Various Advanced Accounting Methods

1. Under the equity method, when the company’s share of cumulative losses equals its investment and the company has no obligation or intention to fund such additional losses, which of the following statements is true?
The investor should change to the fair-value method to account for its investment
The investor should suspend applying the equity method until the investee reports income
The investor should suspend applying the equity method and not record any equity in income of investee until its share of future profits is sufficient to recover losses that have not previously been recorded
The cumulative losses should be reported as a prior period adjustment
The investor should report these losses as extraordinary items

2. A company has been using the fair-value method to account for its investment. The company now has the ability to significantly control the investee and the equity method has been deemed appropriate. Which of the following statements is true? (Points: 5)
A cumulative effect change in accounting principle must occur
A prospective change in accounting principle must occur
A retrospective change in accounting principle must occur
The investor will not receive future dividends from the investee
Future dividends will continue to be recorded as revenue

3. Which of the following results in an increase in the Equity in Investee Income account when applying the equity method? (Points: 5)
Amortizations of purchase price over book value on date of purchase
Amortizations of purchase price over book value on date of purchase for the prior year
Extraordinary gain of the investor
Unrealized gain on inter-company inventory transfers for the prior year
Sale of a portion of the investment at a loss

4. In a purchase or acquisition where control is achieved, how would the land accounts of the parent and the land accounts of the subsidiary be combined?

Parent Subsidiary
A Book Value Book Value
B Book Value Fair Value
C Fair Value Fair Value
D Fair Value Book Value
E Cost Cost
(Points: 5)
Entry A
Entry B
Entry C
Entry D
Entry E

5. Direct combination costs and stock issuance costs are often incurred in the process of making a controlling investment in another company. How should those costs be accounted for in an Acquisition transaction?

Direct Combination Costs Stock Issuance Costs
A Increase Investment Decrease Investment

B Increase Investment Decrease Paid-In Capital
C Increase Investment Increase Expenses
D Decrease Paid-In Capital Increase Investment
E Increase Expenses Decrease Investment

Entry A
Entry B
Entry C
Entry D
Entry E

6. Which one of the following is a characteristic of a business combination that should be accounted for as a purchase? (Points: 5)
The combination must involve the exchange of equity securities only
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
The transaction may be considered to be the uniting of the ownership interests of the companies involved
The acquired subsidiary must be smaller in size than the acquiring parent

7. Which of the following statements is true regarding the pooling of interests method of accounting for a business combination?
Net assets of the acquired company are reported at their book values
Net assets of the acquired company are reported at their fair values
Any goodwill associated with the acquisition has an indefinite life
Subsequent amounts of cost in excess of fair value of net assets are amortized over their useful lives
Indirect costs reduce additional paid-in capital

8. Which one of the following accounts would not appear on the consolidated financial statements at the end of the first fiscal period of the combination?
Goodwill
Equipment
Investment in Subsidiary
Common Stock
Additional Paid-In Capital

9. When a company applies the partial equity method in accounting for its investment in a subsidiary and initial value, book values and fair values of net assets are all equal, what consolidation worksheet entry would be made?

A Retained earnings
Investment in subsidiary
B Investment in subsidiary
Retained earnings
C Investment in subsidiary
Equity in subsidiary’s income

D Investment in subsidiary
Additional paid-in capital
E No entry is necessary

above
B above
C above
D above
E above

10. (TCO C) Under the partial equity method, the parent recognizes income when
Dividends are received from the investee
Dividends are declared by the investee
The related expense has been incurred
The related contract is signed by the subsidiary
It is earned by the subsidiary

11. Which of the following internal record-keeping methods can a parent choose to account for a subsidiary acquired in a business combination? (Points: 5)
Initial value or book value
Initial value, lower-of-cost-or-market-value or equity
Initial value, equity or partial equity
Initial value, equity or book value
Initial value, lower-of-cost-or-market-value or partial equity

12. When using the acquisition method for accounting for business combinations, all of the following statements are false regarding the sale of subsidiary shares except: (Points: 5)
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
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
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
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

13. When a parent uses the acquisition method for business combinations and sells shares of its subsidiary, which of the following statements is false? (Points: 5)
If majority control is still maintained, consolidated financial statements are still required
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
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
A gain or loss calculation must be prepared if control is lost

14. Bell Company acquires 80% of Demers Company for $500,000 on January 1, 2009. Demers reported common stock of $300,000 and retained earnings of $200,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired.
Demers earns income and pays dividends as follows:

2009 2010 2011
Net Income $100,000 $120,000 $130,000
Dividends 40,000 50,000 60,000

Assume the initial value method is applied.

Compute the non-controlling interest in the net income of Demers at December 31, 2009.

$12,000
$10,600
$18,600
$20,000
$14,400

15. McGuire company acquired 90 percent of Hogan Company on January 1, 2009, for $234,000 cash. Hogan’s stockholders’ equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan’s net assets revealed the following:
Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years.
Book Value Fair Value
Buildings (10-year life $10,000 $8,000
Equipment (4-year life) 14,000 18,000
Land 5,000 12,000

In consolidation at January 1, 2009, what adjustment is necessary for Hogan’s Equipment account?

$4,000 increase
$4,000 decrease
$3,600 increase
$3,600 decrease
No change