BUSINESS COMBINATIONS

1. If company A acquires 80% of Company B’s shares for $500,000. The fair value

of the identifiable net assets of Company B is $550,000. What is the goodwill

generated in the acquisition?
A. $50,000
B. $60,000
C. $80,000
D. $90,000
2. If Company X acquires 90% of Company Y for $450,000. The fair value of
Company Y's net assets is $500,000. What is the non-controlling interest at fair
value?
A. $40,000
B. $45,000
C. $50,000
D. $55,000
3. If Parent Company P owns 70% of Subsidiary S. In the current year, Parent
Company P reported a net income of $300,000, while Subsidiary S reported a net
income of $100,000. What is the consolidated net income?
A. $360,000
B. $370,000
C. $380,000
D. $400,000
4. If Parent Company A sells goods to Subsidiary B for $200,000, with a markup
of 20%. By year-end, Subsidiary B has 50% of the goods still in inventory. What
adjustment is required to eliminate the unrealized profit in inventory on the
consolidated statements?
A. $10,000
B. $15,000
C. $20,000
D. $25,000
5. If Company C acquires 100% of Company D for $1,200,000. The book value of
Company D's net assets is $900,000, and the fair value of net assets is $1,000,000.
What is the acquisition differential?
A. $100,000
B. $200,000
C. $300,000
D. $400,000
6. If Parent Company E acquires 85% of Subsidiary F. On the acquisition date,
Subsidiary F has retained earnings of $100,000. During the year, Subsidiary F
reports a net income of $50,000 and pays dividends of $10,000. What are the
consolidated retained earnings attributable to the parent?
A. $33,000
B. $34,000
C. $35,000
D. $36,000
7. In business combinations, goodwill is recorded when:

A. Fair value of assets exceeds purchase price

B. Purchase price exceeds the fair value of identifiable net assets
C. The acquisition cost matches the fair value of assets
 D. Goodwill can be separately identified and valued
8. Which principle requires an acquirer to measure each recognized asset and
liability at fair value on the acquisition date?
A. Recognition Principle
B. Fair Value Measurement Principle
C. Disclosure Principle
D. Consistency Principle
9. What is negative goodwill, also known as a bargain purchase?
A. When fair value of combinee’s net assets exceeds the purchase
price
B. Excess purchase price over fair value of net assets
C. Fair value exceeding the value of equity shares issued
D. Negative income resulting from the business combination

10. What should be included in the disclosure for a business combination under
purchase accounting?
A. Only the goodwill amount created
B. Purchase price allocation to each major asset class and
reasons for the combination
C. Fair values disregarded in the acquisition cost
D. Voting rights allocated to each stakeholder

CONSOLIDATED FINANCIAL STATEMENTS

1. Which entity prepares the consolidated financial statements in a parent-

subsidiary relationship?
A) The Subsidiary
 B) The Parent Company
C) Both Parent and Subsidiary jointly
D) An external auditor
2. Which of the following statements best describes the consolidated financial
statements?
A) They represent the parent company's financial position only.
B) They combine all assets, liabilities, revenue, and expenses of both parent
and subsidiary, eliminating inter-company transactions.
C) They include only the parent company's cash flows.
D) They combine only the revenue and expenses of both parent and
subsidiary.

3. In a parent-subsidiary relationship, if a parent company holds over 50% of the

subsidiary’s voting stock, the subsidiary is classified as:
A) An affiliate
B) A minority interest
C) A wholly owned company
D) A branch of the parent company

4. Which factor does NOT affect a parent company’s control over a subsidiary?
A) The subsidiary is undergoing liquidation or court-supervised
reorganization.
B) The parent owns the majority voting interest.
 C) The subsidiary operates in a foreign country with strict economic
controls.
D) Minority shareholders have effective participation rights.
5. When preparing consolidated financial statements, the parent company’s equity
account and the subsidiary’s equity account:
A) Are combined in the consolidated balance sheet.
B) Remain separate in the consolidated balance sheet.
C) Are eliminated in the consolidated balance sheet.
D) Are reported as inter-company transactions.
6. The term "goodwill" in a consolidated balance sheet is calculated as:
A) Total assets minus total liabilities of the parent company.
B) Total assets minus total liabilities of the subsidiary.
C) Investment in the subsidiary minus the fair value of the subsidiary’s
identifiable net assets.
D) Investment in the parent company minus the fair value of the parent’s
identifiable net assets
7. Which of the following is NOT an essential step in preparing consolidated
financial statements?
A) Eliminating inter-company transactions and balances
B) Adjusting the subsidiary's assets to current fair value
C) Allocating excess purchase cost to goodwill
D) Combining only the liabilities of the subsidiary with the parent
company

8. Which agency recommended that companies prioritize economic substance over

legal form when determining consolidation requirements?
A) SEC
 B) FASB
C) IASB
D) IFRS
9. In the FASB’s proposed redefinition of control, control is defined primarily as:
A) Majority ownership of an investee’s common stock.
B) Power over an entity’s assets and decision-making.
C) Ownership of at least 40% of the investee’s voting stock.
D) Having management personnel within the investee company.

