Chapter 5 Business Combinations
Multiple Choice Questions
14. On October 1, 2006, Poon Corporation acquired for cash all the outstanding common
stock of Soong Company, which was not liquidated. Consolidated net income for the fiscal year ended December 31, 2006, includes net income of:
A) Poon for three months and Soong for three months B) Poon for twelve months and Soong for three months C) Poon for twelve months and Soong for twelve months D) Poon for twelve months, but no income from Soong until it declares a cash dividend
Answer: B
15. The method of accounting for a subsidiary's operations that emphasizes the legal form
of the parent company-subsidiary relationship is:
A) The cost method B) The equity method C) The purchase method D) The fair value method
Answer: A
16. The format of a parent company's journal entry (explanation omitted), under the equity
method of accounting, to adjust a wholly owned subsidiary's net income or loss for depreciation and amortization of differences between date-of-combination current fair values and carrying amounts of the subsidiary's identifiable net assets, is:
A) Depreciation Expense XXX Amortization Expense XXX Investment in Subsidiary Common Stock XXX B) Intercompany Expenses XXX Intercompany Investment Income XXX C) Intercompany Investment Income XXX Investment in Subsidiary Common Stock XXX D) Some other format
Answer: C
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17.
A parent company that uses the equity method of accounting for a 90%-owned subsidiary prepared the following journal entry: Intercompany Investment Income 63,000 Investment in Subsidiary Common Stock 63,000 A possible explanation for the foregoing journal entry is: A) To recognize 90% of subsidiary's net income for year B) To recognize 90% of subsidiary's net loss for year
C) To amortize differences between current fair values and carrying amounts of
subsidiary's identifiable net assets on date of business combination D) Either a or c E) Either b or c
Answer: E
18. During the fiscal year ended October 31, 2006, a wholly owned subsidiary of Prescott
Company had an adjusted net income of $200,000 and declared dividends of $80,000. In its own operations (exclusive of its equity-method journal entries for the subsidiary), Prescott had total revenue of $800,000 and total costs and expenses of $600,000. In an October 31, 2006, closing entry, Prescott should:
A) Credit Intercompany Investment Income $200,000 B) Credit Retained Earnings of Subsidiary $120,000 C) Credit Retained Earnings $400,000 D) Debit Costs and Expenses $800,000
Answer: B
19. The Retained Earnings of Subsidiary ledger account is: A) An account of the parent company that at all times in any business combination
shows the amount of the subsidiary's retained earnings
B) An account of the subsidiary C) An account that appears only in the working paper for consolidated financial
statements
D) None of the foregoing
Answer: D
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20. Under the equity method of accounting, depreciation and amortization of the
date-of-business-combination differences between current fair values and carrying amounts of a subsidiary's identifiable net assets is debited in a journal entry to the:
A) Subsidiary's expense ledger accounts B) Parent company's expense ledger accounts C) Subsidiary's Retained Earnings ledger account D) Parent company's Intercompany Investment Income ledger account
Answer: D
21. If a parent company uses the equity method of accounting for a partially owned
subsidiary and there are no intercompany profits (gains) or losses eliminated for the measurement of consolidated net income, consolidated retained earnings is equal to the balance of the parent company's:
A) Retained Earnings ledger account B) Retained Earnings ledger account plus the balance of the subsidiary's Retained
Earnings ledger account
C) Retained Earnings ledger account plus the parent's share of the balance of the
subsidiary's Retained Earnings ledger account
D) Retained Earnings ledger account plus the parent's share of the net increase in the
subsidiary's retained earnings subsequent to the date of the business combination
Answer: D
22. Which of the following is not typical of the journal entries prepared by a parent
company to account for its subsidiary's operations under the equity method of accounting?
A) Accrual of the parent company's share of the subsidiary's net income or loss B) A credit to the Intercompany Dividend Revenue ledger account C) Depreciation and amortization of differences between current fair values and
carrying amounts of the subsidiary's identifiable net assets on the date of the business combination
D) None of the foregoing
Answer: B
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23. To recognize the impairment of goodwill arising from a business combination involving
a partially owned subsidiary:
A) The subsidiary debits the Impairment Loss ledger account and credits the Goodwill
account in its accounting records.
B) The parent company debits the Impairment Loss ledger account and credits the
Goodwill account in its accounting records.
C) The parent company debits the Intercompany Investment Income ledger account
and credits the Investment in Subsidiary Common Stock account in its accounting records.
D) The parent company prepares some other journal entry.
Answer: D
Rationale: (Debit Impairment Loss, credit the Investment account)
24. Skeene Company, the 70%-owned subsidiary of Probert Corporation, had a net income
of $80,000 and declared dividends of $30,000 during the fiscal year ended February 28, 2006. Fiscal Year 2006 depreciation and amortization of differences between current fair values and carrying amounts of Skeene's identifiable net assets on the date of the business combination was $15,000; and Fiscal Year 2006 impairment of goodwill
recognized in the Probert-Skeene business combination was $500. The minority interest in net income of Skeene for Fiscal Year 2006 was:
A) $24,000 B) $19,500 C) $19,350 D) $9,000 E) Some other amount
Answer: B
Rationale: [($80,000 – $15,000) x .30 = $19,500]
25. Which of the following does not affect the computation of the minority interest in the
net assets of a partially owned subsidiary?
A) Impairment of goodwill recognized in the business combination B) Dividends declared by the subsidiary C) Depreciation and amortization of differences between current fair values and
carrying amounts of the subsidiary's identifiable net assets on the date of the business combination
D) None of the foregoing
Answer: A
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26. Which of the following is not an attribute of the equity method of accounting for the
operating results of subsidiaries?
A) It facilitates the preparation of unconsolidated parent company financial statements
required by the Securities and Exchange Commission.
B) It emphasizes the legal form of the parent company-subsidiary relationship. C) It facilitates the use of parent company journal entries rather than working paper
eliminations.
D) It provides a useful self-checking technique.
Answer: B
27. Under the equity method of accounting, dividends declared by a subsidiary are
accounted for by the parent company as:
A) A liquidation of a portion of the parent company's investment in the subsidiary B) Revenue C) Both a and b if the amount of the dividends exceeds the subsidiary's
post-combination net income
D) Some other item
Answer: A
28. Plover Corporation accounts for its 80%-owned purchased subsidiary, Swallow
Company, under the equity method of accounting. For the fiscal year ended March 31, 2006, Swallow had a net income of $100,000, but declared no dividends. Depreciation and amortization of differences between current fair values and carrying amounts of Swallow's identifiable net assets for the year ended March 31, 2006, totaled $40,000. Plover's closing entry for the year ended March 31, 2006, includes a:
A) Credit of $48,000 to Intercompany Investment Income B) Credit of $60,000 to Retained Earnings of Subsidiary C) Debit of $60,000 to Intercompany Investment Income D) Credit of $48,000 to Retained Earnings of Subsidiary
Answer: D
Rationale: [($100,000 – $40,000) x 0.80 = $48,000]
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