When a Parent Uses the Acquisition Method for Business Combinations

question 67

Multiple Choice

When a parent uses the acquisition method for business combinations and sells shares of its subsidiary, which of the following statements is false?

• A) If majority control is still maintained, consolidated financial statements are still required.
• B) If majority control is not maintained but significant influence exists, the equity method to account for the investment is still used but consolidated financial statements are not required.
• C) If majority control is not maintained but significant influence exists, the equity method is still used to account for the investment and consolidated financial statements are still required.
• D) If majority control is not maintained and significant influence no longer exists, a prospective change in accounting principle to the fair value method is required.
• E) A gain or loss calculation must be prepared if control is lost.

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Definitions:

Fixed Overhead

Regular, consistent expenses not directly tied to production levels, such as rent, salaries, and insurance.

Direct Labor

The wages and benefits paid to employees who are directly involved in the production of goods or services.

Direct Materials

The raw materials that are directly incorporated into a finished product during the manufacturing process.

Fixed Overhead

Indirect costs that do not change with the level of production, such as rent and salaries.