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MULTIPLECHOICEQUESTIONS - Choose the BESTanswer for the following questions.

_____ 1. Thedifference between implied and book value may be allocated to:

a. any assets or liabilities on S’sbooks.

b. any assets or liabilities on P’sbooks.

c. only to S’s land.

d. only to P’s land.

_____2. When the partialor complete equity methods are used, where is P’s share of S’sincome

recorded in P’s books?

a. Dividend income

b. Equity in S income

c. Investment income

d. It is not recorded

_____3. What is thesignificant difference between the partial equity and the completeequity entries on P’s books?

a. P records only its share of S’sdividends in the partial equity method.

b. P records only its share of S’sdividends in the complete equity method.

c. P records only its share of S’sdividends and reported income in the partial equity method

d. P records only its share of S’sdividends and income in the complete equity method.

_____4. When a specificasset has a fair value less than its book value, the allocation ofthe difference between implied and book value:

a. ignores the asset.

b. writes the asset up by its proportionateshare of the difference.

c. decreases the asset by the excess ofbook value over fair value.

d. decreases P’s cost of investment.

_____ 5. What is theSEC’s position on push down accounting?

a. The SEC requires that push downaccounting be used for all business combinations.

b. The SEC requires that push downaccounting be used for business combinations where P buys 80percent or more of S.

c. The SEC requires that push downaccounting be used for business combinations where P buys 95percent or more of S.

d. The SEC is silent as to push downaccounting.

MATCHING

Match the terms in the list to the definitions below. Each termmay be used only once.

A. Difference between implied and bookvalue F. Complete equity method

B. Excess of fair value over bookvalue G. Allocation of difference

C. Excess of fair value over impliedvalue H. Push down accounting

D. Excess of implied value over fairvalue I. Cost method

E. Partial equitymethod J. Goodwill

_____1. A technique usedto assign the difference between implied and book value to S’sassets and liabilities

_____ 2. What Ppays for S’s net assets is more than the fair value of thoseassets

_____ 3. Precords its share of S’s income and dividends on its books

_____ 4. Srecords the difference between implied and book value on itsbooks

_____ 5. [P’spurchase price divided by its share of S] minus book value of Sequity

_____6. There is apositive difference between what S has on its books for the valueof its assets and the market value of those assets

_____ 7. Precords only its share of S’s dividends

_____ 8. P haspaid less than fair value for S’s net assets

_____ 9. Anaccount used when the fair value of S’s net assets is less than thecost paid by P

_____10. P records its share ofS’s income and dividends, and also an entry to record theamortization and depreciation of the difference between implied andbook value.

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8 Jul 2019

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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.

Problem 21-11 Prepare a statement of cash flows; direct method[LO21-3, 21-8]

The comparative balance sheets for 2016 and 2015 and the incomestatement for 2016 are given below for Arduous Company. Additionalinformation from Arduous’s accounting records is provided also.

ARDUOUS COMPANY
Comparative Balance Sheets
December 31, 2016 and 2015
($ in millions)
2016 2015
Assets
Cash $ 154 $ 100
Accountsreceivable 209 232
Investment revenuereceivable 25 23
Inventory 226 219
Prepaidinsurance 23 32
Long-terminvestment 213 144
Land 234 169
Buildings andequipment 431 438
Less: Accumulateddepreciation (117) (158)
Patent 53 56
$ 1,451 $ 1,255
Liabilities
Accountspayable $ 69 $ 103
Salariespayable 25 37
Bond interestpayable 27 23
Income taxpayable 31 38
Deferred income taxliability 49 27
Notes payable 32 0
Lease liability 101 0
Bonds payable 234 313
Less: Discount onbonds (41) (46)
Shareholders’ Equity
Common stock 465 429
Paid-incapital—excess of par 119 104
Preferred stock 94 0
Retainedearnings 274 227
Less: Treasury stock (28) 0
$ 1,451 $ 1,255

ARDUOUS COMPANY
Income Statement
For Year Ended December 31, 2016
($ in millions)
Revenues
Sales revenue $ 589
Investmentrevenue 30
Gain on sale oftreasury bills 2 $ 621
Expenses andloss:
Cost of goodssold 199
Salariesexpense 92
Depreciationexpense 13
Patent amortizationexpense 2
Insuranceexpense 26
Bond interestexpense 47
Loss on machinedamage 34
Income taxexpense 55 468
Netincome $ 153

Additionalinformation from the accounting records:
a.

