ACCT 451 Advanced Financial Accounting TEST BANK NEW UPDATE SOLUTION Athabasca University

ACCT 451 Advanced Financial Accounting TEST
BANK NEW UPDATE SOLUTION Athabasca
University
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
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1) The purchase price of an entityincludes:
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A) the fair market value of the subsidiary's net assets.
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B) thefair market value of thesubsidiary's shareholders'equityand the purchaseprice
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1 1
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1




discrepancy. w1




C) thebook value of the subsidiary's shareholders' equityand goodwill.
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w w1




D) thebook value of the subsidiary's shareholders' equityand the acquisition differential.
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Answer: D w 1




2) Onthe date of acquisition, consolidated shareholders' equityunder proprietarytheoryis equal to:
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w w1 1
w 1
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A) thesum of the parent and subsidiary's shareholders' equities.
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B) thesum of theparent's shareholders'equityplus its pro rata share ofthesubsidiary's
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1 1
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1 w
1




shareholders' equity on the date of acquisition.
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C) thesubsidiary's shareholders'equity. w
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w




D) theparent's shareholders'equity. w
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1




Answer: D w 1




3) When preparingtheconsolidated balancesheet on the date of acquisition, the parent's investment (in
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subsidiary company) is:
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A) replaced with 100% of the assets and liabilities of the subsidiaryat book value. w1 w1 w1 w1 w1 w1 w1 w1 w1 w1 1
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B) replaced with theparent's pro rata share ofthe assets and liabilities of the subsidiaryat fair market w1 w1 w
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value. w1




C) replaced with 100% of the assets and liabilities of the subsidiaryat fair market value. w1 w1 w1 w1 w1 w1 w1 w1 w1 w1 1
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D) revaluedto fair market value. w1 w1 w1 w1




Answer: C w 1




4) When the parent forms a new subsidiary:
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A) there should be no acquisition differential. w1 w1 w1 w1 w1




B) it should not beincluded in thecompany's consolidatedfinancial statements as this would
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effectively be double-counting.
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C) push down accounting rules must be followed. w1 w1 w1 w1 w1 w1




D) gain or loss will usuallyarise. w1 w1 w1 w1 1
w




Answer: A w 1




5) Anynegative goodwill arising on the date of acquisition:
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A) is recognized as a loss on the date of acquisition.
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B) isprorated amongthe parent company's identifiable net assets.
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C) should be amortized over a predetermined period. w1 w1 w1 w1 w1 w1




1

, D) is recognized as a gain on the date of acquisition.
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Answer: D w 1




2

,6) A companyowning amajority(but less than 100%) of another company's votingshares on thedate of
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acquisition should account for its subsidiary (in its consolidated balance sheet):
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A) by including 100% of the fair market values of the subsidiary's net assets and accounting for any
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unownedportion of thesubsidiary's votingshares usingthe non-controllinginterest (NCI) account.
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B) byincluding 100% of the fair market values of the subsidiary's net assets.
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C) byincluding onlyits share of the book values of the subsidiary's net assets.
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D) byincluding onlyits share of the fair market values of the subsidiary's net assets.
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Answer: A w 1




7) HRN Enterprises Inc. purchases 80% of the outstanding voting shares of NHR Inc. on January 1, 2018.
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On that date,which ofthefollowingstatements pertainingto non-controllinginterest (NCI) is TRUE?
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A) HRN's non-controllinginterest (NCI) account will include20% ofthefair valueof NHR's net assets.
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B) HRN's non-controllinginterest (NCI) account will include 20% ofthe book value ofNHR's net assets.
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C) HRN'snon-controllinginterest (NCI) account will include20% of anyunallocatedportion of the
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acquisition differential on the date of acquisition.
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D) HRN's non-controllinginterest (NCI) account will include20% ofthe acquisition differential on
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1 w
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the date of acquisition.
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Answer: A w 1




8) Underthe ProprietaryTheory, non-controllinginterest (NCI) is:
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A) based on the book values of the subsidiary's net assets. Goodwill is established based on the
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Parent's acquisition cost.
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B) based on the fair market values of thesubsidiary's net assets. Goodwill is established basedon the
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Parent's acquisition cost.
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C) nonexistent. Goodwill is established based on the Parent's pro-rata share of anyacquisition w
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w




differential. w1




D) nonexistent. Goodwill is established based on the Parent's acquisition cost. w1 w1 w1 w1 w1 w1 w1 w1 w1




Answer: D w 1




9) Thecalculation of Goodwill and non-controllinginterest (NCI) under theEntityTheoryis derived :
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1 1
w 1
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A) byusingan imputed acquisition cost, which would be the presumed cost of acquiring100% of the
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outstanding voting shares of the subsidiary.
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B) byusingthe actual acquisition cost less anyuncontrolled portion of the subsidiary's net assets at fair
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market value. w1 w1




C) byusing the actual acquisition cost.
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D) byusingthe actual acquisition cost less anyuncontrolled portion of the subsidiary's net assets at
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book value. w1 w1




Answer: A w 1




3

, 10) One weakness associated with the EntityTheoryis that:
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A) non-controllinginterest (NCI) is computed usingthe book values of the subsidiary's net assets. 1
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B) thepresumed acquisition cost maybe unrealistic when theparent purchases significantlyless than
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100% of the subsidiary's voting shares, or voting control is achieved incrementally.
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C) non-controllinginterest (NCI) is computed usingthefair market values of thesubsidiary's net w
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assets. w1




D) it is inconsistent with the historical cost principle.
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Answer: B w 1




11) Underthe Parent CompanyTheory, which ofthe followingstatements pertainingto consolidated
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financial statements is TRUE?
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A) Theconsolidated balance sheet is prepared byaddingthe carryingamounts of both the Parent and its
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subsidiary.
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B) Theconsolidated balance sheet is prepared byaddingthe carryingamounts of both theParent and its
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subsidiary as well as the Parent's share of any acquisition differentials.
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C) Theconsolidated balance sheet is prepared byaddingtogether thefair market values of both the
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1 w1




parent and its subsidiary.
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D) Theconsolidated balance sheet is prepared byaddingthe fair market values of both theParent and its
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1 w1 w1




subsidiary as well as the parent's share of any acquisition differentials.
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Answer: B w 1




12) On the date of formation of a 100% owned subsidiarybythe parent, which of the following
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w 1
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statements pertaining to consolidated financial statements is TRUE?
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A) Consolidation requires theelimination oftheparent's investment account against the w1 w1 w
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subsidiary's share capital.
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B) It is possible to prepare consolidatedfinancial statements thatinclude all the assets and
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liabilities of the subsidiary.
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C) Consolidation will not be required since a new legal entitywill have been formed. w1 w1 w1 w1 w1 w1 w1 w1 w1 1
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D) Consolidated financial statements are difficult to prepare because the assets and liabilities of the w1 w1 w1 w1 w1 w1 w
1 w1 w1 w1 w1 w1 w1




subsidiary have yet to be determined.
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Answer: A w 1




13) Contingentconsideration should bevalued at: w1 w1 w1 w
1 w1




A) theacquirer's pro-rata share of the subsidiary's net assets at fair value at the date of acquisition.
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B) the fair value of the consideration on the date of acquisition.
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C) theacquirer's pro-rata shareofthesubsidiary's net assets at book valueat thedate of
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1 w
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1 w1




acquisition.
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D) the book value of the consideration at the date of acquisition.
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Answer: B w 1




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