Chapter 16

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Chapter 16
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2012-04-19 19:14:28
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  1. 1. A minority passive investment is one in which the shareholder has no ability to influence the acquired company's operating and financial policies. (T/F)
    TRUE
  2. 2. Minority passive investments of less than 20% of the voting stock are classified as either trading securities or available-for-sale securities. (T/F)
    TRUE
  3. 3. Equity securities designated by the investor to be held for a short period of time are classified as available-for-sale securities. (T/F)
    FALSE
  4. 4. Trading securities are typically purchased by the investor to generate profits on holding gains. (T/F)
    FALSE
  5. 5. GAAP presumes that ownership of less than 20% of another company's voting shares constitutes a passive investment. (T/F)
    TRUE
  6. 6. An investment of 50% or more of a company's voting shares will require the investor to prepare consolidated financial statements. (T/F)
    TRUE
  7. 7. An investment of 30% of a company's voting shares must be accounted for using the equity method. (T/F)
    FALSE
  8. 8. An unrealized loss does not reduce income from operations for an equity securities investment classified as trading securities. (T/F)
    FALSE
  9. 9. The realized gain on an investment classified as trading securities is calculated by comparing the selling price to the original cost. (T/F)
    FALSE
  10. 10. The unrealized gain from an investment classified as available-for-sale reduces income from operations. (T/F)
    FALSE
  11. 11. The upward or downward adjustment to reflect fair value of trading securities is a direct debit or credit to a market adjustment account. (T/F)
    TRUE
  12. 12. When trading securities are sold, the amount of the realized gain or loss is the selling price of the securities relative to the most recent mark-to-market price. (T/F)
    TRUE
  13. 13. Unrealized gains and losses on available-for-sale securities are reported as a component of other comprehensive income. (T/F)
    TRUE
  14. 14. When the ownership percentage of voting stock exceeds 20 percent, GAAP presumes that the investor is able to exert significant influence over the investee company. (T/F)
    TRUE
  15. 15. When the ownership percentage of voting stock exceeds 20 percent, GAAP requires that the investor use the equity method to account for the investment. (T/F)
    FALSE
  16. 16. The investment account is decreased by the dividends received by the investor when the investor uses the equity method to account for the stock investment. (T/F)
    TRUE
  17. 17. The investment account is adjusted for the investor's share of the reported income of the investee when the investor uses the equity method to account for the stock investment. (T/F)
    TRUE
  18. 19. A company can elect to use the fair value option to account for equity method investments at any time. (T/F)
    FALSE
  19. 20. Once a company decides to use the fair value option to account for an equity method investment, the decision is irrevocable. (T/F)
    TRUE
  20. 21. Under the fair value method of accounting for equity investments, unrealized gains and losses as well as dividends received from the investee are reported in the investor's income statement. (T/F)
    TRUE
  21. 22. When two companies form a joint venture and each company owns exactly 50% of the joint venture, both parent's will account for the joint venture using the equity method. (T/F)
    TRUE
  22. 23. Consolidated financial statements must be prepared when a corporation acquires more than 50% of the voting stock of another corporation. (T/F)
    TRUE
  23. 24. Consolidation adjustments that are made to prepare consolidated financial statements of the parent and subsidiary are required to avoid double counting. (T/F)
    TRUE
  24. 25. SFAS No. 160 requires retroactive application and use of the acquisition method to account for business combinations. (T/F)
    FALSE
  25. 26. If a parent owns less than 100% of a subsidiary's stock, the non-controlling shareholders represent the minority interest. (T/F)
    TRUE
  26. 27. The stockholders' equity reported on a consolidated balance sheet includes the equity of both the parent company and the subsidiary company. (T/F)
    FALSE
  27. 28. The minority interest's share of the net assets of a consolidated entity is shown as a contra-asset on the consolidated balance sheet when the purchase method is used. (T/F)
    FALSE
  28. 29. When using purchase accounting to account for a business combination, the subsidiary's assets and liabilities are reported on the consolidated balance sheet at their fair values at the date of purchase regardless of whether there is a noncontrolling interest. (T/F)
    FALSE
  29. 30. When using the acquisition method to account for a business combination, the subsidiary's assets and liabilities are reported on the consolidated balance sheet at their fair values regardless of the level of ownership attributable to the minority shareholders. (T/F)
    TRUE
