Deck 17: Intercorporate Equity Investments

Question 1

The SEC prohibits consolidation of a subsidiary company unless majority ownership exists.

Answer 1

True

Question 2

In the terminology suggested by the FASB related to consolidation reporting, the term parent company refers to the company whose stockholders as a group end up with control of the voting stock of the other company entering into the business combination.

Answer 2

False

Question 3

An advantage of proportionate consolidation is that the minority interest category does not arise.

Answer 3

True

Question 4

With the new entity approach, consolidation of assets and liabilities occurs only to the extent of the stock acquired by the parent.

Question 5

The new proportionate consolidation approach results in the use of current values for the assets and liabilities of all the separate entities as of the date the combination is consummated.

Question 6

A purchase combination is argued to be simply the formal unification of two previously separate ownership groups.

Question 7

Accounting standards for intercorporate equity investments represent the most extensive application of flexible uniformity in accounting practice.

Question 8

With pooling of interests, total stockholders' equity of the combined enterprise would be equal to the sum of the separate companies' equities immediately prior to the combination.

Question 9

The central accounting issue in a business combination is the valuation of the assets and liabilities of the separate entities being combined for reporting purposes.

Question 10

According to SFAS No. 115, the fair market value method applies for investments of less than 50 percent where market values are readily determinable

Question 11

The relevant circumstances that justify differential accounting for intercorporate equity investments depend on the level of influence held by the investor.

Question 12

Application of the purchase method may be complicated by part of the purchase price being of a non-cash nature.

Question 13

Research has provided evidence that the stock market may be fooled by the higher income reported under the pooling method.

Question 14

SFAS 141 requires acquisitions previously accounted for as poolings be converted to purchase accounting.

Question 15

Currently, there are moves to extend consolidated reporting.

Question 16

A FASB survey found that most enterprises entering into a pooling of interest believed that the combination would not have occurred if purchase accounting had been acquired.

Question 17

The pooling of interests consolidation method has been eliminated for new acquisitions by SFAS No. 141.

Question 18

The equity method is questionable in terms of both relevance and representational faithfulness.

Question 19

The equity method is the required reporting method for all less-than-majority owned companies.

Question 20

The relevant circumstance in determining the reporting method for non-consolidated intercorporate equity investments is effective control.

Question 21

SFAS NO. 8 required the temporal method of translation.

Question 22

Under the temporal method of translation, all balance sheet items that are carried at current or future exchange prices are translated at the current exchange rate, while items carried at past prices are translated at exchange rates existing at the time the item was acquired.

Question 23

SPEs are designed to conduct just one well-defined activity.

Question 24

Accounting exposure is the exposure to exchange gains and losses resulting from translating U.S.-dollar-denominated financial statements into foreign denominations.

Question 25

Financing indicators are included in the guidelines provided by SFAS No. 52 for determining the functional currency.

Question 26

The essence of SFAS No. 142 is that goodwill must now be amortized over 40 years.

Question 27

An objective of translation under SFAS No. 52 is to avoid reporting foreign-currency-denominated operations as if they had occurred in U.S. dollars.

Question 28

The FASB was the first standard-setting body to address translation of foreign-based operations and holdings into U.S. dollars.

Question 29

It is difficult to attract investors to SPEs because the cash flows and the risks involved are hard to predict.

Question 30

The key question addressed by SFAS No. 52 involves how to report exchange gains and losses on the income statement.

Question 31

SFAS 142 equates goodwill with other intangible costs to be immediately expensed.

Question 32

The U.S. dollar orientation approach to the translation of foreign operations assumes that foreign currency denominated assets, liabilities, revenues, and expenses are measured in the foreign currency but are translated to U.S. dollars for reporting purposes.

Question 33

Economic exposure directly affects consolidated cash flows.

Question 34

A reporting unit for the impairment test would be an operating segment of the firm or one level below.

Question 35

According to SFAS No. 142, goodwill is an intangible asset with an indefinite life.

Question 36

In many SPE transactions, the tax benefits were likely to outweigh maintenance costs associated with the SPE.

Question 37

SFAS No. 52 adopted a currency U.S. dollar orientation to accounting for foreign currency operations.

Question 38

The U.S. dollar orientation approach to the translation of foreign operations requires an enterprise to account for foreign operations as if those operations actually occurred in U.S. dollars.

