TEST BANK FOR Advanced Financial Accounting 10th Edition. Theodore Christensen David Cottrell Richar by digitaldownload87

Advanced Financial Accounting 10e Theodore Christensen David Cottrell Richard Baker (Test Bank All Chapters, 100% Original Verified, A+ Grade) Answers At The End Of Each Chapter Chapter 01 Intercorporate Acquisitions and Investments in Other Entities

Multiple Choice Questions

1. Assuming no impairment in value prior to transfer, assets transferred by a parent company to another entity it has created should be recorded by the newly created entity at the assets':

A. cost to the parent company. B. book value on the parent company's books at the date of transfer. C. fair value at the date of transfer. D. fair value of consideration exchanged by the newly created entity.

2. Given the increased development of complex business structures, which of the following regulators is responsible for the continued usefulness of accounting reports?

A. Securities and Exchange Commission (SEC) B. Public Company Accounting Oversight Board (PCAOB) C. Financial Accounting Standards Board (FASB) D. All of these

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3. A business combination in which the acquired company's assets and liabilities are combined with those of the acquiring company into a single entity is defined as:

A. Stock acquisition B. Leveraged buyout C. Statutory Merger D. Reverse statutory rollup

4. In which of the following situations do accounting standards not require that the financial statements of the parent and subsidiary be consolidated:

A. A corporation creates a new 100 percent owned subsidiary B. A corporation purchases 90 percent of the voting stock of another company C. A corporation has both control and majority ownership of an unincorporated company D. A corporation owns less-than a controlling interest in an unincorporated company

5. During its inception, Devon Company purchased land for $100,000 and a building for $180,000. After exactly 3 years, it transferred these assets and cash of $50,000 to a newly created subsidiary, Regan Company, in exchange for 15,000 shares of Regan's $10 par value stock. Devon uses straight-line depreciation. Useful life for the building is 30 years, with zero residual value. An appraisal revealed that the building has a fair value of $200,000. Based on the information provided, at the time of the transfer, Regan Company should record:

A. Building at $180,000 and no accumulated depreciation. B. Building at $162,000 and no accumulated depreciation. C. Building at $200,000 and accumulated depreciation of $24,000. D. Building at $180,000 and accumulated depreciation of $18,000.

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6. During its inception, Devon Company purchased land for $100,000 and a building for $180,000. After exactly 3 years, it transferred these assets and cash of $50,000 to a newly created subsidiary, Regan Company, in exchange for 15,000 shares of Regan's $10 par value stock. Devon uses straight-line depreciation. Useful life for the building is 30 years, with zero residual value. An appraisal revealed that the building has a fair value of $200,000. Based on the information provided, what amount would be reported by Devon Company as investment in Regan Company common stock?

A. $312,000 B. $180,000 C. $330,000 D. $150,000

7. During its inception, Devon Company purchased land for $100,000 and a building for $180,000. After exactly 3 years, it transferred these assets and cash of $50,000 to a newly created subsidiary, Regan Company, in exchange for 15,000 shares of Regan's $10 par value stock. Devon uses straight-line depreciation. Useful life for the building is 30 years, with zero residual value. An appraisal revealed that the building has a fair value of $200,000. Based on the preceding information, Regan Company will report

A. additional paid-in capital of $0. B. additional paid-in capital of $150,000. C. additional paid-in capital of $162,000. D. additional paid-in capital of $180,000.

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8. Which of the following situations best describes a business combination to be accounted for as a statutory merger?

A. Both companies in a combination continue to operate as separate, but related, legal entities. B. Only one of the combining companies survives and the other loses its separate identity. C. Two companies combine to form a new third company, and the original two companies are dissolved. D. One company transfers assets to another company it has created.

9. A statutory consolidation is a type of business combination in which:

A. one of the combining companies survives and the other loses its separate identity. B. one company acquires the voting shares of the other company and the two companies continue to operate as separate legal entities. C. two publicly traded companies agree to share a board of directors. D. each of the combining companies is dissolved and the net assets of both companies are transferred to a newly created corporation.

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10. In order to reduce the risk associated with a new line of business, Conservative Corporation established Spin Company as a wholly owned subsidiary. It transferred assets and accounts payable to Spin in exchange for its common stock. Spin recorded the following entry when the transaction occurred:

Based on the preceding information, what number of shares of $7 par value stock did Spin issue to Conservative?

A. 10,000 B. 7,000 C. 8,000 D. 25,000

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11. In order to reduce the risk associated with a new line of business, Conservative Corporation established Spin Company as a wholly owned subsidiary. It transferred assets and accounts payable to Spin in exchange for its common stock. Spin recorded the following entry when the transaction occurred:

Based on the preceding information, what was Conservative's book value of assets transferred to Spin Company?

A. $243,000 B. $263,000 C. $221,000 D. $201,000

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12. In order to reduce the risk associated with a new line of business, Conservative Corporation established Spin Company as a wholly owned subsidiary. It transferred assets and accounts payable to Spin in exchange for its common stock. Spin recorded the following entry when the transaction occurred:

Based on the preceding information, what amount did Conservative report as its investment in Spin after the transfer of assets and liabilities?

A. $181,000 B. $221,000 C. $263,000 D. $243,000

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13. In order to reduce the risk associated with a new line of business, Conservative Corporation established Spin Company as a wholly owned subsidiary. It transferred assets and accounts payable to Spin in exchange for its common stock. Spin recorded the following entry when the transaction occurred:

Based on the preceding information, immediately after the transfer,

A. Conservative's total assets decreased by $23,000. B. Conservative's total assets decreased by $20,000. C. Conservative's total assets increased by $56,000. D. Conservative's total assets remained the same.

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14. Rivendell Corporation and Foster Company merged as of January 1, 20X9. To effect the merger, Rivendell paid finder's fees of $40,000, legal fees of $13,000, audit fees related to the stock issuance of $10,000, stock registration fees of $5,000, and stock listing application fees of $4,000. Based on the preceding information, under the acquisition method, what amount relating to the business combination would be expensed?

A. $72,000 B. $19,000 C. $53,000 D. $63,000

15. Rivendell Corporation and Foster Company merged as of January 1, 20X9. To effect the merger, Rivendell paid finder's fees of $40,000, legal fees of $13,000, audit fees related to the stock issuance of $10,000, stock registration fees of $5,000, and stock listing application fees of $4,000. Based on the preceding information, under the acquisition method:

A. $72,000 of stock issue costs are treated as goodwill. B. $19,000 of stock issue costs are treated as a reduction in the issue price. C. $19,000 of stock issue costs are expensed. D. $72,000 of stock issue costs are expensed.

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16. Burrough Corporation paid $80,000 to acquire all of Helyar Company's net assets. Helyar reported assets with a book value of $60,000 and fair value of $98,000 and liabilities with a book value and fair value of $23,000 on the date of combination. Burrough also paid $3,000 to a search firm for finder's fees related to the acquisition. What amount will be recorded as goodwill by Burrough Corporation while recording its investment in Helyar?

A. $0 B. $5,000 C. $8,000 D. $13,000

17. Plummet Corporation reported the book value of its net assets at $400,000 when Zenith Corporation acquired 100 percent ownership. The fair value of Plummet's net assets was determined to be $510,000 on that date. Based on the preceding information, what amount of goodwill will be reported in consolidated financial statements presented immediately following the combination if Zenith paid $550,000 for the acquisition?

A. $0 B. $50,000 C. $150,000 D. $40,000

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18. Plummet Corporation reported the book value of its net assets at $400,000 when Zenith Corporation acquired 100 percent ownership. The fair value of Plummet's net assets was determined to be $510,000 on that date. Based on the preceding information, what amount will be recorded by Zenith as its investment in Plummet, if it paid $500,000 for the acquisition?

A. $610,000 B. $400,000 C. $500,000 D. $510,000

19. Plummet Corporation reported the book value of its net assets at $400,000 when Zenith Corporation acquired 100 percent ownership. The fair value of Plummet's net assets was determined to be $510,000 on that date. Based on the preceding information, what amount of goodwill will be reported in consolidated financial statements presented immediately following the combination if Zenith paid $500,000 for the acquisition?

A. $0 B. $50,000 C. $150,000 D. $40,000

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20. The fair value of net identifiable assets of a reporting unit of X Company is $300,000. On X Company's books, the carrying value of this reporting unit's net assets is $350,000, including $60,000 goodwill. If the fair value of the reporting unit as a whole is $335,000, what amount of goodwill impairment will be recognized for this unit?

A. $0 B. $10,000 C. $25,000 D. $35,000

21. The fair value of net identifiable assets of a reporting unit of Y Company is $270,000. The carrying value of the reporting unit's net assets on Y Company's books is $320,000, including $50,000 goodwill. If the reported goodwill impairment for the unit is $10,000, what would be the fair value of the reporting unit?

A. $320,000 B. $310,000 C. $270,000 D. $290,000

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22. Following its acquisition of the net assets of Dan Company, Empire Company assigned goodwill of $60,000 to one of the reporting divisions. Information for this division follows:

Based on the preceding information, what amount of goodwill (after any impairment) will be reported for this division if its fair value is determined to be $200,000?

A. $0 B. $60,000 C. $30,000 D. $10,000

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23. Following its acquisition of the net assets of Dan Company, Empire Company assigned goodwill of $60,000 to one of the reporting divisions. Information for this division follows:

Based on the preceding information, what amount of goodwill impairment will be recognized for this division if its fair value is determined to be $195,000?

A. $5,000 B. $30,000 C. $60,000 D. $55,000

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24. Following its acquisition of the net assets of Dan Company, Empire Company assigned goodwill of $60,000 to one of the reporting divisions. Information for this division follows:

Based on the preceding information, what amount of amount of goodwill impairment will be recognized for this division if its fair value is determined to be $245,000?

A. $0 B. $5,000 C. $60,000 D. $55,000

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25. Public Equity Corporation acquired Lenore Company through an exchange of common shares. All of Lenore's assets and liabilities were immediately transferred to Public Equity. Public's common stock was trading at $20 per share at the time of exchange. Following selected information is also available.

Based on the preceding information, what number of shares was issued at the time of the exchange?

A. 5,000 B. 17,500 C. 12,500 D. 10,000

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26. Public Equity Corporation acquired Lenore Company through an exchange of common shares. All of Lenore's assets and liabilities were immediately transferred to Public Equity. Public's common stock was trading at $20 per share at the time of exchange. Following selected information is also available.

Based on the preceding information, what is the par value of Public's common stock?

A. $10 B. $1 C. $5 D. $4

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27. Public Equity Corporation acquired Lenore Company through an exchange of common shares. All of Lenore's assets and liabilities were immediately transferred to Public Equity. Public's common stock was trading at $20 per share at the time of exchange. Following selected information is also available.

Based on the preceding information, what is the fair value of Lenore's net assets, if goodwill of $56,000 is recorded?

A. $306,000 B. $244,000 C. $194,000 D. $300,000

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28. Pursuing an inorganic growth strategy, Wilson Company acquired Venus Company's net assets and assigned them to four separate reporting divisions. Wilson assigned total goodwill of $134,000 to the four reporting divisions as given below:

Based on the preceding information, what amount of goodwill will be reported for Alpha at year-end?

A. $0 B. $20,000 C. $30,000 D. $10,000

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29. Pursuing an inorganic growth strategy, Wilson Company acquired Venus Company's net assets and assigned them to four separate reporting divisions. Wilson assigned total goodwill of $134,000 to the four reporting divisions as given below:

Based on the preceding information, what amount of goodwill will be reported for Beta at year-end?

A. $0 B. $14,000 C. $34,000 D. $50,000

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30. Pursuing an inorganic growth strategy, Wilson Company acquired Venus Company's net assets and assigned them to four separate reporting divisions. Wilson assigned total goodwill of $134,000 to the four reporting divisions as given below:

Based on the preceding information, for Gamma:

A. no goodwill should be reported at year-end. B. goodwill impairment of $30,000 should be recognized at year-end. C. goodwill impairment of $20,000 should be recognized at year-end. D. goodwill of $30,000 should be reported at year-end.

31. Pursuing an inorganic growth strategy, Wilson Company acquired Venus Company's net assets and assigned them to four separate reporting divisions. Wilson assigned total goodwill of $134,000 to the four reporting divisions as given below:

Based on the preceding information, for Delta:

A. no goodwill should be reported at year-end. B. goodwill impairment of $15,000 should be recognized at year-end. C. goodwill impairment of $20,000 should be recognized at year-end. D. goodwill of $30,000 should be reported at year-end.

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32. Pursuing an inorganic growth strategy, Wilson Company acquired Venus Company's net assets and assigned them to four separate reporting divisions. Wilson assigned total goodwill of $134,000 to the four reporting divisions as given below:

Based on the preceding information, what would be the total amount of goodwill that Wilson should report at year-end?

A. $0 B. $69,000 C. $79,000 D. $94,000

33. Which of the following observations is (are) consistent with the acquisition method of accounting for business combinations? I. Expenses related to the business combination are expensed. II. Stock issue costs are treated as a reduction in the issue price. III. All merger and stock issue costs are expensed. IV. No goodwill is ever recorded.

A. III B. IV C. I and II D. I, II, and IV

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34. Which of the following observations refers to the term differential?

A. Excess of consideration exchanged over fair value of net identifiable assets. B. Excess of fair value over book value of net identifiable assets. C. Excess of consideration exchanged over book value of net identifiable assets. D. Excess of fair value over historical cost of net identifiable assets.

35. Which of the following observations concerning "goodwill" is NOT correct?

A. Once written down, it may be written up for recoveries. B. It must be tested for impairment at least annually. C. Goodwill impairment losses are recognized in income from continuing operations or income before extraordinary gains and losses. D. It must be reported as a separate line item in the balance sheet.

36. Big Company acquired the following assets and liabilities of Little Company (fair values listed below) for $470,000 cash.

Assuming these items are all recorded at their acquisition date fair values, what additional item needs to be recorded and how will it be accounted for in the future?

A. $30,000 Goodwill, capitalized and tested for impairment B. $30,000 Bargain purchase, recognized in current earnings C. $30,000 Bargain purchase, capitalized and recognized over time D. $30,000 Goodwill, capitalized and amortized over time

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37. Paul Corp. acquired 100 percent of Sam Inc.'s voting stock on July 1, 20X1. The following information was available as of December 31, 20X1:

How much net income should be reported in Paul Corp's income statement for 20X1?

A. $370,000 B. $720,000 C. $940,000 D. $1,090,000

38. Note: This is a Kaplan CPA Review Question On August 31, 20X1, Wood Corp. issued 100,000 shares of its $20 par value common stock for the net assets of Pine, Inc. in a business combination accounted for by the acquisition method. The market value of Wood's common stock on August 31 was $36 per share. Wood paid a fee of $160,000 to the consultant who arranged this acquisition. Costs of registering and issuing the equity securities amounted to $80,000. No goodwill was involved in the purchase. What amount should Wood capitalize as the cost of acquiring Pine's net assets?

A. $3,680,000 B. $3,600,000 C. $3,760,000 D. $3,840,000

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39. Note: This is a Kaplan CPA Review Question Company X acquired for cash all of the outstanding common stock of Company Y. How should Company X determine in general the amounts to be reported for the inventories and long-term debt acquired from Company Y?

A. Option A B. Option B C. Option C D. Option D

40. Point Co. purchased 90% of Sharpe Corp.'s voting stock on January 1, 20X2 for $5,580,000. Prior to the acquisition, Point held a 10% equity position in Sharpe Company. On January 1, 20X2 Pointe's 10% investment in Sharpe has a book value of $340,000 and a fair value of $620,000. On January 1, 20X2 Point records the following:

A. Debit Gain on revaluation of Sharpe's stock $280,000 B. Credit Gain on revaluation of Sharpe's stock $280,000 C. Credit Investment in Sharpe stock $5,860,000 D. Debit Investment in Sharpe stock $6,200,000

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41. The length of the measurement period allowed to value the assets and liabilities in an acquired business combination starts on the date of acquisition and lasts until:

A. All necessary information about the facts of the acquisition is obtained B. All necessary information about the facts of the acquisition is obtained, not to exceed one month C. All necessary information about the facts of the acquisition is obtained, not to exceed one reporting period D. All necessary information about the facts of the acquisition is obtained, not to exceed one year

42. ASC 805 requires contingent consideration in a business combination to be classified as:

A. An asset B. A liability or equity C. An asset or equity D. An asset or a liability

43. For all acquired contingencies, the acquirer should do all of the following except:

A. Provide documentation from the acquirer's attorney regarding pending lawsuits and loan guarantees B. Provide a description of each contingency C. Disclose the amount recognized at the acquisition date D. Describe the estimated range of possible undiscounted outcomes of the contingency

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44. ASC 805 requires that ongoing research and development projects be treated in all of the following ways except:

A. Recorded at acquisition-date fair values B. Classified as intangible assets having indefinite lives C. Expensed immediately D. Tested for impairment periodically

Essay Questions

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45. On January 1, 20X8, Alaska Corporation acquired Mercantile Corporation's net assets by paying $160,000 cash. Balance sheet data for the two companies and fair value information for Mercantile Corporation immediately before the business combination are given below:

Required: Prepare the journal entry to record the acquisition of Mercantile Corporation.

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46. On January 1, 20X8, Line Corporation acquired all of the common stock of Staff Company for $300,000. On that date, Staff's identifiable net assets had a fair value of $250,000. The assets acquired in the purchase of Staff are considered to be a separate reporting unit of Line Corporation. The carrying value of Staff's investment at December 31, 20X8, is $310,000. The fair value of the net assets (excluding goodwill) at that date is $220,000 and the fair value of the reporting unit is determined to be 260,000. Required: 1) Explain how goodwill is tested for impairment for a reporting unit. 2) Determine the amount, if any, of impairment loss to be recognized at December 31, 20X8.

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47. SeaLine Corporation is involved in the distribution of processed marine products. The fair values of assets and liabilities held by three reporting units and other information related to the reporting units owned by SeaLine are as follows:

Required: Determine the amount of goodwill that SeaLine should report in its current financial statements.

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Chapter 01 Intercorporate Acquisitions and Investments in Other Entities Answer Key

Multiple Choice Questions

Assuming no impairment in value prior to transfer, assets transferred by a parent company to another entity it has created should be recorded by the newly created entity at the assets':

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-01 Understand and explain the reasons for and different methods of business expansion; the types of organizational structures; and the types of acquisitions. Learning Objective: 01-04 Understand and explain the differences between different forms of business combinations. Topic: Internal Expansion: Creating a Business Entity Topic: Valuation of Business Entities

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Given the increased development of complex business structures, which of the following regulators is responsible for the continued usefulness of accounting reports?

A. Securities and Exchange Commission (SEC) B. Public Company Accounting Oversight Board (PCAOB) C. Financial Accounting Standards Board (FASB) D. All of these

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-01 Understand and explain the reasons for and different methods of business expansion; the types of organizational structures; and the types of acquisitions. Topic: An Introduction to Complex Business Structures

A business combination in which the acquired company's assets and liabilities are combined with those of the acquiring company into a single entity is defined as:

A. Stock acquisition B. Leveraged buyout C. Statutory Merger D. Reverse statutory rollup

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In which of the following situations do accounting standards not require that the financial statements of the parent and subsidiary be consolidated:

During its inception, Devon Company purchased land for $100,000 and a building for $180,000. After exactly 3 years, it transferred these assets and cash of $50,000 to a newly created subsidiary, Regan Company, in exchange for 15,000 shares of Regan's $10 par value stock. Devon uses straight-line depreciation. Useful life for the building is 30 years, with zero residual value. An appraisal revealed that the building has a fair value of $200,000. Based on the information provided, at the time of the transfer, Regan Company should record:

AACSB: Analytic AICPA FN: Measurement Blooms: Understand 1-33 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Difficulty: 2 Medium Learning Objective: 01-03 Make calculations and prepare journal entries for the creation and purchase of a business entity. Learning Objective: 01-04 Understand and explain the differences between different forms of business combinations. Topic: Accounting for Internal Expansion: Creating Business Entities Topic: Valuation of Business Entities

During its inception, Devon Company purchased land for $100,000 and a building for $180,000. After exactly 3 years, it transferred these assets and cash of $50,000 to a newly created subsidiary, Regan Company, in exchange for 15,000 shares of Regan's $10 par value stock. Devon uses straight-line depreciation. Useful life for the building is 30 years, with zero residual value. An appraisal revealed that the building has a fair value of $200,000. Based on the information provided, what amount would be reported by Devon Company as investment in Regan Company common stock?

A. $312,000 B. $180,000 C. $330,000 D. $150,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the history of the development of standards related to acquisition accounting over time. Learning Objective: 01-03 Make calculations and prepare journal entries for the creation and purchase of a business entity. Topic: Accounting for Internal Expansion: Creating Business Entities Topic: The Development of Accounting for Business Combinations

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A. additional paid-in capital of $0. B. additional paid-in capital of $150,000. C. additional paid-in capital of $162,000. D. additional paid-in capital of $180,000.

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Make calculations and prepare journal entries for the creation and purchase of a business entity. Topic: Accounting for Internal Expansion: Creating Business Entities

Which of the following situations best describes a business combination to be accounted for as a statutory merger?

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Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-04 Understand and explain the differences between different forms of business combinations. Topic: Forms of Business Combinations

A statutory consolidation is a type of business combination in which:

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10.

In order to reduce the risk associated with a new line of business, Conservative Corporation established Spin Company as a wholly owned subsidiary. It transferred assets and accounts payable to Spin in exchange for its common stock. Spin recorded the following entry when the transaction occurred:

Based on the preceding information, what number of shares of $7 par value stock did Spin issue to Conservative?

A. 10,000 B. 7,000 C. 8,000 D. 25,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-05 Make calculations and business combination journal entries in the presence of a differential; goodwill; or a bargain purchase element. Topic: Combination Effected through Acquisition of Stock

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11.

Based on the preceding information, what was Conservative's book value of assets transferred to Spin Company?

A. $243,000 B. $263,000 C. $221,000 D. $201,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-01 Understand and explain the reasons for and different methods of business expansion; the types of organizational structures; and the types of acquisitions. Learning Objective: 01-03 Make calculations and prepare journal entries for the creation and purchase of a business entity. Topic: Accounting for Internal Expansion: Creating Business Entities Topic: Internal Expansion: Creating a Business Entity

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12.

Based on the preceding information, what amount did Conservative report as its investment in Spin after the transfer of assets and liabilities?

A. $181,000 B. $221,000 C. $263,000 D. $243,000

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13.

Based on the preceding information, immediately after the transfer,

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14.

Rivendell Corporation and Foster Company merged as of January 1, 20X9. To effect the merger, Rivendell paid finder's fees of $40,000, legal fees of $13,000, audit fees related to the stock issuance of $10,000, stock registration fees of $5,000, and stock listing application fees of $4,000. Based on the preceding information, under the acquisition method, what amount relating to the business combination would be expensed?

A. $72,000 B. $19,000 C. $53,000 D. $63,000

15.

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AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-05 Make calculations and business combination journal entries in the presence of a differential; goodwill; or a bargain purchase element. Topic: Applying the Acquisition Method

16.

Burrough Corporation paid $80,000 to acquire all of Helyar Company's net assets. Helyar reported assets with a book value of $60,000 and fair value of $98,000 and liabilities with a book value and fair value of $23,000 on the date of combination. Burrough also paid $3,000 to a search firm for finder's fees related to the acquisition. What amount will be recorded as goodwill by Burrough Corporation while recording its investment in Helyar?

A. $0 B. $5,000 C. $8,000 D. $13,000

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17.

Plummet Corporation reported the book value of its net assets at $400,000 when Zenith Corporation acquired 100 percent ownership. The fair value of Plummet's net assets was determined to be $510,000 on that date. Based on the preceding information, what amount of goodwill will be reported in consolidated financial statements presented immediately following the combination if Zenith paid $550,000 for the acquisition?

A. $0 B. $50,000 C. $150,000 D. $40,000

18.

Plummet Corporation reported the book value of its net assets at $400,000 when Zenith Corporation acquired 100 percent ownership. The fair value of Plummet's net assets was determined to be $510,000 on that date. Based on the preceding information, what amount will be recorded by Zenith as its investment in Plummet, if it paid $500,000 for the acquisition?

A. $610,000 B. $400,000 C. $500,000 D. $510,000

AACSB: Analytic 1-43 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Understand the history of the development of standards related to acquisition accounting over time. Learning Objective: 01-05 Make calculations and business combination journal entries in the presence of a differential; goodwill; or a bargain purchase element. Topic: Combination Effected through the Acquisition of Net Assets Topic: The Development of Accounting for Business Combinations

19.

A. $0 B. $50,000 C. $150,000 D. $40,000

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20.

The fair value of net identifiable assets of a reporting unit of X Company is $300,000. On X Company's books, the carrying value of this reporting unit's net assets is $350,000, including $60,000 goodwill. If the fair value of the reporting unit as a whole is $335,000, what amount of goodwill impairment will be recognized for this unit?

A. $0 B. $10,000 C. $25,000 D. $35,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-05 Make calculations and business combination journal entries in the presence of a differential; goodwill; or a bargain purchase element. Topic: Goodwill

21.

The fair value of net identifiable assets of a reporting unit of Y Company is $270,000. The carrying value of the reporting unit's net assets on Y Company's books is $320,000, including $50,000 goodwill. If the reported goodwill impairment for the unit is $10,000, what would be the fair value of the reporting unit?

A. $320,000 B. $310,000 C. $270,000 D. $290,000

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Topic: Fair Value Measurements Topic: Goodwill

22.

Following its acquisition of the net assets of Dan Company, Empire Company assigned goodwill of $60,000 to one of the reporting divisions. Information for this division follows:

Based on the preceding information, what amount of goodwill (after any impairment) will be reported for this division if its fair value is determined to be $200,000?

A. $0 B. $60,000 C. $30,000 D. $10,000

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23.

Following its acquisition of the net assets of Dan Company, Empire Company assigned goodwill of $60,000 to one of the reporting divisions. Information for this division follows:

Based on the preceding information, what amount of goodwill impairment will be recognized for this division if its fair value is determined to be $195,000?

A. $5,000 B. $30,000 C. $60,000 D. $55,000

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24.

Following its acquisition of the net assets of Dan Company, Empire Company assigned goodwill of $60,000 to one of the reporting divisions. Information for this division follows:

Based on the preceding information, what amount of amount of goodwill impairment will be recognized for this division if its fair value is determined to be $245,000?

A. $0 B. $5,000 C. $60,000 D. $55,000

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25.

Public Equity Corporation acquired Lenore Company through an exchange of common shares. All of Lenore's assets and liabilities were immediately transferred to Public Equity. Public's common stock was trading at $20 per share at the time of exchange. Following selected information is also available.

Based on the preceding information, what number of shares was issued at the time of the exchange?

A. 5,000 B. 17,500 C. 12,500 D. 10,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 01-01 Understand and explain the reasons for and different methods of business expansion; the types of organizational structures; and the types of acquisitions. Learning Objective: 01-05 Make calculations and business combination journal entries in the presence of a differential; goodwill; or a bargain purchase element. Topic: Combination Effected through Acquisition of Stock Topic: External Expansion: Business Combinations

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26.

Based on the preceding information, what is the par value of Public's common stock?

A. $10 B. $1 C. $5 D. $4

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27.

Based on the preceding information, what is the fair value of Lenore's net assets, if goodwill of $56,000 is recorded?

A. $306,000 B. $244,000 C. $194,000 D. $300,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 01-02 Understand the history of the development of standards related to acquisition accounting over time. Learning Objective: 01-05 Make calculations and business combination journal entries in the presence of a differential; goodwill; or a bargain purchase element. Topic: Combination Effected through Acquisition of Stock Topic: Fair Value Measurements Topic: The Development of Accounting for Business Combinations

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28.

Pursuing an inorganic growth strategy, Wilson Company acquired Venus Company's net assets and assigned them to four separate reporting divisions. Wilson assigned total goodwill of $134,000 to the four reporting divisions as given below:

Based on the preceding information, what amount of goodwill will be reported for Alpha at year-end?

A. $0 B. $20,000 C. $30,000 D. $10,000

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29.

Based on the preceding information, what amount of goodwill will be reported for Beta at year-end?

A. $0 B. $14,000 C. $34,000 D. $50,000

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30.

Based on the preceding information, for Gamma:

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31.

Based on the preceding information, for Delta:

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32.

Based on the preceding information, what would be the total amount of goodwill that Wilson should report at year-end?

A. $0 B. $69,000 C. $79,000 D. $94,000

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33.

Which of the following observations is (are) consistent with the acquisition method of accounting for business combinations? I. Expenses related to the business combination are expensed. II. Stock issue costs are treated as a reduction in the issue price. III. All merger and stock issue costs are expensed. IV. No goodwill is ever recorded.

A. III B. IV C. I and II D. I, II, and IV

34.

Which of the following observations refers to the term differential?

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-05 Make calculations and business combination journal entries in the presence of a differential; goodwill; or a bargain purchase element. Topic: Applying the Acquisition Method 1-57 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

35.

Which of the following observations concerning "goodwill" is NOT correct?

36.

Big Company acquired the following assets and liabilities of Little Company (fair values listed below) for $470,000 cash.

Assuming these items are all recorded at their acquisition date fair values, what additional item needs to be recorded and how will it be accounted for in the future?

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Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-05 Make calculations and business combination journal entries in the presence of a differential; goodwill; or a bargain purchase element. Topic: Bargain Purchase

37.

Paul Corp. acquired 100 percent of Sam Inc.'s voting stock on July 1, 20X1. The following information was available as of December 31, 20X1:

How much net income should be reported in Paul Corp's income statement for 20X1?

A. $370,000 B. $720,000 C. $940,000 D. $1,090,000

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38.

Note: This is a Kaplan CPA Review Question On August 31, 20X1, Wood Corp. issued 100,000 shares of its $20 par value common stock for the net assets of Pine, Inc. in a business combination accounted for by the acquisition method. The market value of Wood's common stock on August 31 was $36 per share. Wood paid a fee of $160,000 to the consultant who arranged this acquisition. Costs of registering and issuing the equity securities amounted to $80,000. No goodwill was involved in the purchase. What amount should Wood capitalize as the cost of acquiring Pine's net assets?

A. $3,680,000 B. $3,600,000 C. $3,760,000 D. $3,840,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 01-05 Make calculations and business combination journal entries in the presence of a differential; goodwill; or a bargain purchase element. Topic: Applying the Acquisition Method

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39.

Note: This is a Kaplan CPA Review Question Company X acquired for cash all of the outstanding common stock of Company Y. How should Company X determine in general the amounts to be reported for the inventories and long-term debt acquired from Company Y?

A. Option A B. Option B C. Option C D. Option D

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40.

Point Co. purchased 90% of Sharpe Corp.'s voting stock on January 1, 20X2 for $5,580,000. Prior to the acquisition, Point held a 10% equity position in Sharpe Company. On January 1, 20X2 Pointe's 10% investment in Sharpe has a book value of $340,000 and a fair value of $620,000. On January 1, 20X2 Point records the following:

AACSB: Reflective Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-06 Understand additional considerations associated with business combinations. Topic: Noncontrolling Equity Held Prior to Combination

41.

The length of the measurement period allowed to value the assets and liabilities in an acquired business combination starts on the date of acquisition and lasts until:

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-06 Understand additional considerations associated with business combinations. Topic: Uncertainty in Business Combinations-Measurement Period 1-62 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

42.

ASC 805 requires contingent consideration in a business combination to be classified as:

A. An asset B. A liability or equity C. An asset or equity D. An asset or a liability

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-06 Understand additional considerations associated with business combinations. Topic: Uncertainty in Business Combinations-Contingent Consideration

43.

For all acquired contingencies, the acquirer should do all of the following except:

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44.

ASC 805 requires that ongoing research and development projects be treated in all of the following ways except:

A. Recorded at acquisition-date fair values B. Classified as intangible assets having indefinite lives C. Expensed immediately D. Tested for impairment periodically

Essay Questions

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45.

On January 1, 20X8, Alaska Corporation acquired Mercantile Corporation's net assets by paying $160,000 cash. Balance sheet data for the two companies and fair value information for Mercantile Corporation immediately before the business combination are given below:

Required: Prepare the journal entry to record the acquisition of Mercantile Corporation.

Or if the cash paid is reported net of cash received:

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 01-02 Understand the history of the development of standards related to acquisition accounting over time. Learning Objective: 01-05 Make calculations and business combination journal entries in the presence of a differential; goodwill; or a bargain purchase element. Topic: Goodwill Topic: The Development of Accounting for Business Combinations

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46.

On January 1, 20X8, Line Corporation acquired all of the common stock of Staff Company for $300,000. On that date, Staff's identifiable net assets had a fair value of $250,000. The assets acquired in the purchase of Staff are considered to be a separate reporting unit of Line Corporation. The carrying value of Staff's investment at December 31, 20X8, is $310,000. The fair value of the net assets (excluding goodwill) at that date is $220,000 and the fair value of the reporting unit is determined to be 260,000. Required: 1) Explain how goodwill is tested for impairment for a reporting unit. 2) Determine the amount, if any, of impairment loss to be recognized at December 31, 20X8.

1) To test for the impairment of goodwill, the fair value of the reporting unit is compared with its carrying amount. If the fair value of the reporting unit exceeds its carrying amount, the goodwill of that reporting unit is considered unimpaired. On the other hand, if the carrying amount of the reporting unit exceeds its fair value, an impairment of the reporting unit's goodwill is implied. The amount of the reporting unit's goodwill impairment is measured as the excess of the carrying amount of the unit's goodwill over the implied value of its goodwill. The implied value of its goodwill is determined as the excess of the fair value of the reporting unit over the fair value of its net assets excluding goodwill. 2) The $310,000 carrying value exceeds the $260,000 fair value, implying impairment. Implied goodwill = $260,000 - $220,000 = $40,000. Impairment loss = $50,000 - $40,000 = $10,000.

AACSB: Analytic AACSB: Communication AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-05 Make calculations and business combination journal entries in the presence of a differential; goodwill; or a bargain purchase element. Topic: Goodwill

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47.

SeaLine Corporation is involved in the distribution of processed marine products. The fair values of assets and liabilities held by three reporting units and other information related to the reporting units owned by SeaLine are as follows:

Required: Determine the amount of goodwill that SeaLine should report in its current financial statements.

Total Goodwill reported = $70,000

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Chapter 02 Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential

Multiple Choice Questions

1. If Push Company owned 51 percent of the outstanding common stock of Shove Company, which reporting method would be appropriate?

A. Cost method B. Consolidation C. Equity method D. Merger method

2. Usually, an investment of 20 to 50 percent in another company's voting stock is reported under the:

A. cost method B. equity method C. full consolidation method D. fair value method

3. From an investor's point of view, a liquidating dividend from an investee is:

A. a dividend declared by the investee in excess of its earnings in the current year B. a dividend declared by the investee in excess of its earnings since acquisition by the investor C. any dividend declared by the investee since acquisition D. a dividend declared by the investee in excess of the investee's retained earnings

4. Which of the following observations is NOT consistent with the cost method of accounting?

A. Investee dividends from earnings since acquisition by investor are treated as a reduction of the investment. B. Investments are carried by the investor at historical cost. C. No journal entry is made regarding the earnings of the investee. D. It is consistent with the treatment normally accorded noncurrent assets.

5. On January 1, 20X9 Athlon Company acquired 30 percent of the common stock of Opteron Corporation, at underlying book value. For the same year, Opteron reported net income of $55,000, which includes an extraordinary gain of 40,000. It did not pay any dividends during the year. By what amount would Athlon's investment in Opteron Corporation increase for the year, if Athlon used the equity method?

A. $0 B. $16,500 C. $4,500 D. $12,000

6. On January 1, 20X8, William Company acquired 30 percent of eGate Company's common stock, at underlying book value of $100,000. eGate has 100,000 shares of $2 par value, 5 percent cumulative preferred stock outstanding. No dividends are in arrears. eGate reported net income of $150,000 for 20X8 and paid total dividends of $72,000. William uses the equity method to account for this investment. Based on the preceding information, what amount would William Company receive as dividends from eGate for the year?

A. $62,000 B. $21,600 C. $18,600 D. $54,000

7. On January 1, 20X8, William Company acquired 30 percent of eGate Company's common stock, at underlying book value of $100,000. eGate has 100,000 shares of $2 par value, 5 percent cumulative preferred stock outstanding. No dividends are in arrears. eGate reported net income of $150,000 for 20X8 and paid total dividends of $72,000. William uses the equity method to account for this investment. Based on the preceding information, what amount of investment income will William Company report from its investment in eGate for the year?

A. $45,000 B. $42,000 C. $62,000 D. $35,000

8. On January 1, 20X8, William Company acquired 30 percent of eGate Company's common stock, at underlying book value of $100,000. eGate has 100,000 shares of $2 par value, 5 percent cumulative preferred stock outstanding. No dividends are in arrears. eGate reported net income of $150,000 for 20X8 and paid total dividends of $72,000. William uses the equity method to account for this investment. Based on the preceding information, what amount would be reported by William Company as the balance in its investment account on December 31, 20X8?

A. $100,000 B. $123,400 C. $120,400 D. $142,000

9. On January 1, 20X7, Yang Corporation acquired 25 percent of the outstanding shares of Spiel Corporation for $100,000 cash. Spiel Company reported net income of $75,000 and paid dividends of $30,000 for both 20X7 and 20X8. The fair value of shares held by Yang was $110,000 and $105,000 on December 31, 20X7 and 20X8 respectively. Based on the preceding information, what amount will be reported by Yang as income from its investment in Spiel for 20X8, if it used the equity method of accounting?

A. $7,500 B. $11,250 C. $18,750 D. $26,250

10. On January 1, 20X7, Yang Corporation acquired 25 percent of the outstanding shares of Spiel Corporation for $100,000 cash. Spiel Company reported net income of $75,000 and paid dividends of $30,000 for both 20X7 and 20X8. The fair value of shares held by Yang was $110,000 and $105,000 on December 31, 20X7 and 20X8 respectively. Based on the preceding information, what amount will be reported by Yang as balance in investment in Spiel on December 31, 20X8, if it used the equity method of accounting?

A. $108,250 B. $118,750 C. $100,000 D. $122,500

11. On January 1, 20X7, Yang Corporation acquired 25 percent of the outstanding shares of Spiel Corporation for $100,000 cash. Spiel Company reported net income of $75,000 and paid dividends of $30,000 for both 20X7 and 20X8. The fair value of shares held by Yang was $110,000 and $105,000 on December 31, 20X7 and 20X8 respectively. Based on the preceding information, what amount will be reported by Yang as income from its investment in Spiel for 20X7 if it used the fair value option to account for its investment in Spiel?

A. $17,500 B. $12,500 C. $11,250 D. $7,500

12. On January 1, 20X7, Yang Corporation acquired 25 percent of the outstanding shares of Spiel Corporation for $100,000 cash. Spiel Company reported net income of $75,000 and paid dividends of $30,000 for both 20X7 and 20X8. The fair value of shares held by Yang was $110,000 and $105,000 on December 31, 20X7 and 20X8 respectively. Based on the preceding information, what amount will be reported by Yang as income from its investment in Spiel for 20X8 if it used the fair value option to account for its investment in Spiel?

A. $11,250 B. $2,500 C. $6,250 D. $7,500

13. On January 1, 20X7, Yang Corporation acquired 25 percent of the outstanding shares of Spiel Corporation for $100,000 cash. Spiel Company reported net income of $75,000 and paid dividends of $30,000 for both 20X7 and 20X8. The fair value of shares held by Yang was $110,000 and $105,000 on December 31, 20X7 and 20X8 respectively. Based on the preceding information, what amount will be reported by Yang as balance in investment in Spiel on December 31, 20X8, if it used the fair value option to account for its investment in Spiel?

A. $105,000 B. $118,750 C. $100,000 D. $122,500

14. A change from the cost method to the equity method of accounting for an investment in common stock resulting from an increase in the number of shares held by the investor requires:

A. only a footnote disclosure B. that the cumulative amount of the change be shown as a line item on the income statement, net of tax C. that the change be accounted for as an unrealized gain included in other comprehensive income D. retroactive restatement as if the investor always had used the equity method

15. Under the equity method of accounting for a stock investment, the investment initially should be recorded at:

A. cost B. cost minus any differential C. proportionate share of the fair value of the investee company's net assets D. proportionate share of the book value of the investee company's net assets

16. Which of the following observations is consistent with the equity method of accounting?

A. Dividends declared by the investee are treated as income by the investor. B. It is used when the investor lacks the ability to exercise significant influence over the investee. C. It may be used in place of consolidation. D. Its primary use is in reporting nonsubsidiary investments.

17. Note: This is a Kaplan CPA Review Question On July 1, 20X4, Denver Corp. purchased 3,000 shares of Eagle Co.'s 10,000 outstanding shares of common stock for $20 per share. On December 15, 20X4, Eagle paid $40,000 in dividends to its common stockholders. Eagle's net income for the year ended December 31, 20X4, was $120,000, earned evenly throughout the year. In its 20X4 income statement, what amount of income from this investment should Denver report?

A. $12,000 B. $36,000 C. $18,000 D. $6,000

18. Note: This is a Kaplan CPA Review Question On January 2, 20X5, Well Co. purchased 10 percent of Rea, Inc.'s outstanding common shares for $400,000. Well is the largest single shareholder in Rea, and Well's officers are a majority on Rea's board of directors. As a result, Well is able to exercise significant influence over Rea. Rea reported net income of $500,000 for 20X5, and paid dividends of $150,000. In its December 31, 20X5, balance sheet, what amount should Well report as investment in Rea?

A. $385,000 B. $450,000 C. $400,000 D. $435,000

19. Note: This is a Kaplan CPA Review Question The Jamestown Corporation (Jamestown) reported net income for the current year of $200,000 and paid cash dividends of $30,000. The Stadium Company (Stadium) holds 22 percent of the outstanding voting stock of Jamestown. However, another corporation holds the other 78 percent ownership and does not take Stadium's wants and wishes into consideration when making financing and operating decisions for Jamestown. What investment income should Stadium recognize for the current year?

A. $6,600 B. $0 C. $44,000 D. $50,600

20. Note: This is a Kaplan CPA Review Question Grant, Inc. acquired 30 percent of South Co.'s voting stock for $200,000 on January 2, 20X4. Grant's 30 percent interest in South gave Grant the ability to exercise significant influence over South's operating and financial policies. During 20X4, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the six months ended June 30, 20X5, and $200,000 for the year ended December 31, 20X5. On July 1, 20X5, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, 20X5. What amount should Grant include in its 20X4 income statement as a result of the investment?

A. $15,000 B. $24,000 C. $50,000 D. $80,000

21. Note: This is a Kaplan CPA Review Question Grant, Inc. acquired 30 percent of South Co.'s voting stock for $200,000 on January 2, 20X4. Grant's 30 percent interest in South gave Grant the ability to exercise significant influence over South's operating and financial policies. During 20X4, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the six months ended June 30, 20X5, and $200,000 for the year ended December 31, 20X5. On July 1, 20X5, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, 20X5. In Grant's December 31, 20X4, balance sheet, what should be the carrying amount of this investment?

A. $224,000 B. $200,000 C. $234,000 D. $209,000

22. Note: This is a Kaplan CPA Review Question Grant, Inc. acquired 30 percent of South Co.'s voting stock for $200,000 on January 2, 20X4. Grant's 30 percent interest in South gave Grant the ability to exercise significant influence over South's operating and financial policies. During 20X4, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the six months ended June 30, 20X5, and $200,000 for the year ended December 31, 20X5. On July 1, 20X5, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, 20X5. In its 20X5 income statement, what amount should Grant report as a gain from the sale of half of its investment?

A. $35,000 B. $24,500 C. $30,500 D. $45,500

23. What portion of the subsidiary stockholders' equity account balances should be eliminated in preparing the consolidated balance sheet?

A. Common stock B. Additional paid-in capital C. Retained Earnings D. All of the balances are eliminated

24. The consolidation process consists of all the following except:

A. combining the financial statements of two or more legally separate companies B. eliminating intercompany transactions and holdings C. closing the individual subsidiary's revenue and expense accounts into the parent's retained earnings D. combining the accounts of separate companies, creating a single set of financial statements

25. Beta Company acquired 100 percent of the voting common shares of Standard Video Corporation, its bitter rival, by issuing bonds with a par value and fair value of $150,000. Immediately prior to the acquisition, Beta reported total assets of $500,000, liabilities of $280,000, and stockholders' equity of $220,000. At that date, Standard Video reported total assets of $400,000, liabilities of $250,000, and stockholders' equity of $150,000. Included in Standard's liabilities was an account payable to Beta in the amount of $20,000, which Beta included in its accounts receivable. Based on the preceding information, what amount of total assets did Beta report in its balance sheet immediately after the acquisition?

A. $500,000 B. $650,000 C. $750,000 D. $900,000

26. Beta Company acquired 100 percent of the voting common shares of Standard Video Corporation, its bitter rival, by issuing bonds with a par value and fair value of $150,000. Immediately prior to the acquisition, Beta reported total assets of $500,000, liabilities of $280,000, and stockholders' equity of $220,000. At that date, Standard Video reported total assets of $400,000, liabilities of $250,000, and stockholders' equity of $150,000. Included in Standard's liabilities was an account payable to Beta in the amount of $20,000, which Beta included in its accounts receivable. Based on the preceding information, what amount of total assets was reported in the consolidated balance sheet immediately after acquisition?

A. $650,000 B. $880,000 C. $920,000 D. $750,000

27. Beta Company acquired 100 percent of the voting common shares of Standard Video Corporation, its bitter rival, by issuing bonds with a par value and fair value of $150,000. Immediately prior to the acquisition, Beta reported total assets of $500,000, liabilities of $280,000, and stockholders' equity of $220,000. At that date, Standard Video reported total assets of $400,000, liabilities of $250,000, and stockholders' equity of $150,000. Included in Standard's liabilities was an account payable to Beta in the amount of $20,000, which Beta included in its accounts receivable. Based on the preceding information, what amount of total liabilities was reported in the consolidated balance sheet immediately after acquisition?

A. $500,000 B. $530,000 C. $280,000 D. $660,000

28. Beta Company acquired 100 percent of the voting common shares of Standard Video Corporation, its bitter rival, by issuing bonds with a par value and fair value of $150,000. Immediately prior to the acquisition, Beta reported total assets of $500,000, liabilities of $280,000, and stockholders' equity of $220,000. At that date, Standard Video reported total assets of $400,000, liabilities of $250,000, and stockholders' equity of $150,000. Included in Standard's liabilities was an account payable to Beta in the amount of $20,000, which Beta included in its accounts receivable. Based on the preceding information, what amount of stockholders' equity was reported in the consolidated balance sheet immediately after acquisition?

A. $220,000 B. $150,000 C. $370,000 D. $350,000

29. Parent Co. purchases 100 percent of Son Company on January 1, 20X1, when Parent's retained earnings balance is $520,000 and Son's is $150,000. During 20X1, Son reports $15,000 of net income and declares $6,000 of dividends. Parent reports $105,000 of separate operating earnings plus $15,000 of equity-method income from its 100 percent interest in Son; Parent declares dividends of $40,000. Based on the preceding information, what is Parent's post-closing retained earnings balance on December 31, 20X1?

A. $485,000 B. $505,000 C. $525,000 D. $600,000

30. Parent Co. purchases 100 percent of Son Company on January 1, 20X1, when Parent's retained earnings balance is $520,000 and Son's is $150,000. During 20X1, Son reports $15,000 of net income and declares $6,000 of dividends. Parent reports $105,000 of separate operating earnings plus $15,000 of equity-method income from its 100 percent interest in Son; Parent declares dividends of $40,000. Based on the preceding information, what is Son's post-closing retained earnings balance on December 31, 20X1:

A. $141,000 B. $150,000 C. $159,000 D. $165,000

31. Parent Co. purchases 100 percent of Son Company on January 1, 20X1, when Parent's retained earnings balance is $520,000 and Son's is $150,000. During 20X1, Son reports $15,000 of net income and declares $6,000 of dividends. Parent reports $105,000 of separate operating earnings plus $15,000 of equity-method income from its 100 percent interest in Son; Parent declares dividends of $40,000. Based on the preceding information, what is the consolidated retained earnings balance on December 31, 20X1?

A. $470,000 B. $585,000 C. $600,000 D. $759,000

32. The main guidance on equity-method reporting, found in ASC 323 and 325 requires all of the following except:

A. the investor's share of the investee's extraordinary items should be reported B. the investor's share of the investee's prior-period adjustments should be reported C. continued use of the equity-method even if continued losses results in a zero or negative balance in the investment account D. preferred dividends of the investee should be deducted from net income before the investor computes its share of investee earnings

33. On January 1, 20X4, Plimsol Company acquired 100 percent of Shipping Corporation's voting shares, at underlying book value. Plimsol uses the cost method in accounting for its investment in Shipping. Shipping's retained earnings was $75,000 on the date of acquisition. On December 31, 20X4, the trial balance data for the two companies are as follows:

Based on the information provided, what amount of net income will be reported in the consolidated financial statements prepared on December 31, 20X4?

A. $100,000 B. $85,000 C. $110,000 D. $125,000

34. On January 1, 20X4, Plimsol Company acquired 100 percent of Shipping Corporation's voting shares, at underlying book value. Plimsol uses the cost method in accounting for its investment in Shipping. Shipping's retained earnings was $75,000 on the date of acquisition. On December 31, 20X4, the trial balance data for the two companies are as follows:

Based on the information provided, what amount of total assets will be reported in the consolidated balance sheet prepared on December 31, 20X4?

A. $425,000 B. $525,000 C. $650,000 D. $630,000

35. On January 1, 20X4, Plimsol Company acquired 100 percent of Shipping Corporation's voting shares, at underlying book value. Plimsol uses the cost method in accounting for its investment in Shipping. Shipping's retained earnings was $75,000 on the date of acquisition. On December 31, 20X4, the trial balance data for the two companies are as follows:

Based on the information provided, what amount of retained earnings will be reported in the consolidated balance sheet prepared on December 31, 20X4?

A. $235,000 B. $210,000 C. $310,000 D. $225,000

36. On January 1, 20X4, Plimsol Company acquired 100 percent of Shipping Corporation's voting shares, at underlying book value. Plimsol uses the cost method in accounting for its investment in Shipping. Shipping's retained earnings was $75,000 on the date of acquisition. On December 31, 20X4, the trial balance data for the two companies are as follows:

Based on the information provided, what amount of total liabilities will be reported in the consolidated balance sheet prepared on December 31, 20X4?

A. $525,000 B. $115,000 C. $125,000 D. $190,000

37. On January 1, 20X4, Plimsol Company acquired 100 percent of Shipping Corporation's voting shares, at underlying book value. Plimsol uses the cost method in accounting for its investment in Shipping. Shipping's retained earnings was $75,000 on the date of acquisition. On December 31, 20X4, the trial balance data for the two companies are as follows:

Based on the information provided, what amount of total stockholder's equity will be reported in the consolidated balance sheet prepared on December 31, 20X4?

A. $190,000 B. $335,000 C. $460,000 D. $310,000

38. Parent Company purchased 100 percent of Son Inc. on January 1, 20X2 for $420,000. Son reported earnings of $82,000 and declared dividends of $4,000 during 20X2. Based on the preceding information and assuming Parent uses the cost method to account for its investment in Son, what is the balance in Parent's Investment in Son account on December 31, 20X2, prior to consolidation?

A. $416,000 B. $420,000 C. $424,000 D. $498,000

39. Parent Company purchased 100 percent of Son Inc. on January 1, 20X2 for $420,000. Son reported earnings of $82,000 and declared dividends of $4,000 during 20X2. Based on the preceding information and assuming Parent uses the equity method to account for its investment in Son, what is the balance in Parent's Investment in Son account on December 31, 20X2, prior to consolidation?

A. $416,000 B. $420,000 C. $424,000 D. $498,000

Essay Questions

40. A cash dividend returns assets to the stockholders while reducing corporate liquidity. Why are not all cash dividends considered to be "liquidating dividends"? In your response include a discussion of how an investor accounts for a liquidating dividend.

41. Dear Corporation acquired 100 percent of the voting shares of Therry Inc. by issuing 10,000 new shares of $5 par value common stock with a $30 market value. Required: 1. Which company is the parent and which is the subsidiary? 2. Define a subsidiary corporation. 3. Define a parent corporation. 4. Which entity prepares consolidated worksheet? 5. Why are elimination entries used?

42. On January 1, 20X9, Zigma Company acquired 100 percent of Standard Company's common shares at underlying book value. Zigma uses the equity method in accounting for its ownership of Standard. On December 31, 20X9, the trial balances of the two companies are as follows:

Required: 1. Prepare the eliminating entries needed as of December 31, 20X9, to complete a consolidation worksheet. 2. Prepare a three-part consolidation worksheet as of December 31, 20X9.

43. In the absence of other evidence, common stock ownership of between 20 and 50 percent is viewed as indicating that the investor is able to exercise significant influence over the investee. What are some of the other factors that could constitute evidence of the ability to exercise significant influence?

44. On January 1, 20X7, Plimsol Company acquired 100 percent of Shipping Corporation's voting shares, at underlying book value. Plimsol uses the cost method in accounting for its investment in Shipping. Shipping's reported retained earnings of $75,000 on the date of acquisition. The trial balances for Plimsol Company and Shipping Corporation as of December 31, 20X8, follow:

Required: 1. Provide all eliminating entries required to prepare a full set of consolidated statements for 20X8. 2. Prepare a three-part consolidation worksheet in good form as of December 31, 20X8.

Chapter 02 Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential Answer Key

Multiple Choice Questions

If Push Company owned 51 percent of the outstanding common stock of Shove Company, which reporting method would be appropriate?

A. Cost method B. Consolidation C. Equity method D. Merger method

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-01 Understand and explain how ownership and control can influence the accounting for investments in common stock. Topic: Accounting for Investments in Common Stock

Usually, an investment of 20 to 50 percent in another company's voting stock is reported under the:

A. cost method B. equity method C. full consolidation method D. fair value method

From an investor's point of view, a liquidating dividend from an investee is:

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-02 Prepare journal entries using the cost method for accounting for investments. Topic: The Cost Method

Which of the following observations is NOT consistent with the cost method of accounting?

On January 1, 20X9 Athlon Company acquired 30 percent of the common stock of Opteron Corporation, at underlying book value. For the same year, Opteron reported net income of $55,000, which includes an extraordinary gain of 40,000. It did not pay any dividends during the year. By what amount would Athlon's investment in Opteron Corporation increase for the year, if Athlon used the equity method?

A. $0 B. $16,500 C. $4,500 D. $12,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-03 Prepare journal entries using the equity method for accounting for investments. Section: Appendix 2A Topic: Investor's Share of other Comprehensive Income

Topic: The Equity Method

On January 1, 20X8, William Company acquired 30 percent of eGate Company's common stock, at underlying book value of $100,000. eGate has 100,000 shares of $2 par value, 5 percent cumulative preferred stock outstanding. No dividends are in arrears. eGate reported net income of $150,000 for 20X8 and paid total dividends of $72,000. William uses the equity method to account for this investment. Based on the preceding information, what amount would William Company receive as dividends from eGate for the year?

A. $62,000 B. $21,600 C. $18,600 D. $54,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-03 Prepare journal entries using the equity method for accounting for investments. Section: Appendix 2A Topic: Additional Requirements of ASC 323-10 Topic: The Equity Method

On January 1, 20X8, William Company acquired 30 percent of eGate Company's common stock, at underlying book value of $100,000. eGate has 100,000 shares of $2 par value, 5 percent cumulative preferred stock outstanding. No dividends are in arrears. eGate reported net income of $150,000 for 20X8 and paid total dividends of $72,000. William uses the equity method to account for this investment. Based on the preceding information, what amount of investment income will William Company report from its investment in eGate for the year?

A. $45,000 B. $42,000 C. $62,000 D. $35,000

On January 1, 20X8, William Company acquired 30 percent of eGate Company's common stock, at underlying book value of $100,000. eGate has 100,000 shares of $2 par value, 5 percent cumulative preferred stock outstanding. No dividends are in arrears. eGate reported net income of $150,000 for 20X8 and paid total dividends of $72,000. William uses the equity method to account for this investment. Based on the preceding information, what amount would be reported by William Company as the balance in its investment account on December 31, 20X8?

A. $100,000 B. $123,400 C. $120,400 D. $142,000

1-33 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

On January 1, 20X7, Yang Corporation acquired 25 percent of the outstanding shares of Spiel Corporation for $100,000 cash. Spiel Company reported net income of $75,000 and paid dividends of $30,000 for both 20X7 and 20X8. The fair value of shares held by Yang was $110,000 and $105,000 on December 31, 20X7 and 20X8 respectively. Based on the preceding information, what amount will be reported by Yang as income from its investment in Spiel for 20X8, if it used the equity method of accounting?

A. $7,500 B. $11,250 C. $18,750 D. $26,250

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-03 Prepare journal entries using the equity method for accounting for investments. Topic: The Equity Method

10.

On January 1, 20X7, Yang Corporation acquired 25 percent of the outstanding shares of Spiel Corporation for $100,000 cash. Spiel Company reported net income of $75,000 and paid dividends of $30,000 for both 20X7 and 20X8. The fair value of shares held by Yang was $110,000 and $105,000 on December 31, 20X7 and 20X8 respectively. Based on the preceding information, what amount will be reported by Yang as balance in investment in Spiel on December 31, 20X8, if it used the equity method of accounting?

A. $108,250 B. $118,750 C. $100,000 D. $122,500

1-35 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

11.

A. $17,500 B. $12,500 C. $11,250 D. $7,500

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-05 Prepare journal entries using the fair value option. Topic: The Fair Value Option

12.

A. $11,250 B. $2,500 C. $6,250 D. $7,500

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-05 Prepare journal entries using the fair value option. Topic: The Fair Value Option

13.

On January 1, 20X7, Yang Corporation acquired 25 percent of the outstanding shares of Spiel Corporation for $100,000 cash. Spiel Company reported net income of $75,000 and paid dividends of $30,000 for both 20X7 and 20X8. The fair value of shares held by Yang was $110,000 and $105,000 on December 31, 20X7 and 20X8 respectively. Based on the preceding information, what amount will be reported by Yang as balance in investment in Spiel on December 31, 20X8, if it used the fair value option to account for its investment in Spiel?

A. $105,000 B. $118,750 C. $100,000 D. $122,500

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-05 Prepare journal entries using the fair value option. Topic: The Fair Value Option

14.

A change from the cost method to the equity method of accounting for an investment in common stock resulting from an increase in the number of shares held by the investor requires:

AACSB: Reflective Thinking

AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-03 Prepare journal entries using the equity method for accounting for investments. Topic: Changes in the Number of Shares Held

15.

Under the equity method of accounting for a stock investment, the investment initially should be recorded at:

A. cost B. cost minus any differential C. proportionate share of the fair value of the investee company's net assets D. proportionate share of the book value of the investee company's net assets

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-03 Prepare journal entries using the equity method for accounting for investments. Topic: The Equity Method

16.

Which of the following observations is consistent with the equity method of accounting?

17.

Note: This is a Kaplan CPA Review Question On July 1, 20X4, Denver Corp. purchased 3,000 shares of Eagle Co.'s 10,000 outstanding shares of common stock for $20 per share. On December 15, 20X4, Eagle paid $40,000 in dividends to its common stockholders. Eagle's net income for the year ended December 31, 20X4, was $120,000, earned evenly throughout the year. In its 20X4 income statement, what amount of income from this investment should Denver report?

A. $12,000 B. $36,000 C. $18,000 D. $6,000

18.

Note: This is a Kaplan CPA Review Question On January 2, 20X5, Well Co. purchased 10 percent of Rea, Inc.'s outstanding common shares for $400,000. Well is the largest single shareholder in Rea, and Well's officers are a majority on Rea's board of directors. As a result, Well is able to exercise significant influence over Rea. Rea reported net income of $500,000 for 20X5, and paid dividends of $150,000. In its December 31, 20X5, balance sheet, what amount should Well report as investment in Rea?

A. $385,000 B. $450,000 C. $400,000 D. $435,000

1-41 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

19.

Note: This is a Kaplan CPA Review Question The Jamestown Corporation (Jamestown) reported net income for the current year of $200,000 and paid cash dividends of $30,000. The Stadium Company (Stadium) holds 22 percent of the outstanding voting stock of Jamestown. However, another corporation holds the other 78 percent ownership and does not take Stadium's wants and wishes into consideration when making financing and operating decisions for Jamestown. What investment income should Stadium recognize for the current year?

A. $6,600 B. $0 C. $44,000 D. $50,600

20.

Note: This is a Kaplan CPA Review Question Grant, Inc. acquired 30 percent of South Co.'s voting stock for $200,000 on January 2, 20X4. Grant's 30 percent interest in South gave Grant the ability to exercise significant influence over South's operating and financial policies. During 20X4, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the six months ended June 30, 20X5, and $200,000 for the year ended December 31, 20X5. On July 1, 20X5, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, 20X5. What amount should Grant include in its 20X4 income statement as a result of the investment?

A. $15,000 B. $24,000 C. $50,000 D. $80,000

1-43 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

21.

Note: This is a Kaplan CPA Review Question Grant, Inc. acquired 30 percent of South Co.'s voting stock for $200,000 on January 2, 20X4. Grant's 30 percent interest in South gave Grant the ability to exercise significant influence over South's operating and financial policies. During 20X4, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the six months ended June 30, 20X5, and $200,000 for the year ended December 31, 20X5. On July 1, 20X5, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, 20X5. In Grant's December 31, 20X4, balance sheet, what should be the carrying amount of this investment?

A. $224,000 B. $200,000 C. $234,000 D. $209,000

22.

Note: This is a Kaplan CPA Review Question Grant, Inc. acquired 30 percent of South Co.'s voting stock for $200,000 on January 2, 20X4. Grant's 30 percent interest in South gave Grant the ability to exercise significant influence over South's operating and financial policies. During 20X4, South earned $80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the six months ended June 30, 20X5, and $200,000 for the year ended December 31, 20X5. On July 1, 20X5, Grant sold half of its stock in South for $150,000 cash. South paid dividends of $60,000 on October 1, 20X5. In its 20X5 income statement, what amount should Grant report as a gain from the sale of half of its investment?

A. $35,000 B. $24,500 C. $30,500 D. $45,500

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-03 Prepare journal entries using the equity method for accounting for investments. Topic: Changes in the Number of Shares Held Topic: The Equity Method

23.

What portion of the subsidiary stockholders' equity account balances should be eliminated in preparing the consolidated balance sheet?

A. Common stock B. Additional paid-in capital C. Retained Earnings D. All of the balances are eliminated

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-06 Make calculations and prepare basic elimination entries for a simple consolidation. Topic: Overview of the Consolidation Process

24.

The consolidation process consists of all the following except:

25.

Beta Company acquired 100 percent of the voting common shares of Standard Video Corporation, its bitter rival, by issuing bonds with a par value and fair value of $150,000. Immediately prior to the acquisition, Beta reported total assets of $500,000, liabilities of $280,000, and stockholders' equity of $220,000. At that date, Standard Video reported total assets of $400,000, liabilities of $250,000, and stockholders' equity of $150,000. Included in Standard's liabilities was an account payable to Beta in the amount of $20,000, which Beta included in its accounts receivable. Based on the preceding information, what amount of total assets did Beta report in its balance sheet immediately after the acquisition?

A. $500,000 B. $650,000 C. $750,000 D. $900,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-07 Prepare a consolidation worksheet. Topic: Consolidation Worksheets

26.

Beta Company acquired 100 percent of the voting common shares of Standard Video Corporation, its bitter rival, by issuing bonds with a par value and fair value of $150,000. Immediately prior to the acquisition, Beta reported total assets of $500,000, liabilities of $280,000, and stockholders' equity of $220,000. At that date, Standard Video reported total assets of $400,000, liabilities of $250,000, and stockholders' equity of $150,000. Included in Standard's liabilities was an account payable to Beta in the amount of $20,000, which Beta included in its accounts receivable. Based on the preceding information, what amount of total assets was reported in the consolidated balance sheet immediately after acquisition?

A. $650,000 B. $880,000 C. $920,000 D. $750,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-07 Prepare a consolidation worksheet. Topic: Consolidation Worksheets

27.

Beta Company acquired 100 percent of the voting common shares of Standard Video Corporation, its bitter rival, by issuing bonds with a par value and fair value of $150,000. Immediately prior to the acquisition, Beta reported total assets of $500,000, liabilities of $280,000, and stockholders' equity of $220,000. At that date, Standard Video reported total assets of $400,000, liabilities of $250,000, and stockholders' equity of $150,000. Included in Standard's liabilities was an account payable to Beta in the amount of $20,000, which Beta included in its accounts receivable. Based on the preceding information, what amount of total liabilities was reported in the consolidated balance sheet immediately after acquisition?

A. $500,000 B. $530,000 C. $280,000 D. $660,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-07 Prepare a consolidation worksheet. Topic: Consolidation Worksheets

28.

Beta Company acquired 100 percent of the voting common shares of Standard Video Corporation, its bitter rival, by issuing bonds with a par value and fair value of $150,000. Immediately prior to the acquisition, Beta reported total assets of $500,000, liabilities of $280,000, and stockholders' equity of $220,000. At that date, Standard Video reported total assets of $400,000, liabilities of $250,000, and stockholders' equity of $150,000. Included in Standard's liabilities was an account payable to Beta in the amount of $20,000, which Beta included in its accounts receivable. Based on the preceding information, what amount of stockholders' equity was reported in the consolidated balance sheet immediately after acquisition?

A. $220,000 B. $150,000 C. $370,000 D. $350,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-07 Prepare a consolidation worksheet. Topic: Consolidation Worksheets

29.

Parent Co. purchases 100 percent of Son Company on January 1, 20X1, when Parent's retained earnings balance is $520,000 and Son's is $150,000. During 20X1, Son reports $15,000 of net income and declares $6,000 of dividends. Parent reports $105,000 of separate operating earnings plus $15,000 of equity-method income from its 100 percent interest in Son; Parent declares dividends of $40,000. Based on the preceding information, what is Parent's post-closing retained earnings balance on December 31, 20X1?

A. $485,000 B. $505,000 C. $525,000 D. $600,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-07 Prepare a consolidation worksheet. Topic: Consolidation Subsequent to Acquisition

30.

Parent Co. purchases 100 percent of Son Company on January 1, 20X1, when Parent's retained earnings balance is $520,000 and Son's is $150,000. During 20X1, Son reports $15,000 of net income and declares $6,000 of dividends. Parent reports $105,000 of separate operating earnings plus $15,000 of equity-method income from its 100 percent interest in Son; Parent declares dividends of $40,000. Based on the preceding information, what is Son's post-closing retained earnings balance on December 31, 20X1:

A. $141,000 B. $150,000 C. $159,000 D. $165,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 02-07 Prepare a consolidation worksheet. Topic: Consolidation Subsequent to Acquisition

31.

Parent Co. purchases 100 percent of Son Company on January 1, 20X1, when Parent's retained earnings balance is $520,000 and Son's is $150,000. During 20X1, Son reports $15,000 of net income and declares $6,000 of dividends. Parent reports $105,000 of separate operating earnings plus $15,000 of equity-method income from its 100 percent interest in Son; Parent declares dividends of $40,000. Based on the preceding information, what is the consolidated retained earnings balance on December 31, 20X1?

A. $470,000 B. $585,000 C. $600,000 D. $759,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-07 Prepare a consolidation worksheet. Topic: Consolidation Subsequent to Acquisition

32.

The main guidance on equity-method reporting, found in ASC 323 and 325 requires all of the following except:

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember 1-53 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Difficulty: 1 Easy Section: Appendix 2A Topic: Additional Requirements of ASC 323-10

33.

On January 1, 20X4, Plimsol Company acquired 100 percent of Shipping Corporation's voting shares, at underlying book value. Plimsol uses the cost method in accounting for its investment in Shipping. Shipping's retained earnings was $75,000 on the date of acquisition. On December 31, 20X4, the trial balance data for the two companies are as follows:

Based on the information provided, what amount of net income will be reported in the consolidated financial statements prepared on December 31, 20X4?

A. $100,000 B. $85,000 C. $110,000 D. $125,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium

Section: Appendix 2B Topic: Consolidation and the Cost Method

34.

Based on the information provided, what amount of total assets will be reported in the consolidated balance sheet prepared on December 31, 20X4?

A. $425,000 B. $525,000 C. $650,000 D. $630,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Section: Appendix 2B

Topic: Consolidation and the Cost Method

35.

Based on the information provided, what amount of retained earnings will be reported in the consolidated balance sheet prepared on December 31, 20X4?

A. $235,000 B. $210,000 C. $310,000 D. $225,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Section: Appendix 2B Topic: Consolidation and the Cost Method

36.

Based on the information provided, what amount of total liabilities will be reported in the consolidated balance sheet prepared on December 31, 20X4?

A. $525,000 B. $115,000 C. $125,000 D. $190,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Section: Appendix 2B Topic: Consolidation and the Cost Method

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37.

Based on the information provided, what amount of total stockholder's equity will be reported in the consolidated balance sheet prepared on December 31, 20X4?

A. $190,000 B. $335,000 C. $460,000 D. $310,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Section: Appendix 2B Topic: Consolidation and the Cost Method

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38.

Parent Company purchased 100 percent of Son Inc. on January 1, 20X2 for $420,000. Son reported earnings of $82,000 and declared dividends of $4,000 during 20X2. Based on the preceding information and assuming Parent uses the cost method to account for its investment in Son, what is the balance in Parent's Investment in Son account on December 31, 20X2, prior to consolidation?

A. $416,000 B. $420,000 C. $424,000 D. $498,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Section: Appendix 2B Topic: Consolidation and the Cost Method

39.

Parent Company purchased 100 percent of Son Inc. on January 1, 20X2 for $420,000. Son reported earnings of $82,000 and declared dividends of $4,000 during 20X2. Based on the preceding information and assuming Parent uses the equity method to account for its investment in Son, what is the balance in Parent's Investment in Son account on December 31, 20X2, prior to consolidation?

A. $416,000 B. $420,000 C. $424,000 D. $498,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand

Difficulty: 2 Medium Section: Appendix 2B Topic: Consolidation and the Cost Method

Essay Questions

40.

A cash dividend returns assets to the stockholders while reducing corporate liquidity. Why are not all cash dividends considered to be "liquidating dividends"? In your response include a discussion of how an investor accounts for a liquidating dividend.

A dividend represents earnings of a company being returned to its shareholders. A liquidating dividend occurs when an investee declares dividends in excess of the earnings from the purchase date of the investment. An individual investor must treat a liquidating dividend associated with its investment as a return of capital and reduce the investment account accordingly. It is possible for blocks of stock acquired at different times to have different amounts associated with a potential liquidating dividend.

AACSB: Communication AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Prepare journal entries using the cost method for accounting for investments. Topic: The Cost Method

41.

Dear Corporation acquired 100 percent of the voting shares of Therry Inc. by issuing 10,000 new shares of $5 par value common stock with a $30 market value. Required: 1. Which company is the parent and which is the subsidiary? 2. Define a subsidiary corporation. 3. Define a parent corporation. 4. Which entity prepares consolidated worksheet? 5. Why are elimination entries used?

1. Dear is the parent and Therry is the subsidiary. 2. A subsidiary is an entity in which another entity, the parent company, holds a controlling financial interest. 3. A parent company holds a controlling financial interest in another company. 4. The parent, Dear, prepares the consolidated worksheet. 5. Elimination entries are used to adjust the amounts reported by the parent and all of the subsidiaries to reflect the amounts that would be reported if the separate legal entities were a single company.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 1 Easy Learning Objective: 02-06 Make calculations and prepare basic elimination entries for a simple consolidation. Topic: Overview of the Consolidation Process

42.

On January 1, 20X9, Zigma Company acquired 100 percent of Standard Company's common shares at underlying book value. Zigma uses the equity method in accounting for its ownership of Standard. On December 31, 20X9, the trial balances of the two companies are as follows:

Required: 1. Prepare the eliminating entries needed as of December 31, 20X9, to complete a consolidation worksheet. 2. Prepare a three-part consolidation worksheet as of December 31, 20X9.

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(T-Accounts not required)

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-07 Prepare a consolidation worksheet. Topic: Consolidation Worksheets

43.

In the absence of other evidence, common stock ownership of between 20 and 50 percent is viewed as indicating that the investor is able to exercise significant influence over the investee. What are some of the other factors that could constitute evidence of the ability to exercise significant influence?

APB stated that these include: 1. Representation on board of directors 2. Participation in policy making 3. Material intercompany transactions 4. Interchange of managerial personnel 5. Technological dependency 6. Size of investment in relation to concentration of other shareholdings

AACSB: Communication AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Section: Appendix 2A Topic: Determination of Significant Influence

44.

On January 1, 20X7, Plimsol Company acquired 100 percent of Shipping Corporation's voting shares, at underlying book value. Plimsol uses the cost method in accounting for its investment in Shipping. Shipping's reported retained earnings of $75,000 on the date of acquisition. The trial balances for Plimsol Company and Shipping Corporation as of December 31, 20X8, follow:

Required: 1. Provide all eliminating entries required to prepare a full set of consolidated statements for 20X8. 2. Prepare a three-part consolidation worksheet in good form as of December 31, 20X8.

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Section: Appendix 2B Topic: Consolidation and the Cost Method

Chapter 03 The Reporting Entity and the Consolidation of Less-than-WhollyOwned Subsidiaries with No Differential

Multiple Choice Questions

1. Consolidated financial statements tend to be most useful for:

A. Creditors of a consolidated subsidiary. B. Investors and long-term creditors of the parent company. C. Short-term creditors of the parent company. D. Stockholders of a consolidated subsidiary.

2. Company Pea owns 90 percent of Company Essone which in turn owns 80 percent of Company Esstwo. Company Esstwo owns 100 percent of Company Essthree. Consolidated financial statements should be prepared to report the financial status and results of operations for:

A. Pea. B. Pea plus Essone. C. Pea plus Essone plus Esstwo. D. Pea plus Essone plus Esstwo plus Essthree.

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3. In which of the following cases would consolidation be inappropriate?

A. The subsidiary is in bankruptcy. B. Subsidiary's operations are dissimilar from those of the parent. C. The parent owns 90 percent of the subsidiary's common stock, but all of the subsidiary's nonvoting preferred stock is held by a single investor. D. Subsidiary is foreign.

4. On January 1, 20X8, Zeta Company acquired 85 percent of Theta Company's common stock for $100,000 cash. The fair value of the noncontrolling interest was determined to be 15 percent of the book value of Theta at that date. What portion of the retained earnings reported in the consolidated balance sheet prepared immediately after the business combination is assigned to the noncontrolling interest?

A. None B. 15 percent C. 100 percent D. Cannot be determined

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5. On January 3, 20X9, Redding Company acquired 80 percent of Frazer Corporation's common stock for $344,000 in cash. At the acquisition date, the book values and fair values of Frazer's assets and liabilities were equal, and the fair value of the noncontrolling interest was equal to 20 percent of the total book value of Frazer. The stockholders' equity accounts of the two companies at the acquisition date are:

Noncontrolling interest was assigned income of $11,000 in Redding's consolidated income statement for 20X9. Based on the preceding information, what amount will be assigned to the noncontrolling interest on January 3, 20X9, in the consolidated balance sheet?

A. $86,000 B. $44,000 C. $68,800 D. $50,000

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6. On January 3, 20X9, Redding Company acquired 80 percent of Frazer Corporation's common stock for $344,000 in cash. At the acquisition date, the book values and fair values of Frazer's assets and liabilities were equal, and the fair value of the noncontrolling interest was equal to 20 percent of the total book value of Frazer. The stockholders' equity accounts of the two companies at the acquisition date are:

Noncontrolling interest was assigned income of $11,000 in Redding's consolidated income statement for 20X9. Based on the preceding information, what is the total stockholders' equity in the consolidated balance sheet as of January 3, 20X9?

A. $1,580,000 B. $1,064,000 C. $1,150,000 D. $1,236,000

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7. On January 3, 20X9, Redding Company acquired 80 percent of Frazer Corporation's common stock for $344,000 in cash. At the acquisition date, the book values and fair values of Frazer's assets and liabilities were equal, and the fair value of the noncontrolling interest was equal to 20 percent of the total book value of Frazer. The stockholders' equity accounts of the two companies at the acquisition date are:

Noncontrolling interest was assigned income of $11,000 in Redding's consolidated income statement for 20X9. Based on the preceding information, what will be the amount of net income reported by Frazer Corporation in 20X9?

A. $44,000 B. $55,000 C. $66,000 D. $36,000

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8. On January 3, 20X9, Jane Company acquired 75 percent of Miller Company's outstanding common stock for cash. The fair value of the noncontrolling interest was equal to a proportionate share of the book value of Miller Company's net assets at the date of acquisition. Selected balance sheet data at December 31, 20X9, are as follows:

Based on the preceding information, what amount should be reported as noncontrolling interest in net assets in Jane Company's December 31, 20X9, consolidated balance sheet?

A. $90,000 B. $54,000 C. $36,000 D. $0

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9. On January 3, 20X9, Jane Company acquired 75 percent of Miller Company's outstanding common stock for cash. The fair value of the noncontrolling interest was equal to a proportionate share of the book value of Miller Company's net assets at the date of acquisition. Selected balance sheet data at December 31, 20X9, are as follows:

Based on the preceding information, what amount will Jane Company report as common stock outstanding in its consolidated balance sheet at December 31, 20X9?

A. $120,000 B. $180,000 C. $156,000 D. $264,000

10. Xing Corporation owns 80 percent of the voting common shares of Adams Corporation. Noncontrolling interest was assigned $24,000 of income in the 20X9 consolidated income statement. What amount of net income did Adams Corporation report for the year?

A. $150,000 B. $96,000 C. $120,000 D. $30,000

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11. Zeta Corporation and its subsidiary reported consolidated net income of $320,000 for the year ended December 31, 20X8. Zeta owns 80 percent of the common shares of its subsidiary, acquired at book value. Noncontrolling interest was assigned income of $30,000 in the consolidated income statement for 20X8. What is the amount of separate operating income reported by Zeta for the year?

A. $170,000 B. $150,000 C. $120,000 D. $200,000

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12. On January 1, 20X8, Wilhelm Corporation acquired 90 percent of Kaiser Company's voting stock, at underlying book value. The fair value of the noncontrolling interest was equal to 10 percent of the book value of Kaiser at that date. Wilhelm uses the equity method in accounting for its ownership of Kaiser. On December 31, 20X9, the trial balances of the two companies are as follows:

Based on the preceding information, what amount would be reported as total assets in the consolidated balance sheet at December 31, 20X9?

A. $805,000 B. $712,000 C. $742,000 D. $1,102,000

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13. On January 1, 20X8, Wilhelm Corporation acquired 90 percent of Kaiser Company's voting stock, at underlying book value. The fair value of the noncontrolling interest was equal to 10 percent of the book value of Kaiser at that date. Wilhelm uses the equity method in accounting for its ownership of Kaiser. On December 31, 20X9, the trial balances of the two companies are as follows:

Based on the preceding information, what amount would be reported as total liabilities in the consolidated balance sheet at December 31, 20X9?

A. $330,000 B. $712,000 C. $318,000 D. $130,000

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14. On January 1, 20X8, Wilhelm Corporation acquired 90 percent of Kaiser Company's voting stock, at underlying book value. The fair value of the noncontrolling interest was equal to 10 percent of the book value of Kaiser at that date. Wilhelm uses the equity method in accounting for its ownership of Kaiser. On December 31, 20X9, the trial balances of the two companies are as follows:

Based on the preceding information, what amount would be reported as retained earnings in the consolidated balance sheet prepared at December 31, 20X9?

A. 314,000 B. 294,000 C. 150,000 D. 424,000

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15. On January 1, 20X8, Wilhelm Corporation acquired 90 percent of Kaiser Company's voting stock, at underlying book value. The fair value of the noncontrolling interest was equal to 10 percent of the book value of Kaiser at that date. Wilhelm uses the equity method in accounting for its ownership of Kaiser. On December 31, 20X9, the trial balances of the two companies are as follows:

Based on the preceding information, what amount would be reported as noncontrolling interest in the consolidated balance sheet at December 31, 20X9?

A. $27,000 B. $4,000 C. $15,000 D. $18,000

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16. On January 1, 20X8, Wilhelm Corporation acquired 90 percent of Kaiser Company's voting stock, at underlying book value. The fair value of the noncontrolling interest was equal to 10 percent of the book value of Kaiser at that date. Wilhelm uses the equity method in accounting for its ownership of Kaiser. On December 31, 20X9, the trial balances of the two companies are as follows:

Based on the preceding information, what amount would be reported as total stockholder's equity in the consolidated balance sheet at December 31, 20X9?

A. $412,000 B. $394,000 C. $542,000 D. $348,000

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17. On January 1, 20X8, Wilhelm Corporation acquired 90 percent of Kaiser Company's voting stock, at underlying book value. The fair value of the noncontrolling interest was equal to 10 percent of the book value of Kaiser at that date. Wilhelm uses the equity method in accounting for its ownership of Kaiser. On December 31, 20X9, the trial balances of the two companies are as follows:

Based on the preceding information, what amount would be reported as income to controlling interest in the consolidated financial statements for 20X9?

A. $168,000 B. $138,000 C. $164,000 D. $150,000

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18. Blue Company owns 80 percent of the common stock of White Corporation. During the year, Blue reported sales of $1,000,000, and White reported sales of $500,000, including sales to Blue of $80,000. The amount of sales that should be reported in the consolidated income statement for the year is:

A. $500,000. B. $1,300,000. C. $1,420,000. D. $1,500,000.

19. Note: This is a Kaplan CPA Review Question For which of the following reporting units is the preparation of combined financial statements most appropriate?

A. A corporation and a foreign subsidiary with nonintegrated homogeneous operations. B. A corporation and a majority-owned subsidiary with nonhomogeneous operations. C. Several corporations with related operations owned by one individual. D. Several corporations with related operations with some common individual owners.

20. Which of the following usually does not represent a variable interest?

A. Common stock, with no special features or provisions B. Senior debt C. Subordinated debt D. Loan or asset guarantees

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21. All of the following statements accurately describe Special Purpose Entities (SPEs) except for:

A. SPEs are corporations, trust or partnerships created for a single specified purpose. B. SPEs usually have no substantive operations and are used for financing operations. C. SPEs are used for asset securitization, risk sharing and taking advantage of tax statues. D. A variable interest entity (VIE) is a type of SPE with a limited number of equity investors.

22. On December 31, 20X9, Rudd Company acquired 80 percent of the common stock of Wilton Company. At the time, Rudd held land with a book value of $100,000 and a fair value of $260,000; Wilton held land with a book value of $50,000 and fair value of $600,000. Using the parent company theory, at what amount would land be reported in a consolidated balance sheet prepared immediately after the combination?

A. $550,000 B. $590,000 C. $700,000 D. $860,000

23. Princeton Company acquired 75 percent of the common stock of Sheffield Corporation on December 31, 20X9. On the date of acquisition, Princeton held land with a book value of $150,000 and a fair value of $300,000; Sheffield held land with a book value of $100,000 and fair value of $500,000. Using the entity theory, at what amount would land be reported in a consolidated balance sheet prepared immediately after the combination?

A. $650,000 B. $500,000 C. $550,000 D. $375,000

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24. Under ASC 805, consolidation follows largely which theory approach?

A. Proprietary B. Parent company C. Entity D. Variable

25. For a less-than-wholly-owned subsidiary, goodwill under the parent theory:

A. exceeds goodwill under the proprietary theory. B. exceeds goodwill under the entity theory. C. is less than goodwill under the entity theory. D. is less than goodwill under the proprietary theory.

26. Small-Town Retail owns 70 percent of Supplier Corporation's common stock. For the current financial year, Small-Town and Supplier reported sales of $450,000 and $300,000 and expenses of $290,000 and $240,000, respectively. Based on the preceding information, what is the amount of net income to be reported in the consolidated income statement for the year under the parent company theory approach?

A. $220,000 B. $202,000 C. $160,000 D. $200,000

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27. Small-Town Retail owns 70 percent of Supplier Corporation's common stock. For the current financial year, Small-Town and Supplier reported sales of $450,000 and $300,000 and expenses of $290,000 and $240,000, respectively. Based on the preceding information, what is the amount of net income to be reported in the consolidated income statement for the year under the proprietary theory approach?

A. $210,000 B. $202,000 C. $160,000 D. $200,000

28. Small-Town Retail owns 70 percent of Supplier Corporation's common stock. For the current financial year, Small-Town and Supplier reported sales of $450,000 and $300,000 and expenses of $290,000 and $240,000, respectively. Based on the preceding information, what is the amount of net income to be reported in the consolidated income statement for the year under the entity theory approach?

A. $210,000 B. $202,000 C. $160,000 D. $220,000

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29. Quid Corporation acquired 75 percent of Pro Company's common stock on December 31, 20X6. Goodwill (attributable to Quid's acquisition of Pro shares) of $300,000 was reported in the consolidated financial statements at December 31, 20X6. Parent company approach was used in determining this amount. What is the amount of goodwill to be reported under proprietary theory approach?

A. $300,000 B. $400,000 C. $150,000 D. $100,000

30. Quid Corporation acquired 60 percent of Pro Company's common stock on December 31, 20X4. Goodwill (attributable to Quid's acquisition of Pro shares) of $150,000 was calculated under the proprietary theory approach. What is the amount of goodwill that should be reported under entity theory approach?

A. $150,000 B. $200,000 C. $250,000 D. $100,000

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31. On January 1, 20X9, Heathcliff Corporation acquired 80 percent of Garfield Corporation's voting common stock. Garfield's buildings and equipment had a book value of $300,000 and a fair value of $350,000 at the time of acquisition. Based on the preceding information, what will be the amount at which Garfield's buildings and equipment will be reported in consolidated statements using the parent company approach?

A. $350,000 B. $340,000 C. $280,000 D. $300,000

32. On January 1, 20X9, Heathcliff Corporation acquired 80 percent of Garfield Corporation's voting common stock. Garfield's buildings and equipment had a book value of $300,000 and a fair value of $350,000 at the time of acquisition. Based on the preceding information, what will be the amount at which Garfield's buildings and equipment will be reported in consolidated statements using the current accounting practice?

A. $350,000 B. $340,000 C. $280,000 D. $300,000

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33. On January 1, 20X9, Gold Rush Company acquires 80 percent ownership in California Corporation for $200,000. The fair value of the noncontrolling interest at that time is determined to be $50,000. It reports net assets with a book value of $200,000 and fair value of $230,000. Gold Rush Company reports net assets with a book value of $600,000 and a fair value of $650,000 at that time, excluding its investment in California. What will be the amount of goodwill that would be reported immediately after the combination under current accounting practice?

A. $50,000 B. $30,000 C. $40,000 D. $20,000

Essay Questions

34. Consolidated financial statements are required by GAAP in certain circumstances. This information can be very useful to stockholders and creditors. Yet, there are limitations to these financial statements for which the users must be aware. What are at least three (3) limitations of consolidated financial statements?

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35. In reading a set of consolidated financial statements you are surprised to see the term noncontrolling interest not reported under the Liability section of the Balance Sheet. Required: a. What is a non-controlling interest? b. Why must it be reported in the financial statements as an element of equity rather than a liability?

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36. Parent Company acquired 90% of Son Inc. on January 31, 20X2 in exchange for cash. The book value of Son's individual assets and liabilities approximated their acquisition-date fair values. On the date of acquisition, Son reported the following:

During the year Son Inc. reported $310,000 in net income and declared $15,000 in dividends. Parent Company reported $520,000 in net income and declared $25,000 in dividends. Parent accounts for their investment using the equity method. Required: 1) What journal entry will Parent make on the date of acquisition to record the investment in Son Inc.? 2) If Parent were to prepare a consolidated balance sheet on the acquisition date (January 31, 20X2), what is the basic elimination entry Parent would use in the consolidation worksheet? 3) What is Parent's balance in "Investment in Son Inc." prior to consolidation on December 31, 20X2? 4) What is the basic elimination entry Parent would use in the consolidation worksheet on December 31, 20X2?

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37. On January 1, 20X8, Gregory Corporation acquired 90 percent of Nova Company's voting stock, at underlying book value. The fair value of the noncontrolling interest was equal to 10 percent of the book value of Nova at that date. Gregory uses the equity method in accounting for its ownership of Nova. On December 31, 20X8, the trial balances of the two companies are as follows:

Required: 1) Provide all eliminating entries required as of December 31, 20X8, to prepare consolidated financial statements. 2) Prepare a three-part consolidation worksheet.

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38. On January 1, 20X8, Gregory Corporation acquired 90 percent of Nova Company's voting stock, at underlying book value. The fair value of the noncontrolling interest was equal to 10 percent of the book value of Nova at that date. Gregory uses the equity method in accounting for its ownership of Nova. On December 31, 20X9, the trial balances of the two companies are as follows:

Required: 1) Give all eliminating entries required on December 31, 20X8, to prepare consolidated financial statements. 2) Prepare a three-part consolidation worksheet as of December 31, 20X8.

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39. ASC 805 is related to the Consolidation of Variable Interest Entities. Describe what a Variable Interest Entity is and discuss why the FASB has difficulty in prescribing when these entities are consolidated?

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Chapter 03 The Reporting Entity and the Consolidation of Less-thanWholly-Owned Subsidiaries with No Differential Answer Key

Multiple Choice Questions

Consolidated financial statements tend to be most useful for:

A. Creditors of a consolidated subsidiary. B. Investors and long-term creditors of the parent company. C. Short-term creditors of the parent company. D. Stockholders of a consolidated subsidiary.

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-01 Understand and explain the usefulness and limitations of consolidated financial statements. Topic: The Usefulness and Limitations of Consolidated Financial Statements

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Company Pea owns 90 percent of Company Essone which in turn owns 80 percent of Company Esstwo. Company Esstwo owns 100 percent of Company Essthree. Consolidated financial statements should be prepared to report the financial status and results of operations for:

A. Pea. B. Pea plus Essone. C. Pea plus Essone plus Esstwo. D. Pea plus Essone plus Esstwo plus Essthree.

AACSB: Analytic AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-02 Understand and explain how direct and indirect control influence the consolidation of a subsidiary. Topic: Direct and Indirect Control

In which of the following cases would consolidation be inappropriate?

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-02 Understand and explain how direct and indirect control influence the consolidation of a subsidiary. Topic: Direct and Indirect Control

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On January 1, 20X8, Zeta Company acquired 85 percent of Theta Company's common stock for $100,000 cash. The fair value of the noncontrolling interest was determined to be 15 percent of the book value of Theta at that date. What portion of the retained earnings reported in the consolidated balance sheet prepared immediately after the business combination is assigned to the noncontrolling interest?

A. None B. 15 percent C. 100 percent D. Cannot be determined

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Understand and explain differences in the consolidation process when the subsidiary is not wholly owned. Topic: Noncontrolling interest

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On January 3, 20X9, Redding Company acquired 80 percent of Frazer Corporation's common stock for $344,000 in cash. At the acquisition date, the book values and fair values of Frazer's assets and liabilities were equal, and the fair value of the noncontrolling interest was equal to 20 percent of the total book value of Frazer. The stockholders' equity accounts of the two companies at the acquisition date are:

A. $86,000 B. $44,000 C. $68,800 D. $50,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03 Understand and explain differences in the consolidation process when the subsidiary is not wholly owned. Topic: Noncontrolling interest

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A. $1,580,000 B. $1,064,000 C. $1,150,000 D. $1,236,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-05 Prepare a consolidation worksheet for a less-than-wholly-owned subsidiary. Topic: Prepare a Consolidated Worksheet

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A. $44,000 B. $55,000 C. $66,000 D. $36,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-04 Make calculations and prepare basic elimination entries for the consolidation of a less-thanwholly-owned subsidiary. Topic: The Effect of Noncontrolling Interest (NI and RE)

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On January 3, 20X9, Jane Company acquired 75 percent of Miller Company's outstanding common stock for cash. The fair value of the noncontrolling interest was equal to a proportionate share of the book value of Miller Company's net assets at the date of acquisition. Selected balance sheet data at December 31, 20X9, are as follows:

Based on the preceding information, what amount should be reported as noncontrolling interest in net assets in Jane Company's December 31, 20X9, consolidated balance sheet?

A. $90,000 B. $54,000 C. $36,000 D. $0

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-04 Make calculations and prepare basic elimination entries for the consolidation of a less-thanwholly-owned subsidiary. Topic: The Effect of Noncontrolling Interest (NI and RE)

3-33 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Based on the preceding information, what amount will Jane Company report as common stock outstanding in its consolidated balance sheet at December 31, 20X9?

A. $120,000 B. $180,000 C. $156,000 D. $264,000

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10.

Xing Corporation owns 80 percent of the voting common shares of Adams Corporation. Noncontrolling interest was assigned $24,000 of income in the 20X9 consolidated income statement. What amount of net income did Adams Corporation report for the year?

A. $150,000 B. $96,000 C. $120,000 D. $30,000

11.

Zeta Corporation and its subsidiary reported consolidated net income of $320,000 for the year ended December 31, 20X8. Zeta owns 80 percent of the common shares of its subsidiary, acquired at book value. Noncontrolling interest was assigned income of $30,000 in the consolidated income statement for 20X8. What is the amount of separate operating income reported by Zeta for the year?

A. $170,000 B. $150,000 C. $120,000 D. $200,000

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Topic: The Effect of Noncontrolling Interest (NI and RE)

12.

On January 1, 20X8, Wilhelm Corporation acquired 90 percent of Kaiser Company's voting stock, at underlying book value. The fair value of the noncontrolling interest was equal to 10 percent of the book value of Kaiser at that date. Wilhelm uses the equity method in accounting for its ownership of Kaiser. On December 31, 20X9, the trial balances of the two companies are as follows:

Based on the preceding information, what amount would be reported as total assets in the consolidated balance sheet at December 31, 20X9?

A. $805,000 B. $712,000 C. $742,000 D. $1,102,000

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13.

Based on the preceding information, what amount would be reported as total liabilities in the consolidated balance sheet at December 31, 20X9?

A. $330,000 B. $712,000 C. $318,000 D. $130,000

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14.

Based on the preceding information, what amount would be reported as retained earnings in the consolidated balance sheet prepared at December 31, 20X9?

A. 314,000 B. 294,000 C. 150,000 D. 424,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 03-05 Prepare a consolidation worksheet for a less-than-wholly-owned subsidiary. Topic: Prepare a Consolidated Worksheet

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15.

Based on the preceding information, what amount would be reported as noncontrolling interest in the consolidated balance sheet at December 31, 20X9?

A. $27,000 B. $4,000 C. $15,000 D. $18,000

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16.

Based on the preceding information, what amount would be reported as total stockholder's equity in the consolidated balance sheet at December 31, 20X9?

A. $412,000 B. $394,000 C. $542,000 D. $348,000

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17.

Based on the preceding information, what amount would be reported as income to controlling interest in the consolidated financial statements for 20X9?

A. $168,000 B. $138,000 C. $164,000 D. $150,000

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18.

Blue Company owns 80 percent of the common stock of White Corporation. During the year, Blue reported sales of $1,000,000, and White reported sales of $500,000, including sales to Blue of $80,000. The amount of sales that should be reported in the consolidated income statement for the year is:

A. $500,000. B. $1,300,000. C. $1,420,000. D. $1,500,000.

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-05 Prepare a consolidation worksheet for a less-than-wholly-owned subsidiary. Topic: Prepare a Consolidated Worksheet

19.

Note: This is a Kaplan CPA Review Question For which of the following reporting units is the preparation of combined financial statements most appropriate?

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-06 Understand and explain the purpose of combined financial statements and how they differ from consolidated financial statements. Topic: Combined Financial Statements

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20.

Which of the following usually does not represent a variable interest?

A. Common stock, with no special features or provisions B. Senior debt C. Subordinated debt D. Loan or asset guarantees

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-07 Understand and explain rules related to the consolidation of variable interest entities. Topic: Variable Interest Entities

21.

All of the following statements accurately describe Special Purpose Entities (SPEs) except for:

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-07 Understand and explain rules related to the consolidation of variable interest entities. Topic: Off-Balance Sheet Financing

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22.

On December 31, 20X9, Rudd Company acquired 80 percent of the common stock of Wilton Company. At the time, Rudd held land with a book value of $100,000 and a fair value of $260,000; Wilton held land with a book value of $50,000 and fair value of $600,000. Using the parent company theory, at what amount would land be reported in a consolidated balance sheet prepared immediately after the combination?

A. $550,000 B. $590,000 C. $700,000 D. $860,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Section: Appendix 3B Topic: Theories of Consolidation

23.

Princeton Company acquired 75 percent of the common stock of Sheffield Corporation on December 31, 20X9. On the date of acquisition, Princeton held land with a book value of $150,000 and a fair value of $300,000; Sheffield held land with a book value of $100,000 and fair value of $500,000. Using the entity theory, at what amount would land be reported in a consolidated balance sheet prepared immediately after the combination?

A. $650,000 B. $500,000 C. $550,000 D. $375,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Section: Appendix 3B 3-44 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Topic: Theories of Consolidation

24.

Under ASC 805, consolidation follows largely which theory approach?

A. Proprietary B. Parent company C. Entity D. Variable

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Section: Appendix 3B Topic: Theories of Consolidation

25.

For a less-than-wholly-owned subsidiary, goodwill under the parent theory:

A. exceeds goodwill under the proprietary theory. B. exceeds goodwill under the entity theory. C. is less than goodwill under the entity theory. D. is less than goodwill under the proprietary theory.

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Understand Difficulty: 2 Medium Section: Appendix 3B Topic: Theories of Consolidation

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26.

Small-Town Retail owns 70 percent of Supplier Corporation's common stock. For the current financial year, Small-Town and Supplier reported sales of $450,000 and $300,000 and expenses of $290,000 and $240,000, respectively. Based on the preceding information, what is the amount of net income to be reported in the consolidated income statement for the year under the parent company theory approach?

A. $220,000 B. $202,000 C. $160,000 D. $200,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Section: Appendix 3B Topic: Theories of Consolidation

27.

A. $210,000 B. $202,000 C. $160,000 D. $200,000

AACSB: Analytic AICPA FN: Measurement 3-46 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Blooms: Apply Difficulty: 3 Hard Section: Appendix 3B Topic: Theories of Consolidation

28.

A. $210,000 B. $202,000 C. $160,000 D. $220,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Section: Appendix 3B Topic: Theories of Consolidation

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29.

Quid Corporation acquired 75 percent of Pro Company's common stock on December 31, 20X6. Goodwill (attributable to Quid's acquisition of Pro shares) of $300,000 was reported in the consolidated financial statements at December 31, 20X6. Parent company approach was used in determining this amount. What is the amount of goodwill to be reported under proprietary theory approach?

A. $300,000 B. $400,000 C. $150,000 D. $100,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Section: Appendix 3B Topic: Theories of Consolidation

30.

Quid Corporation acquired 60 percent of Pro Company's common stock on December 31, 20X4. Goodwill (attributable to Quid's acquisition of Pro shares) of $150,000 was calculated under the proprietary theory approach. What is the amount of goodwill that should be reported under entity theory approach?

A. $150,000 B. $200,000 C. $250,000 D. $100,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Section: Appendix 3B Topic: Theories of Consolidation 3-48 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

31.

On January 1, 20X9, Heathcliff Corporation acquired 80 percent of Garfield Corporation's voting common stock. Garfield's buildings and equipment had a book value of $300,000 and a fair value of $350,000 at the time of acquisition. Based on the preceding information, what will be the amount at which Garfield's buildings and equipment will be reported in consolidated statements using the parent company approach?

A. $350,000 B. $340,000 C. $280,000 D. $300,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Section: Appendix 3B Topic: Theories of Consolidation

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32.

A. $350,000 B. $340,000 C. $280,000 D. $300,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Section: Appendix 3B Topic: Theories of Consolidation

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33.

On January 1, 20X9, Gold Rush Company acquires 80 percent ownership in California Corporation for $200,000. The fair value of the noncontrolling interest at that time is determined to be $50,000. It reports net assets with a book value of $200,000 and fair value of $230,000. Gold Rush Company reports net assets with a book value of $600,000 and a fair value of $650,000 at that time, excluding its investment in California. What will be the amount of goodwill that would be reported immediately after the combination under current accounting practice?

A. $50,000 B. $30,000 C. $40,000 D. $20,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Section: Appendix 3B Topic: Theories of Consolidation

Essay Questions

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34.

Consolidated financial statements are required by GAAP in certain circumstances. This information can be very useful to stockholders and creditors. Yet, there are limitations to these financial statements for which the users must be aware. What are at least three (3) limitations of consolidated financial statements?

Limitations to consolidated financial statements include: 1). The operating results and financial position of individual companies included in the consolidation are not disclosed. Therefore, the poor performance or position of one or more companies may be hidden by the good performance and position of others. 2). The consolidated statements include the subsidiary's assets, not all assets shown are available to dividend distributions of the parent company. 3). Financial ratios are based upon the aggregated consolidated information; therefore, these ratios may not be representative of any single company in the consolidation, including the parent. 4). Similar accounts of different companies that are consolidated may not be entirely comparable. For example, the length of operating cycles of different subsidiaries may vary, causing receivables of similar length to be classified differently. 5). Additional information about individual companies or groups of companies that have been consolidated may be necessary for fair presentation, resulting in voluminous footnote disclosures.

AACSB: Communication AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-01 Understand and explain the usefulness and limitations of consolidated financial statements. Topic: The Usefulness and Limitations of Consolidated Financial Statements

3-52 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

35.

In reading a set of consolidated financial statements you are surprised to see the term noncontrolling interest not reported under the Liability section of the Balance Sheet. Required: a. What is a non-controlling interest? b. Why must it be reported in the financial statements as an element of equity rather than a liability?

a. Noncontrolling interest occurs when less than 100 percent equity is acquired in a subsidiary. It represents the fact that the parent may control but not own the entire subsidiary. The noncontrolling shareholders have a claim on the subsidiary's assets and earnings through their percentage ownership of the stock. b. Noncontrolling interest clearly does not meet the definition of a liability. ASC 810 makes clear that the noncontrolling interest's claim on net assets is an element of equity, not a liability. It requires reporting the noncontrolling interest in equity.

AACSB: Communication AICPA FN: Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-03 Understand and explain differences in the consolidation process when the subsidiary is not wholly owned. Topic: Noncontrolling interest

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36.

Parent Company acquired 90% of Son Inc. on January 31, 20X2 in exchange for cash. The book value of Son's individual assets and liabilities approximated their acquisition-date fair values. On the date of acquisition, Son reported the following:

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3) $1,300,500 (T-Account not required):

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-04 Make calculations and prepare basic elimination entries for the consolidation of a less-thanwholly-owned subsidiary. Learning Objective: 03-05 Prepare a consolidation worksheet for a less-than-wholly-owned consolidation. Topic: Basic Elimination Entry

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37.

On January 1, 20X8, Gregory Corporation acquired 90 percent of Nova Company's voting stock, at underlying book value. The fair value of the noncontrolling interest was equal to 10 percent of the book value of Nova at that date. Gregory uses the equity method in accounting for its ownership of Nova. On December 31, 20X8, the trial balances of the two companies are as follows:

Required: 1) Provide all eliminating entries required as of December 31, 20X8, to prepare consolidated financial statements. 2) Prepare a three-part consolidation worksheet.

3-56 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

(T-Accounts not required)

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3-58 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

38.

On January 1, 20X8, Gregory Corporation acquired 90 percent of Nova Company's voting stock, at underlying book value. The fair value of the noncontrolling interest was equal to 10 percent of the book value of Nova at that date. Gregory uses the equity method in accounting for its ownership of Nova. On December 31, 20X9, the trial balances of the two companies are as follows:

Required: 1) Give all eliminating entries required on December 31, 20X8, to prepare consolidated financial statements. 2) Prepare a three-part consolidation worksheet as of December 31, 20X8.

3-59 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

(T-Accounts not required)

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39.

ASC 805 is related to the Consolidation of Variable Interest Entities. Describe what a Variable Interest Entity is and discuss why the FASB has difficulty in prescribing when these entities are consolidated?

A Variable Interest Entity (VIE) is a legal structure used for business purposes that either: 1. Does not have equity investors that: a. have voting rights or b. doesn't share in all of the entity's profits or losses. 2. Has equity investors that do not provide sufficient financial resources to support the entity's activities. Therefore, FASB has been trying to define the Primary Beneficiary and from this lead to consolidation not just control as presumed under ASC 805.

AACSB: Communication AICPA FN: Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-07 Understand and explain rules related to the consolidation of variable interest entities. Topic: Variable Interest Entities

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Chapter 04 Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value

Multiple Choice Questions

1. On July 1, 20X9, Link Corporation paid $340,000 for all of Tinsel Company's outstanding common stock. On that date, the costs and fair values of Tinsel's recorded assets and liabilities were as follows:

Based on the preceding information, the differential reflected in a consolidation worksheet to prepare a consolidated balance sheet immediately after the business combination is:

A. $0. B. $25,000. C. $70,000. D. $45,000.

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2. On July 1, 20X9, Link Corporation paid $340,000 for all of Tinsel Company's outstanding common stock. On that date, the costs and fair values of Tinsel's recorded assets and liabilities were as follows:

Based on the preceding information, what amount should be allocated to goodwill in the consolidated balance sheet, prepared after this business combination?

A. $0 B. $25,000 C. $70,000 D. $45,000

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3. On December 31, 20X9, Add-On Company acquired 100 percent of Venus Corporation's common stock for $300,000. Balance sheet information Venus just prior to the acquisition is given here:

At the date of the business combination, Venus's net assets and liabilities approximated fair value except for inventory, which had a fair value of $60,000, land which had a fair value of $125,000, and buildings and equipment (net), which had a fair value of $250,000. Based on the information provided, what amount of inventory will be included in the consolidated balance sheet immediately following the acquisition?

A. $60,000 B. $75,000 C. $15,000 D. $45,000

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4. On December 31, 20X9, Add-On Company acquired 100 percent of Venus Corporation's common stock for $300,000. Balance sheet information Venus just prior to the acquisition is given here:

At the date of the business combination, Venus's net assets and liabilities approximated fair value except for inventory, which had a fair value of $60,000, land which had a fair value of $125,000, and buildings and equipment (net), which had a fair value of $250,000. Based on the information provided, what amount of goodwill will be included in the consolidated balance sheet immediately following the acquisition?

A. $30,000 B. $15,000 C. $85,000 D. $45,000

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5. On December 31, 20X9, Add-On Company acquired 100 percent of Venus Corporation's common stock for $300,000. Balance sheet information Venus just prior to the acquisition is given here:

At the date of the business combination, Venus's net assets and liabilities approximated fair value except for inventory, which had a fair value of $60,000, land which had a fair value of $125,000, and buildings and equipment (net), which had a fair value of $250,000. Based on the information provided, what amount will be included as investment in Venus Corporation in the consolidated balance sheet immediately following the acquisition?

A. $0 B. $395,000 C. $255,000 D. $300,000

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6. Enya Corporation acquired 100 percent of Celtic Corporation's common stock on January 1, 20X9.Summarized balance sheet information for the two companies immediately after the combination is provided:

Based on the preceding information, the amount of differential associated with the acquisition is:

A. $0. B. $58,000. C. $22,000. D. $36,000.

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7. Enya Corporation acquired 100 percent of Celtic Corporation's common stock on January 1, 20X9.Summarized balance sheet information for the two companies immediately after the combination is provided:

Based on the information provided, the consolidated balance sheet of Enya and Celtic will reflect goodwill in the amount of:

A. $0. B. $58,000. C. $22,000. D. $36,000.

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8. Tanner Company, a subsidiary acquired for cash, owned equipment with a fair value higher than the book value as of the date of combination. A consolidated balance sheet prepared immediately after the acquisition would include this difference in:

A. goodwill. B. retained earnings. C. deferred charges. D. equipment.

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9. Pace Corporation acquired 100 percent of Spin Company's common stock on January 1, 20X9. Balance sheet data for the two companies immediately following the acquisition follow:

At the date of the business combination, the book values of Spin's net assets and liabilities approximated fair value except for inventory, which had a fair value of $60,000, and land, which had a fair value of $50,000. The fair value of land for Pace Corporation was estimated at $80,000 immediately prior to the acquisition. Based on the preceding information, at what amount should total land be reported in the consolidated balance sheet prepared immediately after the business combination?

A. $130,000 B. $105,000 C. $115,000 D. $120,000

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10. Pace Corporation acquired 100 percent of Spin Company's common stock on January 1, 20X9. Balance sheet data for the two companies immediately following the acquisition follow:

At the date of the business combination, the book values of Spin's net assets and liabilities approximated fair value except for inventory, which had a fair value of $60,000, and land, which had a fair value of $50,000. The fair value of land for Pace Corporation was estimated at $80,000 immediately prior to the acquisition. Based on the preceding information, what amount of total assets will appear in the consolidated balance sheet prepared immediately after the business combination?

A. $756,000 B. $735,000 C. $750,000 D. $642,000

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11. Pace Corporation acquired 100 percent of Spin Company's common stock on January 1, 20X9. Balance sheet data for the two companies immediately following the acquisition follow:

At the date of the business combination, the book values of Spin's net assets and liabilities approximated fair value except for inventory, which had a fair value of $60,000, and land, which had a fair value of $50,000. The fair value of land for Pace Corporation was estimated at $80,000 immediately prior to the acquisition. Based on the preceding information, what is the differential associated with the acquisition?

A. $15,000 B. $21,000 C. $6,000 D. $10,000

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12. Pace Corporation acquired 100 percent of Spin Company's common stock on January 1, 20X9. Balance sheet data for the two companies immediately following the acquisition follow:

At the date of the business combination, the book values of Spin's net assets and liabilities approximated fair value except for inventory, which had a fair value of $60,000, and land, which had a fair value of $50,000. The fair value of land for Pace Corporation was estimated at $80,000 immediately prior to the acquisition. Based on the preceding information, what amount of goodwill will be reported in the consolidated balance sheet prepared immediately after the business combination?

A. $0 B. $21,000 C. $6,000 D. $15,000

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13. Pace Corporation acquired 100 percent of Spin Company's common stock on January 1, 20X9. Balance sheet data for the two companies immediately following the acquisition follow:

At the date of the business combination, the book values of Spin's net assets and liabilities approximated fair value except for inventory, which had a fair value of $60,000, and land, which had a fair value of $50,000. The fair value of land for Pace Corporation was estimated at $80,000 immediately prior to the acquisition. Based on the preceding information, what amount of liabilities will be reported in the consolidated balance sheet prepared immediately after the business combination?

A. $615,000 B. $406,000 C. $300,000 D. $265,000

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14. Pace Corporation acquired 100 percent of Spin Company's common stock on January 1, 20X9. Balance sheet data for the two companies immediately following the acquisition follow:

At the date of the business combination, the book values of Spin's net assets and liabilities approximated fair value except for inventory, which had a fair value of $60,000, and land, which had a fair value of $50,000. The fair value of land for Pace Corporation was estimated at $80,000 immediately prior to the acquisition. Based on the preceding information, what amount of retained earnings will be reported in the consolidated balance sheet prepared immediately after the business combination?

A. $300,000 B. $409,000 C. $259,000 D. $191,000

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15. Pace Corporation acquired 100 percent of Spin Company's common stock on January 1, 20X9. Balance sheet data for the two companies immediately following the acquisition follow:

At the date of the business combination, the book values of Spin's net assets and liabilities approximated fair value except for inventory, which had a fair value of $60,000, and land, which had a fair value of $50,000. The fair value of land for Pace Corporation was estimated at $80,000 immediately prior to the acquisition. Based on the preceding information, what amount of total stockholder's equity will be reported in the consolidated balance sheet prepared immediately after the business combination?

A. $300,000 B. $479,000 C. $315,000 D. $350,000

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16. Note: This is a Kaplan CPA Review Question Park Co. uses the equity method to account for its January 1, 20X5, purchase of Tun Inc.'s common stock. On January 1, 20X5, the fair values of Tun's depreciable assets and land exceeded their carrying amounts. How do these excesses of fair values over carrying amounts affect Park's reported year-end Earnings from Investment in Tun for 20X5?

A. Option A B. Option B C. Option C D. Option D

17. Note: This is a Kaplan CPA Review Question An investor uses the equity method to account for its 30% investment in common stock of an investee. Amortization of the investor's share of the excess of fair value over book value of depreciable assets should be reported in the investor's income statement as part of

A. Amortization of goodwill. B. Other expense. C. Depreciation expense. D. Income from investee.

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18. Note: This is a Kaplan CPA Review Question The Greenpath Corporation's (Greenpath) balance sheet shows assets of $800,000 and liabilities of $300,000. In addition, the company has an unrecorded intangible asset with a value of $100,000 and a 10-year useful life. On January 1, 20X1, the Montana Corporation acquires 30% of Greenpath's outstanding stock for $290,000. In 20X1, Greenpath reported net income of $90,000 and paid dividends of $20,000. In 20X2, Greenpath reported net income of $110,000 and paid dividends of $50,000. If the equity method is being applied to this investment, what is the reported balance for the investment account at the end of 20X2?

A. $311,000 B. $302,000 C. $323,000 D. $317,500

19. Note: This is a Kaplan CPA Review Question On January 1, 20X1, Big Company (Big) bought 30% of the outstanding stock of Little Company (Little) for $110,000 which provided Big with the ability to significantly influence the decisions of Little. Little reported assets of $400,000 and liabilities of $100,000 on that date. As part of its analysis before buying these shares, Big determined that Little owned a patent that had not been recorded despite having a remaining useful life of five years and a value of $20,000. During 20X1, Little reported net income of $70,000 and paid cash dividends of $30,000. What investment income should Big report for 20X1?

A. $9,000 B. $19,800 C. $17,000 D. $21,000

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20. Note: This is a Kaplan CPA Review Question Grant, Inc. (Grant) acquired 30% of South Co.'s (South) voting stock for $200,000 on January 1, 20X1. Grant's 30% interest in South gave Grant the ability to exercise significant influence over South's operating and financial policies. On that date, South reported assets of $500,000 and liabilities of $100,000. South had equipment with a book value of $60,000 that was actually worth $160,000. The equipment had a remaining useful life of five years. During 20X1, South reported net income of $80,000 and paid dividends of $50,000. What amount of income should Grant recognize in 20X1 as a result of this investment?

A. $18,000 B. $4,000 C. $15,000 D. $16,750

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21. On January 1, 20X8, Chariot Company acquired 100 percent of Stryder Company for $220,000 cash. The trial balances for the two companies on December 31, 20X8, included the following amounts:

On the acquisition date, Stryder reported net assets with a book value of $170,000. A total of $10,000 of the acquisition price is applied to goodwill, which was not impaired in 20X8. Stryder's depreciable assets had an estimated economic life of 10 years on the date of combination.The difference between fair value and book value of tangible assets is related entirely to buildings and equipment. Chariot used the equity method in accounting for its investment in Stryder. Analysis of receivables and payables revealed that Stryder owed Chariot $10,000 on December 31, 20X8. Based on the information provided, the differential associated with this acquisition is:

A. $36,000. B. $40,000. C. $10,000. D. $50,000.

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22. On January 1, 20X8, Chariot Company acquired 100 percent of Stryder Company for $220,000 cash. The trial balances for the two companies on December 31, 20X8, included the following amounts:

A. $50,000. B. $40,000. 4-20 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

C. $10,000. D. $36,000.

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23. On January 1, 20X8, Chariot Company acquired 100 percent of Stryder Company for $220,000 cash. The trial balances for the two companies on December 31, 20X8, included the following amounts:

A. $5,000. B. $4,000. 4-22 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

C. $10,000. D. $3,600.

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24. On January 1, 20X8, Chariot Company acquired 100 percent of Stryder Company for $220,000 cash. The trial balances for the two companies on December 31, 20X8, included the following amounts:

On the acquisition date, Stryder reported net assets with a book value of $170,000. A total of $10,000 of the acquisition price is applied to goodwill, which was not impaired in 20X8. Stryder's depreciable assets had an estimated economic life of 10 years on the date of combination.The difference between fair value and book value of tangible assets is related entirely to buildings and equipment. Chariot used the equity method in accounting for its investment in Stryder. Analysis of receivables and payables revealed that Stryder owed Chariot $10,000 on December 31, 20X8. Based on the information provided, what amount of retained earnings will be reported in the consolidated financial statements for the year?

A. $331,000 B. $110,000 4-24 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

C. $441,000 D. $456,000

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25. On January 1, 20X8, Chariot Company acquired 100 percent of Stryder Company for $220,000 cash. The trial balances for the two companies on December 31, 20X8, included the following amounts:

On the acquisition date, Stryder reported net assets with a book value of $170,000. A total of $10,000 of the acquisition price is applied to goodwill, which was not impaired in 20X8. Stryder's depreciable assets had an estimated economic life of 10 years on the date of combination.The difference between fair value and book value of tangible assets is related entirely to buildings and equipment. Chariot used the equity method in accounting for its investment in Stryder. Analysis of receivables and payables revealed that Stryder owed Chariot $10,000 on December 31, 20X8. Based on the information provided, what amount of net income will be reported in the consolidated financial statements for the year?

A. $226,000 B. $55,000 4-26 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

C. $230,000 D. $171,000

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26. On January 1, 20X8, Chariot Company acquired 100 percent of Stryder Company for $220,000 cash. The trial balances for the two companies on December 31, 20X8, included the following amounts:

On the acquisition date, Stryder reported net assets with a book value of $170,000. A total of $10,000 of the acquisition price is applied to goodwill, which was not impaired in 20X8. Stryder's depreciable assets had an estimated economic life of 10 years on the date of combination.The difference between fair value and book value of tangible assets is related entirely to buildings and equipment. Chariot used the equity method in accounting for its investment in Stryder. Analysis of receivables and payables revealed that Stryder owed Chariot $10,000 on December 31, 20X8. Based on the information provided, what amount of total assets will be reported in the consolidated balance sheet for the year?

A. $895,000 B. $801,000 4-28 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

C. $723,000 D. $1,111,000

27. West, Inc. holds 100 percent of the common stock of Coast Company, an investment acquired for $680,000. Immediately following the combination, West's net assets have a book value of $1,150,000 and a fair value of $1,390,000. The book value and the fair value of Coast's net assets on the date of combination are $400,000 and $550,000, respectively. Immediately following the combination, a consolidated balance sheet is prepared. Based on the information given above, what will be the amount of net assets reported in the consolidated balance sheet, prepared immediately following the combination?

A. $1,150,000 B. $1,550,000 C. $1,700,000 D. $1,830,000

28. West, Inc. holds 100 percent of the common stock of Coast Company, an investment acquired for $680,000. Immediately following the combination, West's net assets have a book value of $1,150,000 and a fair value of $1,390,000. The book value and the fair value of Coast's net assets on the date of combination are $400,000 and $550,000, respectively. Immediately following the combination, a consolidated balance sheet is prepared. Based on the information given above, goodwill will be reported in the consolidated balance sheet in the amount of:

A. $240,000. B. $130,000. C. $150,000. D. $270,000.

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29. West, Inc. holds 100 percent of the common stock of Coast Company, an investment acquired for $680,000. Immediately following the combination, West's net assets have a book value of $1,150,000 and a fair value of $1,390,000. The book value and the fair value of Coast's net assets on the date of combination are $400,000 and $550,000, respectively. Immediately following the combination, a consolidated balance sheet is prepared. Based on the information given above, at what amount will West's investment in Coast stock be reported in the consolidated balance sheet?

A. $0 B. $400,000 C. $440,000 D. $480,000

30. When a parent company uses the equity method to account for investments, the controlling interest in consolidated net income includes all of the following except:

A. The parent's income from its own operations. B. The parent company's share of income from consolidated subsidiaries. C. The non-controlling interest's share of income from consolidated subsidiaries. D. Differential adjustments.

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31. On December 31, 20X8, Mercury Corporation acquired 100 percent ownership of Saturn Corporation. On that date, Saturn reported assets and liabilities with book values of $300,000 and $100,000, respectively, common stock outstanding of $50,000, and retained earnings of $150,000. The book values and fair values of Saturn's assets and liabilities were identical except for land which had increased in value by $10,000 and inventories which had decreased by $5,000. Based on the preceding information, what amount of differential will appear in the eliminating entries required to prepare a consolidated balance sheet immediately after the business combination, if the acquisition price was $240,000?

A. $0 B. $40,000 C. $25,000 D. $5,000

32. On December 31, 20X8, Mercury Corporation acquired 100 percent ownership of Saturn Corporation. On that date, Saturn reported assets and liabilities with book values of $300,000 and $100,000, respectively, common stock outstanding of $50,000, and retained earnings of $150,000. The book values and fair values of Saturn's assets and liabilities were identical except for land which had increased in value by $10,000 and inventories which had decreased by $5,000. Based on the preceding information, what amount of goodwill will be reported if the acquisition price was $240,000?

A. $0 B. $40,000 C. $15,000 D. $35,000

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33. On December 31, 20X8, Mercury Corporation acquired 100 percent ownership of Saturn Corporation. On that date, Saturn reported assets and liabilities with book values of $300,000 and $100,000, respectively, common stock outstanding of $50,000, and retained earnings of $150,000. The book values and fair values of Saturn's assets and liabilities were identical except for land which had increased in value by $10,000 and inventories which had decreased by $5,000. Based on the preceding information, what amount of goodwill will be reported if the acquisition price was $195,000?

A. $0 B. $40,000 C. $15,000 D. $35,000

34. Company X acquires 100 percent of the voting shares of Company Y for $275,000 on December 31, 20X8.The fair value of the net assets of Company X at the date of acquisition was $300,000. This is an example of a(n):

A. positive differential. B. bargain purchase. C. extraordinary loss. D. revaluation adjustment.

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35. Lea Company acquired all of Tenzing Corporation's stock on January 1, 20X6 for $150,000 cash. On December 31, 20X8, the trial balances of the two companies were as follows:

Tenzing Corporation reported retained earnings of $75,000 at the date of acquisition. The difference between the acquisition price and underlying book value is assigned to buildings and equipment with a remaining economic life of five years from the date of acquisition. At December 31, 20X8, Tenzing owed Lea $4,000 for services provided. Based on the preceding information, all of the following are eliminating entries required on December 31, 20X8, to prepare consolidated financial statements, except:

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A. Option A B. Option B C. Option C D. Option D

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36. Lea Company acquired all of Tenzing Corporation's stock on January 1, 20X6 for $150,000 cash. On December 31, 20X8, the trial balances of the two companies were as follows:

Tenzing Corporation reported retained earnings of $75,000 at the date of acquisition. The difference between the acquisition price and underlying book value is assigned to buildings and equipment with a remaining economic life of five years from the date of acquisition. At December 31, 20X8, Tenzing owed Lea $4,000 for services provided. Based on the preceding information, what amount will be reported as total assets in the consolidated balance sheet for 20X8?

A. $666,000 B. $747,000 C. $651,000 D. $946,000

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37. Lea Company acquired all of Tenzing Corporation's stock on January 1, 20X6 for $150,000 cash. On December 31, 20X8, the trial balances of the two companies were as follows:

Tenzing Corporation reported retained earnings of $75,000 at the date of acquisition. The difference between the acquisition price and underlying book value is assigned to buildings and equipment with a remaining economic life of five years from the date of acquisition. At December 31, 20X8, Tenzing owed Lea $4,000 for services provided. Based on the preceding information, what amount will be reported for total accounts payable in the consolidated balance sheet for the year 20X8?

A. $56,000 B. $46,000 C. $60,000 D. $42,000

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38. Lea Company acquired all of Tenzing Corporation's stock on January 1, 20X6 for $150,000 cash. On December 31, 20X8, the trial balances of the two companies were as follows:

Tenzing Corporation reported retained earnings of $75,000 at the date of acquisition. The difference between the acquisition price and underlying book value is assigned to buildings and equipment with a remaining economic life of five years from the date of acquisition. At December 31, 20X8, Tenzing owed Lea $4,000 for services provided. Based on the preceding information, what amount of total liabilities will be reported in the consolidated balance sheet for 20X8?

A. $225,000 B. $221,000 C. $217,000 D. $137,000

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39. Lea Company acquired all of Tenzing Corporation's stock on January 1, 20X6 for $150,000 cash. On December 31, 20X8, the trial balances of the two companies were as follows:

Tenzing Corporation reported retained earnings of $75,000 at the date of acquisition. The difference between the acquisition price and underlying book value is assigned to buildings and equipment with a remaining economic life of five years from the date of acquisition. At December 31, 20X8, Tenzing owed Lea $4,000 for services provided. Based on the preceding information, what amount of total retained earnings will be reported in the consolidated balance sheet for the year 20X8?

A. $330,000 B. $450,000 C. $430,000 D. $370,000

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40. On January 1, 20X8, Blake Company acquired all of Frost Corporation's voting shares for $280,000 cash.On December 31, 20X9, Frost owed Blake $5,000 for services provided during the year. When consolidated financial statements are prepared for 20X9, which entry is needed to eliminate intercompany receivables and payables in the consolidation worksheet?

A. Option A B. Option B C. Option C D. Option D

41. Consolidated financial statements are being prepared for Behemoth Corporation and its two wholly-owned subsidiaries that have intercompany loans of $50,000 and intercompany profits of $100,000. How much of these intercompany loans and profits should be eliminated?

