TEST BANK For Advanced Accounting 13th Edition. Joe Hoyle Thomas Schaefer Timothy Doupnik

File: Chapter 01 - The Equity Method of Accounting for Investments Multiple Choice: [QUESTION] 1. Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value method to account for this investment. Trace reported net income of $110,000 for 2018 and paid dividends of $60,000 on October 1, 2018. How much income should Gaw recognize on this investment in 2018? A) $16,500. B) $ 9,000. C) $25,500. D) $ 7,500. E) $50,000. Answer: B Learning Objective: 01-01 Topic: Investments―Fair-value method Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: $60,000 × .15 = $9,000 [QUESTION] 2. Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to account for the investment. During 2018, Dew reported income of $250,000 and paid dividends of $80,000. There is no amortization associated with the investment. During 2018, how much income should Yaro recognize related to this investment? A) $24,000. B) $75,000. C) $99,000. D) $51,000. E) $80,000. Answer: B Learning Objective: 01-03 Topic: Equity method―Investment income Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: $250,000 × .30 = $75,000 [QUESTION] 3. On January 1, 2018, Pacer Company paid $1,920,000 for 60,000 shares of Lennon Co.’s voting common stock which represents a 45% investment. No allocation to goodwill or other specific account was necessary. Significant influence over Lennon was achieved by this acquisition. Lennon distributed a dividend of $2.50 per share during 2018 and reported net income of $670,000. What was the balance in the Investment in Lennon Co. account found in the financial records of Pacer as of December 31, 2018?

A) $2,040,500. B) $2,212,500. C) $2,260,500. D) $2,171,500. E) $2,071,500. Answer: E Learning Objective: 01-03 Topic: Equity method―Investment account balance Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: $1,920,000 + ($670,000 × .45) – ($2.50 × 60,000) = $2,071,500 [QUESTION] 4. An investor should always use the equity method to account for an investment if: A) It has the ability to exercise significant influence over the operating policies of the investee. B) It owns 30% of an investee’s stock. C) It has a controlling interest (more than 50%) of an investee’s stock. D) The investment was made primarily to earn a return on excess cash. E) It does not have the ability to exercise significant influence over the operating policies of the investee. Answer: A Learning Objective: 01-02 Topic: Equity method―Significant influence criterion Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 5. On January 1, 2016, Dermot Company purchased 15% of the voting common stock of Horne Corp. On January 1, 2018, 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 2018 but should make no changes in its financial statements for 2017 and 2016. B) It should prepare consolidated financial statements for 2018. C) It must restate the financial statements for 2017 and 2016 as if the equity method had been used for those two years. D) It should record a prior period adjustment at the beginning of 2018 but should not restate the financial statements for 2017 and 2016. E) It must restate the financial statements for 2017 as if the equity method had been used then. Answer: A Learning Objective: 01-05a Topic: Report change to equity method Difficulty: 2 Medium Blooms: Understand AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] 6. During January 2017, Wells, Inc. acquired 30% of the outstanding common stock of Wilton Co. for $1,400,000. This investment gave Wells the ability to exercise significant influence over Wilton. Wilton’s assets on that date were recorded at $6,400,000 with liabilities of $3,000,000. Any excess of cost over book value of Wells’ investment was attributed to unrecorded patents having a remaining useful life of ten years. In 2017, Wilton reported net income of $600,000. For 2018, Wilton reported net income of $750,000. Dividends of $200,000 were paid in each of these two years. What was the reported balance of Wells’ Investment in Wilson Co. at December 31, 2018? A) $1,609,000. B) $1,485,000. C) $1,685,000. D) $1,647,000. E) $1,054,300. Answer: A Learning Objective: 01-04 Topic: Equity method―Investment account balance Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $6,400,000 - $3,000,000 = $3,400,000 × 30% = $1,020,000 $1,400,000 - $1,020,000 = $380,000 / 10yrs = $38,000 Unrecorded Patents Amortization $1,400,000 + $180,000 + $225,000 - $60,000 - $60,000 - $38,000 - $38,000 = $1,609,000 [QUESTION] 7. On January 1, 2018, 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 2018, 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, 2018? A) $950,800. B) $958,000. C) $836,000. D) $990,100. E) $956,400. Answer: A Learning Objective: 01-03 Learning Objective: 01-05c Topic: Equity method―Investment account balance Topic: Report investee losses Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: $1,000,000 - $42,000 - $7,200 = $950,800 [QUESTION] Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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8. On January 1, 2018, Jordan Inc. acquired 30% of Nico Corp. Jordan used the equity method to account for the investment. On January 1, 2019, Jordan sold two-thirds of its investment in Nico. It no longer had the ability to exercise significant influence over the operations of Nico. How should Jordan account for this change? A) Jordan should continue to use the equity method to maintain consistency in its financial statements. B) Jordan 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 2018. C) Jordan has the option of using either the equity method or the fair-value method for 2018 and future years. D) Jordan should report the effect of the change from the equity to the fair-value method as a retrospective change in accounting principle. E) Jordan should use the fair-value method for 2019 and future years, but should not make a retrospective adjustment to the investment account. Answer: E Learning Objective: 01-05d Topic: Report sale of equity investment Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 9. Tower Inc. owns 30% of Yale Co. and applies the equity method. During the current year, Tower bought inventory costing $66,000 and then sold it to Yale for $120,000. At year-end, only $24,000 of merchandise was still being held by Yale. What amount of intra-entity gross profit must be deferred by Tower? A) $ 6,480. B) $ 3,240. C) $10,800. D) $16,200. E) $ 6,610. Answer: B Learning Objective: 01-06 Topic: Intra–entity sales of inventory Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: $120,000 - $66,000 = $54,000 $24,000 / $120,000 = 20% × $54,000 = $10,800 × 30% = $3,240 [QUESTION] 10. On January 4, 2018, Watts Co. purchased 40,000 shares (40%) of the common stock of Adams Corp., paying $800,000. There was no goodwill or other cost allocation associated with the investment. Watts has significant influence over Adams. During 2018, Adams reported income of $200,000 and paid dividends of $80,000. On January 2, 2019, Watts sold 5,000 shares for $125,000. What was the balance in the investment account after the shares had been sold? A) $848,000. B) $742,000. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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C) $723,000. D) $761,000. E) $925,000. Answer: B Learning Objective: 01-05d Topic: Report sale of equity investment Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: $800,000 + $80,000 - $32,000 = $848,000 – (5,000 / 40,000 × $848,000) = $742,000 REFERENCE: 01-01 On January 3, 2018, Austin Corp. purchased 25% of the voting common stock of Gainsville Co., paying $2,500,000. Austin decided to use the equity method to account for this investment. At the time of the investment, Gainsville’s total stockholders’ equity was $8,000,000. Austin gathered the following information about Gainsville’s assets and liabilities:

Buildings (10- year life) Equipment (5 -year life) Franchises (8- year life)

Book Value $ 400,000 1,000,000 0

Fair Value $ 500,000 1,300,000 400,000

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. [QUESTION] REFER TO: 01-01 11. What is the amount of goodwill associated with the investment? A) $500,000. B) $200,000. C) $0. D) $300,000. E) $400,000. Answer: D Learning Objective: 01-04 Topic: Equity method―Allocate cost of investment Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Buildings $500,000 - $400,000 = $100,000 FV > BV Equipment $1,300,000 - $1,000,000 = $300,000 FV > BV Franchises $400,000 – 0 = $400,000 FV > BV $100,000 + $300,000 + $400,000 = $800,000 × 25% = $200,000 Identifiable Excess Paid $8,000,000 × 25% = $2,000,000 BV ($2,500,000 Paid) – ($2,000,000 BV) = ($500,000 FV > BV) – ($200,000 Identifiable Excess Paid) = $300,000 Unidentifiable Excess Paid (Goodwill) Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 01-01 12. For 2018, what is the total amount of excess amortization for Austin’s 25% investment in Gainsville? A) $ 27,500. B) $ 20,000. C) $ 30,000. D) $120,000. E) $ 70,000. Answer: C Learning Objective: 01-04 Topic: Equity method―Amortize allocations Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $500,000 - $400,000 = $100,000 / 10yrs = $10,000 $1,300,000 - $1,000,000 = $300,000 / 5yrs = $60,000 $400,000 – 0 = $400,000 / 8yrs = $50,000 $10,000 + $60,000 + $50,000 = $120,000 × 25% = $30,000 [QUESTION] 13. Club Co. appropriately uses the equity method to account for its investment in Chip Corp. As of the end of 2018, Chip’s common stock had suffered a significant decline in fair value, which is expected to recover over the next several months. How should Club account for the decline in value? A) Club should switch to the fair-value method. B) No accounting because the decline in fair value is temporary. C) Club should decrease the balance in the investment account to the current value and recognize a loss on the income statement. D) Club should not record its share of Chip’s 2018 earnings until the decline in the fair value of the stock has been recovered. E) Club should decrease the balance in the investment account to the current value and recognize an unrealized loss on the balance sheet. Answer: B Learning Objective: 01-05c Topic: Report investee losses Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: E Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Learning Objective: 01-06 Topic: Intra–entity sales of inventory Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement REFERENCE: 01-02 Atlarge Inc. owns 30% of the outstanding voting common stock of Ticker Co. and has the ability to significantly influence the investee’s operations and decision-making. On January 1, 2018, the balance in the Investment in Ticker Co. account was $402,000. Amortization associated with the purchase of this investment is $8,000 per year. During 2018, Ticker earned income of $108,000 and paid cash dividends of $36,000. Previously in 2017, Ticker had sold inventory costing $28,800 to Atlarge for $48,000. All but 25% of this merchandise was consumed by Atlarge during 2017. The remainder was used during the first few weeks of 2018. Additional sales were made to Atlarge in 2018; inventory costing $33,600 was transferred at a price of $60,000. Of this total, 40% was not consumed until 2019. [QUESTION] REFER TO: 01-02 15. What amount of equity income would Atlarge have recognized in 2018 from its ownership interest in Ticker? A) $19,792. B) $27,640. C) $22,672. D) $24,400. E) $21,748. Answer: C Learning Objective: 01-03 Learning Objective: 01-04 Learning Objective: 01-06 Topic: Equity method―Investment income Topic: Equity method―Amortize allocations Topic: Intra–entity sales of inventory Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 2018 Income $108,000 × 30% = $32,400 2017 Inventory Profit Recognized $48,000 - $28,800 = $19,200 × 25% = $4,800 × 30% = $1,440 2018 Inventory Profit Deferred $60,000 - $33,600 = $26,400 × 40% = $10,560 × 30% = $3,168 2018 Purchase Amortization $8,000 $32,400 + $1,440 - $3,168 -$8,000 = $22,672 Equity Income 2018 [QUESTION] REFER TO: 01-02 16. What was the balance in the Investment in Ticker Co. account at the end of 2018? A) $401,136. B) $413,872. C) $418,840. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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D) $412,432. E) $410,148. Answer: B Learning Objective: 01-03 Learning Objective: 01-04 Learning Objective: 01-06 Topic: Equity method―Investment income Topic: Equity method―Amortize allocations Topic: Intra–entity sales of inventory Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 2018 Beginning Balance = $402,000 2018 Income Recognized = $22,672 (see previous question) 2018 Dividend Received = ($36,000 × 30%) = $10,800 2018 Ending Balance = ($402,000 + $22,672 - $10,800) = $413,872 REFERENCE: 01-03 On January 1, 2018, Deuce Inc. acquired 15% of Wiz Co.’s outstanding common stock for $62,400 and did not exercise significant influence. Wiz earned net income of $96,000 in 2018 and paid dividends of $36,000. The fair value of Deuce’s investment was $80,000 at December 31, 2018. On January 3, 2019, Deuce bought an additional 10% of Wiz for $54,000. This second purchase gave Deuce the ability to significantly influence the decision making of Wiz. During 2019, Wiz earned $120,000 and paid $48,000 in dividends. As of December 31, 2019, Wiz reported a net book value of $468,000. At the date of the second purchase, Deuce concluded that Wiz Co.’s book values approximated fair values and attributed any excess cost to goodwill. [QUESTION] REFER TO: 01-03 17. On Deuce’s December 31, 2019 balance sheet, what balance was reported for the Investment in Wiz Co. account? A) $117,000. B) $143,400. C) $152,000. D) $134,400. E) $141,200. Answer: C Learning Objective: 01-01 Learning Objective: 01-03 Learning Objective: 01-05a Topic: Investments―Fair-value method Topic: Equity method―Investment account balance Topic: Report change to equity method Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 2018 Purchase = $62,400. The investment was increased to fair value of $80,000 at 12/31/18. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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2019 Income = ($120,000 × 25%) = $30,000 2019 Dividend = ($48,000 × 25%) = $12,000 Ending 2019 Balance = ($80,000 + $54,000 + $30,000 - $12,000) = $152,000

[QUESTION] REFER TO: 01-03 18. What amount of equity income should Deuce have reported for 2019? A) $30,000. B) $16,420. C) $38,340. D) $18,000. E) $32,840. Answer: A Learning Objective: 01-03 Learning Objective: 01-05a Topic: Equity method―Investment income Topic: Report change to equity method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: 2019 Income = ($120,000 × 25%) = $30,000 [QUESTION] 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. Answer: D Learning Objective: 01-03 Topic: Equity method―Basic journal entries Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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D) Technological dependency. E) Interchange of managerial personnel. Answer: C Learning Objective: 01-02 Topic: Equity method―Significant influence criterion Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: B Learning Objective: 01-02 Topic: Equity method―Investment account balance Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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? 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. Answer: B Learning Objective: 01-05a Topic: Report change to equity method Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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. Answer: B Learning Objective: 01-05d Topic: Report sale of equity investment Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: B Learning Objective: 01-05b Topic: Report investee OCI Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 25. How should a permanent loss in value of an investment using the equity method be treated? 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. Answer: B Learning Objective: 01-05c Topic: Report investee losses Difficulty: 3 Hard Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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? Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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. Answer: C Learning Objective: 01-05c Topic: Report investee losses Difficulty: 3 Hard Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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) An recognized gain or loss is reported as the difference between selling price 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. Answer: C Learning Objective: 01-05d Topic: Report sale of equity investment Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 28. When applying the equity method, how is the excess of cost over book value calculated and accounted for? 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. Answer: C Learning Objective: 01-04 Topic: Equity method―Allocate cost of investment Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] 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. Answer: D Learning Objective: 01-04 Topic: Equity method―Allocate cost of investment Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: C Learning Objective: 01-06 Topic: Intra–entity sales of inventory Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 31. Which statement is true concerning unrecognized profits in intra-entity inventory sales when an investor uses the equity method? 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. Answer: B Learning Objective: 01-06 Topic: Intra–entity sales of inventory Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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REFERENCE: 01-04 On January 1, 2017, Dawson, Incorporated, paid $100,000 for a 30% interest in Sacco Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six-year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2017, Sacco reported net income of $50,000 and paid dividends of $20,000 while in 2018 it reported net income of $75,000 and dividends of $30,000. Assume Dawson has the ability to significantly influence the operations of Sacco. [QUESTION] REFER TO: 01-04 32. The amount allocated to goodwill at January 1, 2017, is A) $25,000. B) $13,000 C) $ 9,000. D) $16,000. E) $10,000. Answer: D Learning Objective: 01-04 Topic: Equity method―Allocate cost of investment Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Book value purchased = ($550,000 - $300,000) = 250,000 × 30% = 75,000 Excess: $75,000 × 30% = $25,000 Allocated to patent: $30,000 × 30% = $9,000 Remainder to goodwill: $25,000 - $9,000 = $16,000. [QUESTION] REFER TO: 01-04 33. The equity in income of Sacco for 2017, is A) $ 9,000. B) $13,500. C) $15,000. D) $ 7,500. E) $50,000. Answer: B Learning Objective: 01-03 Learning Objective: 01-04 Topic: Equity method―Investment income Topic: Equity method―Amortize allocations Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 2017 Equity Income = ($50,000 × 30%) = $15,000 2017 Excess Patent Amortization = ($30,000 / 6 = $5,000) × 30%) = $1,500 $15,000 - $1,500 = $13,500 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 01-04 34. The equity in income of Sacco for 2018, is A) $22,500. B) $21,000. C) $12,000. D) $13,500. E) $75,000. Answer: B Learning Objective: 01-03 Learning Objective: 01-04 Topic: Equity method―Investment income Topic: Equity method―Amortize allocations Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 2018 Equity Income = ($75,000 × 30%) = $22,500 2018 Excess Patent Amortization = ($30,000 / 6 = $5,000) × 30%) = $1,500 $22,500 - $1,500 = $21,000 [QUESTION] REFER TO: 01-04 35. The balance in the Investment in Sacco account at December 31, 2017, is A) $100,000. B) $112,000. C) $106,000. D) $107,500. E) $140,000. Answer: D Learning Objective: 01-03 Learning Objective: 01-04 Topic: Equity method―Investment account balance Topic: Equity method―Investment income Topic: Equity method―Amortize allocations Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: $100,000 + $13,500 – ($20,000 × 30%) = $107,500 [QUESTION] REFER TO: 01-04 36. The balance in the Investment in Sacco account at December 31, 2018, is A) $119,500. B) $125,500. C) $116,500. D) $118,000. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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E) $100,000. Answer: A Learning Objective: 01-03 Learning Objective: 01-04 Topic: Equity method―Investment account balance Topic: Equity method―Amortize allocations Topic: Equity method―Investment income Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: $107,500 + $21,000 – ($30,000 × 30%) = $119,500 REFERENCE: 01-05 Dodge, Incorporated acquires 15% of Gates Corporation on January 1, 2017, for $105,000 when the book value of Gates was $600,000. During 2017 Gates reported net income of $150,000 and paid dividends of $50,000. On January 1, 2018, Dodge purchased an additional 25% of Gates for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2017 but Dodge has deemed it necessary to change to the equity method after the second purchase. During 2018 Gates reported net income of $200,000, and reported dividends of $75,000. [QUESTION] REFER TO: 01-05 37. The income reported by Dodge for 2017 with regard to the Gates investment is A) $ 7,500. B) $ 22,500. C) $ 15,000. D) $100,000. E) $150,000. Answer: A Learning Objective: 01-01 Topic: Investments―Fair-value method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: ($50,000 × 15% = $7,500) = Dividends received by Dodge in 2017 [QUESTION] REFER TO: 01-05 38. The income reported by Dodge for 2018 with regard to the Gates investment is A) $80,000. B) $30,000. C) $50,000. D) $15,000. E) $75,000. Answer: A Learning Objective: 01-02 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Learning Objective: 01-05a Topic: Equity method―Investment income Topic: Report change to equity method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: $200,000 × 40% = $80,000 [QUESTION] REFER TO: 01-05 39. Which of the following is true regarding the change from the fair-value method to the equity method? A) Dodge must record a debit to additional paid-in capital in the amount of $200,000. B) Dodge must record a debit to additional paid-in capital for $15,000. C) Dodge must retrospectively apply the equity method to interests reported under the fair-value method. D) Dodge must record a debit of $200,000 to the Gates Investment Account. E) Dodge must record a credit of $15,000 to the Gates Investment Account. Answer: D Learning Objective: 01-05a Topic: Report change to equity method Difficulty: 3 Hard Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: ASU No. 2016-07 eliminated retrospective application of equity method and requires prospective treatment such that the acquisition cost of the new shares of the investment is added to the current basis of the investment. [QUESTION] REFER TO: 01-05 40. The balance in the investment account at December 31, 2018, is A) $335,000. B) $355,000. C) $400,000. D) $412,500. E) $480,000. Answer: B Learning Objective: 01-05a Topic: Report change to equity method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Balance 2018 Year End Book value purchased = $105,000 + $200,000 = $305,000 2018 Net Income and Dividends = $80,000 - $30,000 = $50,000 End of Year Balance = $305,000 + $55,000 = $355,000 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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REFERENCE: 01-06 Clancy Incorporated sold $210,000 of its inventory to Reid Company during 2018 for $350,000. Reid sold $224,000 of this merchandise in 2018 with the remainder to be disposed of during 2019. Assume Clancy owns 30% of Reid and accounts for its investment using the equity method. [QUESTION] REFER TO: 01-06 41. What journal entry will be recorded at the end of 2018 to defer the recognition of the investor’s share of the intra-entity gross profits? A) B) C) D)

Equity in income of Reid Investment in Reid Investment in Reid Equity in income of Reid Equity in income of Reid Investment in Reid Investment in Reid Equity in income of Reid

$50,400 $50,400 $50,400 $50,400 $15,120 $15,120 $15,120 $15,120

A) Entry A. B) Entry B. C) Entry C. D) Entry D. E) No entry is necessary. Answer: C Learning Objective: 01-06 Topic: Intra–entity sales of inventory Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $350,000 - $210,000 = $140,000 × (1 – ($224,000 / $350,000)) = $50,400 × 30% = $15,120 Recognition of its share of intra-entity gross profits by reduction <CR> in the Investment in Reid Account [QUESTION] REFER TO: 01-06 42. What journal entry will be recorded in 2019 to recognize its share of the intra-entity gross profit that was deferred in 2018? A) Equity in income of Reid $50,400 Investment in Reid $50,400 B) Investment in Reid $50,400 Equity in income of Reid $50,400 C) Equity in income of Reid $15,120 Investment in Reid $15,120 D) Investment in Reid $15,120 Equity in income of Reid $15,120 A) Entry A. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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B) Entry B. C) Entry C. D) Entry D. E) No entry is necessary. Answer: D Learning Objective: 01-06 Topic: Intra–entity sales of inventory Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: Reversal of the previous deferral entry in 2018, thus recognizing the profit in 2019 income REFERENCE: 01-07 On January 1, 2017, 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, 2018, 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, 2017 was $1,000,000. The book value of Cook on January 1, 2018, 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: 2017 2018 2019

Net Income $200,000 225,000 250,000

Dividends $50,000 50,000 60,000

On April 1, 2019, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. [QUESTION] REFER TO: 01-07 43. What is the balance in the investment account for the 15% ownership interest, at January 1, 2018? A) $150,000. B) $172,500. C) $180,000. D) $157,500. E) $170,000 Answer: A Learning Objective: 01-01 Topic: Investments―Fair-value method Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 01-07 44. How much income did Mehan report from Cook during 2017? A) $30,000. B) $22,500. C) $ 7,500. D) $ 0. E) $50,000. Answer: C Learning Objective: 01-01 Topic: Investments―Fair-value method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $7,500 Dividends Received = 15% × (Dividends Declared $50,000) [QUESTION] REFER TO: 01-07 45. How much income did Mehan report from Cook during 2018? A) $90,000. B) $110,000. C) $67,500. D) $87,500. E) $78,750. Answer: D Learning Objective: 01-04 Learning Objective: 01-05a Topic: Report change to equity method Topic: Equity method―Allocate cost of investment Topic: Equity method―Amortize allocations Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 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 x 40% = $440,000 $450,000 - $440,000 = $10,000 attributable to database $10,000 / 4 = $2,500 $90,000 - $2,500 = $87,500 [QUESTION] REFER TO: 01-07 46. What was the balance in the investment account at December 31, 2018? A) $517,500. B) $537,500. C) $520,000. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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D) $540,000. E) $211,250. Answer: A Learning Objective: 01-03 Learning Objective: 01-04 Learning Objective: 01-05a Topic: Report change to equity method Topic: Equity method―Amortize allocations Topic: Equity method―Investment account balance Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $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 2018 Year End [QUESTION] REFER TO: 01-07 47. What was the balance in the investment account at April 1, 2019 just before the sale of shares? A) $447,500. B) $468,750. C) $535,875. D) $555,000. E) $624,375. Answer: C Learning Objective: 01-05d Topic: Report sale of equity investment Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $517,500 + ($25,000 - $625) - $6,000 = $535,875 2019 Beginning Investment Account Balance + (40% of 1st Quarter Income – 1st Quarter Amortization) – 1st Quarter Dividend [QUESTION] REFER TO: 01-07 48. How much of Cook’s net income did Mehan report for the year 2019? A) $61,750. B) $81,250. C) $72,500. D) $59,250. E) $75,000. Answer: B Learning Objective: 01-05d Topic: Report sale of equity investment Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: (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 REFERENCE: 01-08 On January 4, 2017, Harley, Inc. acquired 40% of the outstanding common stock of Bike Co. for $2,400,000. This investment gave Harley the ability to exercise significant influence over Bike. Bike’s assets on that date were recorded at $10,500,000 with liabilities of $4,500,000. There were no other differences between book and fair values. During 2017, Bike reported net income of $500,000. For 2018, Bike reported net income of $800,000. Dividends of $300,000 were paid in each of these two years. [QUESTION] REFER TO: 01-08 49. How much income did Harley report from Bike for 2017? A) $120,000. B) $200,000. C) $300,000. D) $320,000. E) $500,000. Answer: B Learning Objective: 01-02 Learning Objective: 01-03 Topic: Equity method―Investment income Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $500,000 × 40% = $200,000 [QUESTION] REFER TO: 01-08 50. How much income did Harley report from Bike for 2018? A) $120,000. B) $200,000. C) $300,000. D) $320,000. E) $500,000. Answer: D Learning Objective: 01-02 Learning Objective: 01-03 Topic: Equity method―Investment income Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: $800,000 × 40% = $320,000 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 01-08 51. What was the reported balance of Harley’s Investment in Bike Co. at December 31, 2017? A) $880,000. B) $2,400,000. C) $2,480,000. D) $2,600,000. E) $2,900,000. Answer: C Learning Objective: 01-02 Topic: Equity method―Investment account balance Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: $2,400,000 + $200,000 - $120,000 = $2,480,000 [QUESTION] REFER TO: 01-08 52. What was the reported balance of Harley’s Investment in Bike Co. at December 31, 2018? A) $2,400,000. B) $2,480,000. C) $2,500,000. D) $2,600,000. E) $2,680,000. Answer: E Learning Objective: 01-02 Topic: Equity method―Investment account balance Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: $2,480,000 + $320,000 - $120,000 = $2,680,000 REFERENCE: 01-09 On January 1, 2018, Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000, which approximated book value. During 2018, Barney paid dividends of $30,000 and reported a net loss of $70,000. [QUESTION] REFER TO: 01-09 53. What is the balance in the investment account on December 31, 2018? A) $1,900,000. B) $1,960,000. C) $2,000,000. D) $2,016,000. E) $2,028,000. Answer: B Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Learning Objective: 01-02 Topic: Equity method―Investment account balance Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: $2,000,000 - $28,000 - $12,000 = $1,960,000 [QUESTION] REFER TO: 01-09 54. What amount of equity income would Anderson recognize in 2018 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. Answer: E Learning Objective: 01-02 Topic: Equity method―Investment income Difficulty: 2 Medium Blooms: Apply AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: $70,000 Loss × 40% = $28,000 Loss [QUESTION] 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 intraentity sales must be deferred by Luffman? A) $ 0. B) $ 8,400. C) $28,000. D) $52,000. E) $80,000. Answer: A Learning Objective: 01-06 Topic: Intra–entity sales of inventory Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: $80,000 - $52,000 = $28,000 Income Recognized; None Deferred REFERENCE: 01-10

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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On January 3, 2018, 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 2018, Thomas reported net income of $300,000 and paid dividends of $100,000. On January 4, 2019, Roberts sold 15,000 shares for $800,000. [QUESTION] REFER TO: 01-10 56. 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. Answer: A Learning Objective: 01-05d Topic: Equity method―Investment income Topic: Report sale of equity investment Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $1,500,000 + $90,000 - $30,000 = $1,560,000 [QUESTION] REFER TO: 01-10 57. What is the gain/loss on the sale of the 15,000 shares? A) $ 0 B) $10,000 gain. C) $12,000 loss. D) $15,000 loss. E) $20,000 gain. Answer: E Learning Objective: 01-05d Topic: Report sale of equity investment Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $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 [QUESTION] REFER TO: 01-10 58. 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Answer: C Learning Objective: 01-05d Topic: Report sale of equity investment Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $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 [QUESTION] REFER TO: 01-10 59. What is the appropriate journal entry to record the sale of the 15,000 shares? A) B)

C)

D)

E)

Cash Investment in Thomas Cash Investment in Thomas Gain on sale of investment Cash Loss on investment Investment in Thomas Cash Investment in Thomas Gain on sale of investment Cash Loss on sale of investment Investment in Thomas

800,000 800,000 800,000 780,000 20,000 800,000 12,000 812,000 800,000 790,000 10,000 800,000 15,000 815,000

A) A Above. B) B Above. C) C Above. D) D Above. E) E Above. Answer: B Learning Objective: 01-05d Topic: Report sale of equity investment Difficulty: 3 Hard Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $20,000 Gain is only shown in Option B REFERENCE: 01-11 On January 4, 2018, 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 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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2018, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2019, Mason sold 10,000 shares for $150,000. [QUESTION] REFER TO: 01-11 60. 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. Answer: D Learning Objective: 01-02 Topic: Equity method―Investment account balance Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $560,000 + ($150,000 × 40%) – ($40,000 × 40%) = $604,000 [QUESTION] REFER TO: 01-11 61. 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. Answer: D Learning Objective: 01-05d Topic: Report sale of equity investment Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $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 [QUESTION] REFER TO: 01-11 62. 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. Answer: C Learning Objective: 01-05d Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Topic: Report sale of equity investment Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $604,000 - $151,000 = $453,000 [QUESTION] REFER TO: 01-11 63. What is the appropriate journal entry to record the sale of the 10,000 shares? A) B)

C)

D)

E)

Cash Investment in Hefly Cash Investment in Hefly Gain on sale of investment Cash Loss on investment Investment in Hefly Cash Investment in Hefly Gain on sale of investment Cash Loss on sale of investment Investment in Hefly

150,000 150,000 150,000 130,000 20,000 150,000 1,000 151,000 150,000 149,000 1,000 150,000 10,000 160,000

A) A Above B) B Above C) C Above D) D Above E) E Above Answer: C Learning Objective: 01-05d Topic: Report sale of equity investment Difficulty: 3 Hard Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $1,000 Loss only shown in Option C

REFERENCE: 01-12 On January 4, 2018, Bailey Corp. purchased 40% of the voting common stock of Emery Co., paying $3,000,000. Bailey properly accounts for this investment using the equity method. At the time of the investment, Emery’s total stockholders’ equity was $5,000,000. Bailey gathered the following information about Emery’s assets and liabilities whose book values and fair values differed: Buildings (20-year life) Equipment (5-year life)

Book Value $1,000,000 1,500,000

Fair Value $1,800,000 2,000,000

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Franchises (10-year life)

0

700,000

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Emery Co. reported net income of $400,000 for 2018, and paid dividends of $200,000 during that year. [QUESTION] REFER TO: 01-12 64. 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. Answer: C Learning Objective: 01-04 Topic: Equity method―Allocate cost of investment Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $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 [QUESTION] REFER TO: 01-12 65. How much goodwill is associated with this investment? A) $(500,000). B) $ 0. C) $ 100,000. D) $ 200,000. E) $2,000,000. Answer: D Learning Objective: 01-04 Topic: Equity method―Allocate cost of investment Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $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) [QUESTION] REFER TO: 01-12 66. What is the amount of excess amortization expense for Bailey’s investment in Emery for the first year? A) $ 0. B) $ 84,000. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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C) $100,000. D) $160,000. E) $400,000. Answer: B Learning Objective: 01-04 Topic: Equity method―Amortize allocations Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $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 REFERENCE: 01-13 On January 1, 2018, 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: Buildings (15-year life) Equipment (5-year life) Franchises (10-year life)

Book Value $1,000,000 2,500,000 0

Fair Value $1,500,000 3,000,000 500,000

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 2018, and paid dividends of $100,000 during that year. [QUESTION] REFER TO: 01-13 67. 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. Answer: E Learning Objective: 01-04 Topic: Equity method―Allocate cost of investment Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: $2,000,000 – ($3,000,000 × 30%) = $1,100,000 Price Paid > BV [QUESTION] REFER TO: 01-13 68. How much goodwill is associated with this investment? Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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A) $(500,000.) B) $ 0. C) $ 650,000. D) $1,000,000. E) $2,000,000. Answer: C Learning Objective: 01-04 Topic: Equity method―Allocate cost of investment Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $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) [QUESTION] REFER TO: 01-13 69. What is the amount of excess amortization expense for Jackie Corp’s investment in Rob Co. for year 2018? A) $ 0. B) $30,000. C) $40,000. D) $55,000. E) $60,000. Answer: D Learning Objective: 01-04 Topic: Equity method―Amortize allocations Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $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 [QUESTION] REFER TO: 01-13 70. What is the balance in Jackie Corp’s Investment in Rob Co. account at December 31, 2018? A) $2,000,000. B) $2,005,000. C) $2,060,000. D) $2,090,000. E) $2,200,000. Answer: B Learning Objective: 01-04 Topic: Equity method―Investment account balance Difficulty: 3 Hard Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: $2,000,000 + ($300,000 × 30%) – ($100,000 × 30%) – $55,000 = $2,005,000 REFERENCE: 01-14 Acker Inc. bought 40% of Howell Co. on January 1, 2017 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 2017 2018

Cost to Acker $55,000 $70,000

Transfer Price $ 75,000 $110,000

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

Howell reported net income of $100,000 in 2017 and $120,000 in 2018 while paying $40,000 in dividends each year. [QUESTION] REFER TO: 01-14 71. What is Acker’s share of the intra-entity inventory gross profit that should be deferred on December 31, 2017? A) $ 1,600. B) $ 4,000. C) $ 8,000. D) $15,000. E) $20,000. Answer: A Learning Objective: 01-06 Topic: Intra–entity sales of inventory Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $75,000 - $55,000 = $20,000 × ($15,000 / $75,000) = $4,000 × 40% = $1,600 Deferred itraentity gross profit [QUESTION] REFER TO: 01-14 72. What is Acker’s share of the intra-entity inventory gross profit that should be deferred on December 31, 2018? A) $ 1,600. B) $ 8,000. C) $15,000. D) $20,000. E) $40,000 Answer: B Learning Objective: 01-06 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Topic: Intra–entity sales of inventory Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $110,000 - $70,000 = $40,000 × ($55,000 / $110,000) = $20,000 × 40% = $8,000 Deferred intra-entity gross profit [QUESTION] REFER TO: 01-14 73. What is the Equity in Howell Income that should be reported by Acker in 2017? A) $10,000. B) $24,000. C) $36,000. D) $38,400. E) $40,000. Answer: D Learning Objective: 01-06 Topic: Deferral Intra–entity sales of inventory Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $100,000 × 40 % = $40,000 – ($1,600 Deferred intra-entity gross profit) = $38,400 [QUESTION] REFER TO: 01-14 74. What is the balance in Acker’s Investment in Howell account at December 31, 2017? A) $576,000. B) $598,400. C) $614,400. D) $606,000. E) $616,000. Answer: B Learning Objective: 01-06 Topic: Intra–entity sales of inventory Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $576,000 + ($100,000 × 40%) – ($40,000 × 40%) – ($1,600 Deferred intra-entity gross profit) = $598,400 [QUESTION] REFER TO: 01-14 75. What is the Equity in Howell Income that should be reported by Acker in 2018? A) $32,000. B) $41,600. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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C) $48,000. D) $49,600. E) $50,600. Answer: B Learning Objective: 01-06 Topic: Intra–entity sales of inventory Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $120,000 × 40 % = $48,000 + ($1,600 in 2017 Recognized intra-entity gross profit) – ($8,000 in 2018 Deferred intra-entity gross profit) = $41,600 [QUESTION] REFER TO: 01-14 76. What is the balance in Acker’s Investment in Howell account at December 31, 2018? A) $624,000. B) $636,000. C) $646,000. D) $656,000. E) $666,000. Answer: A Learning Objective: 01-06 Topic: Intra–entity sales of inventory Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: ($598,400 Balance 2017) + ($41,600 Income from 2018) – ($16,000 Dividend from 2018) = $624,000 REFERENCE: 01-15 Cayman Inc. bought 30% of Maya Company on January 1, 2018 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 2018 2019

Cost to Maya $30,000 $48,000

Transfer Price $45,000 $80,000

Amount Held by Cayman at Year-End $ 9,000 $20,000

Maya reported net income of $100,000 in 2018 and $120,000 in 2019 while paying $40,000 in dividends each year. [QUESTION] REFER TO: 01-15 77. What is the investor’s share of gross profit on intra-entity inventory sales that should be deferred on December 31, 2018? Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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A) $ 900. B) $3,000. C) $4,500. D) $6,000. E) $9,000. Answer: A Learning Objective: 01-06 Topic: Intra–entity sales of inventory Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $45,000 - $30,000 = $15,000 × ($9,000 / $45,000) = $3,000 × 30% = $900 Deferred intraentity gross profit [QUESTION] REFER TO: 01-15 78. What is the investor’s share of gross profit on intra-entity inventory sales that should be deferred on December 31, 2019? A) $1,500. B) $2,400. C) $3,600. D) $4,000. E) $8,000. Answer: B Learning Objective: 01-06 Topic: Intra–entity sales of inventory Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $80,000 - $48,000 = $32,000 × ($20,000 / $80,000) = $8,000 × 30% = $2,400 Deferred intraentity gross profit [QUESTION] REFER TO: 01-15 79. What is the Equity in Maya Income that should be reported by Cayman in 2018? A) $17,100. B) $18,000. C) $25,500. D) $29,100. E) $30,900. Answer: D Learning Objective: 01-06 Topic: Intra–entity sales of inventory Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: FN Measurement Feedback: $100,000 × 30% = $30,000 - $900 Share of Deferred gross profit on intra-entity inventory sales = $29,100 [QUESTION] REFER TO: 01-15 80. What is the balance in Cayman’s Investment in Maya account at December 31, 2018? A) $463,500. B) $467,100. C) $468,000. D) $468,900. E) $480,000. Answer: B Learning Objective: 01-06 Topic: Intra–entity sales of inventory Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $450,000 + ($100,000 × 30% = $30,000 - $900 Deferred) – ($40,000 Dividends × 30%) = $467,100 [QUESTION] REFER TO: 01-15 81. What is the Equity in Maya Income that should be reported by Cayman in 2019? A) $34,200. B) $34,800. C) $34,500. D) $36,000. E) $37,800. Answer: C Learning Objective: 01-06 Topic: Intra–entity sales of inventory Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $120,000 × 30% = $36,000 + ($900 from 2018) – ($2,400 from 2019 Deferral) = $34,500 [QUESTION] REFER TO: 01-15 82. What is the balance in Cayman’s Investment in Maya account at December 31, 2019? A) $488,700. B) $489,600. C) $492,000. D) $494,400. E) $514,500. Answer: B Learning Objective: 01-06 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Topic: Intra–entity sales of inventory Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $467,100 + $34,500 - $12,000 = $489,600 [QUESTION] 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. Answer: D Learning Objective: 01-06 Topic: Deferral of Intra-Entity Gross Profits in Inventory Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: A Learning Objective: 01-06 Topic: Intra–entity sales of inventory Difficulty: 1 Easy Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: C Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Learning Objective: 01-06 Topic: Intra–entity sales of inventory Difficulty: 1 Easy Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: D Learning Objective: 01-06 Topic: Intra–entity sales of inventory Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement REFERENCE: 01-16 Renfroe, Inc. acquired 10% of Stanley Corporation on January 1, 2017, for $90,000 when the book value of Stanley was $1,000,000. During 2017, 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, 2018, 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 2018, Renfroe reported net income of $320,000 and paid dividends of $50,000. [QUESTION] REFER TO: 01-16 87. How much is the adjustment to the Investment in Stanley Corporation for the change from the fairvalue method to the equity method on January 1, 2018? 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. Answer: E Learning Objective: 01-03 Topic: Report change to equity method Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: The change is prospective only. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 01-16 88. What is the balance in the Investment in Stanley Corporation on December 31, 2018? A) $415,000. B) $512,500. C) $523,000. D) $539,500. E) $544,500. Answer: C Learning Objective: 01-03 Learning Objective: 01-05a Topic: Report change to equity method Topic: Equity method―Investment account balance Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $90,000 2017 Cost + $325,000 2018 Cost + ($320,000 Income × 40%) – ($50,000 Dividends × 40%) = $523,000 REFERENCE: 01-17 On January 4, 2017, 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 2017, Inkblot reported net income of $500,000 and paid dividends of $300,000. The fair value of Inkblot at December 31, 2017 is $7,000,000. Trycker elects the fair value option for its investment in Inkblot. [QUESTION] REFER TO: 01-17 89. How are dividends received from Inkblot reflected in Trycker’s accounting records for 2017? 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. Answer: E Learning Objective: 01-07 Topic: Report using fair-value accounting option Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $300,000 × 40% = $120,000 Credit to the Dividend Income Account Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 01-17 90. At what amount will Inkblot be reflected in Trycker’s December 31, 2017 balance sheet? A) $2,400,000. B) $2,280,000. C) $2,480,000. D) $2,800,000. E) $7,000,000. Answer: D Learning Objective: 01-07 Topic: Report using fair-value accounting option Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $7,000,000 FV × 40 % = $2,800,000 at December 31, 2017

Essay: [QUESTION] 91. 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. Answer: (1) A; (2) D; (3) B; (4) D; (5) D; (6) D; (7) D; (8) D; (9) B; (10) C; (11) A; (12) B Learning Objective: 01-01 Learning Objective: 01-02 Learning Objective: 01-03 Learning Objective: 01-05a Learning Objective: 01-05d Learning Objective: 01-06 Topic: Investments―Fair-value method Topic: Equity method―Significant influence criterion Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Topic: Equity method―Investment income Topic: Report change to equity method Topic: Report sale of equity investment Topic: Intra–entity sales of inventory Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 92. 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? Answer: 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. Learning Objective: 01-01 Topic: Investments―Fair-value method Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 93. 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? Answer: Idler should discontinue the use of the equity method. The investment would have a zero balance until investee profits eliminate unrecognized losses. Learning Objective: 01-05c Topic: Report investee losses Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 94. 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? Answer: 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; and (5) the extent of investor Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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ownership and the concentration of other ownership interests in the investee; (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. Learning Objective: 01-02 Topic: Equity method―Significant influence criterion Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 95. 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? Answer: 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. Learning Objective: 01-02 Topic: Equity method―Significant influence criterion Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 96. How does the use of the equity method affect the investor’s financial statements? Answer: The use of the equity method influences the investor’s income statement and balance sheet. On the income statement, the investor’s total revenues 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. Learning Objective: 01-02 Topic: Equity method―Investment income Topic: Equity method―Investment account balance Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] 97. What is the primary objective of the equity method of accounting for an investment? Answer: 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. Learning Objective: 01-01 Topic: Equity method―Significant influence criterion Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 98. What is the justification for the timing of recognition of income under the equity method? Answer: 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. Learning Objective: 01-02 Topic: Equity method―Significant influence criterion Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 99. What argument could be made against the equity method? Answer: 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. Learning Objective: 01-02 Topic: Equity method―Significant influence criterion Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 100. How would a change be made from the equity method to the fair value method of accounting for investments? Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Answer: 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. Learning Objective: 01-03 Topic: Equity method―Investment income Difficulty: 3 Hard Blooms: Remember AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 101. How should an investor account for, and report, an investee’s other comprehensive income (or loss)? Answer: The investor should account for other comprehensive income or loss by including it in an 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). Learning Objective: 01-05b Topic: Report investee OCI Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 102. When should an investor not use the equity method for an investment of 21% in another corporation? Answer: When the investor does not have significant influence with regard to the investee. Learning Objective: 01-02 Topic: Equity method―Significant influence criterion Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 103. What is the primary objective of the fair value method of accounting for an investment? Answer: The investor possesses only a small percentage of an investee and cannot expect to have a significant impact on the operations or decision-making 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. Learning Objective: 01-01 Topic: Investments―Fair-value method Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 104. How would a change be made from the fair value method to the equity method of accounting for investments? Answer: 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. Learning Objective: 01-05a Topic: Report change to equity method Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 105. 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? Answer: 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. Learning Objective: 01-07 Topic: Report using fair-value accounting option Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement Problems: [QUESTION] 106. Charlie Co. owns 30% of the voting common stock of Turf Services Inc. Charlie uses the equity method to account for its investment. On January 1, 2018, the balance in the investment account was $624,000. During 2018, Turf Services reported net income of $120,000 and paid dividends of $30,000. 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, 2018? Answer:

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Investment in Turf Services Inc.: Balance at January 1, 2018 2018 equity income accrual ($120,000 × 30%) 2018 dividends ($30,000 × 30%) Balance at December 31, 2018

$ 624,000 36,000 ( 9,000) $ 651,000

Learning Objective: 01-02 Topic: Equity method―Investment account balance Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 107. Tinker Co. owns 25% of the common stock of Harbor Co. and uses the equity method to account for the investment. During 2018, 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 2018 related to this investment. Answer:

2016 equity income accrual ($120,000 × 25%) 2016 amortization on purchase ($80,000 ÷ 20 × 25%) 2016 equity income

$ 30,000 ( 1,000) $ 29,000

Learning Objective: 01-04 Topic: Equity method―Investment income Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 108. Aqua Corp. purchased 30% of the common stock of Marcus Co. by paying $500,000. Of this amount, $50,000 is associated with goodwill. Required: Prepare the journal entry to record Aqua’s investment. Answer:

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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The journal entry is: Investment in Marcus Co 500,000 Cash 500,000 The amount of goodwill does not affect the journal entry used to record the investment. Learning Objective: 01-04 Topic: Equity method―Basic journal entries Topic: Equity method―Allocate cost of investment Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 109. On January 2, 2018, 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 2018, 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, 2018. Answer: 1) Purchase price Net book value ($1,800,000 × 25%) Goodwill

$ 500,000 (450,000) $ 50,000

2) Investment in Jones Corp.: Acquisition price 2018 equity loss accrual ($60,000 × 25%) 2018 dividends ($100,000 × 25%) Balance at December 31, 2018

$ 500,000 ( 15,000) ( 25,000) $ 460,000

Learning Objective: 01-02 Learning Objective: 01-04 Topic: Equity method―Allocate cost of investment Topic: Equity method―Investment account balance Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 110. On January 3, 2018, Jenkins Corp. acquired 40% of the outstanding common stock of Bolivar Co. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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for $1,200,000. This acquisition gave Jenkins the ability to exercise significant influence over the investee. The book value of the acquired shares was $950,000. Any excess cost over the underlying book value was assigned to a patent that was undervalued on Bolivar’s balance sheet. This patent has a remaining useful life of ten years. For the year ended December 31, 2018, Bolivar reported net income of $312,000 and paid cash dividends of $96,000.

Required: Prepare a schedule to show the balance Jenkins should report as its Investment in Bolivar Co. at December 31, 2018. Answer:

Investment in Bolivar Co.: Acquisition price Equity income ($312,000 × 40%) Dividends ($96,000 × 40%) Excess patent amortization ($1,200,000 – $950,000 ÷ 10) Balance at December 31, 2018

$ 1,200,000 124,800 ( 38,400) ( 25,000) $ 1,261,400

Learning Objective: 01-04 Topic: Equity method―Investment account balance Topic: Equity method―Amortize allocations Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 111. On January 1, 2018, 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 2018, Cranston reported net income of $100,000 and paid cash dividends of $30,000. Spark sold inventory costing $40,000 to Cranston during 2018 for $50,000. Cranston used all of this merchandise in its operations during 2018. 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 2018 to apply the equity method to this investment. Answer:

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

250,000

Investment in Cranston Inc.

40,000

250,000

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 1-48

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

40,000

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

12,000 12,000

Equity in Investee Income 3,900 Investment in Cranston Inc. To reflect amortization of trademark excess over book value acquired. **Note: All merchandise was used, so no deferral entry is needed.

3,900

Learning Objective: 01-02 Learning Objective: 01-03 Learning Objective: 01-04 Learning Objective: 01-06 Topic: Equity method―Basic journal entries Topic: Equity method―Investment income Topic: Equity method―Amortize allocations Topic: Intra–entity sales of inventory Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 112. Wathan Inc. sold $180,000 in inventory to Miller Co. during 2017, for $270,000. Miller resold $108,000 of this merchandise in 2017 with the remainder to be disposed of during 2018.

Required: Assuming Wathan owns 25% of Miller and applies the equity method, prepare the journal entry Wathan should have recorded at the end of 2017 to defer gross profit on intra-entity inventory sales. Answer: Ending inventory ($270,000 - $108,000) Gross profit markup ($90,000 ÷ $270,000) Gross profit on intra-entity inventory sales Ownership percentage Wathan’s share intra-entity inventory gross profit to defer to subsequent year

$162,000 x 1/3 $ 54,000 x 25% $ 13,500

Equity Income – Investment in Miller Co. Investment in Miller Co.

13,500 13,500

Learning Objective: 01-06 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 1-49

Topic: Intra–entity sales of inventory Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 113. 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 2018, Kinson reported earnings of $100,000 and paid cash dividends of $40,000. During 2018, Kinson acquired inventory for $62,400, which was then sold to Jager for $96,000. At the end of 2018, 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 2018. Equity in investee income: Equity income accrual ($100,000 × 30%) Deferral of share of intra-entity gross profit (below) Amortization (given) Equity in investee income

$ 30,000 ( 5,250) ( 11,000) $ 13,750

Deferral of its share of intra-entity gross profit: Remaining inventory — end of year Gross profit percentage ($33,600 ÷ $96,000) Profit within remaining inventory Ownership percentage Share of intra-entity gross profit

$ 50,000 × 35% $ 17,500 × 30% $ 5,250

Answer: Learning Objective: 01-06 Topic: Intra–entity sales of inventory Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 1-50

[QUESTION] 114. On January 2, 2017, 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 2017, the balance in the investment account was $620,000. On January 2, 2018, Hull sold 12,000 shares of Oliver stock for $12 per share. For 2018, 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 2018. Answer: A) Cash Loss on Sale of Investment Investment in Oliver Co.

B)

144,000 11,000 155,000

Calculation of loss: (12,000 × $12) – [($620,000  48,000) × 12,000]

$ 11,000

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%

D)

To account for the investments, the fair-value method should be used.

E)

Cash Dividend Revenue

5,400 5,400

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

$ 5,400

Learning Objective: 01-01 Learning Objective: 01-05d Topic: Investments―Fair-value method Topic: Report sale of equity investment Difficulty: 3 Hard Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 115. On January 1, 2018, Jolley Corp. paid $250,000 for 25% of the voting common stock of Tige Co. On that date, the book value of Tige 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. Tige owned a trademark valued at $90,000 over cost that was to be amortized over 20 years. During 2018, Tige 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. Tige reported net income of $200,000 during 2018. This amount included a gain of $35,000. Tige paid dividends totaling $40,000. Required: Prepare all of Jolley’s journal entries for 2018 in relation to Tige Co. Assume the equity method is appropriate for use. Answer: Required journal entries: Investment in Tige Co. Cash To record the initial investment in Tige Co.

250,000 250,000

Investor Cost of Intra-Entity Inventory Cash To record the purchase of inventory from Tige Co.

90,000

Investment in Tige Co. Equity in Tige Co. Income Gain of Tige Co. To record share of Tige Co.’s income.

50,000

Cash Investment in Tige Co. To record the receipt of dividend.

10,000

Equity in Tige Co. Income Investment in Tige Co. To record amortizations.

1,875

Equity in Tige Co. Income Investment in Tige Co. To defer its share of gross profit on Intra-Entity.

2,750

90,000

41,250 8,750

10,000

1,875

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

2,750

$ 41,250

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 1-52

Calculation of unusual gain of Tige Co.: $35,000 × 25%

$ 8,750

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 Cost Gross profit GP % = 30,000/90,000 = Remaining inventory = Intra-entity gross profit remaining in ending inventory Jolley’s ownership % Deferred gross profit on intra-entity inventory sales

$

750 1,125 $ 1,875

$90,000 ( 60,000) $30,000 1/3 $33,000 ﾗ $11,000 x 25% $ 2,750

Learning Objective: 01-02 Learning Objective: 01-03 Learning Objective: 01-04 Learning Objective: 01-06 Topic: Equity method―Basic journal entries Topic: Equity method―Amortize allocations Topic: Equity method―Investment income Topic: Intra–entity sales of inventory

Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 116. On January 1, 2017, 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 2017 and a loss of $120,000 in 2018. In each of these two years, Ramp paid a cash dividend of $70,000 to its stockholders. During 2017, 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 2017 and the remainder was sold during 2018. In 2018, Ramp sold inventory to Pond for $180,000. This inventory had cost only $108,000. Pond resold $120,000 of the inventory during 2018 and the rest during 2019. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 1-53

Required: For 2017 and then for 2018, calculate the equity income to be reported by Pond for external reporting purposes. Answer: Equity Income-2017: Basic equity accrual ($300,000 × 40%) Amortization (Schedule 1) Deferred intra-entity gross profit (Schedule 2) Equity income – 2017

$120,000 (6,000) (3,600) $110,400

Equity Income (Loss) – 2018: Basic equity accrual [($120,000) × 40%] Amortization (Schedule 1) Recognition of 2017 deferred intra-entity gross profit (Schedule 2) Deferral of 2018 gross profit on intra- entity inventory sales (Schedule 3) Equity income (loss) – 2018

($48,000) ( 6,000) 3,600 ( 9,600) ($ 60,000)

Schedule 1 Life Acquisition price Book value equivalence ($1,500,000 × 40%) Payment in excess of book value Excess payment identified with specific assets Building ($180,000 × 40%) Excess payment not identified with specific accounts

Annual Amortization

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

72,000 $ 28,000

12 yrs

$

6,000

________ $ 6,000

Schedule 2 Inventory remaining at December 31, 2017 ($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 12/31/17 (to be deferred until recognized in 2018)

$ 24,000 × 37.5% $ 9,000 × 40.0% $

3,600

Schedule 3 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 1-54

Inventory remaining at December 31, 2018 ($180,000 - $120,000) Gross profit percentage ($72,000  $180,000) Gross profit on intra-entity inventory sales Investor ownership percentage Deferred intra-entity gross profit -12/31/18 (to be deferred until recognized in 2019)

$ 60,000 × 40.0% $ 24,000 × 40.0% $

9,600

Learning Objective: 01-03 Learning Objective: 01-04 Learning Objective: 01-06 Topic: Equity method―Allocate cost of investment Topic: Equity method―Amortize allocations Topic: Equity method―Investment income Topic: Intra–entity sales of inventory Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 117. Pursley, Inc. acquires 10% of Ritz Corporation on January 3, 2017, 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, 2017. During 2017 Ritz reported net income of $125,000 and paid dividends of $30,000. On January 10, 2018, 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 1, 2018? Answer: Investment in Ritz 325,000 Cash To record the purchase of an additional 20% share in Ritz Corporation

325,000

Additionally, if the fair value of the original 10% shares differed on January 10, 2018, than it did on December 31, 2017, 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 10, 2018. Learning Objective: 01-5a Topic: Report change to equity method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 1-55

REFERENCE: 01-18 Steven Company owns 40% of the outstanding voting common stock of Nicole Corp. and has the ability to significantly influence the investee’s operations. On January 3, 2018, the balance in the Investment in Nicole Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2018, Nicole earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2017, Nicole 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 2017; the remainder was sold in 2018. Additional sales were made to Steven in 2018 at an intra-entity selling price of $75,000. The goods in the intra-entity sales cost Nicole $54,000. Only 10% of the 2018 intra-entity purchases from Nicole had not been sold to outsiders by the end of 2018. [QUESTION] REFER TO: 01-18 118. What amount of gross profit on 2017 intra-entity sales should Steven defer at December 31, 2017? Answer: [($50,000 - $35,000) × .25 × .40] = $1,500 Learning Objective: 01-06 Topic: Intra–entity sales of inventory Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 01-18 119. What amount of gross profit on 2018 intra-entity sales should Steven defer at December 31, 2018? Answer: [($75,000 - $54,000) × .10 × .40] = $840 Learning Objective: 01-06 Topic: Intra–entity sales of inventory Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 01-18 120. What amount of equity income would Steven have recognized in 2018 from its ownership interest in Nicole? Answer: [($120,000 × .4) - $12,000 - $840 + $1,500] = $36,660 Learning Objective: 01-04 Learning Objective: 01-06 Topic: Equity method―Investment income Topic: Intra–entity sales of inventory Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 1-56

AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 01-18 121. What was the balance in the Investment in Nicole Corp. account at December 31, 2018? Answer: [$503,000 + $36,660 – ($40,000 × .4)] = $523,660 Learning Objective: 01-03 Learning Objective: 01-04 Learning Objective: 01-06 Topic: Equity method―Amortize allocations Topic: Equity method―Investment account balance Topic: Intra–entity sales of inventory Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 1-57

File: Chapter 02 - Consolidation of Financial Information Multiple Choice: [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. Answer: C Learning Objective: 02-04 Learning Objective: 02-05 Topic: Acquisition―Valuation principles Topic: Acquisition―Allocate fair value Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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 Book Value Book Value Fair Value Fair Value Cost

Subsidiary Book Value Fair Value Fair Value Book Value Cost

Answer: B Learning Objective: 02-04 Learning Objective: 02-05 Topic: Acquisition―Valuation principles Topic: Acquisition―Allocate fair value Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 2-1

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. Answer: A Learning Objective: 02-07 Topic: Consolidation worksheet Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: D Learning Objective: 02-04 Learning Objective: 02-05 Topic: Acquisition―Valuation principles Topic: Acquisition―Calculate goodwill or bargain Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 5. Direct combination costs and amounts incurred to register and issue stock in connection with a business combination. How should those costs be accounted for in a pre-2009 business combination? Direct Combination Costs Stock Issuance Costs A) Increase Investment Decrease Investment B) Increase Investment Decrease Additional Paid-in Capital C) Increase Investment Increase Expenses D) Decrease Additional Paid-in Capital Increase Investment E) Increase Expenses Decrease Investment Answer: B Learning Objective: 02-09 Topic: Legacy methods―Purchase and pooling Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 2-2

AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 6. How are direct and indirect costs accounted for when applying the acquisition method for a business combination?

Answer: A Learning Objective: 02-06b Topic: Costs of combination Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: E Learning Objective: 02-03 Learning Objective: 02-06a Learning Objective: 02-06c Topic: Business combination―Differentiate across forms Topic: Journal entry―Dissolution Topic: Journal entry―Investment with no dissolution Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 8. According to GAAP, which of the following is true with respect to the pooling of interest method of accounting for business combinations? A) It was the only method used prior to 2002. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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. Answer: C Learning Objective: 02-09 Topic: Legacy methods―Purchase and pooling Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: C Learning Objective: 02-03 Topic: Business combination―Differentiate across forms Difficulty: 3 Hard Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: D Learning Objective: 02-08 Topic: In-process research and development Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: FN Measurement [QUESTION] 11. Which of the following statements is true regarding the acquisition method of accounting for a business combination? 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. Answer: B Learning Objective: 02-04 Topic: Acquisition―Valuation principles Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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 plus 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. Answer: C Learning Objective: 02-04 Topic: Acquisition―Valuation principles Difficulty: 3 Hard Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: A Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Learning Objective: 02-03 Topic: Business combination―Differentiate across forms Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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? 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. Answer: C Learning Objective: 02-06b Topic: Costs of combination Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement REFERENCE: 02-01 Bullen Inc. acquired 100% of the voting common stock of Vicker Inc. on January 1, 2018. The book value and fair value of Vicker's accounts on that date (prior to creating the combination) are as follows, along with the book value of Bullen's accounts:

Retained earnings, 1/1/20 Cash and receivables Inventory Land Buildings (net) Equipment (net) Liabilities Common stock Additional paid-in capital

Bullen Book Value $250,000 170,000 230,000 280,000 480,000 120,000 650,000 360,000 20,000

Vicker Book Value $240,000 70,000 170,000 220,000 240,000 90,000 430,000 80,000 40,000

Vicker Fair Value $70,000 210,000 240,000 270,000 90,000 420,000

[QUESTION] REFER TO: 02-01 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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15. Assume that Bullen issued 12,000 shares of common stock, with a $5 par value and a $47 fair value, to obtain all of Vicker's outstanding stock. In this acquisition transaction, how much goodwill should be recognized? A) $144,000. B) $104,000. C) $ 64,000. D) $ 60,000. E) $ 0. Answer: B Learning Objective: 02-05 Topic: Acquisition―Calculate consideration transferred Topic: Acquisition―Calculate goodwill or bargain Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Goodwill = Consideration Transferred less Acquisition Date Fair Value of Net Assets Acquired and Liabilities Assumed Consideration Transferred: $47 × 12,000 = $564,000 Fair Value of Assets Acquired: 70,000 (cash and receivables) + 210,000 (inventory) + 240,000 (land) + 270,000 (buildings) + 90,000 (equipment) = $880,000 Fair Value of Liabilities Assumed: $420,000 Consideration Less Net Assets/Liabilities = $880,000 - $420,000 = $460,000 Goodwill: $564,000 - $460,000 = $104,000 [QUESTION] REFER TO: 02-01 16. Assume that Bullen issued 12,000 shares of common stock with a $5 par value and a $47 fair value for all of the outstanding stock of Vicker. What is the consolidated balance for Land as a result of this acquisition transaction? A) $460,000. B) $510,000. C) $500,000. D) $520,000. E) $490,000. Answer: D Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Allocate fair value Topic: Acquisition―Calculate consolidated balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: $280,000 (Bullen Land) + $240,000 (Vicker Land) = $520,000 [QUESTION] REFER TO: 02-01 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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17. Assume that Bullen issued 12,000 shares of common stock with a $5 par value and a $47 fair value for all of the outstanding shares of Vicker. What will be the consolidated Additional PaidIn Capital and Retained Earnings (January 1, 2018 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) $524,000 and $250,000. E) $524,000 and $420,000. Answer: D Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Calculate consideration transferred Topic: Acquisition―Calculate consolidated balances Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Consolidated Additional Paid-In Capital = Bullen APIC ($20,000) + APIC related to stock issued in connection with Vicker business combination ($42 × 12,000) = $20,000 + $504,000 = $524,000 Bullen’s Retained Earnings: $250,000 [QUESTION] REFER TO: 02-01 18. Assume that Bullen issued preferred stock with a par value of $240,000 and a fair value of $500,000 for all of the outstanding shares of Vicker in an acquisition business combination. What will be the balance in the consolidated Inventory and Land accounts? A) $440,000, $496,000. B) $440,000, $520,000. C) $425,000, $505,000. D) $400,000, $500,000. E) $427,000, $510,000. Answer: B Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Allocate fair value Topic: Acquisition―Calculate consolidated balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Inventory $230,000 BV + $210,000 FV = $440,000 Land $280,000 BV + $240,000 FV = $520,000 [QUESTION] REFER TO: 02-01 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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19. Assume that Bullen paid a total of $480,000 in cash for all of the shares of Vicker. In addition, Bullen paid $35,000 for secretarial and management time allocated to the acquisition transaction. What will be the balance in consolidated goodwill? A) $ 0. B) $20,000. C) $35,000. D) $55,000. E) $65,000. Answer: B Learning Objective: 02-05 Learning Objective: 02-06b Topic: Acquisition―Calculate goodwill or bargain Topic: Costs of combination Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Fair value of consideration transferred less fair value of net assets = goodwill $480,000 – (70,000+210,000+240,000+270,000+90,000-420,000) = $20,000 Excess REFERENCE: 02-02 Prior to being united in a business combination, Botkins Inc. and Volkerson Corp. had the following stockholders' equity figures:

Common stock ($1 par value) Additional paid-in capital Retained earnings

Botkins $ 220,000 110,000 360,000

Volkerson $ 54,000 25,000 130,000

Botkins issued 56,000 new shares of its common stock valued at $3.25 per share for all of the outstanding stock of Volkerson. [QUESTION] REFER TO: 02-02 20. Assume that Botkins acquired Volkerson on January 1, 2017 and that Volkerson maintains a separate corporate existence. At what amount did Botkins record the investment in Volkerson? A) $ 56,000. B) $182,000. C) $209,000. D) $261,000. E) $312,000. Answer: B Learning Objective: 02-06c Topic: Journal entry―Investment with no dissolution Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $3.25 × 56,000 = $182,000 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 02-02 21. Assume that Botkins acquired Volkerson on January 1, 2017. Immediately afterwards, what is the value of the consolidated Common Stock? A) $456,000. B) $402,000. C) $274,000. D) $276,000. E) $330,000. Answer: D Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Calculate consideration transferred Topic: Acquisition―Calculate consolidated balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $220,000 + ($1.00 × 56,000) = $276,000 [QUESTION] 22. Chapel Hill Company had common stock of $350,000 and retained earnings of $490,000. Blue Town Inc. had common stock of $700,000 and retained earnings of $980,000. On January 1, 2018, Blue Town issued 34,000 shares of common stock with a $12 par value and a $35 fair value for all of Chapel Hill 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? A) $2,520,000. B) $1,190,000. C) $1,680,000. D) $2,870,000. E) $2,030,000. Answer: D Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Calculate goodwill or bargain Topic: Acquisition―Calculate consolidated balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Consideration Transferred = Net Fair Value of Assets Acquired and Liabilities Assumed Consideration Transferred: $35 per share × 34,000 shares = $1,190,000 Net Fair Value of Assets/Liabilities: $700,000 + $980,000 = $1,680,000 Total: $1,190,000 + $1,680,000 = $2,870,000 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] 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. Answer: E Learning Objective: 02-01 Topic: Business combination―Reasons to combine Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: C Learning Objective: 02-03 Topic: Business combination―Differentiate across forms Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 25. Which of the following statements is true regarding a statutory consolidation? 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 consolidation is no longer a legal option. Answer: A Learning Objective: 02-03 Topic: Business combination―Differentiate across forms Difficulty: 2 Medium Blooms: Remember Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: A Learning Objective: 02-04 Learning Objective: 02-05 Topic: Acquisition―Valuation principles Topic: Acquisition―Allocate fair value Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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? 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. Answer: C Learning Objective: 02-04 Learning Objective: 02-05 Topic: Acquisition―Valuation principles Topic: Acquisition―Calculate goodwill or bargain Difficulty: 1 Easy Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 28. Which of the following statements is true regarding the acquisition method of accounting for a business combination? Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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. Answer: A Learning Objective: 02-04 Topic: Acquisition―Valuation principles Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: C Learning Objective: 02-09 Topic: Legacy methods―Purchase and pooling Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement REFERENCE: 02-03 The financial statements for Goodwin, Inc., and Corr Company for the year ended December 31, 2018, prior to the business combination whereby Goodwin acquired Corr, are as follows (in thousands):

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Revenues Expenses Net income

Goodwin $2,700 1,980 $ 720

Corr $600 400 $200

Retained earnings 1/1 Net income Dividends Retained earnings, 12/31

$2,400 720 (270) $2,850

$400 200 (0) $600

Cash Receivables and inventory Buildings (net) Equipment (net) Total assets

$ 240 1,200 2,700 2,100 $6,240

$ 220 340 600 1,200 $2,360

Liabilities Common stock Additional paid-in capital Retained earnings Total liabilities & stockholders’ equity

$1,500 1,080 810 2,850 $6,240

$ 820 400 540 600 $2,360

On December 31, 2018, Goodwin obtained a loan for $600 and used the proceeds, along with the transfer of 30 shares of its $10 par value common stock, in exchange for all of Corr’s common stock. At the time of the transaction, Goodwin’s common stock had a fair value of $40 per share. In connection with the business combination, Goodwin paid $25 to a broker for arranging the transaction and $35 in stock issuance costs. At the time of the transaction, Corr's equipment was actually worth $1,400 but its buildings were only valued at $560. [QUESTION] REFER TO: 02-03 30. Assuming that Corr retains a separate corporate existence after this acquisition, at what amount is the investment recorded on Goodwin's books? A) $1,540. B) $1,800. C) $1,860. D) $1,825. E) $1,625. Answer: B Learning Objective: 02-06b Learning Objective: 02-06c Topic: Costs of combination Topic: Journal entry―Investment with no dissolution Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Feedback: $600 Cash + ($40 per share × 30 shares) = $1,800 Investment [QUESTION] REFER TO: 02-03 31. In this acquisition business combination, what total amount of common stock and additional paid-in capital should Goodwin recognize on its consolidated financial statements? A) $ 265. B) $1,165. C) $1,200. D) $1,235. E) $1,765. Answer: B Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-06b Learning Objective: 02-07 Topic: Acquisition―Calculate consideration transferred Topic: Costs of combination Topic: Acquisition―Calculate consolidated balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Total for Common Stock equals par value of stock; with respect to stock issued, APIC is adjusted by the amount fair value exceeds par value + stock issuance costs. Common Stock: $10 par value per share x 30 shares = $300 APIC: Excess Value of Stock Over Par = $30 x 30 shares = $900 APIC: Stock Issuance Costs = $35 Total APIC = $300 + $900 - $35 = $1,165 [QUESTION] REFER TO: 02-03 32. Compute the consolidated revenues for 2018. A) $2,700. B) $ 720. C) $ 920. D) $3,300. E) $1,540. Answer: A Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Calculate consolidated balances Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $2,700 Parent’s Revenue Only [QUESTION] Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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REFER TO: 02-03 33. Compute the consolidated receivables and inventory for 2018. A) $1,200. B) $1,515. C) $1,540. D) $1,800. E) $2,140. Answer: C Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Allocate fair value Topic: Acquisition―Calculate consolidated balances Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $1,200 + $340 = $1,540 [QUESTION] REFER TO: 02-03 34. Compute the consolidated expenses for 2018. A) $1,980. B) $2,005. C) $2,040. D) $2,380. E) $2,405. Answer: B Learning Objective: 02-06a Learning Objective: 02-06b Learning Objective: 02-07 Topic: Costs of combination Topic: Acquisition―Calculate consolidated balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Consolidated Expenses = Goodwin’s Expenses + Corr’s Expenses immediately following the transaction Goodwin’s Expenses = $1,980 (2018 Expenses Reported on Financial Statements) + $25 (Fees Expensed as Incurred) = $2,005 [QUESTION] REFER TO: 02-03 35. Compute the consolidated cash account at December 31, 2018. A) $460. B) $425. C) $400. D) $435. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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E) $240. Answer: C Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-06b Learning Objective: 02-07 Topic: Acquisition―Calculate consideration transferred Topic: Costs of combination Topic: Acquisition―Calculate consolidated balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Consolidated Cash Equals Goodwin’s Cash + Corr’s Cash – Cash to Pay Costs and Expenses Related to Business Combination Goodwin’s Cash: $240 Corr’s Cash: $220 Costs and Expenses: $25 + $35 = $60 Consolidated Total = $240 + $220 = $460 – ($25 + $35) = $400 [QUESTION] REFER TO: 02-03 36. Compute the consolidated buildings (net) account at December 31, 2018. A) $2,700. B) $3,370. C) $3,300. D) $3,260. E) $3,340. Answer: D Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Allocate fair value Topic: Acquisition―Calculate consolidated balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Consolidated Value of Buildings Determined by adding the book value of Goodwin’s buildings ($2,700) to the Fair Value of Corr’s buildings ($560 FV) = $3,260 [QUESTION] REFER TO: 02-03 37. Compute the consolidated equipment (net) account at December 31, 2018. A) $2,100. B) $3,500. C) $3,300. D) $3,000. E) $3,200. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Answer: B Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition method―Allocate fair value Topic: Acquisition―Calculate consolidated balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Consolidated Value of Equipment (net) Determined by adding the book value of Goodwin’s Equipment Account ($2,100) to the Fair Value of Corr’s Equipment (net) ($1,400) for a total consolidated fair value of $3,500 [QUESTION] REFER TO: 02-03 38. Compute the consideration transferred for this acquisition at December 31, 2018. A) $ 900. B) $1,165. C) $1,200. D) $1,765. E) $1,800. Answer: E Learning Objective: 02-05 Topic: Acquisition―Calculate consideration transferred Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Consideration transferred equals fair value of cash ($600) + fair value of Goodwin stock issued ($40 per share × 30 shares) = $600 + $1,200 = $1,800 [QUESTION] REFER TO: 02-03 39. Compute the goodwill arising from this acquisition at December 31, 2018. A) $ 0. B) $100. C) $125. D) $160. E) $ 45. Answer: B Learning Objective: 02-05 Topic: Acquisition―Calculate goodwill or bargain Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Feedback: Goodwill equals excess of: (i) fair value of assets received and liabilities assumed; less (ii) consideration paid. Fair value of assets received: $220 cash + $340 receivables and inventory + $560 fair value of buildings (net) + $1,400 fair value of equipment (net) = $2,520 Fair value of liabilities assumed: $820 Consideration paid: $600 cash + FV of common stock ($40 × 30 = $1,200) = $1,800 Goodwill = Consideration Paid ($1,800) less Fair Value of assets received and liabilities assumed ($2,520 assets received - $820 liabilities assumed = $1,700) = $1,800 - $1,700 = $100 [QUESTION] REFER TO: 02-03 40. Compute the consolidated common stock account at December 31, 2018. A) $1,080. B) $1,480. C) $1,380. D) $2,280. E) $2,680. Answer: C Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Calculate consideration transferred Topic: Acquisition―Calculate consolidated balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Goodwin Stock (par value $1,080) + Stock Issued for Corr (par value $10 × 30 shares) = $1,080 + $300 = $1,380 [QUESTION] REFER TO: 02-03 41. Compute the consolidated additional paid-in capital at December 31, 2018. A) $ 810. B) $1,350. C) $1,675. D) $1,910. E) $1,875. Answer: C Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-06b Learning Objective: 02-07 Topic: Acquisition―Calculate consideration transferred Topic: Costs of combination Topic: Acquisition―Calculate consolidated balances Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: FN Measurement Feedback: Goodwin’s APIC total ($810) + Corr’s APIC total Corr’s APIC total: Excess of FV of shares issued on combination to Corr over par value, ($40 $10) × 30 shares = $30 × 30 shares = $900) less Stock Issuance Costs ($35) = $900 - $35 = $865 Consolidated APIC = $810 (Goodwin) + $865 (Corr) = $1,675 [QUESTION] REFER TO: 02-03 42. Compute the consolidated liabilities at December 31, 2018. A) $1,500. B) $2,100. C) $2,320. D) $2,920. E) $2,885. Answer: D Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Calculate consolidated balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Goodwin’s liabilities plus Corr’s liabilities equal consolidated liabilities Goodwin’s Liabilities: $1,500 Existing + $600 to fund consideration paid on business consolidation = $2,100 Corr’s Liabilities: $820 Consolidated Liabilities = $2,100 (Goodwin) + $820 (Corr) = $2,920 [QUESTION] REFER TO: 02-03 43. Compute the consolidated retained earnings at December 31, 2018. A) $2,800. B) $2,825. C) $2,850. D) $3,425. E) $3,450. Answer: B Learning Objective: 02-06a Learning Objective: 02-06b Learning Objective: 02-07 Topic: Costs of combination Topic: Acquisition―Calculate consolidated balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $2,850 - $25 Broker Expense = $2,825 REFERENCE: 02-04 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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On January 1, 2018, 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:

Cash Receivables Inventories Land Buildings (net) Equipment (net) Accounts payable Long-term liabilities Common stock ($1 par) Common stock ($20 par) Additional paid-in capital Retained earnings

Moody $ 180 810 1,080 600 1,260 480 (450) (1,290) (330) (1,080) (1,260)

Osorio $ 40 180 280 360 440 100 (80) (400) (240) (340) (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. [QUESTION] REFER TO: 02-04 44. If Osorio retains a separate corporate existence, what amount was recorded as the investment in Osorio? A) $930. B) $820. C) $800. D) $835. E) $815. Answer: C Learning Objective: 02-06c Topic: Journal entry―Investment with no dissolution Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Total Consideration Paid = Cash and Stock Cash: $400 Common Stock (Par Value): $1.00 × 40 shares = $40 APIC: Excess of fair value of stock over par value = ($10 - $1) x (40 shares) = $9 × 40 = $360 Total Consideration: $400 + $40 + $360 = $800 [QUESTION] Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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REFER TO: 02-04 45. 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. Answer: D Learning Objective: 02-05 Topic: Acquisition―Calculate goodwill or bargain Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Goodwill = Total Consideration Paid – Excess of Fair Value of Assets Acquired Over Liabilities Assumed Total Consideration Paid: $800 Fair Value of Assets Acquired: Cash ($40) + $180 (Accounts Receivables) + $290 (Inventory) + $400 (Land) + $500 (Buildings) = $1,050 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 ($1,050) = $250 Less Combination Expenses: $20 Total Gain on Purchase = $250 - $20 = $230 [QUESTION] REFER TO: 02-04 46. Compute the amount of consolidated inventories at date of acquisition. A) $1,080. B) $1,350. C) $1,360. D) $1,370. E) $ 290. Answer: D Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Allocate fair value Topic: Acquisition―Calculate consolidated balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Moody Inventory ($1,080 Book Value on Acquisition Date) + Osario Inventory ($290 - Fair Value on Acquisition Date) = $1,370 [QUESTION] REFER TO: 02-04 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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47. 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. Answer: B Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Allocate fair value Topic: Acquisition―Calculate consolidated balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Moody Buildings on Acquisition Date (Book Value of $1,260) + Osario Buildings on Acquisition Date ($500 Fair Value) = $1,760 [QUESTION] REFER TO: 02-04 48. Compute the amount of consolidated land at date of acquisition. A) $1,000. B) $ 960. C) $ 920. D) $ 400. E) $ 320. Answer: A Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Allocate fair value Topic: Acquisition―Calculate consolidated balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Moody’s Land (Book Value of $600) + Osario Land (Fair Value on Acquisition Date of $400) = $1,000 [QUESTION] REFER TO: 02-04 49. Compute the amount of consolidated equipment at date of acquisition. A) $480. B) $580. C) $559. D) $570. E) $560. Answer: B Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Allocate fair value Topic: Acquisition―Calculate consolidated balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Moody Acquisition Date Equipment (Book Value of $480) + (Osario’s Equipment with Fair Value on Acquisition Date of $100) = $580 [QUESTION] REFER TO: 02-04 50. Compute the amount of consolidated common stock at date of acquisition. A) $370. B) $570. C) $610. D) $330. E) $530. Answer: A Learning Objective: 02-05 Topic: Acquisition―Calculate consideration transferred Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Moody’s Common Stock ($330) + Common Stock Issued in Connection With Osario Business Combination ($1.00 par value per share x 40 shares = $40) = $330 + $40 = $370 [QUESTION] REFER TO: 02-04 51. 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. Answer: D Learning Objective: 02-05 Learning Objective: 02-06b Learning Objective: 02-06c Learning Objective: 02-07 Topic: Acquisition―Calculate consideration transferred Topic: Costs of combination Topic: Acquisition―Calculate consolidated balances Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Moody’s APIC on Acquisition Date: $1,080 APIC Adjustments Related to Osario Business Combination: Excess of Fair Value Over Par Value ($9.00 per share x 40 shares = $360) + Stock Issuance Costs ($15) = $360 + $15 = $375 Combined APIC = $1,080 + $375 = $1,425 [QUESTION] REFER TO: 02-04 52. Compute the amount of consolidated cash after recording the acquisition transaction. A) $220. B) $185. C) $200. D) $205. E) $215. Answer: B Learning Objective: 02-05 Learning Objective: 02-06b Learning Objective: 02-07 Topic: Acquisition―Calculate consideration transferred Topic: Costs of combination Topic: Acquisition―Calculate consolidated balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Moody’s Cash on Acquisition Date: $180 Osario’s Cash on Acquisition Date: $40 Reductions to Cash for Business Combination Related Costs and Expenses ($20 + $15) = $35 Combined: $180 + $40 Sub - $35 = $185 REFERENCE: 02-05 Carnes has the following account balances as of December 31, 2017 before an acquisition transaction takes place.

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

$100,000 400,000 500,000 600,000 200,000 200,000 450,000 250,000

The fair value of Carnes’ Land and Buildings are $650,000 and $550,000, respectively. On December 31, 2017, Riley Company issues 30,000 shares of its $10 par value ($25 fair value) Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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common stock in exchange for all of the shares of Carnes’ common stock. Riley paid $10,000 for costs to issue the new shares of stock. Before the acquisition, Riley has $700,000 in its common stock account and $300,000 in its additional paid-in capital account. [QUESTION] REFER TO: 02-05 53. On December 31, 2017, assuming that Cames will retain its separate corporate existence, what value is assigned to Riley’s investment account? A) $ 150,000. B) $ 300,000. C) $ 750,000. D) $ 760,000. E) $1,350,000. Answer: C Learning Objective: 02-06c Topic: Journal entry―Investment with no dissolution Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Consideration Paid = Fair Value of $25 per share x 30,000 shares = $750,000 [QUESTION] REFER TO: 02-05 54. At the date of acquisition, by how much does Riley's additional paid-in capital increase or decrease? A) $ 0. B) $440,000 increase. C) $450,000 increase. D) $640,000 increase. E) $650,000 decrease. Answer: B Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-06b Learning Objective: 02-06c Topic: Acquisition―Calculate consideration transferred Topic: Costs of combination Topic: Journal entry―Dissolution Topic: Journal entry―Investment with no dissolution Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 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. $25 fair value per share - $10 par value per share = $15 per share x 30,000 shares = $450,000 $10,000 stock issuance costs = $440,000 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 02-05 55. What will the consolidated common stock account be as a result of this acquisition? A) $ 300,000. B) $ 990,000. C) $1,000,000. D) $1,590,000. E) $1,600,000. Answer: C Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Calculate consideration transferred Topic: Acquisition―Calculate consolidated balances Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Riley Common Stock Account Before Acquisition: $700,000 Par Value of Stock Issued in Connection With Business Combination: $10 par value per share x 30,000 shares = $300,000 Total: $700,000 + $300,000 = $1,000,000 [QUESTION] REFER TO: 02-05 56. What will be the consolidated additional paid-in capital as a result of this acquisition? A) $440,000. B) $740,000. C) $750,000. D) $940,000. E) $950,000. Answer: B Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-06b Learning Objective: 02-07 Topic: Acquisition―Calculate consideration transferred Topic: Costs of combination Topic: Acquisition―Calculate consolidated balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $300,000 (Riley APIC Balance on Acquisition Date) + $440,000 Additional Business Combination Related APIC (Calculated in Question 54) = $740,000 REFERENCE: 02-06 The financial balances for the Atwood Company and the Franz Company as of December 31, 2018, are presented below. Also included are the fair values for Franz Company's net assets. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Atwood

Franz Co. Franz Co. (all numbers are in thousands) Book Value Book Value Fair Value 12/31/2018 12/31/2018 12/31/2018 Cash Receivables Inventory Land Buildings (net) Equipment (net) Accounts payable Accrued expenses Long-term liabilities Common stock ($20 par) Common stock ($5 par) Additional paid-in capital Retained earnings Revenues Expenses

$ 870 660 1,230 1,800 1,800 660 ( 570) ( 270) (2,700) (1,980) ( 210) (1,170) (2,880) 2,760

$ 240 600 420 260 540 380 ( 240) ( 60) (1,020) ( ( ( (

$ 240 600 580 250 650 400 ( 240) ( 60) (1,120)

420) 180) 480) 660) 620

Note: Parenthesis indicate a credit balance

Assume an acquisition business combination took place at December 31, 2018. 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. [QUESTION] REFER TO: 02-06 57. Compute the amount of the consideration transferred by Atwood to acquire Franz. A) $1,750. B) $1,760. C) $1,775. D) $1,300. E) $1,120. Answer: A Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-06c Topic: Acquisition―Calculate consideration transferred Topic: Journal entry―Dissolution Topic: Journal entry―Investment with no dissolution Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Atwood Shares Issued in Connection With Business Combination = $35 Fair Value Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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per share x 50 shares = $1,750 [QUESTION] REFER TO: 02-06 58. 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. Answer: B Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Calculate consideration transferred Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 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 [QUESTION] REFER TO: 02-06 59. Compute consolidated inventory at the date of the acquisition. A) $1,650. B) $1,810. C) $1,230. D) $ 580. E) $1,830. Answer: B Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Allocate fair value Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Atwood Acquisition Date Inventory ($1,230 book value) + Acquisition Date Fair Value of Franz Inventory ($580) = $1,230 + $580 = $1,810 [QUESTION] Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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REFER TO: 02-06 60. Compute consolidated land at the date of the acquisition. A) $2,060. B) $1,800. C) $ 260. D) $2,050. E) $2,070. Answer: D Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Allocate fair value Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Atwood Acquisition Date Land ($1,800 book value) + Franz Acquisition Date Land Fair Value ($250) = $2,050 Consolidated Value [QUESTION] REFER TO: 02-06 61. Compute consolidated buildings (net) at the date of the acquisition. A) $2,450. B) $2,340. C) $1,800. D) $ 650. E) $1,690. Answer: A Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Allocate fair value Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Atwood Acquisition Date Buildings ($1,800 book value) + Franz Acquisition Date Building Fair Value ($650) = $2,450 [QUESTION] REFER TO: 02-06 62. Compute consolidated long-term liabilities at the date of the acquisition. A) $2,600. B) $2,700. C) $2,800. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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D) $3,720. E) $3,820. Answer: E Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Allocate fair value Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Atwood Acquisition Date Long-Term Liabilities ($2,700 book value) + Franz Acquisition Date Long-Term Liabilities at Fair Value ($1,120) = $3,820 [QUESTION] REFER TO: 02-06 63. Compute consolidated goodwill at the date of the acquisition. A) $360. B) $450. C) $460. D) $440. E) $475. Answer: B Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Calculate goodwill or bargain Topic: Consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Goodwill = Total Consideration Paid – Excess of Fair Value of Assets Acquired Over Liabilities Assumed Total Consideration Paid: $1,750 Net Assets/Liabilities at Fair Value: $1,300 Goodwill: Consideration ($1,750) – Net Assets/Liabilities ($1,300) = $450 Consolidated Goodwill: $450 [QUESTION] REFER TO: 02-06 64. Compute consolidated equipment (net) at the date of the acquisition. A) $ 400. B) $ 660. C) $1,060. D) $1,040. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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E) $1,050. Answer: C Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Allocate fair value Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Atwood Acquisition Date Equipment ($660 book value) + Franz Acquisition Date Equipment ($400 Fair Value) = $1,060 [QUESTION] REFER TO: 02-06 65. Compute fair value of the net assets acquired at the date of the acquisition. A) $1,300. B) $1,340. C) $1,500. D) $1,750. E) $2,480. Answer: A Learning Objective: 02-05 Topic: Acquisition―Allocate fair value Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 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 [QUESTION] REFER TO: 02-06 66. 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. Answer: C Learning Objective: 02-06a Learning Objective: 02-06b Learning Objective: 02-07 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Topic: Costs of combination Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $1,170 + ($2,880 - $2760 - $10) = $1,280 [QUESTION] REFER TO: 02-06 67. Compute consolidated revenues immediately following the acquisition. A) $3,540. B) $2,880. C) $1,170. D) $1,650. E) $4,050. Answer: B Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $2,880 Revenues of the Parent Only [QUESTION] REFER TO: 02-06 68. Compute consolidated cash at the completion of the acquisition. A) $1,350. B) $1,085. C) $1,110. D) $ 870. E) $ 845. Answer: B Learning Objective: 02-06a Learning Objective: 02-06b Learning Objective: 02-07 Topic: Costs of combination Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $870 + $240 - $15 - $10 = $1,085 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 02-06 69. Compute consolidated expenses immediately following the acquisition. A) $2,760. B) $2,770. C) $2,785. D) $3,380. E) $3,390. Answer: B Learning Objective: 02-06a Learning Objective: 02-06b Learning Objective: 02-07 Topic: Costs of combination Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $2,760 + $10 = $2,770 REFERENCE: 02-07 Presented below are the financial balances for the Boxwood Company and the Tranz Company as of December 31, 2017, immediately before Boxwood acquired Tranz. Also included are the fair values for Tranz Company's net assets at that date.

Boxwood

Tranz Co. Tranz Co. (all amounts in thousands) Book Value Book Value Fair Value 12/31/17 12/31/17 12/31/17 Cash Receivables Inventory Land Buildings (net) Equipment (net) Accounts payable Accrued expenses Long-term liabilities Common stock ($20 par) Common stock ($5 par) Additional paid-in capital Retained earnings Revenues Expenses

$ 870 660 1,230 1,800 1,800 660 ( 570) ( 270) (2,700) (1,980) ( 210) (1,170) (2,880) 2,760

$ 240 600 420 260 540 380 ( 240) ( 60) (1,020) ( ( ( (

$ 240 600 580 250 650 400 ( 240) ( 60) (1,120)

420) 180) 480) 660) 620

Note: Parenthesis indicate a credit balance Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Assume a business combination took place at December 31, 2017. 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). [QUESTION] REFER TO: 02-07 70. 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. Answer: B Learning Objective: 02-04 Learning Objective: 02-06c Topic: Contingent consideration Topic: Journal entry―Investment with no dissolution Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $35 × 50 shares = $1,750 + $5 = $1,755 [QUESTION] REFER TO: 02-07 71. Compute consolidated inventory immediately following the acquisition. A) $1,650. B) $1,810. C) $1,230. D) $ 580. E) $1,830. Answer: B Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Allocate fair value Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $1,230 book value + $580 fair value = $1,810 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 02-07 72. Compute consolidated land immediately following the acquisition. A) $2,060. B) $1,800. C) $ 260. D) $2,050. E) $2,070. Answer: D Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Allocate fair value Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $1,800 Book Value + $250 Fair Value = $2,050 [QUESTION] REFER TO: 02-07 73. Compute consolidated buildings (net) immediately following the acquisition. A) $2,450. B) $2,340. C) $1,800. D) $ 650. E) $1,690. Answer: A Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Allocate fair value Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $1,800 book value + $650 fair value = $2,450 [QUESTION] REFER TO: 02-07 74. Compute consolidated goodwill immediately following the acquisition. A) $440. B) $442. C) $450. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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D) $455. E) $452. Answer: D Learning Objective: 02-04 Learning Objective: 02-05 Topic: Contingent consideration Topic: Acquisition―Calculate goodwill or bargain Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $35 fair value × 50 shares = $1,750 – ($1,300 - $5 Contingency) = $455 [QUESTION] REFER TO: 02-07 75. Compute consolidated equipment immediately following the acquisition. A) $ 400. B) $ 660. C) $1,060. D) $1,040. E) $1,050. Answer: C Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Allocate fair value Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $660 + $400 = $1,060 [QUESTION] REFER TO: 02-07 76. 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. Answer: D Learning Objective: 02-06a Learning Objective: 02-06b Learning Objective: 02-07 Topic: Costs of combination Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Components of ending retained earnings (revenues and expenses) are extended across the worksheet, then combined vertically. Atwood’s Total Expenses = Balance Sheet Expenses + Transaction Expenses = $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 [QUESTION] REFER TO: 02-07 77. Compute consolidated revenues immediately following the acquisition. A) $3,540. B) $2,880. C) $1,170. D) $1,650. E) $4,050. Answer: B Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $2,880 Revenues of the Parent Only [QUESTION] REFER TO: 02-07 78. Compute consolidated expenses immediately following the acquisition. A) $2,735. B) $2,760. C) $2,770. D) $2,785. E) $3,380. Answer: C Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-06b Learning Objective: 02-07 Topic: Costs of combination Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Atwood’s Total Expenses = Balance Sheet Expenses + Transaction Expenses = $2,760 + $10 = $2,770 [QUESTION] REFER TO: 02-07 79. Compute the consolidated cash upon completion of the acquisition. A) $1,350. B) $1,110. C) $1,080. D) $1,085. E) $ 635. Answer: D Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-06b Learning Objective: 02-07 Topic: Costs of combination Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Cash of Parent + Cash of Subsidiary – (Post-Transaction Costs + Post-Transaction Expenses) = $870 + $240 – ($15 + $10) = $870 + $240 - $25 = $1,085 REFERENCE: 02-08 Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2018. 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 as of January 1, 2018 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.

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Flynn, Inc. Cash $ 900 Receivables 480 Inventory 660 Land 300 Buildings (net) 1,200 Equipment 360 Accounts payable 480 Long-term liabilities 1,140 Common stock 1,000 Additional paid-in capital 200 Retained earnings 1,080

Macek Company Fair Value Book Value $ 80 $ 80 180 160 260 300 120 130 220 280 100 75 60 60 340 300 80 0 480

[QUESTION] REFER TO: 02-08 80. 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. Answer: A Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-06b Learning Objective: 02-06c Topic: Acquisition―Calculate consideration transferred Topic: Costs of combination Topic: Journal entry―Dissolution Topic: Journal entry―Investment with no dissolution Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 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 [QUESTION] REFER TO: 02-08 81. What amount will be reported for goodwill as a result of this acquisition? A) $ 30,000. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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B) $ 55,000. C) $ 65,000. D) $175,000. E) $ 200,000. Answer: B Learning Objective: 02-05 Learning Objective: 02-08 Topic: Acquisition―Calculate goodwill or bargain Topic: Intangibles acquired Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 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 and Liabilities: $705,000 Goodwill = $760,000 - $705,000 = $55,000 [QUESTION] REFER TO: 02-08 82. What amount will be reported for consolidated receivables? A) $660,000. B) $640,000. C) $500,000. D) $460,000. E) $480,000. Answer: B Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Allocate fair value Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Flynn Receivable ($480,000) + Fair Value of Macek Receivable ($160,000) = $640,000 [QUESTION] REFER TO: 02-08 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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83. What amount will be reported for consolidated inventory? A) $1,000,000. B) $ 960,000. C) $ 920,000. D) $ 660,000. E) $ 620,000. Answer: B Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Allocate fair value Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Flynn Inventory ($660,000) + Fair Value of Macek Inventory ($300,000) = $960,000 [QUESTION] REFER TO: 02-08 84. What amount will be reported for consolidated buildings (net)? A) $1,420,000. B) $1,260,000. C) $1,140,000. D) $1,480,000. E) $1,200,000. Answer: D Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Allocate fair value Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Flynn Buildings ($1,200,000) + Fair Value of Macek Buildings ($280,000) = $1,480,000 [QUESTION] REFER TO: 02-08 85. What amount will be reported for consolidated equipment (net)? A) $385,000. B) $335,000. C) $435,000. D) $460,000. E) $360,000. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Answer: C Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Allocate fair value Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Flynn Equipment ($360,000) + Fair Value of Macek Equipment ($75,000) = $435,000 [QUESTION] REFER TO: 02-08 86. 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. Answer: C Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Allocate fair value Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Flynn Long-Term Liabilities ($1,140,000) + Fair Value of Macek Long-Term Liabilities ($300,000) = $1,440,000 [QUESTION] REFER TO: 02-08 87. 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. Answer: C Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Calculate consideration transferred Topic: Acquisition―Calculate consolidated balances Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Topic: Consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 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 [QUESTION] REFER TO: 02-08 88. 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. Answer: C Learning Objective: 02-09 Topic: Legacy methods―Purchase and pooling Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $1,080,000 Retained Earnings of the Parent Only [QUESTION] REFER TO: 02-08 89. 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. Answer: A Learning Objective: 02-06a Learning Objective: 02-06b Learning Objective: 02-07 Topic: Costs of combination Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $1,080,000 - $15,000 = $1,065,000 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 02-08 90. 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. Answer: B Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-06b Learning Objective: 02-06c Learning Objective: 02-07 Topic: Acquisition―Calculate consideration transferred Topic: Costs of combination Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Flynn’s APIC balance + Macek’s APIC Adjustments Flynn’s APIC balance ($200,000) + Macek’s APIC Adjustment ($150,000 from question 80) = $200,000 + $150,000 = $350,000 [QUESTION] REFER TO: 02-08 91. 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. Answer: C Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-06b Learning Objective: 02-07 Topic: Acquisition―Calculate consideration transferred Topic: Costs of combination Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

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Feedback: 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 Essay: [QUESTION] 92. What term is used to refer to a business combination in which only one of the original companies continues to exist? Answer: The appropriate term is statutory merger. Learning Objective: 02-03 Topic: Business combination―Differentiate across forms Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 93. How are stock issuance costs accounted for in an acquisition business combination? Answer: Stock issuance costs reduce the balance in the acquirer’s Additional Paid-In Capital in an acquisition business combination. Learning Objective: 02-06b Topic: Costs of combination Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 94. What is the primary difference between recording an acquisition when the subsidiary is dissolved and when separate incorporation is maintained? Answer: 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. Learning Objective: 02-03 Learning Objective: 02-06a Learning Objective: 02-06c Topic: Business combination―Differentiate across forms Topic: Journal entry―Dissolution Topic: Journal entry―Investment with no dissolution Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] 95. How are direct combination costs accounted for in an acquisition transaction? Answer: In an acquisition, direct combination costs are expensed in the period of the acquisition. Learning Objective: 02-06b Topic: Costs of combination Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 96. Peterman Co. owns 55% of Samson Co. Under what circumstances would Peterman not be required to prepare consolidated financial statements? Answer: 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. Learning Objective: 02-02 Topic: Business combination―Control–Need to consolidate Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 97. How would you account for in-process research and development acquired in a business combination accounted for as an acquisition? Answer: 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. Learning Objective: 02-08 Topic: In-process research and development Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 98. 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? Answer: The difference between the consideration transferred and the fair value of the net assets Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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acquired is recognized as a gain on bargain purchase. Learning Objective: 02-04 Topic: Acquisition―Valuation principles Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 99. For acquisition accounting, why are assets and liabilities of the subsidiary consolidated at fair value? Answer: 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. Learning Objective: 02-04 Topic: Acquisition―Valuation principles Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 100. 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? Answer: 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. Learning Objective: 02-08 Topic: Intangibles acquired Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 101. How are direct combination costs, contingent consideration, and a bargain purchase reflected in recording an acquisition transaction? Answer: 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 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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. Learning Objective: 02-04 Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-06b Learning Objective: 02-06c Topic: Contingent consideration Topic: Acquisition―Valuation principles Topic: Acquisition―Calculate goodwill or bargain Topic: Costs of combination Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 102. How is contingent consideration accounted for in an acquisition business combination transaction? Answer: 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. Learning Objective: 02-04 Topic: Contingent consideration Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 103. How are bargain purchases accounted for in an acquisition business transaction? Answer: 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. Learning Objective: 02-04 Learning Objective: 02-05 Topic: Acquisition―Valuation principles Topic: Acquisition―Calculate goodwill or bargain Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 104. Describe the accounting for direct costs, indirect costs, and issuance costs under the acquisition method of accounting for a business combination. Answer: Direct and indirect combination costs are expensed and issuance costs reduce the otherwise fair value of the consideration issued under the acquisition method of accounting for business combinations. Learning Objective: 02-06b Topic: Costs of combination Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 105. 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? Answer: There is no difference in consolidated results. Learning Objective: 02-06a Learning Objective: 02-06c Learning Objective: 02-07 Topic: Journal entry―Dissolution Topic: Journal entry―Investment with no dissolution Topic: Acquisition―Calculate consolidated balances Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Problems: [QUESTION] 106. Bale Co. acquired Silo Inc. on December 31, 2018, 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 2018? Answer: Bale’s net income for 2018 Less: direct combination costs Less: indirect combination costs Consolidated net income for 2018

$1,400,000 100,000 50,000 $1,250,000

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Note: Silo’s net income does not affect consolidated net income until after the date of acquisition. The combination costs belong to Bale only. Learning Objective: 02-06b Learning Objective: 02-06a Learning Objective: 02-07 Topic: Costs of combination Topic: Acquisition―Calculate consolidated balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 107. 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? Answer: Book value of Fine Co.’s land Fair value of Dandy Corp.’s land Consolidated balance for land

$480,000 190,000 $670,000

Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Allocate fair value Topic: Acquisition―Calculate consolidated balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 108. Jernigan Corp. had the following account balances at 12/1/17:

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Receivables Inventory Land Building Liabilities Common stock Additional paid-in capital Retained earnings, 12/1/12 7 Revenues Expenses

$ 96,000 240,000 720,000 600,000 480,000 120,000 120,000 840,000 360,000 264,000

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. Answer: 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 Allocations to specific accounts based on the acquisition-date fair value Receivables

$1,320,000 ($1,236,000) $

84,000

$ 96,000

Inventory Land Building Liabilities Goodwill

336,000 480,000 720,000 (396,000)

1,236,000 84,000

$

Learning Objective: 02-05 Topic: Acquisition―Calculate goodwill or bargain Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement REFERENCE: 02-09 Salem Co. had the following account balances as of December 1, 2017:

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Inventory Land Buildings — net (valued at $1,200,000) Common stock ($10 par value) Retained earnings, December 1, 2017 Revenues Expenses

$

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

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. [QUESTION] REFER TO: 02-09 109. Determine the balance for Goodwill that would be included in a December 1, 2017, consolidation. Answer: Fair value of consideration transferred: Cash Stock issued Total consideration transferred:

$1,700,000 1,080,000 $2,780,000

Fair value of assets acquired: Inventory Land Buildings Total of Assets

$ 720,000 600,000 1,200,000 ($2,520,000)

Excess of consideration transferred over fair value of assets transferred: Allocations to specific accounts based on the acquisition-date fair value Inventory Land Buildings Goodwill

$260,000

$ 720,000 600,000 1,200,000 260,000

Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Calculate goodwill or bargain Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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REFER TO: 02-09 110. Assume that Bellington paid cash of $2.8 million. No stock is issued. An additional $50,000 is paid in direct combination costs. Required: For Goodwill, determine what balance would be included in a December 1, 2017 consolidation. Answer: Fair value of consideration transferred: Cash

$2,800,000

Total consideration transferred:

$2,800,000

Fair value of assets acquired: Inventory Land Buildings Total of Assets

$ 720,000 600,000 1,200,000 ($2,520,000)

Excess of consideration transferred over fair value of assets transferred:

Allocations to specific accounts based on the acquisition-date fair value Inventory Land Buildings Goodwill

$280,000

$ 720,000 600,000 1,200,000 280,000

Learning Objective: 02-05 Learning Objective: 02-06a Learning Objective: 02-06b Learning Objective: 02-07 Topic: Acquisition―Calculate goodwill or bargain Topic: Costs of combination Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 111. On January 1, 2018, 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, 2018, 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.

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Book Value $ 30,000 120,000 200,000 230,000 450,000 175,000 (80,000) (500,000) (350,000) (275,000)

Cash Accounts Receivable Inventory Land Building (net) Equipment (net) Accounts Payable Common Stock, $1 par Paid-in Capital Retained Earnings, 1/1/18

Fair Value $ 120,000 230,000 290,000 600,000 160,000 (80,000)

Required: Compute the value of Goodwill on the date of acquisition, 1/1/18. Answer: Fair value of consideration transferred: Stock Total consideration transferred:

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

Fair value of assets acquired: Cash Accounts Receivable Inventory Land Buildings Equipment Total fair value of assets acquired Fair value of liabilities assumed: Accounts Payable Net fair value of assets acquired and liabilities assumed

$ 30,000 120,000 230,000 290,000 600,000 160,000 $ 1,430,000 80,000

Excess of consideration transferred over fair value of assets transferred:

Allocations to specific accounts based on the acquisition-date fair value Cash Accounts Receivable Inventory Land Buildings Equipment Goodwill

(80,000) $ 1,350,000

$ 150,000

$ 30,000 120,000 230,000 290,000 600,000 160,000 150,000

Learning Objective: 02-05 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Learning Objective: 02-06a Learning Objective: 02-07 Topic: Acquisition―Calculate goodwill or bargain Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement REFERENCE: 02-10 The financial statements for Jode Inc. and Lakely Corp., just prior to their combination, for the year ending December 31, 2017, follow. Lakely's buildings were undervalued on its financial records by $60,000.

Jode Inc. $ 1,300,000 ( 1,180,000) $ 120,000 $ 700,000 120,000 ( 110,000) $ 710,000 $ 160,000 240,000 700,000 700,000 $ 1,800,000 $ 250,000 750,000 90,000 710,000 $ 1,800,000

Revenues Expenses Net income Retained earnings, January 1, 2017 Net income (from above) Dividends declared Retained earnings, December 31, 2017 Cash Receivables and inventory Buildings (net) Equipment (net) Total assets Liabilities Common stock Additional paid-in capital Retained earnings, 12/31/17 Total liabilities and stockholders’ equity

Lakely Corp. $ 500,000 ( 290,000) $ 210,000 $ 500,000 210,000 ( 110,000) $ 600,000 $ 120,000 240,000 350,000 600,000 $ 1,310,000 $ 195,000 430,000 85,000 600,000 $ 1,310,000

On December 31, 2017, 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. [QUESTION] REFER TO: 02-10 112. Prepare the journal entries to record: (1) the issuance of stock by Jode; and (2) the payment of the combination costs. Answer: Entry One – To record the issuance of common stock by Jode to execute the purchase.

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Entry Two – To record the combination costs. Professional fee expense Paid-in capital Cash

34,000 24,000 58,000

Learning Objective: 02-06b Learning Objective: 02-06c Topic: Journal entry―Investment with no dissolution Topic: Costs of combination Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 02-10 113. Required: Determine consolidated net income for the year ended December 31, 2017. Answer:

Consolidated Net Income Jode’s Revenues Jode’s Expenses Consolidated net income Note: The subsidiary’s revenues and expenses prior to the date of acquisition are not consolidated.

$ 1,300,000 (1,214,000) $ 86,000

Learning Objective: 02-07 Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 02-10 114. Determine consolidated Additional Paid-In Capital at December 31, 2017. Answer:

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

$

90,000

1,350,000 (24,000) $1,416,000

Learning Objective: 02-06b Learning Objective: 02-07 Topic: Costs of combination Topic: Acquisition―Calculate consolidated balances Topic: Consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 115. The following are preliminary financial statements for Black Co. and Blue Co. for the year ending December 31, 2018, prior to Black’s acquisition of Blue Co. Black Co. Blue Co. Sales $360,000 $228,000 Expenses (240,000) (132,000) Net income $120,000 $ 96,000 Retained earning, January 1, 2018 Net income (from above) Dividends paid Retained earnings, December 31, 2018

$480,000 120,000 (36,000) $564,000

$252,000 96,000 -0$348,000

Current assets Land Building (net) Total assets

$360,000 120,000 480,000 $960,000

$120,000 108,000 336,000 $564,000

Liabilities Common stock Additional Paid-In Capital Retained earnings, December 31, 2018 Total liabilities and stockholders’ equity

$108,000 192,000 96,000 564,000 $960,000

$132,000 72,000 12,000 348,000 $564,000

On December 31, 2018 (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 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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consolidation worksheet as of December 31, 2018. Answer: Bargain Purchase Acquisition Consolidation Worksheet

For the Year Ended 12/31/2018

Account Income Statement Sales Expenses Bargain-Purchase—Gain Net Income

Black Company

Blue Company

Consolidation Entries Dr. Cr.

Consolidated Balance

(360,000) 254,000

(360,000) 254,000

(28,000) (134,000)

(28,000) (134,000)

R/E, 12/31/18

(480,000) (134,000) 36,000 (578,000)

(480,000) (134,000) 36,000 (578,000)

Balance Sheet Current assets Investment in Blue Co. Lan dBuildings (net)

346,000 528,000 120,000 480,000

120,000

Total Assets

1,474,000

564,000

Liabilities Common Stock Additional Paid-in Capital R/E, 12/31/18

(108,000) (292,000) (496,000) (578,000)

(132,000) (72,000) (12,000) (348,000)

(S) 72,000 (S) 12,000 (S) 348,000

(1,474,000)

(564,000)

528,000

Statement of Retained Earnings R/E, 1/1/18 Net Income Dividends Net Incomedeclared

Total Liabilities & Stockholders' Equity

108,000 336,000

(A) 96,000

(S) 432,000 (A) 96,000

466,000 0 324,000 816,000 1,606,000 (240,000) (292,000) (496,000) (578,000)

528,000

(1,606,000)

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Page 2-59

Calculation for Potential Goodwill: Consideration transferred by Black Co. Book value of Blue Co. Excess of Cost over Book Value Allocations: Land (204,000 - 108,000) – Bargain Purchase

500,000 (432,000) (Entry S) 68,000 (Entry A) (96,000) (Entry A)

(28,000) (Entry A) Entry to record the acquisition on Black Co's books Professional fee expense 14,000 Investment in Blue Co. 528,000 Common Stock - Black (10,000 × $10 Par) 100,000 400,000 Add'l Paid-in Capital - Black (10,000 × $40) Cash (paid for direct acquisition costs) 14,000 Gain on Bargain Purchase 28,000 Entry S: Common Stock 72,000 Additional Paid-in Capital 12,000 Retained Earnings - 12/31/18 348,000 Investment in Blue Co. 432,000 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: Land Investment in Blue Co.

