Questions Based on Business Combinations

1. Which of the following is not a cost that is typically incurred as part of a business combination:

a. Direct Costs
b. Research & Development Costs
c. Cost of Issuing Securities
d. Indirect & General Costs
e. None of the above

Questions 2&3 refer to the following:

Assume that P Company purchases 10 percent of S Company common stock for $50,000 at the beginning of the year. During the year, S has net income of $25,000 and pays dividends of $10,000.

2. The entry recorded by P for the purchase of S' common stock includes which of the following:

a. a debit to cash for $50,000
b. a credit to investment in S Company Common Stock for $50,000
c. a credit to cash for $50,000
d. a debit to cash for $10,000
e. None of the above

3. The entry recorded by P for the receipt of dividend income from S Company includes which of the following:
a. a credit to Cash for $1,000
b. a debit to Cash for $10,000
c. a debit to dividend income for $1,000
d. a debit to cash for $1,000
e. None of the above

4. When would consolidation of a majority-owned subsidiary not be appropriate?
a. The subsidiary is located in a foreign country that has placed restrictions preventing distribution of profits or assets to the parent.
b. The subsidiary is in bankruptcy
c. The subsidiary is in legal reorganization
d. All of the above
e. None of the above

5. Whenever an unallocated credit differential exists as the result of a bargain purchase, the FASB requires that the resulting negative goodwill be treated as follows:

a. Recorded as an extraordinary gain in the period of combination
b. Allocated proportionately against the amounts that otherwise would be assigned to all of the acquired assets other than current assets, assets to be disposed of by sale, and deferred tax assets
c. Recorded as a liability and amortized over future periods
d. Recorded as revenue in the period of combination
e. None of the above

Questions 6 and 7 relate to the following:
Alpha Corporation owns 75 percent of X-Ray's common stock, which was purchased at book value. During the year, X-Ray reports net income of $40,000, while Alpha reports earnings of $150,000 from its own operations and $30,000 of investment income. Alpha pays dividends during the year of $50,000, and X-Ray pays dividends of $20,000. On January 1, Alpha has a retained earnings balance of $500,000 while X-Ray has retained earnings of $300,000.Alpha accounts for its investment in X-Ray using the equity method.

6. Consolidated net income for the year is:
a. $180,000
b. $150,000
c. $ 40,000
d. $ 30,000
e. None of the above

7. Consolidated retained earnings as of the end of the year is:
a. $950,000
b. $800,000
c. $630,000
d. $320,000
e. None of the above

8. In preparing a consolidation work paper for an entity in which one affiliate has sold a depreciable asset to another affiliate, consolidation procedures for years subsequent to the sale include:
a. Reducing beginning retained earnings by the amount of the intercompany gain unrealized at the beginning of the year
b. Adjusting depreciation expense for the year
c. Restating the asset and accumulated depreciation balances
d. All of the above
e. None of the above

Questions 9 through 12 relate to the following:
On July 1, 20X1, Flip Company purchases 80 percent of the common stock of Flop Company for its underlying book value of $406,400. As of January 1, 20X1, Flop has common stock of $400,000 and retained earnings of $100,000. Flop's net income before the combination (January 1 through June 30) is $24,000, and its net income after the combination (July 1 through December 31) is $36,000. Flop pays dividends prior to the combination (January 1 through June 30) of $16,000, and pays dividends after the combination (July 1 through December 31) of $24,000. Flip accounts for its investment using the equity method.

9. After the acquisition, the entry Flip records on its books to recognize its share of Flop's net income would include:
a. A credit to Investment in Flop Stock for $28,800
b. A debit to Income from Subsidiary for $28,800
c. A credit to Income from Subsidiary for $28,800
d. A credit to Income from Subsidiary for $48,000
e. None of the above

10. After the acquisition, the entry Flip records on its books to recognize its share of the dividends paid by Flop would include:

a. A debit to Investment in Flop Stock for $19,200
b. A credit to Investment in Flop Stock for $19,200
c. A credit to Investment in Flop Stock for $32,000
d. A credit to Cash for $32,000
e. None of the above

11. The amount of pre-acquisition subsidiary income is:
a. $ 4,800
b. $12,800
c. $24,000
d. $16,000
e. None of the above

12. For Flip/Flop's consolidated income statement assume that gross margin is $530,000 and total expenses are $150,000. If the consolidated income statement is prepared as if the combination had taken place at the beginning of the year, what is consolidated net income?
a. $348,800
b. $380,000
c. $368,000
d. $360,800
e. None of the above

Questions 13 and 14 relate to the following:
ABC Company acquires (10,000 from its bank on January 1, 20X3, for use in future purchases from foreign companies. The direct exchange rate is $1.30 = (1. ABC prepares financial statements on June 30, 20X3, when the exchange rate is $1.25 = (1.

13. The entry to record the purchase of the foreign currency (widgets) on January 1 would include:
a. A debit to Foreign Currency Units (() for $10,000
b. A debit to Cash for $13,000
c. A credit to Cash for $10,000
d. A debit to Foreign Currency Units (() for $13,000
e. None of the above

14. When ABC prepares financial statements as of June 30, 20X3, the adjusting entry to account for the change in the widget exchange rate would include:
a. A debit to Foreign Currency Transaction Loss for $3,000
b. A debit to Foreign Currency Transaction Loss for $500
c. A debit to Foreign Currency Units (() for $500
d. A credit to Foreign Currency Units (() for $3,000
e. None of the above

15. Which of the following is an example of an account that would be remeasured using the current exchange rate?
a. Marketable equity securities
b. Short-term receivables
c. Inventories
d. Prepaid expenses
e. None of the above