Advanced Accounting, 8e Debra Jeter, Paul Chaney Test Bank by QuentinAxel

Package Title: Test Bank Questions Course Title: Advanced Accounting, 8e Chapter: Introduction to Business Combinations Chapter Number: 1

Question Type: Multiple Choice

1. A(n) ______ occurs when the operations of two or more companies are brought under common control. a) tender offer b) vertical combination c) operating synergy d) business combination Answer: d Question Title: Test Bank (Multiple Choice) Question 01 Difficulty: Easy Learning Objective: 1 Describe historical trends in types of business combinations. Section Reference: 1.1 2. The objectives of FASB 141R (Business Combinations) and FASB 160 (Noncontrolling Interests in Consolidated Financial Statements) are as follows: a) to improve the relevance, comparability, and transparency of financial information related to business combinations. b) to eliminate the amortization of Goodwill. c) to facilitate the convergence project of the FASB and the International Accounting Standards Board. d) to improve the relevance, comparability, and transparency of financial information related to business combinations and to eliminate the amortization of Goodwill. Answer: d Question Title: Test Bank (Multiple Choice) Question 02 Difficulty: Medium Learning Objective: 9 Discuss the Statements of Financial Accounting Concepts (SFAC). Section Reference: 1.1

3. A business combination in which the boards of directors of the potential combining companies negotiate mutually agreeable terms is a(n): a) agreeable combination. b) friendly combination. c) hostile combination. d) unfriendly combination. Answer: b

Question Title: Test Bank (Multiple Choice) Question 03 Difficulty: Easy Learning Objective: 4 Identify defensive tactics used to attempt to block business combinations. Section Reference: 1.2

4. The defense tactic that involves purchasing shares held by the would-be acquiring company at a price substantially in excess of their fair value is called: a) poison pill. b) pac-man defense. c) greenmail. d) white knight. Answer: c Question Title: Test Bank (Multiple Choice) Question 04 Difficulty: Medium Learning Objective: 4 Identify defensive tactics used to attempt to block business combinations. Section Reference: 1.2 5. Which of the following is NOT the benefit of horizontal integration? a) expansion in size. b) reduction in competition. c) creating a monopoly in the market space. d) regulatory issues. Answer: d Question Title: Test Bank (Multiple Choice) Question 05 Difficulty: Easy Learning Objective: 2 Identify the major reasons firms combine. Section Reference: 1.3 6. The third period of business combinations started after World War II and is called: a) horizontal integration. b) merger mania. c) operating integration. d) vertical integration. Answer: b Question Title: Test Bank (Multiple Choice) Question 06 Difficulty: Easy Learning Objective: 1 Describe historical trends in types of business combinations. Section Reference: 1.4 7. During the period between 1880-1904, huge trusts were created. This period of time is referred to as

a) horizontal integration b) vertical integration c) merger mania d) the conglomerate era Answer: a Question Title: Test Bank (Multiple Choice) Question 7 Difficulty: Medium Learning Objective: 1 Describe historical trends in types of business combinations. Section Reference: 1.4 8. Which of the following situations best describes a business combination to be accounted for as a statutory merger? a) Both companies in a combination continue to operate as separate, but related, legal entities. b) Only one of the combining companies survives and the other loses its separate identity. c) Two companies combine to form a new third company, and the original two companies are dissolved. d) One company transfers assets to another company it has created. Answer: b Question Title: Test Bank (Multiple Choice) Question 8 Difficulty: Easy Learning Objective: 5 Distinguish between an asset and a stock acquisition. Section Reference: 1.5

9. A firm can use which method of financing for an acquisition structured as either an asset or stock acquisition? a) cash b) issuing debt c) issuing stock d) all of these Answer: d Question Title: Test Bank (Multiple Choice) Question 9 Difficulty: Easy Learning Objective: 5 Distinguish between an asset and a stock acquisition. Section Reference: 1.5

10. When the stock acquisition occurs, the acquiring company: a) closes its book. b) transfers the underlying assets and liabilities onto its own books. c) debits an account “Investment in Subsidiary”. d) acquires the total assets.

Answer: c Question Title: Test Bank (Multiple Choice) Question 10 Difficulty: Easy Learning Objective: 5 Distinguish between an asset and a stock acquisition. Section Reference: 1.5

11. The excess of the amount offered in an acquisition over the prior stock price of the acquired firm is the: a) bonus. b) goodwill. c) implied offering price. d) takeover premium. Answer: d Question Title: Test Bank (Multiple Choice) Question 11 Difficulty: Easy Learning Objective: 5 Distinguish between an asset and a stock acquisition. Section Reference: 1.6

12. After the deal, the acquiring firm should do all of the following to create a culture of success except: a) minimize client retention. b) create interoffice functional teams early to address cultural integration. c) be realistic with timelines, due dates, budgets. d) make a detailed post-merger integration plan. Answer: a Question Title: Test Bank (Multiple Choice) Question 12 Difficulty: Medium Learning Objective: 3 Identify the factors that managers should consider in exercising due diligence in business combinations. Section Reference: 1.7 13. The difference between normal earnings and expected future earnings is: a) average earnings. b) excess earnings. c) ordinary earnings. d) target earnings. Answer: b Question Title: Test Bank (Multiple Choice) Question 13 Difficulty: Easy

Learning Objective: 6 Indicate the factors used to determine the price and the method of payment for a business combination. Section Reference: 1.8 14. The first step in estimating goodwill in the excess earnings approach is to: a) determine normal earnings. b) identify a normal rate of return for similar firms. c) compute excess earnings. d) estimate expected future earnings.

Answer: b Question Title: Test Bank (Multiple Choice) Question 14 Difficulty: Medium Learning Objective: 7 Calculate an estimate of the value of goodwill to be included in an offering price by discounting expected future excess earnings over some period of years. Section Reference: 1.8

15. When the merger decreases the earning per share of the acquiring institution, the acquisition is called: a) accretive. b) dilutive. c) vertical. d) horizontal. Answer: b Question Title: Test Bank (Multiple Choice) Question 15 Difficulty: Easy Learning Objective: 7 Calculate an estimate of the value of goodwill to be included in an offering price by discounting expected future excess earnings over some period of years. Section Reference: 1.8

16. __________ is defined as the number of shares of the acquiring company to be exchanged for each share of the acquired company. a) implied exchange ratio. b) turnover ratio. c) stock exchange ratio. d) target earnings. Answer: c Question Title: Test Bank (Multiple Choice) Question 16 Difficulty: Easy Learning Objective: 6 Indicate the factors used to determine the price and the method of payment for a business combination.

Section Reference: 1.8 17. The parent company concept of consolidation represents the view that the primary purpose of consolidated financial statements is: a) to provide information relevant to the controlling stockholders. b) to represent the view that the affiliated companies are a separate, identifiable economic entity. c) to emphasis control of the whole by a single management. d) to include only a portion of the subsidiary’s assets, liabilities, revenues, expenses, gains, and losses. Answer: a Question Title: Test Bank (Multiple Choice) Question 17 Difficulty: Medium Learning Objective: 8 Describe the two alternative views of consolidated financial statements: the economic entity and the parent company concepts. Section Reference: 1.9

18. Which of the following statements is correct? a) total elimination is consistent with the parent company concept. b) partial elimination is consistent with the economic unit concept. c) past accounting standards required the total elimination of unrealized intercompany profit in assets acquired from affiliated companies. d) none of these. Answer: c Question Title: Test Bank (Multiple Choice) Question 18 Difficulty: Hard Learning Objective: 8 Describe the two alternative views of consolidated financial statements: the economic entity and the parent company concepts. Section Reference: 1.9

19. Under the economic unit concept, noncontrolling interest in net assets is treated as: a) a liability. b) an asset. c) stockholders' equity. d) an expense. Answer: c Question Title: Test Bank (Multiple Choice) Question 19 Difficulty: Easy Learning Objective: 8 Describe the two alternative views of consolidated financial statements: the economic entity and the parent company concepts. Section Reference: 1.9

20. The parent company concept adjusts subsidiary net asset values for the: a) differences between cost and fair value. b) differences between cost and book value. c) total fair value implied by the price paid by the parent. d) total cost implied by the price paid by the parent. Answer: b Question Title: Test Bank (Multiple Choice) Question 20 Difficulty: Hard Learning Objective: 8 Describe the two alternative views of consolidated financial statements: the economic entity and the parent company concepts. Section Reference: 1.9 21. Which of the following statements is correct? a) The economic unit concept suggests partial elimination of unrealized intercompany profits. b) The parent company concept suggests partial elimination of unrealized intercompany profits. c) The economic unit concept suggests no elimination of unrealized intercompany profits. d) The parent company concept suggests total elimination of unrealized intercompany profits. Answer: b Question Title: Test Bank (Multiple Choice) Question 21 Difficulty: Easy Learning Objective: 8 Describe the two alternative views of consolidated financial statements: the economic entity and the parent company concepts. Section Reference: 1.9

22. When following the parent company concept in the preparation of consolidated financial statements, noncontrolling interest in combined income is considered a(n): a) prorated share of the combined income. b) addition to combined income to arrive at consolidated net income. c) expense deducted from combined income to arrive at consolidated net income. d) deduction from current assets in the balance sheet. Answer: c Question Title: Test Bank (Multiple Choice) Question 22 Difficulty: Medium Learning Objective: 8 Describe the two alternative views of consolidated financial statements: the economic entity and the parent company concepts. Section Reference: 1.9

23. When following the economic unit concept in the preparation of consolidated financial statements, the basis for valuing the noncontrolling interest in net assets is the:

a) book values of subsidiary assets and liabilities. b) fair values of subsidiary assets and liabilities. c) general price level adjusted values of subsidiary assets and liabilities. d) fair values of parent company assets and liabilities. Answer: b Question Title: Test Bank (Multiple Choice) Question 23 Difficulty: Easy Learning Objective: 8 Describe the two alternative views of consolidated financial statements: the economic entity and the parent company concepts. Section Reference: 1.9

24. The view that consolidated financial statements represent those of a single economic entity with several classes of stockholder interest is consistent with the: a) parent company concept. b) current practice concept. c) historical cost company concept. d) economic unit concept. Answer: d Question Title: Test Bank (Multiple Choice) Question 24 Difficulty: Easy Learning Objective: 8 Describe the two alternative views of consolidated financial statements: the economic entity and the parent company concepts. Section Reference: 1.9

25. The view that the noncontrolling interest in income reflects the noncontrolling stockholders' allocated share of consolidated income is consistent with the: a) economic unit concept. b) parent company concept. c) current practice concept. d) historical cost company concept. Answer: a Question Title: Test Bank (Multiple Choice) Question 25 Difficulty: Easy Learning Objective: 8 Describe the two alternative views of consolidated financial statements: the economic entity and the parent company concepts. Section Reference: 1.9

26. The view that only the parent company's share of the unrealized intercompany profit recognized by the selling affiliate that remains in assets should be eliminated in the preparation of consolidated financial statements is consistent with the: a) economic unit concept. b) current practice concept. c) parent company concept. d) historical cost company concept. Answer: c Question Title: Test Bank (Multiple Choice) Question 26 Difficulty: Medium Learning Objective: 8 Describe the two alternative views of consolidated financial statements: the economic entity and the parent company concepts. Section Reference: 1.9 27. Which of the following is not a component of other comprehensive income under GAAP? a) earnings. b) gains and losses that bypass earnings. c) impairment losses. d) accumulated other comprehensive income. Answer: d Question Title: Test Bank (Multiple Choice) Question 27 Difficulty: Easy Learning Objective: 9 Discuss the Statements of Financial Accounting Concepts (SFAC). Section Reference: 1.10 28. Many of FASB’s recent pronouncements indicate a shift away from historical cost accounting toward: a) an elevated status for the Statements of Financial Accounting Concepts. b) convergence of standards. c) fair value accounting. d) representationally faithful reporting. Answer: c Question Title: Test Bank (Multiple Choice) Question 28 Difficulty: Medium Learning Objective: 9 Discuss the Statements of Financial Accounting Concepts (SFAC). Section Reference: 1.10

29. The impairment standard as it relates to goodwill is an example of a: a) consumption of benefit approach. b) loss or lack of benefit approach. c) component of other comprehensive income.

d) direct matching of expenses to revenues. Answer: b Question Title: Test Bank (Multiple Choice) Question 29 Difficulty: Easy Learning Objective: 9 Discuss the Statements of Financial Accounting Concepts (SFAC). Section Reference: 1.11

Question Type: Essay

30. Estimating the value of goodwill to be included in an offering price can be done under several alternative methods. The excess earnings approach is frequently used. Identify the steps used in this approach to estimate goodwill. Answer: The excess earnings approach to estimating goodwill includes the following steps: (a) Identify a normal rate of return for firms similar to the company being targeted, (b) Apply the identified rate of return of the level of identifiable assets (or net assets) of the target to approximate what would be normal earnings in this industry, (c) Estimate the expected future earnings of the target, (d) Subtract the normal earnings from the expected target earnings to compute “excess earnings”, and (e) Assume an appropriate time period and a discount rate to compute the discounted value of the excess earnings − the estimated goodwill. Question Title: Test Bank (Essay) Question 30 Difficulty: Medium Learning Objective: 7 Calculate an estimate of the value of goodwill to be included in an offering price by discounting expected future excess earnings over some period of years. Section Reference: 1.8

31. The two alternative views of consolidated financial statements are the parent company concept and the economic entity concept. Briefly explain the differences between the concepts. Answer: Under the parent company concept, the consolidated financial statements reflect the stockholders’ interests in the parent, plus their undivided interests in the net assets of the parent's subsidiaries. The focus is on the interests of the parent's shareholders. Under the economic entity concept, control of the whole by a single management is emphasized. With this concept, consolidated financial statements are intended to provide information about a group of legal entities − a parent company and its subsidiaries − operating as a single unit. Question Title: Test Bank (Essay) Question 31 Difficulty: Easy Learning Objective: 8 Describe the two alternative views of consolidated financial statements: the economic entity and the parent company concepts. Section Reference: 1.9

Question Type: Problem

32. Hopkins Company is considering the acquisition of Richfield, Inc. To assess the amount it might be willing to pay, Hopkins makes the following computations and assumptions. A. Richfield, Inc. has identifiable assets with a total fair value of $6,000,000 and liabilities of $3,700,000. The assets include office equipment with a fair value approximating book value, buildings with a fair value 25% higher than book value, and land with a fair value 50% higher than book value. The remaining lives of the assets are deemed to be approximately equal to those used by Richfield, Inc. B. Richfield, Inc.'s pretax incomes for the years 2020 through 2022 were $470,000, $570,000, and $370,000, respectively. Hopkins believes that an average of these earnings represents a fair estimate of annual earnings for the indefinite future. However, it may need to consider adjustments for the following items included in pretax earnings: Depreciation on Buildings (each year) Depreciation on Equipment (each year) Extraordinary Loss (year 2022) Salary Expense (each year)

380,000 30,000 130,000 170,000

C. The normal rate of return on net assets for the industry is 15%.

Required: A. Assume that Hopkins feels that it must earn a 20% return on its investment, and that goodwill is determined by capitalizing excess earnings. Based on these assumptions, calculate a reasonable offering price for Richfield, Inc. Indicate how much of the price consists of goodwill. B. Assume that Hopkins feels that it must earn a 15% return on its investment, but that average excess earnings are to be capitalized for five years only. Based on these assumptions, calculate a reasonable offering price for Richfield, Inc. Indicate how much of the price consists of goodwill. Answer: A. Normal earnings for similar firms = ($6,000,000 - $3,700,000) × 15% = $345,000 Expected earnings of target: Pretax income of Richfield, Inc., 2020 Subtract: Additional depreciation on buildings ($380,000 × .25) Target's adjusted earnings, 2020

$470,000 (95,000) 375,000

Pretax income of Richfield, Inc., 2021 Subtract: Additional depreciation on buildings Target's adjusted earnings, 2021

$570,000 (95,000)

Pretax income of Richfield, Inc., 2022 Add: Extraordinary loss Subtract: Additional depreciation on buildings Target's adjusted earnings, 2022

$370,000 130,000 (95,000)

475,000

405,000

Target's three year total adjusted earnings Target's three year average adjusted earnings

1,255,000 418,333

Excess earnings of target = $418,333 – $345,000 = $73,333 per year

Present value of excess earnings (perpetuity) at 20%:

$73,333 20% = $366,665 (Estimated Goodwill)

Implied offering price = Fair value of assets - Fair value of liabilities + Estimated goodwill Implied offering price = $6,000,000 - $3,700,000 + $366,665 = 2,666,665.

Excess earnings of target (same as in A): $73,333

Present value of excess earnings (ordinary annuity) for five years at 15%; $73,333 × 3.35216 = $245,824 Implied offering price = $6,000,000 - $3,700,000 + $245,824 = $2,545,824. Note: The salary expense and depreciation on equipment are expected to continue at the same rate, and thus do not necessitate adjustments. Question Title: Test Bank (Problem) Question 1-1 Difficulty: Hard Learning Objective: 7 Calculate an estimate of the value of goodwill to be included in an offering price by discounting expected future excess earnings over some period of years. Section Reference: 1.8

33. Eden Company is trying to decide whether to acquire Bloomington Inc. The following balance sheet for Bloomington Inc. provides information about book values. Estimated market values are also listed, based upon Eden Company's appraisals.

Current Assets Property, Plant & Equipment (net) Total Assets Total Liabilities Common Stock, $10 par value Retained Earnings Total Liabilities and Equities

Bloomington Inc. Book Values $ 450,000 1,140,000 $1,590,000

Bloomington Inc. Market Values $ 450,000 1,300,000 $1,750,000

$700,000 280,000 610,000 $1,590,000

$700,000

Eden Company expects that Bloomington will earn approximately $290,000 per year in net income over the next five years. This income is higher than the 14% annual return on tangible assets considered to be the industry "norm." Required: A. Compute an estimation of goodwill based on the information above that Eden might be willing to pay (include in its purchase price), under each of the following additional assumptions: (1) Eden is willing to pay for excess earnings for an expected life of 4 years (undiscounted).

(2) Eden is willing to pay for excess earnings for an expected life of 4 years, which should be capitalized at the industry normal rate of return. (3) Excess earnings are expected to last indefinitely, but Eden demands a higher rate of return of 20% because of the risk involved. B. Determine the amount of goodwill to be recorded on the books if Eden pays $1,300,000 cash and assumes Bloomington's liabilities. Answer: A. Normal earnings for similar firms (based on tangible assets only) = $1,750,000 × 14% = $245,000 Excess earnings = $290,000 - 245,000 = $45,000 (1)

Goodwill based on four years excess earnings undiscounted. Goodwill = ($45,000)(4 years) = $180,000

(2)

Goodwill based on four years discounted excess earnings Goodwill = ($45,000)(2.91371) = $131,117 (present value of an annuity factor for n=4, I=14% is 2.91371)

(3)

Goodwill based on a perpetuity Goodwill = ($45,000)/.20 = $225,000

Goodwill = Cost less fair value of net assets Goodwill = ($1,300,000 - ($1,750,000 - $700,000)) = $250,000

Question Title: Test Bank (Problem) Question 1-2 Difficulty: Hard Learning Objective: 7 Calculate an estimate of the value of goodwill to be included in an offering price by discounting expected future excess earnings over some period of years. Section Reference: 1.8

34. Park Company acquired an 80% interest in the common stock of Southdale Company for $1,540,000 on July 1, 2022. Southdale Company's stockholders' equity on that date consisted of: Common stock Other contributed capital Retained earnings

$800,000 400,000 330,000

Required: Compute the total noncontrolling interest to be reported in the consolidated balance sheet assuming the: (1) parent company concept. (2) economic unit concept. Answer: 1. Total book value of Southdale's net assets ($800,000 + $400,000 + $330,000) Noncontrolling interest % Noncontrolling interest in net assets

$1,530,000 × .2 $306,000

2. Total fair value of Southdale's net assets ($1,540,000/.8) Noncontrolling interest % Noncontrolling interest in net assets

$1,925,000 × .2 $385,000

Question Title: Test Bank (Problem) Question 1-3 Difficulty: Medium Learning Objective: 8 Describe the two alternative views of consolidated financial statements: the economic entity and the parent company concepts. Section Reference: 1.9

35. The following balances were taken from the records of S Company: Common stock (1/1/20 and 12/31/20) Retained earnings 1/1/20 Net income for 2023 Dividends declared in 2023 Retained earnings, 12/31/20 Total stockholders' equity on 12/31/20

$720,000 $160,000 180,000 (40,000) 300,000 $1,020,000

P Company purchased 75% of S Company's common stock on January 1, 2021 for $900,000. The difference between implied value and book value is attributable to assets with a remaining useful life on January 1, 2023 of ten years. Required: A. 1. 2.

Compute the difference between cost/(implied) and book value applying: Parent company theory. Economic unit theory.

B. 1. 2.

Assuming the economic unit theory: Compute noncontrolling interest in consolidated income for 2023. Compute noncontrolling interest in net assets on December 31, 2023.

Answer: A1. Cost of investment Equity acquired .75($720,000 + $160,000) Difference (parent company theory)

$900,000 660,000 $240,000

2. Implied value of S Company ($900,000/.75) Book value of S Company ($720,000 + $160,000) Difference (economic unit theory)

$1,200,000 880,000 $320,000

B1. Noncontrolling interest in consolidated income: .25[$180,000 - ($320,000/10)]

$37,000

2. Noncontrolling interest in net assets: .25[$1,020,000 + (9/10 × $320,000)]

$327,000

Question Title: Test Bank (Problem) Question 1-4 Difficulty: Hard Learning Objective: 8 Describe the two alternative views of consolidated financial statements: the economic entity and the parent company concepts. Section Reference: 1.9

Package Title: Test Bank Questions Course Title: Advanced Accounting, 8e Chapter: Accounting for Business Combinations Chapter Number: 2

Question Type: Multiple Choice

1. SFAS 141R requires that all business combinations be accounted for by using: a) the pooling of interests method. b) the acquisition method. c) either the acquisition or the pooling of interests methods. d) neither the acquisition nor the pooling of interests methods. Answer: b Question Title: Test Bank (Multiple Choice) Question 01 Difficulty: Easy Learning Objective: 1 Describe the major changes in the accounting for business combinations since 2001, and the reasons for those changes. Section Reference: 2.1

2. The fair value of assets and liabilities of the acquired entity is to be reflected in the financial statements of the combined entity. When the acquisition takes place over a period of time rather than all at once, at what time is the fair value of the assets and liabilities of the acquired entity determined under SFAS 141R? a) the date the interest in the acquiree was acquired. b) the date the acquirer obtains control of the acquiree c) the date of acquisition of the largest portion of the interest in the acquiree. d) the date of the financial statements. Answer: b Question Title: Test Bank (Multiple Choice) Question 02 Difficulty: Medium Learning Objective: 1 Describe the major changes in the accounting for business combinations since 2001, and the reasons for those changes. Section Reference: 2.1

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

Cash Inventory Equipment Goodwill Accounts Payable

Carrying Amount $ 20,000 35,000 125,000 60,000 30,000

Fair Value $20,000 40,000 160,000 30,000

Based on the preceding information, what amount of goodwill will be reported for this division if its fair value is determined to be $200,000? a) $0 b) $60,000 c) $30,000 d) $10,000 Answer: d Question Title: Test Bank (Multiple Choice) Question 03 Difficulty: Medium Learning Objective: 2 Discuss the goodwill impairment test, including its frequency, the steps required by the standard, and some of the implementation problems. Section Reference: 2.2 4. Under SFAS 141R: a) both direct and indirect costs are to be capitalized. b) both direct and indirect costs are to be expensed. c) direct costs are to be capitalized and indirect costs are to be expensed. d) indirect costs are to be capitalized and direct costs are to be expensed. Answer: b Question Title: Test Bank (Multiple Choice) Question 04 Difficulty: Easy Learning Objective: 3 Explain how acquisition expenses are reported. Section Reference: 2.2 5. A business combination is accounted for properly as an acquisition. Which of the following expenses related to effecting the business combination should enter into the determination of net income of the combined corporation for the period in which the expenses are incurred? a) Security issue cost, yes; overhead allocated merger, yes b) Security issue cost, yes; overhead allocated merger, no

c) Security issue cost, no; overhead allocated merger, yes d) Security issue cost, no; overhead allocated merger, no Answer: c Question Title: Test Bank (Multiple Choice) Question 05 Difficulty: Medium Learning Objective: 3 Explain how acquisition expenses are reported. Section Reference: 2.2

6. North Company issued 24,000 shares of its $20 par value common stock for the net assets of Prairie Company in business combination under which Prairie Company will be merged into North Company. On the date of the combination, North Company common stock had a fair value of $30 per share. Balance sheets for North Company and Prairie Company immediately prior to the combination were as follows:

Current Assets Plant and Equipment (net) Total

North $ 1,314,000 1,725,000 $ 3,039,000

Prairie $ 192,000 408,000 $ 600,000

Liabilities Common Stock, $20 par value Other Contributed Capital Retained Earnings Total

$ 900,000 1,650,000 218,000 271,000 $3,039,000

$150,000 240,000 60,000 150,000 $600,000

If the business combination is treated as an acquisition and Prairie Company’s net assets have a fair value of $686,400, North Company’s balance sheet immediately after the combination will include goodwill of: a) $30,600. b) $38,400. c) $33,600. d) $56,400. Answer: c Question Title: Test Bank (Multiple Choice) Question 06 Difficulty: Medium Learning Objective: 4 Describe the valuation of assets, including goodwill, and liabilities acquired in a business combination accounted for by the acquisition method. Section Reference: 2.2

7. P Company acquires all of the voting stock of S Company for $930,000 cash. The book values of S Company’s assets are $800,000, but the fair values are $840,000 because land has a fair value above its book value. Goodwill from the combination is computed as: a) $130,000. b) $90,000. c) $40,000. d) $0. Answer: b Question Title: Test Bank (Multiple Choice) Question 07 Difficulty: Easy Learning Objective: 4 Describe the valuation of assets, including goodwill, and liabilities acquired in a business combination accounted for by the acquisition method. Section Reference: 2.2

8. On February 5, Pryor Corporation paid $1,600,000 for all the issued and outstanding common stock of Shaw, Inc., in a transaction properly accounted for as an acquisition. The book values and fair values of Shaw's assets and liabilities on February 5 were as follows:

Cash Receivables (net) Inventory Plant and equipment (net) Liabilities Net assets

Book Value $ 160,000 180,000

Fair Value $160,000 180,000

315,000 820,000

300,000 920,000

(350,000) $1,125,000

(350,000) $1,210,000

What is the amount of goodwill resulting from the business combination? a) $-0-. b) $475,000. c) $85,000. d) $390,000. Answer: d Question Title: Test Bank (Multiple Choice) Question 08 Difficulty: Easy Learning Objective: 4 Describe the valuation of assets, including goodwill, and liabilities acquired in a business combination accounted for by the acquisition method. Section Reference: 2.2

9. P Company purchased the net assets of S Company for $225,000. On the date of P's purchase, S Company had no investments in marketable securities and $30,000 (book and fair value) of liabilities. The fair values of S Company's assets, when acquired, were: Current assets Noncurrent assets Total

$120,000 180,000 $300,000

How should the $45,000 difference between the fair value of the net assets acquired ($270,000) and the consideration paid ($225,000) be accounted for by P Company? a) The noncurrent assets should be recorded at $ 135,000. b) The $45,000 difference should be credited to retained earnings. c) The current assets should be recorded at $102,000, and the noncurrent assets should be recorded at $153,000. d) An ordinary gain of $45,000 should be recorded. Answer: d Question Title: Test Bank (Multiple Choice) Question 09 Difficulty: Easy Learning Objective: 4 Describe the valuation of assets, including goodwill, and liabilities acquired in a business combination accounted for by the acquisition method. Section Reference: 2.2 10. When the net amount of the fair values of identifiable assets less liabilities exceeds the total

cost of the acquired company, the acquisition is sometimes referred to as a) a loss b) a bargain c) goodwill d) acquisition income Answer: b Question Title: Test Bank (Multiple Choice) Question 10 Difficulty: Medium Learning Objective: 4 Describe the valuation of assets, including goodwill, and liabilities acquired in a business combination accounted for by the acquisition method. Section Reference: 2.2

11. Under the acquisition method, if the fair values of identifiable net assets exceed the value implied by the purchase price of the acquired company, the excess should be: a) accounted for as goodwill. b) allocated to reduce current and long-lived assets. c) allocated to reduce current assets and classify any remainder as an extraordinary gain.

d) allocated to reduce any previously recorded goodwill on the seller’s books and classify any remainder as an ordinary gain. Answer: d Question Title: Test Bank (Multiple Choice) Question 11 Difficulty: Easy Learning Objective: 4 Describe the valuation of assets, including goodwill, and liabilities acquired in a business combination accounted for by the acquisition method. Section Reference: 2.3

12. Parental Company and Sub Company were combined in an acquisition transaction. Parental was able to acquire Sub at a bargain price. The sum of the fair values of identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to Parental. After eliminating previously recorded goodwill, there was still some "negative goodwill." Proper accounting treatment by Parental is to report the amount as: a) paid-in capital. b) a deferred credit, which is amortized. c) an ordinary gain. d) an extraordinary gain. Answer: c Question Title: Test Bank (Multiple Choice) Question 12 Difficulty: Easy Learning Objective: 4 Describe the valuation of assets, including goodwill, and liabilities acquired in a business combination accounted for by the acquisition method. Section Reference: 2.3 13. When the acquisition price of an acquired firm is less than the fair value of the identifiable net assets, all of the following are recorded at fair value EXCEPT: a) Assumed liabilities. b) Current assets. c) Long-lived assets. d) Each of these is recorded at fair value. Answer: d Question Title: Test Bank (Multiple Choice) Question 13 Difficulty: Easy Learning Objective: 4 Describe the valuation of assets, including goodwill, and liabilities acquired in a business combination accounted for by the acquisition method. Section Reference: 2.3

14. North Company issued 24,000 shares of its $20 par value common stock for the net assets of Prairie Company in business combination under which Prairie Company will be merged into North Company. On the date of the combination, North Company common stock had a fair value of $30 per share. Balance sheets for North Company and Prairie Company immediately prior to the combination were as follows:

Current Assets Plant and Equipment (net) Total

North $ 1,314,000 1,725,000 $ 3,039,000

Prairie $ 192,000 408,000 $ 600,000

Liabilities Common Stock, $20 par value Other Contributed Capital Retained Earnings Total

$ 900,000 1,650,000 218,000 271,000 $3,039,000

$150,000 240,000 60,000 150,000 $600,000

If the business combination is treated as an acquisition and the fair value of Prairie Company’s current assets is $270,000, its plant and equipment is $726,000, and its liabilities are $168,000, North Company’s financial statements immediately after the combination will include: a) Negative goodwill of $108,000. b) Plant and equipment of $2,133,000. c) Plant and equipment of $2,343,000. d) An ordinary gain of $108,000. Answer: d Question Title: Test Bank (Multiple Choice) Question 14 Difficulty: Medium Learning Objective: 4 Describe the valuation of assets, including goodwill, and liabilities acquired in a business combination accounted for by the acquisition method. Section Reference: 2.3

15. On May 1, 2020, the Phil Company paid $1,200,000 for 80% of the outstanding common stock of Sage Corporation in a transaction properly accounted for as an acquisition. The recorded assets and liabilities of Sage Corporation on May 1, 2020, follow: Cash Inventory Property & equipment (Net of accumulated depreciation)

$100,000 200,000 800,000

Liabilities

(160,000)

On May 1, 2020, it was determined that the inventory of Sage had a fair value of $220,000 and the property and equipment (net) has a fair value of $1,200,000. What is the amount of goodwill resulting from the business combination? a) $0. b) $112,000. c) $140,000. d) $28,000. Answer: c Question Title: Test Bank (Multiple Choice) Question 15 Difficulty: Hard Learning Objective: 4 Describe the valuation of assets, including goodwill, and liabilities acquired in a business combination accounted for by the acquisition method. Section Reference: 2.3

16. Posch Company issued 12,000 shares of its $20 par value common stock for the net assets of Sato Company in a business combination under which Sato Company will be merged into Posch Company. On the date of the combination, Posch Company common stock had a fair value of $30 per share. Balance sheets for Posch Company and Sato Company immediately prior to the combination were as follows:

Current Assets Plant and Equipment (net) Total

Posch $ 657,000 863,000 $1,520,000

Sato $ 96,000 204,000 $300,000

Liabilities Common Stock, $20 par value Other Contributed Capital Retained Earnings Total

$ 450,000 825,000 109,000 136,000 $1,520,000

$ 75,000 120,000 30,000 75,000 $300,000

If the business combination is treated as an acquisition and Sato Company’s net assets have a fair value of $343,200, Posch Company’s balance sheet immediately after the combination will include goodwill of: a) $15,300. b) $19,200. c) $16,800. d) $28,200. Answer: c

Question Title: Test Bank (Multiple Choice) Question 16 Difficulty: Medium Learning Objective: 4 Describe the valuation of assets, including goodwill, and liabilities acquired in a business combination accounted for by the acquisition method. Section Reference: 2.3

17. Posch Company issued 12,000 shares of its $20 par value common stock for the net assets of Sato Company in a business combination under which Sato Company will be merged into Posch Company. On the date of the combination, Posch Company common stock had a fair value of $30 per share. Balance sheets for Posch Company and Sato Company immediately prior to the combination were as follows:

Current Assets Plant and Equipment (net) Total

Posch $ 657,000 863,000 $1,520,000

Sato $ 96,000 204,000 $300,000

Liabilities Common Stock, $20 par value Other Contributed Capital Retained Earnings Total

$ 450,000 825,000 109,000 136,000 $1,520,000

$ 75,000 120,000 30,000 75,000 $300,000

If the business combination is treated as an acquisition and the fair value of Sato Company’s current assets is $135,000, its plant and equipment is $363,000, and its liabilities are $84,000, Posch Company’s financial statements immediately after the combination will include: a) Negative goodwill of $54,000. b) Plant and equipment of $1,226,000. c) Plant and equipment of $1,172,000. d) An extraordinary gain of $54,000. Answer: b Question Title: Test Bank (Multiple Choice) Question 17 Difficulty: Medium Learning Objective: 4 Describe the valuation of assets, including goodwill, and liabilities acquired in a business combination accounted for by the acquisition method. Section Reference: 2.3

18. In a business combination accounted for as an acquisition, how should the excess of fair value of net assets acquired over the consideration paid be treated?

a) Amortized as a credit to income over a period not to exceed forty years. b) Amortized as a charge to expense over a period not to exceed forty years. c) Amortized directly to retained earnings over a period not to exceed forty years. d) Recorded as an ordinary gain. Answer: d Question Title: Test Bank (Multiple Choice) Question 18 Difficulty: Easy Learning Objective: 4 Describe the valuation of assets, including goodwill, and liabilities acquired in a business combination accounted for by the acquisition method. Section Reference: 2.3 19. In a period in which an impairment loss occurs, SFAS No. 142 requires each of the following note disclosures EXCEPT: a) a description of the facts and circumstances leading to the impairment. b) the amount of goodwill by reporting segment. c) the method of determining the fair value of the reporting unit. d) the amounts of any adjustments made to impairment estimates from earlier periods, if significant. Answer: b Question Title: Test Bank (Multiple Choice) Question 19 Difficulty: Easy Learning Objective: 2 Discuss the goodwill impairment test, including its frequency, the steps laid out in the new standard, and some of the implementation problems. Section Reference: 2.5

20. Once a reporting unit is determined to have a fair value below its carrying value, the goodwill impairment amount is computed by comparing the: a) fair value of the reporting unit and the fair value of the identifiable net assets. b) carrying value of the goodwill and the excess of the carrying value of the reporting unit over its fair value. c) fair value of the reporting unit to its carrying amount (goodwill included). d) carrying value of the reporting unit to the fair value of the identifiable net assets. Answer: b Question Title: Test Bank (Multiple Choice) Question 20 Difficulty: Medium Learning Objective: 2 Discuss the goodwill impairment test, including its frequency, the steps required by the standard, and some of the implementation problems.

Section Reference: 2.5

21. SFAS 141R requires that the acquirer disclose each of the following for each material business combination EXCEPT the: a) name and a description of the acquiree acquired. b) percentage of voting equity instruments acquired. c) fair value of the consideration transferred. d) each of the above is a required disclosure Answer: d Question Title: Test Bank (Multiple Choice) Question 21 Difficulty: Easy Learning Objective: 7 Describe the disclosure requirements according to current GAAP related to each business combination that takes place during a given year. Section Reference: 2.5 22. If the value implied by the purchase price of an acquired company exceeds the fair values of identifiable net assets, the excess should be: a) allocated to reduce any previously recorded goodwill and classify any remainder as an ordinary gain. b) recognized as ordinary gain or loss. c) allocated to reduce long-lived assets. d) accounted for as goodwill. Answer: d Question Title: Test Bank (Multiple Choice) Question 22 Difficulty: Easy Learning Objective: 4 Describe the valuation of assets, including goodwill, and liabilities acquired in a business combination accounted for by the acquisition method. Section Reference: 2.5

23. The first step in determining goodwill impairment (quantitative assessment) involves comparing the: a) implied value of a reporting unit to its carrying amount (goodwill excluded). b) fair value of a reporting unit to its carrying amount (goodwill excluded). c) implied value of a reporting unit to its carrying amount (goodwill included). d) fair value of a reporting unit to its carrying amount (goodwill included). Answer: d

Question Title: Test Bank (Multiple Choice) Question 23 Difficulty: Medium Learning Objective: 2 Discuss the goodwill impairment test, including its frequency, the steps required by the standard, and some of the implementation problems. Section Reference: 2.5

24. If an impairment loss is recorded on previously recognized goodwill due to the transitional goodwill impairment test, the loss should be treated as a(n): a) loss from a change in accounting principles. b) extraordinary loss c) loss from continuing operations. d) loss from discontinuing operations. Answer: a Question Title: Test Bank (Multiple Choice) Question 24 Difficulty: Hard Learning Objective: 2 Discuss the goodwill impairment test, including its frequency, the steps laid out in the new standard, and some of the implementation problems. Section Reference: 2.5

25. The fair value of net identifiable assets exclusive of goodwill of a reporting unit of X Company is $300,000. On X Company's books, the carrying value of this reporting unit's net assets is $350,000, including $60,000 goodwill. If the fair value of the reporting unit is $335,000, what amount of goodwill impairment will be recognized for this unit, assuming that the X company has not adopted ASU 2017-04? a) $0 b) $10,000 c) $25,000 d) $35,000 Answer: c Question Title: Test Bank (Multiple Choice) Question 25 Difficulty: Medium Learning Objective: 2 Discuss the goodwill impairment test, including its frequency, the steps required by the standard, and some of the implementation problems. Section Reference: 2.5

26. The fair value of net identifiable assets of a reporting unit exclusive of goodwill of Y Company is $270,000. The carrying value of the reporting unit's net assets on Y Company's books is $320,000, including $50,000 goodwill. If the reported goodwill impairment for the unit is $10,000, what would be the fair value of the reporting unit (the company has not adopted ASU 2017-04)? a) $320,000 b) $310,000 c) $270,000 d) $290,000 Answer: b Question Title: Test Bank (Multiple Choice) Question 26 Difficulty: Medium Learning Objective: 2 Discuss the goodwill impairment test, including its frequency, the steps required by the standard, and some of the implementation problems. Section Reference: 2.5 27. According to the new guidelines, the goodwill impairment amount of a reporting unit is: a) the carrying value of goodwill. b) the lower of the 1) carrying value of goodwill or 2) the excess of the carrying amount of the reportable unit (including goodwill) over its fair value. c) the fair value of the reporting unit. d) the implied value of the reporting unit. Answer: b Question Title: Test Bank (Multiple Choice) Question 27 Difficulty: Medium Learning Objective: 2 Discuss the goodwill impairment test, including its frequency, the steps required by the standard, and some of the implementation problems. Section Reference: 2.5 28. When a contractual contingency is based on earnings or gross profit, it is known as: a) earnout. b) ordinary gain. c) extraordinary gain. d) profit.

Answer: a Question Title: Test Bank (Multiple Choice) Question 28 Difficulty: Easy

Learning Objective: 5 Explain how contingent consideration affects the valuation of assets acquired in a business combination accounted for by the acquisition method. Section Reference: 2.6

29. In a leveraged buyout, the portion of the net assets of the new corporation provided by the management group is recorded at: a) appraisal value. b) book value. c) fair value. d) either book or fair value. Answer: d Question Title: Test Bank (Multiple Choice) Question 29 Difficulty: Medium Learning Objective: 6 Describe a leveraged buyout. Section Reference: 2.6

30. P Corporation issued 10,000 shares of common stock with a fair value of $25 per share for all the outstanding common stock of S Company in a business combination properly accounted for as an acquisition. The fair value of S Company's net assets on that date was $220,000. P Company also agreed to issue an additional 2,000 shares of common stock with a fair value of $50,000 to the former stockholders of S Company as an earnings contingency. Assuming that the contingency is expected to be met, the $50,000 fair value of the additional shares to be issued should be treated as a(n): a) decrease in noncurrent liabilities of S Company that were assumed by P Company. b) decrease in consolidated retained earnings. c) increase in consolidated goodwill. d) decrease in consolidated other contributed capital. Answer: c Question Title: Test Bank (Multiple Choice) Question 30 Difficulty: Medium Learning Objective: 5 Explain how contingent consideration affects the valuation of assets acquired in a business combination accounted for by the acquisition method. Section Reference: 2.6

31. P Co. issued 5,000 shares of its common stock, valued at $200,000, to the former shareholders of S Company two years after S Company was acquired in an all-stock transaction. The additional shares were issued because P Company agreed to issue additional shares of common

stock if the average post combination earnings over the next two years exceeded $500,000. P Company will treat the issuance of the additional shares as a (decrease in): a) consolidated retained earnings. b) consolidated goodwill. c) consolidated paid-in capital. d) non-current liabilities of S Company assumed by P Company. Answer: c Question Title: Test Bank (Multiple Choice) Question 31 Difficulty: Medium Learning Objective: 5 Explain how contingent consideration affects the valuation of assets acquired in a business combination accounted for by the acquisition method. Section Reference: 2.6 32. Under SFAS 141R, what value of the assets and liabilities is reflected in the financial statements on the acquisition date of a business combination? a) Carrying value b) Fair value c) Book value d) Average value Answer: b Question Title: Test Bank (Multiple Choice) Question 32 Difficulty: Easy Learning Objective: 1 Describe the major changes in the accounting for business combinations since 2007, and the reasons for those changes. Section Reference: 2.6 33. Porpoise Corporation acquired Sims Company through an exchange of common shares. All of Sims’ assets and liabilities were immediately transferred to Porpoise. Porpoise Company’s common stock was trading at $20 per share at the time of exchange. The following selected information is also available: Porpoise Company Before Acquisition After Acquisition Par value of shares outstanding Additional Paid in Capital

$200,000 350,000

What number of shares was issued at the time of the exchange? a) 5,000

$250,000 550,000

b) 17,500 c) 12,500 d) 10,000 Answer: c Question Title: Test Bank (Multiple Choice) Question 33 Difficulty: Medium Learning Objective: 5 Describe the use of pro forma statements in business combinations. Section Reference: 2.7

Question Type: Essay

34. In 2017, FASB simplified the test for goodwill impairment for public companies. Discuss the necessary steps of the annual goodwill impairment test for public companies. Answer: In the first step, assess qualitative factors to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If the assessment indicates that it is more likely than not (a likelihood greater than 50%) that the fair value of the reporting unit is less than its carrying amount (with goodwill), the entity performs the quantitative test to determine the amount of impairment. In the quantitative test, if the carrying amount of a reporting unit is greater than its fair value, goodwill of the reporting unit is considered impaired. The amount of goodwill impairment is the lower of a) the carrying value of goodwill or b) the excess of the carrying amount of the reportable unit (including goodwill) over its fair value. Question Title: Test Bank (Essay) Question 34 Difficulty: Easy Learning Objective: 2 Discuss the goodwill impairment test, including its frequency, the steps required by the standard, and some of the implementation problems. Section Reference: 2.5

35. Briefly describe the different treatment under SFAS 141 vs. SFAS 141R for the following issues:  Business definition  Acquisition costs  In-process R&D  Contingent consideration Answer: Issue Business definition

SFAS No. 141 A business is defined as a selfsustaining integrated set of activities and assets conducted

SFAS No. 141R The business or group of assets consisting of inputs and processes with the ability to

and managed for the purpose of providing a return to investors. The definition would exclude early-stage development entities. Capitalize the costs.

produce outputs and as being conducted for the purpose of providing a return to its owners, members, or participants. Expense as incurred.

In-process R&D

Included as part of purchase price, but then immediately expensed.

Included as part of purchase price, treated as an asset.

Contingent consideration

Record when determinable and reflect subsequent changes in the purchase price.

Record at fair value on the acquisition date with subsequent changes recorded on the income statement.

Acquisition costs

Question Title: Test Bank (Essay) Question 35 Difficulty: Medium Learning Objective: 1 Describe the major changes in the accounting for business combinations since 2007, and the reasons for those changes. Section Reference: 2.1 Question Type: Problem 36. Balance sheet information for Hope Corporation at January 1, 2020, is summarized as follows: Current assets Plant assets

920,000 1,800,000

Liabilities Capital stock $10 par Retained earnings

$2,720,000

$ 1,200,000 800,000 720,000 $ 2,720,000

Hope’s assets and liabilities are fairly valued except for plant assets that are undervalued by $200,000. On January 2, 2020, Robin Corporation issues 80,000 shares of its $10 par value common stock for all of Hope’s net assets and Hope is dissolved. Market quotations for the two stocks on this date are: Robin common: Hope common:

$28 $19

Robin pays the following fees and costs in connection with the combination: Finder’s fee $10,000 Costs of registering and issuing stock 5,000 Legal and accounting fees 6,000 Required:

A. Calculate Robin’s investment cost of Hope Corporation. B. Calculate any goodwill from the business combination. Answer: A. FMV of shares issued by Robin (80,000 sh × $28) =

$2,240,000

B. Investment cost from Part A Less: Fair value of Hope’s net assets ($2,720,000+$200,000–$1,200,000) Goodwill from investment

$2,240,000 1,720,000 $ 520,000

Question Title: Test Bank (Problem) Question 2-1 Difficulty: Medium Learning Objective: 4 Describe the valuation of assets, including goodwill, and liabilities acquired in a business combination accounted for by the acquisition method. Section Reference: 2.3

37. Maplewood Corporation purchased the net assets of West Corporation on January 2, 2020 for $560,000 and also paid $20,000 in direct acquisition costs. West’s balance sheet on January 1, 2020 was as follows: Accounts receivable-net Inventory Land Building-net Equipment-net Total assets

$ 180,000 360,000 40,000 60,000 80,000 $720,000

Current liabilities Long term debt Common stock ($1 par) Paid-in capital Retained earnings Total liab. & equity

$ 70,000 160,000 20,000 430,000 40,000 $ 720,000

Fair values agree with book values except for inventory, land, and equipment, which have fair values of $400,000, $50,000 and $70,000, respectively. West has patent rights valued at $20,000. Required: A. Prepare Maplewood’s general journal entry for the cash purchase of West’s net assets. B. Assume Maplewood Corporation purchased the net assets of West Corporation for $500,000 rather than $560,000, prepare the general journal entry. Answer: A. Accounts Inventory Land Building Equipment Patent

Receivable

180,000 400,000 50,000 60,000 70,000 20,000

Goodwill Acquisition

B. Acquisition Accounts Receivable Inventory Land Building Equipment Patent

10,000 Expense Current Liabilities Long-term Debt Cash Expense

20,000 70,000 160,000 580,000 20,000 180,000 400,000 50,000 60,000 70,000 20,000

Current Liabilities Long-term Debt Cash Gain on Acquisition

70,000 160,000 520,000 50,000

Question Title: Test Bank (Problem) Question 2-2 Difficulty: Medium Learning Objective: 4 Describe the valuation of assets, including goodwill, and liabilities acquired in a business combination accounted for by the acquisition method. Section Reference: 2.3

38. Edina Company acquired the assets (except cash) and assumed the liabilities of Burns Company on January 1, 2020, paying $2,600,000 cash. Immediately prior to the acquisition, Burns Company's balance sheet was as follows:

Accounts receivable (net) Inventory Land Buildings (net) Total

BOOK VALUE $ 240,000 290,000 960,000 1,020,000 $2,510,000

FAIR VALUE $ 220,000 320,000 1,508,000 1,392,000 $3,440,000

Accounts payable Note payable Common stock, $5 par Other contributed capital Retained earnings Total

$ 270,000 600,000 420,000 640,000 580,000 $2,510,000

$ 270,000 600,000

Edina Company agreed to pay Burns Company's former stockholders $200,000 cash in 2021 if post- combination earnings of the combined company reached $1,000,000 during 2020.

Required: A. Prepare the journal entry necessary for Edina Company to record the acquisition on January 1, 2020. It is expected that the earnings target is likely to be met. B. Prepare the journal entry necessary for Edina Company in 2021 assuming the earnings contingency was not met. Answer: A. Accounts Receivable Inventory Land Buildings Goodwill Allowance for Uncollectible Accounts Accounts Payable Note Payable Cash Goodwill Liability for Contingent Consideration Cost of acquisition Fair value of net assets acquired ($3,440,000 – $870,000) Goodwill

240,000 320,000 1,508,000 1,392,000 30,000 20,000 270,000 600,000 2,600,000 200,000 200,000

B. Liability for Contingent Consideration Income from Change in Estimate

$2,600,000 2,570,000 $ 30,000 200,000 200,000

Question Title: Test Bank (Problem) Question 2-3 Difficulty: Hard Learning Objective: 4 Describe the valuation of assets, including goodwill, and liabilities acquired in a business combination accounted for by the acquisition method., 5 Explain how contingent consideration affects the valuation of assets acquired in a business combination accounted for by the acquisition method. Section Reference: 2.3, 2.5

39. Condensed balance sheets for Rich Company and Jordan Company on January 1, 2020 are as follows:

Current Assets Plant and Equipment (net) Total Assets

Rich $ 440,000 1,080,000 $1,520,000

Jordan $200,000 340,000 $540,000

Total Liabilities Common Stock, $10 par value Other Contributed Capital Retained Earnings Total Equities

$ 230,000 840,000 300,000 150,000 $1,520,000

$ 80,000 240,000 130,000 90,000 $540,000

On January 1, 2020 the stockholders of Rich and Jordan agreed to a consolidation whereby a new corporation, Cannon Company, would be formed to consolidate Rich and Jordan. Cannon Company issued 70,000 shares of its $20 par value common stock for the net assets of Rich and Jordan. On the date of consolidation, the fair values of Rich's and Jordan's current assets and liabilities were equal to their book values. The fair value of plant and equipment for each company was: Rich, $1,270,000; Jordan, $360,000. An investment banking house estimated that the fair value of Cannon Company's common stock was $35 per share. Rich will incur $45,000 of direct acquisition costs and $15,000 in stock issue costs. Required: Prepare the journal entries to record the consolidation on the books of Cannon Company assuming that the consolidation is accounted for as an acquisition. Answer: Current Assets ($440,000 + $200,000) Plant and Equipment ($1,270,000 + $360,000) Goodwill Liabilities ($230,000 + $80,000) Common Stock (70,000 shares @ $20/share) Other Contributed Capital (70,000 × ($35 – $20))

640,000 1,630,000 490,000

Acquisition Expense Cash

45,000

Other Contributed Capital Cash

15,000

310,000 1,400,000 1,050,000

45,000

15,000

Question Title: Test Bank (Problem) Question 2-4 Difficulty: Hard Learning Objective: 4 Describe the valuation of assets, including goodwill, and liabilities acquired in a business combination accounted for by the acquisition method. Section Reference: 2.3 40. The stockholders’ equities of Penn Corporation and Simon Corporation were as follows on January 1, 2020:

Common Stock, $1 par Other Contributed Capital Retained Earnings Total Stockholders’ Equity

Penn Corp. $1,000,000 2,800,000 600,000 $4,400,000

Simon Corp. $ 600,000 1,100,000 340,000 $2,040,000

On January 2, 2020 Penn Corp. issued 100,000 of its shares with a market value of $14 per share in exchange for all of Simon’s shares, and Simon Corp. was dissolved. Penn Corp. paid $10,000 to register and issue the new common shares. Required: Prepare the stockholders’ equity section of Penn Corp. balance sheet after the business combination on January 2, 2020. Answer: Stockholders’ Equity: Common Stock, $1 par Other Contributed Capital Retained Earnings Total stockholders’ Equity

$1,100,000 4,090,000 [$2,800,000 + (100,000 × $13) – $10,000] 600,000 $ 5,790,000

Question Title: Test Bank (Problem) Question 2-5 Difficulty: Medium Learning Objective: 4 Describe the valuation of assets, including goodwill, and liabilities acquired in a business combination accounted for by the acquisition method. Section Reference: 2.3

41. The managers of Savage Company own 10,000 of its 100,000 outstanding common shares. Swann Company is formed by the managers of Savage Company to take over Savage Company in a leveraged buyout. The managers contribute their shares in Savage Company and Swann Company then borrows $675,000 to purchase the remaining 90,000 shares of Savage Company for $600,000; the remaining $75,000 is used for working capital. Savage Company is then merged into Swann Company effective January 1, 2020. Data relevant to Savage Company immediately prior to the leveraged buyout follow:

Current Assets Plant Assets Liabilities Stockholders' Equity

Book Value $ 90,000 255,000 (45,000) $300,000

Fair Value $ 90,000 525,000 (45,000) $570,000

Required: A. Prepare journal entries on Swann Company's books to reflect the effects of the leveraged buyout.

B. Determine the balance of each of the following immediately after the merger: 1. Current Assets 2. Plant Assets 3. Note Payable 4. Common Stock Answer: A. Investment in Savage Company ($300,000 × .10) Common Stock

30,000 30,000

Cash Note Payable

675,000

Investment in Savage Company Cash

600,000

Current Assets Plant Assets (1) Goodwill (2) Liabilities Investment in Savage

90,000 498,000 87,000

(1)

600,000

45,000 630,000

$255,000 + [.90 × ($525,000 – $255,000)] = $498,000

(2) Cost of shares Book value of net assets (.90 × $300,000) = Difference between cost and book value Allocated to: Plant assets (.90 × ($525,000 – $255,000)) = Goodwill B. 1. 2. 3. 4.

675,000

Current Assets ($90,000 + $75,000) Plant Assets ($255,000 + $243,000) Note Payable Common Stock

Question Title: Test Bank (Problem) Question 2-6 Difficulty: Hard Learning Objective: 8 Describe a leveraged buyout. Section Reference: 2.3

$600,000 270,000 $330,000 243,000 87,000

165,000 498,000 675,000 30,000

42. On January 1, 2018, Brighton Company acquired the net assets of Dakota Company for $1,580,000 cash. The fair value of Dakota’s identifiable net assets was $1,310,000 on this date. Brighton Company decided to measure goodwill impairment using the present value of future cash flows to estimate the fair value of the reporting unit (Dakota). The information for these subsequent years is as follows:

Year

Present value of Future Cash Flows

Carrying value of Dakota’s Identifiable Net Assets*

2021 2022

$1,400,000 $1,400,000

$1,160,000 $1,120,000

Fair Value Dakota’s Identifiable Net Assets $1,190,000 $1,210,000

* Identifiable net assets do not include goodwill. Required: A: Assume that the company has not adopted ASU 2017-04. For each year determine the amount of goodwill impairment, if any. B: Prepare the journal entries needed each year to record the goodwill impairment (if any) on Brighton’s books. Answer: A. 2021:

Step 1:Fair value of the reporting unit Carrying value of unit: Carrying value of identifiable net assets Carrying value of goodwill ($1,580,000 – $1,310,000) Excess of carrying value over fair value The excess of carrying value over fair value means that step 2 is required.

2022:

$1,400,000 $1,160,000 270,000 1,430,000 $30,000

Step 2: Fair value of the reporting unit Fair value of identifiable net assets Implied value of goodwill Recorded value of goodwill ($1,580,000 – $1,310,000) Impairment loss

$1,400,000 1,190,000 210,000

Step 1:Fair value of the reporting unit Carrying value of unit:

$1,400,000

270,000 $60,000

Carrying value of identifiable net assets Carrying value of goodwill ($270,000 – $40,000)

$1,120,000 230,000 1,350,000 $ 50,000

Excess of Fair value over Carrying value

The excess of fair value over carrying value means that step 2 is not required. B. 2021: 2022:

Impairment Loss—Goodwill Goodwill No entry

60,000 60,000

Question Title: Test Bank (Problem) Question 2-7 Difficulty: Medium Learning Objective: 2 Discuss the goodwill impairment test, including its frequency, the steps required by the standard, and some of the implementation problems. Section Reference: 2.1

43. The following balance sheets were reported on January 1, 2020, for Wood Company and Rose Company:

Cash Inventory Equipment (net) Total

Wood $ 150,000 450,000 1,320,000 $1,920,000

Rose $ 30,000 150,000 570,000 $750,000

Total liabilities Common stock, $20 par value Other contributed capital Retained earnings Total

$ 450,000 600,000 375,000 495,000 $1,920,000

$150,000 300,000 105,000 195,000 $750,000

Required: Appraisals reveal that the inventory has a fair value $180,000, and the equipment has a current value of $615,000. The book value and fair value of liabilities are the same. Assuming that Wood Company wishes to acquire Rose for cash in an asset acquisition, determine the following cutoff amounts: A. The purchase price above which Wood would record goodwill. B. The purchase price at which Wood would record a $50,000 gain. C. The purchase price below which Wood would obtain a ―bargain.‖ D. The purchase price at which Wood would record $75,000 of goodwill.

Answer: a. Fair Value of Identifiable Net Assets Book values $750,000 – $150,000 = Write up of Inventory and Equipment: ($30,000 + $45,000) = Purchase price above which goodwill would result

$600,000 75,000 $675,000

Any existing goodwill would be eliminated before recording a gain: $675,000 Fair Value of Identifiable Net Assets – $50,000 Gain = $625,000.

Anything below $675,000 is technically considered a bargain.

Goodwill would be $75,000 at a purchase price of $750,000 or ($675,000 + $75,000).

Question Title: Test Bank (Problem) Question 2-8 Difficulty: Hard Learning Objective: 5 Describe the use of pro forma statements in business combinations. Section Reference: 2.2

Package Title: Test Bank Questions Course Title: Advanced Accounting, 8e Chapter: Consolidated Financial Statements - Date of Acquisition Chapter Number: 03

Question Type: Multiple Choice

1. Business combinations may be negotiated as a) an asset acquisition b) a stock acquisition c) cash acquisition d) an asset or stock acquisition Answer: d Question Title: Test Bank (Multiple Choice) Question 01 Difficulty: Medium Learning Objective: 1 Understand the concept of control as used in reference to consolidations. Section Reference: Introduction 2. Which of the following standard indicates that the acquired firm should adopt the acquirer’s basis for reporting its own assets and liabilities in any stand-alone financial statements? a) consolidated accounting. b) creditors accounting. c) historical cost accounting. d) pushdown accounting. Answer: d Question Title: Test Bank (Multiple Choice) Question 02 Difficulty: Medium Learning Objective: 1 Understand the concept of control as used in reference to consolidations. Section Reference: 3.1 3. The main evidence of control for purposes of consolidated financial statements involves: a) possessing majority ownership b) having decision-making ability that is not shared with others. c) being the sole shareholder d) having the parent company and the subsidiary participating in the same industry. Answer: b Question Title: Test Bank (Multiple Choice) Question 03 Difficulty: Easy Learning Objective: 1 Understand the concept of control as used in reference to consolidations. Section Reference: 3.1

4. The primary beneficiary of a variable interest entity (VIE) must consolidate the VIE into its financial statements whenever: a) substantially all of the entity’s activities are conducted on behalf of an investor who has disproportionally few voting rights. b) the voting rights are not proportional to the obligations to absorb the expected losses or receive expected residual returns. c) the total equity at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties. d) the holders of the equity investment at risk have the right to receive the residual returns of the legal entity Answer: c Question Title: Test Bank (Multiple Choice) Question 04 Difficulty: Medium Learning Objective: 1 Understand the concept of control as used in reference to consolidations. Section Reference: 3.1

5. If an entity is not considered a VIE, the determination of consolidation is based on whether: a) the voting rights are proportional to the obligations to absorb expected losses or receive expected residual returns. b) the total equity at risk is sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties. c) the equity investments or investments in subordinated debt are at risk. d) one of the entities in the consolidated group directly or indirectly has a controlling financial interest (usually ownership of a majority voting interest) in the other entities. Answer: d Question Title: Test Bank (Multiple Choice) Question 05 Difficulty: Easy Learning Objective: 1 Understand the concept of control as used in reference to consolidations. Section Reference: 3.1 6. IFRS defines control as: a) the direct or indirect ability to determine the direction of management and policies through ownership, contract, or otherwise. b) the power to govern the entity’s financial and operating policies as to obtain benefits from its activities. c) the power to direct the activities that impact economic performance, the obligation to absorb expected losses, and the right to receive expected residual returns. d) having a majority of the ownership interests entitled to elect management. Answer: b Question Title: Test Bank (Multiple Choice) Question 06 Difficulty: Medium

Learning Objective: 1 Understand the concept of control as used in reference to consolidations., 10 Discuss some of the similarities and differences between U.S. GAAP and IFRS with respect to the preparation of consolidated financial statements at the date of acquisition. Section Reference: 3.1, 3.8

7. In which of the following cases would consolidation be inappropriate? a) The subsidiary is in bankruptcy. b) Subsidiary's operations are dissimilar from those of the parent. c) The parent owns 90 percent of the subsidiary's common stock, but all of the subsidiary's nonvoting preferred stock is held by a single investor. d) Subsidiary is foreign. Answer: a Question Title: Test Bank (Multiple Choice) Question 07 Difficulty: Easy Learning Objective: 5 List the requirements for inclusion of a subsidiary in consolidated financial statements. Section Reference: 3.2 8. Majority-owned subsidiaries should be excluded from the consolidated statements when: a) control does not rest with the majority owner. b) the subsidiary operates under governmentally imposed uncertainty. c) a foreign subsidiary is domiciled in a country with foreign exchange restrictions or controls. d) any of these circumstances exist. Answer: d Question Title: Test Bank (Multiple Choice) Question 08 Difficulty: Medium Learning Objective: 5 List the requirements for inclusion of a subsidiary in consolidated financial statements. Section Reference: 3.2

9. Advantages of acquiring a controlling interest in the voting stock of another company instead of purchasing assets or all of the voting stock include all of the following except a) relatively simple b) relatively smaller investment c) bypasses accounting standards d) provides protection of the parent’s assets Answer: c Question Title: Test Bank (Multiple Choice) Question 09 Difficulty: Medium Learning Objective: 3 Describe the reasons why a company acquires a subsidiary rather than its net assets.

Section Reference: 3.3 10. Under the acquisition method, indirect costs relating to acquisitions should be: a) included in the investment cost. b) expensed as incurred. c) deducted from other contributed capital. d) none of these. Answer: b Question Title: Test Bank (Multiple Choice) Question 10 Difficulty: Easy Learning Objective: 7 Record the investment in the subsidiary on the parent’s books at the date of acquisition. Section Reference: 3.5

11. In a business combination accounted for as an acquisition, registration costs related to common stock issued by the parent company are: a) expensed as incurred. b) deducted from other contributed capital. c) included in the investment cost. d) deducted from the investment cost. Answer: b Question Title: Test Bank (Multiple Choice) Question 11 Difficulty: Easy Learning Objective: 7 Record the investment in the subsidiary on the parent’s books at the date of acquisition., 8 Prepare the consolidated workpapers and eliminating entries at the date of acquisition. Section Reference: 3.5 12. Eliminating entries are made to cancel the effects of intercompany transactions and are made on the: a) books of the parent company. b) books of the subsidiary company. c) workpaper only. d) books of both the parent company and the subsidiary. Answer: c Question Title: Test Bank (Multiple Choice) Question 12 Difficulty: Easy Learning Objective: 8 Prepare the consolidated workpapers and eliminating entries at the date of acquisition. Section Reference: 3.6

13. One reason a parent company may pay an amount less than the book value of the subsidiary's stock acquired is:

a) an undervaluation of the subsidiary's assets. b) the existence of unrecorded goodwill. c) an overvaluation of the subsidiary's liabilities. d) the existence of unrecorded contingent liabilities. Answer: d Question Title: Test Bank (Multiple Choice) Question 13 Difficulty: Easy Learning Objective: 3 Describe the reasons why a company acquires a subsidiary rather than its net assets. Section Reference: 3.6

14. On the consolidated balance sheet, consolidated stockholders' equity is: a) equal to the sum of the parent and subsidiary stockholders' equity. b) greater than the parent's stockholders' equity. c) less than the parent's stockholders' equity. d) equal to the parent's stockholders' equity. Answer: d Question Title: Test Bank (Multiple Choice) Question 14 Difficulty: Easy Learning Objective: 8 Prepare the consolidated workpapers and eliminating entries at the date of acquisition. Section Reference: 3.6 15. Reasons a parent company may pay more than book value for the subsidiary company's stock include all of the following EXCEPT: a) the fair value of one of the subsidiary's assets may exceed its recorded value because of appreciation. b) the existence of unrecorded goodwill. c) liabilities may be overvalued. d) stockholders' equity may be undervalued. Answer: d Question Title: Test Bank (Multiple Choice) Question 15 Difficulty: Medium Learning Objective: 4 Describe the valuation and classification of accounts in consolidated financial statements., 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity. Section Reference: 3.6 16. Pina Corp. owns 60% of Simon Corp.'s outstanding common stock. On May 1, 2021, Pina advanced Simon $90,000 in cash, which was still outstanding at December 31, 2021. What portion of this advance should be eliminated in the preparation of the December 31, 2021 consolidated balance sheet? a) $90,000. b) $54,000.

c) $36,000. d) $-0-. Answer: a Question Title: Test Bank (Multiple Choice) Question 16 Difficulty: Easy Learning Objective: 8 Prepare the consolidated workpapers and eliminating entries at the date of acquisition. Section Reference: 3.6, 3.7

17. On January 1, 2021, Pell Company and Sand Company had condensed balance sheets as follows:

Current assets Noncurrent assets Total assets

Pell $ 280,000 360,000 $640,000

Sand $80,000 160,000 $240,000

Current liabilities Long-term debt Stockholders' equity Total liabilities & stockholders' equity

$ 120,000 200,000 320,000 $640,000

$40,000 -0200,000 $240,000

On January 2, 2021 Pell borrowed $240,000 and used the proceeds to purchase 90% of the outstanding common stock of Sand. This debt is payable in 10 equal annual principal payments, plus interest, starting December 30, 2021. Any difference between book value and the value implied by the purchase price relates to land. On Pell's January 2, 2021 consolidated balance sheet, noncurrent assets should be: a) $520,000. b) $536,000. c) $544,000. d) $586,667. Answer: d Question Title: Test Bank (Multiple Choice) Question 17 Difficulty: Medium Learning Objective: 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity. Section Reference: 3.6

18. On January 1, 2021, Pell Company and Sand Company had condensed balance sheets as follows:

Current assets Noncurrent assets Total assets

Pell $ 280,000 360,000 $640,000

Sand $80,000 160,000 $240,000

Current liabilities Long-term debt Stockholders' equity Total liabilities & stockholders' equity

$ 120,000 200,000 320,000 $640,000

$40,000 -0200,000 $240,000

On January 2, 2021 Pell borrowed $240,000 and used the proceeds to purchase 90% of the outstanding common stock of Sand. This debt is payable in 10 equal annual principal payments, plus interest, starting December 30, 2021. Any difference between book value and the value implied by the purchase price relates to land. On Pell's January 2, 2021 consolidated balance sheet, current liabilities should be: a) $200,000. b) $184,000. c) $160,000. d) $120,000. Answer: b Question Title: Test Bank (Multiple Choice) Question 18 Difficulty: Medium Learning Objective: 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity. Section Reference: 3.6

19. On January 1, 2021, Pell Company and Sand Company had condensed balance sheets as follows:

Current assets Noncurrent assets Total assets

Pell $ 280,000 360,000 $640,000

Sand $80,000 160,000 $240,000

Current liabilities Long-term debt Stockholders' equity Total liabilities & stockholders' equity

$ 120,000 200,000 320,000 $640,000

$40,000 -0200,000 $240,000

Question Title: Test Bank (Multiple Choice) Question 19 Difficulty: Medium Learning Objective: 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity. Section Reference: 3.6 20. A newly acquired subsidiary has pre-existing goodwill on its books. The parent company’s consolidated balance sheet will: a) treat the goodwill the same as other intangible assets of the acquired company. b) will always show the pre-existing goodwill of the subsidiary at its book value. c) not show any value for the subsidiary’s pre-existing goodwill. d) do an impairment test to see if any of it has been impaired. Answer: c Question Title: Test Bank (Multiple Choice) Question 20 Difficulty: Easy Learning Objective: 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity. Section Reference: 3.6

21. The Difference between Implied and Book Value account is: a) an asset or liability account reflected on the consolidated balance sheet. b) used in allocating the amounts paid for recorded balance sheet accounts that are different than their fair values. c) the excess implied value assigned to goodwill. d) the unamortized excess that cannot be assigned to any related balance sheet accounts Answer: b Question Title: Test Bank (Multiple Choice) Question 21 Difficulty: Easy Learning Objective: 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity. Section Reference: 3.6 22. Price Company acquired 75 percent of the common stock of Shandie Corporation on December 31, 2020. On the date of acquisition, Price held land with a book value of $150,000 and a fair value of $300,000; Shandie held land with a book value of $100,000 and fair value of $500,000. What amount would land be reported in the consolidated balance sheet prepared immediately after the combination? a) $650,000 b) $500,000 c) $550,000 d) $375,000

Answer: a Question Title: Test Bank (Multiple Choice) Question 22 Difficulty: Easy Learning Objective: 8 Prepare the consolidated workpapers and eliminating entries at the date of acquisition. Section Reference: 3.6

23. On January 1, 2021, Pent Company and Shelter Company had condensed balance sheets as follows:

Current assets Noncurrent assets Total assets

Pent $210,00 270,000 $480,000

Shelter $60,000 120,000 $180,000

Current liabilities Long-term debt Stock holders' equity Total liabilities & stockholders' equity

$90,000 150,000 240,000 $480,000

$30,000 -0150,000 $180,000

On January 2, 2021 Pent borrowed $180,000 and used the proceeds to purchase 90% of the outstanding common stock of Shelter. This debt is payable in 10 equal annual principal payments, plus interest, starting December 30, 2021. Any difference between book value and the value implied by the purchase price relates to land. On Pent's January 2, 2021 consolidated balance sheet, noncurrent assets should be: a) $390,000. b) $402,000. c) $408,000. d) $440,000. Answer: d Question Title: Test Bank (Multiple Choice) Question 23 Difficulty: Medium Learning Objective: 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity. Section Reference: 3.6

24. On January 1, 2021, Pent Company and Shelter Company had condensed balance sheets as follows:

Current assets Noncurrent assets Total assets

Pent $210,00 270,000 $480,000

Shelter $60,000 120,000 $180,000

Current liabilities Long-term debt Stock holders' equity

$90,000 150,000 240,000

$30,000 -0150,000

Total liabilities & stockholders' equity

$480,000

$180,000

On January 2, 2021 Pent borrowed $180,000 and used the proceeds to purchase 90% of the outstanding common stock of Shelter. This debt is payable in 10 equal annual principal payments, plus interest, starting December 30, 2021. Any difference between book value and the value implied by the purchase price relates to land. On Pent's January 2, 2021 consolidated balance sheet, current liabilities should be: a) $150,000. b) $138,000. c) $120,000. d) $90,000. Answer: b Question Title: Test Bank (Multiple Choice) Question 24 Difficulty: Easy Learning Objective: 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity. Section Reference: 3.6

25. On January 1, 2021, Pent Company and Shelter Company had condensed balance sheets as follows:

Current assets Noncurrent assets Total assets

Pent $210,00 270,000 $480,000

Shelter $60,000 120,000 $180,000

Current liabilities Long-term debt Stock holders' equity Total liabilities & stockholders' equity

$90,000 150,000 240,000 $480,000

$30,000 -0150,000 $180,000

On January 2, 2021 Pent borrowed $180,000 and used the proceeds to purchase 90% of the outstanding common stock of Shelter. This debt is payable in 10 equal annual principal payments, plus interest, starting December 30, 2021. Any difference between book value and the value implied by the purchase price relates to land. On Pent's January 2, 2021 consolidated balance sheet, noncurrent liabilities should be: a) $330,000. b) $312,000. c) $180,000. d) $162,000. Answer: b Question Title: Test Bank (Multiple Choice) Question 25 Difficulty: Easy

Learning Objective: 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity. Section Reference: 3.6

26. On January 1, 2021, Prima Corporation acquired 80 percent of Sunder Corporation's voting common stock. Sunders's buildings and equipment had a book value of $300,000 and a fair value of $350,000 at the time of acquisition. At what amount will Sunder’s buildings and equipment will be reported in the consolidated statements? a) $350,000 b) $340,000 c) $280,000 d) $300,000 Answer: a Question Title: Test Bank (Multiple Choice) Question 26 Difficulty: Easy Learning Objective: 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity. Section Reference: 3.6 27. Which of the following is a limitation of consolidated financial statements? a) Consolidated statements provide no benefit for the stockholders and creditors of the parent company. b) Consolidated statements of highly diversified companies cannot be compared with industry standards. c) Consolidated statements are beneficial only when the consolidated companies operate within the same industry. d) Consolidated statements are beneficial only when the consolidated companies operate in different industries. Answer: b Question Title: Test Bank (Multiple Choice) Question 27 Difficulty: Easy Learning Objective: 6 Discuss the limitations of consolidated financial statements. Section Reference: 3.8 Question Type: Essay 28. There are several reasons why a company would acquire a subsidiary’s voting common stock rather than its net assets. Identify at least two advantages to acquiring a controlling interest in the voting stock of another company rather than its assets. Answer: Reasons why a company would acquire a subsidiary rather than its net assets include the following:  Stock acquisition is relatively simple and avoids the often lengthy and difficult negotiations that are required in a complete takeover.  Control of the subsidiary's operations can be accomplished with a much smaller investment.