A. intercompany loans - $0; intercompany profits - $0 B. intercompany loans - $50,000; intercompany profits - $0 C. intercompany loans - $50,000; intercompany profits - $100,000 D. intercompany loans - $0; intercompany profits - $100,000

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42. On January 1, 20X9, Wilton Company acquired all of Sirius Company's common shares, for $365,000 cash. On that date, Sirius's balance sheet appeared as follows:

The fair values of all of Sirius's assets and liabilities were equal to their book values except for inventory that had a fair value of $85,000, land that had a fair value of $60,000, and buildings and equipment that had a fair value of $250,000. Buildings and equipment have a remaining useful life of 10 years with zero salvage value. Wilton Company decided to employ push-down accounting for the acquisition. Subsequent to the combination, Sirius continued to operate as a separate company. Based on the preceding information, what amount will be present in the revaluation capital account, when eliminating entries are prepared?

A. $0 B. $65,000 C. $60,000 D. $15,000

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43. On January 1, 20X9, Wilton Company acquired all of Sirius Company's common shares, for $365,000 cash. On that date, Sirius's balance sheet appeared as follows:

The fair values of all of Sirius's assets and liabilities were equal to their book values except for inventory that had a fair value of $85,000, land that had a fair value of $60,000, and buildings and equipment that had a fair value of $250,000. Buildings and equipment have a remaining useful life of 10 years with zero salvage value. Wilton Company decided to employ push-down accounting for the acquisition. Subsequent to the combination, Sirius continued to operate as a separate company. Based on the preceding information, what amount of differential will arise in the consolidation process?

A. $0 B. $5,000 C. $15,000 D. $65,000

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44. Which term refers to the practice of revaluing an acquired subsidiary's assets and liabilities to their fair values directly on that subsidiary's books at the date of acquisition?

A. Fair value accounting B. Push-down accounting C. Fully adjusted method D. Reciprocal ownership

45. Which of the following observations is NOT consistent with the use of push-down accounting?

A. The revaluation capital account is part of the subsidiary's stockholders' equity. B. No differential arises in the consolidation process. C. Revaluation Capital account is eliminated in preparing consolidated statements. D. Eliminating entries related to the differential are needed in the worksheets.

46. Which of the following is true? When companies employ push-down accounting:

A. the subsidiary revalues assets and liabilities to their fair values as of the acquisition date. B. a special account called Revaluation Capital will appear in the consolidated balance sheet. C. all consolidation elimination entries are made on the books of the subsidiary rather than in consolidated worksheets. D. the subsidiary is not substantially wholly owned by the parent.

Essay Questions

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47. Dish Corporation acquired 100 percent of the common stock of Toll Company by issuing 10,000 shares of $10 par common stock with a market value of $60 per share. Summarized balance sheet data for the two companies immediately preceding the acquisition are as follows:

Required: Determine the dollar amounts to be presented in the consolidated balance sheet for (1) total assets, (2) total liabilities, and (3) total stockholders' equity.

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48. Top Company obtained 100 percent of Bottom Company's common stock on January 1, 20X6 by issuing 12,500 shares of its own common stock, which had a $5 par value and a $15 fair value on that date. Bottom reported a net book value of $150,000 and its shares had a $20 per share fair value on that date. However, some of its plant assets (with a 5-year remaining life) were undervalued by $20,000 in the company's accounting records. Bottom had also developed a customer list with an estimated fair value of $10,000 and a remaining life of 10 years. Top Company uses the equity-method to account for its investment in Bottom. During 20X6 Top and Bottom reported the following:

Required: Prepare each of the journal entries listed below related to Top's investment in Bottom. 1. Top's acquisition of Bottom. 2. Top's share of Bottom's 20X6 income. 3. Top's share of Bottom's 20X6 dividend income. 4. Top's amortization of excess acquisition price.

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49. Paco Company acquired 100 percent of the stock of Garland Corp. on December 31, 20X8. The stockholder's equity section of Garland's balance sheet at that date is as follows:

Paco financed the acquisition by using $880,000 cash and giving a note payable for $400,000. Book value approximated fair value for all of Garland's assets and liabilities except for buildings which had a fair value $60,000 more than its book value and a remaining useful life of 10 years. Any remaining differential was related to goodwill. Paco has an account payable to Garland in the amount of $30,000. Required: 1) Present all eliminating entries needed to prepare a consolidated balance sheet immediately following the acquisition. 2) What additional eliminating entry must be prepared at December 31, 20X9?

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50. Lea Company acquired all of Tenzing Corporation's stock on January 1, 20X6 for $150,000 cash. On December 31, 20X7, the balance sheets of the two companies showed the following amounts:

Tenzing Corporation reported retained earnings of $75,000 at the date of acquisition. The difference between the acquisition price and underlying book value is assigned to buildings and equipment with a remaining economic life of five years from the date of acquisition. Required: 1) Give the appropriate eliminating entry or entries needed to prepare a consolidated balance sheet as of December 31, 20X7. 2) Prepare a consolidated balance sheet worksheet as of December 31, 20X7.

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51. Silver Corporation acquired 100 percent of Bronze Company on January 1, 20X5, for $350,000. Following are selected account balances from Silver and Bronze Corporation as of December 31, 20X5:

Additional Information: 1. On January 1, 20X5 the fair market value of Bronze's assets equaled their book value with the exception of Plant Assets (with an estimated economic life of 6 years) which had a fair market value in excess in Bronze's depreciable assets of $33,000. 2. Silver used the equity-method in accounting for its investment in Bronze. 3. Detailed analysis of receivables and payables showed that Bronze owed Silver $10,000 on December 31, 20X5. Required: a. Give all journal entries recorded by Silver with regard to its investment in Bronze during 20X5. b. Give all eliminating entries needed to prepare a full set of consolidated financial statements for 20X5. c. Prepare a three-part consolidation worksheet as of December 31, 20X5.

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52. On December 31, 20X9, Thessaly Corporation acquired all of Ionian Company's common shares, for $570,000 cash. On that date, Ionian's balance sheet appeared as follows:

The fair values of all of Ionian's assets and liabilities were equal to their book values except for the following:

In recording this acquisition, push-down accounting was used. Required: 1) Record the acquisition of Ionian's stock on Thessaly's books on December 31, 20X9. 2) Record any entries that would be made on December 31, 20X9, on Ionian's books related to the business combination. 3) Present all eliminating entries that would appear in the worksheet to prepare a consolidated balance sheet immediately after the combination.

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Chapter 04 Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value Answer Key

Multiple Choice Questions

On July 1, 20X9, Link Corporation paid $340,000 for all of Tinsel Company's outstanding common stock. On that date, the costs and fair values of Tinsel's recorded assets and liabilities were as follows:

Based on the preceding information, the differential reflected in a consolidation worksheet to prepare a consolidated balance sheet immediately after the business combination is:

A. $0. B. $25,000. C. $70,000. D. $45,000.

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 04-01 Understand and make equity-method journal entries related to the differential.

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Topic: Journal Entries related to Differential (beginning, amort.)

Based on the preceding information, what amount should be allocated to goodwill in the consolidated balance sheet, prepared after this business combination?

A. $0 B. $25,000 C. $70,000 D. $45,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-03 Make calculations and prepare elimination entries for the consolidation of a wholly owned subsidiary when there is a complex positive differential at the acquisition date. Topic: Calculations/Elimination Entries for Complex Differential

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On December 31, 20X9, Add-On Company acquired 100 percent of Venus Corporation's common stock for $300,000. Balance sheet information Venus just prior to the acquisition is given here:

A. $60,000 B. $75,000 C. $15,000 D. $45,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 04-01 Understand and make equity-method journal entries related to the differential. Topic: Journal Entries related to Differential (beginning, amort.)

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On December 31, 20X9, Add-On Company acquired 100 percent of Venus Corporation's common stock for $300,000. Balance sheet information Venus just prior to the acquisition is given here:

At the date of the business combination, Venus's net assets and liabilities approximated fair value except for inventory, which had a fair value of $60,000, land which had a fair value of $125,000, and buildings and equipment (net), which had a fair value of $250,000. Based on the information provided, what amount of goodwill will be included in the consolidated balance sheet immediately following the acquisition?

A. $30,000 B. $15,000 C. $85,000 D. $45,000

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On December 31, 20X9, Add-On Company acquired 100 percent of Venus Corporation's common stock for $300,000. Balance sheet information Venus just prior to the acquisition is given here:

At the date of the business combination, Venus's net assets and liabilities approximated fair value except for inventory, which had a fair value of $60,000, land which had a fair value of $125,000, and buildings and equipment (net), which had a fair value of $250,000. Based on the information provided, what amount will be included as investment in Venus Corporation in the consolidated balance sheet immediately following the acquisition?

A. $0 B. $395,000 C. $255,000 D. $300,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-02 Understand and explain how consolidation procedures differ when there is a differential. Topic: Consolidation procedures: 100% ownership, differential

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Enya Corporation acquired 100 percent of Celtic Corporation's common stock on January 1, 20X9.Summarized balance sheet information for the two companies immediately after the combination is provided:

Based on the preceding information, the amount of differential associated with the acquisition is:

A. $0. B. $58,000. C. $22,000. D. $36,000.

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-01 Understand and make equity-method journal entries related to the differential. Topic: Journal Entries related to Differential (beginning, amort.)

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Enya Corporation acquired 100 percent of Celtic Corporation's common stock on January 1, 20X9.Summarized balance sheet information for the two companies immediately after the combination is provided:

Based on the information provided, the consolidated balance sheet of Enya and Celtic will reflect goodwill in the amount of:

A. $0. B. $58,000. C. $22,000. D. $36,000.

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Tanner Company, a subsidiary acquired for cash, owned equipment with a fair value higher than the book value as of the date of combination. A consolidated balance sheet prepared immediately after the acquisition would include this difference in:

A. goodwill. B. retained earnings. C. deferred charges. D. equipment.

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-01 Understand and make equity-method journal entries related to the differential. Topic: Journal Entries related to Differential (beginning, amort.)

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Pace Corporation acquired 100 percent of Spin Company's common stock on January 1, 20X9. Balance sheet data for the two companies immediately following the acquisition follow:

A. $130,000 B. $105,000 C. $115,000 D. $120,000

AACSB: Analytic AICPA FN: Measurement

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Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-01 Understand and make equity-method journal entries related to the differential. Topic: Journal Entries related to Differential (beginning, amort.)

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10.

Pace Corporation acquired 100 percent of Spin Company's common stock on January 1, 20X9. Balance sheet data for the two companies immediately following the acquisition follow:

At the date of the business combination, the book values of Spin's net assets and liabilities approximated fair value except for inventory, which had a fair value of $60,000, and land, which had a fair value of $50,000. The fair value of land for Pace Corporation was estimated at $80,000 immediately prior to the acquisition. Based on the preceding information, what amount of total assets will appear in the consolidated balance sheet prepared immediately after the business combination?

A. $756,000 B. $735,000 C. $750,000 D. $642,000

AACSB: Analytic AICPA FN: Measurement

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Blooms: Apply Difficulty: 3 Hard Learning Objective: 04-05 Prepare equity-method journal entries; elimination entries; and the consolidation worksheet for a wholly owned subsidiary when there is a complex positive differential. Topic: Consolidated Worksheet

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11.

Pace Corporation acquired 100 percent of Spin Company's common stock on January 1, 20X9. Balance sheet data for the two companies immediately following the acquisition follow:

At the date of the business combination, the book values of Spin's net assets and liabilities approximated fair value except for inventory, which had a fair value of $60,000, and land, which had a fair value of $50,000. The fair value of land for Pace Corporation was estimated at $80,000 immediately prior to the acquisition. Based on the preceding information, what is the differential associated with the acquisition?

A. $15,000 B. $21,000 C. $6,000 D. $10,000

AACSB: Analytic AICPA FN: Measurement

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Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-03 Make calculations and prepare elimination entries for the consolidation of a wholly owned subsidiary when there is a complex positive differential at the acquisition date. Topic: Calculations/Elimination Entries for Complex Differential

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12.

Pace Corporation acquired 100 percent of Spin Company's common stock on January 1, 20X9. Balance sheet data for the two companies immediately following the acquisition follow:

At the date of the business combination, the book values of Spin's net assets and liabilities approximated fair value except for inventory, which had a fair value of $60,000, and land, which had a fair value of $50,000. The fair value of land for Pace Corporation was estimated at $80,000 immediately prior to the acquisition. Based on the preceding information, what amount of goodwill will be reported in the consolidated balance sheet prepared immediately after the business combination?

A. $0 B. $21,000 C. $6,000 D. $15,000

AACSB: Analytic AICPA FN: Measurement

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13.

Pace Corporation acquired 100 percent of Spin Company's common stock on January 1, 20X9. Balance sheet data for the two companies immediately following the acquisition follow:

At the date of the business combination, the book values of Spin's net assets and liabilities approximated fair value except for inventory, which had a fair value of $60,000, and land, which had a fair value of $50,000. The fair value of land for Pace Corporation was estimated at $80,000 immediately prior to the acquisition. Based on the preceding information, what amount of liabilities will be reported in the consolidated balance sheet prepared immediately after the business combination?

A. $615,000 B. $406,000 C. $300,000 D. $265,000

AACSB: Analytic AICPA FN: Measurement

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14.

Pace Corporation acquired 100 percent of Spin Company's common stock on January 1, 20X9. Balance sheet data for the two companies immediately following the acquisition follow:

At the date of the business combination, the book values of Spin's net assets and liabilities approximated fair value except for inventory, which had a fair value of $60,000, and land, which had a fair value of $50,000. The fair value of land for Pace Corporation was estimated at $80,000 immediately prior to the acquisition. Based on the preceding information, what amount of retained earnings will be reported in the consolidated balance sheet prepared immediately after the business combination?

A. $300,000 B. $409,000 C. $259,000 D. $191,000

AACSB: Analytic AICPA FN: Measurement

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Blooms: Understand Difficulty: 1 Easy Learning Objective: 04-02 Understand and explain how consolidation procedures differ when there is a differential. Topic: Consolidation procedures: 100% ownership, differential

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15.

Pace Corporation acquired 100 percent of Spin Company's common stock on January 1, 20X9. Balance sheet data for the two companies immediately following the acquisition follow:

At the date of the business combination, the book values of Spin's net assets and liabilities approximated fair value except for inventory, which had a fair value of $60,000, and land, which had a fair value of $50,000. The fair value of land for Pace Corporation was estimated at $80,000 immediately prior to the acquisition. Based on the preceding information, what amount of total stockholder's equity will be reported in the consolidated balance sheet prepared immediately after the business combination?

A. $300,000 B. $479,000 C. $315,000 D. $350,000

AACSB: Analytic

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AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 04-02 Understand and explain how consolidation procedures differ when there is a differential. Topic: Consolidation procedures: 100% ownership, differential

16.

Note: This is a Kaplan CPA Review Question Park Co. uses the equity method to account for its January 1, 20X5, purchase of Tun Inc.'s common stock. On January 1, 20X5, the fair values of Tun's depreciable assets and land exceeded their carrying amounts. How do these excesses of fair values over carrying amounts affect Park's reported year-end Earnings from Investment in Tun for 20X5?

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 3 Hard Learning Objective: 04-01 Understand and make equity-method journal entries related to the differential. Topic: Journal Entries related to Differential (beginning, amort.)

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17.

Note: This is a Kaplan CPA Review Question An investor uses the equity method to account for its 30% investment in common stock of an investee. Amortization of the investor's share of the excess of fair value over book value of depreciable assets should be reported in the investor's income statement as part of

A. Amortization of goodwill. B. Other expense. C. Depreciation expense. D. Income from investee.

AACSB: Analytic AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-01 Understand and make equity-method journal entries related to the differential. Topic: Journal Entries related to Differential (beginning, amort.)

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18.

Note: This is a Kaplan CPA Review Question The Greenpath Corporation's (Greenpath) balance sheet shows assets of $800,000 and liabilities of $300,000. In addition, the company has an unrecorded intangible asset with a value of $100,000 and a 10-year useful life. On January 1, 20X1, the Montana Corporation acquires 30% of Greenpath's outstanding stock for $290,000. In 20X1, Greenpath reported net income of $90,000 and paid dividends of $20,000. In 20X2, Greenpath reported net income of $110,000 and paid dividends of $50,000. If the equity method is being applied to this investment, what is the reported balance for the investment account at the end of 20X2?

A. $311,000 B. $302,000 C. $323,000 D. $317,500

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 04-01 Understand and make equity-method journal entries related to the differential. Topic: Journal Entries related to Differential (beginning, amort.)

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19.

Note: This is a Kaplan CPA Review Question On January 1, 20X1, Big Company (Big) bought 30% of the outstanding stock of Little Company (Little) for $110,000 which provided Big with the ability to significantly influence the decisions of Little. Little reported assets of $400,000 and liabilities of $100,000 on that date. As part of its analysis before buying these shares, Big determined that Little owned a patent that had not been recorded despite having a remaining useful life of five years and a value of $20,000. During 20X1, Little reported net income of $70,000 and paid cash dividends of $30,000. What investment income should Big report for 20X1?

A. $9,000 B. $19,800 C. $17,000 D. $21,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 04-01 Understand and make equity-method journal entries related to the differential. Topic: Journal Entries related to Differential (beginning, amort.)

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20.

Note: This is a Kaplan CPA Review Question Grant, Inc. (Grant) acquired 30% of South Co.'s (South) voting stock for $200,000 on January 1, 20X1. Grant's 30% interest in South gave Grant the ability to exercise significant influence over South's operating and financial policies. On that date, South reported assets of $500,000 and liabilities of $100,000. South had equipment with a book value of $60,000 that was actually worth $160,000. The equipment had a remaining useful life of five years. During 20X1, South reported net income of $80,000 and paid dividends of $50,000. What amount of income should Grant recognize in 20X1 as a result of this investment?

A. $18,000 B. $4,000 C. $15,000 D. $16,750

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21.

On January 1, 20X8, Chariot Company acquired 100 percent of Stryder Company for $220,000 cash. The trial balances for the two companies on December 31, 20X8, included the following amounts:

A. $36,000. B. $40,000. C. $10,000. 4-75 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

D. $50,000.

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22.

On January 1, 20X8, Chariot Company acquired 100 percent of Stryder Company for $220,000 cash. The trial balances for the two companies on December 31, 20X8, included the following amounts:

A. $50,000. B. $40,000. 4-77 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

C. $10,000. D. $36,000.

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23.

On January 1, 20X8, Chariot Company acquired 100 percent of Stryder Company for $220,000 cash. The trial balances for the two companies on December 31, 20X8, included the following amounts:

A. $5,000. B. $4,000. 4-79 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

C. $10,000. D. $3,600.

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24.

On January 1, 20X8, Chariot Company acquired 100 percent of Stryder Company for $220,000 cash. The trial balances for the two companies on December 31, 20X8, included the following amounts:

On the acquisition date, Stryder reported net assets with a book value of $170,000. A total of $10,000 of the acquisition price is applied to goodwill, which was not impaired in 20X8. Stryder's depreciable assets had an estimated economic life of 10 years on the date of combination.The difference between fair value and book value of tangible assets is related entirely to buildings and equipment. Chariot used the equity method in accounting for its investment in Stryder. Analysis of receivables and payables revealed that Stryder owed Chariot $10,000 on December 31, 20X8. Based on the information provided, what amount of retained earnings will be reported in the consolidated financial statements for the year?

A. $331,000 B. $110,000 4-81 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

C. $441,000 D. $456,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-05 Prepare equity-method journal entries; elimination entries; and the consolidation worksheet for a wholly owned subsidiary when there is a complex positive differential. Topic: Consolidated Worksheet

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25.

On January 1, 20X8, Chariot Company acquired 100 percent of Stryder Company for $220,000 cash. The trial balances for the two companies on December 31, 20X8, included the following amounts:

On the acquisition date, Stryder reported net assets with a book value of $170,000. A total of $10,000 of the acquisition price is applied to goodwill, which was not impaired in 20X8. Stryder's depreciable assets had an estimated economic life of 10 years on the date of combination.The difference between fair value and book value of tangible assets is related entirely to buildings and equipment. Chariot used the equity method in accounting for its investment in Stryder. Analysis of receivables and payables revealed that Stryder owed Chariot $10,000 on December 31, 20X8. Based on the information provided, what amount of net income will be reported in the consolidated financial statements for the year?

A. $226,000 B. $55,000 4-83 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

C. $230,000 D. $171,000

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26.

On January 1, 20X8, Chariot Company acquired 100 percent of Stryder Company for $220,000 cash. The trial balances for the two companies on December 31, 20X8, included the following amounts:

On the acquisition date, Stryder reported net assets with a book value of $170,000. A total of $10,000 of the acquisition price is applied to goodwill, which was not impaired in 20X8. Stryder's depreciable assets had an estimated economic life of 10 years on the date of combination.The difference between fair value and book value of tangible assets is related entirely to buildings and equipment. Chariot used the equity method in accounting for its investment in Stryder. Analysis of receivables and payables revealed that Stryder owed Chariot $10,000 on December 31, 20X8. Based on the information provided, what amount of total assets will be reported in the consolidated balance sheet for the year?

A. $895,000 B. $801,000 4-85 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

C. $723,000 D. $1,111,000

27.

West, Inc. holds 100 percent of the common stock of Coast Company, an investment acquired for $680,000. Immediately following the combination, West's net assets have a book value of $1,150,000 and a fair value of $1,390,000. The book value and the fair value of Coast's net assets on the date of combination are $400,000 and $550,000, respectively. Immediately following the combination, a consolidated balance sheet is prepared. Based on the information given above, what will be the amount of net assets reported in the consolidated balance sheet, prepared immediately following the combination?

A. $1,150,000 B. $1,550,000 C. $1,700,000 D. $1,830,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-03 Make calculations and prepare elimination entries for the consolidation of a wholly owned subsidiary when there is a complex positive differential at the acquisition date. Topic: Consolidation procedures: 100% ownership, differential

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28.

West, Inc. holds 100 percent of the common stock of Coast Company, an investment acquired for $680,000. Immediately following the combination, West's net assets have a book value of $1,150,000 and a fair value of $1,390,000. The book value and the fair value of Coast's net assets on the date of combination are $400,000 and $550,000, respectively. Immediately following the combination, a consolidated balance sheet is prepared. Based on the information given above, goodwill will be reported in the consolidated balance sheet in the amount of:

A. $240,000. B. $130,000. C. $150,000. D. $270,000.

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29.

West, Inc. holds 100 percent of the common stock of Coast Company, an investment acquired for $680,000. Immediately following the combination, West's net assets have a book value of $1,150,000 and a fair value of $1,390,000. The book value and the fair value of Coast's net assets on the date of combination are $400,000 and $550,000, respectively. Immediately following the combination, a consolidated balance sheet is prepared. Based on the information given above, at what amount will West's investment in Coast stock be reported in the consolidated balance sheet?

A. $0 B. $400,000 C. $440,000 D. $480,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 04-02 Understand and explain how consolidation procedures differ when there is a differential. Topic: Consolidation procedures: 100% ownership, differential

30.

When a parent company uses the equity method to account for investments, the controlling interest in consolidated net income includes all of the following except:

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Understand Difficulty: 1 Easy Learning Objective: 04-02 Understand and explain how consolidation procedures differ when there is a differential.

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Topic: Consolidation procedures: 100% ownership, differential

31.

On December 31, 20X8, Mercury Corporation acquired 100 percent ownership of Saturn Corporation. On that date, Saturn reported assets and liabilities with book values of $300,000 and $100,000, respectively, common stock outstanding of $50,000, and retained earnings of $150,000. The book values and fair values of Saturn's assets and liabilities were identical except for land which had increased in value by $10,000 and inventories which had decreased by $5,000. Based on the preceding information, what amount of differential will appear in the eliminating entries required to prepare a consolidated balance sheet immediately after the business combination, if the acquisition price was $240,000?

A. $0 B. $40,000 C. $25,000 D. $5,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 04-03 Make calculations and prepare elimination entries for the consolidation of a wholly owned subsidiary when there is a complex positive differential at the acquisition date. Topic: Calculations/Elimination Entries for Complex Differential

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32.

On December 31, 20X8, Mercury Corporation acquired 100 percent ownership of Saturn Corporation. On that date, Saturn reported assets and liabilities with book values of $300,000 and $100,000, respectively, common stock outstanding of $50,000, and retained earnings of $150,000. The book values and fair values of Saturn's assets and liabilities were identical except for land which had increased in value by $10,000 and inventories which had decreased by $5,000. Based on the preceding information, what amount of goodwill will be reported if the acquisition price was $240,000?

A. $0 B. $40,000 C. $15,000 D. $35,000

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33.

On December 31, 20X8, Mercury Corporation acquired 100 percent ownership of Saturn Corporation. On that date, Saturn reported assets and liabilities with book values of $300,000 and $100,000, respectively, common stock outstanding of $50,000, and retained earnings of $150,000. The book values and fair values of Saturn's assets and liabilities were identical except for land which had increased in value by $10,000 and inventories which had decreased by $5,000. Based on the preceding information, what amount of goodwill will be reported if the acquisition price was $195,000?

A. $0 B. $40,000 C. $15,000 D. $35,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-04 Make calculations and prepare elimination entries for the consolidation of a wholly owned subsidiary when there is a complex bargain-purchase differential. Topic: Calculations/Elimination Entries for Bargain Purchase Differential

34.

Company X acquires 100 percent of the voting shares of Company Y for $275,000 on December 31, 20X8.The fair value of the net assets of Company X at the date of acquisition was $300,000. This is an example of a(n):

A. positive differential. B. bargain purchase. C. extraordinary loss. D. revaluation adjustment.

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Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-04 Make calculations and prepare elimination entries for the consolidation of a wholly owned subsidiary when there is a complex bargain-purchase differential. Topic: Calculations/Elimination Entries for Bargain Purchase Differential

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35.

Lea Company acquired all of Tenzing Corporation's stock on January 1, 20X6 for $150,000 cash. On December 31, 20X8, the trial balances of the two companies were as follows:

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A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 04-05 Prepare equity-method journal entries; elimination entries; and the consolidation worksheet for a wholly owned subsidiary when there is a complex positive differential. Topic: Second year of ownership

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36.

Lea Company acquired all of Tenzing Corporation's stock on January 1, 20X6 for $150,000 cash. On December 31, 20X8, the trial balances of the two companies were as follows:

Tenzing Corporation reported retained earnings of $75,000 at the date of acquisition. The difference between the acquisition price and underlying book value is assigned to buildings and equipment with a remaining economic life of five years from the date of acquisition. At December 31, 20X8, Tenzing owed Lea $4,000 for services provided. Based on the preceding information, what amount will be reported as total assets in the consolidated balance sheet for 20X8?

A. $666,000 B. $747,000 C. $651,000 D. $946,000

AACSB: Analytic

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AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 04-05 Prepare equity-method journal entries; elimination entries; and the consolidation worksheet for a wholly owned subsidiary when there is a complex positive differential. Topic: Second year of ownership

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37.

Lea Company acquired all of Tenzing Corporation's stock on January 1, 20X6 for $150,000 cash. On December 31, 20X8, the trial balances of the two companies were as follows:

Tenzing Corporation reported retained earnings of $75,000 at the date of acquisition. The difference between the acquisition price and underlying book value is assigned to buildings and equipment with a remaining economic life of five years from the date of acquisition. At December 31, 20X8, Tenzing owed Lea $4,000 for services provided. Based on the preceding information, what amount will be reported for total accounts payable in the consolidated balance sheet for the year 20X8?

A. $56,000 B. $46,000 C. $60,000 D. $42,000

AACSB: Analytic

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AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-06 Understand and explain the elimination of basic intercompany transactions. Topic: Intercompany Transactions

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38.

Lea Company acquired all of Tenzing Corporation's stock on January 1, 20X6 for $150,000 cash. On December 31, 20X8, the trial balances of the two companies were as follows:

Tenzing Corporation reported retained earnings of $75,000 at the date of acquisition. The difference between the acquisition price and underlying book value is assigned to buildings and equipment with a remaining economic life of five years from the date of acquisition. At December 31, 20X8, Tenzing owed Lea $4,000 for services provided. Based on the preceding information, what amount of total liabilities will be reported in the consolidated balance sheet for 20X8?

A. $225,000 B. $221,000 C. $217,000 D. $137,000

AACSB: Analytic

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AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-05 Prepare equity-method journal entries; elimination entries; and the consolidation worksheet for a wholly owned subsidiary when there is a complex positive differential. Topic: Second year of ownership

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39.

Lea Company acquired all of Tenzing Corporation's stock on January 1, 20X6 for $150,000 cash. On December 31, 20X8, the trial balances of the two companies were as follows:

Tenzing Corporation reported retained earnings of $75,000 at the date of acquisition. The difference between the acquisition price and underlying book value is assigned to buildings and equipment with a remaining economic life of five years from the date of acquisition. At December 31, 20X8, Tenzing owed Lea $4,000 for services provided. Based on the preceding information, what amount of total retained earnings will be reported in the consolidated balance sheet for the year 20X8?

A. $330,000 B. $450,000 C. $430,000 D. $370,000

AACSB: Analytic

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40.

On January 1, 20X8, Blake Company acquired all of Frost Corporation's voting shares for $280,000 cash.On December 31, 20X9, Frost owed Blake $5,000 for services provided during the year. When consolidated financial statements are prepared for 20X9, which entry is needed to eliminate intercompany receivables and payables in the consolidation worksheet?

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-06 Understand and explain the elimination of basic intercompany transactions. Topic: Intercompany Transactions

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41.

Consolidated financial statements are being prepared for Behemoth Corporation and its two wholly-owned subsidiaries that have intercompany loans of $50,000 and intercompany profits of $100,000. How much of these intercompany loans and profits should be eliminated?

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-06 Understand and explain the elimination of basic intercompany transactions. Topic: Intercompany Transactions

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42.

On January 1, 20X9, Wilton Company acquired all of Sirius Company's common shares, for $365,000 cash. On that date, Sirius's balance sheet appeared as follows:

A. $0 B. $65,000 C. $60,000 D. $15,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-07 Understand and explain the basics of push-down accounting. Topic: Pushdown Accounting

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43.

On January 1, 20X9, Wilton Company acquired all of Sirius Company's common shares, for $365,000 cash. On that date, Sirius's balance sheet appeared as follows:

The fair values of all of Sirius's assets and liabilities were equal to their book values except for inventory that had a fair value of $85,000, land that had a fair value of $60,000, and buildings and equipment that had a fair value of $250,000. Buildings and equipment have a remaining useful life of 10 years with zero salvage value. Wilton Company decided to employ push-down accounting for the acquisition. Subsequent to the combination, Sirius continued to operate as a separate company. Based on the preceding information, what amount of differential will arise in the consolidation process?

A. $0 B. $5,000 C. $15,000 D. $65,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-07 Understand and explain the basics of push-down accounting. Topic: Pushdown Accounting

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44.

Which term refers to the practice of revaluing an acquired subsidiary's assets and liabilities to their fair values directly on that subsidiary's books at the date of acquisition?

A. Fair value accounting B. Push-down accounting C. Fully adjusted method D. Reciprocal ownership

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-07 Understand and explain the basics of push-down accounting. Topic: Pushdown Accounting

45.

Which of the following observations is NOT consistent with the use of push-down accounting?

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-07 Understand and explain the basics of push-down accounting. Topic: Pushdown Accounting

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46.

Which of the following is true? When companies employ push-down accounting:

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-07 Understand and explain the basics of push-down accounting. Topic: Pushdown Accounting

Essay Questions

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47.

Dish Corporation acquired 100 percent of the common stock of Toll Company by issuing 10,000 shares of $10 par common stock with a market value of $60 per share. Summarized balance sheet data for the two companies immediately preceding the acquisition are as follows:

Required: Determine the dollar amounts to be presented in the consolidated balance sheet for (1) total assets, (2) total liabilities, and (3) total stockholders' equity.

Total assets = $2,550,000 ($1,200,000 + $1,300,000 + $50,000 GW) Total liabilities = $1,550,000 ($800,000 + $750,000) Total stockholders' equity = $1,000,000 [$400,000 + ($60 x 10,000 shares)]

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48.

Top Company obtained 100 percent of Bottom Company's common stock on January 1, 20X6 by issuing 12,500 shares of its own common stock, which had a $5 par value and a $15 fair value on that date. Bottom reported a net book value of $150,000 and its shares had a $20 per share fair value on that date. However, some of its plant assets (with a 5year remaining life) were undervalued by $20,000 in the company's accounting records. Bottom had also developed a customer list with an estimated fair value of $10,000 and a remaining life of 10 years. Top Company uses the equity-method to account for its investment in Bottom. During 20X6 Top and Bottom reported the following:

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49.

Paco Company acquired 100 percent of the stock of Garland Corp. on December 31, 20X8. The stockholder's equity section of Garland's balance sheet at that date is as follows:

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50.

Lea Company acquired all of Tenzing Corporation's stock on January 1, 20X6 for $150,000 cash. On December 31, 20X7, the balance sheets of the two companies showed the following amounts:

Tenzing Corporation reported retained earnings of $75,000 at the date of acquisition. The difference between the acquisition price and underlying book value is assigned to buildings and equipment with a remaining economic life of five years from the date of acquisition. Required: 1) Give the appropriate eliminating entry or entries needed to prepare a consolidated balance sheet as of December 31, 20X7. 2) Prepare a consolidated balance sheet worksheet as of December 31, 20X7.

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**Note the amortization entry is already incorporated in the ending Retained Earnings balance

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Difficulty: 3 Hard Learning Objective: 04-05 Prepare equity-method journal entries; elimination entries; and the consolidation worksheet for a wholly owned subsidiary when there is a complex positive differential. Topic: Consolidated Worksheet

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51.

Silver Corporation acquired 100 percent of Bronze Company on January 1, 20X5, for $350,000. Following are selected account balances from Silver and Bronze Corporation as of December 31, 20X5:

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52.

On December 31, 20X9, Thessaly Corporation acquired all of Ionian Company's common shares, for $570,000 cash. On that date, Ionian's balance sheet appeared as follows:

The fair values of all of Ionian's assets and liabilities were equal to their book values except for the following:

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Section: Appendix 4A Topic: Consolidation of Pushdown Accounting

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Chapter 05 Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value

Multiple Choice Questions

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1. Bristle Corporation acquired 75 percent of Silver Corporation's common stock on December 31, 20X8, for $300,000. The fair value of the noncontrolling interest at that date was determined to be $100,000. Silver's balance sheet immediately before the combination reflected the following balances:

A careful review of the fair value of Silver's assets and liabilities indicated that inventory, land, and buildings and equipment (net) had fair values of $65,000, $100,000, and, $300,000 respectively. Goodwill is assigned proportionately to Bristle and the noncontrolling shareholders. Based on the preceding information, what amount of inventory will be included in the consolidated balance sheet immediately following the acquisition?

A. $0 B. $65,000 C. $70,000 D. $60,000

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2. Bristle Corporation acquired 75 percent of Silver Corporation's common stock on December 31, 20X8, for $300,000. The fair value of the noncontrolling interest at that date was determined to be $100,000. Silver's balance sheet immediately before the combination reflected the following balances:

A careful review of the fair value of Silver's assets and liabilities indicated that inventory, land, and buildings and equipment (net) had fair values of $65,000, $100,000, and, $300,000 respectively. Goodwill is assigned proportionately to Bristle and the noncontrolling shareholders. Based on the preceding information, what amount of land will be included in the consolidated balance sheet immediately following the acquisition?

A. $0 B. $10,000 C. $90,000 D. $100,000

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3. Bristle Corporation acquired 75 percent of Silver Corporation's common stock on December 31, 20X8, for $300,000. The fair value of the noncontrolling interest at that date was determined to be $100,000. Silver's balance sheet immediately before the combination reflected the following balances:

A careful review of the fair value of Silver's assets and liabilities indicated that inventory, land, and buildings and equipment (net) had fair values of $65,000, $100,000, and, $300,000 respectively. Goodwill is assigned proportionately to Bristle and the noncontrolling shareholders. Based on the preceding information, what amount of buildings and equipment (net) will be included in the consolidated balance sheet immediately following the acquisition?

A. $0 B. $50,000 C. $250,000 D. $300,000

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4. Bristle Corporation acquired 75 percent of Silver Corporation's common stock on December 31, 20X8, for $300,000. The fair value of the noncontrolling interest at that date was determined to be $100,000. Silver's balance sheet immediately before the combination reflected the following balances:

A careful review of the fair value of Silver's assets and liabilities indicated that inventory, land, and buildings and equipment (net) had fair values of $65,000, $100,000, and, $300,000 respectively. Goodwill is assigned proportionately to Bristle and the noncontrolling shareholders. Based on the preceding information, what amount of goodwill will be reported in the consolidated balance sheet immediately following the acquisition?

A. $0 B. $120,000 C. $65,000 D. $20,000

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5. Bristle Corporation acquired 75 percent of Silver Corporation's common stock on December 31, 20X8, for $300,000. The fair value of the noncontrolling interest at that date was determined to be $100,000. Silver's balance sheet immediately before the combination reflected the following balances:

A careful review of the fair value of Silver's assets and liabilities indicated that inventory, land, and buildings and equipment (net) had fair values of $65,000, $100,000, and, $300,000 respectively. Goodwill is assigned proportionately to Bristle and the noncontrolling shareholders. Based on the preceding information, what amount will be reported as investment in Silver Corporation stock in the consolidated balance sheet immediately following the acquisition?

A. $0 B. $210,000 C. $300,000 D. $400,000

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6. Bristle Corporation acquired 75 percent of Silver Corporation's common stock on December 31, 20X8, for $300,000. The fair value of the noncontrolling interest at that date was determined to be $100,000. Silver's balance sheet immediately before the combination reflected the following balances:

A careful review of the fair value of Silver's assets and liabilities indicated that inventory, land, and buildings and equipment (net) had fair values of $65,000, $100,000, and, $300,000 respectively. Goodwill is assigned proportionately to Bristle and the noncontrolling shareholders. Based on the preceding information, what amount will be reported as noncontrolling interest in the consolidated balance sheet immediately following the acquisition?

A. $0 B. $70,000 C. $83,750 D. $100,000

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7. On January 1, 20X9, Gulliver Corporation acquired 80 percent of Sea-Gull Company's common stock for $160,000 cash. The fair value of the noncontrolling interest at that date was determined to be $40,000. Data from the balance sheets of the two companies included the following amounts as of the date of acquisition:

At the date of the business combination, the book values of Sea-Gull's net assets and liabilities approximated fair value except for inventory, which had a fair value of $45,000, and land, which had a fair value of $60,000. Based on the preceding information, what amount of total inventory will be reported in the consolidated balance sheet prepared immediately after the business combination?

A. $130,000 B. $135,000 C. $90,000 D. $45,000

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8. On January 1, 20X9, Gulliver Corporation acquired 80 percent of Sea-Gull Company's common stock for $160,000 cash. The fair value of the noncontrolling interest at that date was determined to be $40,000. Data from the balance sheets of the two companies included the following amounts as of the date of acquisition:

At the date of the business combination, the book values of Sea-Gull's net assets and liabilities approximated fair value except for inventory, which had a fair value of $45,000, and land, which had a fair value of $60,000. Based on the preceding information, what amount of goodwill will be reported in the consolidated balance sheet prepared immediately after the business combination?

A. $0 B. $40,000 C. $20,000 D. $15,000

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9. On January 1, 20X9, Gulliver Corporation acquired 80 percent of Sea-Gull Company's common stock for $160,000 cash. The fair value of the noncontrolling interest at that date was determined to be $40,000. Data from the balance sheets of the two companies included the following amounts as of the date of acquisition:

At the date of the business combination, the book values of Sea-Gull's net assets and liabilities approximated fair value except for inventory, which had a fair value of $45,000, and land, which had a fair value of $60,000. Based on the preceding information, what amount of total assets will be reported in the consolidated balance sheet prepared immediately after the business combination?

A. $720,000 B. $840,000 C. $825,000 D. $865,000

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10. On January 1, 20X9, Gulliver Corporation acquired 80 percent of Sea-Gull Company's common stock for $160,000 cash. The fair value of the noncontrolling interest at that date was determined to be $40,000. Data from the balance sheets of the two companies included the following amounts as of the date of acquisition:

At the date of the business combination, the book values of Sea-Gull's net assets and liabilities approximated fair value except for inventory, which had a fair value of $45,000, and land, which had a fair value of $60,000. Based on the preceding information, what amount of total liabilities will be reported in the consolidated balance sheet prepared immediately after the business combination?

A. $395,000 B. $280,000 C. $275,000 D. $195,000

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11. On January 1, 20X9, Gulliver Corporation acquired 80 percent of Sea-Gull Company's common stock for $160,000 cash. The fair value of the noncontrolling interest at that date was determined to be $40,000. Data from the balance sheets of the two companies included the following amounts as of the date of acquisition:

At the date of the business combination, the book values of Sea-Gull's net assets and liabilities approximated fair value except for inventory, which had a fair value of $45,000, and land, which had a fair value of $60,000. Based on the preceding information, what amount will be reported as noncontrolling interest in the consolidated balance sheet prepared immediately after the business combination?

A. $0 B. $15,000 C. $40,000 D. $46,000

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12. On January 1, 20X9, Gulliver Corporation acquired 80 percent of Sea-Gull Company's common stock for $160,000 cash. The fair value of the noncontrolling interest at that date was determined to be $40,000. Data from the balance sheets of the two companies included the following amounts as of the date of acquisition:

At the date of the business combination, the book values of Sea-Gull's net assets and liabilities approximated fair value except for inventory, which had a fair value of $45,000, and land, which had a fair value of $60,000. Based on the preceding information, what amount of consolidated retained earnings will be reported immediately after the business combination?

A. $205,000 B. $120,000 C. $325,000 D. $310,000

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13. On January 1, 20X9, Gulliver Corporation acquired 80 percent of Sea-Gull Company's common stock for $160,000 cash. The fair value of the noncontrolling interest at that date was determined to be $40,000. Data from the balance sheets of the two companies included the following amounts as of the date of acquisition:

At the date of the business combination, the book values of Sea-Gull's net assets and liabilities approximated fair value except for inventory, which had a fair value of $45,000, and land, which had a fair value of $60,000. Based on the preceding information, what amount will be reported as total stockholders' equity in the consolidated balance sheet prepared immediately after the business combination?

A. $445,000 B. $205,000 C. $565,000 D. $550,000

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14. On December 31, 20X8, X Company acquired controlling ownership of Y Company. A consolidated balance sheet was prepared immediately. Partial balance sheet data for the two companies and the consolidated entity at that date follow:

During 20X8, X Company provided consulting services to Y Company and has not yet paid for them. There were no other receivables or payables between the companies at December 31, 20X8. Based on the information given, what is the amount of unpaid consulting services at December 31, 20X8, on work done by X Company for Y Company?

A. $0 B. $10,000 C. $5,000 D. $15,000

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15. On December 31, 20X8, X Company acquired controlling ownership of Y Company. A consolidated balance sheet was prepared immediately. Partial balance sheet data for the two companies and the consolidated entity at that date follow:

During 20X8, X Company provided consulting services to Y Company and has not yet paid for them. There were no other receivables or payables between the companies at December 31, 20X8. Based on the information given, what balance in accounts receivable did Y Company report at December 31, 20X8?

A. $28,000 B. $48,000 C. $40,000 D. $38,000

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16. On December 31, 20X8, X Company acquired controlling ownership of Y Company. A consolidated balance sheet was prepared immediately. Partial balance sheet data for the two companies and the consolidated entity at that date follow:

A. $50,000 and $28,000 respectively. B. $60,000 and $32,000 respectively. C. $40,000 and $35,000 respectively. D. $28,000 and $60,000 respectively.

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17. On December 31, 20X8, X Company acquired controlling ownership of Y Company. A consolidated balance sheet was prepared immediately. Partial balance sheet data for the two companies and the consolidated entity at that date follow:

During 20X8, X Company provided consulting services to Y Company and has not yet paid for them. There were no other receivables or payables between the companies at December 31, 20X8. Based on the information given, what was the fair value of Y Company as a whole at the date of acquisition?

A. $155,000 B. $110,000 C. $115,000 D. $135,000

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18. On December 31, 20X8, X Company acquired controlling ownership of Y Company. A consolidated balance sheet was prepared immediately. Partial balance sheet data for the two companies and the consolidated entity at that date follow:

During 20X8, X Company provided consulting services to Y Company and has not yet paid for them. There were no other receivables or payables between the companies at December 31, 20X8. Based on the information given, what percentage of Y Company's shares were acquired by X Company?

A. 100 percent B. 60 percent C. 80 percent D. 75 percent

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19. On December 31, 20X8, X Company acquired controlling ownership of Y Company. A consolidated balance sheet was prepared immediately. Partial balance sheet data for the two companies and the consolidated entity at that date follow:

During 20X8, X Company provided consulting services to Y Company and has not yet paid for them. There were no other receivables or payables between the companies at December 31, 20X8. Based on the information given, what amount will be reported as total controlling interest in the consolidated balance sheet?

A. $254,000 B. $285,000 C. $364,000 D. $395,000

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20. Rohan Corporation holds assets with a fair value of $150,000 and a book value of $125,000 and liabilities with a book value and fair value of $50,000. What balance will be assigned to the noncontrolling interest in the consolidated balance sheet if Helms Company pays $90,000 to acquire 75 percent ownership in Rohan and goodwill of $20,000 is reported?

A. $50,000 B. $30,000 C. $40,000 D. $20,000

21. When a parent owns less than 100% of a subsidiary, the noncontrolling interest shareholders are allocated their ownership percentage of income or net assets in all of the following eliminating entries except for:

A. The basic investment account elimination entry B. The excess value (differential) reclassification entry C. The optional accumulated depreciation elimination entry D. The amortized excess value reclassification entry

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22. On January 1, 20X6, Climber Corporation acquired 90 percent of Wisden Corporation for $180,000 cash. Wisden reported net income of $30,000 and dividends of $10,000 for 20X6, 20X7, and 20X8. On January 1, 20X6, Wisden reported common stock outstanding of $100,000 and retained earnings of $60,000, and the fair value of the noncontrolling interest was $20,000. It held land with a book value of $30,000 and a market value of $35,000 and equipment with a book value of $50,000 and a market value of $60,000 at the date of combination. The remainder of the differential at acquisition was attributable to an increase in the value of patents, which had a remaining useful life of five years. All depreciable assets held by Wisden at the date of acquisition had a remaining economic life of five years. Climber uses the equity method in accounting for its investment in Wisden. Based on the preceding information, the increase in the fair value of patents held by Wisden is:

A. $20,000 B. $25,000 C. $15,000 D. $5,000

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23. On January 1, 20X6, Climber Corporation acquired 90 percent of Wisden Corporation for $180,000 cash. Wisden reported net income of $30,000 and dividends of $10,000 for 20X6, 20X7, and 20X8. On January 1, 20X6, Wisden reported common stock outstanding of $100,000 and retained earnings of $60,000, and the fair value of the noncontrolling interest was $20,000. It held land with a book value of $30,000 and a market value of $35,000 and equipment with a book value of $50,000 and a market value of $60,000 at the date of combination. The remainder of the differential at acquisition was attributable to an increase in the value of patents, which had a remaining useful life of five years. All depreciable assets held by Wisden at the date of acquisition had a remaining economic life of five years. Climber uses the equity method in accounting for its investment in Wisden. Based on the preceding information, what balance would Climber report as its investment in Wisden at January 1, 20X8?

A. $230,400 B. $180,000 C. $234,000 D. $203,400

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24. On January 1, 20X6, Climber Corporation acquired 90 percent of Wisden Corporation for $180,000 cash. Wisden reported net income of $30,000 and dividends of $10,000 for 20X6, 20X7, and 20X8. On January 1, 20X6, Wisden reported common stock outstanding of $100,000 and retained earnings of $60,000, and the fair value of the noncontrolling interest was $20,000. It held land with a book value of $30,000 and a market value of $35,000 and equipment with a book value of $50,000 and a market value of $60,000 at the date of combination. The remainder of the differential at acquisition was attributable to an increase in the value of patents, which had a remaining useful life of five years. All depreciable assets held by Wisden at the date of acquisition had a remaining economic life of five years. Climber uses the equity method in accounting for its investment in Wisden. Based on the preceding information, what balance would Climber report as its investment in Wisden at January 1, 20X9?

A. $251,100 B. $224,100 C. $215,100 D. $234,000

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25. On December 31, 20X8, Melkor Corporation acquired 80 percent of Sydney Company's common stock for $160,000. At that date, the fair value of the noncontrolling interest was $40,000. Of the $75,000 differential, $10,000 related to the increased value of Sydney's inventory, $20,000 related to the increased value of its land, and $25,000 related to the increased value of its equipment that had a remaining life of 10 years from the date of combination. Sydney sold all inventory it held at the end of 20X8 during 20X9. The land to which the differential related was also sold during 20X9 for a large gain. At the date of combination, Sydney reported retained earnings of $75,000 and common stock outstanding of $50,000. In 20X9, Sydney reported net income of $60,000, but paid no dividends. Melkor accounts for its investment in Sydney using the equity method. Based on the preceding information, the amount of goodwill reported in the consolidated financial statements prepared immediately after the combination is:

A. $0 B. $32,500 C. $26,000 D. $20,000

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26. On December 31, 20X8, Melkor Corporation acquired 80 percent of Sydney Company's common stock for $160,000. At that date, the fair value of the noncontrolling interest was $40,000. Of the $75,000 differential, $10,000 related to the increased value of Sydney's inventory, $20,000 related to the increased value of its land, and $25,000 related to the increased value of its equipment that had a remaining life of 10 years from the date of combination. Sydney sold all inventory it held at the end of 20X8 during 20X9. The land to which the differential related was also sold during 20X9 for a large gain. At the date of combination, Sydney reported retained earnings of $75,000 and common stock outstanding of $50,000. In 20X9, Sydney reported net income of $60,000, but paid no dividends. Melkor accounts for its investment in Sydney using the equity method. Based on the preceding information, what is the amount of write-off of differential associated with this acquisition recorded by Melkor during 20X9?

A. $0 B. $32,500 C. $26,000 D. $20,000

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27. On January 1, 20X8, Ramon Corporation acquired 75 percent of Tester Company's voting common stock for $300,000. At the time of the combination, Tester reported common stock outstanding of $200,000 and retained earnings of $150,000, and the fair value of the noncontrolling interest was $100,000. The book value of Tester's net assets approximated market value except for patents that had a market value of $50,000 more than their book value. The patents had a remaining economic life of ten years at the date of the business combination. Tester reported net income of $40,000 and paid dividends of $10,000 during 20X8. Based on the preceding information, what balance will Ramon report as its investment in Tester at December 31, 20X8, assuming Ramon uses the equity method in accounting for its investment?

A. $318,750 B. $317,500 C. $330,000 D. $326,250

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28. On January 1, 20X8, Ramon Corporation acquired 75 percent of Tester Company's voting common stock for $300,000. At the time of the combination, Tester reported common stock outstanding of $200,000 and retained earnings of $150,000, and the fair value of the noncontrolling interest was $100,000. The book value of Tester's net assets approximated market value except for patents that had a market value of $50,000 more than their book value. The patents had a remaining economic life of ten years at the date of the business combination. Tester reported net income of $40,000 and paid dividends of $10,000 during 20X8. Based on the preceding information, which of the following is an eliminating entry needed to prepare a full set of consolidated financial statements at December 31, 20X8:

A. Choice A B. Choice B C. Choice C D. Choice D

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29. Note: This is a Kaplan CPA Review Question On January 1, 20X6, Polka Co. (Polka) and Strauss Co. (Strauss) had condensed balance sheets as follows:

On January 2, 20X6, Polka borrowed $90,000 and used the proceeds to acquire 90% of the outstanding common shares of Strauss. This debt is payable in ten equal annual principal and accrued interest payments beginning December 30, 20X6. On the acquisition date, the fair value of Strauss was $100,000, and the excess cost of the investment over Strauss's carrying amount of acquired net assets should be allocated 60% to inventory and 40% to goodwill. Current assets on the January 2, 20X6, consolidated balance sheet should be:

A. $79,000 B. $120,000 C. $90,000 D. $96,000

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30. On January 1, 20X6, Polka Co. (Polka) and Strauss Co. (Strauss) had condensed balance sheets as follows:

On January 2, 20X6, Polka borrowed $90,000 and used the proceeds to acquire 90% of the outstanding common shares of Strauss. This debt is payable in ten equal annual principal and accrued interest payments beginning December 30, 20X6. On the acquisition date, the fair value of Strauss was $100,000, and the excess cost of the investment over Strauss's carrying amount of acquired net assets should be allocated 60% to inventory and 40% to goodwill. Noncurrent assets on the January 2, 20X6, consolidated balance sheet should be:

A. $130,000 B. $150,000 C. $134,000 D. $136,000

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31. On January 1, 20X6, Polka Co. (Polka) and Strauss Co. (Strauss) had condensed balance sheets as follows:

On January 2, 20X6, Polka borrowed $90,000 and used the proceeds to acquire 90% of the outstanding common shares of Strauss. This debt is payable in ten equal annual principal and accrued interest payments beginning December 30, 20X6. On the acquisition date, the fair value of Strauss was $100,000, and the excess cost of the investment over Strauss's carrying amount of acquired net assets should be allocated 60% to inventory and 40% to goodwill. Current liabilities on the January 2, 20X6, consolidated balance sheet should be:

A. $49,000 B. $30,000 C. $40,000 D. $50,000

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32. On January 1, 20X6, Polka Co. (Polka) and Strauss Co. (Strauss) had condensed balance sheets as follows:

On January 2, 20X6, Polka borrowed $90,000 and used the proceeds to acquire 90% of the outstanding common shares of Strauss. This debt is payable in ten equal annual principal and accrued interest payments beginning December 30, 20X6. On the acquisition date, the fair value of Strauss was $100,000, and the excess cost of the investment over Strauss's carrying amount of acquired net assets should be allocated 60% to inventory and 40% to goodwill. Noncurrent liabilities on the January 2, 20X6, consolidated balance sheet should be:

A. $109,000 B. $55,000 C. $104,000 D. $131,000

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33. On January 1, 20X6, Polka Co. (Polka) and Strauss Co. (Strauss) had condensed balance sheets as follows:

On January 2, 20X6, Polka borrowed $90,000 and used the proceeds to acquire 90% of the outstanding common shares of Strauss. This debt is payable in ten equal annual principal and accrued interest payments beginning December 30, 20X6. On the acquisition date, the fair value of Strauss was $100,000, and the excess cost of the investment over Strauss's carrying amount of acquired net assets should be allocated 60% to inventory and 40% to goodwill. Stockholders' equity on the January 2, 20X6, consolidated balance sheet should be:

A. $85,000 B. $80,000 C. $90,000 D. $130,000

34. All of the following are examples of how a parent company may lose control over a subsidiary and discontinue future consolidation, except:

A. The parent sells some of its interest in the subsidiary. B. The subsidiary issues additional common stock. C. The subsidiary comes under the control of the government or other regulator. D. The subsidiary issues a stock dividend or a stock split.

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35. Pink Inc. sells half of its 70% interest in Brown Co. on January 1, 20X6. On that date, the fair value of Brown as a whole is $940,000 and the carrying amount of Pink's 70% share of Brown is $320,000. What, if any, is the gain on the sale of half of Pink's interest in Brown?

A. $0 B. $9,000 C. $169,000 D. $338,000

36. On January 1, 20X8, Bristol Company acquired 80 percent of Animation Company's common stock for $280,000 cash. At that date, Animation reported common stock outstanding of $200,000 and retained earnings of $100,000, and the fair value of the noncontrolling interest was $70,000. The book values and fair values of Animation's assets and liabilities were equal, except for other intangible assets which had a fair value $50,000 greater than book value and an 8-year remaining life. Animation reported the following data for 20X8 and 20X9:

Bristol reported net income of $100,000 and paid dividends of $30,000 for both the years. Based on the preceding information, what is the amount of consolidated comprehensive income reported for 20X8?

A. $125,000 B. $123,750 C. $118,750 D. $130,000

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37. On January 1, 20X8, Bristol Company acquired 80 percent of Animation Company's common stock for $280,000 cash. At that date, Animation reported common stock outstanding of $200,000 and retained earnings of $100,000, and the fair value of the noncontrolling interest was $70,000. The book values and fair values of Animation's assets and liabilities were equal, except for other intangible assets which had a fair value $50,000 greater than book value and an 8-year remaining life. Animation reported the following data for 20X8 and 20X9:

A. $145,000 B. $135,000 C. $138,750 D. $128,750

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38. On January 1, 20X8, Bristol Company acquired 80 percent of Animation Company's common stock for $280,000 cash. At that date, Animation reported common stock outstanding of $200,000 and retained earnings of $100,000, and the fair value of the noncontrolling interest was $70,000. The book values and fair values of Animation's assets and liabilities were equal, except for other intangible assets which had a fair value $50,000 greater than book value and an 8-year remaining life. Animation reported the following data for 20X8 and 20X9:

Bristol reported net income of $100,000 and paid dividends of $30,000 for both the years. Based on the preceding information, what is the amount of comprehensive income attributable to the controlling interest for 20X8?

A. $123,750 B. $118,750 C. $119,000 D. $104,000

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39. On January 1, 20X8, Bristol Company acquired 80 percent of Animation Company's common stock for $280,000 cash. At that date, Animation reported common stock outstanding of $200,000 and retained earnings of $100,000, and the fair value of the noncontrolling interest was $70,000. The book values and fair values of Animation's assets and liabilities were equal, except for other intangible assets which had a fair value $50,000 greater than book value and an 8-year remaining life. Animation reported the following data for 20X8 and 20X9:

A. $138,750 B. $131,000 C. $128,750 D. $135,000

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40. On January 1, 20X8, Colorado Corporation acquired 75 percent of Denver Company's voting common stock for $90,000 cash. At that date, the fair value of the noncontrolling interest was $30,000. Denvers's balance sheet at the date of acquisition contained the following balances:

At the date of acquisition, the reported book values of Denver's assets and liabilities approximated fair value. Eliminating entries are being made to prepare a consolidated balance sheet immediately following the business combination. Based on the preceding information, in the entry to eliminate the investment balance,

A. retained earnings will be credited for $20,000. B. additional paid-in-capital will be credited for $20,000. C. retained earnings will be credited for $10,000. D. noncontrolling interest will be debited for 30,000.

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41. On January 1, 20X8, Colorado Corporation acquired 75 percent of Denver Company's voting common stock for $90,000 cash. At that date, the fair value of the noncontrolling interest was $30,000. Denvers's balance sheet at the date of acquisition contained the following balances:

A. $0 B. $10,000 C. $15,000 D. $20,000

42. Which of the following stockholders equity accounts are eliminated during the consolidation process?

A. Common Stock of the subsidiary B. Preferred Stock of the subsidiary C. Additional Paid-in Capital of the subsidiary D. All of these

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Essay Questions

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43. On December 31, 20X8, Defoe Corporation acquired 80 percent of Crusoe Company's common stock for $104,000 cash. The fair value of the noncontrolling interest at that date was determined to be $26,000. Data from the balance sheets of the two companies included the following amounts as of the date of acquisition:

On that date, the book values of Crusoe's assets and liabilities approximated fair value except for inventory, which had a fair value of $45,000, and buildings and equipment, which had a fair value of $100,000. At December 31, 20X8, Defoe reported accounts payable of $15,000 to Crusoe, which reported an equal amount in its accounts receivable. Required: 1) Provide the eliminating entries needed to prepare a consolidated balance sheet immediately following the business combination. 2) Prepare a consolidated balance sheet worksheet.

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44. Magellan Corporation acquired 80 percent ownership of Dipper Corporation on January 1, 20X8, for $200,000. At that date, Dipper reported common stock outstanding of $75,000 and retained earnings of $150,000. The fair value of the noncontrolling interest was $50,000. The differential is assigned to equipment, which had a fair value $25,000 greater than book value and a remaining economic life of five years at the date of the business combination. Dipper reported net income of $40,000 and paid dividends of $20,000 in 20X8. Required: 1) Provide the journal entries recorded by Magellan during 20X8 on its books if it accounts for its investment in Dipper using the equity method. 2) Give the eliminating entries needed at December 31, 20X8, to prepare consolidated financial statements.

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45. On January 1, 20X8, Vector Company acquired 80 percent of Scalar Company's ownership on for $120,000 cash. At that date, the fair value of the noncontrolling interest was $30,000. The book value of Scalar's net assets at acquisition was $125,000. The book values and fair values of Scalar's assets and liabilities were equal, except for buildings and equipment, which were worth $15,000 more than book value. Buildings and equipment are depreciated on a 10year basis. Although goodwill is not amortized, the management of Vector concluded at December 31, 20X8, that goodwill from its acquisition of Scalar shares had been impaired and the correct carrying amount was $5,000. Goodwill and goodwill impairment were assigned proportionately to the controlling and noncontrolling shareholders. No additional impairment occurred in 20X9. Trial balance data for Vector and Scalar on December 31, 20X9, are as follows:

Required: 1) Provide all eliminating entries needed to prepare a three-part consolidation worksheet as of December 31, 20X9. 2) Prepare a three-part consolidation worksheet for 20X9 in good form.

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46. Top Corporation acquired 80 percent of Bottom Corporation's common stock on January 1, 20X8, for $520,000. At that date, Bottom reported common stock outstanding of $250,000 and retained earnings of $375,000. Assume the fair value of the noncontrolling interest on January 1, 20X8 was $130,000. The book values and fair values of Bottom's assets and liabilities were equal on the acquisition date, except for other intangible assets, which had a fair value $25,000 greater than book value and a 5-year remaining life. Top and Bottom reported the following data for 20X8 and 20X9:

a. Compute consolidated comprehensive income for 20X8 and 20X9. b. Compute comprehensive income attributable to the controlling interest for 20X8 and 20X9.

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Chapter 05 Consolidation of Less-than-Wholly-Owned Subsidiaries Acquired at More than Book Value Answer Key

Multiple Choice Questions

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Bristle Corporation acquired 75 percent of Silver Corporation's common stock on December 31, 20X8, for $300,000. The fair value of the noncontrolling interest at that date was determined to be $100,000. Silver's balance sheet immediately before the combination reflected the following balances:

A. $0 B. $65,000 C. $70,000 D. $60,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand

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Difficulty: 1 Easy Learning Objective: 05-01 Understand and explain how the consolidation process differs when the subsidiary is lessthan-wholly owned and there is a differential. Topic: Basic consolidated info with NCI (at acquisition)

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A careful review of the fair value of Silver's assets and liabilities indicated that inventory, land, and buildings and equipment (net) had fair values of $65,000, $100,000, and, $300,000 respectively. Goodwill is assigned proportionately to Bristle and the noncontrolling shareholders. Based on the preceding information, what amount of land will be included in the consolidated balance sheet immediately following the acquisition?

A. $0 B. $10,000 C. $90,000 D. $100,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand

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A careful review of the fair value of Silver's assets and liabilities indicated that inventory, land, and buildings and equipment (net) had fair values of $65,000, $100,000, and, $300,000 respectively. Goodwill is assigned proportionately to Bristle and the noncontrolling shareholders. Based on the preceding information, what amount of buildings and equipment (net) will be included in the consolidated balance sheet immediately following the acquisition?

A. $0 B. $50,000 C. $250,000 D. $300,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand

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A careful review of the fair value of Silver's assets and liabilities indicated that inventory, land, and buildings and equipment (net) had fair values of $65,000, $100,000, and, $300,000 respectively. Goodwill is assigned proportionately to Bristle and the noncontrolling shareholders. Based on the preceding information, what amount of goodwill will be reported in the consolidated balance sheet immediately following the acquisition?

A. $0 B. $120,000 C. $65,000 D. $20,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand

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Difficulty: 2 Medium Learning Objective: 05-01 Understand and explain how the consolidation process differs when the subsidiary is lessthan-wholly owned and there is a differential. Topic: Basic consolidated info with NCI (at acquisition)

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A careful review of the fair value of Silver's assets and liabilities indicated that inventory, land, and buildings and equipment (net) had fair values of $65,000, $100,000, and, $300,000 respectively. Goodwill is assigned proportionately to Bristle and the noncontrolling shareholders. Based on the preceding information, what amount will be reported as investment in Silver Corporation stock in the consolidated balance sheet immediately following the acquisition?

A. $0 B. $210,000 C. $300,000 D. $400,000

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Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-01 Understand and explain how the consolidation process differs when the subsidiary is lessthan-wholly owned and there is a differential. Topic: Basic consolidated info with NCI (at acquisition)

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A careful review of the fair value of Silver's assets and liabilities indicated that inventory, land, and buildings and equipment (net) had fair values of $65,000, $100,000, and, $300,000 respectively. Goodwill is assigned proportionately to Bristle and the noncontrolling shareholders. Based on the preceding information, what amount will be reported as noncontrolling interest in the consolidated balance sheet immediately following the acquisition?

A. $0 B. $70,000 C. $83,750 D. $100,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand

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On January 1, 20X9, Gulliver Corporation acquired 80 percent of Sea-Gull Company's common stock for $160,000 cash. The fair value of the noncontrolling interest at that date was determined to be $40,000. Data from the balance sheets of the two companies included the following amounts as of the date of acquisition:

A. $130,000 B. $135,000 C. $90,000 D. $45,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand

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At the date of the business combination, the book values of Sea-Gull's net assets and liabilities approximated fair value except for inventory, which had a fair value of $45,000, and land, which had a fair value of $60,000. Based on the preceding information, what amount of goodwill will be reported in the consolidated balance sheet prepared immediately after the business combination?

A. $0 B. $40,000 C. $20,000 D. $15,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand

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At the date of the business combination, the book values of Sea-Gull's net assets and liabilities approximated fair value except for inventory, which had a fair value of $45,000, and land, which had a fair value of $60,000. Based on the preceding information, what amount of total assets will be reported in the consolidated balance sheet prepared immediately after the business combination?

A. $720,000 B. $840,000 C. $825,000 D. $865,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand

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10.

At the date of the business combination, the book values of Sea-Gull's net assets and liabilities approximated fair value except for inventory, which had a fair value of $45,000, and land, which had a fair value of $60,000. Based on the preceding information, what amount of total liabilities will be reported in the consolidated balance sheet prepared immediately after the business combination?

A. $395,000 B. $280,000 C. $275,000 D. $195,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand

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11.

At the date of the business combination, the book values of Sea-Gull's net assets and liabilities approximated fair value except for inventory, which had a fair value of $45,000, and land, which had a fair value of $60,000. Based on the preceding information, what amount will be reported as noncontrolling interest in the consolidated balance sheet prepared immediately after the business combination?

A. $0 B. $15,000 C. $40,000 D. $46,000

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Blooms: Understand Difficulty: 1 Easy Learning Objective: 05-01 Understand and explain how the consolidation process differs when the subsidiary is lessthan-wholly owned and there is a differential. Topic: Basic consolidated info with NCI (at acquisition)

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12.

At the date of the business combination, the book values of Sea-Gull's net assets and liabilities approximated fair value except for inventory, which had a fair value of $45,000, and land, which had a fair value of $60,000. Based on the preceding information, what amount of consolidated retained earnings will be reported immediately after the business combination?

A. $205,000 B. $120,000 C. $325,000 D. $310,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand

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13.

At the date of the business combination, the book values of Sea-Gull's net assets and liabilities approximated fair value except for inventory, which had a fair value of $45,000, and land, which had a fair value of $60,000. Based on the preceding information, what amount will be reported as total stockholders' equity in the consolidated balance sheet prepared immediately after the business combination?

A. $445,000 B. $205,000 C. $565,000 D. $550,000

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14.

On December 31, 20X8, X Company acquired controlling ownership of Y Company. A consolidated balance sheet was prepared immediately. Partial balance sheet data for the two companies and the consolidated entity at that date follow:

A. $0 B. $10,000 C. $5,000 D. $15,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium

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Learning Objective: 05-01 Understand and explain how the consolidation process differs when the subsidiary is lessthan-wholly owned and there is a differential. Topic: Basic consolidated info with NCI (at acquisition)

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15.

During 20X8, X Company provided consulting services to Y Company and has not yet paid for them. There were no other receivables or payables between the companies at December 31, 20X8. Based on the information given, what balance in accounts receivable did Y Company report at December 31, 20X8?

A. $28,000 B. $48,000 C. $40,000 D. $38,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium

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16.

A. $50,000 and $28,000 respectively. B. $60,000 and $32,000 respectively. C. $40,000 and $35,000 respectively. D. $28,000 and $60,000 respectively.

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17.

During 20X8, X Company provided consulting services to Y Company and has not yet paid for them. There were no other receivables or payables between the companies at December 31, 20X8. Based on the information given, what was the fair value of Y Company as a whole at the date of acquisition?

A. $155,000 B. $110,000 C. $115,000 D. $135,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium

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18.

During 20X8, X Company provided consulting services to Y Company and has not yet paid for them. There were no other receivables or payables between the companies at December 31, 20X8. Based on the information given, what percentage of Y Company's shares were acquired by X Company?

A. 100 percent B. 60 percent C. 80 percent D. 75 percent

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium

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19.

During 20X8, X Company provided consulting services to Y Company and has not yet paid for them. There were no other receivables or payables between the companies at December 31, 20X8. Based on the information given, what amount will be reported as total controlling interest in the consolidated balance sheet?

A. $254,000 B. $285,000 C. $364,000 D. $395,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium

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20.

Rohan Corporation holds assets with a fair value of $150,000 and a book value of $125,000 and liabilities with a book value and fair value of $50,000. What balance will be assigned to the noncontrolling interest in the consolidated balance sheet if Helms Company pays $90,000 to acquire 75 percent ownership in Rohan and goodwill of $20,000 is reported?

A. $50,000 B. $30,000 C. $40,000 D. $20,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-01 Understand and explain how the consolidation process differs when the subsidiary is lessthan-wholly owned and there is a differential. Topic: Basic consolidated info with NCI (at acquisition)

21.

When a parent owns less than 100% of a subsidiary, the noncontrolling interest shareholders are allocated their ownership percentage of income or net assets in all of the following eliminating entries except for:

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember

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22.

On January 1, 20X6, Climber Corporation acquired 90 percent of Wisden Corporation for $180,000 cash. Wisden reported net income of $30,000 and dividends of $10,000 for 20X6, 20X7, and 20X8. On January 1, 20X6, Wisden reported common stock outstanding of $100,000 and retained earnings of $60,000, and the fair value of the noncontrolling interest was $20,000. It held land with a book value of $30,000 and a market value of $35,000 and equipment with a book value of $50,000 and a market value of $60,000 at the date of combination. The remainder of the differential at acquisition was attributable to an increase in the value of patents, which had a remaining useful life of five years. All depreciable assets held by Wisden at the date of acquisition had a remaining economic life of five years. Climber uses the equity method in accounting for its investment in Wisden. Based on the preceding information, the increase in the fair value of patents held by Wisden is:

A. $20,000 B. $25,000 C. $15,000 D. $5,000

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23.

On January 1, 20X6, Climber Corporation acquired 90 percent of Wisden Corporation for $180,000 cash. Wisden reported net income of $30,000 and dividends of $10,000 for 20X6, 20X7, and 20X8. On January 1, 20X6, Wisden reported common stock outstanding of $100,000 and retained earnings of $60,000, and the fair value of the noncontrolling interest was $20,000. It held land with a book value of $30,000 and a market value of $35,000 and equipment with a book value of $50,000 and a market value of $60,000 at the date of combination. The remainder of the differential at acquisition was attributable to an increase in the value of patents, which had a remaining useful life of five years. All depreciable assets held by Wisden at the date of acquisition had a remaining economic life of five years. Climber uses the equity method in accounting for its investment in Wisden. Based on the preceding information, what balance would Climber report as its investment in Wisden at January 1, 20X8?

A. $230,400 B. $180,000 C. $234,000 D. $203,400

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-02 Make calculations and prepare elimination entries for the consolidation of a partially owned subsidiary when there is a complex positive differential. Topic: Second year of ownership

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24.

On January 1, 20X6, Climber Corporation acquired 90 percent of Wisden Corporation for $180,000 cash. Wisden reported net income of $30,000 and dividends of $10,000 for 20X6, 20X7, and 20X8. On January 1, 20X6, Wisden reported common stock outstanding of $100,000 and retained earnings of $60,000, and the fair value of the noncontrolling interest was $20,000. It held land with a book value of $30,000 and a market value of $35,000 and equipment with a book value of $50,000 and a market value of $60,000 at the date of combination. The remainder of the differential at acquisition was attributable to an increase in the value of patents, which had a remaining useful life of five years. All depreciable assets held by Wisden at the date of acquisition had a remaining economic life of five years. Climber uses the equity method in accounting for its investment in Wisden. Based on the preceding information, what balance would Climber report as its investment in Wisden at January 1, 20X9?

A. $251,100 B. $224,100 C. $215,100 D. $234,000

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25.

On December 31, 20X8, Melkor Corporation acquired 80 percent of Sydney Company's common stock for $160,000. At that date, the fair value of the noncontrolling interest was $40,000. Of the $75,000 differential, $10,000 related to the increased value of Sydney's inventory, $20,000 related to the increased value of its land, and $25,000 related to the increased value of its equipment that had a remaining life of 10 years from the date of combination. Sydney sold all inventory it held at the end of 20X8 during 20X9. The land to which the differential related was also sold during 20X9 for a large gain. At the date of combination, Sydney reported retained earnings of $75,000 and common stock outstanding of $50,000. In 20X9, Sydney reported net income of $60,000, but paid no dividends. Melkor accounts for its investment in Sydney using the equity method. Based on the preceding information, the amount of goodwill reported in the consolidated financial statements prepared immediately after the combination is:

A. $0 B. $32,500 C. $26,000 D. $20,000

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26.

On December 31, 20X8, Melkor Corporation acquired 80 percent of Sydney Company's common stock for $160,000. At that date, the fair value of the noncontrolling interest was $40,000. Of the $75,000 differential, $10,000 related to the increased value of Sydney's inventory, $20,000 related to the increased value of its land, and $25,000 related to the increased value of its equipment that had a remaining life of 10 years from the date of combination. Sydney sold all inventory it held at the end of 20X8 during 20X9. The land to which the differential related was also sold during 20X9 for a large gain. At the date of combination, Sydney reported retained earnings of $75,000 and common stock outstanding of $50,000. In 20X9, Sydney reported net income of $60,000, but paid no dividends. Melkor accounts for its investment in Sydney using the equity method. Based on the preceding information, what is the amount of write-off of differential associated with this acquisition recorded by Melkor during 20X9?

A. $0 B. $32,500 C. $26,000 D. $20,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Section: Appendix 5A Topic: Subsidiary's Disposal of Differential-Related Assets

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27.

On January 1, 20X8, Ramon Corporation acquired 75 percent of Tester Company's voting common stock for $300,000. At the time of the combination, Tester reported common stock outstanding of $200,000 and retained earnings of $150,000, and the fair value of the noncontrolling interest was $100,000. The book value of Tester's net assets approximated market value except for patents that had a market value of $50,000 more than their book value. The patents had a remaining economic life of ten years at the date of the business combination. Tester reported net income of $40,000 and paid dividends of $10,000 during 20X8. Based on the preceding information, what balance will Ramon report as its investment in Tester at December 31, 20X8, assuming Ramon uses the equity method in accounting for its investment?

A. $318,750 B. $317,500 C. $330,000 D. $326,250

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-02 Make calculations and prepare elimination entries for the consolidation of a partially owned subsidiary when there is a complex positive differential. Topic: Complex differential; no OCI

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28.

On January 1, 20X8, Ramon Corporation acquired 75 percent of Tester Company's voting common stock for $300,000. At the time of the combination, Tester reported common stock outstanding of $200,000 and retained earnings of $150,000, and the fair value of the noncontrolling interest was $100,000. The book value of Tester's net assets approximated market value except for patents that had a market value of $50,000 more than their book value. The patents had a remaining economic life of ten years at the date of the business combination. Tester reported net income of $40,000 and paid dividends of $10,000 during 20X8. Based on the preceding information, which of the following is an eliminating entry needed to prepare a full set of consolidated financial statements at December 31, 20X8:

A. Choice A B. Choice B C. Choice C D. Choice D

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29.

Note: This is a Kaplan CPA Review Question On January 1, 20X6, Polka Co. (Polka) and Strauss Co. (Strauss) had condensed balance sheets as follows:

A. $79,000 B. $120,000 C. $90,000 D. $96,000

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Difficulty: 2 Medium Learning Objective: 05-02 Make calculations and prepare elimination entries for the consolidation of a partially owned subsidiary when there is a complex positive differential. Topic: Complex differential; no OCI

30.

On January 1, 20X6, Polka Co. (Polka) and Strauss Co. (Strauss) had condensed balance sheets as follows:

On January 2, 20X6, Polka borrowed $90,000 and used the proceeds to acquire 90% of the outstanding common shares of Strauss. This debt is payable in ten equal annual principal and accrued interest payments beginning December 30, 20X6. On the acquisition date, the fair value of Strauss was $100,000, and the excess cost of the investment over Strauss's carrying amount of acquired net assets should be allocated 60% to inventory and 40% to goodwill. Noncurrent assets on the January 2, 20X6, consolidated balance sheet should be:

A. $130,000 B. $150,000 C. $134,000 D. $136,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 05-02 Make calculations and prepare elimination entries for the consolidation of a partially owned subsidiary when there is a complex positive differential. Topic: Complex differential; no OCI

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31.

On January 1, 20X6, Polka Co. (Polka) and Strauss Co. (Strauss) had condensed balance sheets as follows:

On January 2, 20X6, Polka borrowed $90,000 and used the proceeds to acquire 90% of the outstanding common shares of Strauss. This debt is payable in ten equal annual principal and accrued interest payments beginning December 30, 20X6. On the acquisition date, the fair value of Strauss was $100,000, and the excess cost of the investment over Strauss's carrying amount of acquired net assets should be allocated 60% to inventory and 40% to goodwill. Current liabilities on the January 2, 20X6, consolidated balance sheet should be:

A. $49,000 B. $30,000 C. $40,000 D. $50,000

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32.

On January 1, 20X6, Polka Co. (Polka) and Strauss Co. (Strauss) had condensed balance sheets as follows:

On January 2, 20X6, Polka borrowed $90,000 and used the proceeds to acquire 90% of the outstanding common shares of Strauss. This debt is payable in ten equal annual principal and accrued interest payments beginning December 30, 20X6. On the acquisition date, the fair value of Strauss was $100,000, and the excess cost of the investment over Strauss's carrying amount of acquired net assets should be allocated 60% to inventory and 40% to goodwill. Noncurrent liabilities on the January 2, 20X6, consolidated balance sheet should be:

A. $109,000 B. $55,000 C. $104,000 D. $131,000

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33.

On January 1, 20X6, Polka Co. (Polka) and Strauss Co. (Strauss) had condensed balance sheets as follows:

On January 2, 20X6, Polka borrowed $90,000 and used the proceeds to acquire 90% of the outstanding common shares of Strauss. This debt is payable in ten equal annual principal and accrued interest payments beginning December 30, 20X6. On the acquisition date, the fair value of Strauss was $100,000, and the excess cost of the investment over Strauss's carrying amount of acquired net assets should be allocated 60% to inventory and 40% to goodwill. Stockholders' equity on the January 2, 20X6, consolidated balance sheet should be:

A. $85,000 B. $80,000 C. $90,000 D. $130,000

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34.

All of the following are examples of how a parent company may lose control over a subsidiary and discontinue future consolidation, except:

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-03 Understand and explain what happens when a parent company ceases to consolidate a subsidiary. Topic: Discontinuance of consolidation

35.

Pink Inc. sells half of its 70% interest in Brown Co. on January 1, 20X6. On that date, the fair value of Brown as a whole is $940,000 and the carrying amount of Pink's 70% share of Brown is $320,000. What, if any, is the gain on the sale of half of Pink's interest in Brown?

A. $0 B. $9,000 C. $169,000 D. $338,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-03 Understand and explain what happens when a parent company ceases to consolidate a subsidiary. Topic: Discontinuance of consolidation

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36.

On January 1, 20X8, Bristol Company acquired 80 percent of Animation Company's common stock for $280,000 cash. At that date, Animation reported common stock outstanding of $200,000 and retained earnings of $100,000, and the fair value of the noncontrolling interest was $70,000. The book values and fair values of Animation's assets and liabilities were equal, except for other intangible assets which had a fair value $50,000 greater than book value and an 8-year remaining life. Animation reported the following data for 20X8 and 20X9:

A. $125,000 B. $123,750 C. $118,750 D. $130,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-04 Make calculations and prepare elimination entries for the consolidation of a partially owned subsidiary when there is a complex positive differential and other comprehensive income. Topic: Treatment of OCI

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37.

A. $145,000 B. $135,000 C. $138,750 D. $128,750

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38.

A. $123,750 B. $118,750 C. $119,000 D. $104,000

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39.

A. $138,750 B. $131,000 C. $128,750 D. $135,000

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40.

On January 1, 20X8, Colorado Corporation acquired 75 percent of Denver Company's voting common stock for $90,000 cash. At that date, the fair value of the noncontrolling interest was $30,000. Denvers's balance sheet at the date of acquisition contained the following balances:

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Section: Appendix 5A Topic: Negative Retained Earnings of Subsidiary

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41.

A. $0 B. $10,000 C. $15,000 D. $20,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Section: Appendix 5A Topic: Negative Retained Earnings of Subsidiary

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42.

Which of the following stockholders equity accounts are eliminated during the consolidation process?

A. Common Stock of the subsidiary B. Preferred Stock of the subsidiary C. Additional Paid-in Capital of the subsidiary D. All of these

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Section: Appendix 5A Topic: Other Stockholders' Equity Accounts

Essay Questions

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43.

On December 31, 20X8, Defoe Corporation acquired 80 percent of Crusoe Company's common stock for $104,000 cash. The fair value of the noncontrolling interest at that date was determined to be $26,000. Data from the balance sheets of the two companies included the following amounts as of the date of acquisition:

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-01 Understand and explain how the consolidation process differs when the subsidiary is lessthan-wholly owned and there is a differential. Topic: Basic consolidated info with NCI (at acquisition)

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44.

Magellan Corporation acquired 80 percent ownership of Dipper Corporation on January 1, 20X8, for $200,000. At that date, Dipper reported common stock outstanding of $75,000 and retained earnings of $150,000. The fair value of the noncontrolling interest was $50,000. The differential is assigned to equipment, which had a fair value $25,000 greater than book value and a remaining economic life of five years at the date of the business combination. Dipper reported net income of $40,000 and paid dividends of $20,000 in 20X8. Required: 1) Provide the journal entries recorded by Magellan during 20X8 on its books if it accounts for its investment in Dipper using the equity method. 2) Give the eliminating entries needed at December 31, 20X8, to prepare consolidated financial statements.

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45.

On January 1, 20X8, Vector Company acquired 80 percent of Scalar Company's ownership on for $120,000 cash. At that date, the fair value of the noncontrolling interest was $30,000. The book value of Scalar's net assets at acquisition was $125,000. The book values and fair values of Scalar's assets and liabilities were equal, except for buildings and equipment, which were worth $15,000 more than book value. Buildings and equipment are depreciated on a 10-year basis. Although goodwill is not amortized, the management of Vector concluded at December 31, 20X8, that goodwill from its acquisition of Scalar shares had been impaired and the correct carrying amount was $5,000. Goodwill and goodwill impairment were assigned proportionately to the controlling and noncontrolling shareholders. No additional impairment occurred in 20X9. Trial balance data for Vector and Scalar on December 31, 20X9, are as follows:

Required: 1) Provide all eliminating entries needed to prepare a three-part consolidation worksheet as of December 31, 20X9. 2) Prepare a three-part consolidation worksheet for 20X9 in good form.

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46.

Top Corporation acquired 80 percent of Bottom Corporation's common stock on January 1, 20X8, for $520,000. At that date, Bottom reported common stock outstanding of $250,000 and retained earnings of $375,000. Assume the fair value of the noncontrolling interest on January 1, 20X8 was $130,000. The book values and fair values of Bottom's assets and liabilities were equal on the acquisition date, except for other intangible assets, which had a fair value $25,000 greater than book value and a 5-year remaining life. Top and Bottom reported the following data for 20X8 and 20X9:

a. Compute consolidated comprehensive income for 20X8 and 20X9. b. Compute comprehensive income attributable to the controlling interest for 20X8 and 20X9.

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Proof of various numbers in calculations to parts "a" and "b":

AACSB: Analytic AICPA FN: Reporting Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-04 Make calculations and prepare elimination entries for the consolidation of a partially owned subsidiary when there is a complex positive differential and other comprehensive income. Topic: Treatment of OCI

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Chapter 06 Intercompany Inventory Transactions

Multiple Choice Questions

1. When there are intercompany sales of inventory during the year and a three-part consolidation worksheet is prepared, elimination entries related to the intercompany sales: I. Always are needed. II. Are not needed if the entire inventory is resold to unrelated parties prior to the end of the year.

A. I B. II C. Both I and II D. Either I or II

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2. Earth Company owns 100 percent of the capital stock of both Mars Corporation and Venus Corporation. Mars purchases merchandise inventory from Venus at 125 percent of Venus's cost. During 20X8, Venus sold inventory to Mars that it had purchased for $25,000. Mars sold all of this merchandise to unrelated customers for $56,892 during 20X8. In preparing combined financial statements for 20X8, Earth's bookkeeper disregarded the common ownership of Mars and Venus. Based on the information given above, what amount should be eliminated from cost of goods sold in the combined income statement for 20X8?

A. $31,250 B. $25,000 C. $56,892 D. $6,250

3. Earth Company owns 100 percent of the capital stock of both Mars Corporation and Venus Corporation. Mars purchases merchandise inventory from Venus at 125 percent of Venus's cost. During 20X8, Venus sold inventory to Mars that it had purchased for $25,000. Mars sold all of this merchandise to unrelated customers for $56,892 during 20X8. In preparing combined financial statements for 20X8, Earth's bookkeeper disregarded the common ownership of Mars and Venus. Based on the information given above, by what amount was unadjusted revenue overstated in the combined income statement for 20X8?

A. $25,000 B. $56,892 C. $31,250 D. $6,250

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4. Which of the following are examples of intercompany balances and transactions that must be eliminated in preparing consolidated financial statements? I. Security holdings II. Interest and dividends III. Sales and purchases

A. I, II B. I, III C. I, II, III D. II

5. Senior Inc. owns 85 percent of Junior Inc. During 20X8, Senior sold goods with a 25 percent gross profit to Junior. Junior sold all of these goods in 20X8. How should 20X8 consolidated income statement items be adjusted?

A. No adjustment is necessary. B. Sales and cost of goods sold should be reduced by 85 percent of the intercompany sales. C. Net income should be reduced by 85 percent of the gross profit on intercompany sales. D. Sales and cost of goods sold should be reduced by the intercompany sales.

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6. During the year a parent makes sales of inventory at a profit to its 75 percent owned subsidiary. The subsidiary also makes sales of inventory at a profit to its parent during the same year. Both the parent and the subsidiary have on hand at the end of the year 20 percent of the inventory acquired from one another. Consolidated revenues for the year should exclude:

A. 80 percent of the total revenues from intercompany sales. B. total revenues from intercompany sales. C. only the revenues from the subsidiary's intercompany sales. D. only the revenues from the parent's intercompany sales.

7. Consolidated net income may include the parent's separate operating income plus the parent's share of the subsidiary's reported net income:

A. plus the unrealized profit on upstream intercompany sales of inventory made during the current year. B. plus the profit realized this year from upstream intercompany sales of inventory made last year. C. plus unrealized profit on downstream intercompany sales of inventory made during the current year. D. minus the parent's share of profit realized this year from upstream intercompany sales of inventory made last year.

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8. Perth Corporation owns 90 percent of Dundee Company's stock. At the end of 20X8, Perth and Dundee reported the following partial operating results and inventory balances:

Perth regularly prices its products at cost plus a 30 percent markup for profit. Dundee prices its sales at cost plus a 10 percent markup. The total sales reported by Perth and Dundee include both intercompany sales and sales to nonaffiliates. Based on the information given above, what amount of sales will be reported in the consolidated income statement for 20X8?

A. $500,000 B. $850,000 C. $600,000 D. $800,000

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9. Perth Corporation owns 90 percent of Dundee Company's stock. At the end of 20X8, Perth and Dundee reported the following partial operating results and inventory balances:

Perth regularly prices its products at cost plus a 30 percent markup for profit. Dundee prices its sales at cost plus a 10 percent markup. The total sales reported by Perth and Dundee include both intercompany sales and sales to nonaffiliates. Based on the information given above, what balance will be reported for inventory in the consolidated balance sheet for December 31, 20X8?

A. $56,573 B. $23,846 C. $32,727 D. $67,000

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10. Consolidated net income for a parent and its 80 percent owned subsidiary should be computed by eliminating:

A. all unrealized profit in downstream intercompany inventory sales, and unrealized profit in upstream intercompany inventory sales made during the current year. B. all unrealized profit in downstream intercompany inventory sales, and the noncontrolling interest's share of unrealized profit in upstream inventory sales made during the current year. C. the controlling interest's share of unrealized profit in downstream intercompany sales, and the controlling interest's share of unrealized profit in upstream sales made during the current year. D. all unrealized profit in downstream intercompany sales, and the noncontrolling interest's share of unrealized profit in upstream sales made during the current year.

11. When a parent and its subsidiary use a periodic inventory system rather than a perpetual system, the income and asset balances reported in the consolidated financial statements are: I. affected only if there are upstream intercompany sales of inventory. II. affected only if there are downstream intercompany sales of inventory.

A. I B. II C. Both I and II D. Neither I nor II

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12. Global Corporation acquired 85 percent of Local Company's voting shares of stock in 20X7. During 20X8, Global purchased 50,000 picture tubes for $15 each and sold 28,000 of them to Local for $20 each. Local sold all of the units to unrelated entities prior to December 31, 20X8, for $30 each. Both companies use perpetual inventory systems. Which worksheet eliminating entry is needed in preparing consolidated financial statements for 20X8 to remove all effects of the intercompany sale?

A. Option A B. Option B C. Option C D. Option D

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13. On January 1, 20X8, Parent Company acquired 90 percent ownership of Subsidiary Corporation, at underlying book value. The fair value of the noncontrolling interest at the date of acquisition was equal to 10 percent of the book value of Subsidiary Corporation. On Mar 17, 20X8, Subsidiary purchased inventory from Parent for $90,000. Subsidiary sold the entire inventory to an unaffiliated company for $120,000 on November 21, 20X8. Parent had produced the inventory sold to Subsidiary for $62,000. The companies had no other transactions during 20X8. Based on the information given above, what amount of sales will be reported in the 20X8 consolidated income statement?

A. $62,000 B. $120,000 C. $90,000 D. $58,000

14. On January 1, 20X8, Parent Company acquired 90 percent ownership of Subsidiary Corporation, at underlying book value. The fair value of the noncontrolling interest at the date of acquisition was equal to 10 percent of the book value of Subsidiary Corporation. On Mar 17, 20X8, Subsidiary purchased inventory from Parent for $90,000. Subsidiary sold the entire inventory to an unaffiliated company for $120,000 on November 21, 20X8. Parent had produced the inventory sold to Subsidiary for $62,000. The companies had no other transactions during 20X8. Based on the information given above, what amount of cost of goods sold will be reported in the 20X8 consolidated income statement?

A. $62,000 B. $120,000 C. $90,000 D. $58,000

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15. On January 1, 20X8, Parent Company acquired 90 percent ownership of Subsidiary Corporation, at underlying book value. The fair value of the noncontrolling interest at the date of acquisition was equal to 10 percent of the book value of Subsidiary Corporation. On Mar 17, 20X8, Subsidiary purchased inventory from Parent for $90,000. Subsidiary sold the entire inventory to an unaffiliated company for $120,000 on November 21, 20X8. Parent had produced the inventory sold to Subsidiary for $62,000. The companies had no other transactions during 20X8. Based on the information given above, what amount of consolidated net income will be assigned to the controlling shareholders for 20X8?

A. $58,000 B. $59,000 C. $55,000 D. $52,200

16. ABC Corporation owns 75 percent of XYZ Company's voting shares. During 20X8, ABC produced 50,000 chairs at a cost of $79 each and sold 35,000 chairs to XYZ for $90 each. XYZ sold 18,000 of the chairs to unaffiliated companies for $117 each prior to December 31, 20X8, and sold the remainder in early 20X9 to unaffiliated companies for $130 each. Both companies use perpetual inventory systems. Based on the information given above, what amount of cost of goods sold did ABC record in 20X8?

A. $2,765,000 B. $1,620,000 C. $1,422,000 D. $2,963,000

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17. ABC Corporation owns 75 percent of XYZ Company's voting shares. During 20X8, ABC produced 50,000 chairs at a cost of $79 each and sold 35,000 chairs to XYZ for $90 each. XYZ sold 18,000 of the chairs to unaffiliated companies for $117 each prior to December 31, 20X8, and sold the remainder in early 20X9 to unaffiliated companies for $130 each. Both companies use perpetual inventory systems. Based on the information given above, what amount of cost of goods sold did XYZ record in 20X8?

A. $2,765,000 B. $1,620,000 C. $1,422,000 D. $2,963,000

18. ABC Corporation owns 75 percent of XYZ Company's voting shares. During 20X8, ABC produced 50,000 chairs at a cost of $79 each and sold 35,000 chairs to XYZ for $90 each. XYZ sold 18,000 of the chairs to unaffiliated companies for $117 each prior to December 31, 20X8, and sold the remainder in early 20X9 to unaffiliated companies for $130 each. Both companies use perpetual inventory systems. Based on the information given above, what amount of cost of goods sold must be reported in the consolidated income statement for 20X8?

A. $2,765,000 B. $1,620,000 C. $1,422,000 D. $2,963,000

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19. ABC Corporation owns 75 percent of XYZ Company's voting shares. During 20X8, ABC produced 50,000 chairs at a cost of $79 each and sold 35,000 chairs to XYZ for $90 each. XYZ sold 18,000 of the chairs to unaffiliated companies for $117 each prior to December 31, 20X8, and sold the remainder in early 20X9 to unaffiliated companies for $130 each. Both companies use perpetual inventory systems. Based on the information given above, what amount of cost of goods sold must be eliminated from the consolidated income statement for 20X8?

A. $2,765,000 B. $1,620,000 C. $1,422,000 D. $2,963,000

20. ABC Corporation owns 75 percent of XYZ Company's voting shares. During 20X8, ABC produced 50,000 chairs at a cost of $79 each and sold 35,000 chairs to XYZ for $90 each. XYZ sold 18,000 of the chairs to unaffiliated companies for $117 each prior to December 31, 20X8, and sold the remainder in early 20X9 to unaffiliated companies for $130 each. Both companies use perpetual inventory systems. Based on the information given above, what amount of cost of goods sold must be eliminated from the consolidated income statement for 20X9?

A. $187,000 B. $221,000 C. $1,422,000 D. $2,963,000

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21. Push Company owns 60% of Shove Company's outstanding common stock. Intra-entity sales are as follows:

Assume Push sold the inventory to Shove. Using the fully adjusted equity method, what journal entry would be recorded by Push to defer the unrealized gross profit on inventory sales to Shove in 20X1?

A. Option A B. Option B C. Option C D. Option D

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22. Push Company owns 60% of Shove Company's outstanding common stock. Intra-entity sales are as follows:

Assume Shove sold the inventory to Push. Using the fully adjusted equity method, what journal entry would be recorded by Push to defer the unrealized gross profit on inventory sales to Shove in 20X1?

A. Option A B. Option B C. Option C D. Option D

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23. Push Company owns 60% of Shove Company's outstanding common stock. Intra-entity sales are as follows:

Assume Push sold the inventory to Shove. Using the fully adjusted equity method, what journal entry would be recorded by Push to recognize the realization of the 20X1 deferred intercompany profit and to defer the 20X2 unrealized gross profit on inventory sales to Shove?

A. Option A B. Option B C. Option C D. Option D

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24. Push Company owns 60% of Shove Company's outstanding common stock. Intra-entity sales are as follows:

Assume Shove sold the inventory to Push. Using the fully adjusted equity method, what journal entry would be recorded by Push to recognize the realization of the 20X1 deferred intercompany profit and to defer the 20X2 unrealized gross profit on inventory sales to Shove?

A. Option A B. Option B C. Option C D. Option D

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25. Note: This is a Kaplan CPA Review Question Selected information from the separate and consolidated balance sheets and income statements of Pare, Inc. and its subsidiary, Shel Co., as of December 31, 20X5, and for the year then ended is as follows:

Additional information: During 20X5, Pare sold goods to Shel at the same markup on cost that Pare uses for all sales. What was the amount of intercompany sales from Pare to Shel during 20X5?

A. $12,000 B. $6,000 C. $64,000 D. $58,000

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26. Note: This is a Kaplan CPA Review Question Selected information from the separate and consolidated balance sheets and income statements of Pare, Inc. and its subsidiary, Shel Co., as of December 31, 20X5, and for the year then ended is as follows:

Additional information: During 20X5, Pare sold goods to Shel at the same markup on cost that Pare uses for all sales. At December 31, 20X5, what was the amount of Shel's payable to Pare for intercompany sales?

A. $12,000 B. $6,000 C. $58,000 D. $64,000

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27. Note: This is a Kaplan CPA Review Question Selected information from the separate and consolidated balance sheets and income statements of Pare, Inc. and its subsidiary, Shel Co., as of December 31, 20X5, and for the year then ended is as follows:

Additional information: During 20X5, Pare sold goods to Shel at the same markup on cost that Pare uses for all sales. In Pare's consolidating worksheet, what amount of unrealized intercompany profit was eliminated?

A. $12,000 B. $6,000 C. $58,000 D. $64,000

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28. Pilfer Company acquired 90 percent ownership of Scrooge Corporation in 20X7, at underlying book value. On that date, the fair value of noncontrolling interest was equal to 10 percent of the book value of Scrooge Corporation. Pilfer purchased inventory from Scrooge for $90,000 on August 20, 20X8, and resold 70 percent of the inventory to unaffiliated companies on December 1, 20X8, for $100,000. Scrooge produced the inventory sold to Pilfer for $67,000. The companies had no other transactions during 20X8. Based on the information given above, what amount of sales will be reported in the 20X8 consolidated income statement?

A. $90,000 B. $120,000 C. $100,000 D. $67,000

29. Pilfer Company acquired 90 percent ownership of Scrooge Corporation in 20X7, at underlying book value. On that date, the fair value of noncontrolling interest was equal to 10 percent of the book value of Scrooge Corporation. Pilfer purchased inventory from Scrooge for $90,000 on August 20, 20X8, and resold 70 percent of the inventory to unaffiliated companies on December 1, 20X8, for $100,000. Scrooge produced the inventory sold to Pilfer for $67,000. The companies had no other transactions during 20X8. Based on the information given above, what amount of cost of goods sold will be reported in the 20X8 consolidated income statement?

A. $60,900 B. $90,000 C. $46,900 D. $67,000

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30. Pilfer Company acquired 90 percent ownership of Scrooge Corporation in 20X7, at underlying book value. On that date, the fair value of noncontrolling interest was equal to 10 percent of the book value of Scrooge Corporation. Pilfer purchased inventory from Scrooge for $90,000 on August 20, 20X8, and resold 70 percent of the inventory to unaffiliated companies on December 1, 20X8, for $100,000. Scrooge produced the inventory sold to Pilfer for $67,000. The companies had no other transactions during 20X8. Based on the information given above, what amount of consolidated net income will be assigned to the controlling interest for 20X8?

A. $51,490 B. $53,100 C. $37,000 D. $20,100

31. Pilfer Company acquired 90 percent ownership of Scrooge Corporation in 20X7, at underlying book value. On that date, the fair value of noncontrolling interest was equal to 10 percent of the book value of Scrooge Corporation. Pilfer purchased inventory from Scrooge for $90,000 on August 20, 20X8, and resold 70 percent of the inventory to unaffiliated companies on December 1, 20X8, for $100,000. Scrooge produced the inventory sold to Pilfer for $67,000. The companies had no other transactions during 20X8. Based on the information given above, what inventory balance will be reported by the consolidated entity on December 31, 20X8?

A. $51,490 B. $53,100 C. $37,000 D. $20,100

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32. Sub Company sells all its output at 20 percent above cost to Par Corporation. Par purchases its entire inventory from Sub. The incomes reported by the companies over the past three years are as follows:

Sub Company sold inventory for $300,000, $262,500 and $337,500 in the years 20X6, 20X7, and 20X8 respectively. Par Company reported ending inventory of $105,000, $157,500 and $180,000 for 20X6, 20X7, and 20X8 respectively. Par acquired 70 percent of the ownership of Sub on January 1, 20X6, at underlying book value. The fair value of the noncontrolling interest at the date of acquisition was equal to 30 percent of the book value of Sub Company. Based on the information given above, what will be the consolidated net income for 20X6?

A. $357,500 B. $375,000 C. $490,000 D. $317,750

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33. Sub Company sells all its output at 20 percent above cost to Par Corporation. Par purchases its entire inventory from Sub. The incomes reported by the companies over the past three years are as follows:

A. $495,000 B. $317,750 C. $486,250 D. $690,000

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34. Sub Company sells all its output at 20 percent above cost to Par Corporation. Par purchases its entire inventory from Sub. The incomes reported by the companies over the past three years are as follows:

A. $448,375 B. $495,000 C. $486,250 D. $615,375

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35. Sub Company sells all its output at 20 percent above cost to Par Corporation. Par purchases its entire inventory from Sub. The incomes reported by the companies over the past three years are as follows:

A. $39,750 B. $37,875 C. $71,275 D. $70,875

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36. Sub Company sells all its output at 20 percent above cost to Par Corporation. Par purchases its entire inventory from Sub. The incomes reported by the companies over the past three years are as follows:

A. $615,375 B. $686,250 C. $690,000 D. $694,000

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37. A newly created subsidiary sold all of its inventory to its parent at a profit in its first year of existence. The parent, in turn, sold all but 20 percent of the inventory to unaffiliated companies, recognizing a profit. The parent had no other sales during the year. The amount that should be reported as cost of goods sold in the this year's consolidated income statement should be:

A. 80 percent of the amount reported as intercompany sales by the subsidiary. B. 80 percent of the amount reported as cost of goods sold by the subsidiary. C. the amount reported as cost of goods sold by the parent minus unrealized profit in the ending inventory of the parent. D. 80 percent of the amount reported as cost of goods sold by the parent.

38. Note: This is a Kaplan CPA Review Question Clark Co. had the following transactions with affiliated parties during 20X1: ▪ Sales of $60,000 to Dean, Inc., with $20,000 gross profit. Dean had $15,000 of this inventory on hand at year end. Clark owns a 15% interest in Dean and does not exert significant influence. ▪ Purchases of raw materials totaling $240,000 from Kent Corp., a wholly-owned subsidiary. Kent's gross profit on the sale was $48,000. Clark had $60,000 of this inventory remaining on December 31, 20X1. Before eliminating entries, Clark had consolidated current assets of $320,000. What amount should Clark report in its December 31, 20X1, consolidated balance sheet for current assets?

A. $303,000 B. $320,000 C. $317,000 D. $308,000

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39. Parent Corporation owns 90 percent of Subsidiary 1 Company's stock and 75 percent of Subsidiary 2 Company's stock. During 20X8, Parent sold inventory purchased in 20X7 for $48,000 to Subsidiary 1 for $60,000. Subsidiary 1 then sold the inventory at its cost of $60,000 to Subsidiary 2. Prior to December 31, 20X8, Subsidiary 2 sold $45,000 of inventory to a nonaffiliate for $67,000 and held $15,000 in inventory at December 31, 20X8. Based on the information given above, what amount should be reported in the 20X8 consolidated income statement as cost of goods sold?

A. $36,000 B. $12,000 C. $48,000 D. $45,000

40. Parent Corporation owns 90 percent of Subsidiary 1 Company's stock and 75 percent of Subsidiary 2 Company's stock. During 20X8, Parent sold inventory purchased in 20X7 for $48,000 to Subsidiary 1 for $60,000. Subsidiary 1 then sold the inventory at its cost of $60,000 to Subsidiary 2. Prior to December 31, 20X8, Subsidiary 2 sold $45,000 of inventory to a nonaffiliate for $67,000 and held $15,000 in inventory at December 31, 20X8. Based on the information given above, what amount should be reported in the December 31, 20X8, consolidated balance sheet as inventory?

A. $36,000 B. $12,000 C. $15,000 D. $28,000

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41. Parent Corporation owns 90 percent of Subsidiary 1 Company's stock and 75 percent of Subsidiary 2 Company's stock. During 20X8, Parent sold inventory purchased in 20X7 for $48,000 to Subsidiary 1 for $60,000. Subsidiary 1 then sold the inventory at its cost of $60,000 to Subsidiary 2. Prior to December 31, 20X8, Subsidiary 2 sold $45,000 of inventory to a nonaffiliate for $67,000 and held $15,000 in inventory at December 31, 20X8. Based on the information given above, what amount of cost of goods sold must be eliminated from the consolidated income statement for 20X8?

A. $117,000 B. $120,000 C. $150,000 D. $128,000

42. Parent Corporation owns 90 percent of Subsidiary 1 Company's stock and 75 percent of Subsidiary 2 Company's stock. During 20X8, Parent sold inventory purchased in 20X7 for $48,000 to Subsidiary 1 for $60,000. Subsidiary 1 then sold the inventory at its cost of $60,000 to Subsidiary 2. Prior to December 31, 20X8, Subsidiary 2 sold $45,000 of inventory to a nonaffiliate for $67,000 and held $15,000 in inventory at December 31, 20X8. Based on the information given above, what amount of sales must be eliminated from the consolidated income statement for 20X8?

A. $117,000 B. $120,000 C. $150,000 D. $128,000

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43. Parent Corporation owns 90 percent of Subsidiary 1 Company's stock and 75 percent of Subsidiary 2 Company's stock. During 20X8, Parent sold inventory purchased in 20X7 for $48,000 to Subsidiary 1 for $60,000. Subsidiary 1 then sold the inventory at its cost of $60,000 to Subsidiary 2. Prior to December 31, 20X8, Subsidiary 2 sold $45,000 of inventory to a nonaffiliate for $67,000 and held $15,000 in inventory at December 31, 20X8. Based on the information given above, what amount of inventory must be eliminated from the consolidated balance sheet for 20X8?

A. $2,400 B. $9,000 C. $12,000 D. $3,000

44. The consolidation treatment of profits on inventory transfers that occurred before the business combination depends on whether: I. the companies were independent at that time. II. the sale transaction was the result of arm's-length bargaining.

A. I B. II C. Both I and II D. Neither I nor II

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45. Elvis Company purchases inventory for $70,000 on Mar 19, 20X8 and sells it to Graceland Corporation for $95,000 on May 14, 20X8. Graceland still holds the inventory on December 31, 20X8, and determines that its market value (replacement cost) is $82,000 at that time. Graceland writes the inventory down from $95,000 to its lower market value of $82,000 at the end of the year. Elvis owns 75 percent of Graceland. Based on the information given above, what amount of cost of goods sold should be eliminated in the consolidation worksheet for 20X8?

A. $82,000 B. $70,000 C. $95,000 D. $60,000

46. Elvis Company purchases inventory for $70,000 on Mar 19, 20X8 and sells it to Graceland Corporation for $95,000 on May 14, 20X8. Graceland still holds the inventory on December 31, 20X8, and determines that its market value (replacement cost) is $82,000 at that time. Graceland writes the inventory down from $95,000 to its lower market value of $82,000 at the end of the year. Elvis owns 75 percent of Graceland. Based on the information given above, what amount of inventory should be eliminated in the consolidation worksheet for 20X8?

A. $15,000 B. $14,000 C. $12,000 D. $13,000

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47. Elvis Company purchases inventory for $70,000 on Mar 19, 20X8 and sells it to Graceland Corporation for $95,000 on May 14, 20X8. Graceland still holds the inventory on December 31, 20X8, and determines that its market value (replacement cost) is $82,000 at that time. Graceland writes the inventory down from $95,000 to its lower market value of $82,000 at the end of the year. Elvis owns 75 percent of Graceland. Based on the information given above, by what amount should Graceland write down inventory in its books?

A. $14,000 B. $15,000 C. $13,000 D. $16,000

Essay Questions

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48. Colton Company acquired 80 percent ownership of Mota Company's voting shares on January 1, 2008, at underlying book value. The fair value of the noncontrolling interest on that date was equal to 20 percent of the book value of Mota Company. During 2008, Colton purchased inventory for $30,000 and sold the full amount to Mota Company for $50,000. On December 31, 2008, Mota's ending inventory included $10,000 of items purchased from Colton. Also in 2008, Mota purchased inventory for $80,000 and sold the units to Colton for $100,000. Colton included $30,000 of its purchase from Mota in ending inventory on December 31, 2008. Summary income statement data for the two companies revealed the following:

Required: a. Compute the amount to be reported as sales in the 20X8 consolidated income statement. b. Compute the amount to be reported as cost of goods sold in the 20X8 consolidated income statement. c. What amount of income will be assigned to the noncontrolling shareholders in the 20X8 consolidated income statement? d. What amount of income will be assigned to the controlling interest in the 20X8 consolidated income statement?

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49. Hunter Company and Moss Company both produce and purchase fabric for resale each period and frequently sell to each other. Since Hunter Company holds 80 percent ownership of Moss Company, Hunter's controller compiled the following information with regard to intercompany transactions between the two companies in 20X7 and 20X8:

Required: a. Give the eliminating entries required at December 31, 20X8, to eliminate the effects of the inventory transfers in preparing a full set of consolidated financial statements. b. Compute the amount of cost of goods sold to be reported in the consolidated income statement for 20X8.

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50. On January 1, 20X7, Jones Company acquired 90 percent of the outstanding common stock of Smith Corporation for $1,242,000. On that date, the fair value of noncontrolling interest was equal to $138,000. The entire differential was related to land held by Smith. At the date of acquisition, Smith had common stock outstanding of $520,000, additional paid-in capital of $200,000, and retained earnings of $540,000. During 20X7, Smith sold inventory to Jones for $440,000. The inventory originally cost Smith $360,000. By year-end, 30 percent was still in Jones' ending inventory. During 20X8, the remaining inventory was resold to an unrelated customer. Both Jones and Smith use perpetual inventory systems. Income and dividend information for both Jones and Smith for 20X7 and 20X8 are as follows:

Assume Jones uses the fully adjusted equity method to account for its investment in Smith. Required: a. Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X7. b. Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X8.

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51. Pisa Company acquired 75 percent of Siena Company on January 1, 20X3 for $712,500. The fair value of the noncontrolling interest was equal to 25 percent of book value. On the date of acquisition, Siena had common stock outstanding of $300,000 and a balance in retained earnings of $650,000. During 20X3, Siena purchased inventory for $35,000 and sold it to Pisa for $50,000. Of this amount, Pisa reported $20,000 in ending inventory in 20X3 and later sold it in 20X4. In 20X4, Pisa sold inventory it had purchased for $40,000 to Siena for $60,000. Siena sold $45,000 of this inventory in 20X4. Income and dividend information for Siena for 20X3 and 20X4 are as follows:

Pisa Company uses the fully adjusted equity method. Required: a. Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X3. b. Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X4.

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52. On January 1, 20X7, Jones Company acquired 90 percent of the outstanding common stock of Smith Corporation for $1,242,000. On that date, the fair value of noncontrolling interest was equal to $138,000. The entire differential was related to land held by Smith. At the date of acquisition, Smith had common stock outstanding of $520,000, additional paid-in capital of $200,000, and retained earnings of $540,000. During 20X7, Smith sold inventory to Jones for $440,000. The inventory originally cost Smith $360,000. By year-end, 30 percent was still in Jones' ending inventory. During 20X8, the remaining inventory was resold to an unrelated customer. Both Jones and Smith use perpetual inventory systems. Income and dividend information for both Jones and Smith for 20X7 and 20X8 are as follows:

Assume Jones uses the modified equity method to account for its investment in Smith. Required: a. Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X7. b. Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X8.

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53. On January 1, 20X7, Jones Company acquired 90 percent of the outstanding common stock of Smith Corporation for $1,242,000. On that date, the fair value of noncontrolling interest was equal to $138,000. The entire differential was related to land held by Smith. At the date of acquisition, Smith had common stock outstanding of $520,000, additional paid-in capital of $200,000, and retained earnings of $540,000. During 20X7, Smith sold inventory to Jones for $440,000. The inventory originally cost Smith $360,000. By year-end, 30 percent was still in Jones' ending inventory. During 20X8, the remaining inventory was resold to an unrelated customer. Both Jones and Smith use perpetual inventory systems. Income and dividend information for both Jones and Smith for 20X7 and 20X8 are as follows:

Assume Jones uses the cost method to account for its investment in Smith. Required: a. Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X7. b. Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X8.

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54. Pisa Company acquired 75 percent of Siena Company on January 1, 20X3 for $712,500. The fair value of the noncontrolling interest was equal to 25 percent of book value. On the date of acquisition, Siena had common stock outstanding of $300,000 and a balance in retained earnings of $650,000. During 20X3, Siena purchased inventory for $35,000 and sold it to Pisa for $50,000. Of this amount, Pisa reported $20,000 in ending inventory in 20X3 and later sold it in 20X4. In 20X4, Pisa sold inventory it had purchased for $40,000 to Siena for $60,000. Siena sold $45,000 of this inventory in 20X4. Income and dividend information for Siena for 20X3 and 20X4 are as follows:

Pisa Company uses the modified equity method. Required: a. Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X3. b. Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X4.

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55. Pisa Company acquired 75 percent of Siena Company on January 1, 20X3 for $712,500. The fair value of the noncontrolling interest was equal to 25 percent of book value. On the date of acquisition, Siena had common stock outstanding of $300,000 and a balance in retained earnings of $650,000. During 20X3, Siena purchased inventory for $35,000 and sold it to Pisa for $50,000. Of this amount, Pisa reported $20,000 in ending inventory in 20X3 and later sold it in 20X4. In 20X4, Pisa sold inventory it had purchased for $40,000 to Siena for $60,000. Siena sold $45,000 of this inventory in 20X4. Income and dividend information for Siena for 20X3 and 20X4 are as follows:

Pisa Company uses the cost method. Required: a. Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X3. b. Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X4.

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Chapter 06 Intercompany Inventory Transactions Answer Key

Multiple Choice Questions

When there are intercompany sales of inventory during the year and a three-part consolidation worksheet is prepared, elimination entries related to the intercompany sales: I. Always are needed. II. Are not needed if the entire inventory is resold to unrelated parties prior to the end of the year.

A. I B. II C. Both I and II D. Either I or II

AACSB: Analytic AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-01 Understand and explain intercompany transfers and why they must be eliminated. Topic: Overview, Conceptual Understanding

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Earth Company owns 100 percent of the capital stock of both Mars Corporation and Venus Corporation. Mars purchases merchandise inventory from Venus at 125 percent of Venus's cost. During 20X8, Venus sold inventory to Mars that it had purchased for $25,000. Mars sold all of this merchandise to unrelated customers for $56,892 during 20X8. In preparing combined financial statements for 20X8, Earth's bookkeeper disregarded the common ownership of Mars and Venus. Based on the information given above, what amount should be eliminated from cost of goods sold in the combined income statement for 20X8?

A. $31,250 B. $25,000 C. $56,892 D. $6,250

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-01 Understand and explain intercompany transfers and why they must be eliminated. Topic: Overview, Conceptual Understanding

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Earth Company owns 100 percent of the capital stock of both Mars Corporation and Venus Corporation. Mars purchases merchandise inventory from Venus at 125 percent of Venus's cost. During 20X8, Venus sold inventory to Mars that it had purchased for $25,000. Mars sold all of this merchandise to unrelated customers for $56,892 during 20X8. In preparing combined financial statements for 20X8, Earth's bookkeeper disregarded the common ownership of Mars and Venus. Based on the information given above, by what amount was unadjusted revenue overstated in the combined income statement for 20X8?

A. $25,000 B. $56,892 C. $31,250 D. $6,250

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Which of the following are examples of intercompany balances and transactions that must be eliminated in preparing consolidated financial statements? I. Security holdings II. Interest and dividends III. Sales and purchases

A. I, II B. I, III C. I, II, III D. II

AACSB: Analytic AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-01 Understand and explain intercompany transfers and why they must be eliminated. Topic: Overview, Conceptual Understanding

Senior Inc. owns 85 percent of Junior Inc. During 20X8, Senior sold goods with a 25 percent gross profit to Junior. Junior sold all of these goods in 20X8. How should 20X8 consolidated income statement items be adjusted?

AACSB: Analytic AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-01 Understand and explain intercompany transfers and why they must be eliminated.

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Topic: Overview, Conceptual Understanding

During the year a parent makes sales of inventory at a profit to its 75 percent owned subsidiary. The subsidiary also makes sales of inventory at a profit to its parent during the same year. Both the parent and the subsidiary have on hand at the end of the year 20 percent of the inventory acquired from one another. Consolidated revenues for the year should exclude:

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-01 Understand and explain intercompany transfers and why they must be eliminated. Topic: Overview, Conceptual Understanding

Consolidated net income may include the parent's separate operating income plus the parent's share of the subsidiary's reported net income:

AACSB: Analytic

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AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-01 Understand and explain intercompany transfers and why they must be eliminated. Topic: Overview, Conceptual Understanding

Perth Corporation owns 90 percent of Dundee Company's stock. At the end of 20X8, Perth and Dundee reported the following partial operating results and inventory balances:

A. $500,000 B. $850,000 C. $600,000 D. $800,000

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Perth Corporation owns 90 percent of Dundee Company's stock. At the end of 20X8, Perth and Dundee reported the following partial operating results and inventory balances:

Perth regularly prices its products at cost plus a 30 percent markup for profit. Dundee prices its sales at cost plus a 10 percent markup. The total sales reported by Perth and Dundee include both intercompany sales and sales to nonaffiliates. Based on the information given above, what balance will be reported for inventory in the consolidated balance sheet for December 31, 20X8?

A. $56,573 B. $23,846 C. $32,727 D. $67,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-01 Understand and explain intercompany transfers and why they must be eliminated. Topic: Overview, Conceptual Understanding

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10.

Consolidated net income for a parent and its 80 percent owned subsidiary should be computed by eliminating:

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11.

When a parent and its subsidiary use a periodic inventory system rather than a perpetual system, the income and asset balances reported in the consolidated financial statements are: I. affected only if there are upstream intercompany sales of inventory. II. affected only if there are downstream intercompany sales of inventory.

A. I B. II C. Both I and II D. Neither I nor II

AACSB: Analytic AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 06-02 Understand and explain concepts associated with inventory transfers and transfer pricing. Topic: Effect of Type of Inventory System

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12.

Global Corporation acquired 85 percent of Local Company's voting shares of stock in 20X7. During 20X8, Global purchased 50,000 picture tubes for $15 each and sold 28,000 of them to Local for $20 each. Local sold all of the units to unrelated entities prior to December 31, 20X8, for $30 each. Both companies use perpetual inventory systems. Which worksheet eliminating entry is needed in preparing consolidated financial statements for 20X8 to remove all effects of the intercompany sale?

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA FN: Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-03 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following downstream inventory transfers. Topic: Downstream - Year One

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13.

On January 1, 20X8, Parent Company acquired 90 percent ownership of Subsidiary Corporation, at underlying book value. The fair value of the noncontrolling interest at the date of acquisition was equal to 10 percent of the book value of Subsidiary Corporation. On Mar 17, 20X8, Subsidiary purchased inventory from Parent for $90,000. Subsidiary sold the entire inventory to an unaffiliated company for $120,000 on November 21, 20X8. Parent had produced the inventory sold to Subsidiary for $62,000. The companies had no other transactions during 20X8. Based on the information given above, what amount of sales will be reported in the 20X8 consolidated income statement?

A. $62,000 B. $120,000 C. $90,000 D. $58,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 06-03 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following downstream inventory transfers. Topic: Downstream - Year One

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14.

On January 1, 20X8, Parent Company acquired 90 percent ownership of Subsidiary Corporation, at underlying book value. The fair value of the noncontrolling interest at the date of acquisition was equal to 10 percent of the book value of Subsidiary Corporation. On Mar 17, 20X8, Subsidiary purchased inventory from Parent for $90,000. Subsidiary sold the entire inventory to an unaffiliated company for $120,000 on November 21, 20X8. Parent had produced the inventory sold to Subsidiary for $62,000. The companies had no other transactions during 20X8. Based on the information given above, what amount of cost of goods sold will be reported in the 20X8 consolidated income statement?

A. $62,000 B. $120,000 C. $90,000 D. $58,000

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15.

On January 1, 20X8, Parent Company acquired 90 percent ownership of Subsidiary Corporation, at underlying book value. The fair value of the noncontrolling interest at the date of acquisition was equal to 10 percent of the book value of Subsidiary Corporation. On Mar 17, 20X8, Subsidiary purchased inventory from Parent for $90,000. Subsidiary sold the entire inventory to an unaffiliated company for $120,000 on November 21, 20X8. Parent had produced the inventory sold to Subsidiary for $62,000. The companies had no other transactions during 20X8. Based on the information given above, what amount of consolidated net income will be assigned to the controlling shareholders for 20X8?

A. $58,000 B. $59,000 C. $55,000 D. $52,200

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-03 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following downstream inventory transfers. Topic: Downstream - Year One

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16.

ABC Corporation owns 75 percent of XYZ Company's voting shares. During 20X8, ABC produced 50,000 chairs at a cost of $79 each and sold 35,000 chairs to XYZ for $90 each. XYZ sold 18,000 of the chairs to unaffiliated companies for $117 each prior to December 31, 20X8, and sold the remainder in early 20X9 to unaffiliated companies for $130 each. Both companies use perpetual inventory systems. Based on the information given above, what amount of cost of goods sold did ABC record in 20X8?

A. $2,765,000 B. $1,620,000 C. $1,422,000 D. $2,963,000

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17.

A. $2,765,000 B. $1,620,000 C. $1,422,000 D. $2,963,000

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18.

A. $2,765,000 B. $1,620,000 C. $1,422,000 D. $2,963,000

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19.

A. $2,765,000 B. $1,620,000 C. $1,422,000 D. $2,963,000

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20.

A. $187,000 B. $221,000 C. $1,422,000 D. $2,963,000

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21.

Push Company owns 60% of Shove Company's outstanding common stock. Intra-entity sales are as follows:

Assume Push sold the inventory to Shove. Using the fully adjusted equity method, what journal entry would be recorded by Push to defer the unrealized gross profit on inventory sales to Shove in 20X1?

A. Option A B. Option B C. Option C D. Option D

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22.

Push Company owns 60% of Shove Company's outstanding common stock. Intra-entity sales are as follows:

Assume Shove sold the inventory to Push. Using the fully adjusted equity method, what journal entry would be recorded by Push to defer the unrealized gross profit on inventory sales to Shove in 20X1?

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-04 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following upstream inventory transfers. Topic: Upstream - Year One

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23.

Push Company owns 60% of Shove Company's outstanding common stock. Intra-entity sales are as follows:

A. Option A B. Option B C. Option C D. Option D

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24.

Push Company owns 60% of Shove Company's outstanding common stock. Intra-entity sales are as follows:

A. Option A B. Option B C. Option C D. Option D

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25.

Note: This is a Kaplan CPA Review Question Selected information from the separate and consolidated balance sheets and income statements of Pare, Inc. and its subsidiary, Shel Co., as of December 31, 20X5, and for the year then ended is as follows:

Additional information: During 20X5, Pare sold goods to Shel at the same markup on cost that Pare uses for all sales. What was the amount of intercompany sales from Pare to Shel during 20X5?

A. $12,000 B. $6,000 C. $64,000 D. $58,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 3 Hard Learning Objective: 06-03 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following downstream inventory transfers. Topic: Downstream - Year One

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26.

A. $12,000 B. $6,000 C. $58,000 D. $64,000

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27.

A. $12,000 B. $6,000 C. $58,000 D. $64,000

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28.

Pilfer Company acquired 90 percent ownership of Scrooge Corporation in 20X7, at underlying book value. On that date, the fair value of noncontrolling interest was equal to 10 percent of the book value of Scrooge Corporation. Pilfer purchased inventory from Scrooge for $90,000 on August 20, 20X8, and resold 70 percent of the inventory to unaffiliated companies on December 1, 20X8, for $100,000. Scrooge produced the inventory sold to Pilfer for $67,000. The companies had no other transactions during 20X8. Based on the information given above, what amount of sales will be reported in the 20X8 consolidated income statement?

A. $90,000 B. $120,000 C. $100,000 D. $67,000

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29.

Pilfer Company acquired 90 percent ownership of Scrooge Corporation in 20X7, at underlying book value. On that date, the fair value of noncontrolling interest was equal to 10 percent of the book value of Scrooge Corporation. Pilfer purchased inventory from Scrooge for $90,000 on August 20, 20X8, and resold 70 percent of the inventory to unaffiliated companies on December 1, 20X8, for $100,000. Scrooge produced the inventory sold to Pilfer for $67,000. The companies had no other transactions during 20X8. Based on the information given above, what amount of cost of goods sold will be reported in the 20X8 consolidated income statement?

A. $60,900 B. $90,000 C. $46,900 D. $67,000

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30.

Pilfer Company acquired 90 percent ownership of Scrooge Corporation in 20X7, at underlying book value. On that date, the fair value of noncontrolling interest was equal to 10 percent of the book value of Scrooge Corporation. Pilfer purchased inventory from Scrooge for $90,000 on August 20, 20X8, and resold 70 percent of the inventory to unaffiliated companies on December 1, 20X8, for $100,000. Scrooge produced the inventory sold to Pilfer for $67,000. The companies had no other transactions during 20X8. Based on the information given above, what amount of consolidated net income will be assigned to the controlling interest for 20X8?

A. $51,490 B. $53,100 C. $37,000 D. $20,100

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 3 Hard Learning Objective: 06-04 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following upstream inventory transfers. Topic: Upstream - Year One

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31.

