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Advanced Accounting Exam #1 – Chapters 1,2,3

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?
Investment in Subsidiary
Which one of the following varies between the equity, initial value, and partial equity methods of accounting for an investment?
The Balance in the investment account on the parent’s books
Which is the following internal record-keeping methods can a parent choose to account for a subsidiary acquired in a business combination?
Initial value, equity, or partial equity
Which of the following is false regarding contingent consideration in business combinations?
Contingent consideration is recorded because of it’s substantial probability of eventual payment
When is goodwill impairment loss recognized?
If both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying values
Using the acquisition method for a business combination, goodwill is generally defined as:
Cost of the investment less the subsidiary’s fair value at acquisition date
At the date of an acquisition which is not a bargain purchase, the acquisition method
Consolidates all subsidiary assets and liabilities at fair value
Which of the following is not a reason for a business combination to take place?
Increase in stock price of the acquired company
In a transaction accounted for using the acquisition method where consideration transferred exceeds book value of the acquired company, which statement is true of the acquiring company with regard to its investment?
Net assets of the acquired company are revalued to their fair values and any excess of consideration transferred over fair value of net assets acquired is allocated to goodwill
In a transaction accounted for using the acquisition method where consideration transferred is less than fair value of net assets acquired, which statement is true?
Negative goodwill is recorded
In an acquisition where control is achieved, how would the land accounts of the parent and the land accounts of the subsidiary be combined?
Parent: Book Value
Subsidiary: Fair Value
Lisa Co. paid cash for all of the voting common stock of Victoria Corp. Victoria will continue to exist as a separate corporation. Entries for the consolidation of Lisa and Victoria would be recorded in
a worksheet
According to GAAP, the pooling of interest method for business combinations
Is no longer allowed for business combinations after June 30, 2001
An example of a difference in types of business combinations is
A statutory merger requires dissolution of the acquired company while a statutory merger does not require dissolution
How are stock issuance costs and direct combination costs treated in a business combination which is accounted for as an acquisition when the subsidiary will retain its incorporation?
Direct combination costs are expensed and stock issuance costs are a reduction to additional paid-in capital
Example of Stock Issuance Costs
Professional Fees
Example of Direct Combination Costs
Legal Fees
A company should always use the equity method to account for an investment if:
It has the ability to exercise significance over the operating polices of the investee
An upstream sale of inventory is a sale:
Made by investee to investor
A downstream sale of inventory is a sale:
Made by investor to investee
On January 1, 2011, Dermot Company purchased 15% of the voting common stock of Horne Corp. One January 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?
It must restate the financial statements for the 2012 and 2011 as if the equity method had been used for those two years
An investee company incurs an extraordinary loss during the period. The investor appropriately applies the equity method. Which of the following statement’s is true?
The extraordinary loss would reduce the value of the investment
When applying the equity method, how is the excess of cost over book value accounted for?
The excess is allocated to the difference between fair value and the book value multiplied by the percent ownership of net assets
What are the 3 methods of reporting investments in other companies?
Fair-Value Method, Consolidated of Financial Statements, Equity Method
What is the criteria for using Equity method of accounting?
Significant influence and ownership between 20% and 50%
What is amortization?
The paying off of debt with a fixed repayment schedule in regular installments over a period of time, and the spreading out of capital expenses for intangible assets over a specific period of time.
Upstream Sale
Subsidiary selling into a parent entity
Downstream Sale
Parent selling into a subsidiary
What is unrealized gross profit of intra entity sales?
Gross profit that is unrealized because the inventory sold remains unsold
A company acquires a subsidiary and will prepare consolidated financial statements for external reporting purposes. For internal reporting purposes, the company has decided to apply the initial value method. Why might the company have made this decision?
It is relatively easy method to apply
A company acquires a subsidiary and will prepare consolidated financial statements for external reporting purposes. For internal reporting purposes, the company had decided to apply the equity method. Why might the company have made this decision?
Operating results appearing on the parent’s financial records reflect consolidated totals
When an investor uses the equity method to account for investments in common stock, the investor’s share of cash dividends from the investee should be recorded as
A deduction from the investment account.
Which of the following does not indicate an investor company’s ability to significantly influence an investee?
The investor owns 30 percent of the investee but another owner holds the remaining 70 percent.
Sisk Company has owned 10 percent of Maust, Inc., for the past several years. This ownership did not allow Sisk to have significant influence over Maust. Recently, Sisk acquired an additional 30 percent of Maust and now will use the equity method. How will the investor report change?
A retrospective adjustment is made to restate all prior years presented using the equity method.
Under fair-value accounting for an equity investment, which of the following affects the income the investor recognizes from its ownership of the investee?
