1. Under the equity method, when the company’s share of
cumulative losses equals its investment and the company has no obligation or
intention 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 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

The investor should report these losses as extraordinary
items

2. A company has been using the fair-value method to account
for its investment. The company now has the ability to significantly control
the investee and the equity method has been deemed appropriate. Which of the
following statements is true? (Points: 5)

A cumulative effect change in accounting principle must
occur

A prospective change in accounting principle must occur

A retrospective change in accounting principle must occur

The investor will not receive future dividends from the
investee

Future dividends will continue to be recorded as revenue

3. Which of the following results in an increase in the
Equity in Investee Income account when applying the equity method? (Points: 5)

Amortizations of purchase price over book value on date of
purchase

Amortizations of purchase price over book value on date of
purchase for the prior year

Extraordinary gain of the investor

Unrealized gain on inter-company inventory transfers for the
prior year

Sale of a portion of the investment at a loss

4. In a purchase or acquisition where control is achieved,
how would the land accounts of the parent and the land accounts of the
subsidiary be combined?

Parent Subsidiary

A Book Value Book Value

B Book Value Fair Value

C Fair Value Fair Value

D Fair Value Book Value

E Cost Cost

(Points: 5)

Entry A

Entry B

Entry C

Entry D

Entry E

5. Direct combination costs and stock issuance costs are
often incurred in the process of making a controlling investment in another
company. How should those costs be accounted for in an Acquisition transaction?

Direct Combination Costs Stock Issuance Costs

A Increase Investment Decrease Investment

B Increase Investment Decrease Paid-In Capital

C Increase Investment Increase Expenses

D Decrease Paid-In Capital Increase Investment

E Increase Expenses Decrease Investment

Entry A

Entry B

Entry C

Entry D

Entry E

6. Which one of the following is a characteristic of a
business combination that should be accounted for as a purchase? (Points: 5)

The combination must involve the exchange of equity
securities only

The transaction clearly establishes an acquisition price for
the company being acquired

The two companies may be about the same size and it is difficult
to determine the acquired company and the acquiring company

The transaction may be considered to be the uniting of the
ownership interests of the companies involved

The acquired subsidiary must be smaller in size than the
acquiring parent

7. Which of the following statements is true regarding the
pooling of interests method of accounting for a business combination?

Net assets of the acquired company are reported at their
book values

Net assets of the acquired company are reported at their
fair values

Any goodwill associated with the acquisition has an
indefinite life

Subsequent amounts of cost in excess of fair value of net
assets are amortized over their useful lives

Indirect costs reduce additional paid-in capital

8. Which one of the following accounts would not appear on
the consolidated financial statements at the end of the first fiscal period of
the combination?

Goodwill

Equipment

Investment in Subsidiary

Common Stock

Additional Paid-In Capital

9. When a company applies the partial equity method in
accounting for its investment in a subsidiary and initial value, book values
and fair values of net assets are all equal, what consolidation 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 Investment in subsidiary

Additional paid-in capital

E No entry is necessary

above

B above

C above

D above

E above

10. (TCO C) Under the partial equity method, the parent
recognizes income when

Dividends are received from the investee

Dividends are declared by the investee

The related expense has been incurred

The related contract is signed by the subsidiary

It is earned by the subsidiary

11. Which of the following internal record-keeping methods
can a parent choose to account for a subsidiary acquired in a business
combination? (Points: 5)

Initial value or book value

Initial value, lower-of-cost-or-market-value or equity

Initial value, equity or partial equity

Initial value, equity or book value

Initial value, lower-of-cost-or-market-value or partial
equity

12. When using the acquisition method for accounting for
business combinations, all of the following statements are false regarding the
sale of subsidiary shares except: (Points: 5)

If control ceases to exist and significant influence ceases
to exist, the difference between selling price and acquisition value is
recorded as a realized gain or loss

If control ceases to exist and significant influence ceases
to exist, the difference between selling price and acquisition value is
recorded as an unrealized gain or loss

If control ceases to exist and significant influence ceases
to exist, the difference between selling price and carrying value is recorded
as a realized gain or loss

If control ceases to exist and significant influence ceases
to exist, the difference between selling price and carrying value is recorded
as an unrealized gain or loss

If control ceases to exist and significant influence ceases
to exist, the difference between selling price and carrying value is recorded
as an adjustment to retained earnings

13. When a parent uses the acquisition method for business
combinations and sells shares of its subsidiary, which of the following
statements is false? (Points: 5)

If majority control is still maintained, consolidated
financial statements are still required

If majority control is not maintained but significant
influence exists, the equity method to account for the investment is still used
but consolidated financial statements are not required

If majority control is not maintained but significant
influence exists, the equity method is still used to account for the investment
and consolidated financial statements are still required

If majority control is not maintained and significant
influence no longer exists, a prospective change in accounting principle to the
fair value method is required

A gain or loss calculation must be prepared if control is
lost

14. Bell Company acquires 80% of Demers Company for $500,000
on January 1, 2009. Demers reported common stock of $300,000 and retained
earnings of $200,000 on that date. Equipment was undervalued by $30,000 and
buildings were undervalued by $40,000, each having a 10-year remaining life.
Any excess consideration transferred over fair value was attributed to goodwill
with an indefinite life. Based on an annual review, goodwill has not been
impaired.

Demers earns income and pays dividends as follows:

2009 2010 2011

Net Income $100,000 $120,000 $130,000

Dividends 40,000 50,000 60,000

Assume the initial value method is applied.

Compute the non-controlling interest in the net income of
Demers at December 31, 2009.

$12,000

$10,600

$18,600

$20,000

$14,400

15. McGuire company acquired 90 percent of Hogan Company on
January 1, 2009, for $234,000 cash. Hogan’s stockholders’ equity consisted of
common stock of $160,000 and retained earnings of $80,000. An analysis of
Hogan’s net assets revealed the following:

Any excess consideration transferred over fair value is
attributable to an unamortized patent with a useful life of 5 years.

Book Value Fair Value

Buildings (10-year life $10,000 $8,000

Equipment (4-year life) 14,000 18,000

Land 5,000 12,000

In consolidation at January 1, 2009, what adjustment is
necessary for Hogan’s Equipment account?

$4,000 increase

$4,000 decrease

$3,600 increase

$3,600 decrease

No change