Question 1

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 2

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

According to the information given, Neely, Inc. owns a significant percentage of both Randle, Inc. and Walker, Inc. but does not wholly own Walker, Inc. Therefore, consolidated statements would be appropriate for these companies if Neely, Inc. owns a controlling interest in the other two companies. Choice A is the only option where Neely, Inc. owns a controlling interest in Randle, Inc. and a significant interest in Walker, Inc. that, when combined with Randle's interest, provides a controlling interest. Choice B is not appropriate because Neely, Inc. did not hold the stock of Walker, Inc. long enough to have a controlling interest. Choice C is not appropriate because Walker, Inc. is in legal reorganization. Choice D is not appropriate because Reeves, Inc. owns a significant portion of Walker, Inc. which prevents Neely, Inc. from having controlling interest.

Question 3

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

C

Question 4

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 include as a an)
A)Other comprehensive income
B)Deferred credit
C)Component of income from continuing operations
D)Extraordinary item

Accepted Answer

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

Question 5

Under the acquisition method of accounting for a business combination,restructuring costs are
A)Capitalized and amortized over a period not exceeding ten years.
B)Fees paid to lawyers and accountants to bring about the business combination .
C)Costs incurred to effect the business combination.
D)Treated as post acquisition expenses.

Accepted Answer

Under the acquisition method, restructuring costs incurred after the acquisition are treated as post-acquisition expenses and are charged to the income statement in the period in which they are incurred. This is because these costs do not relate to the cost of the business combination itself.

Question 6

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. Rather, it is a consideration for financial statement consolidation when a parent company controls one or more subsidiaries. Segment reporting focuses on identifying and defining the business segments of an enterprise, allocating joint costs to those segments, and determining appropriate transfer pricing between them.

Question 7

The profitability information that should be reported for each reportable segment of a business enterprise consists of
A)An operating profit-or-loss figure consisting of segment revenues less traceable costs and allocated common costs
B)An operating profit-or-loss figure consisting of segment revenues less traceable costs but not allocated common costs
C)An operating profit-or-loss figure consisting of segment revenues less allocated common costs but not traceable costs
D)Segment revenues only

Accepted Answer

Reportable segments should disclose the operating profit or loss figure, which includes both traceable costs and allocated common costs. These costs are then deducted from the segment's revenues to arrive at the segment's operating profit or loss. This information is required to be reported in accordance with the accounting standards issued by the Financial Accounting Standards Board (FASB). Option B is incorrect because allocated common costs must be considered. Option C is incorrect because traceable costs must be considered. Option D is incorrect as it only provides information about revenues and not profitability.

Question 8

Under the acquisition method of accounting for a business combination,goodwill is equal to
A)The acquired company's ability to generate excess profits .
B)The excess of the cost of the acquisition plus the fair value of the noncontrolling interest over the fair value of the acquiree's net assets.
C)The excess of the cost of the acquisition over the fair value of the acquiree's net assets.
D)The excess of the fair value of acquiree's net assets over the cost of acquisition.

Accepted Answer

Goodwill is the excess of the cost of the acquisition plus the fair value of the noncontrolling interest over the fair value of the acquiree's net assets. This implies that goodwill represents the value of the acquired business that cannot be attributed to the fair value of its identifiable net assets.

Question 9

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

Costs incurred to effect a business combination, such as finders and legal fees, are typically expensed as incurred rather than being included as part of the historical cost of the business or allocated to the assets of the acquiree company. This is in accordance with Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS).

Question 10

Under the acquisition method of accounting for a business combination when the parent company has acquired only 90% of the voting stock of a subsidiary,
A)10% of the goodwill will be reported in a separate section of the balance sheet because it belongs to the noncontrolling interest .
B)The consolidated balance sheet will report 100% of the value of goodwill.
C)The consolidated balance sheet will report 90% of the value of goodwill.
D)Goodwill will be amortized over its useful life or 40 years whichever comes first.

Accepted Answer

Under the acquisition method of accounting, the consolidated financial statements report the assets, liabilities, and equity of the parent and subsidiary as if they were one entity. The parent company will report 100% of the subsidiary's assets, liabilities, and equity, including any goodwill generated by the acquisition. Therefore, the consolidated balance sheet will report 100% of the value of goodwill.

Question 11

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 less than 50% of the outstanding stock of Baldwin Company, therefore it is considered a noncontrolling interest and is consolidated under the equity method on the consolidated financial statements of Arkin, Inc.

Question 12

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

The preferred method of presenting noncontrolling interest on a consolidated balance sheet is as a separate item within the stockholders' equity section. This allows for clearer presentation of ownership and equity interests, as well as compliance with accounting standards such as US GAAP and IFRS. Option A is not appropriate as deferred credits refer to liabilities, not equity. Option B is not preferred as it may not provide sufficient detail on the noncontrolling interest. Option C is not ideal as footnotes should be used to provide additional information or explanation, rather than to present fundamental components of the financial statements.

Question 13

Under the acquisition method of accounting for a business combination,a bargain purchase is
A)Reported as goodwill in the balance sheet.
B)Tested annually for impairment.
C)Reported as a gain in the income statement.
D)Reported as an adjustment to other comprehensive income.

Accepted Answer

A bargain purchase occurs when the fair value of the net assets acquired in a business combination exceed the purchase price paid by the acquiring company. In such cases, the acquiring company recognizes a gain in the income statement for the excess amount. The gain is not recognized as goodwill and is not tested for impairment annually.

Question 14

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.

Question 15

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 represents the current market value of the asset at the time of acquisition, which is more relevant than historical cost or book value. Additionally, fair value is required under International Financial Reporting Standards (IFRS) and generally accepted accounting principles (GAAP) for business combinations.

Question 16

The acquisition method of accounting for a business combination is consistent with
A)Entity theory.
B)Proprietary theory.
C)Parent company theory.
D)Residual interest theory.

Accepted Answer

The acquisition method of accounting for a business combination is consistent with entity theory, which views the acquiring company and the acquired company as separate legal entities that combine to form a new entity. This method focuses on consolidating the financial statements of the two entities to present a more accurate picture of the combined financial position, performance, and cash flows of the new entity.

Question 17

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

In a business combination accounted for under the acquisition method, the entity that obtains control over one or more businesses is known as the acquirer. The acquirer establishes the acquisition date that control was achieved, and the financial statements of the acquired business are consolidated with those of the acquirer. Therefore, B is the correct answer. A, C, and D are not correct as they do not accurately describe the entity that obtains control over one or more businesses under the acquisition method.

Question 18

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 in a business combination is an exit value, meaning it reflects the price that would be received to sell the asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date.

Question 19

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 cash...

Question 20

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)An extraordinary item
B)Part of current income in the year of combination
C)A deferred credit and amortize it
D)Paid-in capital

Accepted Answer

The remaining bargain purchase amount should be recognized as a gain in the income statement in the year of the acquisition.

Quiz 16: Accounting for Multiple Entities

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

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

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

Under the acquisition method of accounting for a business combination,restructuring costs are

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

The profitability information that should be reported for each reportable segment of a business enterprise consists of

Under the acquisition method of accounting for a business combination,goodwill is equal to

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

Under the acquisition method of accounting for a business combination when the parent company has acquired only 90% of the voting stock of a subsidiary,

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

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

Under the acquisition method of accounting for a business combination,a bargain purchase is

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

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 acquisition method of accounting for a business combination is consistent with

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

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