Garcia College of Technology

ACCTG 10
Theories

PRE-LIM

1. Statement 1 (S1): The acquiree entity is liquidated in a statutory merger.

Statement 2 (S2): For a business combination to qualify as a statutory consolidation, a new
corporation must be formed.
a S1- True; S2 - True
b. S1 - True; S2 - False
c. S1 - False; S2 - True
d. S1-False; S2 - False

2. Which of the following is not a true statement with regard to a statutory merger?
a. One entity continues to exist
b. One entity ceases to exist
c. The name of the new entity is not the same as either of the entities
d. All of the above except one are true statements with regard to a statutory merger

3. Which of the following is not a business combination?

a. Statutory amalgamation
b. Joint venture
c. A company's purchase of 100% of another company's net assets
d. A company's purchase of 80% of another company's voting shares

4. On the date of acquisition, consolidated shareholder equity is equal to:

a. The sum of the parent and subsidiary' shareholder equities.
b. The sum of the parent's shareholder equity plus its pro rata share of the subsidiary's
shareholder equity on the date of acquisition.
c. The parent's shareholder equity.
d. The subsidiary's shareholder equity.

5. A company owning a majority but less than 100% of another's voting shares on the date of
acquisition should account for its subsidiary
a. By including only its share of the fair market values of the subsidiary's net assets.
b. By including only its share of the book values of the subsidiary's net assets.
c. By including 100% of the fair market values of the subsidiary's net assets.
d. By including 100% of the fair market values of the subsidiary's net assets and accounting for
any unowned portion of the subsidiary's voting shares using the Non-Controlling Interest
account.
MID-TERM

1. Which of the following is not true with regard to a business combination accomplished in the
form of a stock acquisition?
a. Two companies remain in existence after the combination.
b. A parent-subsidiary relationship is said to exist.
c. Consolidated financial statements are normally required.
d. All of the above statements are true.

2. S1 - In a business combination accomplished as a stock acquisition, normally two companies

exist after the combination.
S2 - A business combination accomplished as a stock acquisition must be accomplished with a
stock for stock exchange.
a. S1-True; S2-True
b. S1-True; S2-False
c. S1- False; S2-True
d. S1- False; S2- False

3. Contingent consideration should be valued at

a. The fair value of the consideration on the date of acquisition.
b. The book value of the consideration at the date of acquisition.
c. The acquirer's pro-rata share of the subsidiary's net assets at book value at the date of
acquisition.
d. The acquirer's pro-rata share of the subsidiary's net assets at fair value at the date of
acquisition.

4. In an acquisition where there is an exchange of assets for assets, how does the value of the
acquiree net assets change?
a. The net assets increase
b. The net assets decrease
c. There is no change in net assets
d. The net assets may increase, decrease or remain the same

5. The purchase price of an entity includes:

a. The book value of the subsidiary's shareholder equity and the acquisition differential.
b. The book value of the subsidiary's shareholder equity and goodwill.
c. The fair market value of the subsidiary's shareholder equity and the purchase price
discrepancy.
d. The fair market value of the subsidiary's net assets.

6. S1-A business combination occurs when one entity gains control over the net assets of another
entity.
S2 - The only way to attain control over the net assets of another entity is to purchase the net
assets.
a. S1-True; S2-True
b. S1-True; S2-False
c. S1-False; S2-True
d. S1-False; S2- False

7. Any negative goodwill arising on the date of acquisition:

a. Is recognized as a gain on the date of acquisition.
b. Is prorated among the parent company's identifiable net assets.
c. Should be amortized over a predetermined period.
d. Is recognized as a loss on the date of acquisition.

PRE-FINAL

1. Intercompany profits on sales of inventory are only realized

a. Once the seller received payment for the sale
b. Once the inventory has been sold to outsiders
c. When the inventory has been received by the purchaser
d. When the inventory has been shipped to the purchaser

2. The elimination entry required to remove any dividends received from a subsidiary prior to the
preparation of consolidated financial statements would be
Credit Debit

a. Investment income - Parent xx

Retained earnings – Parent xx

b. Investment income – Subsidiary xx

Investment in Subsidiary xx

c. Investment income – Parent xx

Dividends – Subsidiary xx

d. Investment income – Subsidiary xx

Investment income – Parent xx

3. A company sells inventory to its subsidiary, B Company at a mark-up of 20% on cost. Of what
significance is this transaction, should A wish to prepare consolidated financial statements? The
inventory is still in B's warehouse at year end.
a. This is not significant. Any intercompany profits are eliminated during the consolidation
process.
b. A's net income will be understated.
c. B's income will be overstated
d. There will be unrealized profits in inventory which will only be realized once B sells this
inventory to outsiders.
4. Which of the following is not an intercompany transaction?
a. The parent company acquires inventory from the subsidiary
b. The subsidiary purchases a machine from another subsidiary
c. The parent purchases inventory from a supplier
d. The subsidiary purchase the parent's bond payable from an independent investor

5. If the fair value of a reporting unit with goodwill falls below its book value, which of the
following statements is true?
a. No additional impairment testing is required.
b. A goodwill impairment loss is recognized for the excess of book value over fair value of the
reporting unit.
c. There is a potential impairment loss for the amount that the book value of the goodwill
exceeds its implied fair value.
d. Goodwill is removed from the consolidated balance sheet.

