Select the correct answer for each of the following questions.
1. Growth in the complexity of the U.S. business environment:
a. Has led to increased use of partnerships to avoid legal liability.
b. Has led to increasingly complex organizational structures as management has attempted to
achieve its business objectives.
c. Has encouraged companies to reduce the number of operating divisions and product lines so they
may better control those they retain.
d. Has had no particular impact on the organizational structures or the way in which companies are
2. Which of the following is not an appropriate reason for establishing a subsidiary?
a. The parent wishes to protect existing operations by shifting new activities with greater risk to a
newly created subsidiary.
b. The parent wishes to avoid subjecting all of its operations to regulatory control by establishing a
subsidiary that focuses its operations in regulated industries.
c. The parent wishes to reduce its taxes by establishing a subsidiary that focuses its operations in
areas where special tax benefits are available.
d. The parent wishes to be able to increase its reported sales by transferring products to the subsidiary
at the end of the fiscal year.
3. Which of the following actions is likely to result in recording goodwill on Randolph Company's
a. Randolph acquires Penn Corporation in a business combination recorded as a merger.
b. Randolph purchases a majority of Penn's common stock in a business combination and continues
to operate it as a subsidiary.
c. Randolph distributes ownership of a newly created subsidiary in a distribution considered to be a
d. Randolph distributes ownership of a newly created subsidiary in a distribution considered to be
4. When an existing company creates a new subsidiary and transfers a portion of its assets and liabilities
to the new entity:
a. The new entity records both the assets and liabilities it received at fair values.
b. The new entity records both the assets and liabilities it received at the carrying values of the original
c. The original company records a gain or loss on the difference between its carrying values and the
fair values of the assets transferred to the new entity.
d. The original company records the difference between the carrying values and the fair values of
the assets transferred to the new entity as goodwill.
5. When a company assigns goodwill to a reporting unit acquired in a business combination, it must:
a. Record an impairment loss if the fair value of the net identifiable assets held by a reporting unit
b. Record an impairment loss if the fair value of the reporting unit decreases.
c. Record an impairment loss if the carrying value of the reporting unit is less than the fair value of
the reporting unit.
6. Peel Company received a cash dividend from a common stock investment. Should Peel report an
increase in the investment account if it uses the cost method or equity method of accounting?
a. No No
b. Yes Yes
c. Yes No
d. No Yes
7. In 20X0, Neil Company held the following investments in common stock:
? 25,000 shares of B&K Inc.'s 100,000 outstanding shares. Neil's level of ownership gives it the
ability to exercise significant influence over the financial and operating policies of B&K.
? 6,000 shares of Amal Corporation's 309,000 outstanding shares.
During 20X0, Neil received the following distributions from its common stock investments:
November 6 $30,000 cash dividend from B&K
November 11 $1,500 cash dividend from Amal
December 26 3 percent common stock dividend from Amal
The closing price of this stock was $115 per share.
What amount of dividend revenue should Neil report for 20X0?
8. What is the most appropriate basis for recording the acquisition of 40 percent of the stock in another
company if the acquisition was a noncash transaction?
a. At the book value of the consideration given.
b. At the par value of the stock acquired.
c. At the book value of the stock acquired.
d. At the fair value of the consideration given.
9. An investor uses the equity method to account for investments in common stock. The purchase price
implies a fair value of the investee's depreciable assets in excess of the investee's net asset carrying
values. The investor's amortization of the excess:
a. Decreases the investment account.
b. Decreases the goodwill account.
c. Increases the investment revenue account.
d. Does not affect the investment account.
10. Consolidated financial statements are typically prepared when one company has a controlling interest
in another unless:
a. The subsidiary is a finance company.
b. The fiscal year-ends of the two companies are more than three months apart.
c. Circumstances prevent the exercise of control.
d. The two companies are in unrelated industries, such as real estate and manufacturing.
11. Penn Inc., a manufacturing company, owns 75 percent of the common stock of Sell Inc., an investment
company. Sell owns 60 percent of the common stock of Vane Inc., an insurance company. In
Penn's consolidated statements, should consolidation accounting or equity-method accounting be
used for Sell and Vane?
a. Consolidation used for Sell and equity method used for Vane.
b. Consolidation used for both Sell and Vane.
c. Equity method used for Sell and consolidation used for Vane.
d. Equity method used for both Sell and Vane.
