Posted: September 16th, 2017

Gaw Company owns 15% of the common stock of Teal Corporation and used the fair-value method

Question 1

Gaw Company owns 15% of the common stock of Teal Corporation and used the fair-value method to account for this investment. Teal reported net income of $110,000 for 2005 and paid dividends of $60,000 on October 1, 2005. How much income should Gaw recognize on this investment in 2005?

$16,500

$9,000

$25,500

$7,500

Question 2.2. A company should always use the equity method to account for an investment if

it has the ability to exercise significant influence over the operating policies of the investee.

it owns 30% of another company’s stock.

it has a controlling interest (more than 50%) of another company’s stock.

it does not have the ability to exercise significant influence over the operating policies of the investee.

Question 3.3. All of the following would require use of the equity method for investments except

material intercompany transactions.

investor participation in the policy-making process of the investee.

valuation at fair market value.

significant control.

Question 4.4. On January 1, 2005, Dermot Company purchased 12% of the voting common stock of Horne Corp. On January 1, 2006, Dermot purchased 18% of Horne’s voting common stock. If Dermot achieves significant influence with this new investment, how must Dermot account for the change to the equity method? (Points : 2)

It must use the equity method for 2005 but should make no changes in its financial statements for 2005 and 2006.

It should prepare consolidated financial statements for 2005.

It must restate the financial statements for 2005 and 2006 as if the equity method had been used for those two years.

It must restate the financial statements for 2006 as if the equity method had been used then.

Question 5.5.

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?

A cumulative effect change in accounting principle must occur.

A prospective change in accounting principle must occur.

A retroactive change in accounting principle must occur.

Future dividends will continue to be recorded as revenue.

Question 6.6.

Club Co. appropriately uses the equity method to account for its investment in Chip Corp. As of the end of 2005, Chip’s common stock had suffered a significant decline in market value, which is expected to be recovered over the next several months. How should Club account for the decline in value?

Club should switch to the fair-value method.

No accounting because the decline in market value is temporary.

Club should not record its share of Chip’s 2005 earnings until the decline in the market value of the stock has been recovered.

Club should decrease the balance in the investment account to the current value and recognize an unrealized loss on the balance sheet.

Question 7.7.

On January 1, 2005, Jordan Inc. acquired 30% of Nico Corp. Jordan used the equity method to account for the investment. On January 1, 2006, Jordan sold 2/3 of its investment in Nico. It no longer had the ability to exercise significant influence over the operations of Nico. How should Jordan have accounted for this change?

Jordan should continue to use the equity method to maintain consistency in its financial statements.

Jordan has the option of using either the equity method or the fair-value method for 2005 and future years.

Jordan should report the effect of the change from the equity to the fair-value method as a cumulative effect of a change in accounting principle.

Jordan should use the fair-value method for 2005 and future years but should not make a retroactive adjustment to the investment account.

Question 8.8. Bowler Inc. owns 30% of Yarby Co. and applies the equity method. During the current year, Bowler bought inventory costing $66,000 and then sold it to Yarby for $120,000. At year-end, only $24,000 of merchandise was still being held by Yarby. What amount of unrealized gain must be deferred by Bowler?

$6,480

$3,240

$10,800

$6,610

Question 9.9.

An upstream sale of inventory is a sale

between subsidiaries owned by a common parent.

with the transfer of goods scheduled by contract to occur on a specified future date.

made by the investor to the investee.

made by the investee to the investor.

Question 10.10. Which of the following results in a decrease in the investment account when applying the equity method?

Dividends paid by the investor.

Net income of the investee.

Net income of the investor.

Unrealized gain on intercompany inventory transfers for the current year.

11. Which of the following is a reason for a business combination to take place?

Cost savings through elimination of duplicate facilities

Quick entry for new and existing products into domestic and foreign markets.

Diversification of business risk.

All of the above.

Question 12.12. Which of the following statements is true regarding a statutory merger?

The original companies dissolve while remaining as separate divisions of a newly created company.

Both companies remain in existence as legal corporations with one corporation now a subsidiary of the acquiring company.

The acquired company dissolves as a separate corporation and becomes a division of the acquiring company.

The acquiring company acquires the stock of the acquired company as an investment.

Question 13.13.

A statutory merger is a(n)

business combination in which only one of the two companies continues to exist as a legal corporation.

business combination in which both companies continues to exist.

acquisition of a supplier or a customer.

legal proposal to acquire outstanding shares of the target’s stock.

Question 14.14. At the date of an acquisition which is not a bargain purchase, the purchase

consolidates the subsidiary’s assets at fair market value and the liabilities at book value.

consolidates all subsidiary assets and liabilities at book value.

consolidates all subsidiary assets and liabilities at fair market value.

consolidates the subsidiary’s assets at book value and the liabilities at fair market value.