MID-SUMMER

1. On the date of acquisition, the parent's investment (in subsidiary account):

a. Revalued to fair market value
b. Replaced with 100% of the assets and liabilities of the subsidiary at fair market value.
c. Replaced with 100% of the assets and liabilities of the subsidiary at book value.
d. Replaced with the parent's pro rata share of the assets and liabilities of the subsidiary at fair
market value.

2. On the date of formation of a 100% owned subsidiary by the parent:

a. It is possible to prepare consolidated financial statements the include all the assets and
liabilities of the subsidiary.
b. Consolidated financial statements are difficult to prepare because the assets and liabilities of
the subsidiary have yet to be determined.
c. Consolidation requires the elimination of the parent's investment account against the
subsidiaries share capital.
d. None of the above is applicable.

3. Which of the following is not true with regard to the statutory consolidation form of business
combination?
a. A new corporation must be formed
b. Control of the net assets of the combining entities must be acquired by the new entity
c. The net assets of the combining entities must be acquired with assets of the new corporation
d. The combining entities both cease to exist after the combination
4. Which of the following is not true with regard to a business combination accomplished in the
form of a stock acquisition?
a. Two companies remain in existence after the combination.
b. A parent-subsidiary relationship is said to exist.
c. Consolidated financial statements are normally required.
d. All of the above statements are true.

5. Goodwill is required to be tested for impairment:

a. Only when the overall economy is bad
b. Only when there is new competition
c. Every year
d. Only when there has been a series of operating losses

6. On the date of acquisition, consolidated shareholder equity is equal to:

a. The sum of the parent and subsidiary' shareholder equities.
b. The sum of the parent's shareholder equity plus its pro rata share of the subsidiary's
shareholder equity on the date of acquisition.
c. The parent's shareholder equity.
d. The subsidiary's shareholder equity.

7. Consolidated net income equals to

a. The sum of the net income of both the parent and its subsidiaries.
b. The sum of the net incomes of both the parent and its subsidiaries less any intercompany
dividends.
c. The parent's net income excluding any income arising from its investment in the subsidiary.
d. The parent's net income excluding an income arising from its investment in the subsidiary,
plus the parent's share of the net income of the subsidiary less the amortization of the
acquisition differential.

8. S1 - In a business combination accomplished as a stock acquisition normally two companies

exist after the combination.
S2-A business combination accomplished as a stock acquisition must be accomplished with a
stock for stock exchange.
a. S1-True; S2-True
b. S1-True; S2-False
c. S1- False; S2-True
d. S1- False; S2- False

9. HRN Enterprises purchases 80% of the outstanding voting shares of NHR Inc. on January 2,
20x9. On that date
a. HRN's NCI account will include 20% of the fair value of NHR's net assets.
b. HRN's NCI account will include 20% of the book value of NHR's net assets.
c. HRN's NCI account will include 20% of the acquisition differential on the date of acquisition.
d. HRN's NCI account will include 20% of any unallocated portion of the acquisition differential
on the date of acquisition.
10. In an acquisition where there is an exchange of assets for assets, how does the ownership
structure of the acquirer change?
a. There is no change in the acquirer ownership structure.
b. The acquirer stockholders become the acquiree stockholders.
c. The acquirer and acquiree stockholders share ownership of the acquire.
d. It is not possible to determine if there is a change in the acquire ownership structure.

PL

1. Control over an acquire can be attained through which of the following?

a. Acquisition of the acquiree assets
b. Acquisition of the acquiree stock
c. Either acquisition of the acquiree assets or stock
d. Neither acquisition of the acquiree assets or stock

2. Consolidated financial statements consist of

a. A balance sheet, a statement of comprehensive income, a statement of changes in equity, a
cash flow statement, and accompanying notes
b. A balance sheet, a statement of income, a statement of changes in financial position, and a
statement of retained earnings
c. A balance sheet, income statements and a statement of retained earnings
d. A balance sheet, a statement of comprehensive and non-comprehensive income and any other
statements that will provide useful information to the users of the financial statements