Question 39

Under SFAS No. 52, if the results of foreign-currency-denominated operations will not affect U.S. dollar cash flows, no exchange gain or loss is recorded.

Question 40

The functional currency is defined as the currency of the country in which the foreign subsidiary is located.

Question 41

SPEs were widely used by U.S. companies for legitimate purposes.

Question 42

Which of the following is not a true statement regarding SFAS No. 94?

A)SFAS No. 94 rejected the exclusionary arguments of ARB 51 and ARB 43.
B)SFAS No. 94 requires all majority-owned companies to be consolidated except when control is only temporary or if the majority owner does not have effective control.
C)SFAS No. 94 says that neither legal reorganization nor bankruptcy is an instance of non-control by a majority owner.
D)There is some evidence that the FASB was attempting to "level the playing field" in SFAS No. 94 by requiring companies to provide more information to financial statement users who might not have been aware of debt levels carried by unconsolidated subsidiaries.

Question 43

A _____ occurs when the subsidiary's stock is distributed to the combinor's shareholders as a dividend.

A)spin-off
B)split-off
C)split-up
D)sell-off

Question 44

In a 1976 discussion memorandum, the FASB defined the pooling-of-interest method of accounting for business combinations as a method which:

A)results in the assets and liabilities of the subsidiary being valued at market value at the time of acquisition, and the parent's assets and liabilities being valued at book value.
B)results in the assets and liabilities of the parent being valued at market value at the time of acquisition, and the subsidiary's assets and liabilities being valued at book value.
C)results in all entities' assets and liabilities being revalued to market values at the time the combination originates.
D)uses the book values of the combining companies.

Question 45

With which of the following methods of accounting for a business combination does a minority interest category not arise?

A)Pooling of interests
B)The purchase method
C)The new entity approach
D)Proportionate consolidation

Question 46

Which of the following methods of accounting for a business combination assumes that the parent company purchases the subsidiary and must account for the acquisition as it would for the acquisition of any asset?

A)Pooling of interests
B)The purchase method
C)The new entity approach
D)Proportionate consolidation

Question 47

In a 1976 discussion memorandum, the FASB defined the new entity approach to accounting for business combinations as a method which:

A)results in the assets and liabilities of the subsidiary being valued at market value at the time of acquisition, and the parent's assets and liabilities being valued at book value.
B)results in the assets and liabilities of the parent being valued at market value at the time of acquisition, and the subsidiary's assets and liabilities being valued at book value.
C)results in all entities' assets and liabilities being revalued to market values at the time the combination originates.
D)uses the book values of the combining companies.

Question 48

In the terminology suggested by the FASB, which of the following terms refers to the accounting entity that results from a business combination?

A)Parent enterprise
B)Combined enterprise
C)Consolidated enterprise
D)Controlling enterprise

Question 49

With which of the following methods of accounting for a business combination does consolidation of assets and liabilities occur only to the extent of the stock acquired by the parent?

A)Pooling of interests
B)The purchase method
C)The new entity approach
D)Proportionate consolidation

Question 50

Which of the following criteria has been most used by standard-setting bodies as the basis for evaluating the level of investor influence?

A)Controlling influence on the board of directors
B)Operating control
C)Managerial control
D)Percentage of voting stock owned

Question 51

A _________ occurs when the shares of two or more subsidiaries are distributed to the combinor's shareholders in exchange for all of the parent's shares with the parent then liquidated.

A)spin-off
B)split-off
C)split-up
D)sell-off

Question 52

A _________ occurs when the subsidiary's shares are distributed to the combinor's shareholders in exchange for shares of the parent's stock.

A)spin-off
B)split-off
C)split-up
D)sell-off

Question 53

In the terminology suggested by the FASB, which of the following terms refers to the separate business enterprises that enter into a business combination?

A)Constituent companies
B)Combined companies
C)Subsidiary companies
D)Consolidated companies

Question 54

In the terminology suggested by the FASB, which of the following terms refers to the company whose stockholders as a group end up with control of the voting stock of the other company entering into the business combination?

A)Parent
B)Subsidiary
C)Combinee
D)Combinor

Question 55

Which of the following is not one of the three ways of reporting on intercorporate equity investments?

A)Consolidated reporting as if the two separate legal entities are an accounting entity using the purchase method.
B)Consolidated reporting using the pooling method
C)Non-consolidation using the equity method of accounting
D)Non-consolidation using a fair market value approach

Question 56

A _____ occurs when the subsidiary's stock is sold for cash, assets, or in settlement of a debt.

