Q.

On January 1, 2024, Riley Corporation acquired some of the outstanding bonds of

one of its subsidiaries. The bonds had a carrying value of $421,620, and Riley paid
$401,937 for them. How should you account for the difference between the carrying
value and the purchase price in the consolidated financial statements for 2024? Top of
Form
A.The difference is treated as a gain from the extinguishment of the debt.

Q. A company has been using the equity method to account for its investment. The
company sells shares and does not continue to have significant influence. Which of the
following statements is true?
A. A prospective change in accounting principle must occur.

Q. A necessary condition to use the equity method of reporting for an equity investment
is that the investor company must
A. have the ability to exercise significant influence over the operating and
financial policies of the investee.

Q. A variable interest entity can take all of the following forms except a(n)
A. estate

Q. According to GAAP, which of the following is true with respect to the pooling of
interest method of accounting for business combinations?
A. GAAP allowed its use prior to 2002.

Q. Acquired in-process research and development is considered as

A. an indefinite-lived asset subject to testing for impairment.

Q. After allocating cost in excess of book value, which asset or liability would not be
amortized over a useful life?
A. Goodwill

Q. All of the following are acceptable methods to account for a majority-owned

investment in subsidiary except
A. the fair value method

Q. All of the following are examples of variable interests except

A. stock options
Q. All of the following statements regarding the sale of subsidiary shares are true except
which of the following?
A. The use of specific LIFO assumption is acceptable

Q. An upstream sale of inventory is a sale:

A. made by the investee to the investor

Q. At the date of an acquisition which is not a bargain purchase, the acquisition method
A. Consolidates all subsidiary assets and liabilities at fair value.

Q. Daniels Incorporated acquired 85% of the outstanding common stock of Noyce

Corporation in 2024. Noyce currently owes Daniels $400,000 for inventory acquired
during 2025. In preparing consolidated financial statements for 2025, what amount of
Noyce’s liability should be eliminated?
A. $400,000 All intra-entity debt must be eliminated in preparing consolidated
financial statements $400,000

Q. Dunne Incorporated bought 65% of the outstanding common stock of Hardy

Incorporated in an acquisition that resulted in the recognition of goodwill. Hardy owned
a piece of land that cost $375,000 but was worth $700,000 at the date of acquisition.
What value would be attributed to this land in a consolidated balance sheet at the date
of acquisition?
A. $700,000

Q. During 2023, Odyssey Company sold inventory to its wholly-owned subsidiary, Civic
Company. The inventory cost $40,000 and was sold to Lord for $58,000. For
consolidation reporting purposes, when is the $18,000 intra-entity gross profit
recognized?
A. When goods are transferred to a third party by Civic

Q. For business combinations involving less than 100 percent ownership, the acquirer
recognizes and measures all of the following at the acquisition date except
A. liabilities assumed, at book value

Q. How are direct and indirect costs accounted for when applying the acquisition
method for a business combination?
A. Direct costs expensed; indirect costs expensed
Q. How do intra-entity transfers of inventory affect the preparation of a consolidated
statement of cash flows?
A. Because the consolidated balance sheet and income statement are used in
preparing the consolidated statement of cash flows, no special elimination is
required.

Q. How do outstanding subsidiary stock warrants affect the calculation of consolidated

earnings per share?
A. They will only be included in diluted earnings per share if they are dilutive.

Q. How is the fair value allocation of an intangible asset allocated to expense when the
asset has no legal, regulatory, contractual, competitive, economic, or other factors that
limit its life?
A. No amortization, but annually reviewed for impairment and adjusted
accordingly.

Q. How should a permanent loss in value of an investment using the equity method be
treated?
A. A loss is reported in the same manner as a loss in value of other long-term
assets.

Q. How would consolidated earnings per share be calculated if the subsidiary has no
convertible securities or warrants?
A. Consolidated net income divided by parent's number of shares outstanding.

Q. If a subsidiary issues a stock dividend, which of the following statements is true?

A. No adjustment is necessary.

Q. If new bonds are issued from a parent to its subsidiary, which of the following
statements is false?
A. A net gain or loss on the bond transaction will be reported.

