1
Test Bank – Advanced Accounting, All
Chapters Covered with Complete
Solutions Question and Answers Highly
Guarantee Pass
How do we account for Goodwill subsequent to the acquisition? <<Answer>> Goodwill
is reported on the consolidated balance sheet and remains on the balance sheet until
deemed impaired.
A parent company exchanges 28,000 shares of its $2 par value common stock, with a
fair value of $10/share, for all of the shares owned by the subsidiary's shareholders. On
the acquisition date, the subsidiary reported $56,000 of contributed capital (i.e.,
common stock) and $140,000 of Retained Earnings. An examination of the subsidiary's
balance sheet revealed that book values were equal to fair values for all assets except
for PPE (net), which has a book value of $98,000 and a fair value of $182,000.
a. Prepare the entry that the parent makes to record the investment.
b. Prepare the [E] and [A] consolidation entries. <<Answer>> A) equity
investment 280,000
common stock 56,000
APIC 224,000
B) elimination:
common stock 56,000
retained earnings 140,000
equity investment 196,000
acquisition:
PPE 84,000
equity investment 84,000
Several years ago, a parent company acquired all of the outstanding common stock of
its subsidiary for a purchase price of $345,000. On the acquisition date, this purchase
price was $80,500 more than the subsidiary's book value of Stockholders' Equity. The
AAP was entirely attributable to Goodwill. On the date of acquisition, the parent
company management believes that the goodwill only has a 10-year useful life. Since
the date of acquisition, the subsidiary has reported cumulative net income of $287,500
and paid $115,000 of dividends to its parent company.
Compute the balance of the Equity Investment account on the parent's pre-
consolidation balance sheet assuming that the Goodwill asset has not declined in value
subsequent to the date of acquisition. <<Answer>> 345,000 purchase price
,2
287,500 cumulative net income
(115,000) dividends
=517,500
10. An example of an intangible asset is:
a.
A patent
b.
Land
c.
Investment in another company
d.
Raw material inventory <<Answer>> A
13. The accrual basis of accounting recognizes:
a.
Revenue when cash is received from customers
b.
Expenses when paid
c.
Revenue when all or a substantial portion is performed
d.
Revenue when contracts are signed <<Answer>> C
16. A value chain for an industry sets forth:
a.
The layers of management the needed to be successful
b.
Sequence of activities involved in the creation, manufacture, and distribution of its
products.
c.
Sequence of activities involved in a firm's research and development activities.
d.
Whether the industry is horizontally or vertically integrated. <<Answer>> A
25. Which of the following activities is an operating activity?
a.
Collections of accounts receivable.
b.
Investing in equity securities of other companies.
c.
Payment of dividends.
d.
Issuing common stock <<Answer>> A
31. Which forces typically represent vertical competition in a value chain?
a.
,3
Potential entry and substitutes.
b.
Buyer power and rivalry among existing firms
c.
Supplier power and potential entry.
d.
Buyer power and supplier power <<Answer>> A
Which two organizations are working together to harmonize financial reporting
worldwide?
a.
FASB and IASB
b.
GAAP and FASB
c.
SEC and FASB
d.
EU and SEC <<Answer>> A
28. When a firm attempting to create unique products or services for particular market
niches, in order to achieve relatively high profit margins, this is best known as:
a.
A quality strategy
b.
A low-cost leadership strategy
c.
A vertical integration strategy
d.
A product differentiation strategy <<Answer>> A
22. Current assets are defined as:
a.
Cash and cash equivalents.
b.
All assets expected to be quickly used by the firm.
c.
Cash and other assets that the firm expects to sell or consume during the normal
operating cycle of a business, usually one year.
d.
Cash and other assets that the firm expects maintain for a period including the normal
operating cycle of a business, usually one year. <<Answer>> A
37. Opinions on the effectiveness of the internal control system and the fairness of the
amounts reported in the financial statements are known as:
a.
Management Discussion and Analysis.
, 4
b.
Assurance Opinions.
c.
Notes to the Financial Statements
d.
Management Assessments. <<Answer>> A
40. Which financial statement would you look at to determine whether a company will be
able to pay for the goods when payment is due in 30 days?
a.
Statement of cash flows.
b.
Test Bank – Advanced Accounting, All
Chapters Covered with Complete
Solutions Question and Answers Highly
Guarantee Pass
How do we account for Goodwill subsequent to the acquisition? <<Answer>> Goodwill
is reported on the consolidated balance sheet and remains on the balance sheet until
deemed impaired.
A parent company exchanges 28,000 shares of its $2 par value common stock, with a
fair value of $10/share, for all of the shares owned by the subsidiary's shareholders. On
the acquisition date, the subsidiary reported $56,000 of contributed capital (i.e.,
common stock) and $140,000 of Retained Earnings. An examination of the subsidiary's
balance sheet revealed that book values were equal to fair values for all assets except
for PPE (net), which has a book value of $98,000 and a fair value of $182,000.
a. Prepare the entry that the parent makes to record the investment.
b. Prepare the [E] and [A] consolidation entries. <<Answer>> A) equity
investment 280,000
common stock 56,000
APIC 224,000
B) elimination:
common stock 56,000
retained earnings 140,000
equity investment 196,000
acquisition:
PPE 84,000
equity investment 84,000
Several years ago, a parent company acquired all of the outstanding common stock of
its subsidiary for a purchase price of $345,000. On the acquisition date, this purchase
price was $80,500 more than the subsidiary's book value of Stockholders' Equity. The
AAP was entirely attributable to Goodwill. On the date of acquisition, the parent
company management believes that the goodwill only has a 10-year useful life. Since
the date of acquisition, the subsidiary has reported cumulative net income of $287,500
and paid $115,000 of dividends to its parent company.
Compute the balance of the Equity Investment account on the parent's pre-
consolidation balance sheet assuming that the Goodwill asset has not declined in value
subsequent to the date of acquisition. <<Answer>> 345,000 purchase price
,2
287,500 cumulative net income
(115,000) dividends
=517,500
10. An example of an intangible asset is:
a.
A patent
b.
Land
c.
Investment in another company
d.
Raw material inventory <<Answer>> A
13. The accrual basis of accounting recognizes:
a.
Revenue when cash is received from customers
b.
Expenses when paid
c.
Revenue when all or a substantial portion is performed
d.
Revenue when contracts are signed <<Answer>> C
16. A value chain for an industry sets forth:
a.
The layers of management the needed to be successful
b.
Sequence of activities involved in the creation, manufacture, and distribution of its
products.
c.
Sequence of activities involved in a firm's research and development activities.
d.
Whether the industry is horizontally or vertically integrated. <<Answer>> A
25. Which of the following activities is an operating activity?
a.
Collections of accounts receivable.
b.
Investing in equity securities of other companies.
c.
Payment of dividends.
d.
Issuing common stock <<Answer>> A
31. Which forces typically represent vertical competition in a value chain?
a.
,3
Potential entry and substitutes.
b.
Buyer power and rivalry among existing firms
c.
Supplier power and potential entry.
d.
Buyer power and supplier power <<Answer>> A
Which two organizations are working together to harmonize financial reporting
worldwide?
a.
FASB and IASB
b.
GAAP and FASB
c.
SEC and FASB
d.
EU and SEC <<Answer>> A
28. When a firm attempting to create unique products or services for particular market
niches, in order to achieve relatively high profit margins, this is best known as:
a.
A quality strategy
b.
A low-cost leadership strategy
c.
A vertical integration strategy
d.
A product differentiation strategy <<Answer>> A
22. Current assets are defined as:
a.
Cash and cash equivalents.
b.
All assets expected to be quickly used by the firm.
c.
Cash and other assets that the firm expects to sell or consume during the normal
operating cycle of a business, usually one year.
d.
Cash and other assets that the firm expects maintain for a period including the normal
operating cycle of a business, usually one year. <<Answer>> A
37. Opinions on the effectiveness of the internal control system and the fairness of the
amounts reported in the financial statements are known as:
a.
Management Discussion and Analysis.
, 4
b.
Assurance Opinions.
c.
Notes to the Financial Statements
d.
Management Assessments. <<Answer>> A
40. Which financial statement would you look at to determine whether a company will be
able to pay for the goods when payment is due in 30 days?
a.
Statement of cash flows.
b.