The separate legal existence of the individual affiliates provides an element of protection of the parent's assets from attachment by subsidiary creditors.

Question Title: Test Bank (Essay) Question 28 Difficulty: Medium Learning Objective: 3 Describe the reasons why a company acquires a subsidiary rather than its net assets. Section Reference: 3.6

29. A useful first step in the consolidating process is to prepare a Computation and Allocation of Difference (CAD) Schedule. Identify the steps involved in preparing the CAD schedule. Answer: Preparation of the Computation and Allocation of Difference Schedule involves the following process:  Determine the percentage of stock acquired in the subsidiary.  Compute the implied value of the subsidiary by dividing the purchase price by the percentage acquired.  Allocate any difference between the implied value and the book value of the subsidiary's equity to adjust the underlying assets and/or liabilities of the acquired company. Question Title: Test Bank (Essay) Question 29 Difficulty: Medium Learning Objective: 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity. Section Reference: 3.6 Question Type: Problems

30. On December 31, 2020, Pinta Company purchased 80% of the outstanding common stock of Snead Company for cash. At the time of acquisition, Snead Company's balance sheet was as follows: Current assets Plant and equipment Land Total assets

$ 1,680,000 1,580,000 280,000 $3,540,000

Liabilities Common stock, $10 par value Other contributed capital Retained earnings Total Treasury stock at cost, 5,000 shares Total equities

$ 1,320,000 1,440,000 700,000 240,000 $3,700,000 <160,000> $3,540,000

Required: Prepare the elimination entry(s) required for the preparation of a consolidated balance sheet workpaper on December 31, 2020, assuming the purchase price of the stock was $1,670,000. Any difference between the

value implied by the purchase price of the investment and the book value of net assets acquired relates to subsidiary land. Answer: Common Stock – Snead Other Contributed Capital – Snead Retained Earnings – Snead Investment in Snead Company Treasury Stock - Snead Difference Between Implied and Book Value Noncontrolling Interest

1,440,000 700,000 240,000

Difference Between Implied and Book Value Land

106,000

1,670,000 160,000 106,000 444,000

106,000

Question Title: Test Bank (Problem) Question 3-1 Difficulty: Medium Learning Objective: 8 Prepare the consolidated workpapers and eliminating entries at the date of acquisition., 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity. Section Reference: 3.6

31. P Company purchased 80% of the outstanding common stock of S Company on January 2, 2020, for $380,000. Balance sheets for P Company and S Company immediately after the stock acquisition were as follows:

Current assets Investment in S Company Plant and equipment (net) Land

Current liabilities Long-term notes payable Common stock Other contributed capital Retained earnings

P Company $ 166,000 380,000 560,000 40,000 $1,146,000

S Company $ 96,000 -0224,000 120,000 $440,000

$ 120,000 -0480,000 244,000 302,000 $1,146,000

$ 44,000 36,000 160,000 64,000 136,000 $440,000

S Company owed P Company $16,000 on open account on the date of acquisition. Required: Prepare a consolidated balance sheet for P and S Companies on the date of acquisition. Any difference between the value implied by the purchase price of the investment and the book value of net assets acquired relates to subsidiary land. The book values of S Company's other assets and liabilities are equal to their fair values.

Answer: P COMPANY AND SUBSIDIARY Consolidated Balance Sheet January 2, 2020 Current assets $246,000 Plant and equipment (net) 784,000 Land ($160,000 + $115,000 excess cost) 275,000 Total $1,305,000 Current liabilities Long-term notes payable Common stock Noncontrolling interest Other contributed capital Retained earnings Total

$ 148,000 36,000 480,000 95,000 244,000 302,000 $1,305,000

Question Title: Test Bank (Problem) Question 3-2 Difficulty: Medium Learning Objective: 8 Prepare the consolidated workpapers and eliminating entries at the date of acquisition., 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity. Section Reference: 3.6

32. P Company acquired 54,000 shares of the common stock of S Company on January 1, 2020, for $950,000 cash. The stockholders' equity section of S Company's balance sheet on that date was as follows: Common stock, $10 par value Other contributed capital Retained earnings Total

$600,000 80,000 320,000 $1,000,000

On the date of acquisition, S Company owed P Company $10,000 on open account. Required: Present, in general journal form, the elimination entries for the preparation of a consolidated balance sheet workpaper on January 1, 2020. The difference between the value implied by the purchase price of the investment and the book value of the net assets acquired relates to subsidiary land. Answer: Accounts Payable (to P) Accounts Receivable (from S)

10,000

Common Stock – S Other Contributed Capital - S Retained Earnings – S

600,000 80,000 320,000

10,000

Difference Between Implied and Book Value Investment in S Company Noncontrolling Interest

50,000

Land Difference Between Implied and Book Value

50,000

950,000 100,000

50,000

Question Title: Test Bank (Problem) Question 3-3 Difficulty: Medium Learning Objective: 8 Prepare the consolidated workpapers and eliminating entries at the date of acquisition., 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity. Section Reference: 3.6

33. On January 2, 2020, Pope Company acquired 90% of the outstanding common stock of Smithwick Company for $480,000 cash. Just before the acquisition, the balance sheets of the two companies were as follows:

Cash Accounts Receivable (net) Inventory Plant and Equipment (net) Land Total Assets

Pope $ 650,000 360,000 290,000 970,000 150,000 $2,420,000

Smithwick $ 160,000 60,000 140,000 240,000 80,000 $680,000

Accounts Payable Mortgage Payable Common Stock, $2 par value Other Contributed Capital Retained Earnings Total Equities

$ 260,000 180,000 1,000,000 520,000 460,000 $2,420,000

$ 120,000 100,000 170,000 50,000 240,000 $680,000

The fair values of Smithwick's assets and liabilities are equal to their book values with the exception of land. Required: A. Prepare the journal entry necessary to record the purchase of Smithwick's common stock. B. Prepare a consolidated balance sheet at the date of acquisition. Answer: A. Investment in Smithwick Company Cash

480,000 480,000

POPE COMPANY AND SUBSIDIARY Consolidated Balance Sheet January 2, 2020 Assets Cash (650,000 + 160,000 - $480,000) Accounts Receivable Inventory Plant and Equipment (net) Land ($150,000 + $80,000 + $73,333*) Total Assets

$330,000 420,000 430,000 1,210,000 303,333 $2,693,333

Liabilities and Stockholders’ Equity Accounts Payable Mortgage Payable Total liabilities

$380,000 280,000 $660,000

Noncontrolling Interest ($170,000 + $50,000 + $240,000 + 73,333) × .10 Common Stock Other Contributed Capital Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity

$ 53,333 $1,000,000 520,000 460,000 1,980,000 $2,693,333

* $480,000/.9 - ($170,000 + $50,000 + $240,000)

Question Title: Test Bank (Problem) Question 3-4 Difficulty: Hard Learning Objective: 8 Prepare the consolidated workpapers and eliminating entries at the date of acquisition., 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity. Section Reference: 3.6 34. P Corporation paid $420,000 for 70% of S Corporation’s $10 par common stock on December 31, 2020, when S Corporation’s stockholders’ equity was made up of $300,000 of Common Stock, $90,000 of Other Contributed Capital and $60,000 of Retained Earnings. S’s identifiable assets and liabilities reflected their fair values on December 31, 2020, except for S’s inventory which was undervalued by $60,000 and their land which was undervalued by $25,000. Balance sheets for P and S immediately after the business combination are presented in the partially completed work-paper below. P ASSETS Cash Accounts receivable-net Inventories

$40,000

$30,000

30,000 185,000

45,000 165,000

Eliminations Debit Credit

Noncontrolling Interest

Consolidated Balances

Land Plant assetsNet Investment in S Corp. Difference between implied and book value Goodwill Total Assets EQUITIES Current Liabilities Capital stock Additional paidin capital Retained earnings Noncontrolling interest Total Equities

45,000

120,000

480,000

240,000

420,000

$1,200,000

$600,000

$170,000 600,000

$150,000 300,000

150,000

90,000

280,000

60,000

$1,200,000

$600,000

Required: Complete the consolidated balance sheet workpaper for P Corporation and Subsidiary. Answer:

ASSETS Cash Accounts receivable-net Inventories Land Plant assetsNet Investment in S Corp. Difference between implied and book value Goodwill Total Assets EQUITIES Current Liabilities Capital stock Additional

Eliminations Debit Credit

Noncontrolling Interest

Consolidated Balances

$40,000

$30,000

$70,000

30,000 185,000 45,000

45,000 165,000 120,000

75,000 410,000 190,000

480,000

240,000

(b) 60,000 (b) 25,000

720,000

420,000

(a) 420,000

(a) 150,000 (b) 65,000 $1,200,000

$600,000

$170,000 600,000 150,000

$150,000 300,000 90,000

(a) 300,000 (a) 90,000

(b) 150,000 65,000 $1,530,000

$320,000 600,000 150,000

paid-in capital Retained earnings Noncontrolling interest Total Equities

280,000

60,000

(a) 60,000

$1,200,000

$600,000

$750,000

280,000 (a) 180,000 $750,000

180,000

180,000 $1,530,000

Question Title: Test Bank (Problem) Question 3-5 Difficulty: Hard Learning Objective: 8 Prepare the consolidated workpapers and eliminating entries at the date of acquisition., 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity. Section Reference: 3.6

35. Prepare in general journal form the workpaper entries to eliminate Porter Company's investment in Sewell Company in the preparation of a consolidated balance sheet at the date of acquisition for each of the following independent cases:

Cash a. b.

Percent of Stock Owned 90 80

Investment Cost $675,000 318,000

Sewell Company Equity Balances Common Other Contributed Retained Stock Capital Earnings $450,000 $180,000 $75,000 620,000 140,000 20,000

Any difference between book value of net assets acquired and the value implied by the purchase price relates to subsidiary property, plant, and equipment except for case (b). In case (b) assume that all book values and fair values are the same. Answer: A. Common Stock – Sewell Other Contributed Capital – Sewell Difference between Implied and Book Values Retained Earnings – Sewell Investment in Sewell Noncontrolling Interest in Equity B. Common Stock – Sewell Other Contributed Capital – Sewell Retained Earnings – Sewell Investment in Sewell Gain on Purchase of Business - Porter Noncontrolling Interest in Equity

450,000 180,000 45,000 75,000 675,000 75,000

620,000 140,000 20,000 318,000 306,000 156,000

Question Title: Test Bank (Problem) Question 3-6 Difficulty: Hard Learning Objective: 8 Prepare the consolidated workpapers and eliminating entries at the date of acquisition., 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity. Section Reference: 3.6

36. On December 31, 2020, Priestly Company purchased a controlling interest in Shelter Company for $1,060,000. The consolidated balance sheet on December 31, 2020 reported noncontrolling interest in Shelter Company of $265,000. On the date of acquisition, the stockholders' equity section of Shelter Company's balance sheet was as follows: Common stock Other contributed capital Retained earnings Total

$520,000 380,000 280,000 1,180,000

Required: A. Compute the noncontrolling interest percentage on December 31, 2020. B. Prepare the investment elimination entry made to prepare a consolidated balance sheet workpaper. Any difference between book value and the value implied by the purchase price relates to subsidiary land. Answer: A. 265,000/(1,060,000 +265,000) = 20% Noncontrolling interest B. Common Stock – Shelter Other Contributed Capital – Shelter Retained Earnings – Shelter Difference between Implied and Book Values Investment in Shelter Company Noncontrolling Interest in Equity

520,000 380,000 280,000 145,000 1,060,000 265,000

Question Title: Test Bank (Problem) Question 3-7 Difficulty: Medium Learning Objective: 8 Prepare the consolidated workpapers and eliminating entries at the date of acquisition., 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity. Section Reference: 3.6

37. On January 1, 2020, Prima Company issued 1,500 of its $20 par value common shares with a fair value of $50 per share in exchange for 2,000 outstanding common shares of Swatch Company in a purchase transaction. Registration costs amounted to $1,700 paid in cash. Just prior to the acquisition, the balance sheets of the two companies were as follows:

Prima

Swatch

Cash Accounts Receivable (net) Inventory Plant and Equipment (net) Land Total Assets

$ 73,000 95,000 58,000 95,000 26,000 $ 347,000

$13,000 19,000 25,000 43,000 20,000 $ 120,000

Accounts Payable Notes Payable Common Stock, $20 par value Other Contributed Capital Retained Earnings Total Liabilities and Equities

$ 66,000 82,000 100,000 60,000 39,000 $ 347,000

16,000 21,000 40,000 24,000 19,000 $ 120,000

Any differences between the book value of equity and the value implied by the purchase price relates to Land. Required: A. Prepare the journal entry on Prima’s books to record the exchange of stock. B. Prepare a Computation and Allocation Schedule for the Difference between book value and value implied by the purchase price. C. Calculate the consolidated balance for each of the following accounts as of December 31, 2020: 1. Cash 2. Land 3. Common Stock 4. Other Contributed Capital Answer: A. Investment in Swatch Company ($50  1,500) Common Stock ($20  1,500) Other Contributed Capital ($30  1,500) Other Contributed Capital Cash

75,000 30,000 45,000 1,700 1,700

B. Computation and Allocation of Difference

Purchase price and implied value Less: Book value of equity acquired Difference between implied and book value Land Balance * $40,000 + $24,000 + $19,000 = $83,000

Parent Share $75,000 83,000* 7,000 (7,000) -0-

NonControlling Share 0 0 0 (0) -0-

Entire Value 75,000 83,000 7,000 (7,000) -0-

C. Cash balance: 73,000 + 13,000 –1,700 = $84,300 Land balance: 26,000 + 20,000 + 7,000= $ 53,000 Common Stock balance: 100,000 + 30,000 = $130,000 Other Contributed Capital: 60,000 + 45,000 – 1,700 = $ 103,300 Question Title: Test Bank (Problem) Question 3-8 Difficulty: Hard Learning Objective: 8 Prepare the consolidated workpapers and eliminating entries at the date of acquisition., 9 Compute and allocate the difference between implied value and book value of the acquired firm’s equity. Section Reference: 3.6

Package Title: Test Bank Questions Course Title: Advanced Accounting, 8e Chapter: Consolidated Financial Statements after Acquisition Chapter Number: 4

Question Type: Multiple Choice

1. An investor adjusts the investment account for the amortization of any difference between cost and book value under the: a) cost method. b) complete equity method. c) partial equity method. d) complete and partial equity methods. Answer: b Question Title: Test Bank (Multiple Choice) Question 01 Difficulty: Easy Learning Objective: 1 Describe the accounting treatment required under current GAAP for varying levels of influence or control by investors. Section Reference: 4.1

2. Prime Industries acquired an 80 percent interest in Sands Company by purchasing 24,000 of its 30,000 outstanding shares of common stock at book value of $105,000 on January 1, 2024. Sands reported net income in 2024 of $45,000 and in 2025 of $60,000 earned evenly throughout the respective years. Prime received $12,000 dividends from Sands in 2024 and $18,000 in 2025. Prime uses the equity method to record its investment. Prime should record investment income from Sands during 2025 of: a) $18,000. b) $60,000. c) $48,000. d) $33,600. Answer: c Question Title: Test Bank (Multiple Choice) Question 02 Difficulty: Easy Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method. Section Reference: 4.1 3. On January 1, 2021, Puma Corporation acquired 30 percent of Slume Company's stock for $150,000. On the acquisition date, Slume reported net assets of $450,000 valued at historical cost and $500,000 stated at fair value. The difference was due to the increased value of buildings with a remaining life of

10 years. During 2021 Slume reported net income of $25,000 and paid dividends of $10,000. Puma uses the equity method. What will be the balance in the Investment account as of Dec 31, 2021? a) $150,000 b) $157,500 c) $154,500 d) $153,000 Answer: d Question Title: Test Bank (Multiple Choice) Question 03 Difficulty: Easy Learning Objective: 1 Describe the accounting treatment required under current GAAP for varying levels of influence or control by investors., 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method. Section Reference: 4.1 4. Under the cost method, the investment account is reduced when: a) there is a liquidating dividend. b) the subsidiary declares a cash dividend. c) the subsidiary incurs a net loss. d) none of these. Answer: a Question Title: Test Bank (Multiple Choice) Question 04 Difficulty: Medium Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method. Section Reference: 4.1 5. On January 1, 2021, Pantera Company purchased 40% of Stratton Company’s 30,000 shares of voting common stock for a cash payment of $1,800,000 when 40% of the net book value of Stratton Company was $1,740,000. The payment in excess of the net book value was attributed to depreciable assets with a remaining useful life of six years. As a result of this transaction Pantera has the ability to exercise significant influence over Stratton Company’s operating and financial policies. Stratton’s net income for the ended December 31, 2021 was $600,000. During 2021, Stratton paid $325,000 in dividends to its shareholders. What is the ending balance in Pantera’s investment account as of December 31, 2021? a) 1,800,000 b) 1,900,000 c) 1,910,000 d) 2,030,000 Answer: b

Question Title: Test Bank (Multiple Choice) Question 05 Difficulty: Hard Learning Objective: 1 Describe the accounting treatment required under current GAAP for varying levels of influence or control by investors., 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method. Section Reference: 4.1 6. On January 1, 2021, Pantera Company purchased 40% of Stratton Company’s 30,000 shares of voting common stock for a cash payment of $1,800,000 when 40% of the net book value of Stratton Company was $1,740,000. The payment in excess of the net book value was attributed to depreciable assets with a remaining useful life of six years. As a result of this transaction Pantera has the ability to exercise significant influence over Stratton Company’s operating and financial policies. Stratton’s net income for the ended December 31, 2021 was $600,000. During 2021, Stratton paid $325,000 in dividends to its shareholders. The income reported by Pantera for its investment in Stratton should be: a) $120,000 b) $130,000 c) $230,000 d) $240,000 Answer: c Question Title: Test Bank (Multiple Choice) Question 06 Difficulty: Medium Learning Objective: 1 Describe the accounting treatment required under current GAAP for varying levels of influence or control by investors., 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method. Section Reference: 4.1 7. The parent company records its share of a subsidiary’s income by: a) crediting Investment in S Company under the partial equity method. b) crediting Equity in Subsidiary Income under both the cost and partial equity methods. c) debiting Equity in Subsidiary Income under the cost method. d) none of these. Answer: d Question Title: Test Bank (Multiple Choice) Question 07 Difficulty: Medium Learning Objective: 1 Describe the accounting treatment required under current GAAP for varying levels of influence or control by investors. Section Reference: 4.1

8. On October 1, 2021, Perma Company acquired for cash all of the voting common stock of Street Company. The purchase price of Street’s stock equaled the book value and fair value of Street’s net assets. The separate net income for each company, excluding Perma’s share of income from Street was as follows:

Twelve months ended Three months ended 12/31/21

Perma $4,500,000 495,000

Street $2,700,000 450,000

During September, Street paid $150,000 in dividends to its stockholders. For the year ended December 31, 2021, Perma issued parent company only financial statements. These statements are not considered those of the primary reporting entity. Under the partial equity method, what is the amount of net income reported in Perma’s income statement? a) $7,200,000. b) $4,650,000. c) $4,950,000. d) $1,800,000. Answer: c Question Title: Test Bank (Multiple Choice) Question 08 Difficulty: Medium Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method. Section Reference: 4.1 9. Prime Industries acquired an 80 percent interest in Sands Company by purchasing 24,000 of its 30,000 outstanding shares of common stock at book value of $105,000 on January 1, 2024. Sands reported net income in 2024 of $45,000 and in 2025 of $60,000 earned evenly throughout the respective years. Prime received $12,000 dividends from Sands in 2024 and $18,000 in 2025. Prime uses the equity method to record its investment. The balance of Prime’s Investment in Sands account at December 31, 2025 is: a) $105,000. b) $138,600. c) $159,000. d) $165,000. Answer: c Question Title: Test Bank (Multiple Choice) Question 09 Difficulty: Easy Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method., Section Reference: 4.1 10. On January 1, 2024, Puma Corporation acquired 30 percent of Slume Company's stock for $150,000. On the acquisition date, Slume reported net assets of $450,000 valued at historical cost and $500,000 stated at fair value. The difference was due to the increased value of buildings with a remaining life of 10 years. During 2024, Slume reported net income of $25,000 and paid dividends of $10,000. Puma uses the equity method. What amount of investment income will be reported by Puma for the year 2024? a) $7,500

b) $6,000 c) $4,500 d) $25,000 Answer: b Question Title: Test Bank (Multiple Choice) Question 10 Difficulty: Medium Learning Objective: 1 Describe the accounting treatment required under current GAAP for varying levels of influence or control by investors., 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method. Section Reference: 4.1 11. On January 1, 2025, Panda Company purchased 25% of Skill Company’s common stock; no goodwill resulted from the acquisition. Panda Company appropriately carries the investment using the equity method of accounting and the balance in Panda’s investment account was $190,000 on December 31, 2025. Skill reported net income of $120,000 for the year ended December 31, 2025 and paid dividends on its common stock totaling $48,000 during 2025. How much did Panda pay for its 25% interest in Skill? a) $172,000 b) $202,000 c) $208,000 d) $232,000 Answer: a Question Title: Test Bank (Multiple Choice) Question 11 Difficulty: Medium Learning Objective: 1 Describe the accounting treatment required under current GAAP for varying levels of influence or control by investors., 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method. Section Reference: 4.1 12. In years subsequent to the year of acquisition, an entry to establish reciprocity is made under the: a) complete equity method. b) cost method. c) partial equity method. d) complete and partial equity methods. Answer: b Question Title: Test Bank (Multiple Choice) Question 12 Difficulty: Easy Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method. Section Reference: 4.2

13. Park Company acquired a 90% interest in Southwestern Company on December 31, 2024, for $320,000. During 2025 Southwestern had a net income of $22,000 and paid a cash dividend of $7,000. Applying the cost method would give a debit balance in the Investment in Stock of Southwestern Company account at the end of 2025 of: a) $335,000 b) $333,500 c) $313,700 d) $320,000 Answer: d Question Title: Test Bank (Multiple Choice) Question 13 Difficulty: Easy Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method. Section Reference: 4.2 14. Under the cost method, the workpaper entry to establish reciprocity: a) debits Retained Earnings - S Company. b) credits Retained Earnings - S Company. c) debits Retained Earnings - P Company. d) credits Retained Earnings - P Company. Answer: d Question Title: Test Bank (Multiple Choice) Question 14 Difficulty: Medium Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method. Section Reference: 4.2 15. P Company purchased 80% of the outstanding common stock of S Company on May 1, 2025, for a cash payment of $1,272,000. S Company’s December 31, 2024 balance sheet reported common stock of $800,000 and retained earnings of $540,000. During the calendar year 2025, S Company earned $840,000 evenly throughout the year and declared a dividend of $300,000 on November 1. What is the amount needed to establish reciprocity under the cost method in the preparation of a consolidated workpaper on December 31, 2026? a) $208,000 b) $260,000 c) $248,000 d) $432,000 Answer: a Question Title: Test Bank (Multiple Choice) Question 15 Difficulty: Hard Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method.

Section Reference: 4.2 16. P Company purchased 90% of the outstanding common stock of S Company on January 1, 2016. S Company’s stockholders’ equity at various dates was:

Common stock Retained earnings Total

1/1/16 $400,000 120,000 $520,000

1/1/20 $400,000 380,000 $780,000

12/31/20 $400,000 460,000 $860,000

The workpaper entry to establish reciprocity under the cost method in the preparation of a consolidated statements workpaper on December 31, 2020 should include a credit to P Company’s retained earnings of: a) $80,000. b) $234,000. c) $260,000. d) $306,000. Answer: b Question Title: Test Bank (Multiple Choice) Question 16 Difficulty: Hard Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method., 3 Understand the use of the workpaper in preparing consolidated financial statements. Section Reference: 4.2 17. In the preparation of a consolidated statements workpaper, dividend income recognized by a parent company for dividends distributed by its subsidiary is: a) included with parent company income from other sources to constitute consolidated net income. b) assigned as a component of the noncontrolling interest. c) allocated proportionately to consolidated net income and the noncontrolling interest. d) eliminated. Answer: d Question Title: Test Bank (Multiple Choice) Question 17 Difficulty: Easy Learning Objective: 3 Understand the use of the workpaper in preparing consolidated financial statements. Section Reference: 4.2 18. P Company purchased 90% of the outstanding common stock of S Company on January 1, 2019. S Company’s stockholders’ equity at various dates was:

Common stock Retained earnings Total

1/1/19 $200,000 60,000 $260,000

1/1/21 $200,000 190,000 $390,000

12/31/21 $200,000 230,000 $430,000

The workpaper entry to establish reciprocity under the cost method in the preparation of a consolidated statements workpaper on December 31, 2021 should include a credit to P Company’s retained earnings of: a) $40,000. b) $117,000. c) $130,000. d) $153,000. Answer: b Question Title: Test Bank (Multiple Choice) Question 18 Difficulty: Medium Learning Objective: 5 Prepare the workpaper eliminating entries for the year of acquisition (and subsequent years) for the cost and equity methods. Section Reference: 4.2 19. Pendleton Company acquired a 70% interest in Sunflower Company on December 31, 2024, for $380,000. During 2025 Sunflower had a net income of $30,000 and paid a cash dividend of $10,000. Applying the cost method would give a debit balance in the Investment in Stock of Sunflower Company account at the end of 2025 of: a) $400,000. b) $394,000. c) $373,000. d) $380,000. Answer: d Question Title: Test Bank (Multiple Choice) Question 19 Difficulty: Easy Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method. Section Reference: 4.2 20. Consolidated net income for a parent company and its partially owned subsidiary is best defined as the parent company’s: a) recorded net income. b) recorded net income plus the subsidiary’s recorded net income. c) recorded net income plus the its share of the subsidiary’s recorded net income. d) income from independent operations plus subsidiary’s income resulting from transactions with outside parties. Answer: d Question Title: Test Bank (Multiple Choice) Question 20 Difficulty: Easy Learning Objective: 1 Describe the accounting treatment required under current GAAP for varying levels of influence or control by investors. Section Reference: 4.2

21. P Company purchased 80% of the outstanding common stock of S Company on May 1, 2025, for a cash payment of $318,000. During the calendar year 2025, S Company earned $210,000 evenly throughout the year and declared a dividend of $75,000 on November 1. What is the amount needed to establish reciprocity under the cost method in the preparation of a consolidated workpaper on December 31, 2025? a) $52,000 b) $65,000 c) $62,000 d) $108,000 Answer: a Question Title: Test Bank (Multiple Choice) Question 21 Difficulty: Medium Learning Objective: 5 Prepare the workpaper eliminating entries for the year of acquisition (and subsequent years) for the cost and equity methods. Section Reference: 4.2 22. Under the partial equity method, the entry to eliminate subsidiary income and dividends includes a debit to: a) Dividend Income. b) Dividends Declared - S Company. c) Equity in Subsidiary Income. d) Retained Earnings - S Company. Answer: c Question Title: Test Bank (Multiple Choice) Question 22 Difficulty: Medium Learning Objective: 5 Prepare the workpaper eliminating entries for the year of acquisition (and subsequent years) for the cost and equity methods. Section Reference: 4.3

23. A parent company uses the partial equity method to account for an investment in common stock of its subsidiary. A portion of the dividends received this year were in excess of the parent company’s share of the subsidiary’s earnings subsequent to the date of the investment. The amount of dividend income that should be reported in the parent company’s separate income statement should be: a) zero. b) the total amount of dividends received this year. c) the portion of the dividends received this year that were in excess of the parent’s share of subsidiary’s earnings subsequent to the date of investment. d) the portion of the dividends received this year that were not in excess of the parent’s share of subsidiary’s earnings subsequent to the date of investment. Answer: a Question Title: Test Bank (Multiple Choice) Question 23

Difficulty: Easy Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method. Section Reference: 4.3

24. Prime Industries acquired a 70 percent interest in Suburbia Company by purchasing 14,000 of its 20,000 outstanding shares of common stock at book value of $210,000 on January 1, 2024. Suburbia reported net income in 2024 of $90,000 and in 2025 of $120,000 earned evenly throughout the respective years. Prime received $24,000 dividends from Suburbia in 2024 and $36,000 in 2025. Prime uses the equity method to record its investment. The balance of Prime’s Investment in Suburbia account at December 31, 2025 is: a) $210,000 b) $285,000 c) $297,000 d) $315,000 Answer: c Question Title: Test Bank (Multiple Choice) Question 24 Difficulty: Easy Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method. Section Reference: 4.3

25. Prime Industries acquired a 70 percent interest in Suburbia Company by purchasing 14,000 of its 20,000 outstanding shares of common stock at book value of $210,000 on January 1, 2024. Suburbia reported net income in 2024 of $90,000 and in 2025 of $120,000 earned evenly throughout the respective years. Prime received $24,000 dividends from Suburbia in 2024 and $36,000 in 2025. Prime uses the equity method to record its investment. Prime should record investment income from Suburbia during 2025 of: a) $36,000 b) $120,000 c) $84,000 d) $48,000 Answer: c Question Title: Test Bank (Multiple Choice) Question 25 Difficulty: Easy Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method. Section Reference: 4.3 26. Pall, Inc, owns 40% of the outstanding stock of Sibil Company. During 2025, Pall received a $4,000 cash dividend from Sibil. What effect did this dividend have on Pall’s 2025 financial statements?

a) Increased total assets. b) Decreased total assets. c) Increased income. d) Decreased investment account. Answer: d Question Title: Test Bank (Multiple Choice) Question 26 Difficulty: Easy Learning Objective: 1 Describe the accounting treatment required under current GAAP for varying levels of influence or control by investors., 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method. Section Reference: 4.1, 4.3 27. Pine, Inc. owns 40% of Supra Corporation. During the year, Supra had net earnings of $200,000 and paid dividends of $50,000. Masters used the cost method of accounting. What effect would this have on the investment account, net earnings, and retained earnings, respectively? a) understate, overstate, overstate. b) overstate, understate, understate c) overstate, overstate, overstate d) understate, understate, understate Answer: d Question Title: Test Bank (Multiple Choice) Question 27 Difficulty: Medium Learning Objective: 1 Describe the accounting treatment required under current GAAP for varying levels of influence or control by investors., 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method. Section Reference: 4.1, 4.2, 4.3 28. On the consolidated statement of cash flows, the parent’s acquisition of additional shares of the subsidiary’s stock directly from the subsidiary is reported as: a) an investing activity. b) a financing activity. c) an operating activity. d) none of these. Answer: d Question Title: Test Bank (Multiple Choice) Question 28 Difficulty: Medium Learning Objective: 7 Explain how the consolidated statement of cash flows differs from a single firm’s statement of cash flows. Section Reference: 4.6 29. A parent company received dividends in excess of the parent company’s share of the subsidiary’s earnings subsequent to the date of the investment. How will the parent company’s investment account be affected by those dividends under each of the following accounting methods?

a) Cost Method, no effect; Partial Equity Method, no effect b) Cost Method, decreased; Partial Equity Method, no effect c) Cost Method, no effect; Partial Equity Method, decreased d) Cost Method, decreased; Partial Equity Method, decreased Answer: d Question Title: Test Bank (Multiple Choice) Question 29 Difficulty: Hard Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method. Section Reference: 4.1, 4.5 30. In the preparation of a consolidated statement of cash flows using the indirect method of presenting cash flows from operating activities, the amount of the noncontrolling interest in consolidated income is: a) combined with the controlling interest in consolidated net income. b) deducted from the controlling interest in consolidated net income. c) reported as a significant noncash investing and financing activity in the notes. d) reported as a component of cash flows from financing activities. Answer: a Question Title: Test Bank (Multiple Choice) Question 30 Difficulty: Medium Learning Objective: 7 Explain how the consolidated statement of cash flows differs from a single firm’s statement of cash flows. Section Reference: 4.6 31. When separate tax returns are filed, the parent company will include dividends received from the subsidiary in its taxable income, while the subsidiary’s reported income is included in _______________. a) equity b) consolidated net income c) consolidated retained earnings d) gross income Answer: b Question Title: Test Bank (Multiple Choice) Question 31 Difficulty: Medium Learning Objective: 1 Describe the accounting treatment required under current GAAP for varying levels of influence or control by investors. Section Reference: Appendix 4B 32. When the undistributed earnings of the subsidiary is not expected to be realized until the subsidiary is sold, ____________is used to compute deferred taxes. a) equity

b) dividends-received exclusion c) capital gains tax rate d) none of the above Answer: c Question Title: Test Bank (Multiple Choice) Question 32 Difficulty: Medium Learning Objective: 1 Describe the accounting treatment required under current GAAP for varying levels of influence or control by investors. Section Reference: Appendix 4B

Question Type: Essay

33. There are three levels of influence or control by an investor over an investee which determine the appropriate accounting treatment. Identify and briefly describe the three levels and their accounting treatment. Answer: The three levels of influence (control) over an investee are (1) no significant influence, (2) significant influence, and (3) effective control. When an investor has no significant influence over an investee, the investment is accounted for at fair value with year-end adjustment for market changes (the cost method). If the investor has significant influence over the investee, the investment is accounted for under the equity method. In the equity method, the investor adjusts the investment account for changes in the investee's net assets. Question Title: Test Bank (Essay) Question 33 Difficulty: Medium Learning Objective: 1 Describe the accounting treatment required under current GAAP for varying levels of influence or control by investors. Section Reference: 4.1 34. Two methods are available to account for interim acquisitions of a subsidiary’s stock at the end of the first year. Describe the two methods of accounting for interim acquisitions. Answer: The two methods of accounting for interim acquisitions are the full-year reporting alternative and the partial-year reporting alternative. The full-year method includes the subsidiary's revenues and expenses in the consolidated income statement for the entire year and then makes a deduction at the bottom of the income statement for the preacquisition earnings. The partial-year method includes in the consolidated income statement only the subsidiary's revenue and expense amounts for the period after acquisition. The full-year method is preferred. Question Title: Test Bank (Essay) Question 34 Difficulty: Medium Learning Objective: 6 Describe how to account for interim acquisitions of subsidiary stock at the end of the first year. Section Reference: 4.5

Question Type: Problems 35. On January 1, 2025, Prince Company purchased an 80% interest in the common stock of Sivet Company for $1,040,000, which was $60,000 greater than the book value of equity acquired. The difference between implied and book value relates to the subsidiary’s land. The following information is from the consolidated retained earnings section of the consolidated statements workpaper for the year ended December 31, 2025:

1/01/25 retained earnings Net income Dividends declared 12/31/25 retained earnings

SIVET COMPANY $300,000 220,000 (80,000) $440,000

CONSOLIDATED BALANCES $1,400,000 680,000 (140,000) $1,940,000

Sivet’s stockholders’ equity includes only common stock and retained earnings. Required: A. Prepare the workpaper eliminating entries for a consolidated statements workpaper on December 31, 2025. Prince uses the cost method. B. Compute the total noncontrolling interest to be reported on the consolidated balance sheet on December 31, 2025. Answer: A. Dividend Income (80,000 × .80) Dividends Declared – Sivet Common Stock – Sivet Retained Earnings, 1/1 – Sivet Difference Between Implied and Book Value Investment in Sivet Company Noncontrolling Interest in Equity

64,000 64,000 925,000* 300,000 75,000** 1,040,000 260,000

*[(1,040,000 – 60,000)/.8] – 300,000 **60,000/.8 = 75,000 Land Difference Between Implied and Book Value

75,000

B. Noncontrolling Interest: In retained earnings 300,000 × .20 In 2025 net income 220,000 × .20 In dividends declared 80,000 × .20 In common stock of Sivet 925,000 × .20 In difference between implied and book value 75,000 x .20 Total noncontrolling interest Question Title: Test Bank (Problem) Question 4-1

75,000

$60,000 44,000 (16,000) 185,000 15,000 $288,000

Difficulty: Medium Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method., 4 Prepare a schedule for the computation and allocation of the difference between implied and book values. Section Reference: 4.2

36. On October 1, 2025, Pamela Company purchased 90% of the common stock of Shingle Company for $290,000. Additional information for both companies for 2025 follows:

Common stock Other contributed capital Retained Earnings, 1/1 Net Income Dividends declared (10/31)

PAMELA $300,000 120,000 240,000 260,000 40,000

SHINGLE $90,000 40,000 50,000 160,000 8,000

Any difference between implied and book value relates to Shingle’s land. Pamela uses the cost method to record its investment in Shingle. Shingle Company’s income was earned evenly throughout the year. Required: A. Prepare the workpaper entries that would be made on a consolidated statements workpaper on December 31, 2025. Use the full year reporting alternative. B. Calculate the controlling interest in consolidated net income for 2025. Answer: A. Dividend Income (8,000 × .90) Dividends Declared – Shingle

7,200 7,200

Common Stock - Shingle 90,000 Other Contributed Capital – Shingle 40,000 Retained Earnings 1/1 – Shingle 50,000 Difference between Implied# and Book Value (290,000/.9 – 300,000*) 22,222 Subsidiary Income Purchased (160,000 × 9/12) 120,000 Investment in Shingle Company Noncontrolling Interest in Equity (.10 x $322,222)

290,000 32,222

*BV=[90,000 + 40,000 + 50,000 + (160,000 × 9/12)] = $300,000 #Implied Value = Purchase Price/90% = $322,222 Land Difference Between Implied and Book Value B. Controlling interest in Consolidated Net Income Pamela’s reported net income – dividend income from Shingle Pamela’s income from independent operations

22,222 22,222

$260,000 7,200 252,800

+ Pamela’s share of Shingle’s net income in 2025 since acquisition (.90 × 40,000) 36,000 Controlling Interest in Consolidated Net Income $288,800

Question Title: Test Bank (Problem) Question 4-2 Difficulty: Hard Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method., 3 Understand the use of the workpaper in preparing consolidated financial statements., 4 Prepare a schedule for the computation and allocation of the difference between implied and book values. Section Reference: 4.3

37. On January 1, 2025, Pioneer Company purchased 80% of the common stock of Shipley Company for $600,000. At that time, Shipley’s stockholders’ equity consisted of the following: Common stock Other contributed capital Retained earnings

$220,000 90,000 320,000

During 2025, Shipley distributed a dividend in the amount of $120,000 and at year-end reported a $320,000 net income. Any difference between implied and book value relates to subsidiary goodwill. Pioneer Company uses the equity method to record its investment. No impairment of goodwill is observed in the first year. Required: A. Prepare on Pioneer Company’s books journal entries to record the investment related activities for 2025. B. Prepare the workpaper eliminating entries for a workpaper on December 31, 2025.

Answer: A. Investment in Shipley Company Cash Investment in Shipley Company (.80 × 320,000) Equity in Subsidiary Income

600,000 600,000

256,000 256,000

Cash (.80 × 120,000) Investment in Shipley Company

96,000

B. Equity in Subsidiary Income Dividends Declared – Shipley Investment in Shipley Company

216,000

Common Stock – Shipley Other Contributed Capital – Shipley Retained Earnings 1/1 – Shipley

220,000 90,000 320,000

96,000

96,000 120,000

Difference Between Implied and Book Value Investment in Shipley Company Noncontrolling Interest in Equity

120,000 600,000 150,000

Goodwill 120,000 Difference Between Implied and Book Value

120,000

Question Title: Test Bank (Problem) Question 4-3 Difficulty: Hard Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method., 3 Understand the use of the workpaper in preparing consolidated financial statements., 4 Prepare a schedule for the computation and allocation of the difference between implied and book values. Section Reference: 4.3

38. Prune Company purchased 80% of the outstanding common stock of Selma Company on January 2, 2024, for $680,000. The composition of Selma Company’s stockholders’ equity on January 2, 2024, and December 31, 2025, was: 1/2/24 12/31/25 Common stock $540,000 $540,000 Other contributed capital 325,000 325,000 Retained earnings (deficit) (60,000) 295,000 Total stockholders’ equity $805,000 $1,160,000 During 2025, Selma Company earned $210,000 net income and declared a $60,000 dividend. Any difference between implied and book value relates to land. Prune Company uses the cost method to record its investment in Selma Company. Required: A. Prepare any journal entries that Prune Company would make on its books during 2025 to record the effects of its investment in Selma Company. B. Prepare, in general journal form, all workpaper entries needed for the preparation of a consolidated statements workpaper on December 31, 2025. Answer: A. Cash

48,000 Dividend Income (.8 × $60,000)

To Establish Reciprocity Investment in Selma Company 1/1 Retained Earnings - Prune Company

48,000

164,000 164,000

$295,000 – $210,000 + $60,000 = $145,000 Retained Earnings on 1/1/25 $145,000 + $60,000 (deficit on date of acquisition) = $205,000 increase in retained earnings from date of acquisition to 1/1/25 Eliminating Entries

Dividend Income Dividends Declared – Selma Company

48,000 48,000

Common Stock – Selma 540,000 Other Contributed Capital – Selma 325,000 1/1 Retained Earnings – Selma 145,000 Difference Between Implied and Book Value45,000* Investment in Selma Company Noncontrolling Interest in Equity

844,000 211,000

Implied Value = $680,000/.80 = $850,000. Diff = $850,000 – $805,000BV. Land 45,000 Difference Between Implied and Book Value

45,000

Question Title: Test Bank (Problem) Question 4-4 Difficulty: Hard Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method., 3 Understand the use of the workpaper in preparing consolidated financial statements., 4 Prepare a schedule for the computation and allocation of the difference between implied and book values. Section Reference: 4.3

39. P Company purchased 90% of the common stock of S Company on January 2, 2025 for $900,000. On that date, S Company’s stockholders’ equity was as follows: Common stock, $20 par value Other contributed capital Retained earnings

$400,000 100,000 450,000

During 2025, S Company earned $200,000 and declared a $100,000 dividend. P Company uses the partial equity method to record its investment in S Company. The difference between implied and book value relates to land. Required: Prepared, in general journal form, all eliminating entries for the preparation of a consolidated statements workpaper on December 31, 2025. Answer: Equity in Subsidiary Income Dividends Declared - S Company Investment in S Company Common Stock – S Other Contributed Capital – S 1/1 Retained Earnings – S Difference Between Implied and Book Value Investment in S Company Noncontrolling Interest in Equity

270,000 90,000 180,000 400,000 100,000 450,000 50,000 900,000 100,000

Land 50,000 Difference Between Implied and Book Value

50,000

Question Title: Test Bank (Problem) Question 4-5 Difficulty: Hard Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method., 3 Understand the use of the workpaper in preparing consolidated financial statements., 4 Prepare a schedule for the computation and allocation of the difference between implied and book values. Section Reference: 4.3

40. Pure Company acquired 80% of the outstanding common stock of Saxxon Company on January 2, 2024 for $675,000. At that time, Saxxon’s total stockholders’ equity amounted to $1,000,000. Saxxon Company reported net income and dividends for the last two years as follows:

Reported net income Dividends distributed

2024 $45,000 35,000

2025 $60,000 75,000

Required: Prepare journal entries for Pure Company for 2024 and 2025 assuming Pure uses: A. The cost method to record its investment B. The complete equity method to record its investment. The difference between implied value and the book value of equity acquired was attributed solely to a building, with a 20-year expected life.

Answer: A. 2024 Investment in Saxxon Company Cash Cash Dividend Income (.8 × $35,000)

675,000 675,000 28,000 28,000

2025 Cash (.8 × $75,000) 60,000 Investment in Saxxon Company (.8 × $5,000) Dividend Income B. 2024 Investment in Saxxon Company Cash

675,000

Cash

28,000 Investment in Saxxon Company

4,000 56,000

675,000

28,000

Investment in Saxxon Company Equity in Subsidiary Income (.8 × $45,000) Equity in Subsidiary Income ($75,000*/20) Investment in Saxxon Company

36,000 36,000

3,750 3,750

* $675,000/.8 – $750,000 = $93,750 write-up of PPE; Parent’s share = 80%, or $75,000 2025 Cash Investment in Saxxon Company

60,000 60,000

Investment in Saxxon Company Equity in Subsidiary Income (.8 × $60,000) Equity in Subsidiary Income Investment in Saxxon Company

48,000 48,000

3,750 3,750

Question Title: Test Bank (Problem) Question 4-6 Difficulty: Hard Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method., 3 Understand the use of the workpaper in preparing consolidated financial statements., 4 Prepare a schedule for the computation and allocation of the difference between implied and book values. Section Reference: 4.3

41. Pell Company purchased 90% of the stock of Salton Company on January 1, 2013, for $1,860,000, an amount equal to $60,000 in excess of the book value of equity acquired. All book values were equal to fair values at the time of purchase (i.e., any excess payment relates to subsidiary goodwill). On the date of purchase, Salton Company’s retained earnings balance was $200,000. The remainder of the stockholders’ equity consists of no-par common stock. During 2023, Salton Company declared dividends in the amount of $40,000, and reported net income of $160,000. The retained earnings balance of Salton Company on December 31, 2022 was $640,000. Pell Company uses the cost method to record its investment. No impairment of goodwill was recognized between the date of acquisition and December 31, 2023. Required: Prepare in general journal form the workpaper entries that would be made in the preparation of a consolidated statements workpaper on December 31, 2023. Answer: Workpaper entries Investment in Salton Company Retained Earnings 1/1 - Pell company To establish reciprocity (.90 × ($640,000 – $200,000)) Dividend Income

396,000 396,000

36,000

Dividends Declared - Salton Company

36,000

Common Stock - Salton Company# 1,800,000 Retained Earnings 1/1/111/1/14 - Salton Company 640,000 Difference between Implied and Book Values 66,667 Investment in Salton Company ($1,860,000 + $396,000) Noncontrolling Interest in Equity ($206,667 + $44,000##) #$2,000,000– $200,000 ##NCI share of change in R/E = .10($640,000 - $200,000) Goodwill* Difference between Implied and Book Values

2,256,000 250,667

66,667 66,667

*See computation of difference between implied and book values on following page. Computation and Allocation of Difference between Implied and Book Value Parent Share Purchase price and implied value Equity at book value Difference between Implied value and bv Allocated to undervalued land Balance * $1,860,000 – $60,000 ** $1,800,000/.9

$1,860,000 1,800,000* 60,000 (60,000) -0-

NonEntire Controlling Value Share 206,667 2,066,667 200,000 2,000,000** 6,667 66,667 (6,667) (66,667) -0-0-

Question Title: Test Bank (Problem) Question 4-7 Difficulty: Hard Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method., 3 Understand the use of the workpaper in preparing consolidated financial statements., 4 Prepare a schedule for the computation and allocation of the difference between implied and book values. Section Reference: 4.2

42. On January 1, 2025, Pruit Company purchased 85% of the outstanding common stock of Salty Company for $525,000. On that date, Salty Company’s stockholders’ equity consisted of common stock, $150,000; other contributed capital, $60,000; and retained earnings, $210,000. Pruit Company paid more than the book value of net assets acquired because the recorded cost of Salty Company’s land was significantly less than its fair value. During 2025 Salty Company earned $222,000 and declared and paid a $75,000 dividend. Pruit Company used the partial equity method to record its investment in Salty Company. Required: A.

Prepare the investment related entries on Pruit Company’s books for 2025.

Prepare the workpaper eliminating entries for a workpaper on December 31, 2025.

Answer: A. Investment in Salty Cash

525,000 525,000

Investment in Salty ($222,000)(.85) Equity in Subsidiary Income

188,700

Cash ($75,000)(.85) Investment in Salty

63,750

B. Equity in Subsidiary Income Dividends Declared - Salty Investment in Salty

188,700

63,750 188,700 63,750 124,950

Common Stock - Salty Other Contributed Capital - Salty Retained Earnings 1/1 - Salty Difference between Implied and Book Value Investment in Salty Noncontrolling Interest in Equity

150,000 60,000 210,000 197,647

Land Difference between Implied and Book Value

197,647

525,000 92,647

197,647

Computation and Allocation of Difference between Implied and Book Value Parent NonShare controlling share Purchase price and implied value $ 525,000 92,647 Book Value of Equity Acquired 357,000 63,000 Difference between Implied and Book Value 168,000 29,647 Adjust Land Upward (168,000) (29,647) Balance -0-0-

Entire value 617,647 420,000 197,647 (197,647) -0-

Question Title: Test Bank (Problem) Question 4-8 Difficulty: Hard Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method., 3 Understand the use of the workpaper in preparing consolidated financial statements., 4 Prepare a schedule for the computation and allocation of the difference between implied and book values. Section Reference: 4.3

43. Pinta Company purchased 40% of Snuggie Corporation on January 1, 2025 for $150,000. Snuggie Corporation’s balance sheet at the time of acquisition was as follows:

Cash Accounts Receivable Inventory Land Buildings & Equipment Less: Acc. Depreciation

$30,000 120,000 80,000 150,000 300,000 (120,000)

Current Liabilities Bonds Payable Common Stock Additional Paid in Capital Retained Earnings

$40,000 200,000 200,000 40,000 80,000

Total Assets

$560,000

Total Liabilities and Equities

$560,000

During 2025, Snuggie Corporation reported net income of $30,000 and paid dividends of $9,000. The fair values of Snuggie’s assets and liabilities were equal to their book values at the date of acquisition, with the exception of Building and Equipment, which had a fair value of $35,000 above book value. All buildings and equipment had a remaining useful life of five years at the time of the acquisition. The amount attributed to goodwill as a result of the acquisition in not impaired. Required: A. What amount of investment income will Pinta record during 2025 under the equity method of accounting? B. What amount of income will Pinta record during 2025 under the cost method of accounting? C. What will be the balance in the investment account on December 31, 2025 under the cost and equity method of accounting? Answer: A. Pinta Company 2025 equity-method income: Proportionate share of reported income ($30,000 x .40) Amortization of differential assigned to: Buildings and equipment [($35,000 x .40) / 5 years] Goodwill ($8,000: not impaired) Investment Income

$ 12,000 (2,800) -0$ 9,200

Assignment of differential Purchase price Proportionate share of book value of net assets ($320,000 x .40) Proportionate share of fair value increase in buildings and equipment ($35,000 x .40) Goodwill

$150,000 (128,000) (14,000) $ 8,000

Dividend income, 2025 ($9,000 x .40)

$ 3,600

Cost-method account balance (unchanged):

$150,000

Equity-method account balance:

Balance, January 1, 2025 Investment income Dividends received Balance, December 31, 2025

$150,000 9,200 (3,600) $155,600

Question Title: Test Bank (Problem) Question 4-9 Difficulty: Medium Learning Objective: 2 Prepare journal entries on the parent’s books to account for an investment using the cost method, the partial equity method, and the complete equity method., 3 Understand the use of the workpaper in preparing consolidated financial statements., 4 Prepare a schedule for the computation and allocation of the difference between implied and book values. Section Reference: 4.2, 4.3

Package Title: Test Bank Questions Course Title: Advanced Accounting, 8e Chapter: Allocation and Depreciation of Differences between Implied and Book Values Chapter Number: 5

Question Type: Multiple Choice

1. When the implied value exceeds the aggregate fair values of identifiable net assets, the residual difference is accounted for as: a) excess of implied over fair value. b) a deferred credit. c) difference between implied and fair value. d) goodwill. Answer: d Question Title: Test Bank (Multiple Choice) Question 01 Difficulty: Easy Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities. Section Reference: 5-1

2. Under which set of circumstances would it not be appropriate to assume the value the noncontrolling shares is the same as the controlling shares? a) The acquisition is for less than 100% of the subsidiary. b) The fair value of the noncontrolling shares can be inferred from the value implied by the acquisition price. c) Active market prices for shares not obtained by the acquirer imply a different value. d) The amount of the “control premium” cannot be determined . Answer: c Question Title: Test Bank (Multiple Choice) Question 02 Difficulty: Medium Learning Objective: 4 Describe how the allocation process differs if less than 100% of the subsidiary is acquired. Section Reference: 5.1

3. On January 1, 2024, Lester Company purchased 70% of Stork Corporation's $5 par common stock for $600,000. The book value of Stork net assets was $640,000 at that time. The fair value of Stork's identifiable net assets were the same as their book value except for equipment that was $40,000 in excess of the book value. In the January 1, 2024, consolidated balance sheet, goodwill would be reported at: a) $152,000.

b) $177,143. c) $80,000. d) $0. Answer: b Question Title: Test Bank (Multiple Choice) Question 03 Difficulty: Hard Learning Objective: 4 Describe how the allocation process differs if less than 100% of the subsidiary is acquired. Section Reference: 5-1

4. When the value implied by the purchase price of a subsidiary is in excess of the fair value of identifiable net assets, the workpaper entry to allocate the difference between implied and book value includes a: a) debit to Difference Between Implied and Book Value. b) credit to Excess of Implied over Fair Value. c) credit to Difference Between Implied and Book Value. d) debit to Difference Between Implied and Book Value and credit to Excess of Implied over Fair Value. Answer: c Question Title: Test Bank (Multiple Choice) Question 04 Difficulty: Medium Learning Objective: 4 Describe how the allocation process differs if less than 100% of the subsidiary is acquired. Section Reference: 5-1

5. If the fair value of the subsidiary's identifiable net assets exceeds both the book value and the value implied by the purchase price, the difference between implied and book value initially will be: a) debited in the investment elimination workpaper entry. b) debited to fair value. c) credited in the investment elimination workpaper entry. d) credited as book value. Answer: c Question Title: Test Bank (Multiple Choice) Question 05 Difficulty: Medium Learning Objective: 2 Describe FASB’s position on accounting for bargain acquisitions.; 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods. Section Reference: 5-1

6. The entry to amortize the amount of difference between implied and book value allocated to an unspecified intangible is recorded:

a) on the subsidiary's books. b) on the parent's books. c) on the consolidated statements workpaper. d) on the parent's books and on the consolidated statements workpaper. Answer: c Question Title: Test Bank (Multiple Choice) Question 06 Difficulty: Medium Learning Objective: 3 Explain how goodwill is measured at the time of the acquisition.; 4 Describe how the allocation process differs if less than 100% of the subsidiary is acquired. Section Reference: 5-1

7. The excess of fair value over implied value must be allocated to reduce proportionally the fair values initially assigned to: a) current assets. b) noncurrent assets. c) both current and noncurrent assets. d) none of these Answer: d Question Title: Test Bank (Multiple Choice) Question 07 Difficulty: Easy Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 2 Describe FASB’s position on accounting for bargain acquisitions. Section Reference: 5-1 8. In a business combination accounted for as an acquisition, how should the excess of fair value of identifiable net assets acquired over implied value be treated? a) Amortized as a credit to income over a period not to exceed forty years. b) Amortized as a charge to expense over a period not to exceed forty years. c) Amortized directly to retained earnings over a period not to exceed forty years. d) Recognized as an ordinary gain in the year of acquisition. Answer: d Question Title: Test Bank (Multiple Choice) Question 08 Difficulty: Easy Learning Objective: 2 Describe FASB’s position on accounting for bargain acquisitions. Section Reference: 5-1

9. On November 30, 2021, Piani Incorporated purchased for cash of $25 per share all 400,000 shares of the outstanding common stock of Surge Company. Surge 's balance sheet at November 30, 2021, showed a book value of $8,000,000. Additionally, the fair value of Surge's property, plant, and equipment on November 30, 2021, was $1,200,000 in excess of its book value. What amount, if any, will be shown in

the balance sheet caption "Goodwill" in the November 30, 2021, consolidated balance sheet of Piani Incorporated, and its wholly owned subsidiary, Surge Company? a) $0. b) $800,000. c) $1,200,000. d) $2,000,000. Answer: b Question Title: Test Bank (Multiple Choice) Question 09 Difficulty: Medium Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities. Section Reference: 5-1

10. Goodwill represents the excess of the implied value of an acquired company over the: a) aggregate fair values of identifiable assets less liabilities assumed. b) aggregate fair values of tangible assets less liabilities assumed. c) aggregate fair values of intangible assets less liabilities assumed. d) book value of an acquired company. Answer: a Question Title: Test Bank (Multiple Choice) Question 10 Difficulty: Easy Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities. Section Reference: 5-1

11. Dividends declared by a subsidiary are eliminated against dividend income recorded by the parent under the: a) partial equity method. b) equity method. c) cost method. d) equity and partial equity methods. Answer: c Question Title: Test Bank (Multiple Choice) Question 11 Difficulty: Medium Learning Objective: 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods. Section Reference: 5.3

12. _______is the establishment of a new accounting and reporting basis for a subsidiary company in its separate financial statements based on the purchase price paid by the parent company to acquire a controlling interest in the outstanding voting stock of the subsidiary company. a) Push down accounting b) Computational accounting c) Controlling interest d) The complete equity method Answer: a Question Title: Test Bank (Multiple Choice) Question 12 Difficulty: Medium Learning Objective: 10 Understand the concept of push down accounting Section Reference: 5.10

13. The SEC requires the use of push down accounting when: a) the ownership change is greater than 50% b) the ownership change is greater than 80% c) the ownership change is greater than 85% d) regardless of the size of the ownership stake Answer: d Question Title: Test Bank (Multiple Choice) Question 13 Difficulty: Easy Learning Objective: 10 Understand the concept of push down accounting. Section Reference: 5-10

14. Under push down accounting, the workpaper entry to eliminate the investment account includes a: a) debit to Goodwill. b) debit to Revaluation Capital. c) credit to Revaluation Capital. d) debit to Revaluation Assets. Answer: b Question Title: Test Bank (Multiple Choice) Question 14 Difficulty: Medium Learning Objective: 10 Understand the concept of push down accounting. Section Reference: 5-10 15. Simple Company, a 70%-owned subsidiary of Punter Corporation, reported net income of $240,000 and paid dividends totaling $90,000 during Year 3. Year 3 amortization of differences between current fair

values and carrying amounts of Simple's identifiable net assets at the date of the business combination was $45,000. The noncontrolling interest in net income of Simple for Year 3 was: a) $58,500. b) $13,500. c) $27,000. d) $72,000. Answer: a Question Title: Test Bank (Multiple Choice) Question 15 Difficulty: Hard Learning Objective: 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods. Section Reference: 5.2, 5.4, 5.6

16. Pinta Company acquired an 80% interest in Strummer Company on January 1, 2021, for $270,000 cash when Strummer Company had common stock of $150,000 and retained earnings of $150,000. All excess was attributable to plant assets with a 10-year life. Strummer Company made $30,000 in 2021 and paid no dividends. Pinta Company’s separate income in 2021 was $375,000. Controlling interest in consolidated net income for 2021 is: a) $405,000. b) $399,000. c) $396,000. d) $375,000. Answer: c Question Title: Test Bank (Multiple Choice) Question 16 Difficulty: Hard Learning Objective: 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods. Section Reference: 5.2, 5.4, 5.6

17. In preparing consolidated working papers, beginning retained earnings of the parent company will be adjusted in years subsequent to acquisition with an elimination entry whenever: a) a noncontrolling interest exists. b) it does not reflect the equity method. c) the cost method has been used only. d) the complete equity method is in use. Answer: b Question Title: Test Bank (Multiple Choice) Question 17 Difficulty: Medium

Learning Objective: 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods. Section Reference: 5.2, 5.7 18. On January 1, 2021, Pamela Company purchased 75% of the common stock of Snicker Company. Separate balance sheet data for the companies at the combination date are given below:

Cash Accounts receivable Inventory Land Plant assets Acc. depreciation Investment in Snicker Co Total assets

Pamela Co. $ 18,000 108,000 99,000 60,000 525,000 (180,000) 330,000 $960,000

Accounts payable Capital stock Retained earnings Total liabilities & equities

$156,000 600,000 204,000 $960,000

Snicker Co. Book Values $155,000 20,000 26,000 24,000 225,000 (45,000)

Snicker Co. Fair Values $155,000 20,000 45,000 45,000 300,000

$405,000

$565,000

$105,000 225,000 75,000 $405,000

$105,000

Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2021. What amount of inventory will be reported? a) $125,000 b) $132,750 c) $139,250 d) $144,000 Answer: d Question Title: Test Bank (Multiple Choice) Question 18 Difficulty: Easy Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.; 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods. Section Reference: 5.1, 5.3, 5.5

19. On January 1, 2021, Pamela Company purchased 75% of the common stock of Snicker Company. Separate balance sheet data for the companies at the combination date are given below:

Pamela Co.

Snicker Co. Book Values

Snicker Co. Fair Values

Cash Accounts receivable Inventory Land Plant assets Acc. depreciation Investment in Snicker Co Total assets

$ 18,000 108,000 99,000 60,000 525,000 (180,000) 330,000 $960,000

$155,000 20,000 26,000 24,000 225,000 (45,000)

$155,000 20,000 45,000 45,000 300,000

$405,000

$565,000

Accounts payable Capital stock Retained earnings Total liabilities & equities

$156,000 600,000 204,000 $960,000

$105,000 225,000 75,000 $405,000

$105,000

Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2021.

What amount of goodwill will be reported? a) ($20,000) b) ($25,000) c) $25,000 d) $0 Answer: d Question Title: Test Bank (Multiple Choice) Question 19 Difficulty: Easy Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.; 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods. Section Reference: 5.1, 5.3, 5.5

20. On January 1, 2021, Pamela Company purchased 75% of the common stock of Snicker Company. Separate balance sheet data for the companies at the combination date are given below:

Cash Accounts receivable Inventory Land Plant assets Acc. depreciation Investment in Snicker Co Total assets

Pamela Co. $ 18,000 108,000 99,000 60,000 525,000 (180,000) 330,000 $960,000

Snicker Co. Book Values $155,000 20,000 26,000 24,000 225,000 (45,000)

Snicker Co. Fair Values $155,000 20,000 45,000 45,000 300,000

$405,000

$565,000

Accounts payable Capital stock Retained earnings Total liabilities & equities

$156,000 600,000 204,000 $960,000

$105,000 225,000 75,000 $405,000

$105,000

Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2021. What is the amount of consolidated retained earnings? a) $204,000 b) $209,250 c) $260,250 d) $279,000 Answer: a Question Title: Test Bank (Multiple Choice) Question 20 Difficulty: Medium Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.; 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods. Section Reference: 5.1, 5.3, 5.5

21. On January 1, 2021, Pamela Company purchased 75% of the common stock of Snicker Company. Separate balance sheet data for the companies at the combination date are given below:

Cash Accounts receivable Inventory Land Plant assets Acc. depreciation Investment in Snicker Co Total assets

Pamela Co. $ 18,000 108,000 99,000 60,000 525,000 (180,000) 330,000 $960,000

Accounts payable Capital stock Retained earnings Total liabilities & equities

$156,000 600,000 204,000 $960,000

Snicker Co. Book Values $155,000 20,000 26,000 24,000 225,000 (45,000)

Snicker Co. Fair Values $155,000 20,000 45,000 45,000 300,000

$405,000

$565,000

$105,000 225,000 75,000 $405,000

$105,000

Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2021. What is the amount of total assets?

a) $921,000 b) $1,185,000 c) $1,525,000 d) $1,195,000 Answer: d Question Title: Test Bank (Multiple Choice) Question 21 Difficulty: Medium Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.; 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods. Section Reference: 5.1, 5.3, 5.5

22. Sleepy Company, a 70%-owned subsidiary of Pickle Corporation, reported net income of $600,000 and paid dividends totaling $225,000 during Year 3. Year 3 amortization of differences between current fair values and carrying amounts of Sleepy's identifiable net assets at the date of the business combination was $112,500. The noncontrolling interest in consolidated net income of Sleepy for Year 3 was: a) $146,250. b) $33,750. c) $67,500. d) $180,000. Answer: a Question Title: Test Bank (Multiple Choice) Question 22 Difficulty: Hard Learning Objective: 4 Describe how the allocation process differs if less than 100% of the subsidiary is acquired.; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.; 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods. Section Reference: 5.5, 5.6

23. Primer Company acquired an 80% interest in SealCoat Company on January 1, 2021, for $450,000 cash when SealCoat Company had common stock of $250,000 and retained earnings of $250,000. All excess was attributable to plant assets with a 10-year life. SealCoat Company made $50,000 in 2021 and paid no dividends. Primer Company’s separate income in 2021 was $625,000. The controlling interest in consolidated net income for 2021 is: a) $675,000. b) $665,000. c) $660,000. d) $625,000. Answer: c

Question Title: Test Bank (Multiple Choice) Question 23 Difficulty: Medium Learning Objective: 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods. Section Reference: 5.2, 5.4, 5.6, 5.8

24. On January 1, 2021, Poole Company purchased 75% of the common stock of Swimmer Company. Separate balance sheet data for the companies at the combination date are given below:

Cash Accounts receivable Inventory Land Plant assets Acc. depreciation Investment in Swimmer Co. Total assets

Poole Co. $ 24,000 144,000 132,000 78,000 700,000 (240,000) 440,000 $1,278,000

Accounts payable Capital stock Retained earnings Total liabilities & equities

$206,000 800,000 272,000 $1,278,000

Swimmer Co Book Values $206,000 26,000 38,000 32,000 300,000 (60,000)

Swimmer Co. Fair Values $206,000 26,000 60,000 60,000 350,000

$542,000

$702,000

$142,000 300,000 100,000 $542,000

$142,000

Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2021. What amount of inventory will be reported? a) $170,000. b) $177,000. c) $186,500. d) $192,000. Answer: d Question Title: Test Bank (Multiple Choice) Question 24 Difficulty: Easy Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.; 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods. Section Reference: 5.1, 5.3, 5.5

25. On January 1, 2021, Poole Company purchased 75% of the common stock of Swimmer Company. Separate balance sheet data for the companies at the combination date are given below:

Cash Accounts receivable Inventory Land Plant assets Acc. depreciation Investment in Swimmer Co. Total assets

Poole Co. $ 24,000 144,000 132,000 78,000 700,000 (240,000) 440,000 $1,278,000

Accounts payable Capital stock Retained earnings Total liabilities & equities

$206,000 800,000 272,000 $1,278,000

Swimmer Co Book Values $206,000 26,000 38,000 32,000 300,000 (60,000)

Swimmer Co. Fair Values $206,000 26,000 60,000 60,000 350,000

$542,000

$702,000

$142,000 300,000 100,000 $542,000

$142,000

Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2021. What amount of goodwill will be reported? a) $26,667. b) $20,000. c) $42,000. d) $86,667. Answer: a Question Title: Test Bank (Multiple Choice) Question 25 Difficulty: Easy Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.; 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods. Section Reference: 5.1, 5.3, 5.5

26. On January 1, 2021, Poole Company purchased 75% of the common stock of Swimmer Company. Separate balance sheet data for the companies at the combination date are given below:

Cash Accounts receivable Inventory Land Plant assets

Poole Co. $ 24,000 144,000 132,000 78,000 700,000

Swimmer Co Book Values $206,000 26,000 38,000 32,000 300,000

Swimmer Co. Fair Values $206,000 26,000 60,000 60,000 350,000

Acc. depreciation Investment in Swimmer Co. Total assets

(240,000) 440,000 $1,278,000

(60,000) $542,000

$702,000

Accounts payable Capital stock Retained earnings Total liabilities & equities

$206,000 800,000 272,000 $1,278,000

$142,000 300,000 100,000 $542,000

$142,000

Determine below what the consolidated balance would be for each of the requested accounts on January 2, 2021. What is the amount of total assets? a) $1,626,667. b) $1,566,667 c) $1,980,000. d) $2,006,667. Answer: b Question Title: Test Bank (Multiple Choice) Question 26 Difficulty: Easy Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.; 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods. Section Reference: 5.1, 5.3, 5.5

Question Type: Essay

27. When the value implied by the acquisition price is below the fair value of the identifiable net assets the residual amount will be negative (bargain acquisition). Explain the difference in accounting for bargain acquisition between past accounting and proposed accounting requirements. Answer: In the past, when a bargain acquisition occurred some of the acquired assets were reduced below their fair values. Long-lived assets were recorded at fair market value less an adjustment for the bargain. In addition, an extraordinary gain was recorded in certain instances. Under proposed accounting requirements, no assets are reduced below fair value. Instead the credit (negative) balance will be shown as an ordinary gain in the year of acquisition. Question Title: Test Bank (Essay) Question 27 Difficulty: Medium Learning Objective: 2 Describe FASB’s position on accounting for bargain acquisitions. Section Reference: 5.1

28. Push down accounting is an accounting method required for the subsidiary in some instances such as the banking industry. Briefly explain the concept of push down accounting. Answer: Push down accounting is the establishment of a new accounting and reporting basis for a subsidiary company in its separate financial statements based on the purchase price paid by the Parent Company to acquire a controlling interest in the outstanding voting stock of the subsidiary company. The valuation implied by the price of the stock to the Parent Company is “pushed down” to the subsidiary and used to restate its assets and liabilities in its separate financial statements. Under push down accounting, the Parent Company’s cost of acquiring a subsidiary is used to establish a new accounting basis for the assets and liabilities of the subsidiary in the subsidiary’s separate financial statements. Question Title: Test Bank (Essay) Question 28 Difficulty: Medium Learning Objective: 10 Understand the concept of push down accounting. Section Reference: 5.10

29. Phillips Company purchased a 90% interest in Standards Corporation for $2,340,000 on January 1, 2021. Standards Corporation had $1,650,000 of common stock and $1,050,000 of retained earnings on that date. The following values were determined for Standards Corporation on the date of purchase:

Inventory Land Equipment

Book Value $240,000 2,400,000 1,620,000

Fair Value $300,000 2,700,000 1,800,000

Required: A. Prepare a computation and allocation schedule for the difference between the implied and book value in the consolidated statements workpaper. B. Prepare the January 1, 2021, workpaper entries to eliminate the investment account and allocate the difference between implied and book value. Answer: A. Allocation of Difference Between Implied and Book Value

Purchase price and implied value Less: Book value of equity acquired Difference between implied and book value Inventory Land Equipment Balance (excess of FV over implied value) Gain Increase Noncontrolling interest to fair value of assets Total allocated bargain

Parent Share $2,340,000 2,430,000 (90,000) (54,000) (270,000) (162,000) (576,000) 576,000

NonControlling Entire Share Value 260,000 2,600,000 270,000 2,700,000 (10,000) (100,000) (6,000) (60,000) (30,000) (300,000) (18,000) (180,000) (64,000) (640,000) 64,000 640,000

Balance

-0B. Common Stock – Standards 1,650,000 Beginning R/E – Standards 1,050,000 Investment in Standards Corp. Difference Between Implied and Book Value Noncontrolling Interest in Equity Difference Between Implied and Book Value Inventory Land Equipment Gain on Acquisition Noncontrolling Interest

-0-

2,340,000 100,000 260,000

100,000 60,000 300,000 180,000 576,000 64,000

Question Title: Test Bank (Problem) Question 5-1 Difficulty: Hard Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities. Section Reference: 5.1

30. Pullman Corporation acquired a 90% interest in Sleeter Company for $6,500,000 on January 1 2021. At that time Sleeter Company had common stock of $4,500,000 and retained earnings of $1,800,000. The balance sheet information available for Sleeter Company on January 1, 2021, showed the following:

Inventory (FIFO) Equipment (net) Land

Book Value $1,300,000 1,500,000 3,000,000

Fair Value $1,500,000 1,900,000 3,000,000

The equipment had a remaining useful life of ten years. Sleeter Company reported $240,000 of net income in 2021 and declared $60,000 of dividends during the year. Required: Prepare the workpaper entries assuming the cost method is used, to eliminate dividends, eliminate the investment account, and to allocate and depreciate the difference between implied and book value for 2021. Answer: Dividend Income (.90 × 60,000) Dividends Declared

54,000

Beginning R/E – Sleeter 1,800,000 Common Stock – Sleeter 4,500,000 Difference Between Implied and Book Value 922,222* Investment in Sleeter Company Noncontrolling Interest *$6,500,000/.9 - $1,800,000 - $4,500,000 = $922,222 Allocated to: $922,222

54,000

6,500,000 722,222

Inventory Equipment Goodwill Cost of Goods Sold Depreciation Expense 400,000/10 Equipment 400,000– 40,000 Goodwill Difference Between Implied and Book Value

(200,000) (400,000) $ 322,222 200,000 40,000 360,000 322,222 922,222

Question Title: Test Bank (Problem) Question 5-2 Difficulty: Hard Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 4 Describe how the allocation process differs if less than 100% of the subsidiary is acquired; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods. Section Reference: 5.1, 5.2, 5.3

31. On January 1, 2021, Preston Corporation acquired an 80% interest in Spiegel Company for $2,400,000. At that time Spiegel Company had common stock of $1,800,000 and retained earnings of $800,000. The book values of Spiegel Company's assets and liabilities were equal to their fair values except for land and bonds payable. The land's fair value was $120,000 and its book value was $100,000. The outstanding bonds were issued on January 1, 2010, at 9% and mature on January 1, 2023. The bond principal is $600,000 and the current yield rate on similar bonds is 8%. Required: Prepare the workpaper entries necessary on December 31, 2021, to allocate, amortize, and depreciate the difference between implied and book value. Present Value Present value of 1 of Annuity of 1 9%, 5 periods .64993 3.88965 8%, 5 periods .68058 3.99271

Answer:

Parent Share Purchase price and implied value $2,400,000 Less: Book value of equity acquired 2,080,000 Difference between implied and book value 320,000 Land ($120,000 – $100,000) (16,000) Premium on Bonds Payable (623,954*– 600,000) 19,163 Balance 323,163 Goodwill (323,163) Balance -0-

NonControlling Share 600,000 520,000 80,000 (4,000) 4,791 80,791 (80,791) -0-

Present Value of 9% Bonds Payable discounted at 8% for 5 periods:

Entire Value 3,000,000 2,600,000 400,000 (20,000) 23,954 403,954 (403,954) -0-

$600,000 × .68058 = $408,348 54,000 × 3.99271 = 215,606 $623,954* Land Goodwill Difference Between Implied and Book Value Interest Expense Unamortized Premium on Bonds Payable (23,954 – 4,084) **[54,000 – (623,954 × .08)]

20,000 403,954 400,000 4,084** 19,870

Alternative Entries Land 20,000 Goodwill 403,954 Premium on Bonds Payable Difference Between Implied and Book Value Premium on Bonds Payable Interest Expense

23,954 400,000

4,084 4,084

Question Title: Test Bank (Problem) Question 5-3 Difficulty: Hard Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 4 Describe how the allocation process differs if less than 100% of the subsidiary is acquired; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.; 7 Understand the allocation of the difference between implied and book values to long-term debt components. Section Reference: 5.1, 5.2, 5.3, 5.9

32. Pennington Corporation purchased 80% of the voting common stock of Stafford Corporation for $3,200,000 cash on January 1, 2021. On this date the book values and fair values of Stafford Corporation's assets and liabilities were as follows: Book Value Fair Value Cash $ 70,000 $ 70,000 Receivables 240,000 240,000 Inventories 600,000 700,000 Other Current Assets 340,000 405,000 Land 600,000 720,000 Buildings – net 1,050,000 1,920,000 Equipment – net 850,000 750,000 $3,750,000 $4,805,000 Accounts Payable Other Liabilities Capital Stock Retained Earnings

$ 250,000 740,000 2,400,000 360,000 $3,750,000

$250,000 670,000

Required: Prepare a schedule showing how the difference between Stafford Corporation's implied value and the book value of the net assets acquired should be allocated.

