Chapter 3 - MATCHING

Match the terms in the list to the definitions below. Each term may be used only once.

A. Parent G. Workpaper K. Adjustment

B. Subsidiary H. Consolidated statements L. Intercompany transaction

C. Majority owned I. Difference between M. Investment in S

D. Wholly owned implied and book value N. P-only statement

E. Totally held J. Goodwill O. Noncontrolling interest

F. Elimination

_____ 1. Statements prepared for the parent company and its subsidiaries

_____ 2. The excess of the value implied by the purchase price over the fair value of the subsidiary's identifiable net assets

_____ 3. A parent owns at least 50 percent of a subsidiary

_____ 4. An entry made to remove P's investment account and P's share of Ss equity accounts

_____ 5. The portion of equity in S not owned by P

_____ 6. A company that is owned in whole or in part by another company

_____ 7. P loans money to S

_____8. The parent company owns 100 percent of the subsidiary

_____9. A document used by the parent in the preparation of consolidated financial statements

_____10. The account on P's books that reflects its interest in S

_____11. The parent company owns and controls substantially all of the subsidiary

_____12. A company which owns a majority of the stock of one or more companies

_____13. Financial statements prepared primarily for the creditors of the parent company

_____14. An entry made to recognize the effect of transactions between affiliates that have been recorded by one party, but not by the other

_____15. The amount which arises when the parent company's cost is not the same as its share of the recorded value of the subsidiary company's net assets

CHAPTER 3 MULTIPLE CHOICE QUESTIONS

Choose the BEST answer for the following questions.

_____ 1 A parent-subsidiary relationship may be distinguished from a merger by:

a. the number of affiliates joining.

b. the resulting legal entity or entities.

c. the price paid for the subsidiary.

d. whether the affiliation was accomplished with a cash payment or stock transaction.

_____ 2. Which of the following best describes the SECs definition of a totally held company?

a. At least 50 percent of the stock of the subsidiary is owned by the parent.

b. No more than 90 percent of the stock is owned by the parent.

c. The parent owns 100 percent of the subsidiary.

d. The parent owns or controls substantially all of the subsidiarys stock.

_____ 3. Which of the following is NOT a reason for a parent-subsidiary relationship?

a. It is easier to establish a parent-subsidiary relationship than a merger.

b. The parent has limited responsibility for the liabilities of the subsidiary.

c. The relationship is permanent the parent can never sell its interest in the subsidiary.

d. The parent can establish a controlling interest with a smaller investment.

_____ 4. How does P record its investment in S?

a. At the fair market value of the assets received.

b. At the fair market value of the assets given up.

c. At the book value of the assets received.

d. At the book value of the assets given up.

_____ 5. Why does the parent company use a worksheet in the preparation of consolidated financial statements?

a. Because there are no consolidated journals and ledgers.

b. Because certain intercompany transactions must be eliminated.

c. Because there might be a difference between the value implied by the purchase price and the value of the net assets.

d. All of the above

_____ 6. The difference between value implied by the purchase price and book value results when the:

a. book value of the net assets acquired is different from the fair value of the identifiable assets acquired.

b. fair value of the net assets acquired is different from the fair value of the net assets used .

c. book value of the net assets acquired is different from the fair value of the consideration paid.

d. book value of the net assets acquired is different from the book value of the assets used.

_____ 7. What is the noncontrolling interest?

a. The interest of the parent company if that company owns less than 100 percent of the subsidiary.

b. The interest of the other stockholders of the subsidiary company which appears on the consolidated statements.

c. The equity of a subsidiary company which is in legal reorganization.

d. The difference between the Ps investment account and the book value of the Ss net assets.

_____ 8. What is the effect of Ss treasury stock on the consolidated statements?

a. The treasury stock is included as a deduction from total equity.

b. The treasury stock is included as a liability.

c. The treasury stock is eliminated in the entry to offset Ps investment against its share of Ss equity.

d. P cannot create a parent-subsidiary relationship if S has treasury stock.

_____ 9. P Company has loaned $10,000 to S Company. P recorded the transfer in its books, but S has not yet recorded the receipt of cash. On the workpaper, the proper entry would be to:

a. eliminate Ps note receivable against Ss general liabilities.

b. reverse the entry in Ps books until next year.

c. adjust Ss liabilities to reflect the loan from P to S before preparing the eliminating entry.

d. ignore the intercompany loan.

_____10. When are consolidated statements for a parent and subsidiary NOT indicated?

a. When the parent does not have actual control over the actions of the subsidiary.

b. When the fiscal year ends of the two companies are not the same.

c. When the subsidiary company is in a foreign company.

d. Consolidated statements must always be prepared when the P owns more than 50 % of S.

_____ 11. In whose books are elimination entries recorded?

a. Both Ps and Ss

b. Neither Ps nor Ss

c. Ps only

d. Ss only