CHAPTER 16 Intercorporate Investments
53. 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?
a. The carrying value of the investment is the fair value of the investment.
b. A retroactive adjustment is required if the investor switches from the fair value method.
c. Dividends received by the investor increase net income.
d. Unrealized gains and losses resulting from changes in market value are reported in the
investor’s income statement.
54. If the parent company owns more than 50% of the subsidiary’s voting stock, and effectively
has control of the subsidiary, consolidated financial statements are
a. optional.
b. required.
c. not possible.
d. required only by the SEC.
55. When two companies form a joint venture and each company owns exactly 50% of the joint
venture
a. the cost method is used.
b. the equity method is used and line-by-line consolidation is required.
c. the equity method is used and line-by-line consolidation is not required.
d. the company that has more net assets is deemed the parent.
56. A parent company’s investment account would include an element which is representative of
a. the unrecorded book value of the investor’s assets.
b. the recorded current value of the investee’s assets.
c. the unrecorded difference between fair value and book value of the investee’s assets.
d. the goodwill accrued since the purchase of the investee.
57. Consolidation adjustments that are made to prepare consolidated financial statements of the
parent and subsidiary are required in order to
a. obey the state laws.
b. avoid double counting.
c. follow tax laws.
d. eliminate transactions with third parties.
58. Which of the following statements does not properly describe the accounting for business
combinations?
a. Under the purchase method, the subsidiary’s assets and liabilities are not valued at their full
fair values on the consolidated balance sheet when noncontrolling interests are present.
b. Under the acquisition method, the subsidiary’s assets and liabilities are valued at their full
fair values on the consolidated balance sheet when noncontrolling interests are present.
c. The parent company has the option of choosing either the purchase method or the
acquisition method to account for the business combination.
CHAPTER 16 Intercorporate Investments
d. The noncontrolling interest is reported as a component of stockholders’ equity when using
the acquisition method.
59. The Parent Company acquired 80% of the Sub Corporation’s voting stock on January 1,
2018. Which of the following is not an accurate description of the consolidated balance sheet on
January 1, 2018?
a. Consolidated stockholders’ equity does not include the stockholders’ equity of the Sub
Corporation.
b. Consolidated assets do not include the Investment in Sub account.
c. The fair value of both Parent’s and Sub’s assets are included within the consolidated
balance sheet.
d. Consolidated assets will include goodwill if the imputed total business fair value of Sub is
in excess of the fair value of Sub’s identifiable assets.
60. On January 1, 2018, the Shaw Corporation acquired 70% of the Ward Company’s voting
stock for $1,050,000. Ward’s net assets had a book value of $1,200,000; the fair value of Ward’s
equipment was $200,000 greater than its book value. The book value of Shaw’s assets
immediately after the acquisition of Ward totaled $3,750,000 while Ward’s assets had a book
value of $2,150,000. What was the amount of total consolidated assets as of January 1, 2018?
a. $5,150,000
b. $6,200,000
c. $5,050,000
d. $4,850,000
61. On January 1, 2018, the Knight Corporation acquired 80% of the Red Company’s voting
stock for $1,500,000. Red’s net assets had a book value of $1,350,000; the fair value of Red’s
land was $325,000 greater than its book value. The book value of Knight’s assets immediately
after the acquisition of Red totaled $6,850,000 while Red’s assets had a book value of
$1,350,000. What was the amount of goodwill reported on the January 1, 2018 consolidated
balance sheet?
a. $525,000
b. $200,000
c. $160,000
d. $42,000
62. Testing for goodwill impairment
a. requires both qualitative and quantitative tests.
b. necessitates determining if the reporting unit itself is impaired after calculating implied
goodwill.
c. may result in an impairment charge defined as the difference between the goodwill reflected
for the reporting unit in the consolidated balance sheet and the reporting unit’s implied
goodwill.
d. requires computing implied goodwill, which is the amount of fair value of the reporting unit
less the book value of the separately identifiable net assets of the reporting unit.
