Chapter 4 - MATCHING Match the terms in the list to the definitions below. Each
ID: 2417703 • Letter: C
Question
Chapter 4 - MATCHING
Match the terms in the list to the definitions below. Each term may be used only once.
A. Cost method F. Investment elimination K. Computation and
B. Partial equity method G. Reciprocity allocation schedule
C. Complete equity method H. No significant influence L. Consolidated retained
D. Intercompany revenue I. Significant influence earnings
E. Interim acquisition J. Effective control M. Investment in associates
_____ 1. An amount that reflects the consolidated entity’s portion of S’s undistributed income since acquisition
_____ 2. The total of P’s retained earnings plus the portion of S’s retained earnings since acquisition
_____ 3. The technique where only P’s share of S’s declared dividends is recorded
_____ 4. The workpaper entry which offsets P’s asset account with S’s equity accounts
_____ 5. Income given by one affiliate in a business combination to another affiliate
_____ 6. One corporation has between 20 and 50 percent of the stock of another corporation
_____ 7. A technique to determine how to divide up the difference between implied and book value
_____ 8. A way of recording a business combination where P’s share of S’s income and dividends are recorded
_____ 9. One corporation owns less than 20 percent of another corporation
_____10. A technique of accounting for a combination where the effects of all intercompany transactions are reflected in P’s books
_____11. P buys a controlling interest in S at some time other than the end of S’s fiscal year
_____12. P owns more than 50 percent of S’s outstanding stock
_____13. IFRS term for equity method investments
Chapter 4 - MULTIPLE CHOICE QUESTIONS
Choose the BEST answer for the following questions.
_____ 1. If a corporation shows effective control over another corporation, the first corporation owns:
a. less than 20 percent of the second corporation.
b. between 20 and 50 percent of the second corporation.
c. over 50 percent of the second corporation.
d. 100 percent of the second corporation.
_____ 2. The cost method of accounting for a parent-subsidiary relationship records P’s share of S’s:
a. dividends as income for the year.
b. income whether dividends are paid or not.
c. dividends as a reduction of the investment account.
d. none of the above.
_____ 3. The primary difference between the partial equity and the complete equity methods of accounting for business combinations is:
a. under the complete equity method, the combination assumes that the two businesses have always been together.
b. under the complete equity method, the parent records amortization and/or depreciation to account for the difference between implied and book value.
c. under the partial equity method the parent records its share of dividends as income.
d. there is no difference between the partial equity and full equity methods.
_____ 4. What is the purpose of the consolidated statements workpaper?
a. The workpaper allows for year-end adjustments of accruals and deferrals.
b. The workpaper takes the balances from the consolidated ledger to prepare the consolidated financial statements.
c. The workpaper helps the accountant determine the amount of consolidated income taxes.
d. The workpaper accumulates, classifies, and arranges information from the trial balances of the affiliated companies.
_____ 5. What is the noncontrolling interest in S’s income?
a. The difference between P’s reported income and S’s reported income
b. The part of S’s income that is owned by shareholders other than P
c. The allocation of difference between implied and book value
d. The portion of S’s income that is not included in consolidated income
_____ 6. What is consolidated retained earnings?
a. P’s retained earnings plus S’s retained earnings.
b. P’s retained earnings only.
c. P’s retained earnings plus P’s share of the net increase in S’s retained earnings since acquisition.
d. P’s retained earnings plus P’s share of S’s net income for the current year less P’s share of S’s dividends declared.
_____ 7. Under the cost method, to establish reciprocity (convert to equity), P’s share:
a. of the difference between S’s retained earnings at the beginning and the end of the year must be added to P’s investment.
b. of the difference between S’s reported income and the noncontrolling interest income must be added to P’s investment.
c. of the difference between S’s retained earnings at the beginning of the year and at acquisition must be added to P’s investment.
d. of S’s dividends must be subtracted from P’s investment.
_____ 8. Under the equity methods, the elimination entry to establish reciprocity (convert to equity) between P’s investment and S’s equity:
a. will add P’s share of S’s undistributed income to P’s investment.
b. does not have to be made.
c. will have S record its noncontrolling interest in income.
d. will have S decrease its retained earnings to reflect income not distributed.
_____ 9. Why should intercompany revenues and expenses be eliminated?
a. Because the consolidated entity cannot earn from itself.
b. Because the consolidated entity cannot owe itself a debt.
c. Because the consolidated financial statements would include overstated amounts.
d. Both A and C.
_____10. What is meant by an interim acquisition of subsidiary stock?
a. P purchases a controlling interest in S’s equity at some time other than the end of the fiscal year.
b. P purchases S’s treasury stock.
c. P restates its income to include both pre-acquisition and post-acquisition earnings.
d. P divides its income into pre-acquisition and post-acquisition earnings.
_____11. Under the partial-year reporting alternative:
a. S generally closes its books at the date of acquisition.
b. P buys its share of S’s pre-acquisition earnings.
c. retained earnings eliminated are from the date of acquisition, not the beginning of the fiscal year.
d. all of the above.
_____12. The accounting for investments using the equity method under U.S. GAAP and using the investment in associates method under IFRS is the same for all the following issues except:
a. that P and S have uniform accounting policies.
b. P’s carrying value of S’s investment account.
c. definition of P having significant influence over S
d. allowance of 3-month reporting period difference between P and S
_____13. In a consolidated statements workpaper, which items are carried forward from one section to another?
a. P’s retained earnings, but not S’s
b. The total of the income section to the retained earnings section and then the total of the retained earnings section to the balance sheet section.
c. The eliminations must balance for each section in order to carry them forward.
d. Each section on the workpaper is separate, so no numbers are carried forward.
Explanation / Answer
Chapter 4 - MATCHING.
1. Reciprocity
2. Consolidated retained earnings
3. Cost method
4.Investment elimination
5.Intercompany revenue
6.Significant influence
7.Computation and allocation schedule
8.Partial equity method
9.No significant influence
10.Complete equity method
11.Interim acquisition
12.Effective control
13.Investment in associates
Chapter 4 - MULTIPLE CHOICE QUESTIONS
1.c. over 50 percent of the second corporation
2. a. dividends as income for the year.
3. b. under the complete equity method, the parent records amortization and/or depreciation to account for the difference between implied and book value.
4. d. The workpaper accumulates, classifies, and arranges information from the trial balances of the affiliated companies.
5. b.The part of S’s income that is owned by shareholders other than P
6. c. P’s retained earnings plus P’s share of the net increase in S’s retained earnings since acquisition
7.c. of the difference between S’s retained earnings at the beginning of the year and at acquisition must be added to P’s investment.
8. b. does not have to be made.
9. d.Both A and C.
10. a.P purchases a controlling interest in S’s equity at some time other than the end of the fiscal year.
11. d.all of the above
12. a.that P and S have uniform accounting policies.
13. b.The total of the income section to the retained earnings section and then the total of the retained earnings section to the balance sheet section.
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