Question 15.15. Goodwill is generally defined as:

Cost of the investment less the subsidiary’s book value at the beginning of the year.

Cost of the investment less the subsidiary’s book value at the acquisition date.

Cost of the investment less the subsidiary’s Fair Market Value at the beginning of the year.

Cost of the investment less the subsidiary’s Fair Market Value at the acquisitiom date.

Question 16. 16.Bullen Inc. assumed 100% control over Vicker Inc. on January 1, 2002. The book value and fair market value of Vicker’s accounts on that date (prior to creating the combination) follow, along with the book value of Bullen’s accounts: Bullen Vicker Vicker Remaining Book Book Market Useful Value Value Value Life Reatined earnings 1/1/02 $160,000 $240,000 Cash Receivables 170,000 70,000 70,000 Inventory 230,000 170,000 210,000 Land 280,000 220,000 240,000 Buildings (net) 480,000 240,000 270,000 10 yrs Equipment (net) 120,000 90,000 90,000 5 yrs Liabilities 650,000 430,000 420,000 4 yrs Common Stock 360,000 80,000 Addtl Paid in Capital 20,000 40,000 Assume that Bullen issued 12,000 shares of common stock with a $5 par value and a $47 fair market value to obtain all of Vicker’s outstanding stock. If this transaction is a purchase, how much Goodwill should be recognized?

$144,000

$104,000

$64,000

$60,000

17. In a transaction (accounted for) using the purchase method where cost exceeds book value, which statement is true?

Net assets of the acquired company are revalued to their fair market values and any excess of costs over fair market value is allocated to goodwill.

Net assets of the acquired company are maintained at book value and any excess of cost over book value is allocated to goodwill.

Assets are revalued to their fair market values. Liabilities are maintained at book values, any excess is allocated to goodwill.

Long-term assets are revalued to their fair market values. Any excess is allocated to goodwill.

Question 18.18.

On July 1, 2002, Big acquires 100% of Little. Both companies have a fiscal year end of 12/31/02. At 12/31/02, how much of the fair market value adjustment associated with inventory should be amortized?

100% of the FMV adjustment

50% of the FMV adjustment

None of the FMV adjustment is amortized

The FASB does not allow inventory to be adjusted to FMV on consolidated financial statements

Use the same data from the previous question.

What amount will be reported for consolidated inventory?

$960

$920

$700

$620

Question 19. 19. Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2003. To obtain these shares, Flynn pays $400,000 and issues 10,000 shares of $20 par value common stock on this date. Flynn’s stock had a fair market value of $36 per share on that date. Flynn also pays $15,000 to a local investment firm for arranging the acquisition. An additional $10,000 was paid by Flynn in stock issuance costs.?The book values for both Flynn and Macek as of January 1, 2003 follow. The fair market value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40,000 value. The figures below are in thousands. Macek Co Macek Co Flynn, Inc Book Value FMV Cash $ 900 $ 80 $ 80 Receivables 480 180 160 Inventory 660 260 300 Land 300 120 130 Buildings (net) 1,200 220 280 Equipment 360 100 75 Accts Payable 480 60 60 LT Liabilities 1,140 340 300 Common Stock 1,200 80 Retained earnings 1,080 480 Assume that this combination is accounted for using the purchase method. What amount will be reported for consolidated receivables? $660 $640 $500 $460

Question 21. 21.

For each of the following situations, select the best answer concerning accounting for combinations: PLEASE INPUT THE FOLLOWING ANSWER FORMAT EXAMPLE: 1=A 2= H etc.

(A) Pooling-of-interests method only.

(B) Purchase method only.

(C) Acquisition method only.

(D) Pooling-of-interests method and purchase method, but not acquisition method.

(E) Purchase method and acquisition method, but not pooling-of-interests method.

(F) Pooling-of-interests method and acquisition method, but not purchase method.

(G) All methods (pooling-of-interests, purchase, and acquisition.)

(H) None of the methods (neither pooling-of-interests, purchase, nor acquisition.)

_____1. Direct costs are expensed.

_____2. Indirect costs are expensed.

_____3. Direct costs reduce the additional paid-in capital of the acquirer.

_____4. Both direct costs and indirect costs increase the investment account.

_____5. Direct costs increase the investment account, and indirect costs reduce the acquirer’s additional paid-in capital account.

_____6. Contingent consideration increases the investment account at date of acquisition.

_____7. Contingent consideration increases the investment account at a date subsequent to the acquisition date.

_____8. A bargain purchase is recorded at date of acquisition as a gain.

_____9. The combination clearly defines an acquired company and an acquiring company.

_____10.. Method(s) appropriate to combinations prior to June 30, 2001.

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