Question 1

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

Accepted Answer

SPEs, or special purpose entities, can serve legitimate purposes for companies, such as facilitating financing or managing risk. However, they have also been used for questionable activities, such as hiding debt or manipulating financial statements.

Question 2

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

Accepted Answer

SFAS No. 94 specifically states that legal reorganization or bankruptcy does not represent a lack of control by a majority owner. A, B, and D are true statements about SFAS No. 94.

Question 3

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

Accepted Answer

A spin-off is a type of corporate restructuring that involves a company creating a new, independent company by separating a part of its existing business. This new company is then distributed to the original company's shareholders as a dividend. This is typically done when a parent company wants to focus on its core area of expertise and believes that the new company would be better served as an independent entity. A split-off, on the other hand, involves the subsidiary being exchanged for shares of the parent company's stock, while a split-up involves dividing a company into two or more independent companies. A sell-off refers to the sale of a company or a part of its business to another company.

Question 4

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

Accepted Answer

The pooling-of-interest method of accounting for business combinations uses the book values of the combining companies.

Question 5

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

Accepted Answer

The answer of With which of the following methods of...

Question 6

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?

Accepted Answer

The purchase method assumes that the parent company purchases the subsidiary and must account for the acquisition as it would for the acquisition of any asset. Under this method, the parent company records the assets and liabilities of the subsidiary at their fair market values on the date of acquisition.

Question 7

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

Accepted Answer

The new entity approach involves revaluing all entities' assets and liabilities to market values at the time the business combination occurs, reflecting the creation of a new entity.

Question 8

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

Accepted Answer

The term "Combined enterprise" refers to the accounting entity that results from a business combination, as it represents the combination of two or more entities into one.

Question 9

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?

Accepted Answer

Proportionate consolidation is the method where consolidation of assets and liabilities occurs only to the extent of the stock acquired by the parent. This method is typically used for joint ventures where each party includes their share of the assets, liabilities, income, and expenses in their financial statements.

Question 10

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

Accepted Answer

The percentage of voting stock owned has been most used by standard-setting bodies as the basis for evaluating the level of investor influence. This is because owning a higher percentage of voting stock gives investors greater power to influence the decisions made by the company.

Question 11

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.

Accepted Answer

A split-up occurs when a parent company is divided into two or more independent companies, distributing the shares of these new entities to the parent's shareholders and then liquidating the parent company.

Question 12

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

Accepted Answer

A split-off occurs when a subsidiary's shares are distributed to the combinor's shareholders in exchange for shares of the parent's stock. A spin-off refers to the creation of a new, independent company through the sale or distribution of shares of an existing business, while a split-up is the division of a company into smaller, separate entities. A sell-off refers to the sale of all or part of a company's assets or operations.

Question 13

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

Accepted Answer

The FASB uses the term "constituent companies" to refer to separate business enterprises that enter into a business combination. The combined entity resulting from the business combination can be referred to as the "combined company," while subsidiary companies refer to companies that are controlled by another entity. Consolidated companies refer to financial statements in which the assets, liabilities, equity, revenues, and expenses of a parent company and its subsidiaries are presented as those of a single economic entity.

Question 14

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?

Accepted Answer

The term "combinor" refers to the company whose stockholders end up with control of the voting stock of the other company in a business combination, according to FASB terminology.

Question 15

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

Accepted Answer

The pooling method for reporting intercorporate equity investments has been prohibited since 2001 due to concerns about its reliability and comparability. Therefore, of the options given, consolidated reporting using the pooling method is not a valid way of reporting intercorporate equity investments.

Question 16

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

Accepted Answer

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

Question 17

Which of the following is not a true statement?

Accepted Answer

ARB 51 did not prohibit consolidation of a subsidiary company unless majority ownership exists.

Question 18

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

Accepted Answer

When an investor has less than majority ownership in a company, they can use either the equity method or the fair value method to report their investment, depending on whether they can exercise significant influence over the operating and financial policies of the company. The equity method is used when the investor has significant influence and allows the investor to report the investment on their balance sheet based on their share of ownership of the company's net assets. The fair value method is used when the investor does not have significant influence and requires the investor to report the investment at fair value on their balance sheet, with changes in fair value recorded in the income statement. Therefore, the best choice is C.

Question 19

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?

Accepted Answer

The pooling of interests method is based on the premise that no substantive transaction occurs between the companies involved. Under this method, the assets and liabilities of the two companies are simply added together, and there is no recognition of goodwill or other intangible assets. This method was allowed under previous accounting standards but has been largely replaced by the purchase method in current practice.

Question 20

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

Accepted Answer

The purchase method of accounting for business combinations involves recording the assets and liabilities of the acquired company (subsidiary) at their fair market values at the time of acquisition, while the acquiring company (parent) continues to report its assets and liabilities at historical (book) values.

Quiz 17: Intercorporate Equity Investments