TEST BANK for Fundamentals of Advanced Accounting 8th Edition By Joe Ben Hoyle and Thomas Schaefer a by StudyGuide

CHAPTER 1 MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) Baker Company owns 15% of the common stock of Charlie Corporation and used the fair-value method to account for this investment. Charlie reported net income of $120,000 for 2021 and paid dividends of $70,000 on October 1, 2021. How much income should Baker recognize on this investment in 2021? A) $18,000. B) $10,500. C) $28,500. D) $7,500. E) $50,000.

2) Loeffler Company owns 35% of the common stock of Tetter Co. and uses the equity method to account for the investment. During 2021, Tetter reported income of $260,000 and paid dividends of $90,000. There is no amortization associated with the investment. During 2021, how much income should Loeffler recognize related to this investment? A) $90,000. B) $91,000. C) $122,500. D) $31,500. E) $59,500.

3) On January 1, 2021, Lee Company paid $1,870,000 for 80,000 shares of Thomas Co.’s voting common stock which represents a 45% investment. No allocation to goodwill or other specific account was necessary. Significant influence over Thomas was achieved by this acquisition. Thomas distributed a dividend of $2.00 per share during 2021 and reported net income of $720,000. What was the balance in the Investment in Thomas Co. account found in the financial records of Lee as of December 31, 2021?

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A) $2,114,000. B) $2,194,000. C) $2,354,000. D) $2,158,000. E) $2,034,000.

4) A necessary condition to use the equity method of reporting for an equity investment is that the investor company must

A) have the ability to exercise significant influence over the operating and financial policies of the investee. B) own at least 30% of the investee's voting stock. C) possess a controlling interest in the investee's voting stock. D) not have the ability to exercise significant influence over the operating and financial policies of the investee.

5) On January 1, 2019, Dermot Company purchased 15% of the voting common stock of Horne Corp. On January 1, 2021, Dermot purchased 28% of Horne’s voting common stock. If Dermot achieves significant influence with this new investment, how must Dermot account for the change to the equity method? A) It must use the equity method for 2021 but should make no changes in its financial statements for 2020 and 2019. B) It should prepare consolidated financial statements for 2021. C) It must restate the financial statements for 2020 and 2019 as if the equity method had been used for those two years. D) It should record a prior period adjustment at the beginning of 2021 but should not restate the financial statements for 2020 and 2019. E) It must restate the financial statements for 2020 as if the equity method had been used then.

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6) During January 2020, Nelson, Inc. acquired 30% of the outstanding common stock of Fuel Co. for $1,600,000. This investment gave Nelson the ability to exercise significant influence over Fuel. Fuel’s assets on that date were recorded at $7,200,000 with liabilities of $3,400,000. Any excess of cost over book value of Nelson’s investment was attributed to unrecorded patents having a remaining useful life of ten years. In 2020, Fuel reported net income of $650,000. For 2021, Fuel reported net income of $800,000. Dividends of $250,000 were paid in each of these two years. What was the reported balance of Nelson’s Investment in Fuel Co. at December 31, 2021? A) $1,793,000. B) $1,885,000. C) $1,943,000. D) $1,977,000. E) $1,054,300.

7) On January 1, 2021, Bangle Company purchased 30% of the voting common stock of Sleat Corp. for $1,000,000. Any excess of cost over book value was assigned to goodwill. During 2021, Sleat paid dividends of $24,000 and reported a net loss of $140,000. What is the balance in the investment account on December 31, 2021? A) $950,800. B) $958,000. C) $836,000. D) $990,100. E) $956,400.

8) On January 1, 2021, Halpert Inc. acquired 30% of Schrute Corp. Halpert used the equity method to account for the investment. On January 1, 2022, Halpert sold two-thirds of its investment in Schrute. It no longer had the ability to exercise significant influence over the operations of Schrute. How should Halpert account for this change?

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A) Halpert should continue to use the equity method to maintain consistency in its financial statements. B) Halpert should restate the prior years’ financial statements and change the balance in the investment account as if the fair-value method had been used since 2021. C) Halpert has the option of using either the equity method or the fair-value method for 2021 and future years. D) Halpert should report the effect of the change from the equity to the fair-value method as a retrospective change in accounting principle. E) Halpert should use the fair-value method for 2022 and future years, but should not make a retrospective adjustment to the investment account.

9) Kane Inc. owns 30% of Woodhouse Co. and applies the equity method. During the current year, Kane bought inventory costing $71,500 and then sold it to Woodhouse for $130,000. At year-end, only $30,000 of merchandise was still being held by Woodhouse. What amount of intra-entity gross profit must be deferred by Kane? A) $9,000. B) $4,050. C) $13,500. D) $17,550. E) $5,600.

10) On January 4, 2021, Snow Co. purchased 40,000 shares (40%) of the common stock of Walker Corp., paying $900,000. There was no goodwill or other cost allocation associated with the investment. Snow has significant influence over Walker. During 2021, Walker reported income of $240,000 and paid dividends of $75,000. On January 2, 2022, Snow sold 5,000 shares for $125,000. What was the balance in the investment account after the shares had been sold? A) $871,500. B) $845,250. C) $761,250. D) $897,250. E) $950,250.

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11) On January 3, 2021, Madison Corp. purchased 30% of the voting common stock of Huntsville Co., paying $3,000,000. Madison decided to use the equity method to account for this investment. At the time of the investment, Huntsville’s total stockholders’ equity was $8,000,000. Madison gathered the following information about Huntsville’s assets and liabilities: Book Value Buildings (10-year life)

Equipment (5-year life) Franchises (8-year life)

Fair Value

400,000

1,200,000 $

600,000 1,400,000

480,000

For all other assets and liabilities, book value and fair value were equal. Any excess of cost over fair value was attributed to goodwill, which has not been impaired. What is the amount of goodwill associated with the investment? A) $600,000. B) $264,000. C) $0. D) $336,000. E) $480,000.

12) On January 3, 2021, Madison Corp. purchased 30% of the voting common stock of Huntsville Co., paying $3,000,000. Madison decided to use the equity method to account for this investment. At the time of the investment, Huntsville’s total stockholders’ equity was $8,000,000. Madison gathered the following information about Huntsville’s assets and liabilities: Book Value Buildings (10-year life)

Equipment (5-year life) Franchises (8-year life)

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Fair Value

400,000

1,200,000 $

600,000 1,400,000

480,000

For all other assets and liabilities, book value and fair value were equal. Any excess of cost over fair value was attributed to goodwill, which has not been impaired. For 2021, what is the total amount of excess amortization for Madison’s 30% investment in Huntsville? A) $36,000. B) $20,000. C) $40,000. D) $120,000. E) $60,000.

13) Town Co. appropriately uses the equity method to account for its investment in Country Corp. As of the end of 2021, Country’s common stock had suffered a significant decline in fair value, which is expected to recover over the next several months. How should Town account for the decline in value? A) Town should switch to the fair-value method. B) No accounting because the decline in fair value is temporary. C) Town should decrease the balance in the investment account to the current value and recognize a loss on the income statement. D) Town should not record its share of Country’s 2021 earnings until the decline in the fair value of the stock has been recovered. E) Town should decrease the balance in the investment account to the current value and recognize an unrealized loss on the balance sheet.

14)

An upstream sale of inventory is a sale: A) Between subsidiaries owned by a common parent. B) With the transfer of goods scheduled by contract to occur on a specified future date. C) In which the goods are physically transported by boat from a subsidiary to its parent. D) Made by the investor to the investee. E) Made by the investee to the investor.

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15) Borgin Inc. owns 30% of the outstanding voting common stock of Burkes Co. and has the ability to significantly influence the investee’s operations and decision-making. On January 1, 2021, the balance in the Investment in Burkes Co. account was $402,000. Amortization associated with the purchase of this investment is $8,000 per year. During 2021, Burkes earned income of $108,000 and paid cash dividends of $36,000. Previously in 2020, Burkes had sold inventory costing $28,800 to Borgin for $48,000. All but 25% of this merchandise was consumed by Borgin during 2020. The remainder was used during the first few weeks of 2021. Additional sales were made to Borgin in 2021; inventory costing $33,600 was transferred at a price of $60,000. Of this total, 40% was not consumed until 2022. What amount of equity income would Borgin have recognized in 2021 from its ownership interest in Burkes? A) $19,792. B) $27,640. C) $22,672. D) $24,400. E) $21,748.

16) Borgin Inc. owns 30% of the outstanding voting common stock of Burkes Co. and has the ability to significantly influence the investee’s operations and decision-making. On January 1, 2021, the balance in the Investment in Burkes Co. account was $402,000. Amortization associated with the purchase of this investment is $8,000 per year. During 2021, Burkes earned income of $108,000 and paid cash dividends of $36,000. Previously in 2020, Burkes had sold inventory costing $28,800 to Borgin for $48,000. All but 25% of this merchandise was consumed by Borgin during 2020. The remainder was used during the first few weeks of 2021. Additional sales were made to Borgin in 2021; inventory costing $33,600 was transferred at a price of $60,000. Of this total, 40% was not consumed until 2022. What was the balance in the Investment in Burkes Co. account at the end of 2021? A) $401,136. B) $413,872. C) $418,840. D) $412,432. E) $410,148.

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17) On January 1, 2021, Corzine Inc. acquired 15% of Hammon Co.’s outstanding common stock for $62,400 and did not exercise significant influence. Hammon earned net income of $96,000 in 2021 and paid dividends of $36,000. The fair value of Corzine’s investment was $80,000 at December 31, 2021. On January 3, 2022, Corzine bought an additional 10% of Hammon for $54,000. This second purchase gave Corzine the ability to significantly influence the decision making of Hammon. During 2022, Hammon earned $120,000 and paid $48,000 in dividends. As of December 31, 2022, Hammon reported a net book value of $468,000. At the date of the second purchase, Corzine concluded that Hammon Co.’s book values approximated fair values and attributed any excess cost to goodwill. On Corzine’s December 31, 2022 balance sheet, what balance was reported for the Investment in Hammon Co. account? A) $117,000. B) $143,400. C) $152,000. D) $134,400. E) $141,200.

18) On January 1, 2021, Corzine Inc. acquired 15% of Hammon Co.’s outstanding common stock for $62,400 and did not exercise significant influence. Hammon earned net income of $96,000 in 2021 and paid dividends of $36,000. The fair value of Corzine’s investment was $80,000 at December 31, 2021. On January 3, 2022, Corzine bought an additional 10% of Hammon for $54,000. This second purchase gave Corzine the ability to significantly influence the decision making of Hammon. During 2022, Hammon earned $120,000 and paid $48,000 in dividends. As of December 31, 2022, Hammon reported a net book value of $468,000. At the date of the second purchase, Corzine concluded that Hammon Co.’s book values approximated fair values and attributed any excess cost to goodwill. What amount of equity income should Corzine have reported for 2022? A) $30,000. B) $16,420. C) $38,340. D) $18,000. E) $32,840.

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19) In a situation where the investor exercises significant influence over the investee, which of the following entries is not actually posted to the books of the investor? (I) Debit to the Investment account, and a Credit to the Equity in Investee Income account. (II) Debit to Cash (for dividends received from the investee), and a Credit to Investment Income account. (III) Debit to Cash (for dividends received from the investee), and a Credit to the Dividend Receivable. A) Entries I and II. B) Entries II and III. C) Entry I only. D) Entry II only. E) Entry III only.

20)

All of the following would require use of the equity method for investments except: A) Material intra-entity transactions. B) Investor participation in the policy-making process of the investee. C) Valuation at fair value. D) Technological dependency. E) Interchange of managerial personnel.

21) All of the following statements regarding the investment account using the equity method are true except: A) The investment is recorded at cost. B) Dividends received are reported as revenue. C) Net income of investee increases the investment account. D) Dividends received reduce the investment account. E) Amortization of fair value over cost reduces the investment account.

22) A company has been using the fair-value method to account for its investment. The company now has the ability to significantly influence the investee and the equity method has been deemed appropriate. Which of the following statements is true?

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A) A cumulative effect change in accounting principle must occur. B) A prospective change in accounting principle must occur. C) A retrospective change in accounting principle must occur. D) The investor will not receive future dividends from the investee. E) Future dividends will continue to be recorded as revenue.

23) A company has been using the equity method to account for its investment. The company sells shares and does not continue to have significant influence. Which of the following statements is true? A) A cumulative effect change in accounting principle must occur. B) A prospective change in accounting principle must occur. C) A retrospective change in accounting principle must occur. D) The investor will not receive future dividends from the investee. E) Future dividends will continue to reduce the investment account.

24) When an investor appropriately applies the equity method, how should it account for any investee Other Comprehensive Income (OCI)? A) Under the equity method, the investor only recognizes its share of investee’s income from continuing operations. B) The OCI would reduce the investment. C) The OCI would increase the investment. D) The OCI would not appear on the investor’s income statement but would be a component of comprehensive income. E) The OCI would be ignored but shown in the investor’s notes to the financial statements.

25) How should a permanent loss in value of an investment using the equity method be treated?

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A) The equity in investee income is reduced. B) A loss is reported in the same manner as a loss in value of other long-term assets. C) The investor’s stockholders’ equity is reduced. D) No adjustment is necessary. E) Record an offset to cash.

26) Under the equity method, when the company’s share of cumulative losses equals its investment and the company has no obligation or intention to fund such additional losses, which of the following statements is true? A) The investor should change to the fair-value method to account for its investment. B) The investor should suspend applying the equity method until the investee reports income. C) The investor should suspend applying the equity method and not record any equity in income of investee until its share of future profits is sufficient to recover losses that have not previously been recorded. D) The cumulative losses should be reported as a prior period adjustment. E) The investor should report these as equity method losses in its income statement.

27) When an investor sells shares of its investee company, which of the following statements is true? A) A recognized gain or loss is reported as the difference between selling price and original cost. B) A recognized gain or loss is reported as the difference between carrying value and original cost. C) A recognized gain or loss is reported as the difference between selling price and carrying value. D) An unrealized gain or loss is reported as the difference between selling price and carrying value. E) Any gain or loss is reported as part of comprehensive income.

28) When applying the equity method, how is the excess of cost over book value calculated and accounted for?

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A) The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of current assets. B) The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of total assets. C) The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of net assets. D) The excess is allocated to goodwill. E) The excess is ignored.

29) After allocating cost in excess of book value, which asset or liability would not be amortized over a useful life? A) Cost of goods sold. B) Property, plant, & equipment. C) Patents. D) Goodwill. E) Bonds payable.

30) Which statement is true concerning unrecognized profits in intra-entity inventory sales when an investor uses the equity method? A) The investee must defer upstream ending inventory profits. B) The investee must defer upstream beginning inventory profits. C) The investor must defer downstream ending inventory profits. D) The investor must defer downstream beginning inventory profits. E) The investor must defer upstream beginning inventory profits.

31) Which statement is true concerning unrecognized profits in intra-entity inventory sales when an investor uses the equity method?

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A) The investor and investee make reciprocal entries to defer and recognize inventory profits. B) The same adjustments are made for upstream and downstream sales. C) Different adjustments are made for upstream and downstream sales. D) No adjustments are necessary. E) Adjustments will be made only when profits are known upon sale to outsiders.

32) On January 1, 2020, Archer, Incorporated, paid $100,000 for a 30% interest in Harley Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Harley having a book value of $10,000 was actually worth $40,000 with a sixyear remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2020, Harley reported net income of $50,000 and paid dividends of $20,000 while in 2021 it reported net income of $75,000 and dividends of $30,000. Assume Archer has the ability to significantly influence the operations of Harley. The amount allocated to goodwill at January 1, 2020, is A) $25,000. B) $13,000. C) $9,000. D) $16,000. E) $10,000.

33) On January 1, 2020, Archer, Incorporated, paid $100,000 for a 30% interest in Harley Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Harley having a book value of $10,000 was actually worth $40,000 with a sixyear remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2020, Harley reported net income of $50,000 and paid dividends of $20,000 while in 2021 it reported net income of $75,000 and dividends of $30,000. Assume Archer has the ability to significantly influence the operations of Harley. The equity in income of Harley for 2020, is

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A) $9,000. B) $13,500. C) $15,000. D) $7,500. E) $50,000.

34) On January 1, 2020, Archer, Incorporated, paid $100,000 for a 30% interest in Harley Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Harley having a book value of $10,000 was actually worth $40,000 with a sixyear remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2020, Harley reported net income of $50,000 and paid dividends of $20,000 while in 2021 it reported net income of $75,000 and dividends of $30,000. Assume Archer has the ability to significantly influence the operations of Harley. The equity in income of Harley for 2021, is A) $22,500. B) $21,000. C) $12,000. D) $13,500. E) $75,000.

35) On January 1, 2020, Archer, Incorporated, paid $100,000 for a 30% interest in Harley Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Harley having a book value of $10,000 was actually worth $40,000 with a sixyear remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2020, Harley reported net income of $50,000 and paid dividends of $20,000 while in 2021 it reported net income of $75,000 and dividends of $30,000. Assume Archer has the ability to significantly influence the operations of Harley. The balance in the Investment in Harley account at December 31, 2020, is A) $100,000. B) $112,000. C) $106,000. D) $107,500. E) $140,000.

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36) On January 1, 2020, Archer, Incorporated, paid $100,000 for a 30% interest in Harley Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Harley having a book value of $10,000 was actually worth $40,000 with a sixyear remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2020, Harley reported net income of $50,000 and paid dividends of $20,000 while in 2021 it reported net income of $75,000 and dividends of $30,000. Assume Archer has the ability to significantly influence the operations of Harley. The balance in the Investment in Harley account at December 31, 2021, is A) $119,500. B) $125,500. C) $116,500. D) $118,000. E) $100,000.

37) Jones, Incorporated acquires 15% of Anderson Corporation on January 1, 2020, for $105,000 when the book value of Anderson was $600,000. During 2020 Anderson reported net income of $150,000 and paid dividends of $50,000. On January 1, 2021, Jones purchased an additional 25% of Anderson for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2020 but Jones has deemed it necessary to change to the equity method after the second purchase. During 2021 Anderson reported net income of $200,000, and reported dividends of $75,000. The income reported by Jones for 2020 with regard to the Anderson investment is A) $7,500. B) $22,500. C) $15,000. D) $100,000. E) $150,000.

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38) Jones, Incorporated acquires 15% of Anderson Corporation on January 1, 2020, for $105,000 when the book value of Anderson was $600,000. During 2020 Anderson reported net income of $150,000 and paid dividends of $50,000. On January 1, 2021, Jones purchased an additional 25% of Anderson for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2020 but Jones has deemed it necessary to change to the equity method after the second purchase. During 2021 Anderson reported net income of $200,000, and reported dividends of $75,000. The income reported by Jones for 2021 with regard to the Anderson investment is A) $80,000. B) $30,000. C) $50,000. D) $15,000. E) $75,000.

39) Jones, Incorporated acquired 15% of Anderson Corporation on January 1, 2020, for $105,000 when the Anderson’s book value was $600,000. During 2020 Anderson reported net income of $150,000 and declared dividends of $50,000. By January 1, 2021, the fair value of Jones’ 15% investment in Anderson had increased to $120,000. On January 1, 2021, Jones purchased an additional 25% of Anderson for $200,000. Any excess cost over book value was attributable to goodwill with an indefinite life. The fair-value method was used during 2020 but Jones has deemed it necessary to change to the equity method after the second purchase. During 2021 Anderson reported net income of $180,000, and declared dividends of $55,000. How would Jones record its January 1, 2021 investment in Anderson under the equity method?

A) Jones must record an adjustment to additional paid-in capital for $200,000. B) Jones must record a debit to additional paid-in capital for $15,000. C) Jones must retrospectively adjust its retained earnings for the difference between 2020 equity method income and income recognized under the fair-value method for its investment in Anderson account. D) Jones must debit the Investment in Anderson account for $200,000. E) Jones must record a credit of $15,000 to the Investment in Anderson account.

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40) Jones, Incorporated acquired 15% of Anderson Corporation on January 1, 2020, for $105,000 when the Anderson’s book value was $600,000. During 2020 Anderson reported net income of $150,000 and declared dividends of $50,000. By January 1, 2021, the fair value of Jones’ 15% investment in Anderson had increased to $120,000. On January 1, 2021, Jones purchased an additional 25% of Anderson for $200,000. Any excess cost over book value was attributable to goodwill with an indefinite life. The fair-value method was used during 2020 but Jones has deemed it necessary to change to the equity method after the second purchase. During 2021 Anderson reported net income of $180,000, and declared dividends of $55,000. What is the balance in Jones’ Investment in Anderson account at December 31, 2021?

A) $320,000. B) $351,250. C) $370,000. D) $412,500. E) $445,000.

41) Chase Incorporated sold $260,000 of its inventory to Bartlett Company during 2021 for $400,000. Bartlett sold $300,000 of this merchandise in 2021 with the remainder to be disposed of during 2022. Assume Chase owns 35% of Bartlett and accounts for its investment using the equity method. What journal entry will be recorded at the end of 2021 to defer the recognition of the investor’s share of the intra-entity gross profits? A)

Equity in income of Bartlett

$35,000

Investment in Bartlett B)

Investment in Bartlett

35,000 $35,000

Equity in income of Bartlett C)

Equity in income of Bartlett

$35,000 $12,250

Investment in Bartlett D)

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Investment in Bartlett

$12,250 $12,250

Equity in income of Bartlett

$12,250

A) Entry A. B) Entry B. C) Entry C. D) Entry D. E) No entry is necessary.

42) Chase Incorporated sold $260,000 of its inventory to Bartlett Company during 2021 for $400,000. Bartlett sold $300,000 of this merchandise in 2021 with the remainder to be disposed of during 2022. Assume Chase owns 35% of Bartlett and accounts for its investment using the equity method. What journal entry will be recorded in 2022 to recognize its share of the intra-entity gross profit that was deferred in 2021? A)

Equity in income of Bartlett

$35,000

Investment in Bartlett B)

Investment in Bartlett

$35,000 $35,000

Equity in income of Bartlett C)

Equity in income of Bartlett

$35,000 $12,250

Investment in Bartlett D)

Investment in Bartlett Equity in income of Bartlett

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$12,250 $12,250 $12,250

A) Entry A. B) Entry B. C) Entry C. D) Entry D. E) No entry is necessary.

43) On January 1, 2020, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. The fair value of the 15% investment was the same as the carrying value of the investment when, on January 1, 2021, Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2020 was $1,000,000. The book value of Cook on January 1, 2021, was $1,100,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over four years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years: 2020

Net Income

Dividends

200,000

50,000

2021

225,000

50,000

2022

250,000

60,000

On April 1, 2022, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. What is the balance in the investment account for the 15% ownership interest, at January 1, 2021? A) $150,000. B) $172,500. C) $180,000. D) $157,500. E) $170,000.

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44) On January 1, 2020, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. The fair value of the 15% investment was the same as the carrying value of the investment when, on January 1, 2021, Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2020 was $1,000,000. The book value of Cook on January 1, 2021, was $1,100,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over four years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years: 2020

Net Income

Dividends

200,000

50,000

2021

225,000

50,000

2022

250,000

60,000

On April 1, 2022, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. How much income did Mehan report from Cook during 2020? A) $30,000. B) $22,500. C) $7,500. D) $0. E) $50,000.

45) On January 1, 2020, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. The fair value of the 15% investment was the same as the carrying value of the investment when, on January 1, 2021, Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2020 was $1,000,000. The book value of Cook on January 1, 2021, was $1,100,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over four years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years: Net Income

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Dividends

2020

200,000

50,000

2021

225,000

50,000

2022

250,000

60,000

On April 1, 2022, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. How much income did Mehan report from Cook during 2021? A) $90,000. B) $110,000. C) $67,500. D) $87,500. E) $78,750.

46) On January 1, 2020, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. The fair value of the 15% investment was the same as the carrying value of the investment when, on January 1, 2021, Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2020 was $1,000,000. The book value of Cook on January 1, 2021, was $1,100,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over four years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years: 2020

Net Income

Dividends

200,000

50,000

2021

225,000

50,000

2022

250,000

60,000

On April 1, 2022, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. What was the balance in the investment account at December 31, 2021?

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A) $517,500. B) $537,500. C) $520,000. D) $540,000. E) $211,250.

47) On January 1, 2020, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. The fair value of the 15% investment was the same as the carrying value of the investment when, on January 1, 2021, Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2020 was $1,000,000. The book value of Cook on January 1, 2021, was $1,100,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over four years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years: 2020

Net Income

Dividends

200,000

50,000

2021

225,000

50,000

2022

250,000

60,000

On April 1, 2022, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. What was the balance in the investment account at April 1, 2022 just before the sale of shares? A) $447,500. B) $468,750. C) $535,875. D) $555,000. E) $624,375.

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48) On January 1, 2020, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. The fair value of the 15% investment was the same as the carrying value of the investment when, on January 1, 2021, Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2020 was $1,000,000. The book value of Cook on January 1, 2021, was $1,100,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over four years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years: 2020

Net Income

Dividends

200,000

50,000

2021

225,000

50,000

2022

250,000

60,000

On April 1, 2022, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. How much of Cook’s net income did Mehan report for the year 2022? A) $61,750. B) $81,250. C) $72,500. D) $59,250. E) $75,000.

49) On January 3, 2020, Baxter, Inc. acquired 40% of the outstanding common stock of Anchor Co. for $2,800,000. This investment gave Baxter the ability to exercise significant influence over Anchor. Anchor’s assets on that date were recorded at $11,700,000 with liabilities of $4,700,000. There were no other differences between book and fair values. During 2020, Anchor reported net income of $600,000. For 2021, Anchor reported net income of $900,000. Dividends of $350,000 were paid in each of these two years. How much income did Baxter report from Anchor for 2020?

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A) $140,000. B) $220,000. C) $240,000. D) $360,000. E) $600,000.

50) On January 3, 2020, Baxter, Inc. acquired 40% of the outstanding common stock of Anchor Co. for $2,800,000. This investment gave Baxter the ability to exercise significant influence over Anchor. Anchor’s assets on that date were recorded at $11,700,000 with liabilities of $4,700,000. There were no other differences between book and fair values. During 2020, Anchor reported net income of $600,000. For 2021, Anchor reported net income of $900,000. Dividends of $350,000 were paid in each of these two years. How much income did Baxter report from Anchor for 2021? A) $150,000. B) $220,000. C) $240,000. D) $360,000. E) $600,000.

51) On January 3, 2020, Baxter, Inc. acquired 40% of the outstanding common stock of Anchor Co. for $2,800,000. This investment gave Baxter the ability to exercise significant influence over Anchor. Anchor’s assets on that date were recorded at $11,700,000 with liabilities of $4,700,000. There were no other differences between book and fair values. During 2020, Anchor reported net income of $600,000. For 2021, Anchor reported net income of $900,000. Dividends of $350,000 were paid in each of these two years. What was the reported balance of Baxter’s Investment in Anchor Co. at December 31, 2020? A) $2,420,000. B) $2,800,000. C) $2,900,000. D) $3,040,000. E) $3,180,000.

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52) On January 3, 2020, Baxter, Inc. acquired 40% of the outstanding common stock of Anchor Co. for $2,800,000. This investment gave Baxter the ability to exercise significant influence over Anchor. Anchor’s assets on that date were recorded at $11,700,000 with liabilities of $4,700,000. There were no other differences between book and fair values. During 2020, Anchor reported net income of $600,000. For 2021, Anchor reported net income of $900,000. Dividends of $350,000 were paid in each of these two years. What was the reported balance of Baxter’s Investment in Anchor Co. at December 31, 2021? A) $2,400,000. B) $2,800,000. C) $2,900,000. D) $3,120,000. E) $3,260,000.

53) On January 1, 2021, Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000, which approximated book value. During 2021, Barney paid dividends of $30,000 and reported a net loss of $70,000. What is the balance in the investment account on December 31, 2021? A) $1,900,000. B) $1,960,000. C) $2,000,000. D) $2,016,000. E) $2,028,000.

54) On January 1, 2021, Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000, which approximated book value. During 2021, Barney paid dividends of $30,000 and reported a net loss of $70,000. What amount of equity income would Anderson recognize in 2021 from its ownership interest in Barney? A) $12,000 income. B) $12,000 loss. C) $16,000 loss. D) $28,000 income. E) $28,000 loss.

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55) Luffman Inc. owns 30% of Bruce Inc. and appropriately applies the equity method. During the current year, Bruce bought inventory costing $52,000 and then sold it to Luffman for $80,000. At year-end, all of the merchandise had been sold by Luffman to other customers. What amount of gross profit on intra-entity sales must be deferred by Luffman? A) $0. B) $8,400. C) $28,000. D) $52,000. E) $80,000.

56) On January 3, 2021, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation, paying $1,500,000. There was no goodwill or other cost allocation associated with the investment. Roberts has significant influence over Thomas. During 2021, Thomas reported net income of $300,000 and paid dividends of $100,000. On January 4, 2022, Roberts sold 15,000 shares for $800,000. What was the balance in the investment account before the shares were sold? A) $1,560,000. B) $1,600,000. C) $1,700,000. D) $1,800,000. E) $1,860,000.

57) On January 3, 2021, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation, paying $1,500,000. There was no goodwill or other cost allocation associated with the investment. Roberts has significant influence over Thomas. During 2021, Thomas reported net income of $300,000 and paid dividends of $100,000. On January 4, 2022, Roberts sold 15,000 shares for $800,000. What is the gain/loss on the sale of the 15,000 shares?

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A) $0. B) $10,000 gain. C) $12,000 loss. D) $15,000 loss. E) $20,000 gain.

58) On January 3, 2021, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation, paying $1,500,000. There was no goodwill or other cost allocation associated with the investment. Roberts has significant influence over Thomas. During 2021, Thomas reported net income of $300,000 and paid dividends of $100,000. On January 4, 2022, Roberts sold 15,000 shares for $800,000. What is the balance in the investment account after the sale of the 15,000 shares? A) $750,000. B) $760,000. C) $780,000. D) $790,000. E) $800,000.

59) On January 3, 2021, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation, paying $1,500,000. There was no goodwill or other cost allocation associated with the investment. Roberts has significant influence over Thomas. During 2021, Thomas reported net income of $300,000 and paid dividends of $100,000. On January 4, 2022, Roberts sold 15,000 shares for $800,000. What is the appropriate journal entry to record the sale of the 15,000 shares? A)

Cash

800,000

Investment in Thomas B)

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Cash

800,000 800,000

Investment in Thomas

780,000

Gain on sale of investment

20,000

Cash

800,000

Loss on investment

12,000

Investment in Thomas D)

Cash

812,000 800,000

Investment in Thomas

790,000

Gain on sale of investment

10,000

Cash

800,000

Loss on sale of investment

15,000

Investment in Thomas

815,000

A) A Above. B) B Above. C) C Above. D) D Above. E) E Above.

60) On January 4, 2021, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly’s net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2021, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2022, Mason sold 10,000 shares for $150,000. What was the balance in the investment account before the shares were sold? A) $520,000. B) $544,000. C) $560,000. D) $604,000. E) $620,000.

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61) On January 4, 2021, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly’s net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2021, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2022, Mason sold 10,000 shares for $150,000. What is the gain/loss on the sale of the 10,000 shares? A) $20,000 gain. B) $10,000 gain. C) $1,000 gain. D) $1,000 loss. E) $10,000 loss.

62) On January 4, 2021, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly’s net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2021, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2022, Mason sold 10,000 shares for $150,000. What is the balance in the investment account after the sale of the 10,000 shares? A) $390,000. B) $420,000. C) $453,000. D) $454,000. E) $465,000.

63) On January 4, 2021, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly’s net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2021, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2022, Mason sold 10,000 shares for $150,000. What is the appropriate journal entry to record the sale of the 10,000 shares? A)

Cash Investment in Hefly

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150,000 150,000

Cash

150,000

Investment in Hefly

130,000

Gain on sale of investment

20,000

Cash

150,000

Loss on sale of investment

1,000

Investment in Hefly D)

151,000

Cash

150,000

Investment in Hefly

149,000

Gain on sale of investment E)

1,000

Cash

150,000

Loss on sale of investment

10,000

Investment in Hefly

160,000

A) A Above B) B Above C) C Above D) D Above E) E Above

64) On January 2, 2021, Barley Corp. purchased 40% of the voting common stock of Wheat Co., paying $3,000,000. Barley properly accounts for this investment using the equity method. At the time of the investment, Wheat’s total stockholders’ equity was $5,000,000. Barley gathered the following information about Wheat’s assets and liabilities whose book values and fair values differed: Buildings (20-year life)

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Book Value

Fair Value

1,000,000

1,800,000

Equipment (5-year life)

1,500,000

2,000,000

700,000

Franchises (10-year life)

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Wheat Co. reported net income of $400,000 for 2021, and paid dividends of $200,000 during that year. What is the amount of the excess of purchase price over book value? A) $(2,000,000). B) $800,000. C) $1,000,000. D) $2,000,000. E) $3,000,000.

65) On January 2, 2021, Barley Corp. purchased 40% of the voting common stock of Wheat Co., paying $3,000,000. Barley properly accounts for this investment using the equity method. At the time of the investment, Wheat’s total stockholders’ equity was $5,000,000. Barley gathered the following information about Wheat’s assets and liabilities whose book values and fair values differed: Buildings (20-year life) Equipment (5-year life) Franchises (10-year life)

Book Value

Fair Value

1,000,000

1,800,000

1,500,000

2,000,000

700,000

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A) $(500,000). B) $0. C) $100,000. D) $200,000. E) $2,000,000.

66) On January 2, 2021, Barley Corp. purchased 40% of the voting common stock of Wheat Co., paying $3,000,000. Barley properly accounts for this investment using the equity method. At the time of the investment, Wheat’s total stockholders’ equity was $5,000,000. Barley gathered the following information about Wheat’s assets and liabilities whose book values and fair values differed: Buildings (20-year life) Equipment (5-year life) Franchises (10-year life)

Book Value

Fair Value

1,000,000

1,800,000

1,500,000

2,000,000

700,000

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Wheat Co. reported net income of $400,000 for 2021, and paid dividends of $200,000 during that year. What is the amount of excess amortization expense for Barley’s investment in Wheat for the first year? A) $0. B) $84,000. C) $100,000. D) $160,000. E) $400,000.

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67) On January 1, 2021, Jackie Corp. purchased 30% of the voting common stock of Rob Co., paying $2,000,000. Jackie properly accounts for this investment using the equity method. At the time of the investment, Rob’s total stockholders’ equity was $3,000,000. Jackie gathered the following information about Rob’s assets and liabilities whose book values and fair values differed: Book Value

Fair Value

Buildings (15-year life) Equipment (5-year life)

1,000,000 2,500,000

1,500,000 3,000,000

Franchises (10-year life)

500,000

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Rob Co. reported net income of $300,000 for 2021, and paid dividends of $100,000 during that year. What is the amount of the excess of purchase price over book value? A) $(1,000,000.) B) $400,000. C) $800,000. D) $1,000,000. E) $1,100,000.

68) On January 1, 2021, Jackie Corp. purchased 30% of the voting common stock of Rob Co., paying $2,000,000. Jackie properly accounts for this investment using the equity method. At the time of the investment, Rob’s total stockholders’ equity was $3,000,000. Jackie gathered the following information about Rob’s assets and liabilities whose book values and fair values differed: Book Value

Fair Value

Buildings (15-year life) Equipment (5-year life)

1,000,000 2,500,000

1,500,000 3,000,000

Franchises (10-year life)

500,000

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A) $(500,000.) B) $0. C) $650,000. D) $1,000,000. E) $2,000,000.

69) On January 1, 2021, Jackie Corp. purchased 30% of the voting common stock of Rob Co., paying $2,000,000. Jackie properly accounts for this investment using the equity method. At the time of the investment, Rob’s total stockholders’ equity was $3,000,000. Jackie gathered the following information about Rob’s assets and liabilities whose book values and fair values differed: Book Value

Fair Value

Buildings (15-year life) Equipment (5-year life)

1,000,000 2,500,000

1,500,000 3,000,000

Franchises (10-year life)

500,000

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Rob Co. reported net income of $300,000 for 2021, and paid dividends of $100,000 during that year. What is the amount of excess amortization expense for Jackie Corp’s investment in Rob Co. for year 2021? A) $0. B) $30,000. C) $40,000. D) $55,000. E) $60,000.

70) On January 1, 2021, Jackie Corp. purchased 30% of the voting common stock of Rob Co., paying $2,000,000. Jackie properly accounts for this investment using the equity method. At the time of the investment, Rob’s total stockholders’ equity was $3,000,000. Jackie gathered the following information about Rob’s assets and liabilities whose book values and fair values differed: Book Value

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Fair Value

Buildings (15-year life) Equipment (5-year life)

1,000,000 2,500,000

1,500,000 3,000,000

Franchises (10-year life)

500,000

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Rob Co. reported net income of $300,000 for 2021, and paid dividends of $100,000 during that year. What is the balance in Jackie Corp’s Investment in Rob Co. account at December 31, 2021? A) $2,000,000. B) $2,005,000. C) $2,060,000. D) $2,090,000. E) $2,200,000.

71) Acker Inc. bought 40% of Howell Co. on January 1, 2020 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows: Year 2020 2021

Cost to Acker Transfer Price $ $

55,000 70,000

$ $

75,000 110,000

Amount Held by Howell at Year-End $15,000 $55,000

Howell reported net income of $100,000 in 2020 and $120,000 in 2021 while paying $40,000 in dividends each year. What is Acker’s share of the intra-entity inventory gross profit that should be deferred on December 31, 2020? A) $1,600. B) $4,000. C) $8,000. D) $15,000. E) $20,000.

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72) Acker Inc. bought 40% of Howell Co. on January 1, 2020 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows: Year 2020 2021

Cost to Acker Transfer Price $ $

55,000 70,000

$ $

75,000 110,000

Amount Held by Howell at Year-End $15,000 $55,000

Howell reported net income of $100,000 in 2020 and $120,000 in 2021 while paying $40,000 in dividends each year. What is Acker’s share of the intra-entity inventory gross profit that should be deferred on December 31, 2021? A) $1,600. B) $8,000. C) $15,000. D) $20,000. E) $40,000.

73) Acker Inc. bought 40% of Howell Co. on January 1, 2020 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows: Year 2020 2021

Cost to Acker Transfer Price $ $

55,000 70,000

$ $

75,000 110,000

Amount Held by Howell at Year-End $15,000 $55,000

Howell reported net income of $100,000 in 2020 and $120,000 in 2021 while paying $40,000 in dividends each year. What is the Equity in Howell Income that should be reported by Acker in 2020?

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A) $10,000. B) $24,000. C) $36,000. D) $38,400. E) $40,000.

74) Acker Inc. bought 40% of Howell Co. on January 1, 2020 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows: Year 2020 2021

Cost to Acker Transfer Price $ $

55,000 70,000

$ $

75,000 110,000

Amount Held by Howell at Year-End $15,000 $55,000

Howell reported net income of $100,000 in 2020 and $120,000 in 2021 while paying $40,000 in dividends each year. What is the balance in Acker’s Investment in Howell account at December 31, 2020? A) $576,000. B) $598,400. C) $614,400. D) $606,000. E) $616,000.

75) Acker Inc. bought 40% of Howell Co. on January 1, 2020 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows: Year 2020 2021

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Cost to Acker Transfer Price $ $

55,000 70,000

$ $

75,000 110,000

Amount Held by Howell at Year-End $15,000 $55,000

Howell reported net income of $100,000 in 2020 and $120,000 in 2021 while paying $40,000 in dividends each year. What is the Equity in Howell Income that should be reported by Acker in 2021? A) $32,000. B) $41,600. C) $48,000. D) $49,600. E) $50,600.

76) Acker Inc. bought 40% of Howell Co. on January 1, 2020 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows: Year 2020 2021

Cost to Acker Transfer Price $ $

55,000 70,000

$ $

75,000 110,000

Amount Held by Howell at Year-End $15,000 $55,000

Howell reported net income of $100,000 in 2020 and $120,000 in 2021 while paying $40,000 in dividends each year. What is the balance in Acker’s Investment in Howell account at December 31, 2021? A) $624,000. B) $636,000. C) $646,000. D) $656,000. E) $666,000.

77) Cayman Inc. bought 30% of Maya Company on January 1, 2021 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows: Year 2021 2022

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Cost to Maya Transfer Price Amount Held by Cayman at Year-End $ 30,000 $ 45,000 $ 9,000 $ 48,000 $ 80,000 $ 20,000

Maya reported net income of $100,000 in 2021 and $120,000 in 2022 while paying $40,000 in dividends each year. What is the investor’s share of gross profit on intra-entity inventory sales that should be deferred on December 31, 2021? A) $900. B) $3,000. C) $4,500. D) $6,000. E) $9,000.

78) Cayman Inc. bought 30% of Maya Company on January 1, 2021 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows: Year 2021 2022

Cost to Maya Transfer Price Amount Held by Cayman at Year-End $ 30,000 $ 45,000 $ 9,000 $ 48,000 $ 80,000 $ 20,000

Maya reported net income of $100,000 in 2021 and $120,000 in 2022 while paying $40,000 in dividends each year. What is the investor’s share of gross profit on intra-entity inventory sales that should be deferred on December 31, 2022? A) $1,500. B) $2,400. C) $3,600. D) $4,000. E) $8,000.

79) Cayman Inc. bought 30% of Maya Company on January 1, 2021 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows: Year 2021 2022

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Cost to Maya Transfer Price Amount Held by Cayman at Year-End $ 30,000 $ 45,000 $ 9,000 $ 48,000 $ 80,000 $ 20,000

Maya reported net income of $100,000 in 2021 and $120,000 in 2022 while paying $40,000 in dividends each year. What is the Equity in Maya Income that should be reported by Cayman in 2021? A) $17,100. B) $18,000. C) $25,500. D) $29,100. E) $30,900.

80) Cayman Inc. bought 30% of Maya Company on January 1, 2021 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows: Year 2021 2022

Cost to Maya Transfer Price Amount Held by Cayman at Year-End $ 30,000 $ 45,000 $ 9,000 $ 48,000 $ 80,000 $ 20,000

Maya reported net income of $100,000 in 2021 and $120,000 in 2022 while paying $40,000 in dividends each year. What is the balance in Cayman’s Investment in Maya account at December 31, 2021? A) $463,500. B) $467,100. C) $468,000. D) $468,900. E) $480,000.

81) Cayman Inc. bought 30% of Maya Company on January 1, 2021 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows: Year 2021 2022

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Cost to Maya Transfer Price Amount Held by Cayman at Year-End $ 30,000 $ 45,000 $ 9,000 $ 48,000 $ 80,000 $ 20,000

Maya reported net income of $100,000 in 2021 and $120,000 in 2022 while paying $40,000 in dividends each year. What is the Equity in Maya Income that should be reported by Cayman in 2022? A) $34,200. B) $34,800. C) $34,500. D) $36,000. E) $37,800.

82) Cayman Inc. bought 30% of Maya Company on January 1, 2021 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows: Year 2021 2022

Cost to Maya Transfer Price Amount Held by Cayman at Year-End $ 30,000 $ 45,000 $ 9,000 $ 48,000 $ 80,000 $ 20,000

Maya reported net income of $100,000 in 2021 and $120,000 in 2022 while paying $40,000 in dividends each year. What is the balance in Cayman’s Investment in Maya account at December 31, 2022? A) $488,700. B) $489,600. C) $492,000. D) $494,400. E) $514,500.

83) Which of the following results in a decrease in the investment account when applying the equity method? A) Dividends paid by the investor. B) Net income of the investee. C) Net income of the investor. D) Share of gross profit on intra-entity inventory sales for the current year. E) Purchase of additional common stock by the investor during the current year.

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84) Which of the following results in an increase in the investment account when applying the equity method? A) Investor’s share of gross profit from intra-entity inventory sales for the prior year. B) Investor’s share of gross profit from intra-entity inventory sales for the current year. C) Dividends paid by the investor. D) Dividends paid by the investee. E) Sale of a portion of the investment during the current year.

85) Which of the following results in a decrease in the Equity in Investee Income account when applying the equity method? A) Dividends paid by the investor. B) Net income of the investee. C) Investor’s share of gross profit from intra-entity inventory sales for the current year. D) Investor’s share of gross profit from intra-entity inventory sales for the prior year. E) Other Comprehensive Income of the investee.

86) Which of the following results in an increase in the Equity in Investee Income account when applying the equity method? A) Amortizations of purchase price over book value on date of purchase. B) Amortizations, since date of purchase, of purchase price over book value on date of purchase. C) Sale of a portion of the investment at a gain to the investor. D) Investor’s share of gross profit from intra-entity inventory sales for the prior year. E) Sale of a portion of the investment at a loss.

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87) Renfroe, Inc. acquired 10% of Stanley Corporation on January 4, 2020, for $90,000 when the book value of Stanley was $1,000,000. During 2020, Stanley reported net income of $215,000 and paid dividends of $50,000. The book value of the 10% investment was the same as the fair value of that investment when, on January 1, 2021, Renfroe purchased an additional 30% of Stanley for $325,000. Any excess of cost over book value is attributable to goodwill with an indefinite life. During 2021, Stanley reported net income of $320,000 and paid dividends of $50,000. How much is the adjustment to the Investment in Stanley Corporation for the change from the fair-value method to the equity method on January 1, 2021?

A) A debit of $16,500. B) A debit of $21,500. C) A debit of $90,000. D) A debit of $165,000. E) There is no adjustment.

88) Renfroe, Inc. acquired 10% of Stanley Corporation on January 4, 2020, for $90,000 when the book value of Stanley was $1,000,000. During 2020, Stanley reported net income of $215,000 and paid dividends of $50,000. The book value of the 10% investment was the same as the fair value of that investment when, on January 1, 2021, Renfroe purchased an additional 30% of Stanley for $325,000. Any excess of cost over book value is attributable to goodwill with an indefinite life. During 2021, Stanley reported net income of $320,000 and paid dividends of $50,000. What is the balance in the Investment in Stanley Corporation on December 31, 2021?

A) $415,000. B) $512,500. C) $523,000. D) $539,500. E) $544,500.

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89) On January 3, 2020, Trycker, Inc. acquired 40% of the outstanding common stock of Inkblot Co. for $2,400,000. This investment gave Trycker the ability to exercise significant influence over Inkblot. Inkblot’s assets on that date were recorded at $8,000,000 with liabilities of $2,000,000. There were no other differences between book and fair values. During 2020, Inkblot reported net income of $500,000 and paid dividends of $300,000. The fair value of Inkblot at December 31, 2020 is $7,000,000. Trycker elects the fair value option for its investment in Inkblot. How are dividends received from Inkblot reflected in Trycker’s accounting records for 2020? A) Reduce investment in Inkblot by $280,000. B) Increase Investment in Inkblot by $280,000. C) Reduce Investment in Inkblot by $120,000. D) Increase Investment in Inkblot by $120,000. E) Increase Dividend Income by $120,000.

90) On January 3, 2020, Trycker, Inc. acquired 40% of the outstanding common stock of Inkblot Co. for $2,400,000. This investment gave Trycker the ability to exercise significant influence over Inkblot. Inkblot’s assets on that date were recorded at $8,000,000 with liabilities of $2,000,000. There were no other differences between book and fair values. During 2020, Inkblot reported net income of $500,000 and paid dividends of $300,000. The fair value of Inkblot at December 31, 2020 is $7,000,000. Trycker elects the fair value option for its investment in Inkblot. At what amount will Inkblot be reflected in Trycker’s December 31, 2020 balance sheet? A) $2,400,000. B) $2,280,000. C) $2,480,000. D) $2,800,000. E) $7,000,000.

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SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 91) Franklin Co. owns 40% of the voting common stock of Academic Services Inc. Franklin uses the equity method to account for its investment. On January 1, 2021, the balance in the investment account was $726,000. During 2021, Academic Services reported net income of $150,000 and paid dividends of $40,000. Any excess of fair value over book value is attributable to goodwill with an indefinite life. What is the balance in the investment account as of December 31, 2021?

92) Tinker Co. owns 25% of the common stock of Harbor Co. and uses the equity method to account for the investment. During 2021, Harbor reported income of $120,000 and paid dividends of $40,000. Harbor owns a building with a useful life of twenty years, which was undervalued by $80,000 at the time that Tinker bought its shares of Harbor’s common stock. Required: Prepare a schedule to show the equity income Tinker should recognize for 2021 related to this investment.

93) Farah Corp. purchased 35% of the common stock of Dastan Co. by paying $625,000. Of this amount, $45,000 is associated with goodwill. Required: Prepare the journal entry to record Farah’s investment.

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94) On January 3, 2021, Heinreich Co. paid $500,000 for 25% of the voting common stock of Jones Corp. At the time of the investment, Jones had net assets with a book value and fair value of $1,800,000. During 2021, Jones incurred a net loss of $60,000 and paid dividends of $100,000. Any excess cost over book value is attributable to goodwill with an indefinite life. Required: 1) Prepare a schedule to show the amount of goodwill from Heinrich’s investment in Jones. 2) Prepare a schedule to show the balance in Heinreich’s investment account at December 31, 2021.

95) On January 4, 2021, Colton Corp. acquired 30% of the outstanding common stock of Hicks Co. for $1,300,000. This acquisition gave Colton the ability to exercise significant influence over the investee. The book value of the acquired shares was $1,175,000. Any excess cost over the underlying book value was assigned to a copyright that was undervalued on Hicks’s balance sheet. This copyright has a remaining useful life of ten years. For the year ended December 31, 2021, Hicks reported net income of $368,000 and paid cash dividends of $107,000. Required: Prepare a schedule to show the balance Colton should report as its Investment in Hicks Co. at December 31, 2021.

96) On January 1, 2021, Spark Corp. acquired a 40% interest in Cranston Inc. for $250,000. On that date, Cranston’s balance sheet disclosed net assets of $430,000. During 2021, Cranston reported net income of $100,000 and paid cash dividends of $30,000. Spark sold inventory costing $40,000 to Cranston during 2021 for $50,000. Cranston used all of this merchandise in its operations during 2021. Any excess cost over fair value is attributable to an unamortized trademark with a 20-year remaining life. Required: Prepare all of Spark’s journal entries for 2021 to apply the equity method to this investment.

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97) Wathan Inc. sold $180,000 in inventory to Miller Co. during 2020, for $270,000. Miller resold $108,000 of this merchandise in 2020 with the remainder to be disposed of during 2021. Required: Assuming Wathan owns 25% of Miller and applies the equity method, prepare the journal entry Wathan should have recorded at the end of 2020 to defer gross profit on intra-entity inventory sales.

98) Jager Inc. holds 30% of the outstanding voting shares of Kinson Co. and appropriately applies the equity method of accounting. Amortization associated with this investment equals $11,000 per year. For 2021, Kinson reported earnings of $100,000 and paid cash dividends of $40,000. During 2021, Kinson acquired inventory for $62,400, which was then sold to Jager for $96,000. At the end of 2021, Jager still held some of this inventory at its intra-entity selling price of $50,000. Required: Determine the amount of Equity in Investee Income that Jager should have reported for 2021.

99) On January 4, 2020, Hull Corp. paid $516,000 for 24% (48,000 shares) of the outstanding common stock of Oliver Co. Hull used the equity method to account for the investment. At the end of 2020, the balance in the investment account was $620,000. On January 3, 2021, Hull sold 12,000 shares of Oliver stock for $12 per share. For 2021, Oliver reported net income of $118,000 and paid dividends of $30,000. Required: (A) Prepare the journal entry to record the sale of the 12,000 shares. (B) After the sale has been recorded, what is the balance in the investment account? (C) What percentage of Oliver Co. stock does Hull own after selling the 12,000 shares? (D) Because of the sale of stock, Hull can no longer exercise significant influence over the operations of Oliver. What effect will this have on Hull’s accounting for the investment? (E) Prepare Hull’s journal entries related to the investment for the rest of 2021.

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100) On January 2, 2021, Jolley Corp. paid $250,000 for 25% of the voting common stock of Wonder Co. On that date, the book value of Wonder was $850,000. A building with a carrying value of $160,000 was actually worth $220,000. The building had a remaining life of twenty years. Wonder owned a trademark valued at $90,000 over cost that was to be amortized over 20 years. During 2021, Wonder sold to Jolley inventory costing $60,000, at a markup of 50% on cost. At the end of the year, Jolley still owned some of these goods with an intra-entity selling price of $33,000. Jolly uses a perpetual inventory system. Wonder reported net income of $200,000 during 2021. This amount included a gain of $35,000. Wonder paid dividends totaling $40,000. Required: Prepare all of Jolley’s journal entries for 2021 in relation to Wonder Co. Assume the equity method is appropriate for use.

101) On January 2, 2020, Pond Co. acquired 40% of the outstanding voting common shares of Ramp Co. for $700,000. On that date, Ramp reported assets and liabilities with book values of $2.2 million and $700,000, respectively. A building owned by Ramp had an appraised value of $300,000, although it had a book value of only $120,000. This building had a 12-year remaining life and no salvage value. It was being depreciated on the straight-line basis. Ramp generated net income of $300,000 in 2020 and a loss of $120,000 in 2021. In each of these two years, Ramp paid a cash dividend of $70,000 to its stockholders. During 2020, Ramp sold inventory to Pond that had an original cost of $60,000. The merchandise was sold to Pond for $96,000. Of this balance, $72,000 was resold to outsiders during 2020 and the remainder was sold during 2021. In 2021, Ramp sold inventory to Pond for $180,000. This inventory had cost only $108,000. Pond resold $120,000 of the inventory during 2021 and the rest during 2022. Required: For 2020 and then for 2021, calculate the equity income to be reported by Pond for external reporting purposes.

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102) Pursley, Inc. acquires 10% of Ritz Corporation on January 2, 2020, for $80,000 when the book value of Ritz was $800,000. Pursley adjusted the investment to its fair value of $162,500 at December 31, 2020. During 2020 Ritz reported net income of $125,000 and paid dividends of $30,000. On January 7, 2021, Pursley purchased an additional 20% of Ritz for $325,000, giving Pursley the ability to significantly influence the operating policies of Ritz. Any excess of cost over book value is attributable to goodwill with an indefinite life. What journal entry(ies) is(are) required on January 7, 2021?

103) Steven Company owns 40% of the outstanding voting common stock of Nicholas Corp. and has the ability to significantly influence the investee’s operations. On January 4, 2021, the balance in the Investment in Nicholas Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2021, Nicholas earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2020, Nicholas had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2020; the remainder was sold in 2021. Additional sales were made to Steven in 2021 at an intraentity selling price of $75,000. The goods in the intra-entity sales cost Nicholas $54,000. Only 10% of the 2021 intra-entity purchases from Nicholas had not been sold to outsiders by the end of 2021. What amount of gross profit on 2020 intra-entity sales should Steven defer at December 31, 2020?

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104) Steven Company owns 40% of the outstanding voting common stock of Nicholas Corp. and has the ability to significantly influence the investee’s operations. On January 4, 2021, the balance in the Investment in Nicholas Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2021, Nicholas earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2020, Nicholas had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2020; the remainder was sold in 2021. Additional sales were made to Steven in 2021 at an intraentity selling price of $75,000. The goods in the intra-entity sales cost Nicholas $54,000. Only 10% of the 2021 intra-entity purchases from Nicholas had not been sold to outsiders by the end of 2021. What amount of gross profit on 2021 intra-entity sales should Steven defer at December 31, 2021?

105) Steven Company owns 40% of the outstanding voting common stock of Nicholas Corp. and has the ability to significantly influence the investee’s operations. On January 4, 2021, the balance in the Investment in Nicholas Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2021, Nicholas earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2020, Nicholas had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2020; the remainder was sold in 2021. Additional sales were made to Steven in 2021 at an intraentity selling price of $75,000. The goods in the intra-entity sales cost Nicholas $54,000. Only 10% of the 2021 intra-entity purchases from Nicholas had not been sold to outsiders by the end of 2021. What amount of equity income would Steven have recognized in 2021 from its ownership interest in Nicholas?

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106) Steven Company owns 40% of the outstanding voting common stock of Nicholas Corp. and has the ability to significantly influence the investee’s operations. On January 4, 2021, the balance in the Investment in Nicholas Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2021, Nicholas earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2020, Nicholas had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2020; the remainder was sold in 2021. Additional sales were made to Steven in 2021 at an intraentity selling price of $75,000. The goods in the intra-entity sales cost Nicholas $54,000. Only 10% of the 2021 intra-entity purchases from Nicholas had not been sold to outsiders by the end of 2021. What was the balance in the Investment in Nicholas Corp. account at December 31, 2021?

107) On January 4, 2020, Nelson Corporation purchased 35% of the outstanding voting common stock of Christopher Company for $560,000. This purchase gave Nelson the ability to exercise significant influence over the operating and financial policies of Christopher. On the date of purchase, Christopher’s books reported assets of $2,000,000 and liabilities of $600,000. Any excess of cost over book value of Nelson’s investment was attributed to a patent with a remaining useful life of seven years. During 2020, Christopher reported net income of $250,000 and declared and paid cash dividends of $55,000. In the following year, 2021, Christopher reported net income of $300,000 and declared and paid cash dividends of $70,000. In 2020, Nelson sold inventory costing $60,000 to Christopher for $80,000. Christopher sold 75% of that inventory to outsiders during 2020 with the remainder being sold in 2021. During 2021, Nelson sold inventory costing $70,000 to Christopher for $100,000. Christopher sold 80% of that inventory to outsiders during 2021. What amount of gross profit on 2020 intra-entity sales should Nelson defer at December 31, 2020?

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108) On January 4, 2020, Nelson Corporation purchased 35% of the outstanding voting common stock of Christopher Company for $560,000. This purchase gave Nelson the ability to exercise significant influence over the operating and financial policies of Christopher. On the date of purchase, Christopher’s books reported assets of $2,000,000 and liabilities of $600,000. Any excess of cost over book value of Nelson’s investment was attributed to a patent with a remaining useful life of seven years. During 2020, Christopher reported net income of $250,000 and declared and paid cash dividends of $55,000. In the following year, 2021, Christopher reported net income of $300,000 and declared and paid cash dividends of $70,000. In 2020, Nelson sold inventory costing $60,000 to Christopher for $80,000. Christopher sold 75% of that inventory to outsiders during 2020 with the remainder being sold in 2021. During 2021, Nelson sold inventory costing $70,000 to Christopher for $100,000. Christopher sold 80% of that inventory to outsiders during 2021. What amount of gross profit on 2021 intra-entity sales should Nelson defer at December 31, 2021?

109) On January 4, 2020, Nelson Corporation purchased 35% of the outstanding voting common stock of Christopher Company for $560,000. This purchase gave Nelson the ability to exercise significant influence over the operating and financial policies of Christopher. On the date of purchase, Christopher’s books reported assets of $2,000,000 and liabilities of $600,000. Any excess of cost over book value of Nelson’s investment was attributed to a patent with a remaining useful life of seven years. During 2020, Christopher reported net income of $250,000 and declared and paid cash dividends of $55,000. In the following year, 2021, Christopher reported net income of $300,000 and declared and paid cash dividends of $70,000. In 2020, Nelson sold inventory costing $60,000 to Christopher for $80,000. Christopher sold 75% of that inventory to outsiders during 2020 with the remainder being sold in 2021. During 2021, Nelson sold inventory costing $70,000 to Christopher for $100,000. Christopher sold 80% of that inventory to outsiders during 2021. Prepare all of Nelson’s journal entries for 2020 to apply the equity method.

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110) On January 4, 2020, Nelson Corporation purchased 35% of the outstanding voting common stock of Christopher Company for $560,000. This purchase gave Nelson the ability to exercise significant influence over the operating and financial policies of Christopher. On the date of purchase, Christopher’s books reported assets of $2,000,000 and liabilities of $600,000. Any excess of cost over book value of Nelson’s investment was attributed to a patent with a remaining useful life of ten years. During 2020, Christopher reported net income of $250,000 and declared and paid cash dividends of $55,000. In the following year, 2021, Christopher reported net income of $300,000 and declared and paid cash dividends of $10,000. In 2020, Nelson sold inventory costing $60,000 to Christopher for $80,000. Christopher sold 75% of that inventory to outsiders during 2020 with the remainder being sold in 2021. During 2021, Nelson sold inventory costing $90,000 to Christopher for $120,000. Christopher sold 80% of that inventory to outsiders during 2021. Prepare all of Nelson’s journal entries for 2021 to apply the equity method.

111) How does the equity method of accounting for investments under International Accounting Standard (IAS) 28 differ from those prescribed by the FASB ASC?

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ESSAY. Write your answer in the space provided or on a separate sheet of paper. 112) For each of the following numbered situations below, select the best letter answer concerning accounting for investments: (A) Increase the investment account. (B) Decrease the investment account. (C) Increase dividend revenue. (D) No adjustment necessary. (1.) Income reported by 40% owned investee. (2.) Income reported by 10% owned investee. (3.) Loss reported by 40% owned investee. (4.) Loss reported by 10% investee. (5.) Change from fair-value method to equity method. Prior income exceeded dividends. (6.) Change from fair-value method to equity method. Prior income was less than dividends. (7.) Change from equity method to fair-value method. Prior income exceeded dividends. (8.) Change from equity method to fair-value method. Prior income was less than dividends. (9.) Dividends received from 40% investee. (10.) Dividends received from 10% investee. (11.) Purchase of additional shares of investee. (12.) Investor’s share of gross profit from intra-entity inventory sales when using the equity method.

113) Jarmon Company owns twenty-three percent (23%) of the voting common stock of Kaleski Corp. Jarmon does not have the ability to exercise significant influence over the operations of Kaleski. What method should Jarmon use to account for its investment in Kaleski?

114) Idler Co. has an investment in Cowl Corp. for which it uses the equity method. Cowl has suffered large losses for several years, and the balance in the investment account has been reduced to zero. How should Idler account for this investment?

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115) Which types of transactions, exchanges, or events would indicate that an investor has the ability to exercise significant influence over the operations of an investee?

116) You are auditing a company that owns twenty percent of the voting common stock of another corporation and uses the equity method to account for the investment. How would you verify that the equity method is appropriate in this case?

117)

How does the use of the equity method affect the investor’s financial statements?

118)

What is the primary objective of the equity method of accounting for an investment?

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119)

What is the justification for the timing of recognition of income under the equity method?

120)

What argument could be made against the equity method?

121) How would a change be made from the equity method to the fair value method of accounting for investments?

122) How should an investor account for, and report, an investee’s other comprehensive income (or loss)?

123) When should an investor not use the equity method for an investment of 21% in another corporation?

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124)

What is the primary objective of the fair value method of accounting for an investment?

125) How would a change be made from the fair value method to the equity method of accounting for investments?

126) When the fair value option is elected for application to an investment in which the investor has significant influence over the investee, how would the investor reflect the use of the fair value option in its balance sheet and in its income statement?

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Answer Key Test name: Chap 01_8e 1) B $70,000 × 0.15 = $10,500 2) B $260,000 × 0.35 = $91,000 3) E $1,870,000 + ($720,000 × 0.45) − ($2.00 × 80,000) = $2,034,000 4) A 5) A 6) A $7,200,000 − $3,400,000 = $3,800,000 × 30% = $1,140,000 $1,600,000 − $1,140,000 = $460,000 ÷ 10yrs = $46,000 Unrecorded Patents Amortization $1,600,000 + $195,000 − $75,000 − $46,000 + $240,000 − $75,000 − $46,000 = $1,793,000 7) A $1,000,000 − $42,000 − $7,200 = $950,800 8) E 9) B $130,000 − $71,500 = $58,500 $58,500 ÷ $130,000 = 45% × $30,000 = $13,500 × 30% = $4,050 10) B $900,000 + $96,000 − $30,000 = $966,000 − (5,000 ÷ 40,000 × $966,000) = $845,250 11) D

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Buildings $600,000 − $400,000 = $200,000 FV > BV Equipment $1,400,000 − $1,200,000 = $200,000 FV > BV Franchises $480,000 − 0 = $480,000 FV > BV $200,000 + $200,000 + $480,000 = $880,000 × 30% = $264,000 Identifiable Excess Paid $8,000,000 × 30% = $2,400,000 BV ($3,000,000 Paid) − ($2,400,000 BV) = ($600,000 FV > BV) − ($264,000 Identifiable Excess Paid) = $336,000 Unidentifiable Excess Paid (Goodwill) 12) A $600,000 − $400,000 = $200,000 ÷ 10yrs = $20,000 $1,400,000 − $1,200,000 = $200,000 ÷ 5yrs = $40,000 $480,000 − 0 = $480,000 ÷ 8yrs = $60,000 $20,000 + $40,000 + $60,000 = $120,000 × 30% = $36,000 13) B 14) E 15) C 2021 Income $108,000 × 30% = $32,400 2020 Inventory Profit Recognized $48,000 − $28,800 = $19,200 × 25% = $4,800 × 30% = $1,440 2021 Inventory Profit Deferred $60,000 − $33,600 = $26,400 × 40% = $10,560 × 30% = $3,168 2021 Purchase Amortization $8,000 $32,400 + $1,440 − $3,168 − $8,000 = $22,672 Equity Income 2021 16) B

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2021 Beginning Balance = $402,000 2021 Income Recognized = $22,672 2021 Income $108,000 × 30% = $32,400 2020 Inventory Profit Recognized $48,000 − $28,800 = $19,200 × 25% = $4,800 × 30% = $1,440 2021 Inventory Profit Deferred $60,000 − $33,600 = $26,400 × 40% = $10,560 × 30% = $3,168 2021 Purchase Amortization $8,000 $32,400 + $1,440 − $3,168 − $8,000 = $22,672 Equity Income 2021 2021 Dividend Received = ($36,000 × 30%) = $10,800 2021 Ending Balance = ($402,000 + $22,672 − $10,800) = $413,872 17) C 2021 Purchase = $62,400. The investment was increased to fair value of $80,000 at 12/31/21. 2022 Income = ($120,000 × 25%) = $30,000 2022 Dividend = ($48,000 × 25%) = $12,000 Ending 2022 Balance = ($80,000 + $54,000 + $30,000 − $12,000) = $152,000 18) A 2022 Income = ($120,000 × 25%) = $30,000 19) D 20) C 21) B 22) B 23) B 24) C 25) B 26) C 27) C 28) C Version 1

29) D 30) C 31) B 32) D Book value purchased = ($550,000 − $300,000) = $250,000 × 30% = $75,000 Excess: $100,000 − $75,000 = $25,000 Allocated to patent: $30,000 × 30% = $9,000 Remainder to goodwill: $25,000 − $9,000 = $16,000. 33) B 2020 Equity Income = ($50,000 × 30%) = $15,000 2020 Excess Patent Amortization = ($30,000 ÷ 6 = $5,000) × 30%) = $1,500 $15,000 − $1,500 = $13,500 34) B 2021 Equity Income = ($75,000 × 30%) = $22,500 2021 Excess Patent Amortization = ($30,000 ÷ 6 = $5,000) × 30%) = $1,500 $22,500 − $1,500 = $21,000 35) D $100,000 + $13,500 − ($20,000 × 30%) = $107,500 36) A $107,500 + $21,000 − ($30,000 × 30%) = $119,500 37) A ($50,000 × 15% = $7,500) = Dividends received by Jones in 2020 38) A $200,000 × 40% = $80,000 39) D

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ASU No. 2016-07 eliminated retrospective application of equity method and requires prospective treatment. Thus, the acquisition cost of the Anderson shares acquired on January 1, 2021 is added to the current fair value of the previous investment. 40) C Investment in Anderson balance 2021 year end: January 1, 2021 fair value = $120,000 + $200,000 = $320,000 40% of 2021 Anderson net income less dividends = $72,000 − $22,000 = $50,000 December 31, 2021 equity method balance = $320,000 + $50,000 = $370,000 41) C $400,000 − $260,000 = $140,000 × (1 – ($300,000 ÷ $400,000)) = $35,000 × 35% = $12,250 Recognition of its share of intra-entity gross profits by reduction <CR> in the Investment in Bartlett Account

42) D Reversal of the deferral entry in 2021, thus recognizing the profit in 2022 income: $400,000 − $260,000 = $140,000 × (1 − ($300,000 ÷ $400,000)) = $35,000 × 35% = $12,250

43) A $150,000; The fair value is the same as the carrying value so there is no adjustment to the investment account. Thus, the account is carried at the original cost of the investment.

44) C $7,500 Dividends Received = 15% × (Dividends Declared $50,000)

45) D Share of net income: $225,000 × 40% = $90,000 Fair value of 40% acquired: $150,000 + $300,000 = $450,000. Book value of 40% acquired: $1,100,000 × 40% = $440,000 $450,000 − $440,000 = $10,000 attributable to database $10,000 ÷ 4 = $2,500 $90,000 − $2,500 = $87,500

46) A $150,000 = $150,000 Balance at date of changing to equity method. $150,000 + $300,000 + ($90,000 − $2,500) − $20,000 = $517,500 Balance 2021 Year End

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$517,500 + ($25,000 − $625) − $6,000 = $535,875 2022 Beginning Investment Account Balance + (40% of 1st Quarter Income – 1st Quarter Amortization) – 1st Quarter Dividend

48) B (First Quarter Income × 40%) + (2nd thru 4th Qtr Income × 30%) = ($250,000/4 × 40%) + [($250,000/4 × 30%) × 3] = $25,000 + ($18,750 × 3) = $25,000 + $56,250 = $81,250

49) C $600,000 × 40% = $240,000 50) D $900,000 × 40% = $360,000 51) C $2,800,000 + ($600,000 × 40%) − ($350,000 × 40%) = $2,900,000 52) D December 31, 2020: $2,800,000 + ($600,000 × 40%) − ($350,000 × 40%) = $2,900,000 December 31, 2021: $2,900,000 + ($900,000 × 40%) − ($350,000 × 40%) = $3,120,000 53) B $2,000,000 − ($70,000 × 40%) − ($30,000 × 40%) = $1,960,000 54) E $70,000 Loss × 40% = $28,000 Loss 55) A $80,000 − $52,000 = $28,000 Income Recognized; None Deferred 56) A $1,500,000 + ($300,000 × 30%) − ($100,000 × 30%) = $1,560,000 57) E Investment account balance prior to sale: $1,500,000 + ($300,000 × 30%) − ($100,000 × 30%) = $1,560,000 $1,560,000 × (15,000 ÷ 30,000) = $780,000 Cost of Shares Sold $800,000 Sales Price − $780,000 Cost of Shares Sold = $20,000 Gain on Sale of Shares Version 1

58) C Investment account balance prior to sale: $1,500,000 + ($300,000 × 30%) − ($100,000 × 30%) = $1,560,000 $1,560,000 × (15,000 ÷ 30,000) = $780,000 Cost of shares Sold $1,560,000 − $780,000 Cost of Shares Sold = $780,000 Balance in the Investment Account 59) B Investment account balance prior to sale: $1,500,000 + ($300,000 × 30%) − ($100,000 × 30%) = $1,560,000 $1,560,000 × (15,000 ÷ 30,000) = $780,000 Cost of Shares Sold $800,000 Sales Price − $780,000 Cost of Shares Sold = $20,000 Gain on Sale of Shares

60) D $560,000 + ($150,000 × 40%) − ($40,000 × 40%) = $604,000 61) D Investment account balance prior to sale: $560,000 + ($150,000 × 40%) − ($40,000 × 40%) = $604,000 $604,000 × (10,000 ÷ 40,000) = $151,000 Cost of Shares Sold $150,000 Sales Price − $151,000 Cost of Shares Sold = $1,000 Loss on Sale of Shares 62) C Investment account balance prior to sale: $560,000 + ($150,000 × 40%) − ($40,000 × 40%) = $604,000 $604,000 × (10,000 ÷ 40,000) = $151,000 Cost of Shares Sold $150,000 Sales Price − $151,000 Cost of Shares Sold = $1,000 Loss on Sale of Shares $604,000 − $151,000 = $453,000 63) C Investment account balance prior to sale: $560,000 + ($150,000 × 40%) − ($40,000 × 40%) = $604,000 $604,000 × (10,000 ÷ 40,000) = $151,000 Cost of Shares Sold $150,000 Sales Price − $151,000 Cost of Shares Sold = $1,000 Loss on Sale of Shares

64) C Version 1

$5,000,000 × 40% = $2,000,000 BV for 40% of the Shares $3,000,000 Price Paid − $2,000,000 BV = $1,000,000 Excess

65) D $800,000 Buildings + $500,000 Equipment + $700,000 Franchises = $2,000,000 FV > BV of Assets $2,000,000 × 40% = $800,000 FV Identified to Purchaser $1,000,000 Price Paid − $800,000 FV > BV = $200,000 Excess Unidentified (Goodwill)

66) B $800,000 ÷ 20 = $40,000 per year Buildings × 40% = $16,000 $500,000 ÷ 5 = $100,000 per year Equipment × 40% = $40,000 $700,000 ÷ 10 = $70,000 per year Franchises × 40% = $28,000 $16,000 + $40,000 + $28,000 = $84,000 Annual Excess Amortization

67) E $2,000,000 − ($3,000,000 × 30%) = $1,100,000 Price Paid > BV

68) C $500,000 Buildings + $500,000 Equipment + $500,000 Franchises = ($1,500,000 FV > BV) × 30% = $450,000 ($1,100,000 Total > BV) − ($450,000 Identified) = $650,000 Unidentified (Goodwill)

69) D $500,000 ÷ 15 = $33,333 per year Buildings × 30% = $10,000 $500,000 ÷ 5 = $100,000 per year Equipment × 30% = $30,000 $500,000 ÷ 10 = $50,000 per year Franchises × 30% = $15,000 $10,000 + $30,000 + $15,000 = $55,000 Annual Excess Amortization

70) B $2,000,000 + ($300,000 × 30%) − ($100,000 × 30%) − $55,000 = $2,005,000

71) A $75,000 − $55,000 = $20,000 × ($15,000 ÷ $75,000) = $4,000 × 40% = $1,600 Deferred intraentity gross profit

72) B $110,000 − $70,000 = $40,000 × ($55,000 ÷ $110,000) = $20,000 × 40% = $8,000 Deferred intra-entity gross profit

73) D $100,000 × 40 % = $40,000 − ($1,600 Deferred intra-entity gross profit) = $38,400

74) B $576,000 + ($100,000 × 40%) − ($40,000 × 40%) − ($1,600 Deferred intra-entity gross profit) = $598,400 Version 1

75) B $120,000 × 40 % = $48,000 + ($1,600 in 2020 Recognized intra-entity gross profit) − ($8,000 in 2021 Deferred intra-entity gross profit) = $41,600

76) A ($598,400 Balance 2020) + ($41,600 Income from 2021) − ($16,000 Dividend from 2021) = $624,000

77) A $45,000 − $30,000 = $15,000 × ($9,000 ÷ $45,000) = $3,000 × 30% = $900 Deferred intra-entity gross profit

78) B $80,000 − $48,000 = $32,000 × ($20,000 ÷ $80,000) = $8,000 × 30% = $2,400 Deferred intraentity gross profit

79) D $100,000 × 30% = $30,000 − $900 Share of Deferred gross profit on intra-entity inventory sales = $29,100

80) B $450,000 + ($100,000 × 30% = $30,000 − $900 Deferred) − ($40,000 Dividends × 30%) = $467,100

81) C $120,000 × 30% = $36,000 + ($900 from 2021) − ($2,400 from 2022 Deferral) = $34,500

82) B $467,100 + ($34,500 net income) − ($12,000 dividends) = $489,600

83) D 84) A 85) C 86) D 87) E The change is prospective only. 88) C $90,000 2020 Cost + $325,000 2021 Cost + ($320,000 Income × 40%) − ($50,000 Dividends × 40%) = $523,000 89) E $300,000 × 40% = $120,000 Credit to the Dividend Income Account Version 1

90) D $7,000,000 FV × 40 % = $2,800,000 at December 31, 2020 91) Investment in Academic Services Inc.: Balance at January 1, 2021

$ 726,000

2021 equity income accrual ($150,000 × 40%)

60,000

2021 dividends ($40,000 × 40%)

(16,000 )

Balance at December 31, 2021

$ 770,000

92) 2021 equity income accrual ($120,000 × 25%)

$ 30,000

2021 amortization on purchase ($80,000 ÷ 20 × 25%) 2021 equity income

(1,000 ) $ 29,000

93) The journal entry is: Investment in Dastan Co Cash

625,000 625,000

The amount of goodwill does not affect the journal entry used to record the investment. 94) 1)

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Purchase price

Net book value ($1,800,000 × 25%) Goodwill

500,000 (450,000 )

50,000

2) Investment in Jones Corp.: Acquisition price

500,000

2021 equity loss accrual ($60,000 × 25%)

(15,000 )

2021 dividends ($100,000 × 25%)

(25,000 )

Balance at December 31, 2021

460,000

95) Investment in Hicks Co.: Acquisition price

$ 1,300,000

Equity income ($368,000 × 30%)

110,400

Dividends ($107,000 × 30%)

(32,100 )

Excess copyright amortization (($1,300,000 − $1,175,000) ÷ 10)

(12,500 )

Balance at December 31, 2021

$ 1,365,800

96) Purchase price of Cranston Inc. stock

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250,000

Equivalent book value of Cranston Inc. stock ($430,000 × 40%) Trademark

(172,000 ) 78,000

Life in years

Annual amortization

3,900

Investment in Cranston Inc.

250,000

Cash (or liability) To record acquisition of a 40% interest in Cranston Inc. Investment in Cranston Inc.

250,000

40,000

Equity in Investee Income To recognize forty percent of income earned during the period by Cranston Inc., an investment recorded using the equity method. Cash

40,000

12,000

Investment in Cranston Inc. To record collection of dividend from investee using the equity method Equity in Investee Income Investment in Cranston Inc.

12,000

3,900 3,900

To reflect amortization of trademark excess over book value acquired.

**Note: All merchandise was used, so no deferral entry is needed. 97)

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Ending inventory ($270,000 − $108,000)

162,000

Gross profit markup ($90,000 ÷ $270,000)

1/3

Gross profit on intra-entity inventory sales

54,000

Ownership percentage

Wathan’s share intra-entity inventory gross profit to defer to subsequent year

Equity Income—Investment in Miller Co.

25 %

13,500

Investment in Miller Co.

13,500

98) Equity in investee income: Equity income accrual ($100,000 × 30%)

30,000

Deferral of share of intra-entity gross profit (below)

(5,250 )

Amortization (given)

(11,000 )

Equity in investee income

13,750

Remaining inventory — end of year

50,000

Gross profit percentage ($33,600 ÷ $96,000) Profit within remaining inventory

× $

35 % 17,500

Ownership percentage

30 %

Share of intra-entity gross profit

Deferral of its share of intra-entity gross profit:

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5,250

99) A) Cash

144,000

Loss on Sale of Investment

11,000

Investment in Oliver Co.

155,000

Calculation of loss: (12,000 × $12) − [($620,000 ÷ 48,000) × 12,000]

$11,000

B) Balance in investment: $620,000− $155,000

$465,000

C) -Before sale, Hull owns 48,000 shares = 24% Oliver (given). -Oliver has 200,000 shares outstanding (48,000/.24). -After sale, Hull owns 36,000 shares (48,000 − 12,000). -After sale, Hull owns 18% of Oliver (36,000/200,000). Alternate calculation: 48,000 shares =

24 %

Sell 1/4 of investment

(6) %

Remaining ownership of Oliver

18 %

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D) To account for the investments, the fair-value method should be used. E) Cash

5,400

Dividend Revenue

5,400

Calculation of dividend revenue: $30,000 × 18% (from part C above)

$5,400

100) Required journal entries: Investment in Wonder Co.

250,000

Cash To record the initial investment in Wonder Co. Investor Cost of Intra-Entity Inventory Cash To record the purchase of inventory from Wonder Co. Investment in Wonder Co.

250,000

90,000 90,000

50,000

Equity in Wonder Co. Income

41,250

Gain of Wonder Co.

8,750

To record share of Wonder Co.’s income. Cash

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10,000

Investment in Wonder Co.

10,000

To record the receipt of dividend. Equity in Wonder Co. Income

1,875

Investment in Wonder Co.

1,875

To record amortizations. Equity in Wonder Co. Income

2,750

Investment in Wonder Co.

2,750

To defer its share of gross profit on intra-entity sales.

Calculation of equity in Wonder Co. income: ($200,000 − $35,000) × 25%

$ 41,250

Calculation of unusual gain of Wonder Co.: $35,000 × 25% Calculation of amortizations: Building [($220,000 − $160,000) ÷ 20] x 25%) Trademark [($90,000 × 25%)÷ 20] Total

Calculation of deferred gross profit on intra-entity inventory sales: Cost + 50% cost = $60,000 + $ $30,000

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8,750

750 1,125

1,875

90,000

Cost Gross profit

(60,000 ) $

30,000

GP % = 30,000/90,000 = Remaining inventory

1/3 $

33,000

= Intra-entity gross profit $ remaining in ending inventory Jolley’s ownership % ×

11,000

Deferred gross profit on intra-entity inventory sales

25 %

2,750

101) Equity Income-2020: Basic equity accrual ($300,000 × 40%)

$ 120,000

Amortization (Schedule 1)

(6,000 )

Deferred intra-entity gross profit (Schedule 2)

(3,600 )

Equity income – 2020

$ 110,400

Equity Income (Loss) – 2021: Basic equity accrual [$120,000 × 40%] Amortization (Schedule 1) Recognition of 2020 deferred intraentity gross profit (Schedule 2) Deferral of 2021 gross profit on intra- entity inventory sales (Schedule 3) Equity income (loss) – 2021

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$ (48,000 ) (6,000 ) 3,600 (9,600 )

$ (60,000 )

Schedule 1

Acquisition price Book value equivalence($1,500,000 × 40%) Payment in excess of book value

Annual Amortization

12 yrs.

$6,000

$ 700,000 (600,000 ) $ 100,000

Excess payment identified with specific assets Building ($180,000 × 40%) Excess payment not identified with specific accounts

Life

72,000 $

28,000 $6,000

Schedule 2 Inventory remaining at December 31, 2020 ($96,000 − $72,000) Gross profit percentage ($36,000 ÷ $96,000) Total gross profit on intra-entity sales Investor ownership percentage Deferred intra-entity gross profit

12/31/20 (to be deferred until recognized in 2021)

24,000

37.5 %

9,000

40.0 %

3,600

60,000

Schedule 3 Inventory remaining at December 31, 2021 ($180,000 − $120,000) Gross profit percentage ($72,000÷ $180,000) Gross profit on intra-entity inventory sales Investor ownership percentage

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× $ ×

40.0 % 24,000 40.0 % 75

Deferred intra-entity gross profit 12/31/21 (to be deferred until recognized in 2022)

9,600

102)

Investment in Ritz

325,000

Cash

325,000

To record the purchase of an additional 20% share in Ritz Corporation

Additionally, if the fair value of the original 10% shares differed on January 7, 2021, than it did on December 31, 2020, Pursley would record the adjustment to the investment account so that the proper allocation of excess payment to goodwill could be prepared when the ownership percentage required use of the equity method of accounting on January 7, 2021. 103) [($50,000 − $35,000) × 0.25 × 0.40] = $1,500 104) [($75,000− $54,000) × 0.10 × 0.40] = $840 105) [($120,000 × 0.4) − $12,000 − $840 + $1,500] = $36,660 106) [$503,000 + $36,660 − ($40,000 × 0.4)] = $523,660 107) [($80,000 − $60,000) × 0.25 × 0.35] = $1,750 108) [($100,000 − $70,000) × 0.20 × 0.35] = $2,100 109) Purchase price of Christopher Company Stock Share of book value acquired [($2,000,000 − $600,000) × 35%]

Version 1

560,000 (490,000 )

Patent

70,000

Life in years Annual amortization

Investment in Christopher Company

÷ 10 $

560,000

Cash (or liability) To record the purchase of 35% interest in Christopher Company. Investment in Christopher Company

560,000

87,500

Equity in Investee Income To accrue earnings of Christopher ($250,000 × 35%). Dividend Receivable

87,500

19,250

Investment in Christopher Company To record a dividend declaration by Christopher ($55,000 × 35%). Cash

7,000

19,250

Dividend Receivable

19,250

To record collection of the cash dividend. Equity in Investee Income

7,000

Investment in Christopher Company To record amortization of excess payment allocated to patent. Equity in Investee Income Investment in Christopher Company

7,000

1,750 1,750

To defer gross profit on sale of inventory to Christopher Company. ($80,000 − $60,000) × 25%

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× 35% = $1,750

110) Purchase price of Christopher Company Stock

Share of book value acquired [($2,000,000 − $600,000) × 35%]

(490,000 )

Patent

70,000

Life in years Annual amortization

Investment in Christopher Company

÷ 10 $

105,000

3,500

Investment in Christopher Company To record a dividend declaration by Christopher ($10,000 × 35%). Cash

7,000

105,000

Equity in Investee Income To accrue earnings of Christopher ($300,000 × 35%). Dividend Receivable

560,000

3,500

Dividend Receivable

3,500

To record collection of the cash dividend. Equity in Investee Income Investment in Christopher Company

7,000 7,000

To record amortization of excess payment allocated to patent.

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Investment in Christopher Company

1,750

Equity in Investee Income To recognize income on intra-entity sale from 2020 that can now be recognized after sales to outsiders. ($80,000 − $60,000) × 25% × 35% = $1,750 Equity in Investee Income Investment in Christopher Company

1,750

2,100 2,100

To defer the investor's share of gross profit on intra-entity sales/purchases remaining in Christopher's ending inventory. ($120,000 − $90,000) × 20% × 35% = $2,100

111) The equity method concepts and applications described in IAS 28 are virtually identical to those prescribed by the FASB ASC. However, some differences do exist. First, the FASB allows a fair-value reporting option for investments that otherwise are accounted for under the equity method. IAS 28 does not provide for a fair-value reporting option. Second, if the investee employs accounting policies that differ from those of the investor, IAS 28 requires the financial statements of the investee to be adjusted to reflect the investor’s accounting policies for the purpose of applying the equity method. U.S. GAAP does not have a similar conformity requirement. 112) (1) A; (2) D; (3) B; (4) D; (5) D; (6) D; (7) D; (8) D; (9) B; (10) C; (11) A; (12) B 113) The fair-value method should be used. Generally, ownership of more than twenty percent (20%) of the voting common stock would be presumed to carry significant influence and would require use of the equity method. The equity method is not appropriate in this case because of the lack of the ability to exercise significant influence.

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114) Idler should discontinue the use of the equity method. The investment would have a zero balance until investee profits eliminate unrecognized losses. 115) When an investor has the ability to exercise significant influence over the operations of an investee, the investor should use the equity method to account for the investment. GAAP suggests several events or conditions which would indicate such influence: (1) investor representation on the investee’s board of directors; (2) material transactions between investor and investee; (3) interchange of managerial personnel; (4) technological dependency between investor and investee; (5) the extent of investor ownership and the concentration of other ownership interests in the investee; and (6) investor participation in the policy-making process of the investee. All of these conditions should be examined to determine whether the investor has the ability to exercise significant influence over the investee. 116) In order to verify that the equity method is appropriate, the auditor should determine whether the investor is able to exercise significant influence over the operations of the investee. The ability to influence the investee’s operations is the most important criterion for adopting the equity method. The auditor should look for such evidence of significant influence such as: (1) frequent or material intercompany transactions; (2) exchange of managerial personnel; (3) technological interdependency; and (4) investor participation in the decision-making process of the investee.

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117) The use of the equity method influences the investor’s income statement and balance sheet. On the income statement, the investor’s net income will be increased by its share of the investee’s earnings reduced by any amortization of cost in excess of fair value of depreciable net assets. On the balance sheet, the investor’s total assets will include the investment account. The balance of the investment account is increased by the investor’s share of the investee’s income and decreased by investee losses and dividends paid and amortization of depreciable allocations. The investor’s retained earnings are influenced by the investee’s income or loss reported on the investor’s income statement. 118) The objective of the equity method is to reflect the special relationship between investor and investee. The equity method is used when the investor holds a relatively large share of the investee, but not a controlling interest. The large ownership percentage indicates that the investor has the ability to influence the decision-making processes of the investee. Use of the fair-value method would not reflect the relationship between the two parties. 119) According to the equity method, the investor should recognize its share of the investee’s income in the same period in which it is earned by the investee. The equity method applies accrual accounting when the investor could exercise significant influence over the investee. 120) An argument could be made against the recognition of income under the equity method. The investor is required to recognize its share of the investee’s income even when it is unlikely that the investor will ever receive the entire amount in cash dividends.

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121) A change to the fair value method is appropriate when the investor can no longer exercise significant influence over the operations of the investee. No retrospective adjustment of previous years’ financial statements or the balance in the investment account is required. The balance in the investment account at the time of the change would be treated prospectively as the cost of the investment. 122) The investor should account for other comprehensive income or loss by including it in an Other Comprehensive Income statement account that is separate from the Equity in Investee Income account. The investor should record its share of investee OCI, which should be included in its balance sheet as Accumulated Other Comprehensive Income (AOCI). 123) When the investor does not have significant influence with regard to the investee. 124) The investor possesses only a small percentage of an investee and cannot expect to have a significant impact on the operations or decisionmaking of the investee. Since the shares are bought in anticipation of cash dividends or appreciation of stock market values, dividends received are accounted for as income and the investment is reflected at each balance sheet date at its fair value which is generally the market value at that date. 125) According to GAAP, when there is a change from the fair value method to the equity method for investments, the change should be incorporated prospectively. 126) In the balance sheet, the Investment in Investee account will be at fair value at the balance sheet date. In the income statement, any change in fair value from period to period would be reflected as investment Income (increase in fair value) or loss (decrease in fair value). Also in the income statement, the dividends received would be reflected as dividend income. Version 1

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CHAPTER 2 MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) At the date of an acquisition which is not a bargain purchase, the acquisition method A) Consolidates the subsidiary’s assets at fair value and the liabilities at book value. B) Consolidates all subsidiary assets and liabilities at book value. C) Consolidates all subsidiary assets and liabilities at fair value. D) Consolidates current assets and liabilities at book value, and long-term assets and liabilities at fair value. E) Consolidates the subsidiary’s assets at book value and the liabilities at fair value.

2) In an acquisition where 100% control is acquired, how would the land accounts of the parent and the land accounts of the subsidiary be reported on consolidated financial statements? A) B) C) D) E)

Parent

Subsidiary

Book Value Book Value Fair Value Fair Value Cost

Book Value Fair Value Fair Value Book Value Cost

A) Option A. B) Option B. C) Option C. D) Option D. E) Option E.

3) Lisa Co. paid cash for all of the voting common stock of Victoria Corp. Victoria will continue to exist as a separate corporation. Entries for the consolidation of Lisa and Victoria would be recorded in

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A) A worksheet. B) Lisa's general journal. C) Victoria's general journal. D) Victoria's secret consolidation journal. E) The general journals of both companies.

4) Using the acquisition method for a business combination, goodwill is generally calculated as the: A) Cost of the investment less the subsidiary's book value at the beginning of the year. B) Cost of the investment less the subsidiary's book value at the acquisition date. C) Cost of the investment less the subsidiary's fair value at the beginning of the year. D) Cost of the investment less the subsidiary's fair value at acquisition date. E) Zero, it is no longer allowed under federal law.

5) How should direct combination costs and amounts incurred to register and issue stock in connection with a business combination be accounted for in a pre-2009 business combination? Direct Combination Cost

Stock Issuance Costs

A) B)

Increase Investment Increase Investment

C) D)

Increase Investment Decrease Additional paid-in Capital Increase Expenses

Decrease Investment Decrease Additional paid-in Capital Increase Expenses Increase Investment

Decrease Investment

A) Option A. B) Option B. C) Option C. D) Option D. E) Option E.

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6) How are direct and indirect costs accounted for when applying the acquisition method for a business combination? Direct Costs

Indirect Costs

A. B.

Expensed Increase investment account

Expensed

D. E.

Increase investment account Increase investment account

Expensed Decrease additional paid-in Capital Decrease additional paid-in capital Expensed Increase investment account

A) Option A. B) Option B. C) Option C. D) Option D. E) Option E.

7) What is the primary difference between: (i) accounting for a business combination when the subsidiary is dissolved; and (ii) accounting for a business combination when the subsidiary retains its incorporation? A) If the subsidiary is dissolved, it will not be operated as a separate division. B) If the subsidiary is dissolved, assets and liabilities are consolidated at their book values. C) If the subsidiary retains its incorporation, there will be no goodwill associated with the acquisition. D) If the subsidiary retains its incorporation, assets and liabilities are consolidated at their book values. E) If the subsidiary retains its incorporation, the consolidation is not formally recorded in the accounting records of the acquiring company.

8) According to GAAP, which of the following is true with respect to the pooling of interest method of accounting for business combinations?

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A) It was the only method used prior to 2002. B) It must be used for all new acquisitions. C) GAAP allowed its use prior to 2002. D) It, or the acquisition method, may be used at the acquirer’s discretion. E) GAAP requires it to be used instead of the acquisition method for business combinations for which $50 billion or more in consideration is transferred.

9) Which of the following examples accurately describes a difference in the types of business combinations? A) A statutory merger can only be effected through an asset acquisition while a statutory consolidation can only be effected through a capital stock acquisition. B) A statutory merger can only be effected through a capital stock acquisition while a statutory consolidation can only be effected through an asset acquisition. C) A statutory merger requires the dissolution of the acquired company while a statutory consolidation requires dissolution of the companies involved in the combination following the transfer of assets or stock to a newly formed entity. D) A statutory consolidation requires dissolution of the acquired company while a statutory merger does not require dissolution. E) Both a statutory merger and a statutory consolidation can only be effected through an asset acquisition but only a statutory consolidation requires dissolution of the acquired company.

10)

Acquired in-process research and development is considered as A) A definite-lived asset subject to amortization. B) A definite-lived asset subject to testing for impairment. C) An indefinite-lived asset subject to amortization. D) An indefinite-lived asset subject to testing for impairment. E) A research and development expense at the date of acquisition.

11) Which of the following statements is true regarding the acquisition method of accounting for a business combination?

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A) The combination must involve the exchange of equity securities only. B) The transaction establishes an acquisition fair value basis for the company being acquired. C) The two companies may be about the same size, and it is difficult to determine the acquired company and the acquiring company. D) The transaction may be considered to be the uniting of the ownership interests of the companies involved. E) The acquired subsidiary must be smaller in size than the acquiring parent.

12) With respect to recognizing and measuring the fair value of a business combination in accordance with the acquisition method of accounting, which of the following should the acquirer consider when determining fair value? A) Only assets received by the acquirer. B) Only consideration transferred by the acquirer. C) The consideration transferred by the acquirer and the fair value of assets received less liabilities assumed. D) The par value of stock transferred by the acquirer, and the book value of identifiable assets transferred by the entity acquired. E) The book value of identifiable assets transferred to the acquirer as part of the business combination less any liabilities assumed.

13)

A statutory merger is a(n)

A) Business combination in which only one of the two companies continues to exist as a legal corporation. B) Business combination in which both companies continue to exist. C) Acquisition of a competitor. D) Acquisition of a supplier or a customer. E) Legal proposal to acquire outstanding shares of the target's stock.

14) In a business combination where a subsidiary retains its incorporation and which is accounted for under the acquisition method, how should stock issuance costs and direct combination costs be treated?

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A) Stock issuance costs and direct combination costs are expensed as incurred. B) Direct combination costs are ignored, and the stock issuance costs result in a reduction to additional paid-in capital. C) Direct combination costs are expensed as incurred and stock issuance costs result in a reduction to additional paid-in capital. D) Both are treated as part of the acquisition consideration transferred. E) Both reduce additional paid-in capital.

15) Wilkins Inc. acquired 100% of the voting common stock of Granger Inc. on January 1, 2021. The book value and fair value of Granger’s accounts on that date (prior to creating the combination) are as follows, along with the book value of Wilkins’s accounts:

Retained earnings, 1/1/21

Wilkins Granger Granger Book Value Book Value Fair Value $ 250,000 $ 240,000

Cash and receivables

170,000

70,000

Inventory

230,000

180,000

210,000

Land

320,000

220,000

240,000

Buildings (net)

480,000

240,000

280,000

Equipment (net)

120,000

90,000

Liabilities

650,000

440,000

430,000

Common stock

360,000

80,000

Additional paid-in capital

60,000

40,000

Assume that Wilkins issued 13,000 shares of common stock, with a $5 par value and a $46 fair value, to obtain all of Granger’s outstanding stock. In this acquisition transaction, how much goodwill should be recognized?

Version 1

A) $178,000. B) $138,000. C) $98,000. D) $94,000. E) $0.

16) Wilkins Inc. acquired 100% of the voting common stock of Granger Inc. on January 1, 2021. The book value and fair value of Granger’s accounts on that date (prior to creating the combination) are as follows, along with the book value of Wilkins’s accounts:

Retained earnings, 1/1/21

Wilkins Granger Granger Book Value Book Value Fair Value $ 250,000 $ 240,000

Cash and receivables

170,000

70,000

Inventory

230,000

180,000

210,000

Land

320,000

220,000

240,000

Buildings (net)

480,000

240,000

280,000

Equipment (net)

120,000

90,000

Liabilities

650,000

440,000

430,000

Common stock

360,000

80,000

Additional paid-in capital

60,000

40,000

Assume that Wilkins issued 13,000 shares of common stock with a $5 par value and a $46 fair value for all of the outstanding stock of Granger. What is the consolidated balance for Land as a result of this acquisition transaction? A) $500,000. B) $550,000. C) $540,000. D) $560,000. E) $530,000.

Version 1

17) Wilkins Inc. acquired 100% of the voting common stock of Granger Inc. on January 1, 2021. The book value and fair value of Granger’s accounts on that date (prior to creating the combination) are as follows, along with the book value of Wilkins’s accounts:

Retained earnings, 1/1/21

Wilkins Granger Granger Book Value Book Value Fair Value $ 250,000 $ 240,000

Cash and receivables

170,000

70,000

Inventory

230,000

180,000

210,000

Land

320,000

220,000

240,000

Buildings (net)

480,000

240,000

280,000

Equipment (net)

120,000

90,000

Liabilities

650,000

440,000

430,000

Common stock

360,000

80,000

Additional paid-in capital

60,000

40,000

Assume that Wilkins issued 13,000 shares of common stock with a $5 par value and a $46 fair value for all of the outstanding shares of Granger. What will be the consolidated Additional PaidIn Capital and Retained Earnings (January 1, 2021 balances) as a result of this acquisition transaction? A) $60,000 and $490,000. B) $60,000 and $250,000. C) $380,000 and $250,000. D) $593,000 and $250,000. E) $593,000 and $490,000.

18) Wilkins Inc. acquired 100% of the voting common stock of Granger Inc. on January 1, 2021. The book value and fair value of Granger’s accounts on that date (prior to creating the combination) are as follows, along with the book value of Wilkins’s accounts: Wilkins Granger Granger Book Value Book Value Fair Value

Version 1

Retained earnings, 1/1/21

$ 250,000

$ 240,000

Cash and receivables

170,000

70,000

Inventory

230,000

180,000

210,000

Land

320,000

220,000

240,000

Buildings (net)

480,000

240,000

280,000

Equipment (net)

120,000

90,000

Liabilities

650,000

440,000

430,000

Common stock

360,000

80,000

Additional paid-in capital

60,000

40,000

70,000

Assume that Wilkins issued preferred stock with a par value of $260,000 and a fair value of $500,000 for all of the outstanding shares of Granger in an acquisition business combination. What will be the balance in the consolidated Inventory and Land accounts? A) $440,000, $540,000. B) $440,000, $560,000. C) $410,000, $540,000. D) $410,000, $560,000. E) $390,000, $460,000.

19) Wilkins Inc. acquired 100% of the voting common stock of Granger Inc. on January 1, 2021. The book value and fair value of Granger’s accounts on that date (prior to creating the combination) are as follows, along with the book value of Wilkins’s accounts:

Retained earnings, 1/1/21

Wilkins Granger Granger Book Value Book Value Fair Value $ 250,000 $ 240,000

Cash and receivables

170,000

70,000

Inventory

230,000

180,000

210,000

Land

320,000

220,000

240,000

Version 1

70,000

Buildings (net)

480,000

240,000

280,000

Equipment (net)

120,000

90,000

Liabilities

650,000

440,000

430,000

Common stock

360,000

80,000

Additional paid-in capital

60,000

40,000

Assume that Wilkins paid a total of $500,000 in cash for all of the shares of Granger. In addition, Wilkins paid $42,000 for secretarial and management time allocated to the acquisition transaction. What will be the balance in consolidated goodwill? A) $0. B) $20,000. C) $40,000. D) $42,000. E) $82,000.

20) Prior to being united in a business combination, Taunton Inc. and Eubanks Corp. had the following stockholders' equity figures: Common stock ($1 par value) Additional paid-in capital Retained earnings

Taunton

Eubanks

$ 240,000 120,000

$ 64,000 30,000

370,000

14,000

Taunton issued 62,000 new shares of its common stock valued at $2.75 per share for all of the outstanding stock of Eubanks. Assume that Taunton acquired Eubanks on January 1, 2020 and that Eubanks maintains a separate corporate existence. At what amount did Taunton record the investment in Eubanks?

Version 1

A) $62,000. B) $108,000. C) $170,500. D) $201,500. E) $234,000.

21) Prior to being united in a business combination, Taunton Inc. and Eubanks Corp. had the following stockholders' equity figures: Common stock ($1 par value) Additional paid-in capital Retained earnings

Taunton

Eubanks

$ 240,000 120,000

$ 64,000 30,000

370,000

14,000

Taunton issued 62,000 new shares of its common stock valued at $2.75 per share for all of the outstanding stock of Eubanks. Assume that Taunton acquired Eubanks on January 1, 2020. Immediately afterwards, what is the reported amount of the consolidated Common Stock? A) $240,000. B) $302,000. C) $304,000. D) $366,000. E) $410,500.

22) Crown Company had common stock of $360,000 and retained earnings of $510,000. Baker Inc. had common stock of $750,000 and retained earnings of $970,000. On January 1, 2021, Baker issued 32,000 shares of common stock with a $13 par value and a $37 fair value for all of Crown Company's outstanding common stock. This combination was accounted for using the acquisition method. Immediately after the combination, what was the amount of total consolidated net assets?

Version 1

A) $2,054,000. B) $2,136,000. C) $2,590,000. D) $2,904,000. E) $3,006,000.

23)

Which of the following is a not a reason for a business combination to take place? A) Cost savings through elimination of duplicate facilities. B) Quick entry for new and existing products into domestic and foreign markets. C) Diversification of business risk. D) Vertical integration. E) Increase in stock price of the acquired company.

24)

Which of the following statements is true regarding a statutory merger?

A) The original companies dissolve while remaining as separate divisions of a newly created company. B) Both companies remain in existence as legal corporations with one corporation now a subsidiary of the acquiring company. C) The acquired company dissolves as a separate corporation and becomes a division of the acquiring company. D) The acquiring company acquires the stock of the acquired company as an investment. E) A statutory merger is no longer a legal option.

25)

Which of the following statements is true regarding a statutory consolidation?

Version 1

26) In a transaction accounted for using the acquisition method where consideration transferred exceeds book value of the acquired company, which statement is true for the acquiring company with regard to its investment? A) Net assets of the acquired company are revalued to their fair values and any excess of consideration transferred over fair value of net assets acquired is allocated to goodwill. B) Net assets of the acquired company are maintained at book value and any excess of consideration transferred over book value of net assets acquired is allocated to goodwill. C) Acquired assets are revalued to their fair values. Acquired liabilities are maintained at book values. Any excess is allocated to goodwill. D) Acquired long-term assets are revalued to their fair values. Any excess is allocated to goodwill. E) Net assets of the acquired company are revalued to their fair values and any excess of consideration transferred over fair value of net assets acquired is deducted from additional paidin capital.

27) In a transaction accounted for using the acquisition method where consideration transferred is less than fair value of net assets acquired, which statement is true?

Version 1

A) Negative goodwill is recorded. B) A deferred credit is recorded. C) A gain on bargain purchase is recorded. D) Long-term assets of the acquired company are reduced in proportion to their fair values. Any excess is recorded as a deferred credit. E) Long-term assets and liabilities of the acquired company are reduced in proportion to their fair values. Any excess is recorded as gain.

28) Which of the following statements is true regarding the acquisition method of accounting for a business combination? A) Net assets of the acquired company are reported at their fair values. B) Net assets of the acquired company are reported at their book values. C) Any goodwill associated with the acquisition is reported as a development cost. D) The acquisition can only be effected by a mutual exchange of voting common stock. E) Indirect costs of the combination reduce additional paid-in capital.

29)

Which of the following statements is true?

A) The pooling of interests for business combinations is an alternative to the acquisition method. B) The purchase method for business combinations is an alternative to the acquisition method. C) Neither the purchase method nor the pooling of interests method is allowed for new business combinations. D) Any previous business combination originally accounted for under purchase or pooling of interests accounting method will now be accounted for under the acquisition method of accounting for business combinations. E) Companies previously using the purchase or pooling of interests accounting method must report a change in accounting principle when consolidating those subsidiaries with new acquisition combinations.

30) The financial statements for Campbell, Inc., and Newton Company for the year ended December 31, 2021, prior to the business combination whereby Campbell acquired Newton, are as follows (in thousands): Version 1

Campbell

Newton

Revenues

$ 2,600

Expenses

1,880

Net income Retained earnings, 1/1

700 400

720

300

$ 2,400

500

Net income

720

300

Dividends

(270 )

Retained earning, 12/31 Cash

$ 2,850

800

230

240

Receivables and inventory

1,200

360

Buildings (net)

2,700

650

Equipment (net)

2,100

1,300

Total assets

$ 6,240

$ 2,540

Liabilities

$ 1,500

Common stock

1,080

400

810

620

2,850

800

$ 6,240

$ 2,540

Additional paid-in capital Retained earnings Total liabilities & stockholders' equity

Version 1

720

On December 31, 2021, Campbell obtained a loan for $650 and used the proceeds, along with the transfer of 35 shares of its $10 par value common stock, in exchange for all of Newton’s common stock. At the time of the transaction, Campbell’s common stock had a fair value of $40 per share. In connection with the business combination, Campbell paid $25 to a broker for arranging the transaction and $30 in stock issuance costs. At the time of the transaction, Newton’s equipment was actually worth $1,450 but its buildings were only valued at $590. Assuming that Newton retains a separate corporate existence after this acquisition, at what amount is the investment recorded on Campbell’s books? A) $1,000. B) $1,055. C) $1,995. D) $2,050. E) $2,105.

31) The financial statements for Campbell, Inc., and Newton Company for the year ended December 31, 2021, prior to the business combination whereby Campbell acquired Newton, are as follows (in thousands): Campbell

Newton

Revenues

$ 2,600

Expenses

1,880

Net income Retained earnings, 1/1

700 400

720

300

$ 2,400

500

Net income

720

300

Dividends

(270 )

Retained earning, 12/31 Cash

$ 2,850

800

230

240

Receivables and inventory

1,200

360

Buildings (net)

2,700

650

Version 1

Equipment (net)

2,100

1,300

Total assets

$ 6,240

$ 2,540

Liabilities

$ 1,500

Common stock

1,080

400

810

620

2,850

800

$ 6,240

$ 2,540

Additional paid-in capital Retained earnings Total liabilities & stockholders' equity

720

On December 31, 2021, Campbell obtained a loan for $650 and used the proceeds, along with the transfer of 35 shares of its $10 par value common stock, in exchange for all of Newton’s common stock. At the time of the transaction, Campbell’s common stock had a fair value of $40 per share. In connection with the business combination, Campbell paid $25 to a broker for arranging the transaction and $30 in stock issuance costs. At the time of the transaction, Newton’s equipment was actually worth $1,450 but its buildings were only valued at $590. What total amount of additional paid-in capital will Campbell recognize from this acquisition? A) $1,020. B) $1,050. C) $1,080. D) $1,105. E) $1,400.

32) The financial statements for Campbell, Inc., and Newton Company for the year ended December 31, 2021, prior to the business combination whereby Campbell acquired Newton, are as follows (in thousands): Campbell

Newton

Revenues

$ 2,600

Expenses

1,880

Version 1

700 400

Net income Retained earnings, 1/1

720

300

$ 2,400

500

Net income

720

300

Dividends

(270 )

Retained earning, 12/31 Cash

$ 2,850

800

230

240

Receivables and inventory

1,200

360

Buildings (net)

2,700

650

Equipment (net)

2,100

1,300

Total assets

$ 6,240

$ 2,540

Liabilities

$ 1,500

Common stock

1,080

400

810

620

2,850

800

$ 6,240

$ 2,540

Additional paid-in capital Retained earnings Total liabilities & stockholders' equity

720

Version 1

A) $300. B) $700. C) $720. D) $2,600. E) $3,300.

33) The financial statements for Campbell, Inc., and Newton Company for the year ended December 31, 2021, prior to the business combination whereby Campbell acquired Newton, are as follows (in thousands): Campbell

Newton

Revenues

$ 2,600

Expenses

1,880

Net income Retained earnings, 1/1

700 400

720

300

$ 2,400

500

Net income

720

300

Dividends

(270 )

Retained earning, 12/31 Cash

$ 2,850

800

230

240

Receivables and inventory

1,200

360

Buildings (net)

2,700

650

Equipment (net)

2,100

1,300

Total assets

$ 6,240

$ 2,540

Liabilities

$ 1,500

Common stock

1,080

400

810

620

Additional paid-in capital

Version 1

720

Retained earnings Total liabilities & stockholders' equity

2,850

800

$ 6,240

$ 2,540

On December 31, 2021, Campbell obtained a loan for $650 and used the proceeds, along with the transfer of 35 shares of its $10 par value common stock, in exchange for all of Newton’s common stock. At the time of the transaction, Campbell’s common stock had a fair value of $40 per share. In connection with the business combination, Campbell paid $25 to a broker for arranging the transaction and $30 in stock issuance costs. At the time of the transaction, Newton’s equipment was actually worth $1,450 but its buildings were only valued at $590. Compute the consolidated receivables and inventory for 2021. A) $470. B) $1,200. C) $1,440. D) $1,560. E) $2,030.

34) The financial statements for Campbell, Inc., and Newton Company for the year ended December 31, 2021, prior to the business combination whereby Campbell acquired Newton, are as follows (in thousands): Campbell

Newton

Revenues

$ 2,600

Expenses

1,880

Net income Retained earnings, 1/1

700 400

720

300

$ 2,400

500

Net income

720

300

Dividends

(270 )

Retained earning, 12/31

Version 1

$ 2,850

800

Cash

240

230

Receivables and inventory

1,200

360

Buildings (net)

2,700

650

Equipment (net)

2,100

1,300

Total assets

$ 6,240

$ 2,540

Liabilities

$ 1,500

Common stock

1,080

400

810

620

2,850

800

$ 6,240

$ 2,540

Additional paid-in capital Retained earnings Total liabilities & stockholders' equity

720

On December 31, 2021, Campbell obtained a loan for $650 and used the proceeds, along with the transfer of 35 shares of its $10 par value common stock, in exchange for all of Newton’s common stock. At the time of the transaction, Campbell’s common stock had a fair value of $40 per share. In connection with the business combination, Campbell paid $25 to a broker for arranging the transaction and $30 in stock issuance costs. At the time of the transaction, Newton’s equipment was actually worth $1,450 but its buildings were only valued at $590. Compute the consolidated expenses for 2021. A) $1,880. B) $1,905. C) $2,280. D) $2,305. E) $2,335.

35) The financial statements for Campbell, Inc., and Newton Company for the year ended December 31, 2021, prior to the business combination whereby Campbell acquired Newton, are as follows (in thousands): Campbell

Version 1

Newton

Revenues

$ 2,600

Expenses

1,880

Net income Retained earnings, 1/1

700 400

720

300

$ 2,400

500

Net income

720

300

Dividends

(270 )

Retained earning, 12/31 Cash

$ 2,850

800

230

240

Receivables and inventory

1,200

360

Buildings (net)

2,700

650

Equipment (net)

2,100

1,300

Total assets

$ 6,240

$ 2,540

Liabilities

$ 1,500

Common stock

1,080

400

810

620

2,850

800

$ 6,240

$ 2,540

Additional paid-in capital Retained earnings Total liabilities & stockholders' equity

720

On December 31, 2021, Campbell obtained a loan for $650 and used the proceeds, along with the transfer of 35 shares of its $10 par value common stock, in exchange for all of Newton’s common stock. At the time of the transaction, Campbell’s common stock had a fair value of $40 per share. In connection with the business combination, Campbell paid $25 to a broker for arranging the transaction and $30 in stock issuance costs. At the time of the transaction, Newton’s equipment was actually worth $1,450 but its buildings were only valued at $590. Compute the consolidated cash account at December 31, 2021.

Version 1

A) $230. B) $240. C) $415. D) $445. E) $470.

36) The financial statements for Campbell, Inc., and Newton Company for the year ended December 31, 2021, prior to the business combination whereby Campbell acquired Newton, are as follows (in thousands): Campbell

Newton

Revenues

$ 2,600

Expenses

1,880

Net income Retained earnings, 1/1

700 400

720

300

$ 2,400

500

Net income

720

300

Dividends

(270 )

Retained earning, 12/31 Cash

$ 2,850

800

230

240

Receivables and inventory

1,200

360

Buildings (net)

2,700

650

Equipment (net)

2,100

1,300

Total assets

$ 6,240

$ 2,540

Liabilities

$ 1,500

Common stock

1,080

400

810

620

Additional paid-in capital

Version 1

720

Retained earnings Total liabilities & stockholders' equity

2,850

800

$ 6,240

$ 2,540

On December 31, 2021, Campbell obtained a loan for $650 and used the proceeds, along with the transfer of 35 shares of its $10 par value common stock, in exchange for all of Newton’s common stock. At the time of the transaction, Campbell’s common stock had a fair value of $40 per share. In connection with the business combination, Campbell paid $25 to a broker for arranging the transaction and $30 in stock issuance costs. At the time of the transaction, Newton’s equipment was actually worth $1,450 but its buildings were only valued at $590. Compute the consolidated buildings (net) account at December 31, 2021. A) $2,700. B) $3,290. C) $3,350. D) $3,400. E) $4,150.

37) The financial statements for Campbell, Inc., and Newton Company for the year ended December 31, 2021, prior to the business combination whereby Campbell acquired Newton, are as follows (in thousands): Campbell

Newton

Revenues

$ 2,600

Expenses

1,880

Net income Retained earnings, 1/1

700 400

720

300

$ 2,400

500

Net income

720

300

Dividends

(270 )

Retained earning, 12/31

Version 1

$ 2,850

800

Cash

240

230

Receivables and inventory

1,200

360

Buildings (net)

2,700

650

Equipment (net)

2,100

1,300

Total assets

$ 6,240

$ 2,540

Liabilities

$ 1,500

Common stock

1,080

400

810

620

2,850

800

$ 6,240

$ 2,540

Additional paid-in capital Retained earnings Total liabilities & stockholders' equity

720

On December 31, 2021, Campbell obtained a loan for $650 and used the proceeds, along with the transfer of 35 shares of its $10 par value common stock, in exchange for all of Newton’s common stock. At the time of the transaction, Campbell’s common stock had a fair value of $40 per share. In connection with the business combination, Campbell paid $25 to a broker for arranging the transaction and $30 in stock issuance costs. At the time of the transaction, Newton’s equipment was actually worth $1,450 but its buildings were only valued at $590. Compute the consolidated equipment (net) account at December 31, 2021. A) $1,300. B) $1,450. C) $2,100. D) $3,400. E) $3,550.

38) The financial statements for Campbell, Inc., and Newton Company for the year ended December 31, 2021, prior to the business combination whereby Campbell acquired Newton, are as follows (in thousands): Campbell

Version 1

Newton

Revenues

$ 2,600

Expenses

1,880

Net income Retained earnings, 1/1

700 400

720

300

$ 2,400

500

Net income

720

300

Dividends

(270 )

Retained earning, 12/31 Cash

$ 2,850

800

230

240

Receivables and inventory

1,200

360

Buildings (net)

2,700

650

Equipment (net)

2,100

1,300

Total assets

$ 6,240

$ 2,540

Liabilities

$ 1,500

Common stock

1,080

400

810

620

2,850

800

$ 6,240

$ 2,540

Additional paid-in capital Retained earnings Total liabilities & stockholders' equity

720

On December 31, 2021, Campbell obtained a loan for $650 and used the proceeds, along with the transfer of 35 shares of its $10 par value common stock, in exchange for all of Newton’s common stock. At the time of the transaction, Campbell’s common stock had a fair value of $40 per share. In connection with the business combination, Campbell paid $25 to a broker for arranging the transaction and $30 in stock issuance costs. At the time of the transaction, Newton’s equipment was actually worth $1,450 but its buildings were only valued at $590. Compute the consideration transferred for this acquisition at December 31, 2021.