10. In a working paper for a consolidated balance sheet, intercompany receivables

and payables are:
A) Combined to show a consolidated amount of zero.
B) Listed separately for parent and subsidiary.
C) Included as assets and liabilities.
D) Recorded only in the subsidiary’s accounts.
FOREIGN CURRENCY
1. Which of the following is considered a foreign currency transaction?
A. A transaction that is measured and recorded in the domestic currency.
B. A transaction that requires settlement in a foreign currency.
C. A transaction that only involves the domestic supplier.
D. A transaction that requires no exchange rate consideration
2. When assets and liabilities are denominated in a currency, it means:
A. The currency amount is fixed and requires no conversion.
B. The amount is flexible and can be settled in any currency.
C. The transaction is measured in the reporting currency only.
D. The asset or liability amount is fixed in terms of a specific currency.
3. A direct exchange quotation refers to:
A. The number of units of foreign currency required to buy one unit of
domestic currency.
B. The amount of domestic currency needed to purchase one unit of
foreign currency.
C. An equal exchange rate between two currencies.
D. The rate at which the bank buys foreign currency from customers.
4. In foreign currency accounting, a "spot rate" refers to:
A. The exchange rate quoted for immediate currency delivery.
B. The future rate of exchange agreed upon today.
C. The rate used exclusively for recording transactions.
D. The rate set by the government for all foreign transactions.

5. A company that recognizes foreign currency transaction gains or losses

immediately follows which perspective?
A. One-transaction perspective
 B. Two-transaction perspective
C. Deferred transaction perspective
D. Monetary perspective
6. Which of the following is true about the one-transaction perspective?
A. Gains or losses from exchange rate changes are recognized separately
from the purchase.
B. Exchange rate fluctuations are adjusted within the cost of goods sold.
C. It reflects a gain or loss at each balance sheet date.
D. The initial transaction is considered final and no adjustments are
made.
7. If an Ethiopian company makes a sale denominated in USD and the USD
weakens by the balance sheet date, what does this typically lead to?
A. A foreign currency transaction gain
B. A foreign currency transaction loss
C. An increase in cash flow
D. An increase in inventory value
8. A forward exchange contract is used to:
A. Immediately deliver currency at the spot rate.
B. Hedge against future exchange rate fluctuations by fixing an exchange
rate for future delivery.
C. Gain additional income from currency fluctuations.
D. Eliminate the need for reporting foreign currency transactions.

9. In the two-transaction perspective, foreign currency transaction gains or losses

are recognized when:
A. The initial transaction occurs.
B. Each balance sheet date and settlement date.
 C. The transaction is settled only.
D. When all currency-related accounts are closed.
10. What is the key difference between a "bid rate" and an "offer rate" in foreign
currency trading?
A. Bid rate is higher than offer rate to gain profit.
B. Bid rate is the price at which a trader buys foreign currency, while
offer rate is the price at which a trader sells it.
C. Both are identical and used interchangeably.
D. Bid rate is only for spot transactions, and offer rate is for forward
transactions.
11. A foreign currency transaction gain or loss is considered as part of:
A. The cost of goods sold
B. Administrative expenses
C. Net income for the period in which the change occurs
D. Deferred tax liabilities
12. What is the primary purpose of using foreign exchange spot and forward
markets?
A. To invest and gain profits on foreign exchange changes
B. To manage and mitigate risks associated with exchange rate
fluctuations
C. To avoid any need for foreign currency transactions
D. To keep financial records in domestic currency only

13. What is the primary purpose of foreign currency translation?

A. To increase revenue in the home office
B. To consolidate foreign and domestic financial statements using a
common currency
 C. To prevent any exposure to foreign exchange risk
D. To avoid the need for foreign subsidiaries
14. Which of the following exchange rates should be used for monetary assets and
liabilities in the temporal method?
A. Historical rate
B. Current rate
C. Average rate
D. None of the above
15. What is transaction exposure?
A. Risk due to foreign currency conversion errors
B. Potential gain or loss from foreign exchange rate fluctuations
between transaction and settlement dates
C. Change in investment value due to economic shifts in a foreign
country
D. None of the above
16. Which translation method is commonly used when the functional currency is
not the reporting currency?
A. Temporal method
B. Current rate method
C. Direct method
D. Monetary method

17. Under which condition is a foreign subsidiary consolidated?

A. If the parent company owns any shares of the subsidiary
B. If the parent company holds a controlling interest in the voting stock
C. When foreign exchange rates are favorable
 D. Only when local currency is the reporting currency
18. Which foreign currency exchange rate is typically used for revenue and
expense items in the income statement under the current rate method?
A. Current exchange rate
B. Average exchange rate
C. Historical rate
D. Future projected rate
19. What does SFAS No. 52 require for a subsidiary whose functional currency is
neither the local currency nor the reporting currency?
A. Use of current rate translation only
B. Translation without remeasurement
C. Two-step process of remeasurement and translation
D. No conversion is necessary
20. If foreign currency accounts are translated at different exchange rates, what is
used to balance accounts?
A. Historical rate adjustment
B. Exchange adjustment balance
C. Investment gain or loss account
D. Remeasurement gain only