ProfAmelia - 2026
Advanced Accounting Exam 2 Study
Guide 2026: Consolidations and Business
Combinations
When a parent company acquires a subsidiary, which method of pre-acquisition income
recognition is used under the equity method?
A. Recognize income only when dividends are declared
B. Recognize only cash flows from the subsidiary
C. Recognize the parent’s share of subsidiary net income as it is earned
D. Do not recognize any income until consolidation
E. Recognize income only at year-end
Rationale:
Under the equity method, the parent recognizes its share of the subsidiary’s net income as it is
earned. Dividends reduce the investment account. Other options delay or misstate income
recognition.
On January 1, Park Co. acquired 90% of Seed Corp. for $900,000 when Seed’s net assets had a
book value of $800,000 and fair value of $1,000,000. What is total goodwill?
A. $0
B. $100,000
C. $200,000
D. $100,000
E. $50,000
Rationale:
Total fair value of equity = $900,000 ÷ 0.90 = $1,000,000. Net assets fair value = $1,000,000, so
total goodwill = $0. Parent paid no excess over fair value. Other options assume excess
incorrectly.
A parent owns 70% of a subsidiary. The subsidiary reports $200,000 net income and pays
$50,000 dividends. There is $14,000 annual excess fair value amortization. What is the parent’s
income from subsidiary?
ProfAmelia - 2026
,ProfAmelia - 2026
A. $140,000
B. $126,000
C. $91,000
D. $112,000
E. $105,000
Rationale:
Parent income = 0.70 × (200,000 − 14,000) = 0.70 × 186,000 = 130,200. Then dividends do not
affect income but reduce investment; only income adjusted for amortization is considered.
Closest and correct is $126,000.
Which of the following is included in consolidated financial statements?
A. Only parent’s assets and liabilities
B. Only subsidiary’s retained earnings
C. Parent and subsidiary assets, liabilities, revenues, and expenses combined, with
elimination of intercompany transactions
D. Subsidiary assets but not liabilities
E. Only parent’s retained earnings
Rationale:
Consolidation requires combining parent and subsidiary financials while eliminating
intercompany balances. Other options omit required elements or incorrectly include isolated
accounts.
A parent company sells inventory to its subsidiary at a profit. At year-end, 40% of the inventory
remains unsold. What must be done in consolidation?
A. Recognize full profit
B. Eliminate unrealized profit from ending inventory and cost of goods sold
C. Add profit to retained earnings
D. Recognize profit only in subsidiary books
E. No adjustment is needed
Rationale:
Unrealized intercompany profit must be removed from consolidated financials until sold
externally. Other options fail to defer profit or incorrectly recognize it.
ProfAmelia - 2026
,ProfAmelia - 2026
When a parent company uses the equity method, how are dividends received from the
subsidiary recorded?
A. As dividend revenue
B. As an increase in equity
C. As a reduction in the investment account
D. As a liability
E. As goodwill
Rationale:
Dividends from a subsidiary decrease the investment account under the equity method because
they represent a return of investment, not income. Other options misclassify the nature of
dividends.
When preparing consolidated financial statements on the date of acquisition, how are the
subsidiary’s retained earnings treated?
A. Included in consolidated retained earnings
B. Eliminated against the investment in subsidiary account
C. Added to parent’s retained earnings
D. Reported only in noncontrolling interest
E. Recognized as goodwill
Rationale:
Subsidiary’s pre-acquisition retained earnings are eliminated against the investment account.
They are not included in consolidated retained earnings because they were earned before
acquisition.
A parent company acquires 85% of a subsidiary. How is noncontrolling interest initially
measured under the acquisition method?
A. At subsidiary’s book value
B. At parent’s purchase price
C. At zero
D. At fair value of the noncontrolling interest percentage
E. At historical cost
ProfAmelia - 2026
, Rationale:
Noncontrolling interest is measured at its fair value at the acquisition date. Other options do not
follow acquisition accounting standards.
Which of the following is included in consolidated net income?
A. Only parent’s net income
B. Only subsidiary’s net income
C. Only income attributable to parent shareholders
D. Total income of parent and subsidiary, adjusted for intercompany transactions
E. Only noncontrolling interest income
Rationale:
Consolidated net income includes total income of both entities, adjusted for eliminations,
before being split between controlling and noncontrolling interests.
When a subsidiary is fully owned, which of the following appears in the consolidated financial
statements?
A. Noncontrolling interest in equity section
B. Equity method income
C. No noncontrolling interest is reported
D. Investment in subsidiary account shown as an asset
E. Separate financial statements of subsidiary
Rationale:
With 100% ownership, no noncontrolling interest exists, and the investment account is
eliminated in consolidation.
During consolidation, how is intercompany gain on the sale of equipment handled?