Answer:

Purchase price and implied value Less: Book value of equity acquired

Parent Share $3,200,000 2,208,000

NonControlling Share 800,000 552,000

Entire Value 4,000,000 2,760,000

Difference between implied and book value Inventories Other Current assets Land Buildings (net) Other liabilities Equipment (net) Balance Goodwill Balance

992,000 (80,000) (52,000) (96,000) (696,000) (56,000) 80,000 92,000 (92,000) -0-

248,000 (20,000) (13,000) (24,000) (174,000) (14,000) 20,000 23,000 (23,000) -0-

1,240,000 (100,000) (65,000) (120,000) (870,000) (70,000) * 100,000 115,000 (115,000) -0-

*A debit to Other Liabilities is a reduction of their carrying value.

Question Title: Test Bank (Problem) Question 5-4 Difficulty: Hard Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 4 Describe how the allocation process differs if less than 100% of the subsidiary is acquired; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.; 8 Explain how to allocate the difference between implied and book values when some assets have fair values below book values. Section Reference: 5.1, 5.2, 5.3, 5.9

33. Plain Corporation acquired a 75% interest in Swampy Company on January 1, 2021, for $2,000,000. The book value and fair value of the assets and liabilities of Swampy Company on that date were as follows: Book Value Fair Value Current Assets $ 600,000 $ 600,000 Property & Equipment (net) 1,400,000 1,800,000 Land 700,000 900,000 Deferred Charge 300,000 300,000 Total Assets $3,000,000 $3,600,000 Less Liabilities 600,000 600,000 Net Assets $2,400,000 $3,000,000 The property and equipment had a remaining life of 6 years on January 1, 2021, and the deferred charge was being amortized over a period of 5 years from that date. Common stock was $1,500,000 and retained earnings was $900,000 on January 1, 2021. Plain Company records its investment in Swampy Company using the cost method. Required: Prepare, in general journal form, the December 31, 2021, workpaper entries necessary to: A. Eliminate the investment account. B. Allocate and amortize the difference between implied and book value. Answer: A. Beginning Retained Earnings (Swampy) Capital Stock (Swampy)

900,000 1,500,000

Difference Between Implied and Book Value Investment in Swampy Noncontrolling Interest in Equity

266,667 2,000,000 666,667

B. Depreciation Expense ($400,000/6) 66,667 Equipment (net) ($400,000 – $66,667) 333,333 Land ($900,000 - $700,000) 200,000 Gain on Acquisition ($200,000+$400,000-$266,667) × 0.75 Difference Between Implied and Book Value Noncontrolling Interest ($200,000+$400,000-$266,667) × 0.25

250,000 266,667 83,333

Question Title: Test Bank (Problem) Question 5-5 Difficulty: Medium Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities. Section Reference: 5.1

34. On January 1, 2021, Pilsner Company acquired an 80% interest in Smalley Company for $3,600,000. On that date, Smalley Company had retained earnings of $800,000 and common stock of $2,800,000. The book values of assets and liabilities were equal to fair values except for the following:

Inventory Equipment (net) Land

Book Value $ 50,000 540,000 300,000

Fair Value $ 85,000 720,000 660,000

The equipment had an estimated remaining useful life of 8 years. One-half of the inventory was sold in 2021 and the remaining half was sold in 2022. Smalley Company reported net income of $240,000 in 2021 and $300,000 in 2022. No dividends were declared or paid in either year. Pilsner Company uses the cost method to record its investment in Smalley Company. Required: Prepare, in general journal form, the workpaper eliminating entries necessary in the consolidated statements workpaper for the year ending December 31, 2022. Answer: Calculations Cost of Investment and Implied Value ($3,600,000/0.8) Book Value of Equity Acquired Difference between Implied and Book Value

$4,500,000 3,600,000 $ 900,000 Annual Adjustment in Determining Consolidated Net Income

Land Equipment (net) Inventory

Difference Between Implied and Book Value 2021 $360,000 --180,000 $22,500 35,000 17,500

2022 --$22,500 17,500

Goodwill

325,000 $900,000

--$40,000

(1) Investment in Smalley Beginning Retained Earnings (Pilsner)

192,000

(2) Beginning Retained Earnings (Smalley) Difference between Implied and Book Value Common Stock (Smalley) Investment in Smalley ($3,600,000 + $192,000) Noncontrolling Interest in Equity

1,040,000 900,000 2,800,000

--$40,000

192,000

(3) Beginning Retained Earnings – PilsnerSmalley 32,000 Noncontrolling Interest 8,000 Depreciation Expense 22,500 Cost of Goods Sold (Beginning Inventory) 17,500 Goodwill 325,000 Land 360,000 Equipment (net) ($180,000 – $22,500 – $22,500) 135,000 Difference between Implied and Book Value

3,792,000 948,000

900,000

Question Title: Test Bank (Problem) Question 5-6 Difficulty: Hard Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 3 Explain how goodwill is measured at the time of the acquisition.; 4 Describe how the allocation process differs if less than 100% of the subsidiary is acquired; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods. Section Reference: 5.1, 5.2, 5.3, 5.4

35. Pulman Company acquired 90% of the stock of Spectrum Company for $6,300,000 on January 1, 2021. On this date, the fair value of the assets and liabilities of Spectrum Company was equal to their book value except for the inventory and equipment accounts. The inventory had a fair value of $2,300,000 and a book value of $1,900,000. The equipment had a fair value of $3,300,000 and a book value of $2,800,000. The balances in Spectrum Company's capital stock and retained earnings accounts on the date of acquisition were $3,700,000 and $1,900,000, respectively. Required: In general journal form, prepare the entries on Spectrum Company's books to record the effect of the pushed down values implied by the acquisition of its stock by Pulman Company assuming that: A values are allocated on the basis of the fair value of Spectrum Company as a whole imputed from the transaction. B values are allocated on the basis of the proportional interest acquired by Pulman Company.

Answer: A Net Assets Imputed Value ($6,300,000/.9) Recorded Value ($1,900,000 + $3,700,000) Unrecorded Values Allocate to identifiable assets Inventory ($2,300,000 – $1,900,000) Equipment ($3,300,000 – $2,800,000) Goodwill Inventory Equipment Goodwill Revaluation Capital

$7,000,000 5,600,000 $1,400,000 $400,000 500,000

900,000 $ 500,000

400,000 500,000 500,000 1,400,000

B Unrecorded Value Imputed by Pulman Company's Proportionate Interest (.9 × $1,400,000) Allocate to Inventory ($2,300,000 – $1,900,000) × .9 $360,000 Equipment ($3,300,000 – $2,800,000) × .9 450,000 Goodwill

Inventory Equipment Goodwill Revaluation Capital

$1,260,000

810,000 $ 450,000

360,000 450,000 450,000 1,260,000

Question Title: Test Bank (Problem) Question 5-7 Difficulty: Hard Learning Objective: 10 Understand the concept of push down accounting. Section Reference: 5.10

36. Pruin Corporation acquired all of the voting stock of Satto Corporation on January 1, 2021, for $210,000 when Satto had common stock of $150,000 and retained earnings of $24,000. The excess of implied over book value was allocated $9,000 to inventories that were sold in 2021, $12,000 to equipment with a 4-year remaining useful life under the straight-line method, and the remainder to goodwill. Financial statements for Pruitt and Satto Corporations at the end of the fiscal year ended December 31, 2022 (two years after acquisition), appear in the first two columns of the partially completed consolidated statements workpaper. Pruin Corp. has accounted for its investment in Satto using the partial equity method of accounting. Required: Complete the consolidated statements workpaper for Pruin Corporation and Satto Corporation for December 31, 2022. Pruin Corporation and Satto Corporation

Consolidated Statements Workpaper at December 31, 2022 Eliminations

INCOME STATEMENT Sales Equity from Subsidiary Income Cost of Sales Other Expenses Net Income to Ret. Earn.

Pruin Corp.

Satto Corp.

618,000

180,000

Debit

36,000 (450,000)

(90,000)

(114,000)

(54,000)

90,000

36,000

Pruin Retained Earnings 1/1

72,000

Soto Retained Earnings 1/1 Add: Net Income Less: Dividends Retained Earnings 12/31

3,000 90,000

36,000

(60,000)

(12,000)

102,000

54,000

42,000

21,000

63,000

45,000

33,000

18,000

192,000 240,000

165,000

570,000

249,000

168,000

45,000

300,000

150,000

102,000

54,000

570,000

249,000

BALANCE SHEET Cash Inventories Land Equipment and Buildings-net Investment in Satto Corp. Total Assets LIA & EQUITIES Liabilities Common Stock Retained Earnings Total Equities

Answer: Pruin Corporation and Satto Corporation Consolidated Statements Workpaper at December 31, 2022

Credit

Consolidated Balances

Eliminations Pruin Corp.

Satto Corp.

618,000

180,000

INCOME STATEMENT Sales Equity from Subsidiary Income Cost of Sales

(450,000)

(90,000)

Other Expenses

(114,000)

(54,000)

Net Income to Ret. Earn.

90,000

36,000

Pruin Retained Earnings 1/1 Satto Retained Earnings

72,000

36,000

1/1

Debit

Credit

Consolidated Balances 798,000

(a) 36,000 (540,000) (c)

3,000

(171,000)

39,000 (b) (c)

87,000

9,000 3,000

30,000

(b) 30,000 39,000

60,000

Add: Net Income

90,000

36,000

Less: Dividends

(60,000)

(12,000)

Retained Earnings 12/31

102,000

54,000

Cash

42,000

21,000

63,000

Inventories

63,000

45,000

108,000

Land

33,000

18,000

51,000

Equipment and Buildings-net

192,000

165,000

81,000

87,000 (a) 12,000

(60,000)

12,000

87,000

BALANCE SHEET

(b) 12,000

363,000

Investment in Satto Corp. Goodwill

240,000

Total Assets

570,000

249,000

600,000

Liabilities

168,000

45,000

213,000

Common Stock

300,000

150,000

(b) 150,000

Retained Earnings

102,000

54,000

81,000

12,000

87,000

Total Equities

570,000

249,000

258,000

600,000

(b) 15,000

15,000

LIA & EQUITIES

300,000

Question Title: Test Bank (Problem) Question 5-8 Difficulty: Hard Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 3 Explain how goodwill is measured at the time of the acquisition.; 4 Describe how the allocation process differs if less than 100% of the subsidiary is acquired; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.; 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods. Section Reference: 5.1, 5.5, 5.6

37. On January 1, 2021, Phoenix Company acquired 80% of the outstanding capital stock of Skyler Company for $570,000. On that date, the capital stock of Skyler Company was $150,000 and its retained earnings were $450,000. On the date of acquisition, the assets of Skyler Company had the following values:

Book Value Inventories........................................................................ $ 90,000 Plant and equipment ............................................................. 150,000

Fair Market Value $165,000 180,000

All other assets and liabilities had book values approximately equal to their respective fair market values. The plant and equipment had a remaining useful life of 10 years from January 1, 2021, and Skyler Company uses the FIFO inventory cost flow assumption. Skyler Company earned $180,000 in 2021 and paid dividends in that year of $90,000. Phoenix Company uses the complete equity method to account for its investment in S Company. Required: A. Prepare a computation and allocation schedule. B. Prepare the balance sheet elimination entries as of December 31, 2021. C. Compute the amount of equity in subsidiary income recorded on the books of Phoenix Company on December 31, 2021. D. Compute the balance in the investment account on December 31, 2021. Answer: A. Phoenix Share Purchase price and implied value Less: Book value of equity acquired Difference between implied and book value Inventories Equipment (net) Balance Goodwill

$570,000 480,000 90,000 (60,000) (24,000) 6,000 (6,000)

NonControlling Share 142,500 120,000 22,500 (15,000) (6,000) 1,500 (1,500)

Entire Value 712,500 600,000 112,500 (75,000) (30,000) 7,500 (7,500)

Balance

-0-

B. Common Stock – Skyler Retained Earnings – Skyler Difference Between Implied and Book Value Investment in Skyler Company Noncontrolling Interest in Equity

-0-

150,000 450,000 112,500 570,000 142,500

Cost of Goods Sold 75,000 Depreciation Expense ($30,000/10 years) 3,000 Plant and Equipment ($30,000 – $3,000) 27,000 Goodwill 7,500 Difference Between Implied and Book Value C. Skyler Company net income $180,000 × 80% = Less: Inventory sold Plant & equipment depreciation Equity in subsidiary income

D. Investment balance 1/1 + Equity in subsidiary income – Dividends ($90,000 × 80%) Investment balance 12/31

-0-

112,500

$144,000 (60,000) ( 2,400) $81,600

$570,000 81,600 (72,000) $579,600

Question Title: Test Bank (Problem) Question 5-9 Difficulty: Hard Learning Objective: 1 Calculate the difference between implied and book values and allocate to the subsidiary’s assets and liabilities.; 3 Explain how goodwill is measured at the time of the acquisition.; 4 Describe how the allocation process differs if less than 100% of the subsidiary is acquired; 5 Record the entries needed on the parent’s books to account for the investment under the three methods: the cost, the partial equity, and the complete equity methods.; 6 Prepare workpapers for the year of acquisition and the year(s) subsequent to the acquisition, assuming that the parent accounts for the investment alternatively using the cost, the partial equity, and the complete equity methods. Section Reference: 5.1, 5.7, 5.8

Package Title: Test Bank Questions Course Title: Advanced Accounting, 8e Chapter: Elimination of Unrealized Profit on Intercompany sales of Inventory Chapter Number: 6

Question Type: Multiple Choice

1. Sales from one subsidiary to another are called: a) downstream sales. b) upstream sales. c) intersubsidiary sales. d) horizontal sales. Answer: d Question Title: Test Bank (Multiple Choice) Question 01 Difficulty: Easy Learning Objective: 4 Distinguish between upstream and downstream sales of inventory. Section Reference: 6.0

2. In determining controlling interest in consolidated income in the consolidated financial statements, unrealized intercompany profit on inventory acquired by a parent from its subsidiary should: a) not be eliminated. b) be eliminated in full. c) be eliminated to the extent of the parent company’s controlling interest in the subsidiary. d) be eliminated to the extent of the noncontrolling interest in the subsidiary. Answer: b Question Title: Test Bank (Multiple Choice) Question 02 Difficulty: Easy Learning Objective: 3 Understand the concept of eliminating 100% of intercompany profit not realized in transactions with outsiders, and know the authoritative position. Section Reference: 6.0 3. Noncontrolling interest in consolidated income is never affected by: a) upstream sales. b) downstream sales. c) horizontal sales. d) Noncontrolling interest is affected by all sales. Answer: b Question Title: Test Bank (Multiple Choice) Question 03 Difficulty: Easy

Learning Objective: 5 Compute the noncontrolling interest in consolidated net income for upstream and downstream sales, when not all the inventory has been sold to outsiders., 6 Prepare consolidated workpapers for firms with upstream and downstream sales using the cost, partial equity, and complete equity methods. Section Reference: 6.1

4. Failure to eliminate intercompany sales would result in an overstatement of consolidated: a) net income. b) gross profit. c) cost of sales. d) all of these. Answer: c Question Title: Test Bank (Multiple Choice) Question 04 Difficulty: Medium Learning Objective: 1 Describe the financial reporting objectives for intercompany sales of inventory., 2 Determine the amount of intercompany profit, if any, to be eliminated from the consolidated statements., 3 Understand the concept of eliminating 100% of intercompany profit not realized in transactions with outsiders, and know the authoritative position. Section Reference: 6.1 5. Pruitt Company owns 80% of Stoney Company’s common stock. During 2024, Stoney sold $400,000 of merchandise to Pruitt. At December 31, 2024, one-fourth of the merchandise remained in Pruitt’s inventory. In 2024, gross profit percentages were 25% for Pruitt and 30% for Stoney. The amount of unrealized intercompany profit that should be eliminated in the consolidated statements is: a) $80,000. b) $24,000. c) $30,000. d) $25,000. Answer: c Question Title: Test Bank (Multiple Choice) Question 05 Difficulty: Easy Learning Objective: 1 Describe the financial reporting objectives for intercompany sales of inventory., 2 Determine the amount of intercompany profit, if any, to be eliminated from the consolidated statements., 3 Understand the concept of eliminating 100% of intercompany profit not realized in transactions with outsiders, and know the authoritative position. Section Reference: 6.1 6. The noncontrolling interest’s share of the selling affiliate’s profit on intercompany sales is considered to be realized under: a) partial elimination. b) total elimination. c) 100% elimination.

d) both total and 100% elimination. Answer: a Question Title: Test Bank (Multiple Choice) Question 06 Difficulty: Medium Learning Objective: 3 Understand the concept of eliminating 100% of intercompany profit not realized in transactions with outsiders, and know the authoritative position., 5 Compute the noncontrolling interest in consolidated net income for upstream and downstream sales, when not all the inventory has been sold to outsiders. Section Reference: 6.1

7. The workpaper entry in the year of sale to eliminate unrealized intercompany profit in ending inventory includes a: a) credit to Ending Inventory (Cost of Sales). b) credit to Sales. c) debit to Ending Inventory (Cost of Sales). d) debit to Inventory - Balance Sheet. Answer: c Question Title: Test Bank (Multiple Choice) Question 07 Difficulty: Medium Learning Objective: 3 Understand the concept of eliminating 100% of intercompany profit not realized in transactions with outsiders, and know the authoritative position. Section Reference: 6.1

8. P Company sold merchandise costing $240,000 to S Company (90% owned) for $300,000. At the end of the current year, one-third of the merchandise remains in S Company’s inventory. Applying the lowerof- cost-or-market rule, S Company wrote this inventory down to $92,000. What amount of intercompany profit should be eliminated on the consolidated statements workpaper? a) $20,000. b) $18,000. c) $12,000. d) $10,800. Answer: c Question Title: Test Bank (Multiple Choice) Question 08 Difficulty: Hard Learning Objective: 2 Determine the amount of intercompany profit, if any, to be eliminated from the consolidated statements. Section Reference: 6.1

9. The material sale of inventory items by a parent company to an affiliated company:

a) enters the consolidated revenue computation only if the transfer was the result of arm’s length bargaining. b) affects consolidated net income under a periodic inventory system but not under a perpetual inventory system. c) does not result in consolidated income until the merchandise is sold to outside parties. d) does not require a working paper adjustment if the merchandise was transferred at cost. Answer: c Question Title: Test Bank (Multiple Choice) Question 09 Difficulty: Easy Learning Objective: 1 Describe the financial reporting objectives for intercompany sales of inventory. Section Reference: 6.1 10. Petunia Company acquired an 80% interest in Shaman Company in 2024. In 2025 and 2026, Shaman reported net income of $400,000 and $480,000, respectively. During 2025, Shaman sold $80,000 of merchandise to Petunia for a $20,000 profit. Petunia sold the merchandise to outsiders during 2026 for $140,000. For consolidation purposes, what is the noncontrolling interest’s share of Shaman's 2025 and 2026 net income? a) $90,000 and $96,000. b) $100,000 and $76,000. c) $84,000 and $92,000. d) $76,000 and $100,000. Answer: d Question Title: Test Bank (Multiple Choice) Question 10 Difficulty: Medium Learning Objective: 5 Compute the noncontrolling interest in consolidated net income for upstream and downstream sales, when not all the inventory has been sold to outsiders. Section Reference: 6.1

11. P Company regularly sells merchandise to its 80%-owned subsidiary, S Corporation. In 2024, P sold merchandise that cost $240,000 to S for $300,000. Half of this merchandise remained in S’s December 31, 2024 inventory. During 2025, P sold merchandise that cost $375,000 to S for $468,000. Forty percent of this merchandise inventory remained in S’s December 31, 2025 inventory. Selected income statement information for the two affiliates for the year 2025 is as follows:

Sales Revenue Cost of Goods Sold Gross profit

P $2,250,000 1,800,000 $450,000

S $1,125,000 937,500 $187,500

Consolidated sales revenue for P and Subsidiary for 2025 are: a) $2,907,000. b) $3,000,000. c) $3,205,500. d) $3,375,000.

Answer: a Question Title: Test Bank (Multiple Choice) Question 11 Difficulty: Easy Learning Objective: 2 Determine the amount of intercompany profit, if any, to be eliminated from the consolidated statements. Section Reference: 6.1 12. P Company regularly sells merchandise to its 80%-owned subsidiary, S Corporation. In 2024, P sold merchandise that cost $240,000 to S for $300,000. Half of this merchandise remained in S’s December 31, 2024 inventory. During 2025, P sold merchandise that cost $375,000 to S for $468,000. Forty percent of this merchandise inventory remained in S’s December 31, 2025 inventory. Selected income statement information for the two affiliates for the year 2025 is as follows:

Sales Revenue Cost of Goods Sold Gross profit

P $2,250,000 1,800,000 $450,000

S $1,125,000 937,500 $187,500

Consolidated cost of goods sold for P Company and Subsidiary for 2025 are: a) $2,260,500. b) $2,268,000. c) $2,276,700. d) $2,737,500. Answer: c Question Title: Test Bank (Multiple Choice) Question 12 Difficulty: Medium Learning Objective: 2 Determine the amount of intercompany profit, if any, to be eliminated from the consolidated statements., 6 Prepare consolidated workpapers for firms with upstream and downstream sales using the cost, partial equity, and complete equity methods. Section Reference: 6.1 13. P Company owns an 80% interest in S Company. During 2025, S sells merchandise to P for $200,000 at a profit of $40,000. On December 31, 2025, 50% of this merchandise is included in P’s inventory. Income statements for P and S are summarized below: P S Sales $1,200,000 $600,000 Cost of Sales (600,000) (400,000) Operating Expenses (300,000) (80,000) Net Income (2025) $300,000 $120,000

Noncontrolling interest in income for 2025 is: a) $4,000. b) $19,200. c) $20,000. d) $24,000.

Answer: c Question Title: Test Bank (Multiple Choice) Question 13 Difficulty: Medium Learning Objective: 2 Determine the amount of intercompany profit, if any, to be eliminated from the consolidated statements., 5 Compute the noncontrolling interest in consolidated net income for upstream and downstream sales, when not all the inventory has been sold to outsiders. Section Reference: 6.1

14. The amount of intercompany profit eliminated is the same under total elimination and partial elimination in the case of: a) upstream sales where the selling affiliate is a less than wholly owned subsidiary. b) all downstream sales. c) horizontal sales where the selling affiliate is a wholly owned subsidiary. d) all downstream sales and horizontal sales where the selling affiliate is a wholly owned subsidiary. Answer: d Question Title: Test Bank (Multiple Choice) Question 14 Difficulty: Hard Learning Objective: 3 Understand the concept of eliminating 100% of intercompany profit not realized in transactions with outsiders, and know the authoritative position. Section Reference: 6.1

15. Polly, Inc. owns 80% of Saffron, Inc. During 2025, Polly sold goods with a 40% gross profit to Saffron. Saffron sold all of these goods in 2025. For 2025 consolidated financial statements, how should the summation of Polly and Saffron income statement items be adjusted? a) Sales and cost of goods sold should be reduced by the intercompany sales. b) Sales and cost of goods sold should be reduced by 80% of the intercompany sales. c) Net income should be reduced by 80% of the gross profit on intercompany sales. d) No adjustment is necessary. Answer: a Question Title: Test Bank (Multiple Choice) Question 15 Difficulty: Easy Learning Objective: 3 Understand the concept of eliminating 100% of intercompany profit not realized in transactions with outsiders, and know the authoritative position. Section Reference: 6.1 16. P Corporation acquired a 60% interest in S Corporation on January 1, 2025, at book value equal to fair value. During 2025, P sold merchandise that cost $225,000 to S for $315,000. One-third of this merchandise remained in S’s inventory at December 31, 2025. S reported net income of $200,000 for 2025. P’s income from S for 2025 is: a) $60,000.

b) $90,000. c) $120,000. d) $102,000. Answer: c Question Title: Test Bank (Multiple Choice) Question 16 Difficulty: Medium Learning Objective: 2 Determine the amount of intercompany profit, if any, to be eliminated from the consolidated statements., 6 Prepare consolidated workpapers for firms with upstream and downstream sales using the cost, partial equity, and complete equity methods. Section Reference: 6.1

17. P Company regularly sells merchandise to its 80%-owned subsidiary, S Corporation. In 2024, P sold merchandise that cost $192,000 to S for $240,000. Half of this merchandise remained in S’s December 31, 2024 inventory. During 2025, P sold merchandise that cost $300,000 to S for $375,000. Forty percent of this merchandise inventory remained in S’s December 31, 2025 inventory. Selected income statement information for the two affiliates for the year 2025 is as follows:

Sales Revenue Cost of Goods Sold Gross profit

P $1,800,000 1,440,000 $ 360,000

S $900,000 750,000 $150,000

Consolidated sales revenue for P and Subsidiary for 2025 are: a) $2,325,000. b) $2,400,000. c) $2,565,000. d) $2,700,000. Answer: a Question Title: Test Bank (Multiple Choice) Question 17 Difficulty: Easy Learning Objective: 2 Determine the amount of intercompany profit, if any, to be eliminated from the consolidated statements. Section Reference: 6.1

18. A 90% owned subsidiary sold merchandise at a profit to its parent company near the end of 2024. Under the partial equity method, the workpaper entry in 2025 to recognize the intercompany profit in beginning inventory realized during 2025 includes a debit to: a) Retained Earnings - P. b) Noncontrolling interest. c) Cost of Sales. d) both Retained Earnings - P and Noncontrolling Interest. Answer: d

Question Title: Test Bank (Multiple Choice) Question 18 Difficulty: Medium Learning Objective: 6 Prepare consolidated workpapers for firms with upstream and downstream sales using the cost, partial equity, and complete equity methods. Section Reference: 6.2

19. The noncontrolling interest in consolidated income when the selling affiliate is an 80% owned subsidiary is calculated by multiplying the noncontrolling minority ownership percentage by the subsidiary’s reported net income: a) plus unrealized profit in ending inventory less unrealized profit in beginning inventory. b) plus realized profit in ending inventory less realized profit in beginning inventory. c) less unrealized profit in ending inventory plus realized profit in beginning inventory. d) less realized profit in ending inventory plus realized profit in beginning inventory. Answer: c Question Title: Test Bank (Multiple Choice) Question 19 Difficulty: Medium Learning Objective: 5 Compute the noncontrolling interest in consolidated net income for upstream and downstream sales, when not all the inventory has been sold to outsiders. Section Reference: 6.3 20. A parent company regularly sells merchandise to its 80%-owned subsidiary. Which of the following statements describes the computation of noncontrolling interest income? a) the subsidiary’s net income times 20%. b) (the subsidiary’s net income x 20%) + unrealized profits in the beginning inventory – unrealized profits in the ending inventory. c) (the subsidiary’s net income + unrealized profits in the beginning inventory – unrealized profits in the ending inventory) × 20%. d) (the subsidiary’s net income + unrealized profits in the ending inventory – unrealized profits in the beginning inventory) × 20%. Answer: a Question Title: Test Bank (Multiple Choice) Question 20 Difficulty: Medium Learning Objective: 5 Compute the noncontrolling interest in consolidated net income for upstream and downstream sales, when not all the inventory has been sold to outsiders. Section Reference: 6.1, 6.3

21. P Corporation acquired a 60% interest in S Corporation on January 1, 2025, at book value equal to fair value. During 2025, P sold merchandise that cost $135,000 to S for $189,000. One-third of this merchandise remained in S’s inventory at December 31, 2025. S reported net income of $120,000 for 2025. P’s income from S for 2025 is: a) $36,000.

b) $50,400. c) $54,000. d) $61,200. Answer: c Question Title: Test Bank (Multiple Choice) Question 21 Difficulty: Medium Learning Objective: 2 Determine the amount of intercompany profit, if any, to be eliminated from the consolidated statements. Section Reference: 6.3 22. P Company owns an 80% interest in S Company. During 2025, S sells merchandise to P for $200,000 at a profit of $40,000. On December 31, 2025, 50% of this merchandise is included in P’s inventory. Income statements for P and S are summarized below: P S Sales $1,200,000 $600,000 Cost of Sales (600,000) (400,000) Operating Expenses (300,000) (80,000) Net Income (2025) $300,000 $120,000 Controlling interest in consolidated net income for 2025 is: a) $300,000. b) $380,000. c) $396,000. d) $420,000. Answer: b Question Title: Test Bank (Multiple Choice) Question 22 Difficulty: Medium Learning Objective: 2 Determine the amount of intercompany profit, if any, to be eliminated from the consolidated statements. Section Reference: 6.3 23. P Company regularly sells merchandise to its 80%-owned subsidiary, S Corporation. In 2024, P sold merchandise that cost $192,000 to S for $240,000. Half of this merchandise remained in S’s December 31, 2024 inventory. During 2025, P sold merchandise that cost $300,000 to S for $375,000. Forty percent of this merchandise inventory remained in S’s December 31, 2025 inventory. Selected income statement information for the two affiliates for the year 2025 is as follows:

Sales Revenue Cost of Goods Sold Gross profit

P $1,800,000 1,440,000 $ 360,000

S $900,000 750,000 $150,000

Consolidated cost of goods sold for P Company and Subsidiary for 2025 are: a) $1,809,000. b) $1,815,000.

c) $1,821,000. d) $2,190,000. Answer: c Question Title: Test Bank (Multiple Choice) Question 23 Difficulty: Medium Learning Objective: 2 Determine the amount of intercompany profit, if any, to be eliminated from the consolidated statements., 6 Prepare consolidated workpapers for firms with upstream and downstream sales using the cost, partial equity, and complete equity methods. Section Reference: 6.3

24. P Company owns an 80% interest in S Company. During 2025, S sells merchandise to P for $150,000 at a profit of $30,000. On December 31, 2025, 50% of this merchandise is included in P’s inventory. Income statements for P and S are summarized below:

Sales Cost of Sales Operating Expenses Net Income (2025)

P $900,000 (450,000) (225,000) $225,000

S $450,000 (300,000) ( 60,000) $ 90,000

Controlling interest in consolidated net income for 2025 is: a) $225,000. b) $285,000. c) $297,000. d) $315,000. Answer: b Question Title: Test Bank (Multiple Choice) Question 24 Difficulty: Hard Learning Objective: 2 Determine the amount of intercompany profit, if any, to be eliminated from the consolidated statements. Section Reference: 6.3

25. P Company owns an 80% interest in S Company. During 2025, S sells merchandise to P for $150,000 at a profit of $30,000. On December 31, 2025, 50% of this merchandise is included in P’s inventory. Income statements for P and S are summarized below:

Sales Cost of Sales Operating Expenses Net Income (2025)

P $900,000 (450,000) (225,000) $225,000

S $450,000 (300,000) ( 60,000) $ 90,000

Noncontrolling interest in income for 2025 is:

a) $3,000. b) $14,400. c) $15,000. d) $18,000. Answer: c Question Title: Test Bank (Multiple Choice) Question 25 Difficulty: Hard Learning Objective: 2 Determine the amount of intercompany profit, if any, to be eliminated from the consolidated statements. Section Reference: 6.3 Question Type: Essay

26. Past and proposed GAAP agree that unrealized intercompany profit should not be included in consolidated net income or assets. Briefly explain the preferred approach of eliminating intercompany profit. Answer: Both current and proposed GAAP require 100% elimination of intercompany profit in the preparation of consolidated financial statements. Under 100% elimination, the entire amount of unconfirmed intercompany profit is eliminated from consolidated net income and the related asset balance. This approach is logical under the proposed view of consolidated financial statements, based on the entity concept. Question Title: Test Bank (Essay) Question 26 Difficulty: Easy Learning Objective: 3 Understand the concept of eliminating 100% of intercompany profit not realized in transactions with outsiders, and know the authoritative position. Section Reference: 6.1

27. Determination of the noncontrolling interest in consolidated net income differs depending on whether intercompany sales are downstream or upstream. Explain the difference in calculating noncontrolling interest for downstream and upstream sales. Answer: For downstream sales, no modification to the noncontrolling interest in consolidated income is needed. For upstream sales, the noncontrolling interest must be adjusted. The reported income of the subsidiary is reduced by the amount of gross profit remaining in ending inventory of the purchasing affiliate before multiplying by the noncontrolling percentage interest; it is increased for gross profit realized from beginning inventory. Question Title: Test Bank (Essay) Question 27 Difficulty: Medium Learning Objective: 5 Compute the noncontrolling interest in consolidated net income for upstream and downstream sales, when not all the inventory has been sold to outsiders. Section Reference: 6.1

Question Type: Problem

28. On January 1, 2025, Pharma Company purchased a 90% interest in Sandy Company for $2,800,000. At that time, Sandy had $1,840,000 of common stock and $360,000 of retained earnings. The difference between implied and book value was allocated to the following assets of Sandy Company: Inventory Plant and equipment (net) Goodwill

$ 80,000 240,000 591,111

The plant and equipment had a 10-year remaining useful life on January 1, 2025. During 2025, Pharma sold merchandise to Sandy at a 20% markup above cost. At December 31, 2025, Sandy still had $180,000 of merchandise in its inventory that it had purchased from Pharma. In 2025, Pharma reported net income from independent operations of $1,600,000, while Sandy reported net income of $600,000. Required: A. Prepare the workpaper entry to allocate, amortize, and depreciate the difference between implied and book value for 2025. B. Calculate controlling interest in consolidated net income for 2025. Answer: A. Depreciation Expense (240,000/10) Plant and Equipment (net) (240,000 – 24,000) 1/1 Inventory Goodwill Difference Between Implied and Book Value

24,000 216,000 80,000 591,111

B. Pharma’s net income from independent operations Less: unrealized profit on sales to Sandy [180,000 – (180,000/1.20)] Pharma’s income from independent operations that has been realized in transactions with third parties Pharma’s share of Sandy’s income (600,000 × .90) Less: amortization of difference between implied and book value Controlling Interest in Consolidated Net Income for 2025

911,111 $1,600,000 (30,000) 1,570,000 540,000 (104,000)* $2,006,000

* 80,000 + (240,000/10) Question Title: Test Bank (Problem) Question 6-1 Difficulty: Hard Learning Objective: 6 Prepare consolidated workpapers for firms with upstream and downstream sales using the cost, partial equity, and complete equity methods. Section Reference: 6.3, 6.5

29. Puma Company owns 80% of the common stock of Smarte Company. Puma sells merchandise to Smarte at 20% above cost. During 2025 and 2026, intercompany sales amounted to $1,080,000 and

$1,200,000 respectively. At the end of 2025, Smarte had one-fifth of the goods purchased that year from Puma in its ending inventory. Smarte’s 2026 ending inventory contained one-fourth of that year’s purchases from Puma. There were no intercompany sales prior to 2025. Puma reported net income from its own operations of $720,000 in 2025 and $760,000 in 2026. Smarte reported net income of $400,000 in 2025 and $460,000 in 2026. Neither company declared dividends in either year. Required: A. Prepare in general journal form all entries necessary on the consolidated statements workpapers to eliminate the effects of the intercompany sales for both 2025 and 2026. B. Calculate controlling interest in consolidated net income for 2026. Answer: A. 2025 Sales

1,080,000 Purchases (Cost of Goods Sold)

12/31 Inventory (Income Statement) [216,000 – (216,000/1.20)] 12/31 Inventory(Balance Sheet) 2026 Sales

1,080,000

36,000 36,000

1,200,000 Purchases (Cost of Goods Sold)

1,200,000

12/31 Inventory (Income Statement) [300,000 – (300,000/1.20)] 12/31 Inventory (Balance Sheet)

50,000

Beginning R/E – Puma 1/1 Inventory (Income Statement)

36,000

50,000

36,000

B. Puma’s Income from independent operations Less: Unrealized profit in ending inventory Add: Unrealized profit in beginning inventory Puma’s Income Realized in Transactions with third parties Puma’s Share of Subsidiary Income Controlling Interest in Consolidated Net Income

$760,000 (50,000) 36,000 746,000 $368,000 $1,114,000

Question Title: Test Bank (Problem) Question 6-2 Difficulty: Hard Learning Objective: 6 Prepare consolidated workpapers for firms with upstream and downstream sales using the cost, partial equity, and complete equity methods.

Section Reference: 6.1, 6.2, 6.4

30. Pinta Company owns 90% of the common stock of Simplex Company. Simplex Company sells merchandise to Pinta Company at 25% above cost. During 2024 and 2025 such sales amounted to $800,000 and $1,020,000, respectively. At the end of each year, Pinta Company had in its inventory one-fourth of the amount of goods purchased from Simplex Company during that year. Pinta Company reported income of $1,500,000 from its independent operations in 2024 and $1,720,000 in 2025. Simplex Company reported net income of $600,000 in each year and did not declare any dividends in either year. There were no intercompany sales prior to 2024. Required: A. Prepare, in general journal form, all entries necessary on the 2025 consolidated statements workpaper to eliminate the effects of intercompany sales. B. Calculate the amount of noncontrolling interest to be deducted from consolidated income in the consolidated income statement in 2025. C. Calculate controlling interest in consolidated net income for 2025. Answer: A. Sales

1,020,000

Purchases (Cost of Sales) To eliminate intercompany sales.

1,020,000

12/31 Inventory (Income Statement) 51,000 Inventory (Balance Sheet) To eliminate unrealized intercompany profit in ending inventory.

51,000

Beginning Retained Earnings – Pinta (.90 × $40,000) 36,000 Noncontrolling interest 4,000 1/1 Inventory (Balance Sheet) 40,000 To recognize unrealized profit in beginning inventory realized during the year. B. Noncontrolling Interest Calculation: Simplex Company reported net income Less: Unrealized profit in ending inventory

$600,000 (51,000)

Add: Realized profit in beginning inventory Subsidiary income included in consolidated income Noncontrolling interest ownership percentage Noncontrolling interest in consolidated income

40,000 589,000 × .1 $ 58,900

C. Controlling Interest in Consolidated Net Income: Pinta Company’s net income from independent operations Reported net income of Simplex Company $600,000 Less: Unrealized profit on sales of 2025 (51,000) Add: Profit on intercompany sales to Pinta realized in transactions with third parties 40,000 Subsidiary income realized in transactions with third parties $589,000 Pinta Company’s share of subsidiary income (589,000 × .9) Controlling interest in consolidated net income $2,250,100

$1,720,000

530,100

Question Title: Test Bank (Problem) Question 6-3 Difficulty: Hard Learning Objective: 6 Prepare consolidated workpapers for firms with upstream and downstream sales using the cost, partial equity, and complete equity methods.

Section Reference: 6.2, 6.3

31. Pine Company owns an 80% interest in Salad Company and a 90% interest in Tuna Company. During 2024 and 2025, intercompany sales of merchandise were made by all three companies. Total sales amounted to $2,400,000 in 2024, and $2,700,000 in 2025. The companies sold their merchandise at the following percentages above cost. Pine 15% Salad 20% Tuna 25% The amount of merchandise remaining in the 2025 beginning and ending inventories of the companies from these intercompany sales is shown below. Merchandise Remaining in Beginning Inventory Pine Salad Tuna Total Sold by Pine Salad Tuna

$225,000 $180,000 180,000

Pine Sold by Pine Salad Tuna

$189,000 216,000

135,000

$414,000 396,000 315,000

Merchandise Remaining in Ending Inventory Salad Tuna Total $207,000

$144,000 195,000

150,000

$138,000 198,000

$345,000 342,000 345,000

Reported net incomes (from independent operations including sales to affiliates) of Pine, Salad, and Tuna for 2025 were $3,600,000, $1,500,000, and $2,400,000, respectively. Required: A. Calculate the amount noncontrolling interest to be deducted from consolidated income in the consolidated income statement for 2025. B. Calculate the controlling interest in consolidated net income for 2025. Answer: A. Reported subsidiary income Add: Unrealized profit in beginning inventory Less: Unrealized profit in ending inventory Subsidiary income included in consolidated income Noncontrolling interest ownership percentage Noncontrolling interest in consolidated income

Salad Tuna $1,500,000 $2,400,000 66,000 63,000 (57,000) (69,000) 1,509,000 2,394,000 × .2 × .1 $301,800 $239,400

Total noncontrolling interest:$301,800 + $239,400 = $541,200 B. Pine Company’s income independent operations Add: Unrealized profit considered realized in 2025 ($414,000 – $414,000/1.15) Less: Unrealized profit in 2025 income ($345,000 – $345,000/1.15) Pine's income realized in transactions with third parties Salad Company’s Reported Net Income Add: Unrealized profit considered realized in 2025 ($396,000 – $396,000/1.2) Less: Unrealized profit in 2025 income ($342,000 – $342,000/1.20) Subsidiary income realized in transactions with third parties Pine's share of subsidiary income (.8 × 1,509,000) Tuna Company’s reported net income Add: Unrealized profit considered realized in 2025 ($315,000 – $315,000/1.25) Less: Unrealized profit in 2025 income ($345,000 – $345,000/1.25) Subsidiary income realized in transactions with third parties Pine's share of subsidiary income (.9 × 2,394,000) Controlling Interest in Consolidated Net Income

$3,600,000 54,000 (45,000) $3,609,000 $1,500,000 66,000 (57,000) 1,509,000 1,207,200 $2,400,000 63,000 (69,000) $2,394,000 2,154,600 $6,970,800

Question Title: Test Bank (Problem) Question 6-4 Difficulty: Hard

Learning Objective: 6 Prepare consolidated workpapers for firms with upstream and downstream sales using the cost, partial equity, and complete equity methods.

Section Reference: 6.3

32. The following balances were taken from the records of S Company: Common stock Retained earnings, 1/1 $1,450,000 Net income for 2025 3,000,000 Dividends declared in 2025 (1,550,000) Retained earnings, 12/31 Total stockholders’ equity, 12/31

$2,500,000

2,900,000 $5,400,000

P Company owns 80% of the common stock of S Company. During 2025, P Company purchased merchandise from S Company for $4,000,000. S Company sells merchandise to P Company at cost plus 25% of cost. On December 31, 2025, merchandise purchased from S Company for $1,250,000 remains in the inventory of P Company. On January 1, 2025, P Company’s inventory contained merchandise purchased from S Company for $525,000. The affiliated companies file a consolidated income tax return. There was no difference between the implied value and the book value of net assets acquired. Required: A. Prepare all workpaper entries necessitated by the intercompany sales of merchandise. B. Compute noncontrolling interest in consolidated income for 2025. C. Compute noncontrolling interest in consolidated net assets on December 31, 2025. Answer: A. Sales

4,000,000 Cost of Goods Sold

4,000,000

Cost of Goods Sold Ending Inventory (Balance Sheet) [$1,250,000 - ($1,250,000/1.25)]

250,000

1/1 Retained Earnings – P Company (1) Noncontrolling interest (2) Cost of Goods Sold (Beginning Inventory) [$525,000 – ($525,000/1.25)] = $105,000

84,000 21,000

250,000

105,000

(1) .8($105,000) (2) .2($105,000) B. $3,000,000 × .20 = $600,000 noncontrolling interest in consolidated income. C. [(.20 × $5,400,000) -.20($1,250,000 – $1,250,000/1.25)] = $1,030,000 noncontrolling interest in consolidated net assets on December 31, 2025.

Question Title: Test Bank (Problem) Question 6-5 Difficulty: Hard

Learning Objective: 6 Prepare consolidated workpapers for firms with upstream and downstream sales using the cost, partial equity, and complete equity methods.

Section Reference: 6.1, 6.2, 6.4 33. P Corporation acquired 80% of S Corporation on January 1, 2025 for $240,000 cash when S’s stockholders’ equity consisted of $100,000 of Common Stock and $30,000 of Retained Earnings. The difference between the price paid by P and the underlying equity acquired in S was allocated solely to a patent amortized over 10 years. P sold merchandise to S during the year in the amount of $30,000. $10,000 worth of inventory is still on hand at the end of the year with an unrealized profit of $4,000. The separate company statements for P and S appear in the first two columns of the partially completed consolidated workpaper. Required: Complete the consolidated workpaper for P and S for the year 2025. P Corporation and Subsidiary Consolidated Statements Workpaper December 31, 2025

Income Statement Sales Dividend Income Cost of Sales Other Expenses Noncontrolling Interest in Income Net Income Retained Earnings Statement Retained Earnings 1/1 Add: Net Income Less: Dividends Retained Earnings 12/31 Balance Sheet Cash Accounts Receivable-net Inventories Patent Land Equipment and Buildings-net Investment in S Corporation Total Assets Equities Accounts Payable Common Stock Retained Earnings 1/1 Noncontrolling Interest in Net Assets 12/31 Noncontrolling Interest in Net Assets Total Equities

P Corp.

S Corp.

200,000 16,000 (92,000) (23,000)

150,000

101,000

63,000

110,000 101,000 ( 30,000) 181,000

30,000 63,000 (20,000) 73,000

20,000 120,000 140,000

19,000 55,000 80,000

270,000 600,000 240,000 695,000

420,000 430,000 1,004,000

909,000 300,000 181,000

831,000 100,000 73,000

1,390,000

1,004,000

(47,000) (40,000)

Eliminations Dr. Cr.

Noncontrolling Interest

Consolidated Balances

Answer: 6-6

Income Statement Sales Dividend Income Cost of Sales Other Expenses Noncontrolling Interest in Income Net income Retained Earnings Statement Retained Earnings 1/1 Add: Net Income Less: Dividends Retained Earnings 12/31 Balance Sheet Cash Accounts Receivable-net Inventories Patent Land Equipment and Buildings-net Investment in S Corporation Total Assets Equities Accounts Payable Common Stock Retained Earnings from above 1/1 Noncontrolling Interest in Net Assets 12/31 Noncontrolling Interest in Net Assets Total Equities

P Corporation and Subsidiary Consolidated Statements Workpaper at December 31, 2025 Eliminations Cr

P Corp.

S Corp.

$200,000 16,000 (92,000) (23,000)

$ 150,000 (47,000) (40,000)

(a) 30,000 (c) 16,000 (b) 4,000 (e) 17,000

101,000

63,000

67,000

110,000 101,000 ( 30,000) 181,000

30,000 63,000 (20,000) 73,000

(d) 30,000 67,000

20,000 120,000 140,000

19,000 55,000 80,000

97,000

(d)170,000 270,000 600,000 240,000 1,390,000

1,004,000

909,000 300,000 181,000

831,000 100,000 73,000

Noncontrolling Interest

320,000 (a) 30,000

(113,000) (80,000)

30,000

9,200 9,200

(9,200) 117,800

30,000 (c) 16,000 46,000

9,200 (4,000) 5,200

110,000 117,800 (30,000) 197,800 39,000 175,000 216,000 153,000 690,000 1,030,000

(b) 4,000 (e) 17,000

420,000 430,000 (d)240,000

2,303,000

(d)100,000 97,000

46,000

5,200

(d)60,000

60,000 65,200

1,390,000

Consolidated Balances

1,004,000

367,000

1,740,000 300,000 197,800

65,200 2,303,000

Question Title: Test Bank (Problem) Question 6-6 Difficulty: Hard Learning Objective: 6 Prepare consolidated workpapers for firms with upstream and downstream sales using the cost, partial equity, and complete equity methods. Section Reference: 6.2

34. On January 1, 2025, Perch Company purchased an 80% interest in the capital stock of Salmon Company for $3,400,000. At that time, Salmon Company had common stock of $2,200,000 and retained earnings of $620,000. Perch Company uses the cost method to record its investment in Salmon Company. Differences between the fair value and the book value of the identifiable assets of Salmon Company were as follows: Fair Value in Excess of Book Value Equipment Land Inventory

$400,000 200,000 80,000

The book values of all other assets and liabilities of Salmon Company were equal to their fair values on January 1, 2025. The equipment had a remaining life of five years on January 1, 2025; the inventory was sold in 2025. Salmon Company’s net income and dividends declared in 2025 were as follows:

Year 2025 Net Income of $400,000; Dividends Declared of $100,000 Required: Prepare a consolidated statements workpaper for the year ended December 31, 2026 using the partially completed worksheet. PERCH COMPANY AND SUBSIDIARY Consolidated Statements Workpaper For the Year Ended December 31, 2026 Perch Salmon Eliminations Company Company Dr. Cr. Income Statement Sales Dividend Income Total Revenue Cost of Goods Sold Depreciation Expense Other Expenses Total Cost & Expenses Net/Consolidated Income Noncontrolling Interest in Income Net Income to Retained Earnings Retained Earnings Statement 1/1 Retained Earnings Perch Company Salmon Company Net Income from above Dividends Declared Perch Company

4,400,000 192,000 4,592,000 3,600,000 160,000 240,000 4,000,000 592,000

1,800,000

592,000

680,000

1,800,000 800,000 120,000 200,000 1,120,000 680,000

2,000,000 592,000 (360,000)

920,000 680,000

Noncontrolling Consolidated Interest Balances

Salmon Company 12/31 Retained Earnings to Balance Sheet

(240,000) 2,232,000

1,360,000

Perch Salmon Company Company Balance Sheet Cash Accounts Receivable Inventory Investment in Salmon Company Difference between Implied and Book Value Land Plant and Equipment Total Assets

280,000 1,040,000 960,000 3,400,000

1,440,000 7,120,000

Accounts Payable 528,000 Notes Payable 360,000 Common Stock: Perch Company 4,000,000 Salmon Company Retained Earnings from above 2,232,000 1/1 Noncontrolling Interest in Net Assets 12/31 Noncontrolling Interest in Net Assets Total Liabilities & Equity 7,120,000

Eliminations Dr. Cr.

Noncontrolling Consolidated Interest Balances

260,000 760,000 700,000

1,280,000 1,120,000 4,120,000 440,000 120,000

2,200,000 1,360,000

4,120,000

Answer: PERCH COMPANY AND SUBSIDIARY Consolidated Statements Workpaper For the Year Ended December 31, 2026 Perch Salmon Company Company Income Statement Sales Dividend Income Total Revenue Cost of Goods Sold Depreciation Expense Other expense Total Cost & Expenses Net/Consolidated Income Noncontrolling Interest in Income Net Income to Retained Earnings Statement of Retained Earnings 1/1 Retained Earnings Perch Company

4,400,000 192,000 4,592,000 3,600,000 160,000 240,000 4,000,000 592,000 592,000

2,000,000

Eliminations Dr. Cr.

Noncontrolling Interest

Consolidated Balances

120,000 120,000

6,200,000 ---6,200,000 4,400,000 360,000 440,000 5,200,000 1,000,000 120,000 880,000

1,800,000 (a) 1,800,000 800,000 120,000 (d) 20,0000 1,120,000 680,000 680,000

192,000

80,000

272,000

64,000 64,000

(e) 240,000

2,112,000

Salmon Company Net Income from above Dividends Declared Perch Company Salmon Company 12/31 Retained Earnings to Balance Sheet Balance Sheet Cash Accounts Receivable Inventory Investment in Salmon Company Difference between Implied and Book Value Land Plant and Equipment Goodwill Total Assets Accounts Payable Notes Payable Common Stock: Perch Company Salmon Company Retained Earnings from above

592,000

920,000 (b) 920,000 680,000 272,000

(360,000) (240,000) 2,232,000

1,360,000

280,000 1,040,000 960,000 3,400,000

260,000 760,000 700,000

1,440,000 7,120,000 528,000 360,000

1,320,000

(a) 192,000

(48,000)

432,000

72,000

7,120,000

2,632,000

240,000 (b)3,640,000

540,000 1,800,000 1,660,000 ---

(b) 1,430,000 (c)1,430,000 1,280,000 (c) 200,000 1,120,000 (c) 400,000 (d) 160,000 (c) 750,000 4,120,000 440,000 120,000

1,480,000 2,800,000 750,000 9,030,000 968,000 480,000

(e)

4,000,000 2,232,000

880,000

(360,000)

4,000,000 2,200,000 (b) 2,200,000 1,360,000 1,320,000

1/1 Noncontrolling Interest in Net Assets 12/31 Noncontrolling Interest in Net Assets Total Liabilities & Equity

120,000

4,120,000

432,000

72,000

(b) 910,000

878,000

6,572,000

950,000 712,000

2,632,000

950,000 9,030,000

Question Title: Test Bank (Problem) Question 6-7 Difficulty: Hard Learning Objective: 6 Prepare consolidated workpapers for firms with upstream and downstream sales using the cost, partial equity, and complete equity methods. Section Reference: 6.1, 6.2, 6.4

35. Poole Company owns a 90% interest in Solumbra Company. The consolidated income statement drafted by the controller of Poole Company appeared as follows: Poole Company and Subsidiary Consolidated Income Statement For theYear Ended December 31, 2025 Sales

$13,800,000

Cost of Sales Operating Expenses Consolidated Income Less Noncontrolling Interest in Consolidated Income Controlling Interest in Consolidated Net Income

$9,000,000 1,800,000

10,800,000 3,000,000 190,000 $2,810,000

During your audit you discover that intercompany sales transactions were not reflected in the controller’s draft of the consolidated income statement. Information relating to intercompany sales and unrealized intercompany profit is as follows:

2024 Sales—Solumbra to Poole 2025 Sales—Poole to Solumbra

Cost

Selling Price

Unsold at Year-End

$1,500,000 900,000

$1,800,000 1,350,000

1/4 2/5

Required: Prepare a corrected consolidated income statement for Poole Company and Solumbra Company for the year ended December 31, 2025. Answer: POOLE COMPANY AND SUBSIDIARY Consolidated Income Statement For the Year Ended December 31, 2025 Sales ($13,800,000 – $1,350,000) Cost of Goods Sold (a) Operating Expenses Consolidated Income Less Noncontrolling Interest in Consolidated Income (b) Controlling Interest in Consolidated Net Income

$12,450,000 $7,755,000 1,800,000

(a) Reported Cost of Goods Sold Less intercompany sales in 2025 Plus unrealized profit in ending inventory (2/5 x ($1,350,000 - $900,000)) Less realized profit in beginning inventory (1/4 x ($1,800,000 - $1,500,000)) Corrected cost of goods sold

9,555,000 2,895,000 197,500 $2,697,500 $9,000,000 (1,350,000) 180,000 (75,000) $7,755,000

$190,000 $1,900,000 0.1 Plus unrealized profit on subsidiary sales in 2024 that is considered realized in 2025 (1/4 x ($1,800,000 - $1,500,000)) 75,000 Less unrealized profit on subsidiary sales in 2025 (there were no upstream sales in 2025) 0 Income realized in transactions with third parties 1,975,000 × 0.10 Noncontrolling interest in consolidated income $197,500

(b) Reported net income of subsidiary

Question Title: Test Bank (Problem) Question 6-8 Difficulty: Hard

Learning Objective: 1 Describe the financial reporting objectives for intercompany sales of inventory., 2 Determine the amount of intercompany profit, if any, to be eliminated from the consolidated statements., 5 Compute the noncontrolling interest in consolidated net income for upstream and downstream sales, when not all the inventory has been sold to outsiders. Section Reference: 6.4

Package Title: Test Bank Questions Course Title: Advanced Accounting, 8e Chapter: Elimination of Unrealized Gains or Losses on Intercompany Sales of Property and Equipment Chapter Number: 7

Question Type: Multiple Choice

1. In the year a subsidiary sells land to its parent company at a gain, a workpaper entry is made debiting: a) Retained Earnings - P Company b) Retained Earnings - S Company c) Gain on Sale of Land d) both Retained Earnings - P Company and Retained Earnings - S Company Answer: c Question Title: Test Bank (Multiple Choice) Question 01 Difficulty: Easy Learning Objective: 1 Understand the financial reporting objectives in accounting for intercompany sales of nondepreciable assets on the consolidated financial statements. Section Reference: 7.1

2. In years subsequent to the upstream intercompany sale of nondepreciable assets, the necessary consolidated workpaper entry under the cost method is to debit the: a) Noncontrolling interest and Retained Earnings (Parent) accounts, and credit the nondepreciable asset. b) Retained Earnings (Parent) account and credit the nondepreciable asset. c) Nondepreciable asset, and credit the Noncontrolling interest and Investment in Subsidiary accounts. d) No entries are necessary. Answer: a Question Title: Test Bank (Multiple Choice) Question 02 Difficulty: Medium Learning Objective: 1 Understand the financial reporting objectives in accounting for intercompany sales of nondepreciable assets on the consolidated financial statements. Section Reference: 7.1 3. In 2020, P Company sells land to its 80% owned subsidiary, S Company, at a gain of $50,000. What is the effect of this sale of land on consolidated net income assuming S Company still owns the land at the end of the year? a) consolidated net income will be the same as if the sale had not occurred. b) consolidated net income will be $50,000 less than it would had the sale not occurred. c) consolidated net income will be $40,000 less than it would had the sale not occurred. d) consolidated net income will be $50,000 greater than it would had the sale not occurred. Answer: a

Question Title: Test Bank (Multiple Choice) Question 03 Difficulty: Easy Learning Objective: 1 Understand the financial reporting objectives in accounting for intercompany sales of nondepreciable assets on the consolidated financial statements. Section Reference: 7.1

4. Several years ago, P Company bought land from S Company, its 80% owned subsidiary, at a gain of $50,000 to S Company. The land is still owned by P Company. The consolidated working papers for this year will require: a) no entry because the gain happened prior to this year. b) a credit to land for $50,000. c) a debit to P’s retained earnings for $50,000. d) a debit to Noncontrolling interest for $50,000. Answer: b Question Title: Test Bank (Multiple Choice) Question 04 Difficulty: Easy Learning Objective: 1 Understand the financial reporting objectives in accounting for intercompany sales of nondepreciable assets on the consolidated financial statements. Section Reference: 7.1

5. P Company purchased land from its 80% owned subsidiary at a cost of $100,000 greater than its subsidiary’s book value. Two years later P sold the land to an outside entity for $50,000 more than P’s cost. In its current year consolidated income statement P and its subsidiary should report a gain on the sale of land of: a) $50,000. b) $120,000. c) $130,000. d) $150,000. Answer: d Question Title: Test Bank (Multiple Choice) Question 05 Difficulty: Easy Learning Objective: 1 Understand the financial reporting objectives in accounting for intercompany sales of nondepreciable assets on the consolidated financial statements. Section Reference: 7.1 6. When preparing consolidated financial statement workpapers, unrealized intercompany gains, as a result of equipment or inventory sales by affiliates, are allocated proportionately by percent of ownership between parent and subsidiary only when the selling affiliate is: a) the parent and the subsidiary is less than wholly owned. b) a wholly owned subsidiary. c) the subsidiary and the subsidiary is less than wholly owned.

d) the parent of a wholly owned subsidiary. Answer: c Question Title: Test Bank (Multiple Choice) Question 06 Difficulty: Medium Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements., 6 Compare the eliminating entries when the selling affiliate is a subsidiary (less than wholly owned) versus when the selling affiliate is the parent company. Section Reference: 7.2 7. In years subsequent to the year a 90% owned subsidiary sells equipment to its parent company at a gain, the noncontrolling interest in consolidated income is computed by multiplying the noncontrolling interest percentage by the subsidiary’s reported net income: a) minus the net amount of unrealized gain on the intercompany sale. b) plus the net amount of unrealized gain on the intercompany sale. c) minus intercompany gain considered realized in the current period. d) plus intercompany gain considered realized in the current period. Answer: d Question Title: Test Bank (Multiple Choice) Question 07 Difficulty: Medium Learning Objective: 7 Compute the noncontrolling interest in consolidated net income when the selling affiliate is a subsidiary. Section Reference: 7.2

8. Company S sells equipment to its parent company (P) at a gain. In years subsequent to the year of the intercompany sale, a workpaper entry is made under the cost method debiting: a) Retained Earnings - P. b) Noncontrolling interest. c) Equipment. d) all of these. Answer: d Question Title: Test Bank (Multiple Choice) Question 08 Difficulty: Medium Learning Objective: 6 Compare the eliminating entries when the selling affiliate is a subsidiary (less than wholly owned) versus when the selling affiliate is the parent company., 7 Compute the noncontrolling interest in consolidated net income when the selling affiliate is a subsidiary. Section Reference: 7.2

9. P Corp. owns 90% of the outstanding common stock of S Company. On December 31, 2021, S sold equipment to P for an amount greater than the equipment’s book value but less than its original cost. The equipment should be reported on the December 31, 2021 consolidated balance sheet at:

a) P’s original cost less 90% of S’s recorded gain. b) P’s original cost less S’s recorded gain. c) S’s original cost. d) P’s original cost. Answer: b Question Title: Test Bank (Multiple Choice) Question 09 Difficulty: Medium Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements. Section Reference: 7.2

10. Petunia Company owns 100% of Sage Corporation. On January 1, 2021 Petunia sold equipment to Sage at a gain. Petunia had owned the equipment for four years and used a ten-year straight-line rate with no residual value. Sage is using an eight-year straight-line rate with no residual value. In the consolidated income statement, Sage’s recorded depreciation expense on the equipment for 2021 will be reduced by: a) 10% of the gain on sale. b) 12 1/2% of the gain on sale. c) 80% of the gain on sale. d) 100% of the gain on sale. Answer: b Question Title: Test Bank (Multiple Choice) Question 10 Difficulty: Medium Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements., 4 Explain the term “realized through usage.” Section Reference: 7.2 11. Petunia Corporation owns 100% of Stone Company’s common stock. On January 1, 2021, Petunia sold equipment with a book value of $210,000 to Stone for $300,000. Stone is depreciating the equipment over a ten-year life by the straight-line method. The net adjustments to compute 2021 and 2022 consolidated income would be an increase (decrease) of: a) 2021, ($90,000); 2022, $0 b) 2021, ($90,000); 2022, $9,000 c) 2021, ($81,000); 2022, $0 d) 2021, ($81,000); 2022, $9,000 Answer: d Question Title: Test Bank (Multiple Choice) Question 11 Difficulty: Medium

Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements., 4 Explain the term “realized through usage.” Section Reference: 7.2, 7.3 12. The amount of the adjustment to the noncontrolling interest in consolidated net assets is equal to the noncontrolling interest’s percentage of the: a) unrealized intercompany gain at the beginning of the period. b) unrealized intercompany gain at the end of the period. c) realized intercompany gain at the beginning of the period. d) realized intercompany gain at the end of the period. Answer: a Question Title: Test Bank (Multiple Choice) Question 13 Difficulty: Medium Learning Objective: 7 Compute the noncontrolling interest in consolidated net income when the selling affiliate is a subsidiary. Section Reference: 7.2

13. In January 2019, S Company, an 80% owned subsidiary of P Company, sold equipment to P Company for $1,980,000. S Company’s original cost for this equipment was $2,000,000 and had accumulated depreciation of $200,000. P Company continued to depreciate the equipment over its 9 year remaining life using the straight-line method. This equipment was sold to a third party on January 1, 2023 for $1,440,000. What amount of gain should P Company record on its books in 2023? a) $60,000. b) $120,000. c) $240,000. d) $360,000. Answer: b Question Title: Test Bank (Multiple Choice) Question 13 Difficulty: Medium Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements., 3 Explain when gains or losses on intercompany sales of depreciable assets should be recognized on a consolidated basis., 4 Explain the term “realized through usage.” Section Reference: 7.2 14. Gain or loss resulting from an intercompany sale of equipment between a parent and a subsidiary is: a) recognized in the consolidated statements in the year of the sale. b) considered to be realized over the remaining useful life of the equipment as an adjustment to depreciation in the consolidated statements. c) considered to be unrealized in the consolidated statements until the equipment is sold to a third party. d) amortized over a period not less than 2 years and not greater than 40 years.

Answer: b Question Title: Test Bank (Multiple Choice) Question 14 Difficulty: Easy Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements. Section Reference: 7.2 15. On January 1, 2021 S Corporation sold equipment that cost $120,000 and had a book value of $48,000 to P Corporation for $60,000. P Corporation owns 100% of S Corporation and the equipment has a 4-year remaining life. What is the effect of the sale on P Corporation’s Equity from Subsidiary Income account for 2022? a) no effect b) increase of $12,000. c) decrease of $12,000. d) increase of $3,000. Answer: d Question Title: Test Bank (Multiple Choice) Question 15 Difficulty: Medium Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements. Section Reference: 7.2

16. P Corporation acquired an 80% interest in S Corporation two years ago at an implied value equal to the book value of S. On January 2, 2021, S sold equipment with a five-year remaining life to P for a gain of $120,000. S reports net income of $600,000 for 2021 and pays dividends of $200,000. P’s Equity from Subsidiary Income for 2021 is: a) $480,000. b) $384,000. c) $403,200. d) $576,000 Answer: c Question Title: Test Bank (Multiple Choice) Question 16 Difficulty: Medium Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements. Section Reference: 7.2 17. On January 1, 2021, P Corporation sold equipment with a 3-year remaining life and a book value of $40,000 to its 70% owned subsidiary for a price of $46,000. In the consolidated workpapers for the year ended December 31, 2022, an elimination entry for this transaction will include a:

a) debit to Equipment for $6,000. b) debit to Gain on Sale of Equipment for $6,000. c) credit to Depreciation Expense for $6,000. d) debit to Accumulated Depreciation for $4,000. Answer: d Question Title: Test Bank (Multiple Choice) Question 17 Difficulty: Medium Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements. Section Reference: 7.2 18. On January 1, 2021, P Corporation sold equipment with a 3-year remaining life and a book value of $100,000 to its 70% owned subsidiary for a price of $115,000. In the consolidated workpapers for the year ended December 31, 2022, an elimination entry for this transaction will include a: a) debit to Equipment for $15,000. b) debit to Gain on Sale of Equipment for $15,000. c) credit to Depreciation Expense for $15,000. d) debit to Accumulated Depreciation for $10,000. Answer: d Question Title: Test Bank (Multiple Choice) Question 18 Difficulty: Medium Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements., 6 Compare the eliminating entries when the selling affiliate is a subsidiary (less than wholly owned) versus when the selling affiliate is the parent company. Section Reference: 7.2 19. In January 2019, S Company, an 80% owned subsidiary of P Company, sold equipment to P Company for $990,000. S Company’s original cost for this equipment was $1,000,000 and had accumulated depreciation of $100,000. P Company continued to depreciate the equipment over its 9 year remaining life using the straight-line method. This equipment was sold to a third party on January 1, 2022 for $720,000. What amount of gain should P Company record on its books in 2022? a) $30,000. b) $60,000. c) $120,000. d) $180,000. Answer: b Question Title: Test Bank (Multiple Choice) Question 19 Difficulty: Medium Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements., 9 Describe the eliminating entry needed to adjust the consolidated financial statements when the purchasing affiliate sells a depreciable asset that was acquired from another affiliate.

Section Reference: 7.2

20. For firms using the complete equity method, the controlling interest in consolidated net income will always be equal to a) the net income reported by the parent minus retained earnings b) the net income reported by the parent minus intercompany interest c) the gross income reported by the parent d) the net income reported by the parent Answer: d Question Title: Test Bank (Multiple Choice) Question 20 Difficulty: Medium Learning Objective: 8 Compute consolidated net income considering the effects of intercompany sales of depreciable assets. Section Reference: 7.6

21. Income and expenses related to rents, fees, and interest should be reported in the ______ only when they arise from transactions _____________. a) consolidated balance sheet; with parties inside the affiliated group b) consolidated income statement; with parties inside the affiliated group c) consolidated income statement; with parties outside the affiliated group d) consolidated balance sheet; with parties outside the affiliated group Answer: c Question Title: Test Bank (Multiple Choice) Question 21 Difficulty: Medium Learning Objective: 10 Explain the basic principles used to record or eliminate intercompany interest, rent, and service fees. Section Reference: 7.8

22. P Company purchased land from its 80% owned subsidiary at a cost of $30,000 greater than its subsidiary’s book value. Two years later P sold the land to an outside entity for $15,000 more than P’s cost. In its current year consolidated income statement P and its subsidiary should report a gain on the sale of land of: a) $15,000. b) $36,000. c) $39,000. d) $45,000. Answer: d Question Title: Test Bank (Multiple Choice) Question 22 Difficulty: Easy

Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements., 3 Explain when gains or losses on intercompany sales of depreciable assets should be recognized on a consolidated basis., 8 Compute consolidated net income considering the effects of intercompany sales of depreciable assets. Section Reference: 7.2, 7.4, 7.6 23. In the year an 80% owned subsidiary sells equipment to its parent company at a gain, the noncontrolling interest in consolidated income is calculated by multiplying the noncontrolling interest percentage by the subsidiary’s reported net income: a) plus the intercompany gain considered realized in the current period. b) plus the net amount of unrealized gain on the intercompany sale. c) minus the net amount of unrealized gain on the intercompany sale. d) minus the intercompany gain considered realized in the current period. Answer: c Question Title: Test Bank (Multiple Choice) Question 23 Difficulty: Medium Learning Objective: 7 Compute the noncontrolling interest in consolidated net income when the selling affiliate is a subsidiary. Section Reference: Summary 24. When the selling affiliate is a partially owned subsidiary (upstream sale), for the treatment of deferred income taxes relating to intercompany sales of equipment, the calculation of the noncontrolling interest in consolidated income requires that: a) the after-tax amount of gain recorded by the subsidiary be subtracted from the reported net income of the subsidiary. b) the after-tax amount of the gain realized through depreciation be added to the reported net income of the subsidiary. c) Both A and B needs to be done before multiplying by the noncontrolling interest percentage. d) None of the above. Answer: c Question Title: Test Bank (Multiple Choice) Question 24 Difficulty: Medium Section Reference: Appendix

Question Type: Essay 25. When there have been intercompany sales of depreciable property, workpaper entries are necessary to accomplish several financial reporting objectives. Identify three of these financial reporting objectives for depreciable property. Answer: Workpaper entries are necessary to accomplish the following financial reporting objectives:  To report as gains or losses in the consolidated income statement only those that result from the sale of depreciable property to parties outside the affiliated group.  To present property in the consolidated balance sheet at its cost to the affiliated group.



To present accumulated depreciation in the consolidated balance sheet and depreciation expense in the consolidated income statement based on the cost to the affiliated group of the related assets.