A)spin-off
B)split-off
C)split-up
D)sell-off

Question 57

Which of the following is not a true statement?

A)ARB 51 prohibited consolidation of a subsidiary company unless majority ownership exists.
B)ARB 51 took the view that majority ownership per se did not indicate control if ownership were temporary or if for some reason control did not reside with the majority owner.
C)ARB 51 permitted separate reporting for heterogeneous subsidiaries instead of consolidation.
D)ARB 43 permitted separate reporting for foreign subsidiaries instead of consolidation.

Question 58

What is the appropriate reporting method for less than majority owned companies?

A)The equity method
B)The fair value method
C)Either the equity method or the fair value method depending on whether the investor can exercise significant influence over operating and financial policies
D)Either the equity method or the fair value method depending on whether the investor has effective control over operating and financial policies

Question 59

Which of the following methods of accounting for a business combination is based on the premise that no substantive transaction occurs between the companies involved?

A)Pooling of interests
B)The purchase method
C)The new entity approach
D)Proportionate consolidation

Question 60

In a 1976 discussion memorandum, the FASB defined the purchase method of accounting for business combinations as a method which:

A)results in the assets and liabilities of the subsidiary being valued at market value at the time of acquisition, and the parent's assets and liabilities being valued at book value.
B)results in the assets and liabilities of the parent being valued at market value at the time of acquisition, and the subsidiary's assets and liabilities being valued at book value.
C)results in all entities' assets and liabilities being revalued to market values at the time the combination originates.
D)uses the book values of the combining companies.

Question 61

Which of the following is not one of the six guidelines or economic factors provided by SFAS No. 52 for determining the functional currency?

A)Sales price indicators
B)Interest rate indicators
C)Expense indicators
D)Intercompany transactions and arrangements

Question 62

Which of the following standard-setting bodies was the first to address translation of foreign-based operations and holdings into U.S. dollars?

A)CAP
B)APB
C)FASB
D)SEC

Question 63

Which of the following methods of accounting for business combinations has been viewed as an important motivation for business combinations?

A)Pooling of interests
B)The purchase method
C)The new entity approach
D)Proportionate consolidation

Question 64

Which of the following is not true if the functional currency of a foreign operation is U.S. dollars?

A)All balance sheet items that were carried at current or future exchange prices are translated at the current exchange rate.
B)All balance sheet items carried at past prices are translated at exchange rates existing at the time the item was acquired.
C)All income statement items are translated at the average exchange rate for the reporting period.
D)Exchange gains and losses arising from translation from the currency of record into the functional currency are recognized on the income statement.

Question 65

Which of the following is not a true statement regarding SFAS No. 52?

A)The key question brought up in SFAS No. 52 involves how to report exchange gains and losses on the income statement.
B)The six guidelines or economic factors provided by SFAS No. 52 for determining the functional currency have a differential cash flow orientation.
C)The six indicators provided by SFAS No. 52 have been found to provide adequate guidance for determining the functional currency.
D)The six indicators provided by SFAS No. 52 for determining the functional currency have a foreign currency component and a parent's currency component.

Question 66

Which of the following directly affects consolidated cash flows?

A)Accounting exposure
B)Economic exposure
C)Both accounting exposure and economic exposure
D)Neither accounting exposure nor economic exposure

Question 67

With the temporal method of translation:

A)all balance sheet items that are carried at current or future exchange prices are translated at the current exchange rate.
B)balance sheet items carried at past prices, such as fixed assets, are translated at the current exchange rate.
C)income statement items are translated at the current exchange rate.
D)income statement items are translated at historical exchange rates.

Question 68

Accounting exposure is:

A)the exposure to exchange gains and losses resulting from translating U.S.-dollar-denominated financial statements into foreign denominations.
B)the exposure to exchange gains and losses resulting from translating foreign-currency-denominated financial statements into U.S. dollars.
C)the exposure to cash flow changes resulting from dealings in foreign-denominated transactions and commitments.
D)a result of the need to use more U.S. dollars to settle a foreign-currency-denominated debt.

Question 69

Which of the following is not a true statement?

A)Consolidated reporting emerged in the early 1900s in response to the growth of holding companies.
B)Consolidation reporting presumes that the accounting fiction of a group entity is more meaningful than defining the reporting entity in legal terms.
C)There are moves afoot to curtail consolidated reporting.
D)The relevant circumstance in the reporting of intercorporate equity investments centers on the notion of investor control, but, in practice, the magnitude of ownership has been the guiding criterion.

