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					1. On January 1 of the current year, Barger Company buys 150,000 shares of Booker, Inc.'s
common stock for $1,200,000, the book value of the shares. This purchase gave Barger 25%
ownership in Booker and the ability to significantly influence operating and financing decisions.
At the time of the acquisition, Booker had a total book value of $4,800,000. During the current
year, Booker reported net income of $700,000 and paid a $.85 per share dividend.

Barger elects to use the equity method of accounting. What is the balance in the Investment in
Booker account in the records of Barger Company at December 31, of the current year? (Points
: 3)

       $1,200,000
       $1,247,500
       $1,772,500
       $1,900,000
       $1,152,500




2. Tara Company owns 30% of Hawkins, Inc. and applies the equity method. During the current
year, Hawkins buys inventory costing $400,000 and sells it to Tara for $500,000. At the end of
the year, only 25% of this merchandise is still being held by Tara. What amount of unrealized
gain must be deferred by Hawkins in reporting on the equity method? (Points : 3)

       $ 937.50
       $ 30,000.00
       $ 25,000.00
       $ 7,500.00
       $100,000.00




3. What is an upstream sale? (Points : 2)

       A sale from an investor to its investee
       A sale from a producer to its outside supplier
       A sale from an investee to its investor
       A sale from one manufacturer to another
       A sale from a small company to a large one




4. TunaCo purchases 25% of Stanley, Inc. on January 1 of the current year for $500,000. This
acquisition gives TunaCo the ability to apply significant influence to Stanley's operating and
financing policies and TunaCo elects to use the equity method of accounting. Stanley reports
assets on that date of $1,600,000 with liabilities of $400,000. One building with a 15-year life
has a book value of $100,000 and a fair market value of $400,000. During the current year,
Stanley reports net income of $140,000 while paying dividends of $70,000. What is the
Investment in Stanley account balance in TunaCo's accounting records at the end of the current
year? (Points : 3)

       $500,000
       $517,500
       $530,000
       $460,000
       $512,500




5. Smith Company holds 20% of the outstanding shares of Leef Greeting Cards and applies the
equity method of accounting. For the current year, Leef reports earnings of $100,000 and pays
cash dividends of $22,000. During the current year, Leef acquired inventory for $80,000, which
was then sold to Smith for $100,000. At the end of the current year, Smith continues to hold
merchandise with a transfer price of $40,000. Assuming no amortization expense related to
this investment, what Equity in Investee Income should Smith report in the current year?
(Points : 3)

       $18,400
       $ -0-
       $12,000
       $14,000
       $ 7,600
6. Norbin Company uses the equity method to account for its investment in Stice Company's
common stock. After the acquisition date, the investment account reported on Norbin's
balance sheet would: (Points : 2)

         be increased by Norbin's share of Stice's earnings and decreased by Norbin's share of
Stice's losses.
         be increased by Norbin's share of Stice's earnings but not be affected by Norbin's share
of Stice's losses.
        not be affected by Norbin's share of Stice's earnings and losses.
         not be affected by Norbin's share of Stice's earnings but be decreased by Norbin's share
of Stice's losses.
         be decreased by Norbin's share of Stice's earnings and increased by Norbin's share of
Stice's losses.




7. B. Atman, Inc. acquires 19% of S. Uperman, Inc. and owns the highest percentage of stock of
any other stockholder. The C.E.O. of B. Atman is on the Board of Directors of S. Uperman.
Material intercompany transactions exist between these two companies. B. Atman intends to
hold this investment for at least two years. B. Atman will report this investment: (Points : 2)

        as trading securities.
        as available-for-sale securities.
        as a consolidated entity.
        using the equity method.
        as a special purpose entity.




8. A company acquires a 25% investment in another corporation. The reporting of this
investment depends primarily on: (Points : 2)

        the percentage of ownership.
        the length of time that the investor intends to own the investment.
        technology dependency.
        material intercompany transactions.
        the degree of influence that the investor has over the investee.