Version 1

A) $1,000. B) $1,055. C) $1,995. D) $2,050. E) $2,105.

39) The financial statements for Campbell, Inc., and Newton Company for the year ended December 31, 2021, prior to the business combination whereby Campbell acquired Newton, are as follows (in thousands): Campbell

Newton

Revenues

$ 2,600

Expenses

1,880

Net income Retained earnings, 1/1

700 400

720

300

$ 2,400

500

Net income

720

300

Dividends

(270 )

Retained earning, 12/31 Cash

$ 2,850

800

230

240

Receivables and inventory

1,200

360

Buildings (net)

2,700

650

Equipment (net)

2,100

1,300

Total assets

$ 6,240

$ 2,540

Liabilities

$ 1,500

Common stock

1,080

400

810

620

Additional paid-in capital

Version 1

720

Retained earnings Total liabilities & stockholders' equity

2,850

800

$ 6,240

$ 2,540

On December 31, 2021, Campbell obtained a loan for $650 and used the proceeds, along with the transfer of 35 shares of its $10 par value common stock, in exchange for all of Newton’s common stock. At the time of the transaction, Campbell’s common stock had a fair value of $40 per share. In connection with the business combination, Campbell paid $25 to a broker for arranging the transaction and $30 in stock issuance costs. At the time of the transaction, Newton’s equipment was actually worth $1,450 but its buildings were only valued at $590. Compute the goodwill arising from this acquisition at December 31, 2021. A) $0. B) $55. C) $100. D) $140. E) $230.

40) The financial statements for Campbell, Inc., and Newton Company for the year ended December 31, 2021, prior to the business combination whereby Campbell acquired Newton, are as follows (in thousands): Campbell

Newton

Revenues

$ 2,600

Expenses

1,880

Net income Retained earnings, 1/1

700 400

720

300

$ 2,400

500

Net income

720

300

Dividends

(270 )

Retained earning, 12/31

Version 1

$ 2,850

800

Cash

240

230

Receivables and inventory

1,200

360

Buildings (net)

2,700

650

Equipment (net)

2,100

1,300

Total assets

$ 6,240

$ 2,540

Liabilities

$ 1,500

Common stock

1,080

400

810

620

2,850

800

$ 6,240

$ 2,540

Additional paid-in capital Retained earnings Total liabilities & stockholders' equity

720

On December 31, 2021, Campbell obtained a loan for $650 and used the proceeds, along with the transfer of 35 shares of its $10 par value common stock, in exchange for all of Newton’s common stock. At the time of the transaction, Campbell’s common stock had a fair value of $40 per share. In connection with the business combination, Campbell paid $25 to a broker for arranging the transaction and $30 in stock issuance costs. At the time of the transaction, Newton’s equipment was actually worth $1,450 but its buildings were only valued at $590. Compute the consolidated common stock account at December 31, 2021. A) $750. B) $1,080. C) $1,430. D) $1,480. E) $1,830.

41) The financial statements for Campbell, Inc., and Newton Company for the year ended December 31, 2021, prior to the business combination whereby Campbell acquired Newton, are as follows (in thousands): Campbell

Version 1

Newton

Revenues

$ 2,600

Expenses

1,880

Net income Retained earnings, 1/1

700 400

720

300

$ 2,400

500

Net income

720

300

Dividends

(270 )

Retained earning, 12/31 Cash

$ 2,850

800

230

240

Receivables and inventory

1,200

360

Buildings (net)

2,700

650

Equipment (net)

2,100

1,300

Total assets

$ 6,240

$ 2,540

Liabilities

$ 1,500

Common stock

1,080

400

810

620

2,850

800

$ 6,240

$ 2,540

Additional paid-in capital Retained earnings Total liabilities & stockholders' equity

720

On December 31, 2021, Campbell obtained a loan for $650 and used the proceeds, along with the transfer of 35 shares of its $10 par value common stock, in exchange for all of Newton’s common stock. At the time of the transaction, Campbell’s common stock had a fair value of $40 per share. In connection with the business combination, Campbell paid $25 to a broker for arranging the transaction and $30 in stock issuance costs. At the time of the transaction, Newton’s equipment was actually worth $1,450 but its buildings were only valued at $590. Compute the consolidated additional paid-in capital at December 31, 2021

Version 1

A) $810. B) $1,400. C) $1,430. D) $1,830. E) $1,860.

42) The financial statements for Campbell, Inc., and Newton Company for the year ended December 31, 2021, prior to the business combination whereby Campbell acquired Newton, are as follows (in thousands): Campbell

Newton

Revenues

$ 2,600

Expenses

1,880

Net income Retained earnings, 1/1

700 400

720

300

$ 2,400

500

Net income

720

300

Dividends

(270 )

Retained earning, 12/31 Cash

$ 2,850

800

230

240

Receivables and inventory

1,200

360

Buildings (net)

2,700

650

Equipment (net)

2,100

1,300

Total assets

$ 6,240

$ 2,540

Liabilities

$ 1,500

Common stock

1,080

400

810

620

Additional paid-in capital

Version 1

720

Retained earnings Total liabilities & stockholders' equity

2,850

800

$ 6,240

$ 2,540

On December 31, 2021, Campbell obtained a loan for $650 and used the proceeds, along with the transfer of 35 shares of its $10 par value common stock, in exchange for all of Newton’s common stock. At the time of the transaction, Campbell’s common stock had a fair value of $40 per share. In connection with the business combination, Campbell paid $25 to a broker for arranging the transaction and $30 in stock issuance costs. At the time of the transaction, Newton’s equipment was actually worth $1,450 but its buildings were only valued at $590. Compute the consolidated liabilities at December 31, 2021. A) $1,500. B) $2,150. C) $2,200. D) $2,870. E) $3,550.

43) The financial statements for Campbell, Inc., and Newton Company for the year ended December 31, 2021, prior to the business combination whereby Campbell acquired Newton, are as follows (in thousands): Campbell

Newton

Revenues

$ 2,600

Expenses

1,880

Net income Retained earnings, 1/1

700 400

720

300

$ 2,400

500

Net income

720

300

Dividends

(270 )

Retained earning, 12/31

Version 1

$ 2,850

800

Cash

240

230

Receivables and inventory

1,200

360

Buildings (net)

2,700

650

Equipment (net)

2,100

1,300

Total assets

$ 6,240

$ 2,540

Liabilities

$ 1,500

Common stock

1,080

400

810

620

2,850

800

$ 6,240

$ 2,540

Additional paid-in capital Retained earnings Total liabilities & stockholders' equity

720

On December 31, 2021, Campbell obtained a loan for $650 and used the proceeds, along with the transfer of 35 shares of its $10 par value common stock, in exchange for all of Newton’s common stock. At the time of the transaction, Campbell’s common stock had a fair value of $40 per share. In connection with the business combination, Campbell paid $25 to a broker for arranging the transaction and $30 in stock issuance costs. At the time of the transaction, Newton’s equipment was actually worth $1,450 but its buildings were only valued at $590. Compute the consolidated retained earnings at December 31, 2021. A) $2,825. B) $2,875. C) $2,900. D) $3,625. E) $3,650.

Version 1

44) On January 1, 2021, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and also issued 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows: Moody Cash

180

Osorio $

Receivables

810

180

Inventories

1,080

280

600

360

Buildings (net)

1,260

440

Equipment (net)

480

100

Accounts payable

(450 )

(80 )

Long-term liabilities

(1,290 )

(400 )

Common stock ($1 par)

(330 )

Land

Common stock ($20 par)

(240 )

Additional paid-in capital

(1,080 )

(340 )

Retained earnings

(1,260 )

(340 )

Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. If Osorio retains a separate corporate existence, what amount was recorded as the investment in Osorio?

Version 1

A) $400. B) $440. C) $800. D) $820. E) $1,030.

45) On January 1, 2021, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and also issued 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows: Moody Cash

180

Osorio $

Receivables

810

180

Inventories

1,080

280

600

360

Buildings (net)

1,260

440

Equipment (net)

480

100

Accounts payable

(450 )

(80 )

Long-term liabilities

(1,290 )

(400 )

Common stock ($1 par)

(330 )

Land

Common stock ($20 par)

(240 )

Additional paid-in capital

(1,080 )

(340 )

Retained earnings

(1,260 )

(340 )

Version 1

Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. What is the amount of goodwill arising from this acquisition? A) $230. B) $120. C) $520. D) None. There is a gain on bargain purchase of $230. E) None. There is a gain on bargain purchase of $265.

46) On January 1, 2021, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and also issued 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows: Moody Cash

180

Osorio $

Receivables

810

180

Inventories

1,080

280

600

360

Buildings (net)

1,260

440

Equipment (net)

480

100

Accounts payable

(450 )

(80 )

Long-term liabilities

(1,290 )

(400 )

Common stock ($1 par)

(330 )

Land

Common stock ($20 par) Additional paid-in capital

Version 1

(240 ) (1,080 )

(340 )

Retained earnings

(1,260 )

(340 )

Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. Compute the amount of consolidated inventories at date of acquisition. A) $1,080. B) $1,350. C) $1,360. D) $1,370. E) $290.

47) On January 1, 2021, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and also issued 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows: Moody Cash

180

Osorio $

Receivables

810

180

Inventories

1,080

280

600

360

Buildings (net)

1,260

440

Equipment (net)

480

100

Accounts payable

(450 )

(80 )

Long-term liabilities

(1,290 )

(400 )

Common stock ($1 par)

(330 )

Land

Version 1

Common stock ($20 par)

(240 )

Additional paid-in capital

(1,080 )

(340 )

Retained earnings

(1,260 )

(340 )

Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. Compute the amount of consolidated buildings (net) at date of acquisition. A) $1,700. B) $1,760. C) $1,640. D) $1,320. E) $500.

48) On January 1, 2021, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and also issued 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows: Moody Cash

180

Osorio $

Receivables

810

180

Inventories

1,080

280

600

360

Buildings (net)

1,260

440

Equipment (net)

480

100

Accounts payable

(450 )

(80 )

Land

Version 1

Long-term liabilities

(1,290 )

Common stock ($1 par)

(330 )

(400 )

Common stock ($20 par)

(240 )

Additional paid-in capital

(1,080 )

(340 )

Retained earnings

(1,260 )

(340 )

Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. Compute the amount of consolidated land at date of acquisition. A) $1,000. B) $960. C) $920. D) $400. E) $320.

49) On January 1, 2021, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and also issued 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows: Moody Cash

180

Osorio $

Receivables

810

180

Inventories

1,080

280

600

360

1,260

440

Land Buildings (net)

Version 1

Equipment (net)

480

100

Accounts payable

(450 )

(80 )

Long-term liabilities

(1,290 )

(400 )

Common stock ($1 par)

(330 )

Common stock ($20 par)

(240 )

Additional paid-in capital

(1,080 )

(340 )

Retained earnings

(1,260 )

(340 )

Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. Compute the amount of consolidated equipment at date of acquisition. A) $480. B) $580. C) $559. D) $570. E) $560.

50) On January 1, 2021, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and also issued 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows: Moody Cash

180

Osorio $

Receivables

810

180

Inventories

1,080

280

Version 1

Land

600

360

Buildings (net)

1,260

440

Equipment (net)

480

100

Accounts payable

(450 )

(80 )

Long-term liabilities

(1,290 )

(400 )

Common stock ($1 par)

(330 )

Common stock ($20 par)

(240 )

Additional paid-in capital

(1,080 )

(340 )

Retained earnings

(1,260 )

(340 )

Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. Compute the amount of consolidated common stock at date of acquisition. A) $370. B) $570. C) $610. D) $330. E) $530.

51) On January 1, 2021, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and also issued 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows: Moody Cash

Version 1

180

Osorio $

Receivables

810

180

Inventories

1,080

280

600

360

Buildings (net)

1,260

440

Equipment (net)

480

100

Accounts payable

(450 )

(80 )

Long-term liabilities

(1,290 )

(400 )

Common stock ($1 par)

(330 )

Land

Common stock ($20 par)

(240 )

Additional paid-in capital

(1,080 )

(340 )

Retained earnings

(1,260 )

(340 )

Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. Compute the amount of consolidated additional paid-in capital at date of acquisition. A) $1,080. B) $1,420. C) $1,065. D) $1,425. E) $1,440.

52) On January 1, 2021, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and also issued 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows:

Version 1

Moody Cash

180

Osorio $

Receivables

810

180

Inventories

1,080

280

600

360

Buildings (net)

1,260

440

Equipment (net)

480

100

Accounts payable

(450 )

(80 )

Long-term liabilities

(1,290 )

(400 )

Common stock ($1 par)

(330 )

Land

Common stock ($20 par)

(240 )

Additional paid-in capital

(1,080 )

(340 )

Retained earnings

(1,260 )

(340 )

Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. Compute the amount of consolidated cash after recording the acquisition transaction. A) $220. B) $185. C) $200. D) $205. E) $215.

53) McCoy has the following account balances as of December 31, 2020 before an acquisition transaction takes place.

Version 1

Inventory Land Buildings (net) Common stock ($10 par) Additional paid-in capital Retained earnings

$125,000 450,000 575,000 600,000 300,000 250,000

The fair value of McCoy’s Land and Buildings are $650,000 and $600,000, respectively. On December 31, 2020, Ferguson Company issues 30,000 shares of its $10 par value ($30 fair value) common stock in exchange for all of the shares of McCoy’s common stock. Ferguson paid $12,000 for costs to issue the new shares of stock. Before the acquisition, Ferguson has $800,000 in its common stock account and $350,000 in its additional paid-in capital account. On December 31, 2020, assuming that McCoy will retain its separate corporate existence, what value is assigned to Ferguson’s investment account?

A) $150,000. B) $300,000. C) $600,000. D) $900,000. E) $912,000.

54) McCoy has the following account balances as of December 31, 2020 before an acquisition transaction takes place. Inventory Land Buildings (net) Common stock ($10 par) Additional paid-in capital Retained earnings

Version 1

$125,000 450,000 575,000 600,000 300,000 250,000

The fair value of McCoy’s Land and Buildings are $650,000 and $600,000, respectively. On December 31, 2020, Ferguson Company issues 30,000 shares of its $10 par value ($30 fair value) common stock in exchange for all of the shares of McCoy’s common stock. Ferguson paid $12,000 for costs to issue the new shares of stock. Before the acquisition, Ferguson has $800,000 in its common stock account and $350,000 in its additional paid-in capital account. At the date of acquisition, by how much does Ferguson’s additional paid-in capital increase or decrease?

A) $0. B) $588,000 increase. C) $600,000 increase. D) $612,000 increase. E) $900,000 decrease.

55) McCoy has the following account balances as of December 31, 2020 before an acquisition transaction takes place. Inventory Land Buildings (net) Common stock ($10 par) Additional paid-in capital Retained earnings

$125,000 450,000 575,000 600,000 300,000 250,000

The fair value of McCoy’s Land and Buildings are $650,000 and $600,000, respectively. On December 31, 2020, Ferguson Company issues 30,000 shares of its $10 par value ($30 fair value) common stock in exchange for all of the shares of McCoy’s common stock. Ferguson paid $12,000 for costs to issue the new shares of stock. Before the acquisition, Ferguson has $800,000 in its common stock account and $350,000 in its additional paid-in capital account. What will the consolidated common stock account be as a result of this acquisition?

Version 1

A) $300,000. B) $800,000. C) $1,100,000. D) $1,400,000. E) $1,700,000.

56) McCoy has the following account balances as of December 31, 2020 before an acquisition transaction takes place. Inventory Land Buildings (net) Common stock ($10 par) Additional paid-in capital Retained earnings

$125,000 450,000 575,000 600,000 300,000 250,000

The fair value of McCoy’s Land and Buildings are $650,000 and $600,000, respectively. On December 31, 2020, Ferguson Company issues 30,000 shares of its $10 par value ($30 fair value) common stock in exchange for all of the shares of McCoy’s common stock. Ferguson paid $12,000 for costs to issue the new shares of stock. Before the acquisition, Ferguson has $800,000 in its common stock account and $350,000 in its additional paid-in capital account. What will be the consolidated additional paid-in capital as a result of this acquisition?

A) $350,000. B) $650,000. C) $938,000. D) $950,000. E) $962,000.

57) The financial statement amounts for the Atwood Company and the Franz Company as of December 31, 2021, are presented below. Also included are the fair values for Franz Company's net assets (all numbers are in thousands). Atwood Book Value

Version 1

Franz Co. Book Value

Franz Co. Fair Value 46

Cash

12/31/2021

870

240

Receivables

660

600

Inventory

1,230

420

580

Land

1,800

260

250

Buildings (net)

1,800

540

650

Equipment (net)

660

380

400

Accounts payable

(570 )

(240 )

Accrued expenses

(270 )

(60 )

Long-term liabilities

(2,700 )

(1,020 )

(1,120 )

Common stock ($20 par)

(1,980 )

Common stock ($5 par)

(420 )

Additional paid-in capital

(210 )

(180 )

Retained earnings 1/1/18

(1,170 )

(480 )

Revenues

(2,880 )

(660 )

Expenses

2,760

620

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2021. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute the amount of the consideration transferred by Atwood to acquire Franz.

Version 1

A) $1,750. B) $1,760. C) $1,775. D) $1,300. E) $1,120.

58) The financial statement amounts for the Atwood Company and the Franz Company as of December 31, 2021, are presented below. Also included are the fair values for Franz Company's net assets (all numbers are in thousands).

Cash

Atwood Book Value 12/31/2021

Franz Co. Book Value 12/31/2021

Franz Co. Fair Value 12/31/2021

870

240

Receivables

660

600

Inventory

1,230

420

580

Land

1,800

260

250

Buildings (net)

1,800

540

650

Equipment (net)

660

380

400

Accounts payable

(570 )

(240 )

Accrued expenses

(270 )

(60 )

Long-term liabilities

(2,700 )

(1,020 )

(1,120 )

Common stock ($20 par)

(1,980 )

Common stock ($5 par)

(420 )

Additional paid-in capital

(210 )

(180 )

Retained earnings 1/1/18

(1,170 )

(480 )

Revenues

(2,880 )

(660 )

Expenses

2,760

620

Version 1

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2021. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute the consolidated common stock at the date of acquisition.

A) $1,000. B) $2,980. C) $2,400. D) $3,400. E) $3,730.

59) The financial statement amounts for the Atwood Company and the Franz Company as of December 31, 2021, are presented below. Also included are the fair values for Franz Company's net assets (all numbers are in thousands).

Cash

Atwood Book Value 12/31/2021

Franz Co. Book Value 12/31/2021

Franz Co. Fair Value 12/31/2021

870

240

Receivables

660

600

Inventory

1,230

420

580

Land

1,800

260

250

Buildings (net)

1,800

540

650

Equipment (net)

660

380

400

Accounts payable

(570 )

(240 )

Accrued expenses

(270 )

(60 )

(2,700 )

(1,020 )

(1,120 )

Long-term liabilities

Version 1

Common stock ($20 par)

(1,980 )

Common stock ($5 par)

(420 )

Additional paid-in capital

(210 )

(180 )

Retained earnings 1/1/18

(1,170 )

(480 )

Revenues

(2,880 )

(660 )

Expenses

2,760

620

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2021. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated inventory at the date of the acquisition.

A) $1,650. B) $1,810. C) $1,230. D) $580. E) $1,830.

60) The financial statement amounts for the Atwood Company and the Franz Company as of December 31, 2021, are presented below. Also included are the fair values for Franz Company's net assets (all numbers are in thousands).

Cash

Atwood Book Value 12/31/2021

Franz Co. Book Value 12/31/2021

Franz Co. Fair Value 12/31/2021

870

240

Receivables

660

600

Inventory

1,230

420

580

Version 1

Land

1,800

260

250

Buildings (net)

1,800

540

650

Equipment (net)

660

380

400

Accounts payable

(570 )

(240 )

Accrued expenses

(270 )

(60 )

Long-term liabilities

(2,700 )

(1,020 )

(1,120 )

Common stock ($20 par)

(1,980 )

Common stock ($5 par)

(420 )

Additional paid-in capital

(210 )

(180 )

Retained earnings 1/1/18

(1,170 )

(480 )

Revenues

(2,880 )

(660 )

Expenses

2,760

620

A) $2,060. B) $1,800. C) $260. D) $2,050. E) $2,070.

61) The financial statement amounts for the Atwood Company and the Franz Company as of December 31, 2021, are presented below. Also included are the fair values for Franz Company's net assets (all numbers are in thousands). Version 1

Cash

Atwood Book Value 12/31/2021

Franz Co. Book Value 12/31/2021

Franz Co. Fair Value 12/31/2021

870

240

Receivables

660

600

Inventory

1,230

420

580

Land

1,800

260

250

Buildings (net)

1,800

540

650

Equipment (net)

660

380

400

Accounts payable

(570 )

(240 )

Accrued expenses

(270 )

(60 )

Long-term liabilities

(2,700 )

(1,020 )

(1,120 )

Common stock ($20 par)

(1,980 )

Common stock ($5 par)

(420 )

Additional paid-in capital

(210 )

(180 )

Retained earnings 1/1/18

(1,170 )

(480 )

Revenues

(2,880 )

(660 )

Expenses

2,760

620

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2021. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated buildings (net) at the date of the acquisition.

Version 1

A) $2,450. B) $2,340. C) $1,800. D) $650. E) $1,690.

62) The financial statement amounts for the Atwood Company and the Franz Company as of December 31, 2021, are presented below. Also included are the fair values for Franz Company's net assets (all numbers are in thousands).

Cash

Atwood Book Value 12/31/2021

Franz Co. Book Value 12/31/2021

Franz Co. Fair Value 12/31/2021

870

240

Receivables

660

600

Inventory

1,230

420

580

Land

1,800

260

250

Buildings (net)

1,800

540

650

Equipment (net)

660

380

400

Accounts payable

(570 )

(240 )

Accrued expenses

(270 )

(60 )

Long-term liabilities

(2,700 )

(1,020 )

(1,120 )

Common stock ($20 par)

(1,980 )

Common stock ($5 par)

(420 )

Additional paid-in capital

(210 )

(180 )

Retained earnings 1/1/18

(1,170 )

(480 )

Revenues

(2,880 )

(660 )

Expenses

2,760

620

Version 1

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2021. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated long-term liabilities at the date of the acquisition.

A) $2,600. B) $2,700. C) $2,800. D) $3,720. E) $3,820.

63) The financial statement amounts for the Atwood Company and the Franz Company as of December 31, 2021, are presented below. Also included are the fair values for Franz Company's net assets (all numbers are in thousands).

Cash

Atwood Book Value 12/31/2021

Franz Co. Book Value 12/31/2021

Franz Co. Fair Value 12/31/2021

870

240

Receivables

660

600

Inventory

1,230

420

580

Land

1,800

260

250

Buildings (net)

1,800

540

650

Equipment (net)

660

380

400

Accounts payable

(570 )

(240 )

Accrued expenses

(270 )

(60 )

(2,700 )

(1,020 )

(1,120 )

Long-term liabilities

Version 1

Common stock ($20 par)

(1,980 )

Common stock ($5 par)

(420 )

Additional paid-in capital

(210 )

(180 )

Retained earnings 1/1/18

(1,170 )

(480 )

Revenues

(2,880 )

(660 )

Expenses

2,760

620

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2021. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated goodwill at the date of the acquisition.

A) $360. B) $450. C) $460. D) $440. E) $475.

64) The financial statement amounts for the Atwood Company and the Franz Company as of December 31, 2021, are presented below. Also included are the fair values for Franz Company's net assets (all numbers are in thousands).

Cash

Atwood Book Value 12/31/2021

Franz Co. Book Value 12/31/2021

Franz Co. Fair Value 12/31/2021

870

240

Receivables

660

600

Inventory

1,230

420

580

Version 1

Land

1,800

260

250

Buildings (net)

1,800

540

650

Equipment (net)

660

380

400

Accounts payable

(570 )

(240 )

Accrued expenses

(270 )

(60 )

Long-term liabilities

(2,700 )

(1,020 )

(1,120 )

Common stock ($20 par)

(1,980 )

Common stock ($5 par)

(420 )

Additional paid-in capital

(210 )

(180 )

Retained earnings 1/1/18

(1,170 )

(480 )

Revenues

(2,880 )

(660 )

Expenses

2,760

620

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2021. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated equipment (net) at the date of the acquisition.

A) $400. B) $660. C) $1,060. D) $1,040. E) $1,050.

65) The financial statement amounts for the Atwood Company and the Franz Company as of December 31, 2021, are presented below. Also included are the fair values for Franz Company's net assets (all numbers are in thousands). Version 1

Cash

Atwood Book Value 12/31/2021

Franz Co. Book Value 12/31/2021

Franz Co. Fair Value 12/31/2021

870

240

Receivables

660

600

Inventory

1,230

420

580

Land

1,800

260

250

Buildings (net)

1,800

540

650

Equipment (net)

660

380

400

Accounts payable

(570 )

(240 )

Accrued expenses

(270 )

(60 )

Long-term liabilities

(2,700 )

(1,020 )

(1,120 )

Common stock ($20 par)

(1,980 )

Common stock ($5 par)

(420 )

Additional paid-in capital

(210 )

(180 )

Retained earnings 1/1/18

(1,170 )

(480 )

Revenues

(2,880 )

(660 )

Expenses

2,760

620

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2021. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute fair value of the net assets acquired at the date of the acquisition.

Version 1

A) $1,300. B) $1,340. C) $1,500. D) $1,750. E) $2,480.

66) The financial statement amounts for the Atwood Company and the Franz Company as of December 31, 2021, are presented below. Also included are the fair values for Franz Company's net assets (all numbers are in thousands).

Cash

Atwood Book Value 12/31/2021

Franz Co. Book Value 12/31/2021

Franz Co. Fair Value 12/31/2021

870

240

Receivables

660

600

Inventory

1,230

420

580

Land

1,800

260

250

Buildings (net)

1,800

540

650

Equipment (net)

660

380

400

Accounts payable

(570 )

(240 )

Accrued expenses

(270 )

(60 )

Long-term liabilities

(2,700 )

(1,020 )

(1,120 )

Common stock ($20 par)

(1,980 )

Common stock ($5 par)

(420 )

Additional paid-in capital

(210 )

(180 )

Retained earnings 1/1/21

(1,170 )

(480 )

Revenues

(2,880 )

(660 )

Expenses

2,760

620

Version 1

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2021. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated retained earnings at the date of the acquisition.

A) $1,160. B) $1,170. C) $1,280. D) $1,290. E) $1,640.

67) The financial statement amounts for the Atwood Company and the Franz Company as of December 31, 2021, are presented below. Also included are the fair values for Franz Company's net assets (all numbers are in thousands).

Cash

Atwood Book Value 12/31/2021

Franz Co. Book Value 12/31/2021

Franz Co. Fair Value 12/31/2021

870

240

Receivables

660

600

Inventory

1,230

420

580

Land

1,800

260

250

Buildings (net)

1,800

540

650

Equipment (net)

660

380

400

Accounts payable

(570 )

(240 )

Accrued expenses

(270 )

(60 )

(2,700 )

(1,020 )

(1,120 )

Long-term liabilities

Version 1

Common stock ($20 par)

(1,980 )

Common stock ($5 par)

(420 )

Additional paid-in capital

(210 )

(180 )

Retained earnings 1/1/18

(1,170 )

(480 )

Revenues

(2,880 )

(660 )

Expenses

2,760

620

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2021. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated revenues immediately following the acquisition.

A) $3,540. B) $2,880. C) $1,170. D) $1,650. E) $4,050.

68) The financial statement amounts for the Atwood Company and the Franz Company as of December 31, 2021, are presented below. Also included are the fair values for Franz Company's net assets (all numbers are in thousands).

Cash

Atwood Book Value 12/31/2021

Franz Co. Book Value 12/31/2021

Franz Co. Fair Value 12/31/2021

870

240

Receivables

660

600

Inventory

1,230

420

580

Version 1

Land

1,800

260

250

Buildings (net)

1,800

540

650

Equipment (net)

660

380

400

Accounts payable

(570 )

(240 )

Accrued expenses

(270 )

(60 )

Long-term liabilities

(2,700 )

(1,020 )

(1,120 )

Common stock ($20 par)

(1,980 )

Common stock ($5 par)

(420 )

Additional paid-in capital

(210 )

(180 )

Retained earnings 1/1/18

(1,170 )

(480 )

Revenues

(2,880 )

(660 )

Expenses

2,760

620

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2021. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated cash at the completion of the acquisition.

A) $1,350. B) $1,085. C) $1,110. D) $870. E) $845.

69) The financial statement amounts for the Atwood Company and the Franz Company as of December 31, 2021, are presented below. Also included are the fair values for Franz Company's net assets (all numbers are in thousands). Version 1

Cash

Atwood Book Value 12/31/2021

Franz Co. Book Value 12/31/2021

Franz Co. Fair Value 12/31/2021

870

240

Receivables

660

600

Inventory

1,230

420

580

Land

1,800

260

250

Buildings (net)

1,800

540

650

Equipment (net)

660

380

400

Accounts payable

(570 )

(240 )

Accrued expenses

(270 )

(60 )

Long-term liabilities

(2,700 )

(1,020 )

(1,120 )

Common stock ($20 par)

(1,980 )

Common stock ($5 par)

(420 )

Additional paid-in capital

(210 )

(180 )

Retained earnings 1/1/18

(1,170 )

(480 )

Revenues

(2,880 )

(660 )

Expenses

2,760

620

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2021. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated expenses immediately following the acquisition.

Version 1

A) $2,760. B) $2,770. C) $2,785. D) $3,380. E) $3,390.

70) Presented below are the financial balances for the Boxwood Company and the Tranz Company as of December 31, 2020, immediately before Boxwood acquired Tranz. Also included are the fair values for Tranz Company's net assets at that date (all amounts in thousands).

Cash

Boxwood Book Value 12/31/20

Tranz Co. Book Value 12/31/20

Tranz Co. Fair Value 12/31/20

870

240

Receivables

660

600

Inventory

1,230

420

580

Land

1,800

260

250

Buildings (net)

1,800

540

650

Equipment (net)

660

380

400

Accounts payable

(570 )

(240 )

Accrued expenses

(270 )

(60 )

Long-term liabilities

(2,700 )

(1,020 )

(1,120 )

Common stock ($20 par)

(1,980 )

Common stock ($5 par) Additional paid-in capital

(420 ) (210 )

(180 )

Retained earnings

(1,170 )

(480 )

Revenues

(2,880 )

(660 )

Expenses

2,760

620

Version 1

Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 2020. Boxwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Tranz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid to effect this acquisition transaction. To settle a difference of opinion regarding Tranz’s fair value, Boxwood promises to pay an additional $5.2 (in thousands) to the former owners if Tranz’s earnings exceed a certain sum during the next year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is $5 (in thousands). Compute the investment to be recorded at the date of acquisition. A) $1,750. B) $1,755. C) $1,725. D) $1,760. E) $1,765.

71) Presented below are the financial balances for the Boxwood Company and the Tranz Company as of December 31, 2020, immediately before Boxwood acquired Tranz. Also included are the fair values for Tranz Company's net assets at that date (all amounts in thousands).

Cash

Boxwood Book Value 12/31/20

Tranz Co. Book Value 12/31/20

Tranz Co. Fair Value 12/31/20

870

240

Receivables

660

600

Inventory

1,230

420

580

Land

1,800

260

250

Buildings (net)

1,800

540

650

Equipment (net)

660

380

400

Accounts payable

(570 )

(240 )

Accrued expenses

(270 )

(60 )

Version 1

Long-term liabilities

(2,700 )

Common stock ($20 par)

(1,980 )

(1,020 )

Common stock ($5 par)

(1,120 )

(420 )

Additional paid-in capital

(210 )

(180 )

Retained earnings

(1,170 )

(480 )

Revenues

(2,880 )

(660 )

Expenses

2,760

620

Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 2020. Boxwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Tranz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid to effect this acquisition transaction. To settle a difference of opinion regarding Tranz’s fair value, Boxwood promises to pay an additional $5.2 (in thousands) to the former owners if Tranz’s earnings exceed a certain sum during the next year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is $5 (in thousands). Compute consolidated inventory immediately following the acquisition. A) $1,650. B) $1,810. C) $1,230. D) $580. E) $1,830.

72) Presented below are the financial balances for the Boxwood Company and the Tranz Company as of December 31, 2020, immediately before Boxwood acquired Tranz. Also included are the fair values for Tranz Company's net assets at that date (all amounts in thousands).

Cash

Version 1

Boxwood Book Value 12/31/20

Tranz Co. Book Value 12/31/20

Tranz Co. Fair Value 12/31/20

870

240

Receivables

660

600

Inventory

1,230

420

580

Land

1,800

260

250

Buildings (net)

1,800

540

650

Equipment (net)

660

380

400

Accounts payable

(570 )

(240 )

Accrued expenses

(270 )

(60 )

Long-term liabilities

(2,700 )

(1,020 )

(1,120 )

Common stock ($20 par)

(1,980 )

Common stock ($5 par) Additional paid-in capital

(420 ) (210 )

(180 )

Retained earnings

(1,170 )

(480 )

Revenues

(2,880 )

(660 )

Expenses

2,760

620

Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 2020. Boxwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Tranz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid to effect this acquisition transaction. To settle a difference of opinion regarding Tranz’s fair value, Boxwood promises to pay an additional $5.2 (in thousands) to the former owners if Tranz’s earnings exceed a certain sum during the next year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is $5 (in thousands). Compute consolidated land immediately following the acquisition.

Version 1

A) $2,060. B) $1,800. C) $260. D) $2,050. E) $2,070.

73) Presented below are the financial balances for the Boxwood Company and the Tranz Company as of December 31, 2020, immediately before Boxwood acquired Tranz. Also included are the fair values for Tranz Company's net assets at that date (all amounts in thousands).

Cash

Boxwood Book Value 12/31/20

Tranz Co. Book Value 12/31/20

Tranz Co. Fair Value 12/31/20

870

240

Receivables

660

600

Inventory

1,230

420

580

Land

1,800

260

250

Buildings (net)

1,800

540

650

Equipment (net)

660

380

400

Accounts payable

(570 )

(240 )

Accrued expenses

(270 )

(60 )

Long-term liabilities

(2,700 )

(1,020 )

(1,120 )

Common stock ($20 par)

(1,980 )

Common stock ($5 par) Additional paid-in capital

(420 ) (210 )

(180 )

Retained earnings

(1,170 )

(480 )

Revenues

(2,880 )

(660 )

Expenses

2,760

620

Version 1

Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 2020. Boxwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Tranz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid to effect this acquisition transaction. To settle a difference of opinion regarding Tranz’s fair value, Boxwood promises to pay an additional $5.2 (in thousands) to the former owners if Tranz’s earnings exceed a certain sum during the next year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is $5 (in thousands). Compute consolidated buildings (net) immediately following the acquisition. A) $2,450. B) $2,340. C) $1,800. D) $650. E) $1,690.

74) Presented below are the financial balances for the Boxwood Company and the Tranz Company as of December 31, 2020, immediately before Boxwood acquired Tranz. Also included are the fair values for Tranz Company's net assets at that date (all amounts in thousands).

Cash

Boxwood Book Value 12/31/20

Tranz Co. Book Value 12/31/20

Tranz Co. Fair Value 12/31/20

870

240

Receivables

660

600

Inventory

1,230

420

580

Land

1,800

260

250

Buildings (net)

1,800

540

650

Equipment (net)

660

380

400

Accounts payable

(570 )

(240 )

Accrued expenses

(270 )

(60 )

Version 1

Long-term liabilities

(2,700 )

Common stock ($20 par)

(1,980 )

(1,020 )

Common stock ($5 par)

(1,120 )

(420 )

Additional paid-in capital

(210 )

(180 )

Retained earnings

(1,170 )

(480 )

Revenues

(2,880 )

(660 )

Expenses

2,760

620

Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 2020. Boxwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Tranz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid to effect this acquisition transaction. To settle a difference of opinion regarding Tranz’s fair value, Boxwood promises to pay an additional $5.2 (in thousands) to the former owners if Tranz’s earnings exceed a certain sum during the next year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is $5 (in thousands). Compute consolidated goodwill immediately following the acquisition. A) $440. B) $442. C) $450. D) $455. E) $452.

75) Presented below are the financial balances for the Boxwood Company and the Tranz Company as of December 31, 2020, immediately before Boxwood acquired Tranz. Also included are the fair values for Tranz Company's net assets at that date (all amounts in thousands).

Cash

Version 1

Boxwood Book Value 12/31/20

Tranz Co. Book Value 12/31/20

Tranz Co. Fair Value 12/31/20

870

240

Receivables

660

600

Inventory

1,230

420

580

Land

1,800

260

250

Buildings (net)

1,800

540

650

Equipment (net)

660

380

400

Accounts payable

(570 )

(240 )

Accrued expenses

(270 )

(60 )

Long-term liabilities

(2,700 )

(1,020 )

(1,120 )

Common stock ($20 par)

(1,980 )

Common stock ($5 par) Additional paid-in capital

(420 ) (210 )

(180 )

Retained earnings

(1,170 )

(480 )

Revenues

(2,880 )

(660 )

Expenses

2,760

620

Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 2020. Boxwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Tranz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid to effect this acquisition transaction. To settle a difference of opinion regarding Tranz’s fair value, Boxwood promises to pay an additional $5.2 (in thousands) to the former owners if Tranz’s earnings exceed a certain sum during the next year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is $5 (in thousands). Compute consolidated equipment immediately following the acquisition.

Version 1

A) $400. B) $660. C) $1,060. D) $1,040. E) $1,050.

76) Presented below are the financial balances for the Boxwood Company and the Tranz Company as of December 31, 2020, immediately before Boxwood acquired Tranz. Also included are the fair values for Tranz Company's net assets at that date (all amounts in thousands).

Cash

Boxwood Book Value 12/31/20

Tranz Co. Book Value 12/31/20

Tranz Co. Fair Value 12/31/20

870

240

Receivables

660

600

Inventory

1,230

420

580

Land

1,800

260

250

Buildings (net)

1,800

540

650

Equipment (net)

660

380

400

Accounts payable

(570 )

(240 )

Accrued expenses

(270 )

(60 )

Long-term liabilities

(2,700 )

(1,020 )

(1,120 )

Common stock ($20 par)

(1,980 )

Common stock ($5 par) Additional paid-in capital

(420 ) (210 )

(180 )

Retained earnings

(1,170 )

(480 )

Revenues

(2,880 )

(660 )

Expenses

2,760

620

Version 1

Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 2020. Boxwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Tranz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid to effect this acquisition transaction. To settle a difference of opinion regarding Tranz’s fair value, Boxwood promises to pay an additional $5.2 (in thousands) to the former owners if Tranz’s earnings exceed a certain sum during the next year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is $5 (in thousands). Compute consolidated retained earnings as a result of this acquisition. A) $1,160. B) $1,170. C) $1,265. D) $1,280. E) $1,650.

77) Presented below are the financial balances for the Boxwood Company and the Tranz Company as of December 31, 2020, immediately before Boxwood acquired Tranz. Also included are the fair values for Tranz Company's net assets at that date (all amounts in thousands).

Cash

Boxwood Book Value 12/31/20

Tranz Co. Book Value 12/31/20

Tranz Co. Fair Value 12/31/20

870

240

Receivables

660

600

Inventory

1,230

420

580

Land

1,800

260

250

Buildings (net)

1,800

540

650

Equipment (net)

660

380

400

Accounts payable

(570 )

(240 )

Accrued expenses

(270 )

(60 )

Version 1

Long-term liabilities

(2,700 )

Common stock ($20 par)

(1,980 )

(1,020 )

Common stock ($5 par)

(1,120 )

(420 )

Additional paid-in capital

(210 )

(180 )

Retained earnings

(1,170 )

(480 )

Revenues

(2,880 )

(660 )

Expenses

2,760

620

Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 2020. Boxwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Tranz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid to effect this acquisition transaction. To settle a difference of opinion regarding Tranz’s fair value, Boxwood promises to pay an additional $5.2 (in thousands) to the former owners if Tranz’s earnings exceed a certain sum during the next year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is $5 (in thousands). Compute consolidated revenues immediately following the acquisition. A) $3,540. B) $2,880. C) $1,170. D) $1,650. E) $4,050.

78) Presented below are the financial balances for the Boxwood Company and the Tranz Company as of December 31, 2020, immediately before Boxwood acquired Tranz. Also included are the fair values for Tranz Company's net assets at that date (all amounts in thousands).

Cash

Version 1

Boxwood Book Value 12/31/20

Tranz Co. Book Value 12/31/20

Tranz Co. Fair Value 12/31/20

870

240

Receivables

660

600

Inventory

1,230

420

580

Land

1,800

260

250

Buildings (net)

1,800

540

650

Equipment (net)

660

380

400

Accounts payable

(570 )

(240 )

Accrued expenses

(270 )

(60 )

Long-term liabilities

(2,700 )

(1,020 )

(1,120 )

Common stock ($20 par)

(1,980 )

Common stock ($5 par) Additional paid-in capital

(420 ) (210 )

(180 )

Retained earnings

(1,170 )

(480 )

Revenues

(2,880 )

(660 )

Expenses

2,760

620

Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 2020. Boxwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Tranz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid to effect this acquisition transaction. To settle a difference of opinion regarding Tranz’s fair value, Boxwood promises to pay an additional $5.2 (in thousands) to the former owners if Tranz’s earnings exceed a certain sum during the next year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is $5 (in thousands). Compute consolidated expenses immediately following the acquisition.

Version 1

A) $2,735. B) $2,760. C) $2,770. D) $2,785. E) $3,380.

79) Presented below are the financial balances for the Boxwood Company and the Tranz Company as of December 31, 2020, immediately before Boxwood acquired Tranz. Also included are the fair values for Tranz Company's net assets at that date (all amounts in thousands).

Cash

Boxwood Book Value 12/31/20

Tranz Co. Book Value 12/31/20

Tranz Co. Fair Value 12/31/20

870

240

Receivables

660

600

Inventory

1,230

420

580

Land

1,800

260

250

Buildings (net)

1,800

540

650

Equipment (net)

660

380

400

Accounts payable

(570 )

(240 )

Accrued expenses

(270 )

(60 )

Long-term liabilities

(2,700 )

(1,020 )

(1,120 )

Common stock ($20 par)

(1,980 )

Common stock ($5 par) Additional paid-in capital

(420 ) (210 )

(180 )

Retained earnings

(1,170 )

(480 )

Revenues

(2,880 )

(660 )

Expenses

2,760

620

Version 1

Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 2020. Boxwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Tranz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid to effect this acquisition transaction. To settle a difference of opinion regarding Tranz’s fair value, Boxwood promises to pay an additional $5.2 (in thousands) to the former owners if Tranz’s earnings exceed a certain sum during the next year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is $5 (in thousands). Compute the consolidated cash upon completion of the acquisition. A) $1,350. B) $1,110. C) $1,080. D) $1,085. E) $635.

80) Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2021. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek immediately preceding the acquisition follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands. Flynn, Inc

Macek Company

900

Book Value $ 80

Fair Value $ 80

Receivables

480

180

160

Inventory

660

260

300

Land

300

120

130

Cash

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Buildings (net)

1,200

220

280

Equipment

360

100

Accounts payable

480

Long-term liabilities

1,140

340

300

Common stock

1,000

200

1,080

480

Additional paid-in capital Retained earnings

By how much will Flynn’s additional paid-in capital increase as a result of this acquisition? A) $150,000. B) $160,000. C) $230,000. D) $350,000. E) $360,000.

81) Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2021. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek immediately preceding the acquisition follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands. Flynn, Inc

Cash Receivables

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Macek Company

900

Book Value $ 80

Fair Value $ 80

480

180

160

Inventory

660

260

300

Land

300

120

130

1,200

220

280

Equipment

360

100

Accounts payable

480

Long-term liabilities

1,140

340

300

Common stock

1,000

200

1,080

480

Buildings (net)

Additional paid-in capital Retained earnings

What amount will be reported for goodwill as a result of this acquisition? A) $30,000. B) $55,000. C) $65,000. D) $175,000. E) $200,000.

82) Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2021. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek immediately preceding the acquisition follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands. Flynn, Inc

Macek Company Book Value

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Fair Value

Cash

900

Receivables

480

180

160

Inventory

660

260

300

Land

300

120

130

1,200

220

280

Equipment

360

100

Accounts payable

480

Long-term liabilities

1,140

340

300

Common stock

1,000

200

1,080

480

Buildings (net)

Additional paid-in capital Retained earnings

What amount will be reported for consolidated receivables? A) $660,000. B) $640,000. C) $500,000. D) $460,000. E) $480,000.

83) Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2021. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek immediately preceding the acquisition follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands. Flynn,

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Macek Company

Inc 900

Book Value $ 80

Fair Value $ 80

Receivables

480

180

160

Inventory

660

260

300

Land

300

120

130

1,200

220

280

Equipment

360

100

Accounts payable

480

Long-term liabilities

1,140

340

300

Common stock

1,000

200

1,080

480

Cash

Buildings (net)

Additional paid-in capital Retained earnings

What amount will be reported for consolidated inventory? A) $1,000,000. B) $960,000. C) $920,000. D) $660,000. E) $620,000.

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84) Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2021. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek immediately preceding the acquisition follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands. Flynn, Inc

Macek Company

900

Book Value $ 80

Fair Value $ 80

Receivables

480

180

160

Inventory

660

260

300

Land

300

120

130

1,200

220

280

Equipment

360

100

Accounts payable

480

Long-term liabilities

1,140

340

300

Common stock

1,000

200

1,080

480

Cash

Buildings (net)

Additional paid-in capital Retained earnings

What amount will be reported for consolidated buildings (net)?

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A) $1,420,000. B) $1,260,000. C) $1,140,000. D) $1,480,000. E) $1,200,000.

85) Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2021. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek immediately preceding the acquisition follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands. Flynn, Inc

Macek Company

900

Book Value $ 80

Fair Value $ 80

Receivables

480

180

160

Inventory

660

260

300

Land

300

120

130

1,200

220

280

Equipment

360

100

Accounts payable

480

Long-term liabilities

1,140

340

300

Common stock

1,000

200

1,080

480

Cash

Buildings (net)

Additional paid-in capital Retained earnings

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What amount will be reported for consolidated equipment (net)? A) $385,000. B) $335,000. C) $435,000. D) $460,000. E) $360,000.

86) Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2021. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek immediately preceding the acquisition follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands. Flynn, Inc

Macek Company

900

Book Value $ 80

Fair Value $ 80

Receivables

480

180

160

Inventory

660

260

300

Land

300

120

130

1,200

220

280

Equipment

360

100

Accounts payable

480

Long-term liabilities

1,140

340

300

Common stock

1,000

Cash

Buildings (net)

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Additional paid-in capital Retained earnings

200

1,080

480

What amount will be reported for consolidated long-term liabilities? A) $1,520,000. B) $1,480,000. C) $1,440,000. D) $1,180,000. E) $1,100,000.

87) Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2021. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek immediately preceding the acquisition follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands. Flynn, Inc

Macek Company

900

Book Value $ 80

Fair Value $ 80

Receivables

480

180

160

Inventory

660

260

300

Land

300

120

130

1,200

220

280

Equipment

360

100

Accounts payable

480

Cash

Buildings (net)

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Long-term liabilities

1,140

340

Common stock

1,000

200

1,080

480

Additional paid-in capital Retained earnings

300

What amount will be reported for consolidated common stock? A) $1,000,000. B) $1,080,000. C) $1,200,000. D) $1,280,000. E) $1,360,000.

88) Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2021. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek immediately preceding the acquisition follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands. Flynn, Inc

Macek Company

900

Book Value $ 80

Fair Value $ 80

Receivables

480

180

160

Inventory

660

260

300

Land

300

120

130

1,200

220

280

Cash

Buildings (net)

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Equipment

360

100

Accounts payable

480

Long-term liabilities

1,140

340

300

Common stock

1,000

200

1,080

480

Additional paid-in capital Retained earnings

Assuming the combination occurred prior to 2009 and was accounted for under the purchase method, what amount will be reported for consolidated retained earnings? A) $1,830,000. B) $1,350,000. C) $1,080,000. D) $1,560,000. E) $1,535,000.

89) Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2021. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek immediately preceding the acquisition follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands. Flynn, Inc

Macek Company

900

Book Value $ 80

Fair Value $ 80

Receivables

480

180

160

Inventory

660

260

300

Cash

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Land

300

120

130

1,200

220

280

Equipment

360

100

Accounts payable

480

Long-term liabilities

1,140

340

300

Common stock

1,000

200

1,080

480

Buildings (net)

Additional paid-in capital Retained earnings

Under the acquisition method, what amount will be reported for consolidated retained earnings? A) $1,065,000. B) $1,080,000. C) $1,525,000. D) $1,535,000. E) $1,560,000.

90) Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2021. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek immediately preceding the acquisition follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands. Flynn, Inc

Cash

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900

Macek Company Book Value $ 80

Fair Value $ 80

Receivables

480

180

160

Inventory

660

260

300

Land

300

120

130

1,200

220

280

Equipment

360

100

Accounts payable

480

Long-term liabilities

1,140

340

300

Common stock

1,000

200

1,080

480

Buildings (net)

Additional paid-in capital Retained earnings

What amount will be reported for consolidated additional paid-in capital? A) $365,000. B) $350,000. C) $360,000. D) $375,000. E) $345,000.

91) Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2021. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek immediately preceding the acquisition follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands. Flynn, Inc

Macek Company Book

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Fair

900

Value $ 80

Receivables

480

180

160

Inventory

660

260

300

Land

300

120

130

1,200

220

280

Equipment

360

100

Accounts payable

480

Long-term liabilities

1,140

340

300

Common stock

1,000

200

1,080

480

Cash

Buildings (net)

Additional paid-in capital Retained earnings

What amount will be reported for consolidated cash after the acquisition is completed? A) $475,000. B) $500,000. C) $555,000. D) $580,000. E) $875,000.

92) Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2021. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek immediately preceding the acquisition follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands.

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Flynn, Inc

Macek Company

900

Book Value $ 80

Fair Value $ 80

Receivables

480

180

160

Inventory

660

260

300

Land

300

120

130

1,200

220

280

Equipment

360

100

Accounts payable

480

Long-term liabilities

1,140

340

300

Common stock

1,000

200

1,080

480

Cash

Buildings (net)

Additional paid-in capital Retained earnings

Which of the following is true regarding the FASB Accounting Standards Update No. 2014-17, Business Combinations: Pushdown Accounting? A) It requires the use of pushdown accounting in all business combinations. B) It prohibits the use of pushdown accounting in business combinations. C) It provides an option to use pushdown accounting in a business combination. D) It requires the use of pushdown accounting in a business combination only when the parent acquires 100% of a subsidiary’s outstanding stock. E) It prohibits the use of pushdown accounting in a business combination only when the parent acquires 100% of a subsidiary’s outstanding stock.

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SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 93) Bale Co. acquired Silo Inc. on December 31, 2021, in an acquisition business combination transaction. Bale's net income for the year was $1,400,000, while Silo had net income of $400,000 earned evenly during the year. Bale paid $100,000 in direct combination costs, $50,000 in indirect costs, and $30,000 in stock issuance costs to effect the combination. Required: What is consolidated net income for 2021?

94) Fine Co. issued its common stock in exchange for the common stock of Dandy Corp. in an acquisition. At the date of the combination, Fine had land with a book value of $480,000 and a fair value of $620,000. Dandy had land with a book value of $170,000 and a fair value of $190,000. Required: What was the consolidated balance for Land in a consolidated balance sheet prepared at the date of the acquisition combination?

95)

Jernigan Corp. had the following account balances at 12/1/20:

Receivables Inventory

96,000 240,000

Land

720,000

Buildings

600,000

Liabilities

480,000

Common stock

120,000

Additional paid-in capital

120,000

Retained earnings, 12/1/20

840,000

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Revenues

360,000

Expenses

264,000

Several of Jernigan's accounts have fair values that differ from book value. The fair values are: Land — $480,000; Building — $720,000; Inventory — $336,000; and Liabilities — $396,000. Inglewood Inc. acquired all of the outstanding common shares of Jernigan by issuing 20,000 shares of common stock having a $6 par value per share, but a $66 fair value per share. Stock issuance costs amounted to $12,000. Required: Prepare a fair value allocation and goodwill schedule at the date of the acquisition.

96)

Salem Co. had the following account balances as of December 1, 2020:

Inventory Land Buildings—net (valued at $1,200,000) Common stock ($10 par value) Retained earnings, December 1, 2020

720,000 600,000 1,080,000 960,000 1,320,000

Revenues

720,000

Expenses

600,000

Bellington Inc. transferred $1.7 million in cash and 12,000 shares of its newly issued $30 par value common stock (valued at $90 per share) to acquire all of Salem's outstanding common stock. Determine the balance for Goodwill that would be included in a December 1, 2020, consolidation as a result of the acquisition.

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97)

Salem Co. had the following account balances as of December 1, 2020:

Inventory

720,000

Land

600,000

Buildings—net (valued at $1,200,000)

1,080,000

Common stock ($10 par value)

960,000

Retained earnings, December 1, 2020

1,320,000

Revenues

720,000

Expenses

600,000

Assume that Bellington paid cash of $2.8 million and no stock is issued. Also assume that $50,000 is paid in direct combination costs. Required: For Goodwill, determine what balance would be included in a December 1, 2020 consolidation as a result of the acquisition.

98) On January 1, 2021, Chester Inc. acquired 100% of Festus Corp.'s outstanding common stock by exchanging 37,500 shares of Chester's $2 par value common voting stock. On January 1, 2021, Chester's voting common stock had a fair value of $40 per share. Festus' voting common shares were selling for $6.50 per share. Festus' balances on the acquisition date, just prior to acquisition are listed below. Book Value Cash

30,000

Accounts Receivable

120,000

Inventory

200,000

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Fair Value

230,000

Land

230,000

290,000

Building (net)

450,000

600,000

Equipment (net)

175,000

160,000

Accounts Payable

(80,000 )

Common Stock, $1 par

(500,000 )

Paid-in Capital

(350,000 )

Retained Earnings, 1/1/21

(275,000 )

Required: Compute the value of Goodwill resulting from the acquisition.

99) The financial statements for Jode Inc. and Lakely Corp., just prior to their combination, for the year ending December 31, 2020, follow. Lakely's buildings were undervalued on its financial records by $60,000. Revenues

Expenses

Jode Inc.

Lakely Corp.

1,300,000

(1,180,000 )

500,000 (290,000 )

Net income

120,000

210,000

Retained earnings, January 1, 2020

700,000

500,000

Net income (from above)

120,000

210,000

Dividends declared

(110,000 )

Retained earnings, December 31, 2020

710,000

600,000

Cash

160,000

120,000

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Receivables and inventory

240,000

Buildings (net)

700,000

350,000

Equipment (net)

700,000

600,000 $ 1,310,000

Total assets

1,800,000

Liabilities

250,000

195,000

Common stock

750,000

430,000

Additional paid-in capital

90,000

85,000

Retained earnings, 12/31/20

710,000

600,000

1,800,000

$ 1,310,000

Total liabilities and stockholders’ equity

On December 31, 2020, Jode issued 54,000 new shares of its $10 par value stock in exchange for all the outstanding shares of Lakely. Jode's shares had a fair value on that date of $35 per share. Jode paid $34,000 to an investment bank for assisting in the arrangements. Jode also paid $24,000 in stock issuance costs to effect the acquisition of Lakely. Lakely will retain its incorporation. Prepare the journal entries to record: (1) the issuance of stock by Jode; and (2) the payment of the combination costs.

100) The financial statements for Jode Inc. and Lakely Corp., just prior to their combination, for the year ending December 31, 2020, follow. Lakely's buildings were undervalued on its financial records by $60,000. Revenues

Expenses Net income

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Jode Inc.

Lakely Corp.

1,300,000

(1,180,000 ) $

120,000

500,000 (290,000 )

210,000

Retained earnings, January 1, 2020

700,000

500,000

Net income (from above)

120,000

210,000

Dividends declared

(110,000 )

Retained earnings, December 31, 2020

710,000

600,000

Cash

160,000

120,000

Receivables and inventory

240,000

Buildings (net)

700,000

350,000

Equipment (net)

700,000

600,000 $ 1,310,000

Total assets

1,800,000

Liabilities

250,000

195,000

Common stock

750,000

430,000

Additional paid-in capital

90,000

85,000

Retained earnings, 12/31/20

710,000

600,000

1,800,000

$ 1,310,000

Total liabilities and stockholders’ equity

On December 31, 2020, Jode issued 54,000 new shares of its $10 par value stock in exchange for all the outstanding shares of Lakely. Jode's shares had a fair value on that date of $35 per share. Jode paid $34,000 to an investment bank for assisting in the arrangements. Jode also paid $24,000 in stock issuance costs to effect the acquisition of Lakely. Lakely will retain its incorporation. Required: Determine consolidated net income for the year ended December 31, 2020.

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101) The financial statements for Jode Inc. and Lakely Corp., just prior to their combination, for the year ending December 31, 2020, follow. Lakely's buildings were undervalued on its financial records by $60,000. Revenues

Expenses

Jode Inc.

Lakely Corp.

1,300,000

(1,180,000 )

500,000 (290,000 )

Net income

120,000

210,000

Retained earnings, January 1, 2020

700,000

500,000

Net income (from above)

120,000

210,000

Dividends declared

(110,000 )

Retained earnings, December 31, 2020

710,000

600,000

Cash

160,000

120,000

Receivables and inventory

240,000

Buildings (net)

700,000

350,000

Equipment (net)

700,000

600,000 $ 1,310,000

Total assets

1,800,000

Liabilities

250,000

195,000

Common stock

750,000

430,000

Additional paid-in capital

90,000

85,000

Retained earnings, 12/31/20

710,000

600,000

1,800,000

$ 1,310,000

Total liabilities and stockholders’ equity

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On December 31, 2020, Jode issued 54,000 new shares of its $10 par value stock in exchange for all the outstanding shares of Lakely. Jode's shares had a fair value on that date of $35 per share. Jode paid $34,000 to an investment bank for assisting in the arrangements. Jode also paid $24,000 in stock issuance costs to effect the acquisition of Lakely. Lakely will retain its incorporation. Determine consolidated Additional Paid-In Capital at December 31, 2020.

102) The following are preliminary financial statements for Black Co. and Blue Co. for the year ending December 31, 2021, prior to Black’s acquisition of Blue Co. Black Co. Sales

Expenses

360,000

Blue Co. $

(240,000 )

228,000 (132,000 )

Net income

120,000

96,000

Retained earnings, January 1, 2021

480,000

252,000

Net income (from above)

120,000

Dividends paid

(36,000 )

96,000 0

Retained earnings, December 31, 2021

564,000

348,000

Current assets

360,000

120,000

Land

120,000

108,000

Building (net)

480,000

336,000

Total assets

960,000

564,000

Liabilities

108,000

132,000

Common stock

192,000

72,000

Additional paid-in capital

96,000

12,000

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Retained earnings, December 31, 2021 Total liabilities and stockholders’ equity

564,000 $

960,000

348,000 $

564,000

On December 31, 2021 (subsequent to the preceding statements), Black exchanged 10,000 shares of its $10 par value common stock for all of the outstanding shares of Blue. Black's stock on that date has a fair value of $50 per share. Black was willing to issue 10,000 shares of stock because Blue's land was appraised at $204,000. Black also paid $14,000 to attorneys and accountants who assisted in creating this combination. Required: Assuming that these two companies retained their separate legal identities, prepare a consolidation worksheet as of December 31, 2021.

103) The following are preliminary financial statements for Green Co. and Gold Co. for the year ending December 31, 2021 prior to Green’s acquisition of Gold. Green Co. Sales

Expenses

360,000

Gold Co. $

(240,000 )

228,000 (132,000 )

Net income

120,000

96,000

Retained earnings, January 1, 2021

480,000

252,000

Net income (from above)

120,000

Dividends declared

(36,000 )

96,000 0

Retained earnings, December 31, 2021

564,000

348,000

Current assets

360,000

120,000

Land

120,000

108,000

Building (net)

480,000

336,000

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Total assets

960,000

564,000

Liabilities

108,000

132,000

Common stock

192,000

72,000

Additional paid-in capital

96,000

12,000

Retained earnings, December 31, 2021

564,000

348,000

Total liabilities and stockholders’ equity $

960,000

564,000

On December 31, 2021 (subsequent to the preceding statements), Green exchanged 10,000 shares of its $10 par value common stock for all of the outstanding shares of Gold. Green's stock on that date has a fair value of $60 per share. Green was willing to issue 10,000 shares of stock because Gold's land was appraised at $204,000. Green also paid $14,000 to attorneys and accountants who assisted in creating this combination. Required: Assuming that these two companies retained their separate legal identities, prepare a consolidation worksheet as of December 31, 2021 after the acquisition transaction is completed.

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100

104) For each of the following situations, select the best letter answer to reflect the effect of the numbered item on the acquirer’s accounting entry at the date of combination when separate incorporation will be maintained. Item (4) requires two selections. (A) Increase Investment account. (B) Decrease Investment account. (C) Increase Liabilities. (D) Increase Common stock. (E) Decrease common stock. (F) Increase Additional paid-in capital. (G) Decrease Additional paid-in capital. (H) Increase Retained earnings. (I) Decrease Retained earnings. 1. Direct costs. 2. Indirect costs. 3. Stock issue costs. 4. Contingent consideration. 5. Bargain purchase.

ESSAY. Write your answer in the space provided or on a separate sheet of paper. 105) What term is used to refer to a business combination in which only one of the original companies continues to exist?

106)

How are stock issuance costs accounted for in an acquisition business combination?

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101

107) What is the primary difference between recording an acquisition when the subsidiary is dissolved and when separate incorporation is maintained?

108)

How are direct combination costs accounted for in an acquisition transaction?

109) Peterman Co. owns 55% of Samson Co. Under what circumstances would Peterman not be required to prepare consolidated financial statements?

110) How would you account for in-process research and development acquired in a business combination accounted for as an acquisition?

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102

111) Elon Corp. obtained all of the common stock of Finley Co., paying slightly less than the fair value of Finley's net assets acquired. How should the difference between the consideration transferred and the fair value of the net assets be treated if the transaction is accounted for as an acquisition?

112) For acquisition accounting, why are assets and liabilities of the subsidiary consolidated at fair value?

113) Goodwill is often acquired as part of a business combination. Why, when separate incorporation is maintained, does Goodwill not appear on the Parent company's trial balance as a separate account?

114) How are direct combination costs, contingent consideration, and a bargain purchase reflected in recording an acquisition transaction?

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103

115) How is contingent consideration accounted for in an acquisition business combination transaction?

116)

How are bargain purchases accounted for in an acquisition business transaction?

117) Describe the accounting for direct costs, indirect costs, and issuance costs under the acquisition method of accounting for a business combination.

118) What is the difference in consolidated results between a business combination whereby the acquired company is dissolved, and a business combination whereby separate incorporation is maintained?

119)

What are some reasons that a business combination may take place?

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104

120)

What are the benefits of using pushdown accounting?

121) What are the two specific criteria essential to determining whether to recognize an intangible asset in a business combination?

122)

What is the purpose of Consolidation Entry S in a consolidation worksheet?

123)

What is the purpose of Consolidation Entry A in a consolidation worksheet?

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105

Answer Key Test name: Chap 02_8e 1) C 2) B 3) A 4) D 5) B 6) A 7) E 8) C 9) C 10) D 11) B 12) C 13) A 14) C 15) B Goodwill = Consideration Transferred less Acquisition Date Fair Value of Net Assets Acquired and Liabilities Assumed Consideration Transferred: $46 × 13,000 = $598,000 Fair Value of Assets Acquired: $70,000 (cash and receivables) + $210,000 (inventory) + $240,000 (land) + $280,000 (buildings) + $90,000 (equipment) = $890,000 Fair Value of Liabilities Assumed: $430,000 Net Assets = $890,000 − $430,000 = $460,000 Goodwill: $598,000 − $460,000 = $138,000

16) D $320,000 (Wilkins Land) + $240,000 (Granger Land) = $560,000

17) D

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Consolidated Additional Paid-In Capital = Wilkins APIC ($60,000) + APIC related to stock issued in connection with Granger business combination ($41 × 13,000) = $60,000 + $533,000 = $593,000 Wilkins’s Retained Earnings: $250,000

18) B Inventory $230,000 BV + $210,000 FV = $440,000 Land $320,000 BV + $240,000 FV = $560,000

19) C Fair value of consideration transferred less fair value of net assets = goodwill $500,000 − ($70,000 + $210,000 + $240,000 + $280,000 + $90,000 − $430,000) = $40,000 Excess

20) C $2.75 × 62,000 = $170,500

21) B $240,000 + ($1.00 × 62,000) = $302,000

22) D Consideration Transferred = Net Fair Value of Assets Acquired and Liabilities Assumed Consideration Transferred: $37 per share × 32,000 shares = $1,184,000 Net Fair Value of Assets/Liabilities: $750,000 + $970,000 = $1,720,000 Total: $1,184,000 + $1,720,000 = $2,904,000 23) E 24) C 25) A 26) A 27) C 28) A 29) C 30) D $650 Cash + ($40 per share × 35 shares) = $2,050 Investment

31) A

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With respect to stock issued, APIC is adjusted by the amount fair value exceeds par value and stock issuance costs. APIC: Excess Value of Stock Over Par = ($40 − $10) × 35 shares = $1,050 APIC: Stock Issuance Costs = $30 Total APIC resulting from acquisition = $1,050 − $30 = $1,020

32) D $2,600 Parent’s Revenue Only

33) D $1,200 + $360 = $1,560

34) B Consolidated Expenses = Campbell’s Expenses only immediately following the transaction Campbell’s Expenses = $1,880 (2021 Expenses Reported on Financial Statements) + $25 (Fees Expensed as Incurred) = $1,905

35) C Consolidated Cash Equals Campbell’s Cash + Newton’s Cash − Cash to Pay Costs and Expenses Related to Business Combination Campbell’s Cash: $240 Newton’s Cash: $230 Costs and Expenses: $25 + $30 = $55 Consolidated Total = $240 + $230 − $55 = $415

36) B Consolidated Value of Buildings determined by adding the book value of Campbell’s buildings ($2,700 BV) to the Fair Value of Newton’s buildings ($590 FV) = $3,290

37) E Consolidated Value of Equipment (net) Determined by adding the book value of Campbell’s Equipment Account ($2,100) to the Fair Value of Newton’s Equipment (net) ($1,450) for a total consolidated fair value of $3,550

38) D Consideration transferred equals fair value of cash ($650) + fair value of Campbell stock issued ($40 per share × 35 shares) = $650 + $1,400 = $2,050

39) D

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Goodwill equals excess of: (i) fair value of assets received and liabilities assumed; less (ii) consideration paid. Fair value of assets received: $230 cash + $360 receivables and inventory + $590 fair value of buildings (net) + $1,450 fair value of equipment (net) = $2,630 Fair value of liabilities assumed: $720 Consideration paid: $650 cash + FV of common stock ($40 × 35 = $1,400) = $2,050 Goodwill = Consideration Paid ($2,050) less Fair Value of assets received and liabilities assumed ($2,630 assets received − $720 liabilities assumed = $1,910) = $2,050 − $1,910 = $140

40) C Campbell Stock (par value $1,080) + Stock Issued for Newton (par value $10 × 35 shares) = $1,080 + $350 = $1,430

41) D Campbell’s reported APIC ($810) plus the excess of FV of shares issued to acquire Newton [($40 − $10) × 35 shares = $1,050] less stock issuance costs ($30) = $810 + $1,050 − $30 = $1,830

42) D Campbell’s liabilities plus Newton’s liabilities equal consolidated liabilities Campbell’s Liabilities: $1,500 Existing + $650 to fund consideration paid on business consolidation = $2,150 Newton’s Liabilities: $720 Consolidated Liabilities = $2,150 (Campbell) + $720 (Newton) = $2,870

43) A $2,850 − $25 Broker Expense = $2,825

44) E Because the fair value of Osorio’s net assets acquired exceeds the consideration paid by Moody, a bargain purchase gain has occurred as follows:

Fair value of Osorio’s net assets acquired ($1,510 assets - $480 liabiities) Consideration transferred for 100% of Osorio ($400 liabilities + $400 common stock)

Bargain purchase gain

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1,030 800 230

109

When the fair value of net assets acquired exceeds the consideration transferred, the investment account is recorded at the fair value of the net assets acquired and not the consideration transferred. Therefore, Moody records the Osorio acquisition on its books as follows: Investment in Osorio

$1,030

Long-term liabilities

400

Common stock ($1 par)

Additional paid-in capital

360

Gain on bargain purchase

230

45) D Feedback: Goodwill = Total Consideration Paid − Excess of Fair Value of Assets Acquired Over Liabilities Assumed Total Consideration Paid: $400 + ($10 × 40) = $800 Fair Value of Assets Acquired: $40 (Cash) + $180 (Accounts Receivables) + $290 (Inventory) + $400 (Land) + $500 (Buildings) + $100 (Equipment) = $1,510 Fair Value of Liabilities Assumed: $400 (Long Term Liabilities) + $80 (Accounts Payable) = $480 Bargain Purchase Gain: Consideration ($800) − Excess of Fair Value of Assets Acquired Over Liabilities Assumed ($1,030) = $230

46) D Moody Inventory ($1,080 Book Value on Acquisition Date) + Osorio Inventory ($290 − Fair Value on Acquisition Date) = $1,370

47) B Moody Buildings on Acquisition Date (Book Value of $1,260) + Osorio Buildings on Acquisition Date ($500 Fair Value) = $1,760

48) A Moody’s Land (Book Value of $600) + Osorio Land (Fair Value on Acquisition Date of $400) = $1,000

49) B Moody Acquisition Date Equipment (Book Value of $480) + (Osorio’s Equipment with Fair Value on Acquisition Date of $100) = $580

50) A Version 1

110

Moody’s Common Stock ($330) + Common Stock Issued in Connection With Osorio Business Combination ($1.00 par value per share × 40 shares = $40) = $330 + $40 = $370

51) D Moody’s APIC on Acquisition Date: $1,080 APIC Adjustments Related to Osorio Business Combination: Excess of Fair Value Over Par Value ($9.00 per share × 40 shares = $360) − Stock Issuance Costs ($15) = $345 Combined APIC = $1,080 + $345 = $1,425

52) B Moody’s Cash on Acquisition Date: $180 Osorio’s Cash on Acquisition Date: $40 Reductions to Cash for Business Combination Related Costs and Expenses ($20 + $15) = $35 Combined: $180 + $40 − $35 = $185

53) D Consideration Paid = Fair Value of $30 per share × 30,000 shares = $900,000

54) B APIC increases by the excess of the fair value over the par value of shares issued in connection with business combination less stock issuance costs. $30 fair value per share − $10 par value per share = $20 per share × 30,000 shares = $600,000 − $12,000 stock issuance costs = $588,000

55) C Ferguson Common Stock Account Before Acquisition: $800,000 Par Value of Stock Issued in Connection With Business Combination: $10 par value per share × 30,000 shares = $300,000 Total: $800,000 + $300,000 = $1,100,000

56) C 350,000 (Ferguson APIC Balance on Acquisition Date) + $588,000 Additional Business Combination Related APIC ($30 fair value per share − $10 par value per share = $20 per share × 30,000 shares = $600,000 − $12,000 stock issuance costs = $588,000) = $938,000 57) A Atwood Shares Issued in Connection With Business Combination = $35 Fair Value per share × 50 shares = $1,750

58) B

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Atwood Common Stock Account on Acquisition Date: $1,980 Franz Related Business Combination Common Stock: $20 par value per share × 50 shares = $1,000 Total Common Stock Account: $1,980 + $1,000 = $2,980

59) B Atwood Acquisition Date Inventory ($1,230 book value) + Acquisition Date Fair Value of Franz Inventory ($580) = $1,230 + $580 = $1,810

60) D Atwood Acquisition Date Land ($1,800 book value) + Franz Acquisition Date Land Fair Value ($250) = $2,050 Consolidated Value

61) A Atwood Acquisition Date Buildings ($1,800 book value) + Franz Acquisition Date Building Fair Value ($650) = $2,450

62) E Atwood Acquisition Date Long-Term Liabilities ($2,700 book value) + Franz Acquisition Date Long-Term Liabilities at Fair Value ($1,120) = $3,820

63) B Goodwill = Total Consideration Paid − Excess of Fair Value of Assets Acquired Over Liabilities Assumed Total Consideration Paid: $35 fair value per share × 50 shares = $1,750 Net Assets/Liabilities at Fair Value: $240 + $600 + $580 + $250 + $650 + $400 − $240 − $60 − $1,120 = $1,300 Goodwill: Consideration ($1,750) − Net Assets/Liabilities ($1,300) = $450 Consolidated Goodwill: $450

64) C Atwood Acquisition Date Equipment ($660 book value) + Franz Acquisition Date Equipment ($400 Fair Value) = $1,060

65) A Net Assets = Fair Value of Assets Acquired Less Fair Value of Liabilities Assumed Franz Assets: $240 (Cash) + $600 (Accounts Receivable) + $580 (Inventory) + $250 (Land) + $650 (Building) + Equipment ($400) = $2,720 Franz Liabilities: Long Term Liabilities at Acquisition Date ($1,120 fair value) + Accounts Payable ($240 fair value) + Accrued Expenses ($60 fair value) = $1,420 Net Assets Total: $1,300

66) C $1,170 (Atwood reported R/E) + $2,880 (Atwood Revenues to be closed to R/E) − $2760 (Atwood Expenses to be closed to R/E) − $10 (direct costs) = $1,280

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112

67) B $2,880 Revenues of the Parent Only

68) B $870 (Atwood reported balance) + $240 (Franz reported balance) − $15 (stock issuance costs) − $10 (direct costs) = $1,085

69) B $2,760 (Atwood reported balance) + $10 (direct costs) = $2,770

70) B $35 fair value per share × 50 shares = $1,750 (stock issued) + $5 (contingency) = $1,755

71) B $1,230 book value of Boxwood + $580 fair value of Tranz = $1,810

72) D $1,800 Book Value of Boxwood + $250 Fair Value of Tranz = $2,050

73) A $1,800 book value of Boxwood + $650 fair value of Tranz = $2,450

74) D Acquisition price: $35 fair value per share × 50 shares = $1,750 Net Assets at Fair Value: $240 + $600 + $580 + $250 + $650 + $400 – $240 – $60 – $1,120 = $1,300 Contingency: $5 Goodwill = $1,750 + $5 – $1,300 = $455

75) C $660 book value of Boxwood + $400 fair value of Tranz = $1,060

76) D Components of ending retained earnings (revenues and expenses) are extended across the worksheet, then combined vertically. Atwood’s Total Expenses = Expenses Before Acquisition + Direct Costs = $2,760 + $10 = $2,770 Atwood’s Ending Retained Earnings = Revenues ($2,880) – Total Expenses ($2,770) = $110 Total Ending Retained Earnings = $1,170 + $110 = $1,280

77) B $2,880 Revenues of the Parent Only

78) C Atwood’s Total Expenses = Expenses Before Acquisition + Direct Costs = $2,760 + $10 = $2,770

79) D Version 1

113

Cash of Parent + Cash of Subsidiary – Post-Transaction Costs = $870 + $240 – ($15 + $10) = $870 + $240 − $25 = $1,085

80) A APIC adjusted for excess of fair value of stock issued as business combination consideration over its par value, and stock issuance costs Excess of Fair Value Over Par Value = $36 − $20 = $16 per share Total Excess = $16 × 10,000 shares = $160,000 Stock Issuance Costs: $10,000 Total APIC Adjustment = $160,000 − $10,000 = $150,000

81) B Goodwill = Excess of Consideration Paid Over Net Fair Value of Assets and Liabilities Consideration Paid: Cash + Fair Value of Stock = $400,000 + ($36 × 10,000 shares) = $400,000 + $360,000 = $760,000 Fair Value of Assets = $80,000 (cash) + $160,000 (receivables) + $300,000 (inventory) + $130,000 (land) + $280,000 (buildings) + $75,000 (equipment) + $40,000 (trademark) = $1,065,000 Liabilities at Fair Value = $300,000 (long-term liabilities) + $60,000 (accounts payable) = $360,000 Net Assets: $1,065,000 – $360,000 = $705,000 Goodwill = $760,000 (consideration paid) − $705,000 (net assets) = $55,000

82) B Flynn Receivable ($480,000) + Fair Value of Macek Receivable ($160,000) = $640,000

83) B Flynn Inventory ($660,000) + Fair Value of Macek Inventory ($300,000) = $960,000

84) D Flynn Buildings ($1,200,000) + Fair Value of Macek Buildings ($280,000) = $1,480,000

85) C Flynn Equipment ($360,000) + Fair Value of Macek Equipment ($75,000) = $435,000

86) C Flynn Long-Term Liabilities ($1,140,000) + Fair Value of Macek Long-Term Liabilities ($300,000) = $1,440,000

87) C Flynn common stock ($1,000,000) + Par Value of Stock Issued in Connection with the Business Combination ($20 × 10,000 shares = $200,000) = $1,200,000

88) C $1,080,000 Retained Earnings of the Parent Only

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114

89) A $1,080,000 (book value of Flynn) − $15,000 (direct costs) = $1,065,000

90) B Flynn’s APIC balance + APIC adjustments as a result of acquisition Flynn’s APIC balance ($200,000) + APIC adjustment ($150,000 see below) = $200,000 + $150,000 = $350,000 APIC adjusted for excess of fair value of stock issued as business combination consideration over its par value, and stock issuance costs Excess of Fair Value Over Par Value = $36 − $20 = $16 per share Total Excess = $16 × 10,000 shares = $160,000 Stock Issuance Costs: $10,000 Total APIC Adjustment = $160,000 − $10,000 = $150,000

91) C Flynn’s Cash + Fair Value of Macek’s Cash at Acquisition − (Business Combination Costs + Business Combination Expenses + Business Combination Consideration Paid) = $900,000 + $80,000 − ($15,000 + $10,000 + $400,000) = $980,000 − $425,000 = $555,000

92) C 93) Bale’s net income for 2021

1,400,000

Less: direct combination costs

100,000

Less: indirect combination costs

50,000

Consolidated net income for 2021

1,250,000

Note: Silo’s net income does not affect consolidated net income until after the date of acquisition. The combination costs belong to Bale only. 94)

Book value of Fine Co.’s land

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480,000

115

Fair value of Dandy Corp.’s land

190,000

Consolidated balance for land

670,000

95) Fair value consideration transferred by Inglewood (20,000 shares × $66) Fair value of Jernigan assets acquired and liabilities assumed

Excess of consideration transferred over net fair value of assets and liabilities—Goodwill

84,000

1,236,000

2,780,000

Receivables

1,320,000

$ (1,236,000 )

96,000

Inventory

336,000

Land

480,000

Building

720,000

Liabilities

(396,000 )

Fair value of Jernigan net assets acquired

96)

Fair value of consideration transferred: Cash Stock issued Total consideration transferred:

$ 1,700,000 1,080,000

Fair value of assets acquired:

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116

Inventory

Land

720,000 600,000

Buildings

1,200,000

Total of Assets

(2,520,000 )

Excess of consideration transferred over fair value of assets transferred— Goodwill:

260,000

2,800,000

97) Fair value of consideration transferred: Cash

$ 2,800,000

Total consideration transferred: Fair value of assets acquired: Inventory Land Buildings

720,000 600,000 1,200,000

Total of Assets

$ (2,520,000 )

Excess of consideration transferred over fair value of assets transferred — Goodwill:

280,000

98) Stock Total consideration transferred:

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$ 1,500,000 $ 1,500,000

117

Fair value of assets acquired: Cash

30,000

Accounts Receivable

120,000

Inventory

230,000

Land

290,000

Buildings

600,000

Equipment

160,000

Total fair value of assets acquired

$ 1,430,000

Fair value of liabilities assumed: Accounts Payable

(80,000 )

Net fair value of assets acquired and liabilities assumed Excess of consideration transferred over fair value of assets transferred—Goodwill:

$ 1,350,000 $

150,000

99) Entry One – To record the issuance of common stock by Jode to execute the purchase. Investment in Lakely Corp.

1,890,000

Common Stock (par value)

540,000

Paid-in Capital

1,350,000

Entry Two – To record the combination costs. Professional fee expense

34,000

Paid-in capital

24,000

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118

Cash

58,000

100) Consolidated Net Income Jode’s Revenues

Jode’s Expenses

1,300,000 (1,214,000 )

Consolidated net income

86,000

Note: The subsidiary’s revenues and expenses prior to the date of acquisition are not consolidated. Jode’s Expenses = $1,180,000 + $34,000 direct costs = $1,214,000 101) Consolidated Additional Paid-In Capital Jode’s Additional Paid-In Capital

90,000

Additional Paid-In Capital arising from the acquisition (54,000 shares issued × $25 per share in excess of par value) Less: Stock issuance costs

$ 1,350,000

Consolidated Additional Paid-In Capital

$ 1,416,000

(24,000 )

102) Bargain Purchase Acquisition Consolidation Worksheet For the Year Ended 12/31/2021 Accounts Income Statement Sales

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Black Company

$ (360,00 ) 0

Blue Company

Consolidation Entries Dr. Cr.

Consolida ted Balance

(360,00 ) 0

119

Expenses

254,000

BargainPurchase— Gain

(28,000 )

Net Income

(134,00 ) 0

(480,00 ) 0 (134,00 ) 0 36,000

$ (578,00 ) 0

Statement of Retained Earnings R/E, 1/1/21 Net Income Dividends declared R/E, 12/31/21 Balance Sheet Current assets Investment in Blue Co. Land Buildings (net) Total Assets Liabilitie s Common stock Additional paid-in capital R/E, 12/31/21

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346,000

120,00 0

466,000

528,000

120,000 480,000 $ 1,474,0 00

108,00 0 336,00 0

(S 432,0 ) 00

(A 96,00 (A 96,00 ) 0 ) 0

324,000

$ 564,00 0

816,000 $ 1,606,0 00

(108,00 ) 0 (292,00 ) 0 (496,00 ) 0

(132,0 ) 00 (72,00 ) (S 72,00 0 ) 0 (12,00 ) (S 12,00 0 ) 0

(240,00 ) 0 (292,00 ) 0 (496,00 ) 0

(578,00 ) 0

(348,0 ) (S 348,0 00 ) 00

(578,00 ) 0

120

Total Liabilitie s & Stockholde rs' Equity

$ (1,474, ) 000

Calculation for Potential Goodwill: Considerati 500,00 on 0 transferred by Black Co. Book value (432,0 ) of Blue Co. 00 Excess of 68,000 Cost over Book Value Allocations : Land (96,00 ) (204,000 0 − 108,000) – (28,00 ) Bargain 0 Purchas e

$ (564,0 ) 00

$ 528,0 00

$ 528,0 $ (1,606, ) 00 000

(Ent ry S) (Ent ry A)

(Ent ry A) (Ent ry A)

Entry to record the acquisition on Black Co's books Professiona 14,00 l fee 0 expense

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121

Investment 528,0 in Blue Co. 00 Common Stock − Black (10,000 × $10 Par) Add'l Paid-in Capital − Black (10,000 × $40) Cash (paid for direct acquisiti on costs) Gain on Bargain Purchase

100,00 0

400,00 0

14,000

28,000

Entry S: Common 72,00 Stock 0 Additional 12,00 Paid-in 0 Capital Retained 348,0 Earnings 00 12/31/21 Investmen t in Blue Co.

432,00 0

To eliminate Blue Co's stockholders' equity accounts and the book value of Blue Co's net assets from Black Co's investment account Entry A:

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122

Land

96,000

Investment in Blue Co.

96,000

To eliminate Black Co's excess payment over book value from its investment account and reassign the excess to specific assets from the bargain purchase 103) Acquisition Consolidation Worksheet For the Year Ended 12/31/2021 Accounts Income Statement Sales Expenses Net Income Statement of Retained Earnings R/E, 1/1/21 Net Income Dividends declared R/E, 12/31/21 Balance Sheet Current assets Investment in Gold Co. Land

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Green Company

Gold Company

Consolidation Entries Dr. Cr.

Consolida ted Balance

$ (360,00 ) 0 254,000

(360,00 ) 0 254,000

(106,00 ) 0

(480,00 ) 0 (106,00 ) 0 36,000

$ (550,00 ) 0

346,000

120,0 00

600,000 120,000

108,0 00

466,000 (S 432,0 ) 00 (A 96,00 (A 168,0 ) 0 ) 00

0 324,000

123

Buildings (net) Goodwill Total Assets

480,000

$ 1,546,0 00

Common stock Additional paid-in capital R/E, 12/31/21

$ 564,0 00

Excess of 168,00 considerat 0 ion transferre d over Book Value Allocations: Land (96,00 ) (204,000 0 108,000)

72,000 $ 1,678,0 00

(108,00 ) 0 (292,00 ) 0 (596,00 ) 0

(132, ) 000 (72,0 ) (S 72,00 00 ) 0 (12,0 ) (S 12,00 00 ) 0

(240,00 ) 0 (292,00 ) 0 (596,00 ) 0

(550,00 ) 0

(348, ) (S 348,0 000 ) 00

(550,00 ) 0

$ (1,546, ) 000

Calculation of Goodwill: Consideratio 600,00 n 0 transferred by Green Co. Book value (432,0 ) of Gold Co. 00

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816,000 (A 72,00 ) 0

Liabilities

Total Liabilities & Stockholder s' Equity

336,0 00

$ (564, ) 000

$ 600,0 00

$ 600,0 $ (1,678, ) 00 000

(Ent ry S) (Ent ry A)

(Ent ry A)

124

Excess 72,000 cost not identifi ed Goodwill

Green Co.'s entry to record acquisition: Professional 14,00 fee expense 0 Investment 600,0 in Gold Co. 00 Common Stock Green (10,000 × $10 Par) Add'l Paid-in Capital Green (10,000 × $50) Cash (paid for direct acquisitio n costs)

(Ent ry A)

100,00 0

500,00 0

14,000

Entry S: Common Stock 72,00 0 Additional 12,00 Paid-in 0 Capital Retained 348,0 Earnings 00 12/31/21 Investment in Gold

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432,00 0 125

Co.

To eliminate Gold Co.'s stockholders' equity accounts and the book value of Gold Co.'s net assets from Green Co.'s investment account Entry A: Land

96,000

Goodwill

72,000

Investment in Gold Co.

168,000

To eliminate Green Co.'s excess payment over book value from its investment account and reassign the excess to specific assets and goodwill 104) (1) I; (2) I; (3) G; (4) A, C; (5) H 105) The appropriate term is statutory merger. 106) Stock issuance costs reduce the balance in the acquirer’s Additional Paid-In Capital in an acquisition business combination. 107) When the subsidiary is dissolved, the acquirer records in its books the fair value of individual assets and liabilities acquired as well as the resulting goodwill from the acquisition. However, when separate incorporation is maintained, the acquirer only records the total fair value of consideration transferred as an investment. 108) In an acquisition, direct combination costs are expensed in the period of the acquisition. 109) Peterman would not be required to prepare consolidated financial statements if control of Samson is temporary or if, despite majority ownership, Peterman does not have control over Samson. A lack of control might exist if Samson is in a country that imposes restrictions on Peterman's actions.

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126

110) In-Process Research and Development is capitalized as an asset of the combination and reported as intangible assets with indefinite lives subject to impairment reviews. 111) The difference between the consideration transferred and the fair value of the net assets acquired is recognized as a gain on bargain purchase. 112) The acquisition transaction is assumed to occur through an orderly transaction between market participants at the measurement date of the acquisition. Thus identified assets and liabilities acquired have been assigned fair value for the transfer to the acquirer and this is a relevant and faithful representation for consolidation. 113) While the Goodwill does not appear on the Parent company's books, it is implied as part of the account called Investment in Subsidiary. During the consolidation process, the Investment account is broken down into its component parts. Goodwill, along with other items such as subsidiary fair value adjustments, is then shown separately as part of the consolidated financial statement balances. 114) The acquisition method embraces a fair value concept as measured by the fair value of consideration transferred. (1) Direct combination costs are expensed as incurred; (2) Contingent consideration obligations are recognized at their present value of the potential obligation as part of the acquisition consideration transferred; (3) When a bargain purchase occurs, the acquirer measures and recognizes the fair values of each of the assets acquired and liabilities assumed at the date of the combination, and as a result a gain on the bargain purchase is recognized at the acquisition date.

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127

115) The fair value approach of the acquisition method views contingent payments as part of the consideration transferred. Under this view, contingencies have a value to those who receive the consideration and represent measurable obligations of the acquirer. The amount of the contingent consideration is measured as the expected present value of a potential payment and increases the investment value recorded. 116) A bargain purchase results when the collective fair values of the net identified assets acquired and liabilities assumed exceed the fair value of consideration transferred. The assets and liabilities acquired are recorded at their fair values and the bargain purchase is recorded as a Gain on Bargain Purchase. 117) Direct and indirect combination costs are expensed as incurred and issuance costs reduce the otherwise fair value of the securities issued (typically a debit to additional paid-in capital) under the acquisition method of accounting for business combinations. 118) There is no difference in consolidated results. 119) There are many reasons that a business combination may take place including a desire for: ● Vertical integration of one firm’s output and another firm’s distribution or further processing. ● Costs savings through elimination of duplicate facilities and staff. ● Quick entry for new or existing products into domestic and foreign markets. ● Economies of scale allowing greater efficiency and negotiating power. ● The ability to access financing at more attractive rates. As firm size increases, negotiating power with financial institutions can increase also. ● Diversification of business risk. ● Continuous expansion of an organization.

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128

120) Pushdown accounting provides a newly acquired subsidiary the option to revalue its assets and liabilities to acquisition-date fair values in its separately reported financial statements. This valuation option may be useful when the parent expects to offer the subsidiary shares to the public following a period of planned improvements. Other benefits from pushdown accounting may arise when the subsidiary plans to issue debt and needs its separate financial statements to incorporate acquisitiondate fair values and previously unrecognized intangibles in their standalone financial reports. 121) 1.Does the intangible asset arise from contractual or other legal rights? 2.Is the intangible asset capable of being sold or otherwise separated from the acquired enterprise? 122) Consolidation Entry S is a worksheet entry that eliminates the beginning stockholders’ equity of the subsidiary. The stockholders’ equity subsidiary balances (in accounts such as Common Stock, Additional Paid-In Capital, and Retained Earnings) represent ownership interests that are now held by the parent and are not represented as equity in the parent’s consolidated balance sheet. Also, removing these account balances on the worksheet leaves on the subsidiary’s assets and liabilities to be combined with the parent company figures. Consolidation Entry S also removes from the parent’s Investment account balance the amount that equates to the book value of the subsidiary’s net assets. 123) Consolidation Entry A is a worksheet entry that removes the excess payment from the parent’s Investment account and assigns that excess payment to the specific accounts indicated by the fair-value allocation. It also assists in eliminating the parent’s Investment account balance on the consolidation worksheet. Version 1

129

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130

CHAPTER 3 MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) Which one of the following accounts would not appear in the consolidated financial statements at the end of the first fiscal period of the combination? A) Goodwill. B) Equipment. C) Investment in Subsidiary. D) Common Stock. E) Additional Paid-In Capital.

2) Which one of the following accounts would not appear in the consolidated financial statements at the end of the first fiscal period of the combination? A) Goodwill. B) Equipment. C) Retained Earnings. D) Common Stock. E) Equity in Subsidiary Earnings.

3) Which of the following internal record-keeping methods can a parent choose to account for a subsidiary acquired in a business combination? A) Initial value or book value. B) Initial value, lower-of-cost-or-market-value, or equity. C) Initial value, equity, or partial equity. D) Initial value, equity, or book value. E) Initial value, lower-of-cost-or-market-value, or partial equity.

4) Which one of the following varies between the equity, initial value, and partial equity methods of accounting for an investment?

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A) The amount of consolidated net income. B) Total assets on the consolidated balance sheet. C) Total liabilities on the consolidated balance sheet. D) The balance in the investment account on the parent's books. E) The amount of consolidated cost of goods sold.

Under the partial equity method, the parent recognizes income when A) Dividends are received from the investee. B) Dividends are declared by the investee. C) The related expense has been incurred. D) The related contract is signed by the subsidiary. E) It is earned by the subsidiary.

Under the initial value method, the parent recognizes income when A) Dividends are received from the investee. B) Dividends are declared by the investee. C) The related expense has been incurred. D) The related contract is signed by the subsidiary. E) It is earned by the subsidiary.

An impairment model is used A) To assess whether asset write-downs are appropriate for indefinite-lived assets. B) To calculate the fair value of intangible assets. C) To calculate the amortization of indefinite-lived assets over their useful lives. D) To determine whether the fair value of assets should be recognized. E) To determine the likelihood that the fair value of an assumed liability will increase.

8) Craft Corp. acquired all of the common stock of Pitts Co. in 2019. Pitts maintained its incorporation. Which of Craft's account balances would vary between the equity method and the initial value method? Version 1

A) Goodwill, Investment in Pitts Co., and Retained Earnings. B) Expenses, Investment in Pitts Co., and Equity in Subsidiary Earnings. C) Investment in Pitts Co., Equity in Subsidiary Earnings, and Retained Earnings. D) Common Stock, Goodwill, and Investment in Pitts Co. E) Expenses, Goodwill, and Investment in Pitts Co.

How does the partial equity method differ from the equity method?

A) In the total assets reported on the consolidated balance sheet. B) In the treatment of dividends. C) In the total liabilities reported on the consolidated balance sheet. D) Under the partial equity method, subsidiary income does not increase the balance in the parent's investment account. E) Under the partial equity method, the balance in the investment account is not decreased by amortization on allocations made in the acquisition of the subsidiary.

10) Vaughn Inc. acquired all of the outstanding common stock of Roberts Co. on January 1, 2020, for $276,000. Annual amortization of $21,000 resulted from this acquisition. Vaughn reported net income of $80,000 in 2020 and $60,000 in 2021 and paid $24,000 in dividends each year. Roberts reported net income of $50,000 in 2020 and $57,000 in 2021 and paid $12,000 in dividends each year. What is the Investment in Roberts Co. balance on Vaughn's books as of December 31, 2021, if the equity method has been applied? A) $317,000. B) $326,000. C) $341,000. D) $368,000. E) $383,000.

11) Vaughn Inc. acquired all of the outstanding common stock of Roberts Co. on January 1, 2020, for $276,000. Annual amortization of $21,000 resulted from this acquisition. Vaughn reported net income of $80,000 in 2020 and $60,000 in 2021 and paid $24,000 in dividends each year. Roberts reported net income of $50,000 in 2020 and $57,000 in 2021 and paid $12,000 in dividends each year. What is the Investment in Roberts Co. balance on Vaughn's books as of December 31, 2021, if the partial equity method has been applied? Version 1

A) $317,000. B) $326,000. C) $359,000. D) $368,000. E) $383,000.

12) Vaughn Inc. acquired all of the outstanding common stock of Roberts Co. on January 1, 2020, for $276,000. Annual amortization of $21,000 resulted from this acquisition. Vaughn reported net income of $80,000 in 2020 and $60,000 in 2021 and paid $24,000 in dividends each year. Roberts reported net income of $50,000 in 2020 and $57,000 in 2021 and paid $12,000 in dividends each year. What is the Investment in Roberts Co. balance on Vaughn's books as of December 31, 2021, if the initial value method has been applied? A) $276,000. B) $317,000. C) $359,000. D) $368,000. E) $383,000.

13)

Which of the following is not an example of an intangible asset? A) Customer list B) Database C) Lease agreement D) Broken equipment E) Trademark

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14) Reeder Corp. acquired one hundred percent of O’Neill Inc. on January 1, 2019, at a price in excess of the subsidiary's fair value. On that date, Reeder’s equipment (ten-year life) had a book value of $380,000 but a fair value of $460,000. O’Neill had equipment (ten-year life) with a book value of $240,000 and a fair value of $370,000. Reeder used the partial equity method to record its investment in O’Neill. On December 31, 2021, Reeder had equipment with a book value of $270,000 and a fair value of $400,000. O’Neill had equipment with a book value of $180,000 and a fair value of $300,000. What is the consolidated balance for the Equipment account as of December 31, 2021? A) $450,000. B) $531,000. C) $541.000. D) $567,000. E) $580,000.

15) On January 1, 2020, Barber Corp. paid $1,160,000 to acquire Thompson Co. Thompson maintained separate incorporation. Barber used the equity method to account for the investment. The following information is available for Thompson’s assets, liabilities, and stockholders' equity accounts on January 1, 2020:

Current assets

Book Value 130,000

Fair Value 130,000

Land

75,000

193,000

Building (twenty year life)

250,000

276,000

Equipment (ten year life)

540,000

518,000

Current liabilities

26,000

Long-term liabilities

124,000

Common stock

233,000

Additional paid-in capital

389,000

Retained earnings

223,000

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Thompson earned net income for 2020 of $134,000 and paid dividends of $51,000 during the year. The 2020 total excess amortization of fair-value allocations is calculated to be A) ($2,200). B) ($900). C) $(1,300). D) $(2,100). E) $3,500.

16) On January 1, 2020, Barber Corp. paid $1,160,000 to acquire Thompson Co. Thompson maintained separate incorporation. Barber used the equity method to account for the investment. The following information is available for Thompson’s assets, liabilities, and stockholders' equity accounts on January 1, 2020:

Current assets

Book Value 130,000

Fair Value 130,000

Land

75,000

193,000

Building (twenty year life)

250,000

276,000

Equipment (ten year life)

540,000

518,000

Current liabilities

26,000

Long-term liabilities

124,000

Common stock

233,000

Additional paid-in capital

389,000

Retained earnings

223,000

Thompson earned net income for 2020 of $134,000 and paid dividends of $51,000 during the year. In Barber's accounting records, what amount would appear on December 31, 2020 for equity in subsidiary earnings?

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A) $83,000. B) $133,100. C) $134,000. D) $134,900. E) $185,000.

17) On January 1, 2020, Barber Corp. paid $1,160,000 to acquire Thompson Co. Thompson maintained separate incorporation. Barber used the equity method to account for the investment. The following information is available for Thompson’s assets, liabilities, and stockholders' equity accounts on January 1, 2020:

Current assets

Book Value 130,000

Fair Value 130,000

Land

75,000

193,000

Building (twenty year life)

250,000

276,000

Equipment (ten year life)

540,000

518,000

Current liabilities

26,000

Long-term liabilities

124,000

Common stock

233,000

Additional paid-in capital

389,000

Retained earnings

223,000

Thompson earned net income for 2020 of $134,000 and paid dividends of $51,000 during the year. What is the balance in Barber’s investment in subsidiary account at the end of 2020?

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A) $1,211,000. B) $1,242,100. C) $1,243,000. D) $1,243,900. E) $1,294,000.

18) On January 1, 2020, Barber Corp. paid $1,160,000 to acquire Thompson Co. Thompson maintained separate incorporation. Barber used the equity method to account for the investment. The following information is available for Thompson’s assets, liabilities, and stockholders' equity accounts on January 1, 2020:

Current assets

Book Value 130,000

Fair Value 130,000

Land

75,000

193,000

Building (twenty year life)

250,000

276,000

Equipment (ten year life)

540,000

518,000

Current liabilities

26,000

Long-term liabilities

124,000

Common stock

233,000

Additional paid-in capital

389,000

Retained earnings

223,000

Thompson earned net income for 2020 of $134,000 and paid dividends of $51,000 during the year. At the end of 2020, the consolidation entry to eliminate Barber’s accrual of Thompson’s earnings would include a credit to Investment in Thompson Co. for

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A) $83,000. B) $133,100. C) $134,000. D) $134,900. E) $0.

19) On January 1, 2020, Barber Corp. paid $1,160,000 to acquire Thompson Co. Thompson maintained separate incorporation. Barber used the equity method to account for the investment. The following information is available for Thompson’s assets, liabilities, and stockholders' equity accounts on January 1, 2020:

Current assets

Book Value 130,000

Fair Value 130,000

Land

75,000

193,000

Building (twenty year life)

250,000

276,000

Equipment (ten year life)

540,000

518,000

Current liabilities

26,000

Long-term liabilities

124,000

Common stock

233,000

Additional paid-in capital

389,000

Retained earnings

223,000

Thompson earned net income for 2020 of $134,000 and paid dividends of $51,000 during the year. If Barber Corp. had net income of $468,000 in 2020, exclusive of the investment, what is the amount of consolidated net income?

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A) $468,000. B) $519,000. C) $602,000. D) $602,900. E) $691,000.

20) On January 1, 2020, Hemingway Co. acquired all of the common stock of Crotec Corp. For 2020, Crotec earned net income of $375,000 and paid dividends of $200,000. Amortization of the patent allocation that was included in the acquisition was $8,000. How much difference would there have been in Hemingway’s income with regard to the effect of the investment, between using the equity method or using the initial value method of internal recordkeeping? A) $8,000. B) $167,000. C) $175,000. D) $200,000. E) $375,000.

21) On January 1, 2020, Hemingway Co. acquired all of the common stock of Crotec Corp. For 2020, Crotec earned net income of $375,000 and paid dividends of $200,000. Amortization of the patent allocation that was included in the acquisition was $8,000. How much difference would there have been in Hemingway’s income with regard to the effect of the investment, between using the equity method or using the partial equity method of internal recordkeeping? A) $8,000. B) $167,000. C) $175,000. D) $200,000. E) $375,000.

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22) Scott Co. paid $2,800,000 to acquire all of the common stock of Dawn Corp. on January 1, 2020. Dawn’s reported earnings for 2020 totaled $512,000, and it paid $160,000 in dividends during the year. The amortization of allocations related to the investment was $28,000. Scott’s net income, not including the investment, was $3,310,000, and it paid dividends of $950,000. On the consolidated financial statements for 2020, what amount should have been shown for Equity in Subsidiary Earnings? A) $-0B) $132,000. C) $160,000. D) $484,000. E) $512,000.

23) Scott Co. paid $2,800,000 to acquire all of the common stock of Dawn Corp. on January 1, 2020. Dawn’s reported earnings for 2020 totaled $512,000, and it paid $160,000 in dividends during the year. The amortization of allocations related to the investment was $28,000. Scott’s net income, not including the investment, was $3,310,000, and it paid dividends of $950,000. On the consolidated financial statements for 2020, what amount should have been shown for consolidated dividends? A) $-0B) $160,000. C) $922,000. D) $950,000. E) $1,110,000.

24) Scott Co. paid $2,800,000 to acquire all of the common stock of Dawn Corp. on January 1, 2020. Dawn’s reported earnings for 2020 totaled $512,000, and it paid $160,000 in dividends during the year. The amortization of allocations related to the investment was $28,000. Scott’s net income, not including the investment, was $3,310,000, and it paid dividends of $950,000. What is the amount of consolidated net income for the year 2020?

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A) $3,150,000. B) $3,282,000. C) $3,310,000. D) $3,794,000. E) $3,822,000.

25) Bassett Inc. acquired all of the outstanding common stock of Brinkman Corp. on January 1, 2019, for $422,000. Equipment with a ten-year life was undervalued on Brinkman’s financial records by $48,000. Brinkman also owned an unrecorded customer list with an assessed fair value of $71,000 and an estimated remaining life of five years. Brinkman earned reported net income of $185,000 in 2019 and $226,000 in 2020. Dividends of $75,000 were paid in each of these two years. Selected account balances as of December 31, 2021, for the two companies follow. Revenues Expenses

Bassett

Brinkman

1,120,000

860,000

500,000

600,000

Not given

Retained earnings, 1/1/21

850,000

650,000

Dividends paid

132,000

80,000

Investment income

If the partial equity method had been applied, what was 2021 consolidated net income? A) $260,000. B) $620,000. C) $861,000. D) $880,000. E) $1,291,000.

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26) Bassett Inc. acquired all of the outstanding common stock of Brinkman Corp. on January 1, 2019, for $422,000. Equipment with a ten-year life was undervalued on Brinkman’s financial records by $48,000. Brinkman also owned an unrecorded customer list with an assessed fair value of $71,000 and an estimated remaining life of five years. Brinkman earned reported net income of $185,000 in 2019 and $226,000 in 2020. Dividends of $75,000 were paid in each of these two years. Selected account balances as of December 31, 2021, for the two companies follow. Revenues Expenses

Bassett

Brinkman

1,120,000

860,000

500,000

600,000

Not given

Retained earnings, 1/1/21

850,000

650,000

Dividends paid

132,000

80,000

Investment income

If the equity method had been applied, what would be the Investment in Brinkman Corp. account balance within the records of Bassett at the end of 2021? A) $806,000. B) $811,000. C) $863,000. D) $920,000. E) $1,036,000.

27) Black Co. acquired 100% of Blue, Inc. on January 1, 2020. On that date, Blue had land with a book value of $38,000 and a fair value of $49,000. Also, on the date of acquisition, Blue had a building with a book value of $250,000 and a fair value of $460,000. Blue had equipment with a book value of $340,000 and a fair value of $280,000. The building had a 10-year remaining useful life and the equipment had a 5-year remaining useful life. How much total expense will be in the consolidated financial statements for the year ended December 31, 2020 related to the acquisition allocations of Blue?

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A) $0. B) $9,000. C) $12,000. D) $21,000. E) $30,000.

28) All of the following are acceptable methods to account for a majority-owned investment in subsidiary except A) The equity method. B) The initial value method. C) The partial equity method. D) The fair-value method.

29)

Under the equity method of accounting for an investment: A) The investment account remains at initial value. B) Dividends received are recorded as revenue. C) Goodwill is amortized over 20 years. D) Income reported by the subsidiary increases the investment account. E) Dividends received increase the investment account.

30)

Under the partial equity method of accounting for an investment,

A) The investment account remains at initial value. B) Dividends received are recorded as revenue. C) The allocations for excess fair value allocations over book value of net assets at date of acquisition are applied over their useful lives to reduce the investment account. D) Amortization of the excess of fair value allocations over book value is ignored in regard to the investment account. E) Dividends received increase the investment account.

31)

Under the initial value method, when accounting for an investment in a subsidiary,

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A) Dividends received by the subsidiary decrease the investment account. B) The investment account is adjusted to fair value at year-end. C) Income reported by the subsidiary increases the investment account. D) The investment account does not change from year to year. E) Dividends received are ignored.

32) According to GAAP regarding amortization of goodwill, which of the following statements is true? A) Goodwill recognized in consolidation must be amortized over 20 years. B) Goodwill recognized in consolidation must be expensed in the period of acquisition. C) Goodwill recognized in consolidation will not be amortized but subject to an annual test for impairment. D) Goodwill recognized in consolidation can never be written off. E) Goodwill recognized in consolidation must be amortized over 40 years.

33) When a company applies the initial value method in accounting for its investment in a subsidiary, and the subsidiary reports income in excess of dividends paid, what entry would be made to convert to full-accrual totals in a consolidation worksheet for the second year? A)

Retained earnings Investment in subsidiary

Investment in subsidiary Retained earnings

Investment in subsidiary Equity in subsidiary’s income

Equity in subsidiary’s income Investment in subsidiary

Additional paid-in capital Retained earnings

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A) A above. B) B above. C) C above. D) D above. E) E above.

34) When a company applies the initial value method in accounting for its investment in a subsidiary and the subsidiary reports income less than dividends paid, what entry would be made to convert to full-accrual totals in a consolidation worksheet for the second year? A)

Retained earnings Investment in subsidiary

Investment in subsidiary Retained earnings

Investment in subsidiary Equity in subsidiary’s income

Investment in subsidiary Additional paid-in capital

Retained earnings Additional paid-in capital

A) A above. B) B above. C) C above. D) D above. E) E above.

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35) When a company applies the partial equity method in accounting for its investment in a subsidiary and the subsidiary’s equipment has a fair value greater than its book value, what consolidation worksheet entry is made to convert to full-accrual totals in a year subsequent to the initial acquisition of the subsidiary? A)

Retained earnings Investment in subsidiary

Investment in subsidiary Retained earnings

Investment in subsidiary Equity in subsidiary’s income

Investment in subsidiary Additional paid-in capital

Retained earnings Additional paid-in capital

A) A above. B) B above. C) C above. D) D above. E) E above.

36) When consolidating parent and subsidiary financial statements, which of the following statements is true? A) Goodwill is never recognized. B) Goodwill required is amortized over 20 years. C) Goodwill may be recorded on the parent company's books. D) The value of any goodwill should be tested annually for impairment in value. E) Goodwill should be expensed in the year of acquisition.

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37) When consolidating a subsidiary under the equity method, which of the following statements is true with regard to the subsidiary subsequent to the year of acquisition? A) All net assets are revalued to fair value and must be amortized over their useful lives. B) Only net assets that had excess fair value over book value when acquired by the parent must be amortized over their useful lives. C) All depreciable net assets are revalued to fair value at date of acquisition and must be amortized over their useful lives. D) Only depreciable net assets that have excess fair value over book value must be amortized over their useful lives. E) Only assets that have excess fair value over book value must be amortized over their useful lives.

38) Which of the following is not a factor to be considered when determining the useful life of an intangible asset? A) Legal, regulatory or contractual provisions. B) The effects of obsolescence. C) The expected use of the asset by the organization. D) The fair value of the asset. E) The level of maintenance expenditures that will be required to obtain expected future benefits.

39) Which of the following is false regarding contingent consideration in business combinations? A) Contingent consideration payable in cash is reported under liabilities. B) Contingent consideration payable in stock shares is reported under stockholders' equity. C) Contingent consideration is recorded because of its substantial probability of eventual payment. D) The contingent consideration fair value is recognized as part of the acquisition regardless of whether eventual payment is based on future performance of the target firm or future stock price of the acquirer. E) Contingent consideration is reflected in the acquirer's balance sheet at the present value of the potential expected future payment.

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40) With respect to identifiable intangible assets other than goodwill, which of the following is true? A) If the value of the identified asset meets a de minimis exception, the entity may elect to treat it as goodwill. B) An identifiable intangible asset with an indefinite useful life must be assessed for impairment once every three years. C) If the average fair value of the asset is less than the average carrying amount of the asset with respect to, and determined for, the preceding three-year period, the asset is considered impaired and the entity may recognize a loss. D) A quantitative evaluation of value is required each year regardless of circumstances. E) If a qualitative assessment of the asset performed by an entity indicates impairment is likely, a quantitative assessment must be performed to determine whether there has been a loss in fair value.

41) Consolidated net income using the equity method for an acquisition combination is computed as follows: A) Parent company's revenues from its own operations plus subsidiary retained earnings. B) Parent's reported net income plus subsidiary dividends. C) Combined revenues less combined expenses less equity in subsidiary's earnings less amortization of fair-value allocations in excess of book value. D) Parent's revenues less expenses for its own operations plus the equity from subsidiary's earnings less subsidiary dividends. E) None of these answer choices are correct.

42) Jackson Company acquires 100% of the stock of Clark Corporation on January 1, 2020, for $4,100 cash. As of that date Clark has the following trial balance: Debit Cash

500

Accounts receivable

600

Inventory

900

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Credit

Buildings (net) (5 year life)

1,600

Equipment (net) (2 year life)

1,000

Land

900

Accounts payable

400

Long-term liabilities (due 12/31/22)

1,900

Common stock

1,000

Additional paid-in capital

700

Retained earnings

1,500

Total

5,500

Net income and dividends reported by Clark for 2020 and 2021 follow: 2020

2021

Net income

$ 120

$ 140

Dividends

The fair value of Clark’s net assets that differ from their book values are listed below: Fair Value Buildings

1,200

Equipment

1,350

Land

1,300

Long-term liabilities

1,750

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. Compute the consideration transferred in excess of book value acquired at January 1, 2020.

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A) $900. B) $1,400. C) $1,900. D) $2,400. E) $2,600.

43) Jackson Company acquires 100% of the stock of Clark Corporation on January 1, 2020, for $4,100 cash. As of that date Clark has the following trial balance: Debit Cash

Credit

500

Accounts receivable

600

Inventory

900

Buildings (net) (5 year life)

1,600

Equipment (net) (2 year life)

1,000

Land

900

Accounts payable

400

Long-term liabilities (due 12/31/22)

1,900

Common stock

1,000

Additional paid-in capital

700

Retained earnings

1,500

Total

5,500

Net income and dividends reported by Clark for 2020 and 2021 follow: 2020

2021

Net income

$ 120

$ 140

Dividends

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The fair value of Clark’s net assets that differ from their book values are listed below: Fair Value Buildings

1,200

Equipment

1,350

Land

1,300

Long-term liabilities

1,750

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. Compute goodwill, if any, at January 1, 2020. A) $0. B) $100. C) $400. D) $900. E) $1,300.

44) Jackson Company acquires 100% of the stock of Clark Corporation on January 1, 2020, for $4,100 cash. As of that date Clark has the following trial balance: Debit Cash

500

Accounts receivable

600

Inventory

900

Buildings (net) (5 year life)

1,600

Equipment (net) (2 year life)

1,000

Land Accounts payable

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Credit

900 $

400

Long-term liabilities (due 12/31/22)

1,900

Common stock

1,000

Additional paid-in capital

700

Retained earnings

1,500

Total

5,500

Net income and dividends reported by Clark for 2020 and 2021 follow: 2020

2021

Net income

$ 120

$ 140

Dividends

The fair value of Clark’s net assets that differ from their book values are listed below: Fair Value Buildings

1,200

Equipment

1,350

Land

1,300

Long-term liabilities

1,750

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. Compute the amount of Clark’s inventory that would be reported in a January 1, 2020, consolidated balance sheet. A) $0. B) $100. C) $400. D) $550. E) $900.

Version 1

45) Jackson Company acquires 100% of the stock of Clark Corporation on January 1, 2020, for $4,100 cash. As of that date Clark has the following trial balance: Debit Cash

Credit

500

Accounts receivable

600

Inventory

900

Buildings (net) (5 year life)

1,600

Equipment (net) (2 year life)

1,000

Land

900

Accounts payable

400

Long-term liabilities (due 12/31/22)

1,900

Common stock

1,000

Additional paid-in capital

700

Retained earnings

1,500

Total

5,500

Net income and dividends reported by Clark for 2020 and 2021 follow: 2020

2021

Net income

$ 120

$ 140

Dividends

The fair value of Clark’s net assets that differ from their book values are listed below: Fair Value Buildings

Version 1

1,200

Equipment

1,350

Land

1,300

Long-term liabilities

1,750

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. Compute the amount of Clark’s buildings that would be reported in a December 31, 2020, consolidated balance sheet. A) $1,200. B) $1,280. C) $1,520. D) $1,600. E) $1,680.

46) Jackson Company acquires 100% of the stock of Clark Corporation on January 1, 2020, for $4,100 cash. As of that date Clark has the following trial balance: Debit Cash

500

Accounts receivable

600

Inventory

900

Buildings (net) (5 year life)

1,600

Equipment (net) (2 year life)

1,000

Land Accounts payable

Credit

900 $

400

Long-term liabilities (due 12/31/22)

1,900

Common stock

1,000

Additional paid-in capital

Version 1

700

Retained earnings

1,500

Total

5,500

Net income and dividends reported by Clark for 2020 and 2021 follow: 2020

2021

Net income

$ 120

$ 140

Dividends

The fair value of Clark’s net assets that differ from their book values are listed below: Fair Value Buildings

1,200

Equipment

1,350

Land

1,300

Long-term liabilities

1,750

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. Compute the amount of Clark’s equipment that would be reported in a December 31, 2020, consolidated balance sheet. A) $825. B) $1,000. C) $1,175. D) $1,350. E) $1,525.