Q. In a situation where the investor exercises significant influence over the investee,
which of the following entries is not actually posted to the books of the investor? I. Debit
to the Investment account, and a Credit to the Equity in Investee Income account. II
Debit to Cash (for dividends received from the investee), and a Credit to Investment
Income account. III Debit to Cash (for dividends received from the investee), and a
Credit to the Dividend Receivable.
A. Entry II only.
Q. In a step acquisition, which of the following statements is false?
A. Income from subsidiary is computed for the entire year for a new purchase
acquired during the year.

Q. In comparing U.S. GAAP and International Financial Reporting Standards (IFRS)

with regard to a basis for measurement of a noncontrolling interest, which of the
following is true?
A. U.S. GAAP requires acquisition-date fair value measurement, but IFRS allows
an option for acquisition-date fair value measurement.

Q. In measuring the noncontrolling interest immediately following the date of acquisition,

which of the following would not be indicative of the value attributed to the
noncontrolling interest?
A. Book value of subsidiary net assets.

Q. In reporting consolidated earnings per share when there is a wholly owned

subsidiary, which of the following statements is true?
A. Parent company earnings per share equals consolidated earnings per share
when the equity method is used.

Q. Jax Company used the acquisition method when it acquired its investment in Saxton
Company. Jax now sells some of its shares of Saxton such that neither control nor
significant influence exists. Which of the following statements is true?
A. The difference between selling price and carrying value is recorded as a
realized gain or loss.

Q. Lisa Company paid cash for all of the voting common stock of Victoria Corporation.
Victoria will continue to exist as a separate corporation. Entries for the consolidation of
Lisa and Victoria would be recorded in
A. A worksheet.

Q. Macklin Company owned 70% of Holland Corporation. During 2024, Macklin sold to
Holland land with a book value of $51,000. The selling price was $75,000. For purposes
of the December 31, 2024, consolidated financial statements, at what amount should
the land be reported?
A. $51,000
Q. McGuire Company acquired 90 percent of Hogan Company on January 1, 2022, for
$234,000 cash. This amount is reflective of Hogan’s total acquisition-date fair value.
Hogan's stockholders' equity consisted of common stock of $160,000 and retained
earnings of $80,000. An analysis of Hogan's net assets revealed the following:
A. $3,000 increase -nFair Value Differential ($18,000 − $14,000) $4,000 – 2022
Amortization of $1,000 = $3,000 Increase Excess amortization = $4,000 ÷ 4 years =
$1,000 per year

Q. On January 1, 2022, Dermot Company purchased 15% of the voting common stock
of Horne Corporation. On January 1, 2024, Dermot purchased 28% of Horne’s voting
common stock. If Dermot achieves significant influence with this new investment, how
must Dermot account for the change to the equity method?
A. It must use the equity method for 2024 but should make no changes in its
financial statements for 2023 and 2022.

Q. On January 1, 2024, Halpert Incorporated acquired 30% of Schrute Corporation.

Halpert used the equity method to account for the investment. On January 1, 2025,
Halpert sold two-thirds of its investment in Schrute. It no longer had the ability to
exercise significant influence over the operations of Schrute. How should Halpert
account for this change?
A. Halpert should use the fair-value method for 2025 and future years, but should
not make a retrospective adjustment to the investment account.

Q. On October 6, 2024, Ronan Corporation sold land to Bane Company, its wholly
owned subsidiary. The land cost $72,400 and was sold to Bane for $96,000. For
consolidated financial statement reporting purposes, when must the gain on the sale of
the land be recognized?
A. When Bane sells the land to a third party

Q. Parent sold land to its subsidiary resulting in a gain in 2022, the year of transfer. The
subsidiary sold the land to an unrelated third party for a gain in 2025. Which of the
following statements is true?
A. A gain will be recognized in the consolidated income statement in 2025.