96,000 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

Learning Objective: 02-05 Learning Objective: 02-06b Learning Objective: 02-07 Topic: Acquisition―Calculate goodwill or bargain Topic: Costs of combination Topic: Consolidation worksheet Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 116. The following are preliminary financial statements for Green Co. and Gold Co. for the year ending December 31, 2018 prior to Black’s acquisition of Blue. Green Co. Gold Co. Sales $360,000 $228,000 Expenses (240,000) (132,000) Net income $120,000 $ 96,000

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Page 2-60

Retained earnings, January 1, 2018 Net income (from above) Dividends declared Retained earnings, December 31, 2018

$480,000 120,000 (36,000) $564,000

$252,000 96,000 -0$348,000

Current assets Land Building (net) Total assets

$360,000 120,000 480,000 $960,000

$120,000 108,000 336,000 $564,000

Liabilities Common stock Additional paid-in capital Retained earnings, December 31, 2018 Total liabilities and stockholders’ equity

$108,000 192,000 96,000 564,000 $960,000

$132,000 72,000 12,000 348,000 564,000

On December 31, 2018 (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, 2018 after the acquisition transaction is completed. Answer: Acquisition Consolidation Worksheet

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For the Year Ended 12/31/2018

Account Income Statement Sales Expenses Net Income Statement of Retained Earnings R/E, 1/1/18 Net Income Dividends declared R/E, 12/31/18

Green Company

Gold Company

Consolidation Entries Dr. Cr.

(360,000) 254,000 (106,000)

(360,000) 254,000 (106,000)

(480,000) (106,000) 36,000 (550,000)

(480,000) (106,000) 36,000 (550,000)

Balance Sheet Current assets Investment in Gold Co. Land Buildings (net) Goodwill Total Assets

346,000 600,000 120,000 480,000

120,000

1,546,000

564,000

Liabilities Common Stock Additional Paid-in Capital R/E, 12/31/18

(108,000) (292,000) (596,000) (550,000)

(132,000) (72,000) (12,000) (348,000)

(S) 72,000 (S) 12,000

(1,546,000)

(564,000)

600,000

Total Liabilities & Stockholders' Equity

Consolidated Balance

108,000 336,000

(S) 432,000 (A) 168,000 ( A) 96,000 (A) 72,000

466,000 0 324,000 816,000 72,000 1,678,000 (240,000) (292,000) (596,000) (550,000)

(S) 348,000

600,000

(1,678,000)

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Page 2-62

Calculation of Goodwill: Consideration transferred by Green Co. 600,000 Book value of Gold Co. (432,000) (Entry S) Excess of consideration transferred over Book Value 168,000 (Entry A) Allocations: Land (204,000 - 108,000) (96,000) (Entry A) Excess cost not identified - Goodwill 72,000 (Entry A) Green Co.'s entry to record acquisition: Professional fee expense Investment in Gold Co. Common Stock - Green (10,000 × $10 Par) Add'l Paid-in Capital - Green (10,000 × $50) Cash (paid for direct acquisition costs)

14,000 600,000 100,000 500,000 14,000

Entry S: Common Stock 72,000 Additional Paid-in Capital 12,000 Retained Earnings - 12/31/18 348,000 Investment in Gold Co. 432,000 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

Learning Objective: 02-05 Learning Objective: 02-06b Learning Objective: 02-07 Topic: Acquisition―Calculate goodwill or bargain Topic: Costs of combination Topic: Consolidation worksheet Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 117. 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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(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. Answer: (1) I; (2) I; (3) G; (4) A, C; (5) H Learning Objective: 02-04 Learning Objective: 02-05 Learning Objective: 02-06b Learning Objective: 02-06c Topic: Contingent consideration Topic: Acquisition―Calculate goodwill or bargain Topic: Costs of combination Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement

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Page 2-64

File: Chapter 03 - Consolidations - Subsequent to the Date of Acquisition Multiple Choice: [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. Answer: C Learning Objective: 03-01 Topic: Consolidation―Overall effects Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 2. 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. Answer: C Learning Objective: 03-02 Topic: Investment methods―Identify and differentiate Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 3. Which one of the following varies between the equity, initial value, and partial equity methods of accounting for an investment? 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. Answer: D Learning Objective: 03-02 Topic: Investment methods―Identify and differentiate Difficulty: 2 Medium Blooms: Understand Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 4. 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. Answer: E Learning Objective: 03-02 Learning Objective: 03-03c Topic: Investment methods―Identify and differentiate Topic: Investment and income―Partial equity method Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 5. 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. Answer: A Learning Objective: 03-05 Learning Objective: 03-07 Topic: Impairment―Goodwill―Rationale Topic: Impairment―Intangibles other than goodwill Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 6. Racer Corp. acquired all of the common stock of Tangiers Co. in 2016. Tangiers maintained its incorporation. Which of Racer's account balances would vary between the equity method and the initial value method? A) Goodwill, Investment in Tangiers Co., and Retained Earnings. B) Expenses, Investment in Tangiers Co., and Equity in Subsidiary Earnings. C) Investment in Tangiers Co., Equity in Subsidiary Earnings, and Retained Earnings. D) Common Stock, Goodwill, and Investment in Tangiers Co. E) Expenses, Goodwill, and Investment in Tangiers Co. Answer: C Learning Objective: 03-02 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Learning Objective: 03-03a Learning Objective: 03-03b Topic: Investment methods―Identify and differentiate Difficulty: 3 Hard Blooms: Understand AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 7. 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. Answer: E Learning Objective: 03-02 Learning Objective: 03-03a Learning Objective: 03-03c Topic: Investment methods―Identify and differentiate Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 8. Jansen Inc. acquired all of the outstanding common stock of Merriam Co. on January 1, 2017, for $257,000. Annual amortization of $19,000 resulted from this acquisition. Jansen reported net income of $70,000 in 2017 and $50,000 in 2018 and paid $22,000 in dividends each year. Merriam reported net income of $40,000 in 2017 and $47,000 in 2018 and paid $10,000 in dividends each year. What is the Investment in Merriam Co. balance on Jansen's books as of December 31, 2018, if the equity method has been applied? A) $286,000. B) $295,000. C) $276,000. D) $344,000. E) $324,000. Answer: A Learning Objective: 03-03a Topic: Investment and income―Equity method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement

Feedback: $257,000 + $40,000 + $47,000 - $10,000 - $19,000 - $10,000 - $19,000 = $286,000 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] 9. 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 Answer: D Learning Objective: 03-07 Topic: Impairment―Intangibles other than goodwill Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 10. Parrett Corp. acquired one hundred percent of Jones Inc. on January 1, 2016, at a price in excess of the subsidiary's fair value. On that date, Parrett's equipment (ten-year life) had a book value of $360,000 but a fair value of $480,000. Jones had equipment (ten-year life) with a book value of $240,000 and a fair value of $350,000. Parrett used the partial equity method to record its investment in Jones. On December 31, 2018, Parrett had equipment with a book value of $250,000 and a fair value of $400,000. Jones had equipment with a book value of $170,000 and a fair value of $320,000. What is the consolidated balance for the Equipment account as of December 31, 2018? A) $387,000. B) $497,000. C) $508.000. D) $537,000. E) $570,000. Answer: B Learning Objective: 03-03 Learning Objective: 03-03c Topic: Amortization calculations Topic: Investment and income―Partial equity method Topic: Consolidation balances―Calculate Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Excess of Sub’s FV = $110,000 + Parent’s BV $250,000 + Sub’s BV $170,000 – Excess Amortization ($11,000 × 3yrs) = $497,000 REFERENCE: 03-01 On January 1, 2017, Cale Corp. paid $1,020,000 to acquire Kaltop Co. Kaltop maintained separate incorporation. Cale used the equity method to account for the investment. The following information is available for Kaltop's assets, liabilities, and stockholders' equity accounts on January 1, 2017: Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Current assets Land Building (twenty year life) Equipment (ten year life) Current liabilities Long -term liabilities Common stock Additional paid -in capital Retained earnings

Book Value $ 120,000 72,000 240,000 540,000 24,000 120,000 228,000 384,000 216,000

Fair Value $ 120,000 192,000 268,000 516,000 24,000 120,000

Kaltop earned net income for 2017 of $126,000 and paid dividends of $48,000 during the year. [QUESTION] REFER TO: 03-01 11. The 2017 total excess amortization of fair-value allocations is calculated to be A) $4,000. B) $6,400. C) ($2,400). D) ($1,000). E) $3,800. Answer: D Learning Objective: 03-03 Learning Objective: 03-03a Topic: Amortization calculations Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Building = FV $268,000 – BV $240,000 = $28,000 / 20 yrs = $1,400 Equipment = FV $516,000 – BV $540,000 = ($24,000) / 10 yrs = ($2,400) ($2,400) + $1,400 = ($1,000) [QUESTION] REFER TO: 03-01 12. In Cale's accounting records, what amount would appear on December 31, 2017 for equity in subsidiary earnings? A) $77,000. B) $79,000. C) $125,000. D) $127,000. E) $81,800. Answer: D Learning Objective: 03-03a Topic: Investment and income―Equity method Difficulty: 2 Medium Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement

Feedback: $126,000 + $1,000 = $127,000 [QUESTION] REFER TO: 03-01 13. What is the balance in Cale's investment in subsidiary account at the end of 2017? A) $1,099,000. B) $1,020,000. C) $1,096,200. D) $1,098,000. E) $1,144,400. Answer: A Learning Objective: 03-03a Topic: Investment and income―Equity method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement

Feedback: $1,020,000 + ($126,000 + $1,000) - $48,000 = $1,099,000 [QUESTION] REFER TO: 03-01 14. At the end of 2017, the consolidation entry to eliminate Cale’s accrual of Kaltop’s earnings would include a credit to Investment in Kaltop Co. for A) $124,400. B) $126,000. C) $127,000. D) $ 76,400. E) $ 0. Answer: C Learning Objective: 03-03a Topic: Consolidation entries―Equity Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement

Feedback: $126,000 + $1,000 = $127,000 [QUESTION] REFER TO: 03-01 15. If Cale Corp. had net income of $444,000 in 2017, exclusive of the investment, what is the amount of consolidated net income? A) $569,000. B) $570,000. C) $571,000. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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D) $566,400. E) $444,000. Answer: C Learning Objective: 03-03 Learning Objective: 03-03a Learning Objective: 03-04 Topic: Consolidation entries―Equity Topic: Consolidation balances―Calculate Topic: Consolidation balances―Understand by any method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: $444,000 + ($126,000 + $1,000) = $571,000 REFERENCE: 03-02 On January 1, 2017, Franel Co. acquired all of the common stock of Hurlem Corp. For 2017, Hurlem earned net income of $360,000 and paid dividends of $190,000. Amortization of the patent allocation that was included in the acquisition was $6,000. [QUESTION] REFER TO: 03-02 16. How much difference would there have been in Franel'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) $190,000. B) $360,000. C) $164,000. D) $354,000. E) $150,000. Answer: C Learning Objective: 03-02 Learning Objective: 03-03a Learning Objective: 03-03b Topic: Investment methods―Identify and differentiate Topic: Investment and income―Equity method Topic: Investment and income―Initial value method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Initial Value Method = $190,000 Recognized from Sub Income (only dividend income) Equity Method = $360,000 - $6,000=$354,000 (Sub income less amortizations). $354,000 - $190,000 = $164,000 difference in equity method and initial value [QUESTION] REFER TO: 03-02 17. How much difference would there have been in Franel's income with regard to the effect of Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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the investment, between using the equity method or using the partial equity method of internal recordkeeping? A) $170,000. B) $354,000. C) $164,000. D) $ 6,000. E) $174,000. Answer: D Learning Objective: 03-02 Learning Objective: 03-03a Learning Objective: 03-03c Topic: Investment methods―Identify and differentiate Topic: Investment and income―Equity method Topic: Investment and income―Partial equity method Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Equity Method = $360,000 - $6,000 = $354,000 Equity income Partial Equity Method = $360,000 – $0 (amortizations not recorded under partial equity method); $354,000 - $360,000 = $6,000 difference REFERENCE: 03-03 Cashen Co. paid $2,400,000 to acquire all of the common stock of Janex Corp. on January 1, 2017. Janex's reported earnings for 2017 totaled $432,000, and it paid $120,000 in dividends during the year. The amortization of allocations related to the investment was $24,000. Cashen's net income, not including the investment, was $3,180,000, and it paid dividends of $900,000. [QUESTION] REFER TO: 03-03 18. On the consolidated financial statements for 2017, what amount should have been shown for Equity in Subsidiary Earnings? A) $432,000. B) $ -0C) $408,000. D) $120,000. E) $288,000. Answer: B Learning Objective: 03-03 Learning Objective: 03-04 Topic: Consolidation balances―Calculate Topic: Consolidation balances―Understand by any method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement

Feedback: $0; (Income is eliminated from the investment account) [QUESTION] Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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REFER TO: 03-03 19. On the consolidated financial statements for 2017, what amount should have been shown for consolidated dividends? A) $ 900,000. B) $1,020,000. C) $ 876,000. D) $ 996,000. E) $ 948,000. Answer: A Learning Objective: 03-03 Learning Objective: 03-04 Topic: Consolidation balances―Calculate Topic: Consolidation balances―Understand by any method Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement

Feedback: $900,000 Parent’s Dividends Only QUESTION] REFER TO: 03-03 20. What is the amount of consolidated net income for the year 2017? A) $3,180,000. B) $3,612,000. C) $3,300,000. D) $3,588,000. E) $3,420,000. Answer: D Learning Objective: 03-03 Learning Objective: 03-04 Topic: Consolidation balances―Calculate Topic: Consolidation balances―Understand by any method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement

Feedback: Parent Income $3,180,000 + Sub Income $432,000 – Amortization Allocations $24,000 = Consolidated Net Income $3,588,000 REFERENCE: 03-04 Jans Inc. acquired all of the outstanding common stock of Tysk Corp. on January 1, 2016, for $372,000. Equipment with a ten-year life was undervalued on Tysk's financial records by $46,000. Tysk also owned an unrecorded customer list with an assessed fair value of $67,000 and an estimated remaining life of five years. Tysk earned reported net income of $180,000 in 2016 and $216,000 in 2017. Dividends of $70,000 were paid in each of these two years. Selected account balances as of December 31, 2018, for the two companies follow. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Revenues Expenses Investment income Retained earnings, 1/1/18 Dividends paid

Jans $1,080,000 480,000 Not given 840,000 132,000

Tysk $840,000 600,000 0 600,000 70,000

[QUESTION] REFER TO: 03-04 21. If the partial equity method had been applied, what was 2018 consolidated net income? A) $840,000. B) $768,400. C) $822,000. D) $240,000. E) $600,000. Answer: C Learning Objective: 03-03 Learning Objective: 03-03c Learning Objective: 03-04 Topic: Amortization calculations Topic: Consolidation entries―Partial equity Topic: Consolidation balances―Calculate Topic: Consolidation balances―Understand by any method Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Excess amortizations: Equipment ($46,000/10) = $4,600 Customer list ($67,000/5) = $13,400 Total: $4,600 + $13,400 = $18,000 Parent $1,080,000 - $480,000 = $600,000; Sub $840,000 - $600,000 = $240,000; $600,000 + $240,000 = $840,000 – $18,000 = $822,000 [QUESTION] REFER TO: 03-04 22. If the equity method had been applied, what would be the Investment in Tysk Corp. account balance within the records of Jans at the end of 2018? A) $612,100. B) $744,000. C) $774,150. D) $372,000. E) $844,150. Answer: B Learning Objective: 03-03a Topic: Investment and income―Equity method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Initial Investment $372,000 2016 Entries: $180,000 - $70,000 - $18,000 = $92,000 2017 Entries: $216,000 - $70,000 - $18,000 = $128,000 2018 Entries: $240,000 - $70,000 - $18,000 = $152,000 $372,000 + $92,000 + $128,000 + $152,000 = $744,000 [QUESTION] 23. Red Co. acquired 100% of Green, Inc. on January 1, 2017. On that date, Green had land with a book value of $42,000 and a fair value of $52,000. Also, on the date of acquisition, Green had a building with a book value of $200,000 and a fair value of $390,000. Green had equipment with a book value of $350,000 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, 2017 related to the acquisition allocations of Green? A) $43,000. B) $33,000. C) $ 5,000. D) $15,000. E) $0. Answer: C Learning Objective: 03-03 Learning Objective: 03-04 Topic: Amortization calculations Topic: Consolidation balances―Understand by any method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement

Feedback: Land ($0 excess amortization) + Building ($190,000/10 = $19,000 excess amortization) + Equipment ($70,000/5 = $14,000 reduction of amortization expense) = ($19,000 - $14,000) = $5,000 excess amortization [QUESTION] 24. 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. E) Book value method. Answer: D Learning Objective: 03-02 Topic: Investment methods―Identify and differentiate Difficulty: 1 Easy Blooms: Remember AACSB: Reflective thinking AICPA BB: Critical Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA FN: Measurement [QUESTION] 25. 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. Answer: D Learning Objective: 03-02 Topic: Investment methods―Identify and differentiate Topic: Investment and income―Equity method Difficulty: 1 Easy Blooms: Remember AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 26. 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. Answer: D Learning Objective: 03-02 Topic: Investment and income―Partial equity method Difficulty: 2 Medium Blooms: Understand AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 27. Under the initial value method, when accounting for an investment in a subsidiary, 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. Answer: D Learning Objective: 03-02 Topic: Investment and income―Initial value method Difficulty: 2 Medium Blooms: Understand AACSB: Reflective thinking AICPA BB: Critical Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA FN: Measurement [QUESTION] 28. 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. Answer: C Learning Objective: 03-05 Topic: Impairment―Goodwill―Rationale Difficulty: 1 Easy Blooms: Remember AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 29. 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 for a consolidation worksheet for the second year? A) B) C) D) E)

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

Answer: B Learning Objective: 03-03b Topic: Consolidation entries―Initial value Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 30. 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 for a consolidation worksheet in the second year?

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A) B) C) D) E)

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

Answer: A Learning Objective: 03-03b Topic: Consolidation entries―Initial value Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 31. 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 in a year subsequent to the initial acquisition of the subsidiary? A) B) C) D) E)

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

Answer: A Learning Objective: 03-03c Topic: Consolidation entries―Partial equity Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement

[QUESTION] 32. When consolidating parent and subsidiary financial statements, which of the following statements is true? Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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. Answer: D Learning Objective: 03-05 Topic: Impairment―Goodwill―Rationale Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 33. 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. Answer: B Learning Objective: 03-03a Topic: Consolidation entries―Equity Topic: Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 34. 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. Answer: D Learning Objective: 03-07 Topic: Impairment―Intangibles other than goodwill Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA FN: Measurement [QUESTION] 35. 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. Answer: C Learning Objective: 03-08 Topic: Contingent consideration Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 36. 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. Answer: E Learning Objective: 03-07 Topic: Impairment―Intangibles other than goodwill Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 37. 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 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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. Answer: C Learning Objective: 03-03a Topic: Consolidation entries―Equity Topic: Consolidation balances―Calculate Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement REFERENCE: 03-05 Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2017, for $3,800 cash. As of that date Hurley has the following trial balance;

Cash Accounts receivable Inventory Buildings (net) (5 year life) Equipment (net) (2 year life) Land Accounts payable Long -term liabilities (due 12/31/20) Common stock Additional paid -in capital Retained earnings Total

Debit $ 500 600 800 1,500 1,000 900

_____ $5,300

Credit

$ 400 1,800 1,000 600 1,500 $5,300

Net income and dividends reported by Hurley for 2017 and 2018 follow: 2017 2018 Net income $100 $120 Dividends 30 40 The fair value of Hurley’s net assets that differ from their book values are listed below: Fair Value Buildings Equipment Land Long -term liabilities

$ 1,200 1,250 1,300 1,700

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Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. [QUESTION] REFER TO: 03-05 38. Compute the consideration transferred in excess of book value acquired at January 1, 2017. A) $ 150. B) $ 700. C) $2,200. D) $ 550. E) $2,900. Answer: B Learning Objective: 03-04 Topic: Consolidation balances―Understand by any method Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement

Feedback: Acquisition Price $3,800 – Total Equity at Acquisition $3,100 = $700 [QUESTION] REFER TO: 03-05 39. Compute goodwill, if any, at January 1, 2017. A) $ 150. B) $ 250. C) $ 700. D) $1,200. E) $ 550. Answer: B Learning Objective: 03-04 Topic: Consolidation balances―Understand by any method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement

Feedback: Excess (from above) $700 + $300 buildings – $250 equipment – $400 Land – $100 liabilities = $250 Excess Unidentified (Goodwill) [QUESTION] REFER TO: 03-05 40. Compute the amount of Hurley's inventory that would be reported in a January 1, 2017, consolidated balance sheet. A) $800. B) $100. C) $900. D) $150. E) $ 0. Answer: A Learning Objective: 03-03 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Topic: Consolidation balances―Calculate Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Fair Value at Acquisition = $800

[QUESTION] REFER TO: 03-05 41. Compute the amount of Hurley's buildings that would be reported in a December 31, 2017, consolidated balance sheet. A) $1,560. B) $1,260. C) $1,440. D) $1,160. E) $1,140. Answer: B Learning Objective: 03-03 Topic: Amortization calculations Topic: Consolidation balances―Calculate Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: FV $1,200 + Excess Amortization ($300 / 5) $60 = $1,260 [QUESTION] REFER TO: 03-05 42. Compute the amount of Hurley's equipment that would be reported in a December 31, 2017, consolidated balance sheet. A) $1,000. B) $1,250. C) $ 875. D) $1,125. E) $ 750. Answer: D Learning Objective: 03-03 Topic: Amortization calculations Topic: Consolidation balances―Calculate Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: FV $1,250 – Excess Amortization ($250 / 2) $125 = $1,125 [QUESTION] REFER TO: 03-05 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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43. Compute the amount of Hurley's long-term liabilities that would be reported in a December 31, 2017, consolidated balance sheet. A) $1,800. B) $1,700. C) $1,725. D) $1,675. E) $3,500. Answer: C Learning Objective: 03-03 Topic: Amortization calculations Topic: Consolidation balances―Calculate Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: FV $1,700 + Excess Amortization ($100 / 4) $25 = $1,725 [QUESTION] REFER TO: 03-05 44. Compute the amount of Hurley's buildings that would be reported in a December 31, 2018, consolidated balance sheet. A) $1,620. B) $1,380. C) $1,320. D) $1,080. E) $1,500. Answer: C Learning Objective: 03-03 Topic: Amortization calculations Topic: Consolidation balances―Calculate Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: FV $1,200 + Excess Amortization ($300 / 5) $60 × 2 = $1,320 [QUESTION] REFER TO: 03-05 45. Compute the amount of Hurley's equipment that would be reported in a December 31, 2018, consolidated balance sheet. A) $ 0. B) $1,000. C) $1,250. D) $1,125. E) $1,200. Answer: B Learning Objective: 03-03 Topic: Amortization calculations Topic: Consolidation balances―Calculate Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: FV $1,250 – Excess Amortization ($250 / 2) $125 × 2 = $1,000 [QUESTION] REFER TO: 03-05 46. Compute the amount of Hurley's land that would be reported in a December 31, 2018, consolidated balance sheet. A) $ 900. B) $1,300. C) $ 400. D) $1,450. E) $2,200. Answer: B Learning Objective: 03-03 Topic: Consolidation balances―Calculate Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement

Feedback: FV $1,300 [QUESTION] REFER TO: 03-05 47. Compute the amount of Hurley's long-term liabilities that would be reported in a December 31, 2018, consolidated balance sheet. A) $1,700. B) $1,800. C) $1,650. D) $1,750. E) $3,500. Answer: D Learning Objective: 03-03 Topic: Amortization calculations Topic: Consolidation balances―Calculate Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: FV $1,700 + Excess Amortization ($100 / 4) $25 × 2 = $1,750 REFERENCE: 03-06 Kaye Company acquired 100% of Fiore Company on January 1, 2018. 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 2018 and paid dividends of $100. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 03-06 48. 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 Answer: C Learning Objective: 03-02 Learning Objective: 03-03a Topic: Investment and income―Equity method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement

Feedback: 2018 Income $400 – Amortization $20 = $380 [QUESTION] REFER TO: 03-06 49. 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 Answer: A Learning Objective: 03-02 Topic: Investment and income―Partial equity method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: 2018 Income = $400 [QUESTION] REFER TO: 03-06 50. 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 Answer: D Learning Objective: 03-02 Topic: Investment and income―Initial value method Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement

Feedback: 2018 Dividends = $100 [QUESTION] REFER TO: 03-06 51. Assume the partial equity method is used. In the years following acquisition, what additional worksheet entry must be made for consolidation purposes, but is not required for the equity method? A) B) C) D) E)

Retained earnings Investment in Fiore Investment in Fiore Retained earnings Expenses Investment in Fiore Expenses Retained earnings Retained earnings Additional paid-in capital

20 20 20 20 20 20 20 20 20 20

A) Entry A. B) Entry B. C) Entry C. D) Entry D. E) Entry E. Answer: A Learning Objective: 03-03c Topic: Consolidation entries―Partial equity Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] REFER TO: 03-06 52. 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) B) C)

Investment in Fiore Retained earnings Retained earnings Investment in Fiore Investment in Fiore

380 380 380 380 280

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D) E)

Retained earnings Retained earnings Investment in Fiore Additional paid-in capital Retained earnings

280 280 280 280 280

A) Entry A. B) Entry B. C) Entry C. D) Entry D. E) Entry E. Answer: C Learning Objective: 03-03b Topic: Consolidation entries―Initial value Difficulty: 3 Hard Blooms: Analyze AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 53. Hoyt Corporation agreed to the following terms in order to acquire the net assets of Brown Company on January 1, 2018: (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. Answer: E Learning Objective: 03-04 Topic: Consolidation balances―Understand by any method Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Common Stock (400 shares × $45) $18,000 + Liabilities Assumed $1,500 = $19,500 REFERENCE: 03-07 Following are selected accounts for Green Corporation and Vega Company as of December 31, 2020. Several of Green's accounts have been omitted.

Revenues Cost of goods sold Depreciation expense Other expenses

Green $900,000 360,000 140,000 100,000

Vega $500,000 200,000 40,000 60,000

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Equity in Vega’s income Retained earnings, 1/1/2020 Dividends Current assets Land Building (net) Equipment (net) Liabilities Common stock Additional paid-in capital

? 1,350,000 195,000 300,000 450,000 750,000 300,000 600,000 450,000 75,000

1,200,000 80,000 1,380,000 180,000 280,000 500,000 620,000 80,000 320,000

Green acquired 100% of Vega on January 1,2016, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share. On January 1, 2016, 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. [QUESTION] REFER TO: 03-07 54. Compute the book value of Vega at January 1, 2016. A) $ 997,500. B) $ 857,500. C) $1,200,000. D) $1,600,000. E) $ 827,500. Answer: B Learning Objective: 03-04 Topic: Consolidation balances―Understand by any method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: 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 [QUESTION] REFER TO: 03-07 55. Compute the December 31, 2020, consolidated revenues. A) $1,400,000. B) $ 800,000. C) $ 500,000. D) $1,590,375. E) $1,390,375. Answer: A Learning Objective: 03-03 Topic: Consolidation balances―Calculate Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: $900,000 + $500,000 = $1,400,000 [QUESTION] REFER TO: 03-07 56. Compute the December 31, 2020, consolidated total expenses. A) $620,000. B) $280,000. C) $900,000. D) $909,625. E) $299,625. Answer: D Learning Objective: 03-03 Topic: Amortization calculations Topic: Consolidation balances―Calculate Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: COGS ($360,000 + $200,000) + Depreciation ($140,000 + $40,000) + Other Exp ($100,000 + $60,000) + Excess FV Amortization (Blg [$1,500] + Equip $8,000 + Trademark $3,125) = $909,625 [QUESTION] REFER TO: 03-07 57. Compute the December 31, 2020, consolidated buildings. A) $1,037,500. B) $1,007,500. C) $1,000,000. D) $1,022,500. E) $1,012,500. Answer: B Learning Objective: 03-03 Topic: Amortization calculations Topic: Consolidation balances―Calculate Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: $750,000 + $280,000 - $30,000 = $1,000,000 + Amortization ($1,500 × 5) = $1,007,500 [QUESTION] REFER TO: 03-07 58. Compute the December 31, 2020, consolidated equipment. A) $800,000. B) $808,000. C) $840,000. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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D) $760,000. E) $848,000. Answer: C Learning Objective: 03-03 Topic: Amortization calculations Topic: Consolidation balances―Calculate Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: $300,000 + $580,000 = $880,000 – Amortization ($8,000 × 5) = $840,000 [QUESTION] REFER TO: 03-07 59. Compute the December 31, 2020, consolidated land. A) $220,000. B) $180,000. C) $670,000. D) $630,000. E) $450,000. Answer: C Learning Objective: 03-03 Topic: Consolidation balances―Calculate Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: $450,000 + $180,000 +$40,000= $670,000 [QUESTION] REFER TO: 03-07 60. Compute the December 31, 2020, consolidated trademark. A) $50,000. B) $46,875. C) $ 0. D) $34,375. E) $37,500. Answer: D Learning Objective: 03-03 Topic: Amortization calculations Topic: Consolidation balances―Calculate Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: $50,000 – Amortization ($3,125 × 5) = $34,375 [QUESTION] Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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REFER TO: 03-07 61. Compute the December 31, 2020, consolidated common stock. A) $450,000. B) $530,000. C) $555,000. D) $635,000. E) $525,000. Answer: A Learning Objective: 03-03 Topic: Consolidation balances―Calculate Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: $450,000 (Parent Only) [QUESTION] REFER TO: 03-07 62. Compute the December 31, 2020, consolidated additional paid-in capital. A) $210,000. B) $75,000. C) $1,102,500. D) $942,500. E) $525,000. Answer: B Learning Objective: 03-03 Topic: Consolidation balances―Calculate Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: $75,000 (Parent Only) [QUESTION] REFER TO: 03-07 63. Compute the December 31, 2020 consolidated retained earnings. A) $1,645,375. B) $1,350,000. C) $1,565,375. D) $1,840,375. E) $1,265,375. Answer: A Learning Objective: 03-03 Topic: Consolidation balances―Calculate Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Feedback: Parent Beg RE: $1,350,000 + Consolidated Net Income $490,375 – Consolidated Dividends $195,000 = Consolidated RE $1,645,375 [QUESTION] 64. 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 method is used, no worksheet entries are required in the consolidation process. Answer: B Learning Objective: 03-02 Topic: Investment methods―Identify and differentiate Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 65. 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. Answer: D Learning Objective: 03-02 Topic: Investment methods―Identify and differentiate Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 66. 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. Answer: C Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Learning Objective: 03-05 Topic: Impairment―Goodwill―Rationale Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 67. Which of the following will result in the recognition of an impairment loss on goodwill? 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. Answer: B Learning Objective: 03-05 Topic: Impairment―Goodwill―Rationale Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement REFERENCE: 03-08 Goehler, Inc. acquires all of the voting stock of Kenneth, Inc. on January 4, 2017, 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). Goehler has equipment with a book value of $800,000 and a fair value of $1,200,000 (10-year remaining life). On December 31, 2018, Goehler 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. [QUESTION] REFER TO: 03-08 68. If Goehler applies the equity method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2018? A) $1,080,000. B) $1,104,000. C) $1,100,000. D) $1,468,000. E) $1,475,000. Answer: B Learning Objective: 03-03 Learning Objective: 03-03a Topic: Amortization calculations Topic: Consolidation balances―Calculate Topic: Consolidation entries―Equity Difficulty: 2 Medium Blooms: Apply Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Excess amortizations: (120,000-90,000=30,000/10 = 3,000 per year). 2018 Balance Goehler Bv 975,000+ Kenneth BV 105,000 + Fair value adjustment 30,000 – amortization for 2017 and 2018 (3,000 × 2) = 1,104,000 [QUESTION] REFER TO: 03-08 69. If Goehler applies the partial equity method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2018? A) $1,080,000. B) $1,104,000. C) $1,100,000. D) $1,468,000. E) $1,475,000. Answer: B Learning Objective: 03-03 Learning Objective: 03-04 Learning Objective: 03-03c Topic: Amortization calculations Topic: Consolidation balances―Calculate Topic: Consolidation entries―Partial equity Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Same as above [QUESTION] REFER TO: 03-08 70. If Goehler applies the initial value method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2018? A) $1,080,000. B) $1,104,000. C) $1,100,000. D) $1,468,000. E) $1,475,000. Answer: B Learning Objective: 03-03 Learning Objective: 03-04 Learning Objective: 03-03b Topic: Amortization calculations Topic: Consolidation balances―Calculate Topic: Consolidation entries―Initial value Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Feedback: Same as above, [QUESTION] 71. 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. Answer: D Learning Objective: 03-07 Topic: Impairment―Intangibles other than goodwill Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement REFERENCE: 03-09 Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2017 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2018 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. [QUESTION] REFER TO: 03-09 72. What will Harrison record as its Investment in Rhine on January 1, 2017? A) $400,000. B) $403,142. C) $406,000. D) $409,142. E) $416,500. Answer: B Learning Objective: 03-08 Difficulty: 2 Medium Topic: Contingent consideration Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Cash Payment $400,000 + Weighted Fair Value of Contingency $3,142 = $403,142 [QUESTION] REFER TO: 03-09 73. Assuming Rhine generates cash flow from operations of $27,200 in 2017, how will Harrison record the $16,500 payment of cash on April 15, 2018 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 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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. Answer: B Learning Objective: 03-08 Topic: Contingent consideration Difficulty: 3 Hard Blooms: Analyze AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] REFER TO: Ref. 03-09 74. When recording consideration transferred for the acquisition of Rhine on January 1, 2017, 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 Answer: C Learning Objective: 03-08 Topic: Contingent consideration Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Weighted Fair Value of Contingency = $3,142 REFERENCE: 03-10 Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2017 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, 2018 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 Gateaux on April 1, 2018 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. [QUESTION] REFER TO: 03-10 75. What will Beatty record as its Investment in Gataux on January 1, 2017? A) $500,000. B) $503,461. C) $506,345. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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D) $532,000. E) $546,500. Answer: C Learning Objective: 03-08 Topic: Contingent consideration Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Cash Payment $500,000 + Weighted Fair Value of Contingency ($3,461 cash + $2,884 stock) = $506,345. [QUESTION] REFER TO: 03-10 76. 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. Answer: B Learning Objective: 03-08 Topic: Contingent consideration Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] REFER TO: 03-10 77. On April 1, 2018, 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 Gateax? A) 682 B) 2,000 C) 2,228 D) 2,884 E) 6,000 Answer: C Learning Objective: 03-08 Topic: Contingent consideration Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: $20,000/8.98 per share = 2,228 shares [QUESTION] 78. Prince Company acquires Duchess, Inc. on January 1, 2016. At the date of acquisition, Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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 Answer: E Learning Objective: 03-03 Topic: Amortization calculations Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 79. 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. Answer: B Learning Objective: 03-05 Topic: Impairment―Goodwill―Rationale Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement REFERENCE: 03-12 Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2017. At that date, Glen owns only three assets and has no liabilities:

Land Equipment (10-year life) Building (20-year life)

Book Value

Fair Value

$ 40,000 80,000 200,000

$ 50,000 75,000 300,000

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 03-12 80. 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, 2019, 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. Answer: B Learning Objective: 03-03 Topic: Amortization calculations Topic: Consolidation balances―Calculate Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Fair Value at Acquisition ($300,000) – Amortization [($100,000 / 20) × 3] = $285,000 [QUESTION] REFER TO: 03-12 81. 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, 2019, 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. Answer: B Learning Objective: 03-03 Topic: Amortization calculations Topic: Consolidation balances―Calculate Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Fair Value at Acquisition ($300,000) – Amortization [($100,000 / 20) × 3] = $285,000 [QUESTION] REFER TO: 03-12 82. 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, 2019, 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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E) $80,000. Answer: D Learning Objective: 03-03 Topic: Amortization calculations Topic: Consolidation balances―Calculate Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Fair Value at Acquisition ($75,000) + Amortization [($5,000 / 10) × 3] = $76,500 [QUESTION] REFER TO: 03-12 83. 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, 2019? A) ($5,000). B) $80,000. C) $75,000. D) $73,500. E) ($3,500). Answer: E Learning Objective: 03-03 Topic: Amortization calculations Topic: Consolidation balances―Calculate Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Fair Value Differential at Acquisition [$5,000] + Amortization ([($5000 / 10) × 3] = [$3,500] [QUESTION] REFER TO: 03-12 84. If Watkins pays $300,000 in cash for Glen, at what amount would the subsidiary’s Building be represented in a January 2, 2017 consolidation? A) $200,000. B) $225,000. C) $273,000. D) $279,000. E) $300,000. Answer: E Learning Objective: 03-03 Topic: Consolidation balances―Calculate Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Feedback: Fair Value at Acquisition = $300,000 [QUESTION] REFER TO: 03-12 85. If Watkins pays $450,000 in cash for Glen, and Glen earns $50,000 in net income and pays $20,000 in dividends during 2017, what amount representing Glen would be reflected in consolidated net income for the year ended December 31, 2017? 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. Answer: E Learning Objective: 03-03 Learning Objective: 03-04 Topic: Amortization calculations Topic: Consolidation balances―Calculate Topic: Consolidation balances―Understand by any method Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Sub Income $50,000 – Amortizations ([$5,000] / 10) – ($100,000 / 20) = $45,500 [QUESTION] 86. 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. Answer: E Learning Objective: 03-06 Topic: Impairment―Goodwill―Procedures Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 87. When is a goodwill impairment loss recognized? 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. Answer: B Learning Objective: 03-06 Topic: Impairment―Goodwill―Procedures Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement

Essay: [QUESTION] 88. For an acquisition when the subsidiary retains its incorporation, which method of internal recordkeeping is the easiest for the parent to use? Answer: The initial value method is the easiest to use. Learning Objective: 03-02 Topic: Investment methods―Identify and differentiate Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 89. 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? Answer: The equity method gives the most accurate portrayal of the results for the combined entity. Learning Objective: 03-02 Topic: Investment methods―Identify and differentiate Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] 90. 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? Answer: 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. Learning Objective: 03-02 Topic: Investment and income―Partial equity method Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 91. From which methods can a parent choose for its internal recordkeeping related to the operations of a subsidiary? Answer: The parent can choose from among the initial value method, equity method, and partial equity method. Learning Objective: 03-02 Topic: Investment methods―Identify and differentiate Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 92. For recognized intangible assets that are considered to possess indefinite lives, what is the accounting treatment for purposes of income recognition? Answer: 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. Learning Objective: 03-07 Topic: Impairment―Intangibles other than goodwill Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 93. 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? Answer: 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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 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. Learning Objective: 03-02 Learning Objective: 03-03c Topic: Investment methods―Identify and differentiate Topic: Investment and income―Partial equity method Topic: Consolidation entries―Partial equity Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 94. What should an entity evaluate when making an initial impairment assessment of an intangible asset (other than goodwill)? Answer: An entity may perform qualitative assessments for its indefinite-lived 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. Learning Objective: 03-07 Topic: Impairment―Intangibles other than goodwill Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 95. What is the basic objective of all consolidations? Answer: 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 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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. Learning Objective: 03-01 Difficulty: 2 Medium Topic: Consolidation―Overall effects Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 96. 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. Answer: 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. Learning Objective: 03-02 Topic: Investment and income―Partial equity method Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 97. 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? Answer: 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. Learning Objective: 03-08 Topic: Contingent consideration Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 98. Avery Company acquires Billings Company in a combination accounted for as an acquisition Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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? Answer: 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. Learning Objective: 03-02 Topic: Investment and income―Equity method Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 99. 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? Answer: 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. Learning Objective: 03-06 Topic: Consolidation balances―Calculate Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 100. 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. Answer: 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. Learning Objective: 03-05 Topic: Impairment―Goodwill―Rationale Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 101. Compare the differences in accounting treatment for goodwill between U.S. GAAP and Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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IFRS. Answer: 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. Learning Objective: 03-05 Topic: Impairment―Goodwill―Rationale Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Problems: [QUESTION] 102. On January 1, 2017, 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 2017, Cable recognized net income of $54,000 and paid dividends of $24,000. Cable's net income and dividends for 2018 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 2018. Answer: Investment in Cable Corp. – initial cost Income accrual – 2017 Dividends collected – 2017 Income accrual– 2018 Dividends collected – 2018 Investment in Cable Corp., December 31, 2018

$540,000 54,000 (24,000) 86,000 (24,000) $632,000

Learning Objective: 03-02 Learning Objective: 03-03c Topic: Investment and income―Partial equity method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 103. Hanson Co. acquired all of the common stock of Roberts Inc. on January 1, 2017, Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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, 2018, 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, 2018? Answer: Building balance - Hanson Co. Building balance – Roberts Co. Original fair value allocation to Roberts’ buildings ($696,000 – 600,000) Amortization of allocation [($96,000/20 years) × 2 years] Buildings, consolidated balance Learning Objective: 03-03 Learning Objective: 03-04 Topic: Amortization calculations Topic: Consolidation balances―Calculate Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement

$1,878,000 570,000 96,000 (9,600) $2,534,400

[QUESTION] 104. 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 2018, 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? Answer: Equity in Subsidiary Earnings for 2018 Amortization of trademark ($30,000 ÷ 10 years) Equity in Subsidiary Earnings balance at December 31, 2018

$ $

78,000 3,000 75,000

Learning Objective: 03-02 Learning Objective: 03-03a Topic: Investment methods―Identify and differentiate Topic: Amortization calculations Topic: Investment and income―Equity method Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA FN: Measurement REFERENCE: 03-13 Fesler Inc. acquired all of the outstanding common stock of Pickett Company on January 1, 2017. 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 2017 and $68,000 in 2018, and paid dividends of $25,000 in dividends each year. Pickett reported net income of $24,000 in 2017 and $36,000 in 2018, and paid dividends of $10,000 in dividends each year. [QUESTION] REFER TO: 03-13 105. If the parent’s net income reflected use of the equity method, what were the consolidated retained earnings on December 31, 2018? Answer: Equity Method Fesler (parent) balance — 1/1/17 $ 520,000 Fesler net income — 2017 100,000 Fesler dividends — 2017 ( 25,000) Fesler income — 2018 68,000 Fesler dividends — 2018 ( 25,000) Consolidated retained earnings, December 31, 2018 $ 638,000

Learning Objective: 03-03a Topic: Consolidation balances―Calculate Topic: Consolidation entries―Equity Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] REFER TO: 03-13 106. If the parent’s net income reflected use of the partial equity method, what were the consolidated retained earnings on December 31, 2018? Answer: Partial Equity Method Fesler (parent) balance — 1/1/17 $ 520,000 Fesler income — 2017 100,000 Amortization — 2017 ( 22,000) Fesler dividends — 2017 ( 25,000) Fesler income — 2018 68,000 Amortization — 2018 ( 22,000) Fesler dividends — 2018 ( 25,000) Consolidated retained earnings, December 31, 2018 $ 594,000

Learning Objective: 03-03c Topic: Consolidation balances―Calculate Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Topic: Consolidation entries―Partial equity Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] REFER TO: 03-13 107. If the parent’s net income reflected use of the initial value method, what were the consolidated retained earnings on December 31, 2018? Answer: Initial value Method Fesler (parent) balance — 1/1/17 $ 520,000 Fesler income — 2017 100,000 Amortization — 2017 ( 22,000) Pickett income in excess of dividends paid — 2017 ($24,000 – $10,000) 14,000 Fesler dividends — 2018 ( 25,000) Fesler income — 2018 68,000 Amortization — 2018 ( 22,000) Pickett income in excess of dividends paid — 2018 ($36,000 – $10,000) 26,000 Fesler dividends — 2018 ( 25,000) Consolidated retained earnings, December 31, 2018 $ 634,000

Learning Objective: 03-03b Topic: Consolidation balances―Calculate Topic: Consolidation entries―Initial value Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement REFERENCE: 03-14 Jaynes Inc. acquired all of Aaron Co.'s common stock on January 1, 2017, 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.

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The following figures came from the individual accounting records of these two companies as of December 31, 2017: Jaynes Inc. $ 720,000 528,000 Not given 100,000

Revenues Expenses Investment income Dividends paid

$

Aaron Co. 276,000 144,000 — 60,000

The following figures came from the individual accounting records of these two companies as of December 31, 2018: Jaynes Inc. $ 840,000 552,000 Not given 110,000 600,000 960,000

Revenues Expenses Investment income Dividends paid Equipment Retained earnings, 12/31/18 balance

$

Aaron Co. 336,000 180,000 — 50,000 360,000 216,000

[QUESTION] REFER TO: 03-14 108. What balance would Jaynes' Investment in Aaron Co. account have shown on December 31, 2018, when the equity method was applied for this acquisition? Answer: An allocation of the acquisition value (based on the fair value of the shares issued) must first be made.

Life Acquisition value (11,000 shares × 17) Book value equivalency Excess of fair value over book value Excess of fair value assigned to specific accounts based on fair value Equipment Patent Total

Annual Amortization

$187,000 (120,000) $ 67,000

6,000 $ 61,000

Original acquisition value 2017 income accrual ($276,000 - $144,000) 2017 dividends paid by Aaron 2017 amortization (from above) 2018 income accrual ($336,000 - $180,000) 2018 dividends paid by Aaron

5 years 10 years

$ 1,200 6,100 $ 7,300 $187,000 132,000 (60,000) (7,300) 156,000 (50,000)

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2018 amortization Investment in Aaron Co. – December 31, 2018 Learning Objective: 03-03 Learning Objective: 03-03a Topic: Amortization calculations Topic: Investment and income―Equity method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement

(7,300) $350,400

[QUESTION] REFER TO: 03-14 109. What was consolidated net income for the year ended December 31, 2018? Answer: Net income of Jaynes Inc. ($840,000 - $552,000) Net income of Aaron Co. ($336,000 - $180,000) Amortization expense (from schedule below) Consolidated net income – 2018 Excess of fair value assigned to specific accounts based on fair value Equipment Patent Total

$288,000 156,000 (7,300) $436,700

6,000 $ 61,000

5 years 10 years

$ 1,200 6,100 $ 7,300

Learning Objective: 03-03 Topic: Amortization calculations Topic: Consolidation balances―Calculate Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] REFER TO: 03-14 110. What was consolidated equipment as of December 31, 2018? Answer: Equipment balance – Jaynes Inc. $600,000 Equipment balance – Aaron Co. 360,000 Allocation based on fair value (from above) 6,000 Amortization for 2017- 2018 ($1,200 × 2) (2,400) Consolidated equipment – December 31, 2018 $963,600 Learning Objective: 03-03 Topic: Amortization calculations Topic: Consolidation balances―Calculate Difficulty: 2 Medium Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] REFER TO: 03-14 111. What was the total for consolidated patents as of December 31, 2018? Answer: Allocation to patent based on acquisition price (from above) $61,000 Amortization for 2017- 2018 ($6,100 × 2) (12,200) Consolidated patent – December 31, 2018 $48,800 Learning Objective: 03-03 Topic: Amortization calculations Topic: Consolidation balances―Calculate Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement REFERENCE: 03-15 Utah Inc. acquired all of the outstanding common stock of Trimmer Corp. on January 1, 2016. At that date, Trimmer owned only three assets and had no liabilities: Book Value $ 36,000 84,000 120,000

Land Equipment (5 - year life) Building (10 - year life)

Fair Value $ 48,000 60,000 180,000

[QUESTION] REFER TO: 03-15 112. 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, 2018 consolidation? Answer: 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 Equipment

Fair Value Allocation $60,000 (24,000)

Life 10 years 5 years

Building: Allocation – January 1, 2016

Annual Amortization $6,000 (4,800)

$60,000

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Amortization during past years ($6,000 × 2 years) Amortization for current year Allocation – December 31, 2018

(12,000) (6,000) $42,000

Equipment: Allocation – January 1, 2016 (valuation reduction) Amortization during past years ($4,800 × 2 years) Amortization for current year Allocation – December 31, 2018

$(24,000) 9,600 4,800 $(9,600)

Learning Objective: 03-03 Topic: Amortization calculations Topic: Consolidation balances―Calculate Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement

[QUESTION] 113. Matthews Co. acquired all of the common stock of Jackson Co. on January 1, 2017. As of that date, Jackson had the following trial balance:

During 2017, Jackson reported net income of $96,000 while paying dividends of $12,000. During 2018, 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, 2017, 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, 2017. (B.) Prepare consolidation worksheet entries for December 31, 2018. Answer: Consideration transferred for Jackson Co. Book value Excess of consideration transferred over book value Excess consideration transferred, assigned to specific accounts based on fair values Land Buildings Equipment

$588,000 (480,000) $108,000 Annual Amortization

Allocation

20 years

$ 2,400

12,000 48,000

8 years

(3,000)

(24,000)

Life

36,000

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Patent (remaining excess) Total

10 years

7,200 6,600

72,000

A. Consolidated Worksheet Entries-2017: Entry S Common Stock-Jackson Co. Additional Paid-In Capital Retained Earnings, 1/1/17 Investment in Jackson Co.

300,000 60,000 120,000 480,000

Entry A Land Buildings Patent Equipment Investment in Jackson Co.

12,000 48,000 72,000 24,000 108,000

Entry I Investment Income Investment in Jackson Co.

89,400 89,400

Entry D Investment in Jackson Co. Dividends Paid

12,000 12,000

Entry E Expense Equipment Buildings Patent

6,600 3,000 2,400 7,200

B. Consolidated Worksheet Entries - 2018: Entry S Common Stock-Jackson Co. Additional Paid-In Capital

300,000 60,000

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Retained Earnings, 1/1/18 Investment in Jackson Co.

204,000 564,000

Entry A Land Buildings Patent Equipment Investment in Jackson Co.

12,000 45,600 64,800 21,000 101,400

Entry I Investment Income Investment in Jackson Co.

125,400 125,400

Entry D Investment in Jackson Co. Dividends Paid

36,000 36,000

Entry E Expense Equipment Buildings Patent

6,600 3,000 2,400 7,200

Learning Objective: 03-03a Topic: Consolidation entries―Equity Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 114. On January 1, 2016, 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, 2019. Rand

Spaulding

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Revenues Expenses Equity in subsidiary earnings Net income

Corp. $ 372,000 (264,000) 25,000 $ 133,000

Inc. $108,000 (72,000) 0 $ 36,000

Retained earnings, January 1, 2019 Net income (above) Dividends paid Retained earnings, December 31, 2019

$ 765,000 133,000 (84,000) $ 814,000

$102,000 36,000 (24,000) $114,000

Current assets Investment in Spaulding Inc. Buildings (net) Equipment (net) Total assets

$ 150,000 242,000 525,000 389,250 $1,306,250

$ 22,000 0 85,000 129,000 $236,000

Liabilities Common stock Additional paid-in capital Retained earnings, December 31, 2019 (above) Total liabilities and stockholders’ equity

$ 82,250 360,000 50,000 814,000 $1,306,250

$ 50,000 72,000 0 114,000 $236,000

Required: Prepare a consolidation worksheet for this business combination. Answer: Consolidation Worksheet for Rand and Spaulding: CONSOLIDATION WORKSHEET-Acquisition For the Year Ended 12/31/ 2019

Rand

Spaulding

Account Revenues Expenses Equity in Sub Income Net Income

Corp. 372,000 (264,000) 25,000 133,000

Inc. 108,000 (72,000) _____ 36,000

R/E, 1/1/19 Net Income Dividends R/E, 12/31/19

765,000 133,000 (84,000) 814,000

102,000 36,000 (24,000) 114,000

Current assets Investment in Spaulding

150,000 242,000

22,000

Consolidation Entries

DR

CR

(E) 11,000 (I) 25,000

(S) 102,000 (D) 24,000

Consolidated Balance 480,000 (347,000) ______ 133,000 765,000 133,000 (84,000) 814,000 172,000

(D) 24,000

(S) 174,000 (A) 67,000 (I) 25,000

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Building (net) Equipment (net) Goodwill Total Assets

525,000 389,250 _______ 1,306,250

85,000 129,000 ______ 236,000

(A) 42,000 (A) 10,000 (A) 15,000

Liabilities Common Stock Additional Paid-in Capital R/E, 12/31/19 Total liabilities& Stockholders’ Equity

82,250 360,000 50,000 814,000 ________ 1,306,250

50,000 72,000

(S) 72,000

114,000 _______ 236,000

_______ 301,000

(E) 6,000 (E) 5,000

_______ 301,000

646,000 523,250 15,000 1,356,250 132,250 360,000 50,000 814,000 ________ 1,356,250

Learning Objective: 03-03a Topic: Consolidation worksheet preparation Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement REFERENCE: 03-16 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 2018 annual review for impairment:

[QUESTION] REFER TO: 03-16 115. Which of Pritchett’s reporting units require both steps to test for goodwill impairment? Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Answer: 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 Banana Carrot

Total Fair Value (w/GW) $525,000 450,000 215,000

Carrying Value (w/GW) > $515,000 > 433,000 < 230,000

Potential Goodwill Impairment? No No Yes

Therefore, the Carrot reporting unit requires both steps to test for goodwill impairment. Learning Objective: 03-06 Topic: Impairment―Goodwill―Procedures Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] REFER TO: 03-16 116. How much goodwill impairment should Pritchett report for 2018? Answer: Goodwill Impairment Test—Step 2 (Carrot only) Carrot—total fair value Fair values of identifiable net assets Tangible assets Unpatented technology Customer list Implied value of goodwill Carrying value of goodwill Total Impairment loss

$215,000 $120,000 50,000 45,000

215,000 0 75,000 $75,000

Learning Objective: 03-06 Topic: Impairment―Goodwill―Procedures Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement REFERENCE: 03-17 On 1/1/16, Sey Mold Corporation acquired 100% of DotDot.Com for $2,000,000 cash. On the Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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. [QUESTION] REFER TO: 03-17 117. Determine the amortization expense related to the combination at the year-end date of 12/31/16. Answer:

Fair value consideration transferred in Sey Mold’s acquisition BV of DotDot.com at 1/1/16 Fair value in excess of BV, to be allocated: Land Building Equipment Patent Total Amortization

Amount $2,000,000

Life

Amortization

8 4 5

$50,000 (12,500) 90,000 $127,500

(900,000) $1,100,000 (300,000) (400,000) 50,000 $ 450,000

Learning Objective: 03-03 Topic: Amortization calculations Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement

[QUESTION] REFER TO: 03-17 118. Determine the amortization expense related to the consolidation at the year-end date of 12/31/24. Answer: By 2024, all of the fair value adjustments and the patent will have been fully amortized. The amortization expense for 2024 related to the combination will be $0. Learning Objective: 03-03 Topic: Amortization calculations Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] 119. 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. Answer: (1) F; (2) A; (3) E; (4) C; (5) D; (6) A; (7) A; (8) E; (9) C; (10) B Learning Objective: 03-02 Topic: Investment methods―Identify and differentiate Difficulty: 3 Hard Blooms: Understand AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement ADDITIONAL QUESTIONS COVERING APPENDIX MATERIAL AND NEW LO: 03-09 [QUESTION] 120. 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. Answer: E Learning Objective: 03-09 Topic: Private company accounting Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] 121. How is the goodwill impairment process simplified for private companies? ANSWER: 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. Learning Objective: 03-09 Topic: Private company accounting Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Measurement

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File: Chapter 04 - Consolidated Financial Statements and Outside Ownership Multiple Choice: [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) None of these choices is correct. Answer: B Learning Objective: 04-02 Topic: Acquisition-date―Consolidated balance sheet Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement REFERENCE: 04-01 When Jolt Co. acquired 75% of the common stock of Yelts Corp., Yelts owned land with a book value of $70,000 and a fair value of $100,000. [QUESTION] REFER TO: 04-01 2. What amount should have been reported for the land in a consolidated balance sheet at the acquisition date? A) $ 52,500. B) $ 70,000. C) $ 75,000. D) $ 92,500. E) $100,000. Answer: E Learning Objective: 04-02 Topic: Acquisition-date―Consolidated balance sheet Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: $100,000 FV of Land at Acquisition [QUESTION] REFER TO: 04-01 3. What is the total amount of excess land allocation at the acquisition date? A) $ 0. B) $30,000. C) $22,500. D) $25,000. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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E) $17,500. Answer: B Learning Objective: 04-05 Topic: Acquisition-date―Fair value allocation Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: FV $100,000 – BV $70,000 = $30,000 [QUESTION] REFER TO: 04-01 4. What is the amount of excess land allocation attributed to the controlling interest at the acquisition date? A) $ 0. B) $30,000. C) $22,500. D) $25,000. E) $17,500. Answer: C Learning Objective: 04-05 Topic: Acquisition-date―Fair value allocation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: FV – BV ($30,000) × .75 = $22,500 [QUESTION] REFER TO: 04-01 5. What is the amount of excess land allocation attributed to the noncontrolling interest at the acquisition date? A) $ 0. B) $30,000. C) $22,500. D) $ 7,500. E) $17,500. Answer: D Learning Objective: 04-05 Topic: Acquisition-date―Fair value allocation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: FV – BV ($30,000) × .25 = $7,500 [QUESTION] 6. Which of the following methods is not used to value a noncontrolling interest under circumstances Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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. Answer: D Learning Objective: 04-02 Learning Objective: 04-07 Topic: Acquisition-date―Fair value of subsidiary Topic: Goodwill―With control premium Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement REFERENCE: 04-02 Perch Co. acquired 80% of the common stock of Float Corp. for $1,600,000. The fair value of Float's net assets was $1,850,000, and the book value was $1,500,000. The noncontrolling interest shares of Float Corp. are not actively traded. [QUESTION] REFER TO: 04-02 7. What is the total amount of goodwill recognized at the date of acquisition? A) $150,000. B) $250,000. C) $ 0. D) $120,000. E) $170,000. Answer: A Learning Objective: 04-03 Topic: Goodwill―No control premium Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: FV $1,850,000 – FV of 100% of Float’s Stock based on Purchase Price ($1,600,000 / .80) $2,000,000 = ($150,000) Goodwill [QUESTION] REFER TO: 04-02 8. What amount of goodwill should be attributed to Perch at the date of acquisition? A) $150,000. B) $250,000. C) $ 0. D) $120,000. E) $170,000. Answer: D Learning Objective: 04-03 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Topic: Goodwill―No control premium Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: (Purchase Price for 80%) $1,600,000 – (FV $1,850,000 × .80 = $1,480,000) = $120,000 [QUESTION] REFER TO: 04-02 9. What amount of goodwill should be attributed to the noncontrolling interest at the date of acquisition? A) $ 0. B) $ 20,000. C) $ 30,000. D) $100,000. E) $120,000. Answer: C Learning Objective: 04-03 Topic: Goodwill―No control premium Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: $150,000 Goodwill × .20 = $30,000 to Noncontrolling Interest [QUESTION] REFER TO: 04-02 10. What is the dollar amount of noncontrolling interest that should appear in a consolidated balance sheet prepared at the date of acquisition? A) $350,000. B) $300,000. C) $400,000. D) $370,000. E) $0. Answer: C Learning Objective: 04-02 Learning Objective: 04-05 Learning Objective: 04-06 Topic: Acquisition-date―Consolidated balance sheet Topic: Acquisition-date―Fair value of subsidiary Topic: Noncontrolling interest―Calculate balance Topic: Noncontrolling interest―Statement presentation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: FV of Stock at Acquisition Date for 100% ($1,600,000 / .80) $2,000,000 × .20 = $400,000 [QUESTION] Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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REFER TO: 04-02 11. What is the dollar amount of Float Corp.’s net assets that would be represented in a consolidated balance sheet prepared at the date of acquisition? A) $1,600,000. B) $1,480,000. C) $1,200,000. D) $1,780,000. E) $1,850,000. Answer: E Learning Objective: 04-02 Learning Objective: 04-05 Topic: Acquisition-date―Consolidated balance sheet Topic: Acquisition-date―Fair value allocation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: FV of Assets Acquired = $1,850,000 [QUESTION] REFER TO: 04-02 12. What is the dollar amount of fair value over book value differences attributed to Perch at the date of acquisition? A) $120,000. B) $150,000. C) $280,000. D) $350,000. E) $370,000. Answer: C Learning Objective: 04-05 Topic: Acquisition-date―Fair value allocation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: FV $1,850,000 – BV $1,500,000 = $350,000 × .80 = $280,000 REFERENCE: 04-03 Femur Co. acquired 70% of the voting common stock of Harbor Corp. on January 1, 2019. During 2019, Harbor had revenues of $2,500,000 and expenses of $2,000,000. The amortization of fair value allocations totaled $60,000 in 2019. Not including its investment in Harbor, Femur Co. had its own revenues of $4,500,000 and expenses of $3,000,000 for the year 2019. [QUESTION] REFER TO: 04-03 13. The noncontrolling interest's share of the earnings of Harbor Corp. for 2019 is calculated to be A) $132,000. B) $150,000. C) $168,000. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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D) $160,000. E) $0. Answer: A Learning Objective: 04-04 Topic: Consolidated net income―Allocation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Revenue $2,500,000 – Expenses $2,000,000 = $500,000 – $60,000 = $440,000 × .30 = $132,000 [QUESTION] REFER TO: 04-03 14. What amount would Femur Co. report as consolidated net income for 2019? A) $440,000. B) $500,000. C) $1,500,000. D) $1,940,000. E) $2,000,000. Answer: D Learning Objective: 04-04 Topic: Consolidated net income Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Femur Net Income (Femur Revenue $4,500,000 less Femur Expenses $3,000,000 = $1,500,000) + Harbor Net Income (Harbor Revenue $2,500,000 – Harbor Expenses $2,000,000 – Amortizations for Excess Fair Value over Book Value = $500,000 – $60,000 = $440,000) = $1,500,000 + $440,000 = $1,940,000 [QUESTION] REFER TO: 04-03 15. What amount of consolidated net income for 2019 should be allocated to Femur’s controlling interest in Harbor? A) $ 582,000 B) $1,050,000 C) $1,358,000 D) $1,808,000 E) $2,140,000 Answer: D Learning Objective: 04-04 Topic: Consolidated net income―Allocation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Feedback: Total Consolidated Net Income ($1,940,000 – 132,000 to NCI) = $1,808,000 REFERENCE: 04-04 Denber Co. acquired 60% of the common stock of Kailey Corp. on September 1, 2019. For 2019, Kailey reported revenues of $810,000 and expenses of $630,000, not including its investment in Denber, and all reflected evenly throughout the year. The annual amount of amortization related to this acquisition was $15,000. [QUESTION] REFER TO: 04-04 16. In consolidation, the total amount of expenses related to Kailey, and to Denber’s acquisition of Kailey, for 2019 is determined to be A) $153,750. B) $161,250. C) $205,000. D) $210,000. E) $215,000. Answer: E Learning Objective: 04-08 Topic: Midyear acquisition Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Expenses $630,000 × 4/12 = $210,000; Amortization $15,000 × 4/12 = $5,000 = $215,000 [QUESTION] REFER TO: 04-04 17. What is the effect of including Kailey in consolidated net income for 2019? A) $31,000. B) $33,000. C) $55,000. D) $60,000. E) $39,000. Answer: C Learning Objective: 04-08 Topic: Midyear acquisition Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Revenue $810,000 – Expenses $630,000 = Income $180,000 × 4/12 = $60,000 – Annual Amortization ($15,000 × 4/12) = $55,000 [QUESTION] REFER TO: 04-04 18. What is the amount of Kailey’s net income to the controlling interest for 2019? A) $31,000. B) $33,000. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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C) $55,000. D) $60,000. E) $39,000. Answer: B Learning Objective: 04-08 Topic: Midyear acquisition Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Revenue $810,000 – Expenses $630,000 = Income $180,000 × 4/12 = $60,000 – Annual Amortization ($15,000 × 4/12) = $55,000 × .60 = $33,000 [QUESTION] REFER TO: 04-04 19. What is the amount of the noncontrolling interest's share of Kailey’s income for 2019? A) $22,000. B) $24,000. C) $48,000. D) $66,000. E) $72,000. Answer: A Learning Objective: 04-08 Topic: Midyear acquisition Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Total Income for September-December = $55,000 – Controlling Interest Portion $33,000 = $22,000. Revenue $810,000 – Expenses $630,000 = Income $180,000 × 4/12 = $60,000 – Annual Amortization ($15,000 × 4/12) = $55,000 × .40 = $22,000

[QUESTION] 20. MacHeath Inc. bought 60% of the outstanding common stock of Nomes Inc. in an acquisition that resulted in the recognition of goodwill. Nomes owned a piece of land that cost $250,000 but was worth $600,000 at the date of acquisition. What value would be attributed to this land in a consolidated balance sheet at the date of acquisition? A) $250,000. B) $150,000. C) $600,000. D) $360,000. E) $460,000. Answer: C Learning Objective: 04-02 Topic: Acquisition-date―Consolidated balance sheet Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: FV of the Land $600,000 [QUESTION] 21. Kordel Inc. acquired 75% of the outstanding common stock of Raxston Corp. Raxston currently owes Kordel $500,000 for inventory acquired over the past few months. In preparing consolidated financial statements, what amount of Raxston’s liability should be eliminated? A) $375,000 B) $125,000 C) $300,000 D) $500,000 E) $0. Answer: D Learning Objective: 04-05 Topic: Worksheet procedures Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: BV & FV of the Existing Receivable $500,000 REFERENCE: 04-05 Royce Co. acquired 60% of Park Co. for $420,000 on December 31, 2019 when Park's book value was $560,000. The Royce stock was not actively traded. On the date of acquisition, Park had equipment (with a ten-year life) that was undervalued in the financial records by $140,000. One year later, the two companies provided the selected amounts shown below. Additionally, no dividends have been paid.

Current assets Equipment Buildings Liabilities Revenues Expenses Investment income

Royce Co. Park Co. Book Book Fair Value Value Value $ 868,000 $ 420,000 $ 448,000 364,000 280,000 400,000 574,000 210,000 210,000 ( 546,000) ( 168,000) ( 168,000) ( 1,260,000) ( 560,000) 700,000 420,000 Not Given

[QUESTION] REFER TO: 04-05 22. What amount of consolidated net income for 2020 is attributable to Royce’s controlling interest? A) $686,000. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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B) $560,000. C) $644,000. D) $635,600. E) $691,600. Answer: D Learning Objective: 04-04 Topic: Consolidated net income―Allocation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: [Parent’s Income ($1,260,000 - $700,000 = $560,000)] + [Sub’s Income ($560,000 - $420,000) × .60 = $84,000] – [Excess Equipment Amortization for 2020 ($140,000 / 10) × .60 = $8,400] = $635,600 [QUESTION] REFER TO: 04-05 23. 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) $56,000 and $280,000. B) $50,400 and $218,400. C) $56,000 and $224,000. D) $56,000 and $336,000. E) $50,400 and $330,400. Answer: E Learning Objective: 04-04 Learning Objective: 04-05 Topic: Consolidated net income―Allocation Topic: Noncontrolling interest―Calculate balance Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: [Sub’s Income ($560,000 - $420,000) × .40 = $56,000] - [Excess Equipment Amortization for 2020 ($140,000 / 10) × .40 = $5,600] = $50,400 [Noncontrolling Interest at Acquisition (FV $700,000 × .40) = $280,000] + [Noncontrolling Interest 2020 Income $56,000] – [Excess Equipment Amortization ($140,000 / 10) × .40] = $330,400 [QUESTION] REFER TO: 04-05 24. What is the consolidated balance of the Equipment account at December 31, 2020? A) $644,400. B) $784,000. C) $719,600. D) $770,000. E) $775,600. Answer: D Learning Objective: 04-05 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Topic: Consolidated totals―Individual items Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: [Parent’s Equipment $364,000] + [Sub’s Equipment $280,000] + [Fair value allocation less one year of Amortization $140,000 - $14,000] = $770,000 REFERENCE: 04-06 On January 1, 2019, Palk Corp. and Spraz Corp. had condensed balance sheets as follows:

Current assets Noncurrent assets

Palk Corp. $ 99,000 $ 125,000

Spraz Corp. $ 28,000 $ 56,000

Total assets

$ 224,000

$

84,000

Current liabilities Long-term debt Stockholders' equity

$ 42,000 $ 70,000 $ 112,000

$ $ $

14,000 70,000

Total liabilities and stockholders' equity

$ 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. [QUESTION] REFER TO: 04-06 25. 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. Answer: D Learning Objective: 04-02 Learning Objective: 04-05 Topic: Acquisition-date―Consolidated balance sheet Topic: Acquisition-date―Fair value allocation Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Topic: Consolidated totals―Individual items Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: [Parent’s Current Assets $99,000] + [Sub’s Current Assets $28,000] + [Excess Consideration to Inventory ($105,000 - $70,000 = $35,000 × .60) $21,000] = $148,000 [QUESTION] REFER TO: 04-06 26. 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. Answer: A Learning Objective: 04-02 Learning Objective: 04-03 Learning Objective: 04-05 Topic: Acquisition-date―Consolidated balance sheet Topic: Goodwill―No control premium Topic: Consolidated totals―Individual items Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: [Parent’s Non-Current Assets $125,000] + [Sub’s Non-Current Assets $56,000] + [Excess Consideration to Goodwill ($105,000 - $70,000 = $35,000 × .40) $14,000] = $195,000 [QUESTION] REFER TO: 04-06 27. What are the total consolidated current liabilities at January 2, 2019? A) $53,200. B) $56,000. C) $64,400. D) $42,000. E) $70,000. Answer: C Learning Objective: 04-02 Learning Objective: 04-05 Topic: Acquisition-date―Consolidated balance sheet Topic: Consolidated totals―Individual items Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Feedback: [Parent’s Current Liabilities $42,000] + [Sub’s Current Liabilities $14,000] + [Current Portion of Acquisition Loan ($84,000 / 10) = $8,400] = $64,400 [QUESTION] REFER TO: 04-06 28. What is consolidated stockholders’ equity at January 2, 2019? A) $112,000. B) $133,000. C) $168,000. D) $182,000. E) $203,000. Answer: B Learning Objective: 04-02 Learning Objective: 04-05 Learning Objective: 04-06 Topic: Acquisition-date―Consolidated balance sheet Topic: Consolidated totals―Individual items Topic: Noncontrolling interest―Statement presentation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Parent’s Equity $112,000 + Noncontrolling Interest $21,000 = $133,000 [QUESTION] 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. Answer: C Learning Objective: 04-02 Topic: Acquisition-date―Fair value of subsidiary Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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E) Goodwill is not recorded on the parent’s books. Answer: C Learning Objective: 04-04 Learning Objective: 04-05 Topic: Consolidated net income―Allocation Topic: Investment account balance―Equity method Topic: Worksheet procedures Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 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? 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. Answer: D Learning Objective: 04-05 Topic: Initial value or Partial equity accounting Topic: Worksheet procedures Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 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. Answer: D Learning Objective: 04-05 Topic: Initial value or Partial equity accounting Topic: Worksheet procedures Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] 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. Answer: C Learning Objective: 04-09 Topic: Step acquisition―Additional shares post-control Topic: Step acquisition―Resulting in control Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 34. Which of the following statements is false regarding multiple acquisitions of a subsidiary's existing common stock? 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. Answer: C Learning Objective: 04-09 Topic: Step acquisition―Resulting in control Topic: Step acquisition―Additional shares post-control Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 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. Answer: B Learning Objective: 04-08 Topic: Midyear acquisition Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 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 revenues and expenses. 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 ignored in the consolidated income statement. Answer: E Learning Objective: 04-08 Topic: Midyear acquisition Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 37. When a parent uses the acquisition method for business combinations and sells shares of its subsidiary, which of the following statements is false? A) If majority control is still maintained, consolidated financial statements are still required. B) If majority control is not maintained but significant influence exists, the equity method to account for the investment is still used but consolidated financial statements are not required. C) If majority control is not maintained but significant influence exists, the equity method is still used to account for the investment and consolidated financial statements are still required. D) If majority control is not maintained and significant influence no longer exists, a prospective change in accounting principle to the fair value method is required. E) A gain or loss calculation must be prepared if control is lost. Answer: C Learning Objective: 04-10 Topic: Sale of shares―Control maintained Topic: Sale of shares―Control lost Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Answer: D Learning Objective: 04-10 Topic: Sale of shares―Control maintained Topic: Sale of shares―Control lost Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 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. Answer: C Learning Objective: 04-10 Topic: Sale of shares―Control maintained Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 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. Answer: C Learning Objective: 04-10 Topic: Sale of shares―Control lost Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] 41. Keefe, Inc., a calendar-year corporation, acquires 70% of George Company on September 1, 2019, and an additional 10% on January 1, 2020. Total annual amortization of $6,000 relates to the first acquisition. George reports the following figures for 2020: Revenues Expenses Retained earnings, 1/1/20 Dividends paid Common stock

$500,000 400,000 300,000 50,000 200,000

Without regard for this investment, Keefe independently earns $300,000 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? A) $380,000. B) $375,200. C) $375,800. D) $376,000. E) $400,000. Answer: B Learning Objective: 04-09 Topic: Step acquisition―Additional shares post-control Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Keefe owns 80% of George for the entire year of 2020. Keefe’s share of consolidated net income: 100,000 sub income – 6,000 amortization = 94,000 × .80= 75,200 from Sub + 300,000 internally generated REFERENCE: 04-07 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) Equipment (4-year life) Land

Book Value $10,000 14,000 5,000

Fair Value $ 8,000 18,000 12,000

Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years. [QUESTION] REFER TO: 04-07 42. The acquisition value attributable to the noncontrolling interest at January 1, 2019 is: Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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A) $23,400. B) $24,000. C) $24,900. D) $26,000. E) $20,000. Answer: D Learning Objective: 04-02 Topic: Acquisition-date―Fair value of subsidiary Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: $234,000 / .90 = $260,000 × .10 = $26,000 [QUESTION] REFER TO: 04-07 43. 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. Answer: B Learning Objective: 04-05 Topic: Acquisition-date―Fair value allocation Topic: Worksheet procedures Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: FV $8,000 – BV $10,000 = <$2,000> Reduction [QUESTION] REFER TO: 04-07 44. In consolidation at December 31, 2019, what adjustment is necessary for Hogan's Buildings account? A) $1,620 increase. B) $1,620 decrease. C) $1,800 increase. D) $1,800 decrease. E) No adjustment is necessary. Answer: D Learning Objective: 04-05 Topic: Acquisition-date―Fair value allocation Topic: Amortization of fair value allocations Topic: Worksheet procedures Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA FN: Measurement Feedback: <$2,000> Reduction – 2019 Excess Amortization of <$200> = <$1,800> Reduction [QUESTION] REFER TO: 04-07 45. 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. Answer: D Learning Objective: 04-05 Topic: Acquisition-date―Fair value allocation Topic: Amortization of fair value allocations Topic: Worksheet procedures Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: <$1,800> 2019 BV – 2020 Excess Amortization of <$200> = <$1,600> Reduction [QUESTION] REFER TO: 04-07 46. 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. Answer: A Learning Objective: 04-05 Topic: Acquisition-date―Fair value allocation Topic: Worksheet procedures Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: FV $18,000 – BV $14,000 = Increase $4,000 [QUESTION] REFER TO: 04-07 47. In consolidation at December 31, 2019, what adjustment is necessary for Hogan's Equipment account? A) $3,000 increase. B) $3,000 decrease. C) $2,700 increase. D) $2,700 decrease. E) No adjustment is necessary. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Answer: A Learning Objective: 04-05 Topic: Acquisition-date―Fair value allocation Topic: Amortization of fair value allocations Topic: Worksheet procedures Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Fair Value Differential $4,000 – Amortization for 2019 $1,000 = $3,000 Increase [QUESTION] REFER TO: 04-07 48. 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. Answer: A Learning Objective: 04-05 Topic: Acquisition-date―Fair value allocation Topic: Amortization of fair value allocations Topic: Worksheet procedures Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Fair Value Differential $4,000 – Amortization for 2019 & 2020 $2,000 = $2,000 Increase [QUESTION] REFER TO: 04-07 49. 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. Answer: A Learning Objective: 04-05 Topic: Acquisition-date―Fair value allocation Topic: Worksheet procedures Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Fair Value Differential at Acquisition $7,000 – No Amortization = $7,000 Increase Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 04-07 50. In consolidation at December 31, 2019, what adjustment is necessary for Hogan's Land account? A) $8,000 decrease . B) $7,000 increase. C) $6,300 increase. D) $6,300 decrease. E) No adjustment is necessary. Answer: B Learning Objective: 04-05 Topic: Acquisition-date―Fair value allocation Topic: Worksheet procedures Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Fair Value Differential at Acquisition $7,000 – No Amortization = $7,000 Increase [QUESTION] REFER TO: 04-07 51. 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. Answer: B Learning Objective: 04-05 Topic: Acquisition-date―Fair value allocation Topic: Worksheet procedures Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Fair Value Differential at Acquisition $7,000 – No Amortization = $7,000 Increase [QUESTION] REFER TO: 04-07 52. 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. Answer: C Learning Objective: 04-05 Topic: Acquisition-date―Fair value allocation Topic: Worksheet procedures Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: BV Equity $240,000 – Fair Value Equity at Acquisition $260,000 = $20,000 – Identified Net FV Increase $9,000 (Blgs + Equipt + Land) = $11,000 Excess Attributed to Patent [QUESTION] REFER TO: 04-07 53. In consolidation at December 31, 2019, what net adjustment is necessary for Hogan's Patent account? A) $5,600. B) $8,800. C) $7,000. D) $7,700. E) No adjustment is necessary. Answer: B Learning Objective: 04-05 Topic: Acquisition-date―Fair value allocation Topic: Amortization of fair value allocations Topic: Worksheet procedures Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Attributed Fair Value Patent $11,000 – Amortization for 2019 $2,200 = $8,800 [QUESTION] REFER TO: 04-07 54. 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. Answer: D Learning Objective: 04-05 Topic: Acquisition-date―Fair value allocation Topic: Amortization of fair value allocations Topic: Worksheet procedures Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Attributed Fair Value Patent $11,000 – Amortization for 2019 & 2020 $4,400 = $6,600 REFERENCE: 04-08 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 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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:

Net income Dividends

2019 $100,000 40,000

2020 $120,000 50,000

2021 $130,000 60,000

Assume the equity method is applied. [QUESTION] REFER TO: 04-08 55. 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. Answer: D Learning Objective: 04-05 Topic: Investment account balance―Equity method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Initial Investment $500,000 + Controlling Interest Share of [Net Income for 2019 ($100,000 × .80) – Dividends for 2019 ($40,000 × .80) – Excess FV Annual Amortization ($7,000 × .80)] = $542,400 [QUESTION] REFER TO: 04-08 56. 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. Answer: C Learning Objective: 04-05 Topic: Investment account balance―Equity method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: December 2019 Investment Balance $542,400 + Controlling Interest Share of [Net Income for 2020 ($120,000 × .80) – Dividends for 2020 ($50,000 × .80) – Excess FV Annual Amortization ($7,000 × Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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.80)] = $592,800 [QUESTION] REFER TO: 04-08 57. 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. Answer: B Learning Objective: 04-05 Topic: Investment account balance―Equity method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: December 2020 Investment Balance $592,800 + Controlling Interest Share of [Net Income for 2021 ($130,000 × .80) – Dividends for 2020 ($60,000 × .80) – Excess FV Annual Amortization ($7,000 × .80)] = $643,200 [QUESTION] REFER TO: 04-08 58. Compute Pell's 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. Answer: A Learning Objective: 04-04 Topic: Consolidated net income―Allocation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Controlling Interest Share of [Net Income for 2019 ($100,000 × .80) – Excess FV Annual Amortization ($7,000 × .80)] = $74,400 [QUESTION] REFER TO: 04-08 59. Compute Pell's 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. Answer: A Learning Objective: 04-04 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Topic: Consolidated net income―Allocation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Controlling Interest Share of [Net Income for 2020 ($120,000 × .80) – Excess FV Annual Amortization ($7,000 × .80)] = $90,400 [QUESTION] REFER TO: 04-08 60. Compute Pell's 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. Answer: C Learning Objective: 04-04 Topic: Consolidated net income―Allocation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Controlling Interest Share of [Net Income for 2021 ($130,000 × .80) – Excess FV Annual Amortization ($7,000 × .80)] = $98,400 [QUESTION] REFER TO: 04-08 61. 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. Answer: C Learning Objective: 04-04 Topic: Consolidated net income―Allocation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Noncontrolling Interest Share of [Net Income for 2019 ($100,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $18,600 [QUESTION] REFER TO: 04-08 62. Compute the noncontrolling interest in the net income of Demers at December 31, 2020. A) $18,400. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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B) $14,400. C) $22,600. D) $24,000. E) $12,600. Answer: C Learning Objective: 04-04 Topic: Consolidated net income―Allocation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Noncontrolling Interest Share of [Net Income for 2020 ($120,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $22,600 [QUESTION] REFER TO: 04-08 63. 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. Answer: B Learning Objective: 04-04 Topic: Consolidated net income―Allocation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Noncontrolling Interest Share of [Net Income for 2021 ($130,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $24,600 [QUESTION] REFER TO: 04-08 64. 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. Answer: A Learning Objective: 04-05 Topic: Noncontrolling interest―Calculate balance Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Noncontrolling Interest at Acquisition $125,000 + Noncontrolling Interest Share of [Net Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Income for 2019 ($100,000 × .20) – Dividends for 2019 ($40,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $135,600 [QUESTION] REFER TO: 04-08 65. 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. Answer: E Learning Objective: 04-05 Topic: Noncontrolling interest―Calculate balance Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: December 2019 Noncontrolling Interest Balance $135,600 + Noncontrolling Interest Share of [Net Income for 2020 ($120,000 × .20) – Dividends for 2020 ($50,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $148,200 [QUESTION] REFER TO: 04-08 66. 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. Answer: D Learning Objective: 04-05 Topic: Noncontrolling interest―Calculate balance Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: December 2020 Noncontrolling Interest Balance $148,200 + Noncontrolling Interest Share of [Net Income for 2021 ($130,000 × .20) – Dividends for 2021 ($60,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $160,800 REFERENCE: 04-09 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: Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Net income Dividends

2019 $100,000 40,000

2020 $120,000 50,000

2021 $130,000 60,000

Assume the initial value method is applied. [QUESTION] REFER TO: 04-09 67. 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. Answer: A Learning Objective: 04-05 Topic: Initial value or Partial equity accounting Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Initial Investment = $500,000 [QUESTION] REFER TO: 04-09 68. 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. Answer: D Learning Objective: 04-05 Topic: Initial value or Partial equity accounting Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Initial Investment = $500,000 [QUESTION] REFER TO: 04-09 69. Compute Pell's investment in Demers at December 31, 2021. A) $592,400. B) $500,000. C) $625,000. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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D) $676,000. E) $620,000. Answer: B Learning Objective: 04-05 Topic: Initial value or Partial equity accounting Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Initial Investment = $500,000 [QUESTION] REFER TO: 04-09 70. How much does Pell record as Income from Demers for the year ended December 31, 2019? A) $32,000. B) $74,400. C) $73,000. D) $42,400. E) $41,000. Answer: A Learning Objective: 04-04 Topic: Initial value or Partial equity accounting Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: 2019 Dividends $40,000 × .80 = $32,000 [QUESTION] REFER TO: 04-09 71. 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. Answer: B Learning Objective: 04-05 Topic: Initial value or Partial equity accounting Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: 2020 Dividends $50,000 × .80 = $40,000 [QUESTION] REFER TO: 04-09 72. How much does Pell record as Income from Demers for the year ended December 31, 2021? Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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A) $48,000. B) $56,000. C) $98,400. D) $97,000. E) $50,400. Answer: A Learning Objective: 04-04 Topic: Initial value or Partial equity accounting Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: 2021 Dividends $60,000 × .80 = $48,000 [QUESTION] REFER TO: 04-09 73. 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. Answer: C Learning Objective: 04-05 Topic: Noncontrolling interest―Calculate balance Topic: Initial value or Partial equity accounting Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Noncontrolling Interest Share of [Net Income for 2019 ($100,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $18,600 [QUESTION] REFER TO: 04-09 74. 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. Answer: C Learning Objective: 04-04 Topic: Consolidated net income―Allocation Topic: Initial value or Partial equity accounting Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA FN: Measurement Feedback: Noncontrolling Interest Share of [Net Income for 2020 ($120,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $22,600 [QUESTION] REFER TO: 04-09 75. 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. Answer: A Learning Objective: 04-04 Topic: Consolidated net income―Allocation Topic: Initial value or Partial equity accounting Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Noncontrolling Interest Share of [Net Income for 2021 ($130,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $24,600 [QUESTION] REFER TO: 04-09 76. 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. Answer: A Learning Objective: 04-05 Topic: Noncontrolling interest―Calculate balance Topic: Initial value or Partial equity accounting Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: 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 [QUESTION] REFER TO: 04-09 77. Compute the noncontrolling interest in Demers at December 31, 2020. A) $126,000. B) $106,000. C) $109,200. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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D) $149,600. E) $148,200. Answer: E Learning Objective: 04-05 Topic: Noncontrolling interest―Calculate balance Topic: Initial value or Partial equity accounting Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: December 2019 Noncontrolling Interest Balance $135,600 + Noncontrolling Interest Share of [Net Income for 2020 ($120,000 × .20) – Dividends for 2020 ($50,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $148,200 [QUESTION] REFER TO: 04-09 78. Compute the noncontrolling interest in Demers at December 31, 2021. A) $107,800. B) $140,000. C) $ 80,000. D) $ 50,000. E) $160,800. Answer: E Learning Objective: 04-05 Topic: Noncontrolling interest―Calculate balance Topic: Initial value or Partial equity accounting Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: December 2020 Noncontrolling Interest Balance $148,200 + Noncontrolling Interest Share of [Net Income for 2021 ($130,000 × .20) – Dividends for 2021 ($60,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $160,800 REFERENCE: 04-10 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:

Net income Dividends

2019 $100,000 40,000

2020 $120,000 50,000

2021 $130,000 60,000

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Assume the partial equity method is applied. [QUESTION] REFER TO: 04-10 79. 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. Answer: C Learning Objective: 04-05 Topic: Initial value or Partial equity accounting Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Initial Investment $500,000 + Controlling Interest Share of [Net Income for 2019 ($100,000 × .80) – Dividends for 2019 ($40,000 × .80)] = $548,000 [QUESTION] REFER TO: 04-10 80. 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. Answer: D Learning Objective: 04-05 Topic: Initial value or Partial equity accounting Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: December 2019 Investment Balance $548,000 + Controlling Interest Share of [Net Income for 2020 ($120,000 × .80) – Dividends for 2020 ($50,000 × .80)] = $604,000 [QUESTION] REFER TO: 04-10 81. 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. Answer: B Learning Objective: 04-05 Topic: Initial value or Partial equity accounting Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: December 2020 Investment Balance $604,000 + Controlling Interest Share of [Net Income for 2021 ($130,000 × .80) – Dividends for 2020 ($60,000 × .80)] = $660,000 [QUESTION] REFER TO: 04-10 82. 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. Answer: A Learning Objective: 04-05 Topic: Initial value or Partial equity accounting Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Controlling Interest Share of Net Income for 2019 ($100,000 × .80) = $80,000 [QUESTION] REFER TO: 04-10 83. 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. Answer: D Learning Objective: 04-05 Topic: Initial value or Partial equity accounting Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Controlling Interest Share of Net Income for 2020 ($120,000 × .80) = $96,000 [QUESTION] REFER TO: 04-10 84. 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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E) $ 50,400. Answer: C Learning Objective: 04-05 Topic: Initial value or Partial equity accounting Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Controlling Interest Share of Net Income for 2021 ($130,000 × .80) = $104,000 [QUESTION] REFER TO: 04-10 85. 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. Answer: C Learning Objective: 04-04 Topic: Consolidated net income―Allocation Topic: Initial value or Partial equity accounting Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Noncontrolling Interest Share of [Net Income for 2019 ($100,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $18,600 [QUESTION] REFER TO: 04-10 86. 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. Answer: C Learning Objective: 04-04 Topic: Consolidated net income―Allocation Topic: Initial value or Partial equity accounting Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Noncontrolling Interest Share of [Net Income for 2020 ($120,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $22,600 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 04-10 87. 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. Answer: C Learning Objective: 04-04 Topic: Consolidated net income―Allocation Topic: Initial value or Partial equity accounting Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: Noncontrolling Interest Share of [Net Income for 2021 ($130,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $24,600 [QUESTION] REFER TO: 04-10 88. 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. Answer: A Learning Objective: 04-05 Topic: Noncontrolling interest―Calculate balance Topic: Initial value or Partial equity accounting Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: 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 [QUESTION] REFER TO: 04-10 89. 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. Answer: E Learning Objective: 04-05 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Topic: Noncontrolling interest―Calculate balance Topic: Initial value or Partial equity accounting Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: December 2019 Noncontrolling Interest Balance $135,600 + Noncontrolling Interest Share of [Net Income for 2020 ($120,000 × .20) – Dividends for 2020 ($50,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $148,200 [QUESTION] REFER TO: 04-10 90. 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. Answer: D Learning Objective: 04-05 Topic: Noncontrolling interest―Calculate balance Topic: Initial value or Partial equity accounting Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: December 2020 Noncontrolling Interest Balance $148,200 + Noncontrolling Interest Share of [Net Income for 2021 ($130,000 × .20) – Dividends for 2021 ($60,000 × .20) – Excess FV Annual Amortization ($7,000 × .20)] = $160,800 REFERENCE: 04-11 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. [QUESTION] REFER TO: 04-11 91. At what amount would consolidated goodwill be reported for 2020? A) $150,000 B) $200,000. C) $ 50,000. D) $ 0. E) $135,000. Answer: A Learning Objective: 04-05 Topic: Consolidated totals―Individual items Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA BB: Critical Thinking AICPA FN: Measurement Feedback: (Recorded Goodwill $200,000) – (2020 Goodwill Impairment $50,000) = $150,000 Reported Goodwill for 2020 [QUESTION] 92. 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. Answer: D Learning Objective: 04-02 Topic: Acquisition-date―Fair value of subsidiary Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Essay: [QUESTION] 93. Where should a noncontrolling interest appear on a consolidated balance sheet? Answer: 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. Learning Objective: 04-06 Topic: Noncontrolling interest―Statement presentation Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 94. What is pre-acquisition income? Answer: 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. Learning Objective: 04-08 Topic: Midyear acquisition Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 95. 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? Answer: 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. Learning Objective: 04-02 Topic: Acquisition-date―Fair value of subsidiary PreDifficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 96. Why is it important to know if the parent paid a premium to acquire control of a subsidiary? Answer: 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. Learning Objective: 04-07 Topic: Goodwill―With control premium Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 97. How would you determine the amount of goodwill to be recognized at date of acquisition when there is a noncontrolling interest present? Answer: The noncontrolling interest fair value may be implied by the parent’s consideration transferred Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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. Learning Objective: 04-03 Learning Objective: 04-07 Topic: Goodwill―No control premium Topic: Goodwill―With control premium Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Communication AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 98. How is a noncontrolling interest in the net income of an entity reported in the income statement? Answer: 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. Learning Objective: 04-06 Topic: Noncontrolling interest―Statement presentation Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 99. 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? Answer: Only post-acquisition revenues and expenses are included in consolidated totals. The noncontrolling interest is thereby viewed as beginning as of the acquisition date. Learning Objective: 04-08 Topic: Midyear acquisition Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 100. 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? Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Answer: 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. Learning Objective: 04-10 Topic: Sale of shares―Control maintained Topic: Sale of shares―Control lost Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 101. How does a parent company account for the sale of a portion of an investment in a subsidiary? Answer: 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. Learning Objective: 04-10 Topic: Sale of shares―Control maintained Topic: Sale of shares―Control lost Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Communication AICPA BB: Critical Thinking AICPA FN: Measurement

Problems: [QUESTION] 102. 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? Answer: Implied value of Beazley Corp. ($240,000 ÷ 60%) Noncontrolling percentage Noncontrolling interest in Beazley Corp.

x

$ 400,000 40% $ 160,000

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Learning Objective: 04-02 Topic: Acquisition-date―Fair value of subsidiary Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 103. 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? Answer: Implied fair value ($540,000/80%) Book value Goodwill

$ 675,000 (600,000) $ 75,000

Learning Objective: 04-03 Topic: Goodwill―No control premium Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 104. 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? Answer: Book value of building Allocation of difference Fenton’s building for consolidation

$ 120,000 30,000 $ 150,000

Learning Objective: 04-02 Learning Objective: 04-05 Topic: Acquisition-date―Consolidated balance sheet Topic: Consolidated totals―Individual items Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 105. Pennant Corp. owns 70% of the common stock of Scarvens Co. Scarvens' 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? Answer:

Scarvens’ revenues Scarvens’ portion of consolidated revenues

$ 200,000 $ 200,000

Learning Objective: 04-05 Topic: Consolidated totals―Individual items Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement REFERENCE: 04-12 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. [QUESTION] REFER TO: 04-12 106. Using the acquisition method, determine the amount of goodwill associated with Caldwell's purchase of Club. Answer:

Implied fair value of Club Corp. ($2,600,000 ÷ 65%) $ 4,000,000 Fair value of Club Corp.’s net assets (3,500,000) Goodwill $ 500,000

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Learning Objective: 04-03 Topic: Goodwill―No control premium Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] REFER TO: 04-12 107. Determine the amount of the noncontrolling interest as of the date of the acquisition. Answer: Implied value of Club Corp. ($2,600,000/ 65%) Noncontrolling interest percentage Noncontrolling interest in Club Corp. Learning Objective: 04-02 Topic: Acquisition-date―Fair value of subsidiary Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement

$ 4,000,000 x 35% $1,400,000

REFERENCE: 04-13 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. [QUESTION] REFER TO: 04-13 108. Determine the amount of goodwill to be recognized in this acquisition. Answer: Consideration transferred $500,000 for 80% implies value for 100% ($500,000/80%) $ 625,000 Fair value net assets (600,000) Goodwill $ 25,000 Learning Objective: 04-03 Topic: Goodwill―No control premium Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] REFER TO: 04-13 109. Determine the value assigned to the noncontrolling interest as of the date of the acquisition. Answer: Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Implied value $625,000 × 20%

$

125,000

Learning Objective: 04-02 Topic: Acquisition-date―Fair value of subsidiary Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement

REFERENCE: 04-14 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. [QUESTION] REFER TO: 04-14 110. Prepare a proper presentation of consolidated net income and its allocation for 2019. Answer: Jannison’s income – 2019 Techron’s income – 2019 Amortization expense (given) Consolidated net income To noncontrolling interest (10%) ($98,000-11,000) To controlling interest

$308,000 98,000 (11,000) $395,000 (8,700) $386,300

Learning Objective: 04-04 Learning Objective: 04-06 Topic: Consolidated net income Topic: Consolidated net income―Allocation Topic: Noncontrolling interest―Statement presentation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] REFER TO: 04-14 111. Prepare a proper presentation of consolidated net income and its allocation for 2020. Answer: Jannison’s income – 2020 Techron’s income – 2020 Amortization expense (given)

$364,000 126,000 (11,000)

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Consolidated net income To noncontrolling interest (10%) ($126,000-11,000) To controlling interest

$479,000 (11,500) $467,500

Learning Objective: 04-04 Learning Objective: 04-06 Topic: Consolidated net income Topic: Consolidated net income―Allocation Topic: Noncontrolling interest―Statement presentation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] REFER TO: 04-14 112. What is the noncontrolling interest balance as of December 31, 2020? Answer: At January 1, 2019: Common stock + Retained earnings Fair value excess allocation $530,000-420,000 Techron’s income - 2019 (98,000 - amort. 11,000) Dividends paid Techron’s income - 2020 (126,000 - amort. 11,000) Dividends paid T echron’s book value — December 31, 2020 Noncontrolling interest percentage Noncontrolling interest — December 31, 2020

$ 420,000 110,000 87,000 ( 42,000) 115,000 ( 42,000)

$ 530,000 45,000 73,000 $ 648,000 × 10% $ 64,800

Learning Objective: 04-05 Topic: Noncontrolling interest―Calculate balance Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 113. 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:

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2018 2019 2020

Net Income $ 105,000 134,400 154,000

Dividends Paid $ 54,600 61,600 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? Answer: 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. Retained Earnings, 1/1/20- Carper Inc. Investment in Carper Inc. (70%) Noncontrolling Interest in Carper Inc., 1/1/20 Entry A Building (28,000 less 2 yrs. Deprn.) Copyright (80,000 less 2 yrs. Amort.) Goodwill Investment in Carper Inc. Noncontrolling Interest

420,000 375,200 556,640 238,560

22,400 72,000 140,000 170,080 64,320

Entry I Equity in Subsidiary Earnings Investment in Carper Inc.

103,040

Entry D Investment in Carper Inc. Dividends Paid

58,800

103,040

58,800

Entry E Depreciation Expense Amortization Expense Buildings Copyright

2,800 4,000 2,800 4,000

Entry P Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Accounts Payable Accounts receivable

30,800 30,800

Noncontrolling Interest items: Dividends Income of Carper

(25,200) 44,160

Learning Objective: 04-05 Learning Objective: 04-07 Topic: Acquisition-date―Fair value allocation Topic: Investment account balance―Equity method Topic: Worksheet procedures Topic: Goodwill―With control premium Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement

Beginning NCI = $270,000 + $29,460 (income) - $16,380 (divs) + $38,280 (income) - $18,480 (divs) = $302,880 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% x $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% x $780,000]) and the goodwill attributable to the noncontrolling interest is $36,000 (= $270,000 – [30% x $780,000]). REFERENCE: 04-15 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 Fair Value Value Land $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 For internal reporting purposes, JDE employed the equity method to account for this investment. [QUESTION] REFER TO: 04-15 114. Prepare a schedule to determine goodwill, and the amortization and allocation amounts. Answer:

Life

Annual Amortization

Controlling Interest

Noncontrolling Interest

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Consideration transferred for Bubba Mfg. Implied fair value $10,450,000/55% Book value Fair value in excess of book value Excess cost assigned to specific accounts based on fair values Land Buildings Equipment Goodwill Total

share

Share

$100,000 (80,000)

$55,000 ( 44,000)

$45,000 (36,000)

$20,000

$11,000

$9,000

$10,450,000 $19,000,000 (16,970, 000) $ 2,030,000

850,000 700,000 (400,000) $ 880,000

7 years 5 years

Learning Objective: 04-03 Learning Objective: 04-05 Topic: Goodwill―No control premium Topic: Acquisition-date―Fair value allocation Topic: Amortization of fair value allocations Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] REFER TO: 04-15 115. The following account balances are for the year ending December 31, 2020 for both companies.

Revenues Expenses Equity in income of Bubba Manufacturing Net income

John Doe Enterprises $(298,000,000) 271,000,000 ( 4,361,500) $( 31,361,500)

Bubba Manufacturing $(103,750,000) 95,800,000 0 $( 7,950,000)

Retained earnings, January 1, 2020 Net income (above) Dividends paid Retained earnings, December 31, 2020

$( 2,500,000) ( 31,361,500) 5,000,000 $( 28,861,500)

$( (

Current Assets Investment in Bubba Manufacturing Land Buildings Equipment (net) Total assets

$ 30,500,000 13,161,500 1,500,000 5,600,000 3,100,000 $ 53,861,500

$ 20,800,000

Accounts payable Notes payable Common stock Additional paid-in capital

$( 3,100,000)

$ (4,900,000) ( 1,000,000) ( 6,000,000) ( 10,870,000)

( 2,900,000) ( 19,000,000)

$(

$

100,000) 7,950,000) 3,000,000 5,050,000)

1,700,000 2,360,000 2,960,000 27,820,000

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 4-50

Retained earnings, Dec. 31, 2020 (above) Total liabilities and stockholders’ equity

( 28,861,500) $ (53,861,500)

( 5,050,000) $( 27,820,000)

Required: Prepare a consolidation worksheet for this business combination. Assume goodwill has been reviewed and there is no goodwill impairment. Answer: Consolidation Worksheet for John Doe Enterprises and Bubba Manufacturing at 12/31/20. CONSOLIDATION WORKSHEET For the year ended 12/31/2020

Account Revenues Expenses Equity in Sub Income Separate Net Income Consolidated Net Income Noncontrolling Interest in Bubba’s Income Net income to controlling interest

John Doe Ent. (298,000,000) 271,000,000 (4,361,500) (31,361,500)

Bubba MFG. (103,750,000) 95,800,000 (7,950,000)

__________

Consolidated Balance (401,750,000) 366,820,000

(3,568,500)

3,568,500 (31,361,500)

(100,000) (7,950,000) 3,000,000 (5,050,000)

Current assets Investment in Bubba Mfg.