Investment revenue includes Arduous Company’s $25 million shareof the net income of Demur Company, an equity method investee.
b.

Treasury bills were sold during 2016 at a gain of $2 million.Arduous Company classifies its investments in Treasury bills ascash equivalents.
c.

A machine originally costing $108 million that was one-halfdepreciated was rendered unusable by a flood. Most major componentsof the machine were unharmed and were sold for $20 million.
d.

Temporary differences between pretax accounting income andtaxable income caused the deferred income tax liability to increaseby $22 million.
e.

The preferred stock of Tory Corporation was purchased for $44million as a long-term investment.
f.

Land costing $65 million was acquired by issuing $33 millioncash and a 10%, four-year, $32 million note payable to theseller.
g.

The right to use a building was acquired with a 15-year leaseagreement; present value of lease payments, $101 million.
h. $79 million of bonds wereretired at maturity.
i.

In February, Arduous issued a 4% stock dividend (6 millionshares). The market price of the $6 par value common stock was$8.50 per share at that time. Also the company paid a cashdividend.
j. In April, 1 million shares ofcommon stock were repurchased as treasury stock at a cost of $28.00million.

I NEED HELP WITH CREATING THE CASH FLOW STATEMENT FOR DEC31.

he comparative balance sheets for 2016 and 2015 and the incomestatement for 2016 are given below for Arduous Company. Additionalinformation from Arduous’s accounting records is provided also.

ARDUOUS COMPANY
Comparative Balance Sheets
December 31, 2016 and 2015
($ in millions)
2016 2015
Assets
Cash $ 154 $ 100
Accountsreceivable 209 232
Investment revenuereceivable 25 23
Inventory 226 219
Prepaidinsurance 23 32
Long-terminvestment 213 144
Land 234 169
Buildings andequipment 431 438
Less: Accumulateddepreciation (117) (158)
Patent 53 56
$ 1,451 $ 1,255
Liabilities
Accountspayable $ 69 $ 103
Salariespayable 25 37
Bond interestpayable 27 23
Income taxpayable 31 38
Deferred income taxliability 49 27
Notes payable 32 0
Lease liability 101 0
Bonds payable 234 313
Less: Discount onbonds (41) (46)
Shareholders’ Equity
Common stock 465 429
Paid-incapital—excess of par 119 104
Preferred stock 94 0
Retainedearnings 274 227
Less: Treasury stock (28) 0
$ 1,451 $ 1,255

ARDUOUS COMPANY
Income Statement
For Year Ended December 31, 2016
($ in millions)
Revenues
Sales revenue $ 589
Investmentrevenue 30
Gain on sale oftreasury bills 2 $ 621
Expenses andloss:
Cost of goodssold 199
Salariesexpense 92
Depreciationexpense 13
Patent amortizationexpense 2
Insuranceexpense 26
Bond interestexpense 47
Loss on machinedamage 34
Income taxexpense 55 468
Netincome $ 153

Additionalinformation from the accounting records:
a.

Investment revenue includes Arduous Company’s $25 million shareof the net income of Demur Company, an equity method investee.
b.

Treasury bills were sold during 2016 at a gain of $2 million.Arduous Company classifies its investments in Treasury bills ascash equivalents.
c.

A machine originally costing $108 million that was one-halfdepreciated was rendered unusable by a flood. Most major componentsof the machine were unharmed and were sold for $20 million.
d.

Temporary differences between pretax accounting income andtaxable income caused the deferred income tax liability to increaseby $22 million.
e.

The preferred stock of Tory Corporation was purchased for $44million as a long-term investment.
f.

Land costing $65 million was acquired by issuing $33 millioncash and a 10%, four-year, $32 million note payable to theseller.
g.

The right to use a building was acquired with a 15-year leaseagreement; present value of lease payments, $101 million.
h. $79 million of bonds wereretired at maturity.
i.

In February, Arduous issued a 4% stock dividend (6 millionshares). The market price of the $6 par value common stock was$8.50 per share at that time. Also the company paid a cashdividend.
j. In April, 1 million shares ofcommon stock were repurchased as treasury stock at a cost of $28.00million.

Required:

Prepare the statement of cash flows of Arduous Company for theyear ended December 31, 2016. Present cash flows from operatingactivities by the direct method. (Do not round yourintermediate calculations. Enter your answers in millions (i.e.,10,000,000 should be entered as 10.). Amounts to be deducted shouldbe indicated with a minus sign.)

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