Chapter #1 1. Estimated goodwill is determined by computing the present value of the A) average earnings. B) excess earnings. C) expected future earnings. D) normal earnings. 2. Which of the following statements would not be a valid or logical reason for entering into a business combination? A) to increase market share. B) to avoid becoming a takeover target. C) to reduce risk by acquiring established product lines. D) the operating costs of the combined entity would be more than the sum of the separate entities. 3. The parent company concept of consolidation represents the view that the primary purpose of consolidated financial statements is: A) to provide information relevant to the controlling stockholders. B) to represent the view that the affiliated companies are a separate, identifiable economic entity. C) to emphasis control of the whole by a single management. D) to include only a portion of the subsidiary's assets, liabilities, revenues, expenses, gains, and losses. 4. Which of the following statements is correct? A) Total elimination is consistent with the parent company concept. B) Partial elimination is consistent with the economic unit concept. C) Past accounting standards required the total elimination of unrealized intercompany profit in assets acquired from affiliated companies. D) none of these. Page 1
5. Under the parent company concept, consolidated net income __________ the consolidated net income under the economic unit concept. A) is the same as B) is higher than C) is lower than D) can be higher or lower than 6. Under the economic unit concept, noncontrolling interest in net assets is treated as A) a liability. B) an asset. C) stockholders' equity. D) an expense. 7. The parent company concept adjusts subsidiary net asset values for the A) differences between cost and fair value. B) differences between cost and book value. C) total fair value implied by the price paid by the parent. D) total cost implied by the price paid by the parent. 8. According to the economic unit concept, the primary purpose of consolidated financial statements is to provide information that is relevant to A) majority stockholders. B) minority stockholders. C) creditors. D) both majority and minority stockholders. 9. Which of the following statements is correct? A) The economic unit concept suggests partial elimination of unrealized intercompany profits. B) The parent company concept suggests partial elimination of unrealized intercompany profits. Page 2
C) The economic unit concept suggests no elimination of unrealized intercompany profits. D) The parent company concept suggests total elimination of unrealized intercompany profits. 10. When following the parent company concept in the preparation of consolidated financial statements, noncontrolling interest in combined income is considered a(n) A) prorated share of the combined income. B)
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