Advanced Accounting Exam 2 (Questions)

When should a consolidated entry recognize a goodwill impairment loss?

when the fair value of the reporting unit with goodwill falls below its carrying value

Goodwill recognized in a business combination must be allocated across a firm’s identified reporting units. For a consolidated entity with multiple reporting units, when is goodwill considered to be impaired?

when any individual reporting unit’s carrying amount exceeds its fair value

When a particular asset acquired in a business combination has an acquisition-date book value in excess of its fair value, the asset's carrying amount from the subsidiary's financial records ______.

remains the same in consolidated financial statements as its current book value

Which of the following represent components of subsidiary income recognized when the parent applies the partial equity method?

the parent’s share of subsidiary’s reported income

When a particular asset acquired in a business combination which has a fair value in excess of its book value on acquisition - date, the asset's carrying amount from the subsidiary's financial records

must be increased in preparing consolidated financial statements.

A parent company controls a subsidiary company through ownership of 100% of the subsidiary's voting stock. How are cash dividends declared by the subsidiary on its voting stock treated in the parent's consolidated financial reports?

Not included having been eliminated in the consolidation process.

Why does Consolidation Entry S remove the subsidiary’s stockholders’ equity accounts?

subsidiary ownership accounts are not relevant, because consolidated statements are prepared for the parent company owners

In Consolidation Entry D, the credit to the Dividends Declared account

reduces the subsidiary’s dividends balance

Consolidation Entry E recognizes amortization expenses related to

the subsidiary's acquisition-date differences between fair and book values

Consolidation Entry A adjusts the subsidiary's assets to their unamortized acquisition-date fair value as of what date?

beginning of the current reporting period

Consolidation Entry D debits the "Investment in Subsidiary" account when

the parent employs the equity method in accounting for its investment and the subsidiary has declared a current period cash dividend

What effect does the parent's selection of the equity method vs. the initial value method have on consolidated financial statements?

no effect

Beyond recording the acquisition price, what periodic adjustments does the parent typically make to the investment account when the initial value method is employed?

no periodic adjustments are typically made

Consolidation Entry P

removes the balances from intra-entity receivables and payables

Consolidated totals include the unamortized subsidiary acquisition-date excess of fair over book value allocations.

True

Depending on the investment accounting method (equity, initial value, partial equity) chosen, which of the following accounts will vary on the parent’s financial records?

all of the above

When the acquisition-date fair value of subsidiary long-term debt exceeds its carrying amount, the difference serves to reduce interest expense over the life of the debt, similar to amortizing a bond

premium

When the parent applies the initial value method for its investment accounting, Consolidation Entry I is needed to

remove the balance in the parent’s Dividend Income and the subsidiary’s Dividends Declared

Consolidated income statements report goodwill impairment losses as

a component of operating income

Goodwill recognized in a business combination must be assigned to reporting units of the consolidated entity in order to

properly subject goodwill to impairment assessment

For goodwill testing purposes, operating units within a combined entity that report information about their earnings activities to upper management are designed as

reporting units

In accounting for goodwill impairment, the maximum amount of goodwill impairment to be recognized by a reporting unit is

the carrying amount of goodwill

Conducting goodwill impairment tests at the reporting unit level (rather than the combined entity level) helps capture goodwill impairment losses that may otherwise be offset by an increase in goodwill in another reporting unit.

True

The FASB is considering a requirement that all business entities adopt which type of model that would require companies to both amortize goodwill and subject goodwill to impairment testing either periodically and/or based on a triggering event?

amortization-with-impairment

Rather than “reporting units,” IFRS uses the terminology ________ units to describe the business components that form the basis for goodwill impairment testing.

cash-generating

In the quantitative goodwill impairment test, for each reporting unit

a comparison is made between the reporting unit’s carrying amount (including goodwill) and fair value

The level of maintenance expenditure required to obtain the asset’s expected future benefits is not a factor in determining the useful life of an intangible asset.

False

What is the primary difference between U.S. GAAP and IFRS in terms of goodwill impairment testing?

U.S. GAAP allows a qualitative assessment option, whereas IFRS does not

A parent agrees to issue additional shares of stock to the former owners of an acquired subsidiary if a contingency is met. The contingent stock issue is reported on the acquisition-date consolidated balance sheet as a component of

stockholders’ equity

Which of the following is not among the most prominent internal record-keeping methods for accounting for an investment in subsidiary?

net realizable value method

When a subsidiary’s acquisition-date fair values exceed its book values for it limited-lived assets, the equity method records over time

a reduction in Equity in Subsidiary Earnings for amortization expense

Which of the following is not a reason why it is necessary to remove the subsidiary’s income figure each period as part of a consolidation?

1. The subsidiary’s revenues and expenses can be separately included when creating an income statement for the combined business entity

2. It is necessary to remove the subsidiary’s income in order to avoid double counting

3. The subsidiary’s income no longer matters for reporting purposes

3 only

Under the initial value method of accounting for an investment in a subsidiary company, the parent recognizes income when the subsidiary

declares a dividend

The initial value method is said to reflect the ______ basis for income recognition.

cash

Subsequent to acquisition, consolidated depreciation expense is based upon

the acquisition-date fair values of the subsidiary’s depreciable assets

When a particular asset acquired in a business combination which has a fair value in excess of its book value on acquisition-date, the asset’s carrying amount from the subsidiary’s financial records

1. remains the same in consolidated financial statements as its current book value

2. must be reduced in preparing consolidated financial statements

3. must be increased in preparing consolidated financial statements

3 only

Which of the following is (are) a reason (reasons) why it is necessary to remove the subsidiary’s income figure each period as part of a consolidation?

1. it is necessary to remove the subsidiary’s income in order to avoid double counting

2. the subsidiary’s income no longer matters for reporting purposes

3. the subsidiary’s revenues and expenses can be separately included when creating an income statement for the combined business entity

1 and 3

Which of the following is not a characteristics of equity method of accounting for a parent company’s investment in a subsidiary company?

the parent records subsidiary dividends as increases to the investment account

Which of the following represent components of subsidiary income recognized when the parent applies the partial equity method?

the parent’s share of the subsidiary’s reported income