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    Accounting Concept Definitions

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    1.Under the parent company concept, which of the following statements is true?

    A)Holding control of a subsidiary provides the parent with an indivisible interest in that company.
    B)Consolidated financial statements are produced primarily for the benefit of the parent company stockholders.
    C)The parent company concept is a hybrid of the proportionate consolidation concept and the parent company concept.
    D)All of the above.

    2.Which one of the following is a characteristic of a business combination that should be accounted for as a purchase?

    A)The combination must involve the exchange of equity securities only.
    B)The transaction clearly establishes an acquisition price for the company being acquired.
    C)The two companies may be about the same size, and it is difficult to determine the acquired company and the acquiring company.
    D)The transaction may be considered to be the uniting of the ownership interests of the companies involved.
    E)The acquired subsidiary must be smaller in size than the acquiring parent.

    3.When a company applies the cost method in accounting for its investment in subsidiary and the subsidiary reports income in excess of dividends paid, what worksheet entry would be made?

    A)Retained earnings
    Investment in subsidiary
    B)Investment in subsidiary
    Retained earnings
    C)Investment in subsidiary
    Equity in subsidiary's income
    D)Equity in subsidiary's income
    Investment in subsidiary
    E)Additional paid-in capital
    Retained earnings

    4.In translating a foreign subsidiary's financial statements, which exchange rate does the current method require being used for the subsidiary's assets and liabilities?

    A)the exchange rate in effect when each asset or liability was acquired
    B)the average exchange rate for the current year
    C)a calculated exchange rate based on market value
    D)the exchange rate in effect as of the balance sheet date
    E)the exchange rate in effect at the start of the current year

    5.In accounting, the term translation refers to

    A)the calculation of gains or losses from hedging transactions.
    B)the calculation of exchange rate gains or losses on individual transactions in foreign currencies.
    C)the procedure required to identify a company's functional currency.
    D)the calculation of gains or losses from all transactions for the year.
    E)a procedure to prepare a foreign subsidiary's financial statements for consolidation.

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    Solution Preview

    Question 1 B
    Parent Company Concept emphasizes legal control and assumes that it is for the equity investors of the parent company that the group accounts are prepared and for whom a true and fair view must be disclosed (Barker and Ohogartaigh, 2000, p. 13).

    Question 2 B
    With a purchase, one company is identified as ...

    Solution Summary

    This solution correctly identifies the accounting concepts and justifies why.