Deck 16: Accounting for Multiple Entities

Question 1

Which of the following is the appropriate basis for valuing fixed assets acquired in a business combination carried out by exchanging cash for common stock?

A) Historic cost
B) Book value
C) Cost plus any excess of purchase price over book value of asset acquired
D) Fair value

Answer 1

D

Question 2

The theoretically preferred method of presenting noncontrolling interest on a consolidated balance sheet is

A) As a separate item with the deferred credits section
B) As a reduction from (contra to) goodwill from consolidation, if any
C) By means of notes or footnotes to the balance sheet
D) As a separate item within the stockholders' equity section

Answer 2

D

Question 3

Meredith Company and Kyle Company were combined in an acquisition transaction. Meredith was able to acquire Kyle at a bargain price. The sum of the market or appraised values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Meredith. After revaluing noncurrent assets to zero there was still some of the bargain purchase amount remaining (formerly termed negative goodwill). Proper accounting treatment by Meredith is to report the amount as

A) A discontinued operations item
B) Part of current income in the year of combination
C) A deferred credit and amortize it
D) Paid-in capital

Answer 3

B

Question 4

Under which of the theories of equity is a manager's goals considered as important as those of the common stockholder.

A) Proprietary theory.
B) Commander theory.
C) Entity theory.
D) Enterprise theory.

Question 5

In a business combination that is accounted for under the acquisition method, the entity that obtains control over one or more businesses and establishes the acquisition date that control was achieved is called the

A) Controller.
B) Acquirer.
C) Proprietor.
D) Controlling interest.

Question 6

A sale of goods, denominated in a currency other than the entity's functional currency, resulted in a receivable that was fixed in terms of the amount of foreign currency that would be received. Exchange rates between the functional currency and the currency in which the transaction was denominated changed. The resulting gain should be included as a (an)

A) Other comprehensive income
B) Deferred credit
C) Component of income from continuing operations
D) Discontinued operations

Question 7

For a business combination, we measure all assets and liabilities of an acquired company at fair value. Fair value

A) Is an exit value.
B) Is an entry value.
C) Is an appraisal value.
D) Can be either an exit value or an entry value depending on the circumstances.

Question 8

When a parent-subsidiary relation exists, consolidated financial statements are prepared in recognition of the accounting concept of:

A) Reliability
B) Materiality
C) Legal entity
D) Economic entity

Question 9

Consolidated financial statements are typically prepared when one company has a controlling interest in another unless:

A) The subsidiary is a finance company
B) The fiscal year-ends of the companies are more than three months apart.
C) Circumstance prevent the exercise of control
D) The two company are in unrelated industries, such as real estate and manufacturing.

Question 10

When translating foreign currency financial statements, which of the following accounts would be translated using current exchange rates? Property, Plant, and Inventories
Equipment carried at cost

A) Yes Yes
B) No No
C) Yes No
D) No Yes

Question 11

In financial reporting for segments of a business enterprise, the operating profit or loss of a segment should include Allocated
Corporate
Overhead Operating expenses

A) No No
B) No Yes
C) Yes No
D) Yes Yes

Question 12

Which of the following is not a consideration in segment reporting for diversified enterprises?

A) Allocation of joint costs
B) Transfer pricing
C) Defining the segments
D) Consolidation policy

Question 13

Which of the following is the best theoretical justification for consolidated financial statements?

A) In form the companies are one entity; in substance they are separate
B) In form the companies are separate; in substance they are one entity
C) In form and substance, the companies are one entity
D) In form and substance, the companies are separate

Question 14

Consolidated statements are proper for Neely, Inc., Randle, Inc., and Walker, Inc., if

A) Neely owns 80 percent of the outstanding common stock of Randle and 40 percent of Walker; Randle owns 30 percent of Walker.
B) Neely owns 100 percent of the outstanding common stock of Randle and 90 percent of Walker; Neely bought the stock of Walker one month before the balance sheet date and sold it seven weeks later.
C) Neely owns 100 percent of the outstanding common stock of Randle and Walker; Walker is in legal reorganization.
D) Neely owns 80 percent of the outstanding common stock of Randle and 40 percent of Walker; Reeves, Inc., owns 55 percent of Walker.

Question 15

Under the acquisition method for a business combination, the cost incurred to effect the business combination, such as finders and legal fees are

A) Considered part of the historical cost of the business.
B) Expensed as incurred.
C) Allocated, along with the purchase price of the acquired company's stock to the assets of the acquiree company.
D) Deferred until a full accounting of all costs to acquire the acquire company are known.