Question Title: Test Bank (Essay) Question 25 Difficulty: Medium Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements. Section Reference: 7.2 26. An eliminating entry is needed to adjust the consolidated financial statements when the purchasing affiliate sells a depreciable asset that was acquired from another affiliate. Describe the necessary eliminating entry. Answer: The eliminating entry adjusts the gain or loss reported by the purchasing affiliate from the amount it recorded to the correct amount from the perspective of the consolidated entity, and adjusts the controlling and noncontrolling interests for the unrealized intercompany profit associated with the equipment on the date of its premature disposal. Question Title: Test Bank (Essay) Question 26 Difficulty: Medium Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements., 6 Compare the eliminating entries when the selling affiliate is a subsidiary (less than wholly owned) versus when the selling affiliate is the parent company. Section Reference: Summary Question Type: Problem 27. Pine Company, a computer manufacturer, owns 90% of the outstanding stock of Slider Company. On January 1, 2021, Pine sold computers to Slider for $500,000. The computers, which are inventory to Pine, had a cost to Pine of $350,000. Slider Company estimated that the computers had a useful life of six years from the date of purchase. Slider Company reported net income of $310,000, and Pine Company reported net income of $870,000 from its independent operations (including sales to affiliates) for the year ended December 31, 2021. Required: A. Prepare in general journal form the workpaper entries necessary because of the intercompany sales in the consolidated statements workpaper for both 2021 and 2022. B. Calculate controlling interest in consolidated net income for 2021. Answer: A. 2021 Sales Cost of Sales Equipment Accumulated Depreciation Depreciation Expense (150,000/6) 2022

500,000 350,000 150,000 25,000 25,000

Beginning R/E – Pine Equipment

150,000

Accumulated Depreciation Depreciation Expense Beginning R/E – Pine

50,000

B. Pine’s net income from independent operations - Unrealized profit on 2021 sales to Slider + Profit on sales to Slider realized through 2021 depreciation

150,000

25,000 25,000 $870,000 (150,000) 25,000

Pine’s income from independent operations that has been realized from third party transactions 745,000 Income of Slider that has been realized in transactions with third parties $310,000 Pine’s share thereof (.9 × $310,000) 279,000 Controlling Interest in Consolidated Net Income – 2021 $1,024,000

Question Title: Test Bank (Problem) Question 7-1 Difficulty: Hard Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements. Section Reference: 7.2, 7.7

28. On January 1, 2015, Perry Company purchased a 90% interest in Sludge Company for $800,000, the same as the book value on that date. On January 1, 2024, Sludge sold new equipment to Perry for $16,000. The equipment cost $11,000 and had a five year estimated life as of January 1, 2024. During 2025, Perry sold merchandise to Sludge at 20% above cost in the amount (selling price) of $126,000. At the end of the year, Sludge had $42,000 of this merchandise in its ending inventory. At the beginning of 2025, Sludge had $48,000 of inventory purchased in 2024 from Perry. Required: A. Prepare all workpaper entries necessary to eliminate the effects of the intercompany sales on the consolidated financial statements for 2025. B. Calculate the amount of noncontrolling interest to be deducted from consolidated net income in the consolidated income statement for 2025. Sludge Company reported $40,000 of net income in 2025. Answer: A. Sales

126,000 Cost of Sales

126,000

Cost of Sales Inventory [42,000 – (42,000/1.20)

7,000

Beginning R/E – Perry Cost of Sales [48,000 – (48,000/1.20)]

8,000

7,000 8,000

Beginning R/E – Perry ($5,000 × .9) Noncontrolling interest ($5,000 × .1) Equipment (16,000 – 11,000)

4,500 500

Accumulated Depreciation Depreciation Expense (5,000/5) Beginning R/E – Perry ($1,000 × .9) Noncontrolling interest ($1,000 × .1)

2,000

5,000 1,000 900 100

B. Noncontrolling Interest in Consolidated net Income: .1 × (40,000 + 1,000) = $4,100 Question Title: Test Bank (Problem) Question 7-2 Difficulty: Hard Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements., 6 Compare the eliminating entries when the selling affiliate is a subsidiary (less than wholly owned) versus when the selling affiliate is the parent company., 7 Compute the noncontrolling interest in consolidated net income when the selling affiliate is a subsidiary. Section Reference: 7.2, 7.7

29. Prince Company owns 104,000 of the 130,000 shares outstanding of Serf Corporation. Serf Corporation sold equipment to Prince Company on January 1, 2024 for $740,000. The equipment was originally purchased by Serf Corporation on January 1, 2023 for $1,280,000 and at that time its estimated depreciable life was 8 years. The equipment is estimated to have a remaining useful life of four years on January 1, 2024. Both companies use the straight-line method to depreciate equipment. In 2025 Prince Company reported net income from its independent operations of $3,270,000, and Serf Corporation reported net income of $820,000 and declared dividends of $60,000. Prince Company uses the cost method to record the investment in Serf Company. Required: A. Prepare, in general journal form, the workpaper entries relating to the intercompany sale of equipment that are necessary in the December 31, 2025 consolidated financial statements workpapers. B. Calculate the amount of noncontrolling interest to be deducted from consolidated net income in the consolidated income statement for 2025. C. Calculate controlling interest in consolidated net income for 2025. Answer: A. Equipment Beginning R/E – Prince ($100,000 × .80) Noncontrolling Interest ($100,000 × .20) Accumulated Depreciation Accumulated Depreciation ($100,000/4) × 2 Depreciation Expense Beginning R/E – Prince ($25,000 × .80) Noncontrolling Interest ($25,000 × .20) B. Noncontrolling Interest Calculation:

540,000 80,000 20,000 640,000 50,000 25,000 20,000 5,000

Reported income of Serf Company Plus: Intercompany profit considered realized in the current period Noncontrolling interest in Serf Company (.20 × 845,000) C. Controlling Interest in Consolidated Net Income: Prince Company’s income from its independent operations Reported net income of Serf Company Plus profit on intercompany sale of equipment considered to be realized through depreciation in 2024 Reported subsidiary income that has been realized in transactions with third parties Prince Company’s share thereof Controlling Interest in Consolidated net income

$820,000 25,000 $845,000 $169,000

$3,270,000 $820,000

25,000

845,000 × .8 676,000 $3,946,000

Question Title: Test Bank (Problem) Question 7-3 Difficulty: Hard Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements., 6 Compare the eliminating entries when the selling affiliate is a subsidiary (less than wholly owned) versus when the selling affiliate is the parent company., 7 Compute the noncontrolling interest in consolidated net income when the selling affiliate is a subsidiary. Section Reference: 7.2, 7.4, 7.7

30. P Company bought 60% of the common stock of S Company on January 1, 2024. On January 1, 2024 there was an intercompany sale of equipment at a gain of $63,000. The equipment had an estimated remaining life of six years. Net incomes of the two companies from their own operations (including sales to affiliates) were as follows: 2024 2025 P Company $280,000 $210,000 S Company 70,000 105,000 A. If S Company sold the equipment to P Company, fill in the following matrix: 2024 2025 Noncontrolling interest in consolidated net income Controlling Interest in Consolidated net income B. If P Company sold the equipment to S Company, fill in the following matrix: 2024 2025 Noncontrolling interest in consolidated net income Controlling interest in consolidated net income

Answer: 2024

2025

Noncontrolling interest in Consolidated net income

$ 7,000 (1)

$ 46,200 (2)

Controlling interest in Consolidated net income

290,500 (3)

279,300 (4)

(1) .4($70,000 – $63,000 + $10,500) = $7,000 (2) .4($105,000 + $10,500) = $46,200 (3) $280,000 + .6($70,000 – $63,000 + $10,500) = $290,500 (4) $210,000 + .6($105,000 + $10,500) = $279,300 2024

2025

B. Noncontrolling interest in $ 28,000 (5) $ 42,000 (6) Consolidated income Controlling interest in 269,500 (7) 283,500 (8) Consolidated net income (5) .4($70,000) = $28,000 (6) .4($105,000) = $42,000 (7) ($280,000 – $63,000 + $10,500) + .6($70,000) = $269,500 (8) ($210,000 + $10,500) + .6($105,000) = $283,500

Question Title: Test Bank (Problem) Question 7-4 Difficulty: Hard Learning Objective: 5 Describe the differences between upstream and downstream sales in determining consolidated net income and the controlling and noncontrolling interests in consolidated income., 7 Compute the noncontrolling interest in consolidated net income when the selling affiliate is a subsidiary., 8 Compute consolidated net income considering the effects of intercompany sales of depreciable assets. Section Reference: 7.2, 7.4, 7.7

31. On January 1, 2024, Pharma Company purchased equipment from its 80%-owned subsidiary for $2,400,000. On the date of the sale, the carrying value of the equipment on the books of the subsidiary company was $1,800,000. The equipment had a remaining useful life of six years on January 2024. On January 1, 2025, Pharma Company sold the equipment to an outside party for $2,200,000. Required: A. Prepare, in general journal form, the entries necessary in 2024 and 2025 on the books of Pharma Company to account for the purchase and sale of the equipment. B. Determine the consolidated gain or loss on the sale of the equipment and prepare, in general journal form, the entry necessary on the December 31, 2025 consolidated statements workpaper to properly reflect this gain or loss. Answer: A. 2024

(1) Equipment Cash

2,400,000 2,400,000

(2) Depreciation Expense (1/6 × $2,400,000) Accumulated Depreciation 2025 (3) Cash Accumulated Depreciation Equipment Gain on Sale of Equipment B. Cost Accumulated Depreciation 1/1 Book Value Proceeds from Sale Gain on Sale

400,000 400,000

2,200,000 400,000 2,400,000 200,000 Pharma Company Consolidated $2,400,000 (400,000) 2,000,000 $1,500,000* 2,200,000 2,200,000 $ 200,000 $700,000

*$1,800,000 – 1/6($1,800,000) = $1,500,000 1/1 Retained Earnings - Pharma [.8 × ($600,000 – $100,000)] 1/1 Noncontrolling interest [.2 × ($600,000 – $100,000)] Gain on Sale of Equipment

400,000 100,000 500,000

$2,400,000 – $1,800,000 = $600,000 $600,000/6 = $100,000 Unrealized intercompany gain on date of sale to outsiders = $600,000 – $100,000 = $500,000

Question Title: Test Bank (Problem) Question 7-5 Difficulty: Hard Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements., 6 Compare the eliminating entries when the selling affiliate is a subsidiary (less than wholly owned) versus when the selling affiliate is the parent company., 7 Compute the noncontrolling interest in consolidated net income when the selling affiliate is a subsidiary. Section Reference: 7.2, 7.4, 7.7

32. P Corporation acquired 80% of the outstanding voting stock of S Corporation when the fair values equaled the book values. On July 1, 2021, P sold land to S for $300,000. The land originally cost P $200,000. S recently resold the land on October 30, 2022 for $350,000. On October 1, 2022, S Corporation sold equipment to P Corporation for $80,000. S originally paid $100,000 for this equipment and had accumulated depreciation of $40,000 thus far. The equipment has a five-year remaining life.

Required: A. Complete the consolidated income statement for P Corporation and subsidiary for the year ended December 31, 2022.

Sales

1,200,000

600,000

Dividend Income from S

Elimination Entries Dr. Cr.

Noncontrolling Interest

Consolidated Balances

80,000

Gain on Sale of Equipment Gain on Sale of Land

20,000 50,000

Cost of Sales

(800,000)

(300,000)

Depreciation Expense

(160,000)

(80,000)

Other Expenses

(200,000)

(160,000)

Noncontrolling Interest in Income Net Income

120,000

130,000

Answer:

Sales

$1,200,000

$600,000

Elimination Entries Dr. Cr.

Noncontrolling Interest

Consolidating Balances $1,800,000

Dividend Income from S

80,000

Gain on Sale of Equipment Gain on Sale of

(a)80,000 20,000

Land

50,000

Cost of Sales

(800,000)

(300,000)

(160,000)

(80,000)

(200,000)

(160,000)

$120,000

$130,000

(b)20,000

(d)100,000

150,000 (1,100,000)

Depreciation Expense Other Expenses

(c)

1,000

(239,000) (360,000)

Noncontrolling Interest in Income ($130,000 – $20,000 + 1,000) × .20 Net Income

Dividend Income from S

22,200 22,200

80,000

(22,200) $228,800

Dividends Declared b.

80,000

Gain on Sale of Equipment Equipment Accumulated Depreciation

20,000 20,000

Accumulated Depreciation Depreciation Expense

1,000*

Retained Earnings – P Gain on Sale of Land

100,000

40,000

1,000

100,000

* ($20,000/5) × 3/12

Question Title: Test Bank (Problem) Question 7-6 Difficulty: Hard Learning Objective: 1 Understand the financial reporting objectives in accounting for intercompany sales of nondepreciable assets on the consolidated financial statements., 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements., 6 Compare the eliminating entries when the selling affiliate is a subsidiary (less than wholly owned) versus when the selling affiliate is the parent company., 7 Compute the noncontrolling interest in consolidated net income when the selling affiliate is a subsidiary., 8 Compute consolidated net income considering the effects of intercompany sales of depreciable assets. Section Reference: 7.1, 7.2, 7.4, 7.7

33. Pale Company owns 90% of the outstanding common stock of Shale Company. On January 1, 2024, Shale Company sold equipment to Pale Company for $300,000. Shale Company had purchased the equipment for $450,000 on January 1, 2013 and has been depreciating it over a 10 year life by the straight-line method. The management of Pale Company estimated that the equipment had a remaining life of 5 years on January 1, 2024. In 2024, Pale Company reported $225,000 and Shale Company reported $150,000 in net income from their independent operations. Required: A. Prepare in general journal form the workpaper entries relating to the intercompany sale of equipment that are necessary in the December 31, 2024 and 2025 consolidated statements workpapers. Pale Company uses the cost method to record its investment in Shale Company. B. Calculate equity in subsidiary income for 2024 and noncontrolling interest in net income for 2024. Answer: A. 2024 Gain on Sale of Equipment Equipment Accumulated Depreciation

75,000 150,000

Accumulated Depreciation Depreciation Expense

15,000

2025

225,000

15,000

Retained Earnings – Pale Noncontrolling Interest Equipment Accumulated Depreciation

67,500 7,500 150,000 225,000

Accumulated Depreciation 30,000 Depreciation Expense Beginning Retained Earnings – Pale Noncontrolling Interest B. Shale Company net income Unrealized gain-equipment ($75,000) upstream Confirmed gain

15,000 13,500 1,500

Equity in Sub. Income $135,000

Noncontrolling Interest $15,000

(67,500) 13,500 $81,000

(7,500) 1,500 $ 9,000

Question Title: Test Bank (Problem) Question 7-7 Difficulty: Hard Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements., 6 Compare the eliminating entries when the selling affiliate is a subsidiary (less than wholly owned) versus when the selling affiliate is the parent company., 7 Compute the noncontrolling interest in consolidated net income when the selling affiliate is a subsidiary., 8 Compute consolidated net income considering the effects of intercompany sales of depreciable assets. Section Reference: 7.2, 7.4, 7.7 34. On January 1, 2024, Pound Company acquired an 80% interest in the common stock of Sound Company on the open market for $3,000,000, the book value at that date. On January 1, 2025, Pound Company purchased new equipment for $58,000 from Sound Company. The equipment cost $36,000 and had an estimated life of five years as of January 1, 2025. During 2026, Pound Company had merchandise sales to Sound Company of $400,000; the merchandise was priced at 25% above Pound Company’s cost. Sound Company still owes Pound Company $70,000 on open account and has 20% of this merchandise in inventory at December 31, 2026. At the beginning of 2026, Sound Company had in inventory $100,000 of merchandise purchased in the previous period from Pound Company. Required: A. Prepare all workpaper entries necessary to eliminate the effects of the intercompany sales on the consolidated financial statements for the year ended December 31, 2026. B. Assume that Sound Company reports net income of $160,000 for the year ended December 31, 2026. Calculate the amount of noncontrolling interest to be deducted from consolidated income in the consolidated income statement for the year ended December 31, 2026. Answer: A. (1) Sales

400,000

Cost of Sales

400,000

(2) Accounts Payable Accounts Receivable

70,000

(3) Cost of Sales (beginning inventory – income statement) Inventory ($80,000 – ($80,000/1.25))

16,000

(4) Beginning Retained Earnings – Pound ($100,000 – ($100,000/1.25)) Cost of Sales (beginning inventory – income statement)

20,000

(5) Beginning Retained Earnings – Pound ($22,000 × .8) Noncontrolling Interest ($22,000 × .2) Property, Plant and Equipment

17,600 4,400

(6) Accumulated Depreciation Depreciation Expense ($22,000/5) Beginning Retained Earnings – Pound ($4,400 × .8) Noncontrolling Interest ($4,400 × .2)

8,800

70,000

16,000

20,000

22,000

4,400 3,520 880

B. Noncontrolling Interest in Consolidated Income .2 × ($160,000 + $4,400) = $32,880

Question Title: Test Bank (Problem) Question 7-8 Difficulty: Hard Learning Objective: 2 State the additional financial reporting objectives in accounting for intercompany sales of depreciable assets on the consolidated financial statements., 6 Compare the eliminating entries when the selling affiliate is a subsidiary (less than wholly owned) versus when the selling affiliate is the parent company., 7 Compute the noncontrolling interest in consolidated net income when the selling affiliate is a subsidiary., 8 Compute consolidated net income considering the effects of intercompany sales of depreciable assets. Section Reference: 7.2, 7.4, 7.7

Package Title: Test Bank Questions Course Title: Advanced Accounting, 8e Chapter: Changes in Ownership Interest Chapter Number: 8

Question Type: Multiple Choice

1. If an investor has between 5% - 20% ownership, a) this investment is classified as trading b) this investment is classified as available-for-sale c) it requires the use of the equity method d) the investment is classified as market value Answer: b Question Title: Test Bank (Multiple Choice) Question 01 Difficulty: Medium Learning Objective: 1 Parent acquires subsidiary stock through several open-market purchases-cost method Section Reference: Introduction 2. Assume that an investor initially owns 10% of an investee and subsequently purchases another 30%. a) The initial 10% was classified as trading, but after the second investment, the 40% investment is accounted for with the equity method. b) The initial 10% was classified as trading, but after the second investment, the 40% investment is classified as available for sale. c) The initial 10% will continue to be classified as available for sale, and the additional 30% investment is accounted for with the equity method. d) The initial 10% was classified as available for sale, but after the second investment, the 40% investment is accounted for with the equity method. Answer: d Question Title: Test Bank (Multiple Choice) Question 02 Difficulty: Medium Learning Objective: 1 Parent acquires subsidiary stock through several open-market purchases-cost method Section Reference: Introduction 3. The computation of noncontrolling interest in net assets is made by multiplying the noncontrolling interest percentage at the: a) beginning of the year times subsidiary stockholders’ equity amounts. b) beginning of the year times consolidated stockholders’ equity amounts. c) end of the year times subsidiary stockholders’ equity amounts. d) end of the year times consolidated stockholders’ equity amounts. Answer: c Question Title: Test Bank (Multiple Choice) Question 03

Difficulty: Easy Learning Objective: 2 Describe the process needed when the parent acquires subsidiary shares through multiple open market purchases. Section Reference: 8.2 4. Parr Company owned 24,000 of the 30,000 outstanding common shares of Solomon Company on January 1, 2024. Parr’s shares were purchased at book value when the fair values of Solomon’s assets and liabilities were equal to their book values. The stockholders’ equity of Solomon Company on January 1, 2024, consisted of the following: Common stock, $15 par value Other contributed capital Retained earnings Total

$ 450,000 337,500 712,500 $1,500,000

Solomon Company sold 7,500 additional shares of common stock for $90 per share on January 2, 2024. If Parr Company purchased all 7,500 shares, the book entry to record the purchase should increase the Investment in Solomon Company account by: a) $562,500. b) $590,625. c) $675,000. d) $150,000. Answer: c Question Title: Test Bank (Multiple Choice) Question 04 Difficulty: Easy Learning Objective: 2 Describe the process needed when the parent acquires subsidiary shares through multiple open market purchases. Section Reference: 8.2 5. P Corporation purchased an 80% interest in S Corporation on January 1, 2023, at book value for $300,000. S’s net income for 2023 was $90,000 and no dividends were declared. On May 1, 2023, P reduced its interest in S by selling a 20% interest, or one-fourth of its investment for $90,000. What would be the balance in the Investment of S Corporation account on December 31, 2023? a) $300,000. b) $225,000. c) $279,000. d) $261,000. Answer: c Question Title: Test Bank (Multiple Choice) Question 05 Difficulty: Hard Learning Objective: 2 Describe the process needed when the parent acquires subsidiary shares through multiple open market purchases. Section Reference: 8.2 6. When the parent company sells a portion of its investment in a subsidiary, the workpaper entry to adjust for the current year’s income sold to noncontrolling stockholders includes a:

a) debit to Subsidiary Income Sold. b) debit to Equity in Subsidiary Income. c) credit to Equity in Subsidiary Income. d) credit to Subsidiary Income Sold. Answer: d Question Title: Test Bank (Multiple Choice) Question 06 Difficulty: Easy Learning Objective: 3 Explain how the parent reports the difference between selling price and book value when shares are sold subsequent to acquisition. Section Reference: 8.3

7. On January 1, 2020, Parent Company purchased 32,000 of the 40,000 outstanding common shares of Sub Company for $1,520,000. On January 1, 2024, Parent Company sold 4,000 of its shares of Sub Company on the open market for $90 per share. Sub Company’s stockholders’ equity on January 1, 2020, and January 1, 2024, was as follows:

Common stock, $10 par value Other contributed capital Retained earnings

1/1/20 $400,000 400,000 800,000 $1,600,000

1/1/24 $ 400,000 400,000 1,400,000 $2,200,000

The difference between implied and book value is assigned to Sub Company’s land. The amount of the gain on sale of the 4,000 shares that should be recorded on the books of Parent Company is: a) $68,000. b) $170,000. c) $96,000. d) $200,000. Answer: b Question Title: Test Bank (Multiple Choice) Question 07 Difficulty: Easy Learning Objective: 3 Explain how the parent reports the difference between selling price and book value when shares are sold subsequent to acquisition. Section Reference: 8.3 8. On January 1, 2020, Pharma Company purchased 16,000 of the 20,000 outstanding common shares of Sludge Company for $760,000. On January 1, 2024, Pharma Company sold 2,000 of its shares of Sludge Company on the open market for $90 per share. Sludge Company’s stockholders’ equity on January 1, 2020, and January 1, 2024, was as follows:

Common stock, $10 par value Other contributed capital Retained earnings

1/1/20 $ 200,000 200,000 400,000 $800,000

1/1/24 $ 200,000 200,000 700,000 $1,100,000

The difference between implied and book value is assigned to Sludge Company’s land. As a result of the sale, Pharma Company’s Investment in Sludge account should be credited for: a) $110,000. b) $137,500. c) $80,000. d) $95,000. Answer: d Question Title: Test Bank (Multiple Choice) Question 08 Difficulty: Hard Learning Objective: 3 Explain how the parent reports the difference between selling price and book value when shares are sold subsequent to acquisition. Section Reference: 8.3 9. On January 1, 2020, Pharma Company purchased 16,000 of the 20,000 outstanding common shares of Sludge Company for $760,000. On January 1, 2024, Pharma Company sold 2,000 of its shares of Sludge Company on the open market for $90 per share. Sludge Company’s stockholders’ equity on January 1, 2020, and January 1, 2024, was as follows:

Common stock, $10 par value Other contributed capital Retained earnings

1/1/20 $ 200,000 200,000 400,000 $800,000

1/1/24 $ 200,000 200,000 700,000 $1,100,000

The difference between implied and book value is assigned to Sludge Company’s land. Assuming no other equity transactions, the amount of the difference between implied and book value that would be added to land on a work paper for the preparation of consolidated statements on December 31, 2024 would be: a) $120,000. b) $115,000. c) $105,000. d) $84,000. Answer: c Question Title: Test Bank (Multiple Choice) Question 09 Difficulty: Hard Learning Objective: 3 Explain how the parent reports the difference between selling price and book value when shares are sold subsequent to acquisition. Section Reference: 8.3 10. On January 1, 2020, Pine Corporation purchased 24,000 of the 30,000 outstanding common shares of Summit Company for $1,140,000. On January 1, 2024, Pine Corporation sold 3,000 of its shares of Summit Company on the open market for $90 per share. Summit Company’s stockholders’ equity on January 1, 2020, and January 1, 2024, was as follows:

Common stock, $10 par value

1/1/20 $300,000

1/1/24 $ 300,000

Other contributed capital Retained earnings

300,000 600,000 $1,200,000

300,000 1,050,000 $1,650,000

The difference between implied and book value is assigned to Summit Company’s land. As a result of the sale, Pine Corporation’s Investment in Summit account should be credited for: a) $165,000. b) $206,250. c) $120,000. d) $142,500. Answer: d Question Title: Test Bank (Multiple Choice) Question 10 Difficulty: Easy Learning Objective: 3 Explain how the parent reports the difference between selling price and book value when shares are sold subsequent to acquisition. Section Reference: 8.3 11. On January 1, 2020, Panda Company purchased 16,000 of the 20,000 outstanding common shares of Simian Company for $760,000. On January 1, 2024, Panda Company sold 2,000 of its shares of Simian Company on the open market for $90 per share. Simian Company’s stockholders’ equity on January 1, 2020, and January 1, 2024, was as follows:

Common stock, $10 par value Other contributed capital Retained earnings

1/1/20 $200,000 200,000 400,000 $800,000

1/1/24 $200,000 200,000 700,000 $1,100,000

The difference between implied and book value is assigned to Simian Company’s land. Assuming no other equity transactions, the amount of the difference between implied and book value that would be added to land on a workpaper for the preparation of consolidated statements on December 31, 2024, would be: a) $120,000. b) $115,000. c) $105,000. d) $84,000. Answer: c Question Title: Test Bank (Multiple Choice) Question 11 Difficulty: Medium Learning Objective: 3 Explain how the parent reports the difference between selling price and book value when shares are sold subsequent to acquisition. Section Reference: 8.3 12. Under the partial equity method, the workpaper entry that reverses the effect of subsidiary income for the year includes a: a) credit to Equity in Subsidiary Income.

b) debit to Subsidiary Income Sold. c) debit to Equity in Subsidiary Income. d) credit to Equity in Subsidiary Income and debit to Subsidiary Income Sold. Answer: c Question Title: Test Bank (Multiple Choice) Question 12 Difficulty: Easy Learning Objective: 2 Describe the process needed when the parent acquires subsidiary shares through multiple open market purchases. Section Reference: 8.4 13. On January 1 2024, Paulus Company purchased 75% of Sweet Corporation for $500,000. Sweet’ stockholders’ equity on that date was equal to $600,000 and Sweet had 60,000 shares issued and outstanding on that date. Sweet Corporation sold an additional 15,000 shares of previously unissued stock on December 31, 2024. Assuming that Paulus Company purchased the additional shares, what would be their current percentage ownership on December 31, 2024? a) 92% b) 87% c) 80% d) 100% Answer: c Question Title: Test Bank (Multiple Choice) Question 13 Difficulty: Easy Learning Objective: 4 Compute the controlling interest in income after the parent sells some shares of the subsidiary company. Section Reference: 8.4, 8.5 14. The controlling interest in income is computed as: a) internally generated income of the parent plus or minus the usual adjustments for excess depreciation, and so on, plus the controlling percentage of the subsidiary adjusted income. b) internally generated income of the parent. c) income of the parent plus or minus the usual adjustments for excess depreciation. d) internally generated income of the parent plus or minus the controlling percentage of the subsidiary adjusted income. Answer: a Question Title: Test Bank (Multiple Choice) Question 13 Difficulty: Easy Learning Objective: 4 Compute the controlling interest in income after the parent sells some shares of the subsidiary company. Section Reference: 8.4, 8.5 15. When the parent sells a portion of the investment in a subsidiary and in the process, control is lost, a) the interest is adjusted to the carrying value

b) an adjustment is needed to additional contributed capital of the controlling interest c) no gain or loss is recognized in the income statement d) the interest is adjusted to fair value. Answer: d Question Title: Test Bank (Multiple Choice) Question 15 Difficulty: Medium Learning Objective: 3 Explain how the parent reports the difference between selling price and book value when shares are sold subsequent to acquisition. Section Reference: 8.5 16. Which one of the following statements regarding IFRS and accounting for step acquisitions is most correct? a) Under IFRS goodwill is identified and net assets remeasured to fair value for all subsequent transactions, both increasing and decreasing the ownership percentage, after control is achieved. b) IFRS requires the recording of additional goodwill on subsequent increases in the parent’s ownership percentage. c) Under IFRS acquisition accounting is applied only at the date that control is achieved. d) IFRS requires the non-controlling interest to be measured at fair value. Answer: c Question Title: Test Bank (Multiple Choice) Question 16 Difficulty: Easy Learning Objective: 2 Describe the process needed when the parent acquires subsidiary shares through multiple open market purchases. Section Reference: 8.6 17. If a subsidiary issues new shares of its stock to noncontrolling stockholders, the book value of the parent’s interest in the subsidiary may: a) increase. b) decrease. c) remain the same. d) increase, decrease, or remain the same. Answer: d Question Title: Test Bank (Multiple Choice) Question 17 Difficulty: Medium Learning Objective: 5 Describe the effect on the eliminating process when the subsidiary issues new shares entirely to the parent, and the parent pays either more or less than the book value of the subsidiary shares. Section Reference: 8.6 18. Parr Company owned 24,000 of the 30,000 outstanding common shares of Solomon Company on January 1, 2023. Parr’s shares were purchased at book value when the fair values of Solomon’s assets and liabilities were equal to their book values. The stockholders’ equity of Solomon Company on January 1, 2023, consisted of the following: Common stock, $15 par value

$ 450,000

Other contributed capital Retained earnings Total

337,500 712,500 $1,500,000

Solomon Company sold 7,500 additional shares of common stock for $90 per share on January 2, 2023. If all 7,500 shares were sold to noncontrolling stockholders, the workpaper adjustment needed each time a workpaper is prepared should increase (decrease) the Investment in Solomon Company by: a) ($140,625). b) $140,625. c) ($112,500). d) $192,000. Answer: d Question Title: Test Bank (Multiple Choice) Question 18 Difficulty: Hard Learning Objective: 5 Describe the effect on the eliminating process when the subsidiary issues new shares entirely to the parent, and the parent pays either more or less than the book value of the subsidiary shares. Section Reference: 8.6 19. On January 1 2024, Pounder Company purchased 75% of Sludge Company for $500,000. Sludge Company’s stockholders’ equity on that date was equal to $600,000 and Sludge Company had 60,000 shares issued and outstanding on that date. Sludge Company Corporation sold an additional 15,000 shares of previously unissued stock on December 31, 2024. Assume Sludge Company sold the 15,000 shares to outside interests, Pounder Company’s percent ownership would be: a) 33 1/3% b) 60% c) 75% d) 80% Answer: b Question Title: Test Bank (Multiple Choice) Question 19 Difficulty: Easy Learning Objective: 6 Describe the impact on the parent’s investment account when the subsidiary issues new shares and either the new shares are purchased ratably by the parent and noncontrolling shareholders or entirely by the noncontrolling shareholders. Section Reference: 8.6 20. On January 1, 2024, P Corporation purchased 75% of S Corporation for $500,000. S’s stockholders’ equity on that date was equal to $600,000 and S had 40,000 shares issued and outstanding on that date. S Corporation sold an additional 8,000 shares of previously unissued stock on December 31, 2024. Assume that P Corporation purchased the additional shares what would be their current percentage ownership on December 31, 2024? a) 62 1/2%. b) 75%

c) 79 1/6% d) 100% Answer: c Question Title: Test Bank (Multiple Choice) Question 20 Difficulty: Easy Learning Objective: 6 Describe the impact on the parent’s investment account when the subsidiary issues new shares and either the new shares are purchased ratably by the parent and noncontrolling shareholders or entirely by the noncontrolling shareholders. Section Reference: 8.6 21. On January 1, 2024, P Corporation purchased 75% of S Corporation for $500,000. S’s stockholders’ equity on that date was equal to $600,000 and S had 40,000 shares issued and outstanding on that date. S Corporation sold an additional 8,000 shares of previously unissued stock on December 31, 2024. Assume S sold the 8,000 shares to outside interests, P’s percent ownership would be: a) 56 1/4% b) 62 1/2% c) 75% d) 79 1/6% Answer: b Question Title: Test Bank (Multiple Choice) Question 21 Difficulty: Easy Learning Objective: 6 Describe the impact on the parent’s investment account when the subsidiary issues new shares and either the new shares are purchased ratably by the parent and noncontrolling shareholders or entirely by the noncontrolling shareholders. Section Reference: 8.6

Question Type: Essay 22. A parent’s ownership percentage in a subsidiary may change for several reasons. Identify three reasons the ownership percentage may change. Answer: A parent’s ownership percentage in a subsidiary may change because (a) additional shares of the subsidiary may be purchased on the open market, (b) some of the shares held by the parent company may be sold; or (c) the subsidiary may enter into capital transactions with the parent or outside parties that change the parent’s ownership percentage. Question Title: Test Bank (Essay) Question 22 Difficulty: Easy Learning Objective: 1 Identify the types of transactions that change the parent company’s ownership interest in a subsidiary. Section Reference: 8.1 23. A parent company’s equity interest in a subsidiary may change as the result of the issuance of additional shares of stock by the subsidiary. Describe the effect on the parent’s investment account when the new

shares are (a) purchased ratably by the parent and noncontrolling shareholders or (b) entirely by the noncontrolling shareholders. Answer: (a) If the shares issued by the subsidiary are purchased ratably by the parent and noncontrolling stockholders the percentage of stock owned by the parent and noncontrolling stockholders after the new issue would be the same as their respective interests prior to the issue. (b) If the new shares are purchased entirely by the noncontrolling shareholders, the parent’s ownership percentage is reduced. The book value of the parent’s interest in the subsidiary may increase, decrease, or remain the same depending on the relationship of the issue price to book value per share of stock. Question Title: Test Bank (Essay) Question 23 Difficulty: Medium Learning Objective: 6 Describe the impact on the parent's investment account when the subsidiary issues new shares and either the new shares are purchased ratably by the parent and noncontrolling shareholders or entirely by the noncontrolling shareholders. Section Reference: 8.6 Question Type: Problem 24. Pizza Company purchased Salt Company common stock through open-market purchases as follows: Acquired Date Shares Cost 1/1/23 1,500 $ 50,000 1/1/24 3,300 $ 90,000 1/1/25 6,600 $250,000 Salt Company had 12,000 shares of $20 par value common stock outstanding during the entire period. Salt had the following retained earnings balances on the relevant dates: January 1, 2023 January 1, 2024 January 1, 2025 December 31, 2025

$ 90,000 30,000 150,000 300,000

Salt Company declared no dividends in 2023 or 2024 but did declare and pay $60,000 of dividends in 2025. Any difference between cost and book value is assigned to subsidiary land. Pizza uses the equity method to account for its investment in Salt. Required: A. Prepare the journal entries Pizza Company will make during 2024 and 2025 to account for its investment in Salt Company. B. Prepare workpaper eliminating entries necessary to prepare a consolidated statements workpaper on December 31, 2025. Answer: A. 2024 Retained Earnings [0.125 × (90,000 – 30,000)] Investment in Salt Company Investment in Salt Company [0.40 × (150,000 – 30,000)]

7,500 7,500

48,000

Equity in Salt Company Income

48,000

2025 Cash (60,000 × 0.95) Investment in Salt Company

57,000

Investment in Salt Company [0.95 × (300,000 + 60,000 – 150,000)] Equity in Subsidiary Income

199,500

B. Equity in Subsidiary Income Dividends Declared—Salt Investment in Salt Company

57,000

199,500

199,500 57,000 142,500

Common Stock 1/1 Retained Earnings—Salt Difference Between Implied and Book Value Investment in Salt Company Noncontrolling Interest in Equity

240,000 150,000 60,000

Land

60,000

430,500 19,500

Difference Between Implied and Book Value

60,000

Question Title: Test Bank (Problem) Question 8-1 Difficulty: Hard Learning Objective: 2 Describe the process needed when the parent acquires subsidiary shares through multiple open market purchases. Section Reference: 8.2

25. On January 1, 2023, Panel Company acquired 90% of the common stock of Singapore Company for $650,000. At that time, Singapore had common stock ($5 par) of $500,000 and retained earnings of $200,000. On January 1, 2025, Singapore issued 20,000 shares of its unissued common stock, with a market value of $7 per share, to noncontrolling stockholders. Singapore’s retained earnings balance on this date was $300,000. Any difference between cost and book value relates to Singapore’s land. No dividends were declared in 2025. Required: A. Prepare the entry on Panel’s books to record the effect of the issuance assuming the cost method. B. Prepare the elimination entries for the preparation of a consolidated statements workpaper on December 31, 2025 assuming the cost method. Answer: A.

Loss from Subsidiary Issuance of Shares Investment in Singapore Company

15,000*

Panel Company’s share of Singapore Company’s equity before the new issue (0.90 × 800,000) Panel Company’s share of Singapore Company’s equity

15,000*

$720,000

after the new issue 0.75 × (800,000 + 140,000) Decrease in Panel Company’s interest B.

Investment in Singapore Company (300,000 – 200,000) × 0.90 1/1 Retained Earnings—Panel

705,000 $ 15,000

90,000 90,000

Common Stock Other Contributed Capital Retained Earnings Difference Between Implied and Book Value Investment in Singapore Company (650,000 – 15,000 + 90,000) Noncontrolling Interest in Equity

600,000 40,000 300,000 20,000

Land

20,000

725,000 235,000

Difference Between Implied and Book Value

20,000

Question Title: Test Bank (Problem) Question 8-2 Difficulty: Hard Learning Objective: 6 Describe the impact on the parent’s investment account when the subsidiary issues new shares and either the new shares are purchased ratably by the parent and noncontrolling shareholders or entirely by the noncontrolling shareholders. Section Reference: 8.6 26. Pratt Company purchased 40,000 shares of Silas Company’s common stock for $860,000 on January 1, 2024. At that time Silas Company had $500,000 of $10 par value common stock and $300,000 of retained earnings. Silas Company’s income earned and increase in retained earnings during 2024 and 2025 were: 2024 Income earned $260,000 Increase in Retained Earnings 200,000

2025 $360,000 300,000

Silas Company income is earned evenly throughout the year. On September 1, 2025, Pratt Company sold on the open market, 12,000 shares of its Silas Company stock for $460,000. Any difference between cost and book value relates to Silas Company land. Pratt Company uses the cost method to account for its investment in Silas Company. Required: A. Compute Pratt Company’s reported gain (loss) on the sale. B. Prepare all consolidated statements workpaper eliminating entries for a workpaper on December 31, 2025. Answer: A.

Selling price $460,000 Carrying value sold ($860,000 × 12,000/40,000) 258,000 Gain on sale of investment $202,000

Investment in Silas Company (0.56 × $200,000) 1/1 Retained Earnings—Pratt Company

112,000

Gain on Sale of Investments 1/1 Retained Earnings—Pratt Company

48,000

112,000

48,000

0.8 × $200,000 × 12/40

Gain on Sale of Investments Subsidiary Income Sold

57,600 57,600

(8/12 × $360,000 = $240,000 × 0.8 × 12/40)

Common Stock—Silas Company 1/1 Retained Earnings—Silas Company Difference Between Implied and Book Value (28/40 × $220,000) Investment in Silas Company Noncontrolling Interest in Equity

500,000 500,000

Land

154,000

154,000 714,000 440,000

Difference Between Implied and Book Value

154,000

Question Title: Test Bank (Problem) Question 8-3 Difficulty: Hard Learning Objective: 3 Explain how the parent reports the difference between selling price and book value when shares are sold subsequent to acquisition. Section Reference: 8.3

27. Poole made the following purchases of Smarte Company common stock: Date 1/1/23 1/1/24

Shares 70,000 (70%) 10,000 (10%)

Cost $1,000,000 160,000

Stockholders’ equity information for Smarte Company for 2023 and 2024 follows:

Common stock, $10 par value

2023 $1,000,000

2024 $1,000,000

1/1 Retained earnings Net income Dividends declared, 12/22 Retained earnings, 12/31 Total stockholders’ equity, 12/31

300,000 110,000 (30,000) 380,000 $1,380,000

380,000 140,000 (40,000) 480,000 $1,480,000

On July 1, 2024, Poole sold 14,000 shares of Smarte Company common stock on the open market for $22 per share. The shares sold were purchased on January 1, 2023. Smarte notified Poole that its net income for the first six months was $70,000. Any difference between cost and book value relates to subsidiary land. Poole uses the cost method to account for its investment in Smarte Company.

Required: A. Prepare the journal entry made by Poole to record the sale of the 14,000 shares on July 1, 2025. B. Prepare the workpaper eliminating entries needed for a consolidated statements workpaper on December 31, 2025. C. Compute the amount of noncontrolling interest that would be reported on the consolidated balance sheet on December 31, 2025. Answer: A. Cash (14,000 × $22) Investment in Smarte Company Gain on Sale of Investments

308,000 200,000* 108,000

*14,000/70,000 × $1,000,000

Investment in Smarte Company Retained Earnings 1/1—Poole

44,800 44,800

[0.7 × 0.8 × ($380,000 - $300,000)]

Gain on Sale of Investments Retained Earnings 1/1—Poole ($80,000 × 0.7 × 0.2)

11,200

Gain on Sale of Investments ($70,000 × 0.7 × 0.2) Subsidiary Income Sold

9,800

Dividend Income (0.66 × $40,000) Dividends Declared—Smarte

26,400

Common Stock—Smarte Retained Earnings—Smarte Difference Between Implied and Book Value Investment in Smarte Company

11,200

9,800

26,400 1,000,000 380,000 94,000 1,004,800

*$1,000,000 + 160,000 - $200,000 + $44,800

Noncontrolling Interest in Equity Land

94,000 Difference Between Implied and Book Value

469,200

94,000

$1,480,000 × 0.34 = $503,200 noncontrolling interest

Question Title: Test Bank (Problem) Question 8-4 Difficulty: Hard Learning Objective: 3 Explain how the parent reports the difference between selling price and book value when shares are sold subsequent to acquisition. Section Reference: 8.3

28. P Company purchased 96,000 shares of the common stock of S Company for $1,200,000 on January 1, 2020, when S’s stockholders’ equity consisted of $5 par value, Common Stock at $600,000 and Retained Earnings of $800,000. The difference between cost and book value relates to goodwill.

On January 2, 2023, S Company purchased 20,000 of its own shares from noncontrolling interests for cash of $300,000 to be held as treasury stock. S Company’s retained earnings had increased to $1,000,000 by January 2, 2023. S Company uses the cost method in regards to its treasury stock and P Company uses the equity method to account for its investment in S Company. Required: Prepare all determinable workpaper entries for the preparation of consolidated statements on December 31, 2023. Answer: A. Percentage on 1/1/2020 Percentage on 1/2/2023

96,000 / 120,000 = 80% 96,000 / 100,000 = 96%

P Company’s share of S Company’s equity: Before reacquisition of treasury stock (80% × $1,600,000) = $1,280,000 After reacquisition of treasury stock [96% × ($1,600,000 - $300,000)= 1,248,000 Decrease in P Company’s share $ 32,000 Elimination entries determinable: Common Stock—S Retained Earnings—S Difference Between Cost and Book Value Treasury Stock—S (96% × $300,000) Investment in S Company

600,000 1,000,000 112,000 288,000 1,360,000 64,000

($1,200,000 + $160,000)

Noncontrolling Interest in Equity (600,000 + 1,000,000) x .04

Goodwill* Difference Between Implied and Book Value

112,000

*Original difference $1,200,000 – (80% × $1,400,000) = Plus: Decrease from treasury stock transaction

112,000 $80,000 32,000 $112,000

Question Title: Test Bank (Problem) Question 8-5 Difficulty: Hard Learning Objective: 2 Describe the process needed when the parent acquires subsidiary shares through multiple open market purchases., 6 Describe the impact on the parent’s investment account when the subsidiary issues new shares and either the new shares are purchased ratably by the parent and noncontrolling shareholders or entirely by the noncontrolling shareholders. Section Reference: 8.2, 8.4, 8.6

29. Pamela Company acquired 80% of the outstanding common stock of Silt Company on January 1, 2022, for $396,000. At the date of purchase, Silt Company had a balance in its $2 par value common stock account of $360,000 and retained earnings of $90,000. On January 1, 2024, Silt Company issued 45,000 shares of its previously unissued stock to noncontrolling stockholders for $3 per share. On this date, Silt Company had a retained earnings balance of $152,000. The difference between cost and book value

relates to subsidiary land. No dividends were paid in 2024. Silt Company reported income of $30,000 in 2024. Required: A. Prepare the journal entry on Pamela’s books to record the effect of the issuance assuming the equity method. B. Prepare the eliminating entries needed for the preparation of a consolidated statements workpaper on December 31, 2024, assuming the equity method. Answer: A. Investment in Silt Company* Gain from Issuance of Subsidiary Shares B.

4,480 4,480

Equity Income ($30,000 × 0.64) Investment in Silt Company

19,200

Common Stock—Silt Company Other Contributed Capital—Silt Company Retained Earnings—Silt Difference Between Implied and Book Value Investment in Silt Company Noncontrolling Interest in Equity

450,000 45,000 152,000 36,000

Land

36,000

19,200

450,080 232,920

Difference Between Implied and Book Value

36,000

*Pamela Company’s share of Silt Company’s equity: Before sale to noncontrolling shareholders (0.8 × $512,000) $409,600 After sale to noncontrolling shareholders (0.64* × ($512,000 + $135,000) 414,080 Increase in Pamela Company’s share $ 4,480 *(0.80 × 180,000) / (180,000 + 45,000) = 0.64

Question Title: Test Bank (Problem) Question 8-6 Difficulty: Hard Learning Objective: 6 Describe the impact on the parent’s investment account when the subsidiary issues new shares and either the new shares are purchased ratably by the parent and noncontrolling shareholders or entirely by the noncontrolling shareholders. Section Reference: 8.4, 8.6

30. Partner Company acquired 85% of the common stock of Simplex Company in two separate cash transactions. The first purchase of 108,000 shares (60%) on January 1, 2023, cost $735,000. The second purchase, one year later, of 45,000 shares (25%) cost $330,000. Simplex Company’s stockholders’ equity was as follows:

Common Stock, $5 par Retained Earnings, 1/1 Net Income

December 31 2023

December 31 2024

$ 900,000 262,000 69,000

$ 900,000 302,000 90,000

Dividends Declared, 9/30 Retained Earnings, 12/31 Total Stockholders’ Equity, 12/31

(30,000) 301,000 $1,201,000

(38,000) 354,000 $1,254,000

On April 1, 2024, after a significant rise in the market price of Simplex Company’s stock, Partner Company sold 32,400 of its Simplex Company shares for $390,000. Simplex Company notified Partner Company that its net income for the first three months was $22,000. The shares sold were identified as those obtained in the first purchase. Any difference between cost and book value relates to goodwill. Partner uses the partial equity method to account for its investment in Simplex Company. Required: A. Prepare the journal entries Partner Company will make on its books during 2023 and 2024 to account for its investment in Simplex Company. B. Prepare the workpaper eliminating entries needed for a consolidated statements workpaper on December 31, 2024. Answer: A. 2023 Investment in Simplex Company Cash

735,000

Cash

18,000

735,000

Investment in Simplex Company (0.60 × $30,000 subsidiary dividend)

18,000

Investment in Simplex Company Equity in Subsidiary Income (0.60 × $69,000 subsidiary income)

41,400

Investment in Simplex Company Cash

330,000

Investment in Simplex Company Equity in Subsidiary Income (0.85 × $22,000 income for 1st three months)

18,700

Cash

390,000

41,400

2024 330,000

18,700

Investment in Simplex Company* Gain on Sale of Investment

231,480 158,520

*Cost of first purchase (60%) $735,000 2023 subsidiary income (0.60 × $69,000) 41,400 2023 subsidiary dividends (0.60 × $30,000) (18,000) 2024 subsidiary income to April 1 (0.60 × $22,000) 13,200 Total 771,600 Portion sold (32,400 ÷ 108,000) × 0.30 Carrying value of investment sold $231,480 Cash

25,460 Investment in Simplex Company (0.67* × $38,000 subsidiary dividend)

25,460

**0.67 = (108,000 + 45,000 - 32,400)  180,000

Investment in Simplex Company 45,560 Equity in Subsidiary Income [0.67 × ($90,000 – $22,000)]

45,560

Equity in Subsidiary Income ($18,700 + $45,560) 64,260 Subsidiary Income Sold ($22,000 × 0.60 × 0.30) Dividends Declared—Simplex ($38,000 × 0.67) Investment in Simplex Company

3,960 25,460 34,840

Common Stock—Simplex 1/1 Retained Earnings—Simplex Difference Between Implied and Book Value Investment In Simplex Company Noncontrolling Interest in Equity

900,000 302,000 55,540 860,880 396,660

Land

55,540 Difference Between Implied and Book Value

55,540

Question Title: Test Bank (Problem) Question 8-7 Difficulty: Hard Learning Objective: 2 Describe the process needed when the parent acquires subsidiary shares through multiple open market purchases., 3 Explain how the parent reports the difference between selling price and book value when shares are sold subsequent to acquisition. Section Reference: 8.2, 8.4

Package Title: Test Bank Questions Course Title: Advanced Accounting, 8e Chapter: Insolvency-Liquidation and Reorganization Chapter Number: 9

Question type: Multiple Choice

1. Which of the following requires the total of all post-petition liabilities and allowed claims to be greater than the asset value of the emerging entity just prior to the confirmation date? a) loss-of-control test b) screen-test c) reorganization-value test d) none of the above is correct Answer: c Question Title: Test Bank (Multiple Choice) Question 01 Difficulty: Easy Learning Objective: 6 Describe the ways debt may be restructured in a reorganization and the criteria necessary to qualify for fresh-start reporting. Section Reference: 9.0 2. A corporation that is unable to pay its debts as they become due is: a) bankrupt. b) overdrawn. c) insolvent. d) liquidating. Answer: c Question Title: Test Bank (Multiple Choice) Question 02 Difficulty: Easy Learning Objective: 1 Distinguish between a Chapter 7 and a Chapter 11 bankruptcy. Section Reference: 9.0

3. When a business becomes insolvent, it generally has three possible courses of action. Which of the following is NOT one of the three possible courses of action? a) The debtor and its creditors may enter into a contractual agreement, outside of formal bankruptcy proceedings. b) The debtor continues operating the business in the normal course of the day-to-day operations. c) The debtor or its creditors may file a bankruptcy petition, after which the debtor is liquidated under Chapter 7. d) The debtor or its creditors may file a petition for reorganization under Chapter 11. Answer: b

Question Title: Test Bank (Multiple Choice) Question 03 Difficulty: Easy Learning Objective: 1 Distinguish between a Chapter 7 and a Chapter 11 bankruptcy. Section Reference: 9.0 4. A composition agreement is an agreement between the debtor and its creditors whereby the creditors agree to: a) accept less than the full amount of their claims. b) delay settlement of the claim until a later date. c) force the debtor into a liquidation. d) accrue interest at a higher rate. Answer: a Question Title: Test Bank (Multiple Choice) Question 04 Difficulty: Easy Learning Objective: 5 Describe contractual agreements that the debtor and its creditors may enter into outside of formal bankruptcy proceedings to resolve the debtor’s insolvent position. Section Reference: 9.1 5. Which of the following items is NOT a specified priority for unsecured creditors in a bankruptcy petition? a) Administration fees incurred in administering the bankrupt’s estate. b) Unsecured claims for wages earned within 90 days and are less than $4,650 per employee. c) Unsecured claims of governmental units for unpaid taxes. d) Unsecured claims on credit card charges that do not exceed $3,000. Answer: d Question Title: Test Bank (Multiple Choice) Question 05 Difficulty: Medium Learning Objective: 2 Describe the five priority categories of unsecured claims and list the order in which they are settled. Section Reference: 9.2 6. A bankruptcy petition filed by a firm is a: a) chapter petition. b) involuntary petition. c) voluntary petition. d) chapter 11 petition. Answer: c Question Title: Test Bank (Multiple Choice) Question 06 Difficulty: Easy Learning Objective: 3 Distinguish between a voluntary and involuntary bankruptcy petition. Section Reference: 9.2

7. When a secured claim is not fully settled by the selling of the underlying collateral, the remaining portion: a) of the claim cannot be collected by the creditor. b) remains as a secured claim. c) is classified as an unsecured priority claim. d) is classified as an unsecured nonpriority claim. Answer: d Question Title: Test Bank (Multiple Choice) Question 07 Difficulty: Medium Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors. Section Reference: 9.2 8. An involuntary petition filed by a firm’s creditors whereby there are twelve or more creditors must be signed by at least: a) two creditors. b) three creditors. c) five creditors. d) six creditors. Answer: b Question Title: Test Bank (Multiple Choice) Question 08 Difficulty: Easy Learning Objective: 3 Distinguish between a voluntary and involuntary bankruptcy petition. Section Reference: 9.2 9. Splat Company filed a voluntary bankruptcy petition, and the statement of affairs reflected the following amounts: Estimated Book Value Current Value Assets Assets pledged with fully secured creditors $ 900,000 $ 1,110,000 Assets pledged partially secured creditors 540,000 360,000 Free assets 1,260,000 960,000 $2,700,000 $2,430,000 Liabilities Liabilities with priority $ 210,000 Fully secured creditors 780,000 Partially secured creditors 600,000 Unsecured creditors 1,620,000 $3,210,000 Assume the assets are converted to cash at their estimated current values. What amount of cash will be available to pay unsecured nonpriority claims? a) $720,000.

b) $840,000. c) $960,000. d) $1,080,000. Answer: d Question Title: Test Bank (Multiple Choice) Question 09 Difficulty: Hard Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors. Section Reference: 9.2 10. Tangent Corporation was forced into bankruptcy and is in the process of liquidating assets and paying claims. Unsecured claims will be paid at the rate of thirty cents on the dollar. Arrow holds a note receivable from Tangent for $90,000 collateralized by an asset with a book value of $60,000 and a liquidation value of $30,000. The amount to be realized by Arrow on this note is: a) $30,000. b) $48,000. c) $60,000. d) $90,000. Answer: b Question Title: Test Bank (Multiple Choice) Question 10 Difficulty: Medium Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors. Section Reference: 9.2 11. Poor Company filed a voluntary bankruptcy petition, and the settlement of affairs reflected the following amounts:

Assets Assets pledged with fully secured creditors Assets pledged partially secured creditors Free assets Liabilities Liabilities with priority Fully secured creditors Partially secured creditors Unsecured creditors

Estimated Book Value

Current Value

$ 450,000 270,000 630,000 $1,350,000

$ 555,000 180,000 480,000 $1,215,000

$ 105,000 390,000 300,000 810,000 $1,605,000

Assume the assets are converted to cash to their estimated current values. What amount of cash will be available to pay unsecured nonpriority claims? a) $360,000. b) $420,000. c) $480,000. d) $540,000.

Answer: d Question Title: Test Bank (Multiple Choice) Question 11 Difficulty: Hard Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors. Section Reference: 9.2 12. When a bankruptcy court enters an “order for relief” it has: a) accepted the petition. b) dismissed the petition. c) appointed a trustee. d) started legal action against the debtor by its creditors. Answer: a Question Title: Test Bank (Multiple Choice) Question 12 Difficulty: Easy Learning Objective: 3 Distinguish between a voluntary and involuntary bankruptcy petition. Section Reference: 9.3 13. The duties of the trustee include: a) appointing creditors’ committees in liquidation cases. b) approving all payments for debts incurred before the bankruptcy filing. c) examining claims and disallowing any that are improper. d) calling a meeting of the debtor’s creditors. Answer: c Question Title: Test Bank (Multiple Choice) Question 13 Difficulty: Easy Learning Objective: 1 Distinguish between a Chapter 7 and a Chapter 11 bankruptcy. Section Reference: 9.3 14. Which statement with respect to gains and losses on troubled debt restructuring is correct? a) Creditors losses on restructuring are extraordinary. b) Debtor’s gains and losses on asset transfers and debtor’s gains on restructuring are combined and treated as extraordinary. c) Debtor gains and creditor losses on restructuring are extraordinary, if material in amount. d) Debtor losses on asset transfers and debtor gains on restructuring are reported as a component of net income. Answer: d Question Title: Test Bank (Multiple Choice) Question 14 Difficulty: Medium Learning Objective: 6 Describe the ways debt may be restructured in a reorganization and the criteria necessary to qualify for fresh-start reporting.

Section Reference: 9.4 15. In a troubled debt restructuring involving a modification of terms, the debtor’s gain on restructuring: a) will equal the creditor’s gain on restructuring. b) will equal the creditor’s loss on restructuring. c) may not equal the creditor’s gain on restructuring. d) may not equal the creditor’s loss on restructuring. Answer: d Question Title: Test Bank (Multiple Choice) Question 15 Difficulty: Easy Learning Objective: 6 Describe the ways debt may be restructured in a reorganization and the criteria necessary to qualify for fresh-start reporting. Section Reference: 9.4 16. Assets transferred by the debtor to a creditor to settle a debt are transferred at: a) book value of the debt. b) book value of the transferred assets. c) fair market value of the debt. d) fair market value of the transferred assets. Answer: d Question Title: Test Bank (Multiple Choice) Question 16 Difficulty: Easy Learning Objective: 6 Describe the ways debt may be restructured in a reorganization and the criteria necessary to qualify for fresh-start reporting. Section Reference: 9.4 17. When fresh-start reporting is used according to Statement of Position (SOP) 90-7 (now incorporated in FSB ASC topic 852), the implication is that a new firm exists. Which of the following statements is NOT correct about fresh-start accounting? a) Assets are reported at fair values. b) Beginning retained earnings is reported at zero. c) The fair value of the assets must be greater than the post liabilities and allowed claims just prior to the confirmation date. d) The original owners must own less than 50% of the voting stock after reorganization. Answer: c Question Title: Test Bank (Multiple Choice) Question 17 Difficulty: Medium Learning Objective: 1 Distinguish between a Chapter 7 and a Chapter 11 bankruptcy. Section Reference: 9.4

18. A Statement of Affairs is a report designed to show: a) an estimated amount that would be received by each class of creditor’s claims in the event of liquidation. b) a balance sheet prepared on the going-concern assumption. c) assets and liabilities classified as current and noncurrent. d) assets and liabilities reported at their current book values. Answer: a Question Title: Test Bank (Multiple Choice) Question 18 Difficulty: Easy Learning Objective: 6 Describe the ways debt may be restructured in a reorganization and the criteria necessary to qualify for fresh-start reporting. Section Reference: 9.4 19. Lyme Corporation entered into a troubled debt restructuring agreement with their local bank. The bank agreed to accept land with a carrying amount of $360,000 and a fair value of $540,000 in exchange for a note with a carrying amount of $765,000. Ignoring income taxes, what amount should Lyme report as a gain on its income statement? a) $0. b) $180,000. c) $225,000. d) $405,000. Answer: c Question Title: Test Bank (Multiple Choice) Question 19 Difficulty: Medium Learning Objective: 6 Describe the ways debt may be restructured in a reorganization and the criteria necessary to qualify for fresh-start reporting. Section Reference: 9.4

20. The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by North Co. to Bell Co. in full settlement of North’s liability to Bell: Carrying amount of liability settled Carrying amount of real estate transferred Fair value of real estate transferred

$450,000 $300,000 $330,000

What amount should North report as ordinary gain (loss) on transfer of real estate? a) $(30,000). b) $30,000. c) $120,000. d) $150,000. Answer: b Question Title: Test Bank (Multiple Choice) Question 20

Difficulty: Medium Learning Objective: 6 Describe the ways debt may be restructured in a reorganization and the criteria necessary to qualify for fresh-start reporting. Section Reference: 9.4

21. The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by North Co. to Bell Co. in full settlement of North’s liability to Bell: Carrying amount of liability settled Carrying amount of real estate transferred Fair value of real estate transferred

$450,000 $300,000 $330,000

What amount should Bell report as a gain or (loss) on restructuring? a) $120,000 ordinary loss. b) $120,000 extraordinary loss. c) $150,000 ordinary loss. d) $150,000 extraordinary loss. Answer: a Question Title: Test Bank (Multiple Choice) Question 21 Difficulty: Medium Learning Objective: 6 Describe the ways debt may be restructured in a reorganization and the criteria necessary to qualify for fresh-start reporting. Section Reference: 9.4

22. Dobby Corporation was forced into bankruptcy and is in the process of liquidating assets and paying claims. Unsecured claims will be paid at the rate of thirty cents on the dollar. Carson holds a note receivable from Dobby for $75,000 collateralized by an asset with a book value of $50,000 and a liquidation value of $25,000. The amount to be realized by Carson on this note is: a) $25,000. b) $40,000. c) $50,000. d) $75,000. Answer: b Question Title: Test Bank (Multiple Choice) Question 22 Difficulty: Medium Learning Objective: 6 Describe the ways debt may be restructured in a reorganization and the criteria necessary to qualify for fresh-start reporting. Section Reference: 9.4 23. The final settlement with unsecured creditors is computed by dividing: a) total net realizable value by total unsecured creditor claims. b) net free assets by total secured creditor claims.

c) total net realizable value by total secured creditor claims. d) net free assets by total unsecured creditor claims. Answer: d Question Title: Test Bank (Multiple Choice) Question 23 Difficulty: Easy Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors. Section Reference: 9.4 24. Ford Corporation entered into a troubled debt restructuring agreement with their local bank. The bank agreed to accept land with a carrying value of $200,000 and a fair value of $300,000 in exchange for a note with a carrying amount of $425,000. Ignoring income taxes, what amount should Ford report as a gain on its income statement? a) $0. b) $100,000. c) $125,000. d) $225,000. Answer: c Question Title: Test Bank (Multiple Choice) Question 24 Difficulty: Medium Learning Objective: 6 Describe the ways debt may be restructured in a reorganization and the criteria necessary to qualify for fresh-start reporting. Section Reference: 9.4

25. The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by MSG Co. to Beta Co. in full settlement of MSG’s liability to Beta: Carrying amount of liability settled Carrying amount of real estate transferred Fair value of real estate transferred

$375,000 $250,000 $275,000

What amount should MSG report as ordinary gain (loss) on transfer of real estate? a) $(25,000). b) $25,000. c) $100,000. d) $125,000. Answer: b Question Title: Test Bank (Multiple Choice) Question 25 Difficulty: Medium Learning Objective: 6 Describe the ways debt may be restructured in a reorganization and the criteria necessary to qualify for fresh-start reporting. Section Reference: 9.4

26. The following information pertains to the transfer of real estate in regards to a troubled debt restructuring by MSG Co. to Beta Co. in full settlement of MSG’s liability to Beta: Carrying amount of liability settled Carrying amount of real estate transferred Fair value of real estate transferred

$375,000 $250,000 $275,000

What amount should Beta report as a gain or (loss) on restructuring? a) $100,000 ordinary loss. b) $100,000 extraordinary loss. c) $125,000 ordinary loss. d) $125,000 extraordinary loss. Answer: a Question Title: Test Bank (Multiple Choice) Question 26 Difficulty: Easy Learning Objective: 6 Describe the ways debt may be restructured in a reorganization and the criteria necessary to qualify for fresh-start reporting. Section Reference: 9.4

Question Type: Essay

27. The Bankruptcy Reform Act assigns priorities to certain unsecured claims, and each rank must be satisfied in full before the next–lower rank is paid. Identify the five categories of unsecured creditor claims. Answer: The five categories of unsecured creditor claims are:  Administration expenses and fees incurred in administering the bankrupt’s estate.  Unsecured claims for wages and salaries earned within 90 days before the date of filing of the petition.  Unsecured claims for contributions to employee benefit plans from services provided within 180 days before the date of filing of the petition.  Unsecured claims of individuals arising from deposits for the purchase, lease, or rental of property or services that were not delivered.  Claims of governmental units for unpaid taxes. Question Title: Test Bank (Essay) Question 27 Difficulty: Medium Learning Objective: 2 Describe the five priority categories of unsecured claims and list the order in which they are settled. Section Reference: 9.2

28. Creditors are classified by law as either secured or unsecured. Distinguish among fully secured, partially secured, and unsecured creditors.

Answer: Fully secured creditor claims are those with liens against assets whose realizable value is equal to or in excess of the claim. Partially secured claims are those with liens against assets whose realizable value is less than the amount of the claim. Unsecured creditors are paid from whatever proceeds remain from the realization process. Question Title: Test Bank (Essay) Question 28 Difficulty: Easy Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors. Section Reference: 9.2 Question Type: Problem 29. On January 1, 2021, Deal Mart owed Money Bank $1,600,000, under an 8% note with three years remaining to maturity. Due to financial difficulties, Deal Mart was unable to pay the previous year’s interest. Money Bank agreed to settle Deal Mart’s debt in exchange for land having a fair market value of $1,310,000. Deal Mart purchased the land in 2003 for $1,000,000. Required: Prepare the journal entries to record the restructuring of the debt by Deal Mart. Answer: Land

310,000 Gain on Disposal of Land

Note Payable Interest Payable Land Gain on Debt Restructuring

310,000 1,600,000 128,000 1,310,000 418,000

Question Title: Test Bank (Problem) Question 9-1 Difficulty: Medium Learning Objective: 6 Describe the ways debt may be restructured in a reorganization and the criteria necessary to qualify for fresh-start reporting. Section Reference: 9.4

30. On January 1, 2020, Terminator, Inc. owed 9th National Bank $12 million on a 10% note due December 31, 2021. Interest was last paid on December 31, 2019. Terminator was experiencing severe financial difficulties and asked 9th National Bank to modify the terms of the debt agreement. After negotiation 9th National Bank agreed to: - Forgive the interest accrued for the year just ended, - Reduce the remaining two years interest payments to $900,000 each and delay the first payment until December 31, 2021, and - Reduce the unpaid principal amount to $9,600,000. Required: Prepare the journal entries for Terminator, Inc. necessitated by the restructuring of the debt at (1) January 1, 2020, (2) December 31, 2021, and (3) December 31, 2022. Answer:

Carrying amount: $12,000,000 + $1,200,000 = Future payments: ($900,000 × 2) + 9,600,000 Gain to debtor/Loss to creditor

$13,200,000 11,400,000 $ 1,800,000

January 1, 2020 Interest Payable Note Payable Gain on Debt Restructuring

1,200,000 600,000 1,800,000

December 31, 2021 Note Payable Cash

900,000 900,000

December 31, 2022 Note Payable Cash (Interest) Note Payable Cash (Principal)

900,000 900,000 9,600,000 9,600,000

Question Title: Test Bank (Problem) Question 9-2 Difficulty: Hard Learning Objective: 6 Describe the ways debt may be restructured in a reorganization and the criteria necessary to qualify for fresh-start reporting. Section Reference: 9.4

31. On January 2, 2021 Cretin Co., was indebted to Fourth National Bank under a $12 million, 10% unsecured note. The note was signed January 2, 2019, and was due December 31, 2024. Annual interest was last paid on December 31, 2019. Cretin Co. negotiated a restructuring of the terms of the debt agreement due to financial difficulties. Required: Prepare all journal entries for Cretin Co., to record the restructuring and any remaining transactions relating to the debt under each independent assumption. A. Fourth National Bank agreed to settle the debt in exchange for land which cost Cretin Co. $8,500,000 and has a fair market value of $10,000,000. B. Fourth National Bank agreed to (1) forgive the accrued interest from last year (2) reduce the remaining four interest payments to $600,000 each, and (3) reduce the principal to $9,000,000. Answer: A. January 2, 2021 Land

1,500,000 Gain on Disposal of Land

Interest Payable Note Payable

1,500,000 1,200,000 12,000,000

Land Gain on Debt Restructuring B.

10,000,000 3,200,000

Carrying amount $12,000,000 + $1,200,000 = Future payments ($600,000 × 4) + $9,000,000 = Gain to debtor/Loss to creditor

$13,200,000 11,400,000 $ 1,800,000

January 2, 2021 Interest Payable Note Payable Gain on Debt Restructuring

1,200,000 600,000

December 31, 2021, 2022, 2023, 2024 Note Payable (Interest) Cash

600,000

December 31, 2024 Note Payable Cash

1,800,000

600,000

9,000,000 9,000,000

Question Title: Test Bank (Problem) Question 9-3 Difficulty: Hard Learning Objective: 6 Describe the ways debt may be restructured in a reorganization and the criteria necessary to qualify for fresh-start reporting. Section Reference: 9.4 32. On December 31, 2021, Pilot’s Credit Union agreed to restructure a $900,000, 8% loan receivable from Norma Corporation because of Norma’s financial problems. At December 31 there was $36,000 of accrued interest for a six-month period. Terms of the restructuring agreement are as follows: - Reduce the loan from $900,000 to $600,000; - Extend the maturity date by 2 years from December 31, 2021 to December 31, 2023; - Reduce the interest rate on the loan from 8% to 6%. Present value assumptions: Present value of $1 for 2 years at 6% = Present value of $1 for 2 years at 8% = Present value of an ordinary annuity of $1 for 2 years at 6% = Present value of an ordinary annuity of $1 for 2 years at 8% =

0.8900 0.8573 1.8334 1.7833

Required: Compute the gain or loss that will be reported by Pilot’s Credit Union. Answer: Carrying value of the loan before restructuring Present value of $600,000 due in 2 years at 8% historical rate: ($600,000 × 0.8573) = Present value of $36,000 interest for 2 years at 8% historical rate: ($36,000 × 1.7833) = Carrying value of the loan

$936,000 $514,380 64,199 $578,579

(578,579)

Loss on restructuring

$357,421

Question Title: Test Bank (Problem) Question 9-4 Difficulty: Hard Learning Objective: 6 Describe the ways debt may be restructured in a reorganization and the criteria necessary to qualify for fresh-start reporting. Section Reference: 9.4 33. O’Donnell Corporation incurred major losses in 2020 and entered into voluntary Chapter 7 bankruptcy in the early part of 2021. By June 1, all assets were converted into cash, the secured creditors were paid, and $150,000 in cash was left to pay the remaining claims as follows. Accounts payable Claims prior to the trustee’s appointment Property taxes payable Wages payable (all under $4,650 per employee) Unsecured note payable Accrued interest on the note payable Administrative expenses of the trustee Total

$ 48,000 21,000 18,000 54,000 60,000 6,000 30,000 $237,000

Required: Classify the claims by their Chapter 7 priority ranking, and analyze which amounts will be paid and which amounts will be written off. Answer: Unsecured priority claims:

Administrative expenses Claims prior to the trustee’s appointment Wages payable Property taxes payable

Claim Amount

To be Paid

$30,000 21,000 54,000 18,000

Cash Left $150,000 120,000 99,000 45,000 27,000

Claim Amount

To be Paid

Written Off

$ 48,000 60,000 6,000

$12,000* 15,000** 0

$36,000 45,000 6,000

Unsecured Nonpriority Claims:

Accounts payable Unsecured note Accrued interest on the note $27,000 / ($48,000 + $60,000) = .25 * $48,000 × 0.25 = $12,000 **$60,000 × 0.25 = $15,000

Question Title: Test Bank (Problem) Question 9-5 Difficulty: Medium Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors. Section Reference: 9.2

34. Down Dog Corporation filed a petition under Chapter 7 of the U.S. Bankruptcy Act on June 30, 2021. Data relevant to its financial position as of this date are: Estimated Net Book Value Realizable Values Cash $ 3,000 $ 3,000 Accounts receivable-net 72,000 48,000 Inventories 60,000 72,000 Equipment-net 165,000 87,000 Total assets $300,000 $210,000 Accounts payable Rent payable Wages payable Note payable plus accrued interest Capital stock Retained earnings (deficit) Total liabilities and equity

$ 72,000 21,000 45,000 96,000 180,000 (120,000) $300,000

Required: A. Prepare a statement of affairs assuming that the note payable and interest are secured by a mortgage on the equipment and that wages are less than $4,650 per employee. B. Estimate the amount that will be paid to each class of claims if priority liquidation expenses including trustee fees are $24,000 and estimated net realizable values are actually realized. Answer: A. Down Dog Corporation Statement of Affairs June 30, 2021

Book Value $165,000

3,000 72,000 60,000

Assets Pledged with partially secured creditors Equipment-net Less: Note payable and accrued interest Unsecured amount (See below) Free Assets Cash Accounts receivable-net Inventories Total net realizable value Less: Priority liabilities – wages payable

Realizable Value $87,000 (96,000) (9,000)

3,000 48,000 72,000 123,000 <45,000>

Deficiency Account (Loss/Gain) (78,000)

(24,000) 12,000

______ $300,000

Book Value

Total available for unsecured creditors Estimated deficiency to unsecured creditors

78,000 30,000 $108,000 Unsecured Liabilities

Equities

$ 45,000

96,000

72,000 27,000

180,000 (120,000) $300,000

______ (90,000)

Priority liabilities Wages payable (assumed under $4,650 per employee)

$ 45,000

Partially secured creditors Note payable and accrued interest Less: Equipment pledged as security

$ 96,000 (87,000)

$ 9,000

Unsecured creditors Accounts payable Rent payable

72,000 27,000

Stockholders’ equity Capital stock Retained earnings (deficit)

180,000 (120,000) $ 60,000 $(30,000)

______ $108,000

Estimated Deficiency B.

Estimated payments per dollar for unsecured creditors

Cash available Distribution to partially secured and unsecured priority creditors: Note payable and interest Administrative expenses Wages payable Available to unsecured nonpriority creditors

$210,000

$87,000 24,000 45,000

< 156,000> $ 54,000

Note payable and interest (unsecured portion) Accounts payable Rent payable

$ 9,000 72,000 27,000

Unsecured nonpriority claims

$108,000

($54,000 / $108,000 = $0.50 per dollar)

Partially secured Note payable and interest Secured portion Unsecured portion ($9,000 × 0.50)

$87,000 4,500

Unsecured priority Administrative expenses

$24,000

$91,500

Wages payable Unsecured nonpriority Accounts payable ($72,000 × 0.50 Rent payable ($27,000 × 0.50) Total payments

45,000

69,000

$36,000 13,500

49,500 $210,000

Question Title: Test Bank (Problem) Question 9-6 Difficulty: Hard Learning Objective: 1 Distinguish between a Chapter 7 and a Chapter 11 bankruptcy., 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors., 6 Describe the ways debt may be restructured in a reorganization and the criteria necessary to qualify for fresh-start reporting. Section Reference: 9.4

35. The following data are taken from the statement of affairs of Motor Sports Company. Assets pledged with fully secured creditors (Realizable value, $635,000) Assets pledged with partially secured creditors (realizable value, $300,000) Free assets (Realizable value, $340,000) Fully secured creditor claims Partially secured creditor claims Unsecured creditor claims with priority General unsecured creditor claims

$800,000 365,000 535,000 316,000 400,000 100,000 1,165,000

Required: Compute the amount that will be paid to each class of creditor. Answer: Realizable value of all assets ($635,000 + $300,000 + $340,000) Allocated to: Fully secured creditors Partially secured creditors Unsecured creditors with priority Remainder available to general unsecured creditors Payment rate to general unsecured creditors (Including balance due to partially secured creditors) $559,000 / ($1,165,000 + ($400,000 - $300,000)) Realizable value of assets: Assets pledged to fully secured creditors Assets pledged to partially secured creditors Free assets Total realizable value Amounts to be paid to: Fully secured creditors

$1,275,000 (316,000) (300,000) (100,000) $559,000

44.2%

$635,000 300,000 340,000 $1,275,000

$316,000

Partially secured creditors [$300,000 + (0.442 × $100,000)] Unsecured creditors with priority General unsecured creditors (0.442 × $1,165,000) Total

344,200 100,000 514,800* $1,275,000

*Rounded $130 Question Title: Test Bank (Problem) Question 9-7 Difficulty: Medium Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors. Section Reference: 9.2

36. On February 1, 2021, Hillary Company filed a petition for reorganization under the bankruptcy statutes. The court approved the plan on September 1, 2021, including the following provisions: 1. 2.

3. 4.