Pilfer Company acquired 90 percent ownership of Scrooge Corporation in 20X7, at underlying book value. On that date, the fair value of noncontrolling interest was equal to 10 percent of the book value of Scrooge Corporation. Pilfer purchased inventory from Scrooge for $90,000 on August 20, 20X8, and resold 70 percent of the inventory to unaffiliated companies on December 1, 20X8, for $100,000. Scrooge produced the inventory sold to Pilfer for $67,000. The companies had no other transactions during 20X8. Based on the information given above, what inventory balance will be reported by the consolidated entity on December 31, 20X8?

A. $51,490 B. $53,100 C. $37,000 D. $20,100

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32.

Sub Company sells all its output at 20 percent above cost to Par Corporation. Par purchases its entire inventory from Sub. The incomes reported by the companies over the past three years are as follows:

A. $357,500 B. $375,000 C. $490,000 D. $317,750

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33.

A. $495,000 B. $317,750 C. $486,250 D. $690,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-04 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following upstream inventory transfers. Topic: Upstream - Year Two +

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34.

A. $448,375 B. $495,000 C. $486,250 D. $615,375

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35.

A. $39,750 B. $37,875 C. $71,275 D. $70,875

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36.

A. $615,375 B. $686,250 C. $690,000 D. $694,000

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37.

A newly created subsidiary sold all of its inventory to its parent at a profit in its first year of existence. The parent, in turn, sold all but 20 percent of the inventory to unaffiliated companies, recognizing a profit. The parent had no other sales during the year. The amount that should be reported as cost of goods sold in the this year's consolidated income statement should be:

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Understand Difficulty: 3 Hard Learning Objective: 06-04 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following upstream inventory transfers. Topic: Upstream - Year One

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38.

Note: This is a Kaplan CPA Review Question Clark Co. had the following transactions with affiliated parties during 20X1: ▪ Sales of $60,000 to Dean, Inc., with $20,000 gross profit. Dean had $15,000 of this inventory on hand at year end. Clark owns a 15% interest in Dean and does not exert significant influence. ▪ Purchases of raw materials totaling $240,000 from Kent Corp., a wholly-owned subsidiary. Kent's gross profit on the sale was $48,000. Clark had $60,000 of this inventory remaining on December 31, 20X1. Before eliminating entries, Clark had consolidated current assets of $320,000. What amount should Clark report in its December 31, 20X1, consolidated balance sheet for current assets?

A. $303,000 B. $320,000 C. $317,000 D. $308,000

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39.

Parent Corporation owns 90 percent of Subsidiary 1 Company's stock and 75 percent of Subsidiary 2 Company's stock. During 20X8, Parent sold inventory purchased in 20X7 for $48,000 to Subsidiary 1 for $60,000. Subsidiary 1 then sold the inventory at its cost of $60,000 to Subsidiary 2. Prior to December 31, 20X8, Subsidiary 2 sold $45,000 of inventory to a nonaffiliate for $67,000 and held $15,000 in inventory at December 31, 20X8. Based on the information given above, what amount should be reported in the 20X8 consolidated income statement as cost of goods sold?

A. $36,000 B. $12,000 C. $48,000 D. $45,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-02 Understand and explain concepts associated with inventory transfers and transfer pricing. Learning Objective: 06-05 Understand and explain additional considerations associated with consolidation. Topic: Sale from One Subsidiary to Another Topic: Transfers at Cost Topic: Transfers at a Profit or Loss

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40.

Parent Corporation owns 90 percent of Subsidiary 1 Company's stock and 75 percent of Subsidiary 2 Company's stock. During 20X8, Parent sold inventory purchased in 20X7 for $48,000 to Subsidiary 1 for $60,000. Subsidiary 1 then sold the inventory at its cost of $60,000 to Subsidiary 2. Prior to December 31, 20X8, Subsidiary 2 sold $45,000 of inventory to a nonaffiliate for $67,000 and held $15,000 in inventory at December 31, 20X8. Based on the information given above, what amount should be reported in the December 31, 20X8, consolidated balance sheet as inventory?

A. $36,000 B. $12,000 C. $15,000 D. $28,000

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41.

Parent Corporation owns 90 percent of Subsidiary 1 Company's stock and 75 percent of Subsidiary 2 Company's stock. During 20X8, Parent sold inventory purchased in 20X7 for $48,000 to Subsidiary 1 for $60,000. Subsidiary 1 then sold the inventory at its cost of $60,000 to Subsidiary 2. Prior to December 31, 20X8, Subsidiary 2 sold $45,000 of inventory to a nonaffiliate for $67,000 and held $15,000 in inventory at December 31, 20X8. Based on the information given above, what amount of cost of goods sold must be eliminated from the consolidated income statement for 20X8?

A. $117,000 B. $120,000 C. $150,000 D. $128,000

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42.

Parent Corporation owns 90 percent of Subsidiary 1 Company's stock and 75 percent of Subsidiary 2 Company's stock. During 20X8, Parent sold inventory purchased in 20X7 for $48,000 to Subsidiary 1 for $60,000. Subsidiary 1 then sold the inventory at its cost of $60,000 to Subsidiary 2. Prior to December 31, 20X8, Subsidiary 2 sold $45,000 of inventory to a nonaffiliate for $67,000 and held $15,000 in inventory at December 31, 20X8. Based on the information given above, what amount of sales must be eliminated from the consolidated income statement for 20X8?

A. $117,000 B. $120,000 C. $150,000 D. $128,000

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43.

Parent Corporation owns 90 percent of Subsidiary 1 Company's stock and 75 percent of Subsidiary 2 Company's stock. During 20X8, Parent sold inventory purchased in 20X7 for $48,000 to Subsidiary 1 for $60,000. Subsidiary 1 then sold the inventory at its cost of $60,000 to Subsidiary 2. Prior to December 31, 20X8, Subsidiary 2 sold $45,000 of inventory to a nonaffiliate for $67,000 and held $15,000 in inventory at December 31, 20X8. Based on the information given above, what amount of inventory must be eliminated from the consolidated balance sheet for 20X8?

A. $2,400 B. $9,000 C. $12,000 D. $3,000

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44.

The consolidation treatment of profits on inventory transfers that occurred before the business combination depends on whether: I. the companies were independent at that time. II. the sale transaction was the result of arm's-length bargaining.

A. I B. II C. Both I and II D. Neither I nor II

AACSB: Analytic AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-05 Understand and explain additional considerations associated with consolidation. Topic: Sales and Purchases before Affiliation

45.

Elvis Company purchases inventory for $70,000 on Mar 19, 20X8 and sells it to Graceland Corporation for $95,000 on May 14, 20X8. Graceland still holds the inventory on December 31, 20X8, and determines that its market value (replacement cost) is $82,000 at that time. Graceland writes the inventory down from $95,000 to its lower market value of $82,000 at the end of the year. Elvis owns 75 percent of Graceland. Based on the information given above, what amount of cost of goods sold should be eliminated in the consolidation worksheet for 20X8?

A. $82,000 B. $70,000 C. $95,000 D. $60,000

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Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-05 Understand and explain additional considerations associated with consolidation. Topic: Lower of Cost or Market

46.

Elvis Company purchases inventory for $70,000 on Mar 19, 20X8 and sells it to Graceland Corporation for $95,000 on May 14, 20X8. Graceland still holds the inventory on December 31, 20X8, and determines that its market value (replacement cost) is $82,000 at that time. Graceland writes the inventory down from $95,000 to its lower market value of $82,000 at the end of the year. Elvis owns 75 percent of Graceland. Based on the information given above, what amount of inventory should be eliminated in the consolidation worksheet for 20X8?

A. $15,000 B. $14,000 C. $12,000 D. $13,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-05 Understand and explain additional considerations associated with consolidation. Topic: Lower of Cost or Market

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47.

Elvis Company purchases inventory for $70,000 on Mar 19, 20X8 and sells it to Graceland Corporation for $95,000 on May 14, 20X8. Graceland still holds the inventory on December 31, 20X8, and determines that its market value (replacement cost) is $82,000 at that time. Graceland writes the inventory down from $95,000 to its lower market value of $82,000 at the end of the year. Elvis owns 75 percent of Graceland. Based on the information given above, by what amount should Graceland write down inventory in its books?

A. $14,000 B. $15,000 C. $13,000 D. $16,000

Essay Questions

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48.

Colton Company acquired 80 percent ownership of Mota Company's voting shares on January 1, 2008, at underlying book value. The fair value of the noncontrolling interest on that date was equal to 20 percent of the book value of Mota Company. During 2008, Colton purchased inventory for $30,000 and sold the full amount to Mota Company for $50,000. On December 31, 2008, Mota's ending inventory included $10,000 of items purchased from Colton. Also in 2008, Mota purchased inventory for $80,000 and sold the units to Colton for $100,000. Colton included $30,000 of its purchase from Mota in ending inventory on December 31, 2008. Summary income statement data for the two companies revealed the following:

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Alternative solution: d

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Information on consolidated sales was computed in part (a); consolidated cost of goods sold was computed in part (b) and income assigned to the noncontrolling interest was computed in part (c).

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49.

Hunter Company and Moss Company both produce and purchase fabric for resale each period and frequently sell to each other. Since Hunter Company holds 80 percent ownership of Moss Company, Hunter's controller compiled the following information with regard to intercompany transactions between the two companies in 20X7 and 20X8:

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50.

On January 1, 20X7, Jones Company acquired 90 percent of the outstanding common stock of Smith Corporation for $1,242,000. On that date, the fair value of noncontrolling interest was equal to $138,000. The entire differential was related to land held by Smith. At the date of acquisition, Smith had common stock outstanding of $520,000, additional paid-in capital of $200,000, and retained earnings of $540,000. During 20X7, Smith sold inventory to Jones for $440,000. The inventory originally cost Smith $360,000. By year-end, 30 percent was still in Jones' ending inventory. During 20X8, the remaining inventory was resold to an unrelated customer. Both Jones and Smith use perpetual inventory systems. Income and dividend information for both Jones and Smith for 20X7 and 20X8 are as follows:

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51.

Pisa Company acquired 75 percent of Siena Company on January 1, 20X3 for $712,500. The fair value of the noncontrolling interest was equal to 25 percent of book value. On the date of acquisition, Siena had common stock outstanding of $300,000 and a balance in retained earnings of $650,000. During 20X3, Siena purchased inventory for $35,000 and sold it to Pisa for $50,000. Of this amount, Pisa reported $20,000 in ending inventory in 20X3 and later sold it in 20X4. In 20X4, Pisa sold inventory it had purchased for $40,000 to Siena for $60,000. Siena sold $45,000 of this inventory in 20X4. Income and dividend information for Siena for 20X3 and 20X4 are as follows:

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-03 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following downstream inventory transfers. Learning Objective: 06-04 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following upstream inventory transfers. 6-95 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Topic: Downstream - Year One Topic: Upstream - Year Two +

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52.

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Section: Appendix 6A Topic: Modified Equity Method

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53.

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard

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Section: Appendix 6A Topic: Cost Method

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54.

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Section: Appendix 6A Topic: Modified Equity Method

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55.

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Section: Appendix 6A Topic: Cost Method

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Chapter 07 Intercompany Transfers of Noncurrent Assets and Services

Multiple Choice Questions

1. Blue Company owns 70 percent of Black Company's outstanding common stock. On December 31, 20X8, Black sold equipment to Blue at a price in excess of Black's carrying amount, but less than its original cost. On a consolidated balance sheet at December 31, 20X8, the carrying amount of the equipment should be reported at:

A. Blue's original cost. B. Black's original cost. C. Blue's original cost less Black's recorded gain. D. Blue's original cost less 70 percent of Black's recorded gain.

2. A parent and its 80 percent owned subsidiary have made several intercompany sales of noncurrent assets during the past two years. The amount of income assigned to the noncontrolling interest for the second year should include the noncontrolling interest's share of gains:

A. unrealized in the second year from upstream sales made in the second year. B. realized in the second year from downstream sales made in both years. C. realized in the second year from upstream sales made in both years. D. both realized and unrealized from upstream sales made in the second year.

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3. Parent Corporation purchased land from S1 Corporation for $220,000 on December 26, 20X8. This purchase followed a series of transactions between P-controlled subsidiaries. On February 15, 20X8, S3 Corporation purchased the land from a nonaffiliate for $160,000. It sold the land to S2 Company for $145,000 on October 19, 20X8, and S2 sold the land to S1 for $197,000 on November 27, 20X8. Parent has control of the following companies:

Parent reported income from its separate operations of $200,000 for 20X8. Based on the preceding information, at what amount should the land be reported in the consolidated balance sheet as of December 31, 20X8?

A. $145,000 B. $220,000 C. $197,000 D. $160,000

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4. Parent Corporation purchased land from S1 Corporation for $220,000 on December 26, 20X8. This purchase followed a series of transactions between P-controlled subsidiaries. On February 15, 20X8, S3 Corporation purchased the land from a nonaffiliate for $160,000. It sold the land to S2 Company for $145,000 on October 19, 20X8, and S2 sold the land to S1 for $197,000 on November 27, 20X8. Parent has control of the following companies:

Parent reported income from its separate operations of $200,000 for 20X8. Based on the preceding information, what amount of gain or loss on sale of land should be reported in the consolidated income statement for 20X8?

A. $60,000 B. $0 C. $75,000 D. $23,000

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5. Parent Corporation purchased land from S1 Corporation for $220,000 on December 26, 20X8. This purchase followed a series of transactions between P-controlled subsidiaries. On February 15, 20X8, S3 Corporation purchased the land from a nonaffiliate for $160,000. It sold the land to S2 Company for $145,000 on October 19, 20X8, and S2 sold the land to S1 for $197,000 on November 27, 20X8. Parent has control of the following companies:

Parent reported income from its separate operations of $200,000 for 20X8. Based on the preceding information, what should be the amount of income assigned to the controlling shareholders in the consolidated income statement for 20X8?

A. $369,400 B. $405,000 C. $465,000 D. $60,000

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6. Big Corporation receives management consulting services from its 92 percent owned subsidiary, Small Inc. During 20X7, Big paid Small $125,432 for its services. For the year 20X8, Small billed Big $140,000 for such services and collected all but $7,900 by year-end. Small's labor cost and other associated costs for the employees providing services to Big totaled $86,000 in 20X7 and $121,000 in 20X8. Big reported $2,567,000 of income from its own separate operations for 20X8, and Small reported net income of $695,000. Based on the preceding information, what amount of consolidated net income should be reported in 20X8?

A. $3,262,000 B. $4,050,000 C. $3,254,100 D. $3,122,000

7. Big Corporation receives management consulting services from its 92 percent owned subsidiary, Small Inc. During 20X7, Big paid Small $125,432 for its services. For the year 20X8, Small billed Big $140,000 for such services and collected all but $7,900 by year-end. Small's labor cost and other associated costs for the employees providing services to Big totaled $86,000 in 20X7 and $121,000 in 20X8. Big reported $2,567,000 of income from its own separate operations for 20X8, and Small reported net income of $695,000. Based on the preceding information, what amount of income should be assigned to the noncontrolling shareholders in the consolidated income statement for 20X8?

A. $47,700 B. $44,400 C. $55,600 D. $60,000

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8. Big Corporation receives management consulting services from its 92 percent owned subsidiary, Small Inc. During 20X7, Big paid Small $125,432 for its services. For the year 20X8, Small billed Big $140,000 for such services and collected all but $7,900 by year-end. Small's labor cost and other associated costs for the employees providing services to Big totaled $86,000 in 20X7 and $121,000 in 20X8. Big reported $2,567,000 of income from its own separate operations for 20X8, and Small reported net income of $695,000. Based on the preceding information, what amount of receivable/payable should be eliminated in the 20X8 consolidated financial statements?

A. $125,432 B. $7,900 C. $5,560 D. $140,000

9. A wholly owned subsidiary sold land to its parent during the year at a gain. The parent continues to hold the land at the end of the year. The amount to be reported as consolidated net income for the year should equal:

A. the parent's separate operating income, plus the subsidiary's net income. B. the parent's separate operating income, plus the subsidiary's net income, minus the intercompany gain. C. the parent's separate operating income, plus the subsidiary's net income, plus the intercompany gain. D. the parent's net income, plus the subsidiary's net income, minus the intercompany gain.

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10. Phobos Company holds 80 percent of Deimos Company's voting shares. During the preparation of consolidated financial statements for 20X9, the following eliminating entry was made:

Which of the following statements is correct?

A. Phobos Company purchased land from Deimos Company during 20X9. B. Phobos Company purchased land from Deimos Company before January 1, 20X9. C. Deimos Company purchased land from Phobos Company during 20X9. D. Deimos Company purchased land from Phobos Company before January 1, 20X9.

11. Any intercompany gain or loss on a downstream sale of land should be recognized in consolidated net income: I. in the year of the downstream sale. II. over the period of time the subsidiary uses the land. III. in the year the subsidiary sells the land to an unrelated party.

A. I B. II C. III D. I or II

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12. ABC Corporation purchased land on January 1, 20X6, for $50,000. On July 15, 20X8, it sold the land to its subsidiary, XYZ Corporation, for $70,000. ABC owns 80 percent of XYZ's voting shares. Based on the preceding information, what will be the worksheet eliminating entry to remove the effects of the intercompany sale of land in preparing the consolidated financial statements for 20X8?

A. Option A B. Option B C. Option C D. Option D

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13. ABC Corporation purchased land on January 1, 20X6, for $50,000. On July 15, 20X8, it sold the land to its subsidiary, XYZ Corporation, for $70,000. ABC owns 80 percent of XYZ's voting shares. Based on the preceding information, what will be the worksheet eliminating entry to remove the effects of the intercompany sale of land in preparing the consolidated financial statements for 20X9?

A. Option A B. Option B C. Option C D. Option D

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14. ABC Corporation purchased land on January 1, 20X6, for $50,000. On July 15, 20X8, it sold the land to its subsidiary, XYZ Corporation, for $70,000. ABC owns 80 percent of XYZ's voting shares. Which worksheet eliminating entry will be made on December 31, 20X9, if XYZ Corporation had initially purchased the land for $50,000 and then sold it to ABC on July 15, 20X8, for $70,000?

A. Option A B. Option B C. Option C D. Option D

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15. A parent sold land to its partially owned subsidiary during the year at a loss. The subsidiary continues to hold the land at the end of the year. The amount to be reported as consolidated net income for the year should equal:

A. the parent's separate operating income, plus the intercompany loss. B. the parent's separate operating income, plus the intercompany loss, plus the subsidiary's net income. C. the parent's separate operating income, minus the intercompany loss. D. the parent's separate operating income, minus the intercompany loss, plus the subsidiary's net income.

16. Parent Company owns 70% of Son Company's outstanding stock. During 20X1 Son Company sold land to Parent Company for a gain of $25,000. Parent company held the land all of 20X1. The gain on the sale to Parent should be:

A. recorded on Son's books as a gain of $25,000 and then eliminated during the consolidation process. B. deferred by Son until Parent sells the land to an outside party. C. recorded on Son's books as a gain of $17,500 and eliminated during the consolidation process. D. recorded on Parent's book as a gain of $17,500 and eliminated during the consolidation process.

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17. Using the fully adjusted equity method, an intercompany gain on an upstream sale of land is:

A. recognized by the parent and the deferral is shared between the controlling and noncontrolling stockholders of the subsidiary. B. recognized by the subsidiary and the deferral is shared between the controlling and noncontrolling stockholders of the subsidiary. C. deferred by the subsidiary until the land is sold to an entity outside the consolidated group. D. recognized by the subsidiary and the deferral is completely allocated to the controlling stockholders of the subsidiary.

18. Sky Corporation owns 75 percent of Earth Company's stock. On July 1, 20X8, Sky sold a building to Earth for $33,000. Sky had purchased this building on January 1, 20X6, for $36,000. The building's original eight-year estimated total economic life remains unchanged. Both companies use straight-line depreciation. The equipment's residual value is considered negligible. Based on the information provided, in the preparation of the 20X8 consolidated financial statements, building will be _____ in the eliminating entries.

A. debited for $33,000 B. debited for $36,000 C. credited for $36,000 D. debited for $3,000

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19. Sky Corporation owns 75 percent of Earth Company's stock. On July 1, 20X8, Sky sold a building to Earth for $33,000. Sky had purchased this building on January 1, 20X6, for $36,000. The building's original eight-year estimated total economic life remains unchanged. Both companies use straight-line depreciation. The equipment's residual value is considered negligible. Based on the information provided, the gain on sale of the building eliminated in the consolidated financial statements for 20X8 is:

A. $8,250. B. $10,500. C. $6,000. D. $11,250.

20. Sky Corporation owns 75 percent of Earth Company's stock. On July 1, 20X8, Sky sold a building to Earth for $33,000. Sky had purchased this building on January 1, 20X6, for $36,000. The building's original eight-year estimated total economic life remains unchanged. Both companies use straight-line depreciation. The equipment's residual value is considered negligible. Based on the information provided, while preparing the 20X8 consolidated income statement, depreciation expense will be:

A. debited for $750 in the eliminating entries. B. credited for $750 in the eliminating entries. C. credited for $1,500 in the eliminating entries. D. debited for $1,500 in the eliminating entries.

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21. Sky Corporation owns 75 percent of Earth Company's stock. On July 1, 20X8, Sky sold a building to Earth for $33,000. Sky had purchased this building on January 1, 20X6, for $36,000. The building's original eight-year estimated total economic life remains unchanged. Both companies use straight-line depreciation. The equipment's residual value is considered negligible. Based on the information provided, in the preparation of the 20X9 consolidated income statement, depreciation expense will be:

A. debited for $750 in the eliminating entries. B. credited for $750 the eliminating entries. C. credited for $1500 in the eliminating entries. D. debited for $1500 in the eliminating entries.

22. On January 1, 20X9, Light Corporation sold equipment for $400,000 to Star Corporation, its wholly owned subsidiary. Light had paid $900,000 for this equipment, which had accumulated depreciation of $170,000. Light estimated a $50,000 salvage value and depreciated the tractor using the straight-line method over 10 years, a policy that Star continued. In Light's December 31, 20X9, consolidated balance sheet, this tractor should be included in fixedasset cost and accumulated depreciation as:

A. Option A B. Option B C. Option C D. Option D

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23. Note: This is a Kaplan CPA Review Question On January 1, 20X1, Poe Corp. sold a machine for $900,000 to Saxe Corp., its wholly-owned subsidiary. Poe paid $1,100,000 for this machine, which had accumulated depreciation of $250,000. Poe estimated a $100,000 salvage value and depreciated the machine on the straight-line method over 20 years, a policy which Saxe continued. In Poe's December 31, 20X1, consolidated balance sheet, this machine should be included in cost and accumulated depreciation as:

A. Option A B. Option B C. Option C D. Option D

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24. Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On December 31, 20X8, Mortar received $390,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipments on a straight-line basis. Based on the preceding information, in the preparation of the 20X8 consolidated financial statements, equipment will be:

A. debited for $1,000. B. debited for $10,000. C. credited for $15,000. D. debited for $25,000.

25. Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On December 31, 20X8, Mortar received $390,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipments on a straight-line basis. Based on the preceding information, the gain on sale of the equipment recorded by Mortar for 20X8 is:

A. $150,000. B. $65,000. C. $110,000. D. $40,000.

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26. Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On December 31, 20X8, Mortar received $390,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipments on a straight-line basis. Based on the preceding information, in the preparation of the 20X9 consolidated financial statements, equipment will be:

A. debited for $1,000. B. debited for $10,000. C. credited for $15,000. D. debited for $25,000.

27. Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On December 31, 20X8, Mortar received $390,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipments on a straight-line basis. Based on the preceding information, in the preparation of the 20X9 consolidated income statement, depreciation expense will be:

A. debited for $25,000 in the eliminating entries. B. credited for $15,000 in the eliminating entries. C. debited for $15,000 in the eliminating entries. D. credited for $25,000 in the eliminating entries.

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28. Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On December 31, 20X8, Mortar received $390,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipments on a straight-line basis. Based on the preceding information, in the preparation of elimination entries related to the equipment transfer for the 20X9 consolidated financial statements, the net effect on accumulated depreciation will be:

A. a decrease of $160,000. B. an increase of $160,000. C. an increase of $135,000. D. a decrease of $135,000.

29. Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On January 1, 20X8, Mortar received $350,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipment on a straightline basis. Based on the preceding information, in the preparation of the 20X8 consolidated financial statements, equipment will be:

A. debited for $50,000. B. debited for $40,000. C. credited for $70,000. D. debited for $25,000.

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30. Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On January 1, 20X8, Mortar received $350,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipment on a straightline basis. Based on the preceding information, the gain on sale of equipment recorded by Mortar for 20X8 is:

A. $70,000. B. $65,000. C. $50,000. D. $40,000.

31. Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On January 1, 20X8, Mortar received $350,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipment on a straightline basis. Based on the preceding information, in the preparation of elimination entries related to the equipment transfer for the 20X8 consolidated financial statements, net effect on accumulated depreciation will be:

A. a decrease of $50,000. B. an increase of $110,000. C. an increase of $120,000. D. a decrease of $160,000.

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32. Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On January 1, 20X8, Mortar received $350,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipment on a straightline basis. Based on the preceding information, in the preparation of the 20X9 consolidated income statement, depreciation expense will be:

A. Debited for $40,000 in the eliminating entries. B. Credited for $10,000 in the eliminating entries. C. Debited for $10,000 in the eliminating entries. D. Credited for $40,000 in the eliminating entries.

33. Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On January 1, 20X8, Mortar received $350,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipment on a straightline basis. Based on the preceding information, in the preparation of elimination entries related to the equipment transfer for the 20X9 consolidated financial statements, net effect on accumulated depreciation will be:

A. a decrease of $110,000. B. an increase of $110,000. C. an increase of $100,000. D. a decrease of $100,000.

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34. On January 1, 20X7, Servant Company purchased a machine with an expected economic life of five years. On January 1, 20X9, Servant sold the machine to Master Corporation and recorded the following entry:

Master Corporation holds 75 percent of Servant's voting shares. Servant reported net income of $50,000, and Master reported income from its own operations of $100,000 for 20X9. There is no change in the estimated economic life of the equipment as a result of the intercorporate transfer. Based on the preceding information, in the preparation of the 20X9 consolidated income statement, depreciation expense will be:

A. Debited for $1,000 in the eliminating entries. B. Credited for $1,000 in the eliminating entries. C. Debited for $15,000 in the eliminating entries. D. Credited for $15,000 in the eliminating entries.

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35. On January 1, 20X7, Servant Company purchased a machine with an expected economic life of five years. On January 1, 20X9, Servant sold the machine to Master Corporation and recorded the following entry:

A. debited for $1,000. B. debited for $15,000. C. credited for $45,000. D. debited for $25,000.

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36. On January 1, 20X7, Servant Company purchased a machine with an expected economic life of five years. On January 1, 20X9, Servant sold the machine to Master Corporation and recorded the following entry:

Master Corporation holds 75 percent of Servant's voting shares. Servant reported net income of $50,000, and Master reported income from its own operations of $100,000 for 20X9. There is no change in the estimated economic life of the equipment as a result of the intercorporate transfer. Based on the preceding information, income assigned to the noncontrolling interest in the 20X9 consolidated income statement will be:

A. $12,000. B. $14,000. C. $12,500. D. $48,000.

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37. On January 1, 20X7, Servant Company purchased a machine with an expected economic life of five years. On January 1, 20X9, Servant sold the machine to Master Corporation and recorded the following entry:

A. $150,000. B. $100,000. C. $148,000. D. $130,000.

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38. Blue Corporation holds 70 percent of Black Company's voting common stock. On January 1, 20X3, Black paid $500,000 to acquire a building with a 10-year expected economic life. Black uses straight-line depreciation for all depreciable assets. On December 31, 20X8, Blue purchased the building from Black for $180,000. Blue reported income, excluding investment income from Black, of $140,000 and $162,000 for 20X8 and 20X9, respectively. Black reported net income of $30,000 and $45,000 for 20X8 and 20X9, respectively. Based on the preceding information, the amount to be reported as consolidated net income for 20X8 will be:

A. $190,000. B. $170,000. C. $175,000. D. $150,000.

39. Blue Corporation holds 70 percent of Black Company's voting common stock. On January 1, 20X3, Black paid $500,000 to acquire a building with a 10-year expected economic life. Black uses straight-line depreciation for all depreciable assets. On December 31, 20X8, Blue purchased the building from Black for $180,000. Blue reported income, excluding investment income from Black, of $140,000 and $162,000 for 20X8 and 20X9, respectively. Black reported net income of $30,000 and $45,000 for 20X8 and 20X9, respectively. Based on the preceding information, the amount of income assigned to the controlling shareholders in the consolidated income statement for 20X8 will be:

A. $190,000. B. $170,000. C. $175,000. D. $150,000.

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40. Blue Corporation holds 70 percent of Black Company's voting common stock. On January 1, 20X3, Black paid $500,000 to acquire a building with a 10-year expected economic life. Black uses straight-line depreciation for all depreciable assets. On December 31, 20X8, Blue purchased the building from Black for $180,000. Blue reported income, excluding investment income from Black, of $140,000 and $162,000 for 20X8 and 20X9, respectively. Black reported net income of $30,000 and $45,000 for 20X8 and 20X9, respectively. Based on the preceding information, the amount to be reported as consolidated net income for 20X9 will be:

A. $207,000. B. $202,000. C. $212,000. D. $190,000.

41. Blue Corporation holds 70 percent of Black Company's voting common stock. On January 1, 20X3, Black paid $500,000 to acquire a building with a 10-year expected economic life. Black uses straight-line depreciation for all depreciable assets. On December 31, 20X8, Blue purchased the building from Black for $180,000. Blue reported income, excluding investment income from Black, of $140,000 and $162,000 for 20X8 and 20X9, respectively. Black reported net income of $30,000 and $45,000 for 20X8 and 20X9, respectively. Based on the preceding information, the amount of income assigned to the controlling shareholders in the consolidated income statement for 20X9 will be:

A. $207,000. B. $202,000. C. $212,000. D. $190,000.

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Essay Questions

42. Peter Architectural Services owns 100 percent of Smith Manufacturing. During the course of 20X8 Peter provides $100,000 of architectural services associated with Smith's new manufacturing facility, which will open January 4, 20X9, and has a 5 year useful life. Explain the impact providing this service has on Peter Architectural Services' 20X8 and 20X9 consolidated financial statements.

43. PeopleMag sells a plot of land for $100,000 to Seven Star Company, its 100 percent owned subsidiary, on January 1, 20X7. The cost of the land was $75,000, when it was purchased in 20X6. In 20X9, Seven Star sells the land to Hot Properties Inc., an unrelated entity, for $120,000. How is the land reported in the consolidated financial statements for 20X7, 20X8 and 20X9?

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44. Fred Corporation owns 75 percent of Winner Company's voting shares, acquired on March 21, 20X5, at book value. At that date, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Winner Company.

On January 1, 20X4, Fred paid $150,000 for equipment with a 10-year expected total economic life. The equipment was depreciated on a straight-line basis with no residual value. Winner purchased the equipment from Fred on December 31, 20X6, for $140,000. Winner sold land it had purchased for $75,000 on February 18, 20X4, to Fred for $60,000 on October 10, 20X7. Required: Prepare the elimination entries for 20X8 related to the sale of depreciable assets and land if Fred uses the fully adjusted equity method to account for its investment in Winner.

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45. Pie Company acquired 75 percent of Strawberry Company's stock at the underlying book value on January 1, 20X8. At that date, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Strawberry Company. Strawberry Company reported shares outstanding of $350,000 and retained earnings of $100,000. During 20X8, Strawberry Company reported net income of $60,000 and paid dividends of $3,000. In 20X9, Strawberry Company reported net income of $90,000 and paid dividends of $15,000. The following transactions occurred between Pie Company and Strawberry Company in 20X8 and 20X9: Strawberry Co. sold equipment to Pie Co. for a $42,000 gain on December 31, 20X8. Strawberry Co. had originally purchased the equipment for $140,000 and it had a carrying value of $28,000 on December 31, 20X8. At the time of the purchase, Pie Co. estimated that the equipment still had a seven-year remaining useful life. Pie Co. sold land costing $90,000 to Strawberry Co. on June 28, 20X9, for $110,000. Required: Give all eliminating entries needed to prepare a consolidation worksheet for 20X9 assuming that Pie Co. uses the fully adjusted equity method to account for its investment in Strawberry Company.

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46. Big Company acquired 75 percent of Little Company's stock at underlying book value on January 1, 20X8. At that date, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Little Company. Little Company reported shares outstanding of $350,000 and retained earnings of $100,000. During 20X8, Little Company reported net income of $60,000 and paid dividends of $3,000. In 20X9, Little Company reported net income of $90,000 and paid dividends of $15,000. The following transactions occurred between Big Company and Little Company in 20X8 and 20X9: Little Co. sold equipment to Big Co. for a $42,000 gain on December 31, 20X8. Little Co. had originally purchased the equipment for $140,000 and it had a carrying value of $28,000 on December 31, 20X8. At the time of the purchase, Big Co. estimated that the equipment still had a seven-year remaining useful life. Big sold land costing $90,000 to Old Company on June 28, 20X9, for $110,000. Required: Give all eliminating entries needed to prepare a consolidation worksheet for 20X9 assuming that Big Co. uses the modified equity method to account for its investment in Old Company.

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47. Peanut Company acquired 75 percent of Snoopy Company's stock at underlying book value on January 1, 20X8. At that date, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Snoopy Company. Snoopy Company reported shares outstanding of $350,000 and retained earnings of $100,000. During 20X8, Snoopy Company reported net income of $60,000 and paid dividends of $3,000. In 20X9, Snoopy Company reported net income of $90,000 and paid dividends of $15,000. The following transactions occurred between Peanut Company and Snoopy Company in 20X8 and 20X9: Snoopy Co. sold equipment to Peanut Co. for a $42,000 gain on December 31, 20X8. Snoopy Co. had originally purchased the equipment for $140,000 and it had a carrying value of $28,000 on December 31, 20X8. At the time of the purchase, Peanut Co. estimated that the equipment still had a seven-year remaining useful life. Peanut sold land costing $90,000 to Snoopy Company on June 28, 20X9, for $110,000. Required: Give all eliminating entries needed to prepare a consolidation worksheet for 20X9 assuming that Peanut Co. uses the cost method to account for its investment in Snoopy Company.

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Chapter 07 Intercompany Transfers of Noncurrent Assets and Services Answer Key

Multiple Choice Questions

Blue Company owns 70 percent of Black Company's outstanding common stock. On December 31, 20X8, Black sold equipment to Blue at a price in excess of Black's carrying amount, but less than its original cost. On a consolidated balance sheet at December 31, 20X8, the carrying amount of the equipment should be reported at:

A. Blue's original cost. B. Black's original cost. C. Blue's original cost less Black's recorded gain. D. Blue's original cost less 70 percent of Black's recorded gain.

AACSB: Analytic AICPA FN: Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-01 Understand and explain concepts associated with transfers of long-term assets and services. Topic: Intercompany Long-Term Asset Transfers

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A parent and its 80 percent owned subsidiary have made several intercompany sales of noncurrent assets during the past two years. The amount of income assigned to the noncontrolling interest for the second year should include the noncontrolling interest's share of gains:

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Parent Corporation purchased land from S1 Corporation for $220,000 on December 26, 20X8. This purchase followed a series of transactions between P-controlled subsidiaries. On February 15, 20X8, S3 Corporation purchased the land from a nonaffiliate for $160,000. It sold the land to S2 Company for $145,000 on October 19, 20X8, and S2 sold the land to S1 for $197,000 on November 27, 20X8. Parent has control of the following companies:

A. $145,000 B. $220,000 C. $197,000 D. $160,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 07-01 Understand and explain concepts associated with transfers of long-term assets and services. Topic: Intercompany Long-Term Asset Transfers

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A. $60,000 B. $0 C. $75,000 D. $23,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-01 Understand and explain concepts associated with transfers of long-term assets and services. Topic: Intercompany Long-Term Asset Transfers

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A. $369,400 B. $405,000 C. $465,000 D. $60,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 07-01 Understand and explain concepts associated with transfers of long-term assets and services. Topic: Intercompany Long-Term Asset Transfers

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Big Corporation receives management consulting services from its 92 percent owned subsidiary, Small Inc. During 20X7, Big paid Small $125,432 for its services. For the year 20X8, Small billed Big $140,000 for such services and collected all but $7,900 by year-end. Small's labor cost and other associated costs for the employees providing services to Big totaled $86,000 in 20X7 and $121,000 in 20X8. Big reported $2,567,000 of income from its own separate operations for 20X8, and Small reported net income of $695,000. Based on the preceding information, what amount of consolidated net income should be reported in 20X8?

A. $3,262,000 B. $4,050,000 C. $3,254,100 D. $3,122,000

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Big Corporation receives management consulting services from its 92 percent owned subsidiary, Small Inc. During 20X7, Big paid Small $125,432 for its services. For the year 20X8, Small billed Big $140,000 for such services and collected all but $7,900 by year-end. Small's labor cost and other associated costs for the employees providing services to Big totaled $86,000 in 20X7 and $121,000 in 20X8. Big reported $2,567,000 of income from its own separate operations for 20X8, and Small reported net income of $695,000. Based on the preceding information, what amount of income should be assigned to the noncontrolling shareholders in the consolidated income statement for 20X8?

A. $47,700 B. $44,400 C. $55,600 D. $60,000

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Big Corporation receives management consulting services from its 92 percent owned subsidiary, Small Inc. During 20X7, Big paid Small $125,432 for its services. For the year 20X8, Small billed Big $140,000 for such services and collected all but $7,900 by year-end. Small's labor cost and other associated costs for the employees providing services to Big totaled $86,000 in 20X7 and $121,000 in 20X8. Big reported $2,567,000 of income from its own separate operations for 20X8, and Small reported net income of $695,000. Based on the preceding information, what amount of receivable/payable should be eliminated in the 20X8 consolidated financial statements?

A. $125,432 B. $7,900 C. $5,560 D. $140,000

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A wholly owned subsidiary sold land to its parent during the year at a gain. The parent continues to hold the land at the end of the year. The amount to be reported as consolidated net income for the year should equal:

AACSB: Analytic AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-02 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following an intercompany land transfer. Topic: Overview of the Profit Elimination Process

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10.

Phobos Company holds 80 percent of Deimos Company's voting shares. During the preparation of consolidated financial statements for 20X9, the following eliminating entry was made:

Which of the following statements is correct?

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-02 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following an intercompany land transfer. Topic: Overview of the Profit Elimination Process

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11.

Any intercompany gain or loss on a downstream sale of land should be recognized in consolidated net income: I. in the year of the downstream sale. II. over the period of time the subsidiary uses the land. III. in the year the subsidiary sells the land to an unrelated party.

A. I B. II C. III D. I or II

AACSB: Analytic AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-02 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following an intercompany land transfer. Topic: Overview of the Profit Elimination Process

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12.

ABC Corporation purchased land on January 1, 20X6, for $50,000. On July 15, 20X8, it sold the land to its subsidiary, XYZ Corporation, for $70,000. ABC owns 80 percent of XYZ's voting shares. Based on the preceding information, what will be the worksheet eliminating entry to remove the effects of the intercompany sale of land in preparing the consolidated financial statements for 20X8?

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-03 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following a downstream land transfer. Topic: Downstream Sale of Land

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13.

A. Option A B. Option B C. Option C D. Option D

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14.

ABC Corporation purchased land on January 1, 20X6, for $50,000. On July 15, 20X8, it sold the land to its subsidiary, XYZ Corporation, for $70,000. ABC owns 80 percent of XYZ's voting shares. Which worksheet eliminating entry will be made on December 31, 20X9, if XYZ Corporation had initially purchased the land for $50,000 and then sold it to ABC on July 15, 20X8, for $70,000?

A. Option A B. Option B C. Option C D. Option D

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15.

A parent sold land to its partially owned subsidiary during the year at a loss. The subsidiary continues to hold the land at the end of the year. The amount to be reported as consolidated net income for the year should equal:

AACSB: Analytic AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-03 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following a downstream land transfer. Topic: Downstream Sale of Land

16.

Parent Company owns 70% of Son Company's outstanding stock. During 20X1 Son Company sold land to Parent Company for a gain of $25,000. Parent company held the land all of 20X1. The gain on the sale to Parent should be:

AACSB: Analytic AICPA FN: Reporting

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Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-04 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following an upstream land transfer. Topic: Upstream Land Second Year

17.

Using the fully adjusted equity method, an intercompany gain on an upstream sale of land is:

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-04 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following an upstream land transfer. Topic: Upstream Land Second Year

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18.

Sky Corporation owns 75 percent of Earth Company's stock. On July 1, 20X8, Sky sold a building to Earth for $33,000. Sky had purchased this building on January 1, 20X6, for $36,000. The building's original eight-year estimated total economic life remains unchanged. Both companies use straight-line depreciation. The equipment's residual value is considered negligible. Based on the information provided, in the preparation of the 20X8 consolidated financial statements, building will be _____ in the eliminating entries.

A. debited for $33,000 B. debited for $36,000 C. credited for $36,000 D. debited for $3,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-05 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following a downstream depreciable asset transfer. Topic: Downstream sale of depreciable assets

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19.

Sky Corporation owns 75 percent of Earth Company's stock. On July 1, 20X8, Sky sold a building to Earth for $33,000. Sky had purchased this building on January 1, 20X6, for $36,000. The building's original eight-year estimated total economic life remains unchanged. Both companies use straight-line depreciation. The equipment's residual value is considered negligible. Based on the information provided, the gain on sale of the building eliminated in the consolidated financial statements for 20X8 is:

A. $8,250. B. $10,500. C. $6,000. D. $11,250.

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20.

Sky Corporation owns 75 percent of Earth Company's stock. On July 1, 20X8, Sky sold a building to Earth for $33,000. Sky had purchased this building on January 1, 20X6, for $36,000. The building's original eight-year estimated total economic life remains unchanged. Both companies use straight-line depreciation. The equipment's residual value is considered negligible. Based on the information provided, while preparing the 20X8 consolidated income statement, depreciation expense will be:

A. debited for $750 in the eliminating entries. B. credited for $750 in the eliminating entries. C. credited for $1,500 in the eliminating entries. D. debited for $1,500 in the eliminating entries.

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 3 Hard Learning Objective: 07-05 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following a downstream depreciable asset transfer. Topic: Downstream sale of depreciable assets

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21.

Sky Corporation owns 75 percent of Earth Company's stock. On July 1, 20X8, Sky sold a building to Earth for $33,000. Sky had purchased this building on January 1, 20X6, for $36,000. The building's original eight-year estimated total economic life remains unchanged. Both companies use straight-line depreciation. The equipment's residual value is considered negligible. Based on the information provided, in the preparation of the 20X9 consolidated income statement, depreciation expense will be:

A. debited for $750 in the eliminating entries. B. credited for $750 the eliminating entries. C. credited for $1500 in the eliminating entries. D. debited for $1500 in the eliminating entries.

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22.

On January 1, 20X9, Light Corporation sold equipment for $400,000 to Star Corporation, its wholly owned subsidiary. Light had paid $900,000 for this equipment, which had accumulated depreciation of $170,000. Light estimated a $50,000 salvage value and depreciated the tractor using the straight-line method over 10 years, a policy that Star continued. In Light's December 31, 20X9, consolidated balance sheet, this tractor should be included in fixed-asset cost and accumulated depreciation as:

A. Option A B. Option B C. Option C D. Option D

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23.

Note: This is a Kaplan CPA Review Question On January 1, 20X1, Poe Corp. sold a machine for $900,000 to Saxe Corp., its whollyowned subsidiary. Poe paid $1,100,000 for this machine, which had accumulated depreciation of $250,000. Poe estimated a $100,000 salvage value and depreciated the machine on the straight-line method over 20 years, a policy which Saxe continued. In Poe's December 31, 20X1, consolidated balance sheet, this machine should be included in cost and accumulated depreciation as:

A. Option A B. Option B C. Option C D. Option D

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24.

Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On December 31, 20X8, Mortar received $390,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipments on a straight-line basis. Based on the preceding information, in the preparation of the 20X8 consolidated financial statements, equipment will be:

A. debited for $1,000. B. debited for $10,000. C. credited for $15,000. D. debited for $25,000.

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25.

Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On December 31, 20X8, Mortar received $390,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipments on a straight-line basis. Based on the preceding information, the gain on sale of the equipment recorded by Mortar for 20X8 is:

A. $150,000. B. $65,000. C. $110,000. D. $40,000.

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26.

Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On December 31, 20X8, Mortar received $390,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipments on a straight-line basis. Based on the preceding information, in the preparation of the 20X9 consolidated financial statements, equipment will be:

A. debited for $1,000. B. debited for $10,000. C. credited for $15,000. D. debited for $25,000.

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27.

Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On December 31, 20X8, Mortar received $390,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipments on a straight-line basis. Based on the preceding information, in the preparation of the 20X9 consolidated income statement, depreciation expense will be:

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28.

Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On December 31, 20X8, Mortar received $390,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipments on a straight-line basis. Based on the preceding information, in the preparation of elimination entries related to the equipment transfer for the 20X9 consolidated financial statements, the net effect on accumulated depreciation will be:

A. a decrease of $160,000. B. an increase of $160,000. C. an increase of $135,000. D. a decrease of $135,000.

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29.

Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On January 1, 20X8, Mortar received $350,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipment on a straight-line basis. Based on the preceding information, in the preparation of the 20X8 consolidated financial statements, equipment will be:

A. debited for $50,000. B. debited for $40,000. C. credited for $70,000. D. debited for $25,000.

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30.

Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On January 1, 20X8, Mortar received $350,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipment on a straight-line basis. Based on the preceding information, the gain on sale of equipment recorded by Mortar for 20X8 is:

A. $70,000. B. $65,000. C. $50,000. D. $40,000.

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31.

Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On January 1, 20X8, Mortar received $350,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipment on a straight-line basis. Based on the preceding information, in the preparation of elimination entries related to the equipment transfer for the 20X8 consolidated financial statements, net effect on accumulated depreciation will be:

A. a decrease of $50,000. B. an increase of $110,000. C. an increase of $120,000. D. a decrease of $160,000.

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32.

Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On January 1, 20X8, Mortar received $350,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipment on a straight-line basis. Based on the preceding information, in the preparation of the 20X9 consolidated income statement, depreciation expense will be:

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33.

Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on January 1, 20X7. On January 1, 20X8, Mortar received $350,000 from Granite for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipment on a straight-line basis. Based on the preceding information, in the preparation of elimination entries related to the equipment transfer for the 20X9 consolidated financial statements, net effect on accumulated depreciation will be:

A. a decrease of $110,000. B. an increase of $110,000. C. an increase of $100,000. D. a decrease of $100,000.

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 07-05 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following a downstream depreciable asset transfer. Topic: Downstream asset Second Year

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34.

On January 1, 20X7, Servant Company purchased a machine with an expected economic life of five years. On January 1, 20X9, Servant sold the machine to Master Corporation and recorded the following entry:

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-06 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following an upstream depreciable asset transfer. Topic: Upstream sale of depreciable assets

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35.

A. debited for $1,000. B. debited for $15,000. C. credited for $45,000. D. debited for $25,000.

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36.

Master Corporation holds 75 percent of Servant's voting shares. Servant reported net income of $50,000, and Master reported income from its own operations of $100,000 for 20X9. There is no change in the estimated economic life of the equipment as a result of the intercorporate transfer. Based on the preceding information, income assigned to the noncontrolling interest in the 20X9 consolidated income statement will be:

A. $12,000. B. $14,000. C. $12,500. D. $48,000.

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37.

A. $150,000. B. $100,000. C. $148,000. D. $130,000.

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38.

Blue Corporation holds 70 percent of Black Company's voting common stock. On January 1, 20X3, Black paid $500,000 to acquire a building with a 10-year expected economic life. Black uses straight-line depreciation for all depreciable assets. On December 31, 20X8, Blue purchased the building from Black for $180,000. Blue reported income, excluding investment income from Black, of $140,000 and $162,000 for 20X8 and 20X9, respectively. Black reported net income of $30,000 and $45,000 for 20X8 and 20X9, respectively. Based on the preceding information, the amount to be reported as consolidated net income for 20X8 will be:

A. $190,000. B. $170,000. C. $175,000. D. $150,000.

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39.

Blue Corporation holds 70 percent of Black Company's voting common stock. On January 1, 20X3, Black paid $500,000 to acquire a building with a 10-year expected economic life. Black uses straight-line depreciation for all depreciable assets. On December 31, 20X8, Blue purchased the building from Black for $180,000. Blue reported income, excluding investment income from Black, of $140,000 and $162,000 for 20X8 and 20X9, respectively. Black reported net income of $30,000 and $45,000 for 20X8 and 20X9, respectively. Based on the preceding information, the amount of income assigned to the controlling shareholders in the consolidated income statement for 20X8 will be:

A. $190,000. B. $170,000. C. $175,000. D. $150,000.

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 3 Hard Learning Objective: 07-06 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following an upstream depreciable asset transfer. Topic: Upstream sale of depreciable assets

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40.

A. $207,000. B. $202,000. C. $212,000. D. $190,000.

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41.

Blue Corporation holds 70 percent of Black Company's voting common stock. On January 1, 20X3, Black paid $500,000 to acquire a building with a 10-year expected economic life. Black uses straight-line depreciation for all depreciable assets. On December 31, 20X8, Blue purchased the building from Black for $180,000. Blue reported income, excluding investment income from Black, of $140,000 and $162,000 for 20X8 and 20X9, respectively. Black reported net income of $30,000 and $45,000 for 20X8 and 20X9, respectively. Based on the preceding information, the amount of income assigned to the controlling shareholders in the consolidated income statement for 20X9 will be:

A. $207,000. B. $202,000. C. $212,000. D. $190,000.

Essay Questions

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42.

Peter Architectural Services owns 100 percent of Smith Manufacturing. During the course of 20X8 Peter provides $100,000 of architectural services associated with Smith's new manufacturing facility, which will open January 4, 20X9, and has a 5 year useful life. Explain the impact providing this service has on Peter Architectural Services' 20X8 and 20X9 consolidated financial statements.

Peter has provided a service to the subsidiary Smith. During 2008 the cost of the architectural services will be capitalized by Smith as part of the cost of the manufacturing facility. The profit earned on the consulting services must be eliminated in 2008 against the cost of the building. In this manner consolidated net income is not overstated. Beginning in 2009 the intercompany profit would be realized over a 5 year period. In each of the years, depreciation expense is decreased and consolidated net income is increased; as income to the controlling interests.

AACSB: Communication AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-01 Understand and explain concepts associated with transfers of long-term assets and services. Topic: Intercompany transfers of services

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43.

PeopleMag sells a plot of land for $100,000 to Seven Star Company, its 100 percent owned subsidiary, on January 1, 20X7. The cost of the land was $75,000, when it was purchased in 20X6. In 20X9, Seven Star sells the land to Hot Properties Inc., an unrelated entity, for $120,000. How is the land reported in the consolidated financial statements for 20X7, 20X8 and 20X9?

PeopleMag cannot report a gain on the sale of land for 2008 or 2009 in the consolidated financial statements. The land must be reported on the consolidated balance sheet at its original cost of $75,000. The intercompany gain is unrealized and is eliminated. In 2010, the entire gain of $45,000 ($120,000 - $75,000) is realized and recognized when the land is sold to an outside party.

AACSB: Communication AICPA FN: Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-02 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following an intercompany land transfer. Topic: Disposition of land

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44.

Fred Corporation owns 75 percent of Winner Company's voting shares, acquired on March 21, 20X5, at book value. At that date, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Winner Company.

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 07-04 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following an upstream land transfer. Learning Objective: 07-05 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following a downstream depreciable asset transfer. Topic: Downstream depreciable asset Second Year Topic: Upstream Land Second Year

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45.

Pie Company acquired 75 percent of Strawberry Company's stock at the underlying book value on January 1, 20X8. At that date, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Strawberry Company. Strawberry Company reported shares outstanding of $350,000 and retained earnings of $100,000. During 20X8, Strawberry Company reported net income of $60,000 and paid dividends of $3,000. In 20X9, Strawberry Company reported net income of $90,000 and paid dividends of $15,000. The following transactions occurred between Pie Company and Strawberry Company in 20X8 and 20X9: Strawberry Co. sold equipment to Pie Co. for a $42,000 gain on December 31, 20X8. Strawberry Co. had originally purchased the equipment for $140,000 and it had a carrying value of $28,000 on December 31, 20X8. At the time of the purchase, Pie Co. estimated that the equipment still had a seven-year remaining useful life. Pie Co. sold land costing $90,000 to Strawberry Co. on June 28, 20X9, for $110,000. Required: Give all eliminating entries needed to prepare a consolidation worksheet for 20X9 assuming that Pie Co. uses the fully adjusted equity method to account for its investment in Strawberry Company.

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 07-03 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following a downstream land transfer. Learning Objective: 07-06 Prepare equity-method journal entries and elimination entries for the consolidation of a subsidiary following an upstream depreciable asset transfer. Topic: Downstream Sale of Land Topic: Upstream depreciable asset Second Year

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46.

Big Company acquired 75 percent of Little Company's stock at underlying book value on January 1, 20X8. At that date, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Little Company. Little Company reported shares outstanding of $350,000 and retained earnings of $100,000. During 20X8, Little Company reported net income of $60,000 and paid dividends of $3,000. In 20X9, Little Company reported net income of $90,000 and paid dividends of $15,000. The following transactions occurred between Big Company and Little Company in 20X8 and 20X9: Little Co. sold equipment to Big Co. for a $42,000 gain on December 31, 20X8. Little Co. had originally purchased the equipment for $140,000 and it had a carrying value of $28,000 on December 31, 20X8. At the time of the purchase, Big Co. estimated that the equipment still had a seven-year remaining useful life. Big sold land costing $90,000 to Old Company on June 28, 20X9, for $110,000. Required: Give all eliminating entries needed to prepare a consolidation worksheet for 20X9 assuming that Big Co. uses the modified equity method to account for its investment in Old Company.

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Section: Appendix 7A Topic: Downstream Sale of Land - Modified Equity Method Topic: Upstream depreciable asset Second Year - Modified Equity Method

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47.

Peanut Company acquired 75 percent of Snoopy Company's stock at underlying book value on January 1, 20X8. At that date, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Snoopy Company. Snoopy Company reported shares outstanding of $350,000 and retained earnings of $100,000. During 20X8, Snoopy Company reported net income of $60,000 and paid dividends of $3,000. In 20X9, Snoopy Company reported net income of $90,000 and paid dividends of $15,000. The following transactions occurred between Peanut Company and Snoopy Company in 20X8 and 20X9: Snoopy Co. sold equipment to Peanut Co. for a $42,000 gain on December 31, 20X8. Snoopy Co. had originally purchased the equipment for $140,000 and it had a carrying value of $28,000 on December 31, 20X8. At the time of the purchase, Peanut Co. estimated that the equipment still had a seven-year remaining useful life. Peanut sold land costing $90,000 to Snoopy Company on June 28, 20X9, for $110,000. Required: Give all eliminating entries needed to prepare a consolidation worksheet for 20X9 assuming that Peanut Co. uses the cost method to account for its investment in Snoopy Company.

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Section: Appendix 7A Topic: Downstream Sale of Land - Cost Method Topic: Upstream depreciable asset Second Year - Cost Method

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Chapter 08 Intercompany Indebtedness

Multiple Choice Questions

Cutler Company owns 80 percent of the common stock of Marina Inc. Cutler acquires some of Marina's bonds from an unrelated party for less than the carrying value on Marina's books and holds them as a long-term investment. For consolidated reporting purposes, how is the acquisition of Marina's bonds treated?

A. As a decrease in the Bonds Payable account on Marina's books. B. As an increase in noncurrent assets. C. Everything related to the bonds is eliminated in the consolidation worksheet, and nothing related to the bonds appears in the consolidated financial statements. D. As a retirement of bonds.

Culver owns 80 percent of the common stock of Fowler Company. Culver also purchases some of Fowler's bonds directly from Fowler and holds the bonds as a long-term investment. How is the acquisition of the bonds treated for consolidated reporting purposes?

A. As a retirement of bonds. B. As an increase in the Bonds Payable account on Fowler's books. C. Everything related to the intercompany bonds is eliminated in the consolidation worksheet, and nothing related to the bonds appears in the consolidated financial statements. D. As an increase in noncurrent assets.

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At the end of the year, a parent acquires a wholly owned subsidiary's bonds from unaffiliated parties at a cost less than the subsidiary's carrying value. The consolidated net income for the year of acquisition should include the parent's separate operating income plus:

A. the subsidiary's net income increased by the gain on constructive retirement of debt. B. the subsidiary's net income decreased by the loss on constructive retirement of debt. C. the subsidiary's net income increased by the gain on constructive retirement of debt, and decreased by the subsidiary's bond interest expense. D. the subsidiary's net income decreased by the loss on constructive retirement of debt, and decreased by the subsidiary's bond interest expense.

A loss on the constructive retirement of a parent's bonds by a subsidiary is effectively recognized in the individual accounting records of the parent and its subsidiary: I. at the date of constructive retirement. II. over the remaining term of the bonds.

A. I B. II C. Both I and II D. Neither I nor II

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When one company purchases the debt of an affiliate from an unrelated party, a gain or loss on the constructive retirement of debt is recognized by which of the following?

A. Option A B. Option B C. Option C D. Option D

Which of the following statements is(are) correct? I. The amount assigned to the noncontrolling interest may be affected by a constructive retirement of bonds. II. A constructive retirement of bonds normally results in an extraordinary gain or loss. III. In constructive retirement, the entity would still consider the bonds outstanding, even though they are treated as if they were retired in preparing consolidated financial statements.

A. I B. II C. I and III D. I, II, and III

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On January 1, 20X6, Nichols Corporation issued 10-year bonds at par to unrelated parties. The bonds have a 10% stated rate, face value of $300,000, and pay interest every June 30 and December 31. On December 31, 20X9, Harn Corporation purchased all of Nichols' bonds in the open market at a $6,000 discount. Harn is Nichols' 80 percent owned subsidiary. Harn uses the effective interest method of amortization. The consolidated income statement for the year 20X9 should report with respect to the bonds: I. interest expense of $30,000. II. an extraordinary gain of $6,000.

A. I B. II C. Either I or II D. Neither I nor II

Light Corporation owns 80 percent of Sound Company's voting shares. On January 1, 20X7, Sound sold bonds with a par value of $300,000 when the market rate was 7 percent. Light purchased two thirds of the bonds; the remainder was sold to nonaffiliates. The bonds mature in ten years and pay an annual interest rate of 6 percent. Interest is paid semiannually on June 30 and Dec 31. Based on the information given above, what amount of interest expense should be reported in the 20X8 consolidated income statement?

A. $0 B. $6,548 C. $6,511 D. $19,643

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Light Corporation owns 80 percent of Sound Company's voting shares. On January 1, 20X7, Sound sold bonds with a par value of $300,000 when the market rate was 7 percent. Light purchased two thirds of the bonds; the remainder was sold to nonaffiliates. The bonds mature in ten years and pay an annual interest rate of 6 percent. Interest is paid semiannually on June 30 and Dec 31. Based on the information given above, what amount of interest income will Light Corporation recognize on December 31, 20X8 relative to the interest received on that day, in its separate financial statements?

A. $13,023 B. $13,096 C. $6,538 D. $6,557

10. Light Corporation owns 80 percent of Sound Company's voting shares. On January 1, 20X7, Sound sold bonds with a par value of $300,000 when the market rate was 7 percent. Light purchased two thirds of the bonds; the remainder was sold to nonaffiliates. The bonds mature in ten years and pay an annual interest rate of 6 percent. Interest is paid semiannually on June 30 and Dec 31. Based on the information given above, what amount of interest expense will be eliminated in the preparation of the 20X8 consolidated financial statements?

A. $13,096 B. $13,023 C. $8,730 D. $8,682

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11. Master Corporation owns 85 percent of Servant Corporation's voting shares. On January 1, 20X8, Master Corporation sold $200,000 par value 8 percent bonds to Servant when the market interest rate was 5 percent. The bonds mature in 10 years and pay interest semiannually on June 30 and Dec 31. Based on the information given above, in the preparation of the 20X8 consolidated financial statements, premium on bonds payable will be:

A. debited for $46,767 in the eliminating entries. B. credited for $43,060 in the eliminating entries. C. debited for $43,060 in the eliminating entries. D. credited for $46,767 in the eliminating entries.

12. Master Corporation owns 85 percent of Servant Corporation's voting shares. On January 1, 20X8, Master Corporation sold $200,000 par value 8 percent bonds to Servant when the market interest rate was 5 percent. The bonds mature in 10 years and pay interest semiannually on June 30 and Dec 31. Based on the information given above, in the preparation of the 20X8 consolidated financial statements, interest income will be:

A. debited for $12,293 in the eliminating entries. B. credited for $12,293 in the eliminating entries. C. debited for $16,000 in the eliminating entries. D. credited for $16,000 in the eliminating entries.

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13. Master Corporation owns 85 percent of Servant Corporation's voting shares. On January 1, 20X8, Master Corporation sold $200,000 par value 8 percent bonds to Servant when the market interest rate was 5 percent. The bonds mature in 10 years and pay interest semiannually on June 30 and Dec 31. Based on the information given above, what amount of investment in bonds will be eliminated in the preparation of the 20X8 consolidated financial statements?

A. $243,060 B. $200,000 C. $246,767 D. $156,940

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14. Moon Corporation issued $300,000 par value 10-year bonds at 107 on January 1, 20X3, which Star Corporation purchased. Sun Corporation owns 65% of Moon's voting shares. On Jan 1, 20X7, Sun Corporation purchased $120,000 face value of Moon bonds from Star for $118,020. On the date Sun purchased the bonds, the bonds' carrying value on Moon's book was $126,019. The bonds pay 12 percent interest annually on December 31. The preparation of consolidated financial statements for Moon and Sun at December 31, 20X9, required the following eliminating entry:

Based on the information given above, what amount of gain or loss on bond retirement is included in the 20X7 consolidated income statement?

A. $8,000 B. $5,200 C. $(8,000) D. $(5,200)

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15. Moon Corporation issued $300,000 par value 10-year bonds at 107 on January 1, 20X3, which Star Corporation purchased. Sun Corporation owns 65% of Moon's voting shares. On Jan 1, 20X7, Sun Corporation purchased $120,000 face value of Moon bonds from Star for $118,020. On the date Sun purchased the bonds, the bonds' carrying value on Moon's book was $126,019. The bonds pay 12 percent interest annually on December 31. The preparation of consolidated financial statements for Moon and Sun at December 31, 20X9, required the following eliminating entry:

Based on the information given above, if 20X9 consolidated net income of $50,000 would have been reported without the eliminating entry provided, what amount will actually be reported?

A. $45,286 B. $47,774 C. $51,244 D. $48,756

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16. ABC, a holder of a $400,000 XYZ Inc. bond, collected the interest due on June 30, 20X8, and then sold the bond to DEF Inc. for $365,000. On that date the bond issuer, XYZ, a 90 percent owner of DEF, had a $450,000 carrying amount for this bond. Based on the information given above, what amount of gain or loss on bond retirement was recorded?

A. No gain or loss B. $85,000 gain C. $85,000 loss D. $35,000 loss

17. ABC, a holder of a $400,000 XYZ Inc. bond, collected the interest due on June 30, 20X8, and then sold the bond to DEF Inc. for $365,000. On that date the bond issuer, XYZ, a 90 percent owner of DEF, had a $450,000 carrying amount for this bond. Based on the information given above, what was the effect of DEF's purchase of XYZ's bond on the noncontrolling interest amount reported in XYZ's June 30, 20X8, consolidated balance sheet?

A. No effect B. $35,000 increase C. $8,500 decrease D. $8,500 increase

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18. Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on December 31, 20X8, for $125,000. Mortar owns 75 percent of Granite's voting common stock. Granite's partial bond amortization schedule is as follows:

Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the December 31, 20X8 consolidated financial statements?

A. $4,276 B. $6,108 C. $6,581 D. $4,607

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19. Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on December 31, 20X8, for $125,000. Mortar owns 75 percent of Granite's voting common stock. Granite's partial bond amortization schedule is as follows:

Based on the information given above, what amount of gain or loss on constructive bond retirement will be reported in the December 31, 20X8 consolidated financial statements?

A. $8,892 loss B. $81,108 loss C. $19,276 gain D. $81,108 gain

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20. Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on December 31, 20X8, for $125,000. Mortar owns 75 percent of Granite's voting common stock. Granite's partial bond amortization schedule is as follows:

Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the December 31, 20X9 consolidated financial statements?

A. $5,097 B. $3,568 C. $5,614 D. $3,930

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21. Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on December 31, 20X8, for $125,000. Mortar owns 75 percent of Granite's voting common stock. Granite's partial bond amortization schedule is as follows:

Based on the information given above, what amount of interest expense will be eliminated in the preparation of the December 31, 20X9 consolidated financial statements?

A. $13,292 B. $18,988 C. $16,296 D. $9,483

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22. Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on December 31, 20X8, for $125,000. Mortar owns 75 percent of Granite's voting common stock. Granite's partial bond amortization schedule is as follows:

Based on the information given above and assuming a market interest rate of 12.979 percent, what amount of interest income will be eliminated in the preparation of the December 31, 20X9 consolidated financial statements?

A. $8,184 B. $16,296 C. $12,704 D. $18,988

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23. Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on December 31, 20X8, for $125,000. Mortar owns 75 percent of Granite's voting common stock. Granite's partial bond amortization schedule is as follows:

Based on the information given above, what amount of constructive gain or loss will be allocated to noncontrolling interest in 20X9 consolidated financial statements?

A. $(20,277) B. $(2,223) C. $20,277 D. $4,819

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24. Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on January 1, 20X8, for $122,000. Mortar owns 75 percent of Granite's voting common stock. Granite's partial bond amortization schedule is as follows:

Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X8 year-end consolidated financial statements?

A. $4,276 B. $4,923 C. $6,108 D. $7,033

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25. Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on January 1, 20X8, for $122,000. Mortar owns 75 percent of Granite's voting common stock. Granite's partial bond amortization schedule is as follows:

Based on the information given above, what amount of gain or loss on bond retirement will be reported in the 20X8 consolidated financial statements?

A. $(84,018) B. $84,108 C. $(22,923) D. $22,923

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26. Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on January 1, 20X8, for $122,000. Mortar owns 75 percent of Granite's voting common stock. Granite's partial bond amortization schedule is as follows:

Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X9 year-end consolidated financial statements?

A. $4,276 B. $3,568 C. $5,097 D. $6,108

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27. Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on January 1, 20X8, for $122,000. Mortar owns 75 percent of Granite's voting common stock. Granite's partial bond amortization schedule is as follows:

Based on the information given above and assuming a 13.166 percent market rate, what amount of interest income will be eliminated in the preparation of the 20X9 consolidated financial statements?

A. $16,420 B. $11,494 C. $16,103 D. $11,291

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28. Hunter Corporation holds 80 percent of the voting shares of Moss Company. On January 1, 20X8, Moss purchased $100,000 par value 12 percent Hunter bonds from Cruse Corporation for $115,000. Hunter originally issued the bonds to Cruse on January 1, 20X6, for $110,000. The bonds have an 8-year maturity from the date of issue and pay interest semiannually on June 30 and December 31 each year. Moss' reported net income of $65,000 for 20X8, and Hunter reported income (excluding income from ownership of Moss's stock) of $90,000. Hunter's partial bond amortization schedule is as follows:

Based on the information given above, what amount of interest expense does Hunter record in 20X8?

A. $10,950 B. $8,760 C. $10,301 D. $10,002

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29. Hunter Corporation holds 80 percent of the voting shares of Moss Company. On January 1, 20X8, Moss purchased $100,000 par value 12 percent Hunter bonds from Cruse Corporation for $115,000. Hunter originally issued the bonds to Cruse on January 1, 20X6, for $110,000. The bonds have an 8-year maturity from the date of issue and pay interest semiannually on June 30 and December 31 each year. Moss' reported net income of $65,000 for 20X8, and Hunter reported income (excluding income from ownership of Moss's stock) of $90,000. Hunter's partial bond amortization schedule is as follows:

Based on the information given above and assuming an 8.735 percent market rate, what amount of interest income does Moss record for 20X8?

A. $10,950 B. $8,002 C. $9,410 D. $10,002

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30. Hunter Corporation holds 80 percent of the voting shares of Moss Company. On January 1, 20X8, Moss purchased $100,000 par value 12 percent Hunter bonds from Cruse Corporation for $115,000. Hunter originally issued the bonds to Cruse on January 1, 20X6, for $110,000. The bonds have an 8-year maturity from the date of issue and pay interest semiannually on June 30 and December 31 each year. Moss' reported net income of $65,000 for 20X8, and Hunter reported income (excluding income from ownership of Moss's stock) of $90,000. Hunter's partial bond amortization schedule is as follows:

Based on the information given above, what gain or loss on the retirement of bonds should be reported in the 20X8 consolidated income statement?

A. $6,326 gain B. $6,813 gain C. $6,813 loss D. $6,326 loss

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31. Hunter Corporation holds 80 percent of the voting shares of Moss Company. On January 1, 20X8, Moss purchased $100,000 par value 12 percent Hunter bonds from Cruse Corporation for $115,000. Hunter originally issued the bonds to Cruse on January 1, 20X6, for $110,000. The bonds have an 8-year maturity from the date of issue and pay interest semiannually on June 30 and December 31 each year. Moss' reported net income of $65,000 for 20X8, and Hunter reported income (excluding income from ownership of Moss's stock) of $90,000. Hunter's partial bond amortization schedule is as follows:

Based on the information given above and assuming an 8.735 percent market rate, what amount of consolidated net income should be reported for 20X8?

A. $147,240 B. $134,240 C. $149,134 D. $136,134

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32. Senior Corporation acquired 80 percent of Junior Company's voting shares on January 1, 20X8, at underlying book value. On Dec. 31, 20X8, it also purchased $500,000 par value 8 percent Junior bonds, which had been issued on January 1, 20X5 to Partner Corporation (unaffiliated with either Senior or Junior) at a $45,000 premium. The bonds were originally issued with a 12-year maturity and pay interest annually on December 31. During preparation of the consolidated financial statements for December 31, 20X8, the following eliminating entry was included in the consolidation worksheet:

Based on the information given above, what price did Senior pay to purchase the Junior bonds?

A. $533,769 B. $516,875 C. $500,000 D. $550,644

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33. Senior Corporation acquired 80 percent of Junior Company's voting shares on January 1, 20X8, at underlying book value. On Dec. 31, 20X8, it also purchased $500,000 par value 8 percent Junior bonds, which had been issued on January 1, 20X5 to Partner Corporation (unaffiliated with either Senior or Junior) at a $45,000 premium. The bonds were originally issued with a 12-year maturity and pay interest annually on December 31. During preparation of the consolidated financial statements for December 31, 20X8, the following eliminating entry was included in the consolidation worksheet:

Based on the information given above, what was the carrying amount of the bonds on Junior's books on the date of purchase?

A. $533,769 B. $516,875 C. $500,000 D. $550,644

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34. Senior Corporation acquired 80 percent of Junior Company's voting shares on January 1, 20X8, at underlying book value. On Dec. 31, 20X8, it also purchased $500,000 par value 8 percent Junior bonds, which had been issued on January 1, 20X5 to Partner Corporation (unaffiliated with either Senior or Junior) at a $45,000 premium. The bonds were originally issued with a 12-year maturity and pay interest annually on December 31. During preparation of the consolidated financial statements for December 31, 20X8, the following eliminating entry was included in the consolidation worksheet:

Based on the information given above and assuming a market rate of 6.346 percent, what is the interest income that must be eliminated in preparing the 20X9 consolidated financial statements?

A. $33,769 B. $27,957 C. $34,946 D. $16,894

Essay Questions

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35. A subsidiary issues bonds. The parent can then acquire the bonds either directly from the subsidiary or from a nonaffiliate that had originally acquired the subsidiary's bonds. Required: a) Discuss the parent's accounting as it relates to the preparation of consolidated financial statements, for their acquisition of the bonds: 1. from the nonaffiliate. 2. directly from the subsidiary. b) Why does it matter who the bonds are acquired from?

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36. Dundee Company issued $1,000,000 par value 10-year bonds at 102 on January 1, 20X5, which Mega Corporation purchased. The coupon rate on the bonds is 9 percent. Interest payments are made semiannually on July 1 and January 1. On Jan 1, 20X8, Perth Company purchased $500,000 par value of the bonds from Mega for $492,200. Perth owns 65 percent of Dundee's voting shares. Required: a. What amount of gain or loss will be reported in Dundee's 20X8 income statement on the retirement of bonds? b. Will a gain or loss be reported in the 20X8 consolidated financial statements for Perth for the constructive retirement of bonds? What amount will be reported? c. How much will Perth's purchase of the bonds change consolidated net income for 20X8? d. Prepare the worksheet eliminating entry or entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements at December 31, 20X8. e. Prepare the worksheet eliminating entry or entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements at December 31, 20X9.

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37. On January 1, 20X7, Gild Company acquired 60 percent of the outstanding common stock of Leeds Company at the book value of the shares acquired. On that date, the fair value of noncontrolling interest was equal to 40 percent of book value of Leeds. At the time of purchase, Leeds had common stock of $1,000,000 outstanding and retained earnings of $800,000. On December 31, 20X7, Gild purchased 50 percent of Leeds' bonds outstanding which were originally issued on January 1, 20X4, at 99. The total bond issue has a face value of $600,000, pays 10 percent interest annually, and has a 10-year maturity. Any premium or discount is amortized using the effective interest method. Gild paid $306,000 for its investment in Leeds' bonds and intends to hold the bonds until maturity. Income and dividends for Gild and Leeds for 20X7 and 20X8 are as follows:

Assume Gild accounts for its investment in Leeds stock using the fully adjusted equity method. Required: A) Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X7. B) Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X8.

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38. On January 1, 20X7, Gild Company acquired 60 percent of the outstanding common stock of Leeds Company at the book value of the shares acquired. On that date, the fair value of noncontrolling interest was equal to 40 percent of book value of Leeds. At the time of purchase, Leeds had common stock of $1,000,000 outstanding and retained earnings of $800,000. On December 31, 20X7, Gild purchased 50 percent of Leeds' bonds outstanding which were originally issued on January 1, 20X4, at 99. The total bond issue has a face value of $600,000, pays 10 percent interest annually, and has a 10-year maturity. Any premium or discount is amortized using the effective interest method. Gild paid $306,000 for its investment in Leeds' bonds and intends to hold the bonds until maturity. Income and dividends for Gild and Leeds for 20X7 and 20X8 are as follows:

Assume Gild accounts for its investment in Leeds stock using the modified equity method. Required: A) Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X7. B) Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X8.

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39. On January 1, 20X7, Gild Company acquired 60 percent of the outstanding common stock of Leeds Company at the book value of the shares acquired. On that date, the fair value of noncontrolling interest was equal to 40 percent of book value of Leeds. At the time of purchase, Leeds had common stock of $1,000,000 outstanding and retained earnings of $800,000. On December 31, 20X7, Gild purchased 50 percent of Leeds' bonds outstanding which were originally issued on January 1, 20X4, at 99. The total bond issue has a face value of $600,000, pays 10 percent interest annually, and has a 10-year maturity. Any premium or discount is amortized using the effective interest method. Gild paid $306,000 for its investment in Leeds' bonds and intends to hold the bonds until maturity. Income and dividends for Gild and Leeds for 20X7 and 20X8 are as follows:

Assume Gild accounts for its investment in Leeds stock using the cost method. Required: A) Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X7. B) Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X8.

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Chapter 08 Intercompany Indebtedness Answer Key

Multiple Choice Questions

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-01 Understand and explain concepts associated with intercompany debt transfers. Topic: Consolidation Overview

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AACSB: Analytic AICPA FN: Decision Making

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Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-01 Understand and explain concepts associated with intercompany debt transfers. Topic: Consolidation Overview

A. I B. II C. Both I and II D. Neither I nor II

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When one company purchases the debt of an affiliate from an unrelated party, a gain or loss on the constructive retirement of debt is recognized by which of the following?

A. Option A B. Option B C. Option C D. Option D

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A. I B. II C. I and III D. I, II, and III

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-01 Understand and explain concepts associated with intercompany debt transfers. Topic: Consolidation Overview

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A. I B. II C. Either I or II D. Neither I nor II

AACSB: Analytic AICPA FN: Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-01 Understand and explain concepts associated with intercompany debt transfers. Topic: Consolidation Overview

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A. $0 B. $6,548 C. $6,511 D. $19,643

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-02 Prepare journal entries and elimination entries related to direct intercompany debt transfers. Topic: Bond Sale Directly to an Affiliate (at a Discount)

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Light Corporation owns 80 percent of Sound Company's voting shares. On January 1, 20X7, Sound sold bonds with a par value of $300,000 when the market rate was 7 percent. Light purchased two thirds of the bonds; the remainder was sold to nonaffiliates. The bonds mature in ten years and pay an annual interest rate of 6 percent. Interest is paid semiannually on June 30 and Dec 31. Based on the information given above, what amount of interest income will Light Corporation recognize on December 31, 20X8 relative to the interest received on that day, in its separate financial statements?

A. $13,023 B. $13,096 C. $6,538 D. $6,557

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10.

Light Corporation owns 80 percent of Sound Company's voting shares. On January 1, 20X7, Sound sold bonds with a par value of $300,000 when the market rate was 7 percent. Light purchased two thirds of the bonds; the remainder was sold to nonaffiliates. The bonds mature in ten years and pay an annual interest rate of 6 percent. Interest is paid semiannually on June 30 and Dec 31. Based on the information given above, what amount of interest expense will be eliminated in the preparation of the 20X8 consolidated financial statements?

A. $13,096 B. $13,023 C. $8,730 D. $8,682

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11.

Master Corporation owns 85 percent of Servant Corporation's voting shares. On January 1, 20X8, Master Corporation sold $200,000 par value 8 percent bonds to Servant when the market interest rate was 5 percent. The bonds mature in 10 years and pay interest semiannually on June 30 and Dec 31. Based on the information given above, in the preparation of the 20X8 consolidated financial statements, premium on bonds payable will be:

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12.

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13.

Master Corporation owns 85 percent of Servant Corporation's voting shares. On January 1, 20X8, Master Corporation sold $200,000 par value 8 percent bonds to Servant when the market interest rate was 5 percent. The bonds mature in 10 years and pay interest semiannually on June 30 and Dec 31. Based on the information given above, what amount of investment in bonds will be eliminated in the preparation of the 20X8 consolidated financial statements?

A. $243,060 B. $200,000 C. $246,767 D. $156,940

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14.

Moon Corporation issued $300,000 par value 10-year bonds at 107 on January 1, 20X3, which Star Corporation purchased. Sun Corporation owns 65% of Moon's voting shares. On Jan 1, 20X7, Sun Corporation purchased $120,000 face value of Moon bonds from Star for $118,020. On the date Sun purchased the bonds, the bonds' carrying value on Moon's book was $126,019. The bonds pay 12 percent interest annually on December 31. The preparation of consolidated financial statements for Moon and Sun at December 31, 20X9, required the following eliminating entry:

Based on the information given above, what amount of gain or loss on bond retirement is included in the 20X7 consolidated income statement?

A. $8,000 B. $5,200 C. $(8,000) D. $(5,200)

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 08-03 Prepare journal entries and elimination entries related to debt purchased from a nonaffiliate at an amount less than book value. Topic: Purchase at an Amount Less than Book Value (Year 2)

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15.

Based on the information given above, if 20X9 consolidated net income of $50,000 would have been reported without the eliminating entry provided, what amount will actually be reported?

A. $45,286 B. $47,774 C. $51,244 D. $48,756

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16.

ABC, a holder of a $400,000 XYZ Inc. bond, collected the interest due on June 30, 20X8, and then sold the bond to DEF Inc. for $365,000. On that date the bond issuer, XYZ, a 90 percent owner of DEF, had a $450,000 carrying amount for this bond. Based on the information given above, what amount of gain or loss on bond retirement was recorded?

A. No gain or loss B. $85,000 gain C. $85,000 loss D. $35,000 loss

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-03 Prepare journal entries and elimination entries related to debt purchased from a nonaffiliate at an amount less than book value. Topic: Purchase at an Amount Less than Book Value (Year 1)

17.

ABC, a holder of a $400,000 XYZ Inc. bond, collected the interest due on June 30, 20X8, and then sold the bond to DEF Inc. for $365,000. On that date the bond issuer, XYZ, a 90 percent owner of DEF, had a $450,000 carrying amount for this bond. Based on the information given above, what was the effect of DEF's purchase of XYZ's bond on the noncontrolling interest amount reported in XYZ's June 30, 20X8, consolidated balance sheet?

A. No effect B. $35,000 increase C. $8,500 decrease D. $8,500 increase

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AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-03 Prepare journal entries and elimination entries related to debt purchased from a nonaffiliate at an amount less than book value. Topic: Purchase at an Amount Less than Book Value (Year 1)

18.

Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on December 31, 20X8, for $125,000. Mortar owns 75 percent of Granite's voting common stock. Granite's partial bond amortization schedule is as follows:

Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the December 31, 20X8 consolidated financial statements?

A. $4,276 B. $6,108 C. $6,581 D. $4,607

AACSB: Analytic AICPA FN: Measurement

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Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-03 Prepare journal entries and elimination entries related to debt purchased from a nonaffiliate at an amount less than book value. Topic: Purchase at an Amount Less than Book Value (Year 1)

19.

Based on the information given above, what amount of gain or loss on constructive bond retirement will be reported in the December 31, 20X8 consolidated financial statements?

A. $8,892 loss B. $81,108 loss C. $19,276 gain D. $81,108 gain

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy

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Learning Objective: 08-03 Prepare journal entries and elimination entries related to debt purchased from a nonaffiliate at an amount less than book value. Topic: Purchase at an Amount Less than Book Value (Year 1)

20.

Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the December 31, 20X9 consolidated financial statements?

A. $5,097 B. $3,568 C. $5,614 D. $3,930

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an amount less than book value. Topic: Purchase at an Amount Less than Book Value (Year 2)

21.

Based on the information given above, what amount of interest expense will be eliminated in the preparation of the December 31, 20X9 consolidated financial statements?

A. $13,292 B. $18,988 C. $16,296 D. $9,483

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 08-03 Prepare journal entries and elimination entries related to debt purchased from a nonaffiliate at an amount less than book value. Topic: Purchase at an Amount Less than Book Value (Year 2)

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22.

A. $8,184 B. $16,296 C. $12,704 D. $18,988

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 08-03 Prepare journal entries and elimination entries related to debt purchased from a nonaffiliate at an amount less than book value. Topic: Purchase at an Amount Less than Book Value (Year 2)

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23.

Based on the information given above, what amount of constructive gain or loss will be allocated to noncontrolling interest in 20X9 consolidated financial statements?

A. $(20,277) B. $(2,223) C. $20,277 D. $4,819

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 3 Hard Learning Objective: 08-03 Prepare journal entries and elimination entries related to debt purchased from a nonaffiliate at an amount less than book value. Topic: Purchase at an Amount Less than Book Value (Year 1)

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24.

Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on January 1, 20X8, for $122,000. Mortar owns 75 percent of Granite's voting common stock. Granite's partial bond amortization schedule is as follows:

Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X8 year-end consolidated financial statements?

A. $4,276 B. $4,923 C. $6,108 D. $7,033

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25.

Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on January 1, 20X8, for $122,000. Mortar owns 75 percent of Granite's voting common stock. Granite's partial bond amortization schedule is as follows:

Based on the information given above, what amount of gain or loss on bond retirement will be reported in the 20X8 consolidated financial statements?

A. $(84,018) B. $84,108 C. $(22,923) D. $22,923

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26.

Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on January 1, 20X8, for $122,000. Mortar owns 75 percent of Granite's voting common stock. Granite's partial bond amortization schedule is as follows:

Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X9 year-end consolidated financial statements?

A. $4,276 B. $3,568 C. $5,097 D. $6,108

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27.

Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on January 1, 20X8, for $122,000. Mortar owns 75 percent of Granite's voting common stock. Granite's partial bond amortization schedule is as follows:

Based on the information given above and assuming a 13.166 percent market rate, what amount of interest income will be eliminated in the preparation of the 20X9 consolidated financial statements?

A. $16,420 B. $11,494 C. $16,103 D. $11,291

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28.

Hunter Corporation holds 80 percent of the voting shares of Moss Company. On January 1, 20X8, Moss purchased $100,000 par value 12 percent Hunter bonds from Cruse Corporation for $115,000. Hunter originally issued the bonds to Cruse on January 1, 20X6, for $110,000. The bonds have an 8-year maturity from the date of issue and pay interest semiannually on June 30 and December 31 each year. Moss' reported net income of $65,000 for 20X8, and Hunter reported income (excluding income from ownership of Moss's stock) of $90,000. Hunter's partial bond amortization schedule is as follows:

Based on the information given above, what amount of interest expense does Hunter record in 20X8?

A. $10,950 B. $8,760 C. $10,301 D. $10,002

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 08-04 Prepare journal entries and elimination entries related to debt purchased from a nonaffiliate at an amount more than book value. Topic: Purchase at an Amount Higher than Book Value (Year 2)

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29.

Based on the information given above and assuming an 8.735 percent market rate, what amount of interest income does Moss record for 20X8?

A. $10,950 B. $8,002 C. $9,410 D. $10,002

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 08-04 Prepare journal entries and elimination entries related to debt purchased from a nonaffiliate at an amount more than book value. Topic: Purchase at an Amount Higher than Book Value (Year 2)

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30.

Based on the information given above, what gain or loss on the retirement of bonds should be reported in the 20X8 consolidated income statement?

A. $6,326 gain B. $6,813 gain C. $6,813 loss D. $6,326 loss

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 08-04 Prepare journal entries and elimination entries related to debt purchased from a nonaffiliate at an amount more than book value. Topic: Purchase at an Amount Higher than Book Value (Year 2)

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31.

Based on the information given above and assuming an 8.735 percent market rate, what amount of consolidated net income should be reported for 20X8?

A. $147,240 B. $134,240 C. $149,134 D. $136,134

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32.

Senior Corporation acquired 80 percent of Junior Company's voting shares on January 1, 20X8, at underlying book value. On Dec. 31, 20X8, it also purchased $500,000 par value 8 percent Junior bonds, which had been issued on January 1, 20X5 to Partner Corporation (unaffiliated with either Senior or Junior) at a $45,000 premium. The bonds were originally issued with a 12-year maturity and pay interest annually on December 31. During preparation of the consolidated financial statements for December 31, 20X8, the following eliminating entry was included in the consolidation worksheet:

Based on the information given above, what price did Senior pay to purchase the Junior bonds?

A. $533,769 B. $516,875 C. $500,000 D. $550,644

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33.

Based on the information given above, what was the carrying amount of the bonds on Junior's books on the date of purchase?

A. $533,769 B. $516,875 C. $500,000 D. $550,644

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34.

Based on the information given above and assuming a market rate of 6.346 percent, what is the interest income that must be eliminated in preparing the 20X9 consolidated financial statements?

A. $33,769 B. $27,957 C. $34,946 D. $16,894

Essay Questions

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35.

A subsidiary issues bonds. The parent can then acquire the bonds either directly from the subsidiary or from a nonaffiliate that had originally acquired the subsidiary's bonds. Required: a) Discuss the parent's accounting as it relates to the preparation of consolidated financial statements, for their acquisition of the bonds: 1. from the nonaffiliate. 2. directly from the subsidiary. b) Why does it matter who the bonds are acquired from?

a) 1. When the parent acquires the bonds from a nonaffiliate, the bonds were originally held outside the consolidated entity and the bonds must be treated as if they were reacquired by the original issuer. In this case the bond acquisition is handled as a constructive retirement, which means the bonds are treated as if the subsidiary had retired the bonds when the consolidated financial statements are prepared. Any gain or loss on constructive retirement should be reported in the consolidated income statement but not in separate financial statements of the parent and subsidiary. 2. When the parent purchases the bonds directly from the subsidiary the transaction is viewed as an inter-company debt and must be eliminated in the preparation of the consolidated financial statements. b) When a parent acquires a subsidiary's debt it is important to know if the acquisition is direct or indirect. In case of direct intercompany debt transfer, there is no impact on consolidated financial statements. However, if the parent has to go outside the consolidated entity i.e. in case of indirect intercompany debt transfer, the impact of the transaction on the consolidated entity must be reported.

AACSB: Communication AICPA FN: Reporting Blooms: Understand Difficulty: 2 Medium

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Learning Objective: 08-01 Understand and explain concepts associated with intercompany debt transfers. Topic: Consolidation Overview

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36.

Dundee Company issued $1,000,000 par value 10-year bonds at 102 on January 1, 20X5, which Mega Corporation purchased. The coupon rate on the bonds is 9 percent. Interest payments are made semiannually on July 1 and January 1. On Jan 1, 20X8, Perth Company purchased $500,000 par value of the bonds from Mega for $492,200. Perth owns 65 percent of Dundee's voting shares. Required: a. What amount of gain or loss will be reported in Dundee's 20X8 income statement on the retirement of bonds? b. Will a gain or loss be reported in the 20X8 consolidated financial statements for Perth for the constructive retirement of bonds? What amount will be reported? c. How much will Perth's purchase of the bonds change consolidated net income for 20X8? d. Prepare the worksheet eliminating entry or entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements at December 31, 20X8. e. Prepare the worksheet eliminating entry or entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements at December 31, 20X9.

a. No gain or loss will be reported by Dundee b. A gain of $15,633 will be reported:

c. Consolidated net income for 20X8 will increase by $13,945:

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d. Eliminating entries, December 31, 20X8

e. Eliminating entries, December 31, 20X9

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37.

On January 1, 20X7, Gild Company acquired 60 percent of the outstanding common stock of Leeds Company at the book value of the shares acquired. On that date, the fair value of noncontrolling interest was equal to 40 percent of book value of Leeds. At the time of purchase, Leeds had common stock of $1,000,000 outstanding and retained earnings of $800,000. On December 31, 20X7, Gild purchased 50 percent of Leeds' bonds outstanding which were originally issued on January 1, 20X4, at 99. The total bond issue has a face value of $600,000, pays 10 percent interest annually, and has a 10-year maturity. Any premium or discount is amortized using the effective interest method. Gild paid $306,000 for its investment in Leeds' bonds and intends to hold the bonds until maturity. Income and dividends for Gild and Leeds for 20X7 and 20X8 are as follows:

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38.

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8EIM-74 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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39.

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Chapter 08 Appendix A Intercompany Indebtedness

Multiple Choice Questions

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A. I B. II C. Both I and II D. Neither I nor II

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When one company purchases the debt of an affiliate from an unrelated party, a gain or loss on the constructive retirement of debt is recognized by which of the following?

A. Option A B. Option B C. Option C D. Option D

A. I B. II C. I and III D. I, II, and III

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On January 1, 20X6, Nichols Corporation issued 10-year bonds at par to unrelated parties. The bonds pay interest of $15,000 every June 30 and December 31. On December 31, 20X9, Harn Corporation purchased all of Nichols' bonds in the open market at a $6,000 discount. Harn is Nichols' 80 percent owned subsidiary. Harn uses the straight line method of amortization. The consolidated income statement for the year 20X9 should report with respect to the bonds: I. interest expense of $30,000. II. an extraordinary gain of $6,000.

A. I B. II C. Either I or II D. Neither I nor II

Light Corporation owns 80 percent of Sound Company's voting shares. On January 1, 20X7, Sound sold bonds with a par value of $300,000 at 95. Light purchased two thirds of the bonds; the remainder was sold to nonaffiliates. The bonds mature in ten years and pay an annual interest rate of 6 percent. Interest is paid semiannually on January 1 and July 1. Based on the information given above, what amount of interest expense should be reported in the 20X8 consolidated income statement?

A. $6,000 B. $6,500 C. $5,000 D. $10,000

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Light Corporation owns 80 percent of Sound Company's voting shares. On January 1, 20X7, Sound sold bonds with a par value of $300,000 at 95. Light purchased two thirds of the bonds; the remainder was sold to nonaffiliates. The bonds mature in ten years and pay an annual interest rate of 6 percent. Interest is paid semiannually on January 1 and July 1. Based on the information given above, what amount of interest receivable will be recorded by Light Corporation on December 31, 20X8, in its separate financial statements?

A. $5,000 B. $6,500 C. $10,000 D. $6,000

10. Light Corporation owns 80 percent of Sound Company's voting shares. On January 1, 20X7, Sound sold bonds with a par value of $300,000 at 95. Light purchased two thirds of the bonds; the remainder was sold to nonaffiliates. The bonds mature in ten years and pay an annual interest rate of 6 percent. Interest is paid semiannually on January 1 and July 1. Based on the information given above, what amount of interest expense will be eliminated in the preparation of the 20X8 consolidated financial statements?

A. $13,000 B. $13,500 C. $10,000 D. $15,000

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11. Master Corporation owns 85 percent of Servant Corporation's voting shares. On January 1, 20X8, Master Corporation sold $200,000 par value 8 percent bonds to Servant for $245,000. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Based on the information given above, in the preparation of the 20X8 consolidated financial statements, premium on bonds payable will be:

A. debited for $45,000 in the eliminating entries. B. credited for $40,500 in the eliminating entries. C. debited for $40,500 in the eliminating entries. D. credited for $45,000 in the eliminating entries.

12. Master Corporation owns 85 percent of Servant Corporation's voting shares. On January 1, 20X8, Master Corporation sold $200,000 par value 8 percent bonds to Servant for $245,000. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Based on the information given above, in the preparation of the 20X8 consolidated financial statements, interest income will be:

A. debited for $11,500 in the eliminating entries. B. credited for $11,500 in the eliminating entries. C. debited for $16,000 in the eliminating entries. D. credited for $16,000 in the eliminating entries.

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13. Master Corporation owns 85 percent of Servant Corporation's voting shares. On January 1, 20X8, Master Corporation sold $200,000 par value 8 percent bonds to Servant for $245,000. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Based on the information given above, what amount of investment in bonds will be eliminated in the preparation of the 20X8 consolidated financial statements?

A. $240,500 B. $200,000 C. $245,000 D. $211,500

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14. Moon Corporation issued $300,000 par value 10-year bonds at 107 on January 1, 20X3, which Star Corporation purchased. On July 1, 20X7, Sun Corporation purchased $120,000 face value of Moon bonds from Star. The bonds pay 12 percent interest annually on December 31. The preparation of consolidated financial statements for Moon and Sun at December 31, 20X9, required the following eliminating entry:

Based on the information given above, what percentage of the subsidiary's ownership does the parent company hold?

A. 75 percent B. 65 percent C. 80 percent D. 95 percent

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15. Moon Corporation issued $300,000 par value 10-year bonds at 107 on January 1, 20X3, which Star Corporation purchased. On July 1, 20X7, Sun Corporation purchased $120,000 face value of Moon bonds from Star. The bonds pay 12 percent interest annually on December 31. The preparation of consolidated financial statements for Moon and Sun at December 31, 20X9, required the following eliminating entry:

Based on the information given above, what amount did Sun pay when it purchased the bonds on July 1, 20X7?

A. $118,020 B. $118,920 C. $118,620 D. $117,220

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16. Moon Corporation issued $300,000 par value 10-year bonds at 107 on January 1, 20X3, which Star Corporation purchased. On July 1, 20X7, Sun Corporation purchased $120,000 face value of Moon bonds from Star. The bonds pay 12 percent interest annually on December 31. The preparation of consolidated financial statements for Moon and Sun at December 31, 20X9, required the following eliminating entry:

Based on the information given above, what amount of gain or loss on bond retirement is included in the 20X7 consolidated income statement?

A. $6,600 B. $4,800 C. $6,000 D. $5,400

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17. Moon Corporation issued $300,000 par value 10-year bonds at 107 on January 1, 20X3, which Star Corporation purchased. On July 1, 20X7, Sun Corporation purchased $120,000 face value of Moon bonds from Star. The bonds pay 12 percent interest annually on December 31. The preparation of consolidated financial statements for Moon and Sun at December 31, 20X9, required the following eliminating entry:

Based on the information given above, if 20X9 consolidated net income of $50,000 would have been reported without the eliminating entry provided, what amount will actually be reported?

A. $47,900 B. $48,200 C. $49,400 D. $48,800

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18. ABC, a holder of a $400,000 XYZ Inc. bond, collected the interest due on June 30, 20X8, and then sold the bond to DEF Inc. for $365,000. On that date the bond issuer, XYZ, a 90 percent owner of DEF, had a $450,000 carrying amount for this bond. Based on the information given above, what amount of gain or loss on bond retirement was recorded?

A. No gain or loss B. $85,000 gain C. $85,000 loss D. $35,000 loss

19. ABC, a holder of a $400,000 XYZ Inc. bond, collected the interest due on June 30, 20X8, and then sold the bond to DEF Inc. for $365,000. On that date the bond issuer, XYZ, a 90 percent owner of DEF, had a $450,000 carrying amount for this bond. Based on the information given above, what was the effect of DEF's purchase of XYZ's bond on the noncontrolling interest amount reported in XYZ's June 30, 20X8, consolidated balance sheet?

A. No effect B. $35,000 increase C. $8,500 decrease D. $8,500 increase

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20. Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on December 31, 20X8, for $125,000. Mortar owns 75 percent of Granite's voting common stock. Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X8 consolidated financial statements?

A. $3,500 B. $2,800 C. $5,000 D. $2,500

21. Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on December 31, 20X8, for $125,000. Mortar owns 75 percent of Granite's voting common stock. Based on the information given above, what amount of gain or loss on bond retirement will be reported in the 20X8 consolidated financial statements?

A. $17,000 loss B. $12,800 loss C. $18,500 gain D. $22,200 gain

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22. Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on December 31, 20X8, for $125,000. Mortar owns 75 percent of Granite's voting common stock. Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X9 consolidated financial statements?

A. $3,500 B. $2,800 C. $5,000 D. $2,500

23. Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on December 31, 20X8, for $125,000. Mortar owns 75 percent of Granite's voting common stock. Based on the information given above, what amount of interest income will be eliminated in the preparation of the 20X9 consolidated financial statements?

A. $17,000 B. $13,300 C. $18,500 D. $22,200

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24. Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on December 31, 20X8, for $125,000. Mortar owns 75 percent of Granite's voting common stock. Based on the information given above, what amount of interest expense will be eliminated in the preparation of the 20X9 consolidated financial statements?

A. $17,000 B. $13,300 C. $18,500 D. $22,200

25. Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on December 31, 20X8, for $125,000. Mortar owns 75 percent of Granite's voting common stock. Based on the information given above, what amount of constructive gain will be allocated to noncontrolling interest in 20X8 consolidated financial statements?

A. $4,925 B. $5,550 C. $5,625 D. $4,625

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26. Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on January 1, 20X8, for $122,000. Mortar owns 75 percent of Granite's voting common stock. Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X8 year-end consolidated financial statements?

A. $3,500 B. $2,800 C. $5,000 D. $2,500

27. Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on January 1, 20X8, for $122,000. Mortar owns 75 percent of Granite's voting common stock. Based on the information given above, what amount of gain or loss on bond retirement will be reported in the 20X8 consolidated financial statements?

A. $17,000 B. $12,800 C. $18,500 D. $22,200

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28. Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on January 1, 20X8, for $122,000. Mortar owns 75 percent of Granite's voting common stock. Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X9 year-end consolidated financial statements?

A. $3,500 B. $2,800 C. $5,000 D. $2,500

29. Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on January 1, 20X8, for $122,000. Mortar owns 75 percent of Granite's voting common stock. Based on the information given above, what amount of interest income will be eliminated in the preparation of the 20X9 consolidated financial statements?

A. $17,000 B. $13,300 C. $18,500 D. $22,200

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30. Hunter Corporation holds 80 percent of the voting shares of Moss Company. On January 1, 20X8, Moss purchased $100,000 par value 12 percent first mortgage bonds of Hunter from Cruse for $115,000. Hunter originally issued the bonds to Cruse on January 1, 20X6, for $110,000. The bonds have an 8-year maturity from the date of issue. Moss' reported net income of $65,000 for 20X8, and Hunter reported income (excluding income from ownership of Moss's stock) of $90,000. Based on the information given above, what amount of interest expense does Hunter record annually?

A. $10,750 B. $9,500 C. $2,500 D. $12,000

31. Hunter Corporation holds 80 percent of the voting shares of Moss Company. On January 1, 20X8, Moss purchased $100,000 par value 12 percent first mortgage bonds of Hunter from Cruse for $115,000. Hunter originally issued the bonds to Cruse on January 1, 20X6, for $110,000. The bonds have an 8-year maturity from the date of issue. Moss' reported net income of $65,000 for 20X8, and Hunter reported income (excluding income from ownership of Moss's stock) of $90,000. Based on the information given above, what amount of interest income does Moss record for 20X8?

A. $12,000 B. $2,500 C. $7,500 D. $9,500

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32. Hunter Corporation holds 80 percent of the voting shares of Moss Company. On January 1, 20X8, Moss purchased $100,000 par value 12 percent first mortgage bonds of Hunter from Cruse for $115,000. Hunter originally issued the bonds to Cruse on January 1, 20X6, for $110,000. The bonds have an 8-year maturity from the date of issue. Moss' reported net income of $65,000 for 20X8, and Hunter reported income (excluding income from ownership of Moss's stock) of $90,000. Based on the information given above, what gain or loss on the retirement of bonds should be reported in the 20X8 consolidated income statement?

A. $6,250 gain B. $7,500 gain C. $7,500 loss D. $6,250 loss

33. Hunter Corporation holds 80 percent of the voting shares of Moss Company. On January 1, 20X8, Moss purchased $100,000 par value 12 percent first mortgage bonds of Hunter from Cruse for $115,000. Hunter originally issued the bonds to Cruse on January 1, 20X6, for $110,000. The bonds have an 8-year maturity from the date of issue. Moss' reported net income of $65,000 for 20X8, and Hunter reported income (excluding income from ownership of Moss's stock) of $90,000. Based on the information given above, what amount of consolidated net income should be reported for 20X8?

A. $163,750 B. $161,250 C. $146,250 D. $148,750

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34. Senior Corporation acquired 80 percent of Junior Company's voting shares on January 1, 20X8, at underlying book value. On that date, it also purchased $500,000 par value 8 percent Junior bonds, which had been issued on January 1, 20X5, with a 12-year maturity. During preparation of the consolidated financial statements for December 31, 20X8, the following eliminating entry was made in the worksheet:

Based on the information given above, what price did Senior pay to purchase the Junior bonds?

A. $530,000 B. $516,875 C. $533,750 D. $550,625

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35. Senior Corporation acquired 80 percent of Junior Company's voting shares on January 1, 20X8, at underlying book value. On that date, it also purchased $500,000 par value 8 percent Junior bonds, which had been issued on January 1, 20X5, with a 12-year maturity. During preparation of the consolidated financial statements for December 31, 20X8, the following eliminating entry was made in the worksheet:

Based on the information given above, what was the carrying amount of the bonds on Junior's books on the date of purchase?

A. $533,750 B. $516,875 C. $545,000 D. $550,625

Essay Questions

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36. A subsidiary issues bonds. The parent can then acquire the bonds either directly from the subsidiary or from a nonaffiliate that had originally acquired the subsidiary's bonds. Required: a) Discuss the parent's accounting as it relates to the preparation of consolidated financial statements, for their acquisition of the bonds: 1. from the nonaffiliate. 2. directly from the subsidiary. b) Why does it matter who the bonds are acquired from?

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37. Dundee Company issued $1,000,000 par value 10-year bonds at 102 on January 1, 20X5, which Mega Corporation purchased. The coupon rate on the bonds is 9 percent. Interest payments are made semiannually on July 1 and January 1. On July 1, 20X8, Perth Company purchased $500,000 par value of the bonds from Mega for $492,200. Perth owns 65 percent of Dundee's voting shares. Required: a. What amount of gain or loss will be reported in Dundee's 20X8 income statement on the retirement of bonds? b. Will a gain or loss be reported in the 20X8 consolidated financial statements for Perth for the constructive retirement of bonds? What amount will be reported? c. How much will Perth's purchase of the bonds change consolidated net income for 20X8? d. Prepare the worksheet eliminating entry or entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements at December 31, 20X8. e. Prepare the worksheet eliminating entry or entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements at December 31, 20X9.

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38. On January 1, 20X7, Gild Company acquired 60 percent of the outstanding common stock of Leeds Company at the book value of the shares acquired. On that date, the fair value of noncontrolling interest was equal to 40 percent of book value of Leeds. At the time of purchase, Leeds had common stock of $1,000,000 outstanding and retained earnings of $800,000. On December 31, 20X7, Gild purchased 50 percent of Leeds' bonds outstanding which were originally issued on January 2, 20X4, at 99. The total bond issue has a face value of $600,000, pays 10 percent interest annually, and has a 10-year maturity. Any premium or discount is amortized on a straight-line basis. Gild paid $306,000 for its investment in Leeds' bonds and intends to hold the bonds until maturity. Income and dividends for Gild and Leeds for 20X7 and 20X8 are as follows:

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39. On January 1, 20X7, Gild Company acquired 60 percent of the outstanding common stock of Leeds Company at the book value of the shares acquired. On that date, the fair value of noncontrolling interest was equal to 40 percent of book value of Leeds. At the time of purchase, Leeds had common stock of $1,000,000 outstanding and retained earnings of $800,000. On December 31, 20X7, Gild purchased 50 percent of Leeds' bonds outstanding which were originally issued on January 2, 20X4, at 99. The total bond issue has a face value of $600,000, pays 10 percent interest annually, and has a 10-year maturity. Any premium or discount is amortized on a straight-line basis. Gild paid $306,000 for its investment in Leeds' bonds and intends to hold the bonds until maturity. Income and dividends for Gild and Leeds for 20X7 and 20X8 are as follows:

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40. On January 1, 20X7, Gild Company acquired 60 percent of the outstanding common stock of Leeds Company at the book value of the shares acquired. On that date, the fair value of noncontrolling interest was equal to 40 percent of book value of Leeds. At the time of purchase, Leeds had common stock of $1,000,000 outstanding and retained earnings of $800,000. On December 31, 20X7, Gild purchased 50 percent of Leeds' bonds outstanding which were originally issued on January 2, 20X4, at 99. The total bond issue has a face value of $600,000, pays 10 percent interest annually, and has a 10-year maturity. Any premium or discount is amortized on a straight-line basis. Gild paid $306,000 for its investment in Leeds' bonds and intends to hold the bonds until maturity. Income and dividends for Gild and Leeds for 20X7 and 20X8 are as follows:

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Chapter 08 Appendix A Intercompany Indebtedness Answer Key

Multiple Choice Questions

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AACSB: Analytic AICPA FN: Decision Making

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Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-01 Understand and explain concepts associated with intercompany debt transfers. Topic: Consolidation Overview

A. I B. II C. Both I and II D. Neither I nor II

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When one company purchases the debt of an affiliate from an unrelated party, a gain or loss on the constructive retirement of debt is recognized by which of the following?

A. Option A B. Option B C. Option C D. Option D

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A. I B. II C. I and III D. I, II, and III

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A. I B. II C. Either I or II D. Neither I nor II

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A. $6,000 B. $6,500 C. $5,000 D. $10,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-02A Prepare journal entries and elimination entries related to direct intercompany debt transfers. Topic: Bond Sale Directly to an Affiliate (at a Discount)

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Light Corporation owns 80 percent of Sound Company's voting shares. On January 1, 20X7, Sound sold bonds with a par value of $300,000 at 95. Light purchased two thirds of the bonds; the remainder was sold to nonaffiliates. The bonds mature in ten years and pay an annual interest rate of 6 percent. Interest is paid semiannually on January 1 and July 1. Based on the information given above, what amount of interest receivable will be recorded by Light Corporation on December 31, 20X8, in its separate financial statements?

A. $5,000 B. $6,500 C. $10,000 D. $6,000

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10.

Light Corporation owns 80 percent of Sound Company's voting shares. On January 1, 20X7, Sound sold bonds with a par value of $300,000 at 95. Light purchased two thirds of the bonds; the remainder was sold to nonaffiliates. The bonds mature in ten years and pay an annual interest rate of 6 percent. Interest is paid semiannually on January 1 and July 1. Based on the information given above, what amount of interest expense will be eliminated in the preparation of the 20X8 consolidated financial statements?

A. $13,000 B. $13,500 C. $10,000 D. $15,000

11.

Master Corporation owns 85 percent of Servant Corporation's voting shares. On January 1, 20X8, Master Corporation sold $200,000 par value 8 percent bonds to Servant for $245,000. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Based on the information given above, in the preparation of the 20X8 consolidated financial statements, premium on bonds payable will be:

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Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-02A Prepare journal entries and elimination entries related to direct intercompany debt transfers. Topic: Bond Sale Directly to an Affiliate (at a Premium)

12.

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13.

Master Corporation owns 85 percent of Servant Corporation's voting shares. On January 1, 20X8, Master Corporation sold $200,000 par value 8 percent bonds to Servant for $245,000. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Based on the information given above, what amount of investment in bonds will be eliminated in the preparation of the 20X8 consolidated financial statements?

A. $240,500 B. $200,000 C. $245,000 D. $211,500

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14.

Moon Corporation issued $300,000 par value 10-year bonds at 107 on January 1, 20X3, which Star Corporation purchased. On July 1, 20X7, Sun Corporation purchased $120,000 face value of Moon bonds from Star. The bonds pay 12 percent interest annually on December 31. The preparation of consolidated financial statements for Moon and Sun at December 31, 20X9, required the following eliminating entry:

Based on the information given above, what percentage of the subsidiary's ownership does the parent company hold?

A. 75 percent B. 65 percent C. 80 percent D. 95 percent

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 08-03A Prepare journal entries and elimination entries related to debt purchased from a nonaffiliate at an amount less than book value. Topic: Purchase at an Amount Less than Book Value (Year 2)

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15.

Based on the information given above, what amount did Sun pay when it purchased the bonds on July 1, 20X7?

A. $118,020 B. $118,920 C. $118,620 D. $117,220

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16.

Based on the information given above, what amount of gain or loss on bond retirement is included in the 20X7 consolidated income statement?

A. $6,600 B. $4,800 C. $6,000 D. $5,400

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17.

Based on the information given above, if 20X9 consolidated net income of $50,000 would have been reported without the eliminating entry provided, what amount will actually be reported?

A. $47,900 B. $48,200 C. $49,400 D. $48,800

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18.

A. No gain or loss B. $85,000 gain C. $85,000 loss D. $35,000 loss

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-03A Prepare journal entries and elimination entries related to debt purchased from a nonaffiliate at an amount less than book value. Topic: Purchase at an Amount Less than Book Value (Year 1)

19.

ABC, a holder of a $400,000 XYZ Inc. bond, collected the interest due on June 30, 20X8, and then sold the bond to DEF Inc. for $365,000. On that date the bond issuer, XYZ, a 90 percent owner of DEF, had a $450,000 carrying amount for this bond. Based on the information given above, what was the effect of DEF's purchase of XYZ's bond on the noncontrolling interest amount reported in XYZ's June 30, 20X8, consolidated balance sheet?

A. No effect B. $35,000 increase C. $8,500 decrease D. $8,500 increase

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AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-03A Prepare journal entries and elimination entries related to debt purchased from a nonaffiliate at an amount less than book value. Topic: Purchase at an Amount Less than Book Value (Year 1)

20.

Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on December 31, 20X8, for $125,000. Mortar owns 75 percent of Granite's voting common stock. Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X8 consolidated financial statements?

A. $3,500 B. $2,800 C. $5,000 D. $2,500

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21.

Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on December 31, 20X8, for $125,000. Mortar owns 75 percent of Granite's voting common stock. Based on the information given above, what amount of gain or loss on bond retirement will be reported in the 20X8 consolidated financial statements?

A. $17,000 loss B. $12,800 loss C. $18,500 gain D. $22,200 gain

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22.

Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on December 31, 20X8, for $125,000. Mortar owns 75 percent of Granite's voting common stock. Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X9 consolidated financial statements?

A. $3,500 B. $2,800 C. $5,000 D. $2,500

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23.

Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on December 31, 20X8, for $125,000. Mortar owns 75 percent of Granite's voting common stock. Based on the information given above, what amount of interest income will be eliminated in the preparation of the 20X9 consolidated financial statements?

A. $17,000 B. $13,300 C. $18,500 D. $22,200

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24.

Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on December 31, 20X8, for $125,000. Mortar owns 75 percent of Granite's voting common stock. Based on the information given above, what amount of interest expense will be eliminated in the preparation of the 20X9 consolidated financial statements?

A. $17,000 B. $13,300 C. $18,500 D. $22,200

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25.

Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on December 31, 20X8, for $125,000. Mortar owns 75 percent of Granite's voting common stock. Based on the information given above, what amount of constructive gain will be allocated to noncontrolling interest in 20X8 consolidated financial statements?

A. $4,925 B. $5,550 C. $5,625 D. $4,625

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26.

Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on January 1, 20X8, for $122,000. Mortar owns 75 percent of Granite's voting common stock. Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X8 year-end consolidated financial statements?

A. $3,500 B. $2,800 C. $5,000 D. $2,500

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27.

Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on January 1, 20X8, for $122,000. Mortar owns 75 percent of Granite's voting common stock. Based on the information given above, what amount of gain or loss on bond retirement will be reported in the 20X8 consolidated financial statements?

A. $17,000 B. $12,800 C. $18,500 D. $22,200

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28.

Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on January 1, 20X8, for $122,000. Mortar owns 75 percent of Granite's voting common stock. Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X9 year-end consolidated financial statements?

A. $3,500 B. $2,800 C. $5,000 D. $2,500

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29.

Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on January 1, 20X8, for $122,000. Mortar owns 75 percent of Granite's voting common stock. Based on the information given above, what amount of interest income will be eliminated in the preparation of the 20X9 consolidated financial statements?

A. $17,000 B. $13,300 C. $18,500 D. $22,200

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30.

Hunter Corporation holds 80 percent of the voting shares of Moss Company. On January 1, 20X8, Moss purchased $100,000 par value 12 percent first mortgage bonds of Hunter from Cruse for $115,000. Hunter originally issued the bonds to Cruse on January 1, 20X6, for $110,000. The bonds have an 8-year maturity from the date of issue. Moss' reported net income of $65,000 for 20X8, and Hunter reported income (excluding income from ownership of Moss's stock) of $90,000. Based on the information given above, what amount of interest expense does Hunter record annually?

A. $10,750 B. $9,500 C. $2,500 D. $12,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 08-04A Prepare journal entries and elimination entries related to debt purchased from a nonaffiliate at an amount more than book value. Topic: Purchase at an Amount Higher than Book Value (Year 2)

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31.

A. $12,000 B. $2,500 C. $7,500 D. $9,500

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32.

Hunter Corporation holds 80 percent of the voting shares of Moss Company. On January 1, 20X8, Moss purchased $100,000 par value 12 percent first mortgage bonds of Hunter from Cruse for $115,000. Hunter originally issued the bonds to Cruse on January 1, 20X6, for $110,000. The bonds have an 8-year maturity from the date of issue. Moss' reported net income of $65,000 for 20X8, and Hunter reported income (excluding income from ownership of Moss's stock) of $90,000. Based on the information given above, what gain or loss on the retirement of bonds should be reported in the 20X8 consolidated income statement?

A. $6,250 gain B. $7,500 gain C. $7,500 loss D. $6,250 loss

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33.

A. $163,750 B. $161,250 C. $146,250 D. $148,750

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34.

Senior Corporation acquired 80 percent of Junior Company's voting shares on January 1, 20X8, at underlying book value. On that date, it also purchased $500,000 par value 8 percent Junior bonds, which had been issued on January 1, 20X5, with a 12-year maturity. During preparation of the consolidated financial statements for December 31, 20X8, the following eliminating entry was made in the worksheet:

Based on the information given above, what price did Senior pay to purchase the Junior bonds?

A. $530,000 B. $516,875 C. $533,750 D. $550,625

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35.

Based on the information given above, what was the carrying amount of the bonds on Junior's books on the date of purchase?

A. $533,750 B. $516,875 C. $545,000 D. $550,625

Essay Questions

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36.

AACSB: Communication AICPA FN: Reporting Blooms: Understand Difficulty: 2 Medium

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Learning Objective: 08-01 Understand and explain concepts associated with intercompany debt transfers. Topic: Consolidation Overview

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37.

Dundee Company issued $1,000,000 par value 10-year bonds at 102 on January 1, 20X5, which Mega Corporation purchased. The coupon rate on the bonds is 9 percent. Interest payments are made semiannually on July 1 and January 1. On July 1, 20X8, Perth Company purchased $500,000 par value of the bonds from Mega for $492,200. Perth owns 65 percent of Dundee's voting shares. Required: a. What amount of gain or loss will be reported in Dundee's 20X8 income statement on the retirement of bonds? b. Will a gain or loss be reported in the 20X8 consolidated financial statements for Perth for the constructive retirement of bonds? What amount will be reported? c. How much will Perth's purchase of the bonds change consolidated net income for 20X8? d. Prepare the worksheet eliminating entry or entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements at December 31, 20X8. e. Prepare the worksheet eliminating entry or entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements at December 31, 20X9.

a. No gain or loss will be reported by Dundee b. A gain of $14,300 will be reported:

c. Consolidated net income for 20X8 will increase by $13,200:

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d. Eliminating entries, December 31, 20X8

e. Eliminating entries, December 31, 20X9

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38.

On January 1, 20X7, Gild Company acquired 60 percent of the outstanding common stock of Leeds Company at the book value of the shares acquired. On that date, the fair value of noncontrolling interest was equal to 40 percent of book value of Leeds. At the time of purchase, Leeds had common stock of $1,000,000 outstanding and retained earnings of $800,000. On December 31, 20X7, Gild purchased 50 percent of Leeds' bonds outstanding which were originally issued on January 2, 20X4, at 99. The total bond issue has a face value of $600,000, pays 10 percent interest annually, and has a 10-year maturity. Any premium or discount is amortized on a straight-line basis. Gild paid $306,000 for its investment in Leeds' bonds and intends to hold the bonds until maturity. Income and dividends for Gild and Leeds for 20X7 and 20X8 are as follows:

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39.

On January 1, 20X7, Gild Company acquired 60 percent of the outstanding common stock of Leeds Company at the book value of the shares acquired. On that date, the fair value of noncontrolling interest was equal to 40 percent of book value of Leeds. At the time of purchase, Leeds had common stock of $1,000,000 outstanding and retained earnings of $800,000. On December 31, 20X7, Gild purchased 50 percent of Leeds' bonds outstanding which were originally issued on January 2, 20X4, at 99. The total bond issue has a face value of $600,000, pays 10 percent interest annually, and has a 10-year maturity. Any premium or discount is amortized on a straight-line basis. Gild paid $306,000 for its investment in Leeds' bonds and intends to hold the bonds until maturity. Income and dividends for Gild and Leeds for 20X7 and 20X8 are as follows:

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40.

On January 1, 20X7, Gild Company acquired 60 percent of the outstanding common stock of Leeds Company at the book value of the shares acquired. On that date, the fair value of noncontrolling interest was equal to 40 percent of book value of Leeds. At the time of purchase, Leeds had common stock of $1,000,000 outstanding and retained earnings of $800,000. On December 31, 20X7, Gild purchased 50 percent of Leeds' bonds outstanding which were originally issued on January 2, 20X4, at 99. The total bond issue has a face value of $600,000, pays 10 percent interest annually, and has a 10-year maturity. Any premium or discount is amortized on a straight-line basis. Gild paid $306,000 for its investment in Leeds' bonds and intends to hold the bonds until maturity. Income and dividends for Gild and Leeds for 20X7 and 20X8 are as follows:

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Chapter 09 Consolidation Ownership Issues

Multiple Choice Questions

1. On January 1, 20X9, Company A acquired 80 percent of the common stock and 60 percent of the preferred stock of Company B, for $400,000 and $60,000, respectively. At the time of acquisition, the fair value of the common shares of Company B held by the noncontrolling interest was $100,000. Company B's balance sheet contained the following balances:

For the year ended December 31, 20X9, Company B reported net income of $100,000 and paid dividends of $40,000. The preferred stock is cumulative and pays an annual dividend of 10 percent. Based on the preceding information, what will be the equity method income reported by Company A from its investment in Company B during 20X9?

A. $32,000 B. $30,000 C. $72,000 D. $48,000

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2. On January 1, 20X9, Company A acquired 80 percent of the common stock and 60 percent of the preferred stock of Company B, for $400,000 and $60,000, respectively. At the time of acquisition, the fair value of the common shares of Company B held by the noncontrolling interest was $100,000. Company B's balance sheet contained the following balances:

For the year ended December 31, 20X9, Company B reported net income of $100,000 and paid dividends of $40,000. The preferred stock is cumulative and pays an annual dividend of 10 percent. Based on the preceding information, the eliminating entry to prepare the consolidated financial statements for Company A as of December 31, 20X9 will include a credit to Investment in Company B—Common Stock for:

A. 506,000 B. 440,000 C. 400,000 D. 500,000

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3. On January 1, 20X9, Company A acquired 80 percent of the common stock and 60 percent of the preferred stock of Company B, for $400,000 and $60,000, respectively. At the time of acquisition, the fair value of the common shares of Company B held by the noncontrolling interest was $100,000. Company B's balance sheet contained the following balances:

For the year ended December 31, 20X9, Company B reported net income of $100,000 and paid dividends of $40,000. The preferred stock is cumulative and pays an annual dividend of 10 percent. Based on the preceding information, the eliminating entry to prepare the consolidated financial statements for Company A as of December 31, 20X9 will include a credit to noncontrolling interest in net income of Company B for:

A. 140,000 B. 154,000 C. 152,000 D. 150,000

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4. Winner Corporation acquired 80 percent of the common shares and 70 percent of the preferred shares of First Corporation at underlying book value on January 1, 20X9. At that date, the fair value of the noncontrolling interest in First's common stock was equal to 20 percent of the book value of its common stock. First's balance sheet at the time of acquisition contained the following balances:

The preferred shares are cumulative and have a 10 percent annual dividend rate and are four years in arrears on January 1, 20X9. All of the $5 par value preferred shares are callable at $6 per share. During 20X9, First reported net income of $100,000 and paid no dividends. Based on the preceding information, what is First's contribution to consolidated net income for 20X9?

A. $80,000 B. $100,000 C. $90,000 D. $50,000

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5. Winner Corporation acquired 80 percent of the common shares and 70 percent of the preferred shares of First Corporation at underlying book value on January 1, 20X9. At that date, the fair value of the noncontrolling interest in First's common stock was equal to 20 percent of the book value of its common stock. First's balance sheet at the time of acquisition contained the following balances:

The preferred shares are cumulative and have a 10 percent annual dividend rate and are four years in arrears on January 1, 20X9. All of the $5 par value preferred shares are callable at $6 per share. During 20X9, First reported net income of $100,000 and paid no dividends. Based on the preceding information, what will be the amount of income to be assigned to the noncontrolling interest in the 20X9 consolidated income statement?

A. $21,000 B. $18,000 C. $23,000 D. $15,000

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6. Winner Corporation acquired 80 percent of the common shares and 70 percent of the preferred shares of First Corporation at underlying book value on January 1, 20X9. At that date, the fair value of the noncontrolling interest in First's common stock was equal to 20 percent of the book value of its common stock. First's balance sheet at the time of acquisition contained the following balances:

The preferred shares are cumulative and have a 10 percent annual dividend rate and are four years in arrears on January 1, 20X9. All of the $5 par value preferred shares are callable at $6 per share. During 20X9, First reported net income of $100,000 and paid no dividends. Based on the preceding information, the amount assigned to noncontrolling stockholders' share of preferred stock interest in the preparation of a consolidated balance sheet on January 1, 20X9, is:

A. $40,000 B. $42,000 C. $36,000 D. $48,000

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7. Winner Corporation acquired 80 percent of the common shares and 70 percent of the preferred shares of First Corporation at underlying book value on January 1, 20X9. At that date, the fair value of the noncontrolling interest in First's common stock was equal to 20 percent of the book value of its common stock. First's balance sheet at the time of acquisition contained the following balances:

The preferred shares are cumulative and have a 10 percent annual dividend rate and are four years in arrears on January 1, 20X9. All of the $5 par value preferred shares are callable at $6 per share. During 20X9, First reported net income of $100,000 and paid no dividends. Based on the preceding information, what is the portion of First's retained earnings assignable to its preferred shareholders on January 1, 20X9?

A. $40,000 B. $50,000 C. $60,000 D. $70,000

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8. Winner Corporation acquired 80 percent of the common shares and 70 percent of the preferred shares of First Corporation at underlying book value on January 1, 20X9. At that date, the fair value of the noncontrolling interest in First's common stock was equal to 20 percent of the book value of its common stock. First's balance sheet at the time of acquisition contained the following balances:

The preferred shares are cumulative and have a 10 percent annual dividend rate and are four years in arrears on January 1, 20X9. All of the $5 par value preferred shares are callable at $6 per share. During 20X9, First reported net income of $100,000 and paid no dividends. Based on the information provided, what is the book value of the common stock on January 1, 20X9?

A. $410,000 B. $360,000 C. $390,000 D. $350,000

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9. Winner Corporation acquired 80 percent of the common shares and 70 percent of the preferred shares of First Corporation at underlying book value on January 1, 20X9. At that date, the fair value of the noncontrolling interest in First's common stock was equal to 20 percent of the book value of its common stock. First's balance sheet at the time of acquisition contained the following balances:

The preferred shares are cumulative and have a 10 percent annual dividend rate and are four years in arrears on January 1, 20X9. All of the $5 par value preferred shares are callable at $6 per share. During 20X9, First reported net income of $100,000 and paid no dividends. Based on the information provided, what amount will be reported as the noncontrolling interest in the consolidated balance sheet on January 1, 20X9?

