Accounting Question

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ACC 321 – Fall 2023
Final Exam
Name ___________________________________________________
Date _____________
1. Baker Company owns 15% of the common stock of Charlie Corporation and used the fair-value
method to account for this investment. Charlie reported net income of $120,000 for 2021 and paid
dividends of $70,000 on October 1, 2021. How much income should Baker recognize on this
investment in 2021?
a) $18,000.
b) $10,500.
c) $28,500.
d) $7,500.
e) $50,000.
2. Loeffler Company owns 35% of the common stock of Tetter Co. and uses the equity method to
account for the investment. During 2021, Tetter reported income of $260,000 and paid dividends
of $90,000. There is no amortization associated with the investment. During 2021, how much
income should Loeffler recognize related to this investment?
a) $90,000.
b) $91,000.
c) $122,500.
d) $31,500.
e) $59,500.
3. On January 1, 2021, Lee Company paid $1,870,000 for 80,000 shares of Thomas Co.’s voting
common stock which represents a 45% investment. No allocation to goodwill or other specific
account was necessary. Significant influence over Thomas was achieved by this acquisition.
Thomas distributed a dividend of $2.00 per share during 2021 and reported net income of
$720,000. What was the balance in the Investment in Thomas Co. account found in the financial
records of Lee as of December 31, 2021?
a) $2,114,000.
b) $2,194,000.
c) $2,354,000.
d) $2,158,000.
e) $2,034,000.
4. On January 1, 2019, Dermot Company purchased 15% of the voting common stock of Horne
Corp. On January 1, 2021, Dermot purchased 28% of Horne’s voting common stock. If Dermot
achieves significant influence with this new investment, how must Dermot account for the change
to the equity method?
a) It must use the equity method for 2021 but should make no changes in its financial
statements for 2020 and 2019.
b) It should prepare consolidated financial statements for 2021.
c) It must restate the financial statements for 2020 and 2019 as if the equity method had been
used for those two years.
d) It should record a prior period adjustment at the beginning of 2021 but should not restate
the financial statements for 2020 and 2019.
e) It must restate the financial statements for 2020 as if the equity method had been used
then.
5. During January 2020, Nelson, Inc. acquired 30% of the outstanding common stock of Fuel Co.
for $1,600,000. This investment gave Nelson the ability to exercise significant influence over
Fuel. Fuel’s assets on that date were recorded at $7,200,000 with liabilities of $3,400,000. Any
excess of cost over book value of Nelson’s investment was attributed to unrecorded patents
having a remaining useful life of ten years. In 2020, Fuel reported net income of $650,000. For
2021, Fuel reported net income of $800,000. Dividends of $250,000 were paid in each of these
two years. What was the reported balance of Nelson’s Investment in Fuel Co. at December 31,
2021?
a) $1,793,000.
b) $1,885,000.
c) $1,943,000.
d) $1,977,000.
e) $1,054,300.
6. On January 1, 2021, Bangle Company purchased 30% of the voting common stock of Sleat Corp.
for $1,000,000. Any excess of cost over book value was assigned to goodwill. During 2021, Sleat
paid dividends of $24,000 and reported a net loss of $140,000. What is the balance in the
investment account on December 31, 2021?
a) $950,800.
b) $958,000.
c) $836,000.
d) $990,100.
e) $956,400.
7. On January 1, 2021, Halpert Inc. acquired 30% of Schrute Corp. Halpert used the equity method
to account for the investment. On January 1, 2022, Halpert sold two-thirds of its investment in
Schrute. It no longer had the ability to exercise significant influence over the operations of
Schrute. How should Halpert account for this change?
a) Halpert should continue to use the equity method to maintain consistency in its financial
statements.
b) Halpert should restate the prior years’ financial statements and change the balance in the
investment account as if the fair-value method had been used since 2021.
c) Halpert has the option of using either the equity method or the fair-value method for 2021
and future years.
d) Halpert should report the effect of the change from the equity to the fair-value method as a
retrospective change in accounting principle.
e) Halpert should use the fair-value method for 2022 and future years, but should not make a
retrospective adjustment to the investment account.
8. Kane Inc. owns 30% of Woodhouse Co. and applies the equity method. During the current year,
Kane bought inventory costing $71,500 and then sold it to Woodhouse for $130,000. At year-end,
only $30,000 of merchandise was still being held by Woodhouse. What amount of intra-entity
gross profit must be deferred by Kane?
a) $9,000.
b) $4,050.
c) $13,500.
d) $17,550.
e) $5,600.
9. On January 4, 2021, Snow Co. purchased 40,000 shares (40%) of the common stock of Walker
Corp., paying $900,000. There was no goodwill or other cost allocation associated with the
investment. Snow has significant influence over Walker. During 2021, Walker reported income
of $240,000 and paid dividends of $75,000. On January 2, 2022, Snow sold 5,000 shares for
$125,000. What was the balance in the investment account after the shares had been sold?
a) $871,500.
b) $845,250.
c) $761,250.
d) $897,250.
e) $950,250.
10. On January 3, 2021, Madison Corp. purchased 30% of the voting common stock of Huntsville
Co., paying $3,000,000. Madison decided to use the equity method to account for this investment.