  30. 31. The amount of goodwill recognized on a consolidated balance sheet will always be the same when accounting for a business combination under either the acquisition method or the purchase method. (T/F)
    FALSE
  31. 32. U.S. GAAP requires comparative financial statements to be retroactively adjusted to include data for the acquired company for periods prior to the acquisition. (T/F)
    FALSE
  32. 33. A variable interest entity must be consolidated into the financial statements of the sponsoring entity if the sponsoring entity is subject to a majority of the risk of loss from the variable interest entity activities and/or is entitled to receive a majority of variable interest entity's residual returns. (T/F)
    TRUE
  33. 34. When consolidating foreign subsidiaries, the foreign subsidiary's financial numbers must be translated into the parents' currency unit. Under U.S. GAAP, if the foreign subsidiary is merely an extension of the parent, the current rate method is used. (T/F)
    FALSE
  34. 35. Monetary assets that arise from foreign currency transactions are shown in the financial statements at their dollar equivalent using the exchange rate in effect at the financial statement date. (T/F)
    TRUE
  35. 36. Foreign currency nonmonetary assets and liabilities for non-free-standing subsidiaries are translated using the current exchange rate at the balance sheet date. (T/F)
    FALSE
  36. 37. Any foreign translation gains or losses using the current rate method should be put directly into the owner's equity account. (T/F)
    TRUE
  37. 38. Under the temporal method, foreign translation gains and losses are reported on the income statement. (T/F)
    TRUE
  38. 39. In a pooling of interests, both companies are assumed to combine their resources with neither having a controlling interest over the other. (T/F)
    TRUE
  39. 40. The consolidated financial statements under a pooling of interests combine the market values of the two entities. (T/F)
    FALSE
  40. 41. Minority ownership occurs when a corporate investor owns less than which one of the following percentages of the stock of another company?
    D. 50%
  41. 42. A minority active ownership is represented by
    B. more than 20% and less than 50% ownership.
  42. 43. Equity securities designated by the investor to be held for a short period of time are classified as
    B. trading securities.
  43. 44. Minority passive equity securities designated by the investor to be held for the long-term are
    B. available-for-sale securities.
  44. 45. Bond investments made to generate trading gains are classified as
    B. trading securities.
  45. 46. Minority active equity investments are accounted for by the
    C. equity method.
  46. 47. The unrealized holding gain or loss on trading securities is recorded on
    B. the income statement in the period OF the security price change.
  47. 48. The fair value adjustment for available-for-sale securities results in
    D. an unrealized gain or loss to be reported as a component of other comprehensive income.
  48. 51. Refer to Table 16-1. Perry should record the of the Baker dividend as
    D. BLANK ANSWER CHOICES?
  49. 53. Refer to Table 16-1. If the securities purchased are classified as available-for- sale securities, Perry should record the year-end adjustment as
    A. BLANK ANSWER CHOICES?
  50. 57. Which of the following properly describes a difference between the accounting for a trading security relative to the accounting for an available-for-sale security for a particular investment?
    C. Net income for a particular period may differ between the two alternatives.
  51. 59. The Kerry Company began operations during 2008 and purchased shares of Molson Corporation stock during the year. The market value of the Molson stock had increased as of the end of 2008. Kerry should have classified this investment as a trading security but mistakenly classified it as an available-for-sale security. Which of the following properly describes the impact of this error?
    D. Total stockholders' equity as of December 31, 2008 was not misstated.
  52. 60. When the ownership percentage of stock exceeds 20 percent, GAAP presumes that the investor
    C. is able to exert influence over the investee company.
  53. 61. When an investor owns less than 20 percent of the investee company, the investor may still be able to exert influence over the investee company if the other stock is
    C. widely distributed across a large number of individual investors.
  54. 62. When an investor is capable of influencing the investee company's dividend policy, the investor is able to augment its own reported income when using
    A. minority passive accounting treatment.
  55. 63. A minority active investment is accounted for by the
    B. equity method.
  56. 69. When the cost of the investor's shares exceeds the underlying book value at the acquisition date, the investor must amortize any excess that is attributable to inventory, or depreciable assets. The rationale for this amortization is
    C. the matching principle.
  57. 75. Which of the following does not properly describe the accounting for an investment using the equity method when the fair value option has been elected?