A. $70,000 B. $130,000 C. $118,000 D. $142,000

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10. Micron Corporation owns 75 percent of the common shares and 60 percent of the preferred shares of Stanley Company, all acquired at underlying book value on January 1, 20X8. At that date, the fair value of the noncontrolling interest in Stanley's common stock was equal to 25 percent of the book value of its common stock. The balance sheets of Micron and Stanley immediately after the acquisition contained these balances:

Stanley's preferred stock pays a 12 percent dividend and is cumulative. For 20X8, Stanley reports net income of $40,000 and pays no dividends. Micron reports income from its separate operations of $75,000 and pays dividends of $30,000 during 20X8. Based on the preceding information, what is the total noncontrolling interest reported in the consolidated balance sheet as of January 1, 20X8?

A. $80,000 B. $40,000 C. $50,000 D. $60,000

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11. Micron Corporation owns 75 percent of the common shares and 60 percent of the preferred shares of Stanley Company, all acquired at underlying book value on January 1, 20X8. At that date, the fair value of the noncontrolling interest in Stanley's common stock was equal to 25 percent of the book value of its common stock. The balance sheets of Micron and Stanley immediately after the acquisition contained these balances:

Stanley's preferred stock pays a 12 percent dividend and is cumulative. For 20X8, Stanley reports net income of $40,000 and pays no dividends. Micron reports income from its separate operations of $75,000 and pays dividends of $30,000 during 20X8. Based on the preceding information, what is the income assigned to the noncontrolling interest in the 20X8 consolidated income statement?

A. $10,000 B. $7,000 C. $11,800 D. $4,800

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12. Micron Corporation owns 75 percent of the common shares and 60 percent of the preferred shares of Stanley Company, all acquired at underlying book value on January 1, 20X8. At that date, the fair value of the noncontrolling interest in Stanley's common stock was equal to 25 percent of the book value of its common stock. The balance sheets of Micron and Stanley immediately after the acquisition contained these balances:

Stanley's preferred stock pays a 12 percent dividend and is cumulative. For 20X8, Stanley reports net income of $40,000 and pays no dividends. Micron reports income from its separate operations of $75,000 and pays dividends of $30,000 during 20X8. Based on the preceding information, what amount of income is attributable to the controlling interest in the consolidated income statement for 20X8?

A. $75,000 B. $105,000 C. $96,000 D. $103,200

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13. Micron Corporation owns 75 percent of the common shares and 60 percent of the preferred shares of Stanley Company, all acquired at underlying book value on January 1, 20X8. At that date, the fair value of the noncontrolling interest in Stanley's common stock was equal to 25 percent of the book value of its common stock. The balance sheets of Micron and Stanley immediately after the acquisition contained these balances:

Stanley's preferred stock pays a 12 percent dividend and is cumulative. For 20X8, Stanley reports net income of $40,000 and pays no dividends. Micron reports income from its separate operations of $75,000 and pays dividends of $30,000 during 20X8. Based on the preceding information, what is the total stockholders' equity reported in the consolidated balance sheet as of January 1, 20X8?

A. $450,000 B. $530,000 C. $490,000 D. $370,000

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14. Micron Corporation owns 75 percent of the common shares and 60 percent of the preferred shares of Stanley Company, all acquired at underlying book value on January 1, 20X8. At that date, the fair value of the noncontrolling interest in Stanley's common stock was equal to 25 percent of the book value of its common stock. The balance sheets of Micron and Stanley immediately after the acquisition contained these balances:

Stanley's preferred stock pays a 12 percent dividend and is cumulative. For 20X8, Stanley reports net income of $40,000 and pays no dividends. Micron reports income from its separate operations of $75,000 and pays dividends of $30,000 during 20X8. Based on the preceding information, what amount is reported as preferred stock outstanding reported in the consolidated balance sheet as of January 1, 20X8?

A. $0 B. $40,000 C. $50,000 D. $44,000

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15. Janet Corporation holds 75 percent of Slider Corporation's voting common stock, acquired at book value.The fair value of the noncontrolling interest at the date of acquisition was equal to 25 percent of the book value of Slider Corporation. On December 31, 20X8, Slider Corporation acquired 25 percent of Janet Corporation's stock. Slider records dividends received from Janet as nonoperating income. In 20X9, Janet reported operating income of $100,000 and paid dividends of $40,000. During the same year, Slider reported operating income of $75,000 and paid $20,000 in dividends. Based on the information provided, what amount will be reported as consolidated net income for 20X9 under the treasury stock method?

A. $150,000 B. $100,000 C. $75,000 D. $175,000

16. Janet Corporation holds 75 percent of Slider Corporation's voting common stock, acquired at book value.The fair value of the noncontrolling interest at the date of acquisition was equal to 25 percent of the book value of Slider Corporation. On December 31, 20X8, Slider Corporation acquired 25 percent of Janet Corporation's stock. Slider records dividends received from Janet as nonoperating income. In 20X9, Janet reported operating income of $100,000 and paid dividends of $40,000. During the same year, Slider reported operating income of $75,000 and paid $20,000 in dividends. Based on the information provided, what amount will be reported as income assigned to the controlling interest for 20X9 under the treasury stock method?

A. $18,750 B. $156,250 C. $175,000 D. $100,000

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17. Vision Corporation acquired 75 percent of the stock of Meta Company on January 1, 20X7, for $225,000.At that date, the fair value of the noncontrolling interest was $75,000. Meta's balance sheet contained the following amounts at the time of the combination:

During each of the next three years, Meta reported net income of $30,000 and paid dividends of $10,000. On January 1, 20X9, Vision sold 1,500 shares of Meta's $10 par value shares for $60,000 in cash. Vision used the fully adjusted equity method in accounting for its ownership of Meta Company. Based on the preceding information, what was the balance in the investment account reported by Vision on January 1, 20X9, before its sale of shares?

A. $225,000 B. $285,000 C. $245,000 D. $255,000

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18. Vision Corporation acquired 75 percent of the stock of Meta Company on January 1, 20X7, for $225,000.At that date, the fair value of the noncontrolling interest was $75,000. Meta's balance sheet contained the following amounts at the time of the combination:

During each of the next three years, Meta reported net income of $30,000 and paid dividends of $10,000. On January 1, 20X9, Vision sold 1,500 shares of Meta's $10 par value shares for $60,000 in cash. Vision used the fully adjusted equity method in accounting for its ownership of Meta Company. Based on the preceding information, in the journal entry recorded by Vision for sale of shares:

A. Cash will be credited for $60,000. B. Investment in Meta Stock will be credited for $51,000. C. Investment in Meta Stock will be credited for $60,000. D. Additional Paid-in Capital will be credited for $45,000.

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19. Vision Corporation acquired 75 percent of the stock of Meta Company on January 1, 20X7, for $225,000.At that date, the fair value of the noncontrolling interest was $75,000. Meta's balance sheet contained the following amounts at the time of the combination:

During each of the next three years, Meta reported net income of $30,000 and paid dividends of $10,000. On January 1, 20X9, Vision sold 1,500 shares of Meta's $10 par value shares for $60,000 in cash. Vision used the fully adjusted equity method in accounting for its ownership of Meta Company. Based on the preceding information, in the journal entry recorded by Vision for sale of shares, Additional Paid-in Capital will be credited for:

A. $0. B. $15,000. C. $9,000. D. $45,000.

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20. Vision Corporation acquired 75 percent of the stock of Meta Company on January 1, 20X7, for $225,000.At that date, the fair value of the noncontrolling interest was $75,000. Meta's balance sheet contained the following amounts at the time of the combination:

During each of the next three years, Meta reported net income of $30,000 and paid dividends of $10,000. On January 1, 20X9, Vision sold 1,500 shares of Meta's $10 par value shares for $60,000 in cash. Vision used the fully adjusted equity method in accounting for its ownership of Meta Company. Based on the preceding information, in the elimination entries to complete a full consolidation worksheet for 20X9, noncontrolling interest in the net income of Meta Co. will be credited for:

A. $12,000. B. $7,500. C. $8,000. D. $2,500.

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21. Vision Corporation acquired 75 percent of the stock of Meta Company on January 1, 20X7, for $225,000.At that date, the fair value of the noncontrolling interest was $75,000. Meta's balance sheet contained the following amounts at the time of the combination:

During each of the next three years, Meta reported net income of $30,000 and paid dividends of $10,000. On January 1, 20X9, Vision sold 1,500 shares of Meta's $10 par value shares for $60,000 in cash. Vision used the fully adjusted equity method in accounting for its ownership of Meta Company. Based on the preceding information, in the eliminating entries to complete a full consolidation worksheet, Investment in Meta Stock at January 1, 20X9, will be credited for:

A. $255,000. B. $240,000. C. $204,000. D. $136,000.

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22. Perfect Corporation acquired 70 percent of Trevor Company's shares on December 31, 2008, for $140,000. At that date, the fair value of the noncontrolling interest was $60,000. On January 1, 2010, Perfect acquired an additional 10 percent of Trevor's common stock for $32,500. Summarized balance sheets for Trevor on the dates indicated are as follows:

Trevor paid dividends of $10,000 in each of the three years. Perfect uses the fully adjusted equity method in accounting for its investment in Trevor and amortizes all differentials over 5 years against the related investment income.All differentials are assigned to patents in the consolidated financial statements. Based on the preceding information, Trevor Company's net income for 2009 and 2010 are:

A. $10,000 and $20,000 respectively. B. $25,000 and $35,000 respectively. C. $35,000 and $45,000 respectively. D. $25,000 and $45,000 respectively.

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23. Perfect Corporation acquired 70 percent of Trevor Company's shares on December 31, 2008, for $140,000. At that date, the fair value of the noncontrolling interest was $60,000. On January 1, 2010, Perfect acquired an additional 10 percent of Trevor's common stock for $32,500. Summarized balance sheets for Trevor on the dates indicated are as follows:

A. $164,500 B. $157,500 C. $165,000 D. $168,000

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24. Perfect Corporation acquired 70 percent of Trevor Company's shares on December 31, 2008, for $140,000. At that date, the fair value of the noncontrolling interest was $60,000. On January 1, 2010, Perfect acquired an additional 10 percent of Trevor's common stock for $32,500. Summarized balance sheets for Trevor on the dates indicated are as follows:

Trevor paid dividends of $10,000 in each of the three years. Perfect uses the fully adjusted equity method in accounting for its investment in Trevor and amortizes all differentials over 5 years against the related investment income. All differentials are assigned to patents in the consolidated financial statements. Based on the preceding information, what was the balance in Perfect's Investment in Trevor Company Stock account on December 31, 2010?

A. $211,500 B. $218,000 C. $173,000 D. $216,000

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25. Cinema Company acquired 70 percent of Movie Corporation's shares on December 31, 20X5, at underlying book value of $98,000. At that date, the fair value of the noncontrolling interest was equal to 30 percent of the book value of Movie Corporation. Movie's balance sheet on January 1, 20X8, contained the following balances:

On January 1, 20X8, Movie acquired 5,000 of its own $2 par value common shares from Nonaffiliated Corporation for $6 per share. Based on the preceding information, what is the increase in the book value of the equity attributable to the parent as a result of the repurchase of shares by Movie Corporation?

A. $19,375 B. $6,125 C. $2,625 D. $9,000

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26. Cinema Company acquired 70 percent of Movie Corporation's shares on December 31, 20X5, at underlying book value of $98,000. At that date, the fair value of the noncontrolling interest was equal to 30 percent of the book value of Movie Corporation. Movie's balance sheet on January 1, 20X8, contained the following balances:

On January 1, 20X8, Movie acquired 5,000 of its own $2 par value common shares from Nonaffiliated Corporation for $6 per share. Based on the preceding information, what will be the journal entry to be recorded on Cinema Company's books to recognize the change in the book value of the shares it holds?

A. Option A B. Option B C. Option C D. Option D

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27. Cinema Company acquired 70 percent of Movie Corporation's shares on December 31, 20X5, at underlying book value of $98,000. At that date, the fair value of the noncontrolling interest was equal to 30 percent of the book value of Movie Corporation. Movie's balance sheet on January 1, 20X8, contained the following balances:

On January 1, 20X8, Movie acquired 5,000 of its own $2 par value common shares from Nonaffiliated Corporation for $6 per share. Based on the preceding information, the eliminating entry needed in preparing a consolidated balance sheet immediately following the acquisition of shares will include:

A. a credit to NCI in NA of Movie Corp. for $19,375. B. a credit to Additional Paid-In Capital for $75,000. C. a debit to Treasury Shares for $30,000. D. a credit to Investment in Movie stock for $6,125.

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28. Cinema Company acquired 70 percent of Movie Corporation's shares on December 31, 20X5, at underlying book value of $98,000. At that date, the fair value of the noncontrolling interest was equal to 30 percent of the book value of Movie Corporation. Movie's balance sheet on January 1, 20X8, contained the following balances:

On January 1, 20X8, Movie acquired 5,000 of its own $2 par value common shares from Nonaffiliated Corporation for $6 per share. Based on the preceding information, in the eliminating entry needed in preparing a consolidated balance sheet immediately following the acquisition of shares, Investment in Movie stock will be credited for:

A. $165,625. B. $135,625. C. $185,000. D. $155,000.

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29. On January 1, 20X7, Pisa Company acquired 80 percent of Siena Company by purchasing 40,000 shares of Siena's common stock. There was no differential related to this transaction. The noncontrolling interest had a fair value equal to 20 percent of book value. The book value of Siena on December 31, 20X7 was as follows:

On January 1, 20X8, Pisa purchased an additional 12,500 shares directly from Siena for $25 per share. Based on the preceding information, by what amount did the Investment in Siena account change?

A. Increase of $296,500 B. Decrease of $296,500 C. Increase of $64,000 D. Decrease of $64,000

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30. On January 1, 20X7, Pisa Company acquired 80 percent of Siena Company by purchasing 40,000 shares of Siena's common stock. There was no differential related to this transaction. The noncontrolling interest had a fair value equal to 20 percent of book value. The book value of Siena on December 31, 20X7 was as follows:

On January 1, 20X8, Pisa purchased an additional 12,500 shares directly from Siena for $25 per share. Based on the preceding information, the elimination entry to prepare the consolidated financial statements on December 31, 20X7 would include a:

A. credit to common stock for $625,000 B. debit to retained earnings for $37,500 C. credit to Investment in Siena Co. for $976,500 D. credit to NCI in the net assets of Siena Co. for $232,500

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31. On January 1, 20X7, Pisa Company acquired 80 percent of Siena Company by purchasing 40,000 shares of Siena's common stock. There was no differential related to this transaction. The noncontrolling interest had a fair value equal to 20 percent of book value. The book value of Siena on December 31, 20X7 was as follows:

On January 1, 20X8, Pisa purchased an additional 12,500 shares directly from Siena for $25 per share. Based on the preceding information, the ending balance in Additional Paid-In Capital would be:

A. $0 B. $187,500 C. $312,500 D. $125,000

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32. On January 1, 20X7, Pisa Company acquired 80 percent of Siena Company by purchasing 40,000 shares of Siena's common stock. There was no differential related to this transaction. The noncontrolling interest had a fair value equal to 20 percent of book value. The book value of Siena on December 31, 20X7 was as follows:

On January 1, 20X8, Siena sold an additional 12,500 shares to a nonaffiliate for $25 per share. Based on the preceding information, what is Pisa's new ownership interest?

A. 84 percent B. 55 percent C. 70 percent D. 64 percent

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33. On January 1, 20X7, Pisa Company acquired 80 percent of Siena Company by purchasing 40,000 shares of Siena's common stock. There was no differential related to this transaction. The noncontrolling interest had a fair value equal to 20 percent of book value. The book value of Siena on December 31, 20X7 was as follows:

On January 1, 20X8, Siena sold an additional 12,500 shares to a nonaffiliate for $25 per share. Based on the preceding information, what is the ending balance in noncontrolling interest in the net assets of Siena?

A. $186,000 B. $418,500 C. $523,125 D. $232,500

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34. On January 1, 20X7, Pisa Company acquired 80 percent of Siena Company by purchasing 40,000 shares of Siena's common stock. There was no differential related to this transaction. The noncontrolling interest had a fair value equal to 20 percent of book value. The book value of Siena on December 31, 20X7 was as follows:

On January 1, 20X8, Siena sold an additional 12,500 shares to a nonaffiliate for $25 per share. Based on the preceding information, the elimination entry to prepare the consolidated financial statements on December 31, 20X7 would include a:

A. debit to common stock for $812,500 B. credit to additional paid-in capital for $187,500 C. credit to Investment in Siena Co. for $744,000 D. credit to retained earnings for $350,000

35. Windsor Corporation owns 75 percent of Elven Corporation's outstanding common stock. Elven, in turn, owns 15 percent of Windsor's outstanding common stock. What percent of the dividends paid by Windsor is reported as dividends declared in the consolidated retained earnings statement?

A. None B. 100 percent C. 85 percent D. 75 percent

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36. On January 1, 20X9, A Company acquired 85 percent of B Company's voting common stock for $425,000. At that date, the fair value of the noncontrolling interest of B Company was $75,000. Immediately after A Company acquired its ownership, B Company acquired 75 percent of C Company's stock for $150,000. The fair value of the noncontrolling interest of C Company was $50,000 at that date. At January 1, 20X9, the stockholders' equity sections of the balance sheets of the companies were as follows:

During 20X9, A Company reported operating income of $175,000 and paid dividends of $50,000. B Company reported operating income of $125,000 and paid dividends of $40,000. C Company reported net income of $100,000 and paid dividends of $25,000. Based on the information provided, what amount of consolidated net income will A Company report for 20X9?

A. $175,000 B. $285,000 C. $356,250 D. $400,000

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37. On January 1, 20X9, A Company acquired 85 percent of B Company's voting common stock for $425,000. At that date, the fair value of the noncontrolling interest of B Company was $75,000. Immediately after A Company acquired its ownership, B Company acquired 75 percent of C Company's stock for $150,000. The fair value of the noncontrolling interest of C Company was $50,000 at that date. At January 1, 20X9, the stockholders' equity sections of the balance sheets of the companies were as follows:

A. $125,000 B. $200,000 C. $170,000 D. $181,250

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38. On January 1, 20X9, A Company acquired 85 percent of B Company's voting common stock for $425,000. At that date, the fair value of the noncontrolling interest of B Company was $75,000. Immediately after A Company acquired its ownership, B Company acquired 75 percent of C Company's stock for $150,000. The fair value of the noncontrolling interest of C Company was $50,000 at that date. At January 1, 20X9, the stockholders' equity sections of the balance sheets of the companies were as follows:

During 20X9, A Company reported operating income of $175,000 and paid dividends of $50,000. B Company reported operating income of $125,000 and paid dividends of $40,000. C Company reported net income of $100,000 and paid dividends of $25,000. Based on the information provided, what amount of income will be assigned to the noncontrolling interest in the consolidated income statement for 20X9?

A. $55,000 B. $25,000 C. $30,000 D. $43,750

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39. On January 1, 20X9, A Company acquired 85 percent of B Company's voting common stock for $425,000. At that date, the fair value of the noncontrolling interest of B Company was $75,000. Immediately after A Company acquired its ownership, B Company acquired 75 percent of C Company's stock for $150,000. The fair value of the noncontrolling interest of C Company was $50,000 at that date. At January 1, 20X9, the stockholders' equity sections of the balance sheets of the companies were as follows:

During 20X9, A Company reported operating income of $175,000 and paid dividends of $50,000. B Company reported operating income of $125,000 and paid dividends of $40,000. C Company reported net income of $100,000 and paid dividends of $25,000. Based on the information provided, what amount of income will be assigned to the controlling interest in the consolidated income statement for 20X9?

A. $400,000 B. $345,000 C. $285,000 D. $175,000

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40. X Corporation owns 80 percent of Y Corporation's common stock and 40 percent of Z Corporation's common stock. Additionally, Y Corporation owns 35 percent of Z Corporation's common stock. The acquisitions were made at book values. The following information is available for 20X8:

Based on the information provided, what amount of consolidated net income will X Corporation report for 20X8?

A. $148,750 B. $175,000 C. $150,000 D. $158,750

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41. X Corporation owns 80 percent of Y Corporation's common stock and 40 percent of Z Corporation's common stock. Additionally, Y Corporation owns 35 percent of Z Corporation's common stock. The acquisitions were made at book values. The following information is available for 20X8:

Based on the information provided, what amount of income will be assigned to the noncontrolling interest in the 20X8 consolidated income statement?

A. $23,750 B. $25,000 C. $18,000 D. $33,750

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42. X Corporation owns 80 percent of Y Corporation's common stock and 40 percent of Z Corporation's common stock. Additionally, Y Corporation owns 35 percent of Z Corporation's common stock. The acquisitions were made at book values. The following information is available for 20X8:

Based on the information provided, what amount of income will be assigned to the controlling interest in the 20X8 consolidated income statement?

A. $130,750 B. $150,000 C. $141,250 D. $157,000

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43. X Corporation owns 80 percent of Y Corporation's common stock and 40 percent of Z Corporation's common stock. Additionally, Y Corporation owns 35 percent of Z Corporation's common stock. The acquisitions were made at book values. The following information is available for 20X8:

Based on the information provided, what amount will be reported as dividends declared in X Corporation's 20X8 consolidated retained earnings statement?

A. $30,000 B. $50,000 C. $60,000 D. $0

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44. Lemon Corporation acquired 80 percent of Bricks Corporation's common shares on January 1, 20X7, at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 20 percent of the book value of Bricks Corporation. Bricks prepared the following balance sheet as of December 31, 20X8:

On January 1, 20X9, Bricks declares a stock dividend of 9,000 shares on its $5 par value common stock. The current market price per share of Bricks stock on January 1, 20X9, is $20. Based on the preceding information, the investment elimination entry required to prepare a consolidated balance sheet immediately after the stock dividend is issued will include a debit to Additional Paid-In Capital for:

A. $50,000. B. $95,000. C. $230,000. D. $185,000.

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45. Lemon Corporation acquired 80 percent of Bricks Corporation's common shares on January 1, 20X7, at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 20 percent of the book value of Bricks Corporation. Bricks prepared the following balance sheet as of December 31, 20X8:

A. $200,000 B. $65,000 C. $155,000 D. $20,000

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46. Lemon Corporation acquired 80 percent of Bricks Corporation's common shares on January 1, 20X7, at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 20 percent of the book value of Bricks Corporation. Bricks prepared the following balance sheet as of December 31, 20X8:

On January 1, 20X9, Bricks declares a stock dividend of 9,000 shares on its $5 par value common stock. The current market price per share of Bricks stock on January 1, 20X9, is $20. Begin with information provided, but assume instead that Bricks declared a stock dividend of 3,000 shares on its $5 par value common stock. The investment elimination entry required to prepare a consolidated balance sheet immediately after the stock dividend is issued will include a debit to Additional Paid-In Capital for:

A. $65,000. B. $95,000. C. $50,000. D. $110,000.

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47. Lemon Corporation acquired 80 percent of Bricks Corporation's common shares on January 1, 20X7, at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 20 percent of the book value of Bricks Corporation. Bricks prepared the following balance sheet as of December 31, 20X8:

On January 1, 20X9, Bricks declares a stock dividend of 9,000 shares on its $5 par value common stock. The current market price per share of Bricks stock on January 1, 20X9, is $20. Begin with the information provided, but assume instead that Bricks declared a stock dividend of 3,000 shares on its $5 par value common stock. The investment elimination entry required to prepare a consolidated balance sheet immediately after the stock dividend is issued will include a debit to Retained Earnings for:

A. $185,000. B. $65,000. C. $155,000. D. $200,000

Essay Questions

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48. Portfolio Corporation acquired 70 percent ownership of Index Company on January 1, 20X6, at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 30 percent of the book value of Index. On January 1, 20X8, Portfolio sold 1,000 shares of Index Company for $20,000 to Adventure Corporation and recorded a $5,000 gain. Trial balances for the companies on December 31, 20X8, contain the following data:

Index Company's net income was earned evenly throughout the year. Both companies declared and paid their dividends on December 31, 20X8. Portfolio uses the fully adjusted equity method in accounting for its investment in Index. Required: 1) Prepare the elimination entries needed to complete a full consolidation worksheet for 20X8. 2) Prepare a consolidation worksheet for 20X8.

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49. On January 1, 20X7, InfinityCorporation acquired 90 percent of Trader Corporation's common stock for $315,000. At the date of acquisition, the fair value of the noncontrolling interest was $35,000, and Trader reported common stock outstanding of $150,000 and retained earnings of $180,000. The differential is assigned to a patent with a remaining life of eight years. Each year since acquisition, Trader has reported income from operations of $50,000 and paid dividends of $30,000. Trader acquired 75 percent ownership of Minnow Company on January 1, 20X9, for $187,500. At that date, the fair value of the noncontrolling interest was $62,500, and Minnow reported common stock outstanding of $100,000 and retained earnings of $130,000. In 20X9, Minnow reported net income of $20,000 and paid dividends of $8,000. The differential is assigned to buildings and equipment with an economic life of 10 years at the date of acquisition. Required: 1) Prepare the journal entries recorded by Trader for its investment in Minnow during 20X9. 2) Prepare the journal entries recorded by Infinity for its investment in Trader during 20X9. 3) Prepare the eliminating entries related to Trader's investment in Minnow and Infinity's investment in Trader needed to prepare consolidated financial statements for Infinity and its subsidiaries at December 31, 20X9.

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50. On January 1, 2008, Orion Company acquired 70 percent of Simplex Company's stock at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 30 percent of the book value of Simplex Company. On December 31, 2009, Simplex acquired 15 percent of Orion's stock. Balance sheets for the two companies on December 31, 2009, are as follows:

Required: Assuming that the treasury stock method is used in reporting Orion's shares held by Simplex, prepare the elimination entries and a consolidated balance sheet worksheet for December 31, 2009.

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51. Windsor Corporation acquired 90 percent of Agro Corporation's common shares on January 1, 20X6, at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 10 percent of the book value of Agro. Agro Corporation prepared the following balance sheet as of January 1, 20X9:

The company is considering the following alternatives: 1. A 3-for-1 stock split 2. A stock dividend of 7,000 shares 3. A stock dividend of 2,000 shares on its $5 par value common stock The current market price per share of Agro stock on January 1, 20X9, is $15. Required: Give the investment elimination entry required to prepare a consolidated balance sheet at the close of business on January 1, 20X9, for each of the alternative transactions under consideration by Agro Corporation.

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Chapter 09 Consolidation Ownership Issues Answer Key

Multiple Choice Questions

On January 1, 20X9, Company A acquired 80 percent of the common stock and 60 percent of the preferred stock of Company B, for $400,000 and $60,000, respectively. At the time of acquisition, the fair value of the common shares of Company B held by the noncontrolling interest was $100,000. Company B's balance sheet contained the following balances:

A. $32,000 B. $30,000 C. $72,000 D. $48,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-01 Understand and explain how the consolidation process differs when the subsidiary has 9-53 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

preferred stock outstanding. Learning Objective: 09-02 Make calculations and prepare elimination entries for the consolidation of a partially owned subsidiary when the subsidiary has preferred stock outstanding. Topic: Basics with Preferred Stock Outstanding Topic: Subsidiary Preferred Stock Held by Parent

For the year ended December 31, 20X9, Company B reported net income of $100,000 and paid dividends of $40,000. The preferred stock is cumulative and pays an annual dividend of 10 percent. Based on the preceding information, the eliminating entry to prepare the consolidated financial statements for Company A as of December 31, 20X9 will include a credit to Investment in Company B—Common Stock for:

A. 506,000 B. 440,000 C. 400,000 D. 500,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 09-02 Make calculations and prepare elimination entries for the consolidation of a partially owned subsidiary when the subsidiary has preferred stock outstanding. Topic: Subsidiary Preferred Stock Held by Parent

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For the year ended December 31, 20X9, Company B reported net income of $100,000 and paid dividends of $40,000. The preferred stock is cumulative and pays an annual dividend of 10 percent. Based on the preceding information, the eliminating entry to prepare the consolidated financial statements for Company A as of December 31, 20X9 will include a credit to noncontrolling interest in net income of Company B for:

A. 140,000 B. 154,000 C. 152,000 D. 150,000

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Winner Corporation acquired 80 percent of the common shares and 70 percent of the preferred shares of First Corporation at underlying book value on January 1, 20X9. At that date, the fair value of the noncontrolling interest in First's common stock was equal to 20 percent of the book value of its common stock. First's balance sheet at the time of acquisition contained the following balances:

A. $80,000 B. $100,000 C. $90,000 D. $50,000

AACSB: Analytic AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-01 Understand and explain how the consolidation process differs when the subsidiary has preferred stock outstanding. Learning Objective: 09-02 Make calculations and prepare elimination entries for the consolidation of a partially owned subsidiary when the subsidiary has preferred stock outstanding. Topic: Basics with Preferred Stock Outstanding Topic: Subsidiary Preferred Stock with Special Provisions

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The preferred shares are cumulative and have a 10 percent annual dividend rate and are four years in arrears on January 1, 20X9. All of the $5 par value preferred shares are callable at $6 per share. During 20X9, First reported net income of $100,000 and paid no dividends. Based on the preceding information, what will be the amount of income to be assigned to the noncontrolling interest in the 20X9 consolidated income statement?

A. $21,000 B. $18,000 C. $23,000 D. $15,000

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The preferred shares are cumulative and have a 10 percent annual dividend rate and are four years in arrears on January 1, 20X9. All of the $5 par value preferred shares are callable at $6 per share. During 20X9, First reported net income of $100,000 and paid no dividends. Based on the preceding information, the amount assigned to noncontrolling stockholders' share of preferred stock interest in the preparation of a consolidated balance sheet on January 1, 20X9, is:

A. $40,000 B. $42,000 C. $36,000 D. $48,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-02 Make calculations and prepare elimination entries for the consolidation of a partially owned subsidiary when the subsidiary has preferred stock outstanding. Topic: Subsidiary Preferred Stock with Special Provisions

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The preferred shares are cumulative and have a 10 percent annual dividend rate and are four years in arrears on January 1, 20X9. All of the $5 par value preferred shares are callable at $6 per share. During 20X9, First reported net income of $100,000 and paid no dividends. Based on the preceding information, what is the portion of First's retained earnings assignable to its preferred shareholders on January 1, 20X9?

A. $40,000 B. $50,000 C. $60,000 D. $70,000

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The preferred shares are cumulative and have a 10 percent annual dividend rate and are four years in arrears on January 1, 20X9. All of the $5 par value preferred shares are callable at $6 per share. During 20X9, First reported net income of $100,000 and paid no dividends. Based on the information provided, what is the book value of the common stock on January 1, 20X9?

A. $410,000 B. $360,000 C. $390,000 D. $350,000

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The preferred shares are cumulative and have a 10 percent annual dividend rate and are four years in arrears on January 1, 20X9. All of the $5 par value preferred shares are callable at $6 per share. During 20X9, First reported net income of $100,000 and paid no dividends. Based on the information provided, what amount will be reported as the noncontrolling interest in the consolidated balance sheet on January 1, 20X9?

A. $70,000 B. $130,000 C. $118,000 D. $142,000

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10.

Micron Corporation owns 75 percent of the common shares and 60 percent of the preferred shares of Stanley Company, all acquired at underlying book value on January 1, 20X8. At that date, the fair value of the noncontrolling interest in Stanley's common stock was equal to 25 percent of the book value of its common stock. The balance sheets of Micron and Stanley immediately after the acquisition contained these balances:

A. $80,000 B. $40,000 C. $50,000 D. $60,000

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Difficulty: 1 Easy Learning Objective: 09-01 Understand and explain how the consolidation process differs when the subsidiary has preferred stock outstanding. Learning Objective: 09-02 Make calculations and prepare elimination entries for the consolidation of a partially owned subsidiary when the subsidiary has preferred stock outstanding. Topic: Basics with Preferred Stock Outstanding Topic: Subsidiary Preferred Stock Held by Parent

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11.

Stanley's preferred stock pays a 12 percent dividend and is cumulative. For 20X8, Stanley reports net income of $40,000 and pays no dividends. Micron reports income from its separate operations of $75,000 and pays dividends of $30,000 during 20X8. Based on the preceding information, what is the income assigned to the noncontrolling interest in the 20X8 consolidated income statement?

A. $10,000 B. $7,000 C. $11,800 D. $4,800

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Difficulty: 3 Hard Learning Objective: 09-02 Make calculations and prepare elimination entries for the consolidation of a partially owned subsidiary when the subsidiary has preferred stock outstanding. Topic: Subsidiary Preferred Stock Held by Parent

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12.

Stanley's preferred stock pays a 12 percent dividend and is cumulative. For 20X8, Stanley reports net income of $40,000 and pays no dividends. Micron reports income from its separate operations of $75,000 and pays dividends of $30,000 during 20X8. Based on the preceding information, what amount of income is attributable to the controlling interest in the consolidated income statement for 20X8?

A. $75,000 B. $105,000 C. $96,000 D. $103,200

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13.

Stanley's preferred stock pays a 12 percent dividend and is cumulative. For 20X8, Stanley reports net income of $40,000 and pays no dividends. Micron reports income from its separate operations of $75,000 and pays dividends of $30,000 during 20X8. Based on the preceding information, what is the total stockholders' equity reported in the consolidated balance sheet as of January 1, 20X8?

A. $450,000 B. $530,000 C. $490,000 D. $370,000

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Difficulty: 1 Easy Learning Objective: 09-02 Make calculations and prepare elimination entries for the consolidation of a partially owned subsidiary when the subsidiary has preferred stock outstanding. Topic: Subsidiary Preferred Stock Held by Parent

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14.

Stanley's preferred stock pays a 12 percent dividend and is cumulative. For 20X8, Stanley reports net income of $40,000 and pays no dividends. Micron reports income from its separate operations of $75,000 and pays dividends of $30,000 during 20X8. Based on the preceding information, what amount is reported as preferred stock outstanding reported in the consolidated balance sheet as of January 1, 20X8?

A. $0 B. $40,000 C. $50,000 D. $44,000

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15.

Janet Corporation holds 75 percent of Slider Corporation's voting common stock, acquired at book value.The fair value of the noncontrolling interest at the date of acquisition was equal to 25 percent of the book value of Slider Corporation. On December 31, 20X8, Slider Corporation acquired 25 percent of Janet Corporation's stock. Slider records dividends received from Janet as nonoperating income. In 20X9, Janet reported operating income of $100,000 and paid dividends of $40,000. During the same year, Slider reported operating income of $75,000 and paid $20,000 in dividends. Based on the information provided, what amount will be reported as consolidated net income for 20X9 under the treasury stock method?

A. $150,000 B. $100,000 C. $75,000 D. $175,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-03 Make calculations and explain how consolidation procedures differ when the parents' ownership interest changes during the accounting period. Topic: Subsidiary's Purchase of Shares from Parent

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16.

Janet Corporation holds 75 percent of Slider Corporation's voting common stock, acquired at book value.The fair value of the noncontrolling interest at the date of acquisition was equal to 25 percent of the book value of Slider Corporation. On December 31, 20X8, Slider Corporation acquired 25 percent of Janet Corporation's stock. Slider records dividends received from Janet as nonoperating income. In 20X9, Janet reported operating income of $100,000 and paid dividends of $40,000. During the same year, Slider reported operating income of $75,000 and paid $20,000 in dividends. Based on the information provided, what amount will be reported as income assigned to the controlling interest for 20X9 under the treasury stock method?

A. $18,750 B. $156,250 C. $175,000 D. $100,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 09-03 Make calculations and explain how consolidation procedures differ when the parents' ownership interest changes during the accounting period. Topic: Subsidiary's Purchase of Shares from Parent

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17.

Vision Corporation acquired 75 percent of the stock of Meta Company on January 1, 20X7, for $225,000.At that date, the fair value of the noncontrolling interest was $75,000. Meta's balance sheet contained the following amounts at the time of the combination:

A. $225,000 B. $285,000 C. $245,000 D. $255,000

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18.

During each of the next three years, Meta reported net income of $30,000 and paid dividends of $10,000. On January 1, 20X9, Vision sold 1,500 shares of Meta's $10 par value shares for $60,000 in cash. Vision used the fully adjusted equity method in accounting for its ownership of Meta Company. Based on the preceding information, in the journal entry recorded by Vision for sale of shares:

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19.

During each of the next three years, Meta reported net income of $30,000 and paid dividends of $10,000. On January 1, 20X9, Vision sold 1,500 shares of Meta's $10 par value shares for $60,000 in cash. Vision used the fully adjusted equity method in accounting for its ownership of Meta Company. Based on the preceding information, in the journal entry recorded by Vision for sale of shares, Additional Paid-in Capital will be credited for:

A. $0. B. $15,000. C. $9,000. D. $45,000.

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20.

During each of the next three years, Meta reported net income of $30,000 and paid dividends of $10,000. On January 1, 20X9, Vision sold 1,500 shares of Meta's $10 par value shares for $60,000 in cash. Vision used the fully adjusted equity method in accounting for its ownership of Meta Company. Based on the preceding information, in the elimination entries to complete a full consolidation worksheet for 20X9, noncontrolling interest in the net income of Meta Co. will be credited for:

A. $12,000. B. $7,500. C. $8,000. D. $2,500.

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21.

During each of the next three years, Meta reported net income of $30,000 and paid dividends of $10,000. On January 1, 20X9, Vision sold 1,500 shares of Meta's $10 par value shares for $60,000 in cash. Vision used the fully adjusted equity method in accounting for its ownership of Meta Company. Based on the preceding information, in the eliminating entries to complete a full consolidation worksheet, Investment in Meta Stock at January 1, 20X9, will be credited for:

A. $255,000. B. $240,000. C. $204,000. D. $136,000.

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22.

Perfect Corporation acquired 70 percent of Trevor Company's shares on December 31, 2008, for $140,000. At that date, the fair value of the noncontrolling interest was $60,000. On January 1, 2010, Perfect acquired an additional 10 percent of Trevor's common stock for $32,500. Summarized balance sheets for Trevor on the dates indicated are as follows:

A. $10,000 and $20,000 respectively. B. $25,000 and $35,000 respectively. C. $35,000 and $45,000 respectively. D. $25,000 and $45,000 respectively.

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-03 Make calculations and explain how consolidation procedures differ when the parents'

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ownership interest changes during the accounting period. Topic: Parent's Purchase of Additional Shares from Nonaffiliate

23.

A. $164,500 B. $157,500 C. $165,000 D. $168,000

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24.

Trevor paid dividends of $10,000 in each of the three years. Perfect uses the fully adjusted equity method in accounting for its investment in Trevor and amortizes all differentials over 5 years against the related investment income. All differentials are assigned to patents in the consolidated financial statements. Based on the preceding information, what was the balance in Perfect's Investment in Trevor Company Stock account on December 31, 2010?

A. $211,500 B. $218,000 C. $173,000 D. $216,000

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Learning Objective: 09-03 Make calculations and explain how consolidation procedures differ when the parents' ownership interest changes during the accounting period. Topic: Parent's Purchase of Additional Shares from Nonaffiliate

25.

Cinema Company acquired 70 percent of Movie Corporation's shares on December 31, 20X5, at underlying book value of $98,000. At that date, the fair value of the noncontrolling interest was equal to 30 percent of the book value of Movie Corporation. Movie's balance sheet on January 1, 20X8, contained the following balances:

A. $19,375 B. $6,125 C. $2,625 D. $9,000

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26.

A. Option A B. Option B C. Option C D. Option D

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27.

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard

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28.

A. $165,625. B. $135,625. C. $185,000. D. $155,000.

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29.

On January 1, 20X7, Pisa Company acquired 80 percent of Siena Company by purchasing 40,000 shares of Siena's common stock. There was no differential related to this transaction. The noncontrolling interest had a fair value equal to 20 percent of book value. The book value of Siena on December 31, 20X7 was as follows:

On January 1, 20X8, Pisa purchased an additional 12,500 shares directly from Siena for $25 per share. Based on the preceding information, by what amount did the Investment in Siena account change?

A. Increase of $296,500 B. Decrease of $296,500 C. Increase of $64,000 D. Decrease of $64,000

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30.

A. credit to common stock for $625,000 B. debit to retained earnings for $37,500 C. credit to Investment in Siena Co. for $976,500 D. credit to NCI in the net assets of Siena Co. for $232,500

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31.

On January 1, 20X8, Pisa purchased an additional 12,500 shares directly from Siena for $25 per share. Based on the preceding information, the ending balance in Additional Paid-In Capital would be:

A. $0 B. $187,500 C. $312,500 D. $125,000

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32.

On January 1, 20X8, Siena sold an additional 12,500 shares to a nonaffiliate for $25 per share. Based on the preceding information, what is Pisa's new ownership interest?

A. 84 percent B. 55 percent C. 70 percent D. 64 percent

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33.

A. $186,000 B. $418,500 C. $523,125 D. $232,500

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34.

A. debit to common stock for $812,500 B. credit to additional paid-in capital for $187,500 C. credit to Investment in Siena Co. for $744,000 D. credit to retained earnings for $350,000

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35.

Windsor Corporation owns 75 percent of Elven Corporation's outstanding common stock. Elven, in turn, owns 15 percent of Windsor's outstanding common stock. What percent of the dividends paid by Windsor is reported as dividends declared in the consolidated retained earnings statement?

A. None B. 100 percent C. 85 percent D. 75 percent

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36.

On January 1, 20X9, A Company acquired 85 percent of B Company's voting common stock for $425,000. At that date, the fair value of the noncontrolling interest of B Company was $75,000. Immediately after A Company acquired its ownership, B Company acquired 75 percent of C Company's stock for $150,000. The fair value of the noncontrolling interest of C Company was $50,000 at that date. At January 1, 20X9, the stockholders' equity sections of the balance sheets of the companies were as follows:

A. $175,000 B. $285,000 C. $356,250 D. $400,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-04 Make calculations and prepare elimination entries for the consolidation of a partially owned subsidiary when the subsidiary has a complex ownership structure. Topic: Multilevel Ownership and Control

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37.

A. $125,000 B. $200,000 C. $170,000 D. $181,250

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38.

During 20X9, A Company reported operating income of $175,000 and paid dividends of $50,000. B Company reported operating income of $125,000 and paid dividends of $40,000. C Company reported net income of $100,000 and paid dividends of $25,000. Based on the information provided, what amount of income will be assigned to the noncontrolling interest in the consolidated income statement for 20X9?

A. $55,000 B. $25,000 C. $30,000 D. $43,750

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39.

During 20X9, A Company reported operating income of $175,000 and paid dividends of $50,000. B Company reported operating income of $125,000 and paid dividends of $40,000. C Company reported net income of $100,000 and paid dividends of $25,000. Based on the information provided, what amount of income will be assigned to the controlling interest in the consolidated income statement for 20X9?

A. $400,000 B. $345,000 C. $285,000 D. $175,000

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40.

X Corporation owns 80 percent of Y Corporation's common stock and 40 percent of Z Corporation's common stock. Additionally, Y Corporation owns 35 percent of Z Corporation's common stock. The acquisitions were made at book values. The following information is available for 20X8:

Based on the information provided, what amount of consolidated net income will X Corporation report for 20X8?

A. $148,750 B. $175,000 C. $150,000 D. $158,750

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41.

Based on the information provided, what amount of income will be assigned to the noncontrolling interest in the 20X8 consolidated income statement?

A. $23,750 B. $25,000 C. $18,000 D. $33,750

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42.

Based on the information provided, what amount of income will be assigned to the controlling interest in the 20X8 consolidated income statement?

A. $130,750 B. $150,000 C. $141,250 D. $157,000

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43.

Based on the information provided, what amount will be reported as dividends declared in X Corporation's 20X8 consolidated retained earnings statement?

A. $30,000 B. $50,000 C. $60,000 D. $0

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44.

Lemon Corporation acquired 80 percent of Bricks Corporation's common shares on January 1, 20X7, at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 20 percent of the book value of Bricks Corporation. Bricks prepared the following balance sheet as of December 31, 20X8:

A. $50,000. B. $95,000. C. $230,000. D. $185,000.

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45.

A. $200,000 B. $65,000 C. $155,000 D. $20,000

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46.

A. $65,000. B. $95,000. C. $50,000. D. $110,000.

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47.

On January 1, 20X9, Bricks declares a stock dividend of 9,000 shares on its $5 par value common stock. The current market price per share of Bricks stock on January 1, 20X9, is $20. Begin with the information provided, but assume instead that Bricks declared a stock dividend of 3,000 shares on its $5 par value common stock. The investment elimination entry required to prepare a consolidated balance sheet immediately after the stock dividend is issued will include a debit to Retained Earnings for:

A. $185,000. B. $65,000. C. $155,000. D. $200,000

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Essay Questions

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48.

Portfolio Corporation acquired 70 percent ownership of Index Company on January 1, 20X6, at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 30 percent of the book value of Index. On January 1, 20X8, Portfolio sold 1,000 shares of Index Company for $20,000 to Adventure Corporation and recorded a $5,000 gain. Trial balances for the companies on December 31, 20X8, contain the following data:

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49.

On January 1, 20X7, InfinityCorporation acquired 90 percent of Trader Corporation's common stock for $315,000. At the date of acquisition, the fair value of the noncontrolling interest was $35,000, and Trader reported common stock outstanding of $150,000 and retained earnings of $180,000. The differential is assigned to a patent with a remaining life of eight years. Each year since acquisition, Trader has reported income from operations of $50,000 and paid dividends of $30,000. Trader acquired 75 percent ownership of Minnow Company on January 1, 20X9, for $187,500. At that date, the fair value of the noncontrolling interest was $62,500, and Minnow reported common stock outstanding of $100,000 and retained earnings of $130,000. In 20X9, Minnow reported net income of $20,000 and paid dividends of $8,000. The differential is assigned to buildings and equipment with an economic life of 10 years at the date of acquisition. Required: 1) Prepare the journal entries recorded by Trader for its investment in Minnow during 20X9. 2) Prepare the journal entries recorded by Infinity for its investment in Trader during 20X9. 3) Prepare the eliminating entries related to Trader's investment in Minnow and Infinity's investment in Trader needed to prepare consolidated financial statements for Infinity and its subsidiaries at December 31, 20X9.

1) Journal entries recorded by Trader Corporation on its investment in Minnow Company:

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2) Journal entries recorded by Infinity Corporation on its investment in Trader Corporation:

3) Trader Corp.Entries:

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Infinity Entries:

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50.

On January 1, 2008, Orion Company acquired 70 percent of Simplex Company's stock at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 30 percent of the book value of Simplex Company. On December 31, 2009, Simplex acquired 15 percent of Orion's stock. Balance sheets for the two companies on December 31, 2009, are as follows:

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51.

Windsor Corporation acquired 90 percent of Agro Corporation's common shares on January 1, 20X6, at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 10 percent of the book value of Agro. Agro Corporation prepared the following balance sheet as of January 1, 20X9:

Alternative 1:

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Alternative 2:

Alternative 3:

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 09-05 Understand and explain how consolidation procedures differ when the subsidiary pays stock dividends. Topic: Subsidiary Stock Dividends

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Chapter 10 Additional Consolidation Reporting Issues

Multiple Choice Questions

1. Which sections of the cash flow statement are affected by the difference in the direct and indirect approaches of presenting a cash flow statement? I. Operating activities section II. Investing activities section III. Financing activities section

A. I B. II C. III D. I, II, and III

2. Which of the following observations concerning the comparisons between the direct and indirect approaches of presenting a cash flow statement is true?

A. The final number of cash flows from operating activities is different under the two approaches. B. The direct approach provides a clearer picture of cash flows related to operations. C. Authoritative bodies have generally expressed a preference for the indirect method. D. A separate reconciliation of operating cash flows and net income is required under the indirect approach.

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3. Sigma Company develops and markets organic food products to natural foods retailers. The following information is available for the company for the year 20X8:

Based on the preceding information, what amount will be reported by the company as cash received from customers during the year?

A. $455,000 B. $475,000 C. $450,000 D. $425,000

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4. Sigma Company develops and markets organic food products to natural foods retailers. The following information is available for the company for the year 20X8:

Based on the preceding information, what amount will be reported by the company as cash payments to suppliers for 20X8?

A. $292,000 B. $305,000 C. $262,000 D. $258,000

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5. Sigma Company develops and markets organic food products to natural foods retailers. The following information is available for the company for the year 20X8:

Based on the preceding information, what amount will be reported by the company as cash flows from operating activities for 20X8?

A. $175,000 B. $133,000 C. $167,000 D. $207,000

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6. Tower Corporation's controller has just finished preparing a consolidated balance sheet, income statement, and statement of changes in retained earnings for the year ended December 31, 20X9. Tower owns 80 percent of Network Corporation's stock, which it acquired at underlying book value on November 1, 20X6. At that date, the fair value of the noncontrolling interest was equal to 20 percent of Network Corporation's book value. The following information is available: Consolidated net income for 20X9 was $160,000. Network reported net income of $50,000 for 20X9. Tower paid dividends of $30,000 in 20X9. Network paid dividends of $10,000 in 20X9. Tower issued common stock on February, 18, 20X9, for a total of $100,000. Consolidated wages payable decreased by $6,000 in 20X9. Consolidated depreciation expense for the year was $15,000. Consolidated accounts receivable decreased by $20,000 in 20X9. Bonds payable of Tower with a book value of $102,000 were retired for $100,000 on December 31, 20X9. Consolidated amortization expense on patents was $10,000 for 20X9. Tower sold land that it had purchased for $75,000 to a nonaffiliate for $80,000 on June 10, 20X9. Consolidated accounts payable decreased by $7,000 during 20X9. Total purchases of equipment by Tower and Network during 20X9 were $180,000. Consolidated inventory increased by $36,000 during 20X9. There were no intercompany transfers between Tower and Network in 20X9 or prior years 10-5 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

except for Network's payment of dividends. Tower uses the indirect method in preparing its cash flow statement. Based on the preceding information, what amount will be reported in the consolidated cash flow statement as net cash provided by operating activities for 20X9?

A. $207,000 B. $163,000 C. $180,000 D. $149,000

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7. Tower Corporation's controller has just finished preparing a consolidated balance sheet, income statement, and statement of changes in retained earnings for the year ended December 31, 20X9. Tower owns 80 percent of Network Corporation's stock, which it acquired at underlying book value on November 1, 20X6. At that date, the fair value of the noncontrolling interest was equal to 20 percent of Network Corporation's book value. The following information is available: Consolidated net income for 20X9 was $160,000. Network reported net income of $50,000 for 20X9. Tower paid dividends of $30,000 in 20X9. Network paid dividends of $10,000 in 20X9. Tower issued common stock on February, 18, 20X9, for a total of $100,000. Consolidated wages payable decreased by $6,000 in 20X9. Consolidated depreciation expense for the year was $15,000. Consolidated accounts receivable decreased by $20,000 in 20X9. Bonds payable of Tower with a book value of $102,000 were retired for $100,000 on December 31, 20X9. Consolidated amortization expense on patents was $10,000 for 20X9. Tower sold land that it had purchased for $75,000 to a nonaffiliate for $80,000 on June 10, 20X9. Consolidated accounts payable decreased by $7,000 during 20X9. Total purchases of equipment by Tower and Network during 20X9 were $180,000. Consolidated inventory increased by $36,000 during 20X9. There were no intercompany transfers between Tower and Network in 20X9 or prior years 10-7 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

A. $180,000 B. $100,000 C. $255,000 D. $110,000

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8. Tower Corporation's controller has just finished preparing a consolidated balance sheet, income statement, and statement of changes in retained earnings for the year ended December 31, 20X9. Tower owns 80 percent of Network Corporation's stock, which it acquired at underlying book value on November 1, 20X6. At that date, the fair value of the noncontrolling interest was equal to 20 percent of Network Corporation's book value. The following information is available: Consolidated net income for 20X9 was $160,000. Network reported net income of $50,000 for 20X9. Tower paid dividends of $30,000 in 20X9. Network paid dividends of $10,000 in 20X9. Tower issued common stock on February, 18, 20X9, for a total of $100,000. Consolidated wages payable decreased by $6,000 in 20X9. Consolidated depreciation expense for the year was $15,000. Consolidated accounts receivable decreased by $20,000 in 20X9. Bonds payable of Tower with a book value of $102,000 were retired for $100,000 on December 31, 20X9. Consolidated amortization expense on patents was $10,000 for 20X9. Tower sold land that it had purchased for $75,000 to a nonaffiliate for $80,000 on June 10, 20X9. Consolidated accounts payable decreased by $7,000 during 20X9. Total purchases of equipment by Tower and Network during 20X9 were $180,000. Consolidated inventory increased by $36,000 during 20X9. There were no intercompany transfers between Tower and Network in 20X9 or prior years 10-9 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

A. $32,000 B. $38,000 C. $42,000 D. $70,000

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9. Tower Corporation's controller has just finished preparing a consolidated balance sheet, income statement, and statement of changes in retained earnings for the year ended December 31, 20X9. Tower owns 80 percent of Network Corporation's stock, which it acquired at underlying book value on November 1, 20X6. At that date, the fair value of the noncontrolling interest was equal to 20 percent of Network Corporation's book value. The following information is available: Consolidated net income for 20X9 was $160,000. Network reported net income of $50,000 for 20X9. Tower paid dividends of $30,000 in 20X9. Network paid dividends of $10,000 in 20X9. Tower issued common stock on February, 18, 20X9, for a total of $100,000. Consolidated wages payable decreased by $6,000 in 20X9. Consolidated depreciation expense for the year was $15,000. Consolidated accounts receivable decreased by $20,000 in 20X9. Bonds payable of Tower with a book value of $102,000 were retired for $100,000 on December 31, 20X9. Consolidated amortization expense on patents was $10,000 for 20X9. Tower sold land that it had purchased for $75,000 to a nonaffiliate for $80,000 on June 10, 20X9. Consolidated accounts payable decreased by $7,000 during 20X9. Total purchases of equipment by Tower and Network during 20X9 were $180,000. Consolidated inventory increased by $36,000 during 20X9. There were no intercompany transfers between Tower and Network in 20X9 or prior years 10-11 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

except for Network's payment of dividends. Tower uses the indirect method in preparing its cash flow statement. Based on the preceding information, what was the change in cash balance for the consolidated entity for 20X9?

A. Increase of $49,000 B. Decrease of $66,000 C. Increase of $17,000 D. Increase of $32,000

10. Jupiter Corporation's consolidated cash flow statement for the year ended December 31, 20X8, reported operating cash inflows of $160,000, financing cash outflows of $90,000, and investing cash outflows $55,000, and an ending cash balance of $75,000. Jupiter acquired 75 percent of Ganymede Company's common stock on July 1, 20X6, at book value. At that date, the fair value of the noncontrolling interest was equal to 25 percent of Ganymede Company's book value. Ganymede reported net income of $20,000, paid dividends of $8,000 in 20X8, and is included in Jupiter's consolidated statements. Jupiter paid dividends of $25,000 in 20X8. The indirect method is used in computing cash flow from operations. Based on the information provided, what was the consolidated cash balance at January 1, 20X8?

A. $60,000 B. $85,000 C. $15,000 D. $380,000

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11. Jupiter Corporation's consolidated cash flow statement for the year ended December 31, 20X8, reported operating cash inflows of $160,000, financing cash outflows of $90,000, and investing cash outflows $55,000, and an ending cash balance of $75,000. Jupiter acquired 75 percent of Ganymede Company's common stock on July 1, 20X6, at book value. At that date, the fair value of the noncontrolling interest was equal to 25 percent of Ganymede Company's book value. Ganymede reported net income of $20,000, paid dividends of $8,000 in 20X8, and is included in Jupiter's consolidated statements. Jupiter paid dividends of $25,000 in 20X8. The indirect method is used in computing cash flow from operations. Based on the information provided, what amount was reported as dividends paid in the cash flow from financing activities section of the consolidated statement of cash flows?

A. $25,000 B. $33,000 C. $27,000 D. $8,000

12. Dividends paid to noncontrolling shareholders: I. are reported as a cash outflow in the consolidated cash flow statement. II. represent funds that are no longer available to the consolidated entity. III. are reported in the consolidated retained earnings statement.

A. Observation I alone is true. B. Observation III alone is true. C. Observations I and II are true. D. Observations I, II, and II are true.

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13. New Life Corporation has just finished preparing a consolidated balance sheet, income statement, and statement of changes in retained earnings for 20X9. The following items are proposed for inclusion in the consolidated cash flow statement:

New Life holds 75 percent of the voting stock of Shane Pharmaceuticals, acquired at book value on June 21, 20X6. On the date of the acquisition, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Shane. Based on the preceding information, what amount will be reported in the consolidated cash flow statement as net cash provided by operating activities for 20X9?

A. $350,000 B. $463,000 C. $335,000 D. $421,000

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14. New Life Corporation has just finished preparing a consolidated balance sheet, income statement, and statement of changes in retained earnings for 20X9. The following items are proposed for inclusion in the consolidated cash flow statement:

A. $200,000 B. $142,000 C. $155,000 D. $130,000

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15. New Life Corporation has just finished preparing a consolidated balance sheet, income statement, and statement of changes in retained earnings for 20X9. The following items are proposed for inclusion in the consolidated cash flow statement:

A. $40,000 B. $55,000 C. $90,000 D. $10,000

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16. New Life Corporation has just finished preparing a consolidated balance sheet, income statement, and statement of changes in retained earnings for 20X9. The following items are proposed for inclusion in the consolidated cash flow statement:

New Life holds 75 percent of the voting stock of Shane Pharmaceuticals, acquired at book value on June 21, 20X6. On the date of the acquisition, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Shane. Based on the preceding information, what was the change in cash balance for the consolidated entity for 20X9?

A. Decrease of $153,000 B. Increase of $450,000 C. Increase of $293,000 D. Increase of $150,000

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17. New Life Corporation has just finished preparing a consolidated balance sheet, income statement, and statement of changes in retained earnings for 20X9. The following items are proposed for inclusion in the consolidated cash flow statement:

New Life holds 75 percent of the voting stock of Shane Pharmaceuticals, acquired at book value on June 21, 20X6. On the date of the acquisition, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Shane. Based on the preceding information, assuming that New Life uses the direct method of computing cash flows from operating activities, what amount will be reported by the company as cash received from customers during the year?

A. $815,000 B. $785,000 C. $800,000 D. $835,000

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18. New Life Corporation has just finished preparing a consolidated balance sheet, income statement, and statement of changes in retained earnings for 20X9. The following items are proposed for inclusion in the consolidated cash flow statement:

New Life holds 75 percent of the voting stock of Shane Pharmaceuticals, acquired at book value on June 21, 20X6. On the date of the acquisition, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Shane. Based on the preceding information, assuming that New Life uses the direct method of computing cash flows from operating activities, what amount will be reported by the company as cash payments to suppliers for 20X9?

A. $350,000 B. $348,000 C. $312,000 D. $352,000

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19. On July 1, 20X8, Fair Logic Corporation acquires 75 percent of Integrated Systems Inc. common stock for its underlying book value. At the time of acquisition, the fair value of the noncontrolling interest is equal to its proportionate share of book value of Integrated Systems. On January 1, 20X8 Integrated reported common stock of $100,000 and retained earnings of $130,000. For the year 20X8, Integrated reports the following items:

Fair Logic uses the equity method in accounting for this investment. Based on the preceding information, what is the book value of shares acquired by Fair Logic on July 1, 20X8?

A. $240,000 B. $191,250 C. $230,000 D. $180,000

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20. On July 1, 20X8, Fair Logic Corporation acquires 75 percent of Integrated Systems Inc. common stock for its underlying book value. At the time of acquisition, the fair value of the noncontrolling interest is equal to its proportionate share of book value of Integrated Systems. On January 1, 20X8 Integrated reported common stock of $100,000 and retained earnings of $130,000. For the year 20X8, Integrated reports the following items:

Fair Logic uses the equity method in accounting for this investment. Based on the preceding information, what is the fair value of the noncontrolling interest at the time of acquisition?

A. $47,813 B. $57,500 C. $60,000 D. $45,000

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21. On July 1, 20X8, Fair Logic Corporation acquires 75 percent of Integrated Systems Inc. common stock for its underlying book value. At the time of acquisition, the fair value of the noncontrolling interest is equal to its proportionate share of book value of Integrated Systems. On January 1, 20X8 Integrated reported common stock of $100,000 and retained earnings of $130,000. For the year 20X8, Integrated reports the following items:

Fair Logic uses the equity method in accounting for this investment. Based on the preceding information, what journal entry would Fair Logic make to record equity method income for the year?

A. Option A B. Option B C. Option C 10-22 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

D. Option D

22. Catalyst Corporation acquired 90 percent of Trigger Corporation's common stock on September 30, 20X8 for $225,000. At that date, the fair value of the noncontrolling interest was $25,000. On January 1, 20X8, Trigger reported the following stockholders' equity balances:

Trigger reported net income of $80,000 in 20X8, earned uniformly throughout the year, and declared and paid dividends of $10,000 on June 30 and $30,000 on December 31, 20X8. Catalyst reported retained earnings of $250,000 on January 1, 20X8, and had 20X8 income of $120,000 from its separate operations. Catalyst paid dividends of $50,000 on December 31, 20X8. Catalyst accounts for its investment in Trigger Corporation using the fully adjusted equity method. Based on the information provided, what is the consolidated net income reported for the year 20X8?

A. $120,000 B. $138,000 C. $140,000 D. $192,000

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23. Catalyst Corporation acquired 90 percent of Trigger Corporation's common stock on September 30, 20X8 for $225,000. At that date, the fair value of the noncontrolling interest was $25,000. On January 1, 20X8, Trigger reported the following stockholders' equity balances:

A. $192,000 B. $138,000 C. $140,000 D. $120,000

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24. Catalyst Corporation acquired 90 percent of Trigger Corporation's common stock on September 30, 20X8 for $225,000. At that date, the fair value of the noncontrolling interest was $25,000. On January 1, 20X8, Trigger reported the following stockholders' equity balances:

Trigger reported net income of $80,000 in 20X8, earned uniformly throughout the year, and declared and paid dividends of $10,000 on June 30 and $30,000 on December 31, 20X8. Catalyst reported retained earnings of $250,000 on January 1, 20X8, and had 20X8 income of $120,000 from its separate operations. Catalyst paid dividends of $50,000 on December 31, 20X8. Catalyst accounts for its investment in Trigger Corporation using the fully adjusted equity method. Based on the information provided, what is the amount of consolidated retained earnings as of December 31, 20X8?

A. $340,000 B. $250,000 C. $338,000 D. $388,000

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25. Catalyst Corporation acquired 90 percent of Trigger Corporation's common stock on September 30, 20X8 for $225,000. At that date, the fair value of the noncontrolling interest was $25,000. On January 1, 20X8, Trigger reported the following stockholders' equity balances:

Trigger reported net income of $80,000 in 20X8, earned uniformly throughout the year, and declared and paid dividends of $10,000 on June 30 and $30,000 on December 31, 20X8. Catalyst reported retained earnings of $250,000 on January 1, 20X8, and had 20X8 income of $120,000 from its separate operations. Catalyst paid dividends of $50,000 on December 31, 20X8. Catalyst accounts for its investment in Trigger Corporation using the fully adjusted equity method. Based on the information provided, what is the balance of Catalyst's investment in Trigger Corporation as of December 31, 20X8?

A. $216,000 B. $225,000 C. $213,000 D. $215,000

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26. Denver Corporation owns 25 percent of the voting shares of Alamos Corporation. In 20X8, Alamos reported net income of $120,000 and paid dividends of $30,000. Denver uses the equity method to account for this investment. Denver reported taxable income of $160,000 on its separate operations and has an effective tax rate of 40 percent. There is an 80 percent exemption on intercompany dividends. Based on the preceding information, income tax expense for Denver for the year 20X8 will be:

A. $67,000 B. $64,600 C. $64,000 D. $66,400

27. Denver Corporation owns 25 percent of the voting shares of Alamos Corporation. In 20X8, Alamos reported net income of $120,000 and paid dividends of $30,000. Denver uses the equity method to account for this investment. Denver reported taxable income of $160,000 on its separate operations and has an effective tax rate of 40 percent. There is an 80 percent exemption on intercompany dividends. Based on the preceding information, income taxes payable for Denver for the year 20X8 will be:

A. $67,000 B. $64,600 C. $64,000 D. $76,000

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28. On January 1, 20X8, Gulfstream Corporation acquired 40 percent of the voting shares of Hunter Company for $65,000. Hunter reported net income of $45,000 and paid dividends of $10,000 in 20X8. Gulfstream reported operating income of $50,000 for the year. There is 80 percent exemption of intercompany dividends and the effective tax rate is 35 percent. Assume that the equity method is being used. Based on the preceding information, what would Gulfstream report as income tax expense for the year?

A. $17,500 B. $18,760 C. $23,800 D. $22,540

29. On January 1, 20X8, Gulfstream Corporation acquired 40 percent of the voting shares of Hunter Company for $65,000. Hunter reported net income of $45,000 and paid dividends of $10,000 in 20X8. Gulfstream reported operating income of $50,000 for the year. There is 80 percent exemption of intercompany dividends and the effective tax rate is 35 percent. Assume that the equity method is being used. Based on the preceding information, what amount would Gulfstream report as net income (after taxes) for the year?

A. $49,240 B. $68,000 C. $64,000 D. $67,500

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30. For a subsidiary to be eligible to be included in a consolidated tax return, at least _____ of its stock must be held by the parent company or another company included in the consolidated return.

A. 50 percent B. 40 percent C. 75 percent D. 80 percent

31. Company A holds 70 percent of the voting shares of Company B. During 20X8, Company B sold land with a book value of $125,000 to Company A for $150,000. Company A continues to hold the land at the end of the year. The companies file separate tax returns and are subject to a 40 percent tax rate. Assume that Company A uses the fully adjusted equity method in accounting for its investment in Company B. Based on the information given, which eliminating entry relating to the intercorporate sale of land is to be entered in the consolidation worksheet prepared at the end of 20X8?

A. Option A B. Option B C. Option C D. Option D

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32. Company A holds 70 percent of the voting shares of Company B. During 20X8, Company B sold land with a book value of $125,000 to Company A for $150,000. Company A continues to hold the land at the end of the year. The companies file separate tax returns and are subject to a 40 percent tax rate. Assume that Company A uses the fully adjusted equity method in accounting for its investment in Company B. Use the information given, but also assume that Company A holds the land at the end of 20X9. The eliminating entry relating to the intercorporate sale of land to be entered in the consolidation worksheet prepared at the end of 20X9 will include:

A. a debit to Investment in Company B for $7,500. B. a debit to Noncontrolling Interest for $4,500. C. a credit to Land for $150,000. D. a credit to Land for $15,000.

33. Company A holds 70 percent of the voting shares of Company B. During 20X8, Company B sold land with a book value of $125,000 to Company A for $150,000. Company A continues to hold the land at the end of the year. The companies file separate tax returns and are subject to a 40 percent tax rate. Assume that Company A uses the fully adjusted equity method in accounting for its investment in Company B. Use the information given, but also assume that Company A holds the land at the end of 20X9. The eliminating entry relating to the intercorporate sale of land to be entered in the consolidation worksheet prepared at the end of 20X9 will include a debit to Investment in Company B for:

A. $4,500. B. $7,500. C. $15,000. D. $10,500.

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34. Company A owns 85 percent of Company B's stock and 80 percent of Company C's stock. All acquisitions were made at book value. The fair values of noncontrolling interests at the time of acquisition were equal to the proportionate share of the book values of the companies. The companies file a consolidated tax return each year and in 20X9 paid a total tax of $112,000. Each company is involved in a number of intercompany inventory transfers each period. Information on the companies' activities for 20X9 is as follows:

Company A does not record income tax expense on income from subsidiaries because a consolidated tax return is filed. Based on the information provided, what amount of income tax expense should be assigned to Company A?

A. $72,000 B. $66,000 C. $112,000 D. $62,000

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35. Company A owns 85 percent of Company B's stock and 80 percent of Company C's stock. All acquisitions were made at book value. The fair values of noncontrolling interests at the time of acquisition were equal to the proportionate share of the book values of the companies. The companies file a consolidated tax return each year and in 20X9 paid a total tax of $112,000. Each company is involved in a number of intercompany inventory transfers each period. Information on the companies' activities for 20X9 is as follows:

A. $24,000 B. $35,200 C. $19,200 D. $30,400

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36. Company A owns 85 percent of Company B's stock and 80 percent of Company C's stock. All acquisitions were made at book value. The fair values of noncontrolling interests at the time of acquisition were equal to the proportionate share of the book values of the companies. The companies file a consolidated tax return each year and in 20X9 paid a total tax of $112,000. Each company is involved in a number of intercompany inventory transfers each period. Information on the companies' activities for 20X9 is as follows:

Company A does not record income tax expense on income from subsidiaries because a consolidated tax return is filed. Based on the information provided, what amount of consolidated net income will be reported for the year 20X9?

A. $168,000 B. $280,000 C. $165,000 D. $250,000

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37. Company A owns 85 percent of Company B's stock and 80 percent of Company C's stock. All acquisitions were made at book value. The fair values of noncontrolling interests at the time of acquisition were equal to the proportionate share of the book values of the companies. The companies file a consolidated tax return each year and in 20X9 paid a total tax of $112,000. Each company is involved in a number of intercompany inventory transfers each period. Information on the companies' activities for 20X9 is as follows:

Company A does not record income tax expense on income from subsidiaries because a consolidated tax return is filed. Based on the information provided, income to the controlling interest for 20X9 is:

A. $155,370. B. $56,000. C. $168,000. D. $250,000.

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38. Electric Corporation holds 80 percent of Utility Company's voting common shares, acquired at book values, but none of its preferred shares. At the date of acquisition, the fair value of the noncontrolling interest was equal to 20 percent of the book value of Utility Company. Summary balance sheets for the companies on December 31, 20X8, are as follows:

Neither of the preferred issues is convertible. Electric's preferred pays a 8 percent annual dividend, and Utility's preferred pays a 12 percent dividend. Utility reported net income of $30,000 and paid a total of $10,000 of dividends in 20X8. Electric reported income from its separate operations of $70,000 and paid total dividends of $25,000 in 20X8. Based on the preceding information, what is the amount of earnings available to common shareholders reported in the consolidated financial statements for the year?

A. $89,200 B. $87,000 C. $91,000 D. $82,800

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39. Electric Corporation holds 80 percent of Utility Company's voting common shares, acquired at book values, but none of its preferred shares. At the date of acquisition, the fair value of the noncontrolling interest was equal to 20 percent of the book value of Utility Company. Summary balance sheets for the companies on December 31, 20X8, are as follows:

A. 4.46 B. 4.14 C. 4.35 D. 4.55

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40. Flyer Corporation holds 90 percent of Kite Company's common shares but none of its preferred shares. On the date of acquisition, the fair value of the noncontrolling interest was equal to 10 percent of the book value of Kite Company. Summary balance sheets for the companies on December 31, 20X8, are as follows:

Flyer's preferred pays a 8 percent annual dividend, and Kite's preferred pays a 10 percent dividend. Kite's preferred shares can be converted into 20,000 shares of common stock at any time. Kite reported net income of $35,000 and paid a total of $10,000 of dividends in 20X8. Flyer reported income from its separate operations of $80,000 and paid total dividends of $25,000 in 20X8. Based on the information provided, what is the basic earnings per share for the consolidated entity for 20X8?

A. 5.04 B. 5.24 C. 3.80 D. 5.18

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41. Flyer Corporation holds 90 percent of Kite Company's common shares but none of its preferred shares. On the date of acquisition, the fair value of the noncontrolling interest was equal to 10 percent of the book value of Kite Company. Summary balance sheets for the companies on December 31, 20X8, are as follows:

Flyer's preferred pays a 8 percent annual dividend, and Kite's preferred pays a 10 percent dividend. Kite's preferred shares can be converted into 20,000 shares of common stock at any time. Kite reported net income of $35,000 and paid a total of $10,000 of dividends in 20X8. Flyer reported income from its separate operations of $80,000 and paid total dividends of $25,000 in 20X8. Based on the information provided, what is the diluted earnings per share for the consolidated entity for 20X8?

A. 4.53 B. 4.33 C. 4.00 D. 3.80

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Essay Questions

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42. Locus Corporation acquired 80 percent ownership of Stereo Company on January 1, 20X6, at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 20 percent of the book value of Stereo Company. Consolidated balance sheets at January 1, 20X8, and December 31, 20X8, are as follows:

The consolidated income statement for 20X8 contained the following amounts:

Locus and Stereo paid dividends of $25,000 and $15,000, respectively, in 20X8. Required: 10-40 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

1) Prepare a worksheet to develop a consolidated statement of cash flows for 20X8 using the indirect method of computing cash flows from operations. 2) Prepare a consolidated statement of cash flows for 20X8.

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43. Locus Corporation acquired 80 percent ownership of Stereo Company on January 1, 20X6, at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 20 percent of the book value of Stereo Company. Consolidated balance sheets at January 1, 20X8, and December 31, 20X8, are as follows:

The consolidated income statement for 20X8 contained the following amounts:

Locus and Stereo paid dividends of $25,000 and $15,000, respectively, in 20X8. Required: 10-42 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

1) Prepare a worksheet to develop a consolidated statement of cash flows for 20X8 using the direct method of computing cash flows from operations. 2) Prepare a consolidated statement of cash flows for 20X8.

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44. Boycott Company holds 75 percent ownership of Fred Corporation. The consolidated balance sheets as of December 31, 20X8, and December 31, 20X9, are as follows:

The 20X9 consolidated income statement contained the following amounts:

Boycott acquired its investment in Fred on January 1, 20X6, for $120,000. At that date, the fair value of the noncontrolling interest was $40,000, and Fred reported net assets of $130,000. A total of $20,000 of the differential was assigned to goodwill. The remainder of the differential was assigned to equipment with a remaining life of 10 years from the date of combination. 10-44 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Boycott sold $100,000 of bonds on December 31, 20X9, to assist in generating additional funds. Fred reported net income of $20,000 for 20X9 and paid dividends of $10,000. Boycott reported 20X9 equity-method net income of $75,000 paid dividends of $20,000 for the year. Required: 1) Prepare a worksheet to develop a consolidated statement of cash flows for 20X9 using the indirect method of computing cash flows from operations. 2) Prepare a consolidated statement of cash flows for 20X9.

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45. For the first quarter of 20X8, Vinyl Corporation reported sales of $150,000 and operating expenses of $100,000, and paid dividends of $20,000. Vinyl Company operates on a calendaryear basis. On April 1, 20X8, Signature Corporation acquired 80 percent of Vinyl's common stock for $320,000. At that date, the fair value of the noncontrolling interest was $80,000, and Vinyl had 20,000 shares of $5 par common stock outstanding, originally issued at $12 per share. The differential is related to goodwill. On December 31, 20X8, the management of Signature Corporation reviewed the amount attributed to goodwill as a result of its acquisition of Vinyl common stock and concluded that goodwill was not impaired. Vinyl's retained earnings statement for the full year 20X8 appears as follows:

Signature uses the fully adjusted equity method in accounting for this investment: Required: 1) Prepare all entries that Signature would have recorded in accounting for its investment in Vinyl during 20X8. 2) Present all eliminating entries needed in a worksheet to prepare a complete set of consolidated financial statements for the year 20X8.

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46. On December 31, 20X7, Planet Corporation acquired 80 percent of Broadway Company's stock, at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 20 percent of the book value of Broadway Company. The two companies' balance sheets on December 31, 20X9, are as follows:

On December 31, 20X9, Planet holds inventory purchased from Broadway for $40,000. Broadway's cost of producing the merchandise was $25,000. Broadway's ending inventory also contains $30,000 of purchases from Planet that had cost it $20,000 to produce. On December 30, 20X9, Broadway sold equipment to Planet for $40,000. Broadway had purchased the equipment for $60,000 several years earlier. At the time of sale to Planet, the equipment had a book value of $20,000. The two companies file separate tax returns and are subject to a 40 percent tax rate. Planet does not record tax expense on its share of Broadway's undistributed earnings. Required: 10-47 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

1) Prepare the eliminating entries necessary to complete a consolidated balance sheet worksheet as of December 31, 20X9. 2) Complete a consolidated balance sheet worksheet as of December 31, 20X9.

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47. Power Corporation owns 75 percent of Transmitter Company's common stock. At the date of acquisition the fair value of the noncontrolling interest was equal to the book value of Transmitter Company's common stock. The following balance sheet data are presented for December 31, 20X8:

Transmitter reported net income of $90,000 in 20X8 and paid dividends of $30,000. Its bonds have an annual interest rate of 10 percent and are convertible into 12,000 common shares. Its preferred shares pay a 12 percent annual dividend and convert into 5,000 shares of common stock. In addition, Transmitter has warrants outstanding for 12,000 shares of common stock at $15 per share. The 20X8 average price of Transmitter common shares was $25. Power reported income of $180,000 from its own operations for 20X8 and paid dividends of $40,000. Its 9 percent bonds convert into 8,000 shares of its common stock. The companies file separate tax returns and are subject to income taxes of 40 percent. Required: Compute basic and diluted earnings per share for the consolidated entity for 20X8.

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Chapter 10 Additional Consolidation Reporting Issues Answer Key

Multiple Choice Questions

Which sections of the cash flow statement are affected by the difference in the direct and indirect approaches of presenting a cash flow statement? I. Operating activities section II. Investing activities section III. Financing activities section

A. I B. II C. III D. I, II, and III

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 Prepare a consolidated statement of cash flows. Topic: Consolidated Cash Flow Statement-Direct Topic: Consolidated Cash Flow Statement-Indirect

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Which of the following observations concerning the comparisons between the direct and indirect approaches of presenting a cash flow statement is true?

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Sigma Company develops and markets organic food products to natural foods retailers. The following information is available for the company for the year 20X8:

Based on the preceding information, what amount will be reported by the company as cash received from customers during the year?

A. $455,000 B. $475,000 C. $450,000 D. $425,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-01 Prepare a consolidated statement of cash flows. Topic: Consolidated Cash Flow Statement-General

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Sigma Company develops and markets organic food products to natural foods retailers. The following information is available for the company for the year 20X8:

Based on the preceding information, what amount will be reported by the company as cash payments to suppliers for 20X8?

A. $292,000 B. $305,000 C. $262,000 D. $258,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-01 Prepare a consolidated statement of cash flows. Topic: Consolidated Cash Flow Statement-General

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Sigma Company develops and markets organic food products to natural foods retailers. The following information is available for the company for the year 20X8:

Based on the preceding information, what amount will be reported by the company as cash flows from operating activities for 20X8?

A. $175,000 B. $133,000 C. $167,000 D. $207,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-01 Prepare a consolidated statement of cash flows. Topic: Consolidated Cash Flow Statement-General

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Tower Corporation's controller has just finished preparing a consolidated balance sheet, income statement, and statement of changes in retained earnings for the year ended December 31, 20X9. Tower owns 80 percent of Network Corporation's stock, which it acquired at underlying book value on November 1, 20X6. At that date, the fair value of the noncontrolling interest was equal to 20 percent of Network Corporation's book value. The following information is available: Consolidated net income for 20X9 was $160,000. Network reported net income of $50,000 for 20X9. Tower paid dividends of $30,000 in 20X9. Network paid dividends of $10,000 in 20X9. Tower issued common stock on February, 18, 20X9, for a total of $100,000. Consolidated wages payable decreased by $6,000 in 20X9. Consolidated depreciation expense for the year was $15,000. Consolidated accounts receivable decreased by $20,000 in 20X9. Bonds payable of Tower with a book value of $102,000 were retired for $100,000 on December 31, 20X9. Consolidated amortization expense on patents was $10,000 for 20X9. Tower sold land that it had purchased for $75,000 to a nonaffiliate for $80,000 on June 10, 20X9. Consolidated accounts payable decreased by $7,000 during 20X9. Total purchases of equipment by Tower and Network during 20X9 were $180,000. Consolidated inventory increased by $36,000 during 20X9. There were no intercompany transfers between Tower and Network in 20X9 or prior years

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A. $207,000 B. $163,000 C. $180,000 D. $149,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-01 Prepare a consolidated statement of cash flows. Topic: Consolidated Cash Flow Statement-General

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A. $180,000 B. $100,000 C. $255,000 D. $110,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-01 Prepare a consolidated statement of cash flows. Topic: Consolidated Cash Flow Statement-General

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A. $32,000 B. $38,000 C. $42,000 D. $70,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-01 Prepare a consolidated statement of cash flows. Topic: Consolidated Cash Flow Statement-General

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A. Increase of $49,000 B. Decrease of $66,000 C. Increase of $17,000 D. Increase of $32,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-01 Prepare a consolidated statement of cash flows. Topic: Consolidated Cash Flow Statement-General

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10.

Jupiter Corporation's consolidated cash flow statement for the year ended December 31, 20X8, reported operating cash inflows of $160,000, financing cash outflows of $90,000, and investing cash outflows $55,000, and an ending cash balance of $75,000. Jupiter acquired 75 percent of Ganymede Company's common stock on July 1, 20X6, at book value. At that date, the fair value of the noncontrolling interest was equal to 25 percent of Ganymede Company's book value. Ganymede reported net income of $20,000, paid dividends of $8,000 in 20X8, and is included in Jupiter's consolidated statements. Jupiter paid dividends of $25,000 in 20X8. The indirect method is used in computing cash flow from operations. Based on the information provided, what was the consolidated cash balance at January 1, 20X8?

A. $60,000 B. $85,000 C. $15,000 D. $380,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-01 Prepare a consolidated statement of cash flows. Topic: Consolidated Cash Flow Statement-Indirect

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11.

Jupiter Corporation's consolidated cash flow statement for the year ended December 31, 20X8, reported operating cash inflows of $160,000, financing cash outflows of $90,000, and investing cash outflows $55,000, and an ending cash balance of $75,000. Jupiter acquired 75 percent of Ganymede Company's common stock on July 1, 20X6, at book value. At that date, the fair value of the noncontrolling interest was equal to 25 percent of Ganymede Company's book value. Ganymede reported net income of $20,000, paid dividends of $8,000 in 20X8, and is included in Jupiter's consolidated statements. Jupiter paid dividends of $25,000 in 20X8. The indirect method is used in computing cash flow from operations. Based on the information provided, what amount was reported as dividends paid in the cash flow from financing activities section of the consolidated statement of cash flows?

A. $25,000 B. $33,000 C. $27,000 D. $8,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-01 Prepare a consolidated statement of cash flows. Topic: Consolidated Cash Flow Statement-Indirect

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12.

Dividends paid to noncontrolling shareholders: I. are reported as a cash outflow in the consolidated cash flow statement. II. represent funds that are no longer available to the consolidated entity. III. are reported in the consolidated retained earnings statement.

A. Observation I alone is true. B. Observation III alone is true. C. Observations I and II are true. D. Observations I, II, and II are true.

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 2 Medium Learning Objective: 10-01 Prepare a consolidated statement of cash flows. Topic: Consolidated Cash Flow Statement-General

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13.

New Life Corporation has just finished preparing a consolidated balance sheet, income statement, and statement of changes in retained earnings for 20X9. The following items are proposed for inclusion in the consolidated cash flow statement:

A. $350,000 B. $463,000 C. $335,000 D. $421,000

AACSB: Analytic AICPA FN: Measurement

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Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-01 Prepare a consolidated statement of cash flows. Topic: Consolidated Cash Flow Statement-Indirect

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14.

A. $200,000 B. $142,000 C. $155,000 D. $130,000

AACSB: Analytic AICPA FN: Measurement

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Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-01 Prepare a consolidated statement of cash flows. Topic: Consolidated Cash Flow Statement-Indirect

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15.

A. $40,000 B. $55,000 C. $90,000 D. $10,000

AACSB: Analytic AICPA FN: Measurement

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Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-01 Prepare a consolidated statement of cash flows. Topic: Consolidated Cash Flow Statement-Indirect

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16.

New Life holds 75 percent of the voting stock of Shane Pharmaceuticals, acquired at book value on June 21, 20X6. On the date of the acquisition, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Shane. Based on the preceding information, what was the change in cash balance for the consolidated entity for 20X9?

A. Decrease of $153,000 B. Increase of $450,000 C. Increase of $293,000 D. Increase of $150,000

AACSB: Analytic AICPA FN: Measurement

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Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-01 Prepare a consolidated statement of cash flows. Topic: Consolidated Cash Flow Statement-Indirect

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17.

New Life holds 75 percent of the voting stock of Shane Pharmaceuticals, acquired at book value on June 21, 20X6. On the date of the acquisition, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Shane. Based on the preceding information, assuming that New Life uses the direct method of computing cash flows from operating activities, what amount will be reported by the company as cash received from customers during the year?

A. $815,000 B. $785,000 C. $800,000 D. $835,000

AACSB: Analytic

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AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-01 Prepare a consolidated statement of cash flows. Topic: Consolidated Cash Flow Statement-Direct

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18.

New Life holds 75 percent of the voting stock of Shane Pharmaceuticals, acquired at book value on June 21, 20X6. On the date of the acquisition, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Shane. Based on the preceding information, assuming that New Life uses the direct method of computing cash flows from operating activities, what amount will be reported by the company as cash payments to suppliers for 20X9?

A. $350,000 B. $348,000 C. $312,000 D. $352,000

AACSB: Analytic

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AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-01 Prepare a consolidated statement of cash flows. Topic: Consolidated Cash Flow Statement-Direct

19.

On July 1, 20X8, Fair Logic Corporation acquires 75 percent of Integrated Systems Inc. common stock for its underlying book value. At the time of acquisition, the fair value of the noncontrolling interest is equal to its proportionate share of book value of Integrated Systems. On January 1, 20X8 Integrated reported common stock of $100,000 and retained earnings of $130,000. For the year 20X8, Integrated reports the following items:

Fair Logic uses the equity method in accounting for this investment. Based on the preceding information, what is the book value of shares acquired by Fair Logic on July 1, 20X8?

A. $240,000 B. $191,250 C. $230,000 D. $180,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand

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Difficulty: 2 Medium Learning Objective: 10-02 Make calculations and record journal and worksheet entries related to an interim acquisition. Topic: Consolidation following an interim acquisition

20.

Fair Logic uses the equity method in accounting for this investment. Based on the preceding information, what is the fair value of the noncontrolling interest at the time of acquisition?

A. $47,813 B. $57,500 C. $60,000 D. $45,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-02 Make calculations and record journal and worksheet entries related to an interim acquisition.

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Topic: Consolidation following an interim acquisition

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21.

Fair Logic uses the equity method in accounting for this investment. Based on the preceding information, what journal entry would Fair Logic make to record equity method income for the year?

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D. Option D

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-02 Make calculations and record journal and worksheet entries related to an interim acquisition. Topic: Consolidation following an interim acquisition

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22.

Catalyst Corporation acquired 90 percent of Trigger Corporation's common stock on September 30, 20X8 for $225,000. At that date, the fair value of the noncontrolling interest was $25,000. On January 1, 20X8, Trigger reported the following stockholders' equity balances:

A. $120,000 B. $138,000 C. $140,000 D. $192,000

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23.

A. $192,000 B. $138,000 C. $140,000 D. $120,000

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24.

Trigger reported net income of $80,000 in 20X8, earned uniformly throughout the year, and declared and paid dividends of $10,000 on June 30 and $30,000 on December 31, 20X8. Catalyst reported retained earnings of $250,000 on January 1, 20X8, and had 20X8 income of $120,000 from its separate operations. Catalyst paid dividends of $50,000 on December 31, 20X8. Catalyst accounts for its investment in Trigger Corporation using the fully adjusted equity method. Based on the information provided, what is the amount of consolidated retained earnings as of December 31, 20X8?

A. $340,000 B. $250,000 C. $338,000 D. $388,000

AACSB: Analytic AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-02 Make calculations and record journal and worksheet entries related to an interim acquisition. Topic: Consolidation following an interim acquisition

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25.

Trigger reported net income of $80,000 in 20X8, earned uniformly throughout the year, and declared and paid dividends of $10,000 on June 30 and $30,000 on December 31, 20X8. Catalyst reported retained earnings of $250,000 on January 1, 20X8, and had 20X8 income of $120,000 from its separate operations. Catalyst paid dividends of $50,000 on December 31, 20X8. Catalyst accounts for its investment in Trigger Corporation using the fully adjusted equity method. Based on the information provided, what is the balance of Catalyst's investment in Trigger Corporation as of December 31, 20X8?

A. $216,000 B. $225,000 C. $213,000 D. $215,000

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26.

Denver Corporation owns 25 percent of the voting shares of Alamos Corporation. In 20X8, Alamos reported net income of $120,000 and paid dividends of $30,000. Denver uses the equity method to account for this investment. Denver reported taxable income of $160,000 on its separate operations and has an effective tax rate of 40 percent. There is an 80 percent exemption on intercompany dividends. Based on the preceding information, income tax expense for Denver for the year 20X8 will be:

A. $67,000 B. $64,600 C. $64,000 D. $66,400

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-03 Make basic calculations and journal entries related to income taxes in the consolidated financial statements. Topic: Tax Allocation Procedures When Separate Tax Returns are Filed

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27.

A. $67,000 B. $64,600 C. $64,000 D. $76,000

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28.

On January 1, 20X8, Gulfstream Corporation acquired 40 percent of the voting shares of Hunter Company for $65,000. Hunter reported net income of $45,000 and paid dividends of $10,000 in 20X8. Gulfstream reported operating income of $50,000 for the year. There is 80 percent exemption of intercompany dividends and the effective tax rate is 35 percent. Assume that the equity method is being used. Based on the preceding information, what would Gulfstream report as income tax expense for the year?

A. $17,500 B. $18,760 C. $23,800 D. $22,540

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29.

On January 1, 20X8, Gulfstream Corporation acquired 40 percent of the voting shares of Hunter Company for $65,000. Hunter reported net income of $45,000 and paid dividends of $10,000 in 20X8. Gulfstream reported operating income of $50,000 for the year. There is 80 percent exemption of intercompany dividends and the effective tax rate is 35 percent. Assume that the equity method is being used. Based on the preceding information, what amount would Gulfstream report as net income (after taxes) for the year?

A. $49,240 B. $68,000 C. $64,000 D. $67,500

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-03 Make basic calculations and journal entries related to income taxes in the consolidated financial statements. Topic: Tax Allocation Procedures When Separate Tax Returns are Filed

30.

For a subsidiary to be eligible to be included in a consolidated tax return, at least _____ of its stock must be held by the parent company or another company included in the consolidated return.

A. 50 percent B. 40 percent C. 75 percent D. 80 percent

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember 10-90 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Difficulty: 1 Easy Learning Objective: 10-03 Make basic calculations and journal entries related to income taxes in the consolidated financial statements. Topic: Allocation of Tax Expense When a Consolidated Return is Filed

31.

Company A holds 70 percent of the voting shares of Company B. During 20X8, Company B sold land with a book value of $125,000 to Company A for $150,000. Company A continues to hold the land at the end of the year. The companies file separate tax returns and are subject to a 40 percent tax rate. Assume that Company A uses the fully adjusted equity method in accounting for its investment in Company B. Based on the information given, which eliminating entry relating to the intercorporate sale of land is to be entered in the consolidation worksheet prepared at the end of 20X8?

A. Option A B. Option B C. Option C D. Option D

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32.

Company A holds 70 percent of the voting shares of Company B. During 20X8, Company B sold land with a book value of $125,000 to Company A for $150,000. Company A continues to hold the land at the end of the year. The companies file separate tax returns and are subject to a 40 percent tax rate. Assume that Company A uses the fully adjusted equity method in accounting for its investment in Company B. Use the information given, but also assume that Company A holds the land at the end of 20X9. The eliminating entry relating to the intercorporate sale of land to be entered in the consolidation worksheet prepared at the end of 20X9 will include:

A. a debit to Investment in Company B for $7,500. B. a debit to Noncontrolling Interest for $4,500. C. a credit to Land for $150,000. D. a credit to Land for $15,000.

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-03 Make basic calculations and journal entries related to income taxes in the consolidated financial statements. Topic: Subsequent Profit Realization When Separate Returns are Filed

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33.

Company A holds 70 percent of the voting shares of Company B. During 20X8, Company B sold land with a book value of $125,000 to Company A for $150,000. Company A continues to hold the land at the end of the year. The companies file separate tax returns and are subject to a 40 percent tax rate. Assume that Company A uses the fully adjusted equity method in accounting for its investment in Company B. Use the information given, but also assume that Company A holds the land at the end of 20X9. The eliminating entry relating to the intercorporate sale of land to be entered in the consolidation worksheet prepared at the end of 20X9 will include a debit to Investment in Company B for:

A. $4,500. B. $7,500. C. $15,000. D. $10,500.

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-03 Make basic calculations and journal entries related to income taxes in the consolidated financial statements. Topic: Subsequent Profit Realization When Separate Returns are Filed

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34.

Company A owns 85 percent of Company B's stock and 80 percent of Company C's stock. All acquisitions were made at book value. The fair values of noncontrolling interests at the time of acquisition were equal to the proportionate share of the book values of the companies. The companies file a consolidated tax return each year and in 20X9 paid a total tax of $112,000. Each company is involved in a number of intercompany inventory transfers each period. Information on the companies' activities for 20X9 is as follows:

A. $72,000 B. $66,000 C. $112,000 D. $62,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-03 Make basic calculations and journal entries related to income taxes in the consolidated financial statements. Topic: Allocation of Tax Expense When a Consolidated Return is Filed

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35.

A. $24,000 B. $35,200 C. $19,200 D. $30,400

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-03 Make basic calculations and journal entries related to income taxes in the consolidated financial statements. Topic: Allocation of Tax Expense When a Consolidated Return is Filed

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36.

A. $168,000 B. $280,000 C. $165,000 D. $250,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-03 Make basic calculations and journal entries related to income taxes in the consolidated financial statements. Topic: Allocation of Tax Expense When a Consolidated Return is Filed

10-96 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

37.

Company A does not record income tax expense on income from subsidiaries because a consolidated tax return is filed. Based on the information provided, income to the controlling interest for 20X9 is:

A. $155,370. B. $56,000. C. $168,000. D. $250,000.

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-03 Make basic calculations and journal entries related to income taxes in the consolidated financial statements. Topic: Allocation of Tax Expense When a Consolidated Return is Filed

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38.

Electric Corporation holds 80 percent of Utility Company's voting common shares, acquired at book values, but none of its preferred shares. At the date of acquisition, the fair value of the noncontrolling interest was equal to 20 percent of the book value of Utility Company. Summary balance sheets for the companies on December 31, 20X8, are as follows:

A. $89,200 B. $87,000 C. $91,000 D. $82,800

AACSB: Analytic AICPA FN: Measurement Blooms: Understand

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Difficulty: 2 Medium Learning Objective: 10-04 Make calculations related to consolidated earnings per share. Topic: Computation of Diluted Consolidated Earnings per Share

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39.

A. 4.46 B. 4.14 C. 4.35 D. 4.55

AACSB: Analytic AICPA FN: Measurement Blooms: Apply

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Difficulty: 3 Hard Learning Objective: 10-04 Make calculations related to consolidated earnings per share. Topic: Computation of Diluted Consolidated Earnings per Share

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40.

Flyer Corporation holds 90 percent of Kite Company's common shares but none of its preferred shares. On the date of acquisition, the fair value of the noncontrolling interest was equal to 10 percent of the book value of Kite Company. Summary balance sheets for the companies on December 31, 20X8, are as follows:

A. 5.04 B. 5.24 C. 3.80 D. 5.18

AACSB: Analytic AICPA FN: Measurement

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Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-04 Make calculations related to consolidated earnings per share. Topic: Computation of Diluted Consolidated Earnings per Share

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41.

Flyer's preferred pays a 8 percent annual dividend, and Kite's preferred pays a 10 percent dividend. Kite's preferred shares can be converted into 20,000 shares of common stock at any time. Kite reported net income of $35,000 and paid a total of $10,000 of dividends in 20X8. Flyer reported income from its separate operations of $80,000 and paid total dividends of $25,000 in 20X8. Based on the information provided, what is the diluted earnings per share for the consolidated entity for 20X8?

A. 4.53 B. 4.33 C. 4.00 D. 3.80

AACSB: Analytic AICPA FN: Measurement

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Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-04 Make calculations related to consolidated earnings per share. Topic: Computation of Diluted Consolidated Earnings per Share

Essay Questions

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42.

Locus Corporation acquired 80 percent ownership of Stereo Company on January 1, 20X6, at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 20 percent of the book value of Stereo Company. Consolidated balance sheets at January 1, 20X8, and December 31, 20X8, are as follows:

The consolidated income statement for 20X8 contained the following amounts:

Locus and Stereo paid dividends of $25,000 and $15,000, respectively, in 20X8. Required: 10-106 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

2) Consolidated statement of cash flows for 20X8 10-107 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-01 Prepare a consolidated statement of cash flows. Topic: Consolidated Cash Flow Statement-Indirect

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43.

The consolidated income statement for 20X8 contained the following amounts:

Locus and Stereo paid dividends of $25,000 and $15,000, respectively, in 20X8. Required: 10-109 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

10-110 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

10-111 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

10-112 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-01 Prepare a consolidated statement of cash flows. Topic: Consolidated Cash Flow Statement-Direct

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44.

Boycott Company holds 75 percent ownership of Fred Corporation. The consolidated balance sheets as of December 31, 20X8, and December 31, 20X9, are as follows:

The 20X9 consolidated income statement contained the following amounts:

Boycott acquired its investment in Fred on January 1, 20X6, for $120,000. At that date, the fair value of the noncontrolling interest was $40,000, and Fred reported net assets of $130,000. A total of $20,000 of the differential was assigned to goodwill. The remainder of the differential was assigned to equipment with a remaining life of 10 years from the date 10-114 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

of combination. Boycott sold $100,000 of bonds on December 31, 20X9, to assist in generating additional funds. Fred reported net income of $20,000 for 20X9 and paid dividends of $10,000. Boycott reported 20X9 equity-method net income of $75,000 paid dividends of $20,000 for the year. Required: 1) Prepare a worksheet to develop a consolidated statement of cash flows for 20X9 using the indirect method of computing cash flows from operations. 2) Prepare a consolidated statement of cash flows for 20X9.

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Worksheet entries: (a) Increase in cash balance (b) Decrease in accounts receivable (c) Increase in inventory (d) Sale of Land (e) Purchase of buildings and equipment 10-116 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

(f) Goodwill impairment loss recognized in 20X9 (g) Depreciation charges for 20X9 (h) Increase in accounts payable (i) Decrease in interest payable (j) Sale of bonds (k) Amortize bond premium (l) Boycott Company dividend $20,000 (m) Consolidated net income (n) Fred Corporation dividend $10,000 x .25 2)

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-01 Prepare a consolidated statement of cash flows. Topic: Consolidated Cash Flow Statement-Indirect

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45.

For the first quarter of 20X8, Vinyl Corporation reported sales of $150,000 and operating expenses of $100,000, and paid dividends of $20,000. Vinyl Company operates on a calendar-year basis. On April 1, 20X8, Signature Corporation acquired 80 percent of Vinyl's common stock for $320,000. At that date, the fair value of the noncontrolling interest was $80,000, and Vinyl had 20,000 shares of $5 par common stock outstanding, originally issued at $12 per share. The differential is related to goodwill. On December 31, 20X8, the management of Signature Corporation reviewed the amount attributed to goodwill as a result of its acquisition of Vinyl common stock and concluded that goodwill was not impaired. Vinyl's retained earnings statement for the full year 20X8 appears as follows:

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-02 Make calculations and record journal and worksheet entries related to an interim acquisition. Topic: Consolidation following an interim acquisition

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46.

On December 31, 20X7, Planet Corporation acquired 80 percent of Broadway Company's stock, at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 20 percent of the book value of Broadway Company. The two companies' balance sheets on December 31, 20X9, are as follows:

On December 31, 20X9, Planet holds inventory purchased from Broadway for $40,000. Broadway's cost of producing the merchandise was $25,000. Broadway's ending inventory also contains $30,000 of purchases from Planet that had cost it $20,000 to produce. On December 30, 20X9, Broadway sold equipment to Planet for $40,000. Broadway had purchased the equipment for $60,000 several years earlier. At the time of sale to Planet, the equipment had a book value of $20,000. The two companies file separate tax returns and are subject to a 40 percent tax rate. Planet does not record tax expense on its share of Broadway's undistributed earnings. Required: 10-121 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

1) Prepare the eliminating entries necessary to complete a consolidated balance sheet worksheet as of December 31, 20X9. 2) Complete a consolidated balance sheet worksheet as of December 31, 20X9.

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10-123 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-03 Make basic calculations and journal entries related to income taxes in the consolidated

10-124 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

financial statements. Topic: Unrealized Profits When Separate Returns are Filed

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47.

Power Corporation owns 75 percent of Transmitter Company's common stock. At the date of acquisition the fair value of the noncontrolling interest was equal to the book value of Transmitter Company's common stock. The following balance sheet data are presented for December 31, 20X8:

10-126 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-04 Make calculations related to consolidated earnings per share. Topic: Computation of Diluted Consolidated Earnings per Share

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Chapter 11 Multinational Accounting: Foreign Currency Transactions and Financial Instruments

Multiple Choice Questions

1. If 1 British pound can be exchanged for 180 cents of U.S. currency, what fraction should be used to compute the indirect quotation of the exchange rate expressed in British pounds?

A. 1/180 B. 1/.56 C. 1.8/1 D. 1/1.8

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2. Suppose the direct foreign exchange rates in U.S. dollars are: 1 Singapore dollar = $.7025 1 Cyprus pound = $2.5132 Based on the information given above, the indirect exchange rates for the Singapore dollar and the Cyprus Pound (from a U.S. perspective) are:

A. 1.7655 Singapore dollars and 1.4235 Cyprus pounds respectively. B. 0.2975 Singapore dollars and 1.5132 Cyprus pounds respectively. C. 2.1622 Singapore dollars and 0.4625 Cyprus pounds respectively. D. 1.4235 Singapore dollars and 0.3979 Cyprus pounds respectively.

3. Suppose the direct foreign exchange rates in U.S. dollars are: 1 Singapore dollar = $.7025 1 Cyprus pound = $2.5132 Based on the information given above, how many U.S. dollars must be paid for a purchase of citrus fruits costing 10,000 Cyprus pounds?

A. $25,132 B. $15,132 C. $3,979 D. $35,775

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4. Suppose the direct foreign exchange rates in U.S. dollars are: 1 Singapore dollar = $.7025 1 Cyprus pound = $2.5132 Based on the information given above, how many Singapore dollars are required to purchase goods costing 10,000 US dollars?

A. 7,025 B. 14,235 C. 17,655 D. 2,975

5. Upon arrival in Chile, Karen exchanged $1,000 of U.S. currency into 480,000 Chilean Pesos. While returning after her two month visit, she exchanged her remaining 50,000 Pesos into $100 of U.S. currency. What amount of gain or a loss did Karen experience on the 50,000 pesos she held during her visit and converted to U.S. dollars at the departure date?

A. Loss of $4. B. Gain of $4. C. Loss of $6. D. No gain or loss.

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6. Chicago based Corporation X has a number of importing transactions with companies based in UK. Importing activities result in payables. If the settlement currency is the British Pound, which of the following will happen by changes in the direct or indirect exchange rates?

A. Option A B. Option B C. Option C D. Option D

7. Chicago based Corporation X has a number of exporting transactions with companies based in Sweden. Exporting activities result in receivables. If the settlement currency is the Swedish Krona, which of the following will happen by changes in the direct or indirect exchange rates?

A. Option A B. Option B C. Option C D. Option D

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8. Corporation X has a number of exporting transactions with companies based in Vietnam. Exporting activities result in receivables. If the settlement currency is the US dollar, which of the following will happen by changes in the direct or indirect exchange rates?

A. Option A B. Option B C. Option C D. Option D

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9. Heavy Company sold metal scrap to a Brazilian company for 200,000 Brazilian reais on December 1, 20X8, with payment due on January 20, 20X9. The exchange rates were:

Based on the preceding information, which of the following is true of dollar's movement visà-vis Brazilian real during the period?

A. Option A B. Option B C. Option C D. Option D

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10. Heavy Company sold metal scrap to a Brazilian company for 200,000 Brazilian reais on December 1, 20X8, with payment due on January 20, 20X9. The exchange rates were:

Based on the preceding information, what is the Heavy's overall net gain or net loss from its foreign currency exposure related to this transaction?

A. $4,860 loss B. $2,600 loss C. $9,018 gain D. $2,260 gain

11. Mint Corporation has several transactions with foreign entities. Each transaction is denominated in the local currency unit of the country in which the foreign entity is located. On October 1, 20X8, Mint purchased confectionary items from a foreign company at a price of LCU 5,000 when the direct exchange rate was 1 LCU = $1.20. The account has not been settled as of December 31, 20X8, when the exchange rate has decreased to 1 LCU = $1.10. The foreign exchange gain or loss on Mint's records at year-end for this transaction will be:

A. $500 loss B. $500 gain C. $378 gain D. $5,500 loss

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12. Mint Corporation has several transactions with foreign entities. Each transaction is denominated in the local currency unit of the country in which the foreign entity is located. On November 2, 20X8, Mint sold confectionary items to a foreign company at a price of LCU 23,000 when the direct exchange rate was 1 LCU = $1.08. The account has not been settled as of December 31, 20X8, when the exchange rate has increased to 1 LCU = $1.10. The foreign exchange gain or loss on Mint's records at year-end for this transaction will be:

A. $460 loss B. $387 loss C. $387 gain D. $460 gain

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13. On September 3, 20X8, Jackson Corporation purchases goods for a U.S. dollar equivalent of $17,000 from a Swiss company. The transaction is denominated in Swiss francs (SFr). The payment is made on October 10. The exchange rates were:

What entry is required to revalue foreign currency payable to U.S. dollar equivalent value on October 10?

A. Option A B. Option B C. Option C D. Option D

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14. On March 1, 20X8, Wilson Corporation sold goods for a U.S. dollar equivalent of $31,000 to a Thai company. The transaction is denominated in Thai bahts. The payment is received on May 10. The exchange rates were:

What entry is required to revalue foreign currency payable to U.S. dollar equivalent value on May 10?

A. Option A B. Option B C. Option C D. Option D

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15. On December 5, 20X8, Texas based Imperial Corporation purchased goods from a Saudi Arabian firm for 100,000 riyals (SAR), to be paid on January 10, 20X9. The transaction is denominated in Saudi riyals. Imperial's fiscal year ends on December 31, and its reporting currency is the U.S. dollar. The exchange rates are:

Based on the preceding information, what journal entry would Imperial make on December 31, 20X8, to revalue foreign currency payable to equivalent U.S. dollar value?

A. Option A B. Option B C. Option C D. Option D

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16. On December 5, 20X8, Texas based Imperial Corporation purchased goods from a Saudi Arabian firm for 100,000 riyals (SAR), to be paid on January 10, 20X9. The transaction is denominated in Saudi riyals. Imperial's fiscal year ends on December 31, and its reporting currency is the U.S. dollar. The exchange rates are:

Based on the preceding information, what journal entry would Imperial make on January 10, 20X9, to revalue foreign currency payable to equivalent U.S. dollar value?

A. Option A B. Option B C. Option C D. Option D

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17. On December 5, 20X8, Texas based Imperial Corporation purchased goods from a Saudi Arabian firm for 100,000 riyals (SAR), to be paid on January 10, 20X9. The transaction is denominated in Saudi riyals. Imperial's fiscal year ends on December 31, and its reporting currency is the U.S. dollar. The exchange rates are:

Based on the preceding information, what was the overall foreign currency gain or loss on the accounts payable transaction?

A. $300 loss B. $200 loss C. $100 gain D. $200 gain

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18. Spartan Company purchased interior decoration material from Egypt for 100,000 Egyptian pounds on September 5, 20X8, with payment due on December 2, 20X8. Additionally, on September 5, Spartan acquired a 90-day forward contract to purchase 100,000 Egyptian pounds of E£ = $.1850. The forward contract was acquired to manage the exposed net liability position in Egyptian pounds, but it was not designated as a hedge. The spot rates were:

Based on the preceding information, in the entry made on December 2 nd to revalue foreign currency receivable to current equivalent U.S. dollar value,

A. Accounts Payable will be debited for $18,350. B. Foreign Currency Units will be debited for $18,500. C. Foreign Currency Transaction Gain will be credited for $150. D. Other Comprehensive Income will be credited for $300.

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19. Spartan Company purchased interior decoration material from Egypt for 100,000 Egyptian pounds on September 5, 20X8, with payment due on December 2, 20X8. Additionally, on September 5, Spartan acquired a 90-day forward contract to purchase 100,000 Egyptian pounds of E£ = $.1850. The forward contract was acquired to manage the exposed net liability position in Egyptian pounds, but it was not designated as a hedge. The spot rates were:

Based on the preceding information, what is the entry required to settle foreign currency payable on December 2?

A. Option A B. Option B C. Option C D. Option D

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20. Detroit based Auto Corporation, purchased ancillaries from a Japanese firm on December 1, 20X8, for 1,000,000 Yen, when the spot rate for Yen was $.0095. On December 31, 20X8, the spot rate stood at $.0096. On January 10, 20X9 Auto paid 1,000,000 Yen acquired at a rate of $.0094. Auto's income statements should report a foreign exchange gain or loss for the years ended December 31, 20X8 and 20X9 of:

A. Option A B. Option B C. Option C D. Option D

21. On November 1, 20X8, Denver Company borrowed 500,000 local currency units (LCU) from a foreign lender evidenced by an interest-bearing note due on November 1, 20X9, which is denominated in the currency of the lender. The U.S. dollar equivalent of the note principal was as follows:

In its income statement for 20X9, what amount should Denver include as a foreign exchange gain or loss on the note principal?

A. 15,000 gain B. 25,000 gain C. 15,000 loss D. 40,000 loss

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22. Company X denominated a December 1, 20X9, purchase of goods in a currency other than its functional currency. The transaction resulted in a payable fixed in terms of the amount of foreign currency, and was paid on the settlement date, January 10, 2010. Exchange rates moved unfavorably at December 31, 20X9, resulting in a loss that should:

A. be included as a separate component of stockholders' equity at Dec. 31, 20X9. B. be included as a component of income from continuing operations for 20X9. C. be included as a deferred charge at December 31, 20X9. D. not be reported until January 10, 2010, the settlement date.

23. Note: This is a Kaplan CPA Review Question On September 1, 20X1, Bain Corp. received an order for equipment from a foreign customer for 300,000 local currency units (LCU) when the U.S. dollar equivalent was $96,000. Bain shipped the equipment on October 15, 20X1, and billed the customer for 300,000 LCU when the U.S. dollar equivalent was $100,000. Bain received the customer's remittance in full on November 16, 20X1, and sold the 300,000 LCU for $105,000. In its income statement for the year ended December 31, 20X1, Bain should report a foreign exchange gain of

A. $9,000 B. $4,000 C. $0 D. $5,000

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24. Note: This is a Kaplan CPA Review Question On September 22, 20X1, Yumi Corp. purchased merchandise from an unaffiliated foreign company for 10,000 units of the foreign company's local currency. On that date, the spot rate was $.55. Yumi paid the bill in full, six months later, on March 20, 20X2, when the spot rate was $.65. The spot rate was $.70 on December 31, 20X1. What amount should Yumi report as a foreign currency transaction loss in its income statement for the year ended December 31, 20X1?

A. $500 B. $0 C. $1,500 D. $1,000

25. Note: This is a Kaplan CPA Review Question Hunt Co. purchased merchandise for 300,000 British pounds from a vendor in London on November 30, 20X1. Payment in British pounds was due on January 30, 20X2. The exchange rates to purchase one pound were as follows:

In its December 31, Year One, income statement, what amount should Hunt report as foreign exchange gain?

A. $9,000 B. $12,000 C. $6,000 D. $0

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26. Note: This is a Kaplan CPA Review Question Sphinx Co. (Sphinx) records its transactions in U.S. dollars. A sale of goods resulted in a receivable denominated in Japanese yen, and a purchase of goods resulted in a payable denominated in Euros. Sphinx recorded a foreign exchange transaction gain on collection of the receivable and an exchange transaction loss on the settlement of the payable. The exchange rates are expressed as so many units of foreign currency to one dollar. Did the number of foreign currency units exchangeable for a dollar increase or decrease between the contract and settlement dates?

A. Option A B. Option B C. Option C D. Option D

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27. Myway Company sold equipment to a Canadian company for 100,000 Canadian dollars (C$) on January 1, 20X9 with settlement to be in 60 days. On the same date, Alman entered into a 60-day forward contract to sell 100,000 Canadian dollars at a forward rate of 1 C$ = $.94 in order to manage its exposed foreign currency receivable. The forward contract is not designated as a hedge. The spot rates were:

Based on the preceding information, the entry to revalue foreign currency payable to current U.S. dollar value on March 1 will have:

A. a credit to Foreign Currency Transaction Gain for $1,500. B. a debit to Foreign Currency Transaction Loss for $2,500. C. a debit to Foreign Currency Transaction Loss for $1,500. D. a credit to Foreign Currency Transaction Gain for $1,000.

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28. Myway Company sold equipment to a Canadian company for 100,000 Canadian dollars (C$) on January 1, 20X9 with settlement to be in 60 days. On the same date, Alman entered into a 60-day forward contract to sell 100,000 Canadian dollars at a forward rate of 1 C$ = $.94 in order to manage its exposed foreign currency receivable. The forward contract is not designated as a hedge. The spot rates were:

Based on the preceding information, what is the overall effect on net income of Myway's use of the forward exchange contract?

A. Net loss of $1,000 B. Net gain of $1,500 C. Net loss of $500 D. No effect

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29. Myway Company sold equipment to a Canadian company for 100,000 Canadian dollars (C$) on January 1, 20X9 with settlement to be in 60 days. On the same date, Alman entered into a 60-day forward contract to sell 100,000 Canadian dollars at a forward rate of 1 C$ = $.94 in order to manage its exposed foreign currency receivable. The forward contract is not designated as a hedge. The spot rates were:

Based on the preceding information, had Myway not used the forward exchange contract, net income for the year would have:

A. increased by $1,000. B. increased by $500. C. decreased by $1,000. D. decreased by $1,500.

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30. Levin company entered into a forward contract to speculate in the foreign currency. It sold 100,000 foreign currency units under a contract dated November 1, 20X8, for delivery on January 31, 20X9:

In its income statement for the year ended December 31, 20X8, what amount of loss should Levin report from this forward contract?

A. $0 B. $300 C. $200 D. $100

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31. Taste Bits Inc. purchased chocolates from Switzerland for 200,000 Swiss francs (SFr) on December 1, 20X8. Payment is due on January 30, 20X9. On December 1, 20X8, the company also entered into a 60-day forward contract to purchase 100,000 Swiss francs. The forward contract is not designated as a hedge. The rates were as follows:

Based on the preceding information, the entries on December 31, 20X8, include a:

A. Credit to Foreign Currency Payable to Exchange Broker, $4,000. B. Debit to Foreign Currency Receivable from Exchange Broker, $6,000. C. Debit to Foreign Currency Receivable from Exchange Broker, $186,000. D. Debit to Foreign Currency Transaction Gain, $4,000.

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32. Taste Bits Inc. purchased chocolates from Switzerland for 200,000 Swiss francs (SFr) on December 1, 20X8. Payment is due on January 30, 20X9. On December 1, 20X8, the company also entered into a 60-day forward contract to purchase 100,000 Swiss francs. The forward contract is not designated as a hedge. The rates were as follows:

Based on the preceding information, the entries on January 30, 20X9, include a:

A. Debit to Dollars Payable to Exchange Broker, $180,000. B. Credit to Cash, $184,000. C. Credit to Premium on Forward Contract, $4,000. D. Credit to Foreign Currency Receivable from Exchange Broker, $180,000.

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33. Taste Bits Inc. purchased chocolates from Switzerland for 200,000 Swiss francs (SFr) on December 1, 20X8. Payment is due on January 30, 20X9. On December 1, 20X8, the company also entered into a 60-day forward contract to purchase 100,000 Swiss francs. The forward contract is not designated as a hedge. The rates were as follows:

Based on the preceding information, the entries on January 30, 20X9, include a:

A. Credit to Foreign Currency Units (SFr), $184,000. B. Credit to Cash, $180,000. C. Debit to Foreign Currency Transaction Loss, $4,000. D. Debit to Dollars Payable to Exchange Broker, $184,000.

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34. Taste Bits Inc. purchased chocolates from Switzerland for 200,000 Swiss francs (SFr) on December 1, 20X8. Payment is due on January 30, 20X9. On December 1, 20X8, the company also entered into a 60-day forward contract to purchase 100,000 Swiss francs. The forward contract is not designated as a hedge. The rates were as follows:

Based on the preceding information, the entries on January 30, 20X9, include a:

A. Debit to Dollars Payable to Exchange Broker, $184,000. B. Credit to Foreign Currency Transaction Gain, $4,000. C. Credit to Foreign Currency Receivable from Exchange Broker, $180,000. D. Debit to Foreign Currency Units (SFr), $184,000.

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35. On December 1, 20X8, Hedge Company entered into a 60-day speculative forward contract to sell 200,000 British pounds (£) at a forward rate of £1 = $1.78. On the same day it purchased a 60-day speculative forward contract to buy 100,000 euros (€) at a forward rate of €1 = $1.42. The rates are as follows:

Hedge had no other speculation transactions in 20X8 and 20X9. Ignore taxes. Based on the preceding information, what is the effect of the British pound speculative contract on 20X8 net income?

A. $10,000 gain B. $6,000 gain C. $8,000 gain D. $2,000 loss

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36. On December 1, 20X8, Hedge Company entered into a 60-day speculative forward contract to sell 200,000 British pounds (£) at a forward rate of £1 = $1.78. On the same day it purchased a 60-day speculative forward contract to buy 100,000 euros (€) at a forward rate of €1 = $1.42. The rates are as follows:

Hedge had no other speculation transactions in 20X8 and 20X9. Ignore taxes. Based on the preceding information, what is the overall effect of speculation on 20X8 net income?

A. $4,000 gain B. $6,000 gain C. $8,000 loss D. $8,000 gain

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37. On December 1, 20X8, Hedge Company entered into a 60-day speculative forward contract to sell 200,000 British pounds (£) at a forward rate of £1 = $1.78. On the same day it purchased a 60-day speculative forward contract to buy 100,000 euros (€) at a forward rate of €1 = $1.42. The rates are as follows:

Hedge had no other speculation transactions in 20X8 and 20X9. Ignore taxes. Based on the preceding information, what is the effect of the euro speculative contract on 20X9 net income?

A. $4,000 loss B. $1,000 gain C. $8,000 gain D. $2,000 loss

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38. On December 1, 20X8, Hedge Company entered into a 60-day speculative forward contract to sell 200,000 British pounds (£) at a forward rate of £1 = $1.78. On the same day it purchased a 60-day speculative forward contract to buy 100,000 euros (€) at a forward rate of €1 = $1.42. The rates are as follows:

Hedge had no other speculation transactions in 20X8 and 20X9. Ignore taxes. Based on the preceding information, what is the overall effect of speculation on 20X9 net income?

A. $1,000 loss B. $6,000 gain C. $3,000 loss D. $8,000 gain

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39. On December 1, 20X8, Hedge Company entered into a 60-day speculative forward contract to sell 200,000 British pounds (£) at a forward rate of £1 = $1.78. On the same day it purchased a 60-day speculative forward contract to buy 100,000 euros (€) at a forward rate of €1 = $1.42. The rates are as follows:

Hedge had no other speculation transactions in 20X8 and 20X9. Ignore taxes. Based on the preceding information, what is the net gain or loss on the British pound speculative contract?

A. $8,000 gain B. $6,000 gain C. $3,000 loss D. $10,000 gain

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40. On December 1, 20X8, Hedge Company entered into a 60-day speculative forward contract to sell 200,000 British pounds (£) at a forward rate of £1 = $1.78. On the same day it purchased a 60-day speculative forward contract to buy 100,000 euros (€) at a forward rate of €1 = $1.42. The rates are as follows:

Hedge had no other speculation transactions in 20X8 and 20X9. Ignore taxes. Based on the preceding information, what is the net gain or loss on the euro speculative contract?

A. $8,000 gain B. $6,000 gain C. $3,000 loss D. $1,000 loss

41. Which of the following observations is true of forwards contracts?

A. Substantial margin is required to initiate a contract. B. Must be completed either with the underlying's future delivery or net cash settlement. C. Cannot be customized; for a specific amount at a specific date. D. Usually settled with a net cash amount prior to maturity date.

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42. Note: This is a Kaplan CPA Review Question On September 1, 20X1, Brady Corp. entered into a foreign exchange contract for speculative purposes by purchasing 50,000 deutsche marks for delivery in 60 days. The rates to exchange $1 for 1 deutsche mark follow:

In its September 30, 20X1 income statement, what amount should Brady report as foreign exchange loss?

A. $1,000 B. $2,500 C. $1,500 D. $500

43. All of the following are true statements when measuring hedge effectiveness except:

A. Effectiveness means there is an approximate offset with the range of 80% to 125% of the changes in the fair value of the cash flows. B. Effectiveness means there is an approximate offset in fair value to the risk being hedged. C. A Company may elect to choose from several different measures for assessing hedge effectiveness. D. Effectiveness must be assessed at least annually when the company reports their annual financial statements.

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44. All of the following are management tools available for a U.S. company to hedge its net investment in a foreign affiliate except for:

A. Forward exchange contracts B. Foreign currency commitments C. Intercompany financing arrangements including intercompany transactions D. None of these.

45. The fair market value of a near-month call option with a strike price of $45 is $5, when the stock is trading at $48. Based on the preceding information, which of the following is true of the intrinsic and time values associated with this option.

A. Option A B. Option B C. Option C D. Option D

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46. The fair market value of a near-month call option with a strike price of $45 is $5, when the stock is trading at $48. Based on the preceding information, the call option:

A. has no intrinsic value currently. B. is at the money. C. is out of the money. D. is in the money.

47. An investor purchases a put option with a strike price of $100 for $3. This option is considered "in the money" if the underlying is trading:

A. below $100. B. at $100. C. above $100. D. above $103.

48. Which of the following observations is true of futures contracts?

A. Contracted through a dealer, usually a bank. B. Customized to meet contracting company's terms and needs. C. Typically no margin deposit required. D. Traded on an exchange and acquired through an exchange broker.

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49. Company X issues variable-rate debt but wishes to fix its interest rates because it believes the variable rate may increase. Company Y has a fixed-rate bond but is looking for a variablerate interest because it assumes the interest rates may decrease. The two companies agree to exchange cash flows. Such an arrangement is called:

A. a futures contract. B. a forward contract. C. a swap. D. an option.

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50. Spiralling crude oil prices prompted AMAR Company to purchase call options on oil as a price-risk-hedging device to hedge the expected increase in prices on an anticipated purchase of oil. On November 30, 20X8, AMAR purchases call options for 20,000 barrels of oil at $100 per barrel at a premium of $4 per barrel, with a February 1, 20X9, call date. The following is the pricing information for the term of the call:

The information for the change in the fair value of the options follows:

On February 1, 20X9, AMAR sells the options at their value on that date and acquires 20,000 barrels of oil at the spot price. On April 1, 20X9, AMAR sells the oil for $112 per barrel. Based on the preceding information, which of the following adjusting entries would be required on December 31, 20X8?

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B. Option B C. Option C D. Option D

51. Spiralling crude oil prices prompted AMAR Company to purchase call options on oil as a price-risk-hedging device to hedge the expected increase in prices on an anticipated purchase of oil. On November 30, 20X8, AMAR purchases call options for 20,000 barrels of oil at $100 per barrel at a premium of $4 per barrel, with a February 1, 20X9, call date. The following is the pricing information for the term of the call:

The information for the change in the fair value of the options follows:

On February 1, 20X9, AMAR sells the options at their value on that date and acquires 20,000 barrels of oil at the spot price. On April 1, 20X9, AMAR sells the oil for $112 per barrel. Based on the preceding information, in the entry to record the increase in the intrinsic value of the options on December 31, 20X8,

A. Purchased Call Options will be credited for $100,000. B. Purchased Call Options will be debited for $130,000. C. Retained Earnings will be credited for $100,000. D. Other Comprehensive Income will be credited for $100,000.

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52. Spiralling crude oil prices prompted AMAR Company to purchase call options on oil as a price-risk-hedging device to hedge the expected increase in prices on an anticipated purchase of oil. On November 30, 20X8, AMAR purchases call options for 20,000 barrels of oil at $100 per barrel at a premium of $4 per barrel, with a February 1, 20X9, call date. The following is the pricing information for the term of the call:

The information for the change in the fair value of the options follows:

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B. Option B C. Option C D. Option D

53. Spiralling crude oil prices prompted AMAR Company to purchase call options on oil as a price-risk-hedging device to hedge the expected increase in prices on an anticipated purchase of oil. On November 30, 20X8, AMAR purchases call options for 20,000 barrels of oil at $100 per barrel at a premium of $4 per barrel, with a February 1, 20X9, call date. The following is the pricing information for the term of the call:

The information for the change in the fair value of the options follows:

A. a debit to Other Comprehensive Income for $200,000. B. a debit to Cost of Goods Sold for $2,240,000. C. a credit to Oil Inventory for $2,240,000. D. a credit to Cost of Goods Sold for $100,000.

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54. On December 1, 20X8, Winston Corporation acquired 100 shares of Linked Corporation at a cost of $40 per share. Winston classifies them as available-for-sale securities. On this same date, it decides to hedge against a possible decline in the value of the securities by purchasing, at a cost of $250, an at-the-money put option to sell the 100 shares at $40 per share. The option expires on February 20, 20X9. Selected information concerning the fair values of the investment and the options follow:

Assume that Winston exercises the put option and sells Linked shares on February 20, 20X9. Based on the preceding information, what is the market price of Linked Corporation stock on December 31, 20X8?

