Question 1

A parent company purchases 100 percent of the outstanding common stock in a subsidiary.What happens to the subsidiary the day after the purchase? Which of the following statements is FALSE?

Accepted Answer

A)  The purchase by the parent company does not affect the subsidiary's books. 
B)  The subsidiary ceases to exist. 
C)  The subsidiary continues as a separate legal entity. 
D)  The subsidiary has its own set of books.

Question 2

Each year,goodwill on the consolidated balance sheet is ________.

Accepted Answer

A)  amortized 
B)  depreciated 
C)  evaluated by management to determine if it is impaired 
D)  ignored

Question 3

On January 1,2012,Preview Company acquired all of the stock of a subsidiary.The following data is available:
$\begin{array}{lll}
& \text { Preview Company} & \text {  Subsidiary } \
\text { Total assets } & \$ 650 & \$ 400 \
\text { Total liabilities }  & \$ 200 & \$ 190 \
\text { Total stockholders' equity }& \$ 450 & \$ 210
\end{array}$
The acquisition by the Preview Company represents a 100 percent interest in the subsidiary.On January 1,2012,the fair value of the subsidiary's assets and liabilities are equal to the book value.Preview Company paid $250 for the 100 percent interest in the subsidiary.On January 1,2012,what are the total assets on the consolidated balance sheet? (Assume elimination entries are completed.)

Accepted Answer

A)  $650 
B)  $800 
C)  $840 
D)  $1,050

Question 4

The section of the annual report that explains major changes in the income statement,changes in liquidity and capital resources and the impact of inflation is called the ________.

Accepted Answer

A)  notes to the financial statements 
B)  appendix to the financial statements 
C)  internal control report 
D)  management's discussion and analysis

Question 5

The balance sheet for James Company is given below:
$$\begin{array} { l l } 
\text { Cash } & \$ 242 \
\text { Accounts Receivable } & 200 \
\text { Inventory } & 388\
\text { Prepaid Insurance } & 70 \
\text { Fixed Assets } & 452 \
\text { Accumulated Depreciation } & \text { (228) } \
\text { Total Assets } & \$ 1,124
\end{array}$$
$$\begin{array} { l l } 
\text { Accounts payable } & \$ 152 \
\text { Wages payable } & 32 \
\text { Notes payable } & 420 \
\text { Paid-in capital } & 160 \
\text { Retained earnings } & \underline { 360 } \
\text { Total liabilities and stockholders' equity } & \$ 1,124
\end{array}$$
If a common-size balance sheet was prepared,what would James Company report for accounts receivable?

Accepted Answer

A)  13.5% 
B)  17.3% 
C)  17.8% 
D)  86.3%

Question 6

On January 1,2014,Jeff Company purchased common stock in Garcia Company for $1,000,000.Jeff Company treats the investment as available-for-sale securities.During 2014,Garcia Company earned $4,000,000 and paid dividends of $1,000,000.Assume that Jeff Company owns 10% of the outstanding shares of Garcia Company.The market value of the investment at December 31,2014 is $1,100,000.What is the balance in the Investment account at December 31,2014?

Accepted Answer

A)  $1,000,000 
B)  $1,100,000 
C)  $1,400,000 
D)  $1,500,000

Question 7

The financial ratios for a company can be evaluated using ________.

Accepted Answer

A)  time-series comparisons 
B)  benchmark comparisons 
C)  cross-sectional comparisons 
D)  all of the above

Question 8

An investor holds 5% of the outstanding stock of an investee.Securities that the investor company buys only with the intent to resell them shortly are called ________.

Accepted Answer

A)  available-for-sale securities 
B)  equity method securities 
C)  trading securities 
D)  options

Question 9

The account "Noncontrolling Interests" as reported on a balance sheet shows ________.

Accepted Answer

A)  the parent company's interest in a subsidiary 
B)  the subsidiary's interest in a parent company 
C)  the outside stockholders' interest in a subsidiary 
D)  the outside stockholders' interest in a parent company

Question 10

Jerome Company purchased common stock in Gonzalez Company.Jerome Company treats the investment as available-for-sale securities.During the current year,Gonzalez Company earned $4,000,000 and paid dividends of $1,000,000.Assume that Jerome Company owns 10% of the outstanding shares of Gonzalez Company.Gonzalez Company's dividend will affect Jerome Company by ________.

Accepted Answer

A)  increasing cash and investments by $100,000 
B)  increasing investments and investment revenue by $100,000 
C)  increasing cash and investment revenue by $100,000 
D)  increasing cash and decreasing investments by $100,000

Question 11

An investor holds 5% of the outstanding stock of an investee.Securities that the investor company does not intend to sell in the near future are called ________.

Accepted Answer

A)  trading securities 
B)  options 
C)  available-for-sale securities 
D)  equity method securities

Question 12

Noncontrolling interests affect only the balance sheet of consolidated financial statements.

Accepted Answer

A) True 
 B)False

Question 13

Goodwill is recognized when one company purchases another company and ________.