    B. A retroactive adjustment is required if the investor switches from the fair value method.
  58. 76. If the parent company owns more than 50% of the subsidiary's voting stock, consolidated financial statements are
    B. required.
  59. 77. If one company owns exactly 50% of the voting shares of another company
    B. the equity method is used and line-by-line consolidation is required.
  60. 78. The parent company's investment account would include an element which is representative of
    C. the unrecorded difference between fair value and book value of the investee's assets.
  61. 79. Consolidation adjustments that are made to prepare consolidated financial statements of the parent and subsidiary are required to
    B. avoid double counting.
  62. 80. Which of the following statements does not properly describe the accounting for business combinations?
    C. The parent company has the option of choosing either the purchase method or the acquisition method to account for the business combination.
  63. 81. The Parent Company purchased 80% of the Sub Corporation's voting stock on January 1, 2009. The Parent Company used the acquisition method to prepare the consolidated balance sheet. Which of the following is not an accurate description of the consolidated balance sheet on January 1, 2009?
    C. The fair market value of both Parent's and Sub's assets are included within the consolidated balance sheet
  64. 87. Which of the following statements does not accurately describe the accounting for goodwill as outlined within SFAS 142?
    C. If the fair value of the reporting unit is less than its book value there will always be a goodwill impairment.
  65. 88. The disclosure rules pertaining to U.S. GAAP accounting for business combinations complicates financial analysis for which of the following reasons?
    A. Comparative financial statements are not retroactively adjusted to include data for the acquired company for periods prior to the acquisition.
  66. 89. Which of the following criteria is applicable with respect to determining when a variable interest entity (VIE) must be consolidated into the sponsoring firm's financial statements?
    A. A consolidation must occur if the firm is subject to a majority of risk of loss from the VIE's activities.
  67. 91. On November 1, 2008, A U.S. company sold merchandise to a foreign company for 375,000 francs. The payment in francs is due on January 31, 2009. The spot rate was as follows: $.20 per franc on November 1, 2008; $.21 per franc on December 31, 2008; and $.19 per franc on January 31, 2009 when the payment was received. Which of the following incorrectly describes the accounting for this foreign currency transaction?
    D. The foreign currency transaction loss included on the income statement for the year ending December 31, 2009 was $3,750.
  68. 92. Which of the following correctly describes the accounting for assets and liabilities that were created from foreign currency transactions?
    B. Foreign currency monetary assets and liabilities are remeasured using the current rate of exchange as of the balance sheet date.
  69. 93. When consolidating foreign subsidiaries, the foreign subsidiary's financial numbers must be translated into the parents' currency unit. Under U.S. GAAP if the foreign subsidiary is a self contained unit the
    A. current rate method is used.
  70. 94. Foreign currency nonmonetary assets and liabilities for non-free-standing subsidiaries are translated using the
    A. historic rate of exchange in effect when the asset or liability was acquired or incurred.
  71. 95. When accounting for a non-free-standing foreign subsidiary, translation exchange rates are accounted for using the temporal method which involves reporting all revenue accounts at the
    C. rate at time of transaction.
  72. 96. When accounting for a non-free-standing foreign subsidiary, translation exchange rates are accounted for using the temporal method which involves reporting all cost of goods sold accounts at the
    B. historical rate.
  73. 97. When accounting for self-contained foreign subsidiaries, the parent company uses which one of the following methods for the translation of its financial statements into dollars?
    D. Current rate
  74. 98. If Sun Company acquired Star, Inc. in a pooling of interests transaction, the entry would have used which one of the following to account for the pooling?
    B. Book value of Star's assets
  75. 99. Pooling of interests method for accounting for business combinations has been criticized because it tends to allow recording of acquisitions
    B. at artificially low amounts.
  76. 100. Financial analysts must be wary of business acquisitions accounted for as pooling of interests because this method tends to inflate the
    C. rate of return ratios.

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