Accrued expenses of $21,930, representing priority items, are to be paid in full. Hillary Company is to exchange accounts receivable in the face amount of $138,000 and an allowance for uncollectible accounts of $29,200 for the full settlement of $198,600 owed on open account to one of its major unsecured creditors. The estimated fair value of the receivables is $104,000. Unsecured creditors of open accounts amounting to $91,600 and paid 40 cents on the dollar in full settlement. Hillary Company’s only other major unsecured creditor agreed to a five-year extension of the $500,000 principal owed him on a 10% note payable. Accrued interest on the note on September 1, 2021, amounts to $45,000, one-third of which is to be paid in cash and the remainder canceled. In addition, no interest is to be charged during the remaining five years to maturity of the note.

Required: Prepare journal entries on the books of Hillary Company to give effect to the preceding provisions. Answer: 1.

Accrued Expenses Cash

21,930

Allowance for Uncollectible Accounts Loss on Transfer of Assets Accounts Receivable ($138,000 - $104,000)

29,200 4,800

Accounts Payable Accounts Receivable Gain on Restructuring of Debt ($198,600 - $104,000)

198,600

Accounts Payable Cash ($91,600 × 0.40) Gain on Restructuring of Debt

91,600

Notes Payable Accrued Interest Payable

500,000 45,000

21,930

34,000

104,000 94,600

36,640 54,960

Cash Restructured Debt Gain on Restructuring of Debt ($545,000 - $515,000)

15,000 500,000 30,000

Question Title: Test Bank (Problem) Question 9-8 Difficulty: Hard Learning Objective: 4 Distinguish among fully secured, partially secured, and unsecured claims of creditors., 6 Describe the ways debt may be restructured in a reorganization and the criteria necessary to qualify for fresh-start reporting. Section Reference: 9.2

Package Title: Test Bank Questions Course Title: Advanced Accounting, 8e Chapter: International Financial Reporting Standards Chapter Number: 10

Question Type: Multiple Choice

1. The goals of the International Accounting Standards Committee include all of the following EXCEPT: a) To improve international accounting. b) To formulate a single set of auditing standards to be applied in all countries. c) To promote global acceptance of its standards. d) To harmonize accounting practices between countries. Answer: b Question Title: Test Bank (Multiple Choice) Question 01 Difficulty: Easy Learning Objective: 1 Describe how the changing world environment is leading to an increased focus on international financial reporting standards (IFRS). Section Reference: 10.1

2. As of 2022, approximately _________ nations permit or require IFRS for domestic companies. a) b) c) d)

5 50 120 144

Answer: d Question Title: Test Bank (Multiple Choice) Question 02 Difficulty: Medium Learning Objective: 1 Describe how the changing world environment is leading to an increased focus on international financial reporting standards (IFRS). Section Reference: 10.1 3. Considering the use of IFRS by U.S. issuers is based on all of the following except a) improvement in the ability to use static data for IFRS reporting b) improvements in accounting standards c) accountability and funding of the IASC Foundation d) education and training of preparers and users related to IFRS Answer: a

Question Title: Test Bank (Multiple Choice) Question 03 Difficulty: Medium Learning Objective: 1 Describe how the changing world environment is leading to an increased focus on international financial reporting standards (IFRS). Section Reference: 10.2 4. The roles of the IASC Foundation include: a) establishing global standards for financial reporting. b) coordinating the filing requirements of stock exchange regulatory agencies. c) financing IASB operations. d) all of these are roles of the IASC Foundation. Answer: c Question Title: Test Bank (Multiple Choice) Question 04 Difficulty: Easy Learning Objective: 1 Describe how the changing world environment is leading to an increased focus on international financial reporting standards (IFRS). Section Reference: 10.2

5. Which of the following statements is true regarding the IASC? a) The IASC is a public-sector, not-for-profit organization. b) The IASC is accountable to an international securities regulator. c) The IASC is a stand-alone, not-for-profit organization. d) The IASC funds the operations of the IASB through filing fees paid to national securities regulators. Answer: c Question Title: Test Bank (Multiple Choice) Question 05 Difficulty: Easy Learning Objective: 1 Describe how the changing world environment is leading to an increased focus on international financial reporting standards (IFRS). Section Reference: 10.2

6. Which statement below concerning the accountability and funding of the IASC Foundation is correct? a) The IASC Foundation independence is assured through a system of voluntary contributions from firms in the accounting profession. b) The IASC Foundation is not controlled by any national securities regulators. c) The SEC considers the accountability and funding mechanisms for the IASC Foundation to be satisfactory. d) Appointments of IASC Foundation Trustees must be approved by the SEC. Answer: b Question Title: Test Bank (Multiple Choice) Question 06 Difficulty: Medium

Learning Objective: 1 Describe how the changing world environment is leading to an increased focus on international financial reporting standards (IFRS). Section Reference: 10.2

7. SFAS No.162, the Accounting Standards Codification, is directed to: a) auditors. b) Boards of Directors. c) securities regulators. d) entities. Answer: d Question Title: Test Bank (Multiple Choice) Question 07 Difficulty: Easy Learning Objective: 1 Describe how the changing world environment is leading to an increased focus on international financial reporting standards (IFRS). Section Reference: 10.3 8. Under IFRS, development costs (as part of R&D) are capitalized if the firm can demonstrate all of the following except a) sufficient staff to complete the project b) a clear intention to complete c) a clear intent and ability to sell or use the product d) an ability to generate future benefits and reliably measure the expenditure Answer: a Question Title: Test Bank (Multiple Choice) Question 08 Difficulty: Medium Learning Objective: 1 Describe how the changing world environment is leading to an increased focus on international financial reporting standards (IFRS). Section Reference: 10.4 9. IFRS and US GAAP differ with regard to financial statement presentation. Which of the following is NOT true: a) IFRS generally requires that assets be listed in order of increasing liquidity while US GAAP requires that assets be listed in order of decreasing liquidity. b) US GAAP requires expenses to be listed by function while IFRS requires expenses to be listed by nature. c) Both IFRS and US GAAP prohibit extraordinary items. d) IFRS requires one year of comparative financial statements while under US GAAP, public companies are required to present two years of balance sheet Answer: b Question Title: Test Bank (Multiple Choice) Question 09 Difficulty: Medium

Learning Objective: 2 Explain some of the differences between IFRS and U.S. GAAP. Section Reference: 10.4

10. The major difference between IFRS and US GAAP in accounting for inventories is that: a) US GAAP prohibits the use of specific identification. b) IFRS requires the use of the LIFO cost flow assumption. c) US GAAP prohibits the use of the LIFO cost flow assumption d) US GAAP allows the use of the LIFO cost flow assumption. Answer: d Question Title: Test Bank (Multiple Choice) Question 10 Difficulty: Easy Learning Objective: 2 Explain some of the differences between IFRS and U.S. GAAP. Section Reference: 10.4

11. In accounting for research and development costs. a) the general rule under both US GAAP and IFRS is that research and development costs should be expensed as incurred . b) IFRS generally expenses all research and development costs while US GAAP expenses research costs as incurred but capitalizes development costs once technological and economic feasibility has been demonstrated. c) US GAAP generally expenses all research and development costs while IFRS expenses research costs as incurred but capitalizes development costs once technological and economic feasibility has been demonstrated. d) both US GAAP and IFRS expense research costs as incurred but capitalize development costs once technological and economic feasibility has been demonstrated. Answer: c Question Title: Test Bank (Multiple Choice) Question 11 Difficulty: Medium Learning Objective: 2 Explain some of the differences between IFRS and U.S. GAAP. Section Reference: 10.4 and 10.Summary

12. Property, plant and equipment are valued at: a) historical cost under both IFRS and US GAAP. b) historical cost or revalued amounts under both IFRS and US GAAP. c) revalued amounts under IFRS. d) historical cost under US GAAP while IFRS allows the assets to be valued at either historical cost or revalued amounts. Answer: d Question Title: Test Bank (Multiple Choice) Question 12

Difficulty: Easy Learning Objective: 2 Explain some of the differences between IFRS and U.S. GAAP. Section Reference: 10.4 13. In accounting for liabilities, IFRS interprets “probable” as: a) likely. b) more likely than not. c) somewhat possible. d) possible and not remote. Answer: b Question Title: Test Bank (Multiple Choice) Question 13 Difficulty: Medium Learning Objective: 2 Explain some of the differences between IFRS and U.S. GAAP. Section Reference: 10.4 14. Accounting under IFRS and US GAAP is similar for all of the following topics EXCEPT: a) changes in estimates. b) related party transactions. c) research and development costs. d) changes in methods. Answer: c Question Title: Test Bank (Multiple Choice) Question 14 Difficulty: Medium Learning Objective: 2 Explain some of the differences between IFRS and U.S. GAAP. Section Reference: 10.4 15. On January 1, 2021, BelgianAir purchases an airplane for €14,400,000. The components of the airplane and their useful lives are as follows: Component Frame Engine Other

Cost €7,200,000 4,800,000 2,400,000

Useful life 24 years 20 years 10 years

BelgianAir uses the straight-line method of depreciation. The asset is assumed to have no salvage value. Under IFRS, the entry to record the acquisition of the airplane would include a) a debit to Asset/ Airplane of €14,400,000. b) a debit to Asset/ Airplane frame of €14,400,000. c) a debit to Asset/ Airplane engine of €4,800,000. d) cannot be determined from the information given. Answer: c

Question Title: Test Bank (Multiple Choice) Question 15 Difficulty: Medium Learning Objective: 2 Explain some of the differences between IFRS and U.S. GAAP. Section Reference: 10.4 16. On January 1, 2021, BelgianAir purchases an airplane for €14,400,000. The components of the airplane and their useful lives are as follows: Component Frame Engine Other

Cost €7,200,000 4,800,000 2,400,000

Useful life 24 years 20 years 10 years

BelgianAir uses the straight-line method of depreciation. The asset is assumed to have no salvage value. Under US GAAP, the entry to record depreciation expense on the asset at December 31, 2022 will include a) a credit to accumulated depreciation of €1,200,000. b) a debit to depreciation expense of €1,440,000 c) a debit to depreciation expense of €780,000. d) a credit to accumulated depreciation of €600,000. Answer: d Question Title: Test Bank (Multiple Choice) Question 16 Difficulty: Easy Learning Objective: 2 Explain some of the differences between IFRS and U.S. GAAP. Section Reference: 10.4 17. On January 1, 2021, BelgianAir purchases an airplane for €14,400,000. The components of the airplane and their useful lives are as follows: Component Frame Engine Other

Cost €7,200,000 4,800,000 2,400,000

Useful life 24 years 20 years 10 years

BelgianAir uses the straight-line method of depreciation. The asset is assumed to have no salvage value. Under IFRS, the entry to record depreciation expense on the asset at December 31, 2022 will include a credit to accumulated depreciation of: a) €1,440,000. b) €1,200,000 c) €780,000. d) €600,000. Answer: c

Question Title: Test Bank (Multiple Choice) Question 17 Difficulty: Easy Learning Objective: 2 Explain some of the differences between IFRS and U.S. GAAP. Section Reference: 10.4

18. Accounting terminology that differs between IFRS and US GAAP include all of the following EXCEPT: a) the use by IFRS of “turnover” for revenue. b) the use by IFRS of “share premium” for additional paid-in-capital. c) the use by IFRS of “other capital reserves” for retained earnings. d) the use by IFRS of “issued capital” for common stock. Answer: c Question Title: Test Bank (Multiple Choice) Question 18 Difficulty: Hard Learning Objective: 2 Explain some of the differences between IFRS and U.S. GAAP. Section Reference: 10.4

19. Which of the following statements is true? a) U.S. GAAP are often argued to be more rules-based, while IFRS are considered to be more principles-based b) U.S. GAAP are often argued to be more principles-based, while IFRS are considered to be more rules-based c) U.S. GAAP are often argued to be more federal-based, while IFRS are considered to be more regulation-based d) U.S. GAAP are often argued to be more regulation-based, while IFRS are considered to be more federal-based

Answer: a Question Title: Test Bank (Multiple Choice) Question 19 Difficulty: Medium Learning Objective: 2 Explain some of the differences between IFRS and U.S. GAAP. Section Reference: 10.4 20. Which of the following is true about the definition of control under US GAAP and IFRS? a) it is important when less than 50% of the voting stock is obtained. b) it important when more than 50% of the voting stock is obtained c) Whereas in the United States, control for non‐VIE entities relies on the voting‐interests model, IFRS defines three elements of control. d) Both a and c Answer: d Question Title: Test Bank (Multiple Choice) Question 20

Difficulty: Medium Learning Objective: 4 Describe differences in accounting for business combinations and consolidation between U.S. GAAP and IFRS. Section Reference: 10.5 21. One difference between IFRS and GAAP in valuing inventories is that: a) IFRS, but not GAAP, allows reversals so that inventories written down under lower-of-cost-or-market can be written back up to the original cost. b) GAAP defines market value as replacement cost where IFRS defines market as the selling price. c) GAAP strictly adheres to the historical cost concept and does not allow for write-downs of inventory values while IFRS embraces fair value. d) IFRS, but not GAAP, requires that inventories be valued at the lower of cost or market. Answer: a Question Title: Test Bank (Multiple Choice) Question 21 Difficulty: Medium Learning Objective: 2 Explain some of the differences between IFRS and U.S. GAAP. Section Reference: 10.5 22. The amount of a long-lived asset impairment loss is generally determined by comparing: a) the asset’s carrying amount and its fair value under US GAAP. b) the asset’s carrying amount and its discounted future cash flows less cost to sell under IFRS. c) the asset’s carrying amount and its undiscounted future cash flows under US GAAP. d) the asset’s carrying amount and its undiscounted future cash flows less disposal cost under IFRS. Answer: a Question Title: Test Bank (Multiple Choice) Question 22 Difficulty: Medium Learning Objective: 2 Explain some of the differences between IFRS and U.S. GAAP. Section Reference: 10.5 23. Significant differences between IFRS and Chinese GAAP include all of the following EXCEPT: a) Chinese GAAP allows the use of LIFO while IFRS prohibits it. b) Chinese GAAP has different related party disclosure requirements. c) Chinese GAAP follows the cost principle while IFRS allows for revaluations and recoveries of impairment losses. d) Chinese GAAP uses the equity method of accounting for jointly controlled entities while IFRS also allows proportionate consolidation. Answer: a Question Title: Test Bank (Multiple Choice) Question 23 Difficulty: Hard Learning Objective: 1 Describe how the changing world environment is leading to an increased focus on international financial reporting standards (IFRS). Section Reference: 10.6

24. All of the following are options for non-US companies who wish to list securities on a US exchange EXCEPT: a) The company can use either IFRS or their local GAAP. b) If a company uses their local GAAP they must reconcile net income and shareholders’ equity or fully disclose all financial information required of US companies. c) If a company uses their local GAAP they must reconcile net income and shareholders’ equity and fully disclose all financial information required of US companies d) The company must file a form 20-F with the SEC. Answer: c Question Title: Test Bank (Multiple Choice) Question 24 Difficulty: Hard Learning Objective: 5 List the steps that a non-U.S. company must follow to list its shares on a U.S. stock market. Section Reference: 10.6 25. All of the following are true regarding the Offer prospectus EXCEPT: a) It contains only the financial information about the company. b) It contains both financial statements and non-financial information about the company. c) It is the most important component of a registration statement. d) It contains all information deemed necessary by the SEC for investors to make an informed investing decision. Answer: a Question Title: Test Bank (Multiple Choice) Question 25 Difficulty: Hard Learning Objective: 5 List the steps that a non-U.S. company must follow to list its shares on a U.S. stock market. Section Reference: 10.6

Package Title: Test Bank Questions Course Title: Advanced Accounting, 8e Chapter: Accounting for Foreign Currency Transactions and Hedging Foreign Exchange Risk Chapter Number: 11

Question Type: Multiple Choice

1. Firms may resort to using ________ in order to minimize the effects of fluctuations in exchange rates. a) bank loans b) floating rates c) derivatives d) denominated transactions Answer: c Question Title: Test Bank (Multiple Choice) Question 01 Difficulty: Easy Learning Objective: 2 Describe what is meant by a foreign currency transaction. Section Reference: 11.0

2. The ______ is the rate at which currencies can be exchanged today. a) future rate b) spot rate c) explicit rate d) domestic rate Answer: b Question Title: Test Bank (Multiple Choice) Question 02 Difficulty: Easy Learning Objective: 2 Describe what is meant by a foreign currency transaction. Section Reference: 11.1

3. An indirect exchange rate quotation is one in which the exchange rate is quoted: a) in terms of how many units of the domestic currency can be converted into one unit of foreign currency. b) for the immediate delivery of currencies exchanged. c) in terms of how many units of the foreign currency can be converted into one unit of domestic currency. d) for the future delivery of currencies exchanged. Answer: c Question Title: Test Bank (Multiple Choice) Question 03 Difficulty: Easy Learning Objective: 3 Understand some of the more common foreign currency transactions.

Section Reference: 11.1

4. From the viewpoint of a U.S. company, a foreign currency transaction is a transaction: a) measured in a foreign currency. b) denominated in a foreign currency. c) measured in U.S. currency. d) denominated in U.S. currency. Answer: b Question Title: Test Bank (Multiple Choice) Question 04 Difficulty: Easy Learning Objective: 1 Distinguish between the terms “measured” and “denominated.” Section Reference: 11.2 5. A transaction gain is recorded when there is an: a) importing transaction and the exchange rate increases. b) exporting transaction and the exchange rate increases. c) exporting transaction and the exchange rate decreases. d) none of these. Answer: b Question Title: Test Bank (Multiple Choice) Question 05 Difficulty: Medium Learning Objective: 4 Identify three stages of concern to accountants for foreign currency transactions, and explain the steps used to translate foreign currency transactions for each stage. Section Reference: 11.3 6. During 2024, a U.S. company purchased inventory from a foreign supplier. The transaction was denominated in the local currency of the seller. The direct exchange rate increased from the date of the transaction to the balance sheet date. The exchange rate decreased from the balance sheet date to the settlement date in 2025. For the years 2024 and 2025, transaction gains or losses should be recognized as: a) 2024, gain; 2025, gain b) 2024, gain; 2025, loss c) 2024, loss; 2025 loss d) 2024, loss; 2025, gain Answer: d Question Title: Test Bank (Multiple Choice) Question 06 Difficulty: Medium Learning Objective: 4 Identify three stages of concern to accountants for foreign currency transactions, and explain the steps used to translate foreign currency transactions for each stage. Section Reference: 11.3

7. Greco, Inc. a U.S. corporation, bought machine parts from Franco Company of Germany on March 1, 2024, for 70,000 marks, when the spot rate for marks was $0.5395. Greco‟s year-end was March 31, 2024, when the spot rate for marks was $0.5445. Greco bought 70,000 marks and paid the invoice on April 20, 2024, when the spot rate was $0.5495. How much should be shown in Greco‟s income statements as foreign exchange (transaction) gain or loss for the years ended March 31, 2024 and 2025? a) 2024, $0; 2025, $0 b) 2024, $0; 2025, $350 loss c) 2024, $350 loss; 2025, 0 d) 2024, $350 loss; 2025, $350 loss Answer: d Question Title: Test Bank (Multiple Choice) Question 07 Difficulty: Medium Learning Objective: 4 Identify three stages of concern to accountants for foreign currency transactions, and explain the steps used to translate foreign currency transactions for each stage. Section Reference: 11.3 8. A transaction gain or loss is reported currently in the determination of income if the purpose of the forward contract is to: a) hedge a net investment in a foreign entity. b) hedge an identifiable foreign currency commitment. c) speculate in foreign currency. d) none of these. Answer: c Question Title: Test Bank (Multiple Choice) Question 08 Difficulty: Easy Learning Objective: 5 Describe a forward exchange contract. Section Reference: 11.3 9. The exchange rate quoted for future delivery of foreign currency is the definition of a(n): a) direct exchange rate. b) indirect exchange rate. c) spot rate. d) forward exchange rate. Answer: d Question Title: Test Bank (Multiple Choice) Question 09 Difficulty: Easy Learning Objective: 5 Describe a forward exchange contract. Section Reference: 11.3

10. A transaction loss would result from: a) an increase in the exchange rate applicable to an asset denominated in a foreign currency. b) a decrease in the exchange rate applicable to a liability denominated in a foreign currency. c) the import of merchandise when the transaction is denominated in a foreign currency. d) a decrease in the exchange rate applicable to an asset denominated in a foreign currency. Answer: d Question Title: Test Bank (Multiple Choice) Question 10 Difficulty: Easy Learning Objective: 4 Identify three stages of concern to accountants for foreign currency transactions, and explain the steps used to translate foreign currency transactions for each stage. Section Reference: 11.3 11. Madison Paving Company purchased equipment for 350,000 British pounds from a supplier in London on July 7, 2024. Payment in British pounds is due on Sept. 7, 2024. The exchange rates to purchase one pound is as follows:

Spot-rate 30-day rate 60-day rate

July 7 2.08 2.07 2.06

August 31, (year end) 2.05 2.03 1.99

September 7 2.04 ---

On its August 31, 2024 income statement, what amount should Madison Paving report as a foreign exchange transaction gain: a) $14,000. b) $7,000. c) $10,500. d) $0. Answer: c Question Title: Test Bank (Multiple Choice) Question 11 Difficulty: Medium Learning Objective: 4 Identify three stages of concern to accountants for foreign currency transactions, and explain the steps used to translate foreign currency transactions for each stage. Section Reference: 11.3 12. A transaction gain or loss at the settlement date is: a) a change in the exchange rate quoted by a foreign exchange trader. b) synonymous with the translation of foreign currency financial statements into dollars. c) the difference between the recorded dollar amount of an account receivable denominated in a foreign currency and the amount of dollars received. d) the difference between the buying and selling rate quoted by a foreign exchange trader at the settlement date. Answer: c

Question Title: Test Bank (Multiple Choice) Question 12 Difficulty: Easy Learning Objective: 4 Identify three stages of concern to accountants for foreign currency transactions, and explain the steps used to translate foreign currency transactions for each stage. Section Reference: 11.3 13. On September 1, 2024, Mudd Plating Company entered into two forward exchange contracts to purchase 250,000 euros each in 90 days. The relevant exchange rates are as follows:

September 1, 2024 September 30, 2024 (year-end)

Spot rate 1.46 1.50

Forward Rate For Dec. 1, 2024 1.47 1.48

The second forward contract was strictly for speculation. On September 30, 2024, what amount of foreign currency transaction gain should Mudd Plating report in income? a) $0. b) $2,500. c) $5,000. d) $10,000. Answer: b Question Title: Test Bank (Multiple Choice) Question 13 Difficulty: Medium Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges. Section Reference: 11.3 14. Kettle Company purchased equipment for 375,000 British pounds from a supplier in London on July 3, 2024. Payment in British pounds is due on Sept. 3, 2024. The exchange rates to purchase one pound is as follows:

Spot-rate 30-day rate 60-day rate

July 3 1.58 1.57 1.56

August 31, (year end) 1.55 1.53 1.49

September 3 1.54 ---

On its August 31, 2024, income statement, what amount should Kettle report as a foreign exchange transaction gain: a) $18,750. b) $3,750. c) $11,250. d) $0. Answer: c Question Title: Test Bank (Multiple Choice) Question 14 Difficulty: Medium

Learning Objective: 4 Identify three stages of concern to accountants for foreign currency transactions, and explain the steps used to translate foreign currency transactions for each stage. Section Reference: 11.3 15. On November 1, 2024, American Company sold inventory to a foreign customer. The account will be settled on March 1 with the receipt of $500,000 foreign currency units (FCU). On November 1, American also entered into a forward contract to hedge the exposed asset. The forward rate is $0.70 per unit of foreign currency. American has a December 31 fiscal year-end. Spot rates on relevant dates were: Date November 1 December 31 March 1

Per Unit of Foreign Currency $0.73 0.71 0.74

The entry to record the forward contract is a) FCU Receivable, 350,000; Premium on Forward Contract, 15,000; Dollars Payable, 365,000 b) Dollars Receivable, 365,000; Discount on Forward Contract, 15,000; FCU Payable, 350,000 c) FCU Receivable, 365,000; Discount on Forward Contract, 15,000; Dollars Payable, 350,000 d) Dollars Receivable, 350,000; Discount on Forward Contract, 15,000; FCU Payable, 365,000 Answer: d Question Title: Test Bank (Multiple Choice) Question 15 Difficulty: Medium Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges. Section Reference: 11.4

16. On November 1, 2024, American Company sold inventory to a foreign customer. The account will be settled on March 1 with the receipt of $450,000 foreign currency units (FCU). On November 1, American also entered into a forward contract to hedge the exposed asset. The forward rate is $0.70 per unit of foreign currency. American has a December 31 fiscal year-end. Spot rates on relevant dates were: Date November 1 December 31 March 1

Per Unit of Foreign Currency $0.73 0.71 0.74

What will be the adjusted balance in the Accounts Receivable account on December 31, and how much gain or loss was recorded as a result of the adjustment? a) Receivable Balance, $319,500; Gain/Loss Recorded, $9,000 gain b) Receivable Balance, $319,500; Gain/Loss Recorded, $9,000 loss c) Receivable Balance, $333,000; Gain/Loss Recorded, $4,500 gain d) Receivable Balance, $333,000; Gain/Loss Recorded, $18,000 gain Answer: b Question Title: Test Bank (Multiple Choice) Question 16

Difficulty: Medium Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges. Section Reference: 11.4 17. The forward exchange rate quoted for the remaining term of a forward contract is used to account for the contract when the forward contract: a) extends beyond one year or the current operating cycle. b) is a hedge of an identifiable foreign currency commitment. c) is a hedge of an exposed net liability position. d) was acquired to speculate in foreign currency. Answer: d Question Title: Test Bank (Multiple Choice) Question 17 Difficulty: Hard Learning Objective: 3 Understand some of the more common foreign currency transactions. Section Reference: 11.4 18. A transaction gain or loss on a forward contract entered into as a hedge of an identifiable foreign currency commitment may be: a) included as a separate item in the stockholders‟ equity section of the balance sheet. b) recognized currently in the determination of net income. c) deferred and included in the measurement of the related foreign currency transaction. d) none of these. Answer: c Question Title: Test Bank (Multiple Choice) Question 18 Difficulty: Medium Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges. Section Reference: 11.4 19. With respect to disclosure requirements for fair value measurements, which of the following is NOT one of the three levels in the hierarchy of classifying fair value measurements? a) a reconciliation of beginning and ending balances b) significant unobservable inputs c) significant other observable inputs d) quoted prices in active markets for identical assets or liabilities Answer: a Question Title: Test Bank (Multiple Choice) Question 19 Difficulty: Medium Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges. Section Reference: 11.4

20. On September 1, 2024, Mudd Plating Company entered into two forward exchange contracts to purchase 250,000 euros each in 90 days. The relevant exchange rates are as follows:

September 1, 2024 September 30, 2024 (year-end)

Spot rate 1.46 1.50

Forward Rate For Dec. 1, 2024 1.47 1.48

The first forward contract was to hedge a purchase of inventory on September 1, payable on December 1. On September 30, what amount of foreign currency transaction loss should Mudd Plating report in income? a) $0. b) $2,500. c) $5,000. d) $10,000. Answer: d Question Title: Test Bank (Multiple Choice) Question 20 Difficulty: Medium Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges. Section Reference: 11.4 21. On November 1, 2024, Cone Company sold inventory to a foreign customer. The account will be settled on March 1 with the receipt of 250,000 foreign currency units (FCU). On November 1, Cone also entered into a forward contract to hedge the exposed asset. The forward rate is $0.90 per unit of foreign currency. Cone has a December 31 fiscal year-end. Spot rates on relevant dates were: Date November 1 December 31 March 1

Per Unit of Foreign Currency $0.93 0.91 0.94

The entry to record the forward contract is a) FCU Receivable, 225,000; Premium on Forward Contract, 7,500; Dollars Payable, 232,500 b) Dollars Receivable, 232,500; Discount on Forward Contract, 7,500; FCU Payable, 225,000 c) FCU Receivable, 232,500; Discount on Forward Contract, 7,500; Dollars Payable, 225,000 d) Dollars Receivable, 225,000; Discount on Forward Contract, 7,500; FCU Payable, 232,500 Answer: d Question Title: Test Bank (Multiple Choice) Question 21 Difficulty: Medium Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges. Section Reference: 11.4

22. On November 1, 2024, National Company sold inventory to a foreign customer. The account will be settled on March 1 with the receipt of 200,000 foreign currency units (FCU). On November 1, National also entered into a forward contract to hedge the exposed asset. The forward rate is $0.80 per unit of foreign currency. National has a December 31 fiscal year-end. Spot rates on relevant dates were: Date November 1 December 31 March 1

Per Unit of Foreign Currency $0.83 0.81 0.84

What will be the adjusted balance in the Accounts Receivable account on December 31, and how much gain or loss was recorded as a result of the adjustment? a) Receivable Balance, $170,000; Gain/Loss Recorded, $4,000 gain b) Receivable Balance, $162,000; Gain/Loss Recorded, $4,000 loss c) Receivable Balance, $168,000; Gain/Loss Recorded, $2,000 gain d) Receivable Balance, $164,000; Gain/Loss Recorded, $2,000 loss Answer: b Question Title: Test Bank (Multiple Choice) Question 22 Difficulty: Medium Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges. Section Reference: 11.4 23. On April 1, 2024, Manatee Company entered into two forward exchange contracts to purchase 300,000 euros each in 90 days. The relevant exchange rates are as follows:

April 1, 2024 April 30, 2024 (year-end)

Spot rate 1.16 1.20

Forward Rate For Aug. 1, 2024 1.17 1.18

The first forward contract was to hedge a purchase of inventory on April 1, payable on December 1. On April 30, what amount of foreign currency transaction loss should Manatee report in income? a) $0. b) $3,000. c) $9,000. d) $12,000. Answer: d Question Title: Test Bank (Multiple Choice) Question 23 Difficulty: Medium Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges. Section Reference: 11.4 24. On April 1, 2024, Manatee Company entered into two forward exchange contracts to purchase 300,000 euros each in 90 days. The relevant exchange rates are as follows:

April 1, 2024 April 30, 2024 (year-end)

Spot rate 1.16 1.20

Forward Rate For Aug. 1, 2024 1.17 1.18

The second forward contract was strictly for speculation. On April 30, 2024, what amount of foreign currency transaction gain should Manatee report in income. a) $0. b) $3,000. c) $9,000. d) $12,000. Answer: b Question Title: Test Bank (Multiple Choice) Question 24 Difficulty: Medium Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges. Section Reference: 11.4

25. Which of the following is NOT true about cross-currency swaps? a) swaps are over-the-counter derivatives that can be used to reduce borrowing costs. b) swaps are not customizable. c) at the origination date, the companies can borrow in their local currency and send the money to their counterparties. d) swaps are used as a popular means to mitigate the risk from the changes in foreign currency exchange rates.

Answer: b Question Title: Test Bank (Multiple Choice) Question 25 Difficulty: Medium Learning Objective: 8 Describe a derivative instrument and understand how it may be used as a hedge. Section Reference: 11.4

26. FASB released ASC 2017-12 Derivatives and Hedging in August of 2017. The amendments are intended to address all of the following EXCEPT: a) to make hedge accounting for reflective of the hedging activity b) to make hedge accounting easier to apply. c) to enhance the transparency and disclosure of the hedging results. d) not to allow „a shortcut‟ method to assess hedge effectiveness in certain circumstances.

Answer: d

Question Title: Test Bank (Multiple Choice) Question 26 Difficulty: Medium Learning Objective: 8 Describe a derivative instrument and understand how it may be used as a hedge. Section Reference: 11.4 Question Type: Essay

27. Accounting for a foreign currency transaction involves the terms measured and denominated. Describe a foreign currency transaction and distinguish between the terms measured and denominated. Answer: A foreign currency transaction is a transaction that requires settlement in a foreign currency, not in U.S. dollars. Transactions are normally measured and recorded in terms of the currency in which the reporting entity prepares its financial statements. Assets and liabilities are denominated in a currency if their amounts are fixed in terms of that currency. Question Title: Test Bank (Essay) Question 27 Difficulty: Medium Learning Objective: 1 Distinguish between the terms “measured” and “denominated.”, 2 Describe what is meant by a foreign currency transaction. Section Reference: 11.2

28. There are a number of business situations in which a firm may acquire a forward exchange contract. Identify three common situations in which a forward exchange contract can be used as a hedge. Answer: Forward exchange contracts can be used as a hedge of a (an):  foreign currency transaction.  unrecognized firm commitment (a fair value hedge)  foreign-currency-denominated “forecasted” transaction (a cash flow hedge).  net investment in foreign operations. Question Title: Test Bank (Essay) Question 28 Difficulty: Medium Learning Objective: 5 Describe a forward exchange contract, 7 Identify some of the common situations in which a forward exchange contract can be used as a hedge. Section Reference: 11.3, 11.4 Question Type: Problem

29. On November 1, 2023, Jagged Company sold inventory to a company in England. The sale was for 600,000 British pounds and payment will be received on February 1, 2024. On November 1, Jagged entered into a forward contract to sell 600,000 British pounds on February 1 at the forward rate of $1.65. Spot rates for the British pound are as follows: November 1 $1.61 December 31 1.67 February 1 1.62 Jagged has a December 31 fiscal year-end.

Required: Compute each of the following: 1. The dollars to be received on February 1, 2024, from selling the 600,000 pounds to the exchange dealer. 2. The dollars that would have been received from the account receivable if Jagged had not hedged the sale contract with the forward contract. 3. The discount or premium on the forward contract. 4. The transaction gain or loss on the exposed asset related to the sale in 2023 and 2024. 5. The transaction gain or loss on the forward contract in 2023 and 2024. 6. The amount of the discount or premium on the forward contract amortized in 2023 and 2024. Answer: 1.

Dollars received = 600,000 × $1.65 = $990,000

Dollars received = 600,000 × $1.62 = $972,000

Premium on forward contract = ($1.65 - $1.61) × 600,000 = $24,000

2023 transaction gain = ($1.67 - $1.61) × 600,000 = $36,000 2024 transaction loss = ($1.67 - $1.62) × 600,000 = $(30,000)

2023 transaction loss = ($1.67 - $1.61) × 600,000 = ($36,000) 2024 transaction gain = ($1.67 - $1.62) × 600,000 = $30,000

Premium amortized in 2023 = $24,000 × 2/3 = $16,000 Premium amortized in 2024 = $24,000 × 1/3 = $8,000

Question Title: Test Bank (Problem) Question 11-1 Difficulty: Medium Learning Objective: 4 Identify three stages of concern to accountants for foreign currency transactions, and explain the steps used to translate foreign currency transactions for each stage., 5 Describe a forward exchange contract., 6 Explain the use of forward contracts as a hedge of an unrecognized firm commitment., 7 Identify some of the common situations in which a forward exchange contract can be used as a hedge., 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges. Section Reference: 11.3, 11.4

30. On December 1, 2023, Dorn Corporation agreed to purchase a machine to be manufactured by a company in Brazil. The purchase price is 1,150,000 Brazilian reals. To hedge against fluctuations in the exchange rate, Dorn entered into a forward contract on December 1 to buy 1,150,000 reals on April 1, the agreed date of machine delivery, for $0.375 per real. The following exchange rates were quoted: Forward Rate

Date December 1 December 31 April 1

Spot Rate 0.390 0.370 0.385

(Delivery on 4/1) 0.375 0.373 --

Required: Prepare journal entries necessary for Dorn during 2023 and 2024 to account for the transactions described above. Answer: 2023 Dec. 1

FC Receivable from Exchange Dealer Deferred Transaction Adjustment Dollars Payable to Exchange Dealer

Dec. 31 Deferred Transaction Adjustment FC Receivable from Exchange Dealer ($0.39 - $0.37) × 1,150,000) 2024 Apr. 1

448,500 17,250 431,250 23,000 23,000

FC Receivable from Exchange Dealer Deferred Transaction Adjustment ($0.385 - $0.370) × 1,150,000)

17,250

Investment in Foreign Currency FC Receivable from Exchange Dealer

442,750

Dollars Payable to Exchange Dealer Cash

431,250

Machine Investment in Foreign Currency

442,750

Deferred Transaction Adjustment Machine

11,500

17,250

442,750

431,250

442,750

11,500

Question Title: Test Bank (Problem) Question 11-2 Difficulty: Hard Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges. Section Reference: 11.4

31. Imperial Corp., a U.S. corporation, entered into a contract on November 1, 2023, to sell two machines to Crown Company, for 95,000 foreign currency units (FCU). The machines were to be delivered and the amount collected on March 1, 2024. In order to hedge its commitment, Imperial entered into a forward contract for 95,000 FCU delivery on March 1, 2024. The forward contract met all conditions for hedging an identifiable foreign currency commitment.

Selected exchange rates for FCU at various dates were as follows: November 1, 2023– Spot rate Forward rate for delivery on March 1, 2024 December 31, 2023 – Spot rate Forward rate for delivery on March 1, 2024 March 1, 2024– Spot rate

$1.3076 1.2980 1.3060 1.3150 1.2972

Required: Prepare all journal entries relative to the above on the books of Imperial Corp. on the following dates: 1. November 1, 2023. 2. Year-end adjustments on December 31, 2023. 3. March 1, 2024. (Include all adjustments related to the forward contract.) Answer: 1. November 1, 2023 Dollars Receivable from Exchange Dealer Deferred Transaction Adjustment FC Payable to Exchange Dealer ($1.2980 × 95,000 = $123,310) [($1.3076 - $1.2980) × 95,000 = $912) ($1.3076 × 95,000 = $124,222) 2.

December 31, 2023 FC Payable to Exchange Dealer Deferred Transaction Adjustment [($1.3076 - $1.3060) × 95,000 = $152] March 1, 2024 FC Payable to Exchange Dealer Deferred Transaction Adjustment [($1.3060 - $1.2972) × 95,000 = $836]

123,310 912 124,222

152 152

836 836

Investment in Foreign Currency Sales ($1.2972 × 95,000 = $123,234)

123,234

FC Payable to Exchange Dealer Investment in Foreign Currency ($1.2972 × 95,000 = $123,234)

123,234

Cash

123,310

123,234

Dollars Receivable from Exchange Dealer ($1.2980 × 95,000 = $123,310) Deferred Transaction Adjustment Sales [($1.2980 - $1.2972) × 95,000 = $76]

123,310

76 76

Question Title: Test Bank (Problem) Question 11-3 Difficulty: Hard Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges. Section Reference: 11.4 32. On October 1, 2023, Philly Company purchased inventory from a foreign customer for 750,000 units of foreign currency (FCU) due on January 31, 2024. Simultaneously, Philly entered into a forward contract for 750,000 units of FC for delivery on January 31, 2024, at the forward rate of $0.75. Payment was made to the foreign customer on January 31, 2024. Spot rates on October 1, December 31, and January 31, were $0.72, $0.73, and $0.76, respectively. Philly amortizes all premiums and discounts on forward contracts and closes its books on December 31. Required: A. Prepare all journal entries relative to the above to be made by Philly on October 1, 2023. B. Prepare all journal entries relative to the above to be made by Philly on December 31, 2023. C. Compute the transaction gain or loss on the forward contract that would be recorded in 2024. Indicate clearly whether the amount is a gain or loss. Answer: A. October 1 Purchases Accounts Payable ($0.72 × 750,000 = $540,000) FC Receivable from Exchange Dealer Premium on Forward Contract Dollars Payable to Exchange Dealer ($0.72 × 750,000 = $540,000) ($0.75 - $0.72) × 750,000 = $22,500) ($0.75 × 750,000 = $562,500) B.

December 31 Transaction Loss Accounts Payable [($0.73 - $0.72) × 750,000 = $7,500]

540,000 540,000

540,000 22,500 562,500

7,500 7,500

FC Receivable from Exchange Dealer Transaction Gain [($0.73 - $0.72) × 750,000 = $7,500]

7,500

Amortization Expense Premium on Forward Contract [($0.75 - $0.72) × 750,000 × (3/4) = $16,875]

16,875

Value of FC receivable – January 31 $0.76 × 750,000 Carrying value – December 31 Transaction gain

7,500

16,875

$570,000 547,500 $ 22,500

Question Title: Test Bank (Problem) Question 11-4 Difficulty: Hard Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges. Section Reference: 11.4

33. On October 1, 2023, Kill Company shipped equipment to a foreign customer for a foreign currency (FC) price of FC 3,000,000 due on January 31, 2024. All revenue realization criteria were satisfied and accordingly the sale was recorded by Kill Company on October 1. Simultaneously, Kill entered into a forward contract to sell 3,000,000 FCU on January 31, 2024 for $1,200,000. Payment was received from the foreign customer on January 31, 2024. Spot rates on October 1, December 31, and January 31 were $0.42, $0.425, and $0.435, respectively. Kill amortizes all premiums and discounts on forward contracts and closes its books on December 31. Required: Prepare all journal entries relative to the above to be made by Kill during 2023 and 2024. Answer: October 1 Accounts Receivable Sales Dollars Receivable from Exchange Dealer Discount on Forward Contract FC Payable to Exchange Dealer December 31 Accounts Receivable Transaction Gain (3,000,000 × 0.425) = 1,275,000 – 1,260,000

1,260,000 1,260,000 1,200,000 60,000 1,260,000

15,000 15,000

Transaction FC Payable to Exchange Dealer

15,000

Amortization Expense (60,000 × 3/4) Discount on Forward Contract

45,000

January 31 Accounts Receivable Transaction Gain ($3,000,000 × 0.435) = $1,305,000 – $1,275,000 Transaction Loss FC Payable to Exchange Dealer Investment in FC Accounts Receivable

15,000

45,000

30,000 30,000

30,000 30,000 1,305,000 1,305,000

Cash FC Payable to Exchange Dealer Dollars Receivable from Exchange Dealer Investment in FC Amortization Expense Discount on Forward Contract

1,200,000 1,305,000 1,200,000 1,305,000 15,000 15,000

Question Title: Test Bank (Problem) Question 11-5 Difficulty: Hard Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges. Section Reference: 11.4

34. On July 15, Pinta, Inc. purchased 88,500,000 yen Pinta of parts from a Tokyo company paying 20% down, and the balance is due in 90 days. Interest is payable at a rate of 8% on the unpaid balance. The exchange rate on July 15, was $1.00 = 118 Japanese yen. On October 13, the exchange rate was $1.00 = 114 Japanese yen. Required: Prepare journal entries to record the purchase and payment of this foreign currency transaction in U.S. dollars. Answer: July 15 Purchases Accounts Payable Cash (88,500,000 yen / 118) Oct. 13

Accounts Payable Transaction Loss Cash (70,800,000 yen / 114)

750,000 600,000 150,000

600,000 21,053

Interest Expense 12,421 Cash (70,800,000 yen × (90/360) × 8% = 1,416,000 yen / 114 = 12,421)

621,053

12,421

Question Title: Test Bank (Problem) Question 11-6 Difficulty: Medium Learning Objective: 4 Identify three stages of concern to accountants for foreign currency transactions, and explain the steps used to translate foreign currency transactions for each stage. Section Reference: 11.3 35. On November 1, 2023, Platte Corporation, a calendar-year U.S. Corporation, invested in a speculative contract to purchase 700,000 euros on January 31, 2024, from a German brokerage firm. Platte agreed to buy 700,000 euros at a fixed price of $1.46 per euro. The brokerage firm agreed to send 700,000 euros to Platte on January 31, 2024. The spot rates for euros are:

November 1, 2023 December 31, 2023 January 31, 2024

1 euro = 1.45 1 euro = 1.43 1 euro = 1.44

Required: Prepare the journal entries that Platte would record on November 1, December 31, and January 31. Answer: Nov. 1, 2023

Dec. 31, 2023

Jan. 31, 2024

FC Receivable from Exchange Dealer Dollars Payable to Exchange Dealer (700,000 × $1.46)

1,022,000

Transaction Loss FC Receivable from Exchange Dealer (700,000 × ($1.44 – $1.46))

14,000

1,022,000

14,000

Dollars Payable to Exchange Dealer Investment in FC Cash FC Receivable from Exchange Dealer

1,022,000 1,008,000

Cash

1,008,000 Investment in FC

1,022,000 1,008,000

1,008,000

Question Title: Test Bank (Problem) Question 11-7 Difficulty: Medium Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges.

Section Reference: 11.4 36. Consider the following information: 1. On November 1, 2024, a U.S. firm contracts to sell equipment (with an asking price of 500,000 pesos) in Mexico. The firm will take delivery and will pay for the equipment on February 1, 2025. 2. On November 1, 2024, the company enters into a forward contract to sell 500,000 pesos for $0.0948 on February 1, 2025. 3. Spot rates and the forward rates for February 1, 2025, settlement were as follows (dollars per peso):

November 1, 2024 Balance sheet date (12/31/24) February 1, 2025

Spot Rate $0.0954 0.0949 0.0947

Forward Rate for 2/1/25 $0.0948 0.0944

4. On February 1, the equipment was sold for 500,000 pesos. The cost of the equipment was $20,000. Required:

Prepare all journal entries needed on November 1, December 31, and February 1 to account for the forward contract, the firm commitment, and the transaction to sell the equipment. Answer: Nov. 1 Dollars Receivable from Exchange Dealer (500,000 × $0.0948) FC Payable to Exchange Dealer

47,400 47,400

Dec. 31 FC Payable from Exchange Dealer Foreign Exchange Gain [(500,000 × ($0.0948 - $0.0944)]

200

Foreign Exchange Loss Firm Commitment [(500,000 × ($0.0948 - $0.0944)]

200

Foreign Exchange Loss FC Payable from Exchange Dealer [(500,000 × ($0.0944 - $0.0947)]

150

Firm Commitment Foreign Exchange Gain [(500,000 × ($0.0944 - $0.0947)]

150

Feb. 1

200

150

Investment in FC Firm Commitment Sales (500,000 × $0.0948)

47,350 50

Cash FC Payable to Exchange Dealer Investment in FC Dollars Receivable from Exchange Dealer

47,400 47,350

Cost of Goods Sold Inventory

20,000

47,400

47,350 47,400

20,000

Question Title: Test Bank (Problem) Question 11-8 Difficulty: Hard Learning Objective: 9 Explain how exchange gains and losses are reported for fair value hedges and cash flow hedges. Section Reference: 11.4

Package Title: Test Bank Questions Course Title: Advanced Accounting, 8e Chapter: Translation of Financial Statements of Foreign Affiliates Chapter Number: 12

Question Type: Multiple Choice

1. The conversion from another currency into the currency of the parent company is frequently called_____________ a) Foreign Exchange risk b) Translation c) Local Currency conversion d) Remeasurement Answer: b Question Title: Test Bank (Multiple Choice) Question 01 Difficulty: Easy Learning Objective: 1 Distinguish between the current exchange rate and the historical exchange rate. Section Reference: 12.2 2. When translating foreign currency financial statements for a company whose functional currency is the U.S. dollar, which of the following accounts is translated using historical exchange rates? a) Notes Payable, Yes; Equipment, Yes b) Notes Payable, Yes; Equipment, No c) Notes Payable, No; Equipment, No d) Notes Payable, No; Equipment, Yes Answer: d Question Title: Test Bank (Multiple Choice) Question 02 Difficulty: Easy Learning Objective: 4 Compare the two methods used to convert the financial statements of a foreign entity into U.S. dollars. Section Reference: 12.4 3. Under the temporal method, monetary assets and liabilities are translated by using the exchange rate existing at the: a) beginning of the current year. b) date the transaction occurred. c) balance sheet date. d) None of these. Answer: c Question Title: Test Bank (Multiple Choice) Question 03

Difficulty: Easy Learning Objective: 4 Compare the two methods used to convert the financial statements of a foreign entity into U.S. dollars. Section Reference: 12.4 4. Average exchange rates are used to translate certain items from foreign financial statements into U.S. dollars. Such averages are used in order to: a) smooth out large translation gains and losses. b) eliminate temporary fluctuation in exchange rates that may be reversed in the next fiscal period. c) avoid using different exchange rates for some revenue and expense accounts. d) approximate the exchange rate in effect when the items were recognized. Answer: d Question Title: Test Bank (Multiple Choice) Question 04 Difficulty: Easy Learning Objective: 4 Compare the two methods used to convert the financial statements of a foreign entity into U.S. dollars. Section Reference: 12.4 5. Which of the following would be restated using the average exchange rate under the temporal method? a) cost of goods sold b) depreciation expense c) amortization expense d) None of these Answer: d Question Title: Test Bank (Multiple Choice) Question 05 Difficulty: Medium Learning Objective: 4 Compare the two methods used to convert the financial statements of a foreign entity into U.S. dollars. Section Reference: 12.4 6. Which of the following would be restated using the current exchange rate under the temporal method? a) Marketable securities carried at cost. b) Inventory carried at market. c) Common stock. d) None of these. Answer: b Question Title: Test Bank (Multiple Choice) Question 06 Difficulty: Easy Learning Objective: 4 Compare the two methods used to convert the financial statements of a foreign entity into U.S. dollars. Section Reference: 12.4

7. In preparing consolidated financial statements of a U.S. parent company and a foreign subsidiary, the foreign subsidiary’s functional currency is the currency: a) of the country the parent is located. b) of the country the subsidiary is located. c) in which the subsidiary primarily generates and spends cash. d) in which the subsidiary maintains its accounting records. Answer: c Question Title: Test Bank (Multiple Choice) Question 07 Difficulty: Easy Learning Objective: 3 Identify the functional currency of a foreign entity. Section Reference: 12.5 8. The process of translating the accounts of a foreign entity into its functional currency when they are stated in another currency is called: a) verification. b) translation. c) remeasurement. d) None of these. Answer: c Question Title: Test Bank (Multiple Choice) Question 08 Difficulty: Easy Learning Objective: 5 Distinguish between the circumstances under which each of the two methods is appropriate under current GAAP. Section Reference: 12.6 9. The objective of remeasurement is to: a) produce the same results as if the books were maintained in the currency of the foreign entity’s largest customer. b) produce the same results as if the books were maintained solely in the local currency. c) produce the same results as if the books were maintained solely in the functional currency. d) None of these. Answer: c Question Title: Test Bank (Multiple Choice) Question 09 Difficulty: Easy Learning Objective: 5 Distinguish between the circumstances under which each of the two methods is appropriate under current GAAP. Section Reference: 12.6 10. If the functional currency is determined to be the U.S. dollar and its financial statements are prepared in the local currency, SFAS 52, requires which of the following procedures to be followed? a) Translate the financial statements into U.S. dollars using the current rate method.

b) Remeasure the financial statements into U.S. dollars using the temporal method. c) Translate the financial statements into U.S. dollars using the temporal method. d) Remeasure the financial statements into U.S. dollars using the current rate method. Answer: b Question Title: Test Bank (Multiple Choice) Question 10 Difficulty: Easy Learning Objective: 5 Distinguish between the circumstances under which each of the two methods is appropriate under current GAAP. Section Reference: 12.6 11. A foreign subsidiary’s functional currency is its local currency and inflation of over 100 percent has been experienced over a three-year period. For consolidation purposes, SFAS No. 52 requires the use of: a) the current rate method only. b) the temporal method only c) both the current rate and temporal methods. d) neither the current rate or the temporal method. Answer: b Question Title: Test Bank (Multiple Choice) Question 11 Difficulty: Medium Learning Objective: 6 Explain the factors involved in translating the statements of a foreign entity operating in a highly inflationary economy. Section Reference: 12.6 12. The translation adjustment that results from translating the financial statements of a foreign subsidiary using the current rate method should be: a) included as a separate item in the stockholders' equity section of the balance sheet. b) included in the determination of net income for the period it occurs. c) deferred and amortized over a period not to exceed forty years. d) deferred until a subsequent year when a loss occurs and offset against that loss. Answer: a Question Title: Test Bank (Multiple Choice) Question 12 Difficulty: Medium Learning Objective: 9 Understand the concept of comprehensive income in the context of foreign currency translation. Section Reference: 12.7 13. When the functional currency is identified as the U.S. dollar, land purchased by a foreign subsidiary after the controlling interest was acquired by the parent company should be translated using the: a) historical rate in effect when the land was purchased. b) current rate in effect at the balance sheet date. c) forward rate. d) average exchange rate for the current period.

Answer: a Question Title: Test Bank (Multiple Choice) Question 13 Difficulty: Easy Learning Objective: 8 Translate the statements of a foreign entity when the functional currency is the U.S. dollar. Section Reference: 12.7 14. The appropriate exchange rate for translating a plant asset in the balance sheet of a foreign subsidiary in which the functional currency is the U.S. dollar is the: a) current exchange rate. b) average exchange rate for the current year. c) historical exchange rate in effect when the plant asset was acquired or the date of acquisition, whichever is later. d) forward rate. Answer: c Question Title: Test Bank (Multiple Choice) Question 14 Difficulty: Easy Learning Objective: 8 Translate the statements of a foreign entity when the functional currency is the U.S. dollar. Section Reference: 12.7 15. Paid-in capital accounts are translated using the historical exchange rate under: a) the current rate method only. b) the temporal method only. c) both the current rate and temporal methods. d) neither the current rate nor temporal methods. Answer: c Question Title: Test Bank (Multiple Choice) Question 15 Difficulty: Medium Learning Objective: 4 Compare the two methods used to convert the financial statements of a foreign entity into U.S. dollars. Section Reference: 12.7 16. The following balance sheet accounts of a foreign subsidiary at December 31, 2024, have been translated into U.S. dollars as follows:

Accounts receivable, current Accounts receivable, long-term Inventories carried at market Goodwill

Translated at Current Rates Historical Rates $ 600,000 $ 660,000 300,000 324,000 180,000 198,000 190,000 220,000 $1,270,000 $1,402,000

What total should be included in the translated balance sheet at December 31, 2024, for the above items? Assume the U.S. dollar is the functional currency. a) $1,270,000 b) $1,288,000 c) $1,300,000 d) $1,354,000 Answer: c Question Title: Test Bank (Multiple Choice) Question 16 Difficulty: Hard Learning Objective: 8 Translate the statements of a foreign entity when the functional currency is the U.S. dollar. Section Reference: 12.7 17. A foreign subsidiary's functional currency is its local currency which has not experienced significant inflation. The weighted average exchange rate for the current year would be the appropriate exchange rate for translating: a) Wages expense, Yes; Sales to customers, Yes b) Wages expense, Yes; Sales to customers, No c) Wages expense, No; Sales to customers, No d) Wages expense, No; Sales to customers, Yes Answer: a Question Title: Test Bank (Multiple Choice) Question 17 Difficulty: Easy Learning Objective: 7 Translate the statements of a foreign entity when the functional currency is the local currency. Section Reference: 12.7

18. A wholly owned subsidiary of a U.S. parent company has certain expense accounts for the year ended December 31, 2024, stated in local currency units (LCU) as follows:

Depreciation of equipment (related assets were purchased January 1, 2022) Provision for doubtful accounts Rent The exchange rates at various dates are as follows:

December 31, 2024 Average for year ended December 31, 2024 January 1, 2022

Dollar equivalent LCU $0.50 0.55 0.40

LCU 375,000 250,000 625,000

Assume that the LCU is the subsidiary's functional currency and that the charges to the expense accounts occurred approximately evenly during the year. What total dollar amount should be included in the translated income statement to reflect these expenses? a) $687,500 b) $625,000 c) $550,000 d) $500,000 Answer: a Question Title: Test Bank (Multiple Choice) Question 18 Difficulty: Easy Learning Objective: 7 Translate the statements of a foreign entity when the functional currency is the local currency. Section Reference: 12.7 19. P Company acquired 90% of the outstanding common stock of S Company which is a foreign company. The acquisition was accounted for using the purchase method. In preparing consolidated statements, the paid-in capital of S Company should be converted at the: a) exchange rate effective when S Company was organized. b) exchange rate effective on the date of purchase of the stock of S Company by P Company. c) average exchange rate for the period S Company stock has been upheld by P Company. d) current exchange rate. Answer: b Question Title: Test Bank (Multiple Choice) Question 19 Difficulty: Medium Learning Objective: 7 Translate the statements of a foreign entity when the functional currency is the local currency., 8 Translate the statements of a foreign entity when the functional currency is the U.S. dollar. Section Reference: 12.7 20. Monetary assets and liabilities that are entered on the balance sheet at their current value are translated using the a) future exchange rate b) historical exchange rate c) current rate d) translation rate Answer: c Question Title: Test Bank (Multiple Choice) Question 20 Difficulty: Medium Learning Objective: 9 Understand the concept of comprehensive income in the context of foreign currency translation. Section Reference: 12.7

21. Assuming no significant inflation, gains resulting from the process of translating a foreign entity’s financial statements from the functional currency to U.S. dollars should be included as a(n): a) other comprehensive income item. b) extraordinary item (net of tax). c) part of continuing operations. d) deferred credit. Answer: a Question Title: Test Bank (Multiple Choice) Question 21 Difficulty: Easy Learning Objective: 9 Understand the concept of comprehensive income in the context of foreign currency translation. Section Reference: 12.7 22. Which of the following is NOT true about the Constant current measures? a) are used by firms to eliminate the effects of foreign currency fluctuations in financial statements. b) are the GAAP measures. c) use either the exchange rate at the beginning or end of the period for all years being translated. d) to understand constant currency disclosures, the firm preparing the disclosures needs to clearly state how the rate is determined and the base year in which the numbers are being compared. Answer: b Question Title: Test Bank (Multiple Choice) Question 22 Difficulty: Medium Learning Objective: 11 Understand the concept of constant currency. Section Reference: 12.9 Question Type: Essay

23. To accomplish the objectives of translation, two translation methods are used depending on the functional currency of the foreign entity. Describe the two translation methods. Answer: Under the current rate method, all assets and liabilities are translated using the current exchange rate on the balance sheet date. Revenue and expense transactions are translated at the exchange rate existing on the date each underlying transaction occurred. Under the temporal method, monetary assets and liabilities are translated at the current exchange rate. Assets and liabilities carried at historical cost are translated at historical exchange rates while those carried at current values are translated at the current exchange rate. Revenues and expenses except those related to assets and liabilities translated at historical rates, are translated at exchange rates in effect on the dates the underlying transaction occurred. Question Title: Test Bank (Essay) Question 23 Difficulty: Medium Learning Objective: 4 Compare the two methods used to convert the financial statements of a foreign entity into U.S. dollars.

Section Reference: 12.4 24. The translation process can be done using either the current rate method or the temporal method. Explain under what circumstances each of the methods is appropriate. Answer: The current rate method is appropriate when the functional currency is the local currency. The temporal method is appropriate when the functional currency is the U.S. dollar or when the foreign environment is highly inflationary. If the functional currency is the currency of a third country, the accounts are first remeasured into the functional currency using the temporal method and then translated into U.S. dollars using the current rate method. Question Title: Test Bank (Essay) Question 24 Difficulty: Hard Learning Objective: 4 Compare the two methods used to convert the financial statements of a foreign entity into U.S. dollars., 5 Distinguish between the circumstances under which each of the two methods is appropriate under current GAAP., 6 Explain the factors involved in translating the statements of a foreign entity operating in a highly inflationary economy. Section Reference: 12.4, 12.5, 12.6 Question Type: Problem

25. Dakota, Inc. owns a company that operates in France. Account balances in francs for the subsidiary are shown below:

Cash and Receivables Supplies Property, Plant, and Equipment Accounts Payable Long-term Notes Payable Common Stock Retained Earnings Dividends-Declared & Paid on Dec 31 Revenues Operating Expenses Totals

January 1 24,000 1,000 52,500 (11,500) (19,000) (30,000) (17,000) ----------0-

2024 December 31 26,000 500 49,000 (5,500) (11,000) (30,000) (17,000) 3,000 (30,000) 15,000 -0-

Exchange rates for 2024 were as follows: January 1 $0.22 Average for the year 0.19 December 31 0.18 Revenues were earned and operating expenses, except for depreciation and supplies used, were incurred evenly throughout the year. No purchases of supplies or plant assets were made during the year. Required: A. Prepare a schedule to compute the translation adjustment for the year, assuming the subsidiary's functional currency is the franc.

B. Prepare a schedule to compute the translation gain or loss, assuming the subsidiary's functional currency is the U.S. dollar. Answer: A. Translation Francs Exposed net asset position – 1/1 47,000 Adjustment for changes in net asset position during the year Add: Revenues 30,000 Less: Operating expenses (15,000) Dividends (3,000) Net asset position translated using ------rate in effect at date of transactions Exposed net asset position – 12/31 59,000 Translation adjustment – loss

$ 10,340

0.19 0.19 0.18

5,700 (2,850) (540) -----12,650 10,620 2,030

0.18

B. Exposed net monetary liability position – 1/1 Adjustments for changes in net monetary position during the year Add: increase in cash and receivables – revenues Less: decrease in monetary assets or increase in monetary liabilities Operating expenses Dividends paid Net monetary asset position translated using rate in effect at date of transactions Exposed net monetary asset position – 12/31 Translation loss

Rate 0.22

Francs (6,500)

Translation Rate 0.22

$ (1,430)

30,000

0.19

5,700

(11,000) (3,000)

0.19 0.18

(2,090) (540)

9,500

0.18

1,640 1,710 70

Question Title: Test Bank (Problem) Question 12-1 Difficulty: Medium Learning Objective: 7 Translate the statements of a foreign entity when the functional currency is the local currency., 8 Translate the statements of a foreign entity when the functional currency is the U.S. dollar. Section Reference: 12.6, 12.7

26. Stiff Sails Corporation, a U.S. company, operates a 100%-owned British subsidiary, SeaBeWe Corporation. The U.S. dollar is the functional currency of the subsidiary. Financial statements for the subsidiary for the fiscal year-end December 31, 2024, are as follows: SeaBeWe Corporation Income Statement Sales Cost of Goods Sold Beginning Inventory

Pounds 650,000 310,000

Purchases Goods Available For Sale Less: Ending Inventory Cost of Goods Sold Depreciation Selling and Admin. Expenses Income Taxes Net Income

265,000 575,000 285,000 290,000 79,000 155,000 32,000

556,000 94,000

SeaBeWe Corporation Partial Balance Sheet Current Assets Cash Accts. Rec. Inventories

155,000 171,000 285,000 611,000

Current Liabilities Notes Payable Accts. Payable Other Current Liab. Long-term Liab. (issued July 1, 2022)

78,000 165,000 51,000 294,000 250,000

Other Information: 1. Equipment costing 340,000 pounds was acquired July 1, 2022, and 38,000 was acquired June 30, 2024. Depreciation for the period was as follows: Equipment – 2022 acquisitions 66,000 – 2024 acquisitions 6,000 2. The beginning inventory was acquired when the exchange rate was $1.77. The inventory is valued on a FIFO basis. Purchases and the ending inventory were acquired evenly throughout the period. 3. Dividends were paid by the subsidiary on June 30 amounting to 156,000 pounds. 4. Sales were made and all expenses were incurred uniformly throughout the year. 5. Exchange rates for the pound on various dates were: July 1, 2022 Jan. 1, 2024 June 30, 2024 Dec. 31, 2024 Average for 2024

$1.79 1.75 1.74 1.71 1.73

Required: A. Prepare a schedule to determine the translation gain or loss for 2023, assuming the net monetary liability position on January 1, 2024, was 180,000 pounds. B.

Compute the dollar amount that each of the following would be reported at in the 2024 financial statements: 1. Cost of Goods Sold. 2. Depreciation Expense. 3. Equipment.

Answer:

A. Beginning Net Monetary Liab. Pos. +Sales - Purchases - Selling & Admin. Expenses - Income Taxes - Equipment Purchased - Dividends Paid Net Monetary Liab. Pos. Trans. - Ending Net Monetary Liab. Pos. Translation Gain B. 1. Beginning Inventory Purchases Goods Available Ending Inventory Cost of Goods Sold

(180,000) × $1.75 = 650,000 × 1.73 = (265,000) × 1.73 = (155,000) × 1.73 = (32,000) × 1.73 = (38,000) × 1.74 = (156,000) × 1.74 = (176,000) × 1.71 =

$(315,000) 1,124,500 (458,450) (268,150) (55,360) (66,120) (271,440) $(310,020) (300,960) $ 9,060

310,000 × $1.77 = 265,000 × 1.73 = 575,000 285,000 × 1.73 = 290,000

$548,700 458,450 1,007,150 493,050 $514,100

2. Depr. on 2022 equipment: Depr. on 2024 equipment: 2024 Depreciation Expense

66,000 × $1.79 = 6,000 × 1.74 =

$118,140 10,440 $128,580

3. 2022 equipment: 2024 equipment:

340,000 × $1.79 = 38,000 × 1.74 =

$608,600 66,120 $674,720

Question Title: Test Bank (Problem) Question 12-2 Difficulty: Hard Learning Objective: 8 Translate the statements of a foreign entity when the functional currency is the U.S. dollar. Section Reference: 12.7

27. Accounts are listed below for a foreign subsidiary that maintains its books in its local currency. The equity interest in the subsidiary was acquired in a purchase transaction. In the space provided, indicate the exchange rate that would be used to translate the accounts into dollars assuming the functional currency was identified (a) as the U.S. dollar and (b) as the foreign entity's local currency. Use the following letters to identify the exchange rate: H – Historical exchange rate C – Current exchange rate A – Average exchange rate for the current period

Account 1. 2.

Bonds Payable (issued 01/01/11) Office Supplies

Exchange rate if the functional currency is: U.S. Dollar Local currency ___________ ___________

______________ ______________

3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

Answer: U.S. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

Dividends Declared Common Stock Additional Paid-In Capital Inventory Carried at Cost Short-term Notes Payable Accumulated Depreciation Cash Marketable Securities (carried at market) Cost of Goods Sold Sales Accounts Receivable Depreciation Expense Income Tax Expense

Local Dollar C H H H H H C H C C H A C H A

___________ ___________ ___________ ___________ ___________ ___________ ___________

______________ ______________ ______________ ______________ ______________ ______________ ______________

___________ ___________ ___________ ___________ ___________ ___________

______________ ______________ ______________ ______________ ______________ ______________

Currency C C H H H C C C C C A A C A A

Question Title: Test Bank (Problem) Question 12-3 Difficulty: Easy Learning Objective: 7 Translate the statements of a foreign entity when the functional currency is the local currency., 8 Translate the statements of a foreign entity when the functional currency is the U.S. dollar. Section Reference: 12.7

28. Use the information below to (a) translate the year-end financial statements of Perfect Company, the foreign subsidiary, using the temporal method, and (b) prepare a schedule to compute the translation gain or loss for Perfect Company. Round numbers to the nearest dollar. On January 2, 2027, Design Inc., a U.S. parent company, purchased a 100% interest in Perfect Company, a subdivision located in Switzerland. The purchase method of accounting was used to account for the acquisition. The 2027 financial statements for Perfect Company, the subsidiary, in Swiss francs were as follows:

Comparative Balance Sheets Jan. 2 Cash 15,000 Accounts receivable 45,000 Plant and equipment (net) (purchased 6/30/21) 75,000 Land (purchased 6/30/21) 45,000 Total 180,000

Dec. 31 33,000 49,500 67,500 45,000 195,000

Accounts payable Long-term notes payable (issued 6/30/21) Common stock (issued 6/30/21) Retained earnings Total

18,000 27,000 90,000 60,000 195,000

13,500 31,500 90,000 45,000 180,000

Income Statement Revenues Operating expenses including depreciation of 7,500 francs Net income Beginning retained earnings

180,000 135,000 45,000 45,000 90,000 30,000 60,000

Dividends declared and paid Ending retained earnings

Sales were earned and operating expenses were incurred evenly during the year. Exchange rates for the franc at various dates are: January 2, 2027 December 31, 2027 Average for 2027 December 10, 2027, dividend payment date June 30, 2024

0.8600 0.8830 0.8715 0.8810 0.8316

Answer: Temporal method Francs

Translation Rate

U.S. $

Balance Sheet Cash Accounts Receivable Plant and Equipment (net) Land Total

33,000 49,500 67,500 45,000 195,000

0.8830 0.8830 0.8600 0.8600

29,139 43,709 58,050 38,700 169,598

Accounts Payable Notes Payable Common Stock Retained Earnings Total

18,000 27,000 90,000 60,000 195,000

0.8830 0.8830 0.8600 Bal. Amt.

15,894 23,841 77,400 52,463 169,598

Income Statement Revenues Operating Expenses Depreciation Expense Translation Gain (loss) Net Income Retained Earnings – 1/1 Dividends Declared Retained Earnings – 12/31

180,000 (127,500) (7,500) 45,000 45,000 90,000 (30,000) 60,000

Exposed net monetary asset position – 1/1 (60,000 - 45,000) Add: Increases in net monetary assets – Revenues Less: Decreases in net monetary assets – Operating expenses Dividends Net monetary position translated using the rate in effect at date of transaction Exposed net monetary asset position – 12/31 Translation gain (loss)

0.8715 0.8715 0.8600

0.8600 0.8810

156,870 (111,116) (6,450) 889 40,193 38,700 78,893 (26,430) 52,463

Francs

Translation Rate

U.S. $

15,000

0.8600

12,900

180,000

0.8715

156,870

(127,500) (30,000)

0.8715 0.8810

(111,116) (26,430) 32,224

37,500

0.8830

33,113 889

Question Title: Test Bank (Problem) Question 12-4 Difficulty: Hard Learning Objective: 8 Translate the statements of a foreign entity when the functional currency is the U.S. dollar. Section Reference: 12.7

29. Pike Corporation, a U.S. Company, formed a subsidiary with a new company in London on January 1, 2024, by investing 500,000 British pounds in exchange for all of the subsidiary’s common stock. The subsidiary purchased land for 100,000 pounds and a building for 300,000 pounds on July 1, 2024. The building is being depreciated over a 40-year life by the straight-line method. The inventory is valued on an average cost basis. The British pound is the subsidiary’s functional currency and its reporting currency and has not experienced any abnormal inflation. Exchange rates for the pound on various dates were: January 1, 2024 July 1, 2024 December 31, 2024 2024 average rate

1 pound = 1.81 1 pound = 1.86 1 pound = 1.83 1 pound = 1.82

The subsidiary’s adjusted trial balance is presented below for the year ended December 31, 2024.

Debits Cash Accounts receivable Inventory Land Building Depreciation expense Cost of goods sold Other expenses Total debits

In Pounds 200,000 60,000 80,000 100,000 300,000 3,750 213,750 90,000 1,047,500

Credits Accumulated depreciation Accounts payable Accrued liabilities Common stock Retained earnings Sales revenue Total credits

3,750 84,000 16,750 500,000 - 0 443,000 1,047,500

Required: Using the current rate method prepare the subsidiary’s: A. Translated workpapers (round to the nearest dollar) B. Translated income statement C. Translated balance sheet Answer: A. Subsidiary Corporation Translated Workpapers Debits Cash Accounts receivable Inventory Land Building Depreciation expense Cost of goods sold Other expenses Total debits

200,000 × 1.83 = 60,000 × 1.83 = 80,000 × 1.83 = 100,000 × 1.83 = 300,000 × 1.83 = 3,750 × 1.82 = 213,750 × 1.82 = 90,000 × 1.82 =

Credits Accumulated depreciation 3,750 × 1.83 = Accounts payable 84,000 × 1.83 = Accrued liabilities 16,750 × 1.83 = Common stock 500,000 × 1.81 = Retained earnings Sales revenue 443,000 × 1.82 = Total credits Cumulative Translation Adjustment-Credit balance

$366,000 109,800 146,400 183,000 549,000 6,825 389,025 163,800 $1,913,850

$ 6,863 153,720 30,653 905,000 - 0 806,260 1,902,496 11,354 $1,913,850

B. Subsidiary Corporation Translated Income Statement For the Year Ended December 31, 2024

Sales revenue Expenses: Cost of goods sold Depreciation expense Other expenses Net income Beginning retained earnings, Jan. 1, 2024 Ending retained earnings, Dec. 31, 2024

$806,260 (389,025) (6,825) (163,800) $246,610 - 0 $ 246,610

C. Subsidiary Corporation Translated Balance Sheet December 31, 2024 Assets: Cash Accounts receivable Inventory Land Building-net Total Assets

$366,000 109,800 146,400 183,000 542,137 $1,347,337

Equities: Accounts payable Accrued liabilities Common stock Retained earnings Other comprehensive income-translation adj. Total liabilities and equity

$153,720 30,653 905,000 246,610 11,354 $1,347,337

Question Title: Test Bank (Problem) Question 12-5 Difficulty: Hard Learning Objective: 8 Translate the statements of a foreign entity when the functional currency is the U.S. dollar. Section Reference: 12.7

30. Pike Corporation, a U.S. Company, formed a subsidiary with a new company in London on January 1, 2024, by investing 500,000 British pounds in exchange for all of the subsidiary’s common stock. The subsidiary purchased land for 100,000 pounds and a building for 300,000 pounds on July 1, 2024. The building is being depreciated over a 40-year life by the straight-line method. The inventory is valued on an average cost basis. The British pound is the subsidiary’s functional currency and its reporting

currency and has not experienced any abnormal inflation. Exchange rates for the pound on various dates were: January 1, 2024 July 1, 2024 December 31, 2024 2024 average rate

1 pound = 1.81 1 pound = 1.86 1 pound = 1.83 1 pound = 1.82

The subsidiary’s adjusted trial balance is presented below for the year ended December 31, 2024. Debits Cash Accounts receivable Inventory Land Building Depreciation expense Cost of goods sold Other expenses Total debits

In Pounds 200,000 60,000 80,000 100,000 300,000 3,750 213,750 90,000 1,047,500

Credits Accumulated depreciation Accounts payable Accrued liabilities Common stock Retained earnings Sales revenue Total credits

3,750 84,000 16,750 500,000 - 0 443,000 1,047,500

Required: Using the temporal method prepare the subsidiary’s: A. Translated workpapers (round to the nearest dollar) B. Translated income statement C. Translated balance sheet Answer: A. Subsidiary Corporation Translated Workpapers Debits Cash Accounts receivable Inventory (average cost method) Land Building Depreciation expense Cost of goods sold

200,000 × 1.83 = 60,000 × 1.83 = 80,000 × 1.82 = 100,000 × 1.86 = 300,000 × 1.86 = 3,750 × 1.86 = 213,750 × 1.82 =

$366,000 109,800 145,600 186,000 558,000 6,975 389,025

Other expenses Total debits Credits Accumulated depreciation Accounts payable Accrued liabilities Common stock Retained earnings Sales revenue Total credits Cumulative translation remeasurement gain-credit balance

90,000 × 1.82 =

163,800 $1,925,200

3,750 × 1.86 = 84,000 × 1.83 = 16,750 × 1.83 = 500,000 × 1.81 =

$ 6,975 153,720 30,653 905,000 - 0 806,260 $1,902,608

443,000 × 1.82 =

22,592 $1,925,200

B. Subsidiary Corporation Translated Income Statement For the Year Ended December 31, 2024 Sales revenue Expenses: Cost of goods sold Depreciation expense Other expenses Translation remeasurement gain Net income Beginning retained earnings, Jan. 1, 2024 Ending retained earnings, Dec. 31, 2024

$806,260 (389,025) (6,975) (163,800) 22,592 269,052 - 0 -. $ 269,052

C. Subsidiary Corporation Translated Balance Sheet December 31, 2024 Assets: Cash Accounts receivable Inventory Land Building-net Total Assets

$366,000 109,800 145,600 186,000 551,025 $1,358,425

Equities: Accounts payable Accrued liabilities Common stock Retained earnings Total liabilities and equity

153,720 30,653 905,000 269,052 $1,358,425

Question Title: Test Bank (Problem) Question 12-6 Difficulty: Hard Learning Objective: 8 Translate the statements of a foreign entity when the functional currency is the U.S. dollar. Section Reference: 12.7

31. On January 1, 2024, Roswell Systems, a U.S.-based company, purchased a controlling interest in Bern Management Consultants located in Bern, Switzerland. The acquisition was treated as a purchase transaction. The 2024 financial statements stated in Swiss francs are given below. BERN MANAGEMENT CONSULTANTS Comparative Balance Sheets January 1 and December 31, 2024 Jan. 1

Dec. 31

Cash and Receivables Net Property, Plant, and Equipment Totals

30,000 60,000 90,000

84,000 56,000 140,000

Accounts and Notes Payable Common Stock Retained Earnings Totals

45,000 30,000 15,000 90,000

50,000 30,000 60,000 140,000

BERN MANAGEMENT CONSULTANTS Consolidated Income and Retained Earnings Statement For the Year Ended December 31, 2024 Revenues Operating Expenses including depreciation of 5,000 francs Net income Dividends Declared and Paid Increase in Retained Earnings

112,000 45,000 67,000 22,000 45,000

Direct exchange rates for Swiss franc are:

January 1, 2024 December 31, 2024 Average for 2024 Dividend declaration and payment date

U.S. Dollars per Franc $0.9987 0.9321 0.9654 0.9810

Required: A. Translate the year-end balance sheet and income statement of the foreign subsidiary using the current rate method of translation. B. Prepare a schedule to verify the translation adjustment. Answer:

Part A

Swiss Francs

Translation Rate $0.9654 0.9654

Dividends Retained Earnings – 12/31

112,000 (45,000) 67,000 15,000 82,000 (22,000) 60,000

Balance Sheet Cash and Receivables Net Property, Plant and Equipment Total

84,000 56,000 140,000

0.9321 0.9321

78,296 52,198 130,494

50,000 30,000 60,000 140,000 --140,000

0.9321 0.9987

46,605 29,961 58,081 134,647 (4,153) 130,494

Consolidated Income and Retained Earnings Statement Revenues Operating Expenses Net Income Retained Earnings – 1/1

Accounts and Notes Payable Common Stock Retained Earnings Cumulative Translation Adjustment (debit) Total Part B

Swiss Francs 45,000

Exposed net asset position – 1/1 Adjustment for changes in the net asset position during the year: Net income 67,000 Dividends (22,000) Net asset position translated using rate in effect at date of transactions ---Exposed net asset position – 12/31 90,000 Cumulative translation adjustment (debit)

0.9987 0.9810

Balancing amt.

