Consolidations and Mergers Test Preparation
Course Introduction
This course provides an in-depth examination of the accounting principles, procedures, and reporting requirements associated with business combinations, consolidations, and mergers. Students will explore the theoretical foundation and practical application of accounting for investments in subsidiaries, the preparation of consolidated financial statements, and the impact of various types of mergers and acquisitions on financial reporting. Topics include the identification and measurement of goodwill, elimination entries, noncontrolling interests, intercompany transactions, and the regulatory environment. The course emphasizes analysis and interpretation of consolidated statements to support effective management decision-making in the context of complex organizational structures.
Recommended Textbook
Advanced Accounting 12th Edition by Hoyle
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Chapter 1: The Equity Method of Accounting for Investments
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Sample Questions
Q1) On January 1, 2013, Bangle Company purchased 30% of the voting common stock of Sleat Corp. for $1,000,000. Any excess of cost over book value was assigned to goodwill. During 2013, Sleat paid dividends of $24,000 and reported a net loss of $140,000. What is the balance in the investment account on December 31, 2013?
A) $950,800.
B) $958,000.
C) $836,000.
D) $990,100.
E) $956,400.
Answer: A
Q2) How should a permanent loss in value of an investment using the equity method be treated?
A) The equity in investee income is reduced.
B) A loss is reported the same as a loss in value of other long-term assets.
C) The investor's stockholders' equity is reduced.
D) No adjustment is necessary.
E) An extraordinary loss would be reported.
Answer: B
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Chapter 2: Consolidation of Financial Information
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Q1) How is contingent consideration accounted for in an acquisition business combination transaction?
Answer: The fair value approach of the acquisition method views contingent payments as part of the consideration transferred. Under this view, contingencies have a value to those who receive the consideration and represent measurable obligations of the acquirer. The amount of the contingent consideration is measured as the expected present value of a potential payment and increases the investment value recorded.
Q2) Which one of the following is a characteristic of a business combination accounted for as an acquisition?
A) The combination must involve the exchange of equity securities only.
B) The transaction establishes an acquisition fair value basis for the company being acquired.
C) The two companies may be about the same size, and it is difficult to determine the acquired company and the acquiring company.
D) The transaction may be considered to be the uniting of the ownership interests of the companies involved.
E) The acquired subsidiary must be smaller in size than the acquiring parent.
Answer: B
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Chapter 3: Consolidations - Subsequent to the Date of Acquisition
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Q1) Why is push-down accounting a popular internal reporting technique?
Answer: Push-down accounting has become popular for the parent's internal reporting purposes for two reasons. First, this method simplifies the consolidation process each year. If acquisition value allocations and subsequent amortization are recorded by the subsidiary, they do not need to be repeated each year on a consolidation worksheet. Second, recording of amortization by the subsidiary enables that company's information to provide a good representation of the impact that the acquisition has on the earnings of the business combination. For example, if the subsidiary earns $100,000 each year but annual amortization is $80,000, the acquisition is only adding $20,000 to the income of the combination each year rather than the $100,000 that is reported by the subsidiary unless push-down accounting is used.
Q2) What is the basic objective of all consolidations?
Answer: The basic objective of all consolidations is to combine asset, liability, revenue, expense, and stockholders' equity accounts in a manner consistent with the concepts of the acquisition method to reflect substance over form in financial reporting for consolidations. When a parent has control (substance) over a subsidiary and separate incorporation is maintained (form), the consolidated financial statements will reflect results as if the multiple entities were one entity.
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Chapter 4: Consolidated Financial Statements and Outside Ownership
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Q1) Perch Co. acquired 80% of the common stock of Float Corp. for $1,600,000. The fair value of Float's net assets was $1,850,000, and the book value was $1,500,000. The non-controlling interest shares of Float Corp. are not actively traded. What is the dollar amount of Float Corp.'s net assets that would be represented in a consolidated balance sheet prepared at the date of acquisition?
A) $1,600,000.
B) $1,480,000.
C) $1,200,000.
D) $1,780,000.
E) $1,850,000.
Q2) Prevatt, Inc. owns 80% of Franklin Company. During the current year, a portion of the investment in Franklin is sold. Prior to recording the sale, Prevatt adjusts the carrying value of its investment. What is the purpose of the adjustment?
Q3) How is a non-controlling interest in the net income of an entity reported in the income statement?
