TEST BANK For Advanced Accounting 12th Edition. Joe Hoyle Thomas Schaefer Timothy Doupnik by welldoneassistant

Advanced Accounting 12e Joe Hoyle Thomas SchaeferTimothy Doupnik (Test Bank All Chapters, 100% Original Verified, A+ Grade) Answers At The End Of Each Chapter Chapter 01 The Equity Method of Accounting for Investments

Multiple Choice Questions

1. Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value method to account for this investment. Trace reported net income of $110,000 for 2013 and paid dividends of $60,000 on October 1, 2013. How much income should Gaw recognize on this investment in 2013?

A. $16,500. B. $9,000. C. $25,500. D. $7,500. E. $50,000.

2. Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to account for the investment. During 2013, Dew reported income of $250,000 and paid dividends of $80,000. There is no amortization associated with the investment. During 2013, how much income should Yaro recognize related to this investment?

A. $24,000. B. $75,000. C. $99,000. D. $51,000. E. $80,000.

3. On January 1, 2013, Pacer Company paid $1,920,000 for 60,000 shares of Lennon Co.'s voting common stock which represents a 45% investment. No allocation to goodwill or other specific account was made. Significant influence over Lennon was achieved by this acquisition. Lennon distributed a dividend of $2.50 per share during 2013 and reported net income of $670,000. What was the balance in the Investment in Lennon Co. account found in the financial records of Pacer as of December 31, 2013?

A. $2,040,500. B. $2,212,500. C. $2,260,500. D. $2,171,500. E. $2,071,500.

4. A company should always use the equity method to account for an investment if:

A. It has the ability to exercise significant influence over the operating policies of the investee. B. It owns 30% of another company's stock. C. It has a controlling interest (more than 50%) of another company's stock. D. The investment was made primarily to earn a return on excess cash. E. It does not have the ability to exercise significant influence over the operating policies of the investee.

5. On January 1, 2011, Dermot Company purchased 15% of the voting common stock of Horne Corp. On January 1, 2013, Dermot purchased 28% of Horne's voting common stock. If Dermot achieves significant influence with this new investment, how must Dermot account for the change to the equity method?

A. It must use the equity method for 2013 but should make no changes in its financial statements for 2012 and 2011. B. It should prepare consolidated financial statements for 2013. C. It must restate the financial statements for 2012 and 2011 as if the equity method had been used for those two years. D. It should record a prior period adjustment at the beginning of 2013 but should not restate the financial statements for 2012 and 2011. E. It must restate the financial statements for 2012 as if the equity method had been used then.

6. During January 2012, Wells, Inc. acquired 30% of the outstanding common stock of Wilton Co. for $1,400,000. This investment gave Wells the ability to exercise significant influence over Wilton. Wilton's assets on that date were recorded at $6,400,000 with liabilities of $3,000,000. Any excess of cost over book value of Wells' investment was attributed to unrecorded patents having a remaining useful life of ten years. In 2012, Wilton reported net income of $600,000. For 2013, Wilton reported net income of $750,000. Dividends of $200,000 were paid in each of these two years. What was the reported balance of Wells' Investment in Wilson Co. at December 31, 2013?

A. $1,609,000. B. $1,485,000. C. $1,685,000. D. $1,647,000. E. $1,054,300.

7. On January 1, 2013, Bangle Company purchased 30% of the voting common stock of Sleat Corp. for $1,000,000. Any excess of cost over book value was assigned to goodwill. During 2013, Sleat paid dividends of $24,000 and reported a net loss of $140,000. What is the balance in the investment account on December 31, 2013?

A. $950,800. B. $958,000. C. $836,000. D. $990,100. E. $956,400.

8. On January 1, 2013, Jordan Inc. acquired 30% of Nico Corp. Jordan used the equity method to account for the investment. On January 1, 2014, Jordan sold two-thirds of its investment in Nico. It no longer had the ability to exercise significant influence over the operations of Nico. How should Jordan have accounted for this change?

A. Jordan should continue to use the equity method to maintain consistency in its financial statements. B. Jordan should restate the prior years' financial statements and change the balance in the investment account as if the fair-value method had been used since 2013. C. Jordan has the option of using either the equity method or the fair-value method for 2013 and future years. D. Jordan should report the effect of the change from the equity to the fair-value method as a retrospective change in accounting principle. E. Jordan should use the fair-value method for 2014 and future years but should not make a retrospective adjustment to the investment account.

9. Tower Inc. owns 30% of Yale Co. and applies the equity method. During the current year, Tower bought inventory costing $66,000 and then sold it to Yale for $120,000. At year-end, only $24,000 of merchandise was still being held by Yale. What amount of intra-entity inventory profit must be deferred by Tower?

A. $6,480. B. $3,240. C. $10,800. D. $16,200. E. $6,610.

10. On January 4, 2013, Watts Co. purchased 40,000 shares (40%) of the common stock of Adams Corp., paying $800,000. There was no goodwill or other cost allocation associated with the investment. Watts has significant influence over Adams. During 2013, Adams reported income of $200,000 and paid dividends of $80,000. On January 2, 2014, Watts sold 5,000 shares for $125,000. What was the balance in the investment account after the shares had been sold?

A. $848,000. B. $742,000. C. $723,000. D. $761,000. E. $925,000.

11. On January 3, 2013, Austin Corp. purchased 25% of the voting common stock of Gainsville Co., paying $2,500,000. Austin decided to use the equity method to account for this investment. At the time of the investment, Gainsville's total stockholders' equity was $8,000,000. Austin gathered the following information about Gainsville's assets and liabilities:

For all other assets and liabilities, book value and fair value were equal. Any excess of cost over fair value was attributed to goodwill, which has not been impaired. What is the amount of goodwill associated with the investment?

A. $500,000. B. $200,000. C. $0. D. $300,000. E. $400,000.

12. On January 3, 2013, Austin Corp. purchased 25% of the voting common stock of Gainsville Co., paying $2,500,000. Austin decided to use the equity method to account for this investment. At the time of the investment, Gainsville's total stockholders' equity was $8,000,000. Austin gathered the following information about Gainsville's assets and liabilities:

For all other assets and liabilities, book value and fair value were equal. Any excess of cost over fair value was attributed to goodwill, which has not been impaired. For 2013, what is the total amount of excess amortization for Austin's 25% investment in Gainsville?

A. $27,500. B. $20,000. C. $30,000. D. $120,000. E. $70,000.

13. Club Co. appropriately uses the equity method to account for its investment in Chip Corp. As of the end of 2013, Chip's common stock had suffered a significant decline in fair value, which is expected to be recovered over the next several months. How should Club account for the decline in value?

A. Club should switch to the fair-value method. B. No accounting because the decline in fair value is temporary. C. Club should decrease the balance in the investment account to the current value and recognize a loss on the income statement. D. Club should not record its share of Chip's 2013 earnings until the decline in the fair value of the stock has been recovered. E. Club should decrease the balance in the investment account to the current value and recognize an unrealized loss on the balance sheet.

14. An upstream sale of inventory is a sale:

A. between subsidiaries owned by a common parent. B. with the transfer of goods scheduled by contract to occur on a specified future date. C. in which the goods are physically transported by boat from a subsidiary to its parent. D. made by the investor to the investee. E. made by the investee to the investor.

15. Atlarge Inc. owns 30% of the outstanding voting common stock of Ticker Co. and has the ability to significantly influence the investee's operations and decision making. On January 1, 2013, the balance in the Investment in Ticker Co. account was $402,000. Amortization associated with the purchase of this investment is $8,000 per year. During 2013, Ticker earned income of $108,000 and paid cash dividends of $36,000. Previously in 2012, Ticker had sold inventory costing $28,800 to Atlarge for $48,000. All but 25% of this merchandise was consumed by Atlarge during 2012. The remainder was used during the first few weeks of 2013. Additional sales were made to Atlarge in 2013; inventory costing $33,600 was transferred at a price of $60,000. Of this total, 40% was not consumed until 2014. What amount of equity income would Atlarge have recognized in 2013 from its ownership interest in Ticker?

A. $19,792. B. $27,640. C. $22,672. D. $24,400. E. $21,748.

16. Atlarge Inc. owns 30% of the outstanding voting common stock of Ticker Co. and has the ability to significantly influence the investee's operations and decision making. On January 1, 2013, the balance in the Investment in Ticker Co. account was $402,000. Amortization associated with the purchase of this investment is $8,000 per year. During 2013, Ticker earned income of $108,000 and paid cash dividends of $36,000. Previously in 2012, Ticker had sold inventory costing $28,800 to Atlarge for $48,000. All but 25% of this merchandise was consumed by Atlarge during 2012. The remainder was used during the first few weeks of 2013. Additional sales were made to Atlarge in 2013; inventory costing $33,600 was transferred at a price of $60,000. Of this total, 40% was not consumed until 2014. What was the balance in the Investment in Ticker Co. account at the end of 2013?

A. $401,136. B. $413,872. C. $418,840. D. $412,432. E. $410,148.

17. On January 1, 2013, Deuce Inc. acquired 15% of Wiz Co.'s outstanding common stock for $62,400 and categorized the investment as an available-for-sale security. Wiz earned net income of $96,000 in 2013 and paid dividends of $36,000. On January 1, 2014, Deuce bought an additional 10% of Wiz for $54,000. This second purchase gave Deuce the ability to significantly influence the decision making of Wiz. During 2014, Wiz earned $120,000 and paid $48,000 in dividends. As of December 31, 2014, Wiz reported a net book value of $468,000. For both purchases, Deuce concluded that Wiz Co.'s book values approximated fair values and attributed any excess cost to goodwill. On Deuce's December 31, 2014 balance sheet, what balance was reported for the Investment

in Wiz Co. account?

A. $139,560. B. $143,400. C. $310,130. D. $186,080. E. $182,250.

18. On January 1, 2013, Deuce Inc. acquired 15% of Wiz Co.'s outstanding common stock for $62,400 and categorized the investment as an available-for-sale security. Wiz earned net income of $96,000 in 2013 and paid dividends of $36,000. On January 1, 2014, Deuce bought an additional 10% of Wiz for $54,000. This second purchase gave Deuce the ability to significantly influence the decision making of Wiz. During 2014, Wiz earned $120,000 and paid $48,000 in dividends. As of December 31, 2014, Wiz reported a net book value of $468,000. For both purchases, Deuce concluded that Wiz Co.'s book values approximated fair values and attributed any excess cost to goodwill. What amount of equity income should Deuce have reported for 2014?

A. $30,000. B. $16,420. C. $38,340. D. $18,000. E. $32,840.

19. In a situation where the investor exercises significant influence over the investee, which of the following entries is not actually posted to the books of the investor? 1) Debit to the Investment account, and a Credit to the Equity in Investee Income account. 2) Debit to Cash (for dividends received from the investee), and a Credit to Dividend Revenue. 3) Debit to Cash (for dividends received from the investee), and a Credit to the Investment account.

A. Entries 1 and 2. B. Entries 2 and 3. C. Entry 1 only. D. Entry 2 only. E. Entry 3 only.

20. All of the following would require use of the equity method for investments except:

A. material intra-entity transactions. B. investor participation in the policy-making process of the investee. C. valuation at fair value. D. technological dependency. E. significant control.

21. All of the following statements regarding the investment account using the equity method are true except:

A. The investment is recorded at cost. B. Dividends received are reported as revenue. C. Net income of investee increases the investment account. D. Dividends received reduce the investment account. E. Amortization of fair value over cost reduces the investment account.

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

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

23. A company has been using the equity method to account for its investment. The company sells shares and does not continue to have significant control. Which of the following statements is true?

24. An investee company incurs an extraordinary loss during the period. The investor appropriately applies the equity method. Which of the following statements is true?

A. Under the equity method, the investor only recognizes its share of investee's income from continuing operations. B. The extraordinary loss would reduce the value of the investment. C. The extraordinary loss should increase equity in investee income. D. The extraordinary loss would not appear on the income statement but would be a component of comprehensive income. E. The loss would be ignored but shown in the investor's notes to the financial statements.

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

A. The equity in investee income is reduced. B. A loss is reported the same as a loss in value of other long-term assets. C. The investor's stockholders' equity is reduced. D. No adjustment is necessary. E. An extraordinary loss would be reported.

26. Under the equity method, when the company's share of cumulative losses equals its investment and the company has no obligation or intention to fund such additional losses, which of the following statements is true?

A. The investor should change to the fair-value method to account for its investment. B. The investor should suspend applying the equity method until the investee reports income. C. The investor should suspend applying the equity method and not record any equity in income of investee until its share of future profits is sufficient to recover losses that have not previously been recorded. D. The cumulative losses should be reported as a prior period adjustment. E. The investor should report these losses as extraordinary items.

27. When an investor sells shares of its investee company, which of the following statements is true?

A. A realized gain or loss is reported as the difference between selling price and original cost. B. An unrealized gain or loss is reported as the difference between selling price and original cost. C. A realized gain or loss is reported as the difference between selling price and carrying value. D. An unrealized gain or loss is reported as the difference between selling price and carrying value. E. Any gain or loss is reported as part as comprehensive income.

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

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

29. After allocating cost in excess of book value, which asset or liability would not be amortized over a useful life?

A. Cost of goods sold. B. Property, plant, & equipment. C. Patents. D. Goodwill. E. Bonds payable.

30. Which statement is true concerning unrealized profits in intra-entity inventory transfers when an investor uses the equity method?

A. The investee must defer upstream ending inventory profits. B. The investee must defer upstream beginning inventory profits. C. The investor must defer downstream ending inventory profits. D. The investor must defer downstream beginning inventory profits. E. The investor must defer upstream beginning inventory profits.

31. Which statement is true concerning unrealized profits in intra-entity inventory transfers when an investor uses the equity method?

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

32. On January 1, 2012, Dawson, Incorporated, paid $100,000 for a 30% interest in Sacco Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2012, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2013 it reported income of $75,000 and dividends of $30,000. Assume Dawson has the ability to significantly influence the operations of Sacco. The amount allocated to goodwill at January 1, 2012, is

A. $25,000. B. $13,000. C. $9,000. D. $16,000. E. $10,000.

33. On January 1, 2012, Dawson, Incorporated, paid $100,000 for a 30% interest in Sacco Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2012, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2013 it reported income of $75,000 and dividends of $30,000. Assume Dawson has the ability to significantly influence the operations of Sacco. The equity in income of Sacco for 2012, is

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

34. On January 1, 2012, Dawson, Incorporated, paid $100,000 for a 30% interest in Sacco Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2012, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2013 it reported income of $75,000 and dividends of $30,000. Assume Dawson has the ability to significantly influence the operations of Sacco. The equity in income of Sacco for 2013, is

A. $22,500. B. $21,000. C. $12,000. D. $13,500. E. $75,000.

35. On January 1, 2012, Dawson, Incorporated, paid $100,000 for a 30% interest in Sacco Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2012, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2013 it reported income of $75,000 and dividends of $30,000. Assume Dawson has the ability to significantly influence the operations of Sacco. The balance in the Investment in Sacco account at December 31, 2012, is

A. $100,000. B. $112,000. C. $106,000. D. $107,500. E. $140,000.

36. On January 1, 2012, Dawson, Incorporated, paid $100,000 for a 30% interest in Sacco Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2012, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2013 it reported income of $75,000 and dividends of $30,000. Assume Dawson has the ability to significantly influence the operations of Sacco. The balance in the Investment in Sacco account at December 31, 2013, is

A. $119,500. B. $125,500. C. $116,500. D. $118,000. E. $100,000.

37. Dodge, Incorporated acquires 15% of Gates Corporation on January 1, 2013, for $105,000 when the book value of Gates was $600,000. During 2013 Gates reported net income of $150,000 and paid dividends of $50,000. On January 1, 2014, Dodge purchased an additional 25% of Gates for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2013 but Dodge has deemed it necessary to change to the equity method after the second purchase. During 2014 Gates reported net income of $200,000 and reported dividends of $75,000. The income reported by Dodge for 2013 with regard to the Gates investment is

A. $7,500. B. $22,500. C. $15,000. D. $100,000. E. $150,000.

38. Dodge, Incorporated acquires 15% of Gates Corporation on January 1, 2013, for $105,000 when the book value of Gates was $600,000. During 2013 Gates reported net income of $150,000 and paid dividends of $50,000. On January 1, 2014, Dodge purchased an additional 25% of Gates for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2013 but Dodge has deemed it necessary to change to the equity method after the second purchase. During 2014 Gates reported net income of $200,000 and reported dividends of $75,000. The income reported by Dodge for 2014 with regard to the Gates investment is

A. $80,000. B. $30,000. C. $50,000. D. $15,000. E. $75,000.

39. Dodge, Incorporated acquires 15% of Gates Corporation on January 1, 2013, for $105,000 when the book value of Gates was $600,000. During 2013 Gates reported net income of $150,000 and paid dividends of $50,000. On January 1, 2014, Dodge purchased an additional 25% of Gates for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2013 but Dodge has deemed it necessary to change to the equity method after the second purchase. During 2014 Gates reported net income of $200,000 and reported dividends of $75,000. Which adjustment would be made to change from the fair-value method to the equity method?

A. A debit to additional paid-in capital for $15,000. B. A credit to additional paid-in capital for $15,000. C. A debit to retained earnings for $15,000. D. A credit to retained earnings for $15,000. E. A credit to a gain on investment.

40. Dodge, Incorporated acquires 15% of Gates Corporation on January 1, 2013, for $105,000 when the book value of Gates was $600,000. During 2013 Gates reported net income of $150,000 and paid dividends of $50,000. On January 1, 2014, Dodge purchased an additional 25% of Gates for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2013 but Dodge has deemed it necessary to change to the equity method after the second purchase. During 2014 Gates reported net income of $200,000 and reported dividends of $75,000. The balance in the investment account at December 31, 2014, is

A. $370,000. B. $355,000. C. $305,000. D. $400,000. E. $105,000.

41. Clancy Incorporated, sold $210,000 of its inventory to Reid Company during 2013 for $350,000. Reid sold $224,000 of this merchandise in 2013 with the remainder to be disposed of during 2014. Assume Clancy owns 30% of Reid and applies the equity method. What journal entry will be recorded at the end of 2013 to defer the unrealized intra-entity profits?

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

42. Clancy Incorporated, sold $210,000 of its inventory to Reid Company during 2013 for $350,000. Reid sold $224,000 of this merchandise in 2013 with the remainder to be disposed of during 2014. Assume Clancy owns 30% of Reid and applies the equity method. What journal entry will be recorded in 2014 to realize the intra-entity profit that was deferred in 2013?

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

43. On January 1, 2012, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2013 Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2012, was $1,000,000. The book value of Cook on January 1, 2013, was $1,150,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over five years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years:

On April 1, 2014, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. What is the balance in the investment account at December 31, 2012?

A. $150,000. B. $172,500. C. $180,000. D. $157,500. E. $170,000.

44. On January 1, 2012, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2013 Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2012, was $1,000,000. The book value of Cook on January 1, 2013, was $1,150,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over five years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years:

On April 1, 2014, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. How much income did Mehan report from Cook during 2012?

A. $30,000. B. $22,500. C. $7,500. D. $0. E. $50,000.

45. On January 1, 2012, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2013 Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2012, was $1,000,000. The book value of Cook on January 1, 2013, was $1,150,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over five years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years:

On April 1, 2014, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. How much income did Mehan report from Cook during 2013?

A. $90,000. B. $110,000. C. $67,500. D. $87,500. E. $78,750.

46. On January 1, 2012, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2013 Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2012, was $1,000,000. The book value of Cook on January 1, 2013, was $1,150,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over five years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years:

On April 1, 2014, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. What was the balance in the investment account at December 31, 2013?

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

47. On January 1, 2012, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2013 Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2012, was $1,000,000. The book value of Cook on January 1, 2013, was $1,150,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over five years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years:

On April 1, 2014, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. What was the balance in the investment account at April 1, 2014 just before the sale of shares?

A. $468,281. B. $468,750. C. $558,375. D. $616,000. E. $624,375.

48. On January 1, 2012, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2013 Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2012, was $1,000,000. The book value of Cook on January 1, 2013, was $1,150,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over five years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years:

On April 1, 2014, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. How much of Cook's net income did Mehan report for the year 2014?

A. $61,750. B. $81,250. C. $72,500. D. $59,250. E. $75,000.

49. On January 4, 2012, Harley, Inc. acquired 40% of the outstanding common stock of Bike Co. for $2,400,000. This investment gave Harley the ability to exercise significant influence over Bike. Bike's assets on that date were recorded at $10,500,000 with liabilities of $4,500,000. There were no other differences between book and fair values. During 2012, Bike reported net income of $500,000. For 2013, Bike reported net income of $800,000. Dividends of $300,000 were paid in each of these two years. How much income did Harley report from Bike for 2012?

A. $120,000. B. $200,000. C. $300,000. D. $320,000. E. $500,000.

50. On January 4, 2012, Harley, Inc. acquired 40% of the outstanding common stock of Bike Co. for $2,400,000. This investment gave Harley the ability to exercise significant influence over Bike. Bike's assets on that date were recorded at $10,500,000 with liabilities of $4,500,000. There were no other differences between book and fair values. During 2012, Bike reported net income of $500,000. For 2013, Bike reported net income of $800,000. Dividends of $300,000 were paid in each of these two years. How much income did Harley report from Bike for 2013?

A. $120,000. B. $200,000. C. $300,000. D. $320,000. E. $500,000.

51. On January 4, 2012, Harley, Inc. acquired 40% of the outstanding common stock of Bike Co. for $2,400,000. This investment gave Harley the ability to exercise significant influence over Bike. Bike's assets on that date were recorded at $10,500,000 with liabilities of $4,500,000. There were no other differences between book and fair values. During 2012, Bike reported net income of $500,000. For 2013, Bike reported net income of $800,000. Dividends of $300,000 were paid in each of these two years. What was the reported balance of Harley's Investment in Bike Co. at December 31, 2012?

A. $880,000. B. $2,400,000. C. $2,480,000. D. $2,600,000. E. $2,900,000.

52. On January 4, 2012, Harley, Inc. acquired 40% of the outstanding common stock of Bike Co. for $2,400,000. This investment gave Harley the ability to exercise significant influence over Bike. Bike's assets on that date were recorded at $10,500,000 with liabilities of $4,500,000. There were no other differences between book and fair values. During 2012, Bike reported net income of $500,000. For 2013, Bike reported net income of $800,000. Dividends of $300,000 were paid in each of these two years. What was the reported balance of Harley's Investment in Bike Co. at December 31, 2013?

A. $2,400,000. B. $2,480,000. C. $2,500,000. D. $2,600,000. E. $2,680,000.

53. On January 1, 2013, Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000, which approximated book value. During 2013, Barney paid dividends of $30,000 and reported a net loss of $70,000. What is the balance in the investment account on December 31, 2013?

A. $1,900,000. B. $1,960,000. C. $2,000,000. D. $2,016,000. E. $2,028,000.

54. On January 1, 2013, Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000, which approximated book value. During 2013, Barney paid dividends of $30,000 and reported a net loss of $70,000. What amount of equity income would Anderson recognize in 2013 from its ownership interest in Barney?

A. $12,000 income. B. $12,000 loss. C. $16,000 loss. D. $28,000 income. E. $28,000 loss.

55. Luffman Inc. owns 30% of Bruce Inc. and appropriately applies the equity method. During the current year, Bruce bought inventory costing $52,000 and then sold it to Luffman for $80,000. At year-end, all of the merchandise had been sold by Luffman to other customers. What amount of unrealized intercompany profit must be deferred by Luffman?

A. $0. B. $8,400. C. $28,000. D. $52,000. E. $80,000.

56. On January 3, 2013, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation, paying $1,500,000. There was no goodwill or other cost allocation associated with the investment. Roberts has significant influence over Thomas. During 2013, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2014, Roberts sold 15,000 shares for $800,000. What was the balance in the investment account before the shares were sold?

A. $1,560,000. B. $1,600,000. C. $1,700,000. D. $1,800,000. E. $1,860,000.

57. On January 3, 2013, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation, paying $1,500,000. There was no goodwill or other cost allocation associated with the investment. Roberts has significant influence over Thomas. During 2013, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2014, Roberts sold 15,000 shares for $800,000. What is the gain/loss on the sale of the 15,000 shares?

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

58. On January 3, 2013, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation, paying $1,500,000. There was no goodwill or other cost allocation associated with the investment. Roberts has significant influence over Thomas. During 2013, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2014, Roberts sold 15,000 shares for $800,000. What is the balance in the investment account after the sale of the 15,000 shares?

A. $750,000. B. $760,000. C. $780,000. D. $790,000. E. $800,000.

59. On January 3, 2013, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation, paying $1,500,000. There was no goodwill or other cost allocation associated with the investment. Roberts has significant influence over Thomas. During 2013, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2014, Roberts sold 15,000 shares for $800,000. What is the appropriate journal entry to record the sale of the 15,000 shares?

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

60. On January 4, 2013, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly's net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2013, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2014, Mason sold 10,000 shares for $150,000. What was the balance in the investment account before the shares were sold?

A. $520,000. B. $544,000. C. $560,000. D. $604,000. E. $620,000.

61. On January 4, 2013, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly's net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2013, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2014, Mason sold 10,000 shares for $150,000. What is the gain/loss on the sale of the 10,000 shares?

A. $20,000 gain. B. $10,000 gain. C. $1,000 gain. D. $1,000 loss. E. $10,000 loss.

62. On January 4, 2013, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly's net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2013, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2014, Mason sold 10,000 shares for $150,000. What is the balance in the investment account after the sale of the 10,000 shares?

A. $390,000. B. $420,000. C. $453,000. D. $454,000. E. $465,000.

63. On January 4, 2013, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly's net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2013, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2014, Mason sold 10,000 shares for $150,000. What is the appropriate journal entry to record the sale of the 10,000 shares?

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

64. On January 4, 2013, Bailey Corp. purchased 40% of the voting common stock of Emery Co., paying $3,000,000. Bailey properly accounts for this investment using the equity method. At the time of the investment, Emery's total stockholders' equity was $5,000,000. Bailey gathered the following information about Emery's assets and liabilities whose book values and fair values differed:

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Emery Co. reported net income of $400,000 for 2013, and paid dividends of $200,000 during that year. What is the amount of the excess of purchase price over book value?

A. $(2,000,000). B. $800,000. C. $1,000,000. D. $2,000,000. E. $3,000,000.

65. On January 4, 2013, Bailey Corp. purchased 40% of the voting common stock of Emery Co., paying $3,000,000. Bailey properly accounts for this investment using the equity method. At the time of the investment, Emery's total stockholders' equity was $5,000,000. Bailey gathered the following information about Emery's assets and liabilities whose book values and fair values differed:

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Emery Co. reported net income of $400,000 for 2013, and paid dividends of $200,000 during that year. How much goodwill is associated with this investment?

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

66. On January 4, 2013, Bailey Corp. purchased 40% of the voting common stock of Emery Co., paying $3,000,000. Bailey properly accounts for this investment using the equity method. At the time of the investment, Emery's total stockholders' equity was $5,000,000. Bailey gathered the following information about Emery's assets and liabilities whose book values and fair values differed:

A. $0. B. $84,000. C. $100,000. D. $160,000. E. $400,000.

67. On January 1, 2013, Jackie Corp. purchased 30% of the voting common stock of Rob Co., paying $2,000,000. Jackie properly accounts for this investment using the equity method. At the time of the investment, Rob's total stockholders' equity was $3,000,000. Jackie gathered the following information about Rob's assets and liabilities whose book values and fair values differed:

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Rob Co. reported net income of $300,000 for 2013, and paid dividends of $100,000 during that year. What is the amount of the excess of purchase price over book value?

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

68. On January 1, 2013, Jackie Corp. purchased 30% of the voting common stock of Rob Co., paying $2,000,000. Jackie properly accounts for this investment using the equity method. At the time of the investment, Rob's total stockholders' equity was $3,000,000. Jackie gathered the following information about Rob's assets and liabilities whose book values and fair values differed:

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Rob Co. reported net income of $300,000 for 2013, and paid dividends of $100,000 during that year. How much goodwill is associated with this investment?

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

69. On January 1, 2013, Jackie Corp. purchased 30% of the voting common stock of Rob Co., paying $2,000,000. Jackie properly accounts for this investment using the equity method. At the time of the investment, Rob's total stockholders' equity was $3,000,000. Jackie gathered the following information about Rob's assets and liabilities whose book values and fair values differed:

A. $0. B. $30,000. C. $40,000. D. $55,000. E. $60,000.

70. On January 1, 2013, Jackie Corp. purchased 30% of the voting common stock of Rob Co., paying $2,000,000. Jackie properly accounts for this investment using the equity method. At the time of the investment, Rob's total stockholders' equity was $3,000,000. Jackie gathered the following information about Rob's assets and liabilities whose book values and fair values differed:

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Rob Co. reported net income of $300,000 for 2013, and paid dividends of $100,000 during that year. What is the balance in Jackie Corp's Investment in Rob Co. account at December 31, 2013?

A. $2,000,000. B. $2,005,000. C. $2,060,000. D. $2,090,000. E. $2,200,000.

71. Acker Inc. bought 40% of Howell Co. on January 1, 2012 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows:

Howell reported net income of $100,000 in 2012 and $120,000 in 2013 while paying $40,000 in dividends each year. What is the amount of unrealized intra-entity inventory profit to be deferred on December 31, 2012?

A. $1,600. B. $4,000. C. $8,000. D. $15,000. E. $20,000.

72. Acker Inc. bought 40% of Howell Co. on January 1, 2012 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows:

A. $1,600. B. $8,000. C. $15,000. D. $20,000. E. $40,000.

73. Acker Inc. bought 40% of Howell Co. on January 1, 2012 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows:

Howell reported net income of $100,000 in 2012 and $120,000 in 2013 while paying $40,000 in dividends each year. What is the Equity in Howell Income that should be reported by Acker in 2012?

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

74. Acker Inc. bought 40% of Howell Co. on January 1, 2012 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows:

Howell reported net income of $100,000 in 2012 and $120,000 in 2013 while paying $40,000 in dividends each year. What is the balance in Acker's Investment in Howell account at December 31, 2012?

A. $576,000. B. $598,400. C. $614,400. D. $606,000. E. $616,000.

75. Acker Inc. bought 40% of Howell Co. on January 1, 2012 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows:

Howell reported net income of $100,000 in 2012 and $120,000 in 2013 while paying $40,000 in dividends each year. What is the Equity in Howell Income that should be reported by Acker in 2013?

A. $32,000. B. $41,600. C. $48,000. D. $49,600. E. $50,600.

76. Acker Inc. bought 40% of Howell Co. on January 1, 2012 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows:

Howell reported net income of $100,000 in 2012 and $120,000 in 2013 while paying $40,000 in dividends each year. What is the balance in Acker's Investment in Howell account at December 31, 2013?

A. $624,000. B. $636,000. C. $646,000. D. $656,000. E. $666,000.

77. Cayman Inc. bought 30% of Maya Company on January 1, 2013 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows:

Maya reported net income of $100,000 in 2013 and $120,000 in 2014 while paying $40,000 in dividends each year. What is the amount of unrealized intra-entity inventory profit to be deferred on December 31, 2013?

A. $900. B. $3,000. C. $4,500. D. $6,000. E. $9,000.

78. Cayman Inc. bought 30% of Maya Company on January 1, 2013 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows:

Maya reported net income of $100,000 in 2013 and $120,000 in 2014 while paying $40,000 in dividends each year. What is the amount of unrealized inventory profit to be deferred on December 31, 2014?

A. $1,500. B. $2,400. C. $3,600. D. $4,000. E. $8,000.

79. Cayman Inc. bought 30% of Maya Company on January 1, 2013 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows:

Maya reported net income of $100,000 in 2013 and $120,000 in 2014 while paying $40,000 in dividends each year. What is the Equity in Maya Income that should be reported by Cayman in 2013?

A. $17,100. B. $18,000. C. $25,500. D. $29,100. E. $30,900.

80. Cayman Inc. bought 30% of Maya Company on January 1, 2013 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows:

Maya reported net income of $100,000 in 2013 and $120,000 in 2014 while paying $40,000 in dividends each year. What is the balance in Cayman's Investment in Maya account at December 31, 2013?

A. $463,500. B. $467,100. C. $468,000. D. $468,900. E. $480,000.

81. Cayman Inc. bought 30% of Maya Company on January 1, 2013 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows:

Maya reported net income of $100,000 in 2013 and $120,000 in 2014 while paying $40,000 in dividends each year. What is the Equity in Maya Income that should be reported by Cayman in 2014?

A. $34,200. B. $34,800. C. $34,500. D. $36,000. E. $37,800.

82. Cayman Inc. bought 30% of Maya Company on January 1, 2013 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows:

Maya reported net income of $100,000 in 2013 and $120,000 in 2014 while paying $40,000 in dividends each year. What is the balance in Cayman's Investment in Maya account at December 31, 2014?

A. $488,700. B. $489,600. C. $492,000. D. $494,400. E. $514,500.

83. Which of the following results in a decrease in the investment account when applying the equity method?

A. Dividends paid by the investor. B. Net income of the investee. C. Net income of the investor. D. Unrealized gain on intra-entity inventory transfers for the current year. E. Purchase of additional common stock by the investor during the current year.

84. Which of the following results in an increase in the investment account when applying the equity method?

A. Unrealized gain on intra-entity inventory transfers for the prior year. B. Unrealized gain on intra-entity inventory transfers for the current year. C. Dividends paid by the investor. D. Dividends paid by the investee. E. Sale of a portion of the investment during the current year.

85. Which of the following results in a decrease in the Equity in Investee Income account when applying the equity method?

A. Dividends paid by the investor. B. Net income of the investee. C. Unrealized gain on intra-entity inventory transfers for the current year. D. Unrealized gain on intra-entity inventory transfers for the prior year. E. Extraordinary gain of the investee.

86. Which of the following results in an increase in the Equity in Investee Income account when applying the equity method?

A. Amortizations of purchase price over book value on date of purchase. B. Amortizations, since date of purchase, of purchase price over book value on date of purchase. C. Extraordinary gain of the investor. D. Unrealized gain on intra-entity inventory transfers for the prior year. E. Sale of a portion of the investment at a loss.

87. Renfroe, Inc. acquires 10% of Stanley Corporation on January 1, 2012, for $90,000 when the book value of Stanley was $1,000,000. During 2012, Stanley reported net income of $215,000 and paid dividends of $50,000. On January 1, 2013, Renfroe purchased an additional 30% of Stanley for $325,000. Any excess of cost over book value is attributable to goodwill with an indefinite life. During 2013, Renfroe reported net income of $320,000 and paid dividends of $50,000. How much is the adjustment to the Investment in Stanley Corporation for the change from the fair-value method to the equity method on January 1, 2013?

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

88. Renfroe, Inc. acquires 10% of Stanley Corporation on January 1, 2012, for $90,000 when the book value of Stanley was $1,000,000. During 2012, Stanley reported net income of $215,000 and paid dividends of $50,000. On January 1, 2013, Renfroe purchased an additional 30% of Stanley for $325,000. Any excess of cost over book value is attributable to goodwill with an indefinite life. During 2013, Renfroe reported net income of $320,000 and paid dividends of $50,000. What is the balance in the Investment in Stanley Corporation on December 31, 2013?

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

89. On January 4, 2012, Trycker, Inc. acquired 40% of the outstanding common stock of Inkblot Co. for $2,400,000. This investment gave Trycker the ability to exercise significant influence over Inkblot. Inkblot's assets on that date were recorded at $8,000,000 with liabilities of $2,000,000. There were no other differences between book and fair values. During 2012, Inkblot reported net income of $500,000 and paid dividends of $300,000. The fair value of Inkblot at December 31, 2012 is $7,000,000. Trycker elects the fair value option for its investment in Inkblot. How are dividends received from Inkblot reflected in Trycker's accounting records for 2012?

A. Reduce investment in Inkblot by $280,000. B. Increase Investment in Inkblot by $280,000. C. Reduce Investment in Inkblot by $120,000. D. Increase Investment in Inkblot by $120,000. E. Increase Dividend Income by $120,000.

90. On January 4, 2012, Trycker, Inc. acquired 40% of the outstanding common stock of Inkblot Co. for $2,400,000. This investment gave Trycker the ability to exercise significant influence over Inkblot. Inkblot's assets on that date were recorded at $8,000,000 with liabilities of $2,000,000. There were no other differences between book and fair values. During 2012, Inkblot reported net income of $500,000 and paid dividends of $300,000. The fair value of Inkblot at December 31, 2012 is $7,000,000. Trycker elects the fair value option for its investment in Inkblot. At what amount will Inkblot be reflected in Trycker's December 31, 2012 balance sheet?

A. $2,400,000. B. $2,280,000. C. $2,480,000. D. $2,800,000. E. $7,000,000.

Essay Questions

91. For each of the following numbered situations below, select the best letter answer concerning accounting for investments: (A.) Increase the investment account. (B.) Decrease the investment account. (C.) Increase dividend revenue. (D.) No adjustment necessary. (1.) Income reported by 40% owned investee. (2.) Income reported by 10% owned investee. (3.) Loss reported by 40% owned investee. (4.) Loss reported by 10% investee. (5.) Change from fair-value method to equity method. Prior income exceeded dividends. (6.) Change from fair-value method to equity method. Prior income was less than dividends. (7.) Change from equity method to fair-value method. Prior income exceeded dividends. (8.) Change from equity method to fair-value method. Prior income was less than dividends. (9.) Dividends received from 40% investee. (10.) Dividends received from 10% investee. (11.) Purchase of additional shares of investee. (12.) Unrealized ending intra-entity inventory profits using the equity method.

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

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

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

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

96. How does the use of the equity method affect the investor's financial statements?

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

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

99. What argument could be made against the equity method?

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

101.How should an investor account for, and report, an investee's extraordinary income or loss?

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

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

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

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

Short Answer Questions

106.Charlie Co. owns 30% of the voting common stock of Turf Services Inc. Charlie uses the equity method to account for its investment. On January 1, 2013, the balance in the investment account was $624,000. During 2013, Turf Services reported net income of $120,000 and paid dividends of $30,000. What is the balance in the investment account as of December 31, 2013?

107.Tinker Co. owns 25% of the common stock of Harbor Co. and uses the equity method to account for the investment. During 2013, Harbor reported income of $120,000 and paid dividends of $40,000. Harbor owns a building with a useful life of twenty years which is undervalued by $80,000.

Required: Prepare a schedule to show the equity income Tinker should recognize for 2013 related to this investment.

108.Aqua Corp. purchased 30% of the common stock of Marcus Co. by paying $500,000. Of this amount, $50,000 is associated with goodwill.

Required: Prepare the journal entry to record Aqua's investment.

109.On January 2, 2013, Heinreich Co. paid $500,000 for 25% of the voting common stock of Jones Corp. At the time of the investment, Jones had net assets with a book value and fair value of $1,800,000. During 2013, Jones incurred a net loss of $60,000 and paid dividends of $100,000. Any excess cost over book value is attributable to goodwill with an indefinite life.

Required: 1) Prepare a schedule to show the amount of goodwill from Heinrich's investment in Jones. 2) Prepare a schedule to show the balance in Heinreich's investment account at December 31, 2013.

110.On January 3, 2013, Jenkins Corp. acquired 40% of the outstanding common stock of Bolivar Co. for $1,200,000. This acquisition gave Jenkins the ability to exercise significant influence over the investee. The book value of the acquired shares was $950,000. Any excess cost over the underlying book value was assigned to a patent that was undervalued on Bolivar's balance sheet. This patent has a remaining useful life of ten years. For the year ended December 31, 2013, Bolivar reported net income of $312,000 and paid cash dividends of $96,000.

Required: Prepare a schedule to show the balance Jenkins should report as its Investment in Bolivar Co. at December 31, 2013.

111.On January 1, 2013, Spark Corp. acquired a 40% interest in Cranston Inc. for $250,000. On that date, Cranston's balance sheet disclosed net assets of $430,000. During 2013, Cranston reported net income of $100,000 and paid cash dividends of $30,000. Spark sold inventory costing $40,000 to Cranston during 2013 for $50,000. Cranston used all of this merchandise in its operations during 2013. Any excess cost over fair value is attributable to an unamortized trademark with a 20 year remaining life.

Required: Prepare all of Spark's journal entries for 2013 to apply the equity method to this investment.

112.Wathan Inc. sold $180,000 in inventory to Miller Co. during 2012, for $270,000. Miller resold $108,000 of this merchandise in 2012 with the remainder to be disposed of during 2013.

Required: Assuming Wathan owns 25% of Miller and applies the equity method, prepare the journal entry Wathan should have recorded at the end of 2012 to defer the unrealized intra-entity inventory profit.

113.Jager Inc. holds 30% of the outstanding voting shares of Kinson Co. and appropriately applies the equity method of accounting. Amortization associated with this investment equals $11,000 per year. For 2013, Kinson reported earnings of $100,000 and paid cash dividends of $40,000. During 2013, Kinson acquired inventory for $62,400, which was then sold to Jager for $96,000. At the end of 2013, Jager still held some of this inventory at its transfer price of $50,000.

Required: Determine the amount of Equity in Investee Income that Jager should have reported for 2013.

114.On January 2, 2012, Hull Corp. paid $516,000 for 24% (48,000 shares) of the outstanding common stock of Oliver Co. Hull used the equity method to account for the investment. At the end of 2012, the balance in the investment account was $620,000. On January 2, 2013, Hull sold 12,000 shares of Oliver stock for $12 per share. For 2013, Oliver reported income of $118,000 and paid dividends of $30,000.

Required: (A.) Prepare the journal entry to record the sale of the 12,000 shares. (B.) After the sale has been recorded, what is the balance in the investment account? (C.) What percentage of Oliver Co. stock does Hull own after selling the 12,000 shares? (D.) Because of the sale of stock, Hull can no longer exercise significant influence over the operations of Oliver. What effect will this have on Hull's accounting for the investment? (E.) Prepare Hull's journal entries related to the investment for the rest of 2013.

115.On January 1, 2013, Jolley Corp. paid $250,000 for 25% of the voting common stock of Tige Co. On that date, the book value of Tige was $850,000. A building with a carrying value of $160,000 was actually worth $220,000. The building had a remaining life of twenty years. Tige owned a trademark valued at $90,000 over cost that was to be amortized over 20 years. During 2013, Tige sold to Jolley inventory costing $60,000, at a markup of 50% on cost. At the end of the year, Jolley still owned some of these goods with a transfer price of $33,000. Jolly uses a perpetual inventory system. Tige reported net income of $200,000 during 2013. This amount included an extraordinary gain of $35,000. Tige paid dividends totaling $40,000.

Required: Prepare all of Jolley's journal entries for 2013 in relation to Tige Co. Assume the equity method is appropriate for use.

116.On January 1, 2012, Pond Co. acquired 40% of the outstanding voting common shares of Ramp Co. for $700,000. On that date, Ramp reported assets and liabilities with book values of $2.2 million and $700,000, respectively. A building owned by Ramp had an appraised value of $300,000, although it had a book value of only $120,000. This building had a 12-year remaining life and no salvage value. It was being depreciated on the straight-line basis. Ramp generated net income of $300,000 in 2012 and a loss of $120,000 in 2013. In each of these two years, Ramp paid a cash dividend of $70,000 to its stockholders. During 2012, Ramp sold inventory to Pond that had an original cost of $60,000. The merchandise was sold to Pond for $96,000. Of this balance, $72,000 was resold to outsiders during 2012 and the remainder was sold during 2013. In 2013, Ramp sold inventory to Pond for $180,000. This inventory had cost only $108,000. Pond resold $120,000 of the inventory during 2013 and the rest during 2014.

Required: For 2012 and then for 2013, calculate the equity income to be reported by Pond for external reporting purposes.

117.Pursley, Inc. acquires 10% of Ritz Corporation on January 3, 2012, for $80,000 when the book value of Ritz was $800,000. During 2012 Ritz reported net income of $125,000 and paid dividends of $30,000. On January 1, 2013, Pursley purchased an additional 20% of Ritz for $325,000, giving Pursley the ability to significantly influence the operating policies of Ritz. Any excess of cost over book value is attributable to goodwill with an indefinite life. What journal entry(ies) is(are) required on January 1, 2013?

118.Steven Company owns 40% of the outstanding voting common stock of Nicole Corp. and has the ability to significantly influence the investee's operations. On January 3, 2013, the balance in the Investment in Nicole Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2013, Nicole earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2012, Nicole had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2012. Additional sales were made to Steven in 2013 at a transfer price of $75,000 that had cost Nicole $54,000. Only 10% of the 2013 purchases had not been sold to outsiders by the end of 2013. What amount of unrealized intra-entity inventory profit should be deferred by Steven at December 31, 2012?

119.Steven Company owns 40% of the outstanding voting common stock of Nicole Corp. and has the ability to significantly influence the investee's operations. On January 3, 2013, the balance in the Investment in Nicole Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2013, Nicole earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2012, Nicole had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2012. Additional sales were made to Steven in 2013 at a transfer price of $75,000 that had cost Nicole $54,000. Only 10% of the 2013 purchases had not been sold to outsiders by the end of 2013. What amount of unrealized intra-entity profit should be deferred by Steven at December 31, 2013?

120.Steven Company owns 40% of the outstanding voting common stock of Nicole Corp. and has the ability to significantly influence the investee's operations. On January 3, 2013, the balance in the Investment in Nicole Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2013, Nicole earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2012, Nicole had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2012. Additional sales were made to Steven in 2013 at a transfer price of $75,000 that had cost Nicole $54,000. Only 10% of the 2013 purchases had not been sold to outsiders by the end of 2013. What amount of equity income would Steven have recognized in 2013 from its ownership interest in Nicole?

121.Steven Company owns 40% of the outstanding voting common stock of Nicole Corp. and has the ability to significantly influence the investee's operations. On January 3, 2013, the balance in the Investment in Nicole Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2013, Nicole earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2012, Nicole had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2012. Additional sales were made to Steven in 2013 at a transfer price of $75,000 that had cost Nicole $54,000. Only 10% of the 2013 purchases had not been sold to outsiders by the end of 2013. What was the balance in the Investment in Nicole Corp. account at December 31, 2013?

Chapter 01 The Equity Method of Accounting for Investments Answer Key

Multiple Choice Questions

Gaw Company owns 15% of the common stock of Trace Corporation and used the fairvalue method to account for this investment. Trace reported net income of $110,000 for 2013 and paid dividends of $60,000 on October 1, 2013. How much income should Gaw recognize on this investment in 2013?

A. $16,500. B. $9,000. C. $25,500. D. $7,500. E. $50,000. $60,000 × .15 = $9,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 01-01 Describe in general the various methods of accounting for an investment in equity shares of another company.

Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to account for the investment. During 2013, Dew reported income of $250,000 and paid dividends of $80,000. There is no amortization associated with the investment. During 2013, how much income should Yaro recognize related to this investment?

A. $24,000. B. $75,000. C. $99,000. D. $51,000. E. $80,000. $250,000 × .30 = $75,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 01-02 Identify the sole criterion for applying the equity method of accounting and guidance in assessing whether the criterion is met.

On January 1, 2013, Pacer Company paid $1,920,000 for 60,000 shares of Lennon Co.'s voting common stock which represents a 45% investment. No allocation to goodwill or other specific account was made. Significant influence over Lennon was achieved by this acquisition. Lennon distributed a dividend of $2.50 per share during 2013 and reported net income of $670,000. What was the balance in the Investment in Lennon Co. account found in the financial records of Pacer as of December 31, 2013?

A. $2,040,500. B. $2,212,500. C. $2,260,500. D. $2,171,500. E. $2,071,500. $1,920,000 + ($670,000 × .45) - ($2.50 × 60,000) = $2,071,500

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 01-02 Identify the sole criterion for applying the equity method of accounting and guidance in assessing whether the criterion is met.

A company should always use the equity method to account for an investment if:

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-01 Describe in general the various methods of accounting for an investment in equity shares of another company.

On January 1, 2011, Dermot Company purchased 15% of the voting common stock of Horne Corp. On January 1, 2013, Dermot purchased 28% of Horne's voting common stock. If Dermot achieves significant influence with this new investment, how must Dermot account for the change to the equity method?

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Prepare basic equity method journal entries for an investor and describe the financial reporting for equity method investments.

During January 2012, Wells, Inc. acquired 30% of the outstanding common stock of Wilton Co. for $1,400,000. This investment gave Wells the ability to exercise significant influence over Wilton. Wilton's assets on that date were recorded at $6,400,000 with liabilities of $3,000,000. Any excess of cost over book value of Wells' investment was attributed to unrecorded patents having a remaining useful life of ten years. In 2012, Wilton reported net income of $600,000. For 2013, Wilton reported net income of $750,000. Dividends of $200,000 were paid in each of these two years. What was the reported balance of Wells' Investment in Wilson Co. at December 31, 2013?

A. $1,609,000. B. $1,485,000. C. $1,685,000. D. $1,647,000. E. $1,054,300. $6,400,000 - $3,000,000 = $3,400,000 × 30% = $1,020,000 $1,400,000 - $1,020,000 = $380,000/10yrs = $38,000 Unrecorded Patents Amortization $1,400,000 + $180,000 + $225,000 - $60,000 - $60,000 - $38,000 - $38,000 = $1,609,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-04 Allocate the cost of an equity method investment and compute amortization expense to match revenues recognized from the investment to the excess of investor cost over investee book value.

On January 1, 2013, Bangle Company purchased 30% of the voting common stock of Sleat Corp. for $1,000,000. Any excess of cost over book value was assigned to goodwill. During 2013, Sleat paid dividends of $24,000 and reported a net loss of $140,000. What is the balance in the investment account on December 31, 2013?

A. $950,800. B. $958,000. C. $836,000. D. $990,100. E. $956,400. $1,000,000 - $42,000 - $7,200 = $950,800

On January 1, 2013, Jordan Inc. acquired 30% of Nico Corp. Jordan used the equity method to account for the investment. On January 1, 2014, Jordan sold two-thirds of its investment in Nico. It no longer had the ability to exercise significant influence over the operations of Nico. How should Jordan have accounted for this change?

Tower Inc. owns 30% of Yale Co. and applies the equity method. During the current year, Tower bought inventory costing $66,000 and then sold it to Yale for $120,000. At year-end, only $24,000 of merchandise was still being held by Yale. What amount of intra-entity inventory profit must be deferred by Tower?

A. $6,480. B. $3,240. C. $10,800. D. $16,200. E. $6,610. $120,000 - $66,000 = $54,000 $24,000/$120,000 = 20% × $54,000 = $10,800 × 30% = $3,240

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 01-06 Describe the rationale and computations to defer unrealized gains on intra-entity inventory transfers until the goods are either consumed or sold to outside parties.

10.

On January 4, 2013, Watts Co. purchased 40,000 shares (40%) of the common stock of Adams Corp., paying $800,000. There was no goodwill or other cost allocation associated with the investment. Watts has significant influence over Adams. During 2013, Adams reported income of $200,000 and paid dividends of $80,000. On January 2, 2014, Watts sold 5,000 shares for $125,000. What was the balance in the investment account after the shares had been sold?

A. $848,000. B. $742,000. C. $723,000. D. $761,000. E. $925,000. $800,000 + $80,000 - $32,000 = $848,000 - (5,000/40,000 × $848,000) = $742,000

11.

On January 3, 2013, Austin Corp. purchased 25% of the voting common stock of Gainsville Co., paying $2,500,000. Austin decided to use the equity method to account for this investment. At the time of the investment, Gainsville's total stockholders' equity was $8,000,000. Austin gathered the following information about Gainsville's assets and liabilities:

A. $500,000. B. $200,000. C. $0. D. $300,000. E. $400,000. Blgs $500,000 - $400,000 = $100,000 FV > BV Equipment $1,300,000 - $1,000,000 = $300,000 FV > BV Franchises $400,000 - 0 = $400,000 FV > BV $100,000 + $300,000 + $400,000 = $800,000 × 25% = $200,000 Identifiable Excess Paid $8,000,000 × 25% = $2,000,000 BV ($2,500,000 Paid) - ($2,000,000 BV) = ($500,000 FV > BV) - ($200,000 Identifiable Excess Paid) = $300,000 Unidentifiable Excess Paid (Goodwill)

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply

Difficulty: 3 Hard Learning Objective: 01-04 Allocate the cost of an equity method investment and compute amortization expense to match revenues recognized from the investment to the excess of investor cost over investee book value.

12.

A. $27,500. B. $20,000. C. $30,000. D. $120,000. E. $70,000. $500,000 - $400,000 = $100,000/10yrs = $10,000 $1,300,000 - $1,000,000 = $300,000/5yrs = $60,000 $400,000 - 0 = $400,000/8yrs = $50,000 $10,000 + $60,000 + $50,000 = $120,000 × 25% = $30,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement 1-95 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-04 Allocate the cost of an equity method investment and compute amortization expense to match revenues recognized from the investment to the excess of investor cost over investee book value.

13.

Club Co. appropriately uses the equity method to account for its investment in Chip Corp. As of the end of 2013, Chip's common stock had suffered a significant decline in fair value, which is expected to be recovered over the next several months. How should Club account for the decline in value?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-03 Prepare basic equity method journal entries for an investor and describe the financial reporting for equity method investments.

14.

An upstream sale of inventory is a sale:

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-06 Describe the rationale and computations to defer unrealized gains on intra-entity inventory transfers until the goods are either consumed or sold to outside parties.

15.

Atlarge Inc. owns 30% of the outstanding voting common stock of Ticker Co. and has the ability to significantly influence the investee's operations and decision making. On January 1, 2013, the balance in the Investment in Ticker Co. account was $402,000. Amortization associated with the purchase of this investment is $8,000 per year. During 2013, Ticker earned income of $108,000 and paid cash dividends of $36,000. Previously in 2012, Ticker had sold inventory costing $28,800 to Atlarge for $48,000. All but 25% of this merchandise was consumed by Atlarge during 2012. The remainder was used during the first few weeks of 2013. Additional sales were made to Atlarge in 2013; inventory costing $33,600 was transferred at a price of $60,000. Of this total, 40% was not consumed until 2014. What amount of equity income would Atlarge have recognized in 2013 from its ownership interest in Ticker?

A. $19,792. B. $27,640. C. $22,672. D. $24,400. E. $21,748. 2013 Income $108,000 × 30% = $32,400 2012 Inventory Profit Realized $48,000 - $28,800 = $19,200 × 25% = $4,800 × 30% = $1,440 2013 Inventory Profit Deferred $60,000 - $33,600 = $26,400 × 40% = $10,560 × 30% = $3,168 2013 Purchase Amortization $8,000 $32,400 + $1,440 - $3,168 - $8,000 = $22,672 Equity Income 2013

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard

Learning Objective: 01-02 Identify the sole criterion for applying the equity method of accounting and guidance in assessing whether the criterion is met. Learning Objective: 01-04 Allocate the cost of an equity method investment and compute amortization expense to match revenues recognized from the investment to the excess of investor cost over investee book value. Learning Objective: 01-06 Describe the rationale and computations to defer unrealized gains on intra-entity inventory transfers until the goods are either consumed or sold to outside parties.

16.

Atlarge Inc. owns 30% of the outstanding voting common stock of Ticker Co. and has the ability to significantly influence the investee's operations and decision making. On January 1, 2013, the balance in the Investment in Ticker Co. account was $402,000. Amortization associated with the purchase of this investment is $8,000 per year. During 2013, Ticker earned income of $108,000 and paid cash dividends of $36,000. Previously in 2012, Ticker had sold inventory costing $28,800 to Atlarge for $48,000. All but 25% of this merchandise was consumed by Atlarge during 2012. The remainder was used during the first few weeks of 2013. Additional sales were made to Atlarge in 2013; inventory costing $33,600 was transferred at a price of $60,000. Of this total, 40% was not consumed until 2014. What was the balance in the Investment in Ticker Co. account at the end of 2013?

A. $401,136. B. $413,872. C. $418,840. D. $412,432. E. $410,148. 2013 Beginning Balance = $402,000 2013 Income Recognized = $22,672 2013 Dividend Received = ($36,000 × 30%) = $10,800 2013 Ending Balance = ($402,000 + $22,672 - $10,800) = $413,872

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation

Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-02 Identify the sole criterion for applying the equity method of accounting and guidance in assessing whether the criterion is met. Learning Objective: 01-04 Allocate the cost of an equity method investment and compute amortization expense to match revenues recognized from the investment to the excess of investor cost over investee book value. Learning Objective: 01-06 Describe the rationale and computations to defer unrealized gains on intra-entity inventory transfers until the goods are either consumed or sold to outside parties.

17.

On January 1, 2013, Deuce Inc. acquired 15% of Wiz Co.'s outstanding common stock for $62,400 and categorized the investment as an available-for-sale security. Wiz earned net income of $96,000 in 2013 and paid dividends of $36,000. On January 1, 2014, Deuce bought an additional 10% of Wiz for $54,000. This second purchase gave Deuce the ability to significantly influence the decision making of Wiz. During 2014, Wiz earned $120,000 and paid $48,000 in dividends. As of December 31, 2014, Wiz reported a net book value of $468,000. For both purchases, Deuce concluded that Wiz Co.'s book values approximated fair values and attributed any excess cost to goodwill. On Deuce's December 31, 2014 balance sheet, what balance was reported for the

Investment in Wiz Co. account?

A. $139,560. B. $143,400. C. $310,130. D. $186,080. E. $182,250. 2013 Purchase = $62,400 2013 Income = ($96,000 × 15%) = $14,400 2013 Dividend = ($36,000 × 15%) = $5,400 2014 Purchase = $54,000 2014 Income = ($120,000 × 25%) = $30,000 2014 Dividend = ($48,000 × 25%) = $12,000 Ending 2014 Balance = ($62,400 + $14,400 - $5,400 + $54,000 + $30,000 - $12,000) = $143,400

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard

18.

On January 1, 2013, Deuce Inc. acquired 15% of Wiz Co.'s outstanding common stock for $62,400 and categorized the investment as an available-for-sale security. Wiz earned net income of $96,000 in 2013 and paid dividends of $36,000. On January 1, 2014, Deuce bought an additional 10% of Wiz for $54,000. This second purchase gave Deuce the ability to significantly influence the decision making of Wiz. During 2014, Wiz earned $120,000 and paid $48,000 in dividends. As of December 31, 2014, Wiz reported a net book value of $468,000. For both purchases, Deuce concluded that Wiz Co.'s book values approximated fair values and attributed any excess cost to goodwill. What amount of equity income should Deuce have reported for 2014?

A. $30,000. B. $16,420. C. $38,340. D. $18,000. E. $32,840. 2014 Income = ($120,000 × 25%) = $30,000

19.

In a situation where the investor exercises significant influence over the investee, which of the following entries is not actually posted to the books of the investor? 1) Debit to the Investment account, and a Credit to the Equity in Investee Income account. 2) Debit to Cash (for dividends received from the investee), and a Credit to Dividend Revenue. 3) Debit to Cash (for dividends received from the investee), and a Credit to the Investment account.

A. Entries 1 and 2. B. Entries 2 and 3. C. Entry 1 only. D. Entry 2 only. E. Entry 3 only.

20.

All of the following would require use of the equity method for investments except:

A. material intra-entity transactions. B. investor participation in the policy-making process of the investee. C. valuation at fair value. D. technological dependency. E. significant control.

AACSB: Reflective thinking AICPA BB: Critical Thinking

AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-01 Describe in general the various methods of accounting for an investment in equity shares of another company.

21.

All of the following statements regarding the investment account using the equity method are true except:

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Identify the sole criterion for applying the equity method of accounting and guidance in assessing whether the criterion is met.

22.

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

23.

A company has been using the equity method to account for its investment. The company sells shares and does not continue to have significant control. Which of the following statements is true?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium

Learning Objective: 01-05d Understand the financial reporting consequences for sales of equity method investments.

24.

An investee company incurs an extraordinary loss during the period. The investor appropriately applies the equity method. Which of the following statements is true?

25.

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

AACSB: Reflective thinking AICPA BB: Critical Thinking 1-106 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 3 Hard Learning Objective: 01-05c Understand the financial reporting consequences for investee losses.

26.

Under the equity method, when the company's share of cumulative losses equals its investment and the company has no obligation or intention to fund such additional losses, which of the following statements is true?

27.

When an investor sells shares of its investee company, which of the following statements is true?

28.

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

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-04 Allocate the cost of an equity method investment and compute amortization expense to match revenues recognized from the investment to the excess of investor cost over investee book value.

29.

After allocating cost in excess of book value, which asset or liability would not be amortized over a useful life?

A. Cost of goods sold. B. Property, plant, & equipment. C. Patents. D. Goodwill. E. Bonds payable.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation 1-109 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-04 Allocate the cost of an equity method investment and compute amortization expense to match revenues recognized from the investment to the excess of investor cost over investee book value.

30.

Which statement is true concerning unrealized profits in intra-entity inventory transfers when an investor uses the equity method?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-06 Describe the rationale and computations to defer unrealized gains on intra-entity inventory transfers until the goods are either consumed or sold to outside parties.

31.

Which statement is true concerning unrealized profits in intra-entity inventory transfers when an investor uses the equity method?

AACSB: Reflective thinking AICPA BB: Critical Thinking

AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-06 Describe the rationale and computations to defer unrealized gains on intra-entity inventory transfers until the goods are either consumed or sold to outside parties.

32.

On January 1, 2012, Dawson, Incorporated, paid $100,000 for a 30% interest in Sacco Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2012, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2013 it reported income of $75,000 and dividends of $30,000. Assume Dawson has the ability to significantly influence the operations of Sacco. The amount allocated to goodwill at January 1, 2012, is

A. $25,000. B. $13,000. C. $9,000. D. $16,000. E. $10,000. Beginning 2012 Asset Value = ($550,000 + $30,000) = $580,000 Beginning 2012 Liabilities = $300,000 Beginning 2012 Equity = ($580,000 - $300,000) = $280,000 Equity Purchased at Fair Value = ($280,000 × 30%) = $84,000 Price Paid - Equity Purchased = Goodwill $100,000 - $84,000 = $16,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium 1-111 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective: 01-04 Allocate the cost of an equity method investment and compute amortization expense to match revenues recognized from the investment to the excess of investor cost over investee book value.

33.

A. $9,000. B. $13,500. C. $15,000. D. $7,500. E. $50,000. 2012 Equity Income = ($50,000 × 30%) = $15,000 2012 Excess Patent Amortization = ($30,000/6 = $5,000) × 30%) = $1,500 $15,000 - $1,500 = $13,500

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 01-04 Allocate the cost of an equity method investment and compute amortization expense to match revenues recognized from the investment to the excess of investor cost over investee book value.

34.

A. $22,500. B. $21,000. C. $12,000. D. $13,500. E. $75,000. 2013 Equity Income = ($75,000 × 30%) = $22,500 2013 Excess Patent Amortization = ($30,000/6 = $5,000) × 30%) = $1,500 $22,500 - $1,500 = $21,000

35.

On January 1, 2012, Dawson, Incorporated, paid $100,000 for a 30% interest in Sacco Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2012, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2013 it reported income of $75,000 and dividends of $30,000. Assume Dawson has the ability to significantly influence the operations of Sacco. The balance in the Investment in Sacco account at December 31, 2012, is

A. $100,000. B. $112,000. C. $106,000. D. $107,500. E. $140,000. $100,000 + $13,500 - ($20,000 × 30%) = $107,500

36.

On January 1, 2012, Dawson, Incorporated, paid $100,000 for a 30% interest in Sacco Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2012, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2013 it reported income of $75,000 and dividends of $30,000. Assume Dawson has the ability to significantly influence the operations of Sacco. The balance in the Investment in Sacco account at December 31, 2013, is

A. $119,500. B. $125,500. C. $116,500. D. $118,000. E. $100,000. $107,500 + $21,000 - ($30,000 × 30%) = $119,500

37.

Dodge, Incorporated acquires 15% of Gates Corporation on January 1, 2013, for $105,000 when the book value of Gates was $600,000. During 2013 Gates reported net income of $150,000 and paid dividends of $50,000. On January 1, 2014, Dodge purchased an additional 25% of Gates for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2013 but Dodge has deemed it necessary to change to the equity method after the second purchase. During 2014 Gates reported net income of $200,000 and reported dividends of $75,000. The income reported by Dodge for 2013 with regard to the Gates investment is

A. $7,500. B. $22,500. C. $15,000. D. $100,000. E. $150,000. $7,500 = Dividends received in 2013

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 01-01 Describe in general the various methods of accounting for an investment in equity shares of another company.

38.

A. $80,000. B. $30,000. C. $50,000. D. $15,000. E. $75,000. $200,000 × 40% = $80,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 01-03 Prepare basic equity method journal entries for an investor and describe the financial reporting for equity method investments.

39.

Dodge, Incorporated acquires 15% of Gates Corporation on January 1, 2013, for $105,000 when the book value of Gates was $600,000. During 2013 Gates reported net income of $150,000 and paid dividends of $50,000. On January 1, 2014, Dodge purchased an additional 25% of Gates for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2013 but Dodge has deemed it necessary to change to the equity method after the second purchase. During 2014 Gates reported net income of $200,000 and reported dividends of $75,000. Which adjustment would be made to change from the fair-value method to the equity method?

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-03 Prepare basic equity method journal entries for an investor and describe the financial reporting for equity method investments.

40.

Dodge, Incorporated acquires 15% of Gates Corporation on January 1, 2013, for $105,000 when the book value of Gates was $600,000. During 2013 Gates reported net income of $150,000 and paid dividends of $50,000. On January 1, 2014, Dodge purchased an additional 25% of Gates for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2013 but Dodge has deemed it necessary to change to the equity method after the second purchase. During 2014 Gates reported net income of $200,000 and reported dividends of $75,000. The balance in the investment account at December 31, 2014, is

A. $370,000. B. $355,000. C. $305,000. D. $400,000. E. $105,000. $105,000 + $22,500 - $7,500 = $120,000 Balance 2013 Year End $120,000 + $200,000 + $80,000 - $30,000 = $370,000 Balance 2014 Year End

41.

Clancy Incorporated, sold $210,000 of its inventory to Reid Company during 2013 for $350,000. Reid sold $224,000 of this merchandise in 2013 with the remainder to be disposed of during 2014. Assume Clancy owns 30% of Reid and applies the equity method. What journal entry will be recorded at the end of 2013 to defer the unrealized intra-entity profits?

A. Entry A. B. Entry B. C. Entry C. D. Entry D. E. No entry is necessary. $350,000 - $210,000 = $140,000 × (1 - ($224,000/$350,000)) = $50,400 × 30% = $15,120 Profit deferred by reduction <CR> in the Investment in Reid Account

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-06 Describe the rationale and computations to defer unrealized gains on intra-entity inventory transfers until the goods are either consumed or sold to outside parties.

42.

Clancy Incorporated, sold $210,000 of its inventory to Reid Company during 2013 for $350,000. Reid sold $224,000 of this merchandise in 2013 with the remainder to be disposed of during 2014. Assume Clancy owns 30% of Reid and applies the equity method. What journal entry will be recorded in 2014 to realize the intra-entity profit that was deferred in 2013?

A. Entry A. B. Entry B. C. Entry C. D. Entry D. E. No entry is necessary. Reversal of the previous deferral entry in 2013, thus recognizing the profit in 2014 income

43.

On January 1, 2012, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2013 Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2012, was $1,000,000. The book value of Cook on January 1, 2013, was $1,150,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over five years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years:

On April 1, 2014, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. What is the balance in the investment account at December 31, 2012?

A. $150,000. B. $172,500. C. $180,000. D. $157,500. E. $170,000. $150,000; The Initial Investment in Cook Company

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 01-01 Describe in general the various methods of accounting for an investment in equity shares of

another company.

44.

On April 1, 2014, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. How much income did Mehan report from Cook during 2012?

A. $30,000. B. $22,500. C. $7,500. D. $0. E. $50,000. $7,500 Dividends Received

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply

Difficulty: 2 Medium Learning Objective: 01-01 Describe in general the various methods of accounting for an investment in equity shares of another company.

45.

On April 1, 2014, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. How much income did Mehan report from Cook during 2013?

A. $90,000. B. $110,000. C. $67,500. D. $87,500. E. $78,750. $225,000 × 40% = $90,000 $300,000 - $287,500 = $12,500/5 = $2,500 $90,000 - $2,500 = $87,500

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply 1-125 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 2 Medium Learning Objective: 01-03 Prepare basic equity method journal entries for an investor and describe the financial reporting for equity method investments.

46.

On April 1, 2014, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. What was the balance in the investment account at December 31, 2013?

A. $517,500. B. $537,500. C. $520,000. D. $540,000. E. $211,250. $150,000 + $30,000 - $7,500 = $172,500 Balance 2012 Year End $172,500 + $300,000 + ($90,000 - $2,500) - $20,000 = $540,000 Balance 2013 Year End

AACSB: Analytic

AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-03 Prepare basic equity method journal entries for an investor and describe the financial reporting for equity method investments.

47.

On April 1, 2014, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. What was the balance in the investment account at April 1, 2014 just before the sale of shares?

A. $468,281. B. $468,750. C. $558,375. D. $616,000. E. $624,375. $540,000 + ($25,000 - $625) - $6,000 = $558,375 2014 Begin Investment Acct Balance + (40% of 1st Qtr Income - 1st Qtr Amort) - 1st Qtr Div

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply 1-128 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 3 Hard Learning Objective: 01-05d Understand the financial reporting consequences for sales of equity method investments.

48.

On April 1, 2014, just after its first dividend receipt, Mehan sells 10,000 shares of its investment. How much of Cook's net income did Mehan report for the year 2014?

A. $61,750. B. $81,250. C. $72,500. D. $59,250. E. $75,000. (First Qtr Income × 40%) + (2nd thru 4th Qtr Income × 30%) $25,000 + $56,250 = $81,250

AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-05a Understand the financial reporting consequences for a change to the equity method.

49.

On January 4, 2012, Harley, Inc. acquired 40% of the outstanding common stock of Bike Co. for $2,400,000. This investment gave Harley the ability to exercise significant influence over Bike. Bike's assets on that date were recorded at $10,500,000 with liabilities of $4,500,000. There were no other differences between book and fair values. During 2012, Bike reported net income of $500,000. For 2013, Bike reported net income of $800,000. Dividends of $300,000 were paid in each of these two years. How much income did Harley report from Bike for 2012?

A. $120,000. B. $200,000. C. $300,000. D. $320,000. E. $500,000. $500,000 × 40% = $200,000

50.

A. $120,000. B. $200,000. C. $300,000. D. $320,000. E. $500,000. $800,000 × 40% = $320,000

51.

On January 4, 2012, Harley, Inc. acquired 40% of the outstanding common stock of Bike Co. for $2,400,000. This investment gave Harley the ability to exercise significant influence over Bike. Bike's assets on that date were recorded at $10,500,000 with liabilities of $4,500,000. There were no other differences between book and fair values. During 2012, Bike reported net income of $500,000. For 2013, Bike reported net income of $800,000. Dividends of $300,000 were paid in each of these two years. What was the reported balance of Harley's Investment in Bike Co. at December 31, 2012?

A. $880,000. B. $2,400,000. C. $2,480,000. D. $2,600,000. E. $2,900,000. $2,400,000 + $200,000 - $120,000 = $2,480,000

52.

On January 4, 2012, Harley, Inc. acquired 40% of the outstanding common stock of Bike Co. for $2,400,000. This investment gave Harley the ability to exercise significant influence over Bike. Bike's assets on that date were recorded at $10,500,000 with liabilities of $4,500,000. There were no other differences between book and fair values. During 2012, Bike reported net income of $500,000. For 2013, Bike reported net income of $800,000. Dividends of $300,000 were paid in each of these two years. What was the reported balance of Harley's Investment in Bike Co. at December 31, 2013?

A. $2,400,000. B. $2,480,000. C. $2,500,000. D. $2,600,000. E. $2,680,000. $2,480,000 + $320,000 - $120,000 = $2,680,000

53.

On January 1, 2013, Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000, which approximated book value. During 2013, Barney paid dividends of $30,000 and reported a net loss of $70,000. What is the balance in the investment account on December 31, 2013?

A. $1,900,000. B. $1,960,000. C. $2,000,000. D. $2,016,000. E. $2,028,000. $2,000,000 - $28,000 - $12,000 = $1,960,000

54.

On January 1, 2013, Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000, which approximated book value. During 2013, Barney paid dividends of $30,000 and reported a net loss of $70,000. What amount of equity income would Anderson recognize in 2013 from its ownership interest in Barney?

A. $12,000 income. B. $12,000 loss. C. $16,000 loss. D. $28,000 income. E. $28,000 loss. $70,000 Loss × 40% = $28,000 Loss

55.

Luffman Inc. owns 30% of Bruce Inc. and appropriately applies the equity method. During the current year, Bruce bought inventory costing $52,000 and then sold it to Luffman for $80,000. At year-end, all of the merchandise had been sold by Luffman to other customers. What amount of unrealized intercompany profit must be deferred by Luffman?

A. $0. B. $8,400. C. $28,000. D. $52,000. E. $80,000. $80,000 - $52,000 = $28,000 Income Recognized; None Deferred

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 01-06 Describe the rationale and computations to defer unrealized gains on intra-entity inventory transfers until the goods are either consumed or sold to outside parties.

56.

On January 3, 2013, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation, paying $1,500,000. There was no goodwill or other cost allocation associated with the investment. Roberts has significant influence over Thomas. During 2013, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2014, Roberts sold 15,000 shares for $800,000. What was the balance in the investment account before the shares were sold?

A. $1,560,000. B. $1,600,000. C. $1,700,000. D. $1,800,000. E. $1,860,000. $1,500,000 + $90,000 - $30,000 = $1,560,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 01-05d Understand the financial reporting consequences for sales of equity method investments.

57.

A. $0 B. $10,000 gain. C. $12,000 loss. D. $15,000 loss. E. $20,000 gain. $1,560,000 × (15,000/30,000) = $780,000 Cost of Shares Sold $800,000 Sales Price - $780,000 Cost of Shares Sold = $20,000 Gain on Sale of Shares

58.

On January 3, 2013, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation, paying $1,500,000. There was no goodwill or other cost allocation associated with the investment. Roberts has significant influence over Thomas. During 2013, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2014, Roberts sold 15,000 shares for $800,000. What is the balance in the investment account after the sale of the 15,000 shares?

A. $750,000. B. $760,000. C. $780,000. D. $790,000. E. $800,000. $1,560,000 × (15,000/30,000) = $780,000 Cost of shares Sold $1,560,000 - $780,000 Cost of Shares Sold = $780,000 Balance in the Investment Account

59.

On January 3, 2013, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation, paying $1,500,000. There was no goodwill or other cost allocation associated with the investment. Roberts has significant influence over Thomas. During 2013, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2014, Roberts sold 15,000 shares for $800,000. What is the appropriate journal entry to record the sale of the 15,000 shares?

A. A Above. B. B Above. C. C Above. D. D Above. E. E Above. $20,000 Gain is Only shown in Option B

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-05d Understand the financial reporting consequences for sales of equity method investments.

60.

On January 4, 2013, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly's net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2013, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2014, Mason sold 10,000 shares for $150,000. What was the balance in the investment account before the shares were sold?

A. $520,000. B. $544,000. C. $560,000. D. $604,000. E. $620,000. $560,000 + ($150,000 × 40%) - ($40,000 × 40%) = $604,000

61.

A. $20,000 gain. B. $10,000 gain. C. $1,000 gain. D. $1,000 loss. E. $10,000 loss. $604,000 × (10,000/40,000) = $151,000 Cost of Shares Sold $150,000 Sales Price - $151,000 Cost of Shares Sold = $1,000 Loss on Sale of Shares

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-05d Understand the financial reporting consequences for sales of equity method investments.

62.

On January 4, 2013, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly's net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2013, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2014, Mason sold 10,000 shares for $150,000. What is the balance in the investment account after the sale of the 10,000 shares?

A. $390,000. B. $420,000. C. $453,000. D. $454,000. E. $465,000. $604,000 - $151,000 = $453,000

63.

On January 4, 2013, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly's net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2013, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2014, Mason sold 10,000 shares for $150,000. What is the appropriate journal entry to record the sale of the 10,000 shares?

A. A Above B. B Above C. C Above D. D Above E. E Above $1,000 Loss only shown in Option C

64.

On January 4, 2013, Bailey Corp. purchased 40% of the voting common stock of Emery Co., paying $3,000,000. Bailey properly accounts for this investment using the equity method. At the time of the investment, Emery's total stockholders' equity was $5,000,000. Bailey gathered the following information about Emery's assets and liabilities whose book values and fair values differed:

A. $(2,000,000). B. $800,000. C. $1,000,000. D. $2,000,000. E. $3,000,000. $5,000,000 × 40% = $2,000,000 BV for 40% of the Shares $3,000,000 Price Paid - $2,000,000 BV = $1,000,000 Excess

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 01-04 Allocate the cost of an equity method investment and compute amortization expense to match revenues recognized from the investment to the excess of investor cost over investee book value.

65.

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Emery Co. reported net income of $400,000 for 2013, and paid dividends of $200,000 during that year. How much goodwill is associated with this investment?

A. $(500,000). B. $0. C. $100,000. D. $200,000. E. $2,000,000. $800,000 Blgs + $500,000 Equipt + $700,000 Franchises = $2,000,000 FV > BV of Assets $2,000,000 × 40% = $800,000 FV Identified to Purchaser $1,000,000 Price Paid - $800,000 FV > BV = $200,000 Excess Unidentified (Goodwill)

66.

A. $0. B. $84,000. C. $100,000. D. $160,000. E. $400,000. $800,000/20 = $40,000 per year Blgs × 40% = $16,000 $500,000/5 = $100,000 per year Equipt × 40% = $40,000 $700,000/10 = $70,000 per year Franchises × 40% = $28,000 $16,000 + $40,000 + $28,000 = $84,000 Annual Excess Amortization

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-04 Allocate the cost of an equity method investment and compute amortization expense to match 1-147 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

revenues recognized from the investment to the excess of investor cost over investee book value.

67.

On January 1, 2013, Jackie Corp. purchased 30% of the voting common stock of Rob Co., paying $2,000,000. Jackie properly accounts for this investment using the equity method. At the time of the investment, Rob's total stockholders' equity was $3,000,000. Jackie gathered the following information about Rob's assets and liabilities whose book values and fair values differed:

A. $(1,000,000.) B. $400,000. C. $800,000. D. $1,000,000. E. $1,100,000. $2,000,000 - ($3,000,000 × 30%) = $1,100,000 Price Paid > BV

68.

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Rob Co. reported net income of $300,000 for 2013, and paid dividends of $100,000 during that year. How much goodwill is associated with this investment?

A. $(500,000.) B. $0. C. $650,000. D. $1,000,000. E. $2,000,000. $500,000 Blgs + $500,000 Equipt + $500,000 Franchises = ($1,500,000 FV > BV) × 30% = $450,000 ($1,100,000 Total > BV) - ($450,000 Identified) = $650,000 Unidentified (Goodwill)

69.

A. $0. B. $30,000. C. $40,000. D. $55,000. E. $60,000. $500,000/15 = $33,333 per year Blgs × 30% = $10,000 $500,000/5 = $100,000 per year Equipt × 30% = $30,000 $500,000/10 = $50,000 per year Franchises × 30% = $15,000 $10,000 + $30,000 + $15,000 = $55,000 Annual Excess Amortization

revenues recognized from the investment to the excess of investor cost over investee book value.

70.

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Rob Co. reported net income of $300,000 for 2013, and paid dividends of $100,000 during that year. What is the balance in Jackie Corp's Investment in Rob Co. account at December 31, 2013?

A. $2,000,000. B. $2,005,000. C. $2,060,000. D. $2,090,000. E. $2,200,000. $2,000,000 + ($300,000 × 30%) - ($100,000 × 30%) - $55,000 = $2,005,000

71.

Acker Inc. bought 40% of Howell Co. on January 1, 2012 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows:

A. $1,600. B. $4,000. C. $8,000. D. $15,000. E. $20,000. $75,000 - $55,000 = $20,000 × ($15,000/$75,000) = $4,000 × 40% = $1,600 Deferred Profit

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 01-06 Describe the rationale and computations to defer unrealized gains on intra-entity inventory transfers until the goods are either consumed or sold to outside parties.

72.

A. $1,600. B. $8,000. C. $15,000. D. $20,000. E. $40,000. $110,000 - $70,000 = $40,000 × ($55,000/$110,000) = $20,000 × 40% = $8,000 Deferred Profit

73.

Howell reported net income of $100,000 in 2012 and $120,000 in 2013 while paying $40,000 in dividends each year. What is the Equity in Howell Income that should be reported by Acker in 2012?

A. $10,000. B. $24,000. C. $36,000. D. $38,400. E. $40,000. $100,000 × 40% = $40,000 - ($1,600 Deferred Inventory Profit) = $38,400

74.

Howell reported net income of $100,000 in 2012 and $120,000 in 2013 while paying $40,000 in dividends each year. What is the balance in Acker's Investment in Howell account at December 31, 2012?

A. $576,000. B. $598,400. C. $614,400. D. $606,000. E. $616,000. $576,000 + ($100,000 × 40%) - ($40,000 × 40%) - ($1,600 Deferred Profit) = $598,400

75.

Howell reported net income of $100,000 in 2012 and $120,000 in 2013 while paying $40,000 in dividends each year. What is the Equity in Howell Income that should be reported by Acker in 2013?

A. $32,000. B. $41,600. C. $48,000. D. $49,600. E. $50,600. $120,000 × 40% = $48,000 + ($1,600 in 2012 Recognized Inventory Profit) - ($8,000 in 2013 Deferred Inventory Profit) = $41,600

76.

Howell reported net income of $100,000 in 2012 and $120,000 in 2013 while paying $40,000 in dividends each year. What is the balance in Acker's Investment in Howell account at December 31, 2013?

A. $624,000. B. $636,000. C. $646,000. D. $656,000. E. $666,000. ($598,400 Balance 2012) + ($41,600 Income from 2013) - ($16,000 Dividend from 2013) = $624,000

77.

Cayman Inc. bought 30% of Maya Company on January 1, 2013 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows:

A. $900. B. $3,000. C. $4,500. D. $6,000. E. $9,000. $45,000 - $30,000 = $15,000 × ($9,000/$45,000) = $3,000 × 30% = $900 Deferred Profit

78.

Maya reported net income of $100,000 in 2013 and $120,000 in 2014 while paying $40,000 in dividends each year. What is the amount of unrealized inventory profit to be deferred on December 31, 2014?

A. $1,500. B. $2,400. C. $3,600. D. $4,000. E. $8,000. $80,000 - $48,000 = $32,000 × ($20,000/$80,000) = $8,000 × 30% = $2,400 Deferred Profit

79.

Maya reported net income of $100,000 in 2013 and $120,000 in 2014 while paying $40,000 in dividends each year. What is the Equity in Maya Income that should be reported by Cayman in 2013?

A. $17,100. B. $18,000. C. $25,500. D. $29,100. E. $30,900. $100,000 × 30% = $30,000 - $900 Deferred Profit = $29,100

80.

Maya reported net income of $100,000 in 2013 and $120,000 in 2014 while paying $40,000 in dividends each year. What is the balance in Cayman's Investment in Maya account at December 31, 2013?

A. $463,500. B. $467,100. C. $468,000. D. $468,900. E. $480,000. $450,000 + ($100,000 × 30% = $30,000 - $900 Deferred) - ($40,000 Dividends × 30%) = $467,100

81.

Maya reported net income of $100,000 in 2013 and $120,000 in 2014 while paying $40,000 in dividends each year. What is the Equity in Maya Income that should be reported by Cayman in 2014?

A. $34,200. B. $34,800. C. $34,500. D. $36,000. E. $37,800. $120,000 × 30% = $36,000 + ($900 from 2013) - ($2,400 from 2014 Deferral) = $34,500

82.

Maya reported net income of $100,000 in 2013 and $120,000 in 2014 while paying $40,000 in dividends each year. What is the balance in Cayman's Investment in Maya account at December 31, 2014?

A. $488,700. B. $489,600. C. $492,000. D. $494,400. E. $514,500. $467,100 + $34,500 - $12,000 = $489,600

83.

Which of the following results in a decrease in the investment account when applying the equity method?

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 01-06 Describe the rationale and computations to defer unrealized gains on intra-entity inventory transfers until the goods are either consumed or sold to outside parties.

84.

Which of the following results in an increase in the investment account when applying the equity method?

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 1 Easy Learning Objective: 01-06 Describe the rationale and computations to defer unrealized gains on intra-entity inventory

transfers until the goods are either consumed or sold to outside parties.

85.

Which of the following results in a decrease in the Equity in Investee Income account when applying the equity method?

86.

Which of the following results in an increase in the Equity in Investee Income account when applying the equity method?

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation

Blooms: Analyze Difficulty: 2 Medium Learning Objective: 01-06 Describe the rationale and computations to defer unrealized gains on intra-entity inventory transfers until the goods are either consumed or sold to outside parties.

87.

Renfroe, Inc. acquires 10% of Stanley Corporation on January 1, 2012, for $90,000 when the book value of Stanley was $1,000,000. During 2012, Stanley reported net income of $215,000 and paid dividends of $50,000. On January 1, 2013, Renfroe purchased an additional 30% of Stanley for $325,000. Any excess of cost over book value is attributable to goodwill with an indefinite life. During 2013, Renfroe reported net income of $320,000 and paid dividends of $50,000. How much is the adjustment to the Investment in Stanley Corporation for the change from the fair-value method to the equity method on January 1, 2013?

A. A debit of $16,500. B. A debit of $21,500. C. A debit of $90,000. D. A debit of $165,000. E. There is no adjustment. ($215,000 × 10%) - ($50,000 × 10%) = $16,500 Debit to the Investment Account

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 01-03 Prepare basic equity method journal entries for an investor and describe the financial reporting for equity method investments.

88.

Renfroe, Inc. acquires 10% of Stanley Corporation on January 1, 2012, for $90,000 when the book value of Stanley was $1,000,000. During 2012, Stanley reported net income of $215,000 and paid dividends of $50,000. On January 1, 2013, Renfroe purchased an additional 30% of Stanley for $325,000. Any excess of cost over book value is attributable to goodwill with an indefinite life. During 2013, Renfroe reported net income of $320,000 and paid dividends of $50,000. What is the balance in the Investment in Stanley Corporation on December 31, 2013?

A. $415,000. B. $512,500. C. $523,000. D. $539,500. E. $544,500. $90,000 + $325,000 + $16,500 = $431,500 Adjusted Balance on Switch to Equity Method $431,500 Adjusted Balance + ($320,000 Income × 40%) - ($50,000 Dividends × 40%) = $539,500

89.

On January 4, 2012, Trycker, Inc. acquired 40% of the outstanding common stock of Inkblot Co. for $2,400,000. This investment gave Trycker the ability to exercise significant influence over Inkblot. Inkblot's assets on that date were recorded at $8,000,000 with liabilities of $2,000,000. There were no other differences between book and fair values. During 2012, Inkblot reported net income of $500,000 and paid dividends of $300,000. The fair value of Inkblot at December 31, 2012 is $7,000,000. Trycker elects the fair value option for its investment in Inkblot. How are dividends received from Inkblot reflected in Trycker's accounting records for 2012?

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 01-07 Explain the rationale and reporting implications of fair-value accounting for investments otherwise accounted for by the equity method.

90.

On January 4, 2012, Trycker, Inc. acquired 40% of the outstanding common stock of Inkblot Co. for $2,400,000. This investment gave Trycker the ability to exercise significant influence over Inkblot. Inkblot's assets on that date were recorded at $8,000,000 with liabilities of $2,000,000. There were no other differences between book and fair values. During 2012, Inkblot reported net income of $500,000 and paid dividends of $300,000. The fair value of Inkblot at December 31, 2012 is $7,000,000. Trycker elects the fair value option for its investment in Inkblot. At what amount will Inkblot be reflected in Trycker's December 31, 2012 balance sheet?

A. $2,400,000. B. $2,280,000. C. $2,480,000. D. $2,800,000. E. $7,000,000. $7,000,000 FV × 40% = $2,800,000 at December 31, 2012

Essay Questions

91.

For each of the following numbered situations below, select the best letter answer concerning accounting for investments: (A.) Increase the investment account. (B.) Decrease the investment account. (C.) Increase dividend revenue. (D.) No adjustment necessary. (1.) Income reported by 40% owned investee. (2.) Income reported by 10% owned investee. (3.) Loss reported by 40% owned investee. (4.) Loss reported by 10% investee. (5.) Change from fair-value method to equity method. Prior income exceeded dividends. (6.) Change from fair-value method to equity method. Prior income was less than dividends. (7.) Change from equity method to fair-value method. Prior income exceeded dividends. (8.) Change from equity method to fair-value method. Prior income was less than dividends. (9.) Dividends received from 40% investee. (10.) Dividends received from 10% investee. (11.) Purchase of additional shares of investee. (12.) Unrealized ending intra-entity inventory profits using the equity method.

(1) A; (2) D; (3) B; (4) D; (5) A; (6) B; (7) D; (8) D; (9) B; (10) C; (11) A; (12) B

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analyze Difficulty: 2 Medium Learning Objective: 01-01 Describe in general the various methods of accounting for an investment in equity shares of another company. Learning Objective: 01-02 Identify the sole criterion for applying the equity method of accounting and guidance in assessing whether the criterion is met. 1-170 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective: 01-03 Prepare basic equity method journal entries for an investor and describe the financial reporting for equity method investments. Learning Objective: 01-06 Describe the rationale and computations to defer unrealized gains on intra-entity inventory transfers until the goods are either consumed or sold to outside parties.

92.

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

The fair-value method should be used. Generally, ownership of more than twenty percent of the voting common stock would be presumed to carry significant influence and would require use of the equity method. The equity method is not appropriate in this case because of the lack of the ability to exercise significant influence.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 01-01 Describe in general the various methods of accounting for an investment in equity shares of another company.

93.

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

Idler should discontinue the use of the equity method. The investment would have a zero

balance until investee profits eliminate unrealized losses.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement

Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-03 Prepare basic equity method journal entries for an investor and describe the financial reporting for equity method investments.

94.

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

When an investor has the ability to exercise significant influence over the operations of an investee, the investor should use the equity method to account for the investment. GAAP suggests several events or conditions which would indicate such influence: (1) investor representation on the investee's board of directors; (2) material transactions between the companies; (3) interchange of managerial personnel; (4) technological dependency between the companies; and (5) the extent of investor ownership and the concentration of other ownership interests in the investee; (6) investor participation in the policy-making process of the investee. All of these conditions should be examined to determine whether the investor has the ability to exercise significant influence over the investee.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-02 Identify the sole criterion for applying the equity method of accounting and guidance in assessing whether the criterion is met.

95.

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

In order to verify that the equity method is appropriate, the auditor should determine whether the investor is able to exercise significant influence over the operations of the investee. The ability to influence the investee's operations is the most important criterion for adopting the equity method. The auditor should look for such evidence of significant influence as (1) frequent or material intercompany transactions; (2) exchange of managerial personnel; (3) technological interdependency; and (4) investor participation in the decision-making process of the investee.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 01-02 Identify the sole criterion for applying the equity method of accounting and guidance in assessing whether the criterion is met.

96.

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

The use of the equity method influences the investor's income statement and balance sheet. On the income statement, the investor's total revenues will be increased by its share of the investee's earnings reduced by any amortization of cost in excess of fair value of depreciable net assets. On the balance sheet, the investor's total assets will include the investment account. The balance of the investment account is increased by the investor's share of the investee's income and decreased by investee losses and dividends paid and amortization of depreciable allocations. The investor's retained earnings are influenced by the investee's income or loss reported on the investor's income statement.

97.

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

The objective of the equity method is to reflect the special relationship between investor and investee. The equity method is used when the investor holds a relatively large share of the investee, but not a controlling interest. The large ownership percentage indicates that the investor has the ability to influence the decision-making processes of the investee. Use of the fair-value method would not reflect the relationship between the two parties.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember

Difficulty: 2 Medium Learning Objective: 01-01 Describe in general the various methods of accounting for an investment in equity shares of another company.

98.

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

According to the equity method, the investor should recognize its share of the investee's income in the same period in which it is earned by the investee. The equity method applies accrual accounting when the investor could exercise significant influence over the investee.

99.

What argument could be made against the equity method?

An argument could be made against the recognition of income under the equity method. The investor is required to recognize its share of the investee's income even when it is unlikely that the investor will ever receive the entire amount in cash dividends.

100.

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

A change to the fair value method is appropriate when the investor can no longer exercise significant influence over the operations of the investee. No retrospective adjustment of previous years' financial statements or the balance in the investment account is required. The balance in the investment account at the time of the change would be treated as the cost of the investment.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 3 Hard Learning Objective: 01-03 Prepare basic equity method journal entries for an investor and describe the financial reporting for equity method investments.

101.

How should an investor account for, and report, an investee's extraordinary income or loss?

The investor should account for the extraordinary income or loss by including it in an income statement account that is separate from the Equity in Investee Income account. The investor would determine whether its share of the investee's extraordinary income or loss item is material to the investor's financial statements. If it is material, then it would be reported by the investor as an extraordinary item. If it is not material, then is would be included in the Other Income/Loss section of the investor's income statement.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember

Difficulty: 2 Medium Learning Objective: 01-03 Prepare basic equity method journal entries for an investor and describe the financial reporting for equity method investments.

102.

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

When the investor does not have significant influence with regard to the investee.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 01-02 Identify the sole criterion for applying the equity method of accounting and guidance in assessing whether the criterion is met.

103.

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

The investor possesses only a small percentage of an investee and cannot expect to have a significant impact on the operations or decision-making of the investee. Since the shares are bought in anticipation of cash dividends or appreciation of stock market values, dividends received are accounted for as income and the investment is reflected at each balance sheet date at its fair value which is generally the market value at that date.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-01 Describe in general the various methods of accounting for an investment in equity shares of another company.

104.

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

According to GAAP, the investment account and retained earnings of the investor should be adjusted to retrospectively restate results of operations of prior periods.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 01-03 Prepare basic equity method journal entries for an investor and describe the financial reporting for equity method investments.

105.

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

In the balance sheet, the Investment in Investee account will be at fair value at the balance sheet date. In the income statement, any change in fair value from period to period would be reflected as investment Income (increase in fair value) or loss (decrease in fair value). Also in the income statement, the dividends received would be reflected as dividend income.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 01-02 Identify the sole criterion for applying the equity method of accounting and guidance in assessing whether the criterion is met.

Short Answer Questions

106.

Charlie Co. owns 30% of the voting common stock of Turf Services Inc. Charlie uses the equity method to account for its investment. On January 1, 2013, the balance in the investment account was $624,000. During 2013, Turf Services reported net income of $120,000 and paid dividends of $30,000. What is the balance in the investment account as of December 31, 2013?

107.

Tinker Co. owns 25% of the common stock of Harbor Co. and uses the equity method to account for the investment. During 2013, Harbor reported income of $120,000 and paid dividends of $40,000. Harbor owns a building with a useful life of twenty years which is undervalued by $80,000.

Required: Prepare a schedule to show the equity income Tinker should recognize for 2013 related to this investment.

108.

Aqua Corp. purchased 30% of the common stock of Marcus Co. by paying $500,000. Of this amount, $50,000 is associated with goodwill.

Required: Prepare the journal entry to record Aqua's investment.

The journal entry is:

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

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 01-03 Prepare basic equity method journal entries for an investor and describe the financial reporting for equity method investments.

109.

On January 2, 2013, Heinreich Co. paid $500,000 for 25% of the voting common stock of Jones Corp. At the time of the investment, Jones had net assets with a book value and fair value of $1,800,000. During 2013, Jones incurred a net loss of $60,000 and paid dividends of $100,000. Any excess cost over book value is attributable to goodwill with an indefinite life.

Required: 1) Prepare a schedule to show the amount of goodwill from Heinrich's investment in Jones. 2) Prepare a schedule to show the balance in Heinreich's investment account at December 31, 2013.

110.

On January 3, 2013, Jenkins Corp. acquired 40% of the outstanding common stock of Bolivar Co. for $1,200,000. This acquisition gave Jenkins the ability to exercise significant influence over the investee. The book value of the acquired shares was $950,000. Any excess cost over the underlying book value was assigned to a patent that was undervalued on Bolivar's balance sheet. This patent has a remaining useful life of ten years. For the year ended December 31, 2013, Bolivar reported net income of $312,000 and paid cash dividends of $96,000.

Required: Prepare a schedule to show the balance Jenkins should report as its Investment in Bolivar Co. at December 31, 2013.

111.

On January 1, 2013, Spark Corp. acquired a 40% interest in Cranston Inc. for $250,000. On that date, Cranston's balance sheet disclosed net assets of $430,000. During 2013, Cranston reported net income of $100,000 and paid cash dividends of $30,000. Spark sold inventory costing $40,000 to Cranston during 2013 for $50,000. Cranston used all of this merchandise in its operations during 2013. Any excess cost over fair value is attributable to an unamortized trademark with a 20 year remaining life.

Required: Prepare all of Spark's journal entries for 2013 to apply the equity method to this investment.

AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-02 Identify the sole criterion for applying the equity method of accounting and guidance in assessing whether the criterion is met. Learning Objective: 01-04 Allocate the cost of an equity method investment and compute amortization expense to match revenues recognized from the investment to the excess of investor cost over investee book value.

112.

Wathan Inc. sold $180,000 in inventory to Miller Co. during 2012, for $270,000. Miller resold $108,000 of this merchandise in 2012 with the remainder to be disposed of during 2013.

113.

Jager Inc. holds 30% of the outstanding voting shares of Kinson Co. and appropriately applies the equity method of accounting. Amortization associated with this investment equals $11,000 per year. For 2013, Kinson reported earnings of $100,000 and paid cash dividends of $40,000. During 2013, Kinson acquired inventory for $62,400, which was then sold to Jager for $96,000. At the end of 2013, Jager still held some of this inventory at its transfer price of $50,000.

Required: Determine the amount of Equity in Investee Income that Jager should have reported for 2013.

114.

On January 2, 2012, Hull Corp. paid $516,000 for 24% (48,000 shares) of the outstanding common stock of Oliver Co. Hull used the equity method to account for the investment. At the end of 2012, the balance in the investment account was $620,000. On January 2, 2013, Hull sold 12,000 shares of Oliver stock for $12 per share. For 2013, Oliver reported income of $118,000 and paid dividends of $30,000.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-01 Describe in general the various methods of accounting for an investment in equity shares of another company. Learning Objective: 01-05d Understand the financial reporting consequences for sales of equity method investments.

115.

On January 1, 2013, Jolley Corp. paid $250,000 for 25% of the voting common stock of Tige Co. On that date, the book value of Tige was $850,000. A building with a carrying value of $160,000 was actually worth $220,000. The building had a remaining life of twenty years. Tige owned a trademark valued at $90,000 over cost that was to be amortized over 20 years. During 2013, Tige sold to Jolley inventory costing $60,000, at a markup of 50% on cost. At the end of the year, Jolley still owned some of these goods with a transfer price of $33,000. Jolly uses a perpetual inventory system. Tige reported net income of $200,000 during 2013. This amount included an extraordinary gain of $35,000. Tige paid dividends totaling $40,000.

Required: Prepare all of Jolley's journal entries for 2013 in relation to Tige Co. Assume the equity method is appropriate for use.

Required journal entries:

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-02 Identify the sole criterion for applying the equity method of accounting and guidance in assessing whether the criterion is met. Learning Objective: 01-03 Prepare basic equity method journal entries for an investor and describe the financial reporting for equity method investments. Learning Objective: 01-04 Allocate the cost of an equity method investment and compute amortization expense to match revenues recognized from the investment to the excess of investor cost over investee book value. Learning Objective: 01-06 Describe the rationale and computations to defer unrealized gains on intra-entity inventory transfers until the goods are either consumed or sold to outside parties.

116.

On January 1, 2012, Pond Co. acquired 40% of the outstanding voting common shares of Ramp Co. for $700,000. On that date, Ramp reported assets and liabilities with book values of $2.2 million and $700,000, respectively. A building owned by Ramp had an appraised value of $300,000, although it had a book value of only $120,000. This building had a 12-year remaining life and no salvage value. It was being depreciated on the straight-line basis. Ramp generated net income of $300,000 in 2012 and a loss of $120,000 in 2013. In each of these two years, Ramp paid a cash dividend of $70,000 to its stockholders. During 2012, Ramp sold inventory to Pond that had an original cost of $60,000. The merchandise was sold to Pond for $96,000. Of this balance, $72,000 was resold to outsiders during 2012 and the remainder was sold during 2013. In 2013, Ramp sold inventory to Pond for $180,000. This inventory had cost only $108,000. Pond resold $120,000 of the inventory during 2013 and the rest during 2014.

Required: For 2012 and then for 2013, calculate the equity income to be reported by Pond for external reporting purposes.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-05b Understand the financial reporting consequences for investee other comprehensive income. Learning Objective: 01-05c Understand the financial reporting consequences for investee losses. Learning Objective: 01-06 Describe the rationale and computations to defer unrealized gains on intra-entity inventory transfers until the goods are either consumed or sold to outside parties. 1-193 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

117.

Pursley, Inc. acquires 10% of Ritz Corporation on January 3, 2012, for $80,000 when the book value of Ritz was $800,000. During 2012 Ritz reported net income of $125,000 and paid dividends of $30,000. On January 1, 2013, Pursley purchased an additional 20% of Ritz for $325,000, giving Pursley the ability to significantly influence the operating policies of Ritz. Any excess of cost over book value is attributable to goodwill with an indefinite life. What journal entry(ies) is(are) required on January 1, 2013?

118.

Steven Company owns 40% of the outstanding voting common stock of Nicole Corp. and has the ability to significantly influence the investee's operations. On January 3, 2013, the balance in the Investment in Nicole Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2013, Nicole earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2012, Nicole had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2012. Additional sales were made to Steven in 2013 at a transfer price of $75,000 that had cost Nicole $54,000. Only 10% of the 2013 purchases had not been sold to outsiders by the end of 2013. What amount of unrealized intra-entity inventory profit should be deferred by Steven at December 31, 2012?

[($50,000 - $35,000) × .25 × .40] = $1,500

119.

Steven Company owns 40% of the outstanding voting common stock of Nicole Corp. and has the ability to significantly influence the investee's operations. On January 3, 2013, the balance in the Investment in Nicole Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2013, Nicole earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2012, Nicole had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2012. Additional sales were made to Steven in 2013 at a transfer price of $75,000 that had cost Nicole $54,000. Only 10% of the 2013 purchases had not been sold to outsiders by the end of 2013. What amount of unrealized intra-entity profit should be deferred by Steven at December 31, 2013?

[($75,000 - $54,000) × .10 × .40] = $840

120.

Steven Company owns 40% of the outstanding voting common stock of Nicole Corp. and has the ability to significantly influence the investee's operations. On January 3, 2013, the balance in the Investment in Nicole Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2013, Nicole earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2012, Nicole had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2012. Additional sales were made to Steven in 2013 at a transfer price of $75,000 that had cost Nicole $54,000. Only 10% of the 2013 purchases had not been sold to outsiders by the end of 2013. What amount of equity income would Steven have recognized in 2013 from its ownership interest in Nicole?

[($120,000 × .4) - $12,000 - $840 + $1,500] = $36,660

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-04 Allocate the cost of an equity method investment and compute amortization expense to match revenues recognized from the investment to the excess of investor cost over investee book value. Learning Objective: 01-06 Describe the rationale and computations to defer unrealized gains on intra-entity inventory transfers until the goods are either consumed or sold to outside parties.

121.

Steven Company owns 40% of the outstanding voting common stock of Nicole Corp. and has the ability to significantly influence the investee's operations. On January 3, 2013, the balance in the Investment in Nicole Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2013, Nicole earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2012, Nicole had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2012. Additional sales were made to Steven in 2013 at a transfer price of $75,000 that had cost Nicole $54,000. Only 10% of the 2013 purchases had not been sold to outsiders by the end of 2013. What was the balance in the Investment in Nicole Corp. account at December 31, 2013?

[$503,000 + $36,660 - ($40,000 × .4)] = $523,660

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 01-04 Allocate the cost of an equity method investment and compute amortization expense to match revenues recognized from the investment to the excess of investor cost over investee book value. Learning Objective: 01-06 Describe the rationale and computations to defer unrealized gains on intra-entity inventory transfers until the goods are either consumed or sold to outside parties.

Chapter 02 Consolidation of Financial Information

Multiple Choice Questions

1. At the date of an acquisition which is not a bargain purchase, the acquisition method

A. consolidates the subsidiary's assets at fair value and the liabilities at book value. B. consolidates all subsidiary assets and liabilities at book value. C. consolidates all subsidiary assets and liabilities at fair value. D. consolidates current assets and liabilities at book value, long-term assets and liabilities at fair value. E. consolidates the subsidiary's assets at book value and the liabilities at fair value.

2. In an acquisition where control is achieved, how would the land accounts of the parent and the land accounts of the subsidiary be combined?

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

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

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

4. Using the acquisition method for a business combination, goodwill is generally defined as:

A. Cost of the investment less the subsidiary's book value at the beginning of the year. B. Cost of the investment less the subsidiary's book value at the acquisition date. C. Cost of the investment less the subsidiary's fair value at the beginning of the year. D. Cost of the investment less the subsidiary's fair value at acquisition date. E. is no longer allowed under federal law.

5. Direct combination costs and stock issuance costs are often incurred in the process of making a controlling investment in another company. How should those costs be accounted for in a pre-2009 purchase transaction?

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

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

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

7. What is the primary accounting difference between accounting for when the subsidiary is dissolved and when the subsidiary retains its incorporation?

A. If the subsidiary is dissolved, it will not be operated as a separate division. B. If the subsidiary is dissolved, assets and liabilities are consolidated at their book values. C. If the subsidiary retains its incorporation, there will be no goodwill associated with the acquisition. D. If the subsidiary retains its incorporation, assets and liabilities are consolidated at their book values. E. If the subsidiary retains its incorporation, the consolidation is not formally recorded in the accounting records of the acquiring company.

8. According to GAAP, the pooling of interest method for business combinations

A. Is preferred to the purchase method. B. Is allowed for all new acquisitions. C. Is no longer allowed for business combinations after June 30, 2001. D. Is no longer allowed for business combinations after December 31, 2001. E. Is only allowed for large corporate mergers like Exxon and Mobil.

9. An example of a difference in types of business combination is:

A. A statutory merger can only be effected by an asset acquisition while a statutory consolidation can only be effected by a capital stock acquisition. B. A statutory merger can only be effected by a capital stock acquisition while a statutory consolidation can only be effected by an asset acquisition. C. A statutory merger requires dissolution of the acquired company while a statutory consolidation does not require dissolution. D. A statutory consolidation requires dissolution of the acquired company while a statutory merger does not require dissolution. E. Both a statutory merger and a statutory consolidation can only be effected by an asset acquisition but only a statutory consolidation requires dissolution of the acquired company.

10. Acquired in-process research and development is considered as

A. a definite-lived asset subject to amortization. B. a definite-lived asset subject to testing for impairment. C. an indefinite-lived asset subject to amortization. D. an indefinite-lived asset subject to testing for impairment. E. a research and development expense at the date of acquisition.

11. Which one of the following is a characteristic of a business combination accounted for as an acquisition?

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

12. Which one of the following is a characteristic of a business combination that is accounted for as an acquisition?

A. Fair value only for items received by the acquirer can enter into the determination of the acquirer's accounting valuation of the acquired company. B. Fair value only for the consideration transferred by the acquirer can enter into the determination of the acquirer's accounting valuation of the acquired company. C. Fair value for the consideration transferred by the acquirer as well as the fair value of items received by the acquirer can enter into the determination of the acquirer's accounting valuation of the acquired company. D. Fair value for only consideration transferred and identifiable assets received by the acquirer can enter into the determination of the acquirer's accounting valuation of the acquired company. E. Only fair value of identifiable assets received enters into the determination of the acquirer's accounting valuation of the acquired company.

13. A statutory merger is a(n)

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

14. How are stock issuance costs and direct combination costs treated in a business combination which is accounted for as an acquisition when the subsidiary will retain its incorporation?

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

15. Bullen Inc. acquired 100% of the voting common stock of Vicker Inc. on January 1, 2013. The book value and fair value of Vicker's accounts on that date (prior to creating the combination) follow, along with the book value of Bullen's accounts:

Assume that Bullen issued 12,000 shares of common stock with a $5 par value and a $47 fair value to obtain all of Vicker's outstanding stock. In this acquisition transaction, how much goodwill should be recognized?

A. $144,000. B. $104,000. C. $64,000. D. $60,000. E. $0.

16. Bullen Inc. acquired 100% of the voting common stock of Vicker Inc. on January 1, 2013. The book value and fair value of Vicker's accounts on that date (prior to creating the combination) follow, along with the book value of Bullen's accounts:

Assume that Bullen issued 12,000 shares of common stock with a $5 par value and a $42 fair value for all of the outstanding stock of Vicker. What is the consolidated balance for Land as a result of this acquisition transaction?

A. $460,000. B. $510,000. C. $500,000. D. $520,000. E. $490,000.

17. Bullen Inc. acquired 100% of the voting common stock of Vicker Inc. on January 1, 2013. The book value and fair value of Vicker's accounts on that date (prior to creating the combination) follow, along with the book value of Bullen's accounts:

Assume that Bullen issued 12,000 shares of common stock with a $5 par value and a $42 fair value for all of the outstanding shares of Vicker. What will be the consolidated Additional Paid-In Capital and Retained Earnings (January 1, 2013 balances) as a result of this acquisition transaction?

A. $60,000 and $490,000. B. $60,000 and $250,000. C. $380,000 and $250,000. D. $464,000 and $250,000. E. $464,000 and $420,000.

18. Bullen Inc. acquired 100% of the voting common stock of Vicker Inc. on January 1, 2013. The book value and fair value of Vicker's accounts on that date (prior to creating the combination) follow, along with the book value of Bullen's accounts:

Assume that Bullen issued preferred stock with a par value of $240,000 and a fair value of $500,000 for all of the outstanding shares of Vicker in an acquisition business combination. What will be the balance in the consolidated Inventory and Land accounts?

A. $440,000, $496,000. B. $440,000, $520,000. C. $425,000, $505,000. D. $400,000, $500,000. E. $427,000, $510,000.

19. Bullen Inc. acquired 100% of the voting common stock of Vicker Inc. on January 1, 2013. The book value and fair value of Vicker's accounts on that date (prior to creating the combination) follow, along with the book value of Bullen's accounts:

Assume that Bullen paid a total of $480,000 in cash for all of the shares of Vicker. In addition, Bullen paid $35,000 to a group of attorneys for their work in arranging the combination to be accounted for as an acquisition. What will be the balance in consolidated goodwill?

A. $0. B. $20,000. C. $35,000. D. $55,000. E. $65,000.

20. Prior to being united in a business combination, Botkins Inc. and Volkerson Corp. had the following stockholders' equity figures:

Botkins issued 56,000 new shares of its common stock valued at $3.25 per share for all of the outstanding stock of Volkerson. Assume that Botkins acquired Volkerson on January 1, 2012. At what amount did Botkins record the investment in Volkerson?

A. $56,000. B. $182,000. C. $209,000. D. $261,000. E. $312,000.

21. Prior to being united in a business combination, Botkins Inc. and Volkerson Corp. had the following stockholders' equity figures:

Botkins issued 56,000 new shares of its common stock valued at $3.25 per share for all of the outstanding stock of Volkerson. Assume that Botkins acquired Volkerson on January 1, 2012. Immediately afterwards, what is consolidated Common Stock?

A. $456,000. B. $402,000. C. $274,000. D. $276,000. E. $330,000.

22. Chapel Hill Company had common stock of $350,000 and retained earnings of $490,000. Blue Town Inc. had common stock of $700,000 and retained earnings of $980,000. On January 1, 2013, Blue Town issued 34,000 shares of common stock with a $12 par value and a $35 fair value for all of Chapel Hill Company's outstanding common stock. This combination was accounted for as an acquisition. Immediately after the combination, what was the total consolidated net assets?

A. $2,520,000. B. $1,190,000. C. $1,680,000. D. $2,870,000. E. $2,030,000.

23. Which of the following is a not a reason for a business combination to take place?

A. Cost savings through elimination of duplicate facilities. B. Quick entry for new and existing products into domestic and foreign markets. C. Diversification of business risk. D. Vertical integration. E. Increase in stock price of the acquired company.

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

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

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

26. In a transaction accounted for using the acquisition method where consideration transferred exceeds book value of the acquired company, which statement is true for the acquiring company with regard to its investment?

A. Net assets of the acquired company are revalued to their fair values and any excess of consideration transferred over fair value of net assets acquired is allocated to goodwill. B. Net assets of the acquired company are maintained at book value and any excess of consideration transferred over book value of net assets acquired is allocated to goodwill. C. Acquired assets are revalued to their fair values. Acquired liabilities are maintained at book values. Any excess is allocated to goodwill. D. Acquired long-term assets are revalued to their fair values. Any excess is allocated to goodwill.

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

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

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

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

29. Which of the following statements is true?

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

30. The financial statements for Goodwin, Inc. and Corr Company for the year ended December 31, 2013, prior to Goodwin's acquisition business combination transaction regarding Corr, follow (in thousands):

On December 31, 2013, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to acquire all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560. In this acquisition business combination, at what amount is the investment recorded on Goodwin's books?

A. $1,540. B. $1,800.

C. $1,860. D. $1,825. E. $1,625.

31. The financial statements for Goodwin, Inc. and Corr Company for the year ended December 31, 2013, prior to Goodwin's acquisition business combination transaction regarding Corr, follow (in thousands):

On December 31, 2013, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to acquire all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560. In this acquisition business combination, what total amount of common stock and additional paid-in capital is added on Goodwin's books?

A. $265. B. $1,165.

C. $1,200. D. $1,235. E. $1,765.

32. The financial statements for Goodwin, Inc. and Corr Company for the year ended December 31, 2013, prior to Goodwin's acquisition business combination transaction regarding Corr, follow (in thousands):

A. $2,700. B. $720. C. $920.

D. $3,300. E. $1,540.

33. The financial statements for Goodwin, Inc. and Corr Company for the year ended December 31, 2013, prior to Goodwin's acquisition business combination transaction regarding Corr, follow (in thousands):

On December 31, 2013, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to acquire all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560. Compute the consolidated receivables and inventory for 2013.

A. $1,200. B. $1,515. C. $1,540.

D. $1,800. E. $2,140.

34. The financial statements for Goodwin, Inc. and Corr Company for the year ended December 31, 2013, prior to Goodwin's acquisition business combination transaction regarding Corr, follow (in thousands):

A. $1,980. B. $2,005. C. $2,040.

D. $2,380. E. $2,405.

35. The financial statements for Goodwin, Inc. and Corr Company for the year ended December 31, 2013, prior to Goodwin's acquisition business combination transaction regarding Corr, follow (in thousands):

On December 31, 2013, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to acquire all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560. Compute the consolidated cash account at December 31, 2013.

A. $460. B. $425. C. $400.

D. $435. E. $240.

36. The financial statements for Goodwin, Inc. and Corr Company for the year ended December 31, 2013, prior to Goodwin's acquisition business combination transaction regarding Corr, follow (in thousands):

On December 31, 2013, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to acquire all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560. Compute the consolidated buildings (net) account at December 31, 2013.

A. $2,700. B. $3,370. C. $3,300.

D. $3,260. E. $3,340.

37. The financial statements for Goodwin, Inc. and Corr Company for the year ended December 31, 2013, prior to Goodwin's acquisition business combination transaction regarding Corr, follow (in thousands):

On December 31, 2013, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to acquire all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560. Compute the consolidated equipment (net) account at December 31, 2013.

A. $2,100. B. $3,500. C. $3,300.

D. $3,000. E. $3,200.

38. The financial statements for Goodwin, Inc. and Corr Company for the year ended December 31, 2013, prior to Goodwin's acquisition business combination transaction regarding Corr, follow (in thousands):

On December 31, 2013, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to acquire all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560. Compute the consideration transferred for this acquisition at December 31, 2013.

A. $900. B. $1,165. C. $1,200.

D. $1,765. E. $1,800.

39. The financial statements for Goodwin, Inc. and Corr Company for the year ended December 31, 2013, prior to Goodwin's acquisition business combination transaction regarding Corr, follow (in thousands):

On December 31, 2013, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to acquire all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560. Compute the goodwill arising from this acquisition at December 31, 2013.

A. $0. B. $100. C. $125. D. $160. E. $45.

40. The financial statements for Goodwin, Inc. and Corr Company for the year ended December 31, 2013, prior to Goodwin's acquisition business combination transaction regarding Corr, follow (in thousands):

On December 31, 2013, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to acquire all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560. Compute the consolidated common stock account at December 31, 2013.

A. $1,080. B. $1,480. C. $1,380. D. $2,280. E. $2,680.

41. The financial statements for Goodwin, Inc. and Corr Company for the year ended December 31, 2013, prior to Goodwin's acquisition business combination transaction regarding Corr, follow (in thousands):

On December 31, 2013, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to acquire all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560. Compute the consolidated additional paid-in capital at December 31, 2013.

A. $810. B. $1,350. C. $1,675. D. $1,910. E. $1,875.

42. The financial statements for Goodwin, Inc. and Corr Company for the year ended December 31, 2013, prior to Goodwin's acquisition business combination transaction regarding Corr, follow (in thousands):

On December 31, 2013, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to acquire all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560. Compute the consolidated liabilities at December 31, 2013.

A. $1,500. B. $2,100. C. $2,320. D. $2,920. E. $2,885.

43. The financial statements for Goodwin, Inc. and Corr Company for the year ended December 31, 2013, prior to Goodwin's acquisition business combination transaction regarding Corr, follow (in thousands):

On December 31, 2013, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to acquire all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560. Compute the consolidated retained earnings at December 31, 2013.

A. $2,800. B. $2,825. C. $2,850.

D. $3,425. E. $3,450.

44. On January 1, 2013, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows:

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

A. $930. B. $820. C. $800. D. $835. E. $815.

45. On January 1, 2013, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows:

A. $230. B. $120. C. $520. D. None. There is a gain on bargain purchase of $230. E. None. There is a gain on bargain purchase of $265.

46. On January 1, 2013, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows:

Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. Compute the amount of consolidated inventories at date of acquisition.

A. $1,080. B. $1,350. C. $1,360. D. $1,370. E. $290.

47. On January 1, 2013, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows:

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

A. $1,700. B. $1,760. C. $1,640. D. $1,320. E. $500.

48. On January 1, 2013, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows:

Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. Compute the amount of consolidated land at date of acquisition.

A. $1,000. B. $960. C. $920. D. $400. E. $320.

49. On January 1, 2013, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows:

Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. Compute the amount of consolidated equipment at date of acquisition.

A. $480. B. $580. C. $559. D. $570. E. $560.

50. On January 1, 2013, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows:

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

A. $370. B. $570. C. $610. D. $330. E. $530.

51. On January 1, 2013, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows:

Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. Compute the amount of consolidated additional paid-in capital at date of acquisition.

A. $1,080. B. $1,420. C. $1,065. D. $1,425. E. $1,440.

52. On January 1, 2013, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows:

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

A. $220. B. $185. C. $200. D. $205. E. $215.

53. Carnes has the following account balances as of May 1, 2012 before an acquisition transaction takes place.

The fair value of Carnes' Land and Buildings are $650,000 and $550,000, respectively. On May 1, 2012, Riley Company issues 30,000 shares of its $10 par value ($25 fair value) common stock in exchange for all of the shares of Carnes' common stock. Riley paid $10,000 for costs to issue the new shares of stock. Before the acquisition, Riley has $700,000 in its common stock account and $300,000 in its additional paid-in capital account. On May 1, 2012, what value is assigned to Riley's investment account?

A. $150,000. B. $300,000. C. $750,000. D. $760,000. E. $1,350,000.

54. Carnes has the following account balances as of May 1, 2012 before an acquisition transaction takes place.

The fair value of Carnes' Land and Buildings are $650,000 and $550,000, respectively. On May 1, 2012, Riley Company issues 30,000 shares of its $10 par value ($25 fair value) common stock in exchange for all of the shares of Carnes' common stock. Riley paid $10,000 for costs to issue the new shares of stock. Before the acquisition, Riley has $700,000 in its common stock account and $300,000 in its additional paid-in capital account. At the date of acquisition, by how much does Riley's additional paid-in capital increase or decrease?

A. $0. B. $440,000 increase. C. $450,000 increase. D. $640,000 increase. E. $650,000 decrease.

55. Carnes has the following account balances as of May 1, 2012 before an acquisition transaction takes place.

The fair value of Carnes' Land and Buildings are $650,000 and $550,000, respectively. On May 1, 2012, Riley Company issues 30,000 shares of its $10 par value ($25 fair value) common stock in exchange for all of the shares of Carnes' common stock. Riley paid $10,000 for costs to issue the new shares of stock. Before the acquisition, Riley has $700,000 in its common stock account and $300,000 in its additional paid-in capital account. What will be Riley's balance in its common stock account as a result of this acquisition?

A. $300,000. B. $990,000. C. $1,000,000. D. $1,590,000. E. $1,600,000.

56. Carnes has the following account balances as of May 1, 2012 before an acquisition transaction takes place.

The fair value of Carnes' Land and Buildings are $650,000 and $550,000, respectively. On May 1, 2012, Riley Company issues 30,000 shares of its $10 par value ($25 fair value) common stock in exchange for all of the shares of Carnes' common stock. Riley paid $10,000 for costs to issue the new shares of stock. Before the acquisition, Riley has $700,000 in its common stock account and $300,000 in its additional paid-in capital account. What will be the consolidated additional paid-in capital as a result of this acquisition?

A. $440,000. B. $740,000. C. $750,000. D. $940,000. E. $950,000.

57. The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets.

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2013. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute the investment to be recorded at date of acquisition.

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

58. The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets.

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

59. The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets.

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2013. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated inventory at the date of the acquisition.

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

60. The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets.

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

61. The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets.

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2013. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated buildings (net) at the date of the acquisition.

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

62. The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets.

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2013. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated long-term liabilities at the date of the acquisition.

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

63. The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets.

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2013. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated goodwill at the date of the acquisition.

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

64. The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets.

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2013. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated equipment (net) at the date of the acquisition.

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

65. The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets.

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2013. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute fair value of the net assets acquired at the date of the acquisition.

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

66. The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets.

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2013. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated retained earnings at the date of the acquisition.

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

67. The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets.

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2013. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated revenues at the date of the acquisition.

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

68. The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets.

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2013. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated cash at the completion of the acquisition.

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

69. The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets.

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2013. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated expenses at the date of the acquisition.

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

70. Presented below are the financial balances for the Atwood Company and the Franz Company as of December 31, 2012, immediately before Atwood acquired Franz. Also included are the fair values for Franz Company's net assets at that date.

Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 2012. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid to effect this acquisition transaction. To settle a difference of opinion regarding Franz's fair value, Atwood promises to pay an additional $5.2 (in thousands) to the former owners if Franz's earnings exceed a certain sum during the next year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is $5 (in thousands). Compute the investment to be recorded at date of acquisition.

A. $1,750. B. $1,755. C. $1,725. D. $1,760.

E. $1,765.

71. Presented below are the financial balances for the Atwood Company and the Franz Company as of December 31, 2012, immediately before Atwood acquired Franz. Also included are the fair values for Franz Company's net assets at that date.

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

E. $1,830.

72. Presented below are the financial balances for the Atwood Company and the Franz Company as of December 31, 2012, immediately before Atwood acquired Franz. Also included are the fair values for Franz Company's net assets at that date.

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

E. $2,070.

73. Presented below are the financial balances for the Atwood Company and the Franz Company as of December 31, 2012, immediately before Atwood acquired Franz. Also included are the fair values for Franz Company's net assets at that date.

Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 2012. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid to effect this acquisition transaction. To settle a difference of opinion regarding Franz's fair value, Atwood promises to pay an additional $5.2 (in thousands) to the former owners if Franz's earnings exceed a certain sum during the next year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is $5 (in thousands). Compute consolidated buildings (net) at date of acquisition.

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

E. $1,690.

74. Presented below are the financial balances for the Atwood Company and the Franz Company as of December 31, 2012, immediately before Atwood acquired Franz. Also included are the fair values for Franz Company's net assets at that date.

A. $440. B. $442. C. $450. D. $455.

E. $452.

75. Presented below are the financial balances for the Atwood Company and the Franz Company as of December 31, 2012, immediately before Atwood acquired Franz. Also included are the fair values for Franz Company's net assets at that date.

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

E. $1,050.

76. Presented below are the financial balances for the Atwood Company and the Franz Company as of December 31, 2012, immediately before Atwood acquired Franz. Also included are the fair values for Franz Company's net assets at that date.

Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 2012. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid to effect this acquisition transaction. To settle a difference of opinion regarding Franz's fair value, Atwood promises to pay an additional $5.2 (in thousands) to the former owners if Franz's earnings exceed a certain sum during the next year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is $5 (in thousands). Compute consolidated retained earnings as a result of this acquisition.

A. $1,160. B. $1,170. C. $1,265. D. $1,280.

E. $1,650.

77. Presented below are the financial balances for the Atwood Company and the Franz Company as of December 31, 2012, immediately before Atwood acquired Franz. Also included are the fair values for Franz Company's net assets at that date.

A. $3,540. B. $2,880. C. $1,170. D. $1,650.

E. $4,050.

78. Presented below are the financial balances for the Atwood Company and the Franz Company as of December 31, 2012, immediately before Atwood acquired Franz. Also included are the fair values for Franz Company's net assets at that date.

A. $2,735. B. $2,760. C. $2,770. D. $2,785.

E. $3,380.

79. Presented below are the financial balances for the Atwood Company and the Franz Company as of December 31, 2012, immediately before Atwood acquired Franz. Also included are the fair values for Franz Company's net assets at that date.

A. $1,350. B. $1,110. C. $1,080. D. $1,085.

E. $635.

80. Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2013. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek as of January 1, 2013 follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands.

By how much will Flynn's additional paid-in capital increase as a result of this acquisition?

A. $150,000. B. $160,000. C. $230,000. D. $350,000. E. $360,000.

81. Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2013. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek as of January 1, 2013 follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands.

What amount will be reported for goodwill as a result of this acquisition?

A. $30,000. B. $55,000. C. $65,000. D. $175,000. E. $200,000.

82. Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2013. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek as of January 1, 2013 follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands.

What amount will be reported for consolidated receivables?

A. $660,000. B. $640,000. C. $500,000. D. $460,000. E. $480,000.

83. Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2013. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek as of January 1, 2013 follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands.

What amount will be reported for consolidated inventory?

A. $1,000,000. B. $960,000. C. $920,000. D. $660,000. E. $620,000.

84. Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2013. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek as of January 1, 2013 follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands.

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

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

85. Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2013. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek as of January 1, 2013 follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands.

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

A. $385,000. B. $335,000. C. $435,000. D. $460,000. E. $360,000.

86. Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2013. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek as of January 1, 2013 follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands.

What amount will be reported for consolidated long-term liabilities?

A. $1,520,000. B. $1,480,000. C. $1,440,000. D. $1,180,000. E. $1,100,000.

87. Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2013. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek as of January 1, 2013 follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands.

What amount will be reported for consolidated common stock?

A. $1,000,000. B. $1,080,000. C. $1,200,000. D. $1,280,000. E. $1,360,000.

88. Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2013. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek as of January 1, 2013 follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands.

Assuming the combination is accounted for as a purchase, what amount will be reported for consolidated retained earnings?

A. $1,830,000. B. $1,350,000. C. $1,080,000. D. $1,560,000. E. $1,535,000.

89. Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2013. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek as of January 1, 2013 follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands.

What amount will be reported for consolidated retained earnings?

A. $1,065,000. B. $1,080,000. C. $1,525,000. D. $1,535,000. E. $1,560,000.

90. Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2013. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek as of January 1, 2013 follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands.

What amount will be reported for consolidated additional paid-in capital?

A. $365,000. B. $350,000. C. $360,000. D. $375,000. E. $345,000.

91. Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2013. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek as of January 1, 2013 follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands.

What amount will be reported for consolidated cash after the acquisition is completed?

A. $475,000. B. $500,000. C. $555,000. D. $580,000. E. $875,000.

Essay Questions

92. What term is used to refer to a business combination in which only one of the original companies continues to exist?

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

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

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

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

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

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

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

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

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

102.How is contingent consideration accounted for in an acquisition business combination transaction?

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

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

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

106.Bale Co. acquired Silo Inc. on December 31, 2013, in an acquisition business combination transaction. Bale's net income for the year was $1,400,000, while Silo had net income of $400,000 earned evenly during the year. Bale paid $100,000 in direct combination costs, $50,000 in indirect costs, and $30,000 in stock issue costs to effect the combination.

Required: What is consolidated net income for 2013?

107.Fine Co. issued its common stock in exchange for the common stock of Dandy Corp. in an acquisition. At the date of the combination, Fine had land with a book value of $480,000 and a fair value of $620,000. Dandy had land with a book value of $170,000 and a fair value of $190,000.

Required: What was the consolidated balance for Land in a consolidated balance sheet prepared at the date of the acquisition combination?

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

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

Required: Prepare a fair value allocation and goodwill schedule at the date of the acquisition.

109.Salem Co. had the following account balances as of December 1, 2012:

Bellington Inc. transferred $1.7 million in cash and 12,000 shares of its newly issued $30 par value common stock (valued at $90 per share) to acquire all of Salem's outstanding common stock. Determine the balance for Goodwill that would be included in a December 1, 2012, consolidation.

110.Salem Co. had the following account balances as of December 1, 2012:

Bellington Inc. transferred $1.7 million in cash and 12,000 shares of its newly issued $30 par value common stock (valued at $90 per share) to acquire all of Salem's outstanding common stock. Assume that Bellington paid cash of $2.8 million. No stock is issued. An additional $50,000 is paid in direct combination costs.

Required: For Goodwill, determine what balance would be included in a December 1, 2012 consolidation.

111.On January 1, 2013, Chester Inc. acquired 100% of Festus Corp.'s outstanding common stock by exchanging 37,500 shares of Chester's $2 par value common voting stock. On January 1, 2013, Chester's voting common stock had a fair value of $40 per share. Festus' voting common shares were selling for $6.50 per share. Festus' balances on the acquisition date, just prior to acquisition are listed below.

Required: Compute the value of the Goodwill account on the date of acquisition, 1/1/15.

112.The financial statements for Jode Inc. and Lakely Corp., just prior to their combination, for the year ending December 31, 2012, follow. Lakely's buildings were undervalued on its financial records by $60,000.

On December 31, 2012, Jode issued 54,000 new shares of its $10 par value stock in exchange for all the outstanding shares of Lakely. Jode's shares had a fair value on that date of $35 per share. Jode paid $34,000 to an investment bank for assisting in the arrangements. Jode also paid $24,000 in stock issuance costs to effect the acquisition of Lakely. Lakely will retain its incorporation. Prepare the journal entries to record (1) the issuance of stock by Jode and (2) the payment of the combination costs.

113.The financial statements for Jode Inc. and Lakely Corp., just prior to their combination, for the year ending December 31, 2012, follow. Lakely's buildings were undervalued on its financial records by $60,000.

Required: Determine consolidated net income for the year ended December 31, 2012.

114.The financial statements for Jode Inc. and Lakely Corp., just prior to their combination, for the year ending December 31, 2012, follow. Lakely's buildings were undervalued on its financial records by $60,000.

On December 31, 2012, Jode issued 54,000 new shares of its $10 par value stock in exchange for all the outstanding shares of Lakely. Jode's shares had a fair value on that date of $35 per share. Jode paid $34,000 to an investment bank for assisting in the arrangements. Jode also paid $24,000 in stock issuance costs to effect the acquisition of Lakely. Lakely will retain its incorporation. Determine consolidated Additional paid-in Capital at December 31, 2012.

115.The following are preliminary financial statements for Black Co. and Blue Co. for the year ending December 31, 2013.

On December 31, 2013 (subsequent to the preceding statements), Black exchanged 10,000 shares of its $10 par value common stock for all of the outstanding shares of Blue. Black's stock on that date has a fair value of $50 per share. Black was willing to issue 10,000 shares of stock because Blue's land was appraised at $204,000. Black also paid $14,000 to several attorneys and accountants who assisted in creating this combination.

Required: Assuming that these two companies retained their separate legal identities, prepare a consolidation worksheet as of December 31, 2013.

116.The following are preliminary financial statements for Black Co. and Blue Co. for the year ending December 31, 2013 prior to Black's acquisition of Blue.

On December 31, 2013 (subsequent to the preceding statements), Black exchanged 10,000 shares of its $10 par value common stock for all of the outstanding shares of Blue. Black's stock on that date has a fair value of $60 per share. Black was willing to issue 10,000 shares of stock because Blue's land was appraised at $204,000. Black also paid $14,000 to several attorneys and accountants who assisted in creating this combination.

Required: Assuming that these two companies retained their separate legal identities, prepare a consolidation worksheet as of December 31, 2013 after the acquisition transaction is completed.

117.For each of the following situations, select the best letter answer to reflect the effect of the numbered item on the acquirer's accounting entry at the date of combination when separate incorporation will be maintained. Items (4) and (6) require two selections. (A) Increase Investment account. (B) Decrease Investment account. (C) Increase Liabilities. (D) Increase Common stock. (E) Decrease common stock. (F) Increase Additional paid-in capital. (G) Decrease Additional paid-in capital. (H) Increase Retained earnings. (I) Decrease Retained earnings. _____1. Direct costs. _____2. Indirect costs. _____3. Stock issue costs. _____4. Contingent consideration. _____5. Bargain purchase. _____6. In-process research and development acquired.

Chapter 02 Consolidation of Financial Information Answer Key

Multiple Choice Questions

At the date of an acquisition which is not a bargain purchase, the acquisition method

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-04 Describe the valuation principles of the acquisition method. Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase.

In an acquisition where control is achieved, how would the land accounts of the parent and the land accounts of the subsidiary be combined?

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

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

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

Using the acquisition method for a business combination, goodwill is generally defined as:

Direct combination costs and stock issuance costs are often incurred in the process of making a controlling investment in another company. How should those costs be accounted for in a pre-2009 purchase transaction?

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

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 02-09 Appendix: Identify the general characteristics of the legacy purchase and pooling of interest methods of accounting for past business combinations. Understand the effects that persist today in financial statements from the use of these legacy methods.

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

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

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase.

What is the primary accounting difference between accounting for when the subsidiary is dissolved and when the subsidiary retains its incorporation?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

According to GAAP, the pooling of interest method for business combinations

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement 2-122 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-09 Appendix: Identify the general characteristics of the legacy purchase and pooling of interest methods of accounting for past business combinations. Understand the effects that persist today in financial statements from the use of these legacy methods.

