Question 1

Desidero Corporation acquired 100% of the common stock of Basile Company for $170,000.On the date of acquisition,Basile Company's stockholders' equity consisted of: Common Stock,$100,000 and Retained Earnings,$70,000.On the date of the acquisition,Desidero Company's stockholders' equity consisted of: Common Stock $500,000 and Retained Earnings $1,000,000.On the acquisition date,the elimination entry to be made on a worksheet to prepare a consolidated balance sheet would include a:

Accepted Answer

The answer of Desidero Corporation acquired 100% of the common...

Question 2

Consolidated financial statements are prepared for:

Accepted Answer

Consolidated financial statements include the balance sheet, income statement, statement of cash flows, and statement of stockholders' equity. These statements provide a comprehensive overview of the financial performance, position, and changes in equity of a parent company and its subsidiaries as a single entity.

Question 3

Noncontrolling Interest is reported in the:

Accepted Answer

Noncontrolling interest represents the portion of a subsidiary that is not owned by the parent company. Therefore, it is reported as part of the stockholders' equity section of the consolidated balance sheet since it represents the ownership of the subsidiary by the minority shareholders.

Question 4

On a worksheet for a consolidated balance sheet,one elimination entry:

Accepted Answer

The answer of On a worksheet for a consolidated balance...

Question 5

A consolidated income statement will show:

Accepted Answer

A consolidated income statement combines the financial results of a parent company and its subsidiaries, showing the parent's net income plus the parent's share of the subsidiary's net income.

Question 6

A U.S.company sells goods on account to a French company.The French company will pay in euros.If the euro strengthens before the U.S.company collects,the U.S.company will have a foreign-currency transaction gain.

Accepted Answer

If the euro strengthens, the U.S. company will receive more dollars when converting the euros into dollars. This results in a foreign-currency transaction gain.

Question 7

Santa Ana Company purchased merchandise on account from a company in England.The price was 1,000 pounds.At the time of the purchase,the exchange rate for a pound was $1.52.At the time Santa Ana Company paid for the merchandise,the exchange rate for a pound was $1.55.What can we say about the pound relative to the U.S.dollar?

Accepted Answer

The pound strengthened and the U.S. dollar weakened over time, as the exchange rate increased from $1.52 to $1.55 per pound. This means that it took more U.S. dollars to buy one pound, indicating a relative increase in the value of the pound.

Question 8

Consolidated financial statements are prepared when a company owns ________ of the common stock of another company.

Accepted Answer

Consolidated financial statements are prepared when a company owns more than 50% of the common stock of another company, indicating control over the subsidiary.

Question 9

Big Company owns 100% of the outstanding common stock of Small Company.Small Company borrowed $10,000 from Big Company.What elimination entry is required for this transaction?

Accepted Answer

The elimination entry removes the intercompany loan from the consolidated financial statements by debiting Note Payable and crediting Note Receivable.

Question 10

Santa Barbara Company purchased merchandise on account from a company in England.The price was 1,000 pounds.At the time of the purchase,the exchange rate for a pound was $1.52.At the time Santa Barbara Company paid for the merchandise,the exchange rate for a pound was $1.55.What is the amount of the gain or loss recorded by the Santa Barbara Company upon payment?

Accepted Answer

To calculate the gain or loss in a foreign currency transaction, we need to compare the exchange rates at the time of purchase and the time of payment. At the time of purchase, 1,000 pounds cost $1.52 per pound, so the total was $1,520. At the time of payment, 1,000 pounds cost $1.55 per pound, so the total was $1,550. 
To determine the gain or loss, we need to subtract the purchase price in dollars from the payment amount in dollars: 
$1,550 - $1,520 = $30 loss
Therefore, the correct answer is option B, Foreign currency transaction loss $30.

Question 11

A foreign currency translation adjustment is reported as:

Accepted Answer

Foreign currency translation adjustments can be reported as Other Comprehensive Income on the Statement of Comprehensive Income, on a combined statement of income and comprehensive income, and as Accumulated Other Comprehensive Income on the balance sheet.

