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BUSI 218 Exam 1
| Question | Answer |
|---|---|
| A business combination in which the acquired company's assets and liabilities are combined with those of the acquiring company into a single entity is defined as: A) Statutory Merger B) Reverse Statutory Rollup C) Leveraged Buyout D) Stock Acquisition | A) Statutory Merger |
| In which of the following situations do accounting standards not require that the F/S of the parent and sub. be consolidated? A) A corp. has control&maj. B) Corp creates new 100% owned sub. C) Corp purchases 90% voting stk D) Corp owns < CI | D) A corporation owns less-than a controlling interest in an unincorporated company |
| Big Company acquired A&L of Little Company for $470,000 cash. A&L FVs: Inventory=$70k, Land=$100k, B&E=$320k, CL=$50k. Items are all rec. at their acq. date FVs, what additional item needs to be rec. and how will it be accounted for in the future? | $30,000 Goodwill, capitalized and tested for impairment |
| Company X acquired for cash al of the outstanding common stock of Company Y. How should Company X determine in general the amounts to be reported for the inventories and long-term debt acquired from Company Y? | Inventories: FV; Long-term debt: FV |
| The length of the measurement period allowed to value the assets and liabilities in an acquired business combination starts on the date of acquisition and lasts until: | All necessary information about the facts of the acquisition is obtained, not to exceed one year. |
| Usually, an investment of 20 to 50 percent in another company's voting stock is reported under the: | Equity method |
| If Push Company owned 51 percent of the outstanding common stock of Shove Company, which reporting method would be appropriate? | Consolidation Method |
| On 1/1/X9, P acquired 30% of the CS of S, at underlying BV. For the same year, S reported NI of $55k, which includes an extraordinary gain of 40k. It did not pay any div during the year. By what amt would P's inv. in S increase for the year, if P used E? | $16,500 |
| Consolidated financial statements tend to be most useful for: | Investors and long-term creditors of the parent company |
| What portion of the subsidiary stockholders' equity account balances should be eliminated in preparing the consolidated balance sheet? A) RE B)CS C)APIC D) All | D) All of the balances are eliminated |
| Which of the following usually does not represent a variable interest? A) Subordinated debt B) Common stock, with no special features or provisions C) Senior debt D) Loan or asset guarantees | C) Senior debt |
| All of the following statements accurately describe Special Purpose Entities (SPEs) except for: | A variable interest entity (VIE) is a type of SPE with a limited number of equity investors |
| P transfers cash, inventory, and eq. to S in exchange for CS. Which of the following accounts is debited in the books of S while recording the receipt of assets and the issueance of shares? Options: AD, Inventory, CS, Eq. | Inventory and Equipment |
| What is true of a spin-off? | The ownership of a subsidiary is distributed to the parent's stockholders without their surrendering any of their stock in the parent company. |
| The total difference at the acquisition date between the ____ value of the consideration exchanged and the ____ value of the net identifiable assets acquired is referred to as the differential. | Fair; book |
| P exchanges 10k shs of CS when they had a MV of $480k in exchange for all of S's CS and incurs merger costs of $35k and stk issuance costs of $25k. Which is DR in P in recording merger and stk issue costs? DSIC, Cash, Goodwill, Acquisition Expense | Deferred Stock Issue Costs for 25k and Acquisition Expense for 35k |
| P has a 25% investment in S with a fair value of $200k. P subsequently acquires S remaining shares for $600k. Which of the following accounts is debited in the books of P in recording the acquisition of the controlling interest in S? Inv., Cash, Gain, NCI | Investment in S |
| An asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized is defined as ____. | Goodwill |
| Statutory Merger | One of the combining companies survives and the other losses its separate identity. |
| Statutory Consolidation | Neither of the combining companies remains in existence. |
| Stock Acquisition | Neither of the combining companies is liquidated. |
| P acquires land FV of $820k. Measurement period, the land is worth $860k on the acq date. Value of the land acquired by P declined to $810k. P already adjusted. Which of the following accounts is DR in P to recog the decline in the value of land? | Impairment Loss for $50,000 |
| A(n) ____ is a corporation that another corporation, referred to as a(n) ____ company, controls, usually through majority ownership of its common stock. | Subsidiary; parent |
| P creates a sub. The parent transfers cash, inventory, and land to S in exchange for CS. Which of the following accounts is debited on the books of the parent company in recording the creation of a subsidiary company? APIC, Land, Inv., Inventory | Investment in S CS |
| P creates S transfers cash, inventory, and land too S. In exchange for all 100k shs of S's $1 par CS. The cost of inventory and land is $60k and $110k. The cash balance is $130k. Receipt of assets and the issuance of shs on S's books? | DR: Cash for $130k, Inventory for $60k, Land for $110k; CR: CS for $100k, APIC for $200k |
