LEARNING OBJECTIVES: ADAC.FISC.2-1

Chapter 02—Consolidated Statements: Date of Acquisition

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Multiple Choice

• An investor receives dividends from its investee and records those dividends as dividend income because:
• The investor has a controlling interest in its investee.
• The investor has a passive interest in its investee.
• The investor has an influential interest in its investee.
• The investor has an active interest in its investee.

ANSWER: b

RATIONALE: An investor having a passive interest in its investee (generally resulting from less than 20% ownership) records dividends as dividend income.

DIFFICULTY: E

LEARNING OBJECTIVES: ADAC.FISC.2-1

• An investor prepares a single set of financial statements which encompasses the financial results for both it and its

investee because:

• The investor has a controlling interest in its investee.
• The investor has a passive interest in its investee.
• The investor has an influential interest in its investee.
• The investor has an active interest in its investee.

ANSWER: a

RATIONALE: An investor having a controlling interest in its investee (generally resulting from more than 50% ownership) will prepare consolidated financial statements which encompass the financial results of both it and its investee.

DIFFICULTY: E

LEARNING OBJECTIVES: ADAC.FISC.2-1

• An investor records its share of its investee’s income as a separate source of income because:
• The investor has a controlling interest in its investee.
• The investor has a passive interest in its investee.
• The investor has an influential interest in its investee.
• The investor has an active interest in its investee.

ANSWER: c

RATIONALE: An investor having an influential interest in its investee (generally resulting from 20% - 50% ownership) records its share of its investee’s net income as a separate source of income. This amount also increases the investor’s investment in the investee.

DIFFICULTY: E

LEARNING OBJECTIVES: ADAC.FISC.2-1

4.Account Investor Investee Sales $500,000 $300,000 Cost of Goods Sold 230,000 170,000 Gross Profit $270,000 $130,000 Selling & Admin. Expenses 120,000 100,000 Net Income $150,000 $ 30,000

Dividends paid 50,000 10,000

Advanced Accounting 12th Edition Fischer Test Bank Visit TestBankDeal.com to get complete for all chapters

Chapter 02—Consolidated Statements: Date of Acquisition

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Assuming Investor owns 70% of Investee. What is the amount that will be recorded as Net Income for the Controlling Interest?

• $164,000
• $171,000
• $178,000
• $180,000

ANSWER: b

RATIONALE: Investor net income

$150,000

Investor’s portion of Investee income ($30,000 x 70%) 21,000

$171,000

DIFFICULTY: D

LEARNING OBJECTIVES: ADAC.FISC.2-1

5. Consolidated financial statements are designed to provide:

• informative information to all shareholders.
• the results of operations, cash flow, and the balance sheet in an understandable and informative manner for

creditors.

• the results of operations, cash flow, and the balance sheet as if the parent and subsidiary were a single entity.
• subsidiary information for the subsidiary shareholders.

ANSWER: c

RATIONALE: Consolidated financial statements are designed to provide the results of operations, cash flow and the balance sheet as if the parent and subsidiary were a single entity. Generally, these are more informative for shareholders of the controlling company.

DIFFICULTY: E

LEARNING OBJECTIVES: ADAC.FISC.2-2

• Which of the following statements about consolidation is not true?
• Consolidation is not required when control is temporary.
• Consolidation may be appropriate in some circumstances when an investor owns less than 51% of the voting

common stock.

• Consolidation is not required when a subsidiary’s operations are not homogeneous with those of its parent.
• Unprofitable subsidiaries may not be obvious when combined with other entities in consolidation.

ANSWER: c

RATIONALE: Generally, statements are to be consolidated when a parent firm owns over 50% of the voting stock of another company. The only exceptions are when control is temporary or does not rest with the majority owner. There may be instances when a parent firm effectively has control with less than 51% of the voting stock because no other ownership interest exercises significant influence on management. Because many entities may be combined in a consolidation, unprofitable subsidiaries may not be obvious when combined with profitable entities.

DIFFICULTY: M

LEARNING OBJECTIVES: ADAC.FISC.2-2

• Consolidated financial statements are appropriate even without a majority ownership if which of the following exists:
• the subsidiary has the right to appoint members of the parent company's board of directors.
• the parent company has the right to appoint a majority of the members of the subsidiary’s board of directors

because other ownership interests are widely dispersed.

Chapter 02—Consolidated Statements: Date of Acquisition

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• the subsidiary owns a large minority voting interest in the parent company.
• the parent company has an ability to assume the role of general partner in a limited partnership with the

approval of the subsidiary's board of directors.