An example of a difference in types of business combination is:

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 3 Hard Learning Objective: 02-03 Define the term business combination and differentiate across various forms of business combinations.

10.

Acquired in-process research and development is considered as

11.

Which one of the following is a characteristic of a business combination accounted for as an acquisition?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember

Difficulty: 1 Easy Learning Objective: 02-04 Describe the valuation principles of the acquisition method.

12.

Which one of the following is a characteristic of a business combination that is accounted for as an acquisition?

13.

A statutory merger is a(n)

14.

How are stock issuance costs and direct combination costs treated in a business combination which is accounted for as an acquisition when the subsidiary will retain its incorporation?

AACSB: Reflective thinking AICPA BB: Critical Thinking

AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase. Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place.

15.

Bullen Inc. acquired 100% of the voting common stock of Vicker Inc. on January 1, 2013. The book value and fair value of Vicker's accounts on that date (prior to creating the combination) follow, along with the book value of Bullen's accounts:

A. $144,000. B. $104,000. C. $64,000. D. $60,000. E. $0. $47 × 12,000 = $564,000 - ($80,000 + $40,000 + $240,000) = $204,000 - $100,000 = $104,000 FV > BV: Inv +$40,000; Land +$20,000; +Blgs $30,000; +Liab $10,000 = $100,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-04 Describe the valuation principles of the acquisition method.

Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase. Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

16.

A. $460,000. B. $510,000. C. $500,000. D. $520,000. E. $490,000. $280,000 + $240,000 = $520,000

AACSB: Analytic AICPA BB: Critical Thinking 2-129 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase. Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

17.

A. $60,000 and $490,000. B. $60,000 and $250,000. C. $380,000 and $250,000. D. $464,000 and $250,000. E. $464,000 and $420,000. $20,000 + ($37 × 12,000) = $464,000 Add'l Paid-In Capital $250,000 Parent's R/E Only

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-04 Describe the valuation principles of the acquisition method.

18.

A. $440,000, $496,000. B. $440,000, $520,000. C. $425,000, $505,000. D. $400,000, $500,000. E. $427,000, $510,000. Inventory $230,000 BV + $210,000 FV = $440,000 Land $280,000 BV + $240,000 FV = $520,000

purchase. Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

19.

A. $0. B. $20,000. C. $35,000. D. $55,000. E. $65,000. $480,000 - ($80,000 CS + $40,000 APIC + $240,000 R/E + $100,000 FV) = $20,000 Excess

AACSB: Analytic AICPA BB: Critical Thinking

20.

Prior to being united in a business combination, Botkins Inc. and Volkerson Corp. had the following stockholders' equity figures:

A. $56,000. B. $182,000. C. $209,000. D. $261,000. E. $312,000. $3.25 × 56,000 = $182,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply

Difficulty: 1 Easy Learning Objective: 02-04 Describe the valuation principles of the acquisition method. Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase. Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

21.

Prior to being united in a business combination, Botkins Inc. and Volkerson Corp. had the following stockholders' equity figures:

Botkins issued 56,000 new shares of its common stock valued at $3.25 per share for all of the outstanding stock of Volkerson. Assume that Botkins acquired Volkerson on January 1, 2012. Immediately afterwards, what is consolidated Common Stock?

A. $456,000. B. $402,000. C. $274,000. D. $276,000. E. $330,000. $220,000 + ($1.00 × 56,000) = $276,000

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

22.

Chapel Hill Company had common stock of $350,000 and retained earnings of $490,000. Blue Town Inc. had common stock of $700,000 and retained earnings of $980,000. On January 1, 2013, Blue Town issued 34,000 shares of common stock with a $12 par value and a $35 fair value for all of Chapel Hill Company's outstanding common stock. This combination was accounted for as an acquisition. Immediately after the combination, what was the total consolidated net assets?

A. $2,520,000. B. $1,190,000. C. $1,680,000. D. $2,870,000. E. $2,030,000. $700,000 + $980,000 + ($35 × 34,000) = $2,870,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase. Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

23.

Which of the following is a not a reason for a business combination to take place?

24.

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

combinations.

25.

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

26.

In a transaction accounted for using the acquisition method where consideration transferred exceeds book value of the acquired company, which statement is true for the acquiring company with regard to its investment?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 02-04 Describe the valuation principles of the acquisition method. Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase.

27.

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

28.

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

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase.

29.

Which of the following statements is true?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 02-09 Appendix: Identify the general characteristics of the legacy purchase and pooling of interest methods of accounting for past business combinations. Understand the effects that persist today in financial statements from the use of these legacy methods.

30.

The financial statements for Goodwin, Inc. and Corr Company for the year ended December 31, 2013, prior to Goodwin's acquisition business combination transaction regarding Corr, follow (in thousands):

A. $1,540. B. $1,800.

C. $1,860. D. $1,825. E. $1,625. $600 Cash + ($40 × 30 Shares) = $1,800 Investment

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

31.

On December 31, 2013, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to acquire all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560. In this acquisition business combination, what total amount of common stock and additional paid-in capital is added on Goodwin's books?

A. $265. B. $1,165.

C. $1,200. D. $1,235. E. $1,765. ($10 × 30 shares) Common Stock + ($30 × 30 shares) APIC - $35 APIC = $1,165

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-04 Describe the valuation principles of the acquisition method. Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase. Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

32.

A. $2,700. B. $720. C. $920.

D. $3,300. E. $1,540. $2,700 Parent's Revenue Only

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

33.

On December 31, 2013, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to acquire all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560. Compute the consolidated receivables and inventory for 2013.

A. $1,200. B. $1,515. C. $1,540.

D. $1,800. E. $2,140. $1,200 + $340 = $1,540

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase. Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

34.

A. $1,980. B. $2,005. C. $2,040.

D. $2,380. E. $2,405. $1,980 + $25 Fees = $2,005

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase. Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

35.

On December 31, 2013, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to acquire all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560. Compute the consolidated cash account at December 31, 2013.

A. $460. B. $425. C. $400.

D. $435. E. $240. $240 + $220 = $460 - ($25 + $35) = $400

36.

On December 31, 2013, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to acquire all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560. Compute the consolidated buildings (net) account at December 31, 2013.

A. $2,700. B. $3,370. C. $3,300.

D. $3,260. E. $3,340. $2,700 BV + $560 FV = $3,260

37.

On December 31, 2013, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to acquire all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560. Compute the consolidated equipment (net) account at December 31, 2013.

A. $2,100. B. $3,500. C. $3,300.

D. $3,000. E. $3,200. $2,100 BV + $1,400 FV = $3,500

38.

On December 31, 2013, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to acquire all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560. Compute the consideration transferred for this acquisition at December 31, 2013.

A. $900. B. $1,165. C. $1,200.

D. $1,765. E. $1,800. $600 Cash + ($40 × 30 Stock) = $1,800

39.

On December 31, 2013, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to acquire all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560. Compute the goodwill arising from this acquisition at December 31, 2013.

A. $0. B. $100. C. $125.

D. $160. E. $45. $400 CS + $540 APIC + $600 R/E = $1,540 + $200 Equipt - $40 Blgs = $1,700 Total Equity $600 Cash + ($40 × 30 Stock) = $1,800 Consideration - $1,700 = $100 Goodwill

40.

On December 31, 2013, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to acquire all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560. Compute the consolidated common stock account at December 31, 2013.

A. $1,080. B. $1,480. C. $1,380.

D. $2,280. E. $2,680. $1,080 + ($10 × 30 shares) = $1,380

41.

On December 31, 2013, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to acquire all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560. Compute the consolidated additional paid-in capital at December 31, 2013.

A. $810. B. $1,350. C. $1,675.

D. $1,910. E. $1,875. $810 + ($30 × 30 shares) - $35 Issuance Costs = $1,675

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-04 Describe the valuation principles of the acquisition method. Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase. Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

42.

On December 31, 2013, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to acquire all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560. Compute the consolidated liabilities at December 31, 2013.

A. $1,500. B. $2,100. C. $2,320.

D. $2,920. E. $2,885. $1,500 Parent's + $820 Sub's + $600 Parent's New = $2,920

43.

On December 31, 2013, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to acquire all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560. Compute the consolidated retained earnings at December 31, 2013.

A. $2,800. B. $2,825. C. $2,850.

D. $3,425. E. $3,450. $2,850 - $25 Broker Expense = $2,825

44.

On January 1, 2013, the Moody Company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants, and brokers for assistance in bringing about this acquisition. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows:

A. $930. B. $820. C. $800. D. $835. E. $815. $400 Cash + ($1.00 × 40 shares) CS + ($9 × 40 shares) APIC = $800

45.

A. $230. B. $120. C. $520. D. None. There is a gain on bargain purchase of $230. E. None. There is a gain on bargain purchase of $265. $800 Consideration Given

$240 CS + $340 APIC + $340 R/E = $920 + $10 Inv FV + $40 Land FV + $60 Blgs FV = $1,030 ($800 Consideration) - ($1,030 BV/FV) = $230 Bargain Purchase Gain

46.

Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. Compute the amount of consolidated inventories at date of acquisition.

A. $1,080. B. $1,350. C. $1,360. D. $1,370. E. $290. $1,080 + $280 + $10 = $1,370

47.

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

A. $1,700. B. $1,760. C. $1,640. D. $1,320. E. $500. $1,260 + $440 + $60 = $1,760

48.

Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. Compute the amount of consolidated land at date of acquisition.

A. $1,000. B. $960. C. $920. D. $400. E. $320. $600 + $360 + $40 = $1,000

49.

Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. Compute the amount of consolidated equipment at date of acquisition.

A. $480. B. $580. C. $559. D. $570. E. $560. $480 + $100 = $580

50.

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

A. $370. B. $570. C. $610. D. $330. E. $530. $330 + ($1.00 × 40 shares) = $370

51.

Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40, and Buildings by $60. Compute the amount of consolidated additional paid-in capital at date of acquisition.

A. $1,080. B. $1,420. C. $1,065. D. $1,425. E. $1,440. $1,080 + ($9.00 × 40 shares) - $15 Issuance Costs = $1,425

52.

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

A. $220. B. $185. C. $200. D. $205. E. $215. ($180 - $20 - $15 Parent) = $145 + ($40 Sub) = $185

53.

Carnes has the following account balances as of May 1, 2012 before an acquisition transaction takes place.

A. $150,000. B. $300,000. C. $750,000. D. $760,000. E. $1,350,000. $25 × 30,000 shares = $750,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place. 2-189 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

54.

Carnes has the following account balances as of May 1, 2012 before an acquisition transaction takes place.

The fair value of Carnes' Land and Buildings are $650,000 and $550,000, respectively. On May 1, 2012, Riley Company issues 30,000 shares of its $10 par value ($25 fair value) common stock in exchange for all of the shares of Carnes' common stock. Riley paid $10,000 for costs to issue the new shares of stock. Before the acquisition, Riley has $700,000 in its common stock account and $300,000 in its additional paid-in capital account. At the date of acquisition, by how much does Riley's additional paid-in capital increase or decrease?

A. $0. B. $440,000 increase. C. $450,000 increase. D. $640,000 increase. E. $650,000 decrease. $15 × 30,000 shares = $450,000 - $10,000 = $440,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy 2-190 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective: 02-04 Describe the valuation principles of the acquisition method. Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase. Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

55.

Carnes has the following account balances as of May 1, 2012 before an acquisition transaction takes place.

The fair value of Carnes' Land and Buildings are $650,000 and $550,000, respectively. On May 1, 2012, Riley Company issues 30,000 shares of its $10 par value ($25 fair value) common stock in exchange for all of the shares of Carnes' common stock. Riley paid $10,000 for costs to issue the new shares of stock. Before the acquisition, Riley has $700,000 in its common stock account and $300,000 in its additional paid-in capital account. What will be Riley's balance in its common stock account as a result of this acquisition?

A. $300,000. B. $990,000. C. $1,000,000. D. $1,590,000. E. $1,600,000. $700,000 + ($10 × 30,000 shares) = $1,000,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 02-04 Describe the valuation principles of the acquisition method. Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate 2-192 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase. Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

56.

Carnes has the following account balances as of May 1, 2012 before an acquisition transaction takes place.

The fair value of Carnes' Land and Buildings are $650,000 and $550,000, respectively. On May 1, 2012, Riley Company issues 30,000 shares of its $10 par value ($25 fair value) common stock in exchange for all of the shares of Carnes' common stock. Riley paid $10,000 for costs to issue the new shares of stock. Before the acquisition, Riley has $700,000 in its common stock account and $300,000 in its additional paid-in capital account. What will be the consolidated additional paid-in capital as a result of this acquisition?

A. $440,000. B. $740,000. C. $750,000. D. $940,000. E. $950,000. $300,000 APIC + $440,000 Added APIC = $740,000

AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-04 Describe the valuation principles of the acquisition method. Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase. Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

57.

The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets.

A. $1,750. B. $1,760. C. $1,775. D. $1,300. E. $1,120. $35 FV × 50 shares = $1,750

58.

The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets.

A. $1,000. B. $2,980. C. $2,400. D. $3,400. E. $3,730. $1,980 + ($20 Par × 50 shares) = $2,980

59.

The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets.

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2013. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated inventory at the date of the acquisition.

A. $1,650. B. $1,810. C. $1,230. D. $580. E. $1,830. $1,230 BV + $580 FV = $1,810

60.

The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets.

A. $2,060. B. $1,800. C. $260. D. $2,050. E. $2,070. $1,800 BV + $250 FV = $2,050

61.

The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets.

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2013. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated buildings (net) at the date of the acquisition.

A. $2,450. B. $2,340. C. $1,800. D. $650. E. $1,690. $1,800 BV + $650 FV = $2,450

62.

The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets.

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2013. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated long-term liabilities at the date of the acquisition.

A. $2,600. B. $2,700. C. $2,800. D. $3,720. E. $3,820. $2,700 BV + $1,120 FV = $3,820

63.

The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets.

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2013. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated goodwill at the date of the acquisition.

A. $360. B. $450. C. $460. D. $440. E. $475. ($35 FV × 50 shares = $1,750) - ($1,300 Net Assets at FV) = $450 Goodwill

64.

The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets.

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2013. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated equipment (net) at the date of the acquisition.

A. $400. B. $660. C. $1,060. D. $1,040. E. $1,050. $660 BV + $400 FV = $1,060

65.

The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets.

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2013. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute fair value of the net assets acquired at the date of the acquisition.

A. $1,300. B. $1,340. C. $1,500. D. $1,750. E. $2,480. ($240 + $600 + $580 + $250 + $650 + $400) - ($240 + $60 + $1,120) = $1300

66.

The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets.

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2013. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated retained earnings at the date of the acquisition.

A. $1,160. B. $1,170. C. $1,280. D. $1,290. E. $1,640. $1,170 + ($2,880 - $2760 - $10) = $1,280

67.

The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets.

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2013. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated revenues at the date of the acquisition.

A. $3,540. B. $2,880. C. $1,170. D. $1,650. E. $4,050. $2,880 Revenues of the Parent Only

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

68.

The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets.

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2013. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated cash at the completion of the acquisition.

A. $1,350. B. $1,085. C. $1,110. D. $870. E. $845. $870 + $240 - $15 - $10 = $1,085

69.

The financial balances for the Atwood Company and the Franz Company as of December 31, 2013, are presented below. Also included are the fair values for Franz Company's net assets.

Note: Parenthesis indicate a credit balance Assume an acquisition business combination took place at December 31, 2013. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Compute consolidated expenses at the date of the acquisition.

A. $2,760. B. $2,770. C. $2,785. D. $3,380. E. $3,390. $2,760 + $10 = $2,770

70.

Presented below are the financial balances for the Atwood Company and the Franz Company as of December 31, 2012, immediately before Atwood acquired Franz. Also included are the fair values for Franz Company's net assets at that date.

A. $1,750. B. $1,755. C. $1,725. D. $1,760. 2-221 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

E. $1,765. $35 × 50 shares = $1,750 + $5 = $1,755

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-04 Describe the valuation principles of the acquisition method. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

71.

E. $1,830. $1,230 BV + $580 FV = $1,810

72.

E. $2,070. $1,800 BV + $250 FV = $2,050

73.

Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 2012. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid to effect this acquisition transaction. To settle a difference of opinion regarding Franz's fair value, Atwood promises to pay an additional $5.2 (in thousands) to the former owners if Franz's earnings exceed a certain sum during the next year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is $5 (in thousands). Compute consolidated buildings (net) at date of acquisition.

E. $1,690. $1,800 BV + $650 FV = $2,450

74.

E. $452. $35 FV × 50 shares = $1,750 - ($1,300 - $5 Contingency) = $455

75.

E. $1,050. $660 + $400 = $1,060

76.

Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 2012. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid to effect this acquisition transaction. To settle a difference of opinion regarding Franz's fair value, Atwood promises to pay an additional $5.2 (in thousands) to the former owners if Franz's earnings exceed a certain sum during the next year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is $5 (in thousands). Compute consolidated retained earnings as a result of this acquisition.

A. $1,160. B. $1,170. C. $1,265. D. $1,280. 2-233 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

E. $1,650. $1,170 + ($2,880 - $2760 - $10) = $1,280

77.

A. $3,540. B. $2,880. C. $1,170. D. $1,650. 2-235 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

E. $4,050. $2,880 Revenues of the Parent Only

78.

A. $2,735. B. $2,760. C. $2,770. D. $2,785. 2-237 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

E. $3,380. $2,760 + $10 = $2,770

79.

A. $1,350. B. $1,110. C. $1,080. D. $1,085. 2-239 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

E. $635. $870 + $240 - $15 - $10 = $1,085

80.

Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 2013. To obtain these shares, Flynn pays $400 cash (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the acquisition. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek as of January 1, 2013 follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in

thousands. Any related question also is in thousands.

By how much will Flynn's additional paid-in capital increase as a result of this acquisition?

A. $150,000. B. $160,000. C. $230,000. D. $350,000. E. $360,000. $16 × 10,000 = $160,000 - $10,000 = $150,000

AACSB: Analytic

81.

thousands. Any related question also is in thousands.

What amount will be reported for goodwill as a result of this acquisition?

A. $30,000. B. $55,000. C. $65,000. D. $175,000. E. $200,000. $400,000 + ($36 × 10,000shares) = $760,000 Consideration Net Assets at FV = $665,000 + $40,000 Trademark = $705,000 $760,000 - $705,000 = $55,000 Goodwill

82.

thousands. Any related question also is in thousands.

What amount will be reported for consolidated receivables?

A. $660,000. B. $640,000. C. $500,000. D. $460,000. E. $480,000. $480,000 + $160,000 = $640,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement 2-245 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase. Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

83.

thousands. Any related question also is in thousands.

What amount will be reported for consolidated inventory?

A. $1,000,000. B. $960,000. C. $920,000. D. $660,000. E. $620,000. $660,000 + $300,000 = $960,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement 2-247 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

84.

thousands. Any related question also is in thousands.

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

A. $1,420,000. B. $1,260,000. C. $1,140,000. D. $1,480,000. E. $1,200,000. $1,200,000 + $280,000 = $1,480,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement 2-249 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

85.

thousands. Any related question also is in thousands.

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

A. $385,000. B. $335,000. C. $435,000. D. $460,000. E. $360,000. $360,000 + $75,000 = $435,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement 2-251 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

86.

thousands. Any related question also is in thousands.

What amount will be reported for consolidated long-term liabilities?

A. $1,520,000. B. $1,480,000. C. $1,440,000. D. $1,180,000. E. $1,100,000. $1,140,000 + $300,000 = $1,440,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement 2-253 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

87.

thousands. Any related question also is in thousands.

What amount will be reported for consolidated common stock?

A. $1,000,000. B. $1,080,000. C. $1,200,000. D. $1,280,000. E. $1,360,000. $1,000,000 + ($20 × 10,000 shares) = $1,200,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement 2-255 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-04 Describe the valuation principles of the acquisition method. Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase. Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

88.

thousands. Any related question also is in thousands.

Assuming the combination is accounted for as a purchase, what amount will be reported for consolidated retained earnings?

A. $1,830,000. B. $1,350,000. C. $1,080,000. D. $1,560,000. E. $1,535,000. $1,080,000 R/E of the Parent Only

AACSB: Analytic

AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-09 Appendix: Identify the general characteristics of the legacy purchase and pooling of interest methods of accounting for past business combinations. Understand the effects that persist today in financial statements from the use of these legacy methods.

89.

thousands. Any related question also is in thousands.

What amount will be reported for consolidated retained earnings?

A. $1,065,000. B. $1,080,000. C. $1,525,000. D. $1,535,000. E. $1,560,000. $1,080,000 - $15,000 = $1,065,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement 2-259 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

90.

thousands. Any related question also is in thousands.

What amount will be reported for consolidated additional paid-in capital?

A. $365,000. B. $350,000. C. $360,000. D. $375,000. E. $345,000. $200,000 + ($16 × 10,000 shares) - $10,000 = $350,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement 2-261 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-04 Describe the valuation principles of the acquisition method. Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase. Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

91.

thousands. Any related question also is in thousands.

What amount will be reported for consolidated cash after the acquisition is completed?

A. $475,000. B. $500,000. C. $555,000. D. $580,000. E. $875,000. $900,000 + $80,000 - $400,000 - $15,000 - $10,000 = $555,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement 2-263 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase. Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

Essay Questions

92.

What term is used to refer to a business combination in which only one of the original companies continues to exist?

The appropriate term is statutory merger.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 02-03 Define the term business combination and differentiate across various forms of business combinations.

93.

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

Stock issuance costs reduce the balance in the acquirer's Additional Paid-In Capital in an acquisition business combination.

AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase. Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

94.

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

When the subsidiary is dissolved, the acquirer records in its books the fair value of individual assets and liabilities acquired as well as the resulting goodwill from the acquisition. However, when separate incorporation is maintained, the acquirer only records the total fair value of assets and liabilities acquired, as well as the resulting goodwill, in one account as an investment.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase. Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

95.

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

In an acquisition, direct combination costs are expensed in the period of the acquisition.

96.

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

Peterman would not be required to prepare consolidated financial statements if control of Samson is temporary or if, despite majority ownership, Peterman does not have control over Samson. A lack of control might exist if Samson is in a country that imposes restrictions on Peterman's actions.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-02 Recognize when consolidation of financial information into a single set of statements is necessary. Learning Objective: 02-03 Define the term business combination and differentiate across various forms of business combinations.

97.

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

In-Process Research and Development is capitalized as an asset of the combination and reported as intangible assets with indefinite lives subject to impairment reviews.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 02-08 Describe the two criteria for recognizing intangible assets apart from goodwill in a business combination.

98.

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

The difference between the consideration transferred and the fair value of the net assets acquired is recognized as a gain on bargain purchase.

99.

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

The acquisition transaction is assumed to occur through an orderly transaction between market participants at the measurement date of the acquisition. Thus identified assets and liabilities acquired have been assigned fair value for the transfer to the acquirer and this is a relevant and faithful representation for consolidation.

100.

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

While the Goodwill does not appear on the Parent company's books, it is implied as part of the account called Investment in Subsidiary. During the consolidation process, the Investment account is broken down into its component parts. Goodwill, along with other items such as subsidiary fair value adjustments, is then shown separately as part of the consolidated financial statement balances.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-08 Describe the two criteria for recognizing intangible assets apart from goodwill in a business combination. 2-268 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

101.

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

The acquisition method embraces a fair value concept as measured by the fair value of consideration transferred. (1) Direct combination costs are expensed as incurred; (2) Contingent consideration obligations are recognized at their present value of the potential obligation as part of the acquisition consideration transferred; (3) When a bargain purchase occurs, the acquirer measures and recognizes the fair values of each of the assets acquired and liabilities assumed at the date of the combination, and as a result a gain on the bargain purchase is recognized at the acquisition date.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 02-04 Describe the valuation principles of the acquisition method. Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase. Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

102.

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

The fair value approach of the acquisition method views contingent payments as part of the consideration transferred. Under this view, contingencies have a value to those who receive the consideration and represent measurable obligations of the acquirer. The amount of the contingent consideration is measured as the expected present value of a potential payment and increases the investment value recorded.

103.

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

A bargain purchase results when the collective fair values of the net identified assets acquired and liabilities assumed exceed the fair value of consideration transferred. The assets and liabilities acquired are recorded at their fair values and the bargain purchase is recorded as a Gain on Bargain Purchase.

104.

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

Direct and indirect combination costs are expensed and issuance costs reduce the otherwise fair value of the consideration issued under the acquisition method of accounting for business combinations.

105.

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

There is no difference in consolidated results.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

106.

Bale Co. acquired Silo Inc. on December 31, 2013, in an acquisition business combination transaction. Bale's net income for the year was $1,400,000, while Silo had net income of $400,000 earned evenly during the year. Bale paid $100,000 in direct combination costs, $50,000 in indirect costs, and $30,000 in stock issue costs to effect the combination.

Required: What is consolidated net income for 2013?

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

107.

Fine Co. issued its common stock in exchange for the common stock of Dandy Corp. in an acquisition. At the date of the combination, Fine had land with a book value of $480,000 and a fair value of $620,000. Dandy had land with a book value of $170,000 and a fair value of $190,000.

Required: What was the consolidated balance for Land in a consolidated balance sheet prepared at the date of the acquisition combination?

108.

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

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

Required: Prepare a fair value allocation and goodwill schedule at the date of the acquisition.

AACSB: Analytic

109.

Salem Co. had the following account balances as of December 1, 2012:

110.

Salem Co. had the following account balances as of December 1, 2012:

Bellington Inc. transferred $1.7 million in cash and 12,000 shares of its newly issued $30 par value common stock (valued at $90 per share) to acquire all of Salem's outstanding common stock. Assume that Bellington paid cash of $2.8 million. No stock is issued. An additional $50,000 is paid in direct combination costs.

Required: For Goodwill, determine what balance would be included in a December 1, 2012 consolidation.

111.

On January 1, 2013, Chester Inc. acquired 100% of Festus Corp.'s outstanding common stock by exchanging 37,500 shares of Chester's $2 par value common voting stock. On January 1, 2013, Chester's voting common stock had a fair value of $40 per share. Festus' voting common shares were selling for $6.50 per share. Festus' balances on the acquisition date, just prior to acquisition are listed below.

Required: Compute the value of the Goodwill account on the date of acquisition, 1/1/15.

AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-04 Describe the valuation principles of the acquisition method. Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase. Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

112.

The financial statements for Jode Inc. and Lakely Corp., just prior to their combination, for the year ending December 31, 2012, follow. Lakely's buildings were undervalued on its financial records by $60,000.

Entry One - To record the issuance of common stock by Jode to execute the purchase .

Entry Two - To record the combination costs.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-04 Describe the valuation principles of the acquisition method. Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

113.

Required: Determine consolidated net income for the year ended December 31, 2012.

AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

114.

On December 31, 2012, Jode issued 54,000 new shares of its $10 par value stock in exchange for all the outstanding shares of Lakely. Jode's shares had a fair value on that date of $35 per share. Jode paid $34,000 to an investment bank for assisting in the arrangements. Jode also paid $24,000 in stock issuance costs to effect the acquisition of Lakely. Lakely will retain its incorporation. Determine consolidated Additional paid-in Capital at December 31, 2012.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium 2-284 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective: 02-04 Describe the valuation principles of the acquisition method. Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

115.

The following are preliminary financial statements for Black Co. and Blue Co. for the year ending December 31, 2013.

Required: Assuming that these two companies retained their separate legal identities, prepare a consolidation worksheet as of December 31, 2013.

Bargain Purchase Acquisition Consolidation Worksheet

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-04 Describe the valuation principles of the acquisition method. Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

116.

The following are preliminary financial statements for Black Co. and Blue Co. for the year ending December 31, 2013 prior to Black's acquisition of Blue.

On December 31, 2013 (subsequent to the preceding statements), Black exchanged 10,000 shares of its $10 par value common stock for all of the outstanding shares of Blue. Black's stock on that date has a fair value of $60 per share. Black was willing to issue 10,000 shares of stock because Blue's land was appraised at $204,000. Black also paid $14,000 to several attorneys and accountants who assisted in creating this combination.

Required: Assuming that these two companies retained their separate legal identities, prepare a consolidation worksheet as of December 31, 2013 after the acquisition transaction is completed.

Acquisition Consolidation Worksheet

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 02-04 Describe the valuation principles of the acquisition method. Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business combination if dissolution does not take place.

117.

For each of the following situations, select the best letter answer to reflect the effect of the numbered item on the acquirer's accounting entry at the date of combination when separate incorporation will be maintained. Items (4) and (6) require two selections. (A) Increase Investment account. (B) Decrease Investment account. (C) Increase Liabilities. (D) Increase Common stock. (E) Decrease common stock. (F) Increase Additional paid-in capital. (G) Decrease Additional paid-in capital. (H) Increase Retained earnings. (I) Decrease Retained earnings. _____1. Direct costs. _____2. Indirect costs. _____3. Stock issue costs. _____4. Contingent consideration. _____5. Bargain purchase. _____6. In-process research and development acquired.

(1) I; (2) I; (3) G; (4) A, C; (5) H; (6) A, I

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 02-04 Describe the valuation principles of the acquisition method. Learning Objective: 02-05 Determine the total fair value of the consideration transferred for an acquisition and allocate that fair value to specific subsidiary assets acquired (including goodwill); and liabilities assumed; or a gain on bargain purchase. Learning Objective: 02-06 Prepare the journal entry to consolidate the accounts of a subsidiary if dissolution takes place. Learning Objective: 02-07 Prepare a worksheet to consolidate the accounts of two companies that form a business

combination if dissolution does not take place. Learning Objective: 02-08 Describe the two criteria for recognizing intangible assets apart from goodwill in a business combination.

Chapter 03 Consolidations-Subsequent to the Date of Acquisition

Multiple Choice Questions

1. Which one of the following accounts would not appear in the consolidated financial statements at the end of the first fiscal period of the combination?

A. Goodwill. B. Equipment. C. Investment in Subsidiary. D. Common Stock. E. Additional Paid-In Capital.

2. Which of the following internal record-keeping methods can a parent choose to account for a subsidiary acquired in a business combination?

A. initial value or book value. B. initial value, lower-of-cost-or-market-value, or equity. C. initial value, equity, or partial equity. D. initial value, equity, or book value. E. initial value, lower-of-cost-or-market-value, or partial equity.

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

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

4. Under the partial equity method, the parent recognizes income when

A. dividends are received from the investee. B. dividends are declared by the investee. C. the related expense has been incurred. D. the related contract is signed by the subsidiary. E. it is earned by the subsidiary.

5. Push-down accounting is concerned with the

A. impact of the purchase on the subsidiary's financial statements. B. recognition of goodwill by the parent. C. correct consolidation of the financial statements. D. impact of the purchase on the separate financial statements of the parent. E. recognition of dividends received from the subsidiary.

6. Racer Corp. acquired all of the common stock of Tangiers Co. in 2011. Tangiers maintained its incorporation. Which of Racer's account balances would vary between the equity method and the initial value method?

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

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

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

8. Jansen Inc. acquired all of the outstanding common stock of Merriam Co. on January 1, 2012, for $257,000. Annual amortization of $19,000 resulted from this acquisition. Jansen reported net income of $70,000 in 2012 and $50,000 in 2013 and paid $22,000 in dividends each year. Merriam reported net income of $40,000 in 2012 and $47,000 in 2013 and paid $10,000 in dividends each year. What is the Investment in Merriam Co. balance on Jansen's books as of December 31, 2013, if the equity method has been applied?

A. $286,000. B. $295,000. C. $276,000. D. $344,000. E. $324,000.

9. Velway Corp. acquired Joker Inc. on January 1, 2012. The parent paid more than the fair value of the subsidiary's net assets. On that date, Velway had equipment with a book value of $500,000 and a fair value of $640,000. Joker had equipment with a book value of $400,000 and a fair value of $470,000. Joker decided to use push-down accounting. Immediately after the acquisition, what Equipment amount would appear on Joker's separate balance sheet and on Velway's consolidated balance sheet, respectively?

A. $400,000 and $900,000 B. $400,000 and $970,000 C. $470,000 and $900,000 D. $470,000 and $970,000 E. $470,000 and $1,040,000

10. Parrett Corp. acquired one hundred percent of Jones Inc. on January 1, 2011, at a price in excess of the subsidiary's fair value. On that date, Parrett's equipment (ten-year life) had a book value of $360,000 but a fair value of $480,000. Jones had equipment (ten-year life) with a book value of $240,000 and a fair value of $350,000. Parrett used the partial equity method to record its investment in Jones. On December 31, 2013, Parrett had equipment with a book value of $250,000 and a fair value of $400,000. Jones had equipment with a book value of $170,000 and a fair value of $320,000. What is the consolidated balance for the Equipment account as of December 31, 2013?

A. $387,000. B. $497,000. C. $508,000. D. $537,000. E. $570,000.

11. On January 1, 2012, Cale Corp. paid $1,020,000 to acquire Kaltop Co. Kaltop maintained separate incorporation. Cale used the equity method to account for the investment. The following information is available for Kaltop's assets, liabilities, and stockholders' equity accounts on January 1, 2012:

Kaltop earned net income for 2012 of $126,000 and paid dividends of $48,000 during the year. The 2012 total amortization of allocations is calculated to be

A. $4,000. B. $6,400. C. $(2,400). D. $(1,000). E. $3,800.

12. On January 1, 2012, Cale Corp. paid $1,020,000 to acquire Kaltop Co. Kaltop maintained separate incorporation. Cale used the equity method to account for the investment. The following information is available for Kaltop's assets, liabilities, and stockholders' equity accounts on January 1, 2012:

Kaltop earned net income for 2012 of $126,000 and paid dividends of $48,000 during the year. In Cale's accounting records, what amount would appear on December 31, 2012 for equity in

subsidiary earnings?

A. $77,000. B. $79,000. C. $125,000. D. $127,000. E. $81,800.

13. On January 1, 2012, Cale Corp. paid $1,020,000 to acquire Kaltop Co. Kaltop maintained separate incorporation. Cale used the equity method to account for the investment. The following information is available for Kaltop's assets, liabilities, and stockholders' equity accounts on January 1, 2012:

Kaltop earned net income for 2012 of $126,000 and paid dividends of $48,000 during the year. What is the balance in Cale's investment in subsidiary account at the end of 2012?

A. $1,099,000. B. $1,020,000. C. $1,096,200. D. $1,098,000. E. $1,144,400.

14. On January 1, 2012, Cale Corp. paid $1,020,000 to acquire Kaltop Co. Kaltop maintained separate incorporation. Cale used the equity method to account for the investment. The following information is available for Kaltop's assets, liabilities, and stockholders' equity accounts on January 1, 2012:

Kaltop earned net income for 2012 of $126,000 and paid dividends of $48,000 during the year. At the end of 2012, the consolidation entry to eliminate Cale's accrual of Kaltop's earnings would include a credit to Investment in Kaltop Co . for

A. $124,400. B. $126,000. C. $127,000. D. $76,400. E. $0.

15. On January 1, 2012, Cale Corp. paid $1,020,000 to acquire Kaltop Co. Kaltop maintained separate incorporation. Cale used the equity method to account for the investment. The following information is available for Kaltop's assets, liabilities, and stockholders' equity accounts on January 1, 2012:

Kaltop earned net income for 2012 of $126,000 and paid dividends of $48,000 during the year. If Cale Corp. had net income of $444,000 in 2012, exclusive of the investment, what is the amount of consolidated net income?

A. $569,000. B. $570,000. C. $571,000. D. $566,400. E. $444,000.

16. On January 1, 2012, Franel Co. acquired all of the common stock of Hurlem Corp. For 2012, Hurlem earned net income of $360,000 and paid dividends of $190,000. Amortization of the patent allocation that was included in the acquisition was $6,000. How much difference would there have been in Franel's income with regard to the effect of the investment, between using the equity method or using the initial value method of internal recordkeeping?

A. $190,000. B. $360,000. C. $164,000. D. $354,000. E. $150,000.

17. On January 1, 2012, Franel Co. acquired all of the common stock of Hurlem Corp. For 2012, Hurlem earned net income of $360,000 and paid dividends of $190,000. Amortization of the patent allocation that was included in the acquisition was $6,000. How much difference would there have been in Franel's income with regard to the effect of the investment, between using the equity method or using the partial equity method of internal recordkeeping?

A. $170,000. B. $354,000. C. $164,000. D. $6,000. E. $174,000.

18. Cashen Co. paid $2,400,000 to acquire all of the common stock of Janex Corp. on January 1, 2012. Janex's reported earnings for 2012 totaled $432,000, and it paid $120,000 in dividends during the year. The amortization of allocations related to the investment was $24,000. Cashen's net income, not including the investment, was $3,180,000, and it paid dividends of $900,000. On the consolidated financial statements for 2012, what amount should have been shown for

Equity in Subsidiary Earnings?

A. $432,000. B. $-0C. $408,000. D. $120,000. E. $288,000.

19. Cashen Co. paid $2,400,000 to acquire all of the common stock of Janex Corp. on January 1, 2012. Janex's reported earnings for 2012 totaled $432,000, and it paid $120,000 in dividends during the year. The amortization of allocations related to the investment was $24,000. Cashen's net income, not including the investment, was $3,180,000, and it paid dividends of $900,000. On the consolidated financial statements for 2012, what amount should have been shown for

consolidated dividends?

A. $900,000. B. $1,020,000. C. $876,000. D. $996,000. E. $948,000.

20. Cashen Co. paid $2,400,000 to acquire all of the common stock of Janex Corp. on January 1, 2012. Janex's reported earnings for 2012 totaled $432,000, and it paid $120,000 in dividends during the year. The amortization of allocations related to the investment was $24,000. Cashen's net income, not including the investment, was $3,180,000, and it paid dividends of $900,000. What is the amount of consolidated net income for the year 2012?

A. $3,180,000. B. $3,612,000. C. $3,300,000. D. $3,588,000. E. $3,420,000.

21. Jans Inc. acquired all of the outstanding common stock of Tysk Corp. on January 1, 2011, for $372,000. Equipment with a ten-year life was undervalued on Tysk's financial records by $46,000. Tysk also owned an unrecorded customer list with an assessed fair value of $67,000 and an estimated remaining life of five years. Tysk earned reported net income of $180,000 in 2011 and $216,000 in 2012. Dividends of $70,000 were paid in each of these two years. Selected account balances as of December 31, 2013, for the two companies follow.

If the partial equity method had been applied, what was 2013 consolidated net income?

A. $840,000. B. $768,400. C. $822,000. D. $240,000. E. $600,000.

22. Jans Inc. acquired all of the outstanding common stock of Tysk Corp. on January 1, 2011, for $372,000. Equipment with a ten-year life was undervalued on Tysk's financial records by $46,000. Tysk also owned an unrecorded customer list with an assessed fair value of $67,000 and an estimated remaining life of five years. Tysk earned reported net income of $180,000 in 2011 and $216,000 in 2012. Dividends of $70,000 were paid in each of these two years. Selected account balances as of December 31, 2013, for the two companies follow.

If the equity method had been applied, what would be the Investment in Tysk Corp. account balance within the records of Jans at the end of 2013?

A. $612,100. B. $744,000. C. $774,150. D. $372,000. E. $844,150.

23. Red Co. acquired 100% of Green, Inc. on January 1, 2012. On that date, Green had inventory with a book value of $42,000 and a fair value of $52,000. This inventory had not yet been sold at December 31, 2012. Also, on the date of acquisition, Green had a building with a book value of $200,000 and a fair value of $390,000. Green had equipment with a book value of $350,000 and a fair value of $280,000. The building had a 10-year remaining useful life and the equipment had a 5-year remaining useful life. How much total expense will be in the consolidated financial statements for the year ended December 31, 2012 related to the acquisition allocations of Green?

A. $43,000. B. $33,000. C. $5,000. D. $15,000. E. 0.

24. All of the following are acceptable methods to account for a majority-owned investment in subsidiary except

A. The equity method. B. The initial value method. C. The partial equity method. D. The fair-value method. E. Book value method.

25. Under the equity method of accounting for an investment,

A. The investment account remains at initial value. B. Dividends received are recorded as revenue. C. Goodwill is amortized over 20 years. D. Income reported by the subsidiary increases the investment account. E. Dividends received increase the investment account.

26. Under the partial equity method of accounting for an investment,

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

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

A. Dividends received by the subsidiary decrease the investment account. B. The investment account is adjusted to fair value at year-end. C. Income reported by the subsidiary increases the investment account. D. The investment account remains at initial value. E. Dividends received are ignored.

28. According to GAAP regarding amortization of goodwill and other intangible assets, which of the following statements is true?

A. Goodwill recognized in consolidation must be amortized over 20 years. B. Goodwill recognized in consolidation must be expensed in the period of acquisition. C. Goodwill recognized in consolidation will not be amortized but subject to an annual test for impairment. D. Goodwill recognized in consolidation can never be written off. E. Goodwill recognized in consolidation must be amortized over 40 years.

29. When a company applies the initial method in accounting for its investment in a subsidiary and the subsidiary reports income in excess of dividends paid, what entry would be made for a consolidation worksheet?

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

30. When a company applies the initial value method in accounting for its investment in a subsidiary and the subsidiary reports income less than dividends paid, what entry would be made for a consolidation worksheet?

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

31. When a company applies the partial equity method in accounting for its investment in a subsidiary and the subsidiary's equipment has a fair value greater than its book value, what consolidation worksheet entry is made in a year subsequent to the initial acquisition of the subsidiary?

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

32. When a company applies the partial equity method in accounting for its investment in a subsidiary and initial value, book values, and fair values of net assets acquired are all equal, what consolidation worksheet entry would be made?

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

33. When consolidating a subsidiary under the equity method, which of the following statements is true?

A. Goodwill is never recognized. B. Goodwill required is amortized over 20 years. C. Goodwill may be recorded on the parent company's books. D. The value of any goodwill should be tested annually for impairment in value. E. Goodwill should be expensed in the year of acquisition.

34. When consolidating a subsidiary under the equity method, which of the following statements is true with regard to the subsidiary subsequent to the year of acquisition?

A. All net assets are revalued to fair value and must be amortized over their useful lives. B. Only net assets that had excess fair value over book value when acquired by the parent must be amortized over their useful lives. C. All depreciable net assets are revalued to fair value at date of acquisition and must be amortized over their useful lives. D. Only depreciable net assets that have excess fair value over book value must be amortized over their useful lives. E. Only assets that have excess fair value over book value must be amortized over their useful lives.

35. Which of the following statements is false regarding push-down accounting?

A. Push-down accounting simplifies the consolidation process. B. Fewer worksheet entries are necessary when push-down accounting is applied. C. Push-down accounting provides better information for internal evaluation. D. Push-down accounting must be applied for all business combinations under a pooling of interests. E. Push-down proponents argue that a change in ownership creates a new basis for subsidiary assets and liabilities.

36. Which of the following is false regarding contingent consideration in business combinations?

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

37. Factors that should be considered in determining the useful life of an intangible asset include

A. Legal, regulatory, or contractual provisions. B. The residual value of the asset. C. The entity's expected use of the intangible asset. D. The effects of obsolescence, competition, and technological change. E. All of these choices are used in determining the useful life of an intangible asset.

38. Consolidated net income using the equity method for an acquisition combination is computed as follows:

A. Parent company's income from its own operations plus the equity from subsidiary's income recorded by the parent. B. Parent's reported net income. C. Combined revenues less combined expenses less equity in subsidiary's income less amortization of fair-value allocations in excess of book value. D. Parent's revenues less expenses for its own operations plus the equity from subsidiary's income recorded by parent. E. All of these.

39. Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. FIFO inventory valuation method is used. Compute the consideration transferred in excess of book value acquired at January 1, 2012.

A. $150. B. $700. C. $2,200.

D. $550. E. $2,900.

40. Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2012, for $3,800 cash. As of that date Hurley has the following trial balance;

A. $150. B. $250. C. $700.

D. $1,200. E. $550.

41. Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. FIFO inventory valuation method is used. Compute the amount of Hurley's inventory that would be reported in a January 1, 2012, consolidated balance sheet.

A. $800. B. $100.

C. $900. D. $150. E. $0.

42. Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. FIFO inventory valuation method is used. Compute the amount of Hurley's buildings that would be reported in a December 31, 2012, consolidated balance sheet.

A. $1,560. B. $1,260.

C. $1,440. D. $1,160. E. $1,140.

43. Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. FIFO inventory valuation method is used. Compute the amount of Hurley's equipment that would be reported in a December 31, 2012, consolidated balance sheet.

A. $1,000. B. $1,250.

C. $875. D. $1,125. E. $750.

44. Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. FIFO inventory valuation method is used. Compute the amount of total expenses reported in an income statement for the year ended December 31, 2012, in order to recognize acquisition-date allocations of fair value and book value differences,

A. $140.

B. $190. C. $260. D. $285. E. $310.

45. Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. FIFO inventory valuation method is used. Compute the amount of Hurley's long-term liabilities that would be reported in a December 31, 2012, consolidated balance sheet.

A. $1,800. B. $1,700.

C. $1,725. D. $1,675. E. $3,500.

46. Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. FIFO inventory valuation method is used. Compute the amount of Hurley's buildings that would be reported in a December 31, 2013, consolidated balance sheet.

A. $1,620. B. $1,380.

C. $1,320. D. $1,080. E. $1,500.

47. Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. FIFO inventory valuation method is used. Compute the amount of Hurley's equipment that would be reported in a December 31, 2013, consolidated balance sheet.

A. $0. B. $1,000.

C. $1,250. D. $1,125. E. $1,200.

48. Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. FIFO inventory valuation method is used. Compute the amount of Hurley's land that would be reported in a December 31, 2013, consolidated balance sheet.

A. $900. B. $1,300.

C. $400. D. $1,450. E. $2,200.

49. Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. FIFO inventory valuation method is used. Compute the amount of Hurley's long-term liabilities that would be reported in a December 31, 2013, consolidated balance sheet.

A. $1,700. B. $1,800.

C. $1,650. D. $1,750. E. $3,500.

50. Kaye Company acquired 100% of Fiore Company on January 1, 2013. Kaye paid $1,000 excess consideration over book value which is being amortized at $20 per year. Fiore reported net income of $400 in 2013 and paid dividends of $100. Assume the equity method is applied. How much will Kaye's income increase or decrease as a result of Fiore's operations?

A. $400 increase. B. $300 increase. C. $380 increase. D. $280 increase. E. $480 increase.

51. Kaye Company acquired 100% of Fiore Company on January 1, 2013. Kaye paid $1,000 excess consideration over book value which is being amortized at $20 per year. Fiore reported net income of $400 in 2013 and paid dividends of $100. Assume the partial equity method is applied. How much will Kaye's income increase or decrease as a result of Fiore's operations?

A. $400 increase. B. $300 increase. C. $380 increase. D. $280 increase. E. $480 increase.

52. Kaye Company acquired 100% of Fiore Company on January 1, 2013. Kaye paid $1,000 excess consideration over book value which is being amortized at $20 per year. Fiore reported net income of $400 in 2013 and paid dividends of $100. Assume the initial value method is applied. How much will Kaye's income increase or decrease as a result of Fiore's operations?

A. $400 increase. B. $300 increase. C. $380 increase. D. $100 increase. E. $210 increase.

53. Kaye Company acquired 100% of Fiore Company on January 1, 2013. Kaye paid $1,000 excess consideration over book value which is being amortized at $20 per year. Fiore reported net income of $400 in 2013 and paid dividends of $100. Assume the partial equity method is used. In the years following acquisition, what additional worksheet entry must be made for consolidation purposes that is not required for the equity method?

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

54. Kaye Company acquired 100% of Fiore Company on January 1, 2013. Kaye paid $1,000 excess consideration over book value which is being amortized at $20 per year. Fiore reported net income of $400 in 2013 and paid dividends of $100. Assume the initial value method is used. In the year subsequent to acquisition, what additional worksheet entry must be made for consolidation purposes that is not required for the equity method?

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

55. Hoyt Corporation agreed to the following terms in order to acquire the net assets of Brown Company on January 1, 2013: (1.) To issue 400 shares of common stock ($10 par) with a fair value of $45 per share. (2.) To assume Brown's liabilities which have a fair value of $1,500. On the date of acquisition, the consideration transferred for Hoyt's acquisition of Brown would be

A. $18,000. B. $16,500. C. $20,000. D. $18,500. E. $19,500.

56. Following are selected accounts for Green Corporation and Vega Company as of December 31, 2015. Several of Green's accounts have been omitted.

Green acquired 100% of Vega on January 1, 2011, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share. On January 1, 2011, Vega's land was undervalued by $40,000, its buildings were overvalued by $30,000, and equipment was undervalued by $80,000. The buildings have a 20-year life and the equipment has a 10-year life. $50,000 was attributed to an unrecorded trademark with a 16-year remaining life. There was no goodwill associated with this investment. Compute the book value of Vega at January 1, 2011.

A. $997,500. B. $857,500. C. $1,200,000. D. $1,600,000. E. $827,500.

57. Following are selected accounts for Green Corporation and Vega Company as of December 31, 2015. Several of Green's accounts have been omitted.

A. $1,400,000. B. $800,000. C. $500,000. D. $1,590,375. E. $1,390,375.

58. Following are selected accounts for Green Corporation and Vega Company as of December 31, 2015. Several of Green's accounts have been omitted.

A. $620,000. B. $280,000. C. $900,000. D. $909,625. E. $299,625.

59. Following are selected accounts for Green Corporation and Vega Company as of December 31, 2015. Several of Green's accounts have been omitted.

A. $1,037,500. B. $1,007,500. C. $1,000,000. D. $1,022,500. E. $1,012,500.

60. Following are selected accounts for Green Corporation and Vega Company as of December 31, 2015. Several of Green's accounts have been omitted.

A. $800,000. B. $808,000. C. $840,000. D. $760,000. E. $848,000.

61. Following are selected accounts for Green Corporation and Vega Company as of December 31, 2015. Several of Green's accounts have been omitted.

A. $220,000. B. $180,000. C. $670,000. D. $630,000. E. $450,000.

62. Following are selected accounts for Green Corporation and Vega Company as of December 31, 2015. Several of Green's accounts have been omitted.

A. $50,000. B. $46,875. C. $0. D. $34,375. E. $37,500.

63. Following are selected accounts for Green Corporation and Vega Company as of December 31, 2015. Several of Green's accounts have been omitted.

A. $450,000. B. $530,000. C. $555,000. D. $635,000. E. $525,000.

64. Following are selected accounts for Green Corporation and Vega Company as of December 31, 2015. Several of Green's accounts have been omitted.

A. $210,000. B. $75,000. C. $1,102,500. D. $942,500. E. $525,000.

65. Following are selected accounts for Green Corporation and Vega Company as of December 31, 2015. Several of Green's accounts have been omitted.

A. $1,645,375. B. $1,350,000. C. $1,565,375. D. $1,840,375. E. $1,265,375.

66. Following are selected accounts for Green Corporation and Vega Company as of December 31, 2015. Several of Green's accounts have been omitted.

A. $500,000. B. $300,000. C. $190,375. D. $200,000. E. $290,375.

67. One company acquires another company in a combination accounted for as an acquisition. The acquiring company decides to apply the initial value method in accounting for the combination. What is one reason the acquiring company might have made this decision?

A. It is the only method allowed by the SEC. B. It is relatively easy to apply. C. It is the only internal reporting method allowed by generally accepted accounting principles. D. Operating results on the parent's financial records reflect consolidated totals. E. When the initial method is used, no worksheet entries are required in the consolidation process.

68. One company acquires another company in a combination accounted for as an acquisition. The acquiring company decides to apply the equity method in accounting for the combination. What is one reason the acquiring company might have made this decision?

A. It is the only method allowed by the SEC. B. It is relatively easy to apply. C. It is the only internal reporting method allowed by generally accepted accounting principles. D. Operating results on the parent's financial records reflect consolidated totals. E. When the equity method is used, no worksheet entries are required in the consolidation process.

69. When is a goodwill impairment loss recognized?

A. Annually on a systematic and rational basis. B. Never. C. If both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying values. D. If the fair value of a reporting unit falls below its original acquisition price. E. Whenever the fair value of the entity declines significantly.

70. Which of the following will result in the recognition of an impairment loss on goodwill?

A. Goodwill amortization is to be recognized annually on a systematic and rational basis. B. Both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying values. C. The fair value of the entity declines significantly. D. The fair value of a reporting unit falls below the original consideration transferred for the acquisition. E. The entity is investigated by the SEC and its reputation has been severely damaged.

71. Goehler, Inc. acquires all of the voting stock of Kenneth, Inc. on January 4, 2012, at an amount in excess of Kenneth's fair value. On that date, Kenneth has equipment with a book value of $90,000 and a fair value of $120,000 (10-year remaining life). Goehler has equipment with a book value of $800,000 and a fair value of $1,200,000 (10-year remaining life). On December 31, 2013, Goehler has equipment with a book value of $975,000 but a fair value of $1,350,000 and Kenneth has equipment with a book value of $105,000 but a fair value of $125,000. If Goehler applies the equity method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2013?

A. $1,080,000. B. $1,104,000. C. $1,100,000. D. $1,468,000. E. $1,475,000.

72. Goehler, Inc. acquires all of the voting stock of Kenneth, Inc. on January 4, 2012, at an amount in excess of Kenneth's fair value. On that date, Kenneth has equipment with a book value of $90,000 and a fair value of $120,000 (10-year remaining life). Goehler has equipment with a book value of $800,000 and a fair value of $1,200,000 (10-year remaining life). On December 31, 2013, Goehler has equipment with a book value of $975,000 but a fair value of $1,350,000 and Kenneth has equipment with a book value of $105,000 but a fair value of $125,000. If Goehler applies the partial equity method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2013?

A. $1,080,000. B. $1,104,000. C. $1,100,000. D. $1,468,000. E. $1,475,000.

73. Goehler, Inc. acquires all of the voting stock of Kenneth, Inc. on January 4, 2012, at an amount in excess of Kenneth's fair value. On that date, Kenneth has equipment with a book value of $90,000 and a fair value of $120,000 (10-year remaining life). Goehler has equipment with a book value of $800,000 and a fair value of $1,200,000 (10-year remaining life). On December 31, 2013, Goehler has equipment with a book value of $975,000 but a fair value of $1,350,000 and Kenneth has equipment with a book value of $105,000 but a fair value of $125,000. If Goehler applies the initial value method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2013?

A. $1,080,000. B. $1,104,000. C. $1,100,000. D. $1,468,000. E. $1,475,000.

74. How is the fair value allocation of an intangible asset allocated to expense when the asset has no legal, regulatory, contractual, competitive, economic, or other factors that limit its life?

A. Equally over 20 years. B. Equally over 40 years. C. Equally over 20 years with an annual impairment review. D. No amortization, but annually reviewed for impairment and adjusted accordingly. E. No amortization over an indefinite period time.

75. Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2012 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2013 if Rhine generates cash flows from operations of $27,000 or more in the next year. Harrison estimates that there is a 20% probability that Rhine will generate at least $27,000 next year, and uses an interest rate of 5% to incorporate the time value of money. The fair value of $16,500 at 5%, using a probability weighted approach, is $3,142. What will Harrison record as its Investment in Rhine on January 1, 2012?

A. $400,000. B. $403,142. C. $406,000. D. $409,142. E. $416,500.

76. Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2012 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2013 if Rhine generates cash flows from operations of $27,000 or more in the next year. Harrison estimates that there is a 20% probability that Rhine will generate at least $27,000 next year, and uses an interest rate of 5% to incorporate the time value of money. The fair value of $16,500 at 5%, using a probability weighted approach, is $3,142. Assuming Rhine generates cash flow from operations of $27,200 in 2012, how will Harrison record the $16,500 payment of cash on April 15, 2013 in satisfaction of its contingent obligation?

A. Debit Contingent performance obligation $16,500, and Credit Cash $16,500. B. Debit Contingent performance obligation $3,142, debit Loss from revaluation of contingent performance obligation $13,358, and Credit Cash $16,500. C. Debit Investment in Subsidiary and Credit Cash $16,500. D. Debit Goodwill and Credit Cash $16,500. E. No entry.

77. Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2012 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2013 if Rhine generates cash flows from operations of $27,000 or more in the next year. Harrison estimates that there is a 20% probability that Rhine will generate at least $27,000 next year, and uses an interest rate of 5% to incorporate the time value of money. The fair value of $16,500 at 5%, using a probability weighted approach, is $3,142. When recording consideration transferred for the acquisition of Rhine on January 1, 2012, Harrison will record a contingent performance obligation in the amount of:

A. $628.40 B. $2,671.60 C. $3,142.00 D. $13,358.00 E. $16,500.00

78. Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2012 for $500,000 cash. A contingent payment of $12,000 will be paid on April 1, 2013 if Gataux generates cash flows from operations of $26,500 or more in the next year. Beatty estimates that there is a 30% probability that Gataux will generate at least $26,500 next year, and uses an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%, using a probability weighted approach, is $3,461. What will Beatty record as its Investment in Gataux on January 1, 2012?

A. $500,000. B. $503,461. C. $512,000. D. $515,461. E. $526,500.

79. Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2012 for $500,000 cash. A contingent payment of $12,000 will be paid on April 1, 2013 if Gataux generates cash flows from operations of $26,500 or more in the next year. Beatty estimates that there is a 30% probability that Gataux will generate at least $26,500 next year, and uses an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%, using a probability weighted approach, is $3,461. Assuming Gataux generates cash flow from operations of $27,200 in 2012, how will Beatty record the $12,000 payment of cash on April 1, 2013 in satisfaction of its contingent obligation?

A. Debit Contingent performance obligation $3,461, debit Goodwill $8,539, and Credit Cash $12,000. B. Debit Contingent performance obligation $3,461, debit Loss from revaluation of contingent performance obligation $8,539, and Credit Cash $12,000. C. Debit Goodwill and Credit Cash $12,000. D. Debit Goodwill $27,200, credit Contingent performance obligation $15,200, and Credit Cash $12,000. E. No entry.

80. Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2012 for $500,000 cash. A contingent payment of $12,000 will be paid on April 1, 2013 if Gataux generates cash flows from operations of $26,500 or more in the next year. Beatty estimates that there is a 30% probability that Gataux will generate at least $26,500 next year, and uses an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%, using a probability weighted approach, is $3,461. When recording consideration transferred for the acquisition of Gataux on January 1, 2012, Beatty will record a contingent performance obligation in the amount of:

A. $692.20 B. $3,040.00 C. $3,461.00 D. $12,000.00 E. $15,200.00

81. Prince Company acquires Duchess, Inc. on January 1, 2011. The consideration transferred exceeds the fair value of Duchess' net assets. On that date, Prince has a building with a book value of $1,200,000 and a fair value of $1,500,000. Duchess has a building with a book value of $400,000 and fair value of $500,000. If push-down accounting is used, what amounts in the Building account appear in Duchess' separate balance sheet and in the consolidated balance sheet immediately after acquisition?

A. $400,000 and $1,600,000. B. $500,000 and $1,700,000. C. $400,000 and $1,700,000. D. $500,000 and $2,000,000. E. $500,000 and $1,600,000.

82. Prince Company acquires Duchess, Inc. on January 1, 2011. The consideration transferred exceeds the fair value of Duchess' net assets. On that date, Prince has a building with a book value of $1,200,000 and a fair value of $1,500,000. Duchess has a building with a book value of $400,000 and fair value of $500,000. If push-down accounting is not used, what amounts in the Building account appear on Duchess' separate balance sheet and on the consolidated balance sheet immediately after acquisition?

A. $400,000 and $1,600,000. B. $500,000 and $1,700,000. C. $400,000 and $1,700,000. D. $500,000 and $2,000,000. E. $500,000 and $1,600,000.

83. Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2012. At that date, Glen owns only three assets and has no liabilities:

If Watkins pays $450,000 in cash for Glen, what amount would be represented as the subsidiary's Building in a consolidation at December 31, 2014, assuming the book value of the building at that date is still $200,000?

A. $200,000. B. $285,000. C. $290,000. D. $295,000. E. $300,000.

84. Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2012. At that date, Glen owns only three assets and has no liabilities:

If Watkins pays $400,000 in cash for Glen, what amount would be represented as the subsidiary's Building in a consolidation at December 31, 2014, assuming the book value of the building at that date is still $200,000?

A. $200,000. B. $285,000. C. $260,000. D. $268,000. E. $300,000.

85. Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2012. At that date, Glen owns only three assets and has no liabilities:

If Watkins pays $450,000 in cash for Glen, what amount would be represented as the subsidiary's Equipment in a consolidation at December 31, 2014, assuming the book value of the equipment at that date is still $80,000?

A. $70,000. B. $73,500. C. $75,000. D. $76,500. E. $80,000.

86. Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2012. At that date, Glen owns only three assets and has no liabilities:

If Watkins pays $450,000 in cash for Glen, what acquisition-date fair value allocation, net of amortization, should be attributed to the subsidiary's Equipment in consolidation at December 31, 2014?

A. $(5,000.) B. $80,000. C. $75,000. D. $73,500. E. $(3,500.)

87. Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2012. At that date, Glen owns only three assets and has no liabilities:

If Watkins pays $300,000 in cash for Glen, at what amount would the subsidiary's Building be represented in a January 2, 2012 consolidation?

A. $200,000. B. $225,000. C. $273,000. D. $279,000. E. $300,000.

88. Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2012. At that date, Glen owns only three assets and has no liabilities:

If Watkins pays $450,000 in cash for Glen, at what amount would Glen's Inventory acquired be represented in a December 31, 2012 consolidated balance sheet?

A. $40,000. B. $50,000. C. $0. D. $10,000. E. $90,000.

89. Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2012. At that date, Glen owns only three assets and has no liabilities:

If Watkins pays $450,000 in cash for Glen, and Glen earns $50,000 in net income and pays $20,000 in dividends during 2012, what amount would be reflected in consolidated net income for 2012 as a result of the acquisition?

A. $20,000 under the initial value method. B. $30,000 under the partial equity method. C. $50,000 under the partial equity method. D. $44,500 under the equity method. E. $45,500 regardless of the internal accounting method used.

90. According to the FASB ASC regarding the testing procedures for Goodwill Impairment, the proper procedure for conducting impairment testing is:

A. Goodwill recognized in consolidation may be amortized uniformly and only tested if the amortization method originally chosen is changed. B. Goodwill recognized in consolidation must only be impairment tested prior to disposal of the consolidated unit to eliminate the impairment of goodwill from the gain or loss on the sale of that specific entity. C. Goodwill recognized in consolidation may be impairment tested in a two-step approach, first by quantitative assessment of the possible impairment of the fair value of the unit relative to the book value, and then a qualitative assessment as to why the impairment, if any, occurred for disclosure. D. Goodwill recognized in consolidation may be impairment tested in a two-step approach, first by qualitative assessment of the possibility of impairment of the unit fair value relative to the book value, and then quantitative assessments as to how much impairment, if any, occurred for disclosure. E. Goodwill recognized in consolidation may be impairment tested in a two-step approach, first by qualitative assessment of the possibility of impairment of the unit fair value relative to the book value, and then quantitative assessments as to how much impairment, if any, occurred for asset write-down.

91. When is a goodwill impairment loss recognized?

A. Only after both a quantitative and qualitative assessment of the fair value of goodwill of a reporting unit. B. After only definitive quantitative assessments of the fair value of goodwill is completed. C. After only definitive qualitative assessments of the fair value of goodwill is completed. D. If the fair value of a reporting unit falls to zero or below its original acquisition price. E. Never.

Essay Questions

92. For an acquisition when the subsidiary retains its incorporation, which method of internal recordkeeping is the easiest for the parent to use?

93. For an acquisition when the subsidiary retains its incorporation, which method of internal recordkeeping gives the most accurate portrayal of the accounting results for the entire business combination?

94. For an acquisition when the subsidiary maintains its incorporation, under the partial equity method, what adjustments are made to the balance of the investment account?

95. From which methods can a parent choose for its internal recordkeeping related to the operations of a subsidiary?

96. What accounting method requires a subsidiary to record acquisition fair value allocations and the amortization of allocations in its internal accounting records?

97. What is the partial equity method? How does it differ from the equity method? What are its advantages and disadvantages compared to the equity method?

98. What advantages might push-down accounting offer for internal reporting?

99. What is the basic objective of all consolidations?

100.Yules Co. acquired Noel Co. in an acquisition transaction. Yules decided to use the partial equity method to account for the investment. The current balance in the investment account is $416,000. Describe in words how this balance was derived.

101.Paperless Co. acquired Sheetless Co. and in effecting this business combination, there was a cash-flow performance contingency to be paid in cash, and a market-price performance contingency to be paid in additional shares of stock. In what accounts and in what section(s) of a consolidated balance sheet are these contingent consideration items shown?

102.Avery Company acquires Billings Company in a combination accounted for as an acquisition and adopts the equity method to account for Investment in Billings. At the end of four years, the Investment in Billings account on Avery's books is $198,984. What items constitute this balance?

103.Dutch Co. has loaned $90,000 to its subsidiary, Hans Corp., which retains separate incorporation. How would this loan be treated on a consolidated balance sheet?

104.An acquisition transaction results in $90,000 of goodwill. Several years later a worksheet is being produced to consolidate the two companies. Describe in words at what amount goodwill will be reported at this date.

105.Why is push-down accounting a popular internal reporting technique?

Short Answer Questions

106.On January 1, 2012, Jumper Co. acquired all of the common stock of Cable Corp. for $540,000. Annual amortization associated with the purchase amounted to $1,800. During 2012, Cable earned net income of $54,000 and paid dividends of $24,000. Cable's net income and dividends for 2013 were $86,000 and $24,000, respectively. Required: Assuming that Jumper decided to use the partial equity method, prepare a schedule to show the balance in the investment account at the end of 2013.

107.Hanson Co. acquired all of the common stock of Roberts Inc. on January 1, 2012, transferring consideration in an amount slightly more than the fair value of Roberts' net assets. At that time, Roberts had buildings with a twenty-year useful life, a book value of $600,000, and a fair value of $696,000. On December 31, 2013, Roberts had buildings with a book value of $570,000 and a fair value of $648,000. On that date, Hanson had buildings with a book value of $1,878,000 and a fair value of $2,160,000.

Required: What amount should be shown for buildings on the consolidated balance sheet dated December 31, 2013?

108.Carnes Co. decided to use the partial equity method to account for its investment in Domino Corp. An unamortized trademark associated with the acquisition was $30,000, and Carnes decided to amortize the trademark over ten years. For 2013, Carnes' Equity in Subsidiary Earnings was $78,000.

Required: What balance would have been in the Equity in Subsidiary Earnings account if Carnes had used the equity method?

109.Fesler Inc. acquired all of the outstanding common stock of Pickett Company on January 1, 2012. Annual amortization of $22,000 resulted from this transaction. On the date of the acquisition, Fesler reported retained earnings of $520,000 while Pickett reported a $240,000 balance for retained earnings. Fesler reported net income of $100,000 in 2012 and $68,000 in 2013, and paid dividends of $25,000 in dividends each year. Pickett reported net income of $24,000 in 2012 and $36,000 in 2013, and paid dividends of $10,000 in dividends each year. Assume that Fesler's reported net income includes Equity in Subsidiary Income. If the parent's net income reflected use of the equity method, what were the consolidated retained earnings on December 31, 2013?

110.Fesler Inc. acquired all of the outstanding common stock of Pickett Company on January 1, 2012. Annual amortization of $22,000 resulted from this transaction. On the date of the acquisition, Fesler reported retained earnings of $520,000 while Pickett reported a $240,000 balance for retained earnings. Fesler reported net income of $100,000 in 2012 and $68,000 in 2013, and paid dividends of $25,000 in dividends each year. Pickett reported net income of $24,000 in 2012 and $36,000 in 2013, and paid dividends of $10,000 in dividends each year. Assume that Fesler's reported net income includes Equity in Subsidiary Income. If the parent's net income reflected use of the partial equity method, what were the consolidated retained earnings on December 31, 2013?

111.Fesler Inc. acquired all of the outstanding common stock of Pickett Company on January 1, 2012. Annual amortization of $22,000 resulted from this transaction. On the date of the acquisition, Fesler reported retained earnings of $520,000 while Pickett reported a $240,000 balance for retained earnings. Fesler reported net income of $100,000 in 2012 and $68,000 in 2013, and paid dividends of $25,000 in dividends each year. Pickett reported net income of $24,000 in 2012 and $36,000 in 2013, and paid dividends of $10,000 in dividends each year. Assume that Fesler's reported net income includes Equity in Subsidiary Income. If the parent's net income reflected use of the initial value method, what were the consolidated retained earnings on December 31, 2013?

112.Jaynes Inc. acquired all of Aaron Co.'s common stock on January 1, 2012, by issuing 11,000 shares of $1 par value common stock. Jaynes' shares had a $17 per share fair value. On that date, Aaron reported a net book value of $120,000. However, its equipment (with a five-year remaining life) was undervalued by $6,000 in the company's accounting records. Any excess of consideration transferred over fair value of assets and liabilities is assigned to an unrecorded patent to be amortized over ten years.

What balance would Jaynes' Investment in Aaron Co. account have shown on December 31, 2012, when the equity method was applied for this acquisition?

113.Jaynes Inc. acquired all of Aaron Co.'s common stock on January 1, 2012, by issuing 11,000 shares of $1 par value common stock. Jaynes' shares had a $17 per share fair value. On that date, Aaron reported a net book value of $120,000. However, its equipment (with a five-year remaining life) was undervalued by $6,000 in the company's accounting records. Any excess of consideration transferred over fair value of assets and liabilities is assigned to an unrecorded patent to be amortized over ten years.

What was consolidated net income for the year ended December 31, 2013?

114.Jaynes Inc. acquired all of Aaron Co.'s common stock on January 1, 2012, by issuing 11,000 shares of $1 par value common stock. Jaynes' shares had a $17 per share fair value. On that date, Aaron reported a net book value of $120,000. However, its equipment (with a five-year remaining life) was undervalued by $6,000 in the company's accounting records. Any excess of consideration transferred over fair value of assets and liabilities is assigned to an unrecorded patent to be amortized over ten years.

What was consolidated equipment as of December 31, 2013?

115.Jaynes Inc. acquired all of Aaron Co.'s common stock on January 1, 2012, by issuing 11,000 shares of $1 par value common stock. Jaynes' shares had a $17 per share fair value. On that date, Aaron reported a net book value of $120,000. However, its equipment (with a five-year remaining life) was undervalued by $6,000 in the company's accounting records. Any excess of consideration transferred over fair value of assets and liabilities is assigned to an unrecorded patent to be amortized over ten years.

What was the total for consolidated patents as of December 31, 2013?

116.Utah Inc. acquired all of the outstanding common stock of Trimmer Corp. on January 1, 2011. At that date, Trimmer owned only three assets and had no liabilities:

If Utah paid $300,000 in cash for Trimmer, what allocation should have been assigned to the subsidiary's Building account and its Equipment account in a December 31, 2013 consolidation?

117.Matthews Co. acquired all of the common stock of Jackson Co. on January 1, 2012. As of that date, Jackson had the following trial balance:

During 2012, Jackson reported net income of $96,000 while paying dividends of $12,000. During 2013, Jackson reported net income of $132,000 while paying dividends of $36,000. Assume that Matthews Co. acquired the common stock of Jackson Co. for $588,000 in cash. As of January 1, 2012, Jackson's land had a fair value of $102,000, its buildings were valued at $188,000, and its equipment was appraised at $216,000. Any excess of consideration transferred over fair value of assets and liabilities acquired is due to an unamortized patent to be amortized over 10 years. Matthews decided to use the equity method for this investment.

Required: (A.) Prepare consolidation worksheet entries for December 31, 2012. (B.) Prepare consolidation worksheet entries for December 31, 2013.

118.On January 1, 2011, Rand Corp. issued shares of its common stock to acquire all of the outstanding common stock of Spaulding Inc. Spaulding's book value was only $140,000 at the time, but Rand issued 12,000 shares having a par value of $1 per share and a fair value of $20 per share. Rand was willing to convey these shares because it felt that buildings (tenyear life) were undervalued on Spaulding's records by $60,000 while equipment (five-year life) was undervalued by $25,000. Any consideration transferred over fair value of identified net assets acquired is assigned to goodwill. Following are the individual financial records for these two companies for the year ended December 31, 2014.

Required: Prepare a consolidation worksheet for this business combination.

119.Pritchett Company recently acquired three businesses, recognizing goodwill in each acquisition. Destin has allocated its acquired goodwill to its three reporting units: Apple, Banana, and Carrot. Pritchett provides the following information in performing the 2013 annual review for impairment:

Which of Pritchett's reporting units require both steps to test for goodwill impairment?

120.Pritchett Company recently acquired three businesses, recognizing goodwill in each acquisition. Destin has allocated its acquired goodwill to its three reporting units: Apple, Banana, and Carrot. Pritchett provides the following information in performing the 2013 annual review for impairment:

How much goodwill impairment should Pritchett report for 2013?

121.On 4/1/11, Sey Mold Corporation acquired 100% of DotDot.Com for $2,000,000 cash. On the date of acquisition, DotDot's net book value was $900,000. DotDot's assets included land that was undervalued by $300,000, a building that was undervalued by $400,000, and equipment that was overvalued by $50,000. The building had a remaining useful life of 8 years and the equipment had a remaining useful life of 4 years. Any excess fair value over consideration transferred is allocated to an undervalued patent and is amortized over 5 years. Determine the amortization expense related to the combination at the year-end date of 12/31/11.

122.On 4/1/11, Sey Mold Corporation acquired 100% of DotDot.Com for $2,000,000 cash. On the date of acquisition, DotDot's net book value was $900,000. DotDot's assets included land that was undervalued by $300,000, a building that was undervalued by $400,000, and equipment that was overvalued by $50,000. The building had a remaining useful life of 8 years and the equipment had a remaining useful life of 4 years. Any excess fair value over consideration transferred is allocated to an undervalued patent and is amortized over 5 years. Determine the amortization expense related to the combination at the year-end date of 12/31/15.

123.On 4/1/11, Sey Mold Corporation acquired 100% of DotDot.Com for $2,000,000 cash. On the date of acquisition, DotDot's net book value was $900,000. DotDot's assets included land that was undervalued by $300,000, a building that was undervalued by $400,000, and equipment that was overvalued by $50,000. The building had a remaining useful life of 8 years and the equipment had a remaining useful life of 4 years. Any excess fair value over consideration transferred is allocated to an undervalued patent and is amortized over 5 years. Determine the amortization expense related to the consolidation at the year-end date of 12/31/19.

124.For each of the following situations, select the best answer that applies to consolidating financial information subsequent to the acquisition date: (A) Initial value method. (B) Partial equity method. (C) Equity method. (D) Initial value method and partial equity method but not equity method. (E) Partial equity method and equity method but not initial value method. (F) Initial value method, partial equity method, and equity method. _____1. Method(s) available to the parent for internal record-keeping. _____2. Easiest internal record-keeping method to apply. _____3. Income of the subsidiary is recorded by the parent when earned. _____4. Designed to create a parallel between the parent's investment accounts and changes in the underlying equity of the acquired company. _____5. For years subsequent to acquisition, requires the *C entry. _____6. Uses the cash basis for income recognition. _____7. Investment account remains at initially recorded amount. _____8. Dividends received by the parent from the subsidiary reduce the parent's investment account. _____9. Often referred to in accounting as a single-line consolidation. _____10. Increases the investment account for subsidiary earnings, but does not decrease the subsidiary account for equity adjustments such as amortizations.

Chapter 03 Consolidations-Subsequent to the Date of Acquisition Answer Key

Multiple Choice Questions

Which one of the following accounts would not appear in the consolidated financial statements at the end of the first fiscal period of the combination?

A. Goodwill. B. Equipment. C. Investment in Subsidiary. D. Common Stock. E. Additional Paid-In Capital.

Which of the following internal record-keeping methods can a parent choose to account for a subsidiary acquired in a business combination?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to maintain its investment in subsidiary account in its internal records.

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

effect on the resulting consolidated financial statements.

Under the partial equity method, the parent recognizes income when

Push-down accounting is concerned with the

Racer Corp. acquired all of the common stock of Tangiers Co. in 2011. Tangiers maintained its incorporation. Which of Racer's account balances would vary between the equity method and the initial value method?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 3 Hard Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The equity method. Learning Objective: 03-03b Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The intial value method.

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

AACSB: Reflective thinking AICPA BB: Critical Thinking

AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to maintain its investment in subsidiary account in its internal records. Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The equity method. Learning Objective: 03-03c Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The partial equity method.

Jansen Inc. acquired all of the outstanding common stock of Merriam Co. on January 1, 2012, for $257,000. Annual amortization of $19,000 resulted from this acquisition. Jansen reported net income of $70,000 in 2012 and $50,000 in 2013 and paid $22,000 in dividends each year. Merriam reported net income of $40,000 in 2012 and $47,000 in 2013 and paid $10,000 in dividends each year. What is the Investment in Merriam Co. balance on Jansen's books as of December 31, 2013, if the equity method has been applied?

A. $286,000. B. $295,000. C. $276,000. D. $344,000. E. $324,000. $257,000 + $40,000 + $47,000 - $10,000 - $19,000 - $10,000 - $19,000 = $286,000

Velway Corp. acquired Joker Inc. on January 1, 2012. The parent paid more than the fair value of the subsidiary's net assets. On that date, Velway had equipment with a book value of $500,000 and a fair value of $640,000. Joker had equipment with a book value of $400,000 and a fair value of $470,000. Joker decided to use push-down accounting. Immediately after the acquisition, what Equipment amount would appear on Joker's separate balance sheet and on Velway's consolidated balance sheet, respectively?

A. $400,000 and $900,000 B. $400,000 and $970,000 C. $470,000 and $900,000 D. $470,000 and $970,000 E. $470,000 and $1,040,000 FV of EQ = $470,000 for Joker B/S; Consolidated B/S = BV of Parent EQ $500,000 + FV of Sub EQ $470,000 = $970,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-08 Understand in general the requirements of push-down accounting and when its use is appropriate.

10.

Parrett Corp. acquired one hundred percent of Jones Inc. on January 1, 2011, at a price in excess of the subsidiary's fair value. On that date, Parrett's equipment (ten-year life) had a book value of $360,000 but a fair value of $480,000. Jones had equipment (ten-year life) with a book value of $240,000 and a fair value of $350,000. Parrett used the partial equity method to record its investment in Jones. On December 31, 2013, Parrett had equipment with a book value of $250,000 and a fair value of $400,000. Jones had equipment with a book value of $170,000 and a fair value of $320,000. What is the consolidated balance for the Equipment account as of December 31, 2013?

A. $387,000. B. $497,000. C. $508,000. D. $537,000. E. $570,000. Excess of Sub's FV = $110,000 + Parent's BV $250,000 + Sub's BV $170,000 - Excess Amortization ($11,000 × 3yrs) = $497,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03c Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The partial equity method.

11.

On January 1, 2012, Cale Corp. paid $1,020,000 to acquire Kaltop Co. Kaltop maintained separate incorporation. Cale used the equity method to account for the investment. The following information is available for Kaltop's assets, liabilities, and stockholders' equity accounts on January 1, 2012:

Kaltop earned net income for 2012 of $126,000 and paid dividends of $48,000 during the year. The 2012 total amortization of allocations is calculated to be

A. $4,000. B. $6,400. C. $(2,400). D. $(1,000). E. $3,800. Building = FV $268,000 - BV $240,000 = $28,000/20 yrs = $1,400 Equipment = FV $516,000 - BV $540,000 = ($24,000)/10 yrs = ($2,400) ($2,400) + $1,400 = ($1,000)

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply

Difficulty: 2 Medium Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to maintain its investment in subsidiary account in its internal records. Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The equity method.

12.

Kaltop earned net income for 2012 of $126,000 and paid dividends of $48,000 during the year. In Cale's accounting records, what amount would appear on December 31, 2012 for equity

in subsidiary earnings?

A. $77,000. B. $79,000. C. $125,000. D. $127,000. E. $81,800. $126,000 + $1,000 = $127,000

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

Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to maintain its investment in subsidiary account in its internal records. Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The equity method.

13.

Kaltop earned net income for 2012 of $126,000 and paid dividends of $48,000 during the year. What is the balance in Cale's investment in subsidiary account at the end of 2012?

A. $1,099,000. B. $1,020,000. C. $1,096,200. D. $1,098,000. E. $1,144,400. $1,020,000 + ($126,000 + $1,000) - $48,000 = $1,099,000

AACSB: Analytic

AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to maintain its investment in subsidiary account in its internal records. Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The equity method.

14.

A. $124,400. B. $126,000. C. $127,000. D. $76,400. E. $0. $126,000 + $1,000 = $127,000

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

Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The equity method.

15.

A. $569,000. B. $570,000. C. $571,000. D. $566,400. E. $444,000. $444,000 + ($126,000 + $1,000) = $571,000

AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The equity method.

16.

On January 1, 2012, Franel Co. acquired all of the common stock of Hurlem Corp. For 2012, Hurlem earned net income of $360,000 and paid dividends of $190,000. Amortization of the patent allocation that was included in the acquisition was $6,000. How much difference would there have been in Franel's income with regard to the effect of the investment, between using the equity method or using the initial value method of internal recordkeeping?

A. $190,000. B. $360,000. C. $164,000. D. $354,000. E. $150,000. Initial Value Method = $0 Recognized from Sub Income (only dividend income) Equity Method = $360,000 - $6,000 - $190,000 = $164,000 Sub Income Added in Consolidation $164,000 - $0 = $164,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to maintain its investment in subsidiary account in its internal records. Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The equity method. Learning Objective: 03-03b Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The intial value method. 3-120 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

17.

A. $170,000. B. $354,000. C. $164,000. D. $6,000. E. $174,000. Equity Method = $360,000 - $6,000 - $190,000 = $164,000 Added in Consolidation Partial Equity Method = $360,000 - $190,000 = $170,000 Added in Consolidation $170,000 - $164,000 = $6,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to maintain its investment in subsidiary account in its internal records. Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The equity method. Learning Objective: 03-03c Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The partial equity method.

18.

Cashen Co. paid $2,400,000 to acquire all of the common stock of Janex Corp. on January 1, 2012. Janex's reported earnings for 2012 totaled $432,000, and it paid $120,000 in dividends during the year. The amortization of allocations related to the investment was $24,000. Cashen's net income, not including the investment, was $3,180,000, and it paid dividends of $900,000. On the consolidated financial statements for 2012, what amount should have been shown for Equity in Subsidiary Earnings?

A. $432,000. B. $-0C. $408,000. D. $120,000. E. $288,000. $0; (Income is eliminated from the investment account)

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge from the passage of time. Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments has no effect on the resulting consolidated financial statements.

19.

A. $900,000. B. $1,020,000. C. $876,000. D. $996,000. E. $948,000. $900,000 Parent's Dividends Only

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge from the passage of time. Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments has no effect on the resulting consolidated financial statements.

20.

Cashen Co. paid $2,400,000 to acquire all of the common stock of Janex Corp. on January 1, 2012. Janex's reported earnings for 2012 totaled $432,000, and it paid $120,000 in dividends during the year. The amortization of allocations related to the investment was $24,000. Cashen's net income, not including the investment, was $3,180,000, and it paid dividends of $900,000. What is the amount of consolidated net income for the year 2012?

A. $3,180,000. B. $3,612,000. C. $3,300,000. D. $3,588,000. E. $3,420,000. Parent Income $3,180,000 + Sub Income $432,000 - Amortization Allocations $24,000 = Consolidated Net Income $3,588,000

21.

Jans Inc. acquired all of the outstanding common stock of Tysk Corp. on January 1, 2011, for $372,000. Equipment with a ten-year life was undervalued on Tysk's financial records by $46,000. Tysk also owned an unrecorded customer list with an assessed fair value of $67,000 and an estimated remaining life of five years. Tysk earned reported net income of $180,000 in 2011 and $216,000 in 2012. Dividends of $70,000 were paid in each of these two years. Selected account balances as of December 31, 2013, for the two companies follow.

If the partial equity method had been applied, what was 2013 consolidated net income?

A. $840,000. B. $768,400. C. $822,000. D. $240,000. E. $600,000. Parent $1,080,000 - $480,000 = $600,000; Sub $840,000 - $600,000 = $240,000 $600,000 + $240,000 = $840,000 - ($46,000/10) - ($67,000/5) = $822,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03c Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The partial equity method.

22.

If the equity method had been applied, what would be the Investment in Tysk Corp. account balance within the records of Jans at the end of 2013?

A. $612,100. B. $744,000. C. $774,150. D. $372,000. E. $844,150. Initial Investment $372,000 2011 Entries: $180,000 - $70,000 - $18,000 = $92,000 2012 Entries: $216,000 - $70,000 - $18,000 = $128,000 2013 Entries: $240,000 - $70,000 - $18,000 = $152,000 $372,000 + $92,000 + $128,000 + $152,000 = $744,000

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

23.

Red Co. acquired 100% of Green, Inc. on January 1, 2012. On that date, Green had inventory with a book value of $42,000 and a fair value of $52,000. This inventory had not yet been sold at December 31, 2012. Also, on the date of acquisition, Green had a building with a book value of $200,000 and a fair value of $390,000. Green had equipment with a book value of $350,000 and a fair value of $280,000. The building had a 10-year remaining useful life and the equipment had a 5-year remaining useful life. How much total expense will be in the consolidated financial statements for the year ended December 31, 2012 related to the acquisition allocations of Green?

A. $43,000. B. $33,000. C. $5,000. D. $15,000. E. 0. Inventory Adjustment $10,000 + Building Adjustment ($190,000/10) $19,000 + Equipment Adjustment ([$70,000]/5) [$14,000] = $15,000

24.

All of the following are acceptable methods to account for a majority-owned investment in subsidiary except

A. The equity method. B. The initial value method. C. The partial equity method. D. The fair-value method. E. Book value method.

25.

Under the equity method of accounting for an investment,

26.

Under the partial equity method of accounting for an investment,

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to maintain its investment in subsidiary account in its internal records.

27.

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

its investment in subsidiary account in its internal records.

28.

According to GAAP regarding amortization of goodwill and other intangible assets, which of the following statements is true?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-05 Discuss the rationale for the goodwill impairment testing approach.

29.

When a company applies the initial method in accounting for its investment in a subsidiary and the subsidiary reports income in excess of dividends paid, what entry would be made for a consolidation worksheet?

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

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analyze Difficulty: 2 Medium Learning Objective: 03-03b Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The intial value method.

30.

When a company applies the initial value method in accounting for its investment in a subsidiary and the subsidiary reports income less than dividends paid, what entry would be made for a consolidation worksheet?

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

31.

When a company applies the partial equity method in accounting for its investment in a subsidiary and the subsidiary's equipment has a fair value greater than its book value, what consolidation worksheet entry is made in a year subsequent to the initial acquisition of the subsidiary?

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

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analyze Difficulty: 2 Medium Learning Objective: 03-03c Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The partial equity method.

32.

When a company applies the partial equity method in accounting for its investment in a subsidiary and initial value, book values, and fair values of net assets acquired are all equal, what consolidation worksheet entry would be made?

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

33.

When consolidating a subsidiary under the equity method, which of the following statements is true?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-05 Discuss the rationale for the goodwill impairment testing approach.

34.

When consolidating a subsidiary under the equity method, which of the following statements is true with regard to the subsidiary subsequent to the year of acquisition?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to maintain its investment in subsidiary account in its internal records. Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The equity method.

35.

Which of the following statements is false regarding push-down accounting?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-08 Understand in general the requirements of push-down accounting and when its use is appropriate.

36.

Which of the following is false regarding contingent consideration in business combinations?

37.

Factors that should be considered in determining the useful life of an intangible asset include

AACSB: Reflective thinking

AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 03-06 Describe the procedures for conducting a goodwill impairment test.

38.

Consolidated net income using the equity method for an acquisition combination is computed as follows:

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The equity method.

39.

Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2012, for $3,800 cash. As of that date Hurley has the following trial balance;

A. $150. B. $700.

C. $2,200. D. $550. E. $2,900. Acquisition Price $3,800 - Total Equity at Acquisition $3,100 = $700

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments has no effect on the resulting consolidated financial statements.

40.

Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2012, for $3,800 cash. As of that date Hurley has the following trial balance;

A. $150. B. $250. C. $700.

D. $1,200. E. $550. Identified BVs $2,950 - Identified FVs $3,100 = $150 Excess Unidentified (Goodwill)

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments has no effect on the resulting consolidated financial statements.

41.

Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. FIFO inventory valuation method is used. Compute the amount of Hurley's inventory that would be reported in a January 1, 2012, consolidated balance sheet.

A. $800. B. $100.

C. $900. D. $150. E. $0. Fair Value at Acquisition = $900

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge from the passage of time. Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments has no effect on the resulting consolidated financial statements.

42.

Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. FIFO inventory valuation method is used. Compute the amount of Hurley's buildings that would be reported in a December 31, 2012, consolidated balance sheet.

A. $1,560. B. $1,260.

C. $1,440. D. $1,160. E. $1,140. FV $1,200 + Excess Amortization ($300/5) $60 = $1,260

43.

Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. FIFO inventory valuation method is used. Compute the amount of Hurley's equipment that would be reported in a December 31, 2012, consolidated balance sheet.

A. $1,000. B. $1,250.

C. $875. D. $1,125. E. $750. FV $1,250 - Excess Amortization ($250/2) $125 = $1,125

44.

Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. FIFO inventory valuation method is used. Compute the amount of total expenses reported in an income statement for the year ended December 31, 2012, in order to recognize acquisition-date allocations of fair value and book value differences,

A. $140.

B. $190. C. $260. D. $285. E. $310.

45.

Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. FIFO inventory valuation method is used. Compute the amount of Hurley's long-term liabilities that would be reported in a December 31, 2012, consolidated balance sheet.

A. $1,800. B. $1,700.

C. $1,725. D. $1,675. E. $3,500. FV $1,700 + Excess Amortization ($100/4) $25 = $1,725

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge from the passage of time. Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments has no effect on the resulting consolidated financial statements.

46.

Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. FIFO inventory valuation method is used. Compute the amount of Hurley's buildings that would be reported in a December 31, 2013, consolidated balance sheet.

A. $1,620. B. $1,380.

C. $1,320. D. $1,080. E. $1,500. FV $1,200 + Excess Amortization ($300/5) $60 × 2 = $1,320

47.

Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. FIFO inventory valuation method is used. Compute the amount of Hurley's equipment that would be reported in a December 31, 2013, consolidated balance sheet.

A. $0. B. $1,000.

C. $1,250. D. $1,125. E. $1,200. FV $1,250 - Excess Amortization ($250/2) $125 × 2 = $1,000

48.

Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. FIFO inventory valuation method is used. Compute the amount of Hurley's land that would be reported in a December 31, 2013, consolidated balance sheet.

A. $900. B. $1,300.

C. $400. D. $1,450. E. $2,200. FV $1,300

49.

Perry Company acquires 100% of the stock of Hurley Corporation on January 1, 2012, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value of net assets acquired is considered goodwill with an indefinite life. FIFO inventory valuation method is used. Compute the amount of Hurley's long-term liabilities that would be reported in a December 31, 2013, consolidated balance sheet.

A. $1,700. B. $1,800.

C. $1,650. D. $1,750. E. $3,500. FV $1,700 + Excess Amortization ($100/4) $25 × 2 = $1,750

50.

Kaye Company acquired 100% of Fiore Company on January 1, 2013. Kaye paid $1,000 excess consideration over book value which is being amortized at $20 per year. Fiore reported net income of $400 in 2013 and paid dividends of $100. Assume the equity method is applied. How much will Kaye's income increase or decrease as a result of Fiore's operations?

A. $400 increase. B. $300 increase. C. $380 increase. D. $280 increase. E. $480 increase. 2013 Income $400 - Amortization $20 = $380 Increase

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to maintain its investment in subsidiary account in its internal records.

51.

Kaye Company acquired 100% of Fiore Company on January 1, 2013. Kaye paid $1,000 excess consideration over book value which is being amortized at $20 per year. Fiore reported net income of $400 in 2013 and paid dividends of $100. Assume the partial equity method is applied. How much will Kaye's income increase or decrease as a result of Fiore's operations?

A. $400 increase. B. $300 increase. C. $380 increase. D. $280 increase. E. $480 increase. 2013 Income = $400 Increase

52.

Kaye Company acquired 100% of Fiore Company on January 1, 2013. Kaye paid $1,000 excess consideration over book value which is being amortized at $20 per year. Fiore reported net income of $400 in 2013 and paid dividends of $100. Assume the initial value method is applied. How much will Kaye's income increase or decrease as a result of Fiore's operations?

A. $400 increase. B. $300 increase. C. $380 increase. D. $100 increase. E. $210 increase. 2013 Dividends = $100 Increase

53.

Kaye Company acquired 100% of Fiore Company on January 1, 2013. Kaye paid $1,000 excess consideration over book value which is being amortized at $20 per year. Fiore reported net income of $400 in 2013 and paid dividends of $100. Assume the partial equity method is used. In the years following acquisition, what additional worksheet entry must be made for consolidation purposes that is not required for the equity method?

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

54.

Kaye Company acquired 100% of Fiore Company on January 1, 2013. Kaye paid $1,000 excess consideration over book value which is being amortized at $20 per year. Fiore reported net income of $400 in 2013 and paid dividends of $100. Assume the initial value method is used. In the year subsequent to acquisition, what additional worksheet entry must be made for consolidation purposes that is not required for the equity method?

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

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-03b Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The intial value method.

55.

Hoyt Corporation agreed to the following terms in order to acquire the net assets of Brown Company on January 1, 2013: (1.) To issue 400 shares of common stock ($10 par) with a fair value of $45 per share. (2.) To assume Brown's liabilities which have a fair value of $1,500. On the date of acquisition, the consideration transferred for Hoyt's acquisition of Brown would be

A. $18,000. B. $16,500. C. $20,000. D. $18,500. E. $19,500. Common Stock (400 shares × $45) $18,000 + Liabilities Assumed $1,500 = $19,500

56.

Following are selected accounts for Green Corporation and Vega Company as of December 31, 2015. Several of Green's accounts have been omitted.

A. $997,500. B. $857,500. C. $1,200,000. D. $1,600,000. E. $827,500. Common Stock Fair Value $997,500 - Fair Value Asset Adjustment (Land $40,000 Building $30,000 + Equipment $80,000 + Unrecorded Trademark $50,000) $140,000 = $857,500

57.

Following are selected accounts for Green Corporation and Vega Company as of December 31, 2015. Several of Green's accounts have been omitted.

A. $1,400,000. B. $800,000. C. $500,000. D. $1,590,375. E. $1,390,375. $900,000 + $500,000 = $1,400,000

AACSB: Analytic AICPA BB: Critical Thinking 3-168 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge from the passage of time. Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments has no effect on the resulting consolidated financial statements.

58.

Following are selected accounts for Green Corporation and Vega Company as of December 31, 2015. Several of Green's accounts have been omitted.

A. $620,000. B. $280,000. C. $900,000. D. $909,625. E. $299,625. COGS ($360,000 + $200,000) + Depreciation ($140,000 + $40,000) + Other Exp ($100,000 + $60,000) + Excess FV Amortization (Blg [$1,500] + Equip $8,000 + Trademark $3,125) = $909,625

59.

Following are selected accounts for Green Corporation and Vega Company as of December 31, 2015. Several of Green's accounts have been omitted.

A. $1,037,500. B. $1,007,500. C. $1,000,000. D. $1,022,500. E. $1,012,500. $750,000 + $280,000 - $30,000 = $1,000,000 + Amortization ($1,500 × 5) = $1,007,500

AACSB: Analytic AICPA BB: Critical Thinking 3-172 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge from the passage of time. Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments has no effect on the resulting consolidated financial statements.

60.

Following are selected accounts for Green Corporation and Vega Company as of December 31, 2015. Several of Green's accounts have been omitted.

A. $800,000. B. $808,000. C. $840,000. D. $760,000. E. $848,000. $300,000 + $580,000 = $880,000 - Amortization ($8,000 × 5) = $840,000

AACSB: Analytic AICPA BB: Critical Thinking 3-174 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge from the passage of time. Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments has no effect on the resulting consolidated financial statements.

61.

Following are selected accounts for Green Corporation and Vega Company as of December 31, 2015. Several of Green's accounts have been omitted.

A. $220,000. B. $180,000. C. $670,000. D. $630,000. E. $450,000. $450,000 + $220,000 = $670,000

AACSB: Analytic AICPA BB: Critical Thinking 3-176 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

62.

Following are selected accounts for Green Corporation and Vega Company as of December 31, 2015. Several of Green's accounts have been omitted.

A. $50,000. B. $46,875. C. $0. D. $34,375. E. $37,500. $50,000 - Amortization ($3,125 × 5) = $34,375

AACSB: Analytic AICPA BB: Critical Thinking 3-178 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

63.

Following are selected accounts for Green Corporation and Vega Company as of December 31, 2015. Several of Green's accounts have been omitted.

A. $450,000. B. $530,000. C. $555,000. D. $635,000. E. $525,000. $450,000 (Parent Only)

AACSB: Analytic AICPA BB: Critical Thinking 3-180 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

64.

Following are selected accounts for Green Corporation and Vega Company as of December 31, 2015. Several of Green's accounts have been omitted.

A. $210,000. B. $75,000. C. $1,102,500. D. $942,500. E. $525,000. $75,000 (Parent Only)

AACSB: Analytic AICPA BB: Critical Thinking 3-182 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

65.

Following are selected accounts for Green Corporation and Vega Company as of December 31, 2015. Several of Green's accounts have been omitted.

A. $1,645,375. B. $1,350,000. C. $1,565,375. D. $1,840,375. E. $1,265,375.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard 3-184 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge from the passage of time. Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments has no effect on the resulting consolidated financial statements.

66.

Following are selected accounts for Green Corporation and Vega Company as of December 31, 2015. Several of Green's accounts have been omitted.

A. $500,000. B. $300,000. C. $190,375. D. $200,000. E. $290,375.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge from the passage of time. Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments has no effect on the resulting consolidated financial statements.

67.

One company acquires another company in a combination accounted for as an acquisition. The acquiring company decides to apply the initial value method in accounting for the combination. What is one reason the acquiring company might have made this decision?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to maintain its investment in subsidiary account in its internal records.

68.

One company acquires another company in a combination accounted for as an acquisition. The acquiring company decides to apply the equity method in accounting for the combination. What is one reason the acquiring company might have made this decision?

A. It is the only method allowed by the SEC. B. It is relatively easy to apply. C. It is the only internal reporting method allowed by generally accepted accounting principles. D. Operating results on the parent's financial records reflect consolidated totals. E. When the equity method is used, no worksheet entries are required in the consolidation process.

69.

When is a goodwill impairment loss recognized?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation 3-188 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Remember Difficulty: 2 Medium Learning Objective: 03-05 Discuss the rationale for the goodwill impairment testing approach.

70.

Which of the following will result in the recognition of an impairment loss on goodwill?

71.

Goehler, Inc. acquires all of the voting stock of Kenneth, Inc. on January 4, 2012, at an amount in excess of Kenneth's fair value. On that date, Kenneth has equipment with a book value of $90,000 and a fair value of $120,000 (10-year remaining life). Goehler has equipment with a book value of $800,000 and a fair value of $1,200,000 (10-year remaining life). On December 31, 2013, Goehler has equipment with a book value of $975,000 but a fair value of $1,350,000 and Kenneth has equipment with a book value of $105,000 but a fair value of $125,000. If Goehler applies the equity method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2013?

A. $1,080,000. B. $1,104,000. C. $1,100,000. D. $1,468,000. E. $1,475,000.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The equity method. Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments has no effect on the resulting consolidated financial statements.

72.

Goehler, Inc. acquires all of the voting stock of Kenneth, Inc. on January 4, 2012, at an amount in excess of Kenneth's fair value. On that date, Kenneth has equipment with a book value of $90,000 and a fair value of $120,000 (10-year remaining life). Goehler has equipment with a book value of $800,000 and a fair value of $1,200,000 (10-year remaining life). On December 31, 2013, Goehler has equipment with a book value of $975,000 but a fair value of $1,350,000 and Kenneth has equipment with a book value of $105,000 but a fair value of $125,000. If Goehler applies the partial equity method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2013?

A. $1,080,000. B. $1,104,000. C. $1,100,000. D. $1,468,000. E. $1,475,000.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-03c Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The partial equity method. Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments has no effect on the resulting consolidated financial statements.

73.

Goehler, Inc. acquires all of the voting stock of Kenneth, Inc. on January 4, 2012, at an amount in excess of Kenneth's fair value. On that date, Kenneth has equipment with a book value of $90,000 and a fair value of $120,000 (10-year remaining life). Goehler has equipment with a book value of $800,000 and a fair value of $1,200,000 (10-year remaining life). On December 31, 2013, Goehler has equipment with a book value of $975,000 but a fair value of $1,350,000 and Kenneth has equipment with a book value of $105,000 but a fair value of $125,000. If Goehler applies the initial value method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2013?

A. $1,080,000. B. $1,104,000. C. $1,100,000. D. $1,468,000. E. $1,475,000.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-03b Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The intial value method. Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments has no effect on the resulting consolidated financial statements.

74.

How is the fair value allocation of an intangible asset allocated to expense when the asset has no legal, regulatory, contractual, competitive, economic, or other factors that limit its life?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-06 Describe the procedures for conducting a goodwill impairment test.

75.

Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2012 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2013 if Rhine generates cash flows from operations of $27,000 or more in the next year. Harrison estimates that there is a 20% probability that Rhine will generate at least $27,000 next year, and uses an interest rate of 5% to incorporate the time value of money. The fair value of $16,500 at 5%, using a probability weighted approach, is $3,142. What will Harrison record as its Investment in Rhine on January 1, 2012?

A. $400,000. B. $403,142. C. $406,000. D. $409,142. E. $416,500. Cash Payment $400,000 + Weighted Fair Value of Contingency $3,142 = $403,142

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-07 Understand the accounting and reporting for contingent consideration subsequent to a business acquisition.

76.

Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2012 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2013 if Rhine generates cash flows from operations of $27,000 or more in the next year. Harrison estimates that there is a 20% probability that Rhine will generate at least $27,000 next year, and uses an interest rate of 5% to incorporate the time value of money. The fair value of $16,500 at 5%, using a probability weighted approach, is $3,142. Assuming Rhine generates cash flow from operations of $27,200 in 2012, how will Harrison record the $16,500 payment of cash on April 15, 2013 in satisfaction of its contingent obligation?

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 03-07 Understand the accounting and reporting for contingent consideration subsequent to a business acquisition.

77.

Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2012 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2013 if Rhine generates cash flows from operations of $27,000 or more in the next year. Harrison estimates that there is a 20% probability that Rhine will generate at least $27,000 next year, and uses an interest rate of 5% to incorporate the time value of money. The fair value of $16,500 at 5%, using a probability weighted approach, is $3,142. When recording consideration transferred for the acquisition of Rhine on January 1, 2012, Harrison will record a contingent performance obligation in the amount of:

A. $628.40 B. $2,671.60 C. $3,142.00 D. $13,358.00 E. $16,500.00 Weighted Fair Value of Contingency = $3,142

78.

Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2012 for $500,000 cash. A contingent payment of $12,000 will be paid on April 1, 2013 if Gataux generates cash flows from operations of $26,500 or more in the next year. Beatty estimates that there is a 30% probability that Gataux will generate at least $26,500 next year, and uses an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%, using a probability weighted approach, is $3,461. What will Beatty record as its Investment in Gataux on January 1, 2012?

A. $500,000. B. $503,461. C. $512,000. D. $515,461. E. $526,500. Cash Payment $500,000 + Weighted Fair Value of Contingency $3,461 = $503,461

79.

Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2012 for $500,000 cash. A contingent payment of $12,000 will be paid on April 1, 2013 if Gataux generates cash flows from operations of $26,500 or more in the next year. Beatty estimates that there is a 30% probability that Gataux will generate at least $26,500 next year, and uses an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%, using a probability weighted approach, is $3,461. Assuming Gataux generates cash flow from operations of $27,200 in 2012, how will Beatty record the $12,000 payment of cash on April 1, 2013 in satisfaction of its contingent obligation?

80.

Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2012 for $500,000 cash. A contingent payment of $12,000 will be paid on April 1, 2013 if Gataux generates cash flows from operations of $26,500 or more in the next year. Beatty estimates that there is a 30% probability that Gataux will generate at least $26,500 next year, and uses an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%, using a probability weighted approach, is $3,461. When recording consideration transferred for the acquisition of Gataux on January 1, 2012, Beatty will record a contingent performance obligation in the amount of:

A. $692.20 B. $3,040.00 C. $3,461.00 D. $12,000.00 E. $15,200.00 Weighted Fair Value of Contingency = $3,461

81.

Prince Company acquires Duchess, Inc. on January 1, 2011. The consideration transferred exceeds the fair value of Duchess' net assets. On that date, Prince has a building with a book value of $1,200,000 and a fair value of $1,500,000. Duchess has a building with a book value of $400,000 and fair value of $500,000. If push-down accounting is used, what amounts in the Building account appear in Duchess' separate balance sheet and in the consolidated balance sheet immediately after acquisition?

A. $400,000 and $1,600,000. B. $500,000 and $1,700,000. C. $400,000 and $1,700,000. D. $500,000 and $2,000,000. E. $500,000 and $1,600,000. Fair Value ($500,000) & Parent BV + Sub FV ($1,700,000)

82.

Prince Company acquires Duchess, Inc. on January 1, 2011. The consideration transferred exceeds the fair value of Duchess' net assets. On that date, Prince has a building with a book value of $1,200,000 and a fair value of $1,500,000. Duchess has a building with a book value of $400,000 and fair value of $500,000. If push-down accounting is not used, what amounts in the Building account appear on Duchess' separate balance sheet and on the consolidated balance sheet immediately after acquisition?

A. $400,000 and $1,600,000. B. $500,000 and $1,700,000. C. $400,000 and $1,700,000. D. $500,000 and $2,000,000. E. $500,000 and $1,600,000. Book Value ($400,000) & Parent BV + Sub FV ($1,700,000)

83.

Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2012. At that date, Glen owns only three assets and has no liabilities:

A. $200,000. B. $285,000. C. $290,000. D. $295,000. E. $300,000. Fair Value at Acquisition ($300,000) - Amortization [($100,000/20) × 3] = $285,000

84.

Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2012. At that date, Glen owns only three assets and has no liabilities:

A. $200,000. B. $285,000. C. $260,000. D. $268,000. E. $300,000. Fair Value at Acquisition ($300,000) - Amortization [($100,000/20) × 3] = $285,000

85.

Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2012. At that date, Glen owns only three assets and has no liabilities:

A. $70,000. B. $73,500. C. $75,000. D. $76,500. E. $80,000. Fair Value at Acquisition ($75,000) + Amortization [($5,000/10) × 3] = $76,500

86.

Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2012. At that date, Glen owns only three assets and has no liabilities:

If Watkins pays $450,000 in cash for Glen, what acquisition-date fair value allocation, net of amortization, should be attributed to the subsidiary's Equipment in consolidation at December 31, 2014?

A. $(5,000.) B. $80,000. C. $75,000. D. $73,500. E. $(3,500.) Fair Value Differential at Acquisition [$5,000] + Amortization ([$5000]/10 × 3) = [$3,500]

87.

Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2012. At that date, Glen owns only three assets and has no liabilities:

If Watkins pays $300,000 in cash for Glen, at what amount would the subsidiary's Building be represented in a January 2, 2012 consolidation?

A. $200,000. B. $225,000. C. $273,000. D. $279,000. E. $300,000. Fair Value at Acquisition = $300,000

88.

Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2012. At that date, Glen owns only three assets and has no liabilities:

If Watkins pays $450,000 in cash for Glen, at what amount would Glen's Inventory acquired be represented in a December 31, 2012 consolidated balance sheet?

A. $40,000. B. $50,000. C. $0. D. $10,000. E. $90,000. Zero (Under FIFO all Inventory would go to COGS)

89.

Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2012. At that date, Glen owns only three assets and has no liabilities:

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments has no effect on the resulting consolidated financial statements.

90.

According to the FASB ASC regarding the testing procedures for Goodwill Impairment, the proper procedure for conducting impairment testing is:

91.

When is a goodwill impairment loss recognized?

Essay Questions

92.

For an acquisition when the subsidiary retains its incorporation, which method of internal recordkeeping is the easiest for the parent to use?

The initial value method is the easiest to use.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to maintain

its investment in subsidiary account in its internal records.

93.

For an acquisition when the subsidiary retains its incorporation, which method of internal recordkeeping gives the most accurate portrayal of the accounting results for the entire business combination?

The equity method gives the most accurate portrayal of the results for the combined entity.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to maintain its investment in subsidiary account in its internal records.

94.

For an acquisition when the subsidiary maintains its incorporation, under the partial equity method, what adjustments are made to the balance of the investment account?

The balance of the investment account is increased for the subsidiary's net income. It is decreased for subsidiary dividends and losses. The amortization of excess fair value allocations does not affect the account balance.

95.

From which methods can a parent choose for its internal recordkeeping related to the operations of a subsidiary?

The parent can choose from among the initial value method, equity method, and partial

equity method.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to maintain its investment in subsidiary account in its internal records.

96.

What accounting method requires a subsidiary to record acquisition fair value allocations and the amortization of allocations in its internal accounting records?

The appropriate method is termed push-down accounting.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 03-08 Understand in general the requirements of push-down accounting and when its use is appropriate.

97.

What is the partial equity method? How does it differ from the equity method? What are its advantages and disadvantages compared to the equity method?

The partial equity method is a compromise between the initial value method and the equity method. It provides some of the advantages of the equity method but is easier to use. Under the partial equity method, the balance in the investment account is increased by the accrual of the subsidiary's income and decreased when the subsidiary pays dividends. The method is simpler than the equity method because amortization of excess fair value allocations is not done.

98.

What advantages might push-down accounting offer for internal reporting?

Push-down accounting requires the subsidiary to record acquisition fair value allocations and amortizations in its accounting records. One advantage that the method offers to internal reporting is that it simplifies the consolidation process. More important, it provides better information for internal evaluation.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-08 Understand in general the requirements of push-down accounting and when its use is appropriate.

99.

What is the basic objective of all consolidations?

The basic objective of all consolidations is to combine asset, liability, revenue, expense, and stockholders' equity accounts in a manner consistent with the concepts of the acquisition method to reflect substance over form in financial reporting for consolidations. When a parent has control (substance) over a subsidiary and separate incorporation is maintained (form), the consolidated financial statements will reflect results as if the multiple entities were one entity.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge from the passage of time.

100.

Yules Co. acquired Noel Co. in an acquisition transaction. Yules decided to use the partial equity method to account for the investment. The current balance in the investment account is $416,000. Describe in words how this balance was derived.

The initial balance in the investment account would be the acquisition value implied by the fair value of consideration transferred. This would not include consideration paid for costs to effect the combination. After the acquisition, the balance in the account is increased by the parent's accrual of the subsidiary's income and decreased by the dividends paid by the subsidiary.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

Blooms: Analyze Difficulty: 2 Medium Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to maintain its investment in subsidiary account in its internal records.

101.

Paperless Co. acquired Sheetless Co. and in effecting this business combination, there was a cash-flow performance contingency to be paid in cash, and a market-price performance contingency to be paid in additional shares of stock. In what accounts and in what section(s) of a consolidated balance sheet are these contingent consideration items shown?

A cash-flow performance contingency is shown as a contingent performance obligation which is in the liability section of the consolidated balance sheet. A market-price performance contingency to be paid in stock is shown as additional paid-in capital contingent equity outstanding which is in the stockholders' equity section of the consolidated balance sheet.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analyze Difficulty: 2 Medium Learning Objective: 03-07 Understand the accounting and reporting for contingent consideration subsequent to a business acquisition.

102.

Avery Company acquires Billings Company in a combination accounted for as an acquisition and adopts the equity method to account for Investment in Billings. At the end of four years, the Investment in Billings account on Avery's books is $198,984. What items constitute this balance?

Since the equity method has been applied by Avery, the $198,984 is composed of four items: (a.) The acquisition value of consideration transferred by the parent; (b.) The annual accruals made by Avery to recognize income as it is earned by the subsidiary; (c.) The reductions that are created by the subsidiary's payment of dividends; (d.) The periodic amortization recognized by Avery in connection with the excess fair value allocations identified with its acquisition.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to maintain its investment in subsidiary account in its internal records.

103.

Dutch Co. has loaned $90,000 to its subsidiary, Hans Corp., which retains separate incorporation. How would this loan be treated on a consolidated balance sheet?

The loan represents an intra-entity payable for Hans and receivable for Dutch, and each receivable and payable would be eliminated in preparing a consolidated balance sheet.

AACSB: Reflective thinking AICPA BB: Critical Thinking

AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 03-06 Describe the procedures for conducting a goodwill impairment test.

104.

An acquisition transaction results in $90,000 of goodwill. Several years later a worksheet is being produced to consolidate the two companies. Describe in words at what amount goodwill will be reported at this date.

The $90,000 attributed to goodwill is reported at its original amount unless a portion of goodwill is impaired or a unit of the business where goodwill resides is sold.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 03-05 Discuss the rationale for the goodwill impairment testing approach.

105.

Why is push-down accounting a popular internal reporting technique?

Push-down accounting has become popular for the parent's internal reporting purposes for two reasons. First, this method simplifies the consolidation process each year. If acquisition value allocations and subsequent amortization are recorded by the subsidiary, they do not need to be repeated each year on a consolidation worksheet. Second, recording of amortization by the subsidiary enables that company's information to provide a good representation of the impact that the acquisition has on the earnings of the business combination. For example, if the subsidiary earns $100,000 each year but annual amortization is $80,000, the acquisition is only adding $20,000 to the income of the combination each year rather than the $100,000 that is reported by the subsidiary unless push-down accounting is used.

Short Answer Questions

106.

On January 1, 2012, Jumper Co. acquired all of the common stock of Cable Corp. for $540,000. Annual amortization associated with the purchase amounted to $1,800. During 2012, Cable earned net income of $54,000 and paid dividends of $24,000. Cable's net income and dividends for 2013 were $86,000 and $24,000, respectively. Required: Assuming that Jumper decided to use the partial equity method, prepare a schedule to show the balance in the investment account at the end of 2013.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to maintain its investment in subsidiary account in its internal records. Learning Objective: 03-03c Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The partial equity method.

107.

Hanson Co. acquired all of the common stock of Roberts Inc. on January 1, 2012, transferring consideration in an amount slightly more than the fair value of Roberts' net assets. At that time, Roberts had buildings with a twenty-year useful life, a book value of $600,000, and a fair value of $696,000. On December 31, 2013, Roberts had buildings with a book value of $570,000 and a fair value of $648,000. On that date, Hanson had buildings with a book value of $1,878,000 and a fair value of $2,160,000.

Required: What amount should be shown for buildings on the consolidated balance sheet dated December 31, 2013?

108.

Carnes Co. decided to use the partial equity method to account for its investment in Domino Corp. An unamortized trademark associated with the acquisition was $30,000, and Carnes decided to amortize the trademark over ten years. For 2013, Carnes' Equity in Subsidiary Earnings was $78,000.

Required: What balance would have been in the Equity in Subsidiary Earnings account if Carnes had used the equity method?

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to maintain its investment in subsidiary account in its internal records. Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The equity method. Learning Objective: 03-03c Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The partial equity method.

109.

Fesler Inc. acquired all of the outstanding common stock of Pickett Company on January 1, 2012. Annual amortization of $22,000 resulted from this transaction. On the date of the acquisition, Fesler reported retained earnings of $520,000 while Pickett reported a $240,000 balance for retained earnings. Fesler reported net income of $100,000 in 2012 and $68,000 in 2013, and paid dividends of $25,000 in dividends each year. Pickett reported net income of $24,000 in 2012 and $36,000 in 2013, and paid dividends of $10,000 in dividends each year. Assume that Fesler's reported net income includes Equity in Subsidiary Income. If the parent's net income reflected use of the equity method, what were the consolidated retained earnings on December 31, 2013?

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The equity method.

110.

Fesler Inc. acquired all of the outstanding common stock of Pickett Company on January 1, 2012. Annual amortization of $22,000 resulted from this transaction. On the date of the acquisition, Fesler reported retained earnings of $520,000 while Pickett reported a $240,000 balance for retained earnings. Fesler reported net income of $100,000 in 2012 and $68,000 in 2013, and paid dividends of $25,000 in dividends each year. Pickett reported net income of $24,000 in 2012 and $36,000 in 2013, and paid dividends of $10,000 in dividends each year. Assume that Fesler's reported net income includes Equity in Subsidiary Income. If the parent's net income reflected use of the partial equity method, what were the consolidated retained earnings on December 31, 2013?

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-03c Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The partial equity method. Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments has no effect on the resulting consolidated financial statements.

111.

Fesler Inc. acquired all of the outstanding common stock of Pickett Company on January 1, 2012. Annual amortization of $22,000 resulted from this transaction. On the date of the acquisition, Fesler reported retained earnings of $520,000 while Pickett reported a $240,000 balance for retained earnings. Fesler reported net income of $100,000 in 2012 and $68,000 in 2013, and paid dividends of $25,000 in dividends each year. Pickett reported net income of $24,000 in 2012 and $36,000 in 2013, and paid dividends of $10,000 in dividends each year. Assume that Fesler's reported net income includes Equity in Subsidiary Income. If the parent's net income reflected use of the initial value method, what were the consolidated retained earnings on December 31, 2013?

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-03b Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The intial value method. Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments has no effect on the resulting consolidated financial statements.

112.

Jaynes Inc. acquired all of Aaron Co.'s common stock on January 1, 2012, by issuing 11,000 shares of $1 par value common stock. Jaynes' shares had a $17 per share fair value. On that date, Aaron reported a net book value of $120,000. However, its equipment (with a five-year remaining life) was undervalued by $6,000 in the company's accounting records. Any excess of consideration transferred over fair value of assets and liabilities is assigned to an unrecorded patent to be amortized over ten years.

What balance would Jaynes' Investment in Aaron Co. account have shown on December 31, 2012, when the equity method was applied for this acquisition?

An allocation of the acquisition value (based on the fair value of the shares issued) must first be made.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to maintain its investment in subsidiary account in its internal records. Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The equity method.

113.

What was consolidated net income for the year ended December 31, 2013?

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

114.

What was consolidated equipment as of December 31, 2013?

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply

Difficulty: 2 Medium Learning Objective: 03-01 Recognize the complexities in preparing consolidated financial reports that emerge from the passage of time. Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments has no effect on the resulting consolidated financial statements.

115.

What was the total for consolidated patents as of December 31, 2013?

passage of time. Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments has no effect on the resulting consolidated financial statements.

116.

Utah Inc. acquired all of the outstanding common stock of Trimmer Corp. on January 1, 2011. At that date, Trimmer owned only three assets and had no liabilities:

If Utah paid $300,000 in cash for Trimmer, what allocation should have been assigned to the subsidiary's Building account and its Equipment account in a December 31, 2013 consolidation?

Since Utah paid more than the $288,000 fair value of Trimmer's net assets, all allocations are based on fair value with the excess $12,000 assigned to goodwill.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement 3-232 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

117.

Matthews Co. acquired all of the common stock of Jackson Co. on January 1, 2012. As of that date, Jackson had the following trial balance:

Required: (A.) Prepare consolidation worksheet entries for December 31, 2012. (B.) Prepare consolidation worksheet entries for December 31, 2013.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-03a Prepare consolidated financial statements subsequent to acquisition when the parent has aplied in its internal records: The equity method.

118.

On January 1, 2011, Rand Corp. issued shares of its common stock to acquire all of the outstanding common stock of Spaulding Inc. Spaulding's book value was only $140,000 at the time, but Rand issued 12,000 shares having a par value of $1 per share and a fair value of $20 per share. Rand was willing to convey these shares because it felt that buildings (ten-year life) were undervalued on Spaulding's records by $60,000 while equipment (fiveyear life) was undervalued by $25,000. Any consideration transferred over fair value of identified net assets acquired is assigned to goodwill. Following are the individual financial records for these two companies for the year ended December 31, 2014.

Required: Prepare a consolidation worksheet for this business combination.

Consolidation Worksheet for Rand and Spaulding:

119.

Pritchett Company recently acquired three businesses, recognizing goodwill in each acquisition. Destin has allocated its acquired goodwill to its three reporting units: Apple, Banana, and Carrot. Pritchett provides the following information in performing the 2013 annual review for impairment:

Which of Pritchett's reporting units require both steps to test for goodwill impairment?

Goodwill Impairment Test—Step 1

Therefore, the Apple and the Carrot reporting units require both steps to test for goodwill impairment.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply

Difficulty: 2 Medium Learning Objective: 03-06 Describe the procedures for conducting a goodwill impairment test.

120.

How much goodwill impairment should Pritchett report for 2013?

Goodwill Impairment Test—Step 2 (Apple and Carrot only)

Total impairment loss $5,000 + $75,000 = $80,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 03-06 Describe the procedures for conducting a goodwill impairment test.

121.

On 4/1/11, Sey Mold Corporation acquired 100% of DotDot.Com for $2,000,000 cash. On the date of acquisition, DotDot's net book value was $900,000. DotDot's assets included land that was undervalued by $300,000, a building that was undervalued by $400,000, and equipment that was overvalued by $50,000. The building had a remaining useful life of 8 years and the equipment had a remaining useful life of 4 years. Any excess fair value over consideration transferred is allocated to an undervalued patent and is amortized over 5 years. Determine the amortization expense related to the combination at the year-end date of 12/31/11.

122.

123.

By 2019, all of the fair value adjustments and the patent will have been fully amortized. The amortization expense for 2019 related to the combination will be $0.

124.

For each of the following situations, select the best answer that applies to consolidating financial information subsequent to the acquisition date: (A) Initial value method. (B) Partial equity method. (C) Equity method. (D) Initial value method and partial equity method but not equity method. (E) Partial equity method and equity method but not initial value method. (F) Initial value method, partial equity method, and equity method. _____1. Method(s) available to the parent for internal record-keeping. _____2. Easiest internal record-keeping method to apply. _____3. Income of the subsidiary is recorded by the parent when earned. _____4. Designed to create a parallel between the parent's investment accounts and changes in the underlying equity of the acquired company. _____5. For years subsequent to acquisition, requires the *C entry. _____6. Uses the cash basis for income recognition. _____7. Investment account remains at initially recorded amount. _____8. Dividends received by the parent from the subsidiary reduce the parent's investment account. _____9. Often referred to in accounting as a single-line consolidation. _____10. Increases the investment account for subsidiary earnings, but does not decrease the subsidiary account for equity adjustments such as amortizations.

(1) F; (2) A; (3) E; (4) C; (5) D; (6) A; (7) A; (8) E; (9) C; (10) B

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 3 Hard Learning Objective: 03-02 Identify and describe the various methods available to a parent company in order to maintain its investment in subsidiary account in its internal records.

Learning Objective: 03-04 Understand that a parent's internal accounting method for its subsidiary investments has no effect on the resulting consolidated financial statements.

Chapter 04 Consolidated Financial Statements and Outside Ownership

Multiple Choice Questions

1. For business combinations involving less than 100 percent ownership, the acquirer recognizes and measures all of the following at the acquisition date except:

A. identifiable assets acquired, at fair value. B. liabilities assumed, at book value. C. non-controlling interest, at fair value. D. goodwill or a gain from bargain purchase. E. none of these choices is correct.

2. When Jolt Co. acquired 75% of the common stock of Yelts Corp., Yelts owned land with a book value of $70,000 and a fair value of $100,000. What amount should have been reported for the land in a consolidated balance sheet at the acquisition date?

A. $52,500. B. $70,000. C. $75,000. D. $92,500. E. $100,000.

3. When Jolt Co. acquired 75% of the common stock of Yelts Corp., Yelts owned land with a book value of $70,000 and a fair value of $100,000. What is the total amount of excess land allocation at the acquisition date?

A. $0. B. $30,000. C. $22,500. D. $25,000. E. $17,500.

4. When Jolt Co. acquired 75% of the common stock of Yelts Corp., Yelts owned land with a book value of $70,000 and a fair value of $100,000. What is the amount of excess land allocation attributed to the controlling interest at the acquisition date?

A. $0. B. $30,000. C. $22,500. D. $25,000. E. $17,500.

5. When Jolt Co. acquired 75% of the common stock of Yelts Corp., Yelts owned land with a book value of $70,000 and a fair value of $100,000. What is the amount of excess land allocation attributed to the non-controlling interest at the acquisition date?

A. $0. B. $30,000. C. $22,500. D. $7,500. E. $17,500.

6. When Jolt Co. acquired 75% of the common stock of Yelts Corp., Yelts owned land with a book value of $70,000 and a fair value of $100,000. What amount should have been reported for the land in a consolidated balance sheet, assuming the investment was obtained prior to the date the purchase method of accounting for new business combinations was discontinued?

A. $70,000. B. $75,000. C. $85,000. D. $92,500. E. $100,000.

7. Perch Co. acquired 80% of the common stock of Float Corp. for $1,600,000. The fair value of Float's net assets was $1,850,000, and the book value was $1,500,000. The non-controlling interest shares of Float Corp. are not actively traded. What is the total amount of goodwill recognized at the date of acquisition?

A. $150,000. B. $250,000. C. $0. D. $120,000. E. $170,000.

8. Perch Co. acquired 80% of the common stock of Float Corp. for $1,600,000. The fair value of Float's net assets was $1,850,000, and the book value was $1,500,000. The non-controlling interest shares of Float Corp. are not actively traded. What amount of goodwill should be attributed to Perch at the date of acquisition?

A. $150,000. B. $250,000. C. $0. D. $120,000. E. $170,000.

9. Perch Co. acquired 80% of the common stock of Float Corp. for $1,600,000. The fair value of Float's net assets was $1,850,000, and the book value was $1,500,000. The non-controlling interest shares of Float Corp. are not actively traded. What amount of goodwill should be attributed to the non-controlling interest at the date of acquisition?

A. $0. B. $20,000. C. $30,000. D. $100,000. E. $120,000.

10. Perch Co. acquired 80% of the common stock of Float Corp. for $1,600,000. The fair value of Float's net assets was $1,850,000, and the book value was $1,500,000. The non-controlling interest shares of Float Corp. are not actively traded. What is the dollar amount of non-controlling interest that should appear in a consolidated balance sheet prepared at the date of acquisition?

A. $350,000. B. $300,000. C. $400,000. D. $370,000. E. $0.

11. Perch Co. acquired 80% of the common stock of Float Corp. for $1,600,000. The fair value of Float's net assets was $1,850,000, and the book value was $1,500,000. The non-controlling interest shares of Float Corp. are not actively traded. What is the dollar amount of Float Corp.'s net assets that would be represented in a consolidated balance sheet prepared at the date of acquisition?

A. $1,600,000. B. $1,480,000. C. $1,200,000. D. $1,780,000. E. $1,850,000.

12. Perch Co. acquired 80% of the common stock of Float Corp. for $1,600,000. The fair value of Float's net assets was $1,850,000, and the book value was $1,500,000. The non-controlling interest shares of Float Corp. are not actively traded. What is the dollar amount of fair value over book value differences attributed to Perch at the date of acquisition?

A. $120,000. B. $150,000. C. $280,000. D. $350,000. E. $370,000.

13. Femur Co. acquired 70% of the voting common stock of Harbor Corp. on January 1, 2014. During 2014, Harbor had revenues of $2,500,000 and expenses of $2,000,000. The amortization of excess cost allocations totaled $60,000 in 2014. The non-controlling interest's share of the earnings of Harbor Corp. is calculated to be

A. $132,000. B. $150,000. C. $168,000. D. $160,000. E. $0.

14. Femur Co. acquired 70% of the voting common stock of Harbor Corp. on January 1, 2014. During 2014, Harbor had revenues of $2,500,000 and expenses of $2,000,000. The amortization of excess cost allocations totaled $60,000 in 2014. What is the effect of including Harbor in consolidated net income for 2014?

A. $350,000. B. $308,000. C. $500,000. D. $440,000. E. $290,000.

15. Denber Co. acquired 60% of the common stock of Kailey Corp. on September 1, 2014. For 2014, Kailey reported revenues of $810,000 and expenses of $630,000, all reflected evenly throughout the year. The annual amount of amortization related to this acquisition was $15,000. In consolidation, the total amount of expenses related to Kailey, and to Denber's acquisition of Kailey, for 2014 is determined to be

A. $153,750. B. $161,250. C. $205,000. D. $210,000. E. $215,000.

16. Denber Co. acquired 60% of the common stock of Kailey Corp. on September 1, 2014. For 2014, Kailey reported revenues of $810,000 and expenses of $630,000, all reflected evenly throughout the year. The annual amount of amortization related to this acquisition was $15,000. What is the effect of including Kailey in consolidated net income for 2014?

A. $31,000. B. $33,000. C. $55,000. D. $60,000. E. $39,000.

17. Denber Co. acquired 60% of the common stock of Kailey Corp. on September 1, 2014. For 2014, Kailey reported revenues of $810,000 and expenses of $630,000, all reflected evenly throughout the year. The annual amount of amortization related to this acquisition was $15,000. What is the amount of net income to the controlling interest for 2014?

A. $31,000. B. $33,000. C. $55,000. D. $60,000. E. $39,000.

18. Denber Co. acquired 60% of the common stock of Kailey Corp. on September 1, 2014. For 2014, Kailey reported revenues of $810,000 and expenses of $630,000, all reflected evenly throughout the year. The annual amount of amortization related to this acquisition was $15,000. What is the amount of the non-controlling interest's share of Kailey's income for 2014?

A. $22,000. B. $24,000. C. $48,000. D. $66,000. E. $72,000.

19. MacHeath Inc. bought 60% of the outstanding common stock of Nomes Inc. in an acquisition business combination that resulted in the recognition of goodwill. Nomes owned a piece of land that cost $250,000 but was worth $600,000 at the date of acquisition. What value would be attributed to this land in a consolidated balance sheet at the date of acquisition?

A. $250,000. B. $150,000. C. $600,000. D. $360,000. E. $460,000.

20. Kordel Inc. acquired 75% of the outstanding common stock of Raxston Corp. Raxston currently owes Kordel $500,000 for inventory acquired over the past few months. In preparing consolidated financial statements, what amount of this debt should be eliminated?

A. $375,000 B. $125,000 C. $300,000 D. $500,000 E. $0

21. Royce Co. acquired 60% of Park Co. for $420,000 on December 31, 2014 when Park's book value was $560,000. The Royce stock was not actively traded. On the date of acquisition, Park had equipment (with a ten-year life) that was undervalued in the financial records by $140,000. One year later, the following selected figures were reported by the two companies. Additionally, no dividends have been paid.

What is consolidated net income for 2015 attributable to Royce's controlling interest?

A. $686,000. B. $560,000. C. $644,000. D. $635,600. E. $691,600.

22. Royce Co. acquired 60% of Park Co. for $420,000 on December 31, 2014 when Park's book value was $560,000. The Royce stock was not actively traded. On the date of acquisition, Park had equipment (with a ten-year life) that was undervalued in the financial records by $140,000. One year later, the following selected figures were reported by the two companies. Additionally, no dividends have been paid.

What is the non-controlling interest's share of the subsidiary's net income for the year ended December 31, 2015 and what is the ending balance of the non-controlling interest in the subsidiary at December 31, 2015?

A. $56,000 and $280,000. B. $50,400 and $218,400. C. $56,000 and $224,000. D. $56,000 and $336,000. E. $50,400 and $330,400.

23. Royce Co. acquired 60% of Park Co. for $420,000 on December 31, 2014 when Park's book value was $560,000. The Royce stock was not actively traded. On the date of acquisition, Park had equipment (with a ten-year life) that was undervalued in the financial records by $140,000. One year later, the following selected figures were reported by the two companies. Additionally, no dividends have been paid.

What is the consolidated balance of the Equipment account at December 31, 2015?

A. $644,400. B. $784,000. C. $719,600. D. $770,000. E. $775,600.

24. On January 1, 2014, Palk Corp. and Spraz Corp. had condensed balance sheets as follows:

On January 2, 2014, Palk borrowed the entire $84,000 it needed to acquire 80% of the outstanding common shares of Spraz. The loan was to be paid in ten equal annual principal payments, plus interest, beginning December 31, 2014. The excess consideration transferred over the underlying book value of the acquired net assets was allocated 60% to inventory and 40% to goodwill. What is consolidated current assets at January 2, 2014?

A. $127,000. B. $129,800. C. $143,800. D. $148,000. E. $135,400.

25. On January 1, 2014, Palk Corp. and Spraz Corp. had condensed balance sheets as follows:

A. $195,000. B. $192,200. C. $186,600. D. $181,000. E. $169,800.

26. On January 1, 2014, Palk Corp. and Spraz Corp. had condensed balance sheets as follows:

A. $53,200. B. $56,000. C. $64,400. D. $42,000. E. $70,000.

27. On January 1, 2014, Palk Corp. and Spraz Corp. had condensed balance sheets as follows:

A. $112,000. B. $133,000. C. $168,000. D. $182,000. E. $203,000.

28. In measuring non-controlling interest at the date of acquisition, which of the following would

not be indicative of the value attributed to the non-controlling interest?

A. Fair value based on stock trades of the acquired company. B. Subsidiary cash flows discounted to present value. C. Book value of subsidiary net assets. D. Projections of residual income. E. Consideration transferred by the parent company that implies a total subsidiary value.

29. When a parent uses the equity method throughout the year to account for its investment in an acquired subsidiary, which of the following statements is false before making adjustments on the consolidated worksheet?

A. Parent company net income equals controlling interest in consolidated net income. B. Parent company retained earnings equals consolidated retained earnings. C. Parent company total assets equals consolidated total assets. D. Parent company dividends equals consolidated dividends. E. Goodwill will not be recorded on the parent's books.

30. When a parent uses the initial value method throughout the year to account for its investment in an acquired subsidiary, which of the following statements is true before making adjustments on the consolidated worksheet?

A. Parent company net income equals consolidated net income. B. Parent company retained earnings equals consolidated retained earnings. C. Parent company total assets equals consolidated total assets. D. Parent company dividends equal consolidated dividends. E. Goodwill needs to be recognized on the parent's books.

31. When a parent uses the partial equity method throughout the year to account for its investment in an acquired subsidiary, which of the following statements is false before making adjustments on the consolidated worksheet?

A. Parent company net income will equal controlling interest in consolidated net income when initial value, book value, and fair value of the investment are equal. B. Parent company net income will exceed controlling interest in consolidated net income when fair value of depreciable assets acquired exceeds book value of depreciable assets. C. Parent company net income will be less than controlling interest in consolidated net income when fair value of net assets acquired exceeds book value of net assets acquired. D. Goodwill will be recognized if acquisition value exceeds fair value of net assets acquired. E. Subsidiary net assets are valued at their book values before consolidating entries are made.