47) Jackson Company acquires 100% of the stock of Clark Corporation on January 1, 2020, for $4,100 cash. As of that date Clark has the following trial balance: Debit

Version 1

Credit

Cash

500

Accounts receivable

600

Inventory

900

Buildings (net) (5 year life)

1,600

Equipment (net) (2 year life)

1,000

Land

900

Accounts payable

400

Long-term liabilities (due 12/31/22)

1,900

Common stock

1,000

Additional paid-in capital

700

Retained earnings

1,500

Total

5,500

Net income and dividends reported by Clark for 2020 and 2021 follow: 2020

2021

Net income

$ 120

$ 140

Dividends

The fair value of Clark’s net assets that differ from their book values are listed below: Fair Value Buildings

1,200

Equipment

1,350

Land

1,300

Long-term liabilities

1,750

Version 1

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. Compute the amount of Clark’s long-term liabilities that would be reported in a December 31, 2020, consolidated balance sheet. A) $1,700. B) $1,750. C) $1,800. D) $1,850. E) $1,900.

48) Jackson Company acquires 100% of the stock of Clark Corporation on January 1, 2020, for $4,100 cash. As of that date Clark has the following trial balance: Debit Cash

500

Accounts receivable

600

Inventory

900

Buildings (net) (5 year life)

1,600

Equipment (net) (2 year life)

1,000

Land

Credit

900

Accounts payable

400

Long-term liabilities (due 12/31/22)

1,900

Common stock

1,000

Additional paid-in capital

700

Retained earnings Total

Version 1

1,500 $

5,500

Net income and dividends reported by Clark for 2020 and 2021 follow: 2020

2021

Net income

$ 120

$ 140

Dividends

The fair value of Clark’s net assets that differ from their book values are listed below: Fair Value Buildings

1,200

Equipment

1,350

Land

1,300

Long-term liabilities

1,750

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. Compute the amount of Clark’s buildings that would be reported in a December 31, 2021, consolidated balance sheet. A) $1,200. B) $1,280. C) $1,360. D) $1,440. E) $1,600.

49) Jackson Company acquires 100% of the stock of Clark Corporation on January 1, 2020, for $4,100 cash. As of that date Clark has the following trial balance: Debit Cash

500

Accounts receivable

600

Inventory

900

Version 1

Credit

Buildings (net) (5 year life)

1,600

Equipment (net) (2 year life)

1,000

Land

900

Accounts payable

400

Long-term liabilities (due 12/31/22)

1,900

Common stock

1,000

Additional paid-in capital

700

Retained earnings

1,500

Total

5,500

Net income and dividends reported by Clark for 2020 and 2021 follow: 2020

2021

Net income

$ 120

$ 140

Dividends

The fair value of Clark’s net assets that differ from their book values are listed below: Fair Value Buildings

1,200

Equipment

1,350

Land

1,300

Long-term liabilities

1,750

A) $0. B) $1,000. C) $1,175. D) $1,350. E) $1,700.

50) Jackson Company acquires 100% of the stock of Clark Corporation on January 1, 2020, for $4,100 cash. As of that date Clark has the following trial balance: Debit Cash

Credit

500

Accounts receivable

600

Inventory

900

Buildings (net) (5 year life)

1,600

Equipment (net) (2 year life)

1,000

Land

900

Accounts payable

400

Long-term liabilities (due 12/31/22)

1,900

Common stock

1,000

Additional paid-in capital

700

Retained earnings

1,500

Total

5,500

Net income and dividends reported by Clark for 2020 and 2021 follow: 2020

2021

Net income

$ 120

$ 140

Dividends

Version 1

The fair value of Clark’s net assets that differ from their book values are listed below: Fair Value Buildings

1,200

Equipment

1,350

Land

1,300

Long-term liabilities

1,750

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. Compute the amount of Clark’s land that would be reported in a December 31, 2021, consolidated balance sheet. A) $400. B) $900. C) $1,300. D) $1,500. E) $2,200.

51) Jackson Company acquires 100% of the stock of Clark Corporation on January 1, 2020, for $4,100 cash. As of that date Clark has the following trial balance: Debit Cash

500

Accounts receivable

600

Inventory

900

Buildings (net) (5 year life)

1,600

Equipment (net) (2 year life)

1,000

Land

Version 1

Credit

900

Accounts payable

400

Long-term liabilities (due 12/31/22)

1,900

Common stock

1,000

Additional paid-in capital

700

Retained earnings

1,500

Total

5,500

Net income and dividends reported by Clark for 2020 and 2021 follow: 2020

2021

Net income

$ 120

$ 140

Dividends

The fair value of Clark’s net assets that differ from their book values are listed below: Fair Value Buildings

1,200

Equipment

1,350

Land

1,300

Long-term liabilities

1,750

Version 1

A) $1,750. B) $1,800. C) $1,850. D) $1,900. E) $2,000.

52) Kaye Company acquired 100% of Fiore Company on January 1, 2021. Kaye paid $1,000 excess consideration over book value, which is being amortized at $20 per year. There was no goodwill in the combination. Fiore reported net income of $400 in 2021 and paid dividends of $100. Assume the equity method is applied. How much equity income will Kaye report on its internal accounting records as a result of Fiore's operations? A) $400 B) $300 C) $380 D) $280 E) $480

53) Kaye Company acquired 100% of Fiore Company on January 1, 2021. Kaye paid $1,000 excess consideration over book value, which is being amortized at $20 per year. There was no goodwill in the combination. Fiore reported net income of $400 in 2021 and paid dividends of $100. Assume the partial equity method is applied. How much equity income will Kaye report on its internal accounting records as a result of Fiore's operations? A) $400 B) $300 C) $380 D) $280 E) $480

Version 1

54) Kaye Company acquired 100% of Fiore Company on January 1, 2021. Kaye paid $1,000 excess consideration over book value, which is being amortized at $20 per year. There was no goodwill in the combination. Fiore reported net income of $400 in 2021 and paid dividends of $100. Assume the initial value method is applied. How much equity income will Kaye report on its internal accounting records as a result of Fiore's operations? A) $400 B) $300 C) $380 D) $100 E) $210

55) Kaye Company acquired 100% of Fiore Company on January 1, 2021. Kaye paid $1,000 excess consideration over book value, which is being amortized at $20 per year. There was no goodwill in the combination. Fiore reported net income of $400 in 2021 and paid dividends of $100. Assume the partial equity method is used. In the year subsequent to acquisition, what additional worksheet entry must be made for consolidation purposes, but is not required for the equity method? A)

Retained earnings

Investment in Fiore B)

Investment in Fiore

20 20

Retained earnings C)

Expenses

20 20

Investment in Fiore D)

Expenses

20 20

Retained earnings E)

Retained earnings Additional paid-in capital

Version 1

20 20 20

A) Entry A. B) Entry B. C) Entry C. D) Entry D. E) Entry E.

56) Kaye Company acquired 100% of Fiore Company on January 1, 2021. Kaye paid $1,000 excess consideration over book value, which is being amortized at $20 per year. There was no goodwill in the combination. Fiore reported net income of $400 in 2021 and paid dividends of $100. Assume the initial value method is used. In the year subsequent to acquisition, what additional worksheet entry must be made for consolidation purposes that is not required for the equity method? A)

Investment in Fiore

380

Retained earnings B)

Retained earnings

380 380

Investment in Fiore C)

Investment in Fiore

380 280

Retained earnings D)

Retained earnings

280 280

Investment in Fiore E)

Additional paid-in capital Retained earnings

Version 1

280 280 280

A) Entry A. B) Entry B. C) Entry C. D) Entry D. E) Entry E.

57) Hoyt Corporation agreed to the following terms in order to acquire the net assets of Brown Company on January 1, 2021: 1. To issue 400 shares of common stock ($10 par) with a fair value of $45 per share. 2. To assume Brown's liabilities which have a book value of $1,600 and a fair value of $1,500. On the date of acquisition, the consideration transferred for Hoyt's acquisition of Brown would be A) $18,000. B) $16,500. C) $20,000. D) $18,500. E) $19,500.

58) Following are selected accounts for Green Corporation and Vega Company as of December 31, 2023. Several of Green's accounts have been omitted. Green Revenues

Vega

900,000

500,000

Cost of goods sold

360,000

200,000

Depreciation expense

140,000

40,000

Other expenses

100,000

60,000

Equity in Vega’s income Retained earnings, 1/1/2023 Dividends

Version 1

? 1,350,000

1,200,000

195,000

80,000

Current assets

300,000

1,380,000

Land

450,000

180,000

Building (net)

750,000

280,000

Equipment (net)

300,000

500,000

Liabilities

600,000

620,000

Common stock

450,000

80,000

Additional paid-in capital

75,000

320,000

Green acquired 100% of Vega on January 1, 2019, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share. On January 1, 2019, Vega's land was undervalued by $40,000, its buildings were overvalued by $30,000, and equipment was undervalued by $80,000. The buildings have a 20-year life and the equipment has a 10-year life. $50,000 was attributed to an unrecorded trademark with a 16-year remaining life. There was no goodwill associated with this investment. Compute the book value of Vega at January 1, 2019. A) $997,500. B) $857,500. C) $1,200,000. D) $1,600,000. E) $827,500.

59) Following are selected accounts for Green Corporation and Vega Company as of December 31, 2023. Several of Green's accounts have been omitted. Green Revenues

900,000

Vega $

500,000

Cost of goods sold

360,000

200,000

Depreciation expense

140,000

40,000

Other expenses

100,000

60,000

Version 1

Equity in Vega’s income

Retained earnings, 1/1/2023

1,350,000

1,200,000

Dividends

195,000

80,000

Current assets

300,000

1,380,000

Land

450,000

180,000

Building (net)

750,000

280,000

Equipment (net)

300,000

500,000

Liabilities

600,000

620,000

Common stock

450,000

80,000

Additional paid-in capital

75,000

320,000

Green acquired 100% of Vega on January 1, 2019, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share. On January 1, 2019, Vega's land was undervalued by $40,000, its buildings were overvalued by $30,000, and equipment was undervalued by $80,000. The buildings have a 20-year life and the equipment has a 10-year life. $50,000 was attributed to an unrecorded trademark with a 16-year remaining life. There was no goodwill associated with this investment. Compute the December 31, 2023, consolidated revenues. A) $1,400,000. B) $800,000. C) $500,000. D) $1,590,375. E) $1,390,375.

60) Following are selected accounts for Green Corporation and Vega Company as of December 31, 2023. Several of Green's accounts have been omitted. Green Revenues

Version 1

900,000

Vega $

500,000

Cost of goods sold

360,000

200,000

Depreciation expense

140,000

40,000

Other expenses

100,000

60,000

Equity in Vega’s income Retained earnings, 1/1/2023

? 1,350,000

1,200,000

Dividends

195,000

80,000

Current assets

300,000

1,380,000

Land

450,000

180,000

Building (net)

750,000

280,000

Equipment (net)

300,000

500,000

Liabilities

600,000

620,000

Common stock

450,000

80,000

Additional paid-in capital

75,000

320,000

Green acquired 100% of Vega on January 1, 2019, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share. On January 1, 2019, Vega's land was undervalued by $40,000, its buildings were overvalued by $30,000, and equipment was undervalued by $80,000. The buildings have a 20-year life and the equipment has a 10-year life. $50,000 was attributed to an unrecorded trademark with a 16-year remaining life. There was no goodwill associated with this investment. Compute the December 31, 2023, consolidated total expenses. A) $620,000. B) $280,000. C) $900,000. D) $909,625. E) $299,625.

Version 1

61) Following are selected accounts for Green Corporation and Vega Company as of December 31, 2023. Several of Green's accounts have been omitted. Green Revenues

Vega

900,000

500,000

Cost of goods sold

360,000

200,000

Depreciation expense

140,000

40,000

Other expenses

100,000

60,000

Equity in Vega’s income Retained earnings, 1/1/2023

? 1,350,000

1,200,000

Dividends

195,000

80,000

Current assets

300,000

1,380,000

Land

450,000

180,000

Building (net)

750,000

280,000

Equipment (net)

300,000

500,000

Liabilities

600,000

620,000

Common stock

450,000

80,000

Additional paid-in capital

75,000

320,000

Version 1

A) $1,037,500. B) $1,007,500. C) $1,000,000. D) $1,022,500. E) $1,012,500.

62) Following are selected accounts for Green Corporation and Vega Company as of December 31, 2023. Several of Green's accounts have been omitted. Green Revenues

Vega

900,000

500,000

Cost of goods sold

360,000

200,000

Depreciation expense

140,000

40,000

Other expenses

100,000

60,000

Equity in Vega’s income Retained earnings, 1/1/2023

? 1,350,000

1,200,000

Dividends

195,000

80,000

Current assets

300,000

1,380,000

Land

450,000

180,000

Building (net)

750,000

280,000

Equipment (net)

300,000

500,000

Liabilities

600,000

620,000

Common stock

450,000

80,000

Additional paid-in capital

75,000

320,000

Version 1

Green acquired 100% of Vega on January 1, 2019, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share. On January 1, 2019, Vega's land was undervalued by $40,000, its buildings were overvalued by $30,000, and equipment was undervalued by $80,000. The buildings have a 20-year life and the equipment has a 10-year life. $50,000 was attributed to an unrecorded trademark with a 16-year remaining life. There was no goodwill associated with this investment. Compute the December 31, 2023, consolidated equipment. A) $800,000. B) $808,000. C) $840,000. D) $760,000. E) $848,000.

63) Following are selected accounts for Green Corporation and Vega Company as of December 31, 2023. Several of Green's accounts have been omitted. Green Revenues

Vega

900,000

500,000

Cost of goods sold

360,000

200,000

Depreciation expense

140,000

40,000

Other expenses

100,000

60,000

Equity in Vega’s income Retained earnings, 1/1/2023

? 1,350,000

1,200,000

Dividends

195,000

80,000

Current assets

300,000

1,380,000

Land

450,000

180,000

Building (net)

750,000

280,000

Equipment (net)

300,000

500,000

Liabilities

600,000

620,000

Version 1

Common stock

450,000

80,000

Additional paid-in capital

75,000

320,000

Green acquired 100% of Vega on January 1, 2019, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share. On January 1, 2019, Vega's land was undervalued by $40,000, its buildings were overvalued by $30,000, and equipment was undervalued by $80,000. The buildings have a 20-year life and the equipment has a 10-year life. $50,000 was attributed to an unrecorded trademark with a 16-year remaining life. There was no goodwill associated with this investment. Compute the December 31, 2023, consolidated land. A) $220,000. B) $180,000. C) $670,000. D) $630,000. E) $450,000.

64) Following are selected accounts for Green Corporation and Vega Company as of December 31, 2023. Several of Green's accounts have been omitted. Green Revenues

Vega

900,000

500,000

Cost of goods sold

360,000

200,000

Depreciation expense

140,000

40,000

Other expenses

100,000

60,000

Equity in Vega’s income Retained earnings, 1/1/2023

? 1,350,000

1,200,000

Dividends

195,000

80,000

Current assets

300,000

1,380,000

Land

450,000

180,000

Version 1

Building (net)

750,000

280,000

Equipment (net)

300,000

500,000

Liabilities

600,000

620,000

Common stock

450,000

80,000

Additional paid-in capital

75,000

320,000

Green acquired 100% of Vega on January 1, 2019, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share. On January 1, 2019, Vega's land was undervalued by $40,000, its buildings were overvalued by $30,000, and equipment was undervalued by $80,000. The buildings have a 20-year life and the equipment has a 10-year life. $50,000 was attributed to an unrecorded trademark with a 16-year remaining life. There was no goodwill associated with this investment. Compute the December 31, 2023, consolidated trademark. A) $50,000. B) $46,875. C) $0. D) $34,375. E) $37,500.

65) Following are selected accounts for Green Corporation and Vega Company as of December 31, 2023. Several of Green's accounts have been omitted. Green Revenues

Vega

900,000

500,000

Cost of goods sold

360,000

200,000

Depreciation expense

140,000

40,000

Other expenses

100,000

60,000

Equity in Vega’s income Retained earnings, 1/1/2023

Version 1

? 1,350,000

1,200,000

Dividends

195,000

80,000

Current assets

300,000

1,380,000

Land

450,000

180,000

Building (net)

750,000

280,000

Equipment (net)

300,000

500,000

Liabilities

600,000

620,000

Common stock

450,000

80,000

Additional paid-in capital

75,000

320,000

Green acquired 100% of Vega on January 1, 2019, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share. On January 1, 2019, Vega's land was undervalued by $40,000, its buildings were overvalued by $30,000, and equipment was undervalued by $80,000. The buildings have a 20-year life and the equipment has a 10-year life. $50,000 was attributed to an unrecorded trademark with a 16-year remaining life. There was no goodwill associated with this investment. Compute the December 31, 2023, consolidated common stock. A) $450,000. B) $530,000. C) $555,000. D) $635,000. E) $525,000.

66) Following are selected accounts for Green Corporation and Vega Company as of December 31, 2023. Several of Green's accounts have been omitted. Green Revenues

900,000

Vega $

500,000

Cost of goods sold

360,000

200,000

Depreciation expense

140,000

40,000

Version 1

Other expenses

100,000

Equity in Vega’s income Retained earnings, 1/1/2023

60,000

? 1,350,000

1,200,000

Dividends

195,000

80,000

Current assets

300,000

1,380,000

Land

450,000

180,000

Building (net)

750,000

280,000

Equipment (net)

300,000

500,000

Liabilities

600,000

620,000

Common stock

450,000

80,000

Additional paid-in capital

75,000

320,000

Green acquired 100% of Vega on January 1, 2019, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share. On January 1, 2019, Vega's land was undervalued by $40,000, its buildings were overvalued by $30,000, and equipment was undervalued by $80,000. The buildings have a 20-year life and the equipment has a 10-year life. $50,000 was attributed to an unrecorded trademark with a 16-year remaining life. There was no goodwill associated with this investment. Compute the December 31, 2023, consolidated additional paid-in capital. A) $210,000. B) $75,000. C) $1,102,500. D) $942,500. E) $525,000.

67) Following are selected accounts for Green Corporation and Vega Company as of December 31, 2023. Several of Green's accounts have been omitted. Green

Version 1

Vega

Revenues

900,000

500,000

Cost of goods sold

360,000

200,000

Depreciation expense

140,000

40,000

Other expenses

100,000

60,000

Equity in Vega’s income Retained earnings, 1/1/2023

? 1,350,000

1,200,000

Dividends

195,000

80,000

Current assets

300,000

1,380,000

Land

450,000

180,000

Building (net)

750,000

280,000

Equipment (net)

300,000

500,000

Liabilities

600,000

620,000

Common stock

450,000

80,000

Additional paid-in capital

75,000

320,000

Green acquired 100% of Vega on January 1, 2019, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share. On January 1, 2019, Vega's land was undervalued by $40,000, its buildings were overvalued by $30,000, and equipment was undervalued by $80,000. The buildings have a 20-year life and the equipment has a 10-year life. $50,000 was attributed to an unrecorded trademark with a 16-year remaining life. There was no goodwill associated with this investment. Compute the December 31, 2023 consolidated retained earnings. A) $1,645,375. B) $1,350,000. C) $1,565,375. D) $1,840,375. E) $1,265,375.

Version 1

68) One company acquires another company in a combination accounted for under the acquisition method. The acquiring company decides to apply the initial value method in accounting for the combination. What is one reason the acquiring company might have made this decision? A) It is the only method allowed by the SEC. B) It is relatively easy to apply. C) It is the only internal reporting method allowed by generally accepted accounting principles. D) Operating results on the parent's financial records reflect consolidated totals. E) When the initial value method is used, no worksheet entries are required in the consolidation process.

69) One company acquires another company in a combination accounted for under the acquisition method. The acquiring company decides to apply the equity method in accounting for the combination. What is one reason the acquiring company might have made this decision? A) It is the only method allowed by the SEC. B) It is relatively easy to apply. C) It is the only internal reporting method allowed by generally accepted accounting principles. D) Operating results on the parent's financial records reflect consolidated totals. E) When the equity method is used, no worksheet entries are required in the consolidation process.

70)

When is a goodwill impairment loss recognized?

A) Annually on a systematic and rational basis. B) Never. C) When both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying values. D) If the fair value of a reporting unit falls below its original acquisition price. E) Whenever the fair value of the entity declines significantly.

71)

Which of the following will result in the recognition of an impairment loss on goodwill?

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A) Goodwill amortization is to be recognized annually on a systematic and rational basis. B) Both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying values. C) The fair value of the entity declines significantly. D) The fair value of a reporting unit falls below the original consideration transferred for the acquisition. E) The entity is investigated by the SEC and its reputation has been severely damaged.

72) Anderson, Inc. acquires all of the voting stock of Kenneth, Inc. on January 4, 2020, at an amount in excess of Kenneth’s fair value. On that date, Kenneth has equipment with a book value of $90,000 and a fair value of $120,000 (10-year remaining life). Anderson has equipment with a book value of $800,000 and a fair value of $1,200,000 (10-year remaining life). On December 31, 2021, Anderson has equipment with a book value of $975,000 but a fair value of $1,350,000 and Kenneth has equipment with a book value of $105,000 but a fair value of $125,000. If Anderson applies the equity method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2021? A) $1,080,000. B) $1,104,000. C) $1,100,000. D) $1,468,000. E) $1,475,000.

73) Anderson, Inc. acquires all of the voting stock of Kenneth, Inc. on January 4, 2020, at an amount in excess of Kenneth’s fair value. On that date, Kenneth has equipment with a book value of $90,000 and a fair value of $120,000 (10-year remaining life). Anderson has equipment with a book value of $800,000 and a fair value of $1,200,000 (10-year remaining life). On December 31, 2021, Anderson has equipment with a book value of $975,000 but a fair value of $1,350,000 and Kenneth has equipment with a book value of $105,000 but a fair value of $125,000. If Anderson applies the partial equity method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2021?

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A) $1,080,000. B) $1,104,000. C) $1,100,000. D) $1,468,000. E) $1,475,000.

74) Anderson, Inc. acquires all of the voting stock of Kenneth, Inc. on January 4, 2020, at an amount in excess of Kenneth’s fair value. On that date, Kenneth has equipment with a book value of $90,000 and a fair value of $120,000 (10-year remaining life). Anderson has equipment with a book value of $800,000 and a fair value of $1,200,000 (10-year remaining life). On December 31, 2021, Anderson has equipment with a book value of $975,000 but a fair value of $1,350,000 and Kenneth has equipment with a book value of $105,000 but a fair value of $125,000. If Anderson applies the initial value method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2021? A) $1,080,000. B) $1,104,000. C) $1,100,000. D) $1,468,000. E) $1,475,000.

75) How is the fair value allocation of an intangible asset allocated to expense when the asset has no legal, regulatory, contractual, competitive, economic, or other factors that limit its life? A) Equally over 20 years. B) Equally over 40 years. C) Equally over 20 years with an annual impairment review. D) No amortization, but annually reviewed for impairment and adjusted accordingly. E) No amortization over an indefinite period time.

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76) Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2020 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2021 if Rhine generates cash flows from operations of $27,000 or more in the next year. Harrison estimates that there is a 20% probability that Rhine will generate at least $27,000 next year, and uses an interest rate of 5% to incorporate the time value of money. The fair value of $16,500 at 5%, using a probability-weighted approach, is $3,142. What will Harrison record as its Investment in Rhine on January 1, 2020? A) $400,000. B) $403,142. C) $406,000. D) $409,142. E) $416,500.

77) Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2020 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2021 if Rhine generates cash flows from operations of $27,000 or more in the next year. Harrison estimates that there is a 20% probability that Rhine will generate at least $27,000 next year, and uses an interest rate of 5% to incorporate the time value of money. The fair value of $16,500 at 5%, using a probability-weighted approach, is $3,142. Assuming Rhine generates cash flow from operations of $27,200 in 2020, how will Harrison record the $16,500 payment of cash on April 15, 2021 in satisfaction of its contingent obligation? A) Debit Contingent performance obligation $16,500, and Credit Cash $16,500. B) Debit Contingent performance obligation $3,142, debit Loss from revaluation of contingent performance obligation $13,358, and Credit Cash $16,500. C) Debit Investment in Subsidiary and Credit Cash, $16,500. D) Debit Goodwill and Credit Cash, $16,500. E) No entry.

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78) Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2020 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2021 if Rhine generates cash flows from operations of $27,000 or more in the next year. Harrison estimates that there is a 20% probability that Rhine will generate at least $27,000 next year, and uses an interest rate of 5% to incorporate the time value of money. The fair value of $16,500 at 5%, using a probability-weighted approach, is $3,142. When recording consideration transferred for the acquisition of Rhine on January 1, 2020, Harrison will record a contingent performance obligation in the amount of: A) $628.40 B) $2,671.60 C) $3,142.00 D) $13,358.00 E) $16,500.00

79) Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2020 for $80,000, consisting of $20,000 in cash and 6,000 shares of stock. A contingent payment of $12,000 in cash will be paid on April 1, 2021 if Gataux generates cash flows from operations of $26,500 or more in the next year. Beatty estimates that there is a 30% probability that Gataux will generate at least $26,500 next year, and uses an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%, using a probability-weighted approach, is $3,461. A contingent payment of $20,000, payable in stock, will be paid to the former owners of Gataux on April 1, 2021 if the market value of Beatty stock drops below $10 per share. Beatty estimates there is a 15% probability that its share price will not exceed that threshold. Using the same interest rate and probability-weighted approach, Beatty calculates the market value of the stock contingency to be $2,884. What will Beatty record as its Investment in Gataux on January 1, 2020?

A) $12,000. B) $80,000. C) $83,461. D) $86,345. E) $26,500.

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80) Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2020 for $80,000, consisting of $20,000 in cash and 6,000 shares of stock. A contingent payment of $12,000 in cash will be paid on April 1, 2021 if Gataux generates cash flows from operations of $26,500 or more in the next year. Beatty estimates that there is a 30% probability that Gataux will generate at least $26,500 next year, and uses an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%, using a probability-weighted approach, is $3,461. A contingent payment of $20,000, payable in stock, will be paid to the former owners of Gataux on April 1, 2021 if the market value of Beatty stock drops below $10 per share. Beatty estimates there is a 15% probability that its share price will not exceed that threshold. Using the same interest rate and probability-weighted approach, Beatty calculates the market value of the stock contingency to be $2,884. Using the acquisition method, how will Beatty record the stock contingency? A) Credit Contingent Performance Obligation, $20,000. B) Debit Additional Paid-In Capital, $20,000. C) Credit Additional Paid-In Capital, $2,884. D) Debit Contingent Performance Obligation, $2,884. E) No entry.

81) Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2020 for $80,000, consisting of $20,000 in cash and 6,000 shares of stock. A contingent payment of $12,000 in cash will be paid on April 1, 2021 if Gataux generates cash flows from operations of $26,500 or more in the next year. Beatty estimates that there is a 30% probability that Gataux will generate at least $26,500 next year, and uses an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%, using a probability-weighted approach, is $3,461. A contingent payment of $20,000, payable in stock, will be paid to the former owners of Gataux on April 1, 2021 if the market value of Beatty stock drops below $10 per share. Beatty estimates there is a 15% probability that its share price will not exceed that threshold. Using the same interest rate and probability-weighted approach, Beatty calculates the market value of the stock contingency to be $2,884. On April 1, 2021, Beatty stock closes with a market value of $8.98 per share. How many shares of stock, rounded to the next whole number, must it issue to the former owners of Gataux? A) 682 B) 2,000 C) 2,228 D) 2,884 E) 6,000

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82) Prince Company acquires Duchess, Inc. on January 1, 2019. At the date of acquisition, Duchess has long-term debt with a fair value of $1,500,000 and a carrying amount of $1,200,000. With respect to long-term debt consolidation worksheet adjustments in periods following the acquisition, which of the following is correct? A) Debit Interest Expense and Credit Long-Term Debt Expense. B) Prince must recognize an increase in interest expense if the amount is material. C) Do not adjust the value of the debt because Prince is not obligated to repay the debt. D) Credit Long-Term Debt and Debit Interest Expense on the balance sheet of Duchess. E) Debit Long-Term Debt and Credit Interest Expense.

83) With respect to the recognition of goodwill in a business combination, which of the following statements is true? A) Only US GAAP requires recognition of goodwill when the fair value of the consideration transferred exceeds the net fair value of assets and liabilities. B) US GAAP standards require goodwill to be allocated to reporting units expected to benefit from the goodwill. C) Only IFRS standards require annual assessments for goodwill impairment. D) IFRS requires a reporting unit’s implied fair value for goodwill to be calculated as the excess of such unit’s fair value over the fair value of its identifiable net assets. E) Neither US GAAP, nor IFRS, provide that goodwill impairments will not be recoverable once recognized.

84) Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2020. At that date, Glen owns only three assets and has no liabilities:

Land

Book Value 40,000

Fair Value 50,000

Equipment (10-year life)

80,000

75,000

Building (20-year life)

200,000

300,000

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If Watkins pays $450,000 in cash for Glen, what amount would be represented as the subsidiary’s Building in a consolidation at December 31, 2022, assuming the book value of the building at that date is still $200,000? A) $200,000. B) $285,000. C) $290,000. D) $295,000. E) $300,000.

85) Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2020. At that date, Glen owns only three assets and has no liabilities:

Land

Book Value 40,000

Fair Value 50,000

Equipment (10-year life)

80,000

75,000

Building (20-year life)

200,000

300,000

If Watkins pays $400,000 in cash for Glen, what amount would be represented as the subsidiary’s Building in a consolidation at December 31, 2022, assuming the book value of the building at that date is still $200,000? A) $200,000. B) $285,000. C) $260,000. D) $268,000. E) $300,000.

86) Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2020. At that date, Glen owns only three assets and has no liabilities:

Land

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Book Value 40,000

Fair Value 50,000

Equipment (10-year life)

80,000

75,000

Building (20-year life)

200,000

300,000

If Watkins pays $450,000 in cash for Glen, what amount would be represented as the subsidiary’s Equipment in a consolidation at December 31, 2022, assuming the book value of the equipment at that date is still $80,000? A) $70,000. B) $73,500. C) $75,000. D) $76,500. E) $80,000.

87) Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2020. At that date, Glen owns only three assets and has no liabilities:

Land

Book Value 40,000

Fair Value 50,000

Equipment (10-year life)

80,000

75,000

Building (20-year life)

200,000

300,000

If Watkins pays $450,000 in cash for Glen, what acquisition-date fair value allocation, net of amortization, should be attributed to the subsidiary’s Equipment in consolidation at December 31, 2022? A) $(5,000). B) $80,000. C) $75,000. D) $73,500. E) $(3,500).

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88) Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2020. At that date, Glen owns only three assets and has no liabilities:

Land

Book Value 40,000

Fair Value 50,000

Equipment (10-year life)

80,000

75,000

Building (20-year life)

200,000

300,000

If Watkins pays $300,000 in cash for Glen, at what amount would the subsidiary’s Building be represented in a January 2, 2020 consolidation? A) $200,000. B) $225,000. C) $273,000. D) $279,000. E) $300,000.

89) Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2020. At that date, Glen owns only three assets and has no liabilities:

Land

Book Value 40,000

Fair Value 50,000

Equipment (10-year life)

80,000

75,000

Building (20-year life)

200,000

300,000

If Watkins pays $450,000 in cash for Glen, and Glen earns $50,000 in net income and pays $20,000 in dividends during 2020, what amount representing Glen would be reflected in consolidated net income for the year ended December 31, 2020?

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A) $20,000 under the initial value method. B) $30,000 under the partial equity method. C) $50,000 under the partial equity method. D) $44,500 under the equity method. E) $45,500 regardless of the internal accounting method used.

90) According to the FASB ASC regarding the testing procedures for Goodwill Impairment, the proper procedure for conducting impairment testing is: A) Goodwill recognized in consolidation may be amortized uniformly and only tested if the amortization method originally chosen is changed. B) Goodwill recognized in consolidation must only be impairment tested prior to disposal of the consolidated unit to eliminate the impairment of goodwill from the gain or loss on the sale of that specific entity. C) Goodwill recognized in consolidation may be impairment tested in a two-step approach, first by quantitative assessment of the possible impairment of the fair value of the unit relative to the book value, and then a qualitative assessment as to why the impairment, if any, occurred for disclosure. D) Goodwill recognized in consolidation may be impairment tested in a two-step approach, first by qualitative assessment of the possibility of impairment of the unit fair value relative to the book value, and then quantitative assessments as to how much impairment, if any, occurred for disclosure. E) Goodwill recognized in consolidation may be impairment tested in a two-step approach, first by qualitative assessment of the possibility of impairment of the unit fair value relative to the book value, and then quantitative assessments as to how much impairment, if any, occurred for asset write-down.

91)

When is a goodwill impairment loss recognized?

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A) Only after both a quantitative and qualitative assessment of the fair value of goodwill of a reporting unit. B) After only definitive quantitative assessments of the fair value of goodwill is completed. C) After only definitive qualitative assessments of the fair value of goodwill is completed. D) If the fair value of a reporting unit falls to zero or below its original acquisition price. E) Never.

92)

Private companies, with respect to goodwill: A) May elect to amortize it over a period of 15 years. B) Must treat it as an intangible asset with an indefinite life. C) Must amortize it over a 12-year period. D) May amortize goodwill if the value of the company does not exceed $10 million. E) May treat goodwill as a definite lived intangible asset with a 10-year useful life.

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 93) On January 1, 2020, Jumper Co. acquired all of the common stock of Cable Corp. for $540,000. Annual amortization associated with the acquisition amounted to $1,800. During 2020, Cable recognized net income of $54,000 and paid dividends of $24,000. Cable's net income and dividends for 2021 were $86,000 and $24,000, respectively. Required: Assuming that Jumper decided to use the partial equity method, prepare a schedule to show the balance in the investment account at the end of 2021.

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94) Hanson Co. acquired all of the common stock of Roberts Inc. on January 1, 2020, transferring consideration in an amount slightly more than the fair value of Roberts' net assets. At that time, Roberts had buildings with a twenty-year useful life, a book value of $600,000, and a fair value of $696,000. On December 31, 2021, Roberts had buildings with a book value of $570,000 and a fair value of $648,000. On that date, Hanson had buildings with a book value of $1,878,000 and a fair value of $2,160,000. Required: What amount should be shown for buildings on the consolidated balance sheet dated December 31, 2021?

95) Carnes Co. decided to use the partial equity method to account for its investment in Domino Corp. An unamortized trademark associated with the acquisition was $30,000, and Carnes decided to amortize the trademark over ten years. For 2021, Carnes' Equity in Subsidiary Earnings was $78,000. Required: What balance would have been in the Equity in Subsidiary Earnings account if Carnes had used the equity method?

96) Fesler Inc. acquired all of the outstanding common stock of Pickett Company on January 1, 2020. Annual amortization of $22,000 resulted from this transaction. On the date of the acquisition, Fesler reported retained earnings of $520,000 while Pickett reported a $240,000 balance for retained earnings. Fesler reported net income of $100,000 in 2020 and $68,000 in 2021, and paid dividends of $25,000 in dividends each year. Pickett reported net income of $24,000 in 2020 and $36,000 in 2021, and paid dividends of $10,000 in dividends each year. If the parent’s net income reflected use of the equity method, what were the consolidated retained earnings on December 31, 2021?

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97) Fesler Inc. acquired all of the outstanding common stock of Pickett Company on January 1, 2020. Annual amortization of $22,000 resulted from this transaction. On the date of the acquisition, Fesler reported retained earnings of $520,000 while Pickett reported a $240,000 balance for retained earnings. Fesler reported net income of $100,000 in 2020 and $68,000 in 2021, and paid dividends of $25,000 in dividends each year. Pickett reported net income of $24,000 in 2020 and $36,000 in 2021, and paid dividends of $10,000 in dividends each year. If the parent’s net income reflected use of the partial equity method, what were the consolidated retained earnings on December 31, 2021?

98) Fesler Inc. acquired all of the outstanding common stock of Pickett Company on January 1, 2020. Annual amortization of $22,000 resulted from this transaction. On the date of the acquisition, Fesler reported retained earnings of $520,000 while Pickett reported a $240,000 balance for retained earnings. Fesler reported net income of $100,000 in 2020 and $68,000 in 2021, and paid dividends of $25,000 in dividends each year. Pickett reported net income of $24,000 in 2020 and $36,000 in 2021, and paid dividends of $10,000 in dividends each year. If the parent’s net income reflected use of the initial value method, what were the consolidated retained earnings on December 31, 2021?

99) Jaynes Inc. acquired all of Aaron Co.'s common stock on January 1, 2020, by issuing 11,000 shares of $1 par value common stock. Jaynes' shares had a $17 per share fair value. On that date, Aaron reported a net book value of $120,000. However, its equipment (with a five-year remaining life) was undervalued by $6,000 in the company's accounting records. Any excess of consideration transferred over fair value of assets and liabilities acquired is assigned to an unrecorded patent to be amortized over ten years. The following figures came from the individual accounting records of these two companies as of December 31, 2020: Revenues Expenses

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Jaynes Inc.

Aaron Co.

720,000 528,000

276,000 144,000

Investment income Dividends paid

Not given

—

100,000

60,000

The following figures came from the individual accounting records of these two companies as of December 31, 2021: Revenues

Jaynes Inc.

Aaron Co.

840,000

Expenses

336,000

552,000

180,000

Not given

—

Dividends paid

110,000

50,000

Equipment

600,000

360,000

Retained earnings, 12/31/21 balance

960,000

216,000

Investment income

What balance would Jaynes' Investment in Aaron Co. account have shown on December 31, 2021, when the equity method was applied for this acquisition?

100) Jaynes Inc. acquired all of Aaron Co.'s common stock on January 1, 2020, by issuing 11,000 shares of $1 par value common stock. Jaynes' shares had a $17 per share fair value. On that date, Aaron reported a net book value of $120,000. However, its equipment (with a five-year remaining life) was undervalued by $6,000 in the company's accounting records. Any excess of consideration transferred over fair value of assets and liabilities acquired is assigned to an unrecorded patent to be amortized over ten years. The following figures came from the individual accounting records of these two companies as of December 31, 2020: Revenues Expenses

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Jaynes Inc.

Aaron Co.

720,000 528,000

276,000 144,000

Investment income Dividends paid

Not given

—

100,000

60,000

The following figures came from the individual accounting records of these two companies as of December 31, 2021: Revenues

Jaynes Inc.

Aaron Co.

840,000

Expenses

336,000

552,000

180,000

Not given

—

Dividends paid

110,000

50,000

Equipment

600,000

360,000

Retained earnings, 12/31/21 balance

960,000

216,000

Investment income

What was consolidated net income for the year ended December 31, 2021?

101) Jaynes Inc. acquired all of Aaron Co.'s common stock on January 1, 2020, by issuing 11,000 shares of $1 par value common stock. Jaynes' shares had a $17 per share fair value. On that date, Aaron reported a net book value of $120,000. However, its equipment (with a five-year remaining life) was undervalued by $6,000 in the company's accounting records. Any excess of consideration transferred over fair value of assets and liabilities acquired is assigned to an unrecorded patent to be amortized over ten years. The following figures came from the individual accounting records of these two companies as of December 31, 2020: Revenues Expenses

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Jaynes Inc.

Aaron Co.

720,000 528,000

276,000 144,000

Investment income Dividends paid

Not given

—

100,000

60,000

The following figures came from the individual accounting records of these two companies as of December 31, 2021: Revenues

Jaynes Inc.

Aaron Co.

840,000

Expenses

336,000

552,000

180,000

Not given

—

Dividends paid

110,000

50,000

Equipment

600,000

360,000

Retained earnings, 12/31/21 balance

960,000

216,000

Investment income

What was consolidated equipment as of December 31, 2021?

102) Jaynes Inc. acquired all of Aaron Co.'s common stock on January 1, 2020, by issuing 11,000 shares of $1 par value common stock. Jaynes' shares had a $17 per share fair value. On that date, Aaron reported a net book value of $120,000. However, its equipment (with a five-year remaining life) was undervalued by $6,000 in the company's accounting records. Any excess of consideration transferred over fair value of assets and liabilities acquired is assigned to an unrecorded patent to be amortized over ten years. The following figures came from the individual accounting records of these two companies as of December 31, 2020: Revenues Expenses

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Jaynes Inc.

Aaron Co.

720,000 528,000

276,000 144,000

Investment income Dividends paid

Not given

—

100,000

60,000

The following figures came from the individual accounting records of these two companies as of December 31, 2021: Revenues Expenses

Jaynes Inc.

Aaron Co.

840,000

336,000

552,000

180,000

Not given

—

Dividends paid

110,000

50,000

Equipment

600,000

360,000

Retained earnings, 12/31/21 balance

960,000

216,000

Investment income

What was the total for consolidated patents as of December 31, 2021?

103) Utah Inc. acquired all of the outstanding common stock of Trimmer Corp. on January 1, 2019. At that date, Trimmer owned only three assets and had no liabilities:

Land

Book Value 36,000

Fair Value 48,000

Equipment (5-year life)

84,000

60,000

Building (10-year life)

120,000

180,000

If Utah paid $300,000 in cash for Trimmer, what allocation and amortization should have been assigned to the subsidiary's Building account and its Equipment account in a December 31, 2021 consolidation? Version 1

104) Matthews Co. acquired all of the common stock of Jackson Co. on January 1, 2020. As of that date, Jackson had the following trial balance: Debit Accounts payable Accounts receivable

Credit $

60,000

50,000

Additional paid-in capital

60,000

Buildings (net) (20-year life)

140,000

Cash and short-term investments

70,000

Common stock

300,000

Equipment (net) (8-year life)

240,000

Intangible assets (indefinite life)

110,000

Land

90,000

Long-term liabilities (mature 12/31/22)

180,000

Retained earnings, 1/1/20

120,000

Supplies Totals

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20,000 $

720,000

During 2020, Jackson reported net income of $96,000 while paying dividends of $12,000. During 2021, Jackson reported net income of $132,000 while paying dividends of $36,000. Assume that Matthews Co. acquired the common stock of Jackson Co. for $588,000 in cash. As of January 1, 2020, Jackson's land had a fair value of $102,000, its buildings were valued at $188,000, and its equipment was appraised at $216,000. Any excess of consideration transferred over fair value of assets and liabilities acquired is due to an unamortized patent to be amortized over 10 years. Matthews decided to use the equity method for this investment. Required: (A.) Prepare consolidation worksheet entries for December 31, 2020. (B.) Prepare consolidation worksheet entries for December 31, 2021.

105) On January 1, 2019, Rand Corp. issued shares of its common stock to acquire all of the outstanding common stock of Spaulding Inc. Spaulding's book value was only $140,000 at the time, but Rand issued 12,000 shares having a par value of $1 per share and a fair value of $20 per share. Rand was willing to convey these shares because it felt that buildings (ten-year life) were undervalued on Spaulding's records by $60,000 while equipment (five-year life) was undervalued by $25,000. Any consideration transferred over fair value of identified net assets acquired is assigned to goodwill. Following are the individual financial records for these two companies for the year ended December 31, 2022.

Revenues

Expenses

Rand Corp. 372,000

Spaulding Inc. $ 108,000

(264,000 )

Equity in subsidiary earnings

(72,000 )

25,000

Net income

133,000

Retained earnings, January 1, 2022

765,000

$ 102,000

Net income (above)

133,000

36,000

Dividends paid

(84,000 )

(24,000 )

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36,000

Retained earnings, December 31, 2022

814,000

$ 114,000

Current assets

150,000

22,000

Investment in Spaulding Inc.

242,000

Buildings (net)

525,000

85,000

Equipment (net)

389,250

129,000

Total assets

$ 1,306,250

$ 236,000

Liabilities

82,250

50,000

Common stock

360,000

72,000

Additional paid-in capital

50,000

Retained earnings, December 31, 2022 (above)

814,000

114,000

$ 1,306,250

$ 236,000

Total liabilities and stockholders’ equity

Required: Prepare a consolidation worksheet for this business combination.

106) Pritchett Company recently acquired three businesses, recognizing goodwill in each acquisition. Destin has allocated its acquired goodwill to its three reporting units: Apple, Banana, and Carrot. Pritchett provides the following information in performing the 2021 annual review for impairment:

Apple

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Carrying Value

Fair Value

$ 300,000

$ 320,000

Trademark

20,000

10,000

Licenses

85,000

90,000

Tangible assets

Valuation of Reporting Unit (including Goodwill) $ 525,000

Banana

Carrot

Liabilities

20,000

Goodwill

130,000

$ 250,000

$ 400,000

Trademark

25,000

50,000

Licenses

18,000

Goodwill

140,000

$ 120,000

Tangible assets

Tangible assets Unpatented technology Customer list

50,000

35,000

45,000

Goodwill

75,000

450,000

215,000

Which of Pritchett’s reporting units require both steps to test for goodwill impairment?

107) Pritchett Company recently acquired three businesses, recognizing goodwill in each acquisition. Destin has allocated its acquired goodwill to its three reporting units: Apple, Banana, and Carrot. Pritchett provides the following information in performing the 2021 annual review for impairment:

Apple

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Carrying Value

Fair Value

$ 300,000

$ 320,000

Trademark

20,000

10,000

Licenses

85,000

90,000

Liabilities

20,000

Goodwill

130,000

Tangible assets

Valuation of Reporting Unit (including Goodwill) $ 525,000

Banana

Carrot

Tangible assets

$ 250,000

$ 400,000

Trademark

25,000

50,000

Licenses

18,000

Goodwill

140,000

$ 120,000

Tangible assets Unpatented technology Customer list

50,000

35,000

45,000

Goodwill

75,000

450,000

215,000

How much goodwill impairment should Pritchett report for 2021?

108) On 1/1/19, Sey Mold Corporation acquired 100% of DotDot.Com for $2,000,000 cash. On the date of acquisition, DotDot's net book value was $900,000. DotDot's assets included land that was undervalued by $300,000, a building that was undervalued by $400,000, and equipment that was overvalued by $50,000. The building had a remaining useful life of 8 years and the equipment had a remaining useful life of 4 years. Any excess fair value over consideration transferred is allocated to an undervalued patent and is amortized over 5 years. Determine the amortization expense related to the combination at the year-end date of 12/31/19.

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109) On 1/1/19, Sey Mold Corporation acquired 100% of DotDot.Com for $2,000,000 cash. On the date of acquisition, DotDot's net book value was $900,000. DotDot's assets included land that was undervalued by $300,000, a building that was undervalued by $400,000, and equipment that was overvalued by $50,000. The building had a remaining useful life of 8 years and the equipment had a remaining useful life of 4 years. Any excess fair value over consideration transferred is allocated to an undervalued patent and is amortized over 5 years. Determine the amortization expense related to the consolidation at the year-end date of 12/31/27.

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110) For each of the following situations, select the best answer that applies to consolidating financial information subsequent to the acquisition date: (A) Initial value method. (B) Partial equity method. (C) Equity method. (D) Initial value method and partial equity method but not equity method. (E) Partial equity method and equity method but not initial value method. (F) Initial value method, partial equity method, and equity method. 1. Method(s) available to the parent for internal record-keeping. 2. Easiest internal record-keeping method to apply. 3. Income of the subsidiary is recorded by the parent when earned. 4. Designed to create a parallel between the parent’s investment accounts and changes in the underlying equity of the acquired company. 5. For years subsequent to acquisition, requires the *C entry. 6. Uses the cash basis for income recognition. 7. Investment account remains at initially recorded amount. 8. Dividends received by the parent from the subsidiary reduce the parent’s investment account. 9. Often referred to in accounting as a single-line consolidation. 10. Increases the investment account for subsidiary earnings, but does not decrease the subsidiary account for equity adjustments such as amortizations.

111)

How is the goodwill impairment process simplified for private companies?

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ESSAY. Write your answer in the space provided or on a separate sheet of paper. 112) For an acquisition when the subsidiary retains its incorporation, which method of internal recordkeeping is the easiest for the parent to use?

113) For an acquisition when the subsidiary retains its incorporation, which method of internal recordkeeping gives the most accurate portrayal of the accounting results for the entire business combination?

114) For an acquisition when the subsidiary maintains its incorporation, under the partial equity method, what adjustments are made to the balance of the investment account?

115) From which methods can a parent choose for its internal recordkeeping related to the operations of a subsidiary?

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116) For recognized intangible assets that are considered to possess indefinite lives, what is the accounting treatment for purposes of income recognition?

117) What is the partial equity method? How does it differ from the equity method? What are its advantages and disadvantages compared to the equity method?

118) What should an entity evaluate when making an initial impairment assessment of an intangible asset (other than goodwill)?

119)

What is the basic objective of all consolidations?

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120) How does the parent’s choice of investment accounting method impact consolidated figures reported by the combined entity?

121) Yules Co. acquired Noel Co. and applied the acquisition method. Yules decided to use the partial equity method to account for the investment. The current balance in the investment account is $416,000. Describe in words how this balance was derived.

122) Paperless Co. acquired Sheetless Co. and in effecting this business combination, there was a cash-flow performance contingency to be paid in cash, and a market-price performance contingency to be paid in additional shares of stock. In what accounts and in what section(s) of a consolidated balance sheet are these contingent consideration items shown?

123) Avery Company acquires Billings Company in a combination accounted for as an acquisition and adopts the equity method to account for Investment in Billings. At the end of four years, the Investment in Billings account on Avery’s books is $198,984. What items constitute this balance?

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124) Dutch Co. has loaned $90,000 to its subsidiary, Hans Corp., which retains separate incorporation. How would this loan be treated on a consolidated balance sheet?

125) A business combination results in $90,000 of goodwill. Several years later a worksheet is being produced to consolidate the two companies. Describe in words at what amount goodwill will be reported at this date.

126) Compare the differences in accounting treatment for goodwill between U.S. GAAP and IFRS.

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Answer Key Test name: Chap 03_8e 1) C 2) E 3) C 4) D 5) E 6) B 7) A 8) C 9) E 10) A $276,000 + $50,000 + $57,000 − $12,000 − $21,000 − $12,000 − $21,000 = $317,000 11) C $276,000 + $50,000 + $57,000 − $12,000 − $12,000 = $359,000 12) A $276,000 – The investment balance remains at the initial fair value assigned at acquisition date 13) D 14) C Excess Amortization = [($370,000 − $240,000) ÷ 10] = $13,000 Excess of Sub’s FV = $130,000 + Parent’s BV $270,000 + Sub’s BV $180,000 − Excess Amortization ($13,000 × 3yrs) = $541,000 15) B Building = FV $276,000 − BV $250,000 = $26,000 ÷ 20 years = $1,300 Equipment = FV $518,000 − BV $540,000 = ($22,000) ÷ 10 years = ($2,200) ($2,200) + $1,300 = ($900)

16) D Version 1

Excess Amortization: Building = FV $276,000 − BV $250,000 = $26,000 ÷ 20 years = $1,300 Equipment = FV $518,000 − BV $540,000 = ($22,000) ÷ 10 years = ($2,200) ($2,200) + $1,300 = ($900) $134,000 + $900 = $134,900

17) D Excess Amortization: Building = FV $276,000 − BV $250,000 = $26,000 ÷ 20 years = $1,300 Equipment = FV $518,000 − BV $540,000 = ($22,000) ÷ 10 years = ($2,200) ($2,200) + $1,300 = ($900) $1,160,000 + ($134,000 + $900) − $51,000 = $1,243,900

18) D Excess Amortization: Building = FV $276,000 − BV $250,000 = $26,000 ÷ 20 years = $1,300 Equipment = FV $518,000 − BV $540,000 = ($22,000) ÷ 10 years = ($2,200) ($2,200) + $1,300 = ($900) $134,000 + $900 = $134,900

19) D Excess Amortization: Building = FV $276,000 − BV $250,000 = $26,000 ÷ 20 years = $1,300 Equipment = FV $518,000 − BV $540,000 = ($22,000) ÷ 10 years = ($2,200) ($2,200) + $1,300 = ($900) Equity earnings in subsidiary: $134,000 + $900 = $134,900 Net income of Barber ($468,000) + Equity earnings in subsidiary) ($134,900) = $602,900

20) B Initial Value Method = $200,000 Recognized from Sub Income (only dividend income); Equity Method = $375,000 − $8,000 = $367,000 (Sub income less amortizations). $367,000 − $200,000 = $167,000 difference in equity method and initial value 21) A Equity Method = $375,000 − $8,000 = $367,000 Equity income Partial Equity Method = $375,000 − $0 (amortizations not recorded under partial equity method); $367,000 − $375,000 = $8,000 difference 22) A $0; (Equity income is eliminated from the investment account) 23) D Version 1

$950,000 Parent’s Dividends Only 24) D Parent Income $3,310,000 + Sub Income $512,000 − Amortization Allocations $28,000 = Consolidated Net Income $3,794,000

25) C Excess amortizations: Equipment ($48,000 ÷ 10) = $4,800 Customer list ($71,000 ÷ 5) = $14,200 Total: $4,800 + $14,200 = $19,000 Parent $1,120,000 − $500,000 = $620,000; Sub $860,000 − $600,000 = $260,000; $620,000 + $260,000 = $880,000 − $19,000 = $861,000

26) A Initial Investment $422,000 2019 Entries: $185,000 − $75,000 − $19,000 = $91,000 2020 Entries: $226,000 − $75,000 − $19,000 = $132,000 2021 Entries: $260,000 − $80,000 − $19,000 = $161,000 $422,000 + $91,000 + $132,000 + $161,000 = $806,000 27) B Land ($0 excess amortization) + Building [($460,000 − $250,000) ÷ 10 = $21,000 excess amortization] + Equipment [($280,000 − $340,000) ÷ 5 = $12,000 reduction of amortization expense] = ($21,000 − $12,000) = $9,000 excess amortization 28) D 29) D 30) D 31) D 32) C 33) B 34) A 35) A 36) D 37) B 38) D Version 1

39) C 40) E 41) C 42) A Acquisition Price $4,100 − Total Equity at Acquisition $3,200 = $900 Excess 43) C Acquisition Price $4,100 − Total Equity at Acquisition $3,200 = $900 Excess Excess $900 + $400 buildings − $350 equipment − $400 Land − $150 liabilities = $400 Excess Unidentified (Goodwill) 44) E Fair Value at Acquisition = $900 45) B FV $1,200 + Excess Amortization ($400 ÷ 5) $80 = $1,280 46) C FV $1,350 − Excess Amortization ($350 ÷ 2) $175 = $1,175 47) C FV $1,750 + Excess Amortization ($150 ÷ 3) $50 = $1,800 48) C FV $1,200 + Excess Amortization ($400 ÷ 5) $80 × 2 = $1,360 49) B FV $1,350 − Excess Amortization ($350 ÷ 2) $175 × 2 = $1,000 50) C FV $1,300 51) C FV $1,750 + Excess Amortization ($150 ÷ 3) $50 × 2 = $1,850 52) C 2021 Income $400 − Amortization $20 = $380 53) A Version 1

2021 Income = $400 54) D 2021 Dividends = $100 55) A Amortization is not recognized using the partial equity method. The journal entry to convert to full-accrual totals would include the amount of amortization.

56) C Income reported by Fiore ($400) − Dividend Income recorded under the initial value method ($100) − Amortization not recorded under the initial value method ($20) = $280.

57) E Common Stock (400 shares × $45) $18,000 + FV Liabilities Assumed $1,500 = $19,500 58) B Common Stock Fair Value $997,500 − Fair Value Asset Adjustment (Land $40,000 − Building $30,000 + Equipment $80,000 + Unrecorded Trademark $50,000) $140,000 = $857,500

59) A $900,000 + $500,000 = $1,400,000

60) D COGS ($360,000 + $200,000) + Depreciation ($140,000 + $40,000) + Other Exp ($100,000 + $60,000) − Excess FV Amortization (Bldg [$1,500] + Equip $8,000 + Trademark $3,125) = $909,625

61) B $750,000 + $280,000 − $30,000 = $1,000,000 + Amortization ($1,500 × 5) = $1,007,500

62) C $300,000 + $500,000 = $800,000 + $80,000 Undervalued − Amortization ($8,000 × 5) = $840,000

63) C $450,000 + $180,000 + $40,000 = $670,000

64) D $50,000 − Amortization ($3,125 × 5) = $34,375

65) A $450,000 (Parent Only)

66) B $75,000 (Parent Only)

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67) A Parent Beg RE: $1,350,000 + Consolidated Net Income $490,375 − Consolidated Dividends $195,000 = Consolidated RE $1,645,375 Consolidated Net Income = Consolidated Revenues − Consolidated Expenses = $1,400,000 − $909,625 = $490,375 Consolidated Revenues = $900,000 + $500,000 = $1,400,000 Consolidated Expenses = COGS ($360,000 + $200,000) + Depreciation ($140,000 + $40,000) + Other Exp ($100,000 + $60,000) − Excess FV Amortization (Bldg [$1,500] + Equip $8,000 + Trademark $3,125) = $909,625

68) B 69) D 70) C 71) B 72) B Excess amortization: ($120,000 − $90,000 = $30,000 ÷ 10 = $3,000 per year). 2021 Balance: Anderson BV $975,000 + Kenneth BV $105,000 + Fair value adjustment $30,000 − Amortization for 2020 and 2021 ($3,000 × 2 years) = $1,104,000 73) B Excess amortization: ($120,000 − $90,000 = $30,000 ÷ 10 = $3,000 per year). 2021 Balance: Anderson BV $975,000 + Kenneth BV $105,000 + Fair value adjustment $30,000 − Amortization for 2020 and 2021 ($3,000 × 2 years) = $1,104,000 74) B Excess amortization: ($120,000 − $90,000 = 30,000 ÷ 10 = $3,000 per year). 2021 Balance: Anderson BV $975,000 + Kenneth BV $105,000 + Fair value adjustment $30,000 − Amortization for 2020 and 2021 ($3,000 × 2 years) = $1,104,000 75) D Version 1

76) B Cash Payment $400,000 + Weighted Fair Value of Contingency $3,142 = $403,142 77) B 78) C Weighted Fair Value of Contingency = $3,142 79) D Cash Payment $20,000 + Stock $60,000 + Weighted Fair Value of Contingency ($3,461 cash + $2,884 stock) = $86,345. 80) C 81) C $20,000 ÷ $8.98 per share = 2,228 shares 82) E 83) B 84) B Fair Value at Acquisition ($300,000) − Amortization [($100,000 ÷ 20) × 3] = $285,000

85) B Fair Value at Acquisition ($300,000) − Amortization [($100,000 ÷ 20) × 3] = $285,000

86) D Fair Value at Acquisition ($75,000) + Amortization [($5,000 ÷ 10) × 3] = $76,500

87) E Fair Value Differential at Acquisition [$5,000] + Amortization [($5000 ÷ 10) × 3] = [$3,500] 88) E Fair Value at Acquisition = $300,000

89) E Sub Income $50,000 − Amortizations ([−$5,000] ÷ 10) − ($100,000 ÷ 20) = $45,500

90) E 91) B 92) E 93) Version 1

Investment in Cable Corp. − initial cost

540,000

Income accrual – 2020

54,000

Dividends collected – 2020

(24,000 )

Income accrual – 2021

86,000

Dividends collected – 2021

(24,000 )

Investment in Cable Corp., December 31, 2021

632,000

94) Building balance − Hanson Co.

1,878,000

Building balance − Roberts Co.

570,000

Original fair value allocation to Roberts’ buildings ($696,000 − 600,000) Amortization of allocation [($96,000 ÷ 20 years) × 2 years]

96,000

Buildings, consolidated balance

(9,600 ) $

2,534,400

95) Equity in Subsidiary Earnings for 2021 Amortization of trademark ($30,000 ÷ 10 years) Equity in Subsidiary Earnings balance at December 31, 2021

$ 78,000 3,000 $ 75,000

96) Version 1

Equity Method Fesler (parent) balance — 1/1/20

520,000

Fesler net income — 2020

100,000

Fesler dividends — 2020

(25,000 )

Fesler net income — 2021

68,000

Fesler dividends — 2021

(25,000 )

Consolidated retained earnings, December 31, 2021

638,000

520,000

97) Partial Equity Method Fesler (parent) balance — 1/1/21 Fesler income — 2020

100,000

Amortization — 2020

(22,000 )

Fesler dividends — 2020

(25,000 )

Fesler income — 2021

68,000

Amortization — 2021

(22,000 )

Fesler dividends — 2021

(25,000 )

Consolidated retained earnings, December 31, 2021

594,000

98) Initial value Method Fesler (parent) balance — 1/1/20 Fesler income — 2020

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520,000 100,000

Amortization — 2020

(22,000 )

Pickett income in excess of dividends paid — 2020 ($24,000 − $10,000) Fesler dividends — 2021

14,000 (25,000 )

Fesler income — 2021

68,000

Amortization — 2021

(22,000 )

Pickett income in excess of dividends paid — 2021 ($36,000 − $10,000) Fesler dividends — 2021

26,000

Consolidated retained earnings, December 31, 2021

(25,000 ) $

634,000

99) An allocation of the acquisition value (based on the fair value of the shares issued) must first be made. Life

Annual amortization

Acquisition value (11,000 shares × $ 187,000 17) Book value equivalency (120,000 ) Excess of fair value over book value Excess of fair value assigned to specific accounts based on fair value Equipment

Patent

67,000

6,000

5 years

61,000

10 years

Total

Original acquisition value

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6,100 $

1,200

7,300

187,000

2020 income accrual ($276,000 − $144,000) 2020 dividends paid by Aaron

132,000

2020 amortization (from above)

(7,300 )

2021 income accrual ($336,000 − $180,000) 2021 dividends paid by Aaron

156,000

2021 amortization

(7,300 )

Investment in Aaron Co. – December $ 31, 2021

350,400

(60,000 )

(50,000 )

100) Net income of Jaynes Inc. ($840,000 − $ 288,000 $552,000) Net income of Aaron Co. ($336,000 − $ 156,000 $180,000) Amortization expense (from schedule (7,300 ) below) Consolidated net income – 2021 $ 436,700 Excess of fair value assigned to specific accounts based on fair value Equipment Patent Total

6,000

5 years

$ 1,200

61,000

10 years

6,100 $ 7,300

101)

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Equipment balance − Jaynes Inc.

Equipment balance − Aaron Co.

600,000 360,000

Allocation based on fair value (from above)

6,000

Amortization for 2020 - 2021 ($1,200 × 2)

(2,400 )

Consolidated equipment – December 31, 2021

963,600

Allocation to patent based on acquisition price (from above) Amortization for 2020 - 2021 ($6,100 × 2)

61,000

Consolidated patent – December 31, 2021

102)

(12,200 ) 48,800

103) Since Utah paid more than the $288,000 fair value of Trimmer's net assets, all allocations are based on fair value with the excess $12,000 assigned to goodwill. Accounts Building

Fair Value Allocation $ 60,000

Equipment

(24,000 )

Life 10 years 5 years

Annual Amortization $ 6,000 (4,800 )

Building: Allocation – January 1, 2019 Amortization during past years ($6,000 × 2 years) Amortization for current year

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60,000 (12,000 ) (6,000 )

Allocation – December 31, 2021

42,000

Allocation – January 1, 2019 (valuation reduction) Amortization during past years ($4,800 × 2 years) Amortization for current year

(24,000 )

Allocation – December 31, 2021

Equipment:

9,600 4,800 (9,600 )

104)

Consideration transferred for Jackson Co. Book value

$ 588,000

Excess of consideration transferred over book value Excess consideration transferred, assigned to specific accounts based on fair values Land

$ 108,000

Buildings Equipment Patent (remaining excess) Total

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(480,000 )

Life

Annual Allocation amortization

20 years 8 years

12,000

2,400

48,000

$ (3,000 )

(24,000 )

10 years

7,200 $

36,000 $

72,000

6,600

A. Consolidated Worksheet Entries-2020: Entry S Common Stock-Jackson Co.

300,000

Additional Paid-In Capital

60,000

Retained Earnings, 1/1/20

120,000

Investment in Jackson Co.

480,000

Entry A Land

12,000

Buildings

48,000

Patent

72,000

Equipment

24,000

Investment in Jackson Co.

108,000

Entry I Investment Income

89,400

Investment in Jackson Co.

89,400

Entry D Investment in Jackson Co. Dividends Paid

12,000 12,000

Entry E

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Expense

6,600

Equipment

3,000

Building

2,400

Patent

7,200

B. Consolidated Worksheet Entries-2021: Entry S Common Stock-Jackson Co.

300,000

Additional Paid-In Capital

60,000

Retained Earnings, 1/1/21

204,000

Investment in Jackson Co.

564,000

Entry A Land

12,000

Buildings

45,600

Patent

64,800

Equipment

21,000

Investment in Jackson Co.

101,400

Entry I Investment Income Investment in Jackson Co.

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125,400 125,400

Entry D Investment in Jackson Co.

36,000

Dividends Paid

36,000

Entry E Expense

6,600

Equipment

3,000

Building

2,400

Patent

7,200

105) Consolidation Worksheet for Rand and Spaulding: Accounts

CONSOLIDATION WORKSHEET For the Year Ended 12/31/2022 Rand Corp. Spauld Consolidation ing Entries Inc. DR CR

Revenues

372,000

Expenses

(264,00 ) 0 25,000

Equity in sub income

108, 000 (72, ) 000

Net income

133,000

36,0 00

R/E, 1/1/22

765,000

Net income

133,000

Dividends

(84,000 )

102, 000 36,0 00 (24, ) 000

R/E, 12/31/22

814,000

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114, 000

Consolidat ed Balances 480,000

() 11,000 E () 25,000 I

(347,00 ) 0

133,000 () 102,00 S 0

765,000 133,000 ( ) 24,000 D

(84,000 ) 814,000

Current assets

150,000

Investment in Spaulding

242,000

172,000 22,0 00 () 24,000 ( ) 174,00 D S 0

Building (net) Equipment (net) Goodwill

525,000

Total assets

1,306,2 50

236, 000

1,356,2 50

Liabilities

82,250

132,250

Common Stock Additional paid-in capital R/E, 12/31/22

360,000

50,0 00 72,0 00

814,000

114, 000

Total liabilities & Stockholder s’ Equity

1,306,2 50

236, 000

389,250

85,0 00 129, 000

( ) 67,000 A ( ) 25,000 I () 42,000 ( ) 6,000 A E () 10,000 ( ) 5,000 A E () 15,000 A

() 72,000 S

646,000 523,250 15,000

360,000

50,000

814,000 301,00 0

301,00 0

1,356,2 50

Considerati $240,00 on 0 transferred by Rand Corp. (12,000 shares ×

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$20 FV per share) Book value of Spaulding Inc. (given) Excess of fair value over book value

140,000

$100,00 0

Excess Amortization Schedule: Account Buildings Equipment Goodwill Totals

Allocation $60,000 25,000 15,000 $100,000

Life 10 years 5 years Indefinite

Annual Amortization $6,000 5,000 -0$11,000

106) Goodwill Impairment Test—Step 1 For the first step, the fair value of the reporting unit is compared to its carrying value. If the fair value (including goodwill) exceeds the carrying value, the goodwill of the entity is not considered impaired and Step 2 is not required. Apple

Total Fair Carrying Value (w/GW) Value (w/GW) $ 525,000 > $515,000

Potential Goodwill Impairment? No

Banana

450,000

433,000

Carrot

215,000

230,000

Yes

Therefore, the Carrot reporting unit requires both steps to test for goodwill impairment. 107) Goodwill Impairment Test—Step 2 (Carrot only) Version 1

Carrot—total fair value

$ 215,000

Fair values of identifiable net assets Tangible assets

$ 120,000

Unpatented technology

50,000

Customer list

45,000

215,000

Implied value of goodwill

Carrying value of goodwill

75,000

Total Impairment loss

$ 75,000

108) Amount Fair value consideration transferred in Sey Mold’s acquisition BV of DotDot.com at 1/1/19 Fair value in excess of BV, to be allocated: Land

Life

$ 2,000,000

(900,000 ) $ 1,100,000 (300,000 )

Building

(400,000 )

Equipment

50,000

450,000

Patent Total Amortization

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Amortizations

50,000 (12,500 )

90,000

$ 127,500

109) By 2027, all of the fair value adjustments and the patent will have been fully amortized. The amortization expense for 2027 related to the combination will be $0. 110) (1) F; (2) A; (3) E; (4) C; (5) D; (6) A; (7) A; (8) E; (9) C; (10) B 111) The goodwill impairment process is simplified in two ways for private companies. First, if there is a triggering event, the unamortized balance of goodwill is required to be assessed for impairment. A triggering event is defined as any event or change in circumstances that may cause the fair value of the acquired entity, or reporting unit, to decline to an amount less than its carrying amount. However, there are no requirements to re-measure each of the entity’s (or reporting unit’s) separate assets and liabilities at current fair values in order to calculate a residual implied value for goodwill. This rule was adopted in order to save costs and streamline the process. Goodwill impairment loss is calculated as the amount of the excess (if any) of the fair value of the acquired entity over its total carrying amount. Impairment loss is limited to the remaining unamortized balance in the goodwill account. Second, private companies may choose to designate and test goodwill for impairment at either the entity level, or the reporting unit level. This election must be made at the time the alternative goodwill method is adopted by the entity. 112) The initial value method is the easiest to use. 113) The equity method gives the most accurate portrayal of the results for the combined entity. 114) The balance of the investment account is increased for the subsidiary's net income. It is decreased for subsidiary dividends and losses. The amortization of excess fair value allocations does not affect the account balance. 115) The parent can choose from among the initial value method, equity method, and partial equity method. Version 1

116) Assets that are recognized as intangible assets and that are considered to have indefinite lives are assessed for impairment on an annual basis, as opposed to being amortized over their useful lives. 117) The partial equity method is a compromise between the initial value method and the equity method. It provides some of the advantages of the equity method but is easier to use. Under the partial equity method, the balance in the investment account is increased by the accrual of the subsidiary's income and decreased when the subsidiary pays dividends. The advantage is that the partial equity method is simpler than the equity method because amortization of excess fair value allocations is not recorded in the parent’s internal records. The disadvantage is that the full accrual of the subsidiary’s operating results are not reflected in the internal records of the parent and amortizations would then need to be reflected in the consolidation process. Not having the adjustment in the internal records prior to consolidation requires allocating the excess portion of the acquisition-date fair values and calculating amortizations on these allocations at the time of consolidation. In years subsequent to the first year after the date of acquisition, establishment of an appropriate beginning retained earnings figure becomes a significant goal of the consolidation. To convert the parent’s beginning of the year retained earnings balance to a full-accrual basis, the prior years’ amortizations are entered on the consolidation worksheet, so that all of the subsidiary’s operational results for the prior periods are included in the consolidation.

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118) An entity may perform qualitative assessments for its indefinitelived intangible assets. If an entity elects to perform a qualitative assessment, it must examine relevant events and circumstances to determine whether it is more likely than not that the asset is impaired. Factors to consider include costs of using the intangible asset, legal and regulatory factors, as well as industry and market considerations. If the assessment indicates impairment is not likely, no further tests are required. 119) The basic objective of all consolidations is to combine asset, liability, revenue, expense, and stockholders' equity accounts in a manner consistent with the concepts of the acquisition method to reflect substance over form in financial reporting for consolidations. When a parent has control (substance) over a subsidiary and separate incorporation is maintained (form), the consolidated financial statements will reflect results as if the multiple entities were one entity. 120) The parent’s choice of investment accounting method will affect the periodic consolidation process but will not impact the figures to be reported by the combined entity. Regardless of the amount, the parent’s investment account is eliminated on the worksheet so that the subsidiary’s actual assets and liabilities can be consolidated. Likewise, the income figure accrued by the parent is removed each period so that the subsidiary’s revenues and expenses can be included when creating an income statement for the combined business entity. 121) The initial balance in the investment account would be the acquisition value implied by the fair value of consideration transferred. This would not include consideration paid for costs to effect the combination. After the acquisition, the balance in the account is increased by the parent's accrual of the subsidiary's income and decreased by the dividends paid by the subsidiary.

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122) A cash-flow performance contingency is shown as a contingent performance obligation, which is in the liability section of the consolidated balance sheet. A market-price performance contingency to be paid in stock is shown as additional paid-in capital – contingent equity outstanding, which is in the stockholders’ equity section of the consolidated balance sheet. 123) Since the equity method has been applied by Avery, the $198,984 is composed of four items: (a.) The acquisition value of consideration transferred by the parent; (b.) The annual accruals made by Avery to recognize income as it is earned by the subsidiary; (c.) The reductions that are created by the subsidiary’s payment of dividends; (d.) The periodic amortization recognized by Avery in connection with the excess fair value allocations identified with its acquisition. 124) The loan represents an intra-entity payable for Hans, and a receivable for Dutch. Each receivable and payable would be eliminated in preparing a consolidated balance sheet. 125) The $90,000 attributed to goodwill is reported at its original amount unless a portion of goodwill is impaired or a unit of the business where goodwill resides is sold.

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100

126) Both U.S. GAAP and IFRS require goodwill recognition in business combinations in which the fair value of the consideration paid is more than the net fair value of the assets and liabilities assumed. Following acquisition, an assessment for goodwill impairment is required at least annually under both sets of standards. If there are indicators that reflect a possible impairment, the assessment is required to be performed more often. Both standards provide that once goodwill impairments are recognized, they will no longer be recoverable. There are differences, however, with respect to the way goodwill impairment is tested for and recognized. Specifically, goodwill allocation, impairment testing, and the determination of impairment loss are different under U.S. GAAP and IFRS.

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101

CHAPTER 4 MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) For business combinations involving less than 100 percent ownership, the acquirer recognizes and measures all of the following at the acquisition date except: A) Identifiable assets acquired, at fair value. B) Liabilities assumed, at book value. C) Non-controlling interest, at fair value. D) Goodwill, or a gain from bargain purchase. E) Intangible assets acquired, at fair value.

2) When Valley Co. acquired 80% of the common stock of Coleman Corp., Coleman owned land with a book value of $75,000 and a fair value of $125,000. What amount should have been reported for the land in a consolidated balance sheet at the acquisition date? A) $40,000. B) $50,000. C) $75,000. D) $100,000. E) $125,000.

3) When Valley Co. acquired 80% of the common stock of Coleman Corp., Coleman owned land with a book value of $75,000 and a fair value of $125,000. What is the total amount of excess land allocation at the acquisition date? A) $0. B) $40,000. C) $50,000. D) $60,000. E) $75,000.

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4) When Valley Co. acquired 80% of the common stock of Coleman Corp., Coleman owned land with a book value of $75,000 and a fair value of $125,000. What is the amount of excess land allocation attributed to the controlling interest at the acquisition date? A) $0. B) $12,500. C) $40,000. D) $50,000. E) $60,000.

5) When Valley Co. acquired 80% of the common stock of Coleman Corp., Coleman owned land with a book value of $75,000 and a fair value of $125,000. What is the amount of excess land allocation attributed to the noncontrolling interest at the acquisition date? A) $0. B) $10,000. C) $15,000. D) $40,000. E) $50,000.

6) Which of the following methods is not used to value a noncontrolling interest under circumstances where a control premium is applied to determine the appropriate value for such interest? A) Valuation models based on subsidiary discounted cash flows. B) Valuation models based on subsidiary residual income projections. C) Comparison with comparable investments. D) The application of a safe harbor discount rate. E) Fair value based on market trades.

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7) Dodd Co. acquired 75% of the common stock of Wallace Corp. for $1,800,000. The fair value of Wallace’s net assets was $2,100,000, and the book value was $1,900,000. The noncontrolling interest shares of Wallace Corp. are not actively traded. What is the total amount of goodwill recognized at the date of acquisition? A) $0. B) $100,000. C) $200,000. D) $300,000. E) $700,000.

8) Dodd Co. acquired 75% of the common stock of Wallace Corp. for $1,800,000. The fair value of Wallace’s net assets was $2,100,000, and the book value was $1,900,000. The noncontrolling interest shares of Wallace Corp. are not actively traded. What amount of goodwill should be attributed to Dodd at the date of acquisition? A) $0. B) $75,000. C) $150,000. D) $225,000. E) $300,000.

9) Dodd Co. acquired 75% of the common stock of Wallace Corp. for $1,800,000. The fair value of Wallace’s net assets was $2,100,000, and the book value was $1,900,000. The noncontrolling interest shares of Wallace Corp. are not actively traded. What amount of goodwill should be attributed to the noncontrolling interest at the date of acquisition? A) $0. B) $25,000. C) $50,000. D) $75,000. E) $175,000.

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10) Dodd Co. acquired 75% of the common stock of Wallace Corp. for $1,800,000. The fair value of Wallace’s net assets was $2,100,000, and the book value was $1,900,000. The noncontrolling interest shares of Wallace Corp. are not actively traded. What is the dollar amount of noncontrolling interest that should appear in a consolidated balance sheet prepared at the date of acquisition? A) $75,000. B) $450,000. C) $475,000. D) $525,000. E) $600,000.

11) Dodd Co. acquired 75% of the common stock of Wallace Corp. for $1,800,000. The fair value of Wallace’s net assets was $2,100,000, and the book value was $1,900,000. The noncontrolling interest shares of Wallace Corp. are not actively traded. What is the dollar amount of Wallace Corp.'s net assets that would be represented in a consolidated balance sheet prepared at the date of acquisition? A) $1,575,000. B) $1,800,000. C) $1,900,000. D) $2,100,000. E) $2,400,000.

12) Dodd Co. acquired 75% of the common stock of Wallace Corp. for $1,800,000. The fair value of Wallace’s net assets was $2,100,000, and the book value was $1,900,000. The noncontrolling interest shares of Wallace Corp. are not actively traded. What is the dollar amount of fair value over book value differences for identifiable net assets attributed to Dodd at the date of acquisition? A) $0. B) $150,000. C) $200,000. D) $375,000. E) $500,000.

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13) Renz Co. acquired 80% of the voting common stock of Sogers Corp. on January 1, 2022. During 2022, Sogers had revenues of $2,700,000 and expenses of $2,100,000. The amortization of fair value allocations totaled $65,000 in 2022. Not including its investment in Sogers, Renz Co. had its own revenues of $4,800,000 and expenses of $3,600,000 for the year 2022. The noncontrolling interest's share of the earnings of Sogers Corp. for 2022 is calculated to be A) $0. B) $107,000. C) $120,000. D) $133,000. E) $240,000.

14) Renz Co. acquired 80% of the voting common stock of Sogers Corp. on January 1, 2022. During 2022, Sogers had revenues of $2,700,000 and expenses of $2,100,000. The amortization of fair value allocations totaled $65,000 in 2022. Not including its investment in Sogers, Renz Co. had its own revenues of $4,800,000 and expenses of $3,600,000 for the year 2022. What amount would Renz Co. report as consolidated net income for 2022? A) $600,000. B) $1,200,000. C) $1,735,000. D) $1,800,000. E) $1,865,000.

15) Renz Co. acquired 80% of the voting common stock of Sogers Corp. on January 1, 2022. During 2022, Sogers had revenues of $2,700,000 and expenses of $2,100,000. The amortization of fair value allocations totaled $65,000 in 2022. Not including its investment in Sogers, Renz Co. had its own revenues of $4,800,000 and expenses of $3,600,000 for the year 2022. What amount of consolidated net income for 2022 should be allocated to Renz’s controlling interest in Sogers?

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A) $1,200,000 B) $1,388,000 C) $1,440,000 D) $1,492,000 E) $1,628,000

16) LaFevor Co. acquired 70% of the common stock of Dean Corp. on August 1, 2022. For 2022, Dean reported revenues of $960,000 and expenses of $780,000, all reflected evenly throughout the year. The annual amount of amortization related to this acquisition was $21,000. In consolidation, the total amount of expenses related to Dean, and to LaFevor’s acquisition of Dean, for 2022 is determined to be A) $180,000. B) $234,000. C) $325,000. D) $333,750. E) $546,000.

17) LaFevor Co. acquired 70% of the common stock of Dean Corp. on August 1, 2022. For 2022, Dean reported revenues of $960,000 and expenses of $780,000, all reflected evenly throughout the year. The annual amount of amortization related to this acquisition was $21,000. What is the effect of including Dean in consolidated net income for 2022? A) $8,750. B) $66,250. C) $75,000. D) $126,000. E) $159,000.

18) LaFevor Co. acquired 70% of the common stock of Dean Corp. on August 1, 2022. For 2022, Dean reported revenues of $960,000 and expenses of $780,000, all reflected evenly throughout the year. The annual amount of amortization related to this acquisition was $21,000. What is the amount of Dean’s net income attributable to the controlling interest for 2022?

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A) $19,875. B) $46,375. C) $66,250. D) $111,300. E) $126,000.

19) LaFevor Co. acquired 70% of the common stock of Dean Corp. on August 1, 2022. For 2022, Dean reported revenues of $960,000 and expenses of $780,000, all reflected evenly throughout the year. The annual amount of amortization related to this acquisition was $21,000. What is the amount of the noncontrolling interest's share of Dean’s income for 2022? A) $15,900. B) $19,875. C) $46,375. D) $47,700. E) $54,000.

20) Dunne Inc. bought 65% of the outstanding common stock of Hardy Inc. in an acquisition that resulted in the recognition of goodwill. Hardy owned a piece of land that cost $375,000 but was worth $700,000 at the date of acquisition. What value would be attributed to this land in a consolidated balance sheet at the date of acquisition? A) $245,000. B) $325,000. C) $375,000. D) $455,000. E) $700,000.

21) Daniels Inc. acquired 85% of the outstanding common stock of Noyce Corp.in 2021. Noyce currently owes Daniels $400,000 for inventory acquired during 2022. In preparing consolidated financial statements for 2022, what amount of Noyce’s liability should be eliminated?

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A) $0. B) $60,000. C) $300,000. D) $340,000. E) $400,000.

22) Scott Co. acquired 70% of Gregg Co. for $525,000 on December 31, 2019 when Gregg’s book value was $580,000. The Gregg stock was not actively traded. On the date of acquisition, Gregg had equipment (with a ten-year life) that was undervalued in the financial records by $170,000. One year later, the two companies provided the selected amounts shown below. Additionally, no dividends have been paid. Scott Co.

Gregg Co.

Current assets

Book Value $912,000

Book Value $430,000

Fair Value $458,000

Equipment

371,000

290,000

450,000

Buildings

584,000

210,000

Liabilities Revenues

(564,000 ) (1,320,000 )

(238,000 ) (570,000 )

(238,000 )

740,000

410,000

Expenses Investment income

Not Given

What amount of consolidated net income for 2020 is attributable to Scott’s controlling interest? A) $580,000. B) $668,200. C) $680,100. D) $692,000. E) $723,000.

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23) Scott Co. acquired 70% of Gregg Co. for $525,000 on December 31, 2019 when Gregg’s book value was $580,000. The Gregg stock was not actively traded. On the date of acquisition, Gregg had equipment (with a ten-year life) that was undervalued in the financial records by $170,000. One year later, the two companies provided the selected amounts shown below. Additionally, no dividends have been paid. Scott Co.

Gregg Co.

Current assets

Book Value $912,000

Book Value $430,000

Fair Value $458,000

Equipment

371,000

290,000

450,000

Buildings

584,000

210,000

Liabilities Revenues

(564,000 ) (1,320,000 )

(238,000 ) (570,000 )

(238,000 )

740,000

410,000

Expenses Investment income

Not Given

What is the noncontrolling interest's share of the subsidiary's net income for the year ended December 31, 2020 and what is the ending balance of the noncontrolling interest in the subsidiary at December 31, 2020?

A) $48,000 and $262,800. B) $48,000 and $273,000. C) $42,900 and $267,900. D) $42,900 and $262,800. E) $48,000 and $267,900.

24) Scott Co. acquired 70% of Gregg Co. for $525,000 on December 31, 2019 when Gregg’s book value was $580,000. The Gregg stock was not actively traded. On the date of acquisition, Gregg had equipment (with a ten-year life) that was undervalued in the financial records by $170,000. One year later, the two companies provided the selected amounts shown below. Additionally, no dividends have been paid.

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Scott Co.

Gregg Co.

Current assets

Book Value $912,000

Book Value $430,000

Fair Value $458,000

Equipment

371,000

290,000

450,000

Buildings

584,000

210,000

Liabilities Revenues

(564,000 ) (1,320,000 )

(238,000 ) (570,000 )

(238,000 )

740,000

410,000

Expenses Investment income

Not Given

What is the consolidated balance of the Equipment account at December 31, 2020? A) $814,000. B) $821,000. C) $831,000. D) $797,000. E) $661,000.

25) On January 1, 2019, Palk Corp. and Spraz Corp. had condensed balance sheets as follows: Palk Corp. 99,000

Spraz Corp. $ 28,000

Noncurrent assets

125,000

56,000

Total assets

224,000

84,000

Current liabilities

42,000

14,000

Long-term debt

70,000

Current assets

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Stockholders' equity Total liabilities and stockholders' equity

112,000

70,000

$ 224,000

$ 84,000

On January 2, 2019, Palk borrowed the entire $84,000 it needed to acquire 80% of the outstanding common shares of Spraz. Shares of Spraz are not actively traded on the market. The loan was to be paid in ten equal annual principal payments, plus interest, beginning December 31, 2019. The excess consideration transferred over the underlying book value of the acquired net assets was allocated 60% to inventory and 40% to goodwill. What amount represents consolidated current assets at January 2, 2019? A) $127,000. B) $129,800. C) $143,800. D) $148,000. E) $135,400.

26) On January 1, 2019, Palk Corp. and Spraz Corp. had condensed balance sheets as follows: Palk Corp. 99,000

Spraz Corp. $ 28,000

Noncurrent assets

125,000

56,000

Total assets

224,000

84,000

Current liabilities

42,000

14,000

Long-term debt

70,000

Stockholders' equity

112,000

70,000

$ 224,000

$ 84,000

Current assets

Total liabilities and stockholders' equity

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On January 2, 2019, Palk borrowed the entire $84,000 it needed to acquire 80% of the outstanding common shares of Spraz. Shares of Spraz are not actively traded on the market. The loan was to be paid in ten equal annual principal payments, plus interest, beginning December 31, 2019. The excess consideration transferred over the underlying book value of the acquired net assets was allocated 60% to inventory and 40% to goodwill. What is the amount attributable to consolidated noncurrent assets at January 2, 2019? A) $195,000. B) $192,200. C) $186,600. D) $181,000. E) $169,800.

27) On January 1, 2019, Palk Corp. and Spraz Corp. had condensed balance sheets as follows: Palk Corp. 99,000

Spraz Corp. $ 28,000

Noncurrent assets

125,000

56,000

Total assets

224,000

84,000

Current liabilities

42,000

14,000

Long-term debt

70,000

Stockholders' equity

112,000

70,000

$ 224,000

$ 84,000

Current assets

Total liabilities and stockholders' equity

On January 2, 2019, Palk borrowed the entire $84,000 it needed to acquire 80% of the outstanding common shares of Spraz. Shares of Spraz are not actively traded on the market. The loan was to be paid in ten equal annual principal payments, plus interest, beginning December 31, 2019. The excess consideration transferred over the underlying book value of the acquired net assets was allocated 60% to inventory and 40% to goodwill. What are the total consolidated current liabilities at January 2, 2019? Version 1

A) $53,200. B) $56,000. C) $64,400. D) $42,000. E) $70,000.

28) On January 1, 2019, Palk Corp. and Spraz Corp. had condensed balance sheets as follows: Palk Corp. 99,000

Spraz Corp. $ 28,000

Noncurrent assets

125,000

56,000

Total assets

224,000

84,000

Current liabilities

42,000

14,000

Long-term debt

70,000

Stockholders' equity

112,000

70,000

$ 224,000

$ 84,000

Current assets

Total liabilities and stockholders' equity

On January 2, 2019, Palk borrowed the entire $84,000 it needed to acquire 80% of the outstanding common shares of Spraz. Shares of Spraz are not actively traded on the market. The loan was to be paid in ten equal annual principal payments, plus interest, beginning December 31, 2019. The excess consideration transferred over the underlying book value of the acquired net assets was allocated 60% to inventory and 40% to goodwill. What is consolidated stockholders’ equity at January 2, 2019?

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A) $112,000. B) $133,000. C) $168,000. D) $182,000. E) $203,000.

29) In measuring the noncontrolling interest immediately following the date of acquisition, which of the following would not be indicative of the value attributed to the noncontrolling interest? A) Fair value based on stock trades of the acquired company. B) Subsidiary cash flows discounted to present value. C) Book value of subsidiary net assets. D) Projections of residual income. E) Consideration transferred by the parent company that implies a total subsidiary value.

30) When a parent uses the equity method throughout the year to account for its 80% investment in an acquired subsidiary, which of the following statements is false at the date immediately preceding the date on which adjustments are made on the consolidated worksheet? A) Parent company net income equals controlling interest in consolidated net income. B) Parent company retained earnings equals consolidated retained earnings. C) Parent company total assets equals consolidated total assets. D) Parent company dividends equals consolidated dividends. E) Goodwill is not recorded on the parent’s books.

31) When a parent uses the initial value method throughout the year to account for its 80% investment in an acquired subsidiary, which of the following statements is true at the date immediately preceding the date on which adjustments are made on the consolidated worksheet?

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A) Parent company net income equals consolidated net income. B) Parent company retained earnings equals consolidated retained earnings. C) Parent company total assets equals consolidated total assets. D) Parent company dividends equal consolidated dividends. E) Goodwill is recorded on the parent’s books.

32) When a parent uses the partial equity method throughout the year to account for its 80% investment in an acquired subsidiary, which of the following statements is true at the date immediately preceding the date on which adjustments are made on the consolidated worksheet? A) Parent company net income equals consolidated net income. B) Parent company retained earnings equals consolidated retained earnings. C) Parent company total assets equals consolidated total assets. D) Parent company dividends equal consolidated dividends. E) Goodwill is recorded on the parent’s books.

33)

In a step acquisition, which of the following statements is false?

A) The acquisition method views a step acquisition essentially the same as a single step acquisition. B) Income from subsidiary is computed by applying a partial year for a new purchase acquired during the year. C) Income from subsidiary is computed for the entire year for a new purchase acquired during the year. D) Obtaining control through a step acquisition is a significant measurement event. E) Pre-acquisition earnings are not included in the consolidated income statement.

34) Which of the following statements is false regarding multiple acquisitions of a subsidiary's existing common stock?

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A) The parent recognizes a larger percent of subsidiary income. B) A step acquisition resulting in control may result in a parent recognizing a gain on revaluation. C) The book value of the subsidiary will increase. D) The parent's percent ownership in subsidiary will increase. E) Noncontrolling interest in subsidiary's net income will decrease.

35) When a subsidiary is acquired sometime after the first day of the fiscal year, which of the following statements is true? A) Income from subsidiary is not recognized until there is an entire year of consolidated operations. B) Income from subsidiary is recognized from date of acquisition to year-end. C) Excess cost over acquisition value is recognized at the beginning of the fiscal year. D) No goodwill can be recognized. E) Income from subsidiary is recognized for the entire year.

36) When consolidating a subsidiary that was acquired on a date other than the first day of the fiscal year, which of the following statements is true of the subsidiary with respect to the presentation of consolidated financial statement information? A) Pre-acquisition earnings are deducted from consolidated retained earnings. B) Pre-acquisition earnings are added to consolidated revenues and expenses. C) Pre-acquisition earnings are deducted from the beginning consolidated stockholders' equity. D) Pre-acquisition earnings are added to the beginning consolidated stockholders' equity. E) Pre-acquisition earnings are excluded from the consolidated income statement.

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

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

38) All of the following statements regarding the sale of subsidiary shares are true except which of the following? A) The use of specific identification based on serial number is acceptable. B) The use of the FIFO assumption is acceptable. C) The use of the averaging assumption is acceptable. D) The use of specific LIFO assumption is acceptable. E) The parent company must determine whether consolidation is still appropriate for the remaining shares owned.

39) Which of the following statements is true regarding the sale of subsidiary shares when using the acquisition method for accounting for business combinations? A) If control continues, the difference between selling price and acquisition value is recorded as a realized gain or loss. B) If control continues, the difference between selling price and acquisition value is an unrealized gain or loss. C) If control continues, the difference between selling price and carrying value is recorded as an adjustment to additional paid-in capital. D) If control continues, the difference between selling price and carrying value is recorded as a realized gain or loss. E) If control continues, the difference between selling price and carrying value is recorded as an adjustment to retained earnings.

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40) Jax Company used the acquisition method when it acquired its investment in Saxton Company. Jax now sells some of its shares of Saxton such that neither control nor significant influence exists. Which of the following statements is true? A) The difference between selling price and acquisition value is recorded as a realized gain or loss. B) The difference between selling price and acquisition value is recorded as an unrealized gain or loss. C) The difference between selling price and carrying value is recorded as a realized gain or loss. D) The difference between selling price and carrying value is recorded as an unrealized gain or loss. E) The difference between selling price and carrying value is recorded as an adjustment to retained earnings.

41) Brady, Inc., a calendar-year corporation, acquires 75% of Austin Company on September 1, 2019, and an additional 10% on January 1, 2020. Total annual amortization of $8,000 relates to the first acquisition. Austin reports the following figures for 2020: Revenues

550,000

Expenses

425,000

Retained earnings, 1/1/20

300,000

Dividends paid

55,000

Common stock

200,000

Without regard for this investment, Brady independently earns $375,000 in net income during 2020. All net income is earned evenly throughout the year. What is the controlling interest in consolidated net income for 2020?

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A) $464,250. B) $474,450. C) $481,250. D) $492,000. E) $500,000.

42) McGuire Company acquired 90 percent of Hogan Company on January 1, 2019, for $234,000 cash. This amount is reflective of Hogan’s total acquisition-date fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following: Book Value

Fair Value

Buildings (10-year life)

$ 10,000

Equipment (4-year life)

14,000

18,000

Land

5,000

12,000

8,000

Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years. The acquisition value attributable to the noncontrolling interest at January 1, 2019 is: A) $23,400. B) $24,000. C) $24,900. D) $26,000. E) $20,000.

43) McGuire Company acquired 90 percent of Hogan Company on January 1, 2019, for $234,000 cash. This amount is reflective of Hogan’s total acquisition-date fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following: Buildings (10-year life)

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Book Value

Fair Value

$ 10,000

8,000

Equipment (4-year life)

14,000

18,000

Land

5,000

12,000

Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years. In consolidation at January 1, 2019, what adjustment is necessary for Hogan's Buildings account? A) $2,000 increase. B) $2,000 decrease. C) $1,800 increase. D) $1,800 decrease. E) No change.

44) McGuire Company acquired 90 percent of Hogan Company on January 1, 2019, for $234,000 cash. This amount is reflective of Hogan’s total acquisition-date fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following: Book Value

Fair Value

Buildings (10-year life)

$ 10,000

Equipment (4-year life)

14,000

18,000

Land

5,000

12,000

8,000

Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years. In consolidation at December 31, 2019, what adjustment is necessary for Hogan's Buildings account?

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A) $1,620 increase. B) $1,620 decrease. C) $1,800 increase. D) $1,800 decrease. E) No adjustment is necessary.

45) McGuire Company acquired 90 percent of Hogan Company on January 1, 2019, for $234,000 cash. This amount is reflective of Hogan’s total acquisition-date fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following: Book Value

Fair Value

Buildings (10-year life)

$ 10,000

Equipment (4-year life)

14,000

18,000

Land

5,000

12,000

8,000

Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years. In consolidation at December 31, 2020, what adjustment is necessary for Hogan's Buildings account? A) $1,440 increase. B) $1,440 decrease. C) $1,600 increase. D) $1,600 decrease. E) No adjustment is necessary.

46) McGuire Company acquired 90 percent of Hogan Company on January 1, 2019, for $234,000 cash. This amount is reflective of Hogan’s total acquisition-date fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following: Book Value

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Fair Value

Buildings (10-year life)

$ 10,000

8,000

Equipment (4-year life)

14,000

18,000

Land

5,000

12,000

Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years. In consolidation at January 1, 2019, what adjustment is necessary for Hogan's Equipment account? A) $4,000 increase. B) $4,000 decrease. C) $3,600 increase. D) $3,600 decrease. E) No adjustment is necessary.

47) McGuire Company acquired 90 percent of Hogan Company on January 1, 2019, for $234,000 cash. This amount is reflective of Hogan’s total acquisition-date fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following: Book Value

Fair Value

Buildings (10-year life)

$ 10,000

Equipment (4-year life)

14,000

18,000

Land

5,000

12,000

8,000

Version 1

A) $3,000 increase. B) $3,000 decrease. C) $2,700 increase. D) $2,700 decrease. E) No adjustment is necessary.

48) McGuire Company acquired 90 percent of Hogan Company on January 1, 2019, for $234,000 cash. This amount is reflective of Hogan’s total acquisition-date fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following: Book Value

Fair Value

Buildings (10-year life)

$ 10,000

Equipment (4-year life)

14,000

18,000

Land

5,000

12,000

8,000

Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years. In consolidation at December 31, 2020, what adjustment is necessary for Hogan's Equipment account? A) $2,000 increase. B) $2,000 decrease. C) $1,800 increase. D) $1,800 decrease. E) No adjustment is necessary.

49) McGuire Company acquired 90 percent of Hogan Company on January 1, 2019, for $234,000 cash. This amount is reflective of Hogan’s total acquisition-date fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following: Book Value

Version 1

Fair Value

Buildings (10-year life)

$ 10,000

8,000

Equipment (4-year life)

14,000

18,000

Land

5,000

12,000

Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years. In consolidation at January 1, 2019, what adjustment is necessary for Hogan's Land account? A) $7,000 increase. B) $7,000 decrease. C) $6,300 increase. D) $6,300 decrease. E) No adjustment is necessary.

50) McGuire Company acquired 90 percent of Hogan Company on January 1, 2019, for $234,000 cash. This amount is reflective of Hogan’s total acquisition-date fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following: Book Value

Fair Value

Buildings (10-year life)

$ 10,000

Equipment (4-year life)

14,000

18,000

Land

5,000

12,000

8,000

Version 1

A) $8,000 decrease. B) $7,000 increase. C) $6,300 increase. D) $6,300 decrease. E) No adjustment is necessary.

51) McGuire Company acquired 90 percent of Hogan Company on January 1, 2019, for $234,000 cash. This amount is reflective of Hogan’s total acquisition-date fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following: Book Value

Fair Value

Buildings (10-year life)

$ 10,000

Equipment (4-year life)

14,000

18,000

Land

5,000

12,000

8,000

Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years. In consolidation at December 31, 2020, what adjustment is necessary for Hogan's Land account? A) $7,000 decrease. B) $7,000 increase. C) $6,300 increase. D) $6,300 decrease. E) No adjustment is necessary.

52) McGuire Company acquired 90 percent of Hogan Company on January 1, 2019, for $234,000 cash. This amount is reflective of Hogan’s total acquisition-date fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following: Book Value

Version 1

Fair Value

Buildings (10-year life)

$ 10,000

8,000

Equipment (4-year life)

14,000

18,000

Land

5,000

12,000

Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years. In consolidation at January 1, 2019, what adjustment is necessary for Hogan's Patent account? A) $7,000. B) $6,300. C) $11,000. D) $9,900. E) No adjustment is necessary.

53) McGuire Company acquired 90 percent of Hogan Company on January 1, 2019, for $234,000 cash. This amount is reflective of Hogan’s total acquisition-date fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following: Book Value

Fair Value

Buildings (10-year life)

$ 10,000

Equipment (4-year life)

14,000

18,000

Land

5,000

12,000

8,000

Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years. In consolidation at December 31, 2019, what net adjustment is necessary for Hogan's Patent account?

Version 1

A) $5,600. B) $8,800. C) $7,000. D) $7,700. E) No adjustment is necessary.

54) McGuire Company acquired 90 percent of Hogan Company on January 1, 2019, for $234,000 cash. This amount is reflective of Hogan’s total acquisition-date fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following: Book Value

Fair Value

Buildings (10-year life)

$ 10,000

Equipment (4-year life)

14,000

18,000

Land

5,000

12,000

8,000

Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years. In consolidation at December 31, 2020, what net adjustment is necessary for Hogan's Patent account? A) $4,200. B) $5,500. C) $8,000. D) $6,600. E) No adjustment is necessary.

55) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: Version 1

2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

Assume the equity method is applied. Compute Pell's Investment in Demers account balance at December 31, 2019. A) $580,000. B) $574,400. C) $548,000. D) $542,400. E) $541,000.

56) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

Assume the equity method is applied. Compute Pell's investment account balance in Demers at December 31, 2020. A) $577,200. B) $604,000. C) $592,800. D) $632,800. E) $572,000.

Version 1

57) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

Assume the equity method is applied. Compute Pell's investment account balance in Demers at December 31, 2021. A) $639,000. B) $643,200. C) $763,200. D) $676,000. E) $620,000.

58) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

Version 1

Assume the equity method is applied. Compute Pell's equity income from Demers for the year ended December 31, 2019. A) $74,400. B) $73,000. C) $42,400. D) $41,000. E) $80,000.

59) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

Assume the equity method is applied. Compute Pell's equity income from Demers for the year ended December 31, 2020. A) $90,400. B) $89,000. C) $50,400. D) $56,000. E) $96,000.

Version 1

60) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

Assume the equity method is applied. Compute Pell's equity income from Demers for the year ended December 31, 2021. A) $50,400. B) $56,000. C) $98,400. D) $97,000. E) $104,000.

61) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

Assume the equity method is applied. Compute the noncontrolling interest in the net income of Demers at December 31, 2019.

Version 1

A) $20,000. B) $12,000. C) $18,600. D) $10,600. E) $14,400.

62) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

Assume the equity method is applied. Compute the noncontrolling interest in the net income of Demers at December 31, 2020. A) $18,400. B) $14,400. C) $22,600. D) $24,000. E) $12,600.

63) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Version 1

2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

Assume the equity method is applied. Compute the noncontrolling interest in the net income of Demers at December 31, 2021. A) $20,400. B) $24,600. C) $26,000. D) $14,000. E) $12,600.

64) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

Assume the equity method is applied. Compute the noncontrolling interest in Demers at December 31, 2019. A) $135,600. B) $137,000. C) $112,000. D) $100,000. E) $118,600.

Version 1

65) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

Assume the equity method is applied. Compute the noncontrolling interest in Demers at December 31, 2020. A) $107,000. B) $126,000. C) $109,200. D) $149,600. E) $148,200.

66) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

Version 1

Assume the equity method is applied. Compute the noncontrolling interest in Demers at December 31, 2021. A) $107,800. B) $140,000. C) $165,200. D) $160,800. E) $146,800.

67) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

Assume the equity method is applied. What is the consolidated balance of the Investment in Demers account at December 31, 2021. A) $639,000. B) $643,200. C) $763,200. D) $0. E) $620,000.

Version 1

68) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

Assume the equity method is applied. What is the consolidated balance of the Equity in Demers Earnings account at December 31, 2021. A) $0. B) $56,000. C) $98,400. D) $97,000. E) $104,000.

69) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019 Net income Dividends

Version 1

2020

2021

$ 100,000 $ 120,000 $ 130,000 40,000

50,000

60,000

Assume the initial value method is applied. Compute Pell's Investment in Demers at December 31, 2019. A) $500,000. B) $574,400. C) $625,000. D) $542,400. E) $532,000.

70) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019 Net income Dividends

2020

2021

$ 100,000 $ 120,000 $ 130,000 40,000

50,000

60,000

Assume the initial value method is applied. Compute Pell's Investment in Demers at December 31, 2020. A) $625,000. B) $664,800. C) $592,400. D) $500,000. E) $572,000.

Version 1

71) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019 Net income Dividends

2020

2021

$ 100,000 $ 120,000 $ 130,000 40,000

50,000

60,000

Assume the initial value method is applied. Compute Pell's Investment in Demers at December 31, 2021. A) $592,400. B) $500,000. C) $625,000. D) $676,000. E) $620,000.

72) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019 Net income Dividends

2020

2021

$ 100,000 $ 120,000 $ 130,000 40,000

50,000

60,000

Assume the initial value method is applied. How much does Pell record as Income from Demers for the year ended December 31, 2019?

Version 1

A) $32,000. B) $74,400. C) $73,000. D) $42,400. E) $41,000.

73) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019 Net income Dividends

2020

2021

$ 100,000 $ 120,000 $ 130,000 40,000

50,000

60,000

Assume the initial value method is applied. How much does Pell record as Income from Demers for the year ended December 31, 2020? A) $90,400. B) $40,000. C) $89,000. D) $50,400. E) $56,000.

74) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Version 1

2019 Net income Dividends

2020

2021

$ 100,000 $ 120,000 $ 130,000 40,000

50,000

60,000

Assume the initial value method is applied. How much does Pell record as Income from Demers for the year ended December 31, 2021? A) $48,000. B) $56,000. C) $98,400. D) $97,000. E) $50,400.

75) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019 Net income Dividends

2020

2021

$ 100,000 $ 120,000 $ 130,000 40,000

50,000

60,000

Assume the initial value method is applied. Compute the noncontrolling interest in the net income of Demers at December 31, 2019. A) $12,000. B) $10,600. C) $18,600. D) $20,000. E) $14,400.

Version 1

76) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019 Net income Dividends

2020

2021

$ 100,000 $ 120,000 $ 130,000 40,000

50,000

60,000

Assume the initial value method is applied. Compute the noncontrolling interest in the net income of Demers at December 31, 2020. A) $18,400. B) $14,000. C) $22,600. D) $24,000. E) $12,600.

77) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019 Net income Dividends

Version 1

2020

2021

$ 100,000 $ 120,000 $ 130,000 40,000

50,000

60,000

Assume the initial value method is applied. Compute the noncontrolling interest in the net income of Demers at December 31, 2021. A) $24,600. B) $14,000. C) $26,000. D) $20,400. E) $12,600.

78) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019 Net income Dividends

2020

2021

$ 100,000 $ 120,000 $ 130,000 40,000

50,000

60,000

Assume the initial value method is applied. Compute the noncontrolling interest in Demers at December 31, 2019. A) $135,600. B) $80,000. C) $117,000. D) $100,000. E) $110,600.

Version 1

79) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019 Net income Dividends

2020

2021

$ 100,000 $ 120,000 $ 130,000 40,000

50,000

60,000

Assume the initial value method is applied. Compute the noncontrolling interest in Demers at December 31, 2020. A) $126,000. B) $106,000. C) $109,200. D) $149,600. E) $148,200.

80) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019 Net income Dividends

2020

2021

$ 100,000 $ 120,000 $ 130,000 40,000

50,000

60,000

Assume the initial value method is applied. Compute the noncontrolling interest in Demers at December 31, 2021.

Version 1

A) $107,800. B) $140,000. C) $80,000. D) $50,000. E) $160,800.

81) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

Assume the partial equity method is applied. Compute Pell's Investment in Demers at December 31, 2019. A) $625,000. B) $574,400. C) $548,000. D) $542,400. E) $532,000.

82) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Version 1

2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

Assume the partial equity method is applied. Compute Pell's Investment in Demers at December 31, 2020. A) $676,000. B) $629,000. C) $580,000. D) $604,000. E) $572,000.

83) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

Assume the partial equity method is applied. Compute Pell's Investment in Demers at December 31, 2021. A) $780,000. B) $660,000. C) $785,000. D) $676,000. E) $620,000.

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84) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

Assume the partial equity method is applied. How much does Pell record as Income from Demers for the year ended December 31, 2019? A) $80,000. B) $74,400. C) $73,000. D) $42,400. E) $41,000.

85) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

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Assume the partial equity method is applied. How much does Pell record as Income from Demers for the year ended December 31, 2020? A) $90,400. B) $89,000. C) $50,400. D) $96,000. E) $56,000.

86) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

Assume the partial equity method is applied. How much does Pell record as Income from Demers for the year ended December 31, 2021? A) $98,400. B) $56,000. C) $104,000. D) $97,000. E) $50,400.

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87) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

Assume the partial equity method is applied. Compute the noncontrolling interest in the net income of Demers at December 31, 2019. A) $20,000. B) $12,000. C) $18,600. D) $10,600. E) $14,400.

88) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

Assume the partial equity method is applied. Compute the noncontrolling interest in the net income of Demers at December 31, 2020.

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A) $18,400. B) $14,000. C) $22,600. D) $24,000. E) $12,600.

89) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

Assume the partial equity method is applied. Compute the noncontrolling interest in the net income of Demers at December 31, 2021. A) $20,400. B) $26,000. C) $24,600. D) $14,000. E) $12,600.

90) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

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2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

Assume the partial equity method is applied. Compute the noncontrolling interest in Demers at December 31, 2019. A) $135,600. B) $114,000. C) $112,000. D) $100,000. E) $110,600.

91) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

Assume the partial equity method is applied. Compute the noncontrolling interest in Demers at December 31, 2020. A) $124,000. B) $126,000. C) $109,200. D) $149,600. E) $148,200.

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92) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

Assume the partial equity method is applied. Compute the noncontrolling interest in Demers at December 31, 2021. A) $107,800. B) $140,000. C) $80,000. D) $160,800. E) $146,800.

93) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

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Assume the partial equity method is applied. What is the consolidated balance of the Investment in Demers account at December 31, 2021. A) $780,000. B) $660,000. C) $785,000. D) $676,000. E) $0.

94) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2019. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows: 2019

2020

2021

Net income

$ 100,000

$ 120,000

$ 130,000

Dividends

40,000

50,000

60,000

Assume the partial equity method is applied. What is the consolidated balance of the Equity in Demers Earnings account at December 31, 2021. A) $0. B) $56,000. C) $104,000. D) $97,000. E) $50,400.

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95) Parsons Company acquired 90% of Roxy Company several years ago for which the consideration transferred included an amount paid for goodwill of $200,000 at that date. During 2020 an analysis of the fair value of Roxy's assets determined an impairment of goodwill in the amount of $50,000. At what amount would consolidated goodwill be reported for 2020? A) $150,000. B) $200,000. C) $50,000. D) $0. E) $135,000.

96) In comparing U.S. GAAP and International Financial Reporting Standards (IFRS) with regard to a basis for measurement of a noncontrolling interest, which of the following is true? A) U.S. GAAP requires acquisition-date fair value measurement and IFRS requires the acquiree's identifiable net asset fair value measurement. B) U.S. GAAP and IFRS both require acquisition-date fair value measurement. C) U.S. GAAP and IFRS both require the acquiree's identifiable net asset fair value measurement. D) U.S. GAAP requires acquisition-date fair value measurement, but IFRS allows an option for acquisition-date fair value measurement. E) U.S. GAAP and IFRS both apportion goodwill to the parent only.

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 97) Alonzo Co. acquired 60% of Beazley Corp. by paying $240,000 cash. There is no active trading market for Beazley Corp. At the time of the acquisition, the book value of Beazley's net assets was $300,000. Required: What amount should have been assigned to the noncontrolling interest immediately after the combination?

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98) Tosco Co. paid $540,000 for 80% of the stock of Martz Co. when the book value of Martz's net assets was $600,000. For all of Martz's assets and liabilities, book value and fair value were approximately equal. There was no active market for the shares of Martz Co. Required: Using the acquisition method, what amount of goodwill should appear in a consolidated balance sheet prepared immediately after the combination?

99) On January 1, 2020, Elva Corp. paid $750,000 for 80% of Fenton Co. when the book value of Fenton's net assets was $800,000. Fenton owned a building with a fair value of $150,000 and a book value of $120,000. Required: At what amount would the building appear on a consolidated balance sheet prepared immediately after the combination, under the acquisition method of accounting for business combinations?

100) Pennant Corp. owns 70% of the common stock of Scarvens Co. Scarvens's revenues for 2020 totaled $200,000. Required: What amount of Scarvens' revenues would be included in the consolidated revenues under the acquisition method of accounting for business combinations?

101) Caldwell Inc. acquired 65% of Club Corp. for $2,600,000. There was no active market for the shares of Club Corp. Club owned a building and equipment with ten-year useful lives. The combined book value of these assets was $830,000, and the fair value was $950,000. For Club's other assets and liabilities, book value was equal to fair value. The total acquisition-date fair value of Club's net assets was $3,500,000. Using the acquisition method, determine the amount of goodwill associated with Caldwell's purchase of Club.

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102) Caldwell Inc. acquired 65% of Club Corp. for $2,600,000. There was no active market for the shares of Club Corp. Club owned a building and equipment with ten-year useful lives. The combined book value of these assets was $830,000, and the fair value was $950,000. For Club's other assets and liabilities, book value was equal to fair value. The total acquisition-date fair value of Club's net assets was $3,500,000. Determine the amount of the noncontrolling interest as of the date of the acquisition.

103) On January 1, 2019, Glenville Co. acquired an 80% interest in Acron Corp. for $500,000. There is no active trading market for Acron’s stock. The fair value of Acron's net assets was $600,000 and Glenville accounts for its interest using the acquisition method. Determine the amount of goodwill to be recognized in this acquisition.

104) On January 1, 2019, Glenville Co. acquired an 80% interest in Acron Corp. for $500,000. There is no active trading market for Acron’s stock. The fair value of Acron's net assets was $600,000 and Glenville accounts for its interest using the acquisition method. Determine the value assigned to the noncontrolling interest as of the date of the acquisition.

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105) On January 1, 2019, Jannison Inc. acquired 90% of Techron Co. by paying $477,000 cash. There is no active trading market for Techron stock. Techron Co. reported a Common Stock account balance of $140,000 and Retained Earnings of $280,000 at that date. The fair value of Techron Co. was appraised at $530,000. The total annual amortization was $11,000 as a result of this transaction. The subsidiary earned $98,000 in 2019 and $126,000 in 2020 with dividend payments of $42,000 each year. Without regard for this investment, Jannison had income of $308,000 in 2019 and $364,000 in 2020. Prepare a proper presentation of consolidated net income and its allocation for 2019.

106) On January 1, 2019, Jannison Inc. acquired 90% of Techron Co. by paying $477,000 cash. There is no active trading market for Techron stock. Techron Co. reported a Common Stock account balance of $140,000 and Retained Earnings of $280,000 at that date. The fair value of Techron Co. was appraised at $530,000. The total annual amortization was $11,000 as a result of this transaction. The subsidiary earned $98,000 in 2019 and $126,000 in 2020 with dividend payments of $42,000 each year. Without regard for this investment, Jannison had income of $308,000 in 2019 and $364,000 in 2020. Prepare a proper presentation of consolidated net income and its allocation for 2020.

107) On January 1, 2019, Jannison Inc. acquired 90% of Techron Co. by paying $477,000 cash. There is no active trading market for Techron stock. Techron Co. reported a Common Stock account balance of $140,000 and Retained Earnings of $280,000 at that date. The fair value of Techron Co. was appraised at $530,000. The total annual amortization was $11,000 as a result of this transaction. The subsidiary earned $98,000 in 2019 and $126,000 in 2020 with dividend payments of $42,000 each year. Without regard for this investment, Jannison had income of $308,000 in 2019 and $364,000 in 2020. What is the noncontrolling interest balance as of December 31, 2020?

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108) On January 1, 2018, Vacker Co. acquired 70% of Carper Inc. by paying $650,000. This included a $20,000 control premium. Carper reported common stock on that date of $420,000 with retained earnings of $252,000. A building was undervalued in the company's financial records by $28,000. This building had a ten-year remaining life. Copyrights of $80,000 were to be recognized and amortized over 20 years. Carper earned income and paid cash dividends as follows: 2018

Net Income

Dividends Paid

105,000

54,600

2019

134,400

61,600

2020

154,000

84,000

On December 31, 2020, Vacker owed $30,800 to Carper. There have been no changes in Carper’s common stock account since the acquisition. Required: If the equity method had been applied by Vacker for this acquisition, what were the consolidation entries needed as of December 31, 2020?

109) On January 1, 2020, John Doe Enterprises (JDE) acquired a 55% interest in Bubba Manufacturing, Inc. (BMI). JDE paid for the transaction with $3 million cash and 500,000 shares of JDE common stock (par value $1.00 per share). At the time of the acquisition, BMI's book value was $16,970,000. On January 1, JDE stock had a market value of $14.90 per share and there was no control premium in this transaction. Any consideration transferred over book value is assigned to goodwill. BMI had the following balances on January 1, 2020. Book Value

Fair Value

$ 1,700,000

$ 2,550,000

Buildings (seven-year remaining life)

2,700,000

3,400,000

Equipment (five-year remaining life)

3,700,000

3,300,000

Land

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For internal reporting purposes, JDE employed the equity method to account for this investment. The following account balances are for the year ending December 31, 2020 for both companies.