| P acquires all A&L of S for $450k cash when the FV of S's net identifiable assets is estimated to be $460k. S has cash and receivables, inventory, building and equipment, and CL. DR on P books in recording the acquisition? Gain, Inventory, Cash&rec., B&E | Inventory, Cash and Receivables, Buildings and Equipment |
| Which of the following should a company do to reduce its risk of collecting receivables? | It should create or acquire a subsidiary and transfer its receivables to a subsidiary. It should transfer its receivables to a special-purpose entity. |
| P acquires land in a busi combo and records the land at its estimated FV of $55k. During the measurement period, P receives an appraisal that the land was worth $60k on the acq date. While adjusting acq date value of land acquired in busi combo, DR? | Land |
| Current liabilities are often viewed as having fair values ____ ____ their book values because they will be paid at face amount within a short time. | Equal to |
| Purchase method of accounting for business combinations | Individual A&L of the acquired company were valued at their fair values. The difference between the total purchase price and the fair value of the net identifiable assets acquired was recorded as goodwill. |
| P acquires all of S's CS at BV on 1/1/X1, by issuing 10k shs. P's NI, excluding any income from S, for the year 20X1 is $200k. S's NI for year 20X1 is $50k. NI reported by P in its financial statements for year 20X1 is $____. | $250,000 |
| Under the ____ method, an acquirer recognizes all assets acquired and liabilities assumed in a business combination and measures them at their acquisition-date fair values. | Acquisition |
| P's 20% investment in S has a BV of $250k and FV of $400k at date P acquires the remaining 80%. P revalues its original inv. in S to $400k FV. Calculate the G/L recognized by P on the revaluation of the date it acquires the remaining shs of S. | A gain of $150,000 |
| P acquires land in a busi combo and provisionally records the land at its estimated FV of $230k. Measurement period, the land receives an appraisal and is determined to be worth $250k at the acq date. CR on P's books to adjust FV | Goodwill for $20,000 |
| In a statutory merger, the ____ company's assets and liabilities are transferred to the ____ company, and the acquired company is dissolved, or liquidated. | Acquired; acquiring |
| T/F: When using the pooling-of-interest method, the book values of the combining companies were carried forward to the combined company and no revaluations to fair value were made. | True |
| Why do companies transfer their receivables to subsidiaries? | It allows transferring companies to share the risk associated with the receivables. It allows the subsidiary to use the receivables as collateral for bonds issued to other entities. It leads to tax benefits for the transferring companies. |
| P acquires all of the A&L of S in a statutory merger by issuing 10k of $1 par CS to S. P has cash, inventory, and CL. CR on S's books in recording the transfer of assets to P | Inventory |
| Which of the following is true of a hostile takeover? | A tender offer invites the shareholders of the other company to exchange their shares for securities or assets f the acquiring company. |
| P acquires land in a busi combo and records the land at its estimated FV. Measurement, P receives an appraisal of the value of the land at acq date. It is determined that the value of the land has declined. Entry to record decline in value of the land? | DR: Impairment Loss CR: Land |
| Which of the following conditions is true when a company acquires valuable ongoing research and development projects from an acquired in a business combination? | These projects are tested for impairment in accordance with current standards. These projects are assets and should be recorded at their acquisition date fair values. |
| P reports earnings of $42k for the current year and is expecting to generate cash flows of $42k for each of the next 10 years. The company's value based on a multiple of 8 times current earnings is $____. | 336,000 |
| Which of the following is true of a business combination? | The acquiree's assets and liabilities may be combined with those of the acquirer. The acquirer obtains control of one or more businesses. Control over another company may be gained by acquiring a majority of the company's common stock. |
| P acquires all of the A&L of S in a statutory merger by issuing 10k shs of $2 par CS to S. S has cash, inventory, B&E, and CL. Which of the following accounts is DR in S in recording the transfer of assets to P? | Accumulated Depreciation |
| In a(n) ____ ownership, the purchase of a less-than-majority interest in another corporation does not usually result in a business combination or controlling situation. | Noncontrolling |
| The shares of an acquired company not held by the controlling shareholder are called the ____ ____. | Noncontrolling interest |
| P acquires all A&L of S in a statutory merger by issuing 10k shs of $5 par CS to S. S has cash, inventory, land, B&E, and CL. Which of the following accounts is CR in P in recording acq date of combination? | Common Stock |
| Which of the following is a reason for a company to establish new subsidiaries? | To qualify for special tax incentives. To establish clear lines of control. To protect itself from exposing the entire company's assets to legal liability. |