Question 12

The demise of Arthur Andersen,one of the largest public accounting firms,can be attributed to:

Accepted Answer

The demise of Arthur Andersen can be attributed to the lack of quality of audit work for several clients that include Enron, WorldCom and Waste Management. Andersen was found guilty of committing malpractice due to their negligence towards its clients' financial statements. As a result, it lost its reputation and clientele which led to its downfall.

Question 13

A consolidated balance sheet will NOT report:

Accepted Answer

A consolidated balance sheet will not report the specific account balances of a 100% owned subsidiary, including the Investment account, Common Stock, and Retained Earnings. Instead, these balances are eliminated through the consolidation process and only the net assets and equity of the subsidiary are reported on the consolidated balance sheet.

Question 14

Clarke Company owns all of the stock of Patterson Corporation and 80% of the stock of Tyra Corporation.Clarke Company earned net income of $750,000; Patterson earned $200,000; and Tyra earned $100,000.Clarke Company's consolidated income statement would report net income of:

Accepted Answer

Clarke Company's consolidated net income includes its own net income and the full net income of Patterson, plus 80% of Tyra's net income. Thus, $750,000 (Clarke) + $200,000 (Patterson) + $80,000 (80% of Tyra's $100,000) = $1,030,000.

Question 15

The balancing figure that brings the dollar amount of the total liabilities and stockholders' equity of the foreign subsidiary into agreement with the dollar amount of its total assets is the:

Accepted Answer

The balancing figure that brings the dollar amount of the total liabilities and stockholders' equity of the foreign subsidiary into agreement with the dollar amount of its total assets is called the foreign-currency translation adjustment. This adjustment is made in the consolidated financial statements to eliminate the effects of translating foreign currency financial statements into the reporting currency. It represents the net impact of exchange rate changes on the translation of the subsidiary's financial statements.

Question 16

A consolidated balance sheet excludes:

Accepted Answer

A consolidated balance sheet includes the accounts of the parent company and its subsidiaries as if they were one entity. Therefore, the subsidiary's stockholders' equity should be included, as well as the parent company's Investment in Subsidiary account. However, intercompany note receivable and note payable should be eliminated to avoid double counting of the same transactions between the parent and its subsidiaries. Therefore, all of the above options are excluded in a consolidated balance sheet.

Question 17

A noncontrolling interest arises when:

Accepted Answer

A noncontrolling interest arises when a parent company owns less than 100% of the stock of a subsidiary. This means that there are other shareholders that have control over the subsidiary, resulting in a noncontrolling interest for the parent company.

Question 18

When we translate a foreign subsidiary's balance sheet into U.S.dollars,we calculate a:

Accepted Answer

When translating a foreign subsidiary's balance sheet into U.S. dollars, we calculate a foreign currency translation gain or loss. This is because the translation process involves converting the foreign currency financial statement items into U.S. dollars, and any differences between the exchange rates at the transaction date and the balance sheet date can result in a gain or loss. Option A is incorrect because foreign currency transaction gains or losses arise from transactions denominated in a foreign currency, whereas here, we are concerned with converting the entire balance sheet. Option B is incorrect because a foreign exchange conversion rate is just the rate used to convert a foreign currency transaction into the domestic currency. Option D is incorrect because it is incomplete and does not capture the process of translation.

Question 19

Why are consolidated financial statements prepared?

Accepted Answer

Consolidated financial statements are prepared to provide a better understanding of the financial performance and position of the parent company and its subsidiaries as a single economic entity. This helps users of financial statements to make informed decisions based on a comprehensive view of the combined operations and financial position of the group. While the AICPA and SEC may require consolidated financial statements in some situations, this is not the main reason why they are prepared. The Society of Certified Fraud Examiners has no authority to require or regulate the preparation of financial statements.

Question 20

Goodwill occurs when a parent company:

Accepted Answer

Goodwill arises when a parent company pays more to acquire a subsidiary than the fair market value of its net identifiable assets, reflecting intangible assets like brand reputation or customer relationships.

Quiz 8: Long-Term Investments: The Time Value of Money