Test Bank Accounting for Multiple Entities Chapter 16

Chapter 16

Multiple Choice

1. Which of the following is the best theoretical justification for consolidated financial statements?
   • • • 1. In form the companies are one entity; in substance they are separate
         2. In form the companies are separate; in substance they are one entity
         3. In form and substance, the companies are one entity
         4. In form and substance, the companies are separate
2. Consolidated financial statements are typically prepared when one company has a controlling interest in another unless:
   1. The subsidiary is a finance company
   2. The fiscal year-ends of the companies are more than three months apart.
   3. Circumstance prevent the exercise of control
   4. The two company are in unrelated industries, such as real estate and manufacturing.
3. Consolidated statements are proper for Neely, Inc., Randle, Inc., and Walker, Inc., if
4. Neely owns 80 percent of the outstanding common stock of Randle and 40 percent of Walker; Randle owns 30 percent of Walker.
5. Neely owns 100 percent of the outstanding common stock of Randle and 90 percent of Walker; Neely bought the stock of Walker one month before the balance sheet date and sold it seven weeks later.
6. Neely owns 100 percent of the outstanding common stock of Randle and Walker; Walker is in legal reorganization.
7. Neely owns 80 percent of the outstanding common stock of Randle and 40 percent of Walker; Reeves, Inc., owns 55 percent of Walker.
8. On October 1, Company X acquired for cash all of the outstanding common stock of Company Y. 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
9. Company X for3 months and Company Y for 3 months
10. Company X for 12 months and Company Y for 3 months
11. Company X for 12 months and Company Y for 12 months
12. Company X for 12 months, but no income from Company Y until Company Y distributed a dividend
13. When a parent-subsidiary relation exists, consolidated financial statements are prepared in recognition of the accounting concept of:
    1. Reliability
    2. Materiality
    3. Legal entity
    4. Economic entity
14. Arkin, Inc., owns 90 percent of the outstanding stock of Baldwin Company. Curtis, Inc., owns 10 percent of the outstanding stock of Baldwin Company. On the consolidated financial statements of Arkin, Curtis should be considered as
15. A holding company
16. A subsidiary not to be consolidated
17. An affiliate
18. A noncontrolling interest
19. A sale of goods, denominated in a currency other than the entity’s functional currency, resulted in a receivable that was fixed in terms of the amount of foreign currency that would be received. Exchange rates between the functional currency and the currency in which the transaction was denominated changed. The resulting gain should be included as a (an)
20. Other comprehensive income
21. Deferred credit
22. Component of income from continuing operations
23. Discontinued operations
24. Which of the following is not a consideration in segment reporting for diversified enterprises?
25. Allocation of joint costs
26. Transfer pricing
27. Defining the segments
28. Consolidation policy
29. 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?
30. Historic cost
31. Book value
32. Cost plus any excess of purchase price over book value of asset acquired
33. Fair value
34. Goodwill represents the excess of the cost of an acquired company over the
35. Sum of the fair values assigned to identifiable assets acquired less liabilities assumed
36. Sum of the fair values assigned to tangible assets acquired less liabilities assumed
37. Sum of the fair values assigned to intangible assets acquired less liabilities assumed
38. Book value of an acquired company
39. The theoretically preferred method of presenting noncontrolling interest on a consolidated balance sheet is
40. As a separate item with the deferred credits section
41. As a reduction from (contra to) goodwill from consolidation, if any
42. By means of notes or footnotes to the balance sheet
43. As a separate item within the stockholders’ equity section
44. Meredith Company and Kyle Company were combined in an acquisition transaction. Meredith was able to acquire Kyle at a bargain price. The sum of the market or appraised values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Meredith. After revaluing noncurrent assets to zero there was still some of the bargain purchase amount remaining (formerly termed negative goodwill). Proper accounting treatment by Meredith is to report the amount as
45. A discontinued operations item
46. Part of current income in the year of combination
47. A deferred credit and amortize it
48. Paid-in capital
49. When translating foreign currency financial statements, which of the following accounts would be translated using current exchange rates?

