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- AdvAcct Quiz on ADV-MC_1-3, created by susan bye on 29/05/2018.

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ADV-MC_1-3

Question 1 of 38

1

Growth in the complexity of the U.S. business environment

Select one of the following:

  • Has led to increased use of partnerships to avoid legal liability.

  • Has led to increasingly complex organizational structures as management has attempted to achieve its business objectives.

  • Has encouraged companies to reduce the number of operating divisions and product lines so they may better control those they retain.

  • Has had no particular impact on the organizational structures or the way in which companies are managed.

Explanation

Question 2 of 38

1

Which of the following is not an appropriate reason for establishing a subsidiary?

Select one of the following:

  • The parent wishes to protect existing operations by shifting new activities with greater risk to a newly created subsidiary.

  • The parent wishes to avoid subjecting all of its operations to regulatory control by establishing a subsidiary that focuses its operations in regulated industries.

  • The parent wishes to reduce its taxes by establishing a subsidiary that focuses its operations in areas where special tax benefits are available.

  • The parent wishes to be able to increase its reported sales by transferring products to the subsidiary at the end of the fiscal year.

Explanation

Question 3 of 38

1

Which of the following actions is likely to result in recording goodwill on Randolph Company’s books?

Select one of the following:

  • Randolph acquires Penn Corporation in a business combination recorded as a merger.

  • Randolph acquires a majority of Penn’s common stock in a business combination and continues to operate it as a subsidiary.

  • Randolph distributes ownership of a newly created subsidiary in a distribution considered to be a spin-off

  • Randolph distributes ownership of a newly created subsidiary in a distribution considered to be a split-off.

Explanation

Question 4 of 38

1

When an existing company creates a new subsidiary and transfers a portion of its assets and liabilities to the new entity

Select one of the following:

  • The new entity records both the assets and liabilities it received at fair values.

  • The new entity records both the assets and liabilities it received at the carrying values of the original company

  • The original company records a gain or loss on the difference between its carrying values and the fair values of the assets transferred to the new entity.

  • The original company records the difference between the carrying values and the fair values of the assets transferred to the new entity as goodwill.

Explanation

Question 5 of 38

1

Goodwill represents the excess of the sum of the fair value of the (1) consideration given, (2) shares already owned, and (3) the noncontrolling interest over the

Select one of the following:

  • Sum of the fair values assigned to identifiable assets acquired less liabilities assumed

  • Sum of the fair values assigned to tangible assets acquired less liabilities assumed.

  • Sum of the fair values assigned to intangible assets acquired less liabilities assumed.

  • Book value of an acquired company.

Explanation

Question 6 of 38

1

In a business combination, costs of registering equity securities to be issued by the acquiring company are a(n)

Select one of the following:

  • Expense of the combined company for the period in which the costs were incurred

  • Direct addition to stockholders’ equity of the combined company.

  • Reduction of the recorded value of the securities

  • Addition to goodwill.

Explanation

Question 7 of 38

1

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?

Select one of the following:

  • Historical cost.

  • Book value.

  • Cost plus any excess of purchase price over book value of assets acquired.

  • Fair value

Explanation

Question 8 of 38

1

In a business combination in which an acquiring company purchases 100 percent of the out- standing common stock of another company, if the fair value of the net identifiable assets acquired exceeds the fair value of the consideration given. The excess should be reported as a

Select one of the following:

  • Deferred credit

  • Reduction of the values assigned to current assets and a deferred credit for any unallocated portion

  • Pro rata reduction of the values assigned to current and noncurrent assets and a deferred credit for any unallocated portion.

  • No answer listed is correct

Explanation

Question 9 of 38

1

AandBCompanieshavebeenoperatingseparatelyforfiveyears.Eachcompanyhasaminimal amount of liabilities and a simple capital structure consisting solely of voting common stock. In exchange for 40 percent of its voting stock A Company, acquires 80 percent of the common stock of B Company. This is a “tax-free” stock-for-stock exchange for tax purposes. B Com- pany’s identifiable assets have a total net fair market value of $800,000 and a total net book value of $580,000. The fair market value of the A stock used in the exchange is $700,000, and the fair value of the noncontrolling interest is $175,000. The goodwill reported following the acquisition would be

Select one of the following:

  • Zero

  • $60,000.

  • $75,000.

  • $295,000.

Explanation

Question 10 of 38

1

Topper Company established a subsidiary and transferred equipment with a fair value of $72,000 to the subsidiary. Topper had purchased the equipment with ten-year expected life of four years earlier for $100,000 and has used straight-line depreciation with no expected residual value. At the time of the transfer, the subsidiary should record

Select one of the following:

  • Equipment at $72,000 and no accumulated depreciation.

