University of Louisiana, Lafayette - ACCT 526 Final Exam
Questions and Answers 100% Correct | Updated
Question 1
In a business combination, goodwill is recognized and measured as the excess of the
consideration transferred over the:
A) Book value of the identifiable net assets acquired.
B) Fair value of the identifiable net assets acquired.
C) Fair value of the liabilities assumed.
D) Carrying amount of the assets acquired.
E) Book value of the subsidiary's equity.
Correct Answer: B) Fair value of the identifiable net assets acquired.
Rationale: According to ASC 805, Business Combinations, goodwill is calculated as the
excess of the fair value of the consideration given by the acquirer over the net fair value of
the identifiable assets acquired and liabilities assumed. It represents the future economic
benefits arising from other assets acquired in a business combination that are not
individually identified and separately recognized. Using book value (A, E) is incorrect as
acquisition accounting requires measurement at fair value.
Question 2
Parent Company acquires 100% of Subsidiary Company for $500,000. On the acquisition date,
the fair value of Subsidiary's identifiable net assets is $420,000 and the book value is $300,000.
How much goodwill should Parent Company recognize?
A) $200,000
B) $120,000
C) $80,000
D) $0
E) $500,000
Correct Answer: C) $80,000
Rationale: Goodwill is calculated as the consideration transferred minus the fair value of
the net identifiable assets acquired. In this case, the calculation is $500,000 (consideration) -
$420,000 (fair value of net assets) = $80,000. The book value of the subsidiary's net assets is
irrelevant for the goodwill calculation.
Question 3
When preparing a consolidated balance sheet, the parent company's investment in the subsidiary
account is:
A) Carried forward as an asset.
B) Eliminated against the subsidiary's equity accounts.
C) Netted against goodwill.
D) Reported as a long-term liability.
E) Subtracted from the parent's retained earnings.
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Correct Answer: B) Eliminated against the subsidiary's equity accounts.
Rationale: In the consolidation process, the parent's investment account represents its
ownership of the subsidiary's net assets. To avoid double-counting these assets, the
investment account is eliminated. This elimination entry involves crediting the Investment
in Subsidiary account and debiting the subsidiary's equity accounts (Common Stock,
APIC, and Retained Earnings) as of the beginning of the period.
Question 4
A noncontrolling interest (NCI) is reported on the consolidated balance sheet when:
A) The parent company acquires 100% of the subsidiary.
B) The parent company acquires less than 100% of the subsidiary.
C) The subsidiary reports a net loss for the year.
D) The parent company uses the equity method.
E) The parent company pays more than the book value for the subsidiary.
Correct Answer: B) The parent company acquires less than 100% of the subsidiary.
Rationale: A noncontrolling interest represents the portion of a subsidiary's equity that is
not owned by the parent company. It only arises when the parent acquires more than 50%
but less than 100% of the subsidiary's voting stock. The NCI is reported as a separate
component of equity on the consolidated balance sheet.
Question 5
P Company owns 80% of S Company. In 2024, S Company reported net income of $100,000 and
paid dividends of $20,000. What is the amount of net income attributable to the noncontrolling
interest?
A) $100,000
B) $80,000
C) $20,000
D) $16,000
E) $4,000
Correct Answer: C) $20,000
Rationale: The noncontrolling interest's share of the subsidiary's net income is calculated by
multiplying the subsidiary's net income by the NCI ownership percentage. In this case, the
NCI owns 20% (100% - 80%). The calculation is $100,000 (S Company's net income) *
20% = $20,000. Dividends paid do not affect the calculation of net income attributable to
NCI, but they do affect the NCI's equity balance.
Question 6
P Corp. sells inventory to its wholly-owned subsidiary, S Corp., at a profit. At year-end, some of
this inventory is still held by S Corp. What consolidation entry is required?
A) No entry is needed as they are separate legal entities.
B) An entry to increase the parent's sales revenue.