Question 70

"One-line consolidation" refers to:

A)the equity method.
B)the fair value method.
C)the purchase method.
D)pooling of interests.

Question 71

SFAS No. 52 adopted:

A)a U.S. dollar orientation to accounting for foreign currency operations.
B)a functional currency orientation to accounting for foreign currency operations.
C)a foreign currency orientation to accounting for foreign currency operations.
D)none of the above.

Question 72

Economic exposure is:

A)the exposure to exchange gains and losses resulting from translating U.S.-dollar-denominated financial statement into foreign denominations.
B)the exposure to exchange gains and losses resulting from translating foreign-currency-denominated financial statements into U.S. dollars.
C)the exposure to cash flow changes resulting from dealings in foreign-denominated transactions and commitments.
D)a result of the need to use more foreign currency to settle U.S.-dollar-denominated debt.

Question 73

What is the objective of translation under SFAS No. 52?

A)To avoid reporting accounting exchange gains and losses when an economic gain or loss has not occurred
B)To avoid reporting foreign-currency-denominated operations as if they had occurred in U.S. dollars
C)To maintain a U.S. dollar orientation
D)Both a and b

Question 74

Which of the following is not true regarding SFAS No. 142?

A)Goodwill may be defined as the excess earning power of an acquisition.
B)Goodwill is defined as the difference between the amount paid for an acquired subsidiary and the fair market value of its individual net assets.
C)Tests of goodwill impairment must be made on an annual basis.
D)Because goodwill has an indefinite life, it is not subject to write-off as an expense.

Question 75

If the proportionate ownership method of accounting for business combinations were to be used throughout the ownership range, it would be an example of:

A)finite uniformity.
B)flexible uniformity.
C)rigid uniformity.
D)definable uniformity.

Question 76

Which of the following is a true statement regarding SFAS No. 52?

A)When a foreign entity's currency is the functional currency, net income is measured in the foreign currency and then restated into dollars at the current exchange rate at the end of the period.
B)When a foreign entity's currency is the functional currency, any exchange adjustment resulting from translating balance sheet and income statement items at different exchange rates is recognized as a gain or loss on the income statement.
C)When a foreign entity's currency is the functional currency, all balance sheet items are translated at the average exchange rate for the period.
D)If the results of foreign-currency-denominated operations will not affect U.S. dollar cash flows, no exchange gain or loss is recorded.

Question 77

Which of the following does not apply to the Bretton Woods Agreement of 1944?

A)The developments surrounding the agreement have heightened the importance of how translation of foreign-based operations should be handled.
B)It established controlled exchange rates worldwide.
C)It allowed monetary authorities to buy or sell gold or foreign exchange with the intent of maintaining an allowable exchange rate fluctuation.
D)It collapsed in 1971 resulting in freer and more volatile exchange rate fluctuations.

Question 78

Which of the following is not true regarding an equity carve-out?

A)It can result in the creation of minority interests.
B)It arises when a combinor sells a portion of its interest in a combinee.
C)It arises when a combinor dilutes its interest through an initial public offering of the subsidiary.
D)The SEC requires resulting carve-out gains to be booked as non-operating income.
E)It can result in the creation of minority interests.

Question 79

Which of the following applies to the U.S. dollar orientation approach to the translation of foreign operations?

A)It requires an enterprise to account for foreign operations as if those operations actually occurred in U.S. dollars.
B)It recognizes that the foreign operations occurred in a foreign currency and that those operations may not affect U.S. dollars.
C)Foreign currency denominated assets, liabilities, revenues, and expenses are assumed to be measured in the foreign currency but are translated to U.S. dollars for reporting purposes.
D)The effects of changing exchange rates are not reported in income until the net assets are exchanged.

Question 80

Which of the following is not a true statement regarding SFAS No. 8?

A)SFAS was faithful to the historical cost accounting model, but from an economic viewpoint, it produced illogical results.
B)SFAS No. 8 required the temporal method of translation.
C)In empirical studies made of the economic impact of SFAS No. 8 on American multinational enterprises, only foreign exchange risk and management policies regarding hedging of foreign currency exposures were found to have any possible impact.
D)SFAS No. 8 was consistent with the foreign currency orientation.