Revenues

John Doe Enterprises $ (298,000,000 )

Expenses

271,000,000

Equity in income of Bubba Manufacturing

(4,361,500 )

Bubba Manufacturing $ (103,750,000 ) 95,800,000 0

Net income

(31,361,500 )

(7,950,000 )

Retained earnings, January 1, 2020

(2,500,000 )

(100,000 )

Net income (above) Dividends paid

(31,361,500 )

(7,950,000 )

5,000,000 )

3,000,000 )

Retained earnings, December 31, 2020

(28,861,500 )

(5,050,000 )

Current assets

30,500,000

20,800,000

Investment in Bubba Manufacturing

13,161,500

Land

1,500,000

1,700,000

Buildings

5,600,000

2,360,000

Equipment (net)

3,100,000

2,960,000

Total assets

53,861,500

27,820,000

Accounts payable

(3,100,000 )

(4,900,000 )

Notes payable

(1,000,000 )

Common stock

(2,900,000 )

(6,000,000 )

Additional paid-in capital

(19,000,000 )

(10,870,000 )

Retained earnings, December 31, 2020 (above)

(28,861,500 )

(5,050,000 )

Total liabilities and stockholders’ $

(53,861,500 )

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(27,820,000 )

equity

Required: Prepare a consolidation worksheet for this business combination. Assume goodwill has been reviewed and there is no goodwill impairment.

110) McLaughlin, Inc. acquires 70% of Ellis Corporation on September 1, 2019, and an additional 10 percent on November 1, 2020. Annual amortization of $12,000 relates to the first acquisition. Ellis reports the following figures for 2020: Revenues Expenses Retained earnings, 1/1/20

500,000 350,000 3,500,000

Dividends paid

40,000

Common stock

400,000

Without regard for this investment, McLaughlin earns $480,000 in net income ($840,000 revenues less $360,000 expenses; incurred evenly through the year) during 2020. Required: Prepare a schedule of consolidated net income and apportionment to noncontrolling and controlling interests for 2020.

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111) Select True (T) or False (F) for each of the following statements: _____1. A parent will recognize a gain or loss if it sells a portion of its investment in a subsidiary and maintains control after the sale. _____2. A parent sells a portion of its investment in a subsidiary and no longer maintains control. This sale of shares represents a remeasurement event for the investee. _____3. International financial reporting standards (IFRS) allow an option to value the noncontrolling interest with goodwill or to value the noncontrolling interest without goodwill. _____4. Consolidated net income represents the combined net income of the parent and subsidiary after subtracting the noncontrolling interest in the net income of the subsidiary. _____5. The total acquisition-date fair value of an acquired firm is the sum of the fair value of the controlling interest and the fair value of the noncontrolling interest. _____6. When control of a subsidiary is acquired on a date other than the first day of a fiscal year, excess amortization expenses are pro-rated to include only the post-acquisition period. _____7. For a mid-year acquisition following an equity method investment of the same company, the consolidated income statement will report consolidated revenues and expenses for the entire year. _____8. In a step acquisition where the parent previously held a noncontrolling interest in the acquired firm, the parent remeasures the prior interest to fair value. _____9. When a parent has control over a subsidiary with less than 100 percent ownership, and thereafter increases its ownership, the parent remeasures the prior interest to fair value.

ESSAY. Write your answer in the space provided or on a separate sheet of paper. 112) Where should a noncontrolling interest appear on a consolidated balance sheet?

113)

What is pre-acquisition income?

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114) Beta Corp. owns less than one hundred percent of the voting common stock of Shedds Co. Under what conditions will Beta be required to prepare consolidated financial statements?

115) Why is it important to know if the parent paid a premium to acquire control of a subsidiary?

116) How would you determine the amount of goodwill to be recognized at date of acquisition when there is a noncontrolling interest present?

117) How is a noncontrolling interest in the net income of an entity reported in the income statement?

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118) One company buys a controlling interest in another company on April 1 during a company’s calendar year of operations. How should the pre-acquisition subsidiary revenues and expenses be handled in the consolidated balances for the year of acquisition?

119) Prevatt, Inc. owns 80% of Franklin Company. During the current year, a portion of the investment in Franklin is sold. Prior to recording the sale, Prevatt adjusts the carrying value of its investment. What is the purpose of the adjustment?

120) How does a parent company account for the sale of a portion of an investment in a subsidiary?

121) When a parent company acquires a less-than-100 percent controlling interest in another firm, the acquisition method requires a determination of the acquisition-date fair value of the acquired firm for consolidated financial reporting. How can the fair value of the noncontrolling interest be determined?

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122) When a parent company acquires a less-than-100 percent controlling interest in a subsidiary, what portion of that subsidiary’s financial data does the parent consolidate?

123) On January 1, 2020, John Doe Enterprises (JDE) acquired a 55% interest in Bubba Manufacturing, Inc. (BMI). JDE paid for the transaction with $3 million cash and 500,000 shares of JDE common stock (par value $1.00 per share). At the time of the acquisition, BMI's book value was $16,970,000. On January 1, JDE stock had a market value of $14.90 per share and there was no control premium in this transaction. Any consideration transferred over book value is assigned to goodwill. BMI had the following balances on January 1, 2020. Book Value

Fair Value

$ 1,700,000

$ 2,550,000

Buildings (seven-year remaining life)

2,700,000

3,400,000

Equipment (five-year remaining life)

3,700,000

3,300,000

Land

For internal reporting purposes, JDE employed the equity method to account for this investment. Prepare a fair-value allocation and amortization schedule, including goodwill allocation.

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Answer Key Test name: Chap 04_8e 1) B 2) E $125,000 FV of Land at Acquisition. 3) C FV $125,000 − BV $75,000 = $50,000. 4) C ($125,000 FV − $75,000 BV) × 80% = $50,000 Excess × 80% = $40,000 5) B ($125,000 FV − $75,000 BV) × 20% = $50,000 Excess × 20% = $10,000 6) D 7) D Acquisition-date fair value of Wallace Corp. ($1,800,000 ÷ 75%) $2,400,000 − Fair value of Wallace’s identifiable net assets $2,100,000 = $300,000 Goodwill 8) D Acquisition-date fair value of Wallace Corp. Relative fair value of Wallace’s identifiable net assets (75% and 25%) Goodwill

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Controlling interest $1,800,000

Noncontrolling interest $600,000

Total $2,400,000

1,575,000

525,000

2,100,000

$225,000

$ 75,000

$300,000

Acquisition-date total fair value of Wallace = $1,800,000 ÷ 75% = $2,400,000 Noncontrolling interest acquisition-date FV of Wallace = $2,400,000 − $1,800,000 = $600,000 9) D Acquisition-date fair value of Wallace Corp. Relative fair value of Wallace’s identifiable net assets (75% and 25%) Goodwill

Controlling interest $1,800,000

Noncontrolling interest $600,000

Total $2,400,000

1,575,000

525,000

2,100,000

$225,000

$ 75,000

$300,000

Acquisition-date total fair value of Wallace = $1,800,000 ÷ 75% = $2,400,000 Noncontrolling interest acquisition-date FV of Wallace = $2,400,000 − $1,800,000 = $600,000 10) E Total acquisition-date fair value ($1,800,000 ÷ 75%) $2,400,000 × Noncontrolling interest percentage 25% = $600,000 11) D FV of Net Assets Acquired = $2,100,000 12) B FV $2,100,000 − BV $1,900,000 = $200,000 × 75% = $150,000 13) B Revenue $2,700,000 − Expenses $2,100,000 = $600,000 − $65,000 = $535,000 × 20% = $107,000 14) C

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Renz Net Income (Renz Revenue $4,800,000 − Renz Expenses $3,600,000 = $1,200,000) + Sogers Net Income (Sogers Revenue $2,700,000 − Sogers Expenses $2,100,000 − Amortizations for Excess Fair Value over Book Value $65,000 = $535,000) = $1,200,000 + $535,000 = $1,735,000 15) E Consolidated Net Income: Renz Net Income (Renz Revenue $4,800,000 − Renz Expenses $3,600,000 = $1,200,000) + Sogers Net Income (Sogers Revenue $2,700,000 − Sogers Expenses $2,100,000 − Amortizations for Excess Fair Value over Book Value $65,000 = $535,000) = $1,200,000 + $535,000 = $1,735,000 Noncontrolling interest share of Sogers Corp’s earnings: Revenue $2,700,000 − Expenses $2,100,000 = $600,000 − $65,000 = $535,000 × 20% = $107,000 Consolidated net income allocated to Renz: Consolidated net income $1,735,000 − Noncontrolling interest share of Sogers Corp’s earnings $107,000 = $1,628,000 16) D Expenses ($780,000 × 5/12 = $325,000 + Amortization ($21,000 × 5/12 = $8,750) = $333,750 17) B Revenue $960,000 − Expenses $780,000 − Annual Amortization $21,000 = $159,000 × 5/12 = $66,250 18) B Revenue $960,000 − Expenses $780,000 − Annual Amortization $21,000 = $159,000 × 5/12 = $66,250 × 70% = $46,375 19) B Revenue $960,000 − Expenses $780,000 − Annual Amortization $21,000 = $159,000 × 5/12 = $66,250 × 30% = $19,875 20) E Version 1

FV of the Land $700,000 21) E All intra-entity debt must be eliminated in preparing consolidated financial statements $400,000 22) C [Parent’s Income ($1,320,000 − $740,000 = $580,000)] + [Sub’s Income ($570,000 − $410,000) × 70% = $112,000] − [Excess Equipment Amortization for 2020 ($170,000 ÷ 10) × 70% = $11,900] = $680,100

23) C [Sub’s Income ($570,000 − $410,000) × 30% = $48,000] − [Excess Equipment Amortization for 2020 ($170,000 ÷ 10) × 30% = $5,100] = $42,900 [Noncontrolling Interest at Acquisition (FV $750,000 × 30%) = $225,000] + [Noncontrolling Interest 2020 Income $42,900] = $267,900

24) A [Parent’s Equipment BV $371,000] + [Sub’s Equipment BV $290,000] + [Fair value allocation less one year of amortization $170,000 − $17,000] = $814,000

25) D [Parent’s Current Assets $99,000] + [Sub’s Current Assets $28,000] + [Excess Consideration to Inventory (($84,000 ÷ 80%) − $70,000 = $35,000 × 60%) $21,000] = $148,000

26) A [Parent’s Non-Current Assets $125,000] + [Sub’s Non-Current Assets $56,000] + [Excess Consideration to Goodwill (($84,000 ÷ 80%) − $70,000 = $35,000 × 40%) $14,000] = $195,000

27) C [Parent’s Current Liabilities $42,000] + [Sub’s Current Liabilities $14,000] + [Current Portion of Acquisition Loan ($84,000 ÷ 10) = $8,400] = $64,400

28) B Parent’s Stockholders’ Equity $112,000 + Noncontrolling Interest $21,000 = $133,000 Noncontrolling interest = FV at acquisition date × Noncontrolling interest percentage = ($84,000 ÷ 80%) × 20% = $105,000 × 20% = $21,000

29) C 30) C 31) D 32) D 33) C Version 1

34) C 35) B 36) E 37) C 38) D 39) C 40) C 41) B Brady owns 85% of Austin for the entire year of 2020. Brady’s share of consolidated net income: ($550,000 − $425,000) sub income − $8,000 amortization = $117,000 × 85% = $99,450 from Austin + $375,000 internally generated = $474,450.

42) D $234,000 ÷ 90% = $260,000 × 10% = $26,000

43) B Building FV $8,000 − Building BV $10,000 = ($2,000) Differential

44) D Building FV $8,000 − Building BV $10,000 = ($2,000) Differential on January 1, 2019 Excess Amortization = ($2,000) excess ÷ 10 years = ($200) per year ($2,000) Differential − 2019 Excess Amortization of ($200) = ($1,800) Reduction on December 31, 2019

45) D Building FV $8,000 − Building BV $10,000 = ($2,000) Differential on January 1, 2019 Excess Amortization = ($2,000) excess ÷ 10 years = ($200) per year ($2,000) Differential − 2019 Excess Amortization of ($200) − 2020 Excess Amortization of ($200) = ($1,600) Reduction on December 31, 2020

46) A Equipment FV $18,000 − Equipment BV $14,000 = $4,000 Differential on January 1, 2019

47) A Fair Value Differential ($18,000 − $14,000) $4,000 − 2019 Amortization of $1,000 = $3,000 Increase Excess amortization = $4,000 ÷ 4 years = $1,000 per year

48) A

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Fair Value Differential ($18,000 − $14,000) $4,000 − 2019 Amortization of $1,000 − 2020 Amortization of $1,000 = $2,000 Increase Excess amortization = $4,000 ÷ 4 years = $1,000 per year

49) A Land FV $12,000 − Land BV $5,000 = $7,000 FV Differential on January 1, 2019

50) B Fair Value Differential ($12,000 − $5,000) $7,000 − No Amortization for 2019 = $7,000 Increase Land has an indefinite life so no amortization.

51) B Fair Value Differential ($12,000 − $5,000) $7,000 − No Amortization for 2019 or 2020 = $7,000 Increase Land has an indefinite life so no amortization.

52) C Acquisition date FV ($234,000 ÷ 90%) Acquisition date BV (C/S $160,000 + RE $80,000) Excess Buildings ($8,000 − $10,000) Equipment ($18,000 − $14,000) Land ($12,000 − $5,000) Remainder attributed to Patent

$ 260,000 240,000 $ 20,000 (2,000) 4,000 7,000 $ 11,000

53) B Fair Value Attributed to Patent $11,000 − 2019 Amortization $2,200 = $8,800 Acquisition date FV ($234,000 ÷ 90%) Acquisition date BV (C/S $160,000 + RE $80,000) Excess Buildings ($8,000 − $10,000) Equipment ($18,000 − $14,000) Land ($12,000 − $5,000) Remainder attributed to Patent Life of Patent Annual Amortization of Patent

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$ 260,000 240,000 $ 20,000 (2,000) 4,000 7,000 $ 11,000 ÷ 5 years $ 2,200

54) D Fair Value Attributed to Patent $11,000 − 2019 Amortization $2,200 − 2020 Amortization $2,200 = $6,600 Acquisition date FV ($234,000 ÷ 90%) Acquisition date BV (C/S $160,000 + RE $80,000) Excess Buildings ($8,000 − $10,000) Equipment ($18,000 − $14,000) Land ($12,000 − $5,000) Remainder attributed to Patent Life of Patent Annual Amortization of Patent

$ 260,000 240,000 $ 20,000 (2,000) 4,000 7,000 $ 11,000 ÷ 5 years $ 2,200

55) D Initial investment 2019 Share of Demers Net Income ($100,000 × 80%) 2019 Dividends from Demers ($40,000 × 80%) 2019 Amortization* ($7,000 × 80%) Investment in Demers, December 31, 2019

$ 500,000 80,000 (32,000) (5,600) $ 542,400

*Amortization = ($30,000 Equipment undervalued + $40,000 Buildings undervalued) ÷ 10 years = $7,000 per year.

56) C Initial investment 2019 Share of Demers Net Income ($100,000 × 80%) 2019 Dividends from Demers ($40,000 × 80%) 2019 Amortization* ($7,000 × 80%) 2020 Share of Demers Net Income ($120,000 × 80%) 2020 Dividends from Demers ($50,000 × 80%) 2020 Amortization* ($7,000 × 80%) Investment in Demers, December 31, 2020

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$ 500,000 80,000 (32,000) (5,600) 96,000 (40,000) (5,600) $ 592,800

*Amortization = ($30,000 Equipment undervalued + $40,000 Buildings undervalued) ÷ 10 years = $7,000 per year.

57) B Initial investment 2019 Share of Demers Net Income ($100,000 × 80%) 2019 Dividends from Demers ($40,000 × 80%) 2019 Amortization* ($7,000 × 80%) 2020 Share of Demers Net Income ($120,000 × 80%) 2020 Dividends from Demers ($50,000 × 80%) 2020 Amortization* ($7,000 × 80%) 2021 Share of Demers Net Income ($130,000 × 80%) 2021 Dividends from Demers ($60,000 × 80%) 2021 Amortization* ($7,000 × 80%) Investment in Demers, December 31, 2021

$ 500,000 80,000 (32,000) (5,600) 96,000 (40,000) (5,600) 104,000 (48,000) (5,600) $ 643,200

*Amortization = ($30,000 Equipment undervalued + $40,000 Buildings undervalued) ÷ 10 years = $7,000 per year.

58) A Controlling Interest Share of [Net Income for 2019 ($100,000 × 80%) − Excess FV Annual Amortization* ($7,000 × 80%)] = $74,400 *Amortization = ($30,000 Equipment undervalued + $40,000 Buildings undervalued) ÷ 10 years = $7,000 per year.

59) A Controlling Interest Share of [Net Income for 2020 ($120,000 × 80%) − Excess FV Annual Amortization* ($7,000 × 80%)] = $90,400 *Amortization = ($30,000 Equipment undervalued + $40,000 Buildings undervalued) ÷ 10 years = $7,000 per year.

60) C Controlling Interest Share of [Net Income for 2021 ($130,000 × 80%) − Excess FV Annual Amortization* ($7,000 × 80%)] = $98,400 *Amortization = ($30,000 Equipment undervalued + $40,000 Buildings undervalued) ÷ 10 years = $7,000 per year.

61) C

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Noncontrolling Interest Share of [Net Income for 2019 ($100,000 × 20%) − Excess FV Annual Amortization* ($7,000 × 20%)] = $18,600 *Amortization = ($30,000 Equipment undervalued + $40,000 Buildings undervalued) ÷ 10 years = $7,000 per year.

62) C Noncontrolling Interest Share of [Net Income for 2020 ($120,000 × 20%) − Excess FV Annual Amortization* ($7,000 × 20%)] = $22,600 *Amortization = ($30,000 Equipment undervalued + $40,000 Buildings undervalued) ÷ 10 years = $7,000 per year.

63) B Noncontrolling Interest Share of [Net Income for 2021 ($130,000 × 20%) − Excess FV Annual Amortization* ($7,000 × 20%)] = $24,600 *Amortization = ($30,000 Equipment undervalued + $40,000 Buildings undervalued) ÷ 10 years = $7,000 per year.

64) A Noncontrolling Interest at Acquisition $125,000 + Noncontrolling Interest Share of [Net Income for 2019 ($100,000 × 20%) − Dividends for 2019 ($40,000 × 20%) − Excess FV Annual Amortization* ($7,000 × 20%)] = $135,600 *Amortization = ($30,000 Equipment undervalued + $40,000 Buildings undervalued) ÷ 10 years = $7,000 per year.

65) E Noncontrolling Interest at Acquisition Demers 2019 Net Income ($100,000 × 20%) Demers 2019 Dividends ($40,000 × 20%) 2019 Amortization* ($7,000 × 20%) Demers 2020 Net Income ($120,000 × 20%) Demers 2020 Dividends ($50,000 × 20%) 2020 Amortization* ($7,000 × 20%) Noncontrolling Interest, December 31, 2020

$ 125,000 20,000 (8,000) (1,400) 24,000 (10,000) (1,400) $ 148,200

*Amortization = ($30,000 Equipment undervalued + $40,000 Buildings undervalued) ÷ 10 years = $7,000 per year.

66) D Noncontrolling Interest at Acquisition

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$ 125,000 72

Demers 2019 Net Income ($100,000 × 20%) Demers 2019 Dividends ($40,000 × 20%) 2019 Amortization* ($7,000 × 20%) Demers 2020 Net Income ($120,000 × 20%) Demers 2020 Dividends ($50,000 × 20%) 2020 Amortization* ($7,000 × 20%) Demers 2021 Net Income ($130,000 × 20%) Demers 2021 Dividends ($60,000 × 20%) 2021 Amortization* ($7,000 × 20%) Noncontrolling Interest, December 31, 2021

20,000 (8,000) (1,400) 24,000 (10,000) (1,400) 26,000 (12,000) (1,400) $ 160,800

*Amortization = ($30,000 Equipment undervalued + $40,000 Buildings undervalued) ÷ 10 years = $7,000 per year.

67) D The balance reported by the parent is eliminated through the consolidation process. 68) A The balance reported by the parent is eliminated through the consolidation process. 69) A Under the initial value method, the investment account remains at initial investment of $500,000.

70) D Under the initial value method, the investment account remains at initial investment of $500,000.

71) B Under the initial value method, the investment account remains at initial investment of $500,000.

72) A 2019 Dividends $40,000 × 80% = $32,000

73) B 2020 Dividends $50,000 × 80% = $40,000

74) A 2021 Dividends $60,000 × 80% = $48,000

75) C

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76) C Noncontrolling Interest Share of [Net Income for 2020 ($120,000 × 20%) − Excess FV Annual Amortization* ($7,000 × 20%)] = $22,600 *Amortization = ($30,000 Equipment undervalued + $40,000 Buildings undervalued) ÷ 10 years = $7,000 per year.

77) A Noncontrolling Interest Share of [Net Income for 2021 ($130,000 × 20%) − Excess FV Annual Amortization* ($7,000 × 20%)] = $24,600 *Amortization = ($30,000 Equipment undervalued + $40,000 Buildings undervalued) ÷ 10 years = $7,000 per year.

78) A Noncontrolling Interest at Acquisition Demers 2019 Net Income ($100,000 × 20%) Demers 2019 Dividends ($40,000 × 20%) 2019 Amortization* ($7,000 × 20%) Noncontrolling interest at December 31, 2019

$ 125,000 20,000 (8,000) (1,400) $ 136,000

*Amortization = ($30,000 Equipment undervalued + $40,000 Buildings undervalued) ÷ 10 years = $7,000 per year.

79) E Noncontrolling Interest at Acquisition Demers 2019 Net Income ($100,000 × 20%) Demers 2019 Dividends ($40,000 × 20%) 2019 Amortization* ($7,000 × 20%) Demers 2020 Net Income ($120,000 × 20%) Demers 2020 Dividends ($50,000 × 20%) 2020 Amortization* ($7,000 × 20%) Noncontrolling interest at December 31, 2020

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$ 125,000 20,000 (8,000) (1,400) 24,000 (10,000) (1,400) $ 148,200

*Amortization = ($30,000 Equipment undervalued + $40,000 Buildings undervalued) ÷ 10 years = $7,000 per year. 80) E Noncontrolling Interest at Acquisition Demers 2019 Net Income ($100,000 × 20%) Demers 2019 Dividends ($40,000 × 20%) 2019 Amortization* ($7,000 × 20%) Demers 2020 Net Income ($120,000 × 20%) Demers 2020 Dividends ($50,000 × 20%) 2020 Amortization* ($7,000 × 20%) Demers 2021 Net Income ($130,000 × 20%) Demers 2021 Dividends ($60,000 × 20%) 2021 Amortization* ($7,000 × 20%) Noncontrolling interest at December 31, 2021

$ 125,000 20,000 (8,000) (1,400) 24,000 (10,000) (1,400) 26,000 (12,000) (1,400) $ 160,800

*Amortization = ($30,000 Equipment undervalued + $40,000 Buildings undervalued) ÷ 10 years = $7,000 per year.

81) C Initial Investment Demers 2019 Net Income ($100,000 × 80%) Demers 2019 Dividends ($40,000 × 80%) Investment in Demers, December 31, 2019

$ 500,000 80,000 (32,000) $ 548,000

82) D Initial Investment Demers 2019 Net Income ($100,000 × 80%) Demers 2019 Dividends ($40,000 × 80%) Demers 2020 Net Income ($120,000 × 80%) Demers 2020 Dividends ($50,000 × 80%) Investment in Demers, December 31, 2020

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$ 500,000 80,000 (32,000) 96,000 (40,000) $ 604,000

83) B Initial Investment Demers 2019 Net Income ($100,000 × 80%) Demers 2019 Dividends ($40,000 × 80%) Demers 2020 Net Income ($120,000 × 80%) Demers 2020 Dividends ($50,000 × 80%) Demers 2021 Net Income (130,000 × 80%) Demers 2021 Dividends ($60,000 × 80%) Investment in Demers, December 31, 2021

$ 500,000 80,000 (32,000) 96,000 (40,000) 104,000 (48,000) $ 660,000

84) A Controlling Interest Share of Net Income for 2019 ($100,000 × 80%) = $80,000

85) D Controlling Interest Share of Net Income for 2020 ($120,000 × 80%) = $96,000

86) C Controlling Interest Share of Net Income for 2021 ($130,000 × 80%) = $104,000

87) C Noncontrolling Interest Share of [Net Income for 2019 ($100,000 × 20%) − Excess FV Annual Amortization ($7,000 × 20%)] = $18,600

88) C Noncontrolling Interest Share of [Net Income for 2020 ($120,000 × 20%) − Excess FV Annual Amortization ($7,000 × 20%)] = $22,600

89) C Noncontrolling Interest Share of [Net Income for 2021 ($130,000 × 20%) − Excess FV Annual Amortization ($7,000 × 20%)] = $24,600

90) A Noncontrolling Interest at Acquisition Demers 2019 Net Income ($100,000 × 20%) Demers 2019 Dividends ($40,000 × 20%) 2019 Amortization* ($7,000 × 20%) Noncontrolling interest at December 31, 2019

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$ 125,000 20,000 (8,000) (1,400) $ 135,600

*Amortization = ($30,000 Equipment undervalued + $40,000 Buildings undervalued) ÷ 10 years = $7,000 per year.

91) E Noncontrolling Interest at Acquisition Demers 2019 Net Income ($100,000 × 20%) Demers 2019 Dividends ($40,000 × 20%) 2019 Amortization* ($7,000 × 20%) Demers 2020 Net Income ($120,000 × 20%) Demers 2020 Dividends ($50,000 × 20%) 2020 Amortization* ($7,000 × 20%) Noncontrolling interest at December 31, 2020

$ 125,000 20,000 (8,000) (1,400) 24,000 (10,000) (1,400) $ 148,200

*Amortization = ($30,000 Equipment undervalued + $40,000 Buildings undervalued) ÷ 10 years = $7,000 per year.

92) D Noncontrolling Interest at Acquisition Demers 2019 Net Income ($100,000 × 20%) Demers 2019 Dividends ($40,000 × 20%) 2019 Amortization* ($7,000 × 20%) Demers 2020 Net Income ($120,000 × 20%) Demers 2020 Dividends ($50,000 × 20%) 2020 Amortization* ($7,000 × 20%) Demers 2021 Net Income ($130,000 × 20%) Demers 2021 Dividends ($60,000 × 20%) 2021 Amortization* ($7,000 × 20%) Noncontrolling interest at December 31, 2021

$ 125,000 20,000 (8,000) (1,400) 24,000 (10,000) (1,400) 26,000 (12,000) (1,400) $ 160,800

*Amortization = ($30,000 Equipment undervalued + $40,000 Buildings undervalued) ÷ 10 years = $7,000 per year.

93) E The balance reported by the parent is eliminated through the consolidation process. 94) A Version 1

The balance reported by the parent is eliminated through the consolidation process. 95) A (Recorded Goodwill $200,000) − (2020 Goodwill Impairment $50,000) = $150,000 Reported Goodwill for 2020 96) D 97) Implied value of Beazley Corp. ($240,000 ÷ 60%)

Noncontrolling percentage

Noncontrolling interest in Beazley Corp.

400,000 40 % 160,000

98) Implied fair value ($540,000 ÷ 80%)

Fair value net identifiable assets Goodwill

675,000 (600,000 )

75,000

99) All subsidiary identifiable assets and liabilities are consolidated at their full fair values on the date of acquisition. The amount the building would appear on a consolidated balance sheet prepared immediately after the combination is the building’s fair value of $150,000.

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100) The entire amount of the subsidiary’s revenues is combined with the parent’s revenues to arrive at consolidated revenues. The exception to this would be the case of a midyear acquisition. If Pennant owned its shares of Scarvens for all of 2020, all of Scarvens’s revenues ($200,000) would be combined. If Pennant owned its shares of Scarvens for only a portion of 2020, any of Scarvens’s revenues earned prior to the acquisition would be excluded from consolidated revenues. 101) Implied fair value of Club Corp. ($2,600,000 ÷ 65%)

Fair value of Club Corp.’s net assets Goodwill

4,000,000 (3,500,000 )

500,000

Implied value of Club Corp. ($2,600,000 / 65%)

4,000,000

Noncontrolling interest percentage

Noncontrolling interest in Club Corp.

102)

35 % 1,400,000

103) Implied fair value of Acron Corp. ($500,000 ÷ 80%)

Fair value net assets Goodwill

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625,000 (600,000 )

25,000

104) Implied value of Acron Corp. ($500,000 ÷ 80%) Noncontrolling interest percentage Value assigned to noncontrolling interest

$ 625,000 ×

20 %

$ 125,000

105) Jannison’s income – 2019

$ 308,000

Techron’s income – 2019

98,000

Amortization expense (given)

(11,000 )

Consolidated net income To noncontrolling interest [($98,000 − 11,000) × 10%] To controlling interest

$ 395,000 (8,700 ) $ 386,300

106) Jannison’s income – 2020

$ 364,000

Techron’s income – 2020

126,000

Amortization expense (given)

(11,000 )

Consolidated net income To noncontrolling interest [($126,000 − 11,000) × 10%] To controlling interest

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$ 479,000 (11,500 ) $ 467,500

107) At January 1, 2019: Common stock + Retained earnings

$ 420,000

Fair value excess allocation $530,000 − $420,000 Techron’s income - 2019 (98,000 − amort. 11,000) Dividends paid

110,000

Techron’s income - 2020 (126,000 − amort. 11,000) Dividends paid

115,000

$ 530,000

87,000 (42,000 )

45,000

(42,000 )

73,000

Techron’s book value — December 31, 2020

$ 648,000

Noncontrolling interest percentage

Noncontrolling interest — December 31, 2020

10 % 64,800

108) From the acquisition value, $28,000 was allocated based on the fair value of the building. With a ten-year remaining life, amortization will be $2,800 per year of which $1,960 is attributed to the controlling interest. Copyright amortization would have been $4,000 per year of which $2,800 is attributed to the controlling interest. Entry S Common Stock-Carper Inc.

420,000

Retained Earnings, 1/1/20- Carper Inc.

375,200

Investment in Carper Inc. (70%)

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556,640

Noncontrolling Interest in Carper Inc., 1/1/20

238,560

Entry A Building ($28,000 less 2 years depeciation)

22,400

72,000

Goodwill

140,000

Investment in Carper Inc.

170,080

Noncontrolling Interest in Carper Inc.

64,320

Goodwill: Vacker paid $650,000 which includes $20,000 premium. Thus, $630,000 represents 70% of the shares without the premium. $630,000 ÷ 70% = $900,000 value of the company without the premium. 30% × $900,000 = $270,000. The total fair value of the company is thus $650,000 that Vacker paid + $270,000 value of the noncontrolling interest shares = $920,000. The fair value of the net assets acquired is $780,000 (= $672,000 + $28,000 + $80,000). Goodwill attributable to Vacker is $104,000 (= $650,000 − [70% × $780,000]) and the goodwill attributable to the noncontrolling interest is $36,000 (= $270,000 − [30% × $780,000]). Total differential attributable to Vacker $170,080 [$104,000 + ((22,400 + $72,000) × 70%)] and differential attributable to the noncontrolling interest is $64,320 [$36,000 + ((22,400 + $72,000) × 30%)] Entry I Equity in Subsidiary Earnings Investment in Carper Inc.

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103,040 103,040

Entry D Investment in Carper Inc.

58,800

Dividends Paid

58,800

Entry E Depreciation Expense

2,800

Amortization Expense

4,000

Buildings

2,800

4,000

Entry P Accounts Payable Accounts receivable

30,800 30,800

Noncontrolling Interest items: Dividends

(25,200 )

Income of Carper

44,160

Beginning NCI = $270,000 + $29,460 (income) − $16,380 (dividends) + $38,280 (income) − $18,480 (dividends) = $302,880 109) Consolidation Worksheet for John Doe Enterprises and Bubba Manufacturing at 12/31/20. Accounts

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CONSOLIDATION WORKSHEET For the Year Ended 12/31/2020 John Doe Bubba Consolidation NonEnt. MFG. Entries control ling DR CR Interes

Consolida ted Balances

t Revenues

(298,00 ) 0,000 Expenses 271,000 ,000 Equity in (4,361, ) Sub Income 500

(103,75 ) 0,000 95,800, ( ) 20,000 000 E ( ) 4,361, I 500

Separate (31,361 ) Net Income ,500

(7,950, ) 000

(401,75 ) 0,000 366,820 ,000

Consolidat ed Net Income Noncontrol ling Interest in Bubba’s Income

(34,930 ) ,000 (3,568, ) 500

Net income to controllin g interest

3,568,5 00

(31,361 ) ,500

R/E, (2,500, ) 1/1/20 000 Net Income (31,361 ) ,500 Dividends 5,000,0 00

(100,00 ) ( ) 100,00 0 S 0 (7,950, ) 000 3,000,0 ( ) 1,650, 00 D 000

R/E, 12/31/20

(5,050, ) 000

(28,861 ) ,500

20,800, 000

51,300, 000

(28,861 ) ,500

Current 30,500, assets 000 Investment 13,161, in Bubba 500 Mfg.

1,350,0 00

(2,500, ) 000 (31,361 ) ,500 5,000,0 00

( ) 1,650, ( ) 9,333, D 000 S 500 ( ) 1,116, A 500 ( ) 4,361, I 500

Land Building (net)

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1,500,0 00 5,600,0 00

1,700,0 00 2,360,0 00

( ) 850,00 A 0 ( ) 700,00 ( ) 100,00 A 0 E 0

4,050,0 00 8,560,0 00

Equipment (net) Goodwill

3,100,0 00

2,960,0 00

Total assets

53,861, 500

27,820, 000

70,530, 000

(4,900, ) 000 (1,000, ) 000

(8,000, ) 000 (1,000, ) 000

Accounts (3,100, ) Payable 000 Notes Payable Noncontrol ling Interest 1/1/20

( ) 80,000 ( ) 400,00 E A 0 ( ) 880,00 A 0

( ) 7,636, S 500

5,740,0 00 880,000

(8,550, ) 000

( ) 913,50 A 0 Noncontrol ling Interest 12/31/20

(10,768 ) ,500

Common (2,900, ) Stock 000 Additional (19,000 ) Paid-in ,000 Capital R/E, (28,861 ) 12/31/20 ,500 Total liabilit ies & Stockhol ders’ Equity

(53,861 ) ,500

(10,768 ) ,500

(6,000, ) ( ) 6,000, 000 S 000 (10,870 ) ( ) 10,870 ,000 S ,000

(2,900, ) 000 (19,000 ) ,000

(5,050, ) 000

(28,861 ) ,500

(27,820 ) ,000

25,511 ,500

(70,530 ) ,000

110)

Revenues ($840,000 + $500,000) Expenses ($360,000 + $350,000 + amort. $12,000*)

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$ 1,340,000 722,000

Consolidated net income

To noncontrolling interest To controlling interest

618,000 (39,100 )

578,900

500,000

Noncontrolling interest: Revenues Expenses ($350,000 + amort. $12,000) Net income

362,000 $

138,000

39,100

30% × 10/12 months × 138,000 = $34,500 20% × 2/12 months × 138,000 = $4,600

* Amortization of $12,000 = original $8,400 for 70% grossed up to the 100% amount of $12,000. 111) Answer: (1) F; (2) F; (3) T; (4) F; (5) T; (6) T; (7) F; (8) T; (9) F 112) The noncontrolling interest should appear as a part of stockholders' equity where it would be clearly identified, labeled and distinguished from the parent’s controlling interest in subsidiaries. 113) When a company acquires control of a subsidiary during a fiscal year, pre-acquisition income is the income attributed to the previous owners of the shares of the common stock for the portion of the year before the acquisition.

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114) Beta will be required to prepare consolidated financial statements if it has control of Shedds. If Beta has more than 50% of the voting common stock of Shedds, it has control and must prepare consolidated financial statements. Occasionally, ownership of less than 50% of the voting common stock can confer control. In this situation, an argument can be made that the company with control should prepare consolidated financial statements, although such reporting is not currently required. 115) It is necessary to ascertain the subsidiary’s total fair value at the acquisition date so that the value can be appropriately attributed to the parent and to the noncontrolling interest. If there is a control premium, then the total fair value of the subsidiary cannot be implied by the parent’s consideration transferred unless the premium amount is first removed from the consideration value. If separate share fair values are specifically known for the shares acquired by the parent and the shares held by the noncontrolling interest, then the total fair value can be directly calculated. In either calculation, the control premium affects primarily the parents’ shares acquired, and thus goodwill is disproportionately (relative to the ownership percentages) allocated to the controlling and noncontrolling interests. This disproportionate allocation of goodwill is essential to know because the resulting allocation of goodwill affects Entry A for the worksheet and thus affects the resulting balance of the noncontrolling interest reported on the consolidated balance sheet.

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116) The noncontrolling interest fair value may be implied by the parent’s consideration transferred or by a separate value calculation. The total acquisition fair value is then the sum of both parent and noncontrolling interest shares. The fair value of the net assets acquired is apportioned to the parent and to the noncontrolling interest. Then, the difference between acquisition fair value and relative fair value of net assets acquired is goodwill attributed respectively to the parent and to the noncontrolling interest. 117) The noncontrolling interest would appear as a clearly identifiable portion of consolidated net income such that the controlling portion plus the noncontrolling portion equals the consolidated net income presented. 118) Only post-acquisition revenues and expenses are included in consolidated totals. The noncontrolling interest is thereby viewed as beginning as of the acquisition date. 119) If control is maintained after the sale, then the difference between the sales proceeds and the book value is an adjustment to the parent’s owners’ equity. If control is not maintained, then such difference is a gain or loss on sale of investment. In either situation, the carrying value of the investment should be on the equity method basis in order to calculate the proper entry for the sale. Therefore, if Prevatt adjusts the carrying value of its investment, it is in order to bring an initial value method or partial equity method investment basis to an equity method basis.

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120) If control is maintained after the sale, then the difference between the sales proceeds and the book value is an adjustment to the parent’s owners’ equity (APIC). If control is not maintained, then such difference is a gain or loss on sale of investment. In either situation, the book value of the investment should be on the equity method basis in order to calculate the proper entry for the sale. Therefore, if the investment has been kept under the initial value or the partial equity method, the investor adjusts the book value of its investment in order to bring an initial value method or partial equity method investment basis to an equity method basis. 121) The parent company can employ a number of valuation techniques to estimate the fair value of the noncontrolling interest at acquisition date. Usually, a parent can rely on readily available market trading activity to provide a fair valuation of its subsidiary’s noncontrolling interest. In the absence of fair value evidence based on market trades, the parent must turn to less objective measures of noncontrolling interest fair value. For example, comparable investments may be available to estimate fair value. Alternatively, valuation models based on subsidiary discounted cash flows or residual income projections can be employed to estimate the acquisition-date fair value of the noncontrolling interest. Finally, if a control premium is unlikely, the consideration paid by the parent can be used to imply a fair value for the entire subsidiary. The noncontrolling interest fair value is then simply measured as its percentage of this implied subsidiary fair value. 122) The parent company will consolidate all of the financial data of every subsidiary when control is present. A single economic entity is formed whenever one company is able to control the decision-making process of another. The portion of the subsidiary that is not owned by the parent is referred to as a noncontrolling interest and is accounted for in the stockholders’ equity section of the consolidated balance sheet. Version 1

123) JDE’s fair value of consideration transferred = $3,000,000 + (500,000 shares × $14.90 per share) = $3,000,000 + $7,450,000 = $10,450,000 John Doe Enterprises and 55% Owned Subsidiary Bubba Manufacturing Fair-Value Allocation and Amortization January 1, 2020 Allocation Life (years) Annual Amortization Bubba’s acquisition-date fair $ 19,000,000 value ($10,450,000 ÷ 55%) Bubba’s acquisition-date book (16,970,000) value Fair value in excess of book $ 2,030,000 value Adjustments to: Land ($2,550,000 − $1,700,000) Buildings ($3,400,000 − $2,700,000) Equipment ($3,300,000 − $3,700,000) Goodwill Annual amortization of excess fair value over book value

$ 850,000

indefinite

$ 0

700,000

100,000

(400,000)

(80,000)

$ 880,000

indefinite

$ 0 $ 20,000

Goodwill Allocation to the Controlling and Noncontrolling Interests Controlling NCI Total Interest Fair value at acquisition $ 10,450,000 $ 8,550,000 $ date 19,000,000 Relative FV of Bubba’s 9,966,000 8,154,000 18,120,000 identifiable net assets Goodwill $ 484,000 $ 396,000 $ 880,000

FV of Bubba’s identifiable net assets = Bubba’s BV ($16,970,000) + Land Excess ($850,000) + Buildings Excess ($700,000) − Equipment Excess ($400,000) = $18,120,000. Version 1

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CHAPTER 5 MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) On October 6, 2021, Ronan Corp. sold land to Bane Co., its wholly owned subsidiary. The land cost $72,400 and was sold to Bane for $96,000. For consolidated financial statement reporting purposes, when must the gain on the sale of the land be recognized? A) Proportionately over a designated period of years. B) When Bane Co. sells the land to a third party. C) No gain may be recognized. D) As Bane uses the land. E) When Bane Co. begins using the land productively.

2) Kenzie Co. acquired 70% of McCready Co. on January 1, 2021. During 2021, Kenzie made several sales of inventory to McCready. The cost and sales price of the goods were $150,000 and $220,000, respectively. McCready still owned one-fourth of the goods at the end of 2021. Consolidated cost of goods sold for 2021 was $2,280,000 due to a consolidating adjustment for intra-entity transfers less intra-entity gross profit in McCready’s ending inventory. How would consolidated cost of goods sold have differed if the inventory transfers had been for the same amount and cost, but from McCready to Kenzie? A) Consolidated cost of goods sold would have remained $2,280,000. B) Consolidated cost of goods sold would have been more than $2,280,000 because of the controlling interest in the subsidiary. C) Consolidated cost of goods sold would have been less than $2,280,000 because of the noncontrolling interest in the subsidiary. D) Consolidated cost of goods sold would have been more than $2,280,000 because of the noncontrolling interest in the subsidiary. E) The effect on consolidated cost of goods sold cannot be predicted from the information provided.

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3) Kenzie Co. acquired 70% of McCready Co. on January 1, 2021. During 2021, Kenzie made several sales of inventory to McCready. The cost and sales price of the goods were $150,000 and $220,000, respectively. McCready still owned one-fourth of the goods at the end of 2021. Consolidated cost of goods sold for 2021 was $2,280,000 due to a consolidating adjustment for intra-entity transfers less intra-entity gross profit in McCready’s ending inventory. How would net income attributable to the noncontrolling interest be different if the transfers had been for the same amount and cost, but from McCready to Kenzie? A) Net income attributable to the noncontrolling interest would have decreased by $5,250. B) Net income attributable to the noncontrolling interest would have increased by $17,500. C) Net income attributable to the noncontrolling interest would have increased by $10,500. D) Net income attributable to the noncontrolling interest would have decreased by $15,750. E) Net income attributable to the noncontrolling interest would have decreased by $52,500.

4) On January 1, 2021, Doyle Corp. acquired 75% of the voting common stock of Bressant Inc. During the year, Doyle sold to Bressant for $510,000 goods that cost $380,000. At year-end, Bressant owned 20% of the goods transferred. Bressant reported net income of $215,000, and Doyle’s net income was $902,000. Doyle decided to use the equity method to account for this investment. Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, what was the net income attributable to the noncontrolling interest? A) $27,750. B) $43,000. C) $47,250. D) $53,750. E) $60,250.

5) Poole Co. acquired 100% of Mullen Inc. on January 3, 2021. During 2021, Poole sold goods to Mullen for $2,500,000 that cost Poole $1,850,000. Mullen still owned 30% of the goods at the end of the year. Cost of goods sold was $11,200,000 for Poole and $6,600,000 for Mullen. What was consolidated cost of goods sold? Version 1

A) $15,105,000. B) $15,300,000. C) $15,495,000. D) $17,800,000. E) $17,995,000.

6) Colbert Inc. acquired 100% of Stewart Manufacturing on January 2, 2020. During 2020, Colbert sold Stewart $640,000 of goods, which had cost $450,000. Stewart still owned 18% of the goods at the end of the year. In 2021, Colbert sold goods with a cost of $820,000 to Stewart for $1,000,000, and Stewart still owned 15% of the goods at year-end. For 2021, the cost of goods sold totaled $5,800,000 for Colbert, and $1,300,000 for Stewart. What was consolidated cost of goods sold for 2021? A) $6,038,800. B) $6,092,800. C) $6,100,000. D) $6,107,200. E) $7,100,000.

7) Prescott Inc. owned 80% of the voting common stock of Hutchins Corp. During 2021, Hutchins made several sales of inventory to Prescott. The total selling price was $190,000 and the cost was $105,000. At the end of the year, 30% of the goods were still in Prescott’s inventory. Hutchins’s reported net income was $320,000. Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, what was the net income attributable to the noncontrolling interest in Hutchins? A) $47,000. B) $58,900. C) $64,000. D) $69,100. E) $90,900.

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8) Macklin Co. owned 70% of Holland Corp. During 2021, Macklin sold to Holland land with a book value of $51,000. The selling price was $75,000. For purposes of the December 31, 2021 consolidated financial statements, at what amount should the land be reported? A) $7,200. B) $24,000. C) $51,000. D) $67,800. E) $75,000.

9) Clark Corp. owned 75% of the voting common stock of Andrew Co. On January 3, 2020, Andrew sold a parcel of land to Clark. The land had a book value of $36,000 and was sold to Clark for $52,000. Andrew’s reported net income for 2020 was $123,000. Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, what is net income attributable to the noncontrolling interest? A) $14,750. B) $26,750. C) $27,750. D) $30,750. E) $34,750.

10) Milton Co. owned all of the voting common stock of Walker Co. On January 3, 2020, Milton sold equipment to Walker for $140,000. The equipment cost Clemente $165,000. At the time of the transfer, the balance in accumulated depreciation was $45,000. The equipment had a remaining useful life of five years and a $0 salvage value. Both entities use the straight-line method of depreciation. At what amount should the equipment (net of depreciation) be included in the consolidated balance sheet dated December 31, 2020? A) $96,000. B) $120,000. C) $140,000. D) $144,000. E) $165,000.

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11) Milton Co. owned all of the voting common stock of Walker Co. On January 3, 2020, Milton sold equipment to Walker for $140,000. The equipment cost Clemente $165,000. At the time of the transfer, the balance in accumulated depreciation was $45,000. The equipment had a remaining useful life of five years and a $0 salvage value. Both entities use the straight-line method of depreciation. At what amount should the equipment (net of depreciation) be included in the consolidated balance sheet dated December 31, 2021? A) $48,000. B) $72,000. C) $96,000. D) $145,000. E) $165,000.

12) During 2020, Odyssey Co. sold inventory to its wholly-owned subsidiary, Civic Co. The inventory cost $40,000 and was sold to Lord for $58,000. For consolidation reporting purposes, when is the $18,000 intra-entity gross profit recognized? A) When goods are transferred to a third party by Civic. B) When Civic pays Odyssey for the goods. C) When Odyssey sold the goods to Civic. D) When Civic receives the goods. E) No gain can be recognized since the transfer was between related parties.

13) Will Co. owned 80% of the voting common stock of Carlton Co. During 2020, Carlton made frequent sales of inventory to Will. There was deferred intra-entity gross profit of $50,000 in the beginning inventory and $30,000 of intra-entity gross profit at the end of the year. Carlton reported net income of $173,000 for 2020. Will decided to use the equity method to account for the investment. Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, what is the net income attributable to the noncontrolling interest for 2020?

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A) $28,600. B) $30,600. C) $34,600. D) $38,600. E) $50,600.

14) Beesly Co. owned all of the voting common stock of Halpert Corp. The corporations' balance sheets dated December 31, 2020, include the following balances for land: —Beesly – $461,000, and —Halpert – $265,000. On the original date of acquisition, the book value of Halpert’s land was equal to its fair value. On May 2, 2021, Beesly sold to Halpert a parcel of land with a book value of $75,000. The selling price was $88,000. There were no other transfers, which affected the companies' land accounts during 2020. What is the consolidated balance for land on the 2021 balance sheet? A) $713,000. B) $726,000. C) $739,000. D) $801,000. E) $814,000.

15) Hudson Corp. owned a 85% interest in Martin Co. Martin frequently made sales of inventory to Hudson. The sales, which include a markup over cost of 25%, were $460,000 in 2020 and $520,000 in 2021. At the end of each year, Hudson still owned 40% of the goods. Net income for Martin was $932,000 during 2021. Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, what was the net income attributable to the noncontrolling interest for 2021? A) $128,040. B) $137,550. C) $139,080. D) $139,800. E) $151,560.

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16) On January 1, 2021, Kapoor Co. sold equipment to its subsidiary, Howard Corp., for $125,000. The equipment had cost $150,000, and the balance in accumulated depreciation was $70,000. The equipment had an estimated remaining useful life of eight years and no salvage value. Both companies use straight-line depreciation. On their separate 2021 income statements, Kapoor and Howard reported depreciation expense of $86,000 and $64,000, respectively. The amount of depreciation expense on the consolidated income statement for 2021 would have been: A) $134,375. B) $144,375. C) $150,000. D) $155,625. E) $165,625.

17) Flax Co. acquired 80% percent of the voting common stock of Levinson Corp. on January 1, 2021. During the year, Flax made sales of inventory to Levinson. The inventory cost Flax $275,000 and was sold to Levinson for $420,000. Levinson held $84,000 of the goods in its inventory at the end of the year. The amount of intra-entity gross profit for which recognition is deferred, and should therefore be eliminated in the consolidation process at the end of 2021, is: A) $23,200. B) $29,000. C) $67,200. D) $116,000. E) $145,000.

18) Malone Co. owned 70% of Bernard Corp.'s common stock. During November 2021, Bernard sold merchandise to Malone for $150,000. At December 31, 2021, 40% of this merchandise remained in Malone's inventory. For 2021, gross profit percentages were 25% of sales for Malone and 30% of sales for Bernard. The amount of intra-entity gross profit remaining in ending inventory at December 31, 2021 that should be eliminated in the consolidation process is:

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A) $11,250. B) $14,400. C) $18,000. D) $36,000. E) $45,000.

19) Pot Co. holds 90% of the common stock of Skillet Co. During 2021, Pot reported sales of $1,120,000 and cost of goods sold of $840,000. For this same period, Skillet had sales of $420,000 and cost of goods sold of $252,000. Included in the amounts for Pot’s sales were Pot’s sales of merchandise to Skillet for $140,000. There were no intra-entity transfers from Skillet to Pot. Intra-entity transfers had the same markup as sales to outsiders. Skillet still held 40% of the intra-entity gross profit remaining in ending inventory at the end of 2021. What are consolidated sales and cost of goods sold, respectively for 2021? A) $1,400,000 and $952,000. B) $1,400,000 and $966,000. C) $1,540,000 and $1,078,000. D) $1,400,000 and $1,022,000. E) $1,540,000 and $1,092,000.

20) Pot Co. holds 90% of the common stock of Skillet Co. During 2021, Pot reported sales of $1,120,000 and cost of goods sold of $840,000. For this same period, Skillet had sales of $420,000 and cost of goods sold of $252,000. Included in the amounts for Skillet’s sales were intra-entity gross profits related to Skillet’s intra-entity transfer of merchandise to Pot for $140,000. There were no intra-entity transfers from Pot to Skillet. Intra-entity transfers had the same markup as sales to outsiders. Pot still had 40% of the intra-entity gross profit remaining in ending inventory at the end of 2021. What are consolidated sales and cost of goods sold for 2021? A) $1,400,000 and $952,000. B) $1,400,000 and $966,000. C) $1,540,000 and $1,078,000. D) $1,400,000 and $974,400. E) $1,540,000 and $1,092,000.

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21) Pot Co. holds 90% of the common stock of Skillet Co. During 2021, Pot reported sales of $1,120,000 and cost of goods sold of $840,000. For this same period, Skillet had sales of $420,000 and cost of goods sold of $252,000. Included in the amounts for Pot’s sales were Pot’s sales for merchandise to Skillet for $140,000. There were no sales from Skillet to Pot. Intra-entity transfers had the same markup as sales to outsiders. Skillet had resold all of the intra-entity transfers (purchases) from Pot to outside parties during 2021. What are consolidated sales and cost of goods sold for 2021? A) $1,400,000 and $952,000. B) $1,400,000 and $1,092,000. C) $1,540,000 and $952,000. D) $1,400,000 and $1,232,000. E) $1,540,000 and $1,092,000.

22) Palmer Corp. owned 80% of the outstanding common stock of Creed Inc. On January 1, 2019, Palmer acquired a building with a ten-year life for $450,000. No salvage value was anticipated and the building was to be depreciated on the straight-line basis. On January 1, 2021, Palmer sold this building to Creed for $412,000. At that time, the building had a remaining life of eight years but still no expected salvage value. For consolidation purposes, what is the Excess Depreciation (ED entry) for this building for 2021? Event A)

General Journal Accumulated Depreciation

Debit 6,500

Depreciation Expense

Accumulated Depreciation

6,500

5,200

Depreciation Expense

5,200

6,500

Accumulated Depreciation

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Depreciation Expense

Credit

6,500

5,200

Accumulated Depreciation

5,200

Accumulated Depreciation

45,000

Depreciation Expense

45,000

A) Option A. B) Option B. C) Option C. D) Option D. E) Option E.

23) On January 1, 2021, Pride, Inc. acquired 80% of the outstanding voting common stock of Strong Corp. for $364,000. There is no active market for Strong’s stock. Of this payment, $28,000 was allocated to equipment (with a five-year life) that had been undervalued on Strong's books by $35,000. Any remaining excess was attributable to goodwill, which has not been impaired. As of December 31, 2021, before preparing the consolidated worksheet, the financial statements appeared as follows: Revenues

Pride, Inc.

Strong Corp.

420,000

280,000

Cost of goods sold

(196,000 )

(112,000 )

Operating expenses

(28,000 )

(14,000 )

Net income

196,000

154,000

Retained earnings, 1/1/21

420,000

210,000

Net income (above) Dividends paid Retained earnings, 12/31/21

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196,000

154,000

616,000

364,000

Cash and receivables

294,000

126,000

Inventory

210,000

154,000

Investment in Strong Corp

364,000

Equipment (net)

616,000

420,000

Total assets

$ 1,484,000

700,000

Liabilities

196,000

588,000

Common stock

280,000

140,000

Retained earnings, 12/31/21 (above)

616,000

364,000

Total liabilities and stockholders’ equity

$ 1,484,000

700,000

During 2021, Pride bought inventory for $112,000 and sold it to Strong for $140,000. Only half of the inventory purchase price had been remitted to Pride by Strong at year-end. As of December 31, 2021, 60% of these goods remained in the company's possession. What is the total of consolidated revenues at December 31, 2021? A) $700,000. B) $644,000. C) $588,000. D) $560,000. E) $840,000.

24) On January 1, 2021, Pride, Inc. acquired 80% of the outstanding voting common stock of Strong Corp. for $364,000. There is no active market for Strong’s stock. Of this payment, $28,000 was allocated to equipment (with a five-year life) that had been undervalued on Strong's books by $35,000. Any remaining excess was attributable to goodwill, which has not been impaired. As of December 31, 2021, before preparing the consolidated worksheet, the financial statements appeared as follows: Revenues

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Pride, Inc.

Strong Corp.

420,000

280,000

Cost of goods sold

(196,000 )

(112,000 )

Operating expenses

(28,000 )

(14,000 )

Net income

196,000

154,000

Retained earnings, 1/1/21

420,000

210,000

Net income (above) Dividends paid

196,000

154,000

Retained earnings, 12/31/21

616,000

364,000

Cash and receivables

294,000

126,000

Inventory

210,000

154,000

Investment in Strong Corp

364,000

Equipment (net)

616,000

420,000

Total assets

$ 1,484,000

700,000

Liabilities

196,000

588,000

Common stock

280,000

140,000

Retained earnings, 12/31/21 (above)

616,000

364,000

Total liabilities and stockholders’ equity

$ 1,484,000

700,000

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A) $42,000. B) $47,600. C) $53,200. D) $49,000. E) $35,000.

25) On January 1, 2021, Pride, Inc. acquired 80% of the outstanding voting common stock of Strong Corp. for $364,000. There is no active market for Strong’s stock. Of this payment, $28,000 was allocated to equipment (with a five-year life) that had been undervalued on Strong's books by $35,000. Any remaining excess was attributable to goodwill, which has not been impaired. As of December 31, 2021, before preparing the consolidated worksheet, the financial statements appeared as follows: Revenues

Pride, Inc.

Strong Corp.

420,000

280,000

Cost of goods sold

(196,000 )

(112,000 )

Operating expenses

(28,000 )

(14,000 )

Net income

196,000

154,000

Retained earnings, 1/1/21

420,000

210,000

Net income (above) Dividends paid

196,000

154,000

Retained earnings, 12/31/21

616,000

364,000

Cash and receivables

294,000

126,000

Inventory

210,000

154,000

Investment in Strong Corp

364,000

Equipment (net)

616,000

420,000

Total assets

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$ 1,484,000

700,000

Liabilities

588,000

196,000

Common stock

280,000

140,000

Retained earnings, 12/31/21 (above)

616,000

364,000

Total liabilities and stockholders’ equity

$ 1,484,000

700,000

During 2021, Pride bought inventory for $112,000 and sold it to Strong for $140,000. Only half of the inventory purchase price had been remitted to Pride by Strong at year-end. As of December 31, 2021, 60% of these goods remained in the company's possession. What is the total of consolidated cost of goods sold at December 31, 2021? A) $196,000. B) $212,800. C) $184,800. D) $203,000. E) $168,000.

26) On January 1, 2021, Pride, Inc. acquired 80% of the outstanding voting common stock of Strong Corp. for $364,000. There is no active market for Strong’s stock. Of this payment, $28,000 was allocated to equipment (with a five-year life) that had been undervalued on Strong's books by $35,000. Any remaining excess was attributable to goodwill, which has not been impaired. As of December 31, 2021, before preparing the consolidated worksheet, the financial statements appeared as follows: Revenues

Pride, Inc.

Strong Corp.

420,000

280,000

Cost of goods sold

(196,000 )

(112,000 )

Operating expenses

(28,000 )

(14,000 )

Net income

196,000

154,000

Retained earnings, 1/1/21

420,000

210,000

Net income (above)

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196,000

154,000

Dividends paid

Retained earnings, 12/31/21

616,000

364,000

Cash and receivables

294,000

126,000

Inventory

210,000

154,000

Investment in Strong Corp

364,000

Equipment (net)

616,000

420,000

Total assets

$ 1,484,000

700,000

Liabilities

196,000

588,000

Common stock

280,000

140,000

Retained earnings, 12/31/21 (above)

616,000

364,000

Total liabilities and stockholders’ equity

$ 1,484,000

700,000

During 2021, Pride bought inventory for $112,000 and sold it to Strong for $140,000. Only half of the inventory purchase price had been remitted to Pride by Strong at year-end. As of December 31, 2021, 60% of these goods remained in the company's possession. What is the consolidated total of noncontrolling interest at December 31, 2021? A) $100,800. B) $97,440. C) $93,800. D) $120,400. E) $117,040.

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27) On January 1, 2021, Pride, Inc. acquired 80% of the outstanding voting common stock of Strong Corp. for $364,000. There is no active market for Strong’s stock. Of this payment, $28,000 was allocated to equipment (with a five-year life) that had been undervalued on Strong's books by $35,000. Any remaining excess was attributable to goodwill, which has not been impaired. As of December 31, 2021, before preparing the consolidated worksheet, the financial statements appeared as follows: Revenues

Pride, Inc.

Strong Corp.

420,000

280,000

Cost of goods sold

(196,000 )

(112,000 )

Operating expenses

(28,000 )

(14,000 )

Net income

196,000

154,000

Retained earnings, 1/1/21

420,000

210,000

Net income (above) Dividends paid

196,000

154,000

Retained earnings, 12/31/21

616,000

364,000

Cash and receivables

294,000

126,000

Inventory

210,000

154,000

Investment in Strong Corp

364,000

Equipment (net)

616,000

420,000

Total assets

$ 1,484,000

700,000

Liabilities

196,000

588,000

Common stock

280,000

140,000

Retained earnings, 12/31/21 (above)

616,000

364,000

Total liabilities and stockholders’ equity

$ 1,484,000

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700,000

During 2021, Pride bought inventory for $112,000 and sold it to Strong for $140,000. Only half of the inventory purchase price had been remitted to Pride by Strong at year-end. As of December 31, 2021, 60% of these goods remained in the company's possession. What is the consolidated total for equipment (net) at December 31, 2021? A) $952,000. B) $1,058,400. C) $1,069,600. D) $1,064,000. E) $1,066,800.

28) On January 1, 2021, Pride, Inc. acquired 80% of the outstanding voting common stock of Strong Corp. for $364,000. There is no active market for Strong’s stock. Of this payment, $28,000 was allocated to equipment (with a five-year life) that had been undervalued on Strong's books by $35,000. Any remaining excess was attributable to goodwill, which has not been impaired. As of December 31, 2021, before preparing the consolidated worksheet, the financial statements appeared as follows: Revenues

Pride, Inc.

Strong Corp.

420,000

280,000

Cost of goods sold

(196,000 )

(112,000 )

Operating expenses

(28,000 )

(14,000 )

Net income

196,000

154,000

Retained earnings, 1/1/21

420,000

210,000

Net income (above) Dividends paid

196,000

154,000

Retained earnings, 12/31/21

616,000

364,000

Cash and receivables

294,000

126,000

Inventory

210,000

154,000

Investment in Strong Corp

364,000

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Equipment (net)

616,000

420,000

Total assets

$ 1,484,000

700,000

Liabilities

196,000

588,000

Common stock

280,000

140,000

Retained earnings, 12/31/21 (above)

616,000

364,000

Total liabilities and stockholders’ equity

$ 1,484,000

700,000

During 2021, Pride bought inventory for $112,000 and sold it to Strong for $140,000. Only half of the inventory purchase price had been remitted to Pride by Strong at year-end. As of December 31, 2021, 60% of these goods remained in the company's possession. What is the consolidated total for inventory at December 31, 2021? A) $336,000. B) $280,000. C) $364,000. D) $347,200. E) $349,300.

29) Strickland Company sells inventory to its parent, Carter Company, at a profit during 2020. Carter sells one-third of the inventory in 2020. In the consolidation worksheet for 2020, which of the following accounts would be debited to eliminate the intra-entity transfer of inventory? A) Retained earnings. B) Cost of goods sold. C) Inventory. D) Investment in Strickland Company. E) Sales.

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30) Strickland Company sells inventory to its parent, Carter Company, at a profit during 2020. Carter sells one-third of the inventory in 2020. In the consolidation worksheet for 2020, which of the following accounts would be credited to eliminate the intra-entity transfer of inventory? A) Retained earnings. B) Cost of goods sold. C) Inventory. D) Investment in Strickland Company. E) Sales.

31) Strickland Company sells inventory to its parent, Carter Company, at a profit during 2020. Carter sells one-third of the inventory in 2020. In the consolidation worksheet for 2020, which of the following accounts would be debited to eliminate unrecognized intra-entity gross profit with regard to the 2020 intra-entity transfers? A) Retained earnings. B) Cost of goods sold. C) Inventory. D) Investment in Strickland Company. E) Sales.

32) Strickland Company sells inventory to its parent, Carter Company, at a profit during 2020. Carter sells one-third of the inventory in 2020. In the consolidation worksheet for 2020, which of the following accounts would be credited to defer unrecognized intra-entity gross profit with regard to the 2020 intra-entity transfers? A) Retained earnings. B) Cost of goods sold. C) Inventory. D) Investment in Strickland Company. E) Sales.

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33) Strickland Company sells inventory to its parent, Carter Company, at a profit during 2020. Carter sells one-third of the inventory in 2020. In the consolidation worksheet for 2021, assuming Carter uses the initial value method of accounting for its investment in Strickland, which of the following accounts would be debited to defer unrecognized intra-entity gross profit with regard to the 2020 intra-entity transfers? A) Retained earnings. B) Cost of goods sold. C) Inventory. D) Investment in Strickland Company. E) Sales.

34) Strickland Company sells inventory to its parent, Carter Company, at a profit during 2020. Carter sells one-third of the inventory in 2020. In the consolidation worksheet for 2021, assuming Carter uses the initial value method of accounting for its investment in Strickland, which of the following accounts would be credited to defer recognition of intra-entity gross profit with regard to the 2020 intra-entity transfers? A) Retained earnings. B) Cost of goods sold. C) Inventory. D) Investment in Strickland Company. E) Sales.

35) Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2020. With respect to one-third of the inventory sold to Fisher, Walsh accounts for it using the equity method of accounting. In the consolidation worksheet for 2020, which of the following accounts would be debited to eliminate the intra-entity transfer of inventory? A) Retained earnings. B) Cost of goods sold. C) Inventory. D) Investment in Fisher Company. E) Sales.

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36) Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2020. With respect to one-third of the inventory sold to Fisher, Walsh accounts for it using the equity method of accounting. In the consolidation worksheet for 2020, which of the following accounts would be credited to eliminate the intra-entity transfer of inventory? A) Retained earnings. B) Cost of goods sold. C) Inventory. D) Investment in Fisher Company. E) Sales.

37) Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2020. With respect to one-third of the inventory sold to Fisher, Walsh accounts for it using the equity method of accounting. In the consolidation worksheet for 2020, which of the following accounts would be debited to eliminate unrecognized intra-entity gross profit with regard to the 2020 intra-entity transfers? A) Retained earnings. B) Cost of goods sold. C) Inventory. D) Investment in Fisher Company. E) Sales.

38) Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2020. With respect to one-third of the inventory sold to Fisher, Walsh accounts for it using the equity method of accounting. In the consolidation worksheet for 2020, which of the following accounts would be credited to eliminate unrecognized intra-entity gross profit with regard to the 2020 intra-entity transfers? A) Retained earnings. B) Cost of goods sold. C) Inventory. D) Investment in Fisher Company. E) Sales.

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39) Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2020. With respect to one-third of the inventory sold to Fisher, Walsh accounts for it using the equity method of accounting. In the consolidation worksheet for 2021, which of the following accounts would be debited to eliminate unrecognized intra-entity gross profit with regard to the 2020 intra-entity transfers? A) Retained earnings. B) Cost of goods sold. C) Inventory. D) Investment in Fisher Company. E) Sales.

40) Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2020. With respect to one-third of the inventory sold to Fisher, Walsh accounts for it using the equity method of accounting. In the consolidation worksheet for 2021, which of the following accounts would be credited to eliminate unrecognized intra-entity gross profit with regard to the 2020 intra-entity transfers? A) Retained earnings. B) Cost of goods sold. C) Inventory. D) Investment in Fisher Company. E) Sales.

41)

Which of the following statements is true regarding an intra-entity transfer of land?

A) A loss is always recognized but a gain is deferred in a consolidated income statement. B) A loss and a gain are deferred until the land is sold to an outside party. C) A loss and a gain are always recognized in a consolidated income statement. D) A gain is always recognized but a loss is deferred in a consolidated income statement. E) Recognition of a gain or loss is deferred by adjusting stockholders' equity through comprehensive income.

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42) Parent sold land to its subsidiary resulting in a gain in 2019, the year of transfer. The subsidiary sold the land to an unrelated third party for a gain in 2022. Which of the following statements is true? A) A gain will be recognized in the consolidated income statement in 2019. B) A gain will be recognized in the consolidated income statement in 2022. C) No gain will be recognized in the 2022 consolidated income statement. D) Only the parent company will recognize a gain in 2022. E) The subsidiary will recognize a gain in 2019.

43) An intra-entity transfer of a depreciable asset took place whereby the transfer price exceeded the book value of the asset. Which statement is true with respect to the year following the year in which the transfer occurred? A) A worksheet entry is made with a debit to gain for a downstream transfer. B) A worksheet entry is made with a debit to gain for an upstream transfer. C) A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer when the parent uses the equity method. D) A worksheet entry is made with a debit to retained earnings for a downstream transfer, regardless of the method used account for the investment. E) No worksheet entry is necessary.

44) An intra-entity transfer took place whereby the book value exceeded the transfer price of a depreciable asset. Which statement is true for the year after the year of transfer? A) A worksheet entry is made with a debit to retained earnings for an upstream transfer. B) A worksheet entry is made with a credit to retained earnings for an upstream transfer. C) A worksheet entry is made with a debit to retained earnings for a downstream transfer. D) A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer. E) No worksheet entry is necessary.

45) An intra-entity transfer took place whereby the transfer price was less than the book value of a depreciable asset. Which statement is true for the year subsequent to the year of transfer?

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A) A worksheet entry is made with a debit to investment in subsidiary for an upstream transfer. B) A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer. C) A worksheet entry is made with a credit to investment in subsidiary for a downstream transfer when the parent uses the equity method. D) A worksheet entry is made with a debit to retained earnings for an upstream transfer, regardless of the method used to account for the investment. E) No worksheet entry is necessary.

46) Which of the following statements is true concerning an intra-entity transfer of a depreciable asset? A) Net income attributable to the noncontrolling interest is never affected by a gain on the transfer. B) Net income attributable to the noncontrolling interest is always affected by a gain on the transfer. C) Net income attributable to the noncontrolling interest is affected by a downstream gain only. D) Net income attributable to the noncontrolling interest is affected only when the transfer is upstream. E) Net income attributable to the noncontrolling interest is increased by an upstream gain in the year of transfer.

47) Anderson Company, a 90% owned subsidiary of Philbin Corporation, transfers inventory to Philbin at a 25% gross profit rate. The following data are available pertaining specifically to Philbin’s intra-entity purchases from Anderson. Anderson was acquired on January 1, 2020.

Purchases by Philbin Ending inventory on Philbin’s books

2020

2021

2022

$ 8,000

$ 12,000

$ 15,000

1,200

4,000

3,000

Assume the equity method is used. The following data are available pertaining to Anderson’s income and dividends.

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Anderson’s net income Dividends paid by Anderson

2020

2021

2022

$ 70,000

$ 85,000

$ 94,000

10,000

15,000

Compute the equity in earnings of Anderson reported on Philbin’s books for 2020. A) $63,000. B) $62,730. C) $63,270. D) $70,000. E) $62,700.

48) Anderson Company, a 90% owned subsidiary of Philbin Corporation, transfers inventory to Philbin at a 25% gross profit rate. The following data are available pertaining specifically to Philbin’s intra-entity purchases from Anderson. Anderson was acquired on January 1, 2020.

Purchases by Philbin Ending inventory on Philbin’s books

2020

2021

2022

$ 8,000

$ 12,000

$ 15,000

1,200

4,000

3,000

Assume the equity method is used. The following data are available pertaining to Anderson’s income and dividends. Anderson’s net income Dividends paid by Anderson

2020

2021

2022

$ 70,000

$ 85,000

$ 94,000

10,000

15,000

Compute the equity in earnings of Anderson reported on Philbin’s books for 2021.

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A) $76,500. B) $77,130. C) $75,870. D) $75,600. E) $75,800.

49) Anderson Company, a 90% owned subsidiary of Philbin Corporation, transfers inventory to Philbin at a 25% gross profit rate. The following data are available pertaining specifically to Philbin’s intra-entity purchases from Anderson. Anderson was acquired on January 1, 2020.

Purchases by Philbin Ending inventory on Philbin’s books

2020

2021

2022

$ 8,000

$ 12,000

$ 15,000

1,200

4,000

3,000

Assume the equity method is used. The following data are available pertaining to Anderson’s income and dividends. Anderson’s net income Dividends paid by Anderson

2020

2021

2022

$ 70,000

$ 85,000

$ 94,000

10,000

15,000

Compute the equity in earnings of Anderson reported on Philbin’s books for 2022. A) $84,600. B) $84,375. C) $83,925. D) $84,825. E) $84,850.

50) Anderson Company, a 90% owned subsidiary of Philbin Corporation, transfers inventory to Philbin at a 25% gross profit rate. The following data are available pertaining specifically to Philbin’s intra-entity purchases from Anderson. Anderson was acquired on January 1, 2020.

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Purchases by Philbin Ending inventory on Philbin’s books

2020

2021

2022

$ 8,000

$ 12,000

$ 15,000

1,200

4,000

3,000

Assume the equity method is used. The following data are available pertaining to Anderson’s income and dividends. Anderson’s net income Dividends paid by Anderson

2020

2021

2022

$ 70,000

$ 85,000

$ 94,000

10,000

15,000

Assuming there are no excess amortizations associated with the consolidation, and no other intraentity asset transfers, compute the net income attributable to the noncontrolling interest of Anderson for 2020. A) $6,970. B) $7,000. C) $7,030. D) $6,270. E) $6,230.

51) Anderson Company, a 90% owned subsidiary of Philbin Corporation, transfers inventory to Philbin at a 25% gross profit rate. The following data are available pertaining specifically to Philbin’s intra-entity purchases from Anderson. Anderson was acquired on January 1, 2020.

Purchases by Philbin Ending inventory on Philbin’s books

2020

2021

2022

$ 8,000

$ 12,000

$ 15,000

1,200

4,000

3,000

Assume the equity method is used. The following data are available pertaining to Anderson’s income and dividends.

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Anderson’s net income Dividends paid by Anderson

2020

2021

2022

$ 70,000

$ 85,000

$ 94,000

10,000

15,000

Assuming there are no excess amortizations associated with the consolidation, and no other intraentity asset transfers, compute the net income attributable to the noncontrolling interest of Anderson for 2021. A) $8,500. B) $8,570. C) $8,430. D) $8,400. E) $7,580.

52) Anderson Company, a 90% owned subsidiary of Philbin Corporation, transfers inventory to Philbin at a 25% gross profit rate. The following data are available pertaining specifically to Philbin’s intra-entity purchases from Anderson. Anderson was acquired on January 1, 2020.

Purchases by Philbin Ending inventory on Philbin’s books

2020

2021

2022

$ 8,000

$ 12,000

$ 15,000

1,200

4,000

3,000

Assume the equity method is used. The following data are available pertaining to Anderson’s income and dividends. Anderson’s net income Dividends paid by Anderson

2020

2021

2022

$ 70,000

$ 85,000

$ 94,000

10,000

15,000

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A) $9,400. B) $9,375. C) $9,425. D) $9,325. E) $8,485.

53) Anderson Company, a 90% owned subsidiary of Philbin Corporation, transfers inventory to Philbin at a 25% gross profit rate. The following data are available pertaining specifically to Philbin’s intra-entity purchases from Anderson. Anderson was acquired on January 1, 2020.

Purchases by Philbin Ending inventory on Philbin’s books

2020

2021

2022

$ 8,000

$ 12,000

$ 15,000

1,200

4,000

3,000

Assume the equity method is used. The following data are available pertaining to Anderson’s income and dividends. Anderson’s net income Dividends paid by Anderson

2020

2021

2022

$ 70,000

$ 85,000

$ 94,000

10,000

15,000

For consolidation purposes, what amount would be debited to cost of goods sold for the 2020 consolidation worksheet with regard to unrecognized intra-entity gross profit remaining in ending inventory with respect to the transfer of merchandise? A) $300. B) $240. C) $2,000. D) $1,600. E) $270.

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54) Anderson Company, a 90% owned subsidiary of Philbin Corporation, transfers inventory to Philbin at a 25% gross profit rate. The following data are available pertaining specifically to Philbin’s intra-entity purchases from Anderson. Anderson was acquired on January 1, 2020.

Purchases by Philbin Ending inventory on Philbin’s books

2020

2021

2022

$ 8,000

$ 12,000

$ 15,000

1,200

4,000

3,000

Assume the equity method is used. The following data are available pertaining to Anderson’s income and dividends. Anderson’s net income Dividends paid by Anderson

2020

2021

2022

$ 70,000

$ 85,000

$ 94,000

10,000

15,000

For consolidation purposes, what amount would be debited to cost of goods sold for the 2021 consolidation worksheet with regard to the unrecognized intra-entity gross profit remaining in ending inventory with respect to the 2021 transfer of merchandise? A) $1,000. B) $800. C) $3,000. D) $2,400. E) $900.

55) Anderson Company, a 90% owned subsidiary of Philbin Corporation, transfers inventory to Philbin at a 25% gross profit rate. The following data are available pertaining specifically to Philbin’s intra-entity purchases from Anderson. Anderson was acquired on January 1, 2020.

Purchases by Philbin Ending inventory on Philbin’s books

Version 1

2020

2021

2022

$ 8,000

$ 12,000

$ 15,000

1,200

4,000

3,000

Assume the equity method is used. The following data are available pertaining to Anderson’s income and dividends. Anderson’s net income Dividends paid by Anderson

2020

2021

2022

$ 70,000

$ 85,000

$ 94,000

10,000

15,000

For consolidation purposes, what amount would be debited to cost of goods sold for the 2022 consolidation worksheet with regard to the unrecognized intra-entity gross profit remaining in ending inventory with respect to the 2022 intra-entity transfer of merchandise? A) $600. B) $750. C) $3,760. D) $3,000. E) $675.

56) Anderson Company, a 90% owned subsidiary of Philbin Corporation, transfers inventory to Philbin at a 25% gross profit rate. The following data are available pertaining specifically to Philbin’s intra-entity purchases from Anderson. Anderson was acquired on January 1, 2020.

Purchases by Philbin Ending inventory on Philbin’s books

2020

2021

2022

$ 8,000

$ 12,000

$ 15,000

1,200

4,000

3,000

Assume the equity method is used. The following data are available pertaining to Anderson’s income and dividends. Anderson’s net income Dividends paid by Anderson

Version 1

2020

2021

2022

$ 70,000

$ 85,000

$ 94,000

10,000

15,000

For consolidation purposes, what amount would be debited to January 1 retained earnings for the 2020 consolidation worksheet entry with regard to the unrecognized intra-entity gross profit remaining in ending inventory with respect to the 2020 intra-entity transfer of merchandise? A) $0. B) $1,600. C) $300. D) $240. E) $270.

57) Anderson Company, a 90% owned subsidiary of Philbin Corporation, transfers inventory to Philbin at a 25% gross profit rate. The following data are available pertaining specifically to Philbin’s intra-entity purchases from Anderson. Anderson was acquired on January 1, 2020.

Purchases by Philbin Ending inventory on Philbin’s books

2020

2021

2022

$ 8,000

$ 12,000

$ 15,000

1,200

4,000

3,000

Assume the equity method is used. The following data are available pertaining to Anderson’s income and dividends. Anderson’s net income Dividends paid by Anderson

2020

2021

2022

$ 70,000

$ 85,000

$ 94,000

10,000

15,000

For consolidation purposes, what amount would be debited to January 1 retained earnings for the 2021 consolidation worksheet entry with regard to the unrecognized intra-entity gross profit remaining in ending inventory with respect to the 2020 intra-entity transfer of merchandise? A) $240 B) $300. C) $2,000. D) $1,600. E) $270.

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58) Anderson Company, a 90% owned subsidiary of Philbin Corporation, transfers inventory to Philbin at a 25% gross profit rate. The following data are available pertaining specifically to Philbin’s intra-entity purchases from Anderson. Anderson was acquired on January 1, 2020.

Purchases by Philbin Ending inventory on Philbin’s books

2020

2021

2022

$ 8,000

$ 12,000

$ 15,000

1,200

4,000

3,000

Assume the equity method is used. The following data are available pertaining to Anderson’s income and dividends. Anderson’s net income Dividends paid by Anderson

2020

2021

2022

$ 70,000

$ 85,000

$ 94,000

10,000

15,000

For consolidation purposes, what amount would be debited to January 1 retained earnings for the 2022 consolidation worksheet entry with regard to the unrecognized intra-entity gross profit remaining in ending inventory with respect to the 2021 intra-entity transfer of merchandise? A) $3,000. B) $2,400. C) $1,000. D) $800. E) $900.

59) Patti Company owns 80% of the common stock of Shannon, Inc. In the current year, Patti reports sales of $10,000,000 and cost of goods sold of $7,500,000. For the same period, Shannon has sales of $200,000 and cost of goods sold of $160,000. During the year, Patti sold merchandise to Shannon for $60,000 at a price based on the normal markup. At the end of the year, Shannon still possesses 30 percent of this inventory. Compute consolidated sales.

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A) $10,000,000. B) $10,126,000. C) $10,140,000. D) $10,200,000. E) $10,260,000.

60) Patti Company owns 80% of the common stock of Shannon, Inc. In the current year, Patti reports sales of $10,000,000 and cost of goods sold of $7,500,000. For the same period, Shannon has sales of $200,000 and cost of goods sold of $160,000. During the year, Patti sold merchandise to Shannon for $60,000 at a price based on the normal markup. At the end of the year, Shannon still possesses 30 percent of this inventory. Compute consolidated cost of goods sold. A) $7,500,000. B) $7,600,000. C) $7,615,000. D) $7,604,500. E) $7,660,000.

61) Patti Company owns 80% of the common stock of Shannon, Inc. In the current year, Patti reports sales of $10,000,000 and cost of goods sold of $7,500,000. For the same period, Shannon has sales of $200,000 and cost of goods sold of $160,000. During the year, Patti sold merchandise to Shannon for $60,000 at a price based on the normal markup. At the end of the year, Shannon still possesses 30 percent of this inventory. Assume the same information, except Shannon sold inventory to Patti. Compute consolidated sales. A) $10,000,000. B) $10,126,000. C) $10,140,000. D) $10,200,000. E) $10,260,000.

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62) Wilson owned equipment with an estimated life of 10 years when the equipment was acquired for an original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2020. On January 1, 2020, Wilson realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. On April 1, 2020 Simon Company, a 90% owned subsidiary of Wilson Company, bought the equipment from Wilson for $68,250 and for depreciation purposes used the estimated remaining life as of that date. The following data are available pertaining to Simon's income and dividends declared: Net income Dividends declared

2020

2021

2022

$ 100,000

$ 120,000

$ 130,000

40,000

50,000

60,000

What amount should be recorded on Wilson’s books in 2020 as gain on the transfer of equipment, prior to preparing consolidating entries? A) $19,500. B) $18,250. C) $11,750. D) $38,250. E) $37,500.

63) Wilson owned equipment with an estimated life of 10 years when the equipment was acquired for an original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2020. On January 1, 2020, Wilson realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. On April 1, 2020 Simon Company, a 90% owned subsidiary of Wilson Company, bought the equipment from Wilson for $68,250 and for depreciation purposes used the estimated remaining life as of that date. The following data are available pertaining to Simon's income and dividends declared: Net income Dividends declared

Version 1

2020

2021

2022

$ 100,000

$ 120,000

$ 130,000

40,000

50,000

60,000

Compute the amortization of gain through a depreciation adjustment for 2020 for consolidation purposes. A) $1,950. B) $1,825. C) $1,500. D) $2,000. E) $5,250.

64) Wilson owned equipment with an estimated life of 10 years when the equipment was acquired for an original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2020. On January 1, 2020, Wilson realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. On April 1, 2020 Simon Company, a 90% owned subsidiary of Wilson Company, bought the equipment from Wilson for $68,250 and for depreciation purposes used the estimated remaining life as of that date. The following data are available pertaining to Simon's income and dividends declared: Net income Dividends declared

2020

2021

2022

$ 100,000

$ 120,000

$ 130,000

40,000

50,000

60,000

Compute the amortization of gain through a depreciation adjustment for 2021 for consolidation purposes. A) $1,950. B) $1,825. C) $2,000. D) $1,500. E) $7,000.

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65) Wilson owned equipment with an estimated life of 10 years when the equipment was acquired for an original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2020. On January 1, 2020, Wilson realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. On April 1, 2020 Simon Company, a 90% owned subsidiary of Wilson Company, bought the equipment from Wilson for $68,250 and for depreciation purposes used the estimated remaining life as of that date. The following data are available pertaining to Simon's income and dividends declared: Net income Dividends declared

2020

2021

2022

$ 100,000

$ 120,000

$ 130,000

40,000

50,000

60,000

Compute the amortization of gain through a depreciation adjustment for 2022 for consolidation purposes. A) $1,925. B) $1,825. C) $2,000. D) $1,500. E) $7,000.

66) Wilson owned equipment with an estimated life of 10 years when the equipment was acquired for an original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2020. On January 1, 2020, Wilson realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. On April 1, 2020 Simon Company, a 90% owned subsidiary of Wilson Company, bought the equipment from Wilson for $68,250 and for depreciation purposes used the estimated remaining life as of that date. The following data are available pertaining to Simon's income and dividends declared: Net income Dividends declared

Version 1

2020

2021

2022

$ 100,000

$ 120,000

$ 130,000

40,000

50,000

60,000

Assuming there are no excess amortizations associated with the consolidation, and no other intraentity asset transfers, compute Wilson’s share of income from Simon for consolidation for 2020. A) $72,000. B) $90,000. C) $73,575. D) $73,800. E) $72,500.

67) Wilson owned equipment with an estimated life of 10 years when the equipment was acquired for an original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2020. On January 1, 2020, Wilson realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. On April 1, 2020 Simon Company, a 90% owned subsidiary of Wilson Company, bought the equipment from Wilson for $68,250 and for depreciation purposes used the estimated remaining life as of that date. The following data are available pertaining to Simon's income and dividends declared: Net income Dividends declared

2020

2021

2022

$ 100,000

$ 120,000

$ 130,000

40,000

50,000

60,000

Assuming there are no excess amortizations associated with the consolidation, and no other intraentity asset transfers, compute Wilson’s share of income from Simon for consolidation for 2021. A) $108,000. B) $110,000. C) $106,000. D) $109,825. E) $109,800.

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68) Wilson owned equipment with an estimated life of 10 years when the equipment was acquired for an original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2020. On January 1, 2020, Wilson realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. On April 1, 2020 Simon Company, a 90% owned subsidiary of Wilson Company, bought the equipment from Wilson for $68,250 and for depreciation purposes used the estimated remaining life as of that date. The following data are available pertaining to Simon's income and dividends declared: Net income Dividends declared

2020

2021

2022

$ 100,000

$ 120,000

$ 130,000

40,000

50,000

60,000

Assuming there are no excess amortizations associated with the consolidation, and no other intraentity asset transfers, compute Wilson’s share of income from Simon for consolidation for 2022. A) $118,825. B) $115,000. C) $117,000. D) $119,000. E) $118,800.

69) On January 1, 2020, Smeder Company, an 80% owned subsidiary of Collins, Inc., transferred equipment with a 10-year life (six of which remain with no salvage value) to Collins in exchange for $84,000 cash. At the date of transfer, Smeder’s records carried the equipment at a cost of $120,000 less accumulated depreciation of $48,000. Straight-line depreciation is used. Smeder reported net income of $28,000 and $32,000 for 2020 and 2021, respectively. All net income effects of the intra-entity transfer are attributed to the seller for consolidation purposes. What amount of gain should be reported by Smeder Company relating to the equipment for 2020 prior to making consolidating entries? A) $36,000. B) $34,000. C) $12,000. D) $10,000. E) $0.

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70) On January 1, 2020, Smeder Company, an 80% owned subsidiary of Collins, Inc., transferred equipment with a 10-year life (six of which remain with no salvage value) to Collins in exchange for $84,000 cash. At the date of transfer, Smeder’s records carried the equipment at a cost of $120,000 less accumulated depreciation of $48,000. Straight-line depreciation is used. Smeder reported net income of $28,000 and $32,000 for 2020 and 2021, respectively. All net income effects of the intra-entity transfer are attributed to the seller for consolidation purposes. Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, what amount of this gain should be recognized for consolidation purposes for 2020? A) $12,000. B) $9,600. C) $8,400. D) $2,000. E) $1,200.

71) On January 1, 2020, Smeder Company, an 80% owned subsidiary of Collins, Inc., transferred equipment with a 10-year life (six of which remain with no salvage value) to Collins in exchange for $84,000 cash. At the date of transfer, Smeder’s records carried the equipment at a cost of $120,000 less accumulated depreciation of $48,000. Straight-line depreciation is used. Smeder reported net income of $28,000 and $32,000 for 2020 and 2021, respectively. All net income effects of the intra-entity transfer are attributed to the seller for consolidation purposes. For consolidation purposes, what net debit or credit will be made for the year 2020 relating to the accumulated depreciation for the equipment transfer? A) Debit accumulated depreciation, $46,000. B) Debit accumulated depreciation, $48,000. C) Credit accumulated depreciation, $48,000. D) Credit accumulated depreciation, $46,000. E) Debit accumulated depreciation, $2,000.

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72) On January 1, 2020, Smeder Company, an 80% owned subsidiary of Collins, Inc., transferred equipment with a 10-year life (six of which remain with no salvage value) to Collins in exchange for $84,000 cash. At the date of transfer, Smeder’s records carried the equipment at a cost of $120,000 less accumulated depreciation of $48,000. Straight-line depreciation is used. Smeder reported net income of $28,000 and $32,000 for 2020 and 2021, respectively. All net income effects of the intra-entity transfer are attributed to the seller for consolidation purposes. What is the net effect on net income as a result of consolidating adjustments made in 2020 with respect to the equipment transfer? A) Increase net income by $2,000. B) Decrease net income by $12,000. C) Decrease net income by $10,000. D) Decrease net income by $14,000. E) Increase net income by $10,000.

73) Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2020, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2020 and 2021, respectively. Leo uses the equity method to account for its investment. Compute the gain or loss on the intra-entity transfer of land that should be reported on the books of Leo prior to consolidation. A) $15,000 loss. B) $15,000 gain. C) $50,000 loss. D) $50,000 gain. E) $65,000 gain.

74) Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2020, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2020 and 2021, respectively. Leo uses the equity method to account for its investment. On a consolidation worksheet, what adjustment would be made for 2020 regarding the land transfer?

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A) Debit gain for $50,000. B) Credit gain for $50,000. C) Debit land for $15,000. D) Credit land for $15,000. E) Credit gain for $15,000.

75) Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2020, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2020 and 2021, respectively. Leo uses the equity method to account for its investment. On a consolidation worksheet, having used the equity method, what adjustment would be made for 2021 regarding the land transfer? A) Debit retained earnings for $15,000. B) Credit retained earnings for $15,000. C) Debit retained earnings for $50,000. D) Credit retained earnings for $50,000. E) Debit investment in Stiller for $15,000.

76) Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2020, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2020 and 2021, respectively. Leo uses the equity method to account for its investment. Assuming there are no excess amortizations or other intra-entity transactions, compute income from Stiller on Leo's books for 2020. A) $110,000. B) $100,000. C) $125,000. D) $85,000. E) $88,000.

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77) Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2020, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2020 and 2021, respectively. Leo uses the equity method to account for its investment. Assuming there are no excess amortizations or other intra-entity transactions, compute income from Stiller on Leo's books for 2021. A) $140,000. B) $97,000. C) $125,000. D) $100,000. E) $112,000.

78) Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2020, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2020, 2021, and 2022, respectively. Parker sold the land purchased from Stark for $92,000 in 2022. Both companies use the equity method of accounting. Compute the gain or loss reported on Stark’s books prior to consolidation from the intra-entity transfer of land in 2020. A) $80,000 gain. B) $80,000 loss. C) $5,000 gain. D) $5,000 loss. E) $85,000 loss.

79) Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2020, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2020, 2021, and 2022, respectively. Parker sold the land purchased from Stark for $92,000 in 2022. Both companies use the equity method of accounting. Which of the following will be included in a consolidation entry for 2020?

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A) Debit Loss on Sale of Land for $5,000. B) Credit Loss on Sale of Land for $5,000. C) Debit Land for $5,000. D) Debit Retained Earnings for $5,000. E) Credit Gain on Sale of Land for $5,000.

80) Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2020, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2020, 2021, and 2022, respectively. Parker sold the land purchased from Stark for $92,000 in 2022. Both companies use the equity method of accounting. Which of the following will be included in a consolidation entry for 2021? A) Debit Retained Earnings for $5,000. B) Credit Retained Earnings for $5,000. C) Debit Investment in Subsidiary for $5,000. D) Credit Investment in Subsidiary for $5,000. E) Credit Land for $5,000.

81) Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2020, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2020, 2021, and 2022, respectively. Parker sold the land purchased from Stark for $92,000 in 2022. Both companies use the equity method of accounting. Assuming there are no excess amortizations or other intra-entity transactions, compute income from Stark reported on Parker's books for 2020. A) $205,000. B) $200,000. C) $180,000. D) $175,500. E) $184,500.

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82) Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2020, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2020, 2021, and 2022, respectively. Parker sold the land purchased from Stark for $92,000 in 2022. Both companies use the equity method of accounting. Assuming there are no excess amortizations or other intra-entity transactions, compute income from Stark reported on Parker's books for 2021. A) $185,000. B) $157,500. C) $166,500. D) $162,000. E) $180,000.

83) Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2020, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2020, 2021, and 2022, respectively. Parker sold the land purchased from Stark for $92,000 in 2022. Both companies use the equity method of accounting. Compute Parker's reported gain or loss on its internal accounting records prior to consolidation relating to the land for 2022. A) $12,000 gain. B) $5,000 loss. C) $12,000 loss. D) $7,000 gain. E) $7,000 loss.

84) Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2020, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2020, 2021, and 2022, respectively. Parker sold the land purchased from Stark for $92,000 in 2022. Both companies use the equity method of accounting. Compute Stark's reported gain or loss relating to the land for 2022.

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A) $5,000 loss. B) $5,000 gain. C) $7,000 loss. D) $7,000 gain. E) $ 0.

85) Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2020, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2020, 2021, and 2022, respectively. Parker sold the land purchased from Stark for $92,000 in 2022. Both companies use the equity method of accounting. Compute the gain or loss relating to the land that will be reported in consolidated net income for 2022. A) $5,000 loss. B) $7,000 gain. C) $12,000 gain. D) $7,000 loss. E) $12,000 loss.

86) Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2020, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2020, 2021, and 2022, respectively. Parker sold the land purchased from Stark for $92,000 in 2022. Both companies use the equity method of accounting. Assuming there are no excess amortizations or other intra-entity transactions, compute income from Stark reported on Parker's books for 2022. A) $204,300. B) $202,500. C) $193,500. D) $191,700. E) $198,000.

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87) Pepe, Incorporated acquired 60% of Devin Company on January 1, 2020. On that date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000 and $325,000 for 2020 and 2021, respectively. Pepe uses the equity method to account for its investment in Devin. What is the gain or loss on equipment recognized by Devin on its internal accounting records for 2020? A) $54,000 gain. B) $21,000 loss. C) $21,000 gain. D) $9,000 loss. E) $9,000 gain.

88) Pepe, Incorporated acquired 60% of Devin Company on January 1, 2020. On that date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000 and $325,000 for 2020 and 2021, respectively. Pepe uses the equity method to account for its investment in Devin. What is the consolidated gain or loss on equipment for 2020? A) $0. B) $9,000 gain. C) $9,000 loss. D) $21,000 gain. E) $21,000 loss.

89) Pepe, Incorporated acquired 60% of Devin Company on January 1, 2020. On that date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000 and $325,000 for 2020 and 2021, respectively. Pepe uses the equity method to account for its investment in Devin. Assuming there are no excess amortizations or other intra-entity transactions, Compute the income from Devin reported on Pepe's books for 2020.

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A) $174,600. B) $184,800. C) $172,000. D) $171,000. E) $180,000.

90) Pepe, Incorporated acquired 60% of Devin Company on January 1, 2020. On that date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000 and $325,000 for 2020 and 2021, respectively. Pepe uses the equity method to account for its investment in Devin. Assuming there are no excess amortizations or other intra-entity transactions, Compute the income from Devin reported on Pepe's books for 2021. A) $190,200. B) $196,000. C) $194,400. D) $187,000. E) $195,000.

91) Pepe, Incorporated acquired 60% of Devin Company on January 1, 2020. On that date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000 and $325,000 for 2020 and 2021, respectively. Pepe uses the equity method to account for its investment in Devin. Assuming there are no excess amortizations or other intra-entity transactions, Compute the net income attributable to the noncontrolling interest of Devin for 2020. A) $116,400. B) $120,400. C) $120,000. D) $123,200. E) $112,000.

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92) Pepe, Incorporated acquired 60% of Devin Company on January 1, 2020. On that date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000 and $325,000 for 2020 and 2021, respectively. Pepe uses the equity method to account for its investment in Devin. Assuming there are no excess amortizations or other intra-entity transactions, compute the net income attributable to the noncontrolling interest of Devin for 2021. A) $126,800. B) $130,000. C) $122,000. D) $130,800. E) $129,600.

93) On January 1, 2021, Daniel Corp. acquired 80% of the voting common stock of Phillips Inc. During the year, Daniel sold to Phillips for $315,000 goods that cost $210,000. At year-end, Phillips owned 30% of the goods transferred. Phillips reported net income of $305,000, and Daniel’s net income was $986,000. Daniel decided to use the equity method to account for this investment. What amount of intra-entity gross profit would be deferred in 2021? A) $21,000. B) $25,200. C) $31,500. D) $84,000. E) $105,000.

94) Brooks Co. acquired 90% of Hill Inc. on January 3, 2021. During 2021, Brooks sold goods to Hill for $2,500,000 that cost Brooks $1,850,000. Hill still owned 30% of the goods at the end of the year. Cost of goods sold was $11,200,000 for Brooks and $6,600,000 for Hill. What amount of intra-entity gross profit should be deferred in 2021? A) $0. B) $65,000. C) $175,500. D) $195,000. E) $585,000.

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95) Charleston Inc. acquired 75% of Savannah Manufacturing on January 4, 2020. During 2020, Charleston sold Savannah $460,000 of goods, which had cost $380,000. Savannah still owned 20% of the goods at the end of the year. In 2021, Charleston sold goods with a cost of $520,000 to Savannah for $700,000, and Savannah still owned 15% of the goods at year-end. What amount of intra-entity gross profit should be deferred in 2021? A) $27,000. B) $20,250. C) $16,000. D) $12,000. E) $0.

96) Charleston Inc. acquired 75% of Savannah Manufacturing on January 4, 2020. During 2020, Charleston sold Savannah $460,000 of goods, which had cost $380,000. Savannah still owned 20% of the goods at the end of the year. In 2021, Charleston sold goods with a cost of $520,000 to Savannah for $700,000, and Savannah still owned 15% of the goods at year-end. What amount of intra-entity gross profit should be recognized through the consolidation process in 2021? A) $27,000. B) $20,250. C) $16,000. D) $12,000. E) $0.

97) Prater Inc. owned 85% of the voting common stock of Harkin Corp. During 2021, Harkin made several sales of inventory to Prater. The total selling price was $215,000 and the cost was $105,000. At the end of the year, 40% of the goods were still in Prater’s inventory. Harkin’s reported net income was $400,000. Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, what was the net income attributable to the noncontrolling interest in Harkin?

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A) $51,000. B) $53,400. C) $60,000. D) $66,600. E) $32,250.

98) Prater Inc. owned 85% of the voting common stock of Harkin Corp. During 2021, Prater made several sales of inventory to Harkin. The total selling price was $215,000 and the cost was $105,000. At the end of the year, 40% of the goods were still in Harkin’s inventory. Harkin’s reported net income was $400,000. Assuming there are no excess amortizations associated with the consolidation, and no other intra-entity asset transfers, what was the net income attributable to the noncontrolling interest in Harkin? A) $51,000. B) $53,400. C) $60,000. D) $66,600. E) $32,250.

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 99) Tara Company owns 70 percent of the common stock of Stodd Inc. In the current year, Tara reports sales of $5,000,000 and cost of goods sold of $3,500,000. For the same period, Stodd has sales of $500,000 and cost of goods sold of $400,000. During the year, Stodd sold merchandise to Tara for $40,000 at a price based on the normal markup. At the end of the year, Tara still possesses 40 percent of this inventory. Prepare the consolidation entry to defer intraentity gross profit.

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100) King Corp. owns 85% of James Co. King uses the equity method to account for its investments. During 2021, King sells inventory to James for $500,000. The inventory originally cost King $420,000. At December 31, 2021, 25% of the goods were still in James' inventory. Required: Prepare the Consolidation Entry TI and Consolidation Entry G for the consolidation worksheet.

101) Flintstone Inc. acquired all of Rubble Co. on January 1, 2021. Flintstone decided to use the initial value method to account for this investment. During 2021, Flintstone sold to Rubble for $600,000 inventory with a cost of $500,000. At the end of the year 30% of the goods were still in Rubble's inventory. Required: Prepare Consolidation Entry TI for the intra-entity transfer and Consolidation Entry G for the ending inventory adjustment necessary for the consolidation worksheet at December 31, 2021.

102) Yoderly Co., a wholly owned subsidiary of Nelson Corp., sold goods to Nelson near the end of 2021. The goods had cost Yoderly $105,000 and the selling price was $140,000. Nelson had not sold any of the goods by the end of the year. Required: Prepare Consolidation Entry TI and Consolidation Entry G that are required for 2021.

103) Strayten Corp. is a wholly owned subsidiary of Quint Inc. Quint decided to use the initial value method to account for this investment. During 2021, Strayten sold Quint goods, which had cost $48,000. The selling price was $64,000. Quint still had one-eighth of the goods purchased from Strayten on hand at the end of 2021. Required: Prepare Consolidation Entry *G, which would have to be recorded at the end of 2022.

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104) Hambly Corp. owned 80% of the voting common stock of Stroban Co. During 2021, Stroban sold a parcel of land to Hambly. The land had a book value of $82,000 and was sold to Hambly for $145,000. Stroban's reported net income for 2021 was $119,000. Required: Assuming there are no other intra-entity transactions nor excess amortizations, what was the net income attributable to the noncontrolling interest of Stroban?

105) McGraw Corp. owned all of the voting common stock of both Ritter Co. and Lawler Co. During 2021, Ritter sold inventory to Lawler. The goods had cost Ritter $65,000, and they were sold to Lawler for $100,000. At the end of 2021, Lawler still held 30% of the inventory. Required: How should the sale between Lawler and Ritter be accounted for in a 2021 consolidation worksheet? Show worksheet entries to support your answer.

106) Virginia Corp. owned all of the voting common stock of Stateside Co. Both companies use the perpetual inventory method, and Virginia decided to use the partial equity method to account for this investment. During 2020, Virginia made cash sales of $400,000 to Stateside. The gross profit rate was 30% of the selling price. By the end of 2020, Stateside had sold 75% of the goods to outside parties for $420,000 cash. Prepare journal entries for Virginia and Stateside to record the sales/purchases during 2020.

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107) Virginia Corp. owned all of the voting common stock of Stateside Co. Both companies use the perpetual inventory method, and Virginia decided to use the partial equity method to account for this investment. During 2020, Virginia made cash sales of $400,000 to Stateside. The gross profit rate was 30% of the selling price. By the end of 2020, Stateside had sold 75% of the goods to outside parties for $420,000 cash. Prepare the consolidation entries that should be made at the end of 2020.

108) Virginia Corp. owned all of the voting common stock of Stateside Co. Both companies use the perpetual inventory method, and Virginia decided to use the partial equity method to account for this investment. During 2020, Virginia made cash sales of $400,000 to Stateside. The gross profit rate was 30% of the selling price. By the end of 2020, Stateside had sold 75% of the goods to outside parties for $420,000 cash. Prepare any 2021 consolidation worksheet entries that would be required regarding the 2020 inventory transfer.

109) Several years ago, Polar Inc. acquired an 80% interest in Icecap Co. The book values of Icecap's asset and liability accounts at that time were considered to be equal to their fair values. Polar’s acquisition value corresponded to the underlying book value of Icecap so that no allocations or goodwill resulted from the transfer. The following selected account balances were from the individual financial records of these two companies as of December 31, 2021: Polar Inc. Sales

896,000

Icecap Co. $

504,000

Cost of goods sold

406,000

276,000

Operating expenses

210,000

147,000

1,036,000

252,000

484,000

154,000

Retained earnings, 1/1/21 Inventory

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Buildings (net)

501,000

Investment income

not given

220,000

Assume that Polar sold inventory to Icecap at a markup equal to 25% of cost. Intra-entity transfers were $130,000 in 2020 and $165,000 in 2021. Of this inventory, $39,000 of the 2020 transfers were retained and then sold by Icecap in 2021, while $55,000 of the 2021 transfers were held until 2022. Required: For the consolidated financial statements for 2021, determine the balances that would appear for the following accounts: (i) Cost of Goods Sold; (ii) Inventory; and (iii) Net income attributable to the noncontrolling interest.

110) Several years ago, Polar Inc. acquired an 80% interest in Icecap Co. The book values of Icecap's asset and liability accounts at that time were considered to be equal to their fair values. Polar’s acquisition value corresponded to the underlying book value of Icecap so that no allocations or goodwill resulted from the transfer. The following selected account balances were from the individual financial records of these two companies as of December 31, 2021: Polar Inc. Sales

896,000

Icecap Co. $

504,000

Cost of goods sold

406,000

276,000

Operating expenses

210,000

147,000

1,036,000

252,000

Inventory

484,000

154,000

Buildings (net)

501,000

220,000

Investment income

not given

Retained earnings, 1/1/21

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Assume that Icecap sold inventory to Polar at a markup equal to 25% of cost. Intra-entity transfers were $70,000 in 2020 and $112,000 in 2021. Of this inventory, $29,000 of the 2020 transfers were retained and then sold by Polar in 2021, whereas $49,000 of the 2021 transfers were held until 2022. Required: For the consolidated financial statements for 2021, determine the balances that would appear for the following accounts: (i) Cost of Goods Sold; (ii) Inventory; and (iii) Net income attributable to the noncontrolling interest.

111) Several years ago, Polar Inc. acquired an 80% interest in Icecap Co. The book values of Icecap's asset and liability accounts at that time were considered to be equal to their fair values. Polar’s acquisition value corresponded to the underlying book value of Icecap so that no allocations or goodwill resulted from the transfer. The following selected account balances were from the individual financial records of these two companies as of December 31, 2021: Polar Inc. Sales

896,000

Icecap Co. $

504,000

Cost of goods sold

406,000

276,000

Operating expenses

210,000

147,000

1,036,000

252,000

Inventory

484,000

154,000

Buildings (net)

501,000

220,000

Investment income

not given

Retained earnings, 1/1/21

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Polar sold a building to Icecap on January 1, 2020 for $112,000, although the book value of this asset was only $70,000 on that date. The building had a five-year remaining useful life and was to be depreciated using the straight-line method with no salvage value. Required: For the consolidated financial statements for 2021, determine the balances that would appear for the following accounts: (i) Buildings (net); (ii) Operating expenses; and (iii) Net income attributable to the noncontrolling interest.

112) On January 1, 2021, Musical Corp. sold equipment to Martin Inc. (a wholly-owned subsidiary) for $168,000 in cash. The equipment originally cost $140,000 but had a book value of only $98,000 when transferred. On that date, the equipment had a five-year remaining life. Depreciation expense was calculated using the straight-line method. Musical earned $308,000 in net income in 2021 (not including any investment income) while Martin reported $126,000. Assume there is no amortization related to the original investment. What is consolidated net income for 2021?

113) On January 1, 2021, Musical Corp. sold equipment to Martin Inc. (a wholly-owned subsidiary) for $168,000 in cash. The equipment originally cost $140,000 but had a book value of only $98,000 when transferred. On that date, the equipment had a five-year remaining life. Depreciation expense was calculated using the straight-line method. Musical earned $308,000 in net income in 2021 (not including any investment income) while Martin reported $126,000. Assume there is no amortization related to the original investment. Prepare a schedule of consolidated net income and the share to controlling and noncontrolling interests for 2021, assuming that Musical owned only 90% of Martin and the equipment transfer had been downstream.

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114) On January 1, 2021, Musical Corp. sold equipment to Martin Inc. (a wholly-owned subsidiary) for $168,000 in cash. The equipment originally cost $140,000 but had a book value of only $98,000 when transferred. On that date, the equipment had a five-year remaining life. Depreciation expense was calculated using the straight-line method. Musical earned $308,000 in net income in 2021 (not including any investment income) while Martin reported $126,000. Assume there is no amortization related to the original investment. Prepare a schedule of consolidated net income and the share to controlling and noncontrolling interests for 2021, assuming that Musical owned only 90% of Martin and the equipment transfer had been upstream

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ESSAY. Write your answer in the space provided or on a separate sheet of paper. 115) For each of the following situations (1-10), select the correct entry (A - E) that would be required on a consolidation worksheet. (A) Debit Retained Earnings. (B) Credit Retained Earnings. (C) Debit Investment in Subsidiary. (D) Credit Investment in Subsidiary. (E) None of these answer choices are correct. 1. Upstream beginning intra-entity gross profit on inventory, using the initial value method of accounting. 2. Downstream beginning intra-entity gross profit on inventory, using the initial value method of accounting. 3. Upstream ending intra-entity gross profit on inventory, using the initial value method of accounting. 4. Downstream ending intra-entity gross profit on inventory, using the initial value method of accounting. 5. Upstream transfer of depreciable assets, in the period after transfer, where subsidiary recognizes a gain, using the initial value method of accounting. 6. Downstream transfer of depreciable assets, in the period after transfer, where parent recognizes a gain, using the initial value method of accounting. 7. Upstream transfer of land, in the period after transfer, where subsidiary recognizes a loss, using the initial value method of accounting. 8. Downstream transfer of land, in the period after transfer, where parent recognizes a loss, using the initial value method of accounting. 9. Eliminate income from subsidiary, recorded under the equity method of accounting. 10. Eliminate recorded amortization of acquisition-date fair value over book value, recorded under the equity method of accounting.

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116) On April 7, 2021, Martinez Corp. sold land to Hannon Co., its subsidiary. From a consolidated financial statement point of view, when will the gain on this transfer actually be recognized?

117) Throughout 2021, Flenderson Co. sold inventory to Bertram Co., its subsidiary. From a consolidated financial statement point of view, when will the gross profit on this transfer be recognized?

118) Lewis Corp. acquired all of the voting common stock of Vance Co. on January 1, 2021. Lewis owned land with a book value of $84,000 that was sold to Vance for its fair value of $120,000. How should this transfer be accounted for by the consolidated entity?

119) During 2021, Miner Co. sold inventory to its parent company, Bennett Corp. Bennett still owned the entire amount of inventory purchased at the end of 2021. Why must the gross profit on the sale be deferred when consolidated financial statements are prepared at the end of 2021?

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120) How does a gain on an intra-entity transfer of equipment affect the calculation of a noncontrolling interest?

121) How do upstream and downstream inventory transfers differ in their effect in a year-end consolidation?

122)

How is the gain on an intra-entity transfer of a depreciable asset recognized?

123) Vickers Inc. acquired all of the common stock of Scott Corp. on January 1, 2021. During 2021, Scott sold land to Vickers at a gain. No consolidation entry for the sale of the land was made at the end of 2021. What errors will this omission cause in the consolidated financial statements?

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124) Why do intra-entity transfers between the component companies of a business combination occur so frequently?

125) Miller, Inc. owns 90 percent of Green, Inc. and bought $200,000 of Green’s inventory in 2021. The transfer profit was equal to 30 percent of the sales price. When preparing consolidated financial statements, what amount of these sales is eliminated?

126) What is an intra-entity gross profit on a transfer of inventory, and how is it treated on a consolidation worksheet?

127) What is the impact on the noncontrolling interest of a subsidiary when there are downstream transfers of inventory between the parent and subsidiary companies?

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128) When is the gain on an intra-entity transfer of land recognized in consolidated net income?

129) What is the purpose of the adjustments to depreciation expense within the consolidation process when there has been an intra-entity transfer of a depreciable asset?