Question 16

A subsidiary's functional currency is the local currency that has not experienced significant inflation. The appropriate exchange rate for translating the depreciation on plant assets in the income statement of the foreign subsidiary is the

A) Exit exchange rate
B) Historical exchange rate
C) Weighted average exchange rate over the economic life of each plant asset
D) Weighted average exchange rate for the current year

Question 17

A foreign subsidiary's function currency is its local currency that has not experienced significant inflation. The average exchange rate for the current year would be the appropriate exchange rate for translating Sales to
Wages expense Customers

A) Yes Yes
B) Yes No
C) No No
D) No Yes

Question 18

On October 1, Company X acquired for cash all of the outstanding common stock of Company Y. Both companies have a December 31 year-end and have been in business for many years. Consolidated net income for the year ended December 31 should include net income of

A) Company X for3 months and Company Y for 3 months
B) Company X for 12 months and Company Y for 3 months
C) Company X for 12 months and Company Y for 12 months
D) Company X for 12 months, but no income from Company Y until Company Y distributed a dividend

Question 19

Arkin, Inc., owns 90 percent of the outstanding stock of Baldwin Company. Curtis, Inc., owns 10 percent of the outstanding stock of Baldwin Company. On the consolidated financial statements of Arkin, Curtis should be considered as

A) A holding company
B) A subsidiary not to be consolidated
C) An affiliate
D) A noncontrolling interest

Question 20

Goodwill represents the excess of the cost of an acquired company over the

A) Sum of the fair values assigned to identifiable assets acquired less liabilities assumed
B) Sum of the fair values assigned to tangible assets acquired less liabilities assumed
C) Sum of the fair values assigned to intangible assets acquired less liabilities assumed
D) Book value of an acquired company

Question 21

Explain the concept of control as it applies to recording consolidated financial statement.

Question 22

U.S. GAAP requires a reporting entity to consolidate an entity in which it has a controlling financial interest. There are two primary models for assessing whether there is a controlling financial interest. Identify and discuss the accounting treatment required by each.

Question 23

Discuss the following two theories of consolidation:
a. Entity
According to entity theory, the consolidated group (parent company and subsidiaries) is an entity separate from its owners. Thus, the emphasis is on control of the group of legal entities operating as a single unit. Consolidated assets belong to the consolidated entity, and the income earned by investing in those assets is income to the consolidated entity rather than to the parent company stockholders. Consequently, the purpose of consolidated statements is to provide information to all shareholders-parent company stockholders and outside noncontrolling stockholders of the subsidiaries.
b. Patent company
Parent company theory evolved from the proprietary theory of equity. Under parent company theory, parent company stockholders are viewed as having a proprietary interest in the net assets of the consolidated group. The purpose of consolidated statements is to provide information primarily for parent company stockholders. Thus, prior to the issuance of SFAS No. 160, consolidated financial statements reflected a parent company perspective. The assets reported on a consolidated balance sheet were those of the subsidiary adjusted by the parent company's share of the difference between subsidiary historical cost and the asset's fair value at the date of the acquisition. The net income reported in the consolidated income statement was equal to the net income of the parent company. Noncontrolling interest income was reported as a deduction to arrive at consolidated net income and noncontrolling interest was not considered an equity interest.

Question 24

List and explain three reasons why businesses combine.

Question 25

Under the acquisition method of accounting for a business combination when the parent company has acquired only 90% of the voting stock of a subsidiary,

A) 10% of the goodwill will be reported in a separate section of the balance sheet because it belongs to the noncontrolling interest.
B) The consolidated balance sheet will report 100% of the value of goodwill.
C) The consolidated balance sheet will report 90% of the value of goodwill.
D) Goodwill will be amortized over its useful life or 40 years whichever comes first.

Question 26

Under the acquisition method of accounting for a business combination, a bargain purchase is

A) Reported as goodwill in the balance sheet.
B) Tested annually for impairment.
C) Reported as a gain in the income statement.
D) Reported as an adjustment to other comprehensive income.

Question 27

The noncontrolling interest in a subsidiary is reported in the consolidated balance sheet

A) As an investment.
B) As a liability.
C) At fair value, as determined on the acquisition date.
D) As an element of stockholders' equity.

Question 28

Discuss the issues that are to be addressed in an acquisition method business combination effected by an exchange of equity shares.

Question 29

What are the two situations in which the local currency would not be the functional currency?