$ 108,125 43,443 64,682 14,981 79,663 (21,582) 58,081

Translation Rate $0.9987

$ 44,942

0.9654 0.9810

64,682 (21,582)

0.9321

88,042 83,889 4,153

Question Title: Test Bank (Problem) Question 12-7 Difficulty: Hard Learning Objective: 8 Translate the statements of a foreign entity when the functional currency is the U.S. dollar., 10 Identify the disclosure requirements for firms with foreign entities. Section Reference: 12.7, 12.8

Package Title: Assessment Questions Course Title: Advanced Accounting, 8e Chapter: Reporting for Segments and for Interim Financial Periods Chapter Number: 13

Question Type: Multiple Choice

1. A component of a public entity that may earn revenues and incur expenses, and about which management evaluates separate financial information in deciding how to allocate resources and assess performance is a(n): a) identifiable segment. b) operating segment. c) reportable segment. d) industry segment. Answer: b Question Title: Assessment (Multiple Choice) Question 01 Difficulty: Easy Learning Objective: 3 Determine an operating segment. Section Reference: 13.2

2. An entity is permitted to aggregate operating segments if the segments are similar regarding the: a) nature of the production processes. b) types or class of customers. c) methods used to distribute products or provide services. d) all of these. Answer: d Question Title: Assessment (Multiple Choice) Question 02 Difficulty: Easy Learning Objective: 3 Determine an operating segment. Section Reference: 13.2

3. Which of the following is NOT a segment asset of an operating segment? a) Assets used jointly by more than one segment. b) Assets directly associated with a segment. c) Assets maintained for general corporate purposes. d) Assets used exclusively by a segment. Answer: c Question Title: Assessment (Multiple Choice) Question 03

Difficulty: Easy Learning Objective: 3 Determine an operating segment. Section Reference: 13.2

4. ASC 280 requires the disclosure of information on an enterprise's operations in different industries for: a) each annual period presented. b) each interim period presented. c) the current period only. d) each annual period presented and each interim period presented. Answer: d Question Title: Assessment (Multiple Choice) Question 04 Difficulty: Easy Learning Objective: 2 Describe the basic requirements of public companies in reporting segmental data. Section Reference: 13.2

5. Which of the following is NOT required to be disclosed by ASC 280? a) Information concerning the enterprise's products. b) Information related to an enterprise's foreign operations. c) Information related to an enterprise's major suppliers. d) All of these are required disclosures. Answer: c Question Title: Assessment (Multiple Choice) Question 05 Difficulty: Medium Learning Objective: 2 Describe the basic requirements of public companies in reporting segmental data. Section Reference: 13.2

6. To determine whether a substantial portion of a firm's operations are explained by its segment information, the combined revenue from sales to unaffiliated customers of all reportable segments must constitute at least: a) 10% of the combined revenue of all operating segments. b) 75% of the combined revenue of all operating segments. c) 10% of the combined revenue from sales to unaffiliated customers of all operating segments. d) 75% of the combined revenue from sales to unaffiliated customers of all operating segments. Answer: d Question Title: Assessment (Multiple Choice) Question 06 Difficulty: Medium Learning Objective: 5 Identify the information to be presented for each reportable segment. Section Reference: 13.2

7. A segment is considered to be significant if its: a) reported profit is at least 10% of the combined profit of all operating segments. b) reported profit (loss) is at least 10% of the combined reported profit of all operating segments not reporting a loss. c) reported profit (loss) is at least 10% of the combined reported loss of all operating segments that reported a loss. d) reported profit (loss) is at least 10% of the combined reported profit of all operating segments not reporting a loss; and reported profit (loss) is at least 10% of the combined reported loss of all operating segments that reported a loss. Answer: d Question Title: Assessment (Multiple Choice) Question 07 Difficulty: Medium Learning Objective: 3 Determine an operating segment. Section Reference: 13.2

8. Which of the following disclosures is NOT required to be presented for a firm's reportable segments? a) Information about segment assets b) Information about the bases for measurement c) Reconciliation of segment amounts and consolidated amounts for revenue, profit or loss, assets, and other significant items. d) All of these must be presented. Answer: d Question Title: Assessment (Multiple Choice) Question 08 Difficulty: Medium Learning Objective: 5 Identify the information to be presented for each reportable segment. Section Reference: 13.2

9. Current authoritative pronouncements require the disclosure of segment information when certain criteria are met. Which of the following reflects the type of firm and type of financial statement for which this disclosure is required? a) Annual financial statements for publicly held companies. b) Annual financial statements for both publicly held and nonpublicly held companies. c) Annual and interim financial statements for publicly held companies. d) Annual and interim financial statements for both publicly held and nonpublicly held companies. Answer: c Question Title: Assessment (Multiple Choice) Question 09 Difficulty: Easy Learning Objective: 2 Describe the basic requirements of public companies in reporting segmental data. Section Reference: 13.2

10. An enterprise determines that it must report segment data in annual reports for the year ended December 31, 2024. Which of the following would NOT be an acceptable way of reporting segment information? a) Within the body of the financial statements, with appropriate explanatory disclosures in the footnotes b) Entirely in the footnotes to the financial statements. c) As a special report issued separately from the financial statements. d) In a separate schedule that is included as an integral part of the financial statements. Answer: c Question Title: Assessment (Multiple Choice) Question 10 Difficulty: Easy Learning Objective: 5 Identify the information to be presented for each reportable segment. Section Reference: 13.2

11. Selected data for a segment of a business enterprise are to be separately reported in accordance with ASC 280 when the revenues of the segment is 10% or more of the combined: a) net income of all segments reporting profits. b) external and internal revenue of all reportable segments. c) external revenue of all reportable segments. d) revenues of all segments reporting profits. Answer: b Question Title: Assessment (Multiple Choice) Question 11 Difficulty: Medium Learning Objective: 4 Define a reportable segment., 5 Identify the information to be presented for each reportable segment. Section Reference: 13.2

12. Long Corporation's revenues for the year ended December 31, 2024, were as follows: Consolidated revenue per income statement Intersegment sales Intersegment transfers Combined revenues of all operating segments

$800,000 105,000 35,000 $940,000

Long has a reportable segment if that segment's revenues exceed a) $80,000. b) $90,500. c) $94,000. d) $14,000. Answer: c

Question Title: Assessment (Multiple Choice) Question 12 Difficulty: Medium Learning Objective: 4 Define a reportable segment. Section Reference: 13.2

13. Determine the amount of revenue for each of the three segments that would be used to identify the reportable industry segments in accordance with the revenues test specified by ASC 280.

Sales to unaffiliated customers Sales – intersegment Loan interest income – intersegment Loan interest income – unaffiliated Income from equity method investees

Wholesale Segment $3,600 400 -0-0-0-

Revenue test (dollars in thousands) Retail Finance Segment Segment $1,500 $-0240 -0120 900 240 80 280 -0-

a) Wholesale, $3,600; Retail, $1,500; Finance, $ -0b) Wholesale, 4,000; Retail, 1,740; Finance, -0c) Wholesale, 4,000; Retail, 1,980; Finance, 980 d) Wholesale, 4,000; Retail, 2,380; Finance, 980 Answer: c Question Title: Assessment (Multiple Choice) Question 13 Difficulty: Medium Learning Objective: 4 Define a reportable segment. Section Reference: 13.2

14. Which of the following is NOT part of the information about foreign operations that is required to be disclosed? a) Revenues from external customers b) Operating profit or loss, net income, or some other common measure of profitability c) Capital expenditures d) Long-lived assets Answer: c Question Title: Assessment (Multiple Choice) Question 14 Difficulty: Medium Learning Objective: 6 Explain when and what types of geographic data must be reported. Section Reference: 13.2

15. An entity is permitted to aggregate operating segments that have similar economic characteristics under certain circumstances. Which of the following circumstances would allow aggregation of Entity A into Segment B?

a) Entity A is expected to be included in Segment Z, a new segment, in future periods. b) Entity A was spun off from Entity C and is now owned directly by the parent entity. c) Entity A has recently filed bankruptcy and will be liquidated. d) Segment B consists of retail and wholesale operations and Entity A was primarily a retail establishment but is now engaged primarily in rendering services to the parent entity. Answer: b Question Title: Assessment (Multiple Choice) Question 15 Difficulty: Hard Learning Objective: 5 Identify the information to be presented for each reportable segment. Section Reference: 13.2

16. Pale Company has four manufacturing divisions, each of which has been determined to be a reportable segment. Common operating costs are appropriately allocated on the basis of each division's sales in relation to Pale’s aggregate sales. Pale’s Delta division accounted for 40% of Pale's total sales in 2024. For the year ended December 31, 2024, Delta had sales of $5,000,000 and traceable costs of $3,600,000. In 2024, Pale incurred operating costs of $350,000 that were not directly traceable to any of the divisions. In addition, Pale incurred interest expense of $360,000 in 2024. In reporting supplementary segment information, how much should be shown as Delta's operating profit for 2024? a) $1,400,000 b) $1,256,000 c) $1,260,000 d) $1,116,000 Answer: c Question Title: Assessment (Multiple Choice) Question 16 Difficulty: Hard Learning Objective: 5 Identify the information to be presented for each reportable segment. Section Reference: 13.2

17. For external reporting purposes, it is appropriate to use estimated gross profit rates to determine the ending inventory value for: a) Interim Reporting, No; Annual Reporting, No b) Interim Reporting, No; Annual Reporting, Yes c) Interim Reporting, Yes; Annual Reporting, No d) Interim Reporting, Yes; Annual Reporting, Yes Answer: c Question Title: Assessment (Multiple Choice) Question 17 Difficulty: Easy Learning Objective: 5 Identify the information to be presented for each reportable segment. Section Reference: 13.3

18. Inventory losses from market declines that are expected to be temporary: a) should be recognized in the interim period in which the decline occurs. b) should be recognized in the last (fourth) quarter of the year in which the decline occurs. c) should not be recognized. d) none of these. Answer: c Question Title: Assessment (Multiple Choice) Question 18 Difficulty: Easy Learning Objective: 9 Indicate some problems with interim reporting and the authoritative position on the issue. Section Reference: 13.3

19. Gains and losses that arise in an interim period should be: a) recognized in the interim period in which they arise. b) recognized in the last quarter of the year in which they arise. c) allocated equally among the remaining interim periods. d) deferred and included only in the annual income statement. Answer: a Question Title: Assessment (Multiple Choice) Question 19 Difficulty: Easy Learning Objective: 9 Indicate some problems with interim reporting and the authoritative position on the issue. Section Reference: 13.3

20. If a cumulative effect type accounting change is made during the first interim period of a year: a) no cumulative effect of the change should be included in net income of the period of change. b) the cumulative effect of the change on retained earnings at the beginning of the year should be included in net income of the first interim period. c) the cumulative effect of the change should be allocated to the current and remaining interim periods of the year. d) none of these. Answer: b Question Title: Assessment (Multiple Choice) Question 20 Difficulty: Easy Learning Objective: 9 Indicate some problems with interim reporting and the authoritative position on the issue. Section Reference: 13.3

21. Which of the following does NOT have to be disclosed in interim reports?

a) Seasonal costs or expenses. b) Significant changes in estimates. c) Disposal of a segment of a business. d) All of these must be disclosed. Answer: d Question Title: Assessment (Multiple Choice) Question 21 Difficulty: Easy Learning Objective: 9 Indicate some problems with interim reporting and the authoritative position on the issue. Section Reference: 13.3

22. For interim financial reporting, the effective tax rate should reflect: a) Anticipated Tax Credits, Yes; Extraordinary Items, Yes b) Anticipated Tax Credits, Yes; Extraordinary Items, No c) Anticipated Tax Credits, No; Extraordinary Items, Yes d) Anticipated Tax Credits, No; Extraordinary Items, No Answer: b Question Title: Assessment (Multiple Choice) Question 22 Difficulty: Easy Learning Objective: 9 Indicate some problems with interim reporting and the authoritative position on the issue. Section Reference: 13.3

23. Companies using the LIFO method may encounter a liquidation of base period inventories at an interim date that is expected to be replaced by the end of the year. In these cases, cost of goods sold should be charged with the: a) cost of the most recent purchases. b) average cost of the liquidated LIFO base. c) expected replacement cost of the liquidated LIFO base. d) none of these. Answer: c Question Title: Assessment (Multiple Choice) Question 23 Difficulty: Medium Learning Objective: 9 Indicate some problems with interim reporting and the authoritative position on the issue. Section Reference: 13.3 24. In considering interim financial reporting, how did the Accounting Principles Board conclude that each reporting should be viewed?

a) As a "special" type of reporting that need not follow generally accepted accounting principles. b) As useful only if activity is evenly spread throughout the year so that estimates are unnecessary. c) As reporting for a basic accounting period. d) As reporting for an integral part of an annual period. Answer: d Question Title: Assessment (Multiple Choice) Question 24 Difficulty: Easy Learning Objective: 9 Indicate some problems with interim reporting and the authoritative position on the issue. Section Reference: 13.3 25. When a company issues interim financial statements, extraordinary items should be: a) allocated to the current and remaining interim periods of the current year on a pro rata basis. b) deferred and included only in the annual income statement. c) included in the determination of net income in the interim period in which they occur. d) charged or credited directly to retained earnings so that comparisons of interim results of operations will not be distorted. Answer: c Question Title: Assessment (Multiple Choice) Question 25 Difficulty: Easy Learning Objective: 9 Indicate some problems with interim reporting and the authoritative position on the issue. Section Reference: 13.3

26. If annual major repairs made in the first quarter and paid for in the second quarter clearly benefit the entire year, when should they be expensed? a) An allocated portion in each of the last three quarters b) An allocated portion in each quarter of the year c) In full in the first quarter d) In full in the second quarter Answer: b Question Title: Assessment (Multiple Choice) Question 26 Difficulty: Easy Learning Objective: 9 Indicate some problems with interim reporting and the authoritative position on the issue. Section Reference: 13.3

27. During the second quarter of 2024, Clearwater Company sold a piece of equipment at a gain of $90,000. What portion of the gain should Clearwater report in its income statement for the second quarter of 2024?

a) $90,000 b) $45,000 c) $30,000 d) $ -0Answer: a Question Title: Assessment (Multiple Choice) Question 27 Difficulty: Easy Learning Objective: 9 Indicate some problems with interim reporting and the authoritative position on the issue. Section Reference: 13.3 28. In January 2024, Cain Company paid $200,000 in property taxes on its plant for the calendar year 2024. Also in January 2024, Cain estimated that its year-end bonuses to executives for 2024 would be $800,000. What is the amount of expenses related to these two items that should be reflected in Cain's quarterly income statement for the three months ended June 30, 2024 (second quarter)? a) $ -0b) $250,000 c) $ 50,000 d) $200,000 Answer: b Question Title: Assessment (Multiple Choice) Question 28 Difficulty: Easy Learning Objective: 9 Indicate some problems with interim reporting and the authoritative position on the issue. Section Reference: 13.3

29. For interim financial reporting, a company's income tax provision for the second quarter of 2024 should be determined using the: a) statutory tax rate for 2024. b) effective tax rate expected to be applicable for the full year of 2024 as estimated at the end of the first quarter of 2024. c) effective tax rate expected to be applicable for the full year of 2024 as estimated at the end of the second quarter of 2024. d) effective tax rate expected to be applicable for the second quarter of 2024. Answer: c Question Title: Assessment (Multiple Choice) Question 29 Difficulty: Easy Learning Objective: 9 Indicate some problems with interim reporting and the authoritative position on the issue. Section Reference: 13.3

30. Which of the following reporting practices is permissible for interim financial reporting? a) Use of the gross profit method for interim inventory pricing. b) Use of the direct costing method for determining manufacturing inventories. c) Deferral of unplanned variances under a standard cost system until year-end. d) Deferral of inventory market declines until year-end. Answer: a Question Title: Assessment (Multiple Choice) Question 30 Difficulty: Easy Learning Objective: 9 Indicate some problems with interim reporting and the authoritative position on the issue. Section Reference: 13.3 31. Which of the following statements most accurately describes interim period tax expense? a) The best estimate of the annual tax rate times the ordinary income (loss) for the quarter. b) The best estimate of the annual tax rate times income (loss) for the year to date less tax expense (benefit) recognized in previous interim periods. c) Average tax rate for each quarter, including the current quarter, times the current income (loss). d) The previous year's actual effective tax rate times the current quarter's income. Answer: b Question Title: Assessment (Multiple Choice) Question 31 Difficulty: Medium Learning Objective: 9 Indicate some problems with interim reporting and the authoritative position on the issue. Section Reference: 13.3 32. The computation of a company's third quarter provision for income taxes should be based upon earnings: a) for the quarter at an expected annual effective income tax rate. b) for the quarter at the statutory rate. c) to date at an expected annual effective income tax rate less prior quarters' provisions. d) to date at the statutory rate less prior quarters' provisions. Answer: c Question Title: Assessment (Multiple Choice) Question 32 Difficulty: Medium Learning Objective: 9 Indicate some problems with interim reporting and the authoritative position on the issue. Section Reference: 13.3 33. Bjork, a calendar year company, has the following income before income tax provision and estimated effective annual income tax rates for the first three quarters of 2024: Income Before

Estimated Effective

First Second Third

Income Tax Quarter Provision $120,000 160,000 200,000

Annual Tax Rate at the End of Quarter 25% 25% 30%

Bjork's income tax provision in its interim income statement for the third quarter should be a) $74,000. b) $60,000. c) $50,000. d) $144,000. Answer: a Question Title: Assessment (Multiple Choice) Question 33 Difficulty: Hard Learning Objective: 9 Indicate some problems with interim reporting and the authoritative position on the issue. Section Reference: 13.3 34. An inventory loss from a market price decline occurred in the first quarter. The loss was not expected to be restored in the fiscal year. However, in the third quarter the inventory had a market price recovery that exceeded the market decline that occurred in the first quarter. For interim reporting, the dollar amount of net inventory should: a) decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of the market price recovery. b) decrease in the first quarter by the amount of the market price decline and increase in the third quarter by the amount of the decrease in the first quarter. c) not be affected in the first quarter and increase in the third quarter by the amount of the market price recovery that exceeded the amount of the market price decline. d) not be affected in either the first quarter or the third quarter. Answer: b Question Title: Assessment (Multiple Choice) Question 34 Difficulty: Medium Learning Objective: 9 Indicate some problems with interim reporting and the authoritative position on the issue. Section Reference: 13.3

35. Advertising costs may be accrued or deferred to provide an appropriate expense in each period for: a) Interim Reporting, Yes; Annual Reporting, No b) Interim Reporting, Yes; Annual Reporting, Yes c) Interim Reporting, No; Annual Reporting, No d) Interim Reporting, No; Annual Reporting, Yes Answer: b

Question Title: Assessment (Multiple Choice) Question 35 Difficulty: Medium Learning Objective: 9 Indicate some problems with interim reporting and the authoritative position on the issue. Section Reference: 13.3

Question Type: Essay

36. In ASC 280, the FASB requires all public companies to report a variety of information for reportable segments. Define a reportable segment and identify the information to be reported for each reportable segment. Answer: A reportable segment is a segment that has passed one of three 10% tests (combined revenues, reported profit/loss and assets) or has been identified as being reportable through other criteria (i.e. aggregation). The information reported includes information about (a) segment operating profit/loss; (b) segment assets, and (c) bases for measurement. In addition, a reconciliation of segment amounts to the consolidated amounts for revenue, profit/loss, assets and other significant items is presented. Enterprisewide disclosures regarding products or services, geographic areas, and major customers are also made. Question Title: Assessment (Essay) Question 36 Difficulty: Medium Learning Objective: 4 Define a reportable segment. Section Reference: 13.2

37. Publicly owned companies are usually required to file some type of quarterly (interim) report as part of the agreement with the stock exchanges that list their stock. Indicate two problems with interim reporting and GAAP’s position on this reporting. Answer: Problems associated with interim reporting include the seasonal nature of many industries’ operations that can cause wide fluctuations in revenues, expenses and net income from one interim period to another. In addition, the short time period available to determine interim results and the added cost of determining accurate figures for accruals and deferrals result in the use of a variety of estimation techniques, some of which proved to be highly inaccurate. GAAP (APB Opinion No. 28) supports the integral view for interim reporting. The APB stated that each interim period should be viewed primarily as an integral part of an annual period. Question Title: Assessment (Essay) Question 37 Difficulty: Medium Learning Objective: 9 Indicate some problems with interim reporting and the authoritative position on the issue. Section Reference: 13.3

Question Type: Problem

38. The following information is available for Pink Company for 2024: a. In early April Pink made major repairs to its equipment at a cost of $90,000. These repairs will benefit the remainder of 2024 operations. b. At the end of May, Pink sold machinery with a book value of $35,000 for $45,000. c. An inventory loss of $60,000 from market decline occurred in July. In the fourth quarter the inventory had a market value recovery that exceeded the market decline by $30,000. Required: Compute the amount of expense/loss that would appear in Pink Company's June 30, September 30, and December 31, 2024, quarterly financial statements. Answer: June 30 Major repairs $30,000 Gain on Sale (10,000) Inventory loss/(gain) ________ $20,000

Sept. 30 $30,000

Dec. 31 $30,000

60,000 $90,000

(60,000) $(30,000)

Question Title: Assessment (Problem) Question 13-1 Difficulty: Medium Learning Objective: 9 Indicate some problems with interim reporting and the authoritative position on the issue. Section Reference: 13.3

39. Stein Corporation's operations involve three industry segments, X, Y, and Z. During 2024, the operating profit (loss) of each segment was: Operating Segment Profit (Loss) X $ 600 Y 8,100 Z (6,300) Required: Determine which of the segments are reportable segments. Answer: Both segments Y and Z are reportable segments because the amount of their operating profit (loss) is more than 10% of $8,700 ($600 + 8,100) - the combined operating profit of segments that did not incur a loss. Any segment with an operating profit (loss) of $870 or more is a reportable segment. Question Title: Assessment (Problem) Question 13-2 Difficulty: Medium Learning Objective: 4 Define a reportable segment. Section Reference: 13.2

40. Walleye Industries operates in four different industries. Information concerning the operations of these industries for the year 2024 is: Revenue Industry Segment A B C D

Total $ 24,000 18,000 90,000 168,000 $300,000

Operating Intersegment Profit (Loss) $4,200 $ 2,700 2,200 (2,000) 14,000 3,600 -023,700 $28,000

Segment Assets $ 22,400 25,200 70,000 162,400 $280,000

Required: Complete the following schedule to determine which of the above segments must be treated as reportable segments. 10% Test For Segment Revenue Op. Profit (Loss) Segment Assets Reportable? A B C D Answer: Segment A B C D (1) (2) (3) (4) (5) (6)

10% Test For Revenue 8% (1) 6% (2) 30% (3) 56% (4) 24,000/300,000 18,000/300,000 90,000/300,000 168,000/300,000 2,700/30,000 (2,000)/30,000

Op. Profit (Loss) 9% (5) 7% (6) 12% (7) 79% (8) (7) (8) (9) (10) (11) (12)

Segment Assets 8% (9) 9% (10) 25% (11) 58% (12)

Reportable? No No Yes Yes

3,600/30,000 23,700/30,000 22,400/280,000 25,200/280,000 70,000/280,000 162,400/280,000

Question Title: Assessment (Problem) Question 13-3 Difficulty: Hard Learning Objective: 4 Define a reportable segment. Section Reference: 13.2

41. Morgan Company prepares quarterly financial statements. The following information is available concerning calendar year 2024:

Estimated full-year earnings Full-year permanent differences: Penalty for pollution Estimated dividend income exclusion Actual pretax earnings, 1/1/24 to 3/31/24 Nominal income tax rate

$3,000,000 150,000 60,000 480,000 40%

Required: Compute the income tax provision for the first quarter of 2024. Answer: Estimated pretax full-year income Add: Pollution penalty Less: Estimated dividend income inclusion Estimated full-year taxable income Estimated income tax payable ($3,090,000 × 0.40) Estimated effective tax rate ($1,236,000/$3,000,000) First quarter tax provision ($480,000 × 0.412)

$3,000,000 150,000 (60,000) $3,090,000 $1,236,000 41.2% $197.760

Question Title: Assessment (Problem) Question 13-4 Difficulty: Hard Learning Objective: 8 Describe current requirements for companies to report interim information. Section Reference: 13.3 42. XYZ Corporation has eight industry segments with sales, operating profit and loss, and identifiable assets at and for the year ended December 31, 2024, as follows:

Steel Auto Parts Coal Mine Textiles Paint Lumber Leisure Time Electronics Total

Sales to Unaffiliated Customers $1,350,000 1,200,000 600,000 530,000 1,120,000 710,000 690,000 600,000 $6,800,000

Sales to Affiliated Customers $150,000 --450,000 220,000 380,000 ------$1,200,000

Profit or (Loss)

Segment Assets

$265,000 450,000 (300,000) 150,000 300,000 (75,000) 110,000 300,000 $1,200,000

$2,250,000 1,430,000 1,200,000 750,000 1,050,000 600,000 450,000 670,000 $8,400,000

Required:

A. Identify the segments, which are reportable segments under one or more of the 10 percent revenue, operating profit, or assets tests.

B. After reportable segments are determined under the 10 percent tests, they must be reevaluated under a 75 percent revenue test before a final determination of reportable segments can be made. Under this 75 percent test, identify if any other segments may have to be reported. Answer: A.

Revenue Test – 10% ($6,800,000 + $1,200,000) = $700,000 800,000 Steel, Auto Parts, Coal Mine, Paint Operating Profit – 10% ($1,575,000) = $157,500 Steel, Auto Parts, Coal Mine, Paint, Electronics Segment Assets – 10% ($8,400,000) = $840,000 Steel, Auto Parts, Coal Mine, Paint

Reportable segments applying the 10% tests are: Steel, Auto Parts, Coal Mine, Paint and Electronics. B.

75% Revenue Test – 75% ($6,800,000) = $5,100,000 Since the 75% revenue test only applies to “Sales to Unaffiliated Customers” only, the five reportable segments from Part A only include $4,870,000 ($1,350,000 + $1,200,000 + $600,000 + $1,120,000 + $600,000) worth of sales. Because the 75% test is not met, one of the segments that did not qualify as a reportable segment under the previous tests must be included as a reportable segment.

Question Title: Assessment (Problem) Question 13-5 Difficulty: Hard Learning Objective: 4 Define a reportable segment. Section Reference: 13.2

43. Blink Company, which uses the FIFO inventory method, had 508,000 units in inventory at the beginning of the year at a FIFO cost per unit of $20. No purchases were made during the year. Quarterly sales information and end-of-quarter replacement cost figures follow: End-of- Quarter Quarter Unit Sales Replacement Cost 1 200,000 $17 2 60,000 18 3 85,000 13 4 61,000 18 The market decline in the first quarter was expected to be nontemporary. Declines in other quarters were expected to be permanent. Required: Determine cost of goods sold for the four quarters and verify the amounts by computing cost of goods sold using the lower-of-cost-or-market method applied on an annual basis. Answer: Cost of Goods Sold Computation

Quarter

Cumulative

1. Sold 200,000 units @ $20 Write down of ending inventory of 308,000 units to market (308,000 × [$20 – 17])

$4,000,000 924,000

4,924,000

2. Sold 60,000 units @ $17 1,020,000 Less write down recovery on ending inventory of 248,000 (248,000 × [$18 - $17]) 248,000

772,000

5,696,000

2,345,000

8,041,000

283,000

8,324,000

3. Sold 85,000 units @ $18 Write down of ending inventory of 163,000 units to market (163,000 × [$18 - $13])

1,530,000

4. Sold 61,000 units @ $13 Less write down recovery on ending inventory of 102,000 (102,000 × [$18 - $13])

793,000

815,000

510,000

Verification Units Sold During Year FIFO Cost per Unit 406,000 × $20 Add: Write down of ending inventory to the lower of cost or market (102,000 × [$20 - $18]) Total cost of goods sold for the year $8,324,000

Amount $8,120,000 204,000

Question Title: Assessment (Problem) Question 13-6 Difficulty: Hard Learning Objective: 8 Describe current requirements for companies to report interim information. Section Reference: 13.3

44. Itchy Company’s actual earnings for the first two quarters of 2024 and its estimate during each quarter of its annual earnings are: Actual first-quarter earnings Actual second-quarter earnings First-quarter estimate of annual earnings Second-quarter estimate of annual earnings

$ 800,000 1,020,000 2,700,000 2,830,000

Itchy Company estimated its permanent differences between accounting income and taxable income for 2024 as: Environmental violation penalties Dividend income exclusion

$ 45,000 320,000

These estimates did not change during the second quarter. The combined state and federal tax rate for Itchy Company for 2024 is 40%. Required: Prepare journal entries to record Itchy Company’s provisions for income taxes for each of the first two quarters of 2024.

Answer: First Quarter Estimated Annual Earnings Add: Environmental Violation Penalties

$2,700,000 45,000 2,745,000 (320,000) $2,425,000

Deduct: Dividend Income Exclusion Estimated Taxable Income Estimated Annual Income Tax Payable ($2,425,000 × 0.40)

970,000

Estimated Effective Combined Annual Tax Rate ($970,000 / $2,700,000)

35.9%

Income Tax Expense Income Tax Payable ($800,000 × 0.359)

287,200 287,200

Second Quarter Estimated Annual Earnings Less: Net Permanent Differences ($320,000 - $45,000) Estimated Taxable Income

$2,830,000 (275,000) $2,555,000

Estimated Annual Income Tax Payable (2,555,000 × 0.40)

1,022,000

Estimated Effective Combined Annual Tax Rate ($1,022,000/$2,830,000) Cumulative Income to Date ($800,000 + $1,020,000) Estimated Income Tax Rate: Cumulative Tax Provision Needed Tax Provision in 1st Quarter Tax Provision in 2nd Quarter Income Tax Expense Income Tax Payable

36.1% $1,820,000 0.361 657,020 (287,200) $ 369,820

369,820 369,820

Question Title: Assessment (Problem) Question 13-7 Difficulty: Hard Learning Objective: 8 Describe current requirements for companies to report interim information. Section Reference: 13.3

Package Title: Test Bank Questions Course Title: Advanced Accounting, 8e Chapter: Partnerships, Formation, Operation, and Ownership Changes Chapter Number: 14

Question Type: Multiple Choice

1. Which of the following is an advantage of a partnership? a) mutual agency b) limited life c) unlimited liability d) none of these Answer: d Question Title: Test Bank (Multiple Choice) Question 01 Difficulty: Medium Learning Objective: 1 Describe the characteristics of a general partnership, a limited partnership, and a joint venture. Section Reference: 14.2 2. A partnership in which one or more of the partners are general partners and one or more are not is called a(n) : a) joint venture. b) general partnership. c) limited partnership. d) unlimited partnership. Answer: c Question Title: Test Bank (Multiple Choice) Question 02 Difficulty: Easy Learning Objective: 1 Describe the characteristics of a general partnership, a limited partnership, and a joint venture. Section Reference: 14.3 3. The profit and loss sharing ratio should be: a) in the same ratio as the percentage interest owned by each partner. b) based on relative effort contributed to the firm by the partners. c) a weighted average of capital and effort contributions. d) based on any formula that the partners choose. Answer: d Question Title: Test Bank (Multiple Choice) Question 03 Difficulty: Easy Learning Objective: 2 List some important items to be included in the partnership agreement.

Section Reference: 14.4 4. In a partnership, interest on capital investment is accounted for as a(n) : a) return on investment. b) expense. c) allocation of net income. d) reduction of capital. Answer: c Question Title: Test Bank (Multiple Choice) Question 04 Difficulty: Medium Learning Objective: 4 Explain the purpose of the partners’ drawing accounts and capital accounts., 6 Describe some common agreements used to allocate partnership net income or loss., 7 Explain why salary allowances and interest allowances are used in allocating partnership profits and losses. Section Reference: 14.5 5. Bob and Fred form a partnership and agree to share profits in a 2 to 1 ratio. During the first year of operation, the partnership incurs a $20,000 loss. The partners should share the losses: a) based on their average capital balances. b) in a 2 to 1 ratio. c) equally. d) based on their ending capital balances. Answer: b Question Title: Test Bank (Multiple Choice) Question 05 Difficulty: Medium Learning Objective: 5 Prepare journal entries to form a partnership using the bonus and the goodwill methods. Section Reference: 14.5 6. The partnership of Abel and Caine was formed on February 28, 2024. At that date the following assets were invested:

Cash Merchandise Building Furniture and equipment

Abel $ 120,000 -0-0200,000

Caine $200,000 320,000 840,000 -0-

The building is subject to a mortgage loan of $280,000, which is to be assumed by the partnership. The partnership agreement provides that Abel and Caine share profits or losses 30% and 70%, respectively. Caine’s capital account at February 28, 2024, should be a) $1,080,000. b) $1,360,000. c) $1,176,000. d) $952,000.

Answer: a Question Title: Test Bank (Multiple Choice) Question 06 Difficulty: Easy Learning Objective: 5 Prepare journal entries to form a partnership using the bonus and the goodwill methods. Section Reference: 14.5 7. The following balance sheet information is for the partnership of Abele, Boule, and Cayman: Cash Other assets

$ 210,000 Liabilities 1,500,000 Abele, Capital (40%) Boule, Capital (40%) Cayman, Capital (20%) $1,710,000

$ 510,000 300,000 480,000 420,000 $1,710,000

Figures shown parenthetically reflect agreed profit and loss sharing percentages. If the assets are fairly valued on the above balance sheet and the partnership wishes to admit Dann as a new 1/5 partner without recording goodwill or bonus, Dann should invest cash or other assets of a) $427,500. b) $240,000. c) $300,000. d) $342,000. Answer: c Question Title: Test Bank (Multiple Choice) Question 07 Difficulty: Medium Learning Objective: 5 Prepare journal entries to form a partnership using the bonus and the goodwill methods. Section Reference: 14.5 8. The partnership agreement of Powell, Gaunt, and Holl allows Gaunt a bonus of 10% of income after the bonus, salaries of $30,000 per partner and interest of 6% on average capital balances of $120,000, $150,000, and $180,000 for Powell, Gaunt, and Holl, respectively. The amount of Gaunt’s bonus, assuming income before bonus, salaries, and interest of $315,000, is a) $18,000. b) $22,000. c) $19,800. d) $31,500. Answer: c Question Title: Test Bank (Multiple Choice) Question 08 Difficulty: Medium Learning Objective: 7 Explain why salary allowances and interest allowances are used in allocating partnership profits and losses. Section Reference: 14.5

9. Mack and Ruben are partners operating an electronics repair shop. For 2024, net income, after salaries expense of $150,000 was $50,000. Mack and Ruben have salary allowances of $90,000 and $60,000, respectively, and remaining profits and losses are shared 6:4. The division of salaries and profits in total to Mack and Ruben would be: a) $30,000 and $20,000 b) $50,000 and $-0c) $120,000 and $80,000 d) $25,000 and $25,000 Answer: c Question Title: Test Bank (Multiple Choice) Question 09 Difficulty: Easy Learning Objective: 7 Explain why salary allowances and interest allowances are used in allocating partnership profits and losses. Section Reference: 14.5

10. Robbie and Ruben are partners operating a portable toilet lease and maintenance operation. For 2024, net income was $50,000 (without taking into consideration the salary allowances). Robbie and Ruben have salary allowances of $90,000 and $60,000, respectively, and remaining profits and losses are shared 6:4. If their agreement specifies that salaries are allowed only to the extent of income, based on a prorata share of their salary allowances, the division of profits would be: a) $20,000 and $30,000 b) $50,000 and $-0c) $30,000 and $20,000 d) $25,000 and $25,000 Answer: c Question Title: Test Bank (Multiple Choice) Question 10 Difficulty: Easy Learning Objective: 7 Explain why salary allowances and interest allowances are used in allocating partnership profits and losses. Section Reference: 14.5

11. Letterman and Conan are partners who share profits and losses 3:7. The capital accounts on January 1, 2024, are $120,000 and $160,000, respectively. Leno is to be admitted as a partner with a one-fourth interest in the capital and profits and losses by investing $80,000. Goodwill is not to be recorded. The capital balances after admission should be: a) Letterman, $117,000; Conan, $153,000; Leno, $90,000 b) Letterman, $120,000; Conan, $160,000; Leno, $90,000

c) Letterman, $123,000; Conan, $160,000; Leno, $80,000 d) Letterman, $120,000; Conan, $167,000; Leno, $80,000 Answer: a Question Title: Test Bank (Multiple Choice) Question 11 Difficulty: Medium Learning Objective: 5 Prepare journal entries to form a partnership using the bonus and the goodwill methods. Section Reference: 14.5 12. The following balance sheet information is for the partnership of Professor, Mary Ann, and Skipper: Cash Other assets

$ 210,000 Liabilities 1,500,000 Professor, Capital (40%) Mary Ann, Capital (40%) Skipper, Capital (20%) $1,710,000

$ 510,000 300,000 480,000 420,000 $1,710,000

Figures shown parenthetically reflect agreed profit and loss sharing percentages. If the assets are fairly valued on the above balance sheet and the partnership wishes to admit Mrs. Howell as a new 1/5 partner without recording goodwill or bonus, Mrs. Howell should invest cash or other assets of a) $427,500. b) $240,000. c) $300,000. d) $342,000. Answer: c Question Title: Test Bank (Multiple Choice) Question 12 Difficulty: Medium Learning Objective: 5 Prepare journal entries to form a partnership using the bonus and the goodwill methods. Section Reference: 14.5 13. Garlic, Pepper, and Salt are partners in a plumbing service. The business reported net income of $108,000 for 2024. The partnership agreement provides that profits and losses are to be divided equally after Pepper receives a $60,000 salary, Salt receives a $24,000 salary, and each partner receives 10% interest on his beginning capital balance. Beginning capital balances were $40,000 for Garlic, $48,000 for Pepper, and $32,000 for Salt. Pepper’s share of partnership income for 2024 is: a) $68,800. b) $36,000. c) $31,200. d) $27,200. Answer: a Question Title: Test Bank (Multiple Choice) Question 13 Difficulty: Medium

Learning Objective: 7 Explain why salary allowances and interest allowances are used in allocating partnership profits and losses. Section Reference: 14.5 14. When a partner retires and withdraws assets in excess of his book value, the remaining partners absorb the excess: a) equally. b) in their profit-sharing ratio. c) based on their average capital balances. d) based on their ending capital balances. Answer: b Question Title: Test Bank (Multiple Choice) Question 14 Difficulty: Medium Learning Objective: 8 Describe the methods used to record partnership changes when a new partner is admitted or when a partner withdraws from the partnership. Section Reference: 14.8, 14.11 15. When the goodwill method is used to record the admission of a new partner, total partnership capital increases by an amount: a) equal to the new partner’s investment. b) greater than the new partner’s investment. c) less than the new partner’s investment. d) that may be more or less than the new partner’s investment. Answer: b Question Title: Test Bank (Multiple Choice) Question 15 Difficulty: Hard Learning Objective: 8 Describe the methods used to record partnership changes when a new partner is admitted or when a partner withdraws from the partnership. Section Reference: 14.8

16. The bonus and goodwill methods of recording the admission of a new partner will produce the same result if the: a) new partner’s profit-sharing ratio equals his capital interest b) old partners’ profit-sharing ratio in the new partnership is the same relatively as it was in the old partnership. c) both new partner’s profit-sharing ratio equals his capital interest and old partners’ profit-sharing ratio in the new partnership is the same relatively as it was in the old partnership are met d) none of these. Answer: c Question Title: Test Bank (Multiple Choice) Question 16 Difficulty: Hard

Learning Objective: 8 Describe the methods used to record partnership changes when a new partner is admitted or when a partner withdraws from the partnership. Section Reference: 14.8, 14.9 17. When the goodwill method is used and the book value acquired is less than the value of the assets invested, total implied capital is computed by: a) multiplying the new partner’s capital interest by the capital balances of existing partners. b) dividing the total capital balances of existing partners by their collective capital interest. c) dividing the new partner’s investment by his (her) capital interest. d) dividing the new partner’s investment by the existing partners’ collective capital interest. Answer: c Question Title: Test Bank (Multiple Choice) Question 17 Difficulty: Hard Learning Objective: 8 Describe the methods used to record partnership changes when a new partner is admitted or when a partner withdraws from the partnership. Section Reference: 14.8, 14.9

18. The following balance sheet information is for the partnership of Abel, Boule, and Cayman: Cash Other assets

$ 210,000 Liabilities 1,500,000 Abele, Capital (40%) Boule, Capital (40%) Cayman, Capital (20%) $1,710,000

$ 510,000 300,000 480,000 420,000 $1,710,000

Figures shown parenthetically reflect agreed profit and loss sharing percentages. If assets on the initial balance sheet are fairly valued, Abele and Boule consent and Dann pays Cayman $225,000 for his interest; the revised capital balances of the partners would be a) Abele, $315,000; Boule, $495,000; Dann, $450,000. b) Abele, $315,000; Boule, $495,000; Dann, $420,000. c) Abele, $300,000; Boule, $570,000; Dann, $450,000. d) Abele, $300,000; Boule, $480,000; Dann, $420,000. Answer: d Question Title: Test Bank (Multiple Choice) Question 18 Difficulty: Easy Learning Objective: 8 Describe the methods used to record partnership changes when a new partner is admitted or when a partner withdraws from the partnership. Section Reference: 14.9

19. Pink desires to purchase a one-fourth capital and profit and loss interest in the partnership of Brown, Greene, and Red. The three partners agree to sell Pink one-fourth of their respective capital and profit and loss interests in exchange for a total payment of $100,000. The payment is made directly to the

individual partners. The capital accounts and the respective percentage interests in profits and losses immediately before the sale to Pink follow

Brown Greene Red Total

Capital Accounts $168,000 104,000 48,000 $320,000

Percentage Interests in Profits and Losses 50% 35 15

All other assets and liabilities are fairly valued and implied goodwill is to be recorded prior to the acquisition by Pink. Immediately after Pink’s acquisition, what should be the capital balances of Brown, Greene, and Red, respectively? a) $126,000; $78,000; $36,000 b) $156,000; $99,000; $45,000 c) $178,000; $111,000; $51,000 d) $208,000; $132,000; $60,000 Answer: b Question Title: Test Bank (Multiple Choice) Question 19 Difficulty: Hard Learning Objective: 8 Describe the methods used to record partnership changes when a new partner is admitted or when a partner withdraws from the partnership., 9 Describe the rationale behind the goodwill method in accounting for changes in partnership membership. Section Reference: 14.8, 14.9

20. At December 31, 2024, Mick and Keith are partners with capital balances of $250,000 and $150,000, and they share profits and losses in the ratio of 2:1, respectively. On this date, Jumpin Jack invests $125,000 cash for a one-fifth interest in the capital and profit of the new partnership. The partners agree that the implied partnership goodwill is to be recorded simultaneously with the admission of Jumpin Jack. The total implied goodwill of the firm is: a) $25,000. b) $20,000. c) $45,000. d) $100,000. Answer: d Question Title: Test Bank (Multiple Choice) Question 20 Difficulty: Hard Learning Objective: 8 Describe the methods used to record partnership changes when a new partner is admitted or when a partner withdraws from the partnership. Section Reference: 14.8, 14.9

21. Shrek, Donkey, and Muffin are partners with capital balances of $135,000, $90,000, and $60,000, respectively. The partners share profits and losses equally. For an investment of $120,000 cash, Fiona is

to be admitted as a partner with a one-fourth interest in capital and profits. Based on this information, the amount of Fiona’s investment can best be justified by which of the following? a) Fiona will receive a bonus from the other partners upon his admission to the partnership. b) Assets of the partnership were overvalued immediately prior to Fiona’s investment. c) The book value of the partnership’s net assets were less than their fair value immediately prior to Fiona’s investment. d) Fiona is apparently bringing goodwill into the partnership and her capital account will be credited for the appropriate amount. Answer: c Question Title: Test Bank (Multiple Choice) Question 21 Difficulty: Easy Learning Objective: 8 Describe the methods used to record partnership changes when a new partner is admitted or when a partner withdraws from the partnership., 9 Describe the rationale behind the goodwill method in accounting for changes in partnership membership. Section Reference: 14.8, 14.9

22. The partnership of Gilligan, Skipper, and Ginger had total capital of $570,000 on December 31, 2024 as follows: Gilligan, Capital (30%) Skipper, Capital (45%) Ginger, Capital (25%) Total

$180,000 255,000 135,000 $570,000

Profit and loss sharing percentages are shown in parentheses. The partnership has no liabilities. If Mary Ann purchases a 25 percent interest from each of the old partners for a total payment of $270,000 directly to the old partners a) total partnership net assets can logically be revalued to $1,080,000 on the basis of the price paid by Mary Ann. b) the payment of Mary Ann does not constitute a basis for revaluation of partnership net assets because the capital and income interests of the old partnership were not aligned. c) total capital of the new partnership should be $760,000. d) total capital of the new partnership will be $840,000 assuming no revaluation. Answer: a Question Title: Test Bank (Multiple Choice) Question 22 Difficulty: Medium Learning Objective: 8 Describe the methods used to record partnership changes when a new partner is admitted or when a partner withdraws from the partnership., 9 Describe the rationale behind the goodwill method in accounting for changes in partnership membership. Section Reference: 14.8, 14.9 23. The partnership of Gilligan, Skipper, and Ginger had total capital of $570,000 on December 31, 2024 as follows:

Gilligan, Capital (30%) Skipper, Capital (45%) Ginger, Capital (25%) Total

$180,000 255,000 135,000 $570,000

Profit and loss sharing percentages are shown in parentheses. Assume that Mary Ann became a partner by investing $150,000 in the Gilligan, Skipper, and Ginger partnership for a 25 percent interest in capital and profits and that partnership net assets are not revalued. Mary Ann’s capital credit using the bonus method should be a) $180,000. b) $142,500. c) $150,000. d) $190,000. Answer: a Question Title: Test Bank (Multiple Choice) Question 23 Difficulty: Medium Learning Objective: 8 Describe the methods used to record partnership changes when a new partner is admitted or when a partner withdraws from the partnership., 9 Describe the rationale behind the goodwill method in accounting for changes in partnership membership. Section Reference: 14.8, 14.9

24. The partnership of Gilligan, Skipper, and Ginger had total capital of $570,000 on December 31, 2024 as follows: Gilligan, Capital (30%) Skipper, Capital (45%) Ginger, Capital (25%) Total

$180,000 255,000 135,000 $570,000

Profit and loss sharing percentages are shown in parentheses. Assume that Professor became a partner by investing $190,000 in the Gilligan, Skipper, and Ginger partnership for a 25 percent interest in the capital and profits, and the partnership assets are revalued. Under this assumption a) Professor’s capital credit will be $150,000. b) Gilligan’s capital will be increased to $147,000. c) total partnership capital after Professor’s admission to the partnership will be $600,000. d) net assets of the partnership will increase by $190,000, including Professor’s interest. Answer: d Question Title: Test Bank (Multiple Choice) Question 24 Difficulty: Medium Learning Objective: 8 Describe the methods used to record partnership changes when a new partner is admitted or when a partner withdraws from the partnership., 9 Describe the rationale behind the goodwill method in accounting for changes in partnership membership. Section Reference: 14.8, 14.9

25. As the result of a business combination, a) the goodwill is measured and recorded on the acquirer’s firm. b) the goodwill is split evenly among the firms. c) the goodwill is measured and recorded on the non-acquirer’s firm. d) goodwill is only recorded if it exceeds fair market value Answer: c Question Title: Test Bank (Multiple Choice) Question 25 Difficulty: Easy Learning Objective: 10 Differentiate between situations in which it is consistent with current GAAP to record goodwill in the event of a partnership change and those where it is not. Section Reference: 14.10 26. The balance sheet for the partnership of Nina, Pinta, and Santa Maria at January 1, 2024 follows. The partners share profits and losses in the ratio of 3:2:5, respectively. Assets at cost

$480,000

Liabilities Nina, capital Pinta, capital Santa Maria, capital

$135,000 75,000 120,000 150,000 $480,000

Nina is retiring from the partnership. By mutual agreement, the assets are to be adjusted to their fair value of $540,000 at January 1, 2024. Pinta and Santa Maria agree that the partnership will pay Nina $135,000 cash for hers her partnership interest. There is no goodwill is to be recorded. What is the balance of Pinta’s capital account after Nina’s retirement? a) $138,000 b) $108,000 c) $120,000 d) $132,000 Answer: c Question Title: Test Bank (Multiple Choice) Question 26 Difficulty: Medium Learning Objective: 8 Describe the methods used to record partnership changes when a new partner is admitted or when a partner withdraws from the partnership. Section Reference: 14.8, 14.9, 14.11 27. Donkey desires to purchase a one-fourth capital and profit and loss interest in the partnership of Shrek, Fiona, and Muffin. The three partners agree to sell Donkey one-fourth of their respective capital and profit and loss interests in exchange for a total payment of $125,000. The payment is made directly to the individual partners. The capital accounts and the respective percentage interests in profits and losses immediately before the sale to Donkey follow:

Shrek Fiona Muffin Total

Capital Accounts $210,000 130,000 60,000 $400,000

Percentage Interests in Profits and Losses 60% 25 15

All other assets and liabilities are fairly valued above. Immediately after Donkey’s acquisition, what should be the capital balances of Shrek, Fiona, and Muffin, respectively? a) $157,500; $97,500; $45,000 b) $195,000; $123,750; $56,250 c) $222,500; $138,750; $63,750 d) $260,000; $165,000; $75,000 Answer: b Question Title: Test Bank (Multiple Choice) Question 27 Difficulty: Hard Learning Objective: 8 Describe the methods used to record partnership changes when a new partner is admitted or when a partner withdraws from the partnership. Section Reference: 14.8, 14.9

28. The partnership of Gamma, Ginger, and Gert had total capital of $1,140,000 on December 31, 2024, as follows: Gamma, Capital (30%) Ginger, Capital (45%) Gert, Capital (25%) Total

$360,000 510,000 270,000 $1,140,000

Profit and loss sharing percentages are shown in parentheses. Assume that Grizelda became a partner by investing $300,000 in the Gamma, Ginger, and Gert partnership for a 25 percent interest in capital and profits and that partnership net assets are not revalued. Grizelda’s capital credit should be: a) $360,000. b) $285,000. c) $300,000. d) $380,000. Answer: a Question Title: Test Bank (Multiple Choice) Question 28 Difficulty: Easy Learning Objective: 8 Describe the methods used to record partnership changes when a new partner is admitted or when a partner withdraws from the partnership. Section Reference: 14.8, 14.9

29. The partnership of Ned, Fred, and Ted had total capital of $1,140,000 on December 31, 2024, as follows: Ned, Capital (30%) Fred, Capital (45%) Ted, Capital (25%) Total

$360,000 510,000 270,000 $1,140,000

Profit and loss sharing percentages are shown in parentheses. Assume that Ed became a partner by investing $300,000 in the Ned, Fred, and Ted partnership for a 25 percent interest in the capital and profits, and the partnership assets are revalued. Under this assumption: a) Ted’s capital credit will be $300,000. b) Ned’s capital will be increased to $394,000. c) total partnership capital after Ed’s admission to the partnership will be $1,200,000. d) net assets of the partnership will increase by $380,000 including Ed’s interest. Answer: c Question Title: Test Bank (Multiple Choice) Question 29 Difficulty: Easy Learning Objective: 8 Describe the methods used to record partnership changes when a new partner is admitted or when a partner withdraws from the partnership. Section Reference: 14.8, 14.9

Question Type: Essay

30. The principal types of partnerships are general partnerships, limited partnerships, and joint ventures. Describe the characteristics of each type of partnership. Answer: In a general partnership, each member is a general partner. There are no ―limited partners‖. The following are characteristics of a general partnership:  Mutual agency  Right to dispose of a partnership interest  Unlimited liability  Limited or uncertain life In a limited partnership, one or more of the partners are general partners and one or more are limited partners. While general partners manage the firm and are personally liable for obligations of the partnership, limited partners invest capital only and limit their liability for partnership obligations to the amount of their investment. In return, limited partners give up the right to participate in the management of the firm. A joint venture is an arrangement entered into by two or more parties to accomplish a single or limited purpose for the mutual benefit of the members of the group, often to earn a profit. The life of the joint venture is usually limited to that of the undertaking, which may be of short- or long-term duration. The relationship between the parties in the joint venture is generally governed by a written agreement. A

distinguishing characteristic of the agreement is that each joint venture participates directly or indirectly in the overall management of the resources. Accordingly, major decisions require the consent of the ownership group. Joint ventures are sometimes organized as corporations and sometimes organized as partnerships.

Question Title: Test Bank (Essay) Question 30 Difficulty: Medium Learning Objective: 1 Describe the characteristics of a general partnership, a limited partnership, and a joint venture. Section Reference: 14.3 31. There are two methods of recording changes in the membership of a partnership – the bonus method and the goodwill method. Describe these two methods of recording changes in partnership membership. Answer: Two methods are frequently used to record changes in partnership membership: 1. The bonus method. When this method is used, the assets of the partnership are increased by the amount of the assets invested by the partner being admitted. Any difference between the assets invested and the credit to the new partner’s capital account is adjusted to the capital accounts of the other partners involved in the negotiations. If a partner withdraws from a partnership, the partners may agree to settle his or her capital interest by permitting the withdrawal of partnership assets. If the bonus method is used to record the withdrawal, the difference between the recorded value of the assets withdrawn and the debit to the withdrawing partner’s capital account is adjusted to the capital accounts of the remaining partners. 2. The goodwill method. When this method is used, a new asset is recorded that is based on the difference between the value implied by the amount of consideration negotiated in the admission or withdrawal of a partner and the values reported in the partnership books. Question Title: Test Bank (Essay) Question 31 Difficulty: Hard Learning Objective: 5 Prepare journal entries to form a partnership using the bonus and the goodwill methods., 8 Describe the methods used to record partnership changes when a new partner is admitted or when a partner withdraws from the partnership. Section Reference: 14.5, 14.8

32. Portney, Grey, and Ross are partners with capital balances of $80,000, $200,000, and $120,000, respectively. Profits and losses are shared in a 3:2:1 ratio. Grey decided to withdraw and the partnership revalued its assets. The value of inventory was decreased by $20,000 and the value of land was increased by $50,000. Portney and Ross then agreed to pay Grey $230,000 for his withdrawal from the partnership. Required: Prepare the journal entry to record Grey’s withdrawal under the A. bonus method. B. full goodwill method. Answer: A. Grey, Capital $200,000 + ($30,000 × 2/6) Portney, Capital ($20,000 × 3/4) Ross, Capital ($20,000 × 1/4)

210,000 15,000 5,000

Cash B. Goodwill ($20,000 ÷ 2/6) Portney, Capital Grey, Capital Ross, Capital Grey, Capital Cash

230,000 60,000 30,000 20,000 10,000 230,000 230,000

Question Title: Test Bank (Problem) Question14-1 Difficulty: Medium Learning Objective: 9 Describe the rationale behind the goodwill method in accounting for changes in partnership membership. Section Reference: 14.11

33. Carter and Gore are partners in an automobile repair business. Their respective capital balances are $425,000 and $275,000, and they share profits in a 3:2 ratio. Because of growth in their repair business, they decide to admit a new partner. Bush is admitted to the partnership, after which Carter, Gore, and Bush agree to share profits in a 3:2:1 ratio. Required: Prepare the necessary journal entries to record the admission of Bush in each of the following independent situations: A. Bush invests $300,000 for a one-fourth capital interest, but will not accept a capital balance of less than his investment. B. Bush invests $150,000 for a one-fifth capital interest. The partners agree that assets and the firm as a whole should be revalued. C. Bush purchases a 20% capital interest from each partner. Carter receives $100,000 and Gore receives $50,000 directly from Bush. Answer: A. Goodwill [($300,000 ÷ .25) - $1,000,000] Carter, Capital ($200,000 × 3/5) Gore, Capital ($200,000 × 2/5) Cash

200,000 120,000 80,000 300,000

Bush, Capital

300,000

B. Cash Goodwill [($700,000 ÷ .80) - $850,000] Bush, Capital

150,000 25,000

C. Carter, Capital ($425,000 × .20) Gore, Capital ($275,000 × .20) Bush, Capital

85,000 55,000

175,000

140,000

Question Title: Test Bank (Problem) Question14-2 Difficulty: Medium Learning Objective: 8 Describe the methods used to record partnership changes when a new partner is admitted or when a partner withdraws from the partnership. Section Reference: 14.8, 14.9

34. Dante, Milton, and Cervantes formed a partnership and agreed to share profits in a 3:1:2 ratio after recognition of 5% interest on average capital balances and monthly salary allowances of $3,750 to Milton and $3,000 to Cervantes. Average capital balances were as follows: Dante Milton Cervantes

300,000 240,000 180,000

Required: Compute the net income (loss) allocated to each partner assuming the partnership incurred a $27,000 net loss. Answer: Salary Interest Residual Total

Dante --$15,000 (72,000) $(57,000)

Milton $45,000 12,000 (24,000) $33,000

Cervantes $ 36,000 9,000 (48,000) $ (3,000)

Total $ 81,000 36,000 (144,000) $(27,000)

Question Title: Test Bank (Problem) Question14-3 Difficulty: Medium Learning Objective: 7 Explain why salary allowances and interest allowances are used in allocating partnership profits and losses. Section Reference: 14.5

35. Rodgers and Michael formed a partnership on January 2, 2024. Michael invested $120,000 in cash. Rodgers invested land valued at $30,000, which he had purchased for $20,000 in 2012. In addition, Rodgers possessed superior managerial skills and agreed to manage the firm. The partners agreed to the following profit and loss allocation formula: a. Interest —8% on original capital investments. b. Salary — $5,000 a month to Rodgers. c. Bonus — Rodgers is to be allocated a bonus of 20% of net income after subtracting the bonus, interest, and salary. d. Remaining profit is to be divided equally. At the end of 2024 the partnership reported net income before interest, salaries, and bonus of $168,000. Required: Calculate the amount of bonus to be allocated to Rodgers.

Answer: B = Bonus to Rodgers B = 0.20(Net Income - interest - salary - bonus) B = 0.20($168,000 - [0.08($150,000)] - $60,000 – B) B = 0.20($96,000 - B) B = $19,200 - 0.20B 1.20B = $19,200 B = $16,000

Question Title: Test Bank (Problem) Question14-4 Difficulty: Medium Learning Objective: 7 Explain why salary allowances and interest allowances are used in allocating partnership profits and losses. Section Reference: 14.5

36. Joey and Rachel are partners whose capital balances are $400,000 and $300,000 and who share profits 3:2. Due to a shortage of cash, Joey and Rachel agree to admit Ross to the firm. Required: Prepare the journal entries required to record Ross’s admission under each of the following assumptions: (a) Ross invests $200,000 for a 1/4 interest. The total firm capital is to be $900,000. (b) Ross invests $300,000 for a 1/4 interest. Goodwill is to be recorded. (c) Ross invests $150,000 for a 1/5 interest. Goodwill is to be recorded. (d) Ross purchases a 1/4 interest in the firm, with 1/4 of the capital of each old partner transferred to the account of the new partner. Ross pays the partners cash of $250,000, which they divide between themselves. Answer: (a) Cash Joey, Capital ($25,000 × 0.60) Rachel, Capital ($25,000 × 0.40) Ross, Capital ($900,000 × 0.25)

200,000 15,000 10,000 225,000

(b) Implied goodwill - 1/4X = $300,000; X = $1,200,000 Goodwill - $1,200,000 - $1,000,000 = $200,000 Goodwill Joey, Capital Rachel, Capital

200,000

Cash

300,000

120,000 80,000

Ross, Capital

300,000

25,000 150,000

Ross, Capital

(d) Joey, Capital (1/4 of $400,000) Rachel, Capital (1/4 of $300,000) Ross, Capital

175,000

100,000 75,000 175,000

Question Title: Test Bank (Problem) Question14-5 Difficulty: Medium Learning Objective: 6 Describe some common agreements used to allocate partnership net income or loss., 7 Explain why salary allowances and interest allowances are used in allocating partnership profits and losses. Section Reference: 14.5 37. The partners in the ABC partnership have capital balances as follows: A. $70,000; B. $70,000 C. $105,000 Profits and losses are shared 30%, 20%, and 50%, respectively. On this date, C withdraws and the partners agree to pay him $140,000 out of partnership cash. Required: A. Prepare journal entries to show three acceptable methods of recording the withdrawal. (Tangible assets are already stated at values approximating their fair market values.) B. Which alternative would you recommend if you determined that the agreement to pay C $140,000 was not the result of arms length bargaining between C and the other partners? Why? Answer: A. 1) C, Capital A, Capital B, Capital Cash

105,000 21,000 14,000 140,000

2) Goodwill C, Capital

35,000

C, Capital Cash

140,000

35,000

140,000

3) 0.5X = $35,000 X = $70,000 Goodwill A, Capital B, Capital C, Capital

70,000

C, Capital Cash

140,000

21,000 14,000 35,000

140,000

B. The bonus method is more objective. That is, the bonus method does not require the allocation of a subjective value to goodwill. Since this is not an arm’s length transaction, there is no objective basis to revalue the firm as a whole.

Question Title: Test Bank (Problem) Question14-6 Difficulty: Hard Learning Objective: 8 Describe the methods used to record partnership changes when a new partner is admitted or when a partner withdraws from the partnership. Section Reference: 14.10

38. Agler, Bates and Colter are partners who share income in a 5:3:2 ratio. Colter, whose capital balance is $150,000, retires from the partnership. Required: Determine the amount paid to Colter under each of the following cases: (1) $50,000 is debited to Agler capital account; the bonus approach is used. (2) Goodwill of $60,000 is recorded; the partial goodwill approach is used. (3) $66,000 is credited to Bates’ capital account; the total goodwill approach is used. Answer: (1) Since a debit was made to Agler’s capital account, a bonus was paid to the retiring partner of $80,000 (5/8 goodwill = $50,000), resulting in a total payment to Colter of $230,000. The entry would be: Agler, Capital 50,000 Bates, Capital 30,000 Colter, Capital 150,000 Cash 230,000 (2) Under the partial goodwill approach, only the goodwill attributed to the retiring partner is recorded. Thus, the payment to Colter was $210,000 ($150,000 + $60,000). (3) Since $66,000 was credited, total goodwill of $220,000 ($66,000/0.3) is recorded. Colter is allocated $44,000 ($220,000 × 0.20). Thus, the payment to Colter was $194,000 ($150,000 + $44,000).

Question Title: Test Bank (Problem) Question14-7 Difficulty: Medium Learning Objective: 9 Describe the rationale behind the goodwill method in accounting for changes in partnership membership. Section Reference: 14.10 39. The partnership agreement of Sleeter, Frisco, and Kinney provides for annual distribution of profit and loss in the following sequence: – Frisco, the managing partner, receives a bonus of 10% of net income. – Each partner receives 5% interest on average capital investment. – Residual profit or loss is to be divided 4:2:4.

