1. A company acquires a subsidiary and will prepare consolidated financial statements for external reporting purposes. For internal reporting purposes, the company has decided to apply the initial value method. Why might the company have made this decision?

a. It is a relatively easy method to apply.

b. Operating results appearing on the parent’s financial records reflect consolidated totals.

c. GAAP now requires the use of this particular method for internal reporting purposes.

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

2. A company acquires a subsidiary and will prepare consolidated financial statements for external reporting purposes. For internal reporting purposes, the company has decided to apply the equity method. Why might the company have made this decision?

a. It is a relatively easy method to apply.

b. Operating results appearing on the parent’s financial records reflect consolidated totals.

c. GAAP now requires the use of this particular method for internal reporting purposes.

d. Consolidation is not required when the parent uses the equity method.

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

a. If both the market value of a reporting unit and its associated implied goodwill fall below their respective carrying values.

b. Whenever the entity’s market value declines significantly.

c. If a reporting unit’s market value falls below its original acquisition price.

d. Annually on a systematic and rational basis.

4. How would the answer to problem (4) have been affected if the parent had applied the initial value method rather than the equity method?

a. No effect: The method the parent uses is for internal reporting purposes only and has no impact on consolidated totals.

b. The consolidated Equipment account would have a higher reported balance.

c. The consolidated Equipment account would have a lower reported balance.

d. The balance in the consolidated Equipment account cannot be determined for the initial value method using the information given.

5. Goodwill recognized in a business combination must be allocated among a firm’s identified reporting units. If the fair value of a particular reporting unit with recognized goodwill falls below its carrying amount, which of the following is true?

a. No goodwill impairment loss is recognized unless the implied value for goodwill exceeds its carrying amount.

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

c. A goodwill impairment loss is recognized for the difference between the reporting unit’s fair value and carrying amount.

d. The reporting unit reduces the values assigned to its long-term assets (including any unrecognized intangibles) to reflect its fair value.

6. If no legal, regulatory, contractual, competitive, economic, or other factors limit the life of an intangible asset, the asset’s assigned value is allocated to expense over which of the following?

a. 20 years.

b. 20 years with an annual impairment review.

c. Infinitely.

d. Indefinitely (no amortization) with an annual impairment review until its life becomes finite.

7. Dosmann, Inc., bought all outstanding shares of Lizzi Corporation on January 1, 2011, for $700,000 in cash. This portion of the consideration transferred results in a fair-value allocation of $35,000 to equipment and goodwill of $88,000. At the acquisition date, Dosmann also agrees to pay Lizzi’s previous owners an additional $110,000 on January 1, 2013, if Lizzi earns a 10 percent return on the fair value of its assets in 2011 and 2012. Lizzi’s profits exceed this threshold in both years. Which of the following is true?

a. The additional $110,000 payment is a reduction in consolidated retained earnings.

b. The fair value of the expected contingent payment increases goodwill at the acquisition date.

c. Consolidated goodwill as of January 1, 2013, increases by $110,000.

d. The $110,000 is recorded as an expense in 2013.

8. Kaplan Corporation acquired Star, Inc., on January 1, 2011, by issuing 13,000 shares of common stock with a $10 per share par value and a $23 market value. This transaction resulted in recognizing $62,000 of goodwill. Kaplan also agreed to compensate Star’s former owners for any difference if Kaplan’s stock is worth less than $23 on January 1, 2012. On January 1, 2012, Kaplan issues an additional 3,000 shares to Star’s former owners to honor the contingent consideration agreement. Which of the following is true?

a. The fair value of the number of shares issued for the contingency increases the Goodwill account balance at January 1, 2012.

b. The parent’s additional paid-in capital from the contingent equity recorded at the acquisition date is reclassified as a regular common stock issue on January 1, 2012.

c. All of the subsidiary’s asset and liability accounts must be revalued for consolidation purposes based on their fair values as of January 1, 2012.

d. The additional shares are assumed to have been issued on January 1, 2011, so that a retrospective adjustment is required.

9. What is push-down accounting?

a. A requirement that a subsidiary must use the same accounting principles as a parent company.

b. Inventory transfers made from a parent company to a subsidiary.

c. A subsidiary’s recording of the fair-value allocations as well as subsequent amortization.

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

10. Treadway Corporation acquires Hooker, Inc. The parent pays more for it than the fair value of the subsidiary’s net assets. On the acquisition date, Treadway has equipment with a book value of $420,000 and a fair value of $530,000. Hooker has equipment with a book value of $330,000 and a fair value of $390,000. Hooker is going to use push-down accounting. Immediately after the acquisition, what amounts in the Equipment account appear on Hooker’s separate balance sheet and on the consolidated balance sheet?

a. $330,000 and $750,000.

b. $330,000 and $860,000.

c. $390,000 and $810,000.

d. $390,000 and $920,000.