3. In an acquisition where there is an exchange of assets for assets, how does the value of the
acquire net assets change?
a. The net assets increase
b. The net assets decrease
c. There is no change in net assets
d. The net assets may increase, decrease or remain the same

4. A negative acquisition differential

a. Is always equal to negative goodwill
b. Is equal to negative goodwill when the fair values of the subsidiary's identifiable net assets are
equal to their book values
c. Implies that the parent company may have overpaid for its acquisition
d. Cannot occur under the acquisition method

5. On the date of acquisition, the parent's investment (in subsidiary account):

a. Revalued to fair market value
b. Replaced with 100% of the assets and liabilities of the subsidiary at fair market value.
c. Replaced with 100% of the assets and liabilities of the subsidiary at book value.
d. Replaced with the parent's pro rata share of the assets and liabilities of the subsidiary at fair
market value.
MID-TERM

1. Which of the following is not true with regard to a business combination accomplished in the
form of a stock acquisition?
a. Two companies remain in existence after the combination.
b. A parent-subsidiary relationship is said to exist.
c. Consolidated financial statements are normally required..
d. All of the above statements are true.

2. Goodwill is required to be tested for impairment:

a. Only when the overall economy is bad
b. Only when there is new competition
c. Every year
d. Only when there has been a series of operating losses

3. On the date of acquisition, consolidated shareholder equity is equal to:

a. The sum of the parent and subsidiary' shareholder equities.
b. The sum of the parent's shareholder equity plus its pro rata share of the subsidiary's
shareholder equity on the date of acquisition.
c. The parent's shareholder equity.
d. The subsidiary's shareholder equity.

4. Which of the following is not true with regard to the statutory consolidation form of business
combination?
a. A new corporation must be formed
b. Control of the net assets of the combining entities must be acquired by the new entity
c. The net assets of the combining entities must be acquired with assets of the new corporation
d. The combining entities both cease to exist after the combination

5. S1 - In a business combination accomplished as a stock acquisition normally two companies

exist after the combination.
S2 - A business combination accomplished as a stock acquisition must be accomplished with a
stock for stock exchange.
a. S1-True; S2-True c. S1-False; S2-True
b. S1-True; S2-False d. S1-False; S2- False

6. On the date of formation of a 100% owned subsidiary by the parent:

a. It is possible to prepare consolidated financial statements the include all the assets and
liabilities of the subsidiary.
b. Consolidated financial statements are difficult to prepare because the assets and liabilities of
the subsidiary have yet to be determined.
c. Consolidation requires the elimination of the parent's investment account against the
subsidiaries share capital.
d. None of the above is applicable.
PRE-FI

1. Consolidated net income equals to

a. The sum of the net income of both the parent and its subsidiaries.
b. The sum of the net incomes of both the parent and its subsidiaries less any intercompany
dividends.
c. The parent's net income excluding any income arising from its investment in the subsidiary.
d. The parent's net income excluding an income arising from its investment in the subsidiary,
plus the parent's share of the net income of the subsidiary less the amortization of the
acquisition differential.

2. The sale of equipment from the subsidiary to the parent is called what type of transaction?
a. Downstream intercompany transaction
b. Upstream intercompany transaction
c. Lateral intercompany transaction
d. Realized intercompany transaction

3. If the accountant fails to record, on the consolidation worksheet, amortization related to on

undervalued truck:
a. The subsidiary's net income will be overstated
b. The parent's net income will be unaffected
c. Consolidated net income will be overstated
d. The parent's net income will be understated

4. The consolidation entry to realize a loss from an intercompany sale of a building would
include:
A debit to accumulated depreciation
b. A credit to depreciation expense
c. A debit to building
d. A debit to depreciation expense

5. Which of the following is not an intercompany transaction?

a. The parent company acquires inventory from the subsidiary
b. The subsidiary purchases a machine from another subsidiary
c. The parent purchases inventory from a supplier
d. The subsidiary purchase the parent's bond payable from an independent investor

6. Baijan Company sells inventory to its parent, Cruz Company, at a profit during 20x3. Which
of the following would be debited in the consolidated worksheet for 20x4?
a. Retained earnings
b. Cost of goods sold
c. Inventory
d. Investment in Cruz Company
7. What is the impact on the non-controlling interest of a subsidiary when there are downstream
transfer of inventory between the parent and subsidiary companies?
a. A pro rata portion of deferred gain or loss is recognized in the income statement.
b. Any resulting gain or loss is reported (in total) in the current period income statement.
c. Any cash received is reported in Accumulated Other Comprehensive Income.
d. None

8. The sale of inventory from the subsidiary to the parent is called what type of transaction?
a. Downstream intercompany transaction
b. Upstream intercompany transaction
c. Lateral intercompany transaction
d. Realized intercompany transaction