Upgrade to remove ads
Only $35.99/year

Chapter 1 Business Combination

Terms in this set (20)

Consolidated financial statements are prepared for a parent company and all subsidiaries under control of the parent company
True
The parent company often pays an acquisition price equal to the subsidiary corporation's book value.
False. Book values are generally conservative so most acquisitions occur at an amount greater than book value.
At the date of acquisition, the parent's Investment in Subsidiary account shows the amount of the initial investment
True
Consolidated financial statements allow the user to see more detailed information than does the parent company financial statements under the equity method
True
The inclusion of both the parent's Investment in Subsidiary account and the individual subsidiary asset and liability accounts would result in a double counting of the subsidiary's net assets
True
The reason the parent's Investment in Subsidiary account is eliminated when preparing a consolidation worksheet is that no one cares what the parent paid for the subsidiary's stock
F, The Investment in Subsidiary account is eliminated when preparing the consolidation worksheet to prevent the double counting of the subsidiary's net assets.
The subsidiary's owners' equity accounts are eliminating when preparing consolidated financial statements because the consolidated statements are prepared for the parent company stockholders and the parent's net worth is equal to the parent's net assets, including the Investment in Subsidiary
True
Worksheet eliminations are not posted to the financial records of the subsidiary or the parent.
True
The price paid to acquire a company is typically greater than book value because accounting principles tend to be conservative so market values tend to exceed book values.
True
The subsidiary's book values always become the book values to the consolidated entity as of the date of acquisitionThe subsidiary's book values always become the book values to the consolidated entity as of the date of acquisition
F, The market value of the subsidiary's assets and liabilities become the book values to the consolidated entity
Consolidated financial statements normally include what company(ies)?

a. Parent company
b. Subsidiaries
c. Parent company and all controlled subsidiaries
d. Parent company and all 100 percent owned subsidiaries
C
Which of the following statements is not correct with regard to a book value consolidation at the date of acquisition with 100 percent ownership?

a. The parent's investment account balance represents the parent's ownership of the subsidiary's stock
b. The noncontrolling interest is created in the equity section of the consolidated balance sheet
c. The parent's investment account equals the subsidiary's total stockholders' equity
d. Consolidated assets and liabilities are the sum of the parent's book values and the subsidiary's book values
B.
Which of the following statements is correct with regard to the computation of the amount that appears on the acquisition date consolidated balance sheet?

a. Parent's book value plus subsidiary's book value
b. Parent's market value plus subsidiary's book value
c. Parent's book value plus subsidiary's market value
d. Parent's market value plus subsidiary's market value
C
Which of the following statements is correct with regard to the recognition of goodwill at the acquisition date?

a. Goodwill is the positive purchase differential that remains after allocating each asset and liability the amount that market value and book value differ
b. Goodwill is the amount by which the purchase price exceeds the subsidiary's book value
c. Goodwill is assigned 25 percent of the total purchase differential
d. Goodwill is determined by computing the present value of the subsidiary's free cash flows
A
Which of the following statements with regard to worksheet elimination 1 at the date of a 100 percent acquisition with positive goodwill is not correct?

a. The worksheet elimination to the investment account will equal the subsidiary's total stockholders' equity
b. The worksheet elimination will completely remove the subsidiary's stockholders' equity from the consolidated balance sheet
c. The worksheet elimination to the individual identifiable assets and liabilities is based on the difference between the market value and book value of each asset or liability
d. The worksheet elimination to the investment account will equal the amount that was paid for the subsidiary
A
Which of the following is correct with regard to the acquisition of a subsidiary at a price that results in negative goodwill?

a. The investment account is established at the amount paid for the subsidiary's stock
b. The subsidiary recognizes an extraordinary loss on sale of stock to investor that offsets the extraordinary gain recognized on the parent's income statement
c. An extraordinary gain is created on the consolidated balance sheet
d. Before recognizing an extraordinary gain, the parent should review the appraised values of identifiable assets and liabilities to ensure they have not been overvalued
D
Which of the following is not true with regard to the date of acquisition worksheet elimination?

a. The worksheet elimination to common stock is the same regardless of the acquisition date
b. The worksheet elimination to additional paid-in capital is the same regardless of the acquisition date
c. The worksheet elimination to retained earnings is the same regardless of the acquisition date
d. The worksheet elimination to preacquisition earnings only exists when the acquisition date is other than the beginning of the year
C
Which of the following would not have unanimous agreement by proponents of all consolidation concepts?

a. Parent's ownership percentage of subsidiary's net income should be recognized in the consolidated financial statements
b. Consolidated net income should consist of parent company net income and subsidiary net income
c. Parent's ownership percentage of subsidiary's net assets should be recognized in the consolidated financial statements
d. The consolidated balance sheet should include the market value of the parent's ownership of the subsidiary's assets and liabilities.
B
Which of the following statements is not true as it pertains to the economic unit concept of consolidation?

a. Market value of subsidiary's assets and liabilities is included in consolidated balance sheet
b. All of the subsidiary's revenues and expenses are included in the consolidated net income
c. The consolidated balance sheet only includes the parent's ownership interest in the subsidiary's assets and liabilities
d. Noncontrolling interest in net income of subsidiary is subtracted from consolidated net income to determine the parent's portion of consolidated net income
C
10. When less than 100 percent of a subsidiary's stock is acquired during the period, which of the following would appear in the consolidation worksheet elimination?

a. 100 percent of the subsidiary's stockholders' equity is eliminated
b. The parent's ownership percentage of the subsidiary's preacquisition earnings is eliminated
c. The noncontrolling interest percentage ownership in the subsidiary's book value is recognized on the consolidated balance sheet
d. The parent's ownership percentage of the subsidiary's goodwill is recognized on the consolidated balance sheet
A
Other Quizlet sets