Acct 559 Quiz 1 Solution

Quiz I (Chapters 1and 2) Date: Name: ID: Answer the following Questions:

1. Tower Inc. owns 30% of Yale Co. and applies the equity method. During the current year, Tower bought inventory costing $66,000 and then sold it to Yale for $120,000. At year-end, only $24,000 of merchandise was still being held by Yale. What amount of inter-company inventory profit must be deferred by Tower? A. $6,480 B. $3,240 C. $10,800 D. $16,200 E. $6,610

2. All of the following statements regarding the investment account using the equity method are true except A. The investment is recorded at cost B.Dividends received are reported as revenue C. Net income of investee increases the investment account D. Dividends received reduce the investment account E. Amortization of fair value over cost reduces the investment account

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4. A company should always use the equity method to account for an investment if A. it has the ability to exercise significant influence over the operating policies of the investee.

B. it owns 30% of another company’s stock. C. it has a controlling interest (more than 50%) of another company’s stock. D. the investment was made primarily to earn a return on excess cash. E. it does not have the ability to exercise significant influence over the operating policies of the investee.

5. An upstream sale of inventory is a sale A. between subsidiaries owned by a common parent. B. with the transfer of goods scheduled by contract to occur on a specified future date. C. in which the goods are physically transported by boat from a subsidiary to its parent. D. ade by the investor to the investee. E. made by the investee to the investor.

6. In a situation where the investor exercises significant influence over the investee, which of the following entries is not actually posted to the books of the investor?

  • 1) Debit to the Investment account and a Credit to the Equity in Investee Income account.
  • 2) Debit to Cash (for dividends received from the investee) and a Credit to Dividend Revenue.
  • 3) Debit to Cash (for dividends received from the investee) and a Credit to the Investment account. A. Entries 1 and 2 B. Entries 2 and 3 C. Entry 1 only D.

Entry 2 only E. Entry 3 only

7. All of the following statements regarding the investment account using the equity method are true except A. The investment is recorded at cost B. Dividends received are reported as revenue C. Net income of investee increases the investment account D. Dividends received reduce the investment account E. Amortization of fair value over cost reduces the investment account

8. A company has been using the fair-value method to account for its investment. The company now has the ability to significantly control the investee and the equity method has been deemed appropriate.

Which of the following statements is true? A. A cumulative effect change in accounting principle must occur B. A prospective change in accounting principle must occur C. A retrospective change in accounting principle must occur D. The investor will not receive future dividends from the investee E. Future dividends will continue to be recorded as revenue

9. A company has been using the equity method to account for its investment. The company sells shares and does not continue to have significant control. Which of the following statements is true? A. A cumulative effect change in accounting principle must occur B. A prospective change in accounting principle must occur C. A retrospective change in accounting principle must occur D. The investor will not receive future dividends from the investee E. Future dividends will continue to reduce the investment account

10. After allocating cost in excess of book value, which asset or liability would not be amortized over a useful life? A. Cost of goods sold B. Property, plant, & equipment C. Patents D. Goodwill E. Bonds payable

11. How are stock issuance costs and direct combination costs treated in a business combination which is accounted for as an acquisition when the subsidiary will retain its incorporation? A. Stock issuance costs are a part of the acquisition costs and the direct combination costs are expensed B. Direct combination costs are a part of the acquisition costs and the stock issuance costs are a reduction to additional paid-in capital C. Direct combination costs are expensed and stock issuance costs are a reduction to additional paid-in capital D. Both are treated as part of the acquisition price E. Both are treated as a reduction to additional paid-in capital

12. Lisa Co. paid cash for all of the voting common stock of Victoria Corp. Victoria will continue to exist as a separate corporation. Entries for the consolidation of Lisa and Victoria would be recorded in A. A worksheet B. Lisa’s general journal C. Victoria’s general journal D. Victoria’s secret consolidation journal E. The general journals of both companies

13. At the date of an acquisition which is not a bargain purchase, the acquisition method A. Consolidates the subsidiary’s assets at fair value and the liabilities at book value B.

Consolidates all subsidiary assets and liabilities at book value C. Consolidates all subsidiary assets and liabilities at fair value D. Consolidates current assets and liabilities at book value, long-term assets and liabilities at fair value E. Consolidates the subsidiary’s assets at book value and the liabilities at fair value

14. Which of the following statements is true regarding a statutory consolidation? A. The original companies dissolve while remaining as separate divisions of a newly created company B. Both companies remain in existence as legal corporations with one corporation now a subsidiary of the acquiring company C.

The acquired company dissolves as a separate corporation and becomes a division of the acquiring company D. The acquiring company acquires the stock of the acquired company as an investment E. A statutory consolidation is no longer a legal option

15. In a transaction accounted for using the purchase method where cost is less than fair value which statement is true? A. Negative goodwill is recorded B. A deferred credit is recorded C. Long-term assets of the acquired company are reduced in proportion to their fair values. Any excess is recorded as a deferred credit D.Long-term assets of the acquired company are reduced in proportion to their fair values. Any excess is recorded as an extraordinary gain E. Long-term assets and liabilities of the acquired company are reduced in proportion to their fair values. Any excess is recorded as an extraordinary gain

16. In a purchase or acquisition where control is achieved, how would the land accounts of the parent and the land accounts of the subsidiary be combined? A. Entry A B. Entry B C. Entry C D. Entry D E. Entry E

17. In a pooling of interests, A.

Revenues and expenses are consolidated for the entire fiscal year, even if the combination occurred late in the year B. Goodwill may be recognized C. Consolidation is accomplished using the fair values of both companies D. The transactions may involve the exchange of preferred stock or debt securities as well as common stock E. The transaction is properly regarded as an acquisition of one company by another Prior to being united in a business combination, Botkins Inc. and Volkerson Corp. had the following stockholders’ equity figures: Botkins issued 56,000 new shares of its common stock valued at $3. 5 per share for all of the outstanding stock of Volkerson.

18. Assume that Botkins acquired Volkerson as a purchase combination. Immediately afterwards, what are consolidated Additional Paid-In Capital and Retained Earnings, respectively? A. $133,000 and $360,000 B. $236,000 and $360,000 C. $130,000 and $360,000 D. $236,000 and $490,000 E. $133,000 and $490,000

19. Assume that Botkins and Volkerson were being joined in a pooling of interests and this occurred on January 1, 2000, using the same values given. Immediately afterwards, what is consolidated Additional Paid-In Capital? A. 138,000 B. $266,000 C. $130,000 D. $236,000 E. $135,000

20. Chapel Hill Company had common stock of $350,000 and retained earnings of $490,000. Blue Town Inc. had common stock of $700,000 and retained earnings of $980,000. On January 1, 2009, Blue Town issued 34,000 shares of common stock with a $12 par value and a $35 fair value for all of Chapel Hill Company’s outstanding common stock. This combination was accounted for as an acquisition. Immediately after the combination, what was the consolidated net assets? A. $2,520,000 B. $1,190,000 C. $1,680,000 D. $2,870,000 E. $2,030,000

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