| In addition to an initial issuance of shares, P, agrees to issue a certain number of additional shares for each percentage point by which the earnings number exceeds a set amount over the next five years. This is an example of a(n) ____-____ agreement. | Contingent share |
| The shares of the acquired company are recorded on the books of the acquiring company as a(n) | Asset |
| P acquires all of the A&L of S. The FV of consideration given by P is $480k and the FV of S's net identifiable assets is $370k. The BV of NIA is $250k. Calculate the total differential. | $230,000 |
| P issued $100k of 8-year, 5% bonds at par 2 years ago. The bonds pay interest annually. The current market interest rate for similar securities is 8%. Calculate the PV of the liability (rounded to the nearest dollar). | $86,131 |
| P acquires all the A&L of S in a statutory merger by issuing 10k shs of $10 par CS too S. S has cash, inventory, land, B&E, and CL. Which is DR in P in recording the acquisition on the date of combination? | B&E |
| A business combination in which the acquired firm's assets and liabilities are combined with those the acquiring company is known as a(n) ____. | Merger |
| On 1/1/X1, P acquired 60% of the CS of S for $3M. The FV of noncontrolling interest is $1.5M and the FV of S's net identifiable assets is $4.05M. Calculate goodwill. | $450,000 |
| T/F: Under the acquisition method, all costs of bringing about and consummating a business combination are charged to an acquisition expense as incurred. | True |
| P acquires S by providing consideration with a fair value of $660k. FV of NIA is $440k. S's NIA on its books are $220k. Calculate the total differential. | $440,000 |
| P acquires all of the A&L of S in a statutory merger by issuing 10k shs of $1 par CS to S. S has cash, inventory, and CL. Which is CR in S in recording the transfer of assets to P? | Inventory |
| Which of the following accounts is involved in the basic consolidation entry? RE, Inv,. Inc., CS | RE, Inv., CS |
| 1/1/X1, P acquired 30% of S's CS for $220k. During 20X1, S recognized NI of $55k and declared dividends of $20k. What is P's investment income related to its investment in S's CS under the cost and the equity methods? | $6,000; $16,500 |
| P acquires 100% of S's CS for $200k. The FV of the investment is = to the BV on the acq date. The inv. acc is = to the combined BV of S's CS ($150k) and RE of ($50k). In the acq year, S earned NI of $22k and declared div of $8k. S's ending RE is $____. | $64,000 |
| Which of the following will decrease the investment account on the books of the investor when the equity method is applied? | A net loss reported by the invested. Dividends declared by the invest. |
| Which of the following is the journal entry made by an investor company to record its share of the income from an invested company? | DR: Investment in S CS; CR: Income from S |
| Assume a company acquires 20% of the common stock of another company on 10/1/X1 for $300k. The invested company declares a dividend of $50k on 12/31/X1. The investor's share of dividends from this investment is $____. | $10,000 |
| Which of the following methods of accounting for investments in common stock is appropriate when an investor exercises significant influence over the investee? | The equity method |
| Investments in which the investor's voting stock gives it the ability to exercise significant influence over operating and financial policies of the subsidiary company should use the ____ method of accounting for the investment. | Equity |
| Which of the following items is excluded from the parent's NI in calculating consolidated NI using a consolidation worksheet if the parent company owns 100% of the CS of its subsidiary? | Net income from consolidated subsidiaries. Investment income from consolidated subsidiaries. |
| P acquired 10% of S's CS at the beginning of the year for $500k. Undistributed income for the first year was $10k. 2nd year, S earned income of $120k and declared dividend of $150k. What will be the CV of investments at the end of the 2nd year on P | $498,000 |
| If an investor, using the equity method, sells a part of an investment in common stock and if the equity method is no longer appropriate after the sale, which of the following statements is true? | The cost method of the remaining investment is treated as the cost of the investment. The cost method is applied in the normal manner from the date of the sale. The company does not make a retroactive restatement of the investment to actual costs. |
| Which method is used for reporting investments in equity securities when both consolidation and the equity-method reporting are inappropriate? | The cost method |
| Under the equity method, which of the following is a reason the carrying amount of an investment may not be equal to its original cost? | Investor's share in the investee's net loss and dividends declared reduce the carrying value of the investment. Investor's share of the investee's income increases the investment's carrying value. |
| Which of the following is a (are) reason(s) for eliminating the investment account with the basic consolidation entry? | From a single entity viewpoint, a company cannot hold an investment in itself. The amount represented in the investment account is recorded separately as net assets of the subsidiary. |