Use the following to answer questions 63 and 64:
REFERENCE: Ref. 16_06
On January 1, 2018, the Husky Corporation acquired 90% of the Spartan Company’s voting
stock for $2,700,000. Spartan’s net assets had a book value of $2,450,000; the fair value of
Spartan’s building was $325,000 greater than its book value. The book value of Husky’s net
assets immediately after the acquisition of Spartan totaled $6,850,000.
[QUESTION]
REFER TO: Ref. 16_06
63. What is total stockholders’ equity on the January 1, 2018 consolidated balance sheet?
a. $9,300,000
b. $6,850,000
c. $7,150,000
d. $7,120,000
[QUESTION]
REFER TO. Ref. 16_06
64. What is the amount of goodwill to be reported on the January 1, 2018 consolidated balance
sheet?
a. $495,000
b. $202,500
c. $550,000
d. $225,000
65. Hill Company entered into the following inventory transactions with its investees during
2018:
• Sold inventory to Grant Inc. for $150,000. The inventory originally cost Hill $120,000.
Grant sold 75% of the inventory during 2018.
Hill owns 15% of the voting stock of Grant and does not use the equity method to
account for the Grant investment.
• Sold inventory to Thornton Inc. for $400,000. The inventory originally cost Hill
$320,000. Thornton sold all of this inventory during 2018. Hill owns 100% of the
voting stock of Thornton.
Which of the following adjustments is correct with respect to preparing Hill’s 2018 consolidated
financial statements?
a. Sales will be decreased $400,000.
b. Cost of goods sold will be decreased $338,000.
c. Inventory will be decreased $40,000.
d. Gross profit will be decreased $110,000.
66. Which of the following statements does not accurately describe the current accounting
standards for goodwill?
a. If the fair value of the reporting unit is greater than its book value there is not a goodwill
impairment.
b. Goodwill should not be amortized.
c. If the fair value of the reporting unit is less than its book value there will always be a
goodwill impairment.
d. Goodwill should be tested for impairment on at least an annual basis and in certain
conditions between annual dates.
67. When a firm has noncontrolling interests, analysts may compute and review all except which
of the following return on equity ratios?
a. Return on total equity where total equity includes common equity, preferred stock, and
noncontrolling interests.
b. Return on total equity net of non-controlling interests where total equity includes common
equity and preferred stock, less noncontrolling interests.
c. Return on parent company equity where parent company equity includes both common
equity and preferred stock.
d. Return on common equity defined as net income attributable to the parent company minus
preferred dividends divided by average common equity.
68. The disclosure rules pertaining to 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.
b. The inclusion of noncontrolling interest in the retroactively adjusted financial statements
complicates the analysis.
c. The inclusion of acquired goodwill in the retroactively adjusted financial statements
complicates the analysis.
d. The inclusion of the acquired firm’s equity within the retroactively adjusted financial
statements complicates the analysis.
69. 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?
CHAPTER 16 Intercorporate Investments
a. A consolidation must occur if the firm has a controlling financial interest and is the VIE’s
primary beneficiary.
b. A consolidation must occur if the firm is entitled to receive all of the VIE’s residual
returns.
c. A consolidation must occur regardless of the risk of loss exposure.
d. A consolidation must occur if the sponsoring firm owns more than 50% of the VIE’s
equity.
70. Which of the following is not a use of a variable interest entity (VIE)?
a. To set up take-or- pay contracts
b. For any purpose needed by the beneficiary of the VIE
c. To securitize loans or mortgages
d. To sell receivables.
71. Which of the following does not accurately inform about a variable interest entity (VIE)?
a. A variable interest entity may take many forms including corporations and partnerships.
b. In pre-codification literature, a variable interest entity was referred to as a Special Purpose
Entity.
c. There are 2 criteria for determining if a company has a controlling financial interest in a
variable interest entity.
d. The power to direct the activities of the VIE that most significantly impact the VIE’s eco-
nomic performance is the definition of a controlling financial interest.
