Deck 1: Wholly Owned Subsidiaries: at Date of Creation

Question 1

The two manners in which a business may expand or diversify are _________________________________ expansion and _________________________________ expansion.

Answer 1

internal, external

Question 2

Before expanding, management must decide whether it wants to organize the new operation as a(n) ______________________________ or a(n) _______________________________________

Answer 2

subsidiary, branch

Question 3

The relationship between a newly created legal entity and the entity that created and owns 100% of the outstanding common stock of the newly created legal entity is called a(n) ________________________________________ relationship.

Answer 3

parent-subsidiary

Question 4

The relationship between (a) the headquarters of an entity that has established an outlying location as an extension of the existing legal entity and (b) that outlying location is called a(n) ______________________________________ relationship.

Question 5

The process of combining the financial statements of a parent and a subsidiary is called _______________________________________.

Question 6

Consolidated financial statements are ______________________________________ statements.

Question 7

Consolidated financial statements constitute the ______________________________ financial statements of companies having one or more subsidiaries, that is, the statements to be furnished to a parent's stockholders in such situations.

Question 8

The two manners of reporting a subsidiary's financial statement amounts in the consolidated statements are the ________________________________________ format and the ________________________________________ format.

Question 9

Consolidated statements are prepared using a(n) _____________________________.

Question 10

A general ledger is not used or maintained for the _____________________________.

Question 11

The entries made in consolidation are commonly called ________________________ entries.

Question 12

At the date of creation, the parent's Investment in Subsidiary account balance has a(n) ________________________ relationship to the total balance of the subsidiary's equity accounts.

Question 13

In parent-subsidiary relationships, accounts having a debit balance on one set of books and a credit balance on the other set of books are commonly referred to as the __________________________________ accounts.

Question 14

Conceptually, consolidation is essentially a(n) _________________________________ process.

Question 15

A parent cannot consolidate a subsidiary when the parent does not have ____________________________.

Question 16

A parent cannot consolidate an acquired subsidiary if ownership is expected to be ____________________________________ at the acquisition date.

Question 17

The result of FAS 94 (issued in 1988) was to eliminate the _____________________________________________ exception allowed under ARB No. 51.

Question 18

In consolidation, all ___________________________________ account balances are eliminated.

Question 19

Internal expansion can result in using either the subsidiary form of organization or the branch/division form of organization.

Question 20

To limit an existing operation's potential loss exposure, the operation would usually use the subsidiary form of organization when expanding rather than the branch form of organization.

Question 21

Earnings of overseas branches are taxed in the United States when the earnings are remitted.

Question 22

In selecting the form of organization for a new operation to be established, an expanding company would consider income tax considerations for domestic expansion to be far more important than for foreign expansion.

Question 23

To prevent loss of patent protection, a domestic company expanding overseas would use the subsidiary form of organization rather than the branch form of organization.

Question 24

The idea of consolidated statements is to disregard the separate legal entity status of each company.

Question 25

The aggregated format of presenting consolidated statements is a "layered" format.

Question 26

The disaggregated format of presenting consolidated statements is required if the subsidiary is in an unrelated line of business from the parent and its other subsidiaries.

Question 27

In the aggregated format of presenting consolidated statements, the subsidiary's assets and liabilities cannot be identified.

Question 28

A general ledger is maintained for the consolidated reporting entity.

Question 29

Consolidation entries are never posted to a general ledger.

Question 30

Reciprocal account balances are created as a result of the consolidation process.

Question 31

Intercompany accounts and reciprocal accounts are interchangeable terms.

Question 32

In general, foreign consolidation rules for the major trading partners of the United States are more lenient than U.S. consolidation rules.

Question 33

The presumption that consolidated statements are more meaningful than separate statements and are necessary for a fair presentation can be overcome by an assertion to the contrary by management in the notes to the financial statements.

Question 34

Under current GAAP, a banking subsidiary of a parent company that is a manufacturing company need not be consolidated.

Question 35

It is appropriate to consolidate foreign subsidiaries.

Question 36

A foreign subsidiary that is prohibited from paying dividends because of currency exchange restrictions imposed by the foreign government of the country in which it is located may still be consolidated.

Question 37

A subsidiary that has just filed for bankruptcy reorganization usually would not be consolidated.

Question 38

A parent need not consolidate a created subsidiary that the parent is in the process of trying to sell.

Question 39

It is inappropriate to consolidate a subsidiary that has not yet become profitable.

Question 40

It is inappropriate to consolidate a subsidiary that is prohibited by law from making loans to its parent.