30,500,000

20,800,000

Noncontrolling Interest 12/31/20 Common Stock Additional Paid-in Capital R/E, 12/31/20 Total liabilities& Stockholders’ Equity

Noncontrolling Interest

(E) 20,000 (I) 4,361,500

___________

(2,500,000) (31,361,500) 5,000,000 (28,861,500)

Liabilities Notes Payable Noncontrolling Interest 1/1/20

Entries CR

(34,930,000)

R/E, 1/1/20 Net Income Dividends R/E, 12/31/20

Land Building (net) Equipment (net) Goodwill Total Assets

Consolidation DR

13,161,500

(S)

100,000 (D) 1,650,000

51,300,000 (D) 1,650,000

1,500,000 5,600,000 3,100,000 ___________ 53,861,500

1,700,000 2,360,000 2,960,000 ___________ 27,820,000

(3,100,000)

(4,900,000) (1,000,000)

1,350,000

(2,500,000) (31,361,500) 5,000,000 (28,861,500)

(A) (A) (E) (A)

850,000 700,000 80,000 880,000

(S) 9,333,500 (A) 1,116,500 (I) 4,361,500 4,050,000 8,560,000 5,740,000 880,000 70,530,000

(E) 100,000 (A) 400,000

(8,000,000) (1,000,000) (S) 7,636,500 (A) 913,500

(8,550,000)

(10,768,500)

(10,768,500) (2,900,000)

(2,900,000)

(6,000,000)

(S) 6,000,000

(19,000,000) (28,861,500)

(10,870,000) (5,050,000)

(S) 10,870,000 ____________

___________

(19,000,000) (28,861,500)

(53,861,500)

(27,820,000)

25,511,500

25,511,500

(70,530,000)

Learning Objective: 04-05 Topic: Worksheet procedures Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 4-51

Difficulty: 3 Hard Blooms: Apply Blooms: Create AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 116. McLaughlin, Inc. acquires 70 percent 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 Dividends paid Common stock

$500,000 350,000 3,500,000 40,000 400,000

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. Answer: Revenues ($840,000+500,000) Expenses ($360,000+350,000+amort.12,000) Consolidated net income To noncontrolling interest To controlling interest

* **

$1,340,000 722,000 $ 618,000 (39,100) $ 578,900

Noncontrolling interest: ** Revenues $ 500,000 Expenses ($350,000+amort.12,000) 362,000 Net income $ 138,000 30% x10/12 (for months) × 138,000 = $34,500 20% x 2/12 (for months) × 138,000 = 4,600 $ 39,100 * Amortization of $12,000 = original $8,400 for 70% grossed up to the 100% amount of $12,000. Learning Objective: 04-09 Topic: Step acquisition―Additional shares post-control Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Critical Thinking AICPA FN: Measurement [QUESTION] 117. Select True (T) or False (F) for each of the following statements: Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 4-52

_____ 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. Answer: (1) F; (2) F; (3) T; (4) F; (5) T; (6) T; (7) F; (8) T; (9) F Learning Objective: 04-02 Learning Objective: 04-04 Learning Objective: 04-08 Learning Objective: 04-10 Topic: Consolidated net income―Allocation Topic: Acquisition-date―Fair value allocation Topic: Midyear acquisition Topic: Sale of shares―Control lost Topic: Sale of shares―Control maintained Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA BB: Critical Thinking AICPA FN: Measurement

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 4-53

File: Chapter 05 - Consolidated Financial Statements – Intra-Entity Asset Transactions Multiple Choice: [QUESTION] 1. On November 8, 2018, Power Corp. sold land to Wood Co., its wholly owned subsidiary. The land cost $61,500 and was sold to Wood for $89,000. 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 Wood Co. sells the land to a third party. C) No gain may be recognized. D) As Wood uses the land. E) When Wood Co. begins using the land productively. Answer: B Learning Objective: 05-06 Topic: Intra-entity transfer of land Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement REFERENCE: 05-01 Edgar Co. acquired 60% of Stendall Co. on January 1, 2018. During 2018, Edgar made several sales of inventory to Stendall. The cost and sales price of the goods were $140,000 and $200,000, respectively. Stendall still owned one-fourth of the goods at the end of 2018. Consolidated cost of goods sold for 2018 was $2,140,000 due to a consolidating adjustment for intra-entity transfers less intra-entity gross profit in Stendall’s ending inventory. [QUESTION] REFER TO: 05-01 2. How would consolidated cost of goods sold have differed if the inventory transfers had been for the same amount and cost, but from Stendall to Edgar? A) Consolidated cost of goods sold would have remained $2,140,000. B) Consolidated cost of goods sold would have been more than $2,140,000 because of the controlling interest in the subsidiary. C) Consolidated cost of goods sold would have been less than $2,140,000 because of the noncontrolling interest in the subsidiary. D) Consolidated cost of goods sold would have been more than $2,140,000 because of the noncontrolling interest in the subsidiary. E) The effect on consolidated cost of goods sold cannot be predicted from the information provided. Answer: A Learning Objective: 05-02 Learning Objective: 05-05 Topic: Eliminate intra-entity sales and purchases Topic: Noncontrolling interest―Upstream gross profit Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Feedback: $2,140,000 COGS is unaffected by intra-entity gross profits in Consolidated Ending Inventory value [QUESTION] REFER TO: 05-01 3. How would net income attributable to the noncontrolling interest be different if the transfers had been for the same amount and cost, but from Stendall to Edgar? A) Net income attributable to the noncontrolling interest would have decreased by $6,000. B) Net income attributable to the noncontrolling interest would have increased by $24,000. C) Net income attributable to the noncontrolling interest would have increased by $20,000. D) Net income attributable to the noncontrolling interest would have decreased by $18,000. E) Net income attributable to the noncontrolling interest would have decreased by $56,000. Answer: A Learning Objective: 05-05 Topic: Noncontrolling interest―Upstream gross profit Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $200,000 Revenue - $140,000 COGS = $60,000 Gross Profit on Intra-Entity Transfer × 25% (Amount in Ending Inventory) = $15,000 Reduction in consolidated net income. Consolidation Adjustment to Net Income × 40% for Noncontrolling Interest = $6,000 Reduction in Net Income Attributable to the Noncontrolling Interest [QUESTION] 4. On January 1, 2018, Race Corp. acquired 80% of the voting common stock of Gallow Inc. During the year, Race sold to Gallow for $450,000 goods that cost $330,000. At year-end, Gallow owned 15% of the goods transferred. Gallow reported net income of $204,000, and Race's net income was $806,000. Race 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) $ 3,600. B) $22,800. C) $30,900. D) $32,900. E) $40,800. Answer: E Learning Objective: 05-05 Topic: Noncontrolling interest―Downstream gross profit Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Subsidiary’s Net Income $204,000 × .20 (Noncontrolling Interest) = $40,800 [QUESTION] 5. Webb Co. acquired 100% of Rand Inc. on January 5, 2018. During 2018, Webb sold goods to Rand for $2,400,000 that cost Webb $1,800,000. Rand still owned 40% of the goods at the end of the year. Cost of goods sold was $10,800,000 for Webb and $6,400,000 for Rand. What was consolidated cost of Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 5-2

goods sold? A) $17,200,000. B) $15,040,000. C) $14,800,000. D) $15,400,000. E) $14,560,000. Answer: B Learning Objective: 05-02 Learning Objective: 05-03 Topic: Eliminate intra-entity sales and purchases Topic: Intra-entity ending inventory―Year of transfer Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Intra-Entity Gross Profit ($2,400,000 - $1,800,000) $600,000 × Intra-Entity Gross Profit Remaining in Ending Inventory (40%) = $240,000 Consolidated COGS = Parent’s COGS ($10,800,000) + Subsidiary’s COGS ($6,400,000) – COGS in Intra-Entity Transfer ($2,400,000) + Intra-Entity Gross Profit Deferred ($240,000) = $15,040,000 [QUESTION] 6. Gentry Inc. acquired 100% of Gaspard Farms on January 5, 2017. During 2017, Gentry sold Gaspard Farms $625,000 of goods, which had cost $425,000. Gaspard Farms still owned 12% of the goods at the end of the year. In 2018, Gentry sold goods with a cost of $800,000 to Gaspard Farms for $1,000,000, and Gaspard Farms still owned 10% of the goods at year-end. For 2018, the cost of goods sold totaled $5,400,000 for Gentry, and $1,200,000 for Gaspard Farms. What was consolidated cost of goods sold for 2018? A) $6,600,000. B) $6,604,000. C) $5,620,000. D) $5,596,000. E) $5,625,000. Answer: D Learning Objective: 05-02 Learning Objective: 05-04 Topic: Eliminate intra-entity sales and purchases Topic: Intra-entity inventory―Beginning and ending Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Intra-Entity Gross Profit ($1,000,000 - $800,000) $200,000 × Intra-Entity Gross Profit Remaining in Ending Inventory (10%) = $20,000. Consolidated COGS = Parent’s COGS ($5,400,000) + Subsidiary’s COGS ($1,200,000) – Total COGS in Intra-Entity Transfer ($1,000,000) – Intra-Entity Gross Profit Deferred from 2017 ($24,000) + IntraEntity Gross Profit Deferred from 2018 ($20,000) = $5,596,000 [QUESTION] 7. X-Beams Inc. owned 70% of the voting common stock of Kent Corp. During 2018, Kent made Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 5-3

several sales of inventory to X-Beams. The total selling price was $180,000 and the cost was $100,000. At the end of the year, 20% of the goods were still in X-Beams' inventory. Kent's reported net income was $300,000. 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 Kent? A) $90,000. B) $85,200. C) $54,000. D) $94,800. E) $86,640. Answer: B Learning Objective: 05-05 Topic: Noncontrolling interest―Upstream gross profit Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Subsidiary’s Net Income ($300,000) – Intra-Entity Gross Profit Deferred ($16,000) = $284,000 × Noncontrolling Interest (30%) = $85,200 Net Income Attributable to the Noncontrolling Interest [QUESTION] 8. Justings Co. owned 80% of Evana Corp. During 2018, Justings sold to Evana land with a book value of $48,000. The selling price was $70,000. For purposes of the December 31, 2018 consolidated financial statements, at what amount should the land be reported? A) $17,600. B) $22,000. C) $48,000. D) $56,000. E) $70,000. Answer: C Learning Objective: 05-06 Topic: Intra-entity transfer of land Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $48,000, the original book value of the Land. Any intra-entity profit from the transfer is eliminated. [QUESTION] 9. Norek Corp. owned 70% of the voting common stock of Thelma Co. On January 2, 2017, Thelma sold a parcel of land to Norek. The land had a book value of $32,000 and was sold to Norek for $45,000. Thelma's reported net income for 2017 was $119,000. 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) $35,700. B) $31,800. C) $39,600. D) $22,200. E) $26,100. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 5-4

Answer: B Learning Objective: 05-06 Topic: Intra-entity transfer of land Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Sales Price $45,000 – BV $32,000 = Intra-Entity Gain on Transfer That Is Deferred ($13,000) Subsidiary’s Net Income ($ 119,000) – Deferred Intra-Entity Gain on Transfer ($13,000) = Adjusted Subsidiary Net Income ($106,000) Noncontrolling Interest in Net Income = $106,000 × 30% Ownership Interest in Subsidiary = $31,800 REFERENCE: 05-02 Clemente Co. owned all of the voting common stock of Snider Co. On January 2, 2017, Clemente sold equipment to Snider for $125,000. The equipment cost Clemente $140,000. At the time of the transfer, the balance in accumulated depreciation was $40,000. The equipment had a remaining useful life of five years and a $0 salvage value. Both entities use the straight-line method of depreciation. [QUESTION] REFER TO: 05-02 10. At what amount should the equipment (net of depreciation) be included in the consolidated balance sheet dated December 31, 2017? A) $105,000. B) $100,000. C) $ 95,000. D) $ 80,000. E) $ 85,000. Answer: D Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Sales Price $125,000 – BV $140, 000 = Loss on Transfer of $15,000, which is ignored. Equipment is transferred at BV (Cost $140,000 – Accumulated Depreciation of $40,000) = $100,000 on transfer Depreciation for 2017: $100,000 ÷ 5 = $20,000 Equipment Total Net of Depreciation: $100,000 − $20,000 = $80,000 BV at 12/31/2017. [QUESTION] REFER TO: 05-02 11. At what amount should the equipment (net of depreciation) be included in the consolidated balance sheet dated December 31, 2018? A) $110,000. B) $105,000. C) $100,000. D) $ 90,000. E) $ 60,000. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Answer: E Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Sales Price $125,000 – BV $140, 000 = Loss on Transfer of $15,000, which is ignored. Equipment is transferred at BV (Cost $140,000 – Accumulated Depreciation $40,000) $100,000 – Depreciation for 2017 & 2018 ($100,000 / 5) $40,000 = $60,000 BV at 12/31/2018 [QUESTION] 12. During 2017, Von Co. sold inventory to its wholly-owned subsidiary, Lord Co. The inventory cost $30,000 and was sold to Lord for $44,000. For consolidation reporting purposes, when is the $14,000 intra-entity gross profit recognized? A) When goods are transferred to a third party by Lord. B) When Lord pays Von for the goods. C) When Von sold the goods to Lord. D) When Lord receives the goods. E) No gain can be recognized since the transfer was between related parties. Answer: A Learning Objective: 05-01 Topic: Why eliminate intra-entity transfers Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 13. Bauerly Co. owned 70% of the voting common stock of Devin Co. During 2017, Devin made frequent sales of inventory to Bauerly. There was deferred intra-entity gross profit of $40,000 in the beginning inventory and $25,000 of intra-entity gross profit at the end of the year. Devin reported net income of $137,000 for 2017. Bauerly 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 2017? A) $41,100. B) $33,600. C) $21,600. D) $45,600. E) $36,600. Answer: D Learning Objective: 05-04 Learning Objective: 05-05 Topic: Intra-entity inventory―Beginning and ending Topic: Noncontrolling interest―Upstream gross profit Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 5-6

AICPA: FN Measurement Feedback: Subsidiary’s Net Income $137,000 + Recognition of prior year Deferred Recognized Gross profit $40,000 – Deferred gross profit at end of the year $25,000 = $152,000 X Noncontrolling Interest 30% = $45,600 Net Income Attributable to the Noncontrolling Interest [QUESTION] 14. Chain Co. owned all of the voting common stock of Shannon Corp. The corporations' balance sheets dated December 31, 2017, include the following balances for land: for Chain--$416,000, and for Shannon--$256,000. On the original date of acquisition, the book value of Shannon's land was equal to its fair value. On April 4, 2018, Chain sold to Shannon a parcel of land with a book value of $65,000. The selling price was $83,000. There were no other transfers, which affected the companies' land accounts during 2017. What is the consolidated balance for land on the 2018 balance sheet? A) $672,000. B) $690,000. C) $755,000. D) $737,000. E) $654,000. Answer: A Learning Objective: 05-06 Topic: Intra-entity transfer of land Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Parent’s Land $416,000 + Subsidiary’s Land $256,000 = $672,000 – Any gain on the transfer is deferred until the parcel is sold outside the entity in the future. [QUESTION] 15. Gibson Corp. owned a 90% interest in Sparis Co. Sparis frequently made sales of inventory to Gibson. The sales, which include a markup over cost of 25%, were $420,000 in 2017 and $500,000 in 2018. At the end of each year, Gibson still owned 30% of the goods. Net income for Sparis was $912,000 during 2018. 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 2018? A) $84,300. B) $85,680. C) $90,720. D) $91,680. E) $96,720. Answer: C Learning Objective: 05-04 Learning Objective: 05-05 Topic: Intra-entity inventory―Beginning and ending Topic: Noncontrolling interest―Upstream gross profit Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback:

Gross Profit Rate = Gross Profit ÷ COGS = GPR ÷ (1 – GPR) = 25% ÷ (1 + 25%) = .2 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 5-7

Intra-Entity Gross Profit = Transfer Price × GPR (.2) Gross Profit 2017: 84,000 × 30% = $25,200 Gross Profit 2018: 100,000 × 30% = $30,000 Subsidiary’s Net Income ($912,000) + Intra-Entity Gross Profit in Ending Inventory for 2017 ($25,200) – Intra-Entity Gross Profit in 2018 Inventory Deferred ($30,000) = $907,200 × Noncontrolling Interest 10% = $90,720 Net Income Attributable to the Noncontrolling Interest [QUESTION] 16. On January 1, 2018, Payton Co. sold equipment to its subsidiary, Starker Corp., for $115,000. The equipment had cost $125,000, and the balance in accumulated depreciation was $45,000. The equipment had an estimated remaining useful life of eight years and $0 salvage value. Both companies use straightline depreciation. On their separate 2018 income statements, Payton and Starker reported depreciation expense of $84,000 and $60,000, respectively. The amount of depreciation expense on the consolidated income statement for 2018 would have been: A) $144,000. B) $148,375. C) $109,000. D) $134,000. E) $139,625. Answer: E Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Sales Price $115,000 – BV $80,000 = $35,000 Gain on Sale / 8yrs = $4,375 Annual Amortization of Unrealized Gain over Expected Useful Life of the Asset Parent’s Depreciation $84,000 + Subsidiary’s Depreciation $60,000 – Annual amortization $4,375 = $139,625 [QUESTION] 17. Yukon Co. acquired 75% percent of the voting common stock of Ontario Corp. on January 1, 2018. During the year, Yukon made sales of inventory to Ontario. The inventory cost Yukon $260,000 and was sold to Ontario for $390,000. Ontario held $60,000 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 2018, is: A) $15,000. B) $20,000. C) $32,500. D) $30,000. E) $110,000. Answer: B Learning Objective: 05-03 Topic: Intra-entity ending inventory―Year of transfer Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: FN Measurement Feedback: Intra-Entity Gross Profit ($390,000 - $260,000) $130,000 X Intra-Entity Gross Profit Remaining In Ending Inventory ($60,000 / $390,000) = $20,000 [QUESTION] 18. Prince Co. owned 80% of Kile Corp.'s common stock. During October 2018, Kile sold merchandise to Prince for $140,000. At December 31, 2018, 50% of this merchandise remained in Prince's inventory. For 2018, gross profit percentages were 30% of sales for Prince and 40% of sales for Kile. The amount of intra-entity gross profit remaining in ending inventory at December 31, 2018 that should be eliminated in the consolidation process is: A) $28,000. B) $56,000. C) $22,400. D) $21,000. E) $42,000. Answer: A Learning Objective: 05-03 Topic: Intra-entity ending inventory―Year of transfer Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Intra-Entity Gross Profit ($140,000 X .40 (Kile GP Percentage)) $56,000 X Intra-Entity transfers Remaining In Ending Inventory (50%) = $28,000 REFERENCE: 05-03 Pot Co. holds 90% of the common stock of Skillet Co. During 2018, 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. [QUESTION] REFER TO: 05-03 19. 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 2018. What are consolidated sales and cost of goods sold, respectively for 2018? 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. Answer: B Learning Objective: 05-02 Learning Objective: 05-03 Topic: Eliminate intra-entity sales and purchases Topic: Intra-entity ending inventory―Year of transfer Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: FN Measurement Feedback: 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 Inventory transfers ($140,000) + Deferred Unrecognized Gross Profit ($14,000) = $966,000 [QUESTION] REFER TO: 05-03 20. Included in the amounts for Skillet’s sales were intra-entity gross profits related to Skillet’s intraentity 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 intraentity gross profit remaining in ending inventory at the end of 2018. What are consolidated sales and cost of goods sold for 2018? 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. Answer: D Learning Objective: 05-02 Learning Objective: 05-05 Topic: Eliminate intra-entity sales and purchases Topic: Noncontrolling interest―Upstream gross profit Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 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 Gross Profit Remaining in Ending Inventory ($140,000) + Intra-Entity Gross Profit Deferred ($22,400) = $974,400 [QUESTION] REFER TO: 05-03 21. 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 2018. What are consolidated sales and cost of goods sold for 2018? 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. Answer: A Learning Objective: 05-02 Topic: Eliminate intra-entity sales and purchases Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Feedback: 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 [QUESTION] 22. Dalton Corp. owned 70% of the outstanding common stock of Shrugs Inc. On January 1, 2016, Dalton acquired a building with a ten-year life for $420,000. No salvage value was anticipated and the building was to be depreciated on the straight-line basis. On January 1, 2018, Dalton sold this building to Shrugs for $392,000. 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 2018? A) Accumulated Depreciation 7,000 Depreciation expense 7,000 B) Accumulated Depreciation 4,900 Depreciation Expense 4,900 C) Depreciation Expense 7,000 Accumulated Depreciation 7,000 D) Depreciation Expense 4,900 Accumulated Depreciation 4,900 E) Accumulated Depreciation 42,000 Depreciation Expense 42,000 Answer: A Difficulty: 2 Medium Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Blooms: Apply Blooms: Analyze AACSB: Analytical Thinking AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Transfer Cost $392,000 / 8yrs. = $49,000 Annual Depreciation by Shrugs Dalton: Book Value of Cost ($420,000) less accumulated depreciation ($420,000 ÷ 10 years = $42,000 Depreciation expense should be decreased by $7,000. REFERENCE: 05-04 On January 1, 2018, 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, 2018, before preparing the consolidated worksheet, the financial statements appeared as follows:

Revenues Cost of goods sold Operating expenses

Pride, Inc. $ 420,000 (196,000) (28,000)

Strong Corp. $280,000 (112,000) (14,000)

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Net income

$ 196,000

$154,000

Retained earnings, 1/1/18 Net income (above) Dividends paid Retained earnings, 12/31/18

$ 420,000 196,000 0 $ 616,000

$210,000 154,000 0 $364,000

Cash and receivables Inventory Investment in Strong Corp Equipment (net) Total assets

$ 294,000 210,000 364,000 616,000 $1,484,000

$126,000 154,000 0 420,000 $700,000

Liabilities Common stock Retained earnings, 12/31/18 (above) Total liabilities and stockholders’ equity

$ 588,000 280,000 616,000 $1,484,000

$196,000 140,000 364,000 $700,000

During 2018, 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, 2018, 60% of these goods remained in the company's possession. [QUESTION] REFER TO: 05-04 23. What is the total of consolidated revenues? A) $700,000. B) $644,000. C) $588,000. D) $560,000. E) $840,000. Answer: D Learning Objective: 05-02 Topic: Eliminate intra-entity sales and purchases Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Parent’s Revenue ($420,000) + Subsidiary’s Revenue ($280,000) – Intra-Entity Transfers ($140,000) = $560,000 [QUESTION] REFER TO: 05-04 24. What is the total of consolidated operating expenses? A) $42,000. B) $47,600. C) $53,200. D) $49,000. E) $35,000. Answer: D Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Learning Objective: 05-01 Topic: Coverage of prior chapters Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Parent’s Operating Expenses ($28,000) + Subsidiary’s Operating Expenses ($14,000) + Excess Amortization on Equipment (($35,000 / 5) $7,000) = $49,000 [QUESTION] REFER TO: 05-04 25. What is the total of consolidated cost of goods sold? A) $196,000. B) $212,800. C) $184,800. D) $203,000. E) $168,000. Answer: C Learning Objective: 05-02 Learning Objective: 05-03 Topic: Eliminate intra-entity sales and purchases Topic: Intra-entity ending inventory―Year of transfer Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 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 X .60 = $16,800) = $184,800 [QUESTION] REFER TO: 05-04 26. What is the consolidated total of noncontrolling interest appearing in the balance sheet? A) $100,800. B) $ 97,440. C) $ 93,800. D) $120,400. E) $117,040. Answer: D Learning Objective: 05-01 Learning Objective: 05-05 Difficulty: 2 Medium Topic: Coverage of prior chapters Topic: Noncontrolling interest―Downstream gross profit Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [$364,000 / 80% = $455,000 + Net Income ($154,000 - $7,000) $147,000] $602,000 X .20 = Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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$120,400 [QUESTION] REFER TO: 05-04 27. What is the consolidated total for equipment (net) at December 31, 2018? A) $ 952,000. B) $1,058,400. C) $1,069,600. D) $1,064,000. E) $1,066,800. Answer: D Learning Objective: 05-07 Topic: Coverage of prior chapters Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 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 [QUESTION] REFER TO: 05-04 28. What is the consolidated total for inventory at December 31, 2018? A) $336,000. B) $280,000. C) $364,000. D) $347,200. E) $349,300. Answer: D Learning Objective: 05-03 Topic: Intra-entity ending inventory―Year of transfer Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: BV Parent’s Inventory $210,000 + BV Subsidiary’s Inventory $154,000 – Deferred Recognition of Intra-Entity Gross Profit on Inventory Transfer ($28,000 X .60) $16,800 = $347,200 REFERENCE: 05-05 Strickland Company sells inventory to its parent, Carter Company, at a profit during 2017. Carter sells one-third of the inventory in 2017. [QUESTION] REFER TO: 05-05 29. In the consolidation worksheet for 2017, which of the following accounts would be debited to eliminate the intra-entity transfer of inventory? A) Retained earnings. B) Cost of goods sold. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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C) Inventory. D) Investment in Strickland Company. E) Sales. Answer: E Learning Objective: 05-02 Topic: Eliminate intra-entity sales and purchases Difficulty: 1 Easy Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 05-05 30. In the consolidation worksheet for 2017, 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. Answer: B Learning Objective: 05-02 Topic: Eliminate intra-entity sales and purchases Difficulty: 1 Easy Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 05-05 31. In the consolidation worksheet for 2017, which of the following accounts would be debited to eliminate unrecognized intra-entity gross profit with regard to the 2017 intra-entity transfers? A) Retained earnings. B) Cost of goods sold. C) Inventory. D) Investment in Strickland Company. E) Sales. Answer: B Learning Objective: 05-03 Topic: Intra-entity ending inventory―Year of transfer Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 05-05 32. In the consolidation worksheet for 2017, which of the following accounts would be credited to defer Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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unrecognized intra-entity gross profit with regard to the 2017 intra-entity transfers? A) Retained earnings. B) Cost of goods sold. C) Inventory. D) Investment in Strickland Company. E) Sales. Answer: C Learning Objective: 05-03 Topic: Intra-entity ending inventory―Year of transfer Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 05-05 33. In the consolidation worksheet for 2018, 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 2017 intra-entity transfers? A) Retained earnings. B) Cost of goods sold. C) Inventory. D) Investment in Strickland Company. E) Sales. Answer: A Learning Objective: 05-04 Topic: Intra-entity transfer using initial value method Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 05-05 34. In the consolidation worksheet for 2018, 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 2017 intra-entity transfers? A) Retained earnings. B) Cost of goods sold. C) Inventory. D) Investment in Strickland Company. E) Sales. Answer: B Learning Objective: 05-04 Topic: Intra-entity transfer using initial value method Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: FN Measurement REFERENCE: 05-06 Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2017. With respect to one-third of the inventory sold to Fisher, Walsh accounts for it using the equity method of accounting.. [QUESTION] REFER TO: 05-06 35. In the consolidation worksheet for 2017, 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. Answer: E Learning Objective: 05-02 Topic: Eliminate intra-entity sales and purchases Difficulty: 1 Easy Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 05-06 36. In the consolidation worksheet for 2017, 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. Answer: B Learning Objective: 05-02 Topic: Eliminate intra-entity sales and purchases Difficulty: 1 Easy Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 05-06 37. In the consolidation worksheet for 2017, which of the following accounts would be debited to eliminate unrecognized intra-entity gross profit with regard to the 2017 intra-entity transfers? A) Retained earnings. B) Cost of goods sold. C) Inventory. D) Investment in Fisher Company. E) Sales. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Answer: B Learning Objective: 05-03 Topic: Intra-entity ending inventory―Year of transfer Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 05-06 38. In the consolidation worksheet for 2017, which of the following accounts would be credited to eliminate unrecognized intra-entity gross profit with regard to the 2017 intra-entity transfers? A) Retained earnings. B) Cost of goods sold. C) Inventory. D) Investment in Fisher Company. E) Sales. Answer: C Learning Objective: 05-03 Topic: Intra-entity ending inventory―Year of transfer Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 05-06 39. In the consolidation worksheet for 2018, which of the following accounts would be debited to eliminate unrecognized intra-entity gross profit with regard to the 2017 intra-entity transfers? A) Retained earnings. B) Cost of goods sold. C) Inventory. D) Investment in Fisher Company. E) Sales. Answer: D Learning Objective: 05-04 Topic: Intra-entity gross profit―Year after transfer Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 05-06 40. In the consolidation worksheet for 2018, which of the following accounts would be credited to eliminate unrecognized intra-entity gross profit with regard to the 2017 intra-entity transfers? A) Retained earnings. B) Cost of goods sold. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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C) Inventory. D) Investment in Fisher Company. E) Sales. Answer: B Learning Objective: 05-04 Topic: Intra-entity gross profit―Year after transfer Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement

[QUESTION] 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. Answer: B Learning Objective: 05-06 Topic: Intra-entity transfer of land Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 42. Parent sold land to its subsidiary resulting in a gain in 2016, the year of transfer. The subsidiary sold the land to an unrelated third party for a gain in 2019. Which of the following statements is true? A) A gain will be recognized in the consolidated income statement in 2016. B) A gain will be recognized in the consolidated income statement in 2019. C) No gain will be recognized in the 2019 consolidated income statement. D) Only the parent company will recognize a gain in 2019. E) The subsidiary will recognize a gain in 2016. Answer: B Learning Objective: 05-06 Topic: Intra-entity transfer of land Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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? Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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. Answer: C Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: B Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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? 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. Answer: C Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 3 Hard Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] 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. Answer: D Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement REFERENCE: 05-07 Gargiulo Company, a 90% owned subsidiary of Posito Corporation, transfers inventory to Posito at a 25% gross profit rate. The following data are available pertaining specifically to Posito’s intra-entity purchases from Gargiulo. Gargiulo was acquired on January 1, 2017.

Purchases by Posito Ending inventory on Posito’s books

2017 $8,000 1,200

2018 $12,000 4,000

2019 $15,000 3,000

Assume the equity method is used. The following data are available pertaining to Gargiulo’s income and dividends. Gargiulo’s net income Dividends paid by Gargiulo

2017 $70,000 10,000

2018 $85,000 10,000

2019 $94,000 15,000

[QUESTION] REFER TO: 05-07 47. Compute the equity in earnings of Gargiulo reported on Posito's books for 2017. A) $63,000. B) $62,730. C) $63,270. D) $70,000. E) $62,700. Answer: B Learning Objective: 05-03 Learning Objective: 05-05 Topic: Intra-entity ending inventory―Year of transfer Topic: Noncontrolling interest―Upstream gross profit Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: FN Measurement Feedback: Parent’s Part of Net Income for 2017 ($70,000 X .90) $63,000 – Earnings Adjustment for Intra-Entity Gross profit on Which Recognition is Deferred for Subsidiary for 2017 ($1,200 X .25 X .90) $270 = $62,730 [QUESTION] REFER TO: 05-07 48. Compute the equity in earnings of Gargiulo reported on Posito's books for 2018. A) $76,500. B) $77,130. C) $75,870. D) $75,600. E) $75,800. Answer: C Learning Objective: 05-04 Learning Objective: 05-05 Topic: Intra-entity inventory―Beginning and ending Topic: Noncontrolling interest―Upstream gross profit Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Parent’s Part of Net Income for 2018 (($85,000 X .90) $76,500) – Earnings Adjustment for Intra-Entity Gross Profit Remaining in Ending Inventory of Subsidiary for 2018 ($4,000 X .25 X .90 = $900) + Recognition of Intra-Entity Gross Profit of Subsidiary for 2017 ($270) = $75,870 [QUESTION] REFER TO: 05-07 49. Compute the equity in earnings of Gargiulo reported on Posito's books for 2019. A) $84,600. B) $84,375. C) $83,925. D) $84,825. E) $84,850. Answer: D Learning Objective: 05-04 Learning Objective: 05-05 Topic: Intra-entity inventory―Beginning and ending Topic: Noncontrolling interest―Upstream gross profit Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Parent’s Part of Net Income 2019 ($94,000 X .90 = $84,600) – Earnings Adjustment for Unrecognized Gross profit of Subsidiary for 2019 ($3,000 X .25 X .90 = $675) + Gross Profit Recognized with respect to Subsidiary for 2018 ($900) = $84,825 [QUESTION] REFER TO: 05-07 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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50. 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 Gargiulo for 2017. A) $6,970. B) $7,000. C) $7,030. D) $6,270. E) $6,230. Answer: A Learning Objective: 05-05 Topic: Noncontrolling interest―Upstream gross profit Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Parent’s Part of Net Income for 2017 ($70,000 X .10 = $7,000) – Earnings Adjustment for Unrecognized Gross profit of Subsidiary for 2017 ($1,200 X .25 X .10 = $30) = $6,970 [QUESTION] REFER TO: 05-07 51. 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 Gargiulo for 2018. A) $8,500. B) $8,570. C) $8,430. D) $8,400. E) $7,580. Answer: C Learning Objective: 05-05 Topic: Noncontrolling interest―Upstream gross profit Difficulty: 2 Medium Blooms: Apply AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Parent’s Part of Net Income for 2018 ($85,000 X .10 = $8,500) – Earnings Adjustment for Unrecognized gross profit of Subsidiary for 2018 ($4,000 X .25 X .10 = $100) + Recognized Gross profit of Subsidiary for 2017 ($30) = $8,430 [QUESTION] REFER TO: 05-07 52. 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 Gargiulo for 2019. A) $9,400. B) $9,375. C) $9,425. D) $9,325. E) $8,485. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Answer: C Learning Objective: 05-05 Topic: Noncontrolling interest―Upstream gross profit Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Parent’s Part of Net Income for 2019 ($94,000 X .10 = $9,400) – Earnings Adjustment for Unrecognized Gross profit of Subsidiary for 2019 ($3,000 X .25 X .10 = $75) + Recognized Gross profit of Subsidiary for 2018 ($100) = $9,425 [QUESTION] REFER TO: 05-07 53. For consolidation purposes, what amount would be debited to cost of goods sold for the 2017 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. Answer: A Learning Objective: 05-03 Topic: Intra-entity ending inventory―Year of transfer Difficulty: 2 Medium Blooms: Analyze Blooms: Apply AACSB: Analytical Thinking AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Earnings Adjustment for Unrecognized Gross profit of Subsidiary for 2017 ($1,200 X .25 = $300) [QUESTION] REFER TO: 05-07 54. For consolidation purposes, what amount would be debited to cost of goods sold for the 2018 consolidation worksheet with regard to the unrecognized intra-entity gross profit remaining in ending inventory with respect to the 2018 transfer of merchandise? A) $1,000. B) $ 800. C) $3,000. D) $2,400. E) $ 900. Answer: A Learning Objective: 05-03 Topic: Intra-entity ending inventory―Year of transfer Difficulty: 2 Medium Blooms: Analyze Blooms: Apply Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AACSB: Analytical Thinking AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Earnings Adjustment for Unrecognized Gross profit of Subsidiary for 2018 ($4,000 X .25 = $1,000) [QUESTION] REFER TO: 05-07 55. For consolidation purposes, what amount would be debited to cost of goods sold for the 2019 consolidation worksheet with regard to the unrecognized intra-entity gross profit remaining in ending inventory with respect to the 2019 intra-entity transfer of merchandise? A) $ 600. B) $ 750. C) $3,760. D) $3,000. E) $ 675. Answer: B Learning Objective: 05-03 Topic: Intra-entity ending inventory―Year of transfer Difficulty: 2 Medium Blooms: Analyze Blooms: Apply AACSB: Analytical Thinking AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Earnings Adjustment for Unrecognized Gross profit of Subsidiary for 2019 ($3,000 X .25 = $750) [QUESTION] REFER TO: 05-07 56. For consolidation purposes, what amount would be debited to January 1 retained earnings for the 2017 consolidation worksheet entry with regard to the unrecognized intra-entity gross profit remaining in ending inventory with respect to the 2017 intra-entity transfer of merchandise? A) $ 0. B) $1,600. C) $ 300. D) $ 240. E) $ 270. Answer: A Learning Objective: 05-04 Topic: Intra-entity ending inventory―Year of transfer Difficulty: 1 Easy Blooms: Apply Blooms: Analyze AACSB: Analytical Thinking AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Zero -- No Earnings Adjustment would be necessary in January 2017 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 05-07 57. For consolidation purposes, what amount would be debited to January 1 retained earnings for the 2018 consolidation worksheet entry with regard to the unrecognized intra-entity gross profit remaining in ending inventory with respect to the 2017 intra-entity transfer of merchandise? A) $ 240. B) $ 300. C) $2,000. D) $1,600. E) $ 270. Answer: B Learning Objective: 05-04 Topic: Intra-entity gross profit―Year after transfer Difficulty: 2 Medium Blooms: Analyze Blooms: Apply AACSB: Analytical Thinking AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Realized Gross profit of Subsidiary 2017 ($1,200 X .25 = $300) [QUESTION] REFER TO: 05-07 58. For consolidation purposes, what amount would be debited to January 1 retained earnings for the 2019 consolidation worksheet entry with regard to the unrecognized intra-entity gross profit remaining in ending inventory with respect to the 2018 intra-entity transfer of merchandise? A) $3,000. B) $2,400. C) $1,000. D) $ 800. E) $ 900. Answer: C Learning Objective: 05-04 Topic: Intra-entity gross profit―Year after transfer Difficulty: 2 Medium Blooms: Analyze Blooms: Apply AACSB: Analytical Thinking AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Recognized Gross profit of Subsidiary with respect to 2018 ($4,000 X .25 = $1,000) REFERENCE: 05-08 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 05-08 59. Compute consolidated sales. A) $10,000,000. B) $10,126,000. C) $10,140,000. D) $10,200,000. E) $10,260,000. Answer: C Learning Objective: 05-02 Topic: Eliminate intra-entity sales and purchases Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Consolidated Sales = Parent’s Sales $10,000,000 + Subsidiary’s sales $200,000 = $10,200,000 – Intra-Entity Transfers $60,000 = $10,140,000 [QUESTION] REFER TO: 05-08 60. 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. Answer: D Learning Objective: 05-02 Learning Objective: 05-03 Topic: Eliminate intra-entity sales and purchases Topic: Intra-entity ending inventory―Year of transfer Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 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 X .30) $4,500 = $7,604,500 [QUESTION] REFER TO: 05-08 61. 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. Answer: C Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Learning Objective: 05-02 Topic: Eliminate intra-entity sales and purchases Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Consolidated Sales = Parent’s Sales $10,000,000 + Subsidiary’s sales $200,000 = $10,200,000 – Intra-Entity Transfers $60,000 = $10,140,000 REFERENCE: 05-09 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, 2017. On January 1, 2017, Wilson realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. On April 1, 2017 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

2017 $100,000 40,000

2018 $120,000 50,000

2019 $130,000 60,000

[QUESTION] REFER TO: 05-09 62. What amount should be recorded on Wilson’s books 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. Answer: A Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: January 1, 2017 BV $50,000 / 10yrs Expected Useful Life = $5,000 per year Depreciation Expense. Sale on April 1, 2017 required Three Months 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 [QUESTION] REFER TO: 05-09 63. Compute the amortization of gain through a depreciation adjustment for 2017 for consolidation purposes. A) $1,950. B) $1,825. C) $1,500. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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D) $2,000. E) $5,250. Answer: C Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Amortization of Gain on Transfer of Equipment = $19,500 Gain / 9yrs 9 mos. Remaining Useful Life = $2,000 per year X 9 mos. of 2017 = $1,500 Depreciation Adjustment for 2017 [QUESTION] REFER TO: 05-09 64. Compute the amortization of gain through a depreciation adjustment for 2018 for consolidation purposes. A) $1,950. B) $1,825. C) $2,000. D) $1,500. E) $7,000. Answer: C Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Amortization of Gain on Transfer of Equipment = $19,500 Gain / 9yrs 9 mos. Remaining Useful Life = $2,000 per year X 12 mos. of 2018 = $2,000 Depreciation Adjustment for 2018 [QUESTION] REFER TO: 05-09 65. Compute the amortization of gain through a depreciation adjustment for 2019 for consolidation purposes. A) $1,925. B) $1,825. C) $2,000. D) $1,500. E) $7,000. Answer: C Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Feedback: Amortization of Gain on Transfer of Equipment = $19,500 Gain / 9yrs 9 mos. Remaining Useful Life = $2,000 per year X 12 mos. of 2019 = $2,000 Depreciation Adjustment for 2019 [QUESTION] REFER TO: 05-09 66. 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 2017. A) $72,000. B) $90,000. C) $73,575. D) $73,800. E) $72,500. Answer: B Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Parent’s Share of Subsidiary Net Income 2017 ($100,000 X .90) = $90,000 [QUESTION] REFER TO: 05-09 67. 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 2018. A) $108,000 B) $110,000. C) $106,000. D) $109,825. E) $109,800. Answer: A Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Parent’s Share of Subsidiary Net Income 2018 ($120,000 X .90) = $108,000 [QUESTION] REFER TO: 05-09 68. 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 2019. A) $118,825. B) $115,000. C) $117,000. D) $119,000. E) $118,800. Answer: C Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Parent’s Share of Subsidiary Net Income 2019 ($130,000 X .90) = $117,000 REFERENCE: 05-10 On January 1, 2017, 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 2017 and 2018, respectively. All net income effects of the intra-entity transfer are attributed to the seller for consolidation purposes. [QUESTION] REFER TO: 05-10 69. What amount of gain should be reported by Smeder Company relating to the equipment for 2017 prior to making consolidating entries? A) $36,000. B) $34,000. C) $12,000. D) $10,000. E) $ 0. Answer: C Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: January 1, 2017 Sale Price on Transfer $84,000 - BV $72,000 = $12,000 Gain on Sale [QUESTION] REFER TO: 05-10 70. Assuming there are no excess amortizations associated with the consolidation, and no other intraentity asset transfers, what amount of this gain should be recognized for consolidation purposes for 2017? A) $12,000. B) $9,600. C) $8,400. D) $2,000. E) $1,200. Answer: D Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Deferred Gain on Transfer $12,000 divided by 6 years remaining equals $2,000 Amortization of Gain per year. [QUESTION] REFER TO: 05-10 71. For consolidation purposes, what net debit or credit will be made for the year 2017 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. Answer: D Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Accumulated Depreciation $48,000 – Amortization of Gain for First Year $2,000 = $46,000 Credit to Accumulated Depreciation for 2017 [QUESTION] REFER TO: 05-10 72. What is the net effect on net income as a result of consolidating adjustments made in 2017 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. Answer: C Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 2 Medium Blooms: Apply Blooms: Analyze AACSB: Analytical Thinking AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Deferred Recognition of Gain on Transfer $12,000 – Amortization of Gain for First Year $2,000 = $10,000 Decrease in Net Income for 2017 REFERENCE: 05-11 Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2017, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2017 and 2018, respectively. Leo uses the equity method to account for its investment. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 05-11 73. Compute the gain or loss on the intra-entity transfer of land that should be reported on the books of Stiller prior to consolidation. A) $15,000 loss. B) $15,000 gain. C) $50,000 loss. D) $50,000 gain. E) $65,000 gain. Answer: B Learning Objective: 05-06 Topic: Intra-entity transfer of land Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Subsidiary’s Land Transfer Value $75,000 - Subsidiary’s Land BV $60,000 = $15,000 Gain on Intra-Entity Sale of Land [QUESTION] REFER TO: 05-11 74. On a consolidation worksheet, what adjustment would be made for 2017 regarding the land transfer? 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. Answer: D Learning Objective: 05-06 Topic: Intra-entity transfer of land Difficulty: 1 Easy Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 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 [QUESTION] REFER TO: 05-11 75. On a consolidation worksheet, having used the equity method, what adjustment would be made for 2018 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. Answer: E Learning Objective: 05-06 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Topic: Intra-entity transfer of land Difficulty: 1 Easy Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 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. [QUESTION] REFER TO: 05-11 76. Assuming there are no excess amortizations or other intra-entity transactions, compute income from Stiller on Leo's books for 2017. A) $110,000 B) $100,000. C) $125,000. D) $ 85,000. E) $ 88,000. Answer: B Learning Objective: 05-06 Topic: Intra-entity transfer of land Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Parent’s Share of Subsidiary Net Income 2017 ($125,000 X .80) = $100,000 [QUESTION] REFER TO: 05-11 77. Assuming there are no excess amortizations or other intra-entity transactions, compute income from Stiller on Leo's books for 2018. A) $140,000. B) $ 97,000. C) $125,000. D) $100,000. E) $112,000. Answer: E Learning Objective: 05-06 Topic: Intra-entity transfer of land Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Parent’s Share of Subsidiary Net Income 2018 ($140,000 X .80) = $112,000 REFERENCE: 05-12 Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2017, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2017, 2018, and 2019, respectively. Parker sold the land purchased from Stark in 2017 for Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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$92,000 in 2019. Both companies use the equity method of accounting. [QUESTION] REFER TO: 05-12 78. Compute the gain or loss reported on Stark’s books prior to consolidation from the intra-entity transfer of land in 2017. A) $80,000 gain. B) $80,000 loss. C) $ 5,000 gain. D) $ 5,000 loss. E) $85,000 loss. Answer: D Learning Objective: 05-06 Topic: Intra-entity transfer of land Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Subsidiary’s Land Transfer Value $80,000 – Parent’s Land BV $85,000 = $5,000 Loss on Intra-Entity Transfer of Land [QUESTION] REFER TO: 05-12 79. Which of the following will be included in a consolidation entry for 2017? A) Debit loss for $5,000. B) Credit loss for $5,000. C) Credit land for $5,000. D) Debit gain for $5,000. E) Credit gain for $5,000. Answer: B Learning Objective: 05-06 Topic: Intra-entity transfer of land Difficulty: 1 Easy Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 05-12 80. Which of the following will be included in a consolidation entry for 2018? 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. Answer: B Learning Objective: 05-06 Topic: Intra-entity transfer of land Difficulty: 1 Easy Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 05-12 81. Assuming there are no excess amortizations or other intra-entity transactions, compute income from Stark reported on Parker's books for 2017. A) $205,000. B) $200,000. C) $180,000. D) $175,500. E) $184,500. Answer: E Learning Objective: 05-06 Topic: Intra-entity transfer of land Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Parent’s Share of Subsidiary Net Income for 2017 ($200,000 X .90) = $180,000 + (Adjusted Loss on Land $5,000 X .90) $4,500 = $184,500 [QUESTION] REFER TO: 05-12 82. Assuming there are no excess amortizations or other intra-entity transactions, compute income from Stark reported on Parker's books for 2018. A) $185,000. B) $157,500. C) $166,500. D) $162,000. E) $180,000. Answer: D Learning Objective: 05-06 Topic: Intra-entity transfer of land Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Parent’s Share of Subsidiary Net Income for 2018 ($180,000 X .90) = $162,000 [QUESTION] REFER TO: 05-12 83. Compute Parker's reported gain or loss on its internal accounting records prior to consolidation relating to the land for 2019. A) $12,000 gain. B) $ 5,000 loss. C) $12,000 loss. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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D) $ 7,000 gain. E) $ 7,000 loss. Answer: A Learning Objective: 05-06 Topic: Intra-entity transfer of land Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Subsidiary’s Sale Price $92,000 – BV of Land $80,000 = $12,000 [QUESTION] REFER TO: 05-12 84. Compute Stark's reported gain or loss relating to the land for 2019. A) $5,000 loss. B) $5,000 gain. C) $7,000 loss. D) $7,000 gain. E) $ 0. Answer: E Learning Objective: 05-06 Topic: Intra-entity transfer of land Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Stark recognizes no Gain or Loss at the time of Sale by Parker [QUESTION] REFER TO: 05-12 85. Compute the gain or loss relating to the land that will be reported in consolidated net income for 2019. A) $ 5,000 loss. B) $ 7,000 gain. C) $12,000 gain. D) $ 7,000 loss. E) $12,000 loss. Answer: B Learning Objective: 05-06 Topic: Intra-entity transfer of land Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: The recognized gain of $12,000 created by the intra-entity transfer is offset by the recognition of a Deferred Loss on the Original Transfer (of $5,000) resulting in a net $7,000 Gain recognized and reported in Consolidated Net Income Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 05-12 86. Assuming there are no excess amortizations or other intra-entity transactions, compute income from Stark reported on Parker's books for 2019. A) $204,300. B) $202,500. C) $193,500. D) $191,700. E) $198,000. Answer: C Learning Objective: 05-06 Topic: Intra-entity transfer of land Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Parent’s Share of Subsidiary Net Income 2019 $220,000 – Loss Adjustment of ($5,000) on Disposal of Land = $215,000 X .90 = $193,500 REFERENCE: 05-13 Pepe, Incorporated acquired 60% of Devin Company on January 1, 2017. 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 2017 and 2018, respectively. Pepe uses the equity method to account for its investment in Devin. [QUESTION] REFER TO: 05-13 87. What is the gain or loss on equipment recognized by Devin on its internal accounting records for 2017? A) $54,000 gain. B) $21,000 loss. C) $21,000 gain. D) $ 9,000 loss. E) $ 9,000 gain. Answer: D Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Subsidiary’s Equipment Transfer Value $45,000 – Parent’s Equipment BV $54,000 = $9,000 Loss on Intra-Entity Transfer of Equipment [QUESTION] REFER TO: 05-13 88. What is the consolidated gain or loss on equipment for 2017? A) $ 0. B) $ 9,000 gain. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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C) $ 9,000 loss. D) $21,000 gain. E) $21,000 loss. Answer: A Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: There is No Consolidated Gain/Loss Recognized on the Transfer in 2017 [QUESTION] REFER TO: 05-13 89. Assuming there are no excess amortizations or other intra-entity transactions, Compute the income from Devin reported on Pepe's books for 2017. A) $174,600. B) $184,800. C) $172,000. D) $171,000. E) $180,000. Answer: B Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Subsidiary’s 2017 Income ($300,000) + Unrecognized Loss on Transferred Equipment ($9,000) – First Annual Recognition of Loss ($1,000) = $308,000 X .60 = $184,800 Subsidiary’s Net Income Recognized by Parent in Consolidated Financial Statements [QUESTION] REFER TO: 05-13 90. Assuming there are no excess amortizations or other intra-entity transactions, Compute the income from Devin reported on Pepe's books for 2018. A) $190,200. B) $196,000. C) $194,400. D) $187,000. E) $195,000. Answer: C Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Feedback: Subsidiary’s 2018 Income ($325,000) – Second Year Recognition of Loss ($1,000) = $324,000 X .60 = $194,400 Subsidiary’s Net Income Reported by Parent [QUESTION] REFER TO: 05-13 91. Assuming there are no excess amortizations or other intra-entity transactions, Compute the net income attributable to the noncontrolling interest of Devin for 2017. A) $116,400. B) $120,400. C) $120,000. D) $123,200. E) $112,000. Answer: D Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Subsidiary’s 2017 Income ($300,000) + Unrecognized Loss on Transferred Equipment ($9,000) – First Annual Recognition of Loss ($1,000) = $308,000 X .40 = $123,200 Net Income Attributable to the Noncontrolling Interest [QUESTION] REFER TO: 05-13 92. Assuming there are no excess amortizations or other intra-entity transactions, compute the net income attributable to the noncontrolling interest of Devin for 2018. A) $126,800. B) $130,000. C) $122,000. D) $130,800. E) $129,600. Answer: E Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Subsidiary’s 2018 Income ($325,000) – Second Year Recognition of Loss ($1,000) = $324,000 X .40 = $129,600 Net Income Attributable to the Noncontrolling Interest Essay: [QUESTION] 93. 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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(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. Answer: (1.) A; (2.) A; (3.) E; (4.) E; (5.) A; (6.) A; (7.) B; (8.) B; (9.) D; (10.) C. Learning Objective: 05-03 Learning Objective: 05-04 Learning Objective: 05-06 Learning Objective: 05-07 Topic: Intra-entity ending inventory―Year of transfer Topic: Intra-entity gross profit―Year after transfer Topic: Coverage of prior chapters Topic: Intra-entity transfer using initial value method Topic: Intra-entity transfer of land Topic: Intra-entity transfer of depreciable asset Difficulty: 3 Hard Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 94. On April 7, 2018, Pate Corp. sold land to Shannahan Co., its subsidiary. From a consolidated financial statement point of view, when will the gain on this transfer actually be recognized? Answer: The gain is recognized when Shannahan sells the land to a third party. Learning Objective: 05-01 Topic: Why eliminate intra-entity transfers Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 95. Throughout 2018, Cleveland Co. sold inventory to Leeward Co., its subsidiary. From a consolidated financial statement point of view, when will the gross profit on this transfer be recognized? Answer: The gross profit is recognized when Leeward uses the goods or sells them to a third party. Learning Objective: 05-01 Topic: Why eliminate intra-entity transfers Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 96. Varton Corp. acquired all of the voting common stock of Caleb Co. on January 1, 2018. Varton owned some land with a book value of $84,000 that was sold to Caleb for its fair value of $120,000. How should this transfer be accounted for by the consolidated entity? Answer: Caleb and Varton are in substance one entity; although in legal form they are separate. The “sale” of land by Varton should be regarded as intra-entity transfer. No gain on the transfer should be recognized in the consolidated financial statements since the intra-entity transfer is merely the internal

movement of asset, an event that creates no net change in the financial position of the business combination taken as a whole.. Because Caleb recognized a gain in its income statement, the consolidation process must eliminate the gain. Also, Caleb'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 cost. Learning Objective: 05-01 Learning Objective: 05-06 Topic: Why eliminate intra-entity transfers Topic: Intra-entity transfer of land Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 97. During 2018, Edwards Co. sold inventory to its parent company, Forsyth Corp. Forsyth still owned the entire amount of inventory purchased at the end of 2018. Why must the gross profit on the sale be deferred when consolidated financial statements are prepared at the end of 2018? Answer: A sale of inventory by a subsidiary to its parent is more accurately understood as a transfer within the entity. Since Forsyth still owned the inventory at the end of the year, the intra-entity

transfer is merely the internal movement of 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Learning Objective: 05-01 Learning Objective: 05-03 Topic: Why eliminate intra-entity transfers Topic: Intra-entity ending inventory―Year of transfer Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 98. How does a gain on an intra-entity transfer of equipment affect the calculation of a noncontrolling interest? Answer: 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. Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 99. How do upstream and downstream inventory transfers differ in their effect in a year-end consolidation? Answer: 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. Learning Objective: 05-03 Learning Objective: 05-05 Topic: Intra-entity ending inventory―Year of transfer Topic: Noncontrolling interest―Upstream gross profit Topic: Noncontrolling interest―Downstream gross profit Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] 100. How is the gain on an intra-entity transfer of a depreciable asset recognized? Answer: 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. Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 101. Dithers Inc. acquired all of the common stock of Bumstead Corp. on January 1, 2018. During 2018, Bumstead sold land to Dithers at a gain. No consolidation entry for the sale of the land was made at the end of 2018. What errors will this omission cause in the consolidated financial statements? Answer: Consolidation Entry for 2018 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 gain may be allocated to the noncontrolling interest share of subsidiary earnings and the noncontrolling interest balance on the consolidated balance sheet. Learning Objective: 05-06 Topic: Intra-entity transfer of land Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 102. Why do intra-entity transfers between the component companies of a business combination occur so frequently? Answer: One reason for the significant volume and frequency of intra-entity 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. Learning Objective: 05-01 Topic: Why eliminate intra-entity transfers Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: FN Measurement [QUESTION] 103. Fraker, Inc. owns 90 percent of Richards, Inc. and bought $200,000 of Richards’ inventory in 2018. The transfer profit was equal to 30 percent of the sales price. When preparing consolidated financial statements, what amount of these sales is eliminated? Answer: 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. Learning Objective: 05-02 Topic: Eliminate intra-entity sales and purchases Difficulty: 1 Easy Blooms: Analyze AACSB: Analytical Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 104. What is an intra-entity gross profit on a transfer of inventory, and how is it treated on a consolidation worksheet? Answer: 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. Learning Objective: 05-03 Learning Objective: 05-04 Topic: Intra-entity ending inventory―Year of transfer Topic: Intra-entity gross profit―Year after transfer Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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105. What is the impact on the noncontrolling interest of a subsidiary when there are downstream transfers of inventory between the parent and subsidiary companies? Answer: None. Learning Objective: 05-05 Topic: Noncontrolling interest―Downstream gross profit Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 106. When is the gain on an intra-entity transfer of land recognized in consolidated net income? Answer: 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. Learning Objective: 05-06 Topic: Intra-entity transfer of land Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 107. 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? Answer: 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. Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement Problems: [QUESTION] 108. Tara Company owns 80 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 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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$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 20 percent of this inventory. Prepare the consolidation entry to defer intra-entity gross profit. Answer: Cost of Goods Sold Inventory

1,600 1,600

Learning Objective: 05-03 Topic: Intra-entity ending inventory―Year of transfer Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 109. King Corp. owns 85% of James Co. King uses the equity method to account for its investments. During 2018, King sells inventory to James for $500,000. The inventory originally cost King $420,000. At 12/31/2018, 25% of the goods were still in James' inventory. Required: Prepare the Consolidation Entry TI and Consolidation Entry G for the consolidation worksheet. Answer: Consolidation Entry TI Sales Cost of Goods Sold

500,000 500,000

Consolidation Entry G Cost of Goods Sold Inventory

20,000 20,000

Learning Objective: 05-02 Learning Objective: 05-03 Topic: Eliminate intra-entity sales and purchases Topic: Intra-entity ending inventory―Year of transfer Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 110. Flintstone Inc. acquired all of Rubble Co. on January 1, 2018. Flintstone decided to use the initial value method to account for this investment. During 2018, 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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 12/31/20. Answer: Consolidation Entry TI Sales Cost of Goods Sold

600,000 600,000

Consolidation Entry G Cost of Goods Sold Inventory

30,000 30,000

Learning Objective: 05-02 Learning Objective: 05-03 Topic: Eliminate intra-entity sales and purchases Topic: Intra-entity ending inventory―Year of transfer Topic: Intra-entity transfer using initial value method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 111. Yoderly Co., a wholly owned subsidiary of Nelson Corp., sold goods to Nelson near the end of 2018. 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 2018. Answer: Consolidation Entry TI Sales Cost of Goods Sold

140,000 140,000

Consolidation Entry G Cost of Goods Sold Inventory

35,000 35,000

Learning Objective: 05-02 Learning Objective: 05-03 Topic: Eliminate intra-entity sales and purchases Topic: Intra-entity ending inventory―Year of transfer Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 112. Strayten Corp. is a wholly owned subsidiary of Quint Inc. Quint decided to use the initial value method to account for this investment. During 2018, 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 2018. Required: Prepare Consolidation Entry *G, which would have to be recorded at the end of 2019. Answer: Retained Earnings (($64,000 - $48,000) x 1/8) Cost of Goods Sold

2,000 2,000

Learning Objective: 05-05 Topic: Intra-entity transfer using initial value method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 113. Hambly Corp. owned 80% of the voting common stock of Stroban Co. During 2018, 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 2018 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? Answer:

Stroban Co.’s 2018 net income as reported Unrealized gain on land sale ($145,000 – $82,000) Stroban Co.’s 2018 realized income Noncontrolling interest percentage Noncontrolling interest’s share of Stroban Co.’s net income

$ 119,000 ( 63,000) $ 56,000 20% $ 11,200

Learning Objective: 05-06 Topic: Intra-entity transfer of land Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: FN Measurement [QUESTION] 114. McGraw Corp. owned all of the voting common stock of both Ritter Co. and Lawler Co. During 2018, 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 2018, Lawler still held 30% of the inventory. Required: How should the sale between Lawler and Ritter be accounted for in a 2018 consolidation worksheet? Show worksheet entries to support your answer. Answer: 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

100,000

Cost of Goods Sold Inventory

10,500

100,000

10,500

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. Learning Objective: 05-02 Learning Objective: 05-03 Topic: Eliminate intra-entity sales and purchases Topic: Intra-entity ending inventory―Year of transfer Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement REFERENCE: 05-14 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 2017, Virginia made cash sales of $400,000 to Stateside. The gross profit rate was 30% of the selling price. By the end of 2017, Stateside had sold 75% of the goods to outside parties for $420,000 cash. [QUESTION] REFER TO: 05-14 115. Prepare journal entries for Virginia and Stateside to record the sales/purchases during 2017. Answer: On the books of Virginia: Cash Sales

400,000

Cost of Goods Sold ($400,000 x 70%)

280,000

400,000

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Inventory

280,000

On the books of Stateside: Inventory Cash

400,000

Cash Sales

420,000

Cost of Goods Sold Inventory

300,000

400,000

420,000

300,000

Learning Objective: 05-02 Learning Objective: 05-03 Topic: Eliminate intra-entity sales and purchases Topic: Intra-entity ending inventory―Year of transfer Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 05-14 116. Prepare the consolidation entries that should be made at the end of 2017. Answer: Consolidation Entry TI Sales Cost of Goods Sold

400,000 400,000

Consolidation Entry G Cost of Goods Sold Inventory

30,000 30,000

Learning Objective: 05-02 Learning Objective: 05-03 Topic: Eliminate intra-entity sales and purchases Topic: Intra-entity ending inventory―Year of transfer Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 05-14 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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117. Prepare any 2018 consolidation worksheet entries that would be required regarding the 2017 inventory transfer. Answer: Retained Earnings Cost of Goods Sold

30,000 30,000

Learning Objective: 05-04 Topic: Intra-entity gross profit―Year after transfer Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement REFERENCE: 05-15 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, 2018:

Sales Cost of goods sold Operating expenses Retained earnings, 1/1/18 Inventory Buildings (net) Investment income

Polar Inc. $ 896,000 406,000 210,000 1,036,000 484,000 501,000 not given

Icecap Co. $ 504,000 276,000 147,000 252,000 154,000 220,000

[QUESTION] REFER TO: 05-15 118. Assume that Polar sold inventory to Icecap at a markup equal to 25% of cost. Intra-entity transfers were $130,000 in 2017 and $165,000 in 2018. Of this inventory, $39,000 of the 2017 transfers were retained and then sold by Icecap in 2018, while $55,000 of the 2018 transfers was held until 2019. Required: For the consolidated financial statements for 2018, 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. Answer: Consolidated Cost of Goods Sold - 2018 Poplar Inc.’s cost of goods sold Icecap Co.’s cost of goods sold Elimination of 2018 intra-entity transfer of inventory Reduction of beginning inventory because of 2017 unrecognized gain ($39,000 transfer price/125% = $31,200 cost; $39,000 less $31,200 =

$406,000 276,000 (165,000)

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$7,800 unrecognized gain) Reduction of ending inventory because of 2018 unrecognized gain ($55,000 transfer price/125% = $44,000 cost; $55,000 less $44,000 = $11,000 unrecognized gain Consolidated cost of goods sold

(

7,800)

11,000 $520,200

Consolidated Inventory Polar Inc.’s inventory Icecap’s inventory Eliminate ending inventory unrecognized gain (from above) Consolidated inventory

$484,000 154,000 ( 11,000) $627,000

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

$81,000 x 20% $16,200

Learning Objective: 05-02 Learning Objective: 05-03 Learning Objective: 05-04 Learning Objective: 05-05 Topic: Eliminate intra-entity sales and purchases Topic: Intra-entity ending inventory―Year of transfer Topic: Intra-entity inventory―Beginning and ending Topic: Noncontrolling interest―Downstream gross profit Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 05-15 119. Assume that Icecap sold inventory to Polar at a markup equal to 25% of cost. Intra-entity transfers were $70,000 in 2017 and $112,000 in 2018. Of this inventory, $29,000 of the 2017 transfers were retained and then sold by Polar in 2018, whereas $49,000 of the 2018 transfers was held until 2019. Required: For the consolidated financial statements for 2018, 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. Answer: Consolidated Cost of Goods Sold Poplar Inc.’s cost of goods sold Icecap Co.’s cost of goods sold Elimination of 2018 intra-entity transfer of inventory Reduction of beginning inventory because of 2017 unrecognized gain ($29,000 / 125% = $23,200 cost; transfer price $29,000 less $23,200 cost = $5,800 unrecognized gain) Reduction of ending inventory because of 2018 unrecognized gain

$406,000 276,000 (112,000) (

5,800)

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($49,000 / 125% = $39,200 cost; transfer price $49,000 less $39,200 cost = $9,800 unrecognized gain Consolidated cost of goods sold

9,800 $574,000

Consolidated Inventory Polar Inc.’s inventory Icecap’s inventory Eliminate ending inventory unrecognized gain (from above) Consolidated inventory

$484,000 154,000 ( 9,800) $628,200

Net income attributable to the noncontrolling interest Icecap’s reported net income 2017 unrecognized gain realized in 2018 (from above) 2018 unrecognized gain to be realized in 2018 (from above) Noncontrolling interest percentage Net income attributable to the noncontrolling interest

$81,000 5,800 ( 9,800) $77,000 x 20% $15,400

Learning Objective: 05-02 Learning Objective: 05-03 Learning Objective: 05-04 Learning Objective: 05-05 Topic: Eliminate intra-entity sales and purchases Topic: Intra-entity ending inventory―Year of transfer Topic: Intra-entity inventory―Beginning and ending Topic: Noncontrolling interest―Upstream gross profit Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 05-15 120. Polar sold a building to Icecap on January 1, 2017 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 2018, 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. Answer: Consolidated Buildings (Net) Poplar Inc.’s book value Icecap Co.’s book value Removal of gain created by transfer (112,000 - $70,000) Removal of excess depreciation created by transfer ($42,000 unrecognized gain ÷ 5 year life x 2 years)

$501,000 220,000 $(42,000) 16,800

(25,200)

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Consolidated buildings (net)

$695,800

Consolidated Operating expenses Polar Inc.’s book value Icecap’s book value Removal of excess depreciation on transferred building ($42,000 unrecognized gain ÷ 5 year life) Consolidated operating expenses Net income attributable to the noncontrolling interest Icecap’s reported net income Noncontrolling interest percentage Net income attributable to the noncontrolling interest

$210,000 147,000 (8,400) $348,600

$81,000 x 20% $16,200

Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement REFERENCE: 05-16 On January 1, 2018, Musial Corp. sold equipment to Matin 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. Musial earned $308,000 in net income in 2018 (not including any investment income) while Matin reported $126,000. Assume there is no amortization related to the original investment. [QUESTION] REFER TO: 05-16 121. What is consolidated net income for 2018? Answer:

Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 05-16 122. Prepare a schedule of consolidated net income and the share to controlling and noncontrolling interests for 2018, assuming that Musial owned only 90% of Matin and the equipment transfer had been downstream. Answer: Consolidated net income To noncontrolling interest ($126,000 x 10%) To controlling interest

$378,000 ( 12,600) $365,400

Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 05-16 123. Prepare a schedule of consolidated net income and the share to controlling and noncontrolling interests for 2018, assuming that Musial owned only 90% of Matin and the equipment transfer had been upstream Answer: Musial Corp.’s income Matin Inc.’s income Deferral of intra-entity gain recognition on equipment Removal of excess depreciation created by intra-entity transfer ($70,000/5years) Consolidated net income To noncontrolling interest [.10($126,000 - 70,000 + 14,000)] To controlling interest

$308,000 126,000 ( 70,000) 14,000 $378,000 ( 7,000) $371,000

Learning Objective: 05-07 Topic: Intra-entity transfer of depreciable asset Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

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File: Chapter 06 - Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues Multiple Choice: [QUESTION] 1. On January 1, 2018, 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 2018? 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. Answer: D Learning Objective: 06-03 Topic: Intra-entity debt―Gain or loss for consolidation Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: E Learning Objective: 06-03 Topic: Intra-entity debt transactions―General Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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E) The preferred stock is participating. Answer: B Learning Objective: 06-06 Topic: EPS―Consolidated diluted EPS Topic: EPS―EPS of subsidiary by itself Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: C Learning Objective: 06-05 Topic: Consolidated statement of cash flows Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: E Learning Objective: 06-05 Topic: Consolidated statement of cash flows Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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E) Cash flows from financing activities. Answer: A Learning Objective: 06-05 Topic: Consolidated statement of cash flows Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 7. How do intra-entity transfers of inventory affect the preparation of a consolidated statement of cash flows? 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. Answer: D Learning Objective: 06-05 Topic: Consolidated statement of cash flows Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement

[QUESTION] 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. Answer: C Learning Objective: 06-06 Topic: EPS―Consolidated basic EPS Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement REFERENCE: 06-01 On January 1, 2018, Riney Co. owned 80% of the common stock of Garvin Co. On that date, Garvin's stockholders' equity accounts had the following balances: Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Common stock ($5 par value) Additional paid-in capital Retained earnings Total stockholders’ equity

$ 250,000 110,000 330,000 $ 690,000

The balance in Riney's Investment in Garvin Co. account was $552,000, and the noncontrolling interest was $138,000. On January 1, 2018, Garvin Co. sold 10,000 shares of previously unissued common stock for $15 per share. Riney did not acquire any of these shares. [QUESTION] REFER TO: 06-01 9. What is the balance in Riney’s “Investment in Garvin Co. Account” following the sale of the 10,000 shares of common stock? A) $552,000. B) $560,000. C) $460,000. D) $404,000. E) $672,000. Answer: B Learning Objective: 06-07 Topic: Subsidiary stock―New issue-Percentage change Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $250,000 / $5 = 50,000 shares × .80 = 40,000 shares owned by parent Total Equity at Acquisition = $690,000 + Equity Added by Stock Offering (10,000 × $15) $150,000 = Total Equity after Stock Offering $840,000 × 40,000 Parent / 60,000 Total = $560,000 Parent’s Investment Account [QUESTION] REFER TO: 06-01 10. What amount should be attributed to the Noncontrolling Interest in Garvin Co. following the sale of the 10,000 shares of common stock? A) $288,000. B) $101,000. C) $280,000. D) $230,000. E) $168,000. Answer: C Learning Objective: 06-07 Topic: Subsidiary stock―New issue-Percentage change Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $250,000 / $5 = 50,000 shares × .80 = 40,000 shares owned by parent Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Total Equity at Acquisition = $690,000 + Equity Added by Stock Offering (10,000 × $15) $150,000 = Total Equity after Stock Offering $840,000 × 20,000/60,000 = $280,000 Noncontrolling Interest [QUESTION] 11. Rojas Co. owned 7,000 shares (70%) of the outstanding 10%, $100 par, preferred stock and 60% of the outstanding common stock of Brett Co. Assuming there are no excess amortizations or intra-entity transactions, and Brett reports net income of $780,000, what is the noncontrolling interest in the subsidiary's income? A) $234,000. B) $273,000. C) $302,000. D) $312,000. E) $284,000. Answer: C Learning Objective: 06-04 Topic: Subsidiary preferred stock Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $780,000 Net Income – Preferred Dividends (10,000 × $10) = $680,000 × .40 = $272,000 Noncontrolling Interest $100,000 Preferred Dividends × .30 = $30,000 Noncontrolling Interest $272,000 from Income + $30,000 Preferred Dividends = $302,000 Noncontrolling Interest in Income REFERENCE: 06-02 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 2018. Knight has 100,000 shares of common stock outstanding and reported net income of $400,000 for 2018. [QUESTION] REFER TO: 06-02 12. 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 Answer: A Learning Objective: 06-06 Topic: EPS―Subsidiary earnings for consolidated EPS Difficulty: 3 Hard Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Sub net income (300,000) – preferred divs(4,000) = $296,000 x 80% = 236,800 included in consolidated EPS. Parent net income (400,000)+ portion of sub net income = (400,000 + 236,800) / 100,000 shares = $6.37 [QUESTION] REFER TO: 06-02 13. What would Knight Co. report as consolidated diluted earnings per share (rounded)? A) $4.00. B) $. 4.71 C) $8.71. D) $5.89. E) $6.37. Answer: D Learning Objective: 06-06 Topic: EPS―EPS of subsidiary by itself Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: Sub Net income $300,000 + Interest saved $2,000 (no preferred divs)= $322,000. 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% x 302,000) = 588,750/100,000 = $5.89 Knight Co.’s Consolidated Diluted Earnings per Share [QUESTION] 14. Campbell Inc. owned all of Gordon Corp. For 2018, Campbell reported net income (without consideration of its investment in Gordon) of $280,000 while the subsidiary reported $112,000. There are no excess amortizations associated with this consolidation. The subsidiary had bonds payable outstanding on January 1, 2018, with a book value of $297,000. The parent acquired the bonds on that date for $281,000. During 2018, Campbell reported interest income of $31,000 while Gordon reported interest expense of $29,000. What is consolidated net income for 2018? A) $406,000. B) $374,000. C) $378,000. D) $410,000. E) $394,000. Answer: A Learning Objective: 06-03 Topic: Intra-entity debt―Effect on consolidated balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Feedback: Income of the Parent $280,000 + Income of the Sub $112,000 – Difference in Interest Income over Interest Expense on Intra-Entity Bonds ($31,000 - $29,000) $2,000 + Gain on Bonds Purchase ($297,000 - $281,000) $16,000 = $406,000 Consolidated Net Income [QUESTION] 15. Vontkins Inc. owned all of Quasimota Co. The subsidiary had bonds payable outstanding on January 1, 2017, with a book value of $265,000. The parent acquired the bonds on that date for $288,000. Subsequently, Vontkins reported interest income of $25,000 in 2017 while Quasimota reported interest expense of $29,000. Consolidated financial statements were prepared for 2018. What adjustment would be required for the retained earnings balance as of January 1, 2018? A) Reduction of $27,000. B) Reduction of $4,000. C) Reduction of $19,000. D) Reduction of $30,000. E) Reduction of $20,000. Answer: C Learning Objective: 06-03 Topic: Intra-entity debt―Effect on consolidated balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Bond Acquisition Price $288,000 – Bonds carrying amount $265,000 = $23,000 R/E Reduction. Intra-Entity Interest $29,000 - $25,000 = $4,000 R/E Increase $23,000 - $4,000 = $19,000 R/E Reduction [QUESTION] 16. Tray Co. reported current earnings of $560,000 while paying $56,000 in cash dividends. Sparrish Co. earned $140,000 in net income and distributed $14,000 in dividends. Tray held a 70% interest in Sparrish for several years, an investment that it originally acquired by transferring consideration equal to the book value of the underlying net assets. Tray used the initial value method to account for these shares. On January 1, 2018, Sparrish acquired in the open market $70,000 of Tray'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 $67,600. Sparrish paid $65,200 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) $42,000. B) $37,800. C) $39,600. D) $40,070. E) $44,080. Answer: A Learning Objective: 06-03 Topic: Intra-entity debt―Effect on consolidated balances Difficulty: 2 Medium Blooms: Apply Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: Sub’s income $140,000 × .30 = $42,000 NCI’s Portion of Income (gain or loss is assigned to the parent only) [QUESTION] 17. A company had common stock with a total par value of $18,000,000 and fair value of $62,000,000; and 7% preferred stock with a total par value of $6,000,000 and a fair value of $8,000,000. The book value of the company was $85,000,000. Assuming ninety percent (90%) of the company’s total equity is acquired, what amount must be attributed to the noncontrolling interest? A) $8,500,000. B) $7,000,000. C) $6,200,000. D) $2,400,000. E) $6,929,400. Answer: B Learning Objective: 06-04 Topic: Subsidiary preferred stock Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: FV Common Stock $62,000,000 + FV Preferred Stock $8,000,000 = $70,000,000 × .10 = $7,000,000 Noncontrolling Interest [QUESTION] 18. Cadion Co. owned a controlling interest in Knieval Inc. Cadion reported sales of $420,000 during 2018 while Knieval reported $280,000. Inventory costing $28,000 was transferred from Knieval to Cadion (upstream) during the year for $56,000. Of this amount, twenty-five percent was still in ending inventory at year's end. Total receivables on the consolidated balance sheet were $112,000 at the first of the year and $154,000 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? A) $602,000. B) $644,000. C) $686,000. D) $714,000. E) $592,000. Answer: A Learning Objective: 06-05 Topic: Consolidated statement of cash flows Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

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Feedback: Parent’s Sales $420,000 + Sub’s Sales $280,000 – Intra-Entity Sales $56,000 – increase in A/R $42,000 ($154,000 - $112,000) = $602,000 Consolidated Cash Collected [QUESTION] 19. Parker owned all of Odom Inc. Although the Investment in Odom Inc. account had a balance of $834,000, the subsidiary's 12,000 shares had an underlying book value of only $56 per share. On January 1, 2018, Odom issued 3,000 new shares to the public for $70 per share. How does this transaction affect the Investment in Odom Inc. account? A) It should be decreased by $210,000. B) It should be increased by $210,000. C) It should be increased by $168,000. D) It should be decreased by $1,200. E) It is not affected since the shares were sold to outside parties. Answer: D Learning Objective: 06-07 Topic: Subsidiary stock―New issue-Percentage change Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback:

Subsidiary’s unamortized fair value of prior to new share issue (12,000 × $56) ....................................................... Parent's ownership ................................................... Unamortized subsidiary fair value .......................... Subsidiary unamortized fair value after issuing new shares (above value plus 3,000 shares at $70 each) Parent's ownership 12,000 ÷ 15,000 shares) ........... Unamortized subsidiary fair value after stock issue

$834,000 100% $834,000

$1,044,000 80% $835,200

Investment in Odom increases by $1,200 ($835,200 less $834,000). REFERENCE: 06-03 These questions are based on the following information and should be viewed as independent situations. Popper Co. acquired 80% of the common stock of Cocker Co. on January 1, 2016, when Cocker had the following stockholders' equity accounts.

Common stock — 40,000 shares outstanding Additional paid-in capital Retained earnings Total stockholders’ equity

$140,000 105,000 476,000 $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 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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impairment annually and has not been determined to be impaired as of January 1, 2019. Popper did not pay any premium when it acquired its original interest in Cocker. On January 1, 2019, 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. [QUESTION] REFER TO: 06-03 20. On January 1, 2019, 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. Answer: C Learning Objective: 06-07 Topic: Subsidiary stock―New issue-No percentage change Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: 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 [QUESTION] REFER TO: 06-03 21. On January 1, 2019, 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. Answer: E Learning Objective: 06-07 Topic: Subsidiary stock―New issue-Percentage change Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback:

Consideration transferred ........................................................ Noncontrolling interest acquisition-date fair value ............... Increase in Sub book value (1,113,000-721,000) ..................... Stock issue proceeds ................................................................

$682,000 170,500 392,000 210,000

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Subsidiary valuation basis ............................................................. 1,454,000 New parent ownership (32,000 shs. ÷ 50,000 shs.) ..................... 64% Parent’s post-stock issue ownership balance.............................. $930,880 Parent's investment account ($682,000 + [80% × 392,000]) ........ 995,600 Required adjustment —decrease ............................................ $(64,720) [QUESTION] REFER TO: 06-03 22. On January 1, 2019, 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. Answer: D Learning Objective: 06-07 Topic: Subsidiary stock―Treasury stock acquired Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback:

Adjusted acquisition-date fair value ($852,500 + $392,000) .................. $1,244,500 Less Stock repurchase ................................................................... $ ( 272,000) Adjusted fair value after stock repurchase ................................... $972,500 New parent ownership (32,000 shs. ÷ 32,000 shs.) ..................... 100% Fair value equivalency of parent's ownership ........................ $972,500 Parent's investment account ($682,000 + [80% × 392,000]) ........ 995,600 Required adjustment—decrease .............................................. $ (23,100) [QUESTION] 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. Answer: E Learning Objective: 06-03 Topic: Intra-entity debt transactions―General Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: FN Measurement [QUESTION] 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: 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. Answer: C Learning Objective: 06-03 Topic: Intra-entity debt transactions―General Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: B Learning Objective: 06-03 Topic: Intra-entity debt―Effect on consolidated balances Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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. Answer: E Learning Objective: 06-03 Topic: Intra-entity debt―Gain or loss for consolidation Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: C Learning Objective: 06-05 Topic: Consolidated statement of cash flows Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: D Learning Objective: 06-05 Topic: Consolidated statement of cash flows Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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. Answer: A Learning Objective: 06-06 Topic: EPS―Consolidated basic EPS Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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? 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. Answer: D Learning Objective: 06-07 Topic: Subsidiary stock―New issue-Percentage change Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: D Learning Objective: 06-07 Topic: Subsidiary stock―New issue-Percentage change Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 32. If a subsidiary re-acquires its outstanding shares from outside ownership for more than the Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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. Answer: A Learning Objective: 06-07 Topic: Subsidiary stock―Treasury stock acquired Difficulty: 3 Hard Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: E Learning Objective: 06-07 Topic: Subsidiary stock―Stock dividend issued Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 34. Stevens Company has had bonds payable of $10,000 outstanding for several years. On January 1, 2018, when there was an unamortized discount of $2,000 and a remaining life of 5 years, its 80% owned subsidiary, Matthews Company, purchased the bonds in the open market for $11,000. 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 2018. A) $1,000 gain. B) $1,000 loss. C) $2,000 loss. D) $3,000 loss. E) $3,000 gain. Answer: D Learning Objective: 06-03 Topic: Intra-entity debt―Gain or loss for consolidation Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: FN Measurement

Feedback: Bonds Purchase Price $11,000 – Bonds carrying amount ($10,000 - $2,000) = $3,000 Loss to Consolidation Income [QUESTION] 35. Keenan Company has had bonds payable of $20,000 outstanding for several years. On January 1, 2018, there was an unamortized premium of $2,000 with a remaining life of 10 years, Keenan's parent, Ross, Inc., purchased the bonds in the open market for $19,000. Keenan is a 90% owned subsidiary of Ross. 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 2018. A) $3,000 gain. B) $3,000 loss. C) $1,000 gain. D) $1,000 loss. E) $2,000 gain. Answer: A Learning Objective: 06-03 Topic: Intra-entity debt―Gain or loss for consolidation Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: Bonds Purchase Price $19,000 – Bonds carrying amount ($20,000 + $2,000) = $3,000 Gain to Consolidation Income REFERENCE: 06-04 On January 1, 2018, 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,

$500,000 300,000 200,000 500,000 $1,500,000

3,000 shares outstanding Additional paid in capital Retained earnings Total stockholders’ equity

[QUESTION] REFER TO: 06-04 36. 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 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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. Answer: C Learning Objective: 06-04 Topic: Subsidiary preferred stock Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: FV of Consideration Recorded for Each Class of Stock in the Investment Account [QUESTION] REFER TO: 06-04 37. Compute the goodwill recognized in consolidation. A) $ 800,000. B) $ 310,000. C) $ 124,000. D) $ 0. E) $(196,000.) Answer: B Learning Objective: 06-04 Topic: Subsidiary preferred stock Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: 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 [QUESTION] REFER TO: 06-04 38. 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. Answer: A Learning Objective: 06-04 Topic: Subsidiary preferred stock Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 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 [QUESTION] REFER TO: 06-04 39. 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. Answer: C Learning Objective: 06-04 Topic: Subsidiary preferred stock Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: BV is Debited in Consolidation Entry for Acquisition-Date Preparation of Consolidated Balance Sheet [QUESTION] REFER TO: 06-04 40. 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. Answer: C Learning Objective: 06-04 Topic: Subsidiary preferred stock Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $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 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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REFERENCE: 06-05 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. [QUESTION] REFER TO: 06-05 41. 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. Answer: D Learning Objective: 06-05 Topic: Consolidated statement of cash flows Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: Land Sale of $5,000 Reduces Net Income as Operating Activity in Cash Flows [QUESTION] REFER TO: 06-05 42. 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. Answer: E Learning Objective: 06-05 Topic: Consolidated statement of cash flows Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Feedback: NCI’s Income is NOT Reported on Consolidated Cash Flows [QUESTION] REFER TO: 06-05 43. How will dividends be reported in consolidated statement of cash flows? 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. Answer: E Learning Objective: 06-05 Topic: Consolidated statement of cash flows Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: Parent’s Dividends $15,000 + NCI Dividends $2,000 = $17,000 Decrease in Cash Flow for Financing [QUESTION] REFER TO: 06-05 44. 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. Answer: D Learning Objective: 06-05 Topic: Consolidated statement of cash flows Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: $6,000 Excess Amortization is not a Cash Item and therefore Added Back to Net Income on the Cash Flow Statement [QUESTION] REFER TO: 06-05 45. 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Answer: A Learning Objective: 06-05 Topic: Consolidated statement of cash flows Difficulty: 1 Easy Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: The $8,000 Receivables Decrease is Added to Net Income and Classified as an Operating Item [QUESTION] REFER TO: 06-05 46. 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. Answer: B Learning Objective: 06-05 Topic: Consolidated statement of cash flows Difficulty: 1 Easy Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: The $7,000 Payables Decrease is Added to Net Income and Classified as an Operating Item REFERENCE: 06-06 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.

Jones sells 20,000 shares of previously unissued shares of its common stock to outside parties for $10 per share. [QUESTION] REFER TO: 06-06 47. 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. Answer: B Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Learning Objective: 06-07 Topic: Subsidiary stock―New issue-Percentage change Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: Beginning carrying amount $1,200,000 + Add’l Shares Sold $200,000 ($10 × 20,000) = $1,400,000 Current carrying amount [QUESTION] REFER TO: 06-06 48. What is the new percent ownership of Webb in Jones after the stock issuance? A) 75%. B) 90%. C) 80%. D) 64%. E) 60%. Answer: A Learning Objective: 06-07 Topic: Subsidiary stock―New issue-Percentage change Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 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 [QUESTION] REFER TO: 06-06 49. What adjustment is needed for Webb's investment in Jones account? A) $180,000 increase. B) $180,000 decrease. C) $ 45,000 decrease. D) $ 45,000 increase. E) No adjustment is necessary. Answer: D Learning Objective: 06-07 Topic: Subsidiary stock―New issue-Percentage change Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback:

Adjusted acquisition-date sub. fair value Consideration transferred ........................................................ Noncontrolling interest acquisition-date fair value ...............

$990,000 110,000

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Increase in Stamford book value .............................................. 200,000 Stock issue proceeds ................................................................ 200,000 Subsidiary valuation basis ............................................................. 1,500,000 New parent ownership (90,000 shs. ÷ 120,000 shs.) ................... 75% Parent’s post-stock issue ownership balance.............................. $1,125,000 Parent's investment account ($990,000 + [90% × 200,000]) ........ 1,170,000 Required adjustment —increase ............................................. $45,000 REFERENCE: 06-07 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 for $15 per share. [QUESTION] REFER TO: 06-07 50. 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. Answer: A Learning Objective: 06-07 Topic: Subsidiary stock―New issue-Percentage change Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: Beginning BV $1,200,000 + Add’l Shares Sold $300,000 ($15 × 20,000) = $1,500,000 Current BV [QUESTION] REFER TO: 06-07 51. 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. Answer: D Learning Objective: 06-07 Topic: Subsidiary stock―New issue-No percentage change Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Feedback:

Adjusted acquisition-date sub. fair value Consideration transferred ........................................................ $990,000 Noncontrolling interest acquisition-date fair value ............... 110,000 Increase in Stamford book value .............................................. 200,000 Stock issue proceeds ................................................................ 300,000 Subsidiary valuation basis ............................................................. 1,600,000 New parent ownership (90,000 shs. ÷ 120,000 shs.) ................... 75% Parent’s post-stock issue ownership balance.............................. $1,200,000 Parent's investment account ($990,000 + [90% × 200,000]) ........ 1,170,000 Required adjustment — increase ............................................ $30,000 REFERENCE: 06-08 Ryan Company purchased 80% of Chase Company for $270,000 when Chase’s book value was $300,000. Ryan paid no premium. 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. [QUESTION] REFER TO: 06-08 52. 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%. Answer: B Learning Objective: 06-07 Topic: Subsidiary Stock Transactions Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 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 [QUESTION] REFER TO: 06-08 53. 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. Answer: D Learning Objective: 06-07 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Topic: Subsidiary Stock Transactions Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: Beginning carrying amount $400,000 + Additional Shares Sold $360,000 ($12 × 30,000) = $760,000 Current carrying amount [QUESTION] REFER TO: 06-08 54. After acquiring 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. Answer: D Learning Objective: 06-07 Topic: Subsidiary Stock Transactions Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback:

Adjusted acquisition-date sub. fair value Consideration transferred ........................................................ Noncontrolling interest acquisition-date fair value ............... Increase in Stamford book value .............................................. Stock issue proceeds ................................................................ Subsidiary valuation basis ............................................................. New parent ownership (90,000 shs. ÷ 120,000 shs.) ................... Parent’s post-stock issue ownership balance.............................. Parent's investment account ($270,000 + [80% × 100,000]+360,000) .......................... Required adjustment —increase .............................................

$270,000 67,500 100,000 360,000 797,500 87.5% $697,813 710,000 $12,188

REFERENCE: 06-09 Ryan Company purchased 80% of Chase Company for $270,000 when Chase’s book value was $300,000. Ryan paid no premium. 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. [QUESTION] REFER TO: 06-09 55. What should the adjusted book value of Chase be after the treasury shares were purchased? A) $400,000. B) $480,000. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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C) $320,000. D) $336,000. E) $464,000. Answer: C Learning Objective: 06-07 Topic: Subsidiary Stock Transactions Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: Sub carrying amount before Stock Repurchase $400,000 – Stock Repurchase $80,000 (8,000 × $10) = Sub carrying amount after Stock Repurchase $320,000 [QUESTION] REFER TO: 06-09 56. 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%. Answer: B Learning Objective: 06-07 Topic: Subsidiary Stock Transactions Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 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 [QUESTION] REFER TO: 06-09 57. When Ryan’s new percent ownership is rounded to a whole number, what adjustment is needed for Ryan's investment in Chase account? A) $16,000 decrease. B) $60,000 decrease. C) $46,000 increase. D) $46,000 decrease. E) No adjustment is necessary. Answer: A Learning Objective: 06-07 Topic: Subsidiary Stock Transactions Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: FN Measurement

Feedback: Investment balance = 270,000 + (80% x 100,000 increase in book value) = 350,000. Adjusted sub value = (400,000 – 80,000) = 320,000. 320,000 x new ownership percentage 95% = 304,000. 350,000 – 304,000 = 46,000 decrease in investment account [QUESTION] 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. Answer: E Learning Objective: 06-01 Topic: VIE―Characteristics Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: B Learning Objective: 06-01 Topic: VIE―Characteristics Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: C Learning Objective: 06-01 Topic: VIE―Characteristics Difficulty: 2 Medium Blooms: Understand Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: D Learning Objective: 06-01 Topic: VIE―Primary beneficiary Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: E Learning Objective: 06-01 Topic: VIE―Characteristics Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 63. Which of the following statements is 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Answer: E Learning Objective: 06-01 Topic: VIE―Characteristics Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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? 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. Answer: B Learning Objective: 06-01 Topic: VIE―When consolidation required Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: C Learning Objective: 06-04 Topic: Subsidiary preferred stock Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: FN Measurement [QUESTION] 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? 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 percent of the subsidiary’s income after subtracting 60% of preferred stock dividends. Answer: D Learning Objective: 06-04 Topic: Subsidiary preferred stock Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 67. Wolff Corporation owns 70 percent of the outstanding stock of Donald, Inc. During the current year, Donald 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. Answer: E Learning Objective: 06-05 Topic: Consolidated statement of cash flows Difficulty: 1 Easy Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 68. MacDonald, Inc. owns 80 percent 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 percent as a decrease in the investing section. B) Include 100 percent as a decrease in the investing section. C) Include 80 percent as a decrease in the operating section. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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D) Include 100 percent as an increase in the operating section. E) Not reported in the consolidated statement of cash flows. Answer: E Learning Objective: 06-05 Topic: Consolidated statement of cash flows Difficulty: 1 Easy Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 69. Pursley, Inc. owns 70 percent of Harry Corp. The consolidated income statement for a year reports $50,000 Noncontrolling Interest in Harry Corp.’s Net Income. Harry paid dividends in the amount of $80,000 for the year. What are the effects of these transactions in the consolidated statement of cash flows for the year?

Answer: D Learning Objective: 06-05 Topic: Consolidated statement of cash flows Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 70. Goehring, Inc. owns 70 percent of Harry Corp. The consolidated income statement for a year reports $40,000 Noncontrolling Interest in Harry Corp.’s Net Income. Harry paid dividends in the amount of $100,000 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 $70,000, and decrease in the operating section of $30,000. B) Increase in the operating section of $70,000, and decrease in the financing section of $30,000. C) Increase in the operating section of $70,000. D) Decrease in the financing section of $30,000. E) No effects. Answer: D Learning Objective: 06-05 Topic: Consolidated statement of cash flows Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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REFERENCE: 06-10 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:

Cash Accounts Receivable (net) Inventory Plant & Equipment (net) Copyright

$

2018 8,000 75,000 100,000 156,000 16,000 $355,000

2017 $ 26,000 54,000 89,000 170,000 18,000 $357,000

Accounts payable Long-term Debt Noncontrolling interest Common stock, $1 par Retained earnings

$ 60,000 0 27,000 100,000 168,000 $355,000

$ 51,000 35,000 25,000 100,000 146,000 $357,000

Additional information for 2018: • The combination occurred using the acquisition 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. [QUESTION] REFER TO: 06-10 71. Net cash flow from operating activities was: A) $43,000. B) $44,800. C) $46,200. D) $50,000. E) $25,000. Answer: A Learning Objective: 06-05 Topic: Consolidated statement of cash flows Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: $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 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 06-10 72. Net cash flow from financing activities was: A) $(28,000). B) $(35,000). C) $(13,000). D) $(63,000). E) $(61,000). Answer: E Learning Objective: 06-05 Topic: Consolidated statement of cash flows Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 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) REFERENCE: 06-11 The balance sheets of Butler, Inc. and its 70 percent-owned subsidiary, Cassie Corp., which Butler has owned for several years are presented below:

Cash Accounts Receivable (net) Inventory Plant & Equipment (net) Copyright

Accounts payable Long-term Debt Noncontrolling interest Common stock, $1 par Retained earnings

2018 $ 16,000 150,000 220,000 315,000 32,000 $733,000

2017 $ 52,000 108,000 178,000 340,000 36,000 $714,000

$120,000 0 77,000 200,000 336,000 $733,000

$102,000 70,000 50,000 200,000 292,000 $714,000

Additional information for 2018: • • •

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.

[QUESTION] REFER TO: 06-11 73. Net cash flow from operating activities was: Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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A) $92,000. B) $27,000. C) $63,000. D) $29,000. E) $34,000. Answer: C Learning Objective: 06-05 Topic: Consolidated statement of cash flows Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: $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 [QUESTION] REFER TO: 06-11 74. Net cash flow from financing activities was: A) $(129,000). B) $ (96,000). C) $(300,000). D) $ (80,000). E) $(126,000). Answer: A Learning Objective: 06-05 Topic: Consolidated statement of cash flows Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Parent dividend paid $56,000 (income to controlling interest $100,000 less increase in Retained Earnings $44,000) + NCI in subsidiary dividend ($3,000) + repayment of debt ($70,000) = ($129,000)

[QUESTION] 75. How do outstanding subsidiary stock warrants affect the calculation of consolidated earnings per share? 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. Answer: B Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Learning Objective: 06-06 Topic: EPS―Consolidated diluted EPS Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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. Answer: B Learning Objective: 06-07 Topic: Subsidiary stock―New issue-Percentage change Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 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? 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. Answer: C Learning Objective: 06-07 Topic: Subsidiary stock―New issue-Percentage change Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] 78. A parent company owns a 70 percent 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 percent 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 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 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 the adjusted subsidiary value per share, and the parent bought 70 percent 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. Answer: D Learning Objective: 06-07 Topic: Subsidiary Stock Transactions Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 79. Carlson, Inc. owns 80 percent of Madrid, Inc. Carlson reports net income for 2018 (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, 2018 with a carrying value of $1,200,000. Madrid acquired the bonds on the open market on January 3, 2018 for $1,090,000. For the year 2018, 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? A) $2,064,000. B) $2,066,000. C) $2,176,000. D) $2,207,000. E) $2,317,000. Answer: C Learning Objective: 06-03 Topic: Intra-entity debt―Effect on consolidated balances Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: 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

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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REFERENCE: 06-12 On January 1, 2018, Harrison Corporation spent $2,600,000 to acquire control over Involved, Inc. This price was based on paying $750,000 for 30 percent of Involved’s preferred stock, and $1,850,000 for 80 percent of its outstanding common stock. As of the date of the acquisition, Involved’s stockholders’ equity accounts were as follows:

[QUESTION] REFER TO: 06-12 80. 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 Answer: B Learning Objective: 06-04 Topic: Subsidiary preferred stock Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 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 Sub at Acquisition $1,850,000 + $462,500 + $750,000 + $1,750,000 = $4,812,500 [QUESTION] REFER TO: 06-12 81. 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. Answer: D Learning Objective: 06-04 Topic: Subsidiary preferred stock Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Feedback: 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 Sub at Acquisition FV $4,812,500 – carrying amount $4,000,000 = $812,500 Goodwill [QUESTION] 82. Johnson, Inc. owns control over Kaspar, Inc. Johnson reports sales of $400,000 during 2018 while Kaspar reports $250,000. Kaspar transferred inventory during 2018 to Johnson at a price of $50,000. On December 31, 2018, 30% of the transferred goods are still held in Johnson’s inventory. Consolidated accounts receivable on January 1, 2018 was $120,000, and on December 31, 2018 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. Answer: A Learning Objective: 06-05 Topic: Consolidated statement of cash flows Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: Parent $400,000 + Sub $250,000 – Intra-Entity $50,000 – Increase in A/R $10,000 ($120,000 - $130,000) = $590,000 [QUESTION] 83. Which of the following variable interests entitles a holder to residual profits, losses, and dividends? A) Participation rights B) Lease residual value guarantees C) Common stock D) Asset purchase options E) Subordinated debt instruments Answer: C Learning Objective: 06-01 Topic: VIE―Characteristics Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 84. Which of the following statements regarding consolidation of a VIE with its primary beneficiary is true? Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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. Answer: E Learning Objective: 06-02 Topic: VIE―Process of consolidation Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [REFERENCE 06-13] On January 1, 2018, 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, 2023. 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, 2018 through January 1, 2023: (i) 6 percent annual interest on the principal amount of the loan, which reflects a market rate of interest; (ii) 100 percent 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, 2018, the balance sheets for AHI and RMC are as follows:

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 06-13 85. 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. Answer: B Learning Objective: 06-02 Topic: VIE―Process of consolidation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 06-13 86. In preparing the consolidation worksheet as of December 31, 2018 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 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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 $180,000 Interest income $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 $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 1/1/18 $ 6,000 Common stock – RMC $34,000 Retained Earnings-AHI $40,000 Answer: D Learning Objective: 06-02 Topic: VIE―Process of consolidation Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement

Essay: [QUESTION] 87. 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? Answer: The note would be eliminated in the consolidation process with an entry debiting Notes Payable and crediting Notes Receivable. Learning Objective: 06-03 Topic: Intra-entity debt―Effect on consolidated balances Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 88. What are the primary sources of information that are used for preparation of a consolidated statement of cash flows? Answer: The main source of information would be the consolidated income statement and the consolidated balance sheet. Learning Objective: 06-05 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Topic: Consolidated statement of cash flows Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 89. 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? Answer: 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. Learning Objective: 06-03 Topic: Intra-entity debt―Effect on consolidated balances Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 90. 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? Answer: The $40,000 difference between the acquisition price and the carrying value would be recognized as a loss on retirement of bonds. Learning Objective: 06-03 Topic: Intra-entity debt―Gain or loss for consolidation Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 91. How are intra-entity inventory transfers treated on the consolidation worksheet and how are they reflected in a consolidated statement of cash flows? Answer: Intra-entity inventory transfers are eliminated on the consolidation worksheet and, therefore, do not appear in the consolidated statement of cash flows. Learning Objective: 06-05 Topic: Consolidated statement of cash flows Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: FN Measurement [QUESTION] 92. Danbers Co. owned seventy-five percent of the common stock of Renz Corp. How does the issuance of a five percent stock dividend by Renz affect Danbers and the consolidation process? Answer: A stock dividend would not influence Danbers' ownership percentage and would not alter the consolidation process. Learning Objective: 06-07 Topic: Subsidiary stock―Stock dividend issued Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 93. During 2018, 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? Answer: 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. Learning Objective: 06-05 Topic: Consolidated statement of cash flows Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 94. On January 1, 2018, Parent Corporation acquired a controlling interest in the voting common stock of Foxboro Co. At the same time, Parent purchased sixty percent of Foxboro's outstanding preferred stock. In preparing consolidated financial statements, how should the acquisition of the preferred stock be accounted for? Answer: 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. Learning Objective: 06-04 Topic: Subsidiary preferred stock Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] 95. 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? Answer: The noncontrolling interest should be reflected at its acquisition-date fair value. Learning Objective: 06-04 Topic: Subsidiary preferred stock Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 96. Parent Corporation acquired some of its subsidiary's outstanding bonds. Why might Parent purchase the bonds, rather than the subsidiary buying its own bonds? Answer: 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. Learning Objective: 06-03 Topic: Intra-entity debt transactions―General Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 97. 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? Answer: 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. Learning Objective: 06-03 Topic: Intra-entity debt―Effect on consolidated balances Difficulty: 3 Hard Blooms: Remember AACSB: Reflective Thinking AACSB: Communication Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 98. 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? Answer: 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. Learning Objective: 06-03 Topic: Intra-entity debt―Gain or loss for consolidation Difficulty: 3 Hard Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 99. How does the existence of a noncontrolling interest affect the preparation of a consolidated statement of cash flows? Answer: 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. Learning Objective: 06-05 Topic: Consolidated statement of cash flows Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement

Problems: [QUESTION] 100. On January 1, 2018, 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

$ 140,000 1,120,000

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Retained earnings Total shareholders’ equity

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? Answer: Consideration transferred for 60% interest in common stock Consideration transferred for100% interest in preferred stock Noncontrolling interest in common stock (40%): [$1,281,000/.60] - $1,281,000 Total fair value Book value Excess acquisition-date fair value over book value Assigned to building Goodwill

$1,281,000 148,000 854,000 $2,283,000 2,100,000 183,000 70,000 $ 113,000

Learning Objective: 06-04 Topic: Subsidiary preferred stock Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement REFERENCE: 06-13 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, 2017, 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, 2019, for 95% of the face value. Both companies utilized the straight-line method of amortization. [QUESTION] REFER TO: 06-13 101. What balances would need to be considered in order to prepare the consolidation entry in connection with these intra-entity bonds at December 31, 2019, 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. Answer: Carrying amount of bonds payable, January 1, 2019 Book value, January 1, 2017 ($1,400,000 × 1.08) original issue Amortization- 2017-2018 [($112,000 premium ÷ 10 years) × 2 years]

$1,512,000 (22,400)

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Book value of bonds payable, January 1, 2019

$1,489,600

Carrying amount of 40% of bonds payable (intra-entity portion), January 1, 2019

$ 595,840

Gain on retirement of bonds, January 1, 2019: Purchase price ($560,000 face value × 95%) of investment Book value of liability (calculated above) Gain on retirement of bonds

$(532,000) 595,840 $ 63,840

Carrying amount of bonds payable, December 31, 2019 Carrying amount, January 1, 2019 (calculated above) Amortization – 2019 Carrying amount of bonds payable, December 31, 2019

$1,489,600 ( 11,200) $1,478,400

Cash payment ($560,000 face value × 10%) Amortization of premium for 2019 ($11,200 × 40%) Intra-entity interest expense

$56,000 (4,480) $51,520

Carrying amount of 40% of bonds payable (intra-entity portion) December 31, 2019 ($595,840-4,480 premium amortization)

$591,360

Carrying amount of investment, December 31, 2019 Carrying amount of investment, January 1, 2019 (purchase price) Amortization – 2019 ($28,000 discount ÷ 8 years remaining) Carrying amount of bonds payable, December 31, 2019

$532,000 3,500 $535,500

Cash receipt ($560,000 face value × 10%) Amortization of discount for 2019 Intra-entity interest revenue

$56,000 3,500 $59,500

Learning Objective: 06-03 Topic: Intra-entity debt―Effect on consolidated balances Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 06-13 102. What consolidation entry would be recorded in connection with these intra-entity bonds on December 31, 2019? Answer: Bonds Payable Premium on Bonds Payable Interest Income

560,000 31,360 59,500

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Investment in Bonds Interest Expense Gain on retirement Learning Objective: 06-03 Topic: Intra-entity debt―Gain or loss for consolidation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: FN Measurement

535,500 51,520 63,840

[QUESTION] REFER TO: 06-13 103. What consolidation entry would be recorded in connection with these intra-entity bonds on December 31, 2020? Answer: Bonds Payable Premium on Bonds Payable Interest Income Investment in Bonds Interest Expense Retained Earnings, 1/1/20 (Fargus Corp.) Learning Objective: 06-03 Topic: Intra-entity debt transactions―General Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

$560,000 26,880 59,500 539,000 51,520 55,860

[QUESTION] REFER TO: 06-13 104. What consolidation entry would be recorded in connection with these intra-entity bonds on December 31, 2021? Answer: Bonds Payable Premium on Bonds Payable Interest Income Investment in Bonds Interest Expense Retained Earnings, 1/1/21 (Fargus Corp.) Learning Objective: 06-03 Topic: Intra-entity debt transactions―General Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

$560,000 22,400 59,500 542,500 51,520 47,880

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105. Skipen Corp. had the following stockholders' equity accounts:

Preferred stock (8% cumulative dividend) Common stock Additional paid-in capital Retained earnings Total

$

700,000 1,050,000 420,000 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? Answer: Consideration transferred for 90% interest in common stock $2,250,000 Consideration transferred for 70% interest in preferred stock 1,120,000 Noncontrolling interest in common stock (10%): [$2,250,000/.90] - $2,250,000 250,000 Noncontrolling interest in preferred stock (30%): [$1,120,000/.7] - $1,120,000 480,000 Total fair value of Skipen - date of acquisition $4,100,000 Carrying amount 3,500,000 Excess acquisition-date fair value over book value 600,000 Assigned to land 130,000 Goodwill $ 470,000 Learning Objective: 06-04 Topic: Subsidiary preferred stock Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement REFERENCE: 06-14 Thomas Inc. had the following stockholders' equity accounts as of January 1, 2018:

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

Kuried Co. acquired all of the voting common stock of Thomas on January 1, 2018, 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 2018, 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 06-14 106. What is the amount of goodwill resulting from this acquisition? Answer: Consideration transferred for 100% interest in common stock $20,656,000 Noncontrolling interest in preferred stock (100%): 3,060,000 Total fair value of Thomas 1/1/18 $23,716,000 Carrying amount 22,300,000 Excess acquisition-date fair value over book value 1,416,000 Assigned to database 656,000 Goodwill $ 760,000 Learning Objective: 06-04 Topic: Subsidiary preferred stock Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 06-14 107. What was the noncontrolling interest's share of consolidated net income for the year 2018? Answer:

Preferred stock — Thomas Inc. Preferred dividend rate Noncontrolling interest’s share of subsidiary’s income

$ 2,700,000 x 9% $ 243,000

All residual net income is attributed to the controlling interest of Kuried as sole owner of common stock of Thomas. Learning Objective: 06-04 Topic: Subsidiary preferred stock Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 06-14 108. What is the controlling interest share of Thomas’ net income for the year ended December 31, 2018? Answer: Database $ 656,000 Amortization period in years ÷ 5 Annual amortization of database $ 131,200 Thomas net income (book)

$ 630,000

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Amortization of database Preferred stock dividend (9% × $2,700,000) Net income residual to common stockholders (100% to Kuried as controlling interest) Learning Objective: 06-04 Topic: Subsidiary preferred stock Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

(131,200) 498,800 (243,000) $ 255,800

[QUESTION] REFER TO: 06-14 109. What was Kuried’s balance in the Investment in Thomas Inc. account as of December 31, 2018? Answer: Database Amortization period in years Annual amortization of database

$ ÷ $

Investment in Thomas Inc., 12/31/18 Acquisition consideration, 1/1/13 Equity accrual ($630,000 - $243,000) Dividends collected ($504,000 - $243,000) Database amortization (from above) Investment in Thomas Inc., 12/31/18 Learning Objective: 06-04 Topic: Subsidiary preferred stock Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

656,000 5 131,200

$20,656,000 387,000 (261,000) (131,200) $20,650,800

[QUESTION] REFER TO: 06-14 110. Prepare all consolidation entries for 2018. Answer: Consolidation Entries Consolidation Entries S and A (combined) Common Stock (Thomas Inc.) Preferred Stock (Thomas Inc.) Retained Earnings, 1/1/18 (Thomas Inc.) Database Goodwill

5,600,000 2,700,000 14,000,000 656,000 760,000

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Investment in Thomas Inc. Noncontrolling Interest in Thomas Inc.

20,656,000 3,060,000

Consolidated Entry I Equity Income of Subsidiary Investment in Thomas Inc.

387,000 387,000

Consolidation Entry D Investment in Thomas Inc. Dividends Paid

261,000 261,000

Consolidation Entry E Amortization Expense Database

131,200 131,200

Learning Objective: 06-04 Topic: Subsidiary preferred stock Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 111. Jet Corp. acquired all of the outstanding shares of Nittle Inc. on January 1, 2016, 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, 2019, 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 2019, 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, 2019.

Jet Corp. $(894,600) 483,000 187,600 33,600 0 (165,200) $(355,600)

Revenues Cost of goods sold Expenses Interest expense-bonds Interest income-bond investment Equity in income of Nittle Inc. Net income

Nittle Inc. $(652,400) 277,200 225,400 0 (15,400) 0 $ (165,200)

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Retained earnings, January 1, 2019 Net income (above) Dividends paid Retained earnings, December 31, 2019

$(483,000) (355,600) 217,000 $(621,600)

$(505,400) (165,200) 85,400 $(585,200)

Cash and receivables Inventory Investment in Nittle Inc. Investment in Jet Corp. bonds Land, buildings, and equipment (net) Total assets

$186,200 239,400 851,200 0 348,600 $ 1,625,400

$109,200 121,800 0 137,200 757,400 $1,125,600

Accounts payable Bonds payable Discount on bonds payable Common stock Retained earnings, December 31, 2019 (above) Total liabilities and stockholders’ equity

$(315,000) (280,000) 11,200 (420,000) (621,600) $(1,625,400)

$(232,400) (140,000) 0 (168,000) (585,200) $(1,125,600)

Required: Prepare a consolidation worksheet for the year ended December 31, 2019. Answer: CONSOLIDATION WORKSHEET For the Year Ended 12/31/2019

Account Revenues Cost of Goods Sold Expenses Interest Expense – Bonds Interest Income – Bond Investment Loss on extinguishment of debt Equity in Nittle Income Net Income R/E, 1/1/19, Jet Corp. R/E, 1/1/19, Nittle Inc. Net Income Dividends Paid R/E, 12/31/19 Cash & Receivables Inventory Investment in Nittle

Investment in Jet Corp. Bonds Land, Buildings, & Equipment (net) Goodwill Total Assets

Jet Corp ( 894,600) 483,000 187,600 33,600

Nittle Inc. ( 652,400) 277,200 225,400 (

( 165,200) ( 355,600) ( 483,000) ( 355,600) 217,000 ( 621,600) 186,200 239,400 851,200

15,400)

Consolidated Entries DR CR (TI) 140,000 (G) 2,800 (TI) 140,000 (E) 4,200 (B) 16,800 (B) 15,400 (B) 4,200 (I) 165,200

( 165,200) ( 505,400) ( 165,200) 85,400 ( 585,200) 109,200 121,800

348,600

137,200 757,400

(D) 85,400

1,625,400

1,125,600

(A) 29,400 (A) 56,000

4,200 ( 345,800) ( 470,400)

(*C) 12,600 (S) 505,400

(D) 85,400

Consolidated Balance (1,407,000) 623,000 417,200 16,800

(P) 50,400 (G) 2,800 (*C) 12,600 (S) 673,400 (A) 85,400 (I) 165,200 (B) 137,200 (E) 4,200

( 345,800) 217,000 ( 599,200) 245,000 358,400

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1,131,200 56,000 1,790,600

Accounts Payable Bonds Payable Discount on Bonds Payable Common Stock R/E, 12/31/19 Total Liabilities & Stockholders’ Equity

( 315,000) ( 280,000) 11,200 ( 420,000) ( 621,600) (1,625,400)

( 232,400) ( 140,000)

(P) 50,400 (B) 140,000

( 168,000) ( 585,200) (1,125,600)

(S) 168,000

(B) 5,600

1,379,000

1,379,000

( 497,000) ( 280,000) 5,600 ( 420,000) ( 599,200) (1,790,600)

Learning Objective: 06-03 Topic: Intra-entity debt―Effect on consolidated balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 112. 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 2017 and 2018.