Property, Plant, and Inventories

Equipment carried at cost

1. Yes Yes
2. No No
3. Yes No
4. No Yes
5. In financial reporting for segments of a business enterprise, the operating profit or loss of a segment should include

Allocated

Corporate

Overhead Operating expenses

1. No No
2. No Yes
3. Yes No
4. Yes Yes
5. A foreign subsidiary’s function currency is its local currency that has not experienced significant inflation. The average exchange rate for the current year would be the appropriate exchange rate for translating

Sales to

Wages expense Customers

1. Yes Yes
2. Yes No
3. No No
4. No Yes
5. A subsidiary’s functional currency is the local currency that has not experienced significant inflation. The appropriate exchange rate for translating the depreciation on plant assets in the income statement of the foreign subsidiary is the
6. Exit exchange rate
7. Historical exchange rate
8. Weighted average exchange rate over the economic life of each plant asset
9. Weighted average exchange rate for the current year
10. In a business combination that is accounted for under the acquisition method, the entity that obtains control over one or more businesses and establishes the acquisition date that control was achieved is called the
11. Controller.
12. Acquirer.
13. Proprietor.
14. Controlling interest.
15. Under the acquisition method for a business combination, the cost incurred to effect the business combination, such as finders and legal fees are
16. Considered part of the historical cost of the business.
17. Expensed as incurred.
18. Allocated, along with the purchase price of the acquired company’s stock to the assets of the acquiree company.
19. Deferred until a full accounting of all costs to acquire the acquire company are known.
20. Under which of the theories of equity is a manager’s goals considered as important as those of the common stockholder.
21. Proprietary theory.
22. Commander theory.
23. Entity theory.
24. Enterprise theory.
25. For a business combination, we measure all assets and liabilities of an acquired company at fair value. Fair value
26. Is an exit value.
27. Is an entry value.
28. Is an appraisal value.
29. Can be either an exit value or an entry value depending on the circumstances.

1. Under the acquisition method of accounting for a business combination, restructuring costs are
2. Capitalized and amortized over a period not exceeding ten years.
3. Fees paid to lawyers and accountants to bring about the business combination.
4. Costs incurred to effect the business combination.
5. Treated as post acquisition expenses.
6. Under the acquisition method of accounting for a business combination, goodwill is equal to
7. The acquired company’s ability to generate excess profits.
8. The excess of the cost of the acquisition plus the fair value of the noncontrolling interest over the fair value of the acquiree’s net assets.
9. The excess of the cost of the acquisition over the fair value of the acquiree’s net assets.
10. The excess of the fair value of acquiree’s net assets over the cost of acquisition.
11. Under the acquisition method of accounting for a business combination, a bargain purchase is
12. Reported as goodwill in the balance sheet.
13. Tested annually for impairment.
14. Reported as a gain in the income statement.
15. Reported as an adjustment to other comprehensive income.
16. The acquisition method of accounting for a business combination is consistent with
17. Entity theory.
18. Proprietary theory.
19. Parent company theory.
20. Residual interest theory.
21. Halcomb Company's balance sheet on December 31, 2020, was as follows:

Assets

Cash $ 80,000

Trade accounts receivable (net) 160,000

Inventories 400,000

Plant assets (net) 720,000

Total assets $1,360,000

Liabilities & Stockholders' Equity

Current liabilities $ 240,000

Long-term debt 400,000

Common stock, $1 par 80,000

Additional paid-in capital 160,000

Retained earnings 480,000

Total liabilities & stockholders' equity $1,360,000

On December 31, 2020, Ruth Corporation acquired all the outstanding common stock of Halcomb for $1,200,000. On that date, the current fair value of Halcomb's inventories was $360,000 and the current fair value of Halcomb's plant assets was $800,000. The current fair values of all other identifiable assets and liabilities of Halcomb were equal to their carrying amounts.

