QUESTION 1

Company Pea owns 90% of Company Essone which in turn owns 80% of Company Esstwo. Company Esstwo owns 100% of Company Essthree. Consolidated financial statements should be prepared to report the financial status and results of operations for:

a. Pea.
b. Pea plus Essone.
c. Pea plus Essone plus Esstwo.
d. Pea plus Essone plus Esstwo plus Essthree.

QUESTION 2

Under the equity method of accounting for a stock investment, the investment initially should be recorded at

a. cost.
b. cost minus any purchase differential.
c. proportionate share of fair value of the investee company's net assets.
d. proportionate share of the book value of the investee company's net assets.

QUESTION 3

A change from the equity method to the cost method of accounting for an investment in common stock due to a decrease in the number of shares held by the investor requires:

a. Retroactive restatement as if the investor always had used the cost method.
b. Requires an adjustment to beginning retained earnings.
c. That the cumulative amount of the change be shown as a line item on the income statement net of tax.
d. The change be accounted for currently and prospectively.

QUESTION 4

A change from the cost method to the equity method of accounting for an investment in common stock resulting from an increase in the number of shares held by the investor requires:

a. Only footnote disclosure.
b. That the cumulative amount of the change be shown as a line item on the income statement, net of tax.
c. That the change be accounted for currently and prospectively.
d. Retroactive restatement as if the investor always had used the equity method.

QUESTION 5

Which of the following situations best describes a business combination to be accounted for as a statutory merger?

a. All of the outstanding stock of a company is acquired.
b. Cash or other consideration is exchanged for total net assets of another company.
c. Two companies combine to form a new third company, and the original two companies are dissolved.
d. One company transfers assets to another company it has created.

QUESTION 6

On December 31, 2003, Rudd Company purchased 80 percent of the common stock of Wilton Company. At the time, Rudd held land with a book value of $100,000 and a fair value of $260,000; Wilton held land with a book value of $50,000 and fair value of $600,000. At what amount would land be reported in a consolidated balance sheet prepared immediately after the combination?

a. $540,000.
b. $590,000.
c. $700,000.
d. $860,000.

QUESTION 7

Assume that one company owns 70 percent of the common stock of another company, with the investment originally purchased at the book value of the shares acquired. For the current year, the parent reports separate operating income of $300,000, and the subsidiary reports net income of $160,000; each company declares dividends of $50,000. What will the amount of consolidated net income reported in the consolidate income statement for the year?

a. $460,000.
b. $412,000.
c. $377.000.
d. $327,000.

QUESTION 8

Goodwill under the parent theory:

a. exceeds goodwill under the proprietary theory.
b. exceeds goodwill under the entity theory.
c. is less than goodwill under then entity theory.
d. is less than goodwill under the proprietary theory.

QUESTION 9

Goodwill recognized in a business combination should be:

a. Amortized over its useful life.
b. tested for impairment at least annually.
c. identified with the reporting unit benefited by the goodwill.
d. both B and C

QUESTION 10

Dickens Corporation issued nonvoting preferred stock with a fair market value of $1,200,000 in exchange for all the assets and liabilities of D&E Corporation. D&E's net assets on the date of acquisition had a book value of $800,000 and a fair value of $1,050,000. Also, Dickens issued common stock with a fair market value of $50,000 to legal counsel for arranging the transaction. As a result of this business combination Dickens' net assets increased by:
a. $800,000
b. $1,050,000
c. $1,200,000
d. $1,250,000

QUESTION 11

Retroactive application of the equity method of accounting is required when

a. the equity method has been appropriately applied in prior years, and the investor has acquired additional shares in the current year.
b. the investment has been made in installments over several years, and the criteria for using the equity method were met with this year's installment acquisition.
c. an investor has exercised significant influence over an investee in prior years but used the cost method to account for its investment.
d. both B and C.

QUESTION 12

If Oakland Company owned 51 percent of the outstanding common stock of Redding Company, what reporting method would be appropriate?

a. Consolidation.
b. Cost method.
c. Equity method.
d. Merger method.

QUESTION 13

Which of the following statements is correct?

a. The cost method does not represent a departure from historical cost.
b. The cost method is inconsistent with the realization concept.
c. The equity method does not represent a departure from historical cost.
d. The equity method is consistent with valuation at market value.

QUESTION 14

There may be an impairment of goodwill if:

a. the fair value of a reporting unit exceeds its carrying value.
b. implied goodwill exceeds the carrying value of goodwill.
c. either A or B.
d. neither A nor B.

QUESTION 15

Negative goodwill normally is treated as a reduction of noncurrent assets of the acquired company other than:

a. financial assets, excluding investments accounted for using the equity method.
b. prepaid pension and postretirement benefit costs, and deferred tax assets.
c. assets to be disposed of by sale.
d. all of the above.