Question :
51. Park Inc. owns 35 percent of Exeter Corporation. During the : 1245756
51. Park Inc. owns 35 percent of Exeter Corporation. During the calendar year 2013, Exeter had net earnings of $300,000 and paid dividends of $36,000. Park mistakenly accounted for the investment in Exeter using the cost method rather than the equity method of accounting. What effect would this have on the investment account and net income, respectively?
A. Understate, overstate
B. Overstate, understate
C. Overstate, overstate
D. Understate, understate
E. None of these answer choices is correct.
52. U.S. GAAP view investments of between 20 and 50 percent of the voting stock of another company (unless evidence indicates that significant influence cannot be exercised) as
A. minority, passive investments.
B. minority, active investments.
C. majority, passive investments.
D. majority, active investments.
E. marketable securities.
53. Dividends and interest from Minority, Passive Investments become income when the
A. dividends and interest are received.
B. dividends and interest are earned.
C. dividends are earned and the interest is declared.
D. dividends are declared and the interest is earned.
E. dividends are declared and the interest is received.
54. Minority, passive investments are initially recorded at the
A. acquisition cost.
B. fair market value of the net assets.
C. lower of cost or market.
D. present value of future cash flows.
E. future value of present cash flows.
55. Which of the following is/are true?
A. When one firm, P, owns more than 50% of the voting stock of another company, S, P can control the activities of S in terms of broad policy making.
B. When one firm, P, owns more than 50% of the voting stock of another company, S, P can control the activities of S in terms of day-to-day operations.
C. When one firm, P, owns more than 50% of the voting stock of another company, S, common usage refers to the majority investor as the parent and to the majority-owned company as the subsidiary.
D. U.S. GAAP and IFRS require the parent to combine the financial statements of majority-owned companies with those of the parent in consolidated financial statements.
E. all of the above
56. Business firms have several reasons for preferring to operate as a group of legally separate corporations, rather than as a single entity. From the standpoint of the parent company, the more important reasons for maintaining legally separate subsidiary companies include which of the following?
A. To reduce the parent’s legal or operational risk.
B. To reduce the costs of dealing with jurisdiction-specific differences in corporate laws and tax rules.
C. To expand or diversify.
D. To reduce the costs of divesting assets.
E. all of the above
57. For various reasons, a single economic entity may exist in the form of a parent and several legally separate subsidiaries, often referred to as an affiliated group. Which of the following is/are true?
A. A consolidation of the financial statements of the parent and each of its subsidiaries presents the results of operations, financial position, and cash flows of an affiliated group of companies under the control of a parent as if the group of companies composed a single entity.
B. The parent and each subsidiary are legally separate entities that operate as one centrally controlled economic entity.
C. Consolidated financial statements generally provide more useful information to the shareholders of the parent corporation than do separate financial statements for the parent and each subsidiary.
D. all of the above
E. none of the above
58. Consolidated financial statements provide more helpful information than does the equity method, because
A. they include all the assets, liabilities, revenues, and expenses of the controlled subsidiaries, not just the investment account that represents the parent’s investment in the subsidiary’s common shareholders’ equity and not just the parent’s share of the subsidiary’s net income.
B. the parent, because of its voting interest, can control the use of all of the subsidiary’s assets.
C. the parent needs to own only a majority of the voting stock, not necessarily 100%, to control the use of 100% of the subsidiary’s assets.
D. consolidation of the individual assets, liabilities, revenues, and expenses of both the parent and the subsidiary provides a more realistic picture of the operations and financial position of the single economic entity.
E. all of the above
59. U.S. GAAP and IFRS require firms to account for business combinations using the _____ method.
A. purchase
B. pooling-of-interests
C. uniting-of-interests
D. equity
E. cost
60. Which of the following is/are true regarding the acquisition method for a business combination?
A. Measure the identifiable tangible and intangible assets and liabilities of the acquired company at their fair values.
B. The acquirer compares the fair value of the cash, common stock, or other consideration given with the fair value of the identifiable assets less liabilities acquired.
C. The excess of the fair value of the consideration over the fair value of the acquired firm’s identifiable assets net of identifiable liabilities is goodwill.
D. If the fair value of the identifiable assets less liabilities exceeds the fair value of the consideration, the excess is a gain from a bargain purchase, which the purchaser immediately includes in net income.
E. all of the above
