425 Exam Investment

1. After allocating cost in excess of book calue, which asset or liabilty would not be amortized over a useful life?

COGS

Prop,plant,equip

Goodwill

Bonds payable

2. Sisk company has owned 10 percent of maust inc for the past several years. this ownership did not allow sisk to have sig inf over maust. recently sisk aquired an addititonal 30 percent of muast and now will use the equity method. how will the investor report the change

A cumulative effect of an accounting change is shown in current inc statement

No change is recorded

A retrospective adjustment is made to restate all prior yeras presented using equity method

Sisk will report the change as a component of accum other comp income

3. When should a consolidated entity recognize a goodwill impairment loss?

If both the fair value of a reporting unit and its associtaed implied goodwill fall below their repestive carrying amoutns

Whenever the entitys fair value declines significantly

If a reporting units fair value falls below its original acquisition price

Annually on a systematic and rational basis

4. A company acquires a sub and will prepare cons fincl statements for external reporting purposes. for internal reporting the company has chosen to apply the initial value method. why would they do this?

It is a relatively easy method to apply

Operating results appearing on on the parents fincls reflect cons. totals

GAAP now required the use of this method for internal purposes

Consolidation is not required when the parent uses the initial value method

5. Which of the following does not repesent a primary motivation for business combinations

Combinations as a vehilcle for acheiving rapid growth and competitiveness

Cost savings through elimination of duplicate facilities and staff

Quick entry for new and exisitng products into markets

Large rfirms being less likely to fail

6. According to the acquisition method of accounting for business combinations, costs paid to attorneys and accountants for services in arranging a merger should be

Capatilized as part of the overall FV

Recorded as an expense in the period the merger takes place

Included in recognized goodqill

Written off over a five year useful life

7. What is the appropriate accounting treatment for the value assigned to in-process research and development acquired in a business combination

Expense upon acquisition

Capatiliz as an asset

Expense is there is no alternative use for the assetsused in r&d

Expense until further economic benefits become ceratin

8. Which of the following does not indicate an investor companys ability to significantly influence an investee

Material intra-entity transactions

The investor owns 30 percent of the investeee but another owner holds 70 percent

Interchange of personnel

Technological dependency

9. According to GAAP regarding mortization of goodill and ther intangible assets, which of the following is true?

Goodwill recognized in consolidation must be amortized over 20 years

Goodwill recognized in consolidation will not be amortized, but subject to an annual test or impairment

Goodwill recognized in consolidation can never be written off

Goodwill recognized in consolidation must be amortized over 40 years

10. The noncontrolling interst represents an outside ownership in a sub that is not attributable to the parent company.Where in the consolidated balance sheet is this outside ownership interest recognized?

In the liability section

In the mezzanine section between liabilities and owners equity

In the owners equity section

The noncontrolling interst in not recognized

11. When an investor elects the fair value option for a significant influence invesment, cash dividends recieved by the investor from the investeee should be recorded as

A deduction from the investors share of the investees reported income

A deductions from the investment account

A reduction from accum other comp income reported

Dividend income

12. On November 8, 2011, Power Co. sold land to Wood Co., its wholly owned subsidiary. The land cost 61,500 and was sold to Wood for 89,000. From the perspective of the combination, when is the gain on the sale of the land recognized?

Proportionally over a designated period of years

When Wood Co. sells the land to a third party

No gain can be recognized

As wood uses the Land

13. When does gain recognition company a business combination

When a bargain purchase occurs

In a combination created in the middle of a fiscal year

In an acquisition when the value cannot be determined

When the amount of a bargain exceeds the value of assets

14. Under fair value option, which of the following affects the income the investor recognizes from its ownership in the investee

The investees reported income adjusted for excess cost over book value amortization

Changes in the fair value of the investors ownership shares of the investee

Intra-equity profits from upstream sales

Extraordinary items reported by the investee

15. Factors that should be considered in determining the useful life of an intangible asset include:

Legal, regulatory, or contractual provisions

The residual value of an asset

The entitys expected use of the intangible asset

All of the above

16. Which of the following varies betweeen the equity, initial value, and partial equity methods of accounting for an investment?