Q4) How would you determine the amount of goodwill to be recognized at date of acquisition when there is a non-controlling interest present?
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Chapter 5: Consolidated Financial Statements Intra-Entity
Asset Transactions
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Sample Questions
Q1) Stark Company, a 90% owned subsidiary of Parker, Inc. sold land to Parker on May 1, 2012, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2012, 2013, and 2014, respectively. Parker sold the land purchased from Stark in 2012 for $92,000 in 2014.
Compute income from Stark reported on Parker's books for 2013.
A) $185,000.
B) $157,500.
C) $166,500.
D) $162,000.
E) $180,000.
Q2) On November 8, 2013, 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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Consolidated Cash Flows, and Other Issues
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Q1) Parent Corporation recently acquired some of its subsidiary's outstanding bonds, at an amount which required the recognition of a loss. In what ways could the loss be allocated? Which allocation would you recommend? Why?
Q2) A parent acquires all of a subsidiary's common stock and 60 percent of its preferred stock. The preferred stock has a cumulative dividend. No dividends are in arrears. How is the non-controlling interest in the subsidiary's net income assigned?
A) Income is assigned as 40 percent of the value of the preferred stock, based on an allocation between common stock and preferred stock.
B) There is no allocation to the non-controlling interest because the parent owns 100% of the common stock and net income belongs to the residual owners.
C) Income is assigned as 40 percent of the preferred stock dividends.
D) Income is assigned as 40 percent of the subsidiary's income before preferred stock dividends.
E) Income is assigned as 40 percent of the subsidiary's income after subtracting preferred stock dividends.
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Chapter 7: Consolidated Financial Statements - Ownership
Patterns and Income Taxes
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Q1) For each of the following situations, select the best answer concerning accounting for income taxes in combinations:
(A) May file a consolidated income tax return.
(B) May not a file consolidated income tax return.
(C) Must file a consolidated income tax return.
_____1. Parent company owns 85% of the voting stock of the subsidiary, and there are significant intercompany transactions.
_____2. Subsidiary is a foreign corporation.
_____3. Parent company owns 90% of the voting stock of the subsidiary, but there are no intercompany inventory transactions.
_____4. Parent company owns 75% of the voting stock of the subsidiary but there are no intercompany inventory transactions.
_____5. Parent company owns 90% of the voting stock of the subsidiary, and there are intercompany inventory transactions with transferred goods in ending inventory.
_____6. Parent company owns 75% of the voting stock of the subsidiary and there are intercompany inventory transactions with transferred goods in ending inventory.
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Chapter 8: Segment and Interim Reporting
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Q1) Which of the following statements is false concerning the number of operating segments that should be disclosed?
A) At least 75 percent of total company sales made to outsiders should be presented.
B) Even though an operating segment has been reportable in the past and is of continuing significance, it must meet at least one of the three reporting tests to report separately in the current year.
C) If the 75 percent rule is not met by the results of applying all three reporting tests, additional segments must be disclosed separately despite their failure to satisfy even one of the three quantitative thresholds.
D) If an operating segment qualifies for disclosure in the current year, prior period segment data presented for comparative purposes must be restated to reflect the newly reportable segment as a separate segment.
E) The practical limit to the number of operating segments is 10.
Q2) What is the purpose of the U.S. GAAP seventy-five percent requirement for industry segment disclosure?
Q3) Why are quarterly financial statements required to be published for publicly traded companies in the U.S.?
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Chapter 9: Foreign Currency Transactions and Hedging
Foreign Exchange Risk
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Q1) How is the fair value of a Forward Contract determined by U.S. GAAP?
Q2) A spot rate may be defined as
A) The price a foreign currency can be purchased or sold today.
B) The price today at which a foreign currency can be purchased or sold in the future.
C) The forecasted future value of a foreign currency.
D) The U.S. dollar value of a foreign currency.
E) The Euro value of a foreign currency.
Q3) All of the following data may be needed to determine the fair value of a forward contract at any point in time except
A) The forward rate when the forward contract was entered into.
B) The current forward rate for a contract that matures on the same date as the forward contract entered into.
C) The future spot rate.
D) A discount rate.
E) The company's incremental borrowing rate.
Q4) How does a foreign currency forward contract differ from a foreign currency option?
Q5) What is the purpose of a hedge of foreign exchange risk?
Q6) What is meant by the spot rate?
