Advanced Financial Accounting II ?BBUS 363 Quiz #1 Name: ______________________ Chapter 1 Questions: When an investor uses the equity method to account for investments in common stock, cash dividends received by the investor from the investee should be recorded as: A deduction from the investor?s share of the investee?s profits A deduction from the investment account Dividend income A deduction from the stockholders? equity account, dividends to stockholders Which of the following is not indicative of an investor?s ability to significantly influence an investee? Material intercompany transactions The investor owns 30% of the investee, but another investor owns the remaining 70% Technological dependency Interchange of management personnel Sisk Company has owned 10% of Maust, Inc. for the past several years. This ownership did not allow Sisk to have significant influence over Maust. Recently Sisk acquired an additional 30% of Maust and now will use the equity method. How will the investor report this change? A cumulative effect of an accounting change is shown in the current income statement Sisk has the option to choose the method to show this change A retrospective adjustment is made to restate all prior years using the equity method No change is recorded; the equity method is used from the date of the new acquisition Tara Company owns 40% of Hawkins, Inc., and applies the equity method. During the current year, Hawkins buys inventory costing $500,000 and sells it to Tara for $750,000. At the end of the year, 25% of this inventory is still held by Tara. What amount of unrealized gain must be deferred when applying the equity method? $100,000 $25,000 $15,000 $0 Tuna Co. purchases 25% of Stanley Inc. on January 1 of the current year for $500,000. Tuna uses the Equity Method of accounting. The book value of Stanley?s assets and liabilities on the date of acquisition were $1,600,000 and $400,000 respectively. A building on Stanley?s books with a 15 year life was recorded at the carrying value of $100,000, while the market value was $400,000. During the current year, Stanley reports Net Income of $140,000 while paying dividends of $100,000. What is the Investment in Stanley account balance on Tuna?s balance sheet at the end of the current year? $500,000 $505,000 $512,500 $525,000 Refer to the preceding question. What would be the amount of Equity in Stanley?s Earnings reported on Tuna?s Income Statement at the end of the current year? $25,000 $30,000 $35,000 $40,000 Chapter 2 Questions: What is the appropriate accounting treatment for the value assigned to in-process research and development acquired in a business combination? Expense upon acquisition Capitalize as an asset Include in Goodwill Expense until future economic benefits are certain, then capitalize as an asset Under SFAS 141R, when is a gain recognized in consolidating financial information? When a bargain purchase occurs In a combination created in the middle of a fiscal year In an acquisition when the value of all assets and liabilities cannot be determined When the subsidiary?s legal entity is dissolved On June 1, 2009, Cline Co. paid $800,000 cash for all of the issued and outstanding stock of Renn Corp. The carrying values for Renn?s assets and liabilities on June 1, follow: Cash $150,000 Accounts receivable 180,000 Capitalized software costs 320,000 Goodwill 100,000 Liabilities (130,000) Total $620,000 On June 1, Renn?s Accounts Receivable had a carrying value of $160,000. Additionally, Renn?s in-process research and development was estimated to have a fair value of $250,000. All other items were stated at their fair values. What amount would be reported for Goodwill on Cline?s June 1, 2009 consolidated balance sheet? $25,000 $50,000 $75,000 $100,000 To settle a difference of opinion regarding Subco?s fair values, Parco promises to pay an additional $100,000 to the former owners of Subco if Subco?s earnings exceed $500,000 in the year following the acquisition. Parco estimates that there is a 30% probability that the contingent payment will be required. Assuming a discount rate of 4% the present value factor is .961538. Under the acquisition method, what is the contingent liability? No contingent liability is recorded $28,846 $30,000 $96,154 $100,000 Which of the following is not true regarding the differences between the Acquisition Method (SFAS 141R) and the Purchase Method (SFAS 141)? Under the acquisition method, legal and accounting fees are expensed, while under the purchase method, they are treated as part of the cost of the acquisition Under the acquisition method, a bargain purchase results in a gain being recorded, while under the purchase method, the amount of any bargain was treated as a reduction of the cost of assets acquired Under the acquisition method, in-process research and development (IPRD) is treated as an asset, while under the purchase method IPRD was expensed Under the acquisition method, no amount is included in the acquisition cost related to contingent consideration, while under the purchase method; any contingent consideration was added to the purchase price when it was paid. Chapter 3 Questions: A company acquires a subsidiary and will prepare consolidated financial statements for external reporting purposes. For internal reporting purposes, the company has decided to apply the equity method. Why might the company have made this decision? It is a relatively easy method to apply Operating results appearing on the parent?s financial records reflect consolidated totals The FASB now requires the use of the equity method for internal reporting purposes Consolidation is not required when the parent uses the equity method The conversion entry ?C? required when a parent company uses the Cost (aka ?Initial Value?) method typically involves a debit to the Investment account and a credit to which of the following The Parent?s beginning retained earnings The Parent?s ending retained earnings The Subsidiary?s beginning retained earnings The Subsidiary?s ending retained earnings According to SFAS 142, ?Goodwill and Other Intangible Assets?, goodwill must be allocated among a firm?s identified reporting units. If the fair value of a particular reporting unit with recognized goodwill falls below its carrying amount, which of the following is true? No goodwill impairment loss is recognized unless the implied value for goodwill exceeds its carrying amount A goodwill impairment loss is recognized for the difference between the reporting unit?s fair value and carrying amount A goodwill impairment loss is recognized if the carrying amount for goodwill exceeds its implied value The reporting unit reduces the values assigned to its long-term assets (including any unrecognized intangibles) to reflect its fair value 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: (Note that the Revenues reported for Parkway do not include their Equity in the Earnings of Shaw). Parkway Shaw Revenues $250,000 $150,000 Expenses $175,000 $100,000 Equipment (net) $125,000 $60,000 Retained Earnings, Beginning $150,000 $75,500 Dividends Paid $25,000 $5,000 What is consolidated Net Income for the 3rd year of operations if the Parent uses the Partial Equity accounting method? $125,000 $75,000 $117,300 $110,000
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