Question 1

The purchase price of an entity includes:
A)the book value of the subsidiary's shareholder equity and the acquisition differential.
B)the book value of the subsidiary's shareholder equity and goodwill.
C)the fair market value of the subsidiary's shareholder equity and the purchase price discrepancy.
D)the fair market value of the subsidiary's net assets.

Accepted Answer

The purchase price of an entity includes the book value of the subsidiary's shareholder equity and the acquisition differential.

Question 2

On the date of acquisition,the parent's investment (in subsidiary account)is:
A)revalued to fair market value
B)replaced with 100% of the assets and liabilities of the subsidiary at fair market value.
C)replaced with 100% of the assets and liabilities of the subsidiary at book value.
D)replaced with the parent's pro rata share of the assets and liabilities of the subsidiary at fair market value

Accepted Answer

On the date of acquisition, the parent's investment in the subsidiary is replaced with 100% of the assets and liabilities of the subsidiary at fair market value. This is known as the acquisition method and is required by accounting standards such as IFRS 3 and ASC 805. The fair market value of the assets and liabilities is used to determine the purchase price allocation and any goodwill or bargain purchase gain.

Question 3

Any negative goodwill arising on the date of acquisition
A)is recognized as a gain on the date of acquisition.
B)is prorated among the parent company's identifiable net assets.
C)should be amortized over a predetermined period)
D)is recognized as a loss on the date of acquisition.

Accepted Answer

A

Question 4

Consolidated financial statements consist of
A)a balance sheet,a statement of comprehensive income,a statement of changes in equity,a cash flow statement and accompanying notes.
B)a balance sheet,a statement of income,a statement of changes in financial position,and a statement of retained earnings.
C)a balance sheet,income statements and a statement of retained earnings.
D)a balance sheet,a statement of comprehensive and non-comprehensive income and any other statements that will provide useful information to the users of the financial statements.

Accepted Answer

Consolidated financial statements typically include a balance sheet, a statement of comprehensive income, a statement of changes in equity, a cash flow statement, and accompanying notes. This option provides the most comprehensive set of financial statements, which can provide a complete picture of the financial health and performance of the entity being reported on.

Question 5

On the date of formation of a 100% owned subsidiary by the parent:
A)it is possible to prepare consolidated financial statements that include all the assets and liabilities of the subsidiary..
B)consolidated financial statements are difficult to prepare because the assets and liabilities of the subsidiary have yet to be determined)
C)consolidation requires the elimination of the parent's investment account against the subsidiaries share capital..
D)none of the above is applicable.

Accepted Answer

Consolidation requires the elimination of the parent's investment account against the subsidiaries share capital.

Question 6

One weakness associated with the Entity Theory is that
A)it is inconsistent with the Historical Cost Principle.
B)Non-Controlling Interest is computed using the fair market values of the subsidiary's net assets.
C)Non-Controlling interest is computed using the book values of the subsidiary's net assets.
D)the presumed acquisition cost may be unrealistic when the parent purchases significantly less than 100% of the subsidiary's voting shares,or voting control is achieved incrementally.

Accepted Answer

The Entity Theory assumes that the parent company has control over the subsidiary, but this may not always be the case when the parent purchases less than 100% of the subsidiary's shares or gains control incrementally. As a result, the presumed acquisition cost may not be realistic. This is a weakness of the Entity Theory.

Question 7

The calculation of Goodwill and Non-Controlling Interest under the Entity Theory is derived :
A)by using an imputed acquisition cost,which would be the presumed cost of acquiring 100% of the outstanding voting shares of the subsidiary.
B)by using the actual acquisition cost.
C)by using the actual acquisition cost less any uncontrolled portion of the subsidiary's net assets at fair market value.
D)by using the actual acquisition cost less any uncontrolled portion of the subsidiary's net assets at book value.

Accepted Answer

Entity theory assumes that the acquirer has purchased the entire subsidiary, therefore, the calculation of Goodwill and Non-Controlling Interest is done based on the imputed acquisition cost, i.e., the presumed cost of acquiring 100% of the outstanding voting shares of the subsidiary. This approach takes into account the entire value of the subsidiary as if it were acquired completely by the parent company. Therefore, option A is the best choice for the calculation of Goodwill and Non-Controlling Interest under the Entity Theory.

Question 8

The following data pertains to questions 
Parent and Sub Inc had the following balance sheets on July 31,2007:  The Net Incomes for Parent and Sub Inc for the year ended July 31,2007 were $120,000 and $60,000 respectively.
-Assume that Parent Inc.decides to prepare an Income Statement for the combined entity on the date of acquisition.Assuming that Parent acquires 100% of Sub Inc.on that date,what would be the net income reported for the combined entity?
A)$180,000
B)$120,000
C)$ 60,000
D)Nil

Accepted Answer

The answer of The following data pertains to questions 
Parent...

