Question 1

When a parent uses the equity method throughout the year to account for investment in a subsidiary,which of the following statements is false before making adjustments on the consolidated worksheet?

Accepted Answer

Before making adjustments on the consolidated worksheet, the parent company's total assets will not equal the consolidated total assets because the subsidiary's assets are not yet included. Therefore, statement C is false. The other statements are all true under the equity method. However, adjustments may need to be made on the consolidated worksheet to ensure they continue to be true after consolidation.

Question 2

What is consolidated current liabilities as of January 2,2009?

Accepted Answer

The consolidated current liabilities can be found by adding up the current liabilities of both subsidiaries. From the table, "Company A" has current liabilities of $38,000 and "Company B" has current liabilities of $26,400. Adding these up gives us $38,000 + $26,400 = $64,400. Therefore, the correct answer is C.

Question 3

When a parent uses the partial equity method throughout the year to account for investment in a subsidiary,which of the following statements is false before making adjustments on the consolidated worksheet?

Accepted Answer

Under the partial equity method, the parent company's net income will exceed the controlling interest in consolidated net income when the fair value acquired exceeds the book value due to the amortization of the excess fair value over book value.

Question 4

When using the acquisition method for accounting for business combinations,all of the following statements are false regarding the sale of subsidiary shares except:

Accepted Answer

When control and significant influence cease to exist, the difference between the selling price and carrying value is recorded as a realized gain or loss.

Question 5

Under the acquisition method of accounting for business combinations,which of the following statements is true about consolidated financial statements?

Accepted Answer

The acquisition method focuses on the business combination being formed, recognizing and measuring the identifiable assets acquired, liabilities assumed, and any non-controlling interest in the acquiree.

Question 6

All of the following statements regarding the sale of subsidiary shares are true except which of the following?

Accepted Answer

The use of specific LIFO assumption is not acceptable for the sale of subsidiary shares. All other statements are true, including the need for the parent company to determine whether consolidation is still appropriate for the remaining shares owned.

Question 7

Keefe,Inc. ,a calendar-year corporation,acquires 70% of George Company on September 1,2009 and an additional 10% on April 1,2010.Total annual amortization of $6,000 relates to the first acquisition.George reports the following figures for 2010: 
Without regard for this investment,Keefe earns $300,000 in net income during 2010.
All net income is earned evenly throughout the year.
What is the controlling interest in consolidated net income for 2010?

Accepted Answer

To calculate the controlling interest in consolidated net income, we need to first calculate the income attributable to Keefe's ownership percentage in George Company.

- For the period from September 1, 2009 to December 31, 2009, Keefe owns 70% of George Company and therefore 70% of its income. George reports $60,000 in net income for this period, so Keefe's share is $42,000.
- For the period from January 1, 2010 to March 31, 2010, Keefe owns 70% of George Company and 80% of its income (70% from ownership + 10% from the amortization of the initial acquisition). George reports $20,000 in net income for this period, so Keefe's share is $14,000.
- For the period from April 1, 2010 to December 31, 2010, Keefe owns 80% of George Company and therefore 80% of its income. George reports $40,000 in net income for this period, so Keefe's share is $32,000.

Therefore, Keefe's total share of consolidated net income is $88,000 ($42,000 + $14,000 + $32,000).

Adding Keefe's net income of $300,000 to its share of consolidated net income gives a total consolidated net income of $388,000.

The controlling interest in consolidated net income is then calculated by subtracting Keefe's share of net income from the total consolidated net income:

$388,000 - $88,150 = $372,850

Therefore, the correct answer is B) $372,850.

Question 8

Under the purchase methodof accounting for business combinations,which of the following statements is true about consolidated financial statements?

Accepted Answer

The purchase method was replaced by the acquisition method as per SFAS 141(R), which is now part of the ASC 805 guidelines.

Question 9

Which of the following statements is true regarding the sale of subsidiary shares when using the acquisition method for accounting for business combinations?

Accepted Answer

The answer of Which of the following statements is true...

Question 10

When a parent uses the acquisition method for business combinations and sells shares of its subsidiary,which of the following statements is false?

Accepted Answer

The answer of When a parent uses the acquisition method...

Question 11

Which of the following statements is false regarding multiple acquisitions of a subsidiary's existing common stock and using the acquisition method per SFAS 141(R)?

Accepted Answer

The book value of the subsidiary will not increase with multiple acquisitions of its existing common stock, as the acquisition method per SFAS 141(R) only recognizes the fair value of the acquired assets and liabilities at the acquisition date. The book value of the subsidiary remains the same until adjustments are made for subsequent events. Therefore, statement C is false.

Question 12

When consolidating a subsidiary that was acquired on a date other than the first day of the fiscal year,which of the following statements is true in the presentation of consolidated financial statements?

Accepted Answer

The answer of When consolidating a subsidiary that was acquired...

Question 13

What is consolidated current assets as of January 2,2009?

Accepted Answer

The answer of What is consolidated current assets as of...

Question 14

What is consolidated noncurrent assets as of January 2,2009?

Accepted Answer

The answer of What is consolidated noncurrent assets as of...

Question 15

When a parent uses the initial value method throughout the year to account for investment in a subsidiary,which of the following statements is true before making adjustments on the consolidated worksheet?

Accepted Answer

The answer of When a parent uses the initial value...

Question 16

Under the purchase method of accounting for business combinations,which of the following statements is false about consolidated financial statements?

Accepted Answer

Under the purchase method of accounting, all of the subsidiary net assets are valued at fair value. Therefore, statement E is true, but statement D is false. Statements A, B, and C are true.

Question 17

In consolidation at December 31,2009,what adjustment is necessary for Hogan's Buildings account?

Accepted Answer

The answer of In consolidation at December 31,2009,what adjustment is...

Question 18

When a subsidiary is acquired sometime after the first day of the fiscal year,which of the following statements is true?

Accepted Answer

When a subsidiary is acquired sometime after the first day of the fiscal year, income from the subsidiary is recognized from the date of acquisition to year-end. This is in accordance with the acquisition method, which requires the recognition of the assets acquired, liabilities assumed, and any non-controlling interest, as well as the recognition of goodwill or a gain from a bargain purchase. Therefore, the income from the subsidiary is consolidated from the date of acquisition to year-end. Excess cost over the acquisition value is recognized as goodwill, and it is not recognized at the beginning of the fiscal year.

Question 19

In consolidation at January 1,2009,what adjustment is necessary for Hogan's Buildings account?

Accepted Answer

The Buildings account of Hogan was recorded at a value of $12,000 (given in the question) which is higher than its fair value of $10,000 (given in the problem). Therefore, an adjustment is necessary to reduce the value of the Buildings account by $2,000. A decrease of $2,000 in Hogan's Buildings account would be necessary for the consolidation.

Question 20

In a step acquisition,using the acquisition method per SFAS 141(R),which of the following statements is false?

Accepted Answer

In a step acquisition, income from the subsidiary is only computed for the portion of the year that the subsidiary is actually owned. Therefore, statement C is false. The rest of the statements are true. The acquisition method treats step acquisitions as a single step acquisition and obtaining control through a step acquisition is considered to be a significant re-measurement event. Pre-acquisition earnings are also included in the consolidated income statement.

Quiz 4: Consolidated Financial Statements and Outside Ownership