9. Which of the following statements are true? (Points : 2)

        Firms that employ the equity method to account for an investment may switch to fair
value and have the option to switch back to the equity method.
        The fair value option in reporting investments will probably increase the volatility in
earnings that results from using different measurement attributes in reporting related financial
assets and financial liabilities.
        Changes in fair value are reported within comprehensive income.
       Fair values for financial assets and liabilities provide more relevant and understandable
information than cost or cost-based measures.
        None of the above are true




10. Using the acquisition method, a company acquires all of the shares of stock of another
company. In-process research and development exists and is estimated to have $300,000 fair
value. How would you account for these costs? (Points : 2)

        Always expense these costs at the acquisition date.
        Expense these costs unless such costs represent assets with alternative future use.
        Recognize these costs as an intangible asset and amortize the cost over a reasonable
life.
        Recognize these costs as an intangible asset and test for impairment.
        These costs have no impact on the purchase.
11. Which of the following statements is true? (Points : 2)

      The pooling of interests for business combinations is an alternative to the acquisition
method.
      The purchase method for business combinations is an alternative to the acquisition
method.
       Neither the purchase method nor the pooling of interests method is allowed for new
business combinations.
        Any previous business combination originally accounted for under purchase or pooling
of interests accounting method will now be accounted for under the acquisition method of
accounting for business combinations.
        Companies previously using the purchase or pooling of interests accounting method
must report a change in accounting principle when consolidating those subsidiaries with new
acquisition combinations.




12. Using the acquisition method, when a bargain purchase occurs and the net amount of the
fair values of the separately identified assets and liabilities acquired exceed the fair value of the
consideration transferred: (Points : 2)

       assets are recorded at amounts below their assessed fair values.
       a gain on bargain purchase is recognized at the acquisition date.
       a loss on bargain purchase is recognized at the acquisition date.
       a contingent liability is recognized.
       Goodwill is recognized and tested for impairment on an annual basis.




13. On September 1, Mountainview Company acquired all of the outstanding common stock of
Ward Company in a business combination accounted for as a pooling of interests. Both
companies have a December 31 year-end and have been operating for five years. Consolidated
net income for the year ended December 31 should include 12 months of net income for:
(Points : 2)

       only Mountainview
       only Ward
       neither Mountainview nor Ward
       both Mountainview and Ward
       Mountainview and Ward (if Ward's net income is at least 30% of consolidated net
income)




14. On December 31 of the current year, Sam Company was merged into Paul Company. In
carrying out the business combination, Paul Company issued 60,000 shares of its $10 par value
common stock, with a fair value of $15 per share, for all of Sam Company's outstanding
common stock. The stockholders' equity section of the two companies immediately before the
business combination was:

                                               Paul Company         Sam Company

         Common stock                          $500,000             $400,000

         Additional paid-in capital            200,000              100,000

         Retained earnings                     300,000              200,000




Assume that the transaction is accounted for using the acquisition method. In the consolidated
balance sheet at the end of the next year, the Additional Paid-In Capital account should be
reported at: (Points : 3)

       $400,000.
       $300,000.
       $500,000.
       $200,000.
       $100,000.




15. Goodwill is generally defined as: (Points : 2)

       cost of the investment less the subsidiary's book 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 fair value of the subsidiary's net assets and previously
unrecorded intangible assets at the beginning of the year.
       cost of the investment less the fair value of the subsidiary's net assets and previously
unrecorded intangible assets at acquisition date.
        is no longer allowed under Federal Law.