Question 41

When a subsidiary in a different line of business from that of the parent is consolidated, the separate financial statements of the subsidiary must be presented in the notes to the consolidated statements.

Question 42

When a subsidiary's restricted net assets are more than 25% of consolidated net assets, the Securities and Exchange Commission does not allow that subsidiary to be consolidated.

Question 43

When a subsidiary of a publicly owned company is restricted from paying dividends to its parent as a result of U.S. regulatory restraints, the Securities and Exchange Commission does not allow that subsidiary to be consolidated.

Question 44

When a subsidiary's total assets are more than 25% of total consolidated assets, the separate financial statements of the subsidiary must be presented in the notes to the consolidated statements.

Question 45

It may be necessary to consolidate a company in which a publicly owned investor company does not own a majority voting interest.

Question 46

The only way to determine whether control exists is by determining whether a majority of the voting common stock is owned.

Question 47

The consolidation rules of the Securities and Exchange Commission apply to all U.S. corporations.

Question 48

A subsidiary can be consolidated even if it has a different year-end than its parent company.

Question 49

A subsidiary can be consolidated only if the subsidiary's year-end is within three months of the parent's year-end.

Question 50

Transactions between a parent and its subsidiaries must be eliminated in consolidation exactly as if the transactions had not occurred.

Question 51

When a consolidated subsidiary of a publicly owned company is restricted from transferring funds to its parent as a result of borrowing arrangements or regulatory restraints, the parent must disclose such restrictions in the notes to the consolidated statements only if the subsidiary's total assets exceed 25% of total consolidated assets.

Question 52

When a subsidiary of a publicly owned company is restricted from transferring funds to its parent as a result of borrowing arrangements or regulatory restraints, the parent must disclose such restrictions in the notes to the consolidated statements only if the subsidiary's restricted net assets exceed 25% of the total consolidated assets.

Question 53

_____ A reason for using the subsidiary form of organization when expanding instead of the branch form of organization is

A) It better limits the ability of foreign taxing authorities to examine the books and records of the domestic operation.
B) It better insulates legally the existing operation from the new operation.
C) A foreign unit's earnings are not taxed in the United States until remitted to the domestic unit.
D) All of the above.
E) None of the above.

Question 54

_____ The economic resources (normally) that underlie the parent's investment in a subsidiary are the subsidiary's

A) Assets.
B) Assets, net of any liabilities.
C) Fixed assets.
D) Noncurrent assets.
E) Current assets.

Question 55

_____ In an aggregated consolidated balance sheet, the subsidiary's individual assets are

A) Shown separately.
B) Not included.
C) Summed with the parent's individual assets.
D) Netted against its liabilities and shown as a net amount.
E) None of the above.

Question 56

_____ In a disaggregated consolidated balance sheet, the subsidiary's individual assets are

A) Shown separately.
B) Not included.
C) Summed with the parent's individual assets.
D) Netted against its liabilities and shown as a net amount.
E) None of the above.

Question 57

_____ The disaggregated reporting format of presenting a subsidiary's financial statement amounts in the consolidated statements would not serve any useful purpose when the subsidiary is

A) In a different line of business from the parent.
B) In a different line of business from the parent and losing money.
C) Restricted from paying dividends to the parent by regulatory authorities.
D) Located in a foreign country.
E) None of the above.

Question 58

_____ A parent generally will not consolidate a subsidiary that

A) Is in an unrelated line of business.
B) Is located in a foreign country.
C) Has a different year-end.
D) Is in bankruptcy proceedings.
E) None of the above.

Question 59

_____ A parent need not consolidate a subsidiary if

A) The subsidiary is economically independent of the parent.
B) More than 50% of the subsidiary's sales are to the parent.
C) The subsidiary's total assets are less than 10% of total consolidated assets.
D) The parent allows the subsidiary to operate freely and independently (a decentralized management philosophy).
E) None of the above.

Question 60

_____ A parent generally will not consolidate a subsidiary that

A) Is unable to distribute dividends because of a cash shortage that is expected to be temporary.
B) Has completely emerged from bankruptcy reorganization proceedings.
C) Has an entirely different board of directors than the parent.
D) Has total assets and earnings that are less than 10% of the parent's total assets and earnings, respectively.
E) None of the above.

Question 61

_____ A valid reason for not consolidating a subsidiary is

A) The subsidiary is a finance subsidiary of a manufacturing parent.
B) The parent has a "hands off" decentralized operating philosophy and therefore does not take an active role in the day-to-day management of the subsidiary's operations.
C) The subsidiary never declares dividends.
D) The subsidiary is effectively managed by a foreign government.
E) None of the above.

Question 62

_____ A valid reason for not consolidating a subsidiary is

A) The subsidiary is an insurance subsidiary of a manufacturing company parent.
B) The parent does not take an active role in the management of the subsidiary's operations.
C) The subsidiary is entering the third month of a prolonged and bitter strike by its union employees.
D) The subsidiary is located in a foreign country.
E) None of the above.

Question 63

_____ A parent could justifiably not consolidate a subsidiary that is:

A) Reporting substantial operating losses.
B) A bank of a parent company that is not a bank.
C) Newly formed and has not yet become profitable.
D) Does not distribute any of its earnings to its parent.
E) None of the above.

Question 64

_____ Pixco (publicly owned) controls Sixco. Pixco could justifiably not consolidate Sixco if:

A) Sixco is having severe difficulty paying its creditors.
B) Sixco operates in a foreign country that has imposed severe long-term capital outflow restrictions.
C) Sixco is controlled only by legal means.
D) None of Sixco's officers or directors are officers or directors of Pixco.
E) None of the above.

Question 65

_____ A valid reason for not consolidating a subsidiary is

A) Applicable state law prohibits the subsidiary from making loans to its parent company.
B) The subsidiary's liabilities equal its assets.
C) The subsidiary has a serious cash shortage and will not be able to pay dividends for the foreseeable future.
D) The parent has substantial inventory sales to the subsidiary.
E) None of the above.

Question 66

_____ A publicly owned company has only one subsidiary. Under regulatory rules, the subsidiary cannot pay dividends to the parent above a certain amount. Under the SEC's rules, this restriction must be disclosed

A) Regardless of materiality.
B) If the subsidiary's total assets are more than 25% of the total consolidated net assets.
C) If the subsidiary's restricted net assets exceed 25% of consolidated net assets.
D) If the subsidiary's net assets exceed 25% of consolidated net assets.
E) None of the above.

Question 67

_____ Parco, a publicly owned company, could properly not consolidate Sarco, which is controlled by means of

A) (1) A majority voting interest and (2) is unable to distribute dividends because of severe and long-term currency transfer restrictions imposed by a foreign government.
B) (1) A majority voting interest and (2) has emerged from bankruptcy reorganization proceedings (thus is no longer in bankruptcy).
C) Other than a majority voting interest.
D) (1) A majority voting interest and (2) has total assets and earnings that are less than 10% of the Parco's total assets and earnings, respectively.
E) None of the above.

Question 68

_____ Which of the following is not a required consolidation disclosure?

A) The parent's consolidation policy.
B) The parent's consolidation procedures.
C) Restrictions on the ability of a subsidiary to transfer funds to the parent.
D) The business relationship of the subsidiary to the parent.
E) None of the above.

Question 69

_____ Paxco, a publicly owned company, controls Saxco (parent created). Consolidation of Saxco is not required if

A) Paxco has decided to sell Saxco.
B) Paxco is actively trying to sell Saxco and has several offers that it is considering.
C) Saxco has been sold under a pending contract of sale for which the closing date (payment of purchase price and transfer of property) is to be made 40 days after Paxco's year-end.
D) a, b, and c.
E) Saxco must be consolidated right up until the date of sale.

Question 70

A branch that maintains a general ledger is said to use a(n) ____________________ ______________________ accounting system.

Question 71

The Investment in Branch accounting has a balance that equals the ____________ ______________________ account of the branch.

Question 72

On the home office's books, the earnings of a branch are recorded in an account called ________________________________________.

Question 73

Income taxes pertaining to branch earnings are usually recorded on the books of the ________________________________________.

Question 74

A transfer of inventory from a home office to a branch is called a(n)_____________ ___________________________ inventory transfer.

Question 75

A major disadvantage of a centralized accounting system is that the profitability of branch operations cannot be determined because branch operations are not accounted for in a separate general ledger.

Question 76

Home office allocations to a branch are not required under U.S. GAAP.

Question 77

Income taxes can be allocated to a branch.

Question 78

Branch fixed assets can be carried on the home office's books under a decentralized accounting system.

Question 79

If branch fixed assets are recorded on the home office's books, depreciation expense would not be charged to branch operations.

Question 80

_____ Which of the following accounts is a reciprocal account to the Investment in Branch account?

A) Branch Income.
B) Equity in Home Office.
C) Home Office Capital.
D) None of the above.