32. In a step acquisition, which of the following statements is false?

A. The acquisition method views a step acquisition essentially the same as a single step acquisition. B. Income from subsidiary is computed by applying a partial year for a new purchase acquired during the year. C. Income from subsidiary is computed for the entire year for a new purchase acquired during the year. D. Obtaining control through a step acquisition is a significant remeasurement event. E. Preacquisition earnings are not included in the consolidated income statement.

33. Which of the following statements is false regarding multiple acquisitions of a subsidiary's existing common stock?

A. The parent recognizes a larger percent of subsidiary income. B. A step acquisition resulting in control may result in a parent recognizing a gain on revaluation. C. The book value of the subsidiary will increase. D. The parent's percent ownership in subsidiary will increase. E. Non-controlling interest in subsidiary's net income will decrease.

34. When a subsidiary is acquired sometime after the first day of the fiscal year, which of the following statements is true?

A. Income from subsidiary is not recognized until there is an entire year of consolidated operations. B. Income from subsidiary is recognized from date of acquisition to year-end. C. Excess cost over acquisition value is recognized at the beginning of the fiscal year. D. No goodwill can be recognized. E. Income from subsidiary is recognized for the entire year.

35. When consolidating a subsidiary that was acquired on a date other than the first day of the fiscal year, which of the following statements is true in the presentation of consolidated financial statements?

A. Preacquisition earnings are deducted from consolidated revenues and expenses. B. Preacquisition earnings are added to consolidated revenues and expenses. C. Preacquisition earnings are deducted from the beginning consolidated stockholders' equity. D. Preacquisition earnings are added to the beginning consolidated stockholders' equity. E. Preacquisition earnings are ignored in the consolidated income statement.

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

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

37. All of the following statements regarding the sale of subsidiary shares are true except which of the following?

A. The use of specific identification based on serial number is acceptable. B. The use of the FIFO assumption is acceptable. C. The use of the averaging assumption is acceptable. D. The use of specific LIFO assumption is acceptable. E. The parent company must determine whether consolidation is still appropriate for the remaining shares owned.

38. Which of the following statements is true regarding the sale of subsidiary shares when using the acquisition method for accounting for business combinations?

A. If control continues, the difference between selling price and acquisition value is recorded as a realized gain or loss. B. If control continues, the difference between selling price and acquisition value is an unrealized gain or loss. C. If control continues, the difference between selling price and carrying value is recorded as an adjustment to additional paid-in capital. D. If control continues, the difference between selling price and carrying value is recorded as a realized gain or loss. E. If control continues, the difference between selling price and carrying value is recorded as an adjustment to retained earnings.

39. Jax Company uses the acquisition method for accounting for its investment in Saxton Company. Jax sells some of its shares of Saxton such that neither control nor significant influence exists. Which of the following statements is true?

A. The difference between selling price and acquisition value is recorded as a realized gain or loss. B. The difference between selling price and acquisition value is recorded as an unrealized gain or loss. C. The difference between selling price and carrying value is recorded as a realized gain or loss. D. The difference between selling price and carrying value is recorded as an unrealized gain or loss. E. The difference between selling price and carrying value is recorded as an adjustment to retained earnings.

40. Keefe Inc, a calendar-year corporation, acquires 70% of George Company on September 1, 2014, and an additional 10% on January 1, 2015. Total annual amortization of $6,000 relates to the first acquisition. George reports the following figures for 2015:

Without regard for this investment, Keefe independently earns $300,000 in net income during 2015. All net income is earned evenly throughout the year. What is the controlling interest in consolidated net income for 2015?

A. $380,000. B. $375,200. C. $375,800. D. $376,000. E. $400,000.

41. McGuire Company acquired 90 percent of Hogan Company on January 1, 2014, for $234,000 cash. This amount is reflective of Hogan's total fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following:

Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years. The acquisition value attributable to the non-controlling interest at January 1, 2014 is:

A. $23,400. B. $24,000. C. $24,900. D. $26,000. E. $20,000.

42. McGuire Company acquired 90 percent of Hogan Company on January 1, 2014, for $234,000 cash. This amount is reflective of Hogan's total fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following:

Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years. In consolidation at January 1, 2014, what adjustment is necessary for Hogan's Buildings account?

A. $2,000 increase. B. $2,000 decrease. C. $1,800 increase. D. $1,800 decrease. E. No change.

43. McGuire Company acquired 90 percent of Hogan Company on January 1, 2014, for $234,000 cash. This amount is reflective of Hogan's total fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following:

Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years. In consolidation at December 31, 2014, what adjustment is necessary for Hogan's Buildings account?

A. $1,620 increase. B. $1,620 decrease. C. $1,800 increase. D. $1,800 decrease. E. No adjustment is necessary.

44. McGuire Company acquired 90 percent of Hogan Company on January 1, 2014, for $234,000 cash. This amount is reflective of Hogan's total fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following:

Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years. In consolidation at December 31, 2015, what adjustment is necessary for Hogan's Buildings account?

A. $1,440 increase. B. $1,440 decrease. C. $1,600 increase. D. $1,600 decrease. E. No adjustment is necessary.

45. McGuire Company acquired 90 percent of Hogan Company on January 1, 2014, for $234,000 cash. This amount is reflective of Hogan's total fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following:

A. $4,000 increase. B. $4,000 decrease. C. $3,600 increase. D. $3,600 decrease. E. No adjustment is necessary.

46. McGuire Company acquired 90 percent of Hogan Company on January 1, 2014, for $234,000 cash. This amount is reflective of Hogan's total fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following:

A. $3,000 increase. B. $3,000 decrease. C. $2,700 increase. D. $2,700 decrease. E. No adjustment is necessary.

47. McGuire Company acquired 90 percent of Hogan Company on January 1, 2014, for $234,000 cash. This amount is reflective of Hogan's total fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following:

A. $2,000 increase. B. $2,000 decrease. C. $1,800 increase. D. $1,800 decrease. E. No adjustment is necessary.

48. McGuire Company acquired 90 percent of Hogan Company on January 1, 2014, for $234,000 cash. This amount is reflective of Hogan's total fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following:

A. $7,000 increase. B. $7,000 decrease. C. $6,300 increase. D. $6,300 decrease. E. No adjustment is necessary.

49. McGuire Company acquired 90 percent of Hogan Company on January 1, 2014, for $234,000 cash. This amount is reflective of Hogan's total fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following:

A. $8,000 decrease. B. $7,000 increase. C. $6,300 increase. D. $6,300 decrease. E. No adjustment is necessary.

50. McGuire Company acquired 90 percent of Hogan Company on January 1, 2014, for $234,000 cash. This amount is reflective of Hogan's total fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following:

A. $7,000 decrease. B. $7,000 increase. C. $6,300 increase. D. $6,300 decrease. E. No adjustment is necessary.

51. McGuire Company acquired 90 percent of Hogan Company on January 1, 2014, for $234,000 cash. This amount is reflective of Hogan's total fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following:

A. $7,000. B. $6,300. C. $11,000. D. $9,900. E. No adjustment is necessary.

52. McGuire Company acquired 90 percent of Hogan Company on January 1, 2014, for $234,000 cash. This amount is reflective of Hogan's total fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following:

Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years. In consolidation at December 31, 2014, what net adjustment is necessary for Hogan's Patent account?

A. $5,600. B. $8,800. C. $7,000. D. $7,700. E. No adjustment is necessary.

53. McGuire Company acquired 90 percent of Hogan Company on January 1, 2014, for $234,000 cash. This amount is reflective of Hogan's total fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following:

Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years. In consolidation at December 31, 2015, what net adjustment is necessary for Hogan's Patent account?

A. $4,200. B. $5,500. C. $8,000. D. $6,600. E. No adjustment is necessary.

54. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the EQUITY METHOD is applied. Compute Pell's investment account balance in Demers at December 31, 2014.

A. $580,000. B. $574,400. C. $548,000. D. $542,400. E. $541,000.

55. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the EQUITY METHOD is applied. Compute Pell's investment account balance in Demers at December 31, 2015.

A. $577,200. B. $604,000. C. $592,800. D. $632,800. E. $572,000.

56. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the EQUITY METHOD is applied. Compute Pell's investment account balance in Demers at December 31, 2016.

A. $639,000. B. $643,200. C. $763,200. D. $676,000. E. $620,000.

57. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the EQUITY METHOD is applied. Compute Pell's income from Demers for the year ended December 31, 2014.

A. $74,400. B. $73,000. C. $42,400. D. $41,000. E. $80,000.

58. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the EQUITY METHOD is applied. Compute Pell's income from Demers for the year ended December 31, 2015.

A. $90,400. B. $89,000. C. $50,400. D. $56,000. E. $96,000.

59. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the EQUITY METHOD is applied. Compute Pell's income from Demers for the year ended December 31, 2016.

A. $50,400. B. $56,000. C. $98,400. D. $97,000. E. $104,000.

60. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the EQUITY METHOD is applied. Compute the non-controlling interest in the net income of Demers at December 31, 2014.

A. $20,000. B. $12,000. C. $18,600. D. $10,600. E. $14,400.

61. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the EQUITY METHOD is applied. Compute the non-controlling interest in the net income of Demers at December 31, 2015.

A. $18,400. B. $14,400. C. $22,600. D. $24,000. E. $12,600.

62. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the EQUITY METHOD is applied. Compute the non-controlling interest in the net income of Demers at December 31, 2016.

A. $20,400. B. $24,600. C. $26,000. D. $14,000. E. $12,600.

63. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the EQUITY METHOD is applied. Compute the non-controlling interest in Demers at December 31, 2014.

A. $135,600. B. $137,000. C. $112,000. D. $100,000. E. $118,600.

64. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the EQUITY METHOD is applied. Compute the non-controlling interest in Demers at December 31, 2015.

A. $107,000. B. $126,000. C. $109,200. D. $149,600. E. $148,200.

65. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the EQUITY METHOD is applied. Compute the non-controlling interest in Demers at December 31, 2016.

A. $107,800. B. $140,000. C. $165,200. D. $160,800. E. $146,800.

66. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the INITIAL VALUE is applied. Compute Pell's investment in Demers at December 31, 2014.

A. $500,000. B. $574,400. C. $625,000. D. $542,400. E. $532,000.

67. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the INITIAL VALUE is applied. Compute Pell's investment in Demers at December 31, 2015.

A. $625,000. B. $664,800. C. $592,400. D. $500,000. E. $572,000.

68. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the INITIAL VALUE is applied. Compute Pell's investment in Demers at December 31, 2016.

A. $592,400. B. $500,000. C. $625,000. D. $676,000. E. $620,000.

69. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the INITIAL VALUE is applied. How much does Pell record as Income from Demers for the year ended December 31, 2014?

A. $32,000. B. $74,400. C. $73,000. D. $42,400. E. $41,000.

70. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the INITIAL VALUE is applied. How much does Pell record as Income from Demers for the year ended December 31, 2015?

A. $90,400. B. $40,000. C. $89,000. D. $50,400. E. $56,000.

71. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the INITIAL VALUE is applied. How much does Pell record as Income from Demers for the year ended December 31, 2016?

A. $48,000. B. $56,000. C. $98,400. D. $97,000. E. $50,400.

72. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the INITIAL VALUE is applied. Compute the non-controlling interest in the net income of Demers at December 31, 2014.

A. $12,000. B. $10,600. C. $18,600. D. $20,000. E. $14,400.

73. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the INITIAL VALUE is applied. Compute the non-controlling interest in the net income of Demers at December 31, 2015.

A. $18,400. B. $14,000. C. $22,600. D. $24,000. E. $12,600.

74. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the INITIAL VALUE is applied. Compute the non-controlling interest in the net income of Demers at December 31, 2016.

A. $24,600. B. $14,000. C. $26,000. D. $20,400. E. $12,600.

75. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the INITIAL VALUE is applied. Compute the non-controlling interest in Demers at December 31, 2014.

A. $135,600. B. $80,000. C. $117,000. D. $100,000. E. $110,600.

76. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the INITIAL VALUE is applied. Compute the non-controlling interest in Demers at December 31, 2015.

A. $126,000. B. $106,000. C. $109,200. D. $149,600. E. $148,200.

77. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the INITIAL VALUE is applied. Compute the non-controlling interest in Demers at December 31, 2016.

A. $107,800. B. $140,000. C. $80,000. D. $50,000. E. $160,800.

78. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the PARTIAL EQUITY method is applied. Compute Pell's investment in Demers at December 31, 2014.

A. $625,000. B. $574,400. C. $548,000. D. $542,400. E. $532,000.

79. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the PARTIAL EQUITY method is applied. Compute Pell's investment in Demers at December 31, 2015.

A. $676,000. B. $629,000. C. $580,000. D. $604,000. E. $572,000.

80. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the PARTIAL EQUITY method is applied. Compute Pell's investment in Demers at December 31, 2016.

A. $780,000. B. $660,000. C. $785,000. D. $676,000. E. $620,000.

81. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the PARTIAL EQUITY method is applied. How much does Pell record as Income from Demers for the year ended December 31, 2014?

A. $80,000. B. $74,400. C. $73,000. D. $42,400. E. $41,000.

82. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the PARTIAL EQUITY method is applied. How much does Pell record as income from Demers for the year ended December 31, 2015?

A. $90,400. B. $89,000. C. $50,400. D. $96,000. E. $56,000.

83. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the PARTIAL EQUITY method is applied. How much does Pell record as income from Demers for the year ended December 31, 2016?

A. $98,400. B. $56,000. C. $104,000. D. $97,000. E. $50,400.

84. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the PARTIAL EQUITY method is applied. Compute the non-controlling interest in the net income of Demers at December 31, 2014.

A. $20,000. B. $12,000. C. $18,600. D. $10,600. E. $14,400.

85. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the PARTIAL EQUITY method is applied. Compute the non-controlling interest in the net income of Demers at December 31, 2015.

A. $18,400. B. $14,000. C. $22,600. D. $24,000. E. $12,600.

86. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the PARTIAL EQUITY method is applied. Compute the non-controlling interest in the net income of Demers at December 31, 2016.

A. $20,400. B. $26,000. C. $24,600. D. $14,000. E. $12,600.

87. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the PARTIAL EQUITY method is applied. Compute the non-controlling interest in Demers at December 31, 2014.

A. $135,600. B. $114,000. C. $112,000. D. $100,000. E. $110,600.

88. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the PARTIAL EQUITY method is applied. Compute the non-controlling interest in Demers at December 31, 2015.

A. $124,000. B. $126,000. C. $109,200. D. $149,600. E. $148,200.

89. Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the PARTIAL EQUITY method is applied. Compute the non-controlling interest in Demers at December 31, 2016.

A. $107,800. B. $140,000. C. $80,000. D. $160,800. E. $146,800.

90. Parsons Company acquired 90% of Roxy Company several years ago and recorded goodwill of $200,000 at that date. During 2015 an analysis of the fair value of Roxy's assets determined an impairment of goodwill in the amount of $50,000. At what amount would consolidated goodwill be reported for 2015?

A. $150,000. B. $200,000. C. $50,000. D. $0. E. $135,000.

91. Parsons Company acquired 90% of Roxy Company several years ago and recorded goodwill of $200,000 at that date. During 2015 an analysis of the fair value of Roxy's assets determined an impairment of goodwill in the amount of $50,000. What journal entry would be made by Parsons regarding the impairment of goodwill?

A. Journal entry A. B. Journal entry B. C. Journal entry C. D. Journal entry D. E. Journal entry E.

92. In comparing U.S. GAAP and international financial reporting standards (IFRS) with regard to a basis for measurement of a non-controlling interest, which of the following is true?

A. U.S. GAAP requires acquisition-date fair value measurement and IFRS requires the acquiree's identifiable net asset fair value measurement. B. U.S. GAAP and IFRS both require acquisition-date fair value measurement. C. U.S. GAAP and IFRS both require the acquiree's identifiable net asset fair value measurement. D. U.S. GAAP requires acquisition-date fair value measurement, but IFRS allows an option for acquisition-date fair value measurement. E. U.S. GAAP and IFRS both apportion goodwill to the parent only.

Essay Questions

93. Where should a non-controlling interest appear on a consolidated balance sheet?

94. What is preacquisition income?

95. Beta Corp. owns less than one hundred percent of the voting common stock of Shedds Co. Under what conditions will Beta be required to prepare consolidated financial statements?

96. Where may a non-controlling interest be presented in a consolidated balance sheet?

97. How would you determine the amount of goodwill to be recognized at date of acquisition when there is a non-controlling interest present?

98. How is a non-controlling interest in the net income of an entity reported in the income statement?

99. One company buys a controlling interest in another company on April 1. How should the preacquisition subsidiary revenues and expenses be handled in the consolidated balances for the year of acquisition?

100.Prevatt, Inc. owns 80% of Franklin Company. During the current year, a portion of the investment in Franklin is sold. Prior to recording the sale, Prevatt adjusts the carrying value of its investment. What is the purpose of the adjustment?

101.How does a parent company account for the sale of a portion of an investment in a subsidiary?

Short Answer Questions

102.Alonzo Co. acquired 60% of Beazley Corp. by paying $240,000 cash. There is no active trading market for Beazley Corp. At the time of the acquisition, the book value of Beazley's net assets was $300,000.

Required: What amount should have been assigned to the non-controlling interest immediately after the combination?

103.Tosco Co. paid $540,000 for 80% of the stock of Martz Co. when the book value of Martz's net assets was $600,000. For all of Martz's assets and liabilities, book value and fair value were approximately equal.

Required: Using the acquisition method, what amount of goodwill should appear in a consolidated balance sheet prepared immediately after the combination?

104.On January 1, 2015, Elva Corp. paid $750,000 for 80% of Fenton Co. when the book value of Fenton's net assets was $800,000. Fenton owned a building with a fair value of $150,000 and a book value of $120,000.

Required: At what amount would the building appear on a consolidated balance sheet prepared immediately after the combination, under the acquisition method of accounting for business combinations?

105.Pennant Corp. owns 70% of the common stock of Scarvens Co. Scarvens' revenues for 2015 totaled $200,000.

Required: What amount of Scarvens' revenues would be included in the consolidated revenues under the acquisition method of accounting for business combinations?

106.Caldwell Inc. acquired 65% of Club Corp. for $2,600,000. Club owned a building and equipment with ten-year useful lives. The book value of these assets was $830,000, and the fair value was $950,000. For Club's other assets and liabilities, book value was equal to fair value. The total fair value of Club's net assets was $3,500,000. Using the acquisition method, determine the amount of goodwill associated with Caldwell's purchase of Club.

107.Caldwell Inc. acquired 65% of Club Corp. for $2,600,000. Club owned a building and equipment with ten-year useful lives. The book value of these assets was $830,000, and the fair value was $950,000. For Club's other assets and liabilities, book value was equal to fair value. The total fair value of Club's net assets was $3,500,000. Determine the amount of the non-controlling interest as of the date of the acquisition.

108.On January 1, 2014, Glenville Co. acquired an 80% interest in Acron Corp. for $500,000. There is no active trading market for Acron's stock. The fair value of Acron's net assets was $600,000 and Glenville accounts for its interest using the acquisition method. Determine the amount of goodwill to be recognized in this acquisition.

109.On January 1, 2014, Glenville Co. acquired an 80% interest in Acron Corp. for $500,000. There is no active trading market for Acron's stock. The fair value of Acron's net assets was $600,000 and Glenville accounts for its interest using the acquisition method. Determine the value assigned to the non-controlling interest as of the date of the acquisition.

110.On January 1, 2014, Jannison Inc. acquired 90% of Techron Co. by paying $477,000 cash. There is no active trading market for Techron stock. Techron Co. reported a Common Stock account balance of $140,000 and Retained Earnings of $280,000 at that date. The fair value of Techron Co. was appraised at $530,000. The total annual amortization was $11,000 as a result of this transaction. The subsidiary earned $98,000 in 2014 and $126,000 in 2015 with dividend payments of $42,000 each year. Without regard for this investment, Jannison had income of $308,000 in 2014 and $364,000 in 2015. Use the economic unit concept to account for this acquisition. Prepare a proper presentation of consolidated net income for 2014.

111.On January 1, 2014, Jannison Inc. acquired 90% of Techron Co. by paying $477,000 cash. There is no active trading market for Techron stock. Techron Co. reported a Common Stock account balance of $140,000 and Retained Earnings of $280,000 at that date. The fair value of Techron Co. was appraised at $530,000. The total annual amortization was $11,000 as a result of this transaction. The subsidiary earned $98,000 in 2014 and $126,000 in 2015 with dividend payments of $42,000 each year. Without regard for this investment, Jannison had income of $308,000 in 2014 and $364,000 in 2015. Use the economic unit concept to account for this acquisition. Prepare a proper presentation of consolidated net income for 2015.

112.On January 1, 2014, Jannison Inc. acquired 90% of Techron Co. by paying $477,000 cash. There is no active trading market for Techron stock. Techron Co. reported a Common Stock account balance of $140,000 and Retained Earnings of $280,000 at that date. The fair value of Techron Co. was appraised at $530,000. The total annual amortization was $11,000 as a result of this transaction. The subsidiary earned $98,000 in 2014 and $126,000 in 2015 with dividend payments of $42,000 each year. Without regard for this investment, Jannison had income of $308,000 in 2014 and $364,000 in 2015. Use the economic unit concept to account for this acquisition. What is the non-controlling interest balance as of December 31, 2015?

113.On January 1, 2013, Vacker Co. acquired 70% of Carper Inc. by paying $650,000. This included a $20,000 control premium. Carper reported common stock on that date of $420,000 with retained earnings of $252,000. A building was undervalued in the company's financial records by $28,000. This building had a ten-year remaining life. Copyrights of $80,000 were to be recognized and amortized over 20 years. Carper earned income and paid cash dividends as follows:

On December 31, 2015, Vacker owed $30,800 to Carper. There have been no changes in Carper's common stock account since the acquisition.

Required: If the equity method had been applied by Vacker for this acquisition, what were the consolidation entries needed as of December 31, 2015?

114.On January 1, 2015, John Doe Enterprises (JDE) acquired a 55% interest in Bubba Manufacturing, Inc. (BMI). JDE paid for the transaction with $3 million cash and 500,000 shares of JDE common stock (par value $1.00 per share). At the time of the acquisition, BMI's book value was $16,970,000. On January 1, JDE stock had a market value of $14.90 per share and there was no control premium in this transaction. Any consideration transferred over book value is assigned to goodwill. BMI had the following balances on January 1, 2015.

For internal reporting purposes, JDE employed the equity method to account for this investment. Prepare a schedule to determine goodwill, and the amortization and allocation amounts.

115.On January 1, 2015, John Doe Enterprises (JDE) acquired a 55% interest in Bubba Manufacturing, Inc. (BMI). JDE paid for the transaction with $3 million cash and 500,000 shares of JDE common stock (par value $1.00 per share). At the time of the acquisition, BMI's book value was $16,970,000. On January 1, JDE stock had a market value of $14.90 per share and there was no control premium in this transaction. Any consideration transferred over book value is assigned to goodwill. BMI had the following balances on January 1, 2015.

For internal reporting purposes, JDE employed the equity method to account for this investment. The following account balances are for the year ending December 31, 2015 for both companies.

Required: Prepare a consolidation worksheet for this business combination. Assume goodwill has been reviewed and there is no goodwill impairment.

116.McLaughlin, Inc. acquires 70 percent of Ellis Corporation on September 1, 2014, and an additional 10 percent on November 1, 2015. Annual amortization of $8,400 attributed to the controlling interest relates to the first acquisition. Ellis reports the following figures for 2015:

Without regard for this investment, McLaughlin earns $480,000 in net income ($840,000 revenues less $360,000 expenses; incurred evenly through the year) during 2015. Required: Prepare a schedule of consolidated net income and apportionment to noncontrolling and controlling interests for 2015.

117.Select True (T) or False (F) for each of the following statements: _____ 1. A parent will recognize a gain or loss if it sells a portion of its investment in a subsidiary and maintains control after the sale. _____ 2. A parent sells a portion of its investment in a subsidiary and no longer maintains control. This sale of shares represents a remeasurement event for the investee. _____ 3. International financial reporting standards (IFRS) allow an option to value the noncontrolling interest with goodwill or to value the non-controlling interest without goodwill. _____ 4. Consolidated net income represents the combined net income of the parent and subsidiary after subtracting the non-controlling interest in the net income of the subsidiary. _____ 5. The total acquisition-date fair value of an acquired firm is the sum of the fair value of the controlling interest and the fair value of the non-controlling interest. _____ 6. When control of a subsidiary is acquired on a date other than the first day of a fiscal year, excess amortization expenses are pro-rated to include only the post-acquisition period. _____ 7. For a mid-year acquisition following an equity method investment of the same company, the consolidated income statement will report consolidated revenues and expenses for the entire year. _____ 8. In a step acquisition where the parent previously held a non-controlling interest in the acquired firm, the parent remeasures the prior interest to fair value. _____ 9. When a parent has control over a subsidiary with less than 100 percent ownership, and thereafter increases its ownership, the parent remeasures the prior interest to fair value.

Chapter 04 Consolidated Financial Statements and Outside Ownership Answer Key

Multiple Choice Questions

For business combinations involving less than 100 percent ownership, the acquirer recognizes and measures all of the following at the acquisition date except:

A. $52,500. B. $70,000. C. $75,000. D. $92,500. E. $100,000. $100,000 FV of Land at Acquisition

When Jolt Co. acquired 75% of the common stock of Yelts Corp., Yelts owned land with a book value of $70,000 and a fair value of $100,000. What is the total amount of excess land allocation at the acquisition date?

A. $0. B. $30,000. C. $22,500. D. $25,000. E. $17,500. FV $100,000 - BV $70,000 = $30,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 04-01 Understand that complete ownership is not a prerequisite for the formation of a business combination. Learning Objective: 04-05 Identify and calculate the four noncontrolling interest figures that must be included within the consolidation process and prepare a consolidation worksheet in the presence of a noncontrolling interest.

When Jolt Co. acquired 75% of the common stock of Yelts Corp., Yelts owned land with a book value of $70,000 and a fair value of $100,000. What is the amount of excess land allocation attributed to the controlling interest at the acquisition date?

A. $0. B. $30,000. C. $22,500. D. $25,000. E. $17,500. FV - BV ($30,000) × .75 = $22,500

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 04-01 Understand that complete ownership is not a prerequisite for the formation of a business combination. Learning Objective: 04-05 Identify and calculate the four noncontrolling interest figures that must be included within the consolidation process and prepare a consolidation worksheet in the presence of a noncontrolling interest.

A. $0. B. $30,000. C. $22,500. D. $7,500. E. $17,500. FV - BV ($30,000) × .25 = $7,500

When Jolt Co. acquired 75% of the common stock of Yelts Corp., Yelts owned land with a book value of $70,000 and a fair value of $100,000. What amount should have been reported for the land in a consolidated balance sheet, assuming the investment was obtained prior to the date the purchase method of accounting for new business combinations was discontinued?

A. $70,000. B. $75,000. C. $85,000. D. $92,500. E. $100,000. BV $70,000 + FV Controlling Differential ($30,000 × .75) = $92,500

Perch Co. acquired 80% of the common stock of Float Corp. for $1,600,000. The fair value of Float's net assets was $1,850,000, and the book value was $1,500,000. The noncontrolling interest shares of Float Corp. are not actively traded. What is the total amount of goodwill recognized at the date of acquisition?

A. $150,000. B. $250,000. C. $0. D. $120,000. E. $170,000. FV $1,850,000 - FV of Stock at Purchase Price for 100% ($1,600,000/.80) $2,000,000 = ($150,000) Goodwill

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 04-03 Allocate goodwill acquired in a business combination across the controlling and noncontrolling interests.

Perch Co. acquired 80% of the common stock of Float Corp. for $1,600,000. The fair value of Float's net assets was $1,850,000, and the book value was $1,500,000. The noncontrolling interest shares of Float Corp. are not actively traded. What amount of goodwill should be attributed to Perch at the date of acquisition?

A. $150,000. B. $250,000. C. $0. D. $120,000. E. $170,000. (Purchase Price for 80%) $1,600,000 - (FV $1,850,000 × .80 = $1,480,000) = $120,000

Perch Co. acquired 80% of the common stock of Float Corp. for $1,600,000. The fair value of Float's net assets was $1,850,000, and the book value was $1,500,000. The noncontrolling interest shares of Float Corp. are not actively traded. What amount of goodwill should be attributed to the non-controlling interest at the date of acquisition?

A. $0. B. $20,000. C. $30,000. D. $100,000. E. $120,000. $150,000 Goodwill × .20 = $30,000 to Non-Controlling Interest

10.

Perch Co. acquired 80% of the common stock of Float Corp. for $1,600,000. The fair value of Float's net assets was $1,850,000, and the book value was $1,500,000. The noncontrolling interest shares of Float Corp. are not actively traded. What is the dollar amount of non-controlling interest that should appear in a consolidated balance sheet prepared at the date of acquisition?

A. $350,000. B. $300,000. C. $400,000. D. $370,000. E. $0. FV of Stock at Purchase Price for 100% ($1,600,000/.80) $2,000,000 × .20 = $400,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 04-05 Identify and calculate the four noncontrolling interest figures that must be included within the consolidation process and prepare a consolidation worksheet in the presence of a noncontrolling interest.

11.

Perch Co. acquired 80% of the common stock of Float Corp. for $1,600,000. The fair value of Float's net assets was $1,850,000, and the book value was $1,500,000. The noncontrolling interest shares of Float Corp. are not actively traded. What is the dollar amount of Float Corp.'s net assets that would be represented in a consolidated balance sheet prepared at the date of acquisition?

A. $1,600,000. B. $1,480,000. C. $1,200,000. D. $1,780,000. E. $1,850,000. FV of Assets Acquired = $1,850,000

12.

Perch Co. acquired 80% of the common stock of Float Corp. for $1,600,000. The fair value of Float's net assets was $1,850,000, and the book value was $1,500,000. The noncontrolling interest shares of Float Corp. are not actively traded. What is the dollar amount of fair value over book value differences attributed to Perch at the date of acquisition?

A. $120,000. B. $150,000. C. $280,000. D. $350,000. E. $370,000. FV $1,850,000 - BV $1,500,000 = $350,000 × .80 = $280,000

13.

Femur Co. acquired 70% of the voting common stock of Harbor Corp. on January 1, 2014. During 2014, Harbor had revenues of $2,500,000 and expenses of $2,000,000. The amortization of excess cost allocations totaled $60,000 in 2014. The non-controlling interest's share of the earnings of Harbor Corp. is calculated to be

A. $132,000. B. $150,000. C. $168,000. D. $160,000. E. $0. Revenue $2,500,000 - Expenses $2,000,000 = $500,000 - $60,000 = $440,000 × .30 = $132,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 04-04 Demonstrate the computation and allocation of consolidated net income in the presence of a noncontrolling interest.

14.

Femur Co. acquired 70% of the voting common stock of Harbor Corp. on January 1, 2014. During 2014, Harbor had revenues of $2,500,000 and expenses of $2,000,000. The amortization of excess cost allocations totaled $60,000 in 2014. What is the effect of including Harbor in consolidated net income for 2014?

A. $350,000. B. $308,000. C. $500,000. D. $440,000. E. $290,000. Revenue $2,500,000 - Expenses $2,000,000 = $500,000 - $60,000 = $440,000

15.

Denber Co. acquired 60% of the common stock of Kailey Corp. on September 1, 2014. For 2014, Kailey reported revenues of $810,000 and expenses of $630,000, all reflected evenly throughout the year. The annual amount of amortization related to this acquisition was $15,000. In consolidation, the total amount of expenses related to Kailey, and to Denber's acquisition of Kailey, for 2014 is determined to be

A. $153,750. B. $161,250. C. $205,000. D. $210,000. E. $215,000.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 04-08 Understand the impact on consolidated financial statements of a midyear acquisition.

16.

Denber Co. acquired 60% of the common stock of Kailey Corp. on September 1, 2014. For 2014, Kailey reported revenues of $810,000 and expenses of $630,000, all reflected evenly throughout the year. The annual amount of amortization related to this acquisition was $15,000. What is the effect of including Kailey in consolidated net income for 2014?

A. $31,000. B. $33,000. C. $55,000. D. $60,000. E. $39,000. Revenue $810,000 - Expenses $630,000 = Income $180,000 × 4/12 = $60,000 - Annual Amortization ($15,000 × 4/12) = $55,000

17.

Denber Co. acquired 60% of the common stock of Kailey Corp. on September 1, 2014. For 2014, Kailey reported revenues of $810,000 and expenses of $630,000, all reflected evenly throughout the year. The annual amount of amortization related to this acquisition was $15,000. What is the amount of net income to the controlling interest for 2014?

A. $31,000. B. $33,000. C. $55,000. D. $60,000. E. $39,000. Revenue $810,000 - Expenses $630,000 = Income $180,000 × 4/12 = $60,000 - Annual Amortization ($15,000 × 4/12) = $55,000 × .60 = $33,000

18.

Denber Co. acquired 60% of the common stock of Kailey Corp. on September 1, 2014. For 2014, Kailey reported revenues of $810,000 and expenses of $630,000, all reflected evenly throughout the year. The annual amount of amortization related to this acquisition was $15,000. What is the amount of the non-controlling interest's share of Kailey's income for 2014?

A. $22,000. B. $24,000. C. $48,000. D. $66,000. E. $72,000. Total Income for September-December = $55,000 - Controlling Interest Portion $33,000 = $22,000

19.

MacHeath Inc. bought 60% of the outstanding common stock of Nomes Inc. in an acquisition business combination that resulted in the recognition of goodwill. Nomes owned a piece of land that cost $250,000 but was worth $600,000 at the date of acquisition. What value would be attributed to this land in a consolidated balance sheet at the date of acquisition?

A. $250,000. B. $150,000. C. $600,000. D. $360,000. E. $460,000. FV of the Land $600,000

20.

Kordel Inc. acquired 75% of the outstanding common stock of Raxston Corp. Raxston currently owes Kordel $500,000 for inventory acquired over the past few months. In preparing consolidated financial statements, what amount of this debt should be eliminated?

A. $375,000 B. $125,000 C. $300,000 D. $500,000 E. $0 BV & FV of the Existing Receivable $500,000

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 04-05 Identify and calculate the four noncontrolling interest figures that must be included within the consolidation process and prepare a consolidation worksheet in the presence of a noncontrolling interest.

21.

Royce Co. acquired 60% of Park Co. for $420,000 on December 31, 2014 when Park's book value was $560,000. The Royce stock was not actively traded. On the date of acquisition, Park had equipment (with a ten-year life) that was undervalued in the financial records by $140,000. One year later, the following selected figures were reported by the two companies. Additionally, no dividends have been paid.

What is consolidated net income for 2015 attributable to Royce's controlling interest?

A. $686,000. B. $560,000. C. $644,000. D. $635,600. E. $691,600. [Parent's Income ($1,260,000 - $700,000 = $560,000)] + [Sub's Income ($560,000 $420,000) × .60 = $84,000] - [Excess Equipment Amortization for 2015 ($140,000/10) × .60 = $8,400] = $635,600

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 04-04 Demonstrate the computation and allocation of consolidated net income in the presence of a noncontrolling interest.

22.

A. $56,000 and $280,000. B. $50,400 and $218,400. C. $56,000 and $224,000. D. $56,000 and $336,000. E. $50,400 and $330,400. [Sub's Income ($560,000 - $420,000) × .40 = $56,000] - [Excess Equipment Amortization for 2015 ($140,000/10) × .40 = $5,600] = $50,400 [Non-Controlling Interest at Acquisition (FV $700,000 × .40) = $280,000] + [NonControlling Interest 2015 Income $56,000] - [Excess Equipment Amortization ($140,000/10) × .40] = $330,400

AACSB: Analytic

AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 04-04 Demonstrate the computation and allocation of consolidated net income in the presence of a noncontrolling interest. Learning Objective: 04-05 Identify and calculate the four noncontrolling interest figures that must be included within the consolidation process and prepare a consolidation worksheet in the presence of a noncontrolling interest.

23.

What is the consolidated balance of the Equipment account at December 31, 2015?

A. $644,400. B. $784,000. C. $719,600. D. $770,000. E. $775,600. [Parent's Equipment $364,000] + [Sub's Equipment $280,000] + [Excess Amortization Remaining $140,000 - $14,000] = $770,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 04-05 Identify and calculate the four noncontrolling interest figures that must be included within the consolidation process and prepare a consolidation worksheet in the presence of a noncontrolling interest.

24.

On January 1, 2014, Palk Corp. and Spraz Corp. had condensed balance sheets as follows:

A. $127,000. B. $129,800. C. $143,800. D. $148,000. E. $135,400. [Parent's Current Assets $99,000] + [Sub's Current Assets $28,000] + [Excess Consideration to Inventory ($105,000 - $70,000 = $35,000 × .60) $21,000] = $148,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 04-01 Understand that complete ownership is not a prerequisite for the formation of a business 4-116 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

combination.

25.

On January 1, 2014, Palk Corp. and Spraz Corp. had condensed balance sheets as follows:

A. $195,000. B. $192,200. C. $186,600. D. $181,000. E. $169,800. [Parent's Non-Current Assets $125,000] + [Sub's Non-Current Assets $56,000] + [Excess Consideration to Goodwill ($105,000 - $70,000 = $35,000 × .40) $14,000] = $195,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply 4-117 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 2 Medium Learning Objective: 04-01 Understand that complete ownership is not a prerequisite for the formation of a business combination.

26.

On January 1, 2014, Palk Corp. and Spraz Corp. had condensed balance sheets as follows:

A. $53,200. B. $56,000. C. $64,400. D. $42,000. E. $70,000. [Parent's Current Liabilities $42,000] + [Sub's Current Liabilities $14,000] + [Current Portion of Acquisition Loan ($84,000/10) = $8,400] = $64,400

AACSB: Analytic AICPA BB: Critical Thinking 4-118 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 04-01 Understand that complete ownership is not a prerequisite for the formation of a business combination.

27.

On January 1, 2014, Palk Corp. and Spraz Corp. had condensed balance sheets as follows:

A. $112,000. B. $133,000. C. $168,000. D. $182,000. E. $203,000. Parent's Equity $112,000 + Non-Controlling Interest $21,000 = $133,000

AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 04-06 Identify appropriate placements for the components of the noncontrolling interest in consolidated financial statements.

28.

In measuring non-controlling interest at the date of acquisition, which of the following would not be indicative of the value attributed to the non-controlling interest?

29.

When a parent uses the equity method throughout the year to account for its investment in an acquired subsidiary, which of the following statements is false before making adjustments on the consolidated worksheet?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-05 Identify and calculate the four noncontrolling interest figures that must be included within the consolidation process and prepare a consolidation worksheet in the presence of a noncontrolling interest.

30.

When a parent uses the initial value method throughout the year to account for its investment in an acquired subsidiary, which of the following statements is true before making adjustments on the consolidated worksheet?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand

Difficulty: 2 Medium Learning Objective: 04-05 Identify and calculate the four noncontrolling interest figures that must be included within the consolidation process and prepare a consolidation worksheet in the presence of a noncontrolling interest.

31.

When a parent uses the partial equity method throughout the year to account for its investment in an acquired subsidiary, which of the following statements is false before making adjustments on the consolidated worksheet?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-05 Identify and calculate the four noncontrolling interest figures that must be included within the consolidation process and prepare a consolidation worksheet in the presence of a noncontrolling interest.

32.

In a step acquisition, which of the following statements is false?

33.

Which of the following statements is false regarding multiple acquisitions of a subsidiary's existing common stock?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation 4-123 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-09 Understand the impact on consolidated financial statements when a step acquisition has taken place.

34.

When a subsidiary is acquired sometime after the first day of the fiscal year, which of the following statements is true?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-08 Understand the impact on consolidated financial statements of a midyear acquisition.

35.

When consolidating a subsidiary that was acquired on a date other than the first day of the fiscal year, which of the following statements is true in the presentation of consolidated financial statements?

36.

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

37.

All of the following statements regarding the sale of subsidiary shares are true except which of the following?

38.

Which of the following statements is true regarding the sale of subsidiary shares when using the acquisition method for accounting for business combinations?

AACSB: Reflective thinking

AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 04-10 Record the sale of a subsidiary (or a portion of its shares).

39.

Jax Company uses the acquisition method for accounting for its investment in Saxton Company. Jax sells some of its shares of Saxton such that neither control nor significant influence exists. Which of the following statements is true?

40.

Keefe Inc, a calendar-year corporation, acquires 70% of George Company on September 1, 2014, and an additional 10% on January 1, 2015. Total annual amortization of $6,000 relates to the first acquisition. George reports the following figures for 2015:

A. $380,000. B. $375,200. C. $375,800. D. $376,000. E. $400,000.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 04-08 Understand the impact on consolidated financial statements of a midyear acquisition.

41.

McGuire Company acquired 90 percent of Hogan Company on January 1, 2014, for $234,000 cash. This amount is reflective of Hogan's total fair value. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following:

A. $23,400. B. $24,000. C. $24,900. D. $26,000. E. $20,000. $234,000/.90 = $260,000 × .10 = $26,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 04-02 Describe the valuation principles underlying the acquisition method of accounting for the noncontrolling interest.

42.

A. $2,000 increase. B. $2,000 decrease. C. $1,800 increase. D. $1,800 decrease. E. No change. FV $8,000 - BV $10,000 = <$2,000> Reduction

43.

A. $1,620 increase. B. $1,620 decrease. C. $1,800 increase. D. $1,800 decrease. E. No adjustment is necessary. <$2,000> Reduction - 2014 Excess Amortization of <$200> = <$1,800> Reduction

44.

A. $1,440 increase. B. $1,440 decrease. C. $1,600 increase. D. $1,600 decrease. E. No adjustment is necessary. <$1,800> 2014 BV - 2015 Excess Amortization of <$200> = <$1,600> Reduction

45.

A. $4,000 increase. B. $4,000 decrease. C. $3,600 increase. D. $3,600 decrease. E. No adjustment is necessary. FV $18,000 - BV $14,000 = Increase $4,000

46.

A. $3,000 increase. B. $3,000 decrease. C. $2,700 increase. D. $2,700 decrease. E. No adjustment is necessary. Fair Value Differential $4,000 - Amortization for 2014 $1,000 = $3,000 Increase

47.

A. $2,000 increase. B. $2,000 decrease. C. $1,800 increase. D. $1,800 decrease. E. No adjustment is necessary. Fair Value Differential $4,000 - Amortization for 2014 & 2015 $2,000 = $2,000 Increase

48.

A. $7,000 increase. B. $7,000 decrease. C. $6,300 increase. D. $6,300 decrease. E. No adjustment is necessary. Fair Value Differential at Acquisition $7,000 - No Amortization = $7,000 Increase

49.

A. $8,000 decrease. B. $7,000 increase. C. $6,300 increase. D. $6,300 decrease. E. No adjustment is necessary. Fair Value Differential at Acquisition $7,000 - No Amortization = $7,000 Increase

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 04-05 Identify and calculate the four noncontrolling interest figures that must be included within the consolidation process and prepare a consolidation worksheet in the presence of a noncontrolling interest.

50.

A. $7,000 decrease. B. $7,000 increase. C. $6,300 increase. D. $6,300 decrease. E. No adjustment is necessary. Fair Value Differential at Acquisition $7,000 - No Amortization = $7,000 Increase

51.

A. $7,000. B. $6,300. C. $11,000. D. $9,900. E. No adjustment is necessary. BV Equity $240,000 - Fair Value Equity at Acquisition $260,000 = $20,000 - Identified Net FV Increase $9,000 (Blgs + Equipt + Land) = $11,000 Excess Attributed to Patent

52.

A. $5,600. B. $8,800. C. $7,000. D. $7,700. E. No adjustment is necessary. Attributed Fair Value Patent $11,000 - Amortization for 2014 $2,200 = $8,800

53.

A. $4,200. B. $5,500. C. $8,000. D. $6,600. E. No adjustment is necessary. Attributed Fair Value Patent $11,000 - Amortization for 2014 & 2015 $4,400 = $6,600

54.

Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014. Demers reported common stock of $300,000 and retained earnings of $210,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the EQUITY METHOD is applied. Compute Pell's investment account balance in Demers at December 31, 2014.

A. $580,000. B. $574,400. C. $548,000. D. $542,400. E. $541,000. Initial Investment $500,000 + Controlling Interest Income for 2014 ($100,000 × .80) Dividends for 2014 ($40,000 × .80) - Excess FV Annual Amortization ($7,000 × .80) = $542,400

55.

Assume the EQUITY METHOD is applied. Compute Pell's investment account balance in Demers at December 31, 2015.

A. $577,200. B. $604,000. C. $592,800. D. $632,800. E. $572,000. December 2014 Investment Balance $542,400 + Controlling Interest Income for 2015 ($120,000 × .80) - Dividends for 2015 ($50,000 × .80) - Excess FV Annual Amortization ($7,000 × .80) = $592,800

56.

Assume the EQUITY METHOD is applied. Compute Pell's investment account balance in Demers at December 31, 2016.

A. $639,000. B. $643,200. C. $763,200. D. $676,000. E. $620,000. December 2015 Investment Balance $592,800 + Controlling Interest Income for 2016 ($130,000 × .80) - Dividends for 2015 ($60,000 × .80) - Excess FV Annual Amortization ($7,000 × .80) = $643,200

57.

Assume the EQUITY METHOD is applied. Compute Pell's income from Demers for the year ended December 31, 2014.

A. $74,400. B. $73,000. C. $42,400. D. $41,000. E. $80,000. Controlling Interest Income for 2014 ($100,000 × .80) - Excess FV Annual Amortization ($7,000 × .80) = $74,400

58.

Assume the EQUITY METHOD is applied. Compute Pell's income from Demers for the year ended December 31, 2015.

A. $90,400. B. $89,000. C. $50,400. D. $56,000. E. $96,000. Controlling Interest Income for 2015 ($120,000 × .80) - Excess FV Annual Amortization ($7,000 × .80) = $90,400

59.

Assume the EQUITY METHOD is applied. Compute Pell's income from Demers for the year ended December 31, 2016.

A. $50,400. B. $56,000. C. $98,400. D. $97,000. E. $104,000. Controlling Interest Income for 2016 ($130,000 × .80) - Excess FV Annual Amortization ($7,000 × .80) = $98,400

60.

Assume the EQUITY METHOD is applied. Compute the non-controlling interest in the net income of Demers at December 31, 2014.

A. $20,000. B. $12,000. C. $18,600. D. $10,600. E. $14,400. Non-Controlling Interest Income for 2014 ($100,000 × .20) - Excess FV Annual Amortization ($7,000 × .20) = $18,600

61.

Assume the EQUITY METHOD is applied. Compute the non-controlling interest in the net income of Demers at December 31, 2015.

A. $18,400. B. $14,400. C. $22,600. D. $24,000. E. $12,600. Non-Controlling Interest Income for 2015 ($120,000 × .20) - Excess FV Annual Amortization ($7,000 × .20) = $22,600

62.

Assume the EQUITY METHOD is applied. Compute the non-controlling interest in the net income of Demers at December 31, 2016.

A. $20,400. B. $24,600. C. $26,000. D. $14,000. E. $12,600. Non-Controlling Interest Income for 2016 ($130,000 × .20) - Excess FV Annual Amortization ($7,000 × .20) = $24,600

63.

Assume the EQUITY METHOD is applied. Compute the non-controlling interest in Demers at December 31, 2014.

A. $135,600. B. $137,000. C. $112,000. D. $100,000. E. $118,600. Non-Controlling Interest at Acquisition $125,000 + Non-Controlling Interest Income for 2014 ($100,000 × .20) - Non-Controlling Dividends for 2014 ($40,000 × .20) - Excess FV Annual Amortization ($7,000 × .20) = $135,600

64.

Assume the EQUITY METHOD is applied. Compute the non-controlling interest in Demers at December 31, 2015.

A. $107,000. B. $126,000. C. $109,200. D. $149,600. E. $148,200. December 2014 Investment Balance $135,600 + Non-Controlling Interest Income for 2015 ($120,000 × .20) - Non-Controlling Dividends for 2015 ($50,000 × .20) - Excess FV Annual Amortization ($7,000 × .20) = $148,200

65.

Assume the EQUITY METHOD is applied. Compute the non-controlling interest in Demers at December 31, 2016.

A. $107,800. B. $140,000. C. $165,200. D. $160,800. E. $146,800. December 2015 Investment Balance $148,200 + Non-Controlling Interest Income for 2016 ($130,000 × .20) - Non-Controlling Dividends for 2016 ($60,000 × .20) - Excess FV Annual Amortization ($7,000 × .20) = $160,800

66.

Assume the INITIAL VALUE is applied. Compute Pell's investment in Demers at December 31, 2014.

A. $500,000. B. $574,400. C. $625,000. D. $542,400. E. $532,000. Initial Investment = $500,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 04-01 Understand that complete ownership is not a prerequisite for the formation of a business combination. Learning Objective: 04-05 Identify and calculate the four noncontrolling interest figures that must be included within the consolidation process and prepare a consolidation worksheet in the presence of a noncontrolling interest.

67.

Assume the INITIAL VALUE is applied. Compute Pell's investment in Demers at December 31, 2015.

A. $625,000. B. $664,800. C. $592,400. D. $500,000. E. $572,000. Initial Investment = $500,000

68.

Assume the INITIAL VALUE is applied. Compute Pell's investment in Demers at December 31, 2016.

A. $592,400. B. $500,000. C. $625,000. D. $676,000. E. $620,000. Initial Investment = $500,000

69.

Assume the INITIAL VALUE is applied. How much does Pell record as Income from Demers for the year ended December 31, 2014?

A. $32,000. B. $74,400. C. $73,000. D. $42,400. E. $41,000. 2014 Dividends $40,000 × .80 = $32,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 04-01 Understand that complete ownership is not a prerequisite for the formation of a business combination. Learning Objective: 04-04 Demonstrate the computation and allocation of consolidated net income in the presence of a noncontrolling interest.

70.

Assume the INITIAL VALUE is applied. How much does Pell record as Income from Demers for the year ended December 31, 2015?

A. $90,400. B. $40,000. C. $89,000. D. $50,400. E. $56,000. 2015 Dividends $50,000 × .80 = $40,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 04-01 Understand that complete ownership is not a prerequisite for the formation of a business combination. Learning Objective: 04-04 Demonstrate the computation and allocation of consolidated net income in the presence of a noncontrolling interest.

71.

Assume the INITIAL VALUE is applied. How much does Pell record as Income from Demers for the year ended December 31, 2016?

A. $48,000. B. $56,000. C. $98,400. D. $97,000. E. $50,400. 2016 Dividends $60,000 × .80 = $48,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 04-01 Understand that complete ownership is not a prerequisite for the formation of a business combination. Learning Objective: 04-04 Demonstrate the computation and allocation of consolidated net income in the presence of a noncontrolling interest.

72.

Assume the INITIAL VALUE is applied. Compute the non-controlling interest in the net income of Demers at December 31, 2014.

A. $12,000. B. $10,600. C. $18,600. D. $20,000. E. $14,400. Non-Controlling Interest Income for 2014 ($100,000 × .20) - Excess FV Annual Amortization ($7,000 × .20) = $18,600

73.

Assume the INITIAL VALUE is applied. Compute the non-controlling interest in the net income of Demers at December 31, 2015.

A. $18,400. B. $14,000. C. $22,600. D. $24,000. E. $12,600. Non-Controlling Interest Income for 2015 ($120,000 × .20) - Excess FV Annual Amortization ($7,000 × .20) = $22,600

74.

Assume the INITIAL VALUE is applied. Compute the non-controlling interest in the net income of Demers at December 31, 2016.

A. $24,600. B. $14,000. C. $26,000. D. $20,400. E. $12,600. Non-Controlling Interest Income for 2016 ($130,000 × .20) - Excess FV Annual Amortization ($7,000 × .20) = $24,600

75.

Assume the INITIAL VALUE is applied. Compute the non-controlling interest in Demers at December 31, 2014.

A. $135,600. B. $80,000. C. $117,000. D. $100,000. E. $110,600. Non-Controlling Interest at Acquisition $125,000 + Non-Controlling Interest Income for 2014 ($100,000 × .20) - Non-Controlling Dividends for 2014 ($40,000 × .20) - Excess FV Annual Amortization ($7,000 × .20) = $135,600

76.

Assume the INITIAL VALUE is applied. Compute the non-controlling interest in Demers at December 31, 2015.

A. $126,000. B. $106,000. C. $109,200. D. $149,600. E. $148,200. December 2014 Investment Balance $135,600 + Non-Controlling Interest Income for 2015 ($120,000 × .20) - Non-Controlling Dividends for 2015 ($50,000 × .20) - Excess FV Annual Amortization ($7,000 × .20) = $148,200

77.

Assume the INITIAL VALUE is applied. Compute the non-controlling interest in Demers at December 31, 2016.

A. $107,800. B. $140,000. C. $80,000. D. $50,000. E. $160,800. December 2015 Investment Balance $148,200 + Non-Controlling Interest Income for 2016 ($130,000 × .20) - Non-Controlling Dividends for 2016 ($60,000 × .20) - Excess FV Annual Amortization ($7,000 × .20) = $160,800

78.

Assume the PARTIAL EQUITY method is applied. Compute Pell's investment in Demers at December 31, 2014.

A. $625,000. B. $574,400. C. $548,000. D. $542,400. E. $532,000. Initial Investment $500,000 + Controlling Interest Income for 2014 ($100,000 × .80) Dividends for 2014 ($40,000 × .80) = $548,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 04-01 Understand that complete ownership is not a prerequisite for the formation of a business combination. Learning Objective: 04-05 Identify and calculate the four noncontrolling interest figures that must be included within the consolidation process and prepare a consolidation worksheet in the presence of a noncontrolling interest.

79.

Assume the PARTIAL EQUITY method is applied. Compute Pell's investment in Demers at December 31, 2015.

A. $676,000. B. $629,000. C. $580,000. D. $604,000. E. $572,000. December 2014 Investment Balance $548,000 + Controlling Interest Income for 2015 ($120,000 × .80) - Dividends for 2015 ($50,000 × .80) = $604,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 04-01 Understand that complete ownership is not a prerequisite for the formation of a business combination. Learning Objective: 04-05 Identify and calculate the four noncontrolling interest figures that must be included within the consolidation process and prepare a consolidation worksheet in the presence of a noncontrolling interest.

80.

Assume the PARTIAL EQUITY method is applied. Compute Pell's investment in Demers at December 31, 2016.

A. $780,000. B. $660,000. C. $785,000. D. $676,000. E. $620,000. December 2015 Investment Balance $604,000 + Controlling Interest Income for 2016 ($130,000 × .80) - Dividends for 2015 ($60,000 × .80) = $660,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 04-01 Understand that complete ownership is not a prerequisite for the formation of a business combination. Learning Objective: 04-05 Identify and calculate the four noncontrolling interest figures that must be included within the consolidation process and prepare a consolidation worksheet in the presence of a noncontrolling interest.

81.

Assume the PARTIAL EQUITY method is applied. How much does Pell record as Income from Demers for the year ended December 31, 2014?

A. $80,000. B. $74,400. C. $73,000. D. $42,400. E. $41,000. Controlling Interest Income for 2014 ($100,000 × .80) = $80,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 04-01 Understand that complete ownership is not a prerequisite for the formation of a business combination. Learning Objective: 04-04 Demonstrate the computation and allocation of consolidated net income in the presence of a noncontrolling interest.

82.

Assume the PARTIAL EQUITY method is applied. How much does Pell record as income from Demers for the year ended December 31, 2015?

A. $90,400. B. $89,000. C. $50,400. D. $96,000. E. $56,000. Controlling Interest Income for 2015 ($120,000 × .80) = $96,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 04-01 Understand that complete ownership is not a prerequisite for the formation of a business combination. Learning Objective: 04-04 Demonstrate the computation and allocation of consolidated net income in the presence of a noncontrolling interest.

83.

Assume the PARTIAL EQUITY method is applied. How much does Pell record as income from Demers for the year ended December 31, 2016?

A. $98,400. B. $56,000. C. $104,000. D. $97,000. E. $50,400. Controlling Interest Income for 2016 ($130,000 × .80) = $104,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 04-01 Understand that complete ownership is not a prerequisite for the formation of a business combination. Learning Objective: 04-04 Demonstrate the computation and allocation of consolidated net income in the presence of a noncontrolling interest.

84.

Assume the PARTIAL EQUITY method is applied. Compute the non-controlling interest in the net income of Demers at December 31, 2014.

A. $20,000. B. $12,000. C. $18,600. D. $10,600. E. $14,400. Non-Controlling Interest Income for 2014 ($100,000 × .20) - Excess FV Annual Amortization ($7,000 × .20) = $18,600

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 04-04 Demonstrate the computation and allocation of consolidated net income in the presence of a noncontrolling interest.

85.

Assume the PARTIAL EQUITY method is applied. Compute the non-controlling interest in the net income of Demers at December 31, 2015.

A. $18,400. B. $14,000. C. $22,600. D. $24,000. E. $12,600. Non-Controlling Interest Income for 2015 ($120,000 × .20) - Excess FV Annual Amortization ($7,000 × .20) = $22,600

86.

Assume the PARTIAL EQUITY method is applied. Compute the non-controlling interest in the net income of Demers at December 31, 2016.

A. $20,400. B. $26,000. C. $24,600. D. $14,000. E. $12,600. Non-Controlling Interest Income for 2016 ($130,000 × .20) - Excess FV Annual Amortization ($7,000 × .20) = $24,600

87.

Assume the PARTIAL EQUITY method is applied. Compute the non-controlling interest in Demers at December 31, 2014.

A. $135,600. B. $114,000. C. $112,000. D. $100,000. E. $110,600. Non-Controlling Interest at Acquisition $125,000 + Non-Controlling Interest Income for 2014 ($100,000 × .20) - Non-Controlling Dividends for 2014 ($40,000 × .20) - Excess FV Annual Amortization ($7,000 × .20) = $135,600

88.

Assume the PARTIAL EQUITY method is applied. Compute the non-controlling interest in Demers at December 31, 2015.

A. $124,000. B. $126,000. C. $109,200. D. $149,600. E. $148,200. December 2014 Investment Balance $135,600 + Non-Controlling Interest Income for 2015 ($120,000 × .20) - Non-Controlling Dividends for 2015 ($50,000 × .20) - Excess FV Annual Amortization ($7,000 × .20) = $148,200

89.

Assume the PARTIAL EQUITY method is applied. Compute the non-controlling interest in Demers at December 31, 2016.

A. $107,800. B. $140,000. C. $80,000. D. $160,800. E. $146,800. December 2015 Investment Balance $148,200 + Non-Controlling Interest Income for 2016 ($130,000 × .20) - Non-Controlling Dividends for 2016 ($60,000 × .20) - Excess FV Annual Amortization ($7,000 × .20) = $160,800

90.

Parsons Company acquired 90% of Roxy Company several years ago and recorded goodwill of $200,000 at that date. During 2015 an analysis of the fair value of Roxy's assets determined an impairment of goodwill in the amount of $50,000. At what amount would consolidated goodwill be reported for 2015?

A. $150,000. B. $200,000. C. $50,000. D. $0. E. $135,000. (Recorded Goodwill $200,000) - (2015 Goodwill Impairment $50,000) = $150,000 Reported Goodwill for 2015

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 04-05 Identify and calculate the four noncontrolling interest figures that must be included within the consolidation process and prepare a consolidation worksheet in the presence of a noncontrolling interest.

91.

Parsons Company acquired 90% of Roxy Company several years ago and recorded goodwill of $200,000 at that date. During 2015 an analysis of the fair value of Roxy's assets determined an impairment of goodwill in the amount of $50,000. What journal entry would be made by Parsons regarding the impairment of goodwill?

A. Journal entry A. B. Journal entry B. C. Journal entry C. D. Journal entry D. E. Journal entry E.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analyze Difficulty: 1 Easy Learning Objective: 04-05 Identify and calculate the four noncontrolling interest figures that must be included within the consolidation process and prepare a consolidation worksheet in the presence of a noncontrolling interest.

92.

In comparing U.S. GAAP and international financial reporting standards (IFRS) with regard to a basis for measurement of a non-controlling interest, which of the following is true?

Essay Questions

93.

Where should a non-controlling interest appear on a consolidated balance sheet?

The non-controlling interest should appear as a part of stockholders' equity where it would be clearly identified, labeled and distinguished from the parent's controlling interest in subsidiaries.

AACSB: Reflective thinking

AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-06 Identify appropriate placements for the components of the noncontrolling interest in consolidated financial statements.

94.

What is preacquisition income?

When a company acquires control of a subsidiary during a fiscal year, preacquisition income is the income attributed to the previous owners of the shares of the common stock for the portion of the year before the acquisition.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 04-08 Understand the impact on consolidated financial statements of a midyear acquisition.

95.

Beta Corp. owns less than one hundred percent of the voting common stock of Shedds Co. Under what conditions will Beta be required to prepare consolidated financial statements?

Beta will be required to prepare consolidated financial statements if it has control of Shedds. If Beta has more than 50% of the voting common stock of Shedds, it has control and must prepare consolidated financial statements. Occasionally, ownership of less than 50% of the voting common stock can confer control. In this situation, an argument can be made that the company with control should prepare consolidated financial statements, although such reporting is not currently required.

AACSB: Reflective thinking

AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-01 Understand that complete ownership is not a prerequisite for the formation of a business combination.

96.

Where may a non-controlling interest be presented in a consolidated balance sheet?

A non-controlling interest must be shown in the balance sheet as part of stockholders' equity. It may no longer be shown between liabilities and stockholders' equity or classified as neither.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 04-06 Identify appropriate placements for the components of the noncontrolling interest in consolidated financial statements.

97.

How would you determine the amount of goodwill to be recognized at date of acquisition when there is a non-controlling interest present?

The non-controlling interest fair value may be implied by the parent's consideration transferred or by a separate value calculation. The total acquisition fair value is then the sum of both parent and non-controlling interest shares. The fair value of the net assets acquired is apportioned to the parent and to the noncontrolling interest. Then, the difference between acquisition fair value and relative fair value of net assets acquired is goodwill attributed respectively to the parent and to the non-controlling interest.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 04-03 Allocate goodwill acquired in a business combination across the controlling and noncontrolling interests.

98.

How is a non-controlling interest in the net income of an entity reported in the income statement?

The non-controlling interest would appear as a clearly identifiable portion of consolidated net income such that the controlling portion plus the non-controlling portion equals the consolidated net income presented.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember

Difficulty: 2 Medium Learning Objective: 04-04 Demonstrate the computation and allocation of consolidated net income in the presence of a noncontrolling interest.

99.

One company buys a controlling interest in another company on April 1. How should the preacquisition subsidiary revenues and expenses be handled in the consolidated balances for the year of acquisition?

Only postacquisition revenues and expenses are included in consolidated totals. The noncontrolling interest is thereby viewed as beginning as of the acquisition date.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-08 Understand the impact on consolidated financial statements of a midyear acquisition.

100.

Prevatt, Inc. owns 80% of Franklin Company. During the current year, a portion of the investment in Franklin is sold. Prior to recording the sale, Prevatt adjusts the carrying value of its investment. What is the purpose of the adjustment?

If control is maintained after the sale, then the difference between the sales proceeds and the book value is an adjustment to the parent's owners' equity. If control is not maintained, then such difference is a gain or loss on sale of investment. In either situation, the carrying value of the investment should be on the equity method basis in order to calculate the proper entry for the sale. Therefore, if Prevatt adjusts the carrying value of its investment, it is in order to bring an initial value method or partial equity method investment basis to an equity method basis.

AACSB: Reflective thinking

AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-10 Record the sale of a subsidiary (or a portion of its shares).

101.

How does a parent company account for the sale of a portion of an investment in a subsidiary?

If control is maintained after the sale, then the difference between the sales proceeds and the book value is an adjustment to the parent's owners' equity (APIC). If control is not maintained, then such difference is a gain or loss on sale of investment. In either situation, the book value of the investment should be on the equity method basis in order to calculate the proper entry for the sale. Therefore, if the investment has been kept under the initial value or the partial equity method, the investor adjusts the book value of its investment in order to bring an initial value method or partial equity method investment basis to an equity method basis.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 04-10 Record the sale of a subsidiary (or a portion of its shares).

Short Answer Questions

102.

Alonzo Co. acquired 60% of Beazley Corp. by paying $240,000 cash. There is no active trading market for Beazley Corp. At the time of the acquisition, the book value of Beazley's net assets was $300,000.

Required: What amount should have been assigned to the non-controlling interest immediately after the combination?

103.

Tosco Co. paid $540,000 for 80% of the stock of Martz Co. when the book value of Martz's net assets was $600,000. For all of Martz's assets and liabilities, book value and fair value were approximately equal.

Required: Using the acquisition method, what amount of goodwill should appear in a consolidated balance sheet prepared immediately after the combination?

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 04-03 Allocate goodwill acquired in a business combination across the controlling and noncontrolling interests.

104.

On January 1, 2015, Elva Corp. paid $750,000 for 80% of Fenton Co. when the book value of Fenton's net assets was $800,000. Fenton owned a building with a fair value of $150,000 and a book value of $120,000.

Required: At what amount would the building appear on a consolidated balance sheet prepared immediately after the combination, under the acquisition method of accounting for business combinations?

105.

Pennant Corp. owns 70% of the common stock of Scarvens Co. Scarvens' revenues for 2015 totaled $200,000.

Required: What amount of Scarvens' revenues would be included in the consolidated revenues under the acquisition method of accounting for business combinations?

106.

Caldwell Inc. acquired 65% of Club Corp. for $2,600,000. Club owned a building and equipment with ten-year useful lives. The book value of these assets was $830,000, and the fair value was $950,000. For Club's other assets and liabilities, book value was equal to fair value. The total fair value of Club's net assets was $3,500,000. Using the acquisition method, determine the amount of goodwill associated with Caldwell's purchase of Club.

AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 04-03 Allocate goodwill acquired in a business combination across the controlling and noncontrolling interests.

107.

Caldwell Inc. acquired 65% of Club Corp. for $2,600,000. Club owned a building and equipment with ten-year useful lives. The book value of these assets was $830,000, and the fair value was $950,000. For Club's other assets and liabilities, book value was equal to fair value. The total fair value of Club's net assets was $3,500,000. Determine the amount of the non-controlling interest as of the date of the acquisition.

108.

On January 1, 2014, Glenville Co. acquired an 80% interest in Acron Corp. for $500,000. There is no active trading market for Acron's stock. The fair value of Acron's net assets was $600,000 and Glenville accounts for its interest using the acquisition method. Determine the amount of goodwill to be recognized in this acquisition.

109.

On January 1, 2014, Glenville Co. acquired an 80% interest in Acron Corp. for $500,000. There is no active trading market for Acron's stock. The fair value of Acron's net assets was $600,000 and Glenville accounts for its interest using the acquisition method. Determine the value assigned to the non-controlling interest as of the date of the acquisition.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy

Learning Objective: 04-03 Allocate goodwill acquired in a business combination across the controlling and noncontrolling interests.

110.

On January 1, 2014, Jannison Inc. acquired 90% of Techron Co. by paying $477,000 cash. There is no active trading market for Techron stock. Techron Co. reported a Common Stock account balance of $140,000 and Retained Earnings of $280,000 at that date. The fair value of Techron Co. was appraised at $530,000. The total annual amortization was $11,000 as a result of this transaction. The subsidiary earned $98,000 in 2014 and $126,000 in 2015 with dividend payments of $42,000 each year. Without regard for this investment, Jannison had income of $308,000 in 2014 and $364,000 in 2015. Use the economic unit concept to account for this acquisition. Prepare a proper presentation of consolidated net income for 2014.

111.

112.

On January 1, 2014, Jannison Inc. acquired 90% of Techron Co. by paying $477,000 cash. There is no active trading market for Techron stock. Techron Co. reported a Common Stock account balance of $140,000 and Retained Earnings of $280,000 at that date. The fair value of Techron Co. was appraised at $530,000. The total annual amortization was $11,000 as a result of this transaction. The subsidiary earned $98,000 in 2014 and $126,000 in 2015 with dividend payments of $42,000 each year. Without regard for this investment, Jannison had income of $308,000 in 2014 and $364,000 in 2015. Use the economic unit concept to account for this acquisition. What is the non-controlling interest balance as of December 31, 2015?

113.

On January 1, 2013, Vacker Co. acquired 70% of Carper Inc. by paying $650,000. This included a $20,000 control premium. Carper reported common stock on that date of $420,000 with retained earnings of $252,000. A building was undervalued in the company's financial records by $28,000. This building had a ten-year remaining life. Copyrights of $80,000 were to be recognized and amortized over 20 years. Carper earned income and paid cash dividends as follows:

On December 31, 2015, Vacker owed $30,800 to Carper. There have been no changes in Carper's common stock account since the acquisition.

Required: If the equity method had been applied by Vacker for this acquisition, what were the consolidation entries needed as of December 31, 2015?

From the acquisition value, $28,000 was allocated based on the fair value of the building. With a ten-year remaining life, amortization will be $2,800 per year of which $1,960 is attributed to the controlling interest. Copyright amortization would have been $4,000 per year of which $2,800 is attributed to the controlling interest.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 04-07 Determine the effect on consolidated financial statements of a control premium paid by the parent.

114.

On January 1, 2015, John Doe Enterprises (JDE) acquired a 55% interest in Bubba Manufacturing, Inc. (BMI). JDE paid for the transaction with $3 million cash and 500,000 shares of JDE common stock (par value $1.00 per share). At the time of the acquisition, BMI's book value was $16,970,000. On January 1, JDE stock had a market value of $14.90 per share and there was no control premium in this transaction. Any consideration transferred over book value is assigned to goodwill. BMI had the following balances on January 1, 2015.

For internal reporting purposes, JDE employed the equity method to account for this investment. Prepare a schedule to determine goodwill, and the amortization and allocation amounts.

115.

For internal reporting purposes, JDE employed the equity method to account for this investment. The following account balances are for the year ending December 31, 2015 for both companies.

Required: Prepare a consolidation worksheet for this business combination. Assume goodwill has been reviewed and there is no goodwill impairment.

Consolidation Worksheet for John Doe Enterprises and Bubba Manufacturing at 12/31/15.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 04-05 Identify and calculate the four noncontrolling interest figures that must be included within the consolidation process and prepare a consolidation worksheet in the presence of a noncontrolling interest.

116.

McLaughlin, Inc. acquires 70 percent of Ellis Corporation on September 1, 2014, and an additional 10 percent on November 1, 2015. Annual amortization of $8,400 attributed to the controlling interest relates to the first acquisition. Ellis reports the following figures for 2015:

*Amortization of $12,000 = original $8,400 for 70% grossed up to the 100% amount of $12,000.

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

Learning Objective: 04-09 Understand the impact on consolidated financial statements when a step acquisition has taken place.

117.

Select True (T) or False (F) for each of the following statements: _____ 1. A parent will recognize a gain or loss if it sells a portion of its investment in a subsidiary and maintains control after the sale. _____ 2. A parent sells a portion of its investment in a subsidiary and no longer maintains control. This sale of shares represents a remeasurement event for the investee. _____ 3. International financial reporting standards (IFRS) allow an option to value the non-controlling interest with goodwill or to value the non-controlling interest without goodwill. _____ 4. Consolidated net income represents the combined net income of the parent and subsidiary after subtracting the non-controlling interest in the net income of the subsidiary. _____ 5. The total acquisition-date fair value of an acquired firm is the sum of the fair value of the controlling interest and the fair value of the non-controlling interest. _____ 6. When control of a subsidiary is acquired on a date other than the first day of a fiscal year, excess amortization expenses are pro-rated to include only the postacquisition period. _____ 7. For a mid-year acquisition following an equity method investment of the same company, the consolidated income statement will report consolidated revenues and expenses for the entire year. _____ 8. In a step acquisition where the parent previously held a non-controlling interest in the acquired firm, the parent remeasures the prior interest to fair value. _____ 9. When a parent has control over a subsidiary with less than 100 percent ownership, and thereafter increases its ownership, the parent remeasures the prior interest to fair value.

(1) F; (2) F; (3) T; (4) F; (5) T; (6) T; (7) F; (8) T; (9) F

AACSB: Reflective thinking

AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 04-02 Describe the valuation principles underlying the acquisition method of accounting for the noncontrolling interest. Learning Objective: 04-04 Demonstrate the computation and allocation of consolidated net income in the presence of a noncontrolling interest. Learning Objective: 04-08 Understand the impact on consolidated financial statements of a midyear acquisition. Learning Objective: 04-10 Record the sale of a subsidiary (or a portion of its shares).

Chapter 05 Consolidated Financial Statements-Intra-Entity Asset Transactions

Multiple Choice Questions

1. On November 8, 2013, Power Corp. sold land to Wood Co., its wholly owned subsidiary. The land cost $61,500 and was sold to Wood for $89,000. From the perspective of the combination, when is the gain on the sale of the land realized?

A. Proportionately over a designated period of years. B. When Wood Co. sells the land to a third party. C. No gain can be recognized. D. As Wood uses the land. E. When Wood Co. begins using the land productively.

2. Edgar Co. acquired 60% of Stendall Co. on January 1, 2013. During 2013, Edgar made several sales of inventory to Stendall. The cost and selling price of the goods were $140,000 and $200,000, respectively. Stendall still owned one-fourth of the goods at the end of 2013. Consolidated cost of goods sold for 2013 was $2,140,000 because of a consolidating adjustment for intra-entity sales less the entire profit remaining in Stendall's ending inventory. How would consolidated cost of goods sold have differed if the inventory transfers had been for the same amount and cost, but from Stendall to Edgar?

A. Consolidated cost of goods sold would have remained $2,140,000. B. Consolidated cost of goods sold would have been more than $2,140,000 because of the controlling interest in the subsidiary. C. Consolidated cost of goods sold would have been less than $2,140,000 because of the non-controlling interest in the subsidiary. D. Consolidated cost of goods sold would have been more than $2,140,000 because of the non-controlling interest in the subsidiary. E. The effect on consolidated cost of goods sold cannot be predicted from the information provided.

3. Edgar Co. acquired 60% of Stendall Co. on January 1, 2013. During 2013, Edgar made several sales of inventory to Stendall. The cost and selling price of the goods were $140,000 and $200,000, respectively. Stendall still owned one-fourth of the goods at the end of 2013. Consolidated cost of goods sold for 2013 was $2,140,000 because of a consolidating adjustment for intra-entity sales less the entire profit remaining in Stendall's ending inventory. How would non-controlling interest in net income have differed if the transfers had been for the same amount and cost, but from Stendall to Edgar?

4. On January 1, 2013, Race Corp. acquired 80% of the voting common stock of Gallow Inc. During the year, Race sold to Gallow for $450,000 goods which cost $330,000. Gallow still owned 15% of the goods at year-end. Gallow's reported net income was $204,000, and Race's net income was $806,000. Race decided to use the equity method to account for this investment. What was the non-controlling interest's share of consolidated net income ?

A. $3,600. B. $22,800. C. $30,900. D. $32,900. E. $40,800.

5. Webb Co. acquired 100% of Rand Inc. on January 5, 2013. During 2013, Webb sold goods to Rand for $2,400,000 that cost Webb $1,800,000. Rand still owned 40% of the goods at the end of the year. Cost of goods sold was $10,800,000 for Webb and $6,400,000 for Rand. What was

consolidated cost of goods sold?

A. $17,200,000. B. $15,040,000. C. $14,800,000. D. $15,400,000. E. $14,560,000.

6. Gentry Inc. acquired 100% of Gaspard Farms on January 5, 2012. During 2012, Gentry sold Gaspard Farms for $625,000 goods which had cost $425,000. Gaspard Farms still owned 12% of the goods at the end of the year. In 2013, Gentry sold goods with a cost of $800,000 to Gaspard Farms for $1,000,000, and Gaspard Farms still owned 10% of the goods at year-end. For 2013, cost of goods sold was $5,400,000 for Gentry and $1,200,000 for Gaspard Farms. What was consolidated cost of goods sold for 2013?

A. $6,600,000. B. $6,604,000. C. $5,620,000. D. $5,596,000. E. $5,625,000.

7. X-Beams Inc. owned 70% of the voting common stock of Kent Corp. During 2013, Kent made several sales of inventory to X-Beams. The total selling price was $180,000 and the cost was $100,000. At the end of the year, 20% of the goods were still in X-Beams' inventory. Kent's reported net income was $300,000. What was the non-controlling interest in Kent's net

income?

A. $90,000. B. $85,200. C. $54,000. D. $94,800. E. $86,640.

8. Justings Co. owned 80% of Evana Corp. During 2013, Justings sold to Evana land with a book value of $48,000. The selling price was $70,000. In its accounting records, Justings should

A. not recognize a gain on the sale of the land since it was made to a related party. B. recognize a gain of $17,600. C. defer recognition of the gain until Evana sells the land to a third party. D. recognize a gain of $8,000. E. recognize a gain of $22,000.

9. Norek Corp. owned 70% of the voting common stock of Thelma Co. On January 2, 2012, Thelma sold a parcel of land to Norek. The land had a book value of $32,000 and was sold to Norek for $45,000. Thelma's reported net income for 2012 was $119,000. What is the non-

controlling interest's share of Thelma's net income ?

A. $35,700. B. $31,800. C. $39,600. D. $22,200. E. $26,100.

10. Clemente Co. owned all of the voting common stock of Snider Co. On January 2, 2012, Clemente sold equipment to Snider for $125,000. The equipment had cost Clemente $140,000. At the time of the sale, the balance in accumulated depreciation was $40,000. The equipment had a remaining useful life of five years and a $0 salvage value. Straight-line depreciation is used by both Clemente and Snider. At what amount should the equipment (net of depreciation) be included in the consolidated balance sheet dated December 31, 2012?

A. $105,000. B. $100,000. C. $95,000. D. $80,000. E. $85,000.

11. Clemente Co. owned all of the voting common stock of Snider Co. On January 2, 2012, Clemente sold equipment to Snider for $125,000. The equipment had cost Clemente $140,000. At the time of the sale, the balance in accumulated depreciation was $40,000. The equipment had a remaining useful life of five years and a $0 salvage value. Straight-line depreciation is used by both Clemente and Snider. At what amount should the equipment (net of depreciation) be included in the consolidated balance sheet dated December 31, 2013?

A. $110,000. B. $105,000. C. $100,000. D. $90,000. E. $60,000.

12. During 2012, Von Co. sold inventory to its wholly-owned subsidiary, Lord Co. The inventory cost $30,000 and was sold to Lord for $44,000. From the perspective of the combination, when is the $14,000 gain realized?

A. When the goods are sold to a third party by Lord. B. When Lord pays Von for the goods. C. When Von sold the goods to Lord. D. When the goods are used by Lord. E. No gain can be recognized since the transaction was between related parties.

13. Bauerly Co. owned 70% of the voting common stock of Devin Co. During 2012, Devin made frequent sales of inventory to Bauerly. There were unrealized gains of $40,000 in the beginning inventory and $25,000 of unrealized gains at the end of the year. Devin reported net income of $137,000 for 2012. Bauerly decided to use the equity method to account for the investment. What is the non-controlling interest's share of Devin's net income for 2012?

A. $41,100. B. $33,600. C. $21,600. D. $45,600. E. $36,600.

14. Chain Co. owned all of the voting common stock of Shannon Corp. The corporations' balance sheets dated December 31, 2012, include the following balances for land: for Chain-$416,000, and for Shannon-$256,000. On the original date of acquisition, the book value of Shannon's land was equal to its fair value. On April 4, 2013, Chain sold to Shannon a parcel of land with a book value of $65,000. The selling price was $83,000. There were no other transactions which affected the companies' land accounts during 2012. What is the

consolidated balance for land on the 2013 balance sheet?

A. $672,000. B. $690,000. C. $755,000. D. $737,000. E. $654,000.

15. Gibson Corp. owned a 90% interest in Sparis Co. Sparis frequently made sales of inventory to Gibson. The sales, which include a markup over cost of 25%, were $420,000 in 2012 and $500,000 in 2013. At the end of each year, Gibson still owned 30% of the goods. Net income for Sparis was $912,000 during 2013. What was the non-controlling interest's share of Sparis'

net income for 2013?

A. $85,680. B. $90,600. C. $90,720. D. $91,680. E. $91,800.

16. On January 1, 2013, Payton Co. sold equipment to its subsidiary, Starker Corp., for $115,000. The equipment had cost $125,000, and the balance in accumulated depreciation was $45,000. The equipment had an estimated remaining useful life of eight years and $0 salvage value. Both companies use straight-line depreciation. On their separate 2013 income statements, Payton and Starker reported depreciation expense of $84,000 and $60,000, respectively. The amount of depreciation expense on the consolidated income statement for 2013 would have been

A. $144,000. B. $148,375. C. $109,000. D. $134,000. E. $139,625.

17. Yukon Co. acquired 75% percent of the voting common stock of Ontario Corp. on January 1, 2013. During the year, Yukon made sales of inventory to Ontario. The inventory cost Yukon $260,000 and was sold to Ontario for $390,000. Ontario still had $60,000 of the goods in its inventory at the end of the year. The amount of unrealized intra-entity profit that should be eliminated in the consolidation process at the end of 2013 is

A. $15,000. B. $20,000. C. $32,500. D. $30,000. E. $110,000.

18. Prince Corp. owned 80% of Kile Corp.'s common stock. During October 2013, Kile sold merchandise to Prince for $140,000. At December 31, 2013, 50% of this merchandise remained in Prince's inventory. For 2013, gross profit percentages were 30% of sales for Prince and 40% of sales for Kile. The amount of unrealized intra-entity profit in ending inventory at December 31, 2013 that should be eliminated in the consolidation process is

A. $28,000. B. $56,000. C. $22,400. D. $21,000. E. $42,000.

19. Pot Co. holds 90% of the common stock of Skillet Co. During 2013, Pot reported sales of $1,120,000 and cost of goods sold of $840,000. For this same period, Skillet had sales of $420,000 and cost of goods sold of $252,000. Included in the amounts for Pot's sales were Pot's sales of merchandise to Skillet for $140,000. There were no sales from Skillet to Pot. Intra-entity sales had the same markup as sales to outsiders. Skillet still had 40% of the intra-entity sales as inventory at the end of 2013. What are consolidated sales and cost of goods sold for 2013?

A. $1,400,000 and $952,000. B. $1,400,000 and $966,000. C. $1,540,000 and $1,078,000. D. $1,400,000 and $1,022,000. E. $1,540,000 and $1,092,000.

20. Pot Co. holds 90% of the common stock of Skillet Co. During 2013, Pot reported sales of $1,120,000 and cost of goods sold of $840,000. For this same period, Skillet had sales of $420,000 and cost of goods sold of $252,000. Included in the amounts for Skillet's sales were Skillet's sales of merchandise to Pot for $140,000. There were no sales from Pot to Skillet. Intra-entity sales had the same markup as sales to outsiders. Pot still had 40% of the intra-entity sales as inventory at the end of 2013. What are consolidated sales and cost of goods sold for 2013?

A. $1,400,000 and $952,000. B. $1,400,000 and $966,000. C. $1,540,000 and $1,078,000. D. $1,400,000 and $974,400. E. $1,540,000 and $1,092,000.

21. Pot Co. holds 90% of the common stock of Skillet Co. During 2013, Pot reported sales of $1,120,000 and cost of goods sold of $840,000. For this same period, Skillet had sales of $420,000 and cost of goods sold of $252,000. Included in the amounts for Pot's sales were Pot's sales for merchandise to Skillet for $140,000. There were no sales from Skillet to Pot. Intra-entity sales had the same markup as sales to outsiders. Skillet had resold all of the intra-entity purchases from Pot to outside parties during 2013. What are consolidated sales and cost of goods sold for 2013?

A. $1,400,000 and $952,000. B. $1,400,000 and $1,092,000. C. $1,540,000 and $952,000. D. $1,400,000 and $1,232,000. E. $1,540,000 and $1,092,000.

22. Dalton Corp. owned 70% of the outstanding common stock of Shrugs Inc. On January 1, 2011, Dalton acquired a building with a ten-year life for $420,000. No salvage value was anticipated and the building was to be depreciated on the straight-line basis. On January 1, 2013, Dalton sold this building to Shrugs for $392,000. At that time, the building had a remaining life of eight years but still no expected salvage value. In preparing financial statements for 2013, how does this transfer affect the calculation of Dalton's share of consolidated net income?

A. Consolidated net income must be reduced by $44,800. B. Consolidated net income must be reduced by $50,400. C. Consolidated net income must be reduced by $49,000. D. Consolidated net income must be reduced by $56,000. E. Consolidated net income must be reduced by $34,300.

23. On January 1, 2013, Pride, Inc. acquired 80% of the outstanding voting common stock of Strong Corp. for $364,000. There is no active market for Strong's stock. Of this payment, $28,000 was allocated to equipment (with a five-year life) that had been undervalued on Strong's books by $35,000. Any remaining excess was attributable to goodwill which has not been impaired. As of December 31, 2013, before preparing the consolidated worksheet, the financial statements appeared as follows:

During 2013, Pride bought inventory for $112,000 and sold it to Strong for $140,000. Only half of this purchase had been paid for by Strong by the end of the year. 60% of these goods were still in the company's possession on December 31, 2013. What is the total of consolidated revenues?

A. $700,000. B. $644,000. C. $588,000.

D. $560,000. E. $840,000.

24. On January 1, 2013, Pride, Inc. acquired 80% of the outstanding voting common stock of Strong Corp. for $364,000. There is no active market for Strong's stock. Of this payment, $28,000 was allocated to equipment (with a five-year life) that had been undervalued on Strong's books by $35,000. Any remaining excess was attributable to goodwill which has not been impaired. As of December 31, 2013, before preparing the consolidated worksheet, the financial statements appeared as follows:

A. $42,000. B. $47,600. C. $53,200.

D. $49,000. E. $35,000.

25. On January 1, 2013, Pride, Inc. acquired 80% of the outstanding voting common stock of Strong Corp. for $364,000. There is no active market for Strong's stock. Of this payment, $28,000 was allocated to equipment (with a five-year life) that had been undervalued on Strong's books by $35,000. Any remaining excess was attributable to goodwill which has not been impaired. As of December 31, 2013, before preparing the consolidated worksheet, the financial statements appeared as follows:

A. $196,000. B. $212,800. C. $184,800.

D. $203,000. E. $168,000.

26. On January 1, 2013, Pride, Inc. acquired 80% of the outstanding voting common stock of Strong Corp. for $364,000. There is no active market for Strong's stock. Of this payment, $28,000 was allocated to equipment (with a five-year life) that had been undervalued on Strong's books by $35,000. Any remaining excess was attributable to goodwill which has not been impaired. As of December 31, 2013, before preparing the consolidated worksheet, the financial statements appeared as follows:

A. $100,800. B. $97,440. C. $93,800.

D. $120,400. E. $117,040.

27. On January 1, 2013, Pride, Inc. acquired 80% of the outstanding voting common stock of Strong Corp. for $364,000. There is no active market for Strong's stock. Of this payment, $28,000 was allocated to equipment (with a five-year life) that had been undervalued on Strong's books by $35,000. Any remaining excess was attributable to goodwill which has not been impaired. As of December 31, 2013, before preparing the consolidated worksheet, the financial statements appeared as follows:

A. $952,000. B. $1,058,400. C. $1,069,600.

D. $1,064,000. E. $1,066,800.

28. On January 1, 2013, Pride, Inc. acquired 80% of the outstanding voting common stock of Strong Corp. for $364,000. There is no active market for Strong's stock. Of this payment, $28,000 was allocated to equipment (with a five-year life) that had been undervalued on Strong's books by $35,000. Any remaining excess was attributable to goodwill which has not been impaired. As of December 31, 2013, before preparing the consolidated worksheet, the financial statements appeared as follows:

A. $336,000. B. $280,000. C. $364,000.

D. $347,200. E. $349,300.

29. Strickland Company sells inventory to its parent, Carter Company, at a profit during 2012. One-third of the inventory is sold by Carter in 2012. In the consolidation worksheet for 2012, which of the following choices would be a debit entry to eliminate the intra-entity transfer of inventory?

A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Strickland Company. E. Sales.

30. Strickland Company sells inventory to its parent, Carter Company, at a profit during 2012. One-third of the inventory is sold by Carter in 2012. In the consolidation worksheet for 2012, which of the following choices would be a credit entry to eliminate the intra-entity transfer of inventory?

A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Strickland Company. E. Sales.

31. Strickland Company sells inventory to its parent, Carter Company, at a profit during 2012. One-third of the inventory is sold by Carter in 2012. In the consolidation worksheet for 2012, which of the following choices would be a debit entry to eliminate unrealized intra-entity gross profit with regard to the 2012 intra-entity sales?

A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Strickland Company. E. Sales.

32. Strickland Company sells inventory to its parent, Carter Company, at a profit during 2012. One-third of the inventory is sold by Carter in 2012. In the consolidation worksheet for 2012, which of the following choices would be a credit entry to eliminate unrealized intra-entity gross profit with regard to the 2012 intra-entity sales?

A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Strickland Company. E. Sales.

33. Strickland Company sells inventory to its parent, Carter Company, at a profit during 2012. One-third of the inventory is sold by Carter in 2012. In the consolidation worksheet for 2013, assuming Carter uses the initial value method of accounting for its investment in Strickland, which of the following choices would be a debit entry to eliminate unrealized intra-entity gross profit with regard to the 2012 intra-entity sales?

A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Strickland Company. E. Sales.

34. Strickland Company sells inventory to its parent, Carter Company, at a profit during 2012. One-third of the inventory is sold by Carter in 2012. In the consolidation worksheet for 2013, assuming Carter uses the initial value methd of accounting for its investment in Strickland, which of the following choices would be a credit entry to eliminate unrealized intra-entity gross profit with regard to the 2012 intra-entity sales?

A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Strickland Company. E. Sales.

35. Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2012. One-third of the inventory is sold by Walsh uses the equity method to account for its investment in Fisher. In the consolidation worksheet for 2012, which of the following choices would be a debit entry to eliminate the intra-entity transfer of inventory?

A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Fisher Company. E. Sales.

36. Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2012. One-third of the inventory is sold by Walsh uses the equity method to account for its investment in Fisher. In the consolidation worksheet for 2012, which of the following choices would be a credit entry to eliminate the intra-entity transfer of inventory?

A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Fisher Company. E. Sales.

37. Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2012. One-third of the inventory is sold by Walsh uses the equity method to account for its investment in Fisher. In the consolidation worksheet for 2012, which of the following choices would be a debit entry to eliminate unrealized intra-entity gross profit with regard to the 2012 intra-entity sales?

A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Fisher Company. E. Sales.

38. Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2012. One-third of the inventory is sold by Walsh uses the equity method to account for its investment in Fisher. In the consolidation worksheet for 2012, which of the following choices would be a credit entry to eliminate unrealized intra-entity gross profit with regard to the 2012 intra-entity sales?

A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Fisher Company. E. Sales.

39. Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2012. One-third of the inventory is sold by Walsh uses the equity method to account for its investment in Fisher. In the consolidation worksheet for 2013, which of the following choices would be a debit entry to eliminate unrealized intra-entity gross profit with regard to the 2012 intra-entity sales?

A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Fisher Company. E. Sales.

40. Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2012. One-third of the inventory is sold by Walsh uses the equity method to account for its investment in Fisher. In the consolidation worksheet for 2013, which of the following choices would be a credit entry to eliminate unrealized intra-entity gross profit with regard to the 2012 intra-entity sales?

A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Fisher Company. E. Sales.

41. When comparing the difference between an upstream and downstream transfer of inventory, and using the initial value method, which of the following statements is true when there is a non-controlling interest?

A. Income from subsidiary will be lower by the amount of the ending inventory profit multiplied by the non-controlling interest percentage for downstream transfers. B. Income from subsidiary will be higher by the amount of the ending inventory profit multiplied by the non-controlling interest percentage for downstream transfers. C. Income from subsidiary will be reduced for downstream ending inventory profit but not for upstream profit, before the effect of the non-controlling interest. D. Income from subsidiary will be reduced for upstream ending inventory profit but not for downstream profit, before the effect of the non-controlling interest. E. Income from subsidiary will be the same for upstream and downstream profit.

42. When comparing the difference between an upstream and downstream transfer of inventory, and using the initial value method, which of the following statements is true when there is a non-controlling interest?

A. Income from subsidiary will be lower by the amount of the beginning inventory profits multiplied by the non-controlling interest percentage for upstream transfers. B. Income from subsidiary will be higher by the amount of the beginning inventory profits multiplied by the non-controlling interest percentage for upstream transfers. C. Income from subsidiary will be reduced for downstream ending inventory profits but not for upstream profits, before the non-controlling interest. D. Income from subsidiary will be reduced for upstream ending inventory profits but not for downstream profits, before the non-controlling interest. E. Income from subsidiary will be the same for upstream and downstream profits.

43. Which of the following statements is true regarding inventory transfers between a parent and its subsidiary, using the initial value method?

A. The sale of merchandise between a parent and its subsidiary represents an arm's-length transaction and thus provides the basis for the recognition of profit on such transfers. B. Profits on upstream transfers associated with the parent's ending inventory are subtracted from subsidiary net income for the current year in the calculation of parent's income from subsidiary. These year-end deferrals are then added to next year's subsidiary net income in the calculation of parent's income from subsidiary. This procedure is inappropriate because all the intra-entity transactions unsold at year-end may not be sold in the next year. C. Profits on upstream transfers associated with the parent's ending inventory are subtracted from subsidiary net income for the current year in the calculation of parent's income from subsidiary. These year-end deferrals are then added to next year's subsidiary net income in the calculation of parent's income from subsidiary. This procedure is appropriate even if all the intra-entity transactions unsold at year-end may not be sold in the next year. D. Merchandise transfers from a parent to its subsidiary that have not been sold to unaffiliated parties should be included in consolidated inventory at their transfer price. E. Non-controlling interest in subsidiary's net income should not be reduced for upstream or downstream ending inventory profits.

44. Which of the following statements is true regarding an intra-entity sale of land?

A. A loss is always recognized but a gain is eliminated in a consolidated income statement. B. A loss and a gain are always eliminated in a consolidated income statement. C. A loss and a gain are always recognized in a consolidated income statement. D. A gain is always recognized but a loss is eliminated in a consolidated income statement. E. A gain or loss is eliminated by adjusting stockholders' equity through comprehensive income.

45. Parent sold land to its subsidiary for a gain in 2010. The subsidiary sold the land externally for a gain in 2013. Which of the following statements is true?

A. A gain will be reported in the consolidated income statement in 2010. B. A gain will be reported in the consolidated income statement in 2013. C. No gain will be reported in the 2013 consolidated income statement. D. Only the parent company will report a gain in 2013. E. The subsidiary will report a gain in 2010.

46. An intra-entity sale took place whereby the transfer price exceeded the book value of a depreciable asset. Which statement is true for the year following the sale?

A. A worksheet entry is made with a debit to gain for a downstream transfer. B. A worksheet entry is made with a debit to gain for an upstream transfer. C. A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer when the parent uses the equity method. D. A worksheet entry is made with a debit to retained earnings for a downstream transfer, regardless of the method used account for the investment. E. No worksheet entry is necessary.

47. An intra-entity sale took place whereby the book value exceeded the transfer price of a depreciable asset. Which statement is true for the year following the sale?

A. A worksheet entry is made with a debit to retained earnings for an upstream transfer. B. A worksheet entry is made with a credit to retained earnings for an upstream transfer. C. A worksheet entry is made with a debit to retained earnings for a downstream transfer. D. A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer. E. No worksheet entry is necessary.

48. An intra-entity sale took place whereby the transfer price was less than the book value of a depreciable asset. Which statement is true for the year following the sale?

A. A worksheet entry is made with a debit to investment in subsidiary for an upstream transfer. B. A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer. C. A worksheet entry is made with a credit to investment in subsidiary for a downstream transfer when the parent uses the equity method. D. A worksheet entry is made with a debit to retained earnings for an upstream transfer, regardless of the method used to account for the investment. E. No worksheet entry is necessary.

49. Which of the following statements is true concerning an intra-entity transfer of a depreciable asset?

A. Non-controlling interest in subsidiary's net income is never affected by a gain on the transfer. B. Non-controlling interest in subsidiary's net income is always affected by a gain on the transfer. C. Non-controlling interest in subsidiary's net income is affected by a downstream gain only. D. Non-controlling interest in subsidiary's net income is affected only when the transfer is upstream. E. Non-controlling interest in subsidiary's net income is increased by an upstream gain in the year of transfer.

50. Gargiulo Company, a 90% owned subsidiary of Posito Corporation, sells inventory to Posito at a 25% profit on selling price. The following data are available pertaining to intra-entity purchases. Gargiulo was acquired on January 1, 2012.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

Compute the equity in earnings of Gargiulo reported on Posito's books for 2012.

A. $63,000. B. $62,730. C. $63,270. D. $70,000. E. $62,700.

51. Gargiulo Company, a 90% owned subsidiary of Posito Corporation, sells inventory to Posito at a 25% profit on selling price. The following data are available pertaining to intra-entity purchases. Gargiulo was acquired on January 1, 2012.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

Compute the equity in earnings of Gargiulo reported on Posito's books for 2013.

A. $76,500. B. $77,130. C. $75,870. D. $75,600. E. $75,800.

52. Gargiulo Company, a 90% owned subsidiary of Posito Corporation, sells inventory to Posito at a 25% profit on selling price. The following data are available pertaining to intra-entity purchases. Gargiulo was acquired on January 1, 2012.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

Compute the equity in earnings of Gargiulo reported on Posito's books for 2014.

A. $84,600. B. $84,375. C. $83,925. D. $84,825. E. $84,850.

53. Gargiulo Company, a 90% owned subsidiary of Posito Corporation, sells inventory to Posito at a 25% profit on selling price. The following data are available pertaining to intra-entity purchases. Gargiulo was acquired on January 1, 2012.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

Compute the non-controlling interest in Gargiulo's net income for 2012.

A. $6,970. B. $7,000. C. $7,030. D. $6,270. E. $6,230.

54. Gargiulo Company, a 90% owned subsidiary of Posito Corporation, sells inventory to Posito at a 25% profit on selling price. The following data are available pertaining to intra-entity purchases. Gargiulo was acquired on January 1, 2012.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

Compute the non-controlling interest in Gargiulo's net income for 2013.

A. $8,500. B. $8,570. C. $8,430. D. $8,400. E. $7,580.

55. Gargiulo Company, a 90% owned subsidiary of Posito Corporation, sells inventory to Posito at a 25% profit on selling price. The following data are available pertaining to intra-entity purchases. Gargiulo was acquired on January 1, 2012.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

Compute the non-controlling interest in Gargiulo's net income for 2014.

A. $9,400. B. $9,375. C. $9,425. D. $9,325. E. $8,485.

56. Gargiulo Company, a 90% owned subsidiary of Posito Corporation, sells inventory to Posito at a 25% profit on selling price. The following data are available pertaining to intra-entity purchases. Gargiulo was acquired on January 1, 2012.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

For consolidation purposes, what amount would be debited to cost of goods sold for the 2012 consolidation worksheet with regard to unrealized gross profit of the intra-entity transfer of merchandise?

A. $300. B. $240. C. $2,000. D. $1,600. E. $270.

57. Gargiulo Company, a 90% owned subsidiary of Posito Corporation, sells inventory to Posito at a 25% profit on selling price. The following data are available pertaining to intra-entity purchases. Gargiulo was acquired on January 1, 2012.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

For consolidation purposes, what amount would be debited to cost of goods sold for the 2013 consolidation worksheet with regard to the unrealized gross profit of the 2013 intra-entity transfer of merchandise?

A. $1,000. B. $800. C. $3,000. D. $2,400. E. $900.

58. Gargiulo Company, a 90% owned subsidiary of Posito Corporation, sells inventory to Posito at a 25% profit on selling price. The following data are available pertaining to intra-entity purchases. Gargiulo was acquired on January 1, 2012.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

For consolidation purposes, what amount would be debited to cost of goods sold for the 2014 consolidation worksheet with regard to the unrealized gross profit of the 2014 intra-entity transfer of merchandise?

A. $600. B. $750. C. $3,760. D. $3,000. E. $675.

59. Gargiulo Company, a 90% owned subsidiary of Posito Corporation, sells inventory to Posito at a 25% profit on selling price. The following data are available pertaining to intra-entity purchases. Gargiulo was acquired on January 1, 2012.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

For consolidation purposes, what amount would be debited to January 1 retained earnings for the 2012 consolidation worksheet entry with regard to the unrealized gross profit of the 2012 intra-entity transfer of merchandise?

A. $0. B. $1,600. C. $300. D. $240. E. $270.

60. Gargiulo Company, a 90% owned subsidiary of Posito Corporation, sells inventory to Posito at a 25% profit on selling price. The following data are available pertaining to intra-entity purchases. Gargiulo was acquired on January 1, 2012.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

For consolidation purposes, what amount would be debited to January 1 retained earnings for the 2013 consolidation worksheet entry with regard to the unrealized gross profit of the 2012 intra-entity transfer of merchandise?

A. $240. B. $300. C. $2,000. D. $1,600. E. $270.

61. Gargiulo Company, a 90% owned subsidiary of Posito Corporation, sells inventory to Posito at a 25% profit on selling price. The following data are available pertaining to intra-entity purchases. Gargiulo was acquired on January 1, 2012.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

For consolidation purposes, what amount would be debited to January 1 retained earnings for the 2014 consolidation worksheet entry with regard to the unrealized gross profit of the 2013 intra-entity transfer of merchandise?

A. $3,000. B. $2,400. C. $1,000. D. $800. E. $900.

62. Patti Company owns 80% of the common stock of Shannon, Inc. In the current year, Patti reports sales of $10,000,000 and cost of goods sold of $7,500,000. For the same period, Shannon has sales of $200,000 and cost of goods sold of $160,000. During the year, Patti sold merchandise to Shannon for $60,000 at a price based on the normal markup. At the end of the year, Shannon still possesses 30 percent of this inventory. Compute consolidated sales.

A. $10,000,000. B. $10,126,000. C. $10,140,000. D. $10,200,000. E. $10,260,000.

63. Patti Company owns 80% of the common stock of Shannon, Inc. In the current year, Patti reports sales of $10,000,000 and cost of goods sold of $7,500,000. For the same period, Shannon has sales of $200,000 and cost of goods sold of $160,000. During the year, Patti sold merchandise to Shannon for $60,000 at a price based on the normal markup. At the end of the year, Shannon still possesses 30 percent of this inventory. Compute consolidated cost of goods sold.

A. $7,500,000. B. $7,600,000. C. $7,615,000. D. $7,604,500. E. $7,660,000.

64. Patti Company owns 80% of the common stock of Shannon, Inc. In the current year, Patti reports sales of $10,000,000 and cost of goods sold of $7,500,000. For the same period, Shannon has sales of $200,000 and cost of goods sold of $160,000. During the year, Patti sold merchandise to Shannon for $60,000 at a price based on the normal markup. At the end of the year, Shannon still possesses 30 percent of this inventory. Assume the same information, except Shannon sold inventory to Patti. Compute consolidated sales.

A. $10,000,000. B. $10,126,000. C. $10,140,000. D. $10,200,000. E. $10,260,000.

65. Wilson owned equipment with an estimated life of 10 years when it was acquired for an original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2012. On January 1, 2012, Wilson realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. On April 1, 2012 Simon Company, a 90% owned subsidiary of Wilson Company, bought the equipment from Wilson for $68,250 and for depreciation purposes used the estimated remaining life as of that date. The following data are available pertaining to Simon's income and dividends:

Compute the gain on transfer of equipment reported by Wilson for 2012.

A. $19,500. B. $18,250. C. $11,750. D. $38,250. E. $37,500.

66. Wilson owned equipment with an estimated life of 10 years when it was acquired for an original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2012. On January 1, 2012, Wilson realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. On April 1, 2012 Simon Company, a 90% owned subsidiary of Wilson Company, bought the equipment from Wilson for $68,250 and for depreciation purposes used the estimated remaining life as of that date. The following data are available pertaining to Simon's income and dividends:

Compute the amortization of gain through a depreciation adjustment for 2012 for consolidation purposes.

A. $1,950. B. $1,825. C. $1,500. D. $2,000. E. $5,250.

67. Wilson owned equipment with an estimated life of 10 years when it was acquired for an original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2012. On January 1, 2012, Wilson realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. On April 1, 2012 Simon Company, a 90% owned subsidiary of Wilson Company, bought the equipment from Wilson for $68,250 and for depreciation purposes used the estimated remaining life as of that date. The following data are available pertaining to Simon's income and dividends:

Compute the amortization of gain through a depreciation adjustment for 2013 for consolidation purposes.

A. $1,950. B. $1,825. C. $2,000. D. $1,500. E. $7,000.

68. Wilson owned equipment with an estimated life of 10 years when it was acquired for an original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2012. On January 1, 2012, Wilson realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. On April 1, 2012 Simon Company, a 90% owned subsidiary of Wilson Company, bought the equipment from Wilson for $68,250 and for depreciation purposes used the estimated remaining life as of that date. The following data are available pertaining to Simon's income and dividends:

Compute the amortization of gain through a depreciation adjustment for 2014 for consolidation purposes.

A. $1,925. B. $1,825. C. $2,000. D. $1,500. E. $7,000.

69. Wilson owned equipment with an estimated life of 10 years when it was acquired for an original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2012. On January 1, 2012, Wilson realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. On April 1, 2012 Simon Company, a 90% owned subsidiary of Wilson Company, bought the equipment from Wilson for $68,250 and for depreciation purposes used the estimated remaining life as of that date. The following data are available pertaining to Simon's income and dividends:

Compute Wilson's share of income from Simon for consolidation for 2012.

A. $72,000. B. $90,000. C. $73,575. D. $73,800. E. $72,500.

70. Wilson owned equipment with an estimated life of 10 years when it was acquired for an original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2012. On January 1, 2012, Wilson realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. On April 1, 2012 Simon Company, a 90% owned subsidiary of Wilson Company, bought the equipment from Wilson for $68,250 and for depreciation purposes used the estimated remaining life as of that date. The following data are available pertaining to Simon's income and dividends:

Compute Wilson's share of income from Simon for consolidation for 2013.

A. $108,000. B. $110,000. C. $106,000. D. $109,825. E. $109,800.

71. Wilson owned equipment with an estimated life of 10 years when it was acquired for an original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2012. On January 1, 2012, Wilson realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. On April 1, 2012 Simon Company, a 90% owned subsidiary of Wilson Company, bought the equipment from Wilson for $68,250 and for depreciation purposes used the estimated remaining life as of that date. The following data are available pertaining to Simon's income and dividends:

Compute Wilson's share of income from Simon for consolidation for 2014.

A. $118,825. B. $115,000. C. $117,000. D. $119,000. E. $118,800.

72. On January 1, 2012, Smeder Company, an 80% owned subsidiary of Collins, Inc. transferred equipment with a 10-year life (six of which remain with no salvage value) to Collins in exchange for $84,000 cash. At the date of transfer, Smeder's records carried the equipment at a cost of $120,000 less accumulated depreciation of $48,000. Straight-line depreciation is used. Smeder reported net income of $28,000 and $32,000 for 2012 and 2013, respectively. All net income effects of the intra-entity transfer are attributed to the seller for consolidation purposes. Compute the gain recognized by Smeder Company relating to the equipment for 2012.

A. $36,000. B. $34,000. C. $12,000. D. $10,000. E. $0.

73. On January 1, 2012, Smeder Company, an 80% owned subsidiary of Collins, Inc. transferred equipment with a 10-year life (six of which remain with no salvage value) to Collins in exchange for $84,000 cash. At the date of transfer, Smeder's records carried the equipment at a cost of $120,000 less accumulated depreciation of $48,000. Straight-line depreciation is used. Smeder reported net income of $28,000 and $32,000 for 2012 and 2013, respectively. All net income effects of the intra-entity transfer are attributed to the seller for consolidation purposes. Compute Collins' share of Smeder's net income for 2012.

A. $12,400. B. $14,400. C. $11,200. D. $12,800. E. $18,000.

74. On January 1, 2012, Smeder Company, an 80% owned subsidiary of Collins, Inc. transferred equipment with a 10-year life (six of which remain with no salvage value) to Collins in exchange for $84,000 cash. At the date of transfer, Smeder's records carried the equipment at a cost of $120,000 less accumulated depreciation of $48,000. Straight-line depreciation is used. Smeder reported net income of $28,000 and $32,000 for 2012 and 2013, respectively. All net income effects of the intra-entity transfer are attributed to the seller for consolidation purposes. Compute Collins' share of Smeder's net income for 2013.

A. $27,600. B. $23,600. C. $27,200. D. $24,000. E. $34,000.

75. On January 1, 2012, Smeder Company, an 80% owned subsidiary of Collins, Inc. transferred equipment with a 10-year life (six of which remain with no salvage value) to Collins in exchange for $84,000 cash. At the date of transfer, Smeder's records carried the equipment at a cost of $120,000 less accumulated depreciation of $48,000. Straight-line depreciation is used. Smeder reported net income of $28,000 and $32,000 for 2012 and 2013, respectively. All net income effects of the intra-entity transfer are attributed to the seller for consolidation purposes. For consolidation purposes, what net debit or credit will be made for the year 2012 relating to the accumulated depreciation for the equipment transfer?

76. On January 1, 2012, Smeder Company, an 80% owned subsidiary of Collins, Inc. transferred equipment with a 10-year life (six of which remain with no salvage value) to Collins in exchange for $84,000 cash. At the date of transfer, Smeder's records carried the equipment at a cost of $120,000 less accumulated depreciation of $48,000. Straight-line depreciation is used. Smeder reported net income of $28,000 and $32,000 for 2012 and 2013, respectively. All net income effects of the intra-entity transfer are attributed to the seller for consolidation purposes. What is the net effect on consolidated net income in 2012 due to the equipment transfer?

A. Increase $2,000. B. Decrease $12,000. C. Decrease $10,000. D. Decrease $14,000. E. Increase $10,000.

77. Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2012, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2012 and 2013, respectively. Leo uses the equity method to account for its investment. Compute the gain or loss on the intra-entity sale of land.

A. $15,000 loss. B. $15,000 gain. C. $50,000 loss. D. $50,000 gain. E. $65,000 gain.

78. Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2012, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2012 and 2013, respectively. Leo uses the equity method to account for its investment. On a consolidation worksheet, what adjustment would be made for 2012 regarding the land transfer?

A. Debit gain for $50,000. B. Credit gain for $50,000. C. Debit land for $15,000. D. Credit land for $15,000. E. Credit gain for $15,000.

79. Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2012, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2012 and 2013, respectively. Leo uses the equity method to account for its investment. On a consolidation worksheet, having used the equity method, what adjustment would be made for 2013 regarding the land transfer?

80. Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2012, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2012 and 2013, respectively. Leo uses the equity method to account for its investment. Compute income from Stiller on Leo's books for 2012.

A. $110,000. B. $100,000. C. $125,000. D. $85,000. E. $88,000.

81. Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2012, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2012 and 2013, respectively. Leo uses the equity method to account for its investment. Compute income from Stiller on Leo's books for 2013.

A. $140,000. B. $97,000. C. $125,000. D. $100,000. E. $112,000.

82. Stark Company, a 90% owned subsidiary of Parker, Inc. sold land to Parker on May 1, 2012, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2012, 2013, and 2014, respectively. Parker sold the land purchased from Stark in 2012 for $92,000 in 2014. Compute the gain or loss on the intra-entity sale of land.

A. $80,000 gain. B. $80,000 loss. C. $5,000 gain. D. $5,000 loss. E. $85,000 loss.

83. Stark Company, a 90% owned subsidiary of Parker, Inc. sold land to Parker on May 1, 2012, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2012, 2013, and 2014, respectively. Parker sold the land purchased from Stark in 2012 for $92,000 in 2014. Which of the following will be included in a consolidation entry for 2012?

A. Debit loss for $5,000. B. Credit loss for $5,000. C. Credit land for $5,000. D. Debit gain for $5,000. E. Credit gain for $5,000.

84. Stark Company, a 90% owned subsidiary of Parker, Inc. sold land to Parker on May 1, 2012, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2012, 2013, and 2014, respectively. Parker sold the land purchased from Stark in 2012 for $92,000 in 2014. Which of the following will be included in a consolidation entry for 2013?

A. Debit retained earnings for $5,000. B. Credit retained earnings for $5,000. C. Debit investment in subsidiary for $5,000. D. Credit investment in subsidiary for $5,000. E. Credit land for $5,000.

85. Stark Company, a 90% owned subsidiary of Parker, Inc. sold land to Parker on May 1, 2012, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2012, 2013, and 2014, respectively. Parker sold the land purchased from Stark in 2012 for $92,000 in 2014. Compute income from Stark reported on Parker's books for 2012.

A. $205,000. B. $200,000. C. $180,000. D. $175,500. E. $184,500.

86. Stark Company, a 90% owned subsidiary of Parker, Inc. sold land to Parker on May 1, 2012, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2012, 2013, and 2014, respectively. Parker sold the land purchased from Stark in 2012 for $92,000 in 2014. Compute income from Stark reported on Parker's books for 2013.

A. $185,000. B. $157,500. C. $166,500. D. $162,000. E. $180,000.

87. Stark Company, a 90% owned subsidiary of Parker, Inc. sold land to Parker on May 1, 2012, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2012, 2013, and 2014, respectively. Parker sold the land purchased from Stark in 2012 for $92,000 in 2014. Compute Parker's reported gain or loss relating to the land for 2014.

A. $12,000 gain. B. $5,000 loss. C. $12,000 loss. D. $7,000 gain. E. $7,000 loss.

88. Stark Company, a 90% owned subsidiary of Parker, Inc. sold land to Parker on May 1, 2012, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2012, 2013, and 2014, respectively. Parker sold the land purchased from Stark in 2012 for $92,000 in 2014. Compute Stark's reported gain or loss relating to the land for 2014.

A. $5,000 loss. B. $5,000 gain. C. $7,000 loss. D. $7,000 gain. E. $0.

89. Stark Company, a 90% owned subsidiary of Parker, Inc. sold land to Parker on May 1, 2012, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2012, 2013, and 2014, respectively. Parker sold the land purchased from Stark in 2012 for $92,000 in 2014. Compute the gain or loss relating to the land that will be reported in consolidated net income for 2014.

A. $5,000 loss. B. $7,000 gain. C. $12,000 gain. D. $7,000 loss. E. $12,000 loss.

90. Stark Company, a 90% owned subsidiary of Parker, Inc. sold land to Parker on May 1, 2012, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2012, 2013, and 2014, respectively. Parker sold the land purchased from Stark in 2012 for $92,000 in 2014. Compute income from Stark reported on Parker's books for 2014.

A. $204,300. B. $202,500. C. $193,500. D. $191,700. E. $198,000.

91. Pepe, Incorporated acquired 60% of Devin Company on January 1, 2012. On that date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000 and $325,000 for 2012 and 2013, respectively. Pepe uses the equity method to account for its investment in Devin. What is the gain or loss on equipment reported by Devin for 2012?

A. $54,000 gain. B. $21,000 loss. C. $21,000 gain. D. $9,000 loss. E. $9,000 gain.

92. Pepe, Incorporated acquired 60% of Devin Company on January 1, 2012. On that date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000 and $325,000 for 2012 and 2013, respectively. Pepe uses the equity method to account for its investment in Devin. What is the consolidated gain or loss on equipment for 2012?

A. $0. B. $9,000 gain. C. $9,000 loss. D. $21,000 gain. E. $21,000 loss.

93. Pepe, Incorporated acquired 60% of Devin Company on January 1, 2012. On that date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000 and $325,000 for 2012 and 2013, respectively. Pepe uses the equity method to account for its investment in Devin. Compute the income from Devin reported on Pepe's books for 2012.

A. $174,600. B. $184,800. C. $172,000. D. $171,000. E. $180,000.

94. Pepe, Incorporated acquired 60% of Devin Company on January 1, 2012. On that date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000 and $325,000 for 2012 and 2013, respectively. Pepe uses the equity method to account for its investment in Devin. Compute the income from Devin reported on Pepe's books for 2013.

A. $190,200. B. $196,000. C. $194,400. D. $187,000. E. $195,000.

95. Pepe, Incorporated acquired 60% of Devin Company on January 1, 2012. On that date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000 and $325,000 for 2012 and 2013, respectively. Pepe uses the equity method to account for its investment in Devin. Compute the non-controlling interest in the net income of Devin for 2012.

A. $116,400. B. $120,400. C. $120,000. D. $123,200. E. $112,000.

96. Pepe, Incorporated acquired 60% of Devin Company on January 1, 2012. On that date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000 and $325,000 for 2012 and 2013, respectively. Pepe uses the equity method to account for its investment in Devin. Compute the non-controlling interest in the net income of Devin for 2013.

A. $126,800. B. $130,000. C. $122,000. D. $130,800. E. $129,600.

Essay Questions

97. For each of the following situations (1 - 10), select the correct entry (A - E) that would be required on a consolidation worksheet. (A.) Debit retained earnings. (B.) Credit retained earnings. (C.) Debit investment in subsidiary. (D.) Credit investment in subsidiary. (E.) None of the above. ___ 1. Upstream beginning inventory profit, using the initial value method. ___ 2. Downstream beginning inventory profit, using the initial value method. ___ 3. Upstream ending inventory profit, using the initial value method. ___ 4. Downstream ending inventory profit, using the initial value method. ___ 5. Upstream transfer of depreciable assets, in the period after transfer, where subsidiary recognizes a gain, using the initial value method. ___ 6. Downstream transfer of depreciable assets, in the period after transfer, where parent recognizes a gain, using the initial value method. ___ 7. Upstream transfer of land, in the period after transfer, where subsidiary recognizes a loss, using the initial value method. ___ 8. Downstream transfer of land, in the period after transfer, where parent recognizes a loss, using the initial value method. ___ 9. Eliminate income from subsidiary, recorded under the equity method. ___ 10. Eliminate recorded amortization of acquisition fair value over book value, recorded under the equity method.

98. On April 7, 2013, Pate Corp. sold land to Shannahan Co., its subsidiary. From a consolidated point of view, when will the gain on this transfer actually be earned?

99. Throughout 2013, Cleveland Co. sold inventory to Leeward Co., its subsidiary. From a consolidated point of view, when will the gain on this transfer be earned?

100.Varton Corp. acquired all of the voting common stock of Caleb Co. on January 1, 2013. Varton owned some land with a book value of $84,000 that was sold to Caleb for its fair value of $120,000. How should this transaction be accounted for by the consolidated entity?

101.During 2013, Edwards Co. sold inventory to its parent company, Forsyth Corp. Forsyth still owned the entire inventory purchased at the end of 2013. Why must the gross profit on the sale be deferred when consolidated financial statements are prepared at the end of 2013?

102.How does a gain on an intra-entity sale of equipment affect the calculation of a noncontrolling interest?

103.How do upstream and downstream inventory transfers differ in their effect in a year-end consolidation?

104.How is the gain on an intra-entity transfer of a depreciable asset realized?

105.Dithers Inc. acquired all of the common stock of Bumstead Corp. on January 1, 2013. During 2013, Bumstead sold land to Dithers at a gain. No consolidation entry for the sale of the land was made at the end of 2013. What errors will this omission cause in the consolidated financial statements?

106.Why do intra-entity transfers between the component companies of a business combination occur so frequently?

107.Fraker, Inc. owns 90 percent of Richards, Inc. and bought $200,000 of Richards' inventory in 2013. The transfer price was equal to 30 percent of the sales price. When preparing consolidated financial statements, what amount of these sales is eliminated?

108.What is meant by unrealized inventory gains, and how are they treated on a consolidation worksheet?

109.What is the impact on the non-controlling interest of a subsidiary when there are downstream transfers of inventory between the parent and subsidiary companies?

110.When is the gain on an intra-entity transfer of land realized?

111.What is the purpose of the adjustments to depreciation expense within the consolidation process when there has been an intra-entity transfer of a depreciable asset?

Short Answer Questions

112.Tara Company owns 80 percent of the common stock of Stodd Inc. In the current year, Tara reports sales of $5,000,000 and cost of goods sold of $3,500,000. For the same period, Stodd has sales of $500,000 and cost of goods sold of $400,000. During the year, Stodd sold merchandise to Tara for $40,000 at a price based on the normal markup. At the end of the year, Tara still possesses 20 percent of this inventory. Prepare the consolidation entry to defer the unrealized gain.

113.King Corp. owns 85% of James Co. King uses the equity method to account for this investment. During 2015, King sells inventory to James for $500,000. The inventory originally cost King $420,000. At 12/31/15, 25% of the goods were still in James' inventory.

Required: Prepare the Consolidation Entry TI and Consolidation Entry G for the consolidation worksheet.

114.Flintstone Inc. acquired all of Rubble Co. on January 1, 2013. Flintstone decided to use the

initial value method to account for this investment. During 2013, Flintstone sold to Rubble for $600,000 inventory with a cost of $500,000. At the end of the year 30% of the goods were still in Rubble's inventory.

Required: Prepare Consolidation Entry TI for the intra-entity transfer and Consolidation Entry G for the ending inventory adjustment necessary for the consolidation worksheet at 12/31/15.

115.Yoderly Co., a wholly owned subsidiary of Nelson Corp., sold goods to Nelson near the end of 2013. The goods had cost Yoderly $105,000 and the selling price was $140,000. Nelson had not sold any of the goods by the end of the year.

Required: Prepare Consolidation Entry TI and Consolidation Entry G that are required for 2013.

116.Strayten Corp. is a wholly owned subsidiary of Quint Inc. Quint decided to use the initial

value method to account for this investment. During 2013, Strayten sold Quint goods which had cost $48,000. The selling price was $64,000. Quint still had one-eighth of the goods purchased from Strayten on hand at the end of 2013.

Required: Prepare Consolidation Entry *G, which would have to be recorded at the end of 2013.

117.Hambly Corp. owned 80% of the voting common stock of Stroban Co. During 2013, Stroban sold a parcel of land to Hambly. The land had a book value of $82,000 and was sold to Hambly for $145,000. Stroban's reported net income for 2013 was $119,000.

Required: What was the non-controlling interest's share of Stroban Co.'s net income?

118.McGraw Corp. owned all of the voting common stock of both Ritter Co. and Lawler Co. During 2013, Ritter sold inventory to Lawler. The goods had cost Ritter $65,000, and they were sold to Lawler for $100,000. At the end of 2013, Lawler still held 30% of the inventory.

Required: How should the sale between Lawler and Ritter be accounted for in a consolidation worksheet? Show worksheet entries to support your answer.

119.Virginia Corp. owned all of the voting common stock of Stateside Co. Both companies use the

perpetual inventory method, and Virginia decided to use the partial equity method to account for this investment. During 2012, Virginia made cash sales of $400,000 to Stateside. The gross profit rate was 30% of the selling price. By the end of 2012, Stateside had sold 75% of the goods to outside parties for $420,000 cash. Prepare journal entries for Virginia and Stateside to record the sales/purchases during 2012.

120.Virginia Corp. owned all of the voting common stock of Stateside Co. Both companies use the

perpetual inventory method, and Virginia decided to use the partial equity method to account for this investment. During 2012, Virginia made cash sales of $400,000 to Stateside. The gross profit rate was 30% of the selling price. By the end of 2012, Stateside had sold 75% of the goods to outside parties for $420,000 cash. Prepare the consolidation entries that should be made at the end of 2012.

121.Virginia Corp. owned all of the voting common stock of Stateside Co. Both companies use the

perpetual inventory method, and Virginia decided to use the partial equity method to account for this investment. During 2012, Virginia made cash sales of $400,000 to Stateside. The gross profit rate was 30% of the selling price. By the end of 2012, Stateside had sold 75% of the goods to outside parties for $420,000 cash. Prepare any 2013 consolidation worksheet entries that would be required regarding the 2012 inventory transfer.

122.Several years ago Polar Inc. acquired an 80% interest in Icecap Co. The book values of Icecap's asset and liability accounts at that time were considered to be equal to their fair values. Polar's acquisition value corresponded to the underlying book value of Icecap so that no allocations or goodwill resulted from the transaction. The following selected account balances were from the individual financial records of these two companies as of December 31, 2013:

Assume that Polar sold inventory to Icecap at a markup equal to 25% of cost. Intra-entity transfers were $130,000 in 2012 and $165,000 in 2013. Of this inventory, $39,000 of the 2012 transfers were retained and then sold by Icecap in 2013, while $55,000 of the 2013 transfers were held until 2014.

Required: For the consolidated financial statements for 2013, determine the balances that would appear for the following accounts: (1) Cost of Goods Sold, (2) Inventory, and (3) Noncontrolling Interest in Subsidiary's Net Income.

123.Several years ago Polar Inc. acquired an 80% interest in Icecap Co. The book values of Icecap's asset and liability accounts at that time were considered to be equal to their fair values. Polar's acquisition value corresponded to the underlying book value of Icecap so that no allocations or goodwill resulted from the transaction. The following selected account balances were from the individual financial records of these two companies as of December 31, 2013:

Assume that Icecap sold inventory to Polar at a markup equal to 25% of cost. Intra-entity transfers were $70,000 in 2012 and $112,000 in 2013. Of this inventory, $29,000 of the 2012 transfers were retained and then sold by Polar in 2013, whereas $49,000 of the 2013 transfers were held until 2014.

124.Several years ago Polar Inc. acquired an 80% interest in Icecap Co. The book values of Icecap's asset and liability accounts at that time were considered to be equal to their fair values. Polar's acquisition value corresponded to the underlying book value of Icecap so that no allocations or goodwill resulted from the transaction. The following selected account balances were from the individual financial records of these two companies as of December 31, 2013:

Polar sold a building to Icecap on January 1, 2012 for $112,000, although the book value of this asset was only $70,000 on that date. The building had a five-year remaining useful life and was to be depreciated using the straight-line method with no salvage value.

Required: For the consolidated financial statements for 2013, determine the balances that would appear for the following accounts: (1) Buildings (net), (2) Operating expenses, and (3) Noncontrolling Interest in Subsidiary's Net Income.

125.On January 1, 2013, Musial Corp. sold equipment to Matin Inc. (a wholly-owned subsidiary) for $168,000 in cash. The equipment originally cost $140,000 but had a book value of only $98,000 when transferred. On that date, the equipment had a five-year remaining life. Depreciation expense was calculated using the straight-line method. Musial earned $308,000 in net income in 2013 (not including any investment income) while Matin reported $126,000. Assume there is no amortization related to the original investment. What is consolidated net income for 2013?

126.On January 1, 2013, Musial Corp. sold equipment to Matin Inc. (a wholly-owned subsidiary) for $168,000 in cash. The equipment originally cost $140,000 but had a book value of only $98,000 when transferred. On that date, the equipment had a five-year remaining life. Depreciation expense was calculated using the straight-line method. Musial earned $308,000 in net income in 2013 (not including any investment income) while Matin reported $126,000. Assume there is no amortization related to the original investment. Assuming that Musial owned only 90% of Matin, what is consolidated net income for 2013?

127.On January 1, 2013, Musial Corp. sold equipment to Matin Inc. (a wholly-owned subsidiary) for $168,000 in cash. The equipment originally cost $140,000 but had a book value of only $98,000 when transferred. On that date, the equipment had a five-year remaining life. Depreciation expense was calculated using the straight-line method. Musial earned $308,000 in net income in 2013 (not including any investment income) while Matin reported $126,000. Assume there is no amortization related to the original investment. Prepare a schedule of consolidated net income and the share to controlling and noncontrolling interests for 2013, assuming that Musial owned only 90% of Matin and the equipment transfer had been upstream

Chapter 05 Consolidated Financial Statements-Intra-Entity Asset Transactions Answer Key

Multiple Choice Questions

On November 8, 2013, Power Corp. sold land to Wood Co., its wholly owned subsidiary. The land cost $61,500 and was sold to Wood for $89,000. From the perspective of the combination, when is the gain on the sale of the land realized?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years.

Edgar Co. acquired 60% of Stendall Co. on January 1, 2013. During 2013, Edgar made several sales of inventory to Stendall. The cost and selling price of the goods were $140,000 and $200,000, respectively. Stendall still owned one-fourth of the goods at the end of 2013. Consolidated cost of goods sold for 2013 was $2,140,000 because of a consolidating adjustment for intra-entity sales less the entire profit remaining in Stendall's ending inventory. How would consolidated cost of goods sold have differed if the inventory transfers had been for the same amount and cost, but from Stendall to Edgar?

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-05 Explain the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.

Edgar Co. acquired 60% of Stendall Co. on January 1, 2013. During 2013, Edgar made several sales of inventory to Stendall. The cost and selling price of the goods were $140,000 and $200,000, respectively. Stendall still owned one-fourth of the goods at the end of 2013. Consolidated cost of goods sold for 2013 was $2,140,000 because of a consolidating adjustment for intra-entity sales less the entire profit remaining in Stendall's ending inventory. How would non-controlling interest in net income have differed if the transfers had been for the same amount and cost, but from Stendall to Edgar?

A. Non-controlling interest in net income would have decreased by $6,000. B. Non-controlling interest in net income would have increased by $24,000. C. Non-controlling interest in net income would have increased by $20,000. D. Non-controlling interest in net income would have decreased by $18,000. E. Non-controlling interest in net income would have decreased by $56,000. $200,000 Revenue - $140,000 COGS = $60,000 Profit on Intra-Entity Sales × 25% still in Ending Inventory = $15,000 Adjustment to Net Income × 40% for Non-controlling Interest = $6,000 reduction in Net Income for the Non-Controlling Interest.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 05-03 Explain why consolidated entities defer intra-entity gross profit in ending inventory and the consolidation procedures required to recognize profits when actually earned. Learning Objective: 05-05 Explain the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.

On January 1, 2013, Race Corp. acquired 80% of the voting common stock of Gallow Inc. During the year, Race sold to Gallow for $450,000 goods which cost $330,000. Gallow still owned 15% of the goods at year-end. Gallow's reported net income was $204,000, and Race's net income was $806,000. Race decided to use the equity method to account for this investment. What was the non-controlling interest's share of consolidated net

income?

A. $3,600. B. $22,800. C. $30,900. D. $32,900. E. $40,800. Sub's Net Income $204,000 × .20 = $40,800

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 05-03 Explain why consolidated entities defer intra-entity gross profit in ending inventory and the consolidation procedures required to recognize profits when actually earned. Learning Objective: 05-05 Explain the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.

Webb Co. acquired 100% of Rand Inc. on January 5, 2013. During 2013, Webb sold goods to Rand for $2,400,000 that cost Webb $1,800,000. Rand still owned 40% of the goods at the end of the year. Cost of goods sold was $10,800,000 for Webb and $6,400,000 for Rand. What was consolidated cost of goods sold?

A. $17,200,000. B. $15,040,000. C. $14,800,000. D. $15,400,000. E. $14,560,000. Intra-entity gross profit ($2,400,000 - $1,800,000) $600,000 × Inventory remaining at year's end 40% = $240,000 Consolidated COGS = Parents COGS $10,800,000 + Sub's COGS $6,400,000 - Total IntraEntity Transfer $2,400,000 + Deferred Unrealized Profit $240,000 = $15,040,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 05-02 Demonstrate the consolidation procedures to eliminate intra-entity sales and purchases balances. Learning Objective: 05-03 Explain why consolidated entities defer intra-entity gross profit in ending inventory and the consolidation procedures required to recognize profits when actually earned.

Gentry Inc. acquired 100% of Gaspard Farms on January 5, 2012. During 2012, Gentry sold Gaspard Farms for $625,000 goods which had cost $425,000. Gaspard Farms still owned 12% of the goods at the end of the year. In 2013, Gentry sold goods with a cost of $800,000 to Gaspard Farms for $1,000,000, and Gaspard Farms still owned 10% of the goods at year-end. For 2013, cost of goods sold was $5,400,000 for Gentry and $1,200,000 for Gaspard Farms. What was consolidated cost of goods sold for 2013?

A. $6,600,000. B. $6,604,000. C. $5,620,000. D. $5,596,000. E. $5,625,000. Intra-entity gross profit ($1,000,000 - $800,000) $200,000 × Inventory remaining at year's end 10% = $20,000 Consolidated COGS = Parents COGS $5,400,000 + Sub's COGS $1,200,000 - Total IntraEntity Transfer $1,000,000 - Recognize Deferred Gross Profit from 2012 $24,000 + Deferred Unrealized Profit from 2013 $20,000 = $5,596,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-02 Demonstrate the consolidation procedures to eliminate intra-entity sales and purchases balances. Learning Objective: 05-04 Understand that the consolidation process for inventory transfers is designed to defer the unrealized portion of an intra-entity gross profit from the year of transfer into the year of disposal or consumption.

X-Beams Inc. owned 70% of the voting common stock of Kent Corp. During 2013, Kent made several sales of inventory to X-Beams. The total selling price was $180,000 and the cost was $100,000. At the end of the year, 20% of the goods were still in X-Beams' inventory. Kent's reported net income was $300,000. What was the non-controlling

interest in Kent's net income?

A. $90,000. B. $85,200. C. $54,000. D. $94,800. E. $86,640. Sub's Net Income $300,000 - Deferred Unrealized Profit $16,000 = $284,000 × NonControlling Interest 30% = $85,200 Non-Controlling Interest in Net Income

Justings Co. owned 80% of Evana Corp. During 2013, Justings sold to Evana land with a book value of $48,000. The selling price was $70,000. In its accounting records, Justings should

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years.

Norek Corp. owned 70% of the voting common stock of Thelma Co. On January 2, 2012, Thelma sold a parcel of land to Norek. The land had a book value of $32,000 and was sold to Norek for $45,000. Thelma's reported net income for 2012 was $119,000. What is the

non-controlling interest's share of Thelma's net income ?

A. $35,700. B. $31,800. C. $39,600. D. $22,200. E. $26,100. Sales Price $45,000 - BV $32,000 = Gain on Sale $13,000 Sub's Net Income $119,000 - Gain on Sale $13,000 = Adjusted Net Income $106,000 × Sub's Interest 30% = $31,800

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 05-05 Explain the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances. Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years.

10.

Clemente Co. owned all of the voting common stock of Snider Co. On January 2, 2012, Clemente sold equipment to Snider for $125,000. The equipment had cost Clemente $140,000. At the time of the sale, the balance in accumulated depreciation was $40,000. The equipment had a remaining useful life of five years and a $0 salvage value. Straightline depreciation is used by both Clemente and Snider. At what amount should the equipment (net of depreciation) be included in the consolidated balance sheet dated December 31, 2012?

A. $105,000. B. $100,000. C. $95,000. D. $80,000. E. $85,000. Sales Price $125,000 - BV $140, 000 = Loss on Sale $15,000 is Ignored Equipment is transferred at BV (Cost $140,000 - Acc. Deprec. $40,000) $100,000 - Deprec. For 2012 ($100,000/5) $20,000 = $80,000 BV at 12/31/2012

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intraentity fixed asset transfers across affiliated entities.

11.

