PART V

TEST BANK

CHAPTER 1
WHOLLY OWNED SUBSIDIARIES:
AT DATE OF CREATION

COMPLETION STATEMENTS
1. The two manners in which a business may expand or diversify are ______________
___________________ expansion and _________________________________ expansion.

2. Before expanding, management must decide whether it wants to organize the new
operation as a(n) ______________________________ or a(n) __________________
_____________________.

3. The relationship between a newly created legal entity and the entity that created
and owns 100% of the outstanding common stock of the newly created legal
entity is called a(n) ________________________________________ relationship.

4. The relationship between (a) the headquarters of an entity that has established
an outlying location as an extension of the existing legal entity and (b) that
outlying location is called a(n) ______________________________________
relationship.

5. The process of combining the financial statements of a parent and a subsidiary is

called _______________________________________.

6. Consolidated financial statements are ______________________________________

statements.

7. Consolidated financial statements constitute the ______________________________

financial statements of companies having one or more subsidiaries, that is, the
statements to be furnished to a parent’s stockholders in such situations.

8. The two manners of reporting a subsidiary’s financial statement amounts in the

consolidated statements are the ________________________________________ format
and the ________________________________________ format.
9. Consolidated statements are prepared using a(n) _____________________________.

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1-2 • ADVANCED ACCOUNTING: Concepts And Practice
10. A general ledger is not used or maintained for the _____________________________.

11. The entries made in consolidation are commonly called ________________________

entries.

12. At the date of creation, the parent’s Investment in Subsidiary account balance
has a(n) ________________________ relationship to the total balance of the subsid-
iary’s equity accounts.

13. In parent-subsidiary relationships, accounts having a debit balance on one set of

books and a credit balance on the other set of books are commonly referred to as
the __________________________________ accounts.

14. Conceptually, consolidation is essentially a(n) _________________________________

process.

15. A parent cannot consolidate a subsidiary when the parent does not have
____________________________.

16. A parent cannot consolidate an acquired subsidiary if ownership is expected to

be ____________________________________ at the acquisition date.

17. The result of FAS 94 (issued in 1988) was to eliminate the ____________________
_________________________ exception allowed under ARB No. 51.

18. In consolidation, all ___________________________________ account balances are

eliminated.

TRUE-OR-FALSE STATEMENTS
1. T F Internal expansion can result in using either the subsidiary form of
organization or the branch/division form of organization.
2. T F To limit an existing operation’s potential loss exposure, the operation
would usually use the subsidiary form of organization when expanding
rather than the branch form of organization.
3. T F Earnings of overseas branches are taxed in the United States when the
earnings are remitted.
4. T F In selecting the form of organization for a new operation to be established,
an expanding company would consider income tax considerations for
domestic expansion to be far more important than for foreign expansion.
5. T F To prevent loss of patent protection, a domestic company expanding
overseas would use the subsidiary form of organization rather than the
branch form of organization.
6. T F The idea of consolidated statements is to disregard the separate legal
entity status of each company.
7. T F The aggregated format of presenting consolidated statements is a
“layered” format.
 Wholly Owned Subsidiaries: At Date of Creation • 1-3

