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 entityâs portion of Sâs undistributedincome since acquisition
_____ 2. The total of Pâsretained earnings plus the portion of Sâs retained earnings sinceacquisition
_____ 3. The techniquewhere only Pâs share of Sâs declared dividends is recorded
_____ 4. The workpaperentry which offsets Pâs asset account with Sâs 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 Pâs share of Sâs 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 Pâs books
_____11. P buys a controllinginterest in S at some time other than the end of Sâs fiscalyear
_____12. P owns more than 50 percentof Sâs 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 Pâs share of Sâs:
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 Sâs income?
a. The difference between Pâsreported income and Sâs reported income
b. The part of Sâs income that is owned byshareholders other than P
c. The allocation of differencebetween implied and book value
d. The portion of Sâs income that is notincluded in consolidated income
_____6. What is consolidated retained earnings?
a. Pâs retained earnings plus Sâsretained earnings.
b. Pâs retained earnings only.
c. Pâs retained earnings plus Pâsshare of the net increase in Sâs retained earnings sinceacquisition.
d. Pâs retained earnings plus Pâs share ofSâs net income for the current year less Pâs share of Sâs dividendsdeclared.
_____7. Under the cost method, to establish reciprocity (convert toequity), Pâs share:
a. of the difference between Sâsretained earnings at the beginning and the end of the year must beadded to Pâs investment.
b. of the difference between Sâs reportedincome and the noncontrolling interest income must be added to Pâsinvestment.
c. of the difference between Sâsretained earnings at the beginning of the year and at acquisitionmust be added to Pâs investment.
d. of Sâs dividends must be subtracted fromPâs investment.
_____8. Under the equity methods, the elimination entry to establishreciprocity (convert to equity) between Pâs investment and Sâsequity:
a. will add Pâs share of Sâsundistributed income to Pâs 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 Sâs equity at some time other than the end of the fiscalyear.
b. P purchases Sâs 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 Sâs 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. Pâs carrying value of Sâs 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. Pâs retained earnings, but notSâs
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.