Accepted Answer

A)  the purchase price of the acquired company exceeds the book value of the acquired company's assets 
B)  the purchase price of the acquired company exceeds the book value of the acquired company's assets less liabilities 
C)  the purchase price of the acquired company exceeds the fair value of the acquired company's assets 
D)  the purchase price of the acquired company exceeds the fair value of the acquired company's assets less liabilities

Question 14

The Corrao Company reports the following information:
$\begin{array} { l  }
 \text {Sales for the year ended December 31,2012 }&\$106,950\
 \text {Gross profit for the year ended December 31, 2012 }&\$45,150\
 \text { Net income for the year ended December 31,2012}&\$7,300\
 \text {Total Current Assets, December 31, 2012 }&\$18,700\
 \text {Total Current Liabilities, December 31, 2012 }&\$7,600\
 \text {Total Assets, December 31, 2012 }&\$88,400\
 \text {Total Liabilities, December 31,2012 }&\$20,850\
 \text { Total common shares outstanding, December 31, 2012}&\$1,000\
 \text {Market price per share, December 31, 2012 }&\$75.00\
 \text {Dividends per share, for the year ended December 31,2012 }&\$5.00\
\end{array}$

What is the debt-to-equity ratio at December 31,2012?

Accepted Answer

A)  15.7% 
B)  30.9% 
C)  43.1% 
D)  75.7%

Question 15

Presented below is the balance sheet of Houser Company at January 1,2015:
$\begin{array}{ll}
\text { Cash } & \$ 100 \
\text { Net Fixed Assets } & 400 \
\text { Total Assets } & \$500
\end{array}$
$\begin{array}{ll}
\text { Accounts Payable } & \$ 20 \
\text { Long-term Bonds Payable } & 220 \
\text { Stockholders' Equity } & \underline{260} \
\text { Total Liabilities and Stockholders' Equity } & \$ 500
\end{array}$
The balance sheet of Maury Company at January 1,2015 is below:
$\begin{array}{ll}
\text { Cash } & \$ 400 \
\text { Net Fixed Assets } &{380} \
\text { Total Assets } &{\$ 780}
\end{array}$
$\begin{array}{ll}
\text { Accounts Payable } & \$ 120 \
\text { Long-term Bonds Payable } & 280 \
\text { Stockholders' Equity } & \underline{380} \
\text { Total Liabilities and Stockholders' Equity } & \$ 780
\end{array}$
On January 1,2015,Maury Company acquired 100 percent of the outstanding common stock of Houser Company for $260 cash.The book value and fair value of Houser's assets and liabilities were equal.What is the amount of Total Assets on the consolidated balance sheet immediately after the acquisition of Houser Company's stock? (Assume elimination entries are completed.)

Accepted Answer

A)  $0 
B)  $780 
C)  $1,020 
D)  $1,280

Question 16

Arizona Company has 40,000 shares of its common stock outstanding.Mexico Company owns 5,000 shares of Arizona Company's stock.Which of the following methods should Mexico Company use to account for its investment in Arizona Company?

Accepted Answer

A)  market-value 
B)  equity 
C)  consolidated 
D)  available-for-sale

Question 17

Liquidity ratios focus on whether there are sufficient current assets to satisfy current liabilities as they come due.

Accepted Answer

A) True 
 B)False

Question 18

Martin Company purchased 10% of the outstanding shares of Winn Company.Martin Company classifies the investments as trading securities.At the end of the year,the market value of the shares increased from the prior year.The increase in market value of Winn Company's shares will affect Martin Company by ________.

Accepted Answer

A)  increasing cash and increasing investments 
B)  decreasing investments and increasing retained earnings 
C)  increasing investments and increasing retained earnings 
D)  increasing cash and increasing stockholders' equity

Question 19

Noncontrolling interests appear on a consolidated balance sheet when a parent company owns more than 50 percent but less than 100 percent of a subsidiary's common stock.

Accepted Answer

A) True 
 B)False

Question 20

Accountants require investors without significant influence over the decisions of an investee firm to use the ________ method.

Accepted Answer

A)  equity 
B)  cost 
C)  market value 
D)  lower of cost or market

Exam 17: Understanding and Analyzing Consolidated Financial Statements

A parent company purchases 100 percent of the outstanding common stock in a subsidiary.What happens to the subsidiary the day after the purchase? Which of the following statements is FALSE?

Each year,goodwill on the consolidated balance sheet is ________.

The section of the annual report that explains major changes in the income statement,changes in liquidity and capital resources and the impact of inflation is called the ________.

The financial ratios for a company can be evaluated using ________.

An investor holds 5% of the outstanding stock of an investee.Securities that the investor company buys only with the intent to resell them shortly are called ________.

The account "Noncontrolling Interests" as reported on a balance sheet shows ________.

An investor holds 5% of the outstanding stock of an investee.Securities that the investor company does not intend to sell in the near future are called ________.

Noncontrolling interests affect only the balance sheet of consolidated financial statements.

Goodwill is recognized when one company purchases another company and ________.

Arizona Company has 40,000 shares of its common stock outstanding.Mexico Company owns 5,000 shares of Arizona Company's stock.Which of the following methods should Mexico Company use to account for its investment in Arizona Company?

Liquidity ratios focus on whether there are sufficient current assets to satisfy current liabilities as they come due.

Noncontrolling interests appear on a consolidated balance sheet when a parent company owns more than 50 percent but less than 100 percent of a subsidiary's common stock.

Accountants require investors without significant influence over the decisions of an investee firm to use the ________ method.