Deck 9: Intercorporate Entities

Question 1

When a foreign entity has the foreign currency as its functional currency, it uses which exchange rate to translate revenues and expenses in the income statement?

A) the average exchange rate during the period
B) the end of the period exchange rate
C) the historical exchange rate
D) the exchange rate on the date the asset or liability was obtained

Answer 1

A

Question 2

Snowflake, Corp. Penguin, Inc. acquires 100% of the outstanding shares of Snowflake Corp. for $2,250,000 and accounts for the transaction using the purchase method. Snowflake's balance sheet at the acquisition date is as follows:
Based on the information concerning Snowflake Corp. by what amount would Penguin increase depreciable assets when it consolidates Snowflake on the acquisition date?

A) $1,775,000
B) $475,000
C) $2,250,000
D) $375,000

Answer 2

D

Question 3

Which of the following is an acceptable method of accounting for employee stock options?

A) prospective method
B) fair value method
C) intrinsic method
D) historical value method

Answer 3

B

Question 4

When dividends from an investment are recognized as a reduction of the investment account, the investment must have been of which type?

A) Minority, Passive Investment
B) Majority, Passive Investment
C) Majority, Active Investment
D) Minority, Active Investment

Question 5

When dividends from an investment are recognized as income, the investment must have been of which type?

A) Minority, Passive Investment
B) Majority, Passive Investment
C) Majority, Active Investment
D) Minority, Active Investment

Question 6

Solo Corp. purchased $500,000 of bonds for $515,000 as an investment. If Solo expects to hold the bonds until they mature the initial investment should be recorded at

A) Investment in Bonds - $500,000 Additional Investment Expense - $15,000
B) Investment in Bonds - $515,000
C) Investment in Bonds - $500,000 Prepaid Interest Revenue - $15,000
D) Accumulated Other Comprehensive Investment - $500,000

Question 7

Graham Corporation accounts for its investment in the common stock of Luke Company under the equity method. Graham Corporation should ordinarily record a cash dividend received from Luke as

A) a reduction of the carrying value of the investment.
B) additional paid-in capital.
C) an addition to the carrying value of the investment.
D) dividend income.

Question 8

When a foreign entity has the U.S. dollar as its functional currency, it uses which exchange rate to translate monetary assets and liabilities?

A) the average exchange rate during the period
B) the end of the period exchange rate
C) the historical exchange rate
D) the exchange rate on the date the asset or liability was obtained

Question 9

Unrealized holding gains or losses which are recognized in the income statement are from securities classified as

A) trading
B) available for sale
C) held-to-maturity
D) equity

Question 10

Snowflake, Corp. Penguin, Inc. acquires 100% of the outstanding shares of Snowflake Corp. for $2,250,000 and accounts for the transaction using the purchase method. Snowflake's balance sheet at the acquisition date is as follows:
Based on the information concerning Snowflake Corp. what is the value of the goodwill related to the acquisition?

A) $1,775,000
B) $475,000
C) $2,250,000
D) $1,325,000

Question 11

Ashley Company purchased 2,000 of the 10,000 outstanding shares of Judd, Inc.'s common stock for $60,000 on January 1, 2005. During 2005, Judd declared a dividend of $5 per share and reported net income of $75,000. At the end of 2005 the market value of a share of Judd, Inc. stock has increased to $32 per share. If Ashley Company accounts for the investment as a minority, active investment and uses the equity method to account for the investment, Ashley will recognize what amount of 2005 income from the investment?

A) $4,000
B) $10,000
C) $25,000
D) $15,000

Question 12

Ashley Company purchased 2,000 of the 10,000 outstanding shares of Judd, Inc.'s common stock for $60,000 on January 1, 2005. During 2005, Judd declared a dividend of $5 per share and reported net income of $75,000. At the end of 2005 the market value of a share of Judd, Inc. stock has increased to $32 per share. If Ashley Company accounts for the investment as a minority, passive and classifies the investment as an available-for-sale investment, Ashley will recognize what amount of 2005 income from the investment?

A) $4,000
B) $10,000
C) $25,000
D) $15,000

Question 13

Which of the following is not a classification for a minority, passive investment?

A) trading securities
B) equity securities
C) available-for-sale securities
D) held-to-maturity securities

Question 14

Ashley Company purchased 2,000 of the 10,000 outstanding shares of Judd, Inc.'s common stock for $60,000 on January 1, 2005. During 2005, Judd declared a dividend of $5 per share and reported net income of $75,000. At the end of 2005 the market value of a share of Judd, Inc. stock has increased to $32 per share. If Ashley Company accounts for the investment as a minority, passive investment and classifies it as a available-for-sale security the investment will appear in the December 31, 2005 balance sheet at what amount?

