The equity method of accounting for an investment requires the investor to accrue income when earned by the investee. A. True B. False On January 1, 20X5, Post Company purchased an 80 percent investment in Stake Company. The acquisition cost was equal to Post’s equity in Stake’s net assets at that date. On January 1, 20X5, Post and Stake had retained earnings of $500,000 and $100,000, respectively. During 20X5, Post had net income of $200,000, which included its equity in Stake’s earnings, and declared dividends of $50,000; Stake had net income of $40,000 and declared dividends of $20,000; there were no other intercompany transactions between the parent and subsidiary. On December 31, 20X5, what should the consolidated retained earnings be? A. $650,000 B. $666,000 C. $766,000 D. $770,000 E. $800,000 Appreciation to foreign exchange risk exists when a payment to be made is stated in terms of a foreign currency. A. True B. False Perez Inc. owns 80 percent of Senior Inc. During 20X2, Perez sold goods with a 40 percent gross profit to Senior. Senior sold all of these goods in 20X2. For 20X2 consolidated financial statements, how should the summation of Perez and Senior income statement items be adjusted? A. Sales and cost of goods sold should be reduced by the intercompany sales B. Sales and costs of goods sold should be reduced by 80 percent of the intercompany sales C. Net income should be reduced by 80 percent of the gross profit on intercompany sales D. No adjustment is necessary E. None of the above The assets and liabilities of an acquired company are consolidated based on their ___________ at the date of purchase. A. Fair market value B. Purchase price C. Remaining useful life D. Discounted price E. Amortized value At December 21, 20X9, Grey Inc. owned 90 percent of Winn Corporation, a consolidated subsidiary, and 20 percent of Carr Corporation, an investee in which Grey cannot exercise significant influence. On the same date, Grey had receivables of $300,000 from Winn and $200,000 from Carr. In its December 21, 20X9 consolidated balance sheet, Grey should report accounts receivable from it affiliates of: A. $500,000 B. $340,000 C. $230,000 D. $200,000 E. $150,000 What are the two most popular methods for hedging foreign exchange risk? A. Forward bids and currency options B. Forward contracts and currency bids C. Forward bids and currency bids D. Forward contracts and currency options E. None of the above Foreign accounting standards are generally more detailed and have more disclosure requirements than in the United States. A. True B. False The ____________ method of accounting for an investment is applied whenever the owner has the ability to apply significant influence over an organization by enjoying 20-50% ownership. A. Consolidated B. Equity C. Pooling of assets D. Purchase E. None of the above Which of the following is the best theoretical justification for consolidated financial statements? A. In form the companies are one entity; in substance they are separate B. In form the companies are separate; in substance they are one entity C. In form and substance, the companies are one entity D. In form and substance, the companies are separate E. None of the above Goodwill is: A. Seldom reported because it is too difficult to measure B. Reported when more than book value is paid in purchasing another company C. Reported when the fair value of the payment made in the purchase is greater than the fair value of the net identifiable assets acquired D. Generally smaller for small companies and increases in amount as the companies acquired increase in size E. None of the above On October 1, X Company acquired for cash all of Y Company’s outstanding common stock. Both companies have a December 31 year-end and have been in business for many years. Consolidated net income for the year ended December 31 should include net income of: A. X Company for three months and Y Company for three months B. X Company for 12 months and Y Company for 3 months C. X Company for 12 months and Y Company for 12 months D. X Company for 12 months, but no income from Y Company until Y Company distributes a dividend E. None of the aboveA 70 percent owned subsidiary company declares and pays a cash dividend. What effect does the dividend have on the retained earnings and minority interest balances in the parent company’s consolidated balance sheet? A. No effect on either retained earnings or minority interest B. No effect on retained earnings and a decrease in minority interest C. Decreases in both retained earnings and minority interest D. Increases in both retained earnings and minority interest E. A decrease in retained earnings and no effect on minority interest How is the portion of consolidated earnings to be assigned to the noncontrolling interest in consolidated financial statements determined? A. The parent’s net income is subtracted from the subsidiary’s net income to determine the noncontrolling interest. B. The subsidiary’s net income is extended to the noncontrolling interest C. The amount of the subsidiary’s earnings recognized for consolidation purposes is multiplied by the noncontrolling interest’s percentage of ownership D. The amount of consolidated earnings on the consolidated workpapers is multiplied by the noncontrolling interest percentage on the balance sheet date E. None of the above Which of the following is not an adjustment to consolidated net income in arriving at net cash provided by operating activities under the indirect method? A. Dividend payments to non-controlling shareholders B. Depreciation expense resulting from the write-off of a purchase differential C. Income assigned to non-controlling interest D. Gain on sale of land to a non-affiliate E. None of the above GHI Corporation sells land to its wholly-owned subsidiary, KLM Company, for $50,000. The land has a book value of $40,000. The entry to eliminate the unrealized intercompany gain would include: A. A credit to Gain on Sale of Land for $10,000 B. A debit to Land for $10,000 C. A debit to Gain on Sale of Land for $40,000 D. A credit to Land for $40,000 E. None of the above Which of the following is true if the books of a subsidiary are closed immediately before the parent acquires it in the middle of the year? A. Pre-acquisition earnings and dividends of the subsidiary are carried forward. B. The balance of the subsidiary’s retained earnings at the beginning of the year serves as the beginning balance in making the investment elimination entry C. The subsidiary’s retained earnings at the beginning of the period (date of combination) is eliminated D. All of the above E. None of the above When a business combination occurs, the value of a company’s assets and liabilities is usually determined at historical cost. A. True B. False Which of the following is not listed by APB Opinion 18 as an indication of significant influence? A. Investor representation of the board of directors of the investee B. Material intercompany transactions C. Technology dependency D. At least 10% ownership by the investor of the investee E. Interchange of managerial personnel What is a subsidiary’s functional currency? A. The parent’s native currency B. The currency in which transactions are denominated C. Always in the U.S. dollar D. Always the currency of the country in which the transaction occurs E. The currency in which the entity primarily generates and expends cash