Question 30

The parent company concept of consolidated financial statements considers the noncontroling interest in net assets of a subsidiary to be:

A) A liability
B) A part of consolidated stockholders' equity
C) An item between liabilities and stockholders' equity
D) Some other classification

Question 31

How are operating segments defined by SFAS No. 131 (FASB ASC 280-10-50-1)?

Question 32

How is the recorded cost determined in an acquisition business combination?

Question 33

According to SFAS No. 131(FASB ASC 280-10-50-20 to 25), what information should be disclosed for each operating segment?

Question 34

What are the two principles that are used to guide the preparation of consolidated financial statements?

Question 35

Under the acquisition method of accounting for a business combination, restructuring costs are

A) Capitalized and amortized over a period not exceeding ten years.
B) Fees paid to lawyers and accountants to bring about the business combination.
C) Costs incurred to effect the business combination.
D) Treated as post acquisition expenses.

Question 36

Halcomb Company's balance sheet on December 31, 2020, was as follows: Assets
Cash $ 80,000
Trade accounts receivable (net) 160,000
Inventories 400,000
Plant assets (net) 720,000
Total assets $1,360,000
Liabilities & Stockholders' Equity
Current liabilities $ 240,000
Long-term debt 400,000
Common stock, $1 par 80,000
Additional paid-in capital 160,000
Retained earnings 480,000
Total liabilities & stockholders' equity $1,360,000
On December 31, 2020, Ruth Corporation acquired all the outstanding common stock of Halcomb for $1,200,000. On that date, the current fair value of Halcomb's inventories was $360,000 and the current fair value of Halcomb's plant assets was $800,000. The current fair values of all other identifiable assets and liabilities of Halcomb were equal to their carrying amounts.
As a result of the acquisition of Halcomb by Ruth, the December 31, 2020, consolidated balance sheet of Ruth and subsidiary displays goodwill in the amount of:

A) $400,000
B) $440,000
C) $480,000
D) $520,000

Question 37

Under the acquisition method of accounting for a business combination, goodwill is equal to

A) The acquired company's ability to generate excess profits.
B) The excess of the cost of the acquisition plus the fair value of the noncontrolling interest over the fair value of the acquiree's net assets.
C) The excess of the cost of the acquisition over the fair value of the acquiree's net assets.
D) The excess of the fair value of acquiree's net assets over the cost of acquisition.

Question 38

Discuss the purpose of SFAS No. 167.

Question 39

The acquisition method of accounting for a business combination is consistent with
A) Entity theory.

A) Residual interest theory.
B) Proprietary theory.
C) Parent company theory.

Question 40

Define noncontrolling interest. Historically, how has noncontrolling interest been disclosed on corporate balance sheets?

Question 41

IFRS No. 10 changes the method of reporting noncontrolling interests from what was previously required in IAS No.27. How are noncontrolling interest now defined and where are they to be disclosed?

Question 42

Describe the four general procedures involved in the foreign currency translation process when the local currency is defined as the functional currency.

Question 43

How does SFAS No. 52 (FASB ASC 830) define functional currency?

Question 44

Discuss the difference between translation and remeasurement.

Question 45

Discuss the criteria used to determine if an operating segment is a reportable segment.

Question 46

Discuss how foreign currency translation occurs under each of the following methods\
a. Current - noncurrent
The current-noncurrent method is based on the distinction between current and noncurrent assets and liabilities. Under this method all current items (cash, receivables, inventory, and short-term liabilities) are translated at the foreign exchange rate existing at the balance sheet date. The noncurrent items (plant, equipment, property, and long-term liabilities) are translated using the rate in effect when the items were acquired or incurred (the historical rate).
b. Monetary - nonmonetary
The monetary-nonmonetary method requires that a distinction be made between monetary items (accounts representing cash or claims on cash, such as receivables, notes payable, and bonds payable) and nonmonetary items (accounts not representing claims on a specific amount of cash such as land, inventory, plant, equipment, and capital stock). Monetary items are translated at the exchange rate in effect at the balance sheet date, whereas nonmonetary items retain the historical exchange rate.
c. Current
The current rate method requires the translation of all assets and liabilities at the exchange rate in effect on the balance sheet date (current rate). It is, therefore, the only method that translates fixed assets at current rather than historical rates.
d. Temporal
Under this method monetary measurements depend on the temporal characteristics of assets and liabilities. That is, the time of measurement of the elements depends on certain characteristics. That is, money and receivables and payables measured at the amounts promised should be translated at the foreign exchange rate in effect at the balance sheet date. Assets and liabilities measured at money prices should be translated at the foreign exchange rate in effect at the dates to which the money prices pertain. This principle is simply an application of the fair value principle in the area of foreign translation.