A. $110,000. B. $105,000. C. $100,000. D. $90,000. E. $60,000. Sales Price $125,000 - BV $140, 000 = Loss on Sale $15,000 is Ignored Equipment is transferred at BV (Cost $140,000 - Acc. Deprec. $40,000) $100,000 - Deprec. For 2012 & 2013 ($100,000/5) $40,000 = $60,000 BV at 12/31/2013

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intraentity fixed asset transfers across affiliated entities.

12.

During 2012, Von Co. sold inventory to its wholly-owned subsidiary, Lord Co. The inventory cost $30,000 and was sold to Lord for $44,000. From the perspective of the combination, when is the $14,000 gain realized?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 05-01 Understand why intra-entity asset transfers create accounting effects within the financial records of affiliated companies that must be eliminated or adjusted in preparing consolidated financial statements.

13.

Bauerly Co. owned 70% of the voting common stock of Devin Co. During 2012, Devin made frequent sales of inventory to Bauerly. There were unrealized gains of $40,000 in the beginning inventory and $25,000 of unrealized gains at the end of the year. Devin reported net income of $137,000 for 2012. Bauerly decided to use the equity method to account for the investment. What is the non-controlling interest's share of Devin's net income for 2012?

A. $41,100. B. $33,600. C. $21,600. D. $45,600. E. $36,600. Sub's Net Income $137,000 + Deferred Realized Gains $40,000 - Deferred Unrealized gains $25,000 = $152,000 × Non-Controlling Interest 30% = $45,600 Non-Controlling Interest in Net Income

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 05-04 Understand that the consolidation process for inventory transfers is designed to defer the unrealized portion of an intra-entity gross profit from the year of transfer into the year of disposal or consumption. Learning Objective: 05-05 Explain the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.

14.

Chain Co. owned all of the voting common stock of Shannon Corp. The corporations' balance sheets dated December 31, 2012, include the following balances for land: for Chain--$416,000, and for Shannon-$256,000. On the original date of acquisition, the book value of Shannon's land was equal to its fair value. On April 4, 2013, Chain sold to Shannon a parcel of land with a book value of $65,000. The selling price was $83,000. There were no other transactions which affected the companies' land accounts during 2012. What is the consolidated balance for land on the 2013 balance sheet?

A. $672,000. B. $690,000. C. $755,000. D. $737,000. E. $654,000. Parent's Land $416,000 + Sub's Land $256,000 = $672,000 - Any gain on the transfer is deferred until the parcel is sold outside the entity in the future.

15.

Gibson Corp. owned a 90% interest in Sparis Co. Sparis frequently made sales of inventory to Gibson. The sales, which include a markup over cost of 25%, were $420,000 in 2012 and $500,000 in 2013. At the end of each year, Gibson still owned 30% of the goods. Net income for Sparis was $912,000 during 2013. What was the non-controlling interest's

share of Sparis' net income for 2013?

A. $85,680. B. $90,600. C. $90,720. D. $91,680. E. $91,800. Sub's Net Income $912,000 + Deferred Realized Gains ($420,000/1.25 × 30% × 25%) $25,200 - Deferred Unrealized Gains ($500,000/1.25 × 30% × 25%) $30,000 = $907,200 × Non-Controlling Interest 10% = $90,720 Non-Controlling Interest in Net Income

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-04 Understand that the consolidation process for inventory transfers is designed to defer the unrealized portion of an intra-entity gross profit from the year of transfer into the year of disposal or consumption. Learning Objective: 05-05 Explain the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.

16.

On January 1, 2013, Payton Co. sold equipment to its subsidiary, Starker Corp., for $115,000. The equipment had cost $125,000, and the balance in accumulated depreciation was $45,000. The equipment had an estimated remaining useful life of eight years and $0 salvage value. Both companies use straight-line depreciation. On their separate 2013 income statements, Payton and Starker reported depreciation expense of $84,000 and $60,000, respectively. The amount of depreciation expense on the consolidated income statement for 2013 would have been

A. $144,000. B. $148,375. C. $109,000. D. $134,000. E. $139,625. Sales Price $115,000 - BV $80,000 = $35,000 Gain on Sale/8yrs = $4,375 Annual Amortization of Unrealized Gain over Expected Useful Life of the Asset Parent's Depreciation $84,000 + Sub's Depreciation $60,000 - Annual amortization $4,375 = $139,625

17.

Yukon Co. acquired 75% percent of the voting common stock of Ontario Corp. on January 1, 2013. During the year, Yukon made sales of inventory to Ontario. The inventory cost Yukon $260,000 and was sold to Ontario for $390,000. Ontario still had $60,000 of the goods in its inventory at the end of the year. The amount of unrealized intra-entity profit that should be eliminated in the consolidation process at the end of 2013 is

A. $15,000. B. $20,000. C. $32,500. D. $30,000. E. $110,000. Intra-entity gross profit ($390,000 - $260,000) $130,000 × Inventory remaining at year's end ($60,000/$390,000) = $20,000

18.

Prince Corp. owned 80% of Kile Corp.'s common stock. During October 2013, Kile sold merchandise to Prince for $140,000. At December 31, 2013, 50% of this merchandise remained in Prince's inventory. For 2013, gross profit percentages were 30% of sales for Prince and 40% of sales for Kile. The amount of unrealized intra-entity profit in ending inventory at December 31, 2013 that should be eliminated in the consolidation process is

A. $28,000. B. $56,000. C. $22,400. D. $21,000. E. $42,000. Intra-entity gross profit ($140,000 × .40) $56,000 × Inventory remaining at year's end (50%) = $28,000

19.

Pot Co. holds 90% of the common stock of Skillet Co. During 2013, Pot reported sales of $1,120,000 and cost of goods sold of $840,000. For this same period, Skillet had sales of $420,000 and cost of goods sold of $252,000. Included in the amounts for Pot's sales were Pot's sales of merchandise to Skillet for $140,000. There were no sales from Skillet to Pot. Intra-entity sales had the same markup as sales to outsiders. Skillet still had 40% of the intra-entity sales as inventory at the end of 2013. What are consolidated sales and cost of goods sold for 2013?

A. $1,400,000 and $952,000. B. $1,400,000 and $966,000. C. $1,540,000 and $1,078,000. D. $1,400,000 and $1,022,000. E. $1,540,000 and $1,092,000. Consolidated Sales = Parent's Sales $1,120,000 + Sub's sales $420,000 = $1,540,000 Intra-Entity Sales $140,000 = $1,400,000 Consolidated COGS = Parents COGS $840,000 + Sub's COGS $252,000 - Total Intra-Entity Transfer $140,000 + Deferred Unrealized Profit $14,000 = $966,000

20.

Pot Co. holds 90% of the common stock of Skillet Co. During 2013, Pot reported sales of $1,120,000 and cost of goods sold of $840,000. For this same period, Skillet had sales of $420,000 and cost of goods sold of $252,000. Included in the amounts for Skillet's sales were Skillet's sales of merchandise to Pot for $140,000. There were no sales from Pot to Skillet. Intra-entity sales had the same markup as sales to outsiders. Pot still had 40% of the intra-entity sales as inventory at the end of 2013. What are consolidated sales and cost of goods sold for 2013?

A. $1,400,000 and $952,000. B. $1,400,000 and $966,000. C. $1,540,000 and $1,078,000. D. $1,400,000 and $974,400. E. $1,540,000 and $1,092,000. Consolidated Sales = Parent's Sales $1,120,000 + Sub's sales $420,000 = $1,540,000 Intra-Entity Sales $140,000 = $1,400,000 Consolidated COGS = Parents COGS $840,000 + Sub's COGS $252,000 - Total Intra-Entity Transfer $140,000 + Deferred Unrealized Profit $22,400 = $974,400

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-02 Demonstrate the consolidation procedures to eliminate intra-entity sales and purchases balances. Learning Objective: 05-03 Explain why consolidated entities defer intra-entity gross profit in ending inventory and the consolidation procedures required to recognize profits when actually earned. Learning Objective: 05-05 Explain the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.

21.

Pot Co. holds 90% of the common stock of Skillet Co. During 2013, Pot reported sales of $1,120,000 and cost of goods sold of $840,000. For this same period, Skillet had sales of $420,000 and cost of goods sold of $252,000. Included in the amounts for Pot's sales were Pot's sales for merchandise to Skillet for $140,000. There were no sales from Skillet to Pot. Intra-entity sales had the same markup as sales to outsiders. Skillet had resold all of the intra-entity purchases from Pot to outside parties during 2013. What are consolidated sales and cost of goods sold for 2013?

A. $1,400,000 and $952,000. B. $1,400,000 and $1,092,000. C. $1,540,000 and $952,000. D. $1,400,000 and $1,232,000. E. $1,540,000 and $1,092,000. Consolidated Sales = Parent's Sales $1,120,000 + Sub's sales $420,000 = $1,540,000 Intra-Entity Sales $140,000 = $1,400,000 Consolidated COGS = Parents COGS $840,000 + Sub's COGS $252,000 - Total Intra-Entity Transfer $140,000 = $952,000

22.

Dalton Corp. owned 70% of the outstanding common stock of Shrugs Inc. On January 1, 2011, Dalton acquired a building with a ten-year life for $420,000. No salvage value was anticipated and the building was to be depreciated on the straight-line basis. On January 1, 2013, Dalton sold this building to Shrugs for $392,000. At that time, the building had a remaining life of eight years but still no expected salvage value. In preparing financial statements for 2013, how does this transfer affect the calculation of Dalton's share of consolidated net income?

23.

On January 1, 2013, Pride, Inc. acquired 80% of the outstanding voting common stock of Strong Corp. for $364,000. There is no active market for Strong's stock. Of this payment, $28,000 was allocated to equipment (with a five-year life) that had been undervalued on Strong's books by $35,000. Any remaining excess was attributable to goodwill which has not been impaired. As of December 31, 2013, before preparing the consolidated worksheet, the financial statements appeared as follows:

A. $700,000. B. $644,000. C. $588,000.

D. $560,000. E. $840,000. Parent's Revenue $420,000 + Sub's Revenue $280,000 - Intra-Entity Sales $140,000 = $560,000

24.

A. $42,000. B. $47,600. C. $53,200.

D. $49,000. E. $35,000. Parent's Operating Expenses $28,000 + Sub's Operating Expenses $14,000 + Excess Amortization on Equipment ($35,000/5) $7,000 = $49,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 05-01 Understand why intra-entity asset transfers create accounting effects within the financial records of affiliated companies that must be eliminated or adjusted in preparing consolidated financial statements.

25.

A. $196,000. B. $212,800. C. $184,800.

D. $203,000. E. $168,000. Consolidated COGS = Parents COGS $196,000 + Sub's COGS $112,000 - Total Intra-Entity Transfer $140,000 + Deferred Unrealized Profit ($28,000 × .60) $16,800 = $184,800

26.

A. $100,800. B. $97,440. C. $93,800.

D. $120,400. E. $117,040. [$364,000/80% = $455,000 + Net Income ($154,000 - $7,000) $147,000] $602,000 × .20 = $120,400

27.

A. $952,000. B. $1,058,400. C. $1,069,600.

D. $1,064,000. E. $1,066,800. BV Parent's Equipment $616,000 + BV Sub's Equipment $420,000 + FV Equipment Increase at Acquisition $35,000 - First Year Excess Amortization of FV ($35,000/5) $7,000 = $1,064,000

28.

A. $336,000. B. $280,000. C. $364,000.

D. $347,200. E. $349,300. BV Parent's Inventory $210,000 + BV Sub's Inventory $154,000 - Unrealized Profit on Inventory Transfer ($28,000 × .60) $16,800 = $347,200

29.

A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Strickland Company. E. Sales.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-02 Demonstrate the consolidation procedures to eliminate intra-entity sales and purchases balances.

30.

A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Strickland Company. E. Sales.

31.

Strickland Company sells inventory to its parent, Carter Company, at a profit during 2012. One-third of the inventory is sold by Carter in 2012. In the consolidation worksheet for 2012, which of the following choices would be a debit entry to eliminate unrealized intra-entity gross profit with regard to the 2012 intra-entity sales?

A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Strickland Company. E. Sales.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-03 Explain why consolidated entities defer intra-entity gross profit in ending inventory and the consolidation procedures required to recognize profits when actually earned.

32.

Strickland Company sells inventory to its parent, Carter Company, at a profit during 2012. One-third of the inventory is sold by Carter in 2012. In the consolidation worksheet for 2012, which of the following choices would be a credit entry to eliminate unrealized intra-entity gross profit with regard to the 2012 intra-entity sales?

A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Strickland Company. E. Sales.

33.

Strickland Company sells inventory to its parent, Carter Company, at a profit during 2012. One-third of the inventory is sold by Carter in 2012. In the consolidation worksheet for 2013, assuming Carter uses the initial value method of accounting for its investment in Strickland, which of the following choices would be a debit entry to eliminate unrealized intra-entity gross profit with regard to the 2012 intra-entity sales?

A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Strickland Company. E. Sales.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-04 Understand that the consolidation process for inventory transfers is designed to defer the unrealized portion of an intra-entity gross profit from the year of transfer into the year of disposal or consumption.

34.

Strickland Company sells inventory to its parent, Carter Company, at a profit during 2012. One-third of the inventory is sold by Carter in 2012. In the consolidation worksheet for 2013, assuming Carter uses the initial value methd of accounting for its investment in Strickland, which of the following choices would be a credit entry to eliminate unrealized intra-entity gross profit with regard to the 2012 intraentity sales?

A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Strickland Company. E. Sales.

35.

Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2012. One-third of the inventory is sold by Walsh uses the equity method to account for its investment in Fisher. In the consolidation worksheet for 2012, which of the following choices would be a debit entry to eliminate the intra-entity transfer of inventory?

A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Fisher Company. E. Sales.

36.

Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2012. One-third of the inventory is sold by Walsh uses the equity method to account for its investment in Fisher. In the consolidation worksheet for 2012, which of the following choices would be a credit entry to eliminate the intra-entity transfer of inventory?

A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Fisher Company. E. Sales.

37.

A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Fisher Company. E. Sales.

38.

Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2012. One-third of the inventory is sold by Walsh uses the equity method to account for its investment in Fisher. In the consolidation worksheet for 2012, which of the following choices would be a credit entry to eliminate unrealized intra-entity gross profit with regard to the 2012 intra-entity sales?

A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Fisher Company. E. Sales.

39.

Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2012. One-third of the inventory is sold by Walsh uses the equity method to account for its investment in Fisher. In the consolidation worksheet for 2013, which of the following choices would be a debit entry to eliminate unrealized intra-entity gross profit with regard to the 2012 intra-entity sales?

A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Fisher Company. E. Sales.

40.

Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2012. One-third of the inventory is sold by Walsh uses the equity method to account for its investment in Fisher. In the consolidation worksheet for 2013, which of the following choices would be a credit entry to eliminate unrealized intra-entity gross profit with regard to the 2012 intra-entity sales?

A. Retained earnings. B. Cost of goods sold. C. Inventory. D. Investment in Fisher Company. E. Sales.

41.

When comparing the difference between an upstream and downstream transfer of inventory, and using the initial value method, which of the following statements is true when there is a non-controlling interest?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 3 Hard Learning Objective: 05-05 Explain the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.

42.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 3 Hard Learning Objective: 05-05 Explain the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.

43.

Which of the following statements is true regarding inventory transfers between a parent and its subsidiary, using the initial value method?

A. The sale of merchandise between a parent and its subsidiary represents an arm'slength transaction and thus provides the basis for the recognition of profit on such transfers. B. Profits on upstream transfers associated with the parent's ending inventory are subtracted from subsidiary net income for the current year in the calculation of parent's income from subsidiary. These year-end deferrals are then added to next year's subsidiary net income in the calculation of parent's income from subsidiary. This procedure is inappropriate because all the intra-entity transactions unsold at year-end may not be sold in the next year. C. Profits on upstream transfers associated with the parent's ending inventory are subtracted from subsidiary net income for the current year in the calculation of parent's income from subsidiary. These year-end deferrals are then added to next year's subsidiary net income in the calculation of parent's income from subsidiary. This procedure is appropriate even if all the intra-entity transactions unsold at year-end may not be sold in the next year. D. Merchandise transfers from a parent to its subsidiary that have not been sold to unaffiliated parties should be included in consolidated inventory at their transfer price. E. Non-controlling interest in subsidiary's net income should not be reduced for upstream or downstream ending inventory profits.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-01 Understand why intra-entity asset transfers create accounting effects within the financial records of affiliated companies that must be eliminated or adjusted in preparing consolidated financial statements. Learning Objective: 05-03 Explain why consolidated entities defer intra-entity gross profit in ending inventory and the consolidation procedures required to recognize profits when actually earned.

44.

Which of the following statements is true regarding an intra-entity sale of land?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years.

45.

Parent sold land to its subsidiary for a gain in 2010. The subsidiary sold the land externally for a gain in 2013. Which of the following statements is true?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand

Difficulty: 1 Easy Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years.

46.

An intra-entity sale took place whereby the transfer price exceeded the book value of a depreciable asset. Which statement is true for the year following the sale?

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intraentity fixed asset transfers across affiliated entities.

47.

An intra-entity sale took place whereby the book value exceeded the transfer price of a depreciable asset. Which statement is true for the year following the sale?

48.

An intra-entity sale took place whereby the transfer price was less than the book value of a depreciable asset. Which statement is true for the year following the sale?

AACSB: Analytic

AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intraentity fixed asset transfers across affiliated entities.

49.

Which of the following statements is true concerning an intra-entity transfer of a depreciable asset?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-05 Explain the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances. Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intraentity fixed asset transfers across affiliated entities.

50.

Gargiulo Company, a 90% owned subsidiary of Posito Corporation, sells inventory to Posito at a 25% profit on selling price. The following data are available pertaining to intra-entity purchases. Gargiulo was acquired on January 1, 2012.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

Compute the equity in earnings of Gargiulo reported on Posito's books for 2012.

A. $63,000. B. $62,730. C. $63,270. D. $70,000. E. $62,700. Parent's Part of Net Income 2012 ($70,000 × .90) $63,000 - Earnings Adjustment for Unrealized Gains of Sub 2012 ($1,200 × .25 × .90) $270 = $62,730

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 05-03 Explain why consolidated entities defer intra-entity gross profit in ending inventory and the consolidation procedures required to recognize profits when actually earned. Learning Objective: 05-05 Explain the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.

51.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

Compute the equity in earnings of Gargiulo reported on Posito's books for 2013.

A. $76,500. B. $77,130. C. $75,870. D. $75,600. E. $75,800. Parent's Part of Net Income 2013 ($85,000 × .90) $76,500 - Earnings Adjustment for Unrealized Gains of Sub 2013 ($4,000 × .25 × .90) $900 + (Realized Gains of Sub for 2012) $270 = $75,870

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 05-04 Understand that the consolidation process for inventory transfers is designed to defer the unrealized portion of an intra-entity gross profit from the year of transfer into the year of disposal or consumption. Learning Objective: 05-05 Explain the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.

52.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

Compute the equity in earnings of Gargiulo reported on Posito's books for 2014.

A. $84,600. B. $84,375. C. $83,925. D. $84,825. E. $84,850. Parent's Part of Net Income 2014 ($94,000 × .90) $84,600 - Earnings Adjustment for Unrealized Gains of Sub 2014 ($3,000 × .25 × .90) $675 + (Realized Gains of Sub for 2013) $900 = $84,825

affects the computation of noncontrolling interest balances.

53.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

Compute the non-controlling interest in Gargiulo's net income for 2012.

A. $6,970. B. $7,000. C. $7,030. D. $6,270. E. $6,230. Parent's Part of Net Income 2012 ($70,000 × .10) $7,000 - Earnings Adjustment for Unrealized Gains of Sub 2012 ($1,200 × .25 × .10) $30 = $6,970

affects the computation of noncontrolling interest balances.

54.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

Compute the non-controlling interest in Gargiulo's net income for 2013.

A. $8,500. B. $8,570. C. $8,430. D. $8,400. E. $7,580. Parent's Part of Net Income 2013 ($85,000 × .10) $8,500 - Earnings Adjustment for Unrealized Gains of Sub 2013 ($4,000 × .25 × .10) $100 + (Realized Gains of Sub for 2012) $30 = $8,430

Learning Objective: 05-05 Explain the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.

55.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

Compute the non-controlling interest in Gargiulo's net income for 2014.

A. $9,400. B. $9,375. C. $9,425. D. $9,325. E. $8,485. Parent's Part of Net Income 2014 ($94,000 × .10) $9,400 - Earnings Adjustment for Unrealized Gains of Sub 2014 ($3,000 × .25 × .10) $75 + (Realized Gains of Sub for 2013) $100 = $9,425

unrealized portion of an intra-entity gross profit from the year of transfer into the year of disposal or consumption. Learning Objective: 05-05 Explain the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.

56.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

For consolidation purposes, what amount would be debited to cost of goods sold for the 2012 consolidation worksheet with regard to unrealized gross profit of the intra-entity transfer of merchandise?

A. $300. B. $240. C. $2,000. D. $1,600. E. $270. Earnings Adjustment for Unrealized Gains of Sub 2012 ($1,200 × .25) = $300

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analyze Difficulty: 2 Medium

Learning Objective: 05-03 Explain why consolidated entities defer intra-entity gross profit in ending inventory and the consolidation procedures required to recognize profits when actually earned.

57.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

For consolidation purposes, what amount would be debited to cost of goods sold for the 2013 consolidation worksheet with regard to the unrealized gross profit of the 2013 intraentity transfer of merchandise?

A. $1,000. B. $800. C. $3,000. D. $2,400. E. $900. Earnings Adjustment for Unrealized Gains of Sub 2013 ($4,000 × .25) = $1,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-03 Explain why consolidated entities defer intra-entity gross profit in ending inventory and the

consolidation procedures required to recognize profits when actually earned.

58.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

For consolidation purposes, what amount would be debited to cost of goods sold for the 2014 consolidation worksheet with regard to the unrealized gross profit of the 2014 intraentity transfer of merchandise?

A. $600. B. $750. C. $3,760. D. $3,000. E. $675. Earnings Adjustment for Unrealized Gains of Sub 2014 ($3,000 × .25) = $750

59.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

A. $0. B. $1,600. C. $300. D. $240. E. $270. Zero - No Earnings Adjustment would be necessary in January 2012

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-04 Understand that the consolidation process for inventory transfers is designed to defer the unrealized portion of an intra-entity gross profit from the year of transfer into the year of disposal or consumption.

60.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

A. $240. B. $300. C. $2,000. D. $1,600. E. $270. Realized Gains of Sub 2012 ($1,200 × .25) = $300

61.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

A. $3,000. B. $2,400. C. $1,000. D. $800. E. $900. Realized Gains of Sub 2013 ($4,000 × .25) = $1,000

62.

Patti Company owns 80% of the common stock of Shannon, Inc. In the current year, Patti reports sales of $10,000,000 and cost of goods sold of $7,500,000. For the same period, Shannon has sales of $200,000 and cost of goods sold of $160,000. During the year, Patti sold merchandise to Shannon for $60,000 at a price based on the normal markup. At the end of the year, Shannon still possesses 30 percent of this inventory. Compute consolidated sales.

A. $10,000,000. B. $10,126,000. C. $10,140,000. D. $10,200,000. E. $10,260,000. Consolidated Sales = Parent's Sales $10,000,000 + Sub's sales $200,000 = $10,200,000 Intra-Entity Sales $60,000 = $10,140,000

63.

A. $7,500,000. B. $7,600,000. C. $7,615,000. D. $7,604,500. E. $7,660,000. Consolidated COGS = Parents COGS $7,500,000 + Sub's COGS $160,000 - Total IntraEntity Transfer $60,000 + Deferred Unrealized Profit ($15,000 × .30) $4,500 = $7,604,500

64.

65.

Wilson owned equipment with an estimated life of 10 years when it was acquired for an original cost of $80,000. The equipment had a book value of $50,000 at January 1, 2012. On January 1, 2012, Wilson realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. On April 1, 2012 Simon Company, a 90% owned subsidiary of Wilson Company, bought the equipment from Wilson for $68,250 and for depreciation purposes used the estimated remaining life as of that date. The following data are available pertaining to Simon's income and dividends:

Compute the gain on transfer of equipment reported by Wilson for 2012.

A. $19,500. B. $18,250. C. $11,750. D. $38,250. E. $37,500. January 1, 2012 BV $50,000/10yrs Expected Useful Life = $5,000 per yr Depreciation Expense. Sale on April 1, 2012 required Three Months Depreciation Expense leaving a BV on Sale of $48,750. Sale Price of $68,250 - BV on Sale of $48,750 = $19,500 Gain on Sale

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intraentity fixed asset transfers across affiliated entities.

66.

Compute the amortization of gain through a depreciation adjustment for 2012 for consolidation purposes.

A. $1,950. B. $1,825. C. $1,500. D. $2,000. E. $5,250. Amortization of Gain on Transfer of Equipment = $19,500 Gain/9yrs 9 mos. Remaining Useful Life = $2,000 per yr. × 9 mos. of 2012 = $1,500 Depreciation Adjustment for 2012

67.

Compute the amortization of gain through a depreciation adjustment for 2013 for consolidation purposes.

A. $1,950. B. $1,825. C. $2,000. D. $1,500. E. $7,000. Amortization of Gain on Transfer of Equipment = $19,500 Gain/9yrs 9 mos. Remaining Useful Life = $2,000 per yr. × 12 mos. of 2013 = $2,000 Depreciation Adjustment for 2013

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intraentity fixed asset transfers across affiliated entities.

68.

Compute the amortization of gain through a depreciation adjustment for 2014 for consolidation purposes.

A. $1,925. B. $1,825. C. $2,000. D. $1,500. E. $7,000. Amortization of Gain on Transfer of Equipment = $19,500 Gain/9yrs 9 mos. Remaining Useful Life = $2,000 per yr. × 12 mos. of 2014 = $2,000 Depreciation Adjustment for 2014

69.

Compute Wilson's share of income from Simon for consolidation for 2012.

A. $72,000. B. $90,000. C. $73,575. D. $73,800. E. $72,500. Parent's Part of Net Income 2012 ($100,000 × .90) = $90,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intraentity fixed asset transfers across affiliated entities.

70.

Compute Wilson's share of income from Simon for consolidation for 2013.

A. $108,000. B. $110,000. C. $106,000. D. $109,825. E. $109,800. Parent's Part of Net Income 2013 ($120,000 × .90) = $108,000

71.

Compute Wilson's share of income from Simon for consolidation for 2014.

A. $118,825. B. $115,000. C. $117,000. D. $119,000. E. $118,800. Parent's Part of Net Income 2014 ($130,000 × .90) = $117,000

72.

On January 1, 2012, Smeder Company, an 80% owned subsidiary of Collins, Inc. transferred equipment with a 10-year life (six of which remain with no salvage value) to Collins in exchange for $84,000 cash. At the date of transfer, Smeder's records carried the equipment at a cost of $120,000 less accumulated depreciation of $48,000. Straight-line depreciation is used. Smeder reported net income of $28,000 and $32,000 for 2012 and 2013, respectively. All net income effects of the intra-entity transfer are attributed to the seller for consolidation purposes. Compute the gain recognized by Smeder Company relating to the equipment for 2012.

A. $36,000. B. $34,000. C. $12,000. D. $10,000. E. $0. January 1, 2012 Sale Price on Transfer $84,000 - BV $72,000 = $12,000 Gain on Sale

73.

A. $12,400. B. $14,400. C. $11,200. D. $12,800. E. $18,000. 2012 Net Income $28,000 - Unrealized Gain on Transfer $12,000 + Amortization of Gain for First yr. $2,000 = $18,000 × .80 = $14,400 Net Income Share to Parent

74.

A. $27,600. B. $23,600. C. $27,200. D. $24,000. E. $34,000. 2013 Net Income $32,000 + Amortization of Gain for Second yr. $2,000 = $34,000 × .80 = $27,200 Net Income Share to Parent

75.

On January 1, 2012, Smeder Company, an 80% owned subsidiary of Collins, Inc. transferred equipment with a 10-year life (six of which remain with no salvage value) to Collins in exchange for $84,000 cash. At the date of transfer, Smeder's records carried the equipment at a cost of $120,000 less accumulated depreciation of $48,000. Straight-line depreciation is used. Smeder reported net income of $28,000 and $32,000 for 2012 and 2013, respectively. All net income effects of the intra-entity transfer are attributed to the seller for consolidation purposes. For consolidation purposes, what net debit or credit will be made for the year 2012 relating to the accumulated depreciation for the equipment transfer?

A. Debit accumulated depreciation, $46,000. B. Debit accumulated depreciation, $48,000. C. Credit accumulated depreciation, $48,000. D. Credit accumulated depreciation, $46,000. E. Debit accumulated depreciation, $2,000. Acc. Deprec. $48,000 - Amortization of Gain for First yr. $2,000 = $46,000 Credit to Acc. Deprec. for 2012

76.

On January 1, 2012, Smeder Company, an 80% owned subsidiary of Collins, Inc. transferred equipment with a 10-year life (six of which remain with no salvage value) to Collins in exchange for $84,000 cash. At the date of transfer, Smeder's records carried the equipment at a cost of $120,000 less accumulated depreciation of $48,000. Straight-line depreciation is used. Smeder reported net income of $28,000 and $32,000 for 2012 and 2013, respectively. All net income effects of the intra-entity transfer are attributed to the seller for consolidation purposes. What is the net effect on consolidated net income in 2012 due to the equipment transfer?

A. Increase $2,000. B. Decrease $12,000. C. Decrease $10,000. D. Decrease $14,000. E. Increase $10,000. Unrealized Gain on Transfer $12,000 - Amortization of Gain for First yr. $2,000 = $10,000 Decrease in Net Income for 2012

77.

Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2012, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2012 and 2013, respectively. Leo uses the equity method to account for its investment. Compute the gain or loss on the intra-entity sale of land.

A. $15,000 loss. B. $15,000 gain. C. $50,000 loss. D. $50,000 gain. E. $65,000 gain. Sub's Land Transfer Value $75,000 - Sub's Land BV $60,000 = $15,000 Gain on IntraEntity Sale of Land

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years.

78.

Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2012, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2012 and 2013, respectively. Leo uses the equity method to account for its investment. On a consolidation worksheet, what adjustment would be made for 2012 regarding the land transfer?

A. Debit gain for $50,000. B. Credit gain for $50,000. C. Debit land for $15,000. D. Credit land for $15,000. E. Credit gain for $15,000. Credit the Land account for the Gain of $15,000, with any realized gain on the transfer deferred until the parcel is sold outside the entity in the future

79.

Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2012, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2012 and 2013, respectively. Leo uses the equity method to account for its investment. On a consolidation worksheet, having used the equity method, what adjustment would be made for 2013 regarding the land transfer?

A. Debit retained earnings for $15,000. B. Credit retained earnings for $15,000. C. Debit retained earnings for $50,000. D. Credit retained earnings for $50,000. E. Debit investment in Stiller for $15,000. Debit the Investment account for the Gain of $15,000, with any realized gain on the transfer deferred until the parcel is sold outside the entity in the future

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 1 Easy Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years.

80.

A. $110,000. B. $100,000. C. $125,000. D. $85,000. E. $88,000. Parent's Part of Net Income 2012 ($125,000 × .80) = $100,000

81.

A. $140,000. B. $97,000. C. $125,000. D. $100,000. E. $112,000. Parent's Part of Net Income 2013 ($140,000 × .80) = $112,000

82.

Stark Company, a 90% owned subsidiary of Parker, Inc. sold land to Parker on May 1, 2012, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2012, 2013, and 2014, respectively. Parker sold the land purchased from Stark in 2012 for $92,000 in 2014. Compute the gain or loss on the intra-entity sale of land.

A. $80,000 gain. B. $80,000 loss. C. $5,000 gain. D. $5,000 loss. E. $85,000 loss. Sub's Land Transfer Value $80,000 - Parent's Land BV $85,000 = $5,000 Loss on IntraEntity Sale of Land

83.

Stark Company, a 90% owned subsidiary of Parker, Inc. sold land to Parker on May 1, 2012, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2012, 2013, and 2014, respectively. Parker sold the land purchased from Stark in 2012 for $92,000 in 2014. Which of the following will be included in a consolidation entry for 2012?

A. Debit loss for $5,000. B. Credit loss for $5,000. C. Credit land for $5,000. D. Debit gain for $5,000. E. Credit gain for $5,000.

84.

Stark Company, a 90% owned subsidiary of Parker, Inc. sold land to Parker on May 1, 2012, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2012, 2013, and 2014, respectively. Parker sold the land purchased from Stark in 2012 for $92,000 in 2014. Which of the following will be included in a consolidation entry for 2013?

A. Debit retained earnings for $5,000. B. Credit retained earnings for $5,000. C. Debit investment in subsidiary for $5,000. D. Credit investment in subsidiary for $5,000. E. Credit land for $5,000.

85.

A. $205,000. B. $200,000. C. $180,000. D. $175,500. E. $184,500. Parent's Part of Net Income 2012 ($200,000 × .90) = $180,000 + (Adjusted Loss on Land $5,000 × .90) $4,500 = $184,500

86.

A. $185,000. B. $157,500. C. $166,500. D. $162,000. E. $180,000. Parent's Part of Net Income 2013 ($180,000 × .90) = $162,000

87.

A. $12,000 gain. B. $5,000 loss. C. $12,000 loss. D. $7,000 gain. E. $7,000 loss. Sub's Sale Price $92,000 - BV of Land $80,000 = $12,000

88.

A. $5,000 loss. B. $5,000 gain. C. $7,000 loss. D. $7,000 gain. E. $0. Stark has no Gain or Loss at the time of Sale by Parker

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years.

89.

A. $5,000 loss. B. $7,000 gain. C. $12,000 gain. D. $7,000 loss. E. $12,000 loss. The Reported Gain of $12,000 is offset by the Deferred Loss on the Original Transfer of $5,000 to have the net effect of a $7,000 Gain in Reported Consolidated Income

90.

A. $204,300. B. $202,500. C. $193,500. D. $191,700. E. $198,000. Parent's Part of Net Income 2014 $220,000 - Loss Adjustment of ($5,000) on Disposal of Land = $215,000 × .90 = $193,500

91.

Pepe, Incorporated acquired 60% of Devin Company on January 1, 2012. On that date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000 and $325,000 for 2012 and 2013, respectively. Pepe uses the equity method to account for its investment in Devin. What is the gain or loss on equipment reported by Devin for 2012?

A. $54,000 gain. B. $21,000 loss. C. $21,000 gain. D. $9,000 loss. E. $9,000 gain. Sub's Equipment Transfer Value $45,000 - Parent's Equipment BV $54,000 = $9,000 Loss on Intra-Entity Sale of Equipment

92.

A. $0. B. $9,000 gain. C. $9,000 loss. D. $21,000 gain. E. $21,000 loss. There is No Consolidated Gain/Loss Recognized on the Transfer in 2012

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intraentity fixed asset transfers across affiliated entities.

93.

Pepe, Incorporated acquired 60% of Devin Company on January 1, 2012. On that date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000 and $325,000 for 2012 and 2013, respectively. Pepe uses the equity method to account for its investment in Devin. Compute the income from Devin reported on Pepe's books for 2012.

A. $174,600. B. $184,800. C. $172,000. D. $171,000. E. $180,000. (Sub's 2012 Income $300,000 + Unrealized Loss on Transferred Equipment $9,000 - First Annual Recognition of Loss $1,000) $308,000 × .60 = $184,800 Sub's Income Reported by Parent

94.

Pepe, Incorporated acquired 60% of Devin Company on January 1, 2012. On that date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000 and $325,000 for 2012 and 2013, respectively. Pepe uses the equity method to account for its investment in Devin. Compute the income from Devin reported on Pepe's books for 2013.

A. $190,200. B. $196,000. C. $194,400. D. $187,000. E. $195,000. (Sub's 2013 Income $325,000 - Second Year Recognition of Loss $1,000) $324,000 × .60 = $194,400 Sub's Income Reported by Parent

95.

Pepe, Incorporated acquired 60% of Devin Company on January 1, 2012. On that date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000 and $325,000 for 2012 and 2013, respectively. Pepe uses the equity method to account for its investment in Devin. Compute the non-controlling interest in the net income of Devin for 2012.

A. $116,400. B. $120,400. C. $120,000. D. $123,200. E. $112,000. (Sub's 2012 Income $300,000 + Unrealized Loss on Transferred Equipment $9,000 - First Annual Recognition of Loss $1,000) $308,000 × .40 = $123,200 Sub's Income Reported by Non-Controlling Interest

96.

Pepe, Incorporated acquired 60% of Devin Company on January 1, 2012. On that date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000 and $325,000 for 2012 and 2013, respectively. Pepe uses the equity method to account for its investment in Devin. Compute the non-controlling interest in the net income of Devin for 2013.

A. $126,800. B. $130,000. C. $122,000. D. $130,800. E. $129,600. (Sub's 2013 Income $325,000 - Second Year Recognition of Loss $1,000) $324,000 × .40 = $129,600 Sub's Income Reported by Parent

Essay Questions

97.

For each of the following situations (1 - 10), select the correct entry (A - E) that would be required on a consolidation worksheet. (A.) Debit retained earnings. (B.) Credit retained earnings. (C.) Debit investment in subsidiary. (D.) Credit investment in subsidiary. (E.) None of the above. ___ 1. Upstream beginning inventory profit, using the initial value method. ___ 2. Downstream beginning inventory profit, using the initial value method. ___ 3. Upstream ending inventory profit, using the initial value method. ___ 4. Downstream ending inventory profit, using the initial value method. ___ 5. Upstream transfer of depreciable assets, in the period after transfer, where subsidiary recognizes a gain, using the initial value method. ___ 6. Downstream transfer of depreciable assets, in the period after transfer, where parent recognizes a gain, using the initial value method. ___ 7. Upstream transfer of land, in the period after transfer, where subsidiary recognizes a loss, using the initial value method. ___ 8. Downstream transfer of land, in the period after transfer, where parent recognizes a loss, using the initial value method. ___ 9. Eliminate income from subsidiary, recorded under the equity method. ___ 10. Eliminate recorded amortization of acquisition fair value over book value, recorded under the equity method.

(1) A; (2) A; (3) E: (4) E; (5) A: (6) A; (7) B; (8) B; (9) D; (10) C

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 3 Hard Learning Objective: 05-03 Explain why consolidated entities defer intra-entity gross profit in ending inventory and the

consolidation procedures required to recognize profits when actually earned. Learning Objective: 05-04 Understand that the consolidation process for inventory transfers is designed to defer the unrealized portion of an intra-entity gross profit from the year of transfer into the year of disposal or consumption. Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years. Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intraentity fixed asset transfers across affiliated entities.

98.

On April 7, 2013, Pate Corp. sold land to Shannahan Co., its subsidiary. From a consolidated point of view, when will the gain on this transfer actually be earned?

The gain is earned when Shannahan sells the land to a third party.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-01 Understand why intra-entity asset transfers create accounting effects within the financial records of affiliated companies that must be eliminated or adjusted in preparing consolidated financial statements.

99.

Throughout 2013, Cleveland Co. sold inventory to Leeward Co., its subsidiary. From a consolidated point of view, when will the gain on this transfer be earned?

The gain is earned when Leeward uses the goods or sells them to a third party.

100.

Varton Corp. acquired all of the voting common stock of Caleb Co. on January 1, 2013. Varton owned some land with a book value of $84,000 that was sold to Caleb for its fair value of $120,000. How should this transaction be accounted for by the consolidated entity?

Caleb and Varton are in substance one entity; although in legal form they are separate. The "sale" of land by Varton should be regarded as a transfer of assets within the entity. No gain on the transfer should be recognized in the consolidated financial statements since the earnings process is not complete. Because Caleb recognized a gain in its income statement, the consolidation process must eliminate the gain. Also, Caleb's separate balance sheet showed the land at an amount greater than its cost to the combined entity. The consolidation entry must reduce land to its cost.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 05-01 Understand why intra-entity asset transfers create accounting effects within the financial records of affiliated companies that must be eliminated or adjusted in preparing consolidated financial statements. Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years.

101.

During 2013, Edwards Co. sold inventory to its parent company, Forsyth Corp. Forsyth still owned the entire inventory purchased at the end of 2013. Why must the gross profit on the sale be deferred when consolidated financial statements are prepared at the end of 2013?

A sale of inventory by a subsidiary to its parent is more accurately understood as a

transfer within the entity. Since Forsyth still owned the inventory at the end of the year, the earnings process was not yet complete. If recognition of the gross profit on the transfer was allowed, the parent would be able to manipulate consolidated net income and

consolidated net assets by transferring inventory between parent and subsidiary.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-01 Understand why intra-entity asset transfers create accounting effects within the financial records of affiliated companies that must be eliminated or adjusted in preparing consolidated financial statements. Learning Objective: 05-03 Explain why consolidated entities defer intra-entity gross profit in ending inventory and the consolidation procedures required to recognize profits when actually earned.

102.

How does a gain on an intra-entity sale of equipment affect the calculation of a noncontrolling interest?

If the equipment is sold by the parent to the subsidiary, the sale of the equipment does not affect the calculation of the non-controlling interest's share of the subsidiary's net income. When the sale of equipment is upstream, the gain on the sale must be subtracted from the subsidiary's income, and this elimination may be allocated between the controlling interest and non-controlling interest share of the subsidiary's earnings.

AACSB: Reflective thinking AICPA BB: Critical Thinking

AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intraentity fixed asset transfers across affiliated entities.

103.

How do upstream and downstream inventory transfers differ in their effect in a year-end consolidation?

If the sale of inventory is downstream (from parent to subsidiary), any unrealized gain on the sale does not affect the calculation of non-controlling interest. When the sale is upstream (from the subsidiary to the parent), the gain on the sale is associated with the subsidiary. The gain on goods that the parent still owns should be deducted from the subsidiary's income and this elimination may be allocated between the controlling interest and the non-controlling interest's share of the subsidiary's earnings.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-03 Explain why consolidated entities defer intra-entity gross profit in ending inventory and the consolidation procedures required to recognize profits when actually earned. Learning Objective: 05-05 Explain the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.

104.

How is the gain on an intra-entity transfer of a depreciable asset realized?

The gain on an intra-entity transfer of a depreciable asset may be realized in one of two ways: (1) through the use of the asset in operations or (2) through the sale of the asset to an independent third party.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intraentity fixed asset transfers across affiliated entities.

105.

Dithers Inc. acquired all of the common stock of Bumstead Corp. on January 1, 2013. During 2013, Bumstead sold land to Dithers at a gain. No consolidation entry for the sale

of the land was made at the end of 2013. What errors will this omission cause in the consolidated financial statements?

Consolidation Entry for 2013 Gain on Sale of Land XXX Land XXX This omission causes both the amounts for Land and Gain on Sale of Land to be overstated in the consolidated financial statements, and ultimately, Total Assets and Ending Retained Earnings to be overstated as well. Also, the correction for gain may be allocated to the non-controlling interest share of subsidiary earnings and the noncontrolling interest balance on the consolidated balance sheet.

AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Measurement Blooms: Analyze Difficulty: 2 Medium Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years.

106.

Why do intra-entity transfers between the component companies of a business combination occur so frequently?

One reason for the significant volume and frequency of intra-entity transfers is that many business combinations are specifically organized so that the companies can provide products for each other. This design is intended to benefit the business combination as a whole because of the economies provided by vertical integration. In effect, more profit can often be generated by the combination if one member is able to buy from another rather than from an outside party.

107.

Fraker, Inc. owns 90 percent of Richards, Inc. and bought $200,000 of Richards' inventory in 2013. The transfer price was equal to 30 percent of the sales price. When preparing consolidated financial statements, what amount of these sales is eliminated?

Regardless of the ownership percentage or the markup, the $200,000 was simply an intraentity asset transfer for consolidation purposes. Thus, within the consolidation process, the entire $200,000 should be eliminated from both the Sales and the Purchases (Inventory) accounts.

108.

What is meant by unrealized inventory gains, and how are they treated on a consolidation worksheet?

In intra-entity transactions, a transfer price is often established that exceeds the cost of the inventory. Hence, the seller is recording a gain on its books that, from the perspective of the business combination as a whole, remains unrealized until the asset is consumed or sold to an outside party. Any unrealized gain on merchandise still being held by the buyer must be eliminated whenever consolidated financial statements are produced. For the year of transfer, this consolidation procedure is carried out by removing the unrealized gain from the inventory account on the balance sheet and from the ending inventory balance within cost of goods sold. In the year following the transfer (if the goods are resold or consumed), the unrealized gain must again be eliminated within the consolidation process. This second reduction is made on the worksheet to the beginning inventory component of cost of goods sold as well as to the beginning retained earnings balance of the original seller. The gain is being moved into the year of realization. If the transfer was downstream in direction and the parent company has applied the equity method, the adjustment in the subsequent year must be made to the investment in subsidiary account rather than to retained earnings.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-03 Explain why consolidated entities defer intra-entity gross profit in ending inventory and the consolidation procedures required to recognize profits when actually earned. Learning Objective: 05-04 Understand that the consolidation process for inventory transfers is designed to defer the unrealized portion of an intra-entity gross profit from the year of transfer into the year of disposal or consumption.

109.

What is the impact on the non-controlling interest of a subsidiary when there are downstream transfers of inventory between the parent and subsidiary companies?

None.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-05 Explain the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances.

110.

When is the gain on an intra-entity transfer of land realized?

The gain on an intra-entity transfer of land is realized when the asset is sold to an independent third party. The gain on the intra-entity transfer is deferred until the time of that third-party sale.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years.

111.

What is the purpose of the adjustments to depreciation expense within the consolidation process when there has been an intra-entity transfer of a depreciable asset?

Depreciable assets are often transferred between the members of a business combination at amounts in excess of book value. The buyer will then compute depreciation expense based on this inflated transfer price rather than on an historical cost basis. From the perspective of the business combination, depreciation should be calculated solely on historical cost figures. Thus, within the consolidation process for each period, adjustment of the depreciation (recorded by the buyer) is necessary to reduce the expense to a cost based figure.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 05-07 Prepare the consolidation entries to remove the effects of upstream and downstream intraentity fixed asset transfers across affiliated entities.

Short Answer Questions

112.

Tara Company owns 80 percent of the common stock of Stodd Inc. In the current year, Tara reports sales of $5,000,000 and cost of goods sold of $3,500,000. For the same period, Stodd has sales of $500,000 and cost of goods sold of $400,000. During the year, Stodd sold merchandise to Tara for $40,000 at a price based on the normal markup. At the end of the year, Tara still possesses 20 percent of this inventory. Prepare the consolidation entry to defer the unrealized gain.

113.

King Corp. owns 85% of James Co. King uses the equity method to account for this investment. During 2015, King sells inventory to James for $500,000. The inventory originally cost King $420,000. At 12/31/15, 25% of the goods were still in James' inventory.

Required: Prepare the Consolidation Entry TI and Consolidation Entry G for the consolidation worksheet.

114.

Flintstone Inc. acquired all of Rubble Co. on January 1, 2013. Flintstone decided to use the

Required: Prepare Consolidation Entry TI for the intra-entity transfer and Consolidation Entry G for the ending inventory adjustment necessary for the consolidation worksheet at 12/31/15.

115.

Yoderly Co., a wholly owned subsidiary of Nelson Corp., sold goods to Nelson near the end of 2013. The goods had cost Yoderly $105,000 and the selling price was $140,000. Nelson had not sold any of the goods by the end of the year.

Required: Prepare Consolidation Entry TI and Consolidation Entry G that are required for 2013.

116.

Strayten Corp. is a wholly owned subsidiary of Quint Inc. Quint decided to use the initial

Required: Prepare Consolidation Entry *G, which would have to be recorded at the end of 2013.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 05-05 Explain the difference between upstream and downstream intra-entity transfers and how each affects the computation of noncontrolling interest balances. Learning Objective: 05-06 Prepare the consolidation entry to remove any unrealized gain created by the intra-entity transfer of land from the accounting records of the year of transfer and subsequent years.

117.

Hambly Corp. owned 80% of the voting common stock of Stroban Co. During 2013, Stroban sold a parcel of land to Hambly. The land had a book value of $82,000 and was sold to Hambly for $145,000. Stroban's reported net income for 2013 was $119,000.

Required: What was the non-controlling interest's share of Stroban Co.'s net income?

118.

McGraw Corp. owned all of the voting common stock of both Ritter Co. and Lawler Co. During 2013, Ritter sold inventory to Lawler. The goods had cost Ritter $65,000, and they were sold to Lawler for $100,000. At the end of 2013, Lawler still held 30% of the inventory.

Required: How should the sale between Lawler and Ritter be accounted for in a consolidation worksheet? Show worksheet entries to support your answer.

Lawler and Ritter are related parties since they are both part of a combined entity. The following consolidation entries should be prepared:

These entries (1) eliminate the sale from the consolidated income statement, (2) decrease

cost of goods sold, and (3) reduce consolidated inventory to its cost to the combined entity.

119.

Virginia Corp. owned all of the voting common stock of Stateside Co. Both companies use the perpetual inventory method, and Virginia decided to use the partial equity method to account for this investment. During 2012, Virginia made cash sales of $400,000 to Stateside. The gross profit rate was 30% of the selling price. By the end of 2012, Stateside had sold 75% of the goods to outside parties for $420,000 cash. Prepare journal entries for Virginia and Stateside to record the sales/purchases during 2012.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 05-02 Demonstrate the consolidation procedures to eliminate intra-entity sales and purchases balances. Learning Objective: 05-03 Explain why consolidated entities defer intra-entity gross profit in ending inventory and the consolidation procedures required to recognize profits when actually earned.

120.

Virginia Corp. owned all of the voting common stock of Stateside Co. Both companies use the perpetual inventory method, and Virginia decided to use the partial equity method to account for this investment. During 2012, Virginia made cash sales of $400,000 to Stateside. The gross profit rate was 30% of the selling price. By the end of 2012, Stateside had sold 75% of the goods to outside parties for $420,000 cash. Prepare the consolidation entries that should be made at the end of 2012.

121.

Virginia Corp. owned all of the voting common stock of Stateside Co. Both companies use the perpetual inventory method, and Virginia decided to use the partial equity method to account for this investment. During 2012, Virginia made cash sales of $400,000 to Stateside. The gross profit rate was 30% of the selling price. By the end of 2012, Stateside had sold 75% of the goods to outside parties for $420,000 cash. Prepare any 2013 consolidation worksheet entries that would be required regarding the 2012 inventory transfer.

122.

Several years ago Polar Inc. acquired an 80% interest in Icecap Co. The book values of Icecap's asset and liability accounts at that time were considered to be equal to their fair values. Polar's acquisition value corresponded to the underlying book value of Icecap so that no allocations or goodwill resulted from the transaction. The following selected account balances were from the individual financial records of these two companies as of December 31, 2013:

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 05-02 Demonstrate the consolidation procedures to eliminate intra-entity sales and purchases balances. Learning Objective: 05-03 Explain why consolidated entities defer intra-entity gross profit in ending inventory and the consolidation procedures required to recognize profits when actually earned. Learning Objective: 05-04 Understand that the consolidation process for inventory transfers is designed to defer the unrealized portion of an intra-entity gross profit from the year of transfer into the year of disposal or consumption.

123.

124.

125.

On January 1, 2013, Musial Corp. sold equipment to Matin Inc. (a wholly-owned subsidiary) for $168,000 in cash. The equipment originally cost $140,000 but had a book value of only $98,000 when transferred. On that date, the equipment had a five-year remaining life. Depreciation expense was calculated using the straight-line method. Musial earned $308,000 in net income in 2013 (not including any investment income) while Matin reported $126,000. Assume there is no amortization related to the original investment. What is consolidated net income for 2013?

126.

127.

Chapter 06 Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues

Multiple Choice Questions

1. On January 1, 2013, Riley Corp. acquired some of the outstanding bonds of one of its subsidiaries. The bonds had a carrying value of $421,620, and Riley paid $401,937 for them. How should you account for the difference between the carrying value and the purchase price in the consolidated financial statements for 2013?

A. The difference is added to the carrying value of the debt. B. The difference is deducted from the carrying value of the debt. C. The difference is treated as a loss from the extinguishment of the debt. D. The difference is treated as a gain from the extinguishment of the debt. E. The difference does not influence the consolidated financial statements.

2. Regency Corp. recently acquired $500,000 of the bonds of Safire Co., one of its subsidiaries, paying more than the carrying value of the bonds. According to the most practical view of this intra-entity transaction, to whom would the loss be attributed?

A. To Safire because the bonds were issued by Safire. B. The loss should be allocated between Safire and Regency based on the purchase price and the original face value of the debt. C. The loss should be amortized over the life of the bonds and need not be attributed to either party. D. The loss should be deferred until it can be determined to whom the attribution can be made. E. To Regency because Regency is the controlling party in the business combination.

3. Which one of the following characteristics of preferred stock would make the stock a dilutive security for earnings per share?

A. The preferred stock is callable. B. The preferred stock is convertible. C. The preferred stock is cumulative. D. The preferred stock is noncumulative. E. The preferred stock is participating.

4. Where do dividends paid to the non-controlling interest of a subsidiary appear on a consolidated statement of cash flows?

A. Cash flows from operating activities. B. Cash flows from investing activities. C. Cash flows from financing activities. D. Supplemental schedule of noncash investing and financing activities. E. They do not appear in the consolidated statement of cash flows.

5. Where do dividends paid by a subsidiary to the parent company appear in a consolidated statement of cash flows?

6. Where do intra-entity sales of inventory appear in a consolidated statement of cash flows?

A. They do not appear in the consolidated statement of cash flows. B. Supplemental schedule of noncash investing and financing activities. C. Cash flows from operating activities. D. Cash flows from investing activities. E. Cash flows from financing activities.

7. How do intra-entity sales of inventory affect the preparation of a consolidated statement of cash flows?

A. They must be added in calculating cash flows from investing activities. B. They must be deducted in calculating cash flows from investing activities. C. They must be added in calculating cash flows from operating activities. D. Because the consolidated balance sheet and income statement are used in preparing the consolidated statement of cash flows, no special elimination is required. E. They must be deducted in calculating cash flows from operating activities.

8. How would consolidated earnings per share be calculated if the subsidiary has no convertible securities or warrants?

A. Parent's earnings per share plus subsidiary's earnings per share. B. Parent's net income divided by parent's number of shares outstanding. C. Consolidated net income divided by parent's number of shares outstanding. D. Average of parent's earnings per share and subsidiary's earnings per share. E. Consolidated income divided by total number of shares outstanding for the parent and subsidiary.

9. On January 1, 2013, Riney Co. owned 80% of the common stock of Garvin Co. On that date, Garvin's stockholders' equity accounts had the following balances:

The balance in Riney's Investment in Garvin Co. account was $552,000, and the noncontrolling interest was $138,000. On January 1, 2013, Garvin Co. sold 10,000 shares of previously unissued common stock for $15 per share. Riney did not acquire any of these shares. What is the balance in Investment in Garvin Co. after the sale of the 10,000 shares of common stock?

A. $552,000. B. $560,000. C. $460,000. D. $404,000. E. $672,000.

10. On January 1, 2013, Riney Co. owned 80% of the common stock of Garvin Co. On that date, Garvin's stockholders' equity accounts had the following balances:

The balance in Riney's Investment in Garvin Co. account was $552,000, and the noncontrolling interest was $138,000. On January 1, 2013, Garvin Co. sold 10,000 shares of previously unissued common stock for $15 per share. Riney did not acquire any of these shares. What is the balance in Non-controlling Interest in Garvin Co. after the sale of the 10,000 shares of common stock?

A. $138,000. B. $101,000. C. $280,000. D. $230,000. E. $168,000.

11. Rojas Co. owned 7,000 shares (70%) of the outstanding 10%, $100 par preferred stock and 60% of the outstanding common stock of Brett Co. When Brett reported net income of $780,000, what was the non-controlling interest in the subsidiary's income?

A. $234,000. B. $273,000. C. $302,000. D. $312,000. E. $284,000.

12. Knight Co. owned 80% of the common stock of Stoop Co. Stoop had 50,000 shares of $5 par value common stock and 2,000 shares of preferred stock outstanding. Each preferred share received an annual per share dividend of $10 and is convertible into four shares of common stock. Knight did not own any of Stoop's preferred stock. Stoop also had 600 bonds outstanding, each of which is convertible into ten shares of common stock. Stoop's annual after-tax interest expense for the bonds was $22,000. Knight did not own any of Stoop's bonds. Stoop reported income of $300,000 for 2013. What was the amount of Stoop's earnings that should be included in calculating consolidated diluted earnings per share?

A. $300,000. B. $240,000. C. $257,600. D. $322,000. E. $201,250.

13. Knight Co. owned 80% of the common stock of Stoop Co. Stoop had 50,000 shares of $5 par value common stock and 2,000 shares of preferred stock outstanding. Each preferred share received an annual per share dividend of $10 and is convertible into four shares of common stock. Knight did not own any of Stoop's preferred stock. Stoop also had 600 bonds outstanding, each of which is convertible into ten shares of common stock. Stoop's annual after-tax interest expense for the bonds was $22,000. Knight did not own any of Stoop's bonds. Stoop reported income of $300,000 for 2013. Stoop's diluted earnings per share (rounded) is calculated to be

A. $5.62. B. $3.26. C. $3.11. D. $5.03. E. $4.28.

14. Campbell Inc. owned all of Gordon Corp. For 2013, Campbell reported net income (without consideration of its investment in Gordon) of $280,000 while the subsidiary reported $112,000. The subsidiary had bonds payable outstanding on January 1, 2013, with a book value of $297,000. The parent acquired the bonds on that date for $281,000. During 2013, Campbell reported interest income of $31,000 while Gordon reported interest expense of $29,000. What is consolidated net income for 2013?

A. $406,000. B. $374,000. C. $378,000. D. $410,000. E. $394,000.

15. Vontkins Inc. owned all of Quasimota Co. The subsidiary had bonds payable outstanding on January 1, 2012, with a book value of $265,000. The parent acquired the bonds on that date for $288,000. Subsequently, Vontkins reported interest income of $25,000 in 2012 while Quasimota reported interest expense of $29,000. Consolidated financial statements were prepared for 2013. What adjustment would have been required for the retained earnings balance as of January 1, 2013?

A. reduction of $27,000. B. reduction of $4,000. C. reduction of $19,000. D. reduction of $30,000. E. reduction of $20,000.

16. Tray Co. reported current earnings of $560,000 while paying $56,000 in cash dividends. Sparrish Co. earned $140,000 in net income and distributed $14,000 in dividends. Tray held a 70% interest in Sparrish for several years, an investment that it originally acquired by transferring consideration equal to the book value of the underlying net assets. Tray used the initial value method to account for these shares. On January 1, 2013, Sparrish acquired in the open market $70,000 of Tray's 8% bonds. The bonds had originally been issued several years ago at 92, reflecting a 10% effective interest rate. On the date of the bond purchase, the book value of the bonds payable was $67,600. Sparrish paid $65,200 based on a 12% effective interest rate over the remaining life of the bonds. What is the non-controlling interest's share of the subsidiary's net income?

A. $42,000. B. $37,800. C. $39,600. D. $40,070. E. $44,080.

17. A company had common stock with a total par value of $18,000,000 and fair value of $62,000,000; and 7% preferred stock with a total par value of $6,000,000 and a fair value of $8,000,000. The book value of the company was $85,000,000. If 90% of this company's total equity was acquired by another, what portion of the value would be assigned to the noncontrolling interest?

A. $8,500,000. B. $7,000,000. C. $6,200,000. D. $2,400,000. E. $6,929,400.

18. Cadion Co. owned a controlling interest in Knieval Inc. Cadion reported sales of $420,000 during 2013 while Knieval reported $280,000. Inventory costing $28,000 was transferred from Knieval to Cadion (upstream) during the year for $56,000. Of this amount, twenty-five percent was still in ending inventory at year's end. Total receivables on the consolidated balance sheet were $112,000 at the first of the year and $154,000 at year-end. No intra-entity debt existed at the beginning or ending of the year. Using the direct approach, what is the consolidated amount of cash collected by the business combination from its customers?

A. $602,000. B. $644,000. C. $686,000. D. $714,000. E. $592,000.

19. Parker owned all of Odom Inc. Although the Investment in Odom Inc . account had a balance of $834,000, the subsidiary's 12,000 shares had an underlying book value of only $56 per share. On January 1, 2013, Odom issued 3,000 new shares to the public for $70 per share. How does this transaction affect the Investment in Odom Inc . account?

20. These questions are based on the following information and should be viewed as

independent situations. Popper Co. acquired 80% of the common stock of Cocker Co. on January 1, 2011, when Cocker had the following stockholders' equity accounts.

To acquire this interest in Cocker, Popper paid a total of $682,000 with any excess acquisition date fair value over book value being allocated to goodwill, which has been measured for impairment annually and has not been determined to be impaired as of January 1, 2014. On January 1, 2014, Cocker reported a net book value of $1,113,000 before the following transactions were conducted. Popper uses the equity method to account for its investment in Cocker, thereby reflecting the change in book value of Cocker. On January 1, 2014, Cocker issued 10,000 additional shares of common stock for $35 per share. Popper acquired 8,000 of these shares. How would this transaction affect the additional paid-in capital of the parent company?

A. increase it by $28,700. B. increase it by $16,800. C. $0. D. increase it by $280,000. E. increase it by $593,600.

21. These questions are based on the following information and should be viewed as

independent situations. Popper Co. acquired 80% of the common stock of Cocker Co. on January 1, 2011, when Cocker had the following stockholders' equity accounts.

To acquire this interest in Cocker, Popper paid a total of $682,000 with any excess acquisition date fair value over book value being allocated to goodwill, which has been measured for impairment annually and has not been determined to be impaired as of January 1, 2014. On January 1, 2014, Cocker reported a net book value of $1,113,000 before the following transactions were conducted. Popper uses the equity method to account for its investment in Cocker, thereby reflecting the change in book value of Cocker. On January 1, 2014, Cocker issued 10,000 additional shares of common stock for $21 per share. Popper did not acquire any of this newly issued stock. How would this transaction affect the additional paid-in capital of the parent company?

A. $0. B. decrease it by $23,240. C. decrease it by $68,250. D. decrease it by $45,060. E. decrease it by $43,680.

22. These questions are based on the following information and should be viewed as

independent situations. Popper Co. acquired 80% of the common stock of Cocker Co. on January 1, 2011, when Cocker had the following stockholders' equity accounts.

To acquire this interest in Cocker, Popper paid a total of $682,000 with any excess acquisition date fair value over book value being allocated to goodwill, which has been measured for impairment annually and has not been determined to be impaired as of January 1, 2014. On January 1, 2014, Cocker reported a net book value of $1,113,000 before the following transactions were conducted. Popper uses the equity method to account for its investment in Cocker, thereby reflecting the change in book value of Cocker. On January 1, 2014, Cocker reacquired 8,000 of the outstanding shares of its own common stock for $34 per share. None of these shares belonged to Popper. How would this transaction have affected the additional paid-in capital of the parent company?

A. $0. B. decrease it by $32,900. C. decrease it by $45,700. D. decrease it by $49,400. E. decrease it by $50,500.

23. If newly issued debt is issued from a parent to its subsidiary, which of the following statements is false?

A. Any premium or discount on bonds payable is exactly offset by a premium or discount on bond investment. B. There will be $0 net gain or loss on the bond transaction. C. Interest expense needs to be eliminated on the consolidated income statement. D. Interest revenue needs to be eliminated on the consolidated income statement. E. A net gain or loss on the bond transaction will be reported.

24. The accounting problems encountered in consolidated intra-entity debt transactions when the debt is acquired by an affiliate from an outside party include all of the following except:

A. Both the investment and debt accounts have to be eliminated now and for each future consolidated financial statement despite containing differing balances. B. Subsequent interest revenue/expense must be removed although these balances fail to agree in amount. C. A gain or loss must be recognized by both parent and subsidiary companies. D. Changes in the investment, debt, interest revenue, and interest expense accounts occur constantly because of the amortization process. E. The gain or loss on the retirement of the debt must be recognized by the business combination in the year the debt is acquired, even though this balance does not appear on the financial records of either company.

25. Which of the following statements is true concerning the acquisition of existing debt of a consolidated affiliate in the year of the debt acquisition?

A. Any gain or loss is deferred on a consolidated income statement. B. Any gain or loss is recognized on a consolidated income statement. C. Interest revenue on the affiliated debt is recognized on a consolidated income statement. D. Interest expense on the affiliated debt is recognized on a consolidated income statement. E. Consolidated retained earnings is adjusted for the difference between the purchase price and the carrying value of the bonds.

26. Which of the following statements is false regarding the assignment of a gain or loss on intercompany bond transfer?

A. Subsidiary net income is not affected by a gain on bond transaction. B. Subsidiary net income is not affected by a loss on bond transaction. C. Parent Company net income is not affected by a gain on bond transaction. D. Parent Company net income is not affected by a loss on bond transaction. E. Consolidated net income is not affected by a gain or loss on bond transaction.

27. What would differ between a statement of cash flows for a consolidated company and an unconsolidated company using the indirect method?

A. Parent's dividends would be subtracted as a financing activity. B. Gain on sale of land would be deducted from net income. C. Non-controlling interest in net income of subsidiary would be added to net income. D. Proceeds from the sale of long-term investments would be added to investing activities. E. Loss on sale of equipment would be added to net income.

28. Which of the following statements is true for a consolidated statement of cash flows?

A. Parent's dividends and subsidiary's dividends are deducted as a financing activity. B. Only parent's dividends are deducted as a financing activity. C. Parent's dividends and its share of subsidiary's dividends are deducted as a financing activity. D. All of parent's dividends and non-controlling interest of subsidiary's dividends are deducted as a financing activity. E. Neither parent's or subsidiary's dividends are deducted as a financing activity.

29. In reporting consolidated earnings per share when there is a wholly owned subsidiary, which of the following statements is true?

A. Parent company earnings per share equals consolidated earnings per share when the equity method is used. B. Parent company earnings per share is equal to consolidated earnings per share when the initial value method is used. C. Parent company earnings per share is equal to consolidated earnings per share when the partial equity method is used and acquisition-date fair value exceeds book value. D. Parent company earnings per share is equal to consolidated earnings per share when the partial equity method is used and acquisition-date fair value is less than book value. E. Preferred dividends are not deducted from net income for consolidated earnings per share.

30. A subsidiary issues new shares of common stock at an amount below book value. Outsiders buy all of these shares. Which of the following statements is true?

A. The parent's additional paid-in capital will be increased. B. The parent's investment in subsidiary will be increased. C. The parent's retained earnings will be increased. D. The parent's additional paid-in capital will be decreased. E. The parent's retained earnings will be decreased.

31. A subsidiary issues new shares of common stock. If the parent acquires all of these shares at an amount greater than book value, which of the following statements is true?

A. The investment in subsidiary will decrease. B. Additional paid-in capital will decrease. C. Retained earnings will increase. D. The investment in subsidiary will increase. E. No adjustment will be necessary.

32. If a subsidiary reacquires its outstanding shares from outside ownership for more than book value, which of the following statements is true?

A. Additional paid-in capital on the parent company's books will decrease. B. Investment in subsidiary will increase. C. Treasury stock on the parent's books will increase. D. Treasury stock on the parent's books will decrease. E. No adjustment is necessary.

33. If a subsidiary issues a stock dividend, which of the following statements is true?

A. Investment in subsidiary on the parent's books will increase. B. Investment in subsidiary on the parent's books will decrease. C. Additional paid-in capital on the parent's books will increase. D. Additional paid-in capital on the parent's books will decrease. E. No adjustment is necessary.

34. Stevens Company has had bonds payable of $10,000 outstanding for several years. On January 1, 2013, when there was an unamortized discount of $2,000 and a remaining life of 5 years, its 80% owned subsidiary, Matthews Company, purchased the bonds in the open market for $11,000. The bonds pay 6% interest annually on December 31. The companies use the straight-line method to amortize interest revenue and expense. Compute the consolidated gain or loss on a consolidated income statement for 2013.

A. $1,000 gain. B. $1,000 loss. C. $2,000 loss. D. $3,000 loss. E. $3,000 gain.

35. Keenan Company has had bonds payable of $20,000 outstanding for several years. On January 1, 2013, there was an unamortized premium of $2,000 with a remaining life of 10 years, Keenan's parent, Ross, Inc. purchased the bonds in the open market for $19,000. Keenan is a 90% owned subsidiary of Ross. The bonds pay 8% interest annually on December 31. The companies use the straight-line method to amortize interest revenue and expense. Compute the consolidated gain or loss on a consolidated income statement for 2013.

A. $3,000 gain. B. $3,000 loss. C. $1,000 gain. D. $1,000 loss. E. $2,000 gain.

36. On January 1, 2013, Nichols Company acquired 80% of Smith Company's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is:

Determine the amount and account to be recorded for Nichols' investment in Smith.

A. $1,324,000 for Investment in Smith. B. $1,200,000 for Investment in Smith. C. $1,200,000 for Investment in Smith's Common Stock and $124,000 for Investment in Smith's Preferred Stock. D. $1,200,000 for Investment in Smith's Common Stock and $120,000 for Investment in Smith's Preferred Stock. E. $1,448,000 for Investment in Smith's Common Stock.

37. On January 1, 2013, Nichols Company acquired 80% of Smith Company's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is:

Compute the goodwill recognized in consolidation.

A. $800,000. B. $310,000. C. $124,000. D. $0. E. $(196,000.)

38. On January 1, 2013, Nichols Company acquired 80% of Smith Company's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is:

Compute the non-controlling interest in Smith at date of acquisition.

A. $486,000. B. $480,000. C. $300,000. D. $150,000. E. $120,000.

39. On January 1, 2013, Nichols Company acquired 80% of Smith Company's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is:

The consolidation entry at date of acquisition will include (referring to Smith):

A. Debit Common stock $500,000 and debit Preferred stock $120,000. B. Debit Common stock $400,000 and debit Additional paid-in capital $160,000. C. Debit Common stock $500,000 and debit Preferred stock $300,000. D. Debit Common stock $500,000, debit Preferred stock $120,000, and debit Additional paidin capital $200,000. E. Debit Common stock $400,000, debit Preferred stock $300,000, debit Additional paid-in capital $200,000, and debit Retained earnings $500,000.

40. On January 1, 2013, Nichols Company acquired 80% of Smith Company's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is:

If Smith's net income is $100,000 in the year following the acquisition,

A. the portion allocated to the common stock (residual amount) is $92,800. B. $10,800 preferred stock dividend will be subtracted from net income attributed to common stock in arriving at non-controlling interest in subsidiary income. C. the non-controlling interest balance will be $27,200. D. the preferred stock dividend will be ignored in non-controlling interest in subsidiary net income because Nichols owns the non-controlling interest of preferred stock. E. the non-controlling interest in subsidiary net income is $30,800.

41. The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company. (1.) Graham reports a loss on sale of land of $5,000. The land cost Graham $20,000. (2.) Non-controlling interest in Stage's net income was $30,000. (3.) Graham paid dividends of $15,000. (4.) Stage paid dividends of $10,000. (5.) Excess acquisition-date fair value over book value was expensed by $6,000. (6.) Consolidated accounts receivable decreased by $8,000. (7.) Consolidated accounts payable decreased by $7,000. How is the loss on sale of land reported on the consolidated statement of cash flows?

A. $20,000 added to net income as an operating activity. B. $20,000 deducted from net income as an operating activity. C. $15,000 deducted from net income as an operating activity. D. $5,000 added to net income as an operating activity. E. $5,000 deducted from net income as an operating activity.

42. The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company. (1.) Graham reports a loss on sale of land of $5,000. The land cost Graham $20,000. (2.) Non-controlling interest in Stage's net income was $30,000. (3.) Graham paid dividends of $15,000. (4.) Stage paid dividends of $10,000. (5.) Excess acquisition-date fair value over book value was expensed by $6,000. (6.) Consolidated accounts receivable decreased by $8,000. (7.) Consolidated accounts payable decreased by $7,000. Where does the non-controlling interest in Stage's net income appear on a consolidated statement of cash flows?

A. $30,000 added to net income as an operating activity on the consolidated statement of cash flows. B. $30,000 deducted from net income as an operating activity on the consolidated statement of cash flows. C. $30,000 increase as an investing activity on the consolidated statement of cash flows. D. $30,000 decrease as an investing activity on the consolidated statement of cash flows. E. Non-controlling interest in Stage's net income does not appear on a consolidated statement of cash flows.

43. The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company. (1.) Graham reports a loss on sale of land of $5,000. The land cost Graham $20,000. (2.) Non-controlling interest in Stage's net income was $30,000. (3.) Graham paid dividends of $15,000. (4.) Stage paid dividends of $10,000. (5.) Excess acquisition-date fair value over book value was expensed by $6,000. (6.) Consolidated accounts receivable decreased by $8,000. (7.) Consolidated accounts payable decreased by $7,000. How will dividends be reported in consolidated statement of cash flows?

A. $15,000 decrease as a financing activity. B. $25,000 decrease as a financing activity. C. $10,000 decrease as a financing activity. D. $23,000 decrease as a financing activity. E. $17,000 decrease as a financing activity.

44. The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company. (1.) Graham reports a loss on sale of land of $5,000. The land cost Graham $20,000. (2.) Non-controlling interest in Stage's net income was $30,000. (3.) Graham paid dividends of $15,000. (4.) Stage paid dividends of $10,000. (5.) Excess acquisition-date fair value over book value was expensed by $6,000. (6.) Consolidated accounts receivable decreased by $8,000. (7.) Consolidated accounts payable decreased by $7,000. How is the amount of excess acquisition-date fair value over book value recognized in a consolidated statement of cash flows assuming the indirect method is used?

A. It is ignored. B. $6,000 subtracted from net income. C. $4,800 subtracted from net income. D. $6,000 added to net income. E. $4,800 added to net income.

45. The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company. (1.) Graham reports a loss on sale of land of $5,000. The land cost Graham $20,000. (2.) Non-controlling interest in Stage's net income was $30,000. (3.) Graham paid dividends of $15,000. (4.) Stage paid dividends of $10,000. (5.) Excess acquisition-date fair value over book value was expensed by $6,000. (6.) Consolidated accounts receivable decreased by $8,000. (7.) Consolidated accounts payable decreased by $7,000. Using the indirect method, where does the decrease in accounts receivable appear in a consolidated statement of cash flows?

A. $8,000 increase to net income as an operating activity. B. $8,000 decrease to net income as an operating activity. C. $6,400 increase to net income as an operating activity. D. $6,400 decrease to net income as an operating activity. E. $8,000 increase as an investing activity.

46. The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company. (1.) Graham reports a loss on sale of land of $5,000. The land cost Graham $20,000. (2.) Non-controlling interest in Stage's net income was $30,000. (3.) Graham paid dividends of $15,000. (4.) Stage paid dividends of $10,000. (5.) Excess acquisition-date fair value over book value was expensed by $6,000. (6.) Consolidated accounts receivable decreased by $8,000. (7.) Consolidated accounts payable decreased by $7,000. Using the indirect method, where does the decrease in accounts payable appear in a consolidated statement of cash flows?

A. $7,000 increase to net income as an operating activity. B. $7,000 decrease to net income as an operating activity. C. $5,600 increase to net income as an operating activity. D. $5,600 decrease to net income as an operating activity. E. $7,000 increase as a financing activity.

47. Webb Company owns 90% of Jones Company. The original balances presented for Jones and Webb as of January 1, 2013, are as follows:

Jones sells 20,000 shares of previously unissued shares of its common stock to outside parties for $10 per share. What is the adjusted book value of Jones after the sale of the shares?

A. $200,000. B. $1,400,000. C. $1,280,000. D. $1,050,000. E. $1,440,000.

48. Webb Company owns 90% of Jones Company. The original balances presented for Jones and Webb as of January 1, 2013, are as follows:

Jones sells 20,000 shares of previously unissued shares of its common stock to outside parties for $10 per share. What is the new percent ownership of Webb in Jones after the stock issuance?

A. 75%. B. 90%. C. 80%. D. 64%. E. 60%.

49. Webb Company owns 90% of Jones Company. The original balances presented for Jones and Webb as of January 1, 2013, are as follows:

Jones sells 20,000 shares of previously unissued shares of its common stock to outside parties for $10 per share. What adjustment is needed for Webb's investment in Jones account?

A. $180,000 increase. B. $180,000 decrease. C. $30,000 increase. D. $30,000 decrease. E. No adjustment is necessary.

50. Webb Company owns 90% of Jones Company. The original balances presented for Jones and Webb as of January 1, 2013 are as follows:

Assume Jones issues 20,000 new shares of its common stock for $15 per share. Of this total, Webb acquires 18,000 shares to maintain its 90% interest in Jones. What is the adjusted book value of Jones after the stock issuance?

A. $1,500,000. B. $1,200,000. C. $1,350,000. D. $1,080,000. E. $1,335,000.

51. Webb Company owns 90% of Jones Company. The original balances presented for Jones and Webb as of January 1, 2013 are as follows:

Assume Jones issues 20,000 new shares of its common stock for $15 per share. Of this total, Webb acquires 18,000 shares to maintain its 90% interest in Jones. After acquiring the additional shares, what adjustment is needed for Webb's investment in Jones account?

A. $270,000 increase. B. $270,000 decrease. C. $27,000 increase. D. $27,000 decrease. E. No adjustment is necessary.

52. Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and Chase as of January 1, 2013, are as follows:

Assume Chase issues 30,000 additional shares common stock solely to Ryan for $12 per share. What is the new percent ownership Ryan owns in Chase?

A. 80.0%. B. 87.5%. C. 90.0%. D. 75.0%. E. 82.5%.

53. Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and Chase as of January 1, 2013, are as follows:

Assume Chase issues 30,000 additional shares common stock solely to Ryan for $12 per share. What is the adjusted book value of Chase Company after the issuance of the shares?

A. $608,000. B. $720,000. C. $680,000. D. $760,000. E. $400,000.

54. Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and Chase as of January 1, 2013, are as follows:

Assume Chase issues 30,000 additional shares common stock solely to Ryan for $12 per share. After acquiring the additional shares, what adjustment is needed for Ryan's investment in Chase account?

A. $70,000 increase. B. $70,000 decrease. C. $15,000 increase. D. $15,000 decrease. E. No adjustment is necessary.

55. Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and Chase as of January 1, 2013 are as follows:

Assume Chase reacquired 8,000 shares of its common stock from outsiders at $10 per share. What should the adjusted book value of Chase be after the treasury shares were purchased?

A. $400,000. B. $480,000. C. $320,000. D. $336,000. E. $464,000.

56. Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and Chase as of January 1, 2013 are as follows:

Assume Chase reacquired 8,000 shares of its common stock from outsiders at $10 per share. What is Ryan's percent ownership in Chase after the acquisition of the treasury shares (rounded)?

A. 80%. B. 95%. C. 64%. D. 76%. E. 69%.

57. Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and Chase as of January 1, 2013 are as follows:

Assume Chase reacquired 8,000 shares of its common stock from outsiders at $10 per share. When Ryan's new percent ownership is rounded to a whole number, what adjustment is needed for Ryan's investment in Chase account?

A. $16,000 decrease. B. $60,000 decrease. C. $64,000 increase. D. $64,000 decrease. E. No adjustment is necessary.

58. A variable interest entity can take all of the following forms except a(n)

A. Trust. B. Partnership. C. Joint venture. D. Corporation. E. Estate.

59. All of the following are examples of variable interests except

A. Guarantees of debt. B. Stock options. C. Lease residual value guarantees. D. Participation rights. E. Asset purchase options.

60. Which of the following is not a potential loss or return of a variable interest entity?

A. Entitles holder to residual profits. B. Entitles holder to benefit from increases in asset fair value. C. Entitles holder to receive shares of common stock. D. If the variable interest entity cannot repay liabilities, honoring a debt guarantee will produce a loss. E. If leased asset declines below the residual value, honoring the guarantee will produce a loss.

61. Which of the following characteristics is not indicative of an enterprise qualifying as a primary beneficiary with a controlling financial interest in a variable interest entity?

A. The power to direct the most significant economic performance activities. B. The power through voting or similar rights to direct activities which significantly impact economic performance. C. The obligation to absorb potentially significant losses of the entity. D. No ability to make decisions about the entity's activities. E. The right to receive potentially significant benefits of the entity.

62. Which of the following statements is false concerning variable interest entities (VIEs)?

A. Sometimes VIEs do not have independent management. B. Most VIEs are established for valid business purposes. C. VIEs may be formed as a source of low-cost financing. D. VIEs have little need for voting stock. E. A VIE cannot take the legal form of a partnership or corporation.

63. Which of the following statements is true concerning variable interest entities (VIEs)? 1) The role of the VIE equity investors can be fairly minor. 2) A VIE may be created specifically to benefit its sponsoring firm with low-cost financing. 3) VIE governing agreements often limit activities and decision making. 4) VIEs usually have a well-defined and limited business activity.

A. 2 and 4. B. 2, 3, and 4. C. 1, 2, and 4. D. 1, 2, and 3. E. 1, 2, 3, and 4.

64. Which of the following is not an indicator that requires a sponsoring firm to consolidate a variable interest entity (VIE) with its own financial statements?

A. The sponsoring firm has the obligation to absorb potentially significant losses of the VIE. B. The sponsoring firm receives risks and rewards of the VIE in proportion to equity ownership. C. The sponsoring firm has the right to receive potentially significant benefits of the VIE. D. The sponsoring firm has power through voting rights to direct the entity's activities that significantly impact economic performance. E. The sponsoring firm is a primary beneficiary of the VIE.

65. A parent acquires all of a subsidiary's common stock and 60 percent of its preferred stock. The preferred stock has a cumulative dividend. No dividends are in arrears. How is the noncontrolling interest in the subsidiary's net income assigned?

A. Income is assigned as 40 percent of the value of the preferred stock, based on an allocation between common stock and preferred stock. B. There is no allocation to the non-controlling interest because the parent owns 100% of the common stock and net income belongs to the residual owners. C. Income is assigned as 40 percent of the preferred stock dividends. D. Income is assigned as 40 percent of the subsidiary's income before preferred stock dividends. E. Income is assigned as 40 percent of the subsidiary's income after subtracting preferred stock dividends.

66. A parent acquires 70% of a subsidiary's common stock and 60 percent of its preferred stock. The preferred stock is noncumulative. The current year's dividend was paid. How is the noncontrolling interest in the subsidiary's net income assigned?

A. Income is assigned as 40 percent of the value of the preferred stock, based on an allocation between common stock and preferred stock and their relative par values. B. There is no allocation to the non-controlling interest because there are no dividends in arrears. C. Income is assigned as 40 percent of the preferred stock dividends. D. Income is assigned as 40 percent of the preferred stock dividends plus 30% of the subsidiary's income after subtracting all preferred stock dividends. E. Income is assigned as 30 percent of the subsidiary's income after subtracting 60% of preferred stock dividends.

67. Wolff Corporation owns 70 percent of the outstanding stock of Donald, Inc. During the current year, Donald made $75,000 in sales to Wolff. How does this transfer affect the consolidated statement of cash flows?

A. Included as a decrease in the investing section. B. Included as an increase in the operating section. C. Included as a decrease in the operating section. D. Included as an increase in the investing section. E. Not reported in the consolidated statement of cash flows.

68. MacDonald, Inc. owns 80 percent of the outstanding stock of Stahl Corporation. During the current year, Stahl made $125,000 in sales to MacDonald. How does this transfer affect the consolidated statement of cash flows?

A. Include 80 percent as a decrease in the investing section. B. Include 100 percent as a decrease in the investing section. C. Include 80 percent as a decrease in the operating section. D. Include 100 percent as an increase in the operating section. E. Not reported in the consolidated statement of cash flows.

69. Pursley, Inc. owns 70 percent of Harry Corp. The consolidated income statement for a year reports $50,000 Non-controlling Interest in Harry Corp.'s Income. Harry paid dividends in the amount of $80,000 for the year. What are the effects of these transactions in the consolidated statement of cash flows for the year?

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

70. Goehring, Inc. owns 70 percent of Harry Corp. The consolidated income statement for a year reports $40,000 Non-controlling Interest in Harry Corp.'s Income. Harry paid dividends in the amount of $100,000 for the year. What are the effects of these transactions in the consolidated statement of cash flows for the year?

A. Increase in the financing section of $70,000, and decrease in the operating section of $30,000. B. Increase in the operating section of $70,000, and decrease in the financing section of $30,000. C. Increase in the operating section of $70,000. D. Decrease in the financing section of $30,000. E. No effects.

71. Anderson, Inc. has owned 70% of its subsidiary, Arthur Corp., for several years. The consolidated balance sheets of Anderson, Inc. and Arthur Corp. are presented below:

Additional information for 2013:

Net cash flow from operating activities was:

A. $43,000. B. $44,800. C. $46,200. D. $50,000. E. $25,000.

72. Anderson, Inc. has owned 70% of its subsidiary, Arthur Corp., for several years. The consolidated balance sheets of Anderson, Inc. and Arthur Corp. are presented below:

Additional information for 2013:

Net cash flow from financing activities was:

A. $(28,000). B. $(35,000). C. $(13,000). D. $(63,000). E. $(61,000).

73. The balance sheets of Butler, Inc. and its 70 percent-owned subsidiary, Cassie Corp., are presented below:

Additional information for 2013:

Net cash flow from operating activities was:

A. $92,000. B. $27,000. C. $63,000. D. $29,000. E. $34,000.

74. The balance sheets of Butler, Inc. and its 70 percent-owned subsidiary, Cassie Corp., are presented below:

Additional information for 2013:

Net cash flow from financing activities was:

A. $(129,000). B. $(96,000). C. $(300,000). D. $(80,000). E. $(126,000).

75. How do subsidiary stock warrants outstanding affect consolidated earnings per share?

A. They will be included in both basic and diluted earnings per share if they are dilutive. B. They will only be included in diluted earnings per share if they are dilutive. C. They will only be included in basic earnings per share if they are dilutive. D. Only the warrants owned by the parent company affect consolidated earnings per share. E. Because the warrants are for subsidiary shares, there will be no effect on consolidated earnings per share.

76. A parent company owns a controlling interest in a subsidiary whose stock has a book value of $27 per share. The last day of the year, the subsidiary issues new shares entirely to outside parties at $33 per share. The parent still holds control over the subsidiary. Which of the following statements is true?

A. Since the sale was made at the end of the year, the parent's investment account is not affected. B. Since the shares were sold for more than book value, the parent's investment account must be increased. C. Since the shares were sold for more than book value, the parent's investment account must be decreased. D. Since the shares were sold for more than book value but the parent did not buy any of the shares, the parent's investment account is not affected. E. None of these.

77. A parent company owns a controlling interest in a subsidiary whose stock has a book value of $27 per share. The last day of the year, the subsidiary issues new shares entirely to outside parties at $25 per share. The parent still holds control over the subsidiary. Which of the following statements is true?

A. Since the sale was made at the end of the year, the parent's investment account is not affected. B. Since the shares were sold for less than book value, the parent's investment account must be increased. C. Since the shares were sold for less than book value, the parent's investment account must be decreased. D. Since the shares were sold for less than book value but the parent did not buy any of the shares, the parent's investment account is not affected. E. None of these.

78. A parent company owns a 70 percent interest in a subsidiary whose stock has a book value of $27 per share. The last day of the year, the subsidiary issues new shares for $27 per share, and the parent buys its 70 percent interest in the new shares. Which of the following statements is true?

A. Since the sale was made at the end of the year, the parent's investment account is not affected. B. Since the shares were sold for book value, the parent's investment account must be increased. C. Since the shares were sold for book value, the parent's investment account must be decreased. D. Since the shares were sold for book value and the parent bought 70 percent of the shares, the parent's investment account is not affected except for the price of the new shares. E. None of these.

79. Carlson, Inc. owns 80 percent of Madrid, Inc. Carlson reports net income for 2013 (without consideration of its investment in Madrid, Inc.) of $1,500,000. For the same year, Madrid reports net income of $705,000. Carlson had bonds payable outstanding on January 1, 2013 with a carrying value of $1,200,000. Madrid acquired the bonds on the open market on January 3, 2013 for $1,090,000. For the year 2013, Carlson reported interest expense on the bonds in the amount of $96,000, while Madrid reported interest income of $94,000 for the same bonds. What is Carlson's share of consolidated net income?

A. $2,064,000. B. $2,066,000. C. $2,176,000. D. $2,207,000. E. $2,317,000.

80. Davidson, Inc. owns 70 percent of the outstanding voting stock of Ernest Company. On January 2, 2011, Davidson sold 8 percent bonds payable with a $5,000,000 face value maturing January 2, 2031 at a premium of $400,000. On January 1, 2013, Ernest acquired 30 percent of these same bonds on the open market at 97.6. Both companies use the straightline method of amortization. What adjustment should be made to Davidson's 2014 beginning Retained Earnings as a result of this bond acquisition?

A. $114,000. B. $122,000. C. $136,000. D. $144,000. E. $152,000.

81. Franklin Corporation owns 90 percent of the outstanding voting stock of Georgia Company. On January 2, 2011, Georgia sold 7 percent bonds payable with a $5,000,000 face value maturing January 2, 2031 at a premium of $500,000. On January 1, 2013, Franklin acquired 20 percent of these same bonds on the open market at 97.66. Both companies use the straightline method of amortization. What adjustment should be made to Franklin's 2014 beginning Retained Earnings as a result of this bond acquisition?

A. $107,100. B. $113,400. C. $119,700. D. $144,000. E. $152,000.

82. On January 1, 2013, Harrison Corporation spent $2,600,000 to acquire control over Involved, Inc. This price was based on paying $750,000 for 30 percent of Involved's preferred stock, and $1,850,000 for 80 percent of its outstanding common stock. As of the date of the acquisition, Involved's stockholders' equity accounts were as follows:

What is the total acquisition-date fair value of Involved?

A. $2,600,000 B. $4,812,500 C. $3,062,500 D. $2,312,500 E. $3,250,000

83. On January 1, 2013, Harrison Corporation spent $2,600,000 to acquire control over Involved, Inc. This price was based on paying $750,000 for 30 percent of Involved's preferred stock, and $1,850,000 for 80 percent of its outstanding common stock. As of the date of the acquisition, Involved's stockholders' equity accounts were as follows:

Assuming Involved's accounts are correctly valued within the company's financial statements, what amount of goodwill should be recognized for the Investment in Involved?

A. $(100,000.) B. $0. C. $200,000. D. $812,500. E. $2,112,500.

84. Johnson, Inc. owns control over Kaspar Inc, Johnson reports sales of $400,000 during 2013 while Kaspar reports $250,000. Kaspar transferred inventory during 2013 to Johnson at a price of $50,000. On December 31, 2013, 30% of the transferred goods are still in Johnson's inventory. Consolidated accounts receivable on January 1, 2013 was $120,000, and on December 31, 2013 is $130,000. Johnson uses the direct approach in preparing the statement of cash flows. How much is cash collected from customers in the consolidated statement of cash flows?

A. $590,000. B. $610,000. C. $625,000. D. $635,000. E. $650,000.

Essay Questions

85. Parent Corporation loaned money to its subsidiary with a five-year note at the market interest rate. How would the note be accounted for in the consolidation process?

86. What documents or other sources of information would be used to prepare a consolidated statement of cash flows?

87. Parent Corporation acquired some of its subsidiary's bonds on the open bond market. The remaining life of the bonds was eight years, and Parent expected to hold the bonds for the full eight years. How would the acquisition of the bonds affect the consolidation process?

88. Parent Corporation acquired some of its subsidiary's bonds on the open bond market, paying a price $40,000 higher than the bonds' carrying value. How should the difference between the purchase price and the carrying value be accounted for?

89. How are intra-entity inventory transfers treated on the consolidation worksheet and how are they reflected in a consolidated statement of cash flows?

90. Danbers Co. owned seventy-five percent of the common stock of Renz Corp. How does the issuance of a five percent stock dividend by Renz affect Danbers and the consolidation process?

91. During 2013, Parent Corporation purchased at book value some of the outstanding bonds of its subsidiary. How would this acquisition have been reflected in the consolidated statement of cash flows?

92. On January 1, 2013, Parent Corporation acquired a controlling interest in the voting common stock of Foxboro Co. At the same time, Parent purchased sixty percent of Foxboro's outstanding preferred stock. In preparing consolidated financial statements, how should the acquisition of the preferred stock be accounted for?

93. When a company has preferred stock in its capital structure, what amount should be used to calculate non-controlling interest in the preferred stock of the subsidiary when the company is acquired as a subsidiary of another company?

94. Parent Corporation acquired some of its subsidiary's outstanding bonds. Why might Parent purchase the bonds, rather than the subsidiary buying its own bonds?

95. Parent Corporation had just purchased some of its subsidiary's outstanding bonds on the open market. What items related to these bonds will have to be accounted for in the consolidation process?

96. Parent Corporation recently acquired some of its subsidiary's outstanding bonds, at an amount which required the recognition of a loss. In what ways could the loss be allocated? Which allocation would you recommend? Why?

97. How does the existence of a non-controlling interest affect the preparation of a consolidated statement of cash flows?

Short Answer Questions

98. On January 1, 2013, Bast Co. had a net book value of $2,100,000 as follows:

Fisher Co. acquired all of the outstanding preferred shares for $148,000 and 60% of the common stock for $1,281,000. Fisher believed that one of Bast's buildings, with a twelve-year life, was undervalued on the company's financial records by $70,000.

Required: What is the amount of goodwill to be recognized from this purchase?

99. Fargus Corporation owned 51% of the voting common stock of Sanatee, Inc. The parent's interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition price. On January 1, 2012, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a 10% interest rate every December 31. Fargus acquired 40% of these bonds on January 1, 2014, for 95% of the face value. Both companies utilized the straight-line method of amortization. What balances would need to be considered in order to prepare the consolidation entry in connection with these intra-entity bonds at December 31, 2014, the end of the first year of the intra-entity investment? Prepare schedules to show numerical answers for balances that would be needed for the entry.

100.Fargus Corporation owned 51% of the voting common stock of Sanatee, Inc. The parent's interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition price. On January 1, 2012, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a 10% interest rate every December 31. Fargus acquired 40% of these bonds on January 1, 2014, for 95% of the face value. Both companies utilized the straight-line method of amortization. What consolidation entry would be recorded in connection with these intra-entity bonds on December 31, 2014?

101.Fargus Corporation owned 51% of the voting common stock of Sanatee, Inc. The parent's interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition price. On January 1, 2012, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a 10% interest rate every December 31. Fargus acquired 40% of these bonds on January 1, 2014, for 95% of the face value. Both companies utilized the straight-line method of amortization. What consolidation entry would be recorded in connection with these intra-entity bonds on December 31, 2015?

102.Fargus Corporation owned 51% of the voting common stock of Sanatee, Inc. The parent's interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition price. On January 1, 2012, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a 10% interest rate every December 31. Fargus acquired 40% of these bonds on January 1, 2014, for 95% of the face value. Both companies utilized the straight-line method of amortization. What consolidation entry would be recorded in connection with these intra-entity bonds on December 31, 2016?

103.Skipen Corp. had the following stockholders' equity accounts:

The preferred stock was participating and is therefore considered to be equity. Vestin Corp. acquired 90% of this common stock for $2,250,000 and 70% of the preferred stock for $1,120,000. All of the subsidiary's assets and liabilities were determined to have fair values equal to their book values except for land which is undervalued by $130,000.

Required: What amount was attributed to goodwill on the date of acquisition?

104.Thomas Inc. had the following stockholders' equity accounts as of January 1, 2013:

Kuried Co. acquired all of the voting common stock of Thomas on January 1, 2013, for $20,656,000. The preferred stock remained in the hands of outside parties and had a fair value of $3,060,000. A database valued at $656,000 was recognized and amortized over five years. During 2013, Thomas reported earning $630,000 in net income and paid $504,000 in total cash dividends. Kuried used the equity method to account for this investment. What is the amount of goodwill resulting from this acquisition?

105.Thomas Inc. had the following stockholders' equity accounts as of January 1, 2013:

Kuried Co. acquired all of the voting common stock of Thomas on January 1, 2013, for $20,656,000. The preferred stock remained in the hands of outside parties and had a fair value of $3,060,000. A database valued at $656,000 was recognized and amortized over five years. During 2013, Thomas reported earning $630,000 in net income and paid $504,000 in total cash dividends. Kuried used the equity method to account for this investment. What was the non-controlling interest's share of consolidated net income for the year 2013?

106.Thomas Inc. had the following stockholders' equity accounts as of January 1, 2013:

Kuried Co. acquired all of the voting common stock of Thomas on January 1, 2013, for $20,656,000. The preferred stock remained in the hands of outside parties and had a fair value of $3,060,000. A database valued at $656,000 was recognized and amortized over five years. During 2013, Thomas reported earning $630,000 in net income and paid $504,000 in total cash dividends. Kuried used the equity method to account for this investment. What is the controlling interest share of Thomas' net income for the year ended December 31, 2013?

107.Thomas Inc. had the following stockholders' equity accounts as of January 1, 2013:

Kuried Co. acquired all of the voting common stock of Thomas on January 1, 2013, for $20,656,000. The preferred stock remained in the hands of outside parties and had a fair value of $3,060,000. A database valued at $656,000 was recognized and amortized over five years. During 2013, Thomas reported earning $630,000 in net income and paid $504,000 in total cash dividends. Kuried used the equity method to account for this investment. What was Kuried's balance in the Investment in Thomas Inc. account as of December 31, 2013?

108.Thomas Inc. had the following stockholders' equity accounts as of January 1, 2013:

109.Jet Corp. acquired all of the outstanding shares of Nittle Inc. on January 1, 2011, for $644,000 in cash. Of this price, $42,000 was attributed to equipment with a ten-year remaining useful life. Goodwill of $56,000 had also been identified. Jet applied the partial equity method so that income would be accrued each period based solely on the earnings reported by the subsidiary. On January 1, 2014, Jet reported $280,000 in bonds outstanding with a book value of $263,200. Nittle purchased half of these bonds on the open market for $135,800. During 2014, Jet began to sell merchandise to Nittle. During that year, inventory costing $112,000 was transferred at a price of $140,000. All but $14,000 (at Jet's selling price) of these goods were resold to outside parties by year's end. Nittle still owed $50,400 for inventory shipped from Jet during December. The following financial figures were for the two companies for the year ended December 31, 2014.

Required: Prepare a consolidation worksheet for the year ended December 31, 2014.

110.Allen Co. held 80% of the common stock of Brewer Inc. and 40% of this subsidiary's convertible bonds. The following consolidated financial statements were for 2012 and 2013.

Additional Information: 1. Bonds were issued during 2013 by the parent for cash. 2. Amortization of a database acquired in the original combination amounted to $7,000 per year. 3. A building with a cost of $84,000 but a $42,000 book value was sold by the parent for cash on May 11, 2013. 4. Equipment was purchased by the subsidiary on July 23, 2013, using cash. 5. Late in November 2013, the parent issued common stock for cash. 6. During 2013, the subsidiary paid dividends of $14,000.

Required: Prepare a consolidated statement of cash flows for this business combination for the year ending December 31, 2013. Either the direct method or the indirect method may be used.

111.Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago. At the present time, Glotfelty is reporting the following stockholders' equity:

Glotfelty issues 5,000 shares of previously unissued stock to the public for $40 per share. None of this stock is purchased by Panton. Describe how this transaction would affect Panton's books.

112.Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago. At the present time, Glotfelty is reporting the following stockholders' equity:

Glotfelty issues 5,000 shares of previously unissued stock to the public for $40 per share. None of this stock is purchased by Panton. Prepare Panton's journal entry to recognize the impact of this transaction.

113.Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago. At the present time, Glotfelty is reporting the following stockholders' equity:

Glotfelty issues 5,000 shares of previously unissued stock to the public for $27 per share. None of this stock is purchased by Panton. Describe how this transaction would affect Panton's books.

114.Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago. At the present time, Glotfelty is reporting the following stockholders' equity:

Glotfelty issues 5,000 shares of previously unissued stock to the public for $27 per share. None of this stock is purchased by Panton. Prepare Panton's journal entry to recognize the impact of this transaction.

115.Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago. At the present time, Glotfelty is reporting the following stockholders' equity:

Glotfelty issues 5,000 shares of previously unissued stock to Panton for $35 per share. Required: Describe how this transaction would affect Panton's books.

Chapter 06 Variable Interest Entities, Intra-Entity Debt, Consolidated Cash Flows, and Other Issues Answer Key

Multiple Choice Questions

On January 1, 2013, Riley Corp. acquired some of the outstanding bonds of one of its subsidiaries. The bonds had a carrying value of $421,620, and Riley paid $401,937 for them. How should you account for the difference between the carrying value and the purchase price in the consolidated financial statements for 2013?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 06-02 Demonstrate the consolidation procedures to eliminate all intra-entity debt accounts and recognize any associated gain or loss created whenever one company acquires an affiliate's debt instrument from an outside party.

Regency Corp. recently acquired $500,000 of the bonds of Safire Co., one of its subsidiaries, paying more than the carrying value of the bonds. According to the most practical view of this intra-entity transaction, to whom would the loss be attributed?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 06-02 Demonstrate the consolidation procedures to eliminate all intra-entity debt accounts and recognize any associated gain or loss created whenever one company acquires an affiliate's debt instrument from an outside party.

Which one of the following characteristics of preferred stock would make the stock a dilutive security for earnings per share?

A. The preferred stock is callable. B. The preferred stock is convertible. C. The preferred stock is cumulative. D. The preferred stock is noncumulative. E. The preferred stock is participating.

AACSB: Reflective thinking

AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-05 Compute basic and diluted earnings per share for a business combination.

Where do dividends paid to the non-controlling interest of a subsidiary appear on a consolidated statement of cash flows?

Where do dividends paid by a subsidiary to the parent company appear in a consolidated statement of cash flows?

AACSB: Reflective thinking

AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-04 Prepare a consolidated statement of cash flows.

Where do intra-entity sales of inventory appear in a consolidated statement of cash flows?

How do intra-entity sales of inventory affect the preparation of a consolidated statement of cash flows?

How would consolidated earnings per share be calculated if the subsidiary has no convertible securities or warrants?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy

Learning Objective: 06-05 Compute basic and diluted earnings per share for a business combination.

On January 1, 2013, Riney Co. owned 80% of the common stock of Garvin Co. On that date, Garvin's stockholders' equity accounts had the following balances:

A. $552,000. B. $560,000. C. $460,000. D. $404,000. E. $672,000. $250,000/$5 = 50,000 shares × .80 = 40,000 shares owned by parent Total Equity at Acquisition = $690,000 + Equity Added by Stock Offering (10,000 × $15) $150,000 = Total Equity after Stock Offering $840,000 × 40,000 Parent/60,000 Total = $560,000 Parent's Investment Account

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 06-06 Demonstrate the accounting for subsidiary stock transactions that impact the underlying value 6-89 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

recorded within the parent's investment account and the consolidated financial statements.

10.

On January 1, 2013, Riney Co. owned 80% of the common stock of Garvin Co. On that date, Garvin's stockholders' equity accounts had the following balances:

The balance in Riney's Investment in Garvin Co. account was $552,000, and the noncontrolling interest was $138,000. On January 1, 2013, Garvin Co. sold 10,000 shares of previously unissued common stock for $15 per share. Riney did not acquire any of these shares. What is the balance in Non-controlling Interest in Garvin Co. after the sale of the 10,000 shares of common stock?

A. $138,000. B. $101,000. C. $280,000. D. $230,000. E. $168,000. $250,000/$5 = 50,000 shares × .80 = 40,000 shares owned by parent Total Equity at Acquisition = $690,000 + Equity Added by Stock Offering (10,000 × $15) $150,000 = Total Equity after Stock Offering $840,000 × 20,000/60,000 = $280,000 NonControlling Interest

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 06-06 Demonstrate the accounting for subsidiary stock transactions that impact the underlying value 6-90 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

recorded within the parent's investment account and the consolidated financial statements.

11.

Rojas Co. owned 7,000 shares (70%) of the outstanding 10%, $100 par preferred stock and 60% of the outstanding common stock of Brett Co. When Brett reported net income of $780,000, what was the non-controlling interest in the subsidiary's income?

A. $234,000. B. $273,000. C. $302,000. D. $312,000. E. $284,000. $780,000 Net Income - Preferred Dividends (10,000 × $10) = $680,000 × .40 = $272,000 Non-Controlling Interest $100,000 Preferred Dividends × .30 = $30,000 Non-Controlling Interest $272,000 from Income + $30,000 Preferred Dividends = $302,000 Non-Controlling Interest in Income

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-03 Understand that subsidiary preferred stocks not owned by the parent are a component of the noncontrolling interest and are initially valued at acquisition-date fair value.

12.

Knight Co. owned 80% of the common stock of Stoop Co. Stoop had 50,000 shares of $5 par value common stock and 2,000 shares of preferred stock outstanding. Each preferred share received an annual per share dividend of $10 and is convertible into four shares of common stock. Knight did not own any of Stoop's preferred stock. Stoop also had 600 bonds outstanding, each of which is convertible into ten shares of common stock. Stoop's annual after-tax interest expense for the bonds was $22,000. Knight did not own any of Stoop's bonds. Stoop reported income of $300,000 for 2013. What was the amount of Stoop's earnings that should be included in calculating consolidated diluted earnings per share?

A. $300,000. B. $240,000. C. $257,600. D. $322,000. E. $201,250. Parent Shares 40,000/64,000 Total shares (50,000 + 8,000 + 6,000) = 62.5% $300,000 + $22,000 = $322,000 × 62.5% = $201,250

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-05 Compute basic and diluted earnings per share for a business combination.

13.

Knight Co. owned 80% of the common stock of Stoop Co. Stoop had 50,000 shares of $5 par value common stock and 2,000 shares of preferred stock outstanding. Each preferred share received an annual per share dividend of $10 and is convertible into four shares of common stock. Knight did not own any of Stoop's preferred stock. Stoop also had 600 bonds outstanding, each of which is convertible into ten shares of common stock. Stoop's annual after-tax interest expense for the bonds was $22,000. Knight did not own any of Stoop's bonds. Stoop reported income of $300,000 for 2013. Stoop's diluted earnings per share (rounded) is calculated to be

A. $5.62. B. $3.26. C. $3.11. D. $5.03. E. $4.28. Consolidated Earnings $201,250/(50,000 × .80) 40,000 shares = $5.03 Diluted Earnings per Share

14.

Campbell Inc. owned all of Gordon Corp. For 2013, Campbell reported net income (without consideration of its investment in Gordon) of $280,000 while the subsidiary reported $112,000. The subsidiary had bonds payable outstanding on January 1, 2013, with a book value of $297,000. The parent acquired the bonds on that date for $281,000. During 2013, Campbell reported interest income of $31,000 while Gordon reported interest expense of $29,000. What is consolidated net income for 2013?

A. $406,000. B. $374,000. C. $378,000. D. $410,000. E. $394,000. Income of the Parent $280,000 + Income of the Sub $112,000 - Difference in Interest on Intra-Entity Bonds ($31,000 - $29,000) $2,000 + Gain on Bonds Purchase ($297,000 $281,000) $16,000 = $406,000 Consolidated Net Income

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 06-02 Demonstrate the consolidation procedures to eliminate all intra-entity debt accounts and recognize any associated gain or loss created whenever one company acquires an affiliate's debt instrument from an outside party.

15.

Vontkins Inc. owned all of Quasimota Co. The subsidiary had bonds payable outstanding on January 1, 2012, with a book value of $265,000. The parent acquired the bonds on that date for $288,000. Subsequently, Vontkins reported interest income of $25,000 in 2012 while Quasimota reported interest expense of $29,000. Consolidated financial statements were prepared for 2013. What adjustment would have been required for the retained earnings balance as of January 1, 2013?

A. reduction of $27,000. B. reduction of $4,000. C. reduction of $19,000. D. reduction of $30,000. E. reduction of $20,000. Bond Acquisition Price $288,000 - Bonds BV $265,000 = $23,000 R/E Reduction Intra-Entity Interest $29,000 - $25,000 = $4,000 R/E Increase $23,000 - $4,000 = $19,000 R/E Reduction

16.

Tray Co. reported current earnings of $560,000 while paying $56,000 in cash dividends. Sparrish Co. earned $140,000 in net income and distributed $14,000 in dividends. Tray held a 70% interest in Sparrish for several years, an investment that it originally acquired by transferring consideration equal to the book value of the underlying net assets. Tray used the initial value method to account for these shares. On January 1, 2013, Sparrish acquired in the open market $70,000 of Tray's 8% bonds. The bonds had originally been issued several years ago at 92, reflecting a 10% effective interest rate. On the date of the bond purchase, the book value of the bonds payable was $67,600. Sparrish paid $65,200 based on a 12% effective interest rate over the remaining life of the bonds. What is the non-controlling interest's share of the subsidiary's net income?

A. $42,000. B. $37,800. C. $39,600. D. $40,070. E. $44,080. Sub's income $140,000 × .30 = $42,000 NCI's Portion of Income

17.

A company had common stock with a total par value of $18,000,000 and fair value of $62,000,000; and 7% preferred stock with a total par value of $6,000,000 and a fair value of $8,000,000. The book value of the company was $85,000,000. If 90% of this company's total equity was acquired by another, what portion of the value would be assigned to the non-controlling interest?

A. $8,500,000. B. $7,000,000. C. $6,200,000. D. $2,400,000. E. $6,929,400. FV Common Stock $62,000,000 + FV Preferred Stock $8,000,000 = $70,000,000 × .10 = $7,000,000 Non-Controlling Interest

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 06-03 Understand that subsidiary preferred stocks not owned by the parent are a component of the noncontrolling interest and are initially valued at acquisition-date fair value.

18.

Cadion Co. owned a controlling interest in Knieval Inc. Cadion reported sales of $420,000 during 2013 while Knieval reported $280,000. Inventory costing $28,000 was transferred from Knieval to Cadion (upstream) during the year for $56,000. Of this amount, twenty-five percent was still in ending inventory at year's end. Total receivables on the consolidated balance sheet were $112,000 at the first of the year and $154,000 at year-end. No intraentity debt existed at the beginning or ending of the year. Using the direct approach, what is the consolidated amount of cash collected by the business combination from its customers?

A. $602,000. B. $644,000. C. $686,000. D. $714,000. E. $592,000. Parent's Sales $420,000 + Sub's Sales $280,000 - Intra-Entity Sales $56,000 - Change in A/R $42,000 ($154,000 - $112,000) = $602,000 Consolidated Cash Collected

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 06-04 Prepare a consolidated statement of cash flows.

19.

Parker owned all of Odom Inc. Although the Investment in Odom Inc . account had a balance of $834,000, the subsidiary's 12,000 shares had an underlying book value of only $56 per share. On January 1, 2013, Odom issued 3,000 new shares to the public for $70 per share. How does this transaction affect the Investment in Odom Inc . account?

A. It should be decreased by $141,120. B. It should be increased by $176,400. C. It should be increased by $48,000. D. It should be decreased by $128,400. E. It is not affected since the shares were sold to outside parties. BV $56 × 12,000 + $70 × 3,000 = $882,000 × .80 = $705,600 - Investment Account Balance $834,000 = $128,400 Reduction in Investment Account

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 06-06 Demonstrate the accounting for subsidiary stock transactions that impact the underlying value recorded within the parent's investment account and the consolidated financial statements.

20.

These questions are based on the following information and should be viewed as

independent situations. Popper Co. acquired 80% of the common stock of Cocker Co. on January 1, 2011, when Cocker had the following stockholders' equity accounts.

A. increase it by $28,700. B. increase it by $16,800. C. $0. D. increase it by $280,000. E. increase it by $593,600. No Adjustment is made to the APIC of the Parent as a Result of Sub's Stock Issue Since the same Level of Ownership Interest is Maintained

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement 6-100 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Apply Difficulty: 1 Easy Learning Objective: 06-06 Demonstrate the accounting for subsidiary stock transactions that impact the underlying value recorded within the parent's investment account and the consolidated financial statements.

21.

These questions are based on the following information and should be viewed as

independent situations. Popper Co. acquired 80% of the common stock of Cocker Co. on January 1, 2011, when Cocker had the following stockholders' equity accounts.

To acquire this interest in Cocker, Popper paid a total of $682,000 with any excess acquisition date fair value over book value being allocated to goodwill, which has been measured for impairment annually and has not been determined to be impaired as of January 1, 2014. On January 1, 2014, Cocker reported a net book value of $1,113,000 before the following transactions were conducted. Popper uses the equity method to account for its investment in Cocker, thereby reflecting the change in book value of Cocker. On January 1, 2014, Cocker issued 10,000 additional shares of common stock for $21 per share. Popper did not acquire any of this newly issued stock. How would this transaction affect the additional paid-in capital of the parent company?

A. $0. B. decrease it by $23,240. C. decrease it by $68,250. D. decrease it by $45,060. E. decrease it by $43,680. Net BV $1,113,000 + ($21 × 10,000) = $1,323,000 Net BV after Stock Issued Parent Shared Held 32,000/Total Shares Outstanding 50,000 = .64 × $1,323,000 = $846,720 Net BV $1,113,000 × .80 = $890,400 - $846,720 = $43,680 Reduction in Parents APIC

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 06-06 Demonstrate the accounting for subsidiary stock transactions that impact the underlying value recorded within the parent's investment account and the consolidated financial statements.

22.

These questions are based on the following information and should be viewed as

independent situations. Popper Co. acquired 80% of the common stock of Cocker Co. on January 1, 2011, when Cocker had the following stockholders' equity accounts.

To acquire this interest in Cocker, Popper paid a total of $682,000 with any excess acquisition date fair value over book value being allocated to goodwill, which has been measured for impairment annually and has not been determined to be impaired as of January 1, 2014. On January 1, 2014, Cocker reported a net book value of $1,113,000 before the following transactions were conducted. Popper uses the equity method to account for its investment in Cocker, thereby reflecting the change in book value of Cocker. On January 1, 2014, Cocker reacquired 8,000 of the outstanding shares of its own common stock for $34 per share. None of these shares belonged to Popper. How would this transaction have affected the additional paid-in capital of the parent company?

A. $0. B. decrease it by $32,900. C. decrease it by $45,700. D. decrease it by $49,400. E. decrease it by $50,500. $1,113,000 × .80 = $890,400 BV before Share Buy-Back $1,113,000 - Buyback Value $272,000 (8,000 × $34) = $841,000 BV after Buy-Back $890,400 (BV before Share Buy-Back) - $841,000 (BV after Buy-Back) = $49,400 Decrease in Parent's APIC

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 06-06 Demonstrate the accounting for subsidiary stock transactions that impact the underlying value recorded within the parent's investment account and the consolidated financial statements.

23.

If newly issued debt is issued from a parent to its subsidiary, which of the following statements is false?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-02 Demonstrate the consolidation procedures to eliminate all intra-entity debt accounts and recognize any associated gain or loss created whenever one company acquires an affiliate's debt instrument from an outside party.

24.

The accounting problems encountered in consolidated intra-entity debt transactions when the debt is acquired by an affiliate from an outside party include all of the following

except:

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-02 Demonstrate the consolidation procedures to eliminate all intra-entity debt accounts and recognize any associated gain or loss created whenever one company acquires an affiliate's debt instrument from an outside party.

25.

Which of the following statements is true concerning the acquisition of existing debt of a consolidated affiliate in the year of the debt acquisition?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 06-02 Demonstrate the consolidation procedures to eliminate all intra-entity debt accounts and recognize any associated gain or loss created whenever one company acquires an affiliate's debt instrument from an outside party.

26.

Which of the following statements is false regarding the assignment of a gain or loss on intercompany bond transfer?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement 6-107 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 06-02 Demonstrate the consolidation procedures to eliminate all intra-entity debt accounts and recognize any associated gain or loss created whenever one company acquires an affiliate's debt instrument from an outside party.

27.

What would differ between a statement of cash flows for a consolidated company and an unconsolidated company using the indirect method?

28.

Which of the following statements is true for a consolidated statement of cash flows?

29.

In reporting consolidated earnings per share when there is a wholly owned subsidiary, which of the following statements is true?

30.

A subsidiary issues new shares of common stock at an amount below book value. Outsiders buy all of these shares. Which of the following statements is true?

AACSB: Reflective thinking

AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 06-06 Demonstrate the accounting for subsidiary stock transactions that impact the underlying value recorded within the parent's investment account and the consolidated financial statements.

31.

A subsidiary issues new shares of common stock. If the parent acquires all of these shares at an amount greater than book value, which of the following statements is true?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 06-06 Demonstrate the accounting for subsidiary stock transactions that impact the underlying value recorded within the parent's investment account and the consolidated financial statements.

32.

If a subsidiary reacquires its outstanding shares from outside ownership for more than book value, which of the following statements is true?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 06-06 Demonstrate the accounting for subsidiary stock transactions that impact the underlying value recorded within the parent's investment account and the consolidated financial statements.

33.

If a subsidiary issues a stock dividend, which of the following statements is true?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 06-06 Demonstrate the accounting for subsidiary stock transactions that impact the underlying value recorded within the parent's investment account and the consolidated financial statements.

34.

Stevens Company has had bonds payable of $10,000 outstanding for several years. On January 1, 2013, when there was an unamortized discount of $2,000 and a remaining life of 5 years, its 80% owned subsidiary, Matthews Company, purchased the bonds in the open market for $11,000. The bonds pay 6% interest annually on December 31. The companies use the straight-line method to amortize interest revenue and expense. Compute the consolidated gain or loss on a consolidated income statement for 2013.

A. $1,000 gain. B. $1,000 loss. C. $2,000 loss. D. $3,000 loss. E. $3,000 gain. Bonds Purchase Price $11,000 - Bonds BV ($10,000 - $2,000) = $3,000 Loss to Consolidation Income

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 06-02 Demonstrate the consolidation procedures to eliminate all intra-entity debt accounts and recognize any associated gain or loss created whenever one company acquires an affiliate's debt instrument from an outside party.

35.

Keenan Company has had bonds payable of $20,000 outstanding for several years. On January 1, 2013, there was an unamortized premium of $2,000 with a remaining life of 10 years, Keenan's parent, Ross, Inc. purchased the bonds in the open market for $19,000. Keenan is a 90% owned subsidiary of Ross. The bonds pay 8% interest annually on December 31. The companies use the straight-line method to amortize interest revenue and expense. Compute the consolidated gain or loss on a consolidated income statement for 2013.

A. $3,000 gain. B. $3,000 loss. C. $1,000 gain. D. $1,000 loss. E. $2,000 gain. Bonds Purchase Price $19,000 - Bonds BV ($20,000 - $2,000) = $1,000 Gain to Consolidation Income

36.

On January 1, 2013, Nichols Company acquired 80% of Smith Company's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is:

Determine the amount and account to be recorded for Nichols' investment in Smith.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 06-03 Understand that subsidiary preferred stocks not owned by the parent are a component of the noncontrolling interest and are initially valued at acquisition-date fair value.

37.

Compute the goodwill recognized in consolidation.

A. $800,000. B. $310,000. C. $124,000. D. $0. E. $(196,000.) Consideration for Common & Preferred Stock ($1,200,000 + $124,000) + Non-Controlling Interest Value ($300,000 + $186,000) = FV $1,810,000 - BV $1,500,000 = $310,000 Goodwill

38.

Compute the non-controlling interest in Smith at date of acquisition.

A. $486,000. B. $480,000. C. $300,000. D. $150,000. E. $120,000. Common Stock Non-Controlling Interest at Acquisition = $1,200,000/.80 = $1,500,000 × .20 = $300,000 Preferred Stock Non-Controlling Interest at Acquisition = $124,000/.40 = $310,000 × .60 = $186,000 $300,000 + $186,000 = $486,000 Non-Controlling Interest at Acquisition Date

39.

The consolidation entry at date of acquisition will include (referring to Smith):

A. Debit Common stock $500,000 and debit Preferred stock $120,000. B. Debit Common stock $400,000 and debit Additional paid-in capital $160,000. C. Debit Common stock $500,000 and debit Preferred stock $300,000. D. Debit Common stock $500,000, debit Preferred stock $120,000, and debit Additional paid-in capital $200,000. E. Debit Common stock $400,000, debit Preferred stock $300,000, debit Additional paid-in capital $200,000, and debit Retained earnings $500,000. BV Recorded as Debit on Acquisition

40.

If Smith's net income is $100,000 in the year following the acquisition,

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-03 Understand that subsidiary preferred stocks not owned by the parent are a component of the noncontrolling interest and are initially valued at acquisition-date fair value.

41.

The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company. (1.) Graham reports a loss on sale of land of $5,000. The land cost Graham $20,000. (2.) Non-controlling interest in Stage's net income was $30,000. (3.) Graham paid dividends of $15,000. (4.) Stage paid dividends of $10,000. (5.) Excess acquisition-date fair value over book value was expensed by $6,000. (6.) Consolidated accounts receivable decreased by $8,000. (7.) Consolidated accounts payable decreased by $7,000. How is the loss on sale of land reported on the consolidated statement of cash flows?

42.

The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company. (1.) Graham reports a loss on sale of land of $5,000. The land cost Graham $20,000. (2.) Non-controlling interest in Stage's net income was $30,000. (3.) Graham paid dividends of $15,000. (4.) Stage paid dividends of $10,000. (5.) Excess acquisition-date fair value over book value was expensed by $6,000. (6.) Consolidated accounts receivable decreased by $8,000. (7.) Consolidated accounts payable decreased by $7,000. Where does the non-controlling interest in Stage's net income appear on a consolidated statement of cash flows?

43.

The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company. (1.) Graham reports a loss on sale of land of $5,000. The land cost Graham $20,000. (2.) Non-controlling interest in Stage's net income was $30,000. (3.) Graham paid dividends of $15,000. (4.) Stage paid dividends of $10,000. (5.) Excess acquisition-date fair value over book value was expensed by $6,000. (6.) Consolidated accounts receivable decreased by $8,000. (7.) Consolidated accounts payable decreased by $7,000. How will dividends be reported in consolidated statement of cash flows?

44.

The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company. (1.) Graham reports a loss on sale of land of $5,000. The land cost Graham $20,000. (2.) Non-controlling interest in Stage's net income was $30,000. (3.) Graham paid dividends of $15,000. (4.) Stage paid dividends of $10,000. (5.) Excess acquisition-date fair value over book value was expensed by $6,000. (6.) Consolidated accounts receivable decreased by $8,000. (7.) Consolidated accounts payable decreased by $7,000. How is the amount of excess acquisition-date fair value over book value recognized in a consolidated statement of cash flows assuming the indirect method is used?

A. It is ignored. B. $6,000 subtracted from net income. C. $4,800 subtracted from net income. D. $6,000 added to net income. E. $4,800 added to net income. $6,000 Excess Amortization is not a Cash Item and therefore Added Back to Net Income on the Cash Flow Statement

45.

The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company. (1.) Graham reports a loss on sale of land of $5,000. The land cost Graham $20,000. (2.) Non-controlling interest in Stage's net income was $30,000. (3.) Graham paid dividends of $15,000. (4.) Stage paid dividends of $10,000. (5.) Excess acquisition-date fair value over book value was expensed by $6,000. (6.) Consolidated accounts receivable decreased by $8,000. (7.) Consolidated accounts payable decreased by $7,000. Using the indirect method, where does the decrease in accounts receivable appear in a consolidated statement of cash flows?

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 06-04 Prepare a consolidated statement of cash flows.

46.

The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company. (1.) Graham reports a loss on sale of land of $5,000. The land cost Graham $20,000. (2.) Non-controlling interest in Stage's net income was $30,000. (3.) Graham paid dividends of $15,000. (4.) Stage paid dividends of $10,000. (5.) Excess acquisition-date fair value over book value was expensed by $6,000. (6.) Consolidated accounts receivable decreased by $8,000. (7.) Consolidated accounts payable decreased by $7,000. Using the indirect method, where does the decrease in accounts payable appear in a consolidated statement of cash flows?

47.

Webb Company owns 90% of Jones Company. The original balances presented for Jones and Webb as of January 1, 2013, are as follows:

Jones sells 20,000 shares of previously unissued shares of its common stock to outside parties for $10 per share. What is the adjusted book value of Jones after the sale of the shares?

A. $200,000. B. $1,400,000. C. $1,280,000. D. $1,050,000. E. $1,440,000. Starting BV $1,200,000 + Add'l Shares Sold $200,000 ($10 × 20,000) = $1,400,000 Current BV

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 06-06 Demonstrate the accounting for subsidiary stock transactions that impact the underlying value recorded within the parent's investment account and the consolidated financial statements.

48.

Webb Company owns 90% of Jones Company. The original balances presented for Jones and Webb as of January 1, 2013, are as follows:

Jones sells 20,000 shares of previously unissued shares of its common stock to outside parties for $10 per share. What is the new percent ownership of Webb in Jones after the stock issuance?

A. 75%. B. 90%. C. 80%. D. 64%. E. 60%. Shares Outstanding 100,000 × .90 = 90,000 Parent's Shares 100,000 + 20,000 = 120,000 New Outstanding Shares 90,000/120,000 = 75% New Ownership Percentage

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 06-06 Demonstrate the accounting for subsidiary stock transactions that impact the underlying value recorded within the parent's investment account and the consolidated financial statements.

49.

Webb Company owns 90% of Jones Company. The original balances presented for Jones and Webb as of January 1, 2013, are as follows:

Jones sells 20,000 shares of previously unissued shares of its common stock to outside parties for $10 per share. What adjustment is needed for Webb's investment in Jones account?

A. $180,000 increase. B. $180,000 decrease. C. $30,000 increase. D. $30,000 decrease. E. No adjustment is necessary. $1,400,000 × .75 = $1,050,000 - $1,080,000 = $30,000 Decrease in Investment Account

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 06-06 Demonstrate the accounting for subsidiary stock transactions that impact the underlying value recorded within the parent's investment account and the consolidated financial statements.

50.

Webb Company owns 90% of Jones Company. The original balances presented for Jones and Webb as of January 1, 2013 are as follows:

A. $1,500,000. B. $1,200,000. C. $1,350,000. D. $1,080,000. E. $1,335,000. Starting BV $1,200,000 + Add'l Shares Sold $300,000 ($15 × 20,000) = $1,500,000 Current BV

51.

Webb Company owns 90% of Jones Company. The original balances presented for Jones and Webb as of January 1, 2013 are as follows:

A. $270,000 increase. B. $270,000 decrease. C. $27,000 increase. D. $27,000 decrease. E. No adjustment is necessary. Investment in Sub Does Not Change After Add'l Shares Purchased

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 06-06 Demonstrate the accounting for subsidiary stock transactions that impact the underlying value recorded within the parent's investment account and the consolidated financial statements.

52.

Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and Chase as of January 1, 2013, are as follows:

Assume Chase issues 30,000 additional shares common stock solely to Ryan for $12 per share. What is the new percent ownership Ryan owns in Chase?

A. 80.0%. B. 87.5%. C. 90.0%. D. 75.0%. E. 82.5%. Shares Outstanding 50,000 × .80 = 40,000 Parent's Shares 50,000 + 30,000 = 80,000 New Outstanding Shares 40,000 + 30,000 = 70,000 Parent's Shares after New Issue 70,000/80,000 = 87.5% New Ownership Percentage

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 06-06 Demonstrate the accounting for subsidiary stock transactions that impact the underlying value recorded within the parent's investment account and the consolidated financial statements.

53.

Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and Chase as of January 1, 2013, are as follows:

Assume Chase issues 30,000 additional shares common stock solely to Ryan for $12 per share. What is the adjusted book value of Chase Company after the issuance of the shares?

A. $608,000. B. $720,000. C. $680,000. D. $760,000. E. $400,000. Starting BV $400,000 + Add'l Shares Sold $360,000 ($12 × 30,000) = $760,000 Current BV

54.

Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and Chase as of January 1, 2013, are as follows:

Assume Chase issues 30,000 additional shares common stock solely to Ryan for $12 per share. After acquiring the additional shares, what adjustment is needed for Ryan's investment in Chase account?

A. $70,000 increase. B. $70,000 decrease. C. $15,000 increase. D. $15,000 decrease. E. No adjustment is necessary. $760,000 × 87.5 = $665,000 - ($320,000 + $360,000) = $15,000 Decrease in Investment Account

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 06-06 Demonstrate the accounting for subsidiary stock transactions that impact the underlying value recorded within the parent's investment account and the consolidated financial statements.

55.

Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and Chase as of January 1, 2013 are as follows:

Assume Chase reacquired 8,000 shares of its common stock from outsiders at $10 per share. What should the adjusted book value of Chase be after the treasury shares were purchased?

A. $400,000. B. $480,000. C. $320,000. D. $336,000. E. $464,000. Sub BV before Stock Repurchase $400,000 - Stock Repurchase $80,000 (8,000 × $10) = Sub BV after Stock Repurchase $320,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 06-06 Demonstrate the accounting for subsidiary stock transactions that impact the underlying value recorded within the parent's investment account and the consolidated financial statements.

56.

Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and Chase as of January 1, 2013 are as follows:

Assume Chase reacquired 8,000 shares of its common stock from outsiders at $10 per share. What is Ryan's percent ownership in Chase after the acquisition of the treasury shares (rounded)?

A. 80%. B. 95%. C. 64%. D. 76%. E. 69%. Shares Outstanding 50,000 × .80 = 40,000 Parent's Shares before Treasury Purchase 50,000 - 8,000 = 42,000 New Outstanding Shares after Treasury Purchase 40,000/42,000 = 95% New Ownership Percentage

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 06-06 Demonstrate the accounting for subsidiary stock transactions that impact the underlying value recorded within the parent's investment account and the consolidated financial statements.

57.

Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and Chase as of January 1, 2013 are as follows:

A. $16,000 decrease. B. $60,000 decrease. C. $64,000 increase. D. $64,000 decrease. E. No adjustment is necessary. $400,000 × .80 = $320,000 - $304,000 ($320,000 × .95) = $16,000 Decrease in Investment Account

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 06-06 Demonstrate the accounting for subsidiary stock transactions that impact the underlying value recorded within the parent's investment account and the consolidated financial statements.

58.

A variable interest entity can take all of the following forms except a(n)

A. Trust. B. Partnership. C. Joint venture. D. Corporation. E. Estate.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-01 Describe a variable interest entity; a primary beneficiary; and the factors used to decide when a variable interest entity is subject to consolidation.

59.

All of the following are examples of variable interests except

A. Guarantees of debt. B. Stock options. C. Lease residual value guarantees. D. Participation rights. E. Asset purchase options.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 06-01 Describe a variable interest entity; a primary beneficiary; and the factors used to decide when a variable interest entity is subject to consolidation.

60.

Which of the following is not a potential loss or return of a variable interest entity?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-01 Describe a variable interest entity; a primary beneficiary; and the factors used to decide when a variable interest entity is subject to consolidation.

61.

Which of the following characteristics is not indicative of an enterprise qualifying as a primary beneficiary with a controlling financial interest in a variable interest entity?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember

Difficulty: 1 Easy Learning Objective: 06-01 Describe a variable interest entity; a primary beneficiary; and the factors used to decide when a variable interest entity is subject to consolidation.

62.

Which of the following statements is false concerning variable interest entities (VIEs)?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 06-01 Describe a variable interest entity; a primary beneficiary; and the factors used to decide when a variable interest entity is subject to consolidation.

63.

Which of the following statements is true concerning variable interest entities (VIEs)? 1) The role of the VIE equity investors can be fairly minor. 2) A VIE may be created specifically to benefit its sponsoring firm with low-cost financing. 3) VIE governing agreements often limit activities and decision making. 4) VIEs usually have a well-defined and limited business activity.

A. 2 and 4. B. 2, 3, and 4. C. 1, 2, and 4. D. 1, 2, and 3. E. 1, 2, 3, and 4.

64.

Which of the following is not an indicator that requires a sponsoring firm to consolidate a variable interest entity (VIE) with its own financial statements?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 06-01 Describe a variable interest entity; a primary beneficiary; and the factors used to decide when a variable interest entity is subject to consolidation.

65.

A parent acquires all of a subsidiary's common stock and 60 percent of its preferred stock. The preferred stock has a cumulative dividend. No dividends are in arrears. How is the non-controlling interest in the subsidiary's net income assigned?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 06-03 Understand that subsidiary preferred stocks not owned by the parent are a component of the noncontrolling interest and are initially valued at acquisition-date fair value.

66.

A parent acquires 70% of a subsidiary's common stock and 60 percent of its preferred stock. The preferred stock is noncumulative. The current year's dividend was paid. How is the non-controlling interest in the subsidiary's net income assigned?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 06-03 Understand that subsidiary preferred stocks not owned by the parent are a component of the noncontrolling interest and are initially valued at acquisition-date fair value.

67.

Wolff Corporation owns 70 percent of the outstanding stock of Donald, Inc. During the current year, Donald made $75,000 in sales to Wolff. How does this transfer affect the consolidated statement of cash flows?

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 1 Easy Learning Objective: 06-04 Prepare a consolidated statement of cash flows.

68.

MacDonald, Inc. owns 80 percent of the outstanding stock of Stahl Corporation. During the current year, Stahl made $125,000 in sales to MacDonald. How does this transfer affect the consolidated statement of cash flows?

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 1 Easy

Learning Objective: 06-04 Prepare a consolidated statement of cash flows.

69.

Pursley, Inc. owns 70 percent of Harry Corp. The consolidated income statement for a year reports $50,000 Non-controlling Interest in Harry Corp.'s Income. Harry paid dividends in the amount of $80,000 for the year. What are the effects of these transactions in the consolidated statement of cash flows for the year?

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

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 06-04 Prepare a consolidated statement of cash flows.

70.

Goehring, Inc. owns 70 percent of Harry Corp. The consolidated income statement for a year reports $40,000 Non-controlling Interest in Harry Corp.'s Income. Harry paid dividends in the amount of $100,000 for the year. What are the effects of these transactions in the consolidated statement of cash flows for the year?

71.

Anderson, Inc. has owned 70% of its subsidiary, Arthur Corp., for several years. The consolidated balance sheets of Anderson, Inc. and Arthur Corp. are presented below:

Additional information for 2013:

Net cash flow from operating activities was:

A. $43,000. B. $44,800. C. $46,200. D. $50,000. E. $25,000. $50,000 + Depreciation $14,000 ($170,000 - $156,000) + Amortization $2,000 ($18,000 $16,000) - A/R $21,000 ($75,000 - $54,000) - Inventory $11,000 ($100,000 - $89,000) + A/P $9,000 ($60,000 - $51,000) = $43,000 Net Consolidated Cash Flow from Operations

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 06-04 Prepare a consolidated statement of cash flows.

72.

Anderson, Inc. has owned 70% of its subsidiary, Arthur Corp., for several years. The consolidated balance sheets of Anderson, Inc. and Arthur Corp. are presented below:

Additional information for 2013:

Net cash flow from financing activities was:

A. $(28,000). B. $(35,000). C. $(13,000). D. $(63,000). E. $(61,000).

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-04 Prepare a consolidated statement of cash flows. 6-149 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

73.