Average capital investments for 2024 were: Sleeter Frisco Kinney

$270,000 $180,000 $120,000

Required: A. Prepare a schedule to allocate net income, assuming operations for the year resulted in: 1.Net income of $75,000. 2. Net income of $15,000. 3. Net loss of $30,000. B. Prepare the journal entry to close the Income Summary account for each situation above. Answer: A. 1. Sleeter Bonus Interest Residual Total 2. Bonus Interest Residual Total

3. Bonus Interest Residual Total

Frisco $ --13,500 13,500 15,600 $29,100

Kinney $ 7,500 9,000 16,500 7,800 $24,300

$ --13,500 13,500 (6,000) $7,500

$1,500 9,000 10,500 (3,000) $7,500

$ ----13,500 9,000 13,500 9,000 (23,400) (11,700) $(9,000) <9,900>$(2,700)

Total --6,000 6,000 15,600 $21,600

$ 7,500 28,500 36,000 39,000 $75,000

--6,000 6,000 (6,000) -0-

$ 1,500 28,500 30,000 (15,000) $15,000

--6,000 6,000 (23,400) $(17,400)

--28,500 28,500 (58,500) $(30,000)

B. 1. Income Summary Sleeter, Capital Frisco, Capital Kinney, Capital

75,000

2. Income Summary Sleeter, Capital Frisco, Capital

15,000

3. Sleeter, Capital Frisco, Capital Kinney, Capital

9,900 2,700 17,400

29,100 24,300 21,600

7,500 7,500

Income Summary

30,000

Question Title: Test Bank (Problem) Question 14-8 Difficulty: Medium Learning Objective: 7 Explain why salary allowances and interest allowances are used in allocating partnership profits and losses. Section Reference: 14.5

Package Title: Test Bank Questions Course Title: Advanced Accounting, 8e Chapter: Partnership Liquidation Chapter Number: 15

Question Type: Multiple Choice

1. The first step in the liquidation process is to: a) convert noncash assets into cash. b) pay partnership creditors c) compute any net income (loss) up to the date of dissolution. d) allocate any gains or losses to the partners. Answer: c Question Title: Test Bank (Multiple Choice) Question 01 Difficulty: Easy Learning Objective: 1 Describe the steps used to distribute available partnership assets in liquidation under the Uniform Partnership Act (UPA). Section Reference: 15.1 2. If a partner with a debit capital balance during liquidation is personally solvent, the: a) partner must invest additional assets in the partnership. b) partner's debit balance will be allocated to the other partners. c) other partners will give the partner enough cash to absorb the debit balance. d) partnership will loan the partner enough cash to absorb the debit balance. Answer: a Question Title: Test Bank (Multiple Choice) Question 02 Difficulty: Easy Learning Objective: 2 List the order of priority for each class of creditors in partnership liquidation under the UPA. Section Reference: 15.1 3. Which of the following statements is correct? a) Personal creditors have first claim on partnership assets. b) Partnership creditors have first claim on partnership assets. c) Partnership creditors have first claim on personal assets. d) Partnership creditors have first claim on partnership assets; and partnership creditors have first claim on personal assets. Answer: b Question Title: Test Bank (Multiple Choice) Question 03 Difficulty: Easy

Learning Objective: 2 List the order of priority for each class of creditors in partnership liquidation under the UPA. Section Reference: 15.2 4. Under the Uniform Partnership Act: a) partnership creditors have first claim (Rank I) against the assets of an insolvent partnership. b) personal creditors of an individual partner have first claim (Rank I) against the personal assets of all partners. c) partners with credit capital balances share (Rank I) the personal assets of an insolvent partner that has a debit capital balance with personal creditors of that partner. d) personal creditors of the partners of an insolvent partnership share partnership assets on a pro rata basis (Rank I) with partnership creditors. Answer: a Question Title: Test Bank (Multiple Choice) Question 04 Difficulty: Easy Learning Objective: 2 List the order of priority for each class of creditors in partnership liquidation under the UPA. Section Reference: 15.2

5. The classification of assets into personal and partnership categories and recognition of rights of creditors belonging to these two different groups is referred to as _________ a) right of offset b) right to dissolve c) partnership liquidation d) marshaling of assets Answer: d Question Title: Test Bank (Multiple Choice) Question 05 Difficulty: Easy Learning Objective: 2 List the order of priority for each class of creditors in partnership liquidation under the UPA. Section Reference: 15.2 6. Gilligan, Skipper, and Professor are partners with a profit and loss ratio of 4:3:3. The partnership was liquidated and, prior to the liquidation process, the partnership balance sheet was as follows: GILLIGAN, SKIPPER, AND PROFESSOR Balance Sheet January 1, 2024 Assets Cash Other assets Total Assets

Liabilities and Equity $ 60,000 Gilligan, Capital $216,000 540,000 Skipper, Capital 240,000 Professor, Capital 144,000 $600,000 Total Liabilities & Equities $600,000

After the partnership was liquidated and the cash was distributed, Skipper received $96,000 in cash in full settlement of his interest. The liquidation loss must have been: a) $360,000 b) $144,000 c) $504,000 d) $480,000 Answer: d Question Title: Test Bank (Multiple Choice) Question 06 Difficulty: Hard Learning Objective: 3 Prepare a liquidation schedule to settle debts and allocate assets. Section Reference: 15.2

7. Offsetting a partner's loan balance against his debit capital balance is referred to as the: a) marshaling of assets. b) right of offset. c) allocation of assets. d) liquidation of assets. Answer: b Question Title: Test Bank (Multiple Choice) Question 07 Difficulty: Easy Learning Objective: 3 Prepare a liquidation schedule to settle debts and allocate assets. Section Reference: 15.3

8. Shrek, Donkey, and Fiona are partners in SDF and share profits and losses in the ratio of 5:3:2, respectively. The partnership has cash of $10,000 and noncash assets of $90,000 when they decide to liquidate. Liabilities at the time of liquidation are $40,000, including a note payable to Fiona of $5,000. The partner capital accounts are Shrek $40,000, Donkey $ 15,000 and Fiona $5,000. The non-cash assets of the partnership were sold for $26,000. The liabilities other than the note payable to Fiona are paid. Fiona is personally insolvent. Shrek and Donkey are not insolvent. Under the circumstances: a) Shrek will receive a distribution in liquidation of $8,000. b) Fiona will be required to contribute $2,800 to the partnership. c) Shrek will receive a distribution in liquidation of $6,250. d) Donkey will be required to contribute $4,200 to the partnership. Answer: c Question Title: Test Bank (Multiple Choice) Question 08 Difficulty: Hard

Learning Objective: 2 List the order of priority for each class of creditors in partnership liquidation under the UPA., 3 Prepare a liquidation schedule to settle debts and allocate assets. Section Reference: 15.3 9. The partnership of Larry, Moe, and Curly shares profits and losses 60%, 30%, and 10%, respectively. On January 1, 2024, the partners voted to dissolve the partnership, at which time the assets, liabilities, and capital balances were as follows: Assets Cash Other Assets

Liabilities and Capital $ 400,000 Accounts Payable 1,200,000 Larry, Capital Moe, Capital Curly, Capital $1,600,000 Total liabilities

Total assets

$ 580,000 440,000 380,000 200,000 $1,600,000

All of the partners are personally insolvent. Assume that all noncash assets are sold for $840,000 and all available cash is distributed in final liquidation of the partnership. Cash should be distributed to the partners as follows: a) Larry, $744,000; Moe, $372,000; Curly, $124,000. b) Larry, $440,000; Moe, $380,000; Curly, $200,000. c) Larry, $224,000; Moe, $272,000; Curly, $164,000. d) Larry, $396,000; Moe, $198,000; Curly, $66,000. Answer: c Question Title: Test Bank (Multiple Choice) Question 09 Difficulty: Hard Learning Objective: 3 Prepare a liquidation schedule to settle debts and allocate assets. Section Reference: 15.3

10. The partnership of Peter, Paul, and Mary share profits and losses in the ratio of 4:4:2, respectively. The partners voted to dissolve the partnership when its assets, liabilities, and capital were as follows: Assets Cash Other assets

$ 250,000 1,000,000 $1,250,000

Liabilities and Capital Liabilities $ 200,000 Peter, Capital 300,000 Paul, Capital 350,000 Mary, Capital 400,000 $1,250,000

The partnership will be liquidated over a prolonged period of time. As cash is available, it will be distributed to the partners. The first sale of noncash assets having a book value of $600,000 realized $475,000. How much cash should be distributed to each partner after this sale? a) Peter, $90,000; Paul, $140,000; Mary, $295,000 b) Peter, $210,000; Paul, $290,000; Mary, $145,000 c) Peter, $290,000; Paul, $210,000; Mary, $105,000 d) Peter, $150,000; Paul, $175,000; Mary, $200,000 Answer: a Question Title: Test Bank (Multiple Choice) Question 10 Difficulty: Hard Learning Objective: 3 Prepare a liquidation schedule to settle debts and allocate assets. Section Reference: 15.3

11. In a partnership liquidation the final cash distribution to the partners should be made in accordance with the: a) partners' profit and loss sharing ratio. b) balances of the partners' capital accounts. c) ratio of the capital contributions by the partners. d) ratio of capital contributions less withdrawals by the partners. Answer: b Question Title: Test Bank (Multiple Choice) Question 11 Difficulty: Easy Learning Objective: 3 Prepare a liquidation schedule to settle debts and allocate assets. Section Reference: 15.3

12. During the liquidation of the partnership of Karr, Rice, and Long. Karr accepts, in partial settlement of his interest, a machine with a cost to the partnership of $150,000, accumulated depreciation of $70,000, and a current fair value of $110,000. The partners share net income and loss equally. The net debit to Karr's account (including any gain or loss on disposal of the machine) is: a) $90,000. b) $100,000. c) $110,000. d) $150,000. Answer: b Question Title: Test Bank (Multiple Choice) Question 12 Difficulty: Medium Learning Objective: 3 Prepare a liquidation schedule to settle debts and allocate assets. Section Reference: 15.3

13. X, Y, and Z have capital balances of $90,000, $60,000, and $30,000, respectively. Profits are allocated 35% to X, 35% to Y, and 30% to Z. The partners have decided to dissolve and liquidate the partnership. After paying all creditors, the amount available for distribution is $60,000. X, Y, and Z are all personally solvent. Under the circumstances, Z will: a) receive $18,000. b) receive $30,000. c) personally have to contribute an additional $6,000. d) personally have to contribute an additional $36,000. Answer: c Question Title: Test Bank (Multiple Choice) Question 13 Difficulty: Hard Learning Objective: 3 Prepare a liquidation schedule to settle debts and allocate assets. Section Reference: 15.3

14. The ABC partnership has the following capital accounts on its books at December 31, 2024:

A, Capital B, Capital C, Capital

Credit $400,000 240,000 80,000

All liabilities have been liquidated and the cash balance is zero. None of the partners have personal assets in excess of his personal liabilities. The partners share profits and losses in the ratio of 3:2:5. If the noncash assets are sold for $400,000, the partners should receive as a final payment: a) A, $304,000; B, $176,000; C, $80,000 b) A, $256,000; B, $144,000; C, $-0c) A, $304,000; B, $176,000; C, $-0d) A, $120,000; B, $80,000; C, $200,000 Answer: b Question Title: Test Bank (Multiple Choice) Question 14 Difficulty: Hard Learning Objective: 3 Prepare a liquidation schedule to settle debts and allocate assets. Section Reference: 15.3 15. The partnership of Mick, Keith, and Charlie has been dissolved and is in the process of liquidation. On July 1, 2024, just before the second cash distribution, the assets and equities of the partnership along with residual profit sharing ratios were as follows: Assets Cash Receivables-net Inventories Equipment-net Total assets

$ 200,000 50,000 150,000 100,000 $ 500,000

Liabilities & Equities Liabilities $ 150,000 Mick, Capital 50% 100,000 Keith, Capital 30% 175,000 Charlie, Capital 20% 75,000 Total Lia & Equity 500,000

Assume that the available cash is distributed immediately, except for a $25,000 contingency fund that is withheld pending complete liquidation of the partnership. How much cash should be paid to each of the partners? a) Mick, $87,500; Keith, $52,500; Charlie, $35,000 b) Mick 12,500; Keith , 7,500; Charlie, 10,000 c) Mick - 0 -; Keith, 25,000; Charlie, - 0 d) Mick - 0 -; Keith, 15,000; Charlie, 10,000 Answer: c Question Title: Test Bank (Multiple Choice) Question 15 Difficulty: Hard Learning Objective: 3 Prepare a liquidation schedule to settle debts and allocate assets. Section Reference: 15.3

16. The partnership of Mick, Keith, and Charlie has been dissolved and is in the process of liquidation. On July 1, 2024, just before the second cash distribution, the assets and equities of the partnership along with residual profit sharing ratios were as follows: Assets Cash Receivables-net Inventories Equipment-net Total assets

$ 200,000 50,000 150,000 100,000 $ 500,000

Liabilities & Equities Liabilities $ Mick, Capital 50% Keith, Capital 30% Charlie, Capital 20% Total Lia & Equity

150,000 100,000 175,000 75,000 500,000

Assume that Mick takes equipment with a fair value of $40,000 and a book value of $50,000 in partial satisfaction of his equity in the partnership. If all the $200,000 cash is then distributed, the partners should receive: a) Mick, $100,000; Keith, $60,000; Charlie, $40,000 b) Mick, 25,000; Keith, 15,000; Charlie, 10,000 c) Mick, - 0; Keith, 45,000; Charlie, 5,000 d) - 0; Keith, 50,000; Charlie, - 0 Answer: d Question Title: Test Bank (Multiple Choice) Question 16 Difficulty: Hard Learning Objective: 3 Prepare a liquidation schedule to settle debts and allocate assets. Section Reference: 15.3

17. The partnership of Homer, Marge, and Bart share profits and losses in the ratio of 4:4:2, respectively. The partners voted to dissolve the partnership when its assets, liabilities, and capital were as follows: Assets

Liabilities and Equity

Cash Other assets

Total assets

$150,000 Liabilities 600,000 Homer, Capital Marge, Capital Bart, Capital $750,000 Total Lia & Equity

$120,000 180,000 210,000 240,000 $750,000

The partnership will be liquidated over a prolonged period of time. As cash is available, it will be distributed to the partners. The first sale of noncash assets having a book value of $360,000 realized $285,000. How much cash should be distributed to each partner after this sale? a) Homer, $54,000; Marge, $84,000; Bart, $177,000. b) Homer, $174,000; Marge, $174,000; Bart, $87,000. c) Homer, $126,000; Marge, $126,000; Bart, $63,000. d) Homer, $90,000; Marge, $105,000; Bart, $120,000. Answer: a Question Title: Test Bank (Multiple Choice) Question 17 Difficulty: Hard Learning Objective: 3 Prepare a liquidation schedule to settle debts and allocate assets., 4 Prepare a “safe payment approach” liquidation schedule., 5 Describe the four steps in the preparation of an advance plan for the distribution of cash in a partnership liquidation. Section Reference: 15.3, 15.4

18. A, B, and C have capital balances of $80,000, $80,000, and $40,000, respectively. Profits are allocated 40% to A, 40% to B and 20% to C. The partners have decided to dissolve and liquidate the partnership. After paying all creditors the amount available for distribution is $20,000. A, and B are personally solvent. C is personally insolvent. Under the circumstances, A and B will each: a) receive $10,000. b) receive $9,000. c) receive $8,000. d) receive $6,000. Answer: c Question Title: Test Bank (Multiple Choice) Question 18 Difficulty: Medium Learning Objective: 3 Prepare a liquidation schedule to settle debts and allocate assets. Section Reference: 15.3

19. The ABC partnership has the following capital accounts on its books at December 31, 2024: Credit A, Capital $200,000 B, Capital 120,000 C, Capital 40,000

20. The partnership of Stan, Kenney, and Cartman has been dissolved and is in the process of liquidation. On July 1, 2024, just before the second cash distribution, the assets and equities of the partnership along with residual profit sharing ratios were as follows: Assets Cash Receivables-net Inventories Equipment-net Total Assets

Liabilities and Equity $ 80,000 20,000 60,000 40,000 $200,000

Liabilities Stan, Capital 50% Kenney, Capital 30% Cartman, Capital 20% Total Lia & Equities

$ 60,000 40,000 70,000 30,000 $200,000

Assume that the available cash is distributed immediately, except for a $10,000 contingency fund that is withheld pending complete liquidation of the partnership. How much cash should be paid to each of the partners? a) Stan, $35,000; Kenney, $21,000; Cartman, $14,000 b) Stan, $5,000; Kenney, $3,000; Cartman, $4,000 c) Stan, $0; Kenney, $10,000; Cartman, $0 d) Stan, $0; Kenney, $6,000; Cartman, $4,000 Answer: c Question Title: Test Bank (Multiple Choice) Question 20 Difficulty: Hard Learning Objective: 3 Prepare a liquidation schedule to settle debts and allocate assets. Section Reference: 15.3

21. In an advance plan for installment distributions of cash to partners of a liquidating partnership, each partner's loss absorption potential is computed by: a) dividing each partner's capital account balance by the percentage of that partner's capital account balance to total partners' capital.

b) multiplying each partner's capital account balance by the percentage of that partner's capital account balance to total partners' capital. c) dividing the total of each partner's capital account less receivables from the partner plus payables to the partner by the partner's profit and loss percentage. d) some other method. Answer: c Question Title: Test Bank (Multiple Choice) Question 21 Difficulty: Medium Learning Objective: 3 Prepare a liquidation schedule to settle debts and allocate assets. Section Reference: 15.4 22. A schedule prepared each time cash is to be distributed is called a(n) : a) advance cash distribution schedule. b) marshaling of assets schedule. c) loss absorption potential schedule. d) safe payment schedule. Answer: d Question Title: Test Bank (Multiple Choice) Question 22 Difficulty: Easy Learning Objective: 4 Prepare a “safe payment approach” liquidation schedule. Section Reference: 15.4

23. An advance cash distribution plan is prepared: a) each time cash is distributed to partners in an installment liquidation. b) each time a partnership asset is sold in an installment liquidation. c) to determine the order and amount of cash each partner will receive as it becomes available for distribution. d) none of these. Answer: c Question Title: Test Bank (Multiple Choice) Question 23 Difficulty: Medium Learning Objective: 4 Prepare a “safe payment approach” liquidation schedule., 5 Describe the four steps in the preparation of an advance plan for the distribution of cash in a partnership liquidation. Section Reference: 15.4

24. The first step in preparing an advance cash distribution plan is to: a) determine the order in which partners are to participate in cash distributions. b) compute the amount of cash each partner is to receive as it becomes available for distribution. c) allocate any gains (losses) to the partners in their profit-sharing ratio. d) determine the net capital interest of each partner.

Answer: d Question Title: Test Bank (Multiple Choice) Question 24 Difficulty: Medium Learning Objective: 4 Prepare a “safe payment approach” liquidation schedule., 5 Describe the four steps in the preparation of an advance plan for the distribution of cash in a partnership liquidation. Section Reference: 15.4 25. The summarized balances of the accounts of MNO partnership on December 31, 2024, are as follows: Assets Cash Noncash

Total Assets

Liabilities and Capital $ 15,000 Liabilities $ 15,000 90,000 M, Capital 45,000 N, Capital 30,000 O, Capital 15,000 $105,000 Total Equities $105,000

The agreed upon profit/loss ratio is 50:40:10, respectively. Using the information given above, which one of the following amounts, if any, is the loss absorption potential of partner N as of December 31, 2024? a) $20,000 b) $35,000 c) $75,000 d) $120,000 Answer: c Question Title: Test Bank (Multiple Choice) Question 25 Difficulty: Hard Learning Objective: 3 Prepare a liquidation schedule to settle debts and allocate assets. Section Reference: 15.4 26. The summarized balances of the accounts of RST partnership on December 31, 2024, are as follows: Assets Cash Noncash

Total Assets

Liabilities and Equity $ 30,000 Liabilities $ 30,000 180,000 R, Capital 90,000 S, Capital 60,000 T, Capital 30,000 $210,000 Total Lia & Equities $210,000

Question Title: Test Bank (Multiple Choice) Question 26 Difficulty: Hard Learning Objective: 3 Prepare a liquidation schedule to settle debts and allocate assets. Section Reference: 15.4

Question Type: Essay

27. The Uniform Partnership Act specifies specific steps in distributing available partnership assets in liquidation. Describe the steps used to distribute partnership assets during the liquidation process. Answer: The first step in the liquidation process is to compute any net income/loss up to the date of dissolution. Any net income/loss is allocated to the partners according to their profit and loss agreement. In the next step, the assets that are not acceptable for distribution in their present form are converted into cash, and any gains/losses realized are allocated according to the profit and loss ratio. The last step is to distribute the available cash to creditors and partners. Question Title: Test Bank (Essay) Question 27 Difficulty: Easy Learning Objective: 1 Describe the steps used to distribute available partnership assets in liquidation under the Uniform Partnership Act (UPA). Section Reference: 15.1

28. An advance cash distribution plan specifies the order in which each partner will receive cash and the dollar amount each will receive as it becomes available for distribution. Identify the four steps in the preparation of an advance cash distribution plan. Answer: Steps in the preparation of an advance cash distribution plan include:  Determine the net capital interest of each partner by combining partners’ capital accounts with any loans to or receivables from the partners.  Determine the order in which the partners are to participate in cash distributions.  Compute the amount of cash each partner is to receive as it becomes available for distribution.  Prepare the cash distribution plan. Question Title: Test Bank (Essay) Question 28 Difficulty: Medium Learning Objective: 4 Prepare a “safe payment approach” liquidation schedule., 5 Describe the four steps in the preparation of an advance plan for the distribution of cash in a partnership liquidation. Section Reference: 15.4

Question Type: Problem

29. The NOR Partnership is being liquidated. A balance sheet prepared prior to liquidation is presented below:

Assets Cash Other Assets

$240,000 300,000

Total Assets

$540,000

Liabilities & Equities Liabilities $ 160,000 Rice, Loan 60,000 Nutt, Capital 180,000 Ohm, Capital 60,000 Rice, Capital 80,000 Total Equities $540,000

Nutt, Ohm, and Rice share profits and losses in a 40:40:20 ratio. All partners are personally insolvent. Required: A. Prepare the journal entries necessary to record the distribution of the available cash. B. Prepare the journal entries necessary to record the completion of the liquidation process, assuming the other assets are sold for $120,000. Answer: A. Net interest Potential loss–$300,000 Potential loss–$60,000 Cash distribution

Nutt $(180,000) 120,000 (60,000) 40,000 $(20,000)

Ohm $(60,000) 120,000 60,000 (60,000) $ -0-

Rice_ $(140,000) 60,000 (80,000) 20,000 $(60,000)

Liabilities Cash

160,000

Rice, Loan Nutt, Capital Cash

60,000 20,000

B. Cash Nutt, Capital ($180,000 × .40) Ohm, Capital ($180,000 × .40) Rice, Capital ($180,000 × .20) Other Assets

160,000

80,000

120,000 72,000 72,000 36,000 300,000

Nutt, Capital ($12,000 × [40/60]) Rice, Capital ($12,000 × [20/60]) Ohm, Capital ($72,000 - $60,000)

8,000 4,000

Nutt, Capital Rice, Capital Cash

80,000 40,000

Question Title: Test Bank (Problem) Question 15-1 Difficulty: Medium

12,000

120,000

Learning Objective: 3 Prepare a liquidation schedule to settle debts and allocate assets. Section Reference: 15.3

30. The trial balance for the ABC Partnership is as follows just before liquidation: OTHER ASSETS 625,000

CASH 180,000

BALL RECEIVABLE = 90,000

LIABILITIES 150,000

ADLER CAPITAL 420,000

BALL CAPITAL 270,000

CARL CAPITAL 180,000

Partners share profits a 50:30:20 ratio. Required: Prepare an advance cash distribution plan showing how available cash would be distributed. Answer: Net capital interest Profit-loss ratio Loss absorption potential Order of cash distribution

__Alder__ $420,000 / .50 $840,000 2

Profit-Loss Ratio Loss absorption potential Distribution to Cole Balances after distribution Distribution to Adams & Cole Balances after distribution

Profit-Loss Ratio Net capital interest Distribution to Cole Balances after distribution Distribution to Adams & Cole Balances after distribution Remainder of asset distributions

Order of Cash Distribution 1. First $150,000 2. Next $12,000 3. Next $168,000 4. Remainder

__Bell__ $180,000 / .30 $600,000 3

__Cone__ $180,000 / .20 $900,000 1

Loss Absorption Potential Alder Bell Cone .50 .30 .20 $840,000 $600,000 $900,000 60,000 840,000 600,000 840,000 240,000 240,000 $600,000 $600,000 $600,000

Alder .50 $420,000 420,000 _120,000 $300,000

Asset Distribution Bell Cone .30 .20 $180,000 $180,000 12,000 180,000 168,000 _ 48,000 $180,000 $120,000

.50

.30

Cash Distribution Plan Alder Liabilities .5 100% 71% 50%

.20

Bell .3

Cone .2

30%

100% 29% 20%

Question Title: Test Bank (Problem) Question 15-2 Difficulty: Hard Learning Objective: 4 Prepare a “safe payment approach” liquidation schedule., 5 Describe the four steps in the preparation of an advance plan for the distribution of cash in a partnership liquidation. Section Reference: 15.4

31. Lennon, Newman, and Ott operate the LNO Partnership. The partnership agreement provides that the partners share profits in the ratio of 40:40:20, respectively. Unable to satisfy the firm's debts, the partners decide to liquidate. Account balances just prior to the start of the liquidation process are as follows: Debit Credit Cash $ 90,000 Other Assets 330,000 Liabilities $165,000 Ott, Loan 36,000 Lennon, Capital 165,000 Newman, Capital 36,000 Ott, Capital 39,000 Ott, Drawing 21,000 _______ Totals $441,000 $441,000 During the first month of liquidation, other assets with a book value of $150,000 are sold for $165,000, and creditors are paid. In the following month unrecorded liabilities of $12,000 are discovered and assets carried on the books at a cost of $90,000 are sold for $36,000. During the third month the remaining other assets are sold for $42,000 and all available cash is distributed. Required: Prepare a schedule of partnership realization and liquidation. A safe distribution of cash is to be made at the end of the second and third months. The partners agreed to hold $30,000 in cash in reserve to provide for possible liquidation expenses and/or unrecorded liabilities. All of the partners are personally insolvent. Answer: Balances Sale of assets Distribute cash to creditors

CashAssets 90,000 165,000 255,000 (165,000) 90,000

= 330,000 (150,000) 180,000

90,000 36,000 126,000 (96,000) 30,000 42,000 72,000

180,000 (90,000) 90,000

72,000 (72,000) -0-

-0-

-0-__

180,000

Record liabilities Sale of assets Distribute cash Sale of assets

90,000 (90,000) -0-

Liabilities = (165,000) = (165,000) 165,000 = -0(12,000) = (12,000) (12,000) 12,000 -0-0-

Allocate Newman's deficit Distribute cash Balances

Balances Sale of assets

Lennon (165,000) (6,000) (171,000)

Capital Interest Newman = (36,000) = (6,000) (42,000) =

Ohm (54,000) (3,000) (57,000)

Distribute cash to creditors Record liabilities Sale of assets Distribute cash Sale of assets Allocate Newman's deficit Distribute cash Balances

Capital interest Potential loss plus cash reserve (120,000) Allocate potential deficit Cash distribution

(171,000) 4,800 (166,200) 21,600 (144,600) 75,000 (69,600) 19,200 (50,400) 2,400 (48,000) 48,000 -0-

(42,000) 4,800 (37,200) 21,600 (15,600)

-0-

(57,000) 2,400 (54,600) 10,800 (43,800) 9,000 (34,800) 9,600 (25,200) 1,200 (24,000) 24,000 -0-

Lennon (144,600)

Newman (15,600)

Ohm (43,800)

48,000 (96,600) (2/3) 14,400 (75,000)

48,000 32,400 (21,600) -0-

32,000 (19,800) (1/3) 10,800 ( 9,000)

(15,600) 19,200 3,600 (3,600) -0-

= =

Question Title: Test Bank (Problem) Question 15-3 Difficulty: Hard Learning Objective: 3 Prepare a liquidation schedule to settle debts and allocate assets., 4 Prepare a “safe payment approach” liquidation schedule., 5 Describe the four steps in the preparation of an advance plan for the distribution of cash in a partnership liquidation. Section Reference: 15.3, 15.4

32. Due to the fact that the partnership had been unprofitable for the past several years, A, B, C, and D decided to liquidate their partnership. The partners share profits and losses in the ratio of 40:30:20:10, respectively. The following balance sheet was prepared immediately before the liquidation process began: A B C D Partnership Balance Sheet Cash Other Assets

$ 100,000 350,000

Liabilities A, Capital B, Capital C, Capital D, Capital

$250,000 55,000 60,000 50,000 35,000

Total Assets

$450,000

Total Lia & Equities

$450,000

The personal status of each partner is as follows: Personal _Assets_ $165,000 100,000 180,000 60,000

A B C D

Personal Liabilities $ 120,000 140,000 160,000 70,000

The partnership's other assets are sold for $100,000 cash. The partnership operates in a state which has adopted the Uniform Partnership Act. Required: A. Complete the following schedule of partnership realization and liquidation. Assume that a partner makes additional contributions to the partnership when appropriate based on their individual status.

CASH $100,000

OTHER ASSETS $350,000

LIABILITIES $250,000

__A__ 55,000

__B__ 60,000

CAPITAL __C__ 50,000

__D__ 35,000

B.Complete the following schedule to show the total amount that will be paid to the personal creditors. From Personal _Assets_

Distribution from _Partnership_

Total Paid to Personal _Creditors_

A B C D Answer: A.

Account Balances Sale of Assets Allocated Debit Balance of B* Investment from C Investment from A Distribute Cash

Cash 100,000 100,000 200,000 200,000 10,000 45,000 255,000 (255,000) -0-

Other Assets = 350,000 = (350,000) -0= -0-

-0-

Liabilities (250,000) (250,000) (250,000)

(250,000) 250,000 -0-

-0-

Capital

Account Balances Sale of Assets

A .4 (55,000) 100,000

B .3 (60,000) 75,000

C .2 (50,000) 50,000

D .1 (35,000) 25,000

45,000

15,000

-0-

(10,000)

45,000

(15,000) -0-

10,000 10,000 (10,000)

5,000 (5,000)

(45,000) -0-

-0-

(5,000) 5,000 -0-

Allocate Debit Balance of B* Investment from C Investment from A Distribute Cash

*Allocate only to C and D, since A is able to contribute only $45,000 from personal assets. B.

From Personal Assets A B C D

120,000 100,000 160,000 60,000

Distribution from Partnership

Total Paid to Personal Creditors

5,000

120,000 100,000 160,000 65,000

Question Title: Test Bank (Problem) Question 15-4 Difficulty: Hard Learning Objective: 3 Prepare a liquidation schedule to settle debts and allocate assets. Section Reference: 15.4 33. A trial balance for the DEF partnership just prior to liquidation is given below:

Cash Noncash Assets Nonpartner Liabilities Dugan, Loan Dugan, Capital Elston, Capital Flynn, Capital Totals

Debit $ 75,000 750,000

$825,000

Credit

$240,000 75,000 225,000 153,000 132,000 $825,000

The partners share income and loss on the following basis: Dugan 50% Elston 30% Flynn 20% Required: Prepare an advance cash distribution plan for the partners. Answer: Dugan Capital balances Loan balances

Elston $225,000 75,000

Flynn $153,000

$132,000

Net capital interest Profit and loss ratio Loss absorption potential Order of cash distribution

Profit & loss ratio Loss absorption potential Net cap. interest Distrib. to Flynn (60,000 × .2)

153,000 / .3 $510,000 3

Loss Absorption Potential Dugan Elston Flynn .5 .3 .2 $600,000

$510,000

132,000 / .2 $660,000 1

Dugan .5

Asset Distribution Elston .3

Flynn .2

$300,000

$153,000

$132,000

300,000

153,000

12,000 120,000

$660,000 60,000

600,000 Distrib. to Dugan and Flynn (90,000 × .2) (90,000 × .5)

300,000 / .5 $600,000 2

510,000

90,000

600,000 90,000

18,000 $510,000

$510,000

Remainder

45,000 $255,000 .5

$153,000 .3

$102,000 .2

Cash Distribution Plan Order of cash distribution after creditors have been paid: Dugan First $12,000 Next $63,000 5/7 Remainder 50%

Elston

30%

Flynn 100% 2/7 20%

Question Title: Test Bank (Problem) Question 15-5 Difficulty: Hard Learning Objective: 3 Prepare a liquidation schedule to settle debts and allocate assets., 4 Prepare a “safe payment approach” liquidation schedule., 5 Describe the four steps in the preparation of an advance plan for the distribution of cash in a partnership liquidation. Section Reference: 15.4

34. David, Paul, and Burt are partners in a CPA firm sharing profits and losses in a ratio of 2:2:3, respectively. Immediately prior to liquidation, the following balance sheet was prepared: Assets Cash Noncash assets

$ 100,000 580,000

Total Assets

_______ $680,000

Liabilities & Equities Liabilities David, Capital Paul, Capital Burt, Capital Total Liabilities & Equities

$280,000 160,000 160,000 80,000 $680,000

Required: Assuming the noncash assets are sold for $300,000, determine the amount of cash to be distributed to each partner. Complete the worksheet and clearly indicate the amount of cash to be distributed to each partner in the spaces provided. No cash is available from any of the three partners.

Beginning Bal.

Cash 100,000

Noncash Assets 580,000

Cash 100,000 300,000 400,000 (280,000) 120,000

David Paul Assets Liabilities 580,000 280,000 (580,000) -0280,000 (280,000) -0-0-

Answer: Noncash Beginning Balance Sale of Assets Balances Pay Liabilities Balances Allocate deficit Balances

120,000

Liabilities 280,000

-0-

Cash payment to partners (120,000)

Balances

-0-

David Capital 160,000

Burt Capital 160,000 (80,000) 80,000

Paul Capital 160,000

Burt Capital 80,000

Capital Capital 160,000 80,000 (80,000) (120,000 80,000 (40,000)

80,000 (20,000) 60,000 (60,000) -0-

(40,000) 40,000 -0-0-

Question Title: Test Bank (Problem) Question 16-6 Difficulty: Hard Learning Objective: 3 Prepare a liquidation schedule to settle debts and allocate assets. Section Reference: 15.3 35. David, Paul, and Burt are partners in a CPA firm sharing profits and losses in a ratio of 2:2:3, respectively. Immediately prior to liquidation, the following balance sheet was prepared: Assets

Liabilities & Equities

Cash Noncash assets

$ 100,000 580,000

Total Assets

_______ $680,000

Liabilities David, Capital Paul, Capital Burt, Capital Total Liabilities & Equities

$280,000 160,000 160,000 80,000 $680,000

Required: Assuming the noncash assets are sold for $160,000, determine the amount of cash to be distributed to each partner assuming all partners are personally solvent. Complete the worksheet and clearly indicate the amount of cash to be distributed to each partner in the spaces provided.

Beginning Bal.

Cash 100,000

Noncash Assets 580,000

Cash 100,000 160,000 260,000

David Paul Assets Liabilities 580,000 280,000 (580,000) -0280,000

Answer: Noncash Beginning Balance Sale of Assets Balances

Liabilities 280,000

David Capital 160,000

Burt Capital 160,000 (120,000) 40,000

Paul Capital 160,000

Burt Capital 80,000

Capital Capital 160,000 80,000 (120,000) (180,000) 40,000 (100,000)

Cash payment from Burt 100,000 Balances 360,000 Pay Liabilities (280,000) Balances 80,000 Cash payment to partners (80,000) Balances -0-

-0-0-

280,000 (280,000) -0-

-0-

40,000

40,000 (40,000) -0-

100,000 -0-0-0-

Question Title: Test Bank (Problem) Question 15-7 Difficulty: Hard Learning Objective: 3 Prepare a liquidation schedule to settle debts and allocate assets. Section Reference: 15.3

36. The December 31, 2023, balance sheet of the Deng, Danielson, and Gibson partnership, along with the partners’ residual profit and loss sharing ratios, is summarized as follows: Assets Cash Receivables Inventories Other Assets Total Assets

$ 150,000 300,000 375,000 475,000 $1,300,000

Liabilities & Equities Accounts Payable $ 225,000 Loan from Danielson 50,000 Deng, Capital (20%) 250,000 Danielson, Capital (30%) 400,000 Gibson, Capital (50%) 375,000 Total Lia & Equities $1,300,000

The partners agree to liquidate their partnership as soon as possible after January 1, 2024 and to distribute all cash as it becomes available. Required: Prepare an advance cash distribution plan to show how cash will be distributed as it becomes available. Answer: Net capital interest Profit/Loss ratio Loss absorption potential Order of cash distribution

Deng $250,000 / .20 $1,250,000 2

Danielson $450,000 / .30 $1,500,000 1

Gibson $375,000 / .50 $750,000 3

Loss Absorption Potential Loss absorption potential Distribution to Danielson Balances Distribution to Deng & Danielson Balances

Deng $1,250,000 (250,000) $1,250,000 (500,000) $750,000

Danielson $1,500,000 ________ $1,250,000 (500,000) $ 750,000

Gibson $750,000 ________ $750,000 _ ______ $750,000

Deng $250,000

Danielson $450,000 __75,000

Gibson $375,000 ___ ___

Asset Distribution Net capital interest Distribution to Danielson

Balances Distribution to Deng & Danielson Balances

250,000 (100,000) $150,000

375,000 (150,000) $225,000

375,000 _______ $375,000

Remainder of asset distributions

0.20

0.30

0.50

Deng 0.20

Danielson __0.30__

Gibson __0.50__

40% 20%

100% 60% 30%

50%

Cash Distribution Plan

Order of Cash Distribution 1. First $225,000 2. Next $75,000 3. Next $250,000 4. Remainder

Liabilities 100%

Question Title: Test Bank (Problem) Question 15-8 Difficulty: Hard Learning Objective: 3 Prepare a liquidation schedule to settle debts and allocate assets., 4 Prepare a “safe payment approach” liquidation schedule., 5 Describe the four steps in the preparation of an advance plan for the distribution of cash in a partnership liquidation. Section Reference: 15.3, 15.4

Package Title: Test Bank Questions Course Title: Advanced Accounting, 8e Chapter: Introduction to Fund Accounting Chapter Number: 16

Question Type: Multiple Choice

1. Governmental units include all of the following EXCEPT: a) counties. b) school districts. c) industrial development districts. d) voluntary health and welfare organizations. Answer: d Question Title: Test Bank (Multiple Choice) Question 01 Difficulty: Easy Learning Objective: 1 Distinguish between a nonbusiness organization and a profit-oriented enterprise. Section Reference: 16.1

2. Organizations such as heart associations, mental health associations, family planning councils, and foundations for the blind are categorized as a) governmental units b) voluntary health and welfare organizations c) hospital and other health care providers d) trade associations Answer: b Question Title: Test Bank (Multiple Choice) Question 02 Difficulty: Medium Learning Objective: 1 Distinguish between a nonbusiness organization and a profit-oriented enterprise. Section Reference: 16.1 3. The GASB has the responsibility for establishing financial accounting standards for all of the following entities EXCEPT: a) state and local government entities. b) veterans hospitals. c) school districts. d) civic organizations. Answer: d Question Title: Test Bank (Multiple Choice) Question 03 Difficulty: Easy

Learning Objective: 1 Distinguish between a nonbusiness organization and a profit-oriented enterprise. Section Reference: 16.3 4. Which type of fund entities are used to account for the activities of nonbusiness organizations that are similar to those of business enterprises? a) Expendable fund entities b) Proprietary fund entities c) Budgetary fund entities d) Restricted fund entities Answer: b Question Title: Test Bank (Multiple Choice) Question 04 Difficulty: Easy Learning Objective: 2 Explain the role of fund accounting. Section Reference: 16.4

5. When budgeted expenditures are enacted into law, they are referred to as: a) estimated expenditures. b) encumbrances. c) appropriations. d) expenditures. Answer: c Question Title: Test Bank (Multiple Choice) Question 05 Difficulty: Easy Learning Objective: 3 Distinguish among the concepts of revenues, expenses, and expenditures as used in profit-oriented entities and as used for expendable fund entities. Section Reference: 16.4

6. The term used to describe the application of accounting to expendable fund entities is the: a) accrual method. b) cash method. c) modified cash method. d) modified accrual method. Answer: d Question Title: Test Bank (Multiple Choice) Question 06 Difficulty: Easy Learning Objective: 3 Distinguish among the concepts of revenues, expenses, and expenditures as used in profit-oriented entities and as used for expendable fund entities. Section Reference: 16.4

7. The entry to close appropriations, expenditures, and encumbrances accounts includes a debit to: a) Appropriations. b) Expenditures. c) Encumbrances. d) both Appropriations and Encumbrances. Answer: a Question Title: Test Bank (Multiple Choice) Question 07 Difficulty: Medium Learning Objective: 3 Distinguish among the concepts of revenues, expenses, and expenditures as used in profit-oriented entities and as used for expendable fund entities. Section Reference: 16.4

8. The entry to record the receipt of office equipment previously encumbered includes a debit to: a) Office Equipment. b) Encumbrances. c) Reserve for Encumbrances. d) both Office Equipment and Reserve for Encumbrances. Answer: c Question Title: Test Bank (Multiple Choice) Question 08 Difficulty: Medium Learning Objective: 3 Distinguish among the concepts of revenues, expenses, and expenditures as used in profit-oriented entities and as used for expendable fund entities., 8 Understand the role of a general fund. Section Reference: 16.4, 16.5 9. The two basic statements prepared for expendable fund entities are a balance sheet and a(n): a) income statement. b) statement of revenue. c) statement of expenditures and encumbrances. d) none of these. Answer: d Question Title: Test Bank (Multiple Choice) Question 09 Difficulty: Medium Learning Objective: 2 Explain the role of fund accounting., 3 Distinguish among the concepts of revenues, expenses, and expenditures as used in profit-oriented entities and as used for expendable fund entities. Section Reference: 16.5

10. If a credit was made to the fund balance in the process of recording a budget for a governmental unit, it can be assumed that: a) estimated expenses exceed actual revenues.

b) actual expenses exceed estimated expenses. c) estimated revenues exceed appropriations. d) appropriations exceed estimated revenues. Answer: c Question Title: Test Bank (Multiple Choice) Question 10 Difficulty: Easy Learning Objective: 6 Describe the critical events in the use of financial resources of an expendable fund. Section Reference: 16.4, 16.5

11. The "reserve for encumbrances—prior year" account represents amounts recorded by a governmental unit for: a) anticipated expenditures in the next year. b) expenditures for which purchase orders were made in the prior year but disbursement will be in the current year. c) excess expenditures in the prior year that will be offset against the current-year budgeted amounts. d) unanticipated expenditures of the prior year that become evident in the current year. Answer: b Question Title: Test Bank (Multiple Choice) Question 11 Difficulty: Medium Learning Objective: 6 Describe the critical events in the use of financial resources of an expendable fund. Section Reference: 16.5

12. Which of the following requires the use of the encumbrance system? a) Capital projects fund b) Debt service fund c) Internal service fund d) Enterprise fund Answer: a Question Title: Test Bank (Multiple Choice) Question 12 Difficulty: Easy Learning Objective: 5 Understand the classification of expenditures and other resource outflows for fund accounting., 6 Describe the critical events in the use of financial resources of an expendable fund., 7 Explain how capital expenditures are recorded in an expendable fund. Section Reference: 16.4

13. The following related entries were recorded in sequence in the general fund of a municipality: 1. 2.

Encumbrances Reserve for Encumbrances Reserve for Encumbrances

15,000 15,000 15,000

Encumbrances Expenditures Vouchers Payable

15,000 15,350 15,350

The sequence of entries indicates that: a) an adverse event was foreseen and a reserve of $15,000 was created; later the reserve was cancelled and a liability for the item was acknowledged. b) an order was placed for goods or services estimated to cost $15,000; the actual cost was $15,350 for which a liability was acknowledged upon receipt. c) encumbrances were anticipated but later failed to materialize and were reversed. A liability of $15,350 was incurred. d) the first entry was erroneous and was reversed; a liability of $15,350 was acknowledged. Answer: b Question Title: Test Bank (Multiple Choice) Question 13 Difficulty: Medium Learning Objective: 3 Distinguish among the concepts of revenues, expenses, and expenditures as used in profit-oriented entities and as used for expendable fund entities., 4 Understand the classification of revenues and other resource inflows for fund accounting., 5 Understand the classification of expenditures and other resource outflows for fund accounting., 6 Describe the critical events in the use of financial resources of an expendable fund. Section Reference: 16.4

14. The reserve for encumbrances account is properly considered to be a: a) current liability if payable within a year; otherwise, long-term debt. b) fixed liability. c) floating debt. d) reservation of the fund's equity. Answer: d Question Title: Test Bank (Multiple Choice) Question 14 Difficulty: Easy Learning Objective: 3 Distinguish among the concepts of revenues, expenses, and expenditures as used in profit-oriented entities and as used for expendable fund entities., 4 Understand the classification of revenues and other resource inflows for fund accounting., 5 Understand the classification of expenditures and other resource outflows for fund accounting., 6 Describe the critical events in the use of financial resources of an expendable fund. Section Reference: 16.4

15. Customers' meter deposits which cannot be spent for normal operating purposes would be classified as restricted cash in the balance sheet of which fund? a) Internal Service b) Trust c) Agency

d) Enterprise Answer: d Question Title: Test Bank (Multiple Choice) Question 15 Difficulty: Medium Learning Objective: 2 Explain the role of fund accounting., 3 Distinguish among the concepts of revenues, expenses, and expenditures as used in profit-oriented entities and as used for expendable fund entities. Section Reference: 16.4, 16.5

16. What journal entry should be made at the end of the fiscal year to close out encumbrances for which goods and services have not been received? a) Debit reserve for encumbrance and credit encumbrances. b) Debit reserve for encumbrances and credit fund balance. c) Debit fund balance and credit encumbrances. d) Debit encumbrances and credit reserve for encumbrances. Answer: c Question Title: Test Bank (Multiple Choice) Question 16 Difficulty: Medium Learning Objective: 6 Describe the critical events in the use of financial resources of an expendable fund. Section Reference: 16.4, 16.5 17. The expendable fund entity’s measurement focus is on: a) the flow of current financial resources. b) the flow of economic resources. c) the flow of revenue, expenses, and net income. d) none of these. Answer: a Question Title: Test Bank (Multiple Choice) Question 17 Difficulty: Medium Learning Objective: 3 Distinguish among the concepts of revenues, expenses, and expenditures as used in profit-oriented entities and as used for expendable fund entities. Section Reference: 16.4

18. Under GASB Statement No. 34, a government-wide financial statement should include a: a) statement of revenues & and expenses. b) statement of activities. c) statement of financial position. d) notes to the financial statements. Answer: b

Question Title: Test Bank (Multiple Choice) Question 18 Difficulty: Easy Learning Objective: 2 Explain the role of fund accounting., 3 Distinguish among the concepts of revenues, expenses, and expenditures as used in profit-oriented entities and as used for expendable fund entities., 5 Understand the classification of expenditures and other resource outflows for fund accounting., 7 Explain how capital expenditures are recorded in an expendable fund. Section Reference: 16.5

19. In accounting for expendable fund entities, revenue is ordinarily not recognized until: a) it can be objectively measured and it is available to finance expenditures of the current period. b) a transaction has taken place and the earnings process is complete. c) it has been received in cash. d) none of these. Answer: a Question Title: Test Bank (Multiple Choice) Question 19 Difficulty: Medium Learning Objective: 3 Distinguish among the concepts of revenues, expenses, and expenditures as used in profit-oriented entities and as used for expendable fund entities. Section Reference: 16.4

20. The Expenditures account of a governmental unit is debited when: a) the budget is recorded. b) supplies are ordered. c) supplies encumbered are received. d) the supplies invoice is paid. Answer: c Question Title: Test Bank (Multiple Choice) Question 20 Difficulty: Easy Learning Objective: 2 Explain the role of fund accounting., 6 Describe the critical events in the use of financial resources of an expendable fund. Section Reference: 16.4, 16.5

21. Under GASB Statement No. 34, which of the following statements about the methods of accounting of inventories is correct: a) Only the consumption method is acceptable for fund purposes. b) Only the consumption method is acceptable in the government-wide statements. c) Both methods are acceptable in the government-wide statements. d) Only the purchase method is acceptable in the government-wide statements. Answer: b

Question Title: Test Bank (Multiple Choice) Question 21 Difficulty: Easy Learning Objective: 9 Contrast the consumption and the purchases methods of accounting for inventories (and other prepaid items). Section Reference: 16.6 Question Type: Essay

22. Fund entities may be classified as expendable fund entities, fiduciary fund entities, and proprietary fund entities. Distinguish among expendable, fiduciary, and proprietary fund entities. Answer: Expendable fund entities consist of net financial resources that are dedicated to a specified use. Separate expendable fund entities are established based on the purpose for which financial resources may/must be used. Fiduciary fund entities are used to follow the activities in which the government acts as an agent for resources that belong to others such as employee pension plans. Fiduciary funds include both trust and agency funds. Proprietary fund entities are used to account for the activities of nonbusiness organizations that are similar to those of business enterprises, such as a municipal water utility. Question Title: Test Bank (Essay) Question 22 Difficulty: Medium Learning Objective: 3 Distinguish among the concepts of revenues, expenses, and expenditures as used in profit-oriented entities and as used for expendable fund entities. Section Reference: 16.4

23. Expendable fund entities prepare closing entries at the end of each period just as business enterprises do. Describe the necessary closing entries for expendable funds. Answer: Closing entries for expendable funds include the following:  Revenues are closed against estimated revenues with the difference recorded in unreserved fund balance.  Appropriations are closed against expenditures and encumbrances. Any difference is recorded in the unreserved fund balance.  Expenditures made for prior years’ encumbrances are closed against the reserve for encumbrances for that specific year.  Transfers to and from other funds are closed against Fund Balance- Unassigned. Question Title: Test Bank (Essay) Question 23 Difficulty: Medium Learning Objective: 5 Understand the classification of expenditures and other resource outflows for fund accounting., 6 Describe the critical events in the use of financial resources of an expendable fund. Section Reference: 16.5 24. The GASB issued an exposure draft, ―Accounting Changes and Error Corrections-an amendment of GASB Statement No. 62‖. List the categories of changes included in the proposal.

Answer: On May 20, 2021, the GASB issued an exposure draft, ―Accounting Changes and Error Corrections-an amendment of GASB Statement No. 62‖. The proposal distinguishes between a change in accounting principle versus a change in estimate. The proposal defines the following categories of changes:    

Changes in accounting principles Changes in accounting estimates. Changes involving the reporting entity. Corrections of errors in previously issued financial statements.

Question Title: Test Bank (Essay) Question 24 Difficulty: Medium Learning Objective: 9 Recent proposal by the GASB Section Reference: 16.7 Question Type: Problem

25. During 2023, the City of Party Beach was involved in the following transactions: 1. A budget consisting of estimated revenues of $1,500,000 and appropriations for expenditures of $1,550,000 was approved by the city council. 2. Statements of property tax assessments totaling $1,100,000 were mailed to property owners. Experience indicates that 2% of assessed taxes will be uncollectible. 3. Equipment costing $85,000 was purchased, and old equipment was sold for $15,000 at the end of its estimated useful life. 4. The city manager signed a contract to purchase a machine costing $25,000. 5. The city received a statement from the state indicating that the city's portion of the state sales tax is $50,000. 6. The machine ordered in (4) above is delivered and accepted. The invoice in the amount of $26,000 was approved for payment. Required: Prepare the journal entries needed to account for the preceding transactions. Answer: 1. Estimated Revenue Unreserved Fund Balance Appropriations 2. Property Tax Receivable Estimated Uncollectible Prop. Taxes Revenue 3. Expenditures

1,500,000 50,000 1,550,000 1,100,000 22,000 1,078,000 85,000

Cash

85,000

Cash

15,000 Revenue

15,000

4. Encumbrances Reserve for Encumbrances

25,000

5. Due from State Revenue

50,000

6. Reserve for Encumbrances Encumbrances

25,000

Expenditures Vouchers Payable

26,000

25,000

50,000

25,000

26,000

Question Title: Test Bank (Problem) Question 16-1 Difficulty: Medium Learning Objective: 6 Describe the critical events in the use of financial resources of an expendable fund. Section Reference: 16.4, 16.5

26. On December 31, 2017, the following account balances, among others, were included in the preclosing trial balance of the General Fund of the City of Springfield. Estimated Revenue Expenditures Encumbrances Expenditures—2016 Reserve for Encumbrances (1) Appropriations Revenue Reserve for Supplies Inventory (2) Supplies Inventory Unreserved Fund Balance

$2,960,000 1,950,000 530,000 300,000 830,000 2,850,000 3,220,000 600,000 600,000 300,000

(1) The balance in this account was $270,000 on January 1, 2017. Purchase orders outstanding on December 2017 total $530,000. (2) Supplies on hand on December 31, 2017, amount to $380,000. Required: 1. What was the balance in the Unreserved Fund Balance account on December 31, 2016? What was the total Fund Balance on December 31, 2016? 2. Prepare the necessary adjusting and closing entries for the year ended December 31, 2017. Springfield uses the purchase method to account for supplies. Answer:

Unreserved fund balance per trial balance Add: Appropriations Less: Estimated Revenues Unreserved fund balance as of December 31, 2016

$ 300,000 2,850,000 (2,960,000) $ 190,000

Unreserved fund balance as of December 31, 2016 Reserve for encumbrances – 12/31/10 Reserve for supplies inventory Total fund balance – 12/31/10

$ 190,000 270,000 600,000 $1,060,000

2. Adjusting and Closing Entries Revenue Estimated Revenue Unreserved Fund Balance

3,220,000 2,960,000 260,000

Reserve for Supplies Inventory Supplies Inventory

220,000

Unreserved Fund Balance Reserve for Encumbrances Expenditures – 2016

30,000 270,000

Appropriations Expenditures Encumbrances Unreserved Fund Balance

220,000

300,000 2,850,000 1,950,000 530,000 370,000

Question Title: Test Bank (Problem) Question 16-2 Difficulty: Medium Learning Objective: 6 Describe the critical events in the use of financial resources of an expendable fund. Section Reference: 16.4, 16.5

27. The trial balance for the General Fund of the City of Logan as of December 31, 2022, is presented below: CITY OF LOGAN The General Fund Adjusted Trial Balance December 31, 2022

Cash Property Tax Receivable Estimated Uncollectible Taxes Due from Trust Fund Vouchers Payable Reserve for Encumbrances Unreserved Fund Balance

Debit $216,000 31,000

Credit

$ 80,000 41,000

$288,000

55,000 20,000 205,000 $288,000

Transactions for the year ended December 31, 2023 are summarized as follows: 1. The City Council adopted a budget for the year with estimated revenue of $720,000 and appropriations of $710,000. 2. Property taxes in the amount of $495,000 were levied for the current year. It is estimated that $20,000 of the taxes levied will prove to be uncollectible. 3. Proceeds from the sale of equipment in the amount of $32,000 were received by the General Fund. The equipment was purchased four years ago with resources of the General Fund at a cost of $200,000. On the date it was purchased, it was estimated that the equipment had a useful life of six years. 4. Licenses and fees in the amount of $90,000 were collected. 5. The total amount of encumbrances against fund resources for the year was $595,000. 6. Vouchers in the amount of $445,000 were authorized for payment. This was $11,000 less than the amount originally encumbered for these purchases. 7. An invoice in the amount of $19,000 was received for goods ordered in 2022. The invoice was approved for payment. 8. Property taxes in the amount of $425,000 were collected. 9. Vouchers in the amount of $385,000 were paid. 10. Forty-one thousand dollars was transferred to the General Fund from the Trust Fund. 11. The City Council authorized the write-off of $15,000 in uncollected property taxes. Required: 1. Prepare entries, in general journal form, to record the transactions for the year ended December 31, 2023. 2. Prepare the necessary closing entries for the year ending December 31, 2023. Answer: 1. Journal Entries 1. Estimated Revenue Appropriations Unreserved Fund Balance

720,000 710,000 10,000

2. Property Tax Receivable Estimated Uncollectible Taxes Revenue

495,000

3. Cash

32,000

20,000 475,000

Revenue 4. Cash

32,000 90,000

Revenue

90,000

5. Encumbrances Reserve for Encumbrances

595,000

6. Expenditures Vouchers Payable Reserve for Encumbrances Encumbrances

445,000

7. Expenditures – 2022 Vouchers Payable

19,000

8. Cash

425,000

595,000

445,000 456,000 456,000

19,000

Property Tax Receivable

425,000

9. Vouchers Payable Cash

385,000

10. Cash

41,000

385,000

Due from Trust Fund

41,000

11. Estimated Uncollectible Taxes Property Tax Receivable

15,000 15,000

2. Closing Entries 1. Revenue Unreserved Fund Balance Estimated Revenue

597,000 123,000 720,000

2. Reserve for Encumbrances – 2022 Expenditures – 2022 Unreserved Fund Balance

20,000

3. Appropriations Expenditures Encumbrances Unreserved Fund Balance

710,000

19,000 1,000

445,000 139,000 126,000

Question Title: Test Bank (Problem) Question 16-3 Difficulty: Hard Learning Objective: 6 Describe the critical events in the use of financial resources of an expendable fund. Section Reference: 16.4, 16.5

28. The following information regarding the fiscal year ended June 30, 2023, was drawn from the accounts and records of the Johnson County general fund: Revenues and other asset inflows: Property taxes Licenses and permits State grants Collection of interfund advance to other fund

$6,000,000 750,000 150,000 80,000

Proceeds from sale of equipment Expenditures and other asset outflows: General government Public safety Judicial system Health Equipment purchases Payment to debt service fund to cover future debt service on general government bonds Total fund balance, July 1, 2022

40,000

$2,250,000 1,130,000 600,000 900,000 370,000 570,000 $1,200,000

Required: Prepare a statement of revenues, expenditures, and changes in fund balance for the Johnson County general fund for the year ended June 30, 2023. Answer: Johnson County General Fund Statement of Revenues, Expenditures, and Changes in Fund Balance For the Year Ended June 30, 2023 Revenues: Property taxes Licenses and permits State grants Total revenues

$6,000,000 750,000 150,000 $6,900,000

Expenditures: General government Public safety Judicial system Health Equipment purchases Total expenditures

2,250,000 1,130,000 600,000 900,000 370,000 5,250,000

Excess of revenues over expenditures Other financing sources (uses): Operating transfers out-debt service fund Special items: Proceeds from sale of equipment Net change in fund balance Fund Balance-beginning Fund Balance-ending

1,650,000 (570,000) 40,000 1,120,000 1,200,000 $2,320,000

Question Title: Test Bank (Problem) Question 16-4 Difficulty: Medium Learning Objective: 6 Describe the critical events in the use of financial resources of an expendable fund. Section Reference: 16.4, 16.5

29. The unadjusted trial balance for the general fund of the City of Hog’s Breath at June 30, 2023, is as follows: Debits Cash Due from agency fund Encumbrances Estimated revenues Expenditures Property taxes receivable

$170,000 25,000 120,000 800,000 610,000 110,000

Credits Allowance for uncollectible taxes Appropriations Unreserved fund balance Reserve for encumbrances Revenues Vouchers payable

8,000 790,000 30,000 60,000 840,000 107,000

Supplies on hand at June 30, 2023, totaled $8,000. The $120,000 encumbrance relates to equipment ordered but not received by fiscal year-end. Required: Prepare a balance sheet for the general fund of the City of Hog’s Breath at June 30, 2023. Answer: City of Hog’s Breath General Fund Balance Sheet June 30, 2023 Assets: Cash Property taxes receivable (net of estimated uncollectible taxes of $8,000) Due from other funds Supplies Total assets

$170,000 102,000 25,000 8,000 $ 305,000

Liabilities and Fund Balance: Vouchers payable Fund balance unreserved Reserve for encumbrances Reserve for inventory Total fund balance Total liabilities and fund balance

130,000 60,000 8,000

Computation of Unreserved Fund Balance: Pre-closing balance Add:

$ 30,000

107,000

198,000 $305,000

Revenues Appropriations Deduct: Expenditures Encumbrances Estimated revenues Post-closing balance

840,000 790,000 <610,000> <120,000> < 800,000> $130,000

Question Title: Test Bank (Problem) Question 16-5 Difficulty: Hard Learning Objective: 6 Describe the critical events in the use of financial resources of an expendable fund. Section Reference: 16.4, 16.5

30. At the beginning of 2023, the City of Mauer reported an Unreserved Fund Balance of $890,000 and a supplies inventory balance of $280,000. During the year, Mauer purchased $360,000 in supplies and used $350,000 worth. The city will report a reserve for supplies inventory. Required: a. Prepare the journal entries needed to account for the supplies under the consumption method. b. Prepare the necessary journal entries under the purchases method. c. What would the December 31, 2023, balance in the Unreserved Fund Balance be under the consumption method, assuming that the only transactions of the fund are those involving the supplies? Answer: A. Expenditures Cash

360,000 360,000

Inventory Expenditures

8,000

Unreserved Fund Balance Reserve for Supplies Inventory

8,000

Expenditures Cash Inventory Reserve for Supplies Inventory 1/1 Balance Use of Supplies Setting up of Reserve 12/31 Unreserved Fund Balance

8,000

8,000 360,000 360,000 8,000 8,000 $890,000 (350,000) (8,000) $532,000

Question Title: Test Bank (Problem) Question 16-6 Difficulty: Medium Learning Objective: 9 Contrast the consumption and the purchases methods of accounting for inventories (and other prepaid items). Section Reference: 16.6

31. The following account balances, among others, were included in the preclosing trial balance of the General Fund of the City of Baxter on December 31, 2017. Appropriations Cash Due from Other Funds Due to Other Funds Encumbrances Estimated Revenue Expenditures Expenditures – 2016 Reserve for Encumbrances Reserve for Encumbrances – 2016 Revenue Taxes Receivable Transfers from Other Funds Transfers to Other Funds Unreserved Fund Balance Vouchers Payable

$2,350,000 180,000 170,000 70,000 250,000 2,480,000 2,010,000 200,000 250,000 210,000 2,400,000 400,000 250,000 350,000 280,000 270,000

Required: a. Prepare the necessary closing entries on December 31, 2017. b. Calculate the amount of both the unreserved fund balance and the total fund balance in the balance sheet (1) on December 31, 2016, and (2) on December 31, 2017. Answer: Closing Entries 1. Unreserved Fund Balance Revenue Estimated Revenue 2.

80,000 2,400,000 2,480,000

Reserve for Encumbrances – 2016 Expenditures – 2016 Unreserved Fund Balance

210,000

Appropriations Expenditures Encumbrances Unreserved Fund Balance

2,350,000

Transfers from Other Funds Unreserved Fund Balance Transfers to Other Funds

250,000 100,000

200,000 10,000

2,010,000 250,000 90,000

350,000

Budget entry on January 1, 2017 Estimated Revenues Appropriations Unreserved Fund Balance

2,480,000 2,350,000 130,000

Unreserved fund balance per 12/31/11 14 preclosing trial balance Less credit to unreserved fund balance on 1/1/1114 from budget entry Unreserved fund balance on 12/31/10 13 Reserve for encumbrances 12/31/10 13 Total fund balance per balance sheet 12/31/10 13

$ 280,000 <130,000> 150,000 210,000 $ 360,000

Unreserved fund balance per 12/31/1114 pre-closing trial balance Closing entries ($10,000 + $90,000 - $80,000 - $100,000) Unreserved fund balance 12/31/11 14 Reserve for encumbrances 12/31/11 14 Total fund balance per balance sheet 12/31/11 14

$280,000 (80,000) 200,000 250,000 $450,000

Question Title: Test Bank (Problem) Question 16-7 Difficulty: Hard Learning Objective: 6 Describe the critical events in the use of financial resources of an expendable fund. Section Reference: 16.4, 16.5

Package Title: Test Bank Questions Course Title: Advanced Accounting, 8e Chapter: Introduction to Accounting for State and Local Governmental Units Chapter Number: 17

Question Type: Multiple Choice

1. For state and local government units, the full accrual basis of accounting should be used for what type of fund? a) Special revenue b) General c) Debt service d) Internal service Answer: d Question Title: Test Bank (Multiple Choice) Question 01 Difficulty: Easy Learning Objective: 2 Describe the broad categories of government fund entities., 7 Distinguish proprietary funds from government funds. Section Reference: 17.Introduction

2. The highest level of priority of pronouncements that a government entity should look to for accounting and reporting guidance is: a) GASB Technical Bulletins. b) GASB Concepts Statements. c) AICPA Industry Accounting Guides. d) GASB Statements. Answer: d Question Title: Test Bank (Multiple Choice) Question 02 Difficulty: Easy Learning Objective: 1 Identify the issues involved in developing standards for nonprofit organizations. Section Reference: 17.1

3. What is the underlying reason a governmental unit uses separate funds to account for its transactions? a) Governmental units are so large that it would be unduly cumbersome to account for all transactions as a single unit. b) Because of the diverse nature of the services offered and legal provisions regarding activities of a governmental unit, it is necessary to segregate activities by functional nature. c) Generally accepted accounting principles require that nonbusiness entities report on a funds basis. d) Many activities carried on by governmental units are short-lived and their inclusion in a general set of accounts could cause undue probability of error and omission.

Answer: b Question Title: Test Bank (Multiple Choice) Question 03 Difficulty: Easy Learning Objective: 1 Identify the issues involved in developing standards for nonprofit organizations., 2 Describe the broad categories of government fund entities. Section Reference: 17.1, 17.2

4. Which of the following funds would account for operations that are financed and operated in a manner similar to private business enterprises? a) Debt Service Fund b) Enterprise Fund c) Internal Service Fund d) Special Revenue Fund Answer: b Question Title: Test Bank (Multiple Choice) Question 04 Difficulty: Easy Learning Objective: 2 Describe the broad categories of government fund entities., 7 Distinguish proprietary funds from government funds. Section Reference: 17.2, 17.4

5. All of the following are Governmental (Expendable) Fund Entities EXCEPT the: a) Capital Projects Fund. b) Debt Service Fund. c) Internal Service Fund. d) Special Revenue Fund. Answer: c Question Title: Test Bank (Multiple Choice) Question 05 Difficulty: Easy Learning Objective: 2 Describe the broad categories of government fund entities. Section Reference: 17.2

6. The activities of a municipal airport should be accounted for in the: a) General Fund. b) Internal Service Fund. c) Special Revenue Fund. d) Enterprise Fund. Answer: d

Question Title: Test Bank (Multiple Choice) Question 06 Difficulty: Easy Learning Objective: 2 Describe the broad categories of government fund entities., 7 Distinguish proprietary funds from government funds. Section Reference: 17.2, 17.4

7. Fixed assets and noncurrent liabilities are accounted for in the records of: a) governmental funds b) expendable funds c) proprietary funds d) both governmental and expendable funds. Answer: c Question Title: Test Bank (Multiple Choice) Question 07 Difficulty: Medium Learning Objective: 2 Describe the broad categories of government fund entities., 7 Distinguish proprietary funds from government funds. Section Reference: 17.2

8. The liability for general obligation long-term debt is reported in the: a) Debt Service Fund. b) Capital Projects Fund. c) Enterprise Fund. d) none of these. Answer: d Question Title: Test Bank (Multiple Choice) Question 08 Difficulty: Medium Learning Objective: 8 Describe where capital assets and long-term obligations are reported in government financial statements. Section Reference: 17.3

9. The activities of a central computer facility should be accounted for in the: a) General Fund. b) Internal Service Fund. c) Enterprise Fund. d) Capital Projects Fund. Answer: b Question Title: Test Bank (Multiple Choice) Question 09 Difficulty: Easy

Learning Objective: 2 Describe the broad categories of government fund entities., 7 Distinguish proprietary funds from government funds. Section Reference: 17.3

10. Encumbrances would NOT appear in which fund? a) General b) Enterprise c) Capital projects d) Special revenue Answer: b Question Title: Test Bank (Multiple Choice) Question 10 Difficulty: Easy Learning Objective: 2 Describe the broad categories of government fund entities., 7 Distinguish proprietary funds from government funds. Section Reference: 17.3

11. Which type of fund can be either expendable or nonexpendable? a) Debt service b) Enterprise c) Trust d) Special revenues Answer: c Question Title: Test Bank (Multiple Choice) Question 11 Difficulty: Medium Learning Objective: 2 Describe the broad categories of government fund entities., 6 Explain the use of a permanent fund. Section Reference: 17.2

12. Which of the following funds frequently does NOT have a fund balance? a) General fund b) Agency fund c) Special revenue fund d) Capital projects fund Answer: b Question Title: Test Bank (Multiple Choice) Question 12 Difficulty: Easy Learning Objective: 2 Describe the broad categories of government fund entities., 7 Distinguish proprietary funds from government funds. Section Reference: 17.2, 17.5

13. A city should record depreciation as an expense in its: a) general fund and enterprise fund. b) internal service fund and general fund. c) enterprise fund and internal service fund. d) enterprise fund and capital projects fund. Answer: c Question Title: Test Bank (Multiple Choice) Question 13 Difficulty: Easy Learning Objective: 2 Describe the broad categories of government fund entities, 7 Distinguish proprietary funds from government funds. Section Reference: 17.2

14. Part of the general obligation bond proceeds from a new issuance was used to pay for the cost of a new city hall as soon as construction was completed. The remainder of the proceeds was transferred to repay the debt. Entries are needed to record these transactions in the: a) general fund and capital projects fund. b) general fund and debt-service fund. c) trust fund and debt-service fund. d) debt-service fund and capital projects fund. Answer: d Question Title: Test Bank (Multiple Choice) Question 14 Difficulty: Medium Learning Objective: 2 Describe the broad categories of government fund entities., 4 Explain the use of a capital projects fund., 5 Describe the purpose of a debt service fund. Section Reference: 17.2, 17.3

15. One of the differences between accounting for a governmental unit and a commercial unit is that a governmental unit should: a) not record depreciation expense in any of its funds. b) always establish and maintain complete self-balancing accounts for each fund. c) use only the cash basis of accounting. d) use only the modified accrual basis of accounting. Answer: b Question Title: Test Bank (Multiple Choice) Question 15 Difficulty: Easy Learning Objective: 1 Identify the issues involved in developing standards for nonprofit organizations., 2 Describe the broad categories of government fund entities. Section Reference: 17.3

16. When a truck is received by a governmental unit, it should be recorded in the General Fund as a(n): a) appropriation. b) encumbrance. c) expenditure. d) fixed asset. Answer: c Question Title: Test Bank (Multiple Choice) Question 16 Difficulty: Easy Learning Objective: 1 Identify the issues involved in developing standards for nonprofit organizations., 2 Describe the broad categories of government fund entities. Section Reference: 17.3

17. Which of the following should be accrued as revenues by the general fund of a local government? a) Sales tax held by the state which will be remitted to the local government: b) Parking meter revenues c) Sales tax collected by merchants d) Income taxes currently due Answer: a Question Title: Test Bank (Multiple Choice) Question 17 Difficulty: Medium Learning Objective: 2 Describe the broad categories of government fund entities., 3 Distinguish between a general fund and a special revenue fund. Section Reference: 17.2, 17.3

18. Which of the following funds of a governmental unit recognizes revenues and expenditures under the same basis of accounting as the general fund? a) Debt service b) Enterprise c) Internal service d) Nonexpendable trust Answer: a Question Title: Test Bank (Multiple Choice) Question 18 Difficulty: Medium Learning Objective: 2 Describe the broad categories of government fund entities., 3 Distinguish between a general fund and a special revenue fund. Section Reference: 17.2, 17.3

19. With a revolving loan fund, a) the interest that is collected increases the funds available for future loans. b) the interest earned is invested in the stock market. c) the interest earned can be used for future loans only after the principal doubles. d) a new loan cannot be made until a previous loan has been completely paid off. Answer: a Question Title: Test Bank (Multiple Choice) Question 19 Difficulty: Medium Learning Objective: 2 Describe the broad categories of government fund entities., 3 Distinguish between a general fund and a special revenue fund. Section Reference: 17.3 20. Which of the following is NOT a budgetary account? a) Appropriations b) Estimated Revenues c) Encumbrances d) Reserve for Encumbrances Answer: d Question Title: Test Bank (Multiple Choice) Question 20 Difficulty: Hard Learning Objective: 2 Describe the broad categories of government fund entities., 3 Distinguish between a general fund and a special revenue fund. Section Reference: 17.3

21. Internal Service Fund billings to government departments for services rendered is an example of interfund: a) reimbursements. b) transfers. c) services provided and used. d) loans. Answer: c Question Title: Test Bank (Multiple Choice) Question 21 Difficulty: Easy Learning Objective: 11 Describe the types of interfund activities. Section Reference: 17. Summary

22. It is proper to recognize revenues or expenditures resulting from which of the following classifications of interfund activity?

a) Interfund loans and interfund transfers b) Interfund services provided/used and interfund reimbursements c) Interfund reimbursements and interfund loans d) Interfund services provided/used and interfund transfers Answer: b Question Title: Test Bank (Multiple Choice) Question 22 Difficulty: Medium Learning Objective: 11 Describe the types of interfund activities. Section Reference: 17.Summary 23. Repayments from the funds responsible for a particular expenditure to the funds that initially paid for them are interfund: a) loans. b) services provided and used. c) transfers. d) reimbursements. Answer: d Question Title: Test Bank (Multiple Choice) Question 23 Difficulty: Easy Learning Objective: 11 Describe the types of interfund activities. Section Reference: 17.Summary

24. A nonrecurring contribution from the General Fund to the Enterprise Fund is an example of an interfund: a) reimbursement. b) transfer. c) services provided and used. d) loan. Answer: b Question Title: Test Bank (Multiple Choice) Question 24 Difficulty: Easy Learning Objective: 11 Describe the types of interfund activities. Section Reference: 17.Summary

25. An interfund transfer should be reported in a governmental fund operating statement as a(n): a) due from (to) other funds b) other financing source (use) c) revenue or expenditure d) none of these

Answer: b Question Title: Test Bank (Multiple Choice) Question 25 Difficulty: Medium Learning Objective: 11 Describe the types of interfund activities. Section Reference: 17.8, 17.Summary

Question Type: Essay 26. There are eleven categories of government fund entities that fall under three subheadings. What are the subheadings of government fund entities? What are the main characteristics that set these three subheadings apart? Answer: Governmental funds report on current period resources and focus on inflows, outflows, and unexpended financial resources. They are designed to determine compliance with legal provisions specifying how revenues are raised and resources spent. Proprietary funds are used to account for the business-type activities of the government. The reporting focused on the determination of operating income, changes in net assets, financial position, and cash flows. Fiduciary funds account for assets held by the government for others and these funds cannot be used to support the government’s own programs. The reporting focuses on net assets and changes in net assets. Question Title: Test Bank (Essay) Question 26 Difficulty: Medium Learning Objective: 2 Describe the broad categories of government fund entities. Section Reference: 17.2

27. GASB Statement No. 34 specifies how governments report capital assets. Describe where capital assets are reported in government financial statements. Answer: All capital assets should be reported in the government-wide statement of net assets. Schedules of capital assets are required to be presented. Question Title: Test Bank (Essay) Question 27 Difficulty: Easy Learning Objective: 8 Describe where capital assets and long-term obligations are reported in government financial statements. Section Reference: 17.6

Question Type: Problem

28. During 2023, the City of Atlantis started a street paving project. The project is being financed by the proceeds from the issue of five-year, 6% special assessment bonds payable at a face value of $3,000,000. The bonds were issued July 1, 2023 at their par value. One-fifth of the principal plus interest is payable on June 30 of each year beginning June 30, 2024. Property owners are assessed to provide the funds to pay the principal and interest on the debt.

The following transactions occurred during 2023 and 2024: 1. The bonds for the paving of the streets were issued. 2. The street paving was completed at a cost of $3,000,000. 3. Property owners were assessed and billed for the first installment of principal and interest on the special assessment debt. 4. Assessments for the first installment of principal and interest on the special assessment debt were collected. The June 30, 2024, payment of principal and interest was made. Required: Prepare all journal entries for the preceding transactions that are necessary for the City of Atlantis assuming: A. The City of Atlantis has not obligated itself in any manner to the holders of the special assessment bonds. B. The City of Atlantis has made a commitment to the holders of the special assessment bonds to assure the full payment of principal and interest on the due dates.

Answer: A. 1. Capital Projects Fund Cash Contribution from Property Owners 2. Capital Projects Fund Expenditures Cash

3,000,000 3,000,000

3. No Entry Necessary 4. Agency Fund Cash [(3,000,000/5) + (3,000,000 × .06)] Amount Held for Debt Service Amount Held for Debt Service Cash B. 1. Capital Projects Fund Cash Term Bond Payable

2. Capital Projects Fund Expenditures Cash

780,000 780,000 780,000 780,000

3,000,000 3,000,000

3. Debt Service Fund Special Assessment Receivable Special Assessment Revenue [(3,000,000/5) + (3,000,000 × .06)] 4. Debt Service Fund Cash Special Assessment Receivable Expenditures – Principal Expenditures – Interest Cash

780,000 780,000

780,000 780,000 600,000 180,000 780,000

Question Title: Test Bank (Problem) Question 17-1 Difficulty: Hard Learning Objective: 4 Explain the use of a capital projects fund., 5 Describe the purpose of a debt service fund. Section Reference: 17.3

29. The following activities and transactions are typical of those which may affect the various funds used by a municipal government. Required: Prepare journal entries to record each transaction and identify the fund in which each entry is recorded. 1. The Sparta City Council passed a resolution approving a general operating budget of $6,800,000 for the fiscal year. Total revenues are estimated at $5,800,000. 2. The Sparta City Council passed an ordinance providing a property tax levy of $3.50 per $100 of assessed valuation for the fiscal year. Total property valuation in Sparta City is $320,000,000. Property is assessed at 30% of current property valuation. Property tax bills are mailed to property owners. An estimated 5% will be uncollectible. 3. Sparta City sold a general obligation term bond issue for $1,000,000 at 104 to a major brokerage firm. The stated interest rate is 10%. Construction of a new Municipal Courts Building will be financed by the bond issue proceeds. 4. The premium on bond sale in (3) above is transferred to the Debt Service Fund. 5. At the end of fiscal year, the Sparta City Council approves the write-off of $55,000 of uncollected taxes because of inability to locate the property owners. 6. The Sparta City Municipal Courts Building (3 above) is completed. Contracts and expenses total $1,190,000, and all have been paid and recorded in the Capital Projects Fund. Prepare entries to close this project and record the completion of the project in all other funds and/or account groups affected. Any balance in the Capital Projects Fund is to be applied to payment of interest and principal of the bond issue.

7. On March 1, Sparta City issued 10% serial bonds at par to finance streetlights in an area recently incorporated in the city limits. The face amount of the bonds is $900,000; interest is payable annually, and bonds are to be retired in equal amounts over 6 years from collections from assessments against property affected. In case of default by the property owners, the bond principal will be paid by the city. a. Record the issuance of the bonds on March 1 of the current year. b. Record the payment to bondholders on March 1 of the next year. 8. The street lighting project in (7) above was completed on September 30 at a total cost of $840,000. Record summary entries for expenditure transactions from March 1 - September 30, and on completion of the project. Answer: 1. General Fund: Estimated Revenue Unreserved Fund Balance Appropriations 2. General Fund: Property Tax Receivable Allowance for Uncollectible Taxes Revenue

3. Capital Projects Fund: Cash Term Bond Payable Premium on Bond Payable 4. Capital Projects Fund: Transfer to Debt Service Fund Cash Debt Service Fund: Cash Transfer from Capital Projects Fund

5. General Fund: Allowance for Uncollectible Taxes Property Tax Receivable 6. Capital Assets: Buildings Cash Capital Projects Fund: Transfer to Debt Service Fund Cash Debt Service Fund: Cash

5,800,000 1,000,000 6,800,000

3,360,000 168,000 3,192,000

1,040,000 1,000,000 40,000

40,000 40,000

55,000 55,000

1,190,000 1,190,000

10,000 10,000

10,000

Transfer from Capital Projects Fund

10,000

7. Capital Projects Fund: Cash Term Bond Payable

900,000

Debt Service Fund: Expenditures – Principal Expenditures – Interest Cash

150,000 90,000

8. Capital Projects Fund: Expenditures Vouchers Payable/Cash

840,000

Fund Balance Expenditures

900,000

240,000

840,000 840,000 840,000

Question Title: Test Bank (Problem) Question 17-2 Difficulty: Hard Learning Objective: 3 Distinguish between a general fund and a special revenue fund., 4 Explain the use of a capital projects fund., 5 Describe the purpose of a debt service fund. Section Reference: 17.3, 17.6

30. Prepare entries, in general journal form, to record the following transactions in the proper fund(s) and/or account group(s). Designate the fund or account group in which each entry is recorded. 1. Bond proceeds of $2,000,000 were received to be used in constructing a new City Jail. An equal amount is contributed from general revenues. 2. Serial bonds in the amount of $300,000 matured. Interest of $75,000 was paid on these and other serial bonds outstanding. 3. Insurance proceeds amounting to $19,000 were received as a result of the accidental destruction of a garbage truck costing $33,000. Accumulated depreciation on the truck was $21,000. 4. The City Parks Endowment Fund transferred $160,000 in expendable funds to the City Parks Special Revenue Fund. 5. Proceeds of $21,000 were received from the sale of equipment which had been purchased from general revenues at a cost of $100,000. Accumulated depreciation on the equipment was $75,000. 6. The City Power Company (an enterprise fund) issued a bill for $400,000 for electricity provided to municipal government buildings. 7. The City Power Company transferred excess funds of $90,000 to the General Fund.