Page 11
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Chapter 10: Translation of Foreign Currency Financial Statements
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Q1) A net liability balance sheet exposure exists and the foreign currency appreciates. Which of the following statements is true?
A) There is no translation adjustment.
B) There is a transaction loss.
C) There is a transaction gain.
D) There is a negative translation adjustment.
E) There is a positive translation adjustment.
Q2) Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's functional currency was the U.S. dollar.
What must Dilty do to ready the subsidiary's financial statements for consolidation?
A) first translate them, then remeasure them.
B) first remeasure them, then translate them.
C) state all of the subsidiary's accounts in U.S. dollars using the exchange rate in effect at the balance sheet date.
D) translate them.
E) remeasure them.
Q3) What is the justification for the remeasurement of foreign currency transactions?
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Chapter 11: Worldwide Accounting Diversity and International Accounting Standards
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Q1) A company acquired a new piece of equipment on January 1, 2011 at a cost of $200,000. The equipment is expected to have a useful life of 10 years, a residual value of $20,000 and is depreciated on a straight-line basis. On January 1, 2013, the equipment was appraised and determined to have a fair value of $190,000 and a residual value of $25,000 and a remaining useful life of 10 years.
At what amount should the equipment be reported on the December 31, 2013 balance sheet under U.S. GAAP?
A) $160,000
B) $150,000
C) $146,000
D) $140,000
E) $116,000
Q2) What problems are caused by diverse accounting practices?
Q3) What is meant by harmonization of accounting standards?
Q4) What are recognition differences in international reporting and what would be an example of a difference?
Q5) Why does each country have its own unique set of financial reporting practices?
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Q6) What are the three authoritative pronouncements that make up the International Financial Reporting Standards (IFRS)?
Chapter 12: Financial Reporting and the Securities and Exchange Commission
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Q1) 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.
Q2) The SEC's role in the initial registration of securities to be publicly issued is:
A) to ensure that the content of the registration filing is in compliance with securities regulations.
B) to ensure that securities issued are quality investments.
C) to provide data to the public regarding first-time issuance of securities.
D) to give permission to an independent CPA firm to audit the registrant's financial statements.
E) to make the registrant's annual report available for public viewing.
Q3) Describe the two parts of the SEC registration statement.
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Chapter 13: Accounting for Legal Reorganizations and Liquidations
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Q1) Which one of the following is a requirement that must be met before an involuntary bankruptcy petition can be filed when there are at least 12 unsecured creditors?
A) The petition must be filed by all creditor(s) to whom the debtor owes at least $15,325.
B) The petition must be signed by creditor(s) with unsecured debts of at least $5,000.
C) The petition must be signed by a majority of the creditor(s).
D) The petition must be signed by creditor(s) to whom the debtor owes more than half of its debts.
E) The petition must be signed by at least three creditors with unsecured debts of at least $15,325.
Q2) What is the purpose of Chapter 7 of the Bankruptcy Reform Act?
Q3) Who must accept and confirm the Reorganization plan?
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) Jell and Dell were partners with capital balances of $600 and $800 and an income sharing ratio of 2:3. They admitted Zell to a 30% interest in the partnership, and the total amount of goodwill credited to the original partners was $700. What amount did Zell contribute to the business?
A) $900.
B) $560.
C) $600.
D) $590.
E) $630.
Q2) Reed, Sharp, and Tucker were partners with capital account balances of $80,000, $100,000, and $70,000, respectively. They agreed to admit Upton to the partnership. Upton purchased 30% of each partner's interest, with payments directly to Reed, Sharp, and Tucker of $32,000, $40,000, and $28,000, respectively. Before the admission of Upton, the profit and loss sharing ratio was 2:3:2. The partners agreed to use the book value method to account for the admission of Upton to the partnership.
Required:
Prepare the journal entry to record the admission of Upton to the partnership.
Q3) What is the dissolution of a partnership?
Q4) By what methods can a person gain admittance to a partnership?
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Chapter 15: Partnerships: Termination and Liquidation
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Q1) Jones, Marge, and Tate LLP decided to dissolve and liquidate the partnership on September 30, 2013. After realization of a portion of the noncash assets, the capital account balances were Jones $50,000; Marge $40,000; and Tate $15,000. Cash of $35,000 and other assets with a carrying amount of $100,000 were on hand. Creditors' claims totaled $30,000. Jones, Marge, and Tate shared net income and losses in a 2:1:1 ratio, respectively.
