2) A business combination in which a new corporation is created and two or more existing

corporations are combined into the newly created corporation is called a

A. merger.

B. purchase transaction.

C. pooling-of-interests.

D. consolidation.

3) A business combination occurs when a company acquires an equity interest in another entity

and has

A. at least 20% ownership in the entity.

B. more than 50% ownership in the entity.

C. 100% ownership in the entity.

D. control over the entity, irrespective of the percentage owned.

4) With respect to goodwill, an impairment

A. will be amortized over the remaining useful life.

B. is a two-step process which analyzes each business unit of the entity.

C. is a one-step process considering the entire firm.

D. occurs when asset values are adjusted to fair value in a purchase.

5) Swamphen Corporation accounts for its 30% investment in Frog Company using the equity

method. On the date of the original investment, fair values were equal to the book values

except for a patent, which cost Swamphen an additional $40,000. The patent had an

estimated life of 10 years. Frog has a steady net income of $20,000 per year and its dividend

payout ratio is 40%. Which one of the following statements is correct?

A. The net change in the investment account for each full year will be a debit of $400.

B. The net change in the investment account for each full year will be a debit of $3,600.

C. The net change in the investment account for each full year will be a credit of $400.

D. The net change in the investment account for each full year will be a credit of $3,600.

6) On June 1, 2005, Gull Company acquired 100% of the stock of Scrap Inc. On this date, Gull

had Retained Earnings of $200,000 and Scrap had Retained Earnings of $100,000. On

December 31, 2005, Gull had Retained Earnings of $240,000 and Scrap had Retained

Earnings of $120,000. The amount of Retained Earnings that appeared in the December 31,

2005 consolidated balance sheet was:

A. $240,000.

B. $260,000.

C. $300,000.

D. $360,000.

Use the following information to answer questions 7 through 12.

On January 1, 2005, Finch Corporation purchased 75% of the common stock of Grass Co.

Separate balance sheet data for the companies at the combination date are given below:

Finch Grass

Cash $ 24,000 $ 206,000

Accounts Receivable 144,000 26,000

Inventory 132,000 38,000

Land 68,000 32,000

Plant assets 700,000 300,000

Accum. Depreciation ( 240,000 ) ( 60,000 )

Investment in Lapp 392,000

Total assets $ 1,230,000 $ 542,000

Accounts payable $ 206,000 $ 142,000

Capital stock 800,000 300,000

Retained earnings 224,000 100,000

Total liabilities & equities $ 1,230,000 $ 542,000

At the date of combination, the book values of Grass's net assets were equal to the fair value except

for Grass's inventory, which had a fair value of $60,000.

Determine below what the consolidated balance would be for each of the requested accounts.

7) What amount of Inventory will be reported?

A. $170,000.

B. $169,000.

C. $186,500.

D. $192,000.

8) What amount of Goodwill will be reported?

A. $10,500.

B. $20,000.

C. $42,000.

D. $75,500.

9) What amount of total liabilities will be reported?

A. $206,000.

B. $261,000.

C. $302,500.

D. $348,000.

10) What is the reported amount for the minority interest?

A. $ 69,333.

B. $100,000.

C. $130,666.

D. $150,000.

11) What is the amount of consolidated Retained Earnings?

A. $224,000.

B. $299,000.

C. $324,000.

D. $346,666.