Mastering Advanced Accounting
Exam 3: Essential Q&A with Detailed
Rationales on Consolidations, Foreign
Currency, and Segment Reporting
Question 1
ABC Corporation acquired XYZ Company and took over its assets while
dissolving XYZ Company. This type of business combination is considered
as a:
A) Consolidation
B) Merger
C) Pooling of interests
D) Subsidiary
Answer: B) Merger
Rationale: A merger (also called a statutory merger) occurs when one
company acquires another and the acquired company is dissolved. The
acquiring company absorbs the acquired company's assets and liabilities. In
a consolidation, a new entity is formed and both companies dissolve. A
subsidiary relationship means the acquired company continues as a
separate legal entity.
Question 2
In a business combination, the direct costs paid to accountants and lawyers
to negotiate and complete the acquisition are:
,A) Charged against additional paid-in capital of the combined entity
B) Added to the investor company's investment account
C) Deducted from investor company's income in the period of combination
D) None of these
Answer: C) Deducted from investor company's income in the period of
combination
Rationale: Under both IFRS and US GAAP, direct acquisition costs
(professional fees, legal fees, accounting fees) are expensed as incurred.
They are not capitalized as part of the acquisition cost. This differs from the
previous accounting treatment where such costs were added to the
investment account.
Question 3
Pop Corporation agrees to issue additional shares of capital stock to its
acquired entity, Son Corporation, on the condition that Son Corporation
meets a certain earnings goal in the future. This contingency is:
A) Classified as contingent liability
B) Measured at its fair value on each reporting date until resolved
C) Not remeasured
D) None of these
Answer: B) Measured at its fair value on each reporting date until
resolved
Rationale: Contingent consideration in a business combination is
recognized at fair value on the acquisition date and remeasured to fair
value at each reporting date until the contingency is resolved. Changes in
fair value are recognized in profit or loss unless the contingency is classified
as equity.
,Question 4
In a business combination, the excess of the price paid over the fair value of
net assets acquired is:
A) Reported as a gain from a bargain purchase
B) Subject to annual impairment tests
C) Amortized according to its useful life
D) None of these
Answer: B) Subject to annual impairment tests
Rationale: Goodwill (the excess of consideration transferred over fair value
of identifiable net assets acquired) is not amortized but is tested for
impairment annually or more frequently if impairment indicators exist. A
bargain purchase (where fair value exceeds consideration) results in a gain
recognized in income.
Question 5
Noncontrolling interest (NCI), appearing in the consolidated balance sheet,
refers to:
A) Owners of less than 50% of the parent company's stock
B) Parent's interest in subsidiary companies
C) Interest expense on subsidiary's bonds payable
D) Equity in the subsidiary's net assets held by shareholders other than the
parent
Answer: D) Equity in the subsidiary's net assets held by shareholders
other than the parent
Rationale: Noncontrolling interest represents the portion of equity in a
subsidiary not attributable, directly or indirectly, to the parent. It is
presented in equity, separately from the parent shareholders' equity.
, Question 6
The noncontrolling interest (NCI) share that appears in the consolidated
income statement is computed as follows:
A) Consolidated net income is multiplied by the NCI percentage
B) The subsidiary's income less amortization of fair/book value differentials
is multiplied by the NCI percentage
C) Subsidiary net income is subtracted from consolidated net income
D) Subsidiary income determined for consolidated statement purposes is
multiplied by the NCI percentage
Answer: D) Subsidiary income determined for consolidated statement
purposes is multiplied by the NCI percentage
Rationale: NCI in consolidated income is calculated by taking the
subsidiary's adjusted income (after fair value adjustments and amortization
of differentials) and multiplying it by the NCI ownership percentage. This
amount is then deducted from consolidated net income to arrive at income
attributable to the parent's shareholders.