At the time of the investment, Huntsville’s total stockholders’ equity was $8,000,000. Madison
gathered the following information about Huntsville’s assets and liabilities:
Buildings (10-year life)
Equipment (5-year life)
Franchises (8-year life)
Book Value
$
400,000
1,200,000
$
0
Fair Value
600,000
1,400,000
$
480,000
$
For all other assets and liabilities, book value and fair value were equal. Any excess of cost over fair
value was attributed to goodwill, which has not been impaired.
What is the amount of goodwill associated with the investment?
a)
b)
c)
d)
e)
$600,000.
$264,000.
$0.
$336,000.
$480,000.
11. In an acquisition where 100% control is acquired, how would the land accounts of the parent and
the land accounts of the subsidiary be reported on consolidated financial statements?
Parent
Subsidiary
A) Book Value Book Value
B) Book Value Fair Value
C) Fair Value
Fair Value
D) Fair Value
Book Value
E) Cost
Cost
a)
b)
c)
d)
e)
Option A.
Option B.
Option C.
Option D.
Option E.
12. How are direct and indirect costs accounted for when applying the acquisition method for a
business combination?
A.
B.
C.
D.
E.
Direct Costs
Expensed
Increase investment account
Expensed
Increase investment account
Increase investment account
a)
b)
c)
d)
e)
Indirect Costs
Expensed
Decrease additional paid-in Capital
Decrease additional paid-in capital
Expensed
Increase investment account
Option A.
Option B.
Option C.
Option D.
Option E.
13. What is the primary difference between: (i) accounting for a business combination when the
subsidiary is dissolved; and (ii) accounting for a business combination when the subsidiary
retains its incorporation?
a) If the subsidiary is dissolved, it will not be operated as a separate division.
b) If the subsidiary is dissolved, assets and liabilities are consolidated at their book values.
c) If the subsidiary retains its incorporation, there will be no goodwill associated with the
acquisition.
d) If the subsidiary retains its incorporation, assets and liabilities are consolidated at their
book values.
e) If the subsidiary retains its incorporation, the consolidation is not formally recorded in the
accounting records of the acquiring company.
14. According to GAAP, which of the following is true with respect to the pooling of interest method
of accounting for business combinations?
a) It was the only method used prior to 2002.
b) It must be used for all new acquisitions.
c) GAAP allowed its use prior to 2002.
d) It, or the acquisition method, may be used at the acquirer’s discretion.
e) GAAP requires it to be used instead of the acquisition method for business combinations
for which $50 billion or more in consideration is transferred.
15. Which of the following examples accurately describes a difference in the types of business
combinations?
a) A statutory merger can only be effected through an asset acquisition while a statutory
consolidation can only be effected through a capital stock acquisition.
b) A statutory merger can only be effected through a capital stock acquisition while a
statutory consolidation can only be effected through an asset acquisition.
c) A statutory merger requires the dissolution of the acquired company while a statutory
consolidation requires dissolution of the companies involved in the combination following
the transfer of assets or stock to a newly formed entity.
d) A statutory consolidation requires dissolution of the acquired company while a statutory
merger does not require dissolution.
e) Both a statutory merger and a statutory consolidation can only be effected through an asset
acquisition but only a statutory consolidation requires dissolution of the acquired
company.
16. Which one of the following accounts would not appear in the consolidated financial statements at
the end of the first fiscal period of the combination?
a) Goodwill.
b) Equipment.
c) Retained Earnings.
d) Common Stock.
e) Equity in Subsidiary Earnings.
17. Which of the following internal record-keeping methods can a parent choose to account for a
subsidiary acquired in a business combination?
a) Initial value or book value.
b) Initial value, lower-of-cost-or-market-value, or equity.
c) Initial value, equity, or partial equity.
d) Initial value, equity, or book value.
e) Initial value, lower-of-cost-or-market-value, or partial equity.
18. Which one of the following varies between the equity, initial value, and partial equity methods of
accounting for an investment?
a) The amount of consolidated net income.
b) Total assets on the consolidated balance sheet.
c) Total liabilities on the consolidated balance sheet.
d) The balance in the investment account on the parent’s books.
e) The amount of consolidated cost of goods sold.
19. An impairment model is used
a) To assess whether asset write-downs are appropriate for indefinite-lived assets.
b) To calculate the fair value of intangible assets.
c) To calculate the amortization of indefinite-lived assets over their useful lives.
d) To determine whether the fair value of assets should be recognized.
e) To determine the likelihood that the fair value of an assumed liability will increase.
20. Craft Corp. acquired all of the common stock of Pitts Co. in 2019. Pitts maintained its
incorporation. Which of Craft’s account balances would vary between the equity method and the
initial value method?
a) Goodwill, Investment in Pitts Co., and Retained Earnings.
b) Expenses, Investment in Pitts Co., and Equity in Subsidiary Earnings.
c) Investment in Pitts Co., Equity in Subsidiary Earnings, and Retained Earnings.
d) Common Stock, Goodwill, and Investment in Pitts Co.
e) Expenses, Goodwill, and Investment in Pitts Co.