Chapter 4 - MATCHING

Match the terms in the list to the definitions below. Each term may be used only once.

A. Cost method F. Investment elimination K. Computation and

B. Partial equity method G. Reciprocity allocation schedule

C. Complete equity method H. No significant influence L. Consolidated retained

D. Intercompany revenue I. Significant influence earnings

E. Interim acquisition J. Effective control M. Investment in associates

_____ 1. An amount that reflects the consolidated entitys portion of Ss undistributed income since acquisition

_____ 2. The total of Ps retained earnings plus the portion of Ss retained earnings since acquisition

_____ 3. The technique where only Ps share of Ss declared dividends is recorded

_____ 4. The workpaper entry which offsets Ps asset account with Ss equity accounts

_____ 5. Income given by one affiliate in a business combination to another affiliate

_____ 6. One corporation has between 20 and 50 percent of the stock of another corporation

_____ 7. A technique to determine how to divide up the difference between implied and book value

_____ 8. A way of recording a business combination where Ps share of Ss income and dividends are recorded

_____ 9. One corporation owns less than 20 percent of another corporation

_____10. A technique of accounting for a combination where the effects of all intercompany transactions are reflected in Ps books

_____11. P buys a controlling interest in S at some time other than the end of Ss fiscal year

_____12. P owns more than 50 percent of Ss outstanding stock

_____13. IFRS term for equity method investments

Chapter 4 - MULTIPLE CHOICE QUESTIONS

Choose the BEST answer for the following questions.

_____ 1. If a corporation shows effective control over another corporation, the first corporation owns:

a. less than 20 percent of the second corporation.

b. between 20 and 50 percent of the second corporation.

c. over 50 percent of the second corporation.

d. 100 percent of the second corporation.

_____ 2. The cost method of accounting for a parent-subsidiary relationship records Ps share of Ss:

a. dividends as income for the year.

b. income whether dividends are paid or not.

c. dividends as a reduction of the investment account.

d. none of the above.

_____ 3. The primary difference between the partial equity and the complete equity methods of accounting for business combinations is:

a. under the complete equity method, the combination assumes that the two businesses have always been together.

b. under the complete equity method, the parent records amortization and/or depreciation to account for the difference between implied and book value.

c. under the partial equity method the parent records its share of dividends as income.

d. there is no difference between the partial equity and full equity methods.

_____ 4. What is the purpose of the consolidated statements workpaper?

a. The workpaper allows for year-end adjustments of accruals and deferrals.

b. The workpaper takes the balances from the consolidated ledger to prepare the consolidated financial statements.

c. The workpaper helps the accountant determine the amount of consolidated income taxes.

d. The workpaper accumulates, classifies, and arranges information from the trial balances of the affiliated companies.

_____ 5. What is the noncontrolling interest in Ss income?

a. The difference between Ps reported income and Ss reported income

b. The part of Ss income that is owned by shareholders other than P

c. The allocation of difference between implied and book value

d. The portion of Ss income that is not included in consolidated income

_____ 6. What is consolidated retained earnings?

a. Ps retained earnings plus Ss retained earnings.

b. Ps retained earnings only.

c. Ps retained earnings plus Ps share of the net increase in Ss retained earnings since acquisition.

d. Ps retained earnings plus Ps share of Ss net income for the current year less Ps share of Ss dividends declared.

_____ 7. Under the cost method, to establish reciprocity (convert to equity), Ps share:

a. of the difference between Ss retained earnings at the beginning and the end of the year must be added to Ps investment.

b. of the difference between Ss reported income and the noncontrolling interest income must be added to Ps investment.

c. of the difference between Ss retained earnings at the beginning of the year and at acquisition must be added to Ps investment.

d. of Ss dividends must be subtracted from Ps investment.

_____ 8. Under the equity methods, the elimination entry to establish reciprocity (convert to equity) between Ps investment and Ss equity:

a. will add Ps share of Ss undistributed income to Ps investment.

b. does not have to be made.

c. will have S record its noncontrolling interest in income.

d. will have S decrease its retained earnings to reflect income not distributed.

_____ 9. Why should intercompany revenues and expenses be eliminated?

a. Because the consolidated entity cannot earn from itself.

b. Because the consolidated entity cannot owe itself a debt.

c. Because the consolidated financial statements would include overstated amounts.

d. Both A and C.

_____10. What is meant by an interim acquisition of subsidiary stock?

a. P purchases a controlling interest in Ss equity at some time other than the end of the fiscal year.

b. P purchases Ss treasury stock.

c. P restates its income to include both pre-acquisition and post-acquisition earnings.

d. P divides its income into pre-acquisition and post-acquisition earnings.

_____11. Under the partial-year reporting alternative:

a. S generally closes its books at the date of acquisition.

b. P buys its share of Ss pre-acquisition earnings.

c. retained earnings eliminated are from the date of acquisition, not the beginning of the fiscal year.

d. all of the above.

_____12. The accounting for investments using the equity method under U.S. GAAP and using the investment in associates method under IFRS is the same for all the following issues except:

a. that P and S have uniform accounting policies.

b. Ps carrying value of Ss investment account.

c. definition of P having significant influence over S

d. allowance of 3-month reporting period difference between P and S

_____13. In a consolidated statements workpaper, which items are carried forward from one section to another?

a. Ps retained earnings, but not Ss

b. The total of the income section to the retained earnings section and then the total of the retained earnings section to the balance sheet section.

c. The eliminations must balance for each section in order to carry them forward.

d. Each section on the workpaper is separate, so no numbers are carried forward.