Question 9

A negative acquisition differential
A)is always equal to negative goodwill.
B)is equal to negative goodwill when the fair values of the subsidiary's identifiable net assets are equal to their book values.
C)implies that the parent company may have overpaid for its acquisition.
D)cannot occur under the acquisition method)

Accepted Answer

A negative acquisition differential is equal to negative goodwill when the fair values of the subsidiary's identifiable net assets are equal to their book values, as it indicates that the purchase price is less than the fair value of the net assets acquired.

Question 10

The following data pertains to questions 
Parent and Sub Inc had the following balance sheets on July 31,2007:  The Net Incomes for Parent and Sub Inc for the year ended July 31,2007 were $120,000 and $60,000 respectively.
-Assume that Parent Inc.decides to prepare an Income Statement for the combined entity on the date of acquisition.Assuming that Parent acquires 80% of Sub Inc.on that date,what would be the net income reported for the combined entity?
A)$130,000
B)$120,000
C)$104,000
D)Nil

Accepted Answer

The answer of The following data pertains to questions 
Parent...

Question 11

HRN Enterprises Inc purchases 80% of the outstanding voting shares of NHR Inc on January 1,2009.On that date,
A)HRN's Non-Controlling Interest account will include 20% of the fair value of NHR's net assets.
B)HRN's Non-Controlling Interest account will include 20% of the book value of NHR's net assets.
C)HRN's Non-Controlling Interest account will include 20% of the acquisition differential on the Date of Acquisition.
D)HRN's Non-Controlling Interest account will include 20% of any unallocated portion of the acquisition differential on the Date of Acquisition.

Accepted Answer

When an acquiring company purchases a controlling interest in another company, the acquiring company recognizes the non-controlling interest as a separate line item on its financial statements. The amount recognized is based on the non-controlling interest's share of the acquired company's net assets. In this case, HRN Enterprises Inc purchased 80% of the outstanding voting shares of NHR Inc. Therefore, the non-controlling interest is 20%, and it would be recognized at its proportionate share of the book value of NHR's net assets. Therefore, choice B is correct. Choices A, C, and D are incorrect because they do not reflect the appropriate treatment under GAAP for recognizing non-controlling interests.

Question 12

Under the Proprietary theory,Non-Controlling Interest is
A)non-existent.Goodwill is established based on the Parent's pro-rata share of any acquisition differential.
B)non-existent.Goodwill is established based on the Parent's acquisition cost.
C)based on the fair market values of the subsidiary's net assets.Goodwill is established based on the Parent's acquisition cost.
D)based on the book values of the subsidiary's net assets.Goodwill is established based on the Parent's acquisition cost.

Accepted Answer

Under the Proprietary theory, Non-Controlling Interest is non-existent. Goodwill is established based on the Parent's acquisition cost. This means that the goodwill recognized on the consolidated balance sheet is equal to the excess of the parent's purchase price over the fair market value of net assets acquired. Non-Controlling Interest is not recognized, as the subsidiary's equity is simply consolidated with the parent's equity, giving the parent's shareholders ownership of the entirety of the consolidated entity.

Question 13

Contingent consideration should be valued at
A)the fair value of the consideration on the date of acquisition.
B)the book value of the consideration at the date of acquisition.
C)the acquirer's pro-rata share of the subsidiary's net assets at book value at the date of acquisition.
D)the acquirer's pro-rata share of the subsidiary's net assets at fair value at the date of acquisition.

Accepted Answer

Contingent consideration should be valued at the fair value on the date of acquisition, as this represents the most accurate estimate of what the acquirer will ultimately pay for the potential future payments associated with the contingency. The book value of the consideration at the date of acquisition or the subsidiary's net assets at book/fair value would not necessarily reflect the value of the contingent consideration.

Question 14

Under the Parent Company Theory,which of the following pertaining to Consolidated Financial Statements is correct?
A)The Consolidated Balance Sheet is prepared by adding the book values of both the Parent and its subsidiary.
B)The Consolidated Balance Sheet is prepared by adding the book values of both the Parent and its subsidiary as well as the Parent's share of any acquisition differentials.
C)The Consolidated Balance Sheet is prepared by adding the fair market values of both the Parent and its subsidiary as well as the parent's share of any acquisition differentials.
D)The Consolidated Balance Sheet is prepared by adding together the fair market values of both the parent and its subsidiary.

Accepted Answer

Under the Parent Company Theory, the Consolidated Balance Sheet is prepared by adding the book values of both the Parent and its subsidiary as well as the Parent's share of any acquisition differentials. This is because the Parent Company Theory assumes that the parent company controls the subsidiary, and as a result, it should report the subsidiary's results as if they were part of its own operations. Therefore, any differences between the cost of the investment and the fair value of the subsidiary's assets and liabilities need to be added to the consolidated balance sheet.