Q. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2022.
Demers reported common stock of $300,000 and retained earnings of $210,000 on that
date. Equipment was undervalued by $30,000 and buildings were undervalued by
$40,000, each having a 10-year remaining life. Any excess consideration transferred
over fair value was attributed to goodwill with an indefinite life. Based on an annual
review, goodwill has not been impaired.
Demers earns income and pays dividends as follows:
2022 2023 2024
Net income $ 100,000 $ 120,000 $ 130,000
Dividends 40,000 50,000 60,000
Assume the equity/ initial/ partial method is applied.
What is the consolidated balance of the Equity in Demers Earnings account at
December 31, 2024.
A. EQUITY METHOD - $0; INITIAL VALUE METHOD - $500,000; PARTIAL EQUITY
METHOD - $0

Q. Private companies, with respect to goodwill:

A. May treat goodwill as a definite lived intangible asset with a 10-year useful life.

Q. Regency Corporation recently acquired $500,000 of the bonds of Safire Company,

one of its subsidiaries, paying more than the carrying value of the bonds. According to
the most practical view of this intra-entity transaction, to whom should the loss be
attributed?
A. To Regency because Regency is the controlling party in the business
combination.

Q. The accounting problems encountered in consolidated intra-entity debt transactions

when the debt is acquired by an affiliate from an outside party include all of the following
except:
A. A gain or loss must be recognized by both parent and subsidiary companies.

Q. Town Company appropriately uses the equity method to account for its investment in
Country Corporation. As of the end of 2024, Country’s common stock had suffered a
significant decline in fair value, which is expected to recover over the next several
months. How should Town account for the decline in value?
A. No accounting because the decline in fair value is temporary.

Q. Under the initial value method, the parent recognizes income when
A. dividends are declared by the investee.

Q. Under the partial equity method, the parent recognizes income when
A. it is earned by the subsidiary.
Q. What is the consolidated balance of the Investment in Demers account at December
31, 2024.
A. $0 The balance reported by the parent is eliminated through the consolidation
process.

Q. What would differ between a statement of cash flows for a consolidated company
and an unconsolidated company using the indirect method?
A. Noncontrolling interest in the net income of subsidiary would be added to net
income.

Q. When a parent uses the acquisition method for business combinations and sells
shares of its subsidiary, which of the following statements is false?
A. If majority control is not maintained but significant influence exists, the equity
method is still used to account for the investment and consolidated financial
statements are still required.

Q. When a parent uses the initial value method throughout the year to account for its
80% investment in an acquired subsidiary, which of the following statements is true at
the date immediately preceding the date on which adjustments are made on the
consolidated worksheet?
A. Parent company dividends equal consolidated dividends.

Q. When a parent uses the partial equity method throughout the year to account for its
80% investment in an acquired subsidiary, which of the following statements is true at
the date immediately preceding the date on which adjustments are made on the
consolidated worksheet?
A. Parent company dividends equal consolidated dividends.

Q. When a subsidiary is acquired sometime after the first day of the fiscal year, which of
the following statements is true?
A. Income from subsidiary is recognized from date of acquisition to year-end.

Q. When applying the equity method, how is the excess of cost over book value
calculated and accounted for?
A. The excess is allocated to the difference between fair value and book value
multiplied by the percent ownership of net assets.
Q. When applying the equity method, how is the excess of cost over book value
calculated and accounted for?
A. The excess is allocated to the difference between fair value and book value
multiplied by the percent ownership of net assets.

Q. When consolidating parent and subsidiary financial statements, which of the

following statements is true?
A. The value of any goodwill should be tested annually for impairment in value.

Q. When Valley Company acquired 80% of the common stock of Coleman Corporation,
Coleman owned land with a book value of $75,000 and a fair value of $125,000. What
amount should have been reported for the land in a consolidated balance sheet at the
acquisition date?
A. $125,000

Q. Where do dividends paid by a subsidiary to the parent company appear in a

consolidated statement of cash flows?
A. They do not appear in the consolidated statement of cash flows.

Q. Where do dividends paid to the noncontrolling interest of a subsidiary appear on a

consolidated statement of cash flows?
A. cash flows from financing activities

Q. Where do intra-entity transfers of inventory appear in a consolidated statement of

cash flows?
A. They do not appear in the consolidated statement of cash flows.

Q. Which of the following characteristics is not indicative of an enterprise qualifying as a

primary beneficiary with a controlling financial interest in a variable interest entity?
A. No ability to make decisions about the entity's activities

Q. Which of the following internal record-keeping methods can a parent choose to

account for a subsidiary acquired in a business combination?
A. Initial value, equity, or partial equity

Q. Which of the following is not a factor that indicates a business enterprise that
establishes a Variable Interest Entity should consolidate such Variable Interest Entity
with its own financial statements?
A. The business enterprise establishing a Variable Interest Entity receives risks
and rewards of the Variable Interest Entity in proportion to equity ownership.
Q. Which of the following is not a factor to be considered when determining the useful
life of an intangible asset?
A. The fair value of the asset.