8. T F The disaggregated format of presenting consolidated statements is

required if the subsidiary is in an unrelated line of business from the
parent and its other subsidiaries.
9. T F In the aggregated format of presenting consolidated statements, the
subsidiary’s assets and liabilities cannot be identified.
10. T F A general ledger is maintained for the consolidated reporting entity.
11. T F Consolidation entries are never posted to a general ledger.
12. T F Reciprocal account balances are created as a result of the consolidation
process.
13. T F Intercompany accounts and reciprocal accounts are interchangeable terms.
14. T F In general, foreign consolidation rules for the major trading partners of the
United States are more lenient than U.S. consolidation rules.
15. T F The presumption that consolidated statements are more meaningful than
separate statements and are necessary for a fair presentation can be
overcome by an assertion to the contrary by management in the notes to
the financial statements.
16. T F Under current GAAP, a banking subsidiary of a parent company that is a
manufacturing company need not be consolidated.
17. T F It is appropriate to consolidate foreign subsidiaries.
18. T F A foreign subsidiary that is prohibited from paying dividends because of
currency exchange restrictions imposed by the foreign government of the
country in which it is located may still be consolidated.
19. T F A subsidiary that has just filed for bankruptcy reorganization usually
would not be consolidated.
20. T F A parent need not consolidate a created subsidiary that the parent is in
the process of trying to sell.
21. T F It is inappropriate to consolidate a subsidiary that has not yet become
profitable.
22. T F It is inappropriate to consolidate a subsidiary that is prohibited by law
from making loans to its parent.
23. T F When a subsidiary in a different line of business from that of the parent
is consolidated, the separate financial statements of the subsidiary must
be presented in the notes to the consolidated statements.
24. T F When a subsidiary’s restricted net assets are more than 25% of
consolidated net assets, the Securities and Exchange Commission does
not allow that subsidiary to be consolidated.
25. T F When a subsidiary of a publicly owned company is restricted from
paying dividends to its parent as a result of U.S. regulatory restraints, the
Securities and Exchange Commission does not allow that subsidiary to be
consolidated.
26. T F When a subsidiary’s total assets are more than 25% of total consolidated
assets, the separate financial statements of the subsidiary must be
presented in the notes to the consolidated statements.
1-4 • ADVANCED ACCOUNTING: Concepts And Practice
27. T F It may be necessary to consolidate a company in which a publicly owned
investor company does not own a majority voting interest.
28. T F The only way to determine whether control exists is by determining
whether a majority of the voting common stock is owned.
29. T F The consolidation rules of the Securities and Exchange Commission apply
to all U.S. corporations.
30. T F A subsidiary can be consolidated even if it has a different year-end than
its parent company.
31. T F A subsidiary can be consolidated only if the subsidiary’s year-end is
within three months of the parent’s year-end.
32. T F Transactions between a parent and its subsidiaries must be eliminated in
consolidation exactly as if the transactions had not occurred.
33. T F When a consolidated subsidiary of a publicly owned company is
restricted from transferring funds to its parent as a result of borrowing
arrangements or regulatory restraints, the parent must disclose such
restrictions in the notes to the consolidated statements only if the
subsidiary’s total assets exceed 25% of total consolidated assets.
34. T F When a subsidiary of a publicly owned company is restricted from
transferring funds to its parent as a result of borrowing arrangements or
regulatory restraints, the parent must disclose such restrictions in the
notes to the consolidated statements only if the subsidiary’s restricted
net assets exceed 25% of the total consolidated assets.

MULTIPLE-CHOICE QUESTIONS
Conceptual Questions
1. _____ A reason for using the subsidiary form of organization when expanding
instead of the branch form of organization is
a. It better limits the ability of foreign taxing authorities to examine the
books and records of the domestic operation.
b. It better insulates legally the existing operation from the new operation.
c. A foreign unit’s earnings are not taxed in the United States until remitted
to the domestic unit.
d. All of the above.
e. None of the above.
2. _____ The economic resources (normally) that underlie the parent’s investment
in a subsidiary are the subsidiary’s
a. Assets.
b. Assets, net of any liabilities.
c. Fixed assets.
d. Noncurrent assets.
e. Current assets.
 Wholly Owned Subsidiaries: At Date of Creation • 1-5

3. _____ In an aggregated consolidated balance sheet, the subsidiary’s individual

assets are
a. Shown separately.
b. Not included.
c. Summed with the parent’s individual assets.
d. Netted against its liabilities and shown as a net amount.
e. None of the above.
4. _____ In a disaggregated consolidated balance sheet, the subsidiary’s individual
assets are
a. Shown separately.
b. Not included.
c. Summed with the parent’s individual assets.
d. Netted against its liabilities and shown as a net amount.
e. None of the above.
5. _____ The disaggregated reporting format of presenting a subsidiary’s financial
statement amounts in the consolidated statements would not serve any
useful purpose when the subsidiary is
a. In a different line of business from the parent.
b. In a different line of business from the parent and losing money.
c. Restricted from paying dividends to the parent by regulatory authorities.
d. Located in a foreign country.
e. None of the above.
6. _____ Which of the following is the best theoretical justification for consolidated
financial statements?
a. In form, the companies are one entity; in substance, they are separate.
b. In form, the companies are separate; in substance, they are one entity.
c. In form and substance, the companies are one entity.
d. In form and substance, the companies are separate.

Application Questions
7. _____ A parent generally will not consolidate a subsidiary that
a. Is in an unrelated line of business.
b. Is located in a foreign country.
c. Has a different year-end.
d. Is in bankruptcy proceedings.
e. None of the above.
8. _____ A parent need not consolidate a subsidiary if
a. The subsidiary is economically independent of the parent.
b. More than 50% of the subsidiary’s sales are to the parent.
c. The subsidiary’s total assets are less than 10% of total consolidated
assets.
d. The parent allows the subsidiary to operate freely and independently (a
decentralized management philosophy).
e. None of the above.
1-6 • ADVANCED ACCOUNTING: Concepts And Practice