A. $40 B. $37 C. $36 D. $38

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55. On December 1, 20X8, Winston Corporation acquired 100 shares of Linked Corporation at a cost of $40 per share. Winston classifies them as available-for-sale securities. On this same date, it decides to hedge against a possible decline in the value of the securities by purchasing, at a cost of $250, an at-the-money put option to sell the 100 shares at $40 per share. The option expires on February 20, 20X9. Selected information concerning the fair values of the investment and the options follow:

A. $35 B. $37 C. $36 D. $40

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56. On December 1, 20X8, Winston Corporation acquired 100 shares of Linked Corporation at a cost of $40 per share. Winston classifies them as available-for-sale securities. On this same date, it decides to hedge against a possible decline in the value of the securities by purchasing, at a cost of $250, an at-the-money put option to sell the 100 shares at $40 per share. The option expires on February 20, 20X9. Selected information concerning the fair values of the investment and the options follow:

Assume that Winston exercises the put option and sells Linked shares on February 20, 20X9. Based on the preceding information, the journal entry made on December 31, 20X8 to record decrease in the time value of the options will include:

A. a debit to Loss on Hedge Activity for $150. B. a credit to Put Option for $300. C. a debit to Loss on Hedge Activity for $300. D. a credit to Put Option for $100.

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57. On December 1, 20X8, Winston Corporation acquired 100 shares of Linked Corporation at a cost of $40 per share. Winston classifies them as available-for-sale securities. On this same date, it decides to hedge against a possible decline in the value of the securities by purchasing, at a cost of $250, an at-the-money put option to sell the 100 shares at $40 per share. The option expires on February 20, 20X9. Selected information concerning the fair values of the investment and the options follow:

Assume that Winston exercises the put option and sells Linked shares on February 20, 20X9. Based on the preceding information, which of the following journal entries will be made on February 20, 20X9?

A. Option A B. Option B

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C. Option C D. Option D

Essay Questions

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58. Quantum Company imports goods from different countries. Some transactions are denominated in U.S. dollars and others in foreign currencies. A summary of accounts receivable and accounts payable on December 31, 20X8, before adjustments for the effects of changes in exchange rates during 20X8, follows:

The spot rates on December 31, 20X8, were:

The average exchange rates during the collection and payment period in 20X9 are:

Required: 1) Prepare the adjusting entries on December 31, 20X8. 2) Record the collection of the accounts receivable and the payment of the accounts payable in 20X9. 3) What was the foreign currency gain or loss on the accounts receivable transaction denominated in SFr for the year ended December 31, 20X8? For the year ended December 31, 20X9? Overall for this transaction? 4) What was the foreign currency gain or loss on the accounts receivable transaction denominated in ¥? For the year ended December 31, 20X8? For the year ended December 31, 20X9? Overall for this transaction?

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59. On December 1, 20X8, Secure Company bought a 90-day forward contract to purchase 200,000 euros (€) at a forward rate of €1 = $1.35 when the spot rate was $1.33. Other exchange rates were as follows:

Required: 1) Prepare all journal entries related to Secure Company's foreign currency speculation from December 1, 20X8, through March 1, 20X9, assuming the fiscal year ends on December 31, 20X8. 2) Did the company gain or lose on its purchase of the forward contract?

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60. On December 1, 20X8, Denizen Corporation entered into a 120-day forward contract to purchase 200,000 Canadian dollars (C$). Denizen's fiscal year ends on December 31. The forward contract was to hedge a firm commitment agreement made on December 1, 20X8, to purchase electronic goods on January 30, with payment due on March 31, 20X8. The derivative is designated as a fair value hedge. The direct exchange rates follow:

Required: Prepare all journal entries for Denizen Corporation.

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61. On December 1, 20X8, Denizen Corporation entered into a 120-day forward contract to purchase 200,000 Canadian dollars (C$). Denizen's fiscal year ends on December 31. The forward contract was to hedge an anticipated purchase of electronic goods on January 30, 20X9. The purchase took place on January 30, with payment due on March 31, 20X9. The derivative is designated as a cash flow hedge. The company uses the forward exchange rate to measure hedge effectiveness. The direct exchange rates follow:

Required: Prepare all journal entries for Denizen Corporation.

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62. On December 1, 20X8, Merry Corporation acquired 100 shares of Venus Corporation at a cost of $60 per share. Merry classifies them as available-for-sale securities. On this same date, it decides to hedge against a possible decline in the value of the securities by purchasing, at a cost of $400, an at-the-money put option to sell the 100 shares at $60 per share. The option expires on February 20, 20X9. Selected information concerning the fair values of the investment and the options follow:

Assume that Merry exercises the put option and sells Venus shares on February 20, 20X9. Required: 1) Prepare the entries required on December 1, 20X8, to record the purchase of the Venus stock and the put options. 2) Prepare the entries required on December 31, 20X8, to record the change in intrinsic value and time value of the options, as well as the revaluation of the available-for-sale securities. 3) Prepare the entries required on February 20, 20X8, to record the exercise of the put option and the sale of the securities at that date.

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Chapter 11 Multinational Accounting: Foreign Currency Transactions and Financial Instruments Answer Key

Multiple Choice Questions

If 1 British pound can be exchanged for 180 cents of U.S. currency, what fraction should be used to compute the indirect quotation of the exchange rate expressed in British pounds?

A. 1/180 B. 1/.56 C. 1.8/1 D. 1/1.8

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Understand how to make calculations using foreign currency exchange rates. Topic: Direct versus Indirect Exchange Rates

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Suppose the direct foreign exchange rates in U.S. dollars are: 1 Singapore dollar = $.7025 1 Cyprus pound = $2.5132 Based on the information given above, the indirect exchange rates for the Singapore dollar and the Cyprus Pound (from a U.S. perspective) are:

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 11-01 Understand how to make calculations using foreign currency exchange rates. Topic: Direct versus Indirect Exchange Rates

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Suppose the direct foreign exchange rates in U.S. dollars are: 1 Singapore dollar = $.7025 1 Cyprus pound = $2.5132 Based on the information given above, how many U.S. dollars must be paid for a purchase of citrus fruits costing 10,000 Cyprus pounds?

A. $25,132 B. $15,132 C. $3,979 D. $35,775

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Suppose the direct foreign exchange rates in U.S. dollars are: 1 Singapore dollar = $.7025 1 Cyprus pound = $2.5132 Based on the information given above, how many Singapore dollars are required to purchase goods costing 10,000 US dollars?

A. 7,025 B. 14,235 C. 17,655 D. 2,975

Upon arrival in Chile, Karen exchanged $1,000 of U.S. currency into 480,000 Chilean Pesos. While returning after her two month visit, she exchanged her remaining 50,000 Pesos into $100 of U.S. currency. What amount of gain or a loss did Karen experience on the 50,000 pesos she held during her visit and converted to U.S. dollars at the departure date?

A. Loss of $4. B. Gain of $4. C. Loss of $6. D. No gain or loss.

AACSB: Analytic AICPA FN: Measurement

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Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Understand how to make calculations using foreign currency exchange rates. Topic: Changes in Exchange Rates

Chicago based Corporation X has a number of importing transactions with companies based in UK. Importing activities result in payables. If the settlement currency is the British Pound, which of the following will happen by changes in the direct or indirect exchange rates?

A. Option A B. Option B C. Option C D. Option D

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Understand how to make calculations using foreign currency exchange rates. Topic: Changes in Exchange Rates Topic: Direct versus Indirect Exchange Rates

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Chicago based Corporation X has a number of exporting transactions with companies based in Sweden. Exporting activities result in receivables. If the settlement currency is the Swedish Krona, which of the following will happen by changes in the direct or indirect exchange rates?

A. Option A B. Option B C. Option C D. Option D

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Corporation X has a number of exporting transactions with companies based in Vietnam. Exporting activities result in receivables. If the settlement currency is the US dollar, which of the following will happen by changes in the direct or indirect exchange rates?

A. Option A B. Option B C. Option C D. Option D

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Heavy Company sold metal scrap to a Brazilian company for 200,000 Brazilian reais on December 1, 20X8, with payment due on January 20, 20X9. The exchange rates were:

Based on the preceding information, which of the following is true of dollar's movement vis-à-vis Brazilian real during the period?

A. Option A B. Option B C. Option C D. Option D

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10.

Heavy Company sold metal scrap to a Brazilian company for 200,000 Brazilian reais on December 1, 20X8, with payment due on January 20, 20X9. The exchange rates were:

Based on the preceding information, what is the Heavy's overall net gain or net loss from its foreign currency exposure related to this transaction?

A. $4,860 loss B. $2,600 loss C. $9,018 gain D. $2,260 gain

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11.

Mint Corporation has several transactions with foreign entities. Each transaction is denominated in the local currency unit of the country in which the foreign entity is located. On October 1, 20X8, Mint purchased confectionary items from a foreign company at a price of LCU 5,000 when the direct exchange rate was 1 LCU = $1.20. The account has not been settled as of December 31, 20X8, when the exchange rate has decreased to 1 LCU = $1.10. The foreign exchange gain or loss on Mint's records at year-end for this transaction will be:

A. $500 loss B. $500 gain C. $378 gain D. $5,500 loss

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12.

Mint Corporation has several transactions with foreign entities. Each transaction is denominated in the local currency unit of the country in which the foreign entity is located. On November 2, 20X8, Mint sold confectionary items to a foreign company at a price of LCU 23,000 when the direct exchange rate was 1 LCU = $1.08. The account has not been settled as of December 31, 20X8, when the exchange rate has increased to 1 LCU = $1.10. The foreign exchange gain or loss on Mint's records at year-end for this transaction will be:

A. $460 loss B. $387 loss C. $387 gain D. $460 gain

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13.

On September 3, 20X8, Jackson Corporation purchases goods for a U.S. dollar equivalent of $17,000 from a Swiss company. The transaction is denominated in Swiss francs (SFr). The payment is made on October 10. The exchange rates were:

What entry is required to revalue foreign currency payable to U.S. dollar equivalent value on October 10?

A. Option A B. Option B C. Option C D. Option D

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14.

On March 1, 20X8, Wilson Corporation sold goods for a U.S. dollar equivalent of $31,000 to a Thai company. The transaction is denominated in Thai bahts. The payment is received on May 10. The exchange rates were:

What entry is required to revalue foreign currency payable to U.S. dollar equivalent value on May 10?

A. Option A B. Option B C. Option C D. Option D

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15.

On December 5, 20X8, Texas based Imperial Corporation purchased goods from a Saudi Arabian firm for 100,000 riyals (SAR), to be paid on January 10, 20X9. The transaction is denominated in Saudi riyals. Imperial's fiscal year ends on December 31, and its reporting currency is the U.S. dollar. The exchange rates are:

Based on the preceding information, what journal entry would Imperial make on December 31, 20X8, to revalue foreign currency payable to equivalent U.S. dollar value?

A. Option A B. Option B C. Option C D. Option D

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16.

Based on the preceding information, what journal entry would Imperial make on January 10, 20X9, to revalue foreign currency payable to equivalent U.S. dollar value?

A. Option A B. Option B C. Option C D. Option D

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17.

Based on the preceding information, what was the overall foreign currency gain or loss on the accounts payable transaction?

A. $300 loss B. $200 loss C. $100 gain D. $200 gain

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18.

Spartan Company purchased interior decoration material from Egypt for 100,000 Egyptian pounds on September 5, 20X8, with payment due on December 2, 20X8. Additionally, on September 5, Spartan acquired a 90-day forward contract to purchase 100,000 Egyptian pounds of E£ = $.1850. The forward contract was acquired to manage the exposed net liability position in Egyptian pounds, but it was not designated as a hedge. The spot rates were:

Based on the preceding information, in the entry made on December 2 nd to revalue foreign currency receivable to current equivalent U.S. dollar value,

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19.

Based on the preceding information, what is the entry required to settle foreign currency payable on December 2?

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-02 Understand the accounting implications of and be able to make calculations related to foreign currency transactions. Topic: Foreign Currency Import and Export Transactions 11-70 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

20.

Detroit based Auto Corporation, purchased ancillaries from a Japanese firm on December 1, 20X8, for 1,000,000 Yen, when the spot rate for Yen was $.0095. On December 31, 20X8, the spot rate stood at $.0096. On January 10, 20X9 Auto paid 1,000,000 Yen acquired at a rate of $.0094. Auto's income statements should report a foreign exchange gain or loss for the years ended December 31, 20X8 and 20X9 of:

A. Option A B. Option B C. Option C D. Option D

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21.

On November 1, 20X8, Denver Company borrowed 500,000 local currency units (LCU) from a foreign lender evidenced by an interest-bearing note due on November 1, 20X9, which is denominated in the currency of the lender. The U.S. dollar equivalent of the note principal was as follows:

In its income statement for 20X9, what amount should Denver include as a foreign exchange gain or loss on the note principal?

A. 15,000 gain B. 25,000 gain C. 15,000 loss D. 40,000 loss

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22.

Company X denominated a December 1, 20X9, purchase of goods in a currency other than its functional currency. The transaction resulted in a payable fixed in terms of the amount of foreign currency, and was paid on the settlement date, January 10, 2010. Exchange rates moved unfavorably at December 31, 20X9, resulting in a loss that should:

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-02 Understand the accounting implications of and be able to make calculations related to foreign currency transactions. Topic: Basics of Foreign Currency Transactions

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23.

Note: This is a Kaplan CPA Review Question On September 1, 20X1, Bain Corp. received an order for equipment from a foreign customer for 300,000 local currency units (LCU) when the U.S. dollar equivalent was $96,000. Bain shipped the equipment on October 15, 20X1, and billed the customer for 300,000 LCU when the U.S. dollar equivalent was $100,000. Bain received the customer's remittance in full on November 16, 20X1, and sold the 300,000 LCU for $105,000. In its income statement for the year ended December 31, 20X1, Bain should report a foreign exchange gain of

A. $9,000 B. $4,000 C. $0 D. $5,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 11-02 Understand the accounting implications of and be able to make calculations related to foreign currency transactions. Topic: Foreign Currency Import and Export Transactions

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24.

Note: This is a Kaplan CPA Review Question On September 22, 20X1, Yumi Corp. purchased merchandise from an unaffiliated foreign company for 10,000 units of the foreign company's local currency. On that date, the spot rate was $.55. Yumi paid the bill in full, six months later, on March 20, 20X2, when the spot rate was $.65. The spot rate was $.70 on December 31, 20X1. What amount should Yumi report as a foreign currency transaction loss in its income statement for the year ended December 31, 20X1?

A. $500 B. $0 C. $1,500 D. $1,000

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25.

Note: This is a Kaplan CPA Review Question Hunt Co. purchased merchandise for 300,000 British pounds from a vendor in London on November 30, 20X1. Payment in British pounds was due on January 30, 20X2. The exchange rates to purchase one pound were as follows:

In its December 31, Year One, income statement, what amount should Hunt report as foreign exchange gain?

A. $9,000 B. $12,000 C. $6,000 D. $0

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26.

Note: This is a Kaplan CPA Review Question Sphinx Co. (Sphinx) records its transactions in U.S. dollars. A sale of goods resulted in a receivable denominated in Japanese yen, and a purchase of goods resulted in a payable denominated in Euros. Sphinx recorded a foreign exchange transaction gain on collection of the receivable and an exchange transaction loss on the settlement of the payable. The exchange rates are expressed as so many units of foreign currency to one dollar. Did the number of foreign currency units exchangeable for a dollar increase or decrease between the contract and settlement dates?

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 3 Hard Learning Objective: 11-01 Understand how to make calculations using foreign currency exchange rates. Learning Objective: 11-02 Understand the accounting implications of and be able to make calculations related to foreign currency transactions. Topic: Direct versus Indirect Exchange Rates Topic: Foreign Currency Import and Export Transactions

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27.

Myway Company sold equipment to a Canadian company for 100,000 Canadian dollars (C$) on January 1, 20X9 with settlement to be in 60 days. On the same date, Alman entered into a 60-day forward contract to sell 100,000 Canadian dollars at a forward rate of 1 C$ = $.94 in order to manage its exposed foreign currency receivable. The forward contract is not designated as a hedge. The spot rates were:

Based on the preceding information, the entry to revalue foreign currency payable to current U.S. dollar value on March 1 will have:

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-03 Understand how to hedge international currency risk using foreign currency forward exchange financial instruments. Topic: Case 1: Not a Designated Hedging Instrument

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28.

Based on the preceding information, what is the overall effect on net income of Myway's use of the forward exchange contract?

A. Net loss of $1,000 B. Net gain of $1,500 C. Net loss of $500 D. No effect

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29.

Based on the preceding information, had Myway not used the forward exchange contract, net income for the year would have:

A. increased by $1,000. B. increased by $500. C. decreased by $1,000. D. decreased by $1,500.

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30.

Levin company entered into a forward contract to speculate in the foreign currency. It sold 100,000 foreign currency units under a contract dated November 1, 20X8, for delivery on January 31, 20X9:

In its income statement for the year ended December 31, 20X8, what amount of loss should Levin report from this forward contract?

A. $0 B. $300 C. $200 D. $100

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31.

Taste Bits Inc. purchased chocolates from Switzerland for 200,000 Swiss francs (SFr) on December 1, 20X8. Payment is due on January 30, 20X9. On December 1, 20X8, the company also entered into a 60-day forward contract to purchase 100,000 Swiss francs. The forward contract is not designated as a hedge. The rates were as follows:

Based on the preceding information, the entries on December 31, 20X8, include a:

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 11-03 Understand how to hedge international currency risk using foreign currency forward exchange financial instruments. Topic: Case 1: Not a Designated Hedging Instrument

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32.

Based on the preceding information, the entries on January 30, 20X9, include a:

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33.

Based on the preceding information, the entries on January 30, 20X9, include a:

A. Credit to Foreign Currency Units (SFr), $184,000. B. Credit to Cash, $180,000. C. Debit to Foreign Currency Transaction Loss, $4,000. D. Debit to Dollars Payable to Exchange Broker, $184,000.

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34.

Based on the preceding information, the entries on January 30, 20X9, include a:

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35.

On December 1, 20X8, Hedge Company entered into a 60-day speculative forward contract to sell 200,000 British pounds (£) at a forward rate of £1 = $1.78. On the same day it purchased a 60-day speculative forward contract to buy 100,000 euros (€) at a forward rate of €1 = $1.42. The rates are as follows:

Hedge had no other speculation transactions in 20X8 and 20X9. Ignore taxes. Based on the preceding information, what is the effect of the British pound speculative contract on 20X8 net income?

A. $10,000 gain B. $6,000 gain C. $8,000 gain D. $2,000 loss

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36.

Hedge had no other speculation transactions in 20X8 and 20X9. Ignore taxes. Based on the preceding information, what is the overall effect of speculation on 20X8 net income?

A. $4,000 gain B. $6,000 gain C. $8,000 loss D. $8,000 gain

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37.

Hedge had no other speculation transactions in 20X8 and 20X9. Ignore taxes. Based on the preceding information, what is the effect of the euro speculative contract on 20X9 net income?

A. $4,000 loss B. $1,000 gain C. $8,000 gain D. $2,000 loss

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38.

Hedge had no other speculation transactions in 20X8 and 20X9. Ignore taxes. Based on the preceding information, what is the overall effect of speculation on 20X9 net income?

A. $1,000 loss B. $6,000 gain C. $3,000 loss D. $8,000 gain

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39.

Hedge had no other speculation transactions in 20X8 and 20X9. Ignore taxes. Based on the preceding information, what is the net gain or loss on the British pound speculative contract?

A. $8,000 gain B. $6,000 gain C. $3,000 loss D. $10,000 gain

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40.

Hedge had no other speculation transactions in 20X8 and 20X9. Ignore taxes. Based on the preceding information, what is the net gain or loss on the euro speculative contract?

A. $8,000 gain B. $6,000 gain C. $3,000 loss D. $1,000 loss

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41.

Which of the following observations is true of forwards contracts?

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-03 Understand how to hedge international currency risk using foreign currency forward exchange financial instruments. Topic: Forward Exchange Contracts

42.

Note: This is a Kaplan CPA Review Question On September 1, 20X1, Brady Corp. entered into a foreign exchange contract for speculative purposes by purchasing 50,000 deutsche marks for delivery in 60 days. The rates to exchange $1 for 1 deutsche mark follow:

In its September 30, 20X1 income statement, what amount should Brady report as foreign exchange loss?

A. $1,000 B. $2,500 C. $1,500 D. $500

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AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 11-03 Understand how to hedge international currency risk using foreign currency forward exchange financial instruments. Topic: Case 4: Speculation in Foreign Currency Markets

43.

All of the following are true statements when measuring hedge effectiveness except:

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-04 Know how to measure hedge effectiveness; make interperiod tax allocations for foreign currency transactions; and hedge net investments in a foreign entity. Topic: Measuring Hedge Effectiveness

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44.

All of the following are management tools available for a U.S. company to hedge its net investment in a foreign affiliate except for:

A. Forward exchange contracts B. Foreign currency commitments C. Intercompany financing arrangements including intercompany transactions D. None of these.

45.

The fair market value of a near-month call option with a strike price of $45 is $5, when the stock is trading at $48. Based on the preceding information, which of the following is true of the intrinsic and time values associated with this option.

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic

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AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Section: Appendix 11B Topic: Option Contracts

46.

The fair market value of a near-month call option with a strike price of $45 is $5, when the stock is trading at $48. Based on the preceding information, the call option:

A. has no intrinsic value currently. B. is at the money. C. is out of the money. D. is in the money.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 1 Easy Section: Appendix 11B Topic: Option Contracts

47.

An investor purchases a put option with a strike price of $100 for $3. This option is considered "in the money" if the underlying is trading:

A. below $100. B. at $100. C. above $100. D. above $103.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy

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Section: Appendix 11B Topic: Option Contracts

48.

Which of the following observations is true of futures contracts?

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Section: Appendix 11B Topic: Futures Contracts

49.

Company X issues variable-rate debt but wishes to fix its interest rates because it believes the variable rate may increase. Company Y has a fixed-rate bond but is looking for a variable-rate interest because it assumes the interest rates may decrease. The two companies agree to exchange cash flows. Such an arrangement is called:

A. a futures contract. B. a forward contract. C. a swap. D. an option.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 1 Easy Section: Appendix 11B Topic: Swaps

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50.

Spiralling crude oil prices prompted AMAR Company to purchase call options on oil as a price-risk-hedging device to hedge the expected increase in prices on an anticipated purchase of oil. On November 30, 20X8, AMAR purchases call options for 20,000 barrels of oil at $100 per barrel at a premium of $4 per barrel, with a February 1, 20X9, call date. The following is the pricing information for the term of the call:

The information for the change in the fair value of the options follows:

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A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Section: Appendix 11B Topic: Option Contracts

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51.

The information for the change in the fair value of the options follows:

On February 1, 20X9, AMAR sells the options at their value on that date and acquires 20,000 barrels of oil at the spot price. On April 1, 20X9, AMAR sells the oil for $112 per barrel. Based on the preceding information, in the entry to record the increase in the intrinsic value of the options on December 31, 20X8,

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Section: Appendix 11B

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Topic: Option Contracts

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52.

The information for the change in the fair value of the options follows:

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A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Section: Appendix 11B Topic: Option Contracts

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53.

The information for the change in the fair value of the options follows:

A. a debit to Other Comprehensive Income for $200,000. B. a debit to Cost of Goods Sold for $2,240,000. C. a credit to Oil Inventory for $2,240,000. D. a credit to Cost of Goods Sold for $100,000.

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Section: Appendix 11B Topic: Option Contracts

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54.

On December 1, 20X8, Winston Corporation acquired 100 shares of Linked Corporation at a cost of $40 per share. Winston classifies them as available-for-sale securities. On this same date, it decides to hedge against a possible decline in the value of the securities by purchasing, at a cost of $250, an at-the-money put option to sell the 100 shares at $40 per share. The option expires on February 20, 20X9. Selected information concerning the fair values of the investment and the options follow:

A. $40 B. $37 C. $36 D. $38

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Section: Appendix 11B Topic: Option Contracts

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55.

A. $35 B. $37 C. $36 D. $40

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Section: Appendix 11B Topic: Option Contracts

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56.

A. a debit to Loss on Hedge Activity for $150. B. a credit to Put Option for $300. C. a debit to Loss on Hedge Activity for $300. D. a credit to Put Option for $100.

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Section: Appendix 11B Topic: Option Contracts

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57.

A. Option A

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B. Option B C. Option C D. Option D

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Section: Appendix 11B Topic: Option Contracts

Essay Questions

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58.

Quantum Company imports goods from different countries. Some transactions are denominated in U.S. dollars and others in foreign currencies. A summary of accounts receivable and accounts payable on December 31, 20X8, before adjustments for the effects of changes in exchange rates during 20X8, follows:

The spot rates on December 31, 20X8, were:

The average exchange rates during the collection and payment period in 20X9 are:

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 11-02 Understand the accounting implications of and be able to make calculations related to foreign currency transactions. Topic: Foreign Currency Import and Export Transactions

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59.

On December 1, 20X8, Secure Company bought a 90-day forward contract to purchase 200,000 euros (€) at a forward rate of €1 = $1.35 when the spot rate was $1.33. Other exchange rates were as follows:

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2) Secure Company experienced a net loss of $4,000 ($2,000 gain in 20X8 less a $6,000 loss in 20X9).

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Learning Objective: 11-03 Understand how to hedge international currency risk using foreign currency forward exchange financial instruments. Topic: Case 4: Speculation in Foreign Currency Markets

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60.

On December 1, 20X8, Denizen Corporation entered into a 120-day forward contract to purchase 200,000 Canadian dollars (C$). Denizen's fiscal year ends on December 31. The forward contract was to hedge a firm commitment agreement made on December 1, 20X8, to purchase electronic goods on January 30, with payment due on March 31, 20X8. The derivative is designated as a fair value hedge. The direct exchange rates follow:

Required: Prepare all journal entries for Denizen Corporation.

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61.

On December 1, 20X8, Denizen Corporation entered into a 120-day forward contract to purchase 200,000 Canadian dollars (C$). Denizen's fiscal year ends on December 31. The forward contract was to hedge an anticipated purchase of electronic goods on January 30, 20X9. The purchase took place on January 30, with payment due on March 31, 20X9. The derivative is designated as a cash flow hedge. The company uses the forward exchange rate to measure hedge effectiveness. The direct exchange rates follow:

Required: Prepare all journal entries for Denizen Corporation.

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62.

On December 1, 20X8, Merry Corporation acquired 100 shares of Venus Corporation at a cost of $60 per share. Merry classifies them as available-for-sale securities. On this same date, it decides to hedge against a possible decline in the value of the securities by purchasing, at a cost of $400, an at-the-money put option to sell the 100 shares at $60 per share. The option expires on February 20, 20X9. Selected information concerning the fair values of the investment and the options follow:

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Section: Appendix 11B Topic: Option Contracts

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Chapter 12 Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements

Multiple Choice Questions

1. All of the following are benefits the U.S. will gain from the adoption of globally consistent accounting standards except for:

A. Reduction in reporting costs as the need for multiple sets of financial statements decreases. B. Increased quality of information available to investors. C. Continued expansion of capital markets across national borders, facilitating more efficient use of global capital. D. Nearly seamless transition with minimal expenses related to corporate governance considerations.

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2. Which of the following statements is true regarding the SEC's timeline for convergence?

A. The SEC has no immediate plans to converge GAAP reporting with IFRS standards. B. The SEC has a plan in place to allow firms to begin filing in the United States based on IFRS during the next several years. C. The SEC has a plan in place to allow companies to choose to file statements under GAAP reporting or IFRS standards indefinitely. D. The SEC currently allows domestic companies to choose to file financial statements under either GAAP or IFRS reporting standards.

3. All of the following describe the International Accounting Standard Board (IASB) except for:

A. The IASB is a privately funded accounting standards-setting body based in London. B. The mission of the IASB is to develop a single set of high-quality, understandable and enforceable global accounting standards. C. Board members of the IASB come from diverse geographical countries that have adopted IFRS. D. IASB members serve a five-year term subject to one reappointment.

4. Note: This is a Kaplan CPA Review Question Mazeppa, Inc. is a multinational entity with its head office located in Toronto, Canada. Its main foreign subsidiary is in Paris, France, but the primary economic environment in which the foreign subsidiary generates and expends cash is in the United States. Based on this information, which of the following statements is most likely true for Mazeppa, Inc.?

A. The functional currency is the Euro. B. The local currency is the U.S. dollar. C. The reporting currency is the Canadian dollar. D. The reporting currency is the U.S. dollar.

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5. Which of the following defines a foreign-based entity that uses a functional currency different from the local currency? I. A U.S. subsidiary in Britain maintains its accounting records in pounds sterling, with the majority of its transactions denominated in pounds sterling. II. A U.S. subsidiary in Peru conducts virtually all of its business in Latin America, and uses the U.S. dollar as its major currency.

A. I. B. II. C. Both I and II. D. Neither I nor II.

6. If the restatement method for a foreign subsidiary involves remeasuring from the local currency into the functional currency, then translating from functional currency to U.S. dollars, the functional currency of the subsidiary is: I. U.S. dollar. II. Local currency unit. III. A third country's currency.

A. I B. III C. II D. Either I or II

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7. In cases of operations located in highly inflationary economies:

A. The reporting currency of the U.S. parent—the U.S. dollar—should be used as the foreign entity's functional currency. B. The foreign currency should be used as the functional currency with a footnote to the financials displaying what the earnings would have been using the U.S. dollar as the functional currency. C. The foreign currency should be used as the functional currency with a single line item— foreign translation—reporting the adjustment using the U.S. dollar as the functional currency. D. None of these.

8. The balance in Newsprint Corp.'s foreign exchange loss account was $10,000 on December 31, 20X8, before any necessary year-end adjustment relating to the following: (1) Newsprint had a $15,000 debit resulting from the restatement in dollars of the accounts of its wholly owned foreign subsidiary for the year ended December 31, 20X8. (2) Newsprint had an account payable to an unrelated foreign supplier, payable in the supplier's local currency unit (LCU) on January 15, 20X9. The U.S. dollar-equivalent of the payable was $50,000 on the December 1, 20X8, invoice date and $53,000 on December 31, 20X8. Based on the information provided, in Newsprint's 20X8 consolidated income statement, what amount should be included as foreign exchange loss in computing net income, if the LCU is the functional currency and the translation method is appropriate?

A. $28,000 B. $13,000 C. $25,000 D. $8,000

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9. The balance in Newsprint Corp.'s foreign exchange loss account was $10,000 on December 31, 20X8, before any necessary year-end adjustment relating to the following: (1) Newsprint had a $15,000 debit resulting from the restatement in dollars of the accounts of its wholly owned foreign subsidiary for the year ended December 31, 20X8. (2) Newsprint had an account payable to an unrelated foreign supplier, payable in the supplier's local currency unit (LCU) on January 15, 20X9. The U.S. dollar-equivalent of the payable was $50,000 on the December 1, 20X8, invoice date and $53,000 on December 31, 20X8. Based on the information provided, in Newsprint's 20X8 consolidated income statement, what amount should be included as foreign exchange loss in computing net income, if the U.S. dollar is the functional currency and the remeasurement method is appropriate?

A. $15,000 B. $10,000 C. $25,000 D. $28,000

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10. Infinity Corporation acquired 80 percent of the common stock of an Egyptian company on January 1, 20X8. The goodwill associated with this acquisition was $18,350. Exchange rates at various dates during 20X8 follow:

Goodwill suffered an impairment of 20 percent during the year. If the functional currency is the Egyptian Pound, how much goodwill impairment loss should be reported on Infinity's consolidated statement of income for 20X8?

A. $3,670 B. $3,700 C. $3,680 D. $3,690

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11. Infinity Corporation acquired 80 percent of the common stock of an Egyptian company on January 1, 20X8. The goodwill associated with this acquisition was $18,350. Exchange rates at various dates during 20X8 follow:

Goodwill suffered an impairment of 20 percent during the year. If the functional currency is the U.S. dollar, how much goodwill impairment loss should be reported on Infinity's consolidated statement of income for 20X8?

A. $3,680 B. $3,670 C. $3,690 D. $3,700

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12. Simon Company has two foreign subsidiaries. One is located in France, the other in England. Simon has determined the U.S. dollar is the functional currency for the French subsidiary, while the British pound is the functional currency for the English subsidiary. Both subsidiaries maintain their books and records in their respective local currencies. What methods will Simon use to convert each of the subsidiary's financial statements into U.S. dollars?

A. Option A B. Option B C. Option C D. Option D

13. When the local currency of the foreign subsidiary is the functional currency, a foreign subsidiary's inventory carried at cost would be converted to U.S. dollars by:

A. translation using historical exchange rates. B. remeasurement using historical exchange rates. C. remeasurement using the current exchange rate. D. translation using the current exchange rate.

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14. When the local currency of the foreign subsidiary is the functional currency, a foreign subsidiary's income statement accounts would be converted to U.S. dollars by:

A. translation using historical exchange rates. B. remeasurement using current exchange rates at the time of statement preparation. C. translation using average exchange rate for the period. D. remeasurement using the current exchange rate at the time of statement preparation.

15. If the U.S. dollar is the currency in which the foreign affiliate's books and records are maintained, and the U.S. dollar is also the functional currency,

A. the translation method should be used for restatement. B. the remeasurement method should be used for restatement. C. either translation or remeasurement could be used for restatement. D. no restatement is required.

16. Under the temporal method, which of the following is usually used to translate monetary amounts to the functional currency? I. The current exchange rate II The historical exchange rate III. Average exchange rate

A. I B. III C. II D. Either I or II

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17. All of the following stockholders' equity accounts of a foreign subsidiary are translated at historical exchange rates except:

A. retained earnings. B. common stock. C. additional paid-in capital. D. preferred stock.

18. Dividends of a foreign subsidiary are translated at:

A. the average exchange rate for the year. B. the exchange rate on the date of declaration. C. the current exchange rate on the date of preparation of the financial statement. D. the exchange rate on the record date.

19. If the functional currency is the local currency of a foreign subsidiary, what exchange rates should be used to translate the items below, assuming the foreign subsidiary is in a country which has not experienced hyperinflation over three years?

A. Option A B. Option B C. Option C D. Option D

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20. If the functional currency is the local currency of a foreign subsidiary, what exchange rates should be used to translate the items below, assuming the foreign subsidiary is in a country which has not experienced hyperinflation over three years?

A. Option A B. Option B C. Option C D. Option D

21. Which combination of accounts and exchange rates is correct for the translation of a foreign entity's financial statements from the functional currency to U.S. dollars?

A. Option A B. Option B C. Option C D. Option D

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22. The assets listed below of a foreign subsidiary have been converted to U.S. dollars at both current and historical exchange rates. Assuming that the local currency of the foreign subsidiary is the functional currency, what total amount should appear for these assets on the U.S. company's consolidated balance sheet?

A. $636,000 B. $648,000 C. $708,000 D. $960,000

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23. Dover Company owns 90% of the capital stock of a foreign subsidiary located in Italy. Dover's accountant has just translated the accounts of the foreign subsidiary and determined that a debit translation adjustment of $80,000 exists. If Dover uses the fully adjusted equity method for its investment, what entry should Dover record in order to recognize the translation adjustment?

A. Option A B. Option B C. Option C D. Option D

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24. For each of the items listed below, state whether they increase or decrease the balance in cumulative translation adjustments (assuming a credit balance at the beginning of the year) when the foreign currency strengthened relative to the U.S. dollar during the year.

A. Option A B. Option B C. Option C D. Option D

25. The British subsidiary of a U.S. company reported cost of goods sold of 75,000 pounds (sterling) for the current year ended December 31. The beginning inventory was 10,000 pounds, and the ending inventory was 15,000 pounds. Spot rates for various dates are as follows:

Assuming the pound is the functional currency of the British subsidiary, the translated amount of cost of goods sold that should appear in the consolidated income statement is:

A. $108,750. B. $112,500. C. $114,300. D. $125,700.

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26. Seattle, Inc. owns an 80 percent interest in a Portuguese subsidiary. For 20X8, Seattle reported income from operations of $2.0 million. The Portuguese company's income from operations, after foreign currency translation, was $1.1 million. The foreign currency translation adjustment was $120,000 (credit). Consolidated net income and consolidated comprehensive income for the year are:

A. Option A B. Option B C. Option C D. Option D

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27. On September 30, 20X8, Wilfred Company sold inventory to Jackson Corporation, its Canadian subsidiary. The goods cost Wilfred $30,000 and were sold to Jackson for $40,000, payable in Canadian dollars. The goods are still on hand at the end of the year on December 31. The Canadian dollar (C$) is the functional currency of the Canadian subsidiary. The exchange rates follow:

Based on the preceding information, at what dollar amount is the ending inventory shown in the trial balance of the consolidated worksheet?

A. $45,000 B. $50,000 C. $40,000 D. $35,000

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28. On September 30, 20X8, Wilfred Company sold inventory to Jackson Corporation, its Canadian subsidiary. The goods cost Wilfred $30,000 and were sold to Jackson for $40,000, payable in Canadian dollars. The goods are still on hand at the end of the year on December 31. The Canadian dollar (C$) is the functional currency of the Canadian subsidiary. The exchange rates follow:

Based on the preceding information, what amount of unrealized intercompany gross profit is eliminated in preparing the consolidated financial statements for the year?

A. $0 B. $5,000 C. $10,000 D. $15,000

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29. On September 30, 20X8, Wilfred Company sold inventory to Jackson Corporation, its Canadian subsidiary. The goods cost Wilfred $30,000 and were sold to Jackson for $40,000, payable in Canadian dollars. The goods are still on hand at the end of the year on December 31. The Canadian dollar (C$) is the functional currency of the Canadian subsidiary. The exchange rates follow:

Based on the preceding information, at what amount is the inventory shown on the consolidated balance sheet for the year?

A. $45,000 B. $30,000 C. $40,000 D. $35,000

30. Note: This is a Kaplan CPA Review Question Park Co.'s wholly-owned subsidiary, Schnell Corp., maintains its accounting records in German marks. Because all of Schnell's branch offices are in Switzerland, its functional currency is the Swiss franc. Remeasurement of Schnell's 20X1 financial statements resulted in a $7,600 gain, and translation of its financial statements resulted in an $8,100 gain. What amount should Park report as a foreign exchange gain in its income statement for the year ended December 31, 20X1?

A. $15,700 B. $0 C. $8,100 D. $7,600

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31. On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information:

Perth's income statement for 20X8 is as follows:

The balance sheet of Perth at December 31, 20X8, is as follows:

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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:

Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8. Refer to the above information. Assuming the local currency of the country in which Perth Company is located is the functional currency, what are the translated amounts for the items below in U.S. dollars?

A. Option A

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B. Option B C. Option C D. Option D

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32. On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information:

Perth's income statement for 20X8 is as follows:

The balance sheet of Perth at December 31, 20X8, is as follows:

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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:

Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8. Refer to the above information. Assuming Perth's local currency is the functional currency, what is the amount of translation adjustments that result from translating Perth's trial balance into U.S. dollars at December 31, 20X8?

A. $396,500 debit B. $285,000 credit C. $405,000 credit D. $411,000 credit

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33. On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information:

Perth's income statement for 20X8 is as follows:

The balance sheet of Perth at December 31, 20X8, is as follows:

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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:

Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8. Refer to the above information. Assuming Perth's local currency is the functional currency, what is the amount of patent amortization for 20X8 that results from Johnson's acquisition of Perth's stock on January 2, 20X8. Round your answer to the nearest dollar.

A. $11,500 B. $11,884 C. $7,667 D. $9,394

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34. On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information:

Perth's income statement for 20X8 is as follows:

The balance sheet of Perth at December 31, 20X8, is as follows:

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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:

Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8. Refer to the above information. Assuming Perth's local currency is the functional currency, what is the amount of translation adjustment that appears on Johnson's consolidated financial statements at December 31, 20X8?

A. $419,184 credit B. $416,884 credit C. $405,884 debit D. $398,500 credit

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35. On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information:

Perth's income statement for 20X8 is as follows:

The balance sheet of Perth at December 31, 20X8, is as follows:

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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:

Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8. Refer to the above information. Assuming Perth's local currency is the functional currency, what is the balance in Johnson's investment in foreign subsidiary account at December 31, 2008?

A. $3,216,500 B. $3,560,000 C. $3,568,300 D. $3,577,694

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36. On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information:

Perth's income statement for 20X8 is as follows:

The balance sheet of Perth at December 31, 20X8, is as follows:

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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:

Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8. Refer to the above information. Assuming the U.S. dollar is the functional currency, what is Johnson's remeasurement gain (loss) for 20X8? (Assume the ending inventory was acquired on December 31, 20X8.)

A. $31,000 gain B. $36,500 loss C. $22,000 gain D. $32,000 gain

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37. On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information:

Perth's income statement for 20X8 is as follows:

The balance sheet of Perth at December 31, 20X8, is as follows:

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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:

Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8. Refer to the above information. Assuming the U.S. dollar is the functional currency, what is the amount of Perth's cost of goods sold remeasured in U.S. dollars?

A. $811,500 B. $843,500 C. $884,500 D. $799,500

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38. On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information:

Perth's income statement for 20X8 is as follows:

The balance sheet of Perth at December 31, 20X8, is as follows:

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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:

Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8. Refer to the above information. Assuming the U.S. dollar is the functional currency, what is the amount of patent amortization for 20X8 that results from Johnson's acquisition of Perth's stock on January 2, 20X8?

A. $11,884 B. $11,770 C. $12,550 D. $11,500

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39. On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information:

Perth's income statement for 20X8 is as follows:

The balance sheet of Perth at December 31, 20X8, is as follows:

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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:

Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8. Refer to the above information. Assuming the U.S. dollar is the functional currency, what is Perth's net income for 20X8 in U.S. dollars (include the remeasurement gain or loss in Perth's net income)?

A. $238,000 B. $228,000 C. $219,500 D. $202,000

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40. On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information:

Perth's income statement for 20X8 is as follows:

The balance sheet of Perth at December 31, 20X8, is as follows:

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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:

Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8. Refer to the above information. Assuming the U.S. dollar is the functional currency, what is the balance in Johnson's investment in foreign subsidiary account at December 31, 2008?

A. $3,303,400 B. $3,294,500 C. $3,323,400 D. $3,314,500

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41. Michigan-based Leo Corporation acquired 100 percent of the common stock of a British company on January 1, 20X8, for $1,100,000. The British subsidiary's net assets amounted to 500,000 pounds on the date of acquisition. On January 1, 20X8, the book values of its identifiable assets and liabilities approximated their fair values. As a result of an analysis of functional currency indicators, Leo determined that the British pound was the functional currency. On December 31, 20X8, the British subsidiary's adjusted trial balance, translated into U.S. dollars, contained $17,000 more debits than credits. The British subsidiary reported income of 33,000 pounds for 20X8 and paid a cash dividend of 8,000 pounds on October 25, 20X8. Included on the British subsidiary's income statement was depreciation expense of 3,500 pounds. Leo uses the fully adjusted equity method of accounting for its investment in the British subsidiary and determined that goodwill in the first year had an impairment loss of 25 percent of its initial amount. Exchange rates at various dates during 20X8 follow:

Based on the preceding information, what amount should Leo record as "income from subsidiary" based on the British subsidiary's reported net income?

A. $72,930 B. $52,500 C. $72,600 D. $69,300

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42. Michigan-based Leo Corporation acquired 100 percent of the common stock of a British company on January 1, 20X8, for $1,100,000. The British subsidiary's net assets amounted to 500,000 pounds on the date of acquisition. On January 1, 20X8, the book values of its identifiable assets and liabilities approximated their fair values. As a result of an analysis of functional currency indicators, Leo determined that the British pound was the functional currency. On December 31, 20X8, the British subsidiary's adjusted trial balance, translated into U.S. dollars, contained $17,000 more debits than credits. The British subsidiary reported income of 33,000 pounds for 20X8 and paid a cash dividend of 8,000 pounds on October 25, 20X8. Included on the British subsidiary's income statement was depreciation expense of 3,500 pounds. Leo uses the fully adjusted equity method of accounting for its investment in the British subsidiary and determined that goodwill in the first year had an impairment loss of 25 percent of its initial amount. Exchange rates at various dates during 20X8 follow:

Based on the preceding information, the receipt of the dividend will result in a credit to the investment account for:

A. $16,800 B. $17,680 C. $18,000 D. $17,600

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43. Michigan-based Leo Corporation acquired 100 percent of the common stock of a British company on January 1, 20X8, for $1,100,000. The British subsidiary's net assets amounted to 500,000 pounds on the date of acquisition. On January 1, 20X8, the book values of its identifiable assets and liabilities approximated their fair values. As a result of an analysis of functional currency indicators, Leo determined that the British pound was the functional currency. On December 31, 20X8, the British subsidiary's adjusted trial balance, translated into U.S. dollars, contained $17,000 more debits than credits. The British subsidiary reported income of 33,000 pounds for 20X8 and paid a cash dividend of 8,000 pounds on October 25, 20X8. Included on the British subsidiary's income statement was depreciation expense of 3,500 pounds. Leo uses the fully adjusted equity method of accounting for its investment in the British subsidiary and determined that goodwill in the first year had an impairment loss of 25 percent of its initial amount. Exchange rates at various dates during 20X8 follow:

Based on the preceding information, on Leo's consolidated balance sheet at December 31, 20X8, what amount should be reported for the goodwill acquired on January 1, 20X8?

A. $36,845 B. $39,286 C. $36,905 D. $36,607

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44. Michigan-based Leo Corporation acquired 100 percent of the common stock of a British company on January 1, 20X8, for $1,100,000. The British subsidiary's net assets amounted to 500,000 pounds on the date of acquisition. On January 1, 20X8, the book values of its identifiable assets and liabilities approximated their fair values. As a result of an analysis of functional currency indicators, Leo determined that the British pound was the functional currency. On December 31, 20X8, the British subsidiary's adjusted trial balance, translated into U.S. dollars, contained $17,000 more debits than credits. The British subsidiary reported income of 33,000 pounds for 20X8 and paid a cash dividend of 8,000 pounds on October 25, 20X8. Included on the British subsidiary's income statement was depreciation expense of 3,500 pounds. Leo uses the fully adjusted equity method of accounting for its investment in the British subsidiary and determined that goodwill in the first year had an impairment loss of 25 percent of its initial amount. Exchange rates at various dates during 20X8 follow:

Based on the preceding information, in the stockholders' equity section of Leo's consolidated balance sheet at December 31, 20X8, Leo should report the translation adjustment as a component of other comprehensive income of:

A. $19,440 B. $17,000 C. $18,786 D. $19,380

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45. Nichols Company owns 90% of the capital stock of a foreign subsidiary located in Ireland. As a result of translating the subsidiary's accounts, a debit of $160,000 was needed in the translation adjustments account so that the foreign subsidiary's debits and credits were equal in U.S. dollars. How should Nichols report its translation adjustments on its consolidated financial statements?

A. As a $144,000 increase in the stockholders' equity section of the balance sheet. B. As a $144,000 reduction in consolidated comprehensive net income. C. As a $160,000 debit in stockholders' equity section of the balance sheet. D. As a $160,000 reduction in consolidated comprehensive net income.

46. Elan, a U.S. corporation, completed the December 31, 20X8, foreign currency translation of its 70 percent owned Swiss subsidiary's trial balance using the current rate method. The translation resulted in a debit adjustment of $25,000. The subsidiary had reported net income of 800,000 Swiss francs for 20X8 and paid dividends of 50,000 Swiss francs on September 1, 20X8. The translation rates for the year were:

The January 1 balance of the Investment in the Swiss subsidiary account was $1,600,000. Elan acquired its interest in the Swiss subsidiary at book value with no differential or goodwill recorded at acquisition. Elan's Investment in Swiss subsidiary account at December 31, 20X8, is:

A. $1,881,050. B. $1,916,050. C. $1,923,950. D. $2,051,500.

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47. On January 1, 20X8, Transport Corporation acquired 75 percent interest in Steamship Company for $300,000. Steamship is a Norwegian company. The local currency is the Norwegian kroner (NKr). The acquisition resulted in an excess of cost-over-book value of $25,000 due solely to a patent having a remaining life of 5 years. Transport uses the fully adjusted equity method to account for its investment. Steamship's December 31, 20X8, trial balance has been translated into U.S. dollars, requiring a translation adjustment debit of $8,000. Steamship's net income translated into U.S. dollars is $35,000. It declared and paid an NKr 20,000 dividend on June 1, 20X8. Relevant exchange rates are as follows:

Assume the kroner is the functional currency. Based on the preceding information, in the journal entry to record the receipt of dividend from Steamship,

A. Investment in Steamship Company will be credited for $3,450. B. Cash will be debited for $3,300. C. Investment in Steamship Company will be credited for $4,000. D. Cash will be debited for $3,600.

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48. On January 1, 20X8, Transport Corporation acquired 75 percent interest in Steamship Company for $300,000. Steamship is a Norwegian company. The local currency is the Norwegian kroner (NKr). The acquisition resulted in an excess of cost-over-book value of $25,000 due solely to a patent having a remaining life of 5 years. Transport uses the fully adjusted equity method to account for its investment. Steamship's December 31, 20X8, trial balance has been translated into U.S. dollars, requiring a translation adjustment debit of $8,000. Steamship's net income translated into U.S. dollars is $35,000. It declared and paid an NKr 20,000 dividend on June 1, 20X8. Relevant exchange rates are as follows:

Assume the kroner is the functional currency. Based on the preceding information, in the journal entry to record parent's share of subsidiary's translation adjustment:

A. Other Comprehensive Income—Translation Adjustment will be debited for $8,000. B. Other Comprehensive Income—Translation Adjustment will be credited for $6,000. C. Investment in Steamship Company will be credited for $6,000. D. Investment in Steamship Company will be debited for $8,000.

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49. On January 1, 20X8, Transport Corporation acquired 75 percent interest in Steamship Company for $300,000. Steamship is a Norwegian company. The local currency is the Norwegian kroner (NKr). The acquisition resulted in an excess of cost-over-book value of $25,000 due solely to a patent having a remaining life of 5 years. Transport uses the fully adjusted equity method to account for its investment. Steamship's December 31, 20X8, trial balance has been translated into U.S. dollars, requiring a translation adjustment debit of $8,000. Steamship's net income translated into U.S. dollars is $35,000. It declared and paid an NKr 20,000 dividend on June 1, 20X8. Relevant exchange rates are as follows:

Assume the kroner is the functional currency. Based on the preceding information, what amount of translation adjustment is required for increase in differential?

A. $3,000 B. $5,500 C. $4,500 D. $5,000

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50. On January 1, 20X8, Transport Corporation acquired 75 percent interest in Steamship Company for $300,000. Steamship is a Norwegian company. The local currency is the Norwegian kroner (NKr). The acquisition resulted in an excess of cost-over-book value of $25,000 due solely to a patent having a remaining life of 5 years. Transport uses the fully adjusted equity method to account for its investment. Steamship's December 31, 20X8, trial balance has been translated into U.S. dollars, requiring a translation adjustment debit of $8,000. Steamship's net income translated into U.S. dollars is $35,000. It declared and paid an NKr 20,000 dividend on June 1, 20X8. Relevant exchange rates are as follows:

Assume the kroner is the functional currency. Based on the preceding information, in the journal entry to record the amortization of the patent for 20X8 on the parent's books, Investment in Steamship Company will be debited for:

A. $5,000 B. $5,500 C. $4,500 D. $3,000

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51. Note: This is a Kaplan CPA Review Question Certain balance sheet accounts of a foreign subsidiary of Rowan, Inc. (Rowan) at December 31, 20X6, have been translated into U.S. dollars as follows:

The subsidiary's functional currency is the currency of the country in which it is located. What total amount should be included in Rowan's December 31, 20X6 consolidated balance sheet for the above accounts?

A. $450,000 B. $475,000 C. $455,000 D. $495,000

52. Which combination of accounts and exchange rates is correct for the remeasurement of a foreign entity's financial statements from its local currency to U.S. dollars?

A. Option A B. Option B C. Option C D. Option D

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53. Mercury Company is a subsidiary of Neptune Company and is located in Valparaíso, Chile, where the currency is the Chilean Peso. Data on Mercury's inventory and purchases are as follows:

The beginning inventory was acquired during the fourth quarter of 20X7, and the ending inventory was acquired during the fourth quarter of 20X8. Purchases were made evenly over the year. Exchange rates were as follows:

Refer the information provided above. Assuming the U.S. dollar is the functional currency, what is the amount of Mercury's cost of goods sold remeasured in U.S. dollars?

A. $1,680 B. $1,712 C. $1,700 D. $1,692

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54. Mercury Company is a subsidiary of Neptune Company and is located in Valparaíso, Chile, where the currency is the Chilean Peso. Data on Mercury's inventory and purchases are as follows:

Based on the preceding information, the translation of cost of goods sold for 20X8, assuming that the Spanish peseta is the functional currency is:

A. $1,700. B. $1,760. C. $1,680. D. $1,692.

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55. The British subsidiary of a U.S. company reported cost of goods sold of 75,000 pounds (sterling) for the current year ended December 31. The beginning inventory was 10,000 pounds, and the ending inventory was 15,000 pounds. Spot rates for various dates are as follows:

Assuming the dollar is the functional currency of the British subsidiary, the remeasured amount of cost of goods sold that should appear in the consolidated income statement is:

A. $108,750. B. $112,500. C. $114,250. D. $125,700.

56. Note: This is a Kaplan CPA Review Question Gains from remeasuring a foreign subsidiary's financial statements from the local currency, which is not the functional currency, into the company's functional currency should be reported as a(an)

A. Deferred foreign exchange gain. B. Part of continuing operations. C. Separate component of stockholders' equity. D. Extraordinary item, net of income taxes.

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57. The gain or loss on the effective portion of a U.S. parent company's hedge of a net investment in a foreign entity should be treated as:

A. an adjustment to the retained earnings account in the stockholders' equity section of its balance sheet. B. other comprehensive income. C. a translation gain or loss in the computation of net income for the reporting period. D. an adjustment to a valuation account in the asset section of its balance sheet.

58. Which of the following describes a situation when a parent company would not consolidate a foreign subsidiary?

A. Restrictions on foreign exchange in the foreign country. B. Restrictions on transfers of property in the foreign country. C. Other governmentally imposed uncertainties. D. All of these.

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59. Note: This is a Kaplan CPA Review Question The functional currency of Nash, Inc.'s subsidiary is the French franc. Nash borrowed French francs as a partial hedge of its investment in the subsidiary. In preparing consolidated financial statements, Nash's translation loss on its investment in the subsidiary exceeded its exchange gain on the borrowing. How should the effects of the loss and gain be reported in Nash's consolidated financial statements?

A. The translation loss less the exchange gain is reported separately as other comprehensive income. B. The translation loss less the exchange gain is reported in the income statement. C. The translation loss is reported separately in the stockholders' equity section of the balance sheet and the exchange gain is reported in the income statement. D. The translation loss is reported in the income statement and the exchange gain is reported separately in the stockholders' equity section of the balance sheet.

Essay Questions

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60. Briefly explain the following terms associated with accounting for foreign entities: a) Functional Currency b) Translation c) Remeasurement

61. Parisian Co. is a French company located in Paris. Yankee Corp., located in New York City, acquires Parisian Co. Parisian has the Euro as its local currency and the Swiss Franc as its functional currency. Yankee has the U.S. dollar as its local currency and the U.S. dollar as its functional currency. Required: a) The year-end consolidated financial statements will be prepared in which currency? b) Explain which method is appropriate to use to use at year-end: Translation or Remeasurement?

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62. Prepare a schedule providing a proof of the translation adjustment using the information provided below.

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63. On January 1, 2008, Pace Company acquired all of the outstanding stock of Spin PLC, a British Company, for $350,000. Spin's net assets on the date of acquisition were 250,000 pounds (£). On January 1, 2008, the book and fair values of the Spin's identifiable assets and liabilities approximated their fair values except for property, plant, and equipment and trademarks. The fair value of Spin's property, plant, and equipment exceeded its book value by $25,000. The remaining useful life of Spin's equipment at January 1, 2008, was 10 years. The remainder of the differential was attributable to a trademark having an estimated useful life of 5 years. Spin's trial balance on December 31, 2008, in pounds, follows:

Additional Information 1. Spin uses the FIFO method for its inventory. The beginning inventory was acquired on December 31, 2007, and ending inventory was acquired on December 26, 2008. Purchases of £300,000 were made evenly throughout 2008. 2. Spin acquired all of its property, plant, and equipment on March 1, 2006, and uses straightline depreciation. 3. Spin's sales were made evenly throughout 2008, and its operating expenses were incurred evenly throughout 2008. 4. The dividends were declared and paid on November 1, 2008. 12-57 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

5. Pace's income from its own operations was $150,000 for 2008, and its total stockholders' equity on January 1, 2008, was $1,000,000. Pace declared $50,000 of dividends during 2008. 6. Exchange rates were as follows:

Required: 1) Prepare a schedule translating the trial balance from British pounds into U.S. dollars. Assume the pound is the functional currency. 2) Assume that Pace uses the fully adjusted equity method. Record all journal entries that relate to its investment in the British subsidiary during 2008. Provide the necessary documentation and support for the amounts in the journal entries, including a schedule of the translation adjustment related to the differential. 3) Prepare a schedule that determines Pace's consolidated comprehensive income for 2008.

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64. On January 1, 2008, Pace Company acquired all of the outstanding stock of Spin PLC, a British Company, for $350,000. Spin's net assets on the date of acquisition were 250,000 pounds (£). On January 1, 2008, the book and fair values of the Spin's identifiable assets and liabilities approximated their fair values except for property, plant, and equipment and trademarks. The fair value of Spin's property, plant, and equipment exceeded its book value by $25,000. The remaining useful life of Spin's equipment at January 1, 2008, was 10 years. The remainder of the differential was attributable to a trademark having an estimated useful life of 5 years. Spin's trial balance on December 31, 2008, in pounds, follows:

Additional Information 1. Spin uses the FIFO method for its inventory. The beginning inventory was acquired on December 31, 2007, and ending inventory was acquired on December 26, 2008. Purchases of £300,000 were made evenly throughout 2008. 2. Spin acquired all of its property, plant, and equipment on March 1, 2006, and uses straightline depreciation. 3. Spin's sales were made evenly throughout 2008, and its operating expenses were incurred evenly throughout 2008. 4. The dividends were declared and paid on November 1, 2008. 12-59 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Assume the U.S. dollar is the functional currency, not the pound. Prepare a schedule providing a proof of the remeasurement gain or loss. Assume that the British subsidiary had the following monetary assets and liabilities at January 1, 2008:

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65. On January 1, 2008, Pace Company acquired all of the outstanding stock of Spin PLC, a British Company, for $350,000. Spin's net assets on the date of acquisition were 250,000 pounds (£). On January 1, 2008, the book and fair values of the Spin's identifiable assets and liabilities approximated their fair values except for property, plant, and equipment and trademarks. The fair value of Spin's property, plant, and equipment exceeded its book value by $25,000. The remaining useful life of Spin's equipment at January 1, 2008, was 10 years. The remainder of the differential was attributable to a trademark having an estimated useful life of 5 years. Spin's trial balance on December 31, 2008, in pounds, follows:

Additional Information 1. Spin uses the FIFO method for its inventory. The beginning inventory was acquired on December 31, 2007, and ending inventory was acquired on December 26, 2008. Purchases of £300,000 were made evenly throughout 2008. 2. Spin acquired all of its property, plant, and equipment on March 1, 2006, and uses straightline depreciation. 3. Spin's sales were made evenly throughout 2008, and its operating expenses were incurred evenly throughout 2008. 4. The dividends were declared and paid on November 1, 2008. 12-61 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Assume the U.S. dollar is the functional currency, not the pound. Required: 1) Prepare a schedule remeasuring the trial balance from British pound into U.S. dollars. 2) Assume that Pace uses the fully adjusted equity method. Record all journal entries that relate to its investment in the British subsidiary during 2008. Provide the necessary documentation and support for the amounts in the journal entries. 3) Prepare a schedule that determines Pace's consolidated net income for 2008.

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Chapter 12 Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements Answer Key

Multiple Choice Questions

All of the following are benefits the U.S. will gain from the adoption of globally consistent accounting standards except for:

AACSB: Reflective Thinking AICPA BB: Global Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-01 Understand and explain the benefits and ramifications of convergence to international financial reporting standards (IFRS) and the expected timeline to global convergence. Topic: IFRS vs. GAAP

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Which of the following statements is true regarding the SEC's timeline for convergence?

All of the following describe the International Accounting Standard Board (IASB) except for:

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Topic: IFRS vs. GAAP

Note: This is a Kaplan CPA Review Question Mazeppa, Inc. is a multinational entity with its head office located in Toronto, Canada. Its main foreign subsidiary is in Paris, France, but the primary economic environment in which the foreign subsidiary generates and expends cash is in the United States. Based on this information, which of the following statements is most likely true for Mazeppa, Inc.?

A. The functional currency is the Euro. B. The local currency is the U.S. dollar. C. The reporting currency is the Canadian dollar. D. The reporting currency is the U.S. dollar.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-01 Understand and explain the benefits and ramifications of convergence to international financial reporting standards (IFRS) and the expected timeline to global convergence. Learning Objective: 12-02 Determine the functional currency and understand the ramifications of different functional currency designations. Topic: Currency Definitions Topic: Determination of the Functional Currency

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Which of the following defines a foreign-based entity that uses a functional currency different from the local currency? I. A U.S. subsidiary in Britain maintains its accounting records in pounds sterling, with the majority of its transactions denominated in pounds sterling. II. A U.S. subsidiary in Peru conducts virtually all of its business in Latin America, and uses the U.S. dollar as its major currency.

A. I. B. II. C. Both I and II. D. Neither I nor II.

AACSB: Reflective Thinking AICPA BB: Global Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-02 Determine the functional currency and understand the ramifications of different functional currency designations. Topic: Determination of the Functional Currency

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If the restatement method for a foreign subsidiary involves remeasuring from the local currency into the functional currency, then translating from functional currency to U.S. dollars, the functional currency of the subsidiary is: I. U.S. dollar. II. Local currency unit. III. A third country's currency.

A. I B. III C. II D. Either I or II

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-02 Determine the functional currency and understand the ramifications of different functional currency designations. Topic: Determination of the Functional Currency

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In cases of operations located in highly inflationary economies:

A. The reporting currency of the U.S. parent—the U.S. dollar—should be used as the foreign entity's functional currency. B. The foreign currency should be used as the functional currency with a footnote to the financials displaying what the earnings would have been using the U.S. dollar as the functional currency. C. The foreign currency should be used as the functional currency with a single line item—foreign translation—reporting the adjustment using the U.S. dollar as the functional currency. D. None of these.

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-02 Determine the functional currency and understand the ramifications of different functional currency designations. Topic: Functional Currency Designation in Highly Inflationary Economies

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The balance in Newsprint Corp.'s foreign exchange loss account was $10,000 on December 31, 20X8, before any necessary year-end adjustment relating to the following: (1) Newsprint had a $15,000 debit resulting from the restatement in dollars of the accounts of its wholly owned foreign subsidiary for the year ended December 31, 20X8. (2) Newsprint had an account payable to an unrelated foreign supplier, payable in the supplier's local currency unit (LCU) on January 15, 20X9. The U.S. dollar-equivalent of the payable was $50,000 on the December 1, 20X8, invoice date and $53,000 on December 31, 20X8. Based on the information provided, in Newsprint's 20X8 consolidated income statement, what amount should be included as foreign exchange loss in computing net income, if the LCU is the functional currency and the translation method is appropriate?

A. $28,000 B. $13,000 C. $25,000 D. $8,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-03 Understand and explain the differences between translation and remeasurment. Topic: Translation Versus Remeasurement of Foreign Financial Statements

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The balance in Newsprint Corp.'s foreign exchange loss account was $10,000 on December 31, 20X8, before any necessary year-end adjustment relating to the following: (1) Newsprint had a $15,000 debit resulting from the restatement in dollars of the accounts of its wholly owned foreign subsidiary for the year ended December 31, 20X8. (2) Newsprint had an account payable to an unrelated foreign supplier, payable in the supplier's local currency unit (LCU) on January 15, 20X9. The U.S. dollar-equivalent of the payable was $50,000 on the December 1, 20X8, invoice date and $53,000 on December 31, 20X8. Based on the information provided, in Newsprint's 20X8 consolidated income statement, what amount should be included as foreign exchange loss in computing net income, if the U.S. dollar is the functional currency and the remeasurement method is appropriate?

A. $15,000 B. $10,000 C. $25,000 D. $28,000

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10.

Infinity Corporation acquired 80 percent of the common stock of an Egyptian company on January 1, 20X8. The goodwill associated with this acquisition was $18,350. Exchange rates at various dates during 20X8 follow:

A. $3,670 B. $3,700 C. $3,680 D. $3,690

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11.

A. $3,680 B. $3,670 C. $3,690 D. $3,700

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12.

Simon Company has two foreign subsidiaries. One is located in France, the other in England. Simon has determined the U.S. dollar is the functional currency for the French subsidiary, while the British pound is the functional currency for the English subsidiary. Both subsidiaries maintain their books and records in their respective local currencies. What methods will Simon use to convert each of the subsidiary's financial statements into U.S. dollars?

A. Option A B. Option B C. Option C D. Option D

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-03 Understand and explain the differences between translation and remeasurment. Topic: Translation Versus Remeasurement of Foreign Financial Statements

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13.

When the local currency of the foreign subsidiary is the functional currency, a foreign subsidiary's inventory carried at cost would be converted to U.S. dollars by:

A. translation using historical exchange rates. B. remeasurement using historical exchange rates. C. remeasurement using the current exchange rate. D. translation using the current exchange rate.

14.

When the local currency of the foreign subsidiary is the functional currency, a foreign subsidiary's income statement accounts would be converted to U.S. dollars by:

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15.

If the U.S. dollar is the currency in which the foreign affiliate's books and records are maintained, and the U.S. dollar is also the functional currency,

16.

Under the temporal method, which of the following is usually used to translate monetary amounts to the functional currency? I. The current exchange rate II The historical exchange rate III. Average exchange rate

A. I B. III C. II D. Either I or II

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17.

All of the following stockholders' equity accounts of a foreign subsidiary are translated at historical exchange rates except:

A. retained earnings. B. common stock. C. additional paid-in capital. D. preferred stock.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-04 Make calculations and translate financial statements of a foreign subsidiary. Topic: Translation of Functional Currency Statements into the Reporting Currency of the US Company

18.

Dividends of a foreign subsidiary are translated at:

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19.

If the functional currency is the local currency of a foreign subsidiary, what exchange rates should be used to translate the items below, assuming the foreign subsidiary is in a country which has not experienced hyperinflation over three years?

A. Option A B. Option B C. Option C D. Option D

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20.

A. Option A B. Option B C. Option C D. Option D

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21.

Which combination of accounts and exchange rates is correct for the translation of a foreign entity's financial statements from the functional currency to U.S. dollars?

A. Option A B. Option B C. Option C D. Option D

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22.

The assets listed below of a foreign subsidiary have been converted to U.S. dollars at both current and historical exchange rates. Assuming that the local currency of the foreign subsidiary is the functional currency, what total amount should appear for these assets on the U.S. company's consolidated balance sheet?

A. $636,000 B. $648,000 C. $708,000 D. $960,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-04 Make calculations and translate financial statements of a foreign subsidiary. Topic: Translation of Functional Currency Statements into the Reporting Currency of the US Company

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23.

Dover Company owns 90% of the capital stock of a foreign subsidiary located in Italy. Dover's accountant has just translated the accounts of the foreign subsidiary and determined that a debit translation adjustment of $80,000 exists. If Dover uses the fully adjusted equity method for its investment, what entry should Dover record in order to recognize the translation adjustment?

A. Option A B. Option B C. Option C D. Option D

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24.

For each of the items listed below, state whether they increase or decrease the balance in cumulative translation adjustments (assuming a credit balance at the beginning of the year) when the foreign currency strengthened relative to the U.S. dollar during the year.

A. Option A B. Option B C. Option C D. Option D

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-04 Make calculations and translate financial statements of a foreign subsidiary. Topic: Translation of Functional Currency Statements into the Reporting Currency of the US Company

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25.

The British subsidiary of a U.S. company reported cost of goods sold of 75,000 pounds (sterling) for the current year ended December 31. The beginning inventory was 10,000 pounds, and the ending inventory was 15,000 pounds. Spot rates for various dates are as follows:

Assuming the pound is the functional currency of the British subsidiary, the translated amount of cost of goods sold that should appear in the consolidated income statement is:

A. $108,750. B. $112,500. C. $114,300. D. $125,700.

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26.

Seattle, Inc. owns an 80 percent interest in a Portuguese subsidiary. For 20X8, Seattle reported income from operations of $2.0 million. The Portuguese company's income from operations, after foreign currency translation, was $1.1 million. The foreign currency translation adjustment was $120,000 (credit). Consolidated net income and consolidated comprehensive income for the year are:

A. Option A B. Option B C. Option C D. Option D

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27.

On September 30, 20X8, Wilfred Company sold inventory to Jackson Corporation, its Canadian subsidiary. The goods cost Wilfred $30,000 and were sold to Jackson for $40,000, payable in Canadian dollars. The goods are still on hand at the end of the year on December 31. The Canadian dollar (C$) is the functional currency of the Canadian subsidiary. The exchange rates follow:

Based on the preceding information, at what dollar amount is the ending inventory shown in the trial balance of the consolidated worksheet?

A. $45,000 B. $50,000 C. $40,000 D. $35,000

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28.

Based on the preceding information, what amount of unrealized intercompany gross profit is eliminated in preparing the consolidated financial statements for the year?

A. $0 B. $5,000 C. $10,000 D. $15,000

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29.

Based on the preceding information, at what amount is the inventory shown on the consolidated balance sheet for the year?

A. $45,000 B. $30,000 C. $40,000 D. $35,000

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30.

Note: This is a Kaplan CPA Review Question Park Co.'s wholly-owned subsidiary, Schnell Corp., maintains its accounting records in German marks. Because all of Schnell's branch offices are in Switzerland, its functional currency is the Swiss franc. Remeasurement of Schnell's 20X1 financial statements resulted in a $7,600 gain, and translation of its financial statements resulted in an $8,100 gain. What amount should Park report as a foreign exchange gain in its income statement for the year ended December 31, 20X1?

A. $15,700 B. $0 C. $8,100 D. $7,600

AACSB: Analytic AICPA FN: Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-04 Make calculations and translate financial statements of a foreign subsidiary. Learning Objective: 12-06 Make calculations and remeasure financial statements of a foreign subsidiary. Learning Objective: 12-08 Understand other issues related to foreign operations including the hedging of a net investment in a foreign subsidiary. Topic: Remeasurement of the Books of Record into the Functional Currency Topic: Translation When a Third Currency is the Functional Currency Topic: Translation of Functional Currency Statements into the Reporting Currency of the US Company

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31.

On January 2, 20X8, Johnson Company acquired a 100% interest in the capital stock of Perth Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10-year remaining life. At the date of acquisition, Perth's balance sheet contained the following information:

Perth's income statement for 20X8 is as follows:

The balance sheet of Perth at December 31, 20X8, is as follows:

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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:

A. Option A

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B. Option B C. Option C D. Option D

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32.

Perth's income statement for 20X8 is as follows:

The balance sheet of Perth at December 31, 20X8, is as follows:

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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:

Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8. Refer to the above information. Assuming Perth's local currency is the functional currency, what is the amount of translation adjustments that result from translating Perth's trial balance into U.S. dollars at December 31, 20X8?

A. $396,500 debit B. $285,000 credit C. $405,000 credit D. $411,000 credit

AACSB: Analytic AICPA FN: Decision Making

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Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-04 Make calculations and translate financial statements of a foreign subsidiary. Topic: Translation of Functional Currency Statements into the Reporting Currency of the US Company

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33.

Perth's income statement for 20X8 is as follows:

The balance sheet of Perth at December 31, 20X8, is as follows:

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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:

Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8. Refer to the above information. Assuming Perth's local currency is the functional currency, what is the amount of patent amortization for 20X8 that results from Johnson's acquisition of Perth's stock on January 2, 20X8. Round your answer to the nearest dollar.

A. $11,500 B. $11,884 C. $7,667 D. $9,394

AACSB: Analytic AICPA FN: Measurement

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34.

Perth's income statement for 20X8 is as follows:

The balance sheet of Perth at December 31, 20X8, is as follows:

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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:

Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8. Refer to the above information. Assuming Perth's local currency is the functional currency, what is the amount of translation adjustment that appears on Johnson's consolidated financial statements at December 31, 20X8?

A. $419,184 credit B. $416,884 credit C. $405,884 debit D. $398,500 credit

AACSB: Analytic AICPA FN: Decision Making

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Blooms: Apply Difficulty: 3 Hard Learning Objective: 12-04 Make calculations and translate financial statements of a foreign subsidiary. Topic: Translation of Functional Currency Statements into the Reporting Currency of the US Company

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35.

Perth's income statement for 20X8 is as follows:

The balance sheet of Perth at December 31, 20X8, is as follows:

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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:

Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8. Refer to the above information. Assuming Perth's local currency is the functional currency, what is the balance in Johnson's investment in foreign subsidiary account at December 31, 2008?

A. $3,216,500 B. $3,560,000 C. $3,568,300 D. $3,577,694

AACSB: Analytic AICPA FN: Measurement

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Blooms: Apply Difficulty: 3 Hard Learning Objective: 12-05 Prepare consolidated financial statements including a foreign subsidiary after translation. Topic: Translation and Consolidation of a Foreign Subsidiary

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36.

Perth's income statement for 20X8 is as follows:

The balance sheet of Perth at December 31, 20X8, is as follows:

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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:

Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8. Refer to the above information. Assuming the U.S. dollar is the functional currency, what is Johnson's remeasurement gain (loss) for 20X8? (Assume the ending inventory was acquired on December 31, 20X8.)

A. $31,000 gain B. $36,500 loss C. $22,000 gain D. $32,000 gain

AACSB: Analytic AICPA FN: Measurement

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Blooms: Apply Difficulty: 3 Hard Learning Objective: 12-06 Make calculations and remeasure financial statements of a foreign subsidiary. Topic: Remeasurement of the Books of Record into the Functional Currency

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37.

Perth's income statement for 20X8 is as follows:

The balance sheet of Perth at December 31, 20X8, is as follows:

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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:

Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8. Refer to the above information. Assuming the U.S. dollar is the functional currency, what is the amount of Perth's cost of goods sold remeasured in U.S. dollars?

A. $811,500 B. $843,500 C. $884,500 D. $799,500

AACSB: Analytic AICPA FN: Measurement Blooms: Understand

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Difficulty: 2 Medium Learning Objective: 12-06 Make calculations and remeasure financial statements of a foreign subsidiary. Topic: Remeasurement of the Books of Record into the Functional Currency

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38.

Perth's income statement for 20X8 is as follows:

The balance sheet of Perth at December 31, 20X8, is as follows:

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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:

Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8. Refer to the above information. Assuming the U.S. dollar is the functional currency, what is the amount of patent amortization for 20X8 that results from Johnson's acquisition of Perth's stock on January 2, 20X8?

A. $11,884 B. $11,770 C. $12,550 D. $11,500

AACSB: Analytic AICPA FN: Measurement

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Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-06 Make calculations and remeasure financial statements of a foreign subsidiary. Topic: Remeasurement of the Books of Record into the Functional Currency

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39.

Perth's income statement for 20X8 is as follows:

The balance sheet of Perth at December 31, 20X8, is as follows:

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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:

Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8. Refer to the above information. Assuming the U.S. dollar is the functional currency, what is Perth's net income for 20X8 in U.S. dollars (include the remeasurement gain or loss in Perth's net income)?

A. $238,000 B. $228,000 C. $219,500 D. $202,000

AACSB: Analytic AICPA FN: Reporting

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40.

Perth's income statement for 20X8 is as follows:

The balance sheet of Perth at December 31, 20X8, is as follows:

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Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates for 20X8 follow:

Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8. Refer to the above information. Assuming the U.S. dollar is the functional currency, what is the balance in Johnson's investment in foreign subsidiary account at December 31, 2008?

A. $3,303,400 B. $3,294,500 C. $3,323,400 D. $3,314,500

AACSB: Analytic AICPA FN: Reporting Blooms: Apply

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Difficulty: 3 Hard Learning Objective: 12-07 Prepare consolidated financial statements including a foreign subsidiary after remeasurement. Topic: Remeasurement: Subsequent Consolidation Worksheet

41.

Michigan-based Leo Corporation acquired 100 percent of the common stock of a British company on January 1, 20X8, for $1,100,000. The British subsidiary's net assets amounted to 500,000 pounds on the date of acquisition. On January 1, 20X8, the book values of its identifiable assets and liabilities approximated their fair values. As a result of an analysis of functional currency indicators, Leo determined that the British pound was the functional currency. On December 31, 20X8, the British subsidiary's adjusted trial balance, translated into U.S. dollars, contained $17,000 more debits than credits. The British subsidiary reported income of 33,000 pounds for 20X8 and paid a cash dividend of 8,000 pounds on October 25, 20X8. Included on the British subsidiary's income statement was depreciation expense of 3,500 pounds. Leo uses the fully adjusted equity method of accounting for its investment in the British subsidiary and determined that goodwill in the first year had an impairment loss of 25 percent of its initial amount. Exchange rates at various dates during 20X8 follow:

Based on the preceding information, what amount should Leo record as "income from subsidiary" based on the British subsidiary's reported net income?

A. $72,930 B. $52,500 C. $72,600 D. $69,300

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium

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Learning Objective: 12-05 Prepare consolidated financial statements including a foreign subsidiary after translation. Topic: Translation and Consolidation of a Foreign Subsidiary

42.

Based on the preceding information, the receipt of the dividend will result in a credit to the investment account for:

A. $16,800 B. $17,680 C. $18,000 D. $17,600

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-05 Prepare consolidated financial statements including a foreign subsidiary after translation.

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Topic: Translation and Consolidation of a Foreign Subsidiary

43.

Based on the preceding information, on Leo's consolidated balance sheet at December 31, 20X8, what amount should be reported for the goodwill acquired on January 1, 20X8?

A. $36,845 B. $39,286 C. $36,905 D. $36,607

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-05 Prepare consolidated financial statements including a foreign subsidiary after translation. Topic: Translation and Consolidation of a Foreign Subsidiary

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44.

A. $19,440 B. $17,000 C. $18,786 D. $19,380

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45.

Nichols Company owns 90% of the capital stock of a foreign subsidiary located in Ireland. As a result of translating the subsidiary's accounts, a debit of $160,000 was needed in the translation adjustments account so that the foreign subsidiary's debits and credits were equal in U.S. dollars. How should Nichols report its translation adjustments on its consolidated financial statements?

AACSB: Analytic AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-05 Prepare consolidated financial statements including a foreign subsidiary after translation. Topic: Translation and Consolidation of a Foreign Subsidiary

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46.

Elan, a U.S. corporation, completed the December 31, 20X8, foreign currency translation of its 70 percent owned Swiss subsidiary's trial balance using the current rate method. The translation resulted in a debit adjustment of $25,000. The subsidiary had reported net income of 800,000 Swiss francs for 20X8 and paid dividends of 50,000 Swiss francs on September 1, 20X8. The translation rates for the year were:

A. $1,881,050. B. $1,916,050. C. $1,923,950. D. $2,051,500.

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47.

On January 1, 20X8, Transport Corporation acquired 75 percent interest in Steamship Company for $300,000. Steamship is a Norwegian company. The local currency is the Norwegian kroner (NKr). The acquisition resulted in an excess of cost-over-book value of $25,000 due solely to a patent having a remaining life of 5 years. Transport uses the fully adjusted equity method to account for its investment. Steamship's December 31, 20X8, trial balance has been translated into U.S. dollars, requiring a translation adjustment debit of $8,000. Steamship's net income translated into U.S. dollars is $35,000. It declared and paid an NKr 20,000 dividend on June 1, 20X8. Relevant exchange rates are as follows:

Assume the kroner is the functional currency. Based on the preceding information, in the journal entry to record the receipt of dividend from Steamship,

A. Investment in Steamship Company will be credited for $3,450. B. Cash will be debited for $3,300. C. Investment in Steamship Company will be credited for $4,000. D. Cash will be debited for $3,600.

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48.

Assume the kroner is the functional currency. Based on the preceding information, in the journal entry to record parent's share of subsidiary's translation adjustment:

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49.

Assume the kroner is the functional currency. Based on the preceding information, what amount of translation adjustment is required for increase in differential?

A. $3,000 B. $5,500 C. $4,500 D. $5,000

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50.

A. $5,000 B. $5,500 C. $4,500 D. $3,000

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51.

Note: This is a Kaplan CPA Review Question Certain balance sheet accounts of a foreign subsidiary of Rowan, Inc. (Rowan) at December 31, 20X6, have been translated into U.S. dollars as follows:

A. $450,000 B. $475,000 C. $455,000 D. $495,000

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52.

Which combination of accounts and exchange rates is correct for the remeasurement of a foreign entity's financial statements from its local currency to U.S. dollars?

A. Option A B. Option B C. Option C D. Option D

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-06 Make calculations and remeasure financial statements of a foreign subsidiary. Topic: Remeasurement of the Books of Record into the Functional Currency

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53.

Mercury Company is a subsidiary of Neptune Company and is located in Valparaíso, Chile, where the currency is the Chilean Peso. Data on Mercury's inventory and purchases are as follows:

Refer the information provided above. Assuming the U.S. dollar is the functional currency, what is the amount of Mercury's cost of goods sold remeasured in U.S. dollars?

A. $1,680 B. $1,712 C. $1,700 D. $1,692

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-06 Make calculations and remeasure financial statements of a foreign subsidiary. Topic: Remeasurement of the Books of Record into the Functional Currency

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54.

Mercury Company is a subsidiary of Neptune Company and is located in Valparaíso, Chile, where the currency is the Chilean Peso. Data on Mercury's inventory and purchases are as follows:

Based on the preceding information, the translation of cost of goods sold for 20X8, assuming that the Spanish peseta is the functional currency is:

A. $1,700. B. $1,760. C. $1,680. D. $1,692.

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55.

Assuming the dollar is the functional currency of the British subsidiary, the remeasured amount of cost of goods sold that should appear in the consolidated income statement is:

A. $108,750. B. $112,500. C. $114,250. D. $125,700.

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56.

Note: This is a Kaplan CPA Review Question Gains from remeasuring a foreign subsidiary's financial statements from the local currency, which is not the functional currency, into the company's functional currency should be reported as a(an)

A. Deferred foreign exchange gain. B. Part of continuing operations. C. Separate component of stockholders' equity. D. Extraordinary item, net of income taxes.

57.

The gain or loss on the effective portion of a U.S. parent company's hedge of a net investment in a foreign entity should be treated as:

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-08 Understand other issues related to foreign operations including the hedging of a net investment in a foreign subsidiary. Topic: Hedge of a Net Investment in a Foreign Subsidiary

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58.

Which of the following describes a situation when a parent company would not consolidate a foreign subsidiary?

A. Restrictions on foreign exchange in the foreign country. B. Restrictions on transfers of property in the foreign country. C. Other governmentally imposed uncertainties. D. All of these.

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-08 Understand other issues related to foreign operations including the hedging of a net investment in a foreign subsidiary. Topic: Foreign Investments and Unconsolidated Subsidiaries

59.

Note: This is a Kaplan CPA Review Question The functional currency of Nash, Inc.'s subsidiary is the French franc. Nash borrowed French francs as a partial hedge of its investment in the subsidiary. In preparing consolidated financial statements, Nash's translation loss on its investment in the subsidiary exceeded its exchange gain on the borrowing. How should the effects of the loss and gain be reported in Nash's consolidated financial statements?

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Blooms: Remember Difficulty: 2 Medium Learning Objective: 12-08 Understand other issues related to foreign operations including the hedging of a net investment in a foreign subsidiary. Topic: Hedge of a Net Investment in a Foreign Subsidiary

Essay Questions

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60.

Briefly explain the following terms associated with accounting for foreign entities: a) Functional Currency b) Translation c) Remeasurement

a) Functional currency is the currency of the primary economic environment in which the entity operates; normally that is the currency of the environment in which an entity primarily generates and receives cash. The functional currency is used to differentiate between two types of foreign operations, those that are self-contained and integrated into a local environment, and those that are an extension of the parent and integrated with the parent. b) Translation is the most common method used and is applied when the local currency is the foreign entity's functional currency. To translate the financial statements, the company will use the current rate, which is the exchange rate on the balance sheet date, to convert the local currency balance sheet account balances into U.S. dollars. Any translation adjustment that occurs is a component of comprehensive income. Because revenues and expenses are assumed to occur uniformly over the period, revenues and expenses on the income statement are translated using the average rate for the reporting period. c) Remeasurement is the restatement of the foreign entity's financial statements from the local currency that the entity used into the foreign entity's functional currency. Remeasurement is required only when the functional currency is different from the currency used to maintain the books and records of the foreign entity. Monetary assets and liabilities are translated at the current rate. Non-monetary assets and liabilities, including inventories, are translated at their historical rates. The income statement items other than cost of goods sold is translated at average rates. Any resulting adjustment is taken into current period income.

AACSB: Communication AICPA BB: Global Blooms: Remember Difficulty: 1 Easy

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Learning Objective: 12-02 Determine the functional currency and understand the ramifications of different functional currency designations. Learning Objective: 12-03 Understand and explain the differences between translation and remeasurment. Topic: Determination of the Functional Currency Topic: Translation Versus Remeasurement of Foreign Financial Statements

61.

Parisian Co. is a French company located in Paris. Yankee Corp., located in New York City, acquires Parisian Co. Parisian has the Euro as its local currency and the Swiss Franc as its functional currency. Yankee has the U.S. dollar as its local currency and the U.S. dollar as its functional currency. Required: a) The year-end consolidated financial statements will be prepared in which currency? b) Explain which method is appropriate to use to use at year-end: Translation or Remeasurement?

a) The consolidated financial statements will be reported in Yankee's functional currencythe U.S. dollar. b) Parisian's financial statements will need to be remeasured first from the Euro to the Swiss Franc. Then the financial statements' valued in the Swiss Franc will be translated to the U.S. dollar.

AACSB: Communication AICPA BB: Critical Thinking Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-03 Understand and explain the differences between translation and remeasurment. Topic: Translation Versus Remeasurement of Foreign Financial Statements

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62.

Prepare a schedule providing a proof of the translation adjustment using the information provided below.

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 12-04 Make calculations and translate financial statements of a foreign subsidiary. Topic: Translation of Functional Currency Statements into the Reporting Currency of the US Company

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63.

On January 1, 2008, Pace Company acquired all of the outstanding stock of Spin PLC, a British Company, for $350,000. Spin's net assets on the date of acquisition were 250,000 pounds (£). On January 1, 2008, the book and fair values of the Spin's identifiable assets and liabilities approximated their fair values except for property, plant, and equipment and trademarks. The fair value of Spin's property, plant, and equipment exceeded its book value by $25,000. The remaining useful life of Spin's equipment at January 1, 2008, was 10 years. The remainder of the differential was attributable to a trademark having an estimated useful life of 5 years. Spin's trial balance on December 31, 2008, in pounds, follows:

Additional Information 1. Spin uses the FIFO method for its inventory. The beginning inventory was acquired on December 31, 2007, and ending inventory was acquired on December 26, 2008. Purchases of £300,000 were made evenly throughout 2008. 2. Spin acquired all of its property, plant, and equipment on March 1, 2006, and uses straight-line depreciation. 3. Spin's sales were made evenly throughout 2008, and its operating expenses were incurred evenly throughout 2008. 12-139 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

4. The dividends were declared and paid on November 1, 2008. 5. Pace's income from its own operations was $150,000 for 2008, and its total stockholders' equity on January 1, 2008, was $1,000,000. Pace declared $50,000 of dividends during 2008. 6. Exchange rates were as follows:

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12-141 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 12-05 Prepare consolidated financial statements including a foreign subsidiary after translation. Topic: Translation and Consolidation of a Foreign Subsidiary

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64.

Additional Information 1. Spin uses the FIFO method for its inventory. The beginning inventory was acquired on December 31, 2007, and ending inventory was acquired on December 26, 2008. Purchases of £300,000 were made evenly throughout 2008. 2. Spin acquired all of its property, plant, and equipment on March 1, 2006, and uses straight-line depreciation. 3. Spin's sales were made evenly throughout 2008, and its operating expenses were incurred evenly throughout 2008. 12-145 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

12-146 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 12-06 Make calculations and remeasure financial statements of a foreign subsidiary. Topic: Remeasurement of the Books of Record into the Functional Currency

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65.

Additional Information 1. Spin uses the FIFO method for its inventory. The beginning inventory was acquired on December 31, 2007, and ending inventory was acquired on December 26, 2008. Purchases of £300,000 were made evenly throughout 2008. 2. Spin acquired all of its property, plant, and equipment on March 1, 2006, and uses straight-line depreciation. 3. Spin's sales were made evenly throughout 2008, and its operating expenses were incurred evenly throughout 2008. 12-148 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

12-149 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

2) Journal entries for 2008:

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 12-07 Prepare consolidated financial statements including a foreign subsidiary after remeasurement. Topic: Remeasurement: Subsequent Consolidation Worksheet

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Chapter 13 Segment and Interim Reporting

Multiple Choice Questions

1. Trevor Company discloses supplementary operating segment information for its three reportable segments. Data for 20X8 are available as follows:

Additional 20X8 expenses include indirect operating expenses of $200,000. Appropriately selected common indirect operating expenses are allocated to segments based on the ratio of each segment's sales to total sales. The 20X8 operating profit for Segment B was:

A. $180,000 B. $120,000 C. $150,000 D. $250,000

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2. Trevor Company discloses supplementary operating segment information for its three reportable segments. Data for 20X8 are available as follows:

Allocable costs for the year was $180,000. Allocable costs are assigned based on the ratio of a segment's income before allocable costs to total income before allocable costs. The 20X8 operating profit for Segment B was:

A. $110,000 B. $180,000 C. $126,000 D. $120,000

3. The management approach to the definition of segments for financial reporting expects a company to: I. Report disaggregated information on the same organizational basis as used by the company's internal decision makers. II. Report disaggregated information for at least ten segments.

A. I B. II C. Both I and II D. Neither I nor II

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4. ASC 280 uses a(n) ______ approach to the definition of segments.

A. line of business B. entity approach C. portfolio D. management

5. All of the following are differences between international standards and U.S. GAAP regarding operating segments, except:

A. IFRS requires disclosures about geographical segments, not business segments. B. IFRS requires two different bases of segmentation, a primary basis and a secondary basis. C. IFRS required more disclosure for primary segments. D. The amounts disclosed under IFRS are based on the same accounting policies as the financial statements, not based on amounts reported to the chief operating decision maker.

6. In 20X6 and 20X7, each of Putney Company's four operating segments met one of the three quantitative tests for segment reporting. In 20X8, Segment B failed to qualify under the prescribed tests because of abnormal financial conditions. The other three segments qualified for reporting. For 20X8, Segment B:

A. should be excluded from segment disclosure but referred to in the management letter to shareholders. B. should be distinctly separated from the other three segments and listed as a "nonqualifying" segment. C. should be combined with one of the other three segments and reported. D. should be included in the segment disclosures at the discretion of management.

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7. Zeus Corporation has determined that it has 15 reportable operating segments. In order to comply with the standard for segment disclosures, Zeus Corporation should do which of the following?

A. Report 10 reportable segments and disclose the remaining 5 segments as other operating segments. B. Report 10 reportable segments by combining the most closely related segments. C. Report 15 reportable segments as long as the 75 percent revenue test has been satisfied. D. Report 12 reportable segments and show all other operating segments in a column labeled "Other Operating Segments."

8. Trimester Corporation's revenue for the year ended December 31, 20X8, was as follows:

Trimester has a reportable operating segment if that segment's revenue exceeds:

A. $65,500 B. $60,000 C. $64,500 D. $61,000

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9. Five of eight internally reported operating segments of Rollins Company qualify under the standards set by ASC 280 for segment reporting. However, the five identified segments do not meet the 75 percent revenue test. ASC 280 prescribes that management:

A. subdivide segments until there are at least 10 reportable segments. B. consolidate the remaining operating segments and include them under an "all other" category. C. select additional operating segments until the 75% threshold is met. D. include the heading "corporate headquarters" as an operating segment.

10. An analysis of Abbey Company's operating segments provides the following information:

Refer to the above information. Which of the operating segments above meet the revenue test?

A. B, D, and E B. A and D C. A, B, and D D. B, C, D, and E

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11. An analysis of Abbey Company's operating segments provides the following information:

Refer to the above information. Which of the operating segments above meet the operating profit (loss) test?

A. B and E B. A and B C. A, B, and E D. A, B, C, and E

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12. An analysis of Abbey Company's operating segments provides the following information:

Refer to the above information. Which of the operating segments above are reportable segments?

A. B, C, and D B. A, B, D, and E C. B, D, and E D. A, B, C, D, and E

13. Crisfield Company has two reportable segments, C and D. Segment C made $4,000,000 of sales to external customers and $400,000 of sales to other operating segments. Segment D, on the other hand, made sales of $8,000,000 to external customers and $1,600,000 of sales to other operating segments. Crisfield Company reported $13,200,000 of revenues on its consolidated income statement. What calculation below correctly determines whether Crisfield Company's reportable segments satisfy the 75% revenue test?

A. $14,000,000/$15,200,000 B. $14,000,000/$13,200,000 C. $12,000,000/$13,200,000 D. $12,000,000/$15,200,000

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14. Main Manufacturing Corporation reported consolidated revenues of $50,000,000 on its income statement for 20X8. The management of the corporation identified 3 industry segments, M, N, and O. These segments had the following intersegment sales and transfers during 20X8:

For Main Manufacturing Corporation, the revenue test would be satisfied if any of its industry segments had revenue equal to or greater than which of the following?

A. $7,400,000 B. $5,740,000 C. $5,000,000 D. $4,260,000

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15. Note: This is a Kaplan CPA Review Question The following information pertains to revenue earned by Timm Co.'s industry segments for the year ended December 31st:

In conformity with the revenue test, Timm's reportable segments were

A. Only Dil B. Only Bix and Dil C. Only Alo, Bix, and Dil D. Alo, Bix, Cee, and Dil

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16. Note: This is a Kaplan CPA Review Question Correy Corp. and its divisions are engaged solely in manufacturing operations. The following data (consistent with prior years' data) pertain to the industries in which operations were conducted for the year ended December 31st:

In its segment information for the year, how many reportable segments does Correy have?

A. Five B. Three C. Four D. Six

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17. Note: This is a Kaplan CPA Review Question Cott Co.'s four business segments have revenues and identifiable assets expressed as percentages of Cott's total revenues and total assets as follows:

Which of these business segments are deemed to be reportable segments?

A. Ebon, Fair, Gel, and Hak B. Ebon only C. Ebon and Fair only D. Ebon, Fair, and Gel only

18. Note: This is a Kaplan CPA Review Question The key to reporting accounting information by segments is determining what constitutes a segment. Of the following, which is not a method of determining a reportable segment?

A. Operating profit B. Revenues C. Number of employees D. Combined identifiable assets

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19. Note: This is a Kaplan CPA Review Question Which of the following characteristics would render the operating unit "reportable"? The operating unit comprises at least:

A. 5 percent of the assets of a company as a whole. B. 10 percent of the revenues of the company as a whole. C. 50 percent of the long term debt of the company as a whole. D. 20 percent of the operating profit of the company as a whole.

20. Note: This is a Kaplan CPA Review Question Reportable segments are not required to disclose which of the following:

A. Amortization expense B. Intersegment sales C. Capital expenditures D. Long-term debt

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21. Note: This is a Kaplan CPA Review Question Tecumseh Co. (Tecumseh), a publicly owned corporation, assesses performance and makes operating decisions using the following information for its reportable segments: Total revenues $768,000 Total profit and loss $40,600 Included in the total profit and loss are intersegment profits of $6,100. In addition, Tecumseh has $500 of common costs for its reportable segments that are not allocated in reports used internally. For purposes of segment reporting, Tecumseh should report total combined segment profit of:

A. $35,000 B. $34,500 C. $40,600 D. $46,700 E. $41,100

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22. Note: This is a Kaplan CPA Review Question The following information pertains to Aria Co. (Aria) and its operating segments for the year ended December 31, 20X6: Sales to unaffiliated customers $2,000,000 Intersegment sales of products $600,000 Interest earned on loans to other industry segments $40,000 Aria and all its divisions are engaged solely in manufacturing operations. Aria evaluates divisional performance based on controllable contribution by segments. Aria has a reportable segment if that segment's revenue exceeds:

A. $200,000 B. $260,000 C. $204,000 D. $264,000

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23. Collins Company reported consolidated revenue of $120,000,000 in 20X8. Collins operates in two geographic areas, domestic and Asia. The following information pertains to these two areas:

What calculation below is correct to determine if the revenue test is satisfied for the Asian operations?

A. $58,000,000/$140,000,000 B. $50,000,000/$120,000,000 C. $58,000,000/$120,000,000 D. $50,000,000/$140,000,000

24. ASC 280 requires certain disclosures about major customers. All of the following statements about those disclosures are true with the exception of which statement?

A. The identity of the segment reporting the revenue from a significant customer must be disclosed a footnote. B. The amount of revenue from a significant customer must be disclosed in a footnote. C. For applying the disclosure test a threshold of 10 percent of total revenues is mandated. D. A local, state, or foreign government can be considered a major customer.

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25. Stone Company reported $100,000,000 of revenues on its 20X8 income statement. During the year ended December 31, 20X8, Stone made sales of $8,000,000 to external customers in Western Europe. In addition, Stone made sales of $10,000,000 to the U.S. government and $4,000,000 of sales to various state governments. In the footnotes to its financial statements for 20X8, in reporting enterprisewide disclosures, Stone is required to disclose:

A. Option A B. Option B C. Option C D. Option D

26. Which of the following are established by ASC 280 as "enterprisewide disclosure" standards to provide more information about the risks to a company? I. Information about dominant industry segments. II. Information about major customers. III. Information about geographic areas

A. Both II and III B. Both I and III C. Both I and II D. I, II, and II

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27. Note: This is a Kaplan CPA Review Question Grum Corp., a publicly-owned corporation, is subject to the requirements for segment reporting. In its income statement for the year ended December 31 st, Grum reported consolidated revenues of $50,000,000, operating expenses of $47,000,000, and net income of $3,000,000. Operating expenses include payroll costs of $15,000,000. Grum's combined identifiable assets of all industry segments at December 31 st, were $40,000,000. In its yearend financial statements, Grum would be most likely to disclose major customer data if sales to any single customer amounted to at least:

A. $1,500,000 B. $300,000 C. $5,000,000 D. $4,000,000

28. Wakefield Company uses a perpetual inventory system. In August, it sold 2,000 units from its LIFO-base inventory, which had originally cost $35 per unit. The replacement cost is expected to be $45 per unit. The company is planning to reduce its inventory and expects to replace only 1,500 of these units by December 31, the end of its fiscal year. The company replaced 1,500 units in November at an actual cost of $50 per unit. Based on the preceding information, in the entry in August to record the sale of the 2,000 units:

A. Cost of Goods Sold will be debited for $70,000. B. Inventory will be credited for $85,000. C. Excess of Replacement Cost over LIFO Cost of Inventory Liquidation will be credited for $15,000. D. Excess of Replacement Cost over LIFO Cost of Inventory Liquidation will be credited for $67,000.

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29. Wakefield Company uses a perpetual inventory system. In August, it sold 2,000 units from its LIFO-base inventory, which had originally cost $35 per unit. The replacement cost is expected to be $45 per unit. The company is planning to reduce its inventory and expects to replace only 1,500 of these units by December 31, the end of its fiscal year. The company replaced 1,500 units in November at an actual cost of $50 per unit. Based on the preceding information, in the entry to record the replacement of the 1,500 units in November, Cost of Goods Sold will be debited for:

A. $52,500. B. $22,500. C. $15,000. D. $7,500.

30. Wakefield Company uses a perpetual inventory system. In August, it sold 2,000 units from its LIFO-base inventory, which had originally cost $35 per unit. The replacement cost is expected to be $45 per unit. The company is planning to reduce its inventory and expects to replace only 1,500 of these units by December 31, the end of its fiscal year. The company replaced 1,500 units in November at an actual cost of $50 per unit. Based on the preceding information, in the entry to record the replacement of the 1,500 units in November, Inventory will be debited for:

A. $52,500. B. $75,000. C. $67,500. D. $60,000.

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31. Wakefield Company uses a perpetual inventory system. In August, it sold 2,000 units from its LIFO-base inventory, which had originally cost $35 per unit. The replacement cost is expected to be $45 per unit. The company is planning to reduce its inventory and expects to replace only 1,500 of these units by December 31, the end of its fiscal year. The company replaced 1,500 units in November at an actual cost of $50 per unit. Based on the preceding information, in the entry to record the replacement of the 1,500 units in November, Accounts Payable will be credited for:

A. $67,500. B. $75,000. C. $62,500. D. $60,000.

32. Wakefield Company uses a perpetual inventory system. In August, it sold 2,000 units from its LIFO-base inventory, which had originally cost $35 per unit. The replacement cost is expected to be $45 per unit. The company is planning to reduce its inventory and expects to replace only 1,500 of these units by December 31, the end of its fiscal year. The company replaced 1,500 units in November at an actual cost of $50 per unit. Assume that the replacement did not happen in November. In December, the company decided not to replace any of the 1,500 units. The entry required on December 31 to eliminate valuation accounts related to the inventory that will not be replaced will include:

A. a debit to Excess of Replacement Cost over LIFO Cost of Inventory Liquidation for $22,500. B. a credit to Cost of Goods Sold for $15,000. C. a debit to Inventory for $70,000. D. a debit to Inventory for $15,000.

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33. William Corporation, which has a fiscal year ending January 31, had the following pretax accounting income and estimated effective annual income tax rates for the first three quarters of the year ended January 31, 20X8:

William's income tax expenses in its interim income statement for the third quarter are:

A. $36,000. B. $73,500. C. $46,500. D. $120,000.

34. On June 30, 20X8, String Corporation incurred a $220,000 net loss from disposal of a business component. Also, on June 30, 20X8, String paid $60,000 for property taxes assessed for the calendar year 20X8. What amount of the preceding items should be included in the determination of String's net income or loss for the six-month interim period ended June 30, 20X8?

A. $250,000 B. $220,000 C. $140,000 D. $280,000

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35. During the third quarter of 20X8, Pride Company sold a piece of equipment at an $8,000 gain. What portion of the gain should Pride report in its income statement for the third quarter of 20X8?

A. $0 B. $2,000 C. $4,000 D. $8,000

36. On March 15, 20X9, Clarion Company paid property taxes of $60,000 on its factory building for calendar year 20X9. On July 1, 20X9, Clarion made $40,000 in unanticipated repairs to its machinery. The repairs will benefit operations for the remainder of the calendar year. What total amount of these expenses should be included in Clarion's quarterly income statement for the three months ended September 30, 20X9?

A. $55,000 B. $15,000 C. $35,000 D. $40,000

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37. Forge Company, a calendar-year entity, had 6,000 units in its beginning inventory for 20X8. On December 31, 20X7, the units had been adjusted down to $470 per unit from an actual cost of $510 per unit. It was the lower of cost or market. No additional units were purchased during 20X8. The following additional information is provided for 20X8:

Forge does not have sufficient experience with the seasonal market for its inventory units and assumes that any reductions in market value during the year will be permanent. Based on the preceding information, the cost of goods sold for the first quarter is:

A. $636,000 B. $564,000 C. $546,000 D. $624,000

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38. Forge Company, a calendar-year entity, had 6,000 units in its beginning inventory for 20X8. On December 31, 20X7, the units had been adjusted down to $470 per unit from an actual cost of $510 per unit. It was the lower of cost or market. No additional units were purchased during 20X8. The following additional information is provided for 20X8:

A. $416,000 B. $364,000 C. $304,000 D. $424,000

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39. Forge Company, a calendar-year entity, had 6,000 units in its beginning inventory for 20X8. On December 31, 20X7, the units had been adjusted down to $470 per unit from an actual cost of $510 per unit. It was the lower of cost or market. No additional units were purchased during 20X8. The following additional information is provided for 20X8:

A. $2,080,000 B. $1,880,000 C. $1,835,000 D. $1,910,000

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40. Samuel Corporation foresees a downturn in its business in the medium term. It expects to sustain an operating loss of $160,000 for the full year ending December 31, 20X8. Samuel's tax rate is 35 percent. Anticipated tax credits for 20X8 total $8,000. No permanent differences are expected. Realization of the full tax benefit of the expected operating loss and realization of anticipated tax credits are assured beyond any reasonable doubt because they will be carried back. For the first quarter ended March 31, 20X8, Samuel reported an operating loss of $30,000. How much of a tax benefit should Samuel report for the interim period ended March 31, 20X8?

A. $8,000 B. $12,000 C. $13,500 D. $15,500

41. Derby Company pays its executives a bonus of 6 percent of income before deducting the bonus and income taxes. For the quarter ended March 31, 20X8, Derby had income before the bonus and income tax of $12,000,000. For the year ended December 31, 20X8, Derby estimates that its income before bonus and income taxes will be $70,000,000. For the quarter ended March 31, 20X8, what is the amount of the bonus that Derby should deduct on its income statement?

A. $4,200,000 B. $720,000 C. $1,050,000 D. $180,000

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42. Tyler Company incurred an inventory loss due to a decline in market prices during its first quarter of operations in 20X8. At the end of the first quarter, management of the company believed the decline in market prices to be permanent. In the second quarter, the market prices of Tyler's inventories increased above their acquisition cost. Market prices remained higher than acquisition cost during the remainder of 20X8. How should Tyler report the facts above on its first and second quarter income statements?

A. Option A B. Option B C. Option C D. Option D

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43. Denver Company, a calendar-year corporation, had the following actual income before income tax expense and estimated effective annual income tax rates for the first three quarters in 20X8:

Denver's income tax expense in its interim income statement for the third quarter should be:

A. $126,000. B. $68,400. C. $62,400. D. $54,000.

44. ASC 270 uses which view of interim reporting?

A. Integral B. Discrete C. Segmental D. Comprehensive

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45. Which of the following observations is true of the discrete view of interim reporting?

A. An interim period is viewed as an installment of an annual period. B. Recognition and adjustment of certain income or expense items may be affected by judgments about the expected results of the entire year's operations. C. Each interim period is considered as a basic accounting period to be evaluated as if it were an annual accounting period. D. One interim period would not bear the entire expense that benefits more than one interim period.

46. Mason Company paid its annual property taxes of $240,000 on February 15, 20X9. Mason also anticipates that its annual repairs expense for 20X9 will be $1,200,000. This amount is usually incurred and paid in July and August when operations are shut down so that machinery and equipment can be repaired. What amount should Mason deduct for property taxes and repairs in each quarter for 20X9?

A. Option A B. Option B C. Option C D. Option D

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47. Toledo Imports, a calendar-year corporation, had the following income before tax expense and estimated effective annual income tax rates for the first three quarters in 20X8:

Toledo's income tax expense in its interim income statement for the nine months ended September 30 and for the third quarter, respectively, are:

A. $250,800 and $103,200. B. $252,000 and $108,000. C. $252,000 and $103,200. D. $250,800 and $108,000.

48. Estimated gross profit rates may be used to estimate a company's cost of goods sold and its ending inventory for:

A. quarterly but not for annual financial statements. B. both quarterly and annual financial statements. C. neither quarterly nor annual financial statements. D. annual but not for quarterly financial statements.

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49. Davis Company uses LIFO for all of its inventories. During its second quarter of 20X9, Davis experienced a LIFO liquidation. Davis fully expects to replace the liquidated inventory in the early part of the third quarter. How should Davis report the inventory temporarily liquidated on its income statement for the second quarter?

A. Cost of goods sold for the second quarter should include the acquisition cost of the goods temporarily liquidated. B. Cost of goods sold for the second quarter should include the expected replacement cost of the goods temporarily liquidated. C. Cost of goods sold for the second quarter should not include the expected replacement cost of the goods temporarily liquidated. D. Cost of goods sold for the second quarter is not affected by the temporary liquidation of LIFO inventory.

50. How would a company report a change in an accounting principle made on the last day of the third quarter?

A. Retrospective application to all pre-change interim periods reported. B. No change is required. C. Apply to current and prospective interim periods only. D. Apply to prospective interim periods only.

51. Missoula Corporation disposed of one of its segments in the second quarter and incurred a gain from disposal of discontinued segment of $600,000, net of taxes. What is the effect of this gain from disposal of discontinued segment?

A. Increase net income from operations for the year by $600,000. B. Increase second quarter net income by $600,000. C. Increase each quarter's net income by $150,000. D. Increase each of the last three quarters' net income by $200,000.

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52. Frahm Company incurred a first quarter operating loss before income tax effect of $4,000,000. This is a normal occurrence for Frahm because of seasonal fluctuations. Experience has demonstrated the income earned during the remaining quarters far exceeds the first quarter losses each year. Frahm estimates its annual income tax rate will be 30 percent. What net loss should Frahm report for the first quarter?

A. $4,000,000 B. $2,800,000 C. $700,000 D. $0

53. The income tax expense applicable to the second quarter's income statement is determined by:

A. dividing the estimated annual income tax expense by four and allocating the amount to the second quarter. B. multiplying the effective income tax rate times the income before tax for the second quarter. C. subtracting the income tax expense applicable to the first quarter from the income tax expense applicable to the first two quarters. D. subtracting the income tax liability applicable to the first quarter from the income tax liability applicable to the first two quarters.

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54. If a company changes the method it uses to compute the allowance for uncollectible accounts receivable because more recent information has become available, how is this change in method is accounted for?

A. The change is only reported in the current period in which the change is made. B. The change is reported in all future periods affected by the change. C. Previously issued financial statements are not adjusted by the change. D. All of these are correct ways to account for the change.

55. All of the following situations require a retrospective application of a change in a reporting entity except for:

A. Presenting consolidated financials rather than individual statements for separate entities B. Changing the specific subsidiaries that make up a consolidated entity. C. Presenting foreign subsidiaries in addition to domestic subsidiaries. D. Changing entities that are included in combined financial statements.

Essay Questions

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56. ASC 280, Disclosure about Segments of an Enterprise and Related Information, has taken what has been referred to as a "management approach" to the definition of a segment and the allocation of costs to a segment. Required: a) What is meant by a management approach? How does this concept of a management approach impact the decision to disclose information? b) How are decisions about cost allocation handled in segment disclosures?

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57. Lloyd Corporation reports the following information for 20X8 for its three operating segments:

Indirect operating expenses are allocated to segments based upon the ratio of each segment's traceable operating expenses to total traceable operating expenses. Interest expense is allocated to segments based upon the ratio of each segment's sales to total sales. Required: a) Calculate the operating profit or loss for each of the segments for 20X8. b) Determine which segments are reportable, applying the operating profit or loss test.

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58. Ridge Company is in the process of determining its reportable segments for the year ended December 31, 20X8. As the person responsible for determining this information, you gather the following information:

Required: a) Using the appropriate tests, determine which of the industry segments listed above are reportable for 20X8. Show your supporting computations in good form. b) Indicate whether or not Ridge's reportable segments satisfy the 75 percent test. Show your supporting computations in good form.

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59. FASB has specified a "75% percent consolidated revenue test". Required: a) What is the 75% test? b) How is the 75% test impacted by the "10% Significance Rule"?

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60. Iona Corporation is in the process of preparing its financial statements for the first quarter of 20X9 and has asked your advice as to how to report several items. These items include the following events which took place during the first quarter of 20X9 (assume all amounts are material): 1) Iona redeemed bonds with a carrying value of $4,000,000 at a cost of $3,760,000. This early extinguishment occurred because Iona wants to issue new debt at lower interest rates. 2) Iona uses the LIFO method for its inventories. On January 1, 20X9, inventories amounted to $10,000,000, while, on March 31, 20X9, inventories totaled $9,200,000. Iona expects to replace the liquidated inventory at the beginning of the second quarter at a cost of $1,000,000. 3) Iona changed its depreciation method on $4,000,000 of its delivery trucks from the declining balance method to the straight-line method. On January 1, 20X9, accumulated depreciation under the declining balance method was $2,800,000. Had the straight-line method been used, accumulated depreciation on January 1, 20X9, would have been $2,300,000. The remaining life of the trucks is two years. 4) Iona pays its top executives a bonus at year-end of 6 percent of operating income before bonus and income taxes. Operating income before bonus and income taxes for the three months ended March 31, 20X9, was $10,000,000. Iona estimates that its yearly operating income before bonus and income taxes will be $60,000,000. 5) Iona closes its manufacturing operations in July of each year in order to make its major annual repairs. Iona estimates that the cost of these repairs in 20X9 will be $1,000,000. Required: For each of the events numbered 1 through 5, indicate how that event should be reported on Iona's income statement for the three months ended March 31, 20X9, and the balance sheet accounts effects at March 31, 20X9. Ignore income taxes.

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61. The information below is for the second quarter of Tampa Company for 20X8:

Required: Prepare an interim income statement for the second quarter for Tampa Company. Assume the LIFO liquidation is expected to be restored by the end of 20X8.

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62. Interim income statements are required for Smith Orchards. Smith does most of its sales in the fall quarter of the year. These sales are both to individual and commercial customers. How do you recommend Smith report sales during the spring quarter of the year?

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Chapter 13 Segment and Interim Reporting Answer Key

Multiple Choice Questions

Trevor Company discloses supplementary operating segment information for its three reportable segments. Data for 20X8 are available as follows:

A. $180,000 B. $120,000 C. $150,000 D. $250,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 13-01 Understand accounting issues associated with segment reporting both in the United States and internationally. Topic: Segment Reporting Accounting Issues

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Trevor Company discloses supplementary operating segment information for its three reportable segments. Data for 20X8 are available as follows:

A. $110,000 B. $180,000 C. $126,000 D. $120,000

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The management approach to the definition of segments for financial reporting expects a company to: I. Report disaggregated information on the same organizational basis as used by the company's internal decision makers. II. Report disaggregated information for at least ten segments.

A. I B. II C. Both I and II D. Neither I nor II

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-01 Understand accounting issues associated with segment reporting both in the United States and internationally. Topic: Segment Reporting Accounting Issues

ASC 280 uses a(n) ______ approach to the definition of segments.

A. line of business B. entity approach C. portfolio D. management

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-01 Understand accounting issues associated with segment reporting both in the United States and internationally. Topic: Segment Reporting Accounting Issues

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All of the following are differences between international standards and U.S. GAAP regarding operating segments, except:

AACSB: Reflective Thinking AICPA BB: Global Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-01 Understand accounting issues associated with segment reporting both in the United States and internationally. Topic: International Financial Reporting Standards for Operating Segments

In 20X6 and 20X7, each of Putney Company's four operating segments met one of the three quantitative tests for segment reporting. In 20X8, Segment B failed to qualify under the prescribed tests because of abnormal financial conditions. The other three segments qualified for reporting. For 20X8, Segment B:

AACSB: Reflective Thinking AICPA FN: Decision Making

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Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-02 Understand and be able to calculate threshold tests for segment reporting. Topic: 75 Percent Consolidated Revenue Test

Zeus Corporation has determined that it has 15 reportable operating segments. In order to comply with the standard for segment disclosures, Zeus Corporation should do which of the following?

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-02 Understand and be able to calculate threshold tests for segment reporting. Topic: 75 Percent Consolidated Revenue Test

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Trimester Corporation's revenue for the year ended December 31, 20X8, was as follows:

Trimester has a reportable operating segment if that segment's revenue exceeds:

A. $65,500 B. $60,000 C. $64,500 D. $61,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 13-02 Understand and be able to calculate threshold tests for segment reporting. Topic: 10 Percent Quantitative Thresholds

Five of eight internally reported operating segments of Rollins Company qualify under the standards set by ASC 280 for segment reporting. However, the five identified segments do not meet the 75 percent revenue test. ASC 280 prescribes that management:

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember

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Difficulty: 1 Easy Learning Objective: 13-02 Understand and be able to calculate threshold tests for segment reporting. Topic: 75 Percent Consolidated Revenue Test

10.

An analysis of Abbey Company's operating segments provides the following information:

Refer to the above information. Which of the operating segments above meet the revenue test?

A. B, D, and E B. A and D C. A, B, and D D. B, C, D, and E

AACSB: Analytic AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 13-02 Understand and be able to calculate threshold tests for segment reporting. Topic: 10 Percent Quantitative Thresholds

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11.

An analysis of Abbey Company's operating segments provides the following information:

Refer to the above information. Which of the operating segments above meet the operating profit (loss) test?

A. B and E B. A and B C. A, B, and E D. A, B, C, and E

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12.

An analysis of Abbey Company's operating segments provides the following information:

Refer to the above information. Which of the operating segments above are reportable segments?

A. B, C, and D B. A, B, D, and E C. B, D, and E D. A, B, C, D, and E

AACSB: Analytic AICPA FN: Decision Making Blooms: Apply Difficulty: 3 Hard Learning Objective: 13-01 Understand accounting issues associated with segment reporting both in the United States and internationally. Topic: Segment Reporting Accounting Issues

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13.

Crisfield Company has two reportable segments, C and D. Segment C made $4,000,000 of sales to external customers and $400,000 of sales to other operating segments. Segment D, on the other hand, made sales of $8,000,000 to external customers and $1,600,000 of sales to other operating segments. Crisfield Company reported $13,200,000 of revenues on its consolidated income statement. What calculation below correctly determines whether Crisfield Company's reportable segments satisfy the 75% revenue test?

A. $14,000,000/$15,200,000 B. $14,000,000/$13,200,000 C. $12,000,000/$13,200,000 D. $12,000,000/$15,200,000

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14.

Main Manufacturing Corporation reported consolidated revenues of $50,000,000 on its income statement for 20X8. The management of the corporation identified 3 industry segments, M, N, and O. These segments had the following intersegment sales and transfers during 20X8:

For Main Manufacturing Corporation, the revenue test would be satisfied if any of its industry segments had revenue equal to or greater than which of the following?

A. $7,400,000 B. $5,740,000 C. $5,000,000 D. $4,260,000

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15.

Note: This is a Kaplan CPA Review Question The following information pertains to revenue earned by Timm Co.'s industry segments for the year ended December 31st:

In conformity with the revenue test, Timm's reportable segments were

A. Only Dil B. Only Bix and Dil C. Only Alo, Bix, and Dil D. Alo, Bix, Cee, and Dil

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 13-02 Understand and be able to calculate threshold tests for segment reporting. Topic: 10 Percent Quantitative Thresholds

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16.

Note: This is a Kaplan CPA Review Question Correy Corp. and its divisions are engaged solely in manufacturing operations. The following data (consistent with prior years' data) pertain to the industries in which operations were conducted for the year ended December 31 st:

In its segment information for the year, how many reportable segments does Correy have?

A. Five B. Three C. Four D. Six

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 13-02 Understand and be able to calculate threshold tests for segment reporting. Topic: 10 Percent Quantitative Thresholds

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17.

Note: This is a Kaplan CPA Review Question Cott Co.'s four business segments have revenues and identifiable assets expressed as percentages of Cott's total revenues and total assets as follows:

Which of these business segments are deemed to be reportable segments?

A. Ebon, Fair, Gel, and Hak B. Ebon only C. Ebon and Fair only D. Ebon, Fair, and Gel only

AACSB: Analytic AICPA FN: Reporting Blooms: Understand Difficulty: 1 Easy Learning Objective: 13-02 Understand and be able to calculate threshold tests for segment reporting. Topic: 10 Percent Quantitative Thresholds

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18.

Note: This is a Kaplan CPA Review Question The key to reporting accounting information by segments is determining what constitutes a segment. Of the following, which is not a method of determining a reportable segment?

A. Operating profit B. Revenues C. Number of employees D. Combined identifiable assets

19.

Note: This is a Kaplan CPA Review Question Which of the following characteristics would render the operating unit "reportable"? The operating unit comprises at least:

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20.

Note: This is a Kaplan CPA Review Question Reportable segments are not required to disclose which of the following:

A. Amortization expense B. Intersegment sales C. Capital expenditures D. Long-term debt

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-02 Understand and be able to calculate threshold tests for segment reporting. Topic: Reporting Segment Information

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21.

Note: This is a Kaplan CPA Review Question Tecumseh Co. (Tecumseh), a publicly owned corporation, assesses performance and makes operating decisions using the following information for its reportable segments: Total revenues $768,000 Total profit and loss $40,600 Included in the total profit and loss are intersegment profits of $6,100. In addition, Tecumseh has $500 of common costs for its reportable segments that are not allocated in reports used internally. For purposes of segment reporting, Tecumseh should report total combined segment profit of:

A. $35,000 B. $34,500 C. $40,600 D. $46,700 E. $41,100

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22.

Note: This is a Kaplan CPA Review Question The following information pertains to Aria Co. (Aria) and its operating segments for the year ended December 31, 20X6: Sales to unaffiliated customers $2,000,000 Intersegment sales of products $600,000 Interest earned on loans to other industry segments $40,000 Aria and all its divisions are engaged solely in manufacturing operations. Aria evaluates divisional performance based on controllable contribution by segments. Aria has a reportable segment if that segment's revenue exceeds:

A. $200,000 B. $260,000 C. $204,000 D. $264,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 13-02 Understand and be able to calculate threshold tests for segment reporting. Topic: 10 Percent Quantitative Thresholds

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23.

Collins Company reported consolidated revenue of $120,000,000 in 20X8. Collins operates in two geographic areas, domestic and Asia. The following information pertains to these two areas:

What calculation below is correct to determine if the revenue test is satisfied for the Asian operations?

A. $58,000,000/$140,000,000 B. $50,000,000/$120,000,000 C. $58,000,000/$120,000,000 D. $50,000,000/$140,000,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 13-03 Understand the requirements for enterprisewide disclosures. Topic: Information about Geographic Areas

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24.

ASC 280 requires certain disclosures about major customers. All of the following statements about those disclosures are true with the exception of which statement?

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-03 Understand the requirements for enterprisewide disclosures. Topic: Information about Major Customers

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25.

Stone Company reported $100,000,000 of revenues on its 20X8 income statement. During the year ended December 31, 20X8, Stone made sales of $8,000,000 to external customers in Western Europe. In addition, Stone made sales of $10,000,000 to the U.S. government and $4,000,000 of sales to various state governments. In the footnotes to its financial statements for 20X8, in reporting enterprisewide disclosures, Stone is required to disclose:

A. Option A B. Option B C. Option C D. Option D

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-03 Understand the requirements for enterprisewide disclosures. Topic: Information about Major Customers

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26.

Which of the following are established by ASC 280 as "enterprisewide disclosure" standards to provide more information about the risks to a company? I. Information about dominant industry segments. II. Information about major customers. III. Information about geographic areas

A. Both II and III B. Both I and III C. Both I and II D. I, II, and II

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 13-03 Understand the requirements for enterprisewide disclosures. Topic: Information about Geographic Areas Topic: Information about Major Customers

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27.

Note: This is a Kaplan CPA Review Question Grum Corp., a publicly-owned corporation, is subject to the requirements for segment reporting. In its income statement for the year ended December 31 st, Grum reported consolidated revenues of $50,000,000, operating expenses of $47,000,000, and net income of $3,000,000. Operating expenses include payroll costs of $15,000,000. Grum's combined identifiable assets of all industry segments at December 31 st, were $40,000,000. In its year-end financial statements, Grum would be most likely to disclose major customer data if sales to any single customer amounted to at least:

A. $1,500,000 B. $300,000 C. $5,000,000 D. $4,000,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 13-03 Understand the requirements for enterprisewide disclosures. Topic: Information about Major Customers

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28.

Wakefield Company uses a perpetual inventory system. In August, it sold 2,000 units from its LIFO-base inventory, which had originally cost $35 per unit. The replacement cost is expected to be $45 per unit. The company is planning to reduce its inventory and expects to replace only 1,500 of these units by December 31, the end of its fiscal year. The company replaced 1,500 units in November at an actual cost of $50 per unit. Based on the preceding information, in the entry in August to record the sale of the 2,000 units:

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 13-04 Understand the rules for interim financial reporting. Topic: Reporting Standards for the Interim Income Statement

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29.

A. $52,500. B. $22,500. C. $15,000. D. $7,500.

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30.

A. $52,500. B. $75,000. C. $67,500. D. $60,000.

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31.

A. $67,500. B. $75,000. C. $62,500. D. $60,000.

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32.

Wakefield Company uses a perpetual inventory system. In August, it sold 2,000 units from its LIFO-base inventory, which had originally cost $35 per unit. The replacement cost is expected to be $45 per unit. The company is planning to reduce its inventory and expects to replace only 1,500 of these units by December 31, the end of its fiscal year. The company replaced 1,500 units in November at an actual cost of $50 per unit. Assume that the replacement did not happen in November. In December, the company decided not to replace any of the 1,500 units. The entry required on December 31 to eliminate valuation accounts related to the inventory that will not be replaced will include:

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33.

William Corporation, which has a fiscal year ending January 31, had the following pretax accounting income and estimated effective annual income tax rates for the first three quarters of the year ended January 31, 20X8:

William's income tax expenses in its interim income statement for the third quarter are:

A. $36,000. B. $73,500. C. $46,500. D. $120,000.

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34.

On June 30, 20X8, String Corporation incurred a $220,000 net loss from disposal of a business component. Also, on June 30, 20X8, String paid $60,000 for property taxes assessed for the calendar year 20X8. What amount of the preceding items should be included in the determination of String's net income or loss for the six-month interim period ended June 30, 20X8?