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Revenues Cost of goods sold Depreciation and amortization Gain on sale of building Interest expense Noncontrolling interest Net income to controlling interest

2017 2018 $ 1,064,000 $ 1,232,000 ( 714,000) ( 756,000) ( 126,000) ( 140,000) –0– 28,000 ( 42,000) ( 42,000) $ 12,600 $ 15,400 $ 169,400 $ 306,600

Retained earnings, January 1 Net income (from above) Dividends paid Retained earnings, December 31

$

420,000 $ 519,400 169,400 306,600 ( 70,000) ( 140,000) $ 519,400 $ 686,000

Cash Accounts receivable Inventory Buildings and equipment (net) Database Total assets

$

Accounts payable Bonds payable Noncontrolling interest in Brewer Inc. Common stock Additional paid-in capital Retained earnings, December 31 (from above) Total liabilities and stockholders’ equity

$

112,000 210,000 280,000 896,000 210,000 $ 1,708,000

$

196,000 196,000 476,000 966,000 203,000 $ 2,037,000

(196,000) $ (140,000) (560,000) (720,000) ( 44,800) ( 57,400) (140,000) (168,000) (247,800) (265,600) (519,400) (686,000) $ (1,708,000) $ (2,037,000)

Additional Information: 1. Bonds were issued during 2018 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, 2018. 4. Equipment was purchased by the subsidiary on July 23, 2018, using cash. 5. Late in November 2018, the parent issued common stock for cash. 6. During 2018, 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, 2018. Either the direct method or the indirect method may be used. Answer:

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ALLEN CO. AND BREWER INC. Statement of Cash Flows – Direct Method For the Year Ending December 31, 2018 Cash flows from operating activities Cash received from customers Cash payments To suppliers For interest expense Net cash provided by operating activities

$1,246,000 $1,008,000 42,000

Cash flows from investing activities Proceeds from sale of building Purchase of equipment Net cash used by investing activities

$

(1,050,000) $ 196,000

70,000 (245,000) (175,000)

Cash flows from financing activities Payment of cash dividends Issuance of bonds Issuance of common stock Net cash provided by financing activities Net increase in cash Cash, January 1, 2018 Cash, December 31, 2018

$ (142,800) 160,000 45,800 $ 63,000 $ 84,000 112,000 $ 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 For the Year Ending December 31, 2018 Cash flows from operating activities Consolidated net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense Amortization of database Gain on sale of building Decrease in accounts receivable Increase in inventory Decrease in accounts payable Net cash provided by operating activities

$ 322,000

$ 133,000 7,000 (28,000) 14,000 (196,000) (56,000)

$(126,000) $ 196,000

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Learning Objective: 06-05 Topic: Consolidated statement of cash flows Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement REFERENCE: 06-15 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:

Glotfelty issues 5,000 shares of previously unissued stock to the public for $40 per share. None of this stock is purchased by Panton. [QUESTION] REFER TO: 06-15 113. Describe how this transaction would affect Panton’s books. Answer: The investment account and APIC will be increased by $63,000 as shown below:

Consideration transferred ........................................................ $540,000 Noncontrolling interest acquisition-date fair value ............... 135,000 Increase in Sub book value (600,000-450,000) ........................ 150,000 Stock issue proceeds ................................................................ 200,000 Subsidiary valuation basis ............................................................. 1,025,000 New parent ownership (18,000 shs. ÷ 25,000 shs.) ..................... 72% Parent’s post-stock issue ownership balance.............................. $738,000 Parent's investment account ($540,000 + [90% × 150,000]) ........ 675,000 Required adjustment —increase ............................................. $63,000 Learning Objective: 06-07 Topic: Subsidiary stock―New issue-Percentage change Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 06-15 114. Prepare Panton’s journal entry to recognize the impact of this transaction. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Answer: Investment in Glotfelty Additional Paid in Capital

63,000 63,000

Learning Objective: 06-07 Topic: Subsidiary stock―New issue-Percentage change Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement REFERENCE: 06-16 Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years agofor $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:

Glotfelty issues 5,000 shares of previously unissued stock to the public for $22 per share. None of this stock is purchased by Panton. [QUESTION] REFER TO: 06-16 115. Describe how this transaction would affect Panton’s books. Answer: The investment account and APIC would be decreased by $1,800, as shown below:

Consideration transferred ........................................................ Noncontrolling interest acquisition-date fair value ............... Increase in Sub book value (600,000-450,000) ........................ Stock issue proceeds ................................................................ Subsidiary valuation basis ............................................................. New parent ownership (18,000 shs. ÷ 25,000 shs.) ..................... Parent’s post-stock issue ownership balance.............................. Parent's investment account ($540,000 + [90% × 150,000]) ........ Required adjustment —decrease ............................................

$540,000 135,000 150,000 110,000 935,000 72% $673,200 675,000 $1,800

Learning Objective: 06-07 Topic: Subsidiary stock―New issue-Percentage change Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

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Page 6-58

[QUESTION] REFER TO: 06-16 116. Prepare Panton’s journal entry to recognize the impact of this transaction. Answer: Additional paid in capital 1,800 Investment in Glotfelty

1,800

Learning Objective: 06-07 Topic: Subsidiary stock―New issue-Percentage change Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 117. 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:

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. Answer: The investment account and APIC will be increased by $70,000, as shown below:

Consideration transferred ........................................................ $540,000 Noncontrolling interest acquisition-date fair value ............... 135,000 Increase in Sub book value (600,000-450,000) ........................ 150,000 Stock issue proceeds ................................................................ 175,000 Subsidiary valuation basis ............................................................. 1,000,000 New parent ownership (23,000 shs. ÷ 25,000 shs.) ..................... 92% Parent’s post-stock issue ownership balance.............................. $920,000 Parent's investment account ($540,000 + [90% × 150,000]+175,000) .......................... 850,000 Required adjustment —increase ............................................. $70,000 Learning Objective: 06-07 Topic: Subsidiary stock―New issue-Percentage change Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 6-59

AICPA: FN Measurement

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Page 6-60

Chapter 07 - Consolidated Financial Statements - Ownership Patterns and Income Taxes Multiple Choice: Use the following to answer questions 1 – 3: REFERENCE: 07-01 Buckette Co. owned 60% of Shuvelle Corp. and 40% of Tayle Corp., and Shuvelle owned 35% of Tayle. [QUESTION] REFER TO: 07-01 1. When Buckette prepares consolidated financial statements, it should include A) Shuvelle but not Tayle. B) Tayle but not Shuvelle. C) Either Shuvelle or Tayle. D) Shuvelle and Tayle. E) Neither Shuvelle nor Tayle. Answer: D Learning Objective: 07-02 Topic: Consolidation―Connecting affiliation Difficulty: 1 Easy Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 07-01 2. What is this pattern of ownership called? A) Pyramid ownership. B) A connecting affiliation. C) Mutual ownership. D) An indirect affiliation. E) An affiliated group. Answer: B Learning Objective: 07-02 Topic: Consolidation―Connecting affiliation Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 07-01 3. What percentage of Tayle's income is attributed to Buckette's ownership interest? A) 100%. B) 75%. C) 61%. D) 40%. E) 74%. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Answer: C Learning Objective: 07-02 Topic: Consolidation―Connecting affiliation Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 40% + 21% [60% × 35%] = 61% [QUESTION] 4. D Corp. had investments, direct and indirect, in several subsidiaries: • E Co. is a domestic firm in which D Corp. owned a 90% interest • F Co. is a domestic firm in which D Corp. owned 60% and E Co. owned 30% • G Co. is a domestic firm wholly owned by E Co. • H Co. is a foreign subsidiary in which D Corp. owned a 90% interest • I Co. is a domestic firm in which D Corp. owned 50% and G Co. owned 25% Which of these subsidiaries may be included in a consolidated income tax return? A) E, F, G, H, and I. B) E, G, H, and I. C) E and F. D) E, F, G, and H. E) E, F, and G. Answer: E Learning Objective: 07-04 Topic: Income tax criteria for an affiliated group Difficulty: 3 Hard Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Legal AICPA: FN Measurement Feedback: Does D directly or indirectly own 80% or more of any of the domestic companies? E: D owns 90%. Yes. F: D owns 60% plus 27% (90% × 30%) = 87%. Yes. G: D owns 90% × 100% = 90%. Yes. H: Foreign subsidiary. No. I: D owns 50% plus 22.5% (90% × 100% × 25%) = 72.5%. No. [QUESTION] 5. Evanston Co. owned 60% of Montgomery Corp. Montgomery owned 75% of Noir Inc., and Noir owned 15% of Montgomery. This pattern of ownership would be called… A) Mutual ownership. B) Direct control. C) Indirect control. D) An affiliated group. E) A connecting affiliation. Answer: A Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 1 Easy Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 6. In a tax-free business combination, A) The income tax basis for acquired assets and liabilities is adjusted to current fair value. B) Any goodwill created by the combination may be amortized in calculating taxable income. C) The subsidiary's assets and liabilities are assigned an income tax basis of zero dollars, so that they will have no future income tax consequences. D) Any goodwill created by the combination must be deducted in total in calculating taxable income. E) The subsidiary's cost basis for assets are retained for income tax calculations. Answer: E Learning Objective: 07-07 Topic: Temporary differences upon combination Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Use the following to answer questions 7 – 11: REFERENCE: 07-02 West Corp. owns 70% of the voting common stock of East Co. East owns 60% of Compass Co. West and East both use the initial value method to account for their investments. The following information is available from the financial statements and records of the three companies:

West East Compass Corp. Co. Co. Separate company net income before investment income $ 860,000 $ 600,000 $ 120,000 Dividend income from investment in subsidiary 200,000 150,000 Deferral of intra-entity gains 96,000 70,000 15,000 Amortization expense related to excess fair value over book value of investment 30,000 20,000 Separate company net income includes intra-entity gains before the consolidating deferral but does not include dividend income from investment in subsidiary. [QUESTION] REFER TO: 07-02 7. The accrual-based net income of East Co. is calculated to be A) $401,100. B) $510,000. C) $551,000. D) $573,000. E) $615,000. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Answer: C Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Separate company net income before investment income—East Co. Equity income accruing from Compass Co.: Compass’s separate net income Excess amortization related to East acquisition of Compass Deferral of Compass’s intra-entity gain Compass’s accrual-based net income East’s percentage ownership of Compass East’s share of Compass’s net income Excess amortization from West’s acquisition of East Deferral of East’s intra-entity gain Accrual-based net income of East Co.

$600,000 $120,000 (20,000) (15,000) $ 85,000 60%

[QUESTION] REFER TO: 07-02 8. The accrual-based net income of West Corp. is calculated to be A) $ 734,000. B) $1,261,000. C) $1,123,900. D) $1,140,700. E) $1,149,700. Answer: E Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Separate company net income before investment income—West Corp. Equity income accruing from East Co.—70% of $551,000 (see below) Deferral of West’s intra-entity gain Accrual-based net income of West Corp.

51,000 (30,000) (70,000) $551,000

$860,000 385,700 (96,000) $1,149,700

Separate company net income before Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

investment income—East Co. Equity income accruing from Compass Co.: Compass’s separate net income Excess amortization related to East acquisition of Compass Deferral of Compass’s intra-entity gain Compass’s accrual-based net income East’s percentage ownership of Compass East’s share of Compass’s net income Excess amortization from West’s acquisition of East Deferral of East’s intra-entity gain Accrual-based net income of East Co.

$600,000 $120,000 (20,000) (15,000) $ 85,000 60% 51,000 (30,000) (70,000) $551,000

[QUESTION] REFER TO: 07-02 9. What amount should be reported for consolidated net income? A) $1,285,000. B) $1,331,700. C) $1,349,000. D) $1,315,000. E) $1,314,900. Answer: C Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Sum of West, East, and Compass separate $1,580,000 company net income before amortizations and deferrals Less: Combined excess fair-value amortizations (50,000) Less: Combined intra-entity gain deferrals (181,000) Consolidated net income $ 1,349,000 [QUESTION] REFER TO: 07-02 10. For West Corp. and consolidated subsidiaries, what total amount would be reported for the net income attributable to the noncontrolling interest? A) $165,300. B) $199,300. C) $191,000. D) $228,000. E) $153,000. Answer: B Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Consolidated net income ($1,349,000) – Consolidated net income to West Corp. ($1,149,700) = Net income attributable to noncontrolling interest $199,300. Alternatively:

Compass Co. East Co. Net income attributable to noncontrolling interest

Accrualbased net income $85,000 $551,000

Outside Ownership

Net Income Attributable to Noncontrolling Interest

40% 30%

$ 34,000 165,300 $ 199,300

[QUESTION] REFER TO: 07-02 11. What amount of dividends should West Corp. recognize in its consolidated net income with respect to dividends received from Compass Co.? A) $ -0B) $25,200. C) $36,000. D) $42,000. E) $90,000. Answer: A Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: [$0] -- Dividends are not calculated in consolidated net income. Use the following to answer questions 12 – 15: REFERENCE: 07-03 River Co. owns 80% of Boat Inc. The two companies file a consolidated income tax return and River uses the initial value method to account for the investment. The following information is available from the two companies' financial statements:

Separate operating income (excludes equity or dividend income from subsidiary) Net intra-entity gains on assets remaining in the consolidated entity in current year income (included in separate operating income above)

River Co.

Boat Inc.

$600,000

$120,000

50,000

15,000

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Dividends received from Boat Inc. (not included in separate operating income above) Dividends paid

24,000

–0–

110,000

30,000

The income tax rate was 30%. [QUESTION] REFER TO: 07-03 12. What is the amount of taxable income reported on the consolidated income tax return? A) $720,000. B) $625,000. C) $621,000. D) $665,000. E) $655,000. Answer: E Learning Objective: 07-05 Topic: Tax calculation for consolidated returns Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Combined operating income $720,000 ($600,000 + $120,000) – Combined deferred intraentity gains on assets $65,000 ($50,000 + $15,000) = Taxable income $655,000 [QUESTION] REFER TO: 07-03 13. What is the amount of income tax expense that should be assigned to Boat using the percentage allocation method? A) $31,500 B) $32,750 C) $36,000 D) $32,660 E) $30,390 Answer: A Learning Objective: 07-05 Topic: Tax expense―Percentage allocation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Consolidated income tax $655,000 × .30 = $196,500 Parent’s portion of the taxable income $600,000 - $50,000 = $550,000 / Total taxable income $655,000 = 84% Subsidiary’s (Boat) portion of the taxable income $655,000 - $550,000 = $105,000 / Total taxable income $655,000 = 16% Income tax expense assigned to Boat $196,500 × .16 = $31,500 [QUESTION] Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

REFER TO: 07-03 14. The amount of income tax expense that should be assigned to Boat using the separate return method is approximately: A) $36,000 B) $31,500 C) $33,390 D) $32,750 E) $32,660 Answer: D Learning Objective: 07-05 Topic: Tax expense―Separate return method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: River Boat Total Taxable income (separate operating $600,000 $120,000 income) Tax rate 30% 30% Income tax expense—separate returns $180,000 $ 36,000 $216,000 Tax expense portion of Boat $36,000/$216,000 = 16.67% Tax expense: Combined operating income $720,000 ($600,000 + $120,000) – Combined deferred intra-entity gains on assets $65,000 ($50,000 + $15,000) = Taxable income $655,000 Consolidated income tax $655,000 × .30 = $196,500 Tax expense assigned to Boat: $196,500 × 16.67% = approximately $32,750 [QUESTION] REFER TO: 07-03 15. What was the net income attributable to the noncontrolling interest, assuming that the separate return method was used to assign the income tax expense? A) $16,800 B) $14,450 C) $14,700 D) $17,450 E) $13,800 Answer: B Learning Objective: 07-05 Topic: Income tax expense—separate returns Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Boat Inc.—reported operating income $120,000 Less: Intra-entity gains on assets remaining in the (15,000) Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

consolidated entity Less: Assigned income tax expense (see below) Boat Inc.—adjusted income Outside ownership Net income attributable to the noncontrolling interest

(32,750) $72,250 20% $ 14,450

Calculation of assigned income tax expense: Taxable income (separate operating income) Tax rate Income tax expense—separate returns Tax expense portion of Boat

River $600,000 30% $180,000

Boat $120,000 30% $ 36,000 $36,000/$216,000 = 16.67%

Total

$216,000

Tax expense: Combined operating income $720,000 ($600,000 + $120,000) – Combined deferred intra-entity gains on assets $65,000 ($50,000 + $15,000) = Taxable income $655,000 Consolidated income tax $655,000 × .30 = $196,500 Tax expense assigned to Boat: $196,500 × 16.67% = approximately $32,750 Use the following to answer questions 16 and 17: REFERENCE: 07-04 Prescott Corp. owned 90% of Bell Inc., while Bell owned 10% of the outstanding common shares of Prescott. No goodwill or other allocations were recognized in connection with either of these acquisitions. Prescott reported net income of $266,000 for 2018 whereas Bell recognized $98,000 during the same period. No investment income was included within either of these income totals. [QUESTION] REFER TO: 07-04 16. On a consolidated income statement, what is the net income attributable to the noncontrolling interest? A) $ 9,800. B) $13,692. C) $10,836. D) $12,460. E) $11,214. Answer: A Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Bell’s net income ($98,000) × Noncontrolling interest (10 %) = $9,800 [QUESTION] REFER TO: 07-04 17. How would the 10% Investment in Prescott owned by Bell be presented in the consolidated balance sheet? Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

A) The 10% investment would be eliminated and no amount would be shown in the consolidated balance sheet. B) The 10% investment would be reclassified in Bell's balance sheet as Treasury Stock before the consolidation process begins. C) The 10% investment would be eliminated and the same dollar amount would appear as treasury stock in the consolidated balance sheet. D) The 10% investment would be included as part of Additional Paid-In Capital because it is less than 20% and therefore indicates no significant influence is present. E) Prescott would treat the shares owned by Bell as if they had been repurchased on the open market, and a treasury stock account would be set up on Prescott’s books recording the shares at their fair value on the date of combination. Answer: C Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 18. On January 1, 2018, a subsidiary bought 10% of the outstanding shares of its parent company. Although the total book value and fair value of the parent's net assets were $5.5 million, the consideration transferred for these shares was $590,000. During 2018, the parent reported separate net income of $714,000, before including investment income, while dividends declared were $196,000. How were these shares reported at December 31, 2018? A) The investment was recorded for $641,800 at the end of 2018 and then eliminated for consolidation purposes. B) Consolidated stockholders' equity was reduced by $641,800. C) The investment was recorded for $590,000 at the end of 2018 and then eliminated for consolidation purposes. D) Consolidated stockholders' equity was reduced by $639,800. E) Consolidated stockholders' equity was reduced by $590,000. Answer: E Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 19. Jastoon Co. acquired all of Wedner Co. for $588,000 cash in a tax-free transaction. On that date, the subsidiary had net assets with a $560,000 fair value but a $420,000 book value and income tax basis. The income tax rate was 30%. What amount of goodwill should have been recognized on the date of the acquisition? A) $ 70,000. B) $ 28,000. C) $ (14,000). Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

D) $ 19,600. E) $ 65,000. Answer: A Learning Objective: 07-07 Topic: Temporary differences upon combination Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: FV ($560,000) – Tax Basis ($420,000) = Temporary Tax Difference ($140,000) × .30 = Deferred Tax Liability ($42,000) + [Cash Paid ($588,000) – FV Assets ($560,000)] $28,000 = Goodwill ($70,000) Use the following to answer questions 20 – 22: REFERENCE: 07-05 Beagle Co. owned 80% of Maroon Corp. Maroon owned 90% of Eckston Inc. Separate company net incomes for 2018 are shown below; these figures contained no investment income. Amortization expense was not required by any of these acquisitions. Included in Eckston's operating income was a $56,000 gross profit on intra-entity transfers to Maroon.

Separate net income

Beagle Co. $ 420,000

Maroon Corp. $ 280,000

Eckston Inc. $ 280,000

[QUESTION] REFER TO: 07-05 20. The accrual-based net income of Eckston Inc. is calculated to be A) $234,000. B) $211,000. C) $221,000. D) $224,000. E) $246,000. Answer: D Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Net income ($280,000) – deferral of gross profit from intra-entity transfers ($56,000) = Accrual-based net income $224,000 [QUESTION] REFER TO: 07-05 21. The accrual-based net income of Maroon Corp. is calculated to be A) $481,600. B) $472,700. C) $488,900. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

D) $502,300. E) $358,800. Answer: A Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Separate company net income before investment income—Maroon Corp. Equity income accruing from Eckston Inc.: Eckston’s separate net income Deferral of Eckston’s intra-entity gross profit Eckstons’s accrual-based net income Maroon’s percentage ownership of Eckston Maroon’s share of Eckston’s net income Accrual-based net income of Maroon

$280,000 $280,000 (56,000) $224,000 90% 201,600 $481,600

[QUESTION] REFER TO: 07-05 22. The accrual-based net income of Beagle Co. is calculated to be A) $706,670. B) $755,980. C) $805,280. D) $838,150. E) $815,770. Answer: C Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Separate company net income before investment income—Beagle Co. Equity income accruing from Maroon Corp.—80% of $481,600 (see below) Accrual-based net income of Beagle Co. Separate company net income before investment income—Maroon Corp. Equity income accruing from Eckston Inc.: Eckston’s separate net income Deferral of Eckston’s intra-entity gross profit

$420,000 385,280 $805,280

$280,000 $280,000 (56,000)

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Eckstons’s accrual-based net income Maroon’s percentage ownership of Eckston Maroon’s share of Eckston’s net income Accrual-based net income of Maroon

$224,000 90% 201,600 $481,600

Use the following to answer questions 23 – 25: REFERENCE: 07-06 Hardford Corp. held 80% of Inglestone Inc., which, in turn, owned 80% of Jade Co. Excess amortization expense was not required by any of these acquisitions. Separate net income figures (without investment income) as well as upstream intra-entity gross profits (before deferral) included in the income for the current year follow:

Hardford Inglestone Jade Corp. Inc. Co. Separate net income $ 560,000 $ 420,000 $ 280,000 Intra-entity gross profits 70,000

42,000

84,000

[QUESTION] REFER TO: 07-06 23. The accrual-based net income of Jade Co. is calculated to be A) $193,000. B) $189,000. C) $196,000. D) $201,000. E) $144,000. Answer: C Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Separate net income ($280,000) – intra-entity gross profit to be deferred ($84,000) = Accrualbased net income $196,000 [QUESTION] REFER TO: 07-06 24. The net income attributable to the noncontrolling interest of Jade Co. is calculated to be A) $36,900. B) $33,600. C) $42,400. D) $32,300. E) $39,200. Answer: E Learning Objective: 07-01 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Topic: Consolidation―Grandfather-Father-Son Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Separate net income ($280,000) – intra-entity gross profit to be deferred ($84,000) = Accrualbased net income ($196,000) × 20% = Net income attributable to the noncontrolling interest $39,200 [QUESTION] REFER TO: 07-06 25. The net income attributable to the noncontrolling interest of Inglestone Inc. is calculated to be A) $106,950. B) $102,640. C) $114,530. D) $106,960. E) $103,680. Answer: D Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Separate net income of Inglestone ($420,000) – intra-entity gross profit to be deferred ($42,000) = Inglestone’s accrual-based net income ($378,000) + Accrual-based net income of Jade attributable to Inglestone ($196,000* × .80) = $534,800 × .20 = Net income attributable to the noncontrolling interest of Inglestone $106,960. *Separate net income of Jade ($280,000) – intra-entity gross profit to be deferred ($84,000) = Accrualbased net income of Jade ($196,000). [QUESTION] 26. When indirect control is present, which of the following statements is true? A) At least one company within the consolidated entity holds a parent and a subsidiary relationship. B) The parent company owns a percent of subsidiary and subsidiary owns a percent of the parent. C) Consolidated financial statements are required for only one subsidiary. D) Recognition of income for an indirectly owned subsidiary is ignored. E) Only dividend income is recognized for an indirectly owned subsidiary. Answer: A Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 27. Which of the following statements is false concerning a father-son-grandson configuration? Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

A) This type of ownership pattern does not significantly alter the worksheet process. B) Most worksheet entries are simply made twice. C) The doubling of entries may seem overwhelming. D) The individual consolidation procedures remain unaffected. E) Consolidated financial statements are required for only the father and son companies. Answer: E Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 28. Which of the following statements is true regarding mutual ownership between a parent and its subsidiary? A) The shares of the parent held by a subsidiary should be treated as outstanding stock on the consolidated balance sheet. B) Only the subsidiary's shares held by the parent should be eliminated in consolidation. C) The treasury stock approach is required to reflect parent shares held by the subsidiary. D) The treasury stock approach is required to eliminate subsidiary shares held by the parent company. E) The parent company does not need to file consolidated financial statements if there is mutual ownership. Answer: C Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 29. Which of the following statements is true regarding a subsidiary's investment in the parent company's stock? A) The treasury stock approach focuses on the parent’s control over its subsidiary. B) For consolidation, both the parent and subsidiary must defer gross profit on remaining inventory from intra-entity transfers. C) In consolidation, the parent’s retained earnings will not be reduced by the dividends it paid to the subsidiary. D) This corporate combination is known as mutual ownership. E) All of these answer choices are true statements. Answer: E Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: FN Measurement [QUESTION] 30. Which of the following statements is true regarding the subsidiary's investment in its parent's common stock? A) All of the parent company's common stock is eliminated. B) The consolidation worksheet entry to eliminate the subsidiary's investment in parent's common stock is debited to treasury stock. C) The consolidation worksheet entry to eliminate the subsidiary's investment in parent's common stock is debited to retained earnings. D) The consolidation worksheet entry to eliminate the subsidiary's investment in parent's common stock is debited to additional paid-in capital. E) The investment in parent company's common stock is not eliminated in consolidation. Answer: B Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 1 Easy Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 31. Which of the following statements is true regarding the filing of income taxes for an affiliated group? A) Domestic subsidiaries greater than 50% ownership must file a consolidated tax return. B) Domestic subsidiaries greater than 60% ownership must file a consolidated tax return. C) Domestic subsidiaries greater than 80% ownership must file a consolidated tax return. D) Domestic subsidiaries greater than 80% ownership may file a consolidated tax return. E) Foreign subsidiaries must file a consolidated tax return. Answer: D Learning Objective: 07-04 Topic: Income tax criteria for an affiliated group Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 32. The benefits of filing a consolidated tax return include all of the following except A) Gross profits from intra-entity transfers are not taxed until such amounts are recognized for financial statement reporting purposes. B) Recognition of gross profits from intra-entity transfers is deferred for income tax recognition purposes. C) The issuance of dividends between related entities are not taxable. D) Losses incurred by an affiliated company can be used to reduce taxable income earned by other members to that affiliated group. E) Gross profits on intra-entity transfers are taxed before they are recognized for financial statement reporting purposes in the year of the transfer, but any such losses are deferred. Answer: E Learning Objective: 07-04 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Topic: Income tax criteria for an affiliated group Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 33. Which of the following statements is true regarding goodwill? A) For accounting purposes, goodwill may be amortized over a period not to exceed 40 years. B) For accounting purposes, goodwill may be amortized over a period not to exceed 20 years. C) For tax purposes, goodwill amortization cannot be deductible. D) For tax purposes, goodwill amortization may be deductible over a 20-year period. E) For tax purposes, goodwill amortization may be deductible over a 15-year period. Answer: E Learning Objective: 07-05 Topic: Tax calculation for consolidated returns Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Use the following to answer questions 34 – 37: REFERENCE: 07-07 Chase Company owns 80% of Lawrence Company and 40% of Ross Company. Lawrence Company also owns 30% of Ross Company. Separate company net incomes for 2018 of Chase, Lawrence, and Ross are $450,000, $300,000, and $250,000, respectively. Each company also defers a $20,000 intra-entity gain in its current income figures. Excess annual amortization expense of $15,000 is assigned to Chase’s investment in Lawrence and another $15,000 is assigned to Lawrence’s investment in Ross. [QUESTION] REFER TO: 07-07 34. Compute Chase's attributed ownership in Ross. A) 40.0%. B) 64.0%. C) 24.0%. D) 32.0%. E) 12.8%. Answer: B Learning Objective: 07-02 Topic: Consolidation―Connecting affiliation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 40% + 24% [80% × 30%] = 64% [QUESTION] Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

REFER TO: 07-07 35. Compute the net income attributable to the noncontrolling interest in Ross for 2018. A) $92,000. B) $77,400. C) $75,000. D) $64,500. E) $69,000. Answer: D Learning Objective: 07-02 Topic: Consolidation―Connecting affiliation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $250,000 - $20,000 - $15,000 = $215,000 × .30 = $64,500 [QUESTION] REFER TO: 07-07 36. Compute Lawrence's accrual-based net income for 2018. A) $354,000. B) $329,500. C) $334,000. D) $265,000. E) $344,500. Answer: B Learning Objective: 07-02 Topic: Consolidation―Connecting affiliation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Separate net income of Lawrence ($300,000) – intra-entity gain to be deferred ($20,000) – excess annual amortization expense ($15,000) + Accrual-based net income of Ross attributable to Lawrence ($215,000* × .30) $64,500 = $329,500. * Separate net income of Ross ($250,000) – intra-entity gain to be deferred ($20,000) – excess annual amortization expense ($15,000) = Accrual-based net income of Ross $215,000. [QUESTION] REFER TO: 07-07 37. Compute Chase's accrual-based net income for 2018. A) $746,000. B) $719,000. C) $779,600. D) $774,200. E) $758,100. Answer: C Learning Objective: 07-02 Topic: Consolidation―Connecting affiliation Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Accrual-based net income of Chase ($450,000 - $20,000) = $430,000 + Accrual-based net income of Lawrence attributable to Chase ($329,500* × .80) $263,600 + Accrual-based net income of Ross attributable to Lawrence ($215,000** × .40) $86,000 = $779,600. * Accrual-based net income of Lawrence ($300,000 - $20,000 - $15,000) = $265,000 + Accrual-based net income of Ross attributable to Lawrence ($215,000* × .30) $64,500 = $329,500. ** Separate net income of Ross ($250,000) – intra-entity gain to be deferred ($20,000) – excess annual amortization expense ($15,000) = Accrual-based net income of Ross $215,000. Use the following to answer questions 38 – 41: REFERENCE: 07-08 On January 1, 2017, Jones Company bought 15% of Whitton Company. Jones paid $150,000 for these shares, an amount that exactly equaled the proportionate book value of Whitton. On January 1, 2018, Whitton acquired 80% ownership of Jones. The following data are available concerning Whitton's acquisition of Jones: Consideration transferred for 80% interest, January 1, 2018: $800,000 Jones' reported book value, January 1, 2018: 900,000 Excess fair value over book value (assigned to trademarks) is amortized over 20 years. The initial value method is used by both companies. The following information is available regarding Jones and Whitton:

Year 2017 2018

Jones Company Reported Separate Dividend Income Income $40,000 $6,000 50,000 9,000

Dividends Declared $10,000 14,000

Whitton Company Reported Separate Dividend Dividends Income Income Declared $120,000 $ 0 $40,000 140,000 11,200 60,000

[QUESTION] REFER TO: 07-08 38. What would be included in a consolidation worksheet entry for 2018? A) Debit treasury stock, $135,000. B) Credit treasury stock, $135,000. C) Debit treasury stock, $150,000. D) Credit treasury stock, $150,000. E) Debit common stock, $150,000. Answer: C Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: FN Measurement Feedback: Acquisition-date fair value $800,000 / .80 = $1,000,000 FV Jones × .15 = $150,000 Debit to Treasury Stock Account [QUESTION] REFER TO: 07-08 39. Compute the amount allocated to trademarks recognized in the January 1, 2018 consolidated balance sheet. A) $ 80,000. B) $100,000. C) $ 76,000. D) $ 16,000. E) $ -0Answer: B Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Acquisition-date fair value $800,000 / .80 = $1,000,000 FV Jones – BV $900,000 = $100,000 Excess FV of Trademark [QUESTION] REFER TO: 07-08 40. Compute Whitton's accrual-based consolidated net income for 2018. A) $199,000. B) $190,000. C) $185,000. D) $184,000. E) $176,000. Answer: C Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Parent’s Accrual-based net income ($140,000 + $14,000 - $9,000) = $145,000 + Parent’s Portion of Subsidiary’s Accrual-based net income ($50,000 × .80) $40,000 = $185,000 [QUESTION] REFER TO: 07-08 41. Compute the net income attributable to the noncontrolling interest for 2018. A) $11,000. B) $10,800. C) $ 9,000. D) $ 8,200. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

E) $ 7,200. Answer: B Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 50,000 (reported separate income) + 9,000 (dividend) – 500 (amortization) = 54,000 × .20 = 10,800. Use the following to answer questions 42 – 45: REFERENCE: 07-09 Tower Company owns 85% of Hill Company. The two companies engaged in several intra-entity transactions. There were no excess fair-value amortization amounts to account for. Each company's income before income tax and dividend income for the current time period follow, as well as the effects of intra-entity gross profits on remaining inventory which are included in the separate net income amounts. No income tax accruals have been recognized within these totals. The tax rate for each company is 30%.

[QUESTION] REFER TO: 07-09 42. Compute accrual-based consolidated income before income tax. A) $280,000. B) $245,000. C) $200,000. D) $255,200. E) $290,200. Answer: B Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Sum of Tower and Hill separate company income before deferrals $200,000 + $80,000

$280,000

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Less: Combined intra-entity gross profit deferrals $25,000 + $10,000 Consolidated net income

(35,000) $ 245,000

[QUESTION] REFER TO: 07-09 43. What is the income tax liability for the current year if consolidated tax returns are prepared? A) $55,560. B) $70,350. C) $60,000. D) $73,500. E) $84,000. Answer: D Learning Objective: 07-05 Topic: Tax calculation for consolidated returns Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Combined income before income tax and deferrals $280,000 ($200,000 + $80,000) – Combined intra-entity gross profit deferrals $35,000 ($25,000 + $10,000) = Taxable income $245,000 × .30 = Consolidated income tax liability $73,500 [QUESTION] REFER TO: 07-09 44. Using the percentage allocation method for assigning income tax expense, the income tax expense assigned to Hill is closest to: A) $21,000. B) $24,000. C) $20,100. D) $17,400. E) $ 0. Answer: A Learning Objective: 07-05 Topic: Tax expense―Percentage allocation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Combined income before income tax and deferrals $280,000 ($200,000 + $80,000) – Combined intra-entity gross profit deferrals $35,000 ($25,000 + $10,000) = Taxable income $245,000 × .30 = Consolidated income tax liability $73,500. Subsidiary’s (Hill) portion of the taxable income $80,000 - $10,000 = $70,000 / Total taxable income $245,000 = 28.57% Income tax expense assigned to Hill $73,500 × .2857 = $21,000 [QUESTION] REFER TO: 07-09 45. Under the separate return method, income tax expense that will be assigned to Hill is closest to: Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

A) $24,000. B) $22,857. C) $24,874. D) $21,874. E) $21,000. Answer: E Learning Objective: 07-05 Topic: Tax expense―Separate return method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Taxable income (separate operating income) Tax rate Income tax expense—separate returns Tax expense portion of Boat

Tower $200,000 30% $60,000

Hill $80,000 30% $ 24,000 $24,000/$84,000 = 28.57%

Total

$84,000

Tax expense: Combined income before income tax and deferrals $280,000 ($200,000 + $80,000) – Combined deferred intra-entity gross profits $35,000 ($25,000 + $10,000) = Taxable income $245,000 Consolidated income tax $245,000 × .30 = $73,500 Tax expense assigned to Hill: $73,500 × 28.57% = approximately $21,000 Use the following to answer questions 46 – 49: REFERENCE: 07-10 White Company owns 60% of Cody Company. Separate tax returns are required. For 2017, White's operating income (excluding taxes and any income from Cody) was $300,000 while Cody reported a pretax income of $125,000. During the period, Cody declared total dividends of $25,000; $15,000 (60%) to White and $10,000 to the noncontrolling interest. White declared dividends of $180,000. The income tax rate for both companies is 30%. [QUESTION] REFER TO: 07-10 46. Compute the income tax liability of Cody for 2018. A) $33,000. B) $34,500. C) $37,500. D) $30,000. E) $22,500. Answer: C Learning Objective: 07-06 Topic: Tax calculation for separate returns Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Separate tax return calculation: Cody’s operating income $125,000 × .30 = $37,500 Cody’s income tax liability [QUESTION] REFER TO: 07-10 47. Compute Cody's undistributed earnings for 2018. A) $ 62,500. B) $125,000. C) $ 87,500. D) $100,000. E) $ 70,000. Answer: A Learning Objective: 07-06 Topic: Tax calculation for separate returns Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Separate tax calculation: Cody’s operating income $125,000 × .30 = $37,500 Cody’s income tax liability. Cody’s income before tax $125,000 – income tax $37,500 – Dividends declared $25,000 = Undistributed earnings $62,500 [QUESTION] REFER TO: 07-10 48. Compute the income tax liability of White for 2018. A) $93,600. B) $91,350. C) $94,500. D) $90,900. E) $90,000. Answer: D Learning Objective: 07-06 Topic: Tax calculation for separate returns Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Separate tax return calculation: White owns less than 80% of Cody so 20% of the $15,000 dividends attributable to White (= $3,000) are currently taxable. White’s operating income $300,000 plus $3,000 dividends = White’s taxable income of $303,000. $303,000 × .30 = White’s income tax liability $90,900. [QUESTION] REFER TO: 07-10 49. Compute White's deferred income taxes for 2018. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

A) $ 6,000. B) $ 2,250. C) $ 3,150. D) $11,250. E) $21,000. Answer: B Learning Objective: 07-06 Topic: Tax calculation for separate returns Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Separate tax return calculation: White owns less than 80% of Cody so 20% of the $15,000 dividends attributable to White (= $3,000) are currently taxable. Deferred income taxes are required for any of the subsidiary’s income not paid currently as a dividend. Cody’s operating income $125,000 × .30 = $37,500 Cody’s income tax liability. Cody’s income before tax $125,000 – income tax $37,500 – Dividends declared $25,000 = Cody’s Undistributed earnings $62,500. White is entitled to 60% of these undistributed earnings = $37,500 and 20% of these will be taxed in the future. Therefore, $7,500 of dividends will be taxed at a tax rate of 30% and the deferred income tax amount is $2,250. [QUESTION] 50. Woods Company has one depreciable asset valued at $800,000. Because of recent losses, the company has a net operating loss carryforward of $150,000. The tax rate is 30%. The company was acquired for $1,000,000. It is more likely than not that the tax benefit will be realized. Compute the goodwill recognized for consolidated financial statements. A) $ 0. B) $155,000. C) $200,000. D) $305,000. E) $350,000. Answer: B Learning Objective: 07-08 Topic: Net operating loss of acquired subsidiary Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: NOL carryforward $150,000 × 30% tax rate = $45,000 deferred tax asset. Consideration transferred $1,000,000 Fair value of subsidiary asset $800,000 Deferred income tax asset 45,000 845,000 Goodwill $ 155,000 [QUESTION] 51. Under current U.S. tax law for consolidated tax returns: A) One entity in the group can use another entity’s net operating loss carryforward to its advantage. B) The parent can use the net operating loss carryforward of another entity in the group. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

C) A net operating loss carryforward if an entity will be unusable when consolidated tax returns are prepared. D) A net operating loss carryforward of an entity in the group can only be used by that entity. E) Since the tax return is for all entities in one consolidated group, the net operating loss carryforward of one entity must be pro-rated to all other entities in the group. Answer: D Learning Objective: 07-08 Topic: Net operating loss of acquired subsidiary Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 52. Strong Company has had poor operating results in recent years and has a $160,000 net operating loss carryforward. Leader Corp. pays $700,000 to acquire Strong and is optimistic about its future profitability potential. The book value and fair value of Strong’s identifiable net assets is $500,000 at date of acquisition. Strong’s tax rate is 30% and Leader’s tax rate is 40%. What is goodwill resulting from this business acquisition? A) $ 40,000. B) $ 88,000. C) $104,000. D) $152,000. E) $248,000. Answer: D Learning Objective: 07-08 Topic: Net operating loss of acquired subsidiary Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: NOL carryforward $160,000 × 30% tax rate = $48,000 deferred tax asset. Consideration transferred $700,000 Fair value of subsidiary net assets $500,000 Deferred income tax asset 48,000 548,000 Goodwill $ 152,000 [QUESTION] 53. In a father-son-grandson combination, which of the following statements is true? A) Companies that are solely in subsidiary positions must have their accrual-based net income computed first in the consolidation process. B) Father-son-grandson configurations never require consolidation unless one company owns 100% of at least one other member of the combined group. C) The order of the computation of accrual-based net income is not important in the consolidation process. D) The parent must have its accrual-based net income computed first in the consolidation process. E) None of these answer choices are correct. Answer: A Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 54. Which of the following statements is true concerning connecting affiliations and mutual ownerships? A) In a mutual ownership, at least two companies in the consolidated group own portions of a third company. B) There are at least four companies in a connecting affiliation. C) In a connecting affiliation, at least one subsidiary owns stock in the parent company. D) In a mutual ownership, the subsidiary owns a portion of the parent’s stock. E) There are only two companies in a connecting affiliation. Answer: D Learning Objective: 07-02 Learning Objective: 07-03 Topic: Consolidation―Connecting affiliation Topic: Consolidation―Mutual ownership Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 55. Which of the following is true concerning the treasury stock approach in accounting for a subsidiary’s investment in parent company stock? A) The original cost of the subsidiary’s investment reduces long-term liabilities. B) The cost of parent shares is treated as if the shares are no longer outstanding. C) The subsidiary must apply the equity method in accounting for the investment if the treasury stock approach is used. D) The treasury stock approach increases total stockholders’ equity. E) The cost of parent shares is treated as if the shares are no longer issued. Answer: B Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 56. Which of the following is not an advantage of filing a consolidated income tax return? A) The existence of deferred losses in ending inventory. B) The ability to use net operating losses of one company to offset profits of another company. C) The existence of intra-entity gross profit remaining in ending inventory. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

D) Transfers of inventory at a transfer price above cost. E) There is no difference between U.S. GAAP and tax accounting rules for dividends paid to a parent by an 85%-owned subsidiary. Answer: A Learning Objective: 07-04 Topic: Income tax criteria for an affiliated group Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 57. On January 1, 2018, a subsidiary buys 8 percent of the outstanding voting stock of its parent corporation. The payment of $350,000 exceeded book value of the acquired shares by $50,000, attributable to a copyright with a 10-year useful life. During the year, the parent reported operating income of $675,000 (excluding investment income from the subsidiary), and paid $100,000 in dividends. If the treasury stock approach is used, how is the Investment in Parent Stock reported in the consolidated balance sheet at December 31, 2018? A) Included in current assets. B) Included in noncurrent assets. C) Consolidated stockholders’ equity is reduced by $350,000. D) Consolidated stockholders’ equity is reduced by $300,000. E) There is no effect on the consolidated balance sheet, because the effects have been eliminated. Answer: C Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 58. On January 1, 2018, a subsidiary buys 12 percent of the outstanding voting stock of its parent corporation. The payment of $400,000 exceeded book value of the acquired shares by $80,000, attributable to a copyright with a 10-year useful life. During the year, the parent reported separate company income of $1,000,000 (excluding investment income from the subsidiary), and paid $120,000 in dividends. If the treasury stock approach is used, how is the Investment in Parent Stock reported in the consolidated balance sheet at December 31, 2018? A) Consolidated stockholders’ equity is reduced by $400,000. B) Consolidated stockholders’ equity is reduced by $320,000. C) Included in current assets. D) Included in noncurrent assets. E) There is no effect on the consolidated balance sheet, because the effects have been eliminated. Answer: A Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 1 Easy Blooms: Apply Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Full payment of $400,000 is debited to Treasury Stock [QUESTION] 59. Which of the following conditions will allow two companies to file a consolidated income tax return? A) One company owns less than 50 percent of the other company’s voting stock but has the ability to significantly influence the other company. B) One company holds 50 percent of the other company’s voting stock. C) One company holds 75 percent of the other company’s voting stock D) One company holds 83 percent of the other company’s voting stock. E) None of the above. Answer: D Learning Objective: 07-04 Topic: Income tax criteria for an affiliated group Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 60. How is goodwill amortized? A) It is not amortized for reporting purposes or for tax purposes. B) It is not amortized for reporting purposes, but is amortized over a 5-year life for tax purposes. C) It is not amortized for tax purposes, but is amortized over a 5-year life for reporting purposes. D) It is not amortized for tax purposes, but is amortized over a 15-year life for reporting purposes. E) It is not amortized for reporting purposes, but is amortized over a 15-year life for tax purposes. Answer: E Learning Objective: 07-05 Topic: Tax calculation for consolidated returns Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 61. Why might a consolidated group file separate income tax returns? A) There are no intra-entity transfers. B) There are no deferred intra-entity gross profits in ending inventory. C) One of the companies is a foreign company. D) Parent owns 68 percent of one company and 82 percent of another. E) All of these answer choices are correct. Answer: E Learning Objective: 07-04 Learning Objective: 07-06 Topic: Income tax criteria for an affiliated group Topic: Tax calculation for separate returns Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Use the following to answer questions 62 – 67: REFERENCE: 07-11 Alpha Corporation owns 100 percent of Beta Company, and Beta owns 80 percent of Gamma, Inc., all of which are domestic corporations. There were no excess allocation values at the date of acquisition of the subsidiaries. Information for the three companies for the year ending December 31, 2018 follows:

Separate company net income Gross profit from intra-entity transfers of inventory (included in operating income above). The goods have not yet been sold to outsiders or consumed within the consolidated entity.

Alpha $300,000 $12,000

Beta $200,000 0

Gamma $100,000 $4,000

[QUESTION] REFER TO: 07-11 62. Which of the following statements is true? A) Alpha and Beta must file a consolidated income tax return, but must exclude Gamma from the consolidated return. B) Alpha, Beta, and Gamma must file a consolidated income tax return. C) Alpha, Beta, and Gamma must file separate income tax returns because the ownership of Beta is less than 100%. D) Alpha, Beta, and Gamma will probably not file a consolidated income tax return. E) Alpha, Beta, and Gamma may file separate income tax returns or a consolidated income tax return. Answer: E Learning Objective: 07-04 Topic: The Income tax criteria for an affiliated group Difficulty: 1 Easy Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 07-11 63. What is Gamma’s accrual-based net income for 2018? A) $ 76,000. B) $ 80,000. C) $ 96,000. D) $100,000. E) $104,000. Answer: C Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 1 Easy Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Gamma’s separate net income Deferral of Gamma’s intra-entity gain Gamma’s accrual-based net income

$100,000 (4,000) $ 96,000

[QUESTION] REFER TO: 07-11 64. What is Beta’s accrual-based net income for 2018? A) $200,000. B) $276,800. C) $280,000. D) $296,000. E) $300,000. Answer: B Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Separate company net income before investment income—Beta Equity income accruing from Gamma: Gamma’s separate net income $100,000 Deferral of Gamma’s intra-entity gain (4,000) Compass’s accrual-based net income $ 96,000 Beta’s percentage ownership of 80% Compass Beta’s share of Gamma’s net income Accrual-based net income of Beta

$200,000

76,800 $276,800

[QUESTION] REFER TO: 07-11 65. What is Alpha’s accrual-based net income for 2018? A) $564,000. B) $564,800. C) $572,200. D) $580,000. E) $600,000. Answer: B Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 2 Medium Blooms: Apply Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Separate company net income before investment income—Alpha Equity income accruing from Beta—100% of $276,800 (see below) Deferral of Alpha’s intra-entity gain Accrual-based net income of Alpha Separate company net income before investment income—Beta Equity income accruing from Gamma: Gamma’s separate net income Deferral of Gamma’s intra-entity gain Compass’s accrual-based net income Beta’s percentage ownership of Compass Beta’s share of Gamma’s net income Accrual-based net income of Beta

$300,000 276,800 (12,000) $564,800

$200,000 $100,000 (4,000) $ 96,000 80% 76,800 $276,800

[QUESTION] REFER TO: 07-11 66. What is the net income attributable to the noncontrolling interest in Gamma for 2018? A) $ 0. B) $ 9,600. C) $10,000. D) $19,200. E) $20,000. Answer: D Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Gamma’s separate net income $100,000 Deferral of Gamma’s intra-entity gain (4,000) Gamma’s accrual-based net income $ 96,000 Noncontrolling interest percentage 20% Net income attributable to the noncontrolling interest $ 19,200 [QUESTION] REFER TO: 07-11 67. What is the total net income attributable to the noncontrolling interests for 2018? A) $ 0. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

B) $ 9,600. C) $10,000. D) $19,200. E) $20,000. Answer: D Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Since Beta is a wholly-owned subsidiary of Alpha, Gamma is the only subsidiary with net income attributable to the noncontrolling interest and that amount is carried as 100% to Alpha. Gamma’s separate net income $100,000 Deferral of Gamma’s intra-entity gain (4,000) Gamma’s accrual-based net income $ 96,000 Noncontrolling interest percentage 20% Net income attributable to the noncontrolling interest $ 19,200 Use the following to answer questions 68 – 74: REFERENCE: 07-12 Delta Corporation owns 90 percent of Sigma Company, and Sigma owns 90 percent of Pi, Inc., all of which are domestic corporations. There are no excess amortizations associated with any of the acquisitions. Information for the three companies for the year ending December 31, 2018 follows:

Separate company net income Intra-entity gross profits on transfers of inventory which remain with the buyer at the reporting date and are included in operating income above

Delta $600,000

Sigma $400,000

Pi $200,000

$24,000

0

$8,000

[QUESTION] REFER TO: 07-12 68. Which of the following statements is true? A) Delta and Sigma must file a consolidated income tax return, but must exclude Pi from the consolidated return. B) Delta, Sigma, and Pi must file a consolidated income tax return. C) Delta, Sigma, and Pi must file separate income tax returns because the ownership of Sigma and Pi is less than 100%. D) Delta, Sigma, and Pi will probably not file a consolidated income tax return. E) Delta, Sigma, and Pi may file separate income tax returns or a consolidated income tax return. Answer: E Learning Objective: 07-04 Topic: Income tax criteria for an affiliated group Difficulty: 1 Easy Blooms: Analyze AACSB: Analytical Thinking Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 07-12 69. What is Pi’s accrual-based net income for 2018? A) $152,000. B) $ 16,000. C) $192,000. D) $200,000. E) $208,000. Answer: C Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Pi’s separate net income $200,000 Deferral of Gamma’s intra-entity gain (8,000) Gamma’s accrual-based net income $ 192,000 [QUESTION] REFER TO: 07-12 70. What is Sigma’s accrual-based income for 2018? A) $400,000. B) $592,000. C) $540,000. D) $572,800. E) $600,000. Answer: D Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Separate company net income before investment income—Sigma Equity income accruing from Pi: Pi’s separate net income Deferral of Pi’s intra-entity gain Pi’s accrual-based net income Sigma’s percentage ownership of Pi Sigma’s share of Pi’s net income Accrual-based net income of Sigma

$400,000 $200,000 (8,000) $192,000 90% 172,800 $572,800

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

[QUESTION] REFER TO: 07-12 71. What is Delta’s accrual-based net income for 2018? A) $1,091,520. B) $1,115,520. C) $1,168,000. D) $1,168,520. E) $1,200,000. Answer: A Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Separate company net income before investment income—Delta $600,000 Equity income accruing from Sigma—90% of 515,520 $572,800 (see below) Deferral of Delta’s intra-entity gain (24,000) Accrual-based net income of Delta $1,091,520 Separate company net income before investment income—Sigma $400,000 Equity income accruing from Pi: Pi’s separate net income $200,000 Deferral of Pi’s intra-entity gain (8,000) Pi’s accrual-based net income $192,000 Sigma’s percentage ownership of Pi 90% Sigma’s share of Pi’s net income 172,800 Accrual-based net income of Sigma $572,800

[QUESTION] REFER TO: 07-12 72. What is the net income attributable to the noncontrolling interest in Pi for 2018? A) $ 0. B) $ 9,600. C) $10,000. D) $19,200. E) $20,000. Answer: D Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: FN Measurement Feedback: Equity income accruing from Pi: Pi’s separate net income Deferral of Pi’s intra-entity gain Pi’s accrual-based net income Noncontrolling interest percentage Net income attributable to the noncontrolling interest in Pi

$200,000 (8,000) $192,000 10% $ 19,200

[QUESTION] REFER TO: 07-12 73. What is the net income attributable to the noncontrolling interest in Sigma for 2018? A) $55,240. B) $56,420. C) $57,280. D) $59,420. E) $60,000. Answer: C Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Separate company net income before investment income— Sigma $400,000 Equity income accruing from Pi: Pi’s separate net income $200,000 Deferral of Pi’s intra-entity gain (8,000) Pi’s accrual-based net income $192,000 Sigma’s percentage ownership of Pi 90% Sigma’s share of Pi’s net income 172,800 Accrual-based net income of Sigma $572,800 Noncontrolling interest percentage of Sigma 10% Net income attributable to the noncontrolling interest―Sigma $ 57,280 [QUESTION] REFER TO: 07-12 74. What is the total net income attributable to the noncontrolling interest for 2018? A) $55,240. B) $66,020. C) $67,280. D) $76,280. E) $76,480. Answer: E Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 2 Medium Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Income ($200,000) – unrecognized intra-entity gross profits on transfers of inventory ($8,000) = Net income attributable to the noncontrolling interest ($192,000 × .10) $19,200 Operating Income ($400,000) + Second Sub’s Accrual Income ($192,000 × .90) = Noncontrolling Interest in First Sub’s Accrual Income ($572,800 × .10) $57,280 Noncontrolling Interest in First Sub’s Accrual Income $57,280 + Noncontrolling Interest in Second Sub’s Accrual Income $19,200 = $76,480

Pi (see below) Sigma (see below) Net income attributable to noncontrolling interest

Accrualbased net income $192,000 $572,800

Pi’s separate net income Deferral of Gamma’s intra-entity gain Gamma’s accrual-based net income Separate company net income before investment income—Sigma Equity income accruing from Pi: Pi’s separate net income Deferral of Pi’s intra-entity gain Pi’s accrual-based net income Sigma’s percentage ownership of Pi Sigma’s share of Pi’s net income Accrual-based net income of Sigma

Outside Ownership

Net Income Attributable to Noncontrolling Interest

10% 10%

$ 19,200 57,280 $ 76,480 $200,000 (8,000) $ 192,000 $400,000 $200,000 (8,000) $192,000 90% 172,800 $572,800

Use the following to answer questions 75 – 77: REFERENCE: 07-13 Paris, Inc. owns 80 percent of the voting stock of Stance, Inc. The excess total fair value over book value was $75,000. Any excess fair value is assigned to a franchise contract to be amortized over a 10-year period. Stance holds 10 percent of the voting stock of Paris and paid an amount that equaled 10 percent of the book value of Paris at the time the investment was acquired. During the current year, Paris reported its own net income of $200,000 before investment income from Stance. Paris had dividend income from Stance of $20,000. At the same time, Stance reported its own net income of $40,000 before investment income. Stance’s dividend income from Paris was $5,000. [QUESTION] REFER TO: 07-13 75. What will be reported as the net income attributable to the noncontrolling interest of Stance? A) $6,500. B) $8,000. C) $9,000. D) $7,500. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

E) $1,000. Answer: D Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Net income of Stance not including dividends Amortization attributable to franchise contract Dividend income from Paris

$ 40,000 ( 7,500) 5,000 37,500 20% $ 7,500

Percentage attributable to the noncontrolling interest of Stance Net income attributable to noncontrolling interest of Stance [QUESTION] REFER TO: 07-13 76. What is consolidated net income? A) $229,500. B) $237,000. C) $245,000. D) $232,500. E) $240,000. Answer: D Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Separate net income of Paris $200,000 – Amortization of excess fair value attributable to franchise contract ($75,000 over 10 years = $7,500 per year) + Separate net income of Stance $40,000 = $192,500 + $40,000 = Consolidated net income $232,500. [QUESTION] REFER TO: 07-13 77. What is net income attributable to the controlling interest of Paris? A) $232,500. B) $225,000. C) $224,500. D) $226,000. E) $233,500. Answer: B Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Net income Paris not including dividend income Net income Stance not including dividend income and before excess amortization Excess amortization – franchise contract ($75,000 / 10 years) Consolidated net income Net income of Stance not including dividends Amortization attributable to franchise contract Dividend income from Paris Net income attributable to the noncontrolling interest of Stance Net income attributable to controlling interest of Paris

$200,000 40,000 ( 7,500) $232,500 $40,000 ( 7,500) 5,000 37,500 20%

(7,500) $225,000

[QUESTION] 78. Reggie, Inc. owns 70 percent of Nancy Corporation. During the current year, Nancy reported operating income before tax of $100,000 and paid a dividend of $30,000. The income tax rate for both companies is 30 percent. What deferred income tax liability arising in the current year must be recognized in the consolidated balance sheet? A) $1,680. B) $2,400. C) $1,470. D) $9,800. E) $2,940. Answer: A Learning Objective: 07-06 Topic: Tax calculation for separate returns Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 79. Pear, Inc. owns 80 percent of Apple Corporation. During the current year, Apple reported operating income before tax of $400,000 and paid a dividend of $120,000. The income tax rate for each company is 40 percent and separate tax returns are prepared. What deferred income tax liability arising this year must be recognized in the consolidated balance sheet? A) $ 0. B) $ 7,680. C) $17,920. D) $38,400. E) $51,200. Answer: A Learning Objective: 07-06 Topic: Tax calculation for separate returns Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Since there is 80 percent ownership of the subsidiary, there is a 100-percent dividends-received deduction and thus there is no deferred tax consequence of Apple not having currently distributed its entire amount of net income.

Use the following to answer questions 80 and 81: REFERENCE: 07-14 Dean, Inc. owns 90 percent of Ralph, Inc. During the current year, Dean sold merchandise costing $80,000 to Ralph for $100,000. At the end of the year, 30 percent of this merchandise was still on hand. The tax rate is 30 percent. [QUESTION] REFER TO: 07-14 80. Assuming that separate income tax returns are being filed, what deferred income tax asset is created? A) $ 0. B) $1,100. C) $1,800. D) $6,000. E) $9,000. Answer: C Learning Objective: 07-06 Topic: Tax calculation for separate returns Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Since separate tax returns are filed, the gross profit remaining in ending inventory is still taxable in the year of the intra-entity transfer. The gross profit is $20,000; the gross profit rate is 20% ($20,000 / $100,000) and this is applied to the remaining $30,000 of inventory = $6,000 remaining gross profit in ending inventory. The gross profit is taxed at $30% of $6,000 = $1,800. [QUESTION] REFER TO: 07-14 81. Assuming that a consolidated income tax return is being filed, what deferred income tax asset is created? A) $ 0. B) $ 900. C) $1,100. D) $1,800. E) $2,700. Answer: A Learning Objective: 07-05 Topic: Tax calculation for consolidated returns Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: FN Measurement Feedback: Since a consolidated tax return is filed, the gross profit remaining in the inventory of the consolidated entity is deferred until transfer to outsiders or until consumption or use by the consolidated entity. Use the following to answer questions 82 and 83: REFERENCE: 07-15 Tate, Inc. owns 80 percent of Jeffrey, Inc. During the current year, Jeffrey sold merchandise costing $60,000 to Tate for $75,000. At the end of the year, 10 percent of this merchandise remained in Tate’s inventory. The tax rate is 30 percent. [QUESTION] REFER TO: 07-15 82. Assuming that separate income tax returns are being filed, what deferred income tax asset is created? A) $ 0. B) $ 360. C) $ 450. D) $2,250. E) $3,600. Answer: C Learning Objective: 07-06 Topic: Tax calculation for separate returns Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Since separate tax returns are filed, the gross profit remaining in ending inventory is still taxable in the year of the intra-entity transfer. The gross profit is $15,000; the gross profit rate is 20% ($15,000 / $75,000) and this is applied to the remaining $7,500 of inventory = $1,500 remaining gross profit in ending inventory. The gross profit is taxed at $30% of $1,500 = $450. [QUESTION] REFER TO: 07-15 83. Assuming that a consolidated income tax return is being filed, what deferred income tax asset is created? A) $ 0. B) $ 360. C) $ 450. D) $2,250. E) $3,600. Answer: A Learning Objective: 07-05 Topic: Tax calculation for consolidated returns Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Since a consolidated tax return is filed, the gross profit remaining in the inventory of the Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

consolidated entity is deferred until transfer to outsiders or until consumption or use by the consolidated entity. [QUESTION] 84. Horse Corporation acquires all of Pony, Inc. for $300,000 cash. On that date, Pony has net assets with fair value of $250,000 but a book value and tax basis of $200,000. The tax rate is 40 percent. Prior to this date, neither Horse nor Pony has reported any deferred income tax assets or liabilities. What amount of goodwill should be recognized on the date of the acquisition? A) $ 0. B) $ 50,000. C) $ 70,000. D) $100,000. E) $150,000. Answer: C Learning Objective: 07-07 Topic: Temporary differences upon combination Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Consideration transferred (cash) $300,000 to net assets at fair value $250,000 to deferred tax liability on net assets (20,000) 230,000 [($250,000 − $200,000) × 40%] Goodwill $70,000 [QUESTION] 85. Dog Corporation acquires all of Cat, Inc. for $400,000 cash. On that date, Cat has net assets with fair value of $350,000 but a book value and tax basis of $325,000. The tax rate is 30 percent. Prior to this date, neither Dog nor Cat has reported any deferred income tax assets or liabilities. What amount of goodwill should be recognized on the date of the acquisition? A) $ 0. B) $50,000. C) $65,000. D) $66,400. E) $57,500. Answer: E Learning Objective: 07-07 Topic: Temporary differences upon combination Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Consideration transferred (cash) $400,000 to net assets at fair value $350,000 to deferred tax liability on net assets (7,500) 342,500 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

[($350,000 − $325,000) × 30%] Goodwill

$57,500

[QUESTION] 86. Britain Corporation acquires all of English, Inc. for $800,000 cash. On that date, English has net assets with fair value of $750,000 but a book value and tax basis of $500,000. The tax rate is 35 percent. Prior to this date, neither Britain nor English has reported any deferred income tax assets or liabilities. What amount of goodwill should be recognized on the date of the acquisition? A) $ 47,542. B) $117,850. C) $125,000. D) $137,500. E) $250,000. Answer: D Learning Objective: 07-07 Topic: Temporary differences upon combination Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Consideration transferred (cash) $800,000 to net assets at fair value $750,000 to deferred tax liability on net assets [($750,000 − 500,000) × 35%] (87,500) 662,500 Goodwill $137,500 Essay: [QUESTION] 87. What configuration of corporate ownership is described as a father-son-grandson relationship? Answer: A father-son-grandson relationship exists when one company owns a controlling interest in another which, in turn, owns a controlling interest in a third company. Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 88. What ownership structure is referred to as a connecting affiliation? Describe briefly or illustrate with a diagram. Answer: A connecting affiliation exists when a parent owns an interest in each of two companies, and one of the two companies owns an interest in the other. Learning Objective: 07-02 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Topic: Consolidation―Connecting affiliation Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 89. What ownership pattern is referred to as mutual ownership? Describe briefly or illustrate with a diagram. Answer: Mutual ownership exists when a subsidiary owns common stock of its parent corporation or when two subsidiaries own shares of each other's common stock. Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 90. What are the essential criteria for including a subsidiary within an affiliated group? Answer: A subsidiary may be included in an affiliated group if both of the following conditions are met: A. The subsidiary is a domestic corporation. B. The parent has at least eighty percent control of the subsidiary, directly or indirectly. Learning Objective: 07-04 Topic: Income tax criteria for an affiliated group Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 91. X Co. owned 80% of Y Corp., and Y Corp. owned 15% of X Co. Under the treasury stock approach, how would the dividends paid by X Co. to Y Corp. be handled on a consolidation worksheet? Answer: The dividends must be eliminated as intra-entity dividends. Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 92. What term is used to describe a parent and subsidiaries that are eligible to file a consolidated income Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

tax return? Answer: The term affiliated group would be used in this situation. Learning Objective: 07-04 Topic: Income tax criteria for an affiliated group Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 93. What method is used in consolidation to account for a subsidiary's ownership of shares of its parent corporation? Answer: The method is the treasury stock approach. Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 94. What are the benefits or advantages of filing a consolidated income tax return? Answer: When a consolidated income tax return is filed, intra-entity profits are not taxed until realized, either by use or by sale to an outsider. On separate returns, intra-entity profits are taxed in the period the sale is made within the combined entity. Therefore, filing a consolidated return can delay payment of income taxes. A second advantage is that, on a consolidated return, losses incurred by one company within the affiliated group can offset taxable income recognized by other members, reducing the total income tax liability of the combined entity. Learning Objective: 07-04 Topic: Income tax criteria for an affiliated group Difficulty: 2 Medium Blooms: Understand AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 95. How is the amortization of goodwill treated for income tax purposes? How does the amortization of goodwill affect deferred income taxes? Answer: In a business combination, goodwill is tested annually for impairment for financial statement purposes. The Internal Revenue Code allows the deduction of goodwill and other purchased intangibles over a 15-year period. Because the taxable income and financial income differ, the presence of goodwill causes a temporary difference that necessitates the recognition of deferred income taxes. Learning Objective: 07-04 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Topic: Income tax criteria for an affiliated group Difficulty: 2 Medium Blooms: Remember AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 96. C Co. currently owns 80% of D Co. and several other subsidiaries. C Co. is interested in gaining control of H Co. Why might C Co. allow D Co. to acquire H Co., rather than purchasing H Co. directly? Answer: Indirect control (such as a father-son-grandson structure, as proposed by C Co.) may be used to group subsidiaries by product line, geographic location, or other criteria. The use of indirect control may establish clearer and shorter lines of communication for day-to-day operations and improve responsibility reporting. Learning Objective: 07-01 Topic: Consolidation―Grandfather-Father-Son Difficulty: 2 Medium Blooms: Analyze AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement

[QUESTION] 97. Gamma Co. owns 80% of Delta Corp., and Delta Corp. owns 15% of Gamma Co. The two companies use the treasury stock approach to account for mutual ownership. How should Delta Corp.'s ownership interest in Gamma Co. be accounted for in the consolidation? Answer: Under the treasury stock approach, the parent's common stock owned by a subsidiary is treated in consolidated financial statements as being no longer outstanding. The consolidation process will eliminate the Investment in Gamma cost of shares and replace it as Treasury Stock of Gamma, the parent. The dividends received by Delta will be eliminated; thereby increasing Gamma’s retained earnings as if these dividends had not been paid. Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 2 Medium Blooms: Understand AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 98. Explain how the treasury stock approach treats shares of the parent's common stock that are owned by the subsidiary and the rationale behind the approach. Answer: According to the treasury stock approach, acquisition of some of the parent's common stock by the subsidiary is no different than acquisition by the parent itself. Since treasury stock would be recorded if the parent bought some of its own stock, treasury stock should be recognized during the consolidation process when mutual ownership exists. The treasury stock approach focuses on the parent's control over Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

the subsidiary and views the parent and subsidiary as a single economic entity. The main advantage of the treasury stock approach is its simplicity. Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 2 Medium Blooms: Understand AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 99. T Corp. owns several subsidiaries that are eligible for inclusion on a consolidated income tax return, but T Corp. decided that each company in the group will file a separate return. Under what conditions would there be minimal advantage in filing a consolidated income tax return? Answer: There might be fewer disadvantages to filing separate income tax returns if there are few intraentity transactions, and if the companies, which make up the combined entity, are generally profitable. When there are frequent intra-entity transactions, filing a consolidated income tax return postpones taxation on intra-entity gains until they are realized by use or sale to an outsider. Thus, the consolidated return postpones the taxation of some income. When one of the companies records a loss, a consolidated return allows the loss to be offset against other companies' profits, reducing the total income tax obligation for the combined entity. The filing of separate returns allows the companies more flexibility in their choice of accounting methods and tax year. Learning Objective: 07-04 Topic: Consolidation―Mutual ownership Difficulty: 2 Medium Blooms: Understand AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 100. Under what conditions must a deferred income tax asset be recorded? Answer: A deferred income tax asset is recorded when there is a temporary difference between financial accounting and income tax accounting rules, and income is taxed before it is recognized for financial accounting (or an expense is recognized for financial accounting before it can be deducted on the income tax return). Learning Objective: 07-05 Topic: Tax calculation for consolidated returns Difficulty: 2 Medium Blooms: Remember AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement Problems: [QUESTION] 101. B Co. owned 70% of the voting common stock of C Corp.; C Corp. owned 20% of B Co. There Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

were no excess-value allocations at the dates the investments were acquired. For 2018, B Co. and C Corp. reported net income (not including the investment) of $600,000 and $300,000, respectively. B Co. and C Corp. declared dividends of $80,000 and $60,000, respectively. Required: Prepare a schedule showing net income attributable to B Co.’s controlling interest for 2018 using the treasury stock approach. Answer: Net income B Co. Net income C Corp. not including dividends received Consolidated net income Net income of C Corp. not including dividends Dividend income from B Co.

$600,000 300,000 $900,000 $300,000 16,000 316,000 30%

Net income attributable to the noncontrolling interest of C Corp. Net income attributable to B Co. Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

(94,800) $805,200

Use the following to answer questions 102 – 103: REFERENCE: 07-16 Jull Corp. owned 80% of Solaver Co. Solaver paid $250,000 for 10% of Jull's common stock. In 2018, Jull and Solaver reported separate net incomes (not including income from the investment) of $300,000 and $80,000, respectively. Jull and Solaver declared dividends of $120,000 and $50,000, respectively. [QUESTION] REFER TO: 07-16 102. Required: Under the treasury stock approach, what is the net income attributable to the noncontrolling interest? Answer:

Separate net income before dividends Dividend income ($120,000 × 10%) Net income — Solaver Co. Noncontrolling interest ownership percentage Net income attributable to the noncontrolling interest

$

80,000 12,000 $ 92,000 × 20% $ 18,400

Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 07-16 103. Required: Under the treasury stock approach, what is Jull’s net income attributable to the controlling interest in Solaver Co..? Answer: Net income Jull Corp. Net income Solaver Corp. not including dividends Consolidated net income Net income of Solaver Corp. not including dividends Dividends from Jull Corp. Net income attributable to the noncontrolling interest Net income attributable to the controlling interest Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

$300,000 _ 80,000 $380,000 $80,000 12,000 92,000 20%

(18,400) $361,600

Use the following to answer questions 104 – 106: REFERENCE: 07-17 Kurton Inc. owned 90% of Luvyn Corp.'s voting common stock. The consideration paid exceeded book value by $110,000. Of this amount, one half is attributable to a patent and is to be amortized over 5 years. Luvyn held 20% of Kurton's voting common stock, which cost $28,000 more than fair value. During the current year, Kurton reported separate net income of $224,000 as well as dividend income from Luvyn of $37,800. At the same time, Luvyn reported its separate net income of $70,000 as well as dividend income from Kurton of $19,600. [QUESTION] REFER TO: 07-17 104. Required: Using the treasury stock approach, prepare a schedule to show what is reported as the net income attributable to the noncontrolling interest in Luvyn. Answer: Separate net income of Luvyn $70,000 Dividend income 19,600 Less: amortization of excess patent allocation $55,000/5 years (11,000) Luvyn Corp.’s net income for consolidation $78,600 Noncontrolling interest percentage 10% Net income attributable to the noncontrolling interest $ 7,860 Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 07-17 105. Required: Prepare a schedule to show consolidated net income. Answer: Separate net income of Kurton Separate net income of Luvyn Amortization $55,000/5 years Consolidated net income Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

$224,000 $70,000 (11,000)

_59,000 $283,000

[QUESTION] REFER TO: 07-17 106. Required: Prepare a schedule to show net income attributable to the controlling interest of Kurton. Answer: Separate net income of Kurton Separate net income of Luvyn Amortization Consolidated net income Net income attributable to the noncontrolling interest Controlling interest share of net income

$224,000 $55,000/5 years

$70,000 (11,000)

See below

Separate net income of Luvyn Dividend income Less: amortization of excess patent allocation Net income of Luvyn for consolidation Noncontrolling interest percentage Net income attributable to the noncontrolling interest

$55,000/5 years

59,000 $283,000 7,860 $275,140

$70,000 19,600 (11,000) $78,600 10% $ 7,860

Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 3 Hard Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 107. Wilkins Inc. owned 60% of Motumbo Co. During the current year, Motumbo reported net income of $280,000 but paid a total cash dividend of only $56,000. Required: Assuming an income tax rate of 30%, what amount of Deferred Income Tax Liability arising this year must be recognized in the consolidated balance sheet? Answer:

Equity in Motumbo Co.’s net income ($280,000 × 60%) Dividend income ($56,000 × 60%) Undistributed earnings Dividend deduction upon eventual distribution ($134,400 × 80%) Temporary portion of income tax difference Income tax rate Increase in deferred income tax liability

$

168,000 ( 33,600) $ 134,400 ( 107,520) $ 26,880 × 30% $ 8,064

Learning Objective: 07-06 Topic: Tax calculation for separate returns Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Use the following to answer questions 108 – 111: REFERENCE: 07-18 On January 1, 2017, Mace Co. acquired 75% of Lance Co.'s outstanding common stock. On the same date, Lance acquired an 80% interest in Curle Co. Both of these investments were acquired when book value was equal to fair value of identifiable net assets acquired. Both of these investments were accounted using the initial value method. Only Mace declared dividends in any year. Mace declared dividends each year equal to 40% of its separate net income before the calculation of any of its investment income. Separate net income totals for 2017, not including investment income for any company, were as follows:

Mace Co. Lance Co. Curle Co.

$ 420,000 224,000 168,000

Following are the 2018 financial statements for these three companies. Curle made numerous transfers of inventory to Lance since the takeover: $112,000 (2017) and $140,000 (2018). These transfers included the same markup applicable to Curle's outside sales. In each of these years, Lance held 20% of the inventory it bought from Curle and then sold that inventory to outsiders in the following year. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

An effective income tax rate of 45% was applicable to all companies. Mace Co. Lance Co.

Curle Co.

Sales Cost of goods sold Operating expenses

$

1,260,000 (672,000) (140,000)

$

840,000 (448,000) (112,000)

$

700,000 (364,000) (196,000)

Net income

$

448,000

$

280,000

$

140,000

Retained earnings, January 1, 2018 Net income (above) Dividends declared

$

980,000 448,000 (179,200)

$

840,000 280,000 -0-

$

420,000 140,000 -0-

Retained earnings, December 31, 2018 $

1,248,800

$

1,120,000

$

560,000

Current assets Investment in Lance Co. Investment in Curle Co. Land, buildings, and equipment (net)

$

592,200 1,037,400 -01,328,600

$

525,000 -0488,600 1,170,400

$

392,000 -0-0728,000

Total assets

$

2,958,200

$

2,184,000

$

1,120,000

Liabilities $ Common stock Retained earnings, December 31, 2018

1,009,400 700,000 1,248,800

$

644,000 420,000 1,120,000

$

280,000 280,000 560,000

Total liabilities and stockholders' equity$

2,958,200

$

2,184,000

$

1,120,000

[QUESTION] REFER TO: 07-18 108. Required: Determine the total amount of goodwill for the January 1, 2017 acquisition of Curle Co. and for the acquisition of Lance Co. on the same date. Answer: Consideration transferred for 80% of Curle Co. Noncontrolling interest 20% fair value (488,600/.80) – 488,600 Curle total fair value Book value 1/1/17 = fair value 1/1/17: Common stock plus (Retained earnings 1/1/18 less net income 2017)

$ 488,600 122,150 $ 610,750

Goodwill

$

Consideration transferred for 75% of Lance Co. Noncontrolling interest 25% fair value (1,037,400/.75) – 1,037,400 Lance total fair value Book value 1/1/17 = fair value 1/1/17: Common stock plus (Retained earnings 1/1/18 less net income 2017)

$1,037,400 345,800 $1,383,200

532,000 78,750

1,036,000

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Goodwill

$ 347,200

Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 07-18 109. Required: Determine net income attributable to the noncontrolling interest in Curle for the year 2018. Answer: Separate net income for 2018―Curle Removal of 2017 deferred gross profit in inventory (Entry *G) Deferral of 2018 intra-entity gross profit (Entry G) Accrual-based net income for 2018―Curle

$140,000 10,752 ( 13,440) $137,312

Noncontrolling interest percentage Net income attributable to the noncontrolling interest―Curle Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

20% $ 27,462

[QUESTION] REFER TO: 07-18 110. Required: Determine the net income attributable to the noncontrolling interest in Lace for the year 2018. Answer: Separate net income for 2018―Lance Accrual-based net income $137,312 (see below) × 80%―Curle Accrual-based net income for 2018―Lance Noncontrolling interest percentage Net income attributable to the noncontrolling interest―Lance Separate net income for 2018―Curle Removal of 2017 deferred gross profit in inventory (Entry *G) Deferral of 2018 intra-entity gross profit (Entry G) Accrual-based net income for 2018―Curle Learning Objective: 07-03 Topic: Consolidation―Mutual ownership

$280,000 109,850 389,850 25% $ 97,463 $140,000 10,752 ( 13,440) $137,312

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 07-18 111. Required: Determine the accrual-based net income of Mace Co for the year 2018. Answer: Separate net income for 2018―Mace Accrual-based net income of Lance $389,850 (*see below) × 75%

$448,000 292,387

Accrual-based net income of Mace Co. for 2018

740,387

*Separate net income for 2018―Lance Accrual-based net income $137,312 (see below) × 80%―Curle Accrual-based net income for 2018―Lance

$280,000 109,850 $389,850

Separate net income for 2018―Curle Removal of 2017 deferred gross profit in inventory (Entry *G) Deferral of 2018 intra-entity gross profit (Entry G) Accrual-based net income for 2018―Curle

$140,000 10,752 ( 13,440) $137,312

Learning Objective: 07-03 Topic: Consolidation―Mutual ownership Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 112. On January 1, 2018, Youder Inc. bought 120,000 shares of Nopple Co. for $384,000, giving Youder 30% ownership and the ability to apply significant influence to the operating and financing decisions of Nopple. Youder anticipated holding this investment for an indefinite time. In making this acquisition, Youder paid an amount equal to the book value for these shares. The fair value of each asset and liability was the same as its book value. Dividends and income for Nopple for 2018 were as follows: Dividends declared and paid: $ .40 per share Income before income tax provision: $400,000 Required: Assume a 40% income tax rate. Prepare all necessary journal entries for Youder for 2018 beginning at acquisition and ending at tax accrual. Answer: Entry One – To record the acquisition of Nopple common stock: Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Entry Two – To record income for the year: 30% of $400,000, reported balance:

Entry Three – To record the collection of dividends from Nopple Co.: 120,000 shares × $.40 per share:

Entry Four – To record income tax for the year: Current income taxes must be paid by Youder on the twenty percent of dividends ($9,600 = 20% of $48,000) that is taxable now. This current liability is $3,840 ($9,600 at the 40% rate). Furthermore, a deferred income tax liability also exists. On Youder’s accounting records, the Equity Income - Investment in Nopple Co. account balance exceeds its income tax basis by $72,000 which is the undistributed earnings: ($120,000 - $48,000). Since this difference will be erased by the payment of future dividends, the eighty percent dividends-received deduction is applicable ($57,600 = 80% of 72,000). Thus, future taxable income will be increased by $14,400 ($72,000 - $57,600). Based on an income tax rate of forty percent, the deferred income tax liability is $5,760. Income tax expense - current 3,840 Income tax expense – deferred 5,760 Income tax payable 3,840 Deferred tax liability 5,760 Learning Objective: 07-06 Topic: Tax calculation for separate returns Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 113. Dice Inc. owns 40% of the outstanding shares of Spalding Corp., an investment accounted for by the equity method. During 2018, Dice had operating income (not including income from its investment in Spalding) of $370,000. For this same period, Spalding reported net income of $160,000 and paid cash dividends of $60,000. Dice has an effective income tax rate of 35% and anticipates holding its investment in Spalding for an indefinite period. Required: (A.) What income tax expense journal entry would Dice Inc. record at the end of 2018? (B.) If Dice expects to sell its interest in Spalding in the near future, how does that decision change the 2018 income tax expense journal entry? Answer: Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

(A.) Recording of year-end income tax Income tax of Dice Inc. - current Operating income Dividend income ($60,000 x 40%) Dividends-received deduction (80%) Taxable income - current Effective income tax rate Income tax payable - current

$ 370,000 $

24,000 (19,200)

4,800 $ 374,800 × 35 % $ 131,180

Income tax of Dice Inc. - deferred Undistributed income ($160,000 - $60,000) Dice Inc.'s ownership percentage Dice Inc.'s share of undistributed income Percentage dividends-received deduction Potential dividends-received deduction

$ 100,000 × 40% $ 40,000 × 80% $ (32,000)

Potential dividends to be taxed ($40,000 - $32,000) Effective income tax rate Income tax payable - deferred

$ × $

Income tax expense - current Income tax expense – deferred Income tax payable Deferred tax liability

8,000 35% 2,800

131,180 2,800 131,180 2,800

(B.) If Dice expects to sell this investment, the undistributed earnings will be realized through an increase in sales price rather than through dividend payments. Thus, no future dividends received deduction is available if the investment is to be sold; the deferred income tax effect must be calculated without the potential eighty percent reduction:

Income tax expense - current Income tax expense – deferred Income tax payable Deferred tax liability

131,180 14,000 131,180 14,000

Learning Objective: 07-06 Topic: Tax calculation for separate returns Difficulty: 3 Hard Blooms: Apply Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

[QUESTION] 114. Dotes, Inc. owns 40% of Abner Co. Dotes accounts for its investment using the equity method. Abner follows a policy of declaring and paying dividends equal to 30% of its income each year. During the current year, Abner reported net income of $216,000. Dotes has an effective income tax rate of 32%. Required: What journal entry would Dotes record at the end of the current year for income taxes relating to the investment in Abner? Assume the investment is to be held for an indefinite time and that all amounts are to be rounded to the nearest dollar. Answer:

Journal Entry Income tax expense - current Income tax expense – deferred Income tax payable Deferred tax liability Learning Objective: 07-06 Topic: Tax calculation for separate returns Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

1,659 3,871 1,659 3,871

Use the following to answer questions 115 – 117: REFERENCE: 07-19 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Patton’s operating income excludes income from the investment in Stevens, but includes $150,000 of gross profit on intra-entity transfers of inventory and the inventory is still held by Stevens at the end of the year. Patton uses the initial value method to account for the investment in Stevens. [QUESTION] REFER TO: 07-19 115. Assume Patton owns 90 percent of the voting stock of Stevens and files a consolidated income tax return. What amount of income taxes would be paid? Answer:

Intra-entity gross profit and dividends are not relevant because a consolidated return is filed. Learning Objective: 07-05 Topic: Tax calculation for consolidated returns Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 07-19 116. Assume Patton owns 90 percent of the voting stock of Stevens and they each file separate income tax returns. What amount of total income tax would be paid? Answer: Total taxes to be paid are $720,000. Stevens would have to pay $120,000 (30% of its $400,000 operating income.) Patton would pay $600,000 or 30% of its $2,000,000 operating income. The gross profit remaining in inventory form intra-entity transfers is not deferred because separate returns are being filed. Intra-entity dividends paid are not taxable because the parties still qualify as an affiliated group even though separate returns are being filed. Learning Objective: 07-06 Topic: Tax calculation for separate returns Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 07-19 117. How much will the consolidated group save if it decides to file a consolidated income tax return? Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Answer:

(Also computed as $150,000 intra-entity gross profit × 30% tax rate) Learning Objective: 07-05 Learning Objective: 07-06 Topic: Tax calculation for separate returns Topic: Tax calculation for consolidated returns Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 118. For each of the following situations, select the best answer concerning accounting for income taxes in combinations: (A) May file a consolidated income tax return. (B) May not a file consolidated income tax return. (C) Must file a consolidated income tax return. _____1. Parent company owns 85% of the voting stock of the subsidiary, and there are significant intraentity transfers. _____2. Subsidiary is a foreign corporation. _____3. Parent company owns 90% of the voting stock of the subsidiary, but there are no intra-entity transfers of inventory. _____4. Parent company owns 75% of the voting stock of the subsidiary but there are no intra-entity transfers of inventory. _____5. Parent company owns 90% of the voting stock of the subsidiary, and there are intra-entity transfers of inventory. _____6. Parent company owns 75% of the voting stock of the subsidiary and there are intra-entity transfers of inventory. Answer: (1) A; (2) B; (3) A; (4) B; (5) A; (6) B Learning Objective: 07-04 Topic: Income tax criteria for an affiliated group Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

File: Chapter 08 - Segment and Interim Reporting Multiple Choice: [QUESTION] 1. Generally accepted accounting principles require a U.S. corporation to disclose the following disaggregated information for each operating segment, except: A) Revenues from external customers. B) Unusual items. C) Cost of goods sold. D) Depreciation expense. E) Intersegment revenues. Answer: C Learning Objective: 08-03 Topic: Reportable segments―Disclosure requirements Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 2. Which tests must a company use to determine which operating segments require separate disclosure? A) Revenue test and asset test. B) Revenue test, profit or loss test, and asset test. C) Revenue test and profit or loss test. D) Profit or loss test and asset test. E) Revenue test, asset test, and liability test. Answer: B Learning Objective: 08-02 Topic: Reportable segment―Any of the 10-percent tests Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 3. Coulanger Corp. identified four operating segments: A, B, C, and D. Segment A met the revenue test for identifying reportable segments while Segment C met the revenue test, profit or loss test, and asset test. Segment B and Segment D did not meet any of these tests. Which of these segments must be disclosed separately?

A) B) C) D) E)

Segment A Yes Yes Yes No No

Segment B Yes Yes No Yes No

Segment C No Yes Yes No Yes

Segment D No Yes No Yes Yes

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Answer: C Learning Objective: 08-02 Topic: Reportable segment―Any of the 10-percent tests Difficulty: 1 Easy Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 4. Kaycee Corporation's revenues for the year ended December 31, 2017, were as follows: Consolidated Revenue per the Income Statement: $1,200,000 Division 1 Intersegment Sales: $180,000 Division 2 Intersegment Sales: $60,000 For purposes of the Revenue Test, what amount will be used as the benchmark for determining whether a segment is reportable? A) $ 24,000. B) $120,000. C) $138,000. D) $144,000. E) $ 0. Answer: D Learning Objective: 08-02 Topic: Reportable segment―Revenue test Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Consolidated Revenue $1,200,000 + Upstream I/E Sales $180,000 + Downstream I/E Sales $60,000 = $1,440,000 × 10% = $144,000 REFERENCE: 08-01 Natarajan, Inc. had the following operating segments, with the indicated amounts of segment revenues and segment expenses:

Segment A B C D E

External Revenues $ 7,500,000 2,900,000 700,000 4,000,000 1,600,000

Intersegment Sales $ 600,000 1,000,000 1,300,000 250,000 800,000

Segment Expenses $ 6,300,000 4,300,000 2,200,000 4,100,000 2,700,000

[QUESTION] REFER TO: 08-01 5. According to the revenue test, which segments would require disaggregation? A) A, B, D, and E. B) A and B. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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C) B and C. D) A, B, and D. E) C, D, and E. Answer: A Learning Objective: 08-02 Topic: Reportable segment―Revenue test Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: (Total External Rev + Total I/E Sales) × 10% = Threshold for Segment Reporting [QUESTION] REFER TO: 08-01 6. According to the profit or loss test, which segments would require disaggregation? A) A, B, D, and E. B) A, B, C, and E. C) A, B, and D. D) A and D. E) A only. Answer: B Learning Objective: 08-02 Topic: Reportable segment―Profit or loss test Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 08-01 7. For purposes of the profit or loss test, segment C's operating profit or (loss) is A) $1,300,000. B) $ 700,000. C) $2,000,000. D) $ 200,000. E) $ (200,000.) Answer: E Learning Objective: 08-02 Topic: Reportable segment―Profit or loss test Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: External Rev $700,000 + I/E Sales $1,300,000 = Total Segment Sales $2,000,000 – Segment Expenses $2,200,000 = $200,000 Segment Loss [QUESTION] REFER TO: 08-01 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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8. When totaling the revenues to use as the basis for the 75% rule, what is the 75% hurdle that must be exceeded by the revenues of the reportable segments? A) $ 1,670,000. B) $12,525,000. C) $15,487,500. D) $16,700,000. E) $20,650,000. Answer: B Learning Objective: 08-02 Topic: Reportable segments―Other guidelines Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: External Rev $16,700,000 × .75 = $12,525,000 [QUESTION] 9. When defining a reportable segment, which of the following conditions would be sufficient to allow a company to combine two operating segments for purposes of testing? A) The products sold by each segment are produced in the same plant. B) Both segments have several customers in common. C) The segments may sell different products, but they have a similar economic environment and similar business activities. D) Both segments are required to adhere to U.S. Department of Labor regulations regarding immigration laws. E) Both segments are owned by the same parent company. Answer: C Learning Objective: 08-02 Topic: Reportable segment―Any of the 10-percent tests Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement REFERENCE: 08-02 The Fratilo Co. had three operating segments with the following information:

Sales to outsiders Intersegment revenues

Pens $ 11,200 840

Pencils $ 5,600 1,400

Erasers $ 8,400 1,960

In addition, revenues generated at corporate headquarters are $1,400. [QUESTION] REFER TO: 08-02 10. Combined segment revenues are calculated to be A) $29,400. B) $25,200. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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C) $26,600. D) $28,000. E) $27,300. Answer: A Learning Objective: 08-02 Topic: Reportable segment―Revenue test Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: (Total External Rev $11,200 + $5,600 + $8,400) + (Total I/E Sales $840 + $1,400 + $1,960) = $29,400 Combined Segment Revenues [QUESTION] REFER TO: 08-02 11. What is the minimum amount of revenue that each of these segments must earn to be considered separately reportable? A) $2,730. B) $2,660. C) $2,800. D) $2,940. E) $2,520. Answer: D Learning Objective: 08-02 Topic: Reportable segment―Revenue test Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Combined Segment Revenues $29,400 × 10% = $2,940 Minimum Amount of Segment Revenue [QUESTION] 12. The Rivers Co. had four separate operating segments:

Sales to outsiders Intersegment revenue transfers

Blueberries $ 172,200

Cherries $ 113,400

Gooseberries $ 133,000

Grapes $ 107,800

43,400

36,400

18,200

25,200

What amount of revenues must be generated from one customer before that party must be identified as a major customer? A) $57,680. B) $64,960. C) $52,640. D) $78,960. E) $63,560. Answer: C Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Learning Objective: 08-05 Topic: Entitywide information―Major customers Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Total External Sales Revenue $172,200 + $113,400 + $133,000 + $107,800 = $526,400 × 10% = $52,640 [QUESTION] 13. Which one of the following items must be disclosed for all reportable operating segments in the notes to financial statements? (I.) Revenue from external customers. (II.) Total Segment Assets (III.) Revenues from foreign customers, identified by country. A) I, II, and III B) I and III only C) II and III only D) I and II only E) There is no requirement of information to disclose for operating segments. Answer: D Learning Objective: 08-03 Topic: Reportable segments―Disclosure requirements Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 14. Kurves Corp. had six different operating segments reporting the following operating profit and loss figures:

Segment A B C D E F

Profit or (Loss) $ 112,000 (196,000) 1,316,000 (616,000) (126,000) (140,000)

Which one of the following statements is true? A) Segment A is a reportable segment based on this test. B) Segment B is not a reportable segment based on this test. C) Segment E is a reportable segment based on this test. D) Segment C is not a reportable segment based on this test. E) Segment D is a reportable segment based on this test. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Answer: E Learning Objective: 08-02 Topic: Reportable segment―Profit or loss test Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Total Profitable Segments Amount = $1,428,000 × 10% = $142,800 Segment Profit or Loss Threshold REFERENCE: 08-03 Retro Corp. was engaged solely in manufacturing operations. The following data pertain to the operating segments for 2017: Operating Segment A B C D E F

Total Revenue $ 14,000,000 11,200,000 8,400,000 4,200,000 5,950,000 2,100,000 $ 45,850,000

Profit $ 2,450,000 1,960,000 1,680,000 770,000 945,000 315,000 $ 8,120,000

Assets at 12/31/17 $ 28,000,000 24,500,000 17,500,000 10,500,000 9,800,000 4,200,000 $ 94,500,000

[QUESTION] REFER TO: 08-03 15. What is the minimum amount of revenue that each of these segments must earn to be considered separately reportable? A) $4,343,684. B) $4,826,316. C) $5,067,632. D) $4,585,000. E) $4,705,658. Answer: D Learning Objective: 08-02 Topic: Reportable segment―Revenue test Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $45,850,000 × 10% = $4,585,000

[QUESTION] REFER TO: 08-03 16. What is the minimum amount of profit or loss that each of these segments must earn to be Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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considered separately reportable? A) $769,263. B) $812,000. C) $854,737. D) $897,000. E) $833,368. Answer: B Learning Objective: 08-02 Topic: Reportable segment―Profit or loss test Difficulty:1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $8,120,000 × 10% = $812,000 [QUESTION] REFER TO: 08-03 17. What is the minimum amount of assets that each of these segments must own to be considered separately reportable? A) $ 9,450,000. B) $ 8,624,272. C) $10,643,000. D) $12,936,408. E) $10,413,000. Answer: A Learning Objective: 08-02 Topic: Reportable segment―Asset test Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $94,500,000 × 10% = $9,450,000 [QUESTION] 18. Which of the following statements is true regarding the identifying factors used to determine which components of a business are operating segments? A) Operating segments are components of an enterprise that engage in business activities and from which it only recognizes revenues. B) The corporate controller reviews each operating segment’s operating results to assess performance. C) A component may be classified as an operating segment without revenues assuming that it generates a material level of expense. D) An organizational unit can be an operating segment even if all of its revenues or expenses result from transactions with other segments. E) All parts of a company must be included in an operating segment. Answer: D Learning Objective: 08-01 Topic: Determine operating segments Difficulty: 2 Medium Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 19. A company that generates reports by both geographic region and product line must consider additional criteria in identifying operating segments when there are multiple sets of reports. Which of the following statement(s) is correct? (I.) An operating segment has a segment manager who is directly accountable to the chief operating decision maker for its financial performance. (II.) If more than one set of organizational units exists, each organizational unit is considered an operating segment even if there is only one set for which segment managers are held responsible. (III.) If segment managers exist for two or more overlapping sets of organizational units, the nature of the business activities must be considered. A) I, II, and III. B) I and III only. C) I and II only. D) II and III only. E) None of the above. Answer: B Learning Objective: 08-01 Topic: Determine operating segments Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 20. Which of the following is not one of the criteria management should consider in determining whether business activities and environments of an operating segment are similar? A) The geographical location of the operations. B) The nature of the production process. C) The distribution methods. D) The nature of the regulatory environment, if applicable. E) The type or class of customer. Answer: A Learning Objective: 08-02 Topic: Reportable segment―Any of the 10-percent tests Difficulty:1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 21. The Hardware operating segment of Bloom Corporation has the following revenues for the year ended December 31, 2018: Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Sales to outsiders Intersegment transfers Interest revenue – outsiders Interest revenue – intersegment loans

$ 417,000 23,000 7,000 33,000

For purposes of the revenue test, what amount will be used as total revenues of the Hardware operating segment? A) $417,000. B) $440,000. C) $424,000. D) $460,000. E) $480,000. Answer: E Learning Objective: 08-02 Topic: Reportable segment―Revenue test Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $417,000 + $23,000 + $7,000 + $33,000 = $480,000 [QUESTION] 22. Which of the following statements is false concerning the number of operating segments that should be disclosed? A) At least 75 percent of total company sales made to outsiders should be presented. B) Even though an operating segment has been reportable in the past and is of continuing significance, it must meet at least one of the three reporting tests to report separately in the current year. C) If the 75 percent rule is not met by the results of applying all three reporting tests, additional segments must be disclosed separately despite their failure to satisfy even one of the three quantitative thresholds. D) If an operating segment qualifies for disclosure in the current year, prior period segment data presented for comparative purposes must be restated to reflect the newly reportable segment as a separate segment. E) The practical limit to the number of operating segments is 10. Answer: B Learning Objective: 08-02 Topic: Reportable segments―Other guidelines Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 23. Whitley Corporation identified four operating segments: Automotive, Electrical, Lawn Equipment, and Sporting Goods. Automotive met the revenue test and the profit or loss test. Electrical met all three tests. Lawn Equipment met only the asset test. Sporting Goods did not meet any of the three tests. Which of these segments must be disclosed separately? Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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A) B) C) D) E)

Automotive Yes No Yes Yes No

Electrical Yes Yes Yes Yes No

Lawn Equipment Yes No Yes No No

Sporting Goods Yes No No No Yes

Answer: C Learning Objective: 08-02 Topic: Reportable segment―Any of the 10-percent tests Difficulty: 1 Easy Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 24. Which one of the following items is not required to be disclosed for each operating segment? A) Factors used to identify operating segments. B) Products and services from which each segment derives its revenues. C) Revenues from external customers. D) Factors used to allocate company-wide expenses. E) Revenues from transactions with other operating segments. Answer: D Learning Objective: 08-03 Topic: Reportable segments―Disclosure requirements Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 25. The following items are required to be disclosed for each operating segment except: A) Factors used to allocate company-wide pension expense. B) Revenues from transactions with other operating segments. C) Interest revenue and interest expense. D) Depreciation, depletion, and amortization expense. E) Revenues from external customers. Answer: A Learning Objective: 08-03 Topic: Reportable segments―Disclosure requirements Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement REFERENCE: 08-04 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Dean Hardware, Inc. is comprised of five operating segments. Information about each of these segments is as follows (in thousands):

Sales to outsiders Intersegment transfers Interest revenue – outsiders Interest revenue – intersegment Operating expenses – outsiders Operating expenses – intersegment Interest expense Income taxes Tangible assets Intangible assets Intersegment receivables

Rakes $ 94 4 2 116 2 (4) 18 8

Pails $506 26 6 414 20 12 10 116 6

Shovels $44 14 4 40 6 4 12 4 -

Hardware $122 30 8 102 16 2 6 12 8 -

Accessories $28 24 22 26 22 22 2 8 6 -

[QUESTION] REFER TO: 08-04 26. What is the total amount of revenues in applying the revenue test? A) $794. B) $808. C) $892. D) $906. E) $934. Answer: E Learning Objective: 08-02 Topic: Reportable segment―Revenue test Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Sales to Outsiders $794 + I/E Transfers $98 + Interest Rev Out $14 + Interest Rev In $28 = $934 Total Revenues for Test [QUESTION] REFER TO: 08-04 27. Which operating segments are reportable under the revenue test? A) Pails and Hardware. B) Rakes, Pails, and Hardware. C) Rakes, Hardware, and Accessories. D) Rakes and Pails. E) Rakes and Hardware. Answer: B Learning Objective: 08-02 Topic: Reportable segment―Revenue test Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: FN Measurement Feedback: $934,000 × 10% = $93,400 [QUESTION] REFER TO: 08-04 28. In applying the profit or loss test, what is the minimum amount an operating segment must have in order to meet the profit or loss test for a reportable segment? A) $ 8.2. B) $ 9.0. C) $10.4. D) $13.0. E) $82.0. Answer: D Learning Objective: 08-02 Topic: Reportable segment―Profit or loss test Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Pails $82 + Shovels $12 + Hardware $34 + Acc. $2 = Total Profit $130 × 10% = $13 Threshold for Segment Profit/Loss [QUESTION] REFER TO: 08-04 29. Which operating segments are reportable under the profit or loss test? A) Rakes, Pails, and Shovels. B) Rakes, Pails, Shovels, and Hardware. C) Rakes, Pails, and Hardware. D) Rakes, Pails, Shovels, Hardware, and Accessories. E) Pails and Hardware. Answer: C Learning Objective: 08-02 Topic: Reportable segment―Profit or loss test Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Rakes’ Loss is Excluded from Total Profitable Segments Calculation [QUESTION] REFER TO: 08-04 30. In applying the asset test, what is the minimum amount an operating segment must have in order to meet the asset test for a reportable segment? A) $12.5. B) $15.2. C) $17.2. D) $18.4. E) $19.8. Answer: E Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Learning Objective: 08-02 Topic: Reportable segment―Asset test Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Rakes $26 + Pails $122 + Shovels $16 + Hardware $20 + Acc. $14 = Total Assets $198 × 10% = $19.8 Minimum for Reporting [QUESTION] REFER TO: 08-04 31. Which operating segments are reportable under the asset test? A) None. B) Pails. C) Rakes, Pails, and Shovels. D) Rakes and Hardware. E) Rakes, Pails, and Hardware. Answer: E Learning Objective: 08-02 Topic: Reportable segment―Asset test Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: All Segments with Assets > $19.8 REFERENCE: 08-05 Schilling, Inc. has three operating segments with the following information:

[QUESTION] REFER TO: 08-05 32. What is the minimum amount of revenue an operating segment must have to be considered a reportable segment? A) $12,000. B) $15,000. C) $15,500. D) $16,200. E) $16,700. Answer: D Learning Objective: 08-02 Topic: Reportable segment―Revenue test Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: External Rev ($40,000 + $50,000 + $60,000) + I/E Sales ($2,000 + $10,000) = $162,000 × 10% = $16,200 [QUESTION] REFER TO: 08-05 33. According to the revenue test, which segment(s) are separately reportable? A) Silver only. B) Crystal and Silver. C) China and Crystal. D) China and Silver. E) China, Crystal, and Silver. Answer: E Learning Objective: 08-02 Topic: Reportable segment―Revenue test Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: All Segments with Revenues > $16,200 REFERENCE: 08-06 Peterson Corporation has three operating segments with the following information:

[QUESTION] REFER TO: 08-06 34. What is the minimum amount of revenue an operating segment must have to be considered a reportable segment? A) $3,900. B) $4,000. C) $4,100. D) $4,200. E) $4,400. Answer: D Learning Objective: 08-02 Topic: Reportable segment―Revenue test Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: External Rev ($25,000 + $13,000 + $1,000) + I/E Sales ($1,000 + $2,000) = $42,000 × 10% = $4,200

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 08-06 35. According to the revenue test, which segment(s) are separately reportable? A) Mowers only. B) Mowers and Edgers. C) Mowers and Weedeaters. D) Edgers and Weedeaters. E) Mowers, Edgers, and Weedeaters. Answer: B Learning Objective: 08-02 Topic: Reportable segment―Revenue test Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: All Segments with Revenues > $4,200 [QUESTION] REFER TO: 08-06 36. What amount of revenue must be generated from one customer before such party must be identified as a major customer? A) $3,900. B) $4,000. C) $4,100. D) $4,200. E) $4,400. Answer: A Learning Objective: 08-05 Topic: Entitywide information―Major customers Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: External Rev Only ($25,000 + $13,000 + $1,000) = $39,000 × 10% = $3,900 REFERENCE: 08-07 Elektronix, Inc. has three operating segments with the following information:

[QUESTION] REFER TO: 08-07 37. What is the minimum amount of revenue an operating segment must have to be considered a reportable segment? Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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A) $650,000. B) $660,000. C) $670,000. D) $680,000. E) $690,000. Answer: B Learning Objective: 08-02 Topic: Reportable segment―Revenue test Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement

Feedback: External Rev ($4,000,000 + $500,000 + $2,000,000) + I/E Transfers ($100,000) = $6,600,000 × 10% = $660,000 [QUESTION] REFER TO: 08-07 38. What is the operating profit or loss for the VCRs segment? A) $121,000 profit. B) $121,000 loss. C) $124,000 profit. D) $124,000 loss. E) $500,000 profit. Answer: D Learning Objective: 08-02 Topic: Reportable segment―Profit or loss test Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: VCR Segment Revenue $500,000 – VCR Segment Expenses $624,000 = ($124,000) Loss [QUESTION] REFER TO: 08-07 39. What is the minimum amount of operating profit or loss an operating segment must have to be considered a reportable segment? A) $124,000. B) $127,600. C) $100,000. D) $130,000. E) $140,000. Answer: E Learning Objective: 08-02 Topic: Reportable segment―Profit or loss test Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: FN Measurement Feedback: DVDs $1,000,000 + MP3s $400,000 = Total Profitable Segments $1,400,000 × 10% = $140,000 Threshold for Segment Profit/Loss Reporting [QUESTION] REFER TO: 08-07 40. What is the minimum amount of assets an operating segment must have to be considered a reportable segment? A) $ 1,400,000. B) $ 2,500,000. C) $ 4,100,000. D) $ 5,000,000. E) $25,000,000. Answer: B Learning Objective: 08-02 Topic: Reportable segment―Asset test Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $14,000,000 + $6,000,000 + $5,000,000 = $25,000,000 × 10% = $2,500,000 Segment Assets [QUESTION] REFER TO: 08-07 41. Which operating segments are separately reportable under the revenue test? A) DVDs only. B) DVDs and MP3s. C) DVDs and VCRs. D) VCRs and MP3s. E) DVDs, VCRs, and MP3s. Answer: B Learning Objective: 08-02 Topic: Reportable segment―Revenue test Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: All Segments with Revenues > $660,000 [QUESTION] REFER TO: 08-07 42. Which operating segments are separately reportable under the operating profit or loss test? A) DVDs only. B) DVDs and MP3s. C) DVDs and VCRs. D) VCRs and MP3s. E) DVDs, VCRs, and MP3s. Answer: B Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Learning Objective: 08-02 Topic: Reportable segment―Profit or loss test Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: All Segments with Profits/Losses > $140,000 Threshold for Segment Profit/Loss Reporting [QUESTION] REFER TO: 08-07 43. Which operating segments are separately reportable under the asset test? A) DVDs only. B) DVDs and MP3s. C) DVDs and VCRs. D) VCRs and MP3s. E) DVDs, VCRs, and MP3s. Answer: E Learning Objective: 08-02 Topic: Reportable segment―Asset test Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: All Segments with Assets > $2,500,000 Segment Assets [QUESTION] Refer to: 08-07 44. Which of the segments are separately reportable? A) DVDs only. B) DVDs and MP3s. C) DVDs and VCRs. D) VCRs and MP3s. E) DVDs, VCRs, and MP3s. Answer: E Learning Objective: 08-02 Topic: Reportable segment―Any of the 10-percent tests Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 45. Which of the following statements is true according to U.S. GAAP regarding operating segment disclosure? A) The measurement of segment profit and loss disclosure need not be similar to the measurement provided to the chief operating decision maker. B) Segment information does not have to be in accordance with generally accepted accounting Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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principles. C) Disclosure of a major customer’s identity is required. D) Geographic area information must be disclosed in interim financial statements. E) Immaterial items must be disclosed. Answer: B Learning Objective: 08-03 Topic: Reportable segments―Disclosure requirements Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 46. Which of the following is a criterion for determining whether an operating segment is separately reportable? A) An operating segment’s assets are 10 percent or more of combined segment assets. B) An operating segment’s assets are 10 percent or more of consolidated assets. C) An operating segment’s assets are 10 percent or more of combined segment liabilities. D) An operating segment’s assets are 10 percent or more of consolidated liabilities. E) An operating segment’s assets are 10 percent or more of corporate assets. Answer: A Learning Objective: 08-02 Topic: Reportable segment―Asset test Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 47. Which of the following operating segment disclosures is not required by U.S. GAAP? A) Interest expense. B) Intersegment sales. C) Unusual items. D) Depletion. E) Liabilities. Answer: E Learning Objective: 08-03 Topic: Reportable segments―Disclosure requirements Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 48. Vapor Corporation has a fan products operating segment. With respect to the following, which is Vapor not required to report for this segment? A) Depreciation expense. B) Amortization expense. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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C) Research and development expense. D) Interest expense. E) Interest income. Answer: C Learning Objective: 08-03 Topic: Reportable segments―Disclosure requirements Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Reporting [QUESTION] 49. Which of the following must be disclosed by a geographic segment according U.S. GAAP? A) Operating profit or loss. B) Gross profit. C) Total assets. D) Revenues from external customers. E) Revenues from internal customers. Answer: D Learning Objective: 08-04 Topic: Entitywide information―Geographic areas Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 50. Which of the following is not true for an operating segment according to U.S. GAAP? A) Discrete financial information generated by the internal accounting system is available. B) The segment recognizes revenues and incurs expenses. C) The segment is regularly reviewed by a chief decision maker to assess performance decisions. D) The segment is regularly reviewed by a chief decision maker to make resource allocations. E) An organizational unit cannot be an operating segment if all of its operating transactions are only with other segments of the organization. Answer: E Learning Objective: 08-01 Topic: Determine operating segments Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 51. Which of the following statements is true? A) In determining reportable segments, two tests are applied and both must be met. B) In determining reportable segments, three tests are applied and all three must be met. C) In determining reportable segments, two tests are applied and only one must be met. D) In determining reportable segments, three tests are applied and only one must be met. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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E) In determining reportable segments, at least 80% of the revenues from external customers must be reported. Answer: D Learning Objective: 08-02 Topic: Reportable segment―Any of the 10-percent tests Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Reporting [QUESTION] 52. According to U.S. GAAP, which of the following would be an acceptable grouping by a U.S. company for presentation of information by geographic area? A) France, Germany, All Other Countries. B) United States, Europe, Canada. C) United States, Africa, Europe, Asia. D) United States, Canada, Mexico, Germany. E) North America, Spain, All Other Countries. Answer: D Learning Objective: 08-04 Topic: Entitywide information―Geographic areas Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 53. Which of the following would be an acceptable grouping for a U.S. company to provide information by geographic area? A) United States, All Other Countries. B) United States, Europe, Taiwan. C) United States, Asia, Germany. D) United States, Central America, Mexico, Germany. E) South America, Spain, All Other Countries. Answer: A Learning Objective: 08-04 Topic: Entitywide information―Geographic areas Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 54. What information does U.S. GAAP require to be disclosed for a major customer? A) The identity of the customer. B) The operating segment reporting sales to the customer. C) The geographic area of the customer. D) The specific products or services purchased by the customer. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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E) The length of time the customer has been a customer of the company. Answer: B Learning Objective: 08-05 Topic: Entitywide information―Major customers Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 55. How should revenues be recognized in interim periods? A) In the same way as they are recognized on an annual basis. B) On the cash basis. C) On an annualized basis. D) On a seasonal basis. E) There are no revenues recognized in interim periods. Answer: A Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 56. Which of the following is not correct regarding inventory procedures reported in an interim financial statement? A) LIFO liquidations a company expects to be replaced by year-end should be recorded in cost of goods sold, quantified at expected replacement cost rather than original LIFO cost. B) Lower-of-cost-or-net realizable value adjustments are not made for the interim period if they are expected to reverse by the end of the year. C) Variances in a standard costing system are reported at the end of the interim period unless they are expected to be absorbed by year-end. D) FIFO is remeasured using the LIFO method in an interim financial statement. E) LIFO liquidations not expected to be replaced by the end of the year are reflected in cost of goods sold at original LIFO cost. Answer: D Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement REFERENCE: 08-08 Cement Company, Inc. began the first quarter with 1,000 units of inventory costing $25 per unit. During the first quarter, 3,000 units were purchased at a cost of $40 per unit, and sales of 3,400 units at $65 per units were made. During the second quarter, the company expects to replace the Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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units of beginning inventory sold at a cost of $45 per unit. Cement Company uses the LIFO method to account for inventory. [QUESTION] REFER TO: 08-08 57. What is the correct journal entry to record cost of goods sold at the end of the first quarter? A) B) C)