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C) An entry to eliminate the unrealized profit from the ending inventory.
D) An entry to recognize the full profit in the consolidated statements.
E) An entry to reduce the cost of goods sold by the full intercompany sales price.
Correct Answer: C) An entry to eliminate the unrealized profit from the ending inventory.
Rationale: From a consolidated perspective, a company cannot recognize a profit by selling
to itself. The profit on the intercompany sale is considered "unrealized" until the inventory
is sold to an outside, third-party entity. The consolidation workpaper entry must eliminate
this unrealized profit by debiting Sales (or Cost of Goods Sold) and crediting Ending
Inventory to restate the inventory to its original cost.
Question 7
Which of the following describes a "downstream" intercompany sale?
A) A subsidiary sells inventory to the parent company.
B) A subsidiary sells inventory to another subsidiary owned by the same parent.
C) The parent company sells inventory to its subsidiary.
D) The parent company sells inventory to an outside party.
E) An outside party sells inventory to the subsidiary.
Correct Answer: C) The parent company sells inventory to its subsidiary.
Rationale: The direction of an intercompany transaction is described relative to the parent
company. A "downstream" sale is one that flows down from the parent to the subsidiary.
An "upstream" sale (A) is one that flows up from the subsidiary to the parent.
Question 8
A parent company sells a depreciable asset to its 90%-owned subsidiary at a gain. When
preparing consolidated financial statements, the gain on the sale should be:
A) Fully recognized in the year of sale.
B) Recognized only to the extent of the noncontrolling interest's ownership (10%).
C) Deferred and recognized over the remaining useful life of the asset.
D) Ignored as it is an internal transaction.
E) Credited directly to consolidated retained earnings.
Correct Answer: C) Deferred and recognized over the remaining useful life of the asset.
Rationale: From a consolidated viewpoint, the asset has not been sold; it has merely been
transferred between affiliates. The gain is unrealized and must be eliminated. This gain is
then recognized piecemeal over the asset's remaining life through an adjustment to
depreciation expense. Each year, depreciation is reduced to reflect the asset's original cost
basis, which effectively recognizes a portion of the deferred gain.
Question 9
Under the Uniform Partnership Act, which of the following is NOT a characteristic of a general
partnership?
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A) The partners have unlimited liability.
B) The partnership is a separate legal entity from its owners.
C) The partnership has a limited life.
D) The partners have limited liability for partnership debts.
E) The partners are co-owners of the partnership property.
Correct Answer: D) The partners have limited liability for partnership debts.
Rationale: The defining characteristic of a general partnership is the unlimited liability of
its partners. Each partner is personally and individually liable for all of the partnership's
debts and obligations. Limited liability is a feature of corporations and limited
partnerships (for the limited partners), not general partnerships.
Question 10
A and B form a partnership. A contributes cash of $60,000, and B contributes land with a book
value of $40,000 and a fair market value of $70,000. At what amount should the land be recorded
on the partnership's books?
A) $40,000
B) $55,000
C) $60,000
D) $70,000
E) $0
Correct Answer: D) $70,000
Rationale: When a partnership is formed, all non-cash assets contributed by the partners
must be recorded at their current fair market value at the date of contribution. The
contributing partner's original book value is irrelevant to the partnership's accounting
records.
Question 11
Partners X and Y have a profit-sharing agreement that provides for salary allowances of $30,000
to X and $20,000 to Y, with the remainder allocated 60% to X and 40% to Y. If the partnership's
net income is $80,000, how much is allocated to X?
A) $30,000
B) $48,000
C) $50,000
D) $48,000
E) $48,000
Correct Answer: D) $48,000
Rationale: The allocation is done in steps. First, allocate the salaries: $30,000 to X and
$20,000 to Y, for a total of $50,000. The remaining income is $80,000 - $50,000 = $30,000.
This remainder is allocated based on the ratio: X gets 60% * $30,000 = $18,000. X's total
allocation is the salary plus the remainder: $30,000 + $18,000 = $48,000.
