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					1. On January 1 of the current year, Barger Company buys 150,000 shares of Booker, Inc.'s c
shares. This purchase gave Barger 25% ownership in Booker and the ability to significantly inf
of the acquisition, Booker had a total book value of $4,800,000. During the current year, Book
per share dividend.

Barger elects to use the equity method of accounting. What is the balance in the Investment in
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 curre
sells it to Tara for $500,000. At the end of the year, only 25% of this merchandise is still being
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
significant influence to Stanley's operating and financing policies and TunaCo elects to use the
on that date of $1,600,000 with liabilities of $400,000. One building with a 15-year life has a b
$400,000. During the current year, Stanley reports net income of $140,000 while paying divid
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 th
Leef reports earnings of $100,000 and pays cash dividends of $22,000. During the current yea
then sold to Smith for $100,000. At the end of the current year, Smith continues to hold merc
amortization expense related to this investment, what Equity in Investee Income should Smith
    $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 c
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 Stic
     be increased by Norbin's share of Stice's earnings but not be affected by Norbin's share o
     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 o
     be decreased by Norbin's share of Stice's earnings and increased by Norbin's share of Stic

7. B. Atman, Inc. acquires 19% of S. Uperman, Inc. and owns the highest percentage of stock
the Board of Directors of S. Uperman. Material intercompany transactions exist between these
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 investm
     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 com
and is estimated to have $300,000 fair value. How would you account for these costs? (Points
    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
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
for as a pooling of interests. Both companies have a December 31 year-end and have been op
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 mak
Using the acquisition method, how should those costs be accounted for in a purchase transacti
    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	
  year)        150,000           75,500

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	
  year)        150,000         75,500

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 permane
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
$12 per share. Little reports earnings of $864,000 and pays dividends of $240,000 in the year
investment was $48,000. Big's net income, not including the investment, was $6,360,000, and

On the consolidated financial statements, what amount is reported for Equity in Little Compan



22. On January 1, Big Company acquires all of the common stock of Little Company by issuing
$12 per share. Little reports earnings of $864,000 and pays dividends of $240,000 in the year
investment was $48,000. Big's net income, not including the investment, was $6,360,000, and

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



23. Fine Co. issued its common stock in exchange for the common stock of Dandy Corp. in an
with a book value of $480,000 and a fair value of $620,000. Dandy had land with a book value

What was the consolidated balance for Land in a consolidated balance sheet prepared at the d

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
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 e
amortized at $20 per year. Fiore reported net income of $400 in 2011 and paid dividends of $1

Assume the initial value method is used. In the year subsequent to acquisition, what additiona
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
    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 pay
    The contingent consideration fair value is recognized as part of the acquisition regardless
eventual payment is based on future performance of the target firm or future stock price of th
    Contingent consideration is reflected in the acquirer's balance sheet at the present value
expected future payment.

29. Provide a brief explanation for the following. Why is push-down accounting a popular inter



30. On January 1, 2009, Rand Corp. issued shares of its common stock to acquire all of the ou
value was only $140,000 at the time, but Rand issued 12,000 shares having a par value of $1
to convey these shares because it felt that buildings (ten-year life) were undervalued on Spau
was undervalued by $25,000. Any consideration transferred over fair value of identified net as

Following are the individual financial records for these two companies for the year ended Dece
Below is a partially completed consolidation worksheet. Fill in the missing information (each is
the missing letters provided. For example: A = $999,999
       (Points : 21)




	
  

				
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