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1.

Question :

(TCO 3) When using the acquisition method for accounting for business combinations, all of the following statements are false regarding the sale of subsidiary shares except:

Student Answer: If control ceases to exist and significant influence ceases to exist, the difference between selling price and acquisition value is recorded as a realized gain or loss (Find the answer in Chapter 4)

If control ceases to exist and significant influence ceases to exist, the difference between selling price and acquisition value is recorded as an unrealized gain or loss (Find the answer in Chapter 4)

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

If control ceases to exist and significant influence ceases to exist, the difference between selling price and carrying value is recorded as an unrealized gain or loss (Find the answer in Chapter 4)

If control ceases to exist and significant influence ceases to exist, the difference between selling price and carrying value is recorded as an adjustment to retained earnings (Find the answer in Chapter 4)

Points Received: Comments:

3 of 3

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2. Question :

1887068495

MultipleChoice

(TCO 3) Under the proportionate consolidation concept, which of the following statements is true about consolidated financial statements?

Student Answer: The accounting emphasis in preparing consolidated financial statements is placed on the business combination being formed (Find the answer in Chapter 4)

Holding control of a subsidiary provides the parent with an indivisible interest in that company (Find the answer in Chapter 4)

The objective of consolidated financial statements is to serve as a report to the stockholders of the parent company (Find the answer in Chapter 4)

The proportionate consolidation concept is a hybrid of the economic unit concept and the parent company concept (Find the answer in Chapter 4)

The proportionate consolidation concept is no longer allowed according to SFAS 141(R)

Points Received: Comments:

3 of 3

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3. Question : Student Answer:

MultipleChoice 1887068496 MultipleChoice

True 9

(TCO 3) All of the following statements regarding the sale of subsidiary shares are true except which of the following?

The use of specific identification based on serial number is acceptable (Find the answer in Chapter 4)

The use of the FIFO assumption is acceptable (Find the answer in Chapter 4)

The use of the averaging assumption is acceptable (Find the answer in Chapter 4)

The use of specific LIFO assumption is acceptable

The parent company must determine whether consolidation is still appropriate for the remaining shares owned (Find the answer in Chapter 4)

Points Received: Comments:

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4. Question :

MultipleChoice 1887068497

12 MultipleChoice

True 12

(TCO 3) When a parent uses the acquisition method for business combinations and sells shares of its subsidiary, which of the following statements is false?

Student Answer: If majority control is still maintained, consolidated financial statements are still required (Find the answer in Chapter 4)

If majority control is not maintained but significant influence exists, the equity method to account for the investment is still used but consolidated financial statements are not required (Find the answer in Chapter 4)

If majority control is not maintained but significant influence exists, the equity method is still used to account for the investment and consolidated financial statements are still required

If majority control is not maintained and significant influence no longer exists, a prospective change in accounting principle to the fair value method is required (Find the answer in Chapter 4)

A gain or loss calculation must be prepared if control is lost (Find the answer in Chapter 4)

Points Received: Comments:

3 of 3

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5. Question : Student Answer:

MultipleChoice
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MultipleChoice

True
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(TCO 1) All of the following would require use of the equity method for investments except

Material inter-company transactions (Find the answer in Chapter 1)

Investor participation in the policy-making process of the investee (Find the answer in Chapter 1)

Valuation at fair value

Technological dependency (Find the answer in Chapter 1)

Significant control (Find the answer in Chapter 1)

Points Received: Comments:

3 of 3

1887068499

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28

True

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6. Question :

1887068499

MultipleChoice

28

(TCO 1) Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value method to account for this investment. Trace reported net income of $110,000 for 2008 and paid dividends of $60,000 on October 1, 2008. How much income should Gaw recognize on this investment in 2008?

Student Answer: $16,500 (Find the answer in Chapter 1)

$9,000

$25,500 (Find the answer in Chapter 1)

$7,500 (Find the answer in Chapter 1)

$50,000 (Find the answer in Chapter 1)

Points Received: Comments:

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7. Question :

MultipleChoice
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(TCO 1) On January 1, 2008, Bangle Company purchased 30% of the voting common stock of Sleat Corp. for $1,000,000. Any excess of cost over book value was assigned to goodwill. During 2008, Sleat paid dividends of $24,000 and reported a net loss of $140,000. What is the balance in the investment account on December 31, 2008?

