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

Accepted Answer

Fair value is the appropriate basis for valuing fixed assets acquired in a business combination carried out by exchanging cash for common stock. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It provides more relevant and reliable information for financial reporting than historic cost or book value. Cost plus any excess of purchase price over book value of asset acquired is also not appropriate as it does not reflect the fair value of the asset.

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

Accepted Answer

Noncontrolling interest represents the portion of a subsidiary company that is not owned by the parent company. It is a separate item within the stockholders' equity section of the consolidated balance sheet because it represents the equity ownership in the subsidiary that is not owned by the parent company. This is the theoretically preferred method of presenting noncontrolling interest on a consolidated balance sheet.

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

Accepted Answer

When a company acquires another at a bargain price, and the sum of the fair values of the identifiable assets acquired less the fair value of liabilities assumed exceeds the acquisition cost, the excess (formerly known as negative goodwill) should be recognized in current income in the year of the combination.

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.

Accepted Answer

The answer of Under which of the theories of equity...

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.

Accepted Answer

The entity that obtains control over one or more businesses and establishes the acquisition date that control was achieved is called the acquirer, as per the acquisition method. The acquirer records the acquired assets, liabilities, and any noncontrolling interest at their fair values on the acquisition date.

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

Accepted Answer

The resulting gain should be included as a component of other comprehensive income because it is a foreign currency translation gain.

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.

Accepted Answer

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit value). Therefore, the fair value measurement for a business combination is also an exit value.

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

Accepted Answer

The preparation of consolidated financial statements is based on the accounting concept of economic entity, which requires a company to be viewed as a single economic unit, regardless of its legal structure. Under this concept, the parent and subsidiary are considered as a single entity, and the financial statements are consolidated to reflect the financial position and performance of the entire 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.

Accepted Answer

Consolidated financial statements are prepared when one company has a controlling interest in another, regardless of industry differences or fiscal year-end timing. The exception is when circumstances prevent the exercise of control, such as legal restrictions or severe long-term restrictions on fund transfers between the parent and subsidiary.

Question 10

When translating foreign currency financial statements, which of the following accounts would be translated using current exchange rates? Property, Plant, and Equipment$\quad$Inventoriescarried at cost A)Yes$\quad$Yes B)No$\quad$No C)Yes$\quad$No D)No$\quad$Yes

Accepted Answer

The answer of When translating foreign currency financial statements, which...

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

Accepted Answer

In financial reporting for segments of a business enterprise, the operating profit or loss of a segment should include both allocated corporate overhead and operating expenses, hence D is the correct option.

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

Accepted Answer

Consolidation policy is not a consideration in segment reporting for diversified enterprises because it pertains to the consolidation of financial statements, rather than the reporting of segment information. The other options, allocation of joint costs, transfer pricing, and defining the segments, are all important considerations when reporting on different segments within a diversified enterprise.

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

Accepted Answer

The justification for consolidated financial statements is that although in form the companies are separate legal entities, in substance they operate as a single economic entity. Consolidated financial statements present the results of operations and financial position of a group of companies as if they were a single entity.

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.

Accepted Answer

A consolidated statement is proper when one company has control over another company, which is defined as owning more than 50% of the outstanding common stock. In option A, Neely owns 80% of Randle and 40% of Walker, which gives them control over both companies. Randle's ownership of 30% of Walker does not change Neely's control over both companies. Option B is not appropriate because Neely did not own Walker for a significant period of time before the balance sheet date. Option C is not appropriate because Walker is in legal reorganization. Option D is not appropriate because Reeves, Inc. also has significant ownership in Walker, which would not give Neely full control over the company.

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.

Accepted Answer

Under the acquisition method for a business combination, the cost incurred to effect the business combination, such as finders and legal fees are expensed as incurred. This is in line with the principle of recognizing expenses when they are incurred and matching them with the period in which they are utilized to generate revenue.

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

Accepted Answer

The historical exchange rate is used for translating the depreciation on plant assets in the income statement of a foreign subsidiary when the subsidiary's functional currency is the local currency that has not experienced significant inflation. This is because the historical rate reflects the exchange rate at the time the assets were acquired, which is relevant for accurately translating non-monetary assets like plant and equipment that are recorded at historical cost.

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 Wages expense Sales to Customers A)No No B)No Yes C)Yes No D)Yes Yes

Accepted Answer

Since the subsidiary's function currency is its local currency, the wages expense and sales to customers should be translated using the current year's average exchange rates.

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

Accepted Answer

The answer of On October 1, Company X acquired for...

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

Accepted Answer

Curtis, Inc. owns 10 percent of the outstanding stock of Baldwin Company, which is less than 50 percent. Therefore, it is considered a noncontrolling interest and should be included in the consolidated financial statements as such.

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

Accepted Answer

Goodwill is calculated as the excess of the purchase price of an acquired company over the sum of the fair values of its identifiable assets less the liabilities assumed. It reflects the value of intangible assets such as brand reputation, customer relationships, and intellectual property that are not separately identifiable or separately recognized.

Quiz 16: Accounting for Multiple Entities

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?

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

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

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

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

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

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

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

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

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

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

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

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

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 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 Wages expense Sales to Customers

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

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

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