D)

E)

Inventory Cost of Goods Sold Inventory Excess of replacement cost over historical cost of LIFO liquidation Cost of goods sold Inventory Excess of replacement cost over historical cost of LIFO liquidation Cost of goods sold Excess of replacement cost over historical cost of LIFO liquidation Inventory No journal entry is required

8,000 8,000 8,000 8,000 138,000 130,000 8,000 130,000 8,000 138,000

Answer: C Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 3000 × $40 + 400 × $45 = $138,000 COGS [QUESTION] REFER TO: 08-08 58. The amount of gross profit for the first quarter is: A) $ 83,000 B) $ 87,000 C) $ 90,000 D) $221,000 E) $250,000 Answer: A Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: Rev (3,400 × $65) $221,000 – COGS (3000 × $40 + 400 × $45) $138,000 = $83,000 Gross Profit [QUESTION] Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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59. Betsy Kirkland, Inc. incurred a flood loss during the first quarter of 2018 that is deemed both unusual and not expected to recur again in the near future. The loss is considered immaterial to the twelve-month period, but is material in amount relative to the first quarter. The proper accounting treatment in the first quarter interim statement is to: A) Ignore the loss. B) Record the loss in the first quarter as an unusual loss, net of income taxes. C) Record one-fourth of the loss in the first quarter as an unusual loss, net of income taxes. D) Ignore the loss in the first quarter, and record it in the annual statement only. E) Record the loss in the first quarter, but not as an unusual loss, and disclose the loss in a separate note or in the income statement as a separate line item. Answer: A Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 60. How should a change from one generally accepted accounting principle to another accepted principle be handled in a third-quarter income statement? A) Retrospectively restate the first-quarter income statement, net of income taxes, as though the change occurred at the beginning of the year. B) Postpone recording of the change to the annual income statement. C) Record the change in the third-quarter income statement, net of income taxes. D) Adjust financial statements for each prior period presented to reflect the effects of the new principle in those reported periods. E) These changes are prohibited by GAAP. Answer: D Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 61. Which of the following is not a required disclosure in an interim financial report? A) Sales or gross revenues. B) Provision for income taxes. C) Cash flow information. D) Changes in accounting principles. E) Seasonal revenues and expenses. Answer: C Learning Objective: 08-07 Topic: Interim reporting―Disclosures Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 62. Which of the following is not a required disclosure in an interim financial report? A) Net income. B) Earnings per share. C) Gross profit. D) Significant changes in estimates or provisions for income taxes. E) Disposal of a component, net of income taxes. Answer: C Learning Objective: 08-07 Topic: Interim reporting―Disclosures Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 63. Which of the following items of information are required to be included in interim reports for each operating segment? (I.) Revenues from external customers (II.) Segment profit or loss (III.) Reconciliation of segment profit or loss to the enterprise's total income before taxes (IV.) Intersegment revenues A) I and III only. B) I and II only. C) I, II and III. D) II and III only. E) I, II, III, and IV. Answer: E Learning Objective: 08-07 Topic: Interim reporting―Disclosures Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 64. If a company does not include a balance sheet and a statement of cash flows in an interim report, then which of the following items must be separately disclosed for that interim period? A) The balance of long-term liabilities. B) Net working capital. C) The change in stockholders’equity. D) The balance of cash and cash equivalents. E) The balance of retained earnings. Answer: C Learning Objective: 08-07 Topic: Interim reporting―Disclosures Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 65. What are the two approaches that can be followed in preparing interim reports? A) Indiscrete and terminal. B) Discrete and terminal. C) Metric and integral. D) Discrete and integral. E) Discrete and metric. Answer: D Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 66. Which of the following is reported for interim financial reports using the discrete approach? A) Income tax expense. B) Seasonal items. C) Change in accounting principle. D) Property tax expense. E) Discontinued operations. Answer: E Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 67. Which of the following is reported for interim financial reports using the integral approach? A) Bonus expense. B) Gross profit. C) Cash basis accounting. D) Current market value. E) Segment level management compensation. Answer: A Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 3 Hard Blooms: Analyze AACSB: Analytical Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 68. How should seasonal revenues be reported in an interim report? A) Disclose the seasonal nature of business operations, and include a pro forma report for the next 12-month period. B) Disclose the seasonal nature of business operations but do not include other reports supplemental to the interim report. C) Disclose the seasonal nature of business operations, and consider a report for the 12-month period ended at the interim date to supplement the interim report. D) The financial statements should be adjusted to reflect the assumption that no seasonal revenues could be recognized. E) Seasonal revenues have no particular reporting requirement. Answer: C Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 69. According to authoritative accounting literature, which of the following are required to be disclosed in interim reports? A) Cash flows from investing activities. B) Change in cash. C) Total current liabilities. D) Total assets. E) Gross revenues. Answer: E Learning Objective: 08-07 Topic: Interim reporting―Disclosures Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 70. All of the following are required to be reported in interim financial statements with respect to material operating segments, except: A) Segment assets. B) Segment revenues from external customers. C) Intersegment revenues. D) Segment profit or loss. E) Reconciliation of segment profit or loss to total income before taxes. Answer: A Learning Objective: 08-07 Topic: Interim reporting―Disclosures Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 71. What is the appropriate treatment in an interim financial report for inventory with a net realizable value below cost? A) The loss should always be recorded in the interim period in which net realizable value drops below cost. B) The loss should be recorded in the interim period in which net realizable value drops below cost if the loss is considered temporary. C) The loss should be recorded in the interim period in which net realizable value drops below cost if the loss is considered permanent. D) The loss should be ignored for interim reporting purposes. E) There is no loss to report. Answer: C Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 72. What is the appropriate treatment in an interim financial report for inventory that has cost below net realizable value? A) The loss should always be recorded in the interim period in which cost drops below net realizable value. B) The loss should be recorded in the interim period in which cost drops below net realizable value if the loss is considered temporary. C) The loss should be recorded in the interim period in which cost drops below net realizable value if the loss is considered permanent. D) The loss should be ignored for interim reporting purposes. E) There is no loss to report. Answer: E Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 73. What is the appropriate treatment in an interim financial report for a LIFO liquidation? A) The LIFO liquidation is always ignored for interim reporting. B) The LIFO liquidation should always be reflected in gross profit on an interim income statement. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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C) The LIFO liquidation should always result in replacement cost valuation of ending inventory on the interim balance sheet and the interim income statement. D) The LIFO liquidation should always result in replacement cost valuation of ending inventory on the interim income statement but not the interim balance sheet. E) The LIFO liquidation should only be reflected in gross profit on an interim income statement if it is determined that it will not be replaced by year-end. Answer: E Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 74. Which of the following statements is true regarding the reporting of revenues in an interim report? A) Revenues should be recognized on the income tax basis for interim reporting. B) Revenues should be recognized in interim periods in the same way as they are on an annual basis. C) Projected losses on long-term contracts should be deferred to the annual report. D) The percentage-of-completion method of reporting long-term construction projects is not an acceptable method for interim reporting. E) Revenues should be recognized on the cash basis of accounting for interim reporting. Answer: B Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 75. What is the appropriate treatment in an interim financial report for variances arising from the use of a standard costing system? A) The variances are always ignored for interim reporting. B) The variances should always be reflected in gross profit on an interim income statement. C) The variances expected to be absorbed by year-end should not be reflected in the interim statement. D) The variances should always be reflected in the interim income statement but not the interim balance sheet. E) The variances should only be reflected in the interim balance sheet. Answer: C Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: FN Measurement [QUESTION] 76. Which of the following costs require similar treatment to Property Tax Expense in an interim financial report? 1) Annual major repairs. 2) Advertising expense. 3) Bonus expense, if estimable. 4) Quantity discounts based on annual sales. A) 1 and 2 B) 1, 2, and 3 C) 1, 2, and 4 D) 2, 3, and 4 E) 1, 2, 3, and 4 Answer: E Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 77. How should discontinued operations be reported in an interim report? A) Include in the gain or loss section of the interim report and include the tax with all other income tax. B) Include as discontinued operations, net of tax, if the component of the business is classified as held-for-sale or is discontinued in the interim period. C) Include net of the tax estimated specifically for the discontinued operations. D) Include with other operations in the interim period but include the amount net of its specific tax. E) Include with other operations in interim periods until the annual financial statement is prepared. Answer: B Learning Objective: 08-07 Topic: Interim reporting―Accounting treatment Difficulty: 3 Hard Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement REFERENCE: 08-09 Provo, Inc. has an estimated annual tax rate of 35 percent in the first quarter of 2018. Pretax income for the first quarter was $300,000. At the end of the second quarter of 2018, Provo expects the annual tax rate to be 32 percent because of anticipated tax credits. Pretax income for the second quarter was $350,000. Assume no items in either quarter requiring the net-of-tax presentation. [QUESTION] Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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REFER TO: 08-09 78. How much income tax expense is recognized in the first quarter of 2018? A) $ 0. B) $ 26,250. C) $ 96,000. D) $105,000. E) $112,000. Answer: D Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 1st Qtr Income $300,000 × .35 = $105,000 1st Qtr Tax Expense Reported [QUESTION] REFER TO: 08-09 79. How much income tax expense is recognized in the second quarter of 2018? A) $103,000. B) $104,000. C) $112,000. D) $122,500. E) $208,000. Answer: A Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 2nd Qtr Income $350,000 × .32 = $112,000 – 1st Qtr Adjustment ($300,000 × .03) $9,000 = $103,000 2nd Qtr Tax Expense Reported REFERENCE: 08-10 Baker Corporation changed from the LIFO method to the FIFO method for inventory valuation during 2018. Baker has an effective income tax rate of 30 percent and 100,000 shares of common stock issued and outstanding. The following additional information is available: Cost of goods sold Cost of goods sold FIFO LIFO Prior to 2018 $ 40,000 $75,000 1st quarter 2018 $ 10,000 $18,000 Net income before effect of accounting change: 1st quarter 2017 $300,000 1st quarter 2018 $500,000

Difference $35,000 $ 8,000

After-tax Difference $22,750 $ 5,200

[QUESTION] Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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REFER TO: 08-10 80. Assuming Baker makes the change in the first quarter of 2018, how much is reported as net income for the first quarter of 2018? A) $492,000. B) $494,800. C) $500,000. D) $505,200. E) $527,950. Answer: D Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 1sr Qtr 2018 Income $500,000 + Accounting Change Effect (net of tax) $5,200 = $505,200 1st Qtr 2018 Net Income [QUESTION] REFER TO: 08-10 81. Assuming Baker makes the change in the first quarter of 2018, compute net income per common share. A) $4.92. B) $4.95. C) $5.00. D) $5.05. E) $5.28. Answer: D Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: $505,200 1st Qtr Income / Common Stock Shares Outstanding 100,000 = $5.05 EPS [QUESTION] REFER TO: 08-10 82. Assuming Baker makes the change in the first quarter of 2017, how much is reported as net income for the first quarter of 2017? A) $300,000. B) $322,750. C) $335,000. D) $265,000. E) $277,250. Answer: B Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 2 Medium Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: 1st Qtr 2017 Income $300,000 + Accounting Change Effect (net of tax) $22,750 = $322,750 1st Qtr 2017 Net Income [QUESTION] REFER TO: 08-10 83. Assuming Baker makes the change in the first quarter of 2018 and that $400,000 net income is earned during the second quarter, how much is reported as net income for the second quarter of 2018? A) $400,000. B) $405,200. C) $427,950. D) $894,850. E) $905,200. Answer: A Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement Feedback: No Effects of the 1st Qtr Change is Recorded in the 2nd Qtr -- $400,000 [QUESTION] 84. For companies that provide quarterly reports, how is the fourth quarter reported? A) Every company that reports for the first three quarters must also publish a fourth-quarter report. B) A fourth-quarter report is not required. C) Companies must publish a fourth-quarter report if there are significant changes from the third quarter. D) The SEC requires selected quarterly financial data to be reported separately as a fourth-quarter report. E) When fourth-quarter financial statements are provided, special accounting items of that quarter must also be separately disclosed in the annual financial statements. Answer: B Learning Objective: 08-07 Topic: Interim reporting―Disclosures Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 85. According to International Financial Reporting Standards (IFRS), all of the following are part of minimum components of interim financial reporting except: A) A condensed statement of cash flows. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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B) A condensed statement of financial position. C) A condensed statement of accumulated pension liabilities. D) A condensed statement of net income and comprehensive income. E) Accrual of income tax expense at the end of each interim period. Answer: C Learning Objective: 08-07 Topic: IFRS―Interim reporting Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 86. Which of the following is false with regard to accounting standards for segment reporting according to International Financial Reporting Standards (IFRS) and U.S. GAAP? A) IFRS and U.S. GAAP do not each require disclosure of segment liabilities. B) IFRS and U.S. GAAP both require disclosure of intangible assets attributable to geographic segments. C) According to IFRS, operating segments can be based on products and services. D) According to IFRS, operating segments can be based on geographic areas. E) IFRS and U.S. GAAP both require disclosure of total assets. Answer: B Learning Objective: 08-06 Topic: IFRS―Segment reporting Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement

Essay: [QUESTION] 87. What is the major objective of segment reporting? Answer: According to U.S. GAAP, the objective of segment reporting is to provide users of financial statements information that allows them to: (a) understand the enterprise’s performance better; (b) assess such enterprise’s prospects for future net cash flows; and (c) make informed judgments about the enterprise as a whole. Learning Objective: 08-01 Difficulty: 2 Medium Topic: Determine operating segments Blooms: Remember AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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88. What is meant by the term: disaggregated financial information? Answer: Disaggregated financial information is the data of a reporting unit that has been broken down into components so that the separate parts can be identified and studied. Learning Objective: 08-01 Topic: Determine operating segments Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 89. Why are publicly traded companies in the U.S. required to publish quarterly financial statements? Answer: Publicly traded U.S. companies must publish quarterly reports to provide investors and creditors with relevant information on a timelier basis as compared to information being provided once per year in an annual report. Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 90. How does a company measure income tax expense to be reported in an interim period? Answer: Income tax expense related to interim period income is determined by estimating the effective tax rate for the entire year. That rate is then applied to the cumulative pre-tax income earned to date to determine the cumulative income tax to be recognized to date. The amount of income tax recognized in the current interim period is the difference between the cumulative income tax to be recognized to date and the income tax recognized in prior interim periods. Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 91. What two disclosure guidelines for operating segment information are designed to ensure the consistency of data reported from year to year? Answer: 1) If an operating segment does not pass a test for current segment disclosure but was a reportable segment in the past year(s) included in the current comparative report and management Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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deems it as having continued significance, then that segment should be disclosed currently to be comparative to prior periods. 2) If an operating segment is to be disclosed in a current year and was not separately disclosed in prior comparative years, then prior years must be restated to show that segment comparatively with the current year. Learning Objective: 08-02 Topic: Reportable segments―Other guidelines Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 92. Describe the test to determine whether a sufficient number of operating segments are disclosed. Answer: For operating segments deemed reportable by having passed a 10% threshold test of revenues, operating profit or loss, and assets, the total sales revenues to unaffiliated customers are summed. If this sum is less than 75% of total sales to outsiders, then there is not a sufficient number of operating segments disclosed and there should be additional segment disclosure. Learning Objective: 08-02 Topic: Reportable segments―Other guidelines Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 93. What approach is used, according to U.S. GAAP, for determining how a business is divided into segments? Answer: The management approach for segment determination is used. Learning Objective: 08-01 Topic: Determine operating segments Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 94. According to U.S. GAAP, what general information about an operating segment must be disclosed? Answer: The general information about an operating segment that needs to be disclosed per U.S. GAAP includes: (a) the factors considered when identifying operating segments; and (b) the types of products and services from which each operating segment derives its revenues. Learning Objective: 08-03 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Topic: Reportable segments―Disclosure requirements Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 95. According to U.S. GAAP, how should general corporate costs be allocated to individual segments to determine segment profit or loss? Answer: U.S. GAAP does not require general corporate costs to be allocated to individual segments to determine segment profit or loss if this is not done for internal purposes. Any allocations that are made must be done on a reasonable basis. Learning Objective: 08-02 Topic: Reportable segment―Profit or loss test Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 96. List the five aggregation criteria that need to be considered by management in determining whether business activities and environments are similar. Answer: The five aggregation criteria are: (a) the nature of the products and services provided by each operating segment; (b) the nature of the production process; (c) the type or class of customer; (d) distribution methods used; and (e) if applicable, the nature of the regulatory environment. Learning Objective: 08-02 Topic: Reportable segment―Any of the 10-percent tests Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 97. What is the purpose of the U.S. GAAP seventy-five percent requirement for industry segment disclosure? Answer: A substantial portion of the company's operations should be presented in disaggregated form. The seventy-five percent requirement is the GAAP guideline in making sure companies report information about a sufficient number of segments. Learning Objective: 08-02 Topic: Reportable segments―Other guidelines Difficulty: 2 Medium Blooms: Understand Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 98. According to U.S. GAAP, what revenues and expenses included in segment profit or loss need to be disclosed? Answer: The revenues and expenses included in segment profit or loss that need to be disclosed include: (a) revenues from external customers; (b) revenues from transactions with other operating segments; (c) interest revenue and interest expense (reported separately); net interest revenue may be reported for finance segments if this measure is used internally for evaluation; (d) depreciation, depletion, and amortization expense; (e) unusual items; (f) equity in the net income of investees accounted for by the equity method; (g) income tax expense or benefit; and (h) other significant noncash items included in segment profit or loss. Learning Objective: 08-03 Topic: Reportable segments―Disclosure requirements Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 99. What related items need to be disclosed in regard to total segment assets? Answer: The related items in regard to total segment assets that must be disclosed include: (a) investment in equity method affiliates; and (b) expenditures for additions to long-lived assets. Learning Objective: 08-03 Topic: Reportable segments―Disclosure requirements Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 100. Which items of information are required to be included in interim reports for each operating segment? Answer: The items of information required to be included in interim reports for each operating segment are: (a) revenues from external customers; (b) intersegment revenues; (c) segment profit or loss; and (d) total assets, if there has been a material change from the last annual report. Learning Objective: 08-07 Topic: Interim reporting―Disclosures Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AACSB: Communication AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 101. Which two items of information must be reported for: (1) the domestic country; (2) all foreign countries in which the enterprise derives revenues or holds assets; and (3) each foreign country in which a material amount of revenues is earned? Answer: The two items of information that must be reported are revenues from external customers and long-lived assets. Learning Objective: 08-04 Topic: Entitywide information―Geographic areas Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Critical Thinking AICPA: FN Measurement Problems: [QUESTION] 102. Burnside Corp. is organized into four operating segments. The following segment information was generated by the internal reporting system in 2018:

Cards Calendars Clothing Books

Revenues from Outsiders $ 1,680,000 1,260,000 1,400,000 1,120,000

Intersegment Revenues $ 140,000 280,000 — 70,000

Operating Expenses $ 1,260,000 1,890,000 980,000 1,078,000

Required: 1) What was the profit or loss of each of these segments? 2) Prepare the profit or loss test to determine which of these segments was separately reportable. Answer: Requirements (1) and (2)

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Cards Calendars Clothing Books Totals

Revenues from Outsiders $ 1,680,000 1,260,000 1,400,000 1,120,000

Intersegment Operating Revenues Expenses $ 140,000 $ (1,260,000) 280,000 (1,890,000) ( 980,000) 70,000 (1,078,000)

Profit $ 560,000

Loss $ 350,000

420,000 112,000 $ 1,092,000 $ 350,000

Any segment with an absolute amount of profit or loss greater than or equal to $109,200 ($1,092,000 × 10%) is separately reportable. Based on this test, each of the four segments must be reported separately. Learning Objective: 08-02 Topic: Reportable segment―Profit or loss test Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement REFERENCE: 08-11 Faru Co. identified five industry segments: (1) plastics, (2) metals, (3) lumber, (4) paper, and (5) finance. The company properly consolidated the segments when it prepared its annual financial statements. Information describing each segment is presented below (in thousands).

Sales to outside parties Intersegment revenues transfers Interest income from outside parties Interest income from intersegment loans Operating expenses Interest expense Tangible assets Intangible assets

Plastics $8,215 138 0

Metals $2,787 170 25

Lumber $827 125 8

Paper $451 140 0

Finance $0 0 242

0 5,088 79 1,678 94

0 2,096 21 3,882 469

0 1,191 66 408 0

0 753 40 729 62

207 21 113 135 863

[QUESTION] REFER TO: 08-11 103. Prepare the revenue test and determine which of these segments was separately reportable. Answer: Revenues include sales to outside parties, intersegment revenues transfers, and interest income.

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Revenue Test (numbers in thousands) Segment Plastics Metals Lumber Paper Finance Total

Revenues $ 8,353 2,982 960 591 449 $ 13,335

Percentage 62.64% 22.36% 7.20% 4.43% 3.37%

reportable reportable

Reportable segment = at least $1,333.5 (in thousands) of revenues. Learning Objective: 08-02 Topic: Reportable segment―Revenue test Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 08-11 104. Prepare the profit or loss test and determine which of these segments was separately reportable. Answer: Revenues include sales to outside parties, intersegment revenues transfers, and interest income. Expenses include operating expenses and interest expense.

Profit or Loss Test (numbers in thousands) Segment Plastics Metals Lumber Paper Finance Total

Revenues $ 8,353 2,982 960 591 449 $ 13,335

Expenses $ ( 5,167) ( 2,117) ( 1,257) ( 793) ( 134) $ ( 9,468)

Profit $ 3,186 865

315 $ 4,366

Loss reportable reportable $

297 202

$

499

Reportable = at least $436.6 (in thousands) of profit or loss. Learning Objective: 08-02 Topic: Reportable segment―Profit or loss test Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 08-11 105. Prepare the asset test and determine which of these segments was separately reportable. Answer: Assets include tangible assets and intangible assets. Asset Test (numbers in thousands) Segment Plastics Metals Lumber Paper Finance Total

Assets $ 1,772 4,351 408 791 998 $ 8,320

Percentage 21.30% 52.30% 4.90% 9.50% 12.00%

reportable reportable

reportable

Reportable = at least $832. (in thousands) of assets Learning Objective: 08-02 Topic: Reportable segment―Asset test Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 106. Blanton Corporation is comprised of five operating segments. Information about each of these segments is as follows (in thousands):

Required: A) Which operating segments are reportable under the revenue test? Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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B) What is the total amount of revenues in applying the revenue test? C) Which operating segments are reportable under the profit or loss test? D) In applying the profit or loss test, what is the minimum amount an operating segment must have in order to meet the profit or loss test for a reportable segment? E) Which operating segments are reportable under the asset test? F) In applying the asset test, what is the minimum amount an operating segment must have in order to meet the asset test for a reportable segment? G) Which operating segments are reportable? H) According to the test results for reportable segments, is there a sufficient number of reported segments or should any additional segments also be disclosed? Explain the reason for your conclusion. Answer:

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a.

Revenue Test (numbers in thousands): Segment Revenues Percentage Linens $ 50 10.71% reportable Kitchen 269 57.60% reportable Grocery 31 6.64% Furniture 80 17.13% reportable Stationery 37 7.92% Total $467 100.00%

b.

Revenue Test (numbers in thousands): Segment Revenues Linens $ 50 Kitchen 269 Grocery 31 Furniture 80 Stationery 37 Total $467

c.

Profit or Loss Test (numbers in thousands): Segment Revenues Expenses Profits Losses Linens $ 50 $ 57 $7 reportable Kitchen 269 228 $41 - reportable Grocery 31 25 6 Furniture 80 63 17 - reportable Stationery 37 36 1 Total $467 $409 $65 $7 Benchmark: $65 x 10% = $6.5

d. e.

f.

Asset Test (numbers in thousands): Segment Assets Percentage Linens $13 13.13% Kitchen 61 61.62% Grocery 11 11.11% Furniture 10 10.10% Stationery 4 4.04% Total $99 100.00% Benchmark: $99 x 10% = $9.9

reportable reportable reportable reportable

g.

Linens (all three tests), Kitchen (all three tests), Grocery (asset test) and Furniture (all three tests).

h.

There are a sufficient number of reportable segments per the reportable tests, because total sales to outsiders = $397 (numbers all in thousands), 75% of $397 = $298, and the four reportable segments have total sales to outsiders of $383. $383 exceeds the threshold for the 75% test.

Learning Objective: 08-02 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Topic: Reportable segment―Any of the 10-percent tests Topic: Reportable segments―Other guidelines Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement REFERENCE: 08-12 On February 23, 2018, Cleveland, Inc. paid property taxes of $300,000 for the calendar year 2018. [QUESTION] REFER TO: 08-12 107. How much of this expense should be included in Cleveland’s net income for the quarter ending March 31, 2018? Answer: $75,000 [$300,000/4]. Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 08-12 108. Prepare the journal entry for the payment of property taxes on February 23, 2018. Answer: Prepaid property taxes Property tax expense Cash Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement

225,000 75,000 300,000

REFERENCE: 08-13 Gregor Inc. uses the LIFO cost-flow assumption to value inventory. Inventory for Gregor on January 1, 2018 was 100 units at a LIFO cost of $25 per unit. During the first quarter of 2018, 200 units were purchased costing an average of $40 per unit, and sales of 265 units at a retail price of $50 per unit were made. [QUESTION] REFER TO: 08-13 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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109. Assuming Gregor does not expect to replace the units of beginning inventory sold, what is the amount of cost of goods sold for the quarter ended March 31, 2018? Answer: $9,625 [(200 × $40) + (65 × $25)]. Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 08-13 110. Assuming Gregor expects to replace the units of beginning inventory sold before the yearend at a cost of $41, what is the amount of cost of goods sold for the quarter ended March 31, 2018? Answer: $10,665 [(200 × $40) + (65 × $41)]. Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement REFERENCE: 08-14 Harrison Company, Inc. began operations on January 1, 2017, and applied the LIFO method for inventory valuation. On June 10, 2018, Harrison adopted the FIFO method of accounting for inventory. Additional information is as follows:

First quarter 2017 Second quarter 2017 Third quarter 2017 Fourth quarter 2017

First quarter 2018 Second quarter 2018

Net Income Before Change in Principle $ 525,000 600,000 575,000 650,000 $2,350,000

Cost of Cost of goods sold goods sold ___FIFO__ ___LIFO___ $32,000 $ 20,000 29,000 20,000 27,000 20,000 25,000 20,000 $113,000 $ 80,000

$ 700,000 $ 750,000

$ 23,000 $ 21,000

$ 20,000 $ 20,000

The LIFO method was applied during the first quarter of 2018 and the FIFO method was applied during the second quarter of 2018 in computing income, above. Harrison’s effective income tax rate is 40 percent. Harrison has 500,000 shares of common stock outstanding at all times. [QUESTION] REFER TO: 08-14 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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111. Compute the after-tax effect of Harrison’s change in inventory method. Answer:

First quarter 2017 Second quarter 2017 Third quarter 2017 Fourth quarter 2017

First quarter 2018 Second quarter 2018

Net Income before Change in Principle $ 525,000 600,000 575,000 650,000 $ 2,350,000 $ $

700,000 750,000

Cost of goods sold FIFO $ 32,000 29,000 27,000 25,000 $ 113,000 $ $

23,000 21,000

Cost of goods sold LIFO $20,000 20,000 20,000 20,000 $ 80,000 $ $

Difference $ 12,000 9,000 7,000 5,000 $ 33,000

After-tax Difference $ 7,200 5,400 4,200 3,000 $ 19,800

$ 3,000 $ 1,000

$ 1,800 $ 600

20,000 20,000

Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 08-14 112. Prepare a schedule showing the calculation of net income and earnings per share to be reported by Harrison for the three-month period and the six-month period ended June 30, 2017 and 2018. Answer: Net Income and Earnings per Share for 2nd Quarter 2018:

Income before effect of accounting change Effect of accounting change, net of tax

Three Months Ended June 30 2017 2018 $600,000 $750,000 5,400 600

Six Months Ended June 30 2017 2018 $1,125,000 $1,450,000 12,600 2,400

Net income

$605,400

$750,600

$1,137,600

$1,452,400

$1.21

$1.50

$2.28

$2.90

Earnings per share (500,000 shares):

Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement REFERENCE: 08-15 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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The following information for Urbanski Corporation relates to the three months ending June 30, 2018: Units Price per unit Beginning inventory 11,000 $10 Purchases 75,000 $16 Sales 80,000 $25 Ending inventory 6,000 Urbanski uses the LIFO method to account for inventory, and expects at least 15,000 units to be on hand in the ending inventory at year-end. Purchases made in the last six months are expected to cost an average of $18 per unit. [QUESTION] REFER TO: 08-15 113. Compute cost of goods sold and gross profit for the quarter ending June 30, 2018. Answer: Determination of Cost of Goods Sold and Gross Profit

Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 08-15 114. Prepare the journal entries to reflect the sales and cost of goods sold, assuming Urbanski expects to maintain 11,000 units in inventory at year-end. Answer: Journal Entries to Record Sales and Cost of Goods Sold Cash or accounts receivable Sales revenue

2,000,000

Cost of goods sold Inventory Excess of replacement cost over historical cost of LIFO liquidation

1,290,000

2,000,000

1,250,000 40,000

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Excess of replacement cost over historical cost for beginning inventory liquidated: [($18 – $10) × 5,000 units] Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 08-15 115. Prepare the journal entries to reflect the sales and cost of goods sold, assuming Urbanski does not expect to replace the liquidated inventory at year-end. Answer: Journal Entries to Record Sales and Cost of Goods Sold Cash or accounts receivable Sales revenue

2,000,000

Cost of goods sold Inventory Learning Objective: 08-06 Topic: Interim reporting―Accounting treatment Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement

1,250,000

2,000,000

1,250,000

[QUESTION] 116. For each of the following situations, select the best answer concerning segment disclosures of reportable segments. A) Required to be disclosed by an operating segment, but not a geographical segment. B) Required to be disclosed by a geographical segment, but not an operating segment. C) Required to be disclosed by both an operating segment and a geographical segment. D) Not required to be disclosed by either an operating segment or a geographical segment. ___ 1. Factors used to identify segments. ___ 2. Revenues from external customers. ___ 3. Types of products and services from which each segment derives its revenues. ___ 4. Names of major customers. ___ 5. Revenues from transactions with other segments. ___ 6. Interest revenue. ___ 7. Long-lived assets. ___ 8. Discontinued operations, when applicable. ___ 9. Income tax expense or benefit. ___10. Revenues for the domestic country. ___11. Cash flow information Answer: (1) A; (2) C; (3) A; (4) D; (5) A; (6) A; (7) C; (8) A; (9) A; (10) B; (11) D Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Learning Objective: 08-03 Learning Objective: 08-04 Topic: Reportable segments―Other guidelines Topic: Entitywide information―Geographic areas Difficulty: 3 Hard Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Critical Thinking AICPA: FN Measurement

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File: Chapter 09 - Foreign Currency Transactions and Hedging Foreign Exchange Risk Multiple Choice: [QUESTION] 1. Pigskin Co., a U.S. corporation, sold inventory on credit to a British company on April 8, 2018. Pigskin received payment of 35,000 British pounds on May 8, 2018. The exchange rate was £1 = $1.54 on April 8 and £1 = 1.43 on May 8. What amount of foreign exchange gain or loss should be recognized? (round to the nearest dollar) A) $10,500 loss B) $10,500 gain C) $ 1,750 loss D) $ 3,850 loss E) No gain or loss should be recognized. Answer: D Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: $1.43 - $1.54 = ($.11) × £35,000 = ($3,850) Loss REFERENCE: 09-01 Norton Co., a U.S. corporation, sold inventory on December 1, 2018, with payment of 10,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows:

[QUESTION] REFER TO: 09-01 2. For what amount should Sales be credited on December 1? A) $ 5,500. B) $16,949. C) $18,182. D) $17,241. E) $16,667. Answer: D Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Feedback: December 1st Spot Rate $1.7241 × £10,000 = $17,241 Sales Revenue [QUESTION] REFER TO: 09-01 3. What amount of foreign exchange gain or loss should be recorded on December 31? A) $300 gain. B) $300 loss. C) $ 0. D) $941 loss. E) $941 gain. Answer: E Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: $1.8182 - $1.7241 = $.0941 × £10,000 Gain [QUESTION] REFER TO: 09-01 4. What amount of foreign exchange gain or loss should be recorded on January 30? A) $1,516 gain. B) $1,516 loss. C) $575 loss. D) $500 loss. E) $500 gain. Answer: B Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: $1.6666 - $1.8182 = ($.1516) × £10,000 = ($1,516) Loss REFERENCE: 09-02 Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May 8. Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is Brisco's fiscal year-end. The pertinent exchange rates were as follows:

[QUESTION] Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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REFER TO: 09-02 5. For what amount should Brisco's Accounts Payable be credited on May 8? A) $2,500,000. B) $2,440,000. C) $1,600,000. D) $1,639,344. E) $1,666,667. Answer: A Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: $1.25 × FC 2,000,000 = $2,500,000 A/P [QUESTION] REFER TO: 09-02 6. How much Foreign Exchange Gain or Loss should Brisco record on May 31? A) $2,520,000 gain. B) $ 20,000 gain. C) $ 20,000 loss. D) $ 80,000 gain. E) $ 80,000 loss. Answer: C Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: $1.26 - $1.25 = ($.01) × FC 2,000,000 = ($20,000) Loss [QUESTION] REFER TO: 09-02 7. How much US $ will it cost Brisco to finally pay the payable on June 7? A) $1,666,667. B) $2,440,000. C) $2,520,000. D) $2,500,000. E) $2,400,000. Answer: E Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: $1.20 × FC 2,000,000 = FC 2,400,000 A/P [QUESTION] 8. On June 1, CamCo received a signed agreement to sell inventory for ¥500,000. The sale would take place in 90 days. CamCo immediately signed a 90-day forward contract to sell the yen as soon as they are received. The spot rate on June 1 was ¥1 =$.004167, and the 90-day forward rate was ¥1 = $.00427. At what amount would CamCo record the Forward Contract on June 1? A) $2,083. B) $ 0. C) $2,110. D) $2,532. E) $2,135. Answer: B Learning Objective: 09-08 Topic: Hedge–Forward contract–FC firm commitment Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: Forward Contract Not Recorded at Date of Sale [QUESTION] 9. Belsen purchased inventory on December 1, 2017. Payment of 200,000 stickles was to be made in sixty days. Also on December 1, Belsen signed a contract to purchase §200,000 in sixty days. The spot rate was §1 = .35714, and the 60-day forward rate was §1 = $.38462. On December 31, the spot rate was §1 = .34483 and the 30-day forward rate was §1 = .38168. Assume an annual interest rate of 12% and a fair value hedge. The present value for one month at 12% is .9901. In the journal entry to record the establishment of a forward exchange contract, at what amount should the Forward Contract account be recorded on December 1? A) $71,428. B) $76,924. C) $ 588. D) $ 582. E) $ 0, since there is no cost, there is no value for the contract at this date. Answer: E Learning Objective: 09-07 Topic: Hedge–Forward contract–FC denominated asset Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: Forward Contract Not Recorded at Date of Sale [QUESTION] Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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10. Meisner Co. ordered parts costing §100,000 for a foreign supplier on May 12 when the spot rate was $.24 per stickle. A one-month forward contract was signed on that date to purchase §100,000 at a forward rate of $.25 per stickle. On June 12, when the parts were received and payment was made, the spot rate was $.28 per stickle. At what amount should inventory be reported? A) $ 0. B) $28,000. C) $24,000. D) $25,000. E) $ 2,000. Answer: B Learning Objective: 09-07 Topic: Hedge–Forward contract–FC denominated asset Difficulty: 2 Medium Blooms: Analyze Blooms: Apply AACSB: Knowledge Application AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: $.28 × §100,000 = $28,000 REFERENCE: 09-03 Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2018, with payment of 10 million Korean won to be received on January 15, 2019. The following exchange rates applied:

Date December 16, 2018 December 31, 2018 January 15, 2019

Spot Rate $ .00092 .00090 .00095

Forward Rate to Jan.15 $ .00098 .00093 .00095

[QUESTION] REFER TO: 09-03 11. Assuming a forward contract was not entered into, what would be the net impact on Car Corp.'s 2018 income statement related to this transaction? A) $ 500 (gain). B) $ 500 (loss). C) $ 200 (gain). D) $ 200 (loss). E) $ - 0 Answer: D Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: FN Measurement Feedback: $.00090 - $.00092 = ($.00002) × $10,000,000 = ($200) Loss [QUESTION] REFER TO: 09-03 12. Assuming a forward contract was entered into, the foreign currency was originally sold in the foreign currency market on December 16, 2018 at a A) Forward contract discount $ 600. B) Forward contract premium $ 600. C) Forward contract discount $ 980. D) Forward discount premium $ 980. E) There is no premium or discount because the fair value of the contract is zero. Answer: B Learning Objective: 09-01 Topic: Concepts of foreign currency and exchange Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: $.00098 - $.00092 = $.00006 × $10,000,000 = $600 Premium [QUESTION] REFER TO: 09-03 13. Assuming a forward contract was entered into on December 16, at what amount should the forward contract be recorded at December 31, 2018? Assume an annual interest rate of 12% and a fair value hedge. The present value for one month at 12% is .9901. A) $ 200. B) $ 295. C) $ 495. D) $ 500. E) $ 9,300. Answer: C Learning Objective: 09-07 Topic: Hedge–Forward contract–FC denominated asset Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: $.00098 - $.00093 = $.00005 × .9901 × $10,000,000 = $495 [QUESTION] REFER TO: 09-03 14. Assuming a forward contract was entered into on December 16, how would the forward contract be reflected on Car’s December 31, 2018 balance sheet? A) Forward contract (asset). B) Forward contract (liability). C) Foreign currency (asset). Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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D) Foreign currency (liability). E) Foreign exchange (liability) Answer: A Learning Objective: 09-07 Topic: Hedge–Forward contract–FC denominated asset Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] REFER TO: 09-03 15. Assuming a forward contract was entered into on December 16, what would be the net impact on Car Corp.'s 2018 income statement related to this transaction? Assume an annual interest rate of 12% and a fair value hedge. The present value for one half-month at 12% is .9950. A) $ 700 (gain). B) $ 700 (loss). C) $ 995 (gain). D) $ 300 (loss). E) $ 298 (gain). Answer: E Learning Objective: 09-07 Topic: Hedge–Forward contract–FC denominated asset Difficulty: 3 Hard Blooms: Analyze Blooms: Apply AACSB: Knowledge Application AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: [($.00090 - $.00092) X $10,000,000] = $200 Foreign Exchange Loss + [($.00098 - $.00093) × .9950 × $10,000,000] = $498 Gain on Forward Contract. Gain of $298. [QUESTION] REFER TO: 09-03 16. Assuming a forward contract was entered into on December 16, what would be the net impact on Car Corp.'s 2019 income statement related to this transaction? A) $ 500 (gain). B) $ 500 (loss). C) $ 300 (gain). D) $ 300 (loss). E) $0. Answer: C Learning Objective: 09-07 Topic: Hedge–Forward contract–FC denominated asset Difficulty: 3 Hard Blooms: Analyze Blooms: Apply Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AACSB: Knowledge Application AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: [($.00095 - $.00090) × $10,000,000] = $500 Foreign Exchange Gain + [(.00093-.00095) × $10,000,000] = $200 Loss on Forward Contract. Gain of $300. [QUESTION] 17. Mills Inc. had a receivable from a foreign customer that is due in the local currency of the customer (stickles). On December 31, 2018, this receivable for §200,000 was correctly included in Mills' balance sheet at $132,000. When the receivable was collected on February 15, 2019, the U.S. dollar equivalent was $144,000. In Mills' 2019 consolidated income statement, how much should have been reported as a foreign exchange gain? A) $ 0. B) $36,000. C) $48,000. D) $10,000. E) $12,000. Answer: E Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: $144,000 - $132,000 = $12,000 Gain [QUESTION] 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. Answer: A Learning Objective: 09-01 Topic: Concepts of foreign currency and exchange Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 19. The forward rate may be defined as A) The price a foreign currency can be purchased or sold today. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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. Answer: B Learning Objective: 09-01 Topic: Concepts of foreign currency and exchange Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 20. Which statement is true regarding a foreign currency option? 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. Answer: D Learning Objective: 09-01 Topic: Concepts of foreign currency and exchange Difficulty: Easy Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: C Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 1 Easy Blooms: Analyze AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] 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. Answer: A Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 23. A U.S. company buys merchandise from 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) Any gain or loss will be included in comprehensive income. Answer: C Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 1 Easy Blooms: Analyze AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: D Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 2 Medium Blooms: Understand AACSB: Analytical Thinking AACSB: Diversity Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: E Learning Objective: 09-04 Topic: Derivatives―Types and uses Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: C Learning Objective: 09-05 Topic: Derivatives―Fair value–Changes in fair value Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 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 Answer: E Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Learning Objective: 09-04 Topic: Derivatives―Types and uses Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 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 a debit to accumulated other comprehensive income. D) As a debit impact on net income, as a result of the hedge. E) As a decreases to sales. Answer: D Learning Objective: 09-07 Topic: Hedge–Forward contract–FC denominated asset Difficulty: 3 Hard Blooms: Analyze AACSB: Diversity AACSB: Analytical Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: D Learning Objective: 09-04 Topic: Derivatives―Types and uses Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 30. All of the following hedges are used for future purchase/sale transactions except 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Answer: E Learning Objective: 09-04 Topic: Derivatives―Types and uses Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement REFERENCE: 09-04 On December 1, 2018, 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, 2019. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2018. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow: Date December 1, 2018 December 31, 2018 February 1, 2019

Spot Rate $ .97 $ .95 $ .94

Option Premium $ .05 $ .04 $ .03

[QUESTION] REFER TO: 09-04 31. Compute the fair value of the foreign currency option at December 1, 2018. A) $6,000. B) $4,500. C) $3,000. D) $7,500. E) $1,500. Answer: D Learning Objective: 09-07 Topic: Hedge–Option–FC denominated asset Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: $.05 × C$150,000 = $7,500 [QUESTION] REFER TO: 09-04 32. Compute the fair value of the foreign currency option at December 31, 2018. A) $6,000. B) $4,500. C) $3,000. D) $7,500. E) $1,500. Answer: A Learning Objective: 09-07 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Topic: Hedge–Option–FC denominated asset Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: $.04 × C$150,000 = $6,000 [QUESTION] REFER TO: 09-04 33. Compute the fair value of the foreign currency option at February 1, 2019. A) $6,000. B) $4,500. C) $3,000. D) $7,500. E) $1,500. Answer: B Learning Objective: 09-07 Topic: Hedge–Option–FC denominated asset Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: $.03 × C$150,000 = $4,500 [QUESTION] REFER TO: 09-04 34. Compute the U.S. dollars received on February 1, 2019. A) $138,000. B) $136,500. C) $145,500. D) $141,000 E) $142,500. Answer: C Learning Objective: 09-07 Topic: Hedge–Option–FC denominated asset Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: Strike Price $.97 × C$150,000 = $145,500 [QUESTION] 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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. Answer: B Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: A Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 37. Alpha, Inc., a U.S. company, had a receivable from a customer that was denominated in Mexican pesos. On December 31, 2017, this receivable for 75,000 pesos was correctly included in Alpha’s balance sheet at $8,000. The receivable was collected on March 2, 2018, 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, 2018? A) $1,100 loss. B) $1,100 gain. C) $6,900 loss. D) $6,900 gain. E) $8,000 gain. Answer: A Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Feedback: $6,900 - $8,000 = ($1,100) Loss REFERENCE: 09-05 On April 1, 2017, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2018. The dollar value of the loan was as follows: Date April 1, 2017 December 31, 2017 April 1, 2018

Amount $ 97,000 $ 103,000 $ 105,000

[QUESTION] REFER TO: 09-05 38. How much foreign exchange gain or loss should be included in Shannon’s 2017 income statement? A) $3,000 gain. B) $3,000 loss. C) $6,000 gain. D) $6,000 loss. E) $7,000 gain. Answer: D Learning Objective: 09-03 Topic: Foreign currency borrowing Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: $97,000 - $103,000 = ($6,000) Loss [QUESTION] REFER TO: 09-05 39. How much foreign exchange gain or loss should be included in Shannon’s 2018 income statement? A) $1,000 gain. B) $1,000 loss. C) $2,000 gain. D) $2,000 loss. E) $8,000 loss. Answer: D Learning Objective: 09-03 Topic: Foreign currency borrowing Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: $103,000 - $105,000 = ($2,000) Loss [QUESTION] REFER TO: 09-05 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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40. 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?

Answer: B Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 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?

Answer: C Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement REFERENCE: 09-06 Parker Corp., a U.S. company, had the following foreign currency transactions during 2018: (1.) Purchased merchandise from a foreign supplier on July 5, 2018 for the U.S. dollar equivalent of $80,000 and paid the invoice on August 3, 2018 at the U.S. dollar equivalent of $82,000. (2.) On October 1, 2018 borrowed the U.S. dollar equivalent of $872,000 evidenced by a non-interestbearing note payable in euros on October 1, 2019. The U.S. dollar equivalent of the note amount was $860,000 on December 31, 2018, and $881,000 on October 1, 2019. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 09-06 42. What amount should be included as a foreign exchange gain or loss from the two transactions for 2018? A) $ 2,000 loss. B) $ 2,000 gain. C) $10,000 gain. D) $14,000 loss. E) $ 14,000 gain. Answer: C Learning Objective: 09-02 Learning Objective: 09-03 Topic: Foreign currency transactions―Not hedged Topic: Foreign currency borrowing Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: [$80,000 - $82,000 = ($2,000) Loss] + [$872,000 - $860,000 = $12,000 Gain] = $10,000 Gain [QUESTION] REFER TO: 09-06 43. What amount should be included as a foreign exchange gain or loss from the two transactions for 2019? A) $ 9,000 loss. B) $ 9,000 gain. C) $11,000 loss. D) $21,000 loss. E) $21,000 gain. Answer: D Learning Objective: 09-03 Topic: Foreign currency borrowing Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: $860,000 - $881,000 = ($21,000) Loss REFERENCE: 09-07 Winston Corp., a U.S. company, had the following foreign currency transactions during 2018: (1.) Purchased merchandise from a foreign supplier on July 16, 2018 for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2018 at the U.S. dollar equivalent of $54,000. (2.) On October 15, 2018 borrowed the U.S. dollar equivalent of $315,000 evidenced by a non-interestbearing note payable in euros on October 15, 2019. The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2018, and $299,000 on October 15, 2019. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 09-07 44. What amount should be included as a foreign exchange gain or loss from the two transactions for 2018? A) $ 9,000 loss. B) $ 9,000 gain. C) $11,000 loss. D) $13,000 gain. E) $ 14,000 gain. Answer: D Learning Objective: 09-02 Learning Objective: 09-03 Topic: Foreign currency transactions―Not hedged Topic: Foreign currency borrowing Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: [$47,000 - $54,000 = ($7,000) Loss] + [$315,000 - $295,000 = $20,000 Gain] = $13,000 Gain [QUESTION] REFER TO: 09-07 45. What amount should be included as a foreign exchange gain or loss from the two transactions for 2019? A) $1,000 loss. B) $1,000 gain. C) $2,000 loss. D) $4,000 gain. E) $4,000 loss. Answer: E Learning Objective: 09-03 Topic: Foreign currency borrowing Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: $295,000 - $299,000 = ($4,000) Loss [QUESTION] 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 $.0094, and the forward rate was $.0095. Which of the following did the U.S. exporter report in net income? A) Discount revenue. B) Premium revenue. C) Discount expense. D) Premium expense. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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E) Both discount revenue and premium expense. Answer: B Learning Objective: 09-01 Learning Objective: 09-07 Topic: Concepts of foreign currency and exchange Topic: Hedge–Forward contract–FC denominated asset Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 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 $.023, and the forward rate was $.021. Which of the following did the U.S. exporter report in net income? A) Discount revenue. B) Premium revenue. C) Discount expense. D) Premium expense. E) Both discount revenue and premium expense. Answer: C Learning Objective: 09-01 Learning Objective: 09-07 Topic: Concepts of foreign currency and exchange Topic: Hedge–Forward contract–FC denominated asset Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 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 $.025 per rupee. A one-month forward contract was signed on that date to purchase 100,000 rupee at a rate of $.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 $.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. Answer: E Learning Objective: 09-08 Topic: Hedge–Option–FC firm commitment Difficulty: 2 Medium Blooms: Apply Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: $.028 × ₹100,000 = $2,800 [QUESTION] 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 $.025 per baht. A one-month forward contract was signed on that date to purchase 1,000,000 bahts at a rate of $.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 $.028. What is the amount of accounts payable that will be paid at this date? A) $20,000. B) $20,100. C) $25,000. D) $27,000. E) $28,000. Answer: E Learning Objective: 09-08 Topic: Hedge–Option–FC firm commitment Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: $.028 × ฿1,000,000 = $28,000 [QUESTION] 50. On December 1, 2018, Joseph Company, a U.S. company, entered into a three-month forward contract to purchase 50,000 pesos on March 1, 2019, as a fair value hedge of a foreign currency denominated account payable. The following U.S. dollar per peso exchange rates apply:

Date December 1, 2018 December 31, 2018 March 1, 2019

Spot Rate $0.092 $0.090 $0.089

Forward Rate (Mar.1, 2019) $0.105 $0.095 N/A

Joseph’s incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent is .9803. Which of the following is included in Joseph’s December 31, 2018 balance sheet for the forward contract? A) $5,146.58 asset. B) $5,146.58 liability. C) $ 500.00 liability. D) $ 490.15 asset. E) $ 490.15 liability. Answer: E Learning Objective: 09-07 Topic: Hedge–Forward contract–FC denominated asset Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: $0.105 - $0.095 = ($0.01) × MP50,000 = ($500.00) × .9803 = ($490.15) Liability [QUESTION] 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 are the effects on net income from these transactions? A) $20,000 Discount Expense plus a $12,000 positive Adjustment to Net Income when the merchandise is delivered. B) $20,000 Discount Expense plus a $12,000 negative Adjustment to Net Income when the merchandise is delivered. C) $20,000 Discount Expense plus a $20,000 negative Adjustment to Net Income when the merchandise is delivered. D) $20,000 Discount Expense plus a $16,000 positive Adjustment to Net Income when the merchandise is delivered. E) $20,000 Discount Expense plus a $20,000 positive Adjustment to Net Income when the merchandise is delivered. Answer: D Learning Objective: 09-09 Topic: Hedge–Forward contract–FC firm commitment Difficulty: 3 Hard Blooms: Apply Blooms: Analyze AACSB: Knowledge Application AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: [$1.41 - $1.36 = $.05 × €400,000 = $20,000 Discount] & [$1.41 - $1.37 = $.04 × €400,000 = $16,000 Adjustment at Delivery] REFERENCE: 09-08 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, 2018. On July 24, 2018, 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, 2018. The following exchange rates apply: Option strike price Option cost July 24 spot rate October 24 spot rate October 24 option premium

$2.17 $4,000 $2.17 $2.13 $ .04

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 09-08 52. What amount will Woolsey include as an option expense in net income for the period July 24 to October 24? A) $ 4,000. B) $ 5,000. C) $10,000. D) $12,000. E) $14,000. Answer: A Learning Objective: 09-09 Topic: Hedge–Option–Forecasted FC transaction Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: Cost of the Option Contract $4,000 [QUESTION] REFER TO: 09-08 53. What amount will Woolsey include as Adjustment to Net Income for the period ended October 31? A) $ 6,000 positive. B) $ 6,000 negative. C) $10,000 positive. D) $10,000 negative. E) $14,000 positive. Answer: C Learning Objective: 09-09 Topic: Hedge–Option–Forecasted FC transaction Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: $2.17 - $2.13 = $.04 × £250,000 = $10,000 Positive Adjustment [QUESTION] 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 threemonth 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 January 17 Spot Rate April 17 Spot Rate

$ 4.34 $5,000 $ 4.34 $ 4.26

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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What amount will Atherton include as an option expense in net income for the period January 17 to April 17? A) $4,000 B) $4,260 C) $4,340 D) $5,000 E) $5,260 Answer: D Learning Objective: 09-09 Topic: Hedge–Option–Forecasted FC transaction Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: Cost of the Option Contract $5,000 REFERENCE: 09-09 On May 1, 2018, 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, 2019. On May 1, 2018, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2019 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, 2018. The following spot exchange rates apply: Date May 1, 2018 December 31, 2018 March 1, 2019

Spot Rate $0.095 $0.094 $0.089

Mosby’s incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803. [QUESTION] REFER TO: 09-09 55. What was the impact on Mosby’s 2018 net income as a result of this fair value hedge of a firm commitment? A) $1,760.60 decrease. B) $1,960.60 decrease. C) $1,000.00 decrease. D) $1,760.60 increase. E) $1,960.60 increase. Answer: A Learning Objective: 09-08 Topic: Hedge–Option–FC firm commitment Difficulty: 3 Hard Blooms: Analyze Blooms: Apply AACSB: Knowledge Application Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: $.094 - $.095 = ($.001) × MP 2,000,000 = ($2,000) × .9803 = ($1,960.60) Loss on Firm Commitment $3,200 - $3,000 = $200 Option Value Increase ($1,960.60) Loss on Firm Commitment + $200 Option Value Increase = ($1,760.60) Reduction in 2018 Net Income [QUESTION] REFER TO: 09-09 56. What was the impact on Mosby’s 2019 net income as a result of this fair value hedge of a firm commitment? A) $ 1,800.00 decrease. B) $ 2,500.00 increase. C) $ 2,500.00 decrease. D) $188,760.60 increase. E) $188,760.60 decrease. Answer: D Learning Objective: 09-08 Topic: Hedge–Option–FC firm commitment Difficulty: 3 Hard Blooms: Analyze Blooms: Apply AACSB: Knowledge Application AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: [$190,000 Sales Revenue] – [$3,000 Cost of Option] + [$1,760.60 Adjustment from 2018 Net Income] = $188,760.60 Increase to 2019 Net Income [QUESTION] REFER TO: 09-09 57. What was the overall result of having entered into this hedge of exposure to foreign exchange risk? A) $0 B) $9,000 net loss on the option. C) $9,000 net gain on the option. D) $2,000 net gain on the option. E) $2,000 net loss. Answer: C Learning Objective: 09-08 Topic: Hedge–Option–FC firm commitment Difficulty: 3 Hard Blooms: Analyze Blooms: Apply AACSB: Knowledge Application AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: FN Measurement Feedback: $.095 - $.089 = $.006 × MP 2,000,000 = $12,000 Gain from Hedge - $3,000 Cost of Option = $9,000 Net Gain on Option REFERENCE: 09-10 On March 1, 2018, 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, 2019. On March 1, 2018, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2019 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, 2018. The following spot exchange rates apply: Date March 1, 2018 December 31, 2018 March 1, 2019

Spot Rate $1.90 $1.89 $1.84

Mattie’s incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803. [QUESTION] REFER TO: 09-10 58. What was the net impact on Mattie’s 2018 income as a result of this fair value hedge of a firm commitment? A) $1,800.00 decrease. B) $1,760.60 decrease. C) $2,240.40 decrease. D) $1,660.40 increase. E) $2,240.60 increase. Answer: B Learning Objective: 09-08 Topic: Hedge–Option–FC firm commitment Difficulty: 3 Hard Blooms: Apply Blooms: Analyze AACSB: Knowledge Application AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: $1.89 - $1.90 = ($.001) × £200,000 = ($2,000) × .9803 = ($1,960.60) Loss on Firm Commitment $2,200 - $2,000 = $200 Option Value Increase ($1,960.60) Loss on Firm Commitment + $200 Option Value Increase = ($1,760.60) Reduction in 2018 Net Income [QUESTION] REFER TO: 09-10 59. What was the net impact on Mattie’s 2019 income including the fair value hedge of a firm commitment? A) $379,760.60 decrease. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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B) $ 8,360.60 increase. C) $ 8,360.60 decrease. D) $ 4,390.40 decrease. E) $379,760.60 increase. Answer: E Learning Objective: 09-08 Topic: Hedge–Option–FC firm commitment Difficulty: 3 Hard Blooms: Analyze Blooms: Apply AACSB: Knowledge Application AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: [$380,000 Sales Revenue] – [$2,000 Cost of Option] + [$1,760.60 Adjustment from 2018 Net Income] = $379,760.60 Increase to 2019 Net Income [QUESTION] REFER TO: 09-10 60. 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? A) $0 B) $10,000 increase. C) $10,000 decrease. D) $20,000 increase. E) $20,000 decrease. Answer: B Learning Objective: 09-08 Topic: Hedge–Option–FC firm commitment Difficulty: 3 Hard Blooms: Analyze Blooms: Apply AACSB: Knowledge Application AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: $1.90 - $1.84 = $.06 × £200,000 = $12,000 Cash Flow from Hedge - $2,000 Cost of Option = $10,000 Increase in Cash Flow REFERENCE: 09-11 On October 1, 2018, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2019, at a price of 100,000 British pounds. On October 1, 2018, 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, 2018, the option has a fair value of $1,600. The following spot exchange rates apply: Date October 1, 2018 December 31, 2018

Spot Rate $2.00 $1.97

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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February 1, 2019

$2.01

[QUESTION] REFER TO: 09-11 61. What journal entry should Eagle prepare on October 1, 2018? A) Cash 1,800 Foreign Currency Option 1,800 B) Forward Contract 1,800 Cash 1,800 C) Foreign Currency Option 1,800 Gain on Foreign Currency 1,800 D) Loss on Foreign Currency 1,800 Cash 1,800 E) Foreign Currency Option 1,800 Cash 1,800 Answer: E Learning Objective: 09-09 Topic: Hedge–Option–Forecasted FC transaction Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] REFER TO: 09-11 62. What journal entry should Eagle prepare on December 31, 2018? A) B) C) D) E)

Foreign Currency Option Cash Foreign Currency Option Option Revenue Foreign Currency Option Option Revenue Option Expense Foreign Currency Option Option Expense Foreign Currency Option

200 200 200 200 400 400 200 200 400 400

Answer: D Learning Objective: 09-09 Topic: Hedge–Option–Forecasted FC transaction Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AACSB: Diversity Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: BB Global AICPA: FN Measurement [QUESTION] REFER TO: 09-11 63. What is the amount of option expense for 2019 from these transactions? A) $1,000. B) $1,600. C) $2,500. D) $2,600. E) $ 0. Answer: B Learning Objective: 09-09 Topic: Hedge–Option–Forecasted FC transaction Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: Option Expense is the Balance Sheet Fair Value of the Option for 2019 = $1,600 [QUESTION] REFER TO: 09-11 64. What is the amount of Adjustment to Accumulated Other Comprehensive Income for 2019 from these transactions? A) $1,000. B) $1,600. C) $1,800. D) $2,000. E) $2,600. Answer: A Learning Objective: 09-09 Topic: Hedge–Option–Forecasted FC transaction Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: $2.01 - $2.00 = $.01 × £100,000 = $1,000 Adjustment to AOCI for 2019 [QUESTION] REFER TO: 09-11 65. What is the amount of Cost of Goods Sold for 2019 as a result of these transactions? A) $200,000. B) $195,000. C) $201,000. D) $202,600. E) $203,000. Answer: C Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Learning Objective: 09-09 Topic: Hedge–Option–Forecasted FC transaction Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: £100,000 × $2.00 Strike Price = $200,000 + $1,000 AOCI Adjustment = $201,000 COGS [QUESTION] REFER TO: 09-11 66. What is the 2019 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 Answer: B Learning Objective: 09-09 Topic: Hedge–Option–Forecasted FC transaction Difficulty: 3 Hard Blooms: Analyze Blooms: Apply AACSB: Knowledge Application AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: [£100,000 × $2.00 Strike Price = $200,000] + [$1,600 Fair Value of the Option in 2019] = $201,600 [QUESTION] 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. Answer: D Learning Objective: 09-05 Topic: Derivatives―Fair value–Changes in fair value Difficulty: 1 Easy Bloom: Remember AACSB: Reflective Thinking AICPA: FN Measurement Feedback: [QUESTION] 68. Authoritative literature provides guidance for hedges of the following sources of foreign exchange risk. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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 Answer: E Learning Objective: 09-05 Topic: Derivatives―Types and uses Difficulty: 1 Easy Bloom: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: [QUESTION] 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. Answer: C Learning Objective: 09-05 Topic: Derivatives―Fair value–Changes in fair value Difficulty: 1 Easy Bloom: Remember AACSB: Reflective Thinking AICPA: FN Measurement Feedback: [QUESTION] 70. For speculative derivatives, the change in the fair value of the derivative must be: 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. Answer: B Learning Objective: 09-05 Topic: Derivatives―Fair value–Changes in fair value Difficulty: 1 Easy Bloom: Remember AACSB: Reflective Thinking AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Feedback: [QUESTION] 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. Answer: A Learning Objective: 09-06 Topic: Hedge–Accounting concepts Difficulty: 1 Easy Bloom: Remember AACSB: Reflective Thinking AICPA: FN Measurement Feedback: [QUESTION] 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 liability 2. 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 liability 2. 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. Answer: C Learning Objective: 09-06 Topic: Hedge–Accounting concepts Difficulty: 1 Easy Bloom: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: [QUESTION] 73. To account for a forward contract cash flow hedge of a foreign currency denominated asset or liability at the balance sheet date 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 AOCI, 3. Transfer an amount from AOCI to net income to offset the foreign exchange gain or loss on the hedged asset or liability recognized in 1, and 4. Transfer from AOCI to net income (as discount expense or premium revenue) the current period's amortization of discount or premium Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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 and 2. 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 and 2. 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 and 2. 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. Answer: A Learning Objective: 09-06 Topic: Hedge–Accounting concepts Difficulty: 1 Easy Bloom: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback:

Essay: [QUESTION] 74. 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. Answer: 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. Learning Objective: 09-01 Topic: Concepts of foreign currency and exchange Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 75. Where can you find exchange rates between the U.S. dollar and most foreign currencies? Answer: Foreign exchange rates are published in the Wall Street Journal, major U.S. newspapers, and several Internet sites. Learning Objective: 09-01 Topic: Concepts of foreign currency and exchange Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Global Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: FN Measurement [QUESTION] 76. What is meant by the spot rate? Answer: The spot rate is the price at which a foreign currency can be purchased or sold today. Learning Objective: 09-01 Topic: Concepts of foreign currency and exchange Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 77. How is the fair value of a Forward Contract determined by U.S. GAAP? Answer: 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. Learning Objective: 09-04 Topic: Derivatives―Fair value–Changes in fair value Difficulty: 3 Hard Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AICPA: FN Measurement [QUESTION] 78. What are the two separate transactions that require recording under the two-transaction perspective? Answer: 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. Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: FN Measurement [QUESTION] 79. What is the purpose of a hedge of foreign exchange risk? Answer: 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 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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. Learning Objective: 09-04 Topic: Derivatives―Types and uses Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Diversity AACSB: Communication AICPA: BB Global AICPA: FN Risk Analysis [QUESTION] 80. How does a foreign currency forward contract differ from a foreign currency option? Answer: 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. Learning Objective: 09-01 Learning Objective: 09-04 Topic: Concepts of foreign currency and exchange Topic: Derivatives―Types and uses Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Communication AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 81. What factors create a foreign exchange gain? Answer: Foreign exchange gains and losses are created by two factors: having foreign currency exposures (foreign currency receivables and payables) and changes in exchange rates. Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 82. What happens when a U.S. company purchases goods denominated in a foreign currency and the foreign currency depreciates? Answer: The event results in a foreign exchange gain. Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 83. What happens when a U.S. company purchases goods denominated in a foreign currency and the foreign currency appreciates? Answer: The event results in a foreign exchange loss. Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 84. What happens when a U.S. company sells goods denominated in a foreign currency and the foreign currency depreciates? Answer: The event results in a foreign exchange loss. Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 85. What happens when a U.S. company sells goods denominated in a foreign currency and the foreign currency appreciates? Answer: The event results in a foreign exchange gain. Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Problems: Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] 86. Gaw Produce Company purchased inventory from a Japanese company on December 18, 2018. Payment of 4,000,000 yen (¥) was due on January 18, 2019. Exchange rates between the dollar and the yen were as follows: Exchange Rate Date December 18, 2018

¥1 = $.0080

December 31, 2018

¥1 = $.0082

January 18, 2019

¥1 = $.0083

Required: Prepare all journal entries for Gaw Produce Co. in connection with the purchase and payment. Answer: 2018 Dec.18 Purchases (¥4,000,000 × .0080) Accounts payable

32,000 32,000

31 Foreign exchange loss Accounts payable (¥4,000,000 × .0080) - (¥4,000,000 × .0082) 2019 Jan.18 Foreign exchange loss Accounts payable (¥4,000,000 × .0082) - (¥4,000,000 × .0083) 18 Accounts payable Cash (¥4,000,000 × .0083)

800 800

400 400

33,200 33,200

Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 2 Medium Blooms: Analyze Blooms: Apply AACSB: Knowledge Application AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 87. Old Colonial Corp. (a U.S. company) made a sale to a foreign customer on September 15, 2018, for 100,000 stickles. Payment was received on October 15, 2018. The following exchange rates applied:

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Date September 15, 2018 September 30, 2018 October 15, 2018

Exchange Rate §1 = $.48 §1 = $.50 §1 = $.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. Answer: 2018 Sept. 15 Accounts receivable (§100,000 × $.48) Sales 30 Accounts receivable Foreign exchange gain [§100,000 × ($.50 - $.48)]

48,000 48,000 2,000 2,000

Oct. 15 Foreign exchange loss Accounts Receivable [§100,000 × ($.50 - $.44)]

6,000

Oct. 15 Cash [§100,000 × ($.50 - $.44)] Accounts receivable

44,000

6,000

44,000

Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 2 Medium Blooms: Analyze Blooms: Apply AACSB: Knowledge Application AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement REFERENCE: 09-12 Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2018:

The appropriate exchange rates during 2018 were as follows: Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Date March 1, 2018 May 1, 2018 August 1, 2018 September 1, 2018 December 31, 2018

Exchange Rate $.20 = 1 peso $.22 = 1 peso $.23 = 1 peso $.24 = 1 peso $.25 = 1 peso

[QUESTION] REFER TO: 09-12 88. Prepare all journal entries in U.S. dollars along with any December 31, 2018 adjusting entries. Coyote uses a perpetual inventory system. Answer: 2018 March 1

May 1

August 1

Sept. 1

Dec. 31

Dec. 31

Inventory (60,000p × $.20) Accounts payable

12,000

Accounts receivable (54,000p × $.22) Sales

11,880

Cost of goods sold (36,000 × $.20) Inventory

7,200

Cash (48,000p × $.23) Accounts receivable (48,000p × $.22) Foreign Exchange Gain

11,040

Accounts payable (36,000p × $.20) Foreign exchange loss Cash (36,000 × $.24)

7,200 1,440

Foreign exchange loss [24,000 × ($.20 - $.25)] Accounts payable

1,200

12,000

11,880

7,200

Accounts receivable Foreign exchange gain [6,000 × ($.22 - $.25)]

10,560 480

8,640

1,200 180 180

Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 3 Hard Blooms: Analyze Blooms: Apply AACSB: Knowledge Application AACSB: Analytical Thinking AACSB: Diversity Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: BB Global AICPA: FN Measurement [QUESTION] REFER TO: 09-12 89. What amount will Coyote Corp. report in its 2018 balance sheet for Inventory? Answer: Inventory (60,000 pesos × $.20 × 40%): $ 4,800 Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] REFER TO: 09-12 90. What amount will Coyote Corp. report in its 2018 income statement for Cost of goods sold? Answer: Cost of goods sold (60,000 pesos × $.20 × 60%) = $ 7,200 Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] REFER TO: 09-12 91. What amount will Coyote Corp. report in its 2018 income statement for Sales? Answer: Sales (54,000 pesos × $.22) = $11,880 Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] REFER TO: 09-12 92. What amount will Coyote Corp. report in its 2018 balance sheet for Accounts receivable? Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Answer: Accounts receivable ((54,000–48,000 pesos) × $.25) = $1,500 Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] REFER TO: 09-12 93. What amount will Coyote Corp. report in its 2018 balance sheet for Accounts payable? Answer: Accounts payable ((60,000–36,000 pesos) × $.25) = $6,000 Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] REFER TO: 09-12 94. The beginning balance of cash was 50,000 pesos on January 1, 2018, translated at 1 peso = $.18. What amount will Coyote Corp. report in its 2018 balance sheet for Cash? Answer: Cash (50,000 pesos × $.18) + (48,000 pesos × $.23) – (36,000 pesos × $.24)) = $11,400 Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement REFERENCE: 09-13 On November 10, 2018, 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, 2019. On December 1, 2018, King entered into a forward exchange contract wherein 96,000 LCU would be delivered to a currency broker in two months. The two month forward exchange rate on that date was 1 LCU = $.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: Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Date November 10, 2018 December 1, 2018 December 31, 2018 February 1, 2019

Rate Description Spot Rate Spot Rate 2-Month Forward Rate Spot Rate 1-Month Forward Rate Spot Rate

Exchange Rate $.35 = 1 LCU $.32 = 1 LCU $.30 = 1 LCU $.29 = 1 LCU $.28 = 1 LCU $.27 = 1 LCU

The company's borrowing rate is 12%. The present value factor for one month is .9901. [QUESTION] REFER TO: 09-13 95. (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 2018 net income. (C.) Compute the effect on 2019 net income. Answer: Date 11/10/18 12/01/18 12/31/18 02/01/19 1 2

Spot $.35 $.32 $.29 $.27

Value $33,600 $30,720 $27,840 $25,920

Change

Forward

-$5,760 -$1,920

$.30 $.28 $.27

Change

+$1,9011 +$ 9792

[(.30 - .28) 96,000] × .9901 = 1,901 [(.30 - .27) 96,000] = 2,880 – 1,901 = 979

A.

11/10/18 Accounts receivable Sales

33,600 33,600

12/01/18 No entry 12/31/18 Foreign exchange loss Accounts receivable

5,760 5,760

Forward contract AOCI

1,901

AOCI Gain on forward contract

5,760

1,901

5,760

Discount expense AOCI 3 [96,000 × ($.32 - $.30) / 2] for 1st of 2 mos. 02/01/19 Foreign exchange loss Accounts receivable

9603 960 1,920 1,920

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Forward contract AOCI

979 979

AOCI Gain on forward contract

1,920 1,920

Discount expense AOCI 4 [96,000 × ($.32 - $.30) /2] for 2nd of 2 mos. Foreign currency Accounts receivable Cash Forward contract Foreign currency B.

Sales Foreign exchange loss Gain on forward contract Discount expense Increase

9604 960

25,920 25,920 28,800 2,880 25,920

$ 33,600 ( 5,760) 5,760 ( 960) $ 32,640

C.

Foreign exchange loss $( 1,920) Gain on forward contract 1,920 Discount expense ( 960) Decrease $( 960) Learning Objective: 09-07 Topic: Hedge–Forward contract–FC denominated asset Difficulty: 3 Hard Blooms: Analyze Blooms: Apply AACSB: Knowledge Application AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] REFER TO: 09-13 96. (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 2018 net income. (C.) Compute the effect on 2019 net income. Answer: A. 11/10/18 Accounts receivable 33,600 Sales 33,600

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Page 9-43

12/01/18 No entry 12/31/18 Foreign exchange loss Accounts receivable

5,760 5,760

Forward contract Gain on forward contract

1,901 1,901

02/01/19 Foreign exchange loss Accounts receivable

1,920 1,920

Forward contract Gain on forward contract

979 979

Foreign currency Accounts receivable Cash Forward contract Foreign currency

25,920 25,920 28,800 2,880 25,920

Learning Objective: 09-07 Topic: Hedge–Forward contract–FC denominated asset Difficulty: 3 Hard Blooms: Analyze Blooms: Apply AACSB: Knowledge Application AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement REFERENCE: 09-14 On October 1, 2018, 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, 2018, a forward exchange contract was acquired whereby Jarvis Co. was to pay 100,000 LCU in four months (on February 1, 2019) and receive $78,000 in U.S. dollars. The spot and forward rates for the LCU were as follows: Date October 1, 2018

Rate Description Spot Rate

Exchange Rate $.83= 1 LCU

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Page 9-44

December 31, 2018 February 1, 2019

Spot Rate 1-Month Forward Rate Spot Rate

$.85 = 1 LCU $.80 = 1 LCU $.86 = 1 LCU

The company's borrowing rate is 12%. The present value factor for one month is .9901. Any discount or premium on the contract is amortized using the straight-line method. [QUESTION] REFER TO: 09-14 97. Assuming this is a cash flow hedge; prepare journal entries for this sales transaction and forward contract. Answer: Date

Spot

10/01/18 $.83 12/31/18 $.85 02/01/19 $.86 1 2

Fair Value $83,000 $85,000 $86,000

FV Change $2,000 $1,000

Forward to 02/01/19 $.78 $.80 $.86

Forward Change $(1,980)1 $ (6,020)2

[(.80 - .78) 100,000] × .9901 = 1,980 [(.78 - .86) 100,000] – 1,980 = 6,020

10/01/18 Accounts receivable Sales

83,000

12/31/18 Accounts receivable Foreign exchange gain

2,000

83,000

2,000

AOCI Forward contract

1,980

Loss on forward contract AOCI

2,000

Discount expense AOCI 3 [100,000 × ($.83 - $.78) × 3/4] for 3 of 4 months

3,7503

1,980

2,000

02/01/19 Accounts receivable Foreign exchange gain

3,750

1,000 1,000

AOCI Forward contract

6,020

Loss on forward contract AOCI

1,000

6,020

1,000

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Page 9-45

Discount expense AOCI 4 [100,000 × ($.83 - $.78) × 1/4] for 1 of 4 months

1,2504

Foreign currency Accounts receivable

86,000

Cash Forward contract Foreign currency

78,000 8,000

1,250

86,000

86,000

Learning Objective: 09-07 Topic: Hedge–Forward contract–FC denominated asset Difficulty: 3 Hard Blooms: Analyze Blooms: Apply AACSB: Knowledge Application AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] REFER TO: 09-14 98. Assuming this is a fair value hedge; prepare journal entries for this sales transaction and forward contract. Answer:

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Page 9-46

Date 10/1/18 12/31/18 2/1/19

Spot $.83 $.85 $.86

Value $83,000 $85,000 $86,000

Change +$2,000 + 1,000

Forward $.78 $.80 $.86

Adjustment -$1,980 1 -$6,020 2

1 [(.80 - .78)100,000] × 0.9901 = 1,980 2 [(.78 - .86)100,000] × 1,980 = 6,020 10/1/18 12/31/18

2/1/19

Accounts receivable Sales Accounts receivable Foreign exchange gain Loss on forward contract Forward contract Accounts receivable Foreign exchange gain Loss on forward contract Forward contract Foreign currency Accounts receivable Cash Forward contract Foreign currency

83,000 83,000 2,000 2,000 1,980 1,980 1,000 1,000 6,020 6,020 86,000 86,000 78,000 8,000 86,000

Learning Objective: 09-07 Topic: Hedge–Forward contract–FC denominated asset Difficulty: 3 Hard Blooms: Analyze Blooms: Apply AACSB: Knowledge Application AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 99. On October 31, 2017, Darling Company negotiated a two-year 100,000 franc loan from a foreign bank at an interest rate of 3 percent per year. Interest payments are made annually on October 31, and the principal will be repaid on October 31, 2019. 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:

October 31, 2017 December 31, 2017 October 31, 2018 December 31, 2018

Franc Rate $0.50 $0.52 $0.60 $0.62

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Page 9-47

October 31, 2019

$0.75

Answer: In US dollars: 10/31/17

12/31/17

10/31/18

12/31/18

10/31/19

Cash Note payable (franc) [100,000 × $.500] To record the note and conversion of 100,000 francs into $ at the spot rate Interest expense Interest payable (franc) [100,000 × 3% × 2/12 = 500 francs × $.52 spot rate] To accrue interest for the period 10/31/17 – 12/31/17.

50,000 50,000

260 260

Foreign exchange loss Note payable (franc) [100,000 × ($.52 – $.50)] To revalue the note payable at the spot rate of $.52 and record a foreign exchange loss.

2,000

Interest expense [2,500 francs × $.60] Interest payable (franc) Foreign exchange loss [500 francs × ($.60 – $.52)] Cash [3,000 francs × $.60] To record the first annual interest payment, record interest expense for the period 1/1 – 10/31/18, and record a foreign exchange loss on the interest payable accrued at 12/31/17.

1,500 260 40

Interest expense Interest payable (franc) [500 francs × $.62] To accrue interest for the period 10/31 –12/31/18.

310

Foreign exchange loss Note payable (franc) [100,000 × ($.62 – $.52)] To revalue the note payable at the spot rate of $.62 and record a foreign exchange loss.

10,000

Interest expense [2,500 francs × $.75] Interest payable (franc) Foreign exchange loss [500 francs × ($.75 – $.62)] Cash [3,000 francs × $.75] To record the second annual interest payment, record interest expense for the period 1/1 – 10/31/19, and record a foreign exchange loss on the interest payable

1,875 310 65

2,000

1,800

310

10,000

2,250

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Page 9-48

accrued at 12/31/18. Note payable (franc) Foreign exchange loss Cash [100,000 francs × $.75] To record payment of the 100,000 franc note.

62,000 13,000 75,000

Learning Objective: 09-03 Topic: Foreign currency borrowing Difficulty: 3 Hard Blooms: Analyze Blooms: Apply AACSB: Knowledge Application AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 100. 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 buyer appreciates. _____4. Import purchase by a U.S. company denominated in dollars, foreign currency of buyer appreciates. _____5. Import purchase by a U.S. company denominated in foreign currency, foreign currency of buyer depreciates. _____6. Import purchase by a U.S. company denominated in dollars, foreign currency of buyer 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. Answer: (1) N; (2) G; (3) L ; (4) N; (5) G; (6) N; (7) N; (8) L Learning Objective: 09-02 Topic: Foreign currency transactions―Not hedged Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement

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Page 9-49

File: Chapter 10 - Translation of Foreign Currency Financial Statements Multiple Choice: [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. Answer: E Learning Objective: 10-01 Topic: Translation concepts―Temporal method Topic: Translation concepts―Current rate method Difficulty: 1 Easy Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 2. 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. Answer: A Learning Objective: 10-02 Topic: Determine the functional currency Difficulty: 1 Easy Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: B Learning Objective: 10-02 Topic: Determine whether current rate or temporal method Difficulty: 1 Easy Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 10-1

Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 4. In translating a foreign subsidiary's financial statements, which exchange rate does the current method require for the subsidiary's assets and liabilities? 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. Answer: D Learning Objective: 10-01 Topic: Translation method―Choose the rate to use Difficulty: 1 Easy Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: C Learning Objective: 10-02 Topic: Treatment of translation adjustment Difficulty: 1 Easy Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement REFERENCE: 10-01 Westmore, Ltd. is a British subsidiary of a U.S. company. Westmore's functional currency is the pound sterling (£). The following exchange rates were in effect during 2018:

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Jan. 1 June 30 Dec. 31 Weighted average rate for the year

£1 = $1.60 £1 = $1.64 £1 = $1.61 £1 = $1.59

[QUESTION] REFER TO: 10-01 6. Westmore reported sales of £1,500,000 during 2018. What amount (rounded) would have been included for this subsidiary in calculating consolidated sales? A) $2,415,000. B) $2,400,000. C) $2,385,000. D) $ 943,396. E) $ 931,677. Answer: C Learning Objective: 10-01 Learning Objective: 10-02 Learning Objective: 10-03 Topic: Translation method―Choose the rate to use Topic: Determine whether current rate or temporal method Topic: Use current rate method for balances Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: Current rate method: £1,500,000 × $1.59 (Avg Rate) = $2,385,000 [QUESTION] REFER TO: 10-01 7. On December 31, 2018, Westmore had accounts receivable of £280,000. What amount (rounded) would have been included for this subsidiary in calculating consolidated accounts receivable? A) $173,913. B) $176,100. C) $445,200. D) $448,000. E) $450,800. Answer: E Learning Objective: 10-01 Learning Objective: 10-02 Learning Objective: 10-03 Topic: Translation method―Choose the rate to use Topic: Determine whether current rate or temporal method Topic: Use current rate method for balances Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: FN Measurement Feedback: £280,000 × $1.61 = $450,800 [QUESTION] 8. Gunther Co. established a subsidiary in Mexico on January 1, 2018. The subsidiary engaged in the following transactions during 2018: Jan. 1

Dec. 31

Sold common stock to Gunther for 5,000,000 pesos. Purchased inventory throughout the year, 8,000,000 pesos (¼ of the inventory remained at year end). Sales for the year totaled 12,000,000 pesos. Purchased equipment for 1,000,000 pesos.

Gunther concluded that the subsidiary’s functional currency was the dollar. Exchange rates for 2018 were: Jan. 1 1 peso = $.20 31 1 peso = $.19 Dec. 31 1 peso = $.16 Weighted average rate for the year 1 peso = $.18

What amount of foreign exchange gain or loss would have been recognized in Gunther's consolidated income statement for 2018? A) $800,000 gain. B) $760,000 gain. C) $320,000 loss. D) $280,000 loss. E) $440,000 loss. Answer: D Learning Objective: 10-02 Learning Objective: 10-04 Topic: Treatment of translating retained earnings Topic: Use temporal method for balances Topic: Prepare remeasurement gain or loss Difficulty: 3 Hard Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: Cash: 5,000,000p - 8,000,000p + 12,000,000p - 1,000,000p = = 8,000,000p x current rate $.16 = $1,280,000. Inventory: Average for year purchase 8,000,000p – sell 6,000,000p = 2,000,000 x average rate $.18 = $360,000. Equipment: 1,000,000p x historical rate $.16 = $160,000. Total assets = $1,280,000 + 360,000 + $160,000 = $1,800,000. Common stock: 5,000,000p x historical rate $.20 = $1,000,000. Retained earnings must be $800,000. There were no beginning retained earnings or dividends. Thus, net income must be $800,000. Sales: 12,000,000p x weighted average for year $$.18 = 2,160,000. Cost of goods sold: Purchase 8,000,000p less ending inventory 2,000,000p = $6,000,000 x weighted Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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average rate for year (per information provided for flow of goods) $.18 = $1,080,000. Gross profit $1,080,000. Expenses: $0. Net income per retained earnings statement must be $800,000. Remeasurement loss = $1,080,000 – 800,000 - $280,000. Alternatively by doing the statement of cash flows: Pesos Operating Activities Sales Cost of Goods Sold Net Income Increase in Inventory Net Cash from Operations Investing Activities Purchase Equipment Net Cash from Investing Activities Financing Activities Stock Sold Net Cash from Investing Activities Increase in Cash Effect of exchange rate change on cash Cash at December 31, 2017 Cash at December 31, 2018

Translation Rate

U.S.$

12,000,000 6,000,000 6,000,000 (2,000,000) 4,000,000

0.18 0.18

A A

0.18

A

(1,000,000) (1,000,000)

0.16

H

(160,000) (160,000)

5,000,000 5,000,000 8,000,000

0.20

H

1,000,000 1,000,000 1,560,000 (280,000)

C

1,280,000

To Balance 8,000,000

0.16

2,160,000 (1,080,000) 1,080,000 (360,000) 720,000

REFERENCE: 10-02 Darron Co. was formed on January 1, 2018 as a wholly owned foreign subsidiary of a U.S. corporation. Darron's functional currency was the stickle (§). The following transactions and events occurred during 2018: Jan. 1 June 30 Dec. 31

Darron issued common stock for §1,000,000. Darron paid dividends of §20,000. Darron reported net income of §80,000 for the year.

Exchange rates for 2018 were: Jan. 1 June 30 Dec. 31 Weighted average rate for the year

$1 = §.48 $1 = §.46 $1 = §.42 $1 = §.44

[QUESTION] REFER TO: 10-02 9. What exchange rate should have been used in translating Darron's revenues and expenses for 2018? A) $1 = §.48. B) $1 = §.44. C) $1 = §.46. D) $1 = §.42. E) $1 = §.45. Answer: B Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Learning Objective: 10-01 Learning Objective: 10-02 Topic: Translation method―Choose the rate to use Topic: Determine whether current rate or temporal method Difficulty: 1 Easy Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: Current rate method: Average Rate for Revenues & Expenses [$1 = §.44] [QUESTION] REFER TO: 10-02 10. What was the amount of the translation adjustment for 2018? A) $60,800 decrease in relative value of net assets. B) $60,800 decrease in relative value of net assets. C) $61,200 decrease in relative value of net assets. D) $466,400 increase in relative value of net assets. E) $26,000 increase in relative value of net assets. Answer: B Learning Objective: 10-03 Topic: Prepare translation adjustment Difficulty: 3 Hard Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: [§1,000,000 × [$.42 - $.48] ($.06) = ($60,000)] + [§20,000 × [$.42 - $.46] ($.04)] = ($800) = ($60,800) Loss in Relative Asset Value [QUESTION] 11. Sinkal Co. was formed on January 1, 2018 as a wholly owned foreign subsidiary of a U.S. corporation. Sinkal's functional currency was the stickle (§). The following transactions and events occurred during 2018: Jan. 1 June 30 Dec. 31

Sinkal issued common stock for §1,000,000. Sinkal paid dividends of §20,000. Sinkal reported net income of §80,000 for the year.

Exchange rates for 2018 were: Jan. 1 June 30 Dec. 31 Weighted average rate for the year

§1 = $.42 §1 = $.46 §1 = $.48 §1 = $.44

What was the amount of the translation adjustment for 2018? A) $52,000 decrease in relative value of net assets. B) $60,400 decrease in relative value of net assets. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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C) $60,400 increase in relative value of net assets. D) $440,000 decrease in relative value of net assets. E) $26,000 increase in relative value of net assets. Answer: B Learning Objective: 10-03 Topic: Prepare translation adjustment Difficulty: 3 Hard Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: [§1,000,000 × [$.48 - $.42] $.06 = $60,000] + [§20,000 × [$.48 - $.46] $.02] = $400 = $60,400 increase in Relative Asset Value [QUESTION] 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. Answer: B Learning Objective: 10-01 Topic: Translation concepts―Current rate method Difficulty: 2 Medium Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: C Learning Objective: 10-01 Topic: Translation concepts―Temporal method Difficulty: 2 Medium Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 14. For a foreign subsidiary that uses the U.S. dollar as its functional currency, what method is required Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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to ready the financial statements for consolidation? A) Current/Noncurrent Method. B) Monetary/Nonmonetary Method. C) Current Rate Method. D) Temporal Method. E) Indirect Method. Answer: D Learning Objective: 10-02 Topic: Determine whether current rate or temporal method Difficulty: 2 Medium Blooms: Understand AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement REFERENCE: 10-03 Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's functional currency was the U.S. dollar. [QUESTION] REFER TO: 10-03 15. 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. Answer: A Learning Objective: 10-02 Topic: Determine the functional currency Difficulty: 2 Medium Blooms: Analyze AACSB: Diversity AACSB: Analytical Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] REFER TO: 10-03 16. 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. Answer: E Learning Objective: 10-04 Topic: Use temporal method for balances Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 10-8

Difficulty: 1 Easy Blooms: Understand AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement REFERENCE: 10-04 Certain balance sheet accounts of a foreign subsidiary of the Tulip Co. had been stated in U.S. dollars as follows:

Accounts receivable — current Accounts receivable — long -term Prepaid insurance Goodwill Totals

Stated at Current Historical Rates Rates $ 280,000 $ 308,000 140,000 154,000 70,000 77,000 112,000 119,000 $ 602,000 $ 658,000

[QUESTION] REFER TO: 10-04 17. If the subsidiary’s local currency is its functional currency, what total amount should be included in Tulip's balance sheet in U.S. dollars? A) $609,000. B) $658,000. C) $602,000. D) $630,000. E) $616,000. Answer: C Learning Objective: 10-01 Learning Objective: 10-02 Learning Objective: 10-03 Topic: Translation method―Choose the rate to use Topic: Determine whether current rate or temporal method Topic: Use current rate method for balances Difficulty: 1 Easy Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: Current rate method: If LC is the Functional Currency, Current Rates Used for All Items = $602,000 [QUESTION] REFER TO: 10-04 18. If the U.S. dollar is the functional currency of this subsidiary, what total amount should be included Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 10-9

in Tulip's balance sheet in U.S. dollars? A) $609,000. B) $658,000. C) $602,000. D) $630,000. E) $616,000. Answer: E Learning Objective: 10-01 Learning Objective: 10-02 Learning Objective: 10-04 Topic: Translation method―Choose the rate to use Topic: Determine whether current rate or temporal method Topic: Use temporal method for balances Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: Temporal method: If the Dollar is the Functional Currency, Current Rates Used for Receivables at their Historical Rate ($280,000 + $140,000 + $77,000 + $119,000) = $616,000 REFERENCE: 10-05 A subsidiary of Porter 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, 2017, for §120,000 that was sold on January 17, 2018 for §156,000. The subsidiary paid for the inventory on January 31, 2018. Currency exchange rates between the dollar and the Stickle were as follows: November 1, 2017 December 31,2017 January 1, 2018 January 31, 2018 Average for 2018

$.19 = §1 $.20 = §1 $.22 = §1 $.23 = §1 $.24 = §1

[QUESTION] REFER TO: 10-05 19. What amount would have been reported for this inventory in Porter's consolidated balance sheet at December 31, 2017? A) $24,000. B) $26,400. C) $22,800. D) $27,600. E) $28,800. Answer: A Learning Objective: 10-01 Learning Objective: 10-02 Learning Objective: 10-03 Topic: Translation method―Choose the rate to use Topic: Determine whether current rate or temporal method Topic: Use current rate method for balances Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 10-10

Difficulty: 1 Easy Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: Current rate method: §120,000 × $.20 = $24,000 [QUESTION] REFER TO: 10-05 20. What amount would have been reported for cost of goods sold on Porter's consolidated income statement at December 31, 2018? A) $24,000. B) $26,400. C) $22,800. D) $27,600. E) $28,800. Answer: E Learning Objective: 10-01 Learning Objective: 10-02 Learning Objective: 10-03 Topic: Translation method―Choose the rate to use Topic: Determine whether current rate or temporal method Topic: Use current rate method for balances Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: Current rate method: §120,000 × $.24 = $28,800 [QUESTION] 21. A U.S. company's foreign subsidiary had the following amounts in stickles (§) in 2018: Cost of goods sold Ending inventory Beginning inventory

§ 12,000,000 600,000 240,000

The average exchange rate during 2018 was §1 = $.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 = $.90. The exchange rate at December 31, 2018 was §1 = $.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 2018 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. Answer: D Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Learning Objective: 10-01 Learning Objective: 10-02 Topic: Temporal method―Cost of goods sold Topic: Highly inflationary economies Difficulty: 3 Hard Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: Beginning Inventory [(§240,000 × $1.20) $288,000] – Purchases [Beginning Inventory §240,000 – COGS §12,000,000 – Ending Inventory §600,000 = §12,360,000 × $.96 = $11,865,600] – Ending Inventory [(§600,000 × $.90) $540,000] = COGS $11,613,600 [QUESTION] 22. A U.S. company's foreign subsidiary had the following amounts in stickles (§), the functional currency, in 2018: Cost of goods sold Ending inventory Beginning inventory

§ 12,000,000 600,000 240,000

The average exchange rate during 2018 was §1 = $.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 = $.90. The exchange rate at December 31, 2018 was §1 = $.84. At what amount should the foreign subsidiary's cost of goods sold have been reflected in the 2018 U.S. dollar income statement? A) $11,253,600. B) $11,577,600. C) $11,520,000. D) $11,613,600. E) $11,523,600. Answer: C Learning Objective: 10-01 Learning Objective: 10-02 Topic: Translation method―Choose the rate to use Topic: Determine whether current rate or temporal method Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: Current rate method: §12,000,000 × $.96 = $11,520,000 [QUESTION] 23. A U.S. company's foreign subsidiary had the following amounts in stickles (§), the functional currency, in 2018:

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Cost of goods sold Ending inventory Beginning inventory

§ 12,000,000 600,000 240,000

The average exchange rate during 2018 was §1 = $.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 = $.90. The exchange rate at December 31, 2018 was §1 = $.84. Assuming that the foreign nation for the subsidiary had a highly inflationary economy, at what amount should that foreign subsidiary's purchases have been reflected in the 2018 U.S. dollar income statement? A) $11,865,600. B) $11,577,600. C) $11,520,000. D) $11,613,600. E) $11,523,600. Answer: A Learning Objective: 10-01 Learning Objective: 10-02 Topic: Temporal method―Cost of goods sold Topic: Highly inflationary economies Difficulty: 3 Hard Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: Beginning Inventory §240,000 – COGS §12,000,000 – Ending Inventory §600,000 = Purchases §12,360,000 × $.96 = $11,865,600 [QUESTION] 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. Answer: B Learning Objective: 10-01 Topic: Translation concepts―Current rate method Topic: Translation concepts―Temporal method Difficulty: 2 Medium Blooms: Understand AACSB: Diversity AACSB: Analytical Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 10-13

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. Answer: E Learning Objective: 10-01 Topic: Net asset or net liability―Adjustment direction Difficulty: 2 Medium Blooms: Analyze AACSB: Diversity AACSB: Analytical Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: D Learning Objective: 10-01 Topic: Net asset or net liability―Adjustment direction Difficulty: 2 Medium Blooms: Analyze AACSB: Diversity AACSB: Analytical Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: D Learning Objective: 10-01 Topic: Net asset or net liability―Adjustment direction Difficulty: 2 Medium Blooms: Analyze AACSB: Diversity AACSB: Analytical Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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. Answer: E Learning Objective: 10-01 Topic: Net asset or net liability―Adjustment direction Difficulty: 2 Medium Blooms: Analyze AACSB: Diversity AACSB: Analytical Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: C Learning Objective: 10-01 Topic: Translation concepts―Current rate method Difficulty: 1 Easy Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: E Learning Objective: 10-02 Topic: Determine whether current rate or temporal method Difficulty: 1 Easy Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] 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. Answer: C Learning Objective: 10-01 Topic: Treatment of inventory at net realizable value Difficulty: 2 Medium Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: C Learning Objective: 10-01 Topic: Treatment of inventory at net realizable value Difficulty: 2 Medium Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: D Learning Objective: 10-01 Topic: Translation method―Choose the rate to use Difficulty: 1 Easy Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: D Learning Objective: 10-01 Topic: Translation method―Choose the rate to use Difficulty: 1 Easy Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 35. Under the current rate method, property, plant & equipment would be translated at what rate? A) Beginning of the year rate. B) Average rate. C) Current rate. D) Historical rate. E) Composite amount. Answer: C Learning Objective: 10-01 Topic: Translation method―Choose the rate to use Difficulty: 2 Medium Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 36. Under the temporal method, property, plant & equipment would be remeasured at what rate? A) Beginning of the year rate. B) Average rate. C) Current rate. D) Historical rate. E) Composite amount. Answer: D Learning Objective: 10-01 Topic: Translation method―Choose the rate to use Difficulty: 2 Medium Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: E Learning Objective: 10-01 Topic: Translation method―Choose the rate to use Difficulty: 2 Medium Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: E Learning Objective: 10-01 Topic: Translation method―Choose the rate to use Difficulty: 2 Medium Blooms: Understand AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: B Learning Objective: 10-01 Topic: Translation method―Choose the rate to use Difficulty: 2 Medium Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: D Learning Objective: 10-01 Topic: Translation method―Choose the rate to use Difficulty: 2 Medium Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: E Learning Objective: 10-01 Topic: Translation method―Choose the rate to use Difficulty: 2 Medium Blooms: Understand AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: B Learning Objective: 10-01 Topic: Translation method―Choose the rate to use Difficulty: 2 Medium Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: D Learning Objective: 10-02 Topic: Treatment of translation adjustment Difficulty: 2 Medium Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: A Learning Objective: 10-02 Topic: Treatment of translation adjustment Difficulty: 2 Medium Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: B Learning Objective: 10-02 Topic: Highly inflationary economies Difficulty: 2 Medium Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: D Learning Objective: 10-02 Topic: Highly inflationary economies Difficulty: 2 Medium Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 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. Answer: C Learning Objective: 10-06 Topic: Preparing a consolidation worksheet Difficulty: 3 Hard Blooms: Analyze AACSB: Diversity AACSB: Analytical Thinking AICPA: BB Global AICPA: FN Decision Making [QUESTION] 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. Answer: B Learning Objective: 10-03 Topic: Use current rate method for balances Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Difficulty: 3 Hard Blooms: Analyze AACSB: Diversity AACSB: Analytical Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 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? 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. Answer: D Learning Objective: 10-06 Topic: Preparing a consolidation worksheet Difficulty: 2 Medium Blooms: Analyze AACSB: Diversity AACSB: Analytical Thinking AICPA: BB Global AICPA: FN Measurement REFERENCE: 10-06 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 2018: Beginning inventory Purchases Ending inventory

€ 20,000 400,000 € 15,000

Relevant exchange rates follow: 4 th quarter average, 2017 December 31, 2017 Average for 2018 4 th quarter average, 2018 December 31, 2018

$.93 = €1 .94 = €1 .96 = €1 .99 = €1 1.01 = €1

[QUESTION] REFER TO: 10-06 50. Compute the cost of goods sold for 2018 in U.S. dollars using the temporal method. A) $376,650. B) $387,750. C) $388,800. D) $400,950. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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E) $409,050. Answer: B Learning Objective: 10-01 Learning Objective: 10-04 Topic: Temporal method―Cost of goods sold Topic: Use temporal method for balances Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: Begin Inventory (€20,000 × $.93 = $18,600) + Purchases (€400,000 × $.96 = $384,000) – End Inventory (€15,000 × $.99 = $14,850) = COGS $387,750 [QUESTION] REFER TO: 10-06 51. Compute the cost of goods sold for 2018 in U.S. dollars using the current rate method. A) $376,550. B) $387,750. C) $388,800. D) $400,950. E) $409,050. Answer: C Learning Objective: 10-01 Learning Objective: 10-03 Topic: Translation method―Choose the rate to use Topic: Use current rate method for balances Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: €405,000 × $.96 = $388,800 [QUESTION] REFER TO: 10-06 52. Compute ending inventory for 2018 under the temporal method. A) $13,950. B) $14,100. C) $14,400. D) $14,850. E) $15,150. Answer: D Learning Objective: 10-01 Learning Objective: 10-04 Topic: Translation method―Choose the rate to use Topic: Use temporal method for balances Difficulty: 2 Medium Blooms: Apply Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: €15,000 × $.99 = $14,850 [QUESTION] REFER TO: 10-06 53. Compute ending inventory for 2018 under the current rate method. A) $13,950. B) $14,100. C) $14,400. D) $14,850. E) $15,150. Answer: E Learning Objective: 10-01 Learning Objective: 10-03 Topic: Translation method―Choose the rate to use Topic: Use current rate method for balances Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: €15,000 × $1.01 = $15,150 REFERENCE: 10-07 A foreign subsidiary uses the first-in first-out inventory method. The following inventory balances are given at December 31, 2018 in local currency units (LCU): Inventory at cost

320,000 LCU

Inventory at net realizable value

420,000 LCU

The following exchange rates are given for 2018: 4th quarter average, 2018 December 31, 2018

$1.43 = 1 LCU 1.42 = 1 LCU

[QUESTION] REFER TO: 10-07 54. Compute the December 31, 2018, inventory balance using the lower of cost or net realizable value method under the temporal method. A) $321,000. B) $457,600. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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C) $596,400. D) $454,400. E) $419,000. Answer: B Learning Objective: 10-01 Topic: Treatment of inventory at net realizable value Difficulty: 3 Hard Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: 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. [QUESTION] REFER TO: 10-07 55. Compute the December 31, 2018, inventory balance using the current rate method. A) $454,400. B) $457,600. C) $596,400. D) $419,000. E) $321,000. Answer: A Learning Objective: 10-01 Topic: Treatment of inventory at net realizable value Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: Inventory at Cost 320,000 LCU × $1.42 = $454,400 REFERENCE: 10-08 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, 2018. The equipment was purchased on January 1, 2017. Relevant exchange rates for the peso are as follows:

January 1, 2017 March 1, 2018 December 31, 2018 Average, 2018

$.110 .106 .102 .105

[QUESTION] REFER TO: 10-08 56. 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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C) $1,590. D) $1,090. E) $1,650. Answer: C Learning Objective: 10-01 Topic: Treatment for gain or loss on sale of asset Topic: Use current rate method for balances Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: [Sales Price 140,000p × $.106 = $14,840] – [BV at Historical Cost 200,000p – Acc. Deprec. 75,000p = 125,000p × $.106 = $13,250] = $1,590 Gain [QUESTION] REFER TO: 10-08 57. 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. Answer: D Learning Objective: 10-01 Topic: Treatment for gain or loss on sale of asset Topic: Temporal method―Property and depreciation Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: [Sales Price 140,000p × $.106 = $14,840] – [BV at Historical Cost 200,000p – Acc. Deprec. 75,000p = 125,000p × $.110 = $13,750] = $1,090 Gain REFERENCE: 10-09 Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31, 2018, have been restated into U.S. dollars as follows:

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Restated at Current Rates Historical Rates Cash $ 47,500 $ 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 Total $418,000 $396,000 [QUESTION] REFER TO: 10-09 58. 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, 2018, for the above items? A) $407,500. B) $418,000. C) $396,000. D) $403,500. E) $398,500. Answer: A Learning Objective: 10-01 Learning Objective: 10-02 Learning Objective: 10-04 Topic: Translation method―Choose the rate to use Topic: Determine whether current rate or temporal method Topic: Use temporal method for balances Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: 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 [QUESTION] REFER TO: 10-09 59. 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, 2018, for the above items? A) $407,500. B) $418,000. C) $396,000. D) $403,500. E) $398,500. Answer: B Learning Objective: 10-01 Learning Objective: 10-02 Learning Objective: 10-04 Topic: Translation method―Choose the rate to use Topic: Determine whether current rate or temporal method Topic: Use current rate method for balances Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: If LC is the Functional Currency, Current Rates Used for All Items = $418,000 [QUESTION] REFER TO: 10-09 60. If the current rate used to restate these amounts is $.95, what was the average historical rate used to arrive at the total amount for historical rates? A) $0.9000. B) $1.0000. C) $0.9500. D) $0.9474. E) $1.0556. Answer: A Learning Objective: 10-04 Topic: Use temporal method for balances Difficulty: 2 Medium Blooms: Analyze AACSB: Diversity AACSB: Analytical Thinking AICPA: BB Global AICPA: FN Measurement Feedback: $418,000 / $.95 = $440,000; $396,000 / $440,000 = $.90 REFERENCE: 10-10 Kennedy Company acquired all of the outstanding common stock of Hastie Company of Canada for U.S. $350,000 on January 1, 2018, when the exchange rate for the Canadian dollar (CAD) was U.S. $.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, 2018, Hastie's trial balance net income was translated at U.S. $25,000. The average exchange rate for the Canadian dollar during 2018 was U.S. $.68, and the 2018 year-end exchange rate was U.S. $.65. [QUESTION] REFER TO: 10-10 61. Calculate the U.S. dollar amount allocated to the patent at January 1, 2018. A) $50,000. B) $35,000. C) $34,000. D) $32,500. E) $28,200. Answer: B Learning Objective: 10-06 Topic: Preparing a consolidation worksheet Difficulty: 2 Medium Blooms: Apply Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: $350,000 – FV of Assets (C$450,000 × $.70) $315,000 = $35,000 Patent Value [QUESTION] REFER TO: 10-10 62. Amortization of the patent, translated, for 2018 would be A) $ 7,000. B) $10,000. C) $ 6,800. D) $ 9,000. E) $ 6,500. Answer: C Learning Objective: 10-06 Topic: Preparing a consolidation worksheet Difficulty: 3 Hard Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: Patent Value $35,000 / $.70 = Patent Value C$50,000 / 5 yrs = C$10,000 per year × $.68 = $6,800 Translated [QUESTION] REFER TO: 10-10 63. Compute the amount of the patent reported in the consolidated balance sheet at December 31, 2018. A) $28,200. B) $25,700. C) $35,000. D) $27,200. E) $26,000. Answer: E Learning Objective: 10-06 Topic: Preparing a consolidation worksheet Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: Patent Value C$50,000 – Amortization for 2018 C$10,000 = BV C$40,000 × $.65 = $26,000 Translated [QUESTION] REFER TO: 10-10 64. Kennedy's share of Hastie's net income for 2018 would be A) $18,000. B) $15,000. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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C) $18,200. D) $16,000. E) $18,500. Answer: C Learning Objective: 10-06 Topic: Preparing a consolidation worksheet Difficulty: 3 Hard Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: Translated Net Income $25,000 – Translated Amortization $6,800 = $18,200 Parent’s Share of Net Income for 2018 REFERENCE: 10-11 Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2017. Selected account balances are available for the year ended December 31, 2018, and are stated in Euro, the local currency. Sales Inventory (bought on February 1, 2018) Equipment (bought on January 1, 2017) Dividends (paid on September 1, 2018) Accumulated depreciation – Equipment 12/31/18 Depreciation expense – Equipment, 2018