9. _____ A parent generally will not consolidate a subsidiary that

a. Is unable to distribute dividends because of a cash shortage that is
expected to be temporary.
b. Has completely emerged from bankruptcy reorganization proceedings.
c. Has an entirely different board of directors than the parent.
d. Has total assets and earnings that are less than 10% of the parent’s total
assets and earnings, respectively.
e. None of the above.
10. _____ A valid reason for not consolidating a subsidiary is
a. The subsidiary is a finance subsidiary of a manufacturing parent.
b. The parent has a “hands off” decentralized operating philosophy and
therefore does not take an active role in the day-to-day management of
the subsidiary’s operations.
c. The subsidiary never declares dividends.
d. The subsidiary is effectively managed by a foreign government.
e. None of the above.
11. _____ A valid reason for not consolidating a subsidiary is
a. The subsidiary is an insurance subsidiary of a manufacturing company
parent.
b. The parent does not take an active role in the management of the
subsidiary’s operations.
c. The subsidiary is entering the third month of a prolonged and bitter
strike by its union employees.
d. The subsidiary is located in a foreign country.
e. None of the above.
12. _____ A parent could justifiably not consolidate a subsidiary that is:
a. Reporting substantial operating losses.
b. A bank of a parent company that is not a bank.
c. Newly formed and has not yet become profitable.
d. Does not distribute any of its earnings to its parent.
e. None of the above.
13. _____ Pixco (publicly owned) controls Sixco. Pixco could justifiably not
consolidate Sixco if:
a. Sixco is having severe difficulty paying its creditors.
b. Sixco operates in a foreign country that has imposed severe long-term
capital outflow restrictions.
c. Sixco is controlled only by legal means.
d. None of Sixco’s officers or directors are officers or directors of Pixco.
e. None of the above.
14. _____ A valid reason for not consolidating a subsidiary is
a. Applicable state law prohibits the subsidiary from making loans to its
parent company.
b. The subsidiary’s liabilities equal its assets.
c. The subsidiary has a serious cash shortage and will not be able to pay
dividends for the foreseeable future.
d. The parent has substantial inventory sales to the subsidiary.
e. None of the above.
 Wholly Owned Subsidiaries: At Date of Creation • 1-7

15. _____ A publicly owned company has only one subsidiary. Under regulatory
rules, the subsidiary cannot pay dividends to the parent above a certain
amount. Under the SEC’s rules, this restriction must be disclosed
a. Regardless of materiality.
b. If the subsidiary’s total assets are more than 25% of the total consolidated
net assets.
c. If the subsidiary’s restricted net assets exceed 25% of consolidated net
assets.
d. If the subsidiary’s net assets exceed 25% of consolidated net assets.
e. None of the above.
16. _____ Parco, a publicly owned company, could properly not consolidate Sarco,
which is controlled by means of
a. (1) A majority voting interest and (2) is unable to distribute dividends
because of severe and long-term currency transfer restrictions imposed
by a foreign government.
b. (1) A majority voting interest and (2) has emerged from bankruptcy
reorganization proceedings (thus is no longer in bankruptcy).
c. Other than a majority voting interest.
d. (1) A majority voting interest and (2) has total assets and earnings that
are less than 10% of the Parco’s total assets and earnings, respectively.
e. None of the above.
17. _____ Which of the following is not a required consolidation disclosure?
a. The parent’s consolidation policy.
b. The parent’s consolidation procedures.
c. Restrictions on the ability of a subsidiary to transfer funds to the parent.
d. The business relationship of the subsidiary to the parent.
e. None of the above.
18. _____ Paxco, a publicly owned company, controls Saxco (parent created).
Consolidation of Saxco is not required if
a. Paxco has decided to sell Saxco.
b. Paxco is actively trying to sell Saxco and has several offers that it is
considering.
c. Saxco has been sold under a pending contract of sale for which the
closing date (payment of purchase price and transfer of property) is to be
made 40 days after Paxco’s year-end.
d. a, b, and c.
e. Saxco must be consolidated right up until the date of sale.
1-8 • ADVANCED ACCOUNTING: Concepts And Practice

CHAPTER 1—ANSWERS

COMPLETION STATEMENTS
1. internal, external
2. subsidiary, branch
3. parent-subsidiary
4. home office-branch/division
5. consolidation
6. pro forma (or “as if”)
7. general-purpose
8. aggregated, disaggregated
9. worksheet
10. consolidated reporting entity
11. elimination
12. reciprocal
13. intercompany
14. substitution
15. control
16. temporary
17. nonhomogeneity
18. intercompany

TRUE-OR-FALSE STATEMENTS
1. True 10. False 19. True 28. False
2. True 11. True 20. False 29. False
3. False 12. False 21. False 30. True
4. False 13. True 22. False 31. False
5. False 14. True 23. False 32. True
6. True 15. False 24. False 33. False
7. False 16. False 25. False 34. False
8. False 17. True 26. False
9. True 18. True 27. True

MULTIPLE-CHOICE QUESTIONS
1. d 8. e 15. c
2. b 9. e 16. a
3. c 10. d 17. d
4. a 11. e 18. e
5. e 12. e
6. b 13. b
7. d 14. e
 CHAPTER 1 APPENDIX
THE BASICS OF
BRANCH/DIVISION
ACCOUNTING
COMPLETION STATEMENTS
1. A branch that maintains a general ledger is said to use a(n) ____________________
______________________ accounting system.

2. The Investment in Branch accounting has a balance that equals the ____________
______________________ account of the branch.

3. On the home office’s books, the earnings of a branch are recorded in an account
called ________________________________________.

4. Income taxes pertaining to branch earnings are usually recorded on the books of
the ________________________________________.

5. A transfer of inventory from a home office to a branch is called a(n)_____________

___________________________ inventory transfer.

TRUE-OR-FALSE STATEMENTS
1. T F A major disadvantage of a centralized accounting system is that the
profitability of branch operations cannot be determined because branch
operations are not accounted for in a separate general ledger.
2. T F Home office allocations to a branch are not required under U.S. GAAP.
3. T F Income taxes can be allocated to a branch.
4. T F Branch fixed assets can be carried on the home office’s books under a
decentralized accounting system.
5. T F If branch fixed assets are recorded on the home office’s books,
depreciation expense would not be charged to branch operations.

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1-10 • ADVANCED ACCOUNTING: Concepts And Practice
MULTIPLE-CHOICE QUESTIONS
1. _____ Which of the following accounts is a reciprocal account to the Investment
in Branch account?
a. Branch Income.
b. Equity in Home Office.
c. Home Office Capital.
d. None of the above.
2. _____ In preparing combined financial statements, which of the following accounts
are eliminated (brought to a zero balance) in the combining process?
Branch Income or Loss Home Office Capital
a. Yes Yes
b. No Yes
c. No No
d. Yes No
3. _____ A control feature in a decentralized accounting system is
a. The balance in the Investment in Branch account must equal the balance
in the Home Office Capital account.
b. The balance in the Investment in Branch account must equal the balance
in the Home Office Capital account less the branch’s cumulative
unremitted profits.
c. The intracompany accounts are eliminated in preparing combined
financial statements.
d. The balance in the Investment in Branch account must equal the balance
in the Branch Income account.
e. None of the above.
4. _____ Which of the following would explain why the Investment in Branch account
is less than the Home Office Capital account?
a. A cash transfer to the branch is in transit.
b. A cash transfer to the home office is in transit.
c. An inventory shipment to the branch (at cost) is in transit.
d. A home office has received and deposited a remittance from a branch
customer but has not yet notified the branch.
e. None of the above.
5. _____ A home office, month-end allocation of previously recorded advertising
expenses to a branch requires the following entry on the home office’s
books:
Debit Credit
a. Investment in Branch Advertising Expense
b. Home Office Capital Advertising Expense
c. Branch Income Home Office Capital
d. Investment in Branch Accrued Liabilities
e. None of the above.
 Wholly Owned Subsidiaries: At Date of Creation • 1-11

6. _____ A home office, month-end allocation of previously recorded advertising

expenses to a branch requires the following entry on the branch’s books to
record the allocation:
Debit Credit
a. Advertising Expense Accrued Liabilities
b. Branch Income Home Office Capital
c. Advertising Expense Branch Income
d. Home Office Capital Accrued Liabilities
e. None of the above.
7. _____ For 2004 a branch reported $18,000 of profit. In the combining worksheet
at year-end, the Home Office Capital account had a balance of $60,000 in
the balance sheet. The basic elimination entry would include which of the
following individual postings?
a. A debit to the Home Office Capital account for $18,000.
b. A credit to the Home Office Capital account for $42,000.
c. A debit to the Home Office Capital account for $42,000.
d. A debit to the Home office Capital account for $60,000.
e. None of the above.
8. _____ For 2004 a branch reported $18,000 of profit. In the combining worksheet
at year-end, the Home Office Capital account had a balance of $60,000 in
the balance sheet. The basic elimination entry would include which of the
following individual postings?
a. A debit to the Branch Income account for $18,000.
b. A credit to the Branch Income account for $18,000.
c. A debit to the Branch Income account for $42,000.
d. A debit to the Branch Income account for $60,000.
e. None of the above.
1-12 • ADVANCED ACCOUNTING: Concepts And Practice

APPENDIX 1A—ANSWERS
THE BASICS OF BRANCH/DIVISION
ACCOUNTING

COMPLETION STATEMENTS
1. decentralized
2. Home Office Capital
3. Branch Income
4. home office
5. intracompany

TRUE-OR-FALSE STATEMENTS
1. False
2. True
3. True
4. True
5. False

MULTIPLE-CHOICE QUESTIONS
1. c 5. a
2. a 6. e
3. a 7. c
4. d 8. a