The amount of consolidated net income

The assets on the consolidated balance sheet

The balance in the investment account of the parents books

The amount of consolidated COGS

17. Using the acquisition method for a business combination, goodwill is generally defined as:

Cost of the investment less the subs BV at the beginning of the year

Cost of the investment less the subs BV at the acquisition date

Cost of the investment less the subs FV at the beginning of the year

Cost of the investment less the subs FV at the acquistion date

18. Which of the following is the best threoretical justification for consolidatioed fincl staements

In form the companies are one entity; in substance they are seperate

In form the companies are seperate; in substance they are one entity

In form and subtance they are one entitiy

In form and substacne they are seperate

19. An acquired entity has a long term opertaing lease for an office building used for central mgmt, the lease prohibits subleasing or any other transfer of rights, how should it be reported in the fincl statements

An intangible asset under the contractual-legal criterion

A parrt of goodwill

An intangible asset under the seperability criterion

A building

20. James Company acquired 85 percent of MArk-Right Company on April 1, On its Dec 31 cons income statement, how should james account for Mark Rights revenues and expenses that occured before April 1

Include 100 percent of mark-Rights revenues and expenses

Exclude 100 percent of the preacquisiton revenues and 100 percent f the preacquisition expenses from their respective consolidated totals

Exclude 15 percent of preacquisition revenues and expences

Deduct 15 percent from net combined revenues and expenses

21. What is a basic premise of the acquisition method regarding accounting for a noncontrolling interest?

Cons fincl statements should be primarily for the benfit of the parent companys stockholders

Cons fincl statements shoud be produced only if both the parent and the sub are in the same basic industry

22. WHen an investor uses the equity method to account for investments in common stock, cash dividends received by the investor from the investee shoul be recored as

A deduction from the investors share of the profits

Dividend income

A deduction from the stockholders equity account

E deduction from the investment account (AICPA adapted)

23. What is the primary reason we defer financial statement recognition of gross profits on intra-entity sales for goods that remain within the consolidated entity at year-end?

Revenues and COGS must be recognized for all intra-entity sales regardless of whether the sales are upstream or downstream

Intra-entity sales result from gross profit overstaements

Gross profits must be deferred indefinately because sales among affilaites always remian in the consolidation group

When intra-entity sales remian in ending inventory, ownership of the goods has not changes

24. FASB ASC 85 provides principles for allocating the fair value of an acquired business. when the collective fair values of the seperately identified assets acquired and liabilities assumed exceed the fair value of the consideration transferred, the diference should be:

Recognized as an ordinary gain from a bargain purchase

Treated as negative goodwill

Treated as goodwill

Applied pro rata to reeduce the amounts initially assigned

25. If no legal, regulatory, contractrual, economic, or other factors limit the life of an intangible asset, the assets assigned value is allocated to expense over which of the following?

20 years

20 years with an annual impairment review

Infinitely

Indefinately (no amortization) with an annual impairment review until its life becomes finite

26. Why would a company want to use the equity methos for internal purposes?

It is a relatively easy method to apply

Operating results appearing on on the parents fincls reflect cons. totals

GAAP now required the use of this method for internal purposes

Consolidation is not required when the parent uses the initial value method

27. At the date of an acquisiton which is not a bargain purchase, the acquisiton method

Consolidates the subs assets at FV and the liabs at BV

Consolidate all subs assets and liabs at BV

Consolidate all subs assets and liabs at FV

Consolidates the subs assets at BV and the liabs at FV

28. What is push-down accounting?

A requirement that a sub must use the same accounting principles as its parent company

Inventory transfers made from a parent to a sub

A subs recording of the fair value allocations as well as subsequent amortization

The adjustments required fro consolidation when a parent has applied the equity method of accounting for internal purposes

29. How are stock issuance costs and direct combination costs treated in a business combination which is accounted for as an acquisition when the sub will retain its incorporation

Stock issuance costs are a part of the acquistion costs

Direct combination costs are a part of the acquisition costs and stock issuance costs are a reduction to addition PIC

Direct combination costs are expensed and stock issuance costs are a reduction to addition PIC

Both are treated as reduction to PIC

30. A parent buys 32 percents opfa sub in one year and then buys an additional 40 percent in the nexrt year. in step acquistion of this type, the original 32 percent acquisiotn should be

Maintained as initial value

Adjusted to its equity method balance as the date of the second acquisition

Adjusted to fair value at the date of the second acquisition with a resulting gain or loss recorded

Adjusted to fair value at the date of the second acquisition with a resulting adjustment to addintional paid in capital

31. Goodwill recognized in a business combination must be allocated among a firms indentified reporting units. if the fair value of a particular reporting unit with recognized goodwill falls blow its carrying amount, which of the following is true?

No goodwill impairment loss isrecognized unless the implied value for goodwill exceeds its carrying amount

A goodwill impairment loss is recognized if the carrying amount for goodwill exceeds its implied value

A goodwill impairment loss is recognized for the difference betweeen the reporting units fair calue and carrying amount

The reporting unit reduces the values assigned to its longterm assets

32. In computing the noncontrolling interests share of consolidated net income, how should the subs net income be adjusted for intra-entity transfers?

The subs reported net income is adjusted for the impact of upstream transfers prior to computing the noncontrolling interests allocation

The subs reported income is adjusted for the impact of all transfers prior to computing the noncontrolling interests allocation

The subs reported income is not adjusted for the impact of transfers prior to computing the noncontrolling interests allocation

The subs reported net income is adjusted for the impact of downstream transfers prior to computing the noncontrolling interests allocation