€400,000 20,000 90,000 20,000 45,000 9,000

Relevant exchange rates for 1 Euro are given below: January 1, 2017 January 1, 2018 February 1, 2018 September 1, 2018 December 31, 2018 4 th quarter average, 2017 4 th quarter average, 2018 Average, 2018

$ .91 .93 .94 .97 1.01 .90 .98 .95

[QUESTION] REFER TO: 10-11 65. Assume the functional currency is the Euro; compute the U.S. income statement amount for sales for 2018. A) $364,000. B) $372,000. C) $380,000. D) $360,000. E) $404,000. Answer: C Learning Objective: 10-01 Learning Objective: 10-02 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Learning Objective: 10-03 Topic: Translation method―Choose the rate to use Topic: Determine whether current rate or temporal method Topic: Use current rate method for balances Difficulty: 1 Easy Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: €400,000 × $.95 = $380,000 [QUESTION] REFER TO: 10-11 66. Assume the functional currency is the Euro; compute the U.S. balance sheet amount for inventory at December 31, 2018. A) $18,800. B) $19,600. C) $18,000. D) $20,200 E) $19,000. Answer: D Learning Objective: 10-01 Learning Objective: 10-02 Learning Objective: 10-03 Topic: Translation method―Choose the rate to use Topic: Determine whether current rate or temporal method Topic: Use current rate method for balances Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: €20,000 × $1.01 = $20,200 [QUESTION] REFER TO: 10-11 67. Assume the functional currency is the Euro; compute the U.S. balance sheet amount for equipment for 2018. A) $81,900. B) $90,900. C) $83,700. D) $88,200. E) $85,500. Answer: B Learning Objective: 10-01 Learning Objective: 10-02 Learning Objective: 10-03 Topic: Translation method―Choose the rate to use Topic: Determine whether current rate or temporal method Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Topic: Use current rate method for balances Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: €90,000 × $1.01 = $90,900 [QUESTION] REFER TO: 10-11 68. Assume the functional currency is the Euro; compute the U.S. Statement of Retained Earnings amount reported for Dividends in 2018. A) $19,000. B) $20,200. C) $18,600. D) $19,400. E) $19,600. Answer: D Learning Objective: 10-01 Learning Objective: 10-02 Learning Objective: 10-03 Topic: Translation method―Choose the rate to use Topic: Determine whether current rate or temporal method Topic: Use current rate method for balances Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: €20,000 × $.97 = $19,400 [QUESTION] REFER TO: 10-11 69. Assume the functional currency is the Euro; compute the U.S. balance sheet amount for accumulated depreciation for 2018. A) $40,950. B) $41,850. C) $45,450. D) $42,750. E) $44,100. Answer: C Learning Objective: 10-01 Learning Objective: 10-02 Learning Objective: 10-03 Topic: Translation method―Choose the rate to use Topic: Determine whether current rate or temporal method Topic: Use current rate method for balances Difficulty: 2 Medium Blooms: Apply Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: €45,000 × $1.01 = $45,450 [QUESTION] REFER TO: 10-11 70. Assume the functional currency is the Euro; compute the U.S. income statement amount for depreciation expense for 2018. A) $8,190. B) $8,370. C) $8,820. D) $9,090. E) $8,550. Answer: E Learning Objective: 10-01 Learning Objective: 10-02 Learning Objective: 10-03 Topic: Translation method―Choose the rate to use Topic: Determine whether current rate or temporal method Topic: Use current rate method for balances Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: €9,000 × $.95 = $8,550 [QUESTION] REFER TO: 10-11 71. Assume the functional currency is the U.S. Dollar; compute the U.S. income statement amount for sales for 2018. A) $364,000. B) $372,000. C) $380,000. D) $360,000. E) $404,000. Answer: C Learning Objective: 10-01 Learning Objective: 10-02 Learning Objective: 10-04 Topic: Translation method―Choose the rate to use Topic: Determine whether current rate or temporal method Topic: Use temporal method for balances Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: FN Measurement Feedback: €400,000 × $.95 = $380,000 [QUESTION] REFER TO: 10-11 72. Assume the functional currency is the U.S. Dollar; compute the U.S. balance sheet amount for inventory, at cost, for 2018. A) $18,800. B) $19,600. C) $18,000. D) $20,200. E) $19,000. Answer: A Learning Objective: 10-01 Learning Objective: 10-02 Learning Objective: 10-04 Topic: Translation method―Choose the rate to use Topic: Determine whether current rate or temporal method Topic: Use temporal method for balances Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: €20,000 × $.94 = $18,800 [QUESTION] REFER TO: 10-11 73. Assume the functional currency is the U.S. Dollar; compute the U.S. balance sheet amount for equipment for 2018. A) $81,900. B) $90,900. C) $83,700. D) $88,200. E) $85,500. Answer: A Learning Objective: 10-01 Learning Objective: 10-02 Learning Objective: 10-04 Topic: Translation method―Choose the rate to use Topic: Determine whether current rate or temporal method Topic: Use temporal method for balances Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: €90,000 × $.91 = $81,900 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] REFER TO: 10-11 74. Assume the functional currency is the U.S. Dollar; compute the U.S. statement of retained earnings amount for dividends for 2018. A) $19,000. B) $20,200. C) $18,600. D) $19,400. E) $19,600. Answer: D Learning Objective: 10-01 Learning Objective: 10-02 Learning Objective: 10-04 Topic: Translation method―Choose the rate to use Topic: Determine whether current rate or temporal method Topic: Use temporal method for balances Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: €20,000 × $.97 = $19,400 [QUESTION] REFER TO: 10-11 75. Assume the functional currency is the U.S. Dollar; compute the U.S. balance sheet amount for accumulated depreciation for 2018. A) $40,950. B) $41,850. C) $45,450. D) $42,750. E) $44,100. Answer: A Learning Objective: 10-01 Learning Objective: 10-02 Learning Objective: 10-04 Topic: Translation method―Choose the rate to use Topic: Determine whether current rate or temporal method Topic: Use temporal method for balances Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: €45,000 × $.91 = $40,950 [QUESTION] REFER TO: 10-11 76. Assume the functional currency is the U.S. Dollar; compute the U.S. income statement amount for Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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depreciation expense for 2018. A) $8,190. B) $8,370. C) $8,820. D) $9,090. E) $8,550. Answer: A Learning Objective: 10-01 Learning Objective: 10-02 Learning Objective: 10-04 Topic: Translation method―Choose the rate to use Topic: Determine whether current rate or temporal method Topic: Use temporal method for balances Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement Feedback: €9,000 × $.91 = $8,190 Essay: [QUESTION] 77. A foreign subsidiary was acquired on January 1, 2018. Determine the exchange rate used to restate the following accounts at December 31, 2018. Land was purchased on October 1, 2018. Relevant exchange dates follow: (A) January 1, 2018 (B) October 1, 2018 (C) December 31, 2018 (D) Average, 2018 (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. Answer: (1.) C; (2) C; (3.) C; (4.) A; (5.) E; (6.) B; (7.) A; (8.) C; (9.) A; (10.) E Learning Objective: 10-01 Learning Objective: 10-02 Topic: Translation method―Choose the rate to use Topic: Determine whether current rate or temporal method Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Difficulty: 2 Medium Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 78. In translating a foreign subsidiary's financial statements, what exchange rate should be used for the subsidiary's revenues and expenses? Answer: 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. Learning Objective: 10-01 Topic: Translation method―Choose the rate to use Difficulty: 2 Medium Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 79. How can a parent corporation determine the functional currency for a foreign subsidiary that conducts business in more than one country? Answer: 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. Learning Objective: 10-02 Topic: Determine the functional currency Difficulty: 2 Medium Blooms: Analyze AACSB: Diversity AACSB: Communication AACSB: Analytical Thinking AICPA: BB Global AICPA: FN Decision Making [QUESTION] 80. 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? Answer: 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. Learning Objective: 10-01 Topic: Translation method―Choose the rate to use Difficulty: 1 Easy Blooms: Remember Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 81. Perkle Co. owned a subsidiary in Belgium; the subsidiary's functional currency was the Belgian franc. During 2018, 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? Answer: 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. Learning Objective: 10-05 Topic: Hedging balance sheet exposure Difficulty: 1 Easy Blooms: Understand AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 82. Under what circumstances would the remeasurement of a foreign subsidiary's financial statements be required? Answer: 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. Learning Objective: 10-02 Learning Objective: 10-04 Topic: Determine whether current rate or temporal method Topic: Highly inflationary economies Topic: Use temporal method for balances Difficulty: 2 Medium Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 83. A foreign subsidiary of a U.S. corporation purchased equipment on January 4, 2015. (A.) How would depreciation expense on the equipment be translated for 2018? (B.) How would depreciation expense on the equipment be remeasured for 2018? Answer: (A.) Depreciation expense would be translated using the average exchange rate for 2018. (B.) Depreciation expense would be remeasured using the exchange rate in effect when the equipment was purchased. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 10-38

Learning Objective: 10-01 Learning Objective: 10-02 Topic: Translation method―Choose the rate to use Topic: Temporal method―Property and depreciation Difficulty: 2 Medium Blooms: Remember AACSB: Diversity AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 84. 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? Answer: 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. Learning Objective: 10-01 Topic: Translation concepts―Current rate method Difficulty: 1 Easy Blooms: Understand AACSB: Diversity AACSB: Communication AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Measurement [QUESTION] 85. 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? Answer: 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. Learning Objective: 10-02 Topic: Determine the functional currency Difficulty: 1 Easy Blooms: Understand AACSB: Diversity AACSB: Communication AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Decision Making [QUESTION] 86. What is the justification for the remeasurement of foreign currency transactions? Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 10-39

Answer: 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. Learning Objective: 10-01 Topic: Translation concepts―Temporal method Difficulty: 2 Medium Blooms: Evaluate AACSB: Diversity AACSB: Communication AACSB: Analytical Thinking AICPA: BB Global AICPA: FN Decision Making [QUESTION] 87. Contrast the purpose of remeasurement with the purpose of translation. Answer: 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. Learning Objective: 10-01 Learning Objective: 10-04 Topic: Translation concepts―Current rate method Topic: Translation concepts―Temporal method Topic: Use temporal method for balances Difficulty: 2 Medium Blooms: Understand AACSB: Diversity AACSB: Communication AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Decision Making Problems: [QUESTION] 88. On January 1, 2018, Fandu Corp. began operations of a foreign subsidiary. On April 1, 2018, the subsidiary purchased inventory costing 150,000 stickles. One-fourth of this inventory remained unsold at the end of 2018 while 40% of the liability from the purchase had not yet been paid. The pertinent indirect exchange rates were: January 1, 2018 $1 = §3.0 April 1, 2018 $1 = §3.4 Average for 2018 $1 = §3.2 December 31, 2018 $1 = §3.6 Required: What should have been the December 31, 2018 inventory and accounts payable balances for this foreign Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 10-40

subsidiary as translated into U.S. dollars? (Round your answers to the nearest whole dollar.) Answer: Inventory (§150,000 × ¼ × (1 ÷ 3.6))

$ 10,417

Accounts payable (§ 150,000 × 40% × (1 ÷ 3.6))

$ 16,667

Learning Objective: 10-01 Learning Objective: 10-03 Topic: Translation method―Choose the rate to use Topic: Use current rate method for balances Difficulty: 3 Hard Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement [QUESTION] 89. On January 1, 2018, 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 2018: January 1, 2018 July 14, 2018 October 1, 2018

Issued common stock for §500,000 Sold a patent at a gain of §40,000 Paid dividends of §60,000

Malont’ s operating revenues and expenses for 2018 were §800,000 and §650,000, respectively. The appropriate exchange rates were: January 1, 2018 July 14, 2018 October 1, 2018 December 31, 2018 Average for 2018

§1 = $2.5 §1 = $2.1 §1 = $2.6 §1 = $2.7 §1 = $2.4

Required: Calculate the translation adjustment for Malont. (Round your answers to the nearest whole dollar.) Answer: Net assets, 1/1/18 Change in net assets, 2018: Common stock issuance Operating income Gain on sale of patent Dividends paid

§

Stickles 0

Rate

U.S. Dollars

500,000 150,000 40,000 (60,000)

§2.5H §2.4A §2.1H §2.6H

$1,250,000 360,000 84,000 (156,000)

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Page 10-41

Net assets, 12/31/18 Net assets, 12/31/18 at current exchange rate Translation adjustment , 2018 (positive)

§ 630,000 § 630,000

$1,538,000 §2.7C

1,701,000 $ (163,000)

Learning Objective: 10-03 Topic: Prepare translation adjustment Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement REFERENCE: 10-12 Ginvold Co. began operating a subsidiary in a foreign country on January 1, 2018 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, 2019. A building was then purchased for §170,000 on January 1, 2018. 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, 2018. The functional currency for the subsidiary was the Stickle (§). Currency exchange rates were as follows: January 1, 2018 October 1, 2018 Average for 2018 December 31, 2018

§1 = $2.40 §1 = $2.22 §1 = $2.28 §1 = $2.16

[QUESTION] REFER TO: 10-12 90. Prepare an income statement for this subsidiary in stickles and then translate these amounts into U.S. dollars. Answer:

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Page 10-42

Ginvold Co. Subsidiary Income Statement For the Year Ended December 31, 2018

Rent revenue Interest expense Depreciation expense Repair expense Net income

Stickles § 72,000 ( 12,000) ( 17,000) ( 5,000) § 38,000

Rate x $2.28 A = x $2.28 A = x $2.28 A = x $2.22 H =

U.S. Dollars $ 164,160 ( 27,360) ( 38,760) ( 11,100) $ 86,940

Learning Objective: 10-01 Learning Objective: 10-03 Topic: Translation method―Choose the rate to use Topic: Use current rate method for balances Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement [QUESTION] REFER TO: 10-12 91. Prepare a statement of retained earnings for this subsidiary in stickles and then translate the amounts into U.S. dollars. Answer: Ginvold Co. Subsidiary Statement of Retained Earnings For the Year Ended December 31, 2018 Stickles Rate Retained earnings, 1/1/18 § 0 Net income 38,000 (above) Dividends paid (6,000) x $2.16H= Retained earnings, 12/31/18 §32,000 Learning Objective: 10-01 Learning Objective: 10-03 Topic: Treatment of translating retained earnings Topic: Use current rate method for balances Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement

U.S. Dollars $ 0 86,940 (12,960) $73,980

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Page 10-43

[QUESTION] REFER TO: 10-12 92. Prepare a balance sheet for this subsidiary in stickles and then translate the amounts into U.S. dollars. Answer: Ginvold Co. Subsidiary Balance Sheet December 31, 2018

Cash Rent receivable Building Accumulated depreciation Total assets

Stickles § 49,000 12,000 170,000 (17,000) §214,000

Rate x $2.16C = x $2.16C = x $2.16C = x $2.16C =

U. S. Dollars $ 105,840 25,920 367,200 (36,720) $ 462,240

Interest payable Note payable Common stock Retained earnings Translation adjustment Total liabilities and equities

§ 12,000 120,000 50,000 32,000 ______0_ §214,000

x $2.16C = x $2.16C = x $2.40H = (above) (below)

$ 25,920 259,200 120,000 73,980 (16,860) $462,240

Calculation of Translation Adjustment Net assets, 1/1/18 § 0 Change in net assets, 2018: Common stock issuance 50,000 Net income 38,000 Dividends paid (6,000) Net assets, 12/31/18 § 82,000 Net assets, 12/31/18 at current exchange rate § 82,000 Translation adjustment, 2018 negative Learning Objective: 10-03 Topic: Prepare translation adjustment Topic: Use current rate method for balances Difficulty: 3 Hard Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement

$

0

x $2.40 = (above) x $2.16 =

120,000 86,940 (12,960) $193,980

x $2.16 =

177,120 $ 16,860

[QUESTION] REFER TO: 10-12 93. Prepare a statement of cash flows for this subsidiary in stickles and then translate the amounts into U.S. dollars. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 10-44

Answer: Ginvold Co. Subsidiary Statement of Cash Flows For the Year Ended, December 31, 2018

Stickles Operating activities: Net income § 38,000 Depreciation 17,000 Increase in rent receivable (12,000) Increase in interest payable 12,000 Net cash from operations 55,000 Investing activities: Purchase of building (170,000) Financing activities: Proceeds from common stock 50,000 Proceeds from note payable 120,000 Dividend paid (6,000) Net cash from financing 164,000 Increase in cash 49,000 Effect of exchange rate change on cash Cash at December 31, 2017 0 Cash at December 31, 2018 § 49,000 Learning Objective: 10-03 Topic: Use current rate method for balances Difficulty: 3 Hard Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement

Rate

U. S. Dollars

(Above) x $2.28A = x $2.28A = x $2.28A =

$ 86,940 38,760 (27,360) 27,360 125,700

x $2.40H =

(408,000)

x $2.40H = x $2.40H = x $2.16H =

120,000 288,000 (12,960) 395,040 112,740 (6,900) 0 $105,840

x $2.16C =

REFERENCE: 10-13 Boerkian Co. started 2018 with two assets: Cash of §26,000 (Stickles) and Land that originally cost §72,000 when acquired on April 4, 2015. On May 1, 2018, the company rendered services to a customer for §36,000, an amount immediately paid in cash. On October 1, 2018, 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, 2015 January 1, 2018 May 1, 2018 October 1, 2018 December 31, 2018

§1 = $.28 §1 = $.29 §1 = $.30 §1 = $.31 §1 = $.35

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Page 10-45

[QUESTION] REFER TO: 10-13 94. 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 2018 and state whether this is a positive or a negative adjustment. Answer: The translation adjustment is based on changes in the net assets of the subsidiary. Net assets, 1/1/18 Change in net assets, 2018: Rendered services Incurred expense Net assets, 12/31/18 Net assets, 12/31/18 at current exchange rate

§

98,000

x $.29 =

36,000 ( 22,000) § 112,000

x $.30 = x $.31 =

§ 112,000

x $.35 =

Translation adjustment, 2018 (positive)

$

28,420

( $

10,800 6,820) 32,400 39,200

$ (

6,800 )

Learning Objective: 10-03 Topic: Prepare translation adjustment Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement [QUESTION] REFER TO: 10-13 95. 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 2018 and properly label the resulting gain or loss. Answer:

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Page 10-46

The remeasurement gain or loss is based on changes in the net monetary assets of the subsidiary Net monetary assets, 1/1/18 Change in net monetary assets, 2018: Rendered services Incurred expense Net monetary assets, 12/31/18 Net monetary assets, 12/31/18 at current exchange rate

§

26,000

x $.29 =

36,000 ( 22,000) § 40,000

x $.30 = x $.31 =

§

x $.35 =

40,000

Remeasurement gain

$

7,540

$

10,800 6,820) 11,520

(

14,000 $

2,480

Learning Objective: 10-04 Topic: Prepare remeasurement gain or loss Difficulty: 3 Hard Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement [QUESTION] REFER TO: 10-13 96. 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, 2018 balance sheet, what was the translated value of the Land account? Answer: Translated value of land

§

72,000

x $.35 =

$

25,200

Learning Objective: 10-01 Learning Objective: 10-02 Learning Objective: 10-03 Topic: Translation method―Choose the rate to use Topic: Determine whether current rate or temporal method Topic: Use current rate method for balances Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement [QUESTION] REFER TO: 10-13 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 10-47

97. 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, 2018 balance sheet, what was the remeasured value of the Land account? Answer: Remeasured value of land

§

72,000

x $.28 =

$

20,160

Learning Objective: 10-01 Learning Objective: 10-02 Learning Objective: 10-04 Topic: Translation method―Choose the rate to use Topic: Determine whether current rate or temporal method Topic: Use temporal method for balances Difficulty: 2 Medium Blooms: Apply AACSB: Diversity AACSB: Knowledge Application AICPA: BB Global AICPA: FN Measurement

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Page 10-48

Chapter 11 - Worldwide Accounting Diversity and International Accounting Standards Multiple Choice: [QUESTION] 1. In the United States, foreign companies filing annual reports with the SEC that are not prepared in accordance with U.S. GAAP must: A) Present financial statements that comply with international GAAP. B) Conform with U.S. GAAP or present a reconciliation to U.S. GAAP. C) Have a demonstrated need for capital to be used for operations in the U.S. D) Use the U.S. dollar as their reporting currency. E) Either use IFRS, or otherwise use foreign GAAP with a reconciliation to U.S. GAAP. Answer: E Learning Objective: 11-07 Topic: SEC recognition of IFRS Difficulty: 1 Easy Blooms: Understand AACSB: Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 2. Which of the following is not a likely step to furthering convergence of FASB and IFRS? A) FASB adopting an existing IASB Standard. B) IASB adopting an existing FASB standard. C) FASB and IASB issuing an identical standard. D) FASB working with IASB to develop a new standard. E) Realizing that identical standards, rather than similar standards, is not realistic. Answer: C Learning Objective: 11-07 Topic: FASB–IASB Convergence process Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: BB Legal [QUESTION] 3. All of the following are influences on the development of a country’s financial reporting practices except: A) The country’s legal system. B) The country’s political system. C) The taxation system. D) The country’s cultural system. E) The country’s level of inflation. Answer: D Learning Objective: 11-01 Topic: Accounting diversity―Factors of influence Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: BB Legal [QUESTION] 4. Which of the following is a pronouncement originally issued by the IASC and is not a pronouncement originally issued by the IASB? A) Business Combinations. B) First-Time Adoption of IFRS. C) Financial Instruments: Disclosures. D) Interim Financial Reporting. E) Operating Segments. Answer: D Learning Objective: 11-03 Topic: IFRS―Types of pronouncements Difficulty: 3 Hard Blooms: Remember AACSB: Reflective Thinking AICPA: BB Global AACSB: Diversity AICPA: FN Research [QUESTION] 5. In countries of Latin America: A) Accounting practice currently emphasizes political colonialism. B) Accounting standards previously emphasized accounting highly inflationary economies. C) Banks are the primary source of financing for companies. D) Accounting standards focus are based on recent market economy reforms. E) Accounting information is prepared to meet the needs of governmental planners. Answer: B Learning Objective: 11-01 Topic: Accounting diversity―Factors of influence Difficulty: 1 Easy Blooms: Remember AACSB: Reflective thinking AACSB: Diversity AICPA: BB Global AICPA: BB Legal [QUESTION] 6. Which of the following is not a way for a country to use IFRS? A) Require foreign companies listed on that country’s stock exchange to use IFRS for consolidated financial statements. B) Allow foreign companies listed on that country’s stock exchange to use IFRS. C) Permit its domestic companies listed on that country’s stock exchange to use IFRS. D) Adopt IFRS as that country’s national GAAP. E) All of these answer choices are correct. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Answer: E Learning Objective: 11-04 Topic: IFRS―Usage around the world Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: BB Legal [QUESTION] 7. Convergence of accounting standards would not occur by: A) FASB adopting an existing IASB standard. B) IASB adopting an existing FASB standard. C) IASB issuing a new standard. D) IASB and FASB jointly developing a new standard. E) IASB and FASB each issuing a similar but not identical standard. Answer: C Learning Objective: 11-07 Topic: FASB–IASB Convergence process Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Research [QUESTION] 8. The types of differences that exist between IFRS and U.S. GAAP would not generally include: A) Presentation differences. B) Measurement differences. C) Disclosure differences. D) Comparability differences. E) Classification differences. Answer: D Learning Objective: 11-08 Topic: IFRS–US GAAP differences―Select the type Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 9. Which of the following is not true about IFRS? A) The IASB does not have the ability to enforce proper usage of IFRS. B) IFRS is available to any organization or nation that wishes to use those standards. C) IFRS is a comprehensive set of financial reporting standards. D) IFRS includes only pronouncements issued by the IASB. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

E) IFRS are considered as generally accepted accounting principles. Answer: D Learning Objective: 11-03 Topic: IFRS―Types of pronouncements Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Global AICPA: FN Research [QUESTION] 10. Which one of the following is not a background or qualification requirement for full-time IASB members? A) Professional competence. B) Attain 10 years of auditing experience. C) Practical experience. D) Cease holding positions which might call into question their independence. E) Sever relationship with former employers. Answer: B Learning Objective: 11-02 Topic: IASC and IASB―Developers of standards Difficulty: 1 Easy Blooms: Remember AACSB: Ethics AACSB: Diversity AICPA: BB Global AICPA: BB Legal [QUESTION] 11. Which of the following is not an authoritative pronouncement of International Financial Reporting Standards (IFRSs)? A) International Financial Reporting Standards issued by the IASB B) International Accounting Standards issued by the IASC and adopted by the IASB C) Interpretations issued by the International Financial Reporting Interpretations Committee (IFRICs) D) International Accounting Principles E) Interpretations issued by the Standing Interpretations Committee (SICs) and adopted by the IASB Answer: D Learning Objective: 11-03 Topic: IFRS―Types of pronouncements Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Research [QUESTION] 12. Which of the following is not a factor influencing a country's financial reporting practices? A) Providers of financing. B) Inflation. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

C) Legal system. D) Gross National Product. E) Political and economic ties. Answer: D Learning Objective: 11-01 Topic: Accounting diversity―Factors of influence Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: BB Legal [QUESTION] 13. Which of the following statements is false regarding a country's legal system? A) The two major types of legal systems are common law and codified Roman law. B) Common law originated in the Roman jus civile. C) Code law countries tend to have more statutes governing a wider range of human activity. D) Accounting law is rather general in code law countries. E) A nongovernmental organization is more likely to develop in a common law country than in a code law country. Answer: B Learning Objective: 11-01 Topic: Accounting diversity―Factors of influence Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: BB Legal [QUESTION] 14. The most relevant factor in determining the purpose of financial reporting is: A) The nature of the country’s financing system B) The country’s current economic conditions C) The ability to control inflation D) A strong equity financing system which is more conservative, minimal disclosures, and tight tax laws. E) A weak equity financing system which is less conservative, extensive disclosures and loose tax laws. Answer: A Learning Objective: 11-01 Topic: Accounting diversity―Factors of influence Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global [QUESTION] 15. Which of the following is not a problem caused by diverse accounting practices across countries? A) Preparation of consolidated financial statements. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

B) Gaining access to foreign capital markets. C) Lack of comparability of financial statements between companies in the same country. D) Cost and expertise required of accounting staff who prepare consolidated financial statements. E) Need for a company to maintain multiple sets of accounting records. Answer: C Learning Objective: 11-02 Topic: Accounting diversity―Problems caused Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global

[QUESTION] 16. A U.S. company has many foreign subsidiaries and wants to convert its consolidated financial statements from U.S. GAAP to IFRS. Which of the following items is not one of the likely accounting issues to resolve for the opening IFRS balance sheet? A) Inventory valuation. B) Capitalizing development costs. C) Bank overdrafts that are integral to cash management. D) Goodwill calculation from acquisition of a subsidiary. E) Liability for restructuring charges. Answer: D Learning Objective: 11-06 Topic: IFRS―First-time adoption Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 17. A U.S. company has many foreign subsidiaries and is converting its consolidated financial statements from U.S. GAAP to IFRS. Which of the following items is not one of the likely accounting issues to resolve for the conversion? A) Measuring impairment. B) Classifying preferred shares of stock. C) Sale and leaseback gain recognition. D) Measuring salaries expense. E) Prior service cost recognition for defined benefit plans. Answer: D Learning Objective: 11-08 Topic: IFRS–US GAAP differences―Specific topics Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: FN Measurement [QUESTION] 18. Foreign companies whose stock is listed on a U.S. stock exchange and using foreign GAAP other than IFRS must file their annual report with the SEC on: A) Form 8-A. B) Form 10-A. C) Form 16-K. D) Form 20-F. E) Form 20-K. Answer: D Learning Objective: 11-07 Topic: SEC recognition of IFRS Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Legal AICPA: BB Global [QUESTION] 19. What international organization currently issues IFRS? A) IASB. B) IASC. C) IOSCO. D) FASB. E) EU. Answer: A Learning Objective: 11-03 Topic: IFRS―Types of pronouncements Difficulty: 1 Easy Blooms: Remember AACSB: Legal AACSB: Diversity AICPA: BB Global AICPA: BB Legal [QUESTION] 20. All of the following are ways a country may use IFRS except: A) A country may require foreign companies listed on its domestic stock exchange to use IFRS. B) A country may permit companies listed on its domestic stock exchange to use IFRS. C) A country may permit foreign companies listed on a foreign stock exchange to use foreign GAAP. D) A country may require companies listed on its domestic stock exchange to use IFRS in preparing consolidated financial statements. E) A country may adopt IFRS as its national GAAP. Answer: C Learning Objective: 11-04 Topic: IFRS―Usage around the world Difficulty: 1 Easy Blooms: Remember Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: BB Legal [QUESTION] 21. All of the following are true regarding IASB members except: A) IASB shall comprise 16 members, and up to 3 of those members may be part-time. B) Full-time members must sever employment relationships with former employers. C) Full-time members are not allowed to hold any position giving rise to perceived economic incentives that might call their independence into question. D) Part-time members must sever employment relationships with former employers. E) Primary qualifications for IASB membership are professional competence and practical experience. Answer: D Learning Objective: 11-02 Topic: IASC and IASB―Developers of standards Difficulty: 1 Easy Blooms: Remember AACSB: Ethics AACSB: Diversity AICPA: BB Global [QUESTION] 22. IFRS for SMEs differ from full IFRS in all of the following ways except: A) IFRS for SMEs require significantly fewer disclosures. B) Interim period reports need not be prepared when following IFRS for SMEs. C) Recognizing and measuring assets are simplified when following IFRS for SMEs. D) Segment reporting must be provided when following IFRS for SMEs. E) IFRS for SMEs do not require earnings per share to be reported. Answer: D Learning Objective: 11-05 Topic: IFRS for SMEs Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 23. Which of the following is not an example of IFRS simplified for SMEs? A) All borrowing costs are expensed as incurred. B) All development costs are expensed as incurred. C) Goodwill is amortized over its useful life. D) There is a choice between using the cost model and the revaluation model for property, plant, and equipment. E) Actuarial gains and losses for defined benefit plans are recognized immediately. Answer: D Learning Objective: 11-05 Topic: IFRS for SMEs Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement 24. IFRS for SMEs are primarily designed to meet the needs of: A) Small Manufacturing Enterprises. B) Governmental entities. C) Companies whose shares of stock are not publicly traded. D) Not-for-profit organizations. E) Special Model Entities. Answer: C Learning Objective: 11-05 Topic: IFRS for SMEs Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: BB Legal AICPA: FN Research [QUESTION] 25. Which of the following is the organization that governs the IASB? A) IASC. B) IOSCO. C) UNESCO. D) IFRS Foundation. E) IAS Service. Answer: D Learning Objective: 11-02 Topic: IASC and IASB―Developers of standards Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: BB Legal 26. All of the following are simplified principles for recognizing and measuring assets, liabilities, income, and expenses for SMEs under IFRS except: A) Borrowing costs are expensed as incurred. B) All development costs are expensed as incurred. C) Actuarial gains and losses for defined benefit plans may be either recognized immediately or deferred and amortized. D) Goodwill is amortized over its useful life. E) The cost model for property, plant, and equipment must be used. Answer: C Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective: 11-05 Topic: IFRS for SMEs Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement

[QUESTION] 27. Which of the following is a correct statement with regard to differences between IFRS and U.S. GAAP? A) Reporting a bank overdraft that is an integral part of a cash management policy is a recognition difference. B) Reporting LIFO inventory is a presentation difference. C) Reporting past service cost for defined benefit pension plans is a measurement difference. D) Reporting convertible debt is a recognition difference. E) Reporting development costs is a classification difference. Answer: C Learning Objective: 11-08 Topic: IFRS–US GAAP differences―Select the type Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 28. Which of the following is not one of the steps to prepare IFRS statements for the first time? A) Determine applicable IFRS accounting policies based on standards in force on the reporting date. B) Recognize assets and liabilities required to be recognized under IFRS that were not recognized under previous GAAP. C) Derecognize assets and liabilities previously recognized that are not allowed to be recognized under IFRS. D) Reclassify items previously classified in a different manner from what is acceptable under IFRS. E) Comply with most disclosure and presentation requirements. Answer: E Learning Objective: 11-06 Topic: IFRS―First-time adoption Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 29. Which of the following is not a step in preparing IFRS financial statements for the first time? Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

A) Determine applicable IFRS accounting policies based on standards in effect on the reporting date. B) Determine applicable IFRS accounting policies based on the standards in effect on the opening balance sheet date. C) Recognize assets and liabilities required to be recognized under IFRS that were not recognized under previous GAAP. D) Derecognize assets and liabilities previously recognized that are not allowed to be recognized under IFRS. E) Measure assets and liabilities recognized on the opening balance sheet in accordance with IFRS. Answer: B Learning Objective: 11-06 Topic: IFRS―First-time adoption Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 30. A company is preparing financial statements using IFRS for the first time for the year ended December 31, 2018. The “transition date” for reporting is A) December 31, 2018. B) December 31, 2017. C) January 1, 2017. D) January 1, 2018. E) January 1, 2019. Answer: D Learning Objective: 11-06 Topic: IFRS―First-time adoption Difficulty: 1 Easy Blooms: Analyze AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Use the following to answer questions 31 and 32: REFERENCE 11-01 A foreign subsidiary of a U.S.-based company has been notified of a loss contingency with an estimated cost ranging between $220,000 and $250,000 which is probable of resulting in an actual loss. Each dollar amount within this range of cost is equally likely of being the actual outcome. [QUESTION] REFER TO: 11-01 31. According to IFRS, what is the amount recognized as a provision for loss contingency? A) No amount will be recorded but an amount will be disclosed in the notes to the financial statements. B) $110,000 C) $220,000 D) $235,000 E) $250,000 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Answer: D Learning Objective: 11-08 Topic: IFRS–US GAAP differences―Specific topics Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 11-01 32. According to U.S. GAAP, what is the amount recognized as a provision for loss contingency? A) No amount will be recorded but an amount will be disclosed in the notes to the financial statements. B) $110,000 C) $220,000 D) $235,000 E) $250,000 Answer: C Learning Objective: 11-08 Topic: IFRS–US GAAP differences―Specific topics Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Critical Thinking AICPA: FN Measurement Use the following to answer questions 33 and 34: REFERENCE 11-02 Bugs, Inc., a wholly owned subsidiary of the U.S.-based company, Pillows Ltd., was notified of a loss contingency with an estimated cost ranging between $50,000 and $150,000. Bugs, Inc. hired an expert appraiser who assessed that all possible dollar amounts of liability in this range are equally likely. Management of Bugs, Inc. has estimated that there is a 60 percent chance that this contingency will result in an actual loss. [QUESTION] REFER TO: 11-02 33. According to U.S. GAAP, what is the amount recognized by Bugs, Inc. as a provision for loss contingency? A) No amount will be recorded but an amount will be disclosed in the notes to the financial statements. B) $50,000 C) $60,000 D) $100,000 E) $150,000 Answer: A Learning Objective: 11-08 Topic: IFRS–US GAAP differences―Specific topics Difficulty: 2 Medium Blooms: Analyze Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] REFER TO: 11-02 34. In the conversion from U.S. GAAP financial statements to IFRS financial statements, what is the amount of adjustment needed to adjust for the difference in accounting for a provision for loss contingency? A) $0 B) $50,000 C) $100,000 D) $150,000 E) $200,000 Answer: C Learning Objective: 11-06 Topic: IFRS to US GAAP―Conversion adjustments Difficulty: 3 Hard Blooms: Analyze AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Critical Thinking AICPA: FN Measurement [QUESTION] 35. Of the following IFRS, which was the most recently issued? A) First-Time Adoption of IFRS B) Leases C) Revenue from Contracts with Customers D) Insurance Contracts E) Financial Instruments: Disclosures Answer: B Learning Objective: 11-04 Topic: IFRS―Usage around the world Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 36. Which of the following is not a problem caused by diversity in accounting practices across countries? A) Comparing companies in the same industry that are headquartered in different countries. B) Translating foreign currency balances into U.S. dollars. C) Converting local GAAP financial statements into U.S. GAAP for consolidation purposes. D) Maintaining separate accounting records in both the local and U.S. GAAP. E) Identifying and retaining personnel who are competent to prepare financial statements in both international and domestic accounting standards. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Answer: B Learning Objective: 11-02 Topic: Accounting Diversity—Problems Caused Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 37. Which statement is correct as it relates to diverse accounting practices across countries? A) Gaining access to foreign capital markets is relatively easy and inexpensive once the financial statements are converted to the local currency of the country where the financing is desired. B) U.S. GAAP is acceptable worldwide wherever IFRS has not been adopted. C) To have stock listed on a U.S. stock exchange, all financial statements submitted to the SEC must be prepared either using U.S. GAAP or using IFRS. D) Stock analysts specializing in industry coverage can compare financial statements regardless of various national or international accounting standards used by companies being compared. E) Translating financial statements of various currencies into one common currency for consolidation purposes does not resolve the problem of diversity of accounting practices across countries. Answer: E Learning Objective: 11-02 Learning Objective: 11-04 Topic: Accounting Diversity—Problems caused Topic: IFRS―Usage around the world Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 38. Barrel of Oats (BOA), a U.S. company, was acquired by an international company and BOA has a transition date of January 1, 2018 for first-time adoption of IFRS. BOA has a new cereal brand that is ready to be marketed but the company has not yet received copyright approval for the brand’s logo. All costs for development of the copyright were expensed prior to IFRS January 1, 2018. BOA and its new international parent both have December 31 year-end accounting years. What should BOA do to prepare financial statements for the first time in accordance with IFRS? A) Debit development expense and credit copyright for the year ended December 31, 2018. B) Debit copyright and credit copyright expense at January 1, 2018. C) Debit copyright and credit research and development expense for the year ended December 31, 2017. D) Debit copyright and credit stockholders’ equity at January 1, 2018. E) Debit stockholders’ equity and credit research and development expense at January 1, 2018. Answer: D Learning Objective: 11-06 Topic: IFRS―First-time adoption Difficulty: 2 Medium Blooms: Analyze Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 39. When measuring assets and liabilities recognized on the opening balance sheet in accordance with first-time adoption of IFRS, the reporting company must: A) Use its current valuation method and disclose the method in the notes to the financial statements. B) Retrospectively apply applicable IASB standards to each asset and liability reported on the opening balance sheet. C) Prospectively apply applicable IASB standards to each asset and liability reported on the opening balance sheet. D) Recognize the difference in measurement, and disclose it in the notes to the financial statements as a change in accounting estimate. E) Retrospectively apply applicable IASB standards to each asset and liability reported on the opening balance sheet and recognize the amount of change in the income statement. Answer: B Learning Objective: 11-06 Topic: IFRS—First-time adoption Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 40. The FASB-IASB convergence project on leases resulted in the following: A) Lease accounting will be the same under IFRS and under U.S. GAAP in that lessors and lessees will capitalize all leases as finance leases and treat them as such in the measurement of income. B) Lessor and lessee accounting will be the same under IFRS and under U.S. GAAP in that lessors will capitalize all leases and lessees will capitalize some leases as finance leases but treat others as operating leases. C) Lease accounting will differ in that under IFRS lessees will capitalize some leases as finance leases and others as operating leases, while under U.S. GAAP lessees will capitalize all leases as finance leases but treat them as traditional operating leases in the measurement of net income. D) Lease accounting will be similar under IFRS and U.S. GAAP for lessees but will differ for lessors in their treatment of the measurement of net income. E) Lease accounting will differ for lessees in that, under IFRS, all leases will be treated as finance leases both on the balance sheet and in the measurement of net income, and under U.S. GAAP lessees will capitalize operating leases on the balance sheet similar to finance leases but will treat them as traditional operating leases in the measurement of income. Answer: E Learning Objective: 11-07 Topic: FASB–IASB Convergence process Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AACSB: Diversity Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: BB Global AICPA: FN Measurement [QUESTION] 41. The most recent FASB-IASB convergence projects include: A) Leases, Research and Development, Revenue Recognition, and Fair Value Measurement. B) Leases, Revenue Recognition, Fair Value Measurement, and Joint Ventures. C) Insurance Contracts, Post-Employment Benefits, Income Taxes and Impairment D) Insurance Contracts, Income Taxes, Leases, and Revenue Recognition. E) Revenue Recognition, Leases, Insurance Contracts, and Income Taxes. Answer: B Learning Objective: 11-07 Topic: FASB–IASB Convergence process Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement

Essay: [QUESTION] 42. Why do countries have their own unique set of financial reporting practices? Answer: Five commonly accepted factors influence financial reporting practices: (1) legal system, (2) taxation, (3) financing system, (4) inflation, and (5) political and economic ties. Because of the differences in these five factors from one country to another, and because international standards had not been created when many individual country's standards were created, countries continue to have unique financial reporting practices and standards. Learning Objective: 11-01 Topic: Accounting diversity―Factors of influence Difficulty: 2 Medium Blooms: Understand AACSB: Communication AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 43. State the two major types of legal systems used around the world and briefly describe their differences. Answer: The two major types of legal systems used around the world are common law and code law. Common law is primarily used in the English-speaking countries of the world and relies on a limited amount of statute law interpreted by the courts. Code law is followed in most non-English-speaking countries, originated in the Roman jus civile, and tends to rely more on statute or codified law. Learning Objective: 11-01 Topic: Accounting diversity―Factors of influence Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 2 Medium Blooms: Remember AACSB: Communication AACSB: Diversity AICPA BB Global AICPA: BB Legal [QUESTION] 44. The major providers of financing in some countries are stockholders, while other countries predominantly use banks as the main financing source. What difference does it make to accounting disclosures in comparing a company from one of each of those countries? Answer: When banks dominate financing, there is less pressure for public information and disclosures. However, as companies become more reliant upon equity, demand for information increases. Therefore, the disclosures in countries whose main providers of financing are banks are significantly less than those disclosures in countries dependent upon stockholders' equity. Learning Objective: 11-01 Topic: Accounting diversity―Factors of influence Difficulty: 2 Medium Blooms: Understand AACSB: Communication AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 45. What problems are caused by diverse accounting practices? Answer: (1) Difficulty in preparation of consolidated financial statements by companies with foreign operations; (2) difficulty in gaining access to foreign capital markets; and (3) the lack of comparability of financial statements between companies from countries with different accounting standards. Learning Objective: 11-02 Topic: Accounting diversity―Problems caused Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 46. What is the IOSCO? Answer: The International Organization of Securities Commissions (IOSCO) is an organization of stock exchange regulators in more than 100 countries, including the SEC of the United States. One of its objectives is to facilitate cross-border securities offerings and listings by multinational issuers. Therefore, IOSCO has supported accounting standard harmonization. Learning Objective: 11-02 Topic: IASC and IASB―Developers of standards Difficulty: 2 Medium Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Remember AACSB: Communication AACSB: Diversity AICPA: BB Global [QUESTION] 47. What are the four types of authoritative pronouncements that make up the International Financial Reporting Standards (IFRS)? Answer: The four types of authoritative pronouncements are International Financial Reporting Standards issued by the IASB, the International Accounting Standards issued by the IASC adopted by the IASB, the Interpretations issued by the International Financial Reporting Interpretations Committee (IFRICs), and Interpretations issued by the Standing Interpretations Committee (SICs) (and adopted by the IASB). Learning Objective: 11-03 Topic: IFRS―Types of pronouncements Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Research [QUESTION] 48. What does the IASB’s Conceptual Framework for Financial Reporting state as the objective of general purpose financial reporting? Answer: The IASB Conceptual Framework states that the objective of general purpose financial reporting is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the entity. Learning Objective: 11-03 Topic: IFRS―Types of pronouncements Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Research [QUESTION] 49. What are the four different ways IFRS can be used by a country? Answer: IFRS can be used by a country by (1) adopting IFRS as its national GAAP, (2) requiring domestic listed companies to use IFRS in preparation of consolidated financial statements, (3) permitting domestic companies listed on the domestic stock exchange to use IFRS, and (4) requiring or allowing foreign companies listed on the domestic stock exchange to use IFRS. Learning Objective: 11-04 Topic: IFRS―Usage around the world Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: BB Global AICPA: FN Measurement [QUESTION] 50. What are the two primary methods used by countries to incorporate IFRS into their financial reporting requirements for listed companies? Answer: (1) Full adoption of IFRS as issued by the IASB, without any intervening review or approval by a local body. (2) Adoption of IFRS after some form of jurisdictional review and approval process. Learning Objective: 11-04 Topic: IFRS―Usage around the world Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: BB Legal [QUESTION] 51. With regard to IFRS, what does SME refer to, and what is the significance with regard to financial reporting requirements? Answer: With regard to IFRS, SME refers to small and medium–sized entities that do not have publicly traded securities. IFRS issues IFRS for SMEs which are a less complex set of standards than full IFRS. Fewer disclosures are required and some principles for recognizing assets, liabilities, income, and expenses are simplified. Additionally, some topics in full IFRS such as earnings per share, interim reporting, and segment reporting are not required for SMEs to comply with for financial reporting. Objective: 11-05 Topic: IFRS for SMEs Difficulty: 2 Medium Blooms: Remember AACSB: Communication AICPA: BB Global AICPA: FN Research [QUESTION] 52. What are some examples of accounting treatments under IFRS for SMEs for recognizing and measuring assets, liabilities, income, and expenses? Answer: Under IFRS for SMEs, (1) borrowing costs are expensed as incurred, (2) development costs are expensed as incurred, (3) goodwill is amortized over a useful life, (4) the cost model must be used for property, plant, and equipment, and (5) actuarial gains and losses for defined benefit plans are recognized immediately. Learning Objective: 11-05 Topic: IFRS for SMEs Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: FN Measurement [QUESTION] 53. What are the steps to be taken in preparing IFRS financial statements for the first time? Answer: There are five (5) steps to preparing IFRS financial statements for the first time. Step 1 – Determine the applicable IFRS accounting policies based on standards in force on the reporting date. Step 2 – Recognized assets and liabilities required to be recognized under IFRS that were not recognized under previous GAAP and derecognize assets and liabilities previously recognized that are not allowed to be recognized under IFRS. Step 3 – Measure assets and liabilities recognized on the opening balance sheet in accordance with IFRS. Step 4 – Reclassify items previously classified in a different manner from what is acceptable under IFRS. Step 5 – Comply with all presentation and disclosure requirements. Learning Objective: 11-06 Topic: IFRS―First-time adoption Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 54. What two reconciliations are required by IFRS 1 for first-time IFRS Adopters? Answer: (1) Reconciliation of total equity measured under previous GAAP to total equity measured under IFRS at: (a) the date of transition and (b) the end of the comparative period. (2) Reconciliation of net income measured under previous GAAP to net income measured under IFRS for the comparative period. Learning Objective: 11-06 Topic: IFRS―First-time adoption Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 55. What is the significance of the “Norwalk Agreement?” Answer: The “Norwalk Agreement” set the FASB and IASB along the path of convergence of accounting standards. The FASB and IASB agreed to “use their best efforts to (a) make their existing financial reporting standards fully compatible as soon as is practicable and (b) to coordinate their work program to ensure that once achieved, compatibility is maintained.” Learning Objective: 11-07 Topic: FASB–IASB Convergence process Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

[QUESTION] 56. In the 2012 Financial Staff Report issued by the SEC, what were some of the unresolved issues identified that prevented the SEC from requiring IFRS usage? Answer: (1) The diversity in how IFRS are interpreted, applied, and enforced in variance jurisdictions. (2) The potential cost to U.S. issuers of adopting or incorporating IFRS. (3) Investor education. Learning Objective: 11-07 Topic: SEC recognition of IFRS Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 57. What are recognition differences in financial reporting and what would be an example of a recognition difference between IFRS and U.S. GAAP? Answer: Recognition differences relate to whether an item is recognized or not, how it is recognized, or when it is recognized. An example of recognition differences between IFRS and U.S. GAAP exists for the recognition of research and development costs. U.S. GAAP requires that research and development costs must be expensed immediately. The only exception relates to costs incurred in developing computer software, which must be capitalized when several restrictive criteria are met. IFRS (IAS 38) also requires immediate expensing of all research costs. Development costs, on the other hand, must be recognized as an internally generated intangible asset when certain criteria are met. These costs are amortized over their useful life not to exceed 20 years. Learning Objective: 11-08 Topic: IFRS–US GAAP differences―Recognition Difficulty: 2 Medium Blooms: Understand AACSB: Communication AACSB: Diversity AICPA: BB Global AICPA: FN Measurement [QUESTION] 58. What are measurement differences in financial reporting and what would be an example of a difference between IFRS and U.S. GAAP?? Answer: Measurement differences result in different amounts being recognized in the financial statements from using different measurement methods. An example of measurement differences between IFRS and U.S. GAAP exists for the measurement of a contingent liability. For example, when it is determined under both sets of accounting standards that a contingent liability needs to be recognized, and a range of possible cash outflows exists, IFRS requires measurement of the liability at the midpoint of the range when all points in the range are equally likely. However, U.S. GAAP requires the liability to be measured at the low end of the range of values. Learning Objective: 11-08 Topic: IFRS–US GAAP differences―Measurement Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 2 Medium Blooms: Understand AACSB: Communication AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Use the following to answer questions 59 – 61: REFERENCE 11-03 Dowa, Ltd.. is a foreign company that uses IFRS for its financial reporting. Dowa is a wholly-owned subsidiary of Ide Corp. which is a U.S. company that prepares its consolidated financial statements in accordance with U.S. GAAP. Dowa purchased a piece of equipment for 2,000,000 on January 1, 2017. The equipment is comprised of the following three significant components, shown with their associated cost and useful life. Component Cost Useful Life Housing 400,000 20 years Control Unit 600,000 5 years Motor 1,000,000 10 years 2,000,000 As a corporate policy, Ide Corp. utilizes the straight-line method of depreciation for machinery and equipment and plans to extend this policy to Dowa, Ltd. [QUESTION] REFER TO: 11-03 59. Prepare the journal entry for the 2017 depreciation expense for Dowa, Ltd. based on IFRS accounting principles. Answer: Depreciation Expense Accumulated Depreciation – Machinery

$ 240,000 $ 240,000

Learning Objective: 11-08 Topic: IFRS–US GAAP differences―Specific topics Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: [400,000 / 20] + [600,000 / 5] + [1,000,000 / 10] = 20,000 + 120,000 + 100,000 = $240,000 [QUESTION] REFER TO: 11-03 60. Prepare the journal entry for the 2017 depreciation expense for Ide Corp. based on U.S. GAAP. Answer: Depreciation Expense Accumulated Depreciation – Machinery

$ 100,000 $ 100,000

Learning Objective: 11-08 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Topic: IFRS–US GAAP differences―Specific topics Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: [2,000,000 / 20] = $100,000 [QUESTION] REFER TO: 11-03 61. Prepare the journal entry to convert the 2017 Dowa, Ltd. financial statements from IFRS to U.S. GAAP. Answer: Accumulated Depreciation - Machinery Depreciation Expense

$ 140,000 $ 140,000

Learning Objective: 11-09 Topic: IFRS to US GAAP―Conversion adjustments Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Feedback: According to U.S. GAAP rules applied to Ide Corp., both Accumulated Depreciation – Machinery and Depreciation Expense are overstated by $140,000; therefore the entry to convert Dowa, Ltd. financial statements to U.S. GAAP results in a debit to Accumulated Depreciation – Machinery of $140,000 and a credit to Depreciation Expense of $140,000. [QUESTION] 62. On December 31, 2017, Carter Corp. a foreign subsidiary of Barter Corp., had a bank overdraft of $20,000 on one of its bank accounts. Bank overdrafts are an integral part of Carter’s cash management policy. 1) Prepare the journal entry to convert the foreign subsidiary from its IFRS financial statements to U.S.GAAP financial statements. 2) Briefly explain why this journal entry is required. Answer: (1) Cash and cash equivalents Short-term borrowings

$ 20,000 $ 20,000

(2) Under IFRS, bank overdrafts are classified as a reduction in cash and cash equivalents. Under U.S. GAAP, bank overdrafts are classified as a liability. To convert financial statements, a reclassification entry is required to change the account in which the bank overdraft is held so that the overdraft will be presented in the proper section of the financial statements. Learning Objective: 11-08 Learning Objective: 11-09 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Topic: IFRS–US GAAP differences―Classification Topic: IFRS to US GAAP―Conversion adjustments Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AACSB: Diversity AICPA: BB Global AICPA: FN Measurement Problems: [QUESTION] 63. Principal Company is a U.S.-based company that prepares its consolidated financial statements in accordance with U.S. GAAP. Principal reported net income of $ 2,600,000 in 2018 and stockholders’ equity of $12,000,000 at December 31, 2018. Principal wants to determine the reporting impact of switching to IFRS. The following three items would create differences in financial reporting: 1) At December 31, 2018, management had determined that a contingent liability was reasonably possible with regard to a defective product and Principal disclosed an amount of $80,000 for this possibility. However, under IFRS, the likelihood of occurrence of an outflow of resources to settle the liability was considered probable. (Ignore income tax.) 2) Principal acquired a building at the beginning of 2016 at a cost of $5,000,000. The building has an estimated useful life of 20 years, an estimated residual value of $1,000,000, and is being depreciated on a straight-line basis. On January 1, 2018, the building has a fair value of $5,500,000. There is no change in the estimated useful life or residual value. In a switch to IFRS, Principal would use the revaluation model in IAS 16 to determine the carrying value of property, plant, and equipment subsequent to acquisition. 3) In 2018, Principal incurred $800,000 of research and development for a new product, of which 35% relates to development activities subsequent to the point at which criteria indicating the creation of an intangible asset had been met. As of the end of 2018, development of the new product had not been completed. Required: 1) Prepare a schedule reconciling net income under U.S. GAAP to net income under IFRS for the year ended December 31, 2018. 2) Prepare a schedule reconciling stockholders’ equity under U.S. GAAP to stockholders’ equity under IFRS at December 31, 2018. Answer:

1) Net income U.S. GAAP Loss from defective product Building revaluation - depreciation Deferred development costs Net income IFRS 2) Stockholders’ equity U.S. GAAP

$

$

2,600,000 ( 80,000) (50,000) 280,000 2,750,000

$ 12,000,000

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Product liability Building revaluation – basis and expense (see schedule below) Deferred development costs Stockholders’ equity IFRS

( 80,000) 850,000 280,000 $ 13,050,000 U.S. to IFRS Net Income

U.S. to IFRS Stockholders Equity

$(80,000)

$(80,000)

Product liability:

Recognition of contingent liability

U.S.

IFRS

$0

$80,000

U.S. $400,000

IFRS $400,000

0

$900,000

200,000

250,000a

Building revaluation: Accum. Depreciation 2 years BV at date of revaluation: $5,000,000 cost - $400,000 Accum. Depreciation = $4,600,000 Fair value $5,500,000 Revalue: increase Current Depreciation: a IFRS: revalued basis ($5,500,000 – residual value $1,000,000)/remaining 18 years = $250,000 expense Adjustment totals

$900,000 $(50,000)

$(50,000)

$(50,000)

$850,000

$280,000

$280,000

Development costs: 35% x $800,000 capitalized

U.S. 0

IFRS $280,000

Learning Objective: 11-06 Learning Objective: 11-08 Topic: IFRS—First-time adoption Topic: IFRS–US GAAP differences―Specific topics Difficulty: 3 Hard Blooms: Analyze AACSB: Analytical Thinking AACSB: Diversity AICPA: BB Global Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: FN Measurement

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File: Chapter 12 - Financial Reporting and the Securities and Exchange Commission Multiple Choice: [QUESTION] 1. Which one of the following is not a division of the SEC? A) The Division of Corporation Finance. B) The Division of Investment Management. C) The Division of Compliance Information. D) The Division of Enforcement. E) The Division of Trading and Markets. Answer: C Learning Objective: 12-01 Topic: About the Securities and Exchange Commission―SEC Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 2. The goals of the SEC include all except which one of the following? A) Prohibiting the dissemination of materially misstated information. B) Controlling the number of companies whose stock is listed on major stock exchanges. C) Regulating the operation of securities markets. D) Ensuring that full and fair information is disclosed to all investors before the securities of a company may be bought and sold. E) Preventing the misuse of information especially by inside parties. Answer: B Learning Objective: 12-02 Topic: Federal securities laws―Purpose Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 3. Which one of the following Federal laws was enacted in 1935? A) The Securities Act. B) The Securities Exchange Act. C) The Trust Indenture Act. D) The Investment Company Act. E) The Public Utility Holding Company Act. Answer: E Learning Objective: 12-02 Topic: Federal securities laws―Specific laws Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal

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Page 12-1

[QUESTION] 4. Regulation S-K: A) Controls the listing of securities by stock exchanges. B) Establishes requirements for nonfinancial information to be filed with the SEC. C) Prescribes the form of financial statements to be filed with the SEC. D) Describes the internal controls a publicly traded company must maintain. E) Prescribes the financial disclosure information that must be included in filings with the SEC. Answer: B Learning Objective: 12-02 Topic: SEC requirements―Regulations S-K and S-X Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 5. Which of the following are issued by the SEC, as needed, to supplement Regulation S-X and Regulation S-K? A) SABs. B) ASRs. C) FRRs. D) ARBs. E) SRBs. Answer: C Learning Objective: 12-04 Topic: The SEC authority over establishing GAAP Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 6. Regulation S-X specifies: A) Requirements for the nonfinancial information to be filed with the SEC. B) Which form a company must file to register new securities. C) That the financial statements included in a company's annual report must be audited. D) The form and content of financial statements to be filed with the SEC. E) The internal controls a publicly traded company must maintain. Answer: D Learning Objective: 12-02 Topic: SEC requirements―Regulations S-K and S-X Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 12-2

7. Which one of the following forms is used when no other form is prescribed? A) S-4. B) S-3. C) S-11. D) S-8. E) S-1. Answer: E Learning Objective: 12-05 Topic: Issuer filings with SEC―Registration statements Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 8. A wraparound filing: A) May be used by large companies to sell securities over a period of two years without re-filing with the SEC. B) Is a simplified registration procedure for securities to be issued by small companies. C) Allows a company to simplify its periodic filing by attaching its annual report to Form 10-K. D) Is a filing completed using the SEC's electronic filing system. E) May remain in effect for a period of one to five years. Answer: C Learning Objective: 12-06 Topic: Issuer filings with SEC―Periodic-10K-10Q-8K Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 9. Which one of the following registration statement forms is used by large issuers that already have at least $75 million voting stock held by non-affiliates? A) S-11. B) S-3. C) S-8. D) S-4. E) S-1. Answer: B Learning Objective: 12-05 Topic: Issuer filings with SEC―Registration statements Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement

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Page 12-3

[QUESTION] 10. What is Form 10-K? A) A quarterly report filed with the SEC. B) An annual report filed with the SEC. C) A semiannual report filed with the SEC. D) A form filed with the SEC before the company issues stock for the first time. E) A form filed with the SEC before issuing stocks to acquire another company. Answer: B Learning Objective: 12-06 Topic: Issuer filings with SEC―Periodic-10K-10Q-8K Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 11. The prospectus part of a registration contains all except which of the following? A) Financial statements for the issuing company audited by an independent CPA along with appropriate supplementary data. B) An explanation of the intended use of the proceeds to be generated by the sale of the new securities. C) A description of the risks associated with the securities. D) A description of the business and the properties owned by the company. E) Additional data concerning expenses of issuance. Answer: E Learning Objective: 12-06 Topic: Issuer registration―Procedures Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 12. When must Form 8-K be filed with the SEC? A) Within forty-five days of the end of any quarter other than the fourth quarter of the fiscal year. B) Within ninety days of the end of the fiscal year. C) Within fifteen days of the occurrence of certain significant events. D) Within sixty days of the end of the fiscal year. E) When a relatively small company intends to issue securities. Answer: C Learning Objective: 12-06 Topic: Issuer filings with SEC―Periodic-10K-10Q-8K Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement

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Page 12-4

[QUESTION] 13. Which of the following securities offerings is not exempt from registration prior to their sale? A) Securities issued to a company’s board of directors. B) Securities issued by governments. C) Securities issued by banks. D) Securities issued by savings and loan associations. E) Offerings of no more than $1 million made to any number of investors within a 12-month period. Answer: A Learning Objective: 12-06 Topic: Issuer registration―Securities exemptions Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 14. Lechter Co. is preparing to issue stock. Its revenues for last year were $85,000,000, and it had $52,000,000 in stock held by non-affiliates. The company had been filing with the SEC for two years. Which one of the following forms should have been used for registration? A) S-1. B) S-3. C) S-4. D) S-8. E) S-11. Answer: A Learning Objective: 12-05 Topic: Issuer filings with SEC―Registration statements Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 15. Which one of the following is not a prescribed event for the filing of Form 8-K? A) Bankruptcy or receivership. B) Changes in control of the registrant. C) Resignation of a middle manager. D) Changes in the registrant's independent auditor. E) Acquisitions or dispositions of assets. Answer: C Learning Objective: 12-06 Topic: Issuer filings with SEC―Periodic-10K-10Q-8K Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement

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Page 12-5

[QUESTION] 16. The SEC's operating costs are supported through A) Tax revenues of the federal government. B) Registration fees from issuers offering securities to the public. C) Fees paid by stock exchanges. D) Fees paid by stockbrokers. E) Fees paid by accounting firms that practice before the SEC. Answer: B Learning Objective 12-01 Learning Objective: 12-05 Topic: About the Securities and Exchange Commission―SEC Topic: Issuer filings with SEC―Define and describe Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 17. A proxy statement must be filed with the SEC at least how many days before being distributed? A) 30 days. B) 60 days. C) 10 days. D) 90 days. E) 7 days. Answer: C Learning Objective: 12-06 Topic: Issuer filings with SEC―Periodic-10K-10Q-8K-Proxy Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal

[QUESTION] 18. The SEC has usually restricted its role in establishing accounting principles to A) Specifying the information that should be included in interim financial statements. B) Developing definitions of key accounting terms. C) Developing accounting standards for particular industries. D) Determining required disclosures. E) The promulgation and issuance of SASs (Securities Accounting Standards). Answer: D Learning Objective: 12-04 Topic: SEC authority over establishing GAAP Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement

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Page 12-6

[QUESTION] 19. Information required in proxy statements includes all except which of the following? A) Listing of company directors and executive officers. B) Description of the business activities including principal products and sources and availability of raw materials. C) Market price of the company's common stock for each quarterly period within the two most recent fiscal years. D) Five-year summary of operations including sales, total assets, income from continuing operations, and cash dividends per share. E) Two-year summary of industry segments, export sales, and foreign and domestic operations. Answer: E Learning Objective: 12-02 Topic: SEC requirements―Proxy and annual report Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 20. When would a letter of comments be issued by the SEC? A) To request clarification of a registration statement. B) To convey your pertinent comments to the SEC. C) In response to a company's filing of Form 8-K. D) After receiving the company's Form 10-K. E) To indicate that a registration statement has been approved. Answer: A Learning Objective: 12-06 Topic: Issuer registration―Procedures Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 21. Which one of the following regulates the initial offering of securities by a company or underwriter? A) The Securities Act of 1933. B) The Securities Exchange Act of 1934. C) The Investment Company Act of 1940. D) The Investment Advisers Act of 1940. E) The Sarbanes-Oxley Act of 2002. Answer: A Learning Objective: 12-02 Topic: Federal securities laws―Specific laws Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal

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Page 12-7

[QUESTION] 22. Which one of the following prohibits fraudulent and unfair behavior such as sales practice abuses and insider trading? A) The Securities Act of 1933. B) The Securities Exchange Act of 1934. C) The Investment Company Act of 1940. D) The Investment Advisers Act of 1940. E) The Sarbanes-Oxley Act of 2002. Answer: B Learning Objective: 12-02 Topic: Federal securities laws―Specific laws Difficulty: 1 Easy Blooms: Remember AACSB: Ethics AICPA: BB Legal [QUESTION] 23. Which one of the following requires the maintenance of accounting records and adequate internal accounting controls? A) The Securities Act of 1933. B) The Securities Exchange Act of 1934. C) The Investment Company Act of 1940. D) The Foreign Corrupt Practices Act of 1977. E) Insider Trading Sanctions Act of 1984. Answer: D Learning Objective: 12-02 Topic: Federal securities laws―Specific laws Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 24. Which one of the following is not a characteristic of the Public Company Accounting Oversight Board? A) Minimizes self-regulation in the accounting profession. B) Has the authority to amend, modify, repeal, or reject any audit standard of the ASB. C) Only one member can be an accountant, past or present. D) SEC has oversight and enforcement authority over the Board. E) Enforces auditing, quality control, and independence standards and rules. Answer: C Learning Objective: 12-03 Topic: Public Accounting Oversight Board―PCAOB Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal

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Page 12-8

[QUESTION] 25. Which statement is false regarding the registration of public accounting firms with the PCAOB? A) Registration is required of all U.S. firms that prepare, issue, or participate in the preparation of an audit report for an entity that issues securities. B) Foreign accounting firms are exempt from registration. C) Disclosure requirements include annual fees received from each issuer for the firm’s audit and nonaudit services. D) The Public Company Accounting Oversight Board subjects registered firms to periodic inspections. E) Information regarding disagreements between the issuer and the audit firm during the previous year must be disclosed. Answer: B Learning Objective: 12-03 Topic: Public Accounting Oversight Board―PCAOB Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 26. What is a primary focus of the Sarbanes-Oxley Act? A) Accounting standards and the registration of securities. B) Regulation of the continuous reporting by publicly owned companies. C) Accounting standards and registration of investment companies that engage in investing and trading in securities. D) Accounting standards and penalties against persons who profit from illegal use of inside information. E) Regulation of independent audit firms and audit standards. Answer: E Learning Objective: 12-03 Topic: Sarbanes-Oxley Act―SOX Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 27. How has the SEC exercised its power with regard to the continuing evolution of accounting principles? 1. Issuing Financial Reporting Releases (FRRs). 2. Requiring additional disclosures in notes to financial statements. 3. Declaring a moratorium on the use of specified accounting practices. 4. Overruling the FASB. A) 1 and 4. B) 1, 3, and 4. C) 1 and 3. D) 1, 2, and 4. E) 1, 2, 3, and 4. Answer: E Learning Objective: 12-04 Topic: SEC authority over establishing GAAP Difficulty: 1 Easy Blooms: Remember Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 12-9

AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 28. Which of the following is not a security as defined by the SEC? A) Accounts receivable. B) Transferable share. C) Treasury stock. D) Debenture. E) Investment contract. Answer: A Learning Objective: 12-05 Topic: Issuer filings with SEC―Define and describe Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 29. EDGAR stands for: A) Electronic Debits, Gains, Assets and Revenues System. B) Electronic Data Gathering, Analysis, and Retrieval System. C) Explanatory Data Gathering, Analysis, and Retrieval System. D) Explanatory Debits, Gains, Assets and Revenues System. E) Electronic Data, Gross Analysis, and Revenues System. Answer: B Learning Objective: 12-06 Topic: Issuer filings with SEC―Periodic-10K-10Q-8K-Proxy Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 30. Filings with the SEC are divided generally into two broad categories: A) Registration statements and perpetual filings. B) Reconciliation statements and periodic filings. C) Registration statements and periodic filings. D) Registration filings and reconciliation statements. E) Reconciliation filings and perpetual filings. Answer: C Learning Objective: 12-05 Topic: Issuer filings with SEC―Define and describe Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 12-10

31. What information needs to be included in Form 10-Q? (1) Income statements for the most recent quarter and for the year to date as well as for the comparative periods in the previous year. (2) Income statements for the most recent quarter and for the year to date as well as for the comparative periods in the previous two years. (3) A statement of cash flows is necessary, but only for the year to date as well as for the corresponding period in the preceding year. (4) Two balance sheets: one for the end of the most recent quarter and one showing the company's financial position at the end of the previous fiscal year. A) 1 and 3. B) 2, 3, and 4. C) 1 and 2. D) 1, 3, and 4. E) 2 and 4. Answer: D Learning Objective: 12-06 Topic: Issuer filings with SEC―Periodic-10K-10Q-8K-Proxy Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 32. What information is required in proxy statements? (1) Five-year summary of operations. (2) Five-year summary of industry segments. (3) Listing of company directors and executive officers. (4) Management discussion and analysis (MD&A). A) 1, 2 and 3. B) 2, 3 and 4. C) 1, 3 and 4. D) 1, 2 and 4. E) 1, 2, 3, and 4. Answer: C Learning Objective: 12-02 Topic: SEC requirements―Proxy and annual report Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 33. Which information is not contained in the prospectus of the registration statement? A) A listing of directors and executive officers. B) An explanation of the intended use of the proceeds. C) A description of the risks associated with the securities. D) A description of the business of the registrant. E) A description of the properties of the registrant. Answer: A Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 12-11

Learning Objective: 12-06 Topic: Issuer registration―Procedures Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA FN Measurement [QUESTION] 34. What is shelf registration? A) A procedure that allows the sale of securities to a small group of knowledgeable investors without any general solicitation. B) A procedure that allows large companies to register securities with the SEC and then sell them over a period of two years without registering again within that period. C) A method of filing Form 10-K with the SEC. D) The registration of mutual funds that engage in investing and trading securities. E) The registration of securities issued in connection with business combination transactions. Answer: B Learning Objective: 12-06 Topic: Issuer registration―Procedures Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 35. What is private placement of securities? A) A procedure that allows a company to register securities and then sell them over a period of two years without reregistering. B) A procedure that allows the sale of securities to no more than 35 sophisticated knowledgeable investors, with no general solicitation allowed. C) A method of filing Form 10-K with the SEC. D) The registration of mutual funds that engage in investing and trading securities. E) A sale of securities to no more than 50 accredited investors, with no general solicitation allowed. Answer: B Learning Objective: 12-06 Topic: Issuer registration―Securities exemptions Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 36. What is a sophisticated investor? A) An investor with a net worth equal to or exceeding $1,000,000. B) An investor holding an active CPA license. C) An investor with a portfolio of 50 or more securities. D) An investor having knowledge and experience in financial matters. E) An investor currently serving as an audit committee member. Answer: D Learning Objective: 12-06 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 12-12

Topic: Issuer filings with SEC―Registration statements Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 37. Which one of the following requires the audit committee to be responsible for the appointment and compensation of the external auditor? A) The Securities Act of 1933. B) The Securities Exchange Act of 1934. C) The Investment Company Act of 1940. D) The Foreign Corrupt Practices Act of 1977. E) The Sarbanes-Oxley Act of 2002. Answer: E Learning Objective: 12-03 Topic: Sarbanes-Oxley Act―SOX Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 38. Which one of the following requires the registration of mutual funds that engage in investing and trading in securities? A) The Securities Act of 1933. B) The Securities Exchange Act of 1934. C) The Investment Company Act of 1940. D) The Foreign Corrupt Practices Act of 1977. E) The Sarbanes-Oxley Act of 2002. Answer: C Learning Objective: 12-02 Topic: Federal securities laws―Specific laws Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 39. Which statement is false regarding the Public Company Accounting Oversight Board (PCAOB)? A) Regulates audit standards and independent audit firms. B) Has five members appointed by the SEC. C) Allows all members to be accountants, past or present. D) Is under the oversight and enforcement of the SEC. E) Is funded by fees levied on all publicly traded companies. Answer: C Learning Objective: 12-03 Topic: Public Accounting Oversight Board―PCAOB Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: BB Legal [QUESTION] 40. Which one of the following forms is used when companies have filed with the SEC for less than 36 months but are not large enough to file form S-3? A) S-8. B) S-6. C) S-4. D) S-1. E) S-11. Answer: D Learning Objective: 12-05 Topic: Issuer filings with SEC―Registration statements Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 41. Which one of the following forms is used in connection with employee stock plans? A) S-8. B) S-3. C) S-4. D) S-1. E) S-11. Answer: A Learning Objective: 12-05 Topic: Issuer filings with SEC―Registration statements Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 42. Which of the following forms is used in connection with registration of securities by certain real estate companies? A) S-8. B) S-3. C) S-4. D) S-1. E) S-11. Answer: E Learning Objective: 12-05 Topic: Issuer filings with SEC―Registration statements Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 43. Which of the following forms is used in connection with registration of securities of a small reporting Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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company with $25 million of annual revenues and of $25 million of voting securities held by nonaffiliates? A) S-8. B) S-3. C) S-4. D) S-1 E) S-11. Answer: D Learning Objective: 12-05 Topic: Issuer filings with SEC―Registration statements Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 44. The SEC’s role in the initial registration of securities to be publicly issued is: A) To ensure that the content of the registration filing is in compliance with securities regulations. B) To ensure that securities issued are quality investments. C) To provide data to the public regarding first-time issuance of securities. D) To give permission to an independent CPA firm to audit the registrant’s financial statements. E) To make the registrant’s annual report available for public viewing. Answer: A Learning Objective: 12-05 Topic: Issuer filings with SEC―Define and describe Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 45. Audited financial statements in an annual report of an issuer that is subject to SEC regulation must include: A) Three balance sheets, three income statements, and three statements of cash flows. B) Three balance sheets, two income statements, and two statements of cash flows. C) One balance sheet, one income statement, and one statement of cash flows. D) Two balance sheets, three income statements, and three statements of cash flows. E) Two balance sheets, two income statements, and two statements of cash flows. Answer: D Learning Objective: 12-02 Topic: SEC requirements―Proxy and annual report Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 46. The audit committee of an entity subject to SEC regulation will do all of the following except: A) Be responsible for agreeing to fee compensation of the independent audit firm. B) Certify the annual financial statements. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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C) Be comprised only of individuals who are not members of management. D) Approve non-audit services provided by the independent audit firm. E) Serve as liaison between the board of directors and the independent audit firm. Answer: B Learning Objective: 12-03 Topic: Sarbanes-Oxley Act―SOX Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal

Essay: [QUESTION] 47. For each of the following situations, identify the type of form to be filed with the SEC for disclosure purposes: (A) Form 10-K (B) Form 10-Q (C) Form 8-K (D) Not required ___ 1. A unique or significant happening. ___ 2. Annual information required by Regulation S-X. ___ 3. Changes in control of the registrant. ___ 4. Interim financial statements. ___ 5. Fourth quarter income statement. ___ 6. Bankruptcy. ___ 7. Annual information required by Regulation S-K. ___ 8. Income statement for the current quarter, year-to-date, and comparative periods in the previous year. ___ 9. Changes in bookkeeping staff. ___ 10. Changes in the registrant's independent auditor. Answer: (1) C; (2) A; (3) C; (4) B; (5) D; (6) C; (7) A; (8) B; (9) D; (10) C Learning Objective: 12-06 Topic: Issuer filings with SEC―Periodic-10K-10Q-8K-Proxy Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 48. What is shelf registration? Answer: Shelf registration is a procedure that allows large companies to register securities with the SEC and then sell them over a period of two years without registering again during that period. Learning Objective: 12-06 Topic: Issuer registration―Procedures Difficulty: 2 Medium Blooms: Remember Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 49. What is a private placement of securities? Answer: A private placement of securities is a sale of securities according to Regulation D–Rule 506 of the Securities Act of 1933. A private placement is an issue of any dollar amount to unlimited nonaccredited investors and to no more than 35 sophisticated investors, knowledgeable and experienced in financial matters, who already have sufficient information available to them about the issuing company. Learning Objective: 12-06 Topic: Issuer registration―Securities exemptions Difficulty: 3 Hard Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 50. What is a wraparound filing? Answer: A wraparound filing is a method of filing Form 10-K with the SEC. The company attaches its annual report to Form 10-K and uses incorporation by reference to meet most of the filing requirements of the SEC. Learning Objective: 12-06 Topic: Issuer filings with SEC―Periodic-10K-10Q-8K-Proxy Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 51. What is included in Part I of a securities registration statement? Answer: Part I is a prospectus that includes financial statements audited by an independent CPA, an explanation of the intended use of the proceeds from the sale of such securities, a description of the risks associated with the securities, and a description of the business and properties owned by the issuer. Learning Objective: 12-06 Topic: Issuer registration―Procedures Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 52. What is included in Part II of a securities registration statement? Answer: Part II includes information that discloses issuance expenses, marketing arrangements, and other data that is primarily used by SEC staff in the registration process. Learning Objective: 12-06 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Topic: Issuer registration―Procedures Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 53. What is blue sky legislation? Answer: Blue sky legislation represents state legislation that is intended to prevent securities fraud and to offer some protection to investors. These are for securities exempt from SEC registration because they are sold to residents of the state in which the issuing company is chartered and principally doing business. Learning Objective: 12-06 Topic: Issuer registration―Securities exemptions Difficulty: 3 Hard Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 54. How are the operations of the SEC funded? Answer: The operations of the SEC are funded through registration fees charged to companies registering securities. Learning Objective: 12-01 Learning Objective: 12-05 Topic: About the Securities and Exchange Commission―SEC Topic: Issuer filings with SEC―Define and describe Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 55. What was the purpose of the Securities Act of 1933? Answer: The purpose of the Securities Act of 1933 was to ensure that potential investors can have adequate information to make investment decisions, prevent deceit, and misrepresentation in connection with the sale of securities. Learning Objective: 12-02 Topic: Federal securities laws―Purpose Topic: Federal securities laws―Specific laws Difficulty: 1 Easy Blooms: Remember AACSB: Ethics AICPA: BB Legal [QUESTION] 56. What was the purpose of the Securities Exchange Act of 1934? Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Answer: The purpose of the Securities Exchange Act of 1934 was to regulate the trading of previously issued securities through brokers and exchanges. The Act created the SEC and empowered it to: (i) require reporting by publicly owned companies; and (ii) require registration of securities, security exchanges, and certain brokers and dealers of securities. The purpose of the Act is to also prohibit fraudulent and unfair behavior such as sales practice abuses and insider trading. Learning Objective: 12-02 Topic: Federal securities laws―Purpose Topic: Federal securities laws―Specific laws Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AACSB: Ethics AICPA: BB Legal [QUESTION] 57. What is the purpose of the SEC's Regulation S-K? Answer: Regulation S-K establishes requirements for nonfinancial information that is filed with the SEC. Learning Objective: 12-02 Topic: SEC requirements―Regulations S-K and S-X Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 58. Why is the SEC's Rule 14c-3 important to the accounting profession? Answer: Rule 14c-3 is important to the accounting profession because it states that annual reports of a public company must include financial statements of the company that have been audited by CPAs as independent auditors. Learning Objective: 12-02 Topic: SEC requirements―Proxy and annual report Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 59. For what purpose is the SEC's Registration Form S-4 used? Answer: Registration Form S-4 is used to register securities issued in connection with business combination transactions. Learning Objective: 12-05 Topic: Issuer filings with SEC―Registration statements Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] 60. When must Form 8-K be filed with the SEC and in what situations must this form be used? Answer: Form 8-K must be filed with the SEC within 15 calendar days of the occurrence of a significant event. Significant events to be disclosed include: (i) a change in the company's independent auditor; (ii) entering into bankruptcy or receivership; (iii) a change in the control of the company; (iv) the acquisition of, or disposal of, assets, and (v) resignation of a director. Learning Objective: 12-06 Topic: Issuer filings with SEC―Periodic-10K-10Q-8K-Proxy Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 61. What is the purpose of Regulation S-K? Briefly describe requirements of Regulation S-K. Answer: The purpose of Regulation S-K is to establish disclosure requirements for all nonfinancial information included in filings with the SEC. The registrant must: (i) describe its business and securities; (ii) provide data about directors, officers, and management; (iii) include a management’s discussion and analysis of the company’s current financial condition and the results of its operations; (iv) disclose legal proceedings with respect to which the company is a party; and (v) identify and describe the company’s properties. Learning Objective: 12-02 Topic: SEC requirements―Regulations S-K and S-X Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 62. What is a proxy? Briefly explain the importance of a proxy solicitation and a proxy statement. Answer: A proxy is a form signed by a stockholder giving someone else the legal authority to vote the shareholders' stock at a corporation's stockholders' meeting. A proxy solicitation is a request by management for a signed proxy for an authorized vote of anyone unable to attend the annual meeting to encourage a voting quorum at the stockholders’ meeting. A proxy statement is important because it accompanies the solicitation for a stockholder’s vote and includes information regarding all matters that are to be voted upon at the stockholders’ meeting. Learning Objective: 12-06 Topic: Issuer filings with SEC―Periodic-10K-10Q-8K-Proxy Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal

[QUESTION] 63. What are the responsibilities of the SEC's Division of Corporation Finance? Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Answer: The Division of Corporation Finance has responsibility for ensuring that disclosure requirements are met by publicly held companies. Such responsibility includes the reviewing of: (i) registration statements; (ii) tender offers; (iii) proxy materials; (iv) annual reports; and (v) annual and quarterly filings. Learning Objective: 12-01 Topic: About the Securities and Exchange Commission―SEC Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 64. What are the four interconnected goals that the SEC has tried to achieve? Answer: The four interconnected goals include: (1) Ensuring that full and fair information is disclosed to all investors before the securities of a company may be bought and sold. (2) Prohibiting the dissemination of materially misstated information. (3) Preventing the misuse of information especially by inside parties. (4) Regulating the operation of securities markets such as the New York Stock Exchange and various over-the-counter exchanges. Learning Objective: 12-02 Topic: Federal securities laws―Purpose Difficulty: 2 Medium Blooms: Remember AACSB: Ethics AICPA: BB Legal [QUESTION] 65. What is required by the Trust Indenture Act of 1939? Answer: The Trust Indenture Act of 1939 requires the registration of trust indenture documents and supporting data in connection with the public sale of bonds, debentures, notes, and other debt securities. Learning Objective: 12-02 Topic: Federal securities laws―Specific laws Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 66. What information needs to be included in Form 10-Q? Answer: Information in Form 10-Q includes the following: (1) Income statements for the most recent quarter and for the year to date as well as for the comparative periods in the previous year must be included. (2) A statement of cash flows is mandatory, but only for the year to date as well as for the corresponding period in the preceding year. (3) Two balance sheets are reported: one for the end of the most recent quarter with the second showing the company's financial position at the end of the previous fiscal year. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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(4) Any needed disclosures need to be included pertaining to the current period including management's discussion and analysis (MD&A) of the financial condition of the company and the results of operations. Learning Objective: 12-06 Topic: Issuer filings with SEC―Periodic-10K-10Q-8K-Proxy Difficulty: 3 Hard Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 67. What are some of the reasons for the corporate scandals of 2001 and 2002? Answer: The corporate scandals of 2001 and 2002 resulted from: (i) Greed by corporate executives; (ii) a failure in the corporate governance process as practiced by many boards of directors; (iii) failure of public accounting firms to apply appropriate quality control measures to ensure independent judgments; (iv) deficiencies in self-regulatory standards of the accounting profession; (v) unreasonable market expectations; and (vi) an overburdened SEC. Learning Objective: 12-02 Topic: Federal securities laws―Purpose Difficulty: 3 Hard Blooms: Understand AACSB: Ethics AICPA: BB Legal [QUESTION] 68. Why was the Public Utility Holding Company Act of 1935 created? Answer: There were financial reporting abuses in the 1920s by complex utility empires. The owners of the empires minimized the need for equity financing. The Act requires registration of interstate holding companies of public utilities. Learning Objective: 12-02 Topic: Federal securities laws―Purpose Difficulty: 3 Hard Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 69. What information is required in proxy statements? Answer: Proxy statements must include the following information: (i) Five-year summary of operations; (ii) description of business activities; (iii) three-year summary of industry segments, export sales, and foreign and domestic operations; (iv) listing of company directors and executive officers; (v) quarterly market price of the company's common stock; (vi) dividend-paying restrictions; and (vii) MD&A. Learning Objective: 12-02 Topic: SEC requirements―Proxy and annual report Difficulty: 3 Hard Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: FN Measurement [QUESTION] 70. What Federal agency has Congressional authority to amend, modify, repeal, or reject auditing standards? Answer: The Securities and Exchange Commission. Learning Objective: 12-03 Topic: SEC authority over establishing GAAP Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 71. How has the Sarbanes-Oxley Act of 2002 changed the role of the audit committee? Answer: The audit committee is now responsible for the appointment and compensation of the external auditor. To ensure impartiality, the committee must be independent from management. The auditor reports directly to the audit committee. Learning Objective: 12-03 Topic: Sarbanes-Oxley Act―SOX Difficulty: 2 Medium Blooms: Understand AACSB: Ethics AICPA: BB Legal [QUESTION] 72. What is a primary focus of the Sarbanes-Oxley Act of 2002? Answer: A primary focus of the Sarbanes-Oxley Act of 2002 is the establishment of the Public Company Accounting Oversight Board (PCAOB) for regulation of audit standards and independent audit firms. Learning Objective: 12-04 Topic: Sarbanes-Oxley Act―SOX Difficulty: 2 Medium Blooms: Remember AACSB: Ethics AICPA: BB Legal [QUESTION] 73. Who has the responsibility for the evaluation of the quality of an investment? Answer: The investor. Learning Objective: 12-05 Topic: Issuer filings with SEC―Define and describe Difficulty: 1 Easy Blooms: Remember AACSB: Ethics AICPA: BB Legal Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] 74. Name the two broad categories of filings with the SEC. Answer: Registration statements and periodic filings. Learning Objective: 12-05 Topic: Issuer filings with SEC―Define and describe Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 75. Name five securities offerings exempt from registration with the SEC. Answer: Securities offerings exempt from registration include but are not limited to the following (only five are required for this question): (i) Securities sold to the residents of the state in which the issuer is chartered and doing business; (ii) securities issued by governments, banks, and Savings and Loan Associations (iii) securities restricted to a company's existing stockholders and sold without commission (iv) securities issued by nonprofit organizations (v) securities issued under Revised Regulation A (vi) securities issued under Regulation D–Rule 504 (vii) securities issued under Regulation D–Rule 505 (viii) securities issued under Regulation D–Rule 506. Learning Objective: 12-06 Topic: Issuer registration―Securities exemptions Difficulty: 3 Hard Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal [QUESTION] 76. Describe the two parts of the SEC registration statement. Answer: Part I (the prospectus) contains extensive information including: (i) financial statements audited by an independent CPA; (ii) an explanation of the intended use of the proceeds; (iii) a description of the risks associated with the securities; and (iv) a description of the business and the properties of the company. Part II is primarily for the informational needs of the SEC staff. The registrant is not required to provide this information to prospective buyers, although the registration statement is a public document. Part II includes information such as marketing arrangements, sales to special parties, and securities issue expenses. Learning Objective: 12-06 Topic: Issuer registration―Procedures Difficulty: 3 Hard Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Chapter 13 - Accounting for Legal Reorganizations and Liquidations Multiple Choice: [QUESTION] 1. A Chapter 7 bankruptcy is a(n) A) Involuntary reorganization. B) Bankruptcy forced by a company's creditors. C) Liquidation. D) Bankruptcy in which all creditors receive payment in full. E) Voluntary reorganization. Answer: C Learning Objective: 13-05 Topic: Liquidation versus Reorganization Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal [QUESTION] 2. Where should a company undergoing reorganization report the gains and losses resulting from the reorganization? A) On the statement of retained earnings. B) On the income statement, combined with the gains and losses from operations. C) On the statement of stockholders' equity. D) On the income statement, separate from other gains and losses. E) On the statement of cash flows. Answer: D Learning Objective: 13-09 Topic: Reorganization reporting―GAAP Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal AICPA: FN Measurement [QUESTION] 3. Lawyer's fees incurred during a reorganization are accounted for as: A) An expense. B) An intangible asset, Reorganization Cost, which would normally be amortized over a five-year period. C) Additional paid-in capital. D) Retained earnings. E) A prepaid asset until the entity emerges from reorganization. Answer: A Learning Objective: 13-09 Topic: Reorganization reporting―GAAP Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal AICPA: FN Measurement

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[QUESTION] 4. On its balance sheet, a company undergoing reorganization should A) Report its assets at fair value, so that financial statement users can estimate whether creditors' claims will be met. B) Report its assets at net realizable value because there is reason to doubt that the organization is a going concern. C) Report its assets as pledged or free. D) Report its assets at current replacement cost. E) Continue to report its assets at book value. Answer: E Learning Objective: 13-09 Topic: Reorganization reporting―GAAP Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal AICPA: FN Measurement [QUESTION] 5. How should the fresh start reorganization value normally be determined? A) As the sum of current replacement cost of the company's assets. B) As the fair value of assets, debt, and equity, including assets that were not in the previous balance sheet. C) As the sum of the historical book value of net assets, adjusted for assets not previously recorded. D) As the net realizable value of identifiable assets, debt, and equity, only including assets that were in the previous balance sheet. E) As adjusted current cash flows for the entity as it emerges from reorganization. Answer: B Learning Objective: 13-10 Topic: Reorganized entity―Fresh start―GAAP Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal AICPA: FN Measurement [QUESTION] 6. How should liabilities (except for deferred income taxes) be reported by a company using fresh start accounting? A) At the undiscounted sum of future cash payments. B) At book value prior to the reorganization. C) As partially secured liabilities. D) At the present value of future cash payments. E) As unsecured liabilities. Answer: D Learning Objective: 13-10 Topic: Reorganized entity―Fresh start―GAAP Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking

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AICPA BB: Legal AICPA: FN Measurement [QUESTION] 7. Which one of the following is a requirement that must be met before an involuntary bankruptcy petition can be filed when there are at least 12 unsecured creditors? A) The petition must be filed by all creditor(s) to whom the debtor owes at least $15,775. B) The petition must be signed by creditor(s) with unsecured debts of at least $5,000. C) The petition must be signed by a majority of the creditor(s). D) The petition must be signed by creditor(s) to whom the debtor owes more than half of its debts. E) The petition must be signed by at least three creditors with unsecured debts of at least $15,775. Answer: E Learning Objective: 13-03 Topic: Distinguish voluntary and involuntary Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal [QUESTION] 8. Which one of the following unsecured liabilities has the highest priority when an insolvent company is about to be liquidated? A) Federal income taxes payable. B) Claims for expenses of administering the bankruptcy. C) Loans made to the company by its stockholders. D) Employees' claims for salaries. E) Bank loans. Answer: B Learning Objective: 13-04 Topic: Classification of priority liabilities Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal [QUESTION] 9. In a statement of financial affairs, assets are classified A) According to whether they are pledged as collateral in favor of particular creditors. B) As current or noncurrent. C) As monetary or nonmonetary. D) As operating or non-operating. E) As direct or indirect. Answer: A Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal AICPA: FN Measurement

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[QUESTION] 10. The statement of financial affairs should be prepared A) Under the going concern assumption. B) Under the concept of conservatism. C) Under the assumption that liquidation will occur. D) Under the continuity concept. E) Only for a company in Chapter 7 bankruptcy. Answer: C Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal AICPA: FN Measurement [QUESTION] 11. On a statement of financial affairs, a company's assets should be valued at A) Historical cost. B) Net realizable value, if lower than historical cost. C) Replacement cost. D) Net realizable value, if higher than historical cost. E) Net realizable value, whether higher or lower than historical cost. Answer: E Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal AICPA: FN Measurement [QUESTION] 12. On a statement of financial affairs, a company's liabilities should be valued at A) The present value of future cash flows. B) Net realizable value. C) The amount required for settlement. D) Replacement cost. E) The amount expected to be paid if the company could honor its debts. Answer: C Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal AICPA: FN Measurement [QUESTION] 13. What are free assets? A) Assets for which net realizable value is greater than historical cost.

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B) Assets for which no market exists. C) Assets for which replacement cost is greater than historical cost. D) Assets available to be distributed for liabilities with priority and for other unsecured obligations. E) Assets available to be distributed to stockholders. Answer: D Learning Objective: 13-06 Topic: Distinguish pledged and free assets Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal AICPA: FN Measurement [QUESTION] 14. On a statement of financial affairs, a specific liability may be classified as A) Current or long-term. B) Secured or unsecured. C) Monetary or nonmonetary. D) Direct or indirect. E) Past due or not yet due. Answer: B Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal AICPA: FN Measurement [QUESTION] 15. Which of the following is not one of the more common reorganization plan elements? A) Plans for plant expansion. B) Plans for generating additional monetary resources. C) Plans to settle the debts of the company that existed when the order for relief was entered. D) Plans proposing changes in the company's operations. E) Plans for changes in the management of the company. Answer: A Learning Objective: 13-08 Topic: Reorganization plan Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal AICPA FN: Research [QUESTION] 16. What is normally required before a reorganization plan can be implemented? A) The plan must be presented by the company and confirmed by the court. B) The plan must be voted on, and accepted separately by, each class of creditors and each class of stockholders, then confirmed by the court. C) The plan must be presented by the company, approved by two-thirds of each class of creditors, and

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confirmed by the court. D) The plan must be presented by the company, approved by three-fourths of each class of stockholders, and confirmed by the court. E) The plan must be approved by two-thirds of each class of creditors, approved by more than 50% of each class of stockholders, and confirmed by the court. Answer: B Learning Objective: 13-08 Topic: Reorganization plan Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal AICPA FN: Research [QUESTION] 17. During a reorganization, how should interest expense be reported on the financial statements? A) On the income statement, but not classified as a reorganization item. B) On the income statement as a separate reorganization item. C) On the balance sheet as a prepaid expense. D) As a debit directly to retained earnings. E) On the balance sheet as an intangible asset. Answer: A Learning Objective: 13-09 Topic: Reorganization reporting―GAAP Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal AICPA: FN Measurement [QUESTION] 18. During a reorganization, cash reserves tend to grow. How should interest earned on these reserves be reported on the financial statements? A) As deferred revenue until the reorganization is complete. B) As a credit directly to retained earnings. C) On the balance sheet as a long-term liability. D) On the income statement, but not classified as a reorganization item. E) On the income statement as a reorganization item. Answer: E Learning Objective: 13-09 Topic: Reorganization reporting―GAAP Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal AICPA: FN Measurement [QUESTION] 19. Sparkman Co. filed a bankruptcy petition and liquidated its noncash assets. Sparkman was paying forty cents on the dollar for unsecured claims. Bailey Co. held a mortgage of $150,000 on Sparkman’s land which was sold for $110,000. The total amount of payment that Bailey should have received is

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calculated to be A) $110,000. B) $ 44,000. C) $126,000. D) $150,000. E) $ 60,000. Answer: C Learning Objective: 13-07 Topic: Calculate amount to pay creditors Difficulty: 2 Medium Blooms: Analyze Blooms: Apply AACSB: Analytical Thinking AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement Feedback: Sale of land $110,000 + 40% of remaining $40,000 owed = $126,000 Use the following to answer questions 20 and 21: REFERENCE: 13-01 Quincy Corp., about to be liquidated, has the following amounts for its assets and liabilities:

Current assets Land Building Equipment Accounts payable Income taxes payable Mortgage payable Note payable

Book Value $ 200,000 70,000 500,000 300,000 240,000 60,000 510,000 80,000

Net Realizable Value $ 140,000 100,000 350,000 160,000

The mortgage is secured by the land and building, and the note payable is secured by the equipment. Quincy expects that the expenses of administering the liquidation will total $40,000. [QUESTION] REFER TO: 13-01 20. How much should Quincy expect to pay on the accounts payable? A) $240,000. B) $128,000. C) $120,000. D) $ 96,000. E) $146,000. Answer: D Learning Objective: 13-07 Topic: Calculate amount to pay creditors Difficulty: 3 Hard Blooms: Apply

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Blooms: Analyze AACSB: Knowledge Application AACSB: Analytical Thinking AICPA BB: Legal AICPA: FN Measurement Feedback: Assets available for priority claims and unsecured creditors: $220,000 [$140,000 (current assets) + $80,000 (net realizable value of equipment less note payable secured by the equipment)] – priority claims [$100,000 ($40,000 administrative expenses + $60,000 income taxes payable)] = $120,000 $120,000 free assets/$300,000 unsecured ($240,000 A/P + unsecured portion of mortgage $60,000) = payment of 40% on unsecured dollars. 40% × $240,000 A/P = $96,000 [QUESTION] REFER TO: 13-01 21. How much should the mortgage holder expect to collect from the liquidation? A) $474,000 B) $510,000 C) $450,000 D) $480,000 E) $478,000 Answer: A Learning Objective: 13-07 Topic: Calculate amount to pay creditors Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement Feedback: Land and building sold for $450,000 leaves $60,000 unsecured and owed. 40% * × $60,000 = $24,000 Mortgage holder expects $450,000 + $24,000 = $474,000 * Assets available for priority claims and unsecured creditors: $220,000 [$140,000 (current assets) + $80,000 (net realizable value of equipment less note payable secured by the equipment)] – priority claims [$100,000 ($40,000 administrative expenses + $60,000 income taxes payable)] = $120,000 $120,000 free assets/$300,000 unsecured ($240,000 A/P + unsecured portion of mortgage $60,000) = payment of 40% on unsecured dollars.

[QUESTION] 22. Gongman Corp. owned the following assets when it came out of a Chapter 11 bankruptcy: Book Value Inventory $ 200,000 Land 80,000 Buildings 300,000 Equipment 400,000

Fair Value $ 160,000 150,000 340,000 250,000

Gongman Corp. had a fresh start reorganization value of $1,000,000. What amount of goodwill should have been recognized in recording the reorganization? A) $ 20,000.

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B) $100,000. C) $ 60,000. D) $210,000. E) $ 98,000. Answer: B Learning Objective: 13-10 Topic: Reorganized entity―Fresh start―GAAP Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement Feedback: Reorganization Value $1,000,000 – Identifiable FV of Assets ($160,000 + $150,000 + $340,000 + $250,000) $900,000 = Unidentifiable FV $100,000 (i.e., Goodwill) Use the following to answer questions 23 – 25: REFERENCE: 13-02 Mandich Co. had the following amounts for its assets, liabilities, and stockholders' equity accounts just before filing a bankruptcy petition and requesting liquidation:

Cash Accounts receivable Inventory Land Building and equipment Accounts payable Salaries payable Notes payable (secured by inventory) Employees’ claims for contributions to pension plans Taxes payable Liability for accrued expenses Bonds payable Common stock Additional paid-in capital Retained earnings (deficit)

$

Book Value 10,000 100,000 350,000 110,000 700,000 100,000 70,000 300,000

Net Realizable Value $ 10,000 60,000 350,000 75,000 300,000

10,000 80,000 25,000 500,000 200,000 100,000 (115,000)

Of the salaries payable, $30,000 was owed to an officer of the company. The remaining amount was owed to salaried employees who had not been paid within the previous 80 days: John Webb was owed $10,600, Samantha Jones was owed $15,000, Sandra Johnson was owed $11,900, and Dennis Roberts was owed $2,500. The maximum owed for any one employee's claims for contributions to benefit plans was $800. Estimated expense for administering the liquidation amounted to $40,000. [QUESTION] REFER TO: 13-02 23. What was the total amount of unsecured liabilities with priority?

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A) $130,000. B) $155,000. C) $167,850. D) $197,850. E) $200,000. Answer: C Learning Objective: 13-04 Topic: Classification of priority liabilities Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement Feedback: Pension $10,000 + Salaries $37,850 (sum of $10,600 + $12,850 (15,000 limited to 12,850 per individual) + $11,900 + $2,500) + Taxes $80,000 + Liquidation expenses $40,000 = $167,850 [QUESTION] REFER TO: 13-02 24. On a statement of financial affairs, what amount would have been shown as assets available to pay liabilities with priority and unsecured creditors? A) $390,000. B) $445,000. C) $495,000. D) $660,000. E) $795,000. Answer: C Learning Objective: 13-06 Topic: Distinguish pledged and free assets Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement Feedback: Net Realizable Value of Cash ($10,000) + A/R ($60,000) + Inventory Net of Note Payable ($50,000) + Land ($75,000) + Building ($300,000) = $495,000 [QUESTION] REFER TO: 13-02 25. What amount would the company have expected to pay for every dollar of unsecured liability without priority? A) $.30. B) $.40. C) $.50. D) $.60. E) $.75. Answer: C Learning Objective: 13-06 Topic: Calculate amount to pay creditors Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application

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AICPA BB: Legal AICPA: FN Measurement Feedback: Assets available for priority claims and unsecured creditors of $495,000 – Priority claims of $167,850 = Assets available for non-priority unsecured creditors $327,150. $327,150/$657,150 unsecured liabilities = $.50 (Rounded) [QUESTION] 26. All of the following items are liabilities with priority except: A) Obligations arising between the date an order of relief is issued and the date of final realization of assets. B) Employee claims for contributions to benefit plans earned during the 180 days preceding the filing of a petition, limited to $12,850 per individual. C) Government claims for unpaid taxes. D) Claims for the return of deposits made by customers to acquire property or services, which were never delivered or provided by the debtor, limited to $2,850. E) Claims for administrative expenses in preserving and liquidating the company. Answer: A Learning Objective: 13-04 Topic: Classification of priority liabilities Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal [QUESTION] 27. How are assets and liabilities valued on a Statement of Financial Affairs?

A. B. C. D. E.

Assets Fair value Book value Book value Fair value Net realizable value

Liabilities Book value Amount required for settlement Book value Amount required for settlement Amount required for settlement

Answer: E Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal AICPA: FN Measurement [QUESTION] 28. Assuming all of the following expenses have priority, in what order are they prioritized? A) Administrative expenses, employee claims for wages, unpaid taxes, claims for the return of customer deposits. B) Employee claims for wages, unpaid taxes, administrative expenses, claims for the return of customer deposits. C) Unpaid taxes, administrative expenses, employee claims for wages, return of customer deposits.

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D) Administrative expenses, employee claims for wages, claims for the return of customer deposits, unpaid taxes. E) Unpaid taxes, return of customer deposits, employee claims for wages, administrative expenses. Answer: D Learning Objective: 13-04 Topic: Classification of priority liabilities Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal [QUESTION] 29. Which of the following is not a responsibility of the bankruptcy trustee? A) Recover all property belonging to the insolvent company. B) Liquidate common stock of the company. C) Preserve the estate from any further deterioration. D) Make distributions to the proper claimants. E) Void preferences made by the debtor within 90 days prior to the filing of the bankruptcy petition if the company was already insolvent. Answer: B Learning Objective: 13-07 Topic: Trustee duties Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal [QUESTION] 30. What information is conveyed by the Statement of Realization and Liquidation? A) Account balances reported by the company at the date of the filing of the bankruptcy petition. B) Cash receipts generated by the sale of the debtor's property. C) Write up of assets. D) Recognition of recorded liabilities. E) Assets and liabilities but not stockholders’ equity. Answer: B Learning Objective: 13-07 Topic: Statement of Realization and Liquidation Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA BB: Legal AICPA: FN Measurement [QUESTION] 31. Which statement is false regarding a plan for reorganization? A) The plan is the heart of every Chapter 7 bankruptcy. B) The provisions of the plan specify the treatment of all creditors and equity holders upon approval by the Court. C) The plan shapes the financial structure of the entity that emerges. D) The plan may contain numerous provisions as solutions to financial difficulties. E) The plan may contain provisions for changes in the management of the company.

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Answer: A Learning Objective: 13-08 Topic: Reorganization plan Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal [QUESTION] 32. Which statement is false regarding the acceptance and confirmation of a reorganization plan? A) The plan must be voted on by the creditors and the stockholders of the company. B) A separate vote is required of each class of stockholders. C) Any class of creditors that is not damaged by a reorganization is assumed to have accepted the plan without voting. D) Even if creditors and stockholders approve of the plan, the court can reject the plan. E) Acceptance of the plan requires the approval of two-thirds in number of claims and one-half in dollar amount of creditors that cast votes. Answer: E Learning Objective: 13-08 Topic: Reorganization plan Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal Use the following to answer questions 33 – 36: REFERENCE: 13-03 A company that was to be liquidated had the following liabilities: Income Taxes Notes Payable secured by land Accounts Payable Salaries Payable ($16,000 for Employee #1 and $4,000 for Employee #2) Administrative expenses for liquidation The company had the following assets: Current Assets Land Building

$ 10,000 100,000 44,000 20,000 20,000 Book Value $100,000 50,000 150,000

Fair Value 95,000 75,000 200,000

[QUESTION] REFER TO: 13-03 33. Total assets, available to pay liabilities with priority and unsecured creditors, are calculated to be what amount? A) $ 75,000. B) $270,000. C) $275,000.

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D) $295,000. E) $370,000. Answer: D Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement Feedback: $200,000 Building + $95,000 Current Assets = $295,000 [QUESTION] REFER TO: 13-03 34. Total liabilities with priority are calculated to be what amount? A) $ 30,000. B) $ 36,850. C) $ 46,850. D) $ 50,000. E) $150,000. Answer: D Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement Feedback: Employee Wages ($12,850 + $4,000) + Liquidation Administrative Expenses ($20,000) + Taxes ($10,000) = $46,850 [QUESTION] REFER TO: 13-03 35. Assets available for unsecured creditors after payments of liabilities with priority are calculated to be what amount? A) $223,150. B) $248,150. C) $220,000. D) $243,150. E) $275,000. Answer: B Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement Feedback: $295,000 Assets Available to Pay Liabilities with Priority and Unsecured Creditors - $46,850 Liabilities with Priority = $248,150

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[QUESTION] REFER TO: 13-03 36. Total unsecured non-priority liabilities are calculated to be what amount? A) $ 44,000. B) $ 47,150. C) $ 72,150. D) $ 74,000. E) $220,000. Answer: C Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement Feedback: Excess of salaries $3,150 + Notes Payable in Excess of Security $25,000 + A/P of $44,000 = $75,000 [QUESTION] 37. A company is insolvent when A) It is unable to pay debts as the obligations come due. B) It is more likely than not that it will not be able to pay debts within a reasonable period of time following the date such obligations become due. C) It is unable to timely remit payment on more than two-thirds of its outstanding obligations measured on a rolling three-month basis. D) It is unable to pay debts within 90 days following the close of the company’s reporting year, whether such year is a calendar or fiscal year. E) It is in default on one-third or more of its outstanding debt obligations. Answer: A Learning Objective: 13-01 Topic: Bankruptcy laws Difficulty: 1 Easy Blooms: Remember AACSB: Reflecting Thinking AICPA BB: Resource Management AICPA FN: Risk Analysis [QUESTION] 38. Which of the following conditions or events does not signal an entity’s inability to pay its debts as they become due? A) Recurring operating losses. B) Drops in the closing stock prices on a recognized stock exchange. C) Working capital deficiencies. D) Loan defaults. E) Negative cash flows from operating activities. Answer: B Learning Objective: 13-02 Topic: Conditions that signal troubled business Difficulty: 1 Easy Blooms: Remember

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AACSB: Reflecting Thinking AICPA BB: Resource Management AICPA FN: Risk Analysis

[QUESTION] 39. For each of the following situations, select the best answer concerning the classification of the liability. (A.) Unsecured without priority (B.) Unsecured with priority (C.) Partially secured (D.) Fully secured ___ 1. Payroll taxes payable. ___ 2. Land and building valued at $427,000 mortgaged by a bank loan in the amount of $517,000. ___ 3. Equipment valued at $73,000 securing a loan to an individual in the amount of $32,100. ___ 4. Salaries payable to employees in the following amounts: $1,250; $1,876; $4,500. ___ 5. Electric bill owed to a local utility. ___ 6. Unpaid defined contribution pension plan payments in the amount of $4,000 (none in excess of $375 per employee.) ___ 7. Obligations arising from the purchase of materials on July 5, 2018. (Bankruptcy petition filed July 14, 2018). ___ 8. Fees charged by bankruptcy trustee. ___ 9. Inventory valued at $61,895 collateralizing a note payable to a bank in the amount of $56,982. ___ 10. Delivery trucks valued at $389,900 securing a lien by General Motors for $400,000. Answer: (1) B; (2) C; (3) D; (4) B; (5) A; (6) B; (7) A; (8) B; (9) D; (10) C Learning Objective: 13-04 Topic: Classification of creditors Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA BB: Legal AICPA: BB Resource Management AICPA: FN Risk Analysis [QUESTION] 40. What is meant by a “partially secured liability”? Answer: A liability that is collateralized by an asset whose net realizable value is less than the liability. Learning Objective: 13-04 Topic: Classification of creditors Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal AICPA: BB Resource Management AICPA FN: Risk Analysis [QUESTION] 41. What is meant by a “fully secured liability”?