The balance sheets of Butler, Inc. and its 70 percent-owned subsidiary, Cassie Corp., are presented below:

Additional information for 2013:

Net cash flow from operating activities was:

A. $92,000. B. $27,000. C. $63,000. D. $29,000. E. $34,000. $100,000 + Depreciation $25,000 ($340,000 - $315,000) + Amortization $4,000 ($36,000 $32,000) - A/R $42,000 ($150,000 - $108,000) - Inventory $42,000 ($220,000 - $178,000) + A/P $18,000 ($120,000 - $102,000) = $63,000 Net Consolidated Cash Flow from Operations

AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 06-04 Prepare a consolidated statement of cash flows.

74.

The balance sheets of Butler, Inc. and its 70 percent-owned subsidiary, Cassie Corp., are presented below:

Additional information for 2013:

Net cash flow from financing activities was:

A. $(129,000). B. $(96,000). C. $(300,000). D. $(80,000). E. $(126,000).

AACSB: Analytic

AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-04 Prepare a consolidated statement of cash flows.

75.

How do subsidiary stock warrants outstanding affect consolidated earnings per share?

76.

A parent company owns a controlling interest in a subsidiary whose stock has a book value of $27 per share. The last day of the year, the subsidiary issues new shares entirely to outside parties at $33 per share. The parent still holds control over the subsidiary. Which of the following statements is true?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-06 Demonstrate the accounting for subsidiary stock transactions that impact the underlying value recorded within the parent's investment account and the consolidated financial statements.

77.

A parent company owns a controlling interest in a subsidiary whose stock has a book value of $27 per share. The last day of the year, the subsidiary issues new shares entirely to outside parties at $25 per share. The parent still holds control over the subsidiary. Which of the following statements is true?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-06 Demonstrate the accounting for subsidiary stock transactions that impact the underlying value recorded within the parent's investment account and the consolidated financial statements.

78.

A parent company owns a 70 percent interest in a subsidiary whose stock has a book value of $27 per share. The last day of the year, the subsidiary issues new shares for $27 per share, and the parent buys its 70 percent interest in the new shares. Which of the following statements is true?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-06 Demonstrate the accounting for subsidiary stock transactions that impact the underlying value recorded within the parent's investment account and the consolidated financial statements.

79.

Carlson, Inc. owns 80 percent of Madrid, Inc. Carlson reports net income for 2013 (without consideration of its investment in Madrid, Inc.) of $1,500,000. For the same year, Madrid reports net income of $705,000. Carlson had bonds payable outstanding on January 1, 2013 with a carrying value of $1,200,000. Madrid acquired the bonds on the open market on January 3, 2013 for $1,090,000. For the year 2013, Carlson reported interest expense on the bonds in the amount of $96,000, while Madrid reported interest income of $94,000 for the same bonds. What is Carlson's share of consolidated net income?

A. $2,064,000. B. $2,066,000. C. $2,176,000. D. $2,207,000. E. $2,317,000. Parent's Income $1,500,000 + Loss on Bond Sale $110,000 - Bond Interest $94,000 + Bond Income $96,000 + Sub's Income to Parent $564,000 ($705,000 × .80) = $2,176,000 Consolidated Income

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-02 Demonstrate the consolidation procedures to eliminate all intra-entity debt accounts and recognize any associated gain or loss created whenever one company acquires an affiliate's debt instrument from an outside party.

80.

Davidson, Inc. owns 70 percent of the outstanding voting stock of Ernest Company. On January 2, 2011, Davidson sold 8 percent bonds payable with a $5,000,000 face value maturing January 2, 2031 at a premium of $400,000. On January 1, 2013, Ernest acquired 30 percent of these same bonds on the open market at 97.6. Both companies use the straight-line method of amortization. What adjustment should be made to Davidson's 2014 beginning Retained Earnings as a result of this bond acquisition?

A. $114,000. B. $122,000. C. $136,000. D. $144,000. E. $152,000.

81.

Franklin Corporation owns 90 percent of the outstanding voting stock of Georgia Company. On January 2, 2011, Georgia sold 7 percent bonds payable with a $5,000,000 face value maturing January 2, 2031 at a premium of $500,000. On January 1, 2013, Franklin acquired 20 percent of these same bonds on the open market at 97.66. Both companies use the straight-line method of amortization. What adjustment should be made to Franklin's 2014 beginning Retained Earnings as a result of this bond acquisition?

A. $107,100. B. $113,400. C. $119,700. D. $144,000. E. $152,000.

82.

On January 1, 2013, Harrison Corporation spent $2,600,000 to acquire control over Involved, Inc. This price was based on paying $750,000 for 30 percent of Involved's preferred stock, and $1,850,000 for 80 percent of its outstanding common stock. As of the date of the acquisition, Involved's stockholders' equity accounts were as follows:

What is the total acquisition-date fair value of Involved?

A. $2,600,000 B. $4,812,500 C. $3,062,500 D. $2,312,500 E. $3,250,000 Common Stock Non-Controlling Interest at Acquisition = $1,850,000/.80 = $2,312,500 Preferred Stock Non-Controlling Interest at Acquisition = $750,000/.30 = $2,500,000 $2,312,500 + $2,500,000 = $4,812,500 FV of Sub at Acquisition $1,850,000 + $462,500 + $750,000 + $1,750,000 = $4,812,500

83.

Assuming Involved's accounts are correctly valued within the company's financial statements, what amount of goodwill should be recognized for the Investment in Involved?

A. $(100,000.) B. $0. C. $200,000. D. $812,500. E. $2,112,500. Common Stock Non-Controlling Interest at Acquisition = $1,850,000/.80 = $2,312,500 × .20 = $462,500 Preferred Stock Non-Controlling Interest at Acquisition = $750,000/.30 = $2,500,000 × .70 = $1,750,000 (CS Parent $1,850,000) + (CS NCI $462,500) + (PS Parent $750,000) + (PS NCI $1,750,000) = $4,812,500 FV of Sub at Acquisition FV $4,812,500 - BV $4,000,000 = $812,500 Goodwill

noncontrolling interest and are initially valued at acquisition-date fair value.

84.

Johnson, Inc. owns control over Kaspar Inc, Johnson reports sales of $400,000 during 2013 while Kaspar reports $250,000. Kaspar transferred inventory during 2013 to Johnson at a price of $50,000. On December 31, 2013, 30% of the transferred goods are still in Johnson's inventory. Consolidated accounts receivable on January 1, 2013 was $120,000, and on December 31, 2013 is $130,000. Johnson uses the direct approach in preparing the statement of cash flows. How much is cash collected from customers in the consolidated statement of cash flows?

A. $590,000. B. $610,000. C. $625,000. D. $635,000. E. $650,000. Parent $400,000 + Sub $250,000 - Intra-Entity $50,000 - A/R Change $10,000 ($120,000 $130,000) = $590,000

Essay Questions

85.

Parent Corporation loaned money to its subsidiary with a five-year note at the market interest rate. How would the note be accounted for in the consolidation process?

The note would be eliminated in the consolidation process with an entry debiting Notes

Payable and crediting Notes Receivable.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-02 Demonstrate the consolidation procedures to eliminate all intra-entity debt accounts and recognize any associated gain or loss created whenever one company acquires an affiliate's debt instrument from an outside party.

86.

What documents or other sources of information would be used to prepare a consolidated statement of cash flows?

The main source of information would be the consolidated income statement and the consolidated balance sheet.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-04 Prepare a consolidated statement of cash flows.

87.

Parent Corporation acquired some of its subsidiary's bonds on the open bond market. The remaining life of the bonds was eight years, and Parent expected to hold the bonds for the full eight years. How would the acquisition of the bonds affect the consolidation process?

In the consolidation process, the bonds would be treated as if they had been retired. A gain or loss would be recognized in the period in which they were acquired. Intra-entity interest revenue and expense would be eliminated.

88.

Parent Corporation acquired some of its subsidiary's bonds on the open bond market, paying a price $40,000 higher than the bonds' carrying value. How should the difference between the purchase price and the carrying value be accounted for?

The $40,000 difference between the acquisition price and the carrying value would be recognized as a loss on early extinguishment of debt and would only be extraordinary under limited circumstances.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 06-02 Demonstrate the consolidation procedures to eliminate all intra-entity debt accounts and recognize any associated gain or loss created whenever one company acquires an affiliate's debt instrument from an

outside party.

89.

How are intra-entity inventory transfers treated on the consolidation worksheet and how are they reflected in a consolidated statement of cash flows?

Intra-entity inventory transfers are eliminated on the consolidation worksheet and therefore do not appear in the consolidated statement of cash flows.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 06-04 Prepare a consolidated statement of cash flows.

90.

Danbers Co. owned seventy-five percent of the common stock of Renz Corp. How does the issuance of a five percent stock dividend by Renz affect Danbers and the consolidation process?

A stock dividend would not influence Danbers' ownership percentage and would not alter the consolidation process.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 06-06 Demonstrate the accounting for subsidiary stock transactions that impact the underlying value recorded within the parent's investment account and the consolidated financial statements.

91.

During 2013, Parent Corporation purchased at book value some of the outstanding bonds of its subsidiary. How would this acquisition have been reflected in the consolidated statement of cash flows?

The cash paid for the bonds on the open market would be shown under cash flows from financing activities. If the bonds were acquired directly from the subsidiary, the cash received and the cash paid has no effect on the consolidated entity. Therefore, in a direct intra-entity transaction, there is no effect in the consolidated statement of cash flows.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 06-04 Prepare a consolidated statement of cash flows.

92.

On January 1, 2013, Parent Corporation acquired a controlling interest in the voting common stock of Foxboro Co. At the same time, Parent purchased sixty percent of Foxboro's outstanding preferred stock. In preparing consolidated financial statements, how should the acquisition of the preferred stock be accounted for?

The investment in preferred stock account and Foxboro's preferred stock balance should be eliminated in consolidation so that only the parent's equity remains. No gain or loss should be recognized.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 06-03 Understand that subsidiary preferred stocks not owned by the parent are a component of the noncontrolling interest and are initially valued at acquisition-date fair value. 6-166 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

93.

When a company has preferred stock in its capital structure, what amount should be used to calculate non-controlling interest in the preferred stock of the subsidiary when the company is acquired as a subsidiary of another company?

The non-controlling interest should be reflected at its acquisition-date fair value.

94.

Parent Corporation acquired some of its subsidiary's outstanding bonds. Why might Parent purchase the bonds, rather than the subsidiary buying its own bonds?

The purchase might have been made by Parent Corporation because it had more available cash than the subsidiary and there was a desire to bring the bonds in from the market. Also, in some cases, the contract signed when the bonds were issued might prevent the subsidiary from purchasing its own bonds or it might require the payment of a price that would be higher than the market value of the bonds.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analyze Difficulty: 2 Medium Learning Objective: 06-02 Demonstrate the consolidation procedures to eliminate all intra-entity debt accounts and recognize any associated gain or loss created whenever one company acquires an affiliate's debt instrument from an outside party.

95.

Parent Corporation had just purchased some of its subsidiary's outstanding bonds on the open market. What items related to these bonds will have to be accounted for in the consolidation process?

For each period that the parent owns the bonds, the bonds must be eliminated on the consolidation worksheet. Eliminating the bonds (1) requires the elimination of the parent's investment account; (2) the portion of the bonds payable that the parent acquired; (3) interest expense of the issuer; and (4) interest income of the investor. In the year in which the parent acquired the bonds, a gain or loss must have been recognized. Over the life of the bonds, retained earnings must be debited or credited for the amount of the gain or loss, as adjusted by the previous years' difference between interest expense and interest income.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 3 Hard Learning Objective: 06-02 Demonstrate the consolidation procedures to eliminate all intra-entity debt accounts and recognize any associated gain or loss created whenever one company acquires an affiliate's debt instrument from an outside party.

96.

Parent Corporation recently acquired some of its subsidiary's outstanding bonds, at an amount which required the recognition of a loss. In what ways could the loss be allocated? Which allocation would you recommend? Why?

The loss could be assigned to the subsidiary since it originally issued the bonds. The loss could be assigned to the parent since the parent acquired the bonds. A method could be applied to divide the loss between the parent and subsidiary. Finally, the loss could be assigned to the parent because the parent controls the combined entity. The loss should probably be assigned to the parent, without regard to who issued and who purchased the bonds, since the parent is responsible for decision-making for the combined entity.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 3 Hard Learning Objective: 06-02 Demonstrate the consolidation procedures to eliminate all intra-entity debt accounts and recognize any associated gain or loss created whenever one company acquires an affiliate's debt instrument from an outside party.

97.

How does the existence of a non-controlling interest affect the preparation of a consolidated statement of cash flows?

The non-controlling interest's share of the subsidiary's income would not appear in the consolidated statement of cash flows. Dividends paid to the non-controlling interest represent cash outflows for the combined entity to outside parties, and should be shown as cash flows from financing activities.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement

Blooms: Remember Difficulty: 2 Medium Learning Objective: 06-04 Prepare a consolidated statement of cash flows.

Short Answer Questions

98.

On January 1, 2013, Bast Co. had a net book value of $2,100,000 as follows:

Fisher Co. acquired all of the outstanding preferred shares for $148,000 and 60% of the common stock for $1,281,000. Fisher believed that one of Bast's buildings, with a twelveyear life, was undervalued on the company's financial records by $70,000.

Required: What is the amount of goodwill to be recognized from this purchase?

99.

Fargus Corporation owned 51% of the voting common stock of Sanatee, Inc. The parent's interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition price. On January 1, 2012, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a 10% interest rate every December 31. Fargus acquired 40% of these bonds on January 1, 2014, for 95% of the face value. Both companies utilized the straight-line method of amortization. What balances would need to be considered in order to prepare the consolidation entry in connection with these intra-entity bonds at December 31, 2014, the end of the first year of the intra-entity investment? Prepare schedules to show numerical answers for balances that would be needed for the entry.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-02 Demonstrate the consolidation procedures to eliminate all intra-entity debt accounts and recognize any associated gain or loss created whenever one company acquires an affiliate's debt instrument from an outside party.

100.

Fargus Corporation owned 51% of the voting common stock of Sanatee, Inc. The parent's interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition price. On January 1, 2012, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a 10% interest rate every December 31. Fargus acquired 40% of these bonds on January 1, 2014, for 95% of the face value. Both companies utilized the straight-line method of amortization. What consolidation entry would be recorded in connection with these intra-entity bonds on December 31, 2014?

AACSB: Analytic AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 06-02 Demonstrate the consolidation procedures to eliminate all intra-entity debt accounts and recognize any associated gain or loss created whenever one company acquires an affiliate's debt instrument from an outside party.

101.

Fargus Corporation owned 51% of the voting common stock of Sanatee, Inc. The parent's interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition price. On January 1, 2012, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a 10% interest rate every December 31. Fargus acquired 40% of these bonds on January 1, 2014, for 95% of the face value. Both companies utilized the straight-line method of amortization. What consolidation entry would be recorded in connection with these intra-entity bonds on December 31, 2015?

102.

Fargus Corporation owned 51% of the voting common stock of Sanatee, Inc. The parent's interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the acquisition price. On January 1, 2012, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a 10% interest rate every December 31. Fargus acquired 40% of these bonds on January 1, 2014, for 95% of the face value. Both companies utilized the straight-line method of amortization. What consolidation entry would be recorded in connection with these intra-entity bonds on December 31, 2016?

103.

Skipen Corp. had the following stockholders' equity accounts:

Required: What amount was attributed to goodwill on the date of acquisition?

104.

Thomas Inc. had the following stockholders' equity accounts as of January 1, 2013:

105.

Thomas Inc. had the following stockholders' equity accounts as of January 1, 2013:

Kuried Co. acquired all of the voting common stock of Thomas on January 1, 2013, for $20,656,000. The preferred stock remained in the hands of outside parties and had a fair value of $3,060,000. A database valued at $656,000 was recognized and amortized over five years. During 2013, Thomas reported earning $630,000 in net income and paid $504,000 in total cash dividends. Kuried used the equity method to account for this investment. What was the non-controlling interest's share of consolidated net income for the year 2013?

All residual net income is attributed to the controlling interest of Kuried as sole owner of common stock of Thomas.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 06-03 Understand that subsidiary preferred stocks not owned by the parent are a component of the noncontrolling interest and are initially valued at acquisition-date fair value.

106.

Thomas Inc. had the following stockholders' equity accounts as of January 1, 2013:

Kuried Co. acquired all of the voting common stock of Thomas on January 1, 2013, for $20,656,000. The preferred stock remained in the hands of outside parties and had a fair value of $3,060,000. A database valued at $656,000 was recognized and amortized over five years. During 2013, Thomas reported earning $630,000 in net income and paid $504,000 in total cash dividends. Kuried used the equity method to account for this investment. What is the controlling interest share of Thomas' net income for the year ended December 31, 2013?

107.

Thomas Inc. had the following stockholders' equity accounts as of January 1, 2013:

Kuried Co. acquired all of the voting common stock of Thomas on January 1, 2013, for $20,656,000. The preferred stock remained in the hands of outside parties and had a fair value of $3,060,000. A database valued at $656,000 was recognized and amortized over five years. During 2013, Thomas reported earning $630,000 in net income and paid $504,000 in total cash dividends. Kuried used the equity method to account for this investment. What was Kuried's balance in the Investment in Thomas Inc. account as of December 31, 2013?

108.

Thomas Inc. had the following stockholders' equity accounts as of January 1, 2013:

109.

Jet Corp. acquired all of the outstanding shares of Nittle Inc. on January 1, 2011, for $644,000 in cash. Of this price, $42,000 was attributed to equipment with a ten-year remaining useful life. Goodwill of $56,000 had also been identified. Jet applied the partial

equity method so that income would be accrued each period based solely on the earnings reported by the subsidiary. On January 1, 2014, Jet reported $280,000 in bonds outstanding with a book value of $263,200. Nittle purchased half of these bonds on the open market for $135,800. During 2014, Jet began to sell merchandise to Nittle. During that year, inventory costing $112,000 was transferred at a price of $140,000. All but $14,000 (at Jet's selling price) of these goods were resold to outside parties by year's end. Nittle still owed $50,400 for inventory shipped from Jet during December. The following financial figures were for the two companies for the year ended December 31, 2014.

Required: Prepare a consolidation worksheet for the year ended December 31, 2014.

CONSOLIDATION WORKSHEET For the Year Ended 12/31/2014

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 06-02 Demonstrate the consolidation procedures to eliminate all intra-entity debt accounts and recognize any associated gain or loss created whenever one company acquires an affiliate's debt instrument from an outside party.

110.

Allen Co. held 80% of the common stock of Brewer Inc. and 40% of this subsidiary's convertible bonds. The following consolidated financial statements were for 2012 and 2013.

Required: Prepare a consolidated statement of cash flows for this business combination for the year ending December 31, 2013. Either the direct method or the indirect method may be used.

The above statement uses the direct method for calculating cash flows from operating activities. The following presentation would be included for the direct method as a reconciliation of net income to net cash from operations, as well as being the presentation of cash flow from operating activities for the indirect method:

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 06-04 Prepare a consolidated statement of cash flows.

111.

Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago. At the present time, Glotfelty is reporting the following stockholders' equity:

Glotfelty issues 5,000 shares of previously unissued stock to the public for $40 per share. None of this stock is purchased by Panton. Describe how this transaction would affect Panton's books.

Prior to the issuance of the new shares, Panton owns a 90% interest in Glotfelty (18,000 shares out of 20,000 shares). The underlying book value of this investment is $540,000 ($600,000 × 90%). Subsequent to the issuance, total book value of the subsidiary will have risen by $200,000 (5,000 shares × $40) to $800,000. Panton's ownership, however, will only be 72% (18,000/25,000). The book value underlying Panton's investment is now $576,000 (72% of $800,000) so that a $36,000 increase must be recorded by the parent.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analyze Difficulty: 2 Medium Learning Objective: 06-06 Demonstrate the accounting for subsidiary stock transactions that impact the underlying value recorded within the parent's investment account and the consolidated financial statements.

112.

Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago. At the present time, Glotfelty is reporting the following stockholders' equity:

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analyze Difficulty: 1 Easy Learning Objective: 06-06 Demonstrate the accounting for subsidiary stock transactions that impact the underlying value recorded within the parent's investment account and the consolidated financial statements.

113.

Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago. At the present time, Glotfelty is reporting the following stockholders' equity:

Glotfelty issues 5,000 shares of previously unissued stock to the public for $27 per share. None of this stock is purchased by Panton. Describe how this transaction would affect Panton's books.

Prior to the issuance of the new shares, Panton owns a 90% interest in Glotfelty (18,000 shares out of 20,000 shares). The underlying book value of this investment is $540,000 ($600,000 × 90%). Subsequent to the issuance, total book value of the subsidiary will have risen by $135,000 (5,000 shares × $27) to $735,000. Panton's ownership, however, will only be 72% (18,000/25,000). The book value underlying Panton's investment is now $529,200 (72% of $735,000) so that a $10,800 decrease must be recorded by the parent.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 06-06 Demonstrate the accounting for subsidiary stock transactions that impact the underlying value recorded within the parent's investment account and the consolidated financial statements.

114.

Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago. At the present time, Glotfelty is reporting the following stockholders' equity:

115.

Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago. At the present time, Glotfelty is reporting the following stockholders' equity:

Glotfelty issues 5,000 shares of previously unissued stock to Panton for $35 per share. Required: Describe how this transaction would affect Panton's books.

The investment price is above the book value of the subsidiary. In this case, however, the additional amount has been paid by the parent company, not by an outside party. Because the payment is made by Panton, the investment account will need an adjustment after recording the cost of the new shares. A change in ownership is accounted for as an equity transaction when controlling interest is retained. Book value equivalency prior to new issuance (90% × $600,000) = $540,000 Book value of subsidiary after new issuance ($600,000 + $175,000) = $775,000 Panton's ownership (23,000 shares/25,000 shares) × 92% Book value equivalency after new issuance $713,000 Investment account after new shares recorded (540,000 + $175,000) = $715,000 Adjustment: Decrease investment and additional paid-in capital ($713,000 - $715,000) = $(2,000)

recorded within the parent's investment account and the consolidated financial statements.

Chapter 07 Consolidated Financial Statements—Ownership Patterns and Income Taxes

Multiple Choice Questions

1. Buckette Co. owned 60% of Shuvelle Corp. and 40% of Tayle Corp., and Shuvelle owned 35% of Tayle. When Buckette prepared consolidated financial statements, it should include

A. Shuvelle but not Tayle. B. Tayle but not Shuvelle. C. either Shuvelle or Tayle. D. Shuvelle and Tayle. E. neither Shuvelle nor Tayle.

2. Buckette Co. owned 60% of Shuvelle Corp. and 40% of Tayle Corp., and Shuvelle owned 35% of Tayle. What is this pattern of ownership called?

A. pyramid ownership. B. a connecting affiliation. C. mutual ownership. D. an indirect affiliation. E. an affiliated group.

3. Buckette Co. owned 60% of Shuvelle Corp. and 40% of Tayle Corp., and Shuvelle owned 35% of Tayle. What percentage of Tayle's income is attributed to Buckette's ownership interest?

A. 100%. B. 75%. C. 61%. D. 40%. E. 74%.

4. D Corp. had investments, direct and indirect, in several subsidiaries: • E Co. is a domestic firm in which D Corp. owned a 90% interest • F Co. is a domestic firm in which D Corp. owned 60% and E Co. owned 30% • G Co. is a domestic firm wholly owned by E Co. • H Co. is a foreign subsidiary in which D Corp. owned a 90% interest • I Co. is a domestic firm in which D Corp. owned 50% and G Co. owned 25% Which of these subsidiaries may be included in a consolidated income tax return?

A. E, F, G, H, and I. B. E, G, H, and I. C. E and F. D. E, F, G, and H. E. E, F, and G.

5. Evanston Co. owned 60% of Montgomery Corp. Montgomery owned 75% of Noir Inc., and Noir owned 15% of Montgomery. This pattern of ownership would be called

A. mutual ownership. B. direct control. C. indirect control. D. an affiliated group. E. a connecting affiliation.

6. In a tax-free business combination,

A. the income tax basis for acquired assets and liabilities is adjusted to current fair value. B. any goodwill created by the combination may be amortized in calculating taxable income. C. the subsidiary's assets and liabilities are assigned an income tax basis of zero dollars, so that they will have no future income tax consequences. D. any goodwill created by the combination must be deducted in total in calculating taxable income. E. the subsidiary's cost basis for assets are retained for income tax calculations.

7. West Corp. owned 70% of the voting common stock of East Co. East owned 60% of Compass Co. West and East both used the initial value method to account for their investments. The following information was available from the financial statements and records of the three companies:

Operating income included unrealized intra-entity gains (which are related to inventory transfers) but did not include dividend income from investment in subsidiary. The accrual-based income of East Co. is calculated to be

A. $385,700. B. $581,000. C. $557,000. D. $551,000. E. $707,000.

8. West Corp. owned 70% of the voting common stock of East Co. East owned 60% of Compass Co. West and East both used the initial value method to account for their investments. The following information was available from the financial statements and records of the three companies:

A. $734,000. B. $1,261,000. C. $1,123,900. D. $1,140,700. E. $1,149,700.

9. West Corp. owned 70% of the voting common stock of East Co. East owned 60% of Compass Co. West and East both used the initial value method to account for their investments. The following information was available from the financial statements and records of the three companies:

Operating income included unrealized intra-entity gains (which are related to inventory transfers) but did not include dividend income from investment in subsidiary. What amount should have been reported for consolidated net income?

A. $1,285,000. B. $1,331,700. C. $1,349,000. D. $1,315,000. E. $1,314,900.

10. West Corp. owned 70% of the voting common stock of East Co. East owned 60% of Compass Co. West and East both used the initial value method to account for their investments. The following information was available from the financial statements and records of the three companies:

Operating income included unrealized intra-entity gains (which are related to inventory transfers) but did not include dividend income from investment in subsidiary. For West Corp. and consolidated subsidiaries, what total amount would have been reported for the non-controlling interest's share of subsidiaries' net income ?

A. $165,300. B. $199,300. C. $191,000. D. $228,000. E. $153,000.

11. West Corp. owned 70% of the voting common stock of East Co. East owned 60% of Compass Co. West and East both used the initial value method to account for their investments. The following information was available from the financial statements and records of the three companies:

Operating income included unrealized intra-entity gains (which are related to inventory transfers) but did not include dividend income from investment in subsidiary. What amount of dividends did West Corp. receive from Compass Co.?

A. $-0B. $25,200. C. $36,000. D. $42,000. E. $90,000.

12. River Co. owned 80% of Boat Inc. The two companies filed a consolidated income tax return and River used the initial value method to account for the investment. The following information was available from the two companies' financial statements:

Operating income included net unrealized gains, which are associated with transfers of inventories between the two companies, but it did not include dividends received from a subsidiary. The income tax rate was 30%. What is the amount of taxable income reported on the consolidated income tax return?

A. $720,000. B. $625,000. C. $621,000. D. $665,000. E. $655,000.

13. River Co. owned 80% of Boat Inc. The two companies filed a consolidated income tax return and River used the initial value method to account for the investment. The following information was available from the two companies' financial statements:

Operating income included net unrealized gains, which are associated with transfers of inventories between the two companies, but it did not include dividends received from a subsidiary. The income tax rate was 30%. What was the amount of income tax expense that should have been assigned to Boat using the percentage allocation method?

A. $31,500 B. $32,750 C. $36,000 D. $32,660 E. $30,390

14. River Co. owned 80% of Boat Inc. The two companies filed a consolidated income tax return and River used the initial value method to account for the investment. The following information was available from the two companies' financial statements:

Operating income included net unrealized gains, which are associated with transfers of inventories between the two companies, but it did not include dividends received from a subsidiary. The income tax rate was 30%. What was the amount of income tax expense that should have been assigned to Boat using the separate return method?

A. $36,000 B. $31,500 C. $33,390 D. $32,750 E. $32,660

15. River Co. owned 80% of Boat Inc. The two companies filed a consolidated income tax return and River used the initial value method to account for the investment. The following information was available from the two companies' financial statements:

Operating income included net unrealized gains, which are associated with transfers of inventories between the two companies, but it did not include dividends received from a subsidiary. The income tax rate was 30%. What was the non-controlling interest in Boat Inc.'s net income, assuming that the separate

return method was used?

A. $16,800 B. $14,450 C. $14,700 D. $17,450 E. $13,800

16. Prescott Corp. owned 90% of Bell Inc., while Bell owned 10% of the outstanding common shares of Prescott. No goodwill or other allocations were recognized in connection with either of these acquisitions. Prescott reported operating income of $266,000 for 2013 whereas Bell earned $98,000 during the same period. No investment income was included within either of these income totals. On a consolidated income statement, what is the non-controlling

interest in Bell's net income?

A. $9,800. B. $13,692. C. $10,836. D. $12,460. E. $11,214.

17. Prescott Corp. owned 90% of Bell Inc., while Bell owned 10% of the outstanding common shares of Prescott. No goodwill or other allocations were recognized in connection with either of these acquisitions. Prescott reported operating income of $266,000 for 2013 whereas Bell earned $98,000 during the same period. No investment income was included within either of these income totals. How would the 10% investment in Prescott owned by Bell be presented in the consolidated balance sheet?

A. The 10% investment would be eliminated and no amount would be shown in the consolidated balance sheet. B. The 10% investment would be reclassified in Bell's balance sheet as Treasury Stock before the consolidation process begins. C. The 10% investment would be eliminated and the same dollar amount would appear as treasury stock in the consolidated balance sheet. D. The 10% investment would be included as part of Additional Paid-In Capital because it is less than 20% and therefore indicates no significant influence is present. E. Prescott would treat the shares owned by Bell as if they had been repurchased on the open market, and a treasury stock account would be set up on Prescott's books recording the shares at their market value on the date of combination.

18. On January 1, 2013, a subsidiary bought 10% of the outstanding shares of its parent company. Although the total book value and fair value of the parent's net assets were $5.5 million, the consideration transferred for these shares was $590,000. During 2013, the parent reported operating income (no investment income was included) of $714,000 while paying dividends of $196,000. How were these shares reported at December 31, 2013?

A. The investment was recorded for $641,800 at the end of 2013 and then eliminated for consolidation purposes. B. Consolidated stockholders' equity was reduced by $641,800. C. The investment was recorded for $590,000 at the end of 2013 and then eliminated for consolidation purposes. D. Consolidated stockholders' equity was reduced by $639,800. E. Consolidated stockholders' equity was reduced by $590,000.

19. Jastoon Co. acquired all of Wedner Co. for $588,000 cash in a tax-free transaction. On that date, the subsidiary had net assets with a $560,000 fair value but a $420,000 book value and income tax basis. The income tax rate was 30%. What amount of goodwill should have been recognized on the date of the acquisition?

A. $70,000. B. $28,000. C. $(14,000.) D. $19,600. E. $65,000.

20. Beagle Co. owned 80% of Maroon Corp. Maroon owned 90% of Eckston Inc. Operating income totals for 2013 are shown below; these figures contained no investment income. Amortization expense was not required by any of these acquisitions. Included in Eckston's operating income was a $56,000 unrealized gain on intra-entity transfers to Maroon.

The accrual-based income of Eckston Inc. is calculated to be

A. $234,000. B. $211,000. C. $221,000. D. $224,000. E. $246,000.

21. Beagle Co. owned 80% of Maroon Corp. Maroon owned 90% of Eckston Inc. Operating income totals for 2013 are shown below; these figures contained no investment income. Amortization expense was not required by any of these acquisitions. Included in Eckston's operating income was a $56,000 unrealized gain on intra-entity transfers to Maroon.

The accrual-based income of Maroon Corp. is calculated to be

A. $481,600. B. $472,700. C. $488,900. D. $502,300. E. $358,800.

22. Beagle Co. owned 80% of Maroon Corp. Maroon owned 90% of Eckston Inc. Operating income totals for 2013 are shown below; these figures contained no investment income. Amortization expense was not required by any of these acquisitions. Included in Eckston's operating income was a $56,000 unrealized gain on intra-entity transfers to Maroon.

The accrual-based income of Beagle Co. is calculated to be

A. $706,670. B. $755,980. C. $805,280. D. $838,150. E. $815,770.

23. Hardford Corp. held 80% of Inglestone Inc. which, in turn, owned 80% of Jade Co. Operating

income figures (without investment income) as well as unrealized upstream gains included in the income for the current year follow:

The accrual-based income of Jade Co. is calculated to be

A. $193,000. B. $189,000. C. $196,000. D. $201,000. E. $144,000.

24. Hardford Corp. held 80% of Inglestone Inc. which, in turn, owned 80% of Jade Co. Operating

income figures (without investment income) as well as unrealized upstream gains included in the income for the current year follow:

The non-controlling interest in the net income of Jade Co. is calculated to be

A. $36,900. B. $33,600. C. $42,400. D. $32,300. E. $39,200.

25. Hardford Corp. held 80% of Inglestone Inc. which, in turn, owned 80% of Jade Co. Operating

income figures (without investment income) as well as unrealized upstream gains included in the income for the current year follow:

The non-controlling interest in the net income of Inglestone Inc. is calculated to be

A. $106,950. B. $102,640. C. $114,530. D. $106,960. E. $103,680.

26. When indirect control is present, which of the following statements is true?

A. At least one company within the business combination holds a parent and a subsidiary relationship. B. The parent company owns a percent of subsidiary and subsidiary owns a percent of the parent. C. Consolidated financial statements are required for only one subsidiary. D. Recognition of income for an indirectly owned subsidiary is ignored. E. Only dividend income is recognized for an indirectly owned subsidiary.

27. Which of the following statements is false concerning a father-son-grandson configuration?

A. This type of ownership pattern does not significantly alter the worksheet process. B. Most worksheet entries are simply made twice. C. The doubling of entries may seem overwhelming. D. The individual consolidation procedures remain unaffected. E. Consolidated financial statements are required for only the father and son companies.

28. Which of the following statements is true regarding mutual ownership between a parent and its subsidiary?

A. The shares of the parent held by a subsidiary should be treated as outstanding stock on the consolidated balance sheet. B. Only the subsidiary's shares held by the parent should be eliminated in consolidation. C. The treasury stock approach is required to reflect parent shares held by the subsidiary. D. The treasury stock approach is required to eliminate subsidiary shares held by the parent company. E. The parent company does not need to file consolidated financial statements if there is mutual ownership.

29. Which of the following statements is true regarding a subsidiary's investment in the parent company's stock?

A. The treasury stock approach focuses on the parent's control over its subsidiary. B. For consolidation, both the parent and subsidiary must eliminate all intra-entity investments. C. In consolidation, the parent's retained earnings will not be reduced by the dividends it paid to the subsidiary. D. This corporate combination is known as mutual ownership. E. All of these are true statements.

30. Which of the following statements is true regarding the subsidiary's investment in its parent's common stock?

A. All of the parent company's common stock is eliminated. B. The consolidation worksheet entry to eliminate the subsidiary's investment in parent's common stock is debited to treasury stock. C. The consolidation worksheet entry to eliminate the subsidiary's investment in parent's common stock is debited to retained earnings. D. The consolidation worksheet entry to eliminate the subsidiary's investment in parent's common stock is debited to additional paid-in capital. E. The investment in parent company's common stock is not eliminated in consolidation.

31. Which of the following statements is true regarding the filing of income taxes for an affiliated group?

A. Domestic subsidiaries greater than 50% ownership must file a consolidated tax return. B. Domestic subsidiaries greater than 60% ownership must file a consolidated tax return. C. Domestic subsidiaries greater than 80% ownership must file a consolidated tax return. D. Domestic subsidiaries greater than 80% ownership may file a consolidated tax return. E. Foreign subsidiaries must file a consolidated tax return.

32. The benefits of filing a consolidated tax return include all of the following except

A. Intercompany profits are not taxed until realized. B. Intercompany profits are deferred. C. Intercompany dividends are not taxable. D. Losses incurred by an affiliated company can be used to reduce taxable income earned by other members to that affiliated group. E. Intercompany profits are taxed before realized, but intercompany losses are deferred.

33. Which of the following statements is true regarding goodwill?

A. For accounting purposes, goodwill may be amortized over a period not to exceed 40 years. B. For accounting purposes, goodwill may be amortized over a period not to exceed 20 years. C. For tax purposes, goodwill amortization cannot be deductible. D. For tax purposes, goodwill amortization may be deductible over a 20-year period. E. For tax purposes, goodwill amortization may be deductible over a 15-year period.

34. Chase Company owns 80% of Lawrence Company and 40% of Ross Company. Lawrence Company also owns 30% of Ross Company. Separate operating incomes for 2013 of Chase, Lawrence, and Ross are $450,000, $300,000, and $250,000, respectively. Each company also retains a $20,000 unrealized gain in their current income figures. Annual amortization expense of $15,000 is assigned to Chase's investment in Lawrence and another $15,000 is assigned to Lawrence's investment in Ross. Compute Chase's attributed ownership in Ross.

A. 40.0%. B. 64.0%. C. 24.0%. D. 32.0%. E. 12.8%.

35. Chase Company owns 80% of Lawrence Company and 40% of Ross Company. Lawrence Company also owns 30% of Ross Company. Separate operating incomes for 2013 of Chase, Lawrence, and Ross are $450,000, $300,000, and $250,000, respectively. Each company also retains a $20,000 unrealized gain in their current income figures. Annual amortization expense of $15,000 is assigned to Chase's investment in Lawrence and another $15,000 is assigned to Lawrence's investment in Ross. Compute the non-controlling interest in Ross' net income for 2013.

A. $92,000. B. $77,400. C. $75,000. D. $64,500. E. $69,000.

36. Chase Company owns 80% of Lawrence Company and 40% of Ross Company. Lawrence Company also owns 30% of Ross Company. Separate operating incomes for 2013 of Chase, Lawrence, and Ross are $450,000, $300,000, and $250,000, respectively. Each company also retains a $20,000 unrealized gain in their current income figures. Annual amortization expense of $15,000 is assigned to Chase's investment in Lawrence and another $15,000 is assigned to Lawrence's investment in Ross. Compute Lawrence's accrual-based income for 2013.

A. $354,000. B. $329,500. C. $334,000. D. $265,000. E. $344,500.

37. Chase Company owns 80% of Lawrence Company and 40% of Ross Company. Lawrence Company also owns 30% of Ross Company. Separate operating incomes for 2013 of Chase, Lawrence, and Ross are $450,000, $300,000, and $250,000, respectively. Each company also retains a $20,000 unrealized gain in their current income figures. Annual amortization expense of $15,000 is assigned to Chase's investment in Lawrence and another $15,000 is assigned to Lawrence's investment in Ross. Compute Chase's accrual-based income for 2013.

A. $746,000. B. $719,000. C. $779,600. D. $774,200. E. $758,100.

38. On January 1, 2012, Jones Company bought 15% of Whitton Company. Jones paid $150,000 for these shares, an amount that exactly equaled the proportionate book value of Whitton. On January 1, 2013, Whitton acquired 80% ownership of Jones. The following data are available concerning Whitton's acquisition of Jones:

Excess fair value over book value (assigned to trademarks) is amortized over 20 years. The initial value method is used by both companies. The following information is available regarding Jones and Whitton:

What would be included in a consolidation worksheet entry for 2013?

A. Debit treasury stock, $135,000. B. Credit treasury stock, $135,000. C. Debit treasury stock, $150,000. D. Credit treasury stock, $150,000. E. Debit common stock, $150,000.

39. On January 1, 2012, Jones Company bought 15% of Whitton Company. Jones paid $150,000 for these shares, an amount that exactly equaled the proportionate book value of Whitton. On January 1, 2013, Whitton acquired 80% ownership of Jones. The following data are available concerning Whitton's acquisition of Jones:

Compute the amount allocated to trademarks recognized in the January 1, 2013 consolidated balance sheet.

A. $80,000. B. $100,000. C. $76,000. D. $16,000. E. $-0-

40. On January 1, 2012, Jones Company bought 15% of Whitton Company. Jones paid $150,000 for these shares, an amount that exactly equaled the proportionate book value of Whitton. On January 1, 2013, Whitton acquired 80% ownership of Jones. The following data are available concerning Whitton's acquisition of Jones:

Compute Whitton's accrual-based consolidated net income for 2013.

A. $199,000. B. $190,000. C. $185,000. D. $184,000. E. $176,000.

41. On January 1, 2012, Jones Company bought 15% of Whitton Company. Jones paid $150,000 for these shares, an amount that exactly equaled the proportionate book value of Whitton. On January 1, 2013, Whitton acquired 80% ownership of Jones. The following data are available concerning Whitton's acquisition of Jones:

Compute the non-controlling interest in net income for 2013.

A. $11,000. B. $10,800. C. $9,000. D. $8,200. E. $7,200.

42. Tower Company owns 85% of Hill Company. The two companies engaged in several intraentity transactions. Each company's operating and dividend income for the current time period follow, as well as the effects of unrealized gains. No income tax accruals have been recognized within these totals. The tax rate for each company is 30%.

Compute accrual-based consolidated net income.

A. $280,000. B. $245,000. C. $200,000. D. $255,200. E. $290,200.

43. Tower Company owns 85% of Hill Company. The two companies engaged in several intraentity transactions. Each company's operating and dividend income for the current time period follow, as well as the effects of unrealized gains. No income tax accruals have been recognized within these totals. The tax rate for each company is 30%.

What is the tax liability for the current year if consolidated tax returns are prepared?

A. $55,560. B. $70,350. C. $60,000. D. $73,500. E. $84,000.

44. Tower Company owns 85% of Hill Company. The two companies engaged in several intraentity transactions. Each company's operating and dividend income for the current time period follow, as well as the effects of unrealized gains. No income tax accruals have been recognized within these totals. The tax rate for each company is 30%.

Using percentage allocation method, how much income tax expense is assigned to Hill?

A. $21,000. B. $24,000. C. $20,400. D. $17,400. E. $0.

45. Tower Company owns 85% of Hill Company. The two companies engaged in several intraentity transactions. Each company's operating and dividend income for the current time period follow, as well as the effects of unrealized gains. No income tax accruals have been recognized within these totals. The tax rate for each company is 30%.

Under the separate return method, how much income tax expense will be assigned to Hill?

A. $24,000. B. $22,857. C. $24,874. D. $21,874. E. $21,000.

46. White Company owns 60% of Cody Company. Separate tax returns are required. For 2012, White's operating income (excluding taxes and any income from Cody) was $300,000 while Cody reported a pretax income of $125,000. During the period, Cody paid a total of $25,000 in cash dividends; $15,000 (60%) to White and $10,000 to the non-controlling interest. White paid dividends of $180,000. The income tax rate for both companies is 30%. Compute Cody's income tax expense for 2013.

A. $33,000. B. $34,500. C. $37,500. D. $30,000. E. $22,500.

47. White Company owns 60% of Cody Company. Separate tax returns are required. For 2012, White's operating income (excluding taxes and any income from Cody) was $300,000 while Cody reported a pretax income of $125,000. During the period, Cody paid a total of $25,000 in cash dividends; $15,000 (60%) to White and $10,000 to the non-controlling interest. White paid dividends of $180,000. The income tax rate for both companies is 30%. Compute Cody's undistributed earnings for 2013.

A. $62,500. B. $125,000. C. $87,500. D. $100,000. E. $70,000.

48. White Company owns 60% of Cody Company. Separate tax returns are required. For 2012, White's operating income (excluding taxes and any income from Cody) was $300,000 while Cody reported a pretax income of $125,000. During the period, Cody paid a total of $25,000 in cash dividends; $15,000 (60%) to White and $10,000 to the non-controlling interest. White paid dividends of $180,000. The income tax rate for both companies is 30%. Compute the income tax payable by White for 2013.

A. $93,600. B. $91,350. C. $94,500. D. $90,900. E. $90,000.

49. White Company owns 60% of Cody Company. Separate tax returns are required. For 2012, White's operating income (excluding taxes and any income from Cody) was $300,000 while Cody reported a pretax income of $125,000. During the period, Cody paid a total of $25,000 in cash dividends; $15,000 (60%) to White and $10,000 to the non-controlling interest. White paid dividends of $180,000. The income tax rate for both companies is 30%. Compute White's deferred income taxes for 2013.

A. $6,000. B. $2,250. C. $3,150. D. $11,250. E. $21,000.

50. Woods Company has one depreciable asset valued at $800,000. Because of recent losses, the company has a net operating loss carry-forward of $150,000. The tax rate is 30%. The company was acquired for $1,000,000. It is likely the benefit will be realized. Compute the goodwill realized in consolidation.

A. $0. B. $155,000. C. $200,000. D. $305,000. E. $350,000.

51. Under current U.S. tax law for consolidated tax returns:

A. One entity in the group can use another entity's net operating loss carry-forward to its advantage. B. The parent can use the net operating loss carry-forward of another entity in the group. C. A net operating loss carry-forward if an entity will be unusable when consolidated tax returns are prepared. D. A net operating loss carry-forward of an entity in the group can only be used by that entity. E. Since the tax return is for all entities in one consolidated group, the net operating loss carry-forward of one entity must be pro-rated to all other entities in the group.

52. Strong Company has had poor operating results in recent years and has a $160,000 net operating loss carry-forward. Leader Corp. pays $700,000 to acquire Strong and is optimistic about its future profitability potential. The book value and fair value of Strong's identifiable net assets is $500,000 at date of acquisition. Strong's tax rate is 30% and Leader's tax rate is 40%. What is goodwill resulting from this business combination?

A. $40,000. B. $88,000. C. $104,000. D. $152,000. E. $248,000.

53. According to International Financial Reporting Standards: In the consolidation process for subsidiaries that are indirectly controlled:

A. The entity least owned by the parent must be included in consolidation. B. Only the entity most directly controlled by the parent must be consolidated. C. Each controlled subsidiary may be individually consolidated. D. The entity most directly owned by the parent must be consolidated first. E. Indirectly controlled subsidiaries cannot be consolidated.

54. In a father-son-grandson combination, which of the following statements is true?

A. Companies that are solely in subsidiary positions must have their realized income computed first in the consolidation process. B. Father-son-grandson configurations never require consolidation unless one company owns 100% of at least one other member of the combined group. C. The order of the computation of realized income is not important in the consolidation process. D. The parent must have its realized income computed first in the consolidation process. E. None of these.

55. Which of the following statements is true concerning connecting affiliations and mutual ownerships?

A. In a mutual ownership, at least two companies in the consolidated group own portions of a third company. B. There are at least four companies in a connecting affiliation. C. In a connecting affiliation, at least one subsidiary owns stock in the parent company. D. In a mutual ownership, the subsidiary owns a portion of the parent's stock. E. There are only two companies in a connecting affiliation.

56. Which of the following is true concerning the treasury stock approach in accounting for a subsidiary's investment in parent company stock?

A. The original cost of the subsidiary's investment reduces long-term liabilities. B. The cost of parent shares is treated as if the shares are no longer outstanding. C. The subsidiary must apply the equity method in accounting for the investment if the treasury stock approach is used. D. The treasury stock approach increases total stockholders' equity. E. The cost of parent shares is treated as if the shares are no longer issued.

57. Which of the following is not an advantage of filing a consolidated income tax return?

A. The existence of unrealized losses in ending inventory. B. The ability to use net operating losses of one company to offset profits of another company. C. The deferral of unrealized gains. D. Transfers of inventory at a transfer price above cost. E. Intercompany dividends are not taxable.

58. On January 1, 2013, a subsidiary buys 8 percent of the outstanding voting stock of its parent corporation. The payment of $350,000 exceeded book value of the acquired shares by $50,000, attributable to a copyright with a 10-year useful life. During the year, the parent reported operating income of $675,000 (excluding investment income from the subsidiary), and paid $100,000 in dividends. If the treasury stock approach is used, how is the Investment in Parent Stock reported in the consolidated balance sheet at December 31, 2013?

A. Included in current assets. B. Included in noncurrent assets. C. Consolidated stockholders' equity is reduced by $350,000. D. Consolidated stockholders' equity is reduced by $300,000. E. There is no effect on the consolidated balance sheet, because the effects have been eliminated.

59. On January 1, 2013, a subsidiary buys 12 percent of the outstanding voting stock of its parent corporation. The payment of $400,000 exceeded book value of the acquired shares by $80,000, attributable to a copyright with a 10-year useful life. During the year, the parent reported operating income of $1,000,000 (excluding investment income from the subsidiary), and paid $120,000 in dividends. If the treasury stock approach is used, how is the Investment in Parent Stock reported in the consolidated balance sheet at December 31, 2013?

A. Consolidated stockholders' equity is reduced by $400,000. B. Consolidated stockholders' equity is reduced by $320,000. C. Included in current assets. D. Included in noncurrent assets. E. There is no effect on the consolidated balance sheet, because the effects have been eliminated.

60. Which of the following conditions will allow two companies to file a consolidated income tax return?

A. One company owns less than 50 percent of the other company's voting stock but has the ability to significantly influence the other company. B. One company holds 50 percent of the other company's voting stock. C. One company holds 75 percent of the other company's voting stock. D. One company holds 83 percent of the other company's voting stock. E. None of these.

61. How is goodwill amortized?

A. It is not amortized for reporting purposes or for tax purposes. B. It is not amortized for reporting purposes, but is amortized over a 5-year life for tax purposes. C. It is not amortized for tax purposes, but is amortized over a 5-year life for reporting purposes. D. It is not amortized for tax purposes, but is amortized over a 15-year life for reporting purposes. E. It is not amortized for reporting purposes, but is amortized over a 15-year life for tax purposes.

62. Why might a consolidated group file separate income tax returns?

A. There are no intra-entity transfers. B. There are no unrealized gains in ending inventory. C. One company is a foreign company. D. Parent owns 68 percent of one company and 82 percent of another. E. All of these.

63. Alpha Corporation owns 100 percent of Beta Company, and Beta owns 80 percent of Gamma, Inc. all of which are domestic corporations. Information for the three companies for the year ending December 31, 2013 follows:

Which of the following statements is true?

A. Alpha and Beta must file a consolidated income tax return, but must exclude Gamma from the consolidated return. B. Alpha, Beta, and Gamma must file a consolidated income tax return. C. Alpha, Beta, and Gamma must file separate income tax returns because the ownership of Beta is less than 100%. D. Alpha, Beta, and Gamma will probably not file a consolidated income tax return. E. Alpha, Beta, and Gamma may file separate income tax returns or a consolidated income tax return.

64. Alpha Corporation owns 100 percent of Beta Company, and Beta owns 80 percent of Gamma, Inc. all of which are domestic corporations. Information for the three companies for the year ending December 31, 2013 follows:

What is Gamma's accrual-based income for 2013?

A. $76,000. B. $80,000. C. $96,000. D. $100,000. E. $104,000.

65. Alpha Corporation owns 100 percent of Beta Company, and Beta owns 80 percent of Gamma, Inc. all of which are domestic corporations. Information for the three companies for the year ending December 31, 2013 follows:

What is Beta's accrual-based income for 2013?

A. $200,000. B. $276,800. C. $280,000. D. $296,000. E. $300,000.

66. Alpha Corporation owns 100 percent of Beta Company, and Beta owns 80 percent of Gamma, Inc. all of which are domestic corporations. Information for the three companies for the year ending December 31, 2013 follows:

What is Alpha's accrual-based income for 2013?

A. $564,000. B. $564,800. C. $572,200. D. $580,000. E. $600,000.

67. Alpha Corporation owns 100 percent of Beta Company, and Beta owns 80 percent of Gamma, Inc. all of which are domestic corporations. Information for the three companies for the year ending December 31, 2013 follows:

What is the non-controlling interest in Gamma's income for 2013?

A. $0. B. $9,600. C. $10,000. D. $19,200. E. $20,000.

68. Alpha Corporation owns 100 percent of Beta Company, and Beta owns 80 percent of Gamma, Inc. all of which are domestic corporations. Information for the three companies for the year ending December 31, 2013 follows:

What is the total non-controlling interest in the subsidiaries' income for 2013?

A. $0. B. $9,600. C. $10,000. D. $19,200. E. $20,000.

69. Delta Corporation owns 90 percent of Sigma Company, and Sigma owns 90 percent of Pi, Inc. all of which are domestic corporations. Information for the three companies for the year ending December 31, 2013 follows:

Which of the following statements is true?

A. Delta and Sigma must file a consolidated income tax return, but must exclude Pi from the consolidated return. B. Delta, Sigma, and Pi must file a consolidated income tax return. C. Delta, Sigma, and Pi must file separate income tax returns because the ownership of Sigma and Pi is less than 100%. D. Delta, Sigma, and Pi will probably not file a consolidated income tax return. E. Delta, Sigma, and Pi may file separate income tax returns or a consolidated income tax return.

70. Delta Corporation owns 90 percent of Sigma Company, and Sigma owns 90 percent of Pi, Inc. all of which are domestic corporations. Information for the three companies for the year ending December 31, 2013 follows:

What is Pi's accrual-based income for 2013?

A. $152,000. B. $16,000. C. $192,000. D. $200,000. E. $208,000.

71. Delta Corporation owns 90 percent of Sigma Company, and Sigma owns 90 percent of Pi, Inc. all of which are domestic corporations. Information for the three companies for the year ending December 31, 2013 follows:

What is Sigma's accrual-based income for 2013?

A. $400,000. B. $592,000. C. $540,000. D. $572,800. E. $600,000.

72. Delta Corporation owns 90 percent of Sigma Company, and Sigma owns 90 percent of Pi, Inc. all of which are domestic corporations. Information for the three companies for the year ending December 31, 2013 follows:

What is Delta's accrual-based income for 2013?

A. $1,091,520. B. $1,115,520. C. $1,168,000. D. $1,168,520. E. $1,200,000.

73. Delta Corporation owns 90 percent of Sigma Company, and Sigma owns 90 percent of Pi, Inc. all of which are domestic corporations. Information for the three companies for the year ending December 31, 2013 follows:

What is the non-controlling interest in Pi's income for 2013?

A. $0. B. $9,600. C. $10,000. D. $19,200. E. $20,000.

74. Delta Corporation owns 90 percent of Sigma Company, and Sigma owns 90 percent of Pi, Inc. all of which are domestic corporations. Information for the three companies for the year ending December 31, 2013 follows:

What is the non-controlling interest in Sigma's income for 2013?

A. $55,240. B. $56,420. C. $57,280. D. $59,420. E. $60,000.

75. Delta Corporation owns 90 percent of Sigma Company, and Sigma owns 90 percent of Pi, Inc. all of which are domestic corporations. Information for the three companies for the year ending December 31, 2013 follows:

What is the total non-controlling interest in the subsidiaries' income for 2013?

A. $55,240. B. $66,020. C. $67,280. D. $76,280. E. $76,480.

76. Paris, Inc. owns 80 percent of the voting stock of Stance, Inc. The excess total fair value over book value was $75,000. Stance holds 10 percent of the voting stock of Paris. The payment for that investment was in excess of book value and fair value by $15,000. Any excess fair value is assigned to trademarks to be amortized over a 10-year period. During the current year, Paris reported operating income of $200,000 and dividend income from Stance of $20,000. At the same time, Stance reported operating income of $40,000 and dividend income from Paris of $5,000. What will be reported as the non-controlling interest in Stance's net income?

A. $6,500. B. $8,000. C. $9,000. D. $7,700. E. $1,000.

77. Paris, Inc. owns 80 percent of the voting stock of Stance, Inc. The excess total fair value over book value was $75,000. Stance holds 10 percent of the voting stock of Paris. The payment for that investment was in excess of book value and fair value by $15,000. Any excess fair value is assigned to trademarks to be amortized over a 10-year period. During the current year, Paris reported operating income of $200,000 and dividend income from Stance of $20,000. At the same time, Stance reported operating income of $40,000 and dividend income from Paris of $5,000. What is consolidated net income?

A. $229,500. B. $237,000. C. $245,000. D. $223,300. E. $240,000.

78. Paris, Inc. owns 80 percent of the voting stock of Stance, Inc. The excess total fair value over book value was $75,000. Stance holds 10 percent of the voting stock of Paris. The payment for that investment was in excess of book value and fair value by $15,000. Any excess fair value is assigned to trademarks to be amortized over a 10-year period. During the current year, Paris reported operating income of $200,000 and dividend income from Stance of $20,000. At the same time, Stance reported operating income of $40,000 and dividend income from Paris of $5,000. What is Paris' share of consolidated net income?

A. $232,500. B. $215,600. C. $224,500. D. $226,000. E. $233,500.

79. Reggie, Inc. owns 70 percent of Nancy Corporation. During the current year, Nancy reported earnings before tax of $100,000 and paid a dividend of $30,000. The income tax rate for both companies is 30 percent. What deferred income tax liability arising in the current year must be recognized in the consolidated balance sheet?

A. $1,680. B. $2,400. C. $1,470. D. $9,800. E. $2,940.

80. Pear, Inc. owns 80 percent of Apple Corporation. During the current year, Apple reported earnings before tax of $400,000 and paid a dividend of $120,000. The income tax rate for each company is 40 percent and separate tax returns are prepared. What deferred income tax liability arising this year must be recognized in the consolidated balance sheet?

A. $0. B. $7,680. C. $17,920. D. $38,400. E. $51,200.

81. Dean, Inc. owns 90 percent of Ralph, Inc. During the current year, Dean sold merchandise costing $80,000 to Ralph for $100,000. At the end of the year, 30 percent of this merchandise was still on hand. The tax rate is 30 percent. Assuming that separate income tax returns are being filed, what deferred income tax asset is created?

A. $0. B. $1,100. C. $1,800. D. $6,000. E. $9,000.

82. Dean, Inc. owns 90 percent of Ralph, Inc. During the current year, Dean sold merchandise costing $80,000 to Ralph for $100,000. At the end of the year, 30 percent of this merchandise was still on hand. The tax rate is 30 percent. Assuming that a consolidated income tax return is being filed, what deferred income tax asset is created?

A. $0. B. $900. C. $1,100. D. $1,800. E. $2,700.

83. Tate, Inc. owns 80 percent of Jeffrey, Inc. During the current year, Jeffrey sold merchandise costing $60,000 to Tate for $75,000. At the end of the year, 10 percent of this merchandise was still being held. The tax rate is 30 percent. Assuming that separate income tax returns are being filed, what deferred income tax asset is created?

A. $0. B. $360. C. $450. D. $2,250. E. $3,600.

84. Tate, Inc. owns 80 percent of Jeffrey, Inc. During the current year, Jeffrey sold merchandise costing $60,000 to Tate for $75,000. At the end of the year, 10 percent of this merchandise was still being held. The tax rate is 30 percent. Assuming that a consolidated income tax return is being filed, what deferred income tax asset is created?

A. $0. B. $360. C. $450. D. $2,250. E. $3,600.

85. Horse Corporation acquires all of Pony, Inc. for $300,000 cash. On that date, Pony has net assets with fair value of $250,000 but a book value and tax basis of $200,000. The tax rate is 40 percent. Prior to this date, neither Horse nor Pony has reported any deferred income tax assets or liabilities. What amount of goodwill should be recognized on the date of the acquisition?

A. $0. B. $50,000. C. $70,000. D. $100,000. E. $150,000.

86. Dog Corporation acquires all of Cat, Inc. for $400,000 cash. On that date, Cat has net assets with fair value of $350,000 but a book value and tax basis of $325,000. The tax rate is 30 percent. Prior to this date, neither Dog nor Cat has reported any deferred income tax assets or liabilities. What amount of goodwill should be recognized on the date of the acquisition?

A. $0. B. $50,000. C. $65,000. D. $66,400. E. $57,500.

87. Britain Corporation acquires all of English, Inc. for $800,000 cash. On that date, English has net assets with fair value of $750,000 but a book value and tax basis of $500,000. The tax rate is 35 percent. Prior to this date, neither Britain nor English has reported any deferred income tax assets or liabilities. What amount of goodwill should be recognized on the date of the acquisition?

A. $47,542. B. $117,850. C. $125,000. D. $137,500. E. $250,000.

Essay Questions

88. What configuration of corporate ownership is described as a father-son-grandson relationship?

89. What ownership structure is referred to as a connecting affiliation? Describe briefly or illustrate with a diagram.

90. What ownership pattern is referred to as mutual ownership? Describe briefly or illustrate with a diagram.

91. What are the essential criteria for including a subsidiary within an affiliated group?

92. X Co. owned 80% of Y Corp., and Y Corp. owned 15% of X Co. Under the treasury stock

approach, how would the dividends paid by X Co. to Y Corp. be handled on a consolidation worksheet?

93. What term is used to describe a parent and subsidiaries that are eligible to file a consolidated

income tax return?

94. What method is used in consolidation to account for a subsidiary's ownership of shares of its parent corporation?

95. What are the benefits or advantages of filing a consolidated income tax return ?

96. How is the amortization of goodwill treated for income tax purposes? How does the amortization of goodwill affect deferred income taxes?

97. C Co. currently owns 80% of D Co. and several other subsidiaries. C Co. is interested in gaining control of H Co. Why might C Co. allow D Co. to acquire H Co., rather than purchasing H Co. directly?

98. Gamma Co. owns 80% of Delta Corp., and Delta Corp. owns 15% of Gamma Co. The two companies use the treasury stock approach to account for mutual ownership. How should Delta Corp.'s ownership interest in Gamma Co. be accounted for in the consolidation?

99. Explain how the treasury stock approach treats shares of the parent's common stock that are owned by the subsidiary and the rationale behind the approach.

100.T Corp. owns several subsidiaries that are eligible for inclusion on a consolidated income tax return, but T Corp. decided that each company in the group will file a separate return. Under what conditions would there be minimal advantage in filing a consolidated income tax

return?

101.Under what conditions must a deferred income tax asset be recorded?

Short Answer Questions

102.B Co. owned 70% of the voting common stock of C Corp.; C Corp. owned 20% of B Co. For 2013, B Co. and C Corp. reported net income (not including the investment) of $600,000 and $300,000, respectively. B Co. and C Corp. paid dividends of $80,000 and $60,000, respectively.

Required: Prepare a schedule showing B Co.'s share of consolidated net income for 2013 using the

treasury stock approach.

103.Jull Corp. owned 80% of Solaver Co. Solaver paid $250,000 for 10% of Jull's common stock. In 2013, Jull and Solaver reported operating income (not including income from the investment) of $300,000 and $80,000, respectively. Jull and Solaver paid dividends of $120,000 and $50,000, respectively.

Required: Under the treasury stock approach, what is the non-controlling interest in Solaver Co.'s net

income?

104.Jull Corp. owned 80% of Solaver Co. Solaver paid $250,000 for 10% of Jull's common stock. In 2013, Jull and Solaver reported operating income (not including income from the investment) of $300,000 and $80,000, respectively. Jull and Solaver paid dividends of $120,000 and $50,000, respectively.

Required: Under the treasury stock approach, what is Jull's controlling interest in Solaver Co.'s net

income?

105.Kurton Inc. owned 90% of Luvyn Corp.'s voting common stock. The consideration paid exceeded book value by $110,000. Of this amount, one half is attributable to a patent and is to be amortized over 5 years. Luvyn held 20% of Kurton's voting common stock which cost $28,000 more than fair value. During the current year, Kurton reported operating income of $224,000 and dividend income from Luvyn of $37,800. At the same time, Luvyn reported operating income of $70,000 and dividend income from Kurton of $19,600.

Required: Using the treasury stock approach, prepare a schedule to show what is reported as the non-

controlling interest in Luvyn Corp.'s net income.

106.Kurton Inc. owned 90% of Luvyn Corp.'s voting common stock. The consideration paid exceeded book value by $110,000. Of this amount, one half is attributable to a patent and is to be amortized over 5 years. Luvyn held 20% of Kurton's voting common stock which cost $28,000 more than fair value. During the current year, Kurton reported operating income of $224,000 and dividend income from Luvyn of $37,800. At the same time, Luvyn reported operating income of $70,000 and dividend income from Kurton of $19,600.

Required: Prepare a schedule to show consolidated net income.

107.Kurton Inc. owned 90% of Luvyn Corp.'s voting common stock. The consideration paid exceeded book value by $110,000. Of this amount, one half is attributable to a patent and is to be amortized over 5 years. Luvyn held 20% of Kurton's voting common stock which cost $28,000 more than fair value. During the current year, Kurton reported operating income of $224,000 and dividend income from Luvyn of $37,800. At the same time, Luvyn reported operating income of $70,000 and dividend income from Kurton of $19,600.

Required: Prepare a schedule to show Kurton's share of controlling interest in Luvyn's net income .

108.Wilkins Inc. owned 60% of Motumbo Co. During the current year, Motumbo reported net income of $280,000 but paid a total cash dividend of only $56,000.

Required: Assuming an income tax rate of 30%, what amount of Deferred Income Tax Liability arising this year must be recognized in the consolidated balance sheet?

109.On January 1, 2012, Mace Co. acquired 75% of Lance Co.'s outstanding common stock. On the same date, Lance acquired an 80% interest in Curle Co. Both of these investments were acquired when book value was equal to fair value of identifiable net assets acquired. Both of these investments were accounted using the initial value method. No dividends were distributed by either Lance or Curle during 2012 or 2013. Mace paid cash dividends each year equal to 40% of operating income. Reported operating income totals for 2012 were as follows:

Following are the 2013 financial statements for these three companies. Curle made numerous transfers of inventory to Lance since the takeover: $112,000 (2012) and $140,000 (2013). These transactions included the same markup applicable to Curle's outside sales. In each of these years, Lance carried 20% of this inventory into the succeeding year before disposing of it. An effective income tax rate of 45% was applicable to all companies.

Required: Determine the total amount of goodwill for the January 1, 2012 acquisition of Curle Co. and for the acquisition of Lance Co. on the same date.

110.On January 1, 2012, Mace Co. acquired 75% of Lance Co.'s outstanding common stock. On the same date, Lance acquired an 80% interest in Curle Co. Both of these investments were acquired when book value was equal to fair value of identifiable net assets acquired. Both of these investments were accounted using the initial value method. No dividends were distributed by either Lance or Curle during 2012 or 2013. Mace paid cash dividends each year equal to 40% of operating income. Reported operating income totals for 2012 were as follows:

Required: Determine the non-controlling interest in Curle Co.'s net income for the year 2013.

111.On January 1, 2012, Mace Co. acquired 75% of Lance Co.'s outstanding common stock. On the same date, Lance acquired an 80% interest in Curle Co. Both of these investments were acquired when book value was equal to fair value of identifiable net assets acquired. Both of these investments were accounted using the initial value method. No dividends were distributed by either Lance or Curle during 2012 or 2013. Mace paid cash dividends each year equal to 40% of operating income. Reported operating income totals for 2012 were as follows:

Required: Determine the non-controlling interest in Lace Co.'s net income for the year 2013.

112.On January 1, 2012, Mace Co. acquired 75% of Lance Co.'s outstanding common stock. On the same date, Lance acquired an 80% interest in Curle Co. Both of these investments were acquired when book value was equal to fair value of identifiable net assets acquired. Both of these investments were accounted using the initial value method. No dividends were distributed by either Lance or Curle during 2012 or 2013. Mace paid cash dividends each year equal to 40% of operating income. Reported operating income totals for 2012 were as follows:

Required: Determine the accrual-based income of Mace Co. for the year 2013.

113.On January 1, 2013, Youder Inc. bought 120,000 shares of Nopple Co. for $384,000, giving Youder 30% ownership and the ability to apply significant influence to the operating and financing decisions of Nopple. Youder anticipated holding this investment for an indefinite time. In making this acquisition, Youder paid an amount equal to the book value for these shares. The fair value of each asset and liability was the same as its book value. Dividends and income for Nopple for 2013 were as follows:

Required: Assume a 40% income tax rate. Prepare all necessary journal entries for Youder for 2013 beginning at acquisition and ending at tax accrual.

114.Dice Inc. owns 40% of the outstanding shares of Spalding Corp., an investment accounted for by the equity method. During 2013, Dice earned operating income (not including income from its investment in Spalding) of $370,000. For this same period, Spalding reported net income of $160,000 and paid cash dividends of $60,000. Dice has an effective income tax rate of 35% and anticipates holding its investment in Spalding for an indefinite period. Required: (A.) What income tax expense journal entry would Dice Inc. record at the end of 2013? (B.) If Dice expects to sell its interest in Spalding in the near future, how does that decision change the 2013 income tax expense journal entry?

115.Dotes, Inc. owns 40% of Abner Co. Dotes accounts for its investment using the equity method. Abner follows a policy of paying dividends equal to 30% of its income each year. During the current year, Abner reported net income of $216,000. Dotes has an effective income tax rate of 32%.

Required: What journal entry would Dotes record at the end of the current year for income taxes relating to the investment in Abner? Assume the investment is to be held for an indefinite time and that all amounts are to be rounded to the nearest dollar.

116.

Patton's operating income excludes income from the investment in Stevens, but includes $150,000 of unrealized gains on intra-entity transfers of inventory. Patton uses the initial value method to account for the investment in Stevens. Assume Patton owns 90 percent of the voting stock of Stevens and files a consolidated income tax return. What amount of income taxes would be paid?

117.

Patton's operating income excludes income from the investment in Stevens, but includes $150,000 of unrealized gains on intra-entity transfers of inventory. Patton uses the initial value method to account for the investment in Stevens. Assume Patton owns 90 percent of the voting stock of Stevens and they each file separate income tax returns. What amount of total income tax would be paid?

118.

Patton's operating income excludes income from the investment in Stevens, but includes $150,000 of unrealized gains on intra-entity transfers of inventory. Patton uses the initial value method to account for the investment in Stevens. How much will the consolidated group save if it decides to file a consolidated income tax return?

119.For each of the following situations, select the best answer concerning accounting for income taxes in combinations: (A) May file a consolidated income tax return. (B) May not a file consolidated income tax return. (C) Must file a consolidated income tax return. _____1. Parent company owns 85% of the voting stock of the subsidiary, and there are significant intercompany transactions. _____2. Subsidiary is a foreign corporation. _____3. Parent company owns 90% of the voting stock of the subsidiary, but there are no intercompany inventory transactions. _____4. Parent company owns 75% of the voting stock of the subsidiary but there are no intercompany inventory transactions. _____5. Parent company owns 90% of the voting stock of the subsidiary, and there are intercompany inventory transactions with transferred goods in ending inventory. _____6. Parent company owns 75% of the voting stock of the subsidiary and there are intercompany inventory transactions with transferred goods in ending inventory.

Chapter 07 Consolidated Financial Statements—Ownership Patterns and Income Taxes Answer Key

Multiple Choice Questions

Buckette Co. owned 60% of Shuvelle Corp. and 40% of Tayle Corp., and Shuvelle owned 35% of Tayle. When Buckette prepared consolidated financial statements, it should include

A. Shuvelle but not Tayle. B. Tayle but not Shuvelle. C. either Shuvelle or Tayle. D. Shuvelle and Tayle. E. neither Shuvelle nor Tayle.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 1 Easy Learning Objective: 07-02 Demonstrate the consolidation process when a corporate ownership structure is characterized by a connecting affiliation.

Buckette Co. owned 60% of Shuvelle Corp. and 40% of Tayle Corp., and Shuvelle owned 35% of Tayle. What is this pattern of ownership called?

A. pyramid ownership. B. a connecting affiliation. C. mutual ownership. D. an indirect affiliation. E. an affiliated group.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 07-02 Demonstrate the consolidation process when a corporate ownership structure is characterized by a connecting affiliation.

Buckette Co. owned 60% of Shuvelle Corp. and 40% of Tayle Corp., and Shuvelle owned 35% of Tayle. What percentage of Tayle's income is attributed to Buckette's ownership interest?

A. 100%. B. 75%. C. 61%. D. 40%. E. 74%. 40% + 21% [60% × 35%] = 61%

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 07-02 Demonstrate the consolidation process when a corporate ownership structure is characterized by a connecting affiliation.

D Corp. had investments, direct and indirect, in several subsidiaries: • E Co. is a domestic firm in which D Corp. owned a 90% interest • F Co. is a domestic firm in which D Corp. owned 60% and E Co. owned 30% • G Co. is a domestic firm wholly owned by E Co. • H Co. is a foreign subsidiary in which D Corp. owned a 90% interest • I Co. is a domestic firm in which D Corp. owned 50% and G Co. owned 25% Which of these subsidiaries may be included in a consolidated income tax return?

A. E, F, G, H, and I. B. E, G, H, and I. C. E and F. D. E, F, G, and H. E. E, F, and G.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 07-04 List the criteria for being a member of an affiliated group for income tax filling purposes.

Evanston Co. owned 60% of Montgomery Corp. Montgomery owned 75% of Noir Inc., and Noir owned 15% of Montgomery. This pattern of ownership would be called

A. mutual ownership. B. direct control. C. indirect control. D. an affiliated group. E. a connecting affiliation.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 07-03 Demonstrate the consolidation process when a corporate ownership structure is characterized by mutual ownership.

In a tax-free business combination,

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember

Difficulty: 2 Medium Learning Objective: 07-07 Determine the deferred tax consequences for temporary differences generated when a business combination is created.

West Corp. owned 70% of the voting common stock of East Co. East owned 60% of Compass Co. West and East both used the initial value method to account for their investments. The following information was available from the financial statements and records of the three companies:

A. $385,700. B. $581,000. C. $557,000. D. $551,000. E. $707,000. East Income $600,000 [Compass Income ($120,000) - Excess Amort ($20,000) - Unrealized I/E Gains ($15,000)] × 60% = East's Share of Compass Income ($51,000) Excess Amort of West ($30,000) - Unrealized I/E Gains ($70,000) = $100,000 $600,000 + $51,000 - $100,000 = $551,000

AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 07-01 Demonstrate the consolidation process when indirect control is present in a grandfatherfather-son ownership configuration.

A. $734,000. B. $1,261,000. C. $1,123,900. D. $1,140,700. E. $1,149,700. West's Income ($860,000) + West's Income from East ($551,000 × .70 = $385,700 Deferral of I/E Gains ($96,000) = $1,149,700

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply

Difficulty: 2 Medium Learning Objective: 07-01 Demonstrate the consolidation process when indirect control is present in a grandfatherfather-son ownership configuration.

A. $1,285,000. B. $1,331,700. C. $1,349,000. D. $1,315,000. E. $1,314,900. Combined Operating Inc ($860,000 + $600,000 + $120,000) $1,580,000 - Combined Excess Amort ($30,000 + $20,000) $50,000 - Combined I/E Gains ($96,000 + $70,000 + $15,000) $181,000 = Consolidated Income ($1,349,000)

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

Learning Objective: 07-01 Demonstrate the consolidation process when indirect control is present in a grandfatherfather-son ownership configuration.

10.

A. $165,300. B. $199,300. C. $191,000. D. $228,000. E. $153,000. Consolidated Income ($1,349,000) - Controlling Interest Inc ($1,149,700) = NonControlling Interest Inc ($199,300)

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 07-01 Demonstrate the consolidation process when indirect control is present in a grandfather-

father-son ownership configuration.

11.

Operating income included unrealized intra-entity gains (which are related to inventory transfers) but did not include dividend income from investment in subsidiary. What amount of dividends did West Corp. receive from Compass Co.?

A. $-0B. $25,200. C. $36,000. D. $42,000. E. $90,000. [$0] - No Direct Dividends Paid to West

12.

River Co. owned 80% of Boat Inc. The two companies filed a consolidated income tax

return and River used the initial value method to account for the investment. The following information was available from the two companies' financial statements:

A. $720,000. B. $625,000. C. $621,000. D. $665,000. E. $655,000. Combined Income ($600,000 + $120,000) $720,000 - Combined I/E Gains (50,000 + $15,000) = Taxable Income ($655,000)

13.

River Co. owned 80% of Boat Inc. The two companies filed a consolidated income tax

return and River used the initial value method to account for the investment. The following information was available from the two companies' financial statements:

Operating income included net unrealized gains, which are associated with transfers of inventories between the two companies, but it did not include dividends received from a subsidiary. The income tax rate was 30%. What was the amount of income tax expense that should have been assigned to Boat using the percentage allocation method?

A. $31,500 B. $32,750 C. $36,000 D. $32,660 E. $30,390 Consolidated Income Tax $655,000 × .30 = $196,500 Parent's Portion of the Consolidated Income $600,000 - $50,000 = $550,000/Consolidated Income $655,000 = 84% Sub's Portion of the Consolidated Income $655,000 - $550,000 = $105,000/Consolidated Income $655,000 = 16% Consolidated Income Tax $196,500 × .16 = $31,500

presented in a consolidated set of financial statements.

14.

River Co. owned 80% of Boat Inc. The two companies filed a consolidated income tax

return and River used the initial value method to account for the investment. The following information was available from the two companies' financial statements:

Operating income included net unrealized gains, which are associated with transfers of inventories between the two companies, but it did not include dividends received from a subsidiary. The income tax rate was 30%. What was the amount of income tax expense that should have been assigned to Boat using the separate return method?

A. $36,000 B. $31,500 C. $33,390 D. $32,750 E. $32,660 Parent Operating Income $600,000 × .30 = $180,000 Sub Operating Income $120,000 × .30 = $36,000 Total from Separate Returns = $216,000 Sub's Income $36,000/Total from Separate Returns $216,000 = 16.67% Consolidated Income Tax $196,500 × .167 = $32,750

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

Learning Objective: 07-05 Compute taxable income and deferred tax amounts for an affiliated group based on information presented in a consolidated set of financial statements.

15.

River Co. owned 80% of Boat Inc. The two companies filed a consolidated income tax

return and River used the initial value method to account for the investment. The following information was available from the two companies' financial statements:

Operating income included net unrealized gains, which are associated with transfers of inventories between the two companies, but it did not include dividends received from a subsidiary. The income tax rate was 30%. What was the non-controlling interest in Boat Inc.'s net income, assuming that the

separate return method was used?

A. $16,800 B. $14,450 C. $14,700 D. $17,450 E. $13,800 Sub's Reported Income ($120,000) - Unrealized I/E Gains ($15,000) - Assigned Income tax Expense ($32,750) = Sub's Realized Income ($72,250) × Non-Controlling Share 20% = $14,450

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 07-05 Compute taxable income and deferred tax amounts for an affiliated group based on information presented in a consolidated set of financial statements. 7-94 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

16.

Prescott Corp. owned 90% of Bell Inc., while Bell owned 10% of the outstanding common shares of Prescott. No goodwill or other allocations were recognized in connection with either of these acquisitions. Prescott reported operating income of $266,000 for 2013 whereas Bell earned $98,000 during the same period. No investment income was included within either of these income totals. On a consolidated income statement , what is the non-

controlling interest in Bell's net income?

A. $9,800. B. $13,692. C. $10,836. D. $12,460. E. $11,214. Sub's Income ($98,000) × Non-Controlling Interest (10%) = $9,800

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-01 Demonstrate the consolidation process when indirect control is present in a grandfatherfather-son ownership configuration.

17.

Prescott Corp. owned 90% of Bell Inc., while Bell owned 10% of the outstanding common shares of Prescott. No goodwill or other allocations were recognized in connection with either of these acquisitions. Prescott reported operating income of $266,000 for 2013 whereas Bell earned $98,000 during the same period. No investment income was included within either of these income totals. How would the 10% investment in Prescott owned by Bell be presented in the consolidated balance sheet?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 07-01 Demonstrate the consolidation process when indirect control is present in a grandfatherfather-son ownership configuration.

18.

On January 1, 2013, a subsidiary bought 10% of the outstanding shares of its parent company. Although the total book value and fair value of the parent's net assets were $5.5 million, the consideration transferred for these shares was $590,000. During 2013, the parent reported operating income (no investment income was included) of $714,000 while paying dividends of $196,000. How were these shares reported at December 31, 2013?

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 07-03 Demonstrate the consolidation process when a corporate ownership structure is characterized by mutual ownership.

19.

Jastoon Co. acquired all of Wedner Co. for $588,000 cash in a tax-free transaction. On that date, the subsidiary had net assets with a $560,000 fair value but a $420,000 book value and income tax basis. The income tax rate was 30%. What amount of goodwill should have been recognized on the date of the acquisition?

A. $70,000. B. $28,000. C. $(14,000.) D. $19,600. E. $65,000. FV ($560,000) - Tax Basis ($420,000) = Temp Difference ($140,000) × .30 = Deferred Tax Liability ($42,000) + [Cash Paid ($588,000) - FV Assets ($560,000)] $28,000 = Goodwill ($70,000)

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 07-07 Determine the deferred tax consequences for temporary differences generated when a business combination is created.

20.

Beagle Co. owned 80% of Maroon Corp. Maroon owned 90% of Eckston Inc. Operating income totals for 2013 are shown below; these figures contained no investment income. Amortization expense was not required by any of these acquisitions. Included in Eckston's operating income was a $56,000 unrealized gain on intra-entity transfers to Maroon.

The accrual-based income of Eckston Inc. is calculated to be

A. $234,000. B. $211,000. C. $221,000. D. $224,000. E. $246,000. Operating Inc ($280,000) - Unrealized I/E Trans ($56,000) = Accrual Income ($224,000)

21.

The accrual-based income of Maroon Corp. is calculated to be

A. $481,600. B. $472,700. C. $488,900. D. $502,300. E. $358,800. Operating Inc ($280,000) + Parent's Portion of Sub's Accrual Income ($224,000 × .90) $201,600 = Accrual Income $481,600

22.

The accrual-based income of Beagle Co. is calculated to be

A. $706,670. B. $755,980. C. $805,280. D. $838,150. E. $815,770. Operating Income ($420,000) + Parent's Portion of Sub's Accrual Income ($481,600 × .80) $385,280 = Accrual Income $805,280

23.

Hardford Corp. held 80% of Inglestone Inc. which, in turn, owned 80% of Jade Co.

Operating income figures (without investment income) as well as unrealized upstream gains included in the income for the current year follow:

The accrual-based income of Jade Co. is calculated to be

A. $193,000. B. $189,000. C. $196,000. D. $201,000. E. $144,000. Operating Inc ($280,000) - Unrealized I/E Trans ($84,000) = Accrual Income ($196,000)

24.

Hardford Corp. held 80% of Inglestone Inc. which, in turn, owned 80% of Jade Co.

Operating income figures (without investment income) as well as unrealized upstream gains included in the income for the current year follow:

The non-controlling interest in the net income of Jade Co. is calculated to be

A. $36,900. B. $33,600. C. $42,400. D. $32,300. E. $39,200. Operating Inc ($280,000) - Unrealized I/E Trans ($84,000) = Accrual Income ($196,000) × 20% = Non-Controlling Interest Income ($39,200)

25.

Hardford Corp. held 80% of Inglestone Inc. which, in turn, owned 80% of Jade Co.

Operating income figures (without investment income) as well as unrealized upstream gains included in the income for the current year follow:

The non-controlling interest in the net income of Inglestone Inc. is calculated to be

A. $106,950. B. $102,640. C. $114,530. D. $106,960. E. $103,680. Parent's Operating Inc. ($420,000) - Unrealized I/E Trans ($42,000) = Parent's Accrual Income ($378,000) + Parent's Portion of Sub's Accrual Income ($196,000 × .80) = $534,800 × .20 = Non-Controlling Interest Income Portion ($106,960)

26.

When indirect control is present, which of the following statements is true?

27.

Which of the following statements is false concerning a father-son-grandson configuration?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium

Learning Objective: 07-01 Demonstrate the consolidation process when indirect control is present in a grandfatherfather-son ownership configuration.

28.

Which of the following statements is true regarding mutual ownership between a parent and its subsidiary?

29.

Which of the following statements is true regarding a subsidiary's investment in the parent company's stock?

30.

Which of the following statements is true regarding the subsidiary's investment in its parent's common stock?

AACSB: Analytic

AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 1 Easy Learning Objective: 07-03 Demonstrate the consolidation process when a corporate ownership structure is characterized by mutual ownership.

31.

Which of the following statements is true regarding the filing of income taxes for an affiliated group?

32.

The benefits of filing a consolidated tax return include all of the following except

33.

Which of the following statements is true regarding goodwill?

presented in a consolidated set of financial statements.

34.

Chase Company owns 80% of Lawrence Company and 40% of Ross Company. Lawrence Company also owns 30% of Ross Company. Separate operating incomes for 2013 of Chase, Lawrence, and Ross are $450,000, $300,000, and $250,000, respectively. Each company also retains a $20,000 unrealized gain in their current income figures. Annual amortization expense of $15,000 is assigned to Chase's investment in Lawrence and another $15,000 is assigned to Lawrence's investment in Ross. Compute Chase's attributed ownership in Ross.

A. 40.0%. B. 64.0%. C. 24.0%. D. 32.0%. E. 12.8%. 40% + 24% [80% × 30%] = 64%

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 07-02 Demonstrate the consolidation process when a corporate ownership structure is characterized by a connecting affiliation.

35.

A. $92,000. B. $77,400. C. $75,000. D. $64,500. E. $69,000. $250,000 - $20,000 - $15,000 = $215,000 × .30 = $64,500

36.

A. $354,000. B. $329,500. C. $334,000. D. $265,000. E. $344,500. Parent's Accrual Income ($300,000 - $20,000 - $15,000) = $265,000 + Sub's Accrual Income ($215,000 × .30) $64,500 = $329,500

37.

A. $746,000. B. $719,000. C. $779,600. D. $774,200. E. $758,100. Parent's Accrual Income ($450,000 - $20,000) = $430,000 + First Sub's Accrual Income ($329,500 × .80) $263,600 + Second Sub's Accrual Income ($215,000 × .40) $86,000 = $779,600

38.

On January 1, 2012, Jones Company bought 15% of Whitton Company. Jones paid $150,000 for these shares, an amount that exactly equaled the proportionate book value of Whitton. On January 1, 2013, Whitton acquired 80% ownership of Jones. The following data are available concerning Whitton's acquisition of Jones:

What would be included in a consolidation worksheet entry for 2013?

A. Debit treasury stock, $135,000. B. Credit treasury stock, $135,000. C. Debit treasury stock, $150,000. D. Credit treasury stock, $150,000. E. Debit common stock, $150,000. Purchase Price $800,000/.80 = $1,000,000 FV Jones × .15 = $150,000 Debit to Treasury Stock Account

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analyze Difficulty: 2 Medium

Learning Objective: 07-03 Demonstrate the consolidation process when a corporate ownership structure is characterized by mutual ownership.

39.

Compute the amount allocated to trademarks recognized in the January 1, 2013 consolidated balance sheet.

A. $80,000. B. $100,000. C. $76,000. D. $16,000. E. $-0Purchase Price $800,000/.80 = $1,000,000 FV Jones - BV $900,000 = $100,000 Excess FV of Trademark

AACSB: Analytic

AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 07-03 Demonstrate the consolidation process when a corporate ownership structure is characterized by mutual ownership.

40.

Compute Whitton's accrual-based consolidated net income for 2013.

A. $199,000. B. $190,000. C. $185,000. D. $184,000. E. $176,000. Parent's Accrual Income ($140,000 + $14,000 - $9,000) = $145,000 + Parent's Portion of Sub's Accrual Income ($50,000 × .80) $40,000 = $185,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard

Learning Objective: 07-03 Demonstrate the consolidation process when a corporate ownership structure is characterized by mutual ownership.

41.

Compute the non-controlling interest in net income for 2013.

A. $11,000. B. $10,800. C. $9,000. D. $8,200. E. $7,200.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 07-03 Demonstrate the consolidation process when a corporate ownership structure is characterized by mutual ownership. 7-118 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

42.

Tower Company owns 85% of Hill Company. The two companies engaged in several intraentity transactions. Each company's operating and dividend income for the current time period follow, as well as the effects of unrealized gains. No income tax accruals have been recognized within these totals. The tax rate for each company is 30%.

Compute accrual-based consolidated net income.

A. $280,000. B. $245,000. C. $200,000. D. $255,200. E. $290,200. Combined Operating Inc ($200,000 + $80,000) $280,000 - Combined I/E Gains ($25,000 + $10,000) $35,000 = Consolidated Income ($245,000)

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-01 Demonstrate the consolidation process when indirect control is present in a grandfatherfather-son ownership configuration.

43.

What is the tax liability for the current year if consolidated tax returns are prepared?

A. $55,560. B. $70,350. C. $60,000. D. $73,500. E. $84,000. Combined Income ($200,000 + $80,000) $280,000 - Combined I/E Gains (25,000 + $10,000) = Taxable Income ($245,000) × .30 = Tax Liability ($73,500)

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-05 Compute taxable income and deferred tax amounts for an affiliated group based on information presented in a consolidated set of financial statements.

44.

Using percentage allocation method, how much income tax expense is assigned to Hill?

A. $21,000. B. $24,000. C. $20,400. D. $17,400. E. $0. Consolidated Income Tax = $73,500 Parent's Portion of the Consolidated Income $200,000 - $25,000 = $175,000/Consolidated Income $245,000 = 71.5% Sub's Portion of the Consolidated Income $80,000 - $10,000 = $70,000/Consolidated Income $245,000 = 28.5% Consolidated Income Tax $73,500 × .285 = $21,000

45.

Under the separate return method, how much income tax expense will be assigned to Hill?

A. $24,000. B. $22,857. C. $24,874. D. $21,874. E. $21,000. Parent Operating Income $200,000 × .30 = $60,000 Sub Operating Income $80,000 × .30 = $24,000 Total from Separate Returns = $84,000 Sub's Income $24,000/Total from Separate Returns $84,000 = 28.5% Consolidated Income Tax $73,500 × .285 = $21,000

46.

White Company owns 60% of Cody Company. Separate tax returns are required. For 2012, White's operating income (excluding taxes and any income from Cody) was $300,000 while Cody reported a pretax income of $125,000. During the period, Cody paid a total of $25,000 in cash dividends; $15,000 (60%) to White and $10,000 to the non-controlling interest. White paid dividends of $180,000. The income tax rate for both companies is 30%. Compute Cody's income tax expense for 2013.

A. $33,000. B. $34,500. C. $37,500. D. $30,000. E. $22,500. Sub's Operating Income $125,000 × .30 = $37,500 Sub's Tax Liability

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-06 Compute taxable income and deferred tax amounts to be recognized when separate tax returns are filed by any of the affiliates of a business combination.

47.

A. $62,500. B. $125,000. C. $87,500. D. $100,000. E. $70,000. Sub's Operating Income $125,000 - Tax Liability $37,500 - Dividend Payments $25,000 = Undistributed Earnings $62,500

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 07-06 Compute taxable income and deferred tax amounts to be recognized when separate tax returns are filed by any of the affiliates of a business combination.

48.

A. $93,600. B. $91,350. C. $94,500. D. $90,900. E. $90,000.

49.

A. $6,000. B. $2,250. C. $3,150. D. $11,250. E. $21,000.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 07-06 Compute taxable income and deferred tax amounts to be recognized when separate tax returns are filed by any of the affiliates of a business combination.

50.

Woods Company has one depreciable asset valued at $800,000. Because of recent losses, the company has a net operating loss carry-forward of $150,000. The tax rate is 30%. The company was acquired for $1,000,000. It is likely the benefit will be realized. Compute the goodwill realized in consolidation.

A. $0. B. $155,000. C. $200,000. D. $305,000. E. $350,000. Consideration $1,000,000 - FV of Assets $800,000 = $200,000 Excess - FV Carry-Forward ($150,000 × .30) $45,000 = Unattributed Excess to Goodwill ($155,000)

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 07-08 Explain the impact that a net operating loss of an acquired affiliate has on consolidated figures.

51.

Under current U.S. tax law for consolidated tax returns:

52.

Strong Company has had poor operating results in recent years and has a $160,000 net operating loss carry-forward. Leader Corp. pays $700,000 to acquire Strong and is optimistic about its future profitability potential. The book value and fair value of Strong's identifiable net assets is $500,000 at date of acquisition. Strong's tax rate is 30% and Leader's tax rate is 40%. What is goodwill resulting from this business combination?

A. $40,000. B. $88,000. C. $104,000. D. $152,000. E. $248,000. Consideration $700,000 - FV of Assets $500,000 = $200,000 Excess - FV Carry-Forward ($160,000 × .30) $48,000 = Unattributed Excess to Goodwill ($152,000)

53.

According to International Financial Reporting Standards: In the consolidation process for subsidiaries that are indirectly controlled:

54.

In a father-son-grandson combination, which of the following statements is true?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember

Difficulty: 1 Easy Learning Objective: 07-01 Demonstrate the consolidation process when indirect control is present in a grandfatherfather-son ownership configuration.

55.

Which of the following statements is true concerning connecting affiliations and mutual ownerships?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-02 Demonstrate the consolidation process when a corporate ownership structure is characterized by a connecting affiliation. Learning Objective: 07-03 Demonstrate the consolidation process when a corporate ownership structure is characterized by mutual ownership.

56.

Which of the following is true concerning the treasury stock approach in accounting for a subsidiary's investment in parent company stock?

57.

Which of the following is not an advantage of filing a consolidated income tax return?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium

Learning Objective: 07-04 List the criteria for being a member of an affiliated group for income tax filling purposes.

58.

On January 1, 2013, a subsidiary buys 8 percent of the outstanding voting stock of its parent corporation. The payment of $350,000 exceeded book value of the acquired shares by $50,000, attributable to a copyright with a 10-year useful life. During the year, the parent reported operating income of $675,000 (excluding investment income from the subsidiary), and paid $100,000 in dividends. If the treasury stock approach is used, how is the Investment in Parent Stock reported in the consolidated balance sheet at December 31, 2013?

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-03 Demonstrate the consolidation process when a corporate ownership structure is characterized by mutual ownership.

59.

On January 1, 2013, a subsidiary buys 12 percent of the outstanding voting stock of its parent corporation. The payment of $400,000 exceeded book value of the acquired shares by $80,000, attributable to a copyright with a 10-year useful life. During the year, the parent reported operating income of $1,000,000 (excluding investment income from the subsidiary), and paid $120,000 in dividends. If the treasury stock approach is used, how is the Investment in Parent Stock reported in the consolidated balance sheet at December 31, 2013?

60.

Which of the following conditions will allow two companies to file a consolidated income tax return?

61.

How is goodwill amortized?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 07-05 Compute taxable income and deferred tax amounts for an affiliated group based on information presented in a consolidated set of financial statements.

62.

Why might a consolidated group file separate income tax returns?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 07-04 List the criteria for being a member of an affiliated group for income tax filling purposes. Learning Objective: 07-06 Compute taxable income and deferred tax amounts to be recognized when separate tax returns are filed by any of the affiliates of a business combination.

63.

Alpha Corporation owns 100 percent of Beta Company, and Beta owns 80 percent of Gamma, Inc. all of which are domestic corporations. Information for the three companies for the year ending December 31, 2013 follows:

Which of the following statements is true?

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analyze Difficulty: 1 Easy Learning Objective: 07-01 Demonstrate the consolidation process when indirect control is present in a grandfatherfather-son ownership configuration.

64.

What is Gamma's accrual-based income for 2013?

A. $76,000. B. $80,000. C. $96,000. D. $100,000. E. $104,000. Operating Income ($100,000) - Unrealized I/E Gains ($4,000) = Sub's Accrual Income ($96,000)

65.

What is Beta's accrual-based income for 2013?

A. $200,000. B. $276,800. C. $280,000. D. $296,000. E. $300,000. Operating Income ($200,000) + Second Sub's Accrual Income ($96,000 × .80) = First Sub's Accrual Income ($276,800)

66.

What is Alpha's accrual-based income for 2013?

A. $564,000. B. $564,800. C. $572,200. D. $580,000. E. $600,000. Parent's Operating Income ($300,000) - Unrealized I/E Gains ($12,000) + First Sub's Accrual Income ($276,800) = Parent's Accrual Income ($564,800)

67.

What is the non-controlling interest in Gamma's income for 2013?

A. $0. B. $9,600. C. $10,000. D. $19,200. E. $20,000. Operating Income ($100,000) - Unrealized I/E Gains ($4,000) = Sub's Accrual Income ($96,000 × .20) $19,200

68.

What is the total non-controlling interest in the subsidiaries' income for 2013?

A. $0. B. $9,600. C. $10,000. D. $19,200. E. $20,000. Since the First Sub is Wholly-Owned the only Non-Controlling Interest is in the Second Sub therefore, Operating Income ($100,000) - Unrealized I/E Gains ($4,000) = Sub's Accrual Income ($96,000 × .20) $19,200

69.

Delta Corporation owns 90 percent of Sigma Company, and Sigma owns 90 percent of Pi, Inc. all of which are domestic corporations. Information for the three companies for the year ending December 31, 2013 follows:

Which of the following statements is true?

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analyze Difficulty: 1 Easy Learning Objective: 07-04 List the criteria for being a member of an affiliated group for income tax filling purposes.

70.

What is Pi's accrual-based income for 2013?

A. $152,000. B. $16,000. C. $192,000. D. $200,000. E. $208,000. Operating Income ($200,000) - Unrealized I/E Gains ($8,000) = Sub's Accrual Income ($192,000)

71.

What is Sigma's accrual-based income for 2013?

A. $400,000. B. $592,000. C. $540,000. D. $572,800. E. $600,000. Operating Income ($400,000) + Second Sub's Accrual Income ($192,000 × .90) = First Sub's Accrual Income ($572,800)

72.

What is Delta's accrual-based income for 2013?

A. $1,091,520. B. $1,115,520. C. $1,168,000. D. $1,168,520. E. $1,200,000. Parent's Operating Income ($600,000) - Unrealized I/E Gains ($24,000) + First Sub's Accrual Income ($572,800 × .90) $515,520 = Parent's Accrual Income ($1,091,520)

73.

What is the non-controlling interest in Pi's income for 2013?

A. $0. B. $9,600. C. $10,000. D. $19,200. E. $20,000. Operating Income ($200,000) - Unrealized I/E Gains ($8,000) = Non-Controlling Interest in Sub's Accrual Income ($192,000 × .10) $19,200

74.

What is the non-controlling interest in Sigma's income for 2013?

A. $55,240. B. $56,420. C. $57,280. D. $59,420. E. $60,000. Operating Income ($400,000) + Second Sub's Accrual Income ($192,000 × .90) = NonControlling Interest in First Sub's Accrual Income ($572,800 × .10) $57,280

75.

What is the total non-controlling interest in the subsidiaries' income for 2013?

A. $55,240. B. $66,020. C. $67,280. D. $76,280. E. $76,480. Operating Income ($200,000) - Unrealized I/E Gains ($8,000) = Non-Controlling Interest in Second Sub's Accrual Income ($192,000 × .10) $19,200 Operating Income ($400,000) + Second Sub's Accrual Income ($192,000 × .90) = NonControlling Interest in First Sub's Accrual Income ($572,800 × .10) $57,280 Non-Controlling Interest in First Sub's Accrual Income $57,280 + Non-Controlling Interest in Second Sub's Accrual Income $19,200 = $76,480

76.

Paris, Inc. owns 80 percent of the voting stock of Stance, Inc. The excess total fair value over book value was $75,000. Stance holds 10 percent of the voting stock of Paris. The payment for that investment was in excess of book value and fair value by $15,000. Any excess fair value is assigned to trademarks to be amortized over a 10-year period. During the current year, Paris reported operating income of $200,000 and dividend income from Stance of $20,000. At the same time, Stance reported operating income of $40,000 and dividend income from Paris of $5,000. What will be reported as the non-controlling interest in Stance's net income?

A. $6,500. B. $8,000. C. $9,000. D. $7,700. E. $1,000. Operating Income ($40,000) - Amortization ($1,500) = Sub's Accrual Income ($38,500 × .20) $7,700

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 07-03 Demonstrate the consolidation process when a corporate ownership structure is characterized by mutual ownership.

77.

A. $229,500. B. $237,000. C. $245,000. D. $223,300. E. $240,000. Parent's Operating Income ($200,000) - Amortization ($7,500) + Sub's Accrual Income ($38,500 × .80) $30,800 = Consolidated Income ($223,300)

78.

A. $232,500. B. $215,600. C. $224,500. D. $226,000. E. $233,500.

79.

Reggie, Inc. owns 70 percent of Nancy Corporation. During the current year, Nancy reported earnings before tax of $100,000 and paid a dividend of $30,000. The income tax rate for both companies is 30 percent. What deferred income tax liability arising in the current year must be recognized in the consolidated balance sheet?

A. $1,680. B. $2,400. C. $1,470. D. $9,800. E. $2,940.

80.

Pear, Inc. owns 80 percent of Apple Corporation. During the current year, Apple reported earnings before tax of $400,000 and paid a dividend of $120,000. The income tax rate for each company is 40 percent and separate tax returns are prepared. What deferred income tax liability arising this year must be recognized in the consolidated balance sheet?

A. $0. B. $7,680. C. $17,920. D. $38,400. E. $51,200.

AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 07-06 Compute taxable income and deferred tax amounts to be recognized when separate tax returns are filed by any of the affiliates of a business combination.

81.

Dean, Inc. owns 90 percent of Ralph, Inc. During the current year, Dean sold merchandise costing $80,000 to Ralph for $100,000. At the end of the year, 30 percent of this merchandise was still on hand. The tax rate is 30 percent. Assuming that separate income tax returns are being filed, what deferred income tax asset is created?

A. $0. B. $1,100. C. $1,800. D. $6,000. E. $9,000.

82.

Dean, Inc. owns 90 percent of Ralph, Inc. During the current year, Dean sold merchandise costing $80,000 to Ralph for $100,000. At the end of the year, 30 percent of this merchandise was still on hand. The tax rate is 30 percent. Assuming that a consolidated income tax return is being filed, what deferred income tax asset is created?

A. $0. B. $900. C. $1,100. D. $1,800. E. $2,700.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 07-05 Compute taxable income and deferred tax amounts for an affiliated group based on information presented in a consolidated set of financial statements.

83.

Tate, Inc. owns 80 percent of Jeffrey, Inc. During the current year, Jeffrey sold merchandise costing $60,000 to Tate for $75,000. At the end of the year, 10 percent of this merchandise was still being held. The tax rate is 30 percent. Assuming that separate income tax returns are being filed, what deferred income tax asset is created?

A. $0. B. $360. C. $450. D. $2,250. E. $3,600.

84.

Tate, Inc. owns 80 percent of Jeffrey, Inc. During the current year, Jeffrey sold merchandise costing $60,000 to Tate for $75,000. At the end of the year, 10 percent of this merchandise was still being held. The tax rate is 30 percent. Assuming that a consolidated income tax return is being filed, what deferred income tax asset is created?

A. $0. B. $360. C. $450. D. $2,250. E. $3,600.

85.

Horse Corporation acquires all of Pony, Inc. for $300,000 cash. On that date, Pony has net assets with fair value of $250,000 but a book value and tax basis of $200,000. The tax rate is 40 percent. Prior to this date, neither Horse nor Pony has reported any deferred income tax assets or liabilities. What amount of goodwill should be recognized on the date of the acquisition?

A. $0. B. $50,000. C. $70,000. D. $100,000. E. $150,000.

86.

Dog Corporation acquires all of Cat, Inc. for $400,000 cash. On that date, Cat has net assets with fair value of $350,000 but a book value and tax basis of $325,000. The tax rate is 30 percent. Prior to this date, neither Dog nor Cat has reported any deferred income tax assets or liabilities. What amount of goodwill should be recognized on the date of the acquisition?

A. $0. B. $50,000. C. $65,000. D. $66,400. E. $57,500.

87.

Britain Corporation acquires all of English, Inc. for $800,000 cash. On that date, English has net assets with fair value of $750,000 but a book value and tax basis of $500,000. The tax rate is 35 percent. Prior to this date, neither Britain nor English has reported any deferred income tax assets or liabilities. What amount of goodwill should be recognized on the date of the acquisition?

A. $47,542. B. $117,850. C. $125,000. D. $137,500. E. $250,000.

Essay Questions

88.

What configuration of corporate ownership is described as a father-son-grandson relationship?

A father-son-grandson relationship exists when one corporation owns a controlling interest in another which, in turn, owns a controlling interest in a third corporation.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-01 Demonstrate the consolidation process when indirect control is present in a grandfatherfather-son ownership configuration.

89.

What ownership structure is referred to as a connecting affiliation? Describe briefly or illustrate with a diagram.

A connecting affiliation exists when a parent owns an interest in each of two companies, and one of the two companies owns an interest in the other.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-02 Demonstrate the consolidation process when a corporate ownership structure is characterized by a connecting affiliation.

90.

What ownership pattern is referred to as mutual ownership? Describe briefly or illustrate with a diagram.

Mutual ownership exists when a subsidiary owns common stock of its parent corporation or when two subsidiaries own shares of each other's common stock.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-03 Demonstrate the consolidation process when a corporate ownership structure is characterized by mutual ownership.

91.

What are the essential criteria for including a subsidiary within an affiliated group?

A subsidiary may be included in an affiliated group if both of the following conditions are met: A. The subsidiary is a domestic corporation. B. The parent has at least eighty percent control of the subsidiary, directly or indirectly.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 07-04 List the criteria for being a member of an affiliated group for income tax filling purposes.

92.

X Co. owned 80% of Y Corp., and Y Corp. owned 15% of X Co. Under the treasury stock

approach, how would the dividends paid by X Co. to Y Corp. be handled on a consolidation worksheet?

The dividends must be eliminated as intra-entity dividends.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-03 Demonstrate the consolidation process when a corporate ownership structure is characterized by mutual ownership.

93.

What term is used to describe a parent and subsidiaries that are eligible to file a

consolidated income tax return?

The term affiliated group would be used in this situation.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 07-04 List the criteria for being a member of an affiliated group for income tax filling purposes.

94.

What method is used in consolidation to account for a subsidiary's ownership of shares of its parent corporation?

The method is the treasury stock approach.

95.

What are the benefits or advantages of filing a consolidated income tax return?

When a consolidated income tax return is filed, intercompany profits are not taxed until realized, either by use or by sale to an outsider. On separate returns, intercompany profits are taxed in the period the sale is made within the combined entity. Therefore, filing a consolidated return can delay payment of income taxes. A second advantage is that, on a consolidated return, losses incurred by one company within the affiliated group can offset taxable income earned by other members, reducing the total income tax liability of the combined entity.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 07-04 List the criteria for being a member of an affiliated group for income tax filling purposes.

96.

How is the amortization of goodwill treated for income tax purposes? How does the amortization of goodwill affect deferred income taxes?

In a business combination, goodwill is tested annually for impairment for financial statement purposes. The Internal Revenue Code allows the deduction of goodwill and other purchased intangibles over a 15-year period. Because the taxable income and financial income differ, the presence of goodwill causes a temporary difference that necessitates the recognition of deferred income taxes.

97.

C Co. currently owns 80% of D Co. and several other subsidiaries. C Co. is interested in gaining control of H Co. Why might C Co. allow D Co. to acquire H Co., rather than purchasing H Co. directly?

Indirect control (such as a father-son-grandson structure, as proposed by C Co.) may be used to group subsidiaries by product line, geographic location, or other criteria. The use of indirect control may establish clearer and shorter lines of communication for day-to-day operations and improve responsibility reporting.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analyze Difficulty: 2 Medium Learning Objective: 07-01 Demonstrate the consolidation process when indirect control is present in a grandfatherfather-son ownership configuration. 7-165 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

98.

Gamma Co. owns 80% of Delta Corp., and Delta Corp. owns 15% of Gamma Co. The two companies use the treasury stock approach to account for mutual ownership. How should Delta Corp.'s ownership interest in Gamma Co. be accounted for in the consolidation?

Under the treasury stock approach, the parent's common stock owned by a subsidiary is treated in consolidated financial statements as being no longer outstanding. The consolidation process will eliminate the Investment in Gamma cost of shares and replace it as Treasury Stock of Gamma, the parent. The dividends received by Delta will be eliminated; thereby increasing Gamma's retained earnings as if these dividends had not been paid.

99.

Explain how the treasury stock approach treats shares of the parent's common stock that are owned by the subsidiary and the rationale behind the approach.

According to the treasury stock approach, acquisition of some of the parent's common stock by the subsidiary is no different than acquisition by the parent itself. Since treasury stock would be recorded if the parent bought some of its own stock, treasury stock should be recognized during the consolidation process when mutual ownership exists. The

treasury stock approach focuses on the parent's control over the subsidiary and views the parent and subsidiary as a single economic entity. The main advantage of the treasury

stock approach is its simplicity.

100.

T Corp. owns several subsidiaries that are eligible for inclusion on a consolidated income tax return, but T Corp. decided that each company in the group will file a separate return. Under what conditions would there be minimal advantage in filing a consolidated income

tax return?

There might be few disadvantages in filing separate income tax returns if there are few intercompany transactions, and if the companies which make up the combined entity are generally profitable. When there are frequent intercompany transactions, filing a consolidated income tax return postpones taxation on intercompany gains until they are realized by use or sale to an outsider. Thus, the consolidated return postpones the taxation of some income. When one of the companies records a loss, a consolidated return allows the loss to be offset against other companies' profits, reducing the total income tax obligation for the combined entity. The filing of separate returns allows the companies more flexibility in their choice of accounting methods and tax year.

101.

Under what conditions must a deferred income tax asset be recorded?

A deferred income tax asset is recorded when there is a temporary difference between financial accounting and income tax accounting rules, and income is taxed before it is recognized for financial accounting (or an expense is recognized for financial accounting before it can be deducted on the income tax return).

AACSB: Reflective thinking AICPA BB: Critical Thinking 7-168 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 07-05 Compute taxable income and deferred tax amounts for an affiliated group based on information presented in a consolidated set of financial statements.

Short Answer Questions

102.

B Co. owned 70% of the voting common stock of C Corp.; C Corp. owned 20% of B Co. For 2013, B Co. and C Corp. reported net income (not including the investment) of $600,000 and $300,000, respectively. B Co. and C Corp. paid dividends of $80,000 and $60,000, respectively.

Required: Prepare a schedule showing B Co.'s share of consolidated net income for 2013 using the

treasury stock approach.

by mutual ownership.

103.

Jull Corp. owned 80% of Solaver Co. Solaver paid $250,000 for 10% of Jull's common stock. In 2013, Jull and Solaver reported operating income (not including income from the investment) of $300,000 and $80,000, respectively. Jull and Solaver paid dividends of $120,000 and $50,000, respectively.

Required: Under the treasury stock approach, what is the non-controlling interest in Solaver Co.'s

net income?

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 07-03 Demonstrate the consolidation process when a corporate ownership structure is characterized by mutual ownership.

104.

Required: Under the treasury stock approach, what is Jull's controlling interest in Solaver Co.'s net

income?

105.

Kurton Inc. owned 90% of Luvyn Corp.'s voting common stock. The consideration paid exceeded book value by $110,000. Of this amount, one half is attributable to a patent and is to be amortized over 5 years. Luvyn held 20% of Kurton's voting common stock which cost $28,000 more than fair value. During the current year, Kurton reported operating income of $224,000 and dividend income from Luvyn of $37,800. At the same time, Luvyn reported operating income of $70,000 and dividend income from Kurton of $19,600.

Required: Using the treasury stock approach, prepare a schedule to show what is reported as the

non-controlling interest in Luvyn Corp.'s net income.

106.

Required: Prepare a schedule to show consolidated net income.

107.

Required: Prepare a schedule to show Kurton's share of controlling interest in Luvyn's net income.

108.

Wilkins Inc. owned 60% of Motumbo Co. During the current year, Motumbo reported net income of $280,000 but paid a total cash dividend of only $56,000.

Required: Assuming an income tax rate of 30%, what amount of Deferred Income Tax Liability arising this year must be recognized in the consolidated balance sheet?

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 07-06 Compute taxable income and deferred tax amounts to be recognized when separate tax returns are filed by any of the affiliates of a business combination.

109.

On January 1, 2012, Mace Co. acquired 75% of Lance Co.'s outstanding common stock. On the same date, Lance acquired an 80% interest in Curle Co. Both of these investments were acquired when book value was equal to fair value of identifiable net assets acquired. Both of these investments were accounted using the initial value method. No dividends were distributed by either Lance or Curle during 2012 or 2013. Mace paid cash dividends each year equal to 40% of operating income. Reported operating income totals for 2012 were as follows:

Required: Determine the total amount of goodwill for the January 1, 2012 acquisition of Curle Co. and for the acquisition of Lance Co. on the same date.

110.

Required: Determine the non-controlling interest in Curle Co.'s net income for the year 2013.

111.

Required: Determine the non-controlling interest in Lace Co.'s net income for the year 2013.

112.

Required: Determine the accrual-based income of Mace Co. for the year 2013.

113.

On January 1, 2013, Youder Inc. bought 120,000 shares of Nopple Co. for $384,000, giving Youder 30% ownership and the ability to apply significant influence to the operating and financing decisions of Nopple. Youder anticipated holding this investment for an indefinite time. In making this acquisition, Youder paid an amount equal to the book value for these shares. The fair value of each asset and liability was the same as its book value. Dividends and income for Nopple for 2013 were as follows:

Required: Assume a 40% income tax rate. Prepare all necessary journal entries for Youder for 2013 beginning at acquisition and ending at tax accrual.

Entry One-To record the acquisition of Nopple common stock:

Entry Two-To record income for the year: 30% of $400,000, reported balance:

Entry Three-To record the collection of dividends from Nopple Co.: 120,000 shares × $.40 per share:

Entry Four - To record income tax for the year: Current income taxes must be paid by Youder on the twenty percent of dividends ($9,600 = 20% of $48,000) that is taxable now. This current liability is $3,840 ($9,600 at the 40%

rate). Furthermore, a deferred income tax liability also exists. On Youder's accounting records, the Equity Income - Investment in Nopple Co. account balance exceeds its income tax basis by $72,000 which is the undistributed earnings: ($120,000 - $48,000). Since this difference will be erased by the payment of future dividends, the eighty percent

dividends received deduction is applicable ($57,600 = 80% of 72,000). Thus, future taxable income will be increased by $14,400 ($72,000 - $57,600). Based on an income tax rate of forty percent, the deferred income tax liability is $5,760.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 07-06 Compute taxable income and deferred tax amounts to be recognized when separate tax returns are filed by any of the affiliates of a business combination.

114.

Dice Inc. owns 40% of the outstanding shares of Spalding Corp., an investment accounted for by the equity method. During 2013, Dice earned operating income (not including income from its investment in Spalding) of $370,000. For this same period, Spalding reported net income of $160,000 and paid cash dividends of $60,000. Dice has an effective income tax rate of 35% and anticipates holding its investment in Spalding for an indefinite period. Required: (A.) What income tax expense journal entry would Dice Inc. record at the end of 2013? (B.) If Dice expects to sell its interest in Spalding in the near future, how does that decision change the 2013 income tax expense journal entry?

(A.)

Recording of year-end income tax

(B.) If Dice expects to sell this investment, the undistributed earnings will be realized through an increase in sales price rather than through dividend payments. Thus, no future dividends received deduction is available if the investment is to be sold; the deferred income tax effect must be calculated without the potential eighty percent reduction:

115.

Dotes, Inc. owns 40% of Abner Co. Dotes accounts for its investment using the equity method. Abner follows a policy of paying dividends equal to 30% of its income each year. During the current year, Abner reported net income of $216,000. Dotes has an effective income tax rate of 32%.

Journal Entry

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

Blooms: Apply Difficulty: 3 Hard Learning Objective: 07-06 Compute taxable income and deferred tax amounts to be recognized when separate tax returns are filed by any of the affiliates of a business combination.

116.

Intercompany income and dividends are not relevant because a consolidated return is filed.

117.

Patton's operating income excludes income from the investment in Stevens, but includes $150,000 of unrealized gains on intra-entity transfers of inventory. Patton uses the initial value method to account for the investment in Stevens. Assume Patton owns 90 percent of the voting stock of Stevens and they each file separate income tax returns. What amount of total income tax would be paid?

Total taxes to be paid are $720,000. Stevens would have to pay $120,000 (30% of its $400,000 operating income.) Patton would pay $600,000 or 30% of its $2,000,000 operating income. The unrealized gain is not deferred because separate returns are being filed. Intercompany dividends are not taxable because the parties still qualify as an affiliated group even though separate returns are being filed.

118.

Patton's operating income excludes income from the investment in Stevens, but includes $150,000 of unrealized gains on intra-entity transfers of inventory. Patton uses the initial value method to account for the investment in Stevens. How much will the consolidated group save if it decides to file a consolidated income tax return?

(Also computed as $150,000 intercompany gains × 30% tax rate)

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 07-05 Compute taxable income and deferred tax amounts for an affiliated group based on information presented in a consolidated set of financial statements. Learning Objective: 07-06 Compute taxable income and deferred tax amounts to be recognized when separate tax returns are filed by any of the affiliates of a business combination.

119.

For each of the following situations, select the best answer concerning accounting for income taxes in combinations: (A) May file a consolidated income tax return. (B) May not a file consolidated income tax return. (C) Must file a consolidated income tax return. _____1. Parent company owns 85% of the voting stock of the subsidiary, and there are significant intercompany transactions. _____2. Subsidiary is a foreign corporation. _____3. Parent company owns 90% of the voting stock of the subsidiary, but there are no intercompany inventory transactions. _____4. Parent company owns 75% of the voting stock of the subsidiary but there are no intercompany inventory transactions. _____5. Parent company owns 90% of the voting stock of the subsidiary, and there are intercompany inventory transactions with transferred goods in ending inventory. _____6. Parent company owns 75% of the voting stock of the subsidiary and there are intercompany inventory transactions with transferred goods in ending inventory.

(1) A; (2) B; (3) A; (4) B; (5) A; (6) B

Chapter 08 Segment and Interim Reporting

Multiple Choice Questions

1. Generally accepted accounting principles require a U.S. corporation to disclose the following disaggregated information for each operating segment, except:

A. Revenues from external customers. B. Discontinued operations. C. Cost of goods sold. D. Depreciation expense. E. Intersegment revenues.

2. Which tests must a company use to determine which operating segments require separate disclosure?

A. revenue test and asset test. B. revenue test, profit or loss test, and asset test. C. revenue test and profit or loss test. D. profit or loss test and asset test. E. revenue test, asset test, and liability test.

3. Coulanger Corp. identified four operating segments: A, B, C, and D. Segment A met the

revenue test for identifying reportable segments while Segment C met the revenue test, profit or loss test, and asset test. Segment B and Segment D did not meet any of these tests. Which of these segments must be disclosed separately?

A. option A B. option B C. option C D. option D E. option E

4. Kaycee Corporation's revenues for the year ended December 31, 2012, were as follows: Consolidated Revenue per the Income Statement: $1,200,000 Upstream Intersegment Sales: $180,000 Downstream Intersegment Sales: $60,000 For purposes of the Revenue Test, what amount will be used as the benchmark for determining whether a segment is reportable?

A. $24,000. B. $120,000. C. $138,000. D. $144,000. E. $0.

5. Natarajan, Inc. had the following operating segments, with the indicated amounts of segment

revenues and segment expenses:

According to the revenue test, which segments would require disaggregation?

A. A, B, D, and E. B. A and B. C. B and C. D. A, B, and D. E. C, D, and E.

6. Natarajan, Inc. had the following operating segments, with the indicated amounts of segment

revenues and segment expenses:

According to the profit or loss test, which segments would require disaggregation?

A. A, B, D, and E. B. A, B, C, and E. C. A, B, and D. D. A and D. E. A only.

7. Natarajan, Inc. had the following operating segments, with the indicated amounts of segment

revenues and segment expenses:

For purposes of the profit or loss test, segment C's operating profit or (loss) is

A. $1,300,000. B. $700,000. C. $2,000,000. D. $200,000. E. $(200,000.)

8. Natarajan, Inc. had the following operating segments, with the indicated amounts of segment

revenues and segment expenses:

When totaling the revenues to use as the basis for the 75% rule, what is the 75% hurdle that must be exceeded by the revenues of the reportable segments?

A. $1,670,000. B. $12,525,000. C. $15,487,500. D. $16,700,000. E. $20,650,000.

9. When defining a reportable segment, which of the following conditions would be sufficient to allow a company to combine two operating segments for purposes of testing?

A. The products sold by each segment are produced in the same plant. B. Both segments have several customers in common. C. The segments may sell different products, but they have a similar production process. D. Both segments are required to adhere to U.S. Department of Labor regulations regarding immigration laws. E. Both segments are owned by the same parent company.

10. The Fratilo Co. had three operating segments with the following information:

In addition, revenues generated at corporate headquarters are $1,400.

Combined segment revenues are calculated to be

A. $29,400. B. $25,200. C. $26,600. D. $28,000. E. $27,300.

11. The Fratilo Co. had three operating segments with the following information:

In addition, revenues generated at corporate headquarters are $1,400. What is the minimum amount of revenue that each of these segments must earn to be considered separately reportable?

A. $2,730. B. $2,660. C. $2,800. D. $2,940. E. $2,520.

12. The Rivers Co. had four separate operating segments:

What amount of revenues must be generated from one customer before that party must be identified as a major customer?

A. $57,680. B. $64,960. C. $52,640. D. $78,960. E. $63,560.

13. Which one of the following items must be disclosed for all reportable operating segments in the notes to financial statements? (I.) Revenue from external customers. (II.) Total Segment Assets (III.) Revenues from foreign customers, identified by country.

A. I, II, and III B. I and III only C. II and III only D. I and II only E. There is no requirement of information to disclose for operating segments.

14. Kurves Corp. had six different operating segments reporting the following operating profit and loss figures:

Which one of the following statements is true?

A. Segment A is a reportable segment based on this test. B. Segment B is not a reportable segment based on this test. C. Segment E is a reportable segment based on this test. D. Segment C is not a reportable segment based on this test. E. Segment D is a reportable segment based on this test.

15. Retro Corp. was engaged solely in manufacturing operations. The following data pertain to the operating segments for 2013:

What is the minimum amount of revenue that each of these segments must earn to be considered separately reportable?

A. $4,343,684. B. $4,826,316. C. $5,067,632. D. $4,585,000. E. $4,705,658.

16. Retro Corp. was engaged solely in manufacturing operations. The following data pertain to the operating segments for 2013:

What is the minimum amount of profit or loss that each of these segments must earn to be considered separately reportable?

A. $769,263. B. $812,000. C. $854,737. D. $897,000. E. $833,368.

17. Retro Corp. was engaged solely in manufacturing operations. The following data pertain to the operating segments for 2013:

What is the minimum amount of assets that each of these segments must own to be considered separately reportable?

A. $9,450,000. B. $8,624,272. C. $10,643,000. D. $12,936,408. E. $10,413,000.

18. Which of the following statements is true regarding the determination of operating segments in order to decide which segments will be separately reported?

A. An operating segment is a component of an enterprise that engages in business activities from which it only earns revenues. B. The operating results of an operating segment are reviewed regularly by the corporate controller to assess performance. C. There is integral financial information available for each operating segment. D. An organizational unit can be an operating segment if all of its revenues or expenses result from transactions with other segments. E. All parts of a company must be included in some operating segment.

19. A company that generates reports by both geographic region and product line must consider additional criteria in identifying operating segments when there are multiple sets of reports. Which of the following statement(s) is correct? (I.) An operating segment has a segment manager who is directly accountable to the chief operating decision maker for its financial performance. (II.) If more than one set of organizational units exists, each organizational unit is considered an operating segment even if there is only one set for which segment managers are held responsible. (III.) If segment managers exist for two or more overlapping sets of organizational units, the nature of the business activities must be considered.

A. I, II, and III. B. I and III only. C. I and II only. D. II and III only. E. None of these.

20. Which of the following is not one of the criteria management should consider in determining whether business activities and environments of an operating segment are similar?

A. The geographical location of the operations. B. The nature of the production process. C. The distribution methods. D. The nature of the regulatory environment, if applicable. E. The type or class of customer.

21. The hardware operating segment of Bloom Corporation has the following revenues for the year ended December 31, 2013:

For purposes of the revenue test, what amount will be used as total revenues of the hardware operating segment?

A. $417,000. B. $440,000. C. $424,000. D. $460,000. E. $480,000.

22. Which of the following statements is false concerning the number of operating segments that should be disclosed?

A. At least 75 percent of total company sales made to outsiders should be presented. B. Even though an operating segment has been reportable in the past and is of continuing significance, it must meet at least one of the three reporting tests to report separately in the current year. C. If the 75 percent rule is not met by the results of applying all three reporting tests, additional segments must be disclosed separately despite their failure to satisfy even one of the three quantitative thresholds. D. If an operating segment qualifies for disclosure in the current year, prior period segment data presented for comparative purposes must be restated to reflect the newly reportable segment as a separate segment. E. The practical limit to the number of operating segments is 10.

23. Whitley Corporation identified four operating segments: Automotive, Electrical, Lawn Equipment, and Sporting Goods. Automotive met the revenue test and the profit or loss test. Electrical met all three tests. Lawn Equipment met only the asset test. Sporting Goods did not meet any of the three tests. Which of these segments must be disclosed separately?

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

24. Which one of the following items is not required to be disclosed for each operating segment?

A. Factors used to identify operating segments. B. Products and services from which each segment derives its revenues. C. Revenues from external customers. D. Factors used to allocate company-wide expenses. E. Revenues from transactions with other operating segments.

25. The following items are required to be disclosed for each operating segment except:

A. Factors used to allocate company-wide pension expense. B. Revenues from transactions with other operating segments. C. Interest revenue and interest expense. D. Depreciation, depletion, and amortization expense. E. Revenues from external customers.

26. Dean Hardware, Inc. is comprised of five operating segments. Information about each of these segments is as follows (in thousands):

What is the total amount of revenues in applying the revenue test?

A. $794. B. $808. C. $892. D. $906. E. $934.

27. Dean Hardware, Inc. is comprised of five operating segments. Information about each of these segments is as follows (in thousands):

Which operating segments are reportable under the revenue test?

A. Pails and Hardware. B. Rakes, Pails, and Hardware. C. Rakes, Hardware, and Accessories. D. Rakes and Pails. E. Rakes and Hardware.

28. Dean Hardware, Inc. is comprised of five operating segments. Information about each of these segments is as follows (in thousands):

In applying the profit or loss test, what is the minimum amount an operating segment must have in order to meet the profit or loss test for a reportable segment?

A. $8.2. B. $9.0 C. $10.4. D. $13.0. E. $82.0.

29. Dean Hardware, Inc. is comprised of five operating segments. Information about each of these segments is as follows (in thousands):

Which operating segments are reportable under the profit or loss test?

A. Rakes, Pails, and Shovels. B. Rakes, Pails, Shovels, and Hardware. C. Rakes, Pails, and Hardware. D. Rakes, Pails, Shovels, Hardware, and Accessories. E. Pails and Hardware.

30. Dean Hardware, Inc. is comprised of five operating segments. Information about each of these segments is as follows (in thousands):

In applying the asset test, what is the minimum amount an operating segment must have in order to meet the asset test for a reportable segment?

A. $12.5. B. $15.2. C. $17.2. D. $18.4. E. $19.8.

31. Dean Hardware, Inc. is comprised of five operating segments. Information about each of these segments is as follows (in thousands):

Which operating segments are reportable under the asset test?

A. None. B. Pails. C. Rakes, Pails, and Shovels. D. Rakes and Hardware. E. Rakes, Pails, and Hardware.

32. Schilling, Inc. has three operating segments with the following information:

What is the minimum amount of revenue an operating segment must have to be considered a reportable segment?

A. $12,000. B. $15,000. C. $15,500. D. $16,200. E. $16,700.

33. Schilling, Inc. has three operating segments with the following information:

According to the revenues test, which segment(s) are separately reportable?

A. Silver only. B. Crystal and Silver. C. China and Crystal. D. China and Silver. E. China, Crystal, and Silver.

34. Peterson Corporation has three operating segments with the following information:

What is the minimum amount of revenue an operating segment must have to be considered a reportable segment?

A. $3,900. B. $4,000. C. $4,100. D. $4,200. E. $4,400.

35. Peterson Corporation has three operating segments with the following information:

According to the revenues test, which segment(s) are separately reportable?

A. Mowers only. B. Mowers and Edgers. C. Mowers and Weedeaters. D. Edgers and Weedeaters. E. Mowers, Edgers, and Weedeaters.

36. Peterson Corporation has three operating segments with the following information:

What amount of revenues must be generated from one customer before that party must be identified as a major customer?

A. $3,900. B. $4,000. C. $4,100. D. $4,200. E. $4,400.

37. Elektronix, Inc. has three operating segments with the following information:

What is the minimum amount of revenue an operating segment must have to be considered a reportable segment?

A. $650,000. B. $660,000. C. $670,000. D. $680,000. E. $690,000.

38. Elektronix, Inc. has three operating segments with the following information:

What is the operating profit or loss for the VCRs segment?

A. $121,000 profit. B. $121,000 loss. C. $124,000 profit. D. $124,000 loss. E. $500,000 profit.

39. Elektronix, Inc. has three operating segments with the following information:

What is the minimum amount of operating profit or loss an operating segment must have to be considered a reportable segment?

A. $124,000. B. $127,600. C. $100,000. D. $130,000. E. $140,000.

40. Elektronix, Inc. has three operating segments with the following information:

What is the minimum amount of assets an operating segment must have to be considered a reportable segment?

A. $1,400,000. B. $2,500,000. C. $4,100,000. D. $5,000,000. E. $25,000,000.

41. Elektronix, Inc. has three operating segments with the following information:

Which operating segments are separately reportable under the revenues test?

A. DVDs only. B. DVDs and MP3s. C. DVDs and VCRs. D. VCRs and MP3s. E. DVDs, VCRs, and MP3s.

42. Elektronix, Inc. has three operating segments with the following information:

Which operating segments are separately reportable under the operating profit or loss test?

A. DVDs only. B. DVDs and MP3s. C. DVDs and VCRs. D. VCRs and MP3s. E. DVDs, VCRs, and MP3s.

43. Elektronix, Inc. has three operating segments with the following information:

Which operating segments are separately reportable under the assets test?

A. DVDs only. B. DVDs and MP3s. C. DVDs and VCRs. D. VCRs and MP3s. E. DVDs, VCRs, and MP3s.

44. Which of the segments are separately reportable?

A. DVDs only. B. DVDs and MP3s. C. DVDs and VCRs. D. VCRs and MP3s. E. DVDs, VCRs, and MP3s.

45. Which of the following statements is true according to U.S. GAAP regarding segment or enterprise-wide disclosure?

A. A reconciliation of segment assets to consolidated assets is required. B. Segment information does not have to be in accordance with generally accepted accounting principles. C. Disclosure of a major customer's identity is required. D. Geographic area information must be disclosed in interim financial statements. E. A company comprised of only one operating segment does not have to report geographic area information.

46. Which of the following is a criterion for determining whether an operating segment is separately reportable?

A. An operating segment's assets are 10 percent or more of combined segment assets. B. An operating segment's assets are 10 percent or more of consolidated assets. C. An operating segment's assets are 10 percent or more of combined segment liabilities. D. An operating segment's assets are 10 percent or more of consolidated liabilities. E. An operating segment's assets are 10 percent or more of corporate assets.

47. Which of the following operating segment disclosures is not required by U.S. GAAP?

A. Interest expense. B. Intersegment sales. C. Extraordinary items. D. Discontinued operations. E. Liabilities.

48. Vapor Corporation has a fan products operating segment. Which of the following items does Vapor not have to report for this segment?

A. Depreciation expense. B. Amortization expense. C. Research and development expense. D. Interest expense. E. Interest income.

49. Which of the following must be disclosed by a geographic segment according to U.S. GAAP?

A. Operating profit or loss. B. Gross profit. C. Total assets. D. Revenues from external customers. E. Revenues from internal customers.

50. Which of the following is not true for an operating segment according to U.S. GAAP?

A. Discrete financial information generated by the internal accounting system is available. B. The segment earns revenues and incurs expenses. C. The segment is regularly reviewed by a chief decision maker to assess performance decisions. D. The segment is regularly reviewed by a chief decision maker to make resource allocations. E. An organizational unit cannot be an operating segment if all of its operating transactions are only with other segments of the organization.

51. Which of the following statements is true?

A. In determining reportable segments, two tests are applied and both must be met. B. In determining reportable segments, three tests are applied and all three must be met. C. In determining reportable segments, two tests are applied and only one must be met. D. In determining reportable segments, three tests are applied and only one must be met. E. In determining reportable segments, at least 80% of the revenues from external customers must be reported.

52. According to U.S. GAAP, which of the following would be an acceptable grouping by a U.S. company for presentation of information by geographic area?

A. France, Germany, All Other Countries. B. United States, Europe, Canada. C. United States, Africa, Europe, Asia. D. United States, Canada, Mexico, Germany. E. North America, Spain, All Other Countries.

53. Which of the following would be an acceptable grouping for a U.S. company to provide information by geographic area?

A. United States, All Other Countries. B. United States, Europe, Taiwan. C. United States, Asia, Germany. D. United States, Central America, Mexico, Germany. E. South America, Spain, All Other Countries.

54. What information does U.S. GAAP require to be disclosed for a major customer?

A. The identity of the customer. B. The operating segment reporting sales to the customer. C. The geographic area of the customer. D. The percentage of sales derived from the customer. E. The length of time the customer has been a customer of the company.

55. How should revenues be recognized in interim periods?

A. In the same way as they are recognized on an annual basis. B. On the cash basis. C. On an annualized basis. D. On a seasonal basis. E. There are no revenues recognized in interim periods.

56. Which of the following is not correct regarding inventory procedures reported in an interim financial statement?

A. LIFO liquidations expected to be replaced by the end of the year are accounted for in cost of goods sold at expected replacement cost rather than original LIFO cost. B. Lower-of-cost-or-market adjustments are not made for the interim period if they are expected to reverse by the end of the year. C. Variances in a standard costing system are reported at the end of the interim period unless they are expected to be absorbed by year-end. D. FIFO is remeasured using the LIFO method in an interim financial statement. E. LIFO liquidations not expected to be replaced by the end of the year are reflected in cost of goods sold at original LIFO cost.

57. Cement Company, Inc. began the first quarter with 1,000 units of inventory costing $25 per unit. During the first quarter, 3,000 units were purchased at a cost of $40 per unit, and sales of 3,400 units at $65 per units were made. During the second quarter, the company expects to replace the units of beginning inventory sold at a cost of $45 per unit. Cement Company uses the LIFO method to account for inventory. What is the correct journal entry to record cost of goods sold at the end of the first quarter?

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

58. Cement Company, Inc. began the first quarter with 1,000 units of inventory costing $25 per unit. During the first quarter, 3,000 units were purchased at a cost of $40 per unit, and sales of 3,400 units at $65 per units were made. During the second quarter, the company expects to replace the units of beginning inventory sold at a cost of $45 per unit. Cement Company uses the LIFO method to account for inventory. The amount of gross profit for the first quarter is:

A. $83,000 B. $87,000 C. $90,000 D. $221,000 E. $250,000

59. Betsy Kirkland, Inc. incurred a flood loss during the first quarter of 2013 that is deemed both unusual and infrequent. The loss is considered immaterial to the twelve-month period, but is material in amount relative to the first quarter. The proper accounting treatment in the first quarter interim statement is to:

A. Ignore the loss. B. Record the loss in the first quarter as an extraordinary loss, net of income taxes. C. Record one-fourth of the loss in the first quarter as an extraordinary loss, net of income taxes. D. Ignore the loss in the first quarter, and record it in the annual statement only. E. Record the loss in the first quarter, but not as an extraordinary loss, and disclose the loss in a separate note or in the income statement as a separate line item.