Questions and Answers 100% Correct | Updated
Question 1
In a business combination, goodwill is recognized and measured as the excess of the
consideration transferred over the:
A) Book value of the identifiable net assets acquired.
B) Fair value of the identifiable net assets acquired.
C) Fair value of the liabilities assumed.
D) Carrying amount of the assets acquired.
E) Book value of the subsidiary's equity.
Correct Answer: B) Fair value of the identifiable net assets acquired.
Rationale: According to ASC 805, Business Combinations, goodwill is calculated as the
excess of the fair value of the consideration given by the acquirer over the net fair value of
the identifiable assets acquired and liabilities assumed. It represents the future economic
benefits arising from other assets acquired in a business combination that are not
individually identified and separately recognized. Using book value (A, E) is incorrect as
acquisition accounting requires measurement at fair value.
Question 2
Parent Company acquires 100% of Subsidiary Company for $500,000. On the acquisition date,
the fair value of Subsidiary's identifiable net assets is $420,000 and the book value is $300,000.
How much goodwill should Parent Company recognize?
A) $200,000
B) $120,000
C) $80,000
D) $0
E) $500,000
Correct Answer: C) $80,000
Rationale: Goodwill is calculated as the consideration transferred minus the fair value of
the net identifiable assets acquired. In this case, the calculation is $500,000 (consideration) -
$420,000 (fair value of net assets) = $80,000. The book value of the subsidiary's net assets is
irrelevant for the goodwill calculation.
Question 3
When preparing a consolidated balance sheet, the parent company's investment in the subsidiary
account is:
A) Carried forward as an asset.
B) Eliminated against the subsidiary's equity accounts.
C) Netted against goodwill.
D) Reported as a long-term liability.
E) Subtracted from the parent's retained earnings.
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Correct Answer: B) Eliminated against the subsidiary's equity accounts.
Rationale: In the consolidation process, the parent's investment account represents its
ownership of the subsidiary's net assets. To avoid double-counting these assets, the
investment account is eliminated. This elimination entry involves crediting the Investment
in Subsidiary account and debiting the subsidiary's equity accounts (Common Stock,
APIC, and Retained Earnings) as of the beginning of the period.
Question 4
A noncontrolling interest (NCI) is reported on the consolidated balance sheet when:
A) The parent company acquires 100% of the subsidiary.
B) The parent company acquires less than 100% of the subsidiary.
C) The subsidiary reports a net loss for the year.
D) The parent company uses the equity method.
E) The parent company pays more than the book value for the subsidiary.
Correct Answer: B) The parent company acquires less than 100% of the subsidiary.
Rationale: A noncontrolling interest represents the portion of a subsidiary's equity that is
not owned by the parent company. It only arises when the parent acquires more than 50%
but less than 100% of the subsidiary's voting stock. The NCI is reported as a separate
component of equity on the consolidated balance sheet.
Question 5
P Company owns 80% of S Company. In 2024, S Company reported net income of $100,000 and
paid dividends of $20,000. What is the amount of net income attributable to the noncontrolling
interest?
A) $100,000
B) $80,000
C) $20,000
D) $16,000
E) $4,000
Correct Answer: C) $20,000
Rationale: The noncontrolling interest's share of the subsidiary's net income is calculated by
multiplying the subsidiary's net income by the NCI ownership percentage. In this case, the
NCI owns 20% (100% - 80%). The calculation is $100,000 (S Company's net income) *
20% = $20,000. Dividends paid do not affect the calculation of net income attributable to
NCI, but they do affect the NCI's equity balance.
Question 6
P Corp. sells inventory to its wholly-owned subsidiary, S Corp., at a profit. At year-end, some of
this inventory is still held by S Corp. What consolidation entry is required?
A) No entry is needed as they are separate legal entities.
B) An entry to increase the parent's sales revenue.
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C) An entry to eliminate the unrealized profit from the ending inventory.