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Answer Key Test name: Chap 05_8e 1) B 2) A $2,280,000 COGS is unaffected by intra-entity gross profits in Consolidated Ending Inventory value 3) A 220,000 Revenue − $150,000 COGS = $70,000 Gross Profit on IntraEntity Transfer × 25% (Amount in Ending Inventory) = $17,500 Reduction in consolidated net income. Consolidation Adjustment to Net Income × 30% for Noncontrolling Interest = $5,250 Reduction in Net Income Attributable to the Noncontrolling Interest 4) D Subsidiary’s Net Income $215,000 × 25% (Noncontrolling Interest) = $53,750 5) C Intra-Entity Gross Profit ($2,500,000 − $1,850,000) $650,000 × IntraEntity Transfer Remaining in Ending Inventory (30%) = $195,000 Consolidated COGS = Parent’s COGS ($11,200,000) + Subsidiary’s COGS ($6,600,000) − COGS in Intra-Entity Transfer ($2,500,000) + Intra-Entity Gross Profit Deferred ($195,000) = $15,495,000 6) B

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2021 Intra-Entity Gross Profit ($1,000,000 − $820,000) $180,000 × Intra-Entity Gross Profit Remaining in Ending Inventory (15%) = $27,000. 2020 Intra-Entity Gross Profit ($640,000 − $450,000) $190,000 × Intra-Entity Gross Profit Remaining in Ending Inventory (18%) = $34,200. Consolidated COGS = Parent’s COGS ($5,800,000) + Subsidiary’s COGS ($1,300,000) − Total COGS in Intra-Entity Transfer ($1,000,000) − Intra-Entity Gross Profit Deferred from 2020 ($34,200) + Intra-Entity Gross Profit Deferred from 2021 ($27,000) = $6,092,800. 7) B Subsidiary’s Net Income ($320,000) − Intra-Entity Gross Profit Deferred [($190,000 − $105,000) × 30% = $25,500] = $294,500 × Noncontrolling Interest (20%) = $58,900 Net Income Attributable to the Noncontrolling Interest 8) C $51,000, the original book value of the Land. Any intra-entity profit from the transfer is eliminated. 9) B Sales Price $52,000 − BV $36,000 = Intra-Entity Gain on Transfer That Is Deferred ($16,000) Subsidiary’s Net Income ($123,000) − Deferred Intra-Entity Gain on Transfer ($16,000) = Adjusted Subsidiary Net Income ($107,000) Noncontrolling Interest in Net Income = $107,000 × 25% Ownership Interest in Subsidiary = $26,750 10) A

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The equipment would be reinstated at the asset’s historical cost, any gain or loss would be eliminated, and accumulated depreciation and depreciation expense would be returned to the original values. Historical cost $165,000 − Accumulated Depreciation $45,000 = BV $120,000 Depreciation for 2020 = $120,000 ÷ 5 years remaining life = $24,000 Equipment Total Net of Depreciation = $120,000 − $24,000 = $96,000 11) B The equipment would be reinstated at the asset’s historical cost, any gain or loss would be eliminated, and accumulated depreciation and depreciation expense would be returned to the original values. Historical cost $165,000 − Accumulated Depreciation $45,000 = BV $120,000 Depreciation = $120,000 ÷ 5 years remaining life = $24,000 Equipment Total Net of Depreciation = $120,000 BV − $24,000 Depreciation for 2020 − $24,000 Depreciation for 2021 = $72,000 12) A 13) D Subsidiary’s Net Income $173,000 + Recognition of prior year Deferred Recognized Gross profit $50,000 − Deferred gross profit at end of the year $30,000 = $193,000 × Noncontrolling Interest 20% = $38,600 Net Income Attributable to the Noncontrolling Interest 14) B

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Parent's Land $461,000 + Subsidiary's Land $265,000 = $726,000. The intra-entity transfer of land has no impact on the consolidated balance of land. The transfer of land in 2020 would have resulted in an overall increase of $13,000 ($88,000 - $75,000) in the value of the land in the financial records of the individual companies. However, for consolidation purposes, that increase would be eliminated and the land returned to its recorded value at the date of transfer through entry *GL in the 2021 consolidation worksheet. Entry *GL eliminates the effects of intra-entity transfers of land made in a previous year and would be recorded each subsequent year until the land is eventually sold to an outside party. 15) C Gross Profit Rate = Gross Profit ÷ COGS = GPR ÷ (1 − GPR) = 25% ÷ (1 + 25%) = 20% Intra-Entity Gross Profit = Transfer Price × GPR (20%) Gross Profit in 2020 Ending Inventory: ($460,000 × 20%) × Inventory remaining 40% = $36,800 Gross Profit in 2021 Ending Inventory: ($520,000 × 20%) × Inventory remaining 40% = $41,600 Subsidiary’s Net Income ($932,000) + Intra-Entity Gross Profit in Ending Inventory for 2020 ($36,800) − Intra-Entity Gross Profit in 2021 Inventory Deferred ($41,600) = $927,200 × Noncontrolling Interest 15% = $139,080 Net Income Attributable to the Noncontrolling Interest 16) B Sales Price $125,000 – BV ($150,000 − $70,000) = $45,000 Gain on Sale ÷ 8yrs = $5,625 Annual Amortization of Unrealized Gain over Expected Useful Life of the Asset Parent’s Depreciation $86,000 + Subsidiary’s Depreciation $64,000 − Annual amortization $5,625 = $144,375 17) B Version 1

Intra-Entity Gross Profit ($420,000 − $275,000) $145,000 × Intra-Entity Gross Profit Remaining in Ending Inventory ($84,000 ÷ $420,000) 20% = $29,000 18) C Intra-Entity Gross Profit ($150,000 Transfer Price × 30% Bernard’s GP Percentage) $45,000 × Intra-Entity Transfers Remaining in Ending Inventory (40%) = $18,000 19) B Consolidated Sales = Parent’s Sales ($1,120,000) + Subsidiary’s Sales ($420,000) = $1,540,000 − Intra-Entity Transfers ($140,000) = $1,400,000 Deferred Unrecognized Gross Profit = $140,000 × 25% × 40% = $14,000 Consolidated COGS = Parent’s COGS ($840,000) + Subsidiary’s COGS ($252,000) − Total Intra-Entity Inventory transfers ($140,000) + Deferred Unrecognized Gross Profit ($14,000) = $966,000 20) D Consolidated Sales = Parent’s Sales ($1,120,000) + Subsidiary’s Sales ($420,000) = $1,540,000 − Intra-Entity Transfers ($140,000) = $1,400,000 Intra-Entity Gross Profit Deferred = $140,000 × 40% × 40% = $22,400 Consolidated COGS = Parent’s COGS ($840,000) + Subsidiary’s COGS ($252,000) − Total Intra-Entity Transfers ($140,000) + IntraEntity Gross Profit Deferred ($22,400) = $974,400 21) A Consolidated Sales = Parent’s Sales $1,120,000 + Subsidiary’s sales $420,000 = $1,540,000 − Intra-Entity Transfers $140,000 = $1,400,000 Consolidated COGS = Parent’s COGS $840,000 + Subsidiary’s COGS $252,000 − Total Intra-Entity Transfers $140,000 = $952,000 Version 1

22) A Transfer Cost $412,000 ÷ 8 years = $51,500 Annual Depreciation by Creed Palmer Depreciation: (Cost ($450,000) − salvage value ($0)) divided by useful life (10 years) = $45,000 Depreciation expense should be decreased by $6,500. 23) D Parent’s Revenue ($420,000) + Subsidiary’s Revenue ($280,000) − Intra-Entity Transfers ($140,000) = $560,000 24) D Parent’s Operating Expenses ($28,000) + Subsidiary’s Operating Expenses ($14,000) + Excess Amortization on Equipment (($35,000 ÷ 5) $7,000) = $49,000 25) C Consolidated COGS = Parent’s COGS ($196,000) + Subsidiary’s COGS ($112,000) − Total Intra-Entity Transfer ($140,000) + Intra-Entity Transfer Goods Remaining in Ending Inventory ($28,000 × 60% = $16,800) = $184,800 26) D [$364,000 ÷ 80% = $455,000 + Net Income ($154,000 − $7,000) $147,000] $602,000 × 20% = $120,400 27) D BV Parent’s Equipment $616,000 + BV Subsidiary’s Equipment $420,000 + FV Equipment Increase at Acquisition $35,000 − First Year Excess Amortization of FV ($35,000 ÷ 5) $7,000 = $1,064,000 28) D BV Parent’s Inventory $210,000 + BV Subsidiary’s Inventory $154,000 − Deferred Recognition of Intra-Entity Gross Profit on Inventory Transfer ($28,000 × 60%) $16,800 = $347,200 29) E Version 1

30) B 31) B 32) C 33) A 34) B 35) E 36) B 37) B 38) C 39) D 40) B 41) B 42) B 43) C 44) B 45) C 46) D 47) B Philbin’s Share of Anderson’s Net Income for 2020 ($70,000 × 90%) $63,000 − Earnings Adjustment for Intra-Entity Gross profit on Which Recognition is Deferred for Anderson for 2020 ($1,200 × 25% × 90%) $270 = $62,730 48) C Philbin’s Share of Anderson’s Net Income for 2021 ($85,000 × 90%) $76,500 − Earnings Adjustment for Intra-Entity Gross Profit Remaining in Ending Inventory of Anderson for 2021 ($4,000 × 25% × 90%) $900 + Recognition of Intra-Entity Gross Profit of Anderson for 2020 ($1,200 × 25% × 90%) $270 = $75,870 49) D

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Philbin’s Share of Anderson’s Net Income 2022 ($94,000 × 90%) $84,600 − Earnings Adjustment for Unrecognized Gross profit of Anderson for 2022 ($3,000 × 25% × 90%) $675 + Gross Profit Recognized with respect to Anderson for 2021 ($4,000 × 25% × 90%) $900 = $84,825 50) A Philbin’s Share of Anderson’s Net Income for 2020 ($70,000 × 10%) $7,000 − Earnings Adjustment for Unrecognized Gross profit of Anderson for 2020 ($1,200 × 25% × 10%) $30 = $6,970 51) C Philbin’s Share of Anderson’s Net Income for 2021 ($85,000 × 10%) $8,500 − Earnings Adjustment for Unrecognized gross profit of Anderson for 2021 ($4,000 × 25% × 10%) $100 + Recognized Gross profit of Anderson for 2020 ($1,200 × 25% × 10%) $30 = $8,430 52) C Philbin’s Share of Anderson’s Net Income for 2022 ($94,000 × 10%) $9,400 − Earnings Adjustment for Unrecognized Gross profit of Anderson for 2022 ($3,000 × 25% × 10%) $75 + Recognized Gross profit of Anderson for 2021 ($4,000 × 25% × 10%) $100 = $9,425 53) A Earnings Adjustment for Unrecognized Gross profit of Anderson for 2020 ($1,200 × 25% = $300) 54) A Earnings Adjustment for Unrecognized Gross profit of Anderson for 2021 ($4,000 × 25% = $1,000) 55) B Earnings Adjustment for Unrecognized Gross profit of Anderson for 2022 ($3,000 × 25% = $750) 56) A Zero. No Earnings Adjustment would be necessary in January 2020 Version 1

57) B Realized Gross profit of Anderson 2020 ($1,200 × 25% = $300) 58) C Recognized Gross profit of Anderson with respect to 2021 ($4,000 × 25% = $1,000) 59) C Consolidated Sales = Parent’s Sales $10,000,000 + Subsidiary’s sales $200,000 = $10,200,000 − Intra-Entity Transfers $60,000 = $10,140,000 60) D Consolidated COGS = Parent’s COGS $7,500,000 + Subsidiary’s COGS $160,000 − Total Intra-Entity Transfer $60,000 + Deferred Unrecognized Intra-Entity Gross Profit ($15,000* × 30%) $4,500 = $7,604,500 *($10,000,000 − $7,500,000) ÷ $10,000,000 = 25% gross profit rate × $60,000 = $15,000 61) C Consolidated Sales = Parent’s Sales $10,000,000 + Subsidiary’s Sales $200,000 = $10,200,000 − Intra-Entity Transfers $60,000 = $10,140,000 62) A January 1, 2020 BV $50,000 ÷ 10yrs Expected Useful Life = $5,000 per year Depreciation Expense. Sale on April 1, 2020 required three months of Depreciation Expense leaving a BV on Sale of $48,750. Sale Price of $68,250 − BV on Sale of $48,750 = $19,500 Gain on Sale 63) C Amortization of Gain on Transfer of Equipment = $19,500 Gain ÷ 9 years 9 months Remaining Useful Life = $2,000 per year × 9 months of 2020 = $1,500 Depreciation Adjustment for 2020 64) C

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Amortization of Gain on Transfer of Equipment = $19,500 Gain ÷ 9 years 9 months Remaining Useful Life = $2,000 per year × 12 months of 2021 = $2,000 Depreciation Adjustment for 2021 65) C Amortization of Gain on Transfer of Equipment = $19,500 Gain ÷ 9 years 9 months Remaining Useful Life = $2,000 per year × 12 months of 2022 = $2,000 Depreciation Adjustment for 2022 66) B Parent’s Share of Subsidiary Net Income 2020 ($100,000 × 90%) = $90,000 67) A Parent’s Share of Subsidiary Net Income 2021 ($120,000 × 90%) = $108,000 68) C Parent’s Share of Subsidiary Net Income 2022 ($130,000 × 90%) = $117,000 69) C January 1, 2020 Sale Price on Transfer $84,000 − BV $72,000 = $12,000 Gain on Sale 70) D Deferred Gain on Transfer $12,000 ÷ 6 years remaining = $2,000 Amortization of Gain per year. 71) D Deferred Gain on Transfer $12,000 ÷ 6 years remaining = $2,000 Amortization of Gain per year. Accumulated Depreciation $48,000 − Amortization of Gain for First Year $2,000 = $46,000 Credit to Accumulated Depreciation for 2020 72) C

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Deferred Gain on Transfer $12,000 ÷ 6 years remaining = $2,000 Amortization of Gain per year. Deferred Recognition of Gain on Transfer $12,000 − Amortization of Gain for First Year $2,000 = $10,000 Decrease in Net Income for 2020 73) B Leo’s Land Transfer Value $75,000 − Leo’s Land BV $60,000 = $15,000 Gain on Intra-Entity Sale of Land 74) D Credit the Land account for the Gain of $15,000, with any realized gain on the transfer deferred until the parcel is sold outside the entity in the future 75) E Debit the Investment account for the Gain of $15,000, with any recognition of intra-entity gain on the transfer deferred until the parcel is sold outside the entity in the future. 76) B Parent’s Share of Subsidiary Net Income 2020 ($125,000 × 80%) = $100,000 77) E Parent’s Share of Subsidiary Net Income 2021 ($140,000 × 80%) = $112,000 78) D Subsidiary’s Land Transfer Value $80,000 − Subsidiary’s Land BV $85,000 = $5,000 Loss on Intra-Entity Transfer of Land 79) B Subsidiary’s Land Transfer Value $80,000 − Subsidiary’s Land BV $85,000 = $5,000 Loss on Intra-Entity Transfer of Land 80) B Subsidiary’s Land Transfer Value $80,000 − Subsidiary’s Land BV $85,000 = $5,000 Loss on Intra-Entity Transfer of Land Version 1

81) E Parent’s Share of Subsidiary Net Income for 2020 ($200,000 × 90%) = $180,000 + (Adjusted Loss on Land $5,000 × 90%) $4,500 = $184,500 82) D Parent’s Share of Subsidiary Net Income for 2021 ($180,000 × 90%) = $162,000 83) A Parent’s Sale Price $92,000 − BV of Land $80,000 = $12,000 Gain 84) E Stark recognizes no Gain or Loss at the time of Sale by Parker 85) B The recognized gain of ($92,000 − $80,000) $12,000 created by the intra-entity transfer is offset by the recognition of a Deferred Loss on the Original Transfer of ($80,000 − $85,000) $5,000 resulting in a net $7,000 Gain recognized and reported in Consolidated Net Income 86) C Subsidiary Net Income 2022 of $220,000 − Loss Adjustment of ($80,000 − $85,000) $5,000 on Disposal of Land = $215,000 × 90% = $193,500 87) D Subsidiary’s Equipment Transfer Value $45,000 − Subsidiary’s Equipment BV $54,000 = $9,000 Loss on Intra-Entity Transfer of Equipment 88) A There is No Consolidated Gain/Loss Recognized on the Transfer in 2020 89) B

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Subsidiary’s Equipment Transfer Value $45,000 − Subsidiary’s Equipment BV $54,000 = $9,000 Loss on Intra-Entity Transfer of Equipment ÷ 9 years = $1,000 Loss Recognition per year Subsidiary’s 2020 Income ($300,000) + Unrecognized Loss on Transferred Equipment ($9,000) − First Annual Recognition of Loss ($1,000) = $308,000 × 60% = $184,800 Subsidiary’s Net Income Recognized by Parent in Consolidated Financial Statements 90) C Subsidiary’s Equipment Transfer Value $45,000 − Subsidiary’s Equipment BV $54,000 = $9,000 Loss on Intra-Entity Transfer of Equipment ÷ 9 years = $1,000 Loss Recognition per year Subsidiary’s 2021 Income ($325,000) − Second Year Recognition of Loss ($1,000) = $324,000 × 60% = $194,400 Subsidiary’s Net Income Reported by Parent 91) D Subsidiary’s Equipment Transfer Value $45,000 − Subsidiary’s Equipment BV $54,000 = $9,000 Loss on Intra-Entity Transfer of Equipment ÷ 9 years = $1,000 Loss Recognition per year Subsidiary’s 2020 Income ($300,000) + Unrecognized Loss on Transferred Equipment ($9,000) − First Annual Recognition of Loss ($1,000) = $308,000 × 40% = $123,200 Net Income Attributable to the Noncontrolling Interest 92) E Subsidiary’s Equipment Transfer Value $45,000 − Subsidiary’s Equipment BV $54,000 = $9,000 Loss on Intra-Entity Transfer of Equipment ÷ 9 years = $1,000 Loss Recognition per year Subsidiary’s 2021 Income ($325,000) − Second Year Recognition of Loss ($1,000) = $324,000 × 40% = $129,600 Net Income Attributable to the Noncontrolling Interest 93) C Version 1

($315,000 − $210,000) × 30% = $31,500 94) D ($2,500,000 − $1,850,000) × 30% = $195,000 95) A ($700,000 − $520,000) × 15% = $27,000. 96) C ($460,000 − $380,000) × 20% = $16,000. 97) B Subsidiary’s Net Income ($400,000) − Intra-Entity Gross Profit Deferred [($215,000 − $105,000) × 40% = $44,000] = $356,000 × Noncontrolling Interest (15%) = $53,400 Net Income Attributable to the Noncontrolling Interest 98) C Subsidiary’s Net Income $400,000 × Noncontrolling Interest (15%) = $60,000 Net Income Attributable to the Noncontrolling Interest 99)

Cost of Goods Sold Inventory

3,200 3,200

Normal markup for Stodd = (Sales $500,000 − Cost of Goods Sold $400,000) ÷ Sales $500,000 = 20% Intra-entity gross profit to be deferred = $40,000 × 20% × 40% = $3,200 100) Consolidation Entry TI

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Sales

500,000

Cost of Goods Sold

500,000

Consolidation Entry G Cost of Goods Sold

20,000

Inventory

20,000

[($500,000 − $420,000) × 25%]

101) Consolidation Entry TI Sales

600,000

Cost of Goods Sold

600,000

Consolidation Entry G Cost of Goods Sold

30,000

Inventory

30,000

[($600,000 − $500,000) × 30%]

102) Consolidation Entry TI Sales Cost of Goods Sold

140,000 140,000

Consolidation Entry G

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Cost of Goods Sold

35,000

Inventory

35,000

[($140,000 − $105,000) × 100% inventory remaining]

103)

Retained Earnings (($64,000− $48,000)× 1/8)

2,000

Cost of Goods Sold

2,000

104)

Stroban Co.’s 2021 net income as reported

$ 119,000

Unrealized gain on land sale ($145,000 − $82,000) Stroban Co.’s 2021 realized income

(63,000 ) $

Noncontrolling interest percentage

56,000 × 20 %

Noncontrolling interest’s share of Stroban Co.’s net income

11,200

105) Lawler and Ritter are related parties since they are both part of a combined entity. The following consolidation entries should be prepared: Sales Cost of Goods Sold

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100,000 100,000

Cost of Goods Sold Inventory

10,500 10,500

[($100,000 − $65,000) × 30%]

These entries: (i) eliminate the sale from the consolidated income statement; (ii) decrease cost of goods sold; and (iii) reduce consolidated inventory to its cost to the combined entity. 106) On the books of Virginia: Cash

400,000

Sales Cost of Goods Sold ($400,000× 70%)

400,000 280,000

Inventory

280,000

On the books of Stateside: Inventory

400,000

Cash Cash

400,000 420,000

Sales Cost of Goods Sold Inventory

400,000 300,000 300,000

107)

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Consolidation Entry TI Sales

400,000

Cost of Goods Sold

400,000

Consolidation Entry G Cost of Goods Sold

30,000

Inventory [$400,000 × 30% × 25%]

30,000

108)

Retained Earnings

30,000

Cost of Goods Sold

30,000

[$400,000 × 30% × 25%]

109) Consolidated Cost of Goods Sold - 2021 Poplar Inc.’s cost of goods sold

406,000

Icecap Co.’s cost of goods sold

276,000

Elimination of 2021 intra-entity transfer of inventory

(165,000 )

Reduction of beginning inventory because of 2020 unrecognized gain ($39,000 transfer price ÷ 125% = $31,200 cost; $39,000 less $31,200 = $7,800 unrecognized gain)

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(7,800 )

Reduction of ending inventory because of 2021 unrecognized gain ($55,000 transfer price ÷ 125% = $44,000 cost; $55,000 less $44,000 = $11,000 unrecognized gain)

11,000

Consolidated cost of goods sold

520,200

484,000

Consolidated Inventory Polar Inc.’s inventory Icecap’s inventory

154,000

Eliminate ending inventory unrecognized gain (from above)

(11,000 )

Consolidated inventory

627,000

Icecap’s reported net income ($504,000− $276,000 − $147,000) Noncontrolling interest percentage

81,000

Net income attributable to the noncontrolling interest

20 % 16,200

110) Consolidated Cost of Goods Sold Poplar Inc.’s cost of goods sold

406,000

Icecap Co.’s cost of goods sold

276,000

Elimination of 2021 intra-entity transfer of inventory Reduction of beginning inventory because of 2020 unrecognized gain

(112,000 )

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($29,000 ÷ 125% = $23,200 cost; transfer price $29,000 less $23,200 cost = $5,800 unrecognized gain) Reduction of ending inventory because of 2021 unrecognized gain ($49,000 ÷ 125% = $39,200 cost; transfer price $49,000 less $39,200 cost = $9,800 unrecognized gain) Consolidated cost of goods sold

(5,800 )

9,800

574,000

484,000

Consolidated Inventory Polar Inc.’s inventory Icecap’s inventory

154,000

Eliminate ending inventory unrecognized gain (from above)

(9,800 )

Consolidated inventory

628,200

81,000

Net income attributable to the noncontrolling interest Icecap’s reported net income ($504,000 − $276,000 − $147,000) 2020 unrecognized gain realized in 2021 (from above)

5,800

2021 unrecognized gain to be realized in 2022 (from above)

(9,800 ) $

Noncontrolling interest percentage Net income attributable to the noncontrolling interest

× $

77,000 20 % 15,400

111)

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Consolidated Buildings (Net) Poplar Inc.’s book value

$ 501,000

Icecap Co.’s book value

220,000

Removal of gain created by transfer (112,000 − $70,000) Removal of excess depreciation created by transfer ($42,000 unrecognized gain ÷ 5 year life × 2 years) Consolidated buildings (net)

$ (42,000 )

16,800

(25,200 ) $ 695,800

Consolidated Operating expenses Polar Inc.’s book value

$ 210,000

Icecap’s book value

147,000

Removal of excess depreciation on transferred building ($42,000 unrecognized gain ÷ 5 year life)

(8,400 )

Consolidated operating expenses

Net income attributable to the noncontrolling interest Icecap’s reported net income ($504,000 − $276,000 − $147,000) Noncontrolling interest percentage Net income attributable to the noncontrolling interest

$ 348,600

$ × $

81,000 20 % 16,200

112)

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Musical’s income

$ 308,000

Martin’s income

126,000

Removal of unrealized gain on equipment ($168,000 − $98,000)

(70,000 )

Removal of excess depreciation created by inflated transfer price ($70,000 ÷ 5 years) Consolidated net income

14,000 $ 378,000

113) Musical’s income

Martin’s income

308,000 126,000

Removal of unrealized gain on equipment ($168,000 − $98,000)

(70,000 )

Removal of excess depreciation created by inflated transfer price ($70,000 ÷ 5 years)

14,000

Consolidated Net Income

378,000

Consolidated Net Income

378,000

To noncontrolling interest ($126,000 × 10%) To controlling interest

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(126,000 ) $

365,400

114) Musical’s income

$ 308,000

Martin’s income

126,000

Deferral of intra-entity gain recognition on equipment

(70,000 )

Removal of excess depreciation created by intra-entity transfer ($70,000 ÷ 5 years) Consolidated net income

14,000

To noncontrolling interest [($126,000 − $70,000 + $14,000) × 10%] To controlling interest

$ 378,000 (7,000 ) $ 371,000

115) (1.) A; (2.) A; (3.) E; (4.) E; (5.) A; (6.) A; (7.) B; (8.) B; (9.) D; (10.) C. 116) The gain is recognized when Hannon sells the land to a third party. 117) The gross profit is recognized when Bertram uses the goods or sells them to a third party.

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118) Vance and Lewis are in substance one entity; although in legal form they are separate. The “sale” of land by Lewis should be regarded as an intra-entity transfer. No gain on the transfer should be recognized in the consolidated financial statements since the intra-entity transferis merely the internal movement of an asset, an event that creates no net change in the financial position of the business combination taken as a whole. Because Vance recognized a gain in its income statement, the consolidation process must eliminate that gain. Also, Vance’s separate balance sheet showed the land at an amount greater than its cost to the combined entity. The consolidation entry must reduce land to its historical cost. 119) A sale of inventory by a subsidiary to its parent is more accurately understood as a transfer within the entity. Since Bennett still owned the inventory at the end of the year, the intra-entity transferis merely the internal movement of an asset, an event that creates no net change in the financial position of the business combination taken as a whole. If recognition of the gross profit on the transfer was allowed, the parent would be able to manipulate consolidated net income and consolidated net assets by transferring inventory between parent and subsidiary. 120) If the equipment is sold by the parent to the subsidiary, the transfer of the equipment does not affect the calculation of the noncontrolling interest's share of the subsidiary's net income. When the sale of equipment is upstream, the gain on the sale must be subtracted from the subsidiary's income, and this elimination may be allocated between the controlling interest and noncontrolling interest share of the subsidiary’s earnings.

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121) If the sale of inventory is downstream (from parent to subsidiary), any unrecognized gross profit on the transfer does not affect the calculation of noncontrolling interest. When the transfer is upstream (from the subsidiary to the parent), the gross profit on the transfer is associated with the subsidiary. The gross profit on goods that the parent still owns should be deducted from the subsidiary's income which may be allocated between the controlling interest and the noncontrolling interest's share of the subsidiary's earnings. 122) The gain on an intra-entity transfer of a depreciable asset may be recognized in one of two ways: (i) through the use of the asset in operations; or (ii) through the sale of the asset to an independent third party. 123) Consolidation Entry for 2021 Gain on Sale of Land XXX Land

XXX

This omission causes both the amounts for Land and Gain on Sale of Land to be overstated in the consolidated financial statements, and ultimately, Total Assets and Ending Retained Earnings may be overstated as well. Also, the correction for the gain may be allocated to the noncontrolling interest share of subsidiary earnings and the noncontrolling interest balance on the consolidated balance sheet.

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124) One reason for the significant volume and frequency of intraentity transfers is that many business combinations are specifically organized so that the companies can provide products for each other. This design is intended to benefit the business combination as a whole due to the economies provided by such vertical integration. In effect, more profit can be generated by the combination if one member is able to buy from another, as opposed to an outside party. 125) Regardless of the ownership percentage or the markup, the $200,000 was simply an intra-entity asset transfer for consolidation purposes. Thus, within the consolidation process, the entire $200,000 should be eliminated from both the Sales and the Purchases (Inventory) accounts.

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126) In intra-entity transfers, a transfer price often exceeds the underlying cost of the inventory. Hence, the seller recognizes gross profit on its books that, with respect to the entire controlled group, is deferred until the asset is consumed or sold to an outside party. Any unrecognized intra-entity gross profit on merchandise still held by the buyer must be eliminated for consolidated financial statement purposes. With respect to the year of transfer, this consolidation procedure requires unrecognized intra-entity gross profit be deducted from the inventory account on the balance sheet, and from the ending inventory balance within cost of goods sold. In the year following the transfer (if the goods are resold or consumed), the unrecognized intra-entity gross profit must again be deducted for purposes of the consolidated financial statements. This second reduction is recorded on the worksheet as a reduction to the beginning inventory component of cost of goods sold, as well as to the beginning retained earnings balance of the original seller. This functions to defer the recognition of gross profit from the year of transfer to the year the underlying asset is consumed or sold to an unrelated third party. If the transfer was made on a downstream basis, and the parent company applied the equity method of accounting, a subsequent year adjustment must be recorded in the subsidiary investment account as opposed to the retained earnings account. 127) Downstream transfers do not impact noncontrolling interest. Only upstream transfers will have an effect on the noncontrolling interest of a subsidiary. 128) The gain created on an intra-entity transfer of land is recognized when the asset is sold to an independent third party. Gain recognition is deferred until the date of such third-party sale.

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129) Depreciable assets are often transferred between the members of a controlled group for amounts in excess of book value. The buyer in turn calculates depreciation expense based on this inflated transfer price as opposed to a price based on historical cost. For purposes of consolidated financial statement reporting, depreciation should be calculated based solely on historical cost figures. As a result, for consolidated financial statement reporting purposes, for each period an adjustment to the depreciation amounts recorded by the buyer are required to reduce the expense reported on the consolidated financial statements to a cost-based figure.

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CHAPTER 6 MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) On January 1, 2021, Riley Corp. acquired some of the outstanding bonds of one of its subsidiaries. The bonds had a carrying value of $421,620, and Riley paid $401,937 for them. How should you account for the difference between the carrying value and the purchase price in the consolidated financial statements for 2021? A) The difference is added to the carrying value of the debt. B) The difference is deducted from the carrying value of the debt. C) The difference is treated as a loss from the extinguishment of the debt. D) The difference is treated as a gain from the extinguishment of the debt. E) The difference does not influence the consolidated financial statements.

2) Regency Corp. recently acquired $500,000 of the bonds of Safire Co., one of its subsidiaries, paying more than the carrying value of the bonds. According to the most practical view of this intra-entity transaction, to whom should the loss be attributed? A) To Safire because the bonds were issued by Safire. B) The loss should be allocated between Safire and Regency based on the purchase price and the original face value of the debt. C) The loss should be amortized over the life of the bonds and need not be attributed to either party. D) The loss should be deferred until it can be determined to whom the attribution can be made. E) To Regency because Regency is the controlling party in the business combination.

3) Which one of the following characteristics of preferred stock would make the stock a dilutive security for purposes of calculating earnings per share? A) The preferred stock is callable. B) The preferred stock is convertible. C) The preferred stock is cumulative. D) The preferred stock is noncumulative. E) The preferred stock is participating.

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4) Where do dividends paid to the noncontrolling interest of a subsidiary appear on a consolidated statement of cash flows? A) Cash flows from operating activities. B) Cash flows from investing activities. C) Cash flows from financing activities. D) Supplemental schedule of noncash investing and financing activities. E) They do not appear in the consolidated statement of cash flows.

5) Where do dividends paid by a subsidiary to the parent company appear in a consolidated statement of cash flows? A) Cash flows from operating activities. B) Cash flows from investing activities. C) Cash flows from financing activities. D) Supplemental schedule of noncash investing and financing activities. E) They do not appear in the consolidated statement of cash flows.

6) Where do intra-entity transfers of inventory appear in a consolidated statement of cash flows? A) They do not appear in the consolidated statement of cash flows. B) Supplemental schedule of noncash investing and financing activities. C) Cash flows from operating activities. D) Cash flows from investing activities. E) Cash flows from financing activities.

7) How do intra-entity transfers of inventory affect the preparation of a consolidated statement of cash flows?

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A) They must be added in calculating cash flows from investing activities. B) They must be deducted in calculating cash flows from investing activities. C) They must be added in calculating cash flows from operating activities. D) Because the consolidated balance sheet and income statement are used in preparing the consolidated statement of cash flows, no special elimination is required. E) They must be deducted in calculating cash flows from operating activities.

8) How would consolidated earnings per share be calculated if the subsidiary has no convertible securities or warrants? A) Parent's earnings per share plus subsidiary's earnings per share. B) Parent's net income divided by parent's number of shares outstanding. C) Consolidated net income divided by parent's number of shares outstanding. D) Average of parent's earnings per share and subsidiary's earnings per share. E) Consolidated income divided by total number of shares outstanding for the parent and subsidiary.

9) On January 1, 2021, Rhodes Co. owned 75% of the common stock of Brock Co. On that date, Brock's stockholders' equity accounts had the following balances:

Common stock ($6 par value) Additional paid-in capital

Retained earnings Total stockholders’ equity

300,000 120,000 340,000

760,000

The balance in Rhodes’s Investment in Brock Co. account was $570,000, and the noncontrolling interest was $190,000. On January 1, 2021, Brock Co. sold 10,000 shares of previously unissued common stock for $12 per share. Rhodes did not acquire any of these shares. What is the balance in Rhodes’s Investment in Brock Co. account following the sale of the 10,000 shares of common stock?

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A) $403,000. B) $550,000. C) $570,000. D) $660,000. E) $880,000.

10) On January 1, 2021, Rhodes Co. owned 75% of the common stock of Brock Co. On that date, Brock's stockholders' equity accounts had the following balances:

Common stock ($6 par value) Additional paid-in capital

Retained earnings Total stockholders’ equity

300,000 120,000 340,000

760,000

The balance in Rhodes’s Investment in Brock Co. account was $570,000, and the noncontrolling interest was $190,000. On January 1, 2021, Brock Co. sold 10,000 shares of previously unissued common stock for $12 per share. Rhodes did not acquire any of these shares. What amount should be attributed to the Noncontrolling Interest in Brock Co. following the sale of the 10,000 shares of common stock? A) $190,000. B) $220,000. C) $310,000. D) $330,000. E) $550,000.

11) Akers Co. owned 8,000 shares (80%) of the outstanding 8%, $100 par, preferred stock and 70% of the outstanding common stock of Brickman Co. Assuming there are no excess amortizations or intra-entity transactions, and Brickman reports net income of $810,000, what is the noncontrolling interest in the subsidiary's income?

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A) $146,000. B) $156,000. C) $170,000. D) $219,000. E) $235,000.

12) Knight Co. owned 80% of the common stock of Stoop Co. Stoop had 50,000 shares of $5 par value common stock and 2,000 shares of preferred stock outstanding. Each preferred share received an annual per share dividend of $2 and is convertible into four shares of common stock. Knight did not own any of Stoop's preferred stock. Stoop also had 600 bonds outstanding, each of which is convertible into ten shares of common stock. Stoop's annual after-tax interest expense for the bonds was $2,000. Knight did not own any of Stoop's bonds. There are no excess amortizations or intra-entity transactions associated with this consolidation. Stoop reported net income of $300,000 for 2021. Knight has 100,000 shares of common stock outstanding and reported net income of $400,000 for 2021. What would Knight Co. report as consolidated basic earnings per share (rounded)? A) $6.37 B) $6.40 C) $7.00 D) $5.68 E) $6.00

13) Knight Co. owned 80% of the common stock of Stoop Co. Stoop had 50,000 shares of $5 par value common stock and 2,000 shares of preferred stock outstanding. Each preferred share received an annual per share dividend of $2 and is convertible into four shares of common stock. Knight did not own any of Stoop's preferred stock. Stoop also had 600 bonds outstanding, each of which is convertible into ten shares of common stock. Stoop's annual after-tax interest expense for the bonds was $2,000. Knight did not own any of Stoop's bonds. There are no excess amortizations or intra-entity transactions associated with this consolidation. Stoop reported net income of $300,000 for 2021. Knight has 100,000 shares of common stock outstanding and reported net income of $400,000 for 2021. What would Knight Co. report as consolidated diluted earnings per share (rounded)?

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A) $4.00. B) $4.71. C) $8.71. D) $5.89. E) $6.37.

14) Kearns Inc. owned all of Burke Corp. For 2021, Kearns reported net income (without consideration of its investment in Burke) of $350,000 while the subsidiary reported $127,000. There are no excess amortizations associated with this consolidation. The subsidiary had bonds payable outstanding on January 1, 2021, with a book value of $303,000. The parent acquired the bonds on that date for $285,000. During 2021, Kearns reported interest income of $32,000 while Burke reported interest expense of $29,000. What is consolidated net income for 2021? A) $456,000. B) $462,000. C) $477,000. D) $492,000. E) $498,000.

15) Duncan Inc. owned all of the outstanding stock of Brandt Co. The subsidiary had bonds payable outstanding on January 1, 2020, with a book value of $270,000. The parent acquired the bonds on that date for $291,000. Subsequently, Duncan reported interest income of $26,000 in 2020 while Brandt reported interest expense of $31,000. Consolidated financial statements were prepared for 2021. What adjustment would be required for the retained earnings balance as of January 1, 2021? A) Reduction of $5,000. B) Reduction of $16,000. C) Reduction of $26,000. D) Reduction of $31,000. E) Reduction of $57,000.

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16) Gordon Co. reported current earnings of $580,000 while paying $58,000 in cash dividends. Lane Co. earned $150,000 in net income and distributed $15,000 in dividends. Gordon held a 75% interest in Lane for several years, an investment that it originally acquired by transferring consideration equal to the book value of the underlying net assets. Gordon used the initial value method to account for these shares. On January 1, 2021, Lane acquired in the open market $75,000 of Gordon’s 8% bonds. The bonds had originally been issued several years ago at a price that would yield a 10% effective interest rate. On the date of the bond purchase, the book value of the bonds payable was $68,200. Lane paid $66,000 based on a 12% effective interest rate over the remaining life of the bonds. What is the noncontrolling interest's share of the subsidiary's net income? A) $33,750. B) $35,250. C) $36,950. D) $37,500. E) $39,750.

17) A company had common stock with a total par value of $26,000,000 and fair value of $70,000,000; and 8% preferred stock with a total par value of $9,000,000 and a fair value of $12,000,000. The book value of the company was $90,000,000. Assuming 85% of the company’s total equity is acquired, what amount must be attributed to the noncontrolling interest? A) $8,700,000. B) $10,500,000. C) $12,300,000. D) $13,500,000. E) $17,400,000.

18) Jacoby Co. owned a controlling interest in Trimble Inc. Jacoby reported sales of $510,000 during 2021 while Trimble reported $300,000. Inventory costing $27,000 was transferred from Trimble to Jacoby (upstream) during the year for $54,000. Of this amount, 30% was still in ending inventory at year's end. Total receivables on the consolidated balance sheet were $115,000 at the first of the year and $158,000 at year-end. No intra-entity debt existed at the beginning or ending of the year. Using the direct approach, what is the consolidated amount of cash collected by the business from its customers?

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A) $688,500. B) $713,000. C) $799,000. D) $810,000. E) $907,000.

19) Mohan owned all of Beatty Inc. Although the Investment in Beatty Inc. account had a balance of $862,000, the subsidiary's 12,000 shares had an underlying book value of only $55 per share. On January 1, 2021, Beatty issued 4,000 new shares to the public for $75 per share. How does this transaction affect the Investment in Beatty Inc. account? A) It should be decreased by $225,000. B) It should be increased by $225,000. C) It should be increased by $9,500. D) It should be decreased by $9,500. E) It is not affected since the shares were sold to outside parties.

20) Popper Co. acquired 80% of the common stock of Cocker Co. on January 1, 2019, when Cocker had the following stockholders' equity accounts. Common stock — 40,000 shares outstanding

140,000

Additional paid-in capital

105,000

Retained earnings

476,000

Total stockholders’ equity

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721,000

To acquire this interest in Cocker, Popper paid a total of $682,000 with any excess acquisition date fair value over book value being allocated to goodwill, which has been measured for impairment annually and has not been determined to be impaired as of January 1, 2022. Popper did not pay any premium when it acquired its original interest in Cocker. On January 1, 2022, Cocker reported a net book value of $1,113,000 before the following transactions were conducted. Popper uses the equity method to account for its investment in Cocker, thereby reflecting the change in book value of Cocker. On January 1, 2022, Cocker issued 10,000 additional shares of common stock for $35 per share. Popper acquired 8,000 of these shares. How would this transaction affect the additional paid-in capital of the parent company? A) Increase it by $28,700. B) Increase it by $16,800. C) $0. D) Increase it by $280,000. E) Increase it by $593,600.

21) Popper Co. acquired 80% of the common stock of Cocker Co. on January 1, 2019, when Cocker had the following stockholders' equity accounts. Common stock — 40,000 shares outstanding

140,000

Additional paid-in capital

105,000

Retained earnings

476,000

Total stockholders’ equity

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721,000

To acquire this interest in Cocker, Popper paid a total of $682,000 with any excess acquisition date fair value over book value being allocated to goodwill, which has been measured for impairment annually and has not been determined to be impaired as of January 1, 2022. Popper did not pay any premium when it acquired its original interest in Cocker. On January 1, 2022, Cocker reported a net book value of $1,113,000 before the following transactions were conducted. Popper uses the equity method to account for its investment in Cocker, thereby reflecting the change in book value of Cocker. On January 1, 2022, Cocker issued 10,000 additional shares of common stock for $21 per share. Popper did not acquire any of this newly issued stock. How would this transaction affect the additional paid-in capital of the parent company? A) $0. B) Decrease it by $23,240. C) Decrease it by $68,250. D) Decrease it by $45,060. E) Decrease it by $64,720.

22) Popper Co. acquired 80% of the common stock of Cocker Co. on January 1, 2019, when Cocker had the following stockholders' equity accounts. Common stock — 40,000 shares outstanding

140,000

Additional paid-in capital

105,000

Retained earnings

476,000

Total stockholders’ equity

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721,000

To acquire this interest in Cocker, Popper paid a total of $682,000 with any excess acquisition date fair value over book value being allocated to goodwill, which has been measured for impairment annually and has not been determined to be impaired as of January 1, 2022. Popper did not pay any premium when it acquired its original interest in Cocker. On January 1, 2022, Cocker reported a net book value of $1,113,000 before the following transactions were conducted. Popper uses the equity method to account for its investment in Cocker, thereby reflecting the change in book value of Cocker. On January 1, 2022, Cocker reacquired 8,000 of the outstanding shares of its own common stock for $34 per share. None of these shares belonged to Popper. How would this transaction have affected the additional paid-in capital of the parent company? A) $0. B) Decrease it by $32,900. C) Decrease it by $45,700. D) Decrease it by $23,100. E) Decrease it by $50,500.

23) If new bonds are issued from a parent to its subsidiary, which of the following statements is false? A) Any premium or discount on bonds payable is exactly offset by a premium or discount on bond investment. B) There will be $0 net gain or loss on the bond transaction. C) Interest expense needs to be eliminated on the consolidated income statement. D) Interest revenue needs to be eliminated on the consolidated income statement. E) A net gain or loss on the bond transaction will be reported.

24) The accounting problems encountered in consolidated intra-entity debt transactions when the debt is acquired by an affiliate from an outside party include all of the following except:

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A) Both the investment and debt accounts have to be eliminated now and for each future consolidated financial statement despite containing differing balances. B) Subsequent interest revenue/expense must be removed although these balances fail to agree in amount. C) A gain or loss must be recognized by both parent and subsidiary companies. D) Changes in the investment, debt, interest revenue, and interest expense accounts occur constantly because of the amortization process. E) The gain or loss on the retirement of the debt must be recognized by the business combination in the year the debt is acquired, even though this balance does not appear on the financial records of either company.

25) Which of the following statements is true concerning the acquisition of existing debt of a consolidated affiliate in the year of the debt acquisition? A) Recognition of any gain or loss is deferred until the debt is extinguished for purposes of reporting such debt on consolidated financial statements. B) Any gain or loss is recognized in the year of acquisition on a consolidated income statement. C) Interest revenue generated from the debt of an affiliate is recognized on a consolidated income statement. D) Interest expense recognized from carrying debt instruments is recognized on a consolidated income statement. E) Consolidated retained earnings is adjusted to take into account the difference between the purchase price and carrying value of the debt.

26) Which of the following statements is false regarding the assignment of a gain or loss when an affiliate’s debt instrument is acquired on the open market? A) Subsidiary net income is not affected by a gain on the debt transaction. B) Subsidiary net income is not affected by a loss on the debt transaction. C) Parent Company net income is not affected by a gain on the debt transaction. D) Parent Company net income is not affected by a loss on the debt transaction. E) Consolidated net income is not affected by a gain or loss on the debt transaction.

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27) What would differ between a statement of cash flows for a consolidated company and an unconsolidated company using the indirect method? A) Parent's dividends would be subtracted as a financing activity. B) Gain on sale of land would be deducted from net income. C) Noncontrolling interest in net income of subsidiary would be added to net income. D) Proceeds from the sale of long-term investments would be added to investing activities. E) Loss on sale of equipment would be added to net income.

28)

Which of the following statements is true for a consolidated statement of cash flows?

A) Parent's dividends and subsidiary's dividends are deducted as a financing activity. B) Only parent's dividends are deducted as a financing activity. C) Parent's dividends and its share of subsidiary's dividends are deducted as a financing activity. D) All of parent's dividends and noncontrolling interest of subsidiary's dividends are deducted as a financing activity. E) Neither parent's nor subsidiary's dividends are deducted as a financing activity.

29) In reporting consolidated earnings per share when there is a wholly owned subsidiary, which of the following statements is true? A) Parent company earnings per share equals consolidated earnings per share when the equity method is used. B) Parent company earnings per share is equal to consolidated earnings per share when the initial value method is used. C) Parent company earnings per share is equal to consolidated earnings per share when the partial equity method is used and acquisition-date fair value exceeds book value. D) Parent company earnings per share is equal to consolidated earnings per share when the partial equity method is used and acquisition-date fair value is less than book value. E) Preferred dividends are not deducted from net income for consolidated earnings per share.

30) A subsidiary issues new shares of common stock at an amount below book value. Outsiders buy all of these shares. Which of the following statements is true? Version 1

A) The parent's additional paid-in capital will be increased. B) The parent's investment in subsidiary will be increased. C) The parent's retained earnings will be increased. D) The parent's additional paid-in capital will be decreased. E) The parent's retained earnings will be decreased.

31) A subsidiary issues new shares of common stock. If the parent acquires all of these shares at an amount greater than book value, which of the following statements is true? A) The investment in subsidiary will decrease. B) Additional paid-in capital will decrease. C) Retained earnings will increase. D) The investment in subsidiary will increase. E) No adjustment will be necessary.

32) If a subsidiary re-acquires its outstanding shares from outside ownership for more than the noncontrolling interest valuation basis at the date of buying such treasury stock, which of the following statements is true? A) Additional paid-in capital on the parent company's books will decrease. B) Investment in subsidiary will increase. C) Treasury stock on the parent's books will increase. D) Treasury stock on the parent's books will decrease. E) No adjustment is necessary.

33)

If a subsidiary issues a stock dividend, which of the following statements is true? A) Investment in subsidiary on the parent's books will increase. B) Investment in subsidiary on the parent's books will decrease. C) Additional paid-in capital on the parent's books will increase. D) Additional paid-in capital on the parent's books will decrease. E) No adjustment is necessary.

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34) Davis Company has had bonds payable of $12,000 outstanding for several years. On January 1, 2021, when there was an unamortized discount of $1,000 and a remaining life of 5 years, its 90% owned subsidiary, Jacobson Company, purchased the bonds in the open market for $13,000. The bonds pay 6% interest annually on December 31. The companies use the straight-line method to amortize interest revenue and expense. Compute the consolidated gain or loss on a consolidated income statement for 2021. A) $1,000 gain. B) $1,000 loss. C) $2,000 gain. D) $2,000 loss. E) $3,000 gain.

35) Key Company has had bonds payable of $21,000 outstanding for several years. On January 1, 2021, there was an unamortized premium of $1,000 with a remaining life of 10 years, Key’s parent, Peele, Inc., purchased the bonds in the open market for $18,000. Key is an 80% owned subsidiary of Peele. The bonds pay 7% interest annually on December 31. The companies use the straight-line method to amortize interest revenue and expense. Compute the consolidated gain or loss on a consolidated income statement for 2021. A) $3,000 gain. B) $3,000 loss. C) $4,000 gain. D) $4,000 loss. E) $2,000 gain.

36) On January 1, 2021, Nichols Company acquired 80% of Smith Company's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred. There was no premium in the value of consideration transferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is: Common stock, $10 par value (50,000 shares outstanding) Preferred stock, 6% cumulative, $100 par value, 3,000 shares outstanding

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500,000 300,000

Additional paid in capital

200,000

Retained earnings

500,000

Total stockholders’ equity

$ 1,500,000

With respect to Nichols’ investment in Smith, determine the amount to be recorded and identify which account should be adjusted to reflect such amount. A) $1,324,000 for Investment in Smith. B) $1,200,000 for Investment in Smith. C) $1,200,000 for Investment in Smith's Common Stock and $124,000 for Investment in Smith's Preferred Stock. D) $1,200,000 for Investment in Smith's Common Stock and $120,000 for Investment in Smith's Preferred Stock. E) $1,448,000 for Investment in Smith's Common Stock.

37) On January 1, 2021, Nichols Company acquired 80% of Smith Company's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred. There was no premium in the value of consideration transferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is: Common stock, $10 par value (50,000 shares outstanding) Preferred stock, 6% cumulative, $100 par value, 3,000 shares outstanding Additional paid in capital Retained earnings Total stockholders’ equity

500,000 300,000 200,000 500,000

$ 1,500,000

Compute the goodwill recognized in consolidation.

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A) $800,000. B) $310,000. C) $124,000. D) $0. E) $(196,000).

38) On January 1, 2021, Nichols Company acquired 80% of Smith Company's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred. There was no premium in the value of consideration transferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is: Common stock, $10 par value (50,000 shares outstanding) Preferred stock, 6% cumulative, $100 par value, 3,000 shares outstanding Additional paid in capital Retained earnings Total stockholders’ equity

500,000 300,000 200,000 500,000

$ 1,500,000

Compute the noncontrolling interest in Smith at date of acquisition. A) $486,000. B) $480,000. C) $300,000. D) $150,000. E) $120,000.

39) On January 1, 2021, Nichols Company acquired 80% of Smith Company's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred. There was no premium in the value of consideration transferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is: Version 1

Common stock, $10 par value (50,000 shares outstanding) Preferred stock, 6% cumulative, $100 par value, 3,000 shares outstanding Additional paid in capital

300,000 200,000

Retained earnings Total stockholders’ equity

500,000

500,000 $ 1,500,000

The consolidation entry at date of acquisition will include (referring to Smith): A) Debit Common stock $500,000 and debit Preferred stock $120,000. B) Debit Common stock $400,000 and debit Additional paid-in capital $160,000. C) Debit Common stock $500,000 and debit Preferred stock $300,000. D) Debit Common stock $500,000, debit Preferred stock $120,000, and debit Additional paid-in capital $200,000. E) Debit Common stock $400,000, debit Preferred stock $300,000, debit Additional paid-in capital $200,000, and debit Retained earnings $500,000.

40) On January 1, 2021, Nichols Company acquired 80% of Smith Company's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred. There was no premium in the value of consideration transferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is: Common stock, $10 par value (50,000 shares outstanding) Preferred stock, 6% cumulative, $100 par value, 3,000 shares outstanding Additional paid in capital Retained earnings Total stockholders’ equity

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500,000 300,000 200,000 500,000

$ 1,500,000

If Smith’s net income is $100,000 in the year following the acquisition, A) The portion allocated to the common stock (residual amount) is $92,800. B) $10,800 preferred stock dividend will be subtracted from net income attributed to common stock in arriving at noncontrolling interest in consolidated income. C) The noncontrolling interest in consolidated net income is $27,200. D) The preferred stock dividend will be ignored in noncontrolling interest in consolidated net income because Nichols owns the noncontrolling interest of preferred stock. E) The noncontrolling interest in consolidated net income is $30,800.

41) The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company. (1.) Graham reports a loss on sale of land (to an outside party) of $5,000. The land cost Graham $20,000. (2.) Noncontrolling interest in Stage's net income was $30,000. (3.) Graham paid dividends of $15,000. (4.) Stage paid dividends of $10,000. (5.) Excess acquisition-date fair value over book value amortization was $6,000. (6.) Consolidated accounts receivable decreased by $8,000. (7.) Consolidated accounts payable decreased by $7,000. How is the loss on sale of land reported on the consolidated statement of cash flows? A) $20,000 added to net income as an operating activity. B) $20,000 deducted from net income as an operating activity. C) $15,000 deducted from net income as an operating activity. D) $5,000 added to net income as an operating activity. E) $5,000 deducted from net income as an operating activity.

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42) The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company. (1.) Graham reports a loss on sale of land (to an outside party) of $5,000. The land cost Graham $20,000. (2.) Noncontrolling interest in Stage's net income was $30,000. (3.) Graham paid dividends of $15,000. (4.) Stage paid dividends of $10,000. (5.) Excess acquisition-date fair value over book value amortization was $6,000. (6.) Consolidated accounts receivable decreased by $8,000. (7.) Consolidated accounts payable decreased by $7,000. Where does the noncontrolling interest in Stage's net income appear on a consolidated statement of cash flows? A) $30,000 added to net income as an operating activity on the consolidated statement of cash flows. B) $30,000 deducted from net income as an operating activity on the consolidated statement of cash flows. C) $30,000 increase as an investing activity on the consolidated statement of cash flows. D) $30,000 decrease as an investing activity on the consolidated statement of cash flows. E) Noncontrolling interest in Stage's net income does not appear on a consolidated statement of cash flows.

43) The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company. (1.) Graham reports a loss on sale of land (to an outside party) of $5,000. The land cost Graham $20,000. (2.) Noncontrolling interest in Stage's net income was $30,000. (3.) Graham paid dividends of $15,000. (4.) Stage paid dividends of $10,000. (5.) Excess acquisition-date fair value over book value amortization was $6,000. (6.) Consolidated accounts receivable decreased by $8,000. (7.) Consolidated accounts payable decreased by $7,000. How will dividends be reported in consolidated statement of cash flows?

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A) $15,000 decrease as a financing activity. B) $25,000 decrease as a financing activity. C) $10,000 decrease as a financing activity. D) $23,000 decrease as a financing activity. E) $17,000 decrease as a financing activity.

44) The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company. (1.) Graham reports a loss on sale of land (to an outside party) of $5,000. The land cost Graham $20,000. (2.) Noncontrolling interest in Stage's net income was $30,000. (3.) Graham paid dividends of $15,000. (4.) Stage paid dividends of $10,000. (5.) Excess acquisition-date fair value over book value amortization was $6,000. (6.) Consolidated accounts receivable decreased by $8,000. (7.) Consolidated accounts payable decreased by $7,000. How is the amount of excess acquisition-date fair value over book value recognized in a consolidated statement of cash flows assuming the indirect method is used? A) It is ignored. B) $6,000 subtracted from net income. C) $4,800 subtracted from net income. D) $6,000 added to net income. E) $4,800 added to net income.

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45) The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company. (1.) Graham reports a loss on sale of land (to an outside party) of $5,000. The land cost Graham $20,000. (2.) Noncontrolling interest in Stage's net income was $30,000. (3.) Graham paid dividends of $15,000. (4.) Stage paid dividends of $10,000. (5.) Excess acquisition-date fair value over book value amortization was $6,000. (6.) Consolidated accounts receivable decreased by $8,000. (7.) Consolidated accounts payable decreased by $7,000. Using the indirect method, where does the decrease in accounts receivable appear in a consolidated statement of cash flows? A) $8,000 increase to net income as an operating activity. B) $8,000 decrease to net income as an operating activity. C) $6,400 increase to net income as an operating activity. D) $6,400 decrease to net income as an operating activity. E) $8,000 increase as an investing activity.

46) The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company. (1.) Graham reports a loss on sale of land (to an outside party) of $5,000. The land cost Graham $20,000. (2.) Noncontrolling interest in Stage's net income was $30,000. (3.) Graham paid dividends of $15,000. (4.) Stage paid dividends of $10,000. (5.) Excess acquisition-date fair value over book value amortization was $6,000. (6.) Consolidated accounts receivable decreased by $8,000. (7.) Consolidated accounts payable decreased by $7,000. Using the indirect method, where does the decrease in accounts payable appear in a consolidated statement of cash flows?

A) $7,000 increase to net income as an operating activity. B) $7,000 decrease to net income as an operating activity. C) $5,600 increase to net income as an operating activity. D) $5,600 decrease to net income as an operating activity. E) $7,000 increase as a financing activity.

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47) Webb Company purchased 90% of Jones Company for $990,000 when the book value of Jones was $1,000,000. Jones currently has 100,000 shares outstanding and a book value of $1,200,000. Jones sells 20,000 shares of previously unissued shares of its common stock to outside parties for $10 per share. What is the adjusted book value of Jones after the sale of the shares? A) $200,000. B) $1,400,000. C) $1,280,000. D) $1,050,000. E) $1,440,000.

48) Webb Company purchased 90% of Jones Company for $990,000 when the book value of Jones was $1,000,000. Jones currently has 100,000 shares outstanding and a book value of $1,200,000. Jones sells 20,000 shares of previously unissued shares of its common stock to outside parties for $10 per share. What is the new percent ownership of Webb in Jones after the stock issuance? A) 75%. B) 90%. C) 80%. D) 64%. E) 60%.

49) Webb Company purchased 90% of Jones Company for $990,000 when the book value of Jones was $1,000,000. Jones currently has 100,000 shares outstanding and a book value of $1,200,000. Jones sells 20,000 shares of previously unissued shares of its common stock to outside parties for $10 per share. What adjustment is needed for Webb's investment in Jones account?

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A) $180,000 increase. B) $180,000 decrease. C) $45,000 decrease. D) $45,000 increase. E) No adjustment is necessary.

50) Webb Company purchased 90% of Jones Company for $990,000 when the book value of Jones was $1,000,000. There was no premium paid by Webb. Jones currently has 100,000 shares outstanding and a book value of $1,200,000. Assume Jones issues 20,000 new shares of its common stock to outside parties for $15 per share. What is the adjusted book value of Jones after the stock issuance? A) $1,500,000. B) $1,200,000. C) $1,350,000. D) $1,080,000. E) $1,335,000.

51) Webb Company purchased 90% of Jones Company for $990,000 when the book value of Jones was $1,000,000. There was no premium paid by Webb. Jones currently has 100,000 shares outstanding and a book value of $1,200,000. Assume Jones issues 20,000 new shares of its common stock to outside parties for $15 per share. After acquiring the additional shares, what adjustment is needed for Webb's investment in Jones account? A) $270,000 increase. B) $270,000 decrease. C) $30,000 increase. D) $30,000 decrease. E) No adjustment is necessary.

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52) Ryan Company purchased 80% of Chase Company for $270,000 when Chase’s book value was $300,000. Chase has 50,000 shares outstanding and currently has a book value of $400,000. Assume Chase issues 30,000 additional shares common stock solely to Ryan for $12 per share. What is the new percent ownership Ryan owns in Chase? A) 80.0%. B) 87.5%. C) 90.0%. D) 75.0%. E) 82.5%.

53) Ryan Company purchased 80% of Chase Company for $270,000 when Chase’s book value was $300,000. Chase has 50,000 shares outstanding and currently has a book value of $400,000. Assume Chase issues 30,000 additional shares common stock solely to Ryan for $12 per share. What is the adjusted book value of Chase Company after the issuance of the shares? A) $608,000. B) $720,000. C) $680,000. D) $760,000. E) $400,000.

54) Ryan Company purchased 80% of Chase Company for $270,000 when Chase’s book value was $300,000. Chase has 50,000 shares outstanding and currently has a book value of $400,000. Assume Chase issues 30,000 additional shares common stock solely to Ryan for $12 per share. After recording the acquisition of the additional shares, what adjustment is needed for Ryan's Investment in Chase account? A) $70,000 increase. B) $70,000 decrease. C) $12,188 decrease. D) $12,188 increase. E) No adjustment is necessary.

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55) Ryan Company purchased 80% of Chase Company for $240,000 when Chase’s book value was $300,000. Chase has 50,000 shares outstanding and currently has a book value of $400,000. Assume Chase reacquired 8,000 shares of its common stock from outsiders at $10 per share. What should the adjusted book value of Chase be after the treasury shares were purchased? A) $400,000. B) $480,000. C) $320,000. D) $336,000. E) $464,000.

56) Ryan Company purchased 80% of Chase Company for $240,000 when Chase’s book value was $300,000. Chase has 50,000 shares outstanding and currently has a book value of $400,000. Assume Chase reacquired 8,000 shares of its common stock from outsiders at $10 per share. What is Ryan's percent ownership in Chase after the acquisition of the treasury shares (rounded)? A) 80%. B) 95%. C) 64%. D) 76%. E) 69%.

57) Ryan Company purchased 80% of Chase Company for $240,000 when Chase’s book value was $300,000. Chase has 50,000 shares outstanding and currently has a book value of $400,000. Assume Chase reacquired 8,000 shares of its common stock from outsiders at $10 per share. When Ryan’s new percent ownership is rounded to a whole number, what adjustment is needed for Ryan's investment in Chase account?

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A) $16,000 decrease. B) $60,000 decrease. C) $46,000 increase. D) $46,000 decrease. E) No adjustment is necessary.

58)

A variable interest entity can take all of the following forms except a(n): A) Trust. B) Partnership. C) Joint venture. D) Corporation. E) Estate.

59)

All of the following are examples of variable interests except: A) Guarantees of debt. B) Stock options. C) Lease residual value guarantees. D) Participation rights. E) Asset purchase options.

60)

Which of the following is not a potential loss or return of a variable interest entity?

A) Entitles holder to residual profits. B) Entitles holder to benefit from increases in asset fair value. C) Entitles holder to receive shares of common stock. D) If the variable interest entity cannot repay liabilities, honoring a debt guarantee will produce a loss. E) If leased asset declines below the residual value, honoring the guarantee will produce a loss.

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61) Which of the following characteristics is not indicative of an enterprise qualifying as a primary beneficiary with a controlling financial interest in a variable interest entity? A) The power to direct the most significant economic performance activities. B) The power through voting or similar rights to direct activities, which significantly impact economic performance. C) The obligation to absorb potentially significant losses of the entity. D) No ability to make decisions about the entity's activities. E) The right to receive potentially significant benefits of the entity.

62)

Which of the following statements is false concerning variable interest entities (VIEs)? A) Sometimes VIEs do not have independent management. B) Most VIEs are established for valid business purposes. C) VIEs may be formed as a source of low-cost financing. D) VIEs have little need for voting stock. E) A VIE cannot take the legal form of a partnership or corporation.

63) Which of the following statements are true concerning variable interest entities (VIEs)? (1.) The role of the VIE equity investors can be fairly minor. (2.) A VIE may be created specifically to benefit the business enterprise that established it with low-cost financing. (3.) VIE governing agreements often limit activities and decision-making. (4.) VIEs usually have a well-defined and limited business activity. A) 2 and 4. B) 2, 3, and 4. C) 1, 2, and 4. D) 1, 2, and 3. E) 1, 2, 3, and 4.

64) Which of the following is not a factor that indicates a business enterprise that establishes a variable interest entity (VIE) should consolidate such VIE with its own financial statements?

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A) The business enterprise establishing a VIE has the obligation to absorb potentially significant losses of the VIE. B) The business enterprise establishing a VIE receives risks and rewards of the VIE in proportion to equity ownership. C) The business enterprise establishing a VIE has the right to receive potentially significant benefits of the VIE. D) The business enterprise establishing a VIE has power through voting rights to direct the entity's activities that significantly impact economic performance. E) The business enterprise establishing a VIE is a primary beneficiary for the VIE.

65) A parent acquires all of a subsidiary’s common stock and 60 percent of its preferred stock. The preferred stock has a cumulative dividend. No dividends are in arrears. How is the noncontrolling interest in the subsidiary’s net income assigned? A) The noncontrolling interest in consolidated net income is assigned as 40 percent of the value of the preferred stock, based on an allocation between common stock and preferred stock. B) There is no allocation to the noncontrolling interest because the parent owns 100% of the common stock and net income belongs to the controlling interest. C) The noncontrolling interest in consolidated net income is assigned as 40 percent of the preferred stock dividends. D) The noncontrolling interest in consolidated net income is assigned as 40 percent of the subsidiary’s income before preferred stock dividends. E) The noncontrolling interest in consolidated net income is assigned as 40 percent of the subsidiary’s income after subtracting preferred stock dividends.

66) A parent acquires 70% of a subsidiary’s common stock and 60 percent of its preferred stock. The preferred stock is noncumulative. The current year’s dividend was paid. How is the noncontrolling interest in the subsidiary’s net income assigned?

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A) The noncontrolling interest in consolidated net income is assigned as 40 percent of the value of the preferred stock, based on an allocation between common stock and preferred stock and their relative par values. B) There is no allocation to the noncontrolling interest because there are no dividends in arrears. C) The noncontrolling interest in consolidated net income is assigned as 40 percent of the preferred stock dividends. D) The noncontrolling interest in consolidated net income is assigned as 40 percent of the preferred stock dividends plus 30% of the subsidiary’s income after subtracting all preferred stock dividends. E) The noncontrolling interest in consolidated net income is assigned as 30% of the subsidiary’s income after subtracting 60 percent of preferred stock dividends.

67) Wolff corporation owns 70% of the outstanding stock of Sanders, Inc. During the current year, Sanders made $75,000 in sales to Wolff. How does this transfer affect the consolidated statement of cash flows? A) Included as a decrease in the investing section. B) Included as an increase in the operating section. C) Included as a decrease in the operating section. D) Included as an increase in the investing section. E) Not reported in the consolidated statement of cash flows.

68) MacDonald, Inc. owns 80% of the outstanding stock of Stahl Corporation. During the current year, Stahl made $125,000 in sales to MacDonald. How does this transfer affect the consolidated statement of cash flows? A) Include 80% as a decrease in the investing section. B) Include 100% as a decrease in the investing section. C) Include 80% as a decrease in the operating section. D) Include 100% as an increase in the operating section. E) Not reported in the consolidated statement of cash flows.

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69) Dayton, Inc. owns 80% of Haber Corp. The consolidated income statement for a year reports $60,000 Noncontrolling Interest in Haber Corp.’s Net Income. Haber paid dividends in the amount of $75,000 for the year. What are the effects of these transactions in the consolidated statement of cash flows for the year? Financing Activities

Operating Activities

Increased by $15,000

Increased by $12,000

Decreased by $12,000

Unaffected

Decreased by $12,000

Decreased by $15,000

Unaffected

Increased by $15,000

A) Option A B) Option B C) Option C D) Option D E) Option E

70) Waite, Inc. owns 85% of Knight Corp. The consolidated income statement for a year reports $60,000 Noncontrolling Interest in Knight Corp.’s Net Income. Knight paid dividends in the amount of $90,000 for the year. What are the effects of these transactions in the consolidated statement of cash flows for the year? A) Increase in the financing section of $76,500, and decrease in the operating section of $13,500. B) Increase in the operating section of $76,500, and decrease in the financing section of $13,500. C) Increase in the operating section of $76,500. D) Decrease in the financing section of $13,500. E) No effects.

71) Anderson, Inc. has owned 70% of its subsidiary, Arthur Corp., for several years. The consolidated balance sheets of Anderson, Inc. and Arthur Corp. are presented below: 2021 Cash

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8,000

2020 $

26,000

Accounts Receivable (net)

75,000

54,000

Inventory

100,000

89,000

Plant & Equipment (net)

156,000

170,000

16,000

18,000

Accounts payable

355,000

357,000

60,000

51,000

Long-term Debt

35,000

Noncontrolling interest

27,000

25,000

Common stock, $1 par

100,000

Retained earnings

168,000

146,000

355,000

357,000

Additional information for 2021: ● The combination occurred using the equity method. Consolidated net income was $50,000. The noncontrolling interest share of consolidated net income of Arthur was $3,200. ● Arthur paid $4,000 in dividends. ● There were no purchases or disposals of plant & equipment or copyright this year. Net cash flow from operating activities was: A) $43,000. B) $44,800. C) $46,200. D) $50,000. E) $25,000.

72) Anderson, Inc. has owned 70% of its subsidiary, Arthur Corp., for several years. The consolidated balance sheets of Anderson, Inc. and Arthur Corp. are presented below: 2021 Cash

Version 1

8,000

2020 $

26,000

Accounts Receivable (net)

75,000

54,000

Inventory

100,000

89,000

Plant & Equipment (net)

156,000

170,000

16,000

18,000

Accounts payable

355,000

357,000

60,000

51,000

Long-term Debt

35,000

Noncontrolling interest

27,000

25,000

Common stock, $1 par

100,000

Retained earnings

168,000

146,000

355,000

357,000

Additional information for 2021: ● The combination occurred using the equity method. Consolidated net income was $50,000. The noncontrolling interest share of consolidated net income of Arthur was $3,200. ● Arthur paid $4,000 in dividends. ● There were no purchases or disposals of plant & equipment or copyright this year. Net cash flow from financing activities was: A) $(28,000). B) $(35,000). C) $(13,000). D) $(63,000). E) $(61,000).

73) The balance sheets of Butler, Inc. and its 70%-owned subsidiary, Cassie Corp., which Butler has owned for several years are presented below: 2021 Cash

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16,000

2020 $

52,000

Accounts Receivable (net)

150,000

108,000

Inventory

220,000

178,000

Plant & Equipment (net)

315,000

340,000

32,000

36,000

Accounts payable

733,000

714,000

120,000

102,000

Long-term Debt

70,000

Noncontrolling interest

77,000

50,000

Common stock, $1 par

200,000

Retained earnings

336,000

292,000

733,000

714,000

Additional information for 2021: ● Butler & Cassie’s consolidated net income was $100,000. ● Cassie paid $10,000 in dividends. ● There were no purchases or disposals of plant & equipment or copyright this year. Net cash flow from operating activities was: A) $92,000. B) $27,000. C) $63,000. D) $29,000. E) $34,000.

74) The balance sheets of Butler, Inc. and its 70%-owned subsidiary, Cassie Corp., which Butler has owned for several years are presented below: 2021 Cash

Version 1

16,000

2020 $

52,000

Accounts Receivable (net)

150,000

108,000

Inventory

220,000

178,000

Plant & Equipment (net)

315,000

340,000

32,000

36,000

Accounts payable

733,000

714,000

120,000

102,000

Long-term Debt

70,000

Noncontrolling interest

77,000

50,000

Common stock, $1 par

200,000

Retained earnings

336,000

292,000

733,000

714,000

Additional information for 2021: ● Butler & Cassie’s consolidated net income was $100,000. ● Cassie paid $10,000 in dividends. ● There were no purchases or disposals of plant & equipment or copyright this year. Net cash flow from financing activities was: A) $(92,000). B) $(96,000). C) $(300,000). D) $(80,000). E) $(126,000).

75) How do outstanding subsidiary stock warrants affect the calculation of consolidated earnings per share?

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A) They will be included in both basic and diluted earnings per share if they are dilutive. B) They will only be included in diluted earnings per share if they are dilutive. C) They will only be included in basic earnings per share if they are dilutive. D) Only the warrants owned by the parent company affect consolidated earnings per share. E) Because the warrants are for subsidiary shares, there will be no effect on consolidated earnings per share.

76) A parent company owns a controlling interest in a subsidiary and on the last day of the year, the subsidiary issues new shares entirely to outside parties at $33 per share. The parent still holds control over the subsidiary. The adjusted subsidiary value at the date of the new stock issuance was $27 per share. Which of the following statements is true? A) Since the sale was made at the end of the year, the parent's investment account is not affected. B) Since the shares were sold for more than the adjusted subsidiary value per share, the parent’s investment account must be increased. C) Since the shares were sold for more than the adjusted subsidiary value per share, the parent’s investment account must be decreased. D) Since the shares were sold for more than the adjusted subsidiary value per share, but the parent did not buy any of the shares, the parent’s investment account is not affected. E) None of these answer choices are correct.

77) A parent company owns a controlling interest in a subsidiary whose stock has a valuation basis of $27 per share. On the last day of the year, the subsidiary issues new shares entirely to outside parties at $25 per share. The parent still holds control over the subsidiary. Which of the following statements is true?

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A) Since the sale was made at the end of the year, the parent’s investment account is not affected. B) Since the shares were sold for less than the adjusted subsidiary value per share, the parent’s investment account must be increased. C) Since the shares were sold for less than the adjusted subsidiary value per share, the parent’s investment account must be decreased. D) Since the shares were sold for less than the adjusted subsidiary value per share, but the parent did not buy any of the shares, the parent’s investment account is not affected. E) None of these answer choices are correct.

78) A parent company owns a 70% interest in a subsidiary whose stock has a valuation basis of $27 per share. On the last day of the year, the subsidiary issues new shares for $27 per share, and the parent buys its 70% interest in the new shares. Which of the following statements is true? A) Since the sale was made at the end of the year, the parent’s investment account is not affected. B) Since the shares were sold for the same per share amount as the adjusted subsidiary value per share, the parent’s investment account must be increased. C) Since the shares were sold for the same per share amount as the adjusted subsidiary value per share, the parent’s investment account must be decreased. D) Since the shares were sold for the same per share amount as the adjusted subsidiary value per share, and the parent bought 70% of the shares, the parent’s investment account is not affected except for the total acquisition amount for the new shares. E) None of these answer choices are correct.

79) Carlson, Inc. owns 80% of Madrid, Inc. Carlson reports net income for 2021 (without consideration of its investment in Madrid, Inc.) of $1,500,000. For the same year, Madrid reports net income of $705,000. Carlson had bonds payable outstanding on January 1, 2021 with a carrying value of $1,200,000. Madrid acquired the bonds on the open market on January 3, 2021 for $1,090,000. For the year 2021, Carlson reported interest expense on the bonds in the amount of $96,000, while Madrid reported interest income of $94,000 for the same bonds. Assuming there are no excess amortizations or other intra-entity transactions, what is Carlson’s share of consolidated net income?

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A) $2,064,000. B) $2,066,000. C) $2,176,000. D) $2,207,000. E) $2,317,000.

80) On January 1, 2021, Harrison Corporation spent $2,600,000 to acquire control over Involved, Inc. This price was based on paying $750,000 for 30% of Involved’s preferred stock, and $1,850,000 for 80% of its outstanding common stock. As of the date of the acquisition, Involved’s stockholders’ equity accounts were as follows:

Common stock, $10 par value, 100,000 shares outstanding Preferred stock, 7% fully participating, $100 par value, 10,000 shares outstanding Retained earnings

Total stockholders' equity

1,000,000 1,000,000 2,000,000 4,000,000

What is the total acquisition-date fair value of Involved? A) $2,600,000 B) $4,812,500 C) $3,062,500 D) $2,312,500 E) $3,250,000

81) On January 1, 2021, Harrison Corporation spent $2,600,000 to acquire control over Involved, Inc. This price was based on paying $750,000 for 30% of Involved’s preferred stock, and $1,850,000 for 80% of its outstanding common stock. As of the date of the acquisition, Involved’s stockholders’ equity accounts were as follows:

Common stock, $10 par value, 100,000 shares outstanding

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1,000,000

Preferred stock, 7% fully participating, $100 par value, 10,000 shares outstanding Retained earnings Total stockholders' equity

1,000,000 2,000,000 $

4,000,000

Assuming Involved’s accounts are correctly valued within the company’s financial statements, what amount of goodwill should be recognized for the Investment in Involved? A) $(100,000.) B) $0. C) $200,000. D) $812,500. E) $2,112,500.

82) Johnson, Inc. owns control over Kaspar, Inc. Johnson reports sales of $400,000 during 2021 while Kaspar reports $250,000. Kaspar transferred inventory during 2021 to Johnson at a price of $50,000. On December 31, 2021, 30% of the transferred goods are still held in Johnson’s inventory. Consolidated accounts receivable on January 1, 2021 was $120,000, and on December 31, 2021 is $130,000. Johnson uses the direct approach in preparing the statement of cash flows. How much is cash collected from customers in the consolidated statement of cash flows? A) $590,000. B) $610,000. C) $625,000. D) $635,000. E) $650,000.

83) Which of the following variable interests entitles a holder to residual profits, losses, and dividends?

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A) Participation rights B) Lease residual value guarantees C) Common stock D) Asset purchase options E) Subordinated debt instruments

84) Which of the following statements regarding consolidation of a VIE with its primary beneficiary is true? A) The consolidation of a VIE with its primary beneficiary requires the business enterprise to follow a separate process than the one required for consolidations based on voting interests. B) All intra-entity transactions between the primary beneficiary and the VIE are included in the consolidation. C) Only intra-entity transactions between the primary beneficiary and the VIE resulting from intra-entity transfers are eliminated in the consolidation. D) VIEs with controlling interests must include one hundred percent of the primary beneficiary’s net income in a consolidation. E) The allocation of the VIE’s net income is based on an analysis of the underlying contractual arrangements between the primary beneficiary and other holders of variable interests.

85) On January 1, 2021, A. Hamilton, Inc. (“AHI”) provides a loan for $3,000,000 to Reynolds Manufacturing Corp. (“RMC”). The terms of the loan require payment of the loan no later than January 1, 2026. RMC was in terrible financial condition and would cease operations absent securing a loan. Prior to requesting a loan from AHI, RMC exhausted all other possible avenues for funding. The terms of the loan agreement include provisions that require RMC to provide AHI with the following from January 1, 2021 through January 1, 2026: (i) 6% annual interest on the principal amount of the loan, which reflects a market rate of interest; (ii) 100% participation rights to RMC’s profits less $17,000 in a guaranteed annual dividend to RMC’s common shareholders; and (iii) complete decision-making authority over RMC’s operations and financing decisions. At the end of the term of the loan, AHI is given the right to acquire RMC or, in its discretion, extend the term of the original loan an additional 5 years. At the date the loan was extended to RMC, RMC’s common stock had an estimated fair value of $136,000 and a book value of $40,000. The $96,000 difference was attributed to an asset with a 3-year useful life remaining (“Asset”). At January 1, 2021, the balance sheets for AHI and RMC are as follows: Version 1

January 1, 2021 Assets Cash

AHI 97,000

Accounts receivable

137,000

265,000

3,000,000

96,000

Equipment (net)

3,287,000

2,834,000

Total assets

6,521,000

3,273,000

Liabilities and Owners’ Equity Accounts payable

AHI (219,000 )

RMC (233,000 )

Long-term debts

(688,000 )

(3,000,000 )

(4,800,000 )

(34,000 )

(814,000 )

(6,000 )

(6,521,000 )

(3,273,000 )

Loan receivable from AHI Asset with 3-year useful life remaining

Common stock Retained earnings, 1/1/21 Total Liabilities and Owners' Equity

Balance Sheets RMC 78,000

With respect to the acquisition-date consolidation worksheet, which of the following is accurate? A) The value of the noncontrolling interest is $40,000. B) The total of all adjustments and eliminations equal $3,136,000. C) The consolidated total long-term debt equals $3,688,000. D) The total consolidated assets equal $9,794,000. E) The total liabilities and equity on a consolidated basis equals $5,614,000.

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86) On January 1, 2021, A. Hamilton, Inc. (“AHI”) provides a loan for $3,000,000 to Reynolds Manufacturing Corp. (“RMC”). The terms of the loan require payment of the loan no later than January 1, 2026. RMC was in terrible financial condition and would cease operations absent securing a loan. Prior to requesting a loan from AHI, RMC exhausted all other possible avenues for funding. The terms of the loan agreement include provisions that require RMC to provide AHI with the following from January 1, 2021 through January 1, 2026: (i) 6% annual interest on the principal amount of the loan, which reflects a market rate of interest; (ii) 100% participation rights to RMC’s profits less $17,000 in a guaranteed annual dividend to RMC’s common shareholders; and (iii) complete decision-making authority over RMC’s operations and financing decisions. At the end of the term of the loan, AHI is given the right to acquire RMC or, in its discretion, extend the term of the original loan an additional 5 years. At the date the loan was extended to RMC, RMC’s common stock had an estimated fair value of $136,000 and a book value of $40,000. The $96,000 difference was attributed to an asset with a 3-year useful life remaining (“Asset”). At January 1, 2021, the balance sheets for AHI and RMC are as follows: January 1, 2021 Assets Cash

AHI 97,000

Accounts receivable

137,000

265,000

3,000,000

96,000

Equipment (net)

3,287,000

2,834,000

Total assets

6,521,000

3,273,000

Liabilities and Owners’ Equity Accounts payable

AHI (219,000 )

RMC (233,000 )

Long-term debts

(688,000 )

(3,000,000 )

(4,800,000 )

(34,000 )

(814,000 )

(6,000 )

(6,521,000 )

(3,273,000 )

Loan receivable from AHI Asset with 3-year useful life remaining

Common stock Retained earnings, 1/1/21 Total Liabilities and Owners' Equity

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Balance Sheets RMC 78,000

In preparing the consolidation worksheet as of December 31, 2021 for AHI and RMC, which of the following worksheet entry descriptions reflects what AHI should do to consolidate the financial statements? A) Consolidation Entry A is recorded to allocate the excess fair value to the noncontrolling interest and record a credit to the Asset in connection with a fair valuation on the date AHI obtains control of RMC as follows: Noncontrolling interest

96,000

Asset

96,000

B) Consolidation Entry P is recorded to eliminate the long-term receivable and debt representing AHI’s initial investment in RMC as follows:

Loan receivable from RMC

3,000,000

Long-term debt

3,000,000

C) Consolidation Entry S is recorded to eliminate the interest payment on the loan from RMC to AHI as follows: Interest expense Interest income

180,000 180,000

D) Consolidation Entry E is recorded to amortize the excess fair value allocation to the Asset over its remaining useful life as follows: Other operating expenses

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32,000

Asset

32,000

E) Consolidation Entry P is recorded to eliminate the beginning stockholders’ equity of the VIE and recognize the 100% equity ownership of the noncontrolling interest as follows: Retained earnings − RMC 1/1/21

6,000

Common stock − RMC

34,000

Retained Earnings-AHI

40,000

87) Davis Company has had bonds payable of $15,000 outstanding for several years. On January 1, 2021, when there was an unamortized discount of $2,500 and a remaining life of 5 years, its 80% owned subsidiary, Jacobson Company, purchased the bonds in the open market for $18,000. The bonds pay 7% interest annually on December 31. The companies use the straight-line method to amortize interest revenue and expense. Compute the consolidated gain or loss on a consolidated income statement for 2021. A) $5,500 gain. B) $5,500 loss. C) $3,000 gain. D) $3,000 loss. E) No gain or loss.

88) Key Company has had bonds payable of $20,000 outstanding for several years. On January 1, 2021, there was an unamortized premium of $2,000 with a remaining life of 10 years, Key’s parent, Peele, Inc., purchased the bonds in the open market for $17,000. Key is a 90% owned subsidiary of Peele. The bonds pay 8% interest annually on December 31. The companies use the straight-line method to amortize interest revenue and expense. Compute the consolidated gain or loss on a consolidated income statement for 2021.

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A) $3,000 gain. B) $3,000 loss. C) $5,000 gain. D) $5,000 loss. E) $2,000 gain.

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 89) What are variable interests in a variable interest entity?

90)

What condition(s) qualify an entity as a VIE?

91) How does the creation of a consolidated statement of cash flows differ from the creation of a consolidated income statement or consolidated balance sheet?

92)

On January 1, 2021, Bast Co. had a net book value of $2,100,000 as follows:

Preferred stock, 2,000 shares $70 par value, cumulative, nonparticipating, nonvoting Common stock, 22,400 shares $50 par value

1,120,000

Retained earnings Total shareholders’ equity

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140,000

840,000 $

2,100,000

Fisher Co. acquired all of the outstanding preferred shares for $148,000 and 60% of the common stock for $1,281,000. Fisher believed that one of Bast's buildings, with a twelve-year life, was undervalued on the company's financial records by $70,000. Required: What is the amount of goodwill to be recognized from this purchase?

93) Fargus Corporation owned 51% of the voting common stock of Sanatee, Inc. The parent's interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition price. On January 1, 2020, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a 10% interest rate every December 31. Fargus acquired 40% of these bonds on January 1, 2022, for 95% of the face value. Both companies utilized the straight-line method of amortization. What balances would need to be considered in order to prepare the consolidation entry in connection with these intra-entity bonds at December 31, 2022, the end of the first year of the intra-entity investment? Prepare schedules to show numerical answers for balances that would be needed for the entry.

94) Fargus Corporation owned 51% of the voting common stock of Sanatee, Inc. The parent's interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition price. On January 1, 2020, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a 10% interest rate every December 31. Fargus acquired 40% of these bonds on January 1, 2022, for 95% of the face value. Both companies utilized the straight-line method of amortization. What consolidation entry would be recorded in connection with these intra-entity bonds on December 31, 2022?

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95) Fargus Corporation owned 51% of the voting common stock of Sanatee, Inc. The parent's interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition price. On January 1, 2020, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a 10% interest rate every December 31. Fargus acquired 40% of these bonds on January 1, 2022, for 95% of the face value. Both companies utilized the straight-line method of amortization. What consolidation entry would be recorded in connection with these intra-entity bonds on December 31, 2023?

96) Fargus Corporation owned 51% of the voting common stock of Sanatee, Inc. The parent's interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition price. On January 1, 2020, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a 10% interest rate every December 31. Fargus acquired 40% of these bonds on January 1, 2022, for 95% of the face value. Both companies utilized the straight-line method of amortization. What consolidation entry would be recorded in connection with these intra-entity bonds on December 31, 2024?

97)

Skipen Corp. had the following stockholders' equity accounts:

Preferred stock (8% cumulative dividend) Common stock

Additional paid - in capital

420,000

Retained earnings Total

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700,000 1,050,000

1,330,000 $

3,500,000

The preferred stock was participating and is therefore considered to be equity. Vestin Corp. acquired 90% of this common stock for $2,250,000 and 70% of the preferred stock for $1,120,000. All of the subsidiary's assets and liabilities were determined to have fair values equal to their carrying amounts except for land, which is undervalued by $130,000. Required: What amount was attributed to goodwill on the date of acquisition?

98)

Thomas Inc. had the following stockholders' equity accounts as of January 1, 2021:

Preferred stock — $90 par value, nonvoting and nonparticipating 9% cumulative dividend Common stock — $25 par value

2,700,000 5,600,000

Retained earnings

14,000,000

Kuried Co. acquired all of the voting common stock of Thomas on January 1, 2021, for $20,656,000. The preferred stock remained in the hands of outside parties and had a fair value of $3,060,000. A database valued at $656,000 was recognized and amortized over five years. During 2021, Thomas reported earning $630,000 in net income and paid $504,000 in total cash dividends. Kuried used the equity method to account for this investment. What is the amount of goodwill resulting from this acquisition?

99)

Thomas Inc. had the following stockholders' equity accounts as of January 1, 2021:

Preferred stock — $90 par value, nonvoting and nonparticipating 9% cumulative dividend Common stock — $25 par value Retained earnings

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2,700,000 5,600,000 14,000,000

Kuried Co. acquired all of the voting common stock of Thomas on January 1, 2021, for $20,656,000. The preferred stock remained in the hands of outside parties and had a fair value of $3,060,000. A database valued at $656,000 was recognized and amortized over five years. During 2021, Thomas reported earning $630,000 in net income and paid $504,000 in total cash dividends. Kuried used the equity method to account for this investment. What was the noncontrolling interest's share of consolidated net income for the year 2021?

100)

Thomas Inc. had the following stockholders' equity accounts as of January 1, 2021:

Preferred stock — $90 par value, nonvoting and nonparticipating 9% cumulative dividend Common stock — $25 par value

2,700,000 5,600,000

Retained earnings

14,000,000

Kuried Co. acquired all of the voting common stock of Thomas on January 1, 2021, for $20,656,000. The preferred stock remained in the hands of outside parties and had a fair value of $3,060,000. A database valued at $656,000 was recognized and amortized over five years. During 2021, Thomas reported earning $630,000 in net income and paid $504,000 in total cash dividends. Kuried used the equity method to account for this investment. What is the controlling interest share of Thomas’ net income for the year ended December 31, 2021?

101)

Thomas Inc. had the following stockholders' equity accounts as of January 1, 2021:

Preferred stock — $90 par value, nonvoting and nonparticipating 9% cumulative dividend Common stock — $25 par value

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2,700,000 5,600,000

Retained earnings

14,000,000

Kuried Co. acquired all of the voting common stock of Thomas on January 1, 2021, for $20,656,000. The preferred stock remained in the hands of outside parties and had a fair value of $3,060,000. A database valued at $656,000 was recognized and amortized over five years. During 2021, Thomas reported earning $630,000 in net income and paid $504,000 in total cash dividends. Kuried used the equity method to account for this investment. What was Kuried’s balance in the Investment in Thomas Inc. account as of December 31, 2021?

102)

Thomas Inc. had the following stockholders' equity accounts as of January 1, 2021:

Preferred stock — $90 par value, nonvoting and nonparticipating 9% cumulative dividend Common stock — $25 par value Retained earnings

2,700,000 5,600,000 14,000,000

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103) Jet Corp. acquired all of the outstanding shares of Nittle Inc. on January 1, 2019, for $644,000 in cash. Of this consideration transferred, $42,000 was attributed to equipment with a ten-year remaining useful life. Goodwill of $56,000 had also been identified. Jet applied the partial equity method so that income would be accrued each period based solely on the earnings reported by the subsidiary. On January 1, 2022, Jet reported $280,000 in bonds outstanding with a book value of $263,200. Nittle purchased half of these bonds on the open market for $135,800. During 2022, Jet began to sell merchandise to Nittle. During that year, inventory costing $112,000 was transferred at a price of $140,000. All but $14,000 (at Jet’s selling price) of these goods were resold to outside parties by year's end. Nittle still owed $50,400 for inventory shipped from Jet during December. The following financial figures were for the two companies for the year ended December 31, 2022. Jet Corp. Revenues

Nittle Inc.

(894,600 ) $

(652,400 )

Cost of goods sold

483,000

277,200

Expenses

187,600

225,400

Interest expense-bonds

33,600

Interest income-bond investment

Equity in income of Nittle Inc.

(15,400 )

(165,200 )

Net income

(355,600 ) $

(165,200 )

Retained earnings, January 1, 2022

(483,000 ) $

(505,400 )

Net income (above)

(355,600 )

(165,200 )

Dividends paid

217,000

85,400

Retained earnings, December 31, 2022

(621,600 ) $

(585,200 )

Cash and receivables

186,200

109,200

Inventory

239,400

121,800

Investment in Nittle Inc.

851,200

137,200

Investment in Jet Corp. bonds

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Land, buildings, and equipment (net)

348,600

757,400

Total assets

1,625,400

Accounts payable

(315,000 ) $

(232,400 )

(280,000 )

(140,000 )

Bonds payable Discount on bonds payable

1,125,600

11,200

Common stock

(420,000 )

(168,000 )

Retained earnings, December 31, 2022 (above) Total liabilities and stockholders’ equity

(621,600 )

(585,200 )

$ (1,625,400 ) $ (1,125,600 )

Required: Prepare a consolidation worksheet for the year ended December 31, 2022.

104) Allen Co. held 80% of the common stock of Brewer Inc. and 40% of this subsidiary's convertible bonds. The following consolidated financial statements were for 2020 and 2021. 2020 Revenues

2021

1,064,000

1,232,000

Cost of goods sold

(714,000 )

(756,000 )

Depreciation and amortization

(126,000 )

(140,000 )

Gain on sale of building

28,000

Interest expense

(42,000 )

Noncontrolling interest

(12,600 )

(15,400 )

Net income to controlling interest

(169,400 ) $

306,600

Retained earnings, January 1

420,000

519,400

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Net income (from above)

169,400

306,600

Dividends paid

(70,000 )

(140,000 )

Retained earnings, December 31

519,400

686,000

Cash

112,000

196,000

Accounts receivable

210,000

196,000

Inventory

280,000

476,000

Buildings and equipment (net)

896,000

966,000

Database

210,000

203,000

Total assets

1,708,000

Accounts payable

(196,000 ) $

(140,000 )

Bonds payable

(560,000 )

(720,000 )

Noncontrolling interest in Brewer Inc.

(44,800 )

(57,400 )

Common stock

(140,000 )

(168,000 )

Additional paid - in capital

(247,800 )

(265,600 )

Retained earnings, December 31 (from above) Total liabilities and stockholders’ equity

(519,400 )

(686,000 )

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2,037,000

$ (1,708,000 ) $ (2,037,000 )

Additional Information: 1.Bonds were issued during 2021 by the parent for cash. 2.Amortization of a database acquired in the original combination amounted to $7,000 per year. 3.A building with a cost of $84,000 but a $42,000 book value was sold by the parent for cash on May 11, 2021. 4.Equipment was purchased by the subsidiary on July 23, 2021, using cash. 5.Late in November 2021, the parent issued common stock for cash. 6.During 2021, the subsidiary paid dividends of $14,000. Required: Prepare a consolidated statement of cash flows for this business combination for the year ending December 31, 2021. Either the direct method or the indirect method may be used.

105) Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago for $30 per share when Glotfelty had a book value of $450,000. Before and after that time, Glotfelty’s stock traded at $30 per share. At the present time, Glotfelty reports the following stockholders’ equity:

Common stock, $10 par value (20,000 shares outstanding)

$ 200,000

Additional paid-in capital

100,000

Retained earnings

300,000 $ 600,000

Glotfelty issues 5,000 shares of previously unissued stock to the public for $40 per share. None of this stock is purchased by Panton. Describe how this transaction would affect Panton’s books.

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106) Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago for $30 per share when Glotfelty had a book value of $450,000. Before and after that time, Glotfelty’s stock traded at $30 per share. At the present time, Glotfelty reports the following stockholders’ equity:

Common stock, $10 par value (20,000 shares outstanding)

$ 200,000

Additional paid-in capital

100,000

Retained earnings

300,000 $ 600,000

Glotfelty issues 5,000 shares of previously unissued stock to the public for $40 per share. None of this stock is purchased by Panton. Prepare Panton’s journal entry to recognize the impact of this transaction.

107) Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago for $30 per share when Glotfelty had a book value of $450,000. Before and after that time, Glotfelty’s stock traded at $30 per share. At the present time, Glotfelty reports the following stockholders’ equity:

Common stock, $10 par value (20,000 shares outstanding)

$ 200,000

Additional paid in capital

100,000

Retained earnings

300,000 $ 600,000

Glotfelty issues 5,000 shares of previously unissued stock to the public for $22 per share. None of this stock is purchased by Panton. Describe how this transaction would affect Panton’s books.

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108) Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago for $30 per share when Glotfelty had a book value of $450,000. Before and after that time, Glotfelty’s stock traded at $30 per share. At the present time, Glotfelty reports the following stockholders’ equity:

Common stock, $10 par value (20,000 shares outstanding)

$ 200,000

Additional paid in capital

100,000

Retained earnings

300,000 $ 600,000

Glotfelty issues 5,000 shares of previously unissued stock to the public for $22 per share. None of this stock is purchased by Panton. Prepare Panton’s journal entry to recognize the impact of this transaction.

109) Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago for $30 per share when Glotfelty had a book value of $450,000. Before and after that time, Glotfelty’s stock traded at $30 per share. At the present time, Glotfelty reports the following stockholders’ equity:

Common stock, $10 par value (20,000 shares on outstanding) $ 200,000 Additional paid in capital

100,000

Retained earnings

300,000 $ 600,000

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Glotfelty issues 5,000 shares of previously unissued stock to Panton for $35 per share. Required: Describe how this transaction would affect Panton’s books.

ESSAY. Write your answer in the space provided or on a separate sheet of paper. 110) Parent Corporation loaned money to its subsidiary with a five-year note at the market interest rate. How would the note be accounted for in the consolidation process?

111) What are the primary sources of information that are used for preparation of a consolidated statement of cash flows?

112) Parent Corporation acquired some of its subsidiary's bonds on the open bond market. The remaining life of the bonds was eight years, and Parent expected to hold the bonds for the full eight years. How would the acquisition of the bonds affect the consolidation process?

113) Parent Corporation acquired some of its subsidiary's bonds on the open bond market, paying a price $40,000 higher than the bonds' carrying value. How should the difference between the purchase price and the carrying value be accounted for?

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114) How are intra-entity inventory transfers treated on the consolidation worksheet and how are they reflected in a consolidated statement of cash flows?

115) Danbers Co. owned 75% of the common stock of Renz Corp. How does the issuance of a 5% stock dividend by Renz affect Danbers and the consolidation process?

116) During 2021, Parent Corporation purchased at carrying value some of the outstanding bonds of its subsidiary. How would this acquisition have been reflected in the consolidated statement of cash flows?

117) On January 1, 2021, Parent Corporation acquired a controlling interest in the voting common stock of Foxboro Co. At the same time, Parent purchased 60% of Foxboro's outstanding preferred stock. In preparing consolidated financial statements, how should the acquisition of the preferred stock be accounted for?

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118) When a company has preferred stock in its capital structure, what amount should be used to calculate noncontrolling interest in the preferred stock of the subsidiary when the company is acquired as a subsidiary of another company?

119) Parent Corporation acquired some of its subsidiary's outstanding bonds. Why might Parent purchase the bonds, rather than the subsidiary buying its own bonds?

120) Parent Corporation had just purchased some of its subsidiary's outstanding bonds on the open market. What items related to these bonds will have to be accounted for in the consolidation process?

121) Parent Corporation recently acquired some of its subsidiary's outstanding bonds at an amount which required the recognition of a loss. In what ways could the loss be allocated? Which allocation would you recommend? Why?

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122) How does the existence of a noncontrolling interest affect the preparation of a consolidated statement of cash flows?

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Answer Key Test name: Chap 06_8e 1) D 2) E 3) B 4) C 5) E 6) A 7) D 8) C 9) B $300,000 ÷ $6 = 50,000 shares × 75% = 37,500 shares owned by parent Total Equity at Acquisition = $760,000 + Equity Added by Stock Offering (10,000 × $12) $120,000 = Total Equity after Stock Offering $880,000 × 37,500 Parent ÷ 60,000 Total = $550,000 Parent’s Investment Account 10) D $300,000 ÷ $6 = 50,000 shares × 75% = 37,500 shares owned by parent Total Equity at Acquisition = $760,000 + Equity Added by Stock Offering (10,000 × $12) $120,000 = Total Equity after Stock Offering $880,000 × 22,500/60,000 = $330,000 Noncontrolling Interest

11) E $810,000 Net Income − Preferred Dividends (10,000 × $8) = $730,000 × 30% = $219,000 Noncontrolling Interest $80,000 Preferred Dividends × 20% = $16,000 Noncontrolling Interest $219,000 from Income + $16,000 Preferred Dividends = $235,000 Noncontrolling Interest in Income 12) A

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Subsidiary Net Income $300,000 − Preferred Dividends ($2,000 × $2 per share) $4,000 = $296,000 × 80% = $236,800 included in consolidated EPS. Parent net income $400,000 + Parent’s portion of Subsidiary Net Income = ($400,000 + $236,800) ÷ 100,000 shares = $6.37 13) D Subsidiary Net income $300,000 + Interest saved $2,000 (no preferred dividends) = $302,000. New ownership percentage = 40,000 ÷ (50,000 + if-converted preferred shares 8,000 + if-converted bonds 6,000 shares) = 62.5%. Consolidated DEPS = $400,000 + (62.5% × $302,000) = $588,750 ÷100,000 = $5.89 Knight Co.’s Consolidated Diluted Earnings per Share 14) D Income of the Parent $350,000 + Income of the Subsidiary $127,000 − Difference in Interest Income over Interest Expense on Intra-Entity Bonds ($32,000 − $29,000) $3,000 + Gain on Bonds Purchase ($303,000 − $285,000) $18,000 = $492,000 Consolidated Net Income 15) B Bond Acquisition Price $291,000 − Bonds carrying amount $270,000 = $21,000 R/E Reduction. Intra-Entity Interest $31,000 − $26,000 = $5,000 R/E Increase $21,000 R/E Reduction − $5,000 R/E Increase = $16,000 R/E Reduction 16) D Subsidiary’s reported net income $150,000 × 25% = $37,500 NCI’s share of subsidiary’s net income (gain or loss is assigned to the parent only) 17) C FV Common Stock $70,000,000 + FV Preferred Stock $12,000,000 = $82,000,000 × 15% = $12,300,000 Noncontrolling Interest Version 1

18) B Parent’s Sales $510,000 + Subsidiary’s Sales $300,000 − Intra-Entity Sales $54,000 − increase in A/R $43,000 ($158,000 − $115,000) = $713,000 Consolidated Cash Collected 19) C Subsidiary’s unamortized fair value of prior to new share issue

862,000

Parent's ownership

100 %

Unamortized subsidiary fair value

862,000

Subsidiary unamortized fair value after issuing new

$ 1,162,000

shares (above value plus 4,000 shares at $75 each) Parent's ownership 12,000 ÷ 16,000 shares) Unamortized subsidiary fair value after stock issue

75 % $

871,500

Investment in Beatty increases by $9,500 ($871,500 less $862,000). 20) C No Adjustment is made to the APIC of the Parent as a Result of Sub’s Stock Issue because the same Level of Ownership Interest is Maintained

21) E

Consideration transferred

682,000

Noncontrolling interest acquisition-date fair value

170,500

Increase in Sub book value ($1,113,000 − $721,000)

392,000

Stock issue proceeds

210,000

Subsidiary valuation basis

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1,454,500

New parent ownership (32,000 shares ÷ 50,000 shares)

64 %

Parent’s post-stock issue ownership balance

Parent's investment account ($682,000 + [80% × 392,000])

930,880 995,600

Required adjustment —decrease

(64,720 )

22) D Adjusted acquisition-date fair value ($852,500 + $392,000)

Less Stock repurchase Adjusted fair value after stock repurchase

(272,000 ) $

New parent ownership (32,000 shares ÷ 32,000 shares) Fair value equivalency of parent's ownership

972,500 100 %

Parent's investment account ($682,000 + [80% × $392,000]) Required adjustment—decrease

1,244,500

972,500 995,600

(23,100 )

23) E 24) C 25) B 26) E 27) C 28) D 29) A 30) D 31) D 32) A 33) E Version 1

34) D Bonds Purchase Price $13,000 − Bonds carrying amount ($12,000 − $1,000) = $2,000 Loss to Consolidated Income 35) C Bonds Purchase Price $18,000 − Bonds carrying amount ($21,000 + $1,000) = $4,000 Gain to Consolidated Income 36) C FV of Consideration Recorded for Each Class of Stock in the Investment Account

37) B 100% acquisition-date fair value: 100% Common Stock ($1,200,000 ÷ 80% = $1,500,000) + 100% Preferred Stock ($124,000 ÷ 40% = $310,000): Total acquisition-date fair value $1,500,000 + $310,000 = FV $1,810,000 − BV $1,500,000 = $310,000 Goodwill 38) A Common Stock Noncontrolling Interest at Acquisition = $1,200,000 ÷ 80% = $1,500,000 × 20% = $300,000 Preferred Stock Noncontrolling Interest at Acquisition = $124,000 ÷ 40% = $310,000 × 60% = $186,000 $300,000 + $186,000 = $486,000 Noncontrolling Interest at Acquisition Date

39) C BV is Debited in Consolidation Entry for Acquisition-Date Preparation of Consolidated Balance Sheet

40) C $100,000 − Preferred Dividends ($6 × 3,000) $18,000 = $82,000 × 20% = $16,400 Income to NCI Preferred Dividends $18,000 × 60% = $10,800 to NCI $16,400 Income + $10,800 Preferred Dividends = $27,200 Income to NCI

41) D Land Sale of $5,000 Reduces Net Income as Operating Activity in Cash Flows 42) E NCI's Income is NOT Reported on Consolidated Cash Flows 43) E Version 1

Parent's Dividends $15,000 + NCI Dividends $2,000 = $17,000 Decrease in Cash Flow for Financing 44) D $6,000 Excess Amortization is not a Cash Item and therefore Added Back to Net Income on the Cash Flow Statement 45) A The $8,000 Receivables Decrease is Added to Net Income and Classified as an Operating Item 46) B The $7,000 Payables Decrease is Deducted from Net Income and Classified as an Operating Item. 47) B Beginning carrying amount $1,200,000 + Additional Shares Sold $200,000 ($10 × 20,000) = $1,400,000 Current carrying amount

48) A Shares Outstanding 100,000 × 90% = 90,000 Parent’s Shares 100,000 + 20,000 = 120,000 New Outstanding Shares 90,000 ÷ 120,000 = 75% New Ownership Percentage

49) C Adjusted acquisition-date sub. fair value Consideration transferred

990,000

Noncontrolling interest acquisition-date fair value

110,000

Increase in Jones book value

200,000

Stock issue proceeds

200,000

Subsidiary valuation basis New parent ownership (90,000 shares ÷ 120,000 shares) Parent’s post-stock issue ownership balance

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1,500,000 75 %

1,125,000

Parent's investment account [$990,000 + (90% × $200,000)] Required adjustment—decrease

1,170,000 $

(45,000 )

50) A Beginning BV $1,200,000 + Additional Shares Sold $300,000 ($15 × 20,000) = $1,500,000 Current BV

51) C Adjusted acquisition-date sub. fair value Consideration transferred

990,000

Noncontrolling interest acquisition-date fair value

110,000

Increase in Jones book value

200,000

Stock issue proceeds

300,000

Subsidiary valuation basis

1,600,000

New parent ownership (90,000 shares ÷ 120,000 shares) Parent’s post-stock issue ownership balance

75 % $

Parent's investment account [$990,000 + (90% × $200,000)] Required adjustment—increase

1,200,000 1,170,000

30,000

52) B Shares Outstanding 50,000 × 80% = 40,000 Parent’s Shares 50,000 + 30,000 = 80,000 New Outstanding Shares 40,000 + 30,000 = 70,000 Parent’s Shares after New Issue 70,000 ÷ 80,000 = 87.5% New Ownership Percentage

53) D Beginning carrying amount $400,000 + Additional Shares Sold $360,000 ($12 × 30,000) = $760,000 Current carrying amount

54) C Version 1

Adjusted acquisition-date sub. fair value Consideration transferred

270,000

Noncontrolling interest acquisition-date fair value

67,500

Increase in Chase book value

100,000

Stock issue proceeds

360,000

Subsidiary valuation basis

New parent ownership (90,000 shares ÷ 120,000 shares) Parent’s post-stock issue ownership balance

87.5 % $

Parent's investment account [$270,000 + (80% × $100,000) + $360,000] Required adjustment—decrease

797,500

697,813 710,000

(12,188 )

55) C Subsidiary carrying amount before Stock Repurchase $400,000 − Stock Repurchase $80,000 (8,000 × $10) = Subsidiary carrying amount after Stock Repurchase $320,000

56) B Shares Outstanding 50,000 × 80% = 40,000 Parent’s Shares before Treasury Purchase 50,000 − 8,000 = 42,000 New Outstanding Shares after Treasury Purchase 40,000 ÷ 42,000 = 95% New Ownership Percentage

57) A Shares outstanding 50,000 × 80% = 40,000 Parent’s shares before treasury purchase 50,000 − 8,000 = 42,000 New outstanding shares after treasury purchase 40,000 ÷ 42,000 = 95% New ownership percentage Investment balance = $240,000 + [80% × ($400,000 − $300,000) increase in book value] = $320,000. Adjusted subsidiary value = [$400,000 − (8,000 shares × $10)] = $320,000. $320,000 × new ownership percentage 95% = $304,000. $320,000 − $304,000 = $16,000 decrease in investment account

58) E 59) B

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60) C 61) D 62) E 63) E 64) B 65) C 66) D 67) E 68) E 69) D $75,000 Dividends paid by Haber × 20% NCI = $15,000 decrease in the financing section.

70) D $90,000 Dividends paid by Knight × 15% NCI = $13,500 decrease in the financing section. 71) A $50,000 + Depreciation $14,000 ($170,000 − $156,000) + Amortization $2,000 ($18,000 − $16,000) − A/R $21,000 ($75,000 - $54,000) − Inventory $11,000 ($100,000 − $89,000) + A/P $9,000 ($60,000 − $51,000) = $43,000 Net Consolidated Cash Flow from Operations

72) E Parent dividend paid $24,800 (income attributed to controlling interest $46,800 less increase in Retained Earnings $22,000) + Subsidiary dividends paid to NCI ($1,200) + repayment of debt ($35,000)

73) C $100,000 + Depreciation $25,000 ($340,000 − $315,000) + Amortization $4,000 ($36,000 − $32,000) − A/R $42,000 ($150,000 − $108,000) − Inventory $42,000 ($220,000 − $178,000) + A/P $18,000 ($120,000 − $102,000) = $63,000 Net Consolidated Cash Flow from Operations

74) A Parent dividend paid $19,000 (income to controlling interest $63,000 less increase in Retained Earnings $44,000) + NCI in subsidiary dividend ($3,000) + repayment of debt ($70,000) = ($92,000)

75) B 76) B 77) C Version 1

78) D 79) C Parent’s Income $1,500,000 + Loss on Bond Sale $110,000 − Bond Interest $94,000 + Bond Income $96,000 + Sub’s Income to Parent $564,000 ($705,000 × 80%) = $2,176,000 Consolidated Income 80) B Common Stock Noncontrolling Interest at Acquisition = $1,850,000 ÷ 80% = $2,312,500 Preferred Stock Noncontrolling Interest at Acquisition = $750,000 ÷ 30% = $2,500,000 $2,312,500 + $2,500,000 = $4,812,500 FV of Subsidiary at Acquisition $1,850,000 + $462,500 + $750,000 + $1,750,000 = $4,812,500 81) D Common Stock Noncontrolling Interest at Acquisition = $1,850,000 ÷ 80% = $2,312,500 × 20% = $462,500 Preferred Stock Noncontrolling Interest at Acquisition = $750,000 ÷ 30% = $2,500,000 × 70% = $1,750,000 (CS Parent $1,850,000) + (CS NCI $462,500) + (PS Parent $750,000) + (PS NCI $1,750,000) = $4,812,500 FV of Subsidiary at Acquisition FV $4,812,500 − carrying amount $4,000,000 = $812,500 Goodwill 82) A Parent $400,000 + Sub $250,000 − Intra-Entity Inventory Transfer $50,000 − Increase in A/R $10,000 ($120,000 − $130,000) = $590,000

83) C 84) E 85) B 86) D 87) B Bonds Purchase Price $18,000 − Bonds carrying amount ($15,000 − $2,500) = $5,500 Loss to Consolidated Income Version 1

88) C Bonds Purchase Price $17,000 − Bonds carrying amount ($20,000 + $2,000) = $5,000 Gain to Consolidated Income 89) Variable interests in a variable interest entity are contractual, ownership, or other pecuniary interests in an entity that change with changes in the entity’s net asset value. Variable interests absorb portions of a variable interest entity’s expected losses if they occur or receive portions of the entity’s expected residual returns if they occur. 90) An entity qualifies as a VIE if either of the following conditions exist: ● The total equity at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support provided by any parties, including equity holders. ● The equity investors in the VIE, as a group, lack any one of the following characteristics of a controlling financial interest: 1.The power, through voting rights or similar rights, to direct the activities of an entity that most significantly impact the entity’s economic performance. 2.The obligation to absorb the expected losses of the entity. 3.The right to receive the expected residual returns of the entity.

91) Consolidated income statements and consolidated balance sheets are created by consolidating the individual financial statements of the separate companies. The consolidated statement of cash flows is not created by consolidating the individual cash flows of the separate companies. Instead, both a consolidated income statement and consolidated balance sheet are produced, and the cash flows statement is developed from these figures. 92) Version 1

Consideration transferred for 60% interest in common $ stock Consideration transferred for 100% interest in preferred stock Noncontrolling interest in common stock (40%):

1,281,000 148,000 854,000

[$1,281,000 ÷ 60%] − $1,281,000 Total fair value

Book value Excess acquisition-date fair value over book value

2,100,000 $

Assigned to building Goodwill

2,283,000

183,000 70,000

113,0000

93) Carrying amount of bonds payable, January 1, 2022 Book value, January 1, 2020 ($1,400,000 × 1.08) $ original issue Amortization—2020-2021 [($112,000 premium ÷ 10 years) × 2 years]

1,512,000

Book value of bonds payable, January 1, 2022

1,489,600

(22,400 )

Carrying amount of 40% of bonds payable (intra-entity portion), January 1, 2022 = $ 595,840 Gain on retirement of bonds, January 1, 2022: Purchase price ($560,000 face value × 95%) of investment Book value of liability (calculated above)

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$ (532,000 ) 595,840

Gain on retirement of bonds

63,840

Carrying amount of investment, December 31, 2022 Carrying amount, January 1, 2022 (calculated above)

$ 1,489,600

Amortization—2022

(11,200 )

Carrying amount of investment, December 31, 2022

$ 1,478,400

Cash payment ($560,000 face value × 10%)

56,000

Amortization of premium for 2022 $11,200 × 40%) Intra-entity interest expense

4,480 $

51,520

Carrying amount of 40% of bonds payable (intra-entity portion) December 31, 2022 ($595,840 − 4,480 premium amortization) = $591,360 Carrying amount of investment, December 31, 2022 Carrying amount of investment, January 1, 2022 (purchase price) Amortization—2022 ($28,000 discount ÷ 8 years remaining)

Carrying amount of investment, December 31, 2022

535,500

Cash receipt ($560,000 face value × 10%)

56,000

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532,000 3,500

Amortization of discount for 2022

3,500

Intra-entity interest revenue

59,500

94) Bonds payable

560,000

Premium on bonds payable

31,360

Interest income

59,500

Investment in bonds

535,500

Interest expense

51,520

Gain on retirement

63,840

95) Bonds payable

560,000

Premium on bonds payable

26,880

Interest income

59,500

Investment in bonds

539,000

Interest expense

51,520

Retained earnings, 1/1/23 (Fargus Corp.)

55,860

96)

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Bonds payable

560,000

Premium on bonds payable

22,400

Interest income

59,500

Investment in bonds

542,500

Interest expense

51,520

Retained earnings, 1/1/24 (Fargus Corp.)

47,880

97) Consideration transferred for 90% interest in common stock Consideration transferred for 70% interest in preferred stock Noncontrolling interest in common stock (10%): [$2,250,000 ÷ 90%] − $2,250,000 Noncontrolling interest in preferred stock (30%): [$1,120,000 ÷ 70%] − $1,120,000 Total fair value of Skipen - date of acquisition Carrying amount

2,250,000

4,100,000 3,500,000

Excess acquisition-date fair value over book value Assigned to land

600,000 130,000

Goodwill

470,0000

Consideration transferred for 100% interest in common stock Noncontrolling interest in preferred stock (100%):

20,656,000

Total fair value of Thomas 1/1/21

1,120,000 250,000 480,000

98)

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3,060,000 23,716,000

Carrying amount Excess acquisition-date fair value over book value

22,300,000 $

1,416,000

Assigned to database Goodwill

656,000 $

760,0000

Preferred stock — Thomas Inc.

2,700,000

Preferred dividend rate

Noncontrolling interest's share of subsidiary income

99)

9% 243,000

All residual net income is attributed to the controlling interest of Kuried as sole owner of common stock of Thomas. 100) Database

656,000

Amortization period in years

Annual amortization of database

131,200

Thomas net income (book)

630,000

Amortization of database

(131,200 ) 498,800

Preferred stock dividend (9% × $2,700,000) Net income residual to common stockholders (100% to Kuried as controlling interest)

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(243,000 ) $

255,800

101) Database

656,000

Amortization period in years

Annual amortization of database

131,200

Investment in Thomas Inc., 12/31/21 Acquisition consideration, 1/1/21

$ 20,656,000

Equity accrual ($630,000 − $243,000)

387,000

Dividends collected ($504,000 − $243,000)

(261,000 )

Database amortization (from above)

(131,200 )

Investment in Thomas Inc., 12/31/21

$ 20,650,800

102) Consolidation Entry

Consolidation Entries S and A (combined)

Common Stock (Thomas Inc.)

5,600,000

Preferred Stock (Thomas Inc.)

2,700,000

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Retained Earnings, 1/1/21 (Thomas Inc.)

14,000,000

Database

656,000

Goodwill

760,000

Investment in Thomas Inc.

20,656,000

Noncontrolling Interest in Thomas Inc.

3,060,000

Consolidated Entry I

Equity Income of Subsidiary

387,000

Investment in Thomas Inc.

387,000

Consolidation Entry D

Investment in Thomas Inc.

261,000

Dividends Paid

261,000

Consolidation Entry E

Amortization Expense

131,200

Database

131,200

103) CONSOLIDATION WORKSHEET For the Year Ended 12/31/2022

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Accounts

Jet Corp

Nittle Inc.

Consolidation Entries DR

Revenues Cost of goods sold Expenses Interest expense − bonds Interest income − bond investment Loss on extinguishme nt of debt Equity in Nittle income

(894,600 ) (652,400 ) (T ) 140,000 I 483,000 277,200 (G ) 2,800 (T ) 140,000 I 187,600 225,400 (E ) 4,200 33,600

(B )

(15,400 ) (B )

15,400

(B )

4,200

(165,200 )

16,800

Consolidat ed Balances (1,407,0 ) 00 623,000 417,200 16,800

4,200

(I ) 165,200

Net income

(355,600 ) (165,200 )

(345,800 )

R/E, 1/1/22, Jet Corp. R/E, 1/1/22, Nittle Inc. Net income

(483,000 )

(470,400 )

Dividends paid

217,000

R/E, 12/31/22

(621,600 ) (585,200 )

Cash & receivables Inventory

186,200

109,200

(P )

50,400

245,000

239,400

121,800

(G )

2,800

358,400

Investment in Nittle

851,200

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(* ) 12,600 C (505,400 ) (S ) 505,400

(355,600 ) (165,200 )

(345,800 )

85,400

(D )

85,400

217,000 (599,200 )

(D )

85,400 (* ) 12,600 C (S ) 673,400

(A )

85,400

(I ) 165,200 Investment in Jet Corp. bonds Land, buildings, & equipment (net) Goodwill

137,200

348,600

757,400

(B ) 137,200

(A )

29,400 (E )

(A )

56,000

4,200

1,131,20 0

56,000

Total assets

1,625,40 0

Accounts payable Bonds payable Discount on bonds Payable Common stock

(315,000 ) (232,400 ) (P )

(420,000 ) (168,000 ) (S ) 168,000

(420,000 )

R/E, 12/31/22

(621,600 ) (585,200 )

(599,200 )

Total Liabilitie s & Stockholde rs’ Equity

1,125,60 0

1,790,60 0 50,400

(497,000 )

(280,000 ) (140,000 ) (B ) 140,000

(280,000 )

11,200

(1,625,4 ) (1,125,6 ) 00 00

(B )

1,379,0 00

5,600

1,379,0 00

5,600

(1,790,6 ) 00

104) ALLEN CO. AND BREWER INC. Statement of Cash Flows − Direct Method For the Year Ending December 31, 2021

Cash flows from operating activities

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Cash received from customers

1,246,000

Cash payments To suppliers

$ 1,008,000

For interest expense

42,000

Net cash provided by operating activities Cash flows from investing activities Proceeds from sale of building

(1,050,000 ) $

Purchase of equipment

196,000

70,000 (245,000 )

Net cash used by investing activities

(175,000 )

Cash flows from financing activities Payment of cash dividends

(142,800 )

Issuance of bonds

160,000

Issuance of common stock

45,800

Net cash provided by financing activities Net increase in cash

63,000

84,000

Cash, January 1, 2021 Cash, December 31, 2021

112,000 $

196,000

The above statement uses the direct method for calculating cash flows from operating activities. The following presentation would be included for the direct method as a reconciliation of net income to net cash from operations, as well as being the presentation of cash flow from operating activities for the indirect method: ALLEN CO. AND BREWER INC. Statement of Cash Flows − Indirect Method

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For the Year Ending December 31, 2021

Cash flows from operating activities Consolidated net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense

322,000

133,000

Amortization of database

7,000

Gain on sale of building

(28,000 )

Decrease in accounts receivable

14,000

Increase in inventory

(196,000 )

Decrease in accounts payable

(56,000 )

Net cash provided by operating activities

$ (126,000 ) $

196,000

105) The investment account and APIC will be increased by $9,000 as shown below: Consideration transferred

540,000

Noncontrolling interest acquisition-date fair value

60,000

Increase in Sub book value ($600,000 − $450,000)

150,000

Stock issue proceeds

200,000

Subsidiary valuation basis

New parent ownership (18,000 shares ÷ 25,000 shares) Parent’s post-stock issue ownership balance

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950,000 72 %

684,000

Parent's investment account [$540,000 + (90% × $150,000)]

675,000

Required adjustment—increase

9,000

106) Investment in Glotfelty

9,000

Additional Paid in Capital

9,000

107) The investment account and APIC would be decreased by $55,800, as shown below: Consideration transferred

540,000

Noncontrolling interest acquisition-date fair value

60,000

Increase in Sub book value ($600,000 − $450,000)

150,000

Stock issue proceeds

110,000

Subsidiary valuation basis

860,000

New parent ownership (18,000 shares ÷ 25,000 shares) Parent’s post-stock issue ownership balance

72 % $

Parent's investment account [$540,000 + (90% × $150,000)] Required adjustment—decrease

619,200 675,000

55,800

108)

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Additional Paid in Capital

55,800

Investment in Glotfelty

55,800

109) The investment account and APIC will be increased by $1,000, as shown below: Consideration transferred

540,000

Noncontrolling interest acquisition-date fair value

60,000

Increase in Sub book value ($600,000 − $450,000)

150,000

Stock issue proceeds

175,000

Subsidiary valuation basis

925,000

New parent ownership (23,000 shares ÷ 25,000 shares) Parent’s post-stock issue ownership balance

92 % $

Parent's investment account ($540,000 + [90% × $150,000] + $175,000) Required adjustment—increase

851,000 850,000

1,000

110) The note would be eliminated in the consolidation process with an entry debiting Notes Payable and crediting Notes Receivable. 111) The main source of information would be the consolidated income statement and the consolidated balance sheet. 112) In the consolidation process, the bonds would be treated as if they had been retired. A gain or loss would be recognized in the period in which they were acquired. Intra-entity interest revenue and expense would be eliminated. 113) The $40,000 difference between the acquisition price and the carrying value would be recognized as a loss on retirement of bonds. Version 1

114) Intra-entity inventory transfers are eliminated on the consolidation worksheet and, therefore, do not appear in the consolidated statement of cash flows. 115) A stock dividend would not influence Danbers' ownership percentage and would not alter the consolidation process. 116) The cash paid for the bonds on the open market would be shown under cash flows from financing activities. If the bonds were acquired directly from the subsidiary, the cash received and the cash paid has no effect on the consolidated entity. Therefore, in a direct intra-entity transaction, there is no effect in the consolidated statement of cash flows. 117) The investment in preferred stock account and Foxboro’s preferred stock balance should be eliminated in consolidation so that only the parent’s equity remains. No gain or loss should be recognized. 118) The noncontrolling interest should be reflected at its acquisitiondate fair value. 119) The purchase might have been made by Parent Corporation because it had more available cash than the subsidiary and there was a desire to bring the bonds in from the market. Also, in some cases, the contract signed when the bonds were issued might prevent the subsidiary from purchasing its own bonds or it might require the payment of a price that would be higher than the market value of the bonds.

