Chapter 08 Consolidated Cash Flows and Changes in Ownership MCQ's with Correct Answers
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Course
BUSINESS 047866101
Institution
BUSINESS 047866101
Multiple Choice Questions
1. A Inc. owns 80% of B's outstanding voting shares. Under which of the following scenarios
would A's ownership percentage of B change?
A. B Inc. announces a 2-for-1 stock split to all its common shareholders.
B. B issues an additional 10,000 voting shares; A acquires ...
chapter 08 consolidated cash flows and changes in ownership
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Chapter 08 - Consolidated Cash Flows and Changes in Ownership
Chapter 08
Consolidated Cash Flows and Changes in Ownership
Multiple Choice Questions
1. A Inc. owns 80% of B's outstanding voting shares. Under which of the following scenarios
would A's ownership percentage of B change?
A. B Inc. announces a 2-for-1 stock split to all its common shareholders.
B. B issues an additional 10,000 voting shares; A acquires 8,000 shares of the new issue.
C. B issues an additional 10,000 voting shares; A acquires 6,400 shares of the new issue.
D. B retires 20,000 voting share, and in doing so, buy back 16,000 shares from A.
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Easy
Learning Objective: 08-02 Prepare consolidated financial statements in situations where the parent's ownership has increased (step
purchase).
Topic: 08-04 Block Acquisitions of Subsidiary (Step Purchases)
Topic: 08-10 Numerous Small Purchases
Topic: 08-11 Repurchase of Shares by Subsidiary
2. Assume that X Corp. controls Y Corp., X constantly purchases and sells Y's voting shares
on the open market while always ensuring that it maintains a controlling interest over Y.
Which of the following statements pertaining to X buying and selling activity is correct?
A. X's activity has no effect on the non-controlling interest.
B. As X sells shares of Y, the non-controlling interest increases.
C. As X sells shares of Y, the non-controlling interest decreases.
D. As X buys shares of Y, the non-controlling interest increases.
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: Easy
Learning Objective: 08-02 Prepare consolidated financial statements in situations where the parent's ownership has increased (step
purchase).
Topic: 08-04 Block Acquisitions of Subsidiary (Step Purchases)
Topic: 08-10 Numerous Small Purchases
Topic: 08-11 Repurchase of Shares by Subsidiary
8-1
,Chapter 08 - Consolidated Cash Flows and Changes in Ownership
3. ABC Inc. purchased 35,000 voting shares out of 123 Inc.'s 50,000 outstanding voting
shares for $350,000 on January 1, 2020.
On the date of acquisition, 123's common shares and retained earnings were valued at
$120,000 and $180,000, respectively. 123's book values approximated its fair values on the
acquisition date with the exception of a patent and a trademark, neither of which had been
previously recorded. The fair values of the patent and trademark on the date of acquisition
were $30,000 and $20,000 respectively.
On January 2, 2020, ABC sold 7,000 shares of 123 on the open market for $57,750.
ABC Inc. uses the equity method to account for its investment in 123 Inc.
What is the amount of goodwill arising from this business combination?
A. ($5,000)
B. Nil
C. $5,000
D. $150,000
Calculation and allocation of acquisition differential:
Acquisition cost for 70% (35/50 = 70%) $350,000
Implied acquisition cost for 100% $500,000
Less: Carrying value of net identifiable
assets of subsidiary
Common shares $120,000
Retained earnings $180,000 $300,000
Acquisition differential $200,000
Allocation: (FV-CV)
Patent $30,000
Trademark $20,000
Goodwill $150,000
8-2
,Chapter 08 - Consolidated Cash Flows and Changes in Ownership
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 08-03 Prepare consolidated financial statements after the parent's ownership has decreased.
Topic: 08-14 Parent Sells Some of Its Holdings in Subsidiary
Topic: 08-16 Subsidiary Issues Additional Shares to Public
4. ABC Inc. purchased 35,000 voting shares out of 123 Inc.'s 50,000 outstanding voting
shares for $350,000 on January 1, 2020.
On the date of acquisition, 123's common shares and retained earnings were valued at
$120,000 and $180,000, respectively. 123's book values approximated its fair values on the
acquisition date with the exception of a patent and a trademark, neither of which had been
previously recorded. The fair values of the patent and trademark on the date of acquisition
were $30,000 and $20,000 respectively.
On January 2, 2020, ABC sold 7,000 shares of 123 on the open market for $57,750.
ABC Inc. uses the equity method to account for its investment in 123 Inc.
What percentage of its Investment in 123 was sold by ABC?
A. 14%
B. 50%
C. 56%
D. 20%
The sale by ABC Inc. of 7,000 123 Inc shares represents a 20% reduction in ABC Inc.'s
investment [7,000/35,000 = 20%].
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 08-03 Prepare consolidated financial statements after the parent's ownership has decreased.
Topic: 08-14 Parent Sells Some of Its Holdings in Subsidiary
Topic: 08-16 Subsidiary Issues Additional Shares to Public
8-3
, Chapter 08 - Consolidated Cash Flows and Changes in Ownership
5. ABC Inc. purchased 35,000 voting shares out of 123 Inc.'s 50,000 outstanding voting
shares for $350,000 on January 1, 2020.
On the date of acquisition, 123's common shares and retained earnings were valued at
$120,000 and $180,000, respectively. 123's book values approximated its fair values on the
acquisition date with the exception of a patent and a trademark, neither of which had been
previously recorded. The fair values of the patent and trademark on the date of acquisition
were $30,000 and $20,000 respectively.
On January 2, 2020, ABC sold 7,000 shares of 123 on the open market for $57,750.
ABC Inc. uses the equity method to account for its investment in 123 Inc.
What is ABC's ownership interest in 123 after its sale?
A. 70%
B. 14%
C. 42%
D. 56%
ABC Inc shares held in 123 Inc after the sale = 28,000 [35,000 - 7,000]. Percentage
ownership interest after the sale is 56% [28,000/50,000].
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: Easy
Learning Objective: 08-03 Prepare consolidated financial statements after the parent's ownership has decreased.
Topic: 08-14 Parent Sells Some of Its Holdings in Subsidiary
Topic: 08-16 Subsidiary Issues Additional Shares to Public
8-4
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