Q. Which of the following is not a potential loss or return of a variable interest entity?
A. Entitles holder to receive shares of common stock.

Q. Which of the following methods is not used to value a noncontrolling interest under
circumstances where a control premium is applied to determine the appropriate value
for such interest?
A. The application of a safe harbor discount rate.

Q. Which of the following results in a decrease in the investment account when applying
the equity method?
A. Share of gross profit on intra-entity inventory sales for the current year.

Q. Which of the following results in an increase in the Equity in Investee Income

account when applying the equity method?
A. Investor’s share of gross profit from intra-entity inventory sales for the prior
year.

Q. Which of the following results in an increase in the investment account when

applying the equity method?
A. Investor’s share of gross profit from intra-entity inventory sales for the prior
year.

Q. Which of the following statements is false concerning Variable Interest Entities?

A. A Variable Interest Entity cannot take the legal form of a partnership or
corporation.

Q. Which of the following statements is false regarding multiple acquisitions of a

subsidiary's existing common stock?
A. The book value of the subsidiary will increase.

Q. Which of the following statements is false regarding the assignment of a gain or loss
when an affiliate’s debt instrument is acquired on the open market?
A. Consolidated net income is not affected by a gain or loss on the debt
transaction.
Q. Which of the following statements is true concerning an intra-entity transfer of a
depreciable asset?
A. Net income attributable to the noncontrolling interest is affected only when the
transfer is upstream.

Q. Which of the following statements is true concerning the acquisition of existing debt
of a consolidated affiliate in the year of the debt acquisition?
A. Any gain or loss is recognized in the year of acquisition on a consolidated
income statement.

Q. Which of the following statements is true for a consolidated statement of cash flows?
A. All of parent's dividends and noncontrolling interest of subsidiary's dividends
are deducted as a financing activity.

Q. Which of the following statements is true regarding a statutory merger?

A. The acquired company dissolves as a separate corporation and becomes a
division of the acquiring company.

Q. Which of the following statements is true regarding an intra-entity transfer of land?

A. A loss and a gain are deferred until the land is sold to an outside party.

Q.Which of the following statements is true regarding the sale of subsidiary shares
when using the acquisition method for accounting for business combinations?
A. If control continues, the difference between selling price and carrying value is
recorded as an adjustment to additional paid-in capital.

Q. Which of the following statements regarding consolidation of a Variable Interest

Entity with its primary beneficiary is true?
A. The allocation of the Variable Interest Entity’s net income is based on an
analysis of the underlying contractual arrangements between the primary
beneficiary and other holders of variable interests.

Q. Which of the following variable interests entitles a holder to residual profits, losses,
and dividends?
A. Common stock

Q. Which statement is true concerning unrecognized profits in intra-entity inventory

sales when an investor uses the equity method?
A. The same adjustments are made for upstream and downstream sales.
Q. Which statement is true concerning unrecognized profits in intra-entity inventory
sales when an investor uses the equity method?
A. The investor must defer downstream ending inventory profits.

Q. Wilson owned equipment with an estimated life of 10 years when the equipment was
acquired for an original cost of $80,000. The equipment had a book value of $50,000 at
January 1, 2023. On January 1, 2023, Wilson realized that the useful life of the
equipment was longer than originally anticipated, at ten remaining years. On April 1,
2023, Simon Company, a 90% owned subsidiary of Wilson Company, bought the
equipment from Wilson for $68,250 and for depreciation purposes used the estimated
remaining life as of that date.
A. $2,000 Amortization of Gain on Transfer of Equipment = $19,500 Gain ÷ 9 years
9 months Remaining Useful Life = $2,000 per year × 12 months of 2025 = $2,000
Depreciation Adjustment for 2025

Q. With respect to recognizing and measuring the fair value of a business combination
in accordance with the acquisition method of accounting, which of the following should
the acquirer consider when determining fair value?
A. The consideration transferred by the acquirer and the fair value of assets
received less liabilities assumed.