A. $250,000 B. $220,000 C. $140,000 D. $280,000

35.

During the third quarter of 20X8, Pride Company sold a piece of equipment at an $8,000 gain. What portion of the gain should Pride report in its income statement for the third quarter of 20X8?

A. $0 B. $2,000 C. $4,000 D. $8,000

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36.

On March 15, 20X9, Clarion Company paid property taxes of $60,000 on its factory building for calendar year 20X9. On July 1, 20X9, Clarion made $40,000 in unanticipated repairs to its machinery. The repairs will benefit operations for the remainder of the calendar year. What total amount of these expenses should be included in Clarion's quarterly income statement for the three months ended September 30, 20X9?

A. $55,000 B. $15,000 C. $35,000 D. $40,000

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37.

Forge Company, a calendar-year entity, had 6,000 units in its beginning inventory for 20X8. On December 31, 20X7, the units had been adjusted down to $470 per unit from an actual cost of $510 per unit. It was the lower of cost or market. No additional units were purchased during 20X8. The following additional information is provided for 20X8:

A. $636,000 B. $564,000 C. $546,000 D. $624,000

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38.

A. $416,000 B. $364,000 C. $304,000 D. $424,000

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39.

A. $2,080,000 B. $1,880,000 C. $1,835,000 D. $1,910,000

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40.

Samuel Corporation foresees a downturn in its business in the medium term. It expects to sustain an operating loss of $160,000 for the full year ending December 31, 20X8. Samuel's tax rate is 35 percent. Anticipated tax credits for 20X8 total $8,000. No permanent differences are expected. Realization of the full tax benefit of the expected operating loss and realization of anticipated tax credits are assured beyond any reasonable doubt because they will be carried back. For the first quarter ended March 31, 20X8, Samuel reported an operating loss of $30,000. How much of a tax benefit should Samuel report for the interim period ended March 31, 20X8?

A. $8,000 B. $12,000 C. $13,500 D. $15,500

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41.

Derby Company pays its executives a bonus of 6 percent of income before deducting the bonus and income taxes. For the quarter ended March 31, 20X8, Derby had income before the bonus and income tax of $12,000,000. For the year ended December 31, 20X8, Derby estimates that its income before bonus and income taxes will be $70,000,000. For the quarter ended March 31, 20X8, what is the amount of the bonus that Derby should deduct on its income statement?

A. $4,200,000 B. $720,000 C. $1,050,000 D. $180,000

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42.

Tyler Company incurred an inventory loss due to a decline in market prices during its first quarter of operations in 20X8. At the end of the first quarter, management of the company believed the decline in market prices to be permanent. In the second quarter, the market prices of Tyler's inventories increased above their acquisition cost. Market prices remained higher than acquisition cost during the remainder of 20X8. How should Tyler report the facts above on its first and second quarter income statements?

A. Option A B. Option B C. Option C D. Option D

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 13-04 Understand the rules for interim financial reporting. Topic: Reporting Standards for the Interim Income Statement

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43.

Denver Company, a calendar-year corporation, had the following actual income before income tax expense and estimated effective annual income tax rates for the first three quarters in 20X8:

Denver's income tax expense in its interim income statement for the third quarter should be:

A. $126,000. B. $68,400. C. $62,400. D. $54,000.

44.

ASC 270 uses which view of interim reporting?

A. Integral B. Discrete C. Segmental D. Comprehensive

AACSB: Reflective Thinking AICPA FN: Reporting

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Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-04 Understand the rules for interim financial reporting. Topic: Understand Interim Financial Reporting

45.

Which of the following observations is true of the discrete view of interim reporting?

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-04 Understand the rules for interim financial reporting. Topic: Understand Interim Financial Reporting

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46.

Mason Company paid its annual property taxes of $240,000 on February 15, 20X9. Mason also anticipates that its annual repairs expense for 20X9 will be $1,200,000. This amount is usually incurred and paid in July and August when operations are shut down so that machinery and equipment can be repaired. What amount should Mason deduct for property taxes and repairs in each quarter for 20X9?

A. Option A B. Option B C. Option C D. Option D

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47.

Toledo Imports, a calendar-year corporation, had the following income before tax expense and estimated effective annual income tax rates for the first three quarters in 20X8:

Toledo's income tax expense in its interim income statement for the nine months ended September 30 and for the third quarter, respectively, are:

A. $250,800 and $103,200. B. $252,000 and $108,000. C. $252,000 and $103,200. D. $250,800 and $108,000.

48.

Estimated gross profit rates may be used to estimate a company's cost of goods sold and its ending inventory for:

AACSB: Reflective Thinking AICPA FN: Decision Making

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Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-04 Understand the rules for interim financial reporting. Topic: Reporting Standards for the Interim Income Statement

49.

Davis Company uses LIFO for all of its inventories. During its second quarter of 20X9, Davis experienced a LIFO liquidation. Davis fully expects to replace the liquidated inventory in the early part of the third quarter. How should Davis report the inventory temporarily liquidated on its income statement for the second quarter?

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50.

How would a company report a change in an accounting principle made on the last day of the third quarter?

51.

Missoula Corporation disposed of one of its segments in the second quarter and incurred a gain from disposal of discontinued segment of $600,000, net of taxes. What is the effect of this gain from disposal of discontinued segment?

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52.

Frahm Company incurred a first quarter operating loss before income tax effect of $4,000,000. This is a normal occurrence for Frahm because of seasonal fluctuations. Experience has demonstrated the income earned during the remaining quarters far exceeds the first quarter losses each year. Frahm estimates its annual income tax rate will be 30 percent. What net loss should Frahm report for the first quarter?

A. $4,000,000 B. $2,800,000 C. $700,000 D. $0

53.

The income tax expense applicable to the second quarter's income statement is determined by:

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand

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Difficulty: 2 Medium Learning Objective: 13-04 Understand the rules for interim financial reporting. Topic: Reporting Standards for the Interim Income Statement

54.

If a company changes the method it uses to compute the allowance for uncollectible accounts receivable because more recent information has become available, how is this change in method is accounted for?

55.

All of the following situations require a retrospective application of a change in a reporting entity except for:

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Essay Questions

56.

ASC 280, Disclosure about Segments of an Enterprise and Related Information, has taken what has been referred to as a "management approach" to the definition of a segment and the allocation of costs to a segment. Required: a) What is meant by a management approach? How does this concept of a management approach impact the decision to disclose information? b) How are decisions about cost allocation handled in segment disclosures?

a) ASC 280 focuses on financial information that an enterprise's financial decision makers use to evaluate the entity's operating segments. The information provided about segments should correspond to the internal organization structure used by the chief operating decision maker in deciding how to allocate resources and in assessing performance. b) ASC 280 stated that the allocations of revenues and costs should be included for a reported segment only if they are included in the segment's profit or loss that the chief operating decision maker uses.

AACSB: Communication AICPA FN: Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 13-01 Understand accounting issues associated with segment reporting both in the United States and internationally. Topic: Segment Reporting Accounting Issues

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57.

Lloyd Corporation reports the following information for 20X8 for its three operating segments:

a) Operating profit or loss for each segment.

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Segments B and C both meet the operating profit or loss test. The absolute dollar amount of their respective operating profit and loss amounts are 10% or more of the absolute dollar amount of the combined segment operating losses of $157,000 ($10,000 loss + $147,000 loss).

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58.

Ridge Company is in the process of determining its reportable segments for the year ended December 31, 20X8. As the person responsible for determining this information, you gather the following information:

Conclusions from the tests: 1. Operating segments A, L, and R satisfy the revenue test. 2. Operating segments A, L, R, and Z satisfy the segment profit (loss) test. 3. Operating segments A, R, and Z satisfy the identifiable assets test. Conclusion:

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Segments A, L, R, and Z are reportable segments while segments M and S are not. b) The 75 percent test is calculated as follows:

Conclusion: The 75 percent revenue test is satisfied.

AACSB: Analytic AICPA FN: Reporting Blooms: Apply Difficulty: 3 Hard Learning Objective: 13-02 Understand and be able to calculate threshold tests for segment reporting. Topic: 10 Percent Quantitative Thresholds Topic: 75 Percent Consolidated Revenue Test

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59.

FASB has specified a "75% percent consolidated revenue test". Required: a) What is the 75% test? b) How is the 75% test impacted by the "10% Significance Rule"?

a) The total revenue from external sources by all separately reportable operating segments must equal at least 75% of the total consolidated revenue. b) The reporting entity must identify additional operating segments as reportable until this 75% test is met. The 10% Significance Rule includes segments that have significant intersegment sales. If there are more than ten reportable segments then the segments should be aggregated until 75% of the external revenue is disclosed. An entity does not have to have ten reportable segments.

AACSB: Communication AICPA FN: Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 13-02 Understand and be able to calculate threshold tests for segment reporting. Topic: 75 Percent Consolidated Revenue Test

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60.

Iona Corporation is in the process of preparing its financial statements for the first quarter of 20X9 and has asked your advice as to how to report several items. These items include the following events which took place during the first quarter of 20X9 (assume all amounts are material): 1) Iona redeemed bonds with a carrying value of $4,000,000 at a cost of $3,760,000. This early extinguishment occurred because Iona wants to issue new debt at lower interest rates. 2) Iona uses the LIFO method for its inventories. On January 1, 20X9, inventories amounted to $10,000,000, while, on March 31, 20X9, inventories totaled $9,200,000. Iona expects to replace the liquidated inventory at the beginning of the second quarter at a cost of $1,000,000. 3) Iona changed its depreciation method on $4,000,000 of its delivery trucks from the declining balance method to the straight-line method. On January 1, 20X9, accumulated depreciation under the declining balance method was $2,800,000. Had the straight-line method been used, accumulated depreciation on January 1, 20X9, would have been $2,300,000. The remaining life of the trucks is two years. 4) Iona pays its top executives a bonus at year-end of 6 percent of operating income before bonus and income taxes. Operating income before bonus and income taxes for the three months ended March 31, 20X9, was $10,000,000. Iona estimates that its yearly operating income before bonus and income taxes will be $60,000,000. 5) Iona closes its manufacturing operations in July of each year in order to make its major annual repairs. Iona estimates that the cost of these repairs in 20X9 will be $1,000,000. Required: For each of the events numbered 1 through 5, indicate how that event should be reported on Iona's income statement for the three months ended March 31, 20X9, and the balance sheet accounts effects at March 31, 20X9. Ignore income taxes.

1) Iona should report a gain (nonoperating i.e., not extraordinary) from early extinguishment of debt for $240,000 on the income statement. On the balance sheet, longterm debt will be reduced by $4,000,000, retained earnings will increase by $240,000, and 13-91 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

cash will be reduced by $3,760,000. 2) Cost of goods sold should be increased by $1,000,000, the expected replacement cost of inventory. This assumes the cost of the liquidated inventory was not part of cost of goods sold. If the cost of the liquidated inventory has been charged to cost of goods sold, then only the difference between the expected replacement cost of $1,000,000 and the cost of the inventory liquidated of $800,000 should be the increase to cost of goods sold. On the balance sheet, inventory should be reported at $9,200,000, and a liability titled "Excess of Replacement Cost Over LIFO Cost of Inventory Liquidated" should be reported at $200,000. 3) The remaining book value of the trucks is $1,200,000 and will be depreciated over two years, accounted for currently and prospectively as a change in estimate. The current annual depreciation expense of $600,000 is allocated quarterly and therefore $150,000 is an operating expense in the first quarter. On the balance sheet, the accumulated depreciation is $2,800,000 (prior) and $150,000 (current) = $2,950,000. 4) The bonus is accrued for the first quarter based upon the income of the quarter, not the estimate of income for the year. Bonus expense is 6% X $10,000,000, or $600,000, for the 1st quarter. On the March 31, 20X9, balance sheet, the liability for the accrued bonus would be reported as a current liability of $600,000. 5) Since the repairs benefit the entire year, each quarter is benefited by the repairs made in July. It is correct to use the straight-line method to allocate the repairs in the absence of any other approach. Therefore, 1/4 ($1,000,000), or $250,000, should be charged to repairs expense in the first quarter. On the March 31, 20X9, balance sheet, the $250,000 should be disclosed as a current liability and titled "Accrued Repairs Payable."

AACSB: Communication AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 13-04 Understand the rules for interim financial reporting. Topic: Reporting Standards for the Interim Income Statement

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61.

The information below is for the second quarter of Tampa Company for 20X8:

Required: Prepare an interim income statement for the second quarter for Tampa Company. Assume the LIFO liquidation is expected to be restored by the end of 20X8.

Income statement for the second quarter for Tampa Company:

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Note: Cost of sales was $12,400,000 because the LIFO liquidation was expected to be restored by the end of 20X8. Gains from early extinguishment of debt are no longer reported as extraordinary items unless material and specifically deemed as such. Income tax expense for the second quarter is calculated on cumulative income before tax for the first two quarters and then net of income tax expense from the first quarter.

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 13-04 Understand the rules for interim financial reporting. Topic: Reporting Standards for the Interim Income Statement

62.

Interim income statements are required for Smith Orchards. Smith does most of its sales in the fall quarter of the year. These sales are both to individual and commercial customers. How do you recommend Smith report sales during the spring quarter of the year?

Smith Orchards should be encouraged to supplement their interim reports with information for the 12-month periods ending at the interim date for both the current and preceding years. This form of disclosure reduces the possibility that users of the reports might make unwarranted inferences about the annual results from an interim report with material seasonal variations.

AACSB: Communication AICPA FN: Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 13-04 Understand the rules for interim financial reporting. Topic: Reporting Standards for the Interim Income Statement

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Chapter 14 SEC Reporting

Multiple Choice Questions

1. The Securities and Exchange Commission is responsible for:

A. Option A B. Option B C. Option C D. Option D

2. Which regulation created the Securities and Exchange Commission?

A. Securities Act of 1933 B. Securities Exchange Act of 1934 C. Investment Company Act of 1940 D. Garn-St. Germain Depository Institutions Act of 1982

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3. Which of the following divisions of the SEC regulates national securities exchanges, brokers, and dealers of securities?

A. Division of Investment Management B. Division of Corporation Finance C. Division of Corporation Regulation D. Division of Market Regulation

4. Which division of the SEC develops and administers the disclosure requirements for the securities acts and reviews all registration statements and other issue-oriented disclosures?

A. Division of Enforcement B. Division of Corporation Finance C. Division of Investment Management D. Division of Market Regulation

5. Identify the regulation that created an entity which insures investors from possible losses if an investment house enters bankruptcy.

A. Federal Deposit Insurance Protection Act B. Securities Investor Protection Act C. Investment Advisers Act D. Federal Bankruptcy Acts

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6. Regulation S-X and Regulation S-K:

A. govern the preparation of financial statements and associated disclosures. B. govern the registration requirements for private placements. C. outline responsibilities for audit committees of publicly held companies. D. prohibit artificial pyramids of capital in public utilities.

7. Which regulation resulted in the creation of the Public Company Accounting Oversight Board?

A. Investment Advisers Act B. Securities Investor Protection Act C. Sarbanes-Oxley Act D. Trust Indenture Act

8. Regulation S-X presents the rules for preparing all of the following except:

A. financial statements. B. footnotes. C. auditor's report. D. management's discussion.

9. The preparation of which of the following items is covered by Regulation S-K?

A. Descriptions of business B. Pro forma disclosures C. Schedules D. Reports of accountants

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10. Which of the following presents the results of actions taken against accountants, brokers, and other participants for filing false or misleading statements?

A. Financial Reporting Releases B. Financial Reporting Interpretations C. Accounting and Auditing Enforcement Releases D. Staff Accounting Bulletins

11. Which of the following covers new or revised administrative practices and interpretations used by the SEC staff in reviewing financial statements?

A. Securities Exchange Act releases B. Exchange Act industry guides C. Accounting and Auditing Enforcement Releases D. Staff Accounting Bulletins

12. Which of the following acts requires that a trustee be appointed for sales of bonds, debentures, and other debt securities of public corporations?

A. Securities Investor Protection Act B. Trust Indenture Act C. Investment Company Act D. Investment Advisors Act

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13. In the issuer's annual report, how many years of audited financial statements must be presented? I. Three years of audited income statements II. Two years of audited balance sheets III. Three years of audited statements of cash flows

A. I and II B. II and III C. I and III D. I, II, and III

14. Which of the following types of securities or securities transactions are exempt from the need to be registered under the Securities Act of 1933? I. Commercial paper with a maturity of nine months or less. II. Intrastate issues in which the securities are offered and sold only within one state. III. Securities exchanged by an issuer exclusively with its existing shareholders with no commission charged.

A. I and II B. II C. I, II, and III D. III

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15. Regulation D of the SEC presents important exemptions from full registration requirements for:

A. private placements. B. issuances of securities by savings and loan associations. C. issuances of securities by common carriers regulated by the Interstate Commerce Commission. D. foreign companies.

16. Which of the following forms is the most comprehensive registration statement?

A. Form S-1 B. Form F-2 C. Form S-3 D. Form S-2

17. When deficiencies are found in a registration statement that must be corrected before the securities may be offered for sale, which of the following is issued by the SEC?

A. An audit opinion B. A comment letter C. A customary review D. A comfort letter

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18. The purpose of a "tombstone ad" is:

A. to inform investors an upcoming offering has been canceled. B. to inform investors of an upcoming offering. C. to inform investors an upcoming offering will be delayed for 30 days. D. to inform investors securities will be offered for sale after the company has responded to the SEC's comment letter.

19. Which of the following best describes a "red herring" prospectus?

A. A shortened version of registration Form S-1 available to those companies that already have publicly traded securities. B. A prospectus containing material irregularities and deficiencies. C. Preliminary information provided to investors about an upcoming issue, and issued between the time a registration statement is presented to the SEC and its effective date. D. Disclosure in the business press, outlined in red, informing investors of an upcoming offering.

20. Which of the following observations is true of the s helf registration rule?

A. It is an option available to all listed companies. B. Shelf registration is limited to 25 percent of the company's currently outstanding stock. C. It allows private placements of an unlimited amount of securities. D. It allows large companies to select the optimal time to sell their stock.

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21. Accountants are liable for any materially false or misleading information contained in the registration statement filed with the SEC up to:

A. the date the registration statement is filed. B. the date of the audit report. C. the effective date of the registration statement. D. the date securities are sold.

22. What does an underwriter typically require from an accountant which indicates that the company has fulfilled all the accounting requirements in the registration process?

A. A comment letter B. An audit opinion C. A "red herring" prospectus D. A comfort letter

23. Which system helps the SEC accomplish its primary purpose of increasing the efficiency and fairness of the securities markets by expediting the receipt, acceptance, dissemination, and analysis of time-sensitive data filed with it?

A. EDI B. ESEC C. EDGAR D. EMMA

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24. Which of the following classes of information are included in the Form 10-K? I. Management's discussion and analysis II. Audited financial statements and footnotes III. Auditor's opinion on the company's internal control system

A. I and II B. I and III C. II and III D. I, II, and III

25. Which of the following statements concerning Form 10-Q is NOT true?

A. It is filed for all four quarters. B. It is the quarterly report to the SEC. C. It contains an update on significant matters occurring since the last quarter. D. It includes comparative financial statements prepared in accordance with APB 28.

26. Information concerning the unexpected resignation of one or more of the registrant's directors would be disclosed on which of the following forms? I. Form 8-Q II. Form 8-K

A. I B. II C. Both I and II D. Neither I nor II

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27. Proxy statements are:

A. filed by an entity that acquires a beneficial ownership of more than 5 percent in a company. B. interim financial statements need not be audited. C. materials submitted to shareholders for votes on corporate matters. D. used to disclose unscheduled material events.

28. Schedule 13D is filed

A. by entities that acquire a beneficial ownership of more than 5 percent of a class of registered equity securities. B. to broadly report material information that is being provided to securities analysts, selected institutional investors, or others. C. to disclose material items related to asset-backed securities such as a bond issue. D. by management to report the existence and effectiveness of the company's internal control over financial reporting.

29. Which of the following is defined as directly or indirectly having the power to vote the shares or investment power to sell the security?

A. Proxy B. Significant influence C. Control D. Beneficial ownership

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30. Which of the following is true about the Foreign Corrupt Practices Act of 1977 (FCPA)? I. Publicly held companies should maintain an adequate system of internal control. II. Individuals associated with U.S. companies are prohibited from bribing foreign officials for the purpose of securing a contract. III. Compensating or agents' fees are disallowed under all circumstances.

A. I and II B. II and II C. I and III D. I, II, and III

31. According to the provisions of the Sarbanes-Oxley Act,

A. accounting firms can provide both audit and non-audit services to the same company. B. the auditor should report directly to, and have its work overseen by, the company's management. C. audit committees should be composed of non-management members of a company's board of directors. D. both the lead audit partner and the audit review partner for publicly held companies should be rotated at least every two years.

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32. Which of the following statements concerning the management discussion and analysis (MD&A) of a company's financial condition is true? I. It should cover the financial statements and other statistical data for the most recent threeyear time span. II. It should make year-to-year comparisons of material changes in the line items. III. Management need not explain the cause(s) of the material changes. IV. Disclosure of material off-balance sheet transactions, arrangements, and obligations is required in each annual and each quarterly report.

A. I, II, and IV B. II and III C. I, III, and IV D. I, II, III, and IV

33. Pro forma disclosures are:

A. used to disclose unscheduled material events. B. interim financial statements need not be audited. C. materials submitted to shareholders for votes on corporate matters. D. "what-if" presentations often taking the form of summarized financial statements.

34. Which of the following statements concerning pro forma disclosures is not true?

A. They show the effects of major transactions that occur after the end of the fiscal period. B. They show the effects of major transactions that have occurred during the year but are not fully reflected in the company's historical cost financial statements. C. The SEC requires these to be presented only when the company has made an unusual asset exchange, or a restructuring of existing indebtedness. D. They often take the form of summarized financial statements.

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Essay Questions

35. The SEC administers many laws and regulations governing the information made in files reports. Required: a) What is the difference in issues covered by Regulation S-X and Regulation S-K? b) How do the issues covered by these regulations differ from the AAERs and SABs?

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36. Each of the following questions names an item. Select the correct description of the item from this list. Indicate your selection by entering the letter of the description. Descriptions a. Provides preliminary information to investors about an upcoming issue. b. Informs investors of an upcoming offering. c. Required annual filing to the SEC. d. Discloses unscheduled material events. e. Includes amendments to the Securities Act, additional disclosure requirements, and other current issues regarding accounting and auditing principles and standards. f. Results in a thorough examination by the SEC of a registration statement. g. Issued by the staff of the SEC and contains differences that must be corrected in a registration statement before the securities may be offered or sale. h. Quarterly report to SEC. i. Includes new or revised administrative practices and interpretations used in reviewing financial statements. j. Includes the results of actions taken against accountants or other participants because false or misleading statements were filed. k. Includes Regulations S-X and S-K. Customary Review

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37. Each of the following questions names an item. Select the correct description of the item from this list. Indicate your selection by entering the letter of the description. Descriptions a. Provides preliminary information to investors about an upcoming issue. b. Informs investors of an upcoming offering. c. Required annual filing to the SEC. d. Discloses unscheduled material events. e. Includes amendments to the Securities Act, additional disclosure requirements, and other current issues regarding accounting and auditing principles and standards. f. Results in a thorough examination by the SEC of a registration statement. g. Issued by the staff of the SEC and contains differences that must be corrected in a registration statement before the securities may be offered or sale. h. Quarterly report to SEC. i. Includes new or revised administrative practices and interpretations used in reviewing financial statements. j. Includes the results of actions taken against accountants or other participants because false or misleading statements were filed. k. Includes Regulations S-X and S-K. Comment Letter

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38. Each of the following questions names an item. Select the correct description of the item from this list. Indicate your selection by entering the letter of the description. Descriptions a. Provides preliminary information to investors about an upcoming issue. b. Informs investors of an upcoming offering. c. Required annual filing to the SEC. d. Discloses unscheduled material events. e. Includes amendments to the Securities Act, additional disclosure requirements, and other current issues regarding accounting and auditing principles and standards. f. Results in a thorough examination by the SEC of a registration statement. g. Issued by the staff of the SEC and contains differences that must be corrected in a registration statement before the securities may be offered or sale. h. Quarterly report to SEC. i. Includes new or revised administrative practices and interpretations used in reviewing financial statements. j. Includes the results of actions taken against accountants or other participants because false or misleading statements were filed. k. Includes Regulations S-X and S-K. "Red Herring" Prospectus

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39. Each of the following questions names an item. Select the correct description of the item from this list. Indicate your selection by entering the letter of the description. Descriptions a. Provides preliminary information to investors about an upcoming issue. b. Informs investors of an upcoming offering. c. Required annual filing to the SEC. d. Discloses unscheduled material events. e. Includes amendments to the Securities Act, additional disclosure requirements, and other current issues regarding accounting and auditing principles and standards. f. Results in a thorough examination by the SEC of a registration statement. g. Issued by the staff of the SEC and contains differences that must be corrected in a registration statement before the securities may be offered or sale. h. Quarterly report to SEC. i. Includes new or revised administrative practices and interpretations used in reviewing financial statements. j. Includes the results of actions taken against accountants or other participants because false or misleading statements were filed. k. Includes Regulations S-X and S-K. "Tombstone ad"

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40. Each of the following questions names an item. Select the correct description of the item from this list. Indicate your selection by entering the letter of the description. Descriptions a. Provides preliminary information to investors about an upcoming issue. b. Informs investors of an upcoming offering. c. Required annual filing to the SEC. d. Discloses unscheduled material events. e. Includes amendments to the Securities Act, additional disclosure requirements, and other current issues regarding accounting and auditing principles and standards. f. Results in a thorough examination by the SEC of a registration statement. g. Issued by the staff of the SEC and contains differences that must be corrected in a registration statement before the securities may be offered or sale. h. Quarterly report to SEC. i. Includes new or revised administrative practices and interpretations used in reviewing financial statements. j. Includes the results of actions taken against accountants or other participants because false or misleading statements were filed. k. Includes Regulations S-X and S-K. Form 10-K

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41. Each of the following questions names an item. Select the correct description of the item from this list. Indicate your selection by entering the letter of the description. Descriptions a. Provides preliminary information to investors about an upcoming issue. b. Informs investors of an upcoming offering. c. Required annual filing to the SEC. d. Discloses unscheduled material events. e. Includes amendments to the Securities Act, additional disclosure requirements, and other current issues regarding accounting and auditing principles and standards. f. Results in a thorough examination by the SEC of a registration statement. g. Issued by the staff of the SEC and contains differences that must be corrected in a registration statement before the securities may be offered or sale. h. Quarterly report to SEC. i. Includes new or revised administrative practices and interpretations used in reviewing financial statements. j. Includes the results of actions taken against accountants or other participants because false or misleading statements were filed. k. Includes Regulations S-X and S-K. Form 10-Q

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42. Each of the following questions names an item. Select the correct description of the item from this list. Indicate your selection by entering the letter of the description. Descriptions a. Provides preliminary information to investors about an upcoming issue. b. Informs investors of an upcoming offering. c. Required annual filing to the SEC. d. Discloses unscheduled material events. e. Includes amendments to the Securities Act, additional disclosure requirements, and other current issues regarding accounting and auditing principles and standards. f. Results in a thorough examination by the SEC of a registration statement. g. Issued by the staff of the SEC and contains differences that must be corrected in a registration statement before the securities may be offered or sale. h. Quarterly report to SEC. i. Includes new or revised administrative practices and interpretations used in reviewing financial statements. j. Includes the results of actions taken against accountants or other participants because false or misleading statements were filed. k. Includes Regulations S-X and S-K. Form 8-K

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43. Each of the following questions names an item. Select the correct description of the item from this list. Indicate your selection by entering the letter of the description. Descriptions a. Provides preliminary information to investors about an upcoming issue. b. Informs investors of an upcoming offering. c. Required annual filing to the SEC. d. Discloses unscheduled material events. e. Includes amendments to the Securities Act, additional disclosure requirements, and other current issues regarding accounting and auditing principles and standards. f. Results in a thorough examination by the SEC of a registration statement. g. Issued by the staff of the SEC and contains differences that must be corrected in a registration statement before the securities may be offered or sale. h. Quarterly report to SEC. i. Includes new or revised administrative practices and interpretations used in reviewing financial statements. j. Includes the results of actions taken against accountants or other participants because false or misleading statements were filed. k. Includes Regulations S-X and S-K. Staff Accounting Bulletins

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44. Each of the following questions names an item. Select the correct description of the item from this list. Indicate your selection by entering the letter of the description. Descriptions a. Provides preliminary information to investors about an upcoming issue. b. Informs investors of an upcoming offering. c. Required annual filing to the SEC. d. Discloses unscheduled material events. e. Includes amendments to the Securities Act, additional disclosure requirements, and other current issues regarding accounting and auditing principles and standards. f. Results in a thorough examination by the SEC of a registration statement. g. Issued by the staff of the SEC and contains differences that must be corrected in a registration statement before the securities may be offered or sale. h. Quarterly report to SEC. i. Includes new or revised administrative practices and interpretations used in reviewing financial statements. j. Includes the results of actions taken against accountants or other participants because false or misleading statements were filed. k. Includes Regulations S-X and S-K. Accounting and Auditing Enforcement Releases

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45. The items below are associated with the Securities and Exchange Commission. Describe or explain each item as concisely as possible. (a) Customary Review (b) Comment Letter (c) "Red Herring" Prospectus (d) "Tombstone Ad" (e) Financial Reporting Releases (f) Staff Accounting Bulletins (g) Accounting and Auditing Enforcement Releases (h) Management's Discussion and Analysis

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46. Companies issuing stock to the public have to aware of certain terms. Using complete sentences define the following: a) Comment Letter b) Preliminary Prospectus. c) Shelf Registration.

47. The Securities Exchange Act of 1934 requires publicly held companies to file periodic financial disclosures as updates of their economic activity. The three basic forms used for this updating are Form 10-K, Form 10-Q, and Form 8-K. Required: Describe the information contained in each of the three basic forms noted above.

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48. Both the FCPA (Foreign Corrupt Practices Act of 1977) and SOX (Sarbanes-Oxley Act of 2002) contain provisions related to Internal Control. Discuss some significant differences between how the two acts impact internal control practices for publicly held companies.

49. Smithtown Distributors acquired Paul's Plumbing on January 15, 20X8. Violet Flowers acquired Frank's Farm on January 1, 20X7. In the 12/31/X7 financial statements filed with the SEC, Smithtown included a Pro Forma disclosure and Violet did not. If both acquisitions account for 100% of the common stock of the company acquired and are considered to be material, then can both filings be considered proper?

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Chapter 14 SEC Reporting Answer Key

Multiple Choice Questions

The Securities and Exchange Commission is responsible for:

A. Option A B. Option B C. Option C D. Option D

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 14-01 Understand the SEC's structure and regulatory authority. Topic: Laws Administered by the SEC

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Which regulation created the Securities and Exchange Commission?

A. Securities Act of 1933 B. Securities Exchange Act of 1934 C. Investment Company Act of 1940 D. Garn-St. Germain Depository Institutions Act of 1982

Which of the following divisions of the SEC regulates national securities exchanges, brokers, and dealers of securities?

A. Division of Investment Management B. Division of Corporation Finance C. Division of Corporation Regulation D. Division of Market Regulation

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Which division of the SEC develops and administers the disclosure requirements for the securities acts and reviews all registration statements and other issue-oriented disclosures?

A. Division of Enforcement B. Division of Corporation Finance C. Division of Investment Management D. Division of Market Regulation

Identify the regulation that created an entity which insures investors from possible losses if an investment house enters bankruptcy.

A. Federal Deposit Insurance Protection Act B. Securities Investor Protection Act C. Investment Advisers Act D. Federal Bankruptcy Acts

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Regulation S-X and Regulation S-K:

Which regulation resulted in the creation of the Public Company Accounting Oversight Board?

A. Investment Advisers Act B. Securities Investor Protection Act C. Sarbanes-Oxley Act D. Trust Indenture Act

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Regulation S-X presents the rules for preparing all of the following except:

A. financial statements. B. footnotes. C. auditor's report. D. management's discussion.

The preparation of which of the following items is covered by Regulation S-K?

A. Descriptions of business B. Pro forma disclosures C. Schedules D. Reports of accountants

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10.

Which of the following presents the results of actions taken against accountants, brokers, and other participants for filing false or misleading statements?

A. Financial Reporting Releases B. Financial Reporting Interpretations C. Accounting and Auditing Enforcement Releases D. Staff Accounting Bulletins

11.

Which of the following covers new or revised administrative practices and interpretations used by the SEC staff in reviewing financial statements?

A. Securities Exchange Act releases B. Exchange Act industry guides C. Accounting and Auditing Enforcement Releases D. Staff Accounting Bulletins

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12.

Which of the following acts requires that a trustee be appointed for sales of bonds, debentures, and other debt securities of public corporations?

A. Securities Investor Protection Act B. Trust Indenture Act C. Investment Company Act D. Investment Advisors Act

13.

In the issuer's annual report, how many years of audited financial statements must be presented? I. Three years of audited income statements II. Two years of audited balance sheets III. Three years of audited statements of cash flows

A. I and II B. II and III C. I and III D. I, II, and III

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 14-02 Understand the process of registering securities with the SEC. Topic: Issuing Securities: The Registration Process

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14.

Which of the following types of securities or securities transactions are exempt from the need to be registered under the Securities Act of 1933? I. Commercial paper with a maturity of nine months or less. II. Intrastate issues in which the securities are offered and sold only within one state. III. Securities exchanged by an issuer exclusively with its existing shareholders with no commission charged.

A. I and II B. II C. I, II, and III D. III

15.

Regulation D of the SEC presents important exemptions from full registration requirements for:

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 14-02 Understand the process of registering securities with the SEC.

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Topic: Issuing Securities: The Registration Process

16.

Which of the following forms is the most comprehensive registration statement?

A. Form S-1 B. Form F-2 C. Form S-3 D. Form S-2

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 14-02 Understand the process of registering securities with the SEC. Topic: Issuing Securities: The Registration Process

17.

When deficiencies are found in a registration statement that must be corrected before the securities may be offered for sale, which of the following is issued by the SEC?

A. An audit opinion B. A comment letter C. A customary review D. A comfort letter

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 14-02 Understand the process of registering securities with the SEC. Topic: Issuing Securities: The Registration Process

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18.

The purpose of a "tombstone ad" is:

19.

Which of the following best describes a "red herring" prospectus?

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20.

Which of the following observations is true of the s helf registration rule?

21.

Accountants are liable for any materially false or misleading information contained in the registration statement filed with the SEC up to:

A. the date the registration statement is filed. B. the date of the audit report. C. the effective date of the registration statement. D. the date securities are sold.

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22.

What does an underwriter typically require from an accountant which indicates that the company has fulfilled all the accounting requirements in the registration process?

A. A comment letter B. An audit opinion C. A "red herring" prospectus D. A comfort letter

23.

Which system helps the SEC accomplish its primary purpose of increasing the efficiency and fairness of the securities markets by expediting the receipt, acceptance, dissemination, and analysis of time-sensitive data filed with it?

A. EDI B. ESEC C. EDGAR D. EMMA

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 14-03 Understand periodic reporting requirements. Topic: Electronic Data Gathering, Analysis, and Retrieval (EDGAR) System

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24.

Which of the following classes of information are included in the Form 10-K? I. Management's discussion and analysis II. Audited financial statements and footnotes III. Auditor's opinion on the company's internal control system

A. I and II B. I and III C. II and III D. I, II, and III

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 2 Medium Learning Objective: 14-03 Understand periodic reporting requirements. Topic: Periodic Reporting Requirements

25.

Which of the following statements concerning Form 10-Q is NOT true?

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 14-03 Understand periodic reporting requirements. Topic: Periodic Reporting Requirements

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26.

Information concerning the unexpected resignation of one or more of the registrant's directors would be disclosed on which of the following forms? I. Form 8-Q II. Form 8-K

A. I B. II C. Both I and II D. Neither I nor II

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 2 Medium Learning Objective: 14-03 Understand periodic reporting requirements. Topic: Periodic Reporting Requirements

27.

Proxy statements are:

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 14-03 Understand periodic reporting requirements. Topic: Periodic Reporting Requirements

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28.

Schedule 13D is filed

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 14-03 Understand periodic reporting requirements. Topic: Periodic Reporting Requirements

29.

Which of the following is defined as directly or indirectly having the power to vote the shares or investment power to sell the security?

A. Proxy B. Significant influence C. Control D. Beneficial ownership

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 14-03 Understand periodic reporting requirements. Topic: Periodic Reporting Requirements

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30.

Which of the following is true about the Foreign Corrupt Practices Act of 1977 (FCPA)? I. Publicly held companies should maintain an adequate system of internal control. II. Individuals associated with U.S. companies are prohibited from bribing foreign officials for the purpose of securing a contract. III. Compensating or agents' fees are disallowed under all circumstances.

A. I and II B. II and II C. I and III D. I, II, and III

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 2 Medium Learning Objective: 14-04 Understand requirements for management reporting laws. Topic: Foreign Corrupt Practices Act of 1977

31.

According to the provisions of the Sarbanes-Oxley Act,

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 14-04 Understand requirements for management reporting laws.

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Topic: Sarbanes-Oxley Act of 2002

32.

Which of the following statements concerning the management discussion and analysis (MD&A) of a company's financial condition is true? I. It should cover the financial statements and other statistical data for the most recent three-year time span. II. It should make year-to-year comparisons of material changes in the line items. III. Management need not explain the cause(s) of the material changes. IV. Disclosure of material off-balance sheet transactions, arrangements, and obligations is required in each annual and each quarterly report.

A. I, II, and IV B. II and III C. I, III, and IV D. I, II, III, and IV

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 3 Hard Learning Objective: 14-05 Understand disclosure requirements. Topic: Management Discussion and Analysis

33.

Pro forma disclosures are:

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember

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Difficulty: 1 Easy Learning Objective: 14-05 Understand disclosure requirements. Topic: Pro Forma Disclosures

34.

Which of the following statements concerning pro forma disclosures is not true?

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 14-05 Understand disclosure requirements. Topic: Pro Forma Disclosures

Essay Questions

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35.

The SEC administers many laws and regulations governing the information made in files reports. Required: a) What is the difference in issues covered by Regulation S-X and Regulation S-K? b) How do the issues covered by these regulations differ from the AAERs and SABs?

a) Regulation S-X presents the rules for preparing financial statements, footnotes, and the auditor's report. Regulation S-K covers all nonfinancial items such, as management's discussion and analysis of the company's operation and present financial position. b) AAERs (Accounting and Auditing Enforcement Releases) and SABs (Staff Accounting Bulletins) are issued by the SEC. The SABs allow staff to make announcements on technical issues with which it is concerned as a result of reviews of SEC filings. AAERs present the results of enforcement actions taken against accountants, brokers, and other participants in the filing process.

AACSB: Communication AICPA FN: Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 14-01 Understand the SEC's structure and regulatory authority. Topic: The Regulatory Structure

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36.

Each of the following questions names an item. Select the correct description of the item from this list. Indicate your selection by entering the letter of the description. Descriptions a. Provides preliminary information to investors about an upcoming issue. b. Informs investors of an upcoming offering. c. Required annual filing to the SEC. d. Discloses unscheduled material events. e. Includes amendments to the Securities Act, additional disclosure requirements, and other current issues regarding accounting and auditing principles and standards. f. Results in a thorough examination by the SEC of a registration statement. g. Issued by the staff of the SEC and contains differences that must be corrected in a registration statement before the securities may be offered or sale. h. Quarterly report to SEC. i. Includes new or revised administrative practices and interpretations used in reviewing financial statements. j. Includes the results of actions taken against accountants or other participants because false or misleading statements were filed. k. Includes Regulations S-X and S-K. Customary Review

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37.

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38.

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39.

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40.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 14-03 Understand periodic reporting requirements. Topic: Periodic Reporting Requirements

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41.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 14-03 Understand periodic reporting requirements. Topic: Periodic Reporting Requirements

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42.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 14-03 Understand periodic reporting requirements. Topic: Periodic Reporting Requirements

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43.

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44.

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45.

The items below are associated with the Securities and Exchange Commission. Describe or explain each item as concisely as possible. (a) Customary Review (b) Comment Letter (c) "Red Herring" Prospectus (d) "Tombstone Ad" (e) Financial Reporting Releases (f) Staff Accounting Bulletins (g) Accounting and Auditing Enforcement Releases (h) Management's Discussion and Analysis

(a) Customary Review A customary review is a thorough examination made by the staff of the SEC of a registration statement. (b) Comment Letter A comment letter contains the deficiencies that must be corrected in a registration statement before the securities may be offered for sale. (c) "Red Herring" Prospectus A "red herring" prospectus provides preliminary information to investors about an upcoming issue. The name red herring comes from the red ink used on the cover of this preliminary prospectus indicating it is not an offering statement and the securities being discussed are not yet available for sale. (d) "Tombstone Ad" A tombstone ad appears in the business press to inform investors of an upcoming offering. These ads are bordered in black ink, thus the title tombstone ad. (e) Financial Reporting Releases Financial Reporting Releases include amendments to the Securities Act, additional disclosure requirements, and other current issues regarding accounting and auditing

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principles and standards. (f) Staff Accounting Bulletins Staff Accounting Bulletins are new or revised administrative practices and interpretations used by the Commission's staff in reviewing financial statements. (g) Accounting and Auditing Enforcement Releases The Accounting and Auditing Enforcement Releases (AAERs) present the results of enforcement actions taken against accountants, brokers, and other participants in the filing process. They include discussion of the findings and opinions, including sanctions against the accountants involved, and enforcement hearings held by the Commission. (h) Management's Discussion and Analysis Management's Discussion and Analysis is one of the five classes of information comprising the Basic Information Package. The MDA consists of an analysis of the company's financial condition and changes in financial condition. The focus is on the discussion of the company's present and future prospects for liquidity, capital resources, and changes in operations. Management must disclose unused lines of credit, capital budgeting plans, and must perform a line-by-line analysis of the causes for changes in the financial statements presented.

AACSB: Communication AICPA FN: Reporting Blooms: Remember Difficulty: 2 Medium Learning Objective: 14-01 Understand the SEC's structure and regulatory authority. Learning Objective: 14-02 Understand the process of registering securities with the SEC. Learning Objective: 14-03 Understand periodic reporting requirements. Learning Objective: 14-05 Understand disclosure requirements. Topic: Issuing Securities: The Registration Process Topic: Management Discussion and Analysis Topic: Periodic Reporting Requirements Topic: The Regulatory Structure

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46.

Companies issuing stock to the public have to aware of certain terms. Using complete sentences define the following: a) Comment Letter b) Preliminary Prospectus. c) Shelf Registration.

a) A comment letter is issued by the SEC to specify deficiencies that must be corrected prior to the security being offered for sale. b) A preliminary prospectus, also referred to as a red herring, provides tentative information to investors about an upcoming issue. c) The shelf registration allows a company with stock actively traded to establish a registration statement which can be updated in a short period of time, 2 or 3 days, and then issue more stock. The shelf registration is limited to 10 percent of the company's currently outstanding stock. A company may in this manner choose an optimal period in which to sell more stock.

AACSB: Communication AICPA FN: Reporting Blooms: Remember Difficulty: 2 Medium Learning Objective: 14-02 Understand the process of registering securities with the SEC. Topic: Issuing Securities: The Registration Process

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47.

The Securities Exchange Act of 1934 requires publicly held companies to file periodic financial disclosures as updates of their economic activity. The three basic forms used for this updating are Form 10-K, Form 10-Q, and Form 8-K. Required: Describe the information contained in each of the three basic forms noted above.

Form 10-K: Form 10-K must be filed within 60 days after the end of the company's fiscal year-end. Although the report is broken into four parts, the general format is similar to the company's annual report. Parts I, II, and III contain the financial statements, management discussion and analysis, management report on internal control, auditor's report, and condensed financial information disclosures, often incorporated by reference to the annual report. Part IV contains additional schedules and exhibits. However, Form 10-K differs from the annual report by providing specific information relevant to the security holders, discussion of any disagreements with external auditors, management compensation and major ownership blocks, and schedules detailing selected asset and liability accounts including accounts receivable, property, plant, and equipment, the company's investments in other enterprises, and indebtedness of the company and its affiliates. Form 10-Q: Form 10-Q is the interim report of the SEC. It is due within 45 days after the end of each quarter except the fourth quarter when the 10-K is issued. Part I of Form 10-Q includes comparative financial statements prepared in accordance with APB Opinion No. 28, but these interim statements need not be audited. Essentially the company provides financial statements for the most recent quarter, cumulative statements from the beginning of the fiscal period, and comparative statements for the preceding fiscal year. Part II of Form 10-Q is an update on significant matters occurring since the last quarter. These include new legal proceedings, changes in the rights of securities, defaults on senior securities, increases or decreases in the number of securities outstanding, and other materially important events affecting security holders. Form 8-K: Form 8-K is used to disclose unscheduled material events. This form is due with 4 days after the occurrence of a "triggering event". The purpose of Form 8-K is to provide public disclosure of these significant events on a relatively contemporaneous

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basis.

AACSB: Communication AICPA FN: Reporting Blooms: Remember Difficulty: 2 Medium Learning Objective: 14-03 Understand periodic reporting requirements. Topic: Periodic Reporting Requirements

48.

Both the FCPA (Foreign Corrupt Practices Act of 1977) and SOX (Sarbanes-Oxley Act of 2002) contain provisions related to Internal Control. Discuss some significant differences between how the two acts impact internal control practices for publicly held companies.

The FCPA defined important aspects of a good internal control system to include: 1. strong budgetary controls, 2. an objective internal audit function, 3. an active audit committee from the company's board of directors, and 4. a review of the internal audit control system by the independent auditors. SOX, Section 404, requires an internal control report to be filed by management reporting on the existence and effectiveness of the company's internal control over financial reporting.

AACSB: Communication AICPA BB: Critical Thinking Blooms: Apply Difficulty: 3 Hard Learning Objective: 14-04 Understand requirements for management reporting laws. Topic: Foreign Corrupt Practices Act of 1977 Topic: Sarbanes-Oxley Act of 2002

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49.

Smithtown Distributors acquired Paul's Plumbing on January 15, 20X8. Violet Flowers acquired Frank's Farm on January 1, 20X7. In the 12/31/X7 financial statements filed with the SEC, Smithtown included a Pro Forma disclosure and Violet did not. If both acquisitions account for 100% of the common stock of the company acquired and are considered to be material, then can both filings be considered proper?

Pro forma statements can be used to show the effects of major transactions that occur after the end of the fiscal period. The acquisition of Paul's Plumbing occurred after 12/31/X7 so it is proper for Smithtown to disclose the impact of this acquisition on its financial statements. Violet should have reported the acquisition of Frank's Farm in its consolidated 12/31/X7 financial statements.

AACSB: Communication AICPA BB: Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 14-05 Understand disclosure requirements. Topic: Pro Forma Disclosures

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Chapter 15 Partnerships: Formation, Operation, and Changes in Membership

Multiple Choice Questions

1. A partnership is a(n): I. accounting entity. II. taxable entity.

A. I only B. II only C. Neither I nor II D. Both I and II

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2. Which of the following accounts could be found in the general ledger of a partnership?

A. Option A B. Option B C. Option C D. Option D

3. Which of the following accounts could be found in the PQ partnership's general ledger? I. Due from P II. P, Drawing III. Loan Payable to Q

A. I, II B. I, III C. II, III D. I, II, and III

4. Transferable interest of a partner includes all of the following except:

A. the partner's share of the profits and losses of the partnership. B. the right to receive distributions. C. the right to receive any liquidating distribution. D. the authority to transact any of the partnership's business operations.

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5. A limited liability company (LLC): I. is governed by the laws of the state in which it is formed. II. provides liability protection to its investors. III. does not offer pass-through taxation benefits of partnerships.

A. Both I and III B. III C. Both I and II D. I, II, and II

6. Which of the following statements best describes limited partnerships?

A. In an LLP, there must be at least one general partner that is personally liable for the obligations of the partnership and has management responsibilities. B. There are no general or limited partners in a LP; each partner has the rights and duties of a general partner, but limited legal liability. C. The identifier LP or LLP need not be included in the name or identification of a limited partnership. D. If the presumption of control by the general partner can be overcome, the partner would account for its investment using the equity method of accounting.

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7. RD formed a partnership on February 10, 20X9. R contributed cash of $150,000, while D contributed inventory with a fair value of $120,000. Due to R's expertise in selling, D agreed that R should have 60 percent of the total capital of the partnership. R and D agreed to recognize goodwill. What is the total capital of the RD partnership and the capital balance of R after the goodwill is recognized?

A. Option A B. Option B C. Option C D. Option D

8. When a partnership is formed, noncash assets contributed by partners should be recorded: I. at their respective book values for income tax purposes. II. at their respective fair values for financial accounting purposes.

A. I only B. II only C. Both I and II D. Neither I nor II

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9. Note: This is a Kaplan CPA Review Question Roberts and Smith drafted a partnership agreement that lists the following assets contributed at the partnership's formation:

The building is subject to a mortgage of $10,000, which the partnership has assumed. The partnership agreement also specifies that profits and losses are to be distributed evenly. What amounts should be recorded as capital for Roberts and Smith at the formation of the partnership?

A. Option A B. Option B C. Option C D. Option D

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10. Note: This is a Kaplan CPA Review Question Cor-Eng Partnership was formed on January 2, 20X1. Under the partnership agreement, each partner has an equal initial capital balance accounted for under the goodwill method. Partnership net income or loss is allocated 60% to Cor and 40% to Eng. To form the partnership, Cor originally contributed assets costing $30,000 with a fair value of $60,000 on January 2, 20X1, while Eng contributed $20,000 in cash. Drawings by the partners during 20X1 totaled $3,000 by Cor and $9,000 by Eng. Cor-Eng's 20X1 net income was $25,000. Eng's initial capital balance in Cor-Eng is

A. $25,000. B. $20,000. C. $60,000. D. $40,000.

11. The partnership of X and Y shares profits and losses in the ratio of 60 percent to X and 40 percent to Y. For the year 20X8, partnership net income was double X's withdrawals. Assume X's beginning capital balance was $80,000, and ending capital balance (after closing) was $140,000. Partnership net income for the year was:

A. $120,000. B. $300,000. C. $500,000. D. $600,000.

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12. Shue, a partner in the Financial Brokers Partnership, has a 30 percent share in partnership profits and losses. Shue's capital account had a net decrease of $100,000 during 20X8. During 20X8, Shue withdrew $240,000 as withdrawals and contributed equipment valued at $50,000 to the partnership. What was the net income of the Financial Brokers Partnership for 20X8?

A. $633,334 B. $466,666 C. $300,000 D. $190,000

13. Which of the following statements best describes accounting for a partnership?

A. A partnership may be a profit or a nonprofit entity. B. A partnership may use federal income tax rules to account for transactions in their journals and ledger accounts. C. A partnership's equity section contains both capital and retained earnings accounts. D. A partnership may only distribute money through a dividend payment.

14. Which of the following accounts is not maintained for each partner in its accounting records?

A. Capital account B. Drawing account C. Earnings account D. Loan account

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15. Griffin and Rhodes formed a partnership on January 1, 20X9. Griffin contributed cash of $120,000 and Rhodes contributed land with a fair value of $160,000. The partnership assumed the mortgage on the land which amounted to $40,000 on January 1. Rhodes originally paid $90,000 for the land. On July 31, 20X9, the partnership sold the land for $190,000. Assuming Griffin and Rhodes share profits and losses equally, how much of the gain from sale of land should be credited to Griffin for financial accounting purposes?

A. $0 B. $15,000 C. $35,000 D. $45,000

16. The DEF partnership reported net income of $130,000 for the year ended December 31, 20X8. According to the partnership agreement, partnership profits and losses are to be distributed as follows:

How should partnership net income for 20X8 be allocated to D, E, and F?

A. Option A B. Option B C. Option C D. Option D

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17. The JPB partnership reported net income of $160,000 for the year ended December 31, 20X8. According to the partnership agreement, partnership profits and losses are to be distributed as follows:

How should partnership net income for 20X8 be allocated to J, P, and B?

A. Option A B. Option B C. Option C D. Option D

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18. The APB partnership agreement specifies that partnership net income be allocated as follows:

Average capital balances for the current year were $50,000 for A, $30,000 for P, and $20,000 for B. Refer to the information given. Assuming a current year net income of $150,000, what amount should be allocated to each partner?

A. Option A B. Option B C. Option C D. Option D

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19. The APB partnership agreement specifies that partnership net income be allocated as follows:

Average capital balances for the current year were $50,000 for A, $30,000 for P, and $20,000 for B. Refer to the information given. Assuming a current year net income of $50,000, what amount should be allocated to each partner?

A. Option A B. Option B C. Option C D. Option D

20. The terms of a partnership agreement provide that one of the partners is to receive a salary allowance of $30,000, plus a bonus of 20 percent of income after deduction of the bonus and the salary allowance. If income is $150,000, the bonus should be:

A. $18,000. B. $20,000. C. $24,000. D. $30,000.

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21. Note: This is a Kaplan CPA Review Question Fox, Greg, and Howe are partners with average capital balances during 20X1 of $120,000, $60,000, and $40,000, respectively. Partners receive 10% interest on their average capital balances. After deducting salaries of $30,000 to Fox and $20,000 to Howe, the residual profit or loss is divided equally. In 20X1 the partnership sustained a $33,000 loss before interest and salaries to partners. By what amount should Fox's capital account change?

A. $7,000 increase B. $11,000 decrease C. $35,000 decrease D. $42,000 increase

22. In the ABC partnership (to which Daniel seeks admittance), the capital balances of Albert, Bert, and Connell, who share income in the ratio of 5:3:2 are:

Based on the preceding information, if no goodwill or bonus is recorded, how much should Daniel invest for a 20 percent interest?

A. $400,000 B. $200,000 C. $300,000 D. $250,000

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23. In the ABC partnership (to which Daniel seeks admittance), the capital balances of Albert, Bert, and Connell, who share income in the ratio of 5:3:2 are:

Based on the preceding information, what amount of goodwill will be recorded if Daniel invests $450,000 for a one-third interest?

A. $0 B. $10,000 C. $50,000 D. $100,000

24.

Refer to the above information. Which statement below is correct if a new partner receives a bonus upon contributing assets into the partnership?

A. B < A and D = C - A B. B > A and D = C + A C. A = B and A = D + C D. B > A and C = D + A

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25.

Refer to the above information. Which statement below is correct if the old partners receive a bonus upon the contribution of assets into the partnership by a new partner?

A. B < A and D = C - A B. B + A and D > C + A C. B < A and D = C + A D. B > A and D = C + A

26.

Refer to the above information. Which statement below is correct if goodwill of the old partners is recognized upon the contribution of assets into the partnership by a new partner?

A. B = A and D < C + A B. B = A and D > C + A C. B < A and D = C + A D. B > A and D < C + A

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27.

Refer to the above information. Which statement below is correct if a new partner purchases an interest in capital directly from the old partners?

A. C < D B. C = D C. C = D and B = A D. C < D and B = A

28.

Refer to the above information. Which statement below is correct if a new partner's goodwill is recognized upon contributing assets into the partnership?

A. B = A and D > C + A B. B < A and D < C + A C. B > A and D = C + A D. B > A and D > C + A

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29. When a new partner is admitted into a partnership and the new partner receives a capital credit less than the tangible assets contributed, which of the following explains the difference? I. The new partner's goodwill has been recognized. II. The old partners received a bonus from the new partner.

A. I only B. II only C. Either I or II D. Neither I nor II

30. When a new partner is admitted into a partnership and the new partner receives a capital credit greater than the tangible assets contributed, which of the following explains the difference? I. The old partners' goodwill is being recognized. II. The new partner's goodwill is being recognized.

A. I only B. II only C. Either I or II D. Both I and II

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31. When a new partner is admitted into a partnership and the capital of the old partners decreases, which of the following explains the reason for the decrease? I. Undervalued liabilities were written up to their fair values. II. Undervalued assets were written up to their fair values.

A. I only B. II only C. Both I and II D. Neither I nor II

32. When a partner retires from a partnership and the retiring partner is paid more than the capital balance in her account, which of the following explains the difference? I. The retiring partner is receiving a bonus from the other partners. II. The retiring partner's goodwill is being recognized.

A. I only B. II only C. Either I or II D. Neither I nor II

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33. When the old partners receive a bonus upon admission of a new partner into a partnership, the bonus is allocated to: I. all the partners in their profit and loss sharing ratio. II. the existing partners in their profit and loss sharing ratio.

A. I only B. II only C. Either I or II D. Neither I nor II

34. When a new partner is admitted into a partnership and the old partners' goodwill is recognized, the goodwill is allocated to: I. all the partners in their profit-and-loss-sharing ratio. II. the old partners in their profit and loss sharing ratio.

A. I only B. II only C. Either I or II D. Neither I nor II

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35. In the RST partnership, Ron's capital is $80,000, Stella's is $75,000, and Tiffany's is $50,000. They share income in a 3:2:1 ratio, respectively. Tiffany is retiring from the partnership. Each of the following question is independent of the others. Refer to the above information. Tiffany is paid $60,000, and no goodwill is recorded. In the journal entry to record Tiffany's withdrawal:

A. Tiffany, Capital will be credited for $60,000. B. Ron, Capital will be debited for $5,000. C. Stella, Capital will be debited for $4,000. D. Cash will be debited for $60,000.

36. In the RST partnership, Ron's capital is $80,000, Stella's is $75,000, and Tiffany's is $50,000. They share income in a 3:2:1 ratio, respectively. Tiffany is retiring from the partnership. Each of the following question is independent of the others. Refer to the above information. Tiffany is paid $60,000, and no goodwill is recorded. What is the Ron's capital balance after Tiffany withdraws from the partnership?

A. $74,000 B. $71,000 C. $75,000 D. $86,000

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37. In the RST partnership, Ron's capital is $80,000, Stella's is $75,000, and Tiffany's is $50,000. They share income in a 3:2:1 ratio, respectively. Tiffany is retiring from the partnership. Each of the following question is independent of the others. Refer to the above information. Tiffany is paid $56,000, and all implied goodwill is recorded. What is the total amount of goodwill recorded?

A. $0 B. $6,000 C. $30,000 D. $36,000

38. In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the following question is independent of the others. Refer to the information provided above. What amount will David have to invest to give him one-fifth percent interest in the capital of the partnership if no goodwill or bonus is recorded?

A. $60,000 B. $36,000 C. $50,000 D. $45,000

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39. In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the following question is independent of the others. Refer to the information provided above. Assume that David invests $50,000 for a one-fourth interest. Goodwill is to be recorded. The journal to record David's admission into the partnership will include:

A. a credit to cash for $50,000. B. a debit to goodwill for $7,500. C. a credit to David, Capital for $60,000. D. a credit to David, Capital for $50,000.

40. In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the following question is independent of the others. Refer to the information provided above. Allen and Daniel agree that some of the inventory is obsolete. The inventory account is decreased before David is admitted. David invests $40,000 for a one-fifth interest. What is the amount of inventory written down?

A. $4,000 B. $20,000 C. $15,000 D. $10,000

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41. In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the following question is independent of the others. Refer to the information provided above. Allen and Daniel agree that some of the inventory is obsolete. The inventory account is decreased before David is admitted. David invests $40,000 for a one-fifth interest. What are the capital balances of Allen and Daniel after David is admitted into the partnership?

A. Option A B. Option B C. Option C D. Option D

42. In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the following question is independent of the others. Refer to the information provided above. David directly purchases a one-fifth interest by paying Allen $34,000 and Daniel $10,000. The land account is increased before David is admitted. By what amount is the land account increased?

A. $40,000 B. $10,000 C. $36,000 D. $20,000

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43. In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the following question is independent of the others. Refer to the information provided above. David directly purchases a one-fifth interest by paying Allen $34,000 and Daniel $10,000. The land account is increased before David is admitted. What are the capital balances of Allen and Daniel after David is admitted into the partnership?

A. Option A B. Option B C. Option C D. Option D

44. In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the following question is independent of the others. Refer to the information provided above. David invests $40,000 for a one-fifth interest in the total capital of $220,000. The journal to record David's admission into the partnership will include:

A. a credit to Cash for $40,000. B. a debit to Allen, Capital for $3,000. C. a credit to David, Capital for $40,000. D. a credit to Daniel, Capital for $1,000.

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45. In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the following question is independent of the others. Refer to the information provided above. David invests $40,000 for a one-fifth interest in the total capital of $220,000. What are the capital balances of Allen and Daniel after David is admitted into the partnership?

A. Option A B. Option B C. Option C D. Option D

46. In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the following question is independent of the others. Refer to the information provided above. David invests $50,000 for a one-fifth interest. What amount of goodwill will be recorded?

A. $20,000 B. $4,000 C. $40,000 D. $15,000

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47. If A is the total capital of a partnership before the admission of a new partner, B is the total capital of the partnership after the admission of the new partner, C is the amount of the new partner's investment, and D is the amount of capital credited to the new partner, then there is:

A. goodwill to the new partner if B > (A + C) and D < C. B. goodwill to the old partners if B = A + C and D > C. C. a bonus to the new partner if B = A + C and D > C. D. neither bonus nor goodwill if B > (A + C) and D > C.

48. Note: This is a Kaplan CPA Review Question James Dixon, a partner in an accounting firm, decided to withdraw from the partnership. Dixon's share of the partnership profits and losses was 20%. Upon withdrawing from the partnership he was paid $74,000 in final settlement for his interest. The total of the partners' capital accounts before recognition of partnership goodwill prior to Dixon's withdrawal was $210,000. After his withdrawal the remaining partners' capital accounts, excluding their share of goodwill, totaled $160,000. The total agreed upon goodwill of the firm was

A. $250,000. B. $140,000. C. $160,000. D. $120,000.

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49. Note: This is a Kaplan CPA Review Question On June 30, the balance sheet for the partnership of Williams, Brown and Lowe, together with their respective profit and loss ratios, was as follows:

Williams has decided to retire from the partnership and by mutual agreement the assets are to be adjusted to their fair value of $360,000 at June 30. It was agreed that the partnership would pay Williams $102,000 cash for his partnership interest exclusive of his loan which is to be repaid in full. No goodwill is to be recorded in this transaction. After William's retirement, and before the loan is repaid, what are the capital account balances of Brown and Lowe, respectively?

A. $65,000 and $150,000 B. $72,000 and $171,000 C. $73,000 and $174,000 D. $77,000 and $186,000

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50. Jones and Smith formed a partnership with each partner contributing the following items:

Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed by the Jones and Smith partnership. Refer to the above information. What is each partner's tax basis in the Jones and Smith partnership?

A. Option A B. Option B C. Option C D. Option D

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51. Jones and Smith formed a partnership with each partner contributing the following items:

Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed by the Jones and Smith partnership. Refer to the above information. What is the balance in each partner's capital account for financial accounting purposes?

A. Option A B. Option B C. Option C D. Option D

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52. A partner's tax basis in a partnership is comprised of which of the following items? I. The partner's tax basis of assets contributed to the partnership. II. The amount of the partner's liabilities assumed by the other partners. III. The partner's share of other partners' liabilities assumed by the partnership.

A. I plus II minus III B. I plus II plus III C. I minus II plus III D. I minus II minus III

53. Which of the following observations is true of an S corporation?

A. It elects to be taxed in the same manner as a corporation. B. It does not have the burden of double taxation of corporate income. C. Its shareholders have personal liability for the corporation's obligations. D. Its primary income source should be passive investments.

54. A joint venture may be organized as a: I. Partnership. II. Corporation. III. Undivided interest.

A. I only B. II only C. I or III only D. I, II, or III

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Essay Questions

55. Apple and Betty are planning on beginning a new business. They plan on forming a partnership. Apple will contribute $300,000 and will not be working. Betty will be working full time. They plan on splitting profits equally. They approach you, as an accounting major, to confirm their thoughts. What do you recommend?

56. The ABC partnership had net income of $100,000 for 20X9. They allocate profits and losses in the ratio 5:3:2. After closing the 12/31/20X9 books they discovered that $30,000 was spent on a piece of land in December 20X9 and was expensed. What should happen?

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57. Two sole proprietors, L and M, agreed to form a partnership on January 1, 2009. The trial balance for each proprietorship is shown below as of January 1, 2009.

The LM partnership will take over the assets and assume the liabilities of the proprietors as of January 1, 2009. Required: a) Prepare a balance sheet, for financial accounting purposes, for the LM partnership as of January 1, 2009. b) In addition, assume that M agreed to recognize the goodwill generated by L's business. Accordingly, M agreed to recognize an amount for L's goodwill such that L's capital equaled M's capital on January 1, 2009. Given this alternative, how does the balance sheet prepared for requirement A change?

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58. Net income for Levin-Tom partnership for 2009 was $125,000. Levin and Tom have agreed to distribute partnership net income according to the following plan:

Additional Information for 2009 follows: 1. Levin began the year with a capital balance of $75,000. 2. Tom began the year with a capital balance of $100,000. 3. On March 1, Levin invested an additional $25,000 into the partnership. 4. On October 1, Tom invested an additional $20,000 into the partnership. 5. Throughout 2009, each partner withdrew $200 per week in anticipation of partnership net income. The partners agreed that these withdrawals are not to be included in the computation of average capital balances for purposes of income distributions. Required: a. Prepare a schedule that discloses the distribution of partnership net income for 2009. Show supporting computations in good form. b. Prepare the statement of partners' capital at December 31, 2009. c. How would your answer to part a change if all of the provisions of the income distribution plan were the same except that the salaries were $45,000 to Levin and $60,000 to Jack?

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59. The PQ partnership has the following plan for the distribution of partnership net income (loss):

Required: Calculate the distribution of partnership net income (loss) for each independent situation below (for each situation, assume the average capital balance of P is $140,000 and of Q is $240,000). 1. Partnership net income is $360,000. 2. Partnership net income is $240,000. 3. Partnership net loss is $40,000.

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60. Paul and Ray sell musical instruments through their partnership. To bring in additional funds and expertise, they decide to admit Janet to the partnership. Paul's capital is $400,000, Ray's capital is $200,000, and they share income in a ratio of 7:3, respectively. Required Record Janet's admission and the recording of goodwill or inventory write-down, as indicated, for each of the following independent situations: a) Janet invests $180,000 for a one-fourth interest. Goodwill is to be recorded. b) Paul and Ray agree that some of the inventory is obsolete. The inventory account is decreased before Janet is admitted. Janet invests $190,000 for a one-fourth interest.

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61. Miller and Davis, partners in a consulting business, share profits and losses in the ratio of 3:2, respectively. Prior to recording the admission of Shaw as a new partner, Miller has a capital balance of $80,000, and Davis has a capital balance of $40,000. Required: For each of the following independent cases, prepare the journal entry that was made to record the admission of Shaw into the partnership. 1) Shaw purchased 20 percent of the respective capital balances of Miller and Davis, paying $20,000 cash directly to each of them. 2) Shaw invested $30,000 cash in the partnership for a 20 percent ownership interest. Total capital after recording his admission was $150,000. 3) Shaw invested $40,000 cash into the partnership for a 20 percent ownership interest. Total capital after recording his admission was $160,000. 4) Shaw invested $50,000 into the partnership for a 20 percent interest. Goodwill is to be recognized.

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62. In the JAW partnership, Jane's capital is $100,000, Anne's is $80,000, and William's is $75,000. They share income in a 3:2:1 ratio, respectively. William is retiring from the partnership. Required: Prepare journal entries to record William's withdrawal according to each of the following independent assumptions: a. William is paid $80,000, and no goodwill is recorded. b. William is paid $85,000, and only his share of the goodwill is recorded. c. William is paid $78,000, and all implied goodwill is recorded.

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Chapter 15 Partnerships: Formation, Operation, and Changes in Membership Answer Key

Multiple Choice Questions

A partnership is a(n): I. accounting entity. II. taxable entity.

A. I only B. II only C. Neither I nor II D. Both I and II

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 15-01 Understand and explain the nature and regulation of partnerships. Topic: The Nature of the Partnership Entity

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Which of the following accounts could be found in the general ledger of a partnership?

A. Option A B. Option B C. Option C D. Option D

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 15-01 Understand and explain the nature and regulation of partnerships. Topic: The Nature of the Partnership Entity

Which of the following accounts could be found in the PQ partnership's general ledger? I. Due from P II. P, Drawing III. Loan Payable to Q

A. I, II B. I, III C. II, III D. I, II, and III

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Difficulty: 1 Easy Learning Objective: 15-01 Understand and explain the nature and regulation of partnerships. Topic: The Nature of the Partnership Entity

Transferable interest of a partner includes all of the following except:

A limited liability company (LLC): I. is governed by the laws of the state in which it is formed. II. provides liability protection to its investors. III. does not offer pass-through taxation benefits of partnerships.

A. Both I and III B. III C. Both I and II D. I, II, and II

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 15-02 Understand and explain the differences among different types of partnerships. Topic: Types of Limited Partnerships

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Which of the following statements best describes limited partnerships?

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RD formed a partnership on February 10, 20X9. R contributed cash of $150,000, while D contributed inventory with a fair value of $120,000. Due to R's expertise in selling, D agreed that R should have 60 percent of the total capital of the partnership. R and D agreed to recognize goodwill. What is the total capital of the RD partnership and the capital balance of R after the goodwill is recognized?

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 15-03 Make calculations and journal entries for the formation of partnerships. Topic: Accounting for the Formation of a Partnership

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When a partnership is formed, noncash assets contributed by partners should be recorded: I. at their respective book values for income tax purposes. II. at their respective fair values for financial accounting purposes.

A. I only B. II only C. Both I and II D. Neither I nor II

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 15-03 Make calculations and journal entries for the formation of partnerships. Topic: Accounting for the Formation of a Partnership

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Note: This is a Kaplan CPA Review Question Roberts and Smith drafted a partnership agreement that lists the following assets contributed at the partnership's formation:

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 15-03 Make calculations and journal entries for the formation of partnerships. Topic: Accounting for the Formation of a Partnership

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10.

Note: This is a Kaplan CPA Review Question Cor-Eng Partnership was formed on January 2, 20X1. Under the partnership agreement, each partner has an equal initial capital balance accounted for under the goodwill method. Partnership net income or loss is allocated 60% to Cor and 40% to Eng. To form the partnership, Cor originally contributed assets costing $30,000 with a fair value of $60,000 on January 2, 20X1, while Eng contributed $20,000 in cash. Drawings by the partners during 20X1 totaled $3,000 by Cor and $9,000 by Eng. Cor-Eng's 20X1 net income was $25,000. Eng's initial capital balance in Cor-Eng is

A. $25,000. B. $20,000. C. $60,000. D. $40,000.

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 15-03 Make calculations and journal entries for the formation of partnerships. Learning Objective: 15-04 Make calculations and journal entries for the operation of partnerships. Topic: Accounting for the Formation of a Partnership Topic: Accounting for the Operations of a Partnership

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11.

The partnership of X and Y shares profits and losses in the ratio of 60 percent to X and 40 percent to Y. For the year 20X8, partnership net income was double X's withdrawals. Assume X's beginning capital balance was $80,000, and ending capital balance (after closing) was $140,000. Partnership net income for the year was:

A. $120,000. B. $300,000. C. $500,000. D. $600,000.

12.

Shue, a partner in the Financial Brokers Partnership, has a 30 percent share in partnership profits and losses. Shue's capital account had a net decrease of $100,000 during 20X8. During 20X8, Shue withdrew $240,000 as withdrawals and contributed equipment valued at $50,000 to the partnership. What was the net income of the Financial Brokers Partnership for 20X8?

A. $633,334 B. $466,666 C. $300,000 D. $190,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 15-04 Make calculations and journal entries for the operation of partnerships. Topic: Accounting for the Formation of a Partnership 15-45 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

13.

Which of the following statements best describes accounting for a partnership?

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 15-04 Make calculations and journal entries for the operation of partnerships. Topic: Accounting for the Formation of a Partnership

14.

Which of the following accounts is not maintained for each partner in its accounting records?

A. Capital account B. Drawing account C. Earnings account D. Loan account

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 15-04 Make calculations and journal entries for the operation of partnerships. Topic: Accounting for the Formation of a Partnership

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15.

Griffin and Rhodes formed a partnership on January 1, 20X9. Griffin contributed cash of $120,000 and Rhodes contributed land with a fair value of $160,000. The partnership assumed the mortgage on the land which amounted to $40,000 on January 1. Rhodes originally paid $90,000 for the land. On July 31, 20X9, the partnership sold the land for $190,000. Assuming Griffin and Rhodes share profits and losses equally, how much of the gain from sale of land should be credited to Griffin for financial accounting purposes?

A. $0 B. $15,000 C. $35,000 D. $45,000

AACSB: Analytic AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 15-05 Make calculations and journal entries for the allocation of partnership profit or loss. Topic: Allocating Profit or Loss to Partners

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16.

The DEF partnership reported net income of $130,000 for the year ended December 31, 20X8. According to the partnership agreement, partnership profits and losses are to be distributed as follows:

How should partnership net income for 20X8 be allocated to D, E, and F?

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 15-05 Make calculations and journal entries for the allocation of partnership profit or loss. Topic: Allocating Profit or Loss to Partners Topic: Bonus Method Topic: Salaries

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17.

The JPB partnership reported net income of $160,000 for the year ended December 31, 20X8. According to the partnership agreement, partnership profits and losses are to be distributed as follows:

How should partnership net income for 20X8 be allocated to J, P, and B?

A. Option A B. Option B C. Option C D. Option D

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18.

The APB partnership agreement specifies that partnership net income be allocated as follows:

A. Option A B. Option B C. Option C D. Option D

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19.

The APB partnership agreement specifies that partnership net income be allocated as follows:

A. Option A B. Option B C. Option C D. Option D

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20.

The terms of a partnership agreement provide that one of the partners is to receive a salary allowance of $30,000, plus a bonus of 20 percent of income after deduction of the bonus and the salary allowance. If income is $150,000, the bonus should be:

A. $18,000. B. $20,000. C. $24,000. D. $30,000.

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 15-05 Make calculations and journal entries for the allocation of partnership profit or loss. Topic: Bonuses

21.

Note: This is a Kaplan CPA Review Question Fox, Greg, and Howe are partners with average capital balances during 20X1 of $120,000, $60,000, and $40,000, respectively. Partners receive 10% interest on their average capital balances. After deducting salaries of $30,000 to Fox and $20,000 to Howe, the residual profit or loss is divided equally. In 20X1 the partnership sustained a $33,000 loss before interest and salaries to partners. By what amount should Fox's capital account change?

A. $7,000 increase B. $11,000 decrease C. $35,000 decrease D. $42,000 increase

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 15-05 Make calculations and journal entries for the allocation of partnership profit or loss.

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Topic: Allocating Profit or Loss to Partners Topic: Interest on Capital Balances Topic: Salaries

22.

In the ABC partnership (to which Daniel seeks admittance), the capital balances of Albert, Bert, and Connell, who share income in the ratio of 5:3:2 are:

Based on the preceding information, if no goodwill or bonus is recorded, how much should Daniel invest for a 20 percent interest?

A. $400,000 B. $200,000 C. $300,000 D. $250,000

AACSB: Analytic AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 15-06 Make calculations and journal entries to account for changes in partnership ownership. Topic: New Partner Invests in Partnership

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23.

In the ABC partnership (to which Daniel seeks admittance), the capital balances of Albert, Bert, and Connell, who share income in the ratio of 5:3:2 are:

Based on the preceding information, what amount of goodwill will be recorded if Daniel invests $450,000 for a one-third interest?

A. $0 B. $10,000 C. $50,000 D. $100,000

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24.

Refer to the above information. Which statement below is correct if a new partner receives a bonus upon contributing assets into the partnership?

A. B < A and D = C - A B. B > A and D = C + A C. A = B and A = D + C D. B > A and C = D + A

25.

Refer to the above information. Which statement below is correct if the old partners receive a bonus upon the contribution of assets into the partnership by a new partner?

A. B < A and D = C - A B. B + A and D > C + A C. B < A and D = C + A D. B > A and D = C + A

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Difficulty: 2 Medium Learning Objective: 15-06 Make calculations and journal entries to account for changes in partnership ownership. Topic: Bonus Method

26.

Refer to the above information. Which statement below is correct if goodwill of the old partners is recognized upon the contribution of assets into the partnership by a new partner?

A. B = A and D < C + A B. B = A and D > C + A C. B < A and D = C + A D. B > A and D < C + A

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27.

Refer to the above information. Which statement below is correct if a new partner purchases an interest in capital directly from the old partners?

A. C < D B. C = D C. C = D and B = A D. C < D and B = A

28.

Refer to the above information. Which statement below is correct if a new partner's goodwill is recognized upon contributing assets into the partnership?

A. B = A and D > C + A B. B < A and D < C + A C. B > A and D = C + A D. B > A and D > C + A

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Difficulty: 2 Medium Learning Objective: 15-06 Make calculations and journal entries to account for changes in partnership ownership. Topic: Goodwill Recognition

29.

When a new partner is admitted into a partnership and the new partner receives a capital credit less than the tangible assets contributed, which of the following explains the difference? I. The new partner's goodwill has been recognized. II. The old partners received a bonus from the new partner.

A. I only B. II only C. Either I or II D. Neither I nor II

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 15-06 Make calculations and journal entries to account for changes in partnership ownership. Topic: Bonus Method

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30.

When a new partner is admitted into a partnership and the new partner receives a capital credit greater than the tangible assets contributed, which of the following explains the difference? I. The old partners' goodwill is being recognized. II. The new partner's goodwill is being recognized.

A. I only B. II only C. Either I or II D. Both I and II

31.

When a new partner is admitted into a partnership and the capital of the old partners decreases, which of the following explains the reason for the decrease? I. Undervalued liabilities were written up to their fair values. II. Undervalued assets were written up to their fair values.

A. I only B. II only C. Both I and II D. Neither I nor II

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy

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Learning Objective: 15-06 Make calculations and journal entries to account for changes in partnership ownership. Topic: Revaluation Method

32.

When a partner retires from a partnership and the retiring partner is paid more than the capital balance in her account, which of the following explains the difference? I. The retiring partner is receiving a bonus from the other partners. II. The retiring partner's goodwill is being recognized.

A. I only B. II only C. Either I or II D. Neither I nor II

33.

When the old partners receive a bonus upon admission of a new partner into a partnership, the bonus is allocated to: I. all the partners in their profit and loss sharing ratio. II. the existing partners in their profit and loss sharing ratio.

A. I only B. II only C. Either I or II D. Neither I nor II

AACSB: Reflective Thinking

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AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 15-06 Make calculations and journal entries to account for changes in partnership ownership. Topic: Bonus Method

34.

When a new partner is admitted into a partnership and the old partners' goodwill is recognized, the goodwill is allocated to: I. all the partners in their profit-and-loss-sharing ratio. II. the old partners in their profit and loss sharing ratio.

A. I only B. II only C. Either I or II D. Neither I nor II

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35.

In the RST partnership, Ron's capital is $80,000, Stella's is $75,000, and Tiffany's is $50,000. They share income in a 3:2:1 ratio, respectively. Tiffany is retiring from the partnership. Each of the following question is independent of the others. Refer to the above information. Tiffany is paid $60,000, and no goodwill is recorded. In the journal entry to record Tiffany's withdrawal:

A. Tiffany, Capital will be credited for $60,000. B. Ron, Capital will be debited for $5,000. C. Stella, Capital will be debited for $4,000. D. Cash will be debited for $60,000.

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 15-06 Make calculations and journal entries to account for changes in partnership ownership. Topic: New Partner Invests in Partnership

36.

In the RST partnership, Ron's capital is $80,000, Stella's is $75,000, and Tiffany's is $50,000. They share income in a 3:2:1 ratio, respectively. Tiffany is retiring from the partnership. Each of the following question is independent of the others. Refer to the above information. Tiffany is paid $60,000, and no goodwill is recorded. What is the Ron's capital balance after Tiffany withdraws from the partnership?

A. $74,000 B. $71,000 C. $75,000 D. $86,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand

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Difficulty: 2 Medium Learning Objective: 15-06 Make calculations and journal entries to account for changes in partnership ownership. Topic: New Partner Invests in Partnership

37.

In the RST partnership, Ron's capital is $80,000, Stella's is $75,000, and Tiffany's is $50,000. They share income in a 3:2:1 ratio, respectively. Tiffany is retiring from the partnership. Each of the following question is independent of the others. Refer to the above information. Tiffany is paid $56,000, and all implied goodwill is recorded. What is the total amount of goodwill recorded?

A. $0 B. $6,000 C. $30,000 D. $36,000

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38.

In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the following question is independent of the others. Refer to the information provided above. What amount will David have to invest to give him one-fifth percent interest in the capital of the partnership if no goodwill or bonus is recorded?

A. $60,000 B. $36,000 C. $50,000 D. $45,000

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39.

In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the following question is independent of the others. Refer to the information provided above. Assume that David invests $50,000 for a onefourth interest. Goodwill is to be recorded. The journal to record David's admission into the partnership will include:

A. a credit to cash for $50,000. B. a debit to goodwill for $7,500. C. a credit to David, Capital for $60,000. D. a credit to David, Capital for $50,000.

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40.

In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the following question is independent of the others. Refer to the information provided above. Allen and Daniel agree that some of the inventory is obsolete. The inventory account is decreased before David is admitted. David invests $40,000 for a one-fifth interest. What is the amount of inventory written down?

A. $4,000 B. $20,000 C. $15,000 D. $10,000

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41.

In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the following question is independent of the others. Refer to the information provided above. Allen and Daniel agree that some of the inventory is obsolete. The inventory account is decreased before David is admitted. David invests $40,000 for a one-fifth interest. What are the capital balances of Allen and Daniel after David is admitted into the partnership?

A. Option A B. Option B C. Option C D. Option D

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42.

In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the following question is independent of the others. Refer to the information provided above. David directly purchases a one-fifth interest by paying Allen $34,000 and Daniel $10,000. The land account is increased before David is admitted. By what amount is the land account increased?

A. $40,000 B. $10,000 C. $36,000 D. $20,000

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43.

In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the following question is independent of the others. Refer to the information provided above. David directly purchases a one-fifth interest by paying Allen $34,000 and Daniel $10,000. The land account is increased before David is admitted. What are the capital balances of Allen and Daniel after David is admitted into the partnership?

A. Option A B. Option B C. Option C D. Option D

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44.

In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the following question is independent of the others. Refer to the information provided above. David invests $40,000 for a one-fifth interest in the total capital of $220,000. The journal to record David's admission into the partnership will include:

A. a credit to Cash for $40,000. B. a debit to Allen, Capital for $3,000. C. a credit to David, Capital for $40,000. D. a credit to Daniel, Capital for $1,000.

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45.

In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the following question is independent of the others. Refer to the information provided above. David invests $40,000 for a one-fifth interest in the total capital of $220,000. What are the capital balances of Allen and Daniel after David is admitted into the partnership?

A. Option A B. Option B C. Option C D. Option D

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46.

A. $20,000 B. $4,000 C. $40,000 D. $15,000

47.

If A is the total capital of a partnership before the admission of a new partner, B is the total capital of the partnership after the admission of the new partner, C is the amount of the new partner's investment, and D is the amount of capital credited to the new partner, then there is:

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 15-06 Make calculations and journal entries to account for changes in partnership ownership.

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Topic: Bonus Method

48.

Note: This is a Kaplan CPA Review Question James Dixon, a partner in an accounting firm, decided to withdraw from the partnership. Dixon's share of the partnership profits and losses was 20%. Upon withdrawing from the partnership he was paid $74,000 in final settlement for his interest. The total of the partners' capital accounts before recognition of partnership goodwill prior to Dixon's withdrawal was $210,000. After his withdrawal the remaining partners' capital accounts, excluding their share of goodwill, totaled $160,000. The total agreed upon goodwill of the firm was

A. $250,000. B. $140,000. C. $160,000. D. $120,000.

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 15-06 Make calculations and journal entries to account for changes in partnership ownership. Topic: Dissociation of a Partner from the Partnership

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49.

Note: This is a Kaplan CPA Review Question On June 30, the balance sheet for the partnership of Williams, Brown and Lowe, together with their respective profit and loss ratios, was as follows:

A. $65,000 and $150,000 B. $72,000 and $171,000 C. $73,000 and $174,000 D. $77,000 and $186,000

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50.

Jones and Smith formed a partnership with each partner contributing the following items:

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Section: Appendix 15A Topic: Tax Basis of Asset Investments

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51.

Jones and Smith formed a partnership with each partner contributing the following items:

A. Option A B. Option B C. Option C D. Option D

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52.

A partner's tax basis in a partnership is comprised of which of the following items? I. The partner's tax basis of assets contributed to the partnership. II. The amount of the partner's liabilities assumed by the other partners. III. The partner's share of other partners' liabilities assumed by the partnership.

A. I plus II minus III B. I plus II plus III C. I minus II plus III D. I minus II minus III

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Section: Appendix 15A Topic: Tax Basis of Asset Investments

53.

Which of the following observations is true of an S corporation?

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Section: Appendix 15A Topic: Tax Basis of Asset Investments

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54.

A joint venture may be organized as a: I. Partnership. II. Corporation. III. Undivided interest.

A. I only B. II only C. I or III only D. I, II, or III

AACSB: Analytic AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Section: Appendix 15B Topic: Joint Venture

Essay Questions

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55.

Apple and Betty are planning on beginning a new business. They plan on forming a partnership. Apple will contribute $300,000 and will not be working. Betty will be working full time. They plan on splitting profits equally. They approach you, as an accounting major, to confirm their thoughts. What do you recommend?

Students should recognize that partners can agree to any form of profit allocation. However, since one partner, Apple, has contributed money and Betty hasn't, they might want to consider some form of interest on the capital balance. Also, since one partner, Betty, is working full time, Apple is not, they might want to consider having a salary or a bonus opportunity for Apple.

AACSB: Communication AICPA BB: Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 15-01 Understand and explain the nature and regulation of partnerships. Topic: The Nature of the Partnership Entity

56.

The ABC partnership had net income of $100,000 for 20X9. They allocate profits and losses in the ratio 5:3:2. After closing the 12/31/20X9 books they discovered that $30,000 was spent on a piece of land in December 20X9 and was expensed. What should happen?

Since the books are closed then the correction must be made against the capital accounts. The following journal entry would be made:

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Blooms: Apply Difficulty: 3 Hard Learning Objective: 15-01 Understand and explain the nature and regulation of partnerships. Topic: The Nature of the Partnership Entity

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57.

Two sole proprietors, L and M, agreed to form a partnership on January 1, 2009. The trial balance for each proprietorship is shown below as of January 1, 2009.

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b) Assets change due to the addition of goodwill of $34,000. Total assets are now $1,128,000 ($1,094,000 + $34,000 goodwill). L, Capital and M, Capital are each $294,000 if L's goodwill is recognized. Total capital is $588,000, and total liabilities and capital amount to $1,128,000.

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 15-03 Make calculations and journal entries for the formation of partnerships. Topic: Accounting for the Formation of a Partnership

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58.

Net income for Levin-Tom partnership for 2009 was $125,000. Levin and Tom have agreed to distribute partnership net income according to the following plan:

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59.

The PQ partnership has the following plan for the distribution of partnership net income (loss):

Situation 1: Net income is $360,000

Situation 2: Net income is $240,000

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Situation 3: Net loss is $40,000

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60.

Paul and Ray sell musical instruments through their partnership. To bring in additional funds and expertise, they decide to admit Janet to the partnership. Paul's capital is $400,000, Ray's capital is $200,000, and they share income in a ratio of 7:3, respectively. Required Record Janet's admission and the recording of goodwill or inventory write-down, as indicated, for each of the following independent situations: a) Janet invests $180,000 for a one-fourth interest. Goodwill is to be recorded. b) Paul and Ray agree that some of the inventory is obsolete. The inventory account is decreased before Janet is admitted. Janet invests $190,000 for a one-fourth interest.

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61.

Miller and Davis, partners in a consulting business, share profits and losses in the ratio of 3:2, respectively. Prior to recording the admission of Shaw as a new partner, Miller has a capital balance of $80,000, and Davis has a capital balance of $40,000. Required: For each of the following independent cases, prepare the journal entry that was made to record the admission of Shaw into the partnership. 1) Shaw purchased 20 percent of the respective capital balances of Miller and Davis, paying $20,000 cash directly to each of them. 2) Shaw invested $30,000 cash in the partnership for a 20 percent ownership interest. Total capital after recording his admission was $150,000. 3) Shaw invested $40,000 cash into the partnership for a 20 percent ownership interest. Total capital after recording his admission was $160,000. 4) Shaw invested $50,000 into the partnership for a 20 percent interest. Goodwill is to be recognized.

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62.

In the JAW partnership, Jane's capital is $100,000, Anne's is $80,000, and William's is $75,000. They share income in a 3:2:1 ratio, respectively. William is retiring from the partnership. Required: Prepare journal entries to record William's withdrawal according to each of the following independent assumptions: a. William is paid $80,000, and no goodwill is recorded. b. William is paid $85,000, and only his share of the goodwill is recorded. c. William is paid $78,000, and all implied goodwill is recorded.

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Chapter 16 Partnerships: Liquidation

Multiple Choice Questions

1. The CRT partnership has decided to terminate operations and to liquidate the partnership assets. There are no partner loans, and all partners have positive capital balances. Gains and losses on liquidation and cash distributions to partners should be allocated as follows:

A. Option A B. Option B C. Option C D. Option D

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2. According to UPA 1997, during partnership liquidation, loans the partners have made to the partnership have the same status as loans from third-party creditors. As a practical matter, most loans from partners:

A. are subordinated to third-party creditors. B. have the same status as loans from third-party creditors. C. are paid prior to third-party creditors. D. None of these.

3. In order to avoid inequalities in the liquidation process the legal doctrine of setoff effectively treats loans from partners to the partnership as:

A. outside debt that can offset a deficit capital account balance. B. inside debt that can offset a deficit capital account balance. C. additional capital investments that can offset a deficit capital account balance. D. additional capital investments that can offset a partnership loss.

4. When is a partnership considered to be insolvent? I. When the total of all partners' capital accounts results in a debit balance. II. When at least one of the partners is personally insolvent.

A. I only B. II only C. Both I and II D. Neither I nor II

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5. The balance sheet given below is presented for the partnership of Janet, Anton, and Millet:

The partners share profits and losses in the ratio of 5:3:2, respectively. The partners agreed to dissolve the partnership after selling the other assets for $50,000. On dissolution of the partnership, Janet should receive:

A. $0. B. $80,000. C. $10,000. D. $30,000.

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6. Bill, Page, Larry, and Scott have decided to terminate their partnership. The partnership's balance sheet at the time they decide to wind up is as follows:

During the winding up of the partnership, the other assets are sold for $150,000 and the accounts payable are paid. Page and Larry are personally solvent, but Bill and Scott are personally insolvent. The partners share profits and losses in the ratio of 4:2:1:3. Based on the preceding information, what amount will be paid out to Bill upon liquidation of the partnership?

A. $0 B. $25,000 C. $11,667 D. $2,500

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7. Bill, Page, Larry, and Scott have decided to terminate their partnership. The partnership's balance sheet at the time they decide to wind up is as follows:

A. $0 B. $2,500 C. $25,000 D. $65,000

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8. Bill, Page, Larry, and Scott have decided to terminate their partnership. The partnership's balance sheet at the time they decide to wind up is as follows:

During the winding up of the partnership, the other assets are sold for $150,000 and the accounts payable are paid. Page and Larry are personally solvent, but Bill and Scott are personally insolvent. The partners share profits and losses in the ratio of 4:2:1:3. Based on the preceding information, what amount will be distributed to Page and Larry upon liquidation of the partnership?

A. Option A B. Option B C. Option C D. Option D

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9. Bill, Page, Larry, and Scott have decided to terminate their partnership. The partnership's balance sheet at the time they decide to wind up is as follows:

During the winding up of the partnership, the other assets are sold for $150,000 and the accounts payable are paid. Page and Larry are personally solvent, but Bill and Scott are personally insolvent. The partners share profits and losses in the ratio of 3:2:1:4. Based on the preceding information, what amount will be paid out to Bill upon liquidation of the partnership?

A. $0 B. $5,000 C. $25,000 D. $2,500

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10. Bill, Page, Larry, and Scott have decided to terminate their partnership. The partnership's balance sheet at the time they decide to wind up is as follows:

During the winding up of the partnership, the other assets are sold for $150,000 and the accounts payable are paid. Page and Larry are personally solvent, but Bill and Scott are personally insolvent. The partners share profits and losses in the ratio of 3:2:1:4. Based on the preceding information, what amount will be paid out to Scott upon liquidation of the partnership?

A. $0 B. $2,500 C. $5,000 D. $6,429

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11. Bill, Page, Larry, and Scott have decided to terminate their partnership. The partnership's balance sheet at the time they decide to wind up is as follows:

During the winding up of the partnership, the other assets are sold for $150,000 and the accounts payable are paid. Page and Larry are personally solvent, but Bill and Scott are personally insolvent. The partners share profits and losses in the ratio of 3:2:1:4. Based on the preceding information, what amounts will be distributed to Page and Larry upon liquidation of the partnership?

A. Option A B. Option B C. Option C D. Option D

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12. The following condensed balance sheet is presented for the partnership of D, E, and F who share profits and losses in the ratio of 5:3:2, respectively:

The partners agreed to liquidate the partnership after selling the other assets. Refer to the above information. If the other assets are sold for $280,000, how much should F receive upon liquidation?

A. $44,000 B. $50,000 C. $76,000 D. $90,000

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13. The following condensed balance sheet is presented for the partnership of D, E, and F who share profits and losses in the ratio of 5:3:2, respectively:

The partners agreed to liquidate the partnership after selling the other assets. Refer to the above information. If the other assets are sold for $80,000, and all partners are personally insolvent, how much should E receive upon liquidation?

A. $0 B. $6,000 C. $10,000 D. $20,000

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14. Note: This is a Kaplan CPA Review Question The following condensed balance sheet is presented for the partnership of Cooke, Dorry, and Evans who share profits and losses in the ratio of 4:3:3, respectively:

Assume that the partners decide to liquidate the partnership. If the other assets are sold for $600,000, how much of the available cash should be distributed to Cooke?

A. $212,000 B. $170,000 C. $182,000 D. $300,000

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15. Note: This is a Kaplan CPA Review Question The following condensed balance sheet is presented for the partnership of Fisher, Taylor and Simon who share profits and losses in the ratio of 6:2:2, respectively:

The assets and liabilities are fairly valued on the above balance sheet, and it was agreed to by all the partners that the partnership would be liquidated after selling the other assets. What would each of the partners receive at this time if the other assets are sold for $80,000?

A. Option A B. Option B C. Option C D. Option D

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16. The trial balance of WM Partnership is as follows:

Wilfred and Mike decide to incorporate their partnership. The partnership's books will be closed, and new books will be used for W & M Corporation. The following additional information is available: 1. The estimated fair values of the assets follow:

2. All assets and liabilities are transferred to the corporation. 3. The common stock is $10 par. Wilfred and Mike receive a total of 10,000 shares. 4. The partners share profits and losses in the ratio 7:3. Based on the preceding information, the journal entry on the partnership's books to record the Investment in W&M Corporation Stock will be debited for:

A. $181,000. B. $131,000. C. $200,000. D. $150,000.

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17. The trial balance of WM Partnership is as follows:

2. All assets and liabilities are transferred to the corporation. 3. The common stock is $10 par. Wilfred and Mike receive a total of 10,000 shares. 4. The partners share profits and losses in the ratio 7:3. Based on the preceding information, the journal entry on the partnership's books to record distribution of stock to prior partners will include a debit to Wilfred, Capital for:

A. $140,000. B. $91,700. C. $86,700. D. $126,700.

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18. The trial balance of WM Partnership is as follows:

2. All assets and liabilities are transferred to the corporation. 3. The common stock is $10 par. Wilfred and Mike receive a total of 10,000 shares. 4. The partners share profits and losses in the ratio 7:3. Based on the preceding information, the journal entry on the partnership's books to record distribution of stock to prior partners will include a debit to Mike, Capital for:

A. $38,010. B. $31,500. C. $42,000. D. $44,300.

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19. The trial balance of WM Partnership is as follows:

2. All assets and liabilities are transferred to the corporation. 3. The common stock is $10 par. Wilfred and Mike receive a total of 10,000 shares. 4. The partners share profits and losses in the ratio 7:3. Based on the preceding information, the journal entry on W & M Corporation's books to record the assets and the issuance of the common stock will include a credit to Additional Paid-In Capital for:

A. $0. B. $81,000. C. $31,000. D. $50,000.

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20. The capital balances, prior to the liquidation of the XYZ partnership, were as follows:

X, Y, and Z share profits and losses in the ratio of 5:3:2. As a result of a loan, the partnership owes Y $80,000. Using the information above, which partner has the highest Loss Absorption Power (LAP) prior to liquidation?

A. X B. Y C. Z D. Both X and Y

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21. On December 1, 20X9, the partners of Tim, Williams, and Levin, who share profits and losses in the ratio of 4:4:2, decided to liquidate their partnership. On this date the partnership condensed balance sheet was as follows:

On December 11, 20X9, the first cash sale of other assets with a carrying amount of $200,000 realized $140,000. Safe installment payments to the partners were made on the same date. How much cash should be distributed to each partner?

A. Option A B. Option B C. Option C D. Option D

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22. Tom, Dick, and Harry are partners in an equipment leasing business that has not been able to generate the type of revenue expected by the partners. They share profits and losses in a ratio of 5:3:2. They have decided to liquidate the business and have sold all the assets except for one piece of heavy machinery. All partnership liabilities have been settled and all the partners are personally insolvent. The machinery has a book value of $85,000, and the partners have capital account balances as follows:

Each of the following are independent cases. Refer to the information given above. What amount of cash will each partner receive as a liquidating distribution if the machinery is sold for 65,000 dollars?

A. Option A B. Option B C. Option C D. Option D

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23. Tom, Dick, and Harry are partners in an equipment leasing business that has not been able to generate the type of revenue expected by the partners. They share profits and losses in a ratio of 5:3:2. They have decided to liquidate the business and have sold all the assets except for one piece of heavy machinery. All partnership liabilities have been settled and all the partners are personally insolvent. The machinery has a book value of $85,000, and the partners have capital account balances as follows:

A. Option A B. Option B C. Option C D. Option D

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24. Tom, Dick, and Harry are partners in an equipment leasing business that has not been able to generate the type of revenue expected by the partners. They share profits and losses in a ratio of 5:3:2. They have decided to liquidate the business and have sold all the assets except for one piece of heavy machinery. All partnership liabilities have been settled and all the partners are personally insolvent. The machinery has a book value of $85,000, and the partners have capital account balances as follows:

A. Option A B. Option B C. Option C D. Option D

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25. Partners Dennis and Lilly have decided to liquidate their business. The following information is available:

Dennis and Lilly share profits and losses in a 3:2 ratio. During the first month of liquidation, half the inventory is sold for $60,000, and $60,000 of the accounts payable is paid. During the second month, the rest of the inventory is sold for $45,000, and the remaining accounts payable are paid. Cash is distributed at the end of each month, and the liquidation is completed at the end of the second month. Refer to the information provided above. Using a safe payments schedule, how much cash will be distributed to Dennis at the end of the first month?

A. $64,000 B. $60,000 C. $24,000 D. $36,000

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26. Partners Dennis and Lilly have decided to liquidate their business. The following information is available:

A. $24,000 B. $40,000 C. $16,000 D. $64,000

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27. Partners Dennis and Lilly have decided to liquidate their business. The following information is available:

A. $18,000 B. $27,000 C. $36,000 D. $60,000

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28. Partners Dennis and Lilly have decided to liquidate their business. The following information is available:

A. $27,000 B. $36,000 C. $18,000 D. $0

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29. Partners Dennis and Lilly have decided to liquidate their business. The following information is available:

Dennis and Lilly share profits and losses in a 3:2 ratio. During the first month of liquidation, half the inventory is sold for $60,000, and $60,000 of the accounts payable is paid. During the second month, the rest of the inventory is sold for $45,000, and the remaining accounts payable are paid. Cash is distributed at the end of each month, and the liquidation is completed at the end of the second month. Refer to the information provided. Assume instead that the remaining inventory was sold for $10,000 in the second month. What payments will be made to Dennis and Lilly at the end of the second month?

A. Option A B. Option B C. Option C D. Option D

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30. In the computation of a partner's Loss Absorption Power (LAP), the individual partner's capital balance and profit-and-loss percentage are used in which of the following ways?

A. Option A B. Option B C. Option C D. Option D

31. During the liquidation of the FGH partnership, a cash distribution was made to all the partners, who share profits and losses 60 percent, 20 percent, and 20 percent, respectively. Assuming that the cash distribution referred to was made properly, how much would G receive if an additional $60,000 was distributed?

A. $60,000 B. $20,000 C. $17,000 D. $12,000

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32. Which of the following items are important in the determination of safe installment payments to partners? I. Deficits created in capital accounts are distributed to the remaining partners. II. All unsold noncash assets are assumed to be worthless.

A. I only B. II only C. Both I and II D. Neither I nor II

33. In the computation of a partner's Loss Absorption Power (LAP), which of the following statements is incorrect? I. The computation of LAPs for all partners allows cash to be distributed before all partnership assets have been sold and all creditors have been paid. II. The computation of LAPs for all partners indicates the relative strength of each partner's net capital position so that available cash is distributed in respective loss-sharing ratios.

A. I B. II C. Both I and II D. Neither I nor II

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34. The BIG Partnership has decided to liquidate at December 31, 20X8. The capital and loan balances of the partners at December 31, 20X8, are provided below:

If you were to calculate the Loss Absorption Power for each partner, how would the partners rank (from highest to lowest LAP)?

A. B, I, G B. I, B, G C. B, G, I D. G, I, B

35. Partner A has a smaller capital balance than Partner L. Partner A, however, has a higher profit-and-loss-sharing percentage than Partner L. The LA partnership has decided to liquidate. As a result of the information given,

A. Partner L will have a smaller loss absorption power than A. B. Partner L will receive cash only after A has received cash. C. Partner A will have a smaller loss absorption power than L. D. Partner A will never receive any cash from partnership liquidation.

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36. Which of the following statements is(are) true? I. In the calculation of the loss absorption power for a partner, a partner's loan balance (an amount that is owed by the partnership) should be added to the partner's capital balance. II. In liquidation, a partner's loan balance (an amount that is owed by the partnership) should be paid to the partner as a creditor of the partnership after the outside creditors.

A. I only B. II only C. Both I and II D. Neither I nor II

37. When a partnership is liquidated on a piecemeal basis and cash has been distributed properly to all partners as noncash assets have been turned into cash, all future cash distributions should be made: I. In the profit and loss ratio. II. According to the balances in the partners' capital accounts.

A. I only B. II only C. Both I and II D. Neither I nor II

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38. The computation of a safe installment payment for the XYZ partnership resulted in only partner Z receiving cash. Which of the following statements is correct? I. Partner Z lent the partnership cash, and the partnership had to pay back the loan to Z before distributing cash to X and Y. II. After assuming all noncash assets were potentially worthless and that assumed capital deficits created in X's and Y's capital balances were losses to be allocated to Z; Z's capital balance was the only capital balance left with a credit.

A. I only B. II only C. Either I or II D. Neither I nor II

39. The JKL partnership liquidated its business in 20X9. Due to an expected long liquidation period, a cash distribution plan was developed. The initial sale and realization of cash from noncash assets resulted in partner K properly getting $24,000. No other partners received cash along with K. Based upon this information, which of the following statements is correct? I. K's loss absorption power (LAP) was higher than J's LAP and L's LAP. II. K's capital balance was substantially larger than the balances of J and L.

A. I only B. II only C. Either I or II D. Neither I nor II

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40. Note: This is a Kaplan CPA Review Question The following balance sheet is for the partnership of Able, Bayer, and Cain which shares profits and losses in the ratio of 4:4:2, respectively.

The original partnership was dissolved when its assets, liabilities, and capital were as shown on the above balance sheet and liquidated by selling assets in installments. The first sale of noncash assets having a book value of $90,000 realized $50,000, and all cash available after settlement with creditors was distributed. How much cash should the respective partners receive (to the nearest dollar)?

A. Able $0; Bayer $3,000; Cain $17,000. B. Able $8,000; Bayer $8,000; Cain $4,000. C. Able $6,667; Bayer $6,667; Cain $6,666. D. Able $0; Bayer $13,333; Cain $6,667.

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41. Note: This is a Kaplan CPA Review Question The condensed balance sheet of Adams & Gray, a partnership, at December 31, 20X1, follows:

On December 31, 20X1, the fair values of the assets and liabilities were appraised at $240,000 and $20,000, respectively, by an independent appraiser. On January 2, 20X2, the partnership was incorporated and 1,000 shares of $5 par value common stock were issued. Immediately after the incorporation, what amount should the new corporation report as additional paid-in capital?

A. $275,000 B. $215,000 C. $260,000 D. $0

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42. Note: This is a Kaplan CPA Review Question Jay & Kay partnership's balance sheet at December 31, 20X1, reported the following:

On January 2, 20X2, Jay and Kay dissolved their partnership and transferred all assets and liabilities to a newly-formed corporation. At the date of incorporation, the fair value of the net assets was $12,000 more than the carrying amount on the partnership's books, of which $7,000 was assigned to tangible assets and $5,000 was assigned to goodwill. Jay and Kay were each issued 5,000 shares of the corporation's $1 par value common stock. Immediately following incorporation, additional paid-in capital in excess of par should be credited for

A. $77,000. B. $68,000. C. $70,000. D. $82,000.

43. On a partner's personal statement of financial condition, how should liabilities be valued? I. Present value II. Lower of present value or cash settlement amount

A. I B. II C. Both I and II D. Neither I nor II

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44. On a partner's personal statement of financial condition, assets and liabilities are presented: I. As current and noncurrent. II. In order of liquidity and maturity.

A. I B. II C. Both I and II D. Neither I nor II

45. The personal financial statements of a partner include which of the following? I. Statement of financial condition. II. Statement of changes in net worth. III. Statement of cash flows.

A. I and II B. I and III C. II and III D. I, II, and III

46. On a partner's personal statement of financial condition, how are assets valued?

A. Historical cost B. Book value C. Discounted value D. Estimated current value

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47. On a partner's personal statement of changes in net worth, what type(s) of income is(are) recognized? I. Realized II. Unrealized

A. I only B. II only C. Both I and II D. Neither I nor II

48. On December 31, 20X8, Mr. and Mrs. Williams owned a parcel of land held as an investment. The land was purchased for $40,000 in 20X6, and was encumbered by a mortgage with a principal balance of $30,000 at December 31, 20X8. On this date the fair value of the land was $75,000. In the Williams' December 31, 20X8, personal statement of financial condition, at what amount should the land investment and mortgage payable be reported?

A. Option A B. Option B C. Option C D. Option D

Essay Questions

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49. A partnership may be involved in "Dissociation" or "Dissolution." Required: Describe "Dissociation" and "Dissolution."

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50. When Disney and Charles decided to incorporate their partnership, the trial balance was as follows:

The partnership's books will be closed, and new books will be used for D & C Corporation. The following additional information is available: 1. The estimated fair values of the assets follow:

2. All assets and liabilities are transferred to the corporation. 3. The common stock is $5 par. Alice and Betty receive a total of 24,000 shares. 4. Disney and Charles share profits and losses in the ratio 6:4. Required: a. Prepare the entries on the partnership's books to record (1) the revaluation of assets, (2) the transfer of the assets to the D & C Corporation and the receipt of the common stock, and (3) the closing of the books. b. Prepare the entries on D & C Corporation's books to record the assets and the issuance of the common stock.

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51. Listen and Hear are thinking of dissolving their partnership. Listen has a friend who told him to complete a "lump-sum" liquidation. Hear wants to complete an "installment" liquidation. They have come to you for advice. What do you recommend and Why?

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52. On March 1, 20X9, the ABC partnership decides to complete a lump-sum liquidation as soon as possible. The partnership balance sheet prepared on March 1 appears below:

The partners share profits and losses in the ratio of 3:4:3. Partner B is personally insolvent, but partners A and C have sufficient personal assets to satisfy any capital deficits. On March 15, 20X9, the non-cash assets are sold for $550,000. Lump sum payments are made to the partners on March 16, immediately after the creditors have been paid. Required: Prepare a statement of partnership realization and liquidation.

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53. The partnership of Rachel, Adams, and Nixon has the following trial balance on September 30, 2009:

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54. The partnership of Rachel, Adams, and Nixon has the following trial balance on September 30, 2009:

The partners share profits and losses as follows: Rachel, 50 percent; Adams, 30 percent; and Nixon, 20 percent. The partners are considering an offer of $180,000 for the accounts receivable, inventory, and plant and equipment as of September 30. The $180,000 will be paid to creditors and the partners in installments, the number and amounts of which are to be negotiated. The partners have decided to liquidate their partnership by installments instead of accepting the offer of $180,000. Cash is distributed to the partners at the end of each month. A summary of the liquidation transactions follows: October 1. $25,000 is collected on accounts receivable; balance is uncollectible. 2. $20,000 received for the entire inventory. 3. $1,500 liquidation expense paid. 4. $40,000 paid to creditors. 5. $10,000 cash retained in the business at the end of the month. November 6. $2,000 in liquidation expenses paid. 7. As part payment of his capital, Nixon accepted an item of special equipment that he developed, which had a book value of $8,000. The partners agreed that a value of $12,000 should be placed on this item for liquidation purposes.

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8. $4,000 cash retained in the business at the end of the month. December 9. $150,000 received on sale of remaining plant and equipment. 10. $1,000 liquidation expenses paid. No cash retained in the business. Required: Prepare a statement of partnership realization and liquidation with supporting schedules of safe payments to partners.

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55. A personal statement of financial condition dated December 31, 2008, is to be prepared for Wilhelm Holz. He provides the following information for your use in preparing the statements. All amounts are as of December 31, 2008. 1) Cash on hand and in bank is $4,000. 2) Investments costing $30,000 have a market value of $78,000. 3) His personal residence cost $150,000 ten years ago, and is currently worth $320,000. 4) The payoff balance of his home mortgage is $80,000. 5) The fair value of his 401(k) retirement account is $700,000. All withdrawals from the account will be fully taxable. 6) Amounts due on credit card debt total $5,000. 7) Estimated income taxes on his calendar 2008 earnings amount to $15,000. Taxes withheld in 2008 were $14,000. 8) Assume an income tax rate of 30 percent. Required: Prepare a statement of financial condition for Mr. Holz as of December 31, 2008. Assume any gain on subsequent sale of the residence will not be tax-exempt.

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Chapter 16 Partnerships: Liquidation Answer Key

Multiple Choice Questions

The CRT partnership has decided to terminate operations and to liquidate the partnership assets. There are no partner loans, and all partners have positive capital balances. Gains and losses on liquidation and cash distributions to partners should be allocated as follows:

A. Option A B. Option B C. Option C D. Option D

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-01 Understand and explain terms associated with partnership liquidations. Topic: Winding Up and Liquidation

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According to UPA 1997, during partnership liquidation, loans the partners have made to the partnership have the same status as loans from third-party creditors. As a practical matter, most loans from partners:

A. are subordinated to third-party creditors. B. have the same status as loans from third-party creditors. C. are paid prior to third-party creditors. D. None of these.

In order to avoid inequalities in the liquidation process the legal doctrine of setoff effectively treats loans from partners to the partnership as:

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When is a partnership considered to be insolvent? I. When the total of all partners' capital accounts results in a debit balance. II. When at least one of the partners is personally insolvent.

A. I only B. II only C. Both I and II D. Neither I nor II

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-02 Make calculations related to lump-sum partnership liquidations. Topic: Partnership is Insolvent and Deficit Created in Partner's Capital Account

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The balance sheet given below is presented for the partnership of Janet, Anton, and Millet:

A. $0. B. $80,000. C. $10,000. D. $30,000.

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 16-02 Make calculations related to lump-sum partnership liquidations. Topic: Partnership Solvent and Deficit Created in Partner's Capital Account

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Bill, Page, Larry, and Scott have decided to terminate their partnership. The partnership's balance sheet at the time they decide to wind up is as follows:

A. $0 B. $25,000 C. $11,667 D. $2,500

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Bill, Page, Larry, and Scott have decided to terminate their partnership. The partnership's balance sheet at the time they decide to wind up is as follows:

A. $0 B. $2,500 C. $25,000 D. $65,000

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Bill, Page, Larry, and Scott have decided to terminate their partnership. The partnership's balance sheet at the time they decide to wind up is as follows:

During the winding up of the partnership, the other assets are sold for $150,000 and the accounts payable are paid. Page and Larry are personally solvent, but Bill and Scott are personally insolvent. The partners share profits and losses in the ratio of 4:2:1:3. Based on the preceding information, what amount will be distributed to Page and Larry upon liquidation of the partnership?

A. Option A B. Option B C. Option C D. Option D

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Bill, Page, Larry, and Scott have decided to terminate their partnership. The partnership's balance sheet at the time they decide to wind up is as follows:

During the winding up of the partnership, the other assets are sold for $150,000 and the accounts payable are paid. Page and Larry are personally solvent, but Bill and Scott are personally insolvent. The partners share profits and losses in the ratio of 3:2:1:4. Based on the preceding information, what amount will be paid out to Bill upon liquidation of the partnership?

A. $0 B. $5,000 C. $25,000 D. $2,500

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10.

Bill, Page, Larry, and Scott have decided to terminate their partnership. The partnership's balance sheet at the time they decide to wind up is as follows:

During the winding up of the partnership, the other assets are sold for $150,000 and the accounts payable are paid. Page and Larry are personally solvent, but Bill and Scott are personally insolvent. The partners share profits and losses in the ratio of 3:2:1:4. Based on the preceding information, what amount will be paid out to Scott upon liquidation of the partnership?

A. $0 B. $2,500 C. $5,000 D. $6,429

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11.

Bill, Page, Larry, and Scott have decided to terminate their partnership. The partnership's balance sheet at the time they decide to wind up is as follows:

During the winding up of the partnership, the other assets are sold for $150,000 and the accounts payable are paid. Page and Larry are personally solvent, but Bill and Scott are personally insolvent. The partners share profits and losses in the ratio of 3:2:1:4. Based on the preceding information, what amounts will be distributed to Page and Larry upon liquidation of the partnership?

A. Option A B. Option B C. Option C D. Option D

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12.

The following condensed balance sheet is presented for the partnership of D, E, and F who share profits and losses in the ratio of 5:3:2, respectively:

The partners agreed to liquidate the partnership after selling the other assets. Refer to the above information. If the other assets are sold for $280,000, how much should F receive upon liquidation?

A. $44,000 B. $50,000 C. $76,000 D. $90,000

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13.

The following condensed balance sheet is presented for the partnership of D, E, and F who share profits and losses in the ratio of 5:3:2, respectively:

A. $0 B. $6,000 C. $10,000 D. $20,000

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14.

Note: This is a Kaplan CPA Review Question The following condensed balance sheet is presented for the partnership of Cooke, Dorry, and Evans who share profits and losses in the ratio of 4:3:3, respectively:

Assume that the partners decide to liquidate the partnership. If the other assets are sold for $600,000, how much of the available cash should be distributed to Cooke?

A. $212,000 B. $170,000 C. $182,000 D. $300,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-02 Make calculations related to lump-sum partnership liquidations. Topic: Partnership Solvent and No Deficits in Partners' Capital Accounts

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15.

Note: This is a Kaplan CPA Review Question The following condensed balance sheet is presented for the partnership of Fisher, Taylor and Simon who share profits and losses in the ratio of 6:2:2, respectively:

A. Option A B. Option B C. Option C D. Option D

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16.

The trial balance of WM Partnership is as follows:

A. $181,000. B. $131,000. C. $200,000. D. $150,000.

AACSB: Analytic

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AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 16-03 Make calculations related to installment partnership liquidations. Topic: Additional Considerations: Incorporation of a Partnership

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17.

The trial balance of WM Partnership is as follows:

2. All assets and liabilities are transferred to the corporation. 3. The common stock is $10 par. Wilfred and Mike receive a total of 10,000 shares. 4. The partners share profits and losses in the ratio 7:3. Based on the preceding information, the journal entry on the partnership's books to record distribution of stock to prior partners will include a debit to Wilfred, Capital for:

A. $140,000. B. $91,700. C. $86,700. D. $126,700.

AACSB: Analytic

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18.

The trial balance of WM Partnership is as follows:

2. All assets and liabilities are transferred to the corporation. 3. The common stock is $10 par. Wilfred and Mike receive a total of 10,000 shares. 4. The partners share profits and losses in the ratio 7:3. Based on the preceding information, the journal entry on the partnership's books to record distribution of stock to prior partners will include a debit to Mike, Capital for:

A. $38,010. B. $31,500. C. $42,000. D. $44,300.

AACSB: Analytic

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19.

The trial balance of WM Partnership is as follows:

2. All assets and liabilities are transferred to the corporation. 3. The common stock is $10 par. Wilfred and Mike receive a total of 10,000 shares. 4. The partners share profits and losses in the ratio 7:3. Based on the preceding information, the journal entry on W & M Corporation's books to record the assets and the issuance of the common stock will include a credit to Additional Paid-In Capital for:

A. $0. B. $81,000. C. $31,000. D. $50,000.

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AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 16-03 Make calculations related to installment partnership liquidations. Topic: Additional Considerations: Incorporation of a Partnership

20.

The capital balances, prior to the liquidation of the XYZ partnership, were as follows:

A. X B. Y C. Z D. Both X and Y

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21.

On December 1, 20X9, the partners of Tim, Williams, and Levin, who share profits and losses in the ratio of 4:4:2, decided to liquidate their partnership. On this date the partnership condensed balance sheet was as follows:

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 16-03 Make calculations related to installment partnership liquidations. Topic: Installment Liquidations

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22.

Tom, Dick, and Harry are partners in an equipment leasing business that has not been able to generate the type of revenue expected by the partners. They share profits and losses in a ratio of 5:3:2. They have decided to liquidate the business and have sold all the assets except for one piece of heavy machinery. All partnership liabilities have been settled and all the partners are personally insolvent. The machinery has a book value of $85,000, and the partners have capital account balances as follows:

A. Option A B. Option B C. Option C D. Option D

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23.

A. Option A B. Option B C. Option C D. Option D

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24.

A. Option A B. Option B C. Option C D. Option D

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25.

Partners Dennis and Lilly have decided to liquidate their business. The following information is available:

A. $64,000 B. $60,000 C. $24,000 D. $36,000

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26.

Partners Dennis and Lilly have decided to liquidate their business. The following information is available:

A. $24,000 B. $40,000 C. $16,000 D. $64,000

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27.

Partners Dennis and Lilly have decided to liquidate their business. The following information is available:

A. $18,000 B. $27,000 C. $36,000 D. $60,000

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28.

Partners Dennis and Lilly have decided to liquidate their business. The following information is available:

A. $27,000 B. $36,000 C. $18,000 D. $0

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29.

Partners Dennis and Lilly have decided to liquidate their business. The following information is available:

Dennis and Lilly share profits and losses in a 3:2 ratio. During the first month of liquidation, half the inventory is sold for $60,000, and $60,000 of the accounts payable is paid. During the second month, the rest of the inventory is sold for $45,000, and the remaining accounts payable are paid. Cash is distributed at the end of each month, and the liquidation is completed at the end of the second month. Refer to the information provided. Assume instead that the remaining inventory was sold for $10,000 in the second month. What payments will be made to Dennis and Lilly at the end of the second month?

A. Option A B. Option B C. Option C D. Option D

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30.

In the computation of a partner's Loss Absorption Power (LAP), the individual partner's capital balance and profit-and-loss percentage are used in which of the following ways?

A. Option A B. Option B C. Option C D. Option D

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-03 Make calculations related to installment partnership liquidations. Topic: Cash Distribution Plan

31.

During the liquidation of the FGH partnership, a cash distribution was made to all the partners, who share profits and losses 60 percent, 20 percent, and 20 percent, respectively. Assuming that the cash distribution referred to was made properly, how much would G receive if an additional $60,000 was distributed?

A. $60,000 B. $20,000 C. $17,000 D. $12,000

AACSB: Analytic AICPA FN: Measurement

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Blooms: Understand Difficulty: 2 Medium Learning Objective: 16-03 Make calculations related to installment partnership liquidations. Topic: Cash Distribution Plan

32.

Which of the following items are important in the determination of safe installment payments to partners? I. Deficits created in capital accounts are distributed to the remaining partners. II. All unsold noncash assets are assumed to be worthless.

A. I only B. II only C. Both I and II D. Neither I nor II

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33.

In the computation of a partner's Loss Absorption Power (LAP), which of the following statements is incorrect? I. The computation of LAPs for all partners allows cash to be distributed before all partnership assets have been sold and all creditors have been paid. II. The computation of LAPs for all partners indicates the relative strength of each partner's net capital position so that available cash is distributed in respective losssharing ratios.

A. I B. II C. Both I and II D. Neither I nor II

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34.

The BIG Partnership has decided to liquidate at December 31, 20X8. The capital and loan balances of the partners at December 31, 20X8, are provided below:

If you were to calculate the Loss Absorption Power for each partner, how would the partners rank (from highest to lowest LAP)?

A. B, I, G B. I, B, G C. B, G, I D. G, I, B

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 16-03 Make calculations related to installment partnership liquidations. Topic: Cash Distribution Plan

35.

Partner A has a smaller capital balance than Partner L. Partner A, however, has a higher profit-and-loss-sharing percentage than Partner L. The LA partnership has decided to liquidate. As a result of the information given,

AACSB: Reflective Thinking

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AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 16-03 Make calculations related to installment partnership liquidations. Topic: Cash Distribution Plan

36.

Which of the following statements is(are) true? I. In the calculation of the loss absorption power for a partner, a partner's loan balance (an amount that is owed by the partnership) should be added to the partner's capital balance. II. In liquidation, a partner's loan balance (an amount that is owed by the partnership) should be paid to the partner as a creditor of the partnership after the outside creditors.

A. I only B. II only C. Both I and II D. Neither I nor II

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37.

When a partnership is liquidated on a piecemeal basis and cash has been distributed properly to all partners as noncash assets have been turned into cash, all future cash distributions should be made: I. In the profit and loss ratio. II. According to the balances in the partners' capital accounts.

A. I only B. II only C. Both I and II D. Neither I nor II

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38.

The computation of a safe installment payment for the XYZ partnership resulted in only partner Z receiving cash. Which of the following statements is correct? I. Partner Z lent the partnership cash, and the partnership had to pay back the loan to Z before distributing cash to X and Y. II. After assuming all noncash assets were potentially worthless and that assumed capital deficits created in X's and Y's capital balances were losses to be allocated to Z; Z's capital balance was the only capital balance left with a credit.

A. I only B. II only C. Either I or II D. Neither I nor II

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39.

The JKL partnership liquidated its business in 20X9. Due to an expected long liquidation period, a cash distribution plan was developed. The initial sale and realization of cash from noncash assets resulted in partner K properly getting $24,000. No other partners received cash along with K. Based upon this information, which of the following statements is correct? I. K's loss absorption power (LAP) was higher than J's LAP and L's LAP. II. K's capital balance was substantially larger than the balances of J and L.

A. I only B. II only C. Either I or II D. Neither I nor II

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40.

Note: This is a Kaplan CPA Review Question The following balance sheet is for the partnership of Able, Bayer, and Cain which shares profits and losses in the ratio of 4:4:2, respectively.

A. Able $0; Bayer $3,000; Cain $17,000. B. Able $8,000; Bayer $8,000; Cain $4,000. C. Able $6,667; Bayer $6,667; Cain $6,666. D. Able $0; Bayer $13,333; Cain $6,667.

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 16-03 Make calculations related to installment partnership liquidations. Topic: Installment Liquidations

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41.

Note: This is a Kaplan CPA Review Question The condensed balance sheet of Adams & Gray, a partnership, at December 31, 20X1, follows:

A. $275,000 B. $215,000 C. $260,000 D. $0

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 16-03 Make calculations related to installment partnership liquidations. Topic: Additional Considerations: Incorporation of a Partnership

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42.

Note: This is a Kaplan CPA Review Question Jay & Kay partnership's balance sheet at December 31, 20X1, reported the following:

A. $77,000. B. $68,000. C. $70,000. D. $82,000.

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43.

On a partner's personal statement of financial condition, how should liabilities be valued? I. Present value II. Lower of present value or cash settlement amount

A. I B. II C. Both I and II D. Neither I nor II

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Section: Appendix 16A Topic: Partners' Personal Financial Statements

44.

On a partner's personal statement of financial condition, assets and liabilities are presented: I. As current and noncurrent. II. In order of liquidity and maturity.

A. I B. II C. Both I and II D. Neither I nor II

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Section: Appendix 16A Topic: Partners' Personal Financial Statements

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45.

The personal financial statements of a partner include which of the following? I. Statement of financial condition. II. Statement of changes in net worth. III. Statement of cash flows.

A. I and II B. I and III C. II and III D. I, II, and III

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Section: Appendix 16A Topic: Partners' Personal Financial Statements

46.

On a partner's personal statement of financial condition, how are assets valued?

A. Historical cost B. Book value C. Discounted value D. Estimated current value

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Section: Appendix 16A Topic: Partners' Personal Financial Statements

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47.

On a partner's personal statement of changes in net worth, what type(s) of income is(are) recognized? I. Realized II. Unrealized

A. I only B. II only C. Both I and II D. Neither I nor II

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Section: Appendix 16A Topic: Partners' Personal Financial Statements

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48.

