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1. When applying the pooling of interests method, which of the following
statements is true?
 A) The balance sheets of the combining companies are consolidated at
current fair values.
 B) The balance sheets of the combining companies are consolidated at
historical cost.
 C) Goodwill is always recognized and recorded on the balance sheet.
 D) Investments in the subsidiary are recorded at market value.
 Answer: B) The balance sheets of the combining companies are
consolidated at historical cost. Rationale: The pooling of interests method
requires the assets and liabilities of the combining companies to be
reflected at their historical costs, not fair values.
2. In recording investments, the equity method is used when:
 A) The investment generates periodic income.
 B) The investor has significant influence over the investee.
 C) The investment is intended for sale in the near term.
 D) The investor holds less than 20% of the investee's voting stock.
 Answer: B) The investor has significant influence over the investee.
Rationale: The equity method is applied when the investor has significant
influence, typically indicated by owning 20-50% of the voting stock of the
investee.
3. Which treatment of goodwill is correct under GAAP?
 A) Goodwill is amortized over a period not exceeding 40 years.
 B) Goodwill is tested annually for impairment and adjusted if necessary.
 C) Goodwill is immediately expensed in the year of acquisition.
 D) Goodwill is recorded only if it results from a bargain purchase.
 Answer: B) Goodwill is tested annually for impairment and adjusted if
necessary. Rationale: Under GAAP, goodwill is not amortized but instead
tested at least annually for impairment.
4. Proper recording of intercompany transactions requires that:
 A) All intercompany profits are recognized in full.
 B) Intercompany transactions are recorded at arm's length prices.
 C) Intercompany transactions are eliminated in consolidation.
 D) Intercompany receivables and payables are doubled in consolidation.
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