Question 7
The retained earnings appearing on the consolidated financial statements
of a parent company and its 70% owned subsidiary are:
A) Parent company's retained earnings plus 100% of the subsidiary's
retained earnings
B) Parent company's retained earnings plus 70% of the subsidiary's retained
earnings
C) Parent company's retained earnings
D) Pooled retained earnings
Answer: C) Parent company's retained earnings
Exam 3: Essential Q&A with Detailed
Rationales on Consolidations, Foreign
Currency, and Segment Reporting
Question 1
ABC Corporation acquired XYZ Company and took over its assets while
dissolving XYZ Company. This type of business combination is considered
as a:
A) Consolidation
B) Merger
C) Pooling of interests
D) Subsidiary
Answer: B) Merger
Rationale: A merger (also called a statutory merger) occurs when one
company acquires another and the acquired company is dissolved. The
acquiring company absorbs the acquired company's assets and liabilities. In
a consolidation, a new entity is formed and both companies dissolve. A
subsidiary relationship means the acquired company continues as a
separate legal entity.
Question 2
In a business combination, the direct costs paid to accountants and lawyers
to negotiate and complete the acquisition are:
,A) Charged against additional paid-in capital of the combined entity
B) Added to the investor company's investment account
C) Deducted from investor company's income in the period of combination
D) None of these
Answer: C) Deducted from investor company's income in the period of
combination
Rationale: Under both IFRS and US GAAP, direct acquisition costs
(professional fees, legal fees, accounting fees) are expensed as incurred.
They are not capitalized as part of the acquisition cost. This differs from the
previous accounting treatment where such costs were added to the
investment account.
Question 3
Pop Corporation agrees to issue additional shares of capital stock to its
acquired entity, Son Corporation, on the condition that Son Corporation
meets a certain earnings goal in the future. This contingency is:
A) Classified as contingent liability
B) Measured at its fair value on each reporting date until resolved
C) Not remeasured
D) None of these
Answer: B) Measured at its fair value on each reporting date until
resolved
Rationale: Contingent consideration in a business combination is
recognized at fair value on the acquisition date and remeasured to fair
value at each reporting date until the contingency is resolved. Changes in
fair value are recognized in profit or loss unless the contingency is classified
as equity.
,Question 4
In a business combination, the excess of the price paid over the fair value of
net assets acquired is:
A) Reported as a gain from a bargain purchase
B) Subject to annual impairment tests
C) Amortized according to its useful life
D) None of these
Answer: B) Subject to annual impairment tests
Rationale: Goodwill (the excess of consideration transferred over fair value
of identifiable net assets acquired) is not amortized but is tested for
impairment annually or more frequently if impairment indicators exist. A
bargain purchase (where fair value exceeds consideration) results in a gain
recognized in income.
Question 5
Noncontrolling interest (NCI), appearing in the consolidated balance sheet,
refers to:
A) Owners of less than 50% of the parent company's stock
B) Parent's interest in subsidiary companies
C) Interest expense on subsidiary's bonds payable
D) Equity in the subsidiary's net assets held by shareholders other than the
parent
Answer: D) Equity in the subsidiary's net assets held by shareholders
other than the parent
Rationale: Noncontrolling interest represents the portion of equity in a
subsidiary not attributable, directly or indirectly, to the parent. It is
presented in equity, separately from the parent shareholders' equity.
, Question 6
The noncontrolling interest (NCI) share that appears in the consolidated
income statement is computed as follows:
A) Consolidated net income is multiplied by the NCI percentage
B) The subsidiary's income less amortization of fair/book value differentials
is multiplied by the NCI percentage
C) Subsidiary net income is subtracted from consolidated net income
D) Subsidiary income determined for consolidated statement purposes is
multiplied by the NCI percentage
Answer: D) Subsidiary income determined for consolidated statement
purposes is multiplied by the NCI percentage
Rationale: NCI in consolidated income is calculated by taking the
subsidiary's adjusted income (after fair value adjustments and amortization
of differentials) and multiplying it by the NCI ownership percentage. This
amount is then deducted from consolidated net income to arrive at income
attributable to the parent's shareholders.
Question 7
The retained earnings appearing on the consolidated financial statements
of a parent company and its 70% owned subsidiary are:
A) Parent company's retained earnings plus 100% of the subsidiary's
retained earnings
B) Parent company's retained earnings plus 70% of the subsidiary's retained
earnings
C) Parent company's retained earnings
D) Pooled retained earnings
Answer: C) Parent company's retained earnings
