QUESTION 1 Company Pea owns 90% of Company Essone which in turn owns 80% of Company Esstwo. Company Esstwo owns 100% of Company Essthree. Consolidated financial statements should be prepared to report the financial status and results of operations for: a. Pea. b. Pea plus Essone. c. Pea plus Essone plus Esstwo. d. Pea plus Essone plus Esstwo plus Essthree. QUESTION 2 Under the equ ity method of accounting for a stock investment, the investment initially should be recorded at a. cost. b. cost minus any purchase differential. c. proportionate share of fair value of the investee company's net assets. d. proportionate share of the book value of the investee company's net assets. QUESTION 3 A change from the equity method to the cost meth od of accounting for an investment in common stock due to a decrease in the number of shares held by the investor requires: a. Retroactive restatement as if the investor always had used the cost method. b. Requires an adjustment to beginning retained earnings. c. That the cumulative amount of the change be shown as a line item on the income statement net of tax. d. The change be accounted for currently and prospectively. QUESTION 4 A change from the cost method to the equity metho d of accountin g for an i nvestment in common stock resulting from an increase in the number of shares held by the investor requires: a. Only footnote disclosure. b. That the cumulative amount of the change be shown as a line item on the income statement, net of tax. c. That the change be accounted for currently and prospectively. d. Retroactive restatement as if the investor always had used the equity method. QUESTION 5 Which of the following situations best describes a business combination to be accounted for as a s tatutory merger? a. All of the outstanding stock of a company is acquired. b. Cash or other consideration is exchanged for total net assets of another company. c. Two companies combine to form a new third company, and the original two companies are dissolved. d. One company transfers assets to another company it has created. QUESTION 6 On December 31, 2003, Rudd Company purchased 80 percent of the common stock of Wilton Company. At the time, Rudd held land with a book value of $100,000 and a fair value of $260,000; Wilton held land with a book value of $50,000 and fair value of $600,000. At what amount would land be reported in a consolidated balance sheet prepared immediately after the combination? a. $540,000. b. $590,000. c. $700,000. d. $860,000. QUESTION 7 Assume that one company owns 70 percent of the common stock of another company, with the investment originally purchased at the book value of the sh ares acquired. For the current year, the parent reports separate operating income of $300,000, and the subsidiary reports net income of $160,000; each company declares dividends of $50,000. What will the amount of consolidated net income repor ...

1. QUESTION 1
Company Pea owns 90% of Company Essone which in turn owns
80% of Company Esstwo.
Company Esstwo owns 100% of Company Essthree.
Consolidated financial statements should be prepared to report
the financial status and results of operations for:
a.
Pea.
b.
Pea plus Essone.
c.
Pea plus Essone plus Esstwo.
d.
Pea plus Essone plus Esstwo plus Essthree.
QUESTION 2
Under the equ
ity method
of accounting for a stock investment, the investment initially
should be recorded at
a.

2. cost.
b.
cost minus any purchase differential.
c.
proportionate share of fair value of the investee company's net
assets.
d.
proportionate share of the book value of the investee company's
net assets.
QUESTION 3
A change from the equity
method to the
cost meth
od of accounting for an investment in common stock due to a
decrease in the number of shares held by the investor requires:
a.
Retroactive restatement as if the investor always had used the
cost method.
b.
Requires an adjustment to beginning retained earnings.
c.
That the cumulative amount of the change be shown as a line

3. item on the income statement net of tax.
d.
The change be accounted for currently and prospectively.
QUESTION 4
A change from the cost method to the equity metho
d of accountin
g for an i
nvestment in common stock resulting from an increase in the
number of shares held by the investor requires:
a.
Only footnote disclosure.
b.
That the cumulative amount of the change be shown as a line
item on the income statement, net of tax.
c.
That the change be accounted for currently and prospectively.
d.
Retroactive restatement as if the investor always had used the
equity method.
QUESTION 5
Which of the following situations best describes a business
combination to

4. be accounted
for as a s
tatutory merger?
a.
All of the outstanding stock of a company is acquired.
b.
Cash or other consideration is exchanged for total net assets of
another company.
c.
Two companies combine to form a new third company, and the
original two companies are dissolved.
d.
One company transfers assets to another company it has created.
QUESTION 6
On December 31, 2003, Rudd Company purchased 80 percent of
the common stock of Wilton Company.
At
the time, Rudd
held land
with a book value of $100,000 and a fair value of $260,000;
Wilton held land with a book value of $50,000 and fair value of
$600,000.
At what amount would land be reported in a consolidated

5. balance sheet prepared immediately after the combination?
a.
$540,000.
b.
$590,000.
c.
$700,000.
d.
$860,000.
QUESTION 7
Assume that one company owns 70 percent of the common stock
of another company, with the investment originally purchased at
the book value
of the sh
ares acquired.
For the current year, the parent reports separate operating
income of $300,000, and the subsidiary reports net income of
$160,000; each company declares dividends of $50,000.
What will the amount of consolidated net income reported in the
consolidate income statement for the year?
a.
$460,000.

6. b.
$412,000.
c.
$377.000.
d.
$327,000.
QUESTION 8
Goodwill under the parent theory:
a.
exceeds goodwill under the proprietary theory.
b.
exceeds goodwill under the entity theory.
c.
is less tha
n goodwill und
er then en
tity theory.
d.
is less than goodwill under the proprietary theory.

7. QUESTION 9
Goodwill recognized in a business combination should be:
a.
Amortized over its useful life.
b.
tested for impairment at least annually.
c.
identified with the reporting
unit benefite
d by the g
oodwill.
d.
both B and C
QUESTION 10
Dickens Corporation issued nonvoting preferred stock with a
fair market value of $1,200,000 in exchange for all the assets
and liabilities of D&E Corporation.
D&E's net assets on the date of acquis
ition had a bo
ok value of
$800,000 and a fair value of $1,050,000.
Also, Dickens issued common stock with a fair market value of
$50,000 to legal counsel for arranging the transaction.

8. As a result of this business combination Dickens' net assets
increased by:
a.
$800,000
b.
$1,050,000
c.
$1,200,000
d.
$1,250,000
QUESTION 11
Retroactive application of the equity method of accounting is
required when
a.
the equity method has been appropriately applied in prior years,
and the investor has acquired additional shares in the current
year.
b.
the
investment ha
s been made

9. in installments over several years, and the criteria for using the
equity method were met with this year's installment acquisition.
c.
an investor has exercised significant influence over an investee
in prior years but used the cost method to account for its
investment.
d.
both B and C.
QUESTION 12
If Oakland Company owned 51 percent of the outstanding
common stock of Redding Company, what reporting method
would be appropriate?
a.
Consolidation.
b.
Cost method.
c.
Equity method.
d.
Merger method.
QUESTION 13

10. Which of t
he following s
tatements i
s correct?
a.
The cost method does not represent a departure from historical
cost.
b.
The cost method is inconsistent with the realization concept.
c.
The equity method does not represent a departure from
historical cost.
d.
The e
quity method i
s consisten
t with valuation at market value.
QUESTION 14
There may be an impairment of goodwill if:
a.
the fair value of a reporting unit exceeds its carrying value.
b.

11. implied goodwill exceeds the carrying value of goodwill.
c.
either A or B.
d.
neither A nor B.
QUESTION 15
Negative goodwill normally is treated as a reduction of
noncurrent as
sets of the
acquired company other than:
a.
financial assets, excluding investments accounted for using the
equity method.
b.
prepaid pension and postretirement benefit costs, and deferred
tax assets.
c.
assets to be disposed of by sale.
d.
all

12. of the above.