A) $60,000
B) $65,000
C) $64,000
D) $75,000

Question 15

Under the fair value method of accounting for stock options, firms must value of stock options on the

A) grant date.
B) intrinsic date.
C) measurement date.
D) fair value date.

Question 16

Olivia Co. owns 4,000 of the 10,000 outstanding shares of Hobbitt Corp. common stock and exercises significant influence over the company. During 2006, Hobbitt earns $80,000 and pays cash dividends of $30,000. For the year ended December 31, 2006 Olivia should report income related to the investment equal to

A) $0
B) $12,000
C) $32,000
D) $20,000

Question 17

Goodwill represents

A) the synergies that will be achieved through the acquisition.
B) the difference between the acquisition cost and the market value of the identifiable assets and liabilities.
C) the difference between the acquisition cost and the book value of the identifiable assets and liabilities.
D) the merger premium.

Question 18

Ashley Company purchased 2,000 of the 10,000 outstanding shares of Judd, Inc.'s common stock for $60,000 on January 1, 2005. During 2005, Judd declared a dividend of $5 per share and reported net income of $75,000. At the end of 2005 the market value of a share of Judd, Inc. stock has increased to $32 per share. If Ashley Company accounts for the investment as a minority, active investment and uses the equity method to account for the investment, the investment will appear in the December 31, 2005 balance sheet at what amount?

A) $60,000
B) $65,000
C) $64,000
D) $75,000

Question 19

Olivia Co. owns 4,000 of the 10,000 outstanding shares of Hobbitt Corp. common stock and exercises significant influence over the company. During 2006, Hobbitt earns $80,000 and pays cash dividends of $30,000. If the beginning balance in the investment account was $160,000, the balance at December 31, 2006 should b

A) $192,000
B) $172,000
C) $180,000
D) $160,000

Question 20

Snowflake, Corp. Penguin, Inc. acquires 100% of the outstanding shares of Snowflake Corp. for $2,250,000 and accounts for the transaction using the purchase method. Snowflake's balance sheet at the acquisition date is as follows:
Based on the information concerning Snowflake Corp. what is the market value of the company's shareholders' equity at the acquisition date?

A) $1,775,000
B) $475,000
C) $2,250,000
D) $0

Question 21

The ____________________ method views a corporate acquisition as conceptually identical to the purchase of any single asset.

Question 22

When one company acquires another company it may not be able to estimate the potential losses inherent in the acquired assets or the potential liability of the acquired company, for these reasons the acquirer may establish ________________________________________.

Question 23

When a firm can exercise control or significantly influence the operations of a company it has only a minority interest in, it should account for the investment using the ______________________________.

Question 24

When the purchase price of another entity exceeds the book value of the entity's net assets the purchaser allocates the excess to identifiable assets and liabilities in order to revalue them to market value and any additional excess is allocated to ____________________.

Question 25

Unrealized gains and losses that appear in accumulated other comprehensive income are from securities classified as ___________________________________ securities.

Question 26

The functional currency of a foreign unit whose receivables and payables are denominated in foreign currency and not usually remitted to parent company is the ______________________________.

Question 27

Under the fair value method of accounting for stock options, firms must value of stock options on the date of ____________________.

Question 28

The first date at which employees can exercise their stock options is termed the _________________________.

Question 29

CD Inc. acquires 100% of the outstanding shares of Record Corp. for $1,200,000 and accounts for the transaction using the purchase method. Record Corp's balance sheet at the date of acquisition appears below: Based on the information concerning Record Corp. what amount of goodwill should CD record at the acquisition date?

A) ($294,000)
B) $614,000
C) $1,200,000
D) $350,000

Question 30

Under which of the following scenarios would an entity not be classified as a variable interest entity?

A) The equity investing firms do not have the obligation to absorb the expected losses of the variable interest entity if they occur.
B) The investing firms do not have the right to receive the expected residual returns of the variable interest entity if they occur.
C) The total equity investment at risk is sufficient to permit the variable interest entity to finance its activities without additional subordinated financial support from other parties.
D) The equity investing firms do not have the direct or indirect ability to make decisions about the variable interest entity's activities through voting rights or similar rights.

Question 31

The acceptable method of accounting for stock options is the _________________________ method.

Question 32

Under the equity method the investor's share of investee income ____________________ the investment account and dividends ____________________ the investment account.

Question 33

Held-to-maturity securities are accounted for at __________________________________________________.

Question 34

When a foreign entity operates as a relatively self-contained and integrated unit within a foreign country, normally, its functional currency is the ____________________________________________________________.

Question 35

An investing firm consolidates the variable interest entity if it absorbs the majority of the entity's expected ____________________ if they occur, receives a majority of the entity's expected ______________________________ if they occur, or both.

Question 36

The _________________________ is the date a firm gives a stock option to employees.

Question 37

When a company has a minority passive investment it will recognize changes in the market value of the investment as ____________________ gains and losses.

Question 38

CD Inc. acquires 100% of the outstanding shares of Record Corp. for $1,200,000 and accounts for the transaction using the purchase method. Record Corp's balance sheet at the date of acquisition appears below: Based on the information concerning Record Corp. what is the market value of the company's shareholders' equity at the acquisition date?

A) $0
B) $908,000
C) $1,200,000
D) $1,458,000

Question 39

When a foreign entity operates as a direct and integral extension of the U.S. parent, normally, its functional currency is the _________________________.

Question 40

Securities that are purchased in order to take advantage of short-term changes in market value should be classified as ____________________ securities.

Question 41

Interpretation No. 46 relates to the issue of whether an investing firm is the primary beneficiary in a variable-interest entity. When is an entity classified as a variable interest entity?

Question 42

When the functional currency is the U.S. dollar, financial reporting requires firms to use the ___________________________________ translation method.

Question 43

Ownership of 50% or more of the voting stock of another company implies an ability to ____________________.

Question 44

Discuss the method of accounting for employee stock options. In your answer discuss the how the accounting has changed during recent years.

Question 45

When there are two or more investing firms in an entity, how is it determined which entity consolidates the variable interest entity?

Question 46

You are trying to determine the functional currency of a foreign unit. For the following three factors determine what conditions would result in the foreign currency being the functional currency:

Question 47

Pop, Inc. acquires 100% of the outstanding shares of Snap Corp. for $3,923,450 and accounts for the transaction using the purchase method. The purchase price Pop paid for Snap exceeded Snap's book value for four reasons:
Information about Pop and Snap's balance sheet at the acquisition date and the current market value of Snap's assets appears below:
Required: Complete the table for Snap's current market values and the consolidated amounts at the date of acquisition.

Question 48

Coffee Comp. purchased 40% of the outstanding shares of Cream Corp. for $1,854,000. The investment allows Coffee to exert significant influence over the operations of Cream. During 2005 Cream recognized net income of $2,450,000 and paid $560,000 in dividends. Discuss how Coffee should account for its investment in Cream and how the information would appear in Coffee's balance sheet, income statement, and cash flow statement.

Question 49

United owns Estada, a European based subsidiary for which the Euro is the functional currency. Estada had a net asset position at January 1, 2007 of 1,200,000 Euros and reported income of 350,000 Euros for 2007, which was earned evenly throughout the year. In addition, Estada paid 100,000 Euros of dividends at December 31, 2007. The following were in effect during 2007:
Determine the amount of the unrealized translation gain or loss United should record for 2007 with respect to Estada.

Question 50

Unrealized holding gains and losses from investments classified as available for sale are reported in _____________________________________________.

Question 51

Stock Trader, Inc. began operations in 2005. Stock Trader has acquired a number of equity investments during 2005. None have been sold. Stock Trader exerts no influence over any of its investments each of which represents a small percentage of the investee. An analysis of Stock Trader's investment portfolios shows the following totals at December 31, 2005:
Based on the information provided, describe how Stock Trader would present this information in its financial statements. You should discuss what amounts would appear in each financial statement.

Question 52

Although the organizational structure and operating policies of a particular foreign unit determine its functional currency, discuss two actions that a management team might take to ensure that the foreign currency is the functional currency.

Question 53

Examine the five following cases and determine if the functional currency of a U.S. parent's foreign unit is the foreign currency or the U.S. Dollar.

Question 54

Unrealized holding gains and losses from investments classified as trading are reported in the ___________________________________.

Question 55

Below you will find the balance sheet and income statement of a US Corp.'s foreign subsidiary at the end of its first year of operations. The following exchange rates were in effect during the period:
Jan. 1, 2005 - $1 = 1FC
Dec. 31, 2005 - $1.70 = 1FC
The average exchange rate during the period was $1.40=1FC. The common stock was issued on January 1, 2005.
Assuming that the foreign currency is the functional currency translate the financial statements into U.S. dollars.