Changes in the fair value of the investor’s ownership shares of the investee.
When an equity method investment account is reduced to a zero balance
The investment retains a zero balance until subsequent investee profits eliminate all unrecognized
losses.
Perez, Inc., applies the equity method for its 25 percent investment in Senior, Inc. During 2015, Perez sold goods with a 40 percent gross profit to Senior. Senior sold all of these goods in 2015. How should Perez report the effect of the intra-entity sale on its 2015 income statement?
No adjustment is necessary.
Which of the following does not represent a primary motivation for business combinations?
Larger firms being less likely to fail.
Which of the following is the best theoretical justification for consolidated financial statements?
In form the companies are separate; in substance they are one entity.
What is a statutory merger?
A business combination in which only one company continues to exist as a legal entity.
FASB ASC 805, Business Combinations, provides principles for allocating the fair value of an acquired business. When the collective fair values of the separately identified assets acquired and liabilities assumed exceed the fair value of the consideration transferred, the difference should be:
Recognized as an ordinary gain from a bargain purchase.
What is the appropriate accounting treatment for the value assigned to in-process research and development acquired in a business combination?
Capitalize as an asset.
An acquired entity has a long-term operating lease for an office building used for central management. The terms of the lease are very favorable relative to current market rates. However, the lease prohibits subleasing or any other transfer of rights. In its financial statements, the acquiring firm should report the value assigned to the lease contract as
An intangible asset under the contractual-legal criterion.
When does gain recognition accompany a business combination?
When a bargain purchase occurs.
According to the acquisition method of accounting for business combinations, costs paid to attorneys and accountants for services in arranging a merger should be
Recorded as an expense in the period the merger takes place.
When negotiating a business acquisition, buyers sometimes agree to pay extra amounts to sellers in the future if performance metrics are achieved over specified time horizons. How should buyers account for such contingent consideration in recording an acquisition?
The fair value of the contingent consideration is included in the overall fair value of the consideration transferred, and a liability or additional owners’ equity is recognized.
An acquired firm’s financial records sometimes show goodwill from previous business combinations. How does a parent company account for the preexisting goodwill of its newly acquired subsidiary?
The parent ignores preexisting subsidiary goodwill and allocates the subsidiary’s fair value among the separately identifiable assets acquired and liabilities assumed.
A company acquires a subsidiary and will prepare consolidated financial statements for external reporting purposes. For internal reporting purposes, the company has decided to apply the initial value method. Why might the company have made this decision?
It is a relatively easy method to apply.
A company acquires a subsidiary and will prepare consolidated financial statements for external reporting purposes. For internal reporting purposes, the company has decided to apply the equity method. Why might the company have made this decision?
Operating results appearing on the parent’s financial records reflect consolidated totals.
When should a consolidated entity recognize a goodwill impairment loss?
If both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying amounts.
What would be the impact on consolidated balance for the Equipment account as of December 31, 2014 if the parent had applied the initial value method rather than the equity method?
No effect: The method the parent uses is for internal reporting purposes only and has no impact on consolidated totals.
Goodwill recognized in a business combination must be allocated among a firm’s identified reporting units. If the fair value of a particular reporting unit with recognized goodwill falls below its carrying amount, which of the following is true?
A goodwill impairment loss is recognized if the carrying amount for goodwill exceeds its implied value.
If no legal, regulatory, contractual, competitive, economic, or other factors limit the life of an intangible asset, the asset’s assigned value is allocated to expense over which of the following?
Indefinitely (no amortization) with an annual impairment review until its life becomes finite.
January 1, 2015, if Lizzi earns a 10 percent return on the fair value of its assets in 2013 and 2014. Lizzi’s profits exceed this threshold in both years. Which of the following is true?
The fair value of the expected contingent payment increases goodwill at the acquisition date.
On January 1, 2015, Kaplan issues an additional 3,000 shares to Star’s former owners to honor the contingent consideration agreement. Which of the following is true?
The parent’s additional paid-in capital from the contingent equity recorded at the acquisition date is reclassified as a regular common stock issue on January 1, 2015.
What is push-down accounting?
A subsidiary’s recording of the fair-value allocations as well as subsequent amortization
What two conditions require “Consolidation”?
majority ownership or contractual (VIE) conditions
Purchase Method
based on consideration transferred, big difference with bargain purchase (under purchase, value of certain long term assets were lowered, only is they were zero was a gain recorded and then it was extraordinary gain)
Pooling of Interest
No longer allowed Had to meet strict requirements. Combined at book value, No allocations or amortization expense. Stated as if companies were always one.
SAIDEP
Stockholders Equity, Allocations, Income, Dividends, Expenses, Payable

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