As a result of the acquisition of Halcomb by Ruth, the December 31, 2020, consolidated balance sheet of Ruth and subsidiary displays goodwill in the amount of:

• • • • 1. $400,000
        2. $440,000
        3. $480,000
        4. $520,000

1. Under the acquisition method of accounting for a business combination when the parent company has acquired only 90% of the voting stock of a subsidiary,
2. 10% of the goodwill will be reported in a separate section of the balance sheet because it belongs to the noncontrolling interest.
3. The consolidated balance sheet will report 100% of the value of goodwill.
4. The consolidated balance sheet will report 90% of the value of goodwill.
5. Goodwill will be amortized over its useful life or 40 years whichever comes first.
6. The parent company concept of consolidated financial statements considers the noncontroling interest in net assets of a subsidiary to be:
   • • • 1. A liability
         2. A part of consolidated stockholders' equity
         3. An item between liabilities and stockholders' equity
         4. Some other classification
7. The noncontrolling interest in a subsidiary is reported in the consolidated balance sheet
8. As an investment.
9. As a liability.
10. At fair value, as determined on the acquisition date.
11. As an element of stockholders’ equity.

Essay

1. List and explain three reasons why businesses combine.

• Tax consequences. —The purchasing corporation may accrue the benefits of operating loss carryforwards from acquired corporations.
• Growth and diversification. —The purchasing corporation may wish to acquire a new product or enter a new market.
• Financial considerations. —A larger asset base may make it easier for the corporation to acquire additional funds from capital markets.
• Competitive pressure. —Economies of scale may alleviate a highly competitive market situation.
• Profit and retirement. —The seller may be motivated by a high profit or the desire to retire.

1. Discuss the issues that are to be addressed in an acquisition method business combination effected by an exchange of equity shares.
2. The relative voting rights of the combined entity. All else being equal, the acquiring entity would be the one whose owners retained or received the larger portion of the voting rights of the combined entity.
3. The existence of a large minority voting interest in the combined entity when no other owner or group of owners has a significant voting interest. All else being equal, the acquiring entity would be the one with the large minority voting interest.
4. The composition of the governing body of the combined entity. All else being equal, the acquiring entity’s owners or governing body would be the one that has the ability to elect or appoint a majority of the governing body of the combined entity.
5. The composition of senior management of the combined entity. All else being equal, the acquiring entity’s senior management would dominate that of the combined entity.
6. The terms of exchange of equity securities. All else being equal, the acquiring entity would be the one that pays a premium over the market value of the equity securities of the other combining entities.
7. How is the recorded cost determined in an acquisition business combination?
8. What are the two principles that are used to guide the preparation of consolidated financial statements?
9. The entity cannot own or owe itself.
10. The entity cannot make a profit by selling to itself.
11. Explain the concept of control as it applies to recording consolidated financial statement.
12. The subsidiary is in a legal reorganization or bankruptcy.
13. There are severe governmentally imposed uncertainties.
14. Discuss the following two theories of consolidation:
    1. Entity
    2. Patent company
15. Define noncontrolling interest. Historically, how has noncontrolling interest been disclosed on corporate balance sheets?
16. Discuss the purpose of SFAS No. 167.
17. The power to direct the activities of a VIE that most significantly affect the entity’s economic performance.
18. The obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.
19. U.S. GAAP requires a reporting entity to consolidate an entity in which it has a controlling financial interest. There are two primary models for assessing whether there is a controlling financial interest. Identify and discuss the accounting treatment required by each.
20. Determine if the entity is a legal entity. The FASB defines a legal entity as any legal structure used to conduct activities or to hold assets. Examples of such structures are corporations, partnerships, and limited liability companies.
21. Determine if any scope exceptions apply. Topic 810 provides guideline for certain scope exceptions such as: not‐for profit entities, employee benefit plans, and investment companies.
22. Determine if the reporting entity has a variable interest in the legal entity. A variable interest is a contractual, ownership, or other financial interest that changes when the fair value of the net assets of legal entity changes. In essence the reporting entity that has a variable interest is acting as a fiduciary or agent rather than as a principal.
23. Determine if the legal entity is a VIE: An entity is considered to be a VIE if any of the following exist:
    1. It has insufficient equity to carry on its operations without additional subordinated financial support.
    2. As a group, the equity holders are unable to make decisions about the entity’s activities. The entity has equity that does not absorb the entity’s expected losses or receive the entity’s expected residual return.
24. Determine if the reporting entity is the primary beneficiary. Once a reporting entity determines that it has a variable interest in a VIE, it must determine whether or not it is the primary beneficiary and should consolidate the legal entity based on the concept of control. The primary beneficiary is determined to have control based on:
    • • • 1. The power to direct the activities of the VIE that most significantly impact the performance of the VIE. Power might include voting rights, potential substantive voting rights (e.g., options or convertible instruments), rights to appoint key personnel, decision‐making rights within a management contract, removal or “kick‐out” rights.
          2. The obligation to absorb losses or the right to receive benefits of the VIE.
          3. In the event that an entity does not have both power and benefits, it should be determined if a related party or de facto agent individually has power and benefits to assess control or, if these parties collectively have power and benefits, the party most closely associated with the VIE would have control.
25. If the entity is not a VIE evaluate whether to consolidate using the voting interests model
26. According to SFAS No. 131(FASB ASC 280-10-50-20 to 25), what information should be disclosed for each operating segment?
27. Revenues from external users
28. Revenues from transactions with other operating segments of the same enterprise
29. Interest revenue
30. Interest expense
31. Depreciation, depletion, and amortization expense
32. Unusual items
33. Equity in the net income of investees under the equity method
34. Income tax expense or benefit
35. Significant noncash items other than depreciation, depletion, and amortization expense
36. How are operating segments defined by SFAS No. 131 (FASB ASC 280-10-50-1)?