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120) For each period that the parent owns the bonds, the bonds must be eliminated on the consolidation worksheet. Eliminating the bonds on the consolidation worksheet requires the elimination of: (i) the parent's investment account; (ii) the portion of the bonds payable that the parent acquired; (iii) interest expense of the issuer; and (iv) interest income of the investor. In the year in which the parent acquired the bonds, a gain or loss must have been recognized. Over the life of the bonds, retained earnings must be debited or credited for the amount of the gain or loss, as adjusted by the previous years’ difference between interest expense and interest income. 121) The loss could be assigned to the subsidiary since it originally issued the bonds. The loss could be assigned to the parent since the parent acquired the bonds. A method could be applied to divide the loss between the parent and subsidiary. Finally, the loss could be assigned to the parent because the parent controls the combined entity. The loss should probably be assigned to the parent, without regard to who issued and who purchased the bonds, since the parent is responsible for decision-making for the combined entity. 122) The noncontrolling interest's share of the subsidiary's income would not appear in the consolidated statement of cash flows. Dividends paid to the noncontrolling interest represent cash outflows for the combined entity to outside parties, and should be shown as cash flows from financing activities.

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CHAPTER 7 MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) Brandon Co., a U.S. corporation, sold inventory on credit to a British company on April 8, 2021. Brandon received payment of 40,000 British pounds on May 8, 2021. The exchange rate was £1 = $1.56 on April 8 and £1 = 1.45 on May 8. What amount of foreign exchange gain or loss should be recognized? (Round to the nearest dollar.) A) $10,200 loss B) $10,200 gain C) $4,400 gain D) $4,400 loss E) No gain or loss should be recognized.

2) Clark Co., a U.S. corporation, sold inventory on December 1, 2021, with payment of 12,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows: Dec. 1

Spot rate:

1.831

Dec. 31

Spot rate:

1.976

Jan. 30

Spot rate:

1.768

For what amount should Sales be credited on December 1? A) $18,310. B) $19,760. C) $23,712. D) $21,972. E) $21,216.

3) Clark Co., a U.S. corporation, sold inventory on December 1, 2021, with payment of 12,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows:

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Dec. 1

Spot rate:

1.831

Dec. 31

Spot rate:

1.976

Jan. 30

Spot rate:

1.768

What amount of foreign exchange gain or loss should be recorded on December 31? A) $756 gain. B) $756 loss. C) $0. D) $1,740 loss. E) $1,740 gain.

4) Clark Co., a U.S. corporation, sold inventory on December 1, 2021, with payment of 12,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows: Dec. 1

Spot rate:

1.831

Dec. 31

Spot rate:

1.976

Jan. 30

Spot rate:

1.768

What amount of foreign exchange gain or loss should be recorded on January 30? A) $2,496 gain. B) $2,496 loss. C) $0. D) $1,740 loss. E) $1,740 gain.

5) Clark Stone purchases raw material from its foreign supplier, Rinne Clay, on May 8. Payment of 1,500,000 foreign currency units (FC) is due in 30 days. May 31 is Clark’s fiscal year-end. The pertinent exchange rates were as follows:

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May 8

Spot rate:

$ 1.16

May 31

Spot rate:

$ 1.18

June 7

Spot rate:

$ 1.12

For what amount should Clark’s Accounts Payable be credited on May 8? A) $1,740,000. B) $1,850,000. C) $1,500,000. D) $1,680,000. E) $1,770,000.

6) Clark Stone purchases raw material from its foreign supplier, Rinne Clay, on May 8. Payment of 1,500,000 foreign currency units (FC) is due in 30 days. May 31 is Clark’s fiscal year-end. The pertinent exchange rates were as follows: May 8

Spot rate:

$ 1.16

May 31

Spot rate:

$ 1.18

June 7

Spot rate:

$ 1.12

How much Foreign Exchange Gain or Loss should Clark record on May 31? A) $0. B) $30,000 gain. C) $30,000 loss. D) $60,000 gain. E) $60,000 loss.

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7) Clark Stone purchases raw material from its foreign supplier, Rinne Clay, on May 8. Payment of 1,500,000 foreign currency units (FC) is due in 30 days. May 31 is Clark’s fiscal year-end. The pertinent exchange rates were as follows: May 8

Spot rate:

$ 1.16

May 31

Spot rate:

$ 1.18

June 7

Spot rate:

$ 1.12

How much US $ will it cost Clark to finally pay the payable on June 7? A) $1,850,000. B) $1,500,000. C) $1,770,000. D) $1,740,000. E) $1,680,000.

8) On June 1, Cagle Co. received a signed agreement to sell inventory for ¥650,000. The sale would take place in 90 days. Cagle immediately signed a 90-day forward contract to sell the yen as soon as they are received. The spot rate on June 1 was ¥1 = $0.003986, and the 90-day forward rate was ¥1 = $0.004021. At what amount would Cagle record the Forward Contract on June 1? A) $2,613.65. B) $0. C) $2,590.90. D) $2,275.00. E) $1,993.00.

9) Curtis purchased inventory on December 1, 2020. Payment of 250,000 stickles was to be made in sixty days. Also on December 1, Curtis signed a contract to purchase §250,000 in sixty days. The spot rate was §1 = 0.33682, and the 60-day forward rate was §1 = $0.36842. On December 31, the spot rate was §1 = 0.32438 and the 30-day forward rate was §1 = 0.36386. At what amount should the Forward Contract account be recorded on December 1?

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A) $90,965. B) $84,205. C) $81,095. D) $92,105. E) $0.

10) Nelson Co. ordered parts costing §120,000 from a foreign supplier on May 12 when the spot rate was $0.31 per stickle. A one-month forward contract was signed on that date to purchase §120,000 at a forward rate of $0.32 per stickle. On June 12, when the parts were received and payment was made, the spot rate was $0.36 per stickle. At what amount should inventory be reported? A) $0. B) $43,200. C) $38,400. D) $37,200. E) $6,000.

11) Jackson Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2021, with payment of 20 million Korean won to be received on January 15, 2022. The following exchange rates applied: Date December 16, 2021

Spot Rate $ 0.00082

Forward Rate to Jan.15 $ 0.00089

December 31, 2021

0.00080

0.00083

January 15, 2022

0.00086

Assuming a forward contract was not entered into, what would be the net impact on Jackson Corp.'s 2021 income statement related to this transaction?

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A) $600 (gain). B) $600 (loss). C) $400 (gain). D) $400 (loss). E) $0

12) Jackson Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2021, with payment of 20 million Korean won to be received on January 15, 2022. The following exchange rates applied: Date December 16, 2021

Spot Rate $ 0.00082

Forward Rate to Jan.15 $ 0.00089

December 31, 2021

0.00080

0.00083

January 15, 2022

0.00086

Assuming a forward contract was entered into, the foreign currency was originally sold in the foreign currency market on December 16, 2021 at a: A) Forward contract discount $1,400. B) Forward contract premium $1,400. C) Forward contract discount $600. D) Forward discount premium $600. E) There is no premium or discount because the fair value of the contract is zero.

13) Jackson Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2021, with payment of 20 million Korean won to be received on January 15, 2022. The following exchange rates applied: Date December 16, 2021

Spot Rate $ 0.00082

December 31, 2021

0.00080

0.00083

January 15, 2022

0.00086

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Forward Rate to Jan.15 $ 0.00089

Assuming a forward contract was entered into on December 16, at what amount should the forward contract be recorded at December 31, 2021? A) $400. B) $600. C) $1,200. D) $1,000. E) $800.

14) Jackson Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2021, with payment of 20 million Korean won to be received on January 15, 2022. The following exchange rates applied: Date December 16, 2021

Spot Rate $ 0.00082

Forward Rate to Jan.15 $ 0.00089

December 31, 2021

0.00080

0.00083

January 15, 2022

0.00086

Assuming a forward contract was entered into on December 16, how would the forward contract be reflected on Jackson’s December 31, 2021 balance sheet? A) Forward contract (asset). B) Forward contract (liability). C) Foreign currency (asset). D) Foreign currency (liability). E) Foreign exchange (liability).

15) Jackson Corp. (a U.S.-based company) sold parts to a Korean customer on December 16 , 2021, with payment of 20 million Korean won to be received on January 15, 2022. The following exchange rates applied: Date December 16, 2021

Spot Rate $ 0.00082

December 31, 2021

0.00080

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Forward Rate to Jan.15 $ 0.00089 0.00083

January 15, 2022

0.00086

Assuming a forward contract was entered into on December 16 as a fair value hedge, what would be the net foreign exchange gain or loss on Jackson's 2021 income statement related to this transaction? Jackson amortizes forward points using the straight-line method. Ignore present values. A) $0 (no impact). B) $200 (loss). C) $600 (gain). D) $800 (loss). E) $700 (gain).

16) Jackson Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2021, with payment of 20 million Korean won to be received on January 15, 2022. The following exchange rates applied: Date December 16, 2021

Spot Rate $ 0.00082

Forward Rate to Jan.15 $ 0.00089

December 31, 2021

0.00080

0.00083

January 15, 2022

0.00086

Assuming a forward contract was entered into on December 16 as a fair value hedge, what would be the net foreign exchange gain or loss on Jackson's 2022 related to this transaction? Jackson amortizes forward points using the straight-line method. Ignore present values. A) $600 (gain). B) $600 (loss). C) $700 (gain). D) $700 (loss). E) $0.

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17) Schrute Inc. had a receivable from a foreign customer that is due in the local currency of the customer (stickles). On December 31, 2021, this receivable for §200,000 was correctly included in Schrute’s balance sheet at $167,000. When the receivable was collected on February 15, 2022, the U.S. dollar equivalent was $181,000. In Schrute's 2022 consolidated income statement, how much should have been reported as a foreign exchange gain? A) $0. B) $7,000. C) $19,000. D) $33,000. E) $14,000.

18)

A spot rate may be defined as A) The price a foreign currency can be purchased or sold today. B) The price today at which a foreign currency can be purchased or sold in the future. C) The forecasted future value of a foreign currency. D) The U.S. dollar value of a foreign currency. E) The Euro value of a foreign currency.

19)

The forward rate may be defined as A) The price a foreign currency can be purchased or sold today. B) The price today at which a foreign currency can be purchased or sold in the future. C) The forecasted future value of a foreign currency. D) The U.S. dollar value of a foreign currency. E) The Euro value of a foreign currency.

20)

Which statement is true regarding a foreign currency option?

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A) A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future. B) A foreign currency option gives the holder the obligation to only sell foreign currency in the future. C) A foreign currency option gives the holder the obligation to only buy foreign currency in the future. D) A foreign currency option gives the holder the right but not the obligation to buy or sell foreign currency in the future. E) A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future at the spot rate on the future date.

21) A U.S. company sells merchandise to a foreign company denominated in U.S. dollars. Which of the following statements is true? A) If the foreign currency appreciates, a foreign exchange gain will result. B) If the foreign currency depreciates, a foreign exchange gain will result. C) No foreign exchange gain or loss will result. D) If the foreign currency appreciates, a foreign exchange loss will result. E) If the foreign currency depreciates, a foreign exchange loss will result.

22) A U.S. company sells merchandise to a foreign company denominated in the foreign currency. Which of the following statements is true? A) If the foreign currency appreciates, a foreign exchange gain will result. B) If the foreign currency depreciates, a foreign exchange gain will result. C) No foreign exchange gain or loss will result. D) If the foreign currency appreciates, a foreign exchange loss will result. E) Any gain or loss will be included in comprehensive income.

23) A U.S. company buys merchandise from a foreign company denominated in U.S. dollars. Which of the following statements is true?

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A) If the foreign currency appreciates, a foreign exchange gain will result. B) If the foreign currency depreciates, a foreign exchange gain will result. C) No foreign exchange gain or loss will result. D) If the foreign currency appreciates, a foreign exchange loss will result. E) Any gain or loss will be included in comprehensive income.

24) A U.S. company buys merchandise from a foreign company denominated in the foreign currency. Which of the following statements is true? A) If the foreign currency appreciates, a foreign exchange gain will result. B) If the foreign currency depreciates, a foreign exchange loss will result. C) No foreign exchange gain or loss will result. D) If the foreign currency appreciates, a foreign exchange loss will result. E) Any gain or loss will be included in comprehensive income.

25) U.S. GAAP provides guidance for hedges of all the following sources of foreign exchange risk except A) Recognized foreign currency denominated assets and liabilities. B) Unrecognized foreign currency firm commitments. C) Forecasted foreign currency denominated transactions. D) Net investment in foreign operations. E) Deferred foreign currency gains and losses.

26) All of the following data may be needed to determine the fair value of a forward contract at any point in time except A) The forward rate when the forward contract was entered into. B) The current forward rate for a contract that matures on the same date as the forward contract entered into. C) The future spot rate. D) A discount rate. E) The company's incremental borrowing rate.

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27) A forward contract may be used for which of the following? 1) A fair value hedge of an asset. 2) A cash flow hedge of an asset. 3) A fair value hedge of a liability. 4) A cash flow hedge of a liability. A) 1 and 3 B) 2 and 4 C) 1 and 2 D) 1, 3, and 4 E) 1, 2, 3, and 4

28) A company has a discount on a forward contract for a foreign currency denominated asset. How is the discount recognized over the life of the contract under fair value hedge accounting? A) As a debit to discount expense. B) As a debit to amortization expense. C) As an adjustment to the forward contract. D) As an adjustment to the net foreign exchange gain or loss. E) As an adjustment to cost of goods sold.

29)

Which of the following statements is true concerning hedge accounting?

A) Hedges of foreign currency firm commitments are used for future sales only. B) Hedges of foreign currency firm commitments are used for future purchases only. C) Hedges of foreign currency firm commitments are used for current sales or purchases. D) Hedges of foreign currency firm commitments are used for future sales or purchases. E) Hedges of foreign currency firm commitments are entered into for speculative purposes.

30)

All of the following hedges are used for future purchase/sale transactions except

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A) Forward contracts used as a fair value hedge of a firm commitment. B) Options used as a fair value hedge of a firm commitment. C) Option contract cash flow hedge of a forecasted transaction. D) Forward contract cash flow hedges of a forecasted transaction. E) Forward contracts used to hedge a foreign currency denominated liability.

31) On December 1, 2021, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February 1, 2022. Keenan purchased a foreign currency put option with a strike price of $0.97 (U.S.) on December 1, 2021. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow: Date December 1, 2021

Spot Rate Option Premium $ 0.97 $ 0.05

December 31, 2021

$ 0.95

0.04

February 1, 2022

$ 0.94

0.03

Compute the fair value of the foreign currency option at December 1, 2021. A) $6,000. B) $4,500. C) $3,000. D) $7,500. E) $1,500.

32) On December 1, 2021, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February 1, 2022. Keenan purchased a foreign currency put option with a strike price of $0.97 (U.S.) on December 1, 2021. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow: Date December 1, 2021

Spot Rate Option Premium $ 0.97 $ 0.05

December 31, 2021

$ 0.95

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0.04

February 1, 2022

$ 0.94

0.03

Compute the fair value of the foreign currency option at December 31, 2021. A) $6,000. B) $4,500. C) $3,000. D) $7,500. E) $1,500.

33) On December 1, 2021, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February 1, 2022. Keenan purchased a foreign currency put option with a strike price of $0.97 (U.S.) on December 1, 2021. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow: Date December 1, 2021

Spot Rate Option Premium $ 0.97 $ 0.05

December 31, 2021

$ 0.95

0.04

February 1, 2022

$ 0.94

0.03

Compute the fair value of the foreign currency option at February 1, 2022. A) $6,000. B) $4,500. C) $3,000. D) $7,500. E) $1,500.

34) On December 1, 2021, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February 1, 2022. Keenan purchased a foreign currency put option with a strike price of $0.97 (U.S.) on December 1, 2021. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow: Version 1

Date December 1, 2021

Spot Rate Option Premium $ 0.97 $ 0.05

December 31, 2021

$ 0.95

0.04

February 1, 2022

$ 0.94

0.03

Compute the U.S. dollars received on February 1, 2022. A) $138,000. B) $136,500. C) $145,500. D) $141,000 E) $142,500.

35) Which of the following approaches is used in the United States in accounting for foreign currency transactions? A) One-transaction perspective; defer foreign exchange gains and losses. B) Two-transaction perspective; accrue foreign exchange gains and losses. C) Three-transaction perspective; defer foreign exchange gains and losses. D) One-transaction perspective; accrue foreign exchange gains and losses. E) Two-transaction perspective; defer foreign exchange gains and losses.

36) When a U.S. company purchases parts from a foreign company, which of the following will result in zero foreign exchange gain or loss? A) The transaction is denominated in U.S. dollars. B) The option strike price to sell foreign currency is less than the spot rate of the currency. C) The option strike price to buy foreign currency is less than the spot rate of the currency. D) The foreign currency appreciated in value relative to the U.S. dollar. E) The foreign currency depreciated in value relative to the U.S. dollar.

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37) Alpha, Inc., a U.S. company, had a receivable from a customer that was denominated in Mexican pesos. On December 31, 2020, this receivable for 75,000 pesos was correctly included in Alpha’s balance sheet at $8,000. The receivable was collected on March 2, 2021, when the U.S. equivalent was $6,900. How much foreign exchange gain or loss will Alpha record on the income statement for the year ended December 31, 2021? A) $1,100 loss. B) $1,100 gain. C) $6,900 loss. D) $6,900 gain. E) $8,000 gain.

38) On April 1, 2020, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2021. The dollar value of the loan was as follows: Date April 1, 2020

Amount $ 97,000

December 31, 2020

103,000

April 1, 2021

105,000

How much foreign exchange gain or loss should be included in Shannon’s 2020 income statement? A) $3,000 gain. B) $3,000 loss. C) $6,000 gain. D) $6,000 loss. E) $7,000 gain.

39) On April 1, 2020, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2021. The dollar value of the loan was as follows: Date April 1, 2020

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Amount $ 97,000

December 31, 2020

103,000

April 1, 2021

105,000

How much foreign exchange gain or loss should be included in Shannon’s 2021 income statement? A) $1,000 gain. B) $1,000 loss. C) $2,000 gain. D) $2,000 loss. E) $8,000 loss.

40) On April 1, 2020, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2021. The dollar value of the loan was as follows: Date April 1, 2020

Amount $ 97,000

December 31, 2020

103,000

April 1, 2021

105,000

Angela, Inc., a U.S. company, had a euro receivable from exports to Spain and a British pound payable resulting from imports from England. Angela recorded foreign exchange gain related to both its euro receivable and pound payable. Did the foreign currencies increase or decrease in dollar value from the date of the transaction to the settlement date? A) B) C) D) E)

Euro

Pound

Increase Increase Decrease Decrease No change

Increase Decrease Decrease Increase Decrease

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A) Option A. B) Option B. C) Option C. D) Option D. E) Option E.

41) Frankfurter Company, a U.S. company, had a ruble receivable from exports to Russia and a euro payable resulting from imports from Italy. Frankfurter recorded foreign exchange loss related to both its ruble receivable and euro payable. Did the foreign currencies increase or decrease in dollar value from the date of the transaction to the settlement date? A) B) C) D) E)

Ruble

Euro

Increase Decrease Decrease No change Increase

Decrease Decrease Increase Decrease Increase

A) Option A. B) Option B. C) Option C. D) Option D. E) Option E.

42) Parker Corp., a U.S. company, had the following foreign currency transactions during 2021: (1.) Purchased merchandise from a foreign supplier on July 5, 2021 for the U.S. dollar equivalent of $80,000 and paid the invoice on August 3, 2021 at the U.S. dollar equivalent of $82,000. (2.) On October 1, 2021 borrowed the U.S. dollar equivalent of $872,000 evidenced by a noninterest-bearing note payable in euros on October 1, 2022. The U.S. dollar equivalent of the note amount was $860,000 on December 31, 2021, and $881,000 on October 1, 2022. What amount should be included as a foreign exchange gain or loss from the two transactions for 2021?

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A) $2,000 loss. B) $2,000 gain. C) $10,000 gain. D) $14,000 loss. E) $14,000 gain.

43) Parker Corp., a U.S. company, had the following foreign currency transactions during 2021: (1.) Purchased merchandise from a foreign supplier on July 5, 2021 for the U.S. dollar equivalent of $80,000 and paid the invoice on August 3, 2021 at the U.S. dollar equivalent of $82,000. (2.) On October 1, 2021 borrowed the U.S. dollar equivalent of $872,000 evidenced by a noninterest-bearing note payable in euros on October 1, 2022. The U.S. dollar equivalent of the note amount was $860,000 on December 31, 2021, and $881,000 on October 1, 2022. What amount should be included as a foreign exchange gain or loss from the two transactions for 2022? A) $9,000 loss. B) $9,000 gain. C) $11,000 loss. D) $21,000 loss. E) $21,000 gain.

44) Winston Corp., a U.S. company, had the following foreign currency transactions during 2021: (1.) Purchased merchandise from a foreign supplier on July 16, 2021 for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2021 at the U.S. dollar equivalent of $54,000. (2.) On October 15, 2021 borrowed the U.S. dollar equivalent of $315,000 evidenced by a noninterest-bearing note payable in euros on October 15, 2022. The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2021, and $299,000 on October 15, 2022. What amount should be included as a foreign exchange gain or loss from the two transactions for 2021?

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A) $9,000 loss. B) $9,000 gain. C) $11,000 loss. D) $13,000 gain. E) $14,000 gain.

45) Winston Corp., a U.S. company, had the following foreign currency transactions during 2021: (1.) Purchased merchandise from a foreign supplier on July 16, 2021 for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2021 at the U.S. dollar equivalent of $54,000. (2.) On October 15, 2021 borrowed the U.S. dollar equivalent of $315,000 evidenced by a noninterest-bearing note payable in euros on October 15, 2022. The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2021, and $299,000 on October 15, 2022. What amount should be included as a foreign exchange gain or loss from the two transactions for 2022? A) $1,000 loss. B) $1,000 gain. C) $2,000 loss. D) $4,000 gain. E) $4,000 loss.

46) Williams, Inc., a U.S. company, has a Japanese yen account receivable resulting from an export sale on March 1 to a customer in Japan. The exporter signed a forward contract on March 1 to sell yen and designated it as a cash flow hedge of a recognized receivable. The spot rate was $0.0094, and the forward rate was $0.0095. Which of the following would the U.S. exporter allocate over the life of the forward contract? A) Discount as an increase in net income. B) Premium as an increase in net income. C) Discount as a decrease in net income. D) Premium as a decrease in net income. E) Both discount and premium as increases in net income

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47) Larson Company, a U.S. company, has an India rupee account receivable resulting from an export sale on September 7 to a customer in India. Larson signed a forward contract on September 7 to sell rupees and designated it as a cash flow hedge of a recognized receivable. The spot rate was $0.023, and the forward rate was $0.021. Which of the following did the U.S. exporter allocate over the life of the forward contract? A) Discount as an increase in net income. B) Premium as an increase in net income. C) Discount as a decrease in net income. D) Premium as a decrease in net income. E) Both discount and premium as increases in net income.

48) Primo Inc., a U.S. company, ordered parts costing 100,000 rupee from a foreign supplier on July 7 when the spot rate was $0.025 per rupee. A one-month forward contract was signed on that date to purchase 100,000 rupee at a rate of $0.027. The forward contract is properly designated as a fair value hedge of the 100,000 rupee firm commitment. On August 7, when the parts are received, the spot rate is $0.028. At what amount should the payable be carried on Primo’s books? A) $2,000. B) $2,100. C) $2,500. D) $2,700. E) $2,800.

49) Lawrence Company, a U.S. company, ordered parts costing 1,000,000 Thailand bahts from a foreign supplier on July 7 when the spot rate was $0.025 per baht. A one-month forward contract was signed on that date to purchase 1,000,000 bahts at a rate of $0.027. The forward contract is properly designated as a fair value hedge of the 1,000,000 baht firm commitment. On August 7, when the parts are received, the spot rate is $0.028. What is the amount of accounts payable that will be paid at this date?

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A) $20,000. B) $20,100. C) $25,000. D) $27,000. E) $28,000.

50) On December 1, 2021, Joseph Company, a U.S. company, entered into a three-month forward contract to purchase 50,000 pesos on March 1, 2022, as a fair value hedge of a foreign currency denominated account payable. The following U.S. dollar per peso exchange rates apply: Date

Spot Rate

Forward Rate (Mar. 1, 2022) $ 0.105

December 1, 2021

$ 0.092

December 31, 2021

0.090

0.095

March 1, 2022

0.089

N/A

Which of the following is included in Joseph’s December 31, 2021 balance sheet for the forward contract? A) $5,250 asset. B) $5,250 liability. C) $650 liability. D) $500 asset. E) $500 liability.

51) On April 1, Quality Corporation, a U.S. company, expects to sell merchandise to a French customer in three months, denominating the transaction in euros. On April 1, the spot rate is $1.41 per euro, and Quality enters into a three-month forward contract cash flow hedge to sell 400,000 euros at a rate of $1.36. At the end of three months, the spot rate is $1.37 per euro, and Quality delivers the merchandise, collecting 400,000 euros. What amount will Quality recognize in Sales from these transactions?

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A) $0. B) $400,000. C) $544,000. D) $548,000. E) $564,000.

52) Woolsey Corporation, a U.S. company, expects to sell goods to a British customer at a price of 250,000 pounds, with delivery and payment to be made on October 24, 2021. On July 24, 2021, Woolsey purchased a three-month put option for 250,000 British pounds and designated this option as a cash flow hedge of a forecasted foreign currency transaction expected to be completed in late October, 2021. The following exchange rates apply: Option strike price

2.17

Option cost

$ 4,000

July 24 spot rate

2.17

October 24 spot rate

2.13

October 24 option premium

0.04

What amount will Woolsey record for the forecasted sale on July 24? A) $0. B) $4,000. C) $5,000. D) $10,000. E) $12,000.

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53) Woolsey Corporation, a U.S. company, expects to sell goods to a British customer at a price of 250,000 pounds, with delivery and payment to be made on October 24, 2021. On July 24, 2021, Woolsey purchased a three-month put option for 250,000 British pounds and designated this option as a cash flow hedge of a forecasted foreign currency transaction expected to be completed in late October, 2021. The following exchange rates apply: Option strike price

2.17

Option cost

$ 4,000

July 24 spot rate

2.17

October 24 spot rate

2.13

October 24 option premium

0.04

What amount will Woolsey record in AOCI to close it as an adjustment to net income for the period ended October 31? A) $6,000 debit. B) $6,000 credit. C) $10,000 debit. D) $10,000 credit. E) $14,000 debit.

54) Atherton, Inc., a U.S. company, expects to order goods from a foreign supplier at a price of 100,000 lira, with delivery and payment to be made on April 17. On January 17, Atherton purchased a three-month call option on 100,000 lira and designated this option as a cash flow hedge of a forecasted foreign currency transaction. The following exchange rates apply: Option Strike Price

Option Cost

$ 5,000

January 17 Spot Rate

4.34

April 17 Spot Rate

4.26

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4.34

What amount will Atherton record the Foreign Currency Option on January 17? A) $4,000 B) $4,260 C) $4,340 D) $5,000 E) $5,260

55) On May 1, 2021, Mosby Company received an order to sell a machine to a customer in Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was received on March 1, 2022. On May 1, 2021, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2022 at a price of $190,000. Mosby properly designates the option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had a fair value of $3,200 on December 31, 2021. The following spot exchange rates apply: Date May 1, 2021

Spot Rate $ 0.095

December 31, 2021

$ 0.094

March 1, 2022

$ 0.089

What was the impact on Mosby's 2021 net income as a result of this fair value hedge of a firm commitment? A) $1,800 decrease. B) $2,000 decrease. C) $2,200 decrease. D) $1,800 increase. E) $2,200 increase.

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56) On May 1, 2021, Mosby Company received an order to sell a machine to a customer in Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was received on March 1, 2022. On May 1, 2021, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2022 at a price of $190,000. Mosby properly designates the option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had a fair value of $3,200 on December 31, 2021. The following spot exchange rates apply: Date May 1, 2021

Spot Rate $ 0.095

December 31, 2021

$ 0.094

March 1, 2022

$ 0.089

What was the impact on Mosby's 2022 net income as a result of this firm commitment? A) $1,800 decrease. B) $2,500 increase. C) $2,500 decrease. D) $188,800 increase. E) $188,800 decrease.

57) On May 1, 2021, Mosby Company received an order to sell a machine to a customer in Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was received on March 1, 2022. On May 1, 2021, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2022 at a price of $190,000. Mosby properly designates the option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had a fair value of $3,200 on December 31, 2021. The following spot exchange rates apply: Date May 1, 2021

Spot Rate $ 0.095

December 31, 2021

$ 0.094

March 1, 2022

$ 0.089

What was the overall result of having entered into this hedge of exposure to foreign exchange risk?

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A) $0. B) $9,000 decrease in net income. C) $9,000 increase in net income. D) $2,000 increase in net income. E) $2,000 decrease in net income.

58) On March 1, 2021, Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds. The machine was shipped and payment was received on March 1, 2022. On March 1, 2021, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2022 at a price of $380,000. Mattie properly designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and had a fair value of $2,200 on December 31, 2021. The following spot exchange rates apply: Date March 1, 2021

Spot Rate $ 1.90

December 31, 2021

$ 1.89

March 1, 2022

$ 1.84

What was the net impact on Mattie’s 2021 income as a result of this fair value hedge of a firm commitment? A) $1,800 increase. B) $1,800 decrease. C) $2,200 decrease. D) $2,200 increase. E) $2,000 increase.

59) On March 1, 2021, Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds. The machine was shipped and payment was received on March 1, 2022. On March 1, 2021, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2022 at a price of $380,000. Mattie properly designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and had a fair value of $2,200 on December 31, 2021. The following spot exchange rates apply: Date

Version 1

Spot Rate

March 1, 2021

$ 1.90

December 31, 2021

$ 1.89

March 1, 2022

$ 1.84

What was the net impact on Mattie’s 2022 net income including the fair value hedge of a firm commitment? A) $379,800 decrease. B) $8,400 increase. C) $8,400 decrease. D) $4,600 decrease. E) $379,800 increase.

60) On March 1, 2021, Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds. The machine was shipped and payment was received on March 1, 2022. On March 1, 2021, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2022 at a price of $380,000. Mattie properly designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and had a fair value of $2,200 on December 31, 2021. The following spot exchange rates apply: Date March 1, 2021

Spot Rate $ 1.90

December 31, 2021

$ 1.89

March 1, 2022

$ 1.84

Mattie’s incremental borrowing rate is 12%, and the present value factor for two months at a 12% annual rate is 0.9803. What was the net increase or decrease in cash flow from having purchased the foreign currency option to hedge this exposure to foreign exchange risk?

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A) $0 B) $10,000 increase. C) $10,000 decrease. D) $20,000 increase. E) $20,000 decrease.

61) On October 1, 2021, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2022, at a price of 100,000 British pounds. On October 1, 2021, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2021, the option has a fair value of $1,600. The following spot exchange rates apply: Date October 1, 2021

Spot Rate $ 2.00

December 31, 2021

$ 1.97

February 1, 2022

$ 2.01

What journal entry should Eagle prepare on October 1, 2021? Event A)

General Journal Cash

Debit 1,800

Foreign Currency Option B)

Forward Contract

1,800 1,800

Cash C)

Foreign Currency Option

1,800 1,800

Foreign Exchange Gain or Loss D)

Foreign Exchange Gain or Loss

1,800 1,800

Cash E)

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Foreign Currency Option

Credit

1,800 1,800

Cash

1,800

A) Option A. B) Option B. C) Option C. D) Option D. E) Option E.

62) On October 1, 2021, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2022, at a price of 100,000 British pounds. On October 1, 2021, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2021, the option has a fair value of $1,600. The following spot exchange rates apply: Date October 1, 2021

Spot Rate $ 2.00

December 31, 2021

$ 1.97

February 1, 2022

$ 2.01

What journal entry should Eagle prepare for the option on December 31, 2021? Event A)

General Journal Foreign Currency Option

Debit 200

Cash

Foreign Currency Option

200

Other Comprehensive Income

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Foreign Currency Option

Credit

200

400

Other Comprehensive Income

400

200

Foreign Currency Option

Other Comprehensive Income

200

400

Foreign Currency Option

400

A) Option A. B) Option B. C) Option C. D) Option D. E) Option E.

63) On October 1, 2021, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2022, at a price of 100,000 British pounds. On October 1, 2021, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2021, the option has a fair value of $1,600. The following spot exchange rates apply: Date October 1, 2021

Spot Rate $ 2.00

December 31, 2021

$ 1.97

February 1, 2022

$ 2.01

What is the net impact on Eagle’s 2021 net income as a result of this hedge of a forecasted foreign currency transaction?

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A) $0 no effect on net income B) $200 decrease in net income C) $1,000 decrease in net income D) $1,600 decrease in net income E) $2,000 decrease in net income

64) On October 1, 2021, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2022, at a price of 100,000 British pounds. On October 1, 2021, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2021, the option has a fair value of $1,600. The following spot exchange rates apply: Date October 1, 2021

Spot Rate $ 2.00

December 31, 2021

$ 1.97

February 1, 2022

$ 2.01

What is the balance in the Foreign Currency Option account on December 31, 2021? A) $0 B) $1,000. C) $1,600. D) $1,800. E) $2,400.

65) On October 1, 2021, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2022, at a price of 100,000 British pounds. On October 1, 2021, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2021, the option has a fair value of $1,600. The following spot exchange rates apply: Date

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Spot Rate

October 1, 2021

$ 2.00

December 31, 2021

$ 1.97

February 1, 2022

$ 2.01

What is the amount of Cost of Goods Sold for 2022 as a result of these transactions? Assume the inventory purchased is consumed and becomes part of the cost of goods sold for 2022. A) $200,000. B) $195,000. C) $201,000. D) $202,600. E) $203,000.

66) On October 1, 2021, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2022, at a price of 100,000 British pounds. On October 1, 2021, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2021, the option has a fair value of $1,600. The following spot exchange rates apply: Date October 1, 2021

Spot Rate $ 2.00

December 31, 2021

$ 1.97

February 1, 2022

$ 2.01

What is the 2022 effect on net income as a result of these transactions? A) $195,000 B) $201,600 C) $201,000 D) $202,600 E) $203,000

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67) Which is a true statement regarding the fundamental requirement of accounting for derivatives? A) Derivatives are reported on the balance sheet only as an asset. B) Derivatives are reported on the balance sheet only as a liability. C) Changes in derivative cost basis are recorded in the asset value. D) Changes in derivative fair value are included in comprehensive income. E) Changes in derivative cost basis are recorded in the liability value.

68) Authoritative literature provides guidance for hedges of the following sources of foreign exchange risk. I. Recognized foreign currency denominated assets and liabilities. II. Unrecognized foreign currency firm commitments. III. Forecasted foreign currency denominated transactions. A) I only B) I and II C) II only D) II and III E) I, II, and III

69) All of the following data points are needed to determine the fair value of a forward contract (at any point), except A) The forward rate when the forward contract was entered into. B) The current forward rate for a contract that matures on the same date as the forward contract entered into. C) The forward rate for a contract that has the same duration as the forward contract entered into. D) A discount rate which is typically the company’s incremental borrowing rate. E) A future rate which is typically the company’s incremental borrowing rate.

70)

For speculative derivatives, the change in the fair value of the derivative must be:

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A) Utilized to adjust the derivative asset. B) Recognized immediately as a gain or loss in net income. C) Recognized as a loss in other comprehensive income. D) Recognized as a gain in other comprehensive income. E) Recognized as a gain or loss in net income at a later date.

71)

Which of the following is not a condition of accounting for hedge derivatives?

A) The derivative is minimally effective in offsetting changes in the cash flows or fair value related to the hedged item. B) The derivative is properly documented as a hedge. C) The derivative is used to hedge a cash flow exposure to foreign exchange risk. D) The derivative is highly effective in offsetting changes in the cash flows or fair value related to the hedged item. E) The derivative is used to hedge a fair value exposure to foreign exchange risk.

72) To account for a forward contract cash flow hedge of a foreign currency denominated asset or liability at initiation date requires which of the following? A) 1. Recognize the transaction (sale or purchase) and foreign currency denominated asset or liability2. Recognize option as an asset (purchase price is fair value) B) 1. No entry related to the firm commitment (zero value)2. No entry related to forward contract (zero fair value) C) 1. Recognize the transaction (sale or purchase) and foreign currency denominated asset or liability2. No entry related to forward contract (zero fair value) D) 1. Recognize the transaction (sale or purchase).2. Recognize the option as a liability. E) 1. None. No journal entry is required.

73) To account for a forward contract cash flow hedge of a foreign currency denominated asset or liability at the balance sheet date:

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A) 1. Adjust hedged asset or liability to fair value, with counterpart (change in fair value) reported as foreign exchange gain or loss in net income,2. Adjust forward contract to fair value (either an asset or a liability), with counterpart (change in fair value) reported in OCI,3. Recognize a loss or gain related to the hedging instrument to offset the foreign exchange gain or loss on the hedged item recognized in 1, and4. Recognize a portion of the forward points (discount or premium) in net income with the counterpart reported in OCI. B) 1. Adjust hedged asset or liability to fair value, with counterpart (change in fair value) reported as foreign exchange gain or loss in net income and2. Adjust option to fair value (either an asset or zero value), with counterpart (change in fair value) reported as gain or loss in net income. C) 1. Adjust forward contract to fair value (either an asset or a liability), with counterpart (change in fair value) reported as gain or loss in net income and2. Adjust firm commitment to fair value (based on change in forward rate), with counterpart (change in fair value) reported as gain or loss in net income. D) 1. Adjust hedged asset, with counterpart (change in fair value) reported as a foreign exchange gain in net income and2. Adjust forward contract to fair value (either an asset or a liability), with counterpart (change in fair value) reported as a gain or loss in net income. E) 1. None. No journal entry is required.

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 74) What is the purpose of a hedge of foreign exchange risk?

75)

How does a foreign currency forward contract differ from a foreign currency option?

76)

What factors create a foreign exchange gain?

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77) What happens when a U.S. company purchases goods denominated in a foreign currency and the foreign currency depreciates?

78) What happens when a U.S. company purchases goods denominated in a foreign currency and the foreign currency appreciates?

79) What happens when a U.S. company sells goods denominated in a foreign currency and the foreign currency depreciates?

80) What happens when a U.S. company sells goods denominated in a foreign currency and the foreign currency appreciates?

81)

What is meant by the terms direct quote and indirect quote?

82)

How can an import purchase result in an exposure to foreign exchange risk for the buyer?

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83)

How can an export sale result in an exposure to foreign exchange risk for the seller?

84) Gaw Produce Company purchased inventory from a Japanese company on December 18, 2021. Payment of 4,000,000 yen (¥) was due on January 18, 2022. Exchange rates between the dollar and the yen were as follows: Date December 18, 2021

Exchange Rate ¥1 = $0.0080

December 31, 2021

¥1 = $0.0082

January 18, 2022

¥1 = $0.0083

Required: Prepare all journal entries for Gaw Produce Co. in connection with the purchase and payment.

85) Old Colonial Corp. (a U.S. company) made a sale to a foreign customer on September 15, 2021, for 100,000 stickles. Payment was received on October 15, 2021. The following exchange rates applied: Date September 15, 2021

Exchange Rate §1 = $0.48

September 30, 2021

§1 = $0.50

October 15, 2021

§1 = $0.44

Required: Prepare all journal entries for Old Colonial Corp. in connection with this sale assuming that the company closes its books on September 30 to prepare interim financial statements.

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86) Coyote Corp. (a U.S. company in Texas) had the following transactions in Mexican pesos during 2021: Mar. 1 Bought inventory costing 60,000 pesos on credit. May 1 Sold 60% of the inventory for 54,000 pesos on credit. Aug. 1 Collected 48,000 pesos from customers Sept. 1 Paid 36,000 pesos to creditors

The appropriate exchange rates during 2021 were as follows: Date March 1, 2021

Exchange Rate $0.20 = 1 peso

May 1, 2021

$0.22 = 1 peso

August 1, 2021

$0.23 = 1 peso

September 1, 2021

$0.24 = 1 peso

December 31, 2021

$0.25 = 1 peso

Prepare all journal entries in U.S. dollars along with any December 31, 2021 adjusting entries. Coyote uses a perpetual inventory system.

87) Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2021: Mar. 1 Bought inventory costing 60,000 pesos on credit. May 1 Sold 60% of the inventory for 54,000 pesos on credit. Aug. 1 Collected 48,000 pesos from customers

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Sept. 1 Paid 36,000 pesos to creditors

The appropriate exchange rates during 2021 were as follows: Date March 1, 2021

Exchange Rate $0.20 = 1 peso

May 1, 2021

$0.22 = 1 peso

August 1, 2021

$0.23 = 1 peso

September 1, 2021

$0.24 = 1 peso

December 31, 2021

$0.25 = 1 peso

What amount will Coyote Corp. report in its 2021 balance sheet for Inventory?

88) Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2021: Mar. 1 Bought inventory costing 60,000 pesos on credit. May 1 Sold 60% of the inventory for 54,000 pesos on credit. Aug. 1 Collected 48,000 pesos from customers Sept. 1 Paid 36,000 pesos to creditors

The appropriate exchange rates during 2021 were as follows: Date March 1, 2021

Exchange Rate $0.20 = 1 peso

May 1, 2021

$0.22 = 1 peso

August 1, 2021

$0.23 = 1 peso

September 1, 2021

$0.24 = 1 peso

December 31, 2021

$0.25 = 1 peso

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What amount will Coyote Corp. report in its 2021 income statement for Cost of goods sold?

89) Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2021: Mar. 1 Bought inventory costing 60,000 pesos on credit. May 1 Sold 60% of the inventory for 54,000 pesos on credit. Aug. 1 Collected 48,000 pesos from customers Sept. 1 Paid 36,000 pesos to creditors

The appropriate exchange rates during 2021 were as follows: Date March 1, 2021

Exchange Rate $0.20 = 1 peso

May 1, 2021

$0.22 = 1 peso

August 1, 2021

$0.23 = 1 peso

September 1, 2021

$0.24 = 1 peso

December 31, 2021

$0.25 = 1 peso

What amount will Coyote Corp. report in its 2021 income statement for Sales?

90) Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2021: Mar. 1 Bought inventory costing 60,000 pesos on credit. May 1 Sold 60% of the inventory for 54,000 pesos on credit.

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Aug. 1 Collected 48,000 pesos from customers Sept. 1 Paid 36,000 pesos to creditors

The appropriate exchange rates during 2021 were as follows: Date March 1, 2021

Exchange Rate $0.20 = 1 peso

May 1, 2021

$0.22 = 1 peso

August 1, 2021

$0.23 = 1 peso

September 1, 2021

$0.24 = 1 peso

December 31, 2021

$0.25 = 1 peso

What amount will Coyote Corp. report in its 2021 balance sheet for Accounts receivable?

91) Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2021: Mar. 1 Bought inventory costing 60,000 pesos on credit. May 1 Sold 60% of the inventory for 54,000 pesos on credit. Aug. 1 Collected 48,000 pesos from customers Sept. 1 Paid 36,000 pesos to creditors

The appropriate exchange rates during 2021 were as follows: Date March 1, 2021

Exchange Rate $0.20 = 1 peso

May 1, 2021

$0.22 = 1 peso

August 1, 2021

$0.23 = 1 peso

September 1, 2021

$0.24 = 1 peso

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December 31, 2021

$0.25 = 1 peso

What amount will Coyote Corp. report in its 2021 balance sheet for Accounts payable?

92) Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2021: Mar. 1 Bought inventory costing 60,000 pesos on credit. May 1 Sold 60% of the inventory for 54,000 pesos on credit. Aug. 1 Collected 48,000 pesos from customers Sept. 1 Paid 36,000 pesos to creditors

The appropriate exchange rates during 2021 were as follows: Date March 1, 2021

Exchange Rate $0.20 = 1 peso

May 1, 2021

$0.22 = 1 peso

August 1, 2021

$0.23 = 1 peso

September 1, 2021

$0.24 = 1 peso

December 31, 2021

$0.25 = 1 peso

The beginning balance of cash was 50,000 pesos on January 1, 2021, translated at 1 peso = $0.18. What amount will Coyote Corp. report in its 2021 balance sheet for Cash?

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93) On December 1, 2021, King Co. sold inventory to a customer in a foreign country. King agreed to accept 96,000 local currency units (LCU) in full payment for this inventory. Payment was to be made on February 1, 2022. On the date of sale, King entered into a forward exchange contract wherein 96,000 LCU would be delivered to a currency broker in two months. The twomonth forward exchange rate on that date was 1 LCU = $0.30. Any contract discount or premium is amortized using the straight-line method. The spot rates and forward rates on various dates were as follows: Date December 1, 2021

Rate Description Spot Rate 2-Month Forward Rate

December 31, 2021

Spot Rate 1-Month Forward Rate

February 1, 2022

Spot Rate

Exchange Rate $0.32 = 1 LCU $0.30 = 1 LCU $0.29 = 1 LCU $0.28 = 1 LCU $0.27 = 1 LCU

(A.) Assume this hedge is designated as a cash flow hedge. Prepare the journal entries relating to the transaction and the forward contract. (B.) Compute the effect on 2021 net income. (C.) Compute the effect on 2022 net income.

94) On December 1, 2021, King Co. sold inventory to a customer in a foreign country. King agreed to accept 96,000 local currency units (LCU) in full payment for this inventory. Payment was to be made on February 1, 2022. On the date of sale, King entered into a forward exchange contract wherein 96,000 LCU would be delivered to a currency broker in two months. The twomonth forward exchange rate on that date was 1 LCU = $0.30. Any contract discount or premium is amortized using the straight-line method. The spot rates and forward rates on various dates were as follows: Date December 1, 2021

Rate Description Spot Rate 2-Month Forward Rate

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Exchange Rate $0.32 = 1 LCU $0.30 = 1 LCU

December 31, 2021

Spot Rate 1-Month Forward Rate

February 1, 2022

Spot Rate

$0.29 = 1 LCU $0.28 = 1 LCU $0.27 = 1 LCU

(A.) Assume this hedge is designated as a fair value hedge. Prepare the journal entries relating to the transaction and the forward contract. (B.) Compute the effect on 2021 net income. (C.) Compute the effect on 2022 net income.

95) On October 1, 2021, Jarvis Co. sold inventory to a customer in a foreign country, denominated in 100,000 local currency units (LCU). Collection is expected in four months. On October 1, 2021, a forward exchange contract was acquired whereby Jarvis Co. was to pay 100,000 LCU in four months (on February 1, 2022) and receive $78,000 in U.S. dollars. The spot and forward rates for the LCU were as follows: Date October 1, 2021

Rate Description Spot Rate

December 31, 2021

Spot Rate 1-Month Forward Rate

February 1, 2022

Spot Rate

Exchange Rate $0.83 = 1 LCU $0.85 = 1 LCU $0.80 = 1 LCU $0.86 = 1 LCU

Any discount or premium on the forward contract is amortized using the straight-line method. Assuming this is a cash flow hedge; prepare journal entries for this sales transaction and forward contract.

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96) On October 1, 2021, Jarvis Co. sold inventory to a customer in a foreign country, denominated in 100,000 local currency units (LCU). Collection is expected in four months. On October 1, 2021, a forward exchange contract was acquired whereby Jarvis Co. was to pay 100,000 LCU in four months (on February 1, 2022) and receive $78,000 in U.S. dollars. The spot and forward rates for the LCU were as follows: Date October 1, 2021

Rate Description Spot Rate

December 31, 2021

Spot Rate 1-Month Forward Rate

February 1, 2022

Spot Rate

Exchange Rate $0.83 = 1 LCU $0.85 = 1 LCU $0.80 = 1 LCU $0.86 = 1 LCU

The company's borrowing rate is 12%. The present value factor for one month is 0.9901. Any discount or premium on the contract is amortized using the straight-line method. Assuming this is a fair value hedge; prepare journal entries for this sales transaction and forward contract.

97) On October 31, 2020, Darling Company negotiated a two-year 100,000-franc loan from a foreign bank at an interest rate of 3% per year. Interest payments are made annually on October 31, and the principal will be repaid on October 31, 2022. Darling prepares U.S.-dollar financial statements and has a December 31 year-end. Prepare all journal entries related to this foreign currency borrowing assuming the following: Franc Rate October 31, 2020

0.50

December 31, 2020

0.52

October 31, 2021

0.60

December 31, 2021

0.62

October 31, 2022

0.75

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98) For each of the following situations, select the best answer concerning accounting for foreign currency transactions: (G) Results in a foreign exchange gain. (L) Results in a foreign exchange loss. (N) No foreign exchange gain or loss. _____1. Export sale by a U.S. company denominated in dollars, foreign currency of buyer appreciates. _____2. Export sale by a U.S. company denominated in foreign currency, foreign currency of buyer appreciates. _____3. Import purchase by a U.S. company denominated in foreign currency, foreign currency of seller appreciates. _____4. Import purchase by a U.S. company denominated in dollars, foreign currency of seller appreciates. _____5. Import purchase by a U.S. company denominated in foreign currency, foreign currency of seller depreciates. _____6. Import purchase by a U.S. company denominated in dollars, foreign currency of seller depreciates. _____7. Export sale by a U.S. company denominated in dollars, foreign currency of buyer depreciates. _____8. Export sale by a U.S. company denominated in foreign currency, foreign currency of buyer depreciates.

99) Potter Corp. (a U.S. company in Colorado) had the following transactions in Thai baht during 2021: Apr. 1 Bought inventory costing 150,000 Thai baht on credit. May 1 Sold 70% of the inventory for 110,000 Thai baht on credit. Aug. 1 Collected 40,000 Thai baht from customers.

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Oct. 1 Paid 100,000 Thai baht to creditors.

The appropriate exchange rates during 2021 were as follows: Date April 1, 2021

Exchange Rate $0.036 = 1 baht

May 1, 2021

$0.026 = 1 baht

August 1, 2021

$0.031 = 1 baht

October 1, 2021

$0.034 = 1 baht

December 31, 2021

$0.032 = 1 baht

Prepare all journal entries in U.S. dollars along with any December 31, 2021 adjusting entries. Potter uses a perpetual inventory system.

100) Potter Corp. (a U.S. company in Colorado) had the following series of transactions in a foreign country during 2021: Apr. 1 Bought inventory costing 150,000 Thai baht on credit. May 1 Sold 70% of the inventory for 110,000 Thai baht on credit. Aug. 1 Collected 40,000 Thai baht from customers. Oct. 1 Paid 100,000 Thai baht to creditors.

The appropriate exchange rates during 2021 were as follows: Date April 1, 2021

Exchange Rate $0.036 = 1 baht

May 1, 2021

$0.026 = 1 baht

August 1, 2021

$0.031 = 1 baht

October 1, 2021

$0.034 = 1 baht

December 31, 2021

$0.032 = 1 baht

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What amount will Potter Corp. report in its 2021 balance sheet for Inventory?

101) Potter Corp. (a U.S. company in Colorado) had the following series of transactions in a foreign country during 2021: Apr. 1 Bought inventory costing 150,000 Thai baht on credit. May 1 Sold 70% of the inventory for 110,000 Thai baht on credit. Aug. 1 Collected 40,000 Thai baht from customers. Oct. 1 Paid 100,000 Thai baht to creditors.

The appropriate exchange rates during 2021 were as follows: Date April 1, 2021

Exchange Rate $0.036 = 1 baht

May 1, 2021

$0.026 = 1 baht

August 1, 2021

$0.031 = 1 baht

October 1, 2021

$0.034 = 1 baht

December 31, 2021

$0.032 = 1 baht

What amount will Potter Corp. report in its 2021 income statement for Cost of goods sold?

102) Potter Corp. (a U.S. company in Colorado) had the following series of transactions in a foreign country during 2021: Apr. 1 Bought inventory costing 150,000 Thai baht on credit. May 1 Sold 70% of the inventory for 110,000 Thai baht on credit.

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Aug. 1 Collected 40,000 Thai baht from customers. Oct. 1 Paid 100,000 Thai baht to creditors.

The appropriate exchange rates during 2021 were as follows: Date April 1, 2021

Exchange Rate $0.036 = 1 baht

May 1, 2021

$0.026 = 1 baht

August 1, 2021

$0.031 = 1 baht

October 1, 2021

$0.034 = 1 baht

December 31, 2021

$0.032 = 1 baht

What amount will Potter Corp. report in its 2021 income statement for Sales?

103) Potter Corp. (a U.S. company in Colorado) had the following series of transactions in a foreign country during 2021: Apr. 1 Bought inventory costing 150,000 Thai baht on credit. May 1 Sold 70% of the inventory for 110,000 Thai baht on credit. Aug. 1 Collected 40,000 Thai baht from customers. Oct. 1 Paid 100,000 Thai baht to creditors.

The appropriate exchange rates during 2021 were as follows: Date April 1, 2021

Exchange Rate $0.036 = 1 baht

May 1, 2021

$0.026 = 1 baht

August 1, 2021

$0.031 = 1 baht

October 1, 2021

$0.034 = 1 baht

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December 31, 2021

$0.032 = 1 baht

What amount will Potter Corp. report in its 2021 balance sheet for Accounts receivable?

104) Potter Corp. (a U.S. company in Colorado) had the following series of transactions in a foreign country during 2021: Apr. 1 Bought inventory costing 150,000 Thai baht on credit. May 1 Sold 70% of the inventory for 110,000 Thai baht on credit. Aug. 1 Collected 40,000 Thai baht from customers. Oct. 1 Paid 100,000 Thai baht to creditors.

The appropriate exchange rates during 2021 were as follows: Date April 1, 2021

Exchange Rate $0.036 = 1 baht

May 1, 2021

$0.026 = 1 baht

August 1, 2021

$0.031 = 1 baht

October 1, 2021

$0.034 = 1 baht

December 31, 2021

$0.032 = 1 baht

What amount will Potter Corp. report in its 2021 balance sheet for Accounts payable?

105) Potter Corp. (a U.S. company in Colorado) had the following series of transactions in a foreign country during 2021: Apr. 1 Bought inventory costing 150,000 Thai baht on credit.

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May 1 Sold 70% of the inventory for 110,000 Thai baht on credit. Aug. 1 Collected 40,000 Thai baht from customers. Oct. 1 Paid 100,000 Thai baht to creditors.

The appropriate exchange rates during 2021 were as follows: Date April 1, 2021

Exchange Rate $0.036 = 1 baht

May 1, 2021

$0.026 = 1 baht

August 1, 2021

$0.031 = 1 baht

October 1, 2021

$0.034 = 1 baht

December 31, 2021

$0.032 = 1 baht

The beginning balance of cash was 250,000 Thai baht on January 1, 2021, converted at the spot rate of ฿1 = $0.041. What amount will Potter Corp. report in its 2021 balance sheet for Cash?

ESSAY. Write your answer in the space provided or on a separate sheet of paper. 106) Yelton Co. just sold inventory for 80,000 euros, which Yelton will collect in sixty days. Briefly describe a hedging transaction Yelton could engage in to reduce its risk of unfavorable exchange rates.

107)

Where can you find exchange rates between the U.S. dollar and most foreign currencies?

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108)

What is meant by the spot rate?

109)

How is the fair value of a Forward Contract determined by U.S. GAAP?

110) What are the two separate transactions that require recording under the two-transaction perspective?

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Answer Key Test name: Chap 07_8e 1) D $1.45 − $1.56 = ($0.11) × £40,000 = ($4,400) Loss 2) D December 1st Spot Rate $1.831 × £12,000 = $21,972 Sales Revenue 3) E $1.976 − $1.831 = $0.145 × £12,000 = $1,740 gain 4) B $1.768 − $1.976 = ($0.208) × £12,000 = ($2,496) Loss 5) A $1.16 × FC 1,500,000 = $1,740,000 A/P 6) C $1.18 − $1.16 = ($0.02) × FC 1,500,000 = ($30,000) Loss 7) E $1.12 × FC 1,500,000 = $1,680,000 A/P 8) B Cagle will make no formal entry for the forward contract because it is an executory contract (no cash changes hands) and has a fair value of zero. 9) E Curtis will make no formal entry for the forward contract because it is an executory contract (no cash changes hands) and has a fair value of zero. 10) B $0.36 × §120,000 = $43,200 11) D $0.00080 − $0.00082 = ($0.00002) × FC 20,000,000 = ($400) Loss 12) B $0.00089 − $0.00082 = $0.00007 × FC 20,000,000 = $1,400 Premium Version 1

13) C $0.00089 − $0.00083 = $0.00006 × FC 20,000,000 = $1,200 14) A 15) E [($0.00082 − $0.00089) × FC 20,000,000] = $1,400 Premium. $1,400 / 1 month × ½ month = $700 Amortization of premium for 2021. The net effect will be a Foreign exchange gain equal to the amount of premium amortization for the period: [($0.00089 − $0.00083) × FC 20,000,000] = $1,200 Foreign exchange gain to record forward contract − [($0.00082 − $0.00082) × FC 20,000,000] = $400 Foreign exchange loss to adjust Accounts receivable − $100 Foreign exchange loss recognized to adjust amount to reflect current period’s amortization = $700 Net foreign exchange gain. 16) C The net effect will be a Foreign exchange gain equal to the amount of premium amortization for the period: [($0.00082 − $0.00089) × FC 20,000,000] = $1,400 Premium. $1,400 / 1 month × ½ month = $700 Amortization of premium for 2022. [($0.00086 − $0.00080) × FC 20,000,000] = $1,200 Foreign exchange gain to adjust Accounts receivable − [($0.00083 − $0.00086) × FC 20,000,000] = $600 Foreign exchange loss to adjust value of forward contract + $100 Foreign exchange gain to transfer deferred AOCI to net income and reflect current period’s amortization of forward contract premium = $700 Net foreign exchange gain. 17) E $181,000 − $167,000 = $14,000 Gain 18) A 19) B 20) D 21) C Version 1

22) A 23) C 24) D 25) E 26) C 27) E 28) D 29) D 30) E 31) D $0.05 × CAD 150,000 = $7,500 32) A $0.04 × CAD 150,000 = $6,000 33) B $0.03 × CAD 150,000 = $4,500 34) C Strike Price $0.97 × CAD 150,000 = $145,500 35) B 36) A 37) A $6,900 − $8,000 = ($1,100) Loss 38) D $97,000 − $103,000 = ($6,000) Loss 39) D $103,000 − $105,000 = ($2,000) Loss 40) B 41) C 42) C [$80,000 − $82,000 = ($2,000) Loss] + [$872,000 − $860,000 = $12,000 Gain] = $10,000 Gain Version 1

43) D $860,000 − $881,000 = ($21,000) Loss 44) D [$47,000 − $54,000 = ($7,000) Loss] + [$315,000 − $295,000 = $20,000 Gain] = $13,000 Gain 45) E $295,000 − $299,000 = ($4,000) Loss 46) B 47) C 48) E $0.028 × ₹100,000 = $2,800 49) E $0.028 × ฿1,000,000 = $28,000 50) E $0.105 − $0.095 = ($0.010) × MP 50,000 = ($500.00) Liability 51) D [€400,000 × $1.36 = $544,000] (Alternate solution: [Recorded Sales (€400,000 × 1.37) − Amortized discount ((1.41 − 1.36) × €400,000) + Adjustment to close AOCI (20,000 − 4,000) = $544,000)] 52) A There is no entry to record the forecasted sale. 53) C $2.17 − $2.13 = $0.04 × £250,000 = $10,000 debit 54) D Cost of the Option Contract $5,000 55) A

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$0.094 − $0.095 = ($0.001) × MP 2,000,000 = ($2,000) Loss on Firm Commitment $3,200 − $3,000 = $200 Option Value Increase ($2,000) Loss on Firm Commitment + $200 Option Value Increase = ($1,800) Reduction in 2021 Net Income 56) D [$190,000 Sales Revenue] − [$3,000 Cost of Option] + [$1,800 Adjustment from 2021 Net Income] = $188,800 Increase to 2022 Net Income 57) C $0.095 − $0.089 = $0.006 × MP 2,000,000 = $12,000 Gain from Hedge − $3,000 Cost of Option = $9,000 Net Increase in Net Income. 58) B $1.89 − $1.90 = ($0.01) × £200,000 = ($2,000) Loss on Firm Commitment $2,200 − $2,000 = $200 Option Value Increase ($2,000) Loss on Firm Commitment + $200 Option Value Increase = ($1,800) Reduction in 2021 Net Income 59) E [$380,000 Sales Revenue] − [$2,000 Cost of Option] + [$1,800 Adjustment from 2021 Net Income] = $379,800 Increase to 2022 Net Income 60) B $1.90 − $1.84 = $0.06 × £200,000 = $12,000 Cash Flow from Hedge − $2,000 Cost of Option = $10,000 Increase in Cash Flow 61) E 62) D 63) B The decrease in the time value of the option. 64) C Version 1

The fair value of the option on that date. 65) C £100,000 × $2.00 Strike Price = $200,000 + $1,000 AOCI Adjustment = $201,000 COGS 66) B [£100,000 × $2.00 Strike Price = $200,000] + [$1,600 Fair Value of the Option in 2022] = $201,600 67) D 68) E 69) C 70) B 71) A 72) C 73) A 74) Hedge of foreign exchange risk is a strategy to limit exposure to the effect of unfavorable changes in the value of foreign currencies that are caused by fluctuations in exchange rates. In addition to avoiding possible losses, companies hedge foreign currency transactions and commitments to introduce an element of certainty into the future cash flows resulting from foreign currency activities by establishing a price today at which foreign currency can be sold or purchased at a future date. 75) A foreign currency forward contract obligates the parties to deliver one currency in exchange for another at a specified future date. On the other hand, the owner of a foreign currency option can choose whether to exercise the option and exchange one currency for another or not. 76) Foreign exchange gains and losses are created by two factors: having foreign currency exposures (foreign currency receivables and payables) and changes in exchange rates. 77) The event results in a foreign exchange gain. Version 1

78) The event results in a foreign exchange loss. 79) The event results in a foreign exchange loss. 80) The event results in a foreign exchange gain. 81) A direct quote is an exchange rate that indicates the number of U.S. dollars needed to purchase one unit of foreign currency. An indirect quote is an exchange rate that indicates the number of foreign currency units needed to purchase one U.S. dollar. 82) Exposure to foreign exchange risk occurs in the form of a transaction exposure when the importer is required to pay in foreign currency and is allowed to pay sometime after the purchase has been made. The importer is exposed to the risk that the foreign currency might appreciate between the date of purchase and the date of payment, thereby increasing the U.S. dollars that have to be paid for the imported goods. 83) Exposure to foreign exchange risk occurs in the form of a transaction exposure when the exporter allows the buyer to pay in a foreign currency and allows the buyer to pay sometime after the sale has been made. The exporter is exposed to the risk that the foreign currency might depreciate between the date of sale and the date payment is received, thereby decreasing the U.S. dollars ultimately collected. 84) Date 2021

General Journal

Dec. 18

Inventory (¥4,000,000 × $0.0080)

Debit

32,000

Accounts payable

Foreign exchange gain or loss Accounts payable

Version 1

Credit

32,000

800 800

(¥4,000,000 × $0.0080) − (¥4,000,000 × $0.0082) 2022 Jan. 18

Foreign exchange gain or loss

400

Accounts payable

400

(¥4,000,000 × $0.0082) − (¥4,000,000 × $0.0083)

Accounts payable

33,200

Cash (¥4,000,000 × $0.0083)

33,200

85) Date 2021 Sept. 15

General Journal

Debit

Accounts receivable (§100,000 × $0.48)

48,000

Sales

Accounts receivable

Credit

48,000

2,000

Foreign exchange gain

2,000

[§100,000 × ($0.50 − $0.48)]

Oct. 15

Foreign exchange gain or loss

6,000

Accounts Receivable

6,000

[§100,000 × ($0.50 − $0.44)]

Oct. 15

Version 1

Cash [§100,000 × ($0.50 − $0.44)]

44,000

Accounts receivable

44,000

86) Date 2021 March 1

General Journal

Debit

Inventory (60,000p × $0.20)

12,000

Accounts payable

May 1

Accounts receivable (54,000p × $0.22)

12,000

11,880

Sales

Cost of goods sold (36,000p × $0.20)

11,880

7,200

Inventory

August 1

Cash (48,000p × $0.23)

7,200

11,040

Accounts receivable (48,000p × $0.22)

10,560

Foreign exchange gain or loss

Sept. 1

480

Accounts payable (36,000p × $0.20)

7,200

Foreign exchange gain or loss

1,440

Cash (36,000p × $0.24)

Dec. 31

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Foreign exchange gain or loss [24,000p × ($0.20 - $0.25)] Accounts payable

Credit

8,640

1,200 1,200

Dec. 31

Accounts receivable

180

Foreign exchange gain or loss [6,000p × ($0.22 - $0.25)]

180

87) Inventory (60,000 pesos × $0.20 × 40%): $ 4,800 88) Cost of goods sold (60,000 pesos × $0.20 × 60%) = $7,200 89) Sales (54,000 pesos × $0.22) = $11,880 90) Accounts receivable [(54,000 − 48,000 pesos) × $0.25] = $1,500 91) Accounts payable [(60,000 − 36,000 pesos) × $0.25] = $6,000 92) Cash [(50,000 pesos × $0.18) + (48,000 pesos × $0.23) − (36,000 pesos × $0.24)] = $11,400 93) Date 12/01/21

Spot $ 0.32

Value $ 30,720

Change

Forward $ 0.30

Change

12/31/21

$ 0.29

$ 27,840

− $ 2,880

$ 0.28

+ $ 1,9201

02/01/22

$ 0.27

$ 25,920

− $ 1,920

$ 0.27

9602

A. Date 12/01/21

General Journal Accounts receivable

Debit 30,720

Sales

12/31/21

Foreign exchange gain or loss

30,720

2,880

Accounts receivable

Forward contract

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Credit

2,880

1,920

OCI

1,920

2,880

Foreign exchange gain or loss

2,880

9603

OCI

960

3[96,000

× ($0.32 - $0.30) ÷ 2] for 1st of 2 mos.

02/01/22

Foreign exchange gain or loss

1,920

Accounts receivable

Forward contract

1,920

960

OCI

960

1,920

Foreign exchange gain or loss

1,920

9604

OCI

960

4[96,000

× ($0.32 − $0.30) ÷ 2] for 2nd of 2 mos.

Foreign currency

Version 1

25,920

Accounts receivable

Cash

25,920

28,800

Forward contract

2,880

Foreign currency

25,920

B. Sales

$ 30,720

Foreign exchange gain or loss Increase in net income

(960 ) $ 29,760

C. Foreign exchange gain or loss Decrease in net income

$ (960 ) $ (960 )

94) A. Date 12/01/21

General Journal Accounts receivable

Debit 30,720

Sales

12/31/21

Foreign exchange gain or loss Accounts receivable

Version 1

Credit

30,720

2,880 2,880

Forward contract

1,920

Foreign exchange gain or loss

02/01/22

1,920

Foreign exchange gain or loss

1,920

Accounts receivable

1,920

Forward contract

960

Foreign exchange gain or loss

960

Foreign currency

25,920

Accounts receivable

25,920

Cash

28,800

Forward contract

2,880

Foreign currency

25,920

B. Sales

Foreign Exchange gain or loss Increase in net income

30,720 (960 )

29,760

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Foreign Exchange gain or loss

$ (960 )

Decrease in net income

$ (960 )

95) Date

Spot

Fair Value

10/01/21

$ 0.83

$ 83,000

12/31/21

$ 0.85

02/01/22

$ 0.86

FV Change

Forward to 02/01/22 $ 0.78

Forward Change

$ 85,000

$ 2,000

0.80

(2,000 )1

$ 86,000

$ 1,000

0.86

(6,000 )2

Debit 83,000

Credit

[($0.80 − $0.78) × 100,000] = $2,000 2 [($0.78 − $0.86) × 100,000] − $2000 = $6,000

Date 10/01/21

General Journal Accounts receivable Sales

12/31/21

Accounts receivable

83,000

2,000

Foreign exchange gain or loss

OCI

2,000

Forward contract

Foreign exchange gain or loss OCI

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2,000

2,000 2,000

Foreign exchange gain or loss

3,7503

OCI

3,750

3[100,000

× ($0.83 − $0.78) × 3/4] for 3 of 4 months

02/01/22

Accounts receivable

1,000

Foreign exchange gain or loss

OCI

1,000

6,000

Forward contract

Foreign exchange gain or loss

6,000

1,000

OCI

Foreign exchange gain or loss

1,000

1,2504

OCI

1,250

4[100,000

× ($0.83 - $0.78) × 1/4] for 1 of 4 months

Foreign currency

86,000

Accounts receivable

Cash

78,000

Forward contract

8,000

Foreign currency

Version 1

86,000

96) Date 10/1/21

Spot $ 0.83

Value $ 83,000

Change

Forward $ 0.78

Adjustment

12/31/21

$ 0.85

$ 85,000

+ $ 2,000

$ 0.80

− $ 1,980 1

2/1/22

$ 0.86

$ 86,000

+ $ 1,000

$ 0.86

− $ 6,020 2

[($0.80 − $0.78) 100,000 LCU] × 0.9901 = $1,980 2 [($0.78 − $0.86) 100,000] LCU − $1,980 = $6,020

Date 10/01/21

General Journal Accounts receivable

Debit 83,000

Sales

12/31/21

Accounts receivable

83,000

2,000

Foreign exchange gain

Loss on forward contract

2,000

1,980

Forward contract

2/1/22

Accounts receivable

1,980

1,000

Foreign exchange gain

Loss on forward contract Forward contract

Version 1

Credit

1,000

6,020 6,020

Foreign currency

86,000

Accounts receivable

Cash

86,000

78,000

Forward contract

8,000

Foreign currency

86,000

97) In US dollars: Date 10/31/20

General Journal Cash

Debit 50,000

Note payable (franc) [100,000 × $0.50]

Credit

50,000

To record the note and conversion of 100,000 francs into $ at the spot rate

12/31/20

Interest expense

260

Interest payable (franc)

260

[100,000 × 3% × 2/12 = 500 francs × $0.52 spot rate] To accrue interest for the period 10/31/20 − 12/31/20.

Foreign exchange gain or loss Note payable (franc) [100,000 × ($0.52 – $0.50)] To revalue the note payable at the spot rate of $0.52 and record a foreign exchange loss.

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2,000 2,000

10/31/21

Interest expense [2,500 francs × $0.60]

1,500

Interest payable (franc)

260

Foreign exchange gain or loss [500 francs × ($0.60 – $0.52)] Cash [3,000 francs × $0.60]

40 1,800

To record the first annual interest payment, record interest expense for the period 1/1 – 10/31/21, and record a foreign exchange loss on the interest payable accrued at 12/31/20.

12/31/21

Interest expense

310

Interest payable (franc) [500 francs × $0.62] To accrue interest for the period 10/31 − 12/31/21.

Foreign exchange gain or loss

310

10,000

Note payable (franc) [100,000 × ($0.62 – $0.52)] To revalue the note payable at the spot rate of $0.62 and record a foreign exchange loss.

Date 10/31/22

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General Journal Interest expense [2,500 francs × $0.75]

10,000

Debit 1,875

Interest payable (franc)

310

Foreign exchange gain or loss [500 francs × ($0.75 – $0.62)] Cash [3,000 francs × $0.75]

Credit

2,250

To record the second annual interest payment, record interest expense for the period 1/1 – 10/31/22, and record a foreign exchange loss on the interest payable accrued at 12/31/21.

Note payable (franc)

62,000

Foreign exchange gain or loss

13,000

Cash [100,000 francs × $0.75]

75,000

To record payment of the 100,000 franc note.

98) (1) N; (2) G; (3) L ; (4) N; (5) G; (6) N; (7) N; (8) L 99) Date 2021 April 1

General Journal

Inventory (฿150,000 × $0.036)

Debit

5,400

Accounts payable

May 1

Accounts receivable (฿110,000 × $0.026)

5,400

2,860

Sales

Cost of goods sold [(฿150,000 × 70%) × $0.036] Inventory

Version 1

Credit

2,860

3,780 3,780

August 1

Cash (฿40,000 × $0.031)

1,240 1,040

Accounts receivable (฿40,000 × $0.026) Foreign Exchange Gain or Loss

October 1

Accounts payable (฿100,000 × $0.036)

200

3,600 3,400

Cash (฿100,000 × $0.034) Foreign Exchange Gain

Dec. 31

Accounts payable

200

200 200

Foreign Exchange Gain or Loss [฿50,000 × ($0.032 − $0.036)]

Dec. 31

Accounts receivable

420 420

Foreign Exchange Gain or Loss [฿70,000 × ($0.032 − $0.026)]

100) Inventory (฿150,000 × $0.036 × 30%) = $1,620 101) Cost of goods sold (฿150,000 × $0.036 × 70%) = $3,780 102) Sales (฿110,000 × $0.026) = $2,860 103) Accounts receivable [(฿110,000 − ฿40,000) × $0.032] = $2,240 104) Accounts payable [(฿150,000 − ฿100,000) × $0.032] = $1,600 105) Cash [(฿250,000 × $0.041) + (฿40,000 × $0.031) − (฿100,000 × $0.034)] = $8,090 106) Yelton could sign a forward exchange contract to sell the euros in 60 days, after they are received. Alternatively, Yelton could purchase an option to sell the euros in 60 days, after they are received.

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107) Foreign exchange rates are published in the Wall Street Journal, major U.S. newspapers, and several Internet sites. 108) The spot rate is the price at which a foreign currency can be purchased or sold today. 109) The fair value of a Forward Contract is determined by comparing the difference between the contracted forward rate and the currently available forward rate for contracts expiring on the same date. On the initial date of the contract, this would result in a fair value of $0. As time passes, the currently available forward rate will likely fluctuate relative to the “fixed” contracted forward rate, creating a difference that must be accounted for as a gain or loss on the forward contract. A contract with a net gain over its life is recorded on the balance sheet as a Forward Contract Asset. A contract with a net loss over its life is recorded on the balance sheet as a Forward Contract Liability. 110) The two separate transactions that require recording under the two-transaction perspective are the income effects from the 1) export sale and 2) credit extension in foreign currency to a customer.

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CHAPTER 8 MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) In accounting, the term translation refers to A) The calculation of gains or losses from hedging transactions. B) The calculation of exchange rate gains or losses on individual transactions in foreign currencies. C) The procedure required to identify a company's functional currency. D) The calculation of gains or losses from all transactions for the year. E) A procedure to prepare a foreign subsidiary's financial statements for consolidation.

What is a company's functional currency? A) The currency of the primary economic environment in which it operates. B) The currency of the country where it has its headquarters. C) The currency in which it prepares its financial statements. D) The reporting currency of its parent for a subsidiary. E) The currency it chooses to designate as such.

3) According to U.S. GAAP, when the local currency is the functional currency, which method is usually required for translating a foreign subsidiary's financial statements into the parent's reporting currency? A) The temporal method. B) The current rate method. C) The current/noncurrent method. D) The monetary/nonmonetary method. E) The noncurrent rate method.

4) In translating a foreign subsidiary's financial statements, which exchange rate does the current rate method require for the subsidiary's assets and liabilities?

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A) The exchange rate in effect when each asset or liability was acquired. B) The average exchange rate for the current year. C) A calculated exchange rate based on market value. D) The exchange rate in effect as of the balance sheet date. E) The exchange rate in effect at the start of the current year.

5) When using the current rate method, the translation adjustment from translating a foreign subsidiary's financial statements should be shown as A) An asset or liability (depending on the balance) in the consolidated balance sheet. B) A revenue or expense (depending on the balance) in the consolidated income statement. C) A component of stockholders' equity in the consolidated balance sheet. D) A component of cash flows from financing activities in the consolidated statement of cash flows. E) An element of the notes which accompany the consolidated financial statements.

6) Oscar, Ltd. is a British subsidiary of a U.S. company. Oscar’s functional currency is the pound sterling (£). The following exchange rates were in effect during 2021:

Jan. 1 June 30 Dec. 31 Weighted average rate for the year

£1 = £1 = £1 = £1 =

$ 1.58 $ 1.63 $ 1.60 $ 1.56

Oscar reported sales of £1,200,000 during 2021. What amount (rounded) would have been included for this subsidiary in calculating consolidated sales? A) $1,896,000. B) $1,956,000. C) $1,872,000. D) $769,231. E) $750,000.

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7) Oscar, Ltd. is a British subsidiary of a U.S. company. Oscar’s functional currency is the pound sterling (£). The following exchange rates were in effect during 2021:

Jan. 1 June 30 Dec. 31 Weighted average rate for the year

£1 = £1 = £1 = £1 =

$ 1.58 $ 1.63 $ 1.60 $ 1.56

On December 31, 2021, Oscar had accounts receivable of £300,000. What amount (rounded) would have been included for this subsidiary in calculating consolidated accounts receivable? A) $187,500. B) $192,308. C) $474,000. D) $468,000. E) $480,000.

8) Levinson Co. established a subsidiary in Mexico on January 1, 2021. The subsidiary engaged in the following transactions during 2021: Jan. 1

Sold common stock to Levinson for 7,500,000 pesos. Purchased inventory throughout the year, 10,000,000 pesos. (¼ of the inventory remained at year end.) Sales for the year totaled 14,000,000 pesos.

Dec. 31

Purchased equipment for 1,500,000 pesos.

Levinson concluded that the subsidiary's functional currency was the dollar. Exchange rates for 2021 were: Jan.

1 31

Dec. 31 Weighted average rate for the year

Version 1

1 peso = $ 1 peso = $

0.23 0.21

1 peso = $ 1 peso = $

0.17 0.20 3

What amount of foreign exchange gain or loss would have been recognized in Levinson’s consolidated income statement for 2021? A) $825,000 gain. B) $685,000 gain. C) $270,000 loss. D) $570,000 loss. E) $315,000 loss.

9) Gale Co. was formed on January 1, 2021 as a wholly owned foreign subsidiary of a U.S. corporation. Gale’s functional currency was the stickle (§). The following transactions and events occurred during 2021: Jan. 1 Gale issued common stock for §2,000,000. June 30 Gale paid dividends of §50,000. Dec. 31 Gale reported net income of §120,000 for the year.

Exchange rates for 2021 were: Jan. 1 June 30 Dec. 31 Weighted average rate for the year

$1 = $1 = $1 = $1 =

§ 0.50 § 0.47 § 0.44 § 0.46

What exchange rate should have been used in translating Gale’s revenues and expenses for 2021? A) $1 = §0.50. B) $1 = §0.46. C) $1 = §0.47. D) $1 = §0.44. E) $1 = §0.48.

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10) Gale Co. was formed on January 1, 2021 as a wholly owned foreign subsidiary of a U.S. corporation. Gale’s functional currency was the stickle (§). The following transactions and events occurred during 2021: Jan. 1 Gale issued common stock for §2,000,000. June 30 Gale paid dividends of §50,000. Dec. 31 Gale reported net income of §120,000 for the year.

Exchange rates for 2021 were: Jan. 1 June 30 Dec. 31 Weighted average rate for the year

$1 = $1 = $1 = $1 =

§ 0.50 § 0.47 § 0.44 § 0.46

What was the amount of the translation adjustment for 2021? A) $121,500 increase in relative value of net assets. B) $121,500 decrease in relative value of net assets. C) $62,000 decrease in relative value of net assets. D) $62,000 increase in relative value of net assets. E) $58,500 increase in relative value of net assets.

11) Marshall Co. was formed on January 1, 2021 as a wholly owned foreign subsidiary of a U.S. corporation. Marshall’s functional currency was the stickle (§). The following transactions and events occurred during 2021: Jan. Marshall issued common stock for §2,000,000. 1 June Marshall paid dividends of §50,000. 30 Dec. Marshall reported net income of §120,000 for the year. 31

Exchange rates for 2021 were: Version 1

Jan. 1 June 30 Dec. 31 Weighted average rate for the year

$1 = $1 = $1 = $1 =

§ 0.44 § 0.48 § 0.50 § 0.46

What was the amount of the translation adjustment for 2021? A) $119,000 decrease in relative value of net assets. B) $121,000 increase in relative value of net assets. C) $81,000 increase in relative value of net assets. D) $59,000 decrease in relative value of net assets. E) $170,000 increase in relative value of net assets.

12) Under the current rate method, which accounts are translated using current exchange rates? A) All revenues and expenses. B) All assets and liabilities. C) Cash, receivables, and most liabilities. D) All current assets and deferred income. E) All stockholders’ equity.

13) Under the temporal method, which accounts are remeasured using current exchange rates? A) All revenues and expenses. B) All assets and liabilities. C) Cash, receivables, and most liabilities. D) All current assets and deferred income. E) All stockholders’ equity.

14) For a foreign subsidiary that uses the U.S. dollar as its functional currency, what method is required to ready the financial statements for consolidation? Version 1

A) Current/Noncurrent Method. B) Monetary/Nonmonetary Method. C) Current Rate Method. D) Temporal Method. E) Indirect Method.

15) Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's functional currency was the U.S. dollar. Which one of the following statements would justify this conclusion? A) Most of the subsidiary's sales and purchases were with companies in the U.S. B) Dilty's functional currency is the dollar and Dilty is the parent. C) Dilty's other subsidiaries all had the dollar as their functional currency. D) Generally accepted accounting principles require that the subsidiary's functional currency must be the dollar if consolidated financial statements are to be prepared. E) Dilty is located in the U.S.

16) Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's functional currency was the U.S. dollar. What must Dilty do to ready the subsidiary's financial statements for consolidation? A) First translate, then remeasure them. B) First remeasure, then translate them. C) State all of the subsidiary's accounts in U.S. dollars using the exchange rate in effect at the balance sheet date. D) Translate them. E) Remeasure them.

17) Certain balance sheet accounts of a foreign subsidiary of the Crater Co. had been stated in U.S. dollars as follows: Stated at Current Rates

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Historical Rates

Accounts receivable−current

310,000

324,000

Accounts receivable−long term

150,000

167,000

Prepaid insurance

90,000

98,000

Goodwill

115,000

121,000

Totals

665,000

710,000

If the subsidiary’s local currency is its functional currency, what total amount should be included in Crater’s balance sheet in U.S. dollars? A) $688,000. B) $687,000. C) $665,000. D) $679,000. E) $696,000.

18) Certain balance sheet accounts of a foreign subsidiary of the Crater Co. had been stated in U.S. dollars as follows: Stated at Current Rates $ 310,000

Historical Rates $ 324,000

Accounts receivable−long term

150,000

167,000

Prepaid insurance

90,000

98,000

Goodwill

115,000

121,000

Accounts receivable−current

Totals

665,000

710,000

If the U.S. dollar is the functional currency of this subsidiary, what total amount should be included in Crater’s balance sheet in U.S. dollars?

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A) $688,000. B) $696,000. C) $710,000. D) $665,000. E) $679,000.

19) A subsidiary of Dunder Inc., a U.S. company, was located in a foreign country. The functional currency of this subsidiary was the Stickle (§) which is the local currency where the subsidiary is located. The subsidiary acquired inventory on credit on November 1, 2020, for §160,000 that was sold on January 17, 2021 for §207,000. The subsidiary paid for the inventory on January 31, 2021. Currency exchange rates between the dollar and the Stickle were as follows: November 1, 2020 December 31, 2020 January 1, 2021 January 31, 2021 Average for 2021

$ $ $ $ $

0.21 = 0.22 = 0.24 = 0.25 = 0.27 =

§1 §1 §1 §1 §1

What amount would have been reported for this inventory in Dunder’s consolidated balance sheet at December 31, 2020? A) $35,200. B) $33,600. C) $38,400. D) $40,000. E) $43,200.

20) A subsidiary of Dunder Inc., a U.S. company, was located in a foreign country. The functional currency of this subsidiary was the Stickle (§) which is the local currency where the subsidiary is located. The subsidiary acquired inventory on credit on November 1, 2020, for §160,000 that was sold on January 17, 2021 for §207,000. The subsidiary paid for the inventory on January 31, 2021. Currency exchange rates between the dollar and the Stickle were as follows:

Version 1

November 1, 2020 December 31, 2020 January 1, 2021 January 31, 2021 Average for 2021

$ $ $ $ $

0.21 = 0.22 = 0.24 = 0.25 = 0.27 =

§1 §1 §1 §1 §1

What amount would have been reported for cost of goods sold on Dunder’s consolidated income statement at December 31, 2021? A) $33,600. B) $35,200. C) $38,400. D) $40,000. E) $43,200.

21)

A U.S. company's foreign subsidiary had the following amounts in stickles (§) in 2021:

Cost of goods sold Ending inventory Beginning inventory

12,000,000 600,000 240,000

The average exchange rate during 2021 was §1 = $0.96. The beginning inventory was acquired when the exchange rate was §1 = $1.20. The ending inventory was acquired when the exchange rate was §1 = $0.90. The exchange rate at December 31, 2021 was §1 = $0.84. Assuming that the foreign country had a highly inflationary economy, at what amount should the foreign subsidiary's cost of goods sold have been reflected in the 2021 U.S. dollar income statement? A) $11,253,600. B) $11,577,600. C) $11,649,600. D) $11,613,600. E) $11,523,600.

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22) A U.S. company's foreign subsidiary had the following amounts in stickles (§), the functional currency, in 2021: Cost of goods sold Ending inventory

Beginning inventory

18,000,000 900,000 360,000

The average exchange rate during 2021 was §1 = $0.98. The beginning inventory was acquired when the exchange rate was §1 = $1.18. The ending inventory was acquired when the exchange rate was §1 = $0.92. The exchange rate at December 31, 2021 was §1 = $0.82. At what amount should the foreign subsidiary's cost of goods sold have been reflected in the 2021 U.S. dollar income statement? A) $21,240,000. B) $16,560,000. C) $17,640,000. D) $14,760,000. E) $17,110,800.

23) A U.S. company's foreign subsidiary had the following amounts in stickles (§), the functional currency, in 2021: Cost of goods sold Ending inventory Beginning inventory

12,000,000 600,000 240,000

The average exchange rate during 2021 was §1 = $0.96. The beginning inventory was acquired when the exchange rate was §1 = $1.20. The ending inventory was acquired when the exchange rate was §1 = $0.90. The exchange rate at December 31, 2021 was §1 = $0.84. Assuming that the foreign nation for the subsidiary had a highly inflationary economy, what is the amount of the foreign subsidiary's purchases?

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A) $11,865,600. B) $11,577,600. C) $11,520,000. D) $11,613,600. E) $11,523,600.

24)

An historical exchange rate for common stock of a foreign subsidiary is best described as

A) The rate at date of the acquisition business combination. B) The rate when the common stock was originally issued for the acquisition transaction. C) The average rate from date of acquisition to the date of the balance sheet. D) The rate from the prior year's balances. E) The January 1 exchange rate.

25) A net asset balance sheet exposure exists and the foreign currency appreciates. Which of the following statements is true? A) There is no translation adjustment. B) There is a transaction loss. C) There is a transaction gain. D) There is a negative translation adjustment. E) There is a positive translation adjustment.

26) A net asset balance sheet exposure exists and the foreign currency depreciates. Which of the following statements is true? A) There is no translation adjustment. B) There is a transaction loss. C) There is a transaction gain. D) There is a negative translation adjustment. E) There is a positive translation adjustment.

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27) A net liability balance sheet exposure exists and the foreign currency appreciates. Which of the following statements is true? A) There is no translation adjustment. B) There is a transaction loss. C) There is a transaction gain. D) There is a negative translation adjustment. E) There is a positive translation adjustment.

28) A net liability balance sheet exposure exists and the foreign currency depreciates. Which of the following statements is true? A) There is no translation adjustment. B) There is a transaction loss. C) There is a transaction gain. D) There is a negative translation adjustment. E) There is a positive translation adjustment.

29) Which method of translating a foreign subsidiary's financial statements is correct if it is assumed that the parent’s net investment is exposed to foreign exchange risk? A) Historical rate method. B) Working capital method. C) Current rate method. D) Remeasurement. E) Temporal method.

30)

Which method is used for remeasuring a foreign subsidiary's financial statements? A) Historical rate method. B) Working capital method. C) Current rate method. D) Translation. E) Temporal method.

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31) Under the temporal method, inventory at net realizable value would be remeasured for the balance sheet at what rate? A) Beginning of the year rate. B) Average rate. C) Current rate. D) Historical rate. E) Composite amount.

32) Under the current rate method, inventory at net realizable value would be translated for the balance sheet at what rate? A) Beginning of the year rate. B) Average rate. C) Current rate. D) Historical rate. E) Composite amount.

33)

Under the temporal method, common stock would be remeasured at what rate? A) Beginning of the year rate. B) Average rate. C) Current rate. D) Historical rate. E) Composite amount.

34)

Under the current rate method, common stock would be translated at what rate? A) Beginning of the year rate. B) Average rate. C) Current rate. D) Historical rate. E) Composite amount.

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35) rate?

Under the current rate method, property, plant & equipment would be translated at what

A) Beginning of the year rate. B) Average rate. C) Current rate. D) Historical rate. E) Composite amount.

36) rate?

Under the temporal method, property, plant & equipment would be remeasured at what

A) Beginning of the year rate. B) Average rate. C) Current rate. D) Historical rate. E) Composite amount.

37)

Under the current rate method, retained earnings would be translated at what rate? A) Beginning of the year rate. B) Average rate. C) Current rate. D) Historical rate. E) Composite amount.

38)

Under the temporal method, retained earnings would be remeasured at what rate? A) Beginning of the year rate. B) Average rate. C) Current rate. D) Historical rate. E) Composite amount.

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39)

Under the current rate method, depreciation expense would be translated at what rate? A) Beginning of the year rate. B) Average rate. C) Current rate. D) Historical rate. E) Composite amount.

40)

Under the temporal method, depreciation expense would be remeasured at what rate? A) Beginning of the year rate. B) Average rate. C) Current rate. D) Historical rate. E) Composite amount.

41)

Under the temporal method, how would cost of goods sold be remeasured? A) Beginning of the year rate. B) Average rate. C) Current rate. D) A single historical rate. E) Historical rates.

42)

Under the current rate method, how would cost of goods sold be translated? A) Beginning of the year rate. B) Average rate. C) Current rate. D) Historical rate. E) Composite amount.

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43) Where is the translation adjustment reported in the parent company's financial statements? A) Net loss in the income statement. B) Cumulative translation adjustment as a deferred asset. C) Cumulative translation adjustment as a deferred liability. D) Accumulated other comprehensive income. E) Retained earnings.

44) Where is the remeasurement gain or loss reported in the parent company's financial statements? A) Net income/loss in the income statement. B) Cumulative translation adjustment as a deferred asset. C) Cumulative translation adjustment as a deferred liability. D) Other comprehensive income. E) Retained earnings.

45)

A highly inflationary economy is defined as A) Cumulative 5-year inflation in excess of 100%. B) Cumulative 3-year inflation in excess of 100%. C) Cumulative 5-year inflation in excess of 90%. D) Cumulative 3-year inflation in excess of 90%. E) Any country designated as a company operating in a third-world economy.

46) If a subsidiary is operating in a highly inflationary economy, how are the financial statements to be restated? A) Historical rate. B) Working capital rate. C) Translation. D) Temporal method. E) Current rate.

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47)

When consolidating a foreign subsidiary, which of the following statements is true?

A) Parent reports a cumulative translation adjustment from adjusting its investment account under the equity method. B) Parent reports a gain or loss in net income from adjusting its investment account under the equity method. C) Subsidiary's cumulative translation adjustment is carried forward to the consolidated balance sheet. D) Subsidiary's income/loss is carried forward to the consolidated balance sheet. E) All foreign currency gains/losses are eliminated in the consolidated income statement and balance sheet.

48) When preparing a consolidated statement of cash flows, which of the following statements is false? A) All operating activity items are translated at an average exchange rate for the period. B) A change in accounts receivable is translated using the current rate. C) A change in long-term debt is translated using the historical rate at the date of the change. D) Dividends paid are translated using the historical rate at the date of the payment. E) All items follow translation rates used for the balance sheet and the income statement.

49) When preparing a consolidation worksheet for a parent and its foreign subsidiary accounted for under the equity method, which of the following statements is false?

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A) The cumulative translation adjustment included in the Investment in Subsidiary account is eliminated. B) The excess of fair value over book value since the date of acquisition is revalued for the change in exchange rate. C) The amount of equity income recognized by the parent in the current year is eliminated. D) The allocations of excess of fair value over book value at the date of acquisition are eliminated. E) The subsidiary's stockholders' equity accounts as of the beginning of the year are eliminated.

50) Esposito is an Italian subsidiary of a U.S. company. Esposito’s ending inventory is valued at the average cost for the last quarter of the year. The following account balances are available for Esposito for 2021: Beginning inventory Purchases Ending inventory

€ € €

20,000 400,000 15,000

Relevant exchange rates follow: 4th quarter average, 2020 December 31, 2020

0.93 = 0.94 =

€1 €1

Average for 2021

0.96 =

€1

4th quarter average, 2021

0.99 =

€1

December 31, 2021

1.01 =

€1

Compute the cost of goods sold for 2021 in U.S. dollars using the temporal method.

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A) $376,650. B) $387,750. C) $388,800. D) $400,950. E) $409,050.

51) Esposito is an Italian subsidiary of a U.S. company. Esposito’s ending inventory is valued at the average cost for the last quarter of the year. The following account balances are available for Esposito for 2021: Beginning inventory Purchases Ending inventory

€ € €

20,000 400,000 15,000

Relevant exchange rates follow: 4th quarter average, 2020 December 31, 2020

0.93 = 0.94 =

€1 €1

Average for 2021

0.96 =

€1

4th quarter average, 2021

0.99 =

€1

December 31, 2021

1.01 =

€1

Compute the cost of goods sold for 2021 in U.S. dollars using the current rate method. A) $376,550. B) $387,750. C) $388,800. D) $400,950. E) $409,050.

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52) Esposito is an Italian subsidiary of a U.S. company. Esposito’s ending inventory is valued at the average cost for the last quarter of the year. The following account balances are available for Esposito for 2021: Beginning inventory Purchases Ending inventory

€ € €

20,000 400,000 15,000

Relevant exchange rates follow: 4th quarter average, 2020 December 31, 2020

0.93 = 0.94 =

€1 €1

Average for 2021

0.96 =

€1

4th quarter average, 2021

0.99 =

€1

December 31, 2021

1.01 =

€1

Compute ending inventory for 2021 under the temporal method. A) $13,950. B) $14,100. C) $14,400. D) $14,850. E) $15,150.

53) Esposito is an Italian subsidiary of a U.S. company. Esposito’s ending inventory is valued at the average cost for the last quarter of the year. The following account balances are available for Esposito for 2021: Beginning inventory Purchases Ending inventory

Version 1

€ € €

20,000 400,000 15,000

Relevant exchange rates follow: 4th quarter average, 2020 December 31, 2020

0.93 = 0.94 =

€1 €1

Average for 2021

0.96 =

€1

4th quarter average, 2021

0.99 =

€1

December 31, 2021

1.01 =

€1

Compute ending inventory for 2021 under the current rate method. A) $13,950. B) $14,100. C) $14,400. D) $14,850. E) $15,150.

54) A foreign subsidiary uses the first-in first-out inventory method. The following inventory balances are given at December 31, 2021 in local currency units (LCU): Inventory at cost Inventory at net realizable value

320,000 LCU 420,000 LCU

The following exchange rates are given for 2021: 4th quarter average, 2021 December 31, 2021

1.43 = 1.42 =

1 LCU 1 LCU

Compute the December 31, 2021, inventory balance using the lower of cost or net realizable value method under the temporal method.

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A) $321,000. B) $457,600. C) $596,400. D) $454,400. E) $419,000.

55) A foreign subsidiary uses the first-in first-out inventory method. The following inventory balances are given at December 31, 2021 in local currency units (LCU): Inventory at cost Inventory at net realizable value

320,000 LCU 420,000 LCU

The following exchange rates are given for 2021: 4th quarter average, 2021 December 31, 2021

1.43 = 1.42 =

1 LCU 1 LCU

Compute the December 31, 2021, inventory balance using the current rate method. A) $454,400. B) $457,600. C) $596,400. D) $419,000. E) $321,000.

56) Perez Company, a Mexican subsidiary of a U.S. company, sold equipment costing 200,000 pesos with accumulated depreciation of 75,000 pesos for 140,000 pesos on March 1, 2021. The equipment was purchased on January 1, 2020. Relevant exchange rates for the peso are as follows: January 1, 2020

Version 1

0.110

March 1, 2021

0.106

December 31, 2021

0.102

Average, 2021

0.105

The financial statements for Perez are translated by its U.S. parent. What amount of gain or loss would be reported in its translated income statement? A) $1,530. B) $1,575. C) $1,590. D) $1,090. E) $1,650.

57) Perez Company, a Mexican subsidiary of a U.S. company, sold equipment costing 200,000 pesos with accumulated depreciation of 75,000 pesos for 140,000 pesos on March 1, 2021. The equipment was purchased on January 1, 2020. Relevant exchange rates for the peso are as follows: January 1, 2020 March 1, 2021

0.110 0.106

December 31, 2021

0.102

Average, 2021

0.105

The financial statements for Perez are remeasured by its U.S. parent. What amount of gain or loss would be reported in its translated income statement? A) $1,530. B) $1,575. C) $1,590. D) $1,090. E) $1,650.

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58) Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31, 2021, have been restated into U.S. dollars as follows: Restated at Current Rates $ 47,500

Historical Rates $ 45,000

Accounts receivable

95,000

90,000

Marketable securities, at fair value

76,000

72,000

Land

57,000

54,000

Equipment (net)

142,500

135,000

Cash

Total

$ 418,000

396,000

Assuming the functional currency of the subsidiary is the U.S. dollar, what total should be included in Parker's consolidated balance sheet at December 31, 2021, for the above items? A) $407,500. B) $418,000. C) $396,000. D) $403,500. E) $398,500.

59) Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31, 2021, have been restated into U.S. dollars as follows: Restated at Current Rates $ 47,500

Historical Rates $ 45,000

Accounts receivable

95,000

90,000

Marketable securities, at fair value

76,000

72,000

Cash

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Land

57,000

54,000

Equipment (net)

142,500

135,000

Total

$ 418,000

396,000

Assuming the functional currency of the subsidiary is the local currency, what total should be included in Parker's consolidated balance sheet at December 31, 2021, for the above items? A) $407,500. B) $418,000. C) $396,000. D) $403,500. E) $398,500.

60) Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31, 2021, have been restated into U.S. dollars as follows: Restated at Current Rates $ 47,500

Historical Rates $ 45,000

Accounts receivable

95,000

90,000

Marketable securities, at fair value

76,000

72,000

Land

57,000

54,000

Equipment (net)

142,500

135,000

Cash

Total

$ 418,000

396,000

If the current rate used to restate these amounts is $0.95, what was the average historical rate used to arrive at the total amount for historical rates?

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A) $0.9000. B) $1.0000. C) $0.9500. D) $0.9474. E) $1.0556.

61) Kennedy Company acquired all of the outstanding common stock of Hastie Company of Canada for U.S. $350,000 on January 1, 2021, when the exchange rate for the Canadian dollar (CAD) was U.S. $0.70. The fair value of the net assets of Hastie was equal to their book value of CAD 450,000 on the date of acquisition. Any acquisition consideration excess over fair value was attributed to an unrecorded patent with a remaining life of five years. The functional currency of Hastie is the Canadian dollar. For the year ended December 31, 2021, Hastie's trial balance net income was translated at U.S. $25,000. The average exchange rate for the Canadian dollar during 2021 was U.S. $0.68, and the 2021 year-end exchange rate was U.S. $0.65. Calculate the U.S. dollar amount allocated to the patent at January 1, 2021. A) $50,000. B) $35,000. C) $34,000. D) $32,500. E) $28,200.

62) Kennedy Company acquired all of the outstanding common stock of Hastie Company of Canada for U.S. $350,000 on January 1, 2021, when the exchange rate for the Canadian dollar (CAD) was U.S. $0.70. The fair value of the net assets of Hastie was equal to their book value of CAD 450,000 on the date of acquisition. Any acquisition consideration excess over fair value was attributed to an unrecorded patent with a remaining life of five years. The functional currency of Hastie is the Canadian dollar. For the year ended December 31, 2021, Hastie's trial balance net income was translated at U.S. $25,000. The average exchange rate for the Canadian dollar during 2021 was U.S. $0.68, and the 2021 year-end exchange rate was U.S. $0.65. Amortization of the patent, translated, for 2021 would be

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A) $7,000. B) $10,000. C) $6,800. D) $9,000. E) $6,500.

63) Kennedy Company acquired all of the outstanding common stock of Hastie Company of Canada for U.S. $350,000 on January 1, 2021, when the exchange rate for the Canadian dollar (CAD) was U.S. $0.70. The fair value of the net assets of Hastie was equal to their book value of CAD 450,000 on the date of acquisition. Any acquisition consideration excess over fair value was attributed to an unrecorded patent with a remaining life of five years. The functional currency of Hastie is the Canadian dollar. For the year ended December 31, 2021, Hastie's trial balance net income was translated at U.S. $25,000. The average exchange rate for the Canadian dollar during 2021 was U.S. $0.68, and the 2021 year-end exchange rate was U.S. $0.65. Compute the amount of the patent reported in the consolidated balance sheet at December 31, 2021. A) $28,200. B) $25,700. C) $35,000. D) $27,200. E) $26,000.

64) Kennedy Company acquired all of the outstanding common stock of Hastie Company of Canada for U.S. $350,000 on January 1, 2021, when the exchange rate for the Canadian dollar (CAD) was U.S. $0.70. The fair value of the net assets of Hastie was equal to their book value of CAD 450,000 on the date of acquisition. Any acquisition consideration excess over fair value was attributed to an unrecorded patent with a remaining life of five years. The functional currency of Hastie is the Canadian dollar. For the year ended December 31, 2021, Hastie's trial balance net income was translated at U.S. $25,000. The average exchange rate for the Canadian dollar during 2021 was U.S. $0.68, and the 2021 year-end exchange rate was U.S. $0.65. Kennedy's share of Hastie's net income for 2021 would be

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A) $18,000. B) $15,000. C) $18,200. D) $16,000. E) $18,500.

65) Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2020. Selected account balances are available for the year ended December 31, 2021, and are stated in Euro, the local currency. Sales

€

400,000

Inventory (bought on February 1, 2021)

20,000

Equipment (bought on January 1, 2020)

90,000

Dividends (paid on September 1, 2021)

20,000

Accumulated depreciation−Equipment 12/31/21

45,000

Depreciation expense−Equipment, 2021

9,000

Relevant exchange rates for 1 Euro are given below: January 1, 2020 January 1, 2021 February 1, 2021 September 1, 2021 December 31, 2021 4th quarter average, 2020 4th quarter average, 2021 Average, 2021

$0.91 0.93 0.94 0.97 1.01 0.90 0.98 0.95

Assume the functional currency is the Euro; compute the U.S. income statement amount for sales for 2021.

Version 1

A) $364,000. B) $372,000. C) $380,000. D) $360,000. E) $404,000.

66) Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2020. Selected account balances are available for the year ended December 31, 2021, and are stated in Euro, the local currency. Sales

€

400,000

Inventory (bought on February 1, 2021)

20,000

Equipment (bought on January 1, 2020)

90,000

Dividends (paid on September 1, 2021)

20,000

Accumulated depreciation−Equipment 12/31/21

45,000

Depreciation expense−Equipment, 2021

9,000

$0.91 0.93 0.94 0.97 1.01 0.90 0.98 0.95

Assume the functional currency is the Euro; compute the U.S. balance sheet amount for inventory at December 31, 2021.

Version 1

A) $18,800. B) $19,600. C) $18,000. D) $20,200. E) $19,000.

67) Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2020. Selected account balances are available for the year ended December 31, 2021, and are stated in Euro, the local currency. Sales

€

400,000

Inventory (bought on February 1, 2021)

20,000

Equipment (bought on January 1, 2020)

90,000

Dividends (paid on September 1, 2021)

20,000

Accumulated depreciation−Equipment 12/31/21

45,000

Depreciation expense−Equipment, 2021

9,000

$0.91 0.93 0.94 0.97 1.01 0.90 0.98 0.95

Assume the functional currency is the Euro; compute the U.S. balance sheet amount for equipment for 2021.

Version 1

A) $81,900. B) $90,900. C) $83,700 D) $88,200. E) $85,500.

68) Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2020. Selected account balances are available for the year ended December 31, 2021, and are stated in Euro, the local currency. Sales

€

400,000

Inventory (bought on February 1, 2021)

20,000

Equipment (bought on January 1, 2020)

90,000

Dividends (paid on September 1, 2021)

20,000

Accumulated depreciation−Equipment 12/31/21

45,000

Depreciation expense−Equipment, 2021

9,000

$0.91 0.93 0.94 0.97 1.01 0.90 0.98 0.95

Assume the functional currency is the Euro; compute the U.S. Statement of Retained Earnings amount reported for Dividends in 2021.

Version 1

A) $19,000. B) $20,200. C) $18,600. D) $19,400. E) $19,600.

69) Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2020. Selected account balances are available for the year ended December 31, 2021, and are stated in Euro, the local currency. Sales

€

400,000

Inventory (bought on February 1, 2021)

20,000

Equipment (bought on January 1, 2020)

90,000

Dividends (paid on September 1, 2021)

20,000

Accumulated depreciation−Equipment 12/31/21

45,000

Depreciation expense−Equipment, 2021

9,000

$0.91 0.93 0.94 0.97 1.01 0.90 0.98 0.95

Assume the functional currency is the Euro; compute the U.S. balance sheet amount for accumulated depreciation for 2021.

Version 1

A) $40,950. B) $41,850. C) $45,450. D) $42,750. E) $44,100.

70) Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2020. Selected account balances are available for the year ended December 31, 2021, and are stated in Euro, the local currency. Sales

€

400,000

Inventory (bought on February 1, 2021)

20,000

Equipment (bought on January 1, 2020)

90,000

Dividends (paid on September 1, 2021)

20,000

Accumulated depreciation−Equipment 12/31/21

45,000

Depreciation expense−Equipment, 2021

9,000

$0.91 0.93 0.94 0.97 1.01 0.90 0.98 0.95

Assume the functional currency is the Euro; compute the U.S. income statement amount for depreciation expense for 2021.

Version 1

A) $8,190. B) $8,370. C) $8,820. D) $9,090. E) $8,550.

71) Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2020. Selected account balances are available for the year ended December 31, 2021, and are stated in Euro, the local currency. Sales

€

400,000

Inventory (bought on February 1, 2021)

20,000

Equipment (bought on January 1, 2020)

90,000

Dividends (paid on September 1, 2021)

20,000

Accumulated depreciation−Equipment 12/31/21

45,000

Depreciation expense−Equipment, 2021

9,000

$0.91 0.93 0.94 0.97 1.01 0.90 0.98 0.95

Assume the functional currency is the U.S. Dollar; compute the U.S. income statement amount for sales for 2021.

Version 1

A) $364,000. B) $372,000. C) $380,000. D) $360,000. E) $404,000.

72) Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2020. Selected account balances are available for the year ended December 31, 2021, and are stated in Euro, the local currency. Sales

€

400,000

Inventory (bought on February 1, 2021)

20,000

Equipment (bought on January 1, 2020)

90,000

Dividends (paid on September 1, 2021)

20,000

Accumulated depreciation−Equipment 12/31/21

45,000

Depreciation expense−Equipment, 2021

9,000

$0.91 0.93 0.94 0.97 1.01 0.90 0.98 0.95

Assume the functional currency is the U.S. Dollar; compute the U.S. balance sheet amount for inventory, at cost, for 2021.

Version 1

A) $18,800. B) $19,600. C) $18,000. D) $20,200. E) $19,000.

73) Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2020. Selected account balances are available for the year ended December 31, 2021, and are stated in Euro, the local currency. Sales

€

400,000

Inventory (bought on February 1, 2021)

20,000

Equipment (bought on January 1, 2020)

90,000

Dividends (paid on September 1, 2021)

20,000

Accumulated depreciation−Equipment 12/31/21

45,000

Depreciation expense−Equipment, 2021

9,000

$0.91 0.93 0.94 0.97 1.01 0.90 0.98 0.95

Assume the functional currency is the U.S. Dollar; compute the U.S. balance sheet amount for equipment for 2021.

Version 1

A) $81,900. B) $90,900. C) $83,700. D) $88,200. E) $85,500.

74) Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2020. Selected account balances are available for the year ended December 31, 2021, and are stated in Euro, the local currency. Sales

€

400,000

Inventory (bought on February 1, 2021)

20,000

Equipment (bought on January 1, 2020)

90,000

Dividends (paid on September 1, 2021)

20,000

Accumulated depreciation−Equipment 12/31/21

45,000

Depreciation expense−Equipment, 2021

9,000

$0.91 0.93 0.94 0.97 1.01 0.90 0.98 0.95

Assume the functional currency is the U.S. Dollar; compute the U.S. statement of retained earnings amount for dividends for 2021.

Version 1

A) $19,000. B) $20,200. C) $18,600. D) $19,400. E) $19,600.

75) Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2020. Selected account balances are available for the year ended December 31, 2021, and are stated in Euro, the local currency. Sales

€

400,000

Inventory (bought on February 1, 2021)

20,000

Equipment (bought on January 1, 2020)

90,000

Dividends (paid on September 1, 2021)

20,000

Accumulated depreciation−Equipment 12/31/21

45,000

Depreciation expense−Equipment, 2021

9,000

$0.91 0.93 0.94 0.97 1.01 0.90 0.98 0.95

Assume the functional currency is the U.S. Dollar; compute the U.S. balance sheet amount for accumulated depreciation for 2021.

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A) $40,950. B) $41,850. C) $45,450. D) $42,750. E) $44,100.

76) Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2020. Selected account balances are available for the year ended December 31, 2021, and are stated in Euro, the local currency. Sales

€

400,000

Inventory (bought on February 1, 2021)

20,000

Equipment (bought on January 1, 2020)

90,000

Dividends (paid on September 1, 2021)

20,000

Accumulated depreciation−Equipment 12/31/21

45,000

Depreciation expense−Equipment, 2021

9,000

$0.91 0.93 0.94 0.97 1.01 0.90 0.98 0.95

Assume the functional currency is the U.S. Dollar; compute the U.S. income statement amount for depreciation expense for 2021.

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A) $8,190. B) $8,370. C) $8,820. D) $9,090. E) $8,550.

77) A subsidiary of Reynolds Inc., a U.S. company, was located in a foreign country. The local currency of this subsidiary was the Euro (€) while the functional currency of this subsidiary was the U.S. dollar. The subsidiary acquired Equipment A on January 1, 2018, for €250,000. Depreciation expense associated with Equipment A was €25,000 per year. On January 1, 2020, the subsidiary acquired Equipment B for €150,000 and Equipment B had associated depreciation expense of €10,000. The subsidiary owned no other depreciable assets. Currency exchange rates between the U.S. dollar and the Euro were as follows: January 1, 2018 December 31, 2018 2018 Average January 1, 2019 December 31, 2019 2019 Average January 1, 2020 December 31, 2020 2020 Average

€1 = €1 = €1 = €1 = €1 = €1 = €1 = €1 = €1 =

$ 1.20 $ 1.14 $ 1.18 $ 1.15 $ 1.21 $ 1.18 $ 1.26 $ 1.30 $ 1.28

What amount would have been reported for depreciation expense related to the equipment owned by the subsidiary in Reynolds’s consolidated balance sheet at December 31, 2018? A) $29,500. B) $28,500. C) $30,000. D) $12,000. E) $11,800.

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78) A subsidiary of Reynolds Inc., a U.S. company, was located in a foreign country. The local currency of this subsidiary was the Euro (€) while the functional currency of this subsidiary was the U.S. dollar. The subsidiary acquired Equipment A on January 1, 2018, for €250,000. Depreciation expense associated with Equipment A was €25,000 per year. On January 1, 2020, the subsidiary acquired Equipment B for €150,000 and Equipment B had associated depreciation expense of €10,000. The subsidiary owned no other depreciable assets. Currency exchange rates between the U.S. dollar and the Euro were as follows: January 1, 2018 December 31, 2018 2018 Average January 1, 2019 December 31, 2019 2019 Average January 1, 2020 December 31, 2020 2020 Average

€1 = €1 = €1 = €1 = €1 = €1 = €1 = €1 = €1 =

$ 1.20 $ 1.14 $ 1.18 $ 1.15 $ 1.21 $ 1.18 $ 1.26 $ 1.30 $ 1.28

What amount would have been reported for depreciation expense related to the equipment owned by the subsidiary in Reynolds’s consolidated balance sheet at December 31, 2020? A) $42,600. B) $44,800. C) $45,500. D) $42,300. E) $41,500.

79) A subsidiary of Reynolds Inc., a U.S. company, was located in a foreign country. The local currency of this subsidiary was the Euro (€) while the functional currency of this subsidiary was the U.S. dollar. The subsidiary acquired Equipment A on January 1, 2018, for €250,000. Depreciation expense associated with Equipment A was €25,000 per year. On January 1, 2020, the subsidiary acquired Equipment B for €150,000 and Equipment B had associated depreciation expense of €10,000. The subsidiary owned no other depreciable assets. Currency exchange rates between the U.S. dollar and the Euro were as follows: January 1, 2018

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€1 =

$ 1.20

December 31, 2018 2018 Average January 1, 2019 December 31, 2019 2019 Average January 1, 2020 December 31, 2020 2020 Average

€1 = €1 = €1 = €1 = €1 = €1 = €1 = €1 =

$ 1.14 $ 1.18 $ 1.15 $ 1.21 $ 1.18 $ 1.26 $ 1.30 $ 1.28

What amount would have been reported for total equipment owned by the subsidiary in Reynolds’s consolidated balance sheet at December 31, 2018? A) $285,000. B) $456,000. C) $295,000. D) $300,000. E) $472,000.