72. On December 1, 2018, a U.S. company sold merchandise to a foreign company for 750,000
yuan. The payment in yuan is due on January 31, 2019. The spot rate was as follows: $0.20 per
yuan on December 1, 2018; $0.19 per yuan on December 31, 2018; and $0.21 per yuan on
January 31, 2019 when the payment was received. Which of the following incorrectly describes
the accounting for this foreign currency transaction?
a. The receivable was recorded at $150,000 on December 1, 2018.
b. The receivable was recorded at $142,500 on the December 31, 2018 balance sheet.
c. The foreign currency transaction gain included on the income statement for the year ending
December 31, 2018 was $7,500.
d. The foreign currency transaction gain included on the income statement for the year ending
December 31, 2019 was $15,000.
73. On November 1, 2018, A U.S. company sold merchandise to a foreign company for 375,000
krone. The payment in krone is due on January 31, 2019. The spot rate was as follows: $0.20 per
krone on November 1, 2018; $0.21 per krone on December 31, 2018; and $0.19 per krone on
January 31, 2019 when the payment was received. Which of the following incorrectly describes
the accounting for this foreign currency transaction?
a. The receivable was recorded at $75,000 on November 1, 2018.
b. The receivable was recorded at $78,750 on the December 31, 2018 balance sheet.
c. The foreign currency transaction gain included on the income statement for the year ending
December 31, 2018 was $3,750.
d. The foreign currency transaction loss included on the income statement for the year ending
December 31, 2019 was $3,750.
74. Which of the following correctly describes the accounting for assets and liabilities that were
created from foreign currency transactions?
a. Foreign currency monetary assets and liabilities are measured using the current rate of
exchange as of the date of the initial transaction.
b. Foreign currency monetary assets and liabilities are measured using the current rate of
exchange as of the balance sheet date.
c. Foreign currency nonmonetary assets and liabilities are measured using the current rate of
exchange as of the balance sheet date.
d. Foreign currency nonmonetary assets and liabilities are measured using the average annual
rate of exchange during the year.
75. 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.
b. temporal method is used.
c. present value method is used.
d. historical cost method is used.
76. Which of the following is not correct with regard to the translation of a self-contained
foreign subsidiary?
CHAPTER 16 Intercorporate Investments
a. The balance sheet ratios are not impacted by the translation to the parent company’s
currency.
b. The effect of changes in exchange rates on future dollar cash flows is uncertain.
c. The exchange rate used for translating the balance sheet is the weighted average rate over the
statement period.
d. For a material transaction, the rate used for translation is the exchange rate in effect on the
date the transaction occurred.
77. 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.
b. current rate of exchange on the balance sheet date.
c. temporal rate of exchange on the balance sheet date.
d. present value rate of exchange when the translation takes place.
78. 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
a. current rate.
b. historical rate.
c. rate at time of transaction.
d. present value rate.
79. Which of the following does not accurately describe the accounting for debt securities under
IFRS?
a. Accounting for debt securities is similar to U.S. GAAP.
b. IFRS uses a business model classification model.
c. The business model classification is determined by observation of the activities the entity
undertakes to achieve its business objective.
d. The business model classification is determined by individual instruments based on
management’s intentions.
80. 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
a. current rate.
b. historical rate.
c. rate at time of transaction.
d. present value rate.
81. 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?
a. Present value rate
b. Historical rate
c. Future value rate
d. Current rate
82. Which of the following is not correct regarding IFRS with regard to accounting for
investments?
a. Minority passive equity investments are accounted for under the Fair Value through Net
Income approach unless an option is elected to use Fair value through Other
Comprehensive Income.
b. Minority active equity investments are accounted for using the equity method with no fair
value option.
c. The use of Fair Value through Other Comprehensive Income is never available for passive
minority investments.
d. A firm may elect to use Fair Value through Net Income for any security if doing so
eliminates a measurement or recognition inconsistency.
83. Mesquite, Inc. has held-to-maturity debt securities it purchased in 2018. At December 31,
2019, the amortized cost basis of the securities is $220,000 and the fair value of the securities is
$208,000. The present value of estimated future cash flows discounted at the original effective
interest rate is $210,000. Mesquite, Inc. uses IFRS for its external reporting. What amount of
loss, if any, will Mesquite, Inc. report related to these securities for 2019?
a. $ – 0 –
b. $12,000.
c. $10,000.
d. $2,000.