  • Equipment at $60,000 and no accumulated depreciation.

  • Equipment at $100,000 and accumulated depreciation of $40,000.

  • Equipment at $120,000 and accumulated depreciation of $48,000.

Explanation

Question 11 of 38

1

LeadCorporationestablishedanewsubsidiaryandtransferredtoitassetswithacostof$90,000 and a book value of $75,000. The assets had a fair value of $100,000 at the time of transfer. The transfer will result in

Select one of the following:

  • A reduction of net assets reported by Lead Corporation of $90,000

  • A reduction of net assets reported by Lead Corporation of $75,000

  • No change in the reported net assets of Lead Corporation.

  • An increase in the net assets reported by Lead Corporation of $25,000

Explanation

Question 12 of 38

1

Tear Company, a newly established subsidiary of Stern Corporation, received assets with an original cost of $260,000, a fair value of $200,000, and a book value of $140,000 from the par- ent in exchange for 7,000 shares of Tear’s $8 par value common stock. Tear should record

Select one of the following:

  • Additional paid-in capital of $0.

  • Additional paid-in capital of $84,000.

  • Additional paid-in capital of $144,000.

  • Additional paid-in capital of $204,000.

Explanation

Question 13 of 38

1

n December 31, 20X3, Saxe Corporation was merged into Poe Corporation. In the business combination, Poe issued 200,000 shares of its $10 par common stock, with a market price of $18 a share, for all of Saxe’s common stock. The stockholders’ equity section of each com- pany’s balance sheet immediately before the combination was:

Common Stock 3,000,000 (POE) 3,000,000 (SAXE)
Additional Paid-In Capital 1,300,000 (POE) 150,000 (SAXE)
Retained Earnings 2,500,000 (POE) 850,000 (SAXE)

In the December 31, 20X3, consolidated balance sheet, additional paid-in capital should be
reported at

Select one of the following:

  • $950,000.

  • $1,300,000.

  • $1,450,000.

  • $2,900,000.

Explanation

Question 14 of 38

1

OnJanuary1,20X1,RolanCorporationissued10,000sharesofcommonstockinexchangefor all of Sandin Corporation’s outstanding stock. Condensed balance sheets of Rolan and Sandin immediately before the combination follow:

Total Assets $1,000,000 (Rolan) $500,00 (Sandin)
Liabilities $300,000 (Rolan) $150,00 (Sandin)
Common Stock ($10 par) $200,000 (Rolan) $100,00 (Sandin)
Retained Earnings $500,000 (Rolan) $250,00 (Sandin)
Total Liabilities and Equities $1,000,000 (Rolan) $500,00 (Sandin)

Rolan’s common stock had a market price of $60 per share on January 1, 20X1. The market price of Sandin’s stock was not readily determinable. The fair value of Sandin’s net identifiable assets was determined to be $570,000. Rolan’s investment in Sandin’s stock will be stated in Rolan’s balance sheet immediately after the combination in the amount of

Select one of the following:

  • $350,000

  • $500,000

  • $570,000

  • $600,000

Explanation

Question 15 of 38

1

On April 1, 20X2, Jack Company paid $800,000 for all of Ann Corporation’s issued and out- standing common stock. Ann’s recorded assets and liabilities on April 1, 20X2, were as follows:

Cash $80,000
Inventory $240,000
P&E $480,000
Liabilities ($180,000)

On April 1, 20X2, Ann’s inventory was determined to have a fair value of $190,000, and the property and equipment had a fair value of $560,000. What is the amount of goodwill resulting from the business combination?

Select one of the following:

  • $0

  • $50,000

  • $150,000

  • $180,000

Explanation

Question 16 of 38

1

Action Corporation issued nonvoting preferred stock with a fair market value of $4,000,000 in exchange for all the outstanding common stock of Master Corporation. On the date of the exchange, Master had tangible net assets with a book value of $2,000,000 and a fair value of $2,500,000. In addition, Action issued preferred stock valued at $400,000 to an individual as a finder’s fee in arrang- ing the transaction. As a result of this transaction, Action should record an increase in net assets of

Select one of the following:

  • $2,000,000.

  • $2,500,000.

  • $4,000,000.

  • $4,500,000.

Explanation

Question 17 of 38

1

Peel Company received a cash dividend from a common stock investment. Should Peel report an increase in the investment account if it uses the cost method or equity method of accounting?

Select one of the following:

  • Cost: No
    Equity: No

  • Cost: Yes
    Equity: No

  • Cost: No
    Equity: Yes

  • Cost: Yes
    Equity: Yes

Explanation

Question 18 of 38

1

Aninvestorusestheequitymethodtoaccountforaninvestmentincommonstock.Assumethat (1) the investor owns more than 50 percent of the outstanding common stock of the investee, (2) the investee company reports net income and declares dividends during the year, and (3) the investee’s net income is more than the dividends it declares. How would the investor’s invest- ment in the common stock of the investee company under the equity method differ at year-end from what it would have been if the investor had accounted for the investment under the cost method?