| When changing from the cost method to the equity method of accounting for inter corporate investments, if the restated income from the equity method is more than the cost method, the ____ account is DR on the investor company's books for the restatement. | Investment in S |
| P acquired 15% of S's CS for $300k on 1/1/X1. P then acquired another 10% for $170k on 1/1/X3. Changed from cost to equity. Investee declared div of $10k and $15k in X1 and X2. NI of $30k and $20k in X1 and X2. P's inv inc under cost ____, equity ____. | $3,750; $7,500 |
| T/F: Under the cost method, at the time of purchase, the investor records its investment in common stock at the total cost incurred in making the purchase. | True |
| P holds 100% of CS of S. 2nd year of ownership, BV of investment was $430k. BV included CS of $350k and RE of $80k. 2nd year, S earned NI of $50k. Based on this info, the end BV of the total investment is $____. | $480,000 |
| Which of the following accounts is affected in the books of an investor for recording its share of dividends declared by an investee company when the equity method is applied? | Dividends Receivable; Investment in S CS |
| The sale of all or part of an investment in common stock carried under the equity method is treated the same as the sale of any ____ asset. | Noncurrent |
| P holds 30% of S CS. 20X2, P sells inventory to S for $25k. Original cost of the inventory was $20k. S sells half of inventory to an outside co in 20X2 and retains the rest in its ending inventory. Calculate the amount of unrealized gross profit for 20X2. | $2,500 |
| Which of the following are columns in a consolidation worksheet? | Account balances from the books of individual companies, consolidated balances, consolidation entries, names of the accounts of consolidating companies. |
| Assuming an investor uses the cost method to account for its investments, when an investment is acquired in the middle of the year, what is the amount of income from investment recognized for the year? | The investor's share of dividends declared by the investee during the period in which the investor owns the stock. |
| Which of the following accounts is involved in the investor's journal entry to record the purchase of an investee company's stock under the fair value option method? | Investment in S; Cash |
| P purchased 100% of S's CS on 1/1/X1. Acq date, P's CS is $400k while S's CS is $220k. The consolidated CS recorded in the consolidation worksheet on the date of acquisition is $____. | $400,000 |
| When an investor company changes from cost to equity, which of the following accounts is CR if restated income from the equity method is more than cost? | Retained Earnings |
| Which of the following statements is true of the basic consolidation entry? | Eliminates the income from the investee company account, the equity accounts of the investee company, and the investment in the investee company account. |
| The journal entry made by a parent company to record its share of the income from an investee company is referred to as the ____ accrual. | Equity |
| P purchased 35% S's cS for $500k. S reported $100k of NI in the acq year. What is P's journal entry to record its share of S's income? | DR: Investment in S stock for $35,000; CR: Income from S for $35,000 |
| P acquires 100% of CS of S. Acq date, RE of S is $165k. RE of P at year end is $325k. Acq year, S earns NI of $35k and declares dividends of $15k. Based on this info, the value of consolidated RE is $ | $325,000 |
| Which of the following is a criticism for the equity method of accounting for investments? | The inv in stock of another co is reported as a single amount in the investor's B/S. The carrying amount of the inv is composed of many components and is not similar to the val of other assets. The asset val departs from the hist cost but also from FMV. |
| P has investment in S and at beginning of 20X3, it changes from cost to equity. The income from investment under the equity method is $12,800 more than cost. Restate investment account from cost to equity. | DR: Investment in S stock for $12,800; CR: RE for $12,800 |
| Which of the following investor accounts are affected in recording an increase in the FV of an investee's stock? | Investment in S stock and Unrealized Gain on S stock |
| 1/1/X1, P acquires 100% of S's CS for $450k. What is P's journal entry to record the initial investment? | DR: Investment in S for $450,000; CR: Cash for $450,000 |
| Which of the following accurately describes the effect(s) of a stock dividend, split, or reverse stock split by an investee company on the parent's investment in investee account under the equity method? | It is not recorded in the books of the investor company. It is treated in the same way under the cost and equity methods. |
| Under the equity method of accounting for an investment, an investor records its investment at the ____ cost. | Original |
| P purchased 20% of S's CS on 1/1/X1 for $150k. 6/1/X1, P purchased another 15% of S for $90k. S earned $48k from 1/1-5/31. Compute P's share of S's income from 1/1-5/31 | $9,600 |
| P acquires 100% of CS of S. FV of investment is = too BV. S earns NI during acq year and declares dividends out of NI. Which accounts are included in the basic consolidation entry? | CS, RE, Investment in S, Dividends Declared |
| The investee's ____ are viewed as distributions of previously recognized income that already has been capitalized in the carrying amount of the investment. | Dividends |
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