D) An entry to recognize the full profit in the consolidated statements.
E) An entry to reduce the cost of goods sold by the full intercompany sales price.
Correct Answer: C) An entry to eliminate the unrealized profit from the ending inventory.
Rationale: From a consolidated perspective, a company cannot recognize a profit by selling
to itself. The profit on the intercompany sale is considered "unrealized" until the inventory
is sold to an outside, third-party entity. The consolidation workpaper entry must eliminate
this unrealized profit by debiting Sales (or Cost of Goods Sold) and crediting Ending
Inventory to restate the inventory to its original cost.
Question 7
Which of the following describes a "downstream" intercompany sale?
A) A subsidiary sells inventory to the parent company.
B) A subsidiary sells inventory to another subsidiary owned by the same parent.
C) The parent company sells inventory to its subsidiary.
D) The parent company sells inventory to an outside party.
E) An outside party sells inventory to the subsidiary.
Correct Answer: C) The parent company sells inventory to its subsidiary.
Rationale: The direction of an intercompany transaction is described relative to the parent
company. A "downstream" sale is one that flows down from the parent to the subsidiary.
An "upstream" sale (A) is one that flows up from the subsidiary to the parent.
Question 8
A parent company sells a depreciable asset to its 90%-owned subsidiary at a gain. When
preparing consolidated financial statements, the gain on the sale should be:
A) Fully recognized in the year of sale.
B) Recognized only to the extent of the noncontrolling interest's ownership (10%).
C) Deferred and recognized over the remaining useful life of the asset.
D) Ignored as it is an internal transaction.
E) Credited directly to consolidated retained earnings.
Correct Answer: C) Deferred and recognized over the remaining useful life of the asset.
Rationale: From a consolidated viewpoint, the asset has not been sold; it has merely been
transferred between affiliates. The gain is unrealized and must be eliminated. This gain is
then recognized piecemeal over the asset's remaining life through an adjustment to
depreciation expense. Each year, depreciation is reduced to reflect the asset's original cost
basis, which effectively recognizes a portion of the deferred gain.
Question 9
Under the Uniform Partnership Act, which of the following is NOT a characteristic of a general
partnership?
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A) The partners have unlimited liability.
B) The partnership is a separate legal entity from its owners.
C) The partnership has a limited life.
D) The partners have limited liability for partnership debts.
E) The partners are co-owners of the partnership property.
Correct Answer: D) The partners have limited liability for partnership debts.
Rationale: The defining characteristic of a general partnership is the unlimited liability of
its partners. Each partner is personally and individually liable for all of the partnership's
debts and obligations. Limited liability is a feature of corporations and limited
partnerships (for the limited partners), not general partnerships.
Question 10
A and B form a partnership. A contributes cash of $60,000, and B contributes land with a book
value of $40,000 and a fair market value of $70,000. At what amount should the land be recorded
on the partnership's books?
A) $40,000
B) $55,000
C) $60,000
D) $70,000
E) $0
Correct Answer: D) $70,000
Rationale: When a partnership is formed, all non-cash assets contributed by the partners
must be recorded at their current fair market value at the date of contribution. The
contributing partner's original book value is irrelevant to the partnership's accounting
records.
Question 11
Partners X and Y have a profit-sharing agreement that provides for salary allowances of $30,000
to X and $20,000 to Y, with the remainder allocated 60% to X and 40% to Y. If the partnership's
net income is $80,000, how much is allocated to X?
A) $30,000
B) $48,000
C) $50,000
D) $48,000
E) $48,000
Correct Answer: D) $48,000
Rationale: The allocation is done in steps. First, allocate the salaries: $30,000 to X and
$20,000 to Y, for a total of $50,000. The remaining income is $80,000 - $50,000 = $30,000.
This remainder is allocated based on the ratio: X gets 60% * $30,000 = $18,000. X's total
allocation is the salary plus the remainder: $30,000 + $18,000 = $48,000.