Select one of the following:

  • The balance under the equity method is higher than it would have been under the cost method.

  • The balance under the equity method is lower than it would have been under the cost method

  • The balance under the equity method is higher than it would have been under the cost method, but only if the investee company actually paid the dividends before year-end

  • The balance under the equity method is lower than it would have been under the cost method, but only if the investee company actually paid the dividends before year-end.

Explanation

Question 19 of 38

1

A corporation exercises significant influence over an affiliate in which it holds a 40 percent common stock interest. If its affiliate completed a fiscal year profitably but paid no dividends, how would this affect the investor corporation?

Select one of the following:

  • Result in an increased current ratio

  • Result in increased earnings per share

  • Increase asset turnover ratios

  • Decrease book value per share.

Explanation

Question 20 of 38

1

Companies often acquire ownership in other companies using a variety of ownership arrange- ments. The investor should use equity-method reporting whenever

Select one of the following:

  • The investor purchases voting common stock of the investee.

  • The investor has significant influence over the operating and financing decisions of the investee

  • The investor purchases goods and services from the investee

  • The carrying value of the investment is less than the market value of the investee’s shares held by the investor

Explanation

Question 21 of 38

1

The carrying amount of an investment in stock correctly accounted for under the equity method is equal to

Select one of the following:

  • The original price paid to purchase the investment

  • The original price paid to purchase the investment plus cumulative net income plus cumulative dividends declared by the investee since the date the investment was acquired

  • The original price paid to purchase the investment plus cumulative net income minus cumulative dividends declared by the investee since the date the investment was acquired

  • The original price paid to purchase the investment minus cumulative net income minus cumulative dividends declared by the investee since the date the investment was acquired

Explanation

Question 22 of 38

1

On January 2, 20X3, Kean Company purchased a 30 percent interest in Pod Company for
$250,000. Pod reported net income of $100,000 for 20X3 and declared and paid a dividend of $10,000. Kean accounts for this investment using the equity method. In its December 31, 20X3, balance sheet, what amount should Kean report as its investment in Pod?

Select one of the following:

  • $160,000

  • $223,000

  • $340,000

  • $277,000

Explanation

Question 23 of 38

1

Investor Inc. owns 40 percent of Alimand Corporation. During the calendar year 20X5,
Alimand had net earnings of $100,000 and paid dividends of $10,000. Investor mistakenly recorded these transactions using the cost method rather than the equity method of accounting. What effect would this have on the investment account, net earnings, and retained earnings, respectively?

Select one of the following:

  • Understate, overstate, overstate.

  • Overstate, understate, understate

  • Overstate, overstate, overstate

  • Understate, understate, understate.

Explanation

Question 24 of 38

1

A corporation using the equity method of accounting for its investment in a 40 percent–owned investee, which earned $20,000 and paid $5,000 in dividends, made the following entries:

Investment in Investee 8,000
Income from Investee 8,000

Cash 2,000
Dividend Revenue 2,000

What effect will these entries have on the investor’s statement of financial position?

Select one of the following:

  • Financial position will be fairly stated.

  • Investment in the investee will be overstated, retained earnings understated

  • Investment in the investee will be understated, retained earnings understated.

  • Investment in the investee will be overstated, retained earnings overstated

Explanation

Question 25 of 38

1

When a parent–subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of

Select one of the following:

  • Reliability

  • Materiality

  • Legal entity

  • Economic entity.

Explanation

Question 26 of 38

1

Consolidated financial statements are typically prepared when one company has a controlling interest in another unless

Select one of the following:

  • The subsidiary is a finance company

  • The fiscal year-ends of the two companies are more than three months apart

  • Circumstances prevent the exercise of control.

  • The two companies are in unrelated industries, such as real estate and manufacturing

Explanation

Question 27 of 38

1

PennInc.,amanufacturingcompany,owns75percentofthecommonstockofSellInc.,aninvest- ment company. Sell owns 60 percent of the common stock of Vane Inc., an insurance company. In Penn’s consolidated financial statements, should Sell and Vane be consolidated or reported as equity method investments (assuming there are no side agreements)?

Select one of the following:

  • Consolidation used for Sell and equity method used for Vane.

  • Consolidation used for both Sell and Vane

  • Equity method used for Sell and consolidation used for Vane.

  • Equity method used for both Sell and Vane.

Explanation

Question 28 of 38

1

Which of the following is the best theoretical justification for consolidated financial statements?

