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Any question in bold print has been either replaced or edited in some manner. These include: Multiple Choice Questions 1 through 20. Exercise Questions 1, 2, 4, 6 7. Previous exercise # 5 was removed, since it was based on information that was replaced. Exercises 6-10 were renumbered. Chapter 3 Test Bank AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS Multiple Choice Questions LO1 1. What method must be used if FASB 94 prohibits full consolidation of a 70% owned subsidiary? a. The cost method. b. The Liquidation value. c. Market value. d. Equity method. LO1 2. From the standpoint of accounting theory, which of the following statements is the best justification for the preparation of consolidated financial statements? a. In substance the companies are separate, but in form the companies are one entity. b. In substance the companies are one entity, but in form they are separate. c. In substance and form the companies are one entity. d. In substance and form the companies are separate entities. LO2 3. Penguin Corporation owns 90% of the outstanding voting stock of Crevice Company and Burrow Corporation owns the remaining 10% of Crevices voting stock. On the consolidated financial statements of Penguin Corporation and Subsidiary, Burrow is a. an affiliate. b. a minority interest. c. an equity investee. d. a related party 1 LO2 4. A major motivation for FASBs creation of Statement No. 94 was a. temporary control was not being disclosed properly. b. the elimination off-balance sheet financing c. situations occurred where subsidiary control did not lie with the parent company. d. the risk of subsidiary legal reorganization or bankruptcy was not disclosed. LO2 5. Muttonbird Inc. has 90% ownership of Beach Company, but should exclude Beach under FASB 94 if a. Beach is in a regulated industry. b. Muttonbird uses the equity method for Beach. c. Muttonbird expects to sell Beach within a year. d. Beach is in a foreign country and records its books in a foreign currency. LO2 6. Subsequent to an acquisition, the parent company and consolidated financial statement amounts would not be the same for a. investments in unconsolidated subsidiaries. b. investments in consolidated subsidiaries. c. capital stock. d. ending retained earnings. LO3 7. On June 1, 2005, Gull Company acquired 100% of the stock of Scrap Inc. On this date, Gull had Retained Earnings of $200,000 and Scrap had Retained Earnings of $100,000. On December 31, 2005, Gull had Retained Earnings of $240,000 and Scrap had Retained Earnings of $120,000. The amount of Retained Earnings that appeared in the December 31, 2005 consolidated balance sheet was: a. $240,000. b. $260,000. c. $300,000. d. $360,000.... View Full Document

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