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Answer: A liability that is collateralized by an asset whose net realizable value equals or exceeds the liability. Learning Objective: 13-04 Topic: Classification of creditors Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal AICPA:BB Resource Management AICPA FN: Risk Analysis [QUESTION] 42. What is the difference between a liquidation and a reorganization? Answer: In a liquidation, all assets are liquidated (sold) and liabilities paid up to the amount received for the assets, in order of priority and subject to collateral agreements. In a reorganization, the company attempts to continue business. Learning Objective: 13-05 Topic: Liquidation versus Reorganization Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal AICPA FN: Risk Analysis [QUESTION] 43. What are the three categories of assets in a Statement of Financial Affairs? Answer: (1) Pledged with fully secured creditors, (2) pledged with partially secured creditors, and (3) free assets. Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal AICPA: FN Measurement [QUESTION] 44. What are the four categories of debts in a Statement of Financial Affairs? Answer: (1) Liabilities with priority, (2) fully secured creditors, (3) partially secured creditors, and (4) unsecured creditors. Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal AICPA: FN Measurement

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[QUESTION] 45. What is the purpose of Chapter 7 of the Bankruptcy Reform Act? Answer: The purpose of Chapter 7 of the Bankruptcy Reform Act is to regulate the process of liquidation by providing an orderly and equitable structure for the selling of assets and settling debts. Learning Objective: 13-07 Topic: Bankruptcy laws Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal [QUESTION] 46. What is the meaning of the phrase debtor in possession? Answer: When there is a debtor in possession during a reorganization, the owners retain possession of the assets, continue to operate the business, and have the primary responsibility to develop an acceptable plan of reorganization. Learning Objective: 13-08 Topic: Reorganization plan Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal AICPA: BB Resource Management

[QUESTION] 47. What are possible plans that management of a troubled business might create to mitigate substantial doubt that the entity will fail to make its debt payments within one year from the issuance of financial statements? Answer: Many possibilities exist. Some examples are: (1) Develop plans to dispose of assets in order to raise cash and reduce costs (2) Plan to borrow money (3) Plan to restructure the entity’s debt. (4) Plan to reduce expenditures (5) Plan to increase outside ownership. Learning Objective: 13-02 Topic: Conditions that signal troubled business Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Resource Management AICPA FN: Risk Analysis [QUESTION] 48. What is an order for relief? Answer: An order for relief is a court order issued after a bankruptcy petition has been filed, to halt creditors' actions against the debtor while the debtor prepares to liquidate or reorganize. Learning Objective: 13-03 Topic: Distinguish voluntary and involuntary

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Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal [QUESTION] 49. What occurs in the accounting records for fresh start accounting when a bank agrees to accept less than the debtor’s book value of a note payable? Answer: A Gain on Debt Discharge is recorded when the liability is written down and the Gain on Debt Discharge is closed to Retained Earnings, reducing the retained earnings deficit. Learning Objective: 13-10 Topic: Reorganized entity―Fresh start―GAAP Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal AICPA: FN Measurement [QUESTION] 50. What term is used for a bankruptcy forced upon a debtor by its creditors? Answer: The appropriate term is involuntary bankruptcy. Learning Objective: 13-03 Topic: Distinguish voluntary and involuntary Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal [QUESTION] 51. To what does the term Chapter 7 bankruptcy refer? Answer: A Chapter 7 bankruptcy is the liquidation of the debtor and is referred to as such because the laws applicable to liquidation are found in Chapter 7 of the Bankruptcy Reform Act. Learning Objective: 13-05 Topic: Liquidation versus Reorganization Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal [QUESTION] 52. To what does the term Chapter 11 bankruptcy refer? Answer: A Chapter 11 bankruptcy occurs when the debtor tries to reorganize rather than liquidate. The laws applicable to reorganization are found in Chapter 11 of the Bankruptcy Reform Act Learning Objective: 13-05 Topic: Liquidation versus Reorganization Difficulty: 1 Easy Blooms: Remember

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AACSB: Reflective Thinking AICPA BB: Legal [QUESTION] 53. What is the role of the trustee in the liquidation of a company? Answer: The trustee must recover all properties belonging to the insolvent company and preserve the estate from further deterioration. The trustee liquidates noncash assets and makes distributions to proper claimants. The trustee may continue operating the company to complete all business activities that were in progress when the order for relief was entered. The trustee is required to make proper recording of all activities and report them to the court and interested parties. Learning Objective: 13-07 Topic: Trustee duties Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA BB: Legal [QUESTION] 54. What information is included on the statement of realization and liquidation? Answer: The statement of realization and liquidation reports the account balances of the company at the date the order of relief was filed. The report will specify the cash receipts generated by the sale of the debtors’ property, cash disbursements by the trustee to wind up the affairs of the business and to pay secured creditors, and other items that need book adjustments such as asset write-offs and recognition of unrecorded liabilities. Any cash that remains is paid to unsecured creditors. Learning Objective: 13-07 Topic: Statement of Realization and Liquidation Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA BB: Legal AICPA: FN Measurement [QUESTION] 55. What are some of the common elements that can be included in a reorganization proposal? Answer: The common elements in a reorganization proposal are plans for proposing changes in the company’s operations, plans for generating additional monetary resources, plans for changes in management of the company, and plans to settle debts that existed when the order of relief was filed. Learning Objective: 13-08 Topic: Reorganization plan Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA BB: Legal [QUESTION] 56. Who must accept and confirm the Reorganization plan?

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Answer: The Bankruptcy Reform Act specifies the plan must be voted on by the company’s creditors and stockholders before being confirmed by the court. Learning Objective: 13-08 Topic: Reorganization plan Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA BB: Legal AICPA FN: Research [QUESTION] 57. How is the presentation of an income statement during a reorganization different from a normal income statement? Answer: GAAP requires that all revenues, gains, losses, and expenses resulting from the reorganization should be reported separately. Such items are placed on the income statement before any income tax expense or benefit. Learning Objective: 13-09 Topic: Financial Reporting During Reorganization Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA BB: Legal AICPA: FN Measurement [QUESTION] 58. How is the presentation of a balance sheet during a reorganization different from a normal balance sheet? Answer: GAAP requires that assets on the balance sheet will continue to be reported at their book values; however, liabilities that are subject to compromise should be reported at expected amounts to settle claims. Additionally, assets and liabilities are not classified as current/noncurrent. Learning Objective: 13-09 Topic: Reorganization reporting―GAAP Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA BB: Legal AICPA: FN Measurement Problems: Use the following to answer questions 59 – 63: REFERENCE: 13-04 A company that was to be liquidated had the following liabilities: Income taxes Notes payable (secured by land) Accounts payable Salaries payable to employees ($15,000 for John Jay and $2,800 for Ann Still)

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$

10,400 156,000 $ 107,900 17,800

Bonds payable Administrative expenses for liquidation

81,000 26,000

The company had the following assets: Book Fair Value Value Current assets $ 104,000 $ 42,900 Land 130,000 117,000 Buildings & equipment 130,000 143,000 [QUESTION] REFER TO: 13-04 59. Prepare a schedule to show the amount of total assets available to pay liabilities with priority and unsecured creditors. Answer: Assets to pay priority and unsecured creditors: Current assets Buildings and equipment Total

$ 42,900 143,000 $ 185,900

Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement [QUESTION] REFER TO: 13-04 60. Prepare a schedule to show the amount of total liabilities with priority. Answer: Liabilities with priority: Administrative expenses Salaries payable (Maximum of $12,850 per employee; therefore $12,850 for John Jay and $2,800 for Ann Still) Income taxes Total

Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal

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$ 26,000 15,650 10,400 $ 52,050

AICPA: FN Measurement [QUESTION] REFER TO: 13-04 61. Prepare a schedule to show the amount of assets available for unsecured creditors after payment of liabilities with priority. Answer: Assets available after payment of liabilities with priority: Total available to pay priority liabilities with priority and unsecured creditors* $185,900 Total liabilities with priority (52,050) Total available for unsecured creditors after liabilities with $133,850 priority *Assets to pay priority and unsecured creditors: Current assets $ 42,900 143,000 Buildings and equipment Total $ 185,900

Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement [QUESTION] REFER TO: 13-04 62. Prepare a schedule to show the amount of total unsecured non-priority liabilities. Answer: Unsecured liabilities: Salary of Employee #1 in excess of Maximum priority amount $ 2,150 39,000 Notes payable (in excess of value of security) Accounts payable 107,900 81,000 Bonds payable $ 230,050 Total

Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement [QUESTION] REFER TO: 13-04

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63. Prepare a schedule to show the amount of total payment on notes payable. (Round the payout percentage to one decimal place, for example, .1234 as 12.3 percent.) Answer: Payment of notes payable: Value of security (land) $ 117,000 22,698 58.2%* of remaining $39,000 $139,698 Total *Available after priority $133,850 ÷ unsecured liabilities $230,050 = 58.2% Learning Objective: 13-07 Topic: Calculate amount to pay creditors Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement Use the following to answer questions 64 – 67: REFERENCE: 13-05 Bazley Co. had severe financial difficulties and was considering the possibility of filing a bankruptcy petition. At that time, the company had the following assets (stated at net realizable value) and liabilities. Assets (pledged against debts of $91,000) Assets (pledged against debts of $169,000) Other assets Liabilities with priority Unsecured creditors

$ 150,800 65,000 104,000 54,600 260,000

[QUESTION] REFER TO: 13-05 64. Prepare a schedule to show the amount of total assets available to pay liabilities with priority and unsecured creditors. Answer: Assets: Other assets Excess from assets pledged with secured creditors ($150,800 – $91,000) Total assets available to pay liabilities with priority and unsecured creditors Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal

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$ 104,000 59,800 $ 163,800

AICPA: FN Measurement [QUESTION] REFER TO: 13-05 65. Prepare a schedule to show the amount of assets that are available for unsecured creditors after payment of liabilities with priority. Answer: Assets available after payment of liabilities with priority: Total available to pay priority liabilities with priority and unsecured creditors* $163,800 Total liabilities with priority (54,600) Total available for unsecured creditors after liabilities with $109,200 priority Total available to pay priority liabilities with priority and unsecured creditors* Other assets $104,000 Excess from assets pledged with secured creditors ($150,800 – $91,000) 59,800 Total $163,800 Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement [QUESTION] REFER TO: 13-05 66. Prepare a schedule to show the amount of total unsecured liabilities. Answer: Unsecured liabilities: Excess of partially secured liabilities over pledged assets ($169,000 – $65,000) Unsecured creditors Total

$ 104,000 260,000 $ 364,000

Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement [QUESTION] REFER TO: 13-05 67. Prepare a schedule to show the amount of total payment on partially secured debt. Answer:

Page 25

Payment of partially secured debt: Value of pledged assets 30%* of remaining $104,000 Total

$ 65,000 31,200 $ 96,200

* $109,200 ÷ $364,000 = 30% Learning Objective: 13-06 Topic: Calculate amount to pay creditors Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement Use the following to answer questions 68 – 71: REFERENCE: 13-06 Lucky Co. had cash of $65,000, inventory worth $117,000, and a building worth $169,000. The company’s debts consisted of accounts payable of $234,000, a note payable of $104,000 (secured by the inventory), liabilities with priority of $26,000, and a bond payable of $195,000 (secured by the building). [QUESTION] REFER TO: 13-06 68. Prepare a schedule to show the amount of total assets available to pay liabilities with priority and unsecured creditors. Answer: Assets: Cash Excess from inventory pledged with secured creditors ($117,000 – $104,000) Total

$ 65,000 13,000 $ 78,000

Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement [QUESTION] REFER TO: 13-06 69. Prepare a schedule to show the amount of assets available for unsecured creditors after payment of liabilities with priority.

Page 26

Answer: Assets available after payment of liabilities with priority: Total available to pay priority liabilities with priority and unsecured creditors* Total liabilities with priority Total available for unsecured creditors after liabilities with priority

$78,000 (26,000) $ 52,000

Total available to pay priority liabilities with priority and unsecured creditors* Cash Excess from inventory pledged with secured creditors ($117,000 – $104,000) Total

$65,000 13,000 $78,000

Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement [QUESTION] REFER TO: 13-06 70. Prepare a schedule to show the amount of total unsecured liabilities. Answer: Unsecured liabilities: Excess of partially secured bonds payable over pledged building ($195,000 – $169,000) Accounts payable Total

Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement [QUESTION] REFER TO: 13-06 71. Prepare a schedule to show the amount of total payment on the bond. Answer:

Page 27

$ 26,000 234,000 $ 260,000

Payment on bond: Value of pledged assets 20%* of remaining $26,000 Total

$ 169,000 5,200 $ 174,200

*Available after priority $52,000 ÷ unsecured liabilities $260,000 = 20% Learning Objective: 13-06 Topic: Calculate amount to pay creditors Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement [QUESTION] 72. A statement of financial affairs created for an insolvent corporation that was beginning the liquidation process disclosed the following data (assets were shown at net realizable values): Assets pledged with fully secured creditors Fully secured liabilities Assets pledged with partially secured creditors Partially secured liabilities Free assets Unsecured liabilities with priority Unsecured liabilities

$ 260,000 195,000 494,000 637,000 390,000 208,000 650,000

Required: Prepare a schedule to show the amount available for unsecured creditors after payment of liabilities with priority. Answer:

Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement

Page 28

Use the following to answer questions 73 – 75: REFERENCE: 13-07 Mount Inc. was a hardware store that operated in Boise, Idaho. Management made some poor inventory acquisitions that loaded the store with unsalable merchandise. Due to the decline in revenues, the company became insolvent. Following is a trial balance as of March 15, 2018, the day the company filed for Chapter 7 liquidation. Debit Accounts payable Accounts receivable Accumulated depreciation — Building Accumulated depreciation — Equipment Additional paid -in capital Advertising payable Building Cash Common stock Equipment Inventory Investments Land Note payable — Idaho Savings and Loan (secured by a lien on land and building) Note payable — Second National Bank (secured by equipment) Payroll taxes payable Retained earnings (deficit) Salaries payable (split equally between two employees) Totals

Credit $ 42,900

$ 32,500 65,000 20,800 10,400 5,200 104,000 1,300 65,000 39,000 130,000 19,500 13,000 91,000 195,000 1,300 163,800 $ 503,100

6,500 $ 503,100

Company officials believed that sixty percent of the accounts receivable could be collected if the company was liquidated. The building and land had a fair value of $97,500, while the equipment was worth $24,700. The investments represented shares of a publicly traded company that could be sold at the time for $27,300. The entire inventory could be sold for only $42,900. Administrative expenses necessary to carry out a liquidation were estimated to be $20,800. [QUESTION] REFER TO: 13-07 73. Required: Prepare a statement of financial affairs for Mount Inc. as of March 15, 2018. Answer: Mount, Inc. Statement of Financial Affairs March 15, 2018 Book

Available for

Page 29

Values

$52,000

18,200

1,300 32,500 130,000 19,500

________ $253,500

Book Values $

0 6,500 1,300

91,000

195,000

42,900 5,200 (88,400) $253,500

Assets

Unsecured Creditors

Pledged with Fully Secured Creditors: Land and building Notes payable Pledged with Partially Secured Creditors: Equipment Notes payable Assets Not Pledged: Cash Accounts receivable Inventory Investments Total available to pay liabilities with priority and unsecured creditors Liabilities with priority (listed below) Available for unsecured creditors Estimated deficiency

Liabilities and Stockholders’ Equity Liabilities with Priority: Administrative expenses (estimated) Salaries payable Payroll taxes payable Total Fully Secured Creditors Note payable – Idaho Savings & Loan Land and building Partially Secured Creditors: Note payable – Second National Bank Equipment Unsecured Creditors Accounts payable Advertising payable Stockholders equity

Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement [QUESTION]

Page 30

$97,500 (91,000)

$6,500

$24,700 (195,000)

0 1,300 19,500 42,900 27,300 97,500 (28,600) $ 68,900 149,500 $218,400 Unsecured Non-priority Liabilities

$20,800 6,500 1,300 $28,600 $91,000 (97,500) $195,000 (24,700)

$

0

170,300 42,900 5,200 ________ $218,400

REFER TO: 13-07 74. Assume that the company was being liquidated and that the following transactions occurred: ▪ Accounts receivable of $23,400 were collected. ▪ All of the company's inventory was sold for $52,000. ▪ Additional accounts payable of $13,000 incurred for various expenses, for utilities and maintenance that were subsequently discovered. ▪ The land and building were sold for $92,300. ▪ The note payable due to the Idaho Savings and Loan was paid. ▪ The equipment was sold at auction for only $14,300 with the proceeds applied to the note owed to the Second National Bank. ▪ The investments were sold for $27,300. ▪ Administrative expenses totaled $26,000 as of July 26, 2018, but no payment had yet been made. Required: Prepare a statement of realization and liquidation for the period from March 15 through July 26, 2018 . Answer: MOUNT INC. Statement of Realization and Liquidation March 15, 2018 to July 26, 2018

Book balances, 3/15/18 Accounts receivable collected-remaining balance assumed to be uncollectible Inventory sold Accounts payable discovered Land and building sold Fully secured note paid Equipment sold Payment made on partially secured debt Investments sold Administrative expenses accrued Remaining partially secured claims reclassified as unsecured liabilities Final balances remaining for unsecured creditors

Cash $ 1,300

Noncash Assets $252,200

23,400

( 32,500)

52,000

(130,000)

Liabilities

Fully

Partially

Unsecured-

With Priority $( 7,800)

Secured Creditors $(91,000)

Secured Creditors $(195,000)

Nonpriority Liabilities $( 48,100)

(9,100)

( 13,000) 92,300 ( 91,000) 14,300 ( 14,300) 27,300

Stockholders’ Equity (Deficit) $(88,400)

( 52,000)

(78,000) (13,000) 40,300

(91,000) ( 18,200)

(3,900) (14,300)_

( 19,500)

7,800 ( 26,000)

_______

_______

$105,300

$

0

(26,000)

_______ $ (33,800)

Learning Objective: 13-07 Topic: Statement of Realization and Liquidation Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement [QUESTION]

Page 31

$

0

180,700 _______ $ 0

(180,700) $(241,800)

$(170,300)

REFER TO: 13-07 75. How much cash would have been paid to an unsecured non-priority creditor who was owed a total of $1,300 by Mount Inc.? (Round the payout percentage to a whole number.) Answer: The statement of realization and liquidation prepared in Item 13-07 indicated that $105,300 in cash remained. However, $33,800 of this amount had to be distributed to the liabilities with priority, leaving only $71,500 for the unsecured non-priority creditors. Since these unsecured liabilities amounted to $241,800, about 30% ($71,500 ÷ $241,800) of each debt would have been paid. Thus a creditor holding a $1,300 claim would have received approximately $390. Learning Objective: 13-07 Topic: Calculate amount to pay creditors Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement Use the following to answer questions 76 – 83: REFERENCE: 13-08 Hampton Company is trying to decide whether to seek liquidation or reorganization. Hampton has provided the following balance sheet: Hampton Company Balance Sheet February 23, 2018 Current Assets: Cash $ 1,000 Investments 28,000 Accounts receivable 46,500 Inventory 72,000 Prepaid expenses 4,200 $151,700 Plant & Equipment Land $65,000 Building 180,000 Equipment 75,300 320,300 Intangibles 78,000 Total assets $550,000 Current Liabilities: Accounts payable Accrued expenses Notes payable (secured by inventory) Long-term Liabilities Notes payable (secured by land and building) Stockholders’ Equity Common stock Retained earnings (deficit) Total Liabilities and Stockholders’ Equity

$127,000 99,000 68,000

$294,000 300,000

$100,000 (144,000)

Page 32

(44,000) $550,000

Additional information is as follows: ▪ The investments are currently worth $13,000. ▪ It is estimated that $32,000 of the accounts receivable are collectible. ▪ The inventory can be sold for $74,000. ▪ The prepaid expenses and the intangible assets have no net realizable value. ▪ The land and building are currently valued at $250,000. ▪ The equipment can be sold for $60,000. ▪ Administrative expenses (not yet recorded) are estimated to be $12,500. ▪ Accrued expenses include $17,000 of salaries payable ($11,000 to one employee and $3,000 each to two other employees). ▪ Accrued expenses include $7,000 of unpaid payroll taxes. [QUESTION] REFER TO: 13-08 76. Prepare a schedule to show the amount of total assets available to pay liabilities with priority and unsecured creditors. Answer: Total assets available to pay liabilities with priority and unsecured creditors: Cash $ 1,000 Investments 13,000 Accounts receivable 32,000 Inventory 6,000 Equipment 60,000 Total $112,000 Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement [QUESTION] REFER TO: 13-08 77. Prepare a schedule to show the amount of total liabilities with priority. Answer: Administrative expenses $12,500 Salaries [$11,000 + (2 × $3,000)] 17,000 Taxes 7,000 Total $36,500 Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal

Page 33

AICPA: FN Measurement [QUESTION] REFER TO: 13-08 78. Prepare a schedule to show the amount of assets available for unsecured creditors after payment of liabilities with priority. Answer: Assets available for unsecured creditors after payment of liabilities with priority: Total assets available to pay liabilities with priority and unsecured creditors* Liabilities with priority Total *Total assets available to pay liabilities with priority and unsecured creditors: Cash $ 1,000 Investments 13,000 Accounts receivable 32,000 Inventory 6,000 Equipment 60,000 Total $112,000

$112,000 (36,500) $ 75,500

Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement [QUESTION] REFER TO: 13-08 79. Prepare a schedule to show the amount of unsecured liabilities without priority. Answer: Note secured by land and building ($300,000 - $250,000) Accounts payable Accrued expenses ($99,000 - $24,000 salaries and taxes) Total Learning Objective: 13-06 Topic: Statement of Financial Affairs Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement

Page 34

$50,000 127,000 75,000 $252,000

[QUESTION] REFER TO: 13-08 80. What is the payout percentage to unsecured creditors? (Round the percentage to a whole number and two decimal places.) Answer: Assets available after priority obligations/Unsecured liabilities $75,500/$252,000 = .2996 or 29.96% Learning Objective: 13-06 Topic: Calculate amount to pay creditors Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement [QUESTION] REFER TO: 13-08 81. How much will be paid to the holder of the note payable secured by the land and building? (Round your payout percentage to the nearest whole number.) Answer: Assets available after priority obligations/Unsecured liabilities = $75,500/$252,000 = .2996 = .30 rounded. $250,000 secured by land & bldg + ($50,000 not recovered by security × .30) = $265,000. Learning Objective: 13-06 Topic: Calculate amount to pay creditors Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement [QUESTION] REFER TO: 13-08 82. How much will Hampton’s creditor of an unsecured accounts payable of $4,000 receive? Answer: $4,000 × 30% payout percentage= $1,200. Learning Objective: 13-04 Topic: Classification of Creditors Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement [QUESTION] REFER TO: 13-08 83. Prepare a Statement of Financial Affairs.

Page 35

Answer:

Hampton Company Statement of Financial Affairs February 23, 2018 Book Values

$ 72,000

245,000

1,000 28,000 46,500 4,200 78,000 75,300

Available for Unsecured Creditors.

Assets Pledged with Fully Secured Creditors: Inventory Less: Notes payable Pledged with Partially Secured Creditors: Land and building Less: Notes payable Free Assets: Cash Investments

$ 74,000 68,000

$6,000

$250,000 300,000

0 1,000 13,000

Accounts receivable Prepaid expenses Intangible assets Equipment Total available to pay liabilities with priority and unsecured creditors Less: Liabilities with priority Available for unsecured creditors Estimated deficiency

32,000 0 0 60,000 $112,000 36,500 $ 75,500 176,500 $252,000

$550,000

0 $17,000 7,000

68,000 300,000

127,000 75,000

Liabilities and Stockholders’ Equity Liabilities with Priority: Administrative expenses (estimated) Salaries payable (accrued expenses) Taxes payable (accrued expenses) Total Fully Secured Creditors Notes payable Inventory Partially Secured Creditors: Notes payable Land and building Unsecured Creditors Accounts payable Accrued expenses (other than priority) Stockholders equity

(44,000) $550,000

$ 12,500 17,000 7,000 $ 36,500

0

$ 68,000 74,000

0

$300,000 (250,000)

50,000 127,000 75,000 0 $252,000

Learning Objective: 13-06

Page 36

Topic: Statement of Financial Affairs Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement [QUESTION] 84. Berry Company is going through Chapter 11 bankruptcy reorganization. Prepare the income statement for the calendar year 2018 using the following information. The effective tax rate is 20%.

Answer: BERRY COMPANY Income Statement For the year ended December 31, 2018 Revenues Costs and expenses: Cost of goods sold Rent expense Salary expense Depreciation expense Advertising expense Interest expense Earnings before reorganization items and tax effects Reorganization items: Loss on closing of branch Professional fees Interest revenue Loss before income tax benefit Income tax benefit (20 percent) Net loss

$389,000 $234,000 18,000 66,000 20,000 23,000 5,000

($366,000) $23,000

$(100,000) (60,000) 23,000 $(137,000) (114,000) 22,800 $(91,200)

Learning Objective: 13-09 Topic: Reorganization reporting―GAAP Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application

Page 37

AICPA BB: Legal AICPA: FN Measurement [QUESTION] 85. Candice Company is currently going through bankruptcy reorganization. The accountant has determined the following balances of the accounts at December 31, 2018. Assets Cash Inventory Land Building Equipment

Book Value $ 30,000 50,000 80,000 70,000 40,000

Fair Value $30,000 51,000 100,000 95,000 42,000

Liabilities as of the date of the order of relief Accounts Payable Accrued Expenses Income taxes payable Note payable secured by land due 2020

Allowed claims $110,000 40,000 24,000 75,000

Expected Settlement $70,000 15,000 19,000 75,000

Liabilities since the date of the order of relief Accounts Payable Note Payable due 2019

$ 65,000 50,000

Common Stock

$100,000

Prepare the balance sheet for Candice Company. Retained earnings will need to be calculated. Answer: CANDICE COMPANY Balance Sheet December 31, 2018 Current assets: Cash Inventory

$ 30,000 50,000

Land, buildings, and equipment: Land Buildings Equipment Total assets

80,000 70,000 40,000

Liabilities not subject to compromise: Current liabilities: Accounts payable Note payable (due 2019) Total current liabilities

$ 80,000

190,000 $270,000

$ 65,000 50,000 115,000

Page 38

Long-term liabilities: Note payable (due 2020)

75,000 $ 190,000

Liabilities subject to compromise Accounts payable Accrued expenses Income taxes payable Total liabilities

$110,000 40,000 24,000

Stockholders' equity Common stock Retained earnings (deficit)*calc below Total liabilities and shareholders' (deficit)

$100,000 (194,000)

*Retained earnings ($270,000 = $364,000+$100,000-X)

(X=-$194,000)

Learning Objective: 13-09 Topic: Reorganization reporting―GAAP Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA BB: Legal AICPA: FN Measurement

Page 39

174,000 $ 364,000

(94,000) $ 270,000

File: Chapter 14 - Partnerships: Formation and Operation Multiple Choice: [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. Answer: C Learning Objective: 14-07 Topic: Partnership dissolution―Concepts Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 2. 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. Answer: E Learning Objective: 14-10 Topic: Partnership dissolution―Concepts Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 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. Answer: B Learning Objective: 14-01 Topic: Advantages and disadvantages of partnerships Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 14-1

Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 4. The advantages of the partnership form of business organization, compared to corporations, include A) Single taxation. B) Ease of raising capital. C) Mutual agency. D) Limited liability. E) Difficulty of formation. Answer: A Learning Objective: 14-01 Topic: Advantages and disadvantages of partnerships Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 5. 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. Answer: E Learning Objective: 14-07 Topic: Partnership dissolution―Concepts Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 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. Answer: D Learning Objective: 14-01 Topic: Advantages and disadvantages of partnerships Difficulty: 1 Easy Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 14-2

Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Risk Analysis REFERENCE: 14-01 Cleary, Wasser, and Nolan formed a partnership on January 1, 2017, and made capital contributions of $100,000 (Cleary), $150,000 (Wasser), and $200,000 (Nolan), 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 $10,000 to Wasser; and (3) the remainder of the income or loss to be split among the partners in the following percentages: (a) 20% for Cleary; (b) 40% for Wasser; and (c) 40% for Nolan. Net income was $150,000 in 2017 and $180,000 in 2018. Each partner withdrew $1,000 for personal use every month during 2017 and 2018. [QUESTION] REFER TO: 14-01 7. What was Wasser's total share of net income for 2017? A) $63,000. B) $53,000. C) $58,000. D) $29,000. E) $51,000. Answer: A Learning Objective: 14-06 Topic: Net income allocation―Interest-salary-bonus Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: Interest on Wasser's beginning balance of capital contribution ($150,000 × 10% = $15,000) + Salary ($10,000) + 40% of the Remaining net income (calculated below) ($38,000) = $63,000. Remaining net income: $150,000 – $45,000 (10% of $450,000) − $10,000 (Wasser Salary) = $95,000, of which 40% is allocated to Wasser = $38,000. [QUESTION] REFER TO: 14-01 8. What was Nolan's total share of net income for 2017? A) $63,000. B) $53,000. C) $58,000. D) $29,000. E) $51,000. Answer: C Learning Objective: 14-06 Topic: Net income allocation―Interest-salary-bonus Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 14-3

AICPA: BB Legal AICPA: FN Measurement

Feedback: Interest on Nolan’s beginning balance of capital contribution ($200,000 × 10% = $20,000) + Salary ($0) + 40% of the Remaining net income (calculated below) ($38,000) = $58,000. Remaining net income: $150,000 – $45,000 (10% of $450,000) − $10,000 (Wasser Salary) = $95,000, of which 40% is allocated to Nolan = $38,000. [QUESTION] REFER TO: 14-01 9. What was Cleary's total share of net income for 2017? A) $63,000. B) $53,000. C) $58,000. D) $29,000. E) $51,000. Answer: D Learning Objective: 14-06 Topic: Net income allocation―Interest-salary-bonus Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: Interest on Cleary’s beginning balance of capital contribution ($100,000 × 10% = $10,000) + Salary ($0) + 20% of the Remaining net income (calculated below) ($19,000) = $29,000. Remaining net income: $150,000 – $45,000 (10% of $450,000) − $10,000 (Wasser Salary) = $95,000, of which 20% is allocated to Cleary = $19,000. [QUESTION] REFER TO: 14-01 10. What was Nolan's capital balance at the end of 2017? A) $200,000. B) $224,000. C) $238,000. D) $246,000. E) $254,000. Answer: D Learning Objective: 14-05 Learning Objective: 14-06 Topic: Net income allocation―Partner ending balance Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: Beginning 2017 balance $200,000 + Interest $20,000 + Salary $0 + 40% of the Remaining net income $38,000 – Withdrawals $12,000 = $246,000 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 14-4

[QUESTION] REFER TO: 14-01 11. What was Wasser's capital balance at the end of 2017? A) $150,000. B) $160,000. C) $165,000. D) $213,000. E) $201,000. Answer: E Learning Objective: 14-05 Learning Objective: 14-06 Topic: Net income allocation―Partner ending balance Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: Beginning 2017 balance $150,000 + Interest $15,000 + Salary $10,000 + 40% of the Remaining net income $38,000 – Withdrawals $12,000 = $201,000 [QUESTION] REFER TO: 14-01 12. What was Cleary's capital balance at the end of 2017? A) $100,000. B) $117,000. C) $119,000. D) $129,000. E) $153,000. Answer: B Learning Objective: 14-05 Learning Objective: 14-06 Topic: Net income allocation―Partner ending balance Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: Beginning 2017 balance $100,000 + Interest $10,000 + Salary $0 + 20% of the Remaining net income $19,000 – Withdrawals $12,000 = $117,000 [QUESTION] REFER TO: 14-01 13. What was the total capital balance for the partnership at December 31, 2017? A) $600,000. B) $564,000. C) $535,000. D) $523,000. E) $545,000. Answer: B Learning Objective: 14-05 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 14-5

Learning Objective: 14-06 Topic: Net income allocation―Partner ending balance Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: Cleary $117,000 + Wasser $201,000 + Nolan $246,000 = $564,000. Alternatively, beginning capital balances ($100,000 + $150,000 + $200,000) = $450,000 + net income $150,000 − withdrawals $36,000 = $564,000. [QUESTION] REFER TO: 14-01 14. What was the amount of interest attributed to Wasser in the income distribution for 2018? A) $17,600. B) $18,800. C) $20,100. D) $17,800. E) $30,100. Answer: C Learning Objective: 14-06 Topic: Net income allocation―Interest-salary-bonus Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: Beginning Wasser 2017 capital balance $150,000 + 2017 Interest $15,000 + 2017 Salary $10,000 + 40% of the 2017 Remaining net income $38,000 – 2017 Withdrawals $12,000 = $201,000 (2018 Wasser beginning balance). Beginning $201,000 × 10% = $20,100. [QUESTION] REFER TO: 14-01 15. What was Wasser's total share of net income for 2018? A) $34,420. B) $75,540. C) $65,540. D) $70,040. E) $61,420. Answer: B Learning Objective: 14-06 Topic: Net income allocation―Interest-salary-bonus Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: Interest $20,100 + Salary $10,000 + 40% of the 2018 Remaining net income (calculated below) $45,440 = $75,540. Remaining net income = $180,000 − $56,400 (10% of $564,000) − $10,000 (Wasser Salary) = Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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$113,600 × 40% = $45,440. [QUESTION] REFER TO: 14-01 16. What was the remainder portion of net income allocated to Nolan for 2018? A) $45,440. B) $58,040. C) $70,040. D) $72,000. E) $82,040. Answer: A Learning Objective: 14-06 Topic: Net income allocation―Interest-salary-bonus Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: Remainder of 2018 Net Income = $180,000 − $56,400 (10% of $564,000) − $10,000 (Wasser Salary) = $113,600 × 40% = $45,440 [QUESTION] REFER TO: 14-01 17. What was Nolan's total share of net income for 2018? A) $34,420. B) $75,540. C) $65,540. D) $70,040. E) $61,420. Answer: D Learning Objective: 14-06 Topic: Net income allocation―Interest-salary-bonus Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: Interest $24,600 (10% of $246,000) + Salary ($0) + 40% of the 2018 Remaining net income $45,440 = $70,040. Remaining net income = $180,000 − $56,400 (10% of $564,000) − $10,000 (Wasser Salary) = $113,600 × 40% = $45,440. [QUESTION] REFER TO: 14-01 18. What was Cleary's total share of net income for 2018? A) $34,420. B) $75,540. C) $65,540. D) $70,040. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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E) $61,420. Answer: A Learning Objective: 14-06 Topic: Net income allocation―Interest-salary-bonus Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: Interest $11,700 (10% of $117,000) + Salary $0 + 20% of Remaining 2018 Net Income $22,720 = $34,420. Remaining 2018 net income = $180,000 − $56,400 (10% of $564,000) − $10,000 (Wasser Salary) = $113,600 × 20% = $22,720. [QUESTION] REFER TO: 14-01 19. What was Nolan's capital balance at the end of 2018? A) $139,420. B) $246,000. C) $276,540. D) $279,440. E) $304,040. Answer: E Learning Objective: 14-05 Learning Objective: 14-06 Topic: Net income allocation―Partner ending balance Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: 2018 Beginning Nolan capital balance $246,000 + Interest $24,600 + Salary $0 + 40% of Remaining 2018 net income (see below) $45,440 – 2018 Withdrawals $12,000 = $304,040. Remaining 2018 Net Income = $180,000 − $56,400 (10% of $564,000) − $10,000 (Wasser Salary) = $113,600 × 40% = $45,440. [QUESTION] REFER TO: 14-01 20. What was Wasser's capital balance at the end of 2018? A) $201,000. B) $263,520. C) $264,540. D) $304,040. E) $313,780. Answer: C Learning Objective: 14-05 Learning Objective: 14-06 Topic: Net income allocation―Partner ending balance Difficulty: 3 Hard Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 14-8

Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: 2018 Beginning Wasser capital balance $201,000 + Interest $20,100 + Salary $10,000 + 40% of Remaining 2018 net income (calculated below) $45,440 – Withdrawals $12,000 = $264,540. Remaining 2018 net income = $180,000 − $56,400 (10% of $564,000) − $10,000 (Wasser Salary) = $113,600 × 40% = $45,440. [QUESTION] REFER TO: 14-01 21. What was Cleary's capital account balance at the end of 2018? A) $163,420. B) $151,420. C) $139,420. D) $100,000. E) $142,000. Answer: C Learning Objective: 14-05 Learning Objective: 14-06 Topic: Net income allocation―Partner ending balance Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: Beginning Cleary capital balance $117,000 + Interest $11,700 (10% × $117,000) + Salary $0 + 20% of Remaining 2018 net income (calculated below) $22,720 – Withdrawals $12,000 = $139,420. Remaining 2018 net income = $180,000 − $56,400 (10% of $564,000) − $10,000 (Wasser Salary) = $113,600 × 20% = $22,720. [QUESTION] REFER TO: 14-01 22. What was the total capital balance for the partnership at December 31, 2018? A) $852,000. B) $780,000. C) $708,000. D) $744,000. E) $594,000. Answer: C Learning Objective: 14-05 Learning Objective: 14-06 Topic: Net income allocation―Partner ending balance Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Feedback: Cleary 2018 Ending Capital Balance $139,420 + Wasser $264,540 2018 Ending Capital Balance + Nolan 2018 Ending Capital Balance $304,040 = $708,000. Alternatively, beginning 2017 capital balances ($100,000 + $150,000 + $200,000) = $450,000 + 2017 net income $150,000 − 2017 withdrawals $36,000 = $564,000 ending 2017 balance + 2018 net income $180,000 − 2018 withdrawals $36,000 = $708,000. [QUESTION] REFER TO: 14-01 23. What will be the amount of interest attributed to Cleary in the income distribution for 2019? A) $15,142. B) $13,942. C) $12,942. D) $14,142. E) $10,000. Answer: B Learning Objective: 14-06 Topic: Net income allocation―Interest-salary-bonus Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: Beginning 2018 capital balance $117,000 + 2018 Interest $11,700 (10% × $117,000) + Salary $0 + 20% of Remaining 2018 net income $22,720 – Withdrawals $12,000 = (2018 ending balance) $139,420 × 10% = $13,942 [QUESTION] 24. Jell and Dell were partners with capital balances of $600 and $800, and an income-sharing 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. Answer: A Learning Objective: 14-09 Topic: New partner―Partnership valuation Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: Jell $600 + Dell $800 + Goodwill $700 = $2,100 / 70% = $3,000 × 30% = $900 Cash [QUESTION] 25. Jerry, a partner in the JSK partnership, begins the year on January 1, 2018 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 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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partner’s capital balance. • On March 1, 2018, when the partnership tax return for 2017 was completed, Jerry’s capital account was credited for his share of 2017 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 2018 that will go toward his profit distribution for the year? A) $6,000. B) $6,250. C) $7,950. D) $8,400. E) None of these answer choices is correct. Answer: D Learning Objective: 14-06 Topic: Net income allocation―Interest-salary-bonus Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: (Beginning balance $20,000 × 2 months) + [(20,000 + $120,000) x 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 × .06 = $8,400 REFERENCE: 14-02 A partnership began its first year of operations with the following capital balances: Young, Capital: $143,000 Eaton, Capital: $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. [QUESTION] REFER TO: 14-02 26. What was Young'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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Answer: B Learning Objective: 14-06 Topic: Net income allocation―Interest-salary-bonus Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: 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) [QUESTION] REFER TO: 14-02 27. 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. Answer: C Learning Objective: 14-06 Topic: Net income allocation―Interest-salary-bonus Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: 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) [QUESTION] REFER TO: 14-02 28. 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. Answer: A Learning Objective: 14-06 Topic: Net income allocation―Interest-salary-bonus Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: 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 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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$14,300 + Thurman’s Salary $13,000 = Thurman’s share of loss ($3,900) [QUESTION] REFER TO: 14-02 29. 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. Answer: B Learning Objective: 14-05 Learning Objective: 14-06 Topic: Net income allocation―Partner ending balance Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: Beginning $143,000 + Interest $14,300 + Salary $26,000 + Remainder (50%) ($52,000) – Withdrawals $13,000 = Ending Balance $118,300 [QUESTION] REFER TO: 14-02 30. What was the balance in Eaton'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. Answer: D Learning Objective: 14-05 Learning Objective: 14-06 Topic: Net income allocation―Partner ending balance Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: Beginning $104,000 + Interest $10,400 + Salary $0 + Remainder (20%) ($20,800) – Withdrawals $13,000 = Ending Balance $80,600 [QUESTION] REFER TO: 14-02 31. 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Answer: C Learning Objective: 14-05 Topic: Net income allocation―Partner ending balance Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: Beginning $143,000 + Interest ($143,000 × 10%) $14,300 + Salary $13,000 + Remainder (30%) ($31,200) – Withdrawals $13,000 = Ending Balance $126,100 [QUESTION] REFER TO: 14-02 32. What was Young'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. Answer: E Learning Objective: 14-06 Topic: Net income allocation―Interest-salary-bonus Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: 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. [QUESTION] REFER TO: 14-02 33. 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. Answer: B Learning Objective: 14-06 Topic: Net income allocation―Interest-salary-bonus Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Feedback: 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. [QUESTION] REFER TO: 14-02 34. What was Thurman'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. Answer: C Learning Objective: 14-06 Topic: Net income allocation―Interest-salary-bonus Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: 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. [QUESTION] REFER TO: 14-02 35. 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. Answer: A Learning Objective: 14-05 Learning Objective: 14-06 Topic: Net income allocation―Partner ending balance Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: Beginning $118,300 + Interest $11,830 + Salary $26,000 + Remainder (50%) Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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($9,750) – Withdrawals $13,000 = Ending Balance $133,380 [QUESTION] REFER TO: 14-02 36. 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. Answer: E Learning Objective: 14-05 Learning Objective: 14-06 Topic: Net income allocation―Partner ending balance Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: Beginning $80,600 + Interest $8,060 + Salary $0 + Remainder (20%) ($3,900) – Withdrawals $13,000 = Ending Balance $71,760 [QUESTION] REFER TO: 14-02 37. 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. Answer: D Learning Objective: 14-05 Learning Objective: 14-06 Topic: Net income allocation―Partner ending balance Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: Beginning $126,100 + Interest $12,610 + Salary $13,000 + Remainder (30%) ($5,850) – Withdrawals $13,000 = Ending Balance $132,860 [QUESTION] 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. Answer: D Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Learning Objective: 14-01 Topic: Advantages and disadvantages of partnerships Topic: Articles of partnership Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 39. Partnerships have alternative legal forms including all of the following except: A) General Partnership. B) Limited Partnership. C) Subchapter S Partnership. D) Limited Liability Partnership. E) Limited Liability Company. Answer: C Learning Objective: 14-01 Topic: Alternative legal forms of partnership Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 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. Answer: E Learning Objective: 14-01 Topic: Alternative legal forms of partnership Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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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. Answer: C Learning Objective: 14-03 Learning Objective: 14-08 Topic: Capital account―Initial investment Topic: New partner―Transfer of interest Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 42. Withdrawals from the partnership capital accounts are typically not used 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. Answer: C Learning Objective: 14-04 Topic: Capital investment or withdrawal after formation Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 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. Answer: B Learning Objective: 14-06 Topic: Net income allocation―Interest-salary-bonus Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: Bonus = .20 (NI − Bonus) = .20 ($57,600 − Bonus) = $11,520 − .20 Bonus 1.2 Bonus = $11,520. Bonus = $9,600. Net income $57,600 − Bonus $9,600 = $48,000 remaining net Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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income to divide equally = $24,000 to each partner. Hanes receives $24,000 + $9,600 = $33,600. [QUESTION] 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, 2018, were as follows:

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. Answer: C Learning Objective: 14-09 Topic: New partner―Partnership valuation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: $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 [QUESTION] 45. The appropriate format of the December 31, 2017 closing entry for John & Hope Limited Liability Partnership, whose two partners had withdrawn their salaries from the partnership during the year, is:

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Answer: D Learning Objective: 14-05 Topic: Net income allocation―Income or loss Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] 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. Answer: A Feedback: $80,000 − $60,000 = $20,000  3 = $6,667 Learning Objective: 14-10 Topic: Withdrawal of partner―Bonus method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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B) $ 30,000. C) $ 45,000. D) $ 50,000. E) $200,000. Answer: C Learning Objective: 14-10 Topic: Withdrawal of partner―Goodwill method Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: Land will be recorded at the fair value of $45,000 REFERENCE: 14-03 The capital account balances for Donald & Hanes LLP on January 1, 2018, were as follows:

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. [QUESTION] REFER TO: 14-03 48. What is the balance of May’s capital account after the new partnership is created? A) $ 84,000. B) $100,000. C) $140,000. D) $176,000. E) $200,000. Answer: C Learning Objective: 14-09 Topic: New partner―Bonus to new partner Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: Donald $200,000 + Hanes $100,000 + Cash $100,000 = $400,000 × .35 = $140,000 to May [QUESTION] REFER TO: 14-03 49. 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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E) $200,000. Answer: D Learning Objective: 14-09 Topic: New partner―Bonus to new partner Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: Bonus to May $40,000 × .60 = $24,000 from Donald’s $200,000 = $176,000 New capital balance [QUESTION] REFER TO: 14-03 50. 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. Answer: A Learning Objective: 14-09 Topic: New partner―Bonus to new partner Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: Bonus to May $40,000 × .40 = $16,000 from Hanes’ $100,000 = $84,000 New capital balance [QUESTION] REFER TO: 14-03 51. 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. Answer: E Learning Objective: 14-09 Topic: New partner―Bonus to new partner Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: Donald $176,000 + Hanes $84,000 + May $140,000 = Total partnership capital $400,000 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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[QUESTION] 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. A) 1 and 2. B) 1 and 3. C) 1, 2, and 4. D) 1, 3, and 4. E) 1, 2, 3, and 4. Answer: E Learning Objective: 14-05 Topic: Net income allocation―Income or loss Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement REFERENCE: 14-04 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. [QUESTION] REFER TO: 14-04 53. 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 Answer: C Learning Objective: 14-09 Topic: New partner―Partnership valuation Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: $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.

[QUESTION] REFER TO: 14-04 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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54. 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 Answer: C Learning Objective: 14-09 Topic: New partner―Bonus to original partners Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: Current capital $100,000 + Cash invested by C $38,000 = $138,000 × 20% = $27,600 to C [QUESTION] REFER TO: 14-04 55. 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 Answer: E Learning Objective: 14-09 Topic: New partner―Goodwill to original partners Topic: New partner―Partnership valuation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: $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. [QUESTION] REFER TO: 14-04 56. 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Answer: B Learning Objective: 14-09 Topic: New partner―Goodwill to new partner Topic: New partner―Partnership valuation Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: 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 ÷ .20). Goodwill will be attributed to C calculated as: ($10,000 + Goodwill) = .20 × ($110,000 + Goodwill). Thus, ($10,000 + Goodwill) = $22,000 + (.20 Goodwill). .80 Goodwill = $12,000.

Goodwill = $12,000 ÷ .80 = $15,000. REFERENCE: 14-05 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. [QUESTION] REFER TO: 14-05 57. 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. Answer: C Learning Objective: 14-10 Topic: Withdrawal of partner―Goodwill method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: 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. Peter receives 20% × $150,000 = $30,000. Peter’s balance = $80,000 + $30,000 = $110,000. [QUESTION] REFER TO: 14-05 58. 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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D) $120,000. E) $230,000. Answer: D Learning Objective: 14-10 Topic: Withdrawal of partner―Goodwill method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: 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. [QUESTION] REFER TO: 14-05 59. 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. Answer: E Learning Objective: 14-10 Topic: Withdrawal of partner―Goodwill method Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: 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. REFERENCE: 14-06 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. [QUESTION] REFER TO: 14-06 60. 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 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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C) Donald, $65,000; Todd, $55,000 D) Donald, $15,000; Todd, $30,000 E) Donald, $25,000; Todd, $0 Answer: A Learning Objective: 14-10 Topic: Withdrawal of partner―Goodwill method Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: 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. [QUESTION] REFER TO: 14-06 61. 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 Answer: B Learning Objective: 14-10 Topic: Withdrawal of partner―Bonus method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: 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 [QUESTION] REFER TO: 14-06 62. 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. Answer: B Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Learning Objective: 14-10 Topic: Withdrawal of partner―Bonus method Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Essay: [QUESTION] 63. What is the dissolution of a partnership? Answer: The dissolution of a partnership is the breakup of the partnership caused by any change in the members that make up the partnership. Learning Objective: 14-07 Topic: Partnership dissolution―Concepts Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 64. By what methods can a person gain admittance to a partnership? Answer: 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. Learning Objective: 14-03 Topic: Capital account―Initial investment Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 65. What events cause the dissolution of a partnership? Answer: 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. Learning Objective: 14-07 Topic: Partnership dissolution―Concepts Difficulty: 2 Medium Blooms: Remember AACSB: Communication AICPA: BB Legal Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: FN Measurement [QUESTION] 66. For what events or conditions should the Articles of Partnership make provision? Answer: 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. Learning Objective: 14-02 Topic: Articles of partnership Difficulty: 2 Medium Blooms: Remember AACSB: Communication AICPA: BB Legal AICPA: FN Risk Analysis [QUESTION] 67. How is accounting for a partnership different from accounting for a corporation? Answer: 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. Learning Objective: 14-01 Topic: Advantages and disadvantages of partnerships Difficulty: 2 Medium Blooms: Understand AACSB: Communication AICPA: BB Legal AICPA: FN Measurement [QUESTION] 68. Why are the terms of the Articles of Partnership important to partners? Answer: 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. Learning Objective: 14-02 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Topic: Articles of partnership Difficulty: 2 Medium Blooms: Understand AACSB: Communication AICPA: BB Legal AICPA: FN Risk Analysis [QUESTION] 69. 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? Answer: 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. Learning Objective: 14-01 Learning Objective: 14-02 Topic: Advantages and disadvantages of partnerships Topic: Articles of partnership Difficulty: 2 Medium Blooms: Apply AACSB: Evaluate AACSB: Communication AICPA: BB Legal AICPA: FN Risk Analysis [QUESTION] 70. What theoretical argument could be made against the recognition of goodwill when there is a change in the ownership of a partnership? Answer: 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. Learning Objective: 14-04 Topic: Capital investment―Goodwill method Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AACSB: Communication AICPA: BB Legal Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AICPA: FN Measurement [QUESTION] 71. Under what circumstances does a partner's balance in his or her capital account have practical consequences for the partner? Answer: 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. Learning Objective: 14-03 Learning Objective: 14-04 Learning Objective: 14-05 Topic: Capital account―Initial investment Topic: Capital investment or withdrawal after formation Topic: Net income allocation―Partner ending balance Difficulty: 1 Easy Blooms: Understand AACSB: Communication AICPA: BB Legal AICPA: FN Measurement Problems: [QUESTION] 72. 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. Answer: Reed, Capital 24,000 Sharp, Capital 30,000 Tucker, Capital 21,000 Upton, Capital 75,000 Learning Objective: 14-08 Topic: New partner―Transfer of interest Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] 73. 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 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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appropriate when a new partner was admitted. Required: Prepare the journal entries to record the admission of Looney to the partnership. Answer: Goodwill Jipsom, Capital Klark, Capital

60,000 24,000 36,000

Jipsom, Capital 31,200 Klark, Capital 40,800 Looney, Capital 72,000 Learning Objective: 14-08 Topic: New partner―Transfer of interest Topic: New partner―Partnership valuation Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: $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). REFERENCE: 14-07 Norr and Caylor established a partnership on January 1, 2017. 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 divided in a 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 2017, the partnership's income was $70,000. Norr had 1,000 billable hours, and Caylor worked 1,400 billable hours. In 2018, 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 2017 and 2018. [QUESTION] REFER TO: 14-07 74. Determine the amount of net income allocated to each partner for 2017. Answer: Distribution of income for 2017: Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Interest Compensation Subtotals Allocation of remainder Totals

Norr $ 12,000 10,000 $ 22,000 14,640 $ 36,640

Caylor $ 9,600 14,000 $ 23,600 9,760 $ 33,360

Total $ 21,600 24,000 $ 45,600 24,400 $ 70,000

Learning Objective: 14-06 Topic: Net income allocation―Interest-salary-bonus Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 14-07 75. Determine the balance in both capital accounts at the end of 2017. Answer: Capital account balances at the end of 2017:

Beginning capital balances Share of income Withdrawals Ending capital balances

Norr $ 100,000 36,640 ( 12,000) $ 124,640

Caylor $ 80,000 33,360 ( 12,000) $ 101,360

Learning Objective: 14-05 Learning Objective: 14-06 Topic: Net income allocation―Partner ending balance Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 14-07 76. Determine the amount of net income allocated to each partner for 2018. (Round all calculations to the nearest whole dollar). Answer: Distribution of income for 2018:

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Interest Compensation Subtotals Allocation of remainder Totals

Norr $ 14,957 8,000 $ 22,957 ( 13,872) $ 9,085

Caylor $ 12,163 12,000 $ 24,163 ( 9,248) $ 14,915

Total $ 27,120 20,000 $ 47,120 ( 23,120) $ 24,000

Learning Objective: 14-06 Topic: Net income allocation―Interest-salary-bonus Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 14-07 77. Determine the balance in both capital accounts at the end of 2018 to the nearest dollar. Answer: Capital account balances at the end of 2018:

Beginning capital balances Share of income Withdrawals Ending capital balances

Norr $ 124,640 9,085 ( 12,000) $ 121,725

Caylor $ 101,360 14,915 ( 12,000) $ 104,275

Learning Objective: 14-05 Learning Objective: 14-06 Topic: Net income allocation―Partner ending balance Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement REFERENCE: 14-08 The ABCD Partnership has the following balance sheet at January 1, 2017, prior to the admission of new partner, Eden.

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Cash and current assets Land Building and equipment

Total

$

39,000 234,000 130,000

$ 403,000

Liabilities Adams, capital Barnes, capital Cordas, capital Davis, capital Total

$

52,000 26,000 52,000 117,000 156,000 $ 403,000

[QUESTION] REFER TO: 14-08 78. 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. Answer: 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: Cash Adams, Capital Barnes, Capital Cordas, Capital Davis, Capital Eden, Capital

49,000 12,750 12,750 12,750 12,750 100,000

The capital balances of each of the five partners after Eden’s entry into the partnership are as follows: Adams, Capital $ 13,250 Barnes, Capital $ 39,250 Cordas, Capital $104,250 Davis, Capital $143,250 Eden, Capital $100,000 Learning Objective: 14-09 Topic: New partner―Bonus to new partner Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 14-08 79. 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? Answer: Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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After allocating the goodwill to each of the original four partners, their partnership capital balances are as follows: Adams, Capital Barnes, Capital Cordas, Capital Davis, Capital

$ 62,250 88,250 153,250 192,250

Feedback: 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 Adams, Capital Barnes, Capital Cordas, Capital Davis, Capital

145,000 36,250 36,250 36,250 36,250

The second step is to record Eden’s cash contribution and to record Eden’s capital account balance: Cash

124,000 Eden, Capital

124,000

Learning Objective: 14-09 Topic: New partner―Goodwill to original partners Topic: New partner―Partnership valuation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 14-08 80. 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? Feedback: 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 Barnes, Capital Cordas, Capital Davis, Capital Eden, Capital

5,200 10,400 23,400 31,200 70,200

Answer: The partners’ balances following the admission of Eden are: Adams, Capital Barnes, Capital Cordas, Capital Davis, Capital Eden, Capital

$ 20,800 41,600 93,600 124,800 70,200

Learning Objective: 14-08 Topic: New partner―Transfer of interest Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 14-08 81. 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? Feedback: 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 ÷ .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 Barnes, Capital Cordas, Capital Davis, Capital

6,500 975 2,275 1,950 1,300

The adjusted balances for the four original partners, after allocating goodwill, are: Adams, Capital Barnes, Capital

$ 26,975 54,275

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Cordas, Capital Davis, Capital

118,950 157,300

The next step is to allocate 20% of each of the original partners’ balances to Eden: Adams, Capital Barnes, Capital Cordas, Capital Davis, Capital Eden, Capital Answer:

5,395 10,855 23,790 31,460 71,500

The partners’ capital balances after admitting Eden are: Adams, Capital Barnes, Capital Cordas, Capital Davis, Capital Eden, Capital

$ 21,580 43,420 95,160 125,840 71,500

Learning Objective: 14-08 Topic: New partner―Transfer of interest Topic: New partner―Partnership valuation Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement REFERENCE: 14-09 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 $60,000 15,000 25,000

Profit and Loss Ratio 40% 30% 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. [QUESTION] REFER TO: 14-09 82. Prepare the journal entry for the payment to Dean in the dissolution of his partnership interest, assuming the bonus method is to be applied. Answer: Dean, Capital

60,000

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 14-38

Hardin, Capital Roth, Capital Cash

2,400 1,600 64,000

Feedback: 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. Learning Objective: 14-10 Topic: Withdrawal of partner―Bonus method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 14-09 83. What are the remaining partners' capital balances after Dean's interest is dissolved, assuming the bonus method is applied? Answer: Hardin: $12,600 = ($15,000 − $2,400) Roth: $23,400 = ($25,000 − $1,600) Learning Objective: 14-10 Topic: Withdrawal of partner―Bonus method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement REFERENCE: 14-10 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 Waldrop

Capital Balance $ 60,000 15,000 25,000

Profit and Loss Ratio 4 3 2

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. [QUESTION] REFER TO: 14-10 84. Prepare the journal entries for the dissolution of Howell's partnership interest, assuming the goodwill method is to be applied. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 14-39

Feedback: 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.

Answer: Land Goodwill Howell, Capital Madrid, Capital Waldrop, Capital Howell, Capital Cash

15,000 39,000 24,000 18,000 12,000 84,000 84,000

Learning Objective: 14-10 Topic: Withdrawal of partner―Goodwill method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 14-10 85. What are the remaining partners' capital balances after Howell's interest is dissolved, assuming the goodwill method is applied? Answer: Madrid: $33,000 = ($15,000 + $18,000) Waldrop: $37,000 = ($25,000 + $12,000) Learning Objective: 14-10 Topic: Withdrawal of partner―Goodwill method Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement REFERENCE: 14-11 On January 1, 2018, Lamb and Mona LLP admitted Noris to a 20% interest in net assets for an investment of $50,000 cash. Prior to the admission of Noris, 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 Noris, the partnership contract included the following provisions: • Salary of $40,000 a year to Noris. • Remaining net income in ratio Lamb 20%, Mona 60%, Noris 20% • During the fiscal year ended December 31, 2018, the partnership had income of $90,000 prior to recognition of salary to Noris. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 14-40

[QUESTION] REFER TO: 14-11 86. Record the journal entry for the admission of Noris. Goodwill is not to be recorded. Answer: Cash Lamb, Capital ($20,000 × 0.25) Mona, Capital ($20,000 × 0.75) Norris, Capital ($150,000 × 0.20)

50,000 5,000 15,000 30,000

Feedback: After the contribution from Noris, total capital = $150,000. Noris receives 20% of this = $30,000, but Noris is contributing $50,000. Thus, the $20,000 excess contribution is allocated to the original partners in their 25:75 ratio. Learning Objective: 14-09 Topic: New partner―Bonus to original partners Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 14-11 87. Record the journal entry to allocate the salary of Noris. Answer: Income Summary Noris, Capital

40,000 40,000

Learning Objective: 14-06 Topic: Net income allocation―Interest-salary-bonus Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 14-11 88. Record the journal entry to record the remainder of net income to the capital accounts. Answer: Income Summary ($90,000 − $40,000) Lamb, Capital ($50,000 × 0.20) Mona, Capital ($50,000 × 0.60) Noris, Capital ($50,000 × 0.20) Learning Objective: 14-06 Topic: Net income allocation―Interest-salary-bonus Difficulty: 1 Easy Blooms: Apply

50,000 10,000 30,000 10,000

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 14-41

AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] 89. 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? Answer: Keller $ 5,600 15,000

Rivers $ 7,200 20,000

Totals $ 17,200 48,000

Remaining income (loss): $ 30,000 (17,200) (48,000) $(35,200) (7,040)

(10,560)

(17,600)

(35,200)

Totals

$ 10,040

$ 9,600

Interest (8%) Salary

James $ 4,400 (below) 13,000

$ 10,360

$

30,000

CALCULATION OF JAMES INTEREST ALLOCATION Balance, January 1 − June 1 ($48,000 × 5 months) Balance, June 1 − December 31 ($60,000 × 7 months) Total ....................................................................................... Months .................................................................................... Weighted average capital balance .......................................... Interest rate ............................................................................ Interest allocation (above).......................................................

$240,000 420,000 $660,000  12 $ 55,000 x 8% $ 4,400

STATEMENT OF PARTNERS' CAPITAL James Keller Rivers Beginning balances ............... $48,000 $70,000 $90,000 Additional contribution ......... 12,000 0 0 Income (above) ...................... 10,360 10,040 9,600 Drawings ($1,000 per month) (12,000) (12,000) (12,000) Ending capital balances.......... $58,360 $68,040 $87,600

Totals $208,000 12,000 30,000 (36,000) $214,000

Learning Objective: 14-05 Learning Objective: 14-06 Topic: Net income allocation―Interest-salary-bonus Topic: Net income allocation―Partner ending balance Difficulty: 3 Hard Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 14-42

Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 14-43

File: Chapter 15 - Partnerships: Termination and Liquidation

Multiple Choice: [QUESTION] 1. When a partnership is insolvent and a partner has a deficit capital account balance, that partner is legally required to: A) Declare personal bankruptcy. B) Initiate legal proceedings against the partnership. C) Contribute cash to the partnership. 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. Answer: C Learning Objective: 15-03 Topic: Partner deficit balance―General Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement REFERENCE: 15-01 The Abrams, Bartle, and Creighton partnership began the process of liquidation with the following balance sheet:

Cash Noncash assets

Total

$

16,000 434,000

$ 450,000

Liabilities Abrams, capital Bartle, capital Creighton, capital Total

$ 150,000 80,000 90,000 130,000 $ 450,000

Abrams, Bartle, and Creighton share profits and losses in a ratio of 3:2:5. Liquidation expenses are expected to be $12,000. [QUESTION] REFER TO: 15-01 2. If the noncash assets were sold for $234,000, what amount of the loss would have been allocated to Bartle with respect to the noncash assets? A) $43,200. B) $46,800. C) $40,000. D) $42,400. E) $43,100. Answer: C Learning Objective: 15-02 Topic: Statement of liquidation―Effect of transactions Difficulty: 1 Easy Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-1

Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Feedback: Non-Cash Assets BV $434,000 – Cash Received $234,000 = Loss on NonCash Assets ($200,000) × 20% = Loss to Bartle ($40,000) [QUESTION] REFER TO: 15-01 3. Assuming that the noncash assets were sold for $134,000, 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) Abrams. B) Bartle. C) Creighton. D) Abrams and Creighton. E) Abrams and Bartle. Answer: D Learning Objective: 15-03 Topic: Statement of liquidation―Deficit balance Difficulty: 2 Medium Blooms: Apply AACSB: Analytical Thinking AICPA: BB Legal AICPA: FN Measurement Feedback: Non-Cash Assets BV $434,000 – Cash Received $134,000 = Loss on Non-Cash Assets ($300,000) × 30% = Loss to Abrams ($90,000) – Capital account balance $80,000 = Abrams’ Deficit and Need Contribution to Cover $10,000 Non-Cash Assets BV $434,000 – Cash Received $134,000 = Loss on Non-Cash Assets ($300,000) × 20% = Loss to Abrams ($60,000) – Capital account balance $90,000 = Bartle Excess after Loss Allocation of $30,000 Non-Cash Assets BV $434,000 – Cash Received $134,000 = Loss on Non-Cash Assets ($300,000) × 50% = Loss to Abrams ($150,000) – Capital account balance $130,000 = Creighton’s Deficit and Need Contribution to Cover $20,000 [QUESTION] REFER TO: 15-01 4. Assuming that, after the payment of liquidation expenses in the amount of $12,000 was made and the noncash assets were sold, if Creighton has a deficit of $8,000, for what amount would the noncash assets have been sold? A) $170,000. B) $264,000. C) $158,000. D) $146,000. E) $185,000. Answer: A Learning Objective: 15-03 Topic: Safe payments―Allocate potential loss―Deficit Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-2

AICPA: BB Legal AICPA: FN Measurement Feedback: The resulting deficit of $8,000 is after depleting Creighton’s capital account balance of $130,000. Thus, a total of $138,000 was allocated to reduce Creighton’s capital account balance. Since Creighton was allocated one-half of the total reduction, the total allocation of expenses and losses was $276,000 of which $12,000 was for liquidation expenses, leaving a total loss on the sale of non-cash assets of $264,000. The non-cash assets were sold for $264,000 less than book value = sale of non-cash assets for $170,000. The result is provided as: [Non-Cash Assets BV $434,000 – Cash Received $170,000] + Liquidation Expenses $12,000 = Loss on Non-Cash Assets ($276,000) × 50% = Loss to Abrams ($138,000) – Capital Account Balance $130,000 = Creighton’s Deficit $8,000. REFERENCE: 15-02 The Keaton, Lewis, and Meador partnership had the following balance sheet just before entering liquidation: Cash Noncash assets

Total

$ 100,000 210,000

$ 310,000

Liabilities Keaton, Capital Lewis, Capital Meador, Capital Total

$ 40,000 90,000 60,000 120,000 $ 310,000

Keaton, Lewis, and Meador share profits and losses in a ratio of 2:4:4. [QUESTION] REFER TO: 15-02 5. Assume that noncash assets were sold for $58,000 and liquidation expenses in the amount of $10,000 were incurred. If Lewis was personally insolvent and could not contribute any assets to the partnership, and Keaton and Meador were both solvent, what amount of cash would Keaton receive from the distribution of partnership assets? A) $0. B) $56,000. C) $57,600. D) $59,600. E) $60,000. Answer: B Learning Objective: 15-03 Topic: Statement of liquidation―Deficit balance Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: Proceeds from sale of noncash assets in the amount of $58,000 results in a total loss of $152,000 (BV noncash assets ($210,000) less FV of assets ($58,000) = $152,000). The allocation of this loss is as follows: Keaton ($152,000 × 20% = $30,400); Lewis ($152,000 × 40% = $60,800); Meador ($152,000 × 40% = $60,800). Each partner’s allocation of liquidation expenses are calculated as follows: Keaton ($10,000 × 20% = $2,000); Lewis ($10,000 × 40% = $4,000); Meador ($10,000 × 40% = $4,000). Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-3

Capital account balances, after the allocation of these losses, were as follows: Keaton ($90,000 $30,400 (Loss on Noncash Assets) - $2,000 (Liquidation Expenses) = $57,600); Lewis ($60,000 $60,800 (Loss on Noncash Assets) - $4,000 (Liquidation Expenses) = Deficit ($4,800)); Meador ($120,000 - $60,800 (Loss on Noncash Assets) - $4,000 (Liquidation Expenses) = $55,200. Allocation of Lewis’ $4,800 Deficit to Keaton and Meador: $1,600 to Keaton ($4,800 × 1/3 = $1,600) and $3,200 to Meador ($4,800 × 2/3 = $3,600). Keaton’s ending Capital account balance: $57,600 - $1,600 = $56,000.

[QUESTION] REFER TO: 15-02 6. Assuming noncash assets were sold for $60,000, how much will each partner receive in the liquidation?

A) B) C) D) E)

Keaton $ 40,000 $ 24,000 $ 56,667 $ 0 $ 36,000

Lewis $ 26,667 $ 48,000 $ 0 $ 0 $ 12,000

Meador $ 53,333 $ 48,000 $ 53,333 $120,000 $ 72,000

Answer: C Learning Objective: 15-03 Topic: Statement of liquidation―Deficit balance Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback:

[QUESTION] REFER TO: 15-02 7. 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 $60,000 distribution of cash? Keaton Lewis Meador A) $ 40,000 $ 0 $ 20,000 B) $ 12,000 $ 24,000 $ 24,000 C) $ 20,000 $ 13,333 $ 26,667 D) $ 60,000 $ 0 $ 0 E) $ 10,000 $ 0 $ 50,000 Answer: A Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-4

Learning Objective: 15-04 Topic: Schedule of liquidation―Safe capital balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: Non-Cash Assets BV $210,000 = Maximum Loss on Non-Cash Assets ($210,000) × 20% = Loss to Keaton ($42,000); ($210,000) × 40% = ($42,000)Loss to Lewis and to Meador. Potential Balances: Keaton $90,000 – Loss ($42,000) = Keaton Potential Balance $48,000. Lewis $60,000 – Loss ($84,000) = Lewis Potential Balance ($24,000). Meador $120,000 – Loss ($84,000) = Meador Potential Balance $36,000. Lewis’ Deficit ($24,000) × 1/3 = Lewis’ Deficit Portion to Keaton ($8,000) and 2/3 × ($24,000) = Lewis’ Deficit Portion to Meador ($16,000). Lewis will receive $0. Keaton Potential Balance $48,000 + Lewis’ Deficit Portion ($8,000) = Keaton’s Safe Payment $40,000. Meador Potential Balance $36,000 + Lewis’ Deficit Portion ($16,000) = Meador’s Safe Payment $20,000. REFERENCE: 15-03 The Henry, Isaac, and Jacobs partnership was about to enter liquidation with the following account balances:

Cash Noncash assets

Total

$

90,000 300,000

$ 390,000

Liabilities Henry, capital Isaac, capital Jacobs, capital Total

$

60,000 80,000 110,000 140,000 $ 390,000

Estimated expenses of liquidation were $5,000. Henry, Isaac, and Jacobs shared profits and losses in a ratio of 2:4:4. [QUESTION] REFER TO: 15-03 8. 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. Answer: C Learning Objective: 15-04 Topic: Schedule of liquidation―Safe capital balances Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: Cash $90,000 – Liabilities $60,000 – Liquidation Expenses $5,000 = “Safe” Cash Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-5

$25,000 [QUESTION] REFER TO: 15-03 9. 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. Answer: D Learning Objective: 15-04 Topic: Schedule of liquidation―Safe capital balances Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: Non-Cash Assets BV $300,000 = Maximum Loss on Non-Cash Assets ($300,000) × 20% = Loss to Henry ($60,000); ($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 – Loss ($60,000) – Liquidation expenses ($1,000) = Henry’s Potential Balance $19,000. Isaac $110,000 – Loss ($120,000) – Liquidation expenses ($2,000) = Isaac’s Provisional Balance ($12,000) Deficit. Jacobs $140,000 – Loss ($120,000) – Liquidation expenses ($2,000) = Jacobs’ Provisional Balance $18,000. Isaac’s Deficit ($12,000) × 1/3 = Isaac’s Deficit Portion to Henry ($4,000) and 2/3 × ($12,000) = Isaac’s Deficit Portion to Jacobs ($8,000). Isaac will receive $0. Henry Potential Balance $19,000 + Isaac’s Deficit Portion ($4,000) = Henry’s Safe Payment $15,000. Jacobs’ Potential Balance $18,000 + Isaac’s Deficit Portion ($8,000) = Jacobs’ Safe Payment $10,000.

[QUESTION] REFER TO: 15-03 10. 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 noncashassets. How would the $120,000 be distributed to the partners? (Hint: Either a predistribution plan or a schedule of safe capital balances would be appropriate for solving this item.) Henry Isaac Jacobs A) $ 33,000 $ 36,000 $ 51,000 B) $ 28,000 $ 36,000 $ 56,000 C) $ 29,333 $ 32,000 $ 58,667 D) $ 24,000 $ 48,000 $ 48,000 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-6

E)

$ 38,000

$ 26,000

$ 56,000

Answer: B Learning Objective: 15-04 Learning Objective: 15-05 Topic: Schedule of liquidation―Safe capital balances Topic: Predistribution plan―Order of available cash Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: Cash from Sale $120,000 – Liquidation Expenses $5,000 = $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 in 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 – Loss ($36,000) = $28,000. Isaac $108,000 – Loss ($72,000) = $36,000. Jacobs $128,000 – Loss ($72,000) + $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. REFERENCE: 15-04 The following account balances were available for the Perry, Quincy, and Renquist partnership just before it entered liquidation:

Cash Noncash assets

Total

$

90,000 300,000

$ 390,000

Liabilities Perry, capital Quincy, capital Renquist, capital Total

$ 170,000 70,000 50,000 100,000 $ 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. [QUESTION] REFER TO: 15-04 11. 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) $185,000 B) $170,000 C) $165,000 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-7

D) $ 95,000 E) $ 90,000 Answer: D Learning Objective: 15-02 Topic: Statement of liquidation―Updated balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: Cash $90,000 – Liquidation Expenses $15,000 – Liabilities $170,000 = Balance Needed from Non-Cash Assets ($95,000). 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. [QUESTION] REFER TO: 15-04 12. For what amount would the noncash assets need to be sold in order for Quincy to receive some cash from the liquidation? 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. Answer: B Learning Objective: 15-04 Learning Objective: 15-05 Topic: Schedule of liquidation―Safe capital balances Topic: Predistribution plan―Maximum loss to be absorbed Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: 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 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. REFERENCE: 15-05 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) Zobart, capital (35%) Douglass, capital (25%)

$ 23,000 22,000 ( 14,000)

Douglass indicated that the $14,000 deficit would be covered by a forthcoming contribution. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-8

However, the two remaining partners asked to receive the $31,000 that was then in the cash account. [QUESTION] REFER TO: 15-05 13. 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. Answer: B Learning Objective: 15-03 Topic: Safe payments―Allocate potential loss―Deficit Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: Douglass’ Deficit ($14,000) × (.40/.75) = ($7,467) + Justice’s Capital account balance $23,000 = $15,533 Distribution to Justice [QUESTION] REFER TO: 15-05 14. How much of this money should Zobart receive? A) $15,467. B) $14,467. C) $17,333. D) $15,633. E) $15,867. Answer: A Learning Objective: 15-03 Topic: Safe payments―Allocate potential loss―Deficit Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: Douglass’ Deficit ($14,000) × (.35/.75) = ($6,533) + Zobart’s Capital account balance $22,000 = $15,467 Distribution to Zobart REFERENCE: 15-06 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 Ezzard, capital Tillman, capital

$ 60,000 67,000 17,000 96,000

At that time, the partnership held noncash assets reported at $360,000 and liabilities of $120,000. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-9

There was no cash on hand at the time. [QUESTION] REFER TO: 15-06 15. 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. Answer: C Learning Objective: 15-04 Topic: Schedule of liquidation―Safe capital balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: 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). Ding potential balance $7,200 + Ezzard’s Deficit Portion ($4,700) = Amount Ding Receives from Liquidation $2,500 [QUESTION] REFER TO: 15-06 16. 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. Answer: D Learning Objective: 15-04 Topic: Schedule of liquidation―Safe capital balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-10

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 [QUESTION] REFER TO: 15-06 17. 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. Answer: B Learning Objective: 15-04 Topic: Schedule of liquidation―Safe capital balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: 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. [QUESTION] REFER TO: 15-06 18. 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. Answer: E Learning Objective: 15-04 Topic: Schedule of liquidation―Safe capital balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: 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, Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-11

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). Tillman potential balance $69,600 + Ezzard’s Deficit Portion ($2,350) = Amount Tillman Receives from Liquidation $67,250 REFERENCE: 15-07 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 Newman, capital Jahn, capital

$ 72,000 32,000 52,000 24,000

[QUESTION] REFER TO: 15-07 19. 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. Answer: A Learning Objective: 15-05 Topic: Predistribution plan―Order of available cash Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: D = $72,000; R = $32,000; N = $52,000; J = $24,000 with Losses Shared 4:2:2:2 First eliminate lowest value J = $24,000 - $24,000 = 0 D = $72,000 - $48,000 = $24,000 - $16,000 = $8,000 - $8,000 = 0 R= $32,000 - $24,000 = $8,000 - $8,000 = 0 N= $52,000 - $24,000 = $28,000 - $8,000 = $20,000 - $4,000 = $16,000 [QUESTION] REFER TO: 15-07 20. Which one of the following statements is true for a predistribution plan? 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 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-12

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. Answer: B Learning Objective: 15-05 Topic: Predistribution plan―Order of available cash Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: D = $72,000; R = $32,000; N = $52,000; J = $24,000 with Losses Shared 4:2:2:2 First eliminate lowest value J = $24,000 - $24,000 = 0 D = $72,000 - $48,000 = $24,000 - $16,000 = $8,000 - $8,000 = 0 R = $32,000 - $24,000 = $8,000 - $8,000 = 0 N = $52,000 - $24,000 = $28,000 - $8,000 = $20,000 - $4,000 = $16,000 [QUESTION] 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 Answer: E Learning Objective: 15-01 Topic: Partnership termination and liquidation―General Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 22. What accounting transactions are not recorded by an accountant during partnership liquidation? A) The conversion of partnership assets into cash. B) The allocation of gains and losses from sales of assets. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-13

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. Answer: D Learning Objective: 15-02 Topic: Prepare journal entries to record transactions Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 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. Answer: B Learning Objective: 15-02 Topic: Statement of liquidation―Updated balances Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 24. What is the preferred method of resolving a partner's deficit balance, according to the Uniform Partnership Act? A) Partners never have a deficit balance. B) The other partners must contribute personal assets to cover the deficit balance. C) The partnership must sell assets in order to cover the deficit balance. D) The partner with a deficit balance must contribute personal assets to cover the deficit balance. E) The partner with a deficit balance contributes personal assets only if those personal assets exceed personal liabilities. Answer: D Learning Objective: 15-03 Topic: Partner deficit balance―General Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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25. Which of the following statements is true concerning the distribution of safe payments? 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. Answer: A Learning Objective: 15-03 Topic: Safe payments―Allocate potential loss―Deficit Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 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. Answer: A Learning Objective: 15-03 Topic: Statement of liquidation―Deficit balance Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 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. Answer: D Learning Objective: 15-02 Topic: Statement of liquidation―Updated balances Difficulty: 1 Easy Blooms: Remember Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 28. Harding, Jones, and Sandy, a partnership, is in the process of liquidating. The partners have the following capital account balances; $24,000, $24,000, and ($9,000) respectively. The partners share all profits and losses 16%, 48%, and 36%, respectively. Sandy has indicated that the ($9,000) deficit will be covered with a forthcoming contribution. The remaining partners have requested an immediate distribution of $20,000 in cash that is available. How should this cash be distributed? A) Harding $5,000; Jones $15,000. B) Harding $17,000; Jones $3,000. C) Harding $11,154; Jones $8,846. D) Harding $14,297; Jones $5,703. E) Harding $12,500; Jones $7,500. Answer: B Learning Objective: 15-05 Topic: Predistribution plan―Order of available cash Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: Harding = $72,000; Jones = $32,000; Sandy = $52,000 beginning balances with Losses Shared 16:48:36 First eliminate Sandy’s negative capital loss to Harding & Jones Losses shared 16/64 & 48/64 or 25% & 75% Harding = $24,000 – ($9,000 × 25%) $2,250 = $21,750 – $5,750 = $16,000 + ($4,000 × 25%) $1,000 = $17,000 Jones = $24,000 – ($9,000 × 75%) $6,750 = $17,250 - $17,250 = 0 + ($4,000 × 75%) $3,000 = $3,000 [QUESTION] 29. Gonda, Herron, and Morse is considering possible liquidation because partner Morse is personally insolvent. The partners have the following capital account balances: $60,000, $70,000, and $40,000, respectively, and share profits and losses 30%, 45%, and 25%, respectively. The partnership has $200,000 in noncash assets that can be sold for $150,000. The partnership has $10,000 cash on hand, and $40,000 in liabilities. What is the minimum that partner Morse’s creditors would receive if they have filed a claim for $50,000? A) $ 0. B) $27,500. C) $45,000. D) $47,500. E) $50,000. Answer: B Learning Objective: 15-02 Topic: Statement of liquidation―Effect of transactions Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-16

AICPA: BB Legal AICPA: FN Measurement Feedback: M = $40,000 – Loss on Non-Cash Asset Sale ($50,000 × .25) $12,500 = $27,500 REFERENCE: 15-08 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. [QUESTION] REFER TO: 15-08 30. How would $90,000 be distributed? White Sands A) $ 15,000 $ 25,000 B) $ 0 $ 18,947 C) $ 0 $ 40,000 D) $ 0 $ 10,588 E) $ 27,000 $ 18,000

Luke $ 50,000 $ 71,053 $ 50,000 $ 79,412 $ 45,000

Answer: C Learning Objective: 15-05 Topic: Predistribution plan―Order of available cash Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback:

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] [QUESTION] REFER TO: 15-08 31. How would $200,000 be distributed? White Sands Luke A) $ 60,000 $ 40,000 $ 100,000 B) $ 6,000 $ 44,000 $ 150,000 C) $ 48,148 $ 65,432 $ 86,420 D) $ 12,000 $ 68,000 $ 120,000 E) $ 60,000 $100,000 $ 40,000 Answer: D Learning Objective: 15-05 Topic: Predistribution plan―Order of available cash Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-17

AICPA: FN Measurement Feedback:

Beginning Balances Assumed Loss (Sched A) 200,000 Step 1 Balances Assumed Loss (Sched B) 140,000 Step 2 Balances Available Cash First Next All further cash

White 30% 60,000 (60,000) 0

Sands Luke 20% 50% 100,000 200,000 (40,000) (100,000) 60,000 100,000 (40,000) (100,000) 20,000 0

Amount Recipient 20,000 Sands 140,000 Sands (2/7) and Luke (5/7) White (30%), Sands (20%) and Luke (50%)

Schedule A Partner White Sands Luke

Capital Balance 60,000 100,000 200,000

Loss Maximum Allocation Loss 30% 200,000 * 20% 500,000 50% 400,000

Capital Balance

Loss Maximum Allocation Loss

Schedule B Partner White Sands Luke

0 60,000 100,000

2/7 5/7

210,000 140,000 *

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 REFERENCE: 15-09 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. [QUESTION] REFER TO: 15-09 32. 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. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-18

C) $18,000. D) $28,000. E) $55,000. Answer: D Learning Objective: 15-02 Topic: Statement of liquidation―Effect of transactions Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: H = $40,000 – Loss on Building ($30,000 × .40) $12,000 = $28,000 [QUESTION] REFER TO: 15-09 33. 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. Answer: B Learning Objective: 15-02 Topic: Statement of liquidation―Effect of transactions Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: W = $15,000 – Loss on Building ($30,000 × .20) $6,000 = $9,000 REFERENCE: 15-10 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. [QUESTION] REFER TO: 15-10 34. 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. Answer: D Learning Objective: 15-03 Topic: Statement of liquidation―Deficit balance Difficulty: 1 Easy Blooms: Apply Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-19

AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: 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 & 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 [QUESTION] REFER TO: 15-10 35. 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. Answer: A Learning Objective: 15-03 Topic: Statement of liquidation―Deficit balance Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: 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 balance of $20,000 is deficit allocated to remaining partners; Mones receives $0. Essays: [QUESTION] 36. 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. Answer: (1) A, (2) C, (3) D, (4) B Learning Objective: 15-02 Learning Objective: 15-03 Learning Objective: 15-04 Learning Objective: 15-05 Topic: Statement of liquidation―Updated balances Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Topic: Statement of liquidation―Deficit balance Topic: Schedule of liquidation―Safe capital balances Topic: Predistribution plan―Order of available cash Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 37. What is the role of the accountant during the liquidation process? Answer: 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. Learning Objective: 15-01 Topic: Partnership termination and liquidation―General Difficulty: 1 Easy Blooms: Understand AACSB: Communication AICPA: BB Legal AICPA: FN Measurement [QUESTION] 38. 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 claimed some of the partnership assets? Answer: Rayne's personal creditors might have claimed some partnership assets if Rayne had a credit balance in his capital account. Learning Objective: 15-03 Topic: Safe payments―Allocate potential loss―Deficit Difficulty: 1 Easy Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 39. 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. 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? Answer: 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. Learning Objective: 15-03 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Topic: Statement of liquidation―Deficit balance Difficulty: 2 Medium Blooms: Understand AACSB: Communication AICPA: BB Legal AICPA: FN Measurement [QUESTION] 40. 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? Answer: 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. Learning Objective: 15-03 Topic: Partner deficit balance―General Difficulty: 1 Easy Blooms: Understand AACSB: Communication AICPA: BB Legal AICPA: FN Measurement [QUESTION] 41. What is the purpose of a predistribution plan? Answer: 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.. Learning Objective: 15-05 Topic: Predistribution plan―Order of available cash Difficulty: 1 Easy Blooms: Remember AACSB: Communication AICPA: BB Legal AICPA: FN Measurement [QUESTION] 42. 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? Answer: 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. Learning Objective: 15-01 Learning Objective: 15-02 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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Topic: Partnership termination and liquidation―General Topic: Statement of liquidation―Updated balances Difficulty: 2 Medium Blooms: Remember AACSB: Communication AICPA: BB Legal AICPA: FN Measurement [QUESTION] 43. What events or circumstances might force the termination of a partnership and liquidation of its assets? Answer: 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. Learning Objective: 15-01 Topic: Partnership termination and liquidation―General Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 44. Describe the content of a journal entry to record a gain or loss resulting from the liquidation of a partnership asset for cash. Answer: 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 agreed-upon 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. Learning Objective: 15-02 Topic: Prepare journal entries to record transactions Difficulty: 1 Easy Blooms: Remember AACSB: Communication AICPA: BB Legal AICPA: FN Measurement [QUESTION] 45. What should occur when a solvent partner has a deficit balance? Answer: The partner should contribute personal assets to the extent of the deficit balance. Learning Objective: 15-03 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-23

Topic: Partner deficit balance―General Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 46. Why is a preliminary distribution of partnership assets prepared? Answer: 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. Learning Objective: 15-04 Topic: Schedule of liquidation―Safe capital balances Difficulty: 1 Easy Blooms: Remember AACSB: Communication AICPA: BB Legal AICPA: FN Measurement [QUESTION] 47. What is a safe cash payment? Answer: 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. Learning Objective: 15-04 Topic: Schedule of liquidation―Safe capital balances Difficulty: 2 Medium Blooms: Remember AACSB: Communication AICPA: BB Legal AICPA: FN Measurement Problems: [QUESTION] 48. 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. Answer: Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-24

Cash Accumulated Depreciation Albert, Capital Boynton, Capital Creamer, Capital Equipment

24,000 30,000 6,000 18,000 12,000 90,000

Learning Objective: 15-02 Topic: Prepare journal entries to record transactions Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] 49. 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: $45,000 Billings, capital: $75,000 Cleaver, capital: $30,000 Required: If the investment was sold for $80,000, how much cash would each partner receive upon liquidation? Answer:

Amos ($45,000 – ($30,000 loss x .5)) Billings ($75,000 – ($30,000 loss x .25)) Cleaver ($30,000 – ($30,000 loss x .25))

$ 30,000 67,500 22,500

Learning Objective: 15-02 Topic: Statement of liquidation―Effect of transactions Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement REFERENCE: 15-11 As of January 1, 2018, the partnership of Canton, Yulls, and Garr had the following account balances and percentages for the sharing of profits and losses: Cash Noncash assets Liabilities Canton, capital (30%) Yulls, capital (40%) Garr, capital (30%)

$ 80,000 205,000 47,000 138,000 119,500 (19,500)

The partnership incurred losses in recent years and decided to liquidate. The liquidation expenses Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-25

were expected to be $10,000. [QUESTION] REFER TO: 15-11 50. How much of the existing cash balance could be distributed safely to partners at this time? Answer: The amount of cash that could be distributed to partners at this time = current cash balance $80,000 – liabilities $47,000 – estimate for liquidation expenses $10,000 = $23,000. Learning Objective: 15-02 Topic: Statement of liquidation―Updated balances Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 15-11 51. What would be the maximum amount Garr might have to contribute to the partnership to eliminate a deficit balance in his account? Answer: Capital account balances Loss on sale of assets Liquidation expenses Balances

Canton $138,000 (61,500) (3,000) $73,500

Yulls $119,500 (82,000) (4,000) $ 33,500

Garr $(19,500) (61,500) (3,000) $(84,000)

Total $238,000 (205,000) (10,000) $ 23,000

The maximum amount that Garr might have to contribute to eliminate a deficit would be $84,000, assuming that the noncash assets cannot be sold and become a total loss to the partnership. Learning Objective: 15-03 Topic: Statement of liquidation―Deficit balance Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 15-11 52. How much cash should each partner receive at this time, pursuant to a proposed schedule of liquidation? Answer: To determine the amount to be distributed to partners, assuming maximum losses on liquidation:

Capital account balances Loss on sale of assets Liquidation expenses

Canton $138,000 (61,500) (3,000)

Yulls $119,500 (82,000) (4,000)

Garr $(19,500) (61,500) (3,000)

Total $238,000 (205,000) (10,000)

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-26

Balances Allocation of deficit Balances Allocation of deficit Safe balance

$73,500 (36,000) $ 37,500 (14,500) $ 23,000

$ 33,500 (48,000) $(14,500) 14,500 $ 0

$(84,000) 84,000 $ 0 _______ $ 0

$ 23,000 0 $ 23,000 ______ $ 23,000

The entire $23,000 should be distributed to Canton. Learning Objective: 15-03 Learning Objective: 15-04 Topic: Safe payments―Allocate potential loss―Deficit Topic: Schedule of liquidation―Safe capital balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 15-11 53. If the noncash assets are sold for $105,000, what would be the maximum amount of cash that Canton could expect to receive? Answer: The maximum amount that Canton could be expected to receive is $105,000. This assumes that Garr can cover his deficit: Capital account balances Loss on sale of assets Liquidation expenses Balances

Canton $138,000 (30,000) (3,000) $105,000

Yulls $119,500 (40,000) (4,000) $ 75,500

Garr $(19,500) (30,000) (3,000) $(52,500)

Total $238,000 (100,000) (10,000) $ 128,000

Learning Objective: 15-03 Topic: Statement of liquidation―Deficit balance Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] 54. 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? Answer: Since the partnership had total capital of $455,000, the $10,400 that was available would have indicated maximum potential losses of $444,600. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-27

The $10,400 would have gone to Garfield ($8,840) and Arthur ($1,560). Learning Objective: 15-05 Topic: Predistribution plan―Maximum loss to be absorbed Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] 55. 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: $32,700 Murphy, Capital: 36,400 Madison, Capital: 26,000 Pond, Capital: 27,900 The partners shared profits and losses 30:30:20:20, respectively. Required: Prepare a proposed schedule of liquidation, showing how cash could be safely distributed to the partners at this time. Answer: Murphy received $700, Madison received $2,200, and Pond received $4,100.

Recorded balances Maximum losses on land and building ($110,000) allocated on a 3:3:2:2 basis Estimated liquidation expenses ($6,000) allocated 3:3:2:2 Potential balances Assume King to be insolvent ($2,100) allocated 3:2:2 Safe balances

King $32,700

Murphy $36,400

Madison $26,000

Pond $27,900

(33,000)

(33,000)

(22,000)

(22,000)

( 1,800) $( 2,100)

( 1,800) $ 1,600

(

(

( 600) $ 2,200

$

2,100 0

$

900) 700

1,200) ( 1,200) $ 2,800 $ 4,700 ( 600) $ 4,100

Learning Objective: 15-04 Topic: Schedule of liquidation―Safe capital balances Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-28

Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement REFERENCE: 15-12 On January 1, 2018, 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 Credit Cash $ 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 $ 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

February

March

$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. $3,900 in liquidation expenses were paid. $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.

[QUESTION] REFER TO: 15-12 56. Prepare a schedule to calculate the safe payments to be made to the partners at the end of January. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-29

Answer:

Profit and loss ratio

Won, Cadel, and Dax Partnership Safe Installment Payments to Partners January 31, 2018 Won Cadel 50% 30%

Preliquidation Capital account balances Add (deduct) loans Subtotals January actual losses (Schedule 1) Partnership equity January 31, 2018 Potential losses (Schedule 1) Subtotals Potential loss – Won’s deficit balance Safe payments to partners: 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.

$153,400 (39,000) 114,400 (18,200) 96,200 (129,350) (33,150) 33,150 $ 0

$117,000 26,000 143,000 (10,920) 132,080 (77,610) 54,470 (19,890) $ 34,580

Dax 20%

Total 100%

$96,200 0 96,200 (7,280) 88,920 (51,740) 37,180 (13,260) $23,920

$366,600 (13,000) 353,600 (36,400) 317,200 (258,700) 58,500 0 $ 58,500

Schedule 1 Calculation of Actual and Potential Liquidation Losses January 2018

Collection of accounts receivable ($85,800 - $66,300) Sale of inventory ($67,600 - $49,400) Liquidation expenses Liability reduction from January credit memo Machinery and equipment, net Potential unrecorded liabilities and anticipated expenses Totals Learning Objective: 15-04 Topic: Schedule of liquidation―Safe capital balances Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Actual Losses $19,500 18,200 2,600 (3,900)

______ $36,400

Potential Losses

$245,700 13,000 $258,700

[QUESTION] REFER TO: 15-12 57. Prepare a schedule to calculate the safe installment payments to be made to the partners at the end of February. Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-30

Answer: Won, Cadel, and Dax Partnership Safe Installment Payments to Partners February 28, 2018 Won Cadel Profit and loss ratio 50% 30% Partnership equity January 31, 2018 $96,200 $132,080 Safe payments to partners, January 31 0 (34,580) February liquidation expenses ( 1,950) ( 1,170) Partnership equity February 28, 2018 94,250 96,330 Potential liabilities and expenses ( 3,900) ( 2,340) Potential loss on machinery and equipment (122,850) ( 73,710) Subtotals ( 32,500) 20,280 Potential loss – Won’s deficit 32,500 ( 19,500) Safe payments to partners $ 0 $ 780 Proof of cash: Beginning $13,000 – liq. expenses paid $3,900 – cash retained $7,800 = $1,300 Learning Objective: 15-04 Topic: Schedule of liquidation―Safe capital balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

Dax 20% $88,920 (23,920) ( 780) 64,220 ( 1,560) ( 49,140) 13,520 ( 13,000) $ 520

Total 100% $317,200 (58,500) ( 3,900) 254,800 ( 7,800) ( 245,700) 1,300 0 $ 1,300

[QUESTION] REFER TO: 15-12 58. Prepare a schedule to calculate the safe payments to be made to the partners at the end of March. Answer:

Profit and loss ratio

Won, Cadel, and Dax Partnership Safe Installment Payments to Partners March 31, 2018 Won Cadel 50% 30%

Partnership equity February 28, 2018 Safe payments to partners, February 28 Loss on sale of machinery and Equipment ($245,700 - $189,800) Liquidation expenses Safe payments to partners

Dax 20%

Total 100%

$94,250 0

$96,330 (780)

$64,220 (520)

$254,800 (1,300)

(27,950) (3,250) $63,050

(16,770) (1,950) $76,830

(11,180) (1,300) $51,220

(55,900) (6,500) $191,100

Learning Objective: 15-04 Topic: Schedule of liquidation―Safe capital balances Difficulty: 2 Medium Blooms: Apply Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-31

AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement REFERENCE: 15-13 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

$ 10,000 227,000

Total assets

$ 237,000

Liabilities Hardin, capital Sutton, capital Williams, capital Total liabilities and capital

$ 80,000 96,000 45,000 16,000 $ 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. [QUESTION] REFER TO: 15-13 59. Develop a predistribution plan for this partnership, assuming $12,000 of liquidation expenses are expected to be paid. Answer: (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 Sutton Williams Beginning balances $ 96,000 $ 45,000 $ 16,000 Assumed $96,000 loss (Schedule A) ( 48,000) (32,000) (16,000) Subtotal $ 48,000 $ 13,000 $ 0 Assumed $32,500 loss (Schedule B) ( 19,500) (13,000) 0 Total $ 28,500 $ 0 $ 0 Schedule A: Partner

Hardin Sutton Williams

Capital Balance/Loss Allocation $96,000/ 1/2 $45,000/ 1/3 $16,000/ 1/6

Maximum Loss that Can Be Absorbed $192,000 $135,000 $ 96,000

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-32

Schedule B: Partner

Hardin Sutton

Capital Balance/Loss Allocation $48,000/60% $13,000/40%

Maximum Loss that Can Be Absorbed $ 80,000 $ 32,500

Learning Objective: 15-05 Topic: Predistribution plan―Maximum loss to be absorbed Topic: Predistribution plan―Order of available cash Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 15-13 60. Compute safe cash payments after the noncash assets have been sold and the liquidation expenses have been paid. Answer: Safe Cash Payments: Beginning balances $12,000 liquidation expenses $111,000 loss on sale of assets Subtotals Absorption of deficit balance 3:2 Safe Cash Payments $34,000

Hardin $ 96,000 ( 6,000) ( 55,500) $ 34,500 ( 2,700) $ 31,800

Sutton $ 45,000 ( 4,000) (37,000) $ 4,000 ( 1,800) $ 2,200

Williams $ 16,000 ( 2,000) (18,500) ( 4,500) 4,500 $ 0

Learning Objective: 15-03 Topic: Statement of liquidation―Deficit balance Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 15-13 61. Prepare journal entries to record the actual liquidation transactions. Answer: Cash Hardin, capital Sutton, capital Williams capital

116,000 55,500 37,000 18,500

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Page 15-33

Noncash assets

227,000

Hardin, capital Sutton, capital Williams capital Cash

6,000 4,000 2,000

Hardin, capital Sutton, capital Cash

31,800 2,200

Liabilities Cash

80,000

Hardin, capital Sutton, capital Williams, capital

12,000

34,000

80,000 $ 2,700 1,800 $ 4,500

Learning Objective: 15-02 Topic: Prepare journal entries to record transactions Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] 62. Jones, Marge, and Tate LLP decided to dissolve and liquidate the partnership on September 30, 2018. 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. Answer:

Learning Objective: 15-04 Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-34

Topic: Schedule of liquidation―Safe capital balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement REFERENCE: 15-14 The balance sheet of Rogers, Dennis & Berry LLP prior to liquidation included the following:

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. [QUESTION] REFER TO: 15-14 63. Record the journal entry for the sale of the noncash assets. Answer: Cash 60,000 Rogers, Capital 10,000 Dennis, Capital 6,000 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 Learning Objective: 15-02 Topic: Prepare journal entries to record transactions Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 15-14 64. Record the journal entry for payment of outstanding liabilities to the creditors. Answer: Liabilities Cash To record payment to creditors.