16. Direct combination costs and stock issuance costs are often incurred in the process of
making a controlling investment in another company. Using the acquisition method, how
should those costs be accounted for in a purchase transaction? (Points : 2)

        Direct combination costs Increase Investment; Stock issue costs Decrease Investment
        Direct combination costs Increase Investment; Stock issue costs Decrease Paid-in capital
        Direct combination costs Decrease Investment; Stock issue costs Increase expenses
        Direct combination costs Decrease Paid-in capital; Stock issue costs Increase Investment
        Direct combination costs Increase Expenses; Stock issue costs Decrease Paid-in capital




17. On January 1, two years ago, Parkway Corporation purchased all of the outstanding
common stock of Shaw Company for $220,000 cash. On that date, Shaw's net assets had a
book value of $148,000. Equipment with an 8-year life was undervalued by $20,000 in Shaw's
financial records. Shaw has a database that is valued at $52,000 and will be amortized over ten
years. Shaw reported net income of $25,000 in the year of acquisition and $32,500 in the
following year. Dividends of $2,500 were declared and paid in each of those two years.

The third year of operations is now complete. For each of the two companies, selected account
balances as of December 31 for this third year are as follows:

                                                              Parkway             Shaw

                  Revenues                                    $250,000            $142,500

                  Expenses                                    175,000             100,000
                  Equipment (net)                           125,000             60,000

                  Retained earnings (beginning of the       150,000             75,500
                  year)

                  Dividends paid                            25,000              5,000




What is consolidated net income for the third year of operations if the parent company uses
the Initial Value Method (cost method)? (Points : 3)

       $80,000
       $109,800
       $112,500
       $115,000
       $117,500




18. On January 1, two years ago, Parkway Corporation purchased all of the outstanding
common stock of Shaw Company for $220,000 cash. On that date, Shaw's net assets had a
book value of $148,000. Equipment with an 8-year life was undervalued by $20,000 in Shaw's
financial records. Shaw has a database that is valued at $52,000 and will be amortized over ten
years. Shaw reported net income of $25,000 in the year of acquisition and $32,500 in the
following year. Dividends of $2,500 were declared and paid in each of those two years.

The third year of operations is now complete. For each of the two companies, selected account
balances as of December 31 for this third year are as follows:

                                                            Parkway             Shaw

                  Revenues                                  $250,000            $142,500

                  Expenses                                  175,000             100,000

                  Equipment (net)                           125,000             60,000

                  Retained earnings (beginning of the       150,000             75,500
                  year)
                   Dividends paid                               25,000          5,000




What is consolidated retained earnings at January 1 of the third year if the parent company
uses the equity method? (Points : 3)

       $191,100
       $192,500
       $150,000
       $134,600
       $187,100




19. Which of the following circumstances would require a write-down of goodwill? (Points : 2)

       A decline in the fair value of the related subsidiary.
       A permanent impairment of value associated with the goodwill.
       A decline in the fair value of the related reporting unit.
       A decline in the fair value of the parent company.
       An extraordinary loss event experienced by the related reporting unit.




20. According to SFAS 121, if the consolidated building asset grouping has suffered a
permanent impairment, what account is written down first in recognizing the impairment loss?
(Points : 2)

       Investment in Subsidiary
       Equity in Subsidiary Income
       Buildings
       Excess Paid-In Capital
       Goodwill
  21. On January 1, Big Company acquires all of the common stock of Little Company by issuing
  400,000 shares of $1 par value stock with a market value of $12 per share. Little reports
  earnings of $864,000 and pays dividends of $240,000 in the year of acquisition. The
  amortization of allocations related to the investment was $48,000. Big's net income, not
  including the investment, was $6,360,000, and it paid dividends of $400,000.

  On the consolidated financial statements, what amount is reported for Equity in Little
  Company's Earnings? Why (be brief)? (Points : 5)




  22. On January 1, Big Company acquires all of the common stock of Little Company by issuing
  400,000 shares of $1 par value stock with a market value of $12 per share. Little reports
  earnings of $864,000 and pays dividends of $240,000 in the year of acquisition. The
  amortization of allocations related to the investment was $48,000. Big's net income, not
  including the investment, was $6,360,000, and it paid dividends of $400,000.

