FAR 43 - Combined FS and the Consolidating Process Flashcards Preview

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Flashcards in FAR 43 - Combined FS and the Consolidating Process Deck (25):
1

Consolidated financial statements can be prepared for a business combination that was accounted for using which of the following accounting methods?
Acquisition Method
Pooling of Interests Method

Both. Consolidated statements can be prepared when a business combination was accounted for using either the acquisition method or the pooling of interests method. Although the pooling of interests method can no longer be used (since June 30, 2001) to account for new business combinations, business combinations carried out under the pooling of interests method prior to that time still require the preparation of consolidated financial statements.

2

Which one of the following is not necessarily a post-combination characteristic of a legal acquisition?
A. The combining firms remain separate legal entities.
B. A parent-subsidiary relationship exists.
C. The acquiring firm owns 100% of the voting stock of the acquired firm.
D. The combining firms are under common economic control.

C. The acquiring firm in a legal acquisition does not have to own 100% of the voting stock of the acquired firm. In a legal acquisition, the acquiring firm need only acquire greater than 50% (50% + 1 share) of the acquired firm to obtaining a controlling interest. Both firms continue to exist and operate as separate legal entities, the acquiring firm as the parent and the acquired firm as a subsidiary.

3

Which one of the following kinds of accounts is least likely to be eliminated through an eliminating entry on the consolidating worksheet?
A. Receivables.
B. Investment.
C. Goodwill.
D. Payables.

C. Goodwill may be recognized by the entry that eliminates the parent's investment in the subsidiary against the parent's share of the subsidiary's shareholders' equity, but goodwill will not be eliminated through an eliminating entry.

4

Which one of the following methods, if any, may a parent use on its books to carry an investment in a subsidiary that it will consolidate?
Cost Method
Equity Method

Either. A parent may use the cost method, the equity method, or any other method on its books to carry an investment in a subsidiary that it will consolidate. The method that is used on its books will affect the consolidating process, but the final consolidated financial statements will be the same regardless of the method the parent uses on its books.

5

When would a company not consolidate a majority-owned subsidiary?

When the subsidiary is in bankruptcy.
This is the only instance where control does not reside with the majority owner.

6

Which one of the following kinds of eliminations, if any, will be required in every consolidating process?
I. Intercompany Receivables/Payables
II. Intercompany Investment
III. Intercompany Revenues/Expenses

II only. An intercompany investment elimination will be required in every consolidating process (to eliminate the parent's investment against the subsidiary's shareholders' equity). Intercompany receivables/payables and intercompany revenues/expenses eliminations will not be required in every consolidating process. Those kinds of eliminations will be required only if the affiliated companies have engaged in intercompany transactions that resulted in such balances.

7

Which one of the following circumstances will not impact directly the adjustments, eliminations, or related amounts in the consolidating process?
A. Whether the parent company is a manufacturing firm or a service firm.
B. Whether the parent uses the cost or equity method to carry the investment in a subsidiary on its books.
C. Whether the parent owns 100% or less than 100% of the subsidiary.
D. Whether transactions between the affiliated entities originate with the parent or with a subsidiary.

A. Whether the parent company is a manufacturing firm or a service firm (or other type of firm) will not impact directly the adjustments, eliminations, or related amounts in the consolidating process. Whatever the type of firm, the same kinds of adjustments, eliminations, and amounts would have to be made in the consolidating process.

8

T/F: Under GAAP, only consolidated financial statements may be issued as the primary form of public disclosure for a parent and its subsidiaries.

True

9

T/F: A legal consolidation and an accounting consolidation are the same concepts.

False.
A legal consolidation is when a new entity is created to consolidate two or more preexisiting entities.
* The preexisting entitites cease to exist as legal entities.
* Under the acquisition method of accounting, if only equity interest is issued by the new entity, one of the preexisting entities must be determined to be the acquirer, not the new legal entity.

10

T/F: A majority owned subsidiary that is not consolidated would be reported in the parent's consolidated financial statements as an investment.

True

11

T/F: On the date of a business combination using acquisition accounting, the consolidated stockholders' equity will exactly equal the parent company stockholders' equity. This will continue to be the case as long as the parent company uses a complete equity method of accounting for the subsidiary.