On December 31, 20X8, Mr. and Mrs. Williams owned a parcel of land held as an investment. The land was purchased for $40,000 in 20X6, and was encumbered by a mortgage with a principal balance of $30,000 at December 31, 20X8. On this date the fair value of the land was $75,000. In the Williams' December 31, 20X8, personal statement of financial condition, at what amount should the land investment and mortgage payable be reported?

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Section: Appendix 16A Topic: Partners' Personal Financial Statements

Essay Questions

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49.

A partnership may be involved in "Dissociation" or "Dissolution." Required: Describe "Dissociation" and "Dissolution."

Dissociation is the legal description of the withdrawal of a partner including the following: i. Partner's death. ii. Partner's voluntary withdrawal, i.e. retirement. iii. Judicial determination. Not all dissociations result in a partnership's liquidation. Many partner dissociations involve only a buyout of the withdrawing partner's interest rather than a winding up and liquidation of the partnership's business. Dissolution involves dissolving of the partnership and winding up of the partnership business. Dissolutions can occur: i. In a partnership at will. A partnership agreement can avoid this situation. ii. In a partnership for a definite term or specific undertaking. iii. By an event that makes it unlawful to carry on the partnership business. iv. By a judicial determination. A "Dissociation" that results in liquidation has the same end result as "Dissolution."

AACSB: Communication AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-01 Understand and explain terms associated with partnership liquidations. Topic: Dissociation Topic: Dissolution

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50.

When Disney and Charles decided to incorporate their partnership, the trial balance was as follows:

The partnership's books will be closed, and new books will be used for D & C Corporation. The following additional information is available: 1. The estimated fair values of the assets follow:

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 16-03 Make calculations related to installment partnership liquidations.

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Topic: Additional Considerations: Incorporation of a Partnership

51.

Listen and Hear are thinking of dissolving their partnership. Listen has a friend who told him to complete a "lump-sum" liquidation. Hear wants to complete an "installment" liquidation. They have come to you for advice. What do you recommend and Why?

"Lump-sum" liquidation and "Installment" liquidation does not represent a choice in procedures. They represent different points in time. A "Lump-Sum" liquidation takes place when all of the affairs of the partnership can be ended at the same time and all of the resulting cash can be distributed to the partners at that time. "Installment" liquidation is what normally occurs because the partners want access to some cash as soon as possible, and all of the partnership assets have to be sold and liabilities paid. The preparation of a "Safe-Payments Schedule" can allow this to happen in an orderly manner.

AACSB: Communication AICPA BB: Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 16-02 Make calculations related to lump-sum partnership liquidations. Learning Objective: 16-03 Make calculations related to installment partnership liquidations. Topic: Installment Liquidations Topic: Lump-Sum Liquidations

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52.

On March 1, 20X9, the ABC partnership decides to complete a lump-sum liquidation as soon as possible. The partnership balance sheet prepared on March 1 appears below:

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 16-03 Make calculations related to installment partnership liquidations. Topic: Installment Liquidations

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53.

The partnership of Rachel, Adams, and Nixon has the following trial balance on September 30, 2009:

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 16-03 Make calculations related to installment partnership liquidations. Topic: Cash Distribution Plan

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54.

The partnership of Rachel, Adams, and Nixon has the following trial balance on September 30, 2009:

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 16-03 Make calculations related to installment partnership liquidations. Topic: Installment Liquidations

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55.

A personal statement of financial condition dated December 31, 2008, is to be prepared for Wilhelm Holz. He provides the following information for your use in preparing the statements. All amounts are as of December 31, 2008. 1) Cash on hand and in bank is $4,000. 2) Investments costing $30,000 have a market value of $78,000. 3) His personal residence cost $150,000 ten years ago, and is currently worth $320,000. 4) The payoff balance of his home mortgage is $80,000. 5) The fair value of his 401(k) retirement account is $700,000. All withdrawals from the account will be fully taxable. 6) Amounts due on credit card debt total $5,000. 7) Estimated income taxes on his calendar 2008 earnings amount to $15,000. Taxes withheld in 2008 were $14,000. 8) Assume an income tax rate of 30 percent. Required: Prepare a statement of financial condition for Mr. Holz as of December 31, 2008. Assume any gain on subsequent sale of the residence will not be tax-exempt.

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Section: Appendix 16A Topic: Partners' Personal Financial Statements

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Chapter 17 Governmental Entities: Introduction and General Fund Accounting

Multiple Choice Questions

1. Which organization has the authority to establish generally accepted accounting principles for state and local government entities?

A. The National Council on Governmental Accounting B. The Governmental Accounting Standards Board C. The Financial Accounting Standards Board D. The Municipal Officers Finance Organization

2. Which of the following characteristics are emphasized in the accounting for state and local government entities? I. Revenues should be matched with expenditures to measure success or failure of the government entity. II. There is an emphasis on expendability of resources to accomplish objectives of the governmental entity.

A. I only B. II only C. I and II D. Neither I nor II

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3. All of the following are elements of the statement of financial condition for state and local governments with the exception of:

A. Assets and Liabilities B. Deferred inflow and outflow of resources C. Net position D. Inflow and outflow of resources

4. Which of the following statements best describes the reporting process for profit seeking and governmental entities?

A. In profit-seeking enterprises the measurement focus is on the flow of all economic resources of the firm, whereas the focus for governmental funds is on current financial resources. B. In profit-seeking enterprises the measurement focus is on the flow of current financial resources, whereas the focus for government funds is on all economic resources. C. Both Profit-seeking enterprises and governmental entities have an objective to measure profitability. D. Both Profit-seeking enterprises and governmental entities use the accrual or cash basis of accounting to record and report transactions.

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5. Which of the following statements is(are) correct about the funds used by governmental entities? I. Funds are fiscal entities. II. Funds are accounting entities.

A. I only B. II only C. I and II D. Neither I nor II

6. Which of the following funds are classified as fiduciary funds?

A. Agency and Special revenue funds. B. Internal service and Enterprise funds. C. Private-purpose trust and Agency funds. D. Capital projects and Debt service funds.

7. Which of the following funds are classified as proprietary funds?

A. Agency and special revenue funds. B. Enterprise and internal service funds. C. Debt service and capital projects funds. D. Agency and pension trust funds.

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8. Which of the following funds are classified as governmental funds?

A. Internal service and capital projects funds. B. Internal service and debt service funds. C. Enterprise and agency funds. D. The general and special revenue funds.

9. Which of the following funds provides goods and services only to other departments or agencies of the government on a cost-reimbursement basis?

A. Internal service funds B. Enterprise funds C. Special revenue funds D. The general fund

10. All of the following funds have a financial resources measurement focus with the exception of which fund?

A. debt service fund B. special revenue fund C. capital projects fund D. private-purpose trust fund

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11. According to the latest GASB exposure draft, which of the following is the only governmental fund type that may report an unassigned fund balance?

A. General fund B. Special revenue fund C. Capital projects fund D. Permanent fund

12. Which governmental fund includes resources that are legally restricted so that the governmental entity must maintain the principal and can use only the earnings from the fund's resources to benefit the government's programs for all of its citizens?

A. General fund B. Special revenue fund C. Capital projects fund D. Permanent fund

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13. The following information was obtained from the general fund balance sheet of Lima Village on June 30, 20X9, the close of its fiscal year:

On June 30, 20X9, what was Lima's unassigned fund balance in its general fund?

A. $84,000 B. $44,000 C. $34,000 D. $24,000

14. In accounting for governmental funds, which of the following items could appear only on government-wide financial statements? I. Fixed assets II. Long-term debt III. Investments

A. I only B. I and II C. I and III D. I, II, III

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15. At the end of the fiscal year, uncollected property taxes in the general fund should be:

A. reclassified from current to delinquent. B. written off as uncollectible. C. charged against unassigned fund balance. D. reclassified from current to noncurrent.

16. The Town of Baker reported the following items on the June 30, 20X9, balance sheet of its general fund:

At June 30, 20X9, what amount should be reported for Fund Balance—Unassigned?

A. $46,000 B. $40,000 C. $30,000 D. $16,000

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17. Which of the financial statements described below is prepared by the general fund of a state or local government?

A. A statement of cash flows. B. An income statement. C. A statement of revenues, expenses, and changes in retained earnings. D. A statement of revenues, expenditures, and changes in fund balance.

18. Which accounts described below would have non-zero balances after the accounts are closed in the general fund of a state or local government? I. Estimated Revenues Control. II. Appropriations Control. III. Budgetary Fund Balance Unreserved. IV. Deferred Revenue. V. Due to Internal Service Fund. VI. Fund Balance-Reserved for Inventories.

A. I, II, III. B. I, II, IV. C. IV, V, VI. D. III, IV, V.

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19. In a statement of revenues, expenditures, and changes in fund balance, the unassigned fund balance will be increased by: I. a decrease in the fund balance—Nonspendable II. an excess of other financing sources over other financing uses.

A. I only B. II only C. Both I and II D. Neither I nor II

20. Which of the following items should not be included as revenue for a state government?

A. Property taxes levied in the current fiscal year. B. Private property for which a state takes custody when the legal owner cannot be found. C. Amounts received from other financing sources. D. Fines and licensing fees for which amounts cannot be budgeted.

21. Under the modified accrual basis of accounting, revenue should be recognized when it is:

A. measurable and earned. B. received in cash. C. available and earned. D. measurable and available.

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22. Which of the following funds should use the accrual basis of accounting?

A. Enterprise and private-purpose trust funds. B. Permanent funds and internal service funds. C. Debt service and agency funds. D. Special revenue and capital projects funds.

23. Which of the following funds should use the modified accrual basis of accounting?

A. Private-purpose trust and agency funds. B. Capital projects and special revenue funds. C. Internal service and enterprise funds. D. Debt service and private-purpose trust funds.

24. Under the modified accrual basis of accounting for the general fund, expenditures should be recognized in the period in which the related liability is: I. paid. II. incurred.

A. I only B. II only C. Both I and II D. Neither I nor II

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25. The general fund of the Town of Dean levied property taxes of $3,000,000 for the fiscal year beginning on January 1, 20X8. It was estimated that 1% of the levy would be uncollectible. During the period January 1, 20X8, through December 31, 20X8, $2,960,000 of the property tax levy was collected. At December 31, 20X8, Dean estimated that $10,000 of property taxes levied in 20X8 would be collected during the first 60 days of 20X9. What amount of property tax revenue should be reported by the general fund for the year ended December 31, 20X8?

A. $2,960,000 B. $3,000,000 C. $2,970,000 D. $2,990,000

26. The general fund of the City of Atlanta received a check for $10,000 from an Atlanta resident on July 1, 20X8. Of the amount received, $4,800 represented full payment of property taxes for 20X8, and the remaining $5,200 represented an advance payment for property taxes of 20X9. On July 1, 20X8, the general fund should record the receipt by debiting Cash for $10,000 and by crediting

A. Revenue-Property Tax for $10,000. B. Property Taxes Receivable-Current for $4,800 and Deferred Revenue for $5,200. C. Revenue-Property Tax for $4,800 and Deferred Revenue for $5,200. D. Property Taxes Receivable-Current for $4,800 and Revenue- Property Tax for $5,200.

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27. Which combination of fund and measurement basis is correct?

A. Option A B. Option B C. Option C D. Option D

28. Revenues from parking meters and parking fines should be reported in the general fund when:

A. received. B. measurable and available. C. measurable and earned. D. available.

29. The general fund of Gillette levied property taxes of $400,000 on November 1, 20X8. However, the property taxes are not collectible until May and August of 20X9. Assume Gillette reports on the calendar year. On Gillette's general fund balance sheet at December 31, 20X8, the property taxes levied on November 1 should:

A. be reported as an asset and as a decrease in unassigned fund balance. B. be reported as an asset and as an increase in unassigned fund balance. C. be reported as an asset and as a reservation of fund balance. D. be reported as an asset and as a deferred revenue.

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30. Which of the following items is not recognized as revenue by a governmental unit?

A. sales tax proceeds B. property tax levies C. bond proceeds D. grants received from other governmental units

31. Note: This is a Kaplan CPA Review Question Pine City's year end is June 30. Pine levies property taxes in January of each year for the calendar year. One-half of the levy is due in May and one-half is due in October. Property tax revenue is budgeted for the period in which payment is due. The following information pertains to Pine's property taxes for the period from July 1, 20X4, to June 30, 20X5:

The $40,000 balance due for the May 20X5 installments was expected to be collected in August 20X5. What amount should Pine recognize for property tax revenue for the year ended June 30, 20X5?

A. $2,160,000 B. $2,200,000 C. $2,360,000 D. $2,400,000

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32. Note: This is a Kaplan CPA Review Question The following information pertains to property taxes levied by Oak City for 20X4:

What amount should Oak report for 20X4 net property tax revenues?

A. $690,000 B. $700,000 C. $600,000 D. $500,000

33. In a town's general fund operating budget for the year, the amount of its estimated revenues exceeded the amount of its appropriations. This excess should be:

A. credited to Budgetary Fund Balance—Unassigned. B. debited to Budgetary Fund Balance—Unassigned. C. credited to Fund Balance—Unassigned. D. debited to Fund Balance—Unassigned.

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34. The general fund of Caldwell had the following operating budget for the fiscal year beginning July 1, 20X9:

When the general fund records its operating budget on July 1, 20X9, Budgetary Fund Balance—Unassigned should be

A. credited for $600,000. B. debited for $900,000. C. debited for $600,000. D. credited for $900,000.

35. Assuming there is a budget surplus, which of the following accounts are credited when the general fund records its operating budget at the beginning of the year?

A. Appropriations Control and Budgetary Fund Balance—Unassigned. B. Estimated Revenues Control and Estimated Residual Equity Transfer Out. C. Budgetary Fund Balance—Assigned For Encumbrances and Expenditures. D. Estimated Residual Equity Transfer Out and Estimated Transfer In.

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36. Note: This is a Kaplan CPA Review Question When the budget of a governmental unit, for which the estimated revenues exceed the appropriations, is adopted and recorded in the general ledger at the beginning of the year, the budgetary fund balance account is

A. Credited at the beginning of the year and debited at the end of the year. B. Credited at the beginning of the year and no entry made at the end of the year. C. Debited at the beginning of the year and no entry made at the end of the year. D. Debited at the beginning of the year and credited at the end of the year.

37. Note: This is a Kaplan CPA Review Question A budgetary fund balance - assigned in excess of a balance of encumbrances indicates

A. A recording error. B. An excess of vouchers payable over encumbrances. C. An excess of purchase orders over invoices received. D. An excess of appropriations over encumbrances.

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38. Note: This is a Kaplan CPA Review Question The Board of Commissioners of Vane City adopted its budget for the year ending July 31, comprising estimated revenues of $30,000,000 and appropriations of $29,000,000. Vane formally integrates its budget into the accounting records. What entry should be made for budgeted revenues?

A. Memorandum entry only. B. Debit ESTIMATED REVENUES CONTROL, $30,000,000. C. Debit ESTIMATED REVENUES RECEIVABLE CONTROL, $30,000,000. D. Credit ESTIMATED REVENUES CONTROL, $30,000,000.

39. Note: This is a Kaplan CPA Review Question The Board of Commissioners of the City of Rockton adopted its budget for the year ending July 31, 20X2, which indicated revenues of $1,000,000 and appropriations of $900,000. If the budget is formally integrated into the accounting records, what is the required journal entry?

A. Option A B. Option B C. Option C D. Option D

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40. What is the correct sequence in the expenditure process in governmental accounting?

A. Appropriation, Encumbrance, Expenditure, and Disbursement. B. Encumbrance, Expenditure, Disbursement, and Appropriation. C. Expenditure, Encumbrance, Disbursement, and Appropriation. D. Appropriation, Expenditure, Encumbrance, and Disbursement.

41. Which of the following observations concerning encumbrances is NOT true?

A. Their purpose is to ensure that the expenditures within a period do not exceed the budgeted appropriations. B. They provide a control system and safeguard for governmental unit administrators. C. They are a unique element of governmental accounting. D. They are recognized only at the time disbursements are made.

42. The City of Ames uses the consumption method to report its inventory of supplies on its general fund balance sheet. What account is debited in the general fund when Ames acquires supplies?

A. Expenditures B. Inventory of Supplies C. Supplies Expense D. Fund Balance—Nonspendable

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43. On July 25, 20X8, the city of Pullman, which reports on a calendar-year basis, ordered five police cars at an estimated cost of $200,000. On August 26, 20X8, the police cars were received, and the actual cost amounted to $197,000. Pullman encumbered the appropriation for police cars in its general fund when the cars were ordered. When the police cars were received, the general fund of Pullman should:

A. Credit Budgetary Fund Balance Assigned for Encumbrances for $197,000. B. Debit Encumbrances for $200,000. C. Debit Expenditures for $197,000. D. Credit Budgetary Fund Balance Assigned for Expenditures for $200,000.

44. What amount should be reported as expenditures for the current fiscal year when accounting for inventories of supplies under the purchase method and under the consumption method?

A. Option A B. Option B C. Option C D. Option D

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45. The Town of Pasco has no supplies inventory in its general fund on January 1, 20X8. During 20X8, Pasco incurred expenditures of $200,000 for the acquisition of supplies. On December 31, 20X8, Pasco's inventory of supplies amounted to $30,000. Assume Pasco uses the purchase method of accounting for supplies in its general fund and that the village reports on the calendar year. On December 31, 20X8, the general fund of Pasco should credit:

A. Expenditures for $170,000. B. Fund Balance—Unassigned for $170,000. C. Fund Balance—Nonspendable for $30,000. D. Expenditures for $30,000.

46. The general fund of Park City acquired computer equipment at a cost of $50,000 on May 18, 20X9. To record acquisition of this equipment, the general fund of Park City should debit:

A. expenditures. B. encumbrances. C. equipment. D. vouchers payable.

47. Works of art and historical treasures purchased by the general fund should be reported as: I. an expenditure in the general fund. II. assets in the government-wide financial statements.

A. I only B. II only C. Both I and II D. Neither I nor II

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48. Identify the legal term that allows the general fund to make expenditures.

A. Exceptions B. Appropriations C. Encumbrances D. Consumption

49. The general fund of Hatteras acquired a fire truck during the fiscal year ended June 30, 20X9. The purchase order for the fire truck was recorded on February 15, 20X9. Hatteras' acquisition of the fire truck required which of the following sequences of accounting activities? I. Appropriation II. Encumbrance III. Expenditure

A. II, I, III. B. I, III, II. C. III, II, I. D. I, II, III.

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50. Blue Ridge Township uses the consumption method of accounting for its inventory of supplies. On the December 31, 20X7 balance sheet for the general fund, the township reported $10,000 of supplies inventory. During 20X8, expenditures for supplies amounted to $40,000, and, at December 31, 20X8, unused supplies totaled $7,000. In the adjusting entry for supplies at December 31, 20X8,

A. Expenditures should be credited for $3,000. B. Expenditures should be debited for $3,000. C. Fund Balance—Nonspendable should be debited for $7,000. D. Fund Balance—Nonspendable should be credited for $7,000.

51. Gotham City acquires $25,000 of inventory on November 1, 20X7, having held no inventory previously. On December 31, 20X7, the end of Gotham City's fiscal year, a physical count shows $8,000 still in stock. During 20X8, $6,500 of this inventory is used, resulting in a $1,500 remaining balance of supplies on December 31, 20X8. Based on the preceding information, which of the following would be the correct account balances for 20X7 if Gotham City used the purchase method of accounting for inventories?

A. Option A B. Option B C. Option C D. Option D

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52. Gotham City acquires $25,000 of inventory on November 1, 20X7, having held no inventory previously. On December 31, 20X7, the end of Gotham City's fiscal year, a physical count shows $8,000 still in stock. During 20X8, $6,500 of this inventory is used, resulting in a $1,500 remaining balance of supplies on December 31, 20X8. Based on the preceding information, which of the following would be the correct account balances for 20X8 if Gotham City used the purchase method of accounting for inventories?

A. Option A B. Option B C. Option C D. Option D

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53. Gotham City acquires $25,000 of inventory on November 1, 20X7, having held no inventory previously. On December 31, 20X7, the end of Gotham City's fiscal year, a physical count shows $8,000 still in stock. During 20X8, $6,500 of this inventory is used, resulting in a $1,500 remaining balance of supplies on December 31, 20X8. Based on the preceding information, which of the following would be the correct account balances for 20X7 if Gotham City used the consumption method of accounting for inventories?

A. Option A B. Option B C. Option C D. Option D

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54. Gotham City acquires $25,000 of inventory on November 1, 20X7, having held no inventory previously. On December 31, 20X7, the end of Gotham City's fiscal year, a physical count shows $8,000 still in stock. During 20X8, $6,500 of this inventory is used, resulting in a $1,500 remaining balance of supplies on December 31, 20X8. Based on the preceding information, which of the following would be the correct account balances for 20X8 if Gotham City used the consumption method of accounting for inventories?

A. Option A B. Option B C. Option C D. Option D

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55. Gotham City acquires $25,000 of inventory on November 1, 20X7, having held no inventory previously. On December 31, 20X7, the end of Gotham City's fiscal year, a physical count shows $8,000 still in stock. During 20X8, $6,500 of this inventory is used, resulting in a $1,500 remaining balance of supplies on December 31, 20X8. Which of the following accounts are debited when closing entries are made for the general fund (assume outstanding encumbrances lapse at year-end)? I. Appropriations Control. II. Estimated Revenues Control. III. Encumbrances. IV. Budgetary Fund Balance-Reserved for Encumbrances. V. Estimated Other Financing Uses-Transfer Out. VI. Revenue-Property Tax.

A. I, II, III, VI. B. I, II, IV. C. I, IV, V, VI. D. III, IV, V.

56. The general fund of Athens ordered computer equipment on December 1, 20X8, for $32,000. The order was appropriately encumbered on this date. Athens received the computer equipment on January 25, 20X9, and issued a voucher to pay the vendor $32,400. Athens uses the calendar year for reporting, and all outstanding encumbrances lapse at year-end. Athens' governing board honors all outstanding encumbrances by including them in the following year's appropriations. On January 25, 20X9, the general fund of Athens should debit:

A. Encumbrances for $32,000. B. Fund Balance—assigned for Encumbrances for $32,400. C. Expenditures-20X8 for $32,400. D. Expenditures for $32,400.

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57. The general fund of Loveland ordered a new fire truck on November 12, 20X8, for $150,000. The order was appropriately encumbered on this date. Loveland received the fire truck on January 15, 20X9, and issued a voucher to the manufacturer for $148,600. Loveland uses the calendar year for reporting, and outstanding encumbrances at December 31, 20X8, are lapsing. On January 15, 20X9, the general fund of Loveland should debit:

A. Fund Balance—assigned for Encumbrances for $148,600. B. Expenditures for $148,600. C. Expenditures-20X8 for $148,600. D. Encumbrances for $148,600.

58. The general fund of Wold Township ordered office furniture for the mayor's office on August 1, 20X8. The office furniture was estimated to cost $12,000. The office furniture was received on September 1, 20X8, with the actual cost being $11,800. Which of the following accounts decreased on September 1, 20X8?

A. Encumbrances only. B. Expenditures only. C. Encumbrances and Budgetary Fund Balance—Assigned for Encumbrances. D. Expenditures and Budgetary Fund Balance—Assigned for Encumbrances.

59. Due to an error, the general fund of Pueblo did not record an encumbrance for police equipment which had been ordered but not received on June 30, 20X9, the end of its fiscal year. Pueblo's outstanding encumbrances at year-end are nonlapsing. What was the effect of this error on the balance sheet of Pueblo's general fund?

A. Assets are overstated. B. Liabilities are understated. C. Total fund balance is overstated. D. Unassigned fund balance is overstated.

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60. GASB 31 "Accounting for Financial Reporting for Certain Investments and for External Reporting Investment Pools," establishes a general rule that government entities value investments in option contracts, open-ended mutual funds, and debt securities for balance sheet presentation at:

A. lower of cost or market. B. fair value. C. cost. D. amortized cost.

61. The general ledger of Broadway contains the following selected account balances:

Broadway wants to order additional goods and services before the fiscal year end. What is the unencumbered balance of the budget that may be expended by Broadway?

A. $850,000 B. $760,000 C. $180,000 D. $130,000

62. At any time, the remaining appropriating authority available to the fund managers is equal to:

A. Appropriations minus Expenditures B. Appropriations minus (Encumbrances + Expenditures) C. Appropriations minus (Encumbrances - Expenditures) D. Appropriations minus Encumbrances

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63. Which of the following describes how a governmental fund (e.g. general fund) accounts for a capital lease:

A. noncurrent liability B. bond accounting C. an asset and a lease liability D. none of these identifies the appropriate way to account for a capital lease.

64. Note: This is a Kaplan CPA Review Question The following balances are included in the subsidiary records of Burwood Village's Parks and Recreation Department at March 31st:

How much does the Department have available for additional purchases of supplies?

A. $0 B. $2,250 C. $3,000 D. $6,750

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65. Note: This is a Kaplan CPA Review Question Elm City issued a purchase order for supplies with an estimated cost of $5,000. When the supplies were received, the accompanying invoice indicated an actual price of $4,950. What amount should Elm debit (credit) to the budgetary fund balance account after the supplies and invoice were received?

A. $4,950 B. ($50) C. $50 D. $5,000

66. Note: This is a Kaplan CPA Review Question Albee Township's fiscal year ends on June 30. Albee uses encumbrance accounting. On April 5, 20X5, an approved $1,000 purchase order was issued for supplies. Albee received these supplies on May 2, 20X5, and the $1,000 invoice was approved for payment. What journal entry should Albee make on April 5, 20X5, to record the approved purchase order?

A. Option A B. Option B C. Option C D. Option D

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67. Note: This is a Kaplan CPA Review Question The following related entries were recorded in sequence in the general fund of a municipality:

The sequence of entries indicates that

A. Encumbrances were anticipated but later failed to materialize and were reversed. A liability of $12,350 was incurred. B. An adverse event was foreseen and a reserve of $12,000 was created; later the reserve was cancelled and a liability for the item was acknowledged. C. An order was placed for goods or services estimated to cost $12,000; the actual cost was $12,350 for which a liability was acknowledged upon receipt. D. The first entry was erroneous and was reversed; a liability of $12,350 was acknowledged.

68. The general fund of the City of Columbia transferred money to establish an internal service fund for the city's data processing needs. The general fund of Columbia should account for this transaction as a(n):

A. expenditure. B. interfund transfer. C. interfund reimbursement. D. loan.

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69. The general fund of Richmond was billed $22,000 on August 15, 20X8, for using the services of one of its internal service funds (ISF). What accounts should be debited and credited, respectively, in the general fund on August 15, 20X8, to record this transaction?

A. Expenditures and Transfer Out to ISF B. Expenditures and Due to ISF C. Encumbrances and Due to ISF D. Encumbrances and Transfer Out to ISF

70. The general fund of Battle Creek budgeted a transfer to its capital projects fund for $110,000 to be used in operations during the year ended June 20, 20X9. On September 15, 20X8, the general fund transferred $110,000 to the capital projects fund. What account should be debited in the general fund on September 15 to record this transfer?

A. Appropriations B. Expenditures C. Budgetary Fund Balance—Assigned For Encumbrances D. Other Financing Uses—Transfer Out to Capital Projects Fund

71. The general fund of Sun City was billed $7,000 for using the services of one of its internal service funds. The general fund should account for this transaction as a(n)

A. interfund transfer. B. interfund loan. C. interfund service. D. interfund reimbursement for services rendered.

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72. When an internal service fund (ISF) enters into a capital lease the transaction is recorded in the: I. fixed assets of the ISF. II. long-term debt of the ISF.

A. I only B. II only C. Both I and II D. Neither I nor II

73. GASB 34 established four types of interfund activities. Interfund activities are recognized as revenue in a governmental fund for an:

A. Option A B. Option B C. Option C D. Option D

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74. Which of the following observations concerning interfund transfers is true?

A. They are expected to be repaid. B. They are classified as fund revenues or expenditures. C. The receiving fund recognizes these transfers as revenue. D. These transfers are classified under "Other Financing Sources or Uses."

Essay Questions

75. Accounting processes differ between a for-profit entity and a governmental entity. Discuss three differences between a governmental entity and a for-profit entity.

76. Briefly discuss the various types of governmental funds and proprietary funds.

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77. The adjusted trial balance for White River for the fiscal year ended June 30, 20X9, is presented below.

Required: a. Prepare a statement of revenues, expenditures, and changed in fund balance for White River for the year ended June 30, 20X9. Assume there were no supplies or outstanding encumbrances at the beginning of the year. b. Prepare a balance sheet for White River at June 30, 20X9.

78. Discuss major differences between a governmental entity's uses of the modified accrual method and a for-profit corporation's use of the accrual method.

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79. The town of Stow was incorporated and began governmental operations on July 1, 20X8. Stow's transactions and events for the fiscal year ended June 30, 20X9, are listed below. Stow uses the consumption method of accounting for purchases of supplies. Encumbrances do not lapse at year end. Required: Prepare the journal entry(ies) required in the general fund for each of the following transactions or events. a. The town budget was approved, providing for revenues of $800,000, a $40,000 transfer to establish an internal service fund (ISF), and expenditures of $750,000. b. Property taxes were levied in the amount of $700,000, with 4 percent of the total estimated to be uncollectible. c. Purchase orders were issued in the amount of $90,000 for equipment, and $635,000 for other goods and services. d. Collections for fines and licenses totaled $99,000 for the year. e. Property taxes collected amounted to $680,000; the balance was reclassified as delinquent, and the allowance for uncollectible taxes was reduced to $15,000. f. The equipment ordered was received, and a voucher was issued for the final invoice cost of $91,000. g. All but $12,000 of the other goods and services ordered was received. Vouchers were issued for the invoice cost of $622,000. h. All but $10,000 of the vouchers issued during the year was paid. i. A transfer in the amount of $40,000 was made to establish an internal service fund for the town. The general fund received services of $7,000 from the internal service fund during the year, with $2,000 remaining unpaid at year end. j. Expenditures recorded for the year included the purchase of supplies. The estimated balance of supplies on hand at year end was $2,000. k. A reserve was established at year end for the outstanding encumbrances, all of which will be honored in the next fiscal year. l. Closing entries were made.

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Chapter 17 Governmental Entities: Introduction and General Fund Accounting Answer Key

Multiple Choice Questions

Which organization has the authority to establish generally accepted accounting principles for state and local government entities?

A. The National Council on Governmental Accounting B. The Governmental Accounting Standards Board C. The Financial Accounting Standards Board D. The Municipal Officers Finance Organization

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-01 Understand and explain the basic differences between governmental and private sector accounting. Topic: Differences between Governmental and Private Accounting

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Which of the following characteristics are emphasized in the accounting for state and local government entities? I. Revenues should be matched with expenditures to measure success or failure of the government entity. II. There is an emphasis on expendability of resources to accomplish objectives of the governmental entity.

A. I only B. II only C. I and II D. Neither I nor II

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-01 Understand and explain the basic differences between governmental and private sector accounting. Topic: Differences between Governmental and Private Accounting

All of the following are elements of the statement of financial condition for state and local governments with the exception of:

A. Assets and Liabilities B. Deferred inflow and outflow of resources C. Net position D. Inflow and outflow of resources

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-02 Understand and explain major concepts of governmental accounting.

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Topic: Elements of Financial Statements

Which of the following statements best describes the reporting process for profit seeking and governmental entities?

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-02 Understand and explain major concepts of governmental accounting. Topic: Expendability of Resources versus Capital Maintenance Objectives

Which of the following statements is(are) correct about the funds used by governmental entities? I. Funds are fiscal entities. II. Funds are accounting entities.

A. I only B. II only C. I and II D. Neither I nor II

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AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-03 Understand and explain the differences between the various governmental fund types. Topic: Definitions and Types of Funds

Which of the following funds are classified as fiduciary funds?

A. Agency and Special revenue funds. B. Internal service and Enterprise funds. C. Private-purpose trust and Agency funds. D. Capital projects and Debt service funds.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-03 Understand and explain the differences between the various governmental fund types. Topic: Definitions and Types of Funds

Which of the following funds are classified as proprietary funds?

A. Agency and special revenue funds. B. Enterprise and internal service funds. C. Debt service and capital projects funds. D. Agency and pension trust funds.

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Which of the following funds are classified as governmental funds?

A. Internal service and capital projects funds. B. Internal service and debt service funds. C. Enterprise and agency funds. D. The general and special revenue funds.

Which of the following funds provides goods and services only to other departments or agencies of the government on a cost-reimbursement basis?

A. Internal service funds B. Enterprise funds C. Special revenue funds D. The general fund

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10.

All of the following funds have a financial resources measurement focus with the exception of which fund?

A. debt service fund B. special revenue fund C. capital projects fund D. private-purpose trust fund

11.

According to the latest GASB exposure draft, which of the following is the only governmental fund type that may report an unassigned fund balance?

A. General fund B. Special revenue fund C. Capital projects fund D. Permanent fund

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12.

Which governmental fund includes resources that are legally restricted so that the governmental entity must maintain the principal and can use only the earnings from the fund's resources to benefit the government's programs for all of its citizens?

A. General fund B. Special revenue fund C. Capital projects fund D. Permanent fund

13.

The following information was obtained from the general fund balance sheet of Lima Village on June 30, 20X9, the close of its fiscal year:

On June 30, 20X9, what was Lima's unassigned fund balance in its general fund?

A. $84,000 B. $44,000 C. $34,000 D. $24,000

AACSB: Analytic AICPA FN: Measurement

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Blooms: Apply Difficulty: 3 Hard Learning Objective: 17-04 Understand and explain basic concepts for financial reporting in governmental accounting. Topic: Balance Sheet for Governmental Funds

14.

In accounting for governmental funds, which of the following items could appear only on government-wide financial statements? I. Fixed assets II. Long-term debt III. Investments

A. I only B. I and II C. I and III D. I, II, III

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-04 Understand and explain basic concepts for financial reporting in governmental accounting. Topic: Financial Reporting of Governmental Entities

15.

At the end of the fiscal year, uncollected property taxes in the general fund should be:

A. reclassified from current to delinquent. B. written off as uncollectible. C. charged against unassigned fund balance. D. reclassified from current to noncurrent.

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Learning Objective: 17-04 Understand and explain basic concepts for financial reporting in governmental accounting. Topic: Financial Reporting of Governmental Entities

16.

The Town of Baker reported the following items on the June 30, 20X9, balance sheet of its general fund:

At June 30, 20X9, what amount should be reported for Fund Balance—Unassigned?

A. $46,000 B. $40,000 C. $30,000 D. $16,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-04 Understand and explain basic concepts for financial reporting in governmental accounting. Topic: Balance Sheet for Governmental Funds

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17.

Which of the financial statements described below is prepared by the general fund of a state or local government?

A. A statement of cash flows. B. An income statement. C. A statement of revenues, expenses, and changes in retained earnings. D. A statement of revenues, expenditures, and changes in fund balance.

18.

Which accounts described below would have non-zero balances after the accounts are closed in the general fund of a state or local government? I. Estimated Revenues Control. II. Appropriations Control. III. Budgetary Fund Balance Unreserved. IV. Deferred Revenue. V. Due to Internal Service Fund. VI. Fund Balance-Reserved for Inventories.

A. I, II, III. B. I, II, IV. C. IV, V, VI. D. III, IV, V.

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Learning Objective: 17-04 Understand and explain basic concepts for financial reporting in governmental accounting. Topic: Financial Reporting of Governmental Entities

19.

In a statement of revenues, expenditures, and changes in fund balance, the unassigned fund balance will be increased by: I. a decrease in the fund balance—Nonspendable II. an excess of other financing sources over other financing uses.

A. I only B. II only C. Both I and II D. Neither I nor II

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-04 Understand and explain basic concepts for financial reporting in governmental accounting. Topic: Statement of Revenues, Expenditures, and Changes in Fund Balance for Governmental Funds

20.

Which of the following items should not be included as revenue for a state government?

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21.

Under the modified accrual basis of accounting, revenue should be recognized when it is:

A. measurable and earned. B. received in cash. C. available and earned. D. measurable and available.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-05 Understand and explain the basic differences in the measurement focus and basis of accounting between governmental and private sector accounting. Topic: Basis of Accounting

22.

Which of the following funds should use the accrual basis of accounting?

A. Enterprise and private-purpose trust funds. B. Permanent funds and internal service funds. C. Debt service and agency funds. D. Special revenue and capital projects funds.

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23.

Which of the following funds should use the modified accrual basis of accounting?

A. Private-purpose trust and agency funds. B. Capital projects and special revenue funds. C. Internal service and enterprise funds. D. Debt service and private-purpose trust funds.

24.

Under the modified accrual basis of accounting for the general fund, expenditures should be recognized in the period in which the related liability is: I. paid. II. incurred.

A. I only B. II only C. Both I and II D. Neither I nor II

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25.

The general fund of the Town of Dean levied property taxes of $3,000,000 for the fiscal year beginning on January 1, 20X8. It was estimated that 1% of the levy would be uncollectible. During the period January 1, 20X8, through December 31, 20X8, $2,960,000 of the property tax levy was collected. At December 31, 20X8, Dean estimated that $10,000 of property taxes levied in 20X8 would be collected during the first 60 days of 20X9. What amount of property tax revenue should be reported by the general fund for the year ended December 31, 20X8?

A. $2,960,000 B. $3,000,000 C. $2,970,000 D. $2,990,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-05 Understand and explain the basic differences in the measurement focus and basis of accounting between governmental and private sector accounting. Topic: Basis of Accounting-Governmental Funds

26.

The general fund of the City of Atlanta received a check for $10,000 from an Atlanta resident on July 1, 20X8. Of the amount received, $4,800 represented full payment of property taxes for 20X8, and the remaining $5,200 represented an advance payment for property taxes of 20X9. On July 1, 20X8, the general fund should record the receipt by debiting Cash for $10,000 and by crediting

AACSB: Analytic

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AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-05 Understand and explain the basic differences in the measurement focus and basis of accounting between governmental and private sector accounting. Topic: Basis of Accounting-Governmental Funds

27.

Which combination of fund and measurement basis is correct?

A. Option A B. Option B C. Option C D. Option D

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28.

Revenues from parking meters and parking fines should be reported in the general fund when:

A. received. B. measurable and available. C. measurable and earned. D. available.

29.

The general fund of Gillette levied property taxes of $400,000 on November 1, 20X8. However, the property taxes are not collectible until May and August of 20X9. Assume Gillette reports on the calendar year. On Gillette's general fund balance sheet at December 31, 20X8, the property taxes levied on November 1 should:

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-05 Understand and explain the basic differences in the measurement focus and basis of accounting between governmental and private sector accounting. Topic: Basis of Accounting-Governmental Funds

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30.

Which of the following items is not recognized as revenue by a governmental unit?

A. sales tax proceeds B. property tax levies C. bond proceeds D. grants received from other governmental units

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31.

Note: This is a Kaplan CPA Review Question Pine City's year end is June 30. Pine levies property taxes in January of each year for the calendar year. One-half of the levy is due in May and one-half is due in October. Property tax revenue is budgeted for the period in which payment is due. The following information pertains to Pine's property taxes for the period from July 1, 20X4, to June 30, 20X5:

The $40,000 balance due for the May 20X5 installments was expected to be collected in August 20X5. What amount should Pine recognize for property tax revenue for the year ended June 30, 20X5?

A. $2,160,000 B. $2,200,000 C. $2,360,000 D. $2,400,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 17-05 Understand and explain the basic differences in the measurement focus and basis of accounting between governmental and private sector accounting. Topic: Basis of Accounting-Governmental Funds

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32.

Note: This is a Kaplan CPA Review Question The following information pertains to property taxes levied by Oak City for 20X4:

What amount should Oak report for 20X4 net property tax revenues?

A. $690,000 B. $700,000 C. $600,000 D. $500,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 17-05 Understand and explain the basic differences in the measurement focus and basis of accounting between governmental and private sector accounting. Topic: Basis of Accounting-Governmental Funds

33.

In a town's general fund operating budget for the year, the amount of its estimated revenues exceeded the amount of its appropriations. This excess should be:

A. credited to Budgetary Fund Balance—Unassigned. B. debited to Budgetary Fund Balance—Unassigned. C. credited to Fund Balance—Unassigned. D. debited to Fund Balance—Unassigned.

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AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-06 Understand and explain basic budgeting concepts in governmental accounting. Topic: Budgetary Aspects of Governmental Accounting

34.

The general fund of Caldwell had the following operating budget for the fiscal year beginning July 1, 20X9:

When the general fund records its operating budget on July 1, 20X9, Budgetary Fund Balance—Unassigned should be

A. credited for $600,000. B. debited for $900,000. C. debited for $600,000. D. credited for $900,000.

AACSB: Analytic AICPA FN: Decision Making Blooms: Apply Difficulty: 3 Hard Learning Objective: 17-06 Understand and explain basic budgeting concepts in governmental accounting. Topic: Budgetary Aspects of Governmental Accounting

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35.

Assuming there is a budget surplus, which of the following accounts are credited when the general fund records its operating budget at the beginning of the year?

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-06 Understand and explain basic budgeting concepts in governmental accounting. Topic: Budgetary Aspects of Governmental Accounting

36.

Note: This is a Kaplan CPA Review Question When the budget of a governmental unit, for which the estimated revenues exceed the appropriations, is adopted and recorded in the general ledger at the beginning of the year, the budgetary fund balance account is

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Understand Difficulty: 1 Easy Learning Objective: 17-06 Understand and explain basic budgeting concepts in governmental accounting. Topic: Budgetary Aspects of Governmental Accounting

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37.

Note: This is a Kaplan CPA Review Question A budgetary fund balance - assigned in excess of a balance of encumbrances indicates

A. A recording error. B. An excess of vouchers payable over encumbrances. C. An excess of purchase orders over invoices received. D. An excess of appropriations over encumbrances.

38.

Note: This is a Kaplan CPA Review Question The Board of Commissioners of Vane City adopted its budget for the year ending July 31, comprising estimated revenues of $30,000,000 and appropriations of $29,000,000. Vane formally integrates its budget into the accounting records. What entry should be made for budgeted revenues?

A. Memorandum entry only. B. Debit ESTIMATED REVENUES CONTROL, $30,000,000. C. Debit ESTIMATED REVENUES RECEIVABLE CONTROL, $30,000,000. D. Credit ESTIMATED REVENUES CONTROL, $30,000,000.

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 17-06 Understand and explain basic budgeting concepts in governmental accounting. Topic: Budgetary Aspects of Governmental Accounting

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39.

Note: This is a Kaplan CPA Review Question The Board of Commissioners of the City of Rockton adopted its budget for the year ending July 31, 20X2, which indicated revenues of $1,000,000 and appropriations of $900,000. If the budget is formally integrated into the accounting records, what is the required journal entry?

A. Option A B. Option B C. Option C D. Option D

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40.

What is the correct sequence in the expenditure process in governmental accounting?

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-07 Make calculations and record journal entries for the general fund. Topic: The Expenditure Process

41.

Which of the following observations concerning encumbrances is NOT true?

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-07 Make calculations and record journal entries for the general fund. Topic: The Expenditure Process

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42.

The City of Ames uses the consumption method to report its inventory of supplies on its general fund balance sheet. What account is debited in the general fund when Ames acquires supplies?

A. Expenditures B. Inventory of Supplies C. Supplies Expense D. Fund Balance—Nonspendable

43.

On July 25, 20X8, the city of Pullman, which reports on a calendar-year basis, ordered five police cars at an estimated cost of $200,000. On August 26, 20X8, the police cars were received, and the actual cost amounted to $197,000. Pullman encumbered the appropriation for police cars in its general fund when the cars were ordered. When the police cars were received, the general fund of Pullman should:

AACSB: Analytic AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-07 Make calculations and record journal entries for the general fund. Topic: Accounting for Fixed Assets

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44.

What amount should be reported as expenditures for the current fiscal year when accounting for inventories of supplies under the purchase method and under the consumption method?

A. Option A B. Option B C. Option C D. Option D

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45.

The Town of Pasco has no supplies inventory in its general fund on January 1, 20X8. During 20X8, Pasco incurred expenditures of $200,000 for the acquisition of supplies. On December 31, 20X8, Pasco's inventory of supplies amounted to $30,000. Assume Pasco uses the purchase method of accounting for supplies in its general fund and that the village reports on the calendar year. On December 31, 20X8, the general fund of Pasco should credit:

A. Expenditures for $170,000. B. Fund Balance—Unassigned for $170,000. C. Fund Balance—Nonspendable for $30,000. D. Expenditures for $30,000.

46.

The general fund of Park City acquired computer equipment at a cost of $50,000 on May 18, 20X9. To record acquisition of this equipment, the general fund of Park City should debit:

A. expenditures. B. encumbrances. C. equipment. D. vouchers payable.

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47.

Works of art and historical treasures purchased by the general fund should be reported as: I. an expenditure in the general fund. II. assets in the government-wide financial statements.

A. I only B. II only C. Both I and II D. Neither I nor II

48.

Identify the legal term that allows the general fund to make expenditures.

A. Exceptions B. Appropriations C. Encumbrances D. Consumption

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49.

The general fund of Hatteras acquired a fire truck during the fiscal year ended June 30, 20X9. The purchase order for the fire truck was recorded on February 15, 20X9. Hatteras' acquisition of the fire truck required which of the following sequences of accounting activities? I. Appropriation II. Encumbrance III. Expenditure

A. II, I, III. B. I, III, II. C. III, II, I. D. I, II, III.

50.

Blue Ridge Township uses the consumption method of accounting for its inventory of supplies. On the December 31, 20X7 balance sheet for the general fund, the township reported $10,000 of supplies inventory. During 20X8, expenditures for supplies amounted to $40,000, and, at December 31, 20X8, unused supplies totaled $7,000. In the adjusting entry for supplies at December 31, 20X8,

AACSB: Analytic

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AICPA FN: Decision Making Blooms: Apply Difficulty: 3 Hard Learning Objective: 17-07 Make calculations and record journal entries for the general fund. Topic: Expenditures for Inventory-Consumption Method

51.

Gotham City acquires $25,000 of inventory on November 1, 20X7, having held no inventory previously. On December 31, 20X7, the end of Gotham City's fiscal year, a physical count shows $8,000 still in stock. During 20X8, $6,500 of this inventory is used, resulting in a $1,500 remaining balance of supplies on December 31, 20X8. Based on the preceding information, which of the following would be the correct account balances for 20X7 if Gotham City used the purchase method of accounting for inventories?

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-07 Make calculations and record journal entries for the general fund. Topic: Expenditures for Inventory-Purchase Method

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52.

Gotham City acquires $25,000 of inventory on November 1, 20X7, having held no inventory previously. On December 31, 20X7, the end of Gotham City's fiscal year, a physical count shows $8,000 still in stock. During 20X8, $6,500 of this inventory is used, resulting in a $1,500 remaining balance of supplies on December 31, 20X8. Based on the preceding information, which of the following would be the correct account balances for 20X8 if Gotham City used the purchase method of accounting for inventories?

A. Option A B. Option B C. Option C D. Option D

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53.

A. Option A B. Option B C. Option C D. Option D

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54.

Gotham City acquires $25,000 of inventory on November 1, 20X7, having held no inventory previously. On December 31, 20X7, the end of Gotham City's fiscal year, a physical count shows $8,000 still in stock. During 20X8, $6,500 of this inventory is used, resulting in a $1,500 remaining balance of supplies on December 31, 20X8. Based on the preceding information, which of the following would be the correct account balances for 20X8 if Gotham City used the consumption method of accounting for inventories?

A. Option A B. Option B C. Option C D. Option D

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55.

Gotham City acquires $25,000 of inventory on November 1, 20X7, having held no inventory previously. On December 31, 20X7, the end of Gotham City's fiscal year, a physical count shows $8,000 still in stock. During 20X8, $6,500 of this inventory is used, resulting in a $1,500 remaining balance of supplies on December 31, 20X8. Which of the following accounts are debited when closing entries are made for the general fund (assume outstanding encumbrances lapse at year-end)? I. Appropriations Control. II. Estimated Revenues Control. III. Encumbrances. IV. Budgetary Fund Balance-Reserved for Encumbrances. V. Estimated Other Financing Uses-Transfer Out. VI. Revenue-Property Tax.

A. I, II, III, VI. B. I, II, IV. C. I, IV, V, VI. D. III, IV, V.

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56.

The general fund of Athens ordered computer equipment on December 1, 20X8, for $32,000. The order was appropriately encumbered on this date. Athens received the computer equipment on January 25, 20X9, and issued a voucher to pay the vendor $32,400. Athens uses the calendar year for reporting, and all outstanding encumbrances lapse at year-end. Athens' governing board honors all outstanding encumbrances by including them in the following year's appropriations. On January 25, 20X9, the general fund of Athens should debit:

A. Encumbrances for $32,000. B. Fund Balance—assigned for Encumbrances for $32,400. C. Expenditures-20X8 for $32,400. D. Expenditures for $32,400.

57.

The general fund of Loveland ordered a new fire truck on November 12, 20X8, for $150,000. The order was appropriately encumbered on this date. Loveland received the fire truck on January 15, 20X9, and issued a voucher to the manufacturer for $148,600. Loveland uses the calendar year for reporting, and outstanding encumbrances at December 31, 20X8, are lapsing. On January 15, 20X9, the general fund of Loveland should debit:

A. Fund Balance—assigned for Encumbrances for $148,600. B. Expenditures for $148,600. C. Expenditures-20X8 for $148,600. D. Encumbrances for $148,600.

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AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-07 Make calculations and record journal entries for the general fund. Topic: Outstanding Encumbrances Lapse at Year-End

58.

The general fund of Wold Township ordered office furniture for the mayor's office on August 1, 20X8. The office furniture was estimated to cost $12,000. The office furniture was received on September 1, 20X8, with the actual cost being $11,800. Which of the following accounts decreased on September 1, 20X8?

A. Encumbrances only. B. Expenditures only. C. Encumbrances and Budgetary Fund Balance—Assigned for Encumbrances. D. Expenditures and Budgetary Fund Balance—Assigned for Encumbrances.

59.

Due to an error, the general fund of Pueblo did not record an encumbrance for police equipment which had been ordered but not received on June 30, 20X9, the end of its fiscal year. Pueblo's outstanding encumbrances at year-end are nonlapsing. What was the effect of this error on the balance sheet of Pueblo's general fund?

A. Assets are overstated. B. Liabilities are understated. C. Total fund balance is overstated. D. Unassigned fund balance is overstated.

AACSB: Reflective Thinking

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AICPA FN: Decision Making Blooms: Apply Difficulty: 2 Medium Learning Objective: 17-07 Make calculations and record journal entries for the general fund. Topic: Outstanding Encumbrances Nonlapsing at Year-End

60.

GASB 31 "Accounting for Financial Reporting for Certain Investments and for External Reporting Investment Pools," establishes a general rule that government entities value investments in option contracts, open-ended mutual funds, and debt securities for balance sheet presentation at:

A. lower of cost or market. B. fair value. C. cost. D. amortized cost.

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61.

The general ledger of Broadway contains the following selected account balances:

Broadway wants to order additional goods and services before the fiscal year end. What is the unencumbered balance of the budget that may be expended by Broadway?

A. $850,000 B. $760,000 C. $180,000 D. $130,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 17-07 Make calculations and record journal entries for the general fund. Topic: The Expenditure Process

62.

At any time, the remaining appropriating authority available to the fund managers is equal to:

A. Appropriations minus Expenditures B. Appropriations minus (Encumbrances + Expenditures) C. Appropriations minus (Encumbrances - Expenditures) D. Appropriations minus Encumbrances

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-07 Make calculations and record journal entries for the general fund. 17-74 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Topic: The Expenditure Process

63.

Which of the following describes how a governmental fund (e.g. general fund) accounts for a capital lease:

A. noncurrent liability B. bond accounting C. an asset and a lease liability D. none of these identifies the appropriate way to account for a capital lease.

64.

Note: This is a Kaplan CPA Review Question The following balances are included in the subsidiary records of Burwood Village's Parks and Recreation Department at March 31st:

How much does the Department have available for additional purchases of supplies?

A. $0 B. $2,250 C. $3,000 D. $6,750

AACSB: Analytic

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AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 17-07 Make calculations and record journal entries for the general fund. Topic: The Expenditure Process

65.

Note: This is a Kaplan CPA Review Question Elm City issued a purchase order for supplies with an estimated cost of $5,000. When the supplies were received, the accompanying invoice indicated an actual price of $4,950. What amount should Elm debit (credit) to the budgetary fund balance account after the supplies and invoice were received?

A. $4,950 B. ($50) C. $50 D. $5,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 17-07 Make calculations and record journal entries for the general fund. Topic: The Expenditure Process

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66.

Note: This is a Kaplan CPA Review Question Albee Township's fiscal year ends on June 30. Albee uses encumbrance accounting. On April 5, 20X5, an approved $1,000 purchase order was issued for supplies. Albee received these supplies on May 2, 20X5, and the $1,000 invoice was approved for payment. What journal entry should Albee make on April 5, 20X5, to record the approved purchase order?

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 17-07 Make calculations and record journal entries for the general fund. Topic: The Expenditure Process

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67.

Note: This is a Kaplan CPA Review Question The following related entries were recorded in sequence in the general fund of a municipality:

The sequence of entries indicates that

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 3 Hard Learning Objective: 17-07 Make calculations and record journal entries for the general fund. Topic: The Expenditure Process

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68.

The general fund of the City of Columbia transferred money to establish an internal service fund for the city's data processing needs. The general fund of Columbia should account for this transaction as a(n):

A. expenditure. B. interfund transfer. C. interfund reimbursement. D. loan.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-08 Make calculations and record journal entries for basic interfund activities. Topic: Interfund Transfers

69.

The general fund of Richmond was billed $22,000 on August 15, 20X8, for using the services of one of its internal service funds (ISF). What accounts should be debited and credited, respectively, in the general fund on August 15, 20X8, to record this transaction?

A. Expenditures and Transfer Out to ISF B. Expenditures and Due to ISF C. Encumbrances and Due to ISF D. Encumbrances and Transfer Out to ISF

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-08 Make calculations and record journal entries for basic interfund activities. Topic: Interfund Services Provided and Used

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70.

The general fund of Battle Creek budgeted a transfer to its capital projects fund for $110,000 to be used in operations during the year ended June 20, 20X9. On September 15, 20X8, the general fund transferred $110,000 to the capital projects fund. What account should be debited in the general fund on September 15 to record this transfer?

A. Appropriations B. Expenditures C. Budgetary Fund Balance—Assigned For Encumbrances D. Other Financing Uses—Transfer Out to Capital Projects Fund

71.

The general fund of Sun City was billed $7,000 for using the services of one of its internal service funds. The general fund should account for this transaction as a(n)

A. interfund transfer. B. interfund loan. C. interfund service. D. interfund reimbursement for services rendered.

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72.

When an internal service fund (ISF) enters into a capital lease the transaction is recorded in the: I. fixed assets of the ISF. II. long-term debt of the ISF.

A. I only B. II only C. Both I and II D. Neither I nor II

73.

GASB 34 established four types of interfund activities. Interfund activities are recognized as revenue in a governmental fund for an:

A. Option A B. Option B C. Option C D. Option D

AACSB: Reflective Thinking AICPA FN: Decision Making

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Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-08 Make calculations and record journal entries for basic interfund activities. Topic: Interfund Loans Topic: Interfund Reimbursements Topic: Interfund Transfers

74.

Which of the following observations concerning interfund transfers is true?

Essay Questions

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75.

Accounting processes differ between a for-profit entity and a governmental entity. Discuss three differences between a governmental entity and a for-profit entity.

The major differences between a governmental entity and a for-profit entity include: • Governmental accounting must recognize that governmental units collect resources and make expenditures to fulfill societal needs. • Except for some proprietary activities such as utilities, governmental entities do not have a general profit motive. • Governmental operations have legal authorization for their existence, conduct revenue raising through the power of taxation, and have mandated expenditures they must make to provide their services. • Governmental entities use comprehensive budgetary accounting, which services as a significant control mechanism and provides the basis for comparing actual operations against budgeted amounts. • The primary emphasis in governmental fund accounting is to measure and report on management's stewardship of the financial resources committed to the objectives of the governmental unit. • Governmental entities typically are required to establish separate funds to carry out their various missions. • Many fund entities do not record fixed assets or long-term debt in their funds.

AACSB: Communication AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-01 Understand and explain the basic differences between governmental and private sector accounting. Topic: Differences between Governmental and Private Accounting

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76.

Briefly discuss the various types of governmental funds and proprietary funds.

Five types of governmental funds are used to provide basic governmental services to the public. These are: (1) general fund, (2) special revenue funds, (3) capital projects funds, (4) debt service funds, and (5) permanent funds. The number of governmental funds maintained by the governmental entity is based on its legal and operating requirements. The five governmental funds use the current financial resources measurement focus. The two types of proprietary funds typically used by governmental entities are (6) enterprise funds and (7) internal service funds. Some activities of a governmental unit are similar to those of commercial enterprises. The objective of the governmental unit is to recover its costs in such operations through a system of user charges. Accounting and reporting for a proprietary fund are similar to accounting for a commercial operation.

AACSB: Communication AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-03 Understand and explain the differences between the various governmental fund types. Topic: Definitions and Types of Funds

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77.

The adjusted trial balance for White River for the fiscal year ended June 30, 20X9, is presented below.

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 17-04 Understand and explain basic concepts for financial reporting in governmental accounting. Topic: Balance Sheet for Governmental Funds Topic: Statement of Revenues, Expenditures, and Changes in Fund Balance for Governmental Funds

78.

Discuss major differences between a governmental entity's uses of the modified accrual method and a for-profit corporation's use of the accrual method.

The modified accrual method of accounting is used to measure revenues that are available to finance current expenditures and to measure the expenditures made during the period. The accrual method is used to measure the revenues and expenses during a period with the purpose of measuring profitability.

AACSB: Communication AICPA BB: Critical Thinking Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-05 Understand and explain the basic differences in the measurement focus and basis of accounting between governmental and private sector accounting. Topic: Basis of Accounting

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79.

The town of Stow was incorporated and began governmental operations on July 1, 20X8. Stow's transactions and events for the fiscal year ended June 30, 20X9, are listed below. Stow uses the consumption method of accounting for purchases of supplies. Encumbrances do not lapse at year end. Required: Prepare the journal entry(ies) required in the general fund for each of the following transactions or events. a. The town budget was approved, providing for revenues of $800,000, a $40,000 transfer to establish an internal service fund (ISF), and expenditures of $750,000. b. Property taxes were levied in the amount of $700,000, with 4 percent of the total estimated to be uncollectible. c. Purchase orders were issued in the amount of $90,000 for equipment, and $635,000 for other goods and services. d. Collections for fines and licenses totaled $99,000 for the year. e. Property taxes collected amounted to $680,000; the balance was reclassified as delinquent, and the allowance for uncollectible taxes was reduced to $15,000. f. The equipment ordered was received, and a voucher was issued for the final invoice cost of $91,000. g. All but $12,000 of the other goods and services ordered was received. Vouchers were issued for the invoice cost of $622,000. h. All but $10,000 of the vouchers issued during the year was paid. i. A transfer in the amount of $40,000 was made to establish an internal service fund for the town. The general fund received services of $7,000 from the internal service fund during the year, with $2,000 remaining unpaid at year end. j. Expenditures recorded for the year included the purchase of supplies. The estimated balance of supplies on hand at year end was $2,000. k. A reserve was established at year end for the outstanding encumbrances, all of which will be honored in the next fiscal year. l. Closing entries were made.

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 17-07 Make calculations and record journal entries for the general fund. Topic: The Expenditure Process

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Chapter 18 Governmental Entities: Special Funds and Government-wide Financial Statements

Multiple Choice Questions

1. Which of the following funds use the accrual basis of accounting? I. Enterprise fund II. Agency fund III. Internal service fund

A. I only B. II only C. I and III only D. I, II, and III

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2. A special revenue fund should be used in which of the following situations for a state government?

A. For sales taxes which are to be distributed to towns, cities, villages, etc. of the state. B. For the proceeds of general obligation bonds which are to be used to construct major longlived fixed assets. C. For gasoline taxes which are to be used exclusively to repair state roads and bridges. D. For investments donated by a prominent citizen which are to be invested permanently, with income being used to support homeless people.

3. For which of the following funds are the principles and accounting most like those of the general fund?

A. Debt service fund B. Internal service fund C. Special revenue fund D. Investment trust fund

4. Which of the following items would not be reported on the financial statements of a special revenue fund?

A. Long-term productive assets. B. Expenditures and revenues. C. Vouchers payable and unreserved fund balance. D. Fund balance reserved for encumbrances and expenditures.

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5. A city's museum is supported by a special tax levy and by user charges. The user charges constitute only 10 percent of the resources needed to support the operations of the museum. In which fund should the city account for its museum?

A. An enterprise fund B. An agency fund C. An expendable trust fund D. A special revenue fund

6. Fixed assets and investments are reported in which of the following funds? I. Fiduciary fund II. Enterprise fund III. Internal Service funds IV. Capital Projects fund V. Debt Service fund

A. I, II, III B. II, IV, V C. I, II, V D. II, III, IV

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7. Which of the following funds report fixed assets on their balance sheets? I. Capital Projects fund II. Internal Service fund III. Enterprise fund IV. Agency funds

A. I, II B. II, III C. I, IV D. III, IV

8. Ponca City issued general obligation bonds to finance construction of a new city hall. In the city hall capital projects fund, the proceeds of the general obligation bonds should be credited to:

A. Revenue-General Obligation Bonds. B. General Obligation Bonds Payable. C. Deferred Revenue-General Obligation Bonds. D. Other Financing Sources-Bond Issue Proceeds.

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9. The City of Fargo issued general obligation bonds to finance construction of a new fire station. The bonds were issued at a discount. Which of the following is true? I. The amount expended for the improvement must be decreased. II. The general fund must make up the difference to the face value of the bonds. III. A debt service fund must make up the difference to the face value of the bonds.

A. I only B. Either I or III C. Either II or III D. Either I or II

10. The costs of a building being constructed by a capital projects fund should be debited, or charged, to which of the following accounts in the capital projects fund?

A. Expenditures. B. Building. C. Construction in Progress. D. Other Financing Uses.

11. When a capital projects fund transfers a premium from the issuance of general obligation bonds to another fund, the transfer should be accounted for as which type of interfund transaction or transfer?

A. As a loan. B. As an interfund transfer. C. As revenue. D. As a reimbursement.

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12. Upon completion of construction and full payment of all construction costs in a capital projects fund, the entry to record the transfer of any remaining cash should include a debit to: I. Contract Payable-Retained Percentage. II. Transfer Out to Debt Service Fund.

A. I only B. II only C. Either I or II D. Neither I nor II

13. On July 1, 20X8, Cleveland established a capital projects fund to construct a new town hall. Financing for construction came from the following sources:

Construction of the town hall was completed on June 15, 20X9. For the fiscal year ended June 30, 20X9, what amount should Cleveland's capital projects fund report for revenues on its statement of revenues, expenditures, and changes in fund balance?

A. $1,000,000 B. $1,500,000 C. $3,500,000 D. $14,500,000

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14. On the statement of revenues, expenditures, and changes in fund balance for a capital projects fund, proceeds of general obligation bonds should be reported:

A. in the revenue section of the statement. B. as a direct addition to the beginning balance of unreserved fund balance. C. in the other financing sources (uses) section of the statement. D. as a subtraction from construction expenditures.

15. The capital projects fund of Hood River completed construction of an addition to its city hall at a cost of $4,000,000. The city council approved payment of the amount due the general contractor, less a 10 percent retainage. How should the capital projects fund account for the 10 percent retainage? I. As a credit of $400,000 to Deferred Revenue-Retained Percentage. II. As a credit for $400,000 to Contracts Payable-Retained Percentage.

A. I only B. II only C. Either I or II D. Neither I nor II

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16. The capital projects fund of Hysham completed construction of a new building. The building should be reported in the: I. government-wide statement of net assets. II. capital projects fund.

A. I only B. II only C. Either I or II D. Neither I nor II

17. During the fiscal year ended June 30, 20X9, the city of Moorhead constructed a new courthouse which was budgeted to cost $5,000,000. Moorhead used a capital projects fund to account for the construction activities. In July of 20X8, a bid was accepted from Diamond Construction to build the courthouse for $4,800,000. On June 15, 20X9, Diamond completed construction and submitted a bill to the city for $4,900,000. The city accepted the bill and paid Diamond the entire amount owed, except for a 10 percentage retainage. On the statement of revenues, expenditures, and changes in fund balance prepared for the capital projects fund for the year ended June 30, 20X9, expenditures should be reported at

A. $4,900,000. B. $4,800,000. C. $4,410,000. D. $4,320,000.

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18. The town of Decorah issued general obligation serial bonds at par to finance construction of several new streets in the town. Construction activity was accounted for in a capital projects fund. On the date the general obligation serial bonds were issued, what account was credited in Decorah's capital projects fund?

A. Serial Bonds Payable B. Due to Debt Service Fund C. Revenues D. Other Financing Sources-Bond Issue Proceeds

19. Note: This is a Kaplan CPA Review Question Financing for the renovation of Fir City's municipal park, begun and completed during 20X4, came from the following sources:

In its 20X4 capital projects fund operating statement, Fir should report these amounts as:

A. Option A B. Option B C. Option C D. Option D

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20. Note: This is a Kaplan CPA Review Question In 20X4, Menton City received $5,000,000 of bond proceeds to be used for capital projects. Of this amount, $1,000,000 was expended in 20X4. Expenditures for the $4,000,000 balance were expected to be incurred in 20X5. These bond proceeds should be recorded in capital projects funds for:

A. $5,000,000 in 20X4. B. $5,000,000 in 20X5. C. $1,000,000 in 20X4 and $4,000,000 in 20X5. D. $1,000,000 in 20X4 and in the general fund for $4,000,000 in 20X4.

21. Note: This is a Kaplan CPA Review Question Lisa County issued $5,000,000 of general obligation bonds at 101 to finance a capital project. The $50,000 premium was to be used for payment of principal and interest. This transaction should be accounted for in the:

A. debt service funds and the general long-term debt account group only. B. capital projects funds, debt service funds, and the general long-term debt account group. C. capital projects funds and debt service funds only. D. debt service funds only.

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22. A debt service fund for the City of Madison received $50,000 from a capital projects fund. The amount received represented the premium received from the issuance of general obligation bonds. What account should the debt service fund credit to record this receipt?

A. Revenue-General Obligation Bond Premium. B. Matured Bonds Payable. C. Other Financing Sources—Transfer In from Capital Projects Fund. D. Due to Capital Projects Fund.

23. The City of Fargo issued general obligation bonds to finance construction of a new fire station. The bonds were issued at a premium. In the fire station capital projects fund, the premium should be transferred to:

A. an agency fund. B. a special revenue fund. C. a debt service fund. D. an expendable trust fund.

24. For which of the following long-term debt obligations would payments not be accounted for in a debt service fund?

A. Notes and warrants secured by specific tax revenues. B. Special assessment bonds sold to acquire enterprise fund assets. C. Notes and warrants. D. Special assessment bonds may be used to finance capital projects.

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25. A debt service fund of Clifton received $100,000 from its general fund during the fiscal year ended June 30, 20X9. The cash was used to pay matured interest on Clifton's general obligation bonds, which were issued to finance construction of a new municipal building. On the statement of revenues, expenditures, and changes in fund balance prepared for the debt service fund for the year ended June 30, 20X9, the amount received from the general fund should be reported as:

A. revenue. B. a reduction of expenditures. C. another financing source. D. matured interest payments.

26. What account is debited in a debt service fund when it records matured interest payable? I. Interest Expense II. Expenditures

A. I only B. II only C. Either I or II D. Neither I nor II

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27. On the statement of revenues, expenditures, and changes in fund balance prepared for a debt service fund, the cash paid to retire matured serial bonds is reported as: I. expenditures. II. a direct deduction from unreserved fund balance.

A. I only B. II only C. Either I or II D. Neither I nor II

28. Arlington has a debt service fund which it uses to pay the principal and interest on its $2,000,000 of general long-term debt. Interest at 5 percent is due on October 1 and April 1. On October 1, 20X8, and April 1, 20X9, Arlington's debt service fund paid $50,000 of interest due on its bonds. On the balance sheet prepared on June 30, 20X9, for Arlington's debt service fund, interest payable should be reported at:

A. $0. B. $16,667. C. $25,000 D. $50,000.

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29. What account should be debited in the debt service fund to recognize an installment payment currently due on general obligation serial bonds? I. Matured Bonds Payable. II. Expenditures-Principal.

A. I B. II C. Either I or II D. Neither I nor II

30. As of May 30, 20X9, the debt service fund of Cody had accumulated $52,000 of assets in a debt service fund to pay the principal of its currently maturing serial bonds. On June 1, 20X9, $50,000 of serial bonds matured and were paid with the resources accumulated in the debt service fund. In Cody's debt service fund, Matured Bonds Payable was debited for $50,000 and:

A. Cash was credited for $50,000. B. Due to General Fund was credited for $50,000. C. Investments was credited for $50,000. D. Reserve for Encumbrances was credited for $50,000.

31. Which of the following statement is true regarding permanent funds?

A. Permanent funds do not have any donor restrictions when they are established. B. Permanent funds have a donor restriction on the fund principal but the income from the fund may be used to benefit the government's program. C. Permanent funds have a donor restriction on the income generated from the fund principal but the principal may be used to benefit the government's program D. The cash or accrual basis of accounting may be used to account for a permanent fund.

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32. On January 1, 20X1, Washington City received 200,000 from an estate with the stipulation that the money be invested and the income be used to provide maintenance to the city cemetery. The money was invested in 7% governmental securities at 90 to yield an effective interest rate of 10%. The following journal entry would be made to account for the accrued interest of the permanent fund:

A. Option A B. Option B C. Option C D. Option D

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33. Required financial statements of funds may include the following, among others: I. Statement of net assets II. Statement of revenues, expenditures, and changes in fund balances III. Balance sheet IV. Statement of cash flows The financial statements that should be issued by governmental funds and by proprietary funds include the following:

A. Option A B. Option B C. Option C D. Option D

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34. At June 30, 20X9, total assets for the various funds of a local municipality were as follows:

Applying GASB 34 criteria, which of the above are major funds for reporting purposes?

A. GF, CPF, EF B. CPF, EF C. CPF, ISF, EF D. GF, CPF, ISF, EF

35. GASB 34 specifies two criteria for determining major governmental funds to be reported separately in the Governmental Fund Balance Sheet and Statement of Revenues, Expenditures, and Changes in Fund Balances. To be considered a major governmental fund, a fund must:

A. meet at least one criterion. B. be the general fund or meet at least one criterion. C. be the general fund or meet two criteria. D. either meet at least one criterion or be the general fund or meet two criteria.

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36. On October 15, 20X8, an enterprise fund of Blacksburg purchased office supplies at a cost of $10,000. The inventory of office supplies on hand at the June 30, 20X9, fiscal year end was $4,000. There was no beginning inventory. Blacksburg should make entries that include:

A. debiting Supplies $10,000 at October 15, and debiting Expenses $4,000 on June 30. B. debiting Expenditures $10,000 at October 15, and debiting Supplies $4,000 at June 30. C. debiting Supplies $10,000 at October 15, and crediting Supplies $6,000 on June 30. D. debiting Expenditures $10,000 at October 15, and crediting Expenses $4,000 at June 30.

37. The costs of enterprise fund activities are recovered

A. from special tax levies. B. from federal or state governmental grants. C. by user charges. D. by private donations.

38. An enterprise fund of Grist was billed $10,000 for using the services of an internal service fund's data processing center. What account should Grist's enterprise fund debit to record this billing?

A. Due to Internal Service Fund B. Expenditures C. Transfer Out to Internal Service Fund D. General Operating Expenses

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39. During the fiscal year ended June 30, 20X9, an enterprise fund of St. Cloud acquired computer equipment costing $110,000 on account and issued $400,000 of long-term bonds. Revenues of the enterprise fund will be used to repay bond interest and principal. What effect did these transactions have on St. Cloud's enterprise fund assets and long-term debt?

A. Option A B. Option B C. Option C D. Option D

40. Which of the following characteristics best describes an enterprise fund?

A. Capital maintenance, revenues from general public user charges, and net income. B. Operating budgets, expenditures, and tax revenues from general public. C. Capital maintenance, revenues from user charges to other funds, and net income. D. Capital maintenance, tax revenues from general public, and net income.

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41. Note: This is a Kaplan CPA Review Question Fixed assets of an enterprise fund should be accounted for in the

A. Enterprise fund but no depreciation on the fixed assets should be recorded. B. General fixed asset account group but no depreciation on the fixed assets should be recorded. C. General fixed asset account group and depreciation on the fixed assets should be recorded. D. Enterprise fund and depreciation on the fixed assets should be recorded.

42. Which of the following financial statements would not be prepared for an enterprise fund?

A. A statement of cash flows. B. A statement of revenues, expenses, and changes in fund net assets. C. A balance sheet. D. A statement of revenues, expenditures, and changes in fund balance.

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43. The following information pertains to Auburn's water and sewer fund, an enterprise fund, for the year ended June 30, 20X9:

Based upon the information presented, what was the increase in the enterprise funds unrestricted net assets for the fiscal year ended June 30, 20X9?

A. $200,000 B. $240,000 C. $300,000 D. $320,000

44. On the statement of cash flows prepared for an internal service fund, cash received from customers and cash paid for operating expenses should be reported as

A. investing activities. B. operating activities. C. noncapital financing activities. D. capital and related financing activities.

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45. An internal service fund had the following transactions during the year ended June 30, 20X9, its first year of existence: (1) Received $1,000,000 contribution from the general fund. (2) Acquired fleet of cars for $950,000, paying cash. (3) Billed departments in other funds $500,000 for using cars. (4) Incurred operating costs, exclusive of depreciation, of $240,000. (5) Depreciation expense amounted to $250,000. Refer to the above information. On the internal service fund's balance sheet on June 30, 20X9, total net assets should be reported at:

A. $1,000,000. B. $1,010,000. C. $1,250,000. D. $910,000.

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46. An internal service fund had the following transactions during the year ended June 30, 20X9, its first year of existence: (1) Received $1,000,000 contribution from the general fund. (2) Acquired fleet of cars for $950,000, paying cash. (3) Billed departments in other funds $500,000 for using cars. (4) Incurred operating costs, exclusive of depreciation, of $240,000. (5) Depreciation expense amounted to $250,000. Refer to the above information. On the internal service fund's balance sheet at June 30, 20X9, net assets-unrestricted should be reported at:

A. $260,000. B. $310,000. C. $550,000. D. $1,250,000.

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47. Note: This is a Kaplan CPA Review Question The following transactions were among those reported by Cliff County's water and sewer enterprise fund for 20X4:

In the water and sewer enterprise fund's statement of cash flows for the year ended December 31, 20X4, what amount should be reported as cash flows from capital and related financing activities?

A. $9,000,000 B. $6,000,000 C. $8,000,000 D. $5,000,000

48. Enterprise and internal service funds should recognize revenues when they are

A. received in cash. B. available and earned. C. measurable and earned. D. measurable and available.

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49. Carlisle established a motor vehicle service and maintenance fund to service and maintain all cars and trucks owned by the town. Revenues of the fund will only come from billings to the funds which use the motor vehicle service and maintenance fund. What type of fund is the motor vehicle service and maintenance fund?

A. An enterprise fund. B. A special revenue fund. C. An expendable trust fund. D. An internal service fund.

50. Note: This is a Kaplan CPA Review Question The billings for transportation services provided to other governmental units are recorded by the internal service fund as

A. Intergovernmental transfers. B. Interfund exchanges. C. Charges for services. D. Transportation appropriations.

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51. The City of Warwick received $4,000,000 from one of its most prominent citizens during the year ended June 30, 20X9. The donor stipulated that the $4,000,000 be invested permanently, and that interest and dividends earned on the investments be used to support the homeless people of Warwick. During the year ended June 30, 20X9, dividends received from stock investments amounted to $20,000, while interest received from bond investments amounted to $40,000. At June 30, 20X9, $10,000 of interest was earned, but it will not be received until July of 20X9. The fair value of the securities in which the $4,000,000 was invested had increased $8,000 by June 30, 20X9. Refer to the above information. For the year ended June 30, 20X9, what amount should the trust fund report as investment earnings on the statement of revenues, expenses, and changes in fund balance?

A. $60,000 B. $68,000 C. $70,000 D. $78,000

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52. The City of Warwick received $4,000,000 from one of its most prominent citizens during the year ended June 30, 20X9. The donor stipulated that the $4,000,000 be invested permanently, and that interest and dividends earned on the investments be used to support the homeless people of Warwick. During the year ended June 30, 20X9, dividends received from stock investments amounted to $20,000, while interest received from bond investments amounted to $40,000. At June 30, 20X9, $10,000 of interest was earned, but it will not be received until July of 20X9. The fair value of the securities in which the $4,000,000 was invested had increased $8,000 by June 30, 20X9. Refer to the above information. On the statement of fiduciary net assets at June 30, 20X9, the nonexpendable trust fund should report investments and interest receivable of:

A. Option A B. Option B C. Option C D. Option D

53. A trust fund of Bruge City received $100,000 from a donor during the year ended June 30, 20X9. During the year ended June 30, 20X9, $94,000 of the cash received was used to provide food and clothing to the city's poor. How should the trust fund report these resource flows on its statement of changes in fiduciary net assets for the year ended June 30, 20X9?

A. As revenues of $100,000 and as expenditures of $94,000. B. As contributions for $100,000 and as deductions for benefits for $94,000. C. As revenues of $100,000 and as an operating transfer out for $94,000. D. As a transfer in from trust fund for $100,000 and as a transfer out for $94,000.

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54. A tax collection fund that collects property taxes and then distributes them to local governmental units is an example of a(n):

A. trust fund. B. agency fund. C. internal service fund. D. permanent fund.

55. Agency funds report:

A. only assets and liabilities. B. assets, liabilities, fund balance, revenues, and expenditures. C. assets, liabilities, and fund balance. D. only revenues and expenditures.

56. Note: This is a Kaplan CPA Review Question A state government collected income taxes of $8,000,000 for the benefit of one of its cities that imposes an income tax on its residents. The state remitted these collections periodically to the city. The state should account for the $8,000,000 in the

A. General fund. B. Agency funds. C. Internal service funds. D. Special assessment funds.

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57. Riviera Township reported the following data for its governmental activities for the year ended June 30, 20X9:

Additional information available is as follows: All of the long-term debt was used to acquire capital assets. Cash of $475,000 is restricted for debt service. Based on the preceding information, on the statement of net assets prepared at June 30, 20X9, what amount should be reported for total net assets?

A. $2,425,000 B. $4,200,000 C. $2,900,000 D. $3,625,000

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58. Riviera Township reported the following data for its governmental activities for the year ended June 30, 20X9:

A. $4,200,000 B. $2,900,000 C. $2,825,000 D. $3,300,000

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59. Riviera Township reported the following data for its governmental activities for the year ended June 30, 20X9:

A. $425,000 B. $900,000 C. $525,000 D. $825,000

60. A citizen of York purchased a truck in 20X3 for $50,000. On June 10, 20X9, she donated the truck to York. The fair value of the truck on the date of donation was $30,000. How should York report the truck in its government-wide Statement of Net Assets?

A. Machinery and equipment should be increased $50,000. B. Machinery and equipment should be increased $30,000. C. Machinery and equipment should be decreased $20,000. D. No asset should be reported because no expenditures were made to acquire the truck.

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61. The general fund of Reston acquired computer equipment costing $70,000 during the fiscal year ended June 30, 20X9. Machinery and Equipment should be reported in Reston's General Fund Balance Sheet and government-wide Statement of Net Assets at June 30, 20X9, as follows:

A. Option A B. Option B C. Option C D. Option D

62. Which of the following fiduciary funds does not require a statement of changes in net assets? I. Private-purpose trust fund II. Agency fund.

A. I only B. II only C. Both I and II D. Neither I nor II

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63. Government-wide financial statements prepared for a municipality include the following:

A. Option A B. Option B C. Option C D. Option D

64. Revenue and expense on a government-wide statement of activities for a municipality should be measured on a(n)

A. cash basis. B. modified accrual basis. C. accrual basis. D. reconciliation basis.

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65. The government-wide financial statements prepared for a municipality should include assets acquired by the following funds:

A. Option A B. Option B C. Option C D. Option D

66. The statement of changes in fiduciary net assets includes all of the following except:

A. employee benefit trust funds. B. investment trust funds. C. private-purpose trust funds. D. agency funds.

67. Which presentation method combines the component unit's results into the primary government's financial results?

A. Blended presentation B. Discrete presentation C. Combined presentation D. Consolidated presentation

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68. Note: This is a Kaplan CPA Review Question In government-wide statement of activities, special items are transactions or other events that are:

A. unusual in nature or infrequent in occurrence and within management's control. B. unusual in nature or infrequent in occurrence and not within management's control. C. unusual in nature and infrequent in occurrence and within management's control. D. unusual in nature and infrequent in occurrence.

69. Note: This is a Kaplan CPA Review Question Under GASB 34, capital assets and non-current debt are:

A. reported in the government-wide statement of net assets. B. reported in the fixed asset and long-term debt group of accounts. C. reported in the governmental funds balance sheet. D. no longer reported under GASB 34.

70. A budgetary comparison schedule presented as required supplementary information for the general fund should report variances for the difference between: I. Original budget amounts and final budget amounts II. Final budget amounts and actual amounts.

A. I only B. II only C. Both I and II D. Neither I nor II

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71. In accordance with the Single Audit Act of 1984, external auditors issue the standard audit report on the governmental unit's financial statements and must also issue: I. a special report on the effectiveness with which the governmental unit is achieving its social objectives. II. a special report on the governmental unit's internal control system. III. a special report on the governmental unit's compliance with laws and regulations.

A. I only B. I and II C. II and III D. I, II, and III

72. Which of the following items is optional information for a special-purpose governmental entity when issuing financial reports?

A. Management's Discussion and Analysis B. Footnotes to the financial reports C. Supplementary Information to the financial reports D. All of these are required.

73. Note: This is a Kaplan CPA Review Question GASB 34 requires budgetary comparison schedules

A. Be reported for the general fund and each major special revenue fund with a legally adopted budget. B. Be reported for all proprietary funds. C. Be reported for the permanent funds. D. Should not be reported.

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Essay Questions

74. The City of Edmond established a capital projects fund for the construction of a reading room for the City Library. The estimated cost of the construction is $300,000. On January 1, 20X8, an 8 percent, $200,000 bond issue was sold at 102. At that date, the county board provided a $100,000 grant. On March 3, 20X8, the premium from issuance of the bonds was transferred to the debt service fund established to repay the bond principal and interest. On March 1, 20X8, a general contractor's bid was accepted to construct the facility at a cost of $270,000. The construction was completed on October 5, 20X8; its actual cost was $285,000. The city council approved payment of the total actual cost of $285,000. In addition to the $285,000, $9,000 was spent to make the facility ready for use. On November 3, 20X8, the city council gave the final approval for both these payments. After all bills were paid, the remaining fund balance was transferred to the debt service fund. Required a. Prepare entries for the capital projects fund for 20X8. b. Prepare a statement of revenues, expenditures, and changes in fund balance for 20X8 for the capital projects fund.

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75. Required: For each transaction described below for the current fiscal year of the Town of Golden, use an "x" to indicate the fund(s) in which a journal entry should appear, and whether separate information should be kept for General Long Term Debt or General Fixed Assets.

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76. Prior to closing the accounts at the end of the most recent fiscal year, the Town of Sonora reports the following amounts (in thousands):

Required: Applying the criteria specified in GASB 34, determine which of the above funds should be classified as major funds for reporting purposes.

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77. Akron established an internal service fund for its data processing activities on July 1, 20X8. During the fiscal year ended June 30, 20X9, the following transactions and events occurred: 1) On July 1, 20X8, the city council authorized the general fund to contribute $1,000,000 to help establish the internal service fund on July 20, 20X8. 2) The internal service fund spent $900,000 of the contribution to acquire a mainframe computer on July 25, 20X8. 3) During the year ended June 30, 20X9, the internal service billed other funds of the city $300,000 for use of the computer. By year end, all of the billings were collected except for $30,000. 4) The internal service fund incurred general operating expenses of $100,000, exclusive of depreciation, during the year ended June 30, 20X9. All of the expenses were paid by June 30, 20X9, except for $24,000. 5) Depreciation expense related to the computer was $180,000. Required: A) Prepare all journal entries that would be recorded by Akron's internal service fund for the year ended June 30, 20X9. Explanations for journal entries are not necessary. B) Prepare a statement of revenues, expenses, and changes in fund net assets for the internal service fund for the year ended June 30, 20X9. C) Calculate the amount of unrestricted net assets at June 30, 20X9.

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78. Newport Village was recently incorporated and began financial operations on January 1, 20X8, the beginning of its fiscal year. The following transactions occurred during this first fiscal year, January 1, 20X8, to December 31, 20X8: 1. The village council adopted a budget for general operations for the fiscal year ending December 31, 20X8. Revenue was estimated at $650,000. Legal authorizations for budgeted expenditures totaled $620,000. 2. Property taxes were levied in the amount of $630,000; 3 percent of this amount was estimated to prove uncollectible. These taxes are available as of the date of levy to finance current expenditures. 3. During the year, a village resident donated marketable securities valued at $75,000 to the village under the terms of a trust agreement which stipulates that the principal amount be kept intact. The revenue generated by the securities is restricted to providing support to the village library. Revenue earned and received on these amounted to $3,000 through December 31, 20X8. 4. A general fund transfer of $8,000 was made to establish an internal service fund to provide for a permanent investment in inventory. 5. The village decided to construct a small recreation facility through a special assessment project authorized to do so at a cost of $100,000. The city is obligated if the property owners default on their special assessments. Special assessment bonds were issued in the amount of $90,000, and the first year's special assessment of $22,500 was levied against the village's property owners. The remaining $10,000 for the project will be contributed from the village's general fund. 6. The special assessments for the lighting project are due over a four-year period, and the first year's assessments of $22,500 were collected. The $10,000 transfer from the village's general fund was received by the lighting capital projects fund. 7. A contract for $100,000 was let for the installation of the lighting. The capital projects fund was encumbered for the contract. On December, 20X8, the contract was completed and the contractor was paid. 8. During the year, the internal service fund purchased various supplies at a cost of $3,000. 9. Current property taxes collected during the year was $615,000. Licenses and permit fees collected amounted to $15,000. The allowance for estimated uncollectible taxes is adjusted to $15,000.

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Required: Prepare journal entries to record each of these transactions in the appropriate fund or funds of Newport Village for the fiscal year ended December 31, 20X8. Use the following funds: general fund, capital projects fund, internal service fund, and private-purpose trust fund. Closing entries are not required. Organize your answer using the following format:

79. GASB 34 requires a Reconciliation schedule for the Statement of Net Assets. What does this schedule document?

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Chapter 18 Governmental Entities: Special Funds and Governmentwide Financial Statements Answer Key

Multiple Choice Questions

Which of the following funds use the accrual basis of accounting? I. Enterprise fund II. Agency fund III. Internal service fund

A. I only B. II only C. I and III only D. I, II, and III

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-01 Understand and explain the differences in financial reporting requirements of the different fund types. Topic: Governmental and other Funds

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A special revenue fund should be used in which of the following situations for a state government?

A. For sales taxes which are to be distributed to towns, cities, villages, etc. of the state. B. For the proceeds of general obligation bonds which are to be used to construct major long-lived fixed assets. C. For gasoline taxes which are to be used exclusively to repair state roads and bridges. D. For investments donated by a prominent citizen which are to be invested permanently, with income being used to support homeless people.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 18-01 Understand and explain the differences in financial reporting requirements of the different fund types. Topic: Special Revenue Funds

For which of the following funds are the principles and accounting most like those of the general fund?

A. Debt service fund B. Internal service fund C. Special revenue fund D. Investment trust fund

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Which of the following items would not be reported on the financial statements of a special revenue fund?

A. Long-term productive assets. B. Expenditures and revenues. C. Vouchers payable and unreserved fund balance. D. Fund balance reserved for encumbrances and expenditures.

A city's museum is supported by a special tax levy and by user charges. The user charges constitute only 10 percent of the resources needed to support the operations of the museum. In which fund should the city account for its museum?

A. An enterprise fund B. An agency fund C. An expendable trust fund D. A special revenue fund

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Fixed assets and investments are reported in which of the following funds? I. Fiduciary fund II. Enterprise fund III. Internal Service funds IV. Capital Projects fund V. Debt Service fund

A. I, II, III B. II, IV, V C. I, II, V D. II, III, IV

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 18-01 Understand and explain the differences in financial reporting requirements of the different fund types. Topic: Governmental and other Funds

Which of the following funds report fixed assets on their balance sheets? I. Capital Projects fund II. Internal Service fund III. Enterprise fund IV. Agency funds

A. I, II B. II, III C. I, IV D. III, IV

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AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 18-01 Understand and explain the differences in financial reporting requirements of the different fund types. Topic: Governmental and other Funds

Ponca City issued general obligation bonds to finance construction of a new city hall. In the city hall capital projects fund, the proceeds of the general obligation bonds should be credited to:

A. Revenue-General Obligation Bonds. B. General Obligation Bonds Payable. C. Deferred Revenue-General Obligation Bonds. D. Other Financing Sources-Bond Issue Proceeds.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 18-02 Make calculations and record journal entries for capital projects funds. Topic: Capital Projects Funds

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The City of Fargo issued general obligation bonds to finance construction of a new fire station. The bonds were issued at a discount. Which of the following is true? I. The amount expended for the improvement must be decreased. II. The general fund must make up the difference to the face value of the bonds. III. A debt service fund must make up the difference to the face value of the bonds.

A. I only B. Either I or III C. Either II or III D. Either I or II

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-02 Make calculations and record journal entries for capital projects funds. Topic: Capital Projects Funds

10.

The costs of a building being constructed by a capital projects fund should be debited, or charged, to which of the following accounts in the capital projects fund?

A. Expenditures. B. Building. C. Construction in Progress. D. Other Financing Uses.

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11.

When a capital projects fund transfers a premium from the issuance of general obligation bonds to another fund, the transfer should be accounted for as which type of interfund transaction or transfer?

A. As a loan. B. As an interfund transfer. C. As revenue. D. As a reimbursement.

12.

Upon completion of construction and full payment of all construction costs in a capital projects fund, the entry to record the transfer of any remaining cash should include a debit to: I. Contract Payable-Retained Percentage. II. Transfer Out to Debt Service Fund.

A. I only B. II only C. Either I or II D. Neither I nor II

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13.

On July 1, 20X8, Cleveland established a capital projects fund to construct a new town hall. Financing for construction came from the following sources:

A. $1,000,000 B. $1,500,000 C. $3,500,000 D. $14,500,000

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Apply Difficulty: 3 Hard Learning Objective: 18-02 Make calculations and record journal entries for capital projects funds. Topic: Capital Projects Funds

14.

On the statement of revenues, expenditures, and changes in fund balance for a capital projects fund, proceeds of general obligation bonds should be reported:

AACSB: Reflective Thinking

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AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-02 Make calculations and record journal entries for capital projects funds. Topic: Capital Projects Funds

15.

The capital projects fund of Hood River completed construction of an addition to its city hall at a cost of $4,000,000. The city council approved payment of the amount due the general contractor, less a 10 percent retainage. How should the capital projects fund account for the 10 percent retainage? I. As a credit of $400,000 to Deferred Revenue-Retained Percentage. II. As a credit for $400,000 to Contracts Payable-Retained Percentage.

A. I only B. II only C. Either I or II D. Neither I nor II

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16.

The capital projects fund of Hysham completed construction of a new building. The building should be reported in the: I. government-wide statement of net assets. II. capital projects fund.

A. I only B. II only C. Either I or II D. Neither I nor II

17.

During the fiscal year ended June 30, 20X9, the city of Moorhead constructed a new courthouse which was budgeted to cost $5,000,000. Moorhead used a capital projects fund to account for the construction activities. In July of 20X8, a bid was accepted from Diamond Construction to build the courthouse for $4,800,000. On June 15, 20X9, Diamond completed construction and submitted a bill to the city for $4,900,000. The city accepted the bill and paid Diamond the entire amount owed, except for a 10 percentage retainage. On the statement of revenues, expenditures, and changes in fund balance prepared for the capital projects fund for the year ended June 30, 20X9, expenditures should be reported at

A. $4,900,000. B. $4,800,000. C. $4,410,000. D. $4,320,000.

AACSB: Analytic

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AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 18-02 Make calculations and record journal entries for capital projects funds. Topic: Capital Projects Funds

18.

The town of Decorah issued general obligation serial bonds at par to finance construction of several new streets in the town. Construction activity was accounted for in a capital projects fund. On the date the general obligation serial bonds were issued, what account was credited in Decorah's capital projects fund?

A. Serial Bonds Payable B. Due to Debt Service Fund C. Revenues D. Other Financing Sources-Bond Issue Proceeds

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19.

Note: This is a Kaplan CPA Review Question Financing for the renovation of Fir City's municipal park, begun and completed during 20X4, came from the following sources:

In its 20X4 capital projects fund operating statement, Fir should report these amounts as:

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 18-02 Make calculations and record journal entries for capital projects funds. Topic: Capital Projects Funds

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20.

Note: This is a Kaplan CPA Review Question In 20X4, Menton City received $5,000,000 of bond proceeds to be used for capital projects. Of this amount, $1,000,000 was expended in 20X4. Expenditures for the $4,000,000 balance were expected to be incurred in 20X5. These bond proceeds should be recorded in capital projects funds for:

A. $5,000,000 in 20X4. B. $5,000,000 in 20X5. C. $1,000,000 in 20X4 and $4,000,000 in 20X5. D. $1,000,000 in 20X4 and in the general fund for $4,000,000 in 20X4.

21.

Note: This is a Kaplan CPA Review Question Lisa County issued $5,000,000 of general obligation bonds at 101 to finance a capital project. The $50,000 premium was to be used for payment of principal and interest. This transaction should be accounted for in the:

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember

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Difficulty: 1 Easy Learning Objective: 18-02 Make calculations and record journal entries for capital projects funds. Learning Objective: 18-03 Make calculations and record journal entries for debt service funds. Topic: Capital Projects Funds Topic: Debt Service Funds

22.

A debt service fund for the City of Madison received $50,000 from a capital projects fund. The amount received represented the premium received from the issuance of general obligation bonds. What account should the debt service fund credit to record this receipt?

A. Revenue-General Obligation Bond Premium. B. Matured Bonds Payable. C. Other Financing Sources—Transfer In from Capital Projects Fund. D. Due to Capital Projects Fund.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 18-03 Make calculations and record journal entries for debt service funds. Topic: Debt Service Funds

23.

The City of Fargo issued general obligation bonds to finance construction of a new fire station. The bonds were issued at a premium. In the fire station capital projects fund, the premium should be transferred to:

A. an agency fund. B. a special revenue fund. C. a debt service fund. D. an expendable trust fund.

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Learning Objective: 18-03 Make calculations and record journal entries for debt service funds. Topic: Debt Service Funds

24.

For which of the following long-term debt obligations would payments not be accounted for in a debt service fund?

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-03 Make calculations and record journal entries for debt service funds. Topic: Debt Service Funds

25.

A debt service fund of Clifton received $100,000 from its general fund during the fiscal year ended June 30, 20X9. The cash was used to pay matured interest on Clifton's general obligation bonds, which were issued to finance construction of a new municipal building. On the statement of revenues, expenditures, and changes in fund balance prepared for the debt service fund for the year ended June 30, 20X9, the amount received from the general fund should be reported as:

A. revenue. B. a reduction of expenditures. C. another financing source. D. matured interest payments.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy

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Learning Objective: 18-03 Make calculations and record journal entries for debt service funds. Topic: Debt Service Funds

26.

What account is debited in a debt service fund when it records matured interest payable? I. Interest Expense II. Expenditures

A. I only B. II only C. Either I or II D. Neither I nor II

27.

On the statement of revenues, expenditures, and changes in fund balance prepared for a debt service fund, the cash paid to retire matured serial bonds is reported as: I. expenditures. II. a direct deduction from unreserved fund balance.

A. I only B. II only C. Either I or II D. Neither I nor II

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Learning Objective: 18-03 Make calculations and record journal entries for debt service funds. Topic: Debt Service Funds

28.

Arlington has a debt service fund which it uses to pay the principal and interest on its $2,000,000 of general long-term debt. Interest at 5 percent is due on October 1 and April 1. On October 1, 20X8, and April 1, 20X9, Arlington's debt service fund paid $50,000 of interest due on its bonds. On the balance sheet prepared on June 30, 20X9, for Arlington's debt service fund, interest payable should be reported at:

A. $0. B. $16,667. C. $25,000 D. $50,000.

29.

What account should be debited in the debt service fund to recognize an installment payment currently due on general obligation serial bonds? I. Matured Bonds Payable. II. Expenditures-Principal.

A. I B. II C. Either I or II D. Neither I nor II

AACSB: Reflective Thinking AICPA FN: Decision Making

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Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-03 Make calculations and record journal entries for debt service funds. Topic: Debt Service Funds

30.

As of May 30, 20X9, the debt service fund of Cody had accumulated $52,000 of assets in a debt service fund to pay the principal of its currently maturing serial bonds. On June 1, 20X9, $50,000 of serial bonds matured and were paid with the resources accumulated in the debt service fund. In Cody's debt service fund, Matured Bonds Payable was debited for $50,000 and:

A. Cash was credited for $50,000. B. Due to General Fund was credited for $50,000. C. Investments was credited for $50,000. D. Reserve for Encumbrances was credited for $50,000.

31.

Which of the following statement is true regarding permanent funds?

AACSB: Reflective Thinking AICPA FN: Decision Making

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Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-04 Make calculations and record journal entries for permanent funds. Topic: Permanent Funds

32.

On January 1, 20X1, Washington City received 200,000 from an estate with the stipulation that the money be invested and the income be used to provide maintenance to the city cemetery. The money was invested in 7% governmental securities at 90 to yield an effective interest rate of 10%. The following journal entry would be made to account for the accrued interest of the permanent fund:

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 18-04 Make calculations and record journal entries for permanent funds. Topic: Permanent Funds

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33.

Required financial statements of funds may include the following, among others: I. Statement of net assets II. Statement of revenues, expenditures, and changes in fund balances III. Balance sheet IV. Statement of cash flows The financial statements that should be issued by governmental funds and by proprietary funds include the following:

A. Option A B. Option B C. Option C D. Option D

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 18-05 Understand and explain how governmental funds are reported and rules for separate reporting as major funds. Learning Objective: 18-07 Understand and explain the financial reporting of proprietary funds. Topic: Financial Statements for the Proprietary Funds Topic: Governmental Funds Financial Statements

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34.

At June 30, 20X9, total assets for the various funds of a local municipality were as follows:

Applying GASB 34 criteria, which of the above are major funds for reporting purposes?

A. GF, CPF, EF B. CPF, EF C. CPF, ISF, EF D. GF, CPF, ISF, EF

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Apply Difficulty: 3 Hard Learning Objective: 18-05 Understand and explain how governmental funds are reported and rules for separate reporting as major funds. Topic: Governmental Funds Financial Statements

35.

GASB 34 specifies two criteria for determining major governmental funds to be reported separately in the Governmental Fund Balance Sheet and Statement of Revenues, Expenditures, and Changes in Fund Balances. To be considered a major governmental fund, a fund must:

AACSB: Reflective Thinking AICPA FN: Decision Making

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Blooms: Understand Difficulty: 2 Medium Learning Objective: 18-05 Understand and explain how governmental funds are reported and rules for separate reporting as major funds. Topic: Governmental Funds Financial Statements

36.

On October 15, 20X8, an enterprise fund of Blacksburg purchased office supplies at a cost of $10,000. The inventory of office supplies on hand at the June 30, 20X9, fiscal year end was $4,000. There was no beginning inventory. Blacksburg should make entries that include:

AACSB: Analytic AICPA FN: Decision Making Blooms: Apply Difficulty: 3 Hard Learning Objective: 18-06 Make calculations and record journal entries for enterprise funds. Topic: Enterprise Funds

37.

The costs of enterprise fund activities are recovered

A. from special tax levies. B. from federal or state governmental grants. C. by user charges. D. by private donations.

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Learning Objective: 18-06 Make calculations and record journal entries for enterprise funds. Topic: Enterprise Funds

38.

An enterprise fund of Grist was billed $10,000 for using the services of an internal service fund's data processing center. What account should Grist's enterprise fund debit to record this billing?

A. Due to Internal Service Fund B. Expenditures C. Transfer Out to Internal Service Fund D. General Operating Expenses

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 18-06 Make calculations and record journal entries for enterprise funds. Topic: Enterprise Funds

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39.

During the fiscal year ended June 30, 20X9, an enterprise fund of St. Cloud acquired computer equipment costing $110,000 on account and issued $400,000 of long-term bonds. Revenues of the enterprise fund will be used to repay bond interest and principal. What effect did these transactions have on St. Cloud's enterprise fund assets and longterm debt?

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA FN: Decision Making Blooms: Apply Difficulty: 3 Hard Learning Objective: 18-06 Make calculations and record journal entries for enterprise funds. Topic: Enterprise Funds

40.

Which of the following characteristics best describes an enterprise fund?

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand

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Difficulty: 2 Medium Learning Objective: 18-06 Make calculations and record journal entries for enterprise funds. Topic: Enterprise Funds

41.

Note: This is a Kaplan CPA Review Question Fixed assets of an enterprise fund should be accounted for in the

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-06 Make calculations and record journal entries for enterprise funds. Topic: Enterprise Funds

42.

Which of the following financial statements would not be prepared for an enterprise fund?

A. A statement of cash flows. B. A statement of revenues, expenses, and changes in fund net assets. C. A balance sheet. D. A statement of revenues, expenditures, and changes in fund balance.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-07 Understand and explain the financial reporting of proprietary funds. Topic: Financial Statements for the Proprietary Funds

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43.

The following information pertains to Auburn's water and sewer fund, an enterprise fund, for the year ended June 30, 20X9:

Based upon the information presented, what was the increase in the enterprise funds unrestricted net assets for the fiscal year ended June 30, 20X9?

A. $200,000 B. $240,000 C. $300,000 D. $320,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 18-07 Understand and explain the financial reporting of proprietary funds. Topic: Financial Statements for the Proprietary Funds

44.

On the statement of cash flows prepared for an internal service fund, cash received from customers and cash paid for operating expenses should be reported as

A. investing activities. B. operating activities. C. noncapital financing activities. D. capital and related financing activities.

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Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-07 Understand and explain the financial reporting of proprietary funds. Topic: Financial Statements for the Proprietary Funds

45.

An internal service fund had the following transactions during the year ended June 30, 20X9, its first year of existence: (1) Received $1,000,000 contribution from the general fund. (2) Acquired fleet of cars for $950,000, paying cash. (3) Billed departments in other funds $500,000 for using cars. (4) Incurred operating costs, exclusive of depreciation, of $240,000. (5) Depreciation expense amounted to $250,000. Refer to the above information. On the internal service fund's balance sheet on June 30, 20X9, total net assets should be reported at:

A. $1,000,000. B. $1,010,000. C. $1,250,000. D. $910,000.

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46.

An internal service fund had the following transactions during the year ended June 30, 20X9, its first year of existence: (1) Received $1,000,000 contribution from the general fund. (2) Acquired fleet of cars for $950,000, paying cash. (3) Billed departments in other funds $500,000 for using cars. (4) Incurred operating costs, exclusive of depreciation, of $240,000. (5) Depreciation expense amounted to $250,000. Refer to the above information. On the internal service fund's balance sheet at June 30, 20X9, net assets-unrestricted should be reported at:

A. $260,000. B. $310,000. C. $550,000. D. $1,250,000.

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47.

Note: This is a Kaplan CPA Review Question The following transactions were among those reported by Cliff County's water and sewer enterprise fund for 20X4:

In the water and sewer enterprise fund's statement of cash flows for the year ended December 31, 20X4, what amount should be reported as cash flows from capital and related financing activities?

A. $9,000,000 B. $6,000,000 C. $8,000,000 D. $5,000,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 18-07 Understand and explain the financial reporting of proprietary funds. Topic: Financial Statements for the Proprietary Funds

48.

Enterprise and internal service funds should recognize revenues when they are

A. received in cash. B. available and earned. C. measurable and earned. D. measurable and available.

AACSB: Reflective Thinking AICPA FN: Decision Making

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Blooms: Remember Difficulty: 2 Medium Learning Objective: 18-06 Make calculations and record journal entries for enterprise funds. Learning Objective: 18-08 Make calculations and record journal entries for internal service funds. Topic: Enterprise Funds Topic: Internal Service Funds

49.

Carlisle established a motor vehicle service and maintenance fund to service and maintain all cars and trucks owned by the town. Revenues of the fund will only come from billings to the funds which use the motor vehicle service and maintenance fund. What type of fund is the motor vehicle service and maintenance fund?

A. An enterprise fund. B. A special revenue fund. C. An expendable trust fund. D. An internal service fund.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-08 Make calculations and record journal entries for internal service funds. Topic: Internal Service Funds

50.

Note: This is a Kaplan CPA Review Question The billings for transportation services provided to other governmental units are recorded by the internal service fund as

A. Intergovernmental transfers. B. Interfund exchanges. C. Charges for services. D. Transportation appropriations.

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AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-08 Make calculations and record journal entries for internal service funds. Topic: Internal Service Funds

51.

The City of Warwick received $4,000,000 from one of its most prominent citizens during the year ended June 30, 20X9. The donor stipulated that the $4,000,000 be invested permanently, and that interest and dividends earned on the investments be used to support the homeless people of Warwick. During the year ended June 30, 20X9, dividends received from stock investments amounted to $20,000, while interest received from bond investments amounted to $40,000. At June 30, 20X9, $10,000 of interest was earned, but it will not be received until July of 20X9. The fair value of the securities in which the $4,000,000 was invested had increased $8,000 by June 30, 20X9. Refer to the above information. For the year ended June 30, 20X9, what amount should the trust fund report as investment earnings on the statement of revenues, expenses, and changes in fund balance?

A. $60,000 B. $68,000 C. $70,000 D. $78,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 18-09 Make calculations and record journal entries for trust funds. Topic: Trust Funds

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52.

The City of Warwick received $4,000,000 from one of its most prominent citizens during the year ended June 30, 20X9. The donor stipulated that the $4,000,000 be invested permanently, and that interest and dividends earned on the investments be used to support the homeless people of Warwick. During the year ended June 30, 20X9, dividends received from stock investments amounted to $20,000, while interest received from bond investments amounted to $40,000. At June 30, 20X9, $10,000 of interest was earned, but it will not be received until July of 20X9. The fair value of the securities in which the $4,000,000 was invested had increased $8,000 by June 30, 20X9. Refer to the above information. On the statement of fiduciary net assets at June 30, 20X9, the nonexpendable trust fund should report investments and interest receivable of:

A. Option A B. Option B C. Option C D. Option D

AACSB: Analytic AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 18-09 Make calculations and record journal entries for trust funds. Topic: Trust Funds

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53.

A trust fund of Bruge City received $100,000 from a donor during the year ended June 30, 20X9. During the year ended June 30, 20X9, $94,000 of the cash received was used to provide food and clothing to the city's poor. How should the trust fund report these resource flows on its statement of changes in fiduciary net assets for the year ended June 30, 20X9?

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 18-09 Make calculations and record journal entries for trust funds. Topic: Trust Funds

54.

A tax collection fund that collects property taxes and then distributes them to local governmental units is an example of a(n):

A. trust fund. B. agency fund. C. internal service fund. D. permanent fund.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-10 Make calculations and record journal entries for agency funds. Topic: Agency Funds

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55.

Agency funds report:

A. only assets and liabilities. B. assets, liabilities, fund balance, revenues, and expenditures. C. assets, liabilities, and fund balance. D. only revenues and expenditures.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-10 Make calculations and record journal entries for agency funds. Topic: Agency Funds

56.

Note: This is a Kaplan CPA Review Question A state government collected income taxes of $8,000,000 for the benefit of one of its cities that imposes an income tax on its residents. The state remitted these collections periodically to the city. The state should account for the $8,000,000 in the

A. General fund. B. Agency funds. C. Internal service funds. D. Special assessment funds.

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-10 Make calculations and record journal entries for agency funds. Topic: Agency Funds

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57.

Riviera Township reported the following data for its governmental activities for the year ended June 30, 20X9:

A. $2,425,000 B. $4,200,000 C. $2,900,000 D. $3,625,000

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 18-11 Understand and explain the preparation of government-wide financial statements. Topic: Statement of Net Assets

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58.

Riviera Township reported the following data for its governmental activities for the year ended June 30, 20X9:

A. $4,200,000 B. $2,900,000 C. $2,825,000 D. $3,300,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 18-11 Understand and explain the preparation of government-wide financial statements. Topic: Statement of Net Assets

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59.

Riviera Township reported the following data for its governmental activities for the year ended June 30, 20X9:

A. $425,000 B. $900,000 C. $525,000 D. $825,000

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60.

A citizen of York purchased a truck in 20X3 for $50,000. On June 10, 20X9, she donated the truck to York. The fair value of the truck on the date of donation was $30,000. How should York report the truck in its government-wide Statement of Net Assets?

AACSB: Analytic AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 18-11 Understand and explain the preparation of government-wide financial statements. Topic: Statement of Net Assets

61.

The general fund of Reston acquired computer equipment costing $70,000 during the fiscal year ended June 30, 20X9. Machinery and Equipment should be reported in Reston's General Fund Balance Sheet and government-wide Statement of Net Assets at June 30, 20X9, as follows:

A. Option A B. Option B C. Option C D. Option D

AACSB: Reflective Thinking AICPA FN: Decision Making

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Blooms: Understand Difficulty: 2 Medium Learning Objective: 18-11 Understand and explain the preparation of government-wide financial statements. Topic: Statement of Net Assets

62.

Which of the following fiduciary funds does not require a statement of changes in net assets? I. Private-purpose trust fund II. Agency fund.

A. I only B. II only C. Both I and II D. Neither I nor II

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-10 Make calculations and record journal entries for agency funds. Learning Objective: 18-11 Understand and explain the preparation of government-wide financial statements. Topic: Agency Funds Topic: Statement of Net Assets

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63.

Government-wide financial statements prepared for a municipality include the following:

A. Option A B. Option B C. Option C D. Option D

64.

Revenue and expense on a government-wide statement of activities for a municipality should be measured on a(n)

A. cash basis. B. modified accrual basis. C. accrual basis. D. reconciliation basis.

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65.

The government-wide financial statements prepared for a municipality should include assets acquired by the following funds:

A. Option A B. Option B C. Option C D. Option D

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 18-11 Understand and explain the preparation of government-wide financial statements. Topic: Statement of Net Assets

66.

The statement of changes in fiduciary net assets includes all of the following except:

A. employee benefit trust funds. B. investment trust funds. C. private-purpose trust funds. D. agency funds.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-11 Understand and explain the preparation of government-wide financial statements. Topic: Statement of Net Assets 18-83 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

67.

Which presentation method combines the component unit's results into the primary government's financial results?

A. Blended presentation B. Discrete presentation C. Combined presentation D. Consolidated presentation

68.

Note: This is a Kaplan CPA Review Question In government-wide statement of activities, special items are transactions or other events that are:

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69.

Note: This is a Kaplan CPA Review Question Under GASB 34, capital assets and non-current debt are:

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-11 Understand and explain the preparation of government-wide financial statements. Topic: Statement of Net Assets

70.

A budgetary comparison schedule presented as required supplementary information for the general fund should report variances for the difference between: I. Original budget amounts and final budget amounts II. Final budget amounts and actual amounts.

A. I only B. II only C. Both I and II D. Neither I nor II

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-12 Understand and explain the additional disclosures that accompany government-wide financial statements. Topic: Budgetary Comparison Schedule

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71.

In accordance with the Single Audit Act of 1984, external auditors issue the standard audit report on the governmental unit's financial statements and must also issue: I. a special report on the effectiveness with which the governmental unit is achieving its social objectives. II. a special report on the governmental unit's internal control system. III. a special report on the governmental unit's compliance with laws and regulations.

A. I only B. I and II C. II and III D. I, II, and III

72.

Which of the following items is optional information for a special-purpose governmental entity when issuing financial reports?

A. Management's Discussion and Analysis B. Footnotes to the financial reports C. Supplementary Information to the financial reports D. All of these are required.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 18-12 Understand and explain the additional disclosures that accompany government-wide financial

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statements. Topic: Special-Purpose Governmental Entities

73.

Note: This is a Kaplan CPA Review Question GASB 34 requires budgetary comparison schedules

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-12 Understand and explain the additional disclosures that accompany government-wide financial statements. Topic: Budgetary Comparison Schedule

Essay Questions

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74.

The City of Edmond established a capital projects fund for the construction of a reading room for the City Library. The estimated cost of the construction is $300,000. On January 1, 20X8, an 8 percent, $200,000 bond issue was sold at 102. At that date, the county board provided a $100,000 grant. On March 3, 20X8, the premium from issuance of the bonds was transferred to the debt service fund established to repay the bond principal and interest. On March 1, 20X8, a general contractor's bid was accepted to construct the facility at a cost of $270,000. The construction was completed on October 5, 20X8; its actual cost was $285,000. The city council approved payment of the total actual cost of $285,000. In addition to the $285,000, $9,000 was spent to make the facility ready for use. On November 3, 20X8, the city council gave the final approval for both these payments. After all bills were paid, the remaining fund balance was transferred to the debt service fund. Required a. Prepare entries for the capital projects fund for 20X8. b. Prepare a statement of revenues, expenditures, and changes in fund balance for 20X8 for the capital projects fund.

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18-89 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard

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Learning Objective: 18-02 Make calculations and record journal entries for capital projects funds. Learning Objective: 18-03 Make calculations and record journal entries for debt service funds. Topic: Capital Projects Funds Topic: Debt Service Funds

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75.

Required: For each transaction described below for the current fiscal year of the Town of Golden, use an "x" to indicate the fund(s) in which a journal entry should appear, and whether separate information should be kept for General Long Term Debt or General Fixed Assets.

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76.

Prior to closing the accounts at the end of the most recent fiscal year, the Town of Sonora reports the following amounts (in thousands):

Required: Applying the criteria specified in GASB 34, determine which of the above funds should be classified as major funds for reporting purposes.

The major funds for reporting purposes are the General Fund, the Capital Projects Fund, the Internal Service Fund, and the Enterprise Fund—Hydro, determined as follows: 1) GASB 34 states that the General Fund is always a major fund. 2) The following criteria apply to other governmental (includes Internal Service Fund) or enterprise funds: a. Total assets, liabilities, revenues, or expenditures/expenses of the individual governmental or enterprise fund are at least 10 percent of the governmental or enterprise category; in this case, the totals are:

b. Total assets, liabilities, revenues, or expenditures/expenses of the individual governmental or enterprise fund are at least 5 percent of the total for all governmental and enterprise funds combined; in this case, the total is: 18-94 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Application of the 10 percent and 5 percent tests (must meet both of the percentage tests for at least one of the four financial statement items): * for example, assets of $100 < $115 ** for example, assets of $100 < $150 *** both tests are met for expenditures

AACSB: Analytic AICPA FN: Reporting Blooms: Apply Difficulty: 3 Hard Learning Objective: 18-03 Make calculations and record journal entries for debt service funds. Learning Objective: 18-05 Understand and explain how governmental funds are reported and rules for separate reporting as major funds. Learning Objective: 18-08 Make calculations and record journal entries for internal service funds. Topic: Debt Service Funds Topic: Governmental Funds Financial Statements Topic: Internal Service Funds

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77.

Akron established an internal service fund for its data processing activities on July 1, 20X8. During the fiscal year ended June 30, 20X9, the following transactions and events occurred: 1) On July 1, 20X8, the city council authorized the general fund to contribute $1,000,000 to help establish the internal service fund on July 20, 20X8. 2) The internal service fund spent $900,000 of the contribution to acquire a mainframe computer on July 25, 20X8. 3) During the year ended June 30, 20X9, the internal service billed other funds of the city $300,000 for use of the computer. By year end, all of the billings were collected except for $30,000. 4) The internal service fund incurred general operating expenses of $100,000, exclusive of depreciation, during the year ended June 30, 20X9. All of the expenses were paid by June 30, 20X9, except for $24,000. 5) Depreciation expense related to the computer was $180,000. Required: A) Prepare all journal entries that would be recorded by Akron's internal service fund for the year ended June 30, 20X9. Explanations for journal entries are not necessary. B) Prepare a statement of revenues, expenses, and changes in fund net assets for the internal service fund for the year ended June 30, 20X9. C) Calculate the amount of unrestricted net assets at June 30, 20X9.

a) Journal entries for the year ended June 30, 20X9

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18-97 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 18-08 Make calculations and record journal entries for internal service funds. Topic: Internal Service Funds

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78.

Newport Village was recently incorporated and began financial operations on January 1, 20X8, the beginning of its fiscal year. The following transactions occurred during this first fiscal year, January 1, 20X8, to December 31, 20X8: 1. The village council adopted a budget for general operations for the fiscal year ending December 31, 20X8. Revenue was estimated at $650,000. Legal authorizations for budgeted expenditures totaled $620,000. 2. Property taxes were levied in the amount of $630,000; 3 percent of this amount was estimated to prove uncollectible. These taxes are available as of the date of levy to finance current expenditures. 3. During the year, a village resident donated marketable securities valued at $75,000 to the village under the terms of a trust agreement which stipulates that the principal amount be kept intact. The revenue generated by the securities is restricted to providing support to the village library. Revenue earned and received on these amounted to $3,000 through December 31, 20X8. 4. A general fund transfer of $8,000 was made to establish an internal service fund to provide for a permanent investment in inventory. 5. The village decided to construct a small recreation facility through a special assessment project authorized to do so at a cost of $100,000. The city is obligated if the property owners default on their special assessments. Special assessment bonds were issued in the amount of $90,000, and the first year's special assessment of $22,500 was levied against the village's property owners. The remaining $10,000 for the project will be contributed from the village's general fund. 6. The special assessments for the lighting project are due over a four-year period, and the first year's assessments of $22,500 were collected. The $10,000 transfer from the village's general fund was received by the lighting capital projects fund. 7. A contract for $100,000 was let for the installation of the lighting. The capital projects fund was encumbered for the contract. On December, 20X8, the contract was completed and the contractor was paid. 8. During the year, the internal service fund purchased various supplies at a cost of $3,000. 9. Current property taxes collected during the year was $615,000. Licenses and permit fees collected amounted to $15,000. The allowance for estimated uncollectible taxes is

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adjusted to $15,000. Required: Prepare journal entries to record each of these transactions in the appropriate fund or funds of Newport Village for the fiscal year ended December 31, 20X8. Use the following funds: general fund, capital projects fund, internal service fund, and private-purpose trust fund. Closing entries are not required. Organize your answer using the following format:

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 18-08 Make calculations and record journal entries for internal service funds. Learning Objective: 18-09 Make calculations and record journal entries for trust funds. Topic: Internal Service Funds Topic: Trust Funds

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79.

GASB 34 requires a Reconciliation schedule for the Statement of Net Assets. What does this schedule document?

This schedule describes the adjustments necessary to move from the modified accrual method used in the governmental funds to the accrual basis that is used in the government-wide statements.

AACSB: Communication AICPA FN: Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 18-12 Understand and explain the additional disclosures that accompany government-wide financial statements. Topic: Reconciliation Schedules

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Chapter 19 Not-for-Profit Entities

Multiple Choice Questions

1. A not-for-profit organization received a donation temporarily restricted as to use. The donated amount was later spent in accordance with the restriction. In which category(ies) of net assets should the related revenues and expenses be recognized?

A. Option A B. Option B C. Option C D. Option D

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2. According to ASC 958, Not-For-Profit entities should recognize depreciation/amortization: I. on all long-lived tangible assets. II. on all long-lived intangible assets.

A. I only B. II only C. Both I and II D. Neither I nor II

3. Which of the following is an example of volunteer services received by a not-for-profit entity that should be recognized as revenue? I. Services requiring specialized skills, provided by individuals with those skills, that otherwise would have to be purchased. II. Services of lay faculty at a private university operated by a religious order. III. Services that create or enhance non-financial assets, regardless of whether or not they require specialized skills.

A. I only B. I and III only C. II and III only D. I, II, and III

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4. Which of the following recognition and measurement bases best summarizes the usual treatment of current contributions to private not-for-profit entities in accordance with ASC 958?

A. Option A B. Option B C. Option C D. Option D

5. According to ASC 958, not-for-profit entities should report investments in the financial statements at: I. fair market value. II. lower of cost or market.

A. I only B. II only C. Either I or II D. Neither I nor II

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6. Investment income for not-for-profit entities may include: I. interest from debt investments. II. dividends from equity investments. III. changes in the fair values of both debt and equity investments.

A. I only B. I and II only C. I and III only D. I, II, and III

7. One of the major objectives of ASC 958 is to

A. emphasize the different fund structures that currently exist for all private, nonprofit organizations. B. change the reporting for governmental organizations so that their reporting is comparable to that of private, nonprofit organizations. C. report combined financial statements, instead of individual fund financial statements, for all private, nonprofit organizations. D. bring about greater uniformity in the financial statements of all private, not-for-profit organizations.

8. A private, not-for-profit geographic society received cash contributions which were restricted by the donors for the acquisition of fixed assets. In which section of the statement of cash flows would these cash contributions be reported?

A. Financing activities B. Investing activities C. Operating activities D. Capital and related financing activities

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9. On the statement of activities for a private, not-for-profit literary society, expenses decrease which of the following classes of net assets? I. temporarily restricted net assets II. unrestricted net assets

A. I only B. II only C. Either I or II D. Neither I nor II

10. In accordance with ASC 958, contributions of services are recognized as increases in unrestricted net assets by a private, not for profit entity if which of the following criteria are satisfied? I. The services received create or enhance nonfinancial assets. II. The services require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donations. III. The services will be performed within the current fiscal year.

A. I or II. B. I or III. C. II or III. D. I, II, III.

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11. Note: This is a Kaplan CPA Review Question Gray College, a private not-for-profit institution, received a contribution of $100,000 for faculty research. The donation was received in 20X1 and $80,000 was spent in 20X1. As a result of these transactions, Gray College should report on its 20X1 statement of activities a:

A. $100,000 increase in temporarily restricted net assets. B. $20,000 increase in temporarily restricted net assets. C. $80,000 increase in temporarily restricted net assets. D. $100,000 increase in unrestricted net assets.

12. Which rule-making body is currently setting standards of financial reporting for private notfor-profit universities and for public (governmental) universities?

A. Option A B. Option B C. Option C D. Option D

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13. The term "restricted" as used in university accounting refers to a constraint on the use of funds which has been: I. internally imposed. II. externally imposed.

A. I only B. II only C. Either I or II D. Neither I nor II

14. According to ASC 958, the statement of financial position of a private university should report the excess of the university's assets over its liabilities as:

A. fund balance. B. unrestricted and restricted fund balance. C. retained earnings. D. unrestricted, temporarily restricted, and permanently restricted net assets.

15. In a university, class cancellation refunds of tuition and fees should be recorded as: I. a reduction of revenue from tuition and fees. II. a reduction of accounts receivable.

A. I only B. II only C. Either I or II D. Neither I nor II

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16. A private university received $280,000 from student tuition and fees for the year 20X9 summer session. The session began on June 20, 20X9, and ended on July 30, 20X9. The university's fiscal year end is June 30. According to the AICPA College and University Audit Guide, how should the university report the $280,000 of receipts in its financial statements for the year ended June 30, 20X9?

A. Current revenue of $280,000. B. Current revenue of $70,000 and deferred revenue of $210,000. C. Deferred revenue of $280,000. D. Restricted current revenue of $280,000.

17. Assume that a private university collects tuition and fees at the beginning of summer school, in which two weeks are offered in the first fiscal year and the remaining six weeks are offered in the second fiscal year. According to the approach recommended by the National Association of College and University Business Officers (NACUBO), the university would:

A. record the collections as a debit to Cash and a credit to Deferred Revenue for the entire amount of the collections. B. record the collections as a debit to Cash and a credit to Restricted current revenue for the entire amount of the collections. C. account for the entire tuition and fees as revenue in the first fiscal period. D. recognize revenue in the first fiscal period for two-eighths of the tuition and fees and record six-eighths of the collections as a deferred revenue.

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18. A private university offers graduate assistantships to qualified students each year. In exchange for the waiver of tuition, graduate assistants are required to assist faculty members with research and other activities. Assume a graduate assistant received a $4,000 tuition waiver for the current academic year. Based on these facts, the university should record

A. tuition revenues of $4,000 and expenditures of $4,000. B. tuition revenues of $0 and expenditures of $0. C. tuition revenues of $4,000 and expenditures of $0. D. tuition revenues of $4,000 and a reduction of tuition revenues of $4,000.

19. For the year ended June 30, 20X9, a university assessed its students a total of $4,000,000 for tuition and fees. Included in this amount was $300,000 of tuition remissions awarded to graduate teaching assistants, and $150,000 of scholarships awarded to undergraduate students. Tuition and fees totaling $3,550,000 were collected during the year ended June 30, 20X9. What amount should be reported in the unrestricted fund as net revenue from tuition and fees for the year ended June 30, 20X9?

A. $4,000,000 B. $3,550,000 C. $3,700,000 D. $3,850,000

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20. A private not-for-profit university generally must depreciate all tangible fixed assets, except: I. works of art and other historical treasures. II. administration buildings.