Select one of the following:

  • In form, the companies are one entity; in substance, they are separate

  • In form, the companies are separate; in substance, they are one entity

  • In form and substance, the companies are one entity

  • In form and substance, the companies are separate

Explanation

Question 29 of 38

1

An enterprise that will absorb a majority of a variable interest entity’s expected losses is called the

Select one of the following:

  • Primary beneficiary

  • Qualified owner

  • Major facilitator

  • Critical management director.

Explanation

Question 30 of 38

1

In determining whether or not a variable interest entity is to be consolidated, the FASB focused on

Select one of the following:

  • Legal control

  • Share of profits and obligation to absorb losses

  • Frequency of intercompany transfers

  • Proportionate size of the two entities

Explanation

Question 31 of 38

1

Consolidated financial statements are typically prepared when one company has

Select one of the following:

  • Accounted for its investment in another company by the equity method

  • Accounted for its investment in another company by the cost method.

  • Significant influence over the operating and financial policies of another company.

  • The controlling financial interest in another company.

Explanation

Question 32 of 38

1

Aaron Inc. owns 80 percent of the outstanding stock of Belle Inc. Compare the total consoli- dated net earnings of Aaron and Belle (X) and Aaron’s operating earnings before consider- ing the income from Belle (Y). Assume that neither company incurs a net loss during the period.

Select one of the following:

  • X is more than Y.

  • X is equal to Y

  • X is less than Y.

  • Cannot be determined

Explanation

Question 33 of 38

1

On October 1, X Company acquired for cash all of Y Company’s outstanding common stock. 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

Select one of the following:

  • X Company for three months and Y Company for three months

  • X Company for 12 months and Y Company for 3 months

  • X Company for 12 months and Y Company for 12 months.

  • X Company for 12 months, but no income from Y Company until Y Company distributes a dividend

Explanation

Question 34 of 38

1

Ownership of 51 percent of the outstanding voting stock of a company would usually result in

Select one of the following:

  • The use of the cost method

  • The use of the lower-of-cost-or-market method

  • The use of the equity method

  • A consolidation

Explanation

Question 35 of 38

1

On January 2, 20X8, Pare Company acquired 75 percent of Kidd Company’s outstanding common stock at an amount equal to its underlying book value. Selected balance sheet data at December 31, 20X8, are as follows:

Totals Assets 420,000 (Pare) 180,000 (Kidd)
Liabilities 120,000 (Pare) 60,000 (Kidd)
Common Stock 100,000 (Pare) 50,000 (Kidd)
Retained Earnings 200,000 (Pare) 70,000 (Kidd)
420,000 (Pare) 180,000 (Kidd)

In Pare’s December 31, 20X8, consolidated balance sheet, what amount should be reported as minority interest in net assets?

Select one of the following:

  • $0.

  • $30,000.

  • $45,000.

  • $105,000.

Explanation

Question 36 of 38

1

On January 2, 20X8, Pare Company acquired 75 percent of Kidd Company’s outstanding common stock at an amount equal to its underlying book value. Selected balance sheet data at December 31, 20X8, are as follows:

Totals Assets 420,000 (Pare) 180,000 (Kidd)
Liabilities 120,000 (Pare) 60,000 (Kidd)
Common Stock 100,000 (Pare) 50,000 (Kidd)
Retained Earnings 200,000 (Pare) 70,000 (Kidd)
420,000 (Pare) 180,000 (Kidd)

n its consolidated balance sheet at December 31, 20X8, what amount should Pare report as common stock outstanding?

Select one of the following:

  • $50,000.

  • $100,000.

  • $137,500.

  • $150,000.

Explanation

Question 37 of 38

1

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

Select one of the following:

  • Neely owns 80 percent of the outstanding common stock of Randle and 40 percent of Walker; Randle owns 30 percent of Walker.

  • Neely owns 100 percent of the outstanding common stock of Randle and 90 percent of Walker; Neely bought the Walker stock one month before the foreign country in which Walker is based imposed restrictions preventing Walker from remitting profits to Neely.

  • Neely owns 100 percent of the outstanding common stock of Randle and Walker; Walker is in legal reorganization.

  • Neely owns 80 percent of the outstanding common stock of Randle and 40 percent of Walker; Reeves Inc. owns 55 percent of Walker.

Explanation

Question 38 of 38

1

What is the theoretically preferred method of presenting a noncontrolling interest in a consoli- dated balance sheet?

Select one of the following:

  • As a separate item within the liability section

  • As a deduction from (contra to) goodwill from consolidation, if any

  • By means of notes or footnotes to the balance sheet

  • As a separate item within the stockholders’ equity section

Explanation

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