Question

Chapter 4 -MATCHING

Match the terms in the list to thedefinitions below. Each term may be used only once.

A. Costmethod F. Investmentelimination K. Computation and

B. Partialequitymethod G. Reciprocity allocation schedule

C. Completeequitymethod H. No significantinfluence L. Consolidated retained

D. Intercompanyrevenue I. Significantinfluence earnings

E. Interimacquisition J. Effectivecontrol M. Investment in associates

_____ 1. An amount thatreflects the consolidated entity’s portion of S’s undistributedincome since acquisition

_____ 2. The total of P’sretained earnings plus the portion of S’s retained earnings sinceacquisition

_____ 3. The techniquewhere only P’s share of S’s declared dividends is recorded

_____ 4. The workpaperentry which offsets P’s asset account with S’s equity accounts

_____ 5. Income given byone affiliate in a business combination to another affiliate

_____ 6. One corporationhas between 20 and 50 percent of the stock of anothercorporation

_____ 7. A technique todetermine how to divide up the difference between implied and bookvalue

_____ 8. A way ofrecording a business combination where P’s share of S’s income anddividends are recorded

_____ 9. One corporationowns less than 20 percent of another corporation

_____10. A technique of accountingfor a combination where the effects of all intercompanytransactions are reflected in P’s books

_____11. P buys a controllinginterest in S at some time other than the end of S’s fiscalyear

_____12. P owns more than 50 percentof S’s outstanding stock

_____13. IFRS term for equity methodinvestments

Chapter 4 - MULTIPLE CHOICE QUESTIONS

Choose the BEST answer for thefollowing questions.

_____1. If a corporation shows effective control over another corporation,the first corporation owns:

a. less than 20 percent of the secondcorporation.

b. between 20 and 50 percent of the secondcorporation.

c. over 50 percent of the secondcorporation.

d. 100 percent of the secondcorporation.

_____2. The cost method of accounting for a parent-subsidiary relationshiprecords P’s share of S’s:

a. dividends as income for theyear.

b. income whether dividends are paid ornot.

c. dividends as a reduction of theinvestment account.

d. none of the above.

_____3. The primary difference between the partial equity and the completeequity methods of accounting for business combinations is:

a. under the complete equity method,the combination assumes that the two businesses have always beentogether.

b. under the complete equity method, theparent records amortization and/or depreciation to account for thedifference between implied and book value.

c. under the partial equity methodthe parent records its share of dividends as income.

d. there is no difference between thepartial equity and full equity methods.

_____4. What is the purpose of the consolidated statements workpaper?

a. The workpaper allows for year-endadjustments of accruals and deferrals.

b. The workpaper takes the balances fromthe consolidated ledger to prepare the consolidated financialstatements.

c. The workpaper helps the accountantdetermine the amount of consolidated income taxes.

d. The workpaper accumulates, classifies,and arranges information from the trial balances of the affiliatedcompanies.

_____5. What is the noncontrolling interest in S’s income?

a. The difference between P’sreported income and S’s reported income

b. The part of S’s income that is owned byshareholders other than P

c. The allocation of differencebetween implied and book value

d. The portion of S’s income that is notincluded in consolidated income

_____6. What is consolidated retained earnings?

a. P’s retained earnings plus S’sretained earnings.

b. P’s retained earnings only.

c. P’s retained earnings plus P’sshare of the net increase in S’s retained earnings sinceacquisition.

d. P’s retained earnings plus P’s share ofS’s net income for the current year less P’s share of S’s dividendsdeclared.

_____7. Under the cost method, to establish reciprocity (convert toequity), P’s share:

a. of the difference between S’sretained earnings at the beginning and the end of the year must beadded to P’s investment.

b. of the difference between S’s reportedincome and the noncontrolling interest income must be added to P’sinvestment.

c. of the difference between S’sretained earnings at the beginning of the year and at acquisitionmust be added to P’s investment.

d. of S’s dividends must be subtracted fromP’s investment.

_____8. Under the equity methods, the elimination entry to establishreciprocity (convert to equity) between P’s investment and S’sequity:

a. will add P’s share of S’sundistributed income to P’s investment.

b. does not have to be made.

c. will have S record itsnoncontrolling interest in income.

d. will have S decrease its retainedearnings to reflect income not distributed.

_____9. Why should intercompany revenues and expenses be eliminated?

a. Because the consolidated entitycannot earn from itself.

b. Because the consolidated entity cannotowe itself a debt.

c. Because the consolidated financialstatements would include overstated amounts.

d. Both A and C.

_____10. Whatis meant by an interim acquisition of subsidiary stock?

a. P purchases a controlling interestin S’s equity at some time other than the end of the fiscalyear.

b. P purchases S’s treasury stock.

c. P restates its income to includeboth pre-acquisition and post-acquisition earnings.

d. P divides its income intopre-acquisition and post-acquisition earnings.

_____11. Under the partial-year reporting alternative:

a. S generally closes its books atthe date of acquisition.

b. P buys its share of S’s pre-acquisitionearnings.

c. retained earnings eliminated arefrom the date of acquisition, not the beginning of the fiscalyear.

d. all of the above.

_____12. Theaccounting for investments using the equity method underU.S. GAAP and using the investment in associates methodunder IFRS is the same for all the following issues except:

a. that P and S have uniformaccounting policies.

b. P’s carrying value of S’s investmentaccount.

c. definition of P having significantinfluence over S

d. allowance of 3-month reporting perioddifference between P and S

_____13. In aconsolidated statements workpaper, which items are carried forwardfrom one section to another?

a. P’s retained earnings, but notS’s

b. The total of the income section to theretained earnings section and then the total of the retainedearnings section to the balance sheet section.

c. The eliminations must balance foreach section in order to carry them forward.

d. Each section on the workpaper isseparate, so no numbers are carried forward.