12. Shep Company has a receivable from its parent, Pep Company. Should this receivable be separately
reported on Shep's balance sheet and in Pep's consolidated balance sheet?
Shep's Pep's Consolidated
Balance Sheet Balance Sheet
a. Yes No
b. Yes Yes
c. No No
d. No Yes
13. Which of the following is the best theoretical justification for consolidated financial statements?
a. In form the companies are one entity; in substance they are separate.
b. In form the companies are separate; in substance they are one entity.
c. In form and substance the companies are one entity.
d. In form and substance the companies are separate.
14. At what rates should the following balance sheet accounts in the foreign currency financial statements
be restated into U.S. dollars?
a. Current Current
b. Current Average for year
c. Historical Current
d. Historical Historical
15. A credit-balancing item resulting from the process of restating a foreign entity's financial statement
from the local currency unit to U.S. dollars should be included as a (an):
a. Separate component of stockholders' equity.
b. Deferred credit.
c. Component of income from continuing operations.
d. Extraordinary item.
16. A foreign subsidiary of the Bart Corporation has certain balance sheet accounts on December 31,
20X2. Information relating to these accounts in U.S. dollars is as follows:
Marketable Securities $ 75,000 $ 85,000
Inventories carried at average cost 600,000 700,000
Refundable Deposits 25,000 30,000
Goodwill 55,000 70,000
What total should be included in Bart's balance sheet on December 31, 20X2, as a result of the preceding
17. Total noncontrolling interest reported in the consolidated balance sheet as of January 1, 20X2, is:
18. Income assigned to the noncontrolling interest in the 20X2 consolidated income statement is:
19. Consolidated net income for 20X2 is:
20. Excluding the noncontrolling interest, total stockholders' equity reported in the consolidated balance
sheet as of January 1, 20X2, is:
21. By what amount was unadjusted revenue overstated in the combined income statement for 20X0?
22. Clark Company had the following transactions with affiliated parties during 20X2:
? Sales of $60,000 to Dean Inc., with $20,000 gross profit. Dean had $15,000 of this inventory on
hand at year-end. Clark owns a 15 percent interest in Dean and does not exert significant influence.
? Purchases of raw materials totaling $240,000 from Kent Corporation, a wholly owned subsidiary.
Kent's gross profit on the sales was $48,000. Clark had $60,000 of this inventory remaining on
December 31, 20X2.
Before eliminating entries, Clark had consolidated current assets of $320,000. What amount should
Clark report in its December 31, 20X2, consolidated balance sheet for current assets?
23. Perez Inc. owns 80 percent of Senior Inc. During 20X2, Perez sold goods with a 40 percent gross
profit to Senior. Senior sold all of these goods in 20X2. For 20X2 consolidated financial statements,
how should the summation of Perez and Senior income statement items be adjusted?
a. Sales and cost of goods sold should be reduced by the intercompany sales.
b. Sales and cost of goods sold should be reduced by 80 percent of the intercompany sales.
c. Net income should be reduced by 80 percent of the gross profit on intercompany sales.
d. No adjustment is necessary.
24. Parker Corporation owns 80 percent of Smith Inc.'s common stock. During 20X1, Parker sold Smith
$250,000 of inventory on the same terms as sales made to third parties. Smith sold all of the inventory
purchased from Parker in 20X1. The following information pertains to Smith and Parker's sales
Sales $1,000,000 $700,000
Cost of Sales 400,000 350,000
Gross Profit $ 600,000 $350,000
What amount should Parker report as cost of sales in its 20X1 consolidated income statement?
25. Upper Company holds 60 percent of Lower Company's voting shares. During the preparation of
consolidated financial statements for 20X5, the following eliminating entry was made:
Retained Earnings, January 1 10,000
Which of the following statements is correct?
a. Upper Company purchased land from Lower Company during 20X5.
b. Upper Company purchased land from Lower Company before January 1, 20X5.
c. Lower Company purchased land from Upper Company during 20X5.
d. Lower Company purchased land from Upper Company before January 1, 20X5.