Prepare a working paper to compute the amount of cash that may be paid to creditors and to partners at this time, assuming that no partner is solvent.
Q2) What accounting transactions are not recorded by an accountant during partnership liquidation?
A) The conversion of partnership assets into cash.
B) The allocation of gains and losses from sales of assets.
C) The payment of liabilities and expenses.
D) The initiation of legal action by creditors of the partnership.
E) Write-off of remaining unpaid debts.
Q3) For a partnership, how should liquidation gains and losses be accounted for?
Q4) What is the role of the accountant during the liquidation process?
Q5) What is the purpose of a predistribution plan?
Q6) What is a safe cash payment?
Page 17
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Chapter 16: Accounting for State and Local Governments
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Q1) When a city received a federal grant for providing food and other assistance to the homeless, the money should have been recorded in
A) the General Fund.
B) an Expendable Trust Fund.
C) a Capital Projects Fund.
D) an Agency Fund.
E) a Special Revenue Fund.
Q2) A $910,000 bond was issued on October 1, 2013 to build a new road. The bonds carried a 6% interest rate and are due in 10 years.
Required:
(A.) Prepare the required journal entry in the Capital Projects Fund on October 1 for the Fund Financial Statements.
(B.) Prepare the required journal entry for the Government-Wide Financial Statements.
Q3) Under modified accrual accounting, when are expenditures recorded?
Q4) What is the purpose of government-wide financial statements?
Q5) In governmental accounting, what term is used for a decrease in financial resources?
Q6) What are the two proprietary fund types?
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Chapter 17: Accounting for State and Local Governments
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Q1) Which one of the following is a criterion for identifying a primary government?
A) it has an appointed board of directors.
B) it is fiscally dependent.
C) it is a local government.
D) it has a separately elected governing body.
E) it must prepare financial statements.
Q2) Which statement is false regarding the Statement of Revenues, Expenditures, and Changes in Fund Balance when it is included with government-wide financial statements?
A) The Statement of Revenues, Expenditures, and Changes in Fund Balance uses the modified accrual method for timing purposes.
B) The Statement of Revenues, Expenditures, and Changes in Fund Balance presents revenues as either program revenues or general revenues.
C) A presentation reconciles the change in governmental fund balance to the change in net assets for governmental activities.
D) Other financing sources are presented on the Statement of Revenues, Expenditures, and Changes in Fund Balance.
E) All non-major funds are combined and reported together.
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Chapter 18: Accounting and Reporting for Private
Not-For-Profit Organizations
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Q1) In not-for-profit accounting, an acquisition occurs when one not-for-profit organization obtains:
A) Significant influence over another not-for-profit organization.
B) The direct ability to determine the direction of management of another not-for-profit organization.
C) The indirect ability to direct the policies of management of another not-for-profit organization.
D) Control over another not-for-profit organization.
E) None of these. An acquisition can only occur for profit-oriented organizations.
Q2) What is the basis of accounting used in reporting the Statement of Activities and Changes in Net Assets?
A) Cash basis.
B) Modified accrual basis.
C) Accrual basis.
D) Either cash basis or accrual basis, depending on the type of revenue.
E) Either modified accrual basis or accrual basis, depending on the type of revenue.
Q3) What are the objectives of accounting for a not-for-profit organization?
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Chapter 19: Accounting for Estates and Trusts
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Q1) What is the difference between an executor and an administrator?
Q2) The terms of a will currently undergoing probate are: "A gift to my brother David of $25,000 cash; to my son James, $50,000 from my savings account; and to my Daughter Lila, all of my remaining property." At the time of death, the balance in the savings account was $40,000, and there was additional cash (after payment of funeral expenses and all claims against the estate) of $70,000.
How much would Lila have received from the estate?
A) $0.
B) $40,000.
C) $35,000.
D) $45,000.
E) $30,000.
Q3) The executor of Danny Mack's estate has listed the following properties at fair value: Cash $200,000, Life Insurance Receivable $500,000, Investment in Stocks and Bonds
$50,000, Rental Property $100,000, and Personal Property $80,000. Additionally, the executor found $100,000 of various debts incurred before the decedent's death. The cost of Danny Mack's funeral was $20,000. Prepare the journal entry to record the distribution of $4,000 to Anna Lee, an income beneficiary.
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