s1. (TCO A) Which of the following results in an increase in the investment account using the equity method?
Unrealized gain on intercompany inventory transfers for the current year
Sale of a portion of the investment during the current year
Dividends paid by the investee
Dividends paid by the investor
Unrealized gain on intercompany inventory transfers for the prior year
Question 2.2. (TCO A) Rome Inc. owns 30% of Amber Co. and applies the equity method. During the current year, Rome bought inventory costing $66,000 and then sold it to Amber for $120,000. At year-end, only $24,000 of merchandise was still being held by Amber.
What amount of intercompany inventory profit must be deferred by Rome
$6,610
$16,200
$10,800
$3,240
$6,480
Question 3.3. (TCO A) Under the equity method, when the company's share of cumulative losses equals its investment and the company has no obligation to fund such additional losses, which of the following statements is true?
The investor should change to the fair-value method to account for its investment.
The investor should report these losses as extraordinary items.
The investor should suspend applying the equity method until the investee reports income.
The investor should suspend applying the equity method and not record any equity in income of investee until its share of future profits is sufficient to recover losses that have not previously been recorded.
The cumulative losses should be reported as a prior period adjustment.
Question 4.4. (TCO B) Using the purchase method, goodwill is generally defined as the (Points : 5)
cost of the investment less the subsidiary's fair value at acquisition date.
cost of the investment less the subsidiary's fair value at the beginning of the year.
cost of the investment less the subsidiary's book value at the acquisition date.
cost of the investment less the subsidiary's book value at the beginning of the year.
It is no longer allowed under federal law.
Question 5.5. (TCO B) Which of the following statements is true regarding a statutory consolidation? (Points : 5)
The acquired company dissolves as a separate corporation and becomes a division of the acquiring company.
The acquiring company acquires the stock of the acquired company as an investment.
The original companies dissolve while remaining as separate divisions of a newly created company.
Both companies remain in existence as legal corporations with one corporation now a subsidiary of the acquiring company.
A statutory consolidation is no longer a legal option.
Question 6.6. (TCO C) Push-down accounting is associated with the (Points : 5)
impact of the purchase on the subsidiary's financial statements.
impact of the purchase on the separate financial statements of the parent.
correct consolidation of the financial statements.
recognition of goodwill by the parent.
recognition of dividends received from the subsidiary.
Question 7.7. (TCO C) Under the partial equity method of accounting for an investment, (Points : 5)
amortization of the excess of fair value allocations over book value is ignored in regard to the investment account.
dividends received are recorded as revenue.
the investment account remains at initial value.
amortization of the excess of fair value allocations over book value of net assets is applied over their useful lives to reduce the investment account.
dividends received increase the investment account.
Question 8.8. (TCO C) According to SFAS 142, which of the following statements is true? (Points : 5)
Goodwill recognized in consolidation can never be written off.
Goodwill recognized in consolidation must be expensed in the period of acquisition.
Goodwill recognized in consolidation will not be amortized but will be subjected to an annual test for impairment.
Goodwill recognized in consolidation must be amortized over 20 years.
Goodwill recognized in consolidation must be amortized over 40 years.
Question 9.9. (TCO A) Jason Company owns 24% of the voting common stock of Kalco Corp. Jason does not have the ability to exercise significant influence over the operations of Kalco. What method should Jason use to account for its investment in Kalco? (Points : 10)
It should use the "Fair-Value" method. This is because normally we use the Equity method when accounting for ownership that is more than 20% because such ownership share would be presumed to have significant influence over the operations of the investee, but since this is not the case here, then we use the fair-value method.
Question 10.10. (TCO B) Describe how, contingent considerations, and a bargain purchase are reflected in recording an acquisition investment. (Points : 10)
1) Contingent Consideration obligations are recognized at their present value of the potential obligation as part of the acquisition consideration transferred.
2) When Bargain Purchases exist, the acquirer calculates and recognizes the fair-values of both the assets and liabilities at the date of the acquisition. This would result in a gain on the bargain purchase being recognized on the acquisition date.
Unrealized gain on intercompany inventory transfers for the current year
Sale of a portion of the investment during the current year
Dividends paid by the investee
Dividends paid by the investor
Unrealized gain on intercompany inventory transfers for the prior year
Question 2.2. (TCO A) Rome Inc. owns 30% of Amber Co. and applies the equity method. During the current year, Rome bought inventory costing $66,000 and then sold it to Amber for $120,000. At year-end, only $24,000 of merchandise was still being held by Amber.
What amount of intercompany inventory profit must be deferred by Rome
$6,610
$16,200
$10,800
$3,240
$6,480
Question 3.3. (TCO A) Under the equity method, when the company's share of cumulative losses equals its investment and the company has no obligation to fund such additional losses, which of the following statements is true?
The investor should change to the fair-value method to account for its investment.
The investor should report these losses as extraordinary items.
The investor should suspend applying the equity method until the investee reports income.
The investor should suspend applying the equity method and not record any equity in income of investee until its share of future profits is sufficient to recover losses that have not previously been recorded.
The cumulative losses should be reported as a prior period adjustment.
Question 4.4. (TCO B) Using the purchase method, goodwill is generally defined as the (Points : 5)
cost of the investment less the subsidiary's fair value at acquisition date.
cost of the investment less the subsidiary's fair value at the beginning of the year.
cost of the investment less the subsidiary's book value at the acquisition date.
cost of the investment less the subsidiary's book value at the beginning of the year.
It is no longer allowed under federal law.
Question 5.5. (TCO B) Which of the following statements is true regarding a statutory consolidation? (Points : 5)
The acquired company dissolves as a separate corporation and becomes a division of the acquiring company.
The acquiring company acquires the stock of the acquired company as an investment.
The original companies dissolve while remaining as separate divisions of a newly created company.
Both companies remain in existence as legal corporations with one corporation now a subsidiary of the acquiring company.
A statutory consolidation is no longer a legal option.
Question 6.6. (TCO C) Push-down accounting is associated with the (Points : 5)
impact of the purchase on the subsidiary's financial statements.
impact of the purchase on the separate financial statements of the parent.
correct consolidation of the financial statements.
recognition of goodwill by the parent.
recognition of dividends received from the subsidiary.
Question 7.7. (TCO C) Under the partial equity method of accounting for an investment, (Points : 5)
amortization of the excess of fair value allocations over book value is ignored in regard to the investment account.
dividends received are recorded as revenue.
the investment account remains at initial value.
amortization of the excess of fair value allocations over book value of net assets is applied over their useful lives to reduce the investment account.
dividends received increase the investment account.
Question 8.8. (TCO C) According to SFAS 142, which of the following statements is true? (Points : 5)
Goodwill recognized in consolidation can never be written off.
Goodwill recognized in consolidation must be expensed in the period of acquisition.
Goodwill recognized in consolidation will not be amortized but will be subjected to an annual test for impairment.
Goodwill recognized in consolidation must be amortized over 20 years.
Goodwill recognized in consolidation must be amortized over 40 years.
Question 9.9. (TCO A) Jason Company owns 24% of the voting common stock of Kalco Corp. Jason does not have the ability to exercise significant influence over the operations of Kalco. What method should Jason use to account for its investment in Kalco? (Points : 10)
It should use the "Fair-Value" method. This is because normally we use the Equity method when accounting for ownership that is more than 20% because such ownership share would be presumed to have significant influence over the operations of the investee, but since this is not the case here, then we use the fair-value method.
Question 10.10. (TCO B) Describe how, contingent considerations, and a bargain purchase are reflected in recording an acquisition investment. (Points : 10)
1) Contingent Consideration obligations are recognized at their present value of the potential obligation as part of the acquisition consideration transferred.
2) When Bargain Purchases exist, the acquirer calculates and recognizes the fair-values of both the assets and liabilities at the date of the acquisition. This would result in a gain on the bargain purchase being recognized on the acquisition date.