60. How should a change from one generally accepted accounting principle to another accepted principle be handled in a third-quarter income statement?

A. Retrospectively restate the first-quarter income statement, net of income taxes, as though the change occurred at the beginning of the year. B. Postpone recording of the change to the annual income statement. C. Record the change in the third-quarter income statement, net of income taxes. D. Adjust financial statements for each prior period presented to reflect the effects of the new principle in those reported periods. E. These changes are prohibited by GAAP.

61. Which of the following is not a required disclosure in an interim financial report?

A. Sales or gross revenues. B. Provision for income taxes. C. Extraordinary items. D. Gains on sales of major equipment. E. Earnings per share.

62. Which of the following is not a required disclosure in an interim financial report?

A. Net income. B. Earnings per share. C. Gross profit. D. Significant changes in estimates or provisions for income taxes. E. Disposal of a segment, net of income taxes.

63. Which of the following items of information are required to be included in interim reports for each operating segment? (I.) Revenues from external customers (II.) Segment profit or loss (III.) Reconciliation of segment profit or loss to the enterprise's total income before taxes (IV.) Intersegment revenues

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

64. How are extraordinary gains reported in a third quarter interim financial report?

A. Recognized at year-end only. B. Recognized in the first quarter. C. Recognized ratably over the first three quarters. D. Recognized in the third quarter. E. Ignored.

65. What are the two approaches that can be followed in preparing interim reports?

A. Indiscrete and terminal. B. Discrete and terminal. C. Metric and integral. D. Discrete and integral. E. Discrete and metric.

66. Which of the following is reported for interim financial reports using the discrete approach?

A. Income tax expense. B. Seasonal items. C. Change in accounting principle. D. Property tax expense. E. Extraordinary gains.

67. Which of the following is reported for interim financial reports using the integral approach?

A. Bonus expense. B. Extraordinary losses. C. Cash basis accounting. D. Extraordinary gains. E. Change in accounting principle.

68. How should seasonal revenues be reported in an interim financial statement?

A. The seasonal nature should be disclosed, and a pro forma report for the next 12-month period should supplement the interim report. B. The seasonal nature should be disclosed but no other reports should accompany the interim report. C. The seasonal nature should be disclosed, and a supplemental report for the 12-month period ended at the interim date should supplement the interim report. D. The financial statements should be adjusted to reflect the assumption that no seasonal revenues could be earned. E. Seasonal revenues have no particular reporting requirement.

69. Which of the following are required to be disclosed in interim reports?

A. Cash flows from investing activities. B. Change in cash. C. Total current liabilities. D. Total assets. E. Gross revenues.

70. All of the following are required to be reported in interim financial statements for a material operating segment except:

A. Segment assets. B. Segment revenues from external customers. C. Intersegment revenues. D. Segment profit or loss. E. Reconciliation of segment profit or loss to total income before taxes.

71. What is the appropriate treatment in an interim financial report for inventory that has market value below cost?

A. The loss should always be recorded in the interim period in which market value drops below cost. B. The loss should be recorded in the interim period in which market value drops below cost if the loss is considered temporary. C. The loss should be recorded in the interim period in which market value drops below cost if the loss is considered permanent. D. The loss should be ignored for interim reporting purposes. E. There is no loss to report.

72. What is the appropriate treatment in an interim financial report for inventory that has cost below market value?

A. The loss should always be recorded in the interim period in which cost drops below market value. B. The loss should be recorded in the interim period in which cost drops below market value if the loss is considered temporary. C. The loss should be recorded in the interim period in which cost drops below market value if the loss is considered permanent. D. The loss should be ignored for interim reporting purposes. E. There is no loss to report.

73. What is the appropriate treatment in an interim financial report for a LIFO liquidation?

A. The LIFO liquidation is always ignored for interim reporting. B. The LIFO liquidation should always be reflected in gross profit on an interim income statement. C. The LIFO liquidation should always result in replacement cost valuation of ending inventory on the interim balance sheet and the interim income statement. D. The LIFO liquidation should always result in replacement cost valuation of ending inventory on the interim income statement but not the interim balance sheet. E. The LIFO liquidation should only be reflected in gross profit on an interim income statement if it is determined that it will not be replaced by year-end.

74. Which of the following statements is true regarding the reporting of revenues in an interim report?

A. Revenues should be recognized on the income tax basis for interim reporting. B. Revenues should be recognized in interim periods in the same way as they are on an annual basis. C. Projected losses on long-term contracts should be deferred to the annual report. D. The percentage-of-completion method of reporting long-term construction projects is not an acceptable method for interim reporting. E. Revenues should be recognized on the cash basis of accounting for interim reporting.

75. What is the appropriate treatment in an interim financial report for variances arising from the use of a standard costing system?

A. The variances are always ignored for interim reporting. B. The variances should always be reflected in gross profit on an interim income statement. C. The variances expected to be absorbed by year-end should not be reflected in the interim statement. D. The variances should always be reflected in the interim income statement but not the interim balance sheet. E. The variances should only be reflected in the interim balance sheet.

76. Which of the following costs require similar treatment to Property Tax Expense in an interim financial report? 1) Annual major repairs. 2) Advertising expense. 3) Bonus expense, if estimable. 4) Quantity discounts based on annual sales.

A. 1 and 2 B. 1, 2, and 3 C. 1, 2, and 4 D. 2, 3, and 4 E. 1, 2, 3, and 4

77. How should contingencies be reported in an interim report?

A. Disclosed the same way as they are disclosed in annual reports. B. Disclosed in the interim period discovered, and ignored in all future periods. C. Recorded as gains or losses as incurred. D. Recorded as gains or losses only if material. E. Ignored.

78. Provo, Inc. has an estimated annual tax rate of 35 percent in the first quarter of 2013. Pretax income for the first quarter was $300,000. At the end of the second quarter of 2013, Provo expects the annual tax rate to be 32 percent because of anticipated tax credits. Pretax income for the second quarter was $350,000. Assume no items in either quarter requiring the net-of-tax presentation. How much income tax expense is recognized in the first quarter of 2013?

A. $0. B. $26,250. C. $96,000. D. $105,000. E. $112,000.

79. Provo, Inc. has an estimated annual tax rate of 35 percent in the first quarter of 2013. Pretax income for the first quarter was $300,000. At the end of the second quarter of 2013, Provo expects the annual tax rate to be 32 percent because of anticipated tax credits. Pretax income for the second quarter was $350,000. Assume no items in either quarter requiring the net-of-tax presentation. How much income tax expense is recognized in the second quarter of 2013?

A. $103,000. B. $104,000. C. $112,000. D. $122,500. E. $208,000.

80. Baker Corporation changed from the LIFO method to the FIFO method for inventory valuation during 2013. Baker has an effective income tax rate of 30 percent and 100,000 shares of common stock issued and outstanding. The following additional information is available:

Assuming Baker makes the change in the first quarter of 2013, how much is reported as net income for the first quarter of 2013?

A. $492,000. B. $494,800. C. $500,000. D. $505,200. E. $527,950.

81. Baker Corporation changed from the LIFO method to the FIFO method for inventory valuation during 2013. Baker has an effective income tax rate of 30 percent and 100,000 shares of common stock issued and outstanding. The following additional information is available:

Assuming Baker makes the change in the first quarter of 2013, compute net income per common share.

A. $4.92. B. $4.95. C. $5.00. D. $5.05. E. $5.28.

82. Baker Corporation changed from the LIFO method to the FIFO method for inventory valuation during 2013. Baker has an effective income tax rate of 30 percent and 100,000 shares of common stock issued and outstanding. The following additional information is available:

Assuming Baker makes the change in the first quarter of 2012, how much is reported as net income for the first quarter of 2012?

A. $300,000. B. $322,750. C. $335,000. D. $265,000. E. $277,250.

83. Baker Corporation changed from the LIFO method to the FIFO method for inventory valuation during 2013. Baker has an effective income tax rate of 30 percent and 100,000 shares of common stock issued and outstanding. The following additional information is available:

Assuming Baker makes the change in the first quarter of 2013 and that $400,000 net income is earned during the second quarter, how much is reported as net income for the second quarter of 2013?

A. $400,000. B. $405,200. C. $427,950. D. $894,850. E. $905,200.

84. For companies that provide quarterly reports, how is the fourth quarter reported?

A. Every company that reports for the first three quarters must also publish a fourth-quarter report. B. No fourth-quarter report is required. C. No company may publish a fourth-quarter report. D. The SEC requires selected quarterly financial data to be reported separately as a fourthquarter report. E. When fourth-quarter financial statements are provided, special accounting items should be disclosed in the annual financial statements.

85. According to International Financial Reporting Standards (IFRS), all of the following are part of minimum components of interim financial reporting except:

A. A condensed statement of cash flows. B. A condensed statement of financial position. C. A condensed statement of stockholders' equity. D. A condensed statement of net income and comprehensive income. E. Accrual of income tax expense at the end of each interim period.

86. Which of the following is false with regard to accounting standards for segment reporting according to International Financial Reporting Standards (IFRS) and U.S. GAAP?

A. IFRS and U.S. GAAP do not each require disclosure of segment liabilities. B. IFRS and U.S. GAAP both require disclosure of intangible assets attributable to geographic segments. C. According to IFRS, operating segments can be based on products and services. D. According to IFRS, operating segments can be based on geographic areas. E. IFRS and U.S. GAAP both require disclosure of total assets.

Essay Questions

87. What is the major objective of segment reporting?

88. What is meant by the term: disaggregated financial information?

89. Why are quarterly financial statements required to be published for publicly traded companies in the U.S.?

90. How does a company measure income tax expense to be reported in an interim period?

91. What two disclosure guidelines for operating segment information are designed to ensure the consistency of data reported from year to year?

92. Describe the test to determine whether a sufficient number of operating segments are disclosed.

93. What approach is used, according to U.S. GAAP, for determination of how a business is divided into segments?

94. According to U.S. GAAP, what general information about an operating segment needs to be disclosed?

95. According to U.S. GAAP, how should common costs be allocated to individual segments to determine segment profit or loss?

96. List the five aggregation criteria that need to be considered by management in determining whether business activities and environments are similar.

97. What is the purpose of the U.S. GAAP seventy-five percent requirement for industry segment disclosure?

98. According to U.S. GAAP, what revenues and expenses included in segment profit or loss need to be disclosed?

99. What related items need to be disclosed in regard to total segment assets?

100.Which items of information are required to be included in interim reports for each operating segment?

101.Which two items of information must be reported for (1) the domestic country, (2) all foreign countries in which the enterprise derives revenues or holds assets, and (3) each foreign country in which a material amount of revenues is earned?

Short Answer Questions

102.Burnside Corp. is organized into four operating segments. The following segment information was generated by the internal reporting system in 2013:

Required: 1) What was the profit or loss of each of these segments? 2) Prepare the profit or loss test to determine which of these segments was separately reportable.

103.Faru Co. identified five industry segments: (1) plastics, (2) metals, (3) lumber, (4) paper, and (5) finance. Each of these segments had been consolidated appropriately by the company in producing its annual financial statements. Information describing each segment is presented below (in thousands).

Prepare the revenue test and determine which of these segments was separately reportable.

104.Faru Co. identified five industry segments: (1) plastics, (2) metals, (3) lumber, (4) paper, and (5) finance. Each of these segments had been consolidated appropriately by the company in producing its annual financial statements. Information describing each segment is presented below (in thousands).

Prepare the profit or loss test and determine which of these segments was separately reportable.

105.Faru Co. identified five industry segments: (1) plastics, (2) metals, (3) lumber, (4) paper, and (5) finance. Each of these segments had been consolidated appropriately by the company in producing its annual financial statements. Information describing each segment is presented below (in thousands).

Prepare the asset test and determine which of these segments was separately reportable.

106.Blanton Corporation is comprised of five operating segments. Information about each of these segments is as follows (in thousands):

Required: (a.) Which operating segments are reportable under the revenue test? (b.) What is the total amount of revenues in applying the revenues test? (c.) Which operating segments are reportable under the profit or loss test? (d.) In applying the profit or loss test, what is the minimum amount an operating segment must have in order to meet the profit or loss test for a reportable segment? (e.) Which operating segments are reportable under the asset test? (f.) In applying the asset test, what is the minimum amount an operating segment must have in order to meet the asset test for a reportable segment? (g.) Which operating segments are reportable? (h.) According to the test results for reportable segments, is there a sufficient number of reported segments or should any additional segments also be disclosed? Explain the reason for your conclusion.

107.On February 23, 2013, Cleveland, Inc. paid property taxes of $300,000 for the calendar year 2013. How much of this expense should be included in Cleveland's net income for the quarter ending March 31, 2013?

108.On February 23, 2013, Cleveland, Inc. paid property taxes of $300,000 for the calendar year 2013. Prepare the journal entry for the payment of property taxes on February 23, 2013.

109.Gregor Inc. uses the LIFO cost-flow assumption to value inventory. Inventory for Gregor on January 1, 2013 was 100 units at a LIFO cost of $25 per unit. During the first quarter of 2013, 200 units were purchased costing an average of $40 per unit, and sales of 265 units at a retail price of $50 per unit were made. Assuming Gregor does not expect to replace the units of beginning inventory sold, what is the amount of cost of goods sold for the quarter ended March 31, 2013?

110.Gregor Inc. uses the LIFO cost-flow assumption to value inventory. Inventory for Gregor on January 1, 2013 was 100 units at a LIFO cost of $25 per unit. During the first quarter of 2013, 200 units were purchased costing an average of $40 per unit, and sales of 265 units at a retail price of $50 per unit were made. Assuming Gregor expects to replace the units of beginning inventory sold before the yearend at a cost of $41, what is the amount of cost of goods sold for the quarter ended March 31, 2013?

111.Harrison Company, Inc. began operations on January 1, 2012, and applied the LIFO method for inventory valuation. On June 10, 2013, Harrison adopted the FIFO method of accounting for inventory. Additional information is as follows:

The LIFO method was applied during the first quarter of 2013 and the FIFO method was applied during the second quarter of 2013 in computing income, above. Harrison's effective income tax rate is 40 percent. Harrison has 500,000 shares of common stock outstanding at all times. Compute the after-tax effect of Harrison's change in inventory method.

112.Harrison Company, Inc. began operations on January 1, 2012, and applied the LIFO method for inventory valuation. On June 10, 2013, Harrison adopted the FIFO method of accounting for inventory. Additional information is as follows:

The LIFO method was applied during the first quarter of 2013 and the FIFO method was applied during the second quarter of 2013 in computing income, above. Harrison's effective income tax rate is 40 percent. Harrison has 500,000 shares of common stock outstanding at all times. Prepare a schedule showing the calculation of net income and earnings per share to be reported by Harrison for the three-month period and the six-month period ended June 30, 2012 and 2013.

113.The following information for Urbanski Corporation relates to the three months ending June 30, 2013:

Urbanski uses the LIFO method to account for inventory, and expects at least 15,000 units to be on hand in the ending inventory at year-end. Purchases made in the last six months are expected to cost an average of $18 per unit. Compute cost of goods sold and gross profit for the quarter ending June 30, 2013.

114.The following information for Urbanski Corporation relates to the three months ending June 30, 2013:

Urbanski uses the LIFO method to account for inventory, and expects at least 15,000 units to be on hand in the ending inventory at year-end. Purchases made in the last six months are expected to cost an average of $18 per unit. Prepare the journal entries to reflect the sales and cost of goods sold, assuming Urbanski expects to maintain 11,000 units in inventory at year-end.

115.The following information for Urbanski Corporation relates to the three months ending June 30, 2013:

Urbanski uses the LIFO method to account for inventory, and expects at least 15,000 units to be on hand in the ending inventory at year-end. Purchases made in the last six months are expected to cost an average of $18 per unit. Prepare the journal entries to reflect the sales and cost of goods sold, assuming Urbanski does not expect to replace the liquidated inventory at year-end.

116.For each of the following situations, select the best answer concerning segment disclosures of reportable segments. (A.) Required to be disclosed by an operating segment, but not a geographical segment. (B.) Required to be disclosed by a geographical segment, but not an operating segment. (C.) Required to be disclosed by both an operating segment and a geographical segment. (D.) Not required to be disclosed by either an operating segment or a geographical segment. ___ 1. Factors used to identify segments. ___ 2. Revenues from external customers. ___ 3. Types of products and services from which each segment derives its revenues. ___ 4. Names of major customers. ___ 5. Revenues from transactions with other segments. ___ 6. Interest revenue. ___ 7. Long-lived assets. ___ 8. Discontinued operations and extraordinary items, when applicable. ___ 9. Income tax expense or benefit. ___ 10. Revenues for the domestic country. ___ 11. Cash flow information

Chapter 08 Segment and Interim Reporting Answer Key

Multiple Choice Questions

Generally accepted accounting principles require a U.S. corporation to disclose the following disaggregated information for each operating segment, except:

A. Revenues from external customers. B. Discontinued operations. C. Cost of goods sold. D. Depreciation expense. E. Intersegment revenues.

Which tests must a company use to determine which operating segments require separate disclosure?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-02 Apply the three tests that are used to determine which operating segments are of significant size to warrant separate disclosure.

Coulanger Corp. identified four operating segments: A, B, C, and D. Segment A met the

A. option A B. option B C. option C D. option D E. option E

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analyze Difficulty: 1 Easy Learning Objective: 08-02 Apply the three tests that are used to determine which operating segments are of significant size to warrant separate disclosure.

Kaycee Corporation's revenues for the year ended December 31, 2012, were as follows: Consolidated Revenue per the Income Statement: $1,200,000 Upstream Intersegment Sales: $180,000 Downstream Intersegment Sales: $60,000 For purposes of the Revenue Test, what amount will be used as the benchmark for determining whether a segment is reportable?

A. $24,000. B. $120,000. C. $138,000. D. $144,000. E. $0. Consolidated Revenue $1,200,000 + Upstream I/E Sales $180,000 + Downstream I/E Sales $60,000 = $1,440,000 × 10% = $144,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 08-02 Apply the three tests that are used to determine which operating segments are of significant size to warrant separate disclosure.

Natarajan, Inc. had the following operating segments, with the indicated amounts of

segment revenues and segment expenses:

According to the revenue test, which segments would require disaggregation?

A. A, B, D, and E. B. A and B. C. B and C. D. A, B, and D. E. C, D, and E. (Total External Rev + Total I/E Sales) × 10% = Threshold for Segment Reporting

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analyze Difficulty: 2 Medium Learning Objective: 08-02 Apply the three tests that are used to determine which operating segments are of significant size to warrant separate disclosure.

Natarajan, Inc. had the following operating segments, with the indicated amounts of

segment revenues and segment expenses:

According to the profit or loss test, which segments would require disaggregation?

A. A, B, D, and E. B. A, B, C, and E. C. A, B, and D. D. A and D. E. A only.

Natarajan, Inc. had the following operating segments, with the indicated amounts of

segment revenues and segment expenses:

For purposes of the profit or loss test, segment C's operating profit or (loss) is

A. $1,300,000. B. $700,000. C. $2,000,000. D. $200,000. E. $(200,000.) External Rev $700,000 + I/E Sales $1,300,000 = Total Segment Sales $2,000,000 Segment Expenses $2,200,000 = $200,000 Segment Loss

Natarajan, Inc. had the following operating segments, with the indicated amounts of

segment revenues and segment expenses:

When totaling the revenues to use as the basis for the 75% rule, what is the 75% hurdle that must be exceeded by the revenues of the reportable segments?

A. $1,670,000. B. $12,525,000. C. $15,487,500. D. $16,700,000. E. $20,650,000. External Rev $16,700,000 × .75 = $12,525,000

When defining a reportable segment, which of the following conditions would be sufficient to allow a company to combine two operating segments for purposes of testing?

10.

The Fratilo Co. had three operating segments with the following information:

In addition, revenues generated at corporate headquarters are $1,400.

Combined segment revenues are calculated to be

A. $29,400. B. $25,200. C. $26,600. D. $28,000. E. $27,300. (Total External Rev $11,200 + $5,600 + $8,400) + (Total I/E Sales $840 + $1,400 + $1,960) = $29,400 Combined Segment Revenues

11.

The Fratilo Co. had three operating segments with the following information:

In addition, revenues generated at corporate headquarters are $1,400. What is the minimum amount of revenue that each of these segments must earn to be considered separately reportable?

A. $2,730. B. $2,660. C. $2,800. D. $2,940. E. $2,520. Combined Segment Revenues $29,400 × 10% = $2,940 Minimum Amount of Segment Revenue

12.

The Rivers Co. had four separate operating segments:

What amount of revenues must be generated from one customer before that party must be identified as a major customer?

A. $57,680. B. $64,960. C. $52,640. D. $78,960. E. $63,560. Total External Sales Revenue $172,200 + $113,400 + $133,000 + $107,800 = $526,400 × 10% = $52,640

13.

Which one of the following items must be disclosed for all reportable operating segments in the notes to financial statements? (I.) Revenue from external customers. (II.) Total Segment Assets (III.) Revenues from foreign customers, identified by country.

A. I, II, and III B. I and III only C. II and III only D. I and II only E. There is no requirement of information to disclose for operating segments.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-03 List the basic disclosure requirements for operating segments.

14.

Kurves Corp. had six different operating segments reporting the following operating profit and loss figures:

Which one of the following statements is true?

15.

Retro Corp. was engaged solely in manufacturing operations. The following data pertain to the operating segments for 2013:

What is the minimum amount of revenue that each of these segments must earn to be considered separately reportable?

A. $4,343,684. B. $4,826,316. C. $5,067,632. D. $4,585,000. E. $4,705,658. $45,850,000 × 10% = $4,585,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 08-02 Apply the three tests that are used to determine which operating segments are of significant size to warrant separate disclosure.

16.

Retro Corp. was engaged solely in manufacturing operations. The following data pertain to the operating segments for 2013:

What is the minimum amount of profit or loss that each of these segments must earn to be considered separately reportable?

A. $769,263. B. $812,000. C. $854,737. D. $897,000. E. $833,368. $8,120,000 × 10% = $812,000

17.

Retro Corp. was engaged solely in manufacturing operations. The following data pertain to the operating segments for 2013:

What is the minimum amount of assets that each of these segments must own to be considered separately reportable?

A. $9,450,000. B. $8,624,272. C. $10,643,000. D. $12,936,408. E. $10,413,000. $94,500,000 × 10% = $9,450,000

18.

Which of the following statements is true regarding the determination of operating segments in order to decide which segments will be separately reported?

19.

A company that generates reports by both geographic region and product line must consider additional criteria in identifying operating segments when there are multiple sets of reports. Which of the following statement(s) is correct? (I.) An operating segment has a segment manager who is directly accountable to the chief operating decision maker for its financial performance. (II.) If more than one set of organizational units exists, each organizational unit is considered an operating segment even if there is only one set for which segment managers are held responsible. (III.) If segment managers exist for two or more overlapping sets of organizational units, the nature of the business activities must be considered.

A. I, II, and III. B. I and III only. C. I and II only. D. II and III only. E. None of these.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 3 Hard Learning Objective: 08-01 Understand how an enterprise determines its operating segments and the factors that influence this determination. Learning Objective: 08-02 Apply the three tests that are used to determine which operating segments are of significant size to warrant separate disclosure.

20.

Which of the following is not one of the criteria management should consider in determining whether business activities and environments of an operating segment are similar?

21.

The hardware operating segment of Bloom Corporation has the following revenues for the year ended December 31, 2013:

For purposes of the revenue test, what amount will be used as total revenues of the hardware operating segment?

A. $417,000. B. $440,000. C. $424,000. D. $460,000. E. $480,000. $417,000 + $23,000 + $7,000 + $33,000 = $480,000

22.

Which of the following statements is false concerning the number of operating segments that should be disclosed?

23.

Whitley Corporation identified four operating segments: Automotive, Electrical, Lawn Equipment, and Sporting Goods. Automotive met the revenue test and the profit or loss test. Electrical met all three tests. Lawn Equipment met only the asset test. Sporting Goods did not meet any of the three tests. Which of these segments must be disclosed separately?

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

24.

Which one of the following items is not required to be disclosed for each operating segment?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-03 List the basic disclosure requirements for operating segments.

25.

The following items are required to be disclosed for each operating segment except:

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-03 List the basic disclosure requirements for operating segments.

26.

Dean Hardware, Inc. is comprised of five operating segments. Information about each of these segments is as follows (in thousands):

What is the total amount of revenues in applying the revenue test?

A. $794. B. $808. C. $892. D. $906. E. $934. Sales to Outsiders $794 + I/E Transfers $98 + Interest Rev Out $14 + Interest Rev In $28 = $934 Total Revenues for Test

27.

Dean Hardware, Inc. is comprised of five operating segments. Information about each of these segments is as follows (in thousands):

Which operating segments are reportable under the revenue test?

A. Pails and Hardware. B. Rakes, Pails, and Hardware. C. Rakes, Hardware, and Accessories. D. Rakes and Pails. E. Rakes and Hardware. $934,000 × 10% = $93,400

28.

Dean Hardware, Inc. is comprised of five operating segments. Information about each of these segments is as follows (in thousands):

In applying the profit or loss test, what is the minimum amount an operating segment must have in order to meet the profit or loss test for a reportable segment?

A. $8.2. B. $9.0 C. $10.4. D. $13.0. E. $82.0. Pails $82 + Shovels $12 + Hardware $34 + Acc. $2 = Total Profit $130 × 10% = $13 Threshold for Segment Profit/Loss

29.

Dean Hardware, Inc. is comprised of five operating segments. Information about each of these segments is as follows (in thousands):

Which operating segments are reportable under the profit or loss test?

A. Rakes, Pails, and Shovels. B. Rakes, Pails, Shovels, and Hardware. C. Rakes, Pails, and Hardware. D. Rakes, Pails, Shovels, Hardware, and Accessories. E. Pails and Hardware. Rakes' Loss is Excluded from Total Profitable Segments Calculation.

30.

Dean Hardware, Inc. is comprised of five operating segments. Information about each of these segments is as follows (in thousands):

In applying the asset test, what is the minimum amount an operating segment must have in order to meet the asset test for a reportable segment?

A. $12.5. B. $15.2. C. $17.2. D. $18.4. E. $19.8. Rakes $26 + Pails $122 + Shovels $16 + Hardware $20 + Acc. $14 = Total Assets $198 × 10% = $19.8 Minimum for Reporting

31.

Dean Hardware, Inc. is comprised of five operating segments. Information about each of these segments is as follows (in thousands):

Which operating segments are reportable under the asset test?

A. None. B. Pails. C. Rakes, Pails, and Shovels. D. Rakes and Hardware. E. Rakes, Pails, and Hardware. All Segments with Assets > $19.8.

32.

Schilling, Inc. has three operating segments with the following information:

What is the minimum amount of revenue an operating segment must have to be considered a reportable segment?

A. $12,000. B. $15,000. C. $15,500. D. $16,200. E. $16,700. External Rev ($40,000 + $50,000 + $60,000) + I/E Sales ($2,000 + $10,000) = $162,000 × 10% = $16,200

33.

Schilling, Inc. has three operating segments with the following information:

According to the revenues test, which segment(s) are separately reportable?

A. Silver only. B. Crystal and Silver. C. China and Crystal. D. China and Silver. E. China, Crystal, and Silver. All Segments with Revenues > $16,200.

34.

Peterson Corporation has three operating segments with the following information:

What is the minimum amount of revenue an operating segment must have to be considered a reportable segment?

A. $3,900. B. $4,000. C. $4,100. D. $4,200. E. $4,400. External Rev ($25,000 + $13,000 + $1,000) + I/E Sales ($1,000 + $2,000) = $42,000 × 10% = $4,200

35.

Peterson Corporation has three operating segments with the following information:

According to the revenues test, which segment(s) are separately reportable?

A. Mowers only. B. Mowers and Edgers. C. Mowers and Weedeaters. D. Edgers and Weedeaters. E. Mowers, Edgers, and Weedeaters. All Segments with Revenues > $4,200.

36.

Peterson Corporation has three operating segments with the following information:

What amount of revenues must be generated from one customer before that party must be identified as a major customer?

A. $3,900. B. $4,000. C. $4,100. D. $4,200. E. $4,400. External Rev Only ($25,000 + $13,000 + $1,000) = $39,000 × 10% = $3,900

37.

Elektronix, Inc. has three operating segments with the following information:

What is the minimum amount of revenue an operating segment must have to be considered a reportable segment?

A. $650,000. B. $660,000. C. $670,000. D. $680,000. E. $690,000. External Rev ($4,000,000 + $500,000 + $2,000,000) + I/E Transfers ($100,000) = $6,600,000 × 10% = $660,000

38.

Elektronix, Inc. has three operating segments with the following information:

What is the operating profit or loss for the VCRs segment?

A. $121,000 profit. B. $121,000 loss. C. $124,000 profit. D. $124,000 loss. E. $500,000 profit. VCR Segment Revenue $500,000 - VCR Segment Expenses $624,000 = ($124,000) Loss

39.

Elektronix, Inc. has three operating segments with the following information:

What is the minimum amount of operating profit or loss an operating segment must have to be considered a reportable segment?

A. $124,000. B. $127,600. C. $100,000. D. $130,000. E. $140,000. DVDs $1,000,000 + MP3s $400,000 = Total Profitable Segments $1,400,000 × 10% = $140,000 Threshold for Segment Profit/Loss Reporting

40.

Elektronix, Inc. has three operating segments with the following information:

What is the minimum amount of assets an operating segment must have to be considered a reportable segment?

A. $1,400,000. B. $2,500,000. C. $4,100,000. D. $5,000,000. E. $25,000,000. $14,000,000 + $6,000,000 + $5,000,000 = $25,000,000 × 10% = $2,500,000 Segment Assets

41.

Elektronix, Inc. has three operating segments with the following information:

Which operating segments are separately reportable under the revenues test?

A. DVDs only. B. DVDs and MP3s. C. DVDs and VCRs. D. VCRs and MP3s. E. DVDs, VCRs, and MP3s. All Segments with Revenues > $660,000.

42.

Elektronix, Inc. has three operating segments with the following information:

Which operating segments are separately reportable under the operating profit or loss test?

A. DVDs only. B. DVDs and MP3s. C. DVDs and VCRs. D. VCRs and MP3s. E. DVDs, VCRs, and MP3s. All Segments with Profits/Losses > $140,000 Threshold for Segment Profit/Loss Reporting.

43.

Elektronix, Inc. has three operating segments with the following information:

Which operating segments are separately reportable under the assets test?

A. DVDs only. B. DVDs and MP3s. C. DVDs and VCRs. D. VCRs and MP3s. E. DVDs, VCRs, and MP3s. All Segments with Assets > $2,500,000 Segment Assets.

44.

Which of the segments are separately reportable?

A. DVDs only. B. DVDs and MP3s. C. DVDs and VCRs. D. VCRs and MP3s. E. DVDs, VCRs, and MP3s.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 08-02 Apply the three tests that are used to determine which operating segments are of significant size to warrant separate disclosure.

45.

Which of the following statements is true according to U.S. GAAP regarding segment or enterprise-wide disclosure?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium

Learning Objective: 08-03 List the basic disclosure requirements for operating segments.

46.

Which of the following is a criterion for determining whether an operating segment is separately reportable?

47.

Which of the following operating segment disclosures is not required by U.S. GAAP?

A. Interest expense. B. Intersegment sales. C. Extraordinary items. D. Discontinued operations. E. Liabilities.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 08-03 List the basic disclosure requirements for operating segments. 8-109 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

48.

Vapor Corporation has a fan products operating segment. Which of the following items does Vapor not have to report for this segment?

A. Depreciation expense. B. Amortization expense. C. Research and development expense. D. Interest expense. E. Interest income.

49.

Which of the following must be disclosed by a geographic segment according to U.S. GAAP?

A. Operating profit or loss. B. Gross profit. C. Total assets. D. Revenues from external customers. E. Revenues from internal customers.

50.

Which of the following is not true for an operating segment according to U.S. GAAP?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-01 Understand how an enterprise determines its operating segments and the factors that influence this determination.

51.

Which of the following statements is true?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation

Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-02 Apply the three tests that are used to determine which operating segments are of significant size to warrant separate disclosure.

52.

According to U.S. GAAP, which of the following would be an acceptable grouping by a U.S. company for presentation of information by geographic area?

53.

Which of the following would be an acceptable grouping for a U.S. company to provide information by geographic area?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 08-04 Determine when and what types of information must be disclosed for geographic areas.

54.

What information does U.S. GAAP require to be disclosed for a major customer?

55.

How should revenues be recognized in interim periods?

A. In the same way as they are recognized on an annual basis. B. On the cash basis. C. On an annualized basis. D. On a seasonal basis. E. There are no revenues recognized in interim periods.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy

Learning Objective: 08-07 Understand and apply procedures used in interim reports to treat an interim period as an integral part of the annual period.

56.

Which of the following is not correct regarding inventory procedures reported in an interim financial statement?

57.

Cement Company, Inc. began the first quarter with 1,000 units of inventory costing $25 per unit. During the first quarter, 3,000 units were purchased at a cost of $40 per unit, and sales of 3,400 units at $65 per units were made. During the second quarter, the company expects to replace the units of beginning inventory sold at a cost of $45 per unit. Cement Company uses the LIFO method to account for inventory. What is the correct journal entry to record cost of goods sold at the end of the first quarter?

A. Option A B. Option B C. Option C D. Option D E. Option E 3000 × $40 + 400 × $45 = $138,000 COGS

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 08-07 Understand and apply procedures used in interim reports to treat an interim period as an integral part of the annual period.

58.

Cement Company, Inc. began the first quarter with 1,000 units of inventory costing $25 per unit. During the first quarter, 3,000 units were purchased at a cost of $40 per unit, and sales of 3,400 units at $65 per units were made. During the second quarter, the company expects to replace the units of beginning inventory sold at a cost of $45 per unit. Cement Company uses the LIFO method to account for inventory. The amount of gross profit for the first quarter is:

A. $83,000 B. $87,000 C. $90,000 D. $221,000 E. $250,000 Rev (3,400 × $65) $221,000 - COGS (3000 × $40 + 400 × $45) $138,000 = $83,000 Gross Profit

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 08-07 Understand and apply procedures used in interim reports to treat an interim period as an integral part of the annual period.

59.

Betsy Kirkland, Inc. incurred a flood loss during the first quarter of 2013 that is deemed both unusual and infrequent. The loss is considered immaterial to the twelve-month period, but is material in amount relative to the first quarter. The proper accounting treatment in the first quarter interim statement is to:

60.

How should a change from one generally accepted accounting principle to another accepted principle be handled in a third-quarter income statement?

61.

Which of the following is not a required disclosure in an interim financial report?

A. Sales or gross revenues. B. Provision for income taxes. C. Extraordinary items. D. Gains on sales of major equipment. E. Earnings per share.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium

Learning Objective: 08-08 List the minimum disclosure requirements for interim financial reports

62.

Which of the following is not a required disclosure in an interim financial report?

A. Net income. B. Earnings per share. C. Gross profit. D. Significant changes in estimates or provisions for income taxes. E. Disposal of a segment, net of income taxes.

63.

Which of the following items of information are required to be included in interim reports for each operating segment? (I.) Revenues from external customers (II.) Segment profit or loss (III.) Reconciliation of segment profit or loss to the enterprise's total income before taxes (IV.) Intersegment revenues

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

AACSB: Reflective thinking AICPA BB: Critical Thinking 8-119 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 08-08 List the minimum disclosure requirements for interim financial reports

64.

How are extraordinary gains reported in a third quarter interim financial report?

A. Recognized at year-end only. B. Recognized in the first quarter. C. Recognized ratably over the first three quarters. D. Recognized in the third quarter. E. Ignored.

65.

What are the two approaches that can be followed in preparing interim reports?

A. Indiscrete and terminal. B. Discrete and terminal. C. Metric and integral. D. Discrete and integral. E. Discrete and metric.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation

Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-07 Understand and apply procedures used in interim reports to treat an interim period as an integral part of the annual period.

66.

Which of the following is reported for interim financial reports using the discrete approach?

A. Income tax expense. B. Seasonal items. C. Change in accounting principle. D. Property tax expense. E. Extraordinary gains.

67.

Which of the following is reported for interim financial reports using the integral approach?

A. Bonus expense. B. Extraordinary losses. C. Cash basis accounting. D. Extraordinary gains. E. Change in accounting principle.

AACSB: Reflective thinking AICPA BB: Critical Thinking

AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 08-07 Understand and apply procedures used in interim reports to treat an interim period as an integral part of the annual period.

68.

How should seasonal revenues be reported in an interim financial statement?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 08-07 Understand and apply procedures used in interim reports to treat an interim period as an integral part of the annual period. Learning Objective: 08-08 List the minimum disclosure requirements for interim financial reports

69.

Which of the following are required to be disclosed in interim reports?

A. Cash flows from investing activities. B. Change in cash. C. Total current liabilities. D. Total assets. E. Gross revenues.

70.

All of the following are required to be reported in interim financial statements for a material operating segment except:

A. Segment assets. B. Segment revenues from external customers. C. Intersegment revenues. D. Segment profit or loss. E. Reconciliation of segment profit or loss to total income before taxes.

71.

What is the appropriate treatment in an interim financial report for inventory that has market value below cost?

72.

What is the appropriate treatment in an interim financial report for inventory that has cost below market value?

73.

What is the appropriate treatment in an interim financial report for a LIFO liquidation?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-07 Understand and apply procedures used in interim reports to treat an interim period as an integral part of the annual period.

74.

Which of the following statements is true regarding the reporting of revenues in an interim report?

AACSB: Reflective thinking

AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-07 Understand and apply procedures used in interim reports to treat an interim period as an integral part of the annual period.

75.

What is the appropriate treatment in an interim financial report for variances arising from the use of a standard costing system?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-07 Understand and apply procedures used in interim reports to treat an interim period as an integral part of the annual period.

76.

Which of the following costs require similar treatment to Property Tax Expense in an interim financial report? 1) Annual major repairs. 2) Advertising expense. 3) Bonus expense, if estimable. 4) Quantity discounts based on annual sales.

A. 1 and 2 B. 1, 2, and 3 C. 1, 2, and 4 D. 2, 3, and 4 E. 1, 2, 3, and 4

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 08-07 Understand and apply procedures used in interim reports to treat an interim period as an integral part of the annual period.

77.

How should contingencies be reported in an interim report?

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement 8-128 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-08 List the minimum disclosure requirements for interim financial reports

78.

Provo, Inc. has an estimated annual tax rate of 35 percent in the first quarter of 2013. Pretax income for the first quarter was $300,000. At the end of the second quarter of 2013, Provo expects the annual tax rate to be 32 percent because of anticipated tax credits. Pretax income for the second quarter was $350,000. Assume no items in either quarter requiring the net-of-tax presentation. How much income tax expense is recognized in the first quarter of 2013?

A. $0. B. $26,250. C. $96,000. D. $105,000. E. $112,000. 1st Qtr Income $300,000 × .35 = $105,000 1st Qtr Tax Expense Reported

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 08-07 Understand and apply procedures used in interim reports to treat an interim period as an integral part of the annual period.

79.

A. $103,000. B. $104,000. C. $112,000. D. $122,500. E. $208,000. 2nd Qtr Income $350,000 × .32 = $112,000 - 1st Qtr Adjustment ($300,000 × .03) $9,000 = $103,000 2nd Qtr Tax Expense Reported

80.

Baker Corporation changed from the LIFO method to the FIFO method for inventory valuation during 2013. Baker has an effective income tax rate of 30 percent and 100,000 shares of common stock issued and outstanding. The following additional information is available:

Assuming Baker makes the change in the first quarter of 2013, how much is reported as net income for the first quarter of 2013?

A. $492,000. B. $494,800. C. $500,000. D. $505,200. E. $527,950. 1st Qtr 2013 Income $500,000 + Accounting Change Effect (net of tax) $5,200 = $505,200 1st Qtr 2013 Net Income

81.

Assuming Baker makes the change in the first quarter of 2013, compute net income per common share.

A. $4.92. B. $4.95. C. $5.00. D. $5.05. E. $5.28. $505,200 1st Qtr Income/Common Stock Shares Outstanding 100,000 = $5.05 EPS

82.

Assuming Baker makes the change in the first quarter of 2012, how much is reported as net income for the first quarter of 2012?

A. $300,000. B. $322,750. C. $335,000. D. $265,000. E. $277,250. 1st Qtr 2012 Income $300,000 + Accounting Change Effect (net of tax) $22,750 = $322,750 1st Qtr 2012 Net Income

83.

Assuming Baker makes the change in the first quarter of 2013 and that $400,000 net income is earned during the second quarter, how much is reported as net income for the second quarter of 2013?

A. $400,000. B. $405,200. C. $427,950. D. $894,850. E. $905,200. No Effects of the 1st Qtr Change is Recorded in the 2nd Qtr - $400,000

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 08-07 Understand and apply procedures used in interim reports to treat an interim period as an integral part of the annual period.

84.

For companies that provide quarterly reports, how is the fourth quarter reported?

A. Every company that reports for the first three quarters must also publish a fourthquarter report. B. No fourth-quarter report is required. C. No company may publish a fourth-quarter report. D. The SEC requires selected quarterly financial data to be reported separately as a fourth-quarter report. E. When fourth-quarter financial statements are provided, special accounting items should be disclosed in the annual financial statements.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-08 List the minimum disclosure requirements for interim financial reports

85.

According to International Financial Reporting Standards (IFRS), all of the following are part of minimum components of interim financial reporting except:

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium

Learning Objective: 08-09 Recognize differences between U.S. GAAP and IRFS in interim reporting

86.

Which of the following is false with regard to accounting standards for segment reporting according to International Financial Reporting Standards (IFRS) and U.S. GAAP?

Essay Questions

87.

What is the major objective of segment reporting?

According to U.S. GAAP, the objective of segment reporting is to provide information to help users of financial statements: (a.) better understand the enterprise's performance, (b.) better assess its prospects for future net cash flows, and (c.) make more informed judgments about the enterprise as a whole.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 08-01 Understand how an enterprise determines its operating segments and the factors that influence this determination.

88.

What is meant by the term: disaggregated financial information?

Disaggregated financial information is the data of a reporting unit that has been broken down into components so that the separate parts can be identified and studied.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 08-01 Understand how an enterprise determines its operating segments and the factors that influence this determination.

89.

Why are quarterly financial statements required to be published for publicly traded companies in the U.S.?

Publicly traded U.S. companies must publish quarterly reports to provide investors and creditors with relevant information on a timelier basis than is provided by an annual report.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 08-07 Understand and apply procedures used in interim reports to treat an interim period as an integral part of the annual period.

90.

How does a company measure income tax expense to be reported in an interim period?

Income tax expense related to interim period income is determined by estimating the effective tax rate for the entire year. That rate is then applied to the cumulative pre-tax income earned to date to determine the cumulative income tax to be recognized to date. The amount of income tax recognized in the current interim period is the difference between the cumulative income tax to be recognized to date and the income tax recognized in prior interim periods.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 08-07 Understand and apply procedures used in interim reports to treat an interim period as an integral part of the annual period.

91.

What two disclosure guidelines for operating segment information are designed to ensure the consistency of data reported from year to year?

1) If an operating segment does not pass a test for current segment disclosure but was a reportable segment in the past year(s) included in the current comparative report and management deems it as having continued significance, then that segment should be disclosed currently to be comparative to prior periods. 2) If an operating segment is to be disclosed in a current year and was not separately disclosed in prior comparative years, then prior years must be restated to show that segment comparatively with the current year.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 08-02 Apply the three tests that are used to determine which operating segments are of significant size to warrant separate disclosure.

92.

Describe the test to determine whether a sufficient number of operating segments are disclosed.

For operating segments deemed reportable by having passed a 10% threshold test of revenues, operating profit or loss, and assets, the total sales revenues to unaffiliated customers are summed. If this sum is less than 75% of total sales to outsiders, then there is not a sufficient number of operating segments disclosed and there should be additional segment disclosure.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement

Blooms: Remember Difficulty: 2 Medium Learning Objective: 08-02 Apply the three tests that are used to determine which operating segments are of significant size to warrant separate disclosure.

93.

What approach is used, according to U.S. GAAP, for determination of how a business is divided into segments?

The management approach for segment determination is used.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-01 Understand how an enterprise determines its operating segments and the factors that influence this determination.

94.

According to U.S. GAAP, what general information about an operating segment needs to be disclosed?

The general information about an operating segment that needs to be disclosed per U.S. GAAP includes: (1.) Factors used to identify operating segments. (2.) Types of products and services from which each operating segment derives its revenues.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy 8-140 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective: 08-03 List the basic disclosure requirements for operating segments.

95.

According to U.S. GAAP, how should common costs be allocated to individual segments to determine segment profit or loss?

U.S. GAAP does not require common costs to be allocated to individual segments to determine segment profit or loss if this is not done for internal purposes. Any allocations that are made must be done on a reasonable basis.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 08-02 Apply the three tests that are used to determine which operating segments are of significant size to warrant separate disclosure.

96.

List the five aggregation criteria that need to be considered by management in determining whether business activities and environments are similar.

The five aggregation criteria are: (1.) The nature of the products and services provided by each operating segment. (2.) The nature of the production process. (3.) The type or class of customer. (4.) The distribution methods. (5.) If applicable, the nature of the regulatory environment.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember

Difficulty: 2 Medium Learning Objective: 08-02 Apply the three tests that are used to determine which operating segments are of significant size to warrant separate disclosure.

97.

What is the purpose of the U.S. GAAP seventy-five percent requirement for industry segment disclosure?

A substantial portion of the company's operations should be presented in disaggregated form. The seventy-five percent requirement is the GAAP guideline in making sure companies report information about enough segments.

98.

According to U.S. GAAP, what revenues and expenses included in segment profit or loss need to be disclosed?

The revenues and expenses included in segment profit or loss that need to be disclosed include: (1.) Revenues from external customers. (2.) Revenues from transactions with other operating segments. (3.) Interest revenue and interest expense (reported separately); net interest revenue may be reported for finance segments if this measure is used internally for evaluation. (4.) Depreciation, depletion, and amortization expense. (5.) Other significant noncash items included in segment profit or loss. (6.) Unusual items (discontinued operations and extraordinary items). (7.) Income tax expense or benefit.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 08-03 List the basic disclosure requirements for operating segments.

99.

What related items need to be disclosed in regard to total segment assets?

The related items in regard to total segment assets that need to be disclosed include: (1.) Investment in equity method affiliates. (2.) Expenditures for additions to long-lived assets.

AACSB: Reflective thinking AICPA BB: Critical Thinking

AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 08-03 List the basic disclosure requirements for operating segments.

100.

Which items of information are required to be included in interim reports for each operating segment?

The items of information that are required to be included in interim reports for each operating segment are: (1.) Revenues from external customers. (2.) Intersegment revenues. (3.) Segment profit or loss. (4.) Total assets, if there has been a material change from the last annual report.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 08-08 List the minimum disclosure requirements for interim financial reports

101.

Which two items of information must be reported for (1) the domestic country, (2) all foreign countries in which the enterprise derives revenues or holds assets, and (3) each foreign country in which a material amount of revenues is earned?

The two items of information are: (1.) Revenues from external customers. (2.) Long-lived assets.

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 08-04 Determine when and what types of information must be disclosed for geographic areas.

Short Answer Questions

102.

Burnside Corp. is organized into four operating segments. The following segment information was generated by the internal reporting system in 2013:

Required: 1) What was the profit or loss of each of these segments? 2) Prepare the profit or loss test to determine which of these segments was separately reportable.

Requirements (1) and (2)

Any segment with an absolute amount of profit or loss greater than or equal to $109,200 ($1,092,000 × 10%) is separately reportable. Based on this test, each of the four segments must be reported separately.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 08-02 Apply the three tests that are used to determine which operating segments are of significant size to warrant separate disclosure. 8-146 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

103.

Faru Co. identified five industry segments: (1) plastics, (2) metals, (3) lumber, (4) paper, and (5) finance. Each of these segments had been consolidated appropriately by the company in producing its annual financial statements. Information describing each segment is presented below (in thousands).

Prepare the revenue test and determine which of these segments was separately reportable.

Revenues include sales to outside parties, intersegment revenues transfers, and interest income.

Reportable segment = at least $1,333.5 (in thousands) of revenues.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Apply

Difficulty: 2 Medium Learning Objective: 08-02 Apply the three tests that are used to determine which operating segments are of significant size to warrant separate disclosure.

104.

Prepare the profit or loss test and determine which of these segments was separately reportable.

Revenues include sales to outside parties, intersegment revenues transfers, and interest income. Expenses include operating expenses and interest expense.

Reportable = at least $436.6 (in thousands) of profit or loss.

AACSB: Analytic

AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analyze Difficulty: 2 Medium Learning Objective: 08-02 Apply the three tests that are used to determine which operating segments are of significant size to warrant separate disclosure.

105.

Prepare the asset test and determine which of these segments was separately reportable.

Assets include tangible assets and intangible assets.

Reportable = at least $832. (in thousands) of assets

AACSB: Analytic AICPA BB: Critical Thinking

AICPA FN: Measurement Blooms: Analyze Difficulty: 2 Medium Learning Objective: 08-02 Apply the three tests that are used to determine which operating segments are of significant size to warrant separate disclosure.

106.

Blanton Corporation is comprised of five operating segments. Information about each of these segments is as follows (in thousands):

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analyze

Difficulty: 2 Medium Learning Objective: 08-02 Apply the three tests that are used to determine which operating segments are of significant size to warrant separate disclosure.

107.

On February 23, 2013, Cleveland, Inc. paid property taxes of $300,000 for the calendar year 2013. How much of this expense should be included in Cleveland's net income for the quarter ending March 31, 2013?

$75,000 [$300,000/4].

108.

On February 23, 2013, Cleveland, Inc. paid property taxes of $300,000 for the calendar year 2013. Prepare the journal entry for the payment of property taxes on February 23, 2013.

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analyze

Difficulty: 2 Medium Learning Objective: 08-07 Understand and apply procedures used in interim reports to treat an interim period as an integral part of the annual period.

109.

Gregor Inc. uses the LIFO cost-flow assumption to value inventory. Inventory for Gregor on January 1, 2013 was 100 units at a LIFO cost of $25 per unit. During the first quarter of 2013, 200 units were purchased costing an average of $40 per unit, and sales of 265 units at a retail price of $50 per unit were made. Assuming Gregor does not expect to replace the units of beginning inventory sold, what is the amount of cost of goods sold for the quarter ended March 31, 2013?

$9,625 [(200 × $40) + (65 × $25)].

110.

Gregor Inc. uses the LIFO cost-flow assumption to value inventory. Inventory for Gregor on January 1, 2013 was 100 units at a LIFO cost of $25 per unit. During the first quarter of 2013, 200 units were purchased costing an average of $40 per unit, and sales of 265 units at a retail price of $50 per unit were made. Assuming Gregor expects to replace the units of beginning inventory sold before the yearend at a cost of $41, what is the amount of cost of goods sold for the quarter ended March 31, 2013?

$10,665 [(200 × $40) + (65 × $41)].

111.

Harrison Company, Inc. began operations on January 1, 2012, and applied the LIFO method for inventory valuation. On June 10, 2013, Harrison adopted the FIFO method of accounting for inventory. Additional information is as follows:

112.

The LIFO method was applied during the first quarter of 2013 and the FIFO method was applied during the second quarter of 2013 in computing income, above. Harrison's effective income tax rate is 40 percent. Harrison has 500,000 shares of common stock outstanding at all times. Prepare a schedule showing the calculation of net income and earnings per share to be reported by Harrison for the three-month period and the six-month period ended June 30, 2012 and 2013.

Net Income and Earnings per Share for 2nd Quarter 2013:

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement

Blooms: Apply Difficulty: 3 Hard Learning Objective: 08-07 Understand and apply procedures used in interim reports to treat an interim period as an integral part of the annual period.

113.

The following information for Urbanski Corporation relates to the three months ending June 30, 2013:

Determination of Cost-of-Goods-Sold and Gross Profit

114.

The following information for Urbanski Corporation relates to the three months ending June 30, 2013:

Urbanski uses the LIFO method to account for inventory, and expects at least 15,000 units to be on hand in the ending inventory at year-end. Purchases made in the last six months are expected to cost an average of $18 per unit. Prepare the journal entries to reflect the sales and cost of goods sold, assuming Urbanski expects to maintain 11,000 units in inventory at year-end.

Journal Entries to Record Sales and Cost-of-Goods-Sold

Excess of replacement cost over historical cost for beginning inventory liquidated: [($18 - $10) × 5,000 units]

AACSB: Analytic AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Analyze Difficulty: 2 Medium Learning Objective: 08-07 Understand and apply procedures used in interim reports to treat an interim period as an integral part of the annual period.

115.

The following information for Urbanski Corporation relates to the three months ending June 30, 2013:

Urbanski uses the LIFO method to account for inventory, and expects at least 15,000 units to be on hand in the ending inventory at year-end. Purchases made in the last six months are expected to cost an average of $18 per unit. Prepare the journal entries to reflect the sales and cost of goods sold, assuming Urbanski does not expect to replace the liquidated inventory at year-end.

Journal Entries to Record Sales and Cost-of-Goods-Sold

116.

For each of the following situations, select the best answer concerning segment disclosures of reportable segments. (A.) Required to be disclosed by an operating segment, but not a geographical segment. (B.) Required to be disclosed by a geographical segment, but not an operating segment. (C.) Required to be disclosed by both an operating segment and a geographical segment. (D.) Not required to be disclosed by either an operating segment or a geographical segment. ___ 1. Factors used to identify segments. ___ 2. Revenues from external customers. ___ 3. Types of products and services from which each segment derives its revenues. ___ 4. Names of major customers. ___ 5. Revenues from transactions with other segments. ___ 6. Interest revenue. ___ 7. Long-lived assets. ___ 8. Discontinued operations and extraordinary items, when applicable. ___ 9. Income tax expense or benefit. ___ 10. Revenues for the domestic country. ___ 11. Cash flow information

(1) A; (2) C; (3) A; (4) D; (5) A; (6) A; (7) C; (8) A; (9) A; (10) B; (11) D

AACSB: Reflective thinking AICPA BB: Critical Thinking AICPA FN: Measurement Blooms: Understand Difficulty: 3 Hard Learning Objective: 08-03 List the basic disclosure requirements for operating segments. Learning Objective: 08-04 Determine when and what types of information must be disclosed for geographic areas.

Chapter 09 Foreign Currency Transactions and Hedging Foreign Exchange Risk

Multiple Choice Questions

1. Pigskin Co., a U.S. corporation, sold inventory on credit to a British company on April 8, 2013. Pigskin received payment of 35,000 British pounds on May 8, 2013. The exchange rate was £1 = $1.54 on April 8 and £1 = 1.43 on May 8. What amount of foreign exchange gain or loss should be recognized? (round to the nearest dollar)

A. $10,500 loss B. $10,500 gain C. $1,750 loss D. $3,850 loss E. No gain or loss should be recognized.

2. Norton Co., a U.S. corporation, sold inventory on December 1, 2013, with payment of 10,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows:

For what amount should Sales be credited on December 1?

A. $5,500. B. $16,949. C. $18,182. D. $17,241. E. $16,667.

3. Norton Co., a U.S. corporation, sold inventory on December 1, 2013, with payment of 10,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows:

What amount of foreign exchange gain or loss should be recorded on December 31?

A. $300 gain. B. $300 loss. C. $0. D. $941 loss. E. $941 gain.

4. Norton Co., a U.S. corporation, sold inventory on December 1, 2013, with payment of 10,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows:

What amount of foreign exchange gain or loss should be recorded on January 30?

A. $1,516 gain. B. $1,516 loss. C. $575 loss. D. $500 loss. E. $500 gain.

5. Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May 8. Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is Brisco's fiscal year-end. The pertinent exchange rates were as follows:

For what amount should Brisco's Accounts Payable be credited on May 8?

A. $2,500,000. B. $2,440,000. C. $1,600,000. D. $1,639,344. E. $1,666,667.

6. Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May 8. Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is Brisco's fiscal year-end. The pertinent exchange rates were as follows:

How much Foreign Exchange Gain or Loss should Brisco record on May 31?

A. $2,520,000 gain. B. $20,000 gain. C. $20,000 loss. D. $80,000 gain. E. $80,000 loss.

7. Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May 8. Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is Brisco's fiscal year-end. The pertinent exchange rates were as follows:

How much U.S. $ will it cost Brisco to finally pay the payable on June 7?

A. $1,666,667. B. $2,440,000. C. $2,520,000. D. $2,500,000. E. $2,400,000.

8. On June 1, CamCo received a signed agreement to sell inventory for ¥500,000. The sale would take place in 90 days. CamCo immediately signed a 90-day forward contract to sell the yen as soon as they are received. The spot rate on June 1 was ¥1 = $.004167, and the 90-day forward rate was ¥1 = $.00427. At what amount would CamCo record the Forward Contract on June 1?

A. $2,083. B. $0. C. $2,110. D. $2,532. E. $2,135.

9. Belsen purchased inventory on December 1, 2012. Payment of 200,000 stickles was to be made in sixty days. Also on December 1, Belsen signed a contract to purchase §200,000 in sixty days. The spot rate was §1 = .35714, and the 60-day forward rate was §1 = $.38462. On December 31, the spot rate was §1 = .34483 and the 30-day forward rate was §1 = .38168. Assume an annual interest rate of 12% and a fair value hedge. The present value for one month at 12% is .9901. In the journal entry to record the establishment of a forward exchange contract, at what amount should the Forward Contract account be recorded on December 1?

A. $71,428. B. $76,924. C. $588. D. $582. E. $0, since there is no cost, there is no value for the contract at this date.

10. Meisner Co. ordered parts costing §100,000 for a foreign supplier on May 12 when the spot rate was $.24 per stickle. A one-month forward contract was signed on that date to purchase §100,000 at a forward rate of $.25 per stickle. On June 12, when the parts were received and payment was made, the spot rate was $.28 per stickle. At what amount should inventory be reported?

A. $0. B. $28,000. C. $24,000. D. $25,000. E. $2,000.

11. Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied:

Assuming a forward contract was not entered into, what would be the net impact on Car Corp.'s 2013 income statement related to this transaction?

A. $500 (gain). B. $500 (loss). C. $200 (gain). D. $200 (loss). E. $- 0 -

12. Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied:

Assuming a forward contract was entered into, the foreign currency was originally sold in the foreign currency market on December 16, 2013 at a

A. forward contract discount $600. B. forward contract premium $600. C. forward contract discount $980. D. forward discount premium $980. E. There is no premium or discount because the fair value of the contract is zero.

13. Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied:

Assuming a forward contract was entered into, at what amount should the forward contract be recorded at December 31, 2013? Assume an annual interest rate of 12% and a fair value hedge. The present value for one month at 12% is .9901.

A. $200. B. $295. C. $495. D. $500. E. $9,300.

14. Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied:

Assuming a forward contract was entered into, how would the forward contract be reflected on Car's December 31, 2013 balance sheet?

A. Forward contract (asset). B. Forward contract (liability). C. Foreign currency (asset). D. Foreign currency (liability). E. Foreign exchange (liability).

15. Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied:

Assuming a forward contract was entered into, what would be the net impact on Car Corp.'s 2013 income statement related to this transaction? Assume an annual interest rate of 12% and a fair value hedge. The present value for one month at 12% is .9901.

A. $700 (gain). B. $700 (loss). C. $300 (gain). D. $300 (loss). E. $297 (gain).

16. Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied:

Assuming a forward contract was entered into on December 16, what would be the net impact on Car Corp.'s 2014 income statement related to this transaction?

A. $500 (gain). B. $303 (gain). C. $300 (gain). D. $300 (loss). E. $0.

17. Mills Inc. had a receivable from a foreign customer that is due in the local currency of the customer (stickles). On December 31, 2012, this receivable for §200,000 was correctly included in Mills' balance sheet at $132,000. When the receivable was collected on February 15, 2013, the U.S. dollar equivalent was $144,000. In Mills' 2013 consolidated income statement, how much should have been reported as a foreign exchange gain?

A. $0. B. $36,000. C. $48,000. D. $10,000. E. $12,000.

18. A spot rate may be defined as

A. The price a foreign currency can be purchased or sold today. B. The price today at which a foreign currency can be purchased or sold in the future. C. The forecasted future value of a foreign currency. D. The U.S. dollar value of a foreign currency. E. The Euro value of a foreign currency.

19. The forward rate may be defined as

20. Which statement is true regarding a foreign currency option?

A. A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future. B. A foreign currency option gives the holder the obligation only sell foreign currency in the future. C. A foreign currency option gives the holder the obligation to only buy foreign currency in the future. D. A foreign currency option gives the holder the right but not the obligation to buy or sell foreign currency in the future. E. A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future at the spot rate on the future date.

21. A U.S. company sells merchandise to a foreign company denominated in U.S. dollars. Which of the following statements is true?

A. If the foreign currency appreciates, a foreign exchange gain will result. B. If the foreign currency depreciates, a foreign exchange gain will result. C. No foreign exchange gain or loss will result. D. If the foreign currency appreciates, a foreign exchange loss will result. E. If the foreign currency depreciates, a foreign exchange loss will result.

22. A U.S. company sells merchandise to a foreign company denominated in the foreign currency. Which of the following statements is true?

A. If the foreign currency appreciates, a foreign exchange gain will result. B. If the foreign currency depreciates, a foreign exchange gain will result. C. No foreign exchange gain or loss will result. D. If the foreign currency appreciates, a foreign exchange loss will result. E. Any gain or loss will be included in comprehensive income.

23. A U.S. company buys merchandise from a foreign company denominated in U.S. dollars. Which of the following statements is true?

A. If the foreign currency appreciates, a foreign exchange gain will result. B. If the foreign currency depreciates, a foreign exchange gain will result. C. No foreign exchange gain or loss will result. D. If the foreign currency appreciates, a foreign exchange loss will result. E. Any gain or loss will be included in comprehensive income.

24. A U.S. company buys merchandise from a foreign company denominated in the foreign currency. Which of the following statements is true?

A. If the foreign currency appreciates, a foreign exchange gain will result. B. If the foreign currency depreciates, a foreign exchange loss will result. C. No foreign exchange gain or loss will result. D. If the foreign currency appreciates, a foreign exchange loss will result. E. Any gain or loss will be included in comprehensive income.

25. U.S. GAAP provides guidance for hedges of all the following sources of foreign exchange risk except

A. Recognized foreign currency denominated assets and liabilities. B. Unrecognized foreign currency firm commitments. C. Forecasted foreign currency denominated transactions. D. Net investment in foreign operations. E. Deferred foreign currency gains and losses.

26. All of the following data may be needed to determine the fair value of a forward contract at any point in time except

A. The forward rate when the forward contract was entered into. B. The current forward rate for a contract that matures on the same date as the forward contract entered into. C. The future spot rate. D. A discount rate. E. The company's incremental borrowing rate.

27. A forward contract may be used for which of the following? 1) A fair value hedge of an asset. 2) A cash flow hedge of an asset. 3) A fair value hedge of a liability. 4) A cash flow hedge of a liability.

A. 1 and 3 B. 2 and 4 C. 1 and 2 D. 1, 3, and 4 E. 1, 2, 3, and 4

28. A company has a discount on a forward contract for a foreign currency denominated asset. How is the discount recognized over the life of the contract under fair value hedge accounting?

A. As a debit to discount expense. B. As a debit to amortization expense. C. As a debit to accumulated other comprehensive income. D. As a debit impact on net income, as a result of the hedge. E. As a decreases to sales.

29. Which of the following statements is true concerning hedge accounting?

A. Hedges of foreign currency firm commitments are used for future sales only. B. Hedges of foreign currency firm commitments are used for future purchases only. C. Hedges of foreign currency firm commitments are used for current sales or purchases. D. Hedges of foreign currency firm commitments are used for future sales or purchases. E. Hedges of foreign currency firm commitments are speculative in nature.

30. All of the following hedges are used for future purchase/sale transactions except

A. Forward contracts used as a fair value hedge of a firm commitment. B. Options used as a fair value hedge of a firm commitment. C. Option contract cash flow hedge of a forecasted transaction. D. Forward contract cash flow hedges of a forecasted transaction. E. Forward contracts used to hedge a foreign currency denominated liability.

31. On December 1, 2013, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February 1, 2014. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2013. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow:

Compute the fair value of the foreign currency option at December 1, 2013.

A. $6,000. B. $4,500. C. $3,000. D. $7,500. E. $1,500.

32. On December 1, 2013, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February 1, 2014. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2013. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow:

Compute the fair value of the foreign currency option at December 31, 2013.

A. $6,000. B. $4,500. C. $3,000. D. $7,500. E. $1,500.

33. On December 1, 2013, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February 1, 2014. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2013. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow:

Compute the fair value of the foreign currency option at February 1, 2014.

A. $6,000. B. $4,500. C. $3,000. D. $7,500. E. $1,500.

34. On December 1, 2013, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February 1, 2014. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2013. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow:

Compute the U.S. dollars received on February 1, 2014.

A. $138,000. B. $136,500. C. $145,500. D. $141,000. E. $142,500.

35. Which of the following approaches is used in the United States in accounting for foreign currency transactions?

A. One-transaction perspective; defer foreign exchange gains and losses. B. Two-transaction perspective; accrue foreign exchange gains and losses. C. Three-transaction perspective; defer foreign exchange gains and losses. D. One-transaction perspective; accrue foreign exchange gains and losses. E. Two-transaction perspective; defer foreign exchange gains and losses.

36. When a U.S. company purchases parts from a foreign company, which of the following will result in zero foreign exchange gain or loss?

A. The transaction is denominated in U.S. dollars. B. The option strike price to sell foreign currency is less than the spot rate of the currency. C. The option strike price to buy foreign currency is less than the spot rate of the currency. D. The foreign currency appreciated in value relative to the U.S. dollar. E. The foreign currency depreciated in value relative to the U.S. dollar.

37. Alpha Inc., a U.S. company, had a receivable from a customer that was denominated in Mexican pesos. On December 31, 2012, this receivable for 75,000 pesos was correctly included in Alpha's balance sheet at $8,000. The receivable was collected on March 2, 2013, when the U.S. equivalent was $6,900. How much foreign exchange gain or loss will Alpha record on the income statement for the year ended December 31, 2013?

A. $1,100 loss. B. $1,100 gain. C. $6,900 loss. D. $6,900 gain. E. $8,000 gain.

38. On April 1, 2012, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2013. The dollar value of the loan was as follows:

How much foreign exchange gain or loss should be included in Shannon's 2012 income statement?

A. $3,000 gain. B. $3,000 loss. C. $6,000 gain. D. $6,000 loss. E. $7,000 gain.

39. On April 1, 2012, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2013. The dollar value of the loan was as follows:

How much foreign exchange gain or loss should be included in Shannon's 2013 income statement?

A. $1,000 gain. B. $1,000 loss. C. $2,000 gain. D. $2,000 loss. E. $8,000 loss.

40. On April 1, 2012, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2013. The dollar value of the loan was as follows:

Angela Inc., a U.S. company, had a euro receivable from exports to Spain and a British pound payable resulting from imports from England. Angela recorded foreign exchange gain related to both its euro receivable and pound payable. Did the foreign currencies increase or decrease in dollar value from the date of the transaction to the settlement date?

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

41. Frankfurter Company, a U.S. company, had a ruble receivable from exports to Russia and a euro payable resulting from imports from Italy. Frankfurter recorded foreign exchange loss related to both its ruble receivable and euro payable. Did the foreign currencies increase or decrease in dollar value from the date of the transaction to the settlement date?

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

42. Parker Corp., a U.S. company, had the following foreign currency transactions during 2013: (1.) Purchased merchandise from a foreign supplier on July 5, 2013 for the U.S. dollar equivalent of $80,000 and paid the invoice on August 3, 2013 at the U.S. dollar equivalent of $82,000. (2.) On October 1, 2013 borrowed the U.S. dollar equivalent of $872,000 evidenced by a noninterest-bearing note payable in euros on October 1, 2013. The U.S. dollar equivalent of the note amount was $860,000 on December 31, 2013, and $881,000 on October 1, 2014. What amount should be included as a foreign exchange gain or loss from the two transactions for 2013?

A. $2,000 loss. B. $2,000 gain. C. $10,000 gain. D. $14,000 loss. E. $14,000 gain.

43. Parker Corp., a U.S. company, had the following foreign currency transactions during 2013: (1.) Purchased merchandise from a foreign supplier on July 5, 2013 for the U.S. dollar equivalent of $80,000 and paid the invoice on August 3, 2013 at the U.S. dollar equivalent of $82,000. (2.) On October 1, 2013 borrowed the U.S. dollar equivalent of $872,000 evidenced by a noninterest-bearing note payable in euros on October 1, 2013. The U.S. dollar equivalent of the note amount was $860,000 on December 31, 2013, and $881,000 on October 1, 2014. What amount should be included as a foreign exchange gain or loss from the two transactions for 2014?

A. $9,000 loss. B. $9,000 gain. C. $11,000 loss. D. $21,000 loss. E. $21,000 gain.

44. Winston Corp., a U.S. company, had the following foreign currency transactions during 2013: (1.) Purchased merchandise from a foreign supplier on July 16, 2013 for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2013 at the U.S. dollar equivalent of $54,000. (2.) On October 15, 2013 borrowed the U.S. dollar equivalent of $315,000 evidenced by a noninterest-bearing note payable in euros on October 15, 2013. The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2013, and $299,000 on October 15, 2014. What amount should be included as a foreign exchange gain or loss from the two transactions for 2013?

A. $9,000 loss. B. $9,000 gain. C. $11,000 loss. D. $13,000 gain. E. $14,000 gain.

45. Winston Corp., a U.S. company, had the following foreign currency transactions during 2013: (1.) Purchased merchandise from a foreign supplier on July 16, 2013 for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2013 at the U.S. dollar equivalent of $54,000. (2.) On October 15, 2013 borrowed the U.S. dollar equivalent of $315,000 evidenced by a noninterest-bearing note payable in euros on October 15, 2013. The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2013, and $299,000 on October 15, 2014. What amount should be included as a foreign exchange gain or loss from the two transactions for 2014?

A. $1,000 loss. B. $1,000 gain. C. $2,000 loss. D. $4,000 gain. E. $4,000 loss.

46. Williams Inc., a U.S. company, has a Japanese yen account receivable resulting from an export sale on March 1 to a customer in Japan. The exporter signed a forward contract on March 1 to sell yen and designated it as a cash flow hedge of a recognized receivable. The spot rate was $.0094, and the forward rate was $.0095. Which of the following did the U.S. exporter report in net income?

A. Discount revenue. B. Premium revenue. C. Discount expense. D. Premium expense. E. Both discount revenue and premium expense.

47. Larson Company, a U.S. company, has an India rupee account receivable resulting from an export sale on September 7 to a customer in India. Larson signed a forward contract on September 7 to sell rupees and designated it as a cash flow hedge of a recognized receivable. The spot rate was $.023, and the forward rate was $.021. Which of the following did the U.S. exporter report in net income?

A. Discount revenue. B. Premium revenue. C. Discount expense. D. Premium expense. E. Both discount revenue and premium expense.

48. Primo Inc., a U.S. company, ordered parts costing 100,000 rupee from a foreign supplier on July 7 when the spot rate was $.025 per rupee. A one-month forward contract was signed on that date to purchase 100,000 rupee at a rate of $.027. The forward contract is properly designated as a fair value hedge of the 100,000 rupee firm commitment. On August 7, when the parts are received, the spot rate is $.028. At what amount should the parts inventory be carried on Primo's books?

A. $2,000. B. $2,100. C. $2,500. D. $2,700. E. $2,800.

49. Lawrence Company, a U.S. company, ordered parts costing 1,000,000 Thailand bahts from a foreign supplier on July 7 when the spot rate was $.025 per baht. A one-month forward contract was signed on that date to purchase 1,000,000 bahts at a rate of $.027. The forward contract is properly designated as a fair value hedge of the 1,000,000 baht firm commitment. On August 7, when the parts are received, the spot rate is $.028. What is the amount of accounts payable that will be paid at this date?

A. $20,000. B. $20,100. C. $25,000. D. $27,000. E. $28,000.

50. On December 1, 2013, Joseph Company, a U.S. company, entered into a three-month forward contract to purchase 50,000 pesos on March 1, 2014, as a fair value hedge of a foreign currency denominated account payable. The following U.S. dollar per peso exchange rates apply:

Joseph's incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent is .9803. Which of the following is included in Joseph's December 31, 2013 balance sheet for the forward contract?

A. $5,146.58 asset. B. $5,146.58 liability. C. $500.00 liability. D. $490.15 asset. E. $490.15 liability.

51. On April 1, Quality Corporation, a U.S. company, expects to sell merchandise to a French customer in three months, denominating the transaction in euros. On April 1, the spot rate is $1.41 per euro, and Quality enters into a three-month forward contract cash flow hedge to sell 400,000 euros at a rate of $1.36. At the end of three months, the spot rate is $1.37 per euro, and Quality delivers the merchandise, collecting 400,000 euros. What are the effects on net income from these transactions?

A. $16,000 Discount Expense plus a $12,000 positive Adjustment to Net Income when the merchandise is delivered. B. $16,000 Discount Expense plus a $12,000 negative Adjustment to Net Income when the merchandise is delivered. C. $16,000 Discount Expense plus a $20,000 negative Adjustment to Net Income when the merchandise is delivered. D. $16,000 Discount Expense plus a $20,000 positive Adjustment to Net Income when the merchandise is delivered. E. $16,000 Discount Expense plus an $16,000 positive Adjustment to Net Income when the merchandise is delivered.

52. Woolsey Corporation, a U.S. company, expects to sell goods to a British customer at a price of 250,000 pounds, with delivery and payment to be made on October 24. On July 24, Woolsey purchased a three-month put option for 250,000 British pounds and designated this option as a cash flow hedge of a forecasted foreign currency transaction expected to be completed in late October. The following exchange rates apply:

What amount will Woolsey include as an option expense in net income for the period July 24 to October 24?

A. $4,000. B. $5,000. C. $10,000. D. $12,000. E. $14,000.

53. Woolsey Corporation, a U.S. company, expects to sell goods to a British customer at a price of 250,000 pounds, with delivery and payment to be made on October 24. On July 24, Woolsey purchased a three-month put option for 250,000 British pounds and designated this option as a cash flow hedge of a forecasted foreign currency transaction expected to be completed in late October. The following exchange rates apply:

What amount will Woolsey include as Adjustment to Net Income for the period ended October 31?

A. $6,000 positive. B. $6,000 negative. C. $10,000 positive. D. $10,000 negative. E. $14,000 positive.

54. Atherton Inc., a U.S. company, expects to order goods from a foreign supplier at a price of 100,000 lira, with delivery and payment to be made on April 17. On January 17, Atherton purchased a three-month call option on 100,000 lira and designated this option as a cash flow hedge of a forecasted foreign currency transaction. The following exchange rates apply:

What amount will Atherton include as an option expense in net income for the period January 17 to April 17?

A. $4,000 B. $4,260 C. $4,340 D. $5,000 E. $5,260

55. On May 1, 2013, Mosby Company received an order to sell a machine to a customer in Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was received on March 1, 2014. On May 1, 2013, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2014 at a price of $190,000. Mosby properly designates the option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had a fair value of $3,200 on December 31, 2013. The following spot exchange rates apply:

Mosby's incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803. What was the impact on Mosby's 2013 net income as a result of this fair value hedge of a firm commitment?

A. $1,760.60 decrease. B. $1,960.60 decrease. C. $1,000.00 decrease. D. $1,760.60 increase. E. $1,960.60 increase.

56. On May 1, 2013, Mosby Company received an order to sell a machine to a customer in Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was received on March 1, 2014. On May 1, 2013, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2014 at a price of $190,000. Mosby properly designates the option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had a fair value of $3,200 on December 31, 2013. The following spot exchange rates apply:

Mosby's incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803. What was the impact on Mosby's 2014 net income as a result of this fair value hedge of a firm commitment?

A. $1,800.00 decrease. B. $2,500.00 increase. C. $2,500.00 decrease. D. $188,760.60 increase. E. $188,760.60 decrease.

57. On May 1, 2013, Mosby Company received an order to sell a machine to a customer in Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was received on March 1, 2014. On May 1, 2013, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2014 at a price of $190,000. Mosby properly designates the option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had a fair value of $3,200 on December 31, 2013. The following spot exchange rates apply:

Mosby's incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803. What was the overall result of having entered into this hedge of exposure to foreign exchange risk?

A. $0 B. $9,000 net loss on the option. C. $9,000 net gain on the option. D. $2,000 net gain on the option. E. $2,000 net loss.

58. On March 1, 2013, Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds. The machine was shipped and payment was received on March 1, 2014. On March 1, 2013, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2014 at a price of $380,000. Mattie properly designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and had a fair value of $2,200 on December 31, 2013. The following spot exchange rates apply:

Mattie's incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803. What was the net impact on Mattie's 2013 income as a result of this fair value hedge of a firm commitment?

A. $1,800.00 decrease. B. $1,760.60 decrease. C. $2,240.40 decrease. D. $1,660.40 increase. E. $2,240.60 increase.

59. On March 1, 2013, Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds. The machine was shipped and payment was received on March 1, 2014. On March 1, 2013, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2014 at a price of $380,000. Mattie properly designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and had a fair value of $2,200 on December 31, 2013. The following spot exchange rates apply:

Mattie's incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803. What was the net impact on Mattie's 2014 income as a result of this fair value hedge of a firm commitment?

A. $379,760.60 decrease. B. $8,360.60 increase. C. $8,360.60 decrease. D. $4,390.40 decrease. E. $379,760.60 increase.

60. On March 1, 2013, Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds. The machine was shipped and payment was received on March 1, 2014. On March 1, 2013, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2014 at a price of $380,000. Mattie properly designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and had a fair value of $2,200 on December 31, 2013. The following spot exchange rates apply:

Mattie's incremental borrowing rate is 12 percent, and the present value factor for two months at a 12 percent annual rate is .9803. What was the net increase or decrease in cash flow from having purchased the foreign currency option to hedge this exposure to foreign exchange risk?

A. $0 B. $10,000 increase. C. $10,000 decrease. D. $20,000 increase. E. $20,000 decrease.

61. On October 1, 2013, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2014, at a price of 100,000 British pounds. On October 1, 2013, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2013, the option has a fair value of $1,600. The following spot exchange rates apply:

What journal entry should Eagle prepare on October 1, 2013?

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

62. On October 1, 2013, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2014, at a price of 100,000 British pounds. On October 1, 2013, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2013, the option has a fair value of $1,600. The following spot exchange rates apply:

What journal entry should Eagle prepare on December 31, 2013?

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

63. On October 1, 2013, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2014, at a price of 100,000 British pounds. On October 1, 2013, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2013, the option has a fair value of $1,600. The following spot exchange rates apply:

What is the amount of option expense for 2014 from these transactions?

A. $1,000. B. $1,600. C. $2,500. D. $2,600. E. $0.

64. On October 1, 2013, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2014, at a price of 100,000 British pounds. On October 1, 2013, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2013, the option has a fair value of $1,600. The following spot exchange rates apply:

What is the amount of Adjustment to Accumulated Other Comprehensive Income for 2014 from these transactions?

A. $1,000. B. $1,600. C. $1,800. D. $2,000. E. $2,600.

65. On October 1, 2013, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2014, at a price of 100,000 British pounds. On October 1, 2013, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2013, the option has a fair value of $1,600. The following spot exchange rates apply:

What is the amount of Cost of Goods Sold for 2014 as a result of these transactions?

A. $200,000. B. $195,000. C. $201,000. D. $202,600. E. $203,000.

66. On October 1, 2013, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2014, at a price of 100,000 British pounds. On October 1, 2013, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2013, the option has a fair value of $1,600. The following spot exchange rates apply:

What is the 2014 effect on net income as a result of these transactions?

A. $195,000 B. $201,600 C. $201,000 D. $202,600 E. $203,000

Essay Questions

67. Yelton Co. just sold inventory for 80,000 euros, which Yelton will collect in sixty days. Briefly describe a hedging transaction Yelton could engage in to reduce its risk of unfavorable exchange rates.

68. Where can you find exchange rates between the U.S. dollar and most foreign currencies?

69. What is meant by the spot rate?

70. How is the fair value of a Forward Contract determined by U.S. GAAP?

71. What is the major assumption underlying the one-transaction perspective?

72. What is the purpose of a hedge of foreign exchange risk?

73. How does a foreign currency forward contract differ from a foreign currency option?

74. What factors create a foreign exchange gain?

75. What happens when a U.S. company purchases goods denominated in a foreign currency and the foreign currency depreciates?

76. What happens when a U.S. company purchases goods denominated in a foreign currency and the foreign currency appreciates?

77. What happens when a U.S. company sells goods denominated in a foreign currency and the foreign currency depreciates?

78. What happens when a U.S. company sells goods denominated in a foreign currency and the foreign currency appreciates?

Short Answer Questions

79. Gaw Produce Company purchased inventory from a Japanese company on December 18, 2013. Payment of 4,000,000 yen (¥) was due on January 18, 2014. Exchange rates between the dollar and the yen were as follows:

Required: Prepare all journal entries for Gaw Produce Co. in connection with the purchase and payment.

80. Old Colonial Corp. (a U.S. company) made a sale to a foreign customer on September 15, 2013, for 100,000 stickles. Payment was received on October 15, 2013. The following exchange rates applied:

Required: Prepare all journal entries for Old Colonial Corp. in connection with this sale assuming that the company closes its books on September 30 to prepare interim financial statements.

81. Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

Prepare all journal entries in U.S. dollars along with any December 31, 2013 adjusting entries. Coyote uses a perpetual inventory system.

82. Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

What amount will Coyote Corp. report in its 2013 balance sheet for Inventory?

83. Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

What amount will Coyote Corp. report in its 2013 income statement for Cost of goods sold?

84. Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

What amount will Coyote Corp. report in its 2013 income statement for Sales?

85. Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

What amount will Coyote Corp. report in its 2013 balance sheet for Accounts receivable?

86. Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

What amount will Coyote Corp. report in its 2013 balance sheet for Accounts payable?

87. Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

The beginning balance of cash was 50,000 pesos on January 1, 2013, translated at 1 peso = $.18. What amount will Coyote Corp. report in its 2013 balance sheet for Cash?

88. On November 10, 2013, King Co. sold inventory to a customer in a foreign country. King agreed to accept 96,000 local currency units (LCU) in full payment for this inventory. Payment was to be made on February 1, 2014. On December 1, 2013, King entered into a forward exchange contract wherein 96,000 LCU would be delivered to a currency broker in two months. The two month forward exchange rate on that date was 1 LCU = $.30. Any contract discount or premium is amortized using the straight-line method. The spot rates and forward rates on various dates were as follows:

The company's borrowing rate is 12%. The present value factor for one month is .9901. (A.) Assume this hedge is designated as a cash flow hedge. Prepare the journal entries relating to the transaction and the forward contract. (B.) Compute the effect on 2013 net income. (C.) Compute the effect on 2014 net income.

89. On November 10, 2013, King Co. sold inventory to a customer in a foreign country. King agreed to accept 96,000 local currency units (LCU) in full payment for this inventory. Payment was to be made on February 1, 2014. On December 1, 2013, King entered into a forward exchange contract wherein 96,000 LCU would be delivered to a currency broker in two months. The two month forward exchange rate on that date was 1 LCU = $.30. Any contract discount or premium is amortized using the straight-line method. The spot rates and forward rates on various dates were as follows:

The company's borrowing rate is 12%. The present value factor for one month is .9901. (A.) Assume this hedge is designated as a fair value hedge. Prepare the journal entries relating to the transaction and the forward contract. (B.) Compute the effect on 2013 net income. (C.) Compute the effect on 2014 net income.

90. On October 1, 2013, Jarvis Co. sold inventory to a customer in a foreign country, denominated in 100,000 local currency units (LCU). Collection is expected in four months. On October 1, 2013, a forward exchange contract was acquired whereby Jarvis Co. was to pay 100,000 LCU in four months (on February 1, 2014) and receive $78,000 in U.S. dollars. The spot and forward rates for the LCU were as follows:

The company's borrowing rate is 12%. The present value factor for one month is .9901. Any discount or premium on the contract is amortized using the straight-line method. Assuming this is a cash flow hedge; prepare journal entries for this sales transaction and forward contract.

91. On October 1, 2013, Jarvis Co. sold inventory to a customer in a foreign country, denominated in 100,000 local currency units (LCU). Collection is expected in four months. On October 1, 2013, a forward exchange contract was acquired whereby Jarvis Co. was to pay 100,000 LCU in four months (on February 1, 2014) and receive $78,000 in U.S. dollars. The spot and forward rates for the LCU were as follows:

The company's borrowing rate is 12%. The present value factor for one month is .9901. Any discount or premium on the contract is amortized using the straight-line method. Assuming this is a fair value hedge; prepare journal entries for this sales transaction and forward contract.

92. On October 31, 2012, Darling Company negotiated a two-year 100,000 franc loan from a foreign bank at an interest rate of 3 percent per year. Interest payments are made annually on October 31, and the principal will be repaid on October 31, 2014. Darling prepares U.S.dollar financial statements and has a December 31 year-end. Prepare all journal entries related to this foreign currency borrowing assuming the following:

93. For each of the following situations, select the best answer concerning accounting for foreign currency transactions: (G) Results in a foreign exchange gain. (L) Results in a foreign exchange loss. (N) No foreign exchange gain or loss. _____1. Export sale by a U.S. company denominated in dollars, foreign currency of buyer appreciates. _____2. Export sale by a U.S. company denominated in foreign currency, foreign currency of buyer appreciates. _____3. Import purchase by a U.S. company denominated in foreign currency, foreign currency of buyer appreciates. _____4. Import purchase by a U.S. company denominated in dollars, foreign currency of buyer appreciates. _____5. Import purchase by a U.S. company denominated in foreign currency, foreign currency of buyer depreciates. _____6. Import purchase by a U.S. company denominated in dollars, foreign currency of buyer depreciates. _____7. Export sale by a U.S. company denominated in dollars, foreign currency of buyer depreciates. _____8. Export sale by a U.S. company denominated in foreign currency, foreign currency of buyer depreciates.

Chapter 09 Foreign Currency Transactions and Hedging Foreign Exchange Risk Answer Key

Multiple Choice Questions

Pigskin Co., a U.S. corporation, sold inventory on credit to a British company on April 8, 2013. Pigskin received payment of 35,000 British pounds on May 8, 2013. The exchange rate was £1 = $1.54 on April 8 and £1 = 1.43 on May 8. What amount of foreign exchange

gain or loss should be recognized? (round to the nearest dollar)

A. $10,500 loss B. $10,500 gain C. $1,750 loss D. $3,850 loss E. No gain or loss should be recognized. $1.43 - $1.54 = ($.11) × £35,000 = ($3,850) Loss

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

Norton Co., a U.S. corporation, sold inventory on December 1, 2013, with payment of 10,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows:

For what amount should Sales be credited on December 1?

A. $5,500. B. $16,949. C. $18,182. D. $17,241. E. $16,667. December 1st Spot Rate $1.7241 × £10,000 = $17,241 Sales Revenue

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

Norton Co., a U.S. corporation, sold inventory on December 1, 2013, with payment of 10,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows:

What amount of foreign exchange gain or loss should be recorded on December 31?

A. $300 gain. B. $300 loss. C. $0. D. $941 loss. E. $941 gain. $1.8182 - $1.7241 = $.0941 × £10,000 Gain

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

Norton Co., a U.S. corporation, sold inventory on December 1, 2013, with payment of 10,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows:

What amount of foreign exchange gain or loss should be recorded on January 30?

A. $1,516 gain. B. $1,516 loss. C. $575 loss. D. $500 loss. E. $500 gain. $1.6666 - $1.8182 = ($.1516) × £10,000 = ($1,516) Loss

Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May 8. Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is Brisco's fiscal year-end. The pertinent exchange rates were as follows:

For what amount should Brisco's Accounts Payable be credited on May 8?

A. $2,500,000. B. $2,440,000. C. $1,600,000. D. $1,639,344. E. $1,666,667. $1.25 × FC 2,000,000 = $2,500,000 A/P

How much Foreign Exchange Gain or Loss should Brisco record on May 31?

A. $2,520,000 gain. B. $20,000 gain. C. $20,000 loss. D. $80,000 gain. E. $80,000 loss. $1.26 - $1.25 = ($.01) × FC 2,000,000 = ($20,000) Loss

How much U.S. $ will it cost Brisco to finally pay the payable on June 7?

A. $1,666,667. B. $2,440,000. C. $2,520,000. D. $2,500,000. E. $2,400,000. $1.20 × FC 2,000,000 = FC 2,400,000 A/P

On June 1, CamCo received a signed agreement to sell inventory for ¥500,000. The sale would take place in 90 days. CamCo immediately signed a 90-day forward contract to sell the yen as soon as they are received. The spot rate on June 1 was ¥1 = $.004167, and the 90-day forward rate was ¥1 = $.00427. At what amount would CamCo record the Forward Contract on June 1?

A. $2,083. B. $0. C. $2,110. D. $2,532. E. $2,135. Forward Contract Not Recorded at Date of Sale

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 09-03 Understand how foreign currency forward contracts and foreign currency options can be used to hedge foreign exchange risk. Learning Objective: 09-05 Account for forward contracts and options used as hedges of foreign currency firm commitments.

Belsen purchased inventory on December 1, 2012. Payment of 200,000 stickles was to be made in sixty days. Also on December 1, Belsen signed a contract to purchase §200,000 in sixty days. The spot rate was §1 = .35714, and the 60-day forward rate was §1 = $.38462. On December 31, the spot rate was §1 = .34483 and the 30-day forward rate was §1 = .38168. Assume an annual interest rate of 12% and a fair value hedge. The present value for one month at 12% is .9901. In the journal entry to record the establishment of a forward exchange contract, at what amount should the Forward Contract account be recorded on December 1?

A. $71,428. B. $76,924. C. $588. D. $582. E. $0, since there is no cost, there is no value for the contract at this date. Forward Contract Not Recorded at Date of Sale

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency denominated assets and liabilities.

10.

Meisner Co. ordered parts costing §100,000 for a foreign supplier on May 12 when the spot rate was $.24 per stickle. A one-month forward contract was signed on that date to purchase §100,000 at a forward rate of $.25 per stickle. On June 12, when the parts were received and payment was made, the spot rate was $.28 per stickle. At what amount should inventory be reported?

A. $0. B. $28,000. C. $24,000. D. $25,000. E. $2,000. $.28 × §100,000 = $28,000

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency denominated assets and liabilities.

11.

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied:

Assuming a forward contract was not entered into, what would be the net impact on Car Corp.'s 2013 income statement related to this transaction?

A. $500 (gain). B. $500 (loss). C. $200 (gain). D. $200 (loss). E. $- 0 $.00090 - $.00092 = ($.00002) × $10,000,000 = ($200) Loss

12.

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied:

Assuming a forward contract was entered into, the foreign currency was originally sold in the foreign currency market on December 16, 2013 at a

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign exchange risk.

13.

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied:

A. $200. B. $295. C. $495. D. $500. E. $9,300. $.00098 - $.00093 = $.00005 × .9901 × $10,000,000 = $495

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency denominated assets and liabilities.

14.

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied:

Assuming a forward contract was entered into, how would the forward contract be reflected on Car's December 31, 2013 balance sheet?

A. Forward contract (asset). B. Forward contract (liability). C. Foreign currency (asset). D. Foreign currency (liability). E. Foreign exchange (liability).

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Evaluate Difficulty: 2 Medium Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency denominated assets and liabilities.

15.

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied:

A. $700 (gain). B. $700 (loss). C. $300 (gain). D. $300 (loss). E. $297 (gain). $.00098 - $.00095 = $.00003 × .9901 × $10,000,000 = $297 Gain

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency denominated assets and liabilities.

16.

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2013, with payment of 10 million Korean won to be received on January 15, 2014. The following exchange rates applied:

Assuming a forward contract was entered into on December 16, what would be the net impact on Car Corp.'s 2014 income statement related to this transaction?

A. $500 (gain). B. $303 (gain). C. $300 (gain). D. $300 (loss). E. $0. ($.00090 - $.00095 = $.00005) - ($.00093 - $.00095 = $.00002) = $.00003/.9901 × $10,000,000 = $303 Gain

17.

Mills Inc. had a receivable from a foreign customer that is due in the local currency of the customer (stickles). On December 31, 2012, this receivable for §200,000 was correctly included in Mills' balance sheet at $132,000. When the receivable was collected on February 15, 2013, the U.S. dollar equivalent was $144,000. In Mills' 2013 consolidated income statement, how much should have been reported as a foreign exchange gain?

A. $0. B. $36,000. C. $48,000. D. $10,000. E. $12,000. $144,000 - $132,000 = $12,000 Gain

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

18.

A spot rate may be defined as

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AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign exchange risk.

19.

The forward rate may be defined as

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign exchange risk.

20.

Which statement is true regarding a foreign currency option?

21.

A U.S. company sells merchandise to a foreign company denominated in U.S. dollars. Which of the following statements is true?

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AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 1 Easy Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign exchange risk. Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

22.

A U.S. company sells merchandise to a foreign company denominated in the foreign currency. Which of the following statements is true?

A. If the foreign currency appreciates, a foreign exchange gain will result. B. If the foreign currency depreciates, a foreign exchange gain will result. C. No foreign exchange gain or loss will result. D. If the foreign currency appreciates, a foreign exchange loss will result. E. Any gain or loss will be included in comprehensive income.

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 2 Medium Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

23.

A U.S. company buys merchandise from a foreign company denominated in U.S. dollars. Which of the following statements is true?

A. If the foreign currency appreciates, a foreign exchange gain will result. B. If the foreign currency depreciates, a foreign exchange gain will result. C. No foreign exchange gain or loss will result. D. If the foreign currency appreciates, a foreign exchange loss will result. E. Any gain or loss will be included in comprehensive income.

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 1 Easy Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign exchange risk. Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

24.

A U.S. company buys merchandise from a foreign company denominated in the foreign currency. Which of the following statements is true?

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Blooms: Evaluate Difficulty: 2 Medium Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

25.

U.S. GAAP provides guidance for hedges of all the following sources of foreign exchange risk except

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-03 Understand how foreign currency forward contracts and foreign currency options can be used to hedge foreign exchange risk.

26.

All of the following data may be needed to determine the fair value of a forward contract at any point in time except

27.

A forward contract may be used for which of the following? 1) A fair value hedge of an asset. 2) A cash flow hedge of an asset. 3) A fair value hedge of a liability. 4) A cash flow hedge of a liability.

A. 1 and 3 B. 2 and 4 C. 1 and 2 D. 1, 3, and 4 E. 1, 2, 3, and 4

AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-03 Understand how foreign currency forward contracts and foreign currency options can be used to hedge foreign exchange risk.

28.

A company has a discount on a forward contract for a foreign currency denominated asset. How is the discount recognized over the life of the contract under fair value hedge accounting?

29.

Which of the following statements is true concerning hedge accounting?

30.

All of the following hedges are used for future purchase/sale transactions except

31.

On December 1, 2013, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Canada for 150,000 Canadian dollars (CAD). Collection of the receivable is due on February 1, 2014. Keenan purchased a foreign currency put option with a strike price of $.97 (U.S.) on December 1, 2013. This foreign currency option is designated as a cash flow hedge. Relevant exchange rates follow:

Compute the fair value of the foreign currency option at December 1, 2013.

A. $6,000. B. $4,500. C. $3,000. D. $7,500. E. $1,500. $.05 × C$150,000 = $7,500

32.

Compute the fair value of the foreign currency option at December 31, 2013.

A. $6,000. B. $4,500. C. $3,000. D. $7,500. E. $1,500. $.04 × C$150,000 = $6,000

33.

Compute the fair value of the foreign currency option at February 1, 2014.

A. $6,000. B. $4,500. C. $3,000. D. $7,500. E. $1,500. $.03 × C$150,000 = $4,500

34.

Compute the U.S. dollars received on February 1, 2014.

A. $138,000. B. $136,500. C. $145,500. D. $141,000. E. $142,500. Strike Price $.97 × C$150,000 = $145,500

35.

Which of the following approaches is used in the United States in accounting for foreign currency transactions?

36.

When a U.S. company purchases parts from a foreign company, which of the following will result in zero foreign exchange gain or loss?

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation

Blooms: Apply Difficulty: 2 Medium Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign exchange risk. Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

37.

Alpha Inc., a U.S. company, had a receivable from a customer that was denominated in Mexican pesos. On December 31, 2012, this receivable for 75,000 pesos was correctly included in Alpha's balance sheet at $8,000. The receivable was collected on March 2, 2013, when the U.S. equivalent was $6,900. How much foreign exchange gain or loss will Alpha record on the income statement for the year ended December 31, 2013?

A. $1,100 loss. B. $1,100 gain. C. $6,900 loss. D. $6,900 gain. E. $8,000 gain. $6,900 - $8,000 = ($1,100) Loss

38.

On April 1, 2012, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2013. The dollar value of the loan was as follows:

How much foreign exchange gain or loss should be included in Shannon's 2012 income statement?

A. $3,000 gain. B. $3,000 loss. C. $6,000 gain. D. $6,000 loss. E. $7,000 gain. $97,000 - $103,000 = ($6,000) Loss

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 09-07 Prepare journal entries to account for foreign currency borrowings.

39.

On April 1, 2012, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2013. The dollar value of the loan was as follows:

How much foreign exchange gain or loss should be included in Shannon's 2013 income statement?

A. $1,000 gain. B. $1,000 loss. C. $2,000 gain. D. $2,000 loss. E. $8,000 loss. $103,000 - $105,000 = ($2,000) Loss

40.

On April 1, 2012, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign bank by signing an interest-bearing note due April 1, 2013. The dollar value of the loan was as follows:

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

41.

Frankfurter Company, a U.S. company, had a ruble receivable from exports to Russia and a euro payable resulting from imports from Italy. Frankfurter recorded foreign exchange loss related to both its ruble receivable and euro payable. Did the foreign currencies increase or decrease in dollar value from the date of the transaction to the settlement date?

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

42.

Parker Corp., a U.S. company, had the following foreign currency transactions during 2013: (1.) Purchased merchandise from a foreign supplier on July 5, 2013 for the U.S. dollar equivalent of $80,000 and paid the invoice on August 3, 2013 at the U.S. dollar equivalent of $82,000. (2.) On October 1, 2013 borrowed the U.S. dollar equivalent of $872,000 evidenced by a non-interest-bearing note payable in euros on October 1, 2013. The U.S. dollar equivalent of the note amount was $860,000 on December 31, 2013, and $881,000 on October 1, 2014. What amount should be included as a foreign exchange gain or loss from the two transactions for 2013?

A. $2,000 loss. B. $2,000 gain. C. $10,000 gain. D. $14,000 loss. E. $14,000 gain. [$80,000 - $82,000 = ($2,000) Loss] + [$872,000 - $860,000 = $12,000 Gain] = $10,000 Gain

43.

A. $9,000 loss. B. $9,000 gain. C. $11,000 loss. D. $21,000 loss. E. $21,000 gain. $860,000 - $881,000 = ($21,000) Loss

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 09-07 Prepare journal entries to account for foreign currency borrowings.

44.

Winston Corp., a U.S. company, had the following foreign currency transactions during 2013: (1.) Purchased merchandise from a foreign supplier on July 16, 2013 for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2013 at the U.S. dollar equivalent of $54,000. (2.) On October 15, 2013 borrowed the U.S. dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15, 2013. The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2013, and $299,000 on October 15, 2014. What amount should be included as a foreign exchange gain or loss from the two transactions for 2013?

A. $9,000 loss. B. $9,000 gain. C. $11,000 loss. D. $13,000 gain. E. $14,000 gain. [$47,000 - $54,000 = ($7,000) Loss] + [$315,000 - $295,000 = $20,000 Gain] = $13,000 Gain

45.

A. $1,000 loss. B. $1,000 gain. C. $2,000 loss. D. $4,000 gain. E. $4,000 loss. $295,000 - $299,000 = ($4,000) Loss

46.

Williams Inc., a U.S. company, has a Japanese yen account receivable resulting from an export sale on March 1 to a customer in Japan. The exporter signed a forward contract on March 1 to sell yen and designated it as a cash flow hedge of a recognized receivable. The spot rate was $.0094, and the forward rate was $.0095. Which of the following did the U.S. exporter report in net income?

A. Discount revenue. B. Premium revenue. C. Discount expense. D. Premium expense. E. Both discount revenue and premium expense.

47.

Larson Company, a U.S. company, has an India rupee account receivable resulting from an export sale on September 7 to a customer in India. Larson signed a forward contract on September 7 to sell rupees and designated it as a cash flow hedge of a recognized receivable. The spot rate was $.023, and the forward rate was $.021. Which of the following did the U.S. exporter report in net income?

A. Discount revenue. B. Premium revenue. C. Discount expense. D. Premium expense. E. Both discount revenue and premium expense.

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign exchange risk. Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency denominated assets and liabilities.

48.

Primo Inc., a U.S. company, ordered parts costing 100,000 rupee from a foreign supplier on July 7 when the spot rate was $.025 per rupee. A one-month forward contract was signed on that date to purchase 100,000 rupee at a rate of $.027. The forward contract is properly designated as a fair value hedge of the 100,000 rupee firm commitment. On August 7, when the parts are received, the spot rate is $.028. At what amount should the parts inventory be carried on Primo's books?

A. $2,000. B. $2,100. C. $2,500. D. $2,700. E. $2,800. $.028 × ₹100,000 = $2,800

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 09-05 Account for forward contracts and options used as hedges of foreign currency firm commitments.

49.

Lawrence Company, a U.S. company, ordered parts costing 1,000,000 Thailand bahts from a foreign supplier on July 7 when the spot rate was $.025 per baht. A one-month forward contract was signed on that date to purchase 1,000,000 bahts at a rate of $.027. The forward contract is properly designated as a fair value hedge of the 1,000,000 baht firm commitment. On August 7, when the parts are received, the spot rate is $.028. What is the amount of accounts payable that will be paid at this date?

A. $20,000. B. $20,100. C. $25,000. D. $27,000. E. $28,000. $.028 × ฿1,000,000 = $28,000

50.

On December 1, 2013, Joseph Company, a U.S. company, entered into a three-month forward contract to purchase 50,000 pesos on March 1, 2014, as a fair value hedge of a foreign currency denominated account payable. The following U.S. dollar per peso exchange rates apply:

A. $5,146.58 asset. B. $5,146.58 liability. C. $500.00 liability. D. $490.15 asset. E. $490.15 liability. $0.105 - $0.095 = ($0.01) × MP50,000 = ($500.00) × .9803 = ($490.15) Liability

51.

On April 1, Quality Corporation, a U.S. company, expects to sell merchandise to a French customer in three months, denominating the transaction in euros. On April 1, the spot rate is $1.41 per euro, and Quality enters into a three-month forward contract cash flow hedge to sell 400,000 euros at a rate of $1.36. At the end of three months, the spot rate is $1.37 per euro, and Quality delivers the merchandise, collecting 400,000 euros. What are the effects on net income from these transactions?

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign currency transactions.

52.

Woolsey Corporation, a U.S. company, expects to sell goods to a British customer at a price of 250,000 pounds, with delivery and payment to be made on October 24. On July 24, Woolsey purchased a three-month put option for 250,000 British pounds and designated this option as a cash flow hedge of a forecasted foreign currency transaction expected to be completed in late October. The following exchange rates apply:

What amount will Woolsey include as an option expense in net income for the period July 24 to October 24?

A. $4,000. B. $5,000. C. $10,000. D. $12,000. E. $14,000. Cost of the Option Contract $4,000

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign currency transactions.

53.

What amount will Woolsey include as Adjustment to Net Income for the period ended October 31?

A. $6,000 positive. B. $6,000 negative. C. $10,000 positive. D. $10,000 negative. E. $14,000 positive. $2.17 - $2.13 = $.04 × £250,000 = $10,000 Positive Adjustment

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign currency transactions.

54.

Atherton Inc., a U.S. company, expects to order goods from a foreign supplier at a price of 100,000 lira, with delivery and payment to be made on April 17. On January 17, Atherton purchased a three-month call option on 100,000 lira and designated this option as a cash flow hedge of a forecasted foreign currency transaction. The following exchange rates apply:

What amount will Atherton include as an option expense in net income for the period January 17 to April 17?

A. $4,000 B. $4,260 C. $4,340 D. $5,000 E. $5,260 Cost of the Option Contract $5,000

55.

On May 1, 2013, Mosby Company received an order to sell a machine to a customer in Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was received on March 1, 2014. On May 1, 2013, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2014 at a price of $190,000. Mosby properly designates the option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had a fair value of $3,200 on December 31, 2013. The following spot exchange rates apply:

A. $1,760.60 decrease. B. $1,960.60 decrease. C. $1,000.00 decrease. D. $1,760.60 increase. E. $1,960.60 increase. $.094 - $.095 = ($.001) × MP2,000,000 = ($2,000) × .9803 = ($1,960.60) Loss on Firm Commitment $3,200 - $3,000 = $200 Option Value Increase ($1,960.60) Loss on Firm Commitment + $200 Option Value Increase = ($1,760.60) Reduction in 2013 Net Income

AACSB: Analytic AACSB: Diversity AICPA BB: Global

AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 09-05 Account for forward contracts and options used as hedges of foreign currency firm commitments.

56.

A. $1,800.00 decrease. B. $2,500.00 increase. C. $2,500.00 decrease. D. $188,760.60 increase. E. $188,760.60 decrease. [$190,000 Sales Revenue] - [$3,000 Cost of Option] + [$1,760.60 Adjustment from 2013 Net Income] = $188,760.60 Increase to 2014 Net Income

AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 09-05 Account for forward contracts and options used as hedges of foreign currency firm commitments.

57.

A. $0 B. $9,000 net loss on the option. C. $9,000 net gain on the option. D. $2,000 net gain on the option. E. $2,000 net loss. $.095 - $.089 = $.006 × MP2,000,000 = $12,000 Gain from Hedge - $3,000 Cost of Option = $9,000 Net Gain on Option

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commitments.

58.

On March 1, 2013, Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds. The machine was shipped and payment was received on March 1, 2014. On March 1, 2013, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2014 at a price of $380,000. Mattie properly designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and had a fair value of $2,200 on December 31, 2013. The following spot exchange rates apply:

A. $1,800.00 decrease. B. $1,760.60 decrease. C. $2,240.40 decrease. D. $1,660.40 increase. E. $2,240.60 increase. $1.89 - $1.90 = ($.001) × £200,000 = ($2,000) × .9803 = ($1,960.60) Loss on Firm Commitment $2,200 - $2,000 = $200 Option Value Increase ($1,960.60) Loss on Firm Commitment + $200 Option Value Increase = ($1,760.60) Reduction in 2013 Net Income

AACSB: Analytic

59.

A. $379,760.60 decrease. B. $8,360.60 increase. C. $8,360.60 decrease. D. $4,390.40 decrease. E. $379,760.60 increase. [$380,000 Sales Revenue] - [$2,000 Cost of Option] + [$1,760.60 Adjustment from 2013 Net Income] = $379,760.60 Increase to 2014 Net Income

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commitments.

60.

A. $0 B. $10,000 increase. C. $10,000 decrease. D. $20,000 increase. E. $20,000 decrease. $1.90 - $1.84 = $.06 × £200,000 = $12,000 Cash Flow from Hedge - $2,000 Cost of Option = $10,000 Increase in Cash Flow

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Difficulty: 3 Hard Learning Objective: 09-05 Account for forward contracts and options used as hedges of foreign currency firm commitments.

61.

On October 1, 2013, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2014, at a price of 100,000 British pounds. On October 1, 2013, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2013, the option has a fair value of $1,600. The following spot exchange rates apply:

What journal entry should Eagle prepare on October 1, 2013?

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

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AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign currency transactions.

62.

What journal entry should Eagle prepare on December 31, 2013?

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

AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign currency transactions.

63.

What is the amount of option expense for 2014 from these transactions?

A. $1,000. B. $1,600. C. $2,500. D. $2,600. E. $0. Option Expense is the Balance Sheet Fair Value of the Option for 2014 = $1,600

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium

Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign currency transactions.

64.

What is the amount of Adjustment to Accumulated Other Comprehensive Income for 2014 from these transactions?

A. $1,000. B. $1,600. C. $1,800. D. $2,000. E. $2,600. $2.01 - $2.00 = $.01 × £100,000 = $1,000 Adjustment to AOCI for 2014

65.

What is the amount of Cost of Goods Sold for 2014 as a result of these transactions?

A. $200,000. B. $195,000. C. $201,000. D. $202,600. E. $203,000. £100,000 × $2.00 Strike Price = $200,000 + $1,000 AOCI Adjustment = $201,000 COGS

66.

What is the 2014 effect on net income as a result of these transactions?

A. $195,000 B. $201,600 C. $201,000 D. $202,600 E. $203,000 [£100,000 × $2.00 Strike Price = $200,000] + [$1,600 Fair Value of the Option in 2014] = $201,600

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 09-06 Account for forward contracts and options used as hedges of forcasted foreign currency transactions.

Essay Questions

67.

Yelton Co. just sold inventory for 80,000 euros, which Yelton will collect in sixty days. Briefly describe a hedging transaction Yelton could engage in to reduce its risk of unfavorable exchange rates.

Yelton could sign a forward exchange contract to sell the euros in 60 days, after they are received. Alternatively, Yelton could purchase an option to sell the euros in 60 days, after they are received.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign exchange risk.

68.

Where can you find exchange rates between the U.S. dollar and most foreign currencies?

Foreign exchange rates are published in the Wall Street Journal, major U.S. newspapers, and several Internet sites.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-01 Understand concepts related to foreign currency; exchange rates; and foreign exchange risk.

69.

What is meant by the spot rate?

The spot rate is the price at which a foreign currency can be purchased or sold today.

70.

How is the fair value of a Forward Contract determined by U.S. GAAP?

The fair value of a Forward Contract is determined by comparing the difference between the contracted forward rate and the currently available forward rate for contracts expiring on the same date. On the initial date of the contract, this would result in a fair value of $0. As time passes, the currently available forward rate will likely fluctuate relative to the "fixed" contracted forward rate, creating a difference that must be accounted for as a gain or loss on the forward contract. A contract with a net gain over its life is recorded on the balance sheet as a Forward Contract Asset. A contract with a net loss over its life is recorded on the balance sheet as a Forward Contract Liability.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Blooms: Understand Difficulty: 3 Hard Learning Objective: 09-03 Understand how foreign currency forward contracts and foreign currency options can be used to hedge foreign exchange risk.

71.

What is the major assumption underlying the one-transaction perspective?

The one-transaction perspective assumes that an export sale is not complete until the foreign currency receivable has been collected and converted into U.S. dollars.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

72.

What is the purpose of a hedge of foreign exchange risk?

Hedge of foreign exchange risk is a strategy to limit exposure to the effect of unfavorable changes in the value of foreign currencies that are caused by fluctuations in exchange rates. In addition to avoiding possible losses, companies hedge foreign currency transactions and commitments to introduce an element of certainty into the future cash flows resulting from foreign currency activities by establishing a price today at which foreign currency can be sold or purchased at a future date.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-03 Understand how foreign currency forward contracts and foreign currency options can be used to hedge foreign exchange risk.

73.

How does a foreign currency forward contract differ from a foreign currency option?

A foreign currency forward contract obligates the parties to deliver one currency in exchange for another at a specified future date. On the other hand, the owner of a foreign currency option can choose whether to exercise the option and exchange one currency for another or not.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 09-02 Account for foreign currency transactions using the two-transaction perspective; accrual approach.

74.

What factors create a foreign exchange gain?

Foreign exchange gains and losses are created by two factors: having foreign currency exposures (foreign currency receivables and payables) and changes in exchange rates.

75.

What happens when a U.S. company purchases goods denominated in a foreign currency and the foreign currency depreciates?

The event results in a foreign exchange gain.

76.

What happens when a U.S. company purchases goods denominated in a foreign currency and the foreign currency appreciates?

The event results in a foreign exchange loss.

77.

What happens when a U.S. company sells goods denominated in a foreign currency and the foreign currency depreciates?

The event results in a foreign exchange loss.

78.

What happens when a U.S. company sells goods denominated in a foreign currency and the foreign currency appreciates?

The event results in a foreign exchange gain.

Short Answer Questions

79.

Gaw Produce Company purchased inventory from a Japanese company on December 18, 2013. Payment of 4,000,000 yen (¥) was due on January 18, 2014. Exchange rates between the dollar and the yen were as follows:

Required: Prepare all journal entries for Gaw Produce Co. in connection with the purchase and payment.

80.

Old Colonial Corp. (a U.S. company) made a sale to a foreign customer on September 15, 2013, for 100,000 stickles. Payment was received on October 15, 2013. The following exchange rates applied:

Required: Prepare all journal entries for Old Colonial Corp. in connection with this sale assuming that the company closes its books on September 30 to prepare interim financial statements.

81.

Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

Prepare all journal entries in U.S. dollars along with any December 31, 2013 adjusting entries. Coyote uses a perpetual inventory system.

82.

Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

What amount will Coyote Corp. report in its 2013 balance sheet for Inventory?

Inventory (60,000 pesos × $.20 × 40%): $4,800

83.

Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

What amount will Coyote Corp. report in its 2013 income statement for Cost of goods

sold?

Cost of goods sold (60,000 pesos × $.20 × 60%): $7,200

84.

Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

What amount will Coyote Corp. report in its 2013 income statement for Sales?

Sales (54,000 pesos × $.22): $11,880

85.

Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

What amount will Coyote Corp. report in its 2013 balance sheet for Accounts receivable?

Accounts receivable ((54,000 - 48,000 pesos) × $.25): $1,500

86.

Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

What amount will Coyote Corp. report in its 2013 balance sheet for Accounts payable?

Accounts payable ((60,000 - 36,000 pesos) × $.25): $6,000

87.

Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2013:

The appropriate exchange rates during 2013 were as follows:

The beginning balance of cash was 50,000 pesos on January 1, 2013, translated at 1 peso = $.18. What amount will Coyote Corp. report in its 2013 balance sheet for Cash?

Cash (50,000 pesos × $.18) + (48,000 pesos × $.23) - (36,000 pesos × $.24): $11,400

88.

On November 10, 2013, King Co. sold inventory to a customer in a foreign country. King agreed to accept 96,000 local currency units (LCU) in full payment for this inventory. Payment was to be made on February 1, 2014. On December 1, 2013, King entered into a forward exchange contract wherein 96,000 LCU would be delivered to a currency broker in two months. The two month forward exchange rate on that date was 1 LCU = $.30. Any contract discount or premium is amortized using the straight-line method. The spot rates and forward rates on various dates were as follows:

[(.30 - .28) 96,000] × .9901 = 1,901

[(.30 - .27) 96,000] = 2,880 - 1,901 = 979

89.

90.

On October 1, 2013, Jarvis Co. sold inventory to a customer in a foreign country, denominated in 100,000 local currency units (LCU). Collection is expected in four months. On October 1, 2013, a forward exchange contract was acquired whereby Jarvis Co. was to pay 100,000 LCU in four months (on February 1, 2014) and receive $78,000 in U.S. dollars. The spot and forward rates for the LCU were as follows:

[(.80 - .78) 100,000] × .9901 = 1,980

[(.78 - .86) 100,000] - 1,980 = 6,020

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard

Learning Objective: 09-04 Account for forward contracts and options used as hedges of foreign currency denominated assets and liabilities.

91.

The company's borrowing rate is 12%. The present value factor for one month is .9901. Any discount or premium on the contract is amortized using the straight-line method. Assuming this is a fair value hedge; prepare journal entries for this sales transaction and forward contract.

92.

On October 31, 2012, Darling Company negotiated a two-year 100,000 franc loan from a foreign bank at an interest rate of 3 percent per year. Interest payments are made annually on October 31, and the principal will be repaid on October 31, 2014. Darling prepares U.S.dollar financial statements and has a December 31 year-end. Prepare all journal entries related to this foreign currency borrowing assuming the following:

In US dollars:

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 09-07 Prepare journal entries to account for foreign currency borrowings.

93.

For each of the following situations, select the best answer concerning accounting for foreign currency transactions: (G) Results in a foreign exchange gain. (L) Results in a foreign exchange loss. (N) No foreign exchange gain or loss. _____1. Export sale by a U.S. company denominated in dollars, foreign currency of buyer appreciates. _____2. Export sale by a U.S. company denominated in foreign currency, foreign currency of buyer appreciates. _____3. Import purchase by a U.S. company denominated in foreign currency, foreign currency of buyer appreciates. _____4. Import purchase by a U.S. company denominated in dollars, foreign currency of buyer appreciates. _____5. Import purchase by a U.S. company denominated in foreign currency, foreign currency of buyer depreciates. _____6. Import purchase by a U.S. company denominated in dollars, foreign currency of buyer depreciates. _____7. Export sale by a U.S. company denominated in dollars, foreign currency of buyer depreciates. _____8. Export sale by a U.S. company denominated in foreign currency, foreign currency of buyer depreciates.

(1) N; (2) G; (3) L; (4) N; (5) G; (6) N; (7) N; (8) L

approach.

Chapter 10 Translation of Foreign Currency Financial Statements

Multiple Choice Questions

1. In accounting, the term translation refers to

A. the calculation of gains or losses from hedging transactions. B. the calculation of exchange rate gains or losses on individual transactions in foreign currencies. C. the procedure required to identify a company's functional currency. D. the calculation of gains or losses from all transactions for the year. E. a procedure to prepare a foreign subsidiary's financial statements for consolidation.

2. What is a company's functional currency?

A. the currency of the primary economic environment in which it operates. B. the currency of the country where it has its headquarters. C. the currency in which it prepares its financial statements. D. the reporting currency of its parent for a subsidiary. E. the currency it chooses to designate as such.

3. According to U.S. GAAP for a local currency perspective, which method is usually required for translating a foreign subsidiary's financial statements into the parent's reporting currency?

A. the temporal method. B. the current rate method. C. the current/noncurrent method. D. the monetary/nonmonetary method. E. the noncurrent rate method.

4. In translating a foreign subsidiary's financial statements, which exchange rate does the current method require for the subsidiary's assets and liabilities?

A. the exchange rate in effect when each asset or liability was acquired. B. the average exchange rate for the current year. C. a calculated exchange rate based on market value. D. the exchange rate in effect as of the balance sheet date. E. the exchange rate in effect at the start of the current year.

5. The translation adjustment from translating a foreign subsidiary's financial statements should be shown as

A. an asset or liability (depending on the balance) in the consolidated balance sheet. B. a revenue or expense (depending on the balance) in the consolidated income statement. C. a component of stockholders' equity in the consolidated balance sheet. D. a component of cash flows from financing activities in the consolidated statement of cash flows. E. an element of the notes which accompany the consolidated financial statements.

6. Westmore Ltd., is a British subsidiary of a U.S. company. Westmore's functional currency is the pound sterling (£). The following exchange rates were in effect during 2013:

Westmore reported sales of £1,500,000 during 2013. What amount (rounded) would have been included for this subsidiary in calculating consolidated sales?

A. $2,415,000. B. $2,400,000. C. $2,385,000. D. $943,396. E. $931,677.

7. Westmore Ltd., is a British subsidiary of a U.S. company. Westmore's functional currency is the pound sterling (£). The following exchange rates were in effect during 2013:

On December 31, 2013, Westmore had accounts receivable of £280,000. What amount (rounded) would have been included for this subsidiary in calculating consolidated accounts receivable?

A. $173,913. B. $176,100. C. $445,200. D. $448,000. E. $450,800.

8. Gunther Co. established a subsidiary in Mexico on January 1, 2013. The subsidiary engaged in the following transactions during 2013:

What amount of foreign exchange gain or loss would have been recognized in Gunther's consolidated income statement for 2013?

A. $800,000 gain. B. $760,000 gain. C. $320,000 loss. D. $280,000 loss. E. $440,000 loss.

9. Darron Co. was formed on January 1, 2013 as a wholly owned foreign subsidiary of a U.S. corporation. Darron's functional currency was the stickle (§). The following transactions and events occurred during 2013:

What exchange rate should have been used in translating Darron's revenues and expenses for 2013?

A. $1 = §.48. B. $1 = §.44. C. $1 = §.46. D. $1 = §.42. E. $1 = §.45.

10. Darron Co. was formed on January 1, 2013 as a wholly owned foreign subsidiary of a U.S. corporation. Darron's functional currency was the stickle (§). The following transactions and events occurred during 2013:

What was the amount of the translation adjustment for 2013?

11. Sinkal Co. was formed on January 1, 2013 as a wholly owned foreign subsidiary of a U.S. corporation. Sinkal's functional currency was the stickle (§). The following transactions and events occurred during 2013:

What was the amount of the translation adjustment for 2013?

12. Which accounts are translated using current exchange rates?

A. all revenues and expenses. B. all assets and liabilities. C. cash, receivables, and most liabilities. D. all current assets and liabilities. E. all noncurrent assets and liabilities.

13. Which accounts are remeasured using current exchange rates?

A. all revenues and expenses. B. all assets and liabilities. C. cash, receivables, and most liabilities. D. all current assets and liabilities. E. all noncurrent assets and liabilities.

14. For a foreign subsidiary that uses the U.S. dollar as its functional currency, what method is required to ready the financial statements for consolidation?

A. Current/Noncurrent Method. B. Monetary/Nonmonetary Method. C. Current Rate Method. D. Temporal Method. E. Indirect Method.

15. Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's functional currency was the U.S. dollar. Which one of the following statements would justify this conclusion?

A. Most of the subsidiary's sales and purchases were with companies in the U.S. B. Dilty's functional currency is the dollar and Dilty is the parent. C. Dilty's other subsidiaries all had the dollar as their functional currency. D. Generally accepted accounting principles require that the subsidiary's functional currency must be the dollar if consolidated financial statements are to be prepared. E. Dilty is located in the U.S.

16. Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's functional currency was the U.S. dollar. What must Dilty do to ready the subsidiary's financial statements for consolidation?

A. first translate them, then remeasure them. B. first remeasure them, then translate them. C. state all of the subsidiary's accounts in U.S. dollars using the exchange rate in effect at the balance sheet date. D. translate them. E. remeasure them.

17. Certain balance sheet accounts of a foreign subsidiary of the Tulip Co. had been stated in U.S. dollars as follows:

If the subsidiary's local currency is its functional currency, what total amount should be included in Tulip's balance sheet in U.S. dollars?

A. $609,000. B. $658,000. C. $602,000. D. $630,000. E. $616,000.

18. Certain balance sheet accounts of a foreign subsidiary of the Tulip Co. had been stated in U.S. dollars as follows:

If the U.S. dollar is the functional currency of this subsidiary, what total amount should be included in Tulip's balance sheet in U.S. dollars?

A. $609,000. B. $658,000. C. $602,000. D. $630,000. E. $616,000.

19. A subsidiary of Porter Inc., a U.S. company, was located in a foreign country. The functional currency of this subsidiary was the Stickle (§), the local currency where the subsidiary is located. The subsidiary acquired inventory on credit on November 1, 2012, for §120,000 that was sold on January 17, 2013 for §156,000. The subsidiary paid for the inventory on January 31, 2013. Currency exchange rates between the dollar and the Stickle were as follows:

What amount would have been reported for this inventory in Porter's consolidated balance sheet at December 31, 2012?

A. $24,000. B. $26,400. C. $22,800. D. $27,600. E. $28,800.

20. A subsidiary of Porter Inc., a U.S. company, was located in a foreign country. The functional currency of this subsidiary was the Stickle (§), the local currency where the subsidiary is located. The subsidiary acquired inventory on credit on November 1, 2012, for §120,000 that was sold on January 17, 2013 for §156,000. The subsidiary paid for the inventory on January 31, 2013. Currency exchange rates between the dollar and the Stickle were as follows:

What amount would have been reported for cost of goods sold on Porter's consolidated

income statement at December 31, 2013?

A. $24,000. B. $26,400. C. $22,800. D. $27,600. E. $28,800.

21. A U.S. company's foreign subsidiary had the following amounts in stickles (§) in 2013:

The average exchange rate during 2013 was §1 = $.96. The beginning inventory was acquired when the exchange rate was §1 = $1.20. The ending inventory was acquired when the exchange rate was §1 = $.90. The exchange rate at December 31, 2013 was §1 = $.84. Assuming that the foreign country had a highly inflationary economy, at what amount should the foreign subsidiary's cost of goods sold have been reflected in the 2013 U.S. dollar income statement?

A. $11,253,600. B. $11,577,600. C. $11,649,600. D. $11,613,600. E. $11,523,600.

22. A U.S. company's foreign subsidiary had the following amounts in stickles (§), the functional currency, in 2013:

The average exchange rate during 2013 was §1 = $.96. The beginning inventory was acquired when the exchange rate was §1 = $1.20. The ending inventory was acquired when the exchange rate was §1 = $.90. The exchange rate at December 31, 2013 was §1 = $.84. At what amount should the foreign subsidiary's cost of goods sold have been reflected in the 2013 U.S. dollar income statement?

A. $11,253,600. B. $11,577,600. C. $11,520,000. D. $11,613,600. E. $11,523,600.

23. A U.S. company's foreign subsidiary had the following amounts in stickles (§), the functional currency, in 2013:

The average exchange rate during 2013 was §1 = $.96. The beginning inventory was acquired when the exchange rate was §1 = $1.20. The ending inventory was acquired when the exchange rate was §1 = $.90. The exchange rate at December 31, 2013 was §1 = $.84. Assuming that the foreign nation for the subsidiary had a highly inflationary economy, at what amount should that foreign subsidiary's purchases have been reflected in the 2013 U.S. dollar income statement?

A. $11,865,600. B. $11,577,600. C. $11,520,000. D. $11,613,600. E. $11,523,600.

24. A historical exchange rate for common stock of a foreign subsidiary is best described as

A. The rate at date of the acquisition business combination. B. The rate when the common stock was originally issued for the acquisition transaction. C. The average rate from date of acquisition to the date of the balance sheet. D. The rate from the prior year's balances. E. The January 1 exchange rate.

25. A net asset balance sheet exposure exists and the foreign currency appreciates. Which of the following statements is true?

A. There is no translation adjustment. B. There is a transaction loss. C. There is a transaction gain. D. There is a negative translation adjustment. E. There is a positive translation adjustment.

26. A net asset balance sheet exposure exists and the foreign currency depreciates. Which of the following statements is true?

A. There is no translation adjustment. B. There is a transaction loss. C. There is a transaction gain. D. There is a negative translation adjustment. E. There is a positive translation adjustment.

27. A net liability balance sheet exposure exists and the foreign currency appreciates. Which of the following statements is true?

A. There is no translation adjustment. B. There is a transaction loss. C. There is a transaction gain. D. There is a negative translation adjustment. E. There is a positive translation adjustment.

28. A net liability balance sheet exposure exists and the foreign currency depreciates. Which of the following statements is true?

A. There is no translation adjustment. B. There is a transaction loss. C. There is a transaction gain. D. There is a negative translation adjustment. E. There is a positive translation adjustment.

29. Which method of translating a foreign subsidiary's financial statements is correct?

A. Historical rate method. B. Working capital method. C. Current rate method. D. Remeasurement. E. Temporal method.

30. Which method of remeasuring a foreign subsidiary's financial statements is correct?

A. Historical rate method. B. Working capital method. C. Current rate method. D. Translation. E. Temporal method.

31. Under the temporal method, inventory at market would be remeasured at what rate?

A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

32. Under the current rate method, inventory at market would be translated at what rate?

A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

33. Under the temporal method, common stock would be remeasured at what rate?

A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

34. Under the current rate method, common stock would be translated at what rate?

A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

35. Under the current rate method, property, plant & equipment would be translated at what rate?

A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

36. Under the temporal method, property, plant & equipment would be remeasured at what rate?

A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

37. Under the current rate method, retained earnings would be translated at what rate?

A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

38. Under the temporal method, retained earnings would be remeasured at what rate?

A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

39. Under the current rate method, depreciation expense would be translated at what rate?

A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

40. Under the temporal method, depreciation expense would be remeasured at what rate?

A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

41. Under the temporal method, how would cost of goods sold be remeasured?

A. Beginning of the year rate. B. Average rate. C. Current rate. D. A single historical rate. E. A combination of historical rates.

42. Under the current rate method, how would cost of goods sold be translated?

A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

43. Where is the disposition of a translation loss reported in the parent company's financial statements?

A. Net loss in the income statement. B. Cumulative translation adjustment as a deferred asset. C. Cumulative translation adjustment as a deferred liability. D. Accumulated other comprehensive income. E. Retained earnings.

44. Where is the disposition of a remeasurement gain or loss reported in the parent company's financial statements?

A. Net income/loss in the income statement. B. Cumulative translation adjustment as a deferred asset. C. Cumulative translation adjustment as a deferred liability. D. Other comprehensive income. E. Retained earnings.

45. A highly inflationary economy is defined as

A. Cumulative 5-year inflation in excess of 100%. B. Cumulative 3-year inflation in excess of 100%. C. Cumulative 5-year inflation in excess of 90%. D. Cumulative 3-year inflation in excess of 90%. E. Any country designated as a company operating in a third-world economy.

46. If a subsidiary is operating in a highly inflationary economy, how are the financial statements to be restated?

A. Historical rate. B. Working capital rate. C. Translation. D. Remeasurement. E. Current rate.

47. When consolidating a foreign subsidiary, which of the following statements is true?

A. Parent reports a cumulative translation adjustment from adjusting its investment account under the equity method. B. Parent reports a gain or loss in net income from adjusting its investment account under the equity method. C. Subsidiary's cumulative translation adjustment is carried forward to the consolidated balance sheet. D. Subsidiary's income/loss is carried forward to the consolidated balance sheet. E. All foreign currency gains/losses are eliminated in the consolidated income statement and balance sheet.

48. When preparing a consolidating statement of cash flows, which of the following statements is

false?

A. All operating activity items are translated at an average exchange rate for the period. B. A change in accounts receivable is translated using the current rate. C. A change in long-term debt is translated using the historical rate at the date of the change. D. Dividends paid are translated using the historical rate at the date of the payment. E. All items follow translation rates used for the balance sheet and the income statement.

49. When preparing a consolidation worksheet for a parent and its foreign subsidiary accounted for under the equity method, which of the following statements is false?

A. The cumulative translation adjustment included in the Investment in Subsidiary account is eliminated. B. The excess of fair value over book value since the date of acquisition is revalued for the change in exchange rate. C. The amount of equity income recognized by the parent in the current year is eliminated. D. The allocations of excess of fair value over book value at the date of acquisition are eliminated. E. The subsidiary's stockholders' equity accounts as of the beginning of the year are eliminated.

50. Esposito is an Italian subsidiary of a U.S. company. Esposito's ending inventory is valued at the average cost for the last quarter of the year. The following account balances are available for Esposito for 2013:

Compute the cost of goods sold for 2013 in U.S. dollars using the temporal method.

A. $376,650. B. $387,750. C. $388,800. D. $400,950. E. $409,050.

51. Esposito is an Italian subsidiary of a U.S. company. Esposito's ending inventory is valued at the average cost for the last quarter of the year. The following account balances are available for Esposito for 2013:

Compute the cost of goods sold for 2013 in U.S. dollars using the current rate method.

A. $376,550. B. $387,750. C. $388,800. D. $400,950. E. $409,050.

52. Esposito is an Italian subsidiary of a U.S. company. Esposito's ending inventory is valued at the average cost for the last quarter of the year. The following account balances are available for Esposito for 2013:

Compute ending inventory for 2013 under the temporal method.

A. $13,950. B. $14,100. C. $14,400. D. $14,850. E. $15,150.

53. Esposito is an Italian subsidiary of a U.S. company. Esposito's ending inventory is valued at the average cost for the last quarter of the year. The following account balances are available for Esposito for 2013:

Compute ending inventory for 2013 under the current rate method.

A. $13,950. B. $14,100. C. $14,400. D. $14,850. E. $15,150.

54. A foreign subsidiary uses the first-in first-out inventory method. The following inventory balances are given at December 31, 2013 in local currency units (LCU):

Compute the December 31, 2013, inventory balance using the lower of cost or market method under the temporal method.

A. $429,000. B. $457,600. C. $596,400. D. $568,000. E. $426,000.

55. A foreign subsidiary uses the first-in first-out inventory method. The following inventory balances are given at December 31, 2013 in local currency units (LCU):

Compute the December 31, 2013, inventory balance using the current rate method.

A. $454,400. B. $457,600. C. $596,400. D. $568,000. E. $426,000.

56. Perez Company, a Mexican subsidiary of a U.S. company, sold equipment costing 200,000 pesos with accumulated depreciation of 75,000 pesos for 140,000 pesos on March 1, 2013. The equipment was purchased on January 1, 2012. Relevant exchange rates for the peso are as follows:

The financial statements for Perez are translated by its U.S. parent. What amount of gain or loss would be reported in its translated income statement?

A. $1,530. B. $1,575. C. $1,590. D. $1,090. E. $1,650.

57. Perez Company, a Mexican subsidiary of a U.S. company, sold equipment costing 200,000 pesos with accumulated depreciation of 75,000 pesos for 140,000 pesos on March 1, 2013. The equipment was purchased on January 1, 2012. Relevant exchange rates for the peso are as follows:

The financial statements for Perez are remeasured by its U.S. parent. What amount of gain or loss would be reported in its translated income statement?

A. $1,530. B. $1,575. C. $1,590. D. $1,090. E. $1,650.

58. Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31, 2013, have been restated into U.S. dollars as follows:

Assuming the functional currency of the subsidiary is the U.S. dollar, what total should be included in Parker's consolidated balance sheet at December 31, 2013, for the above items?

A. $407,500. B. $418,000. C. $396,000. D. $403,500. E. $398,500.

59. Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31, 2013, have been restated into U.S. dollars as follows:

Assuming the functional currency of the subsidiary is the local currency, what total should be included in Parker's consolidated balance sheet at December 31, 2013, for the above items?

A. $407,500. B. $418,000. C. $396,000. D. $403,500. E. $398,500.

60. Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31, 2013, have been restated into U.S. dollars as follows:

If the current rate used to restate these amounts is $.95, what was the average historical rate used to arrive at the total amount for historical rates?

