1. Under the equity method, a parent company that has guaranteed all of its subsidiarys debt would: a. Discontinue applying the equity method when the subsidiarys retained earning becomes negative. b. Discontinue applying the equity method when the subsidiarys equity becomes negative. c. not discontinue applying the equity method regardless of the subsidiarys losses. d. switch to the cost method when the subsidiarys equity becomes zero e. None of the above 2. A parent need not consolidate a subsidiary if a. The subsidiary is economically independent of the parent b. More than 50% of the subsidiarys sales are to the parent c. The subsidiarys total assets are less than 10% of total consolidated asets d. The parent allows the subsidiary to operate freely and independently (a decentralized management philosophy) e. None of the above 3. Which statement is correct concerning the equity method? a. It is exclusively instead of consolidation b. It is based on the historical cost concept c. It does not have a built-in self-checking feature in the consolidation process d. Cash dividends declared by the subsidiary are always treated as a partial liquidation (reduction) of the parents investment in the subsidiary. e. None of the above. 4. In the consolidated statement of retained earnings for a parent and a 100%-owned subsidiary, dividends declared by the subsidiary are: a. Shown b. Not shown c. Shown only under the equity method. d. Shown only under the cost method. 5. A reason for acquiring assets versus acquiring common stock is that a. Acquiring assets is much simpler. b. Acquiring assets does not require approval by the target companys board of directors c. The acquiring company can avoid inheriting contingent liabilities of the target company. d. By acquiring assets, a statutory consolidation can later be effected. e. None of the above 6. A reason for using the subsidiary form of organization when expanding instead of the branch form of organization is: a. It better limits the ability of foreign taxing authorities to examine the books and records of the domestic operation. b. It better insulates legally the existing operation from the new operation. c. A foreign units earnings are not taxed in the United States until remitted to the domestic unit. d. All of the above e. none of the above. 7. Sally Corporation, an 80%-owned subsidiary of Reynolds Company, buys half of its raw materials from Reynolds. The transfer price is exactly the same price as Sally pays to buy identical raw materials from outside suppliers and the same price as Reynolds sells the materials to unrelated customers. In preparing consolidated statements for Reynolds Company and Subsidiary a. the intercompany transactions can be ignored because the transfer price represents arm's length bargaining. b. any unrealized profit from intercompany sales remaining in Reynolds' ending inventory must be offset against the unrealized profit in Reynolds' beginning inventory. c. any unrealized profit on the intercompany transactions in Sally's ending inventory is eliminated in its entirety. d. eighty percent of any unrealized profit on the intercompany transactions in Sally's ending inventory is eliminated. 8. Under purchase accounting, a. The business combination is automatically a taxable event. b. goodwill cannot exist c. assets of the acquiring company (as compared with the target company) are revalued to their current values d. a fusion of equity interests is deemed to occur e. None of the above. 9 A tax advantage of business combination can occur when the existing owner of a company sells out and receives: a. Cash to defer the taxable gain as a "tax-free reorganization". b. Stock to defer the taxable gain as a "tax-free reorganization". c. Cash to create a taxable gain. d. Stock to create a taxable gain. A 3. 10. The motivation of a parent company to purchase the outstanding bonds of a subsidiary could be to: a. Replace the existing debt with new debt at a lower interest rate. b. Reduce the parent company's acquisition price for the subsidiary. c. Increase the parent company's ownership percentage in the subsidiary. d. Create interest revenue to offset interest expense in future income statements