CA Corporate Accounting 3 — Questions and Answers
Question 1: A parent company owns 80% of a subsidiary. Under the acquisition method, what percentage of the subsidiary's assets and liabilities appears on the consolidated balance sheet?
- 80%
- 20%
- 100% (Correct answer)
- None — only dividends are recorded
Correct answer: 100%
Under the acquisition method, 100% of the subsidiary's assets and liabilities are consolidated, with a noncontrolling interest recorded for the 20% minority.
Question 2: Goodwill arises in a business combination when the purchase price exceeds the fair value of identifiable net assets. Under US GAAP, how is goodwill subsequently measured?
- Amortized over 40 years
- Amortized over 10 years
- Tested annually for impairment (Correct answer)
- Written off immediately
Correct answer: Tested annually for impairment
ASC 350 requires goodwill to be tested for impairment at least annually rather than amortized.
Question 3: Which of the following intercompany transactions must be eliminated in full during the consolidation process?
- Sales from the parent to the subsidiary (Correct answer)
- Dividends paid to external shareholders
- Depreciation on externally purchased assets
- Dividends received from unconsolidated investees
Correct answer: Sales from the parent to the subsidiary
Intercompany sales between parent and subsidiary are eliminated in full to avoid double-counting revenue and cost.
Question 4: Under the equity method, an investor owning 30% of an investee records which of the following when the investee earns net income of $200,000?
- Debit Investment $60,000; Credit Dividend Revenue $60,000
- Debit Investment $60,000; Credit Investment Income $60,000 (Correct answer)
- Debit Cash $60,000; Credit Investment Income $60,000
- No entry until dividends are declared
Correct answer: Debit Investment $60,000; Credit Investment Income $60,000
Under the equity method, the investor recognizes its share of earnings by debiting the Investment account and crediting Investment Income.
Question 5: A corporation has net income of $900,000, preferred dividends of $100,000, and a weighted-average of 400,000 common shares outstanding. What is basic earnings per share?
- $2.00
- $2.25 (Correct answer)
- $2.50
- $3.00
Correct answer: $2.25
Basic EPS = (Net income – Preferred dividends) ÷ Weighted-average shares = $800,000 ÷ 400,000 = $2.00.
Question 6: In a stock split, for example a 2-for-1 split, what happens to par value per share and the total stockholders' equity?
- Par value doubles; total equity doubles
- Par value halves; total equity is unchanged (Correct answer)
- Par value halves; total equity halves
- Par value is unchanged; total equity doubles
Correct answer: Par value halves; total equity is unchanged
A stock split doubles the share count and halves the par value per share, leaving total stockholders' equity unchanged.
Question 7: Which financial statement best shows whether a profitable company is generating sufficient cash to meet its obligations?
- Income statement
- Balance sheet
- Statement of cash flows (Correct answer)
- Statement of changes in equity
Correct answer: Statement of cash flows
The statement of cash flows reveals actual cash inflows and outflows, showing whether profits are converting to cash.
CA Corporate Accounting 3
A parent company owns 80% of a subsidiary.
Under the acquisition method, what percentage of the subsidiary's assets and liabilities appears on the consolidated balance sheet?