Select the correct answer for each of the following questions.
1. Consolidated financial statements are typically prepared when one company has
a. Accounted for its investment in another company by the equity method.
b. Accounted for its investment in another company by the cost method.
c. Significant influence over the operating and financial policies of another company.
d. The controlling financial interest in another company.
2. Aaron Inc. owns 80 percent of the outstanding stock of Belle Inc. Compare the total consolidated net earnings of Aaron and Belle
(X) And Aaron’s operating earnings before considering the income from Belle
(Y). Assume that neither company incurs a net loss during the period.
a. X is more than Y.
b. X is equal to Y.
c. X is less than Y.
d. Cannot be determined.
3. On October 1, X Company acquired for cash all of Y Company’s outstanding common stock. Both companies have a December 31 year-end and have been in business for many years.
Consolidated net income for the year ended December 31 should include net income of
a. X Company for three months and Y Company for three months.
b. X Company for 12 months and Y Company for 3 months.
c. X Company for 12 months and Y Company for 12 months.
d. X Company for 12 months, but no income from Y Company until Y Company distributes a dividend.
4. Ownership of 51 percent of the outstanding voting stock of a company would usually result in
a. The use of the cost method.
b. The use of the lower-of-cost-or-market method.
c. The use of the equity method.
d. A consolidation.