A. $0.9000. B. $1.0000. C. $0.9500. D. $0.9474. E. $1.0556.

61. Kennedy Company acquired all of the outstanding common stock of Hastie Company of Canada for U.S. $350,000 on January 1, 2013, when the exchange rate for the Canadian dollar (CAD) was U.S. $.70. The fair value of the net assets of Hastie was equal to their book value of CAD 450,000 on the date of acquisition. Any acquisition consideration excess over fair value was attributed to an unrecorded patent with a remaining life of five years. The functional currency of Hastie is the Canadian dollar. For the year ended December 31, 2013, Hastie's trial balance net income was translated at U.S. $25,000. The average exchange rate for the Canadian dollar during 2013 was U.S. $.68, and the 2013 year-end exchange rate was U.S. $.65. Calculate the U.S. dollar amount allocated to the patent at January 1, 2013.

A. $50,000. B. $35,000. C. $34,000. D. $32,500. E. $28,200.

62. Kennedy Company acquired all of the outstanding common stock of Hastie Company of Canada for U.S. $350,000 on January 1, 2013, when the exchange rate for the Canadian dollar (CAD) was U.S. $.70. The fair value of the net assets of Hastie was equal to their book value of CAD 450,000 on the date of acquisition. Any acquisition consideration excess over fair value was attributed to an unrecorded patent with a remaining life of five years. The functional currency of Hastie is the Canadian dollar. For the year ended December 31, 2013, Hastie's trial balance net income was translated at U.S. $25,000. The average exchange rate for the Canadian dollar during 2013 was U.S. $.68, and the 2013 year-end exchange rate was U.S. $.65. Amortization of the patent, translated, for 2013 would be

A. $7,000. B. $10,000. C. $6,800. D. $9,000. E. $6,500.

63. Kennedy Company acquired all of the outstanding common stock of Hastie Company of Canada for U.S. $350,000 on January 1, 2013, when the exchange rate for the Canadian dollar (CAD) was U.S. $.70. The fair value of the net assets of Hastie was equal to their book value of CAD 450,000 on the date of acquisition. Any acquisition consideration excess over fair value was attributed to an unrecorded patent with a remaining life of five years. The functional currency of Hastie is the Canadian dollar. For the year ended December 31, 2013, Hastie's trial balance net income was translated at U.S. $25,000. The average exchange rate for the Canadian dollar during 2013 was U.S. $.68, and the 2013 year-end exchange rate was U.S. $.65. Compute the amount of the patent reported in the consolidated balance sheet at December 31, 2013.

A. $28,200. B. $25,700. C. $35,000. D. $27,200. E. $26,000.

64. Kennedy Company acquired all of the outstanding common stock of Hastie Company of Canada for U.S. $350,000 on January 1, 2013, when the exchange rate for the Canadian dollar (CAD) was U.S. $.70. The fair value of the net assets of Hastie was equal to their book value of CAD 450,000 on the date of acquisition. Any acquisition consideration excess over fair value was attributed to an unrecorded patent with a remaining life of five years. The functional currency of Hastie is the Canadian dollar. For the year ended December 31, 2013, Hastie's trial balance net income was translated at U.S. $25,000. The average exchange rate for the Canadian dollar during 2013 was U.S. $.68, and the 2013 year-end exchange rate was U.S. $.65. Kennedy's share of Hastie's net income for 2013 would be

A. $18,000. B. $15,000. C. $18,200. D. $16,000. E. $18,500.

65. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012. Selected account balances are available for the year ended December 31, 2013, and are stated in Euro, the local currency.

Assume the functional currency is the Euro; compute the U.S. income statement amount for sales for 2013.

A. $364,000. B. $372,000. C. $380,000. D. $360,000. E. $404,000.

66. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012. Selected account balances are available for the year ended December 31, 2013, and are stated in Euro, the local currency.

Assume the functional currency is the Euro; compute the U.S. balance sheet amount for inventory at December 31, 2013.

A. $18,800. B. $19,600. C. $18,000. D. $20,200. E. $19,000.

67. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012. Selected account balances are available for the year ended December 31, 2013, and are stated in Euro, the local currency.

Assume the functional currency is the Euro; compute the U.S. balance sheet amount for equipment for 2013.

A. $81,900. B. $90,900. C. $83,700. D. $88,200. E. $85,500.

68. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012. Selected account balances are available for the year ended December 31, 2013, and are stated in Euro, the local currency.

Assume the functional currency is the Euro; compute the U.S. Statement of Retained Earnings amount reported for Dividends in 2013.

A. $19,000. B. $20,200. C. $18,600. D. $19,400. E. $19,600.

69. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012. Selected account balances are available for the year ended December 31, 2013, and are stated in Euro, the local currency.

Assume the functional currency is the Euro; compute the U.S. balance sheet amount for accumulated depreciation for 2013.

A. $40,950. B. $41,850. C. $45,450. D. $42,750. E. $44,100.

70. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012. Selected account balances are available for the year ended December 31, 2013, and are stated in Euro, the local currency.

Assume the functional currency is the Euro; compute the U.S. income statement amount for depreciation expense for 2013.

A. $8,190. B. $8,370. C. $8,820. D. $9,090. E. $8,550.

71. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012. Selected account balances are available for the year ended December 31, 2013, and are stated in Euro, the local currency.

Assume the functional currency is the U.S. Dollar; compute the U.S. income statement amount for sales for 2013.

A. $364,000. B. $372,000. C. $380,000. D. $360,000. E. $404,000.

72. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012. Selected account balances are available for the year ended December 31, 2013, and are stated in Euro, the local currency.

Assume the functional currency is the U.S. Dollar; compute the U.S. balance sheet amount for inventory, at cost, for 2013.

A. $18,800. B. $19,600. C. $18,000. D. $20,200. E. $19,000.

73. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012. Selected account balances are available for the year ended December 31, 2013, and are stated in Euro, the local currency.

Assume the functional currency is the U.S. Dollar; compute the U.S. balance sheet amount for equipment for 2013.

A. $81,900. B. $90,900. C. $83,700. D. $88,200. E. $85,500.

74. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012. Selected account balances are available for the year ended December 31, 2013, and are stated in Euro, the local currency.

Assume the functional currency is the U.S. Dollar; compute the U.S. statement of retained earnings amount for dividends for 2013.

A. $19,000. B. $20,200. C. $18,600. D. $19,400. E. $19,600.

75. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012. Selected account balances are available for the year ended December 31, 2013, and are stated in Euro, the local currency.

Assume the functional currency is the U.S. Dollar; compute the U.S. balance sheet amount for accumulated depreciation for 2013.

A. $40,950. B. $41,850. C. $45,450. D. $42,750. E. $44,100.

76. Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012. Selected account balances are available for the year ended December 31, 2013, and are stated in Euro, the local currency.

Assume the functional currency is the U.S. Dollar; compute the U.S. income statement amount for depreciation expense for 2013.

A. $8,190. B. $8,370. C. $8,820. D. $9,090. E. $8,550.

Essay Questions

77. A foreign subsidiary was acquired on January 1, 2013. Determine the exchange rate used to restate the following accounts at December 31, 2013. Land was purchased on October 1, 2013. Relevant exchange dates follow: (A) January 1, 2013 (B) October 1, 2013 (C) December 31, 2013 (D) Average, 2013 (E) Composite, using multiple dates. Identify the exchange rate used to translate items 1-5 when the functional currency is the foreign currency: ____ 1. Land. ____ 2. Equipment. ____ 3. Bonds payable. ____ 4. Common stock. ____ 5. Retained earnings. Identify the exchange rate used to remeasure the items 6-10 when the functional currency is the U.S. dollar: ____ 6. Land. ____ 7. Equipment. ____ 8. Bonds payable. ____ 9. Common stock. ____ 10. Retained earnings.

78. In translating a foreign subsidiary's financial statements, what exchange rate should be used for the subsidiary's revenues and expenses?

79. How can a parent corporation determine the functional currency for a foreign subsidiary that conducts business in more than one country?

80. What exchange rate should be used to translate (a) revenues and expenses that occur throughout the year and (b) a gain or loss that occurs on a specific day?

81. Perkle Co. owned a subsidiary in Belgium; the subsidiary's functional currency was the Belgian franc. During 2013, Perkle engaged in hedging transactions to offset part of the subsidiary's net asset position. How should the effects of exchange rate fluctuations on the currency hedge be accounted for?

82. Under what circumstances would the remeasurement of a foreign subsidiary's financial statements be required?

83. A foreign subsidiary of a U.S. corporation purchased equipment on January 4, 2010. (A.) How would depreciation expense on the equipment be translated for 2013? (B.) How would depreciation expense on the equipment be remeasured for 2013?

84. What exchange rate would be used to translate the asset and liability account balances of a foreign subsidiary? What justification can be given for using this exchange rate?

85. Farley Brothers, a U.S. company, had a subsidiary in Italy. Under what conditions would the U.S. dollar be the functional currency for this subsidiary?

86. What is the justification for the remeasurement of foreign currency transactions?

87. Contrast the purpose of remeasurement with the purpose of translation.

Short Answer Questions

88. On January 1, 2013, Fandu Corp. began operations of a foreign subsidiary. On April 1, 2013, the subsidiary purchased inventory costing 150,000 stickles. One-fourth of this inventory remained unsold at the end of 2013 while 40% of the liability from the purchase had not yet been paid. The pertinent indirect exchange rates were:

Required: What should have been the December 31, 2013 inventory and accounts payable balances for this foreign subsidiary as translated into U.S. dollars? (Round your answers to the nearest whole dollar.)

89. On January 1, 2013, Veldon Co., a U.S. corporation with the U.S. dollar as its functional currency, established Malont Co. as a subsidiary. Malont is located in the country of Sorania, and its functional currency is the stickle (§). Malont engaged in the following transactions during 2013:

Required: Calculate the translation adjustment for Malont. (Round your answers to the nearest whole dollar.)

90. Ginvold Co. began operating a subsidiary in a foreign country on January 1, 2013 by acquiring all of the common stock for §50,000 Stickles, the local currency. This subsidiary immediately borrowed §120,000 on a five-year note with ten percent interest payable annually beginning on January 1, 2014. A building was then purchased for §170,000 on January 1, 2013. This property had a ten-year anticipated life and no salvage value and was to be depreciated using the straight-line method. The building was immediately rented for three years to a group of local doctors for §6,000 per month. By year-end, payments totaling §60,000 had been received. On October 1, §5,000 were paid for a repair made on that date and it was the only transaction of this kind for the year. A cash dividend of §6,000 was transferred back to Ginvold on December 31, 2013. The functional currency for the subsidiary was the Stickle (§). Currency exchange rates were as follows:

Prepare an income statement for this subsidiary in stickles and then translate these amounts into U.S. dollars.

91. Ginvold Co. began operating a subsidiary in a foreign country on January 1, 2013 by acquiring all of the common stock for §50,000 Stickles, the local currency. This subsidiary immediately borrowed §120,000 on a five-year note with ten percent interest payable annually beginning on January 1, 2014. A building was then purchased for §170,000 on January 1, 2013. This property had a ten-year anticipated life and no salvage value and was to be depreciated using the straight-line method. The building was immediately rented for three years to a group of local doctors for §6,000 per month. By year-end, payments totaling §60,000 had been received. On October 1, §5,000 were paid for a repair made on that date and it was the only transaction of this kind for the year. A cash dividend of §6,000 was transferred back to Ginvold on December 31, 2013. The functional currency for the subsidiary was the Stickle (§). Currency exchange rates were as follows:

Prepare a statement of retained earnings for this subsidiary in stickles and then translate the amounts into U.S. dollars.

92. Ginvold Co. began operating a subsidiary in a foreign country on January 1, 2013 by acquiring all of the common stock for §50,000 Stickles, the local currency. This subsidiary immediately borrowed §120,000 on a five-year note with ten percent interest payable annually beginning on January 1, 2014. A building was then purchased for §170,000 on January 1, 2013. This property had a ten-year anticipated life and no salvage value and was to be depreciated using the straight-line method. The building was immediately rented for three years to a group of local doctors for §6,000 per month. By year-end, payments totaling §60,000 had been received. On October 1, §5,000 were paid for a repair made on that date and it was the only transaction of this kind for the year. A cash dividend of §6,000 was transferred back to Ginvold on December 31, 2013. The functional currency for the subsidiary was the Stickle (§). Currency exchange rates were as follows:

Prepare a balance sheet for this subsidiary in stickles and then translate the amounts into U.S. dollars.

93. Ginvold Co. began operating a subsidiary in a foreign country on January 1, 2013 by acquiring all of the common stock for §50,000 Stickles, the local currency. This subsidiary immediately borrowed §120,000 on a five-year note with ten percent interest payable annually beginning on January 1, 2014. A building was then purchased for §170,000 on January 1, 2013. This property had a ten-year anticipated life and no salvage value and was to be depreciated using the straight-line method. The building was immediately rented for three years to a group of local doctors for §6,000 per month. By year-end, payments totaling §60,000 had been received. On October 1, §5,000 were paid for a repair made on that date and it was the only transaction of this kind for the year. A cash dividend of §6,000 was transferred back to Ginvold on December 31, 2013. The functional currency for the subsidiary was the Stickle (§). Currency exchange rates were as follows:

Prepare a statement of cash flows for this subsidiary in stickles and then translate the amounts into U.S. dollars.

94. Boerkian Co. started 2013 with two assets: Cash of §26,000 (Stickles) and Land that originally cost §72,000 when acquired on April 4, 2010. On May 1, 2013, the company rendered services to a customer for §36,000, an amount immediately paid in cash. On October 1, 2013, the company incurred an operating expense of §22,000 that was immediately paid. No other transactions occurred during the year so an average exchange rate is not necessary. Currency exchange rates were as follows:

Assume that Boerkian was a foreign subsidiary of a U.S. multinational company and the stickle (§) was the functional currency of the subsidiary. Calculate the translation adjustment for this subsidiary for 2013 and state whether this is a positive or a negative adjustment.

95. Boerkian Co. started 2013 with two assets: Cash of §26,000 (Stickles) and Land that originally cost §72,000 when acquired on April 4, 2010. On May 1, 2013, the company rendered services to a customer for §36,000, an amount immediately paid in cash. On October 1, 2013, the company incurred an operating expense of §22,000 that was immediately paid. No other transactions occurred during the year so an average exchange rate is not necessary. Currency exchange rates were as follows:

Assume Boerkian was a foreign subsidiary of a U.S. multinational company and the U.S. dollar was the functional currency of the subsidiary. Prepare a schedule of changes in the net monetary assets of Boerkian for the year 2013 and properly label the resulting gain or loss.

96. Boerkian Co. started 2013 with two assets: Cash of §26,000 (Stickles) and Land that originally cost §72,000 when acquired on April 4, 2010. On May 1, 2013, the company rendered services to a customer for §36,000, an amount immediately paid in cash. On October 1, 2013, the company incurred an operating expense of §22,000 that was immediately paid. No other transactions occurred during the year so an average exchange rate is not necessary. Currency exchange rates were as follows:

Required: Assume that Boerkian was a foreign subsidiary of a U.S. multinational company and the local currency of the subsidiary (stickle) is the functional currency. On the December 31, 2013 balance sheet, what was the translated value of the Land account?

97. Boerkian Co. started 2013 with two assets: Cash of §26,000 (Stickles) and Land that originally cost §72,000 when acquired on April 4, 2010. On May 1, 2013, the company rendered services to a customer for §36,000, an amount immediately paid in cash. On October 1, 2013, the company incurred an operating expense of §22,000 that was immediately paid. No other transactions occurred during the year so an average exchange rate is not necessary. Currency exchange rates were as follows:

Assume that Boerkian was a foreign subsidiary of a U.S. multinational company and the U.S. dollar is the functional currency. On the December 31, 2013 balance sheet, what was the remeasured value of the Land account?

Chapter 10 Translation of Foreign Currency Financial Statements Answer Key

Multiple Choice Questions

In accounting, the term translation refers to

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

What is a company's functional currency?

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate method and when they are to be translated using the temporal method.

According to U.S. GAAP for a local currency perspective, which method is usually required for translating a foreign subsidiary's financial statements into the parent's reporting currency?

A. the temporal method. B. the current rate method. C. the current/noncurrent method. D. the monetary/nonmonetary method. E. the noncurrent rate method.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember

Difficulty: 1 Easy Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate method and when they are to be translated using the temporal method.

In translating a foreign subsidiary's financial statements, which exchange rate does the current method require for the subsidiary's assets and liabilities?

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

The translation adjustment from translating a foreign subsidiary's financial statements should be shown as

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

Westmore Ltd., is a British subsidiary of a U.S. company. Westmore's functional currency is the pound sterling (£). The following exchange rates were in effect during 2013:

Westmore reported sales of £1,500,000 during 2013. What amount (rounded) would have been included for this subsidiary in calculating consolidated sales?

A. $2,415,000. B. $2,400,000. C. $2,385,000. D. $943,396. E. $931,677. £1,500,000 × $1.59 (Avg Rate) = $2,385,000

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods. Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate method and when they are to be translated using the temporal method. Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate method and calculate the related translation adjustment.

Westmore Ltd., is a British subsidiary of a U.S. company. Westmore's functional currency is the pound sterling (£). The following exchange rates were in effect during 2013:

On December 31, 2013, Westmore had accounts receivable of £280,000. What amount (rounded) would have been included for this subsidiary in calculating consolidated accounts receivable?

A. $173,913. B. $176,100. C. $445,200. D. $448,000. E. $450,800. £280,000 × $1.61 = $450,800

Gunther Co. established a subsidiary in Mexico on January 1, 2013. The subsidiary engaged in the following transactions during 2013:

What amount of foreign exchange gain or loss would have been recognized in Gunther's consolidated income statement for 2013?

A. $800,000 gain. B. $760,000 gain. C. $320,000 loss. D. $280,000 loss. E. $440,000 loss.

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods. Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate method and when they are to be translated using the temporal method. Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the associated remeasurement gain or loss.

Darron Co. was formed on January 1, 2013 as a wholly owned foreign subsidiary of a U.S. corporation. Darron's functional currency was the stickle (§). The following transactions and events occurred during 2013:

What exchange rate should have been used in translating Darron's revenues and expenses for 2013?

A. $1 = §.48. B. $1 = §.44. C. $1 = §.46. D. $1 = §.42. E. $1 = §.45. Average Rate for Revenues & Expenses [$1 = §.44]

10.

What was the amount of the translation adjustment for 2013?

A. $52,000 decrease in relative value of net assets. B. $60,800 decrease in relative value of net assets. C. $61,200 decrease in relative value of net assets. D. $466,400 increase in relative value of net assets. E. $26,000 increase in relative value of net assets. [§1,000,000 × [$.42 - $.48] ($.06) = ($60,000)] + [§20,000 × [$.42 - $.46] ($.04)] = ($800) = ($60,800) Loss in Relative Asset Value

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods. Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate method and when they are to be translated using the temporal method. Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate method and calculate the related translation adjustment. 10-76 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11.

Sinkal Co. was formed on January 1, 2013 as a wholly owned foreign subsidiary of a U.S. corporation. Sinkal's functional currency was the stickle (§). The following transactions and events occurred during 2013:

What was the amount of the translation adjustment for 2013?

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods. Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate method and when they are to be translated using the temporal method. Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using 10-77 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

the current rate method and calculate the related translation adjustment.

12.

Which accounts are translated using current exchange rates?

A. all revenues and expenses. B. all assets and liabilities. C. cash, receivables, and most liabilities. D. all current assets and liabilities. E. all noncurrent assets and liabilities.

13.

Which accounts are remeasured using current exchange rates?

A. all revenues and expenses. B. all assets and liabilities. C. cash, receivables, and most liabilities. D. all current assets and liabilities. E. all noncurrent assets and liabilities.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

14.

For a foreign subsidiary that uses the U.S. dollar as its functional currency, what method is required to ready the financial statements for consolidation?

A. Current/Noncurrent Method. B. Monetary/Nonmonetary Method. C. Current Rate Method. D. Temporal Method. E. Indirect Method.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate method and when they are to be translated using the temporal method.

15.

Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's functional currency was the U.S. dollar. Which one of the following statements would justify this conclusion?

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate method and when they are to be translated using the temporal method.

16.

Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's functional currency was the U.S. dollar. What must Dilty do to ready the subsidiary's financial statements for consolidation?

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Evaluate Difficulty: 1 Easy Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate method and when they are to be translated using the temporal method.

17.

Certain balance sheet accounts of a foreign subsidiary of the Tulip Co. had been stated in U.S. dollars as follows:

If the subsidiary's local currency is its functional currency, what total amount should be included in Tulip's balance sheet in U.S. dollars?

A. $609,000. B. $658,000. C. $602,000. D. $630,000. E. $616,000. If LC is the Functional Currency, Current Rates Used for All Items = $602,000

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods. Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate method and when they are to be translated using the temporal method. Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate method and calculate the related translation adjustment.

18.

Certain balance sheet accounts of a foreign subsidiary of the Tulip Co. had been stated in U.S. dollars as follows:

If the U.S. dollar is the functional currency of this subsidiary, what total amount should be included in Tulip's balance sheet in U.S. dollars?

A. $609,000. B. $658,000. C. $602,000. D. $630,000. E. $616,000. If the Dollar is the Functional Currency, Current Rates Used for Receivables at their Historical Rate ($280,000 + $140,000 + $77,000 + $119,000) = $616,000

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods. Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate method and when they are to be translated using the temporal method. Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the associated remeasurement gain or loss.

19.

A subsidiary of Porter Inc., a U.S. company, was located in a foreign country. The functional currency of this subsidiary was the Stickle (§), the local currency where the subsidiary is located. The subsidiary acquired inventory on credit on November 1, 2012, for §120,000 that was sold on January 17, 2013 for §156,000. The subsidiary paid for the inventory on January 31, 2013. Currency exchange rates between the dollar and the Stickle were as follows:

What amount would have been reported for this inventory in Porter's consolidated balance sheet at December 31, 2012?

A. $24,000. B. $26,400. C. $22,800. D. $27,600. E. $28,800. §120,000 × $.20 = $24,000

the current rate method and calculate the related translation adjustment.

20.

What amount would have been reported for cost of goods sold on Porter's consolidated

income statement at December 31, 2013?

A. $24,000. B. $26,400. C. $22,800. D. $27,600. E. $28,800. §120,000 × $.24 = $28,800

Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate method and calculate the related translation adjustment.

21.

A U.S. company's foreign subsidiary had the following amounts in stickles (§) in 2013:

A. $11,253,600. B. $11,577,600. C. $11,649,600. D. $11,613,600. E. $11,523,600. Beginning Inventory [(§240,000 × $1.20) $288,000] - Purchases [Beginning Inventory §240,000 - COGS §12,000,000 - Ending Inventory §600,000 = §12,360,000 × $.96 = $11,865,600] - Ending Inventory [(§600,000 × $.90) $540,000] = COGS $11,613,600

22.

A U.S. company's foreign subsidiary had the following amounts in stickles (§), the functional currency, in 2013:

The average exchange rate during 2013 was §1 = $.96. The beginning inventory was acquired when the exchange rate was §1 = $1.20. The ending inventory was acquired when the exchange rate was §1 = $.90. The exchange rate at December 31, 2013 was §1 = $.84. At what amount should the foreign subsidiary's cost of goods sold have been reflected in the 2013 U.S. dollar income statement?

A. $11,253,600. B. $11,577,600. C. $11,520,000. D. $11,613,600. E. $11,523,600. §12,000,000 × $.96 = $11,520,000

23.

A U.S. company's foreign subsidiary had the following amounts in stickles (§), the functional currency, in 2013:

The average exchange rate during 2013 was §1 = $.96. The beginning inventory was acquired when the exchange rate was §1 = $1.20. The ending inventory was acquired when the exchange rate was §1 = $.90. The exchange rate at December 31, 2013 was §1 = $.84. Assuming that the foreign nation for the subsidiary had a highly inflationary economy, at what amount should that foreign subsidiary's purchases have been reflected in the 2013 U.S. dollar income statement?

A. $11,865,600. B. $11,577,600. C. $11,520,000. D. $11,613,600. E. $11,523,600. Beginning Inventory §240,000 - COGS §12,000,000 - Ending Inventory §600,000 = Purchases §12,360,000 × $.96 = $11,865,600

24.

A historical exchange rate for common stock of a foreign subsidiary is best described as

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

25.

A net asset balance sheet exposure exists and the foreign currency appreciates. Which of the following statements is true?

A. There is no translation adjustment. B. There is a transaction loss. C. There is a transaction gain. D. There is a negative translation adjustment. E. There is a positive translation adjustment.

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal 10-89 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

methods.

26.

A net asset balance sheet exposure exists and the foreign currency depreciates. Which of the following statements is true?

A. There is no translation adjustment. B. There is a transaction loss. C. There is a transaction gain. D. There is a negative translation adjustment. E. There is a positive translation adjustment.

27.

A net liability balance sheet exposure exists and the foreign currency appreciates. Which of the following statements is true?

A. There is no translation adjustment. B. There is a transaction loss. C. There is a transaction gain. D. There is a negative translation adjustment. E. There is a positive translation adjustment.

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement

Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

28.

A net liability balance sheet exposure exists and the foreign currency depreciates. Which of the following statements is true?

A. There is no translation adjustment. B. There is a transaction loss. C. There is a transaction gain. D. There is a negative translation adjustment. E. There is a positive translation adjustment.

29.

Which method of translating a foreign subsidiary's financial statements is correct?

A. Historical rate method. B. Working capital method. C. Current rate method. D. Remeasurement. E. Temporal method.

AACSB: Diversity AACSB: Reflective thinking 10-91 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate method and when they are to be translated using the temporal method.

30.

Which method of remeasuring a foreign subsidiary's financial statements is correct?

A. Historical rate method. B. Working capital method. C. Current rate method. D. Translation. E. Temporal method.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate method and when they are to be translated using the temporal method.

31.

Under the temporal method, inventory at market would be remeasured at what rate?

A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

AACSB: Diversity

AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

32.

Under the current rate method, inventory at market would be translated at what rate?

A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

33.

Under the temporal method, common stock would be remeasured at what rate?

A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

34.

Under the current rate method, common stock would be translated at what rate?

A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

35.

Under the current rate method, property, plant & equipment would be translated at what rate?

A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

36.

Under the temporal method, property, plant & equipment would be remeasured at what rate?

A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation

Blooms: Remember Difficulty: 2 Medium Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

37.

Under the current rate method, retained earnings would be translated at what rate?

A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

38.

Under the temporal method, retained earnings would be remeasured at what rate?

A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

39.

Under the current rate method, depreciation expense would be translated at what rate?

A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

40.

Under the temporal method, depreciation expense would be remeasured at what rate?

A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global

AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

41.

Under the temporal method, how would cost of goods sold be remeasured?

A. Beginning of the year rate. B. Average rate. C. Current rate. D. A single historical rate. E. A combination of historical rates.

42.

Under the current rate method, how would cost of goods sold be translated?

A. Beginning of the year rate. B. Average rate. C. Current rate. D. Historical rate. E. Composite amount.

AACSB: Diversity AACSB: Reflective thinking

AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

43.

Where is the disposition of a translation loss reported in the parent company's financial statements?

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate method and when they are to be translated using the temporal method.

44.

Where is the disposition of a remeasurement gain or loss reported in the parent company's financial statements?

45.

A highly inflationary economy is defined as

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using 10-100 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

the current rate method and when they are to be translated using the temporal method.

46.

If a subsidiary is operating in a highly inflationary economy, how are the financial statements to be restated?

A. Historical rate. B. Working capital rate. C. Translation. D. Remeasurement. E. Current rate.

47.

When consolidating a foreign subsidiary, which of the following statements is true?

AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Learning Objective: 10-06 Prepare a consolidation worksheet for a parent and its foreign subsidiary.

48.

When preparing a consolidating statement of cash flows, which of the following statements is false?

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate method and calculate the related translation adjustment.

49.

When preparing a consolidation worksheet for a parent and its foreign subsidiary accounted for under the equity method, which of the following statements is false?

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 10-06 Prepare a consolidation worksheet for a parent and its foreign subsidiary.

50.

Esposito is an Italian subsidiary of a U.S. company. Esposito's ending inventory is valued at the average cost for the last quarter of the year. The following account balances are available for Esposito for 2013:

Compute the cost of goods sold for 2013 in U.S. dollars using the temporal method.

A. $376,650. B. $387,750. C. $388,800. D. $400,950. E. $409,050. Begin Inventory (€20,000 × $.93 = $18,600) + Purchases (€400,000 × $.96 = $384,000) End Inventory (€15,000 × $.99 = $14,850) = COGS $387,750

51.

Compute the cost of goods sold for 2013 in U.S. dollars using the current rate method.

A. $376,550. B. $387,750. C. $388,800. D. $400,950. E. $409,050. €405,000 × $.96 = $388,800

52.

Compute ending inventory for 2013 under the temporal method.

A. $13,950. B. $14,100. C. $14,400. D. $14,850. E. $15,150. €15,000 × $.99 = $14,850

53.

Compute ending inventory for 2013 under the current rate method.

A. $13,950. B. $14,100. C. $14,400. D. $14,850. E. $15,150. €15,000 × $1.01 = $15,150

54.

A foreign subsidiary uses the first-in first-out inventory method. The following inventory balances are given at December 31, 2013 in local currency units (LCU):

Compute the December 31, 2013, inventory balance using the lower of cost or market method under the temporal method.

A. $429,000. B. $457,600. C. $596,400. D. $568,000. E. $426,000. Inventory at Cost 320,000 LCU × $1.43 = $457,600

55.

A foreign subsidiary uses the first-in first-out inventory method. The following inventory balances are given at December 31, 2013 in local currency units (LCU):

Compute the December 31, 2013, inventory balance using the current rate method.

A. $454,400. B. $457,600. C. $596,400. D. $568,000. E. $426,000. Inventory at Cost 320,000 LCU × $1.42 = $454,400

56.

Perez Company, a Mexican subsidiary of a U.S. company, sold equipment costing 200,000 pesos with accumulated depreciation of 75,000 pesos for 140,000 pesos on March 1, 2013. The equipment was purchased on January 1, 2012. Relevant exchange rates for the peso are as follows:

The financial statements for Perez are translated by its U.S. parent. What amount of gain or loss would be reported in its translated income statement?

A. $1,530. B. $1,575. C. $1,590. D. $1,090. E. $1,650. [Sales Price MNP 140,000 × .106 = $14,840] - [BV as Historical Cost MNP 200,000 - Acc. Deprec. MNP 75,000 = MNP 125,000 × .106 = $13,250] = $1,590 Gain

57.

The financial statements for Perez are remeasured by its U.S. parent. What amount of gain or loss would be reported in its translated income statement?

A. $1,530. B. $1,575. C. $1,590. D. $1,090. E. $1,650. [Sales Price MNP 140,000 × .106 = $14,840] - [BV as Historical Cost MNP 200,000 - Acc. Deprec. MNP 75,000 = MNP 125,000 × .110 = $13,750] = $1,090 Gain

58.

Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31, 2013, have been restated into U.S. dollars as follows:

Assuming the functional currency of the subsidiary is the U.S. dollar, what total should be included in Parker's consolidated balance sheet at December 31, 2013, for the above items?

A. $407,500. B. $418,000. C. $396,000. D. $403,500. E. $398,500. If the Dollar is the Functional Currency, Current Rates Used for All Items except PP&E at their Historical Values ($47,500 + $95,000 + $76,000 + $54,000 + $135,000) = $407,500

59.

Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31, 2013, have been restated into U.S. dollars as follows:

Assuming the functional currency of the subsidiary is the local currency, what total should be included in Parker's consolidated balance sheet at December 31, 2013, for the above items?

A. $407,500. B. $418,000. C. $396,000. D. $403,500. E. $398,500. If LC is the Functional Currency, Current Rates Used for All Items = $418,000

60.

Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31, 2013, have been restated into U.S. dollars as follows:

If the current rate used to restate these amounts is $.95, what was the average historical rate used to arrive at the total amount for historical rates?

A. $0.9000. B. $1.0000. C. $0.9500. D. $0.9474. E. $1.0556. $418,000/$.95 = $440,000; $396,000/$440,000 = $.90

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate method and when they are to be translated using the temporal method.

61.

Kennedy Company acquired all of the outstanding common stock of Hastie Company of Canada for U.S. $350,000 on January 1, 2013, when the exchange rate for the Canadian dollar (CAD) was U.S. $.70. The fair value of the net assets of Hastie was equal to their book value of CAD 450,000 on the date of acquisition. Any acquisition consideration excess over fair value was attributed to an unrecorded patent with a remaining life of five years. The functional currency of Hastie is the Canadian dollar. For the year ended December 31, 2013, Hastie's trial balance net income was translated at U.S. $25,000. The average exchange rate for the Canadian dollar during 2013 was U.S. $.68, and the 2013 year-end exchange rate was U.S. $.65. Calculate the U.S. dollar amount allocated to the patent at January 1, 2013.

A. $50,000. B. $35,000. C. $34,000. D. $32,500. E. $28,200. $350,000 - FV of Assets (C$450,000 × $.70) $315,000 = $35,000 Patent Value

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 10-06 Prepare a consolidation worksheet for a parent and its foreign subsidiary.

62.

Kennedy Company acquired all of the outstanding common stock of Hastie Company of Canada for U.S. $350,000 on January 1, 2013, when the exchange rate for the Canadian dollar (CAD) was U.S. $.70. The fair value of the net assets of Hastie was equal to their book value of CAD 450,000 on the date of acquisition. Any acquisition consideration excess over fair value was attributed to an unrecorded patent with a remaining life of five years. The functional currency of Hastie is the Canadian dollar. For the year ended December 31, 2013, Hastie's trial balance net income was translated at U.S. $25,000. The average exchange rate for the Canadian dollar during 2013 was U.S. $.68, and the 2013 year-end exchange rate was U.S. $.65. Amortization of the patent, translated, for 2013 would be

A. $7,000. B. $10,000. C. $6,800. D. $9,000. E. $6,500. Patent Value $35,000/$.70 = Patent Value C$50,000/5 yrs = C$10,000 per year × $.68 = $6,800 Translated

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

63.

Kennedy Company acquired all of the outstanding common stock of Hastie Company of Canada for U.S. $350,000 on January 1, 2013, when the exchange rate for the Canadian dollar (CAD) was U.S. $.70. The fair value of the net assets of Hastie was equal to their book value of CAD 450,000 on the date of acquisition. Any acquisition consideration excess over fair value was attributed to an unrecorded patent with a remaining life of five years. The functional currency of Hastie is the Canadian dollar. For the year ended December 31, 2013, Hastie's trial balance net income was translated at U.S. $25,000. The average exchange rate for the Canadian dollar during 2013 was U.S. $.68, and the 2013 year-end exchange rate was U.S. $.65. Compute the amount of the patent reported in the consolidated balance sheet at December 31, 2013.

A. $28,200. B. $25,700. C. $35,000. D. $27,200. E. $26,000. Patent Value C$50,000 - Amortization for 2013 C$10,000 = BV C$40,000 × $.65 = $26,000 Translated

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

64.

Kennedy Company acquired all of the outstanding common stock of Hastie Company of Canada for U.S. $350,000 on January 1, 2013, when the exchange rate for the Canadian dollar (CAD) was U.S. $.70. The fair value of the net assets of Hastie was equal to their book value of CAD 450,000 on the date of acquisition. Any acquisition consideration excess over fair value was attributed to an unrecorded patent with a remaining life of five years. The functional currency of Hastie is the Canadian dollar. For the year ended December 31, 2013, Hastie's trial balance net income was translated at U.S. $25,000. The average exchange rate for the Canadian dollar during 2013 was U.S. $.68, and the 2013 year-end exchange rate was U.S. $.65. Kennedy's share of Hastie's net income for 2013 would be

A. $18,000. B. $15,000. C. $18,200. D. $16,000. E. $18,500. Translated Net Income $25,000 - Translated Amortization $6,800 = $18,200 Parent's Share of Net Income for 2013

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-06 Prepare a consolidation worksheet for a parent and its foreign subsidiary.

65.

Quadros Inc., a Portuguese firm was acquired by a U.S. company on January 1, 2012. Selected account balances are available for the year ended December 31, 2013, and are stated in Euro, the local currency.

Assume the functional currency is the Euro; compute the U.S. income statement amount for sales for 2013.

A. $364,000. B. $372,000. C. $380,000. D. $360,000. E. $404,000. €400,000 × $.95 = $380,000

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement

Blooms: Apply Difficulty: 1 Easy Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods. Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate method and calculate the related translation adjustment.

66.

Assume the functional currency is the Euro; compute the U.S. balance sheet amount for inventory at December 31, 2013.

A. $18,800. B. $19,600. C. $18,000. D. $20,200. E. $19,000. €20,000 × $1.01 = $20,200

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement

67.

Assume the functional currency is the Euro; compute the U.S. balance sheet amount for equipment for 2013.

A. $81,900. B. $90,900. C. $83,700. D. $88,200. E. $85,500. €90,000 × $1.01 = $90,900

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement

Blooms: Apply Difficulty: 2 Medium Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods. Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate method and calculate the related translation adjustment.

68.

Assume the functional currency is the Euro; compute the U.S. Statement of Retained Earnings amount reported for Dividends in 2013.

A. $19,000. B. $20,200. C. $18,600. D. $19,400. E. $19,600. €20,000 × $.97 = $19,400

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement

69.

Assume the functional currency is the Euro; compute the U.S. balance sheet amount for accumulated depreciation for 2013.

A. $40,950. B. $41,850. C. $45,450. D. $42,750. E. $44,100. €45,000 × $1.01 = $45,450

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement

70.

Assume the functional currency is the Euro; compute the U.S. income statement amount for depreciation expense for 2013.

A. $8,190. B. $8,370. C. $8,820. D. $9,090. E. $8,550. €9,000 × $.95 = $8,550

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement

71.

Assume the functional currency is the U.S. Dollar; compute the U.S. income statement amount for sales for 2013.

A. $364,000. B. $372,000. C. $380,000. D. $360,000. E. $404,000. €400,000 × $.95 = $380,000

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement

Blooms: Apply Difficulty: 1 Easy Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods. Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the associated remeasurement gain or loss.

72.

Assume the functional currency is the U.S. Dollar; compute the U.S. balance sheet amount for inventory, at cost, for 2013.

A. $18,800. B. $19,600. C. $18,000. D. $20,200. E. $19,000. €20,000 × $.94 = $18,800

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement

Blooms: Apply Difficulty: 1 Easy Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods. Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the associated remeasurement gain or loss.

73.

Assume the functional currency is the U.S. Dollar; compute the U.S. balance sheet amount for equipment for 2013.

A. $81,900. B. $90,900. C. $83,700. D. $88,200. E. $85,500. €90,000 × $.91 = $81,900

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement

Blooms: Apply Difficulty: 2 Medium Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods. Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the associated remeasurement gain or loss.

74.

Assume the functional currency is the U.S. Dollar; compute the U.S. statement of retained earnings amount for dividends for 2013.

A. $19,000. B. $20,200. C. $18,600. D. $19,400. E. $19,600. €20,000 × $.97 = $19,400

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement

Blooms: Apply Difficulty: 1 Easy Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods. Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the associated remeasurement gain or loss.

75.

Assume the functional currency is the U.S. Dollar; compute the U.S. balance sheet amount for accumulated depreciation for 2013.

A. $40,950. B. $41,850. C. $45,450. D. $42,750. E. $44,100. €45,000 × $.91 = $40,950

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement

Blooms: Apply Difficulty: 2 Medium Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods. Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the associated remeasurement gain or loss.

76.

Assume the functional currency is the U.S. Dollar; compute the U.S. income statement amount for depreciation expense for 2013.

A. $8,190. B. $8,370. C. $8,820. D. $9,090. E. $8,550. €9,000 × $.91 = $8,190

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement

Blooms: Apply Difficulty: 2 Medium Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods. Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the associated remeasurement gain or loss.

Essay Questions

77.

A foreign subsidiary was acquired on January 1, 2013. Determine the exchange rate used to restate the following accounts at December 31, 2013. Land was purchased on October 1, 2013. Relevant exchange dates follow: (A) January 1, 2013 (B) October 1, 2013 (C) December 31, 2013 (D) Average, 2013 (E) Composite, using multiple dates. Identify the exchange rate used to translate items 1-5 when the functional currency is the foreign currency: ____ 1. Land. ____ 2. Equipment. ____ 3. Bonds payable. ____ 4. Common stock. ____ 5. Retained earnings. Identify the exchange rate used to remeasure the items 6-10 when the functional currency is the U.S. dollar: ____ 6. Land. ____ 7. Equipment. ____ 8. Bonds payable. ____ 9. Common stock. ____ 10. Retained earnings.

(1.) C; (2) C; (3.) C; (4.) A; (5.) E; (6.) B; (7.) A; (8.) C; (9.) A; (10.) E

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global

AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods. Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate method and when they are to be translated using the temporal method.

78.

In translating a foreign subsidiary's financial statements, what exchange rate should be used for the subsidiary's revenues and expenses?

The historical rate that was in effect when the revenues and expenses were incurred should be used unless those revenues and expenses occur throughout the year, and then a weighted average exchange rate for the year may be used.

79.

How can a parent corporation determine the functional currency for a foreign subsidiary that conducts business in more than one country?

If the foreign subsidiary has distinct and separable operations in different countries, each of these operations can use a different currency. If the subsidiary does not have distinct operations in different countries, the currency in which the most transactions are carried out should be selected.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate method and when they are to be translated using the temporal method.

80.

What exchange rate should be used to translate (a) revenues and expenses that occur throughout the year and (b) a gain or loss that occurs on a specific day?

Revenues and expenses occurring throughout the year may be translated using the average exchange rate for the year. A gain or loss occurring on a specific date should be translated using the rate in effect on that day.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

81.

Perkle Co. owned a subsidiary in Belgium; the subsidiary's functional currency was the Belgian franc. During 2013, Perkle engaged in hedging transactions to offset part of the subsidiary's net asset position. How should the effects of exchange rate fluctuations on the currency hedge be accounted for?

Any effect on the contract resulting from exchange rate fluctuations is classified as a translation adjustment, rather than as a foreign exchange gain or loss.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 10-05 Understand the rationale for hedging a net investment in a foreign operation and describe the treatment of gains and losses on hedges used for this purpose.

82.

Under what circumstances would the remeasurement of a foreign subsidiary's financial statements be required?

The remeasurement of a foreign subsidiary's financial statements is required in the following situations: (A.) when the subsidiary's functional currency is the U.S. dollar. (B.) when the subsidiary operates in a highly inflationary economy. (C.) when the local currency is not the functional currency and the statements first need to be remeasured from one foreign currency to another foreign currency.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global 10-146 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate method and when they are to be translated using the temporal method.

83.

A foreign subsidiary of a U.S. corporation purchased equipment on January 4, 2010. (A.) How would depreciation expense on the equipment be translated for 2013? (B.) How would depreciation expense on the equipment be remeasured for 2013?

(A.) Depreciation expense would be translated using the average exchange rate for 2013. (B.) Depreciation expense would be remeasured using the exchange rate in effect when the equipment was purchased.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods. Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate method and when they are to be translated using the temporal method.

84.

What exchange rate would be used to translate the asset and liability account balances of a foreign subsidiary? What justification can be given for using this exchange rate?

Assets and liabilities are translated using the current exchange rate, the rate in effect at the balance sheet date. This rate is chosen because assets and liabilities are expected to affect future cash flows. Therefore, they should be translated using the most up-to-date exchange rates available.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

85.

Farley Brothers, a U.S. company, had a subsidiary in Italy. Under what conditions would the U.S. dollar be the functional currency for this subsidiary?

To determine the subsidiary's functional currency, Farley Brothers should look at the volume of the subsidiary's transactions in various currencies. If most of the subsidiary's sales and purchases are in dollars, the dollar may be the logical choice for the functional currency. If there are many transactions between the subsidiary and the parent, and if most of the subsidiary's financing comes from the U.S., the dollar may be a better choice than the euro.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Blooms: Understand 10-148 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 1 Easy Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods.

86.

What is the justification for the remeasurement of foreign currency transactions?

Remeasurement is needed for transactions denominated in a currency other than the entity's functional currency. A U.S. company that engages in transactions in other countries may have to remeasure some of its transactions. The implicit justification for remeasurement is that foreign currency transactions which affect monetary assets and liabilities have a direct effect on the entity's cash flows. There will be direct effects on future cash flows in the functional currency, and thus an effect on net income.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the associated remeasurement gain or loss.

87.

Contrast the purpose of remeasurement with the purpose of translation.

The purpose of translation is to transform a subsidiary's financial statements, prepared in its functional currency, into the reporting currency of the parent. The purpose of remeasurement is to restate transactions from one currency into the functional currency of the entity. Remeasurement is also required when a subsidiary's financial statements have been denominated in a currency other than the subsidiary's functional currency.

AACSB: Diversity AACSB: Reflective thinking

AICPA BB: Global AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods. Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the associated remeasurement gain or loss.

Short Answer Questions

88.

On January 1, 2013, Fandu Corp. began operations of a foreign subsidiary. On April 1, 2013, the subsidiary purchased inventory costing 150,000 stickles. One-fourth of this inventory remained unsold at the end of 2013 while 40% of the liability from the purchase had not yet been paid. The pertinent indirect exchange rates were:

AACSB: Analytic

AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods. Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate method and calculate the related translation adjustment.

89.

On January 1, 2013, Veldon Co., a U.S. corporation with the U.S. dollar as its functional currency, established Malont Co. as a subsidiary. Malont is located in the country of Sorania, and its functional currency is the stickle (§). Malont engaged in the following transactions during 2013:

Required: Calculate the translation adjustment for Malont. (Round your answers to the nearest whole dollar.)

AACSB: Analytic AACSB: Diversity AICPA BB: Global

AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate method and calculate the related translation adjustment.

90.

Ginvold Co. began operating a subsidiary in a foreign country on January 1, 2013 by acquiring all of the common stock for §50,000 Stickles, the local currency. This subsidiary immediately borrowed §120,000 on a five-year note with ten percent interest payable annually beginning on January 1, 2014. A building was then purchased for §170,000 on January 1, 2013. This property had a ten-year anticipated life and no salvage value and was to be depreciated using the straight-line method. The building was immediately rented for three years to a group of local doctors for §6,000 per month. By year-end, payments totaling §60,000 had been received. On October 1, §5,000 were paid for a repair made on that date and it was the only transaction of this kind for the year. A cash dividend of §6,000 was transferred back to Ginvold on December 31, 2013. The functional currency for the subsidiary was the Stickle (§). Currency exchange rates were as follows:

Prepare an income statement for this subsidiary in stickles and then translate these amounts into U.S. dollars.

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply

Difficulty: 2 Medium Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods. Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate method and calculate the related translation adjustment.

91.

Prepare a statement of retained earnings for this subsidiary in stickles and then translate the amounts into U.S. dollars.

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium

Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods. Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate method and calculate the related translation adjustment.

92.

Prepare a balance sheet for this subsidiary in stickles and then translate the amounts into U.S. dollars.

Ginvold Co. Subsidiary Balance Sheet December 31, 2013

93.

Prepare a statement of cash flows for this subsidiary in stickles and then translate the amounts into U.S. dollars.

Ginvold Co. Subsidiary Statement of Cash Flows For the Year Ended, December 31, 2013

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using the current rate method and calculate the related translation adjustment.

94.

Boerkian Co. started 2013 with two assets: Cash of §26,000 (Stickles) and Land that originally cost §72,000 when acquired on April 4, 2010. On May 1, 2013, the company rendered services to a customer for §36,000, an amount immediately paid in cash. On October 1, 2013, the company incurred an operating expense of §22,000 that was immediately paid. No other transactions occurred during the year so an average exchange rate is not necessary. Currency exchange rates were as follows:

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 10-03 Translate a foreign subsidiary's financial statements into its parent's reporting currency using 10-162 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

the current rate method and calculate the related translation adjustment.

95.

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement

Blooms: Apply Difficulty: 3 Hard Learning Objective: 10-04 Remeasure a foreign subsidiary's financial statements using the temporal method and calculate the associated remeasurement gain or loss.

96.

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 10-01 Explain the theoretical underpinnings and the limitations of the current rate and temporal methods. Learning Objective: 10-02 Describe guidelines as to when foreign currency financial statements are to be translated using the current rate method and when they are to be translated using the temporal method. 10-164 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

97.

Chapter 11 Worldwide Accounting Diversity and International Standards

Multiple Choice Questions

1. In the United States, foreign companies filing annual reports with the SEC that are not prepared in accordance with U.S. GAAP must:

A. present financial statements that comply with international GAAP. B. conform with U.S. GAAP or present a reconciliation to U.S. GAAP. C. have a demonstrated need for capital to be used for operations in the U.S. D. use the U.S. dollar as their reporting currency. E. use IFRS, or use foreign GAAP and provide a reconciliation to U.S. GAAP.

2. Which of the following are not key FASB initiatives to further converge IFRS and U.S. GAAP?

A. Short-term convergence projects. B. Joint projects sharing FASB and IASB staff resources. C. Having the IASB Chairman in-residence at the FASB office. D. Monitoring ongoing IASB projects. E. Researching differences between U.S. GAAP and IFRS.

3. In countries where there is less pressure for public accountability and information disclosure:

A. information needs can be satisfied by requesting information from internal company sources. B. public offerings of stock shares are the primary source of financing for companies. C. accounting information is prepared to meet the needs of taxing authorities. D. accounting standards emphasize accounting for high inflation situations. E. the accounting focus is on recent market economy reforms.

4. Which of the following is not an IFRS pronouncement originally issued by the IASB?

A. Business Combinations. B. First-Time Adoption of IFRS. C. Financial Instruments: Disclosures. D. Agriculture. E. Operating Segments.

5. In countries of Latin America:

A. accounting practice is designed to provide adequate information to investors and creditors. B. accounting standards emphasize accounting for high inflation situations. C. banks are the primary source of financing for companies. D. accounting focuses are based recent market economy reforms. E. accounting information is prepared to meet the needs of governmental planners.

6. Which of the following is not a way for a country to use IFRS?

A. Require foreign companies listed on that country's stock exchange to use IFRS for consolidated financial statements. B. Allow foreign companies listed on that country's stock exchange to use IFRS. C. Allow that country's companies listed on its stock exchange to use IFRS. D. Adopt IFRS as that country's national GAAP. E. All of these are ways a country can use IFRS.

7. Convergence of accounting standards would not occur by:

A. FASB adopting an existing IASB standard. B. IASB adopting an existing FASB standard. C. IASB issuing a new standard. D. IASB and FASB jointly developing a new standard. E. IASB and FASB each issuing a similar but not identical standard.

8. The types of differences that exist between IFRS and U.S. GAAP would not generally include:

A. Presentation differences. B. Measurement differences. C. Disclosure differences. D. Comparability differences. E. Recognition differences.

9. Which of the following is not true about IFRS?

A. The IASB does not have the ability to enforce proper usage of IFRS. B. IFRS is available to any organization or nation that wishes to use those standards. C. IFRS is a comprehensive set of financial reporting standards. D. IFRS includes only pronouncements issued by the IASB. E. IFRS are considered as generally accepted accounting principles.

10. Which one of the following is not a background requirement for any IASB members?

A. Audit. B. Tax. C. Financial statement preparation. D. Academia. E. Financial statement user.

11. Which of the following are not authoritative pronouncements of International Financial Reporting Standards (IFRSs)? 1) International Financial Reporting Standards issued by the IASB 2) International Accounting Standards issued by the IASC and adopted by the IASB 3) Interpretations originated by the International Financial Reporting Interpretations Committee (IFRIC) 4) U.S. Generally Accepted Accounting Principles

A. 4 only. B. 3 and 4. C. 1, 3, and 4. D. 2, 3, and 4. E. 1, 2, 3, and 4.

12. The IASB and FASB are working on several joint projects. Which of the following is not a topic of the Revenue Recognition Project?

A. Eliminate inconsistencies in existing literature. B. Cash flow presentation of revenue. C. Business models issues for revenue recognition. D. Conceptual basis as framework for future issues of revenue recognition. E. Contract-based revenue recognition.

13. Which of the following is not a factor influencing a country's financial reporting practices?

A. Providers of financing. B. Inflation. C. Legal system. D. Gross National Product. E. Political and economic ties.

14. Which of the following statements is false regarding a country's legal system?

A. The two major types of legal systems are common law and codified Roman law. B. Common law originated in the Roman jus civile. C. Code law countries tend to have more statutes governing a wider range of human activity. D. Accounting law is rather general in code law countries. E. A nongovernmental organization is more likely to develop in a common law country than in a code law country.

15. Which of the following statements is false regarding providers of financing?

A. There is less pressure to provide accounting information in those countries in which financing is primarily by banks. B. In countries where capital stock is the primary source of financing, accounting emphasizes the income statement. C. Disclosures are less extensive in those countries financed primarily by stock. D. Bankers tend to focus more on solvency and stockholders focus more on profitability. E. As companies become more dependent on financing by stock, more information is demanded.

16. Which of the following is not a problem caused by diverse accounting practices across countries?

A. Preparation of consolidated financial statements. B. Gaining access to foreign capital markets. C. Lack of comparability of financial statements between companies in the same country. D. Cost and expertise required of consolidations accounting staff. E. Need for a company to maintain multiple sets of accounting records.

17. A U.S. company has many foreign subsidiaries and wants to convert its consolidated financial statements from U.S. GAAP to IFRS. Which of the following items is not one of the likely accounting issues to resolve for the opening IFRS balance sheet?

A. Inventory valuation. B. Capitalizing development costs. C. Classifying deferred taxes as current or noncurrent. D. Acquisition value for a subsidiary. E. Liability for restructuring charges.

18. A U.S. company has many foreign subsidiaries and wants to convert its consolidated financial statements from U.S. GAAP to IFRS. Which of the following items is not one of the likely accounting issues to resolve for the opening IFRS balance sheet?

A. Measuring asset impairment. B. Classifying extraordinary items. C. Sale and leaseback gain recognition. D. Measuring salaries expense. E. Prior service cost recognition for pension amendments.

19. Foreign companies whose stock is listed on a U.S. stock exchange and using foreign GAAP other than IFRS must file their annual report with the SEC on:

A. Form 8-A. B. Form 10-A. C. Form 16-K. D. Form 20-F. E. Form 20-K.

20. What international organization currently promulgates IFRS?

A. IASB. B. IASC. C. IOSCO. D. FASB. E. EU.

21. Which topic was not covered by FASB under the short-term convergence project?

A. Inventory costs. B. Asset exchanges. C. Liability transfers. D. Accounting changes. E. Earnings-per-share.

22. The IASB and FASB are working on several joint projects. What is the purpose of the Financial Statement Presentation Project?

A. to provide guidance on the application of the acquisition method. B. to enhance the usefulness of information in assessing the financial performance of the reporting enterprise. C. to develop a common comprehensive standard on revenue recognition. D. to develop a common conceptual framework that both boards can use as a basis for future standard-setting. E. to agree upon financial statement titles that will have no differentiation after translation to various languages.

23. The IASB and FASB are working on several joint projects. What is the purpose of the Revenue Recognition Project?

24. The following information pertains to inventory held by a company at December 31, 2013.

What amount of inventory should be reported under U.S. GAAP?

A. $25,000. B. $21,000. C. $20,000. D. $16,800. E. $16,000.

25. The following information pertains to inventory held by a company at December 31, 2013.

What is the amount of inventory loss shown on the income statement under U.S. GAAP?

A. $1,000. B. $2,000. C. $4,000. D. $5,000. E. $8,200.

26. The following information pertains to inventory held by a company at December 31, 2013.

What amount of inventory should be reported under IFRS?

A. $25,000 B. $21,000 C. $20,000 D. $4,000 E. $5,000

27. The following information pertains to inventory held by a company at December 31, 2013.

What is the amount of inventory loss shown on the income statement under IFRS?

A. $1,000. B. $2,000. C. $4,000. D. $5,000. E. $6,000.

28. The following information pertains to inventory held by a company at December 31, 2013.

As a result of inventory loss, what is the difference in income between reporting using U.S. GAAP and IFRS?

A. U.S. GAAP income is $1,000 higher. B. U.S. GAAP income is $2,000 lower. C. IFRS income is $1,000 higher. D. IFRS income is $1,000 lower. E. IFRS income is $5,000 higher.

29. The following information pertains to inventory held by a company on December 31, 2013.

What amount of inventory should be reported under U.S. GAAP?

A. $16,000. B. $27,000. C. $30,000. D. $21,600. E. $20,000.

30. The following information pertains to inventory held by a company on December 31, 2013.

What is the amount of inventory loss shown on the income statement under U.S. GAAP?

A. $0. B. $3,000. C. $14,000. D. $10,000. E. $8,400.

31. The following information pertains to inventory held by a company on December 31, 2013.

What amount of inventory should be reported under IFRS?

A. $25,000. B. $27,000. C. $30,000. D. $5,000. E. $2,000.

32. The following information pertains to inventory held by a company on December 31, 2013.

What is the amount of inventory loss shown on the income statement under IFRS?

A. $0. B. $3,000. C. $14,000. D. $10,000. E. $8,400.

33. The following information pertains to inventory held by a company on December 31, 2013.

As a result of inventory loss, what is the difference in income between reporting using U.S. GAAP and IFRS?

A. U.S. GAAP income is $3,000 higher. B. U.S. GAAP income is $10,000 lower. C. IFRS income is $8,400 higher. D. IFRS income is $3,000 lower. E. IFRS income is $5,400 higher.

34. A company acquired a new piece of equipment on January 1, 2011 at a cost of $200,000. The equipment is expected to have a useful life of 10 years, a residual value of $20,000 and is depreciated on a straight-line basis. On January 1, 2013, the equipment was appraised and determined to have a fair value of $190,000 and a residual value of $25,000 and a remaining useful life of 10 years. At what amount should the equipment be reported on the December 31, 2013 balance sheet under U.S. GAAP?

A. $160,000 B. $150,000 C. $146,000 D. $140,000 E. $116,000

35. A company acquired a new piece of equipment on January 1, 2011 at a cost of $200,000. The equipment is expected to have a useful life of 10 years, a residual value of $20,000 and is depreciated on a straight-line basis. On January 1, 2013, the equipment was appraised and determined to have a fair value of $190,000 and a residual value of $25,000 and a remaining useful life of 10 years. At what amount should the equipment be reported on the December 31, 2013 balance sheet under the IFRS cost model?

A. $160,000 B. $150,000 C. $146,000 D. $140,000 E. $116,000

36. A company acquired a new piece of equipment on January 1, 2011 at a cost of $200,000. The equipment is expected to have a useful life of 10 years, a residual value of $20,000 and is depreciated on a straight-line basis. On January 1, 2013, the equipment was appraised and determined to have a fair value of $190,000 and a residual value of $25,000 and a remaining useful life of 10 years. At what amount should the equipment be reported on the December 31, 2013 balance sheet under the IFRS revaluation model?

A. $190,000 B. $173,500 C. $165,000 D. $136,000 E. $110,000

37. A company incurs research and development costs of $200,000 in 2013 of which $50,000 of these costs relate to development activities because certain criteria have been met which suggest that an intangible asset has been created. What amount should be recognized as research and development expense in 2013 using U.S. GAAP?

A. $50,000. B. $150,000. C. $200,000. D. $0. E. $250,000.

38. A company incurs research and development costs of $200,000 in 2013 of which $50,000 of these costs relate to development activities because certain criteria have been met which suggest that an intangible asset has been created. What amount should be recognized as research and development expense in 2013 using IFRS?

A. $50,000. B. $150,000. C. $200,000. D. $0. E. $250,000.

39. A company incurs research and development costs of $200,000 in 2013 of which $50,000 of these costs relate to development activities because certain criteria have been met which suggest that an intangible asset has been created. As a result of research and development costs, what is the difference in income between reporting using U.S. GAAP and IFRS in 2013?

A. U.S. GAAP income is $50,000 higher. B. U.S. GAAP income is $50,000 lower. C. IFRS income is $50,000 lower. D. IFRS income is $150,000 lower. E. IFRS income is $150,000 higher.

40. A company sells a building to a bank in 2013 at a gain of $100,000 and immediately leases the building back for period of five years. The lease is accounted for as an operating lease. The building was originally purchased for $200,000 and currently had a book value of $50,000 at the date of the sale. What amount should be recognized in 2013 as a gain on the sale using U.S. GAAP?

A. $20,000. B. $50,000. C. $100,000. D. $150,000. E. $200,000.

41. A company sells a building to a bank in 2013 at a gain of $100,000 and immediately leases the building back for period of five years. The lease is accounted for as an operating lease. The building was originally purchased for $200,000 and currently had a book value of $50,000 at the date of the sale. What amount should be recognized as a gain in 2013 using IFRS?

A. $20,000. B. $50,000. C. $100,000. D. $150,000. E. $200,000.

42. A company sells a building to a bank in 2013 at a gain of $100,000 and immediately leases the building back for period of five years. The lease is accounted for as an operating lease. The building was originally purchased for $200,000 and currently had a book value of $50,000 at the date of the sale. As a result of the sale and leaseback transaction in 2013, what is the difference between income using U.S. GAAP and IFRS in 2013?

A. U.S. GAAP income is $80,000 higher. B. U.S. GAAP income is $100,000 higher. C. IFRS income is $50,000 lower. D. IFRS income is $100,000 lower. E. IFRS income is $80,000 higher.

43. A company sells a building to a bank in 2013 at a gain of $100,000 and immediately leases the building back for period of five years. The lease is accounted for as an operating lease. The building was originally purchased for $200,000 and currently had a book value of $50,000 at the date of the sale. As a result of the sale and leaseback transaction in 2013, what is the difference between income using U.S. GAAP and IFRS in 2014?

A. $0. B. U.S. GAAP income is $20,000 higher. C. IFRS income is $80,000 lower. D. IFRS income is $60,000 lower. E. IFRS income is $80,000 higher.

44. A company sells a building to a bank in 2013 at a gain of $100,000 and immediately leases the building back for period of five years. The lease is accounted for as an operating lease. The building was originally purchased for $200,000 and currently had a book value of $50,000 at the date of the sale. Assume the seller of the building is a U.S. company that is preparing to convert from U.S. GAAP to IFRS. At December 31, 2014, with regard to the sale and leaseback accounting, what amount would reconcile stockholders' equity from U.S. GAAP to IFRS at December 31, 2014?

A. Increase $40,000. B. Decrease $40,000. C. Decrease $60,000. D. Increase $60,000. E. No amount would be necessary for reconciliation.

Essay Questions

45. Why does each country have its own unique set of financial reporting practices?

46. What are the two major types of legal systems used around the world?

47. The major providers of financing in some countries are stockholders, while other countries predominantly use banks as the main financing source. What difference does it make to accounting disclosures in comparing a company from one of each of those countries?

48. What problems are caused by diverse accounting practices?

49. What is meant by harmonization of accounting standards?

50. How did the early International Accounting Standards (IAS) obtain support from a sufficient number of board members?

51. What is the IOSCO?

52. What were the major objectives of the Treaty of Rome?

53. Which two EU directives have helped harmonize accounting standards?

54. What are the three authoritative pronouncements that make up the International Financial Reporting Standards (IFRS)?

55. What are the four different ways IFRS can be used by a country?

56. What are the six key FASB initiatives to further convergence?

57. What accounting topics were covered under the FASB short-term convergence project?

58. What are recognition differences in international reporting and what would be an example of a difference?

59. What are measurement differences in international reporting and what would be an example of a difference?

Short Answer Questions

60. Principal Company is a U.S.-based company that prepares its consolidated financial statements in accordance with U.S. GAAP. Principal reported net income of $2,600,000 in 2013 and stockholders' equity of $12,000,000 at December 31, 2013. Principal wants to determine the reporting impact of switching to IFRS. The following three items would create differences in financial reporting: 1) At December 31, 2013, inventory had a historical cost of $850,000, a replacement cost of $700,000, and a net realizable value of $800,000. The normal profit margin was 10%. 2) Principal acquired a building at the beginning of 2011 at a cost of $5,000,000. The building has an estimated useful life of 20 years, an estimated residual value of $1,000,000, and is being depreciated on a straight-line basis. On January 1, 2013, the building has a fair value of $5,500,000. There is no change in the estimated useful life or residual value. In a switch to IFRS, Principal would use the revaluation model in IAS 16 to determine the carrying value of property, plant, and equipment subsequent to acquisition. 3) In 2013, Principal incurred $800,000 of research and development for a new product, of which 35% relates to development activities subsequent to the point at which criteria indicating the creation of an intangible asset had been met. As of the end of 2013, development of the new product had not been completed.

Required: 1) Prepare a schedule reconciling net income under U.S. GAAP to net income under IFRS for the year ended December 31, 2013. 2) Prepare a schedule reconciling stockholders' equity under U.S. GAAP to stockholders' equity under IFRS at December 31, 2013.

Chapter 11 Worldwide Accounting Diversity and International Standards Answer Key

Multiple Choice Questions

In the United States, foreign companies filing annual reports with the SEC that are not prepared in accordance with U.S. GAAP must:

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 11-04 Describe the ways and the extent to which IFRS are used around the world.

Which of the following are not key FASB initiatives to further converge IFRS and U.S. GAAP?

In countries where there is less pressure for public accountability and information disclosure:

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember

Difficulty: 2 Medium Learning Objective: 11-01 Explain the major factors influencing the international development of accounting systems.

Which of the following is not an IFRS pronouncement originally issued by the IASB?

A. Business Combinations. B. First-Time Adoption of IFRS. C. Financial Instruments: Disclosures. D. Agriculture. E. Operating Segments.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 11-03 List the authoritative pronouncements that constitute International Financial Reporting Standards (IFRS).

In countries of Latin America:

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Reporting Accessibility: Keyboard Navigation 11-30 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-01 Explain the major factors influencing the international development of accounting systems.

Which of the following is not a way for a country to use IFRS?

Convergence of accounting standards would not occur by:

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Reporting Accessibility: Keyboard Navigation 11-31 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Remember Difficulty: 2 Medium Learning Objective: 11-05 Describe the FASB-IASB convergence process and the SEC's IFRS Roadmap.

The types of differences that exist between IFRS and U.S. GAAP would not generally include:

A. Presentation differences. B. Measurement differences. C. Disclosure differences. D. Comparability differences. E. Recognition differences.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS and U.S. GAAP.

Which of the following is not true about IFRS?

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global 11-32 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 11-03 List the authoritative pronouncements that constitute International Financial Reporting Standards (IFRS).

10.

Which one of the following is not a background requirement for any IASB members?

A. Audit. B. Tax. C. Financial statement preparation. D. Academia. E. Financial statement user.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Industry Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-02 Understand the problems created by differences in accounting standards across countries and the reasons to develop a set of internationally accepted accounting standards.

11.

Which of the following are not authoritative pronouncements of International Financial Reporting Standards (IFRSs)? 1) International Financial Reporting Standards issued by the IASB 2) International Accounting Standards issued by the IASC and adopted by the IASB 3) Interpretations originated by the International Financial Reporting Interpretations Committee (IFRIC) 4) U.S. Generally Accepted Accounting Principles

A. 4 only. B. 3 and 4. C. 1, 3, and 4. D. 2, 3, and 4. E. 1, 2, 3, and 4.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Research Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 11-03 List the authoritative pronouncements that constitute International Financial Reporting Standards (IFRS).

12.

The IASB and FASB are working on several joint projects. Which of the following is not a topic of the Revenue Recognition Project?

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 11-05 Describe the FASB-IASB convergence process and the SEC's IFRS Roadmap.

13.

Which of the following is not a factor influencing a country's financial reporting practices?

A. Providers of financing. B. Inflation. C. Legal system. D. Gross National Product. E. Political and economic ties.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-01 Explain the major factors influencing the international development of accounting systems. 11-35 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

14.

Which of the following statements is false regarding a country's legal system?

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA BB: Legal AICPA FN: Research Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 11-01 Explain the major factors influencing the international development of accounting systems.

15.

Which of the following statements is false regarding providers of financing?

AACSB: Diversity AACSB: Reflective thinking 11-36 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA BB: Global AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Explain the major factors influencing the international development of accounting systems.

16.

Which of the following is not a problem caused by diverse accounting practices across countries?

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-02 Understand the problems created by differences in accounting standards across countries and the reasons to develop a set of internationally accepted accounting standards.

17.

A U.S. company has many foreign subsidiaries and wants to convert its consolidated financial statements from U.S. GAAP to IFRS. Which of the following items is not one of the likely accounting issues to resolve for the opening IFRS balance sheet?

A. Inventory valuation. B. Capitalizing development costs. C. Classifying deferred taxes as current or noncurrent. D. Acquisition value for a subsidiary. E. Liability for restructuring charges.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-05 Describe the FASB-IASB convergence process and the SEC's IFRS Roadmap.

18.

A. Measuring asset impairment. B. Classifying extraordinary items. C. Sale and leaseback gain recognition. D. Measuring salaries expense. E. Prior service cost recognition for pension amendments.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement

AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS and U.S. GAAP.

19.

Foreign companies whose stock is listed on a U.S. stock exchange and using foreign GAAP other than IFRS must file their annual report with the SEC on:

A. Form 8-A. B. Form 10-A. C. Form 16-K. D. Form 20-F. E. Form 20-K.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA BB: Legal AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-05 Describe the FASB-IASB convergence process and the SEC's IFRS Roadmap.

20.

What international organization currently promulgates IFRS?

A. IASB. B. IASC. C. IOSCO. D. FASB. E. EU.

AACSB: Reflective thinking AICPA BB: Global AICPA FN: Reporting AICPA FN: Research Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 11-03 List the authoritative pronouncements that constitute International Financial Reporting Standards (IFRS).

21.

Which topic was not covered by FASB under the short-term convergence project?

A. Inventory costs. B. Asset exchanges. C. Liability transfers. D. Accounting changes. E. Earnings-per-share.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-04 Describe the ways and the extent to which IFRS are used around the world.

22.

The IASB and FASB are working on several joint projects. What is the purpose of the Financial Statement Presentation Project?

23.

The IASB and FASB are working on several joint projects. What is the purpose of the Revenue Recognition Project?

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-05 Describe the FASB-IASB convergence process and the SEC's IFRS Roadmap.

24.

The following information pertains to inventory held by a company at December 31, 2013.

What amount of inventory should be reported under U.S. GAAP?

A. $25,000. B. $21,000. C. $20,000. D. $16,800. E. $16,000. NRV $21,000 > NRV - Normal Profit ($21,000 × ($21,000 × 20%) = $16,800), so RC becomes carrying Value $20,000

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS and U.S. GAAP.

25.

The following information pertains to inventory held by a company at December 31, 2013.

What is the amount of inventory loss shown on the income statement under U.S. GAAP?

A. $1,000. B. $2,000. C. $4,000. D. $5,000. E. $8,200. Cost $25,000 - Replacement Cost $20,000 = $5,000 Loss on Inventory from LCM

26.

The following information pertains to inventory held by a company at December 31, 2013.

What amount of inventory should be reported under IFRS?

A. $25,000 B. $21,000 C. $20,000 D. $4,000 E. $5,000 Net Realizable Value $21,000

27.

The following information pertains to inventory held by a company at December 31, 2013.

What is the amount of inventory loss shown on the income statement under IFRS?

A. $1,000. B. $2,000. C. $4,000. D. $5,000. E. $6,000. Cost $25,000 - Net Realizable Value $21,000 = $4,000 Loss on Inventory from LCM

28.

The following information pertains to inventory held by a company at December 31, 2013.

As a result of inventory loss, what is the difference in income between reporting using U.S. GAAP and IFRS?

A. U.S. GAAP income is $1,000 higher. B. U.S. GAAP income is $2,000 lower. C. IFRS income is $1,000 higher. D. IFRS income is $1,000 lower. E. IFRS income is $5,000 higher. $5,000 GAAP Loss on Inventory from LCM - $4,000 IFRS Loss on Inventory from LCM = $1,000 Higher Income under IFRS

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 11-07 Determine the impact that specific differences between IFRS and U.S. GAAP have on the measurement of income and stockholders' equity.

29.

The following information pertains to inventory held by a company on December 31, 2013.

What amount of inventory should be reported under U.S. GAAP?

A. $16,000. B. $27,000. C. $30,000. D. $21,600. E. $20,000. Net Realizable Value $27,000 - Normal 20% Markup $5,400 = $21,600

30.

The following information pertains to inventory held by a company on December 31, 2013.

What is the amount of inventory loss shown on the income statement under U.S. GAAP?

A. $0. B. $3,000. C. $14,000. D. $10,000. E. $8,400. Historical Cost $30,000 - [Net Realizable Value $27,000 - Normal 20% Markup $5,400 = $21,600] = $8,400 GAAP Loss on Inventory from LCM

31.

The following information pertains to inventory held by a company on December 31, 2013.

What amount of inventory should be reported under IFRS?

A. $25,000. B. $27,000. C. $30,000. D. $5,000. E. $2,000. Net Realizable Value $27,000

32.

The following information pertains to inventory held by a company on December 31, 2013.

What is the amount of inventory loss shown on the income statement under IFRS?

A. $0. B. $3,000. C. $14,000. D. $10,000. E. $8,400. Cost $30,000 - Net Realizable Value $27,000 = $3,000 IFRS Loss on Inventory from LCM

33.

The following information pertains to inventory held by a company on December 31, 2013.

As a result of inventory loss, what is the difference in income between reporting using U.S. GAAP and IFRS?

A. U.S. GAAP income is $3,000 higher. B. U.S. GAAP income is $10,000 lower. C. IFRS income is $8,400 higher. D. IFRS income is $3,000 lower. E. IFRS income is $5,400 higher. $8,400 GAAP Loss on Inventory from LCM - $3,000 IFRS Loss on Inventory from LCM = $5,400 Higher Income under IFRS

34.

A company acquired a new piece of equipment on January 1, 2011 at a cost of $200,000. The equipment is expected to have a useful life of 10 years, a residual value of $20,000 and is depreciated on a straight-line basis. On January 1, 2013, the equipment was appraised and determined to have a fair value of $190,000 and a residual value of $25,000 and a remaining useful life of 10 years. At what amount should the equipment be reported on the December 31, 2013 balance sheet under U.S. GAAP?

A. $160,000 B. $150,000 C. $146,000 D. $140,000 E. $116,000 Cost $200,000 - Salvage $20,000 = $180,000/10 years = $18,000 Depreciation per year × 3 years = $54,000 Cost $200,000 - Acc. Deprec. ($18,000 × 3) $54,000 = $146,000 BV on 12/31/13

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS and U.S. GAAP.

35.

36.

A. $190,000 B. $173,500 C. $165,000 D. $136,000 E. $110,000 FV $190,000 - Salvage $25,000 = $165,000/10 years = $16,500 Depreciation per year FV $190,000 - Revised Depreciation Expense $16,500 = $173,500 BV 12/31/2013 under IFRS Revaluation Model

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS and U.S. GAAP.

37.

A company incurs research and development costs of $200,000 in 2013 of which $50,000 of these costs relate to development activities because certain criteria have been met which suggest that an intangible asset has been created. What amount should be recognized as research and development expense in 2013 using U.S. GAAP?

A. $50,000. B. $150,000. C. $200,000. D. $0. E. $250,000. R&D Costs are Expensed as Incurred $200,000

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS and U.S. GAAP.

38.

A. $50,000. B. $150,000. C. $200,000. D. $0. E. $250,000. R&D Costs $200,000 - IFRS R&D Capitalizable as Asset $50,000 = R&D Costs Expensed $150,000

39.

A company incurs research and development costs of $200,000 in 2013 of which $50,000 of these costs relate to development activities because certain criteria have been met which suggest that an intangible asset has been created. As a result of research and development costs, what is the difference in income between reporting using U.S. GAAP and IFRS in 2013?

A. U.S. GAAP income is $50,000 higher. B. U.S. GAAP income is $50,000 lower. C. IFRS income is $50,000 lower. D. IFRS income is $150,000 lower. E. IFRS income is $150,000 higher. GAAP [R&D Costs are Expensed as Incurred $200,000] - [R&D Costs $200,000 - IFRS R&D Capitalizable as Asset $50,000 = R&D Costs Expensed $150,000] = $50,000 Lower Income under GAAP

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 11-07 Determine the impact that specific differences between IFRS and U.S. GAAP have on the measurement of income and stockholders' equity.

40.

A. $20,000. B. $50,000. C. $100,000. D. $150,000. E. $200,000. Gain on Sale $100,000/5 year term of the Lease = $20,000 Gain Recognized in Year One

41.

A. $20,000. B. $50,000. C. $100,000. D. $150,000. E. $200,000. Gain on Sale $100,000 Recognized in Year One

42.

A company sells a building to a bank in 2013 at a gain of $100,000 and immediately leases the building back for period of five years. The lease is accounted for as an operating lease. The building was originally purchased for $200,000 and currently had a book value of $50,000 at the date of the sale. As a result of the sale and leaseback transaction in 2013, what is the difference between income using U.S. GAAP and IFRS in 2013?

A. U.S. GAAP income is $80,000 higher. B. U.S. GAAP income is $100,000 higher. C. IFRS income is $50,000 lower. D. IFRS income is $100,000 lower. E. IFRS income is $80,000 higher. IFRS Gain $100,000 - GAAP Gain $20,000 = $80,000 Higher Income under IFRS

43.

A. $0. B. U.S. GAAP income is $20,000 higher. C. IFRS income is $80,000 lower. D. IFRS income is $60,000 lower. E. IFRS income is $80,000 higher. Gain on Sale $100,000/5 year term of the Lease = $20,000 Gain Recognized in Year Two, so GAAP Income is Higher by $20,000 in 2014

44.

A company sells a building to a bank in 2013 at a gain of $100,000 and immediately leases the building back for period of five years. The lease is accounted for as an operating lease. The building was originally purchased for $200,000 and currently had a book value of $50,000 at the date of the sale. Assume the seller of the building is a U.S. company that is preparing to convert from U.S. GAAP to IFRS. At December 31, 2014, with regard to the sale and leaseback accounting, what amount would reconcile stockholders' equity from U.S. GAAP to IFRS at December 31, 2014?

A. Increase $40,000. B. Decrease $40,000. C. Decrease $60,000. D. Increase $60,000. E. No amount would be necessary for reconciliation. In Conversion from GAAP to IFRS, the $60,000 Deferred Gain on the Sale Increases the Equity Reconciliation by $60,000 at Year-End 2014

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 11-07 Determine the impact that specific differences between IFRS and U.S. GAAP have on the measurement of income and stockholders' equity.

Essay Questions

45.

Why does each country have its own unique set of financial reporting practices?

A survey identified five commonly accepted factors that influence financial reporting practices: (1) legal system, (2) taxation, (3) financing system, (4) inflation, and (5) political and economic ties. Because of the differences in these five factors from one country to another, and because international standards had not been created when many individual country's standards were created, countries continue to have unique financial reporting practices and standards.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Reporting Blooms: Understand Difficulty: 3 Hard Learning Objective: 11-01 Explain the major factors influencing the international development of accounting systems.

46.

What are the two major types of legal systems used around the world?

Common law, which relies on a limited amount of statute law interpreted by the courts; and code law (codified Roman law), which is followed in most non-English-speaking countries, originated in the Roman jus civile, and developed further in European universities during the Middle Ages.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA BB: Legal AICPA FN: Research Blooms: Remember Difficulty: 2 Medium Learning Objective: 11-01 Explain the major factors influencing the international development of accounting systems.

47.

The major providers of financing in some countries are stockholders, while other countries predominantly use banks as the main financing source. What difference does it make to accounting disclosures in comparing a company from one of each of those countries?

When banks dominate financing, there is less pressure for public information and disclosures. However, as companies become more reliant upon equity, demand for information increases. Therefore, the disclosures in countries whose main providers of financing are banks are significantly less than those disclosures in countries dependent upon stockholders' equity.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA BB: Resource management AICPA FN: Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 11-01 Explain the major factors influencing the international development of accounting systems.

48.

What problems are caused by diverse accounting practices?

(1) Difficulty in preparation of consolidated financial statements by companies with foreign operations; (2) difficulty in gaining access to foreign capital markets; and (3) the lack of comparability of financial statements between companies from different countries.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA BB: Resource management AICPA FN: Measurement Blooms: Understand

Difficulty: 2 Medium Learning Objective: 11-02 Understand the problems created by differences in accounting standards across countries and the reasons to develop a set of internationally accepted accounting standards.

49.

What is meant by harmonization of accounting standards ?

Harmonization is the process of reducing differences in financial reporting practices across countries, thereby increasing the comparability of financial statements. The goal of harmonization is the development of worldwide financial reporting using similar accounting standards.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Reporting Blooms: Understand Difficulty: 1 Easy Learning Objective: 11-02 Understand the problems created by differences in accounting standards across countries and the reasons to develop a set of internationally accepted accounting standards.

50.

How did the early International Accounting Standards (IAS) obtain support from a sufficient number of board members?

They allowed at least two methods for dealing with a particular accounting issue.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-02 Understand the problems created by differences in accounting standards across countries and the reasons to develop a set of internationally accepted accounting standards.

51.

What is the IOSCO?

IOSCO is an organization of stock exchange regulators in more than 100 countries, including the SEC of the United States. One of its objectives is to facilitate cross-border securities offerings and listings by multinational issuers. Therefore, IOSCO has supported accounting standard harmonization.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA BB: Resource management AICPA FN: Research Blooms: Remember Difficulty: 2 Medium Learning Objective: 11-02 Understand the problems created by differences in accounting standards across countries and the reasons to develop a set of internationally accepted accounting standards.

52.

What were the major objectives of the Treaty of Rome?

The major objectives of the Treaty of Rome were to create the European Economic Community, now called the European Union, to aid in the free movement of persons, goods, services and capital across member countries.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA BB: Legal AICPA BB: Resource management AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-02 Understand the problems created by differences in accounting standards across countries and

the reasons to develop a set of internationally accepted accounting standards.

53.

Which two EU directives have helped harmonize accounting standards?

The fourth and seventh directives have helped to harmonize accounting standards. The fourth directive deals with valuation rules, disclosure requirements, and the format of financial statements. The seventh directive relates to the preparation of consolidated financial statements.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement AICPA FN: Reporting Blooms: Understand Difficulty: 1 Easy Learning Objective: 11-02 Understand the problems created by differences in accounting standards across countries and the reasons to develop a set of internationally accepted accounting standards.

54.

What are the three authoritative pronouncements that make up the International Financial Reporting Standards (IFRS)?

The three authoritative pronouncements are International Financial Reporting Standards issued by the IASB, the International Accounting Standards issued by the IASC adopted by the IASB and the Interpretations originated by the International Financial Reporting Interpretations Committee (IFRIC).

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Research Blooms: Remember

Difficulty: 1 Easy Learning Objective: 11-03 List the authoritative pronouncements that constitute International Financial Reporting Standards (IFRS).

55.

What are the four different ways IFRS can be used by a country?

IFRSs can be used by a country by (1) adopting IFRS as its national GAAP, (2) requiring domestic listed companies to use IFRS in preparation of consolidated financial statements, (3) allowing domestic companies listed on the domestic stock exchange to use IFRS, and (4) requiring or allowing foreign companies listed on the domestic stock exchange to use IFRS.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-04 Describe the ways and the extent to which IFRS are used around the world.

56.

What are the six key FASB initiatives to further convergence?

The six key FASB initiatives to further convergence are: (1) a short term convergence project, (2) sharing FASB and IASB staff resources on joint projects, (3) identifying all substantive differences between U.S. GAAP and IFRS, (4) creating a liaison IASB member on site at the FASB offices, (5) monitoring IASB projects, and (6) explicit consideration of potential cooperation with the IASB when making board agenda decisions.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Reporting

Blooms: Remember Difficulty: 2 Medium Learning Objective: 11-05 Describe the FASB-IASB convergence process and the SEC's IFRS Roadmap.

57.

What accounting topics were covered under the FASB short-term convergence project?

The topics covered under the short-term convergence project included inventory costs, asset exchanges, accounting changes, and earnings-per-share.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 11-05 Describe the FASB-IASB convergence process and the SEC's IFRS Roadmap.

58.

What are recognition differences in international reporting and what would be an example of a difference?

Recognition differences relate to whether an item is recognized or not, how it is recognized, or when it is recognized. An example of recognition differences exist for the recognition of research and development costs by using U.S. GAAP or IFRS. U.S. GAAP requires that research and development costs must be expensed immediately. The only exception relates to costs incurred in developing computer software, which must be capitalized when several restrictive criteria are met. IAS 38 also requires immediate expensing of all research costs. Development costs, on the other hand, must be recognized as an internally generated intangible asset when certain criteria are met. These costs are amortized over their useful life not exceeding 20 years.

AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS and U.S. GAAP.

59.

What are measurement differences in international reporting and what would be an example of a difference?

Measurement differences result in different amounts being recognized in the financial statements from different measurement methods under two sets of standards. For example both U.S. GAAP and IFRS require the use of the lower of cost or market to valuate inventory. However "market" is measured differently under the two sets of standards. Under U.S. GAAP, market value is measured as replacement cost with net realizable value as the ceiling and net realizable value minus normal profit as the floor. IAS 2 requires inventory to be carried on the balance sheet at the lower of cost or net realizable value. A second example exists by permitting the use of LIFO under U.S. GAAP but not allowing it under IFRS.

AACSB: Diversity AACSB: Reflective thinking AICPA BB: Global AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS and U.S. GAAP.

Short Answer Questions

60.

Principal Company is a U.S.-based company that prepares its consolidated financial statements in accordance with U.S. GAAP. Principal reported net income of $2,600,000 in 2013 and stockholders' equity of $12,000,000 at December 31, 2013. Principal wants to determine the reporting impact of switching to IFRS. The following three items would create differences in financial reporting: 1) At December 31, 2013, inventory had a historical cost of $850,000, a replacement cost of $700,000, and a net realizable value of $800,000. The normal profit margin was 10%. 2) Principal acquired a building at the beginning of 2011 at a cost of $5,000,000. The building has an estimated useful life of 20 years, an estimated residual value of $1,000,000, and is being depreciated on a straight-line basis. On January 1, 2013, the building has a fair value of $5,500,000. There is no change in the estimated useful life or residual value. In a switch to IFRS, Principal would use the revaluation model in IAS 16 to determine the carrying value of property, plant, and equipment subsequent to acquisition. 3) In 2013, Principal incurred $800,000 of research and development for a new product, of which 35% relates to development activities subsequent to the point at which criteria indicating the creation of an intangible asset had been met. As of the end of 2013, development of the new product had not been completed.

AACSB: Analytic AACSB: Diversity AICPA BB: Global AICPA FN: Measurement Blooms: Apply

Difficulty: 2 Medium Learning Objective: 11-06 Recognize acceptable accounting treatments under IFRS and identify key differences between IFRS and U.S. GAAP. Learning Objective: 11-07 Determine the impact that specific differences between IFRS and U.S. GAAP have on the measurement of income and stockholders' equity.

Chapter 12 Financial Reporting and the Securities and Exchange Commission

Multiple Choice Questions

1. Which one of the following is not a division of the SEC?

A. the Division of Corporation Finance. B. the Division of Investment Management. C. the Division of Compliance Information. D. the Division of Enforcement. E. the Division of Trading and Markets.

2. The goals of the SEC include all except which one of the following?

A. prohibiting the dissemination of materially misstated information. B. controlling the number of companies whose stock is listed on major stock exchanges. C. regulating the operation of securities markets. D. ensuring that full and fair information is disclosed to all investors before the securities of a company are allowed to be bought and sold. E. preventing the misuse of information especially by inside parties.

3. Which one of the following Federal laws was enacted in 1935?

A. Securities Act. B. Securities Exchange Act. C. Trust Indenture Act. D. Investment Company Act. E. Public Utility Holding Company Act.

4. Regulation S-K:

A. controls the listing of securities by stock exchanges. B. establishes requirements for nonfinancial information to be filed with the SEC. C. prescribes the form of financial statements to be filed with the SEC. D. describes the internal controls a publicly traded company must maintain. E. prescribes the financial disclosure information that must be included in filings with the SEC.

5. Which of the following are issued by the SEC, as needed, to supplement Regulation S-X and

Regulation S-K?

A. SABs. B. ASRs. C. FRRs. D. ARBs. E. SRBs.

6. Regulation S-X specifies:

A. requirements for the nonfinancial information to be filed with the SEC. B. which form a company must file to register new securities. C. that the financial statements included in a company's annual report must be audited. D. the form and content of financial statements to be filed with the SEC. E. the internal controls a publicly traded company must maintain.

7. Which one of the following forms is used when no other form is prescribed?

A. S-4. B. S-3. C. S-11. D. S-8. E. S-1.

8. A wrap-around filing:

A. may be used by large companies to sell securities over a period of two years without refiling with the SEC. B. is a simplified registration procedure for securities to be issued by small companies. C. allows a company to simplify its form 10-K by referring to information in its annual report. D. is a filing completed using the SEC's electronic filing system. E. may remain in effect for a period of one to five years.

9. Which one of the following registration statement forms is used by large issuers that already have at least $75 million voting stock held by non-affiliates?

A. S-11. B. S-3. C. S-8. D. S-4. E. S-1.

10. What is Form 10-K?

A. a quarterly report filed with the SEC. B. an annual report filed with the SEC. C. a semiannual report filed with the SEC. D. a form filed with the SEC before the company issues stock for the first time. E. a form filed with the SEC before issuing stocks to acquire another company.

11. The prospectus part of a registration contains all except which of the following?

A. financial statements for the issuing company audited by an independent CPA along with appropriate supplementary data. B. an explanation of the intended use of the proceeds to be generated by the sale of the new securities. C. a description of the risks associated with the securities. D. a description of the business and the properties owned by the company. E. additional data concerning expenses of issuance.

12. When must Form 8-K be filed with the SEC?

A. within forty-five days of the end of any quarter other than the fourth quarter of the fiscal year. B. within ninety days of the end of the fiscal year. C. within fifteen days of the occurrence of certain significant events. D. within sixty days of the end of the fiscal year. E. when a relatively small company intends to issue securities.

13. Which of the following securities offerings is not exempt from registration prior to their sale?

A. offerings of more than $5 million. B. securities issued by governments. C. securities issued by banks. D. securities issued by savings and loan associations. E. offerings of no more than $1 million made to any number of investors within a 12-month period.

14. Lechter Co. is preparing to issue stock. Its revenues for last year were $85,000,000, and it had $52,000,000 in stock held by non-affiliates. The company had been filing with the SEC for eight years. Which one of the following forms should have been used for registration?

A. S-1. B. S-3. C. S-4. D. S-8. E. S-11.

15. Which one of the following is not a prescribed event for the filing of Form 8-K?

A. bankruptcy or receivership. B. changes in control of the registrant. C. resignation of a middle manager. D. changes in the registrant's independent auditor. E. acquisitions or dispositions of assets.

16. The SEC's operating costs are supported through

A. tax revenues of the federal government. B. registration fees charged to issuers offering securities to the public. C. fees paid by stock exchanges. D. fees paid by stock brokers. E. fees paid by accounting firms that practice before the SEC.

17. A proxy statement must be filed with the SEC at least how many days before being distributed?

A. 30. B. 60. C. 10. D. 90. E. 7.

18. The SEC has usually restricted its role in establishing accounting principles to

A. specifying the information that should be included in interim financial statements. B. developing definitions of key accounting terms. C. developing accounting standards for particular industries. D. determining required disclosures. E. the promulgation and issuance of SASs (Securities Accounting Standards).

19. Information required in proxy statements includes all except which of the following?

A. listing of company directors and executive officers. B. description of the business activities including principal products and sources and availability of raw materials. C. market price of the company's common stock for each quarterly period within the two most recent fiscal years. D. five-year summary of operations including sales, total assets, income from continuing operations, and cash dividends per share. E. two-year summary of industry segments, export sales, and foreign and domestic operations.

20. A letter of comments would be issued by the SEC

A. to request clarification of a registration statement. B. to convey your pertinent comments to the SEC. C. in response to a company's filing of Form 8-K. D. after receiving the company's Form 10-K. E. to indicate that a registration statement has been approved.

21. Which one of the following regulates the initial offering of securities by a company or underwriter?

A. The Securities Act of 1933. B. The Securities Exchange Act of 1934. C. The Investment Company Act of 1940. D. The Investment Advisers Act of 1940. E. The Sarbanes-Oxley Act of 2002.

22. Which one of the following regulates the subsequent trading of securities through brokers and exchanges?

A. The Securities Act of 1933. B. The Securities Exchange Act of 1934. C. The Investment Company Act of 1940. D. The Investment Advisers Act of 1940. E. The Sarbanes-Oxley Act of 2002.

23. Which one of the following requires the maintenance of accounting records and adequate internal accounting controls?

A. The Securities Act of 1933. B. The Securities Exchange Act of 1934. C. The Investment Company Act of 1940. D. The Foreign Corrupt Practices Act of 1977. E. The Sarbanes-Oxley Act of 2002.

24. Which one of the following is not a characteristic of the Public Company Accounting Oversight Board?

A. Minimizes self-regulation in the accounting profession. B. Has the authority to amend, modify, repeal, or reject any audit standard of the ASB. C. Only one member can be an accountant, past or present. D. SEC has oversight and enforcement authority over the Board. E. Enforces auditing, quality control, and independence standards and rules.

25. Which statement is false regarding the registration of public accounting firms with the PCAOB under the Sarbanes-Oxley Act?

A. Registration is required of all U.S. firms that prepare, issue, or participate in the preparation of an audit report for an entity that issues securities. B. Foreign accounting firms are exempt from registration. C. Disclosure requirements include annual fees received from each issuer for the firm's audit and non-audit services. D. The Public Company Accounting Oversight Board subjects registered firms to periodic inspections. E. Information regarding disagreements between the issuer and the audit firm during the previous year must be disclosed.

26. What is the primary focus of the Sarbanes-Oxley Act?

A. Accounting standards and the registration of securities. B. Regulation of the continuous reporting by publicly owned companies. C. Accounting standards and registration of investment companies that engage in investing and trading in securities. D. Accounting standards and penalties against persons who profit from illegal use of inside information. E. Regulation of independent audit firms and audit standards.

27. How has the SEC exercised its power with regard to the continuing evolution of accounting principles? 1. Issuing Financial Reporting Releases (FRRs). 2. Requiring additional disclosures in notes to financial statements. 3. Declaring a moratorium on the use of specified accounting practices. 4. Overruling the FASB.

A. 1 and 4. B. 1, 3, and 4. C. 1 and 3. D. 1, 2, and 4. E. 1, 2, 3, and 4.

28. Which of the following is not a security as defined by the SEC?

A. Accounts receivable. B. Notes receivable. C. Treasury stock. D. Debenture. E. Investment contract.

29. EDGAR stands for:

A. Electronic Debits, Gains, Assets and Revenues System. B. Electronic Data Gathering, Analysis, and Retrieval System. C. Explanatory Data Gathering, Analysis, and Retrieval System. D. Explanatory Debits, Gains, Assets and Revenues System. E. Electronic Data, Gross Analysis, and Revenues System.

30. Filings with the SEC are divided generally into two broad categories:

A. Registration statements and perpetual filings. B. Reconciliation statements and periodic filings. C. Registration statements and periodic filings. D. Registration filings and reconciliation statements. E. Reconciliation filings and perpetual filings.

31. What information needs to be included in Form 10-Q? 1. Income statements for the most recent quarter and for the year to date as well as for the comparative periods in the previous year. 2. Income statements for the most recent quarter and for the year to date as well as for the comparative periods in the previous two years. 3. A statement of cash flows is mandatory, but only for the year to date as well as for the corresponding period in the preceding year. 4. Two balance sheets: one for the end of the most recent quarter and one showing the company's financial position at the end of the previous fiscal year.

A. 1 and 3. B. 2, 3, and 4. C. 1 and 2. D. 1, 3, and 4. E. 2 and 4.

32. What information is required in proxy statements? (1) Five-year summary of operations. (2) Five-year summary of industry segments. (3) Listing of company directors and executive officers. (4) Management discussion and analysis (MD&A).

A. 1, 2 and 3. B. 2, 3 and 4. C. 1, 3 and 4. D. 1, 2 and 4. E. 1, 2, 3, and 4.

33. Which information is not contained in the prospectus of the registration statement?

A. financial statements reviewed by an independent CPA. B. an explanation of the intended use of the proceeds. C. a description of the risks associated with the securities. D. a description of the business of the registrant. E. a description of the properties of the registrant.

34. What is shelf registration?

A. a procedure that allows the sale of securities to a small group of knowledgeable investors without any general solicitation. B. a procedure that allows a company to register securities and then sell them over a period of two years without reregistering. C. a method of filing Form 10-K with the SEC. D. the registration of mutual funds that engage in investing and trading securities. E. the registration of securities issued in connection with business combination transactions.

35. What is private placement of securities?

A. A procedure that allows a company to register securities and then sell them over a period of two years without reregistering. B. A procedure that allows the sale of securities to a small group of sophisticated knowledgeable investors, without any general solicitation. C. A method of filing Form 10-K with the SEC. D. the registration of mutual funds that engage in investing and trading securities. E. A sale of securities to 35 or fewer accredited investors.

36. What is the minimum net worth of those who are considered accredited investors?

A. $200,000. B. $400,000. C. $500,000. D. $1,000,000. E. $2,000,000.

37. Which one of the following requires the audit committee to be responsible for the appointment and compensation of the external auditor?

A. The Securities Act of 1933. B. The Securities Exchange Act of 1934. C. The Investment Company Act of 1940. D. The Foreign Corrupt Practices Act of 1977. E. The Sarbanes-Oxley Act of 2002.

38. Which one of the following requires the registration of mutual funds that engage in investing and trading in securities?

A. The Securities Act of 1933. B. The Securities Exchange Act of 1934. C. The Investment Company Act of 1940. D. The Foreign Corrupt Practices Act of 1977. E. The Sarbanes-Oxley Act of 2002.

39. Which statement is false regarding the Public Company Accounting Oversight Board (PCAOB)?

A. regulates audit standards and independent audit firms. B. has five members appointed by the SEC. C. allows all members to be accountants, past or present. D. is under the oversight and enforcement of the SEC. E. is funded by fees levied on all publicly traded companies.

40. Which one of the following forms is used when companies have filed with the SEC for less than 36 months but are not large enough to file form S-3?

A. S-1. B. S-4. C. S-11. D. S-8. E. S-3.

41. Which one of the following forms is used in connection with employee stock plans?

A. S-8. B. S-3. C. S-4. D. S-1. E. S-11.

42. Which one of the following forms is used in connection with registration of securities of real estate companies?

A. S-8. B. S-1. C. S-4. D. S-3. E. S-11.

43. Which one of the following forms is used in connection with registration of securities of a small reporting company with $25 million of annual revenues and of $25 million of voting securities held by non-affiliates?

A. S-8. B. S-11. C. S-4. D. S-1. E. S-3.

44. The SEC's role in the initial registration of securities to be publicly issued is:

A. to ensure that the content of the registration filing is in compliance with securities regulations. B. to ensure that securities issued are quality investments. C. to provide data to the public regarding first-time issuance of securities. D. to give permission to an independent CPA firm to audit the registrant's financial statements. E. to make the registrant's annual report available for public viewing.

45. Audited financial statements in an annual report of an issuer that is subject to SEC regulation must include:

A. three balance sheets, three income statements, and three statements of cash flows. B. three balance sheets, two income statements, and two statements of cash flows. C. one balance sheet, one income statement, and one statement of cash flows. D. two balance sheets, three income statements, and three statements of cash flows. E. two balance sheets, two income statements, and two statements of cash flows.

46. The audit committee of an entity subject to SEC regulation will do all of the following

except:

A. be responsible for agreeing to fee compensation of the independent audit firm. B. sign certification of the annual financial statements. C. be comprised only of individuals who are not members of management. D. approve non-audit services provided by the independent audit firm. E. serve as liaison between the board of directors and the independent audit firm.

Essay Questions

47. For each of the following situations, select the best answer concerning information forms filed with the SEC: (A.) Form 10-K (B.) Form 10-Q (C.) Form 8-K (D.) Not required ___ 1. A unique or significant happening. ___ 2. Annual information required by Regulation S-X. ___ 3. Changes in control of the registrant. ___ 4. Interim financial statements. ___ 5. Fourth quarter income statement. ___ 6. Bankruptcy. ___ 7. Annual information required by Regulation S-K. ___ 8. Income statement for the current quarter, year-to-date, and comparative periods in the previous year. ___ 9. Changes in bookkeeping staff. ___ 10. Changes in the registrant's external auditor.

48. What is shelf registration?

49. What is a private placement of securities?

50. What are accredited investors?

51. What is a wrap-around filing?

52. What is included in Part I of a securities registration statement?

53. What is included in Part II of a securities registration statement?

54. What is blue sky legislation?

55. How are the operations of the SEC funded?

56. What was the purpose of the Securities Act of 1933?

57. What was the purpose of the Securities Exchange Act of 1934?

58. What is the purpose of the SEC's Regulation S-K?

59. Why is the SEC's Rule 14c-3 important to the accounting profession?

60. When is the SEC's Registration Form S-4 used?

61. When must Form 8-K be filed with the SEC?

62. Briefly describe Regulation S-K. What is its purpose?

63. What is a proxy? Briefly explain the importance of a proxy solicitation.

64. What are the responsibilities of the SEC's Division of Corporation Finance?

65. What are the four interconnected goals that the SEC has tried to achieve?

66. What is required by the Trust Indenture Act of 1939?

67. What information needs to be included in Form 10-Q?

68. What are some of the reasons for the corporate scandals of 2001 and 2002?

69. Why was the Public Utility Holding Company Act of 1935 created?

70. What information is required in proxy statements?

71. What Federal agency has Congressional responsibility to create auditing and accounting standards?

72. How has the Sarbanes-Oxley Act of 2002 changed the role of the audit committee?

73. What is the primary focus of the Sarbanes-Oxley Act of 2002?

74. Who has the responsibility for the evaluation of the quality of an investment?

75. Name the two broad categories of filings with the SEC.

76. Name five securities offerings exempt from registration with the SEC.

77. Describe the two parts of the SEC registration statement.

Chapter 12 Financial Reporting and the Securities and Exchange Commission Answer Key

Multiple Choice Questions

Which one of the following is not a division of the SEC?

A. the Division of Corporation Finance. B. the Division of Investment Management. C. the Division of Compliance Information. D. the Division of Enforcement. E. the Division of Trading and Markets.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 12-01 Understand the origin and expansive role of the Securities and Exchange Commission.

The goals of the SEC include all except which one of the following?

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 12-02 Describe the purpose(s) of various federal securities laws.

Which one of the following Federal laws was enacted in 1935?

A. Securities Act. B. Securities Exchange Act. C. Trust Indenture Act. D. Investment Company Act. E. Public Utility Holding Company Act.

Regulation S-K:

Which of the following are issued by the SEC, as needed, to supplement Regulation S-X and Regulation S-K?

A. SABs. B. ASRs. C. FRRs. D. ARBs. E. SRBs.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 12-04 Describe the SEC's role in establishing generally accepted accounting principles (GAAP).

Regulation S-X specifies:

Which one of the following forms is used when no other form is prescribed?

A. S-4. B. S-3. C. S-11. D. S-8. E. S-1.

A wrap-around filing:

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 12-06 Describe an issuer's registration process; various forms used by the issuers; and the exemption(s) from registration.

Which one of the following registration statement forms is used by large issuers that already have at least $75 million voting stock held by non-affiliates?

A. S-11. B. S-3. C. S-8. D. S-4. E. S-1.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy

Learning Objective: 12-05 Define and describe an issuer's filings with the Securities and Exchange Commission.

10.

What is Form 10-K?

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-06 Describe an issuer's registration process; various forms used by the issuers; and the exemption(s) from registration.

11.

The prospectus part of a registration contains all except which of the following?

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember

Difficulty: 2 Medium Learning Objective: 12-06 Describe an issuer's registration process; various forms used by the issuers; and the exemption(s) from registration.

12.

When must Form 8-K be filed with the SEC?

13.

Which of the following securities offerings is not exempt from registration prior to their sale?

AACSB: Reflective thinking AICPA BB: Legal

AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-06 Describe an issuer's registration process; various forms used by the issuers; and the exemption(s) from registration.

14.

Lechter Co. is preparing to issue stock. Its revenues for last year were $85,000,000, and it had $52,000,000 in stock held by non-affiliates. The company had been filing with the SEC for eight years. Which one of the following forms should have been used for registration?

A. S-1. B. S-3. C. S-4. D. S-8. E. S-11.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-05 Define and describe an issuer's filings with the Securities and Exchange Commission.

15.

Which one of the following is not a prescribed event for the filing of Form 8-K?

AACSB: Reflective thinking

AICPA BB: Legal AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 12-06 Describe an issuer's registration process; various forms used by the issuers; and the exemption(s) from registration.

16.

The SEC's operating costs are supported through

17.

A proxy statement must be filed with the SEC at least how many days before being distributed?

A. 30. B. 60. C. 10. D. 90. E. 7.

AACSB: Reflective thinking AICPA BB: Legal 12-37 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 12-06 Describe an issuer's registration process; various forms used by the issuers; and the exemption(s) from registration.

18.

The SEC has usually restricted its role in establishing accounting principles to

19.

Information required in proxy statements includes all except which of the following?

20.

A letter of comments would be issued by the SEC

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy

Learning Objective: 12-06 Describe an issuer's registration process; various forms used by the issuers; and the exemption(s) from registration.

21.

Which one of the following regulates the initial offering of securities by a company or underwriter?

A. The Securities Act of 1933. B. The Securities Exchange Act of 1934. C. The Investment Company Act of 1940. D. The Investment Advisers Act of 1940. E. The Sarbanes-Oxley Act of 2002.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-02 Describe the purpose(s) of various federal securities laws.

22.

Which one of the following regulates the subsequent trading of securities through brokers and exchanges?

A. The Securities Act of 1933. B. The Securities Exchange Act of 1934. C. The Investment Company Act of 1940. D. The Investment Advisers Act of 1940. E. The Sarbanes-Oxley Act of 2002.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember

Difficulty: 1 Easy Learning Objective: 12-02 Describe the purpose(s) of various federal securities laws.

23.

Which one of the following requires the maintenance of accounting records and adequate internal accounting controls?

A. The Securities Act of 1933. B. The Securities Exchange Act of 1934. C. The Investment Company Act of 1940. D. The Foreign Corrupt Practices Act of 1977. E. The Sarbanes-Oxley Act of 2002.

24.

Which one of the following is not a characteristic of the Public Company Accounting Oversight Board?

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember

Difficulty: 2 Medium Learning Objective: 12-03 Understand the Congressional rationale for enacting the Sarbanes-Oxley Act and the responsibilities of the Public Accounting Oversight Board.

25.

Which statement is false regarding the registration of public accounting firms with the PCAOB under the Sarbanes-Oxley Act?

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 12-03 Understand the Congressional rationale for enacting the Sarbanes-Oxley Act and the responsibilities of the Public Accounting Oversight Board.

26.

What is the primary focus of the Sarbanes-Oxley Act?

27.

How has the SEC exercised its power with regard to the continuing evolution of accounting principles? 1. Issuing Financial Reporting Releases (FRRs). 2. Requiring additional disclosures in notes to financial statements. 3. Declaring a moratorium on the use of specified accounting practices. 4. Overruling the FASB.

A. 1 and 4. B. 1, 3, and 4. C. 1 and 3. D. 1, 2, and 4. E. 1, 2, 3, and 4.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-04 Describe the SEC's role in establishing generally accepted accounting principles (GAAP).

28.

Which of the following is not a security as defined by the SEC?

A. Accounts receivable. B. Notes receivable. C. Treasury stock. D. Debenture. E. Investment contract.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Accessibility: Keyboard Navigation 12-44 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-05 Define and describe an issuer's filings with the Securities and Exchange Commission.

29.

EDGAR stands for:

30.

Filings with the SEC are divided generally into two broad categories:

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy

Learning Objective: 12-05 Define and describe an issuer's filings with the Securities and Exchange Commission.

31.

What information needs to be included in Form 10-Q? 1. Income statements for the most recent quarter and for the year to date as well as for the comparative periods in the previous year. 2. Income statements for the most recent quarter and for the year to date as well as for the comparative periods in the previous two years. 3. A statement of cash flows is mandatory, but only for the year to date as well as for the corresponding period in the preceding year. 4. Two balance sheets: one for the end of the most recent quarter and one showing the company's financial position at the end of the previous fiscal year.

A. 1 and 3. B. 2, 3, and 4. C. 1 and 2. D. 1, 3, and 4. E. 2 and 4.

32.

What information is required in proxy statements? (1) Five-year summary of operations. (2) Five-year summary of industry segments. (3) Listing of company directors and executive officers. (4) Management discussion and analysis (MD&A).

A. 1, 2 and 3. B. 2, 3 and 4. C. 1, 3 and 4. D. 1, 2 and 4. E. 1, 2, 3, and 4.

33.

Which information is not contained in the prospectus of the registration statement?

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember

Difficulty: 2 Medium Learning Objective: 12-06 Describe an issuer's registration process; various forms used by the issuers; and the exemption(s) from registration.

34.

What is shelf registration?

35.

What is private placement of securities?

36.

What is the minimum net worth of those who are considered accredited investors?

A. $200,000. B. $400,000. C. $500,000. D. $1,000,000. E. $2,000,000.

exemption(s) from registration.

37.

Which one of the following requires the audit committee to be responsible for the appointment and compensation of the external auditor?

A. The Securities Act of 1933. B. The Securities Exchange Act of 1934. C. The Investment Company Act of 1940. D. The Foreign Corrupt Practices Act of 1977. E. The Sarbanes-Oxley Act of 2002.

38.

Which one of the following requires the registration of mutual funds that engage in investing and trading in securities?

A. The Securities Act of 1933. B. The Securities Exchange Act of 1934. C. The Investment Company Act of 1940. D. The Foreign Corrupt Practices Act of 1977. E. The Sarbanes-Oxley Act of 2002.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium

Learning Objective: 12-02 Describe the purpose(s) of various federal securities laws.

39.

Which statement is false regarding the Public Company Accounting Oversight Board (PCAOB)?

40.

Which one of the following forms is used when companies have filed with the SEC for less than 36 months but are not large enough to file form S-3?

A. S-1. B. S-4. C. S-11. D. S-8. E. S-3.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember

Difficulty: 2 Medium Learning Objective: 12-05 Define and describe an issuer's filings with the Securities and Exchange Commission.

41.

Which one of the following forms is used in connection with employee stock plans?

A. S-8. B. S-3. C. S-4. D. S-1. E. S-11.

42.

Which one of the following forms is used in connection with registration of securities of real estate companies?

A. S-8. B. S-1. C. S-4. D. S-3. E. S-11.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 12-05 Define and describe an issuer's filings with the Securities and Exchange Commission. 12-52 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

43.

Which one of the following forms is used in connection with registration of securities of a small reporting company with $25 million of annual revenues and of $25 million of voting securities held by non-affiliates?

A. S-8. B. S-11. C. S-4. D. S-1. E. S-3.

44.

The SEC's role in the initial registration of securities to be publicly issued is:

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember

Difficulty: 2 Medium Learning Objective: 12-05 Define and describe an issuer's filings with the Securities and Exchange Commission.

45.

Audited financial statements in an annual report of an issuer that is subject to SEC regulation must include:

46.

The audit committee of an entity subject to SEC regulation will do all of the following

except:

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember

Difficulty: 2 Medium Learning Objective: 12-03 Understand the Congressional rationale for enacting the Sarbanes-Oxley Act and the responsibilities of the Public Accounting Oversight Board.

Essay Questions

47.

For each of the following situations, select the best answer concerning information forms filed with the SEC: (A.) Form 10-K (B.) Form 10-Q (C.) Form 8-K (D.) Not required ___ 1. A unique or significant happening. ___ 2. Annual information required by Regulation S-X. ___ 3. Changes in control of the registrant. ___ 4. Interim financial statements. ___ 5. Fourth quarter income statement. ___ 6. Bankruptcy. ___ 7. Annual information required by Regulation S-K. ___ 8. Income statement for the current quarter, year-to-date, and comparative periods in the previous year. ___ 9. Changes in bookkeeping staff. ___ 10. Changes in the registrant's external auditor.

(1) C; (2) A; (3) C; (4) B; (5) D; (6) C; (7) A; (8) B; (9) D; (10) C

AACSB: Reflective thinking AICPA BB: Legal

AICPA FN: Reporting Blooms: Remember Difficulty: 2 Medium Learning Objective: 12-06 Describe an issuer's registration process; various forms used by the issuers; and the exemption(s) from registration.

48.

What is shelf registration?

Shelf registration is a procedure that allows a company to register securities and then sell them over a period of two years without reregistering.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-06 Describe an issuer's registration process; various forms used by the issuers; and the exemption(s) from registration.

49.

What is a private placement of securities?

A private placement of securities is a sale of securities to a small group of sophisticated investors, knowledgeable and experienced in financial matters, without any general solicitation.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Blooms: Remember Difficulty: 2 Medium Learning Objective: 12-06 Describe an issuer's registration process; various forms used by the issuers; and the exemption(s) from registration.

50.

What are accredited investors?

Banks, insurance companies, and individuals with net worth in excess of $1 million are

accredited investors.

51.

What is a wrap-around filing?

A wrap-around filing is a method of filing Form 10-K with the SEC. The company files its annual report and uses incorporation by reference to meet many of the requirements of the SEC.

52.

What is included in Part I of a securities registration statement?

Part I is a prospectus that includes audited financial statements, the intended use of the securities proceeds, a description of the risks associated with the securities, and a description of the business and properties owned by the registrant.

53.

What is included in Part II of a securities registration statement?

Part II includes information that discloses issuance expenses, marketing arrangements, and other data that is only used by SEC staff in the registration process.

54.

What is blue sky legislation?

Blue sky legislation represents state legislation that is intended to prevent securities fraud and to offer some protection to investors. These are for securities exempt from SEC registration because they are sold to residents of the state in which the issuing company is chartered and principally doing business.

55.

How are the operations of the SEC funded?

The operations of the SEC are funded through registration fees charged to companies registering securities and for periodic filings.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-05 Define and describe an issuer's filings with the Securities and Exchange Commission.

56.

What was the purpose of the Securities Act of 1933?

The purpose of the Securities Act of 1933 was to regulate initial offerings of securities by a company or underwriter.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-02 Describe the purpose(s) of various federal securities laws.

57.

What was the purpose of the Securities Exchange Act of 1934?

The purpose of the Securities Exchange Act of 1934 was to regulate the trading of previously issued securities through brokers and exchanges.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-02 Describe the purpose(s) of various federal securities laws.

58.

What is the purpose of the SEC's Regulation S-K?

Regulation S-K establishes requirements for nonfinancial information that is filed with the SEC.

AICPA BB: Legal AICPA FN: Reporting Blooms: Remember Difficulty: 2 Medium Learning Objective: 12-02 Describe the purpose(s) of various federal securities laws.

59.

Why is the SEC's Rule 14c-3 important to the accounting profession?

Rule 14c-3 is important to the accounting profession because it requires companies' financial statements that are included in annual reports to be audited.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-02 Describe the purpose(s) of various federal securities laws.

60.

When is the SEC's Registration Form S-4 used?

Registration Form S-4 is used to register securities that are issued in connection with business combination transactions.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Blooms: Remember Difficulty: 2 Medium Learning Objective: 12-05 Define and describe an issuer's filings with the Securities and Exchange Commission.

61.

When must Form 8-K be filed with the SEC?

Form 8-K must be filed with the SEC within 15 calendar days, whenever a significant event occurs. Significant events include: (1) a change in the company's independent auditor, (2) bankruptcy, and (3) a change in the control of the company.

62.

Briefly describe Regulation S-K. What is its purpose?

Regulation S-K establishes requirements for the nonfinancial information included in filings with the SEC. The registrant must (1) describe its business, (2) provide data about directors and management, and (3) include a discussion by management of its current financial condition and the results of its operations.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Blooms: Remember Difficulty: 2 Medium Learning Objective: 12-02 Describe the purpose(s) of various federal securities laws.

63.

What is a proxy? Briefly explain the importance of a proxy solicitation.

A proxy is a form signed by the shareholders giving someone else the legal authority to vote the shareholders' stock at a corporation's annual shareholders' meeting. Managers of a corporation usually solicit proxies to vote the stock of anyone unable to attend the annual meeting. Proxy solicitations are important because the decisions made at the annual shareholders' meeting are essential to operations of the business and there must be a voting quorum at the meeting in order to make such decisions. Proxy solicitations encourage shareholders to authorize their vote, if they cannot be in attendance at the meeting, so that there will be a quorum.

64.

What are the responsibilities of the SEC's Division of Corporation Finance?

The Division of Corporation Finance has responsibility for ensuring that disclosure requirements are met by publicly held companies. Such responsibility includes the reviewing of (1) registration statements, (2) tender offers, (3) proxy materials, and (4) annual reports.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Blooms: Remember Difficulty: 2 Medium Learning Objective: 12-01 Understand the origin and expansive role of the Securities and Exchange Commission. 12-63 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

65.

What are the four interconnected goals that the SEC has tried to achieve?

The four interconnected goals include: (1.) Ensuring that full and fair information is disclosed to all investors before the securities of a company are allowed to be bought and sold. (2.) Prohibiting the dissemination of materially misstated information. (3.) Preventing the misuse of information especially by inside parties. (4.) Regulating the operation of securities markets such as the New York Stock Exchange and the NASDAQ.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Blooms: Remember Difficulty: 2 Medium Learning Objective: 12-02 Describe the purpose(s) of various federal securities laws.

66.

What is required by the Trust Indenture Act of 1939?

The Trust Indenture Act of 1939 requires the registration of trust indenture documents and supporting data in connection with the public sale of bonds, debentures, notes, and other debt securities.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Blooms: Remember Difficulty: 2 Medium Learning Objective: 12-02 Describe the purpose(s) of various federal securities laws.

67.

What information needs to be included in Form 10-Q?

Information in Form 10-Q includes the following: (1.) Income statements for the most recent quarter and for the year to date as well as for the comparative periods in the previous year must be included. (2.) A statement of cash flows is mandatory, but only for the year to date as well as for the corresponding period in the preceding year. (3.) Two balance sheets are reported: one for the end of the most recent quarter with the second showing the company's financial position at the end of the previous fiscal year. (4.) Any needed disclosures need to be included pertaining to the current period including management's discussion and analysis (MD&A) of the financial condition of the company and the results of operations.

68.

What are some of the reasons for the corporate scandals of 2001 and 2002?

(1) Greed by corporate executives; (2) a failure in the corporate governance process as practiced by many boards of directors;(3) failure of public accounting firms to apply appropriate quality control measures to ensure independent judgments; (4) deficiencies in self-regulatory standards of the accounting profession; (5) unreasonable market expectations; and (6) an overburdened SEC.

AACSB: Reflective thinking

AICPA BB: Legal AICPA FN: Reporting Blooms: Understand Difficulty: 3 Hard Learning Objective: 12-02 Describe the purpose(s) of various federal securities laws.

69.

Why was the Public Utility Holding Company Act of 1935 created?

There were financial reporting abuses in the 1920s by complex utility empires. The owners of the empires minimized the need for equity financing. The Act requires registration of interstate holding companies of public utilities.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Blooms: Remember Difficulty: 3 Hard Learning Objective: 12-02 Describe the purpose(s) of various federal securities laws.

70.

What information is required in proxy statements?

(1) Five-year summary of operations; (2) description of business activities; (3) three-year summary of industry segments, export sales, and foreign and domestic operations; (4) listing of company directors and executive officers; (5) quarterly market price of the company's common stock; (6) dividend-paying restrictions; and (7) MD&A.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Blooms: Remember Difficulty: 3 Hard Learning Objective: 12-02 Describe the purpose(s) of various federal securities laws.

71.

What Federal agency has Congressional responsibility to create auditing and accounting standards?

The SEC.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 12-03 Understand the Congressional rationale for enacting the Sarbanes-Oxley Act and the responsibilities of the Public Accounting Oversight Board. Learning Objective: 12-04 Describe the SEC's role in establishing generally accepted accounting principles (GAAP).

72.

How has the Sarbanes-Oxley Act of 2002 changed the role of the audit committee?

The audit committee is now responsible for the appointment and compensation of the external auditor. To ensure impartiality, the committee must be independent from management. The auditor reports directly to the audit committee.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Blooms: Understand Difficulty: 2 Medium Learning Objective: 12-03 Understand the Congressional rationale for enacting the Sarbanes-Oxley Act and the responsibilities of the Public Accounting Oversight Board.

73.

What is the primary focus of the Sarbanes-Oxley Act of 2002?

The regulation of audit standards and independent audit firms.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Blooms: Remember Difficulty: 2 Medium Learning Objective: 12-03 Understand the Congressional rationale for enacting the Sarbanes-Oxley Act and the responsibilities of the Public Accounting Oversight Board.

74.

Who has the responsibility for the evaluation of the quality of an investment?

The investor.

75.

Name the two broad categories of filings with the SEC.

Registration statements and periodic filings.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Blooms: Remember 12-68 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 1 Easy Learning Objective: 12-05 Define and describe an issuer's filings with the Securities and Exchange Commission.

76.

Name five securities offerings exempt from registration with the SEC.

(1) Securities sold to the residents of the state in which the issuer is chartered and doing business; (2) securities issued by governments, banks, and S&Ls; (3) securities restricted to a company's existing stockholders without commission; (4) securities issued by nonprofit organizations; (5) small offerings of no more than $5 million within a 12-month period; (6) offerings of no more than $1 million made to any number of investors within a 12-month period; (7) offerings of no more than $5 million made to 35 or fewer purchasers in a 12-month period; and/or (8) the private placement of securities to no more than 35 sophisticated investors.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Blooms: Remember Difficulty: 3 Hard Learning Objective: 12-06 Describe an issuer's registration process; various forms used by the issuers; and the exemption(s) from registration.

77.

Describe the two parts of the SEC registration statement.

Part I (the prospectus) contains extensive information including (1) financial statements audited by an independent CPA; (2) an explanation of the intended use of the proceeds; (3) a description of the risks associated with the securities; and (4) a description of the business and the properties of the company. Part II is primarily for the informational needs of the SEC staff. The registrant is not required to provide this information to prospective buyers, although the registration statement is a public document. Part II includes information such as marketing arrangements, and securities issue expenses.

Chapter 13 Accounting for Legal Reorganizations and Liquidations

Multiple Choice Questions

1. A Chapter 7 bankruptcy is a(n)

A. involuntary reorganization. B. bankruptcy forced by a company's creditors. C. liquidation. D. bankruptcy in which all creditors receive payment in full. E. voluntary reorganization.

2. Where should a company undergoing reorganization report the gains and losses resulting from the reorganization?

A. on the statement of retained earnings. B. on the income statement, combined with the gains and losses from operations. C. on the statement of stockholders' equity. D. on the income statement, separate from other gains and losses. E. on the statement of cash flows.

3. Lawyer's fees incurred during a reorganization are accounted for as:

A. an expense. B. an intangible asset, Reorganization Cost, which would normally be amortized over a fiveyear period. C. additional paid-in capital. D. retained earnings. E. a prepaid asset until the entity emerges from reorganization.

4. On its balance sheet, a company undergoing reorganization should

A. report its assets at fair value, so that financial statement users can estimate whether creditors' claims will be met. B. report its assets at net realizable value because there is reason to doubt that the organization is a going concern. C. report its assets as pledged or free. D. report its assets at current replacement cost. E. continue to report its assets at book value.

5. How should the fresh start reorganization value normally be determined?

A. as the sum of current replacement cost of the company's assets. B. by discounting future cash flows for the entity that will emerge. C. as the sum of the historical cost of net assets. D. as the sum of the net realizable value of identifiable assets. E. by adjusting current cash flows for the entity as it emerges from reorganization.

6. How should liabilities (except for deferred income taxes) be reported by a company using

fresh start accounting?

A. at the undiscounted sum of future cash payments. B. at book value prior to the reorganization. C. as partially secured liabilities. D. at the present value of future cash payments. E. as unsecured liabilities.

7. Which one of the following is a requirement that must be met before an involuntary

bankruptcy petition can be filed when there are at least 12 unsecured creditors?

A. The petition must be filed by all creditor(s) to whom the debtor owes at least $15,325. B. The petition must be signed by creditor(s) with unsecured debts of at least $5,000. C. The petition must be signed by a majority of the creditor(s). D. The petition must be signed by creditor(s) to whom the debtor owes more than half of its debts. E. The petition must be signed by at least three creditors with unsecured debts of at least $15,325.

8. Which one of the following unsecured liabilities has the highest priority when an insolvent company is about to be liquidated?

A. federal income taxes payable. B. claims for expenses of administering the bankruptcy. C. loans made to the company by its stockholders. D. employees' claims for salaries. E. bank loans.

9. In a statement of financial affairs, assets are classified

A. according to whether they are pledged with particular creditors. B. as current or noncurrent. C. as monetary or nonmonetary. D. as operating or non-operating. E. as direct or indirect.

10. The statement of financial affairs should be prepared

A. under the going concern assumption. B. under the concept of conservatism. C. under the assumption that liquidation will occur. D. under the continuity concept. E. only for a company in Chapter 7 bankruptcy.

11. On a statement of financial affairs, a company's assets should be valued at

A. historical cost. B. net realizable value, if lower than historical cost. C. replacement cost. D. net realizable value, if higher than historical cost. E. net realizable value, whether higher or lower than historical cost.

12. On a statement of financial affairs, a company's liabilities should be valued at

A. the present value of future cash flows. B. net realizable value. C. the amount required for settlement. D. replacement cost. E. the amount expected to be paid if the company could honor its debts.

13. What are free assets?

A. assets for which net realizable value is greater than historical cost. B. assets for which no market exists. C. assets for which replacement cost is greater than historical cost. D. assets available to be distributed for liabilities with priority and for other unsecured obligations. E. assets available to be distributed to stockholders.

14. On a statement of financial affairs, a specific liability may be classified as

A. current or long-term. B. secured or unsecured. C. monetary or nonmonetary. D. direct or indirect. E. past due or not yet due.

15. Which of the following is not one of the more common reorganization plan elements?

A. plans for plant expansion. B. plans for generating additional monetary resources. C. plans to settle the debts of the company that existed when the order for relief was entered. D. plans proposing changes in the company's operations. E. plans for changes in the management of the company.

16. What is normally required before a reorganization plan can be implemented?

A. The plan must be presented by the company and confirmed by the court. B. The plan must be approved by each class of creditors and each class of stockholders, and confirmed by the court. C. The plan must be presented by the company, approved by two-thirds of each class of stockholders, and confirmed by the court. D. The plan must be presented by the company, approved by three-fourths of each class of stockholders, and confirmed by the court. E. The plan must be approved by two-thirds of each class of creditors, approved by twothirds of each class of stockholders, and confirmed by the court.

17. During a reorganization, how should interest expense be reported on the financial statements?

A. on the income statement, but not classified as a reorganization item. B. on the income statement as a separate reorganization item. C. on the balance sheet as a prepaid expense. D. as a debit directly to retained earnings. E. on the balance sheet as an intangible asset.

18. During a reorganization, cash reserves tend to grow. How should interest earned on these reserves be reported on the financial statements?

A. as an unearned revenue until the reorganization is complete. B. as a credit directly to retained earnings. C. on the balance sheet as a long-term liability. D. on the income statement, but not classified as a reorganization item. E. on the income statement as a reorganization item.

19. Sparkman Co. filed a bankruptcy petition and liquidated its noncash assets. Sparkman was paying forty cents on the dollar for unsecured claims. Bailey Co. held a mortgage of $150,000 on land that was sold for $110,000. The total amount of payment that Bailey should have received is calculated to be

A. $110,000. B. $44,000. C. $126,000. D. $150,000. E. $60,000.

20. Quincy Corp., about to be liquidated, has the following amounts for its assets and liabilities:

The mortgage is secured by the land and building, and the note payable is secured by the equipment. Quincy expects that the expenses of administering the liquidation will total $40,000. How much should Quincy expect to pay on the accounts payable?

A. $240,000. B. $128,000. C. $120,000. D. $96,000. E. $146,000.

21. Quincy Corp., about to be liquidated, has the following amounts for its assets and liabilities:

A. $474,000 B. $510,000 C. $450,000 D. $480,000 E. $478,000

22. Gongman Corp. owned the following assets when it came out of a Chapter 11 bankruptcy:

Gongman Corp. had a fresh start reorganization value of $1,000,000. What amount of goodwill should have been recognized in recording the reorganization?

A. $20,000. B. $100,000. C. $60,000. D. $210,000. E. $98,000.

23. Mandich Co. had the following amounts for its assets, liabilities, and stockholders' equity accounts just before filing a bankruptcy petition and requesting liquidation:

Of the salaries payable, $30,000 was owed to an officer of the company. The remaining amount was owed to salaried employees who had not been paid within the previous 80 days: John Webb was owed $10,600, Samantha Jones was owed $15,000, Sandra Johnson was owed $11,900, and Dennis Roberts was owed $2,500. The maximum owed for any one employee's claims for contributions to benefit plans was $800. Estimated expense for administering the liquidation amounted to $40,000. What was the total amount of unsecured liabilities with priority?

A. $130,000. B. $155,000. C. $167,475. D. $170,000. E. $200,000.

24. Mandich Co. had the following amounts for its assets, liabilities, and stockholders' equity accounts just before filing a bankruptcy petition and requesting liquidation:

Of the salaries payable, $30,000 was owed to an officer of the company. The remaining amount was owed to salaried employees who had not been paid within the previous 80 days: John Webb was owed $10,600, Samantha Jones was owed $15,000, Sandra Johnson was owed $11,900, and Dennis Roberts was owed $2,500. The maximum owed for any one employee's claims for contributions to benefit plans was $800. Estimated expense for administering the liquidation amounted to $40,000. On a statement of financial affairs, what amount would have been shown as assets available to pay liabilities with priority and unsecured creditors?

A. $390,000. B. $445,000. C. $495,000. D. $660,000. E. $795,000.

25. Mandich Co. had the following amounts for its assets, liabilities, and stockholders' equity accounts just before filing a bankruptcy petition and requesting liquidation:

Of the salaries payable, $30,000 was owed to an officer of the company. The remaining amount was owed to salaried employees who had not been paid within the previous 80 days: John Webb was owed $10,600, Samantha Jones was owed $15,000, Sandra Johnson was owed $11,900, and Dennis Roberts was owed $2,500. The maximum owed for any one employee's claims for contributions to benefit plans was $800. Estimated expense for administering the liquidation amounted to $40,000. What amount would the company have expected to pay for every dollar of unsecured liability without priority?

A. $.30. B. $.40. C. $.50. D. $.60. E. $.75.

26. All of the following items are liabilities with priority except:

A. Obligations arising between the date an order of relief is issued and the date of final realization of assets. B. Employee claims for contributions to benefit plans earned more than 180 days preceding the filing of a petition, limited to $12,475 per individual. C. Government claims for unpaid taxes. D. Claims for the return of deposits made by customers to acquire property or services, which were never delivered or provided by the debtor, limited to $2,775. E. Claims for administrative expenses in preserving and liquidating the company.

27. How are assets and liabilities valued on a Statement of Financial Affairs?

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

28. Assuming all of the following expenses have priority, in what order are they prioritized?

A. Administrative expenses, employee claims for wages, unpaid taxes, claims for the return of customer deposits. B. Employee claims for wages, unpaid taxes, administrative expenses, claims for the return of customer deposits. C. Unpaid taxes, administrative expenses, employee claims for wages, return of customer deposits. D. Administrative expenses, employee claims for wages, claims for the return of customer deposits, unpaid taxes. E. Unpaid taxes, return of customer deposits, employee claims for wages, administrative expenses.

29. Which of the following is not a responsibility of the bankruptcy trustee?

A. Recover all property belonging to the insolvent company. B. Liquidate common stock of the company. C. Preserve the estate from any further deterioration. D. Make distributions to the proper claimants. E. Void preferences made by the debtor within 90 days prior to the filing of the bankruptcy petition if the company was already insolvent.

30. What information is conveyed by the Statement of Realization and Liquidation?

A. Account balances reported by the company at the date of the filing of the bankruptcy petition. B. Cash receipts generated by the sale of the debtor's property. C. Write up of assets. D. Recognition of recorded liabilities. E. Assets and liabilities but not stockholders' equity.

31. Which statement is false regarding a plan for reorganization?

A. The plan is the heart of every Chapter 7 bankruptcy. B. The provisions of the plan specify the treatment of all creditors and equity holders upon approval by the Court. C. The plan shapes the financial structure of the entity that emerges. D. The plan may contain numerous provisions as solutions to financial difficulties. E. The plan may contain provisions for changes in the management of the company.

32. Which statement is false regarding the acceptance and confirmation of a reorganization plan?

A. The plan must be voted on by the creditors and the stockholders of the company. B. A separate vote is required of each class of stockholders. C. Any class of creditors that is not damaged by a reorganization is assumed to have accepted the plan without voting. D. Even if creditors and stockholders approve of the plan, the court can reject the plan. E. Acceptance of the plan requires the approval of two-thirds in number of claims and onehalf in dollar amount of creditors that cast votes.

33. A company that was to be liquidated had the following liabilities:

Total assets, available to pay liabilities with priority and unsecured creditors, are calculated to be what amount?

A. $75,000. B. $270,000. C. $275,000. D. $295,000. E. $370,000.

34. A company that was to be liquidated had the following liabilities:

Total liabilities with priority are calculated to be what amount?

A. $19,000. B. $37,950. C. $43,725. D. $44,000. E. $144,000.

35. A company that was to be liquidated had the following liabilities:

Assets available for unsecured creditors after payments of liabilities with priority are calculated to be what amount?

A. $226,000. B. $247,050. C. $251,000. D. $251,275. E. $275,000.

36. A company that was to be liquidated had the following liabilities:

Total unsecured non-priority liabilities are calculated to be what amount?

A. $44,000. B. $51,050. C. $75,000. D. $85,000. E. $194,000.

Essay Questions

37. For each of the following situations, select the best answer concerning the classification of the liability. (A.) Unsecured without priority (B.) Unsecured with priority (C.) Partially secured (D.) Fully secured ___ 1. Payroll taxes payable. ___ 2. Land and building valued at $427,000 mortgaged by a bank loan in the amount of $517,000. ___ 3. Equipment valued at $73,000 securing a loan to an individual in the amount of $32,100. ___ 4. Salaries payable to employees in the following amounts: $1,250; $1,876; $4,500. ___ 5. Electric bill owed to a local utility. ___ 6. Unpaid defined contribution pension plan payments in the amount of $4,000 (none in excess of $375 per employee). ___ 7. Obligations arising from the purchase of materials on July 5, 2013. (Bankruptcy petition filed July 14, 2013). ___ 8. Fees charged by bankruptcy trustee. ___ 9. Inventory valued at $61,895 collateralizing a note payable to a bank in the amount of $56,982. ___ 10. Delivery trucks valued at $389,900 securing a lien by General Motors for $400,000.