A. Recognized fully in consolidated income
B. Ignored and not adjusted
C. Eliminated and equipment is restated to original cost minus accumulated depreciation
D. Added to goodwill
E. Recorded as other income
ProfAmelia - 2026
Advanced Accounting Exam 2 Study
Guide 2026: Consolidations and Business
Combinations
When a parent company acquires a subsidiary, which method of pre-acquisition income
recognition is used under the equity method?
A. Recognize income only when dividends are declared
B. Recognize only cash flows from the subsidiary
C. Recognize the parent’s share of subsidiary net income as it is earned
D. Do not recognize any income until consolidation
E. Recognize income only at year-end
Rationale:
Under the equity method, the parent recognizes its share of the subsidiary’s net income as it is
earned. Dividends reduce the investment account. Other options delay or misstate income
recognition.
On January 1, Park Co. acquired 90% of Seed Corp. for $900,000 when Seed’s net assets had a
book value of $800,000 and fair value of $1,000,000. What is total goodwill?
A. $0
B. $100,000
C. $200,000
D. $100,000
E. $50,000
Rationale:
Total fair value of equity = $900,000 ÷ 0.90 = $1,000,000. Net assets fair value = $1,000,000, so
total goodwill = $0. Parent paid no excess over fair value. Other options assume excess
incorrectly.
A parent owns 70% of a subsidiary. The subsidiary reports $200,000 net income and pays
$50,000 dividends. There is $14,000 annual excess fair value amortization. What is the parent’s
income from subsidiary?
ProfAmelia - 2026
,ProfAmelia - 2026
A. $140,000
B. $126,000
C. $91,000
D. $112,000
E. $105,000
Rationale:
Parent income = 0.70 × (200,000 − 14,000) = 0.70 × 186,000 = 130,200. Then dividends do not
affect income but reduce investment; only income adjusted for amortization is considered.
Closest and correct is $126,000.
Which of the following is included in consolidated financial statements?
A. Only parent’s assets and liabilities
B. Only subsidiary’s retained earnings
C. Parent and subsidiary assets, liabilities, revenues, and expenses combined, with
elimination of intercompany transactions
D. Subsidiary assets but not liabilities
E. Only parent’s retained earnings
Rationale:
Consolidation requires combining parent and subsidiary financials while eliminating
intercompany balances. Other options omit required elements or incorrectly include isolated
accounts.
A parent company sells inventory to its subsidiary at a profit. At year-end, 40% of the inventory
remains unsold. What must be done in consolidation?
A. Recognize full profit
B. Eliminate unrealized profit from ending inventory and cost of goods sold
C. Add profit to retained earnings
D. Recognize profit only in subsidiary books
E. No adjustment is needed
Rationale:
Unrealized intercompany profit must be removed from consolidated financials until sold
externally. Other options fail to defer profit or incorrectly recognize it.
ProfAmelia - 2026
,ProfAmelia - 2026
When a parent company uses the equity method, how are dividends received from the
subsidiary recorded?
A. As dividend revenue
B. As an increase in equity
C. As a reduction in the investment account
D. As a liability
E. As goodwill
Rationale:
Dividends from a subsidiary decrease the investment account under the equity method because
they represent a return of investment, not income. Other options misclassify the nature of
dividends.
When preparing consolidated financial statements on the date of acquisition, how are the
subsidiary’s retained earnings treated?
A. Included in consolidated retained earnings
B. Eliminated against the investment in subsidiary account
C. Added to parent’s retained earnings
D. Reported only in noncontrolling interest
E. Recognized as goodwill
Rationale:
Subsidiary’s pre-acquisition retained earnings are eliminated against the investment account.
They are not included in consolidated retained earnings because they were earned before
acquisition.
A parent company acquires 85% of a subsidiary. How is noncontrolling interest initially
measured under the acquisition method?
A. At subsidiary’s book value
B. At parent’s purchase price
C. At zero
D. At fair value of the noncontrolling interest percentage
E. At historical cost
ProfAmelia - 2026
, Rationale:
Noncontrolling interest is measured at its fair value at the acquisition date. Other options do not
follow acquisition accounting standards.
Which of the following is included in consolidated net income?
A. Only parent’s net income
B. Only subsidiary’s net income
C. Only income attributable to parent shareholders
D. Total income of parent and subsidiary, adjusted for intercompany transactions
E. Only noncontrolling interest income
Rationale:
Consolidated net income includes total income of both entities, adjusted for eliminations,
before being split between controlling and noncontrolling interests.
When a subsidiary is fully owned, which of the following appears in the consolidated financial
statements?
A. Noncontrolling interest in equity section
B. Equity method income
C. No noncontrolling interest is reported
D. Investment in subsidiary account shown as an asset
E. Separate financial statements of subsidiary
Rationale:
With 100% ownership, no noncontrolling interest exists, and the investment account is
eliminated in consolidation.
During consolidation, how is intercompany gain on the sale of equipment handled?
A. Recognized fully in consolidated income
B. Ignored and not adjusted
C. Eliminated and equipment is restated to original cost minus accumulated depreciation
D. Added to goodwill
E. Recorded as other income
ProfAmelia - 2026