20,000 20,000

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Page 15-35

Learning Objective: 15-02 Topic: Prepare journal entries to record transactions Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 15-14 65. Determine the cash to be retained and prepare a schedule to distribute $35,000 cash to the partners. Answer: 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: Capital (including Rogers' loan of $10,000) before liquidation Actual loss on realization of assets Balances Retained cash for future expenses $45,000 Cash payments $35,000

Rogers

Dennis

Berry

$45,000 (10,000) $35,000 (22,500) $12,500

$30,000 (6,000) $24,000 (13,500) $10,500

$25,000 (4,000) $21,000 (9,000) $12,000

Learning Objective: 15-02 Topic: Statement of liquidation―Updated balances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 15-14 66. Record the journal entry for the cash distribution to the partners. Answer: Loan Payable to Rogers Rogers, Capital Dennis, Capital Berry, Capital Cash To record payment to partners, computed as shown above. Learning Objective: 15-02 Topic: Prepare journal entries to record transactions Difficulty: 2 Medium Blooms: Apply

10,000 2,500 10,500 12,000 35,000

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Page 15-36

AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement REFERENCE: 15-15 The partners of Donald, Chief & Berry LLP decided to liquidate on August 1, 2018. 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, 2018 Assets Liabilities & Partners’ Capital Cash $ 60,000 Trade accounts payable $130,000 Loan receivable from Donald 40,000 Loan payable to Chief 60,000 Other assets 500,000 Donald, capital 140,000 Chief, capital 160,000 _______ Berry, capital 110,000 Total $600,000 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. [QUESTION] REFER TO: 15-15 67. Prepare the journal entry for Donald, Chief & Berry LLP on August 1, 2018, to recognize proceeds from the sale of Other Assets. Answer: 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. Learning Objective: 15-02 Topic: Prepare journal entries to record transactions Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 15-15 68. Prepare the journal entry for Donald, Chief & Berry LLP on August 1, 2018, to record payment of liabilities. Answer: Trade accounts payable Cash

130,000 130,000

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Page 15-37

To record payment of liabilities. Learning Objective: 15-02 Topic: Prepare journal entries to record transactions Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 15-15 69. Prepare the journal entry for Donald, Chief & Berry LLP on August 1, 2018, to record the offset of the loan receivable from Donald. Answer: Donald, Capital Loan receivable from Donald To offset Donald's loan account against Donald's capital account. Learning Objective: 15-02 Topic: Prepare journal entries to record transactions Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

40,000 40,000

[QUESTION] REFER TO: 15-15 70. Prepare the schedule to compute the cash payments to the partners. Answer: Capital account balances Add: Loan payable to Chief Less: Loan receivable from Donald Loss on realization of assets, $60,000 Balances Maximum potential loss of remaining noncash assets, $300,000 in 25:45:30 ratio Safe cash payment

Donald $140,000

Chief $160,000 60,000

Berry $110,000

(40,000) (15,000) $ 85,000

(

27,000) $193,000

(18,000) $ 92,000

(75,000) $ 10,000

( 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. Learning Objective: 15-04 Topic: Schedule of liquidation―Safe capital balances Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-38

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Page 15-39

Chapter 16 - Accounting for State and Local Governments, Part I Multiple Choice: [QUESTION] 1. The Governmental Accounting Standards Board (GASB) requires state and local governments to prepare two sets of financial statements which include: 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. Answer: C Learning Objective: 16-02 Topic: Financial statements―Two sets Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Answer: D Learning Objective: 16-02 Topic: Financial statements―Two sets -02Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 3. Proprietary funds are 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. Answer: B Learning Objective: 16-04 Topic: Funds―Distinguish the categories Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 4. Fiduciary funds are 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. Answer: C Learning Objective: 16-04 Topic: Funds―Distinguish the categories Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 5. Governmental funds are 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. Answer: A Learning Objective: 16-04 Topic: Funds―Distinguish the categories Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 6. Special Revenue funds are 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. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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. Answer: E Learning Objective: 16-04 Topic: Funds―Distinguish the types―Governmental Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 7. 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. Answer: B Learning Objective: 16-02 Topic: Financial statements―Two sets Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 8. 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. Answer: B Learning Objective: 16-04 Topic: Funds―Distinguish the categories Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 9. Which group of financial statements is prepared using the “modified accrual accounting” approach? 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. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Answer: B Learning Objective: 16-02 Topic: Financial statements―Two sets Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Answer: D Learning Objective: 16-02 Topic: Financial statements―Two sets Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Answer: C Learning Objective: 16-02 Topic: Financial statements―Two sets Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Answer: E Learning Objective: 16-04 Topic: Funds―Distinguish the types―Governmental Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement

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[QUESTION] 13. Revenue from property taxes should be recorded in the General Fund 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. Answer: D Learning Objective: 16-08 Topic: Revenue classifications Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Answer: D Learning Objective: 16-02 Topic: Financial statements―Two sets Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Answer: C Learning Objective: 16-04 Topic: Funds―Distinguish the types―Governmental Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

[QUESTION] 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. Answer: E Learning Objective: 16-04 Topic: Funds―Distinguish the types―Governmental Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Answer: A Learning Objective: 16-08 Topic: Revenue classifications Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Answer: E Learning Objective: 16-09 Topic: Bond issuance and liabilities Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement` Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

[QUESTION] 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. Answer: C Learning Objective: 16-04 Topic: Funds―Distinguish the types―Governmental Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Answer: A Learning Objective: 16-04 Topic: Funds―Distinguish the types―Fiduciary Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Answer: D Learning Objective: 16-01 Topic: Characteristics and reporting challenges Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement

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[QUESTION] 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. Answer: B Learning Objective: 16-02 Topic: Financial statements―Two sets Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 23. Which of the following statements is false regarding government-wide financial statements? 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 long-term. 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. Answer: C Learning Objective: 16-02 Topic: Financial statements―Two sets Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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. Answer: D Learning Objective: 16-02 Learning Objective: 16-05 Topic: Financial statements―Two sets Topic: Financial statements―Overview of structure Difficulty: 3 Hard Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 25. Which of the following is not a classification of non-exchange transactions? A) Derived tax expenditures. B) Voluntary non-exchange transactions. C) Government-mandated non-exchange transactions. D) Derived tax revenues. E) Imposed non-exchange revenues. Answer: A Learning Objective: 16-08 Topic: Revenue classifications Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Answer: E Learning Objective: 16-08 Topic: Revenue recognition Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: FN Measurement [QUESTION] 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. Answer: E Learning Objective: 16-06 Topic: Encumbrances Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 28. For governmental entities, the accrual basis of accounting is used for: A) Special revenue funds. B) Internal service funds. C) Debt service funds. D) The general fund. E) Capital projects funds. Answer: B Learning Objective: 16-02 Learning Objective: 16-04 Topic: Financial statements―Two sets Topic: Funds―Distinguish the types―Proprietary Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Answer: A Learning Objective: 16-06 Topic: Encumbrances Topic: Expenditures Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Answer: A Learning Objective: 16-06 Topic: Budgets Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Answer: E Learning Objective: 16-04 Topic: Funds―Distinguish the types―Governmental Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 32. When a city holds pension monies for city employees, the monies should be recorded in A) The general fund. B) A private purpose trust fund. C) A fiduciary fund. D) An agency fund. E) A special revenue fund. Answer: C Learning Objective: 16-04 Topic: Funds―Distinguish the types―Fiduciary Difficulty: 3 Hard Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Industry Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: FN Measurement [QUESTION] 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. Answer: C Learning Objective: 16-04 Topic: Funds―Distinguish the types―Governmental Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Answer: B Learning Objective: 16-04 Topic: Funds―Distinguish the types―Proprietary Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Answer: E Learning Objective: 16-04 Topic: Funds―Distinguish the types―Proprietary Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

[QUESTION] 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. Answer: C Learning Objective: 16-04 Topic: Funds―Distinguish the types―Proprietary Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Answer: A Learning Objective: 16-06 Topic: Expenditures Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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 Answer: E Learning Objective: 16-05 Topic: Funds―Fund balance categories Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: FN Measurement [QUESTION] 39. Which of the following is not one of the categories for reporting fund balances of governmental funds? A) Spendable B) Nonspendable C) Assigned D) Unassigned E) Restricted Answer: A Learning Objective: 16-05 Topic: Funds―Fund balance categories Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Answer: C Learning Objective: 16-05 Topic: Funds―Fund balance categories Difficulty: 2 Medium Blooms:Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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 Answer: B Learning Objective: 16-05 Topic: Funds―Fund balance categories Difficulty: 1 Easy Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 42. The government has just voted to repair the parking garages to all federal building and estimate the cost to be $750,000. The government discloses this decision by debiting which account? A) Committed B) Nonspendable C) Assigned D) Unassigned E) Restricted Answer: A Learning Objective: 16-05 Topic: Funds―Fund balance categories Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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 assess 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. Answer: B Learning Objective: 16-08 Topic: Revenue classifications Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 44. Which statement most accurately reflects property taxes? A) Property taxes are derived tax revenues because property owners have the benefit of Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

ownership. B) Property taxes are considered a special assessment by the governing agency. C) When recording, property taxes the receivable is record and the revenue is recognized when the government has 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. Answer: D Learning Objective: 16-08 Topic: Revenue classifications Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 45. Which of the following would be considered a derived tax revenue? 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 willing sends money to buy books for the local library. E. Fees are collected on overdue library books. Answer: B Learning Objective: 16-08 Topic: Revenue classifications Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement Essay and Problems: [QUESTION] 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. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

___ (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. Answer: (1) A; (2) C; (3) A; (4) D; (5) F; (6) E; (7) B; (8) G; (9) G; (10) G Learning Objective: 16-04 Learning Objective: 16-06 Learning Objective: 16-07 Learning Objective: 16-08 Learning Objective: 16-10 Learning Objective: 16-11 Topic: Encumbrances Topic: Expenditures Topic: Budgets Topic: Revenue recognition Topic: Capital assets Topic: Special assessment projects Topic: Interfund transactions Topic: Funds―Distinguish the types―Governmental Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 47. Which organization is responsible for establishing accounting principles for governmental entities? By whom was this organization established? Answer: 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. Learning Objective: 16-01 Topic: Characteristics and reporting challenges Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Research AICPA: FN Measurement [QUESTION] 48. For what is a special revenue fund used to account? Answer: 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. Learning Objective: 16-04 Topic: Funds―Distinguish the types―Governmental Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 49. What is the definition of the term fund? Answer: The term fund is defined as a self-balancing set of accounts used to record data generated by an identifiable government function. Learning Objective: 16-03 Topic: Funds for internal monitoring Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 50. For a government, what kinds of operations are accounted for using a proprietary fund? Give three examples. Answer: 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 maintenance garage. Learning Objective: 16-04 Topic: Funds―Distinguish the types―Proprietary Difficulty: 2 Medium Blooms: Understand AACSB: Communication AICPA: BB Industry AICPA: FN Measurement [QUESTION] 51. What are the five types of governmental funds? Answer: The five types of governmental funds are: (A) The general fund. (B) Special revenue funds. (C) Capital projectsfFunds. (D) Debt service funds. (E) Permanent funds. Learning Objective: 16-04 Topic: Funds―Distinguish the types―Governmental Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 52. A county enacted a special tax levy and the money must be used to buy unused farmland for Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

environmental preservation. What kind of fund should be used to record the revenues generated by the tax? Answer: A special revenue fund should be used. Learning Objective: 16-04 Topic: Funds―Distinguish the types―Governmental Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 53. In governmental accounting, what term is used for a decrease in financial resources? Answer: The appropriate term is expenditure. Learning Objective: 16-06 Topic: Expenditures Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 54. Under modified accrual accounting, when are expenditures recorded? Answer: Under modified accrual accounting, expenditures are usually recorded when they reduce current financial resources. Learning Objective: 16-02 Topic: Expenditures Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 55. What assets would be included in the accounting records of a city's general fund? Answer: 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. Learning Objective: 16-02 Learning Objective: 16-04 Topic: Financial statements―Two sets Topic: Funds―Distinguish the types―Governmental Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

[QUESTION] 56. Under modified accrual accounting, when should revenues be recognized by a governmentaltype fund? Answer: Under modified accrual accounting, revenues should be recognized by a governmentaltype 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. Learning Objective: 16-02 Learning Objective: 16-08 Topic: Financial statements―Two sets Topic: Revenue recognition Difficulty: 2 Medium Blooms: Understand AACSB: Communication AICPA: BB Industry AICPA: FN Measurement [QUESTION] 57. When should property taxes be recognized under modified accrual accounting? Answer: 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. Learning Objective: 16-02 Learning Objective: 16-08 Topic: Financial statements―Two sets Topic: Revenue recognition Difficulty: 3 Hard Blooms: Understand AACSB: Communication AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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? Answer: 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. Learning Objective: 16-05 Topic: Financial statements―Overview of structure Difficulty: 2 Medium Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 59. What is the primary difference between monies accounted for in the general fund and monies accounted for in the special revenue fund? Answer: 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. Learning Objective: 16-04 Topic: Funds―Distinguish the types―Governmental Difficulty: 3 Hard Blooms: Understand AACSB: Communication AICPA: BB Industry AICPA: FN Measurement [QUESTION] 60. What are the two proprietary fund types? Answer: Internal service funds and enterprise funds. Learning Objective: 16-04 Topic: Funds―Distinguish the types―Proprietary Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 61. What are the four fiduciary fund types? Answer: Investment trust funds, private-purpose trust funds, pension trust funds, and agency funds. Learning Objective: 16-04 Topic: Funds―Distinguish the types―Fiduciary Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 62. What is the purpose of fund financial statements? Answer: The purpose of the fund financial statements is to present individual government Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

activities and the amount of financial resources allocated to them as well as the use made of those resources. Learning Objective: 16-02 Topic: Financial statements―Two sets Difficulty: 1 Easy Blooms: Understand AACSB: Communication AICPA: BB Industry AICPA: FN Measurement [QUESTION] 63. What is the purpose of government-wide financial statements? Answer: 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. Learning Objective: 16-02 Topic: Financial statements―Two sets Difficulty: 2 Medium Blooms: Understand AACSB: Communication AICPA: BB Industry AICPA: FN Measurement [QUESTION] 64. The board of commissioners of the city of Jarmaine adopted a General fund budget for the year ending June 30, 2018, which indicated tax levy revenues of $1,300,000, bond proceeds of $520,000, appropriations for government operations of $1,170,000, and operating transfers out of $390,000. 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? Answer: Governmental fund financial statements – General fund Estimated revenues – Tax levy Estimated other financing sources – Bond proceeds Appropriations – Government operations Appropriations – Other financing uses – Operating transfers out Budgetary fund balance

$1,300,000 520,000 $1,170,000 390,000 260,000

Learning Objective: 16-06 Topic: Budgets Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 65. On July 1, 2018, Fred City ordered $1,500 of office supplies. They were to be paid for out of Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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? Answer: (A) For the governmental fund financial statements, an encumbrance must be recorded in the feneral fund. Encumbrances – Office supplies Encumbrances outstanding

1,500 1,500

(B.) For the government-wide financial statements, no entry is required because under accrual accounting, no entry is made until a transaction occurs. Learning Objective: 16-06 Topic: Encumbrances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 66. On July 12, 2018, Fred City ordered a new computer at an anticipated cost of $114,400. The computer was received on July 16, 2018 with an actual cost of $116,220. Payment was subsequently made on August 15, 2018. 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. Answer: (A) Governmental fund financial statements - General fund 7/12 Encumbrances – Computer Encumbrances outstanding 7/16

7/16

8/15

114,400 114,400

Encumbrances outstanding Encumbrances – Computer

114,400

Expenditures – Computer Vouchers (or Accounts) payable

116,220

Vouchers payable Cash

116,220

114,400

116,220

116,220

(B) Government-wide financial statements 7/12

No entry

7/16

Computer Vouchers (or Accounts) payable

116,220 116,220

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8/15

Vouchers (or Accounts) payable Cash

116,220 116,220

Learning Objective: 16-06 Topic: Encumbrances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 67. A new truck was ordered for the sanitation department at a cost of $122,200 on September 3, 2018. 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. Answer: (A) Governmental fund financial statements – General fund 9/3 Encumbrances – Truck Encumbrances outstanding

122,200 122,200

(B) Government-wide financial statements 9/3 No entry Learning Objective: 16-06 Topic: Encumbrances Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 68. The school system had some brochures printed by a local printing service on September 22, 2018. The school system received an invoice showing an amount of $1,560 for the printing, but the bill is not due until October 15, 2018. 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. Answer: (A) Governmental fund financial statements – General fund 9/22 Expenditures – Printing Vouchers (or Accounts) payable (B) Government-wide financial statements 9/22 Printing Expense

1,560 1,560

1,560

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Vouchers (or Accounts) payable

1,560

Learning Objective: 16-06 Topic: Expenditures Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 69. A $910,000 bond was issued on October 1, 2018 to build a new road. The bonds carried a 6% 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. Answer: (A.) Governmental fund financial statements – Capital projects fund 10/1 Cash Other financing sources – Bond proceeds (B.) Government-wide financial statements 10/1 Cash Bonds payable

910,000 910,000

910,000 910,000

Learning Objective: 16-09 Topic: Bond issuance and liabilities Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 70. On June 14, 2018, Fred City agreed to transfer cash of $52,000 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, 2018. 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. Answer: (A) Fund financial statements – General fund 6/14 Other financing use – Transfers out – Enterprise fund Due to Enterprise fund 6/30 Due to Enterprise fund Cash

52,000 52,000 52,000 52,000

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Fund Financial Statements – Enterprise fund 6/14 Due from General fund Other financing Source – Transfers in – General fund 6/30 Cash Due from General fund

52,000 52,000 52,000 52,000

(B) Government-wide financial statements – Governmental activities 6/14 No entry 6/30 Transfers out – Swimming pool Cash

52,000 52,000

Government-wide financial statements – Business-type activities 6/14 No entry 6/30 Cash Transfers in – General fund

52,000 52,000

Learning Objective: 16-11

Topic: Interfund transactions Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 71. On August 21, 2018, Fred City transferred $100,000 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. Answer: 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 Other Financing Sources – Transfers in – General fund

100,000 100,000

100,000 100,000

Learning Objective: 16-04 Learning Objective: 16-11 Topic: Funds―Distinguish the types―Governmental

Topic: Interfund transactions Difficulty: 2 Medium Blooms: Apply Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 72. On January 1, 2018, Wakefield City purchased office supplies for $40,000. During the year, $35,000 of these supplies were used. Required: Record the journal entries for these transactions using the purchases method. (Disregard the encumbrance entries.) Answer: Expenditures – Supplies Vouchers (or Accounts) payable To record the purchase of supplies Inventory of supplies Fund balance – Nonspendable To establish balance for supplies remaining at year-end

40,000 40,000

5,000 5,000

Learning Objective: 16-07 Topic: Consumption and purchases methods Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 73. On January 1, 2018, Wakefield City purchased office supplies for $40,000. During the year, $35,000 of these supplies were used. Required: Record the journal entries for these transactions using the consumption method. (Disregard the encumbrance entries.) Answer: Inventory of supplies Vouchers (or Accounts) payable To record the purchase of supplies Expenditures – Control (or Supplies) Inventory of supplies To record consumption of supplies during the period

40,000 40,000

35,000 35,000

Learning Objective: 16-07 Topic: Consumption and purchases methods Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

74. The town council adopted an annual budget estimating general revenues of $2,000,000, approved expenditures for general town operations of $1,700,000, and use of other financing reources of $130,000. Required: Record the journal entry to record the budget and identify the fund in which it is recorded. A nswer: In General fund: Estimated revenues – General revenues 2,000,000 Appropriations – General operations 1,700,000 Estimated other financing uses 130,000 Budgetary fund balance 170,000 Learning Objective: 16-06 Topic: Budgets Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 75. Property taxes of 1,500,000 are levied for Miner County. All except 5% 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. Answer: In General fund: Property tax receivable Allowance for uncollectible taxes Revenues - Property taxes

1,500,000 75,000 1,425,000

Learning Objective: 16-08 Topic: Revenue recognition Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 76. Shell City makes a transfer of $100,000 from the General fund to the Debt service fund. Required: Prepare the required journal entries and identify the funds in which they are recorded. Answer: In General fund: Other financing Uses – Transfers out – Debt service fund Cash In Debt service fund: Cash

100,000 100,000

100,000

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Other financing sources – Transfer in – General fund

100,000

Learning Objective: 16-11 Topic: Interfund transactions Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 77. Prepare the journal entry and identify the fund to record Simple City’s purchase order of two trucks for $100,000. Identify the fund in which the entry is recorded. Answer: In General fund: Encumbrances - Trucks Encumbrances outstanding

100,000 100,000

Learning Objective: 16-06 Topic: Encumbrances Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 78. Simple City has recorded the purchase order of two trucks for a total of $100,000. Prepare the journal entries to reflect that the two trucks have been received with an invoice amount of $105,000. This invoice has been approved but not yet paid. Identify the fund in which the entries are recorded. Answer: In General fund: Encumbrances outstanding Encumbrances – Trucks Expenditures – Trucks Vouchers (or Accounts) payable

100,000 100,000 105,000 105,000

Learning Objective: 16-06 Topic: Encumbrances Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 79. A $5,000,000 bond is issued by Northern 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: Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Prepare the journal entry and identify the fund in which it is recorded to reflect the bond issue. Answer: In Capital projects fund: Cash Other financing sources – Bond proceeds

5,000,000 5,000,000

Learning Objective: 16-09 Topic: Bond issuance and liabilities Difficulty: 1 Easy Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 80. In May of 2018, the Town of Anthrop receives a $60,000 grant restricted for transporting all senior citizens to polling locations on Election Day in November of 2018. Required: Prepare the journal entry, and identify the fund in which it is recorded, to record the receipt of the grant. Answer: In Special revenue fund: Cash Deferred inflow of resources

60,000 60,000

Learning Objective: 16-04 Learning Objective: 16-08 Topic: Funds―Distinguish the types―Governmental Topic: Revenue recognition Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 81. The Town of Anthrop has recorded the receipt of a $60,000 grant restricted for transporting all senior citizens to polling locations on Election Day in November of 2018. The town now spends $60,000 to transport the citizens on Election Day. Required: Prepare the journal entry (or entries), and identify the fund for recording, to record that the town spends $60,000 of the grant it received to transport senior citizens on Election Day. Answer: In Special revenue fund: Expenditure – Transportation Cash Deferred inflow of resources Revenues - Grants

60,000 60,000 60,000 60,000

Learning Objective: 16-04 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective: 16-06 Topic: Funds―Distinguish the types―Governmental Topic: Expenditures Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 82. The City of Kamen collected $17,000 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 $17,000 from parking meters, including the fund type in which the entry would have been recorded. Answer: General fund Cash Due to Agency fund

17,000 17,000

Learning Objective: 16-11

Topic: Interfund transactions Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 83. The Trumbull County legislature voted to set aside $500,000 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. Answer: Fund balance – Unassigned Fund balance – Committed

500,000 500,000

Learning Objective: 16-05 Topic: Funds―Fund balance categories Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 84. Holloway City issues bonds in the amount of $700,000 to finance the construction of a Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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 $35,000 and will be repaid at the time of repayment of the bonds. Required: Prepare the journal entries to record each of the following in preparation for (A) the governmentwide 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 Answer: (A) Government-wide financial statements – Special assessment project 1) Issuance of the debt Cash 700,000 Bond Payable – Special Assessment To record debt issued to finance sidewalk construction 2) Payment to the contractor Infrastructure Asset – Sidewalk Cash To record payment to contract for sidewalk construction 3) Special assessment by the city Taxes Receivable – Special Assessment Revenue – Special Assessment To record owner special assessments 4) Assessment collection by the city Cash Taxes Receivable – Special Assessment To record collection of Special Assessment 5) Payment of the debt Bond Payable – Special Assessment Interest Expense Cash To record payment of debt on special assessment bonds

700,000

700,000 700,000

735,000 735,000

735,000 735,000

700,000 35,000 735,000

B) Governmental fund financial statements – Special assessment – Governmental funds 1) Issuance of the bonds Capital projects fund – Special assessment project Cash 700,000 Other Financing Sources – Bond Proceeds 700,000 To record issuance of special assessment bonds Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

2) Payment to the contractor Expenditures – Sidewalk Cash To record payment to contractor 3) Special assessment by the city Debt service fund – Special assessment project Taxes Receivable – Special Assessment Revenue – Special Assessment To record special assessment by city on the neighborhood residents 4) Assessment collection by the city Cash Taxes Receivable – Special Assessment To record collection of special assessment 5) Payment of the debt Expenditure – Special Assessment Bond Expenditure – Interest Cash To record payment of bond

700,000 700,000

735,000 735,000

735,000 735,000

700,000 35,000 735,000

Learning Objective: 16-10 Topic: Special assessment projects Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement

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Chapter 17 - Accounting for State and Local Governments, Part II Multiple Choice: [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 Answer: C Learning Objective: 17-01 Topic: GASB hierarchy Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Answer: C Learning Objective: 17-02 Topic: Disclosure―Tax abatement Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 3. 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. Answer: B Learning Objective: 17-10 Topic: Reports―Public college or university Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: BB Industry AICPA: FN Measurement [QUESTION] 4. For the purpose of government-wide financial statements, the cost of cleaning up a government-owned landfill and closing the landfill 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. Answer: C Learning Objective: 17-03 Topic: Accounting―Landfill Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Answer: D Learning Objective: 17-06 Topic: Accounting–Infrastructure assets Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 6. Drye Township has received a donation of a rare painting worth $1,000,000. For Drye's governmentwide financial statements, three criteria must be met before Drye 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. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

E) None of the three items are required criteria. Answer: B Learning Objective: 17-05 Topic: Accounting―Art and Historical treasures Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 7. Which of the following statements regarding Management's Discussion and Analysis is true? 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. Answer: C Learning Objective: 17-07 Topic: Reports―CAFR Comp Annual Fin Report Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: BB Resource Management AICPA: FN Risk Analysis [QUESTION] 8. 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. Answer: D Learning Objective: 17-08 Topic: Reporting―Primary gov or Component Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

E) A statement of cash flows is not required for any fund types. Answer: A Learning Objective: 17-09 Topic: Reports―Distinguish various statements Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Answer: E Learning Objective: 17-08 Topic: Reporting―Primary gov or Component Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Answer: D Learning Objective: 17-04 Topic: Accounting–Defined benefit pension plans Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 12. The modified approach to accounting for infrastructure assets may be utilized by a state or local government if: i. The government accumulates information about all infrastructure assets within either a network or subsystem of a network. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

ii. iii. iv. A) B) C) D) E)

The government capitalizes infrastructure assets. The government expenses costs of maintaining the infrastructure assets. The government chooses to depreciate its infrastructure assets. i and ii. i, ii, and iv. ii and iii. i, ii, and iii. i, ii, iii, and iv.

Answer: D Learning Objective: 17-06 Topic: Accounting–Infrastructure assets Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement

[QUESTION] 13. All of the following are true about the modified approach to infrastructure depreciation except: 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. Answer: B Learning Objective: 17-06 Topic: Accounting–Infrastructure assets Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA BB: Industry AICPA FN: Measurement [QUESTION] 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. Answer: E Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective: 17-07 Topic: Reports―CAFR Comp Annual Fin Report Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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). Answer: A Learning Objective: 17-07 Topic: Reports―CAFR Comp Annual Fin Report Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: Resource Management AICPA: FN Risk Analysis [QUESTION] 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. Answer: A Learning Objective: 17-07 Topic: Reports―CAFR Comp Annual Fin Report Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

E) Statement of Revenues, Expenditures, and Changes in Fund Balance. Answer: D Learning Objective: 17-09 Topic: Reports―Distinguish various statements Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Answer: E Learning Objective: 17-08 Topic: Reporting―Primary gov or Component Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Answer: B Learning Objective: 17-09 Topic: Reports―G-W Statement of Net Position Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 20. Which item is not included on the government-wide Statement of Activities? A) Revenues. B) Expenses. C) Assets. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

D) Operating grants. E) Capital contributions. Answer: C Learning Objective: 17-09 Topic: Reports―G-W Statement of Activities Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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 long-term financial resources of the governmental entity. E) Long-term debts are not reported on the Balance Sheet for Governmental Fund Financial Statements. Answer: D Learning Objective: 17-09 Topic: Reports―Governmental-Balance Sheet Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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. Answer: E Learning Objective: 17-09 Topic: Reports―Distinguish various statements Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 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? Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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. Answer: B Learning Objective: 17-09 Topic: Reports―Governmental-Revenue-Expend-Changes Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement Use the following to answer questions 24 and 25: A city starts a solid waste landfill during 2017. When the landfill was opened the city estimated that it would fill to capacity within 5 years and that the cost to cover the facility would be $1.5 million which will not be paid until the facility is closed. At the end of 2017, the facility was 20% full, and at the end of 2018 the facility was 45% full. [QUESTION] 24. On government-wide financial statements, which of the following are the appropriate amounts to present in the financial statements for 2018? A) Both expense and liability will be zero. B) Expense will be $300,000 and liability will be $600,000. C) Expense will be $600,000 and liability will be $600,000. D) Expense will be $675,000 and liability will be $600,000. E) Expense will be $375,000 and liability will be $675,000. Answer: E Learning Objective: 17-03 Topic: Accounting―Landfill Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement Feedback: $1,500,000 × 20% = $300,000 Expense & Liability for 2017 $1,500,000 × 45% = $675,000 Liability at Year End of 2018 $675,000 Liability at Year-End of 2018 – $300,000 Liability at Year-End 2017 = $375,000 Expense for 2018. [QUESTION] 25. If the landfill is judged to be a governmental fund, what liability is reported on the fund financial statements at the end of 2018? A) $ 0. B) $300,000. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

C) $375,000. D) $600,000. E) $675,000. Answer: A Learning Objective: 17-03 Topic: Accounting―Landfill Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement Feedback: As a governmental fund, no liability is recorded, only expenditures. [QUESTION] 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. Answer: D Learning Objective: 17-10 Topic: Reports―Public college or university Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement

[QUESTION] 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. Answer: A Learning Objective: 17-02 Topic: Disclosure―Tax abatement Difficulty: 1 Easy Blooms: Remember Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement

[QUESTION] 28. The Town of Conway opened a solid waste landfill in 1995 that is filled to capacity in the current year. The city initially anticipated closure costs of $2 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 $2 million closure costs were properly recorded and the landfill is accounted for in an enterprise fund? A) B) C) D) E)

Expense—Landfill Closure Landfill Closure Liability Landfill Closure Liability Expense—Landfill Closure Expense—Landfill Closure Cash Landfill Closure Liability Cash Expenditure- Landfill Closure Cash

2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000 2,000,000

Answer: D Learning Objective: 17-03 Topic: Accounting―Landfill Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Feedback: Previously accrued Landfill Closure Liability balance of $2,000,000 is satisfied by $2,000,000 cash payment in the year of landfill closure. Essay: [QUESTION] 29. What three criteria must be met to identify a governmental unit as a primary government? Answer: 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. Learning Objective: 17-08 Topic: Reporting―Primary gov or Component Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: BB Industry AICPA: FN Measurement [QUESTION] 30. What three criteria must be met before a governmental unit can elect to not capitalize and therefore report a work of art or historical treasure as an asset? Answer: 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. Learning Objective: 17-05 Topic: Accounting―Art and Historical treasures Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 31. What are the three broad sections of a state or local government's CAFR? Answer: The introductory section, the financial section, and the statistical section. Learning Objective: 17-07 Topic: Reports―CAFR Comp Annual Fin Report Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: BB Legal AICPA: FN Measurement [QUESTION] 32. What information is required in the introductory section of a state or local government's CAFR? Answer: A letter of transmittal from appropriate government officials, an organization chart, and a list of principal officers. Learning Objective: 17-07 Topic: Reports―CAFR Comp Annual Fin Report Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: BB Legal [QUESTION] 33. What information is required in the financial section of a state or local government's CAFR? Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Answer: 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 other than MD&A (RSI). Learning Objective: 17-07 Topic: Reports―CAFR Comp Annual Fin Report Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 34. What is meant by the term fiscally independent? Answer: Fiscally independent means that the leadership of a governing body is able to determine the activity’s budget, levy taxes, set rates, or issue debt without having to seek the approval of the primary government. Learning Objective: 17-08 Topic: Reporting―Primary gov or Component Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: BB Legal AICPA: FN Measurement [QUESTION] 35. What is meant by the term legally independent? Answer: Legal independence is demonstrated by having corporate powers such as the right to sue and be sued, the right to buy, sell and lease property in its own name. Learning Objective: 17-08 Topic: Reporting―Primary gov or Component Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: BB Legal AICPA: FN Measurement [QUESTION] 36. How is the Statement of Cash Flows for Proprietary Funds similar and dissimilar to a Statement of Cash Flows for a for-profit business? Answer: The statement of cash flows for a proprietary fund is very similar to the statement of cash flows for a forprofit 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 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

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. Learning Objective: 17-09 Topic: Reports―Distinguish various statements Difficulty: 3 Hard Blooms: Understand AACSB: Communication AICPA: BB Industry AICPA: FN Measurement

Use the following to answer questions 37 and 38: [QUESTION] The City of Wetteville has a fiscal year ending June 30. Examine the following transactions for Wetteville: (A.) On 6/5/18, Wetteville opens a new landfill. The engineers estimate that at the end of 10 years the landfill will be full. Estimated costs to close the landfill are currently $3,500,000. (B.) On 6/18/18, Wetteville 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 $500,000. (C.) On 6/30/18, Wetteville estimates that the landfill is 2% filled. [QUESTION] 37. Determine and prepare the journal entries for the City of Wetteville, in the general fund, on the dates mentioned for each lettered item, for the purposes of preparing the fund financial statements. Answer: 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. Learning Objective: 17-03 Learning Objective: 17-05 Topic: Accounting―Landfill Topic: Accounting―Art and Historical treasures Difficulty: 3 Hard Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

[QUESTION] 38. Determine and prepare the journal entries for the City of Wetteville, on the dates mentioned for each lettered item, for the purposes of preparing the government-wide financial statements. Answer: Entries for preparing government-wide financial statements A) 6/5

No entry at time of opening

B) 6/18

Vintage Steam Engine Revenue - Donation

Expense – Landfill Closure Landfill Closure Liability Learning Objective: 17-03 Learning Objective: 17-05 Topic: Accounting―Landfill Topic: Accounting―Art and Historical treasures Difficulty: 3 Hard Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement C) 6/30

500,000.00 500,000.00 70,000.00 70,000.00

[QUESTION] 39. The parking garage and parking lots owned by the City of Danton reported the following balances for 2018:

Receipts from public users of the parking facilities Receipts from the city for parking of city-owned vehicles Salaries paid to employees Printing — paid to an internal service fund Interest on bonded debt Sculpture for entrance to parking lot (donated during 2018) Depreciation on parking garage Truck (purchased during 2018) Maintenance — paid to an internal service fund

$ 190,000 8,000 75,000 6,000 10,000 12,500 30,000 35,000 17,000

Required: Prepare the appropriate financial statement for the fund that was used to account for parking operations. Answer: Danton's change in net position from the proprietary fund for parking garages and parking lots is determined as follows:

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Learning Objective: 17-09 Topic: Reports―Distinguish various statements Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 40. The City of Nextville operates a motor pool serving all city-owned vehicles. The motor pool bought a new garage by paying $29,000 in cash and signing a note with the local bank for $280,000. Subsequently, the motor pool performed work for the police department at a cost of $17,000, which had not yet been collected. Depreciation on the garage amounted to $20,000. The first $12,000 payment made on the note included $4,800 in interest. Required: Prepare the journal entries for these transactions that are necessary to prepare government-wide financial statements. Answer: Entries for government-wide financial statements

A)

B)

C)

D)

Assets – Garage Notes Payable Cash (The cash transfer for services performed for the police department is an internal transfer and is not recorded for government-wide financial statements.)

309,000

Expense – Depreciation Accumulated Depreciation

20,000

Expense – Interest

4,800

280,000 29,000

20,000

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Notes Payable Cash

7,200 12,000

Learning Objective: 17-09 Topic: Reports―G-W Statement of Net Position Topic: Reports―G-W Statement of Activities Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement Use the following to answer questions 41 and 42: The City of Kamen 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 $2,000 at an auction using appropriated funds in the General Fund. Also during the year, a donation of a painting valued at $3,000 was made to the city. [QUESTION] 41. Prepare the journal entry/entries for the two transactions for the purposes of preparing the governmental fund financial statements. Answer: General Fund: Expenditure – Painting Cash

2,000 2,000

No entry in General Fund for second transaction – does not represent a change in current financial resources. Learning Objective: 17-05 Topic: Accounting―Art and Historical treasures Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 42. Prepare the journal entry/entries for the two transactions for the purposes of preparing the government-wide financial statements. Answer: Government-wide financial statements – Governmental Activities: Painting Cash Painting Revenue – Donation

2,000 2,000 3,000 3,000

Learning Objective: 17-05 Topic: Accounting―Art and Historical treasures Difficulty: 2 Medium Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement Use the following to answer questions 43 and 44: The Town of Wakefield opened a solid waste landfill in 2017 that was at 20% capacity on December 31, 2017 and at 50% capacity on December 31, 2018. The city initially anticipated closure costs of $2.3 million but in 2018 revised the estimate of the closure costs to be $2.7 million. None of these costs will be incurred until the landfill is scheduled to be closed. [QUESTION] 43. Prepare the journal entry that should be recorded on December 31, 2018 for government-wide financial statements. . Answer: Expense—Landfill Closure 890,000 Landfill Closure Liability 890,000 Learning Objective: 17-03 Topic: Accounting―Landfill Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 44. 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, 2018? Answer: There is nothing recognized in the balance sheet or in the statement of revenues, expenditures, and other changes in fund balance at December 31, 2018 because there is not a claim to any current financial resources. Learning Objective: 17-03 Topic: Accounting―Landfill Difficulty: 1 Easy Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement . Use the following to answer questions 45 – 47: 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 2018. Receipts: Property Taxes Income Taxes

$400,000 100,000

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Fees charged to business owners for Public Safety Fees charged to citizens for Sanitation Payments: Salaries General Government Public Safety Sanitation Rent General Government Public Safety Sanitation Maintenance General Government Public Safety Sanitation Insurance General Government Public Safety Sanitation Final Payment on Debt Principal Payment for Interest on Debt

7,000 5,000

$ 54,000 43,000 36,000 15,000 12,000 3,500 4,000 2,000 1,500 1,000 2,500 4,500 5,000 15,000

Receivables at the end of the year: Property Taxes (80% estimated to be collectible)

$95,000

Payables at year-end: Salaries General Government Public Safety Sanitation

$

Other items at year-end: Cash Building Equipment Supplies Inventory Investments Year-end utility and maintenance expenses, expected to be paid in 2 months

4,000 3,000 4,400

$130,900 95,000 80,000 9,500 160,000 9,000

[QUESTION] 45. Prepare a Statement of Revenues, Expenditures and Other Changes in Fund Balances for the year ended December 31, 2018. Answer: PORTSMOUTH STATEMENT OF REVENUES, EXPENDITURES, AND OTHER CHANGES IN FUND BALANCES Governmental Funds For Year Ended December 31, 2018 Revenues:

Total Governmental Funds

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Property Taxes Income Taxes Public Safety Sanitation Total Revenues Expenditures Current: General Government Public Safety Sanitation Debt Service: Principal Payment on Debt Interest on Debt Total expenditures Excess of Revenues over Expenditures

$400,000 100,000 7,000 5,000 $512,000

Net Change in Fund Balance Fund Balance (Beginning) Fund Balance (Ending)

$313,000 52,000 $365,000

$ 74,000 59,500 45,500 5,000 15,000 $199,000 $313,000

Learning Objective: 17-09 Topic: Reports―Governmental-Revenue-Expend-Changes Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 46. Prepare a Statement of Net Position at December 31, 2018. Answer: PORTSMOUTH STATEMENT OF NET POSITION December 31, 2018 Governmental Activities Assets Cash and cash equivalents Investments Receivables (net of $19,000 allowance) Inventories Capital assets (net) Total assets Liabilities Salaries payable Accrued liabilities Total Liabilities

$

$

$ $

130,900 160,000 76,000 9,500 175,000 551,400

11,400 9,000 20,400

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Net position Invested in capital assets Unrestricted Total net position

$ $

175,000 356,000 531,000

Learning Objective: 17-09 Topic: Reports―G-W Statement of Net Position Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 47. Prepare a Statement of Activities for the year ended December 31, 2018. Answer:

Functions/Programs Governmental activities: General Government Public Safety Sanitation Interest on Debt Total Governmental Activities

CITY OF PORTSMOUTH STATEMENT OF ACTIVITIES For Year Ended December 31, 2018 Program Revenues Operating Charges for Grants and Expenses Services Contributions

$ 74,000 59,500 45,500 15,000

$ 7,000 5,000 ______

$

$ 194,000

$ 12,000

Net (Expense) Revenue and Changes in Net Position Governmental Activities Total

_______

$ ( 74,000) ( 52,500) ( 40,500) ( 15,000)

$ ( 74,000) ( 52,500) ( 40,500) ( 15,000)

$

$ (182,000)

$ (182,000)

General Revenues: Property Taxes Income Taxes Total general revenues

$ 400,000 100,000 $ 500,000

$ 400,000 100,000 $ 500,000

Change in net position: Change during 2018 Net position—beginning Net position—ending

$ 318,000 213,000 $ 531,000

$ 318,000 213,000 $ 531,000

0

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Learning Objective: 17-09 Topic: Reports―G-W Statement of Activities Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement

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Chapter 18 - Accounting for Not-for-Profit Entities

Multiple Choice: [QUESTION] 1. Reciprocal transfers where both parties give and receive something of value are A) Donated supplies and materials. B) Unconditional promises to give. C) Endowment transactions. D) Exchange transactions. E) Required contributions. Answer: D Learning Objective: 18-04 Topic: Exchange transactions―NFP revenues Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 2. Which of the following types of health care entities follow FASB Accounting Standards Codification for preparing financial statements?

Answer: A Learning Objective: 18-01 Topic: Basics required for NFP financial statements Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Research [QUESTION] 3. Which of the following types of health care entitys recognize depreciation expense?

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Answer: D Learning Objective: 18-02 Topic: Distinguish NFP financial statements Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 4. In accruing patient charges for the current month, which one of the following accounts should a hospital credit? A) Accounts Payable. B) Deferred Revenue. C) Public Support Revenue. D) Patient Service Revenues. E) Accounts Receivable. Answer: D Learning Objective: 18-07 Topic: NFP entities―Health care Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 5. Which account should be credited to record a gift of cash which is from an outside party to an animal rescue agency and is used for expenses to care for the animals? A) Non-Operating Gain – Special Revenues. B) Contractual Adjustments. C) Patient Service Revenues. D) Drugs and Medicines. E) Unrestricted net assets - contributions. Answer: E Learning Objective: 18-04 Topic: Distinguish NFP revenues Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: FN Measurement [QUESTION] 6. Which one of the following financial statements is not required by GAAP regarding a voluntary health and welfare entity? A) Statement of Financial Position. B) Statement of Functional Expenses. C) Statement of Activities and Changes in Net Assets. D) Statement of Cash Flows. E) Statement of Operations. Answer: E Learning Objective: 18-02 Topic: Distinguish NFP financial statements Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 7. Unconditional transfers of cash or other resources to an entity in a voluntary nonreciprocal transaction is the GAAP definition of A) Miscellaneous revenues. B) Contributions. C) Unconditional promises to give. D) Exchange transactions. E) Pledges. Answer: B Learning Objective: 18-04 Topic: Distinguish NFP revenues Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement 8. Unconditional promises to transfer cash or other resources to an entity in a voluntary nonreciprocal transaction is the GAAP definition of A) Miscellaneous revenues. B) Contributions. C) Unconditional promises to give. D) Exchange transactions. E) Pledges. Answer: E Learning Objective: 18-04 Topic: Contributions―Pledges Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: FN Measurement [QUESTION] 9. Which of the following is a voluntary health and welfare entity? A) A charity raising money for underprivileged children. B) A nursing home. C) A private medical school. D) A hospital. E) A preschool. Answer: A Learning Objective: 18-02 Topic: NFP entities―Voluntary health and welfare Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement

[QUESTION] 10. On a statement of functional expenses for a voluntary health and welfare entity, how are expenses classified? A) Health services expenses and operating expenses. B) Program services expenses and administrative services expenses. C) Program services expenses and supporting services expenses. D) Operating expenses and supporting services expenses. E) Operating expenses and administrative expenses. Answer: C Learning Objective: 18-03 Topic: Statement of functional expenses Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 11. On a Statement of Activities for a not-for-profit entity, what is the minimum required classification for categories of expenses? A) Fund-raising expenses and operating expenses. B) Program services expenses and administrative services expenses. C) Program services expenses and supporting services expenses. D) Operating expenses and supporting services expenses. E) Operating expenses and administrative expenses. Answer: C Learning Objective: 18-02 Topic: Expense types―Program and Support Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: BB Industry AICPA: FN Measurement [QUESTION] 12. On a Statement of Activities for a not-for-profit entity, what are the broad categories of supporting service costs required to be reported? A) Fund-raising expenses and operating expenses. B) Program services expenses and administrative services expenses. C) Fund-raising expenses and supporting services expenses. D) Fund-raising expenses and administrative expenses. E) Operating expenses and administrative expenses. Answer: D Learning Objective: 18-02 Topic: Expense types―Program and Support Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 13. When individuals are considering whether to make a donation to a not-for-profit entity, the answer to which of the following questions is not typically sought? A) Will donated funds be used effectively by the entity to accomplish its purpose? B) Will the donated funds be wasted? C) How much should this entity receive? D) Is this entity profitable? E) Is contributing to this charity a wise allocation of resources? Answer: D Learning Objective: 18-01 Topic: Basics required for NFP financial statements Difficulty: 2 Medium Blooms: Evaluate AACSB: Analytical Thinking AICPA: BB Legal AICPA: FN Decision-Making [QUESTION] 14. Historically, what pattern of reporting was used by private not-for-profit entities? (1) The same as used with respect to for-profit entities. (2) Reporting that utilizes a fund accounting approach. (3) A pattern of reporting that does not consider the entire entity. A) 1 only. B) 2 only. C) 1 and 2 only. D) 1, 2 and 3. E) 2 and 3 only. Answer: B Learning Objective: 18-01 Topic: Basics required for NFP financial statements Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 15. Which of the following statements is required for voluntary health and welfare entities, but not for other not-for-profit entities? A) Statement of Activities and Changes in Net Assets. B) Statement of Functional Expenses. C) Statement of Financial Position. D) Statement of Cash Flows. E) Statement of Budget to Actual. Answer: B Learning Objective: 18-02 Topic: NFP entities―Voluntary health and welfare Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 16. Prior to ASU 2016-14, what are the three categories of net assets required by GAAP in reporting of a not-for-profit entity? A) Unrestricted, Temporarily Restricted, and Permanently Restricted. B) Unrestricted, Restricted, and Fund Balance. C) Restricted, Permanently Restricted, and Fund Balance. D) Unrestricted, Temporarily Restricted, and Fund Balance. E) None of these answer choices are correct. Answer: A Learning Objective: 18-02 Topic: Distinguish NFP restriction categories Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 17. What is the basis of accounting used in reporting the Statement of Activities? A) Cash basis. B) Modified accrual basis. C) Accrual basis. D) Either cash basis or accrual basis, depending on the type of revenue. E) Either modified accrual basis or accrual basis, depending on the type of revenue. Answer: C Learning Objective: 18-01 Learning Objective: 18-02 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Topic: Basics required for NFP financial statements Topic: Distinguish NFP financial statements Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 18. When are unconditional promises to give recognized as revenues? A) In the period the promise is received. B) In the period the promise is collected. C) In the period in which the conditions upon which they are contingent are substantially met. D) In the period in which the conditions upon which they are contingent have begun to be met. E) Unconditional promises from potential donors are not revenues. Answer: A Learning Objective: 18-04 Topic: Distinguish NFP revenues Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement Use the following to answer questions 19 – 21: REFERENCE: 18-01 The following gifts are received in 2016 by a not-for-profit entity: I. $2,000 specified by the donor to be used to pay salaries. II. $10,000 specified by the donor for new conference room furniture. III. $5,000 specified by the donor to be held for one year before being expended. The salaries are paid in 2017 and the conference room furniture is purchased in 2016. The donor did not specify any time restriction on holding the conference room furniture. [QUESTION] REFER TO: 18-01 19. With respect to the donations received in 2016, what total amount should be recorded as an increase to Temporarily Restricted Net Assets? A) $ 2,000 B) $ 7,000 C) $12,000 D) $15,000 E) $17,000 Answer: E Learning Objective: 18-02 Topic: Distinguish NFP restriction categories Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Feedback: When the donations are recorded in the accounting records in 2016, Temporarily Restricted Net Assets are increased by $17,000 = [I. Salaries $2,000 + II. $10,000 for new conference room furniture] + [III. Time Restricted gift $5,000]. [QUESTION] REFER TO: 18-01 20. With respect to the donations received in 2016, what amount should be reported in the Statement of Activities as net increase to Temporarily Restricted Net Assets for the year 2016? A) $ 2,000 B) $ 7,000 C) $12,000 D) $15,000 E) $17,000 Answer: B Learning Objective: 18-02 Topic: Expenses and Release of restriction Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Feedback: When the donations are recorded in the accounting records, Temporarily Restricted Net Assets are increased by $17,000 = [I. Salaries $2,000 + II. $10,000 for new conference room furniture] + [III. Time Restricted gift $5,000]. .During 2016, the conference room furniture is purchased and the donor did not stipulate a time restriction on holding the furniture. Thus, there is a reclassification of net assets released from restriction as a $10,000 reduction in the Temporarily Restricted column. The net increase.in Temporarily Restricted Net Assets is $17,000 – $10,000 = $7,000. [QUESTION] REFER TO: 18-01 21. What amount should be reclassified on the Statement of Activities for 2017 from the Temporarily Restricted column to the Unrestricted column? A) $ 2,000. B) $ 5,000. C) $ 7,000. D) $10,000. E) $12,000. Answer: C Learning Objective: 18-02 Topic: Expenses and Release of restriction Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement Feedback: Net assets released from restrictions [I. Salaries $2,000] + [III. Satisfaction of one-year time restriction $5,000] = $7,000 reclassified as unrestricted in 2017. [QUESTION] 22. How are investments in equity securities with readily determinable market values, and their related Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

unrealized gains and losses, reported by a not-for-profit entity? A) At lower of cost or market in the Statement of Financial Position, with unrealized losses in the Statement of Activities. B) At fair value in the Statement of Financial Position, with unrealized gains and losses in the Statement of Activities. C) At lower of cost or market in the Statement of Financial Position, with unrealized losses in Temporarily Restricted Net Assets. D) At original cost in the Statement of Financial Position, with unrealized gains and losses in the Statement of Activities. E) At original cost in the Statement of Financial Position, with unrealized gains and losses disclosed in the notes to the financial statements. Answer: B Learning Objective: 18-02 Topic: Distinguish NFP financial statements Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 23. Which statement below is not correct for financial statements of not-for-profit entities? A) Pledged contributions are recognized in the accounting period in which pledged by donors. B) A not-for-profit entity’s Statement of Financial Position includes a section specifically for net assets. C) Contributed assets are recognized by a not-for-profit entity as public support contribution revenue. D) Depreciation expense is not recognized by not-for-profit entities. E) Not-for-profit entities issue a Statement of Activities. Answer: D Learning Objective: 18-02 Topic: Distinguish NFP financial statements Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 24. A gift to a not-for-profit school that is not restricted by the donor is recorded with a credit to: A) Fund Balance. B) Deferred Revenues. C) Contribution Revenues. D) Non-Operating Revenues. E) Encumbrances. Answer: C Learning Objective: 18-02 Learning Objective: 18-04 Topic: Distinguish NFP restriction categories Topic: Distinguish NFP revenues Difficulty: 1 Easy Blooms: Understand Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement

[QUESTION] 25. Which entry would be the correct entry on the donor’s books when the donor relinquishes control of an asset, such as cash, which it contributes to a not-for-profit entity? DEBIT CREDIT A) Expense-charitable contribution Cash B) Refundable advance to charity Cash C) Charitable pledge Cash D) Cash Liability to beneficiary E) Cash Refundable advance Answer: A Learning Objective: 18-04 Topic: Contributions―Holding for others Difficulty: 2 Medium Blooms: Apply Blooms: Analyze AACSB: Knowledge Application AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 26. Which entry would be the correct entry on the donor’s books when the donor retains control of an asset, such as cash, which it contributes to a not-for-profit entity? DEBIT CREDIT A) Expense-charitable contribution Cash B) Refundable advance to charity Cash C) Charitable pledge Cash D) Cash Liability to beneficiary E) Cash Refundable advance Answer: B Learning Objective: 18-04 Topic: Contributions―Holding for others Difficulty: 2 Medium Blooms: Apply Blooms: Analyze AACSB: Analytical Thinking AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 27. Which entry would be the correct entry on the not-for-profit entity’s books to record a donor’s gift when the money is simply passing through the not-for-profit entity, it creates no direct benefit, and control of the assets has been relinquished by the donor? DEBIT CREDIT Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

A) Expense-charitable contribution Cash B) Refundable advance to charity Cash C) Cash Liability to beneficiary D) Cash Refundable advance E) Cash Contribution revenue Answer: C Learning Objective: 18-04 Topic: Contributions―Holding for others Difficulty: 3 Hard Blooms: Apply Blooms: Analyze AACSB: Analytical Thinking AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 28. Which entry would be the correct entry on the not-for-profit entity’s books to record a donor’s gift when the donor retains power over the assets? DEBIT CREDIT A) Expense-charitable contribution Cash B) Refundable advance to charity Cash C) Cash Liability to beneficiary D) Cash Refundable advance E) Cash Contribution revenue Answer: D Learning Objective: 18-04 Topic: Contributions―Holding for others Difficulty: 2 Medium Blooms: Apply Blooms: Analyze AACSB: Analytical Thinking AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 29. Which entry would be the correct entry to record pledges of $100,000 for a telethon event to raise money for a not-for-profit public television station? The public television entity estimates that 5% of the funds will be uncollectible. DEBIT CREDIT A) Pledges Receivable $100,000 Unrestricted net assets-contributions $100,000 B) Cash $100,000 Unrestricted net assets-contributions $100,000 C) Pledges Receivable $100,000 Unrestricted net assets-contributions $95,000 Allowance for uncollectible pledges $ 5,000 D) Pledges Receivable $95,000 Unrestricted net assets-contributions $100,000 Allowance for uncollectible pledges $5,000 E) Cash $95,000 Unrestricted net assets-contributions $100,000 Allowance for uncollectible Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

pledges $5,000 Answer: C Learning Objective: 18-04 Topic: Contributions―Pledges Difficulty: 3 Hard Blooms: Apply Blooms: Analyze AACSB: Analytical Thinking AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement Feedback: Pledges Made $100,000 – Estimated Uncollectible Pledges $5,000 = Net Receivables and also Net Contribution Revenues of $95,000 [QUESTION] 30. Which entry would be the correct entry to record that a not-for-profit entity collected $80,000 of amounts pledged and also wrote off $3,000 of amounts pledged that were previously estimated as amounts uncollectible? DEBIT CREDIT A) Pledges Receivable $80,000 Cash $80,000 B) Cash $80,000 Pledges Receivable $80,000 C) Pledges Receivable $80,000 Allowance for uncollectible pledges 3,000 Cash $83,000 D) Cash $80,000 Pledges Receivable $83,000 Allowance for uncollectible pledges $3,000 E) Cash $80,000 Unrestricted net assets-contributions $83,000 Allowance for uncollectible pledges $3,000 Answer: D Learning Objective: 18-04 Topic: Contributions―Pledges Difficulty: 3 Hard Blooms: Apply Blooms: Analyze AACSB: Analytical Thinking AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement Feedback: Cash $80,000 + Allowance for Uncollectible pledges $3,000 = Pledges Receivable $83,000 [QUESTION] 31. In not-for-profit accounting, an acquisition occurs when one not-for-profit entity obtains: A) Significant influence over another not-for-profit entity. B) More than 50% of another not-for-profit entity’s fixed assets. C) The right to collect more than 20% of pledged contributions. D) Control over another not-for-profit entity. E) None of these answer choices are correct. An acquisition can only occur for profit-oriented entities. Answer: D Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective: 18-06 Topic: Mergers and acquisitions of NFP entities Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AIPCA: BB Industry AICPA: FN Measurement [QUESTION] 32. If the total acquisition value of an acquired not-for-profit entity is greater than the fair value of all identifiable net assets of the entity, and that entity’s revenues are not generated by rendering goods or services or from membership dues, then the excess of acquisition value over identifiable net assets is immediately reported: A) As goodwill on the consolidated Statement of Position. B) As a pro-rata increase to the identifiable assets and liabilities acquired. C) As a direct reduction in unrestricted net assets on the Statement of Financial Position. D) As a reduction in unrestricted net assets on the Statement of Activities. E) As an increase in other assets on the Statement of Financial Position. Answer: D Learning Objective: 18-06 Topic: Mergers and acquisitions of NFP entities Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AIPCA: BB Industry AICPA: FN Measurement [QUESTION] 33. When an acquisition occurs in not-for-profit accounting, recognition of goodwill depends on: A) Whether control has been achieved by the acquiring not-for-profit entity. B) Whether the acquired not-for-profit entity has the ability to generate significant amounts of revenue from providing goods or services or from membership fees, or whether it is expected to generate primarily contribution and investment revenue in the future. C) Whether the acquired not-for-profit entity has the ability to generate significant amounts of revenues from goods or services or membership fees, as well as significant amounts of contribution revenues in the future. D) Whether the acquired not-for-profit entity has a history of generating significant revenues of any type. E) None of these answer choices are correct. Goodwill can only be recognized in an acquisition of a forprofit entity. Answer: B Learning Objective: 18-06 Topic: Mergers and acquisitions of NFP entities Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AIPCA: BB Industry AICPA: FN Measurement [QUESTION] 34. Which of the following is not true about a merger of two not-for-profit entities? Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

A) The two entities will continue to legally exist but there will be a new governing board. B) Neither entity is considered to be acquired. C) Identifiable assets and liabilities are not adjusted to their fair values at the date of the merger. D) The two entities will together form an entirely new entity with a new governing board. E) There will be no acquisition value or goodwill determination. Answer: A Learning Objective: 18-06 Topic: Mergers and acquisitions of NFP entities Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AIPCA: BB Industry AICPA: FN Measurement [QUESTION] 35. Which entry would be the correct entry to record that a hospital has provided patient services for $200,000, of which 25% will be billed to a third party? DEBIT CREDIT A) Accounts Receivable-Patients $200,000 Patient Service Revenue $200,000 B) Accounts Receivable-Patients $150,000 Patient Service Revenue $200,000 Accounts Receivable-Third Party $50,000 C) Accounts Receivable-Patients $50,000 Accounts Receivable-Third Party $150,000 Patient Service Revenue $200,000 D) Accounts Receivable-Patients $200,000 Patient Service Revenue $50,000 Accounts Receivable – Third Party $150,000 E) Patient Service Revenue $200,000 Accounts Receivable-Patients $150,000 Accounts Receivable-Third Party $50,000 Answer: B Learning Objective: 18-07 Topic: NFP entities―Health care Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement Feedback: A/R Patients $150,000 + A/R Third Party Providers $50,000 = Patient Service Revenue Recognized $200,000 [QUESTION] 36. What is the appropriate account to debit when reducing net patient service revenue as a result of arrangements with third party payors? A) Contractual Adjustments. B) Allowance for uncollectible and reduced accounts. C) Patient Service Revenues. D) Account Receivable-Patients. E) Accounts Receivable-Third Party. Answer: A Learning Objective: 18-07 Topic: NFP entities―Health care Difficulty: 2 Medium Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 37. What is the appropriate account to credit when estimating a portion of health care entity’s receivables that will prove to be uncollectible? A) Bad Debt Expense. B) Allowance for Uncollectible Accounts. C) Patient Service Revenues. D) Accounts Receivable. E) Contractual Adjustments. Answer: B Learning Objective: 18-07 Topic: NFP entities―Health care Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 38. Not-for-profit entities that are eligible to obtain tax-exempt status under Internal Revenue Code section 501(c)(4) are A) Those promoting literacy. B) Those promoting scientific research. C) Chambers of Commerce. D) Professional sports leagues. E) Those functioning exclusively to promote social welfare. Answer: E Learning Objective: 18-05 Topic: Tax-exempt status for NFP entities Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: BB Legal [QUESTION] 39. Which of the following topics are not included in the Form 990 which tax-exempt entities file to maintain their tax-exempt status? A) Compensation of Officers, Directors, Trustees, Key Employees, Highest Compensated Employees and Independent Contractors. B) Donor Disclosure: Identification of Every Donor by Name, Contribution Value & Contribution Type. C) Statement of Revenue. D) Balance Sheet. E) Statement of Functional Expenses. Answer: B Learning Objective: 18-05 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Topic: Tax-exempt status for NFP entities Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: BB Legal Essay: [QUESTION] 40. Give several examples, by name, of specific not-for-profit entities that are voluntary health and welfare entities. Answer: Examples of specific not-for-profit entities that are voluntary health and welfare entities include: (i) Save the Children; (ii) The United Way; (iii) The March of Dimes; (iv) The Boy Scouts of the United States of America; (v) The Girl Scouts of the United States of America; (vi) The YMCA of the USA; (vii) The YWCA of the USA; and (viii) The American Cancer Society. Learning Objective: 18-02 Topic: NFP entities―Voluntary health and welfare Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 41. What are the objectives of accounting for a not-for-profit entity? Answer: The objectives of accounting for a not-for-profit entity are: (i) to provide contributors and potential contributors with a means of evaluating the use of resources by the entity; and (ii) to disclose how resources have been acquired, and how they have been used to accomplish the objectives of the entity. Learning Objective: 18-01 Topic: Basics required for NFP financial statements Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 42. What term is often used by voluntary health and welfare entities as a category for resources received from contributions, as opposed to those from providing goods or services? Answer: The term used by voluntary health and welfare entities for contributions is public support. Learning Objective: 18-02 Topic: Distinguish NFP financial statements Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: BB Industry AICPA: FN Measurement [QUESTION] 43. What two classifications are used for the expenses incurred by voluntary health and welfare entities? Answer: The two classifications of expenses incurred by voluntary health and welfare entities are: (i) program (program service) expenses; and (ii) support (supporting service) expenses. Learning Objective: 18-02 Topic: Expense types―Program and Support Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 44. What is the main source of financial support for most voluntary health and welfare entities? Answer: Contributions (public support) represents the main source of financial support for most voluntary health and welfare entities. These contributions can come from sources such as individuals, foundations, government grants, and allocations from the United Way. Learning Objective: 18-02 Topic: NFP entities―Voluntary health and welfare Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 45. What criteria must be met before a not-for-profit entity can recognize contributed services as a means of support? Answer: The criteria that must be met for a not-for-profit entity to recognize contributed services as a means of support are both of the following, if the work:

1. Creates or enhances a nonfinancial asset. 2. Requires a specialized skill possessed by the contributor that would typically need to be purchased if not donated. Learning Objective: 18-04 Topic: Contributions―Contributed services Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 46. For a not-for-profit entity, what are supporting services expenses? Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Answer: Supporting services expenses are the costs of running a not-for-profit entity that are not directly related to its program services, or may be related to program services but not viewed as an actual cost of providing that service. Supporting services expenses are usually split into two subgroups: (i) administrative costs (management and general expenses); and (ii) fund-raising expenses. Learning Objective: 18-02 Topic: Expense types―Program and Support Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 47. What financial statements would normally be prepared by a voluntary health and welfare entity?

Answer: A voluntary health and welfare entity would prepare the following financial statements: (A) Statement of Financial Position (B) Statement of Activities (C) Statement of Cash Flows (D) Statement of Functional Expenses Learning Objective: 18-02 Topic: Distinguish NFP financial statements Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 48. What are third party payors? Why are their interests important in accounting for health care entities? Answer: Third party payors are entities that guarantee payment for a patient’s services, and include insurance companies and Federal programs such as Medicare and Medicaid. Third-party payors pay health care entities for a high percentage of the services provided to patients in the United States and amounts and the amounts they pay are usually less than the health care entity’s full established rates for those services. Thus, the large amount of payments from third-party payors for health care, as well as the large amounts of adjustments the health care entity must make for the amounts received that are less than the established rates makes disclosure of third-party payors important in the financial reporting of health care entities. Learning Objective: 18-07 Topic: NFP entities―Health care Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 49. How does a not-for-profit entity account for: 1) cash contributions, and 2) donated goods that are Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

received for operating purposes? What types of revenues are recognized by voluntary health and welfare entities? Answer: Contributions are recorded as increases in net assets and often reported as public support. Contributions arise from voluntary nonreciprocal transactions and are not revenues from providing goods or services, or from membership or sponsorship fees. They are recognized in the period the . Donated materials are also accounted for as public support. Revenues a voluntary health and welfare entity could recognize include: (i) membership dues; (ii) interest and dividends earned on investments; and (iii) gains on the sale of property and investments. Learning Objective: 18-04 Topic: Distinguish NFP revenues Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 50. For a not-for-profit entity, when is recognition of contributions of artworks and historical treasures not required? Answer: GAAP for not-for-profit entities allows gifts of artworks and historical treasures to not be recorded if: (i) they are added to a collection for public exhibition, education, or research; (ii) they are protected and preserved; and (iii) if they are ever sold, any receipts will be used to acquire other collection items. Learning Objective: 18-04 Topic: Contributions―Art and Historical Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 51. How does a recipient not-for-profit entity record the receipt of a gift that will be transferred without restriction to another charitable entity? What if the donor retains the right to revoke or redirect the gift? Answer: If there are no restrictions, the recipient entity records the transaction as a liability. If the donor retains the right to revoke or redirect the gift, then the recipient entity records a refundable advance (also a liability), except in the case where the recipient entity is in control of the asset, in which case the receipt is recorded as Temporarily Restricted Net Assets – Contributions. Learning Objective: 18-04 Topic: Contributions―Holding for others Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

52. For not-for-profit entities, what is the difference in identification of “control” between a merger and an acquisition? Answer: In a merger, two or more not-for-profit entities combine to form a new not-for-profit entity and a new governing board is appointed. In an acquisition, one entity transfers consideration for value to obtain direct or indirect ability to determine the direction of management and policies of the other entity. Learning Objective: 18-06 Topic: Mergers and acquisitions of NFP entities Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 53. For May 2018, Carlington Hospital's charges for patient services were $608,000, of which 80% was billed to third-party payors. Required: Prepare the journal entry to accrue patient charges for the month. Answer:

Accounts Receivable – Third-Party Payors Accounts Receivable – Patients Patient Service Revenues

$486,400 121,600 $608,000

Learning Objective: 18-07 Topic: NFP entities―Health care Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement Use the following to answer questions 54 – 57: REFERENCE: 18-02 For the month of December 2017, patient charges at Northfield Hospital (a not-for-profit hospital) were $2,720,000. Third-party payors were billed $1,800,000. [QUESTION] REFER TO: 18-02 54. Prepare the necessary journal entry to record the revenue and receivables. Answer: Accounts Receivable – Third-Party Payors $1,800,000 Accounts Receivable – Patients 920,000 Patient Service Revenues $2,720,000 Learning Objective: 18-07 Topic: NFP entities―Health care Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] REFER TO: 18-02 55. $520,000 of the $2,720,000 was expected to be uncollectible. Required: Prepare the necessary journal entry to record the anticipated uncollectible amount. Answer: Bad Debt Expense Allowance for Uncollectible Accounts

$520,000 $520,000

Learning Objective: 18-07 Topic: NFP entities―Health care Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] REFER TO: 18-02 56. In this month, there were several patients that had no health insurance and due to their low income level, the hospital decided that $85,000 of receivables would not be collectible. Required: Prepare the necessary journal entry to reflect the decision to consider the $85,000 as charity care. Answer: Patient Service Revenues Accounts Receivable – Patients

$85,000 $85,000

Learning Objective: 18-07 Topic: NFP entities―Health care Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] REFER TO: 18-02 57. The hospital estimated that contractual adjustments would reduce the amount collected from thirdparty payors to $1,710,000. Required: Prepare the necessary journal entry to record the contractual adjustments. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Answer: Contractual Adjustments Allowance for Uncollectible Accounts

$90,000 $90,000

Learning Objective: 18-07 Topic: NFP entities―Health care Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement

Use the following to answer questions 58 and 59: REFERENCE: 18-03 Dura Foundation, a voluntary health and welfare entity dedicated to finding medical cures and supported by contributions from the general public, included the following costs in its Statement of Functional Expenses for the year ended December 31, 2018: Fund-raising $650,000 Administrative (including $90,000 for data processing) 390,000 Research 130,000 [QUESTION] REFER TO: 18-03 58. What should Dura Foundation report as program service expenses? Answer: Program service expenses Research: $130,000 Learning Objective: 18-02 Learning Objective: 18-03 Topic: Expense types―Program and Support Topic: Statement of functional expenses Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] REFER TO: 18-03 59. What should Dura Foundation report as supporting service expenses? Answer: Supporting service expenses Fund raising Administrative

$ 650,000 390,000 $1,040,000

Learning Objective: 18-02 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective: 18-03 Topic: Expense types―Program and Support Topic: Statement of Functional Expenses Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking AICPA: BB Industry AICPA: FN Measurement [QUESTION] 60. During 2017, the Garfield Humane Society, a voluntary health and welfare entity, received cash donations of $892,000 and membership dues of $62,000. A member of the Humane Society donated services valued at $8,000 that would otherwise have been performed by a paid staff member. A pet food manufacturer donated dog food valued at $16,400. The Humane Society received a gift of $140,000, to be used in building a new animal shelter. Also during 2017, investments held by the Humane Society earned interest of $2,000. Required: Prepare a schedule showing the amount that the Garfield Humane Society should have recorded for contributions from public support for 2017. Answer: Garfield Humane Society Schedule of Public Support For the Year Ended December 31, 2017 Public support: Unrestricted donations, cash $ 892,000 Donated services 8,000 Donated materials 16,400 Gift for new animal shelter, restricted 140,000 $1,056,400 Learning Objective: 18-04 Topic: Distinguish NFP restriction categories Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 60. During 2017, the Garfield Humane Society, a voluntary health and welfare entity, received cash donations of $892,000 and membership dues of $62,000. A member of the Humane Society donated services valued at $8,000 that would otherwise have been performed by a paid staff member. A pet food manufacturer donated dog food valued at $16,400. The Humane Society received a gift of $140,000, to be used in building a new animal shelter. Also during 2017, investments held by the Humane Society earned interest of $2,000. Required: Prepare a schedule showing the amount that the Garfield Humane Society should have recorded for contributions from public support for 2017. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Answer: Garfield Humane Society Schedule of Public Support For the Year Ended December 31, 2017 Public support: Unrestricted donations, cash Donated services, unrestricted Donated materials, unrestricted Gift for new animal shelter, temporarily restricted

$ 892,000 8,000 16,400 140,000 $1,056,400

Note: Interest earned on investments is not public support. Learning Objective: 18-04 Topic: Distinguish NFP restriction categories Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 61. During 2018, the Garfield Humane Society, a voluntary health and welfare entity, received cash donations of $892,000 and membership dues of $62,000. A member of the Humane Society donated services valued at $8,000 that would otherwise have been performed by a paid staff member. A pet food manufacturer donated dog food valued at $16,400. The Humane Society received a gift of $140,000, to be used for building a new animal shelter. Also during 2018, investments held by the Humane Society earned interest of $2,000. Required: Prepare a schedule showing the amount that the Garfield Humane Society should have recorded for contributions from public support for 2018, according to ASU 2016-14. Answer: Garfield Humane Society Schedule of Public Support For the Year Ended December 31, 2017 Public support: Cash donations, without restriction Donated services, without restriction Donated materials, without restriction Gift for new animal shelter, with restriction

$ 892,000 8,000 16,400 140,000 $1,056,400

Note: Interest on investment is not public support. Learning Objective: 18-04 Topic: Distinguish NFP restriction categories Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: FN Measurement [QUESTION] 62. The Yelton Center is a voluntary health and welfare entity. During 2017, unrestricted pledges of $780,000 were received by the Yelton Center, sixty percent of which were fulfilled in 2017. Officials estimated that fifteen percent of the original amount of pledges will be uncollectible. The remainder of the amount expected to be collected from pledges will be received in 2018 (for use in 2018). Required: 1) Show with appropriate amounts how the Yelton Center would present the pledges on its Statement of Financial Position on the day the pledges are recorded in 2017. 2) Show with appropriate amounts the effect on net assets the Yelton Center would report for contributions for 2017. Answer: 1) Contributions receivable Allowance for uncollectible pledges (15%) Net realizable value of pledges

$780,000 ( 117,000) $663,000

2) Increase in unrestricted net assets in 2017 – contributed support (60% x $780,000)

$458,000,

Increase in temporarily restricted net assets in 2017 – contributed support (Net amount expected to be collected of $663,000 less amount collected and released from restriction in 2017 of $458,000)

$205,000

Learning Objective: 18-04 Topic: Contributions―Pledges Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 63. A local social worker, earning $12 per hour working for the state government, contributed 600 hours of time at no charge to the Sunny Homeless Shelter, a voluntary health and welfare entity. If not for these donated services, an additional staff person would have been hired by the entity. Required: How should the Sunny Homeless Shelter record the contributed services? Answer: Donated services would be valued at $7,200 and recognized as an increase in Unrestricted Net Assets as contributed support. At the same time, a salary expense is also recognized for this same amount which serves as a decrease in Unrestricted Net Assets. Therefore, no overall impact would be created but the impact of the donation is reflected. Learning Objective: 18-04 Topic: Contributions―Contributed services Difficulty: 2 Medium Blooms: Analyze AACSB: Analytical Thinking Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: BB Industry AICPA: FN Measurement [QUESTION] 64. A not-for-profit entity receives a computer as a donation (valued at $2,000). Prepare the journal entry for the transaction. Answer: Furniture – Office Unrestricted Net Assets – Contributions

$2,000 $2,000

Learning Objective: 18-02 Learning Objective: 18-04 Topic: Distinguish NFP financial statements Topic: Distinguish NFP revenues Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement

Use the following to answer questions 65 and 66: REFERENCE: 18-04 A not-for-profit entity (Charity A) raises money for other charitable entities. Charity A receives $10,000 to distribute to Charity B. [QUESTION] REFER TO: 18-04 65. Assume there are no donor rights to revoke or redirect the gift. Prepare the journal entries for Charity A when the gift is received, and for Charity A and Charity B when the gift is distributed. Answer: Charity A, upon receipt: Cash Liability to Charity B

$10,000 $10,000

Charity A, when gift is distributed: Liability to Charity B Cash

10,000

Charity B Cash Contribution Revenue

10,000

10,000

10,000

Learning Objective: 18-04 Topic: Contributions―Holding for others Difficulty: 2 Medium Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] REFER TO: 18-04 66. Assume that the donor retains the right to revoke or redirect the gift. Prepare the journal entries for Charity A and Charity B. The entries should be for the gift when received by Charity A, and when the gift is distributed for Charity B. Answer: Charity A, upon receipt: Cash Refundable Advance from Donor

$10,000 $10,000

Charity B, upon receipt by Charity A: Contribution Receivable Contribution Revenue

10,000

Charity A, when gift is distributed: Refundable Advance from Donor Cash

10,000

Charity B, when gift is received from Charity A: Cash Contribution Receivable

10,000

10,000

10,000

10,000

Learning Objective: 18-04 Topic: Contributions―Holding for others Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 67. A not-for-profit entity provides the following information for the year 2017:

Required: Prepare the journal entries for these transactions for the year 2017. Answer: Cash 20,000 Contributions Receivable 125,000 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Allowance for Uncollectible Pledges Unrestricted Net Assets – Contributions Permanently Restricted Net Assets – Contributions Cash Allowance for Uncollectible Pledges Contributions Receivable

12,500 112,500 20,000 75,000 3,000 78,000

Learning Objective: 18-04 Topic: Contributions―Pledges Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement Use the following to answer questions 68 – 70: REFERENCE: 18-05 Wakefield Home is a private not-for-profit health care entity offering services for a fee. In the first quarter of 2017, Wakefield Home rendered services of $300,000 to patients. Of this amount, patients bear responsibility for 75% and the remaining amount is to be paid by third-party insurance providers. However, at the end of 2017, Wakefield Home realizes that $25,000 of the patients’ responsibility to pay their share of the billed amounts is estimated to be uncollectible and $3,000 of the amounts from the third-party payors will not be collected. [QUESTION] REFER TO: 18-05 68. Record the journal entries that reflect all of this information. Answer: Accounts Receivable-Patients $225,000 Accounts Receivable-Third Party 75,000 Patient Service Revenues

$300,000

Provision for Bad Debts Allowance for Uncollectible and Reduced Accounts

$25,000 $25,000

Contractual Adjustments Allowance for Uncollectible and Reduced Accounts

$3,000 $3,000

Learning Objective: 18-07 Topic: NFP entities―Health care Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

REFER TO: 18-05 69. A local business donated medical supplies to Wakefield Home with a value of $40,000. Prepare the journal entry for the receipt of these supplies. Answer: Inventory of Medical Supplies Unrestricted Net Assets-Contribution of Materials

$40,000 $40,000

Learning Objective: 18-04 Topic: NFP entities―Health care Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] REFER TO: 18-05 70. The Wakefield Home incurred the following liabilities that need to be recorded at the end of 2017: $110,000 salaries, $30,000 medical equipment, $10,000 utilities expense. Prepare the journal entries for these transactions. Answer: Salaries Expense Salaries Payable

$110,000 $110,000

Medical Equipment Accounts Payable

30,000

Utilities Expense Utilities Payable

10,000

30,000

10,000

Learning Objective: 18-07 Topic: NFP entities―Health care Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement [QUESTION] 71. Turnaround Childcare Agency is a private not-for-profit entity providing child care for a fee. The agency has a permanent endowment and the income may be used to sponsor families that are unable to pay for services but the principal must be preserved. In addition, various fundraising activities take place during the year. When the agency held its annual holiday fundraiser in 2017, pledges of $50,000 were received. The administration expected 5% of the pledges to be uncollectible. In addition, income of $10,000 was received from the permanent endowment to sponsor children to be placed with foster families. Prepare the journal entries for these transactions. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Answer: Contributions Receivable Unrestricted Net Assets-Contributions Allowance for Uncollectible Pledges Cash Unrestricted Net Assets-Contributions Learning Objective: 18-02 Learning Objective: 18-04 Topic: Distinguish NFP restriction categories Topic: Contributions―Pledges Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Industry AICPA: FN Measurement

$50,000 $47,500 2,500 10,000 10,000

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Chapter 19 - Accounting for Estates and Trusts Multiple Choice: [QUESTION] 1. When a person dies without leaving a valid will, how is the distribution of his or her property determined? A) In accordance with federal inheritance laws. B) In accordance with generally accepted accounting principles. C) In accordance with a plan developed by the executor of the estate. D) In accordance with state inheritance laws. E) In accordance with common law. Answer: D Learning Objective: 19-01 Topic: Estate administration―General rules Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Research [QUESTION] 2. Under what circumstance does an estate have an executor? A) When there is no valid will. B) When the estate exceeds the dollar amount of the estate tax exemption. C) When the will establishes a trust fund. D) When the will is contested. E) When the will names a specific person to administer the estate. Answer: E Learning Objective: 19-01 Topic: Estate administration―General rules Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Research [QUESTION] 3. When an estate does not have sufficient assets to satisfy all claims against it, what claim has the highest priority? A) Expenses of administering the estate. B) Federal income taxes. C) State income taxes. D) Medical expenses of the final illness. E) Back wages owed to any employees. Answer: A Learning Objective: 19-01 Topic: Estate administration―Order of priority Difficulty: 1 Easy Blooms: Remember Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Research [QUESTION] 4. What is the process of abatement? A) An attempt to determine the deceased's intentions when the terms of the will are unclear. B) A reduction of various bequests when the estate is not adequate to satisfy them completely. C) Selling of assets included in an estate to be able to pay creditors. D) Payment of the claims of creditors. E) The establishment of how the creditors will be paid. Answer: B Learning Objective: 19-02 Topic: Estate distribution―Abatement process Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Research [QUESTION] 5. A demonstrative legacy is a A) Gift of personal property that is directly identified. B) Cash gift from a particular source. C) Gift of estate property that remains after carrying out the other provisions of the will. D) Gift of real property. E) Gift of intangible property. Answer: B Learning Objective: 19-02 Topic: Estate distribution―Type of legacy Topic: Legal terminology Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Research [QUESTION] 6. In a will, a devise is a A) Gift of personal property that is directly identified. B) Cash gift from a particular source. C) Gift of estate property that remains after carrying out the other provisions of the will. D) Gift of real property. E) Gift of intangible property. Answer: D Learning Objective: 19-02 Topic: Legal terminology Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: BB Legal AICPA: FN Research [QUESTION] 7. What guidelines must be followed to classify a transaction as associated with the principal of an estate or as an income transaction? A) Generally accepted accounting principles. B) Federal estate laws. C) State estate laws. D) The Internal Revenue Code. E) The decedent's intentions or state laws. Answer: E Learning Objective: 19-04 Topic: Estate income and principal Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 8. Executor's fees and court costs for settling an estate usually A) Must be apportioned between the principal and the income of the estate. B) Are adjustments to the principal of the estate. C) Are adjustments to the income of the estate. D) Are subtracted from life insurance proceeds. E) Are ignored. Answer: A Learning Objective: 19-04 Topic: Estate income and principal Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 9. In an executor's accounting for an estate, debts and other obligations are recorded A) At book value. B) As a reduction of income. C) On the date of payment. D) As soon as discovered. E) Only if they are past due. Answer: C Learning Objective: 19-01 Learning Objective: 19-04 Topic: Estate recordkeeping Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: BB Legal AICPA: FN Measurement [QUESTION] 10. A testamentary trust is a trust A) Intended to protect the assets of a minor. B) That is managed by the trustor. C) That is managed by an estate. D) Established by a living person. E) Established by a will. Answer: E Learning Objective: 19-06 Topic: Legal terminology Topic: Trusts―Type of trust Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Research [QUESTION] 11. Which of the following is usually accounted for as an adjustment to a trust's principal? A) Repairs expense. B) Rent expense. C) Investment costs and commissions. D) Insurance expense. E) Property taxes. Answer: C Learning Objective: 19-06 Topic: Trusts―Income and Principal Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 12. Which of the following is usually not accounted for as an adjustment to a trust's income? A) Ordinary repairs expense. B) Rent expense. C) Investment costs and commissions. D) Insurance expense. E) Property taxes. Answer: C Learning Objective: 19-06 Topic: Trusts―Income and Principal Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: FN Measurement [QUESTION] 13. The trustor is the A) Income beneficiary of the trust. B) Ultimate recipient of the principal from the trust. C) Fiduciary who manages the assets in the trust. D) Person who funds the trust. E) Person who disposes of the assets in the trust. Answer: D Learning Objective: 19-06 Topic: Legal terminology Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Research Use the following to answer questions 14 – 19: REFERENCE: 19-01 The terms of a will currently undergoing probate are: “A gift to my brother David of $25,000 cash; to my son James, $50,000 from my Harbor Savings Bank account; and to my daughter Lila, all of my remaining property.” At the time of death, the balance in the savings account was $40,000, and there was additional cash (after payment of funeral expenses and all claims against the estate) of $70,000. [QUESTION] REFER TO: 19-01 14. The gift to David is a A) General legacy. B) Specific legacy. C) Demonstrative legacy. D) Residual legacy. E) Devise. Answer: A Learning Objective: 19-02 Topic: Estate distribution―Type of legacy Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Research [QUESTION] REFER TO: 19-01 15. The gift to James is a A) General legacy. B) Specific legacy. C) Demonstrative legacy. D) Residual legacy. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

E) Devise. Answer: C Learning Objective: 19-02 Topic: Estate distribution―Type of legacy Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Research [QUESTION] REFER TO: 19-01 16. The decedent resided in a state that does not treat a demonstrative legacy shortfall as a general legacy. How much would James have received from the estate? A) $50,000. B) $40,000. C) $25,000. D) $45,000. E) $30,000. Answer: B Learning Objective: 19-02 Topic: Estate distribution―Calculate amount Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: Balance in Harbor Savings account of $40,000 is the limit for son James to receive, since the $50,000 bequest stated specifically he was to be paid from that account only and the state does not treat the shortfall as a general legacy. [QUESTION] REFER TO: 19-01 17. The decedent resided in a state that does not treat a demonstrative legacy shortfall as a general legacy. How much would Lila have received from the estate? A) $ 0. B) $40,000. C) $35,000. D) $45,000. E) $30,000. Answer: D Learning Objective: 19-02 Topic: Estate distribution―Calculate amount Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: Son James is limited to $40,000 in the Harbor Savings account because the state does not treat the shortfall as a general legacy. Brother David is to receive $25,000 from any source, Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

for a total of $65,000 of the $110,000 available after final expenses, leaving $45,000 for daughter Lila. 18. The decedent resided in a state that treats a demonstrative legacy shortfall as a general legacy. How much would James have received from the estate? A) $50,000. B) $40,000. C) $25,000. D) $45,000. E) $30,000. Answer: A Learning Objective: 19-02 Topic: Estate distribution―Calculate amount Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: Balance in Harbor Savings account of $40,000 is available for son James to receive, and since the state treats the shortfall of $10,000 as a general legacy, the remainder of the $50,000 bequest is treated as a general legacy. James thus receives $50,000. [QUESTION] REFER TO: 19-01 19. The decedent resided in a state that treats a demonstrative legacy shortfall as a general legacy. How much would Lila have received from the estate? A) $ 0. B) $40,000. C) $35,000. D) $45,000. E) $30,000. Answer: C Learning Objective: 19-02 Topic: Estate distribution―Calculate amount Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: Son James is will receive the $40,000 in the Harbor Savings account and the shortfall of $10,000 will be a general legacy. Thus James will receive $50,000. Brother David is to receive $25,000 from any source, for a total of $75,000 of the $110,000 available after final expenses, leaving $35,000 for daughter Lila. Use the following to answer questions 21 and 22: REFERENCE: 19-02 The provisions of a will currently undergoing probate are: “Two thousand shares of Dorn stock to my son; $30,000 in cash from my Atlas Savings Bank account to my brother; $50,000 in cash to my daughter; and any remaining property divided equally between my son and daughter.” Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

[QUESTION] REFER TO: 19-02 20. Assume that, at the time of death, the estate included 1,200 shares of Dorn stock, $60,000 cash in the savings account, and $70,000 in cash from other sources. What would the son have received from the settlement of the estate? A) 1,200 shares of Dorn stock and $35,000 cash. B) 2,000 shares of Dorn stock and $10,000 cash. C) 2,000 shares of Dorn stock and $25,000 cash. D) 1,200 shares of Dorn stock and $10,000 cash. E) 1,200 shares of Dorn stock and $25,000 cash. Answer: E Learning Objective: 19-02 Topic: Estate distribution―Calculate amount Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: Son receives only the 1,200 remaining shares of stock even though 2,000 are referenced in the will. The $130,000 in Cash ($70,000 Cash & $60,000 Savings) – specific bequests (Brother $30,000 + Daughter $50,000) $80,000 = $50,000 residual to be equally divided, therefore the son receives $25,000 of the Cash. [QUESTION] REFER TO: 19-02 21. Assume that the estate included 1,200 shares of Dorn stock, $22,000 cash in the savings account, and $70,000 in cash from other sources. The decedent resided in a state that treats a demonstrative legacy shortfall as a general legacy. .What would the daughter have received from the settlement of the estate? A) $60,000 cash. B) $50,000 cash. C) $55,000 cash. D) $62,000 cash. E) $56,000 cash. Answer: E Learning Objective: 19-02 Topic: Estate distribution―Calculate amount Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: The brother will receive the $22,000 in the savings account and the shortfall of $8,000 will be a general legacy. Thus the brother will receive $30,000. The daughter is to receive $50,000 from any source, for a total of $80,000 of the $92,000 available ($22,000 Cash & $70,000 Savings) , leaving $12,000 to be divided equally to the son and daughter. Therefore, the daughter receives $6,000 + the $50,000 specific bequest to her = $56,000 total in Cash. [QUESTION] 22. Which of the following is not subtracted to arrive at the taxable value of an estate? Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

A) Liabilities. B) Charitable bequests. C) Funeral expenses. D) Estate administration expenses. E) Deduction for property conveyed to children of decedent. Answer: E Learning Objective: 19-03 Topic: Estate and inheritance taxes Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 23. Assume that Bob Smith dies on May 25, 2018. Mr. Smith's assets include the following: ABC Stock costing $30,000 but valued at $40,000; a house costing $280,000 but valued at $620,000; life insurance in the amount of $600,000; and cash from various sources totaling $50,700. Three credit cards in Mr. Smith's name had balances totaling $8,530 on the date of death. The estate paid funeral and final medical expenses in the amount of $50,492. There were no charitable gifts designated by the will, and Mr. Smith was single at the time of his death. What is the amount of the taxable estate? A) $ 901,678. B) $1,251,678. C) $1,268,738. D) $1,310,700. E) $ 651,678. Answer: B Learning Objective: 19-03 Topic: Estate and inheritance taxes Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: ABC Stock at FV $40,000 + House at FV $620,000 + Life Insurance of $600,000 + Cash of 50,700 – Credit Card Liability of $8,530 – Funeral/Medical Expenses of $50,492 = $1,251,678 Estate Valuation [QUESTION] 24. What is the amount of the personal exemption on an estate income tax return? A) $ 0. B) $100. C) $300. D) $500. E) $600. Answer: E Learning Objective: 19-03 Topic: Estate and inheritance taxes Difficulty: 1 Easy Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 25. Which of the following is normally viewed as an adjustment to the principal of an estate? A) Ordinary repair expenses. B) Insurance expenses. C) Utility expenses. D) Major repairs to rental property. E) Property taxes. Answer: D Learning Objective: 19-04 Topic: Estate income and principal Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 26. Which of the following is not normally viewed as an adjustment to the principal of an estate? A) Dividends declared prior to death. B) Investment commissions and other costs. C) Funeral expenses. D) Insurance expenses. E) Debts incurred prior to death. Answer: D Learning Objective: 19-04 Topic: Estate income and principal Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 27. What are the goals of probate laws? (1) Gather and preserve all of the decedent's property (2) Carry out an orderly and fair settlement of all debts (3) Discover and follow the decedent's intent for the remaining property A) 1 only. B) 2 only. C) 3 only. D) 1 and 2. E) 1, 2, and 3. Answer: E Learning Objective: 19-01 Topic: Estate administration―General rules Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Research [QUESTION] 28. After expenses of administering an estate, which claims would be next in a typical order of priority to establish which creditors will get paid? (1) Funeral expenses (2) Medical expenses of the last illness (3) Debts and taxes given preference under laws (4) Credit card debts. A) 1 and 2. B) 2 and 3. C) 3 and 4. D) 1 and 4. E) 2 and 4. Answer: A Learning Objective: 19-01 Topic: Estate administration―Order of priority Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 29. A gift that is specified in a will as “I leave my collection of baseball cards to my son” is a A) General legacy. B) Specific legacy. C) Demonstrative legacy. D) Residual legacy. E) Devise. Answer: B Learning Objective: 19-02 Topic: Estate distribution―Type of legacy Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Research [QUESTION] 30. A gift that is specified in a will as “I leave $5,000 in cash from my checking account to my daughter” is a A) General legacy. B) Specific legacy. C) Demonstrative legacy. D) Residual legacy. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

E) Devise. Answer: C Learning Objective: 19-02 Topic: Estate distribution―Type of legacy Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Research [QUESTION] 31. A gift that is specified in a will as “I leave $5,000 in cash to my son” is a A) General legacy. B) Specific legacy. C) Demonstrative legacy. D) Residual legacy. E) Devise. Answer: A Learning Objective: 19-02 Topic: Estate distribution―Type of legacy Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Research [QUESTION] 32. A gift of any remaining estate property is a A) General legacy. B) Specific legacy. C) Demonstrative legacy. D) Residual legacy. E) Devise. Answer: D Learning Objective: 19-02 Topic: Estate distribution―Type of legacy Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Research Use the following to answer questions 33 – 35: REFERENCE: 19-03 The provisions of a will currently undergoing probate are: “One thousand shares of Wal-Mart Stores stock to my son; $10,000 in cash from my Astoria Savings Bank account to my brother; $5,000 in cash to my daughter; and any remaining property divided equally between my son and daughter.” [QUESTION] Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

REFER TO: 19-03 33. Assuming at the time of death the estate included 1,400 shares of Wal-Mart Stores stock and $25,000 cash in the savings account, what would the son have received from the settlement of the estate? A) 1,000 shares of Wal-Mart stock and $15,000 cash B) 1,000 shares of Wal-Mart stock and $0 cash C) 1,000 shares of Wal-Mart stock and $10,000 cash D) 1,200 shares of Wal-Mart stock and $5,000 cash E) 1,400 shares of Wal-Mart stock and $5,000 cash Answer: D Learning Objective: 19-02 Topic: Estate distribution―Calculate amount Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: Son receives only the 1,000 shares of stock with the other 400 shares to the residual from which he will receive half for a total of 1,200 shares. The $25,000 in Savings Cash – specific bequests (Brother $10,000 + Daughter $5,000) $15,000 = $10,000 residual to be equally divided, therefore the son receives $5,000 of the Cash. [QUESTION] REFER TO: 19-03 34. What is the remaining principal to be divided equally between the son and the daughter? A) $10,000 cash B) $15,000 cash C) 400 shares of Wal-Mart stock and $10,000 cash D) 400 shares of Wal-Mart stock and $15,000 cash E) 1,000 shares of Wal-Mart stock and $5,000 cash Answer: C Learning Objective: 19-02 Topic: Estate distribution―Calculate amount Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: Son receives only the 1,000 shares of stock with the other 400 shares to the residual. The $25,000 in Savings Cash – specific bequests (Brother $10,000 + Daughter $5,000) $15,000 = $10,000 residual to be equally divided. [QUESTION] REFER TO: 19-03 35..Assuming at the time of death the estate included 1,000 shares of Wal-Mart Stores stock and $6,000 cash in the savings account, what would the brother have received from the settlement of the estate? A) $ 0. B) $ 5,000. C) $ 6,000. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

D) $10,000. E) $11,000. Answer: C Learning Objective: 19-02 Topic: Estate distribution―Calculate amount Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: The balance in the savings account of $6,000 is the limit for Brother to receive, since the $10,000 bequest stated specifically he was to be paid from the savings account only. [QUESTION] 36. The estate of Bobbi Jones has the following provisions: total value of estate assets $2,000,000, amount specified to convey to a spouse $1,000,000, amount specified to convey to children $200,000, total debts 400,000, administrative expenses $50,000, and funeral expenses of $30,000. What is the value of the taxable estate? A) $ 320,000. B) $ 520,000. C) $ 550,000. D) $1,480,000. E) $1,520,000. Answer: B Learning Objective: 19-03 Topic: Estate and inheritance taxes Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: Total Estate Value $2,000,000 – Spousal Portion $1,000,000 – Debts $400,000 – Funeral Expense $30,000 – Administration Expense $50,000 = $520,000 Taxable Estate [QUESTION] 37. The party to receive a distribution of principal from an estate is legally called a(n): A) Principal grantee. B) Corpus benefitor. C) Estate receiver. D) Remainderman. E) Estate distributee. Answer: D Learning Objective: 19-04 Topic: Legal terminology Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Research Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

[QUESTION] 38. Jim Bowie died on April 1, 2018. The estate has the following gross asset valuation information: Date of Sale Estate Asset April 1, 2018 October 1, 2018 June 1, 2018 Coin collection $30,000 $28,000 $25,000 Google common stock $50,000 $48,000 $56,000 The estate tax will be calculated based on: A) $73,000. B) $75,000. C) $76,000. D) $80,000. E) $89,000. Answer: D Learning Objective: 19-03 Topic: Estate and inheritance taxes Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Feedback: Coin Collection $30,000 + Stock $50,000 = $80,000 Fair Value for Estate Tax at Time of Death [QUESTION] 39. An executor will normally carry out all the following tasks except: A) Distribute property to beneficiaries. B) Settle claims against the decedent. C) Inventory property existing at the date of death. D) Prepare estate tax returns. E) Account to the probate court. Answer: D Learning Objective: 19-01 Topic: Estate administration―Duties Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Research [QUESTION] 40. When there are not enough assets in the estate to satisfy all legacies in the will, the distribution schedule goes through a process of: A) Ademption. B) Amendment. C) Abatement. D) Accretion. E) Aggregation. Answer: C Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective: 19-02 Topic: Estate distribution―Abatement process Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Research [QUESTION] 41. Which type of trust requires that income generated from its assets be recognized, for federal income tax purposes, by the grantor during his or her lifetime, and reported in his or her individual income tax return? A) Inter vivos trust. B) Grantor trust. C) Revocable living trust. D) Family trust. E) Irrevocable life insurance trust. Answer: C Learning Objective: 19-06 Topic: Trusts―Type of trust Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 42. Which of the following is not a type of trust used for estate planning? A) Minor’s Section 2503(c) trust. B) Alimony trust. C) Credit shelter trust. D) Qualified terminable interest property trust. E) Grantor retained annuity trust. Answer: B Learning Objective: 19-06 Topic: Trusts―Type of trust Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Research

Essay: [QUESTION] 43. For each of the following situations, select the best answer concerning adjustments to principal and income of an estate. Assume that the will does not specify whether the item is to be classified as principal or income. (A) Adjustment to the principal of the estate. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

(B) Adjustment to the income of the estate. (C) Allocated between the principal and income of the estate in some fair manner. (D) Allocated between the principal and income of the estate determined by existence at date of death. ___ 1. Homestead allowance ___ 2. Insurance expenses ___ 3. Executor's fee ___ 4. Life insurance proceeds when estate is beneficiary ___ 5. Investment commissions ___ 6. Debts incurred prior to death ___ 7. Water and other utility expenses ___ 8. Liquidating dividends ___ 9. Dividend income ___ 10. Funeral expenses ___ 11. Extraordinary repairs on income-producing property ___ 12. Attorney fees ___ 13. Property taxes ___ 14. Gains and losses on the sale of securities ___ 15. Interest income ___ 16. Court costs ___ 17. Ordinary repairs on income-producing property ___ 18. Accounting fees Answer: (1) A; (2) B; (3) C; (4) A; (5) A; (6) A; (7) B; (8) A; (9) D; (10) A; (11) A; (12) C; (13) B; (14) A; (15) D; (16) C; (17) B; (18) C Learning Objective: 19-04 Topic: Estate income and principal Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] 44. What is meant by estate accounting? Answer: Estate accounting refers to the recording and reporting of financial events from the time of a person's death until the ultimate distribution of all property of the estate. Learning Objective: 19-01 Topic: Estate administration―General rules Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 45. What is meant by “an individual dies intestate”? Answer: If an individual dies intestate then that person did not create a legal will prior to death. Therefore, there is no executor or executrix and the court will appoint an administrator/administratrix to attend to fiduciary estate responsibilities. Learning Objective: 19-01 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Topic: Legal terminology Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Research [QUESTION] 46. In settling an estate, what is the meaning of the term devise? Answer: A devise is a gift of real property such as land or a building. Learning Objective: 19-02 Topic: Legal terminology Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Research [QUESTION] 47. What is the purpose of the Uniform Probate Code? Answer: The purpose of the Uniform Probate Code is to encourage consistent laws governing wills and estates among the states. Learning Objective: 19-01 Topic: Estate administration―General rules Difficulty: 1 Easy Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Research [QUESTION] 48. How may real property be treated in identifying estate property subject to probate? Answer: In some states, real property is conveyed directly to the beneficiary or co-owner at the time of death and would not be included in the inventory of the estate. Learning Objective: 19-01 Topic: Estate administration―Type of property Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Research [QUESTION] 49. What choices does an executor of an estate have in determining the values of assets included in the estate for tax purposes? Answer: The fair value of property must be determined at the date of death or on the alternative valuation date (six months after death or the date of disposition after death, whichever is earlier), at the option of the executor. Learning Objective: 19-03 Topic: Estate and inheritance taxes Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 50. What is a remainderman of trust property? Answer: A remainderman of trust property is a person who receives the principal from a trust after someone else has received income from the trust for a given period of time. Learning Objective: 19-06 Topic: Legal terminology Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Research [QUESTION] 51. What are the three goals of probate laws? Answer: Probate laws generally are designed to: (i) gather, preserve, and account for all of the decedent's property; (ii) carry out an orderly and fair settlement of all debts; and (iii) discover the decedent's intent for the remaining property held at death and then follow those wishes. Learning Objective: 19-01 Topic: Estate administration―General rules Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Research [QUESTION] 52. What is the difference between an executor and an administrator? Answer: An executor is a specific person named in the will to fulfill the fiduciary responsibilities of satisfying all applicable laws and making certain that the decedent's wishes are achieved, if possible. If the will does not designate an executor, or the named executor is unwilling or unable to serve, an administrator is appointed by the court to fulfill the same responsibilities. Learning Objective: 19-01 Topic: Estate administration―Duties Difficulty: 2 Medium Blooms: Understand AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Research [QUESTION] 53. What are the four levels of claims in the order of priority of the Uniform Probate Code? Answer: The order of priority is as follows: (1) expenses of administering the estate; (ii) funeral expenses and medical expenses of the last illness; (iii) debts and taxes given preference under federal and state laws; and (iv) all other claims. Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective: 19-01 Topic: Estate administration―Order of priority Difficulty: 2 Medium Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Measurement [QUESTION] 54. In settling an estate, what is the meaning of the term legacy? Answer: A legacy, also called a bequest, is a gift of personal property such as stocks or furniture. Learning Objective: 19-02 Topic: Legal terminology Difficulty: 1 Easy Blooms: Remember AACSB: Reflective Thinking AICPA: BB Legal AICPA: FN Research [QUESTION] 55. The estate of Kent Talbert reported the following information:

Required: Prepare a schedule to show the amount of the taxable estate. Answer:

Learning Objective: 19-03 Topic: Estate and inheritance taxes Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA: FN Measurement

Use the following to answer questions 56 and 57: REFERENCE: 19-04 During the most recent year, an estate generated income of $26,000:

The interest income was conveyed immediately to the beneficiary stated in the decedent's will. Dividends of $1,560 were given to the decedent's church. [QUESTION] REFER TO: 19-04 56. Prepare a schedule to show the amount of taxable income. Answer:

Rental income Interest income Dividend income Total income Exemption Gift to charity Distributed to beneficiary Taxable income

$ 11,700 7,800 6,500 $ 26,000 ( 600) ( 1,560) ( 7,800) $ 16,040

Learning Objective: 19-03 Topic: Estate and inheritance taxes Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 19-04 57. Prepare a schedule to show the amount of federal income tax that must be paid. Answer: Income tax: 15% on the first $2,550 $ 382.50 25% on the next $3,400 (subtotal $5,950) 850.00 28% on the next $3,100 (subtotal $9,050) 868.00 33% on the next $3,350 (subtotal $12,400) 1,105.50 39.6% on the next $3,640 (total $16,040) 1,441.44 Federal income tax $4,647.44 Learning Objective: 19-03 Topic: Estate and inheritance taxes Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] 58. The executor of the estate of Yelbert Toper recorded the following information: Assets discovered at death (at fair value):

Cash Life insurance receivable Investments in common stock of companies: Warner Brothers Starbucks General Motors Dell Technologies Rental property Cash outflows: Funeral expenses Executor fees Ordinary repairs of rental property Debts Distribution of income to income beneficiary Distribution of cash to charitable remainder trust Cash inflows: Sale of Starbucks stock Rental income ($5,200 earned prior to death) Dividend income ($2,600 declared prior to death) Life insurance proceeds

$780,000 260,000 14,300 35,100 44,200 41,600 380,000 $ 27,300 15,600 2,600 105,300 5,200 390,000 $ 39,000 14,300 15,600 260,000

Debts of $22,100 still remain to be paid. The shares of Dell Technologies stock were conveyed to the appropriate beneficiary. Executor fees are allocated based on total charges for principal and for income. Required: Prepare a charge and discharge statement for this estate. Answer: ESTATE OF YELBERT TOPER Charge and Discharge Statement As To Principal I charge myself with: Assets per original inventory Assets subsequently discovered: Rental income receivable Dividends receivable Gain on sale of Starbucks stock Total charges

$1,555,200 $ 5,200 2,600

7,800 3,900 $1,566,900

Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

I credit myself with: Debts of decedent Funeral expenses Executor fees (15,600-217) Legacies distributed: Charitable remainder trust Transfer of Dell Technologies stock Estate principal

$105,300 27,300 15,383 390,000 41,600

579,583 $ 987,317

Estate principal: Cash [780,000 - 83,200 debts paid - 42,683 390,000 + 5,200 + 2,600] Life insurance proceeds Starbucks proceeds Investments [14,300 + 44,200] Rental property Less debts remaining unpaid

$ 271,917 260,000 39,000 58,500 380,000 ( 22,100)

Estate principal

$ 987,317 As to Income

I charge myself with: Rental income Dividend income Total charges I credit myself with: Repair expenses Executor fees Legacy: Income to beneficiary Total credits Balance as to income Balance as to income: Cash

$ 9,100 13,000 $ 22,100 $ 2,600 217 5,200 8,017 $ 14,083

$ 14,083

Learning Objective: 19-05 Topic: Reporting―Charge and Discharge Statement Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Use the following to answer questions 59 – 69: REFERENCE: 19-05 The executor of the Estate of Kate Tweed discovered the following assets (at fair value):

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The will of Kate Tweed had the following provisions: • $195,000 in cash went to Victor Vickery. • All shares of PepsiCo went to Duchess Doyle. • The residence went to Louis Tweed. • All other estate assets were to be liquidated with the resulting cash going to the Sacred Church of Liberty, Missouri. [QUESTION] REFER TO: 19-05 59. Prepare the journal entry to record the property of the estate. Answer: Cash - Principal $104,000 Interest Receivable 7,800 Life Insurance – Payable to Estate 390,000 Residence 260,000 Investment in Pepsi Cola 65,000 Investment in Apple 143,000 Investment in Kenyan Lake 182,000 Estate Principal Learning Objective: 19-04 Topic: Estate recordkeeping Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

$1,151,800

[QUESTION] REFER TO: 19-05 60. For the Estate of Kate Tweed, a total amount of interest of $9,100 was collected. Prepare the journal entry to record the collection. Answer: Cash - Principal $7,800 Cash - Income 1,300 Interest Receivable $7,800 Estate Income 1,300 Learning Objective: 19-04 Topic: Estate recordkeeping Topic: Estate income and principal Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 19-05 61. Funeral expenses of $26,000 were paid. Prepare the journal entry to record the transaction. Answer: Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Funeral and Administrative Expenses Cash - Principal

$26,000 $26,000

Learning Objective: 19-04 Topic: Estate recordkeeping Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 19-05 62. Debts of $52,000 were discovered. Prepare the journal entry to record the transaction. Answer: No entry is required, since debts are only recorded by an estate when they are paid. Learning Objective: 19-04 Topic: Estate recordkeeping Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 19-05 63. Assuming an additional savings account of $15,600 was located by the executor, prepare the journal entry required to record the transaction. Answer: Cash - Principal $15,600 Assets Subsequently Discovered $15,600 Learning Objective: 19-04 Topic: Estate recordkeeping Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 19-05 64. Title to the residence was conveyed to Louis Tweed. Prepare the journal entry to record the transaction. Answer: Legacy – Louis Tweed $260,000 Residence $260,000 Learning Objective: 19-04 Topic: Estate recordkeeping Difficulty: 2 Medium Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 19-05 65. The life insurance policy was collected. Prepare the journal entry to record the transaction. Answer: Cash - Principal $390,000 Life Insurance - Payable to Estate $390,000 Learning Objective: 19-04 Topic: Estate recordkeeping Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 19-05 66. Additional debts of $78,000 were discovered. Debts totaling $130,000 were paid. Prepare the journal entry to record the transaction. Answer: Debts of the Decedent $130,000 Cash - Principal $130,000 Learning Objective: 19-04 Topic: Estate recordkeeping Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 19-05 67. Cash of $195,000 was conveyed to the appropriate beneficiary. Prepare the journal entry to record the transaction. Answer: Legacy – Victor Vickery 195,000 Cash - Principal 195,000 Learning Objective: 19-04 Topic: Estate recordkeeping Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

REFER TO: 19-05 68. The shares of Apple were sold for $145,600. Prepare the journal entry to record the transaction. Answer: Cash - Principal $145,600 Investment in Apple $143,000 Gain on Sale of Investment 2,600 Learning Objective: 19-04 Topic: Estate recordkeeping Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 19-05 69. Administrative expenses of $13,000 were paid. Prepare the journal entry to record the transaction. Answer: Funeral and Administrative Expenses $13,000 Cash - Principal $13,000 Learning Objective: 19-04 Topic: Estate recordkeeping Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] 70. An inter vivos trust was created by Isaac Posney. Isaac owned a large department store in Juggins, Utah. Adjacent to the store, Isaac also owned a tract of land that was used as an extra parking lot when the store was having a sale or during the Christmas season. Isaac expected the land to appreciate in value and eventually be sold for an office complex or additional stores. Isaac placed the land into a charitable lead trust, which would hold the land for ten years until Isaac's son would turn 21. At that time, title would be transferred to the son. The store will pay rent to use the land during the interim. The income generated each year from this usage will be given to a local church. The land was currently valued at $416,000. During the first year of this arrangement, the trustee recorded the following cash transactions: Cash inflow: Rental income Cash outflows: Insurance Property taxes Paving (considered an extraordinary repair) Maintenance Distribution to income beneficiary

$78,000 $ 5,200 7,800 5,600 10,400 39,000

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Required: Prepare all required journal entries for this trust fund including the entry to create the trust. Answer: Land $416,000 Trust – Principal $416,000 Cash – Income Trust – Income

78,000

Insurance Expense – Income Cash – Income

5,200

Property Taxes Expense – Income Cash – Income

7,800

Land Improvements Cash – Income

5,600

Due from Trust – Principal Due to Trust – Income

5,600

Maintenance Expense – Income Cash – Income

10,400

Equity in Income: Beneficiary Cash – Income

39,000

78,000

5,200

7,800

5,600

5,600

10,400

39,000

Learning Objective: 19-06 Topic: Trusts―Accounting for activities Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] 71. During the current year, an estate generates the following income amounts: Rental income $10,000, Interest income 4,000, Dividend income 6,000. The rental income is conveyed immediately to the beneficiary stated in the decedent’s will. Dividends of $2,000 are donated to the decedent’s church. What amount of federal income tax must be paid by the estate? Answer: Rental income $ 10,000 Interest income 4,000 Dividend income 6,000 Total income $20,000 Estate exemption ( 600) Gift to charity ( 2,000) Distributed to beneficiary ( 10,000) Taxable income $ 7,400 Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Income Tax: 15% on the first $2,550 25% on the next $3,400 (subtotal $5,950) 28% on the next $1,450 (subtotal $7,400) Total Federal income tax

$ 382.50 850.00 406.00 $1,638.50

Learning Objective: 19-03 Topic: Estate and inheritance taxes Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement Use the following to answer questions 72 – 82: REFERENCE: 19-06 The executor of Danny Mack’s estate has listed the following properties at fair value: Cash $200,000, Life Insurance Receivable $500,000, Investment in Stocks and Bonds $50,000, Rental Property $100,000, and Personal Property $80,000. Additionally, the executor found $100,000 of various debts incurred before the decedent’s death. The cost of Danny Mack’s funeral was $20,000. [QUESTION] REFER TO: 19-06 72. Prepare the journal entry to record the property of the estate. Answer: Cash—Principal $200,000 Life Insurance Receivable 500,000 Investment in Stocks and Bonds 50,000 Rental Property 100,000 Personal Property 80,000 Estate Principal Learning Objective: 19-04 Topic: Estate recordkeeping Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

$930,000

[QUESTION] REFER TO: 19-06 73. Prepare the journal entry for claims of $100,000 made against the estate for various debts incurred before the decedent’s death, and $20,000 for funeral expense bills. Answer: No entry needed until liabilities are paid. Learning Objective: 19-04 Topic: Estate recordkeeping Difficulty: 2 Medium Blooms: Apply Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 19-06 74. Prepare the journal entry to record interest of $5,000 that was earned on the bonds of the estate. Of this amount, $2,000 had been earned prior to death. Answer: Cash—Principal $ 2,000 Cash—Income 3,000 Assets Subsequently Discovered (Interest Rec.) $ 2,000 Estate Income 3,000 Learning Objective: 19-04 Topic: Estate recordkeeping Topic: Estate income and principal Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 19-06 75. Prepare the journal entry to record ordinary repairs to the rental property of $5,000. Answer: Expenses—Income $5,000 Cash—Income $5,000 (Ordinary repair expenses are made to rental property and are generally charged to income rather than principal.) Learning Objective: 19-04 Topic: Estate recordkeeping Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 19-06 76. Prepare the journal entry to record the payment of the estate’s liabilities for debts incurred prior to the decedent’s death. Answer: Debts of the Decedent $100,000 Cash—Principal $100,000 (To pay liabilities and obligations of the decedent.) Learning Objective: 19-04 Topic: Estate recordkeeping Difficulty: 2 Medium Blooms: Apply Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 19-06 77. Prepare the journal entry to record the sales of the stocks and bonds for $120,000 Answer: Cash—Principal $120,000 Investments in Stocks and Bonds $50,000 Gain on Sale of Stocks and Bonds 70,000 (To record sale of stocks and to reflect gain on such sale with the additional proceeds becoming part of the estate’s principal.) Learning Objective: 19-04 Topic: Estate recordkeeping Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 19-06 78. Prepare the journal entry to record the collection of rental income of $10,000. $1,000 had been earned prior to the decedent’s death. Answer: Cash—Principal $1,000 Cash—Income 9,000 Assets Subsequently Discovered (Rent Rec.) $1,000 Estate Income 9,000 (To record the receipt of rental income, the $1,000 earned prior to the decedent's death was not included in original listing of estate assets and is therefore an ‘asset subsequently discovered’.) Learning Objective: 19-04 Topic: Estate recordkeeping Topic: Estate income and principal Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 19-06 79. Prepare the journal entry to record the distribution of $4,000 to Anna Lee, an income beneficiary. Answer: Legacy—Anna Lee $4,000 Cash—Income $4,000 Learning Objective: 19-04 Topic: Estate recordkeeping Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 19-06 80. Prepare the journal entry to record the collection of the life insurance policy. Answer: Cash—Principal $500,000 Life Insurance Receivable $500,000 Learning Objective: 19-04 Topic: Estate recordkeeping Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement [QUESTION] REFER TO: 19-06 81. Prepare the journal entry to record payment of $20,000 in funeral expenses. Answer: Funeral Expenses $20,000 Cash—Principal Learning Objective: 19-04 Topic: Estate recordkeeping Difficulty: 2 Medium Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

$20,000

[QUESTION] REFER TO: 19-06 82. Prepare a Charge and Discharge Statement for the estate. Answer: ESTATE OF DANNY MACK Charge and Discharge Statement As to Principal I charge myself with: Assets per original inventory Assets subsequently discovered: Interest receivable Rental income receivable Gain on sale of stocks Total charges

$ 930,000 $ 2,000 1,000

3,000 70,000 $1,003,000

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I credit myself with: Debts of decedent Funeral expenses Total credits Estate principal Estate principal: Cash Rental property Personal property Estate principal As to Income I charge myself with: Interest income Rental income I credit myself with: Repair expenses Legacy: Anna Lee Balance as to Income Balance as to income: Cash

$ 100,000 20,000 120,000 $ 883,000

$703,000 100,000 80,000 $ 883,000

$ 3,000 9,000

$

$ 12,000

5,000 4,000 $

9,000 3,000

$

3,000

Learning Objective: 19-05 Topic: Reporting―Charge and Discharge Statement Difficulty: 3 Hard Blooms: Apply AACSB: Knowledge Application AICPA: BB Legal AICPA: FN Measurement

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