Student Answer: $950,800

$958,000 (Find the answer in Chapter 1)

$836,000 (Find the answer in Chapter 1)

$990,100 (Find the answer in Chapter 1)

$956,400 (Find the answer in Chapter 1)

Points Received: Comments:

3 of 3

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8. Question : Student Answer:

MultipleChoice
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True
20

(TCO 1) Which of the following results in an increase in the investment account when applying the equity method?

Unrealized gain on inter-company inventory transfers for the prior year

Unrealized gain on inter-company inventory transfers for the current year (Find the answer in Chapter 1)

Dividends paid by the investor (Find the answer in Chapter 1)

Dividends paid by the investee (Find the answer in Chapter 1)

Sale of a portion of the investment during the current year (Find the answer in Chapter 1)

Points Received: Comments:

0 of 3

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MultipleChoice

24

False

0
9. Question :

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24

(TCO 2) Which one of the following is a characteristic of a business combination that should be accounted for as a purchase?

Student Answer: The combination must involve the exchange of equity securities only (Find the answer in Chapter 2)

The transaction clearly establishes an acquisition price for the company being acquired

The two companies may be about the same size and it is difficult to determine the acquired company and the acquiring company (Find the answer in Chapter 2)

The transaction may be considered to be the uniting of the ownership interests of the companies involved (Find the answer in Chapter 2)

The acquired subsidiary must be smaller in size than the acquiring parent (Find the answer in Chapter 2)

Points Received: Comments:

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10. Question : Student Answer:

MultipleChoice 1887068503

40 MultipleChoice

True 40

(TCO 2) In a pooling of interests,

Revenues and expenses are consolidated for the entire fiscal year, even if the combination occurred late in the year

Goodwill may be recognized (Find the answer in Chapter 2)

Consolidation is accomplished using the fair values of both companies (Find the answer in Chapter 2)

The transactions may involve the exchange of preferred stock or debt securities as well as common stock (Find the answer in Chapter 2)

The transaction is properly regarded as an acquisition of one company by another (Find the answer in Chapter 2)

Points Received: Comments:

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11. Question :

MultipleChoice
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MultipleChoice

False
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(TCO 2) Which of the following statements is true regarding a statutory merger?

Student Answer: The original companies dissolve while remaining as separate divisions of a newly created company (Find the answer in Chapter 2)

Both companies remain in existence as legal corporations with one corporation now a subsidiary of the acquiring company (Find the answer in Chapter 2)

The acquired company dissolves as a separate corporation and becomes a division of the acquiring company

The acquiring company acquires the stock of the acquired company as an investment (Find the answer in Chapter 2)

A statutory merger is no longer a legal option (Find the answer in Chapter 2)

Points Received: Comments:

0 of 3

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46

False

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12. Question :

1887068505

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46

(TCO 2) In a transaction accounted for using the purchase method where cost is less than fair value, which statement is true?

Student Answer: Negative goodwill is recorded (Find the answer in Chapter 2)

A deferred credit is recorded (Find the answer in Chapter 2)

Long-term assets of the acquired company are reduced in proportion to their fair values. Any excess is recorded as a deferred credit (Find the answer in Chapter 2)

Long-term assets of the acquired company are reduced in proportion to their fair values. Any excess is recorded as an extraordinary gain

Long-term assets and liabilities of the acquired company are reduced in proportion to their fair values. Any excess is recorded as an extraordinary gain (Find the answer in Chapter 2)

Points Received: Comments:

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13. Question : Student Answer:

MultipleChoice 1887068506

41 MultipleChoice

True 41

(TCO 2) Under the equity method of accounting for an investment,

The investment account remains at initial value (Find the answer in Chapter 3)

Dividends received are recorded as revenue (Find the answer in Chapter 3)

Goodwill is amortized over 20 years (Find the answer in Chapter 3)

Income reported by the subsidiary increases the investment account

Dividends received increase the investment account (Find the answer in Chapter 3)

Points Received: Comments:

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True

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14. Question :

1887068507

MultipleChoice

33

(TCO 3) Hoyt Corporation agreed to the following terms in order to acquire the net assets of Brown Company on January 1, 2009: (1.) To issue 400 shares of common stock ($10 par) with a fair value of $45 per share. (2.) To assume Brown's liabilities which have a fair value of $1,500. On the date of acquisition, the consideration transferred for Hoyt's acquisition of Brown would be

Student Answer: $18,000 (Find the answer in Chapter 3)

$16,500 (Find the answer in Chapter 3)

$20,000 (Find the answer in Chapter 3)

$18,500 (Find the answer in Chapter 3)

$19,500

Points Received: Comments:

3 of 3

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15. Question : Student Answer:

MultipleChoice 1887068508

52 MultipleChoice

True 52

(TCO 3) Under the partial equity method, the parent recognizes income when

Dividends are received from the investee (Find the answer in Chapter 3)

Dividends are declared by the investee (Find the answer in Chapter 3)

The related expense has been incurred (Find the answer in Chapter 3)

The related contract is signed by the subsidiary (Find the answer in Chapter 3)

It is earned by the subsidiary

Points Received: Comments:

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16. Question :

MultipleChoice
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MultipleChoice

False
50

(TCO 3) Which of the following statements is false regarding push-down accounting?

Student Answer: Push-down accounting simplifies the consolidation process (Find the answer in Chapter 3)

Fewer worksheet entries are necessary when push-down accounting is applied (Find the answer in Chapter 3)

Push-down accounting provides better information for internal evaluation (Find the answer in Chapter 3)

Push-down accounting must be applied for combinations under a pooling of interests

Push-down proponents argue that a change in ownership creates a new basis for subsidiary assets and liabilities (Find the answer in Chapter 3)

Points Received: Comments:

3 of 3

1.

Question :

(TCO 1) You are auditing a company that owns twenty percent of the voting common stock of another corporation and uses the equity method to account for the investment. How would you verify that the equity method is appropriate in this case? Be specific and provide several elements to include in your verification. In sanctioning the equity method, the APB reasoned that an investor begins to gain the ability to influence the decisionmaking process of an investee as the level of ownership rises. According to APB Opinion 18 (para. 17), achieving this ability to exercise significant influence over operating and financial policies of an investee even though the investor holds 50 percent or less of the voting stock is the sole criterion for requiring application of the equity method. Clearly, a term such as the ability to exercise significant influence is nebulous and subject to a variety of judgments and interpretations in practice. At what point does the acquisition of one additional share of stock give an owner the ability to exercise significant influence? This decision becomes even more difficult in that only the ability to exercise significant influence need be present: The pronouncement does not specify that any actual influence must have ever been applied. APB Opinion 18 provides guidance to the accountant by listing several conditions that indicate the presence of this degree of influence: Investor representation on the board of directors of the investee. Investor participation in the policy-making process of the investee. Material intercompany transactions. Interchange of managerial personnel. Technological dependency. Extent of ownership by the investor in relation to the size and concentration of other ownership interests in the investee. No single one of these guides should be used exclusively in assessing the applicability of the equity method. Instead, all are evaluated together to determine the presence or absence of the sole criterion: the ability to exercise significant influence over the investee. These guidelines alone do not eliminate the leeway available to each investor when deciding whether the use of the equity method is appropriate. To provide a degree of consistency in applying this standard, the APB established a general ownership test: If an investor holds between 20 and 50 percent of the voting stock of the investee, significant influence is normally assumed and the equity method applied. the 20 to 50 percent rule may appear to be an arbitrarily chosen boundary range established merely to provide a consistent method of reporting for investments. However, the essential criterion is still the ability to significantly influence (but not control) the investee, rather than 20 to 50 percent ownership. If the absence of this ability is proven (or control exists), the equity method should not be applied regardless of the percentage of shares held. In order to verify that the equity method is appropriate, the auditor should determine whether the investor is able to exercise significant influence over the operations of the investee. The ability to influence the investee's operations is the most important criterion for adopting the equity method. The auditor should look for such evidence of significant influence as (1) frequent or material inter-company transactions; (2) exchange of managerial personnel; (3) technological interdependency; and (4) investor participation in the decision-making process of the investee.

Student Answer:

Instructor Explanation:

Points Received: Comments:

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2 . Ques tion :

Short
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(TCO 2) The financial statements for Jode Inc. and Lakely Corp., just prior to their combination, for the year ending December 31, 2009, follow. Lakely's buildings were undervalued on its financial records by $60,000.

On December 31, 2009, Jode issued 54,000 new shares of its $10 par value stock to the owners of Lakely in exchange for all of the outstanding shares of that company. Jode's shares had a fair value on that date of $35 per share. Jode paid $34,000 to an investment bank for assisting in the arrangements. Jode also paid $24,000 in stock issuance costs. This combination is accounted for as an acquisition. Determine consolidated Paid-in Capital at December 31, 2009. Show all of your work. Showing only the answer will result in zero points. Student Answer : Instruct or Explan ation: consolidated paid in capital = 1,416,000 jodes paid in capital prior to the date of acq 90,000 additional paid in cap arising from transaction 1,350,000 less c

Points Received: Comments:

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13

False

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3. Question :

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(TCO 3) Alonzo Co. acquired 60% of Beazley Corp. at a purchase price of $240,000. At the time of the acquisition, the book value of Beazley's net assets was $300,000. Required: Under the economic unit concept, what amount should have been assigned to the non-controlling interest immediately after the combination? Show all of your work. Showing only the answer will result in zero points.

Student Answer: Instructo r Explanati on:

24,000 - 300,000= 60,000 * 60% = 36,000

Points Received: Comments:

(not graded)

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4. Question :

Short
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Short

False
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(TCO 3) One company buys a controlling interest in another company on April 1. How should the pre-acquisition subsidiary revenues and expenses be handled in the consolidated balances for the year of acquisition? "Noncontrolling interest" refers to an equity interest that is held in a member of a business combination by an unrelated (outside) party. A control premium is the portion of an acquisition price (above currently traded market values) paid by a parent company to induce shareholders to sell a sufficient number of shares to obtain control. The extra payment typically becomes part of the goodwill acquired in the acquisition attributable to the parent company. Noncontrolling interest figures will appear in various locations within consolidated financial statements. The end of year balance can be found in the liability section, in the stockholders' equity section, or between these two. The noncontrolling interest's share of net income can be shown as a reduction on either the income statement or the statement of retained earnings. Based on current practice, this textbook reports the ending balance between consolidated liabilities and stockholders' equity with the income allocation shown as a reduction on the income statement. A control premium is the portion of an acquisition price (above currently traded market values) paid by a parent company to induce shareholders to sell a sufficient number of shares to obtain control. The extra payment typically becomes part of the goodwill acquired in the acquisition attributable to the parent company. 4. In practice, noncontrolling interest figures will appear in various locations within consolidated financial statements. The end of year balance can be found in the liability section, in the stockholders' equity section, or between these two. The noncontrolling interest's share of net income can be shown as a reduction on either the income statement or the statement of retained earnings. Based on current practice, this textbook reports the ending balance between consolidated liabilities and stockholders' equity with the income allocation shown as a reduction on the income statement. A control premium is the portion of an acquisition price (above currently traded market values) paid by a parent company to induce shareholders to sell a sufficient number of shares to obtain control. The extra payment typically becomes part of the goodwill acquired in the acquisition attributable to the parent company. 4. In practice, noncontrolling interest figures will appear in various locations within consolidated financial statements. The end of year balance can be found in the liability section, in the stockholders' equity section, or between these two. The noncontrolling interest's share of net income can be shown as a reduction on either the income statement or the statement of retained earnings. Based on current practice, this textbook reports the ending balance between consolidated liabilities and stockholders' equity with the income allocation shown as a reduction on the income statement. A control premium is the portion of an acquisition price (above currently traded market values) paid by a parent company to induce shareholders to sell a sufficient number of shares to obtain control. The extra payment

Student Answer:

typically becomes part of the goodwill acquired in the acquisition attributable to the parent company. 4. In practice, noncontrolling interest figures will appear in various locations within consolidated financial statements. The end of year balance can be found in the liability section, in the stockholders' equity section, or between these two. The noncontrolling interest's share of net income can be shown as a reduction on either the income statement or the statement of retained earnings. Based on current practice, this textbook reports the ending balance between consolidated liabilities and stockholders' equity with the income allocation shown as a reduction on the income statement. Instructor Explanation: Only post-acquisition revenues and expenses are included in consolidated totals. The non-controlling interest is thereby viewed as beginning as of the acquisition date.