Q1. Picasso Co. issued 10,000 shares of its $1 par common stock, valued at $400,000, to acquire shares of Bull Company in an all-stock transaction. Picasso paid the investment bankers $35,000. Picasso will treat the investment banker fee as:

a. an expense for the current year

b. a prior period adjustment to Retained Earnings.

c. additional goodwill on the consolidated balance sheet

d. a reduction in paid-in capital.

Q2. A business combination occurs when a company acquires an equity interest in another entity and has:

a. at least 20% ownership in the entity.

b. more than 50% ownership in the entity.

c. 100% ownership in the entity

d. control over the entity, irrespective of the percentage owned

Q3. When negative goodwill occurs in a business combination calculation,

a. The negative goodwill is considered an impairment

b. The value is allocated first to reduce proportionately (according to market value) non-current assets, then to non-monetary current assets, and any negative remainder is classified as a deferred credit.

c. allocated first to reduce proportionately (according to market value) non-current assets, and any negative remainder is classified as an extraordinary gain.

d. allocated first to reduce proportionately (according to market value) non-current, depreciable assets to zero, and any negative remainder is classified as a deferred credit.

Q4. With respect to goodwill, an impairment

a. Will be amortized over the remaining useful life.

b. Is a two step process which analyzes each business unit of the entity.

c. Is a one step process considering the entire firm.

d. Occurs when asset values are adjusted to fair value in a purchase.

Q5. According to FASB 141, liabilities assumed in a purchase acquisition will be valued at:

a. estimated fair value

b. historical book value.

c. current replacement cost

d present value using market interest rates.

Q6. Goodwill arising from a business combination is:

a. charged to Retained Earnings after the acquisition is completed.

b. amortized over 40 years or its useful life, whichever is longer.

c. amortized over 40 years or its useful life, whichever is shorter.

d. never amortized.

Q7. Jacana Corporation paid $200,000 for a 25% interest in Lilypad Corporation's common stock on January 1, 2005, but was not able to exercise significant influence over Lilypad. During 2006, Jacana reported income of $120,000, excluding its income from Lilypad, and paid dividends of $50,000. Lilypad reported net income of $40,000 during 2006 and paid dividends of $20,000. Jacana should report net income for 2006 in the amount of

a. 115,000

b. 120,000

c. 125,000

d.130,000

Q8. On January 1, 2005, Coot Company acquired a 15% interest in Roost Corporation for $120,000 when Roosts stockholders equity consisted of $600,000 capital stock and $200,000 retained earnings. Book values of Roosts net assets equaled their fair values on this date. Roosts net income and dividends for 2005 through 2007 are as follows:

Assume that Coot uses the cost method of accounting for its investment in Roost. The balance in the Investment in Roost account at December 31, 2007 will be:

a.118,000

b.120,000

c.121,800

d.130,800

Q9. Pelican Corporation acquired a 30% interest in Crustacean Inc at book value several years ago. Crustacean  declared $100,000 dividends in 2005 and reported its income for the year as follows:

Income from continuing operations        $700,000

Loss on discontinued division                     (100,000)

Net income                                                        $600,000

Pelicans Investment in Crustacean account for 2003 should increase by:

a. 150,000

b. 160,000

c. 180,000

d. 210,000

Q10. Pardolate Corporation paid $200,000 for a 60% interest in Arthropod Inc on January 1, 2005, when Arthropod had Capital Stock of $200,000 and Retained Earnings of $100,000. Fair values of identifiable net assets were the same as recorded book values. During 2005, Arthropod had income of $30,000; declared dividends of $10,000 and paid $5,000 of dividends. On December 31, 2005, Pardolate will have

a. Investment in Salem account of $240,000.

b. Investment in Salem account of $218,000.

c. Goodwill of $20,000

d. Dividends receivable of $3,000.

Q11. Spinebill Corporation bought 80% of Nectar Company's common stock at its book value of $500,000 on January 1, 2005. During 2005, Nectar reported net income of $150,000 and paid dividends of $45,000. At what amount should Spinebill's Investment in Nectar account be reported on December 31, 2005?

a. 500,000

b. 548,000

c. 584,000

d.605,000

Q12. Which one of the following will increase consolidated Retained Earnings?

a. An increase in the value of goodwill subsequent to the parent's date of acquisition.

b. The amortization of a $10,000 excess in the fair value of a note payable over its recorded book value.

c. The depreciation of a $10,000 excess in the fair value of equipment over its recorded book value.

d. The sale of inventory by a subsidiary that had a $10,000 excess in fair value over recorded book value on the parent's date of acquisition.

Q13. Pigeon Corporation acquired a 60% interest in Home Company on January 1, 2005, for $70,000 cash when Home had Capital Stock of $60,000 and Retained Earnings of $40,000. All excess purchase cost was attributable to equipment with a 10-year (straight-line) life. Home suffered a $10,000 net loss in 2005 and paid no dividends. At year-end 2005, Home owed Pigeon $12,000 on account. Pigeon's separate income for 2005 was $150,000. Consolidated net income for 2005 is:

a. $135,800

b. $136,800

c. $143,000

d. $144,000