  What is the amount of consolidated net income?
  Show your work, i.e. what numbers were added, subtracted, multiplied, etc.
  (Points : 5)




($620,000+ $190,000) =810,000

  23. Fine Co. issued its common stock in exchange for the common stock of Dandy Corp. in an
  acquisition. At the date of the combination, Fine had land with a book value of $480,000 and
  a fair value of $620,000. Dandy had land with a book value of $170,000 and a fair value of
  $190,000.
  What was the consolidated balance for Land in a consolidated balance sheet prepared at the

  date of the acquisition combination? Show

  Show your work, i.e. what numbers were added, subtracted, multiplied, etc.
  (Points : 5)




24. Push-down accounting is concerned with the (Points : 2)

        impact of the purchase on the subsidiary's financial statements.
        recognition of goodwill by the parent.
        correct consolidation of the financial statements.
        impact of the purchase on the separate financial statements of the parent.
        recognition of dividends received from the subsidiary.




25. When is a goodwill impairment loss recognized? (Points : 2)

        Annually on a systematic and rational basis.
        Never.
         If both the fair value of a reporting unit and its associated implied goodwill fall below
their respective carrying values.
        If the fair value of a reporting unit falls below its original acquisition price.
        Whenever the fair value of the entity declines significantly.




26. When a company applies the initial method in accounting for its investment in a subsidiary
and the subsidiary reports income in excess of dividends paid, what entry would be made for a
consolidation worksheet? (Points : 3)

       Debit retained earnings; Credit investment in subsidiary
       Debit investment in subsidiary; Credit retained earnings
       Debit investment in subsidiary; Credit equity in subsidiary’s income
       Debit equity in subsidiary’s income; Credit investment in subsidiary
       Debit additional paid-in capital; Credit retained earnings




27. Kaye Company acquired 100% of Fiore Company on January 1, 2011. Kaye paid $1,000
excess consideration over book value which is being amortized at $20 per year. Fiore reported
net income of $400 in 2011 and paid dividends of $100.

Assume the initial value method is used. In the year subsequent to acquisition, what additional
worksheet entry must be made for consolidation purposes that is not required for the equity
method? (Points : 3)

       Debit investment in Fiore $380; Credit retained earnings $380.
       Debit retained earnings $380; Credit investment in Fiore $380.
       Debit investment in Fiore $280; Credit retained earnings $280.
       Debit retained earnings $280; Credit investment in Fiore $280.
       Debit additional paid-in capital $280; Credit retained earnings $280.




28. Which of the following is false regarding contingent consideration in business
combinations? (Points : 2)

       Contingent consideration payable in cash is reported under liabilities.
       Contingent consideration payable in stock shares is reported under stockholders' equity.
      Contingent consideration is recorded because of its substantial probability of eventual
payment.
        The contingent consideration fair value is recognized as part of the acquisition
regardless of whether eventual payment is based on future performance of the target firm or
future stock price of the acquirer.
        Contingent consideration is reflected in the acquirer's balance sheet at the present value
of the potential expected future payment.




  29. Provide a brief explanation for the following. Why is push-down accounting a popular
  internal reporting technique? (Points : 5)




  30. On January 1, 2009, Rand Corp. issued shares of its common stock to acquire all of the
  outstanding common stock of Spaulding Inc. Spaulding's book value was only $140,000 at the
  time, but Rand issued 12,000 shares having a par value of $1 per share and a fair value of $20
  per share. Rand was willing to convey these shares because it felt that buildings (ten-year life)
  were undervalued on Spaulding's records by $60,000 while equipment (five-year life) was
  undervalued by $25,000. Any consideration transferred over fair value of identified net assets
  acquired is assigned to goodwill.

  Following are the individual financial records for these two companies for the year ended
  December 31, 2012.
Below is a partially completed consolidation worksheet. Fill in the missing information (each is
worth 3 points). Label your responses to correspond to the missing letters provided. For
example: A = $999,999
(Points : 21)

				
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