80) A subsidiary of Reynolds Inc., a U.S. company, was located in a foreign country. The local currency of this subsidiary was the Euro (€) while the functional currency of this subsidiary was the U.S. dollar. The subsidiary acquired Equipment A on January 1, 2018, for €250,000. Depreciation expense associated with Equipment A was €25,000 per year. On January 1, 2020, the subsidiary acquired Equipment B for €150,000 and Equipment B had associated depreciation expense of €10,000. The subsidiary owned no other depreciable assets. Currency exchange rates between the U.S. dollar and the Euro were as follows: January 1, 2018 December 31, 2018 2018 Average January 1, 2019 December 31, 2019 2019 Average January 1, 2020 December 31, 2020 2020 Average

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€1 = €1 = €1 = €1 = €1 = €1 = €1 = €1 = €1 =

$ 1.20 $ 1.14 $ 1.18 $ 1.15 $ 1.21 $ 1.18 $ 1.26 $ 1.30 $ 1.28

What amount would have been reported for total equipment owned by the subsidiary in Reynolds’s consolidated balance sheet at December 31, 2020? A) $480,000. B) $487,000. C) $520,000. D) $512,000. E) $489,000.

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 81) On January 1, 2021, Fandu Corp. began operations of a foreign subsidiary. On April 1, 2021, the subsidiary purchased inventory costing 150,000 stickles. One-fourth of this inventory remained unsold at the end of 2021 while 40% of the liability from the purchase had not yet been paid. The pertinent indirect exchange rates were: January 1, 2021 April 1, 2021 Average for 2021 December 31, 2021

$1 = $1 = $1 = $1 =

§ § § §

3.0 3.4 3.2 3.6

Required: What should have been the December 31, 2021 inventory and accounts payable balances for this foreign subsidiary as translated into U.S. dollars? (Round your answers to the nearest whole dollar.)

82) On January 1, 2021, Veldon Co., a U.S. corporation with the U.S. dollar as its functional currency, established Malont Co. as a subsidiary. Malont is located in the country of Sorania, and its functional currency is the stickle (§). Malont engaged in the following transactions during 2021: January 1, 2021 July 14, 2021

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Issued common stock for §500,000 Sold a patent at a gain of §40,000 44

October 1, 2021

Paid dividends of §60,000

Malont’s operating revenues and expenses for 2021 were §800,000 and §650,000, respectively. The appropriate exchange rates were: January 1, 2021 July 14, 2021 October 1, 2021 December 31, 2021 Average for 2021

§1 = §1 = §1 = §1 = §1 =

$ $ $ $ $

2.5 2.1 2.6 2.7 2.4

Required: Calculate the translation adjustment for Malont. (Round your answers to the nearest whole dollar.)

83) Ginvold Co. began operating a subsidiary in a foreign country on January 1, 2021 by acquiring all of the common stock for §50,000 Stickles, the local currency. This subsidiary immediately borrowed §120,000 on a five-year note with ten percent interest payable annually beginning on January 1, 2022. A building was then purchased for §170,000 on January 1, 2021. This property had a ten-year anticipated life and no salvage value and was to be depreciated using the straight-line method. The building was immediately rented for three years to a group of local doctors for §6,000 per month. By year-end, payments totaling §60,000 had been received. On October 1, §5,000 were paid for a repair made on that date and it was the only transaction of this kind for the year. A cash dividend of §6,000 was transferred back to Ginvold on December 31, 2021. The functional currency for the subsidiary was the Stickle (§). Currency exchange rates were as follows: January 1, 2021 October 1, 2021 Average for 2021 December 31, 2021

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§1 = §1 = §1 = §1 =

$ 2.40 $ 2.22 $ 2.28 $ 2.16

Prepare an income statement for this subsidiary in stickles and then translate these amounts into U.S. dollars.

84) Ginvold Co. began operating a subsidiary in a foreign country on January 1, 2021 by acquiring all of the common stock for §50,000 Stickles, the local currency. This subsidiary immediately borrowed §120,000 on a five-year note with ten percent interest payable annually beginning on January 1, 2022. A building was then purchased for §170,000 on January 1, 2021. This property had a ten-year anticipated life and no salvage value and was to be depreciated using the straight-line method. The building was immediately rented for three years to a group of local doctors for §6,000 per month. By year-end, payments totaling §60,000 had been received. On October 1, §5,000 were paid for a repair made on that date and it was the only transaction of this kind for the year. A cash dividend of §6,000 was transferred back to Ginvold on December 31, 2021. The functional currency for the subsidiary was the Stickle (§). Currency exchange rates were as follows: January 1, 2021 October 1, 2021 Average for 2021 December 31, 2021

§1 = §1 = §1 = §1 =

$ 2.40 $ 2.22 $ 2.28 $ 2.16

Prepare a statement of retained earnings for this subsidiary in stickles and then translate the amounts into U.S. dollars.

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85) Ginvold Co. began operating a subsidiary in a foreign country on January 1, 2021 by acquiring all of the common stock for §50,000 Stickles, the local currency. This subsidiary immediately borrowed §120,000 on a five-year note with ten percent interest payable annually beginning on January 1, 2022. A building was then purchased for §170,000 on January 1, 2021. This property had a ten-year anticipated life and no salvage value and was to be depreciated using the straight-line method. The building was immediately rented for three years to a group of local doctors for §6,000 per month. By year-end, payments totaling §60,000 had been received. On October 1, §5,000 were paid for a repair made on that date and it was the only transaction of this kind for the year. A cash dividend of §6,000 was transferred back to Ginvold on December 31, 2021. The functional currency for the subsidiary was the Stickle (§). Currency exchange rates were as follows: January 1, 2021 October 1, 2021 Average for 2021 December 31, 2021

§1 = §1 = §1 = §1 =

$ 2.40 $ 2.22 $ 2.28 $ 2.16

Prepare a balance sheet for this subsidiary in stickles and then translate the amounts into U.S. dollars.

86) Ginvold Co. began operating a subsidiary in a foreign country on January 1, 2021 by acquiring all of the common stock for §50,000 Stickles, the local currency. This subsidiary immediately borrowed §120,000 on a five-year note with ten percent interest payable annually beginning on January 1, 2022. A building was then purchased for §170,000 on January 1, 2021. This property had a ten-year anticipated life and no salvage value and was to be depreciated using the straight-line method. The building was immediately rented for three years to a group of local doctors for §6,000 per month. By year-end, payments totaling §60,000 had been received. On October 1, §5,000 were paid for a repair made on that date and it was the only transaction of this kind for the year. A cash dividend of §6,000 was transferred back to Ginvold on December 31, 2021. The functional currency for the subsidiary was the Stickle (§). Currency exchange rates were as follows: January 1, 2021

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§1 =

$ 2.40

October 1, 2021 Average for 2021 December 31, 2021

§1 = §1 = §1 =

$ 2.22 $ 2.28 $ 2.16

Prepare a statement of cash flows for this subsidiary in stickles and then translate the amounts into U.S. dollars.

87) Boerkian Co. started 2021 with two assets: Cash of §26,000 (Stickles) and Land that originally cost §72,000 when acquired on April 4, 2018. On May 1, 2021, the company rendered services to a customer for §36,000, an amount immediately paid in cash. On October 1, 2021, the company incurred an operating expense of §22,000 that was immediately paid. No other transactions occurred during the year so an average exchange rate is not necessary. Currency exchange rates were as follows: April 4, 2018 January 1, 2021 May 1, 2021 October 1, 2021 December 31, 2021

§1 = §1 = §1 = §1 = §1 =

$ 0.28 $ 0.29 $ 0.30 $ 0.31 $ 0.35

Assume that Boerkian was a foreign subsidiary of a U.S. multinational company and the stickle (§) was the functional currency of the subsidiary. Calculate the translation adjustment for this subsidiary for 2021 and state whether this is a positive or a negative adjustment.

88) Boerkian Co. started 2021 with two assets: Cash of §26,000 (Stickles) and Land that originally cost §72,000 when acquired on April 4, 2018. On May 1, 2021, the company rendered services to a customer for §36,000, an amount immediately paid in cash. On October 1, 2021, the company incurred an operating expense of §22,000 that was immediately paid. No other transactions occurred during the year so an average exchange rate is not necessary. Currency exchange rates were as follows: Version 1

April 4, 2018 January 1, 2021 May 1, 2021 October 1, 2021 December 31, 2021

§1 = §1 = §1 = §1 = §1 =

$ 0.28 $ 0.29 $ 0.30 $ 0.31 $ 0.35

Assume Boerkian was a foreign subsidiary of a U.S. multinational company and the U.S. dollar was the functional currency of the subsidiary. Prepare a schedule of changes in the net monetary assets of Boerkian for the year 2021 and properly label the resulting gain or loss.

89) Boerkian Co. started 2021 with two assets: Cash of §26,000 (Stickles) and Land that originally cost §72,000 when acquired on April 4, 2018. On May 1, 2021, the company rendered services to a customer for §36,000, an amount immediately paid in cash. On October 1, 2021, the company incurred an operating expense of §22,000 that was immediately paid. No other transactions occurred during the year so an average exchange rate is not necessary. Currency exchange rates were as follows: April 4, 2018 January 1, 2021 May 1, 2021 October 1, 2021 December 31, 2021

§1 = §1 = §1 = §1 = §1 =

$ 0.28 $ 0.29 $ 0.30 $ 0.31 $ 0.35

Required: Assume that Boerkian was a foreign subsidiary of a U.S. multinational company and the local currency of the subsidiary (stickle) is the functional currency. On the December 31, 2021 balance sheet, what was the translated value of the Land account?

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90) Boerkian Co. started 2021 with two assets: Cash of §26,000 (Stickles) and Land that originally cost §72,000 when acquired on April 4, 2018. On May 1, 2021, the company rendered services to a customer for §36,000, an amount immediately paid in cash. On October 1, 2021, the company incurred an operating expense of §22,000 that was immediately paid. No other transactions occurred during the year so an average exchange rate is not necessary. Currency exchange rates were as follows: April 4, 2018 January 1, 2021 May 1, 2021 October 1, 2021 December 31, 2021

§1 = §1 = §1 = §1 = §1 =

$ 0.28 $ 0.29 $ 0.30 $ 0.31 $ 0.35

Required: Assume that Boerkian was a foreign subsidiary of a U.S. multinational company and the U.S. dollar is the functional currency. On the December 31, 2021 balance sheet, what was the remeasured value of the Land account?

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ESSAY. Write your answer in the space provided or on a separate sheet of paper. 91) A foreign subsidiary was acquired on January 1, 2021. Determine the exchange rate used to restate the following accounts at December 31, 2021. Land was purchased on October 1, 2021. Relevant exchange dates follow: (A) January 1, 2021 (B) October 1, 2021 (C) December 31, 2021 (D) Average, 2021 (E) Composite, using multiple dates. Identify the exchange rate used to translate items 1-5 when the functional currency is the foreign currency: 1. Land. 2. Equipment. 3. Bonds payable. 4. Common stock. 5. Retained earnings. Identify the exchange rate used to remeasure the items 6-10 when the functional currency is the U.S. dollar: 6. Land. 7. Equipment. 8. Bonds payable. 9. Common stock. 10. Retained earnings.

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92) In translating a foreign subsidiary's financial statements, what exchange rate should be used for the subsidiary's revenues and expenses?

93) How can a parent corporation determine the functional currency for a foreign subsidiary that conducts business in more than one country?

94) What exchange rate should be used to translate (a) revenues and expenses that occur throughout the year and (b) a gain or loss that occurs on a specific day?

95) Perkle Co. owned a subsidiary in Belgium; the subsidiary's functional currency was the Belgian franc. During 2021, Perkle engaged in hedging transactions to offset part of the subsidiary's net asset position. How should the effects of exchange rate fluctuations on the currency hedge be accounted for?

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96) Under what circumstances would the remeasurement of a foreign subsidiary's financial statements be required?

97) A foreign subsidiary of a U.S. corporation purchased equipment on January 4, 2021. (A.) How would depreciation expense on the equipment be translated for 2021? (B.) How would depreciation expense on the equipment be remeasured for 2021?

98) What exchange rate would be used to translate the asset and liability account balances of a foreign subsidiary when the local currency is the functional currency? What justification can be given for using this exchange rate?

99) Farley Brothers, a U.S. company, had a subsidiary in Italy. Under what conditions would the U.S. dollar be considered the functional currency for this subsidiary?

100)

What is the justification for the remeasurement of foreign currency transactions?

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101)

Contrast the purpose of remeasurement with the purpose of translation.

102)

What is the basic assumption underlying the current rate method?

103)

What is the basic objective underlying the temporal method?

104) What are techniques that a parent company can use to hedge the balance sheet exposures of their foreign operations?

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Answer Key Test name: Chap 08_8e 1) E 2) A 3) B 4) D 5) C 6) C Current rate method: £1,200,000 × $1.56 (Average Rate) = $1,872,000

7) E £300,000 × $1.60 = $480,000

8) D Cash: 7,500,000p − 10,000,000p + 14,000,000p − 1,500,000p = 10,000,000p × current rate $0.17 = $1,700,000. Inventory: Average for year purchase 10,000,000p − sell 7,500,000p = 2,500,000 × average rate $0.20 = $500,000. Equipment: 1,500,000p × historical rate $0.17 = $255,000. Total assets: $1,700,000 + $500,000 + $255,000 = $2,455,000. Common stock: 7,500,000p × historical rate $0.23 = $1,725,000. Retained earnings must be $730,000 ($2,455,000 − $1,725,000). There was no beginning retained earnings or dividends. Thus, net income must be $730,000. Sales: 14,000,000p × weighted average for year $0.20 = $2,800,000. Cost of goods sold: Purchase 10,000,000p − ending inventory 2,500,000p = 7,500,000p × weighted average rate for year (per information provided for flow of goods) $0.20 = $1,500,000. Gross profit $1,300,000 ($2,800,000 − $1,500,000). Expenses: $0. Net income per retained earnings statement must be $730,000. Remeasurement loss = $1,300,000 − $730,000 = $570,000.

9) B Current rate method: Average Rate for Revenues & Expenses [$1 = §0.46]

10) B [§2,000,000 × [$0.44 − $0.50] ($0.06) = ($120,000)] + [§50,000 × [$0.44 − $0.47] ($0.03)] = ($1,500) = ($121,500) Loss in Relative Asset Value

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11) B [§2,000,000 × ($0.50 − $0.44) $0.06 = $120,000] + [§50,000 × ($0.50 − $0.48) $0.02 = $1,000] = $121,000 increase in Relative Asset Value

12) B 13) C 14) D 15) A 16) E 17) C Current rate method: If the local currency is the functional currency, current rates are used for all items = $665,000

18) E Temporal method: If the dollar is the functional currency, current rates are used for receivables and historical rates for the remaining assets ($310,000 + $150,000 + $98,000 + $121,000) = $679,000

19) A Current rate method: §160,000 × $0.22 = $35,200

20) E Current rate method: §160,000 × $0.27 = $43,200

21) D Beginning Inventory [(§240,000 × $1.20) = $288,000] − Purchases [Beginning Inventory §240,000 − COGS §12,000,000 − Ending Inventory §600,000 = §12,360,000 × $0.96 = $11,865,600] − Ending Inventory [(§600,000 × $0.90) = $540,000] = COGS $11,613,600

22) C Current rate method: §18,000,000 × $0.98 = $17,640,000

23) A Beginning Inventory §240,000 − COGS §12,000,000 − Ending Inventory §600,000 = Purchases §12,360,000 × $0.96 = $11,865,600

24) B 25) E 26) D 27) D 28) E

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29) C 30) E 31) C 32) C 33) D 34) D 35) C 36) D 37) E 38) E 39) B 40) D 41) E 42) B 43) D 44) A 45) B 46) D 47) C 48) B 49) D 50) B Beginning Inventory (€20,000 × $0.93 = $18,600) + Purchases (€400,000 × $0.96 = $384,000) − End Inventory (€15,000 × $0.99 = $14,850) = COGS $387,750

51) C €405,000 × $0.96 = $388,800

52) D €15,000 × $0.99 = $14,850

53) E €15,000 × $1.01 = $15,150

54) B Version 1

Inventory at Historical Cost 320,000 LCU × $1.43 = $457,600. Inventory at Net Realizable Value 420,000 LCU × $1.42 = $596,400. Report at the lower of the two dollar amounts = $457,600.

55) A Inventory at Cost 320,000 LCU × $1.42 = $454,400

56) C [Sales Price 140,000p × $0.106 = $14,840] − [BV at Historical Cost 200,000p − Accum. Depr. 75,000p = 125,000p × $0.106 = $13,250] = $1,590 Gain

57) D [Sales Price 140,000p × $0.106 = $14,840] − [BV at Historical Cost 200,000p − Accum. Depr. 75,000p = 125,000p × $0.110 = $13,750] = $1,090 Gain

58) A If the Dollar is the Functional Currency, Current Rates Used for All Items except PP&E at their Historical Values ($47,500 + $95,000 + $76,000 + $54,000 + $135,000) = $407,500

59) B If LC is the Functional Currency, Current Rates Used for All Items = $418,000

60) A $418,000 ÷ $0.95 = $440,000; $396,000 ÷ $440,000 = $0.90

61) B $350,000 − FV of Assets (CAD 450,000 × $0.70) $315,000 = $35,000 Patent Value 62) C Patent Value $35,000 ÷ $0.70 = Patent Value CAD 50,000 ÷ 5 years = CAD 10,000 per year × $0.68 = $6,800 Translated 63) E Patent Value CAD 50,000 − Amortization for 2021 CAD 10,000 = BV CAD 40,000 × $0.65 = $26,000 Translated 64) C Translated Net Income $25,000 − Translated Amortization $6,800 = $18,200 Parent’s Share of Net Income for 2021 65) C €400,000 × $0.95 = $380,000

66) D Version 1

€20,000 × $1.01 = $20,200

67) B €90,000 × $1.01 = $90,900

68) D €20,000 × $0.97 = $19,400

69) C €45,000 × $1.01 = $45,450

70) E €9,000 × $0.95 = $8,550

71) C €400,000 × $0.95 = $380,000

72) A €20,000 × $0.94 = $18,800

73) A €90,000 × $0.91 = $81,900

74) D €20,000 × $0.97 = $19,400

75) A €45,000 × $0.91 = $40,950

76) A €9,000 × $0.91 = $8,190

77) C €25,000 × $1.20 = $30,000 78) A (€25,000 × $1.20) + (€10,000 × $1.26) = $42,600 79) D €250,000 × $1.20 = $300,000 80) E (€250,000 × $1.20) + (€150,000 × $1.26) = $489,000 81) Inventory (§150,000 × ¼ × (1 ÷ 3.6)) = $10,417 Accounts payable (§150,000 × 40% × (1 ÷ 3.6)) = $16,667 82)

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Stickles Net assets, 1/1/21

Rate

U.S. Dollars

Change in net assets, 2021: Common stock issuance

500,000

§ 2.5H

§ 1,250,000

Operating income

150,000

§ 2.4A

360,000

Gain on sale of patent

40,000

§ 2.1H

84,000

Dividends paid

(60,000 )

§ 2.6H

(156,000 )

Net assets,12/31/21

§ 630,000

Net assets,12/31/21 at current § 630,000 exchange rate

§ 1,538,000 § 2.7C

Translation adjustment,2021 (positive)

1,701,000 §

(163,000 )

83) Ginvold Co. Subsidiary Income Statement For the Year Ended December 31, 2021 Stickles Rate Rent revenue

72,000

U.S. Dollars × $ 2.28 A = $ 164,160

Interest expense

(12,000 ) × $ 2.28 A =

(27,360 )

Depreciation expense

(17,000 ) × $ 2.28 A =

(38,760 )

Repair expense

(5,000 ) × $ 2.22 H =

(11,100 )

38,000

86,940

Net income

= $

84) Ginvold Co. Subsidiary

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Income Statement For the Year Ended December 31, 2021 Stickles Rate Rent revenue

Interest expense

(12,000 ) ×

Depreciation expense

(17,000 ) ×

Repair expense

(5,000 ) ×

Net income

72,000

2.28 = A 2.28 = A 2.28 = A 2.22 = H

38,000

Ginvold Co. Subsidiary Statement of Retained Earnings For the Year Ended December 31, 2021 Stickles Rate Retained earnings, 1/1/21 Net income

Dividends paid

(above)

(6,000 ) × $2.16H

Retained earnings, 12/31/21

32,000

$ 164,160 (27,360 ) (38,760 ) (11,100 ) $

86,940

U.S. Dollars $

38,000

U.S. Dollars

0 86,940

(12,960 ) $

73,980

85) Ginvold Co. Subsidiary Income Statement For the Year Ended December 31, 2021 Stickles Rate Rent revenue

2.28 A =

Interest expense

(12,000 ) ×

2.28 A =

(27,360 )

Depreciation expense

(17,000 ) ×

2.28 A =

(38,760 )

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72,000

U.S. Dollars $ 164,160

Repair expense

(5,000 ) ×

Net income

2.22 H =

38,000

Ginvold Co. Subsidiary Statement of Retained Earnings For the Year Ended December 31, 2021 Stickles Rate Retained earnings, 1/1/21 Net income

(above) =

32,000

$ 73,980

U.S. Dollars

49,000

2.16C =

$ 105,840

Rent receivable

12,000

2.16C =

25,920

Building

170,000

2.16C =

367,200

Accumulated depreciation

(17,000 ) ×

2.16C =

(36,720 )

Total assets

(12,960 )

Ginvold Co. Subsidiary Balance Sheet December 31, 2021 Stickles Rate Cash

86,940

(6,000 ) × $2.16H §

U.S. Dollars $

38,000

Dividends paid Retained earnings, 12/31/21

(11,100 )

§ 214,000

$ 462,240

Interest payable

12,000

2.16C =

25,920

Note payable

120,000

2.16C =

259,200

Common stock

50,000

2.40H =

120,000

Retained earnings

32,000

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(above)

73,980

Translation adjustment

Total liabilities and equities

(below)

(16,860 )

§ 214,000

$ 462,240

Calculation of Translation Adjustment Stickles Net assets, 1/1/21

Rate

U.S. Dollars $ 0

Change in net assets, 2021: Common stock issuance

50,000

Net income

38,000

Dividends paid

(6,000 )

Net assets, 12/31/21

§ 82,000

Net assets, 12/31/21 at current exchange rate

§ 82,000

$2.40

120,000

(above) ×

$2.16

86,940 =

(12,960 ) $

$2.16

Translation adjustment, 2021 negative

193,980 177,120

16,860

86) Ginvold Co. Subsidiary Income Statement For the Year Ended December 31, 2021 Stickles Rate Rent revenue

2.28 A =

Interest expense

(12,000 ) ×

2.28 A =

(27,360 )

Depreciation expense

(17,000 ) ×

2.28 A =

(38,760 )

Repair expense

(5,000 ) ×

2.22 H =

(11,100 )

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72,000

U.S. Dollars $ 164,160

Net income

38,000

Ginvold Co. Subsidiary Statement of Retained Earnings For the Year Ended December 31, 2021 Stickles Rate Retained earnings, 1/1/21 Net income

(above) =

32,000

(12,960 ) $ 73,980

Ginvold Co. Subsidiary Balance Sheet December 31, 2021 Stickles Rate Cash

U.S. Dollars

49,000

2.16C =

$ 105,840

Rent receivable

12,000

2.16C =

25,920

Building

170,000

2.16C =

367,200

Accumulated depreciation

(17,000 ) ×

2.16C =

(36,720 )

Total assets

0 86,940

(6,000 ) × $2.16H §

86,940

U.S. Dollars $

38,000

Dividends paid Retained earnings, 12/31/21

§ 214,000

$ 462,240

Interest payable

12,000

2.16C =

25,920

Note payable

120,000

2.16C =

259,200

Common stock

50,000

2.40H =

120,000

Retained earnings

32,000

(above)

73,980

(below)

(16,860 )

Translation adjustment

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Total liabilities and equities

§ 214,000

$ 462,240

Calculation of Translation Adjustment Stickles Net assets, 1/1/21

Rate

U.S. Dollars $ 0

Change in net assets, 2021: Common stock issuance

50,000

Net income

38,000

Dividends paid

(6,000 ) ×

Net assets, 12/31/21

82,000

Net assets, 12/31/21 at current exchange rate

82,000

$2.40

120,000

(above) $2.16

86,940 =

(12,960 ) $

$2.16

Translation adjustment, 2021 negative

193,980 177,120

Ginvold Co. Subsidiary Statement of Cash Flows For the Year Ended, December 31, 2021 Stickles Rate

16,860

U.S. Dollars

Operating activities: Net income

38,000

(Above)

86,940

Depreciation

17,000

× $

2.28A =

38,760

Increase in rent receivable

(12,000 ) × $

2.28A =

(27,360 )

Increase in interest payable

12,000

2.28A =

27,360

Net cash from operations

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55,000

× $

125,700

Investing activities: Purchase of building

(170,000 ) × $

2.40H =

(408,000 )

Financing activities: Proceeds from common stock

50,000

× $

2.40H =

120,000

Proceeds from note payable

120,000

× $

2.40H =

288,000

Dividend paid

(6,000 ) × $

2.16H =

(12,960 )

Net cash from financing Increase in cash

164,000

395,040

49,000

112,740

Effect of exchange rate change on cash Cash at December 31, 2020 Cash at December 31, 2021

(6,900 ) 0 §

49,000

0 ×

2.16C = $

105,840

87) The translation adjustment is based on changes in the net assets of the subsidiary. Net assets, 1/1/21

98,000

$0.29 = $ 28,420

Rendered services

36,000

$0.30 =

10,800

Incurred expense

(22,000 )

$0.31 =

(6,820 )

Change in net assets, 2021:

Net assets, 12/31/21

§ 112,000

Net assets, 12/31/21 at current exchange rate

§ 112,000

Translation adjustment, 2021 (positive)

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$ 32,400 ×

$0.35 =

39,200 $ (6,800 )

88) The remeasurement gain or loss is based on changes in the net monetary assets of the subsidiary Net monetary assets, 1/1/21

26,000

$0.29 = $

7,540

Rendered services

36,000

$0.30 =

10,800

Incurred expense

(22,000 ) ×

$0.31 =

(6,820 )

Change in net monetary assets, 2021:

Net monetary assets, 12/31/21

40,000

Net monetary assets, 12/31/21 at current exchange rate

40,000

Remeasurement gain

$ 11,520 ×

$0.35 =

14,000 $

2,480

89) Translated value of land §72,000 × $0.35 = $25,200 90) Remeasured value of land §72,000 × $0.28 = $20,160 91) (1.) C; (2) C; (3.) C; (4.) A; (5.) E; (6.) B; (7.) A; (8.) C; (9.) A; (10.) E 92) The historical rate that was in effect when the revenues and expenses were incurred should be used unless those revenues and expenses occur throughout the year, and then a weighted average exchange rate for the year may be used. 93) If the foreign subsidiary has distinct and separable operations in different countries, each of these operations can use a different currency. If the subsidiary does not have distinct operations in different countries, the currency in which the most transactions are carried out should be selected.

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94) Revenues and expenses occurring throughout the year may be translated using the average exchange rate for the year. A gain or loss occurring on a specific date should be translated using the rate in effect on that day. 95) Any effect on the contract resulting from exchange rate fluctuations is classified as a translation adjustment, rather than as a foreign exchange gain or loss. 96) The remeasurement of a foreign subsidiary's financial statements is required in the following situations: (A.) When the subsidiary's functional currency is the U.S. dollar. (B.) When the subsidiary operates in a highly inflationary economy. (C.) When the local currency is not the functional currency and the statements first need to be remeasured from one foreign currency to another foreign currency. 97) (A.) Depreciation expense would be translated using the average exchange rate for 2021. (B.) Depreciation expense would be remeasured using the exchange rate in effect when the equipment was purchased. 98) Assets and liabilities are translated using the current exchange rate; the rate in effect at the balance sheet date. This rate is chosen because assets and liabilities are expected to affect future cash flows. Therefore, they should be translated using the most up-to-date exchange rates available. 99) To determine the subsidiary's functional currency, Farley Brothers should look at the volume of the subsidiary's transactions in various currencies. If most of the subsidiary's sales and purchases are in dollars, the dollar may be the logical choice for the functional currency. If there are many transactions between the subsidiary and the parent, and if most of the subsidiary's financing comes from the U.S., the dollar may be a better choice than the euro. Version 1

100) Remeasurement is needed for transactions denominated in a currency other than the entity's functional currency. A U.S. company that engages in transactions in other countries may have to remeasure some of its transactions. The implicit justification for remeasurement is that foreign currency transactions affecting monetary assets and liabilities have a direct effect on the entity's cash flows. There will be direct effects on future cash flows in the functional currency, and thus an effect on net income. 101) The purpose of translation is to transform a subsidiary's financial statements, prepared in its functional currency, into the reporting currency of the parent. The purpose of remeasurement is to restate transactions from one currency into the functional currency of the entity. Remeasurement is also required when a subsidiary's financial statements have been denominated in a currency other than the subsidiary's functional currency. 102) The basic assumption underlying the current rate method is that a company’s net investment in a foreign operation is exposed to foreign exchange risk. 103) The basic objective underlying the temporal method is to produce a set of U.S. dollar-translated financial statements as if the foreign subsidiary had actually used U.S. dollars in conducting its operations. 104) Parent companies can hedge balance sheet exposure by using a derivative financial instrument, such as a forward contract or foreign currency option, or a nonderivative financial instrument, such as foreign currency borrowing.

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CHAPTER 9 MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) Cherryhill and Hace had been partners for several years, and they decided to admit Quincy to the partnership. The accountant for the partnership believed that the dissolved partnership and the newly formed partnership were two separate entities. What method would the accountant have used for recording the admission of Quincy to the partnership? A) The bonus method. B) The equity method. C) The goodwill method. D) The proportionate method. E) The cost method.

When the hybrid method is used to record the withdrawal of a partner, the partnership

A) revalues assets and liabilities and records goodwill to the continuing partner but not to the withdrawing partner. B) revalues liabilities but not assets, and no goodwill is recorded. C) can recognize goodwill but does not revalue assets and liabilities. D) revalues assets but not liabilities, and records goodwill to the continuing partner but not to the withdrawing partner. E) revalues assets and liabilities but does not record goodwill.

3) The disadvantages of the partnership form of business organization, compared to corporations, include A) the legal requirements for formation. B) unlimited liability for the partners. C) the requirement for the partnership to pay income taxes. D) the extent of governmental regulation. E) the complexity of operations.

4) The advantages of the partnership form of business organization, compared to corporations, include which of the following? Version 1

A) Single taxation. B) Ease of raising capital. C) Mutual agency. D) Limited liability. E) Difficulty of formation.

The dissolution of a partnership occurs A) only when the partnership sells its assets and permanently closes its books. B) only when a partner leaves the partnership. C) at the end of each year, when income is allocated to the partners. D) only when a new partner is admitted to the partnership. E) when there is any change in the individuals who make up the partnership.

6) The partnership of Clapton, Seidel, and Thomas is insolvent and will be unable to pay $30,000 in liabilities that are currently due.What recourse is available to the partnership's creditors? A) They must present equal claims to the three partners as individuals. B) They must try to obtain payment from the partner with the largest capital account balance. C) They cannot seek remuneration from the partners as individuals. D) They may seek remuneration from any partner they choose. E) They must present their claims to the three partners in descending order based on the partners' capital account balances.

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7) Goodman, Pinkman, and White formed a partnership on January 1, 2020, and made capital contributions of $125,000 (Goodman), $175,000 (Pinkman), and $250,000 (White), respectively. With respect to the division of income, they agreed to the following: (1) interest of an amount equal to 10% of the that partner’s beginning capital balance for the year; (2) annual compensation of $15,000 to Pinkman; and (3) the remainder of the income or loss to be split among the partners in the following percentages: (a) 20% for Goodman; (b) 40% for Pinkman; and (c) 40% for White. Net income was $200,000 in 2020 and $240,000 in 2021. Each partner withdrew $1,500 for personal use every month during 2020 and 2021. What was Pinkman’s total share of net income for 2020? A) $84,500. B) $70,000. C) $87,500. D) $52,000. E) $77,000.

8) Goodman, Pinkman, and White formed a partnership on January 1, 2020, and made capital contributions of $125,000 (Goodman), $175,000 (Pinkman), and $250,000 (White), respectively. With respect to the division of income, they agreed to the following: (1) interest of an amount equal to 10% of the that partner’s beginning capital balance for the year; (2) annual compensation of $15,000 to Pinkman; and (3) the remainder of the income or loss to be split among the partners in the following percentages: (a) 20% for Goodman; (b) 40% for Pinkman; and (c) 40% for White. Net income was $200,000 in 2020 and $240,000 in 2021. Each partner withdrew $1,500 for personal use every month during 2020 and 2021. What was White’s total share of net income for 2020? A) $95,000. B) $84,500. C) $77,000. D) $25,000. E) $52,000.

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9) Goodman, Pinkman, and White formed a partnership on January 1, 2020, and made capital contributions of $125,000 (Goodman), $175,000 (Pinkman), and $250,000 (White), respectively. With respect to the division of income, they agreed to the following: (1) interest of an amount equal to 10% of the that partner’s beginning capital balance for the year; (2) annual compensation of $15,000 to Pinkman; and (3) the remainder of the income or loss to be split among the partners in the following percentages: (a) 20% for Goodman; (b) 40% for Pinkman; and (c) 40% for White. Net income was $200,000 in 2020 and $240,000 in 2021. Each partner withdrew $1,500 for personal use every month during 2020 and 2021. What was Goodman’s total share of net income for 2020? A) $41,500. B) $35,000. C) $26,000. D) $38,500. E) $47,500.

10) Goodman, Pinkman, and White formed a partnership on January 1, 2020, and made capital contributions of $125,000 (Goodman), $175,000 (Pinkman), and $250,000 (White), respectively. With respect to the division of income, they agreed to the following: (1) interest of an amount equal to 10% of the that partner’s beginning capital balance for the year; (2) annual compensation of $15,000 to Pinkman; and (3) the remainder of the income or loss to be split among the partners in the following percentages: (a) 20% for Goodman; (b) 40% for Pinkman; and (c) 40% for White. Net income was $200,000 in 2020 and $240,000 in 2021. Each partner withdrew $1,500 for personal use every month during 2020 and 2021. What was White’s capital balance at the end of 2020? A) $327,000. B) $191,000. C) $345,000. D) $309,000. E) $259,000.

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11) Goodman, Pinkman, and White formed a partnership on January 1, 2020, and made capital contributions of $125,000 (Goodman), $175,000 (Pinkman), and $250,000 (White), respectively. With respect to the division of income, they agreed to the following: (1) interest of an amount equal to 10% of the that partner’s beginning capital balance for the year; (2) annual compensation of $15,000 to Pinkman; and (3) the remainder of the income or loss to be split among the partners in the following percentages: (a) 20% for Goodman; (b) 40% for Pinkman; and (c) 40% for White. Net income was $200,000 in 2020 and $240,000 in 2021. Each partner withdrew $1,500 for personal use every month during 2020 and 2021. What was Pinkman’s capital balance at the end of 2020? A) $259,500. B) $190,000. C) $211,500. D) $260,000. E) $241,500.

12) Goodman, Pinkman, and White formed a partnership on January 1, 2020, and made capital contributions of $125,000 (Goodman), $175,000 (Pinkman), and $250,000 (White), respectively. With respect to the division of income, they agreed to the following: (1) interest of an amount equal to 10% of the that partner’s beginning capital balance for the year; (2) annual compensation of $15,000 to Pinkman; and (3) the remainder of the income or loss to be split among the partners in the following percentages: (a) 20% for Goodman; (b) 40% for Pinkman; and (c) 40% for White. Net income was $200,000 in 2020 and $240,000 in 2021. Each partner withdrew $1,500 for personal use every month during 2020 and 2021. What was Goodman’s capital balance at the end of 2020? A) $133,000. B) $145,500. C) $163,500. D) $107,000. E) $181,500.

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13) Goodman, Pinkman, and White formed a partnership on January 1, 2020, and made capital contributions of $125,000 (Goodman), $175,000 (Pinkman), and $250,000 (White), respectively. With respect to the division of income, they agreed to the following: (1) interest of an amount equal to 10% of the that partner’s beginning capital balance for the year; (2) annual compensation of $15,000 to Pinkman; and (3) the remainder of the income or loss to be split among the partners in the following percentages: (a) 20% for Goodman; (b) 40% for Pinkman; and (c) 40% for White. Net income was $200,000 in 2020 and $240,000 in 2021. Each partner withdrew $1,500 for personal use every month during 2020 and 2021. What was the total capital balance for the partnership at December 31, 2020? A) $804,000. B) $696,000. C) $750,000. D) $604,000. E) $496,000.

14) Goodman, Pinkman, and White formed a partnership on January 1, 2020, and made capital contributions of $125,000 (Goodman), $175,000 (Pinkman), and $250,000 (White), respectively. With respect to the division of income, they agreed to the following: (1) interest of an amount equal to 10% of the that partner’s beginning capital balance for the year; (2) annual compensation of $15,000 to Pinkman; and (3) the remainder of the income or loss to be split among the partners in the following percentages: (a) 20% for Goodman; (b) 40% for Pinkman; and (c) 40% for White. Net income was $200,000 in 2020 and $240,000 in 2021. Each partner withdrew $1,500 for personal use every month during 2020 and 2021. What was the amount of interest attributed to Pinkman in the income distribution for 2021? A) $20,750. B) $17,450. C) $24,150. D) $17,500. E) $25,950.

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15) Goodman, Pinkman, and White formed a partnership on January 1, 2020, and made capital contributions of $125,000 (Goodman), $175,000 (Pinkman), and $250,000 (White), respectively. With respect to the division of income, they agreed to the following: (1) interest of an amount equal to 10% of the that partner’s beginning capital balance for the year; (2) annual compensation of $15,000 to Pinkman; and (3) the remainder of the income or loss to be split among the partners in the following percentages: (a) 20% for Goodman; (b) 40% for Pinkman; and (c) 40% for White. Net income was $200,000 in 2020 and $240,000 in 2021. Each partner withdrew $1,500 for personal use every month during 2020 and 2021. What was Pinkman’s total share of net income for 2021? A) $62,160. B) $101,310. C) $135,150. D) $96,000. E) $111,000.

16) Goodman, Pinkman, and White formed a partnership on January 1, 2020, and made capital contributions of $125,000 (Goodman), $175,000 (Pinkman), and $250,000 (White), respectively. With respect to the division of income, they agreed to the following: (1) interest of an amount equal to 10% of the that partner’s beginning capital balance for the year; (2) annual compensation of $15,000 to Pinkman; and (3) the remainder of the income or loss to be split among the partners in the following percentages: (a) 20% for Goodman; (b) 40% for Pinkman; and (c) 40% for White. Net income was $200,000 in 2020 and $240,000 in 2021. Each partner withdrew $1,500 for personal use every month during 2020 and 2021. What was the remainder portion of net income allocated to White for 2021? A) $62,160. B) $96,000. C) $68,160. D) $90,000. E) $74,160.

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17) Goodman, Pinkman, and White formed a partnership on January 1, 2020, and made capital contributions of $125,000 (Goodman), $175,000 (Pinkman), and $250,000 (White), respectively. With respect to the division of income, they agreed to the following: (1) interest of an amount equal to 10% of the that partner’s beginning capital balance for the year; (2) annual compensation of $15,000 to Pinkman; and (3) the remainder of the income or loss to be split among the partners in the following percentages: (a) 20% for Goodman; (b) 40% for Pinkman; and (c) 40% for White. Net income was $200,000 in 2020 and $240,000 in 2021. Each partner withdrew $1,500 for personal use every month during 2020 and 2021. What was White’s total share of net income for 2021? A) $99,060. B) $126,900. C) $62,160. D) $93,060. E) $96,000.

18) Goodman, Pinkman, and White formed a partnership on January 1, 2020, and made capital contributions of $125,000 (Goodman), $175,000 (Pinkman), and $250,000 (White), respectively. With respect to the division of income, they agreed to the following: (1) interest of an amount equal to 10% of the that partner’s beginning capital balance for the year; (2) annual compensation of $15,000 to Pinkman; and (3) the remainder of the income or loss to be split among the partners in the following percentages: (a) 20% for Goodman; (b) 40% for Pinkman; and (c) 40% for White. Net income was $200,000 in 2020 and $240,000 in 2021. Each partner withdrew $1,500 for personal use every month during 2020 and 2021. What was Goodman’s total share of net income for 2021? A) $45,630. B) $31,080. C) $62,550. D) $48,000. E) $60,630.

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19) Goodman, Pinkman, and White formed a partnership on January 1, 2020, and made capital contributions of $125,000 (Goodman), $175,000 (Pinkman), and $250,000 (White), respectively. With respect to the division of income, they agreed to the following: (1) interest of an amount equal to 10% of the that partner’s beginning capital balance for the year; (2) annual compensation of $15,000 to Pinkman; and (3) the remainder of the income or loss to be split among the partners in the following percentages: (a) 20% for Goodman; (b) 40% for Pinkman; and (c) 40% for White. Net income was $200,000 in 2020 and $240,000 in 2021. Each partner withdrew $1,500 for personal use every month during 2020 and 2021. What was White’s capital balance at the end of 2021? A) $402,060. B) $417,900. C) $405,000. D) $390,060. E) $384,060.

20) Goodman, Pinkman, and White formed a partnership on January 1, 2020, and made capital contributions of $125,000 (Goodman), $175,000 (Pinkman), and $250,000 (White), respectively. With respect to the division of income, they agreed to the following: (1) interest of an amount equal to 10% of the that partner’s beginning capital balance for the year; (2) annual compensation of $15,000 to Pinkman; and (3) the remainder of the income or loss to be split among the partners in the following percentages: (a) 20% for Goodman; (b) 40% for Pinkman; and (c) 40% for White. Net income was $200,000 in 2020 and $240,000 in 2021. Each partner withdrew $1,500 for personal use every month during 2020 and 2021. What was Pinkman’s capital balance at the end of 2021? A) $342,810. B) $361,650. C) $324,810. D) $337,500. E) $300,660.

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21) Goodman, Pinkman, and White formed a partnership on January 1, 2020, and made capital contributions of $125,000 (Goodman), $175,000 (Pinkman), and $250,000 (White), respectively. With respect to the division of income, they agreed to the following: (1) interest of an amount equal to 10% of the that partner’s beginning capital balance for the year; (2) annual compensation of $15,000 to Pinkman; and (3) the remainder of the income or loss to be split among the partners in the following percentages: (a) 20% for Goodman; (b) 40% for Pinkman; and (c) 40% for White. Net income was $200,000 in 2020 and $240,000 in 2021. Each partner withdrew $1,500 for personal use every month during 2020 and 2021. What was Goodman’s capital account balance at the end of 2021? A) $191,130. B) $142,050. C) $173,130. D) $190,050. E) $193,500.

22) Goodman, Pinkman, and White formed a partnership on January 1, 2020, and made capital contributions of $125,000 (Goodman), $175,000 (Pinkman), and $250,000 (White), respectively. With respect to the division of income, they agreed to the following: (1) interest of an amount equal to 10% of the that partner’s beginning capital balance for the year; (2) annual compensation of $15,000 to Pinkman; and (3) the remainder of the income or loss to be split among the partners in the following percentages: (a) 20% for Goodman; (b) 40% for Pinkman; and (c) 40% for White. Net income was $200,000 in 2020 and $240,000 in 2021. Each partner withdrew $1,500 for personal use every month during 2020 and 2021. What was the total capital balance for the partnership at December 31, 2021? A) $936,000. B) $805,000. C) $924,000. D) $882,000. E) $860,000.

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23) Goodman, Pinkman, and White formed a partnership on January 1, 2020, and made capital contributions of $125,000 (Goodman), $175,000 (Pinkman), and $250,000 (White), respectively. With respect to the division of income, they agreed to the following: (1) interest of an amount equal to 10% of the that partner’s beginning capital balance for the year; (2) annual compensation of $15,000 to Pinkman; and (3) the remainder of the income or loss to be split among the partners in the following percentages: (a) 20% for Goodman; (b) 40% for Pinkman; and (c) 40% for White. Net income was $200,000 in 2020 and $240,000 in 2021. Each partner withdrew $1,500 for personal use every month during 2020 and 2021. What will be the amount of interest attributed to Goodman in the income distribution for 2022? A) $19,113. B) $17,313. C) $19,005. D) $14,205. E) $24,000.

24) Jell and Dell were partners with capital balances of $600 and $800, and an incomesharing ratio of 2:3. They admitted Zell with a 30% interest in the partnership, and the total amount of goodwill credited to the original partners was $700. What amount did Zell contribute to the business? A) $900. B) $560. C) $600. D) $590. E) $630.

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25) Jerry, a partner in the JSK partnership, begins the year on January 1, 2021 with a capital balance of $20,000. The JSK partnership agreement states that Jerry receives 6% interest on his monthly weighted average capital balance without regard to normal drawings. Each partner draws $5,000 in cash from the business every quarter. Any withdrawal in excess of that will be accounted for as a direct reduction of the partner’s capital balance. ● On March 1, 2021, when the partnership tax return for 2020 was completed, Jerry’s capital account was credited for his share of 2020 profit of $120,000. ● Jerry withdrew $5,000 quarterly, beginning March 31st. ● On September 1, Jerry’s capital account was credited with a special bonus of $60,000 for business he brought to the partnership. What amount of interest will be attributed to Jerry for the year 2021 that will go toward his profitdistribution for the year? A) $6,000. B) $6,250. C) $7,950. D) $8,400. E) None of these answer choices is correct.

26)

A partnership began its first year of operations with the following capital balances:

Young, Capital Eaton, Capital Thurman, Capital

$ $ $

143,000 104,000 143,000

The Articles of Partnership stipulated that profits and losses be assigned in the following manner: ● Young was to be awarded an annual salary of $26,000 and $13,000 salary was to be awarded to Thurman. ● Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. ● The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. ● Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was Young's total share of net loss for the first year?

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A) $3,900 loss. B) $11,700 loss. C) $10,400 loss. D) $24,700 loss. E) $9,100 loss.

27)

A partnership began its first year of operations with the following capital balances:

Young, Capital Eaton, Capital Thurman, Capital

$ $ $

143,000 104,000 143,000

The Articles of Partnership stipulated that profits and losses be assigned in the following manner: ● Young was to be awarded an annual salary of $26,000 and $13,000 salary was to be awarded to Thurman. ● Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. ● The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. ● Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was Eaton's total share of net loss for the first year? A) $3,900 loss. B) $11,700 loss. C) $10,400 loss. D) $24,700 loss. E) $9,100 loss.

28)

A partnership began its first year of operations with the following capital balances:

Young, Capital Eaton, Capital

Version 1

$ $

143,000 104,000

Thurman, Capital

143,000

The Articles of Partnership stipulated that profits and losses be assigned in the following manner: ● Young was to be awarded an annual salary of $26,000 and $13,000 salary was to be awarded to Thurman. ● Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. ● The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. ● Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was Thurman's total share of net loss for the first year? A) $3,900 loss. B) $11,700 loss. C) $10,400 loss. D) $24,700 loss. E) $9,100 loss.

29)

A partnership began its first year of operations with the following capital balances:

Young, Capital Eaton, Capital Thurman, Capital

Version 1

$ $ $

143,000 104,000 143,000

The Articles of Partnership stipulated that profits and losses be assigned in the following manner: ● Young was to be awarded an annual salary of $26,000 and $13,000 salary was to be awarded to Thurman. ● Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. ● The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. ● Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was the balance in Young's Capital account at the end of the first year? A) $120,900. B) $118,300. C) $126,100. D) $80,600. E) $111,500.

30)

A partnership began its first year of operations with the following capital balances:

Young, Capital Eaton, Capital Thurman, Capital

$ $ $

143,000 104,000 143,000

The Articles of Partnership stipulated that profits and losses be assigned in the following manner: ● Young was to be awarded an annual salary of $26,000 and $13,000 salary was to be awarded to Thurman. ● Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. ● The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. ● Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was the balance in Eaton's Capital account at the end of the first year?

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A) $120,900. B) $118,300. C) $126,100. D) $80,600. E) $111,500.

31)

A partnership began its first year of operations with the following capital balances:

Young, Capital Eaton, Capital Thurman, Capital

$ $ $

143,000 104,000 143,000

The Articles of Partnership stipulated that profits and losses be assigned in the following manner: ● Young was to be awarded an annual salary of $26,000 and $13,000 salary was to be awarded to Thurman. ● Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. ● The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. ● Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was the balance in Thurman's Capital account at the end of the first year? A) $120,900. B) $118,300. C) $126,100. D) $80,600. E) $111,500.

32)

A partnership began its first year of operations with the following capital balances:

Young, Capital Eaton, Capital

Version 1

$ $

143,000 104,000

Thurman, Capital

143,000

33)

A partnership began its first year of operations with the following capital balances:

Young, Capital Eaton, Capital Thurman, Capital

Version 1

$ $ $

143,000 104,000 143,000

The Articles of Partnership stipulated that profits and losses be assigned in the following manner: ● Young was to be awarded an annual salary of $26,000 and $13,000 salary was to be awarded to Thurman. ● Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. ● The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. ● Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was Eaton's total share of net income for the second year? A) $17,160 income. B) $4,160 income. C) $19,760 income. D) $17,290 income. E) $28,080 income.

34)

A partnership began its first year of operations with the following capital balances:

Young, Capital Eaton, Capital Thurman, Capital

$ $ $

143,000 104,000 143,000

The Articles of Partnership stipulated that profits and losses be assigned in the following manner: ● Young was to be awarded an annual salary of $26,000 and $13,000 salary was to be awarded to Thurman. ● Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. ● The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. ● Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was Thurman's total share of net income for the second year?

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A) $17,160 income. B) $4,160 income. C) $19,760 income. D) $17,290 income. E) $28,080 income.

35)

A partnership began its first year of operations with the following capital balances:

Young, Capital Eaton, Capital Thurman, Capital

$ $ $

143,000 104,000 143,000

The Articles of Partnership stipulated that profits and losses be assigned in the following manner: ● Young was to be awarded an annual salary of $26,000 and $13,000 salary was to be awarded to Thurman. ● Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. ● The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. ● Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was the balance in Young's Capital account at the end of the second year? A) $133,380. B) $84,760. C) $105,690. D) $132,860. E) $71,760.

36)

A partnership began its first year of operations with the following capital balances:

Young, Capital Eaton, Capital

Version 1

$ $

143,000 104,000

Thurman, Capital

143,000

The Articles of Partnership stipulated that profits and losses be assigned in the following manner: ● Young was to be awarded an annual salary of $26,000 and $13,000 salary was to be awarded to Thurman. ● Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. ● The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. ● Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was the balance in Eaton's Capital account at the end of the second year? A) $133,380. B) $84,760. C) $105,690. D) $132,860. E) $71,760.

37)

A partnership began its first year of operations with the following capital balances:

Young, Capital Eaton, Capital Thurman, Capital

Version 1

$ $ $

143,000 104,000 143,000

The Articles of Partnership stipulated that profits and losses be assigned in the following manner: ● Young was to be awarded an annual salary of $26,000 and $13,000 salary was to be awarded to Thurman. ● Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. ● The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. ● Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was the balance in Thurman's Capital account at the end of the second year? A) $133,380. B) $84,760. C) $105,690. D) $132,860. E) $71,760.

38)

Which of the following is not a characteristic of a partnership? A) The partnership itself pays no income taxes. B) It is easy to form a partnership. C) Any partner can be held personally liable for all debts of the business. D) A partnership requires written Articles of Partnership. E) Each partner has the power to obligate the partnership for liabilities.

39) Partnerships have alternative legal forms including all of the following except which of the following? A) General Partnership. B) Limited Partnership. C) Subchapter S Partnership. D) Limited Liability Partnership. E) Limited Liability Company.

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40) Which of the following type of organization is classified as a partnership, or similar to a partnership, for tax purposes? (I.) Limited Liability Company (II.) Limited Liability Partnership (III.) Subchapter S Corporation A) II only. B) II and III. C) I and II. D) I and III. E) I, II, and III.

41)

Which of the following statements is correct regarding the admission of a new partner?

A) A new partner must purchase a partnership interest directly from the business. B) The right of co-ownership in the business property can be transferred to a new partner without the consent of other existing partners. C) The right to participate in management of the business cannot be conveyed without the consent of other existing partners. D) The right to share in profits and losses can be sold to a new partner without the consent of other existing partners. E) A new partner always pays book value.

42) Withdrawals from the partnership capital accounts are typically not used in which of the following situations? A) To reward partners for work performed in the business. B) To reduce the partners' capital account balances at the end of an accounting period. C) To record interest earned on a partner’s capital balance. D) To reduce the basic investment that has been made in the business. E) To record the partnership’s payment of a partner’s personal expense such as income tax.

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43) The partnership contract for Hanes and Jones LLP provides that Hanes is to receive a bonus of 20% of net income (after the bonus) and that the remaining net income is to be divided equally. If the partnership income before the bonus for the year is $57,600, Hanes’ share of this pre-bonus income is: A) $28,800. B) $33,600. C) $34,560. D) $35,520. E) $38,400.

44) The partners of Apple, Bere, and Carroll LLP share net income and losses in a 5:3:2 ratio, respectively. The capital account balances on January 1, 2021, were as follows: Apple, capital Bere, capital

Carroll, capital Total partners' capital

25,000 75,000 50,000

150,000

The carrying amounts of the assets and liabilities of the partnership are the same as their current fair values. Dorr will be admitted to the partnership with a 20% capital interest and a 20% share of net income and losses in exchange for a cash investment. The amount of cash that Dorr should invest in the partnership is: A) $25,000. B) $30,000. C) $37,500. D) $75,000. E) $90,000.

45) The appropriate format of the December 31, 2020closing entry for John & Hope Limited Liability Partnership, whose two partners had withdrawn their salaries from the partnership during the year, is:

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John, Drawing

XXX

Hope, Drawing

XXX

Salaries Payable B)

Salaries Expense

XXX XXX

John, Drawing

XXX

Hope, Drawing

XXX

John, Capital

XXX

Hope, Capital

XXX

Salaries Payable D)

XXX

John, Capital

XXX

Hope, Capital

XXX

John, Drawing

XXX

Hope, Drawing

XXX

John, Capital

XXX

Hope, Capital

XXX

Drawing Expense

XXX

A) Option A. B) Option B. C) Option C. D) Option D. E) Option E.

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46) When Danny withdrew from John, Daniel, Harry, and Danny, LLP, he was paid $80,000, although his capital account balance was only $60,000. The four partners shared net income and losses equally, and no revaluation will take place. The journal entry to record the effect on John’s capital due to Danny's withdrawal would include: A) $6,667 debit to John, Capital. B) $6,667 credit to John, Capital. C) $20,000 debit to John, Capital. D) $5,000 debit to John, Capital. E) $5,000 credit to John, Capital.

47) Max, Jones and Waters shared profits and losses 20%, 40%, and 40% respectively and their partnership capital balance is $10,000, $30,000 and $50,000 respectively. Max has decided to withdraw from the partnership. An appraisal of the business and its property estimates the fair value to be $200,000. Land with a book value of $30,000 has a fair value of $45,000. Max has agreed to receive $20,000 in exchange for her partnership interest after revaluation. At what amount should land be recorded on the partnership books? A) $20,000. B) $30,000. C) $45,000. D) $50,000. E) $200,000.

48) The capital account balances for Donald & Hanes LLP on January 1, 2021, were as follows: Donald, capital Hanes, capital

200,000 100,000

Donald and Hanes shared net income and losses in the ratio of 3:2, respectively. The partners agreed to admit May to the partnership with a 35% interest in partnership capital and net income. May invested $100,000 cash, and no goodwill was recognized. What is the balance of May’s capital account after the new partnership is created?

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A) $84,000. B) $100,000. C) $140,000. D) $176,000. E) $200,000.

49) The capital account balances for Donald & Hanes LLP on January 1, 2021, were as follows: Donald, capital Hanes, capital

200,000 100,000

Donald and Hanes shared net income and losses in the ratio of 3:2, respectively. The partners agreed to admit May to the partnership with a 35% interest in partnership capital and net income. May invested $100,000 cash, and no goodwill was recognized. What is the balance of Donald’s capital account after the new partnership is created? A) $84,000. B) $100,000. C) $140,000. D) $176,000. E) $200,000.

50) The capital account balances for Donald & Hanes LLP on January 1, 2021, were as follows: Donald, capital Hanes, capital

Version 1

200,000 100,000

Donald and Hanes shared net income and losses in the ratio of 3:2, respectively. The partners agreed to admit May to the partnership with a 35% interest in partnership capital and net income. May invested $100,000 cash, and no goodwill was recognized. What is the balance of Hanes’s capital account after the new partnership is created? A) $84,000. B) $100,000. C) $140,000. D) $176,000. E) $200,000.

51) The capital account balances for Donald & Hanes LLP on January 1, 2021, were as follows: Donald, capital Hanes, capital

200,000 100,000

Donald and Hanes shared net income and losses in the ratio of 3:2, respectively. The partners agreed to admit May to the partnership with a 35% interest in partnership capital and net income. May invested $100,000 cash, and no goodwill was recognized. What is the new total balance of the partnership accounts? A) $84,000. B) $140,000. C) $176,000. D) $200,000. E) $400,000.

52) Which of the following could be used as a basis to allocate profits among partners who are active in the management of the partnership? 1) Allocation of salaries. 2) The number of years with the partnership. 3) The amount of time each partner works. 4) The average capital invested.

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A) 1 and 2. B) 1 and 3. C) 1, 2, and 4. D) 1, 3, and 4. E) 1, 2, 3, and 4.

53) P, L, and O are partners with capital balances of $50,000, $30,000 and $20,000 and who share in the profit and loss of the PLO partnership 30%, 20%, and 50%, respectively, when they agree to admit C for a 20% interest. If C is to contribute an amount equal to his book value share of the new partnership, how much should C contribute? A) $22,000 B) $20,000 C) $25,000 D) $18,000 E) $10,000

54) P, L, and O are partners with capital balances of $50,000, $30,000 and $20,000 and who share in the profit and loss of the PLO partnership 30%, 20%, and 50%, respectively, when they agree to admit C for a 20% interest. C contributes $38,000 to the partnership and the bonus method is used. What amount will be credited for C’s beginning capital balance? A) $20,000 B) $25,000 C) $27,600 D) $32,600 E) $38,000

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55) P, L, and O are partners with capital balances of $50,000, $30,000 and $20,000 and who share in the profit and loss of the PLO partnership 30%, 20%, and 50%, respectively, when they agree to admit C for a 20% interest. If C contributes $40,000 to the partnership and the goodwill method is used, what amount will be debited for goodwill? A) $15,000 B) $20,000 C) $25,000 D) $28,000 E) $60,000

56) P, L, and O are partners with capital balances of $50,000, $30,000 and $20,000 and who share in the profit and loss of the PLO partnership 30%, 20%, and 50%, respectively, when they agree to admit C for a 20% interest. C contributes $10,000 to the partnership and the goodwill method is used.What will be the result of the goodwill calculation? A) Goodwill of $15,000; split among the original partners. B) Goodwill of $15,000; all to C. C) Goodwill of $15,000; split among all four partners: P, L, O, and C. D) Goodwill of $12,000; all to C. E) Goodwill of $12,000; split among original partners.

57) Peter, Roberts, and Dana have the following capital balances; $80,000, $100,000 and $60,000, respectively.The partners share profits and losses 20%, 40%, and 40% respectively. Roberts retires and is paid $160,000 based on an independent appraisal of the business.If the goodwill method is used, what is the capital balance of Peter? A) $20,000. B) $60,000. C) $110,000. D) $120,000. E) $230,000.

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58) Peter, Roberts, and Dana have the following capital balances; $80,000, $100,000 and $60,000, respectively.The partners share profits and losses 20%, 40%, and 40% respectively. Roberts retires and is paid $160,000 based on an independent appraisal of the business.If the goodwill method is used, what is the capital balance of Dana? A) $ 20,000. B) $ 60,000. C) $110,000. D) $120,000. E) $230,000.

59) Peter, Roberts, and Dana have the following capital balances; $80,000, $100,000 and $60,000, respectively.The partners share profits and losses 20%, 40%, and 40% respectively. What is the total partnership capital after Roberts retires receiving $160,000 and using the goodwill method? A) $290,000. B) $176,000. C) $ 80,000. D) $120,000. E) $230,000.

60) Donald, Anne, and Todd have the following capital balances; $40,000, $50,000 and $30,000 respectively.The partners share profits and losses 20%, 40%, and 40% respectively. Anne retires and is paid $80,000 based on an independent appraisal of the business.If the goodwill method is used, what is the capital of the remaining partners? A) Donald, $55,000; Todd, $60,000 B) Donald, $40,000; Todd, $30,000 C) Donald, $65,000; Todd, $55,000 D) Donald, $15,000; Todd, $30,000 E) Donald, $25,000; Todd, $0

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61) Donald, Anne, and Todd have the following capital balances; $40,000, $50,000 and $30,000 respectively.The partners share profits and losses 20%, 40%, and 40% respectively. Anne retires and is paid $80,000 based on the terms of the original partnership agreement.If the bonus method is used, what is the capital of the remaining partners? A) Donald, $40,000; Todd, $30,000. B) Donald, $30,000; Todd, $10,000. C) Donald, $50,000; Todd, $50,000. D) Donald, $24,000; Todd, $18,000. E) Donald, $70,000; Todd, $40,000.

62) Donald, Anne, and Todd have the following capital balances; $40,000, $50,000 and $30,000 respectively.The partners share profits and losses 20%, 40%, and 40% respectively. What is the total partnership capital after Anne retires receiving $80,000 and using the bonus method? A) $70,000. B) $40,000. C) $60,000. D) $80,000. E) $42,000.

63) Which of the following is a type of investment designed primarily for individuals who want the tax benefits of a partnership but who do not wish to work in a partnership or have unlimited liability? A) General Partnership. B) Limited Partnership. C) Subchapter S Partnership. D) Limited Liability Partnership. E) Limited Liability Company.

64) Which of the following has most of the characteristics of a general partnership except that it significantly reduces the partners’ liability?

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A) General Partnership. B) Limited Partnership. C) Subchapter S Partnership. D) Limited Liability Partnership. E) Limited Liability Company.

65) A local partnership has two partners, Jim and Pam. Jim has a capital balance of $150,000 and Pam has a capital balance of $125,000. These two partners share profits and losses 60 percent (Jim) and 40 percent (Pam). Cece invests $75,000 in cash in the partnership for a 25 percent ownership. The bonus method will be used. What is Jim’s capital balance after this new investment? A) $87,500. B) $157,500. C) $142,500. D) $120,000. E) $130,000.

66) A local partnership has two partners, Jim and Pam. Jim has a capital balance of $150,000 and Pam has a capital balance of $125,000. These two partners share profits and losses 60 percent (Jim) and 40 percent (Pam). Cece invests $75,000 in cash in the partnership for a 25 percent ownership. The bonus method will be used. What is Pam’s capital balance after this new investment? A) $87,500. B) $157,500. C) $142,500. D) $120,000. E) $130,000.

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67) A local partnership has two partners, Jim and Pam. Jim has a capital balance of $150,000 and Pam has a capital balance of $125,000. These two partners share profits and losses 60 percent (Jim) and 40 percent (Pam). Cece invests $75,000 in cash in the partnership for a 25 percent ownership. The bonus method will be used. What is Cece’s capital balance after this new investment? A) $87,500. B) $157,500. C) $142,500. D) $120,000. E) $130,000.

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 68) Reed, Sharp, and Tucker were partners with capital account balances of $80,000, $100,000, and $70,000, respectively. They agreed to admit Upton to the partnership. Upton purchased 30% of each partner's interest, with payments directly to Reed, Sharp, and Tucker of $32,000, $40,000, and $28,000, respectively. Before the admission of Upton, the profit and loss sharing ratio was 2:3:2. The partners agreed to use the book value method to account for the admission of Upton to the partnership. Required: Prepare the journal entry to record the admission of Upton to the partnership.

69) Jipsom and Klark were partners with capital account balances of $80,000 and $100,000, respectively. Looney directly paid $32,000 to Jipsom and $40,000 to Klark for 30% of their interests in the partnership. Jipsom and Klark shared income in the ratio of 2:3. They believed that revaluation of the partnership was appropriate when a new partner was admitted. Required: Prepare the journal entries to record the admission of Looney to the partnership.

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70) Norr and Caylor established a partnership on January 1, 2020.Norr invested cash of $100,000 and Caylor invested $30,000 in cash and equipment with a book value of $40,000 and fair value of $50,000.For both partners, the beginning capital balance was to equal the initial investment.Norr and Caylor agreed to the following procedure for sharing profits and losses: - 12% interest on the yearly beginning capital balance - $10 per hour of work that can be billed to the partnership's clients - the remainder allocated ona 3:2 ratio The Articles of Partnership specified that each partner should withdraw no more than $1,000 per month, which is accounted as direct reduction of that partner’s capital balance. For 2020, the partnership's income was $70,000.Norr had 1,000 billable hours, and Caylor worked 1,400 billable hours.In 2021, the partnership's income was $24,000, and Norr and Caylor worked 800 and 1,200 billable hours respectively.Each partner withdrew $1,000 per month throughout 2020and 2021. Determine the amount of net income allocated to each partner for 2020.

71) Norr and Caylor established a partnership on January 1, 2020.Norr invested cash of $100,000 and Caylor invested $30,000 in cash and equipment with a book value of $40,000 and fair value of $50,000.For both partners, the beginning capital balance was to equal the initial investment.Norr and Caylor agreed to the following procedure for sharing profits and losses: - 12% interest on the yearly beginning capital balance - $10 per hour of work that can be billed to the partnership's clients - the remainder allocated ona 3:2 ratio The Articles of Partnership specified that each partner should withdraw no more than $1,000 per month, which is accounted as direct reduction of that partner’s capital balance. For 2020, the partnership's income was $70,000.Norr had 1,000 billable hours, and Caylor worked 1,400 billable hours.In 2021, the partnership's income was $24,000, and Norr and Caylor worked 800 and 1,200 billable hours respectively.Each partner withdrew $1,000 per month throughout 2020and 2021. Determine the balance in both capital accounts at the end of 2020.

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72) Norr and Caylor established a partnership on January 1, 2020.Norr invested cash of $100,000 and Caylor invested $30,000 in cash and equipment with a book value of $40,000 and fair value of $50,000.For both partners, the beginning capital balance was to equal the initial investment.Norr and Caylor agreed to the following procedure for sharing profits and losses: - 12% interest on the yearly beginning capital balance - $10 per hour of work that can be billed to the partnership's clients - the remainder allocated ona 3:2 ratio The Articles of Partnership specified that each partner should withdraw no more than $1,000 per month, which is accounted as direct reduction of that partner’s capital balance. For 2020, the partnership's income was $70,000.Norr had 1,000 billable hours, and Caylor worked 1,400 billable hours.In 2021, the partnership's income was $24,000, and Norr and Caylor worked 800 and 1,200 billable hours respectively.Each partner withdrew $1,000 per month throughout 2020and 2021. Determine the amount of net income allocated to each partner for 2021. (Round all calculations to the nearest whole dollar.)

73) Norr and Caylor established a partnership on January 1, 2020.Norr invested cash of $100,000 and Caylor invested $30,000 in cash and equipment with a book value of $40,000 and fair value of $50,000.For both partners, the beginning capital balance was to equal the initial investment.Norr and Caylor agreed to the following procedure for sharing profits and losses: - 12% interest on the yearly beginning capital balance - $10 per hour of work that can be billed to the partnership's clients - the remainder allocated ona 3:2 ratio The Articles of Partnership specified that each partner should withdraw no more than $1,000 per month, which is accounted as direct reduction of that partner’s capital balance. For 2020, the partnership's income was $70,000.Norr had 1,000 billable hours, and Caylor worked 1,400 billable hours.In 2021, the partnership's income was $24,000, and Norr and Caylor worked 800 and 1,200 billable hours respectively.Each partner withdrew $1,000 per month throughout 2020and 2021. Determine the balance in both capital accounts at the end of 2021to the nearest dollar.

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74) The ABCD Partnership has the following balance sheet at January 1, 2020, prior to the admission of new partner, Eden. Cash and current assets Land

Building and equipment

Total

39,000 234,000

Liabilities Adams, capital

130,000

Barnes, capital

52,000

Cordas, capital

117,000

Davis, capital

156,000

403,000

Total

52,000 26,000

403,000

Eden contributes $49,000 into the partnership for a 25% interest.The four original partners share profits and losses equally.Using the bonus method, determine the balances for each of the five partners after Eden joins the partnership.

75) The ABCD Partnership has the following balance sheet at January 1, 2020, prior to the admission of new partner, Eden. Cash and current assets Land

Building and equipment

Total

39,000 234,000

Liabilities Adams, capital

130,000

Barnes, capital

52,000

Cordas, capital

117,000

Davis, capital

156,000

403,000

Total

52,000 26,000

403,000

Eden contributed $124,000 in cash to the business to receive a 20% interest in the partnership.Goodwill was to be recorded.The four original partners shared all profits and losses equally.After Eden made his investment, what were the individual capital balances?

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76) The ABCD Partnership has the following balance sheet at January 1, 2020, prior to the admission of new partner, Eden. Cash and current assets Land

Building and equipment

Total

39,000 234,000

Liabilities Adams, capital

130,000

Barnes, capital

52,000

Cordas, capital

117,000

Davis, capital

156,000

403,000

Total

52,000 26,000

403,000

Eden acquired a 20% interest in the partnership by contributing a total of $71,500 directly to the other four partners. No goodwill is to be recorded.Profits and losses have previously been split according to the following percentages: Adams, 15%, Barnes, 35%, Cordas, 30%, and Davis, 20%.After Eden made his investment, what were the individual capital balances?

77) The ABCD Partnership has the following balance sheet at January 1, 2020, prior to the admission of new partner, Eden. Cash and current assets Land Building and equipment

Version 1

39,000 234,000

Liabilities Adams, capital

52,000 26,000

130,000

Barnes, capital

52,000

Cordas, capital

117,000

Davis, capital

156,000

Total

403,000

Total

403,000

Eden acquired a 20% interest in the partnership by contributing a total of $71,500 directly to the other four partners. Goodwill is to be recorded.Profits and losses have previously been split according to the following percentages: Adams, 15%; Barnes, 35%; Cordas, 30%; and Davis, 20%.After Eden made his investment, what were the individual capital balances?

78) Assume the partnership of Dean, Hardin, and Roth has been in existence for a number of years.Dean decides to withdraw from the partnership when the partners' capital balances are as follows: Partner Dean Hardin Roth

Capital Balance Profit and Loss Ratio $ 60,000 40 % 15,000 30 % 25,000

20 %

An appraisal of the business and its property estimates the fair value to be $ 100,000. Dean has agreed to receive $64,000 in exchange for his partnership interest. Prepare the journal entry for the payment to Dean in the dissolution of his partnership interest, assuming the bonus method is to be applied.

79) Assume the partnership of Dean, Hardin, and Roth has been in existence for a number of years.Dean decides to withdraw from the partnership when the partners' capital balances are as follows: Partner Dean Hardin Roth

Version 1

Capital Balance Profit and Loss Ratio $ 60,000 40 % 15,000 30 % 25,000

20 %

An appraisal of the business and its property estimates the fair value to be $ 100,000. Dean has agreed to receive $64,000 in exchange for his partnership interest. What are the remaining partners' capital balances after Dean's interest is dissolved, assuming the bonus method is applied?

80) Assume the partnership of Howell, Madrid, and Waldrop has been in existence for a number of years.Howell decides to withdraw from the partnership when the partners' capital balances are as follows: Partner

Howell Madrid

Capital Balance Profit and Loss Ratio $ 60,000 4 15,000 3

Waldrop

25,000

An appraisal of the business and its net assets estimates the fair value to be $154,000. Land with a book value of $20,000 has a fair value of $35,000.Howell has agreed to receive $84,000 in exchange for her partnership interest. Prepare the journal entries for the dissolution of Howell's partnership interest, assuming the goodwill method is to be applied.

81) Assume the partnership of Howell, Madrid, and Waldrop has been in existence for a number of years.Howell decides to withdraw from the partnership when the partners' capital balances are as follows: Partner

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Capital Balance Profit and Loss Ratio

Howell Madrid Waldrop

60,000 15,000

4 3

25,000

An appraisal of the business and its net assets estimates the fair value to be $154,000. Land with a book value of $20,000 has a fair value of $35,000.Howell has agreed to receive $84,000 in exchange for her partnership interest. What are the remaining partners' capital balances after Howell's interest is dissolved, assuming the goodwill method is applied?

82) On January 1, 2021, Lamb and Mona LLP admitted Norris to a 20% interest in net assets for an investment of $50,000 cash. Prior to the admission of Norris, Lamb and Mona had net assets of $100,000 and an income-sharing ratio of 25% to Lamb and 75% to Mona. After the admission of Norris, the partnership contract included the following provisions: ● Salary of $40,000 a year to Norris. ● Remaining net income in ratio Lamb 20%, Mona 60%, Norris 20%. ● During the fiscal year ended December 31, 2021, the partnership had income of $90,000 prior to recognition of salary to Norris. Record the journal entry for the admission of Norris. Goodwill is not to be recorded.

83) On January 1, 2021, Lamb and Mona LLP admitted Norris to a 20% interest in net assets for an investment of $50,000 cash. Prior to the admission of Norris, Lamb and Mona had net assets of $100,000 and an income-sharing ratio of 25% to Lamb and 75% to Mona. After the admission of Norris, the partnership contract included the following provisions: ● Salary of $40,000 a year to Norris. ● Remaining net income in ratio Lamb 20%, Mona 60%, Norris 20%. ● During the fiscal year ended December 31, 2021, the partnership had income of $90,000 prior to recognition of salary to Norris. Record the journal entry to allocate the salary of Norris.

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84) On January 1, 2021, Lamb and Mona LLP admitted Norris to a 20% interest in net assets for an investment of $50,000 cash. Prior to the admission of Norris, Lamb and Mona had net assets of $100,000 and an income-sharing ratio of 25% to Lamb and 75% to Mona. After the admission of Norris, the partnership contract included the following provisions: ● Salary of $40,000 a year to Norris. ● Remaining net income in ratio Lamb 20%, Mona 60%, Norris 20%. ● During the fiscal year ended December 31, 2021, the partnership had income of $90,000 prior to recognition of salary to Norris. Record the journal entry to record the remainder of net income to the capital accounts.

85) James, Keller, and Rivers have the following capital balances; $48,000, $70,000 and $90,000, respectively. Because of a cash shortage James invests an additional $12,000 on June 1st. Each partner withdraws $1,000 per month. James, Keller, and Rivers receive a salary of $13,000, $15,000 and $20,000, respectively, for work done during the year. Each partner receives interest of 8% on that partner’s monthly weighted average capital balance without regard to normal drawings. Any remaining profits are split 20%, 30%, and 50% respectively. The net income for the year is $30,000. What are the ending capital balances for each partner?

ESSAY. Write your answer in the space provided or on a separate sheet of paper. 86) What is the dissolution of a partnership?

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87)

By what methods can a person gain admittance to a partnership?

88)

What events cause the dissolution of a partnership?

89)

For what events or conditions should the Articles of Partnership make provision?

90)

How is accounting for a partnership different from accounting for a corporation?

91)

Why are the terms of the Articles of Partnership important to partners?

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92) Brown and Green are forming a business as partners.If they do not create a formal written partnership agreement, what risks are they exposing themselves to?

93) What theoretical argument could be made against the recognition of goodwill when there is a change in the ownership of a partnership?

94) Under what circumstances does a partner's balance in his or her capital account have practical consequences for the partner?

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Answer Key Test name: Chap 09_8e 1) C 2) E 3) B 4) A 5) E 6) D 7) A Interest on Pinkman’s beginning balance of capital contribution ($175,000 × 10% = $17,500) + Salary ($15,000) + 40% of the Remaining net income (calculated below) ($52,000) = $84,500. Remaining net income: $200,000 − $55,000 (10% of $550,000) − $15,000 (Pinkman Salary) = $130,000, of which 40% is allocated to Pinkman = $52,000. 8) C Interest on White’s beginning balance of capital contribution ($250,000 × 10% = $25,000) + Salary ($0) + 40% of the Remaining net income (calculated below) ($52,000) = $77,000. Remaining net income: $200,000 − $55,000 (10% of $550,000) − $15,000 (White Salary) = $130,000, of which 40% is allocated to White = $52,000. 9) D

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Interest on Goodman’s beginning balance of capital contribution ($125,000 × 10% = $12,500) + Salary ($0) + 20% of the Remaining net income (calculated below) ($26,000) = $38,500. Remaining net income: $200,000 − $55,000 (10% of $550,000) − $15,000 (Pinkman Salary) = $130,000, of which 20% is allocated to Goodman = $26,000. 10) D Beginning 2020 balance $250,000 + Interest $25,000 + Salary $0 + 40% of the Remaining net income $52,000 (calculated below) − Withdrawals $18,000 = $309,000 Remaining net income: $200,000 − $55,000 (10% of $550,000) − $15,000 (Pinkman Salary) = $130,000, of which 40% is allocated to White = $52,000. 11) E Beginning 2020 balance $175,000 + Interest $17,500 + Salary $15,000 + 40% of the Remaining net income $52,000 − Withdrawals $18,000 = $241,500 Remaining net income: $200,000 − $55,000 (10% of $550,000) − $15,000 (Pinkman Salary) = $130,000, of which 40% is allocated to Pinkman = $52,000. 12) B Beginning 2020 balance $125,000 + Interest $12,500 + Salary $0 + 20% of the Remaining net income $26,000 − Withdrawals $18,000 = $145,500 Remaining net income: $200,000 − $55,000 (10% of $550,000) − $15,000 (Pinkman Salary) = $130,000, of which 20% is allocated to Goodman = $26,000. 13) B

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Goodman $145,500 + Pinkman $241,500 + White $309,000 = $696,000. Alternatively, beginning capital balances ($125,000 + $175,000 + $250,000) = $550,000 + net income $200,000 − withdrawals $54,000 = $696,000. 14) C Beginning Pinkman 2020 capital balance $175,000 + 2020 Interest $17,500 + 2020 Salary $15,000 + 40% of the 2020 Remaining net income $52,000 − 2020 Withdrawals $18,000 = $241,500 (2021 Pinkman beginning balance). Beginning capital balance $241,500 × 10% = $24,150. 15) B Interest $24,150 + Salary $15,000 + 40% of the 2021 Remaining net income (calculated below) $62,160 = $101,310. Remaining net income = $240,000 − $69,600 (10% of $696,000) − $15,000 (Pinkman Salary) = $155,400 × 40% = $62,160. 16) A Remainder of 2021 Net Income = $240,000 − $69,600 (10% of $696,000) − $15,000 (Pinkman Salary) = $155,400 × 40% = $62,160 17) D Interest $30,900 (10% of $309,000) + Salary ($0) + 40% of the 2021 Remaining net income $62,160 = $93,060. Remaining net income = $240,000 − $69,600 (10% of $696,000) − $15,000 (Pinkman Salary) = $155,400 × 40% = $62,160. 18) A Interest $14,550 (10% of $145,500) + Salary $0 + 20% of Remaining 2021 Net Income $31,080 = $45,630. Remaining 2021 net income = $240,000 − $69,600 (10% of $696,000) − $15,000 (Pinkman Salary) = $155,400 × 20% = $31,080. 19) E

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2021 Beginning White capital balance $309,000 + Interest $30,900 + Salary $0 + 40% of Remaining 2021 net income (see below) $62,160 − 2021 Withdrawals $18,000 = $384,060. Remaining 2021 Net Income = $240,000 − $69,600 (10% of $696,000) − $15,000 (Pinkman Salary) = $155,400 × 40% = $62,160. 20) C 2021 Beginning Pinkman capital balance $241,500 + Interest $24,150 + Salary $15,000 + 40% of Remaining 2021 net income (calculated below) $62,160 − Withdrawals $18,000 = $324,810. Remaining 2021 net income = $240,000 − $69,600 (10% of $696,000) − $15,000 (Pinkman Salary) = $155,400 × 40% = $62,160. 21) C Beginning Goodman capital balance $145,500 + Interest $14,550 (10% × $145,500) + Salary $0 + 20% of Remaining 2021 net income (calculated below) $31,080 − Withdrawals $18,000 = $173,130. Remaining 2021 net income = $240,000 − $69,600 (10% of $696,000) − $15,000 (Pinkman Salary) = $155,400 × 20% = $31,080. 22) D 2021 Ending Capital Balances $173,130 (Goodman) + $324,810 (Pinkman) + $384,060 (White) = $882,000. Alternatively, beginning 2020 capital balances ($125,000 + $175,000 + $250,000) = $550,000 + 2020 net income $200,000 − 2020 withdrawals $54,000 = $696,000 ending 2020 balance + 2021 net income $240,000 − 2021 withdrawals $54,000 = $882,000. 23) B Beginning 2021 capital balance $145,500 + 2021 Interest $14,550 (10% × $145,500) + Salary $0 + 20% of Remaining 2021 net income $31,080 − Withdrawals $18,000 = (2021 ending balance) $173,130 × 10% = $17,313 24) A Version 1

Jell $600 + Dell $800 + Goodwill $700 = $2,100 ÷ 70% = $3,000 × 30% = $900 Cash 25) D (Beginning balance $20,000 × 2 months) + [($20,000 + $120,000) × 6 months] + [($140,000 + Bonus $60,000) × 4 months] = $40,000 + $840,000 + $800,000 = $1,680,000 ÷ 12 months = Average monthly capital balance $140,000 × 6% = $8,400 26) B Net loss ($26,000) − Interest ($390,000 total beginning capital × 10%) $39,000 − Salaries $39,000 = ($104,000) × 50% = Young’s portion ($52,000) + Young’s Interest $14,300 + Young’s Salary $26,000 = Young’s share of loss ($11,700) 27) C Net loss ($26,000) – Interest ($390,000 total beginning capital × 10%) $39,000 – Salaries $39,000 = ($104,000) × 20% = Eaton’s portion ($20,800) + Eaton’s Interest $10,400 + Eaton’s Salary $0 = Eaton’s share of loss ($10,400) 28) A Net loss ($26,000) − Interest ($390,000 total beginning capital × 10%) $39,000 − Salaries $39,000 = ($104,000) × 30% = Thurman’s portion ($31,200) + Thurman’s Interest $14,300 + Thurman’s Salary $13,000 = Thurman’s share of loss ($3,900) 29) B Beginning $143,000 + Interest $14,300 + Salary $26,000 + Remainder (50%) ($52,000) − Withdrawals $13,000 = Ending Balance $118,300 30) D Beginning $104,000 + Interest $10,400 + Salary $0 + Remainder (20%) ($20,800) − Withdrawals $13,000 = Ending Balance $80,600 31) C

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Beginning $143,000 + Interest ($143,000 × 10%) $14,300 + Salary $13,000 + Remainder (30%) ($31,200) − Withdrawals $13,000 = Ending Balance $126,100 32) E Net income $52,000 − Interest $32,500 (calculated below) − Salaries $39,000 = ($19,500) × 50% = Young’s portion ($9,750) + Young’s Interest $11,830 + Young’s Salary $26,000 = Young’s share of net income $28,080. Interest for second year = First year: Beginning capital balance $390,000 − Net loss $26,000 − Withdrawals $39,000 = Ending capital balance first year (beginning capital balance second year) $325,000 × 10% = $32,500 Interest for second year. 33) B Net income $52,000 − Interest $32,500 (calculated below) − Salaries $39,000 = ($19,500) × 20% = Eaton’s portion ($3,900) + Interest $8,060 + Salary $0 = Eaton’s share of net income $4,160. Interest for second year = First year: Beginning capital balance $390,000 − Net loss $26,000 − Withdrawals $39,000 = Ending capital balance first year (beginning capital balance second year) $325,000 × 10% = $32,500 Interest for second year. 34) C Net Income $52,000 − Interest $32,500 (calculated below) − Salaries $39,000 = ($19,500) × 30% = Thurman’s Portion ($5,850) + Interest $12,610 + Salary $13,000 = Thurman’s share of net income $19,760. Interest for second year = First year: Beginning capital balance $390,000 − Net loss $26,000 − Withdrawals $39,000 = Ending capital balance first year (beginning capital balance second year) $325,000 × 10% = $32,500 Interest for second year. 35) A

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Beginning $118,300 + Interest $11,830 + Salary $26,000 + Remainder (50%) ($9,750) − Withdrawals $13,000 = Ending Balance $133,380 36) E Beginning $80,600 + Interest $8,060 + Salary $0 + Remainder (20%) ($3,900) − Withdrawals $13,000 = Ending Balance $71,760 37) D Beginning $126,100 + Interest $12,610 + Salary $13,000 + Remainder (30%) ($5,850) − Withdrawals $13,000 = Ending Balance $132,860 38) D 39) C 40) E 41) C 42) C 43) B Bonus = 0.20 (NI − Bonus) = 0.20 ($57,600 − Bonus) = $11,520 − 0.20 Bonus 1.2 Bonus = $11,520. Bonus = $9,600. Net income $57,600 − Bonus $9,600 = $48,000 remaining netincome to divide equally = $24,000 to each partner. Hanes receives $24,000 + $9,600 = $33,600. 44) C $150,000 = 80% of the partnership value after Dorr is admitted. $150,000 ÷ 80% = $187,500 total value of the partnership after Dorr is admitted. $187,500 total value − $150,000 existing value = $37,500 investment 45) D 46) A $80,000 − $60,000 = $20,000 ÷ 3 = $6,667 47) C Land will be recorded at the fair value of $45,000 Version 1

48) C Donald $200,000 + Hanes $100,000 + Cash $100,000 = $400,000 × 35%= $140,000 to May 49) D Bonus to May $40,000 × 60% = $24,000 from Donald’s $200,000 = $176,000 New capital balance 50) A Bonus to May $40,000 × 40% = $16,000 from Hanes’ $100,000 = $84,000 New capital balance 51) E Donald $176,000 + Hanes $84,000 + May $140,000 = Total partnership capital $400,000 52) E 53) C $50,000 + $30,000 + $20,000 = $100,000 = 80% of the partnership value after C is admitted. $100,000 ÷ 80% = $125,000 total capital of the partnership after C is admitted. $125,000 total value − $100,000 existing capital = $25,000 Cash C should contribute. 54) C Current capital $100,000 + Cash invested by C $38,000 = $138,000 × 20% = $27,600 to C 55) E $40,000 = 20% of the partnership value as a whole after C is admitted. $40,000 ÷ 20% = $200,000 total capital of the partnership after C is admitted. However, total capital after C’s investment and before goodwill = $140,000 ($50,000 + $30,000 + $20,000 + $40,000). $200,000 – $140,000 = $60,000 Goodwill. 56) B

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Total capital after C’s investment and before goodwill = $110,000 ($50,000 + $30,000 + $20,000 + $10,000). However, the value of the firm is calculated as only $50,000 ($10,000 ÷ 0.20). Goodwill will be attributed to C calculated as: ($10,000 + Goodwill) = 0.20 × ($110,000 + Goodwill). Thus, ($10,000 + Goodwill) = $22,000 + (0.20 Goodwill). 0.80 Goodwill = $12,000. Goodwill = $12,000 ÷ 0.80 = $15,000. 57) C Roberts receives an additional $60,000 above her capital balance. Since she is assigned 40% of all profits and losses, this extra allocation indicates total goodwill of $150,000, which must be split among all partners. 40% of Goodwill = $60,000. $60,000 ÷ 40% = $150,000 Goodwill. Peter receives 20% × $150,000 = $30,000. Peter’s balance = $80,000 + $30,000 = $110,000. 58) D Roberts receives an additional $60,000 above her capital balance. Since she is assigned 40 percent of all profits and losses, this extra allocation indicates total goodwill of $150,000, which must be split among all partners. 40% of Goodwill = $60,000. $60,000 ÷ 40% = $150,000 Goodwill. Dana receives 40% × $150,000 = $60,000. Dana’s Balance = $60,000 + $60,000 = $120,000. 59) E

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Roberts receives an additional $60,000 above her capital balance. Since she is assigned 40 percent of all profits and losses, this extra allocation indicates total goodwill of $150,000, which must be split among all partners. 40% of Goodwill = $60,000. $60,000 ÷ 40% = $150,000 Goodwill. Total Capital is $240,000 ($80,000 + $100,000 + $60,000) + Goodwill $150,000 = $390,000. Roberts receives $160,000 and Partnership Capital is then $390,000 − $160,000 = $230,000. 60) A Anne receives an additional $30,000 above her capital balance. Since she is assigned 40 percent of all profits and losses, this extra allocation indicates total goodwill of $75,000, which must be split among all partners. 40% of Goodwill = $30,000. $30,000 ÷ 40% = $75,000 Goodwill. Donald = 20% Goodwill = $75,000 × 20% = $15,000. Donald’s capital balance is [$40,000 + $15,000] = $55,000. Todd = 40% Goodwill = $75,000 × 40% = $30,000. Todd’s capital balance is [$30,000 + $30,000] = $60,000. 61) B The $30,000 bonus is deducted from the remaining partners according to their relative profit and loss ratio. Donald = 20% and Todd = 40% which is a 1/3, 2/3 split Donald = $40,000 – (1/3 × $30,000) = $30,000 Todd = $30,000 – (2/3 × $30,000) = $10,000 62) B 63) B 64) D 65) C

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Jim $150,000 + Pam $125,000 + Cash from Cece $75,000 = $350,000 × 25% = $87,500 $87,500 Cece capital balance − $75,000 Cash from Cece = $12,500 bonus $12,500 × 60% = $7,500; $150,000 − $7,500 = $142,500 66) D Jim $150,000 + Pam $125,000 + Cash from Cece $75,000 = $350,000 × 25% = $87,500 $87,500 Cece capital balance − $75,000 Cash from Cece = $12,500 bonus $12,500 × 40% = $5,000; $125,000 − $5,000 = $120,000 67) A Jim $150,000 + Pam $125,000 + Cash from Cece $75,000 = $350,000 × 25% = $87,500 to Cece 68) Reed, Capital

24,000

Sharp, Capital

30,000

Tucker, Capital

21,000

Upton, Capital

75,000

69) Goodwill

60,000

Jipsom, Capital

24,000

Klark, Capital

36,000

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Jipsom, Capital

31,200

Klark, Capital

40,800

Looney, Capital

72,000

$72,000 to the existing partners = 30% of the implied partnership value. $72,000 ÷ 30% = $240,000 = the implied total capital of the partnership. However, total capital before Looney’s payment to the existing partners is $180,000 ($100,000 + $80,000). Thus, goodwill is $60,000 ($240,000 − $180,000) which is attributed to Jipsom and Klark in a 2:3 ratio = 2/5 ($24,000) to Jipsom and 3/5 ($36,000) to Klark (first journal entry). Jipsoms’ capital balance becomes $104,000 and Klark’s capital balance becomes $136,000. Looney receives a 30% interest of each which is $31,200 + $40,800 = $72,000 (second entry). 70) Distribution of income for 2020: Norr Interest

Compensation Subtotals

12,000

10,000 $

Allocation of remainder Totals

Caylor

22,000

36,640

14,000 $

14,640 $

9,600

Total

23,600

24,000 $

9,760 $

33,360

21,600

45,600 24,400

70,000

71) Capital account balances at the end of 2020: Norr Beginning capital balances Share of income

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$ 100,000 36,640

Caylor $

80,000 33,360

Withdrawals

(12,000 )

Ending capital balances

(12,000 )

$ 124,640

$ 101,360

72) Distribution of income for 2021: Norr Interest

Compensation Subtotals

Allocation of remainder Totals

Caylor

14,957

$ 12,163

8,000

12,000

22,957

$ 24,163

(13,872 ) $

9,085

Total $

20,000 $

(9,248 ) $ 14,915

27,120

47,120 (23,120 )

24,000

73) Capital account balances at the end of 2021: Beginning capital balances Share of income

Withdrawals Ending capital balances

Norr

Caylor

124,640 $ 9,085

101,360 14,915

(12,000)

121,725 $

104,275

74) Eden's contribution of $49,000 into the partnership raises the total partnership net assets to $400,000.Eden's capital account is credited, by agreement, for 25% of the partnership's total tangible assets, or $100,000.The $51,000 bonus to Eden is allocated in the original ¼ interest from each existing partner. The journal entry to record the admission of Eden is:

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Cash

49,000

Adams, Capital

12,750

Barnes, Capital

12,750

Cordas, Capital

12,750

Davis, Capital

12,750

Eden, Capital

100,000

The capital balances of each of the five partners after Eden’s entry into the partnership are as follows: Adams, Capital Barnes, Capital Cordas, Capital Davis, Capital Eden, Capital

$ $ $ $ $

13,250 39,250 104,250 143,250 100,000

75) After allocating the goodwill to each of the original four partners, their partnership capital balances are as follows: Adams, Capital Barnes, Capital

62,250 88,250

Cordas, Capital

153,250

Davis, Capital

192,250

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Eden's contribution of $124,000 to the partnership implies the value of the partnership as $620,000 ($124,000 ÷ 20%).After Eden’s contribution, the net assets of the partnership increases to $475,000 ($351,000 + $124,000). Goodwill of $145,000 ($620,000 − $475,000) resulted from this transaction. The first entry requires that the goodwill be allocated to each of the original four partners according to their profit and loss sharing percentages.As indicated in the problem, the four original partners share profits and losses equally. Goodwill

145,000

Adams, Capital

36,250

Barnes, Capital

36,250

Cordas, Capital

36,250

Davis, Capital

36,250

The second step is to record Eden’s cash contribution and to record Eden’s capital account balance: Cash Eden, Capital

124,000 124,000

76) The partnership's total net assets are still $351,000, because Eden's $71,500 went to the partners.Using the book value method, each of the original partners will give up 20% of their current capital balance to Eden.The journal entry is:

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Adams, Capital

5,200

Barnes, Capital

10,400

Cordas, Capital

23,400

Davis, Capital

31,200

Eden, Capital

70,200

The partners’ balances following the admission of Eden are: Adams, Capital Barnes, Capital

20,800 41,600

Cordas, Capital

93,600

Davis, Capital

124,800

Eden, Capital

70,200

77) Eden's contribution of $71,500 will go to the original four partners, not into the partnership. $71,500 = 20% of the implied partnership value. $71,500 ÷ 0.20 = 357,500 = the implied total capital of the partnership. However, total capital before Eden’s payment to the existing partners is $351,000 ($26,000 + $52,000 + $117,000 + 156,000). Thus, goodwill is $6,500 ($357,500 − $351,000), which is attributed to the existing partners in their existing percentage allocations. First, the goodwill should be allocated to each of the original four partners: Goodwill Adams, Capital

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6,500 975

Barnes, Capital

2,275

Cordas, Capital

1,950

Davis, Capital

1,300

The adjusted balances for the four original partners, after allocating goodwill, are: Adams, Capital Barnes, Capital

26,975 54,275

Cordas, Capital

118,950

Davis, Capital

157,300

The next step is to allocate 20% of each of the original partners’ balances to Eden: Adams, Capital

5,395

Barnes, Capital

10,855

Cordas, Capital

23,790

Davis, Capital

31,460

Eden, Capital

71,500

The partners’ capital balances after admitting Eden are: Adams, Capital Barnes, Capital

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21,580 43,420

Cordas, Capital

95,160

Davis, Capital

125,840

Eden, Capital

71,500

78) Dean, Capital

60,000

Hardin, Capital

2,400

Roth, Capital

1,600

Cash

64,000

Dean receives $4,000 more than his capital balance. The $4,000 excess distribution reduces the two remaining partners’ capital balances in their existing profit and loss ratios of 30:20 which is 60% and 40% of the $4,000. 79) Hardin:$12,600 = ($15,000 − $2,400) Roth: $23,400 = ($25,000 − $1,600) 80) The $154,000 fair value of the business is $54,000 more than the book value of $100,000 ($60,000 + $15,000 + $25,000). Of this $54,000, $15,000 is allocated to land and the balance of $39,000 is attributable to goodwill. The assets of the business are increased with increases to the partners in their profit and loss ratios. Then Howell’s capital balance will be $84,000 and removed with the payment of cash. Land

15,000

Goodwill

39,000

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Howell, Capital

24,000

Madrid, Capital

18,000

Waldrop, Capital

12,000

Howell, Capital

84,000

Cash

84,000

81) Madrid: $33,000 = ($15,000 + $18,000) Waldrop: $37,000 = ($25,000 + $12,000) 82) Cash

50,000

Lamb, Capital ($20,000 × 25%)

5,000

Mona, Capital ($20,000 × 75%)

15,000

Norris, Capital ($150,000 × 20%)

30,000

After the contribution from Norris, total capital = $150,000. Norris receives 20% of this = $30,000, but Norris is contributing $50,000. Thus, the $20,000 excess contribution is allocated to the original partners in their 25:75 ratio. 83) Income Summary Norris, Capital

40,000 40,000

84) Version 1

Income Summary ($90,000 − $40,000)

50,000

Lamb, Capital ($50,000 × 20%)

10,000

Mona, Capital ($50,000 × 60%)

30,000

Norris, Capital ($50,000 × 20%)

10,000

85) James Interest (8%) Salary

4,400 (below)

Keller $

13,000

5,600

Rivers $

7,200

Totals $

17,200

15,000

20,000

48,000

(10,560 )

(17,600 )

(35,200 )

Remaining income (loss): $

30,000 (17,200 ) (48,000

(35,200 ) Totals

(7,040 ) $ 10,360

10,040

9,600

30,000

CALCULATION OF JAMES INTEREST ALLOCATION Balance, January 1 − $ 240,000 June 1 ($48,000 × 5 months) Balance, June 1 − 420,000 December 31 ($60,000 × 7 months) Total $ 660,000

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Months

Weighted average capital $ 55,000 balance Interest rate × 8% Interest allocation (above)

4,400

STATEMENT OF PARTNERS' CAPITAL James Keller Rivers Beginning balances

Totals

$ 48,000

$ 70,000

$ 90,000

$ 208,000

Additional contribution

12,000

Income (above)

10,360

10,040

9,600

30,000

Drawings ($1,000 per month)

(12,000 )

(36,000 )

Ending capital balances

$ 58,360

$ 68,040

$ 87,600

$ 214,000

86) The dissolution of a partnership is the breakup of the partnership caused by any change in the members that make up the partnership. 87) A person can gain admittance to a partnership by purchasing all or part of a current partner's interest or by investing assets in the partnership. 88) The dissolution of a partnership occurs whenever there is a change in the members that make up the partnership.Dissolution does not mean going out of business, although, on occasion, dissolution would be accompanied by liquidation of assets and termination of the business.Dissolution would occur whenever a new partner is admitted to the partnership, dissolving one partnership and forming a new one.Dissolution also occurs when a partner leaves the partnership or when a partner dies or retires.The Articles of Partnership may allow the partners to force dissolution under some circumstances. Version 1

89) The Articles of Partnership should be a comprehensive document that is fair to all the partners.It should contain the following provisions: (i) the amounts that will be invested in the partnership by the founding partners; (ii) the amounts of withdrawals that partners can make.Limiting the amount of withdrawals causes the partners to maintain a reasonable investment in the partnership; (iii) the division of income or loss between the partners; (iv) guidelines for admission of new partners or withdrawal or retirement of partners; and (v) in some cases, guidelines for division of assets when the partnership liquidates. In addition, the Articles of Partnership should specify how much time each partner will spend in the business, the responsibilities of each partner, and procedures for resolution of disputes between partners. 90) Financial accounting for a partnership differs from corporate accounting only in accounting for owners' equity.A partnership does not sell capital stock and does not have a retained earnings account.Each partner will have a capital account and a drawing account.On the balance sheet, the balance in each of the partner's capital accounts should be reported.The accountant for a partnership must divide income or loss among partners, following the provisions of the Articles of Partnership.Income tax accounting differs between corporations and partnerships.A corporation is a taxable entity and must file an income tax return.A partnership is not a taxable entity but is required to file an informational return that reports the various amounts of revenues and expenses attributed to each partner.

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91) The Articles of Partnership contain terms that help to protect the interests of each partner and the longevity and profitability of the business.One of the most important terms in the Articles of Partnership is the provision for division of income or loss.The amount of income or loss assigned to partners affects the balances in their capital accounts and may affect the amount of withdrawals the partners can make and the assets they receive upon the liquidation of the partnership. The terms in the Articles of Partnership help to prevent one partner from taking advantage of other partners. 92) Due to the fact that business partners are exposed to unlimited liability for their actions, and the actions of their partners, they are advised to document the terms governing the partnership. While a partnership may operate in accordance with an informal, undocumented agreement, the Articles of Partnership documents agreements made between partners regarding the operation of the partnership. By documenting these terms in writing, risk and liability exposure may be limited, providing each partner with protection of his or her interests. If a partnership becomes insolvent, any or all of the partners may be required to use personal assets to settle partnership liabilities.To limit this individual liability exposure, the Articles of Partnership can require that each partner maintain his or her investment in the partnership and to meet other responsibilities, such as working in the business.With a formal written agreement, each partner would have recourse if another partner does not fulfill the terms in the Articles of Partnership.

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93) Goodwill should be recognized only when a business is purchased in an arms-length transaction — a transaction between independent parties.Generally, partners are not independent parties.Transactions between partners, or between a partner and the partnership, may be influenced by factors other than fair value and bargaining between independent parties.For example, if one partner has been causing trouble for a partnership, the other partners might agree to pay more than fair value to convince that partner to leave the business.The amount of goodwill that could be calculated for such a transaction would not be an indication of the fair value of the business. 94) The most direct practical consequence of a partner's capital account balance occurs when the partnership is liquidated.After assets are sold and liabilities are paid, each partner receives the balance in his or her capital account.The balance in the capital account may also influence the division of income or loss each year and could affect the amount of cash each partner is allowed to withdraw from the partnership.

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CHAPTER 10 MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) When a partnership is insolvent and a partner has a deficit capital account balance, that partner should: A) Declare personal bankruptcy. B) Initiate legal proceedings against the partnership. C) Contribute enough cash to the partnership to offset their deficit. D) Deliver a note payable to the partnership with specific payment terms. E) None of these answer choices are correct. The partner has no legal responsibility to cover the capital deficit balance.

2) The Allen, Bevell, and Carter partnership began the process of liquidation with the following balance sheet: Cash Noncash assets

Total

25,000

Liabilities

500,000

Allen, capital

90,000

Bevell, capital

100,000

Carter, capital

160,000

$ 525,000

Total

$ 175,000

$ 525,000

Allen, Bevell, and Carter share profits and losses in a ratio of 3:2:5. Liquidation expenses are expected to be $14,000. If the noncash assets were sold for $275,000, what amount of the loss would have been allocated to Bevell with respect to the noncash assets? A) $55,000. B) $50,000. C) $45,000. D) $46,800. E) $42,400.

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3) The Allen, Bevell, and Carter partnership began the process of liquidation with the following balance sheet: Cash

Noncash assets

Total

25,000

Liabilities

500,000

Allen, capital

90,000

Bevell, capital

100,000

Carter, capital

160,000

$ 525,000

Total

$ 175,000

$ 525,000

Allen, Bevell, and Carter share profits and losses in a ratio of 3:2:5. Liquidation expenses are expected to be $14,000. Assuming that the noncash assets were sold for $150,000, which partner(s) would have been required to contribute assets to the partnership to cover a deficit in his or her capital account, prior to considering the liquidation expenses incurred? A) Allen. B) Bevell. C) Carter. D) Allen and Carter. E) Allen and Bevell.

4) The Allen, Bevell, and Carter partnership began the process of liquidation with the following balance sheet: Cash Noncash assets

Version 1

25,000

Liabilities

$ 175,000

500,000

Allen, capital

90,000

Bevell, capital

100,000

Carter, capital

160,000

Total

$ 525,000

Total

$ 525,000

Allen, Bevell, and Carter share profits and losses in a ratio of 3:2:5. Liquidation expenses are expected to be $14,000. Assuming that, after the payment of liquidation expenses in the amount of $14,000 was made and the noncash assets were sold, if Carter has a deficit of $10,000, for what amount would the noncash assets have been sold? A) $174,000. B) $188,000. C) $160,000. D) $146,000. E) $185,000.

5) The Keller, Long, and Mason partnership had the following balance sheet just before entering liquidation: Cash Noncash assets

Total

$ 115,000 230,000

$ 345,000

Liabilities

45,000

Keller, Capital

100,000

Long, Capital

70,000

Mason, Capital

130,000

Total

$ 345,000

Keller, Long, and Mason share profits and losses in a ratio of 2:4:4. Assume that noncash assets were sold for $60,000 and liquidation expenses in the amount of $18,500 were incurred. If Long was personally insolvent and could not contribute any assets to the partnership, and Keller and Mason were both solvent, what amount of cash would Keller receive from the distribution of partnership assets?

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A) $0. B) $60,500. C) $62,300. D) $58,700. E) $64,100.

6) The Keller, Long, and Mason partnership had the following balance sheet just before entering liquidation: Cash

$ 115,000

Noncash assets

230,000

Total

$ 345,000

Liabilities

45,000

Keller, Capital

100,000

Long, Capital

70,000

Mason, Capital

130,000

Total

$ 345,000

Keller, Long, and Mason share profits and losses in a ratio of 2:4:4. Assuming noncash assets were sold for $70,000 and liquidation expenses in the amount of $18,500 were incurred, how much will each partner receive in the liquidation? Keller

Long

$ 14,000

$ 28,000

28,000

$ 37,000

$ 74,000

74,000

$ 63,833

57,667

$ 121,500

$ 57,833

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Mason

$ 12,000

51,667

A) Option A. B) Option B. C) Option C. D) Option D. E) Option E.

7) The Keller, Long, and Mason partnership had the following balance sheet just before entering liquidation: Cash

$ 115,000

Noncash assets

230,000

Total

$ 345,000

Liabilities

45,000

Keller, Capital

100,000

Long, Capital

70,000

Mason, Capital

130,000

Total

$ 345,000

Keller, Long, and Mason share profits and losses in a ratio of 2:4:4. The partnership feels confident it will be able to eventually sell the noncash assets and wants to distribute some cash before paying liabilities. Assuming there will be no liquidation expenses, how much would each partner receive of a total $70,000 distribution of cash? Keller

Long

Mason

$ 46,667

$ 23,333

$ 14,000

$ 28,000

$ 30,000

$ 13,333

$ 26,667

$ 70,000

$ 15,000

$ 55,000

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A) Option A. B) Option B. C) Option C. D) Option D. E) Option E.

8) The Henry, Isaac, and Jacobs partnership was about to enter liquidation with the following account balances: Cash

Noncash assets

Total

90,000

Liabilities

300,000

Henry,capital

80,000

Isaac, capital

110,000

Jacobs, capital

140,000

$ 390,000

Total

60,000

$ 390,000

Estimated expenses of liquidation were $5,000. Henry, Isaac, and Jacobs shared profits and losses in a ratio of 2:4:4. What amount of cash was available for safe payments, based on the above information? A) $30,000. B) $85,000. C) $25,000. D) $35,000. E) $40,000.

9) The Henry, Isaac, and Jacobs partnership was about to enter liquidation with the following account balances: Cash

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90,000

Liabilities

60,000

Noncash assets

Total

300,000

$ 390,000

Henry,capital

80,000

Isaac, capital

110,000

Jacobs, capital

140,000

Total

$ 390,000

Estimated expenses of liquidation were $5,000. Henry, Isaac, and Jacobs shared profits and losses in a ratio of 2:4:4. Before liquidating any assets, the partners determined the amount of cash available for safe payments. How should the amount of safe cash payments be distributed? A) In a ratio of 2:4:4 among all the partners. B) $18,333 to Henry and $16,667 to Jacobs. C) In a ratio of 1:2 between Henry and Jacobs. D) $15,000 to Henry and $10,000 to Jacobs. E) $21,667 to Henry and $3,333 to Jacobs.

10) The Henry, Isaac, and Jacobs partnership was about to enter liquidation with the following account balances: Cash Noncash assets

Total

Version 1

90,000

Liabilities

300,000

Henry,capital

80,000

Isaac, capital

110,000

Jacobs, capital

140,000

$ 390,000

Total

60,000

$ 390,000

Estimated expenses of liquidation were $5,000. Henry, Isaac, and Jacobs shared profits and losses in a ratio of 2:4:4. Before liquidating any assets, the partners determined the amount of cash for safe payments and distributed it. The noncash assets were then sold for $120,000. The liquidation expenses of $5,000 were paid prior to the sale of noncash assets. How would the $120,000 be distributed to the partners? (Hint: Either a predistribution plan or a statement of liquidation would be appropriate for solving this item.) Henry

Isaac

Jacobs

$ 33,000

$ 36,000

$ 51,000

$ 28,000

$ 36,000

$ 56,000

$ 29,333

$ 32,000

$ 58,667

$ 24,000

$ 48,000

$ 38,000

$ 26,000

$ 56,000

A) Option A. B) Option B. C) Option C. D) Option D. E) Option E.

11) The following account balances were available for the Perry, Quincy, and Renquist partnership just before it entered liquidation: Cash Noncash assets

Total

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90,000

Liabilities

300,000

Perry, capital

70,000

Quincy, capital

50,000

Renquist, capital

100,000

$ 390,000

Total

$ 170,000

$ 390,000

Included in Perry’s Capital account balance is a $20,000 partnership loan owed to Perry. Perry, Quincy, and Renquist shared profits and losses in a ratio of 2:4:4. Liquidation expenses were expected to be $15,000. All partners were insolvent. For what amount would noncash assets need to be sold to generate enough cash in order that at least one partner would receive some cash upon liquidation? A) Any amount in excess of $185,000. B) Any amount in excess of $170,000. C) Any amount in excess of $165,000. D) Any amount in excess of $95,000. E) Any amount in excess of $90,000.

12) The following account balances were available for the Perry, Quincy, and Renquist partnership just before it entered liquidation: Cash Noncash assets

Total

90,000

Liabilities

300,000

Perry, capital

70,000

Quincy, capital

50,000

Renquist, capital

100,000

$ 390,000

Total

$ 170,000

$ 390,000

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A) Any amount in excess of $170,000. B) Any amount in excess of $190,000. C) Any amount in excess of $260,000. D) Any amount in excess of $280,000. E) Any amount in excess of $300,000.

13) A local partnership was in the process of liquidating and reported the following Capital account balances: Justice, capital (40% share of all profits and losses)

23,000

Zobart, capital (35%)

22,000

Douglass, capital (25%)

(14,000 )

Douglass indicated that the $14,000 deficit would be covered by a forthcoming contribution. However, the two remaining partners asked to receive the $31,000 that was then in the cash account. How much of the $31,000 in the cash account should Justice receive? A) $15,467. B) $15,533. C) $17,333. D) $16,533. E) $15,867.

14) A local partnership was in the process of liquidating and reported the following Capital account balances: Justice, capital (40% share of all profits and losses)

23,000

Zobart, capital (35%)

22,000

Douglass, capital (25%)

(14,000 )

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Douglass indicated that the $14,000 deficit would be covered by a forthcoming contribution. However, the two remaining partners asked to receive the $31,000 that was then in the cash account. How much of this money should Zobart receive? A) $15,467. B) $14,467. C) $17,333. D) $15,633. E) $15,867.

15) A local partnership was considering the possibility of liquidation. Capital account balances at that time were as follows. Profits and losses were divided on a 4:2:2:2 basis, respectively. Ding, capital Laurel, capital

$ 60,000 67,000

Ezzard, capital

17,000

Tillman, capital

96,000

At that time, the partnership held noncash assets reported at $360,000 and liabilities of $120,000. There was no cash on hand at the time. If the assets could be sold for $228,000 and there are no liquidation expenses, what is the amount that Ding would receive from the liquidation? A) $36,000. B) $0. C) $2,500. D) $38,720. E) $67,250.

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16) A local partnership was considering the possibility of liquidation. Capital account balances at that time were as follows. Profits and losses were divided on a 4:2:2:2 basis, respectively. Ding, capital Laurel, capital

$ 60,000 67,000

Ezzard, capital

17,000

Tillman, capital

96,000

At that time, the partnership held noncash assets reported at $360,000 and liabilities of $120,000. There was no cash on hand at the time. If the assets could be sold for $228,000 and there are no liquidation expenses, what is the amount that Laurel would receive from the liquidation? A) $36,000. B) $0. C) $2,500. D) $38,250. E) $67,250.

17) A local partnership was considering the possibility of liquidation. Capital account balances at that time were as follows. Profits and losses were divided on a 4:2:2:2 basis, respectively. Ding, capital Laurel, capital

$ 60,000 67,000

Ezzard, capital

17,000

Tillman, capital

96,000

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At that time, the partnership held noncash assets reported at $360,000 and liabilities of $120,000. There was no cash on hand at the time. If the assets could be sold for $228,000 and there are no liquidation expenses, what is the minimum amount that Ezzard would receive from the liquidation? A) $36,000. B) $0. C) $2,500. D) $38,250. E) $67,250.

18) A local partnership was considering the possibility of liquidation. Capital account balances at that time were as follows. Profits and losses were divided on a 4:2:2:2 basis, respectively. Ding, capital Laurel, capital

$ 60,000 67,000

Ezzard, capital

17,000

Tillman, capital

96,000

At that time, the partnership held noncash assets reported at $360,000 and liabilities of $120,000. There was no cash on hand at the time. If the assets could be sold for $228,000 and there are no liquidation expenses, what is the amount that Tillman would receive from the liquidation? A) $36,000. B) $0. C) $2,500. D) $38,250. E) $67,250.

19) Dancey, Reese, Newman, and Jahn were partners who shared profits and losses on a 4:2:2:2 basis, respectively. They were beginning to liquidate their business. At the start of the process, Capital account balances were as follows: Version 1

Dancey, capital Reese, capital

$ 72,000 32,000

Newman, capital

52,000

Jahn, capital

24,000

Which one of the following statements is true for a predistribution plan? A) The first available $16,000 would go to Newman. B) The first available $20,000 would go to Dancey. C) The first available $8,000 would go to Jahn. D) The first available $8,000 would go to Newman. E) The first available $4,000 would go to Jahn.

20) Dancey, Reese, Newman, and Jahn were partners who shared profits and losses on a 4:2:2:2 basis, respectively. They were beginning to liquidate their business. At the start of the process, Capital account balances were as follows: Dancey, capital Reese, capital

$ 72,000 32,000

Newman, capital

52,000

Jahn, capital

24,000

Which one of the following statements is true for a predistribution plan?

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A) The first available $16,000 would go to Newman. The next $12,000 would go $8,000 to Dancey and $4,000 to Newman. The following $32,000 would be shared equally between Dancey, Reese, and Newman. A total distribution of $60,000 would be required before all four partners share any further payments equally. B) The first available $16,000 would go to Newman. The next $12,000 would go $8,000 to Dancey and $4,000 to Newman. The following $32,000 would be shared by Dancey, Reese, and Newman. The total distribution would be $60,000 before all four partners share any further payments in their profit and loss sharing ratios. C) The first $20,000 would go to Newman. The next $8,000 would go to Dancey. The next $12,000 would be shared equally by Dancey, Reese, and Newman. The total distribution would be $40,000 before all four partners share any further payments equally. D) The first available $8,000 would go to Newman. The next $4,000 would be split equally between Dancey and Newman. The following $12,000 would be shared by Dancey, Reese, and Newman. The total distribution would be $24,000 before all four partners share any further payments equally. E) The first available $8,000 would go to Newman. The next $4,000 would be split equally between Dancey and Newman. The following $12,000 would be shared by Dancey, Reese, and Newman. The total distribution would be $24,000 before all four partners share any further payments in their profit and loss sharing ratios.

21) Which of the following could result in the termination and liquidation of a partnership? 1) Partners are incompatible and choose to cease operations. 2) There are excessive losses that are expected to continue. 3) Retirement of a partner. A) 1 only. B) 1 and 2 only. C) 2 and 3 only. D) 3 only. E) 1, 2, and 3.

22) What accounting transactions are not recorded by an accountant during partnership liquidation?

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A) The conversion of partnership assets into cash. B) The allocation of gains and losses from sales of assets. C) The payment of liabilities and expenses. D) The initiation of legal action by creditors of the partnership. E) Write-off of remaining unpaid debts.