38. What is meant by a "partially secured liability"?

39. What is meant by a "fully secured liability"?

40. What is the difference between a liquidation and a reorganization?

41. What are the three categories of assets in a Statement of Financial Affairs?

42. What are the four categories of debts in a Statement of Financial Affairs?

43. What is the purpose of Chapter 7 of the Bankruptcy Reform Act?

44. What is the meaning of the phrase debtor in possession?

45. What are duties of the creditors committee in Chapter 7 liquidation?

46. What is an order for relief?

47. What occurs in the accounting records for fresh start accounting when a bank agrees to accept less than the debtor's book value of a note payable?

48. What term is used for a bankruptcy forced upon a debtor by its creditors?

49. To what does the term Chapter 7 bankruptcy refer?

50. To what does the term Chapter 11 bankruptcy refer?

51. What is the role of the trustee in the liquidation of a company?

52. What information is included on the statement of realization and liquidation?

53. What are some of the common elements that can be included in a reorganization proposal?

54. Who must accept and confirm the Reorganization plan?

55. How is the presentation of an income statement during a reorganization different from a normal income statement?

56. How is the presentation of a balance sheet during a reorganization different from a normal balance sheet?

Short Answer Questions

57. A company that was to be liquidated had the following liabilities:

The company had the following assets:

Total assets available to pay liabilities with priority and unsecured creditors are calculated to be what amount?

58. A company that was to be liquidated had the following liabilities:

The company had the following assets:

Total liabilities with priority are calculated to be what amount?

59. A company that was to be liquidated had the following liabilities:

The company had the following assets:

Required: Assets available for unsecured creditors after payment of liabilities with priority are calculated to be what amount?

60. A company that was to be liquidated had the following liabilities:

The company had the following assets:

Total unsecured non-priority liabilities are calculated to be what amount?

61. A company that was to be liquidated had the following liabilities:

The company had the following assets:

Total payment on notes payable is calculated to be what amount? (Round the payout percentage to one decimal place.)

62. Bazley Co. had severe financial difficulties and was considering the possibility of filing a bankruptcy petition. At that time, the company had the following assets (stated at net realizable value) and liabilities.

In a liquidation, total assets available to pay liabilities with priority and unsecured creditors are calculated to be what amount?

63. Bazley Co. had severe financial difficulties and was considering the possibility of filing a bankruptcy petition. At that time, the company had the following assets (stated at net realizable value) and liabilities.

Assets that are available for unsecured creditors after payment of liabilities with priority are calculated to be what amount?

64. Bazley Co. had severe financial difficulties and was considering the possibility of filing a bankruptcy petition. At that time, the company had the following assets (stated at net realizable value) and liabilities.

Total unsecured liabilities are calculated to be what amount?

65. Bazley Co. had severe financial difficulties and was considering the possibility of filing a bankruptcy petition. At that time, the company had the following assets (stated at net realizable value) and liabilities.

Total payment on partially secured debt is calculated to be what amount?

66. Lucky Co. had cash of $65,000, inventory worth $117,000, and a building worth $169,000. Unfortunately, the company also had accounts payable of $234,000, a note payable of $104,000 (secured by the inventory), liabilities with priority of $26,000, and a bond payable of $195,000 (secured by the building). In a Chapter 7 bankruptcy, total assets available to pay liabilities with priority and unsecured creditors are calculated to be what amount?

67. Lucky Co. had cash of $65,000, inventory worth $117,000, and a building worth $169,000. Unfortunately, the company also had accounts payable of $234,000, a note payable of $104,000 (secured by the inventory), liabilities with priority of $26,000, and a bond payable of $195,000 (secured by the building). Assets available for unsecured creditors after payment of liabilities with priority are calculated to be what amount?

68. Lucky Co. had cash of $65,000, inventory worth $117,000, and a building worth $169,000. Unfortunately, the company also had accounts payable of $234,000, a note payable of $104,000 (secured by the inventory), liabilities with priority of $26,000, and a bond payable of $195,000 (secured by the building). Total unsecured liabilities are calculated to be what amount?

69. Lucky Co. had cash of $65,000, inventory worth $117,000, and a building worth $169,000. Unfortunately, the company also had accounts payable of $234,000, a note payable of $104,000 (secured by the inventory), liabilities with priority of $26,000, and a bond payable of $195,000 (secured by the building). Total payment on the bond is calculated to be what amount?

70. A statement of financial affairs created for an insolvent corporation that was beginning the liquidation process disclosed the following data (assets were shown at net realizable values):

Required: How much money appears to be available for unsecured creditors after payment of liabilities with priority?

71. Mount Inc. was a hardware store that operated in Boise, Idaho. Management made some poor inventory acquisitions that loaded the store with unsalable merchandise. Due to the decline in revenues, the company became insolvent. Following is a trial balance as of March 15, 2013, the day the company filed for Chapter 7 liquidation.

Required: Prepare a statement of financial affairs for Mount Inc. as of March 15, 2013.

72. Mount Inc. was a hardware store that operated in Boise, Idaho. Management made some poor inventory acquisitions that loaded the store with unsalable merchandise. Due to the decline in revenues, the company became insolvent. Following is a trial balance as of March 15, 2013, the day the company filed for Chapter 7 liquidation.

Company officials believed that sixty percent of the accounts receivable could be collected if the company was liquidated. The building and land had a fair value of $97,500, while the equipment was worth $24,700. The investments represented shares of a publicly traded company that could be sold at the time for $27,300. The entire inventory could be sold for only $42,900. Administrative expenses necessary to carry out a liquidation would have approximated $20,800. Assume that the company was being liquidated and that the following transactions occurred: • Accounts receivable of $23,400 were collected. • All of the company's inventory was sold for $52,000. • Additional accounts payable of $13,000 incurred for various expenses such as utilities and maintenance were discovered. • The land and building were sold for $92,300.

• The note payable due to the Idaho Savings and Loan was paid. • The equipment was sold at auction for only $14,300 with the proceeds applied to the note owed to the Second National Bank. • The investments were sold for $27,300. • Administrative expenses totaled $26,000 as of July 26, 2013, but no payment had yet been made.

Required: Prepare a statement of realization and liquidation for the period from March 15 through July 26, 2013.

73. Mount Inc. was a hardware store that operated in Boise, Idaho. Management made some poor inventory acquisitions that loaded the store with unsalable merchandise. Due to the decline in revenues, the company became insolvent. Following is a trial balance as of March 15, 2013, the day the company filed for Chapter 7 liquidation.

Company officials believed that sixty percent of the accounts receivable could be collected if the company was liquidated. The building and land had a fair value of $97,500, while the equipment was worth $24,700. The investments represented shares of a publicly traded company that could be sold at the time for $27,300. The entire inventory could be sold for only $42,900. Administrative expenses necessary to carry out a liquidation would have approximated $20,800. How much cash would have been paid to an unsecured non-priority creditor who was owed a total of $1,300 by Mount Inc.? (Round the payout percentage to a whole number.)

74. Hampton Company is trying to decide whether to seek liquidation or reorganization. Hampton has provided the following balance sheet:

Additional information is as follows: • The investments are currently worth $13,000. • It is estimated that $32,000 of the accounts receivable are collectible. • The inventory can be sold for $74,000. • The prepaid expenses and the intangible assets have no net realizable value. • The land and building are currently valued at $250,000. • The equipment can be sold for $60,000. • Administrative expenses (not yet recorded) are estimated to be $12,500. • Accrued expenses include $17,000 of salaries payable ($11,000 to one employee and $3,000 each to two other employees). • Accrued expenses include $7,000 of unpaid payroll taxes. Compute the amount of total assets available to pay liabilities with priority and unsecured creditors.

75. Hampton Company is trying to decide whether to seek liquidation or reorganization. Hampton has provided the following balance sheet:

76. Hampton Company is trying to decide whether to seek liquidation or reorganization. Hampton has provided the following balance sheet:

Additional information is as follows: • The investments are currently worth $13,000. • It is estimated that $32,000 of the accounts receivable are collectible. • The inventory can be sold for $74,000. • The prepaid expenses and the intangible assets have no net realizable value. • The land and building are currently valued at $250,000. • The equipment can be sold for $60,000. • Administrative expenses (not yet recorded) are estimated to be $12,500. • Accrued expenses include $17,000 of salaries payable ($11,000 to one employee and $3,000 each to two other employees). • Accrued expenses include $7,000 of unpaid payroll taxes. Compute the amount of assets available for unsecured creditors after payment of liabilities with priority.

77. Hampton Company is trying to decide whether to seek liquidation or reorganization. Hampton has provided the following balance sheet:

78. Hampton Company is trying to decide whether to seek liquidation or reorganization. Hampton has provided the following balance sheet:

Additional information is as follows: • The investments are currently worth $13,000. • It is estimated that $32,000 of the accounts receivable are collectible. • The inventory can be sold for $74,000. • The prepaid expenses and the intangible assets have no net realizable value. • The land and building are currently valued at $250,000. • The equipment can be sold for $60,000. • Administrative expenses (not yet recorded) are estimated to be $12,500. • Accrued expenses include $17,000 of salaries payable ($11,000 to one employee and $3,000 each to two other employees). • Accrued expenses include $7,000 of unpaid payroll taxes. What is the payout percentage to unsecured creditors? (Round the percentage to a whole number and two decimal places.)

79. Hampton Company is trying to decide whether to seek liquidation or reorganization. Hampton has provided the following balance sheet:

Additional information is as follows: • The investments are currently worth $13,000. • It is estimated that $32,000 of the accounts receivable are collectible. • The inventory can be sold for $74,000. • The prepaid expenses and the intangible assets have no net realizable value. • The land and building are currently valued at $250,000. • The equipment can be sold for $60,000. • Administrative expenses (not yet recorded) are estimated to be $12,500. • Accrued expenses include $17,000 of salaries payable ($11,000 to one employee and $3,000 each to two other employees). • Accrued expenses include $7,000 of unpaid payroll taxes. How much will be paid to the holder of the note payable secured by the land and building? (Round your payout percentage to the nearest whole number.)

80. Hampton Company is trying to decide whether to seek liquidation or reorganization. Hampton has provided the following balance sheet:

Additional information is as follows: • The investments are currently worth $13,000. • It is estimated that $32,000 of the accounts receivable are collectible. • The inventory can be sold for $74,000. • The prepaid expenses and the intangible assets have no net realizable value. • The land and building are currently valued at $250,000. • The equipment can be sold for $60,000. • Administrative expenses (not yet recorded) are estimated to be $12,500. • Accrued expenses include $17,000 of salaries payable ($11,000 to one employee and $3,000 each to two other employees). • Accrued expenses include $7,000 of unpaid payroll taxes. How much will Hampton's creditor of an unsecured accounts payable of $4,000 receive?

81. Hampton Company is trying to decide whether to seek liquidation or reorganization. Hampton has provided the following balance sheet:

82. Berry Company is going through Chapter 11 bankruptcy reorganization. Prepare the income statement for the calendar year 2013 using the following information. The effective tax rate is 20%.

83. Candice Company is currently going through bankruptcy reorganization. The accountant has determined the following balances of the accounts at December 31, 2013.

Prepare the balance sheet for Candice Company. Retained earnings will need to be calculated.

Chapter 13 Accounting for Legal Reorganizations and Liquidations Answer Key

Multiple Choice Questions

A Chapter 7 bankruptcy is a(n)

A. involuntary reorganization. B. bankruptcy forced by a company's creditors. C. liquidation. D. bankruptcy in which all creditors receive payment in full. E. voluntary reorganization.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-04 Describe the difference between a Chapter 7 bankruptcy and a Chapter 11 bankruptcy.

Where should a company undergoing reorganization report the gains and losses resulting from the reorganization?

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-08 Account for a company as it moves through reorganization.

Lawyer's fees incurred during a reorganization are accounted for as:

A. an expense. B. an intangible asset, Reorganization Cost, which would normally be amortized over a five-year period. C. additional paid-in capital. D. retained earnings. E. a prepaid asset until the entity emerges from reorganization.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 13-08 Account for a company as it moves through reorganization.

On its balance sheet, a company undergoing reorganization should

How should the fresh start reorganization value normally be determined?

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 13-09 Describe the financial reporting for a company that successfully exits bankruptcy as a reorganized entity.

How should liabilities (except for deferred income taxes) be reported by a company using

fresh start accounting?

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-09 Describe the financial reporting for a company that successfully exits bankruptcy as a reorganized entity.

Which one of the following is a requirement that must be met before an involuntary

bankruptcy petition can be filed when there are at least 12 unsecured creditors?

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Accessibility: Keyboard Navigation

Blooms: Remember Difficulty: 2 Medium Learning Objective: 13-02 Explain the difference between a voluntary and involuntary bankruptcy.

Which one of the following unsecured liabilities has the highest priority when an insolvent company is about to be liquidated?

A. federal income taxes payable. B. claims for expenses of administering the bankruptcy. C. loans made to the company by its stockholders. D. employees' claims for salaries. E. bank loans.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-03 Identify the various types of creditors as they are labeled during a bankruptcy.

In a statement of financial affairs, assets are classified

A. according to whether they are pledged with particular creditors. B. as current or noncurrent. C. as monetary or nonmonetary. D. as operating or non-operating. E. as direct or indirect.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy 13-69 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective: 13-05 Account for a company as it enters bankruptcy.

10.

The statement of financial affairs should be prepared

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-05 Account for a company as it enters bankruptcy.

11.

On a statement of financial affairs, a company's assets should be valued at

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 13-05 Account for a company as it enters bankruptcy.

12.

On a statement of financial affairs, a company's liabilities should be valued at

A. the present value of future cash flows. B. net realizable value. C. the amount required for settlement. D. replacement cost. E. the amount expected to be paid if the company could honor its debts.

13.

What are free assets?

14.

On a statement of financial affairs, a specific liability may be classified as

A. current or long-term. B. secured or unsecured. C. monetary or nonmonetary. D. direct or indirect. E. past due or not yet due.

15.

Which of the following is not one of the more common reorganization plan elements?

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-07 List provisions that are often found in a bankruptcy reorganization plan.

16.

What is normally required before a reorganization plan can be implemented?

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 13-07 List provisions that are often found in a bankruptcy reorganization plan.

17.

During a reorganization, how should interest expense be reported on the financial statements?

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember 13-73 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 2 Medium Learning Objective: 13-08 Account for a company as it moves through reorganization.

18.

During a reorganization, cash reserves tend to grow. How should interest earned on these reserves be reported on the financial statements?

19.

Sparkman Co. filed a bankruptcy petition and liquidated its noncash assets. Sparkman was paying forty cents on the dollar for unsecured claims. Bailey Co. held a mortgage of $150,000 on land that was sold for $110,000. The total amount of payment that Bailey should have received is calculated to be

A. $110,000. B. $44,000. C. $126,000. D. $150,000. E. $60,000. Sale of land $110,000 + 40% of remaining $40,000 owed = $126,000

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 13-06 Account for the liquidation of a company in bankruptcy especially when using the liquidation basis of accounting.

20.

Quincy Corp., about to be liquidated, has the following amounts for its assets and liabilities:

A. $240,000. B. $128,000. C. $120,000. D. $96,000. E. $146,000. Assets available for priority claims and unsecured creditors $220,000 - priority claims $100,000 = $120,000 $120,000/$300,000 unsecured = payment of 40% on unsecured dollars. 40% × $240,000 A/P = $96,000

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard

Learning Objective: 13-06 Account for the liquidation of a company in bankruptcy especially when using the liquidation basis of accounting.

21.

Quincy Corp., about to be liquidated, has the following amounts for its assets and liabilities:

A. $474,000 B. $510,000 C. $450,000 D. $480,000 E. $478,000 Land and building sold for $450,000 leaves $60,000 unsecured still owing. 40% × $60,000 = $24,000 Mortgage holder expects $450,000 + $24,000 = $474,000

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply 13-77 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 3 Hard Learning Objective: 13-06 Account for the liquidation of a company in bankruptcy especially when using the liquidation basis of accounting.

22.

Gongman Corp. owned the following assets when it came out of a Chapter 11 bankruptcy:

Gongman Corp. had a fresh start reorganization value of $1,000,000. What amount of goodwill should have been recognized in recording the reorganization?

A. $20,000. B. $100,000. C. $60,000. D. $210,000. E. $98,000. Reorganization Value $1,000,000 - Identifiable FV of Assets ($160,000 + $150,000 + $340,000 + $250,000) $900,000 = Unidentifiable FV $100,000 (i.e., Goodwill)

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 13-09 Describe the financial reporting for a company that successfully exits bankruptcy as a reorganized entity.

23.

Mandich Co. had the following amounts for its assets, liabilities, and stockholders' equity accounts just before filing a bankruptcy petition and requesting liquidation:

A. $130,000. B. $155,000. C. $167,475. D. $170,000. E. $200,000.

Pension $10,000 + Salaries $37,475 (= $10,600 + $12,475 + $11,900 + $2,500) + Taxes $80,000 + Liquidation expenses $40,000 = $167,475

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 13-03 Identify the various types of creditors as they are labeled during a bankruptcy.

24.

Mandich Co. had the following amounts for its assets, liabilities, and stockholders' equity accounts just before filing a bankruptcy petition and requesting liquidation:

Of the salaries payable, $30,000 was owed to an officer of the company. The remaining amount was owed to salaried employees who had not been paid within the previous 80 days: John Webb was owed $10,600, Samantha Jones was owed $15,000, Sandra Johnson was owed $11,900, and Dennis Roberts was owed $2,500. The maximum owed for any one employee's claims for contributions to benefit plans was $800. Estimated expense for administering the liquidation amounted to $40,000. On a statement of financial affairs, what amount would have been shown as assets available to pay liabilities with priority and unsecured creditors?

A. $390,000. B. $445,000. C. $495,000. D. $660,000. E. $795,000.

Net Realizable Value of Cash + A/R + Inventory Net of Note Payable + Land + Building

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 13-05 Account for a company as it enters bankruptcy.

25.

Mandich Co. had the following amounts for its assets, liabilities, and stockholders' equity accounts just before filing a bankruptcy petition and requesting liquidation:

Of the salaries payable, $30,000 was owed to an officer of the company. The remaining amount was owed to salaried employees who had not been paid within the previous 80 days: John Webb was owed $10,600, Samantha Jones was owed $15,000, Sandra Johnson was owed $11,900, and Dennis Roberts was owed $2,500. The maximum owed for any one employee's claims for contributions to benefit plans was $800. Estimated expense for administering the liquidation amounted to $40,000. What amount would the company have expected to pay for every dollar of unsecured liability without priority?

A. $.30. B. $.40. C. $.50. D. $.60. E. $.75.

Assets available for priority claims and unsecured creditors of $495,000 - Priority claims of $167,475 = Assets available for non-priority unsecured creditors $327,525. $327,525/$660,000 unsecured liabilities = $.50. (Rounded)

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 13-05 Account for a company as it enters bankruptcy.

26.

All of the following items are liabilities with priority except:

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 13-03 Identify the various types of creditors as they are labeled during a bankruptcy.

27.

How are assets and liabilities valued on a Statement of Financial Affairs?

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

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-05 Account for a company as it enters bankruptcy.

28.

Assuming all of the following expenses have priority, in what order are they prioritized?

29.

Which of the following is not a responsibility of the bankruptcy trustee?

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-06 Account for the liquidation of a company in bankruptcy especially when using the liquidation basis of accounting.

30.

What information is conveyed by the Statement of Realization and Liquidation?

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 13-06 Account for the liquidation of a company in bankruptcy especially when using the liquidation basis of accounting.

31.

Which statement is false regarding a plan for reorganization?

AACSB: Reflective thinking

AICPA BB: Legal AICPA FN: Research Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-07 List provisions that are often found in a bankruptcy reorganization plan.

32.

Which statement is false regarding the acceptance and confirmation of a reorganization plan?

A. The plan must be voted on by the creditors and the stockholders of the company. B. A separate vote is required of each class of stockholders. C. Any class of creditors that is not damaged by a reorganization is assumed to have accepted the plan without voting. D. Even if creditors and stockholders approve of the plan, the court can reject the plan. E. Acceptance of the plan requires the approval of two-thirds in number of claims and one-half in dollar amount of creditors that cast votes.

33.

A company that was to be liquidated had the following liabilities:

Total assets, available to pay liabilities with priority and unsecured creditors, are calculated to be what amount?

A. $75,000. B. $270,000. C. $275,000. D. $295,000. E. $370,000. ($200,000 + $95,000)

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 13-05 Account for a company as it enters bankruptcy.

34.

A company that was to be liquidated had the following liabilities:

Total liabilities with priority are calculated to be what amount?

A. $19,000. B. $37,950. C. $43,725. D. $44,000. E. $144,000. ($12,000 + $2,000 + $20,000 + $10,000) = $44,000

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 13-05 Account for a company as it enters bankruptcy.

35.

A company that was to be liquidated had the following liabilities:

Assets available for unsecured creditors after payments of liabilities with priority are calculated to be what amount?

A. $226,000. B. $247,050. C. $251,000. D. $251,275. E. $275,000. $295,000 Assets Available to Pay Liabilities with Priority and Unsecured Creditors $44,000 Liabilities with Priority

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 13-05 Account for a company as it enters bankruptcy.

36.

A company that was to be liquidated had the following liabilities:

Total unsecured non-priority liabilities are calculated to be what amount?

A. $44,000. B. $51,050. C. $75,000. D. $85,000. E. $194,000. Notes Payable in Excess of Security $25,000 + A/P of $50,000 = $75,000

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 13-05 Account for a company as it enters bankruptcy.

Essay Questions

37.

For each of the following situations, select the best answer concerning the classification of the liability. (A.) Unsecured without priority (B.) Unsecured with priority (C.) Partially secured (D.) Fully secured ___ 1. Payroll taxes payable. ___ 2. Land and building valued at $427,000 mortgaged by a bank loan in the amount of $517,000. ___ 3. Equipment valued at $73,000 securing a loan to an individual in the amount of $32,100. ___ 4. Salaries payable to employees in the following amounts: $1,250; $1,876; $4,500. ___ 5. Electric bill owed to a local utility. ___ 6. Unpaid defined contribution pension plan payments in the amount of $4,000 (none in excess of $375 per employee). ___ 7. Obligations arising from the purchase of materials on July 5, 2013. (Bankruptcy petition filed July 14, 2013). ___ 8. Fees charged by bankruptcy trustee. ___ 9. Inventory valued at $61,895 collateralizing a note payable to a bank in the amount of $56,982. ___ 10. Delivery trucks valued at $389,900 securing a lien by General Motors for $400,000.

(1) B; (2) C; (3) D; (4) B; (5) A; (6) B; (7) A; (8) B; (9) D; (10) C

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 13-03 Identify the various types of creditors as they are labeled during a bankruptcy.

38.

What is meant by a "partially secured liability"?

A liability that is collateralized by an asset whose net realizable value is less than the liability.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-03 Identify the various types of creditors as they are labeled during a bankruptcy.

39.

What is meant by a "fully secured liability"?

A liability that is collateralized by an asset whose net realizable value equals or exceeds the liability.

40.

What is the difference between a liquidation and a reorganization?

In a liquidation, all assets are liquidated (sold) and liabilities paid up to the amount received for the assets, in order of priority and subject to collateral agreements. In a reorganization, the company attempts to continue business.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-04 Describe the difference between a Chapter 7 bankruptcy and a Chapter 11 bankruptcy.

41.

What are the three categories of assets in a Statement of Financial Affairs?

(1) Pledged with fully secured creditors, (2) pledged with partially secured creditors, and (3) free assets.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 13-05 Account for a company as it enters bankruptcy.

42.

What are the four categories of debts in a Statement of Financial Affairs?

(1) Liabilities with priority, (2) fully secured creditors, (3) partially secured creditors, and (4) unsecured creditors.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 13-05 Account for a company as it enters bankruptcy.

43.

What is the purpose of Chapter 7 of the Bankruptcy Reform Act?

The purpose of Chapter 7 of the Bankruptcy Reform Act is to regulate a liquidation by providing an orderly and equitable structure for the selling of assets and the payment of debts.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-06 Account for the liquidation of a company in bankruptcy especially when using the liquidation basis of accounting.

44.

What is the meaning of the phrase debtor in possession?

When there is a debtor in possession during a reorganization, the owners retain possession of the assets, continue to operate the business, and have the primary responsibility to develop an acceptable plan of reorganization.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Blooms: Remember Difficulty: 2 Medium Learning Objective: 13-07 List provisions that are often found in a bankruptcy reorganization plan.

45.

What are duties of the creditors committee in Chapter 7 liquidation?

The creditors committee consults with the trustee regarding the bankruptcy administration, makes recommendations to the trustee regarding trustee performance, and submits questions to the court regarding bankruptcy administration.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Blooms: Remember Difficulty: 2 Medium Learning Objective: 13-06 Account for the liquidation of a company in bankruptcy especially when using the liquidation basis of accounting.

46.

What is an order for relief?

An order for relief is a court order issued after a bankruptcy petition has been filed, to halt creditors' actions against the debtor while the debtor prepares to liquidate or reorganize.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-02 Explain the difference between a voluntary and involuntary bankruptcy.

47.

What occurs in the accounting records for fresh start accounting when a bank agrees to accept less than the debtor's book value of a note payable?

A Gain on Debt Discharge is recorded when the liability is written down and the Gain on Debt Discharge is closed to Retained Earnings, reducing the retained earnings deficit.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 13-09 Describe the financial reporting for a company that successfully exits bankruptcy as a reorganized entity.

48.

What term is used for a bankruptcy forced upon a debtor by its creditors?

The appropriate term is involuntary bankruptcy.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-02 Explain the difference between a voluntary and involuntary bankruptcy.

49.

To what does the term Chapter 7 bankruptcy refer?

A Chapter 7 bankruptcy is the liquidation of the debtor.

50.

To what does the term Chapter 11 bankruptcy refer?

A Chapter 11 bankruptcy occurs when the debtor tries to reorganize rather than liquidate.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Blooms: Remember Difficulty: 1 Easy 13-99 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective: 13-04 Describe the difference between a Chapter 7 bankruptcy and a Chapter 11 bankruptcy.

51.

What is the role of the trustee in the liquidation of a company?

The trustee must recover all properties belonging to the insolvent company and preserve the estate from further deterioration. The trustee liquidates noncash assets and makes distributions to proper claimants. The trustee may continue operating the company to complete all business activities that were in progress when the order for relief was entered. The trustee is required to make proper recording of all activities and report them to the court and interested parties.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Blooms: Understand Difficulty: 2 Medium Learning Objective: 13-06 Account for the liquidation of a company in bankruptcy especially when using the liquidation basis of accounting.

52.

What information is included on the statement of realization and liquidation?

The statement of realization and liquidation reports the account balances of the company at the date the order of relief was filed. The report will specify the cash receipts generated by the sale of the debtors' property, cash disbursements by the trustee to wind up the affairs of the business and to pay secured creditors, and other items that need book adjustments such as asset write-offs and recognition of unrecorded liabilities. Any cash that remains is paid to unsecured creditors.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Understand 13-100 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 2 Medium Learning Objective: 13-06 Account for the liquidation of a company in bankruptcy especially when using the liquidation basis of accounting.

53.

What are some of the common elements that can be included in a reorganization proposal?

The common elements in a reorganization proposal are plans for proposing changes in the company's operations, plans for generating additional monetary resources, plans for changes in management of the company, and plans to settle debts that existed when the order of relief was filed.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Blooms: Understand Difficulty: 2 Medium Learning Objective: 13-07 List provisions that are often found in a bankruptcy reorganization plan.

54.

Who must accept and confirm the Reorganization plan?

The Bankruptcy Reform Act specifies the plan must be voted on by the company's creditors and stockholders before being confirmed by the court.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 13-07 List provisions that are often found in a bankruptcy reorganization plan.

55.

How is the presentation of an income statement during a reorganization different from a normal income statement?

GAAP requires that all revenues, gains, losses, and expenses resulting from the reorganization should be reported separately. Such items are placed on the income statement before any income tax expense or benefit.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 13-08 Account for a company as it moves through reorganization.

56.

How is the presentation of a balance sheet during a reorganization different from a normal balance sheet?

GAAP requires that assets on the balance sheet will continue to be reported at their book values; however, liabilities that are subject to compromise should be reported at expected amounts to settle claims. Additionally, assets and liabilities are not classified as current/noncurrent.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 13-08 Account for a company as it moves through reorganization.

Short Answer Questions

57.

A company that was to be liquidated had the following liabilities:

The company had the following assets:

Total assets available to pay liabilities with priority and unsecured creditors are calculated to be what amount?

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 13-05 Account for a company as it enters bankruptcy.

58.

A company that was to be liquidated had the following liabilities:

The company had the following assets:

Total liabilities with priority are calculated to be what amount?

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 13-05 Account for a company as it enters bankruptcy.

59.

A company that was to be liquidated had the following liabilities:

The company had the following assets:

Required: Assets available for unsecured creditors after payment of liabilities with priority are calculated to be what amount?

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 13-05 Account for a company as it enters bankruptcy.

60.

A company that was to be liquidated had the following liabilities:

The company had the following assets:

Total unsecured non-priority liabilities are calculated to be what amount?

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 13-05 Account for a company as it enters bankruptcy.

61.

A company that was to be liquidated had the following liabilities:

The company had the following assets:

Total payment on notes payable is calculated to be what amount? (Round the payout percentage to one decimal place.)

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 13-05 Account for a company as it enters bankruptcy.

62.

Bazley Co. had severe financial difficulties and was considering the possibility of filing a bankruptcy petition. At that time, the company had the following assets (stated at net realizable value) and liabilities.

In a liquidation, total assets available to pay liabilities with priority and unsecured creditors are calculated to be what amount?

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 13-05 Account for a company as it enters bankruptcy.

63.

Assets that are available for unsecured creditors after payment of liabilities with priority are calculated to be what amount?

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 13-05 Account for a company as it enters bankruptcy.

64.

Total unsecured liabilities are calculated to be what amount?

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 13-05 Account for a company as it enters bankruptcy.

65.

Total payment on partially secured debt is calculated to be what amount?

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 13-05 Account for a company as it enters bankruptcy.

66.

Lucky Co. had cash of $65,000, inventory worth $117,000, and a building worth $169,000. Unfortunately, the company also had accounts payable of $234,000, a note payable of $104,000 (secured by the inventory), liabilities with priority of $26,000, and a bond payable of $195,000 (secured by the building). In a Chapter 7 bankruptcy, total assets available to pay liabilities with priority and unsecured creditors are calculated to be what amount?

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 13-05 Account for a company as it enters bankruptcy.

67.

Lucky Co. had cash of $65,000, inventory worth $117,000, and a building worth $169,000. Unfortunately, the company also had accounts payable of $234,000, a note payable of $104,000 (secured by the inventory), liabilities with priority of $26,000, and a bond payable of $195,000 (secured by the building). Assets available for unsecured creditors after payment of liabilities with priority are calculated to be what amount?

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 13-05 Account for a company as it enters bankruptcy.

68.

Lucky Co. had cash of $65,000, inventory worth $117,000, and a building worth $169,000. Unfortunately, the company also had accounts payable of $234,000, a note payable of $104,000 (secured by the inventory), liabilities with priority of $26,000, and a bond payable of $195,000 (secured by the building). Total unsecured liabilities are calculated to be what amount?

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 13-05 Account for a company as it enters bankruptcy.

69.

Lucky Co. had cash of $65,000, inventory worth $117,000, and a building worth $169,000. Unfortunately, the company also had accounts payable of $234,000, a note payable of $104,000 (secured by the inventory), liabilities with priority of $26,000, and a bond payable of $195,000 (secured by the building). Total payment on the bond is calculated to be what amount?

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 13-05 Account for a company as it enters bankruptcy.

70.

A statement of financial affairs created for an insolvent corporation that was beginning the liquidation process disclosed the following data (assets were shown at net realizable

values):

Required: How much money appears to be available for unsecured creditors after payment of liabilities with priority?

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 13-05 Account for a company as it enters bankruptcy.

71.

Mount Inc. was a hardware store that operated in Boise, Idaho. Management made some poor inventory acquisitions that loaded the store with unsalable merchandise. Due to the decline in revenues, the company became insolvent. Following is a trial balance as of March 15, 2013, the day the company filed for Chapter 7 liquidation.

Required: Prepare a statement of financial affairs for Mount Inc. as of March 15, 2013.

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 13-05 Account for a company as it enters bankruptcy.

72.

• The land and building were sold for $92,300. • The note payable due to the Idaho Savings and Loan was paid. • The equipment was sold at auction for only $14,300 with the proceeds applied to the note owed to the Second National Bank. • The investments were sold for $27,300. • Administrative expenses totaled $26,000 as of July 26, 2013, but no payment had yet been made.

Required: Prepare a statement of realization and liquidation for the period from March 15 through July 26, 2013.

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 13-06 Account for the liquidation of a company in bankruptcy especially when using the liquidation

basis of accounting.

73.

Company officials believed that sixty percent of the accounts receivable could be collected if the company was liquidated. The building and land had a fair value of $97,500, while the equipment was worth $24,700. The investments represented shares of a publicly traded company that could be sold at the time for $27,300. The entire inventory could be sold for only $42,900. Administrative expenses necessary to carry out a liquidation would have approximated $20,800. How much cash would have been paid to an unsecured non-priority creditor who was owed a total of $1,300 by Mount Inc.? (Round the payout percentage to a whole number.)

The statement of realization and liquidation prepared in Item 13-72 indicated that $105,300 in cash remained. However, $33,800 of this amount had to be distributed to the

liabilities with priority, leaving only $71,500 for the unsecured non-priority creditors. Since these unsecured liabilities amounted to $241,800, about 30% ($71,500 ÷ $241,800) of each debt would have been paid. Thus a creditor holding a $1,300 claim would have received approximately $390.

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 13-06 Account for the liquidation of a company in bankruptcy especially when using the liquidation basis of accounting.

74.

Hampton Company is trying to decide whether to seek liquidation or reorganization. Hampton has provided the following balance sheet:

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 13-05 Account for a company as it enters bankruptcy.

75.

Hampton Company is trying to decide whether to seek liquidation or reorganization. Hampton has provided the following balance sheet:

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 13-05 Account for a company as it enters bankruptcy.

76.

Hampton Company is trying to decide whether to seek liquidation or reorganization. Hampton has provided the following balance sheet:

Additional information is as follows: • The investments are currently worth $13,000. • It is estimated that $32,000 of the accounts receivable are collectible. • The inventory can be sold for $74,000. • The prepaid expenses and the intangible assets have no net realizable value. • The land and building are currently valued at $250,000. • The equipment can be sold for $60,000. • Administrative expenses (not yet recorded) are estimated to be $12,500. • Accrued expenses include $17,000 of salaries payable ($11,000 to one employee and $3,000 each to two other employees). • Accrued expenses include $7,000 of unpaid payroll taxes. Compute the amount of assets available for unsecured creditors after payment of liabilities with priority.

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 13-05 Account for a company as it enters bankruptcy.

77.

Hampton Company is trying to decide whether to seek liquidation or reorganization. Hampton has provided the following balance sheet:

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 13-05 Account for a company as it enters bankruptcy.

78.

Hampton Company is trying to decide whether to seek liquidation or reorganization. Hampton has provided the following balance sheet:

Additional information is as follows: • The investments are currently worth $13,000. • It is estimated that $32,000 of the accounts receivable are collectible. • The inventory can be sold for $74,000. • The prepaid expenses and the intangible assets have no net realizable value. • The land and building are currently valued at $250,000. • The equipment can be sold for $60,000. • Administrative expenses (not yet recorded) are estimated to be $12,500. • Accrued expenses include $17,000 of salaries payable ($11,000 to one employee and $3,000 each to two other employees). • Accrued expenses include $7,000 of unpaid payroll taxes. What is the payout percentage to unsecured creditors? (Round the percentage to a whole number and two decimal places.)

Assets available after priority obligations/Unsecured liabilities $75,500/$252,000 = .2996 or 29.96%

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 13-05 Account for a company as it enters bankruptcy.

79.

Hampton Company is trying to decide whether to seek liquidation or reorganization. Hampton has provided the following balance sheet:

Additional information is as follows: • The investments are currently worth $13,000. • It is estimated that $32,000 of the accounts receivable are collectible. • The inventory can be sold for $74,000. • The prepaid expenses and the intangible assets have no net realizable value. • The land and building are currently valued at $250,000. • The equipment can be sold for $60,000. • Administrative expenses (not yet recorded) are estimated to be $12,500. • Accrued expenses include $17,000 of salaries payable ($11,000 to one employee and $3,000 each to two other employees). • Accrued expenses include $7,000 of unpaid payroll taxes. How much will be paid to the holder of the note payable secured by the land and building? (Round your payout percentage to the nearest whole number.)

Assets available after priority obligations/Unsecured liabilities = $75,500/$252,000 = .2996 = .30 rounded. $250,000 secured by land & bldg + ($50,000 not recovered by security × .30) = $265,000.

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 13-05 Account for a company as it enters bankruptcy.

80.

Hampton Company is trying to decide whether to seek liquidation or reorganization. Hampton has provided the following balance sheet:

Additional information is as follows: • The investments are currently worth $13,000. • It is estimated that $32,000 of the accounts receivable are collectible. • The inventory can be sold for $74,000. • The prepaid expenses and the intangible assets have no net realizable value. • The land and building are currently valued at $250,000. • The equipment can be sold for $60,000. • Administrative expenses (not yet recorded) are estimated to be $12,500. • Accrued expenses include $17,000 of salaries payable ($11,000 to one employee and $3,000 each to two other employees). • Accrued expenses include $7,000 of unpaid payroll taxes. How much will Hampton's creditor of an unsecured accounts payable of $4,000 receive?

$4,000 × 30% payout percentage = $1,200.

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 13-05 Account for a company as it enters bankruptcy.

81.

Hampton Company is trying to decide whether to seek liquidation or reorganization. Hampton has provided the following balance sheet:

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement

Blooms: Apply Difficulty: 3 Hard Learning Objective: 13-05 Account for a company as it enters bankruptcy.

82.

Berry Company is going through Chapter 11 bankruptcy reorganization. Prepare the income statement for the calendar year 2013 using the following information. The effective tax rate is 20%.

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply

Difficulty: 2 Medium Learning Objective: 13-08 Account for a company as it moves through reorganization.

83.

Candice Company is currently going through bankruptcy reorganization. The accountant has determined the following balances of the accounts at December 31, 2013.

Prepare the balance sheet for Candice Company. Retained earnings will need to be calculated.

*Retained earnings ($270,000 = $364,000 + $100,000 - X) (X = $194,000)

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 13-08 Account for a company as it moves through reorganization.

Chapter 14 Partnerships: Formation and Operation

Multiple Choice Questions

1. Cherryhill and Hace had been partners for several years, and they decided to admit Quincy to the partnership. The accountant for the partnership believed that the dissolved partnership and the newly formed partnership were two separate entities. What method would the accountant have used for recording the admission of Quincy to the partnership?

A. the bonus method. B. the equity method. C. the goodwill method. D. the proportionate method. E. the cost method.

2. When the hybrid method is used to record the withdrawal of a partner, the partnership

A. revalues assets and liabilities and records goodwill to the continuing partner but not to the withdrawing partner. B. revalues liabilities but not assets, and no goodwill is recorded. C. can recognize goodwill but does not revalue assets and liabilities. D. revalues assets but not liabilities, and records goodwill to the continuing partner but not to the withdrawing partner. E. revalues assets and liabilities but does not record goodwill.

3. The disadvantages of the partnership form of business organization, compared to corporations, include

A. the legal requirements for formation. B. unlimited liability for the partners. C. the requirement for the partnership to pay income taxes. D. the extent of governmental regulation. E. the complexity of operations.

4. The advantages of the partnership form of business organization, compared to corporations, include

A. single taxation. B. ease of raising capital. C. mutual agency. D. limited liability. E. difficulty of formation.

5. The dissolution of a partnership occurs

A. only when the partnership sells its assets and permanently closes its books. B. only when a partner leaves the partnership. C. at the end of each year, when income is allocated to the partners. D. only when a new partner is admitted to the partnership. E. when there is any change in the individuals who make up the partnership.

6. The partnership of Clapton, Seidel, and Thomas was insolvent and will be unable to pay $30,000 in liabilities currently due. What recourse was available to the partnership's creditors?

A. they must present equal claims to the three partners as individuals. B. they must try obtain a payment from the partner with the largest capital account balance. C. they cannot seek remuneration from the partners as individuals. D. they may seek remuneration from any partner they choose. E. they must present their claims to the three partners in the order of the partners' capital account balances.

7. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012 and 2013. What was Wasser's total share of net income for 2012?

A. $63,000. B. $53,000. C. $58,000. D. $29,000. E. $51,000.

8. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012 and 2013. What was Nolan's total share of net income for 2012?

A. $63,000. B. $53,000. C. $58,000. D. $29,000. E. $51,000.

9. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012 and 2013. What was Cleary's total share of net income for 2012?

A. $63,000. B. $53,000. C. $58,000. D. $29,000. E. $51,000.

10. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012 and 2013. What was Nolan's capital balance at the end of 2012?

A. $200,000. B. $224,000. C. $238,000. D. $246,000. E. $254,000.

11. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012 and 2013. What was Wasser's capital balance at the end of 2012?

A. $150,000. B. $160,000. C. $165,000. D. $213,000. E. $201,000.

12. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012 and 2013. What was Cleary's capital balance at the end of 2012?

A. $100,000. B. $117,000. C. $119,000. D. $129,000. E. $153,000.

13. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012 and 2013. What was the total capital balance for the partnership at December 31, 2012?

A. $600,000 B. $564,000 C. $535,000 D. $523,000 E. $545,000

14. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012 and 2013. What was the amount of interest attributed to Wasser for 2013?

A. $17,600 B. $18,800 C. $20,100 D. $17,800 E. $30,100

15. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012 and 2013. What was Wasser's total share of net income for 2013?

A. $34,420. B. $75,540. C. $65,540. D. $70,040. E. $61,420.

16. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012 and 2013. What was the remainder portion of net income allocated to Nolan for 2013?

A. $45,440 B. $58,040 C. $70,040 D. $72,000 E. $82,040

17. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012 and 2013. What was Nolan's total share of net income for 2013?

A. $34,420. B. $75,540. C. $65,540. D. $70,040. E. $61,420.

18. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012 and 2013. What was Cleary's total share of net income for 2013?

A. $34,420. B. $75,540. C. $65,540. D. $70,040. E. $61,420.

19. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012 and 2013. What was Nolan's capital balance at the end of 2013?

A. $139,420. B. $246,000. C. $276,540. D. $279,440. E. $304,040.

20. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012 and 2013. What was Wasser's capital balance at the end of 2013?

A. $201,000. B. $263,520. C. $264,540. D. $304,040. E. $313,780.

21. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012 and 2013. What was Cleary's capital account balance at the end of 2013?

A. $163,420. B. $151,420. C. $139,420. D. $100,000. E. $142,000.

22. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012 and 2013. What was the total capital balance for the partnership at December 31, 2013?

A. $852,000 B. $780,000 C. $708,000 D. $744,000 E. $594,000

23. Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012 and 2013. What will be the amount of interest attributed to Cleary for 2014?

A. $15,142 B. $13,942 C. $12,942 D. $14,142 E. $10,000

24. Jell and Dell were partners with capital balances of $600 and $800 and an income sharing ratio of 2:3. They admitted Zell to a 30% interest in the partnership, and the total amount of goodwill credited to the original partners was $700. What amount did Zell contribute to the business?

A. $900. B. $560. C. $600. D. $590. E. $630.

25. Jerry, a partner in the JSK partnership, begins the year on January 1, 2013 with a capital balance of $20,000. The JSK partnership agreement states that Jerry receives 6% interest on this weighted average capital balance. • On March 1, 2013, when the partnership tax return for 2012 was completed, Jerry's capital account was credited for his share of 2012 profit of $120,000. • Jerry withdrew $5,000 quarterly, beginning March 31st. • On September 1, Jerry's capital account was credited with a special bonus of $60,000 for business he brought to the partnership. What amount of interest will be attributed to Jerry for year 2013 that will go toward his profit distribution for the year? (Use a 360-day year for calculations.)

A. $5,250 B. $6,000 C. $6,400 D. $7,000 E. $7,200

26. A partnership began its first year of operations with the following capital balances: Young, Capital: $143,000 Eaton, Capital: $104,000 Thurman, Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was Young's total share of net loss for the first year?

A. $3,900 loss. B. $11,700 loss. C. $10,400 loss. D. $24,700 loss. E. $9,100 loss.

27. A partnership began its first year of operations with the following capital balances: Young, Capital: $143,000 Eaton, Capital: $104,000 Thurman, Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was Eaton's total share of net loss for the first year?

A. $3,900 loss. B. $11,700 loss. C. $10,400 loss. D. $24,700 loss. E. $9,100 loss.

28. A partnership began its first year of operations with the following capital balances: Young, Capital: $143,000 Eaton, Capital: $104,000 Thurman, Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was Thurman's total share of net loss for the first year?

A. $3,900 loss. B. $11,700 loss. C. $10,400 loss. D. $24,700 loss. E. $9,100 loss.

29. A partnership began its first year of operations with the following capital balances: Young, Capital: $143,000 Eaton, Capital: $104,000 Thurman, Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was the balance in Young's Capital account at the end of the first year?

A. $120,900. B. $118,300. C. $126,100. D. $80,600. E. $111,500.

30. A partnership began its first year of operations with the following capital balances: Young, Capital: $143,000 Eaton, Capital: $104,000 Thurman, Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was the balance in Eaton's Capital account at the end of the first year?

A. $120,900. B. $118,300. C. $126,100. D. $80,600. E. $111,500.

31. A partnership began its first year of operations with the following capital balances: Young, Capital: $143,000 Eaton, Capital: $104,000 Thurman, Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was the balance in Thurman's Capital account at the end of the first year?

A. $120,900. B. $118,300. C. $126,100. D. $80,600. E. $111,500.

32. A partnership began its first year of operations with the following capital balances: Young, Capital: $143,000 Eaton, Capital: $104,000 Thurman, Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was Young's total share of net income for the second year?

A. $17,160 income. B. $4,160 income. C. $19,760 income. D. $17,290 income. E. $28,080 income.

33. A partnership began its first year of operations with the following capital balances: Young, Capital: $143,000 Eaton, Capital: $104,000 Thurman, Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was Eaton's total share of net income for the second year?

A. $17,160 income. B. $4,160 income. C. $19,760 income. D. $17,290 income. E. $28,080 income.

34. A partnership began its first year of operations with the following capital balances: Young, Capital: $143,000 Eaton, Capital: $104,000 Thurman, Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was Thurman's total share of net income for the second year?

A. $17,160 income. B. $4,160 income. C. $19,760 income. D. $17,290 income. E. $28,080 income.

35. A partnership began its first year of operations with the following capital balances: Young, Capital: $143,000 Eaton, Capital: $104,000 Thurman, Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was the balance in Young's Capital account at the end of the second year?

A. $133,380. B. $84,760. C. $105,690. D. $132,860. E. $71,760.

36. A partnership began its first year of operations with the following capital balances: Young, Capital: $143,000 Eaton, Capital: $104,000 Thurman, Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was the balance in Eaton's Capital account at the end of the second year?

A. $133,380. B. $84,760. C. $105,690. D. $132,860. E. $71,760.

37. A partnership began its first year of operations with the following capital balances: Young, Capital: $143,000 Eaton, Capital: $104,000 Thurman, Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was the balance in Thurman's Capital account at the end of the second year?

A. $133,380. B. $84,760. C. $105,690. D. $132,860. E. $71,760.

38. Which of the following is not a characteristic of a partnership?

A. The partnership itself pays no income taxes. B. It is easy to form a partnership. C. Any partner can be held personally liable for all debts of the business. D. A partnership requires written Articles of Partnership. E. Each partner has the power to obligate the partnership for liabilities.

39. Partnerships have alternative legal forms including all of the following except:

A. General Partnership. B. Limited Partnership. C. Subchapter S Partnership. D. Limited Liability Partnership. E. Limited Liability Company.

40. Which of the following type of organization is classified as a partnership, or similar to a partnership, for tax purposes? (I.) Limited Liability Company (II.) Limited Liability Partnership (III.) Subchapter S Corporation

A. II only. B. II and III. C. I and II. D. I and III. E. I, II, and III.

41. Which of the following statements is correct regarding the admission of a new partner?

A. A new partner must purchase a partnership interest directly from the business. B. The right of co-ownership in the business property can be transferred to a new partner without the consent of other existing partners. C. The right to participate in management of the business cannot be conveyed without the consent of other existing partners. D. The right to share in profits and losses can be sold to a new partner without the consent of other existing partners. E. A new partner always pays book value.

42. Withdrawals from the partnership capital accounts are typically not used

A. to reward partners for work performed in the business. B. to reduce the partners' capital account balances at the end of an accounting period. C. to record interest earned on a partner's capital balance. D. to reduce the basic investment that has been made in the business. E. to record the partnership's payment of a partner's personal expense such as income tax.

43. The partnership contract for Hanes and Jones LLP provides that Hanes is to receive a bonus of 20% of net income (after the bonus) and that the remaining net income is to be divided equally. If the partnership income before the bonus for the year is $57,600, Hanes' share of this pre-bonus income is:

A. $28,800. B. $33,600. C. $34,560. D. $35,520. E. $38,400.

44. The partners of Apple, Bere, and Carroll LLP share net income and losses in a 5:3:2 ratio, respectively. The capital account balances on January 1, 2013, were as follows:

The carrying amounts of the assets and liabilities of the partnership are the same as their current fair values. Dorr will be admitted to the partnership with a 20% capital interest and a 20% share of net income and losses in exchange for a cash investment. The amount of cash that Dorr should invest in the partnership is:

A. $25,000. B. $30,000. C. $37,500. D. $75,000. E. $90,000.

45. The appropriate format of the December 31, 2012 closing entry for John & Hope Limited Liability Partnership, whose two partners had withdrawn their salaries from the partnership during the year is:

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

46. When Danny withdrew from John, Daniel, Harry, and Danny, LLP, he was paid $80,000, although his capital account balance was only $60,000. The four partners shared net income and losses equally. The journal entry to record the effect on John's capital due to Danny's withdrawal would include:

A. $6,667 debit to John, Capital. B. $6,667 credit to John, Capital. C. $20,000 debit to John, Capital. D. $5,000 debit to John, Capital. E. $5,000 credit to John, Capital.

47. Max, Jones and Waters shared profits and losses 20%, 40%, and 40% respectively and their partnership capital balance is $10,000, $30,000 and $50,000 respectively. Max has decided to withdraw from the partnership. An appraisal of the business and its property estimates the fair value to be $200,000. Land with a book value of $30,000 has a fair value of $45,000. Max has agreed to receive $20,000 in exchange for her partnership interest after revaluation. At what amount should land be recorded on the partnership books?

A. $20,000. B. $30,000. C. $45,000. D. $50,000. E. $200,000.

48. The capital account balances for Donald & Hanes LLP on January 1, 2013, were as follows:

Donald and Hanes shared net income and losses in the ratio of 3:2, respectively. The partners agreed to admit May to the partnership with a 35% interest in partnership capital and net income. May invested $100,000 cash, and no goodwill was recognized. What is the balance of May's capital account after the new partnership is created?

A. $84,000. B. $100,000. C. $140,000. D. $176,000. E. $200,000.

49. The capital account balances for Donald & Hanes LLP on January 1, 2013, were as follows:

Donald and Hanes shared net income and losses in the ratio of 3:2, respectively. The partners agreed to admit May to the partnership with a 35% interest in partnership capital and net income. May invested $100,000 cash, and no goodwill was recognized. What is the balance of Donald's capital account after the new partnership is created?

A. $84,000. B. $100,000. C. $140,000. D. $176,000. E. $200,000.

50. The capital account balances for Donald & Hanes LLP on January 1, 2013, were as follows:

Donald and Hanes shared net income and losses in the ratio of 3:2, respectively. The partners agreed to admit May to the partnership with a 35% interest in partnership capital and net income. May invested $100,000 cash, and no goodwill was recognized. What is the balance of Hanes's capital account after the new partnership is created?

A. $84,000. B. $100,000. C. $140,000. D. $176,000. E. $200,000.

51. The capital account balances for Donald & Hanes LLP on January 1, 2013, were as follows:

A. $84,000. B. $140,000. C. $176,000. D. $200,000. E. $400,000.

52. Which of the following could be used as a basis to allocate profits among partners who are active in the management of the partnership? 1) allocation of salaries. 2) the number of years with the partnership. 3) the amount of time each partner works. 4) the average capital invested.

A. 1 and 2. B. 1 and 3. C. 1, 2, and 4. D. 1, 3, and 4. E. 1, 2, 3, and 4.

53. P, L, and O are partners with capital balances of $50,000, $30,000 and $20,000 and who share in the profit and loss of the PLO partnership 30%, 20%, and 50%, respectively, when they agree to admit C for a 20% interest. If C is to contribute an amount equal to his book value share of the new partnership, how much should C contribute?

A. $22,000 B. $20,000 C. $25,000 D. $18,000 E. $10,000

54. P, L, and O are partners with capital balances of $50,000, $30,000 and $20,000 and who share in the profit and loss of the PLO partnership 30%, 20%, and 50%, respectively, when they agree to admit C for a 20% interest. C contributes $38,000 to the partnership and the bonus method is used. What amount will be credited for C's beginning capital balance?

A. $20,000 B. $25,000 C. $27,600 D. $32,600 E. $38,000

55. P, L, and O are partners with capital balances of $50,000, $30,000 and $20,000 and who share in the profit and loss of the PLO partnership 30%, 20%, and 50%, respectively, when they agree to admit C for a 20% interest. If C contributes $40,000 to the partnership and the goodwill method is used, what amount will be debited for goodwill?

A. $15,000 B. $20,000 C. $25,000 D. $28,000 E. $60,000

56. P, L, and O are partners with capital balances of $50,000, $30,000 and $20,000 and who share in the profit and loss of the PLO partnership 30%, 20%, and 50%, respectively, when they agree to admit C for a 20% interest. C contributes $10,000 to the partnership and the goodwill method is used. What will be the result of the goodwill calculation?

57. Peter, Roberts, and Dana have the following capital balances; $80,000, $100,000 and $60,000, respectively. The partners share profits and losses 20%, 40%, and 40% respectively. Roberts retires and is paid $160,000 based on an independent appraisal of the business. If the goodwill method is used, what is the capital balance of Peter?

A. $20,000. B. $60,000. C. $110,000. D. $120,000. E. $230,000.

58. Peter, Roberts, and Dana have the following capital balances; $80,000, $100,000 and $60,000, respectively. The partners share profits and losses 20%, 40%, and 40% respectively. Roberts retires and is paid $160,000 based on an independent appraisal of the business. If the goodwill method is used, what is the capital balance of Dana?

A. $20,000. B. $60,000. C. $110,000. D. $120,000. E. $230,000.

59. Peter, Roberts, and Dana have the following capital balances; $80,000, $100,000 and $60,000, respectively. The partners share profits and losses 20%, 40%, and 40% respectively. What is the total partnership capital after Roberts retires receiving $160,000 and using the goodwill method?

A. $290,000. B. $176,000. C. $80,000. D. $120,000. E. $230,000.

60. Donald, Anne, and Todd have the following capital balances; $40,000, $50,000 and $30,000 respectively. The partners share profits and losses 20%, 40%, and 40% respectively. Anne retires and is paid $80,000 based on an independent appraisal of the business. If the goodwill method is used, what is the capital of the remaining partners?

A. Donald, $55,000; Todd, $60,000 B. Donald, $40,000; Todd, $30,000 C. Donald, $65,000; Todd, $55,000 D. Donald, $15,000; Todd, $30,000

61. Donald, Anne, and Todd have the following capital balances; $40,000, $50,000 and $30,000 respectively. The partners share profits and losses 20%, 40%, and 40% respectively. Anne retires and is paid $80,000 based on the terms of the original partnership agreement. If the bonus method is used, what is the capital of the remaining partners?

A. Donald, $40,000; Todd, $30,000 B. Donald, $30,000; Todd, $10,000 C. Donald, $50,000; Todd, $50,000 D. Donald, $24,000; Todd, $18,000

62. Donald, Anne, and Todd have the following capital balances; $40,000, $50,000 and $30,000 respectively. The partners share profits and losses 20%, 40%, and 40% respectively. What is the total partnership capital after Anne retires receiving $80,000 and using the bonus method?

A. $70,000. B. $40,000. C. $60,000. D. $80,000. E. $42,000.

Essay Questions

63. What is the dissolution of a partnership?

64. By what methods can a person gain admittance to a partnership?

65. What events cause the dissolution of a partnership?

66. For what events or conditions should the Articles of Partnership make provision?

67. How is accounting for a partnership different from accounting for a corporation?

68. Why are the terms of the Articles of Partnership important to partners?

69. Brown and Green are forming a business as partners. If they do not create a formal written partnership agreement, what risks are they exposing themselves to?

70. What theoretical argument could be made against the recognition of goodwill when there is a change in the ownership of a partnership?

71. Under what circumstances does a partner's balance in his or her capital account have practical consequences for the partner?

Short Answer Questions

72. Reed, Sharp, and Tucker were partners with capital account balances of $80,000, $100,000, and $70,000, respectively. They agreed to admit Upton to the partnership. Upton purchased 30% of each partner's interest, with payments directly to Reed, Sharp, and Tucker of $32,000, $40,000, and $28,000, respectively. Before the admission of Upton, the profit and loss sharing ratio was 2:3:2. The partners agreed to use the book value method to account for the admission of Upton to the partnership.

Required: Prepare the journal entry to record the admission of Upton to the partnership.

73. Jipsom and Klark were partners with capital account balances of $80,000 and $100,000, respectively. Looney directly paid $32,000 to Jipsom and $40,000 to Klark for 30% of their interests in the partnership. Jipsom and Klark shared income in the ratio of 2:3. They believed that revaluation of the partnership was appropriate when a new partner was admitted.

Required: Prepare the journal entries to record the admission of Looney to the partnership.

74. Norr and Caylor established a partnership on January 1, 2012. Norr invested cash of $100,000 and Caylor invested $30,000 in cash and equipment with a book value of $40,000 and fair value of $50,000. For both partners, the beginning capital balance was to equal the initial investment. Norr and Caylor agreed to the following procedure for sharing profits and losses: - 12% interest on the yearly beginning capital balance - $10 per hour of work that can be billed to the partnership's clients - the remainder divided in a 3:2 ratio The Articles of Partnership specified that each partner should withdraw no more than $1,000 per month. For 2012, the partnership's income was $70,000. Norr had 1,000 billable hours, and Caylor worked 1,400 billable hours. In 2013, the partnership's income was $24,000, and Norr and Caylor worked 800 and 1,200 billable hours respectively. Each partner withdrew $1,000 per month throughout 2012 and 2013. Determine the amount of net income allocated to each partner for 2012.

75. Norr and Caylor established a partnership on January 1, 2012. Norr invested cash of $100,000 and Caylor invested $30,000 in cash and equipment with a book value of $40,000 and fair value of $50,000. For both partners, the beginning capital balance was to equal the initial investment. Norr and Caylor agreed to the following procedure for sharing profits and losses: - 12% interest on the yearly beginning capital balance - $10 per hour of work that can be billed to the partnership's clients - the remainder divided in a 3:2 ratio The Articles of Partnership specified that each partner should withdraw no more than $1,000 per month. For 2012, the partnership's income was $70,000. Norr had 1,000 billable hours, and Caylor worked 1,400 billable hours. In 2013, the partnership's income was $24,000, and Norr and Caylor worked 800 and 1,200 billable hours respectively. Each partner withdrew $1,000 per month throughout 2012 and 2013. Determine the balance in both capital accounts at the end of 2012.

76. Norr and Caylor established a partnership on January 1, 2012. Norr invested cash of $100,000 and Caylor invested $30,000 in cash and equipment with a book value of $40,000 and fair value of $50,000. For both partners, the beginning capital balance was to equal the initial investment. Norr and Caylor agreed to the following procedure for sharing profits and losses: - 12% interest on the yearly beginning capital balance - $10 per hour of work that can be billed to the partnership's clients - the remainder divided in a 3:2 ratio The Articles of Partnership specified that each partner should withdraw no more than $1,000 per month. For 2012, the partnership's income was $70,000. Norr had 1,000 billable hours, and Caylor worked 1,400 billable hours. In 2013, the partnership's income was $24,000, and Norr and Caylor worked 800 and 1,200 billable hours respectively. Each partner withdrew $1,000 per month throughout 2012 and 2013. Determine the amount of net income allocated to each partner for 2013. (Round all calculations to the nearest whole dollar).

77. Norr and Caylor established a partnership on January 1, 2012. Norr invested cash of $100,000 and Caylor invested $30,000 in cash and equipment with a book value of $40,000 and fair value of $50,000. For both partners, the beginning capital balance was to equal the initial investment. Norr and Caylor agreed to the following procedure for sharing profits and losses: - 12% interest on the yearly beginning capital balance - $10 per hour of work that can be billed to the partnership's clients - the remainder divided in a 3:2 ratio The Articles of Partnership specified that each partner should withdraw no more than $1,000 per month. For 2012, the partnership's income was $70,000. Norr had 1,000 billable hours, and Caylor worked 1,400 billable hours. In 2013, the partnership's income was $24,000, and Norr and Caylor worked 800 and 1,200 billable hours respectively. Each partner withdrew $1,000 per month throughout 2012 and 2013. Determine the balance in both capital accounts at the end of 2013 to the nearest dollar.

78. The ABCD Partnership has the following balance sheet at January 1, 2012, prior to the admission of new partner, Eden.

Eden contributes $49,000 into the partnership for a 25% interest. The four original partners share profits and losses equally. Using the bonus method, determine the balances for each of the five partners after Eden joins the partnership.

79. The ABCD Partnership has the following balance sheet at January 1, 2012, prior to the admission of new partner, Eden.

Eden contributed $124,000 in cash to the business to receive a 20% interest in the partnership. Goodwill was to be recorded. The four original partners shared all profits and losses equally. After Eden made his investment, what were the individual capital balances?

80. The ABCD Partnership has the following balance sheet at January 1, 2012, prior to the admission of new partner, Eden.

Eden acquired a 20% interest in the partnership by contributing a total of $71,500 directly to the other four partners. No goodwill is to be recorded. Profits and losses have previously been split according to the following percentages: Adams, 15%, Barnes, 35%, Cordas, 30%, and Davis, 20%. After Eden made his investment, what were the individual capital balances?

81. The ABCD Partnership has the following balance sheet at January 1, 2012, prior to the admission of new partner, Eden.

Eden acquired a 20% interest in the partnership by contributing a total of $71,500 directly to the other four partners. Goodwill is to be recorded. Profits and losses have previously been split according to the following percentages: Adams, 15%; Barnes, 35%; Cordas, 30%; and Davis, 20%. After Eden made his investment, what were the individual capital balances?

82. Assume the partnership of Dean, Hardin, and Roth has been in existence for a number of years. Dean decides to withdraw from the partnership when the partners' capital balances are as follows:

An appraisal of the business and its property estimates the fair value to be $100,000. Dean has agreed to receive $64,000 in exchange for his partnership interest. Prepare the journal entry for the payment to Dean in the dissolution of his partnership interest, assuming the bonus method is to be applied.

83. Assume the partnership of Dean, Hardin, and Roth has been in existence for a number of years. Dean decides to withdraw from the partnership when the partners' capital balances are as follows:

An appraisal of the business and its property estimates the fair value to be $100,000. Dean has agreed to receive $64,000 in exchange for his partnership interest. What are the remaining partners' capital balances after Dean's interest is dissolved, assuming the bonus method is applied?

84. Assume the partnership of Howell, Madrid, and Waldrop has been in existence for a number of years. Howell decides to withdraw from the partnership when the partners' capital balances are as follows:

An appraisal of the business and its net assets estimates the fair value to be $154,000. Land with a book value of $20,000 has a fair value of $35,000. Howell has agreed to receive $84,000 in exchange for her partnership interest. Prepare the journal entries for the dissolution of Howell's partnership interest, assuming the goodwill method is to be applied.

85. Assume the partnership of Howell, Madrid, and Waldrop has been in existence for a number of years. Howell decides to withdraw from the partnership when the partners' capital balances are as follows:

An appraisal of the business and its net assets estimates the fair value to be $154,000. Land with a book value of $20,000 has a fair value of $35,000. Howell has agreed to receive $84,000 in exchange for her partnership interest. What are the remaining partners' capital balances after Howell's interest is dissolved, assuming the goodwill method is applied?

86. On January 1, 2013, Lamb and Mona LLP admitted Noris to a 20% interest in net assets for an investment of $50,000 cash. Prior to the admission of Noris, Lamb and Mona had net assets of $100,000 and an income-sharing ratio of 25% to Lamb and 75% to Mona. After the admission of Noris, the partnership contract included the following provisions: • Salary of $40,000 a year to Noris. • Remaining net income in ratio Lamb 20%, Mona 60%, Noris 20%. • During the fiscal year ended December 31, 2013, the partnership had income of $90,000 prior to recognition of salary to Noris. Record the journal entry for the admission of Noris. Goodwill is not to be recorded.

87. On January 1, 2013, Lamb and Mona LLP admitted Noris to a 20% interest in net assets for an investment of $50,000 cash. Prior to the admission of Noris, Lamb and Mona had net assets of $100,000 and an income-sharing ratio of 25% to Lamb and 75% to Mona. After the admission of Noris, the partnership contract included the following provisions: • Salary of $40,000 a year to Noris. • Remaining net income in ratio Lamb 20%, Mona 60%, Noris 20%. • During the fiscal year ended December 31, 2013, the partnership had income of $90,000 prior to recognition of salary to Noris. Record the journal entry to allocate the salary of Noris.

88. On January 1, 2013, Lamb and Mona LLP admitted Noris to a 20% interest in net assets for an investment of $50,000 cash. Prior to the admission of Noris, Lamb and Mona had net assets of $100,000 and an income-sharing ratio of 25% to Lamb and 75% to Mona. After the admission of Noris, the partnership contract included the following provisions: • Salary of $40,000 a year to Noris. • Remaining net income in ratio Lamb 20%, Mona 60%, Noris 20%. • During the fiscal year ended December 31, 2013, the partnership had income of $90,000 prior to recognition of salary to Noris. Record the journal entry to record the remainder of net income to the capital accounts.

89. James, Keller, and Rivers have the following capital balances; $48,000, $70,000 and $90,000 respectively. Because of a cash shortage James invests an additional $12,000 on June 1 st. Each partner withdraws $1,000 per month. James, Keller, and Rivers receive a salary of $13,000, $15,000 and $20,000, respectively, for work done during the year. Each partner receives interest of 8% on their weighted average capital balance without regard to normal drawings. Any remaining profits are split 20%, 30%, and 50% respectively. The net income for the year is $30,000. What are the ending capital balances for each partner?

Chapter 14 Partnerships: Formation and Operation Answer Key

Multiple Choice Questions

Cherryhill and Hace had been partners for several years, and they decided to admit Quincy to the partnership. The accountant for the partnership believed that the dissolved partnership and the newly formed partnership were two separate entities. What method would the accountant have used for recording the admission of Quincy to the partnership?

A. the bonus method. B. the equity method. C. the goodwill method. D. the proportionate method. E. the cost method.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 14-07 Explain the meaning of partnership dissolution and understand that a dissolution will often have little or no effect on the operations of the partnership business.

When the hybrid method is used to record the withdrawal of a partner, the partnership

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 14-07 Explain the meaning of partnership dissolution and understand that a dissolution will often have little or no effect on the operations of the partnership business.

The disadvantages of the partnership form of business organization, compared to corporations, include

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy

Learning Objective: 14-01 Explain the advantages and disadvantages of the partnership versus the corporate form of business.

The advantages of the partnership form of business organization, compared to corporations, include

A. single taxation. B. ease of raising capital. C. mutual agency. D. limited liability. E. difficulty of formation.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 14-01 Explain the advantages and disadvantages of the partnership versus the corporate form of business.

The dissolution of a partnership occurs

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy 14-61 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective: 14-07 Explain the meaning of partnership dissolution and understand that a dissolution will often have little or no effect on the operations of the partnership business.

The partnership of Clapton, Seidel, and Thomas was insolvent and will be unable to pay $30,000 in liabilities currently due. What recourse was available to the partnership's creditors?

Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with investments of $100,000, $150,000, and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was $150,000 in 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use every month during 2012 and 2013. What was Wasser's total share of net income for 2012?

A. $63,000. B. $53,000. C. $58,000. D. $29,000. E. $51,000. Interest $15,000 + Salary $10,000 + Remainder (40%) $38,000 = $63,000

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

A. $63,000. B. $53,000. C. $58,000. D. $29,000. E. $51,000. Interest $20,000 + Salary $0 + Remainder (40%) $38,000 = $58,000

A. $63,000. B. $53,000. C. $58,000. D. $29,000. E. $51,000. Interest $10,000 + Salary $0 + Remainder (20%) $19,000 = $29,000

10.

A. $200,000. B. $224,000. C. $238,000. D. $246,000. E. $254,000. Beginning $200,000 + Interest $20,000 + Salary $0 + Remainder (40%) $38,000 Withdrawals $12,000 = $246,000

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual capital balances.

11.

A. $150,000. B. $160,000. C. $165,000. D. $213,000. E. $201,000. Beginning $150,000 + Interest $15,000 + Salary $10,000 + Remainder (40%) $38,000 Withdrawals $12,000 = $201,000

12.

A. $100,000. B. $117,000. C. $119,000. D. $129,000. E. $153,000. Beginning $100,000 + Interest $10,000 + Salary $0 + Remainder (20%) $19,000 Withdrawals $12,000 = $117,000

13.

A. $600,000 B. $564,000 C. $535,000 D. $523,000 E. $545,000 Cleary $117,000 + Wasser $201,000 + Nolan $246,000 = $564,000

14.

A. $17,600 B. $18,800 C. $20,100 D. $17,800 E. $30,100 Beginning $201,000 × 10% = $20,100

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

15.

A. $34,420. B. $75,540. C. $65,540. D. $70,040. E. $61,420. Interest $20,100 + Salary $10,000 + Remainder (40%) $45,440 = $75,540

16.

A. $45,440 B. $58,040 C. $70,040 D. $72,000 E. $82,040 $113,600 × 40% = $45,440

17.

A. $34,420. B. $75,540. C. $65,540. D. $70,040. E. $61,420. Interest $24,600 + Salary $0 + Remainder (40%) $45,440 = $70,040

18.

A. $34,420. B. $75,540. C. $65,540. D. $70,040. E. $61,420. $11,700 + Salary $0 + Remainder (20%) $22,720 = $34,420

19.

A. $139,420. B. $246,000. C. $276,540. D. $279,440. E. $304,040. Beginning $246,000 + Interest $24,600 + Salary $0 + Remainder (40%) $45,440 Withdrawals $12,000 = $304,040

20.

A. $201,000. B. $263,520. C. $264,540. D. $304,040. E. $313,780. Beginning $201,000 + Interest $20,100 + Salary $10,000 + Remainder (40%) $45,440 Withdrawals $12,000 = $264,540

21.

A. $163,420. B. $151,420. C. $139,420. D. $100,000. E. $142,000. Beginning $117,000 + Interest $11,700 + Salary $0 + Remainder (20%) $22,720 Withdrawals $12,000 = $139,420

22.

A. $852,000 B. $780,000 C. $708,000 D. $744,000 E. $594,000 Cleary $139,420 + Wasser $264,540 + Nolan $304,040 = $708,000

23.

A. $15,142 B. $13,942 C. $12,942 D. $14,142 E. $10,000 $139,420 × 10% = $13,942

24.

Jell and Dell were partners with capital balances of $600 and $800 and an income sharing ratio of 2:3. They admitted Zell to a 30% interest in the partnership, and the total amount of goodwill credited to the original partners was $700. What amount did Zell contribute to the business?

A. $900. B. $560. C. $600. D. $590. E. $630. Jell $600 + Dell $800 + Goodwill $700 = $2,100/70% = $3,000 × 30% = $900 Cash

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 14-09 Prepare journal entries to record a new partner's admission by a contribution made directly to the partnership.

25.

Jerry, a partner in the JSK partnership, begins the year on January 1, 2013 with a capital balance of $20,000. The JSK partnership agreement states that Jerry receives 6% interest on this weighted average capital balance. • On March 1, 2013, when the partnership tax return for 2012 was completed, Jerry's capital account was credited for his share of 2012 profit of $120,000. • Jerry withdrew $5,000 quarterly, beginning March 31st. • On September 1, Jerry's capital account was credited with a special bonus of $60,000 for business he brought to the partnership. What amount of interest will be attributed to Jerry for year 2013 that will go toward his profit distribution for the year? (Use a 360-day year for calculations.)

A. $5,250 B. $6,000 C. $6,400 D. $7,000 E. $7,200 Beginning Balance $20,000 + Profit $40,000 ($120,000/3) + Bonus $60,000 - Withdrawals $20,000 = Ending $100,000 × .06 = $6,000

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

26.

A partnership began its first year of operations with the following capital balances: Young, Capital: $143,000 Eaton, Capital: $104,000 Thurman, Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was Young's total share of net loss for the first year?

A. $3,900 loss. B. $11,700 loss. C. $10,400 loss. D. $24,700 loss. E. $9,100 loss. Net Loss ($26,000) - Interest $39,000 - Salaries $39,000 = ($104,000) × 50% = Young's Portion ($52,000) + Interest $14,300 + Salary $26,000 = Young's Share of Loss ($11,700)

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply 14-82 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 2 Medium Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

27.

A partnership began its first year of operations with the following capital balances: Young, Capital: $143,000 Eaton, Capital: $104,000 Thurman, Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was Eaton's total share of net loss for the first year?

A. $3,900 loss. B. $11,700 loss. C. $10,400 loss. D. $24,700 loss. E. $9,100 loss. Net Loss ($26,000) - Interest $39,000 - Salaries $39,000 = ($104,000) × 20% = Eaton's Portion ($20,800) + Interest $10,400 + Salary $0 = Eaton's Share of Loss ($10,400)

AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

28.

A partnership began its first year of operations with the following capital balances: Young, Capital: $143,000 Eaton, Capital: $104,000 Thurman, Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was Thurman's total share of net loss for the first year?

A. $3,900 loss. B. $11,700 loss. C. $10,400 loss. D. $24,700 loss. E. $9,100 loss. Net Loss ($26,000) - Interest $39,000 - Salaries $39,000 = ($104,000) × 30% = Thurman's Portion ($31,200) + Interest $14,300 + Salary $13,000 = Thurman's Share of Loss ($3,900)

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply 14-85 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 2 Medium Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

29.

A partnership began its first year of operations with the following capital balances: Young, Capital: $143,000 Eaton, Capital: $104,000 Thurman, Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was the balance in Young's Capital account at the end of the first year?

A. $120,900. B. $118,300. C. $126,100. D. $80,600. E. $111,500. Beginning $143,000 + Interest $14,300 + Salary $26,000 + Remainder (50%) ($52,000) Withdrawals $13,000 = Ending Balance $118,300

AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual capital balances.

30.

A partnership began its first year of operations with the following capital balances: Young, Capital: $143,000 Eaton, Capital: $104,000 Thurman, Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was the balance in Eaton's Capital account at the end of the first year?

A. $120,900. B. $118,300. C. $126,100. D. $80,600. E. $111,500. Beginning $104,000 + Interest $10,400 + Salary $0 + Remainder (20%) ($20,800) Withdrawals $13,000 = Ending Balance $80,600

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply 14-88 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 2 Medium Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual capital balances.

31.

A partnership began its first year of operations with the following capital balances: Young, Capital: $143,000 Eaton, Capital: $104,000 Thurman, Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was the balance in Thurman's Capital account at the end of the first year?

A. $120,900. B. $118,300. C. $126,100. D. $80,600. E. $111,500. Beginning $143,000 + Interest $14,300 + Salary $13,000 + Remainder (30%) ($31,200) Withdrawals $13,000 = Ending Balance $126,100

AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual capital balances.

32.

A. $17,160 income. B. $4,160 income. C. $19,760 income. D. $17,290 income. E. $28,080 income. Net Income $52,000 - Interest $32,500 - Salaries $39,000 = ($19,500) × 50% = Young's Portion ($9,750) + Interest $11,830 + Salary $26,000 = Young's Share of Income $28,080

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply 14-91 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 3 Hard Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

33.

A partnership began its first year of operations with the following capital balances: Young, Capital: $143,000 Eaton, Capital: $104,000 Thurman, Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was Eaton's total share of net income for the second year?

A. $17,160 income. B. $4,160 income. C. $19,760 income. D. $17,290 income. E. $28,080 income. Net Income $52,000 - Interest $32,500 - Salaries $39,000 = ($19,500) × 20% = Eaton's Portion ($3,900) + Interest $8,060 + Salary $0 = Eaton's Share of Income $4,160

AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

34.

A partnership began its first year of operations with the following capital balances: Young, Capital: $143,000 Eaton, Capital: $104,000 Thurman, Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was Thurman's total share of net income for the second year?

A. $17,160 income. B. $4,160 income. C. $19,760 income. D. $17,290 income. E. $28,080 income. Net Income $52,000 - Interest $32,500 - Salaries $39,000 = ($19,500) × 30% = Thurman's Portion ($5,850) + Interest $12,610 + Salary $13,000 = Thurman's Share of Income $19,760

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement

Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

35.

A partnership began its first year of operations with the following capital balances: Young, Capital: $143,000 Eaton, Capital: $104,000 Thurman, Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was the balance in Young's Capital account at the end of the second year?

A. $133,380. B. $84,760. C. $105,690. D. $132,860. E. $71,760. Beginning $118,300 + Interest $11,830 + Salary $26,000 + Remainder (50%) ($9,750) Withdrawals $13,000 = Ending Balance $133,380

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply 14-96 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 2 Medium Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual capital balances.

36.

A partnership began its first year of operations with the following capital balances: Young, Capital: $143,000 Eaton, Capital: $104,000 Thurman, Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was the balance in Eaton's Capital account at the end of the second year?

A. $133,380. B. $84,760. C. $105,690. D. $132,860. E. $71,760. Beginning $80,600 + Interest $8,060 + Salary $0 + Remainder (20%) ($3,900) Withdrawals $13,000 = Ending Balance $71,760

37.

A partnership began its first year of operations with the following capital balances: Young, Capital: $143,000 Eaton, Capital: $104,000 Thurman, Capital: $143,000 The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis to Young, Eaton, and Thurman, respectively. Each partner withdrew $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. What was the balance in Thurman's Capital account at the end of the second year?

A. $133,380. B. $84,760. C. $105,690. D. $132,860. E. $71,760. Beginning $126,100 + Interest $12,610 + Salary $13,000 + Remainder (30%) ($5,850) Withdrawals $13,000 = Ending Balance $132,860

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply 14-99 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 2 Medium Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual capital balances.

38.

Which of the following is not a characteristic of a partnership?

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 14-01 Explain the advantages and disadvantages of the partnership versus the corporate form of business.

39.

Partnerships have alternative legal forms including all of the following except:

A. General Partnership. B. Limited Partnership. C. Subchapter S Partnership. D. Limited Liability Partnership. E. Limited Liability Company.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy

Learning Objective: 14-01 Explain the advantages and disadvantages of the partnership versus the corporate form of business.

40.

Which of the following type of organization is classified as a partnership, or similar to a partnership, for tax purposes? (I.) Limited Liability Company (II.) Limited Liability Partnership (III.) Subchapter S Corporation

A. II only. B. II and III. C. I and II. D. I and III. E. I, II, and III.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 14-01 Explain the advantages and disadvantages of the partnership versus the corporate form of business.

41.

Which of the following statements is correct regarding the admission of a new partner?

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 14-03 Prepare the journal entry to record the initial capital investment made by a partner.

42.

Withdrawals from the partnership capital accounts are typically not used

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium

Learning Objective: 14-04 Use both the bonus method and the goodwill method to record a partner's capital investment.

43.

The partnership contract for Hanes and Jones LLP provides that Hanes is to receive a bonus of 20% of net income (after the bonus) and that the remaining net income is to be divided equally. If the partnership income before the bonus for the year is $57,600, Hanes' share of this pre-bonus income is:

A. $28,800. B. $33,600. C. $34,560. D. $35,520. E. $38,400. Bonus = .20 (NI - Bonus) = (.20 NI) - (.20 Bonus) 1.2 Bonus = $11,520 Bonus = $9,600 Remainder to share equally = $48,000. Hanes receives $24,000 + $9,600 = $33,600

44.

The partners of Apple, Bere, and Carroll LLP share net income and losses in a 5:3:2 ratio, respectively. The capital account balances on January 1, 2013, were as follows:

A. $25,000. B. $30,000. C. $37,500. D. $75,000. E. $90,000. ($150,000/.8 = $187,500. $187,500 - $150,000 = $37,500 to invest)

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 14-09 Prepare journal entries to record a new partner's admission by a contribution made directly to the partnership.

45.

The appropriate format of the December 31, 2012 closing entry for John & Hope Limited Liability Partnership, whose two partners had withdrawn their salaries from the partnership during the year is:

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

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual capital balances.

46.

When Danny withdrew from John, Daniel, Harry, and Danny, LLP, he was paid $80,000, although his capital account balance was only $60,000. The four partners shared net income and losses equally. The journal entry to record the effect on John's capital due to Danny's withdrawal would include:

A. $6,667 debit to John, Capital. B. $6,667 credit to John, Capital. C. $20,000 debit to John, Capital. D. $5,000 debit to John, Capital. E. $5,000 credit to John, Capital. ($80,000 - $60,000) ÷ 3 = $6,667

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 14-10 Prepare journal entries to record the withdrawal of a current partner.

47.

Max, Jones and Waters shared profits and losses 20%, 40%, and 40% respectively and their partnership capital balance is $10,000, $30,000 and $50,000 respectively. Max has decided to withdraw from the partnership. An appraisal of the business and its property estimates the fair value to be $200,000. Land with a book value of $30,000 has a fair value of $45,000. Max has agreed to receive $20,000 in exchange for her partnership interest after revaluation. At what amount should land be recorded on the partnership books?

A. $20,000. B. $30,000. C. $45,000. D. $50,000. E. $200,000. Land will be recorded at the fair value of $45,000.

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 14-10 Prepare journal entries to record the withdrawal of a current partner.

48.

The capital account balances for Donald & Hanes LLP on January 1, 2013, were as follows:

A. $84,000. B. $100,000. C. $140,000. D. $176,000. E. $200,000. Donald $200,000 + Hanes $100,000 + Cash $100,000 = $400,000 × .35 = $140,000 to May

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 14-09 Prepare journal entries to record a new partner's admission by a contribution made directly to the partnership.

49.

The capital account balances for Donald & Hanes LLP on January 1, 2013, were as follows:

Donald and Hanes shared net income and losses in the ratio of 3:2, respectively. The partners agreed to admit May to the partnership with a 35% interest in partnership capital and net income. May invested $100,000 cash, and no goodwill was recognized. What is the balance of Donald's capital account after the new partnership is created?

A. $84,000. B. $100,000. C. $140,000. D. $176,000. E. $200,000. Bonus to May $40,000 × .60 = $24,000 from Donald's $200,000 = $176,000 New Capital Balance

50.

The capital account balances for Donald & Hanes LLP on January 1, 2013, were as follows:

Donald and Hanes shared net income and losses in the ratio of 3:2, respectively. The partners agreed to admit May to the partnership with a 35% interest in partnership capital and net income. May invested $100,000 cash, and no goodwill was recognized. What is the balance of Hanes's capital account after the new partnership is created?

A. $84,000. B. $100,000. C. $140,000. D. $176,000. E. $200,000. Bonus to May $40,000 × .40 = $16,000 from Hanes' $100,000 = $84,000 New Capital Balance

51.

The capital account balances for Donald & Hanes LLP on January 1, 2013, were as follows:

A. $84,000. B. $140,000. C. $176,000. D. $200,000. E. $400,000. Donald $176,000 + Hanes $84,000 + May $140,000 = Total Partners Capital $400,000

52.

Which of the following could be used as a basis to allocate profits among partners who are active in the management of the partnership? 1) allocation of salaries. 2) the number of years with the partnership. 3) the amount of time each partner works. 4) the average capital invested.

A. 1 and 2. B. 1 and 3. C. 1, 2, and 4. D. 1, 3, and 4. E. 1, 2, 3, and 4.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual capital balances.

53.

P, L, and O are partners with capital balances of $50,000, $30,000 and $20,000 and who share in the profit and loss of the PLO partnership 30%, 20%, and 50%, respectively, when they agree to admit C for a 20% interest. If C is to contribute an amount equal to his book value share of the new partnership, how much should C contribute?

A. $22,000 B. $20,000 C. $25,000 D. $18,000 E. $10,000 $50,000 + $30,000 + $20,000 = $100,000/80% = $125,000 - Current Capital $100,000 = $25,000 Cash

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 14-09 Prepare journal entries to record a new partner's admission by a contribution made directly to the partnership.

54.

P, L, and O are partners with capital balances of $50,000, $30,000 and $20,000 and who share in the profit and loss of the PLO partnership 30%, 20%, and 50%, respectively, when they agree to admit C for a 20% interest. C contributes $38,000 to the partnership and the bonus method is used. What amount will be credited for C's beginning capital balance?

A. $20,000 B. $25,000 C. $27,600 D. $32,600 E. $38,000 Current Capital $100,000 + New Cash $38,000 = $138,000 × 20% = $27,600 to C

55.

P, L, and O are partners with capital balances of $50,000, $30,000 and $20,000 and who share in the profit and loss of the PLO partnership 30%, 20%, and 50%, respectively, when they agree to admit C for a 20% interest. If C contributes $40,000 to the partnership and the goodwill method is used, what amount will be debited for goodwill?

A. $15,000 B. $20,000 C. $25,000 D. $28,000 E. $60,000 $40,000/20% = $200,000 - Current Capital $100,000 - New Cash $40,000 = $60,000 Goodwill

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 14-09 Prepare journal entries to record a new partner's admission by a contribution made directly to the partnership.

56.

P, L, and O are partners with capital balances of $50,000, $30,000 and $20,000 and who share in the profit and loss of the PLO partnership 30%, 20%, and 50%, respectively, when they agree to admit C for a 20% interest. C contributes $10,000 to the partnership and the goodwill method is used. What will be the result of the goodwill calculation?

A. Goodwill of $15,000; split among the original partners. B. Goodwill of $15,000; all to C. C. Goodwill of $15,000; split among all four partners: P, L, O, and C. D. Goodwill of $12,000; all to C. E. Goodwill of $12,000; split among original partners. $50,000 + $30,000 + $20,000 = $100,000/80% = $125,000 - Current Capital $100,000 = $25,000 Cash is needed for 20%, $10,000 Cash received, $15,000 Goodwill is Recorded to C's Capital Account

57.

Peter, Roberts, and Dana have the following capital balances; $80,000, $100,000 and $60,000, respectively. The partners share profits and losses 20%, 40%, and 40% respectively. Roberts retires and is paid $160,000 based on an independent appraisal of the business. If the goodwill method is used, what is the capital balance of Peter?

A. $20,000. B. $60,000. C. $110,000. D. $120,000. E. $230,000. Roberts receives an additional $60,000 above her capital balance. Since she is assigned 40 percent of all profits and losses, this extra allocation indicates total goodwill of $150,000, which must be split among all partners. 40% of Goodwill = $60,000 .40 G = $60,000 G = $150,000 and Peter receives 20% = $30,000. Peter's balance = $80,000 + $30,000 = $110,000.

58.

A. $20,000. B. $60,000. C. $110,000. D. $120,000. E. $230,000. Roberts receives an additional $60,000 above her capital balance. Since she is assigned 40 percent of all profits and losses, this extra allocation indicates total goodwill of $150,000, which must be split among all partners. 40% of Goodwill = $60,000 Goodwill = $150,000 Dana receives 40% = $60,000 Dana's Balance = $60,000 + $60,000 = $120,000

59.

Peter, Roberts, and Dana have the following capital balances; $80,000, $100,000 and $60,000, respectively. The partners share profits and losses 20%, 40%, and 40% respectively. What is the total partnership capital after Roberts retires receiving $160,000 and using the goodwill method?

A. $290,000. B. $176,000. C. $80,000. D. $120,000. E. $230,000. Roberts receives an additional $60,000 above her capital balance. Since she is assigned 40 percent of all profits and losses, this extra allocation indicates total goodwill of $150,000, which must be split among all partners. 40% of Goodwill = $60,000 Goodwill = $150,000 Total Capital is $240,000 + Goodwill $150,000 = $390,000 Roberts receives $160,000 and Partnership Capital is then $390,000 - $160,000 = $230,000

60.

Donald, Anne, and Todd have the following capital balances; $40,000, $50,000 and $30,000 respectively. The partners share profits and losses 20%, 40%, and 40% respectively. Anne retires and is paid $80,000 based on an independent appraisal of the business. If the goodwill method is used, what is the capital of the remaining partners?

A. Donald, $55,000; Todd, $60,000 B. Donald, $40,000; Todd, $30,000 C. Donald, $65,000; Todd, $55,000 D. Donald, $15,000; Todd, $30,000 Anne receives an additional $30,000 above her capital balance. Since she is assigned 40 percent of all profits and losses, this extra allocation indicates total goodwill of $75,000, which must be split among all partners. 40% of Goodwill = $30,000 Goodwill = $75,000 Donald = 20% Goodwill = $15,000 [$40,000 + $15,000] = $55,000 Todd = 40% Goodwill = $30,000 [$30,000 + $30,000] = $60,000

61.

Donald, Anne, and Todd have the following capital balances; $40,000, $50,000 and $30,000 respectively. The partners share profits and losses 20%, 40%, and 40% respectively. Anne retires and is paid $80,000 based on the terms of the original partnership agreement. If the bonus method is used, what is the capital of the remaining partners?

A. Donald, $40,000; Todd, $30,000 B. Donald, $30,000; Todd, $10,000 C. Donald, $50,000; Todd, $50,000 D. Donald, $24,000; Todd, $18,000 The $30,000 bonus is deducted from the remaining partners according to their relative profit and loss ratio. Donald = 20% and Todd = 40% which is a 1/3, 2/3 split Donald = $40,000 - (1/3 × $30,000) = $30,000 Todd = $30,000 - (2/3 × $30,000) = $10,000

62.

Donald, Anne, and Todd have the following capital balances; $40,000, $50,000 and $30,000 respectively. The partners share profits and losses 20%, 40%, and 40% respectively. What is the total partnership capital after Anne retires receiving $80,000 and using the bonus method?

A. $70,000. B. $40,000. C. $60,000. D. $80,000. E. $42,000.

Essay Questions

63.

What is the dissolution of a partnership?

The dissolution of a partnership is the breakup of the partnership caused by any change in the members that make up the partnership.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement 14-122 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Remember Difficulty: 1 Easy Learning Objective: 14-07 Explain the meaning of partnership dissolution and understand that a dissolution will often have little or no effect on the operations of the partnership business.

64.

By what methods can a person gain admittance to a partnership?

A person can gain admittance to a partnership by purchasing all or part of a current partner's interest or by investing assets in the partnership.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 14-03 Prepare the journal entry to record the initial capital investment made by a partner.

65.

What events cause the dissolution of a partnership?

The dissolution of a partnership occurs whenever there is a change in the members that make up the partnership. Dissolution does not mean going out of business, although, on occasion, dissolution would be accompanied by liquidation of assets and termination of the business. Dissolution would occur whenever a new partner is admitted to the partnership, dissolving one partnership and forming a new one. Dissolution also occurs when a partner leaves the partnership or when a partner dies or retires. The Articles of

Partnership may allow the partners to force dissolution under some circumstances.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy

Learning Objective: 14-07 Explain the meaning of partnership dissolution and understand that a dissolution will often have little or no effect on the operations of the partnership business.

66.

For what events or conditions should the Articles of Partnership make provision?

The Articles of Partnership should be a comprehensive document that is fair to all the partners. It should contain the following provisions: (A.) The amounts that will be invested in the partnership by the founding partners. (B.) The amounts of withdrawals that partners can make. Limiting the amount of withdrawals causes the partners to maintain a reasonable investment in the partnership. (C.) The division of income or loss between the partners. (D.) Guidelines for admission of new partners or withdrawal or retirement of partners. (E.) In some cases, guidelines for division of assets when the partnership liquidates. In addition, the Articles of Partnership should specify how much time each partner will spend in the business; the responsibilities of each partner; and procedures for resolution of disputes between partners.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Risk Analysis Blooms: Remember Difficulty: 2 Medium Learning Objective: 14-02 Describe the purpose of the articles of partnership and list specific items that should be included in this agreement.

67.

How is accounting for a partnership different from accounting for a corporation?

Financial accounting for a partnership differs from corporate accounting only in accounting for owners' equity. A partnership does not sell capital stock and does not have a retained earnings account. Each partner will have a capital account and a drawing account. On the balance sheet, the balance in each of the partner's capital accounts should be reported. The accountant for a partnership must divide income or loss among partners, following the provisions of the Articles of Partnership. Income tax accounting differs between corporations and partnerships. A corporation is a taxable entity and must file an income tax return. A partnership is not a taxable entity but is required to file an informational return that reports the various amounts of revenues and expenses attributed to each partner.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 14-01 Explain the advantages and disadvantages of the partnership versus the corporate form of business.

68.

Why are the terms of the Articles of Partnership important to partners?

The Articles of Partnership contain terms that help to protect the interests of each partner and the longevity and profitability of the business. One of the most important terms in the Articles of Partnership is the provision for division of income or loss. The amount of income or loss assigned to partners affects the balances in their capital accounts and may affect the amount of withdrawals the partners can make and the assets they receive upon the liquidation of the partnership. The terms in the Articles of Partnership help to prevent one partner from taking advantage of other partners.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Risk Analysis Blooms: Understand Difficulty: 2 Medium Learning Objective: 14-02 Describe the purpose of the articles of partnership and list specific items that should be included in this agreement.

69.

Brown and Green are forming a business as partners. If they do not create a formal written partnership agreement, what risks are they exposing themselves to?

The Articles of Partnership should help every partner protect his or her interests. Because of mutual agency and unlimited liability, being a partner involves some risk. If a partnership becomes insolvent, any or all of the partners may be required to use personal assets to settle partnership liabilities. The Articles of Partnership can require each partner to maintain his or her investment in the partnership and to meet other responsibilities, such as working in the business. With a formal written agreement, each partner would have recourse if another partner does not fulfill the terms in the Articles of Partnership.

AACSB: Analytic AICPA BB: Legal

AICPA FN: Risk Analysis Blooms: Apply Difficulty: 2 Medium Learning Objective: 14-02 Describe the purpose of the articles of partnership and list specific items that should be included in this agreement.

70.

What theoretical argument could be made against the recognition of goodwill when there is a change in the ownership of a partnership?

Goodwill should be recognized only when a business is purchased in an arms-length transaction — a transaction between independent parties. Generally, partners are not independent parties. Transactions between partners or between a partner and the partnership may be influenced by factors other than fair value and bargaining between independent parties. For example, if one partner has been causing trouble for a partnership, the other partners might agree to pay more than fair value to convince that partner to leave the business. The amount of goodwill that could be calculated for such a transaction would not be an indication of the fair value of the business.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 14-04 Use both the bonus method and the goodwill method to record a partner's capital investment.

71.

Under what circumstances does a partner's balance in his or her capital account have practical consequences for the partner?

The most direct practical consequence of a partner's capital account balance occurs when the partnership is liquidated. After assets are sold and liabilities are paid, each partner receives the balance in his or her capital account. The balance in the capital account may also influence the division of income or loss each year and could affect the amount of cash each partner is allowed to withdraw from the partnership.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 14-03 Prepare the journal entry to record the initial capital investment made by a partner.

Short Answer Questions

72.

Reed, Sharp, and Tucker were partners with capital account balances of $80,000, $100,000, and $70,000, respectively. They agreed to admit Upton to the partnership. Upton purchased 30% of each partner's interest, with payments directly to Reed, Sharp, and Tucker of $32,000, $40,000, and $28,000, respectively. Before the admission of Upton, the profit and loss sharing ratio was 2:3:2. The partners agreed to use the book value method to account for the admission of Upton to the partnership.

Required: Prepare the journal entry to record the admission of Upton to the partnership.

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 14-08 Prepare journal entries to record the acquisition by a new partner of either all or a portion of a current partner's interest.

73.

Jipsom and Klark were partners with capital account balances of $80,000 and $100,000, respectively. Looney directly paid $32,000 to Jipsom and $40,000 to Klark for 30% of their interests in the partnership. Jipsom and Klark shared income in the ratio of 2:3. They believed that revaluation of the partnership was appropriate when a new partner was admitted.

Required: Prepare the journal entries to record the admission of Looney to the partnership.

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 14-08 Prepare journal entries to record the acquisition by a new partner of either all or a portion of a current partner's interest.

74.

Norr and Caylor established a partnership on January 1, 2012. Norr invested cash of $100,000 and Caylor invested $30,000 in cash and equipment with a book value of $40,000 and fair value of $50,000. For both partners, the beginning capital balance was to equal the initial investment. Norr and Caylor agreed to the following procedure for sharing profits and losses: - 12% interest on the yearly beginning capital balance - $10 per hour of work that can be billed to the partnership's clients - the remainder divided in a 3:2 ratio The Articles of Partnership specified that each partner should withdraw no more than $1,000 per month. For 2012, the partnership's income was $70,000. Norr had 1,000 billable hours, and Caylor worked 1,400 billable hours. In 2013, the partnership's income was $24,000, and Norr and Caylor worked 800 and 1,200 billable hours respectively. Each partner withdrew $1,000 per month throughout 2012 and 2013. Determine the amount of net income allocated to each partner for 2012.

Distribution of income for 2012:

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

75.

Norr and Caylor established a partnership on January 1, 2012. Norr invested cash of $100,000 and Caylor invested $30,000 in cash and equipment with a book value of $40,000 and fair value of $50,000. For both partners, the beginning capital balance was to equal the initial investment. Norr and Caylor agreed to the following procedure for sharing profits and losses: - 12% interest on the yearly beginning capital balance - $10 per hour of work that can be billed to the partnership's clients - the remainder divided in a 3:2 ratio The Articles of Partnership specified that each partner should withdraw no more than $1,000 per month. For 2012, the partnership's income was $70,000. Norr had 1,000 billable hours, and Caylor worked 1,400 billable hours. In 2013, the partnership's income was $24,000, and Norr and Caylor worked 800 and 1,200 billable hours respectively. Each partner withdrew $1,000 per month throughout 2012 and 2013. Determine the balance in both capital accounts at the end of 2012.

Capital account balances at the end of 2012:

individual capital balances.

76.

Distribution of income for 2013:

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement

Blooms: Apply Difficulty: 2 Medium Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

77.

Norr and Caylor established a partnership on January 1, 2012. Norr invested cash of $100,000 and Caylor invested $30,000 in cash and equipment with a book value of $40,000 and fair value of $50,000. For both partners, the beginning capital balance was to equal the initial investment. Norr and Caylor agreed to the following procedure for sharing profits and losses: - 12% interest on the yearly beginning capital balance - $10 per hour of work that can be billed to the partnership's clients - the remainder divided in a 3:2 ratio The Articles of Partnership specified that each partner should withdraw no more than $1,000 per month. For 2012, the partnership's income was $70,000. Norr had 1,000 billable hours, and Caylor worked 1,400 billable hours. In 2013, the partnership's income was $24,000, and Norr and Caylor worked 800 and 1,200 billable hours respectively. Each partner withdrew $1,000 per month throughout 2012 and 2013. Determine the balance in both capital accounts at the end of 2013 to the nearest dollar.

Capital account balances at the end of 2013:

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement

Blooms: Apply Difficulty: 2 Medium Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual capital balances.

78.

The ABCD Partnership has the following balance sheet at January 1, 2012, prior to the admission of new partner, Eden.

Eden's contribution of $49,000 into the partnership raises the total partnership net assets to $400,000. Eden's capital account is credited, by agreement, for 25% of the partnership's total tangible assets, or $100,000. The journal entry to record the admission of Eden is:

The capital balances of each of the five partners after Eden's entry into the partnership are as follows:

AACSB: Analytic

AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 14-09 Prepare journal entries to record a new partner's admission by a contribution made directly to the partnership.

79.

The ABCD Partnership has the following balance sheet at January 1, 2012, prior to the admission of new partner, Eden.

Eden's contribution of $124,000 to the partnership increases the partnership's net assets to $475,000. The implied value of the partnership is $620,000 ($124,000 ÷ 20%). Goodwill of $145,000 ($620,000 - $475,000) resulted from this transaction. The first entry requires that the goodwill be allocated to each of the original four partners according to their profit and loss sharing percentages. As indicated in the problem, the four original partners share profits and losses equally.

After allocating the goodwill to each of the original four partners, their partnership capital balances are as follows:

The second step is to record Eden's cash contribution and to record Eden's capital account balance:

80.

The ABCD Partnership has the following balance sheet at January 1, 2012, prior to the admission of new partner, Eden.

The partnership's total net assets are still $351,000, because Eden's $71,500 went to the partners. Using the book value method, each of the original partners will give up 20% of their current capital balance to Eden. The journal entry is:

The partners' balances following the admission of Eden are:

AACSB: Analytic AICPA BB: Legal

AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 14-08 Prepare journal entries to record the acquisition by a new partner of either all or a portion of a current partner's interest.

81.

The ABCD Partnership has the following balance sheet at January 1, 2012, prior to the admission of new partner, Eden.

Eden's contribution of $71,500 will go to the original four partners, not into the partnership. Therefore, the partnership's total net assets remain $351,000. The implied value of the partnership, based on Eden's contribution, is $357,500 ($71,500 ÷ 20%). Goodwill arising out of this transaction is $6,500. First, the goodwill should be allocated to each of the original four partners:

The adjusted balances for the four original partners, after allocating goodwill, are:

The next step is to allocate 20% of each of the original partners' balances to Eden: 14-142 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

The partners' capital balances after admitting Eden are:

82.

Assume the partnership of Dean, Hardin, and Roth has been in existence for a number of years. Dean decides to withdraw from the partnership when the partners' capital balances are as follows:

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 14-10 Prepare journal entries to record the withdrawal of a current partner.

83.

Assume the partnership of Dean, Hardin, and Roth has been in existence for a number of years. Dean decides to withdraw from the partnership when the partners' capital balances are as follows:

Hardin: $12,600 = ($15,000 - $2,400) Roth: $23,400 = ($25,000 - $1,600)

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 14-10 Prepare journal entries to record the withdrawal of a current partner.

84.

Assume the partnership of Howell, Madrid, and Waldrop has been in existence for a number of years. Howell decides to withdraw from the partnership when the partners' capital balances are as follows:

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 14-10 Prepare journal entries to record the withdrawal of a current partner.

85.

Assume the partnership of Howell, Madrid, and Waldrop has been in existence for a number of years. Howell decides to withdraw from the partnership when the partners' capital balances are as follows:

An appraisal of the business and its net assets estimates the fair value to be $154,000. Land with a book value of $20,000 has a fair value of $35,000. Howell has agreed to receive $84,000 in exchange for her partnership interest. What are the remaining partners' capital balances after Howell's interest is dissolved, assuming the goodwill method is applied?

Madrid: $33,000 = ($15,000 + $18,000) Waldrop: $37,000 = ($25,000 + $12,000)

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 14-10 Prepare journal entries to record the withdrawal of a current partner.

86.

On January 1, 2013, Lamb and Mona LLP admitted Noris to a 20% interest in net assets for an investment of $50,000 cash. Prior to the admission of Noris, Lamb and Mona had net assets of $100,000 and an income-sharing ratio of 25% to Lamb and 75% to Mona. After the admission of Noris, the partnership contract included the following provisions: • Salary of $40,000 a year to Noris. • Remaining net income in ratio Lamb 20%, Mona 60%, Noris 20%. • During the fiscal year ended December 31, 2013, the partnership had income of $90,000 prior to recognition of salary to Noris. Record the journal entry for the admission of Noris. Goodwill is not to be recorded.

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 14-03 Prepare the journal entry to record the initial capital investment made by a partner.

87.

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual capital balances.

88.

On January 1, 2013, Lamb and Mona LLP admitted Noris to a 20% interest in net assets for an investment of $50,000 cash. Prior to the admission of Noris, Lamb and Mona had net assets of $100,000 and an income-sharing ratio of 25% to Lamb and 75% to Mona. After the admission of Noris, the partnership contract included the following provisions: • Salary of $40,000 a year to Noris. • Remaining net income in ratio Lamb 20%, Mona 60%, Noris 20%. • During the fiscal year ended December 31, 2013, the partnership had income of $90,000 prior to recognition of salary to Noris. Record the journal entry to record the remainder of net income to the capital accounts.

89.

James, Keller, and Rivers have the following capital balances; $48,000, $70,000 and $90,000 respectively. Because of a cash shortage James invests an additional $12,000 on June 1st. Each partner withdraws $1,000 per month. James, Keller, and Rivers receive a salary of $13,000, $15,000 and $20,000, respectively, for work done during the year. Each partner receives interest of 8% on their weighted average capital balance without regard to normal drawings. Any remaining profits are split 20%, 30%, and 50% respectively. The net income for the year is $30,000. What are the ending capital balances for each partner?

Remaining income (loss):

CALCULATION OF JAMES INTEREST ALLOCATION

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 14-05 Demonstrate the impact that the allocation of partnership income has on the partners' individual capital balances. Learning Objective: 14-06 Allocate income to partners when interest and/or salary factors are included.

Chapter 15 Partnerships: Termination and Liquidation

Multiple Choice Questions

1. When a partnership is insolvent and a partner has a deficit capital balance, that partner is legally required to:

A. declare personal bankruptcy. B. initiate legal proceedings against the partnership. C. contribute cash to the partnership. D. deliver a note payable to the partnership with specific payment terms. E. None of these. The partner has no legal responsibility to cover the capital deficit balance.

2. The Abrams, Bartle, and Creighton partnership began the process of liquidation with the following balance sheet:

Abrams, Bartle, and Creighton share profits and losses in a ratio of 3:2:5. Liquidation expenses are expected to be $12,000. If the noncash assets were sold for $234,000, what amount of the loss would have been allocated to Bartle?

A. $43,200. B. $46,800. C. $40,000. D. $42,400. E. $43,100.

3. The Abrams, Bartle, and Creighton partnership began the process of liquidation with the following balance sheet:

Abrams, Bartle, and Creighton share profits and losses in a ratio of 3:2:5. Liquidation expenses are expected to be $12,000. The noncash assets were sold for $134,000. Which partner(s) would have had to contribute assets to the partnership to cover a deficit in his or her capital account?

A. Abrams. B. Bartle. C. Creighton. D. Abrams and Creighton. E. Abrams and Bartle.

4. The Abrams, Bartle, and Creighton partnership began the process of liquidation with the following balance sheet:

Abrams, Bartle, and Creighton share profits and losses in a ratio of 3:2:5. Liquidation expenses are expected to be $12,000. After the liquidation expenses of $12,000 were paid and the noncash assets sold, Creighton had a deficit of $8,000. For what amount were the noncash assets sold?

A. $170,000. B. $264,000. C. $158,000. D. $146,000. E. $185,000.

5. The Keaton, Lewis, and Meador partnership had the following balance sheet just before entering liquidation:

Keaton, Lewis, and Meador share profits and losses in a ratio of 2:4:4. Noncash assets were sold for $180,000. Liquidation expenses were $10,000. Assume that Lewis was personally insolvent and could not contribute any assets to the partnership, while Keaton and Meador were both solvent. What amount of cash would Keaton have received from the distribution of partnership assets?

A. $38,000. B. $30,000. C. $24,000. D. $34,000. E. $31,600.

6. The Keaton, Lewis, and Meador partnership had the following balance sheet just before entering liquidation:

Keaton, Lewis, and Meador share profits and losses in a ratio of 2:4:4. Noncash assets were sold for $60,000. How much will each partner receive in the liquidation?

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

7. The Keaton, Lewis, and Meador partnership had the following balance sheet just before entering liquidation:

Keaton, Lewis, and Meador share profits and losses in a ratio of 2:4:4. The partnership feels confident it will be able to eventually sell the noncash assets and wants to distribute some cash before paying liabilities. How much would each partner receive of a total $60,000 distribution of cash?

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

8. The Henry, Isaac, and Jacobs partnership was about to enter liquidation with the following account balances:

Estimated expenses of liquidation were $5,000. Henry, Isaac, and Jacobs shared profits and losses in a ratio of 2:4:4. What amount of cash was available for safe payments, based on the above information?

A. $30,000. B. $85,000. C. $25,000. D. $35,000. E. $40,000.

9. The Henry, Isaac, and Jacobs partnership was about to enter liquidation with the following account balances:

10. The Henry, Isaac, and Jacobs partnership was about to enter liquidation with the following account balances:

Estimated expenses of liquidation were $5,000. Henry, Isaac, and Jacobs shared profits and losses in a ratio of 2:4:4. Before liquidating any assets, the partners determined the amount of cash for safe payments and distributed it. The noncash assets were then sold for $120,000. The liquidation expenses of $5,000 were paid. How would the $120,000 be distributed to the partners? (Hint: Either a predistribution plan or a schedule of safe payments would be appropriate for solving this item.)

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

11. The following account balances were available for the Perry, Quincy, and Renquist partnership just before it entered liquidation:

Included in Perry's capital balance is a $20,000 partnership loan owed to Perry. Perry, Quincy, and Renquist shared profits and losses in a ratio of 2:4:4. Liquidation expenses were expected to be $15,000. All partners were solvent. What amount would noncash assets need to be sold for in order for any partner to receive some cash?

A. $185,000 B. $170,000 C. $165,000 D. $95,000 E. $90,000

12. The following account balances were available for the Perry, Quincy, and Renquist partnership just before it entered liquidation:

Included in Perry's capital balance is a $20,000 partnership loan owed to Perry. Perry, Quincy, and Renquist shared profits and losses in a ratio of 2:4:4. Liquidation expenses were expected to be $15,000. All partners were solvent. What would be the minimum amount for which the noncash assets must have been sold, in order for Quincy to receive some cash from the liquidation?

A. any amount in excess of $170,000. B. any amount in excess of $190,000. C. any amount in excess of $260,000. D. any amount in excess of $280,000. E. any amount in excess of $300,000.

13. A local partnership was in the process of liquidating and reported the following capital balances:

Douglass indicated that the $14,000 deficit would be covered by a forthcoming contribution. However, the two remaining partners asked to receive the $31,000 that was then in the cash account. How much of this money should Justice receive?

A. $15,467. B. $15,533. C. $17,333. D. $16,533. E. $15,867.

14. A local partnership was in the process of liquidating and reported the following capital balances:

A. $15,467. B. $14,467. C. $17,333. D. $15,633. E. $15,867.

15. A local partnership was considering the possibility of liquidation since one of the partners (Ding) was personally insolvent. Capital balances at that time were as follows. Profits and losses were divided on a 4:2:2:2 basis, respectively.

Creditors of partner Ding filed a $25,000 claim against the partnership's assets. At that time, the partnership held noncash assets reported at $360,000 and liabilities of $120,000. There was no cash on hand at the time. If the assets could be sold for $228,000, what is the minimum amount that Ding's creditors would have received?

A. $36,000. B. $0. C. $2,500. D. $38,720. E. $67,250.

16. A local partnership was considering the possibility of liquidation since one of the partners (Ding) was personally insolvent. Capital balances at that time were as follows. Profits and losses were divided on a 4:2:2:2 basis, respectively.

A. $36,000. B. $0. C. $2,500. D. $38,250. E. $67,250.

17. A local partnership was considering the possibility of liquidation since one of the partners (Ding) was personally insolvent. Capital balances at that time were as follows. Profits and losses were divided on a 4:2:2:2 basis, respectively.

A. $36,000. B. $0. C. $2,500. D. $38,250. E. $67,250.

18. A local partnership was considering the possibility of liquidation since one of the partners (Ding) was personally insolvent. Capital balances at that time were as follows. Profits and losses were divided on a 4:2:2:2 basis, respectively.

Creditors of partner Ding filed a $25,000 claim against the partnership's assets. At that time, the partnership held noncash assets reported at $360,000 and liabilities of $120,000. There was no cash on hand at the time. If the assets could be sold, for $228,000 what is the minimum amount that Tillman's creditors would have received?

A. $36,000. B. $0. C. $2,500. D. $38,250. E. $67,250.

19. Dancey, Reese, Newman, and Jahn were partners who shared profits and losses on a 4:2:2:2 basis, respectively. They were beginning to liquidate their business. At the start of the process, capital balances were as follows:

Which one of the following statements is true for a predistribution plan?

20. Dancey, Reese, Newman, and Jahn were partners who shared profits and losses on a 4:2:2:2 basis, respectively. They were beginning to liquidate their business. At the start of the process, capital balances were as follows:

Which one of the following statements is true for a predistribution plan?

A. The first available $16,000 would go to Newman. The next $12,000 would go $8,000 to Dancey and $4,000 to Newman. The following $32,000 would be shared by Dancey, Reese, and Newman. The total distribution would be $60,000 before all four partners share any further payments equally. B. The first available $16,000 would go to Newman. The next $12,000 would go $8,000 to Dancey and $4,000 to Newman. The following $32,000 would be shared by Dancey, Reese, and Newman. The total distribution would be $60,000 before all four partners share any further payments in their profit and loss sharing ratios. C. The first $20,000 would go to Newman. The next $8,000 would go to Dancey. The next $12,000 would be shared by Dancey, Reese, and Newman. The total distribution would be $40,000 before all four partners share any further payments equally. D. The first available $8,000 would go to Newman. The next $4,000 would be split equally between Dancey and Newman. The following $12,000 would be shared by Dancey, Reese, and Newman. The total distribution would be $24,000 before all four partners share any further payments equally. E. The first available $8,000 would go to Newman. The next $4,000 would be split equally between Dancey and Newman. The following $12,000 would be shared by Dancey, Reese, and Newman. The total distribution would be $24,000 before all four partners share any further payments in their profit and loss sharing ratios.

21. Which of the following could result in the termination and liquidation of a partnership? 1) Partners are incompatible and choose to cease operations. 2) There are excessive losses that are expected to continue. 3) Retirement of a partner.

A. 1 only B. 1 and 2 only C. 2 and 3 only D. 3 only E. 1, 2, and 3

22. What accounting transactions are not recorded by an accountant during partnership liquidation?

A. The conversion of partnership assets into cash. B. The allocation of gains and losses from sales of assets. C. The payment of liabilities and expenses. D. The initiation of legal action by creditors of the partnership. E. Write-off of remaining unpaid debts.

23. Which of the following statements is false concerning the partnership Schedule of

Liquidation?

A. Liquidations may take a considerable length of time to complete. B. Frequent reporting by the accountant is rarely necessary. C. The Schedule of Liquidation provides a listing of transactions to date, current cash, and capital balances. D. The Schedule of Liquidation provides a listing of property still held by the partnership as well as liabilities remaining unpaid. E. The Schedule of Liquidation keeps creditors and partners apprised of the results of the process of dissolution.

24. What is the preferred method of resolving a partner's deficit balance, according to the

Uniform Partnership Act?

A. Partners never have a deficit balance. B. The other partners must contribute personal assets to cover the deficit balance. C. The partnership must sell assets in order to cover the deficit balance. D. The partner with a deficit balance must contribute personal assets to cover the deficit balance. E. The partner with a deficit balance contributes personal assets only if those personal assets exceed personal liabilities.

25. Which of the following statements is true concerning the distribution of safe payments?

A. The distribution of safe payments assumes that any capital deficit balances will prove to be a total loss to the partnership. B. Safe payments are equal to the recorded capital balances of partners with positive capital balances. C. The distribution of safe payments may only be made after all liabilities have been paid. D. In computing safe payments, partners with positive capital balances are assumed to absorb an equal share of any deficit balance(s). E. There are no safe payments until the liquidation is complete.

26. Which one of the following statements is correct?

A. If a partner of a liquidating partnership is unable to pay a capital account deficit, the deficit is absorbed by the other partners in the profit and loss ratio of those partners. B. Gains and losses from the sale of noncash assets are divided in the ratio of the partners' capital account balances if there is no income-sharing plan in the partnership contract. C. A loan receivable from a partner is added to the partner's capital account balance in the preparation of a cash distribution plan. D. Partners may not receive any cash before partnership creditors receive cash when liquidating a partnership. E. All cash payments to partners are made using their profit and loss ratio when liquidating the partnership.

27. Which item is not shown on the schedule of partnership liquidation?

A. Current cash balances. B. Property owned by the partnership. C. Liabilities still to be paid. D. Personal assets of the partners. E. Current capital balances of the partners.

28. Harding, Jones, and Sandy is in the process of liquidating and the partners have the following capital balances; $24,000, $24,000, and ($9,000) respectively. The partners share all profits and losses 16%, 48%, and 36%, respectively. Sandy has indicated that the ($9,000) deficit will be covered with a forthcoming contribution. The remaining partners have requested to immediately receive $20,000 in cash that is available. How should this cash be distributed?

A. Harding $5,000; Jones $15,000. B. Harding $17,000; Jones $3,000. C. Harding $11,154; Jones $8,846. D. Harding $14,297; Jones $5,703. E. Harding $12,500; Jones $7,500.

29. Gonda, Herron, and Morse is considering possible liquidation because partner Morse is personally insolvent. The partners have the following capital balances: $60,000, $70,000, and $40,000, respectively, and share profits and losses 30%, 45%, and 25%, respectively. The partnership has $200,000 in noncash assets that can be sold for $150,000. The partnership has $10,000 cash on hand, and $40,000 in liabilities. What is the minimum that partner Morse's creditors would receive if they have filed a claim for $50,000?

A. $0. B. $27,500. C. $45,000. D. $47,500. E. $50,000.

30. White, Sands, and Luke has the following capital balances and profit and loss ratios: $60,000 (30%); $100,000 (20%); and $200,000 (50%). The partnership has received a predistribution plan. How would $90,000 be distributed?

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

31. White, Sands, and Luke has the following capital balances and profit and loss ratios: $60,000 (30%); $100,000 (20%); and $200,000 (50%). The partnership has received a predistribution plan. How would $200,000 be distributed?

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

32. A local partnership has assets of cash of $5,000 and a building recorded at $80,000. All liabilities have been paid. The partners' capital accounts are as follows Harry $40,000, Landers $30,000 and Waters 15,000. The partners share profits and losses 4:4:2. If the building is sold for $50,000, how much cash will Harry receive in the final settlement?

A. $5,000. B. $9,000. C. $18,000. D. $28,000. E. $55,000.

33. A local partnership has assets of cash of $5,000 and a building recorded at $80,000. All liabilities have been paid. The partners' capital accounts are as follows Harry $40,000, Landers $30,000 and Waters 15,000. The partners share profits and losses 4:4:2. If the building is sold for $50,000, how much cash will Waters receive in the final settlement?

A. $5,000. B. $9,000. C. $18,000. D. $28,000. E. $55,000.

34. A local partnership has assets of cash of $130,000 and land recorded at $700,000. All liabilities have been paid and the partners are all personally insolvent. The partners' capital accounts are as follows Roberts, $500,000, Ferry, $300,000 and Mones, $30,000. The partners share profits and losses 5:3:2. If the land is sold for $450,000, how much cash will Roberts receive in the final settlement?

A. $0. B. $30,000. C. $217,500. D. $362,500. E. $502,500.

35. A local partnership has assets of cash of $130,000 and land recorded at $700,000. All liabilities have been paid and the partners are all personally insolvent. The partners' capital accounts are as follows Roberts, $500,000, Ferry, $300,000 and Mones, $30,000. The partners share profits and losses 5:3:2. If the land is sold for $450,000, how much cash will Mones receive in the final settlement?

A. $0. B. $15,000. C. $300,000. D. $217,500. E. $362,500.

Matching Questions

36. Matching

A schedule should be produced periodically by the accountant to disclose losses and gains that have been incurred, 1. Safe capital balances

remaining assets and liabilities, and current capital balances. ____ One or more partners may have a

2. Predistribution

negative capital balance often as a result of

plan

losses incurred in disposing of assets. ____

3. Deficit capital

A provision for an equitable distribution

balances

of assets during liquidation. ____ At the start of a liquidation, this document provides guidance for all

4. The schedule of liquidation

payments made to the partners throughout the liquidation. ____

Essay Questions

37. What is the role of the accountant during the liquidation process?

38. The partnership of Rayne, Marin, and Fulton was being liquidated by the partners. Rayne was insolvent and did not have enough assets to pay all his personal creditors. Under what conditions might Rayne's personal creditors have claimed some of the partnership assets?

39. The Arnold, Bates, Carlton, and Delbert partnership was liquidating. It had paid all its liabilities and had some assets yet to be sold. The partners had capital account balances of ($50,000), $90,000, $110,000, and $130,000. There was $40,000 cash available for distribution to the partners. What procedures would be followed to determine the amount of cash that could safely be distributed to each partner?

40. Xygote, Yen, and Zen were partners who were liquidating their partnership. Each partner has a deficit balance in their respective capital account. All assets from the partnership have been liquidated and all of the liabilities had been paid. How should any additional cash coming into the partnership be distributed to the partners?

41. What is the purpose of a predistribution plan?

42. What financial schedule would be prepared for a partnership that has begun liquidation but has not yet completed the process? What is the purpose of this schedule?

43. What events or circumstances might force the termination of a partnership and liquidation of its assets?

44. For a partnership, how should liquidation gains and losses be accounted for?

45. What should occur when a solvent partner has a deficit balance?

46. Why is a Schedule of Liquidation prepared?

47. What is a safe cash payment?

Short Answer Questions

48. The Albert, Boynton, and Creamer partnership was in the process of liquidating its assets and going out of business. Albert, Boynton, and Creamer had capital account balances of $80,000, $120,000, and $200,000, respectively, and shared profits and losses in the ratio of 1:3:2. Equipment that had cost $90,000 and had a book value of $60,000 was sold for $24,000 cash.

Required: Prepare the appropriate journal entry to record the sale of the equipment, distributing any gain or loss directly to the partners.

49. The Amos, Billings, and Cleaver partnership had two assets: (1) cash of $40,000 and (2) an investment with a book value of $110,000. The ratio for sharing profits and losses is 2:1:1. The balances in the capital accounts were: Amos, capital: $45,000 Billings, capital: $75,000 Cleaver, capital: $30,000

Required: If the investment was sold for $80,000, how much cash would each partner have received?

50. As of January 1, 2013, the partnership of Canton, Yulls, and Garr had the following account balances and percentages for the sharing of profits and losses:

The partnership incurred losses in recent years and decided to liquidate. The liquidation expenses were expected to be $10,000. How much of the existing cash balance could be distributed safely to partners at this time?

51. As of January 1, 2013, the partnership of Canton, Yulls, and Garr had the following account balances and percentages for the sharing of profits and losses:

The partnership incurred losses in recent years and decided to liquidate. The liquidation expenses were expected to be $10,000. How much cash should each partner receive at this time, pursuant to a proposed schedule of liquidation?

52. As of January 1, 2013, the partnership of Canton, Yulls, and Garr had the following account balances and percentages for the sharing of profits and losses:

The partnership incurred losses in recent years and decided to liquidate. The liquidation expenses were expected to be $10,000. What would be the maximum amount Garr might have to contribute to the partnership to eliminate a deficit balance in his account?

53. As of January 1, 2013, the partnership of Canton, Yulls, and Garr had the following account balances and percentages for the sharing of profits and losses:

The partnership incurred losses in recent years and decided to liquidate. The liquidation expenses were expected to be $10,000. If the noncash assets are sold for $105,000, what would be the maximum amount of cash that Canton could expect to receive?

54. A partnership had the following account balances: Cash, $91,000; Other Assets, $702,000; Liabilities, $338,000; Polk, Capital (50% of profits and losses), $221,000; Garfield, Capital (30%), $143,000; Arthur, Capital (20%), $91,000. The company liquidated and $10,400 became available to the partners.

Required: Who would have received the $10,400?

55. A partnership held three assets: Cash, $13,000; Land, $45,000; and a Building, $65,000. There were no recorded liabilities. The partners anticipated that expenses required to liquidate their partnership would amount to $6,000. Capital balances were as follows: King, Capital: $32,700 Murphy, Capital: 36,400 Madison, Capital: 26,000 Pond, Capital: 27,900 The partners shared profits and losses 30:30:20:20, respectively.

Required: Prepare a proposed schedule of liquidation, showing how cash could be safely distributed to the partners at this time.

56. On January 1, 2013, the partners of Won, Cadel, and Dax (who shared profits and losses in the ratio of 5:3:2, respectively) decided to liquidate their partnership. The trial balance at this date was as follows:

The partners planned a program of piecemeal conversion of the business assets to minimize liquidation losses. All available cash, less an amount retained to provide for future expenses, was to be distributed to the partners at the end of each month. A summary of liquidation transactions follows:

Prepare a schedule to calculate the safe payments to be made to the partners at the end of January.

57. On January 1, 2013, the partners of Won, Cadel, and Dax (who shared profits and losses in the ratio of 5:3:2, respectively) decided to liquidate their partnership. The trial balance at this date was as follows:

Prepare a schedule to calculate the safe installment payments to be made to the partners at the end of February.

58. On January 1, 2013, the partners of Won, Cadel, and Dax (who shared profits and losses in the ratio of 5:3:2, respectively) decided to liquidate their partnership. The trial balance at this date was as follows:

Prepare a schedule to calculate the safe payments to be made to the partners at the end of March.

59. Hardin, Sutton, and Williams have operated a local business as a partnership for several years. All profits and losses have been allocated in a 3:2:1 ratio, respectively. Recently, Williams has undergone personal financial problems, and is insolvent. To satisfy Williams' creditors, the partnership has decided to liquidate. The following balance sheet has been produced:

During the liquidation process, the following transactions take place: - Noncash assets are sold for $116,000. - Liquidation expenses of $12,000 are paid. No further expenses are expected. - Safe capital distributions are made to the partners. - Payment is made of all business liabilities. - Any deficit capital balances are deemed to be uncollectible. Develop a predistribution plan for this partnership, assuming $12,000 of liquidation expenses are expected to be paid.

60. Hardin, Sutton, and Williams have operated a local business as a partnership for several years. All profits and losses have been allocated in a 3:2:1 ratio, respectively. Recently, Williams has undergone personal financial problems, and is insolvent. To satisfy Williams' creditors, the partnership has decided to liquidate. The following balance sheet has been produced:

During the liquidation process, the following transactions take place: - Noncash assets are sold for $116,000. - Liquidation expenses of $12,000 are paid. No further expenses are expected. - Safe capital distributions are made to the partners. - Payment is made of all business liabilities. - Any deficit capital balances are deemed to be uncollectible. Compute safe cash payments after the noncash assets have been sold and the liquidation expenses have been paid.

61. Hardin, Sutton, and Williams have operated a local business as a partnership for several years. All profits and losses have been allocated in a 3:2:1 ratio, respectively. Recently, Williams has undergone personal financial problems, and is insolvent. To satisfy Williams' creditors, the partnership has decided to liquidate. The following balance sheet has been produced:

During the liquidation process, the following transactions take place: - Noncash assets are sold for $116,000. - Liquidation expenses of $12,000 are paid. No further expenses are expected. - Safe capital distributions are made to the partners. - Payment is made of all business liabilities. - Any deficit capital balances are deemed to be uncollectible. Prepare journal entries to record the actual liquidation transactions.

62. Jones, Marge, and Tate LLP decided to dissolve and liquidate the partnership on September 30, 2013. After realization of a portion of the noncash assets, the capital account balances were Jones $50,000; Marge $40,000; and Tate $15,000. Cash of $35,000 and other assets with a carrying amount of $100,000 were on hand. Creditors' claims totaled $30,000. Jones, Marge, and Tate shared net income and losses in a 2:1:1 ratio, respectively. Prepare a working paper to compute the amount of cash that may be paid to creditors and to partners at this time, assuming that no partner is solvent.

63. The balance sheet of Rogers, Dennis & Berry LLP prior to liquidation included the following:

The three partners shared net income and losses in a 5:3:2 ratio, respectively. Noncash assets were sold for $60,000. Creditors were paid in full, partners were paid $35,000, and the balance of cash was retained pending future developments. Record the journal entry for the sale of the noncash assets.

64. The balance sheet of Rogers, Dennis & Berry LLP prior to liquidation included the following:

65. The balance sheet of Rogers, Dennis & Berry LLP prior to liquidation included the following:

The three partners shared net income and losses in a 5:3:2 ratio, respectively. Noncash assets were sold for $60,000. Creditors were paid in full, partners were paid $35,000, and the balance of cash was retained pending future developments. Determine the cash to be retained and prepare a schedule to distribute $35,000 cash to the partners.

66. The balance sheet of Rogers, Dennis & Berry LLP prior to liquidation included the following:

67. The partners of Donald, Chief & Berry LLP decided to liquidate on August 1, 2013. The balance sheet of the partnership is as follows, with the profit and loss ratio of 25%, 45%, and 30%, respectively.

The disposal of Other Assets with a carrying amount of $200,000 realized $140,000, and all available cash was distributed. Prepare the journal entry for Donald, Chief & Berry LLP on August 1, 2013, to record the realization of Other Assets.

68. The partners of Donald, Chief & Berry LLP decided to liquidate on August 1, 2013. The balance sheet of the partnership is as follows, with the profit and loss ratio of 25%, 45%, and 30%, respectively.

69. The partners of Donald, Chief & Berry LLP decided to liquidate on August 1, 2013. The balance sheet of the partnership is as follows, with the profit and loss ratio of 25%, 45%, and 30%, respectively.

70. The partners of Donald, Chief & Berry LLP decided to liquidate on August 1, 2013. The balance sheet of the partnership is as follows, with the profit and loss ratio of 25%, 45%, and 30%, respectively.

The disposal of Other Assets with a carrying amount of $200,000 realized $140,000, and all available cash was distributed. Prepare the schedule to compute the cash payments to the partners.

Chapter 15 Partnerships: Termination and Liquidation Answer Key

Multiple Choice Questions

When a partnership is insolvent and a partner has a deficit capital balance, that partner is legally required to:

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital balance or become personally insolvent.

The Abrams, Bartle, and Creighton partnership began the process of liquidation with the following balance sheet:

A. $43,200. B. $46,800. C. $40,000. D. $42,400. E. $43,100. Non-Cash Assets BV $434,000 - Cash Received $234,000 = Loss on Non-Cash Assets ($200,000) × 20% = Loss to Bartle ($40,000)

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 15-01 Determine amounts to be paid to partners in a liquidation.

The Abrams, Bartle, and Creighton partnership began the process of liquidation with the following balance sheet:

A. Abrams. B. Bartle. C. Creighton. D. Abrams and Creighton. E. Abrams and Bartle. Non-Cash Assets BV $434,000 - Cash Received $134,000 = Loss on Non-Cash Assets ($300,000) × 30% = Loss to Abrams ($90,000) - Capital Balance $80,000 = Abrams' Contribution to Cover $10,000 Non-Cash Assets BV $434,000 - Cash Received $134,000 = Loss on Non-Cash Assets ($300,000) × 20% = Loss to Abrams ($60,000) - Capital Balance $90,000 = Bartle Excess after Loss $30,000 Non-Cash Assets BV $434,000 - Cash Received $134,000 = Loss on Non-Cash Assets ($300,000) × 50% = Loss to Abrams ($150,000) - Capital Balance $130,000 = Creighton's Contribution to Cover $20,000

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply 15-61 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 2 Medium Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital balance or become personally insolvent.

The Abrams, Bartle, and Creighton partnership began the process of liquidation with the following balance sheet:

A. $170,000. B. $264,000. C. $158,000. D. $146,000. E. $185,000. [Non-Cash Assets BV $434,000 - Cash Received $170,000] + Liquidation Expenses $12,000 = Loss on Non-Cash Assets ($276,000) × 50% = Loss to Abrams ($138,000) Capital Balance $130,000 = Creighton's Contribution to Cover $8,000

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital balance or become personally insolvent.

The Keaton, Lewis, and Meador partnership had the following balance sheet just before entering liquidation:

A. $38,000. B. $30,000. C. $24,000. D. $34,000. E. $31,600.

The Keaton, Lewis, and Meador partnership had the following balance sheet just before entering liquidation:

Keaton, Lewis, and Meador share profits and losses in a ratio of 2:4:4. Noncash assets were sold for $60,000. How much will each partner receive in the liquidation?

A. Option A B. Option B C. Option C D. Option D E. Option E Non-Cash Assets BV $210,000 - Cash Received $60,000 = Loss on Non-Cash Assets ($150,000) × 20% = Loss to Keaton ($30,000) - Capital Balance $90,000 = Keaton Distribution $60,000

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

The Keaton, Lewis, and Meador partnership had the following balance sheet just before entering liquidation:

A. Option A B. Option B C. Option C D. Option D E. Option E Non-Cash Assets BV $210,000 - Assumed Cash Received $0 = Loss on Non-Cash Assets ($210,000) × 20% = Loss to Keaton ($42,000) - Capital Balance $90,000 = Keaton Tentative Distribution $48,000 Non-Cash Assets BV $210,000 - Cash Received $0 = Loss on Non-Cash Assets ($210,000) × 40% = Loss to Lewis ($84,000) - Capital Balance $60,000 = Lewis' Deficit ($24,000) × 1/3 = Lewis' Deficit Portion to Keaton ($8,000) Keaton Tentative Distribution $48,000 + Lewis' Deficit Portion to Keaton ($8,000) = Keaton's Safe Distribution $40,000

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 15-04 Prepare a proposed schedule of liquidation from safe capital balances to determine an equitable preliminary distribution of available partnership assets.

The Henry, Isaac, and Jacobs partnership was about to enter liquidation with the following account balances:

A. $30,000. B. $85,000. C. $25,000. D. $35,000. E. $40,000. Cash $90,000 - Liabilities $60,000 - Liquidation Expenses $5,000 = "Safe" Cash $25,000

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 15-04 Prepare a proposed schedule of liquidation from safe capital balances to determine an

equitable preliminary distribution of available partnership assets.

The Henry, Isaac, and Jacobs partnership was about to enter liquidation with the following account balances:

A. in a ratio of 2:4:4 among all the partners. B. $18,333 to Henry and $16,667 to Jacobs. C. in a ratio of 1:2 between Henry and Jacobs. D. $15,000 to Henry and $10,000 to Jacobs. E. $21,667 to Henry and $3,333 to Jacobs. Non-Cash Assets BV $300,000 - Assumed Cash Received $0 = Loss on Non-Cash Assets ($300,000) × 20% = Loss to Henry ($60,000) - Capital Balance $80,000 = Henry's Provisional Balance $20,000 Non-Cash Assets BV $300,000 - Assumed Cash Received $0 = Loss on Non-Cash Assets ($300,000) × 40% = Loss to Isaac ($120,000) - