Deck 5: Analyzing Investing Activities: Intercorporate Investments

Question 1

Company A acquires Company

A) Merger accounting and Acquisition accounting
B) Consolidation accounting and Acquisition accounting
B) In preparing consolidated financial statements, the two recognized accounting methods are:
C) Merger accounting and Purchase accounting
D) Pooling-of-interests accounting and Purchase accounting

Answer 1

D

Question 2

At the time of acquisition, ABC's stockholders' equity will increase by: $$\begin{array} { | r | r | r | } \hline & \text { Pooling-of-Interest } & \text { Purchase } \\\hline \text { A) } & \$ 0 & \$ 0 \\\hline \text { B) } & \$ 0 & \$ 4 \mathrm { M } \\\hline \text { C) } & \$ 4 \mathrm { M } & \$ 10 \mathrm { M } \\\hline \text { D) } & \$ 6 \mathrm { M } & \$ 6 \mathrm { M } \\\hline\end{array}$$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Answer 2

Choice C

Question 3

Company A acquires 40% of Company B in a stock-for-stock exchange. With respect to preparing financial statements, which of the following statements is correct?

A) Company A will most likely use pooling-of-interest accounting for consolidation purposes.
B) Company A will most likely use purchase accounting.
C) Company A will most likely use the cost method.
D) Company A will most likely use the equity method.

Answer 3

D

Question 4

Agwen Corporation owns 25% of the shares of Bronwo Corporation, which traded on the New York Stock Exchange. Which method is Agwen most likely to use to account for this investment?

A) Cost method
B) Market method
C) Equity method
D) Consolidation method

Question 5

If a company uses the purchase method to account for a merger, which of the following is true?
I) Prior year's statements must be restated as if merged companies had always been one company.
II) Net income of combined companies will probably be lower than net income of two separate companies added together.
III) Goodwill is never recorded.
IV) Assets of acquired company will be recorded on acquirer's books at their fair value.

A) II, III and IV
B) I, II and III
C) II and IV
D) I and III
Target Company is trading at $20 a share and has 1M shares outstanding. Acquirer Corp. is trading at $50 a share and has 2M shares outstanding. Acquirer offers Target's shareholders of one share of its stock for every two shares of Target Company. For the year ending 12/31/06, Acquirer and Target had earnings of $5M and $2M, respectively. The book value of Target's net assets is $12M and fair value is $15M as of 12/31/06. The book value of Acquirer's net assets is $35M and fair value is $48M as of 12/31/06.

Question 6

The reclassification of trading securities as available-for-sale would produce the following effect:

A) The balance sheet would need to be adjusted to report the securities at fair market value and there would be no effect on the income statement.
B) There would be no effect on either the balance sheet or the income statement.
C) The balance sheet would need to be adjusted to report the securities at fair market value and unrealized gains or losses on the date of the transfer would be included in net income.
D) There would be no effect on the balance sheet and unrealized gains or losses on the date of the transfer would be included in net income.

Question 7

If the acquisition is completed as of 12/31/06, what will the reported earnings per share be for the year ended 12/31/06 assuming pooling- of-interest accounting is used?

A) $2.00
B) $2.33
C) $2.50
D) $2.80

Question 8

How many shares outstanding will Acquirer have if they are successful in its acquisition?

A) 2M
B) 2.4M
C) 2.5M
D) 3M

Question 9

Determine the amount Guido Inc. will record as investment income in its income statement under the three scenarios: Weiner is considered trading marketable equity security (MES), available for sale (AFS) MES or using cost method. $$\begin{array} { | l | c | c | c | } \hline & \text { Trading MES } & \text { AFS MES } & \text { Cost } \\\hline \text { A) } & \$ 10,000 & \$ 10,000 & \$ 30,000 \\\hline \text { B) } & \$ 10,000 & \$ 16,000 & \$ 10,000 \\\hline \text { C) } & \$ 16,000 & \$ 10,000 & \$ 10,000 \\\hline \text { D) } & \$ 16,000 & \$ 16,000 & \$ 10,000 \\\hline\end{array}$$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 10

Company ABC acquires company XYZ on 12/31/06 in a share-for-share transaction worth $10M. On 12/31/06, XYZ financial statements reported the following:
$$\begin{array} { | l | r | } \hline \text { Total Assets } & \$ 12 \mathrm { M } \\\hline \text { Liabilities } & \$ 8 \mathrm { M } \\\hline \text { Stockholders' Equity } & \$ 4 \mathrm { M } \\\hline \text { Net income for fiscal 2006 } & \$ 2 \mathrm { M }\\\hline\end{array}$$ At the time of acquisition, the fair value of XYZ's assets equals its book values, except for plant, property and equipment which has a fair value $2M higher than its book value. Goodwill is expected to be amortized over 10 years, and the average life of depreciable assets is 10 years.

-If ABC uses purchase accounting to record the acquisition, the amount of goodwill that will appear on its balance sheet as of 12/31/06 with respect to the acquisition of XYZ will be:

A) $0
B) $2M
C) $4M
D) $6M

Question 11

Compared to the equity method, the cost method of accounting for an investment in a profitable company results in:

A) lower earnings, and lower cash flows.
B) higher earnings, and higher cash flows.
C) lower earnings, and no effect on cash flows.
D) higher earnings, and no effect on cash flows.
Guido Inc. buys 2,000 shares of Weiner Company for $30 per share on January 1, 2006. At the end of 2006, Weiner shares are trading at $33 per share. Weiner has a total of 200,000 shares outstanding and reported net income of $3,000,000 and paid dividends of $1,000,000 for fiscal 2006.

Question 12

Determine the amount Guido Inc. will record as an investment on its balance sheet under the three scenarios: Weiner is considered trading marketable equity security (MES), available for sale (AFS) MES or using cost method. $$\begin{array} { | l | c | c | c | } \hline & \text { Trading MES } & \text { AFS MES } & \underline { \text { Cost } } \\\hline \text { A) } & \$ 60,000 & \$ 60,000 & \$ 60,000 \\\hline \text { B) } & \$ 66,000 & \$ 60,000 & \$ 60,000 \\\hline \text { C) } & \$ 60,000 & \$ 66,000 & \$ 60,000 \\\hline \text { D) } & \$ 66,000 & \$ 66,000 & \$ 60,000 \\\hline\end{array}$$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 13

If a company uses pooling-of-interests to account for a merger, which of the following are true?
I) Prior year's statements must be restated as if merged companies had always been one company.
II) Net income of combined companies will probably be lower than net income of two separate companies added together.
III) No goodwill will be recorded.
IV) Assets of acquired company will be recorded on acquirer's books at their fair value.

A) II, III and IV
B) I, II and III
C) II and IV
D) I and III

Question 14

The equity method of accounting for investments requires:

A) Investment should be marked to market each accounting period.
B) Pro-rata share of investee's earnings should be recorded as investment income.
C) Company should not have significant influence over investee.
D) Goodwill related to purchase of investee stock to be recorded separately on balance sheet.

Question 15

At the time of acquisition, ABC's 2006 net income will increase by: $$\begin{array} { | r | r | r | } \hline & \text { Pooling-of-Interest } & \text { Purchase } \\\hline \text { A) } & \$ 0 & \$ 0 \\\hline \text { B) } & \$ 2 \mathrm { M } & \$ 0 \\\hline \text { C) } & \$ 1.6 \mathrm { M } & \$ 1.4 \mathrm { M } \\\hline \text { D) } & \$ 2 \mathrm { M } & \$ 2 \mathrm { M } \\\hline\end{array}$$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 16

Which of the following is incorrect? An analyst should be aware of the following when analyzing a company that has significant investments recorded using the equity method:

A) Cash flow received from investee may be substantially different from investment income recorded.
B) As investee's liabilities are not recorded on the company's balance sheet, there may be significant off-balance-sheet financing.
C) They must mark investment in investee to market even though there may be no ready market in which they can sell their investment.
D) Company must record pro rata share of investee's earnings, which may not be well correlated with changes in market value of investee.

Question 17

2007 net income of combined companies will:

A) be the same regardless of whether pooling-of-interests or purchase accounting is used.
B) be higher using purchase accounting.
C) be higher using pooling-of-interests accounting.
D) none of the above.

Question 18

Company ABC acquires company XYZ on 12/31/06 in a share-for-share transaction worth $10M. On 12/31/06, XYZ financial statements reported the following:
$$\begin{array} { | l | r | } \hline \text { Total Assets } & \$ 12 \mathrm { M } \\\hline \text { Liabilities } & \$ 8 \mathrm { M } \\\hline \text { Stockholders' Equity } & \$ 4 \mathrm { M } \\\hline \text { Net income for fiscal 2006 } & \$ 2 \mathrm { M }\\\hline\end{array}$$ At the time of acquisition, the fair value of XYZ's assets equals its book values, except for plant, property and equipment which has a fair value $2M higher than its book value. Goodwill is expected to be amortized over 10 years, and the average life of depreciable assets is 10 years.

-If ABC uses pooling-of-interests to record the acquisition, the amount of goodwill that will appear on its balance sheet as of 12/31/06 with respect to the acquisition of XYZ will be:

A) $0
B) $2M
C) $4M
D) $6M

Question 19

The classification of marketable equity securities as trading or available-for-sale is determined by:

A) management's intent regarding the disposition of the securities.
B) when the securities mature.
C) whether the current assets are greater or less than the current liabilities.
D) whether management wants to mark them to market or not.

Question 20

Trading Marketable Securities:

A) are considered non-current assets.
B) are recorded at amortized cost.
C) are marked to the lower of cost or market each accounting period.
D) are marked to market each accounting period.

Question 21

Parent Company Inc. successfully bids for Child Company Inc. in year X1. Parent Company Inc. has purchased all of Child's shares outstanding for $8,500. Following are excerpts from both companies' financial statements for year X1, prior to the acquisition.
$$\begin{array} { | l | l | l | } \hline & \text { Parent Company Inc. } & \text { Child Company Inc. } \\\hline \text { Total Assets } & \$ 37,234 & \$ 5,379 \\\hline \text { Total Liabilities } & \$ 23,467 & \$ 3,764 \\\hline \text { Total Shareholder's Equity } & \$ 13,767 & \$ 1,615 \\\hline \begin{array} { l } \text { Total Liabilities and } \\\text { Shareholders' Equity }\end{array} & \$ 37,234 & \$ 5,379 \\\hline\end{array}$$ Also assume the following information: the acquisition was accounted for using the purchase method. $1,500 of the excess price relates to depreciable assets, and those assets have an additional useful life of 10 years at the time of the acquisition. Parent Company Inc. uses the straight line depreciation method and has a 34% tax rate. The combined net income for both companies for year X2 (excluding any expenses that need to be recorded as a result of the purchase method accounting for the merger) was $1,560.

-What would be total liabilities in the consolidated financial statements for the date on which the merger became effective?

A) $28,221
B) $27,231
C) $27,741
D) $25,462 $23,467 + $3,764 + (.34 x $1,500) = $27,741.

Question 22

If the acquisition is completed as of 12/31/06, what will the reported earnings per share be for the year ended 12/31/06 assuming purchase accounting is used?

A) $2.00
B) $2.33
C) $2.50
D) $2.80

Question 23

Parent Company Inc. successfully bids for Child Company Inc. in year X1. Parent Company Inc. has purchased all of Child's shares outstanding for $8,500. Following are excerpts from both companies' financial statements for year X1, prior to the acquisition.
$$\begin{array} { | l | l | l | } \hline & \text { Parent Company Inc. } & \text { Child Company Inc. } \\\hline \text { Total Assets } & \$ 37,234 & \$ 5,379 \\\hline \text { Total Liabilities } & \$ 23,467 & \$ 3,764 \\\hline \text { Total Shareholder's Equity } & \$ 13,767 & \$ 1,615 \\\hline \begin{array} { l } \text { Total Liabilities and } \\\text { Shareholders' Equity }\end{array} & \$ 37,234 & \$ 5,379 \\\hline\end{array}$$ Also assume the following information: the acquisition was accounted for using the purchase method. $1,500 of the excess price relates to depreciable assets, and those assets have an additional useful life of 10 years at the time of the acquisition. Parent Company Inc. uses the straight line depreciation method and has a 34% tax rate. The combined net income for both companies for year X2 (excluding any expenses that need to be recorded as a result of the purchase method accounting for the merger) was $1,560.

-What would be total liabilities in the consolidated financial statements for the date on which the merger became effective, assuming any excess purchase price relates to goodwill?

A) $28,221
B) $27,231
C) $27,741
D) $25,462 $23,467 + $3,764 = $27,231.

Question 24

Which exchange rates are used for foreign subsidiaries with different functional currencies? Using the following abbreviations, identify which of the below are correct methods for converting inventory.
Year-end rates: YE
Average rates: AR
Historical rates: HR $$\begin{array} { | l | c | c | } \hline & \text { Temporal } & \text { Current Rate } \\\hline \text { A) } & \text { YE } & \text { AR } \\\hline \text { B) } & \text { HR } & \text { YE } \\\hline \text { C) } & \text { YE } & \text { HR } \\\hline \text { D) } & \text { HR } & \text { HR } \\\hline\end{array}$$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 25

Depreciation expense would be:

A) lower using conversion method than temporal method.
B) lower using temporal method than current rate method.
C) lower using current rate method than conversion method.
D) lower using all-current rate method than temporal method.

Question 26

Corporation A acquires Corporation T for $90M, using 25% debt and 75% equity, in 2006. The fair value and book value of net assets acquired are $60M. Which of the following statements are true?
I) If pooling-of-interests accounting is used, no goodwill will be recorded.
II) If purchase accounting is used, goodwill of $30M will be recorded.
III) If purchase accounting is used, Corporation A's stockholders' equity will increase by $90M on date of acquisition.
IV) If purchase accounting is used, net income in future years will be lower than if pooling-of-interests was used.

A) I, II and III
B) I and II only
C) I, II and IV
D) all of the above

Question 27

A U.S. company has a subsidiary located in Great Britain. Information for the subsidiary for the year ended December 31, 2006 is as follows:
$$\begin{array} { | l | l | } \hline & \text { British pound } \\\hline \text { Gross profit margin } & 40 \% \\\hline \text { Inventory } & 2,000 \\\hline & \text { Exchange Rate } \\\hline \text { Balance Sheet date } & 1 \text { pound } = \$ 1.6 \\\hline \text { Average exchange rate } & 1 \text { pound } = \$ 1.5 \\\hline \text { Historical rate } & 1 \text { pound } = \$ 1.4 \\\hline\end{array}$$

-If the British pound was determined to be the functional currency, what would inventory be in US dollars?

A) $3,500
B) $3,200
C) $3,000
D) $2,800

Question 28

Current ratio:

A) would be unchanged after applying the current rate method.
B) would be unchanged after applying the temporal method.
C) would be unchanged after applying the conversion method.
D) would be higher after applying the temporal method.

Question 29

Which exchange rates are used for foreign subsidiaries with different functional currencies? Using the following abbreviations identify which of the below are correct methods for converting accounts receivable.
Year-end rates: YE
Average rates: AR
Historical rates: HR $$\begin{array} { | c | c | c | } \hline & \text { Temporal } & \text { Current Rate } \\\hline \text { A) } & \text { AR } & \text { AR } \\\hline \text { B) } & \text { YE } & \text { YE } \\\hline \text { C) } & \text { YE } & \text { AR } \\\hline \text { D) } & \text { HR } & \text { YE } \\\hline\end{array}$$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 30

A U.S. company has a subsidiary located in Great Britain. Information for the subsidiary for the year ended December 31, 2006 is as follows:
$$\begin{array} { | l | l | } \hline & \text { British pound } \\\hline \text { Gross profit margin } & 40 \% \\\hline \text { Inventory } & 2,000 \\\hline & \text { Exchange Rate } \\\hline \text { Balance Sheet date } & 1 \text { pound } = \$ 1.6 \\\hline \text { Average exchange rate } & 1 \text { pound } = \$ 1.5 \\\hline \text { Historical rate } & 1 \text { pound } = \$ 1.4 \\\hline\end{array}$$

-If sales were 3,000 in British pounds for the fiscal year and the temporal method was used, what would this be in U.S. dollars?

A) $4,800
B) $4,500
C) $4,200
D) $4,000

Question 31

Parent Company Inc. successfully bids for Child Company Inc. in year X1. Parent Company Inc. has purchased all of Child's shares outstanding for $8,500. Following are excerpts from both companies' financial statements for year X1, prior to the acquisition.
$$\begin{array} { | l | l | l | } \hline & \text { Parent Company Inc. } & \text { Child Company Inc. } \\\hline \text { Total Assets } & \$ 37,234 & \$ 5,379 \\\hline \text { Total Liabilities } & \$ 23,467 & \$ 3,764 \\\hline \text { Total Shareholder's Equity } & \$ 13,767 & \$ 1,615 \\\hline \begin{array} { l } \text { Total Liabilities and } \\\text { Shareholders' Equity }\end{array} & \$ 37,234 & \$ 5,379 \\\hline\end{array}$$ Also assume the following information: the acquisition was accounted for using the purchase method. $1,500 of the excess price relates to depreciable assets, and those assets have an additional useful life of 10 years at the time of the acquisition. Parent Company Inc. uses the straight line depreciation method and has a 34% tax rate. The combined net income for both companies for year X2 (excluding any expenses that need to be recorded as a result of the purchase method accounting for the merger) was $1,560.

-What would be the net income in the consolidated income statement for year X2 assuming any excess purchase price relates to goodwill, and goodwill was found to be impaired by $830?

A) $1,461
B) $1,560
C) $1,012.2
D) $730 $1,560 - 830 = $730.

Question 32

Parent Company Inc. successfully bids for Child Company Inc. in year X1. Parent Company Inc. has purchased all of Child's shares outstanding for $8,500. Following are excerpts from both companies' financial statements for year X1, prior to the acquisition.
$$\begin{array} { | l | l | l | } \hline & \text { Parent Company Inc. } & \text { Child Company Inc. } \\\hline \text { Total Assets } & \$ 37,234 & \$ 5,379 \\\hline \text { Total Liabilities } & \$ 23,467 & \$ 3,764 \\\hline \text { Total Shareholder's Equity } & \$ 13,767 & \$ 1,615 \\\hline \begin{array} { l } \text { Total Liabilities and } \\\text { Shareholders' Equity }\end{array} & \$ 37,234 & \$ 5,379 \\\hline\end{array}$$ Also assume the following information: the acquisition was accounted for using the purchase method. $1,500 of the excess price relates to depreciable assets, and those assets have an additional useful life of 10 years at the time of the acquisition. Parent Company Inc. uses the straight line depreciation method and has a 34% tax rate. The combined net income for both companies for year X2 (excluding any expenses that need to be recorded as a result of the purchase method accounting for the merger) was $1,560.

-What would be total assets in the consolidated financial statements for the date on which the merger became effective, assuming any excess purchase price relates to goodwill?

A) $50,008
B) $49,498
C) $41,508
D) $44,113 $37,234 + $5,379 + ($8,500 - $1,615) = $49,498.

Question 33

If the acquisition is completed as of 12/31/06, what will the book value per share be for the year ended 12/31/06 assuming pooling- of-interest accounting is used?

A) $24.00
B) $20.00
C) $18.80
D) $15.67

Question 34

Parent Company Inc. successfully bids for Child Company Inc. in year X1. Parent Company Inc. has purchased all of Child's shares outstanding for $8,500. Following are excerpts from both companies' financial statements for year X1, prior to the acquisition.
$$\begin{array} { | l | l | l | } \hline & \text { Parent Company Inc. } & \text { Child Company Inc. } \\\hline \text { Total Assets } & \$ 37,234 & \$ 5,379 \\\hline \text { Total Liabilities } & \$ 23,467 & \$ 3,764 \\\hline \text { Total Shareholder's Equity } & \$ 13,767 & \$ 1,615 \\\hline \begin{array} { l } \text { Total Liabilities and } \\\text { Shareholders' Equity }\end{array} & \$ 37,234 & \$ 5,379 \\\hline\end{array}$$ Also assume the following information: the acquisition was accounted for using the purchase method. $1,500 of the excess price relates to depreciable assets, and those assets have an additional useful life of 10 years at the time of the acquisition. Parent Company Inc. uses the straight line depreciation method and has a 34% tax rate. The combined net income for both companies for year X2 (excluding any expenses that need to be recorded as a result of the purchase method accounting for the merger) was $1,560.

-What would be the net income in the consolidated income statement for year X2?

A) $1,461
B) $1,560
C) $1,450
D) $1,611 $1,560 - (1,500 / 10) + [.34 x (1,500 / 10)] = $1,461.

Question 35

A U.S. company has a subsidiary located in Great Britain. Information for the subsidiary for the year ended December 31, 2006 is as follows:
$$\begin{array} { | l | l | } \hline & \text { British pound } \\\hline \text { Gross profit margin } & 40 \% \\\hline \text { Inventory } & 2,000 \\\hline & \text { Exchange Rate } \\\hline \text { Balance Sheet date } & 1 \text { pound } = \$ 1.6 \\\hline \text { Average exchange rate } & 1 \text { pound } = \$ 1.5 \\\hline \text { Historical rate } & 1 \text { pound } = \$ 1.4 \\\hline\end{array}$$

-After converting to U.S. dollars using the appropriate method, gross profit margin is 40%. What method is being used to record British subsidiaries financial statements?

A) The Current Rate Method
B) The Temporal Method
C) The Conversion Method
D) Not determinable from information given

Question 36

Parent Company Inc. successfully bids for Child Company Inc. in year X1. Parent Company Inc. has purchased all of Child's shares outstanding for $8,500. Following are excerpts from both companies' financial statements for year X1, prior to the acquisition.
$$\begin{array} { | l | l | l | } \hline & \text { Parent Company Inc. } & \text { Child Company Inc. } \\\hline \text { Total Assets } & \$ 37,234 & \$ 5,379 \\\hline \text { Total Liabilities } & \$ 23,467 & \$ 3,764 \\\hline \text { Total Shareholder's Equity } & \$ 13,767 & \$ 1,615 \\\hline \begin{array} { l } \text { Total Liabilities and } \\\text { Shareholders' Equity }\end{array} & \$ 37,234 & \$ 5,379 \\\hline\end{array}$$ Also assume the following information: the acquisition was accounted for using the purchase method. $1,500 of the excess price relates to depreciable assets, and those assets have an additional useful life of 10 years at the time of the acquisition. Parent Company Inc. uses the straight line depreciation method and has a 34% tax rate. The combined net income for both companies for year X2 (excluding any expenses that need to be recorded as a result of the purchase method accounting for the merger) was $1,560.

-What would be total assets in the consolidated financial statements for the date on which the merger became effective?

A) $50,008
B) $49,498
C) $41,508
D) $44,113 $37,234 + $5,379 + $1,500 + [$8,500 - $1,615 - $1,500 + (.34 x $1,500)] = $50,008.

Question 37

If the acquisition is completed as of 12/31/06, what will the book value per share be for the year ended 12/31/06 assuming purchase accounting is used?

A) $24.00
B) $20.00
C) $18.80
D) $15.67

Question 38

Undie Inc. has many foreign operations, and uses the U.S. dollar as its functional currency worldwide. Which of the following statements is true with respect to foreign operations?

A) All assets and liabilities are translated at current exchange rates.
B) Monetary assets and liabilities are translated at current exchange rates.
C) Translation gains and losses are reported in equity section of balance sheet.
D) Non-monetary assets and liabilities are translated at average exchange rates for the year.

Question 39

Sachen Company uses the local currency for each country in which it operates as its functional currency. When translating statements into U.S. dollars they should use:

A) Current Rate Method
B) Temporal Method
C) Remeasurement Method
D) Exchange Rate Method

Question 40

Pauly Co. reports a foreign currency translation gain of $5M in its statement of shareholders' equity. From this, you can infer:

A) they have foreign operations where the U.S. dollar is the functional currency.
B) they have foreign operations where local currency is the functional currency.
C) they entered into a foreign currency transaction that year.
D) none of the above.

Question 41

Which of the following is allowed to be reported on fair value basis under SFAS 159?

A) Investment in subsidiaries that need to be consolidated
B) Lease assets and obligations
C) Derivatives
D) Postretirement benefit assets and obligations
True / False Questions

Question 42

Constant Corp. bought Steady Company on June 30, 2005 in a pooling-of-interests transaction. Both companies are in stagnant markets. Steady had total assets of $50,000 and total liabilities of $30,000 with fair market values of $60,000 and $30,000, respectively. Constant issued 1,000 shares, valued at $45 per share. Both companies operate in tax-free havens and take a half-year's depreciation in the year acquired using ten-year lives. Monthly operating results are as follows:
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\text { Per Month }$
$\begin{array} { | l | r | r | } \hline \text { Sales } & \$ 3,000 & \$ 1,000 \\\hline \text { Expenses } & 2,000 & 800 \\\hline \text { Net income } & \$ 1,000 & \$ 200\\\hline\end{array}$ Assume revenue and earnings remain same for the next year. Company is following SFAS 142.

-If accounted for as a purchase, 2005 consolidated earnings are reported as

A) $10,700
B) $11,900
C) $12,700
D) $13,200

Question 43

A U.S. company has a subsidiary located in Great Britain. If the U.S. dollar is the functional currency and the British pound is appreciating relative to the dollar, what will happen to the following ratios after remeasurement? $$\begin{array} { | l | c | c | } \hline & \text { Inventory Turnover } & \text { Net Profit Margin } \\\hline \text { A) } & \text { Higher } & \text { Lower } \\\hline \text { B) } & \text { Lower } & \text { Lower } \\\hline \text { C) } & \text { Higher } & \text { Higher } \\\hline \text { D) } & \text { Lower } & \text { Higher } \\\hline\end{array}$$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 44

Constant Corp. bought Steady Company on June 30, 2005 in a pooling-of-interests transaction. Both companies are in stagnant markets. Steady had total assets of $50,000 and total liabilities of $30,000 with fair market values of $60,000 and $30,000, respectively. Constant issued 1,000 shares, valued at $45 per share. Both companies operate in tax-free havens and take a half-year's depreciation in the year acquired using ten-year lives. Monthly operating results are as follows:
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\text { Per Month }$
$\begin{array} { | l | r | r | } \hline \text { Sales } & \$ 3,000 & \$ 1,000 \\\hline \text { Expenses } & 2,000 & 800 \\\hline \text { Net income } & \$ 1,000 & \$ 200\\\hline\end{array}$ Assume revenue and earnings remain same for the next year. Company is following SFAS 142.

-If accounted for as a pooling-of-interests, 2005 consolidated earnings are reported as:

A) $12,000
B) $13,200
C) $14,400
D) It cannot be determined without further information

Question 45

Xena Corporation has a foreign subsidiary, Zete Corporation, located in Japan. At the end of fiscal 2006, Zete has:
$$\begin{array} { | l | l | } \hline \text { Non-monetary assets } & \text { 55M Yen } \\\hline \text { Monetary assets } & \text { 20M Yen } \\\hline \text { Non-monetary liabilities } & \text { 30M Yen } \\\hline \text { Monetary liabilities } & \text { 25M Yen } \\\hline\end{array}$$

-Assume Xena uses the temporal method for translating Zeta's financial statements from the yen into U.S. dollars. If the yen appreciates relative to the dollar, which of the following is true?

A) Xena will record a foreign currency translation gain on the income statement.
B) Xena will record a foreign currency translation loss on the income statement.
C) Xena will record a foreign currency translation gain in the equity section of the balance sheet.
D) Xena will record a foreign currency translation loss in the equity section of the balance sheet.

Question 46

The following information is from L&H's 2004 income statement:
$\begin{array}{|l|r|r|}\hline&&2004\\\hline \text { Sales } & \$ 14,000 \\\hline \text { Investment income } & 800 \\\hline && \$ 14,800 \\\hline \text { Cost of goods sold } & \$ 7,000 \\\hline \text { Depreciation expense } & 2,500 \\\hline \text { Amortization expense } & 2,000 \\\hline \text { Interest expense } & 700 \\\hline && \$ 12,200 \\\hline \text {Pre-tax income}&&\$2,600\\\hline\end{array}$

-Pre-tax earnings growth of 50% for 2005 has just been announced after the close of trading, but further disclosure will not be made until tomorrow. That night, you review 2004 and conclude that, all else being equal, in 2005

A) Sales decreased by approximately $1,400
B) Sales increased by approximately $2,600
C) Investment income doubled, enabling L&H to cut interest expense by $500
D) L&H sold investments and/or fixed assets, realizing a gain of $1,300

Question 47

When an acquisition is made and accounted for using the purchase method, the post-acquisition common stock account:

A) is the sum of the pre-acquisition common stock accounts of the two combining companies.
B) is the pre-acquisition common stock account of the acquired company only.
C) is the pre-acquisition common stock account of the acquiring company plus the par value of new stock issued to affect the acquisition.
D) is the pre-acquisition common stock account of the acquiring company plus the fair value of new stock issued to affect the acquisition.

Question 48

Old Co. was acquired by Raptor for cash, at a significant premium to book value, on January 1, 2004. Since that time, the now wholly owned subsidiary has had modest growth and all of its earnings have been distributed to its parent. Some of Old's bonds remain publicly traded. Which of the following is most likely?

A) An increase in Old's total assets from 2003 to 2005.
B) An increase in Old's pre-tax income from 2003 to 2005.
C) An increase in Old's stockholders' equity from 2003 to 2005.
D) A Raptor guarantee of the bonds.

Question 49

Under U.S. GAAP, the method used to convert financial statements of foreign subsidiaries in countries experiencing hyperinflation is:

A) the current rate method.
B) the inflation method.
C) the temporal method.
D) the transition method.

Question 50

A U.S. company has a subsidiary located in Great Britain. If the British pound is the functional currency and is appreciating relative to the dollar, what will happen to the following ratios after translation? $$\begin{array} { | l | c | c | } \hline & \text { Debt/Equity } & \begin{array} { c } \text { Net Profit } \\\text { Margin }\end{array} \\\hline \text { A) } & \text { Higher } & \text { Lower } \\\hline \text { B) } & \text { Higher } & \text { Same } \\\hline \text { C) } & \text { Same } & \text { Same } \\\hline \text { D) } & \text { Lower } & \text { Higher } \\\hline\end{array}$$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 51

The following information is from L&H's 2004 income statement:
$\begin{array}{|l|r|r|}\hline&&2004\\\hline \text { Sales } & \$ 14,000 \\\hline \text { Investment income } & 800 \\\hline && \$ 14,800 \\\hline \text { Cost of goods sold } & \$ 7,000 \\\hline \text { Depreciation expense } & 2,500 \\\hline \text { Amortization expense } & 2,000 \\\hline \text { Interest expense } & 700 \\\hline && \$ 12,200 \\\hline \text {Pre-tax income}&&\$2,600\\\hline\end{array}$

-Based upon your analysis, you reflect that L&H management

A) is more than holding its own in a tough economic environment.
B) needs to strengthen its marketing.
C) is achieving growth in its new product line.
D) has adroitly managed its asset portfolio.

Question 52

Constant Corp. bought Steady Company on June 30, 2005 in a pooling-of-interests transaction. Both companies are in stagnant markets. Steady had total assets of $50,000 and total liabilities of $30,000 with fair market values of $60,000 and $30,000, respectively. Constant issued 1,000 shares, valued at $45 per share. Both companies operate in tax-free havens and take a half-year's depreciation in the year acquired using ten-year lives. Monthly operating results are as follows:
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\text { Per Month }$
$\begin{array} { | l | r | r | } \hline \text { Sales } & \$ 3,000 & \$ 1,000 \\\hline \text { Expenses } & 2,000 & 800 \\\hline \text { Net income } & \$ 1,000 & \$ 200\\\hline\end{array}$ Assume revenue and earnings remain same for the next year. Company is following SFAS 142.

-If accounted for as a purchase, 2006 consolidated earnings are reported as

A) $10,700
B) $13,400
C) $11,950
D) $14,400

Question 53

Held-to-maturity securities are equity securities that management intends and has the ability to hold to maturity.

Question 54

Xena Corporation has a foreign subsidiary, Zete Corporation, located in Japan. At the end of fiscal 2006, Zete has:
$$\begin{array} { | l | l | } \hline \text { Non-monetary assets } & \text { 55M Yen } \\\hline \text { Monetary assets } & \text { 20M Yen } \\\hline \text { Non-monetary liabilities } & \text { 30M Yen } \\\hline \text { Monetary liabilities } & \text { 25M Yen } \\\hline\end{array}$$

-Assume Xena uses the current rate method for translating Zeta's financial statements from the yen into U.S. dollars. If the yen appreciates relative to the dollar, which of the following is true?

A) Xena will record a foreign currency translation gain on the income statement.
B) Xena will record a foreign currency translation loss on the income statement.
C) Xena will record a foreign currency translation gain in the equity section of the balance sheet.
D) Xena will record a foreign currency translation loss in the equity section of the balance sheet.