Question 15

On the date of acquisition,consolidated shareholder equity is equal to:
A)the sum of the parent and subsidiary's shareholder equities.
B)the sum of the parent's shareholder equity plus its pro rata share of the subsidiary's shareholder equity on the date of acquisition.
C)the parent's shareholder equity.
D)the subsidiary's shareholder equity.

Accepted Answer

On the date of acquisition, consolidated shareholder equity is equal to the parent's shareholder equity. The subsidiary's equity is not added; instead, the parent's investment in the subsidiary is reflected in the consolidated financial statements.

Question 16

When the parent forms a new subsidiary,
A)there should be no acquisition differential.
B)a gain or loss will usually arise.
C)push down accounting rules must be followed)
D)it should not be included in the company's consolidated financial statements as this would effectively be double-counting.

Accepted Answer

When a parent company forms a new subsidiary, there is no acquisition differential because the parent is not acquiring an existing entity at a different value than its book value; it is creating a new entity.

Question 17

Contingent consideration will be classified as a liability when
A)it will be paid in the form of additional equity.
B)it will be paid in the form of cash or another asset.
C)the form of payment will be determined at a future date.
D)the acquirer decides the appropriate time to make a payment.

Accepted Answer

The answer of Contingent consideration will be classified as a...

Question 18

A company owning a majority (but less than 100%)of another's voting shares on the date of acquisition should account for its subsidiary
A)by including only its share of the fair market values of the subsidiary's net assets.
B)by including only its share of the book values of the subsidiary's net assets.
C)by including 100% of the fair market values of the subsidiary's net assets.
D)by including 100% of the fair market values of the subsidiary's net assets and accounting for any unowned portion of the subsidiary's voting shares using the Non-Controlling Interest account.

Accepted Answer

When a company owns a majority but less than 100% of another company's voting shares, it is considered a parent company and the other company is the subsidiary. The parent company should include 100% of the fair market values of the subsidiary's net assets in its financial statements. Additionally, any unowned portion of the subsidiary's voting shares should be accounted for using the Non-Controlling Interest account. This is done to reflect the portion of the subsidiary's net assets that is not owned by the parent company. Therefore, choice D is the best choice.

Question 19

If a subsidiary's goodwill is reasonably measurable on the date of acquisition,which consolidation theory should the parent company apply after January 1,2009?
A)Proprietary Theory.
B)Parent Company Theory.
C)Parent Company Extension.
D)Entity Theory.

Accepted Answer

If the subsidiary's goodwill is reasonably measurable on the date of acquisition, the parent company should apply the Entity Theory, which states that the subsidiary is a separate legal entity from the parent and should be consolidated accordingly. In this case, the subsidiary's goodwill would be recognized on the parent company's consolidated financial statements. The other theories are not applicable because they either only apply to specific types of subsidiaries or do not recognize the subsidiary as a separate entity.

Question 20

Under "push-down" accounting,a subsidiary's assets and liabilities are revalued using:
A)fair market values.
B)Lower of Cost and Market principles.
C)the parent's acquisition cost.
D)the net asset values (NAV).

Accepted Answer

Under push-down accounting, the subsidiary's assets and liabilities are revalued using the parent's acquisition cost. Push-down accounting is used when the parent company acquires a controlling interest in the subsidiary and wants to reflect the economic reality of the acquisition in the financial statements. By revaluing the assets and liabilities at the acquisition cost, the parent company can show a more accurate picture of the subsidiary's financial position.

Quiz 4: Consolidated Statements on Date of Acquisition

The purchase price of an entity includes:

On the date of acquisition,the parent's investment (in subsidiary account) is:

Any negative goodwill arising on the date of acquisition

Consolidated financial statements consist of

On the date of formation of a 100% owned subsidiary by the parent:

One weakness associated with the Entity Theory is that

The calculation of Goodwill and Non-Controlling Interest under the Entity Theory is derived :

A negative acquisition differential

HRN Enterprises Inc purchases 80% of the outstanding voting shares of NHR Inc on January 1,2009.On that date,

Under the Proprietary theory,Non-Controlling Interest is

Contingent consideration should be valued at

Under the Parent Company Theory,which of the following pertaining to Consolidated Financial Statements is correct?

On the date of acquisition,consolidated shareholder equity is equal to:

When the parent forms a new subsidiary,

Contingent consideration will be classified as a liability when

A company owning a majority (but less than 100%) of another's voting shares on the date of acquisition should account for its subsidiary

If a subsidiary's goodwill is reasonably measurable on the date of acquisition,which consolidation theory should the parent company apply after January 1,2009?

Under "push-down" accounting,a subsidiary's assets and liabilities are revalued using: