The cost method: a. allows for the option to record an investment in the event of an impairment. b. requires an investment to be reduced by liquidating dividends. c. can

The cost method:
a.
allows for the option to record an investment in the event of an impairment.
b.
requires an investment to be reduced by liquidating dividends.
c.
can be used for internal and external reporting purposes.
d.
reports dividend income on a cash basis.
Hutton Ltd. owns 75 percent of the voting shares of Malcolm Ltd. Malcolm has not been performing well, and a trustee in bankruptcy has just seized its assets. Which of the following statements it TRUE?
a.
Malcom’s performance has no impact on Hutton.
b.
Hutton no longer has control over Malcolm.
c.
Hutton is required to present consolidated financial statements.
d.
The bankruptcy event does not affect Hutton’s reporting of its investment in Malcolm.
Which of the following is NOT included in cost of an acquisition?
a.
the cost of issuing shares to the acquiree
b.
the value of contingent consideration
c.
the present value of promises by the acquirer to pay cash in the future
d.
the fair value of shares issued to the acquiree
For consolidation purposes, the allocation of an acquisition differential amongst the net assets should
a.
be recorded in the acquiree’s consolidated general ledger.
b.
be recorded in the acquiree’s general ledger.
c.
be recorded in the acquirer’s general ledger.
d.
not be recorded in either the acquirer or the acquiree’s general ledger.
Laulder Ltd. acquired 100 percent of Koco Co. on July 1, 20X1. Laulder’s consolidated statement of income for the year ended December 31, 20X1 should include
a.
Laulder’s income and expenses for all of 20X1 and Koco’s income and expenses for the second half of 20X1.
b.
only Laulder’s income and expenses for all of 20X1.
c.
both Laulder and Koco’s income and expenses for only the second half of 20X1.
d.
both Laulder and Koco’s income and expenses for all of 20X1.
Under ASPE, a parent
a.
must report an investment in a subsidiary at fair value.
b.
must report an investment in a subsidiary using the cost method or the equity method.
c.
must consolidate its investment in a subsidiary.
d.
can choose to report an investment in a subsidiary using the cost method, equity method, fair value, or consolidation.
A company acquired 100 percent of the common shares of a subsidiary for a price below market value. Which of the following statements is TRUE?
a.
The parent should recognize a gain on the purchase of shares.
b.
The subsidiary should recognize a gain on the sale of shares.
c.
The parent should recognize a loss on the purchase of shares.
d.
The subsidiary should recognize a loss on the sale of shares.
The fair value enterprise (FVE) and the identifiable net assets (INA) methods have different effects on the consolidated financial statements. Which of the following statements is TRUE?
a.
Consolidated current assets and current liabilities are usually the same under both methods.
b.
Consolidated NCI is usually the same under both methods.
c.
Consolidated goodwill is usually the same under both methods.
d.
Consolidated noncurrent assets and noncurrent liabilities are usually different under FVE and INA.
For internal reporting purposes, Percy Ltd. uses the cost method to account for its 75 percent ownership in the common shares of Knox Co. Which of the following statements is TRUE?
a.
The balance of Percy’s “Investment in Knox” account would have been the same if Percy had used the equity method.
b.
Percy is required to convert to the equity method for income tax purposes.
c.
Percy’s consolidated net income will be the same under both the cost method and the equity method.
d.
Percy is required to convert to the equity method for external reporting purposes.
Nav Ltd. acquired 80 percent of Dorit Co. There was an acquisition differential relating to land. This differential
a.
should be de-recognized on Nav’s consolidated financial statements when the land is sold.
b.
should be de-recognized on Dorit’s financial statements when the land is sold.
c.
should be amortized on the consolidated financial statements.
d.
can only be removed if there is an impairment to the land.
Kam Co. acquired 100 percent of Yoon Ltd. At the acquisition date, goodwill of $200,000 was recognized. In the current year, the carrying value of the cash-generating unit is $1,900,000 and its recoverable amount is $1,680,000. Which of the following statements is TRUE?
a.
$200,000 of the impairment should be applied to goodwill and $20,000 should be applied first to assets with indefinite useful lives and then to assets with definite lives.
b.
The impairment is capped at $200,000 to reduce the goodwill to zero.
c.
$200,000 of the impairment should be applied to goodwill and $20,000 should be allocated on a pro-rata basis to the other assets.
d.
There is no impairment.
Impairment losses to goodwill cannot be reversed because increases to the recoverable amount
a.
are likely due to internally generated goodwill.
b.
are likely due to external factors.
c.
are likely less than the value in use amount.
d.
violate the conservatism principle under GAAP.
A parent company uses the cost method for internal reporting purposes. Which of the following is NOT a component in calculating its consolidated retained earnings for the current year?
a.
the parent company’s retained earnings
b.
the subsidiary company’s change in retained earnings for the year
c.
changes in the acquisition differentials to the end of the previous year
d.
changes in acquisition differentials in the current year
A few years ago, Posey Ltd. acquired 85 percent of the common shares of Suba Co. In February 20X0, Suba purchased goods for $20,000, and in April 20X0, sold them to Posey for $25,000. Suba’s usual gross margin is 30 percent, but it gave Posey a discount. In July 20X0, Posey sold 60 percent of those goods to one of its customers for $21,000. The rest of the goods remain unsold at the end of the year. Both Posey and Suba have income tax rates of 40 percent.
To calculate the sales for the consolidated income statement, add together the sales from Posey and Suba’s separate-entity income statements and make an adjustment of
a.
$0.
b.
$20,000.
c.
$21,000.
d.
$25,000.
A few years ago, Posey Ltd. acquired 85 percent of the common shares of Suba Co. In February 20X0, Suba purchased goods for $20,000, and in April 20X0, sold them to Posey for $25,000. Suba’s usual gross margin is 30 percent, but it gave Posey a discount. In July 20X0, Posey sold 60 percent of those goods to one of its customers for $21,000. The rest of the goods remain unsold at the end of the year. Both Posey and Suba have income tax rates of 40 percent.
To calculate the income tax expense for the consolidated income statement, add together the income tax expense from Posey and Suba’s separate-entity income statements and reduce by a net adjustment of
a.
$0.
b.
$800.
c.
$1,200.
d.
$4,000.
A few years ago, Posey Ltd. acquired 85 percent of the common shares of Suba Co. In February 20X0, Suba purchased goods for $20,000, and in April 20X0, sold them to Posey for $25,000. Suba’s usual gross margin is 30 percent, but it gave Posey a discount. In July 20X0, Posey sold 60 percent of those goods to one of its customers for $21,000. The rest of the goods remain unsold at the end of the year. Both Posey and Suba have income tax rates of 40 percent.
a.
$1,200.
b.
$1,800.
c.
$2,000.
d.
$3,000.
Which of the following statements about the separate-entity financial statements for a parent company using the cost method is TRUE?
a.
A parent company reflects only unrealized profits on downstream transactions.
b.
A parent company may reflect unrealized profits on upstream and downstream transactions, depending on their nature.
c.
A parent company does not reflect unrealized profits on upstream and downstream transactions.
d.
A parent company reflects only unrealized profits on upstream transactions.
Ivy Ltd. owns 80 percent of Vine Ltd. During the year, there was a downstream transaction involving the sale of used equipment. There was a gain on the sale, and taxes were paid on the gain. Adjustments and eliminations made to prepare the consolidated financial statements with respect to this transaction will not affect consolidated net income,
a.
but will affect the consolidated net income attributable to the parent’s shareholders and the consolidated net income attributable to the NCI.
b.
or the consolidated net income attributable to the parent’s shareholders, but will affect the consolidated net income attributable to the NCI.
c.
or the consolidated net income attributable to the NCI, but will affect the consolidated net income attributable to the parent’s shareholders.
d.
consolidated net income attributable to the parent’s shareholders, or the consolidated net income attributable to the NCI.
The pricing of intercompany transfers is important because
a.
a parent company can potentially manipulate its subsidiaries’ transactions to transfer profits to different tax jurisdictions.
b.
inappropriately priced transactions by the subsidiaries will lead to misleading consolidated balance sheets.
c.
inappropriately priced transactions by both the parent and the subsidiaries will lead to misleading consolidated balance sheets.
d.
inappropriately priced transactions by the subsidiaries will lead to misleading consolidated income statements.

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