23) Which of the following statements is false concerning the partnership Statement of Liquidation? A) Liquidations may take a considerable length of time to complete. B) Frequent reporting by the accountant is rarely necessary. C) The Statement of Liquidation provides a listing of transactions to date, current cash, and capital account balances. D) The Statement of Liquidation provides a listing of property still held by the partnership as well as liabilities remaining unpaid. E) The Statement of Liquidation keeps creditors and partners apprised of the results of the process of dissolution.

24)

Which of the following is false a regarding a partner's deficit balance?

A) A partner cannot refuse to make contributions to cover their deficit balance. B) Deficits can occur when the partnership has incurred significant operating losses. C) Deficits can occur when the sale of noncash assets during the liquidation process results in material losses. D) The partner with a deficit balance should contribute assets to cover the deficit balance. E) The other partners may have to absorb the deficit balance.

25)

Which of the following statements is true concerning the distribution of safe payments?

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A) The distribution of safe payments assumes that any capital deficit balances will prove to be a total loss to the partnership. B) Safe payments are equal to the recorded capital account balances of those partners with capital account balances in excess of $0. C) The distribution of safe payments may only be made after all liabilities have been paid. D) In computing safe payments, partners with positive capital account balances are assumed to absorb an equal share of any deficit balance(s). E) There are no safe payments until the liquidation is complete.

26)

Which one of the following statements is correct?

A) If a partner of a liquidating partnership is unable to pay a capital account deficit, the deficit is absorbed by the other partners in the profit and loss ratio of those partners. B) Gains and losses from the sale of noncash assets are divided in the ratio of the partners' capital account balances absent an alternate income-sharing plan stated in the partnership agreement. C) A loan receivable from a partner is added to the partner's capital account balance in the preparation of a cash distribution plan. D) Partners may not receive any cash before partnership creditors receive cash when liquidating a partnership. E) All cash payments to partners are made using their profit and loss ratio when liquidating the partnership.

27)

Which item is not shown on the statement of partnership liquidation? A) Current cash balances. B) Property owned by the partnership. C) Liabilities still to be paid. D) Personal assets of the partners. E) Current capital account balances of the partners.

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28) Hanson, James, and Smith, a partnership, is in the process of liquidating. The partners have the following capital account balances; $48,000, $48,000, and ($18,000) respectively. The partners share all profits and losses 16%, 48%, and 36%, respectively. Smith has indicated that the ($18,000) deficit will be covered with a forthcoming contribution. The remaining partners have requested an immediate distribution of $40,000 in cash that is available. How should this cash be distributed? A) Hanson $10,000; James $30,000. B) Hanson $34,000; James $6,000. C) Hanson $22,308; James $17,692. D) Hanson $28,594; James $11,406. E) Hanson $25,000; James $15,000.

29) The partnership of Gordon, Handel, and Mitchell is considering possible liquidation because partner Mitchell is personally insolvent. The partners have the following capital account balances: $120,000, $140,000, and $80,000, respectively, and share profits and losses 35%, 45%, and 20%, respectively. The partnership has $400,000 in noncash assets that can be sold for $300,000. The partnership has $20,000 cash on hand, and $80,000 in liabilities. What is the minimum that partner Mitchell’s creditors would receive if they have filed a claim for $100,000? A) $0. B) $20,000. C) $60,000. D) $80,000. E) $100,000.

30) White, Sands, and Luke has the following capital account balances and profit and loss ratios: $60,000 (30%); $100,000 (20%); and $200,000 (50%). The partnership has received a predistribution plan. How would $90,000 be distributed? White

Sands

Luke

$ 15,000

$ 25,000

$ 50,000

$ 18,947

$ 71,053

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$ 40,000

$ 50,000

$ 10,588

$ 79,412

$ 27,000

$ 18,000

$ 45,000

A) Option A. B) Option B. C) Option C. D) Option D. E) Option E.

31) White, Sands, and Luke has the following capital account balances and profit and loss ratios: $60,000 (30%); $100,000 (20%); and $200,000 (50%). The partnership has received a predistribution plan. How would $200,000 be distributed? White

Sands

Luke

$ 60,000

40,000

$ 100,000

6,000

44,000

$ 150,000

$ 48,148

65,432

$ 12,000

68,000

$ 120,000

$ 60,000

$ 100,000

86,420

40,000

A) Option A. B) Option B. C) Option C. D) Option D. E) Option E.

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32) A local partnership has assets of cash of $5,000 and a building recorded at $80,000. All liabilities have been paid. The partners’ capital accounts are as follows Harry $40,000, Landers $30,000 and Waters $15,000. The partners share profits and losses 4:4:2. If the building is sold for $50,000 and there are no liquidation expenses what amount should Harry receive in the final settlement? A) $5,000. B) $9,000. C) $18,000. D) $28,000. E) $55,000.

33) A local partnership has assets of cash of $5,000 and a building recorded at $80,000. All liabilities have been paid. The partners’ capital accounts are as follows Harry $40,000, Landers $30,000 and Waters $15,000. The partners share profits and losses 4:4:2. If the building is sold for $50,000, what amount should Waters receive in the final settlement? A) $5,000. B) $9,000. C) $18,000. D) $28,000. E) $55,000.

34) A local partnership has assets of cash of $30,000 and land recorded at $700,000. All liabilities have been paid and the partners are all personally insolvent. The partners’ capital accounts are as follows Roberts, $500,000, Ferry, $300,000 and Mones, $30,000. The partners share profits and losses 5:3:2. If the land is sold for $450,000, what amount will Roberts receive in the final settlement? A) $0. B) $30,000. C) $217,500. D) $362,500. E) $502,500.

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35) A local partnership has assets of cash of $30,000 and land recorded at $700,000. All liabilities have been paid and the partners are all personally insolvent. The partners’ capital accounts are as follows Roberts, $500,000, Ferry, $300,000 and Mones, $30,000. The partners share profits and losses 5:3:2. If the land is sold for $450,000, how much cash will Mones receive in the final settlement? A) $0. B) $15,000. C) $300,000. D) $217,500. E) $362,500.

36) At the end of a partnership liquidation, how is any remaining cash distributed to the partners? A) Based on the individual partners’ final capital balances. B) Based on their share of profits and losses. C) Equally. D) Based on the length of time the partner was with the partnership. E) Based on the initial investment made by each partner.

37)

During a partnership liquidation, how are gains and losses recorded? A) Accrued in Other Comprehensive Income. B) Accrued in a Liquidation Gain/Loss account. C) Directly to Retained Earnings. D) Directly to the partners’ capital accounts, allocated equally. E) Directly to the partners’ capital accounts, allocated on the partners’ profit and loss

ratio.

38)

A proposed schedule of liquidation is developed

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A) based on the underlying assumption that all future events will result in total gains. B) based on the underlying assumption that all partners will remain solvent throughout liquidation. C) on the first day of each month as required by the Uniform Partnership Act. D) based on the underlying assumption that all future events will result in total losses. E) on a weekly basis as required by the Uniform Partnership Act.

39) A partnership has assets of cash of $10,000 and equipment with a book value of $160,000. All liabilities have been paid. The partners’ capital accounts are as follows Michael $80,000, Gregory $60,000 and Phillips $30,000. The partners share profits and losses on a 4:3:3 basis. If the equipment is sold for $100,000 and there are no liquidation expenses what amount should Michael receive in the final settlement? A) $10,000. B) $18,000. C) $20,000. D) $56,000. E) $62,000.

40) A partnership has assets of cash of $10,000 and equipment with a book value of $160,000. All liabilities have been paid. The partners’ capital accounts are as follows Michael $80,000, Gregory $60,000 and Phillips $30,000. The partners share profits and losses on a 4:3:3 basis. If the equipment is sold for $100,000 and there are no liquidation expenses what amount should Gregory receive in the final settlement? A) $10,000. B) $18,000. C) $20,000. D) $36,000. E) $42,000.

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41) A partnership has assets of cash of $10,000 and equipment with a book value of $160,000. All liabilities have been paid. The partners’ capital accounts are as follows Michael $80,000, Gregory $60,000 and Phillips $30,000. The partners share profits and losses on a 4:3:3 basis. If the equipment is sold for $100,000 and there are no liquidation expenses what amount should Phillips receive in the final settlement? A) $6,000. B) $12,000. C) $20,000. D) $36,000. E) $42,000.

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question. 42) The Albert, Boynton, and Creamer partnership was in the process of liquidating its assets and going out of business. Albert, Boynton, and Creamer had capital account balances of $80,000, $120,000, and $200,000, respectively, and shared profits and losses in the ratio of 1:3:2. Equipment that had cost $90,000 and had a book value of $60,000 was sold for $24,000 cash. Required: Prepare the appropriate journal entry to record the sale of the equipment, distributing any gain or loss directly to the partners.

43) The Amos, Billings, and Cleaver partnership had two assets: (1) cash of $40,000 and (2) an investment with a book value of $110,000. The ratio for sharing profits and losses is 2:1:1. The balances in the capital accounts were: Amos, capital Billings, capital Cleaver, capital

$ 45,000 $ 75,000 $ 30,000

Required: If the investment was sold for $80,000, how much cash would each partner receive upon liquidation?

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44) As of January 1, 2021, the partnership of Carlin, Yearly, and Granite had the following account balances and percentages for the sharing of profits and losses: Cash

$ 160,000

Noncash assets

410,000

Liabilities

94,000

Carlin, capital (30%)

276,000

Yearly, capital (40%)

239,500

Granite, capital (30%)

(39,500 )

The partnership incurred losses in recent years and decided to liquidate. The liquidation expenses were expected to be $20,000. How much of the existing cash balance could be distributed safely to partners at this time?

45) As of January 1, 2021, the partnership of Carlin, Yearly, and Granite had the following account balances and percentages for the sharing of profits and losses: Cash

$ 160,000

Noncash assets

410,000

Liabilities

94,000

Carlin, capital (30%)

276,000

Yearly, capital (40%)

239,500

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Granite, capital (30%)

(39,500 )

The partnership incurred losses in recent years and decided to liquidate. The liquidation expenses were expected to be $20,000. What would be the maximum amount Granite might have to contribute to the partnership to eliminate a deficit balance in his account?

46) As of January 1, 2021, the partnership of Carlin, Yearly, and Granite had the following account balances and percentages for the sharing of profits and losses: Cash

$ 160,000

Noncash assets

410,000

Liabilities

94,000

Carlin, capital (30%)

276,000

Yearly, capital (40%)

239,500

Granite, capital (30%)

(39,500 )

The partnership incurred losses in recent years and decided to liquidate. The liquidation expenses were expected to be $20,000. How much cash should each partner receive at this time, pursuant to a proposed schedule of liquidation?

47) As of January 1, 2021, the partnership of Carlin, Yearly, and Granite had the following account balances and percentages for the sharing of profits and losses:

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Cash

$ 160,000

Noncash assets

410,000

Liabilities

94,000

Carlin, capital (30%)

276,000

Yearly, capital (40%)

239,500

Granite, capital (30%)

(39,500 )

The partnership incurred losses in recent years and decided to liquidate. The liquidation expenses were expected to be $20,000. If the noncash assets are sold for $210,000, what would be the maximum amount of cash that Carlin could expect to receive?

48) A partnership had the following account balances: Cash, $91,000; Other Assets, $702,000; Liabilities, $338,000; Polk, Capital (50% of profits and losses), $221,000; Garfield, Capital (30%), $143,000; Arthur, Capital (20%), $91,000. The company liquidated and $10,400 became available to the partners. Required: Who would have received the $10,400?

49) A partnership held three assets: Cash, $13,000; Land, $45,000; and a Building, $65,000. There were no recorded liabilities. The partners anticipated that expenses required to liquidate their partnership would amount to $6,000. Capital account balances were as follows: King, Capital Murphy, Capital

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$ 32,700 36,400

Madison, Capital

26,000

Pond, Capital

27,900

The partners shared profits and losses 3:3:2:2, respectively. Required: Prepare a proposed schedule of liquidation, showing how cash could be safely distributed to the partners at this time.

50) On January 1, 2021, the partners of Won, Cadel, and Dax (who shared profits and losses in the ratio of 5:3:2, respectively) decided to liquidate their partnership. The trial balance at this date was as follows: Debit Cash

Credit

23,400

Accounts receivable

85,800

Inventory

67,600

Machinery and equipment, net

245,700

Won, loan

39,000

Accounts payable

68,900

Cadel, loan

26,000

Won, capital

153,400

Cadel, capital

117,000

Dax, capital

96,200

Totals

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$ 461,500

The partners planned an installment program to dispose of the business assets and to minimize liquidation losses. All available cash, less an amount retained to provide for future expenses, was to be distributed to the partners at the end of each month. A summary of liquidation transactions follows: January

$66,300 was collected on the accounts receivable; the balance was deemed to be uncollectible. $49,400 was received for the entire inventory. $2,600 in liquidation expenses were paid.

$65,000 was paid to outside creditors, after receiving a $3,900 credit memo from a creditor on January 11. Cash of $13,000 was retained at the end of the month to cover unrecorded liabilities and anticipated expenses. The balance of cash was distributed to the partners. February $3,900 in liquidation expenses were paid.

March

$7,800 in cash was retained at the end of the month to cover unrecorded liabilities and anticipated expenses. $189,800 was received on the sale of all machinery and equipment. $6,500 in final liquidation expenses were paid. No cash was retained as all cash was distributed to partners.

Prepare a schedule to calculate the safe payments to be made to the partners at the end of January.

51) On January 1, 2021, the partners of Won, Cadel, and Dax (who shared profits and losses in the ratio of 5:3:2, respectively) decided to liquidate their partnership. The trial balance at this date was as follows: Debit Cash

23,400

Accounts receivable

85,800

Inventory

67,600

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Credit

Machinery and equipment, net

245,700

Won, loan

39,000

Accounts payable

68,900

Cadel, loan

26,000

Won, capital

153,400

Cadel, capital

117,000

Dax, capital

96,200

Totals

$ 461,500

$66,300 was collected on the accounts receivable; the balance was deemed to be uncollectible. $49,400 was received for the entire inventory. $2,600 in liquidation expenses were paid.

March

Prepare a schedule to calculate the safe installment payments to be made to the partners at the end of February.

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52) On January 1, 2021, the partners of Won, Cadel, and Dax (who shared profits and losses in the ratio of 5:3:2, respectively) decided to liquidate their partnership. The trial balance at this date was as follows: Debit Cash

Credit

23,400

Accounts receivable

85,800

Inventory

67,600

Machinery and equipment, net

245,700

Won, loan

39,000

Accounts payable

68,900

Cadel, loan

26,000

Won, capital

153,400

Cadel, capital

117,000

Dax, capital

96,200

Totals

$ 461,500

$66,300 was collected on the accounts receivable; the balance was deemed to be uncollectible. $49,400 was received for the entire inventory. $2,600 in liquidation expenses were paid.

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March

Prepare a schedule to calculate the safe payments to be made to the partners at the end of March.

53) Hardin, Sutton, and Williams have operated a local business as a partnership for several years. All profits and losses have been allocated in a 3:2:1 ratio, respectively. Recently, Williams has undergone personal financial problems, and is insolvent. To satisfy Williams' creditors, the partnership has decided to liquidate. The following balance sheet has been produced: Cash Noncash assets

Total assets

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10,000

Liabilities

227,000

Hardin, capital

96,000

Sutton, capital

45,000

Williams, capital

16,000

$ 237,000

Total liabilities and capital

80,000

$ 237,000

During the liquidation process, the following transactions take place: - Noncash assets are sold for $116,000. - Liquidation expenses of $12,000 are paid. No further expenses are expected. - Safe capital distributions are made to the partners. - Payment is made of all business liabilities. - Any deficit capital account balances are deemed to be uncollectible. Develop a predistribution plan for this partnership, assuming $12,000 of liquidation expenses are expected to be paid.

54) Hardin, Sutton, and Williams have operated a local business as a partnership for several years. All profits and losses have been allocated in a 3:2:1 ratio, respectively. Recently, Williams has undergone personal financial problems, and is insolvent. To satisfy Williams' creditors, the partnership has decided to liquidate. The following balance sheet has been produced: Cash Noncash assets

Total assets

10,000

Liabilities

227,000

Hardin, capital

96,000

Sutton, capital

45,000

Williams, capital

16,000

$ 237,000

Total liabilities and capital

80,000

$ 237,000

During the liquidation process, the following transactions take place: - Noncash assets are sold for $116,000. - Liquidation expenses of $12,000 are paid. No further expenses are expected. - Safe capital distributions are made to the partners. - Payment is made of all business liabilities. - Any deficit capital account balances are deemed to be uncollectible. Compute safe cash payments after the noncash assets have been sold and the liquidation expenses have been paid.

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55) Hardin, Sutton, and Williams have operated a local business as a partnership for several years. All profits and losses have been allocated in a 3:2:1 ratio, respectively. Recently, Williams has undergone personal financial problems, and is insolvent. To satisfy Williams' creditors, the partnership has decided to liquidate. The following balance sheet has been produced: Cash Noncash assets

Total assets

10,000

Liabilities

227,000

Hardin, capital

96,000

Sutton, capital

45,000

Williams, capital

16,000

$ 237,000

Total liabilities and capital

80,000

$ 237,000

During the liquidation process, the following transactions take place: - Noncash assets are sold for $116,000. - Liquidation expenses of $12,000 are paid. No further expenses are expected. - Safe capital distributions are made to the partners. - Payment is made of all business liabilities. - Any deficit capital account balances are deemed to be uncollectible. Prepare journal entries to record the actual liquidation transactions.

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56) Jones, Marge, and Tate LLP decided to dissolve and liquidate the partnership on September 30, 2021. After realization of a portion of the noncash assets, the capital account balances were Jones $50,000; Marge $40,000; and Tate $15,000. Cash of $35,000 and other assets with a carrying amount of $100,000 were on hand. Creditors' claims totaled $30,000. Jones, Marge, and Tate shared net income and losses in a 2:1:1 ratio, respectively. Prepare a working paper to compute the amount of cash that may be paid to creditors and to partners at this time, assuming that no partner is solvent.

57) The balance sheet of Rogers, Dennis & Berry LLP prior to liquidation included the following: Cash Noncash assets

$ 40,000 80,000

Liabilities

20,000

Loan Payable to Rogers

10,000

Rogers, Capital

35,000

Dennis, Capital

30,000

Berry, Capital

25,000

The three partners shared net income and losses in a 5:3:2 ratio, respectively. Noncash assets were sold for $60,000. Creditors were paid in full, partners were paid $35,000, and the balance of cash was retained pending future developments. Record the journal entry for the sale of the noncash assets.

58) The balance sheet of Rogers, Dennis & Berry LLP prior to liquidation included the following:

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Cash Noncash assets

$ 40,000 80,000

Liabilities

20,000

Loan Payable to Rogers

10,000

Rogers, Capital

35,000

Dennis, Capital

30,000

Berry, Capital

25,000

59) The balance sheet of Rogers, Dennis & Berry LLP prior to liquidation included the following: Cash Noncash assets

$ 40,000 80,000

Liabilities

20,000

Loan Payable to Rogers

10,000

Rogers, Capital

35,000

Dennis, Capital

30,000

Berry, Capital

25,000

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The three partners shared net income and losses in a 5:3:2 ratio, respectively. Noncash assets were sold for $60,000. Creditors were paid in full, partners were paid $35,000, and the balance of cash was retained pending future developments. Determine the cash to be retained and prepare a schedule to distribute $35,000 cash to the partners.

60) The balance sheet of Rogers, Dennis & Berry LLP prior to liquidation included the following: Cash Noncash assets

$ 40,000 80,000

Liabilities

20,000

Loan Payable to Rogers

10,000

Rogers, Capital

35,000

Dennis, Capital

30,000

Berry, Capital

25,000

61) The partners of Donald, Chief & Berry LLP decided to liquidate on August 1, 2021. The balance sheet of the partnership is as follows, with the profit and loss ratio of 25%, 45%, and 30%, respectively. The partners do not expect to incur further liquidation expenses. DONALD, CHIEF, & BERRY LLP Balance Sheet

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Assets Cash Loan receivable from Donald Other assets

Total

August 1, 2021 Liabilities & Partners’ Capital 60,000 Trade accounts $ 130,000 payable 40,000 Loan payable to Chief 60,000 500,000

$ 600,000

Donald, capital

140,000

Chief, capital

160,000

Berry, capital

110,000

Total

$ 600,000

A portion of the Other Assets with a carrying amount of $200,000 were sold for $140,000, and all available cash was distributed. Prepare the journal entry for Donald, Chief & Berry LLP on August 1, 2021, to recognize proceeds from the sale of Other Assets.

62) The partners of Donald, Chief & Berry LLP decided to liquidate on August 1, 2021. The balance sheet of the partnership is as follows, with the profit and loss ratio of 25%, 45%, and 30%, respectively. The partners do not expect to incur further liquidation expenses. DONALD, CHIEF, & BERRY LLP Balance Sheet August 1, 2021 Assets Liabilities & Partners’ Capital Cash $ 60,000 Trade accounts $ 130,000 payable Loan receivable from 40,000 Loan payable to Chief 60,000 Donald Other assets 500,000 Donald, capital 140,000

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Chief, capital

160,000

Berry, capital

110,000

Total

$ 600,000

Total

$ 600,000

63) The partners of Donald, Chief & Berry LLP decided to liquidate on August 1, 2021. The balance sheet of the partnership is as follows, with the profit and loss ratio of 25%, 45%, and 30%, respectively. The partners do not expect to incur further liquidation expenses. DONALD, CHIEF, & BERRY LLP Balance Sheet August 1, 2021 Assets Liabilities & Partners’ Capital Cash $ 60,000 Trade accounts $ 130,000 payable Loan receivable from 40,000 Loan payable to Chief 60,000 Donald Other assets 500,000 Donald, capital 140,000

Total

$ 600,000

Chief, capital

160,000

Berry, capital

110,000

Total

$ 600,000

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64) The partners of Donald, Chief & Berry LLP decided to liquidate on August 1, 2021. The balance sheet of the partnership is as follows, with the profit and loss ratio of 25%, 45%, and 30%, respectively. The partners do not expect to incur further liquidation expenses. DONALD, CHIEF, & BERRY LLP Balance Sheet August 1, 2021 Assets Liabilities & Partners’ Capital Cash $ 60,000 Trade accounts $ 130,000 payable Loan receivable from 40,000 Loan payable to Chief 60,000 Donald Other assets 500,000 Donald, capital 140,000

Total

$ 600,000

Chief, capital

160,000

Berry, capital

110,000

Total

$ 600,000

A portion of the Other Assets with a carrying amount of $200,000 were sold for $140,000, and all available cash was distributed. Prepare the schedule to compute the cash payments to the partners.

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ESSAY. Write your answer in the space provided or on a separate sheet of paper. 65) Matching (1.) The statement of liquidation (2.) Deficit capital account balances (3.) Safe capital account balances (4.) Predistribution plan (A.) A report produced periodically by the accountant to disclose transactions that have occurred during liquidation, the remaining assets and liabilities, and updated capital account balances. (B) At the start of a liquidation, this document provides guidance for all payments to be made to the partners throughout the liquidation. (C.) One or more partners may have a negative capital account balance often as a result of losses incurred in disposing of assets. (D.) A provision for an equitable distribution of assets during liquidation.

66)

What is the role of the accountant during the liquidation process?

67) The partnership of Rayne, Marin, and Fulton was being liquidated by the partners. Rayne was insolvent and did not have enough assets to pay all his personal creditors. Under what conditions might Rayne’s personal creditors have a claim to some of the partnership assets?

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68) The Arnold, Bates, Carlton, and Delbert partnership was liquidating. It had paid all its liabilities and had some assets yet to be sold. The partners had capital account balances of ($50,000), $90,000, $110,000, and $130,000, respectively. There was $40,000 cash available for distribution to the partners. What procedures would be followed to determine the amount of cash that could safely be distributed to each partner?

69) Xygote, Yen, and Zen were partners who were liquidating their partnership. Each partner has a deficit balance in their respective capital account. Assuming all assets from the partnership have been liquidated and all of the liabilities have been paid, how should any additional cash coming into the partnership be distributed to the partners?

70)

What is the purpose of a predistribution plan?

71) What financial report would be prepared for a partnership that has begun liquidation but has not yet completed the process? What is the purpose of this report?

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72) What events or circumstances might force the termination of a partnership and liquidation of its assets?

73) Describe the content of a journal entry to record a gain or loss resulting from the liquidation of a partnership asset for cash.

74)

What should occur when a solvent partner has a deficit balance?

75)

Why is a preliminary distribution of partnership assets prepared?

76)

What is a safe cash payment?

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Answer Key Test name: Chap 10_8e 1) C 2) C Non-Cash Assets BV $500,000 − Cash Received $275,000 = Loss on Non-Cash Assets ($225,000) × 20% = Loss to Bevell ($45,000) 3) D Non-Cash Assets BV $500,000 − Cash Received $150,000 = Loss on Non-Cash Assets ($350,000) × 30% = Loss to Allen ($105,000) − Capital account balance $90,000 = Allen’s Deficit and Contribution Needed to Cover Deficit $15,000 Non-Cash Assets BV $500,000 − Cash Received $150,000 = Loss on Non-Cash Assets ($350,000) × 20% = Loss to Bevell ($70,000) − Capital account balance $100,000 = Bevell Excess after Loss Allocation of $30,000 Non-Cash Assets BV $500,000 − Cash Received $150,000 = Loss on Non-Cash Assets ($350,000) × 50% = Loss to Carter ($175,000) − Capital account balance $160,000 = Carter’s Deficit and Contribution Needed to Cover Deficit $15,000 4) A

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The resulting deficit of $10,000 is after depleting Carter’s capital account balance of $160,000. Thus, a total of $170,000 was allocated to reduce Carter’s capital account balance. Since Carter was allocated onehalf of the total reduction, the total allocation of expenses and losses was $340,000 of which $14,000 was for liquidation expenses, leaving a total loss on the sale of non-cash assets of $326,000. The non-cash assets were sold for $326,000 less than book value which means the non-cash assets were sold for $174,000 ($500,000 − $326,000). The result is provided as: [Non-Cash Assets BV $500,000 − Cash Received $174,000] + Liquidation Expenses $14,000 = Loss on Non-Cash Assets ($340,000) × 50% = Loss to Carter ($170,000) − Capital Account Balance $160,000 = Carter’s Deficit $10,000. 5) B

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Proceeds from sale of noncash assets in the amount of $60,000 results in a total loss of $170,000 [BV noncash assets ($230,000) less FV of assets ($60,000) = $170,000]. The allocation of this loss is as follows: Keller ($170,000 × 20% = $34,000); Long ($170,000 × 40% = $68,000); Mason ($170,000 × 40% = $68,000). Each partner’s allocation of liquidation expenses is calculated as follows: Keller ($18,500 × 20% = $3,700); Long ($18,500 × 40% = $7,400); Mason ($18,500 × 40% = $7,400). Capital account balances, after the allocation of these losses, were as follows: Keller [$100,000 − $34,000 (Loss on Noncash Assets) − $3,700 (Liquidation Expenses) = $62,300]; Long [$70,000 − $68,000 (Loss on Noncash Assets) − $7,400 (Liquidation Expenses) = Deficit ($5,400)]; Mason [$130,000 − $68,000 (Loss on Noncash Assets) − $7,400 (Liquidation Expenses) = $54,600]. Allocation of Longs’ $5,400 Deficit to Keller and Mason: $1,800 to Keller ($5,400 × 1/3 = $1,800) and $3,600 to Mason ($5,400 × 2/3 = $3,600). Keller’s ending capital account balance: $62,300 − $1,800 = $60,500. 6) C

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Proceeds from sale of noncash assets in the amount of $70,000 results in a total loss of $160,000 [BV noncash assets ($230,000) less FV of assets ($70,000) = $160,000]. The allocation of this loss is as follows: Keller ($160,000 × 20% = $32,000); Long ($160,000 × 40% = $64,000); Mason ($160,000 × 40% = $64,000). Each partner’s allocation of liquidation expenses is calculated as follows: Keller ($18,500 × 20% = $3,700); Long ($18,500 × 40% = $7,400); Mason ($18,500 × 40% = $7,400). Capital account balances, after the allocation of these losses, were as follows: Keller [$100,000 − $32,000 (Loss on Noncash Assets) − $3,700 (Liquidation Expenses) = $64,300]; Long [$70,000 − $64,000 (Loss on Noncash Assets) − $7,400 (Liquidation Expenses) = Deficit ($1,400)]; Mason [$130,000 − $64,000 (Loss on Noncash Assets) − $7,400 (Liquidation Expenses) = $58,600]. Allocation of Longs’ $1,400 Deficit to Keller and Mason: $467 to Keller ($1,400 × 1/3 = $467) and $933 to Mason ($1,400 × 2/3 = $933). Keller’s ending capital account balance: $64,300 − $467 = $63,833. Mason’s ending capital account balance: $58,600 − $933 = $57,667. 7) A

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Maximum Loss on Non-Cash Assets = BV of Non-Cash Assets $230,000 $230,000 × 20% = $46,000 Loss to Keller; $230,000 × 40% = $92,000 Loss Each to Long and Mason. Potential Balances: Keller $100,000 – $46,000 = $54,000 Keller Potential Balance. Long $70,000 – $92,000 = ($22,000) Long Potential Deficit Balance. Mason $130,000 – $92,000 = $38,000 Mason Potential Balance. Long’s Deficit ($22,000) × 1/3 = Long’s Deficit to Keller ($7,333) and ($22,000) × 2/3 = Long’s Deficit to Mason ($14,667). Long will receive $0. Keller Potential Balance $54,000 + Share of Long’s Deficit ($7,333) = Keller’s Safe Payment $46,667. Mason Potential Balance $38,000 + Share of Long’s Deficit ($14,667) = Mason’s Safe Payment $23,333. 8) C Cash $90,000 – Liabilities $60,000 – Liquidation Expenses $5,000 = “Safe” Cash $25,000 9) D

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Non-Cash Assets BV $300,000 = Maximum Loss on Non-Cash Assets $300,000 $300,000 × 20% = $60,000 Loss to Henry; $300,000 × 40% = $120,000 Loss each to Isaac and to Jacobs. Liquidation expenses of $5,000 not yet recorded are allocated 20% ($1,000) to Henry; and 40% ($2,000) each to Isaac and Jacobs. Potential Balances: Henry $80,000 –$60,000 Loss – $1,000 Liquidation expenses = $19,000 Henry’s Potential Balance. Isaac $110,000 – $120,000 Loss – $2,000 Liquidation expenses = ($12,000) Isaac’s Potential Deficit Balance. Jacobs $140,000 –$120,000 Loss – $2,000 Liquidation expenses = $18,000 Jacobs’s Potential Balance. Isaac’s Deficit ($12,000) × 1/3 = Isaac’s Deficit to Henry ($4,000) Isaac’s Deficit ($12,000) × 2/3 = Isaac’s Deficit to Jacobs ($8,000). Isaac will receive $0. Henry Potential Balance $19,000 − $4,000 Isaac’s Deficit = $15,000 Henry’s Safe Payment. Jacobs’ Potential Balance $18,000 − $8,000 Isaac’s Deficit = $10,000 Jacobs’ Safe Payment. 10) B

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$120,000 Cash from Sale − $5,000 Liquidation Expenses = $115,000 Cash to Distribute to Partners. Distribution before liquidating assets: $15,000 to Henry and $10,000 to Jacobs. Liquidating expenses paid and allocated as loss to partners at a 2:4:4 ratio of $1,000 to Henry and $2,000 each to Isaac and Jacobs. Capital account balances before sale of noncash assets: Henry $80,000 − $15,000 − $1,000 = $64,000. Isaacs $110,000 − no distribution − $2,000 = $108,000. Jacobs $140,000 − $10,000 − $2,000 = $128,000. Noncash assets sold for $120,000 = Loss of $180,000 ($300,000 − $120,000). Loss allocated in 2:4:4 ratio of $36,000 to Henry, and $72,000 each to Isaac and Jacobs. Updated balances for safe payments: Henry $64,000 − $36,000 Loss = $28,000. Isaac $108,000 − $72,000 Loss = $36,000. Jacobs $128,000 − $72,000 Loss = $56,000. Alternatively, the predistribution plan would be for the first $10,000 to go to Henry and the next $45,000 to go to Henry and Jacobs in a 1:2 ratio. Thus, if $120,000 is available, Henry receives $10,000 + $15,000 (1/3 × $45,000) and Jacobs receives $30,000 (2/3 × $45,000) = $55,000. All remaining cash would be allocated at a ratio of 2:4:4. 11) D $90,000 Cash − $15,000 Liquidation Expenses − $170,000 Liabilities = $95,000 Balance Needed from Non-Cash Assets. After this amount from non-cash assets to pay all expenses and liabilities, any additional cash could be paid to partners in their liquidation order until all partners could receive cash in their 2:4:4 ratio. 12) B Version 1

Capital account balance $50,000 − (40% × $15,000) Liquidation Expenses not yet recorded $6,000 − (40% × $300,000 Maximum loss on non-cash assets) Non-cash Asset Loss $120,000 = $76,000 divided by 40% = $190,000 Proceeds Needed from Non-Cash Assets. Alternatively, Capital balance $50,000 − Share of liquidation expenses not yet recorded $6,000 = $44,000 Capital balance for loss allocation. $44,000 ÷ 40% = $110,000 maximum loss that can be absorbed by Quincy. $300,000 non-cash assets − $110,000 maximum loss = $190,000 proceeds needed from sale of non-cash assets for Quincy to recover funds from the liquidation process. 13) B Douglass’s Deficit ($14,000) × (0.40 ÷ 0.75) = ($7,467) + Justice’s Capital account balance $23,000 = $15,533 Distribution to Justice 14) A Douglass’s Deficit ($14,000) × (0.35 ÷ 0.75) = ($6,533) + Zobart’s Capital account balance $22,000 = $15,467 Distribution to Zobart 15) C

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Non-Cash Assets BV $360,000 − Cash Received $228,000 = Loss on Non-Cash Assets ($132,000) × 40% = ($52,800) Loss to Ding; ($132,000) × 20% = ($26,400) Loss each to Laurel, Ezzard, and Tillman. Potential balances: Ding $60,000 − Loss ($52,800) = Ding Potential Balance $7,200. Laurel $67,000 − Loss ($26,400) = Laurel Potential Balance $40,600. Ezzard $17,000 − Loss ($26,400) = Ezzard Potential Balance ($9,400). Tillman $96,000 − Loss ($26,400) = Tillman Potential Balance $69,600. Ezzard’s Deficit ($9,400) × 4/8 = Ezzard’s Deficit Portion to Ding ($4,700) and 2/8 × ($9,400) = Ezzard’s Deficit Portion each to Laurel and Tillman ($2,350). Laurel potential balance $40,600 + Ezzard’s Deficit Portion ($2,350) = Amount Laurel Receives from Liquidation $38,250. 17) B Non-Cash Assets BV $360,000 − Cash Received $228,000 = Loss on Non-Cash Assets ($132,000) × 40% = ($52,800) Loss to Ding; ($132,000) × 20% = ($26,400) Loss each to Laurel, Ezzard, and Tillman. Potential balance Ezzard $17,000 − Loss ($26,400) = Ezzard Potential Balance ($9,400). Ezzard Receives $0 from Liquidation and Owes Other Partners $9,400. 18) E

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D = $72,000; R = $32,000; N = $52,000; J = $24,000 with Losses Shared 4:2:2:2 First eliminate most vulnerable: J = $24,000 ÷ 20% = $120,000 max loss that can be absorbed $120,000 loss allocated 4:2:2:2; J = $24,000 − ($120,000 × 20%) = 0; D = $72,000 − ($120,000 × 40%) = $24,000; R = $32,000 − ($120,000 × 20%) = $8,000; N = $52,000 − ($120,000 × 20%) = $28,000 Next most vulnerable: R = $8,000 ÷ 2/8 = $32,000 max loss than can be absorbed $32,000 loss allocated 4:2:2; D = $24,000 − ($32,000 × 4/8) = $8,000; R = $8,000 − ($32,000 × 2/8) = 0; N = $28,000 − ($32,000 × 2/8) = $20,000 Next most vulnerable: D = $8,000 ÷ 4/6 = $12,000 max loss that can be absorbed $12,000 loss allocated 4:2; D = $8,000 − ($12,000 × 4/6) = 0; N = $20,000 − ($12,000 × 2/6) = $16,000 20) B

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Hanson = $48,000; James = $48,000; Smith = ($18,000) beginning balances with Losses Shared 16:48:36 First, eliminate Smith’s deficit capital loss to Hanson & James, then allocate max loss on assets: Losses shared 16/64 & 48/64 or 25% & 75% Hanson = $48,000 − ($18,000 Smith deficit × 25%) = $43,500 − ($38,000 max loss* × 25%) = $34,000 James = $48,000 − ($18,000 Smith deficit × 75%) = $34,500 − ($38,000 max loss* × 75%) share of max loss* = $6,000 *Max Loss on Assets = Total capital ($48,000 + $48,000 − $18,000) $78,000 − Available cash $40,000 = $38,000 Max loss on assets 29) C Mitchell = $80,000 − Loss on Non-Cash Asset Sale ($100,000 × 20%) $20,000 = $60,000 30) C Sands: $20,000 + $20,000 [($90,000 − $20,000 = $70,000) × 2/7] = $40,000 Luke $50,000 [($90,000 − $20,000 = $70,000) × 5/7] 31) D

Beginning Balances Assumed Loss (Sched A) Step 1 Balances

200,000

Assumed Loss (Sched B) Step 2 Balances

140,000

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White

Sands

Luke

30%

20%

50%

60,000

100,000

(60,000 )

(40,000 ) (100,000 )

60,000

200,000

100,000

(40,000 ) (100,000 ) 20,000

Available Cash

Amount

Recipient

First

20,000

Sands

140,000

Sands (2/7) and Luke (5/7) White (30%), Sands (20%) and Luke (50%)

All further cash

Schedule A Partner White

Capital Balance 60,000

Loss Maximum Allocation Loss 30 % 200,000

Sands

100,000

20 %

500,000

Luke

200,000

50 %

400,000

Schedule B Partner

Capital Balance

Loss Allocation

Maximum Loss

White

Sands

60,000

2/7

210,000

Luke

100,000

5/7

140,000

White: ($200,000 − $20,000 − $140,000) × 30% = $12,000 Sands: $20,000 + $40,000 ($140,000 × 2/7) + $8,000 [($200,000 − $20,000 - $140,000) × 20%] = $68,000 Luke $100,000 ($140,000 × 5/7) + $20,000 [($200,000 - $20,000 − $140,000) × 50%] = $120,000 32) D Harry = $40,000 – Loss on Building ($30,000 × 40%) $12,000 = $28,000 Version 1

33) B Waters = $15,000 – Loss on Building ($30,000 × 20%) $6,000 = $9,000 34) D Capital account balances: R = $500,000; F = $300,000; M = $30,000 with Losses Shared 5:3:2 First eliminate M Balance of $30,000 in $250,000 Loss Losses now shared 5/8 and 3/8. Remaining loss to allocate = $220,000 ($250,000 – $30,000 to M). R = $500,000 – ($220,000 × 5/8) $137,500 = $362,500 F = $300,000 – ($220,000 × 3/8) $82,500 = $217,500 35) A R = $500,000; F = $300,000; M = $30,000 with Losses Shared 5:3:2 M Share of $250,000 Loss × 20% = $50,000; Capital account deficit balance of $20,000 ($30,000 − $50,000 share of loss) is allocated to remaining partners; Mones receives $0. 36) A 37) E 38) D 39) D Michael = $80,000 – Loss on Equipment ($60,000 × 40%) $24,000 = $56,000 40) E Gregory = $60,000 – Loss on Equipment ($60,000 × 30%) $18,000 = $42,000 41) B Phillips = $30,000 – Loss on Equipment ($60,000 × 30%) $18,000 = $12,000 42)

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Cash

24,000

Accumulated Depreciation

30,000

Albert, Capital

6,000

Boynton, Capital

18,000

Creamer, Capital

12,000

Equipment

90,000

43) Amos ($45,000 − ($30,000 loss × 50%)) Billings ($75,000 − ($30,000 loss × 25%)) Cleaver ($30,000 − ($30,000 loss × 25%))

$ 30,000 $ 67,500 $ 22,500

44) The amount of cash that could be distributed to partners at this time = current cash balance $160,000 – liabilities $94,000 – estimated liquidation expenses $20,000 = $46,000. 45) Carlin

Yearly

Capital account balances Loss on sale of assets Liquidation expenses

$ 276,000

$ 239,000

Balances

$ 147,000

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Granite

Total

$ (39,000 ) $ 476,000

(123,000 )

(164,000 )

(123,000 )

(410,000 )

(6,000 )

(8,000 )

(6,000 )

(20,000 )

67,000

$ (168,000 ) $

46,000

The maximum amount that Granite might have to contribute to eliminate a deficit would be $168,000, assuming that the noncash assets cannot be sold and become a total loss to the partnership. 46) To determine the amount to be distributed to partners, assuming maximum losses on liquidation: Carlin

Yearly

Granite

Total

Capital account $ 276,000 $ 239,000 $ (39,000 ) $ 476,000 balances Loss on sale of (123,000 ) (164,000 ) (123,000 ) (410,000 ) assets Liquidation expenses (6,000 ) (8,000 ) (6,000 ) (20,000 ) Balances Allocation of deficit Balances

$ 147,000

Allocation of deficit Safe balance

67,000

$ (168,000 ) $

(72,000 )

(96,000 )

168,000

75,000

$ (29,000 ) $

(29,000 )

29,000

46,000

46,000 0

46,000

The entire $46,000 should be distributed to Carlin. 47) The maximum amount that Carlin could be expected to receive is $210,000. This assumes that Granite can cover his deficit: Carlin

Yearly

Granite

Total

Capital account balances Loss on sale of assets Liquidation expenses

$ 276,000

$ 239,000

$ (39,000 )

$ 476,000

Balances

$ 210,000

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(60,000 )

(80,000 )

(60,000 )

(200,000

(6,000 )

(8,000 )

(6,000 )

(20,000 )

$ 151,000

$ (105,000 )

$ 256,000

48) Since the partnership had total capital of $455,000, the $10,400 that was available would have indicated maximum anticipated losses of $444,600. Reported balances Anticipated loss of $444,600 allocated on a 5:3:2 basis Potential balances

Polk

Garfield

Arthur

$ 221,000

$ 143,000

$ 91,000

(222,300 ) $

Potential loss from Polk's deflicit (split 3:2)

(1,300 )

(133,380 ) $

9,620

1,300

Current cash distribution

(88,920 ) $

(780 ) $

8,840

2,080 (520 )

1,560

The $10,400 would have gone to Garfield ($8,840) and Arthur ($1,560). 49) Murphy could receive $700, Madison could receive $2,200, and Pond could receive $4,100. Recorded balances

King

Murphy

Madison

Pond

$ 32,700

$ 36,400

$ 26,000

$ 27,900

Maximum losses on land (33,000 ) (33,000 ) (22,000 ) (22,000 ) and building ($110,000) allocated on a 3:3:2:2 basis Estimated liquidation (1,800 ) (1,800 ) (1,200 ) (1,200 ) expenses ($6,000) allocated 3:3:2:2 Potential balances $ (2,100 ) $ 1,600 ) $ 2,800 $ 4,700 Assume King to be insolvent ($2,100) allocated 3:2:2 Safe balances

2,100

(900 )

700

(600 )

2,200

(600 )

4,100

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Won, Cadel, and Dax Partnership Safe Installment Payments to Partners January 31, 2021 Won Cadel Dax Profit and loss ratio

50 %

30 %

Preliquidation Capital $ 153,400 $ 117,000 account balances Add (deduct) loans (39,000 ) 26,000

Total 20 %

$ 96,200

100 %

$ 366,600

(13,000 )

Subtotals

114,400

143,000

96,200

353,600

January actual losses (Schedule 1) Partnership equity January 31, 2021 Potential losses (Schedule 1) Subtotals

(18,200 )

(10,920 )

(7,280 )

(36,400 )

96,200

132,080

88,920

317,200

(129,350 )

(77,610 )

(51,740 )

(258,700 )

(33,150 )

54,470

37,180

58,500

33,150

(19,890 )

(13,260 )

Potential loss – Won’s deficit balance Safe payments to partners:

$ 34,580

$ 23,920

0 $

58,500

Proof of cash: Beginning $23,400 + collect A/R $66,300 + collect on inventory $49,400 – paid liq. expenses $2,600 – paid A/P $65,000 – cash retained $13,000 = $58,500. Schedule 1 Calculation of Actual and Potential Liquidation Losses January 2021 Actual Potential Losses Losses Collection of accounts receivable ($85,800 $ 19,500 $66,300) Sale of inventory ($67,600 − $49,400) 18,200

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Liquidation expenses

2,600

Liability reduction from January credit memo

(3,900 )

Machinery and equipment, net

$ 245,700

Potential unrecorded liabilities and anticipated expenses

13,000

Totals

$ 36,400

$ 258,700

51) Won, Cadel, and Dax Partnership Safe Installment Payments to Partners February 28, 2021 Won Cadel Dax Profit and loss ratio

Partnership equity January 31, 2021 Safe payments to partners, January 31 February liquidation expenses Partnership equity February 28, 2021 Potential liabilities and expenses Potential loss on machinery and equipment Subtotals

50 %

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$ 132,080

Potential loss – Won’s deficit Safe payments to partners

96,200

30 %

Total 20 %

$ 88,920

100 %

$ 317,200

(34,580 )

(23,920 )

(58,500 )

(1,950 )

(1,170 )

(780 )

(3,900 )

94,250

96,330

64,220

254,800

(3,900 )

(2,340 )

(1,560 )

(7,800 )

(122,850 )

(73,710 )

(49,140 )

(245,700 )

(32,500 )

20,280

13,520

1,300

32,500

(19,500 )

(13,000 )

780

520

0 $

1,300

Proof of cash: Beginning $13,000 – liq. expenses paid $3,900 – cash retained $7,800 = $1,300 52) Won, Cadel, and Dax Partnership Safe Installment Payments to Partners March 31, 2021 Won Cadel Dax Profit and loss ratio

50 %

30 %

Total 20 %

100 %

Partnership equity $ 94,250 $ 96,330 $ 64,220 $ 254,800 February 28, 2021 Safe payments to 0 (780 ) (520 ) (1,300 ) partners, February 28 Loss on sale of (27,950 ) (16,770 ) (11,180 ) (55,900 ) machinery and Equipment ($245,700 - $189,800) Liquidation expenses (3,250 ) (1,950 ) (1,300 ) (6,500 ) Safe payments to partners $ 63,050

$ 76,830

$ 51,220

$ 191,100

53) (1.) The first $92,000 pays for liabilities and liquidation expenses. (2.) The next $28,500 goes to Hardin. (3.) The next $32,500 goes to Hardin (60%) and Sutton (40%). (4.) The remainder goes to all three partners in their 3:2:1 ratio. Hardin Beginning balances Assumed $96,000 loss (Schedule A) Subtotal Assumed $32,500 loss (Schedule B)

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96,000

Sutton $

(48,000 ) $

48,000 (19,500 )

45,000

Williams $

(32,000 ) $

13,000

16,000 (16,000 )

(13,000 )

Total

28,500

Schedule A: Partner

Hardin

Capital Balance/Loss Allocation $ 96,000÷ 1/2

Maximum Loss that Can Be Absorbed

Sutton

45,000÷ 1/3

$ 135,000

Williams

16,000÷ 1/6

$ 192,000

96,000

Schedule B: Partner

Hardin

Capital Balance/Loss Allocation $ 48,000 ÷ 60%

Sutton

Maximum Loss that Can Be Absorbed $ 80,000

13,000 ÷ 40%

$ 32,500

54) Safe Cash Payments: Beginning balances

Hardin

Sutton

96,000

$ 45,000

Williams $

16,000

$12,000 liquidation expenses

(6,000 )

(4,000 )

(2,000 )

$111,000 loss on sale of assets Subtotals

(55,500 )

(37,000 )

(18,500 )

Absorption of deficit balance 3:2 Safe Cash Payments $34,000

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34,500

(2,700 ) $

31,800

4,000

(1,800 ) $

2,200

(4,500 ) 4,500

55) Cash

$ 116,000

Hardin, capital

55,500

Sutton, capital

37,000

Williams capital

18,500

Noncash assets (Sale of noncash assets) Hardin, capital

$ 227,000

6,000

Sutton, capital

4,000

Williams capital

2,000

Cash (Allocation of liquidation expenses) Hardin, capital

Sutton, capital

Sutton, capital Williams, capital

34,000

80,000

4,500

2,200

80,000

Cash (Payment of liabilities Hardin, capital

12,000

31,800

Cash (Safe payment to partners) Liabilities

2,700 1,800

(Allocation of Williams deficit balance)

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56) Jones, Marge, and Tate LLP Computation of Cash Payments to Partners and Creditors Assets Liabilitie Partner's Capital s Cash Other Jones Marge Tate Balances $ 35,00 $ 100,000 before 0 liquidation Allocatio (100,00 ) n of 0 potential loss on other assets Balances $ 35,00 $ 0 0 Allocate potential deficit Cash $ 35,00 $ payment 0 to creditors and to partners

$ 30,000 $ 50,000 $ 40,000 $ 15,000

(50,00 ) 0

(25,00 ) 0

$ 30,000 $

0 $ 15,000 $ (10,00 ) 0 0 (10,00 ) 10,000 0

$ 30,000 $

0 $

5,000 $

57) Cash

60,000

Rogers, Capital

10,000

Dennis, Capital

6,000

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Berry, Capital

4,000

Assets

80,000

To record sale of noncash of assets at a loss of $20,000, divided in 5:3:2 ratio. 58) Liabilities

20,000

Cash

20,000

To record payment to creditors. 59) Cash balance = $40,000 + sale noncash assets $60,000 − paid liabilities $20,000 − partners paid $35,000 = $45,000 ending balance retained for future expenses. Distribution of $35,000: Rogers

Dennis

Berry

Capital (including Rogers' loan of $ 45,000 $ 30,000 $ 25,000 $10,000) before liquidation Actual loss on realization of assets (10,000 ) (6,000 ) (4,000 ) Balances Retained cash for future expenses $45,000 Cash payments $35,000

$ 35,000 (22,500 ) $ 12,500

$ 24,000 (13,500 ) $ 10,500

$ 21,000 (9,000 ) $ 12,000

60)

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Loan Payable to Rogers

10,000

Rogers, Capital

2,500

Dennis, Capital

10,500

Berry, Capital

12,000

Cash

35,000

To record payment to partners, computed as shown above. 61) Cash

140,000

Donald, Capital

15,000

Chief, Capital

27,000

Berry, Capital

18,000

Other Assets

200,000

To record the recognition of the proceeds from the sale of assets at a loss of $60,000, divided among Donald, Chief, and Berry. 62) Trade accounts payable Cash

130,000 130,000

To record payment of liabilities. 63)

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Donald, Capital

40,000

Loan receivable from Donald

40,000

To offset Donald's loan account against Donald's capital account. 64) Capital account balances

Donald

Chief

Berry

$ 140,000

$ 160,000

$ 110,000

Add: Loan payable to Chief

60,000

Less: Loan receivable from Donald

(40,000 )

Loss on realization of assets, $60,000 Balances

(15,000 )

Maximum potential loss of remaining noncash assets, $300,000 in 25:45:30 ratio Safe cash payment

$ 85,000

(27,000 ) $ 193,000

(75,000 )

$ 10,000

(18,000 ) $ 92,000

(135,000 )

58,000

(90,000 )

2,000

Total cash of $70,000 can be safely distributed. Beginning cash $60,000 + sale of assets $140,000 – payment of liabilities $130,000 = $70,000. 65) (1) A, (2) C, (3) D, (4) B 66) The accountant works to ensure the equitable treatment of all parties involved in the liquidation. The accountant is responsible for recording and reporting the conversion of partnership assets into cash, the allocation of gains and losses, the payment of liabilities and expenses, and any remaining unpaid debts and distributions to the partners.

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67) Rayne's personal creditors might have a claim to some partnership assets if Rayne had a credit balance in his capital account. 68) To determine the amount of cash that can be safely distributed to each partner, one should: (i) assume that the maximum losses possible will be recognized on the disposal of noncash assets; (ii) estimate liquidation expenses; and (iii) assume that any partners with deficit balances cannot pay them. 69) All partners with deficits in their capital accounts should contribute personal assets to the partnership in amounts necessary to eliminate deficits in their capital accounts. Once deficits are eliminated, each partner should receive any cash remaining in an amount equal to his or her profit-sharing ratio or specific treatment as noted in the partnership agreement based on the source of the cash inflow. 70) The purpose of a predistribution plan is to determine in advance how cash should be distributed to creditors and partners, particularly upon the disposition of any noncash assets that may occur at different times. The predistribution plan eliminates the need to produce schedules of proposed cash distributions each time a sale occurs. 71) The appropriate financial report is a statement of liquidation. The purpose of the statement of liquidation is to report to partners and creditors on the progress of the liquidation to date, summarizing the various transactions that have occurred, showing updated balances of cash, property held, liabilities remaining to be paid, and capital account balances.

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72) There are many events or situations that can give rise to the termination of a partnership and the liquidation of its assets. The partnership may be insolvent, or there may be dissension among the partners that precipitates a dissolution. A partnership might also be liquidated if it was formed to accomplish a specific purpose and has no further usefulness. Liquidation of the partnership may be required whenever there is a large claim against the partnership's assets. Such a claim might occur through the loss of a lawsuit and the payment of a large judgment, the insolvency of a partner, or the death or retirement of a partner. 73) To record a gain or loss resulting from the liquidation of a partnership asset for cash, cash is debited and the asset is removed from the books with a credit to the asset and a debit for any contra-account related to the asset. Any resulting gain or loss arising from the liquidation of the asset would be allocated to the partners' capital accounts using the applicable profit and loss sharing ratio, or the agreedupon formula as documented in the partnership agreement. A loss would be debited in the appropriate amount to each partner’s capital account, and a gain would be credited in the appropriate amount to each partner’s capital account. 74) The partner should contribute personal assets to the extent of the deficit balance. 75) A preliminary distribution of assets is prepared to calculate safe payments to partners so that, in a liquidation taking place over time in installments, cash can be distributed intermittently without waiting until all assets are liquidated.

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76) A safe cash payment is a fair allocation of funds made available before liquidation has been completed. Safe cash is the amount of cash in excess of liabilities and estimated liquidation expenses. Safe cash payments are based on the assumption that any capital deficits will prove to be a total loss to the partnership and must be absorbed by the remaining partners based on their relative profit and loss ratio. It is also assumed that all subsequent events will result in maximum losses, that all partners are personally insolvent, and no cash will be received upon disposition of noncash assets.

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CHAPTER 11 MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) The Governmental Accounting Standards Board (GASB) requires state and local governments to prepare two sets of financial statements which include which of the following? A) Fund financial statements and proprietary financial statements. B) Proprietary financial statements and fund- based financial statements. C) Fund financial statements and government-wide financial statements. D) GAAP-based financial statements and government-wide financial statements. E) Statement of net assets and statement of cash flows.

2) Which group of government financial statements reports all revenues and all costs as well as all assets and liabilities of the governmental entity? A) GAAP-based Financial Statements. B) Fund financial Statements. C) Governmental fund financial statements. D) Government-wide financial statements. E) General fund financial statements.

Which of the following describes proprietary funds?

A) Funds used to account for the activities of a government that are carried out primarily to provide services to citizens. B) Funds used to account for a government's ongoing activities that are similar to those operated by for-profit organizations. C) Funds used to account for monies held by the government in a trustee or agency capacity. D) Funds used to account for all financial resources except those required to be accounted for in another fund. E) Funds used to account for resources that are restricted or committed for a specific purpose other than debt payments or capital projects.

Fiduciary funds are

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A) Funds used to account for the activities of a government that are carried out primarily to provide services to citizens. B) Funds used to account for a government's ongoing organizations and activities that are similar to those operated by for-profit organizations. C) Funds used to account for monies held by the government in a trustee or agency capacity. D) Funds used to account for all financial resources except those required to be accounted for in another fund. E) Funds used to account for resources that are restricted or committed for a specific purpose other than debt payments or capital projects.

Governmental funds are

Special Revenue funds are

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The term "current financial resources" refers to A) Those assets that can quickly be converted into cash. B) Assets that are available to be used for current expenditures. C) The government's current assets and current liabilities. D) The current value of all net assets owned by the governmental unit. E) Financial resources used to provide electricity to local citizens.

What are the broad classifications of funds for a governmental entity such as a city? A) General, governmental, and trust funds. B) Governmental, proprietary, and fiduciary funds. C) Revenue, trust, and governmental funds. D) Enterprise, revenue, and fiduciary funds. E) Governmental, agency, and enterprise funds.

9) Which group of financial statements is prepared using the "modified accrual accounting" approach?

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A) GAAP-based financial statements. B) Governmental fund financial statements. C) Cost-based financial statements. D) Government-wide financial statements. E) General-purpose financial statements.

10)

Under modified accrual accounting, revenues should be recognized when they are A) Collected. B) Realizable and estimable. C) Reasonably estimable. D) Measurable and available to be used. E) Earned and collected.

11) Under modified accrual accounting, when should an expenditure be recorded to recognize interest on long-term debt? A) At the end of each accounting period. B) When payment is due within one fiscal year. C) When it reduces current financial resources. D) When cash is available to pay the interest. E) When the interest is incurred.

12)

Which of the following funds is most likely created with an endowed gift? A) Enterprise Fund. B) Internal Service Fund. C) Debt Service Fund. D) Capital Projects Fund. E) Permanent Fund.

13)

Revenue from property taxes should be recorded in the General Fund

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A) When received. B) When there is an enforceable legal claim. C) When they are available for recognition. D) In the period for which the resulting resources are required or permitted to be used. E) In the period in which the tax bills are mailed.

14) Government-wide financial statements benefit users by allowing them to do all of the following except: A) Determine whether the government’s overall financial position improved or deteriorated during the reporting period. B) Understand the cost of providing services to the citizenry. C) See how the government finances its programs. D) Identify the government official responsible for managing each fund. E) Understand the extent to which the government has invested in capital assets.

15) A city received a grant of $5,000,000 from a private agency. The money was to be used to build a new city library. In which fund should the money be recorded for the governmental fund financial statements? A) The General Fund. B) An Expendable Trust Fund. C) A Capital Projects Fund. D) An Agency Fund. E) A Permanent Fund.

16) When a city received a county grant designated for providing food and other assistance to the homeless, the money should have been recorded in A) The General Fund. B) An Expendable Trust Fund. C) A Capital Projects Fund. D) An Agency Fund. E) A Special Revenue Fund.

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17) Bay City received a federal grant to provide health care services to low income mothers and children. When should the revenues be recognized? A) As health care services are provided. B) When the awarding of the grant is announced. C) When the grant money is received. D) At the end of Bay City's fiscal year. E) When the grant money is receivable.

18) Trapper City issued 30-year bonds for the purpose of building a new City Hall. The proceeds of the bonds are deposited in the General Fund. For the governmental fund financial statements, in what fund will Bonds Payable appear? A) General Fund. B) Internal service fund. C) Permanent Fund. D) Debt Service Fund. E) Bonds Payable do not appear in governmental fund financial statements.

19)

Which of the following is a governmental fund? A) Enterprise fund. B) Internal service fund. C) Permanent fund. D) Investment trust fund. E) Agency fund.

20)

Which of the following is a fiduciary fund? A) Pension trust fund. B) Debt service fund. C) Permanent fund. D) Enterprise fund. E) Capital projects fund.

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21) According to GASB Concepts Statement No. 1, what are the three groups of primary users of external state and local governmental financial reports? A) The Securities and Exchange Commission, the citizenry, and legislative and oversight bodies. B) The Securities and Exchange Commission, legislative and oversight bodies, and investors and creditors. C) The Securities and Exchange Commission, the citizenry, and investors and creditors. D) The citizenry, legislative and oversight bodies, and investors and creditors. E) The citizenry, management, and the Governmental Accounting Office.

22) Which of the following statements is true regarding governmental fund financial statements? A) Governmental fund financial statements report a government's activities and financial position as a whole. B) Governmental fund financial statements should tell the amount spent this year on such services as public safety, education, health and sanitation, and the construction of a new road. C) Governmental fund financial statements utilize the accrual basis of accounting much like any for-profit entity. D) Governmental fund financial statements help to determine whether the government's overall financial position improved or deteriorated. E) Governmental fund financial statements report all assets and liabilities in a way comparable to business-type accounting.

23) Which of the following statements is false regarding government-wide financial statements?

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A) Government-wide financial statements report a government's activities and financial position as a whole. B) The government-wide financial statement approach helps users make long-term evaluations of the financial decisions and stability of the government. C) Government-wide financial statements focus on the short-term instead of the longterm. D) Government-wide financial statements assess the finances of the government in its entirety, including the year's operating results. E) The measurement focus of government-wide financial statements is on all economic resources and utilizes accrual accounting.

24) How do the balance sheet and statement of revenues, expenditures, and changes in fund balances of governmental funds differ from the financial statement presentation for the governmental activities in the government-wide statement of net assets and statement of activities? (1) Internal service funds are not included in the fund financial statements of governmental funds but could be reported in the governmental activities of government-wide financial statements. (2) The economic resources measurement basis is used for fund financial statements of governmental funds and the current financial resources measurement basis is used for governmental activities in the government-wide financial statements. (3) Modified accrual accounting is used for fund financial statements of governmental funds to time revenues and expenditures and accrual accounting is used for governmental activities of government-wide financial statements. (4) The financial statements of governmental funds for fund financial statements are the same as governmental activities in government-wide financial statements but with different titles of the financial statements. A) 1 and 2. B) 2, 3, and 4. C) 1, 2, and 3. D) 1 and 3. E) 1, 2, 3, and 4.

25)

Which of the following is not a classification of non-exchange transactions?

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A) Derived tax expenditures. B) Voluntary non-exchange transactions. C) Government-mandated non-exchange transactions. D) Derived tax revenues. E) Imposed non-exchange revenues.

26) For determining revenue recognition, eligibility requirements for government-mandated nonexchange transactions and voluntary nonexchange transactions are categorized into four general classifications including all of the following except: A) Required characteristics of the recipients. B) Time requirements. C) Reimbursement. D) Contingencies. E) Refunding.

27)

Which statement is not correct?

A) Governmental funds account for expenditures of financial resources rather than matching revenues and expenses. B) The Encumbrances Outstanding account should be reversed and closed at the end of a fiscal year. C) Revenues from licenses and permit fees are recognized when received in cash if using the modified accrual basis of accounting for governmental funds. D) A fund is an independent accounting entity composed of cash and other financial resources, segregated for the purpose of carrying on specific activities and objectives. E) Commitments for purchase orders are recorded as expenses.

28)

For governmental entities, the accrual basis of accounting is used for:

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A) Special revenue funds. B) Internal service funds. C) Debt service funds. D) The general fund. E) Capital projects funds.

29) What account is debited in the general fund when equipment is received by a governmental entity? A) Expenditures. B) Encumbrances. C) Plant assets. D) Accounts Payable. E) Fund Balance-Reserve for Encumbrances.

30)

Annual budgets must be recorded within: A) The general fund and special revenue funds. B) Capital projects funds and debt service funds. C) Enterprise funds and internal service funds. D) The general fund and pension trust Fund. E) Agency funds and the general fund.

31) When a city received a federal grant designated for books to be purchased for a library, the money should have been recorded in: A) A permanent fund. B) A private purpose trust fund. C) A capital projects fund. D) An agency fund. E) A special revenue fund.

32)

When a city holds pension monies for city employees, the monies should be recorded in

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A) The general fund. B) A private purpose trust fund. C) A fiduciary fund. D) An agency fund. E) A special Revenue fund.

33) When a city received a private donation of $1,000,000 stipulating that the principal donation would be preserved but allowing the interest income to be spent on building a city park with access for disabled children, which fund should the money be recorded in? A) The general fund. B) A private purpose trust fund. C) A permanent fund. D) An agency fund. E) A special Revenue fund.

34) When a city collects admission fees from citizens who use the public swimming pool, the money should be recorded in A) The general fund. B) An enterprise fund. C) A capital projects fund. D) An agency fund. E) An internal service fund.

35) A city operates a central data processing facility. The expenses of this facility would be accounted for using A) The general fund. B) An enterprise fund. C) A capital projects fund. D) An agency fund. E) An internal service fund.

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36) What are the two proprietary fund types? (1) Internal service funds. (2) Investment trust funds. (3) Enterprise funds. (4) Agency funds. A) 1 and 2. B) 2 and 3. C) 1 and 3. D) 2 and 4. E) 1 and 4.

37) Salaries and wages that have been earned by governmental employees that have not yet been paid are recorded in the general fund as: A) An expenditure. B) An encumbrance. C) An appropriation. D) An expense. E) An investment.

38) The reporting of the fund balance of governmental funds will result in a maximum of how many categories? A) One. B) Two. C) Three. D) Four. E) Five.

39) Which of the following is not one of the categories for reporting fund balances of governmental funds?

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A) Spendable. B) Nonspendable. C) Assigned. D) Unassigned. E) Restricted.

40) Which of the following statements is true about Fund Balance classifications for the governmental funds? A) A restricted fund balance is for monies the governing board has appropriated. B) An assigned fund balance has been designated for a specific purpose and is restricted to use for only that purpose. C) An unassigned fund balance has no restriction for use of the money and is normally applicable to the general fund. D) A committed fund balance has been designated by an outside party for a particular use. E) A nonspendable fund balance is designated only for the balance of permanent funds.

41) Which type of account would you assign a gift of $1.5 million dollars with restriction indicating that only the future income generated from this balance can be used by the government? A) Committed B) Nonspendable C) Assigned D) Unassigned E) Restricted

42) The government has just voted to repair the parking garages to all government buildings and estimate the cost to be $750,000. The government discloses this decision by debiting which account?

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A) Committed. B) Nonspendable. C) Assigned. D) Unassigned. E) Restricted.

43) Which of the following is not a true statement regarding revenues from various types of nonexchange transactions? A) Derived tax revenues occur as a result of sales and or income tax. B) Imposed nonexchange revenues consist of only fines and penalties assessed by the governing agency. C) Government mandated nonexchange transactions includes grants from the federal government to the local public-school system for a free lunch program. D) Voluntary nonexchange transactions can originate from a governmental agency or private citizen organization. E) Imposed nonexchange transactions revenue recognition is made in the time period when the resulting resources are required to be used or in the first period in which use is permitted.

44)

Which statement most accurately reflects property taxes?

A) Property taxes are derived tax revenues because property owners have the benefit of ownership. B) Property taxes are considered a special assessment by the governing agency. C) When recording property taxes, the receivable is recorded and the revenue is recognized when the government has an enforceable legal claim. D) When recording property taxes, the revenue is recognized in the period in which it can be used. E) Property taxes are the result of the government making an assessment, only when an underlying exchange has occurred.

45)

Which of the following would be considered a derived tax revenue?

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A) Collection of property taxes. B) FICA is withheld from the employee pay. C) A grant is received from the federal government. D) A private citizen sends money to buy books for the local library. E) Fees are collected on overdue library books.

ESSAY. Write your answer in the space provided or on a separate sheet of paper. 46) For each of the following transactions, select the area of accounting records in which an entry will be recorded for governmental fund financial statements and for government-wide financial statements. (A) General fund only. (B) Governmental activities only. (C) General fund and Governmental activities. (D) General fund and Debt service fund. (E) Capital projects fund and Governmental activities. (F) Debt service fund and Governmental activities. (G) Special revenue fund and Governmental activities. (1.) The city council adopts an annual budget for the general fund. (2.) Property taxes are levied. (3.) Computers are ordered for the fire department. (4.) A transfer of funds is made from the general fund to the debt service fund. (5.) The principal and interest of a bond are paid. (6.) A building is acquired for the police department, and renovations begin immediately. (7.) Depreciation on fire trucks is recorded. (8.) Citizens are assessed for a street lighting project that has been legally restricted for those citizens. (9.) A grant is received to landscape tree-lined areas beside city-owned streets. (10.) The city spends grant money received in (9.) above and landscapes the tree-lined areas beside the streets for which the grant money was received.

47) Which organization is responsible for establishing accounting principles for governmental entities? By whom was this organization established? Version 1

48)

For what is a special revenue fund used to account?

49)

What is the definition of the term fund?

50) For a government, what kinds of operations are accounted for using a proprietary fund? Give three examples.

51)

What are the five types of governmental funds?

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52) A county enacted a special tax levy and the money must be used to buy unused farmland for environmental preservation. What kind of fund should be used to record the revenues generated by the tax?

53)

In governmental accounting, what term is used for a decrease in financial resources?

54)

Under modified accrual accounting, when are expenditures recorded?

55)

What assets would be included in the accounting records of a city's general fund?

56) Under modified accrual accounting, when should revenues be recognized by a governmental-type fund?

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57)

When should property taxes be recognized under modified accrual accounting?

58) What are the two sets of financial statements mandated by GASB for state and local governments? For each set, what are the names of the individual statements that must be produced?

59) What is the primary difference between monies accounted for in the general fund and monies accounted for in the special revenue fund?

60)

What are the two proprietary fund types?

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61)

What are the four fiduciary fund types?

62)

What is the purpose of fund financial statements?

63)

What is the purpose of government-wide financial statements?

64) The board of commissioners of the city of Scranton adopted a general fund budget for the year ending June 30, 2021, which indicated tax levy revenues of $1,500,000, bond proceeds of $650,000, appropriations for government operations of $1,360,000, and operating transfers out of $425,000. Required: If this budget was formally integrated into the accounting records used to produce the governmental fund financial statements, what was the required journal entry at the beginning of the year?

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65) On July 1, 2021, Carbondale City ordered $1,800 of office supplies. They were to be paid for out of the general fund. Required: (A) What journal entry was required for the governmental fund financial statements? (B) What journal entry was required for the government-wide financial statements?

66) On July 12, 2021, Carbondale City ordered a new computer at an anticipated cost of $126,200. The computer was received on July 16, 2021 with an actual cost of $129,450. Payment was subsequently made on August 15, 2021. Required: (A) Prepare all the required journal entries and identify the type of fund in which each entry was recorded for the governmental fund financial statements. (B) Prepare all the required journal entries to be recorded for the government-wide financial statements.

67) A new truck was ordered for the sanitation department at a cost of $137,250 on September 3, 2021. Required: (A) Prepare the required journal entry in the general fund for the governmental fund financial statements. (B) Prepare the required journal entry for the government-wide financial statements.

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68) The school system had some brochures printed by a local printing service on September 22, 2021. The school system received an invoice showing an amount of $1,730 for the printing, but the bill is not due until October 15, 2021. Required: (A) Prepare the required journal entry in the general fund for the governmental fund financial statements. (B) Prepare the required journal entry for the government-wide financial statements.

69) A $960,000 bond was issued on October 1, 2021 to build a new road. The bonds carried a 7% interest rate and are due in 10 years. Required: (A.) Prepare the required journal entry in the capital projects fund on October 1 for the governmental fund financial statements. (B.) Prepare the required journal entry for the government-wide financial statements.

70) On June 14, 2021, Carbondale City agreed to transfer cash of $74,000 from the general fund to provide permanent financing for a municipal swimming pool that will be viewed as an enterprise fund. The cash was transferred on June 30, 2021. Required: (A) Prepare all the required journal entries and identify the fund in which each entry was recorded for the fund financial statements. (B) Prepare all the required journal entries and identify the type of activity for the governmentwide financial statements.

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71) On August 21, 2021, Carbondale City transferred $150,000 from one fund to another fund to cover major repairs to the town hall building. Required: Prepare all the required journal entries and identify the fund in which each entry was recorded for the governmental fund financial statements.

72) On January 1, 2021, Kenneth City purchased office supplies for $50,000. During the year, $42,000 of these supplies were used. Required: Record the journal entries for these transactions using the purchases method. (Disregard the encumbrance entries.)

73) On January 1, 2021, Kenneth City purchased office supplies for $50,000. During the year, $42,000 of these supplies were used. Required: Record the journal entries for these transactions using the consumption method. (Disregard the encumbrance entries.)

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74) The town council adopted an annual budget estimating general revenues of $2,400,000, approved expenditures for general town operations of $2,000,000, and use of other financing resources of $160,000. Required: Prepare the journal entry to record the budget and identify the fund in which it is recorded.

75) Property taxes of $1,800,000 are levied for Labrador County. All except 6% of the taxes are expected to be collected within 60 days of year-end. Required: Prepare the required journal entry and identify the fund in which it is recorded.

76) Kurt City makes a transfer of $120,000 from the General Fund to the Debt Service Fund. Required: Prepare the required journal entries and identify the funds in which they are recorded.

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77) Prepare the journal entry and identify the fund to record Palmer City’s purchase order of two trucks for $150,000 and identify the fund in which the entry is recorded.

78) Palmer City has recorded the purchase order of two trucks for a total of $150,000. Prepare the journal entries to reflect that the two trucks have been received with an invoice amount of $160,000. This invoice has been approved but not yet paid. Identify the fund in which the entries are recorded.

79) A $6,000,000 bond is issued by Kensington City to build a new hospital and the proceeds of the bond are received directly by the fund that will be disbursing the monies for the hospital construction. Required: Prepare the journal entry to record the bond issue and identify the fund in which the entry is recorded.

80) In May of 2022, the Town of Lanarte received a $75,000 grant restricted for transporting all senior citizens to polling locations on Election Day in November of 2022. Required: Prepare the journal entry to record the receipt of the grant and identify the fund in which the entry is recorded.

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81) The Town of Lanarte has recorded the receipt of a $75,000 grant restricted for transporting all senior citizens to polling locations on Election Day in November of 2022. The town now spends $75,000 to transport the citizens on Election Day. Required: Prepare the journal entry (or entries) to record that the town spends $75,000 of the grant it received to transport senior citizens on Election Day and identify the fund in which the entry (or entries) is recorded.

82) The City of Grisham collected $19,000 from parking meters that must be transferred to the county government in the next thirty days. Required: For fund financial statements, prepare the journal entry for the collection of the $19,000 from parking meters, including the fund type in which the entry would have been recorded.

83) The Marshall County legislature voted to set aside $650,000 to have new street signs produced for county roads. Required: For governmental fund financial statements, prepare the journal entry for the adjustment to the fund balance of the general fund.

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84) Bassett City issues bonds in the amount of $750,000 to finance the construction of a sidewalk in a specific neighborhood. Repayment of the bonds will be derived from a special assessment on the owners in the neighborhood. The government accepts legal obligation for the construction of the sidewalk. Total interest on the bonds will total $37,500 and will be repaid at the time of repayment of the bonds. Required: Prepare the journal entries to record each of the items below in preparation for (A) the government-wide financial statements and (B) the governmental fund financial statements. For the governmental fund financial statements, include the fund type in which the entry is recorded. Prepare all entries for (A) and all entries for (B) separately. Journal entries to record: 1) Issuance of the bonds. 2) Payment to the contractor. 3) The special assessment by the city on the neighborhood residents. 4) The assessment collection by the city. 5) Payment of the debt on the special assessment bonds.

85) How do intra-activity and interactivity transactions differ in government-wide financial reporting? How is each type reported?

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86) According to GASB Concepts Statement No. 1, what are the three groups of primary users of external state and local governmental financial reports?

87) What is meant by “Fund Balance―Nonspendable” and for what reasons is this classification needed?

88) What are the five fund balance categories established by GASB and why did GASB establish these categories?

89)

What are monetary transfers and how are they reported?

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Answer Key Test name: Chap 11_8e 1) C 2) D 3) B 4) C 5) A 6) E 7) B 8) B 9) B 10) D 11) C 12) E 13) D 14) D 15) C 16) E 17) A 18) E 19) C 20) A 21) D 22) B 23) C 24) D 25) A 26) E Version 1

27) E 28) B 29) A 30) A 31) E 32) C 33) C 34) B 35) E 36) C 37) A 38) E 39) A 40) C 41) B 42) D 43) B 44) D 45) B 46) (1) A; (2) C; (3) A; (4) D; (5) F; (6) E; (7) B; (8) G; (9) G; (10) G 47) The organization that is responsible for establishing accounting principles for governmental entities is the GASB (Governmental Accounting Standards Board). The Financial Accounting Foundation has oversight responsibility for the GASB, as it does for the FASB. 48) A special revenue fund is used to account for revenues that are restricted or committed for a specific purpose of public benefit, other than for debt payments and capital projects. 49) The term fund is defined as a self-balancing set of accounts used to record data generated by an identifiable government function.

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50) A proprietary fund is used to account for governmental operations similar to those found in the private sector. They usually involve user charges. Three examples are (1) a toll road, (2) a municipal swimming pool, and (3) a city run and maintained garage. 51) The five types of governmental funds are (1) the general fund, (2) special revenue funds, (3) capital projects funds, (4) debt service funds, and (5) permanent funds. 52) A special revenue fund should be used. 53) The appropriate term is expenditure. 54) Under modified accrual accounting, expenditures are usually recorded when they reduce current financial resources or there is a claim on current financial resources. 55) The assets in the accounting records of a city's general fund would typically include financial resources such as (1) cash, (2) receivables, and (3) investments other than capital assets. 56) Under modified accrual accounting, revenues should be recognized by a governmental-type fund when they are both measurable and available. Revenues are measurable when they are subject to reasonable estimation. Identifying when revenue is available means that current financial resources will be received soon enough in the future to use for payment of current period expenditures. The determination of what is meant by “soon enough” is up to the reporting government. For property taxes to be recognized as revenue in a fiscal year, they must available within sixty days of the fiscal year-end.

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57) Property taxes should be recognized under modified accrual accounting when they are measurable, which is when an enforceable claim comes into existence. For property taxes to be recognized as revenue in a fiscal year, they must also be available to pay for current fiscal-year expenditures within sixty days of the fiscal year-end. This would be the period in which they are required to be used or in the first period in which use is permitted. 58) GASB requires two sets of financial statements. They are the Government-Wide Financial Statements and the Fund Financial Statements. The Government-Wide Financial Statements include the Statement of Net Position and the Statement of Activities. The Fund Financial Statements include the Balance Sheet and the Statement of Revenues, Expenditures, and Changes in Fund Balance. 59) Monies in the special revenue fund are resources that are restricted or committed for a specific purpose other than debt payments or capital projects. Because of donor stipulations or legislative mandates, there are restrictions that require expenditures be limited to specific operating purposes for public benefit. Monies in the general fund are unassigned resources, not accounted for in another fund, that are used for public benefit. 60) Internal service funds and enterprise funds. 61) Investment trust funds, private-purpose trust funds, pension trust funds, and custodial funds. 62) The purpose of the fund financial statements is to present individual government activities and the amount of financial resources allocated to them as well as the use made of those resources. 63) Government-wide financial statements present information about a government’s financial affairs as a whole. These financial statements provide a method of assessing operational accountability and the government’s ability to meet its operating objectives. Version 1

64) Governmental Fund Financial Statements – General Fund Estimated Revenues – Tax Levy Estimated Other Financing Sources – Bond Proceeds Appropriations – Government Operations

1,500,000 650,000 1,360,000

Appropriations – Other Financing Uses – Operating Transfers Out Budgetary Fund Balance

425,000 365,000

65) (A) For the governmental fund financial statements, an encumbrance must be recorded in the general fund. Encumbrances – Office Supplies

1,800

Encumbrances Outstanding

1,800

(B) For the government-wide financial statements, no entry is required because under accrual accounting, no entry is made until a transaction occurs. 66) (A) Governmental Fund Financial Statements - General Fund 7/12

Encumbrances – Computer

126,200

Encumbrances outstanding 7/16

Encumbrances outstanding Encumbrances – Computer

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126,200 126,200 126,200

7/16

Expenditures – Computer

129,450

Vouchers (or Accounts) payable 8/15

Vouchers payable

129,450 129,450

Cash

129,450

(B) Government-Wide Financial Statements 7/12

No entry

7/16

Computer

129,450

Vouchers (or Accounts) payable 8/15

Vouchers (or Accounts) payable

129,450 129,450

Cash

129,450

67) (A) Governmental Fund Financial Statements – General Fund 9/3 Encumbrances – Truck Encumbrances Outstanding

137,250 137,250

(B) Government-Wide Financial Statements 9/3

No entry

68)

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(A) Governmental Fund Financial Statements – General Fund 9/22 Expenditures – Printing

1,730

Vouchers (or Accounts) Payable

1,730

(B) Government-Wide Financial Statements 9/22

Printing Expense

1,730

Vouchers (or Accounts) Payable

1,730

69) (A.) Governmental Fund Financial Statements – Capital Projects Fund 10/1 Cash

960,000

Other Financing Sources – Bond Proceeds

960,000

(B.) Government-Wide Financial Statements 10/1

Cash

960,000

Bonds Payable

960,000

70) (A) Fund Financial Statements – General Fund 6/14

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Other Financing Use – Transfers Out – Enterprise Fund

74,000

Due to Enterprise Fund

6/30

Due to Enterprise Fund

74,000

Cash

74,000

Fund Financial Statements – Enterprise Fund 6/14

Due from General Fund

74,000

Other Financing Source – Transfers In – General Fund

6/30

Cash

74,000

Due from General Fund

74,000

(B) Government-Wide Financial Statements – Governmental Activities 6/14 No entry

6/30

Transfers Out – Swimming Pool

74,000

Cash

74,000

Government-Wide Financial Statements – Business-Type Activities 6/14 No entry

6/30

Cash Transfers In – General Fund

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74,000 74,000

71) Governmental Fund Financial Statements – General Fund 8/21 Other Financing Uses – Transfers Out – Capital Projects Fund Cash

Governmental Fund Financial Statements – Capital Projects Fund 8/21 Cash

150,000 150,000

150,000

Other Financing Sources – Transfers In – General Fund

150,000

72) Expenditures – Supplies

50,000

Vouchers (or Accounts) payable

50,000

To record the purchase of supplies.

Inventory of Supplies Fund Balance – Nonspendable

8,000 8,000

To establish balance for supplies remaining at year-end.

73)

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Inventory of Supplies

50,000

Vouchers (or Accounts) Payable

50,000

To record the purchase of supplies.

Expenditures – Control (or Supplies)

42,000

Inventory of Supplies

42,000

To record consumption of supplies during the period.

74) In General Fund: Estimated Revenues – General Revenues

2,400,000

Appropriations – General Operations

2,000,000

Estimated Other Financing Uses

160,000

Budgetary Fund Balance

240,000

75) In General Fund: Property Tax Receivable Allowance for Uncollectible Taxes Revenues - Property Taxes

1,800,000 108,000 1,692,000

76) In General Fund:

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Other Financing Uses – Transfers Out – Debt Service Fund Cash

120,000 120,000

In Debt Service Fund: Cash

120,000

Other Financing Sources – Transfer In – General Fund

120,000

77) In General Fund: Encumbrances - Trucks

150,000

Encumbrances Outstanding

150,000

78) In General Fund: Encumbrances Outstanding

150,000

Encumbrances – Trucks Expenditures – Trucks

150,000 160,000

Vouchers (or Accounts) Payable

160,000

79) In Capital Projects Fund: Cash Other Financing Sources – Bond Proceeds

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6,000,000 6,000,000

80) In Special Revenue Fund: Cash

75,000

Deferred Inflow of Resources

75,000

81) In Special Revenue Fund: Expenditure – Transportation

75,000

Cash Deferred Inflow of Resources

75,000 75,000

Revenues - Grants

75,000

82) General Fund Cash

19,000

Due to Agency Fund

19,000

83)

Fund Balance – Unassigned Fund Balance – Committed

650,000 650,000

84)

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(A) Government-Wide Financial Statements – Special Assessment Project 1) Issuance of the debt Cash

750,000

Bond Payable – Special Assessment

750,000

To record debt issued to finance sidewalk construction

2) Payment to the contractor Infrastructure Asset – Sidewalk

750,000

Cash

750,000

To record payment to contract for sidewalk construction

3) Special assessment by the city Taxes Receivable – Special Assessment

787,500

Revenue – Special Assessment

787,500

To record owner special assessments

4) Assessment collection by the city Cash Taxes Receivable – Special Assessment

787,500 787,500

To record collection of Special Assessment

5) Payment of the debt

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Bond Payable – Special Assessment

750,000

Interest Expense

37,500

Cash

787,500

To record payment of debt on special assessment bonds

B) Governmental Fund Financial Statements – Special Assessment – Governmental Funds 1) Issuance of the bonds Capital Projects Fund – Special Assessment Project Cash

750,000

Other Financing Sources – Bond Proceeds

750,000

To record issuance of special assessment bonds

2) Payment to the contractor Expenditures – Sidewalk

750,000

Cash

750,000

To record payment to contractor

3) Special assessment by the city Debt Service Fund – Special Assessment Project Taxes Receivable – Special Assessment Revenue – Special Assessment

787,500 787,500

To record special assessment by city on the neighborhood residents

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4) Assessment collection by the city Cash

787,500

Taxes Receivable – Special Assessment

787,500

To record collection of special assessment

5) Payment of the debt Expenditure – Special Assessment Bond

750,000

Expenditure – Interest

37,500

Cash

787,500

To record payment of bond

85) Intra-activity transactions occur between two governmental funds so that the net totals reported for governmental activities are not affected. These transactions also occur between two enterprise funds so that the net totals reported for business-type activities are not affected. Intra-activity transactions are not reported in government-wide financial statements because no overall change is created in either the governmental activities or the business-type activities. Interactivity transactions occur between governmental funds and enterprise funds. They impact the total amount of resources reported for both governmental and business-type activities. For this reason, interactivity transactions are reported in government-wide financial statements. 86) In Concepts Statement No. 1, GASB identified several distinct groups of primary users of external state and local governmental financial reports: citizenry, legislative and oversight bodies, and investors and creditors. Version 1

87) The Fund Balance―Nonspendable amount is a restricted classification that indicates the amount of a fund’s current financial resources that cannot be spent. This classification is normally necessary for one of two reasons: (1) some assets such as supplies and prepaid expenses are not in a spendable form and (2) financial resources received may have externally imposed limitations. 88) GASB established five fund balance categories in response to credit market participants and to standardize fund balance reporting. The five categories are (1) fund balance―nonspendable, (2) fund balance―restricted, (3) fund balance―committed, (4) fund balance―assigned, and (5) fund balance―unassigned. 89) Monetary transfers are transfers within the governmental funds to ensure adequate financing of budgeted expenses and they are the most common interfund transactions. Because this type of transfer is an intraactivity transaction, no reporting is made in the government-wide financial statements.

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CHAPTER 12 MULTIPLE CHOICE - Choose the one alternative that best completes the statement or answers the question. 1) What is the highest level of authoritative rules for state and local government accounting? A) Technical Bulletins B) Implementation Guides C) Official Statements of GASB D) Interpretations no longer in effect E) Financial Accounting Standards

2) All of the following about tax abatement agreements must be disclosed by state and local governments except: A) The purpose of the tax abatement program. B) The type of tax being abated. C) Identify the companies receiving the abatements. D) Dollar amount of taxes abated. E) Commitments made by the government or other party.

Jones College, a public institution of higher education, must prepare financial statements A) As if the college was an enterprise fund. B) Following the same rules as state and local governments. C) According to GAAP. D) As if the college was a fiduciary fund. E) In the same manner as private colleges and universities.

4) For the purpose of government-wide financial statements, the cost of cleaning up a government-owned landfill and closing the landfill

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A) Is not recognized until the costs are actually incurred. B) Is accrued and amortized over the expected useful life of the landfill. C) Is accrued on a pro-rated basis each period based on how full the landfill is. D) Is accrued in full at the time the costs become estimable. E) Is treated as an encumbrance at the time it become estimable, and then as an expenditure when it is actually paid.

5) A method of accounting for infrastructure assets that allows the expensing of all maintenance costs each year instead of computing depreciation is called: A) Government-wide depreciation. B) Proprietary depreciation. C) GASB depreciation. D) Modified approach. E) Alternative depreciation.

6) Madison Township has received a donation of a rare painting worth $1,400,000. For Madison’s government-wide financial statements, three criteria must be met before Madison can opt not to recognize the painting as an asset. Which of the following is not one of the three criteria? (1.) The painting is held for public exhibition, education, or research in furtherance of public service, rather than financial gain. (2.) The painting is scheduled to be sold immediately at auction. (3.) The painting is protected, kept unencumbered, cared for, and preserved. A) Item 1 is not one of the three criteria. B) Item 2 is not one of the three criteria. C) Item 3 is not one of the three criteria. D) All three items are required criteria. E) None of the three items are required criteria.

7) true?

Which of the following statements regarding Management's Discussion and Analysis is

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A) MD&A is required only for Proprietary Fund Financial Statements. B) MD&A is reported in the statistical section of the annual report. C) MD&A is required for comprehensive annual financial reports. D) MD&A for state and local government financial statements must include an analysis of potential, untapped revenue sources. E) MD&A is an optional inclusion for state and local government financial statements.

Which one of the following is a criterion for identifying a primary government? A) it has an appointed board of directors. B) it is fiscally dependent. C) it is a local government. D) it has a separately elected governing board. E) it must prepare financial statements.

9) A local government's basic financial statements would include a statement of cash flows for all A) proprietary fund types. B) governmental fund types. C) fund types. D) fiduciary fund types. E) A statement of cash flows is not required for any fund types.

10) According to the GASB (Governmental Accounting Standards Board), which one of the following is not a criterion for determining whether a government is legally separate? A) The government can determine its own budget. B) The government can issue bonded debt. C) The government has corporate powers including the right to sue and be sued. D) The government has the power to levy taxes. E) The government can issue preferred stock.

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11)

Which of the following is not a step in reporting a pension liability?

A) The pension benefit payments that will ultimately be required are estimated by an actuary. B) The portion of those payments that are attributable to past periods of employee service is calculated. C) The present value of amounts attributable to past periods of employee service is determined in order to arrive at the government’s obligation at the present time. D) Excess liability balance is shown in the government-wide financial statements as a net pension asset. E) Excess liability balance is shown in the government-wide financial statements as a net pension liability.

12) The modified approach to accounting for infrastructure assets may be utilized by a state or local government if: 1.The government accumulates information about all infrastructure assets within either a network or subsystem of a network. 2.The government capitalizes infrastructure assets. 3.The government expenses costs of maintaining the infrastructure assets. 4.The government chooses to depreciate its infrastructure assets.

A) i and ii. B) i, ii, and iv. C) ii and iii. D) i, ii, and iii. E) i, ii, iii, and iv.

13) All of the following are true about the modified approach to infrastructure depreciation except:

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A) If specific guidelines are met, a government can choose to expense all maintenance costs each year in lieu of recording depreciation. B) The modified approach specifically excludes infrastructure assets within a network or subsystem of a network. C) If specific guidelines are met, additions and improvements must be capitalized. D) For eligible assets, the government must establish a minimum acceptable condition level. E) The government must have an asset management system in place to monitor the eligible assets.

14) Which of the following is a section of the financial section of the comprehensive annual financial report (CAFR) of a state or local government? (1) Management's discussion and analysis (MD&A). (2) Required supplementary information (other than MD&A). (3) Basic financial statements and notes to financial statements. A) 1 and 2. B) 2 and 3. C) 1 and 3. D) 3 only. E) 1, 2, and 3.

15) Which of the following is true regarding Management’s Discussion and Analysis (MD&A)? A) MD&A should provide an objective analysis of the financial activities based on currently known facts, decisions, or conditions. B) MD&A should disclose total assets and liabilities for all substantial component units. C) Management should provide a cash flow projection for at least three consecutive fiscal years in MD&A. D) MD&A is optional for city governments. E) MD&A is the final element of the introductory section of the comprehensive annual financial report (CAFR).

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16)

What are the three broad sections of a state or local government's CAFR? A) Introductory, financial, and statistical. B) Financial statements, notes to the financial statements, and component units. C) Introductory, statistical, and component units. D) Component units, financial, and statistical. E) Financial statements, notes to the financial statements, and statistical.

17)

Which of the following is a financial statement of a proprietary fund? A) Balance sheet. B) Statement of Operations. C) Statement of Changes in Cash Flows. D) Statement of Net Position. E) Statement of Revenues, Expenditures, and Changes in Fund Balance.

18) Which criteria must be met to be considered a special purpose government? (1.) Have a separately elected governing body. (2.) Be legally independent. (3.) Be fiscally independent. A) 1 only. B) 1 and 2. C) 2 and 3. D) 1 and 3. E) 1, 2, and 3.

19)

Which statement is false regarding the government-wide Statement of Net Position? A) Noncurrent liabilities are presented separately from current liabilities. B) Assets are reported excluding capital assets. C) Capital assets are reported net of depreciation. D) Investments are reported at fair value rather than historical cost. E) Discretely presented component units are grouped and shown on the right of the

total.

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20)

Which item is not included on the government-wide Statement of Activities? A) Revenues. B) Expenses. C) Assets. D) Operating grants. E) Capital contributions.

21) Which statement is false regarding the Balance Sheet for Governmental Fund Financial Statements? A) The Balance Sheet for Governmental Fund Financial Statements measures only current financial resources of the governmental entity. B) The Balance Sheet for Governmental Fund Financial Statements uses the modified accrual method for timing purposes. C) Capital Assets are not reported on the Balance Sheet for Governmental Fund Financial Statements. D) The Balance Sheet for Governmental Fund Financial Statements measures only longterm financial resources of the governmental entity. E) Long-term debts are not reported on the Balance Sheet for Governmental Fund Financial Statements.

22) The city operates a public swimming pool where each person is assessed a $2 entrance fee. Which financial statement is most appropriate to report these revenues? A) Statement of Net Position. B) Statement of Revenue, Expenditures, and Other Changes in Fund Balance. C) Statement of Revenue, Expenses, and Other Changes in Fund Balance. D) Statement of Net Revenue and Expenses. E) Statement of Revenue, Expenses, and Other Changes in Net Position.

23) Which statement is false regarding the Statement of Revenues, Expenditures, and Other Changes in Fund Balance when it is included with government-wide financial statements?

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A) The Statement of Revenues, Expenditures, and Other Changes in Fund Balance uses the modified accrual method of accounting. B) The Statement of Revenues, Expenditures, and Changes in Fund Balance presents revenues as either program revenues or general revenues. C) A presentation reconciles the change in governmental fund balance to the change in net position for governmental activities. D) Other financing sources are presented on the Statement of Revenues, Expenditures, and Other Changes in Fund Balance. E) All non-major funds are combined and reported together.

24) A city starts a solid waste landfill during 2020. When the landfill was opened the city estimated that it would fill to capacity within 6 years and that the cost to cover the facility would be $1.8 million which will not be paid until the facility is closed. At the end of 2020, the facility was 15% full, and at the end of 2021 the facility was 35% full. On government-wide financial statements, which of the following are the appropriate amounts to present in the financial statements for 2021? A) Both expense and liability will be zero. B) Expense will be $270,000 and liability will be $540,000. C) Expense will be $540,000 and liability will be $540,000. D) Expense will be $630,000 and liability will be $540,000. E) Expense will be $360,000 and liability will be $630,000.

25) A city starts a solid waste landfill during 2020. When the landfill was opened the city estimated that it would fill to capacity within 6 years and that the cost to cover the facility would be $1.8 million which will not be paid until the facility is closed. At the end of 2020, the facility was 15% full, and at the end of 2021 the facility was 35% full. If the landfill is judged to be a governmental fund, what liability is reported on the fund financial statements at the end of 2021? A) $0. B) $270,000. C) $360,000. D) $540,000. E) $630,000.

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26) Over the years, four alternatives have been suggested for constructing the financial statements for public colleges and universities. These alternatives include all of the following except: A) Adopt FASB’s requirements so that all colleges and universities (public and private) prepare comparable financial statements. B) Apply a more traditional model focusing on fund financial statements and the wide variety of funds that such schools often have to maintain. C) Create an entirely new set of financial statements designed specifically to meet the unique needs of public colleges and universities. D) Adopt the requirements issued by the Private Company Council (PCC) of the FASB. E) Adopt the same reporting model for public schools that has been created for state and local governments.

27) Which information must be disclosed regarding tax abatement agreements? i) The purpose of the tax abatement program. ii) The dollar amount of abatement and the names of recipients. iii) The type of tax being abated. A) i and iii. B) i only. C) ii only. D) iii only. E) i, ii, and iii.

28) The Town of Harvest opened a solid waste landfill in 1998 that is filled to capacity in the current year. The city initially anticipated closure costs of $3 million. These costs were not expected to be incurred until the landfill was closed. What is the final journal entry to record these costs assuming the estimated $3 million closure costs were properly recorded and the landfill is accounted for in an enterprise fund? A)

Expense—Landfill Closure Landfill Closure Liability

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3,000,000 3,000,000

Landfill Closure Liability

3,000,000

Expense—Landfill Closure C)

Expense—Landfill Closure

3,000,000 3,000,000

Cash D)

Landfill Closure Liability

3,000,000 3,000,000

Cash E)

Expenditure—Landfill Closure

3,000,000 3,000,000

Cash

3,000,000

A) Option A. B) Option B. C) Option C. D) Option D. E) Option E.

29)

Under GASB Statement No. 87, Leases, which of the following is false?

A) Unless the maximum life of a lease is one year or less, all leases are the equivalent of financing leases. B) A lessee is required to recognize a lease liability and an intangible right-to-use lease asset. C) The lessor records both a receivable and a deferred lease revenue at present value. D) The lessor is provided with separate categories for all lease contracts. E) The lessor reclassifies the deferred lease revenue as lease revenue over time and in a systematic and rational manner.

30) Which of the following is false regarding defined benefit pension plans provided to employees by a state or local government?

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A) Defined benefit pension plans are fully funded by the employees of a state or local government. B) Pension requirements create a huge financial obligation for many governments across the United States. C) Many state and local governments establish pension trust funds to accumulate and invest monetary resources and to pay out pension benefits. D) Pension trusts are classified as fiduciary funds. E) Pension trusts are not included in reporting government-wide financial statements.

ESSAY. Write your answer in the space provided or on a separate sheet of paper. 31) What three criteria must be met to identify a governmental unit as a primary government?

32) What three criteria must be met before a governmental unit can elect to not capitalize and therefore not report a work of art or historical treasure as an asset?

33)

What are the three broad sections of a state or local government's CAFR?

34) What information is required in the introductory section of a state or local government's CAFR?

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35) What information is required in the financial section of a state or local government's CAFR?

36)

What is meant by the term fiscally independent?

37)

What is meant by the term legally independent?

38) How is the Statement of Cash Flows for Proprietary Funds similar and dissimilar to a Statement of Cash Flows for a for-profit business?

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39) What are the four steps established by GASB Statement No. 68, Accounting for Financial Reporting for Pensions, in the reporting of a government’s liability?

40) The City of Wade has a fiscal year ending June 30. Examine the following transactions for Wade: (A.) On 6/5/21, Wade opens a new landfill. The engineers estimate that at the end of 12 years the landfill will be full. Estimated costs to close the landfill are currently $4,800,000. (B.) On 6/18/21, Wade receives a donation of a vintage railroad steam engine. The engine will be put on display at the local town park. A fee will be charged to actually climb up into the engine. The engine has been valued at $650,000. (C.) On 6/30/21, Wade estimates that the landfill is 2% filled. Determine and prepare the general fund journal entries for the City of Wade for each lettered item for the purposes of preparing the fund financial statements.

41) The City of Wade has a fiscal year ending June 30. Examine the following transactions for Wade: (A.) On 6/5/21, Wade opens a new landfill. The engineers estimate that at the end of 12 years the landfill will be full. Estimated costs to close the landfill are currently $4,800,000. (B.) On 6/18/21, Wade receives a donation of a vintage railroad steam engine. The engine will be put on display at the local town park. A fee will be charged to actually climb up into the engine. The engine has been valued at $650,000. (C.) On 6/30/21, Wade estimates that the landfill is 2% filled. Determine and prepare the journal entries for the City of Wade for each lettered item for the purposes of preparing the government-wide financial statements.

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42) The parking garage and parking lots owned by the City of Barnard reported the following balances for 2021: Receipts from public users of the parking facilities Salaries paid to employees Printing − paid to an internal service fund Interest on bonded debt Sculpture for entrance to parking lot (donated during 2021) Depreciation on Parking Garage Truck (purchased during 2021) Maintenance − paid to an internal service fund

$210,000 78,000 6,500 12,000 14,000 32,000 38,000 18,000

Required: Prepare the appropriate financial statement for the fund that was used to account for parking operations.

43) The City of Athens operates a motor pool serving all city-owned vehicles. The motor pool bought a new garage by paying $34,000 in cash and signing a note with the local bank for $320,000. Subsequently, the motor pool performed work for the police department at a cost of $19,000, which had not yet been collected. Depreciation on the garage amounted to $24,000. The first $14,000 payment made on the note included $5,200 in interest. Required: Prepare the journal entries for these transactions that are necessary to prepare government-wide financial statements.

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44) The City of Ibiza maintains a collection of paintings of a former citizen in its City Hall building. During the year, one painting was purchased by the city for $3,000 at an auction using appropriated funds in the General Fund. Also during the year, a donation of a painting valued at $3,600 was made to the city. Prepare the journal entry/entries for the two transactions for the purposes of preparing the governmental fund financial statements.

45) The City of Ibiza maintains a collection of paintings of a former citizen in its City Hall building. During the year, one painting was purchased by the city for $3,000 at an auction using appropriated funds in the General Fund. Also during the year, a donation of a painting valued at $3,600 was made to the city. Prepare the journal entry/entries for the two transactions for the purposes of preparing the government-wide financial statements.

46) The Town of Sitka opened a solid waste landfill in 2020 that was at 25% capacity on December 31, 2020 and at 60% capacity on December 31, 2021. The city initially anticipated closure costs of $2.8 million but in 2021 revised the estimate of the closure costs to be $3.2 million. None of these costs will be incurred until the landfill is scheduled to be closed. Prepare the journal entry that should be recorded on December 31, 2021 for government-wide financial statements.

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47) The Town of Sitka opened a solid waste landfill in 2020 that was at 25% capacity on December 31, 2020 and at 60% capacity on December 31, 2021. The city initially anticipated closure costs of $2.8 million but in 2021 revised the estimate of the closure costs to be $3.2 million. None of these costs will be incurred until the landfill is scheduled to be closed. Assuming the landfill is recorded within the General Fund, how would the landfill information be represented in the governmental fund financial statements at December 31, 2021?

48) The Town of Portsmouth has at the beginning of the year a $213,000 Net Position balance, and a $52,000 Fund Balance. The following information relates to the activities within the Town of Portsmouth for the year of 2021. Receipts: Property Taxes Income Taxes

$ 400,000 100,000

Fees charged to business owners for Public Safety

7,000

Fees charged to citizens for Sanitation

5,000

Payments: Salaries General Government Public Safety

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54,000 43,000

Sanitation

36,000

Rent General Government

15,000

Public Safety

12,000

Sanitation

3,500

Maintenance General Government

4,000

Public Safety

2,000

Sanitation

1,500

Insurance General Government

1,000

Public Safety

2,500

Sanitation

4,500

Final Payment on Debt Principal

5,000

Payment for Interest on Debt

15,000

Receivables at the end of the year: Property Taxes (80% estimated to be collectible)

95,000

4,000 3,000

Payables at year-end: Salaries General Government Public Safety Sanitation

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4,400

Other items at year-end: Cash Building

$ 130,900 95,000

Equipment

80,000

Supplies Inventory

9,500

Investments

160,000

Year-end utility and maintenance expenses, expected to be paid in 2 months

9,000

Prepare a Statement of Revenues, Expenditures and Other Changes in Fund Balances for the year ended December 31, 2021.

49) The Town of Portsmouth has at the beginning of the year a $213,000 Net Position balance, and a $52,000 Fund Balance. The following information relates to the activities within the Town of Portsmouth for the year of 2021. Receipts: Property Taxes Income Taxes

$ 400,000 100,000

Fees charged to business owners for Public Safety

7,000

Fees charged to citizens for Sanitation

5,000

Payments: Salaries General Government

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54,000

Public Safety

43,000

Sanitation

36,000

Rent General Government

15,000

Public Safety

12,000

Sanitation

3,500

Maintenance General Government

4,000

Public Safety

2,000

Sanitation

1,500

Insurance General Government

1,000

Public Safety

2,500

Sanitation

4,500

Final Payment on Debt Principal

5,000

Payment for Interest on Debt

15,000

Receivables at the end of the year: Property Taxes (80% estimated to be collectible)

95,000

4,000 3,000

Payables at year-end: Salaries General Government Public Safety Sanitation

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4,400

Other items at year-end: Cash Building

$ 130,900 95,000

Equipment

80,000

Supplies Inventory

9,500

Investments

160,000

Year-end utility and maintenance expenses, expected to be paid in 2 months

9,000

Prepare a Statement of Net Position at December 31, 2021.

50) The Town of Portsmouth has at the beginning of the year a $213,000 Net Position balance, and a $52,000 Fund Balance. The following information relates to the activities within the Town of Portsmouth for the year of 2021. Receipts: Property Taxes Income Taxes

$ 400,000 100,000

Fees charged to business owners for Public Safety

7,000

Fees charged to citizens for Sanitation

5,000

Payments: Salaries General Government

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54,000 20

Public Safety

43,000

Sanitation

36,000

Rent General Government

15,000

Public Safety

12,000

Sanitation

3,500

Maintenance General Government

4,000

Public Safety

2,000

Sanitation

1,500

Insurance General Government

1,000

Public Safety

2,500

Sanitation

4,500

Final Payment on Debt Principal

5,000

Payment for Interest on Debt

15,000

Receivables at the end of the year: Property Taxes (80% estimated to be collectible)

95,000

4,000 3,000

Payables at year-end: Salaries General Government Public Safety Sanitation

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4,400

Other items at year-end: Cash Building

$ 130,900 95,000

Equipment

80,000

Supplies Inventory

9,500

Investments Year-end utility and maintenance expenses, expected to be paid in 2 months

160,000 9,000

Prepare a Statement of Activities for the year ended December 31, 2021.

51) On December 31, 2020, the City of Oliver leases a large piece of construction equipment with a 25-year life for five years to use during a construction project. After the contract ends, the city must return the equipment to the lessor but has not guaranteed any residual value. The lease requires five annual payments of $40,000 per year beginning immediately. Oliver uses its own incremental borrowing rate of 10 percent per year because it does not know the implicit interest rate the lessor is charging. The present value of a $40,000 annuity due for five years at an annual interest rate of 10 percent is $166,795 (rounded). Prepare the journal entry/entries required for government-wide financial statements for this lease contract for 2020 and 2021.

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52) On December 31, 2020, the City of Oliver leases a large piece of construction equipment with a 25-year life for five years to use during a construction project. After the contract ends, the city must return the equipment to the lessor but has not guaranteed any residual value. The lease requires five annual payments of $40,000 per year beginning immediately. Oliver uses its own incremental borrowing rate of 10 percent per year because it does not know the implicit interest rate the lessor is charging. The present value of a $40,000 annuity due for five years at an annual interest rate of 10 percent is $166,795 (rounded). Prepare the journal entry/entries required for fund financial statements for this lease contract for 2020 and 2021.

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Answer Key Test name: Chap 12_8e 1) C 2) C 3) B 4) C 5) D 6) B 7) C 8) D 9) A 10) E 11) D 12) D 13) B 14) E 15) A 16) A 17) D 18) E 19) B 20) C 21) D 22) E 23) B 24) E

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$1,800,000 × 15% = $270,000 Expense & Liability for 2020 $1,800,000 × 35% = $630,000 Liability at Year End of 2021 $630,000 Liability at 2021 Year-End − $270,000 Liability at 2020 Year-End = $360,000 Expense for 2021. 25) A As a governmental fund, no liability is recorded, only expenditures. 26) D 27) A 28) D Previously accrued Landfill Closure Liability balance of $3,000,000 is satisfied by $3,000,000 cash payment in the year of landfill closure. 29) D 30) A 31) To be considered a primary government, the unit must meet the following 3 criteria: (1.) It must have a separately elected governing body. (2.) It must be legally independent which can be demonstrated by having corporate powers such as the right to sue and be sued in its own name as well as the right to buy, sell, and lease property in its own name. (3.) It must be fiscally independent of other state and local governments. 32) Before a governmental unit can elect to not record a work of art or a historical treasure as an asset, three criteria must be met: (1.) It must be held for public exhibition, education, or research in furtherance of public service, rather than financial gain. (2.) It must be protected, kept unencumbered, cared for, and preserved. (3.) It must be subject to an organizational policy that requires the proceeds from sales of collection items to be used to acquire other items for collections. Version 1

33) The three broad sections a state or local government’s CAFR are the introductory section, the financial section, and the statistical section. 34) A letter of transmittal from appropriate government officials, an organization chart, and a list of principal officers are required in the introductory section of a state or local government’s CAFR. 35) The financial section of a CAFR must include the auditor's report, Management's Discussion and Analysis (MD&A), the basic financial statements, and Required Supplementary Information (RSI) other than the MD&A. 36) Fiscally independent means that the leadership of a governing body is able to determine the activity’s budget, levy taxes, set rates, and issue debt without having to seek the approval of the primary government. 37) Legal independence is demonstrated by having corporate powers such as the right to sue and be sued and the right to buy, sell and lease property in its own name. 38) The statement of cash flows for a proprietary fund is very similar to the statement of cash flows for a for-profit business. Two sections are similar including the cash flows from operating activities and cash flows from investing activities. The cash flows from financing activities are reported differently than for profit businesses and are split into two sections when reporting for a Proprietary Fund. These two sections specify the cash flows from noncapital financing and cash flows from capital and related financing activities. The statement of cash flows for a proprietary fund is different from the cash flow statement for a for-profit business in that GASB requires the direct method of presenting cash flows from operating activities, with a reconciliation to net operating income. At this time, GAAP for the cash flow statement for a for-profit business gives the option of presenting cash flows from operating activities using either the direct or the indirect method.

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39) For pensions, GASB Statement No. 68, Accounting and Financial Reporting for Pensions, established the following steps in the reporting of a government’s liability: ● An actuary estimates the total pension payments that will ultimately be required. ● The government determines the portion of those payments attributable to past periods of employee service. ● The government calculates the present value of the payments relating to those past amounts to arrive at its obligation at the current time. ● If that liability is larger than the net asset position held in the pension trust fund, the excess is shown in the government-wide financial statements as a net pension liability. 40) Entries for general fund for preparing fund financial statements A) 6/5

No entry at date of opening

B) 6/18

No entry in the general fund because there is no change in current financial resources

C) 6/30

No entry unless cash is being paid in the near future to cover the future expected cost.

41) Entries for preparing government-wide financial statements A) 6/5

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No entry at time of opening

B) 6/18

Vintage Steam Engine

650,000

Revenue - Donation

C) 6/30

Expense – Landfill Closure

650,000

96,000

Landfill Closure Liability

96,000

42) Danton's change in net position from the proprietary fund for parking garages and parking lots is determined as follows: Revenue: Receipts from public users of parking facilities Revenue − Donation

$ 210,000 14,000

Total Revenues

$ 224,000

Expenses: Salaries paid to employees Interest on bonded indebtedness

78,000 12,000

Depreciation on parking garage

32,000

Printing

6,500

Maintenance

18,000

Total Expenses Change in Net Position

$ 146,500 $

77,500

43) Entries for government-wide financial statements A)

Assets – Garage

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354,000

Notes Payable

320,000

Cash

34,000

(The cash transfer for services performed for the police department is an internal transfer and is not recorded for governmentwide financial statements.)

Expense – Depreciation

24,000

Accumulated Depreciation

24,000

Expense – Interest

5,200

Notes Payable

8,800

Cash

14,000

44) General Fund: Expenditure – Painting

3,000

Cash

3,000

No entry in General Fund for second transaction – does not represent a change in current financial resources. 45) Government-wide financial statements – Governmental Activities: Painting Cash

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3,000 3,000

Painting

3,600

Revenue – Donation

3,600

46) Expense—Landfill Closure Landfill Closure Liability

1,220,000 1,220,000

2020 Expense: $2,800,000 × 25% = $700,000 2020 Expense based on revised estimate of closure costs: $3,200,000 × 25% = $800,000 2021 Expense based on revised estimate of closure costs: $3,200,000 × (60% − 25%) = $1,120,000 Total 2021 Expense = $1,120,000 + ($800,000 − $700,000) = $1,220,000 47) There is nothing recognized in the balance sheet or in the statement of revenues, expenditures, and other changes in fund balance at December 31, 2021 because there is not a claim to any current financial resources. 48) PORTSMOUTH STATEMENT OF REVENUES, EXPENDITURES, AND OTHER CHANGES IN FUND BALANCES Governmental Funds For Year Ended December 31, 2021 Revenues: Total Governmental Funds Property Taxes $ 400,000 Income Taxes

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100,000

Public Safety

7,000

Sanitation

5,000

Total Revenues

512,000

74,000

Expenditures Current: General Government Public Safety

59,500

Sanitation

45,500

Debt Service: Principal Payment on Debt

5,000

Interest on Debt

15,000

Total expenditures

199,000

Excess of Revenues over Expenditures

313,000

Net Change in Fund Balance

313,000

Fund Balance (Beginning) Fund Balance (Ending)

52,000 $

365,000

49) PORTSMOUTH STATEMENT OF NET POSITION December 31, 2021 Governmental Activities Assets

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Cash and cash equivalents

130,900

Investments

160,000

Receivables (net of $19,000 allowance)

76,000

Inventories

9,500

Capital assets (net) Total assets

175,000 $

551,400

11,400

Liabilities Salaries payable Accrued liabilities Total Liabilities

9,000 $

20,400

175,000

Net position Invested in capital assets Unrestricted Total net position

356,000 $

531,000

50) CITY OF PORTSMOUTH STATEMENT OF ACTIVITIES For Year Ended December 31, 2021 Program Net (Expense) Revenue Revenues and Changes in Net Position Functions/Progra Operating Charges Grants and Governmenta Total ms Expenses for l Service Contributio Activities s ns

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Governmental activities: General Government Public Safety

$ 74,000

(74,000 ) $ (74,000 )

59,500

7,000

(52,500 )

Sanitation

45,500

5,000

(40,500 )

Interest on Debt

15,000

(15,000 )

Total Governmental Activities

General Revenues: Property Taxes

$ 194,00 0

$ 12,00 0

$ (182,000 ) $ (182,00 ) 0

Income Taxes Total general revenues

Change in net position: Change during 2021 Net position— beginning Net position— ending

400,000 $ 400,000 100,000

100,000

500,000 $ 500,000

318,000 $ 318,000 213,000

213,000

531,000 $ 531,000

Reconciliation of Ending Fund Balance to Ending Net Assets:

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Ending Fund $ 365,00 Balance − 0 Governmental Funds Plus Capital 175,00 Assets which are 0 not current financial resources and are not reported in the governmental funds Less Compensated (9,000 ) absences which are not due and payable in the current period and are not reported in the governmental funds Ending Net Assets − Governmental Activities

$ 531,00 0

Reconciliation of Change in Fund Balance to Change in Net Assets: Change in Fund $ 313,00 Balance − 0 Governmental Funds Plus repayment 5,000 of principal of long-term debt, which uses current financial resources but has no effect on net assets

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Change in Net Assets − Governmental Activities

$ 318,00 0

51) 12/31/20

Right-of Use Asset−Equipment

166,795

Lease Payable

126,795

Cash

40,000

To record Oliver's lease of the equipment at the present value of payments.

12/31/21

Interest Expense

12,680

Lease Payable To record interest for 2021 as 10% of the $126,795 liability. Amortization Expense

12,680

33,359

Right-of-Use Asset−Equipment Cost of the leased asset is amortized over five years using straight-line method ($166,795 ÷ 5 years) Lease Payable Cash

33,359

40,000 40,000

To record 2021 lease payment.

52)

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12/31/20

Expenditure−Lease Contract Other Financing Sources−Lease Contract Contract is signed that will require five annual payments of $40,000 per year with a present value of $166,795. Expenditure−Leased Equipment

166,795 126,795

40,000

Cash

40,000

To record first lease payment. 12/31/21

Expenditure−Leased Equipment Cash

40,000 40,000

To record second lease payment.

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