8. A central data processing center was established by a contribution of $400,000 from the General Fund, a long-term loan of $130,000 from the City Parks Special Revenue Fund, and general obligation bond proceeds of $180,000. 9. The Data Processing Fund billed the General Fund $20,000 and the City Parks Special Revenue Fund $8,500 for data processing services. 10. The City Power Company received $7,000 as customer deposits during the year. The monies are to be held in trust until customers request that their services be discontinued and final bills are collected. 11. In order to retire general obligation term bonds when they become due, it is determined that the Debt Service Fund will require annual contributions of $40,000 and earnings in the current year of $3,000. Answer: 1. Capital Projects Fund: Cash Term Bond Payable Transfer from General Fund General Fund: Transfer to Capital Projects Fund Cash

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

2,000,000 2,000,000

2. Debt Service Fund: Expenditures Cash

375,000

3. General Fund: Cash Revenue

19,000

Capital Assets Cash Accumulated Depreciation Gain on Sale Vehicles

375,000

19,000

19,000 21,000 7,000 33,000

4. Trust Fund: Transfer to Special Revenue Fund Cash

160,000

Special Revenue Fund: Cash Transfer from Trust Fund

160,000

5. General Fund: Cash Revenue Capital Assets:

160,000

21,000 21,000

Cash Accumulated Depreciation Loss on Sale Machinery and Equipment 6. Enterprise Fund: Due from General Fund Revenue General Fund: Expenditures Due to Enterprise Fund 7. Enterprise Fund: Transfer to General Fund Cash General Fund: Cash Transfer from Enterprise Fund

21,000 75,000 4,000 100,000

400,000 400,000

90,000 90,000

8. Internal Service Fund: Cash 710,000 Contribution from General Fund Due to City Parks Fund Contributions from General Obligation Bonds General Fund: Transfer to Internal Service Fund Cash

400,000

Special Revenue Fund: Due from Internal Service Fund Cash

130,000

9. Internal Service Fund: Due from General Fund Due from Special Revenue Fund Revenue

20,000 8,500

400,000

130,000

28,500

General Fund: Expenditures Due to Internal Service Fund

20,000

Special Revenue Fund: Expenditures Due to Internal Service Fund

8,500

10. Agency Fund: Cash Customer Deposit Agency Fund Balance

400,000 130,000 180,000

20,000

8,500

7,000 7,000

11. Debt Service Fund: Required Additions Required Earnings Fund Balance

40,000 3,000 43,000

Question Title: Test Bank (Problem) Question 17-3 Difficulty: Hard Learning Objective: 4 Explain the use of a capital projects fund., 5 Describe the purpose of a debt service fund. Section Reference: 17.3

31. The general fund trial balance for Model City held the following balances at June 30, 2024, just before closing entries were made: Unreserved Fund Balance Estimated Revenues Revenues Appropriations Expenditures Expenditures-Prior Year Encumbrances Operating Transfers In Reserve for Encumbrances Reserve for Encumbrances – Prior Year

$ 2,000 33,000 27,250 28,000 26,200 1,200 3,000 6,000 3,000 1,500

Required: Prepare the necessary closing entries. Answer: Appropriations Unreserved Fund Balance Estimated Revenues

28,000 5,000 33,000

Revenues Operating Transfers In Expenditures Encumbrances Unreserved Fund Balance

27,250 6,000

Reserve for Encumbrances – Prior Year Expenditures – Prior Year

1,500

26,200 3,000 4,050

1,500

Question Title: Test Bank (Problem) Question 17-4 Difficulty: Medium Learning Objective: 2 Describe the broad categories of government fund entities., 3 Distinguish between a general fund and a special revenue fund. Section Reference: 17.3

32. The following schedule of capital assets was prepared for Johnson County. Government Activities Total Capital Assets Less: Accumulated Depreciation Net Capital Assets

Beg. Balance $850,000 ( 500,000)

Additions 250,000 ( 50,000)

Retirements (185,000) 150,000

Ending Balance $915,000 ( 400,000)

$350,000

$200,000

( 35,000)

$515,000

All capital asset acquisitions were made in the capital projects fund and paid in cash. An asset was sold by the general fund for $40,000 cash. Required: Determine how the above information will be reflected on each of the following statements for the year 2024. A. The governmental funds’ statement of revenues, expenditures, and changes in fund balances. List the governmental fund and then list the dollar amount within the appropriate heading on the statement (such as Revenues, Expenditures, or Other Financing Sources (Uses)). B. The government-wide statement of net assets. C. The government-wide statement of activities. Answer: A.

Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balance For the Year Ended December 31, 2024

General Fund

Capital Projects Fund

Debt Service Fund

Total Governmental Funds

Revenues Expenditures Expenditure

(250,000)

Other Financing Sources (Uses) Special Items Revenue from asset sale

40,000

B. Government-wide Statement of Activities For the Year Ended December 31, 2024 Depreciation expense Gain on sale

(50,000) 5,000

C. Government-wide Statement of Net Assets December 31, 2024 Capital Assets Accumulated Depreciation Net Capital Assets

915,000 (400,000) $515,000

Question Title: Test Bank (Problem) Question 17-5 Difficulty: Medium Learning Objective: 9 Describe the changes in reporting requirements under GASB Statement No. 34. Section Reference: 17.9

33. The following events take place: 1. Interest payments in the amount of $20,000 that are the responsibility of the Debt Service Fund are paid by the General Fund. 2. The Internal Service Fund bills the Special Revenue Fund $25,000 for services performed. 3. The Special Revenue Fund transfers $10,000 to the Internal Service Fund as a temporary loan. 4. The General Fund transfers $150,000 to start an Internal Service Fund. Required: Identify the interfund activity as a loan, services provided and used, interfund transfer, or interfund reimbursement and prepare entries in general journal form to record the transactions on the records of the fund involved. Answer: 1. Interfund Reimbursement

General Fund Due From Debt Service Fund Expenditures

20,000

Debt Service Fund Expenditures Due to General Fund

20,000

Interfund service provided and used Internal Service Fund Due From Special Revenue Fund Revenue

25,000

Special Revenue Fund Expenditures Due to Internal Service Fund

25,000

Interfund loan Special Revenue Fund Due From Internal Service Fund Cash

10,000

Internal Service Fund Cash Due to Special Revenue Fund

10,000

Interfund Transfer General Fund Transfer to Internal Service Fund Cash

150,000

Internal Service Fund Cash Contributions from General Fund

150,000

Question Title: Test Bank (Problem) Question 17-6 Difficulty: Medium Learning Objective: 11 Describe the types of interfund activities. Section Reference: 17.Summary 34. The following transactions take place: 1. On January 1, the city issued 9% general obligation bonds with a face value of $4,000,000 payable in 10 years to finance the construction of city offices. Total proceeds were $4,500,000. 2. On December 20, construction was completed and occupancy taken of the city offices. The full cost of $3,900,000 was paid to the contractor, and appropriate closing entries were made with regard to the project. 3. The General Fund repaid the Special Revenue Fund a loan of $15,000 plus $900 in interest on the loan. Required: Prepare entries in general journal form to record these transactions in the proper fund(s). Designate the fund in which each entry is recorded. Answer: 1. Capital Projects Fund Cash Term Bond Payable Premium on Bond Payable Transfer to Debt Service Fund Cash Debt Service Fund Cash

4,500,000 4,000,000 500,000 500,000 500,000

500,000

Transfer From Capital Projects Fund 2.

Capital Projects Fund Expenditures Cash Bond Issue Proceeds Expenditures Transfer to Debt Service Fund Unreserved Fund Balance

3,900,000 3,900,000 4,500,000 3,900,000 500,000 100,000

Transfer to Debt Service Fund Cash

100,000

Unreserved Fund Balance Transfer to Debt Service Fund

100,000

Debt Service Fund Cash Transfer from Capital Projects Fund Capital Assets Buildings Cash 3.

500,000

General Fund Due to Special Revenue Fund Expenditures Cash Special Revenue Fund Cash Due From General Fund Revenue 900

100,000

100,000 100,000

3,900,000 3,900,000

15,000 900 15,900

15,900 15,000

Question Title: Test Bank (Problem) Question 17-7 Difficulty: Hard Learning Objective: 2 Describe the broad categories of government fund entities., 3 Distinguish between a general fund and a special revenue fund., 4 Explain the use of a capital projects fund., 5 Describe the purpose of a debt service fund. Section Reference: 17.3

Package Title: Test Bank Questions Course Title: Advanced Accounting, 8e Chapter: Accounting for Nongovernment Nonbusiness Organizations: Colleges and Universities, Hospitals and Other Health Care Organizations Chapter Number: 18

Question Type: Multiple Choice

1. Special entities are not-for-profit organizations that are: a) government owned. b) privately owned. c) publicly owned. d) either government owned or privately owned. Answer: d Question Title: Test Bank (Multiple Choice) Question 01 Difficulty: Easy Learning Objective: 1 Describe the source of accounting standards for nongovernment nonbusiness organizations (NNOs). Section Reference: 18.1

2. The basic financial statements for all NFPs include a: a) Balance sheet, Statement of cash flows, and Footnotes to the financial statements b) Statement of activities and Statement of cash flows c) Balance sheet and Statement of activities d) Statement of financial position, Statement of activities, Statement of cash flows, and Footnotes to the financial statements Answer: d Question Title: Test Bank (Multiple Choice) Question 02 Difficulty: Easy Learning Objective: 2 Identify the three basic statements for NNOs. Section Reference: 18.1 3. A good reason for NNOs to adopt fund accounting even though FASB standards do NOT require it is because: a) the capital assets are significant. b) the donated services are significant. c) the program services are involved with more than one type of revenue. d) restrictions are placed by donors in many cases. Answer: c

Question Title: Test Bank (Multiple Choice) Question 03 Difficulty: Hard Learning Objective: 1 Describe the source of accounting standards for nongovernment nonbusiness organizations (NNOs). Section Reference: 18.1 4. Which one of the following statements is NOT required for NNOs? a) statement of financial position b) statement of cash flows c) statement of changes in net assets d) statement of activities Answer: c Question Title: Test Bank (Multiple Choice) Question 04 Difficulty: Easy Learning Objective: 2 Identify the three basic statements for NNOs. Section Reference: 18.1 5. GASB Statement No. 35 allows public colleges and universities to: a) apply guidance designed for special-purpose governments. b) use FASB standards to permit consistent reporting. c) optionally follow FASB standards. d) none of these are correct. Answer: a Question Title: Test Bank (Multiple Choice) Question 05 Difficulty: Hard Learning Objective: 1 Describe the source of accounting standards for nongovernment nonbusiness organizations (NNOs). Section Reference: 18.2 6. An endowment fund is considered underwater if: a) the fair value of the fund at the reporting date is equal to either the original amount of the gift or the amount required to be maintained by the donor, or by law. b) the fair value of the fund at the reporting date is less than either the original amount of the gift or the amount required to be maintained by the donor, or by law. c) the fair value of the fund at the reporting date is more than either the original amount of the gift or the amount required to be maintained by the donor, or by law. d) the amount required to be maintained by the donor, or by law is less than the fair value of the fund at the reporting date Answer: b Question Title: Test Bank (Multiple Choice) Question 06 Difficulty: Easy Learning Objective: 1 Identify the three basic statements for NNOs Section Reference: 18.2

7. Revenues and expenses of hospitals are recorded in the accounts of the: a) Endowment Fund. b) General Fund. c) Plant Replacement Fund. d) Specific Purpose Fund. Answer: b Question Title: Test Bank (Multiple Choice) Question 07 Difficulty: Easy Learning Objective: 3 Describe the basic funds used by nongovernment nonbusiness organizations. Section Reference: 18.2 8. Which basis of accounting should a voluntary health and welfare organization use? a) Cash basis for all funds b) Modified accrual basis for all funds c) Accrual basis for all funds d) Accrual basis for some funds and modified accrual basis for other funds Answer: c Question Title: Test Bank (Multiple Choice) Question 08 Difficulty: Easy Learning Objective: 1 Describe the source of accounting standards for nongovernment nonbusiness organizations (NNOs). Section Reference: 18.3 9. Generally accepted accounting standards require that on financial statements for NNOs, a) revenues are reported when received, and expenditures are reported when materials or services are received. b) revenues are reported when earned and realized or realizable, and expenditures are reported when materials or services are received. c) revenues are reported when received, and expenditures are reported when materials or services are ordered. d) revenues are reported when earned and realized or realizable, and expenditures are reported when materials or services are ordered. Answer: b Question Title: Test Bank (Multiple Choice) Question 09 Difficulty: Hard Learning Objective: 1 Describe the source of accounting standards for nongovernment nonbusiness organizations (NNOs). Section Reference: 18.3

10. Admissions, counseling and registration are considered to be: a) educational and general services. b) auxiliary enterprises. c) student services. d) institutional support. Answer: c Question Title: Test Bank (Multiple Choice) Question 10 Difficulty: Hard Learning Objective: 4 Distinguish between a current restricted fund and an unrestricted fund. Section Reference: 18.3 11. Bell Foundation, a voluntary health and welfare organization, supported by contributions from the general public, included the following costs in its statement of functional expenses for the year ended December 31, 2023. Fund raising Administrative Research

$1,000,000 600,000 200,000

Bell’s functional expenses for 2023 program services included: a) $200,000. b) $600,000. c) $1,000,000. d) $1,800,000. Answer: a Question Title: Test Bank (Multiple Choice) Question 11 Difficulty: Hard Learning Objective: 3 Describe the basic funds used by nongovernment nonbusiness organizations. Section Reference: 18.3 12. For a university, the receipt of assets for operating activities that have external restrictions as to the purposes for which they can be used is recorded by crediting: a) Fund Balance-Restricted. b) Contribution Revenue. c) Deferred Revenue. d) Net Assets Released. Answer: b Question Title: Test Bank (Multiple Choice) Question 12 Difficulty: Medium Learning Objective: 1 Describe the source of accounting standards for nongovernment nonbusiness organizations (NNOs). Section Reference: 18.4

13. All NNOs have current restricted funds and unrestricted funds EXCEPT: a) colleges and universities b) hospitals c) VHWOs d) ONNOs Answer: b Question Title: Test Bank (Multiple Choice) Question 13 Difficulty: Easy Learning Objective: 4 Distinguish between a current restricted fund and an unrestricted fund., 5 Explain the term “assets whose use is limited.” Section Reference: 18.4 14. Which of the following statements related to pledges is incorrect? a) Pledges are signed commitments to contribute specific amounts of money on a future date or in installments. b) Pledges are recorded as revenues when a promise to give is nonrevocable and unconditional. c) Pledges are generally enforceable contracts. d) All of these are correct. Answer: c Question Title: Test Bank (Multiple Choice) Question 14 Difficulty: Medium Learning Objective: 7 Explain how contributions are recorded by NNOs. Section Reference: 18.4

15. Which of the following is used for current expenditures by a college? a) Unrestricted Current Funds, No; Restricted Current Funds, No b) Unrestricted Current Funds, No; Restricted Current Funds, Yes c) Unrestricted Current Funds, Yes; Restricted Current Funds, Yes d) Unrestricted Current Funds, Yes; Restricted Current Funds, No Answer: c Question Title: Test Bank (Multiple Choice) Question 15 Difficulty: Medium Learning Objective: 4 Distinguish between a current restricted fund and an unrestricted fund. Section Reference: 18.4 16. Military Family Center is a voluntary welfare organization funded by contributions from the general public. During 2022 unrestricted pledges of $800,000 were received, half of which were payable in 2022 with the other half payable in 2023 for use in 2023. It was estimated that 10% of these pledges would be uncollectible. How much should National report as net contribution revenue for 2022 with respect to the pledges?

a) $800,000 b) $720,000 c) $360,000 d) $0 Answer: b Question Title: Test Bank (Multiple Choice) Question 16 Difficulty: Medium Learning Objective: 7 Explain how contributions are recorded by NNOs. Section Reference: 18.4

17. Cindy Duncan is a social worker on the staff of Military Family Center, a voluntary welfare organization. She earns $42,000 annually for a normal workload of 2,000 hours. During 2023 she contributed an additional 800 hours of her time to Military Family Center at no extra charge. How much should Military Family Center record in 2023 as contributed service expense? a) $0 b) $1,680 c) $8,400 d) $16,800 Answer: d Question Title: Test Bank (Multiple Choice) Question 17 Difficulty: Medium Learning Objective: 7 Explain how contributions are recorded by NNOs. Section Reference: 18.5 18. Mandatory transfers category includes transfers from the Current Funds group to other fund groups arising from ____________ a) voluntary renewals and replacements of plant b) binding legal agreements related to the financing of educational plant and grant agreements with agencies of the federal government, donors, and other organizations c) discretion of the governing board d) prepayments on debt principal Answer: b Question Title: Test Bank (Multiple Choice) Question 18 Difficulty: Medium Learning Objective: 6 Distinguish between a mandatory and a nonmandatory transfer Section Reference: 18.5 19. Board designated funds should be accounted for as: a) restricted funds. b) specific purpose funds.

c) unrestricted funds. d) none of these. Answer: c Question Title: Test Bank (Multiple Choice) Question 19 Difficulty: Easy Learning Objective: 4 Distinguish between a current restricted fund and an unrestricted fund. Section Reference: 18.5 20. During the years ending June 30, 2022, and June 30, 2023, Jefferson University conducted a cancer research project financed by a $3,000,000 gift from an alumnus. This entire amount was pledged by the donor on July 10, 2021, although he paid only $800,000 at that date. The gift was restricted to the financing of this particular research project. During the two-year research period, Jefferson related gift receipts and research expenditures were as follows:

Gift receipts Cancer research restricted expenditures

Year Ended June 30 2022 2023 1,100,000 1,200,000 1,400,000 1,600,000

How much gift revenue should Jefferson University report in the temporarily restricted column of its statement of activities for the year ended June 30, 2023? a) $3,000,000 b) $1,600,000 c) $1,200,000 d) $0 Answer: b Question Title: Test Bank (Multiple Choice) Question 20 Difficulty: Hard Learning Objective: 7 Explain how contributions are recorded by NNOs. Section Reference: 18.5 21. A municipality's capital projects fund is similar to a university's: a) renewals and replacements fund. b) retirement of indebtedness fund. c) investment in plant fund. d) none of these. Answer: a Question Title: Test Bank (Multiple Choice) Question 21 Difficulty: Easy Learning Objective: 9 Describe the funds used to account for property, plant and equipment. Section Reference: 18.6

22. The following funds were among those on Cole University's books at April 30, 2023: Funds to be used for acquisition of additional properties for university purposes (unexpended at 4/30/23)

$2,500,000

Funds set aside for debt service charges and for the retirement of indebtedness on university properties

5,000,000

How much of the above-mentioned funds should be included in plant funds? a) $0 b) $2,500,000 c) $5,000,000 d) $7,500,000 Answer: d Question Title: Test Bank (Multiple Choice) Question 22 Difficulty: Medium Learning Objective: 9 Describe the funds used to account for property, plant and equipment. Section Reference: 18.6 23. Most property, plant and equipment transactions of hospitals are accounted for in the: a) fund for renewals and replacements. b) general fund. c) plant replacement and expansion fund. d) unexpended plant fund. Answer: b Question Title: Test Bank (Multiple Choice) Question 23 Difficulty: Medium Learning Objective: 9 Describe the funds used to account for property, plant and equipment. Section Reference: 18.6 24. All of the following are a plant fund in colleges and universities EXCEPT: a) unexpended plant fund. b) funds for renewals and replacements. c) investment in plant. d) plant replacement and expansion fund. Answer: d Question Title: Test Bank (Multiple Choice) Question 24 Difficulty: Medium Learning Objective: 9 Describe the funds used to account for property, plant and equipment. Section Reference: 18.6

25. When the donor has specified a particular date or event after which the principal of the Endowment Fund may be expended, the Endowment Fund is referred to as a(n): a) pure endowment fund. b) term endowment fund. c) quasi endowment fund. d) expendable endowment fund. Answer: b Question Title: Test Bank (Multiple Choice) Question 25 Difficulty: Easy Learning Objective: 10 Explain the basic accounting used by endowment funds. Section Reference: 18.7 26. Resources of an unrestricted fund that are designated by the governing board for endowment purposes are accounted for in the unrestricted fund by all NNOs EXCEPT: a) voluntary health and welfare organizations. b) hospitals. c) colleges and universities. d) other NNOs. Answer: c Question Title: Test Bank (Multiple Choice) Question 26 Difficulty: Medium Learning Objective: 10 Explain the basic accounting used by endowment funds. Section Reference: 18.7 27. Investments are reported by NNOs at a) cost. b) fair value. c) the lower of cost or fair value. d) the higher of cost or fair value. Answer: b Question Title: Test Bank (Multiple Choice) Question 27 Difficulty: Easy Learning Objective: 11 Indicate how equity investments are reported in the financial statements. Section Reference: 18.8 28. In accounting for loan funds, revenue is recorded when the: a) contribution is received. b) loan is made to students. c) loan is repaid by students. d) students graduate.

Answer: a Question Title: Test Bank (Multiple Choice) Question 28 Difficulty: Medium Learning Objective: 12 Explain the change in accounting for loan funds brought about by new standards. Section Reference: 18.9 29. Tuition waivers for which there is no intention of collection from the student should be classified by a college as: a) Revenue, No; Expenditures, No b) Revenue, No; Expenditures, Yes c) Revenue, Yes; Expenditures, Yes d) Revenue, Yes; Expenditures, No Answer: c Question Title: Test Bank (Multiple Choice) Question 29 Difficulty: Medium Learning Objective: 14 Discuss the special reporting issues of hospitals. Section Reference: 18.12 30. Under Southdale Hospital’s established rate structure, the hospital would have earned patient service revenue of $7,000,000 for the year ended December 31, 2023. However, Southdale did not expect to collect this amount because of charity allowances of $1,000,000 and discounts of $500,000 to third party payers. In May 2023, Southdale purchased bandages from Ace Supply Co. at a cost of $5,000. However, Ace notified Southdale that the invoice was being cancelled and that the bandages were being donated to Southdale. For the year ended December 31, 2023, how much should Southdale record as patient service revenue? a) $7,000,000 b) $6,500,000 c) $6,000,000 d) $5,500,000 Answer: a Question Title: Test Bank (Multiple Choice) Question 30 Difficulty: Easy Learning Objective: 14 Discuss the special reporting issues of hospitals. Section Reference: 18.12 31. Under Southdale Hospital’s established rate structure, the hospital would have earned patient service revenue of $7,000,000 for the year ended December 31, 2023. However, Southdale did not expect to collect this amount because of charity allowances of $1,000,000 and discounts of $500,000 to third party payers. In May 2023, Southdale purchased bandages from Ace Supply Co. at a cost of $5,000. However, Ace notified Southdale that the invoice was being cancelled and that the bandages were being donated to Southdale. For the year ended December 31, 2023, Southdale should record the donation of bandages as: a) a $5,000 reduction in operating expenses.

b) nonoperating revenue of $5,000. c) other operating revenue of $5,000. d) a memorandum entry only. Answer: c Question Title: Test Bank (Multiple Choice) Question 31 Difficulty: Easy Learning Objective: 14 Discuss the special reporting issues of hospitals. Section Reference: 18.12

32. For the fall semester of 2023, Irving College assessed its students $5,000,000 for tuition and fees. The net amount realized was only $4,700,000 because of the following revenue reductions: Refunds occasioned by class cancellations and student withdrawals Tuition remissions granted to faculty members’ families Scholarships and fellowships

$ 80,000 20,000 200,000

How much should Irving College report for the period for unrestricted current funds revenues from tuition and fees? a) $5,000,000 b) $4,900,000 c) $4,780,000 d) $4,700,000 Answer: b Question Title: Test Bank (Multiple Choice) Question 32 Difficulty: Hard Learning Objective: 14 Discuss the special reporting issues of hospitals. Section Reference: 18.12

Question Type: Essay

33. The fund structure and terminology differ among NNOS, but there are six funds commonly used. Identify the funds used by nongovernment nonbusiness organizations. Answer: The six funds commonly used by NNOs are (a) Current fund, (b) Plant fund, (c) Endowment Fund, (d) Loan Fund, (e) Agency or custodial fund, and (f ) Annuity and life income fund. Question Title: Test Bank (Essay) Question 33 Difficulty: Medium Learning Objective: 3 Describe the basic funds used by nongovernment nonbusiness organizations. Section Reference: 18.2

34. Contributions to NNOS include gifts of cash, pledges, donated services, and gifts of noncash assets. Explain how contributions are recorded by NNOS. Answer: Contributions are recognized as revenue in the period received. Conditional promises are recognized when they become unconditional. Donor-restricted contributions are recognized as revenue if the contributions are unconditional. Pledges are recognized as revenues at the present value of the expected receipts when a promise is nonrevocable and unconditional. Question Title: Test Bank (Essay) Question 34 Difficulty: Medium Learning Objective: 7 Explain how contributions are recorded by NNOs. Section Reference: 18.4

Question Type: Problem

35. The following events affected the New Athens University Loan Fund: 1. $300,000 is received from a donor to establish a student loan fund. Loans will carry a 6% annual interest rate. 2. The Loan Fund loaned the $300,000 to students. Five percent of the loans are estimated to be uncollectible. 3. Loans of $50,000 were repaid with $3,000 of interest. 4. A $1,000 student loan was written off as uncollectible. Required: Prepare the journal entries necessary to record these transactions. Answer: 1. Cash

300,000 Revenue-Contributions – Restricted

2. Loans Receivable Cash Bad Debt Expense Allowance for Uncollectible Loans 3. Cash

300,000 300,000 300,000 15,000 15,000 53,000

Loans Receivable Interest Income 4. Allowance for Uncollectible Loans Loans Receivable

50,000 3,000 1,000 1,000

Question Title: Test Bank (Problem) Question 18-1 Difficulty: Medium Learning Objective: 12 Explain the change in accounting for loan funds brought about by new standards. Section Reference: 18.9

36. On October 10, 2022, a national voluntary health help foundation was the recipient of a telethon sponsored by a renowned celebrity. Phone donations totaling $8,500,000 were promised. Based on historical information, 15% of these pledges are expected to be uncollectible. Of these pledges, $7,100,000 were collected in 2023; the remainder were considered uncollectible. Required: Identify the proper fund and prepare the journal entries necessary in 2022 and 2023. Answer: Current Unrestricted Fund 2022 Pledges Receivable Revenue – Contributions Expense-Provision for Uncollectible Pledges Allowance for Uncollectible Pledges 2023 Cash

8,500,000 8,500,000 1,275,000 1,275,000

7,100,000 Pledges Receivable

Expense-Provision for Uncollectible Pledges Allowance for Uncollectible Pledges Pledges Receivable

7,100,000 125,000 1,275,000 1,400,000

Question Title: Test Bank (Problem) Question 18-2 Difficulty: Medium Learning Objective: 7 Explain how contributions are recorded by NNOs. Section Reference: 18.4

37. Prepare journal entries for the following transactions or events: 1. The board of trustees of Snark College voted to designate $300,000 for expansion of the student union and $90,000 for future research projects. 2. In accordance with the requirements of a bond indenture, Snark College transferred $85,000 of unrestricted funds for the accumulation of cash to retire the debt related to the construction of the Central Computer Building. 3. A governing board of a hospital designates $280,000 for the future expansion of the emergency care facilities. 4. A heart association receives pledges of $900,000 from the general public in connection with a telethon. It is estimated that 30% of the amounts pledged will not be collectible.

5. An ONNO receives the donated services of a CPA with a market value of $10,000. 6. On November 3, 2023, $75,000 was donated to a university for library acquisitions of which $50,000 was expended for this purpose during the remainder of the fiscal year. 7. On November 4, 2023, $15,000 was contributed to a voluntary health organization to be used to conduct CPR classes for the public. During the remainder of the current fiscal year $14,000 was expended for this purpose. 8. On November 5, 2023, $100,000 was contributed to a hospital for cancer research of which $90,000 was expended for this purpose during the remainder of the fiscal year. Answer: 1. a. Unrestricted Current Fund Nonmandatory Transfer to Plant Fund Cash

300,000

Fund Balance – Unallocated Fund Balance – Allocated

90,000

b. Unexpended Plant Fund Cash Fund Balance – Unrestricted

300,000

2. a. Unrestricted Current Fund Mandatory Transfer to Plant Fund Cash b. Plant Fund – For Retirement of Indebtedness Cash Fund Balance – Restricted 3.

300,000

General Fund Fund Balance – Unallocated Fund Balance – Allocated for Plant Expansion

90,000

300,000

85,000 85,000

280,000 280,000

or no entry need be made and the designation of $280,000 for plant expansion may be reported in a footnote to the financial statements. 4.

Current Unrestricted Fund Pledges Receivable Revenue – Contributions Expense-Provision for Uncollectible Pledges Allowance for Uncollectible Pledges

Current Unrestricted Fund Management and General Expense Donated Services Revenue

900,000 900,000 270,000 270,000

10,000 10,000

Restricted Current Fund Cash Contribution Revenue Net Assets Released from Restrictions Cash

75,000 75,000 50,000 50,000

Unrestricted Current Fund

Cash

50,000

Net Assets Released from Restrictions Expenses – Library Cash

50,000

Current Restricted Fund Cash Contribution Revenue

15,000

Net Assets Released from Restrictions Cash

50,000 50,000

15,000 14,000 14,000

Unrestricted Current Fund Cash

14,000 Net Assets Transferred–In

8. a. Specific Purpose Fund Cash Fund Balance Fund Balance Cash b. General Fund Research Expenditures Specific Purpose Grants [Revenue]

14,000

100,000 100,000 90,000 90,000

90,000 90,000

Question Title: Test Bank (Problem) Question 18-3 Difficulty: Hard Learning Objective: 4 Distinguish between a current restricted fund and an unrestricted fund., 9 Describe the funds used to account for property, plant and equipment. Section Reference: 18.3, 18.4, 18.5, 18.6

38. An NNO obtained cash for the acquisition of property and equipment as follows: Loan proceeds $200,000 Contributions $400,000 These funds are used to acquire land. In addition, $20,000 in principal and $2,000 in interest is paid on indebtedness relating to property and equipment. Depreciation on property and equipment for the year is $80,000.

Required: Prepare all necessary entries in the affected funds of the NNO, assuming that the NNO is a: a. Voluntary health and welfare organization. b. University. c. Hospital. Answer: a. Plant Fund Cash

600,000 Notes Payable Contributions-Revenue-Restricted

Land

200,000 400,000 600,000

Cash

600,000

Notes Payable Interest Expense Cash

20,000 2,000

Depreciation Expense Accumulated Depreciation

80,000

22,000

80,000

Unexpended Fund Balance 340,000 Expended Fund Balance [($600,000 + $20,000) - ($200,000 + $80,000) = $340,000] b.

Unexpected Plant Fund Cash Notes Payable Revenue-Contributions-Restricted

600,000 200,000 400,000

Land Cash

600,000

Fund Balance – Restricted Notes Payable Land

400,000 200,000

Investment in Plant Fund Land Notes Payable Net Investment in Plant Funds for Retirement of Indebtedness Fund Balance – Restricted Cash (Principal) Interest Expense Cash

340,000

600,000

600,000 200,000 400,000

20,000 20,000 2,000 2,000

Investment in Plant Fund Notes Payable Net Investment in Plant Depreciation Expense Accumulated Depreciation c. Plant Replacement & Expansion Fund Cash Revenue-Contributions-Restricted General Fund Cash Notes Payable Land Cash Fund Balance Plant Replacement & Expansion Fund Fund Balance Cash General Fund Interest Expense Notes Payable Cash Depreciation Expense Accumulated Depreciation

20,000 20,000 80,000 80,000

400,000 400,000

200,000 200,000 600,000 200,000 400,000

400,000 400,000

2,000 20,000 22,000 80,000 80,000

Question Title: Test Bank (Problem) Question 18-4 Difficulty: Hard Learning Objective: 9 Describe the funds used to account for property, plant and equipment. Section Reference: 18.6

39. The following information was taken from the accounts and records of the ABC Foundation, a private, not-for-profit organization. All balances are as of June 30, 2023, unless otherwise noted. Unrestricted Support – Contributions Unrestricted Revenues – Investment Income Temporarily Restricted Gain on Sale of Investments Expenses – Scholarships Expenses – Fund Raising Expenses – Management and General Restricted Support – Contributions Restricted Revenues – Investment Income Permanently Restricted Support – Contributions Unrestricted Net Assets, July 1, 2022

$250,000 28,000 13,000 300,000 60,000 120,000 420,000 30,000 50,000 250,000

Temporarily Restricted Net Assets, July 1, 2022 Permanently Restricted Net Assets, July 1, 2022

40,000 10,000

The unrestricted support from contributions was received in cash during the year. The expenses included $500,000 payable from donor-restricted resources. Required: Prepare ABC’s statement of activities for the fiscal year ended June 30, 2023. Answer: ABC Foundation Statement of Activities For the Year Ended June 30, 2023 Changes in Unrestricted Net Assets Revenues and Gains Contributions Investment Income Total revenues and gains Net assets released from restrictions Increase in unrestricted net assets Expenses: Program Services: Scholarships Supporting Services: Management and General Fund Raising Total Supporting Services Total Expenses Net increase in unrestricted net assets

$250,000 28,000 278,000 500,000 778,000

300,000 $120,000 60,000 180,000 480,000 298,000

Changes in Temporarily Restricted Net Assets Contributions Investment Income Gain on Sale of investments Net assets released from restrictions Decrease in temporarily restricted net assets

420,000 30,000 13,000 (500,000) ( 37,000)

Changes in Permanently Restricted Net Assets Contributions Increase in permanently restricted net assets

50,000 50,000

Increase in net assets Net assets, July 1, 2022 Net assets, June 30, 2023

Question Title: Test Bank (Problem) Question 18-5 Difficulty: Hard

311,000 50,000 $361,000

Learning Objective: 2 Identify the three basic statements for NNOs., 4 Distinguish between a current restricted fund and an unrestricted fund., 7 Explain how contributions are recorded by NNOs. Section Reference: 18.1, 18.2, 18.4, 18.5

40. Jersey Hospital received money from a donor to set up an endowment fund. The following information pertains to this contribution: 2022 1. $3,000,000 was received to establish the fund. The requirements were a. $150,000 of the endowment fund’s income must be used for research grants each year. b. The remainder of income is under the discretion of the governing board. c. The principal is expendable after the donor’s death. It shall be used to purchase equipment. 2. The cash received was invested in a number of securities. 2023 3. Dividends of $150,000 and interest of $400,000 were received. 4. The income was transferred to the appropriate funds. 5. Of the restricted income, only $100,000 was expended for its specified purpose during 2023. 6. The governing board specified that $300,000 of the income would be used for loans for deserving medical students. 2024 7. $250,000 was lent to medical students. 8. The donor died of cancer. Required: Set up headings for the following funds: Endowment, General, Specific Purpose, and Plant Replacement and Expansion. Prepare the entries necessary in each fund to record the events listed above. Answer: Endowment Fund 1. Cash Revenue-Contribution – Restricted 2. Investments Cash 3. Cash

3,000,000 3,000,000 3,000,000 3,000,000 550,000

Due to General Fund Due to Specific Purpose Fund 4. Due to General Fund Due to Specific Purpose Fund Cash 8. Transfer to Plant Replacement and Expansion Fund Cash General Fund

400,000 150,000 400,000 150,000 550,000 3,000,000 3,000,000

3. Due from Endowment Fund Unrestricted Income from Endowment Fund

400,000

4. Cash

400,000

Due from Endowment Fund

400,000

5. Other Professional Services – Research Other Operating Revenue

100,000

6. Assets Whose Use is Limited Cash

100,000

7. Loans Receivable Cash

250,000

100,000

250,000

Specific Purpose Fund 3. Due from Endowment Fund Fund Balance

150,000

4. Cash

150,000

Due from Endowment Fund Fund Balance Cash Plant Replacement and Expansion Fund 8. Cash Transfer from Endowment Fund – Restricted Endowment Fund 1. Fund Balance – Term Cash

150,000 100,000 100,000 3,000,000 3,000,000

3,000,000 3,000,000

Question Title: Test Bank (Problem) Question 18-6 Difficulty: Hard Learning Objective: 10 Explain the basic accounting used by endowment funds. Section Reference: 18.7

41. The following events were recorded on the books of Free Hospital for the year ended December 31, 2023. 1. Revenue from patient services totaled $12,000,000. The allowance for uncollectibles was established at $2,500,000. Of the $12,000,000 revenue, $4,500 was recognized under cost reimbursement agreements. This revenue is subject to audit and retroactive adjustment by third-party payors. 2. Patient service revenue is accounted for at established rates on the accrual basis. 3. Other operating revenue totaled $260,000, of which $120,000 was from specific purpose funds.

4. Free received $310,000 in unrestricted gifts and bequests. They are recorded at fair market value when received. 5. Endowment funds earned $120,000 in unrestricted income. 6. Board designated funds earned $62,000 in income. 7. Free’s operating expenses for the year amounted to $10,030,000. This included $380,000 in straight-line depreciation. Required: Prepare a statement of activities for Free Hospital for the year ended December 31, 2023.

Answer: Statement of Activities Patient Service Revenue Allowances and Uncollectible Accounts Net Patient Service Revenue Other Operating Revenue (includes $120,000 from specific purpose funds) Total Operating Revenue Operating Expenses (includes depreciation of $380,000) Loss from Operations Nonoperating Revenue: Unrestricted Gifts and Requests Unrestricted Income from Endowment Funds Income from Board-Designated Funds Total Nonoperating Revenue Excess of Revenue over Expenses

$12,000,000 (2,500,000) 9,500,000 260,000 9,760,000 10,030,000 (270,000)

310,000 120,000 62,000 492,000 $ 222,000

Question Title: Test Bank (Problem) Question 18-7 Difficulty: Hard Learning Objective: 10 Explain the basic accounting used by endowment funds., 14 Discuss the special reporting issues of hospitals. Section Reference: 18.7, 18.12

Package Title: Test Bank Questions Course Title: Advanced Accounting, 8e Chapter: Intercompany Bond Holdings and Miscellaneous Topics- Consolidated Financial Statements Chapter Number: Online

Question Type: Multiple Choice

1. When the bonds are held within the affiliated group, which of the following must be eliminated: a) intercompany bond investment (a receivable) b) bonds payable (a liability) c) any related intercompany interest expense and interest revenue d) all of the above Answer: d Question Title: Test Bank (Multiple Choice) Question 01 Difficulty: Medium Learning Objective: 1 Describe the term ―constructive retirement of debt‖. Section Reference: Online Chapter section 1 2. Pallet Corporation owns 90% of the outstanding common stock of Stealth Company. On January 1, 2021, Stealth Company issued $500,000, 12%, ten-year bonds. On January 1, 2023, Pallet Corporation paid $412,000 for Stealth Company bonds with a par value of $400,000 and a carrying value of $393,600. Both companies use the straight-line method to amortize bond premiums and discounts. Pallet Corporation accounts for the investment using the cost method of accounting. Pallet Corporation would report a balance in the Investment in Stealth Company Bonds account on December 31, 2023, of a) $412,000. b) $393,600. c) $410,500. d) $400,000. Answer: c Question Title: Test Bank (Multiple Choice) Question 02 Difficulty: Hard Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies. Section Reference: Online Chapter section 2 3. Pallet Corporation owns 90% of the outstanding common stock of Stealth Company. On January 1, 2021, Stealth Company issued $500,000, 12%, ten-year bonds.

On January 1, 2023, Pallet Corporation paid $412,000 for Stealth Company bonds with a par value of $400,000 and a carrying value of $393,600. Both companies use the straight-line method to amortize bond premiums and discounts. Pallet Corporation accounts for the investment using the cost method of accounting. The total gain or loss on the constructive retirement of the debt to be reported in the 2023 consolidated income statement is a) $12,000 loss. b) $12,000 gain. c) $18,400 loss. d) $18,400 gain. Answer: c Question Title: Test Bank (Multiple Choice) Question 03 Difficulty: Easy Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies. Section Reference: Online Chapter section 3

4. Parker Company owns 90% of the outstanding common stock of Stagger Company. On January 1, 2021, Stagger Company issued $500,000, 12%, ten-year bonds. On January 1, 2023, Parker Company paid $315,000 for Stagger Company bonds with a par value of $300,000 and a carrying value of $297,600. Both companies use the straight-line method to amortize bond premiums and discounts. Parker Company accounts for the investment using the cost method of accounting. Parker Company would report a balance in the Investment in Stagger Company Bonds account on December 31, 2023, of: a) $315,000. b) $297,600. c) $313,125. d) $300,000 Answer: c Question Title: Test Bank (Multiple Choice) Question 04 Difficulty: Medium Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies. Section Reference: Online Chapter Section 3 5. Which of the following methods of allocating the gain or loss on an intercompany bond retirement is the soundest conceptually? a) The gain (loss) is allocated to the company that issued the bonds. b) The gain (loss) is allocated to the company that purchased the bonds. c) The gain (loss) is allocated to the parent company.

d) The gain (loss) is allocated between the purchasing and issuing companies. Answer: d Question Title: Test Bank (Multiple Choice) Question 05 Difficulty: Easy Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies. Section Reference: Online Chapter section 3

6. The constructive gain or loss on an intercompany bond retirement is recognized in the consolidated income statement _________ the recognition of the gain or loss on the individual companies' books. a) after b) before c) at the same time as d) before or after Answer: b Question Title: Test Bank (Multiple Choice) Question 06 Difficulty: Easy Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies. Section Reference: Online Chapter section 3 7. The constructive gain or loss to the purchasing company is the difference between the: a) book value of the bonds and their par value. b) book value of the bonds and their purchase price. c) cost of the bonds and their par value. d) cost of the bonds and their purchase price. Answer: c Question Title: Test Bank (Multiple Choice) Question 07 Difficulty: Medium Learning Objective: 1 Describe the term ―constructive retirement of debt.‖, 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies. Section Reference: Online Chapter section 3

8. Parker Company owns 90% of the outstanding common stock of Stagger Company. On January 1, 2021, Stagger Company issued $500,000, 12%, ten-year bonds. On January 1, 2023, Parker Company paid $315,000 for Stagger Company bonds with a par value of $300,000 and a carrying value of $297,600. Both companies use the straight-line method to amortize bond premiums and discounts. Parker Company accounts for the investment using the cost method of accounting.

Compute the noncontrolling interest in the 2023 consolidated income assuming that Parker Company reported a net income of $240,000 (includes dividend income from Stagger Company). Stagger Company reported net income of $150,000 and declared and paid cash dividends of $90,000. a) $15,000. b) $14,790. c) $14,760. d) $15,210. Answer: b Question Title: Test Bank (Multiple Choice) Question 08 Difficulty: Hard Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies. Section Reference: Online Chapter section 3 9. Soren Corporation is an 80% owned subsidiary of Passia Company. Soren purchased bonds of Passia Company for $103,000. Passia Company reported the bond liability on the date of purchase at $100,000 less unamortized discount of $5,000. Assuming that the constructive gain or loss is material, the consolidated income statement should report an: a) ordinary loss of $8,000. b) ordinary gain of $8,000. c) extraordinary loss of $8,000 adjusted for income tax effects. d) extraordinary gain of $8,000 adjusted for income tax effects. Answer: a Question Title: Test Bank (Multiple Choice) Question 09 Difficulty: Easy Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies. Section Reference: Online Chapter section 3 10. Constructive gains and losses from intercompany bond transactions are: a) treated as extraordinary items on the consolidated income statement b) included as other revenues and expenses on the consolidated income statement. c) excluded from the consolidated income statement until realized. d) eliminated from the consolidated income statement. Answer: b Question Title: Test Bank (Multiple Choice) Question 10 Difficulty: Easy Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies. Section Reference: Online Chapter section 3

11. On January 1, 2023, Pale Company has $700,000 of 6%, 10-year bonds with an unamortized discount of $28,000. Slugg Company, an 80% subsidiary, purchased $350,000 of these bonds at 102. The gain or (loss) on the retirement of Pale’s bonds is: a) $14,000 loss. b) $14,000 gain. c) $21,000 loss. d) $21,000 gain. Answer: c Question Title: Test Bank (Multiple Choice) Question 11 Difficulty: Easy Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies. Section Reference: Online Chapter section 3

12. Pallet Corporation owns 90% of the outstanding common stock of Stealth Company. On January 1, 2021, Stealth Company issued $500,000, 12%, ten-year bonds. On January 1, 2023, Pallet Corporation paid $412,000 for Stealth Company bonds with a par value of $400,000 and a carrying value of $393,600. Both companies use the straight-line method to amortize bond premiums and discounts. Pallet Corporation accounts for the investment using the cost method of accounting. Compute the noncontrolling interest in the 2023 consolidated income assuming that Pallet Corporation reported a net income of $300,000 (includes dividend income from Stealth Company). Stealth Company reported net income of $180,000 and declared and paid cash dividends of $100,000. a) $18,000 b) $17,440 c) $17,360 d) $18,560 Answer: b Question Title: Test Bank (Multiple Choice) Question 12 Difficulty: Hard Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies. Section Reference: Online Chapter section 5

13. Parker Company owns 90% of the outstanding common stock of Stagger Company. On January 1, 2021, Stagger Company issued $500,000, 12%, ten-year bonds. On January 1, 2023, Parker Company paid $315,000 for Stagger Company bonds with a par value of $300,000 and a carrying value of $297,600. Both companies use the straight-line method to amortize bond premiums and discounts. Parker Company accounts for the investment using the cost method of accounting.

The total gain or loss on the constructive retirement of the debt to be reported in the 2023 consolidated income statement is: a) $15,000 loss. b) $15,000 gain. c) $17,400 loss. d) $17,400 gain. e) $ 2,400 loss. Answer: c Question Title: Test Bank (Multiple Choice) Question 13 Difficulty: Medium Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies. Section Reference: Online Chapter section 5 14. From a consolidated entity point of view, the constructive gain or loss on the open market purchase of a parent company's bonds by a subsidiary company is: a) considered realized at the date of the open market purchase. b) realized in future periods through discount and premium amortization on the books of the individual companies. c) realized only to the extent of the parent company's interest in the subsidiary. d) deferred and recognized in the consolidated income statement when the bonds are retired. Answer: a Question Title: Test Bank (Multiple Choice) Question 14 Difficulty: Easy Learning Objective: 1 Describe the term ―constructive retirement of debt.‖ Section Reference: Online Chapter section 5

15. Search Company is a 90% owned subsidiary of Passage Company. On January 1, 2023, Search Company purchased for $680,000 bonds of Passage Company that had a carrying value of $725,000 (par value $700,000). The bonds mature on December 31, 2024. Both companies use the straight-line method of amortization and have a December 31 year-end. The increase in 2023 consolidated income (i.e., income before subtracting noncontrolling interest) is: a) $45,000. b) $44,000. c) $54,000. d) $36,000. Answer: a Question Title: Test Bank (Multiple Choice) Question 15 Difficulty: Medium

Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies. Section Reference: Online Chapter sections 3,4,5 16. The workpaper eliminating entry for a stock dividend declared by the subsidiary includes a: a) debit to Stock Dividends Declared - S Co. b) debit to Noncontrolling interest. c) credit to Stock Dividends Declared - S Co. d) debit to Dividend Income. Answer: c Question Title: Test Bank (Multiple Choice) Question 16 Difficulty: Easy Learning Objective: 4 Determine the effect on the consolidated financial statements when a subsidiary issues a stock dividend. Section Reference: Online Chapter section 8

17. The parent company records the receipt of shares from a subsidiary's stock dividend as: a) dividend income. b) a reduction of the investment account. c) an increase in the investment account. d) none of these. Answer: d Question Title: Test Bank (Multiple Choice) Question 17 Difficulty: Easy Learning Objective: 4 Determine the effect on the consolidated financial statements when a subsidiary issues a stock dividend., 5 Understand the difference in how stock dividends and cash dividends issued by a subsidiary company affect the consolidated financial statements., 6 Determine the impact on the investment account when a subsidiary issues a stock dividend from preacquisition earnings and from postacquisition earnings. Section Reference: Online Chapter section 8

18. Pointe Company purchased bonds issued by Sentient Company on the open market at a premium. Sentient Company is a 100% owned subsidiary of Pointe Company. Pointe intends to hold the bonds until maturity. In a consolidated balance sheet, the difference between the bond carrying values in the two companies would be: a) included as a decrease to retained earnings. b) included as an increase to retained earnings. c) reported as a deferred debit to be amortized over the remaining life of the bonds. d) reported as a deferred credit to be amortized over the remaining life of the bonds. Answer: a

Question Title: Test Bank (Multiple Choice) Question 18 Difficulty: Medium Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies. Section Reference: Online Chapter section 8 19. If the book value of preferred stock is greater than its implied value, the difference is accounted for as an increase in: a) consolidated retained earnings. b) consolidated net income. c) other contributed capital. d) investment in subsidiary preferred stock. Answer: c Question Title: Test Bank (Multiple Choice) Question 19 Difficulty: Medium Learning Objective: 7 Explain how the purchase price is allocated when the subsidiary has both common and preferred stock outstanding. Section Reference: Online Chapter section 10

20. If a subsidiary has both common and preferred stock outstanding, a parent must own a controlling interest in: a) both the subsidiary's common and preferred stock to justify consolidation. b) the outstanding voting stock to justify consolidation. c) the subsidiary's common stock and at least 20% of the subsidiary's preferred stock to justify consolidation. d) the subsidiary's common stock and more than 50% of the subsidiary's preferred stock to justify consolidation. Answer: b Question Title: Test Bank (Multiple Choice) Question 20 Difficulty: Easy Learning Objective: 7 Explain how the purchase price is allocated when the subsidiary has both common and preferred stock outstanding., 8 Determine the controlling interest in income when the parent company owns both common and preferred stock of the subsidiary. Section Reference: Online Chapter section 10 21. Polish Company acquired 90% of Sandwich Company's common stock for $780,000 and 40% of its preferred stock for $180,000. On January 1, 2023, the date of acquisition, the companies reported the following account balances:

Preferred stock, $100 par value Common stock, $10 par value Other contributed capital

Polish Company $ 500,000 1,200,000 190,000

Sandwich Company $ 360,000 600,000 140,000

Retained earnings Total stockholders' equity

210,000 $2,100,000

110,000 $1,200,000

The preferred stock is 10%, cumulative, nonparticipating, and has a liquidation value equal to 104% of par value. Dividends were not paid during 2022. During 2023, Sandwich Company reported net income of $120,000 and declared and paid cash dividends in the amount of $70,000. The difference between the implied value of the preferred stock and its book value is: a) $40,000. b) $39,600. c) $34,400. d) $26,000. Answer: b Question Title: Test Bank (Multiple Choice) Question 21 Difficulty: Hard Learning Objective: 7 Explain how the purchase price is allocated when the subsidiary has both common and preferred stock outstanding. Section Reference: Online Chapter section 10

22. Pentagon Company acquired 90% of Smoker Company's common stock for $1,300,000 and 40% of its preferred stock for $300,000. On January 1, 2023, the date of acquisition, the companies reported the following account balances:

Preferred stock, $100 par value Common stock, $10 par value Other contributed capital Retained earnings Total stockholders' equity

Pentagon Company $ 800,000 2,000,000 320,000 350,000 $3,470,000

Smoker Company $ 600,000 1,000,000 230,000 180,000 $2,010,000

Section Reference: Online Chapter section 10

23. Pentagon Company acquired 90% of Smoker Company's common stock for $1,300,000 and 40% of its preferred stock for $300,000. On January 1, 2023, the date of acquisition, the companies reported the following account balances: Pentagon Company Preferred stock, $100 par value Common stock, $10 par value Other contributed capital Retained earnings Total stockholders' equity

$ 800,000 2,000,000 320,000 350,000 $3,470,000

Smoker Company $ 600,000 1,000,000 230,000 180,000 $2,010,000

The preferred stock is 10%, cumulative, nonparticipating, and has a liquidation value equal to 102% of par value. Dividends were not paid during 2022. During 2023, Smoker Company reported net income of $200,000 and declared and paid cash dividends in the amount of $120,000. Noncontrolling interest in the 2023 reported net income of Smoker Company is: a) $50,000. b) $20,000. c) $80,000. d) $56,000. Answer: a Question Title: Test Bank (Multiple Choice) Question 23 Difficulty: Hard Learning Objective: 8 Determine the controlling interest in income when the parent company owns both common and preferred stock of the subsidiary. Section Reference: Online Chapter section 10 24. Polish Company acquired 90% of Sandwich Company's common stock for $780,000 and 40% of its preferred stock for $180,000. On January 1, 2023, the date of acquisition, the companies reported the following account balances: Polish Company Preferred stock, $100 par value Common stock, $10 par value Other contributed capital Retained earnings Total stockholders' equity

$ 500,000 1,200,000 190,000 210,000 $2,100,000

Sandwich Company $ 360,000 600,000 140,000 110,000 $1,200,000

a) $29,500. b) $12,000. c) $34,000. d) $30,000. Answer: d Question Title: Test Bank (Multiple Choice) Question 24 Difficulty: Hard Learning Objective: 7 Explain how the purchase price is allocated when the subsidiary has both common and preferred stock outstanding. Section Reference: Online Chapter section 11

25. On a consolidated balance sheet, subsidiary preferred stock will be shown: a) as part of consolidated stockholder’s equity. b) combined with any preferred stock of the parent. c) as part of the noncontrolling interest amount to the extent such balance represents preferred stock held by the parent. d) as part of the noncontrolling interest amount to the extent such balance represents preferred stock held by outside interests. Answer: d Question Title: Test Bank (Multiple Choice) Question 25 Difficulty: Medium Learning Objective: 8 Determine the controlling interest in income when the parent company owns both common and preferred stock of the subsidiary. Section Reference: Online Chapter section 11 26. Pinta Company has total stockholders’ equity of $2,000,000 consisting of $400,000 of $1 par value common stock, $400,000 of other contributed capital, and $1,200,000 of retained earnings. Pinta owns 80% of Santa Maria Company purchased at book value. Santa Maria has $800,000 of 5% cumulative preferred stock outstanding. Pinta acquired 40% of the preferred stock of Santa Maria for $200,000. After this transaction the balances in Pinta’s retained earnings and other contributed capital accounts are: a) $1,200,000 and $400,000. b) $1,200,000 and $520,000. c) $1,320,000 and $400,000. d) $1,080,000 and $400,000. Answer: b Question Title: Test Bank (Multiple Choice) Question 26 Difficulty: Medium Learning Objective: 7 Explain how the purchase price is allocated when the subsidiary has both common and preferred stock outstanding.

Section Reference: Online Chapter section 11

Question Type: Essay 27. Explain the term “constructive retirement of debt‖. An affiliate company may purchase bonds issued by another affiliate directly from the issuing company or from outsiders after the original issue. In either case, because the bonds are held within the affiliated group, they are viewed as being constructively retired in the consolidated financial statements. Constructively retired means that the bonds are considered retired from a consolidated entity point of view, but legally the bonds are still outstanding as far as the issuing company is concerned. Question Title: Test Bank (Essay) Question 27 Difficulty: Medium Learning Objective: 1 Describe the term ― constructive retirement of debt‖. Section Reference: Online Chapter section 1

Question Type: Problem

28. On January 1, 2023, Pultey Company acquired an 80% interest in Saucey Company for $1,070,000. Saucey reported common stock of $1,000,000 and retained earnings of $400,000 on this date. Any difference between implied value and the book value interest acquired is attributable to land. Other information available for Saucey Company is shown below:

2023

Net Income $130,000

Cash Dividends $160,000

Pultey Company uses the cost method to account for its investment in Saucey Company. Required: A. Prepare the general journal entries for 2023 to record the receipt of the cash dividends. B. Prepare in general journal form the workpaper entries necessary in the consolidated statements workpaper for the year end December 31, 2023. Answer: A. Cash (160,000 × 0.8) Dividend Income (130,000 × 0.8) Investment in Saucey Company

B. Dividend Income Dividends Declared Investment in Saucey Company Dividends Declared

128,000 104,000 24,000

104,000 104,000 24,000 24,000

Common Stock–Saucey 1,000,000 Beginning R/E–Saucey 400,000 Difference Between Implied and Book Value Investment in Saucey Company Noncontrolling Interest in Equity Difference Between Implied and Book Value Land

62,500 1,070,000 267,500

62,500 62,500

Question Title: Test Bank (Problem) Question 1 Difficulty: Medium Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies. Section Reference: Online Chapter section 3

29. Stemberger Company issued 10-year, 8% bonds with a par value of $1,000,000 on January 2, 2022, for $1,040,000. Interest is payable semiannually on June 30 and December 31. On December 31, 2023, Putter Company purchased $700,000 of Stemberger par value bonds for $670,000. Stemberger is an 80% owned subsidiary of Putter. Both companies use the straight-line method to amortize bond discounts and premiums. Stemberger declared cash dividends of $100,000 in 2023 and reported net income of $220,000 for the year. Putter reported net income of $350,000 for 2023 and paid dividends of $160,000 during 2023. Required: A. Compute the total gain or loss on the constructive retirement of the debt. B. Allocate the total gain or loss between Stemberger Company and Putter Company. C. Compute the controlling interest in consolidated net income for 2023. D. Prepare in general journal form the intercompany bond elimination entries for the consolidated statements workpaper prepared on December 31, 2023. Answer: A. Cost of bond investment Par value Unamortized prem. (40,000 × 16/20) Carrying value of bonds Percent of bonds purchased (700/1,000) Total constructive gain B.

Putter Company ---------------Cost of bond investment $670,000 Par value

700,000

$670,000 $1,000,000 32,000 1,032,000 0.70

722,400 $52,400

Stemberger Company --------------Carrying value of bonds purchased $722,400 Par value 700,000

Constructive gain

$ 30,000 C.

Constructive gain 2023 Reported net income – Putter $350,000 - Dividend income ($100,000 × 0.8) - 80,000 Net income from independent oper. – Putter 270,000 + Constructive gain on bond retirement 30,000 Putter's contribution to consolidated income 300,000 Reported net income – Stemberger $220,000 + Constructive gain on bond retirement 22,400 Stemberger’s contribution to consolidated income 242,400 × 0.8 193,920 Controlling interest in consolidated net income $493,920 D. December 31, 2023 Investment in Stemberger Co. Bonds Constructive Gain on Bond Retirement

$ 22,400

30,000 30,000

Premium on Bonds Payable ($32,000 × 0.70) Constructive Gain on Bond Retirement

22,400

Bonds Payable Investment in Stemberger Co. Bonds

700,000

22,400

700,000

Question Title: Test Bank (Problem) Question 2 Difficulty: Hard Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies. Section Reference: Online Chapter section 4, 5 30. Pratt Company, who owns an 80% interest in Smurfe Company, purchased $2,000,000 of Smurfe’s 8% bonds at 106 on December 31, 2023. The bonds pay interest on January 1 and July 1 and mature on December 31, 2033. Pratt Company uses the cost method to account for its investment in Smurfe. Selected balances from December 31, 2023 accounts of the two companies are as follows: Pratt Investment in Smurfe 8% bonds Bond discount Interest payable 8% bonds payable Interest expense Gain or loss on constructive retirement of bonds

$2,120,000 ----------------

_____Smurfe____ $

---300,000 800,000 20,000,000 1,700,000 ----

Required: Prepare in general journal form the workpaper eliminations related to the bonds to consolidated the financial statements of Pratt and its subsidiary for the year ended December 31, 2023 and 2024. Answer:

2023

Loss on Constructive Retirement of Bonds Investment in Smurfe Company Bonds 2.

2024

120,000

Loss on Constructive Retirement of Bonds Bond Discount

120,000 30,000 30,000

Bonds Payable Investment in Smurfe Company Bonds

2,000,000

1.Beginning Retained Earnings-Pratt Investment in Smurfe Company Bonds

120,000

5. 6.

2,000,000

120,000

Beginning Retained Earnings-Pratt ($30,000 × 0.80) Noncontrolling interest Bond Discount

24,000 6,000

Investment in Smurfe Company Bonds ($120,000/3) Interest Revenue

40,000

Bond Discount [($300,000/3) × 0.10] Interest Expense

10,000

Interest Revenue Interest Expense Bonds Payable Investment in Smurfe Company Bonds

160,000

Interest Payable Interest Receivable

30,000

40,000

10,000

160,000 2,000,000 2,000,000 80,000 80,000

Question Title: Test Bank (Problem) Question 3 Difficulty: Hard Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies. Section Reference: Online Chapter section 4,5

31. On January 1, 2023, Power Company purchased 80% of the common stock of Stuckey Company for $400,000. Stuckey Company reported common stock of $200,000 ($10 par value), other contributed capital of $60,000, and retained earnings of $120,000 on this date. The difference between implied value and the book value interest acquired is attributable to the under-valuation of land held by Stuckey Company. Stuckey Company reported net income for 2023 of $100,000. During 2023 Stuckey Company declared and paid a 20% stock dividend and a $24,000 cash dividend. Stuckey Company stock had a market value of $30 per share on the date the stock dividend was declared. Power Company uses the cost method to account for its investment in Stuckey Company. Required: A. Prepare the journal entries required in the books of Power Company to account for the investment in Stuckey Company.

B. Prepare in general journal form the workpaper entries necessary in the consolidated statements workpaper for the year ended December 31, 2023. C. Prepare the workpaper entry to establish reciprocity in the 2024 consolidated statements workpaper. Answer: A. Investment in Stuckey Company 400,000 Cash 400,000 Memorandum entry – Received stock dividend of 3,200 shares of Stuckey Company stock (16,000 × 0.20) Cash

19,200 Dividend Income

19,200

B. Common Stock – Stuckey Other Contributed Capital – Stuckey Stock Dividends Declared – Stuckey

32,000 64,000 96,000

Dividend Income Dividends Declared

19,200

Beginning Retained Earnings – Stuckey Common Stock – Stuckey Other Contributed Capital – Stuckey Difference Between Implied and Book Value Investment in Stuckey Company Noncontrolling Interest in Equity

120,000 200,000 60,000 120,000

Land

19,200

400,000 100,000

120,000 Difference Between Implied and Book Value

120,000

C. Investment in Stuckey Company 28,800 Beginning Retained Earnings – Power Company

28,800

Question Title: Test Bank (Problem) Question 4 Difficulty: Hard Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies. Section Reference: Online Chapter section 4

32. On January 1, 2023, Prosser Company acquired 90% of the common stock of Simone Company for $720,000 and 20% of the preferred stock for $70,000. On this date, Simone Company reported the following account balances: Common stock ($10 par value) Preferred stock ($100 par value, 8%, cumulative, nonparticipating, liquidation value equal to par value) Other contributed capital - premium on

$600,000

300,000

common stock Retained earnings

120,000 80,000

Simone Company did not declare a cash dividend during 2022. Prosser Company uses the cost method. Required: A. During 2023, Simone Company reported net income of $360,000 and declared cash dividends of $160,000. Calculate the 2023 noncontrolling interest in net income and the amount of the cash dividends Prosser Company should have received during the year from each of the stock investments. B. Prepare, in general journal form, the workpaper entries that would be made in the preparation of the December 31, 2023, consolidated statements workpaper. The difference between the implied value of the common stock and the book value interest acquired is attributable to an undervaluation in the land of Simone Company. Any difference between the implied value of the preferred stock and its book value is allocated to other contributed capital. Answer: A. Noncontrolling interest in net income Net income reported by Simone Allocated to preferred stock ($300,000 × 0.08) Residual to common stock Noncontrolling interest in income

$360,000 24,000 × 0.80 = 19,200 336,000 × 0.10 = 33,600 $52,800

Cash dividends to Prosser Company Preferred stock dividend ($24,000 × 2) Residual to common stock Total dividends received by Prosser Company B. Dividend Income Dividends Declared – Preferred Stock Dividends Declared – Common Stock

$ 48,000 × 0.20 = $ 9,600 112,000 × 0.90 = 100,800 $110,400 110,400 9,600 100,800

Beginning Retained Earnings - Simone Company 24,000 Preferred Stock - Simone Company 300,000 Difference Between Implied and Book Value 26,000 Investment in Simone Company Preferred Stock Noncontrolling Interest in Equity

70,000 280,000

Other Contributed Capital—Prosser Company 5,200 Noncontrolling Interest in Equity 20,800 Difference Between Implied and Book Value

26,000

Beginning Retained Earnings – Simone Company 56,000 Common Stock – Simone Company 600,000 Other Contributed Capital – Simone Company 120,000 Difference Between Implied and Book Value 24,000 Investment in Simone Company Common Stock Noncontrolling Interest in Equity

720,000 80,000

Land

24,000 Difference Between Implied and Book Value

24,000

Question Title: Test Bank (Problem) Question 5 Difficulty: Hard Learning Objective: 7 Explain how the purchase price is allocated when the subsidiary has both common and preferred stock outstanding., 8 Determine the controlling interest in income when the parent company owns both common and preferred stock of the subsidiary. Section Reference: Online Chapter section 11

33. On January 1, 2023, Pippert Company acquired 80% of Skyler Company's common stock for $210,000 and 70% of Skyler's preferred stock for $80,000. Skyler Company reported the following stockholders' equity on this date: Preferred stock, 8%, Par value $20 Common stock, Par value $50 Premium on common stock Retained earnings Total

$ 100,000 200,000 30,000 80,000 $410,000

The preferred stock is cumulative, nonparticipating, and callable at 104% of par value plus dividends in arrears. On January 1, 2023, dividends were in arrears for one year. Any difference between the implied value of the preferred stock and its book value interest is to be allocated to other contributed capital. Changes in Skyler Company's retained earnings during 2023 and 2024 were as follows: January 1, 2023 Balance 2023 net income 2024 net income 2024 cash dividends December 31, 2024 Balance

$ 80,000 20,000 16,000 (30,000) $ 86,000

Required: A. Compute the difference between the implied value and book value interest acquired for the investment in preferred stock. B. Compute the balance in the Investment in Preferred Stock account on December 31, 2024. C. Compute the amount of Skyler Company's net income that will be included in the controlling interest in consolidated net income for 2024. Answer: A. Preferred stock Call premium ($100,000 × 4%) Dividends in arrears ($100,000 × 0.08) Book value interest of preferred stock Implied value ($80,000/.7) Difference between implied and book value

$100,000 4,000 8,000 112,000 114,286 $ 2,286

B. Cost of investment Less: Liquidating dividend ($8,000 × 0.70)

$80,000 5,600

Balance – 12/31

$74,400

C. Preferred stock Common stock ($16,000 - $8,000) Total

Net Income $ 8,000

Percentage Controlling interest in Interest Consolidated Income 70 $ 5,600

8,000 $16,000

6,400 $12,000

Question Title: Test Bank (Problem) Question 6 Difficulty: Hard Learning Objective: 7 Explain how the purchase price is allocated when the subsidiary has both common and preferred stock outstanding., 8 Determine the controlling interest in income when the parent company owns both common and preferred stock of the subsidiary. Section Reference: Online Chapter section 11

34. On January 2, 2023, Porous, Inc. acquired an 80% interest in Simtex Corporation for $2,250,000. Simtex reported total stockholders’ equity of $2,500,000 on this date. An examination of Simtex’s books revealed that book value was equal to fair value for all assets and liabilities except for inventory, which was undervalued by $150,000. All of the undervalued inventory was sold during 2023. Porous also purchased 30% of the $1,250,000 par value outstanding bonds of Simtex Corporation for $350,000 on January 2, 2023. The bonds mature in 10 years, carry an 11% annual interest rate payable on June 30 and December 31, and had a carrying value of $1,270,000 on the date of purchase. Both companies use the straight-line method to amortize bond discounts and premiums. Porous reported net income of $750,000 for 2023 and paid dividends of $325,000 during 2023. Simtex Corporation reported net income of $800,000 for 2023 and paid dividends of $225,000 during the year. Required: Compute the following items at December 31, 2023. 1. Carrying value of the debt. 2. Interest revenue reported by Porous, Inc. 3. Interest expense reported by Simtex Corporation. 4. Balance in the Investment in Simtex Bonds account. 5. Controlling interest in consolidated net income for 2023 using the t-account approach. 6. Noncontrolling interest in consolidated income for 2023. Answer: 1. Carrying value of debt – 1/2/2023 $1,270,000 Less: Premium amortization – [($20,000/20) × 2 periods) 2,000 Carrying value of debt – 12/31/2023 $1,268,000 2.

Stated interest (30% of $1,250,000 × 0.11) Add: Discount amortization [($25,000/20) × 2 periods)] Interest revenue

$41,250 2,500 $43,750

Stated interest ($1,250,000 × 0.11) Less: Premium amortization [($20,000/20) × 2]

$137,500 2,000

Interest expense

$135,500

Cost of bond investment (1/2/2023) Add: Discount amortization* Investment account balance – 12/31/2023

$350,000 2,500 $352,500

*$1,250,000 par × 30% less $350,000 paid divided by 10 years = $2,500. 5.

Reported net income – Porous Less: Dividend income ($225,000 × 0.80) Independent net income Add: Constructive gain on bond retirement Less: Constructive gain recorded during year Contribution of Porous to consolidated income Reported net income – Simtex Less: Amortization of difference between implied and book value: Cost of goods sold Add: Constructive gain on bond retirement [($1,270,000 - $1,250,000) × 0.30] = Less: Constructive gain recorded during year Income after adjustment in constructive gain

$750,000 180,000 570,000 25,000 (2,500) 592,500 $800,000

(150,000) 650,000 6,000 (600) 655,400 × 0.80

Porous’s share of adjusted income Controlling interest in consolidated net income

524,320 $1,116,820

Implied value of investment ($2,250,000/0.80) Book value of equity acquired Difference between implied and book value Allocated to inventory Goodwill (Excess implied value over fair value)

$2,812,500 2,500,000 312,500 150,000 $ 162,500

Noncontrolling interest in consolidated income

($2,250,000/0.80) – $2,250,000 = $562,500

Question Title: Test Bank (Problem) Question 7 Difficulty: Hard Learning Objective: 2 Describe how the gain or loss on constructive retirement of intercompany bond holdings is allocated between the purchasing and issuing companies. Section Reference: Online Chapter section 3,4

35. On January 2, 2023, Palomine Corporation purchased 80% of the outstanding common stock and 30% of the outstanding cumulative, nonparticipating, preferred stock of Sour Company for $800,000 and $140,000, respectively. At this date, Sour Company reported account balances of $800,000 in common stock, $400,000 in preferred stock and $200,000 in retained earnings. No other contributed capital accounts exist. The difference between implied and book value of the common stock is attributable to under- or overvalued land. Dividends on the 12% cumulative preferred stock (par $10) were not paid during 2022. Palomine

Sour

Corporation $ 90,000 169,200 50,000

1/2/2023 Retained Earnings 2023 Reported Net Income 2023 Dividends Declared

Company $200,000 180,000 100,000

Required: A. Prepare the journal entries made by Palomine Corporation in 2023 to account for the investments assuming the partial equity method is used. B. Compute the noncontrolling interest in Sour Company’s net income. C. Prepare the 2023 workpaper entries related to the foregoing investments assuming the partial equity method is used to account for the investment. Answer: A. Investment in Sour Company Preferred Stock Investment in Sour Company Common Stock Cash

140,000 800,000 940,000

Cash (preferred stock) Equity in Subsidiary Income – Preferred Stock Investment in Sour Company Common Stock

28,800

Cash

3,200

14,400 14,400

Investment in Sour Company Common Stock

3,200

Investment in Sour Company Common Stock Equity in Subsidiary Income {[($180,000 – ($400,000 × 0.12)] × (.80)}

105,600

Preferred Stock $48,000 48,000 96,000 0.30 $28,800

Common Stock

Arrears Current year Total Percentage interest

105,600

$4,000 4,000 0.80 $3,200

Reported net income – 2023 Allocation to preferred stock interest ($400,000 × 0.12) Residual to common stock interest Noncontrolling interest in 2023 net income

Investment in Sour Company Preferred Stock Investment in Sour Company Common Stock Dividends Declared – Preferred Stock

14,400 14,400

Equity in Subsidiary Income Dividends Declared – Common Stock Investment in Sour Company Common Stock

105,600

Beginning Retained Earnings – Sour Company

48,000

$180,000 48,000 × 0.70 = $33,600 $132,000 × 0.20 = 26,400 $60,000

28,800

3,200 102,400

Preferred Stock Other Contributed Capital (or Retained Earnings) Investment in Sour Company Preferred Stock Noncontrolling Interest in Equity*

400,000 5,600 140,000 313,600

*($400,000 + $48,000)] × 0.7 = $313,600 Beginning Retained Earnings – Sour Company Common Stock Difference between Implied and Book Value Investment in Sung Company Common Stock Noncontrolling Interest in Equity

152,000 800,000 48,000 800,000 200,000

Question Title: Test Bank (Problem) Question 8 Difficulty: Hard Learning Objective: 7 Explain how the purchase price is allocated when the subsidiary has both common and preferred stock outstanding., 8 Determine the controlling interest in income when the parent company owns both common and preferred stock of the subsidiary. Section Reference: Online Chapter section 11