True

12

Which one of the following would be of concern in preparing consolidated financial statements at the end of the operating period following a business combination that would not be a concern in preparing financial statements immediately following a combination?
A. Whether or not there are intercompany accounts receivable/accounts payable.
B. Whether or not goodwill resulted from the business combination.
C. Whether the parent carries its investment in the subsidiary using the cost method or the equity method.
D. Whether or not there is a noncontrolling interest in the subsidiary.

C. Whether the parent carries its investment in the subsidiary using the cost method or the equity method would be of concerning in preparing consolidated financial statements at the end of the operating period following a business combination but would not be of concern in preparing financial statements immediately following the combination. When consolidated financial statements are prepared immediately following a combination, there has been no period over which the parent has "carried" the investment on its books. Therefore, the method it WILL (going forward) use is not of concern immediately after the combination.

13

Which of the following financial statements, if any, prepared by a parent immediately after a business combination is likely to be different from financial statements it prepares immediately before the business combination?
Balance Sheet
Income Statement

BS. While a parent's balance sheet prepared immediately after a business combination will be different from its balance sheet prepared immediately before the business combination, the parent's income statement is not likely to be different than the consolidated income statement prepared immediately after the combination. As a result of the combination, the parent will have on its balance sheet an investment account (and probably other accounts/amounts) that it did not have before the combination, but the consolidated income statement prepared immediately after a business combination will likely be the same as the parent's pre-combination income statement.

14

Under which of the following methods of carrying a subsidiary on its books, if any, will the carrying value of the investment normally change following a combination?
Cost Method
Equity Method

Equity method. If the parent uses the equity method to carry on its books the investment in a subsidiary, the carrying value of the investment will change as the equity of the subsidiary changes. However, if the parent uses the cost method, the carrying value on its books normally will not change.

15

Which of the following financial statements, if any, prepared by a parent following an operating period that occurred after a business combination, is likely to be different from financial statements it prepares immediately before the business combination?
Balance Sheet
Income Statement

Both. Both a parent's balance sheet and income statement prepared following an operating period that occurred after a business combination are likely to be different from financial statements it prepares immediately before the business combination. As a result of the combination, the parent will have on its balance sheet an investment account (and probably other accounts/amounts) that it did not have before the combination as well as the effects of post-combination transactions on the assets, liabilities, and equities of the parent and its subsidiaries. In addition, whereas the consolidated income statement prepared immediately before (or immediately after) the combination will consist of only the parent's revenues and expenses, an income statement prepared after an operating period will include the subsidiaries' revenues and expenses as well as the result of post-combination transactions on the revenues and expenses of the parent.

16

T/F: If an investment eliminating entry is not made on the consolidating worksheet, assets on the consolidated balance sheet will be overstated.

True

17

T/F: An investment eliminating entry prepared immediately following a business combination can result in the recognition of goodwill.

True

18

T/F: A consolidated balance sheet can always be prepared immediately following a legal acquisition.

True

19

T/F: If a parent company also has an investment in bonds issued by its subsidiary, the intercompany bonds must be eliminated.

True

20

T/F: In an investment elimination prepared immediately following a business combination accounted for as an acquisition, the subsidiary's individual assets should be adjusted on the worksheet to fair value as of the acquisition.

True

21

T/F: Adjusting entries are always required in the preparation of consolidated statements immediately following a business combination.

False.
Immediately following a business combination, there has been no time available to begin having intercompany transactions.

22

T/F: Following a legal acquisition, a full set of consolidated financial statements must be prepared at the end of each operating period.

True

23

T/F: The entries made on its books during a fiscal period by a parent company using the equity method must be reversed on the consolidating worksheet in order to prevent double counting of the subsidiary's results of operation for the period.

True

24

T/F: Adjusting entries on a consolidating worksheet record in-transit transactions between affiliates as though the in-transit transactions were completed.

True

25

T/F: The method to be used by a parent to carry its investment in a subsidiary will affect the preparation of consolidated financial statements immediately following a business combination.

False.
At the date of combination, the method the Parent will use to account for the investment in the subsidiary (cost, equity or other) is not a consideration - there is no "carrying" period yet.

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