Question 55

When an acquisition is made and accounted for using the purchase method, the post-acquisition retained earnings account:

A) is the sum of the pre-acquisition retained earnings accounts of the two combining companies.
B) is the pre-acquisition retained earnings account of the acquiring company only.
C) is the pre-acquisition retained earnings accounts of the acquiring company plus net income of acquired company in year of acquisition.
D) is the pre-acquisition retained earnings accounts of the acquiring company less treasury stock of the acquired company.

Question 56

Under U.S. GAAP, the method used to convert financial statements of foreign subsidiaries into the reporting currency depends upon:

A) the size of the subsidiary.
B) the functional currency of the subsidiary.
C) the temporal location of the subsidiary.
D) the current method used by the subsidiary.

Question 57

Both consolidation and equity method accounting assume a dollar earned by a subsidiary is equivalent to a dollar earned for a parent, even if not received in cash. The limitations of this assumption of dollar-for-dollar equivalence include which of the following?
I) Dividends restricted by law and loan covenants.
II) Risks due to political and economic factors.
III) Tax liabilities from remittance of earnings.
IV) Minority interests that limit parent's discretion.

A) None of the above
B) II
C) I and III
D) I, II, III and IV

Question 58

In-process R&D:

A) is written off immediately to retained earnings.
B) is only an issue when purchase accounting is used.
C) is capitalized on the balance sheet and never amortized.
D) is expensed immediately under pooling of interests.

Question 59

When accounting for an investment under the equity method, what situations may reduce the carrying value of the investment?
I) Investee experiences significant losses.
II) Investee distributes dividends in excess of earnings.
III) Investee sells additional shares for less than book value.
IV) Investee engages in a stock split.

A) I and II
B) II and IV
C) I, II and III
D) I, III and IV

Question 60

Constant Corp. bought Steady Company on June 30, 2005 in a pooling-of-interests transaction. Both companies are in stagnant markets. Steady had total assets of $50,000 and total liabilities of $30,000 with fair market values of $60,000 and $30,000, respectively. Constant issued 1,000 shares, valued at $45 per share. Both companies operate in tax-free havens and take a half-year's depreciation in the year acquired using ten-year lives. Monthly operating results are as follows:
$\quad\quad\quad\quad\quad\quad\quad\quad\quad\text { Per Month }$
$\begin{array} { | l | r | r | } \hline \text { Sales } & \$ 3,000 & \$ 1,000 \\\hline \text { Expenses } & 2,000 & 800 \\\hline \text { Net income } & \$ 1,000 & \$ 200\\\hline\end{array}$ Assume revenue and earnings remain same for the next year. Company is following SFAS 142.

-If accounted for as a purchase, 2005 consolidated revenues are reported as:

A) $36,000
B) $42,000
C) $48,000
D) It cannot be determined without further information

Question 61

The Equity Conformity Rule requires that marketable securities must be marked to market for tax purposes.

Question 62

When a company with a higher price-earnings (P/E) ratio acquires a company with a lower P/E ratio in a stock-for-stock transaction accounted for as a pooling-of-interests, the earnings per share of the acquiring company will increase.

Question 63

One of the problems with pooling-of-interests accounting is that the true cost of an acquisition is not reflected in the balance sheet of the acquirer.

Question 64

One of the problems with consolidated financial statements is that all intercompany transactions are not reported.

Question 65

One of the problems with purchase accounting is that there is often very little basis for comparability of financial statements before acquisition and after acquisition.

Question 66

Purchase accounting will normally result in lower asset turnover than pooling-of-interests.

Question 67

The equity method of accounting for investments should be used when the company has a controlling interest in the investee.

Question 68

When a security is reclassified from Available-for-Sale to Trading, it is transferred at fair market value and any unrealized gains and losses must be recognized in the income statement.

Question 69

When using the current rate method to record foreign subsidiary results, all assets and liabilities are translated at a rate, in effect as of the statement date.

Question 70

All derivatives are recorded at market value on the balance sheet.

Question 71

When a company acquires another company and pooling-of-interest accounting is used, the statement of cash flows (after acquisition) will show a cash outflow in the investing section equal to the book value of the acquired company.

Question 72

If a company acquires 100% of another company using its stock, they must use pooling-of-interests accounting.

Question 73

The current rate method should be used to translate foreign currency into the parent currency when the functional currency is deemed to be the parent currency.

Question 74

Investment securities should always be reported at lower-of-cost-or-market.

Question 75

When purchase accounting is used for acquisitions, prior year financial statements presented for comparative purposes should be restated as if the companies had always been combined.

Question 76

When a company acquires another company and purchase accounting is used, net income is usually lower than that in case of pooling-of-interests, because the cost of goods may be higher as inventory is recorded at market value (besides other reasons).

Question 77

One of the problems with pooling-of-interests accounting is that it results, more often than not, in an understatement of assets.

Question 78

Goodwill recorded as the result of an acquisition is defined as the purchase price less the book value of net assets.

Question 79

Purchase accounting is less commonly used for acquisitions than pooling-of interest accounting.

Question 80

Held-to-maturity securities are always classified as non-current assets.