• That engages in business activities from which it may earn revenues and incur expenses.
• Whose operating results are regularly reviewed by the chief operating decision maker of the enterprise in making decisions about allocating resources to the segment and in assessing segment performance.
• For which discrete financial information is available.

1. Discuss the criteria used to determine if an operating segment is a reportable segment.
2. Reported revenue is at least 10 percent of combined revenue.
3. Reported profit (loss) is at least 10 percent of combined profit (loss).
4. Assets are 10 percent or more of combined assets.
5. Discuss how foreign currency translation occurs under each of the following methods\
   1. Current – noncurrent
   2. Monetary – nonmonetary
   3. Current
   4. Temporal
6. How does SFAS No. 52 (FASB ASC 830) define functional currency?
7. What are the two situations in which the local currency would not be the functional currency?
   • • 1. The foreign country’s economic environment is highly inflationary (over 100 percent cumulative inflation
       2. The company’s investment is not considered long term.
8. Discuss the difference between translation and remeasurement.
9. A foreign entity operates in a highly inflationary economy.
10. The accounts of an entity are maintained in a currency other than its functional currency.
11. A foreign entity is a party to a transaction that produces a monetary asset or liability denominated in a currency other than its functional currency.
12. Describe the four general procedures involved in the foreign currency translation process when the local currency is defined as the functional currency.
13. The financial statements of each individual foreign entity are initially recorded in that entity’s functional currency. For example, a Japanese subsidiary would initially prepare its financial statements in terms of yen, for that would be the currency it generally uses to carry out cash transactions.
14. The foreign entity’s statements must be adjusted (if necessary) to comply with generally accepted accounting principles in the United States.
15. The financial statements of the foreign entity are translated into the reporting currency of the parent company (usually the U.S. dollar). Assets and liabilities are translated at the current exchange rate at the balance sheet date. Revenues, expenses, gains, and losses are translated at the rate in effect at the date they were first recognized, or alternatively, at the average rate for the period.
16. Translation gains and losses are accumulated and reported as a component of other comprehensive income.
17. IFRS No. 10 changes the method of reporting noncontrolling interests from what was previously required in IAS No.27. How are noncontrolling interest now defined and where are they to be disclosed?

Noncontrolling interests are now defined as “noncontrolling interests,” rather than as minority interests. They are to be disclosed in the consolidated balance sheet within equity but separate from the parent's shareholders' equity.