ANSWER: b

RATIONALE: SEC Regulation S-X defines control in terms of power to direct or cause the direction of management and policies of a person, whether through ownership of voting securities, by contract, or otherwise. Thus, control may exist when less than a 51% ownership interest exists but where there is no other large ownership interest that can exert influence on management.

DIFFICULTY: M

LEARNING OBJECTIVES: ADAC.FISC.2-2

• Consolidation might not be appropriate even when the majority owner has control if:
• The subsidiary is in bankruptcy.
• A manufacturing-based parent has a subsidiary involved in banking activities.
• The subsidiary is located in a foreign country.
• The subsidiary has a different fiscal-year end than the parent.

ANSWER: a

RATIONALE: Control is presumed not to rest with the majority owner when the subsidiary is in bankruptcy, in legal reorganization, or when foreign exchange restrictions or foreign government controls cast doubt on the ability of the parent to exercise control over the subsidiary.

DIFFICULTY: M

LEARNING OBJECTIVES: ADAC.FISC.2-2

• Which of the following is true of the consolidation process?
• Even though the initial accounting for asset acquisitions and 100% stock acquisitions differs, the consolidation

process should result in the same balance sheet.

• Account balances are combined when recording a stock acquisition so the consolidation is automatic.
• The assets of the non-controlling interest will be predominately displayed on the consolidated balance sheet.
• The investment in subsidiary account will be displayed on the consolidated balance sheet.

ANSWER: a

RATIONALE: The consolidation process will result in the same balance sheet regardless of whether the acquisition was a stock or asset acquisition. The consolidation process is automatic when an asset acquisition has taken place. The assets of the non-controlling interest are not displayed on the balance sheet, but its share of the equity is included in the equity section of the balance sheet. The consolidation process results in the elimination of the investment in subsidiary account.

DIFFICULTY: E

LEARNING OBJECTIVES: ADAC.FISC.2-3

10. In an asset acquisition:

• A consolidation must be prepared whenever financial statements are issued.
• The acquiring company deals only with existing shareholders, not the company itself.
• The assets and liabilities are recorded by the acquiring company at their book values.
• Statements for the single combined entity are produced automatically and no consolidation process is needed.

ANSWER: d

RATIONALE: Since account balances are combined in recording an asset acquisition, statements for the

Chapter 02—Consolidated Statements: Date of Acquisition

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single combined reporting entity are produced automatically.

DIFFICULTY: M

LEARNING OBJECTIVES: ADAC.FISC.2-3

• Which of the following is not true of the consolidation process for a stock acquisition?
• Journal entries for the elimination process are made to the parent’s or subsidiary’s books.
• The investment account balance on the parent’s books will be eliminated.
• The balance sheets of two companies are combined into a single balance sheet.
• The shareholder equity accounts of the subsidiary are eliminated.

ANSWER: a

RATIONALE: The consolidation process is separate from the existing accounting records of the companies and requires completion of a worksheet; no entries are made to the parent’s or the subsidiary’s books.

DIFFICULTY: M

LEARNING OBJECTIVES: ADAC.FISC.2-3

• A subsidiary was acquired for cash in a business combination on December 31, 2016. The purchase price exceeded the

fair value of identifiable net assets. The acquired company owned equipment with a fair value in excess of the book value as of the date of the combination. A consolidated balance sheet prepared on December 31, 2016, would

• report the excess of the fair value over the book value of the equipment as part of goodwill.
• report the excess of the fair value over the book value of the equipment as part of the plant and equipment

account.

• reduce retained earnings for the excess of the fair value of the equipment over its book value.
• make no adjustment for the excess of the fair value of the equipment over book value. Instead, it is an

adjustment to expense over the life of the equipment.

ANSWER: b

RATIONALE: The consolidated balance sheet includes the subsidiary accounts at full fair value.

DIFFICULTY: D

LEARNING OBJECTIVES: ADAC.FISC.2-4

• Parr Company purchased 100% of the voting common stock of Super Company for $2,000,000. There are no

liabilities. The following book and fair values pertaining to Super Company are available:

Book Value Fair Value Current assets $300,000 $600,000 Land and building 600,000 900,000 Machinery 500,000 600,000 Goodwill 100,000 ?

The amount of machinery that will be included in on the consolidated balance sheet is:

• $560,000
• $860,000
• $600,000
• $900,000

ANSWER: c

RATIONALE: The consolidated balance sheet includes the subsidiary accounts at full fair value.

DIFFICULTY: M