A. I only B. II only C. Both I and II D. Neither I nor II

21. A private college received an offer from a CPA who is an alumnus to teach a one-semester advanced accounting course at no cost. ASC 958 prescribes that this contribution of service:

A. need only be disclosed in the footnotes to the financial statements. B. be recorded as an asset with an equivalent amount recorded in the unrestricted fund balance. C. be recorded as a revenue with an equivalent amount recorded as an expenditure. D. need not be recorded if the service is for a period less than one academic year.

22. In accordance with ASC 958, contributions from donors which are to be permanently invested should be disclosed on the statement of activities of a private university as an increase in:

A. Permanently restricted net assets. B. Permanently restricted fund balance. C. Endowment fund balance. D. Deferred revenues.

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23. For the year ended June 30, 20X9, a private college received contributions from alumni which were restricted for faculty research stipends to be awarded during the next fiscal year. For the year ended June 30, 20X9, these contributions should be disclosed on the statement of activities of the private college as an increase in:

A. the fund balance of the restricted current fund. B. temporarily restricted net assets. C. deferred revenues. D. temporarily restricted fund balance.

24. A private, not-for-profit university should prepare which of the following financial statements? I. statement of financial position. II. statement of activities. III. statement of changes in fund balances. IV. statement of cash flows. V. statement of changes in financial position.

A. I, II, and III. B. II, III, and IV. C. I, II, and IV. D. II, III, and V.

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25. Unrestricted gifts and endowment income of a private university are reported as

A. increases in the unrestricted current fund balance on the statement of changes in fund balances. B. unrestricted revenues on the statement of current funds revenues, expenditures, and other changes. C. unrestricted revenues on the statement of activities. D. increases in the unrestricted current fund balance on the statement of activities.

26. A not-for-profit private college in Virginia created a separate foundation responsible for obtaining financial support from alumni and others. Foundation assets are used for the benefit of the college. Donations made to the foundation and subsequently transferred to the college should be:

A. recognized as revenues by the foundation when received, and as revenues of the college when transferred. B. recognized as revenues by the foundation when received and as expenses by the foundation when transferred. C. recognized both as a change in its interest in the foundation and as revenues by the college when the donation is received by the foundation. D. recognized as an increase in net assets of the foundation and as revenues of the college when the donation is received by the college.

27. Unrestricted current funds of a private university designated by the governing board for a specific future purpose should be reported as part of:

A. unrestricted net assets. B. temporarily restricted net assets. C. board-restricted net assets. D. term endowments.

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28. Note: This is a Kaplan CPA Review Question The statement of financial position for a private not-for-profit college should show separate dollar amounts for

A. Unrestricted net assets, temporarily restricted net assets, and permanently restricted net assets. B. All accounts in its equity section. C. Unrestricted net assets only. D. Unrestricted net assets and temporarily restricted net assets.

29. Note: This is a Kaplan CPA Review Question Clay University, a not-for-profit university, earned $300,000 from bookstore revenue and spent $100,000 for faculty research in 20X1. The $100,000 for faculty research came from a $150,000 research grant received in the previous year. What is the effect of these events on unrestricted net assets in 20X1?

A. Increase $450,000 B. Increase $400,000 C. Increase $300,000 D. Increase $200,000

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30. Note: This is a Kaplan CPA Review Question In 20X1, Ellen College, a private not-for-profit institution, received a $100,000 grant for faculty research. The grant money was not spent until 20X2. For 20X1, Ellen College should report the contribution as:

A. Temporarily restricted asset. B. Unrestricted revenue. C. Other operating revenue. D. Other non-operating revenue.

31. Net assets restricted as to time or purpose should be classified as: I. temporarily restricted. II. permanently restricted.

A. I only B. II only C. Both I and II D. Neither I nor II

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32. On the statement of operations prepared for a private, not-for-profit hospital, patient service revenue earned during the year is reported net of amounts for which of the following items? I. Contractual adjustments II. Bad debts expense

A. I only B. II only C. I and II D. Neither I nor II

33. A private, not-for-profit hospital received a cash contribution of $100,000 from Samantha Hicks on November 14, 20X8. Ms. Hicks specified the money be used to acquire equipment. On December 31, 20X8, the hospital had not expended any of Ms. Hicks' contribution. On the statement of changes in net assets for the year ended December 31, 20X8, the hospital should report the contribution as a $100,000 increase in

A. temporarily restricted net assets. B. unrestricted net assets. C. fund balance. D. deferred revenue.

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34. Bridger Hospital, which is operated by a religious organization, provides charity care for the indigent living in the region served by the hospital. How should Bridger report the amount of its charity care on its financial statements?

A. In the notes to the financial statements only. B. As unrestricted revenues on the statement of operations. C. As net patient service revenue and as an expense, equal to the net patient service revenue, on the statement of operations. D. As temporarily restricted revenue on the statement of operations.

35. The governing board of Samaritan Hospital, which is operated by a religious organization, designated $500,000 of cash for future expansion of the hospital. On the hospital's balance sheet, the cash designated for future plant expansion would be disclosed in which of the following classes of net assets?

A. Temporarily restricted net assets B. Unrestricted net assets C. Plant replacement and expansion D. Board designated net assets

36. Good Care Hospital, which is operated by a religious organization, received contributions of $1,000,000 from donors who stipulated that the cash be used to construct an addition to the hospital. As of the balance sheet date, none of the contributions had been expended for construction. On the hospital's balance sheet, the cash contributions would be disclosed in which of the following classes of net assets?

A. Temporarily restricted net assets B. Donor restricted net assets C. Assets whose use is limited D. Permanently restricted net assets

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37. A private, not-for-profit hospital received contributions of $50,000 from donors on June 15, 20X9. The donors stipulated that their contributions be used to purchase equipment for the hospital. As of June 30, 20X9, the end of the hospital's fiscal year, $12,000 of the contributions had been spent on equipment acquisitions. In the hospital's general fund, what account would be credited to recognize the release of the restrictions on the temporarily restricted contributions used to acquire equipment?

A. Revenue released from equipment acquisition restriction B. Other financing sources C. Net assets released from equipment acquisition restriction D. Unrestricted net assets released from equipment acquisition restriction

38. A private, not-for-profit hospital uses a fund structure which includes a general fund and donor restricted funds. The hospital's revenues from nursing programs and gift shops should be accounted for in the:

A. specific purpose fund. B. restricted current fund. C. general fund. D. time-restricted fund.

39. A private, not-for-profit hospital uses a fund structure which includes a general fund and donor restricted funds. Contributions received from donors for research to be conducted by the hospital should be accounted for in the:

A. specific purpose fund. B. time-restricted fund. C. general fund. D. restricted current fund.

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40. The restricted funds of a not-for-profit hospital are often termed "______" funds because they must hold the restricted assets and transfer expendable resources to the general fund for expenditure.

A. specific B. controlled C. limited D. holding

41. All restricted funds of private, not-for-profit hospitals account for resources:

A. whose use is restricted by the donor. B. received and expended in the hospital's primary health care mission. C. that are only temporarily restricted. D. received or pledged by donors for use in future periods.

42. A private, not-for-profit hospital received a donation of medicine from the XYZ Pharmaceutical Company on March 15, 20X9. The cost of the medicine to the company was $66,000, and its market value was $110,000. Twenty percent of the medicine was used by the hospital during the year ended June 30, 20X9. On the hospital's statement of operations for the year ended June 30, 20X9, the contribution of medicine would increase operating revenues by

A. $66,000. B. $110,000. C. $52,800. D. $88,000.

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43. Good Faith Hospital, operated by a religious organization, billed patients $4,000,000 for services rendered during the year ended June 30, 20X9. The hospital realized cash of $3,500,000 from the patient billings because of the following reductions: (1) contractual adjustments of $140,000 granted to private insurance companies and to the federal government; and (2) uncollectible accounts receivable of $360,000. On the statement of operations prepared for the year ended June 30, 20X9, Good Faith Hospital should report net patient service revenue of:

A. $3,500,000. B. $3,860,000. C. $4,000,000. D. $3,640,000.

44. During the fiscal year ended June 30, 20X9, a private, not-for-profit hospital acquired equipment costing $75,000, with cash contributed by donors who restricted their contributions for this purpose. On the hospital's statement of cash flows for the year ended June 30, 20X9, the equipment acquisition should be reported in which of the following sections? I. Operating activities II. Financing activities III. Investing activities

A. I B. II C. III D. I, II, III

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45. A private, not-for-profit hospital expended $35,000 of temporarily restricted assets to acquire equipment. What account should be debited in the hospital's plant replacement and expansion fund as a result of the acquisition of the equipment?

A. Net Assets Released—Plant Acquisition. B. Fund balance Released—Plant Acquisition. C. Equipment. D. Contribution Revenue Released—Plant Acquisition.

46. In 20X9, a private not-for-profit hospital received a $200,000 cash contribution to its endowment fund. During the year, hospital administration invested $150,000 of the funds. Which of the following statements regarding the effect of these transactions on the preparation of the hospital's statement of cash flow is true?

A. The $200,000 contribution will appear in the investing activities section of the cash flow statement as a cash inflow. B. The $200,000 contribution will appear in the financing activities section of the cash flow statement as a cash inflow. C. The $150,000 investment will appear in the investing activities section of the cash flow statement as a cash inflow. D. The $150,000 contribution will appear in the financing activities section of the cash flow statement as a cash inflow.

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47. A private, not-for-profit hospital received a contribution of $40,000 on June 15, 20X8. The donor restricted the contribution to funding research activities currently being performed by the hospital. For the year ended December 31, 20X8, the hospital spent $30,000 of the contribution on research activities. The hospital expended the remaining $10,000 on research activities in January of 20X9. Refer to the above information. On the statement of cash flows prepared for the year ended December 31, 20X8, the events described would increase net cash flows provided by

A. operating activities by $40,000. B. financing activities by $40,000. C. financing activities by $10,000. D. operating activities by $10,000.

48. A private, not-for-profit hospital received a contribution of $40,000 on June 15, 20X8. The donor restricted the contribution to funding research activities currently being performed by the hospital. For the year ended December 31, 20X8, the hospital spent $30,000 of the contribution on research activities. The hospital expended the remaining $10,000 on research activities in January of 20X9. Refer to the above information. On the statement of operations prepared for the year ended December 31, 20X8, the events described would:

A. increase operating income by $30,000. B. have no effect on operating income. C. increase unrestricted net assets by $30,000. D. decrease unrestricted net assets by $30,000.

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49. A private, not-for-profit hospital received a contribution of $40,000 on June 15, 20X8. The donor restricted the contribution to funding research activities currently being performed by the hospital. For the year ended December 31, 20X8, the hospital spent $30,000 of the contribution on research activities. The hospital expended the remaining $10,000 on research activities in January of 20X9. Refer to the above information. On the statement of changes in net assets prepared for the year ended December 31, 20X8, the events described would

A. increase temporarily restricted net assets by $10,000. B. decrease temporarily restricted net assets by $10,000 C. increase unrestricted net assets by $10,000. D. decrease unrestricted net assets by $10,000.

50. In a private, not-for-profit hospital, which fund would record cash and investments which have been restricted by the governing board for acquisitions of equipment and construction of a new hospital addition?

A. The plant replacement and expansion fund. B. The specific purpose fund. C. The endowment fund. D. The general fund.

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51. The governing board of a hospital operated by a religious organization designated $3,000,000 of cash to be used for plant expansion. The cash was invested in stocks and bonds which earned $250,000 of dividend and interest income. The income from investments should be reported on the hospital's statement of operations as an increase in:

A. temporarily restricted net assets. B. operating income. C. either temporarily restricted net assets or unrestricted net assets, depending upon the nature of the governing board's restrictions. D. fund balance in the general fund.

52. A private, not-for-profit hospital received the following restricted contributions and other receipts during the year ended December 31, 20X8:

None of the contributions or other receipts were expended during the ended December 31, 20X8. For the year ended December 31, 20X8, what amount would be reported on the hospital's statement of changes in net assets as an increase in temporarily restricted net assets?

A. $1,500,000 B. $1,200,000 C. $500,000 D. $300,000

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53. The transactions listed in the following questions occurred in a private, not-for-profit hospital during 20X8. For each transaction, indicate its effect on the hospital's statement of operations for the year ended December 31, 20X8. Transaction: Billed patients for services rendered. Effect on Statement of Operations:

A. Increases operating income. B. Decreases operating income. C. The transaction is reported on the statement of operations, but there is no effect on operating income. D. The transaction is not reported on the statement of operations.

54. The transactions listed in the following questions occurred in a private, not-for-profit hospital during 20X8. For each transaction, indicate its effect on the hospital's statement of operations for the year ended December 31, 20X8. Transaction: A gain was realized from the sale of endowment investments. The gain is not expendable. Effect on Statement of Operations:

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55. The transactions listed in the following questions occurred in a private, not-for-profit hospital during 20X8. For each transaction, indicate its effect on the hospital's statement of operations for the year ended December 31, 20X8. Transaction: Depreciation expense was recorded for the year. Effect on Statement of Operations:

56. The transactions listed in the following questions occurred in a private, not-for-profit hospital during 20X8. For each transaction, indicate its effect on the hospital's statement of operations for the year ended December 31, 20X8. Transaction: The governing board designated assets for plant expansion. Effect on Statement of Operations:

A. Increases operating income. B. Decreases operating income. C. The event is reported on the statement of operations, but there is no effect on operating income. D. The event is not reported on the statement of operations.

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57. The transactions listed in the following questions occurred in a private, not-for-profit hospital during 20X8. For each transaction, indicate its effect on the hospital's statement of operations for the year ended December 31, 20X8. Transaction: Received contributions restricted by donors for research activities. Effect on Statement of Operations:

58. The transactions listed in the following questions occurred in a private, not-for-profit hospital during 20X8. For each transaction, indicate its effect on the hospital's statement of operations for the year ended December 31, 20X8. Transaction: Expended 50 percent of the contributions restricted for research in the previous item. Effect on Statement of Operations:

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59. The transactions listed in the following questions occurred in a private, not-for-profit hospital during 20X8. For each transaction, indicate its effect on the hospital's statement of operations for the year ended December 31, 20X8. Transaction: Received contributions restricted by donors for equipment acquisition. Effect on Statement of Operations:

60. The transactions listed in the following questions occurred in a private, not-for-profit hospital during 20X8. For each transaction, indicate its effect on the hospital's statement of operations for the year ended December 31, 20X8. Transaction: Acquired equipment with all of the contributions received in the previous item. Effect on Statement of Operations:

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61. The transactions listed in the following questions occurred in a private, not-for-profit hospital during 20X8. For each transaction, indicate its effect on the hospital's statement of operations for the year ended December 31, 20X8. Transaction: Endowment income was earned. The donor placed no restrictions on the investment earnings. Effect on Statement of Operations:

62. The transactions listed in the following questions occurred in a private, not-for-profit hospital during 20X8. For each transaction, indicate its effect on the hospital's statement of operations for the year ended December 31, 20X8. Transaction: Received cash contribution from donor who stipulated the contribution be permanently invested. Effect on Statement of Operations:

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63. The transactions listed in the following questions occurred in a private, not-for-profit hospital during 20X8. For each transaction, indicate its effect on the hospital's statement of operations for the year ended December 31, 20X8. Transaction: Acquired investments with cash received in the previous item. Effect on Statement of Operations:

64. The transactions listed in the following questions occurred in a private, not-for-profit hospital during 20X8. For each transaction, indicate its effect on the hospital's statement of operations for the year ended December 31, 20X8. Transaction: Received tuition revenue from hospital nursing program and cash from sales of goods in the hospital gift shop. Effect on Statement of Operations:

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65. Note: This is a Kaplan CPA Review Question Which of the following types of health care organizations follow FASB authoritative literature?

A. Option A B. Option B C. Option C D. Option D

66. Note: This is a Kaplan CPA Review Question Fike Hospital, a private, not-for-profit institution, receives an unrestricted gift of common stock with a fair value of $100,000. The donor had paid $40,000 for the stock five years earlier. The gift should be recorded as an

A. Increase in unrestricted net assets of $40,000. B. Increase in temporarily restricted net assets of $100,000. C. Increase in temporarily restricted net assets of $40,000. D. Increase in unrestricted net assets of $100,000.

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67. Note: This is a Kaplan CPA Review Question The Weyman Hospital, a private, not-for-profit institution, reported the following information:

What amount should the hospital report as net patient service revenue?

A. $840,000 B. $880,000 C. $900,000 D. $980,000

68. On June 30, 20X9, a voluntary health and welfare organization received pledges from donors amounting to $50,000. The donors did not place any time or use restrictions on the amount pledged. It was estimated that 10 percent of the pledges would not be collected. How should the voluntary health and welfare organization report these pledges on its financial statements prepared at the end of its fiscal year, June 30, 20X9?

A. As fund balance for $45,000. B. As contribution revenue-unrestricted for $45,000. C. As contribution revenue-unrestricted for $50,000. D. As fund balance-unrestricted for $50,000.

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69. A donor agrees to contribute $5,000 per year at the end of each of the next five years to a voluntary health and welfare organization. The donor did not place any use restrictions on the amount pledged. The stream of the payments is discounted at 6 percent. The first payment of $5,000 is received at the end of the first year. The present value factor for a five-payment annuity due on June 30, 20X9, at 6 percent is 4.2124. Based on the preceding information, the journal entry to recognize present value at the time the pledge is received includes:

A. a credit to Pledges Receivable—Temporarily Restricted for $25,000. B. a debit to Contributions—Temporarily Restricted for $21,062. C. a debit to Pledges Receivable—Temporarily Restricted for $21,062. D. a credit to Contributions—Temporarily Restricted for $25,000.

70. A donor agrees to contribute $5,000 per year at the end of each of the next five years to a voluntary health and welfare organization. The donor did not place any use restrictions on the amount pledged. The stream of the payments is discounted at 6 percent. The first payment of $5,000 is received at the end of the first year. The present value factor for a five-payment annuity due on June 30, 20X9, at 6 percent is 4.2124. Based on the preceding information, at the end of the first year, the pledge increased unrestricted net assets by:

A. $25,000. B. $21,062. C. $4,212. D. $5,000.

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71. A donor agrees to contribute $5,000 per year at the end of each of the next five years to a voluntary health and welfare organization. The donor did not place any use restrictions on the amount pledged. The stream of the payments is discounted at 6 percent. The first payment of $5,000 is received at the end of the first year. The present value factor for a five-payment annuity due on June 30, 20X9, at 6 percent is 4.2124. Based on the preceding information, the increase in present value of the contributions receivable recognized at the end of the first year equals:

A. $5,000. B. $1,264. C. $4,212. D. $787.

72. The disclosure, "net assets released from restrictions," is reported on which of the following financial statements for a voluntary health and welfare organization? I. The statement of cash flows. II. The statement of activities.

A. I only B. II only C. Both I and II. D. Neither I nor II.

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73. During the fiscal year ended June 30, 20X9, Global Charities, a voluntary health and welfare organization, received unrestricted cash contributions of $500,000 and temporarily restricted cash contributions of $300,000. All of the temporarily restricted contributions were restricted by the donors for equipment acquisitions. During the year ended June 30, 20X9, equipment costing $250,000 was acquired with the restricted contributions. As a result of these two contributions, Global Charities' statement of cash flows, prepared for the year ended June 30, 20X9, would report an increase in net cash provided by operating activities of:

A. $500,000. B. $800,000. C. $750,000. D. $550,000.

74. A voluntary health and welfare organization received a $300,000 contribution on April 15, 20X9, from a donor who stipulated the donation be invested permanently in stocks and bonds. The donor further stipulated earnings from the investments be spent according to the wishes of the governing board of the voluntary health and welfare organization. Earnings from the investments for the year ended June 30, 20X9, amounted to $6,000. How would the voluntary health and welfare organization report this information for the year ended June 30, 20X9?

A. Increase in permanently restricted net assets of $306,000. B. Increase in permanently restricted net assets of $300,000, and in temporarily restricted net assets of $6,000. C. Increase in permanently restricted net assets of $300,000, and in unrestricted net assets of $6,000. D. Increase in permanently restricted net assets of $300,000, and in board-designated net assets of $6,000.

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75. Which financial statement is(are) required for a voluntary health and welfare organization which is not required for a private, not-for-profit hospital? I. A statement of operations. II. A statement of functional expenses.

A. I only B. II only C. Both I and II D. Neither I nor II

76. A voluntary health and welfare organization received unrestricted cash donations of $20,000 from donors who attended a dinner held for the benefit of the organization. The costs of the dinner, including room rental, and other expenses, amounted to $7,000. On the statement of activities prepared for the voluntary health and welfare organization, the expenses of the dinner should be:

A. reported as management and general expenses. B. netted against the $20,000 of contribution revenue. C. reported as fund raising costs. D. reported as programmatic expenses.

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77. On the statement of functional expenses prepared for a voluntary health and welfare organization, depreciation expense is allocated to I. expenses for program services. II. expenses for supporting services.

A. I only B. II only C. Both I and II D. Neither I nor II

78. A voluntary health and welfare organization developed and printed informational materials which were intended to both educate the public about how its resources are used to help people in need and to also appeal to the public for much needed support. In this situation, the cost of the informational materials should be

A. accounted for as fund-raising expense. B. allocated to expenses for program services. C. allocated between expenses for program services and fund-raising expense. D. accounted for as management and general expense.

79. In accordance with ASC 958, pledges, which are temporarily restricted by donors, are reported as increases in temporarily restricted net assets on the statement of activities of a voluntary health and welfare organization when the

A. pledges are received in cash. B. cash received from the pledges is expended in accordance with the donors' wishes. C. pledges are made by the donors. D. cash is received from the pledges is transferred to unrestricted net assets.

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80. A voluntary health and welfare organization received $200,000 of pledges from donors on February 15, 20X9. The donors did not place either time or use restrictions on the amount pledged. The governing board estimated that 10 percent of the pledges would be uncollectible. During the remainder of fiscal 20X9, cash received from pledges amounted to $184,000. For the year ended June 30, 20X9, what amount should the voluntary health and welfare organization report as Contributions-Unrestricted?

A. $0 B. $200,000 C. $184,000 D. $180,000

81. A voluntary health and welfare organization reports pledges receivable on its statement of financial position at the present value of the future cash collections. How is the increase in the present value of the pledges receivable, which is due to the passage of time, reported on the voluntary health and welfare organization's statement of activities?

A. As interest income-temporarily restricted. B. As an increase in pledges receivable-temporarily restricted. C. As an increase in contributions-temporarily restricted. D. As an increase in deferred revenue-temporarily restricted.

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82. Local Services, a voluntary health and welfare organization had the following classes of net assets on July 1, 20X8, the beginning of its fiscal year:

During the year ended June 30, 20X9, the following events occurred: (1) It purchased equipment, costing $100,000, with contributions restricted for this purpose. The contributions had been received from donors during June of 20X8. (2) It received $130,000 of cash donations which were restricted for research activities. During the year ended June 30, 20X9, $90,000 of the contributions were expended on research. (3) It sold investments classified in the permanently restricted class for a loss of $40,000. Dividends and interest income earned on the investments amounted to $70,000. There were no restrictions on how investment income was to be used. (4) It received cash contributions of $200,000 from donors who did not place either time or use restrictions upon their donations. (5) Expenses, excluding depreciation expense, for program services and supporting services incurred during the year ended June 30, 20X9, amounted to $260,000. (6) Depreciation expense for the year ended June 30, 20X9, was $80,000. Refer to the above information. At June 30, 20X9, the amount of permanently restricted net assets reported on the statement of financial position would be:

A. $1,070,000. B. $1,030,000. C. $1,000,000. D. $960,000.

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83. Local Services, a voluntary health and welfare organization had the following classes of net assets on July 1, 20X8, the beginning of its fiscal year:

During the year ended June 30, 20X9, the following events occurred: (1) It purchased equipment, costing $100,000, with contributions restricted for this purpose. The contributions had been received from donors during June of 20X8. (2) It received $130,000 of cash donations which were restricted for research activities. During the year ended June 30, 20X9, $90,000 of the contributions were expended on research. (3) It sold investments classified in the permanently restricted class for a loss of $40,000. Dividends and interest income earned on the investments amounted to $70,000. There were no restrictions on how investment income was to be used. (4) It received cash contributions of $200,000 from donors who did not place either time or use restrictions upon their donations. (5) Expenses, excluding depreciation expense, for program services and supporting services incurred during the year ended June 30, 20X9, amounted to $260,000. (6) Depreciation expense for the year ended June 30, 20X9, was $80,000. Refer to the above information. On the statement of activities for the year ended June 30, 20X9, temporarily restricted net assets:

A. increased $130,000. B. increased $40,000. C. decreased $100,000. D. decreased $60,000.

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84. Local Services, a voluntary health and welfare organization had the following classes of net assets on July 1, 20X8, the beginning of its fiscal year:

During the year ended June 30, 20X9, the following events occurred: (1) It purchased equipment, costing $100,000, with contributions restricted for this purpose. The contributions had been received from donors during June of 20X8. (2) It received $130,000 of cash donations which were restricted for research activities. During the year ended June 30, 20X9, $90,000 of the contributions were expended on research. (3) It sold investments classified in the permanently restricted class for a loss of $40,000. Dividends and interest income earned on the investments amounted to $70,000. There were no restrictions on how investment income was to be used. (4) It received cash contributions of $200,000 from donors who did not place either time or use restrictions upon their donations. (5) Expenses, excluding depreciation expense, for program services and supporting services incurred during the year ended June 30, 20X9, amounted to $260,000. (6) Depreciation expense for the year ended June 30, 20X9, was $80,000. Refer to the above information. On the statement of activities for the year ended June 30, 20X9, reclassifications would be reported at

A. $190,000. B. $100,000. C. $90,000. D. $230,000.

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85. Local Services, a voluntary health and welfare organization had the following classes of net assets on July 1, 20X8, the beginning of its fiscal year:

During the year ended June 30, 20X9, the following events occurred: (1) It purchased equipment, costing $100,000, with contributions restricted for this purpose. The contributions had been received from donors during June of 20X8. (2) It received $130,000 of cash donations which were restricted for research activities. During the year ended June 30, 20X9, $90,000 of the contributions were expended on research. (3) It sold investments classified in the permanently restricted class for a loss of $40,000. Dividends and interest income earned on the investments amounted to $70,000. There were no restrictions on how investment income was to be used. (4) It received cash contributions of $200,000 from donors who did not place either time or use restrictions upon their donations. (5) Expenses, excluding depreciation expense, for program services and supporting services incurred during the year ended June 30, 20X9, amounted to $260,000. (6) Depreciation expense for the year ended June 30, 20X9, was $80,000. Refer to the above information. Which of the following statements is(are) correct about the program and supporting expenses that would be reported on the statement of activities for the year ended June 30, 20X9? I. Program and supporting expenses should be reported at $340,000. II. All of the program and supporting expenses should be reported as a deduction from unrestricted revenues and other support.

A. I only B. II only C. I and II

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D. Neither I nor II

86. Note: This is a Kaplan CPA Review Question Which of the following transactions of a private voluntary health and welfare organization would increase temporarily restricted net assets in the statement of activities for the current year? I. Received a contribution of $20,000 from a donor in the current year who stipulated that the money not be spent until the following year. II. Spent $25,000 for fund raising during the current year from a donation from the previous year.

A. I only B. Both I and II C. II only D. Neither I nor II

87. Note: This is a Kaplan CPA Review Question Home Care, Inc. (Home Care), a nongovernmental voluntary health and welfare organization, received two contributions in 20X3. One contribution of $250,000 was restricted for use as general support in 20X4. The other contribution of $200,000 carried no donor restrictions. What amount should Home Care report as temporarily restricted contributions in its 20X3 statement of activities?

A. $200,000 B. $450,000 C. $250,000 D. $0

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88. ASC 958 requires that an "other not-for-profit entity" (ONPO) provide three financial statements. Which of the following is NOT one among them?

A. A statement of functional expenses B. A statement of financial position C. A statement of activities D. A statement of cash flows

89. Golden Path, a labor union, had the following receipts and expenses for the year ended December 31, 20X8:

The union's constitution provides that 12 percent of the per capita dues be designated for the strike insurance fund to be distributed for strike relief at the discretion of the union's executive board. Based on the information provided, in Golden Path's statement of activities for the year ended December 31, 20X8, what amount should be reported under the classification of revenue from unrestricted funds?

A. $980,000 B. $1,100,000 C. $1,210,000 D. $1,020,000

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90. Golden Path, a labor union, had the following receipts and expenses for the year ended December 31, 20X8:

A. $720,000 B. $910,000 C. $440,000 D. $760,000

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91. Golden Path, a labor union, had the following receipts and expenses for the year ended December 31, 20X8:

A. $150,000 B. $720,000 C. $440,000 D. $290,000

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92. Golden Path, a labor union, had the following receipts and expenses for the year ended December 31, 20X8:

The union's constitution provides that 12 percent of the per capita dues be designated for the strike insurance fund to be distributed for strike relief at the discretion of the union's executive board. Based on the information provided, in Golden Path's statement of activities for the year ended December 31, 20X8, what amounts should be reported under the classifications of temporarily and permanently restricted net assets?

A. $0 and $110,000 respectively. B. $110,000 and $0 respectively. C. $60,000 and $50,000 respectively. D. $50,000 and $60,000 respectively.

93. Reporting requirements of other not-for-profit entities (ONPOs) are similar to those of which of the following entities?

A. A public university B. A voluntary health and welfare organization C. An enterprise fund of a state or local government D. A hospital operated by a county government

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94. Note: This is a Kaplan CPA Review Question The statement of cash flows for a private not-for-profit performing arts center should report cash flows according to which of the following classifications?

A. Operating activities, investing activities and financing activities B. Operating activities, non-capital activities and capital activities. C. Investing activities, capital activities and financing activities. D. Financing activities, non-capital activities and capital activities.

Essay Questions

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95. Private Not-For-Profit (NFP) Entities. Select from this list of terms to answer the following questions. A. Fair value B. Unrestricted net assets C. GASB D. FASB E. Statement of Revenues, Expenditures, and Changes in Fund Balance F. Lower of cost or market G. Accrual method H. Statement of Activities I. General fund, restricted fund, endowment fund J. Modified accrual method K. Permanently restricted net assets L. Temporarily restricted net assets M. Endowment fund N. Unrestricted, temporarily restricted, permanently restricted O. Depreciation P. Works of art and other historical treasures Q. General fund R. Cost Indicate your choice by entering the letter corresponding to the correct term. A term may be used more than once or not at all. "Responsible for establishing accounting standards for private NFP entities" describes which term listed above?

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96. Private Not-For-Profit (NFP) Entities. Select from this list of terms to answer the following questions. A. Fair value B. Unrestricted net assets C. GASB D. FASB E. Statement of Revenues, Expenditures, and Changes in Fund Balance F. Lower of cost or market G. Accrual method H. Statement of Activities I. General fund, restricted fund, endowment fund J. Modified accrual method K. Permanently restricted net assets L. Temporarily restricted net assets M. Endowment fund N. Unrestricted, temporarily restricted, permanently restricted O. Depreciation P. Works of art and other historical treasures Q. General fund R. Cost Indicate your choice by entering the letter corresponding to the correct term. A term may be used more than once or not at all. "Classification of an endowment contribution" describes which term listed above?

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97. Private Not-For-Profit (NFP) Entities. Select from this list of terms to answer the following questions. A. Fair value B. Unrestricted net assets C. GASB D. FASB E. Statement of Revenues, Expenditures, and Changes in Fund Balance F. Lower of cost or market G. Accrual method H. Statement of Activities I. General fund, restricted fund, endowment fund J. Modified accrual method K. Permanently restricted net assets L. Temporarily restricted net assets M. Endowment fund N. Unrestricted, temporarily restricted, permanently restricted O. Depreciation P. Works of art and other historical treasures Q. General fund R. Cost Indicate your choice by entering the letter corresponding to the correct term. A term may be used more than once or not at all. "Reported as an expenditure of the fund using plant and equipment" describes which term listed above?

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98. Private Not-For-Profit (NFP) Entities. Select from this list of terms to answer the following questions. A. Fair value B. Unrestricted net assets C. GASB D. FASB E. Statement of Revenues, Expenditures, and Changes in Fund Balance F. Lower of cost or market G. Accrual method H. Statement of Activities I. General fund, restricted fund, endowment fund J. Modified accrual method K. Permanently restricted net assets L. Temporarily restricted net assets M. Endowment fund N. Unrestricted, temporarily restricted, permanently restricted O. Depreciation P. Works of art and other historical treasures Q. General fund R. Cost Indicate your choice by entering the letter corresponding to the correct term. A term may be used more than once or not at all. "Financial statement of a private NFP entity" describes which term listed above?

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99. Private Not-For-Profit (NFP) Entities. Select from this list of terms to answer the following questions. A. Fair value B. Unrestricted net assets C. GASB D. FASB E. Statement of Revenues, Expenditures, and Changes in Fund Balance F. Lower of cost or market G. Accrual method H. Statement of Activities I. General fund, restricted fund, endowment fund J. Modified accrual method K. Permanently restricted net assets L. Temporarily restricted net assets M. Endowment fund N. Unrestricted, temporarily restricted, permanently restricted O. Depreciation P. Works of art and other historical treasures Q. General fund R. Cost Indicate your choice by entering the letter corresponding to the correct term. A term may be used more than once or not at all. "Tangible fixed assets not depreciated by a private college or university" describes which term listed above?

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100.Private Not-For-Profit (NFP) Entities. Select from this list of terms to answer the following questions. A. Fair value B. Unrestricted net assets C. GASB D. FASB E. Statement of Revenues, Expenditures, and Changes in Fund Balance F. Lower of cost or market G. Accrual method H. Statement of Activities I. General fund, restricted fund, endowment fund J. Modified accrual method K. Permanently restricted net assets L. Temporarily restricted net assets M. Endowment fund N. Unrestricted, temporarily restricted, permanently restricted O. Depreciation P. Works of art and other historical treasures Q. General fund R. Cost Indicate your choice by entering the letter corresponding to the correct term. A term may be used more than once or not at all. "Basis for measuring investments in financial statements" describes which term listed above?

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101.Private Not-For-Profit (NFP) Entities. Select from this list of terms to answer the following questions. A. Fair value B. Unrestricted net assets C. GASB D. FASB E. Statement of Revenues, Expenditures, and Changes in Fund Balance F. Lower of cost or market G. Accrual method H. Statement of Activities I. General fund, restricted fund, endowment fund J. Modified accrual method K. Permanently restricted net assets L. Temporarily restricted net assets M. Endowment fund N. Unrestricted, temporarily restricted, permanently restricted O. Depreciation P. Works of art and other historical treasures Q. General fund R. Cost Indicate your choice by entering the letter corresponding to the correct term. A term may be used more than once or not at all. "Classification of investment income from endowment investments if there are no donor restrictions as to income" describes which term listed above?

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102.Private Not-For-Profit (NFP) Entities. Select from this list of terms to answer the following questions. A. Fair value B. Unrestricted net assets C. GASB D. FASB E. Statement of Revenues, Expenditures, and Changes in Fund Balance F. Lower of cost or market G. Accrual method H. Statement of Activities I. General fund, restricted fund, endowment fund J. Modified accrual method K. Permanently restricted net assets L. Temporarily restricted net assets M. Endowment fund N. Unrestricted, temporarily restricted, permanently restricted O. Depreciation P. Works of art and other historical treasures Q. General fund R. Cost Indicate your choice by entering the letter corresponding to the correct term. A term may be used more than once or not at all. "Classification of contributions restricted by purpose" describes which term listed above?

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103.Private Not-For-Profit (NFP) Entities. Select from this list of terms to answer the following questions. A. Fair value B. Unrestricted net assets C. GASB D. FASB E. Statement of Revenues, Expenditures, and Changes in Fund Balance F. Lower of cost or market G. Accrual method H. Statement of Activities I. General fund, restricted fund, endowment fund J. Modified accrual method K. Permanently restricted net assets L. Temporarily restricted net assets M. Endowment fund N. Unrestricted, temporarily restricted, permanently restricted O. Depreciation P. Works of art and other historical treasures Q. General fund R. Cost Indicate your choice by entering the letter corresponding to the correct term. A term may be used more than once or not at all. "Basis for measuring expenditures for contributed services requiring special skills" describes which term listed above?

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104.Private Not-For-Profit (NFP) Entities. Select from this list of terms to answer the following questions. A. Fair value B. Unrestricted net assets C. GASB D. FASB E. Statement of Revenues, Expenditures, and Changes in Fund Balance F. Lower of cost or market G. Accrual method H. Statement of Activities I. General fund, restricted fund, endowment fund J. Modified accrual method K. Permanently restricted net assets L. Temporarily restricted net assets M. Endowment fund N. Unrestricted, temporarily restricted, permanently restricted O. Depreciation P. Works of art and other historical treasures Q. General fund R. Cost Indicate your choice by entering the letter corresponding to the correct term. A term may be used more than once or not at all. "Basis for measuring contributions" describes which term listed above?

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105.Private Not-For-Profit (NFP) Entities. Select from this list of terms to answer the following questions. A. Fair value B. Unrestricted net assets C. GASB D. FASB E. Statement of Revenues, Expenditures, and Changes in Fund Balance F. Lower of cost or market G. Accrual method H. Statement of Activities I. General fund, restricted fund, endowment fund J. Modified accrual method K. Permanently restricted net assets L. Temporarily restricted net assets M. Endowment fund N. Unrestricted, temporarily restricted, permanently restricted O. Depreciation P. Works of art and other historical treasures Q. General fund R. Cost Indicate your choice by entering the letter corresponding to the correct term. A term may be used more than once or not at all. "Net asset classifications per FAC 6" describes which term listed above?

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106.Private Not-For-Profit (NFP) Entities. Select from this list of terms to answer the following questions. A. Fair value B. Unrestricted net assets C. GASB D. FASB E. Statement of Revenues, Expenditures, and Changes in Fund Balance F. Lower of cost or market G. Accrual method H. Statement of Activities I. General fund, restricted fund, endowment fund J. Modified accrual method K. Permanently restricted net assets L. Temporarily restricted net assets M. Endowment fund N. Unrestricted, temporarily restricted, permanently restricted O. Depreciation P. Works of art and other historical treasures Q. General fund R. Cost Indicate your choice by entering the letter corresponding to the correct term. A term may be used more than once or not at all. "Basis of accounting for private NFPs" describes which term listed above?

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107.The following information is contained in the funds which are used to account for the transactions of the Hope Hospital, which is operated by a nonprofit, religious organization. The balances in the accounts are as of June 30, 20X9, the end of the hospital's fiscal year. Credit amounts are in parentheses.

Additional information: The $64,000 in the specific purpose fund is restricted for research activities to be conducted by the hospital. Required: Prepare a balance sheet for Hope Hospital as of June 30, 20X9.

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108.The CFO of a "Not-for-Profit" hospital is making a presentation at your college. The presentation is for Business and Health-Science majors. During the presentation the CFO mentions assets being reported "above the line." On the way out your roommate a healthscience major asks, you an accounting major, to explain what the CFO was referring to. What do you respond?

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109.The transactions described in the following questions occurred in a voluntary health and welfare organization during the year ended December 31, 20X8. For each transaction, indicate its effect(s) on the organization's statement of activities prepared for the year ended December 31, 20X8. List all effects of transactions affecting more than one class of net assets. Indicate your choice(s) by entering the letter corresponding to the effects listed here: Effects of Transactions on Statement of Activities A. Increases unrestricted net assets. B. Decreases unrestricted net assets. C. Increases temporarily restricted net assets. D. Decreases temporarily restricted net assets. E. Increases permanently restricted net assets. F. Decreases permanently restricted net assets. G. Transaction is not reported on the statement of activities. Received cash contributions restricted by donors for research.

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110.The transactions described in the following questions occurred in a voluntary health and welfare organization during the year ended December 31, 20X8. For each transaction, indicate its effect(s) on the organization's statement of activities prepared for the year ended December 31, 20X8. List all effects of transactions affecting more than one class of net assets. Indicate your choice(s) by entering the letter corresponding to the effects listed here: Effects of Transactions on Statement of Activities A. Increases unrestricted net assets. B. Decreases unrestricted net assets. C. Increases temporarily restricted net assets. D. Decreases temporarily restricted net assets. E. Increases permanently restricted net assets. F. Decreases permanently restricted net assets. G. Transaction is not reported on the statement of activities. Incurred fund-raising costs.

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111.The transactions described in the following questions occurred in a voluntary health and welfare organization during the year ended December 31, 20X8. For each transaction, indicate its effect(s) on the organization's statement of activities prepared for the year ended December 31, 20X8. List all effects of transactions affecting more than one class of net assets. Indicate your choice(s) by entering the letter corresponding to the effects listed here: Effects of Transactions on Statement of Activities A. Increases unrestricted net assets. B. Decreases unrestricted net assets. C. Increases temporarily restricted net assets. D. Decreases temporarily restricted net assets. E. Increases permanently restricted net assets. F. Decreases permanently restricted net assets. G. Transaction is not reported on the statement of activities. Depreciation expense for the year was recorded.

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112.The transactions described in the following questions occurred in a voluntary health and welfare organization during the year ended December 31, 20X8. For each transaction, indicate its effect(s) on the organization's statement of activities prepared for the year ended December 31, 20X8. List all effects of transactions affecting more than one class of net assets. Indicate your choice(s) by entering the letter corresponding to the effects listed here: Effects of Transactions on Statement of Activities A. Increases unrestricted net assets. B. Decreases unrestricted net assets. C. Increases temporarily restricted net assets. D. Decreases temporarily restricted net assets. E. Increases permanently restricted net assets. F. Decreases permanently restricted net assets. G. Transaction is not reported on the statement of activities. The governing board designated assets for plant expansion.

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113.The transactions described in the following questions occurred in a voluntary health and welfare organization during the year ended December 31, 20X8. For each transaction, indicate its effect(s) on the organization's statement of activities prepared for the year ended December 31, 20X8. List all effects of transactions affecting more than one class of net assets. Indicate your choice(s) by entering the letter corresponding to the effects listed here: Effects of Transactions on Statement of Activities A. Increases unrestricted net assets. B. Decreases unrestricted net assets. C. Increases temporarily restricted net assets. D. Decreases temporarily restricted net assets. E. Increases permanently restricted net assets. F. Decreases permanently restricted net assets. G. Transaction is not reported on the statement of activities. A gain was realized from the sale of securities which were permanently invested. The gain is restricted as to use.

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114.The transactions described in the following questions occurred in a voluntary health and welfare organization during the year ended December 31, 20X8. For each transaction, indicate its effect(s) on the organization's statement of activities prepared for the year ended December 31, 20X8. List all effects of transactions affecting more than one class of net assets. Indicate your choice(s) by entering the letter corresponding to the effects listed here: Effects of Transactions on Statement of Activities A. Increases unrestricted net assets. B. Decreases unrestricted net assets. C. Increases temporarily restricted net assets. D. Decreases temporarily restricted net assets. E. Increases permanently restricted net assets. F. Decreases permanently restricted net assets. G. Transaction is not reported on the statement of activities. Endowment income was earned. The donor specified that the income be used for community service.

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115.The transactions described in the following questions occurred in a voluntary health and welfare organization during the year ended December 31, 20X8. For each transaction, indicate its effect(s) on the organization's statement of activities prepared for the year ended December 31, 20X8. List all effects of transactions affecting more than one class of net assets. Indicate your choice(s) by entering the letter corresponding to the effects listed here: Effects of Transactions on Statement of Activities A. Increases unrestricted net assets. B. Decreases unrestricted net assets. C. Increases temporarily restricted net assets. D. Decreases temporarily restricted net assets. E. Increases permanently restricted net assets. F. Decreases permanently restricted net assets. G. Transaction is not reported on the statement of activities. Received a multi-year pledge, with cash being received this year and for the next 4 years. Donors did not place any use restrictions on how the pledges were to be spent.

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116.The transactions described in the following questions occurred in a voluntary health and welfare organization during the year ended December 31, 20X8. For each transaction, indicate its effect(s) on the organization's statement of activities prepared for the year ended December 31, 20X8. List all effects of transactions affecting more than one class of net assets. Indicate your choice(s) by entering the letter corresponding to the effects listed here: Effects of Transactions on Statement of Activities A. Increases unrestricted net assets. B. Decreases unrestricted net assets. C. Increases temporarily restricted net assets. D. Decreases temporarily restricted net assets. E. Increases permanently restricted net assets. F. Decreases permanently restricted net assets. G. Transaction is not reported on the statement of activities. Income was earned from investments of assets that the board previously designated for plant expansion.

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117.The transactions described in the following questions occurred in a voluntary health and welfare organization during the year ended December 31, 20X8. For each transaction, indicate its effect(s) on the organization's statement of activities prepared for the year ended December 31, 20X8. List all effects of transactions affecting more than one class of net assets. Indicate your choice(s) by entering the letter corresponding to the effects listed here: Effects of Transactions on Statement of Activities A. Increases unrestricted net assets. B. Decreases unrestricted net assets. C. Increases temporarily restricted net assets. D. Decreases temporarily restricted net assets. E. Increases permanently restricted net assets. F. Decreases permanently restricted net assets. G. Transaction is not reported on the statement of activities. Received pledges from donors who placed no time or use restrictions on how the pledges were to be spent.

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118.The transactions described in the following questions occurred in a voluntary health and welfare organization during the year ended December 31, 20X8. For each transaction, indicate its effect(s) on the organization's statement of activities prepared for the year ended December 31, 20X8. List all effects of transactions affecting more than one class of net assets. Indicate your choice(s) by entering the letter corresponding to the effects listed here: Effects of Transactions on Statement of Activities A. Increases unrestricted net assets. B. Decreases unrestricted net assets. C. Increases temporarily restricted net assets. D. Decreases temporarily restricted net assets. E. Increases permanently restricted net assets. F. Decreases permanently restricted net assets. G. Transaction is not reported on the statement of activities. Received cash contributions restricted by donors for equipment.

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119.The transactions described in the following questions occurred in a voluntary health and welfare organization during the year ended December 31, 20X8. For each transaction, indicate its effect(s) on the organization's statement of activities prepared for the year ended December 31, 20X8. List all effects of transactions affecting more than one class of net assets. Indicate your choice(s) by entering the letter corresponding to the effects listed here: Effects of Transactions on Statement of Activities A. Increases unrestricted net assets. B. Decreases unrestricted net assets. C. Increases temporarily restricted net assets. D. Decreases temporarily restricted net assets. E. Increases permanently restricted net assets. F. Decreases permanently restricted net assets. G. Transaction is not reported on the statement of activities. Acquired equipment with all of the contributions previously received from donors for equipment purchases.

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120.The transactions described in the following questions occurred in a voluntary health and welfare organization during the year ended December 31, 20X8. For each transaction, indicate its effect(s) on the organization's statement of activities prepared for the year ended December 31, 20X8. List all effects of transactions affecting more than one class of net assets. Indicate your choice(s) by entering the letter corresponding to the effects listed here: Effects of Transactions on Statement of Activities A. Increases unrestricted net assets. B. Decreases unrestricted net assets. C. Increases temporarily restricted net assets. D. Decreases temporarily restricted net assets. E. Increases permanently restricted net assets. F. Decreases permanently restricted net assets. G. Transaction is not reported on the statement of activities. Expended 75 percent of the contributions previously received from donors for research.

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121.Following are four independent transactions or events that relate to a voluntary health and welfare organization: 1. Cash disbursement of $45,000 was made from the general fund's unrestricted assets for the purchase of new equipment for the organization. 2. The organization receives an unrestricted cash gift of $80,000 from a donor. 3. Common stock investments with a total carrying value of $100,000 were sold by a permanently restricted endowment fund for $112,000 before any dividends were earned on these stocks. The gain is donor-restricted to remain in the permanently restricted fund. 4. General obligation bonds payable with a face amount of $750,000 were sold at par, with the proceeds required to be used solely for construction of a new building. This building was completed at a total cost of $750,000, and the total amount of bond issue proceeds was disbursed toward this cost. Disregard interest capitalization. Required: For each of these transactions or events, prepare journal entries specifying the affected funds and showing how these transactions or events should be recorded by the organization.

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Chapter 19 Not-for-Profit Entities Answer Key

Multiple Choice Questions

A not-for-profit organization received a donation temporarily restricted as to use. The donated amount was later spent in accordance with the restriction. In which category(ies) of net assets should the related revenues and expenses be recognized?

A. Option A B. Option B C. Option C D. Option D

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 19-01 Understand financial reporting rules and make basic journal entries for private; not-for-profit entities. Topic: Financial Reporting for Private, Not-For-Profit Entities

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According to ASC 958, Not-For-Profit entities should recognize depreciation/amortization: I. on all long-lived tangible assets. II. on all long-lived intangible assets.

A. I only B. II only C. Both I and II D. Neither I nor II

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 19-01 Understand financial reporting rules and make basic journal entries for private; not-for-profit entities. Topic: Important FASB Standards for Not-for-Profit Entities

Which of the following is an example of volunteer services received by a not-for-profit entity that should be recognized as revenue? I. Services requiring specialized skills, provided by individuals with those skills, that otherwise would have to be purchased. II. Services of lay faculty at a private university operated by a religious order. III. Services that create or enhance non-financial assets, regardless of whether or not they require specialized skills.

A. I only B. I and III only C. II and III only D. I, II, and III

AACSB: Reflective Thinking AICPA FN: Decision Making

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Blooms: Remember Difficulty: 2 Medium Learning Objective: 19-01 Understand financial reporting rules and make basic journal entries for private; not-for-profit entities. Topic: Financial Reporting for Private, Not-For-Profit Entities

Which of the following recognition and measurement bases best summarizes the usual treatment of current contributions to private not-for-profit entities in accordance with ASC 958?

A. Option A B. Option B C. Option C D. Option D

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 19-01 Understand financial reporting rules and make basic journal entries for private; not-for-profit entities. Topic: Important FASB Standards for Not-for-Profit Entities

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According to ASC 958, not-for-profit entities should report investments in the financial statements at: I. fair market value. II. lower of cost or market.

A. I only B. II only C. Either I or II D. Neither I nor II

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 19-01 Understand financial reporting rules and make basic journal entries for private; not-for-profit entities. Topic: Important FASB Standards for Not-for-Profit Entities

Investment income for not-for-profit entities may include: I. interest from debt investments. II. dividends from equity investments. III. changes in the fair values of both debt and equity investments.

A. I only B. I and II only C. I and III only D. I, II, and III

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy

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Learning Objective: 19-01 Understand financial reporting rules and make basic journal entries for private; not-for-profit entities. Topic: Financial Reporting for Private, Not-For-Profit Entities

One of the major objectives of ASC 958 is to

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 19-01 Understand financial reporting rules and make basic journal entries for private; not-for-profit entities. Topic: Important FASB Standards for Not-for-Profit Entities

A private, not-for-profit geographic society received cash contributions which were restricted by the donors for the acquisition of fixed assets. In which section of the statement of cash flows would these cash contributions be reported?

A. Financing activities B. Investing activities C. Operating activities D. Capital and related financing activities

AACSB: Reflective Thinking AICPA FN: Decision Making

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Blooms: Remember Difficulty: 1 Easy Learning Objective: 19-01 Understand financial reporting rules and make basic journal entries for private; not-for-profit entities. Topic: Financial Reporting for Private, Not-For-Profit Entities

On the statement of activities for a private, not-for-profit literary society, expenses decrease which of the following classes of net assets? I. temporarily restricted net assets II. unrestricted net assets

A. I only B. II only C. Either I or II D. Neither I nor II

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10.

In accordance with ASC 958, contributions of services are recognized as increases in unrestricted net assets by a private, not for profit entity if which of the following criteria are satisfied? I. The services received create or enhance nonfinancial assets. II. The services require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donations. III. The services will be performed within the current fiscal year.

A. I or II. B. I or III. C. II or III. D. I, II, III.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 19-01 Understand financial reporting rules and make basic journal entries for private; not-for-profit entities. Topic: Important FASB Standards for Not-for-Profit Entities

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11.

Note: This is a Kaplan CPA Review Question Gray College, a private not-for-profit institution, received a contribution of $100,000 for faculty research. The donation was received in 20X1 and $80,000 was spent in 20X1. As a result of these transactions, Gray College should report on its 20X1 statement of activities a:

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 19-01 Understand financial reporting rules and make basic journal entries for private; not-for-profit entities. Topic: Financial Reporting for Private, Not-For-Profit Entities

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12.

Which rule-making body is currently setting standards of financial reporting for private not-for-profit universities and for public (governmental) universities?

A. Option A B. Option B C. Option C D. Option D

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 19-02 Understand financial reporting rules and make basic journal entries for not-for-profit colleges and universities. Topic: Private Colleges and Universities Topic: Public Colleges and Universities

13.

The term "restricted" as used in university accounting refers to a constraint on the use of funds which has been: I. internally imposed. II. externally imposed.

A. I only B. II only C. Either I or II D. Neither I nor II

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AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 19-02 Understand financial reporting rules and make basic journal entries for not-for-profit colleges and universities. Topic: Colleges and Universities

14.

According to ASC 958, the statement of financial position of a private university should report the excess of the university's assets over its liabilities as:

A. fund balance. B. unrestricted and restricted fund balance. C. retained earnings. D. unrestricted, temporarily restricted, and permanently restricted net assets.

15.

In a university, class cancellation refunds of tuition and fees should be recorded as: I. a reduction of revenue from tuition and fees. II. a reduction of accounts receivable.

A. I only B. II only C. Either I or II D. Neither I nor II

AACSB: Reflective Thinking AICPA FN: Decision Making

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Blooms: Remember Difficulty: 1 Easy Learning Objective: 19-02 Understand financial reporting rules and make basic journal entries for not-for-profit colleges and universities. Topic: Special Conventions of Revenue and Expenditure Recognition

16.

A private university received $280,000 from student tuition and fees for the year 20X9 summer session. The session began on June 20, 20X9, and ended on July 30, 20X9. The university's fiscal year end is June 30. According to the AICPA College and University Audit Guide, how should the university report the $280,000 of receipts in its financial statements for the year ended June 30, 20X9?

A. Current revenue of $280,000. B. Current revenue of $70,000 and deferred revenue of $210,000. C. Deferred revenue of $280,000. D. Restricted current revenue of $280,000.

AACSB: Analytic AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 19-02 Understand financial reporting rules and make basic journal entries for not-for-profit colleges and universities. Topic: Private Colleges and Universities

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17.

Assume that a private university collects tuition and fees at the beginning of summer school, in which two weeks are offered in the first fiscal year and the remaining six weeks are offered in the second fiscal year. According to the approach recommended by the National Association of College and University Business Officers (NACUBO), the university would:

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18.

A private university offers graduate assistantships to qualified students each year. In exchange for the waiver of tuition, graduate assistants are required to assist faculty members with research and other activities. Assume a graduate assistant received a $4,000 tuition waiver for the current academic year. Based on these facts, the university should record

19.

For the year ended June 30, 20X9, a university assessed its students a total of $4,000,000 for tuition and fees. Included in this amount was $300,000 of tuition remissions awarded to graduate teaching assistants, and $150,000 of scholarships awarded to undergraduate students. Tuition and fees totaling $3,550,000 were collected during the year ended June 30, 20X9. What amount should be reported in the unrestricted fund as net revenue from tuition and fees for the year ended June 30, 20X9?

A. $4,000,000 B. $3,550,000 C. $3,700,000 D. $3,850,000

AACSB: Analytic AICPA FN: Measurement

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Blooms: Apply Difficulty: 3 Hard Learning Objective: 19-02 Understand financial reporting rules and make basic journal entries for not-for-profit colleges and universities. Topic: Colleges and Universities

20.

A private not-for-profit university generally must depreciate all tangible fixed assets, except: I. works of art and other historical treasures. II. administration buildings.

A. I only B. II only C. Both I and II D. Neither I nor II

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21.

A private college received an offer from a CPA who is an alumnus to teach a one-semester advanced accounting course at no cost. ASC 958 prescribes that this contribution of service:

22.

In accordance with ASC 958, contributions from donors which are to be permanently invested should be disclosed on the statement of activities of a private university as an increase in:

A. Permanently restricted net assets. B. Permanently restricted fund balance. C. Endowment fund balance. D. Deferred revenues.

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23.

For the year ended June 30, 20X9, a private college received contributions from alumni which were restricted for faculty research stipends to be awarded during the next fiscal year. For the year ended June 30, 20X9, these contributions should be disclosed on the statement of activities of the private college as an increase in:

A. the fund balance of the restricted current fund. B. temporarily restricted net assets. C. deferred revenues. D. temporarily restricted fund balance.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 19-02 Understand financial reporting rules and make basic journal entries for not-for-profit colleges and universities. Topic: Private Colleges and Universities

24.

A private, not-for-profit university should prepare which of the following financial statements? I. statement of financial position. II. statement of activities. III. statement of changes in fund balances. IV. statement of cash flows. V. statement of changes in financial position.

A. I, II, and III. B. II, III, and IV. C. I, II, and IV. D. II, III, and V.

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AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 19-02 Understand financial reporting rules and make basic journal entries for not-for-profit colleges and universities. Topic: Private Colleges and Universities

25.

Unrestricted gifts and endowment income of a private university are reported as

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26.

A not-for-profit private college in Virginia created a separate foundation responsible for obtaining financial support from alumni and others. Foundation assets are used for the benefit of the college. Donations made to the foundation and subsequently transferred to the college should be:

27.

Unrestricted current funds of a private university designated by the governing board for a specific future purpose should be reported as part of:

A. unrestricted net assets. B. temporarily restricted net assets. C. board-restricted net assets. D. term endowments.

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Learning Objective: 19-02 Understand financial reporting rules and make basic journal entries for not-for-profit colleges and universities. Topic: Private Colleges and Universities

28.

Note: This is a Kaplan CPA Review Question The statement of financial position for a private not-for-profit college should show separate dollar amounts for

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 19-02 Understand financial reporting rules and make basic journal entries for not-for-profit colleges and universities. Topic: Private Colleges and Universities

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29.

Note: This is a Kaplan CPA Review Question Clay University, a not-for-profit university, earned $300,000 from bookstore revenue and spent $100,000 for faculty research in 20X1. The $100,000 for faculty research came from a $150,000 research grant received in the previous year. What is the effect of these events on unrestricted net assets in 20X1?

A. Increase $450,000 B. Increase $400,000 C. Increase $300,000 D. Increase $200,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 19-01 Understand financial reporting rules and make basic journal entries for private; not-for-profit entities. Learning Objective: 19-02 Understand financial reporting rules and make basic journal entries for not-for-profit colleges and universities. Topic: Financial Reporting for Private, Not-For-Profit Entities Topic: Private Colleges and Universities

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30.

Note: This is a Kaplan CPA Review Question In 20X1, Ellen College, a private not-for-profit institution, received a $100,000 grant for faculty research. The grant money was not spent until 20X2. For 20X1, Ellen College should report the contribution as:

A. Temporarily restricted asset. B. Unrestricted revenue. C. Other operating revenue. D. Other non-operating revenue.

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 19-01 Understand financial reporting rules and make basic journal entries for private; not-for-profit entities. Learning Objective: 19-02 Understand financial reporting rules and make basic journal entries for not-for-profit colleges and universities. Topic: Financial Reporting for Private, Not-For-Profit Entities Topic: Private Colleges and Universities

31.

Net assets restricted as to time or purpose should be classified as: I. temporarily restricted. II. permanently restricted.

A. I only B. II only C. Both I and II D. Neither I nor II

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Difficulty: 1 Easy Learning Objective: 19-03 Understand financial reporting rules and make basic journal entries for not-for-profit health care providers. Topic: Financial Statements for a Not-for-Profit Hospital

32.

On the statement of operations prepared for a private, not-for-profit hospital, patient service revenue earned during the year is reported net of amounts for which of the following items? I. Contractual adjustments II. Bad debts expense

A. I only B. II only C. I and II D. Neither I nor II

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33.

A private, not-for-profit hospital received a cash contribution of $100,000 from Samantha Hicks on November 14, 20X8. Ms. Hicks specified the money be used to acquire equipment. On December 31, 20X8, the hospital had not expended any of Ms. Hicks' contribution. On the statement of changes in net assets for the year ended December 31, 20X8, the hospital should report the contribution as a $100,000 increase in

A. temporarily restricted net assets. B. unrestricted net assets. C. fund balance. D. deferred revenue.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 19-03 Understand financial reporting rules and make basic journal entries for not-for-profit health care providers. Topic: Temporarily Restricted Funds

34.

Bridger Hospital, which is operated by a religious organization, provides charity care for the indigent living in the region served by the hospital. How should Bridger report the amount of its charity care on its financial statements?

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care providers. Topic: Financial Statements for a Not-for-Profit Hospital

35.

The governing board of Samaritan Hospital, which is operated by a religious organization, designated $500,000 of cash for future expansion of the hospital. On the hospital's balance sheet, the cash designated for future plant expansion would be disclosed in which of the following classes of net assets?

A. Temporarily restricted net assets B. Unrestricted net assets C. Plant replacement and expansion D. Board designated net assets

36.

Good Care Hospital, which is operated by a religious organization, received contributions of $1,000,000 from donors who stipulated that the cash be used to construct an addition to the hospital. As of the balance sheet date, none of the contributions had been expended for construction. On the hospital's balance sheet, the cash contributions would be disclosed in which of the following classes of net assets?

A. Temporarily restricted net assets B. Donor restricted net assets C. Assets whose use is limited D. Permanently restricted net assets

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Blooms: Remember Difficulty: 1 Easy Learning Objective: 19-03 Understand financial reporting rules and make basic journal entries for not-for-profit health care providers. Topic: Temporarily Restricted Funds

37.

A private, not-for-profit hospital received contributions of $50,000 from donors on June 15, 20X9. The donors stipulated that their contributions be used to purchase equipment for the hospital. As of June 30, 20X9, the end of the hospital's fiscal year, $12,000 of the contributions had been spent on equipment acquisitions. In the hospital's general fund, what account would be credited to recognize the release of the restrictions on the temporarily restricted contributions used to acquire equipment?

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38.

A private, not-for-profit hospital uses a fund structure which includes a general fund and donor restricted funds. The hospital's revenues from nursing programs and gift shops should be accounted for in the:

A. specific purpose fund. B. restricted current fund. C. general fund. D. time-restricted fund.

39.

A private, not-for-profit hospital uses a fund structure which includes a general fund and donor restricted funds. Contributions received from donors for research to be conducted by the hospital should be accounted for in the:

A. specific purpose fund. B. time-restricted fund. C. general fund. D. restricted current fund.

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40.

The restricted funds of a not-for-profit hospital are often termed "______" funds because they must hold the restricted assets and transfer expendable resources to the general fund for expenditure.

A. specific B. controlled C. limited D. holding

41.

All restricted funds of private, not-for-profit hospitals account for resources:

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42.

A private, not-for-profit hospital received a donation of medicine from the XYZ Pharmaceutical Company on March 15, 20X9. The cost of the medicine to the company was $66,000, and its market value was $110,000. Twenty percent of the medicine was used by the hospital during the year ended June 30, 20X9. On the hospital's statement of operations for the year ended June 30, 20X9, the contribution of medicine would increase operating revenues by

A. $66,000. B. $110,000. C. $52,800. D. $88,000.

AACSB: Analytic AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 19-03 Understand financial reporting rules and make basic journal entries for not-for-profit health care providers. Topic: Financial Statements for a Not-for-Profit Hospital

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43.

Good Faith Hospital, operated by a religious organization, billed patients $4,000,000 for services rendered during the year ended June 30, 20X9. The hospital realized cash of $3,500,000 from the patient billings because of the following reductions: (1) contractual adjustments of $140,000 granted to private insurance companies and to the federal government; and (2) uncollectible accounts receivable of $360,000. On the statement of operations prepared for the year ended June 30, 20X9, Good Faith Hospital should report net patient service revenue of:

A. $3,500,000. B. $3,860,000. C. $4,000,000. D. $3,640,000.

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 19-03 Understand financial reporting rules and make basic journal entries for not-for-profit health care providers. Topic: Financial Statements for a Not-for-Profit Hospital

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44.

During the fiscal year ended June 30, 20X9, a private, not-for-profit hospital acquired equipment costing $75,000, with cash contributed by donors who restricted their contributions for this purpose. On the hospital's statement of cash flows for the year ended June 30, 20X9, the equipment acquisition should be reported in which of the following sections? I. Operating activities II. Financing activities III. Investing activities

A. I B. II C. III D. I, II, III

45.

A private, not-for-profit hospital expended $35,000 of temporarily restricted assets to acquire equipment. What account should be debited in the hospital's plant replacement and expansion fund as a result of the acquisition of the equipment?

A. Net Assets Released—Plant Acquisition. B. Fund balance Released—Plant Acquisition. C. Equipment. D. Contribution Revenue Released—Plant Acquisition.

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Blooms: Understand Difficulty: 2 Medium Learning Objective: 19-03 Understand financial reporting rules and make basic journal entries for not-for-profit health care providers. Topic: Temporarily Restricted Funds

46.

In 20X9, a private not-for-profit hospital received a $200,000 cash contribution to its endowment fund. During the year, hospital administration invested $150,000 of the funds. Which of the following statements regarding the effect of these transactions on the preparation of the hospital's statement of cash flow is true?

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47.

A private, not-for-profit hospital received a contribution of $40,000 on June 15, 20X8. The donor restricted the contribution to funding research activities currently being performed by the hospital. For the year ended December 31, 20X8, the hospital spent $30,000 of the contribution on research activities. The hospital expended the remaining $10,000 on research activities in January of 20X9. Refer to the above information. On the statement of cash flows prepared for the year ended December 31, 20X8, the events described would increase net cash flows provided by

A. operating activities by $40,000. B. financing activities by $40,000. C. financing activities by $10,000. D. operating activities by $10,000.

AACSB: Analytic AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 19-03 Understand financial reporting rules and make basic journal entries for not-for-profit health care providers. Topic: Financial Statements for a Not-for-Profit Hospital

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48.

A private, not-for-profit hospital received a contribution of $40,000 on June 15, 20X8. The donor restricted the contribution to funding research activities currently being performed by the hospital. For the year ended December 31, 20X8, the hospital spent $30,000 of the contribution on research activities. The hospital expended the remaining $10,000 on research activities in January of 20X9. Refer to the above information. On the statement of operations prepared for the year ended December 31, 20X8, the events described would:

A. increase operating income by $30,000. B. have no effect on operating income. C. increase unrestricted net assets by $30,000. D. decrease unrestricted net assets by $30,000.

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49.

A private, not-for-profit hospital received a contribution of $40,000 on June 15, 20X8. The donor restricted the contribution to funding research activities currently being performed by the hospital. For the year ended December 31, 20X8, the hospital spent $30,000 of the contribution on research activities. The hospital expended the remaining $10,000 on research activities in January of 20X9. Refer to the above information. On the statement of changes in net assets prepared for the year ended December 31, 20X8, the events described would

50.

In a private, not-for-profit hospital, which fund would record cash and investments which have been restricted by the governing board for acquisitions of equipment and construction of a new hospital addition?

A. The plant replacement and expansion fund. B. The specific purpose fund. C. The endowment fund. D. The general fund.

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Difficulty: 2 Medium Learning Objective: 19-03 Understand financial reporting rules and make basic journal entries for not-for-profit health care providers. Topic: Hospital Accounting

51.

The governing board of a hospital operated by a religious organization designated $3,000,000 of cash to be used for plant expansion. The cash was invested in stocks and bonds which earned $250,000 of dividend and interest income. The income from investments should be reported on the hospital's statement of operations as an increase in:

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52.

A private, not-for-profit hospital received the following restricted contributions and other receipts during the year ended December 31, 20X8:

A. $1,500,000 B. $1,200,000 C. $500,000 D. $300,000

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53.

The transactions listed in the following questions occurred in a private, not-for-profit hospital during 20X8. For each transaction, indicate its effect on the hospital's statement of operations for the year ended December 31, 20X8. Transaction: Billed patients for services rendered. Effect on Statement of Operations:

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54.

The transactions listed in the following questions occurred in a private, not-for-profit hospital during 20X8. For each transaction, indicate its effect on the hospital's statement of operations for the year ended December 31, 20X8. Transaction: A gain was realized from the sale of endowment investments. The gain is not expendable. Effect on Statement of Operations:

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55.

The transactions listed in the following questions occurred in a private, not-for-profit hospital during 20X8. For each transaction, indicate its effect on the hospital's statement of operations for the year ended December 31, 20X8. Transaction: Depreciation expense was recorded for the year. Effect on Statement of Operations:

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56.

The transactions listed in the following questions occurred in a private, not-for-profit hospital during 20X8. For each transaction, indicate its effect on the hospital's statement of operations for the year ended December 31, 20X8. Transaction: The governing board designated assets for plant expansion. Effect on Statement of Operations:

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57.

The transactions listed in the following questions occurred in a private, not-for-profit hospital during 20X8. For each transaction, indicate its effect on the hospital's statement of operations for the year ended December 31, 20X8. Transaction: Received contributions restricted by donors for research activities. Effect on Statement of Operations:

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58.

The transactions listed in the following questions occurred in a private, not-for-profit hospital during 20X8. For each transaction, indicate its effect on the hospital's statement of operations for the year ended December 31, 20X8. Transaction: Expended 50 percent of the contributions restricted for research in the previous item. Effect on Statement of Operations:

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59.

The transactions listed in the following questions occurred in a private, not-for-profit hospital during 20X8. For each transaction, indicate its effect on the hospital's statement of operations for the year ended December 31, 20X8. Transaction: Received contributions restricted by donors for equipment acquisition. Effect on Statement of Operations:

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60.

The transactions listed in the following questions occurred in a private, not-for-profit hospital during 20X8. For each transaction, indicate its effect on the hospital's statement of operations for the year ended December 31, 20X8. Transaction: Acquired equipment with all of the contributions received in the previous item. Effect on Statement of Operations:

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61.

The transactions listed in the following questions occurred in a private, not-for-profit hospital during 20X8. For each transaction, indicate its effect on the hospital's statement of operations for the year ended December 31, 20X8. Transaction: Endowment income was earned. The donor placed no restrictions on the investment earnings. Effect on Statement of Operations:

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62.

The transactions listed in the following questions occurred in a private, not-for-profit hospital during 20X8. For each transaction, indicate its effect on the hospital's statement of operations for the year ended December 31, 20X8. Transaction: Received cash contribution from donor who stipulated the contribution be permanently invested. Effect on Statement of Operations:

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63.

The transactions listed in the following questions occurred in a private, not-for-profit hospital during 20X8. For each transaction, indicate its effect on the hospital's statement of operations for the year ended December 31, 20X8. Transaction: Acquired investments with cash received in the previous item. Effect on Statement of Operations:

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64.

The transactions listed in the following questions occurred in a private, not-for-profit hospital during 20X8. For each transaction, indicate its effect on the hospital's statement of operations for the year ended December 31, 20X8. Transaction: Received tuition revenue from hospital nursing program and cash from sales of goods in the hospital gift shop. Effect on Statement of Operations:

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65.

Note: This is a Kaplan CPA Review Question Which of the following types of health care organizations follow FASB authoritative literature?

A. Option A B. Option B C. Option C D. Option D

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 19-03 Understand financial reporting rules and make basic journal entries for not-for-profit health care providers. Topic: Hospital Accounting

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66.

Note: This is a Kaplan CPA Review Question Fike Hospital, a private, not-for-profit institution, receives an unrestricted gift of common stock with a fair value of $100,000. The donor had paid $40,000 for the stock five years earlier. The gift should be recorded as an

AACSB: Reflective Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 19-03 Understand financial reporting rules and make basic journal entries for not-for-profit health care providers. Topic: Financial Statements for a Not-for-Profit Hospital

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67.

Note: This is a Kaplan CPA Review Question The Weyman Hospital, a private, not-for-profit institution, reported the following information:

What amount should the hospital report as net patient service revenue?

A. $840,000 B. $880,000 C. $900,000 D. $980,000

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68.

On June 30, 20X9, a voluntary health and welfare organization received pledges from donors amounting to $50,000. The donors did not place any time or use restrictions on the amount pledged. It was estimated that 10 percent of the pledges would not be collected. How should the voluntary health and welfare organization report these pledges on its financial statements prepared at the end of its fiscal year, June 30, 20X9?

A. As fund balance for $45,000. B. As contribution revenue-unrestricted for $45,000. C. As contribution revenue-unrestricted for $50,000. D. As fund balance-unrestricted for $50,000.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 19-04 Understand financial reporting rules and make basic journal entries for not-for-profit voluntary health and welfare organizations. Topic: Financial Statements for a VHWO

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69.

A donor agrees to contribute $5,000 per year at the end of each of the next five years to a voluntary health and welfare organization. The donor did not place any use restrictions on the amount pledged. The stream of the payments is discounted at 6 percent. The first payment of $5,000 is received at the end of the first year. The present value factor for a five-payment annuity due on June 30, 20X9, at 6 percent is 4.2124. Based on the preceding information, the journal entry to recognize present value at the time the pledge is received includes:

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 19-04 Understand financial reporting rules and make basic journal entries for not-for-profit voluntary health and welfare organizations. Topic: Accounting for a VHWO

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70.

A donor agrees to contribute $5,000 per year at the end of each of the next five years to a voluntary health and welfare organization. The donor did not place any use restrictions on the amount pledged. The stream of the payments is discounted at 6 percent. The first payment of $5,000 is received at the end of the first year. The present value factor for a five-payment annuity due on June 30, 20X9, at 6 percent is 4.2124. Based on the preceding information, at the end of the first year, the pledge increased unrestricted net assets by:

A. $25,000. B. $21,062. C. $4,212. D. $5,000.

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71.

A donor agrees to contribute $5,000 per year at the end of each of the next five years to a voluntary health and welfare organization. The donor did not place any use restrictions on the amount pledged. The stream of the payments is discounted at 6 percent. The first payment of $5,000 is received at the end of the first year. The present value factor for a five-payment annuity due on June 30, 20X9, at 6 percent is 4.2124. Based on the preceding information, the increase in present value of the contributions receivable recognized at the end of the first year equals:

A. $5,000. B. $1,264. C. $4,212. D. $787.

72.

The disclosure, "net assets released from restrictions," is reported on which of the following financial statements for a voluntary health and welfare organization? I. The statement of cash flows. II. The statement of activities.

A. I only B. II only C. Both I and II. D. Neither I nor II.

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AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 19-04 Understand financial reporting rules and make basic journal entries for not-for-profit voluntary health and welfare organizations. Topic: Financial Statements for a VHWO

73.

During the fiscal year ended June 30, 20X9, Global Charities, a voluntary health and welfare organization, received unrestricted cash contributions of $500,000 and temporarily restricted cash contributions of $300,000. All of the temporarily restricted contributions were restricted by the donors for equipment acquisitions. During the year ended June 30, 20X9, equipment costing $250,000 was acquired with the restricted contributions. As a result of these two contributions, Global Charities' statement of cash flows, prepared for the year ended June 30, 20X9, would report an increase in net cash provided by operating activities of:

A. $500,000. B. $800,000. C. $750,000. D. $550,000.

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74.

A voluntary health and welfare organization received a $300,000 contribution on April 15, 20X9, from a donor who stipulated the donation be invested permanently in stocks and bonds. The donor further stipulated earnings from the investments be spent according to the wishes of the governing board of the voluntary health and welfare organization. Earnings from the investments for the year ended June 30, 20X9, amounted to $6,000. How would the voluntary health and welfare organization report this information for the year ended June 30, 20X9?

AACSB: Analytic AICPA FN: Decision Making Blooms: Apply Difficulty: 3 Hard Learning Objective: 19-04 Understand financial reporting rules and make basic journal entries for not-for-profit voluntary health and welfare organizations. Topic: Financial Statements for a VHWO

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75.

Which financial statement is(are) required for a voluntary health and welfare organization which is not required for a private, not-for-profit hospital? I. A statement of operations. II. A statement of functional expenses.

A. I only B. II only C. Both I and II D. Neither I nor II

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 19-04 Understand financial reporting rules and make basic journal entries for not-for-profit voluntary health and welfare organizations. Topic: Financial Statements for a VHWO

76.

A voluntary health and welfare organization received unrestricted cash donations of $20,000 from donors who attended a dinner held for the benefit of the organization. The costs of the dinner, including room rental, and other expenses, amounted to $7,000. On the statement of activities prepared for the voluntary health and welfare organization, the expenses of the dinner should be:

A. reported as management and general expenses. B. netted against the $20,000 of contribution revenue. C. reported as fund raising costs. D. reported as programmatic expenses.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium

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Learning Objective: 19-04 Understand financial reporting rules and make basic journal entries for not-for-profit voluntary health and welfare organizations. Topic: Financial Statements for a VHWO

77.

On the statement of functional expenses prepared for a voluntary health and welfare organization, depreciation expense is allocated to I. expenses for program services. II. expenses for supporting services.

A. I only B. II only C. Both I and II D. Neither I nor II

78.

A voluntary health and welfare organization developed and printed informational materials which were intended to both educate the public about how its resources are used to help people in need and to also appeal to the public for much needed support. In this situation, the cost of the informational materials should be

AACSB: Reflective Thinking

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AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 19-04 Understand financial reporting rules and make basic journal entries for not-for-profit voluntary health and welfare organizations. Topic: Accounting for a VHWO

79.

In accordance with ASC 958, pledges, which are temporarily restricted by donors, are reported as increases in temporarily restricted net assets on the statement of activities of a voluntary health and welfare organization when the

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80.

A voluntary health and welfare organization received $200,000 of pledges from donors on February 15, 20X9. The donors did not place either time or use restrictions on the amount pledged. The governing board estimated that 10 percent of the pledges would be uncollectible. During the remainder of fiscal 20X9, cash received from pledges amounted to $184,000. For the year ended June 30, 20X9, what amount should the voluntary health and welfare organization report as Contributions-Unrestricted?

A. $0 B. $200,000 C. $184,000 D. $180,000

81.

A voluntary health and welfare organization reports pledges receivable on its statement of financial position at the present value of the future cash collections. How is the increase in the present value of the pledges receivable, which is due to the passage of time, reported on the voluntary health and welfare organization's statement of activities?

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Learning Objective: 19-04 Understand financial reporting rules and make basic journal entries for not-for-profit voluntary health and welfare organizations. Topic: Financial Statements for a VHWO

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82.

Local Services, a voluntary health and welfare organization had the following classes of net assets on July 1, 20X8, the beginning of its fiscal year:

A. $1,070,000. B. $1,030,000. C. $1,000,000. D. $960,000.

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Learning Objective: 19-04 Understand financial reporting rules and make basic journal entries for not-for-profit voluntary health and welfare organizations. Topic: Financial Statements for a VHWO

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83.

Local Services, a voluntary health and welfare organization had the following classes of net assets on July 1, 20X8, the beginning of its fiscal year:

During the year ended June 30, 20X9, the following events occurred: (1) It purchased equipment, costing $100,000, with contributions restricted for this purpose. The contributions had been received from donors during June of 20X8. (2) It received $130,000 of cash donations which were restricted for research activities. During the year ended June 30, 20X9, $90,000 of the contributions were expended on research. (3) It sold investments classified in the permanently restricted class for a loss of $40,000. Dividends and interest income earned on the investments amounted to $70,000. There were no restrictions on how investment income was to be used. (4) It received cash contributions of $200,000 from donors who did not place either time or use restrictions upon their donations. (5) Expenses, excluding depreciation expense, for program services and supporting services incurred during the year ended June 30, 20X9, amounted to $260,000. (6) Depreciation expense for the year ended June 30, 20X9, was $80,000. Refer to the above information. On the statement of activities for the year ended June 30, 20X9, temporarily restricted net assets:

A. increased $130,000. B. increased $40,000. C. decreased $100,000. D. decreased $60,000.

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Learning Objective: 19-04 Understand financial reporting rules and make basic journal entries for not-for-profit voluntary health and welfare organizations. Topic: Financial Statements for a VHWO

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84.

Local Services, a voluntary health and welfare organization had the following classes of net assets on July 1, 20X8, the beginning of its fiscal year:

During the year ended June 30, 20X9, the following events occurred: (1) It purchased equipment, costing $100,000, with contributions restricted for this purpose. The contributions had been received from donors during June of 20X8. (2) It received $130,000 of cash donations which were restricted for research activities. During the year ended June 30, 20X9, $90,000 of the contributions were expended on research. (3) It sold investments classified in the permanently restricted class for a loss of $40,000. Dividends and interest income earned on the investments amounted to $70,000. There were no restrictions on how investment income was to be used. (4) It received cash contributions of $200,000 from donors who did not place either time or use restrictions upon their donations. (5) Expenses, excluding depreciation expense, for program services and supporting services incurred during the year ended June 30, 20X9, amounted to $260,000. (6) Depreciation expense for the year ended June 30, 20X9, was $80,000. Refer to the above information. On the statement of activities for the year ended June 30, 20X9, reclassifications would be reported at

A. $190,000. B. $100,000. C. $90,000. D. $230,000.

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Learning Objective: 19-04 Understand financial reporting rules and make basic journal entries for not-for-profit voluntary health and welfare organizations. Topic: Financial Statements for a VHWO

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85.

Local Services, a voluntary health and welfare organization had the following classes of net assets on July 1, 20X8, the beginning of its fiscal year:

During the year ended June 30, 20X9, the following events occurred: (1) It purchased equipment, costing $100,000, with contributions restricted for this purpose. The contributions had been received from donors during June of 20X8. (2) It received $130,000 of cash donations which were restricted for research activities. During the year ended June 30, 20X9, $90,000 of the contributions were expended on research. (3) It sold investments classified in the permanently restricted class for a loss of $40,000. Dividends and interest income earned on the investments amounted to $70,000. There were no restrictions on how investment income was to be used. (4) It received cash contributions of $200,000 from donors who did not place either time or use restrictions upon their donations. (5) Expenses, excluding depreciation expense, for program services and supporting services incurred during the year ended June 30, 20X9, amounted to $260,000. (6) Depreciation expense for the year ended June 30, 20X9, was $80,000. Refer to the above information. Which of the following statements is(are) correct about the program and supporting expenses that would be reported on the statement of activities for the year ended June 30, 20X9? I. Program and supporting expenses should be reported at $340,000. II. All of the program and supporting expenses should be reported as a deduction from unrestricted revenues and other support.

A. I only B. II only C. I and II

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D. Neither I nor II

86.

Note: This is a Kaplan CPA Review Question Which of the following transactions of a private voluntary health and welfare organization would increase temporarily restricted net assets in the statement of activities for the current year? I. Received a contribution of $20,000 from a donor in the current year who stipulated that the money not be spent until the following year. II. Spent $25,000 for fund raising during the current year from a donation from the previous year.

A. I only B. Both I and II C. II only D. Neither I nor II

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Understand Difficulty: 1 Easy Learning Objective: 19-04 Understand financial reporting rules and make basic journal entries for not-for-profit voluntary health and welfare organizations. Topic: Financial Statements for a VHWO

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87.

Note: This is a Kaplan CPA Review Question Home Care, Inc. (Home Care), a nongovernmental voluntary health and welfare organization, received two contributions in 20X3. One contribution of $250,000 was restricted for use as general support in 20X4. The other contribution of $200,000 carried no donor restrictions. What amount should Home Care report as temporarily restricted contributions in its 20X3 statement of activities?

A. $200,000 B. $450,000 C. $250,000 D. $0

AACSB: Analytic AICPA FN: Reporting Blooms: Understand Difficulty: 3 Hard Learning Objective: 19-04 Understand financial reporting rules and make basic journal entries for not-for-profit voluntary health and welfare organizations. Topic: Financial Statements for a VHWO

88.

ASC 958 requires that an "other not-for-profit entity" (ONPO) provide three financial statements. Which of the following is NOT one among them?

A. A statement of functional expenses B. A statement of financial position C. A statement of activities D. A statement of cash flows

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 19-05 Understand financial reporting rules and make basic journal entries for other not-for-profit

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organizations. Topic: Financial Statements of ONPOs

89.

Golden Path, a labor union, had the following receipts and expenses for the year ended December 31, 20X8:

A. $980,000 B. $1,100,000 C. $1,210,000 D. $1,020,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 19-05 Understand financial reporting rules and make basic journal entries for other not-for-profit organizations. Topic: Financial Statements of ONPOs

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90.

Golden Path, a labor union, had the following receipts and expenses for the year ended December 31, 20X8:

A. $720,000 B. $910,000 C. $440,000 D. $760,000

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91.

Golden Path, a labor union, had the following receipts and expenses for the year ended December 31, 20X8:

A. $150,000 B. $720,000 C. $440,000 D. $290,000

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92.

Golden Path, a labor union, had the following receipts and expenses for the year ended December 31, 20X8:

The union's constitution provides that 12 percent of the per capita dues be designated for the strike insurance fund to be distributed for strike relief at the discretion of the union's executive board. Based on the information provided, in Golden Path's statement of activities for the year ended December 31, 20X8, what amounts should be reported under the classifications of temporarily and permanently restricted net assets?

A. $0 and $110,000 respectively. B. $110,000 and $0 respectively. C. $60,000 and $50,000 respectively. D. $50,000 and $60,000 respectively.

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93.

Reporting requirements of other not-for-profit entities (ONPOs) are similar to those of which of the following entities?

A. A public university B. A voluntary health and welfare organization C. An enterprise fund of a state or local government D. A hospital operated by a county government

94.

Note: This is a Kaplan CPA Review Question The statement of cash flows for a private not-for-profit performing arts center should report cash flows according to which of the following classifications?

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 19-05 Understand financial reporting rules and make basic journal entries for other not-for-profit organizations. Topic: Financial Statements of ONPOs

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Essay Questions

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95.

Private Not-For-Profit (NFP) Entities. Select from this list of terms to answer the following questions. A. Fair value B. Unrestricted net assets C. GASB D. FASB E. Statement of Revenues, Expenditures, and Changes in Fund Balance F. Lower of cost or market G. Accrual method H. Statement of Activities I. General fund, restricted fund, endowment fund J. Modified accrual method K. Permanently restricted net assets L. Temporarily restricted net assets M. Endowment fund N. Unrestricted, temporarily restricted, permanently restricted O. Depreciation P. Works of art and other historical treasures Q. General fund R. Cost Indicate your choice by entering the letter corresponding to the correct term. A term may be used more than once or not at all. "Responsible for establishing accounting standards for private NFP entities" describes which term listed above?

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96.

Private Not-For-Profit (NFP) Entities. Select from this list of terms to answer the following questions. A. Fair value B. Unrestricted net assets C. GASB D. FASB E. Statement of Revenues, Expenditures, and Changes in Fund Balance F. Lower of cost or market G. Accrual method H. Statement of Activities I. General fund, restricted fund, endowment fund J. Modified accrual method K. Permanently restricted net assets L. Temporarily restricted net assets M. Endowment fund N. Unrestricted, temporarily restricted, permanently restricted O. Depreciation P. Works of art and other historical treasures Q. General fund R. Cost Indicate your choice by entering the letter corresponding to the correct term. A term may be used more than once or not at all. "Classification of an endowment contribution" describes which term listed above?

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember

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Difficulty: 1 Easy Learning Objective: 19-01 Understand financial reporting rules and make basic journal entries for private; not-for-profit entities. Topic: Financial Reporting for Private, Not-For-Profit Entities

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97.

Private Not-For-Profit (NFP) Entities. Select from this list of terms to answer the following questions. A. Fair value B. Unrestricted net assets C. GASB D. FASB E. Statement of Revenues, Expenditures, and Changes in Fund Balance F. Lower of cost or market G. Accrual method H. Statement of Activities I. General fund, restricted fund, endowment fund J. Modified accrual method K. Permanently restricted net assets L. Temporarily restricted net assets M. Endowment fund N. Unrestricted, temporarily restricted, permanently restricted O. Depreciation P. Works of art and other historical treasures Q. General fund R. Cost Indicate your choice by entering the letter corresponding to the correct term. A term may be used more than once or not at all. "Reported as an expenditure of the fund using plant and equipment" describes which term listed above?

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98.

Private Not-For-Profit (NFP) Entities. Select from this list of terms to answer the following questions. A. Fair value B. Unrestricted net assets C. GASB D. FASB E. Statement of Revenues, Expenditures, and Changes in Fund Balance F. Lower of cost or market G. Accrual method H. Statement of Activities I. General fund, restricted fund, endowment fund J. Modified accrual method K. Permanently restricted net assets L. Temporarily restricted net assets M. Endowment fund N. Unrestricted, temporarily restricted, permanently restricted O. Depreciation P. Works of art and other historical treasures Q. General fund R. Cost Indicate your choice by entering the letter corresponding to the correct term. A term may be used more than once or not at all. "Financial statement of a private NFP entity" describes which term listed above?

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember

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99.

Private Not-For-Profit (NFP) Entities. Select from this list of terms to answer the following questions. A. Fair value B. Unrestricted net assets C. GASB D. FASB E. Statement of Revenues, Expenditures, and Changes in Fund Balance F. Lower of cost or market G. Accrual method H. Statement of Activities I. General fund, restricted fund, endowment fund J. Modified accrual method K. Permanently restricted net assets L. Temporarily restricted net assets M. Endowment fund N. Unrestricted, temporarily restricted, permanently restricted O. Depreciation P. Works of art and other historical treasures Q. General fund R. Cost Indicate your choice by entering the letter corresponding to the correct term. A term may be used more than once or not at all. "Tangible fixed assets not depreciated by a private college or university" describes which term listed above?

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100.

Private Not-For-Profit (NFP) Entities. Select from this list of terms to answer the following questions. A. Fair value B. Unrestricted net assets C. GASB D. FASB E. Statement of Revenues, Expenditures, and Changes in Fund Balance F. Lower of cost or market G. Accrual method H. Statement of Activities I. General fund, restricted fund, endowment fund J. Modified accrual method K. Permanently restricted net assets L. Temporarily restricted net assets M. Endowment fund N. Unrestricted, temporarily restricted, permanently restricted O. Depreciation P. Works of art and other historical treasures Q. General fund R. Cost Indicate your choice by entering the letter corresponding to the correct term. A term may be used more than once or not at all. "Basis for measuring investments in financial statements" describes which term listed above?

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101.

Private Not-For-Profit (NFP) Entities. Select from this list of terms to answer the following questions. A. Fair value B. Unrestricted net assets C. GASB D. FASB E. Statement of Revenues, Expenditures, and Changes in Fund Balance F. Lower of cost or market G. Accrual method H. Statement of Activities I. General fund, restricted fund, endowment fund J. Modified accrual method K. Permanently restricted net assets L. Temporarily restricted net assets M. Endowment fund N. Unrestricted, temporarily restricted, permanently restricted O. Depreciation P. Works of art and other historical treasures Q. General fund R. Cost Indicate your choice by entering the letter corresponding to the correct term. A term may be used more than once or not at all. "Classification of investment income from endowment investments if there are no donor restrictions as to income" describes which term listed above?

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102.

Private Not-For-Profit (NFP) Entities. Select from this list of terms to answer the following questions. A. Fair value B. Unrestricted net assets C. GASB D. FASB E. Statement of Revenues, Expenditures, and Changes in Fund Balance F. Lower of cost or market G. Accrual method H. Statement of Activities I. General fund, restricted fund, endowment fund J. Modified accrual method K. Permanently restricted net assets L. Temporarily restricted net assets M. Endowment fund N. Unrestricted, temporarily restricted, permanently restricted O. Depreciation P. Works of art and other historical treasures Q. General fund R. Cost Indicate your choice by entering the letter corresponding to the correct term. A term may be used more than once or not at all. "Classification of contributions restricted by purpose" describes which term listed above?

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember

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103.

Private Not-For-Profit (NFP) Entities. Select from this list of terms to answer the following questions. A. Fair value B. Unrestricted net assets C. GASB D. FASB E. Statement of Revenues, Expenditures, and Changes in Fund Balance F. Lower of cost or market G. Accrual method H. Statement of Activities I. General fund, restricted fund, endowment fund J. Modified accrual method K. Permanently restricted net assets L. Temporarily restricted net assets M. Endowment fund N. Unrestricted, temporarily restricted, permanently restricted O. Depreciation P. Works of art and other historical treasures Q. General fund R. Cost Indicate your choice by entering the letter corresponding to the correct term. A term may be used more than once or not at all. "Basis for measuring expenditures for contributed services requiring special skills" describes which term listed above?

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104.

Private Not-For-Profit (NFP) Entities. Select from this list of terms to answer the following questions. A. Fair value B. Unrestricted net assets C. GASB D. FASB E. Statement of Revenues, Expenditures, and Changes in Fund Balance F. Lower of cost or market G. Accrual method H. Statement of Activities I. General fund, restricted fund, endowment fund J. Modified accrual method K. Permanently restricted net assets L. Temporarily restricted net assets M. Endowment fund N. Unrestricted, temporarily restricted, permanently restricted O. Depreciation P. Works of art and other historical treasures Q. General fund R. Cost Indicate your choice by entering the letter corresponding to the correct term. A term may be used more than once or not at all. "Basis for measuring contributions" describes which term listed above?

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember

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105.

Private Not-For-Profit (NFP) Entities. Select from this list of terms to answer the following questions. A. Fair value B. Unrestricted net assets C. GASB D. FASB E. Statement of Revenues, Expenditures, and Changes in Fund Balance F. Lower of cost or market G. Accrual method H. Statement of Activities I. General fund, restricted fund, endowment fund J. Modified accrual method K. Permanently restricted net assets L. Temporarily restricted net assets M. Endowment fund N. Unrestricted, temporarily restricted, permanently restricted O. Depreciation P. Works of art and other historical treasures Q. General fund R. Cost Indicate your choice by entering the letter corresponding to the correct term. A term may be used more than once or not at all. "Net asset classifications per FAC 6" describes which term listed above?

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember

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106.

Private Not-For-Profit (NFP) Entities. Select from this list of terms to answer the following questions. A. Fair value B. Unrestricted net assets C. GASB D. FASB E. Statement of Revenues, Expenditures, and Changes in Fund Balance F. Lower of cost or market G. Accrual method H. Statement of Activities I. General fund, restricted fund, endowment fund J. Modified accrual method K. Permanently restricted net assets L. Temporarily restricted net assets M. Endowment fund N. Unrestricted, temporarily restricted, permanently restricted O. Depreciation P. Works of art and other historical treasures Q. General fund R. Cost Indicate your choice by entering the letter corresponding to the correct term. A term may be used more than once or not at all. "Basis of accounting for private NFPs" describes which term listed above?

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember

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107.

The following information is contained in the funds which are used to account for the transactions of the Hope Hospital, which is operated by a nonprofit, religious organization. The balances in the accounts are as of June 30, 20X9, the end of the hospital's fiscal year. Credit amounts are in parentheses.

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AACSB: Analytic AICPA FN: Reporting Blooms: Apply

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Difficulty: 3 Hard Learning Objective: 19-03 Understand financial reporting rules and make basic journal entries for not-for-profit health care providers. Topic: Financial Statements for a Not-for-Profit Hospital

108.

The CFO of a "Not-for-Profit" hospital is making a presentation at your college. The presentation is for Business and Health-Science majors. During the presentation the CFO mentions assets being reported "above the line." On the way out your roommate a healthscience major asks, you an accounting major, to explain what the CFO was referring to. What do you respond?

Not-for-Profit hospitals report an operating performance indicator in their statement of operations. This item reports the hospital's operating activities for the period and should include both operating income (loss) for the period and other income available for current operations. ASC 958 requires that net assets released from restrictions that are used in operations to be included in the performance indicator, thus, "above the line". This allows the reader of the financial statements to be able to identify assets that were previously restricted, held for specified purposes by the donor, that are now available for use in operations. Therefore, expenses incurred to achieve the entity's operations can be matched with the resources.

AACSB: Communication AICPA BB: Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 19-03 Understand financial reporting rules and make basic journal entries for not-for-profit health care providers. Topic: Financial Statements for a Not-for-Profit Hospital

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109.

The transactions described in the following questions occurred in a voluntary health and welfare organization during the year ended December 31, 20X8. For each transaction, indicate its effect(s) on the organization's statement of activities prepared for the year ended December 31, 20X8. List all effects of transactions affecting more than one class of net assets. Indicate your choice(s) by entering the letter corresponding to the effects listed here: Effects of Transactions on Statement of Activities A. Increases unrestricted net assets. B. Decreases unrestricted net assets. C. Increases temporarily restricted net assets. D. Decreases temporarily restricted net assets. E. Increases permanently restricted net assets. F. Decreases permanently restricted net assets. G. Transaction is not reported on the statement of activities. Received cash contributions restricted by donors for research.

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110.

19-180 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

111.

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112.

The transactions described in the following questions occurred in a voluntary health and welfare organization during the year ended December 31, 20X8. For each transaction, indicate its effect(s) on the organization's statement of activities prepared for the year ended December 31, 20X8. List all effects of transactions affecting more than one class of net assets. Indicate your choice(s) by entering the letter corresponding to the effects listed here: Effects of Transactions on Statement of Activities A. Increases unrestricted net assets. B. Decreases unrestricted net assets. C. Increases temporarily restricted net assets. D. Decreases temporarily restricted net assets. E. Increases permanently restricted net assets. F. Decreases permanently restricted net assets. G. Transaction is not reported on the statement of activities. The governing board designated assets for plant expansion.

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113.

The transactions described in the following questions occurred in a voluntary health and welfare organization during the year ended December 31, 20X8. For each transaction, indicate its effect(s) on the organization's statement of activities prepared for the year ended December 31, 20X8. List all effects of transactions affecting more than one class of net assets. Indicate your choice(s) by entering the letter corresponding to the effects listed here: Effects of Transactions on Statement of Activities A. Increases unrestricted net assets. B. Decreases unrestricted net assets. C. Increases temporarily restricted net assets. D. Decreases temporarily restricted net assets. E. Increases permanently restricted net assets. F. Decreases permanently restricted net assets. G. Transaction is not reported on the statement of activities. A gain was realized from the sale of securities which were permanently invested. The gain is restricted as to use.

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114.

The transactions described in the following questions occurred in a voluntary health and welfare organization during the year ended December 31, 20X8. For each transaction, indicate its effect(s) on the organization's statement of activities prepared for the year ended December 31, 20X8. List all effects of transactions affecting more than one class of net assets. Indicate your choice(s) by entering the letter corresponding to the effects listed here: Effects of Transactions on Statement of Activities A. Increases unrestricted net assets. B. Decreases unrestricted net assets. C. Increases temporarily restricted net assets. D. Decreases temporarily restricted net assets. E. Increases permanently restricted net assets. F. Decreases permanently restricted net assets. G. Transaction is not reported on the statement of activities. Endowment income was earned. The donor specified that the income be used for community service.

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115.

The transactions described in the following questions occurred in a voluntary health and welfare organization during the year ended December 31, 20X8. For each transaction, indicate its effect(s) on the organization's statement of activities prepared for the year ended December 31, 20X8. List all effects of transactions affecting more than one class of net assets. Indicate your choice(s) by entering the letter corresponding to the effects listed here: Effects of Transactions on Statement of Activities A. Increases unrestricted net assets. B. Decreases unrestricted net assets. C. Increases temporarily restricted net assets. D. Decreases temporarily restricted net assets. E. Increases permanently restricted net assets. F. Decreases permanently restricted net assets. G. Transaction is not reported on the statement of activities. Received a multi-year pledge, with cash being received this year and for the next 4 years. Donors did not place any use restrictions on how the pledges were to be spent.

A and C

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116.

The transactions described in the following questions occurred in a voluntary health and welfare organization during the year ended December 31, 20X8. For each transaction, indicate its effect(s) on the organization's statement of activities prepared for the year ended December 31, 20X8. List all effects of transactions affecting more than one class of net assets. Indicate your choice(s) by entering the letter corresponding to the effects listed here: Effects of Transactions on Statement of Activities A. Increases unrestricted net assets. B. Decreases unrestricted net assets. C. Increases temporarily restricted net assets. D. Decreases temporarily restricted net assets. E. Increases permanently restricted net assets. F. Decreases permanently restricted net assets. G. Transaction is not reported on the statement of activities. Income was earned from investments of assets that the board previously designated for plant expansion.

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117.

The transactions described in the following questions occurred in a voluntary health and welfare organization during the year ended December 31, 20X8. For each transaction, indicate its effect(s) on the organization's statement of activities prepared for the year ended December 31, 20X8. List all effects of transactions affecting more than one class of net assets. Indicate your choice(s) by entering the letter corresponding to the effects listed here: Effects of Transactions on Statement of Activities A. Increases unrestricted net assets. B. Decreases unrestricted net assets. C. Increases temporarily restricted net assets. D. Decreases temporarily restricted net assets. E. Increases permanently restricted net assets. F. Decreases permanently restricted net assets. G. Transaction is not reported on the statement of activities. Received pledges from donors who placed no time or use restrictions on how the pledges were to be spent.

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118.

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119.

The transactions described in the following questions occurred in a voluntary health and welfare organization during the year ended December 31, 20X8. For each transaction, indicate its effect(s) on the organization's statement of activities prepared for the year ended December 31, 20X8. List all effects of transactions affecting more than one class of net assets. Indicate your choice(s) by entering the letter corresponding to the effects listed here: Effects of Transactions on Statement of Activities A. Increases unrestricted net assets. B. Decreases unrestricted net assets. C. Increases temporarily restricted net assets. D. Decreases temporarily restricted net assets. E. Increases permanently restricted net assets. F. Decreases permanently restricted net assets. G. Transaction is not reported on the statement of activities. Acquired equipment with all of the contributions previously received from donors for equipment purchases.

A and D

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120.

The transactions described in the following questions occurred in a voluntary health and welfare organization during the year ended December 31, 20X8. For each transaction, indicate its effect(s) on the organization's statement of activities prepared for the year ended December 31, 20X8. List all effects of transactions affecting more than one class of net assets. Indicate your choice(s) by entering the letter corresponding to the effects listed here: Effects of Transactions on Statement of Activities A. Increases unrestricted net assets. B. Decreases unrestricted net assets. C. Increases temporarily restricted net assets. D. Decreases temporarily restricted net assets. E. Increases permanently restricted net assets. F. Decreases permanently restricted net assets. G. Transaction is not reported on the statement of activities. Expended 75 percent of the contributions previously received from donors for research.

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121.

Following are four independent transactions or events that relate to a voluntary health and welfare organization: 1. Cash disbursement of $45,000 was made from the general fund's unrestricted assets for the purchase of new equipment for the organization. 2. The organization receives an unrestricted cash gift of $80,000 from a donor. 3. Common stock investments with a total carrying value of $100,000 were sold by a permanently restricted endowment fund for $112,000 before any dividends were earned on these stocks. The gain is donor-restricted to remain in the permanently restricted fund. 4. General obligation bonds payable with a face amount of $750,000 were sold at par, with the proceeds required to be used solely for construction of a new building. This building was completed at a total cost of $750,000, and the total amount of bond issue proceeds was disbursed toward this cost. Disregard interest capitalization. Required: For each of these transactions or events, prepare journal entries specifying the affected funds and showing how these transactions or events should be recorded by the organization.

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AACSB: Analytic AICPA FN: Reporting Blooms: Apply Difficulty: 3 Hard Learning Objective: 19-04 Understand financial reporting rules and make basic journal entries for not-for-profit voluntary health and welfare organizations. Topic: Accounting for a VHWO

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Chapter 20 Corporations in Financial Difficulty

Multiple Choice Questions

1. What is defined as a condition in which a company is unable to meet debts as the debts mature?

A. Deficit B. Liability C. Insolvency D. Credit squeeze

2. Under a composition agreement,

A. creditors agree to accept less than the face amount of their claims. B. debtors in financial difficulty transfer assets "without recourse." C. a creditors' committee is initiated with a plan of settlement proposed by the debtor. D. the debtor petitions for relief in a bankruptcy court.

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3. In which of the following ways can debt be restructured? I. Assets can be transferred to the creditor. II. An equity interest can be granted to the creditor. III. The terms of the debt can be modified.

A. I and II only B. I and III only C. II and III only D. I, II, and III

4. Under which nonjudicial action do creditors agree to assist the debtor in managing the most efficient payment of creditors' claims?

A. Debt restructuring arrangement B. Creditors' committee management C. Transfer of assets D. Composition agreement

5. A transfer of assets by a company in financial difficulty is considered a sale if: I. the transfer includes a recourse provision allowing the buyer to return the asset. II. the transferee obtains the right to pledge or exchange the transferred assets. III. the transferred assets have been isolated from the transferor. IV. the transferor does not maintain effective control over the transferred assets.

A. I, II, and IV B. Both I and III C. Both I and II D. II, III, and IV

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6. The Bankruptcy Reform Act contains chapters which deal with: I. Individuals. II. Corporations. III. Municipal governments.

A. Only I and II B. Only II and III C. Only I and III D. I, II, and III

7. A debtor may file which type of petition when seeking judicial protection under the Bankruptcy Reform Act? I. Voluntary II. Involuntary

A. I only B. II only C. Either I or II. D. Neither I nor II

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8. Creditors may file which type of petition when seeking remedy under the Bankruptcy Code? I. Voluntary II. Involuntary

A. I only B. II only C. Either I or II D. Neither I nor II

9. Under the Bankruptcy Code, an insolvent corporation may be: I. Reorganized. II. Liquidated.

A. I B. II C. Either I or II D. Neither I nor II

10. Which chapters of the Bankruptcy Code deal with corporations?

A. Chapters 1, 3, and 5 B. Chapter 9 C. Chapters 7 and 11 D. Chapters 12 and 13

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11. Chapter 11 of the Bankruptcy Code provides for: I. Reorganization. II. Liquidation.

A. I only B. II only C. Both I and II D. Neither I nor II

12. Which of the following could be true of the proceedings under Chapter 11 of the Bankruptcy Code?

A. Always administered by the bankruptcy courts. B. The debtor's assets are sold and its liabilities extinguished. C. The company does not operate during this period. D. The debtor continues as a business after the reorganization.

13. Under Chapter 11 proceedings, what represents the fair value of the entity before considering liabilities and approximates the amount a willing buyer would pay for the entity's assets?

A. Reorganization value B. Fire sale value C. Fresh start value D. Excess value

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14. A reorganization value in excess of amounts assignable to identifiable assets is:

A. not reported. B. reported as an intangible asset called Reorganization Value in Excess of Amounts Allocable to Identifiable Assets. C. reported as Goodwill Associated with Exit or Disposal Activities. D. passed on to prior shareholders of the company.

15. Which of the following observations regarding the use of fresh start accounting is true?

A. It is always required under Chapter 11 bankruptcy proceedings. B. Prior shareholders will have control of the emerging company. C. It results in a new reporting entity. D. It is used under Chapter 7 bankruptcy proceedings.

16. A "debtor-in-possession" balance sheet is prepared for a company which:

A. is having its debts restructured. B. is undergoing a liquidation under Chapter 7. C. is undergoing a reorganization under Chapter 11. D. is in bankruptcy reorganization but management still controls the company.

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17. A debtor-in-possession balance sheet should report: I. Liabilities not subject to compromise. II. Liabilities subject to compromise.

A. I only B. II only C. Both I and II D. Neither I nor II

18. On a debtor-in-possession income statement, which of the following items should be reported under the heading "Reorganization Items"?

A. Sales B. Selling expenses C. Income tax benefit D. Loss on disposal of assets

19. Typically, the plan of reorganization must be approved by at least _____ of all creditors, who must hold at least _____ of the dollar amount of the outstanding debt.

A. one-third; half B. two-thirds; half C. half; one-third D. half; two-thirds

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20. Chapter 7 of the Bankruptcy Code provides for: I. Reorganization. II. Liquidation.

A. I only B. II only C. Both I and II D. Neither I nor II

21. _____ have liens, or security interests, on specific assets.

A. Secured creditors B. Creditors with priority C. Unsecured creditors D. Assured creditors

22. As defined by the Bankruptcy Code, creditors with priority: I. have collateral claim against specific assets. II. are unsecured creditors who have priority over other unsecured creditors. III. are the first to be paid from any proceeds available to unsecured creditors.

A. I only B. II only C. I, II and II D. Both II and III

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23. Which of the following observations concerning claims by general unsecured creditors is NOT true?

A. They are paid only after secured creditors and unsecured creditors with priority are satisfied to the extent of any legal limits. B. They often receive less than the full amount of their claim. C. They are entitled to "preference payments" at the discretion of the debtor's management. D. The amounts to be paid to them are usually stated as a percentage of the total claim.

24. The payment to general unsecured creditors is often termed:

A. a "preference payment." B. a "dividend." C. a "write-off." D. a "bonus."

25. "Preference payments" made by the debtor to one creditor to the detriment of all other creditors within 90 days before the bankruptcy petition was filed:

A. is reduced from the monies available to the general unsecured creditors. B. is usually written off. C. may be recovered and returned to the cash available for all creditors. D. are not recovered, as management assurances are binding.

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26. The accounting statement of affairs is prepared:

A. at the end of the reorganization process. B. at the end of the liquidation process. C. at the beginning of the reorganization process. D. at the beginning of the liquidation process.

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27. Orville Company recently petitioned for bankruptcy and is now in the process of preparing a statement of affairs. The carrying values and estimated fair values of the assets of Orville Company are as follows:

Debts of Orville are as follows:

Based on the preceding information, what is the total amount of unsecured claims?

A. $113,000 B. $126,000 C. $93,000 D. $121,000

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28. Orville Company recently petitioned for bankruptcy and is now in the process of preparing a statement of affairs. The carrying values and estimated fair values of the assets of Orville Company are as follows:

Debts of Orville are as follows:

Based on the preceding information, what estimated amount will be available for general unsecured creditors upon liquidation?

A. $28,000 B. $93,000 C. $113,000 D. $121,000

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29. Orville Company recently petitioned for bankruptcy and is now in the process of preparing a statement of affairs. The carrying values and estimated fair values of the assets of Orville Company are as follows:

Debts of Orville are as follows:

Based on the preceding information, what is the estimated dividend percentage?

A. 23 percent B. 93 percent C. 77 percent D. 68 percent

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30. Eagle Company recently petitioned for bankruptcy and is now in the process of preparing a statement of affairs. The following information has been assembled for this statement:

What amount will be paid to the fully secured creditors and the creditors with priority?

A. Option A B. Option B C. Option C D. Option D

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31. What is the general form of the trustee's opening entry, accepting the assets of the debtor company?

A. Option A B. Option B C. Option C D. Option D

32. Which monthly report shows the results of the trustee's fiduciary actions beginning at the point the trustee accepts the debtor's assets?

A. Statement of affairs B. Statement of realization and liquidation C. Statement of financial position D. Statement of activities

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33. The Statement of Realization and Liquidation contains sections for all the following items except:

A. assets. B. supplementary items. C. liabilities. D. stockholders equity.

34. In a statement of realization and liquidation, unusual revenue items are reported under:

A. assets. B. extraordinary items. C. supplementary items. D. These are never reported.

35. All of the following items are reported in a statement of realization and liquidation except:

A. Cash B. Prepaid assets C. Depreciable assets (net) D. Receiver's expenses

36. Which of the following items are likely to be reported in the supplementary items section of a statement of realization and liquidation?

A. Creditors' claims settled during the period. B. Trustee's administration fees. C. New obligations incurred by the trustee. D. Assets subsequently acquired by the trustee.

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Essay Questions

37. To obtain cash quickly, DebCo. sold $750,000 of its receivables to Finco., with recourse. As the accountant for DebCo., what issues do you need to resolve in order to determine the appropriate accounting treatment?

38. What are the conditions necessary for using fresh start reporting in reorganization?

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39. Wilbur Corporation is to be liquidated under Chapter 7 of the Bankruptcy Code. The balance sheet on December 31, 20X8, is as follows:

The following additional information is available: 1. Marketable securities consist of 2,000 shares of Bristol Inc. common stock. The market value per share of the stock is $8. The stock was pledged against a $20,000, 8 percent note payable that has accrued interest of $800. 2. Accounts receivable of $40,000 are collateral for a $35,000, 10 percent note payable that has accrued interest of $3,500. 3. Inventory with a book value of $35,000 and a current value of $32,000 is pledged against accounts payable of $60,000. The appraised value of the remainder of the inventory is $50,000. 4. Only $1,000 will be recovered from prepaid insurance. 5. Land is appraised at $65,000 and plant and equipment at $160,000. 6. It is estimated that the franchises can be sold for $15,000. 20-18 © 2014 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

7. All the wages payable qualify for priority. 8. The mortgages are on the land and on a building with a book value of $110,000 and an appraised value of $100,000. The accrued interest on the mortgages is $7,500. 9. Estimated legal and accounting fees for the liquidation are $10,000. Required a. Prepare a statement of affairs as of December 31, 20X8. b. Compute the estimated percentage settlement to unsecured creditors.

40. Briefly explain the three classes of creditors specified in the Bankruptcy Code.

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41. A trustee has been appointed for Smith Company, which is being liquidated under Chapter 7 of the Bankruptcy Code. The following transactions occurred after the assets were transferred to the trustee: 1. Credit sales by the trustee were $100,000. Cost of goods sold were $72,000, consisting of all the inventory transferred from Smith. 2. The trustee sold all $20,000 worth of marketable securities for $15,000. 3. Receivables collected by the trustee: Old: $28,000 of the $50,000 transferred New: $65,000 4. Disbursements by the trustee: Old current payables: $31,000 of the $65,000 transferred Trustee's expenses: $6,000 5. Recorded $24,000 depreciation on the plant assets of $120,000 transferred from Smith. Required: Prepare a statement of realization and liquidation according to the traditional approach illustrated in the chapter.

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Chapter 20 Corporations in Financial Difficulty Answer Key

Multiple Choice Questions

What is defined as a condition in which a company is unable to meet debts as the debts mature?

A. Deficit B. Liability C. Insolvency D. Credit squeeze

Under a composition agreement,

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Learning Objective: 20-01 Understand the courses of action available to financially distressed firms. Topic: Nonjudicial Actions

In which of the following ways can debt be restructured? I. Assets can be transferred to the creditor. II. An equity interest can be granted to the creditor. III. The terms of the debt can be modified.

A. I and II only B. I and III only C. II and III only D. I, II, and III

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 20-01 Understand the courses of action available to financially distressed firms. Topic: Nonjudicial Actions

Under which nonjudicial action do creditors agree to assist the debtor in managing the most efficient payment of creditors' claims?

A. Debt restructuring arrangement B. Creditors' committee management C. Transfer of assets D. Composition agreement

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A transfer of assets by a company in financial difficulty is considered a sale if: I. the transfer includes a recourse provision allowing the buyer to return the asset. II. the transferee obtains the right to pledge or exchange the transferred assets. III. the transferred assets have been isolated from the transferor. IV. the transferor does not maintain effective control over the transferred assets.

A. I, II, and IV B. Both I and III C. Both I and II D. II, III, and IV

The Bankruptcy Reform Act contains chapters which deal with: I. Individuals. II. Corporations. III. Municipal governments.

A. Only I and II B. Only II and III C. Only I and III D. I, II, and III

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember

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Difficulty: 1 Easy Learning Objective: 20-01 Understand the courses of action available to financially distressed firms. Topic: Judicial Actions

A debtor may file which type of petition when seeking judicial protection under the Bankruptcy Reform Act? I. Voluntary II. Involuntary

A. I only B. II only C. Either I or II. D. Neither I nor II

Creditors may file which type of petition when seeking remedy under the Bankruptcy Code? I. Voluntary II. Involuntary

A. I only B. II only C. Either I or II D. Neither I nor II

AACSB: Reflective Thinking

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AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-01 Understand the courses of action available to financially distressed firms. Topic: Judicial Actions

Under the Bankruptcy Code, an insolvent corporation may be: I. Reorganized. II. Liquidated.

A. I B. II C. Either I or II D. Neither I nor II

10.

Which chapters of the Bankruptcy Code deal with corporations?

A. Chapters 1, 3, and 5 B. Chapter 9 C. Chapters 7 and 11 D. Chapters 12 and 13

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-01 Understand the courses of action available to financially distressed firms.

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Topic: Judicial Actions

11.

Chapter 11 of the Bankruptcy Code provides for: I. Reorganization. II. Liquidation.

A. I only B. II only C. Both I and II D. Neither I nor II

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-02 Understand Chapter 11 reorganizations and be able to prepare financial statements for debtors-in-possession as well as a plan of recovery. Topic: Chapter 11 Reorganizations

12.

Which of the following could be true of the proceedings under Chapter 11 of the Bankruptcy Code?

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13.

Under Chapter 11 proceedings, what represents the fair value of the entity before considering liabilities and approximates the amount a willing buyer would pay for the entity's assets?

A. Reorganization value B. Fire sale value C. Fresh start value D. Excess value

14.

A reorganization value in excess of amounts assignable to identifiable assets is:

AACSB: Reflective Thinking AICPA FN: Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 20-02 Understand Chapter 11 reorganizations and be able to prepare financial statements for debtors-in-possession as well as a plan of recovery. Topic: Chapter 11 Reorganizations

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15.

Which of the following observations regarding the use of fresh start accounting is true?

16.

A "debtor-in-possession" balance sheet is prepared for a company which:

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17.

A debtor-in-possession balance sheet should report: I. Liabilities not subject to compromise. II. Liabilities subject to compromise.

A. I only B. II only C. Both I and II D. Neither I nor II

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 20-02 Understand Chapter 11 reorganizations and be able to prepare financial statements for debtors-in-possession as well as a plan of recovery. Topic: Chapter 11 Reorganizations

18.

On a debtor-in-possession income statement, which of the following items should be reported under the heading "Reorganization Items"?

A. Sales B. Selling expenses C. Income tax benefit D. Loss on disposal of assets

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19.

Typically, the plan of reorganization must be approved by at least _____ of all creditors, who must hold at least _____ of the dollar amount of the outstanding debt.

A. one-third; half B. two-thirds; half C. half; one-third D. half; two-thirds

20.

Chapter 7 of the Bankruptcy Code provides for: I. Reorganization. II. Liquidation.

A. I only B. II only C. Both I and II D. Neither I nor II

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-03 Understand Chapter 7 liquidations and be able to prepare a statement of affairs. Topic: Chapter 7 Liquidations

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21.

_____ have liens, or security interests, on specific assets.

A. Secured creditors B. Creditors with priority C. Unsecured creditors D. Assured creditors

22.

As defined by the Bankruptcy Code, creditors with priority: I. have collateral claim against specific assets. II. are unsecured creditors who have priority over other unsecured creditors. III. are the first to be paid from any proceeds available to unsecured creditors.

A. I only B. II only C. I, II and II D. Both II and III

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 2 Medium Learning Objective: 20-03 Understand Chapter 7 liquidations and be able to prepare a statement of affairs. Topic: Classes of Creditors

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23.

Which of the following observations concerning claims by general unsecured creditors is NOT true?

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 20-03 Understand Chapter 7 liquidations and be able to prepare a statement of affairs. Topic: Classes of Creditors

24.

The payment to general unsecured creditors is often termed:

A. a "preference payment." B. a "dividend." C. a "write-off." D. a "bonus."

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25.

"Preference payments" made by the debtor to one creditor to the detriment of all other creditors within 90 days before the bankruptcy petition was filed:

26.

The accounting statement of affairs is prepared:

A. at the end of the reorganization process. B. at the end of the liquidation process. C. at the beginning of the reorganization process. D. at the beginning of the liquidation process.

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27.

Orville Company recently petitioned for bankruptcy and is now in the process of preparing a statement of affairs. The carrying values and estimated fair values of the assets of Orville Company are as follows:

Debts of Orville are as follows:

Based on the preceding information, what is the total amount of unsecured claims?

A. $113,000 B. $126,000 C. $93,000 D. $121,000

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 20-03 Understand Chapter 7 liquidations and be able to prepare a statement of affairs.

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Topic: Statement of Affairs

28.

Debts of Orville are as follows:

Based on the preceding information, what estimated amount will be available for general unsecured creditors upon liquidation?

A. $28,000 B. $93,000 C. $113,000 D. $121,000

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Blooms: Apply Difficulty: 3 Hard Learning Objective: 20-03 Understand Chapter 7 liquidations and be able to prepare a statement of affairs. Topic: Statement of Affairs

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29.

Debts of Orville are as follows:

Based on the preceding information, what is the estimated dividend percentage?

A. 23 percent B. 93 percent C. 77 percent D. 68 percent

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 20-03 Understand Chapter 7 liquidations and be able to prepare a statement of affairs.

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Topic: Statement of Affairs

30.

Eagle Company recently petitioned for bankruptcy and is now in the process of preparing a statement of affairs. The following information has been assembled for this statement:

What amount will be paid to the fully secured creditors and the creditors with priority?

A. Option A B. Option B C. Option C D. Option D

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31.

What is the general form of the trustee's opening entry, accepting the assets of the debtor company?

A. Option A B. Option B C. Option C D. Option D

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Understand Difficulty: 2 Medium Learning Objective: 20-04 Understand trustee accounting and reporting. Topic: Trustee Accounting and Reporting

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32.

Which monthly report shows the results of the trustee's fiduciary actions beginning at the point the trustee accepts the debtor's assets?

A. Statement of affairs B. Statement of realization and liquidation C. Statement of financial position D. Statement of activities

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-04 Understand trustee accounting and reporting. Topic: Trustee Accounting and Reporting

33.

The Statement of Realization and Liquidation contains sections for all the following items except:

A. assets. B. supplementary items. C. liabilities. D. stockholders equity.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-04 Understand trustee accounting and reporting. Topic: Trustee Accounting and Reporting

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34.

In a statement of realization and liquidation, unusual revenue items are reported under:

A. assets. B. extraordinary items. C. supplementary items. D. These are never reported.

AACSB: Reflective Thinking AICPA FN: Decision Making Blooms: Remember Difficulty: 1 Easy Learning Objective: 20-04 Understand trustee accounting and reporting. Topic: Trustee Accounting and Reporting

35.

All of the following items are reported in a statement of realization and liquidation except:

A. Cash B. Prepaid assets C. Depreciable assets (net) D. Receiver's expenses

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36.

Which of the following items are likely to be reported in the supplementary items section of a statement of realization and liquidation?

A. Creditors' claims settled during the period. B. Trustee's administration fees. C. New obligations incurred by the trustee. D. Assets subsequently acquired by the trustee.

Essay Questions

37.

To obtain cash quickly, DebCo. sold $750,000 of its receivables to Finco., with recourse. As the accountant for DebCo., what issues do you need to resolve in order to determine the appropriate accounting treatment?

Selling receivables "with recourse" means that the debtor must accept the return of any uncollectible receivables that were transferred. ASC 860 specifies that a transfer of financial assets is considered a sale only if the transferor has surrendered control over the transferred assets. Selling the receivables with recourse does not remove ultimate control from the debtor.

AACSB: Communication AICPA BB: Critical Thinking

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Blooms: Understand Difficulty: 2 Medium Learning Objective: 20-01 Understand the courses of action available to financially distressed firms. Topic: Nonjudicial Actions

38.

What are the conditions necessary for using fresh start reporting in reorganization?

The conditions are: 1. The reorganization value of the assets of the emerging entity immediately before the date of confirmation is less than the total of all postpetition liabilities and allowed claims. 2. Holders of existing voting shares immediately before confirmation receive less than 50 percent of the voting shares of the emerging entity. This implies that the prior shareholders have lost control of the emerging company.

AACSB: Communication AICPA BB: Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 20-02 Understand Chapter 11 reorganizations and be able to prepare financial statements for debtors-in-possession as well as a plan of recovery. Topic: Fresh Start Accounting

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39.

Wilbur Corporation is to be liquidated under Chapter 7 of the Bankruptcy Code. The balance sheet on December 31, 20X8, is as follows:

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6. It is estimated that the franchises can be sold for $15,000. 7. All the wages payable qualify for priority. 8. The mortgages are on the land and on a building with a book value of $110,000 and an appraised value of $100,000. The accrued interest on the mortgages is $7,500. 9. Estimated legal and accounting fees for the liquidation are $10,000. Required a. Prepare a statement of affairs as of December 31, 20X8. b. Compute the estimated percentage settlement to unsecured creditors.

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40.

Briefly explain the three classes of creditors specified in the Bankruptcy Code.

The Bankruptcy Code specifies three classes of creditors whose claims have the following priorities: (1) secured creditors, (2) creditors with priority, and (3) unsecured creditors. Secured creditors have liens, or security interests, on specific assets, often called "collateral." A creditor with such a legal interest in a specific asset has the highest priority claim on that asset. Creditors with priority are unsecured creditors having no collateral claim against specific assets, who have priority over other unsecured creditors. Creditors with priority are the first to be paid from any proceeds available to unsecured creditors. General unsecured creditors are paid only after secured creditors and unsecured creditors with priority are satisfied to the extent of any legal limits. Often the general unsecured creditors receive less than the full amount of their claim.

AACSB: Communication AICPA BB: Critical Thinking Blooms: Understand Difficulty: 2 Medium Learning Objective: 20-03 Understand Chapter 7 liquidations and be able to prepare a statement of affairs. Topic: Classes of Creditors

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41.

A trustee has been appointed for Smith Company, which is being liquidated under Chapter 7 of the Bankruptcy Code. The following transactions occurred after the assets were transferred to the trustee: 1. Credit sales by the trustee were $100,000. Cost of goods sold were $72,000, consisting of all the inventory transferred from Smith. 2. The trustee sold all $20,000 worth of marketable securities for $15,000. 3. Receivables collected by the trustee: Old: $28,000 of the $50,000 transferred New: $65,000 4. Disbursements by the trustee: Old current payables: $31,000 of the $65,000 transferred Trustee's expenses: $6,000 5. Recorded $24,000 depreciation on the plant assets of $120,000 transferred from Smith. Required: Prepare a statement of realization and liquidation according to the traditional approach illustrated in the chapter.

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AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 20-04 Understand trustee accounting and reporting. Topic: Trustee Accounting and Reporting

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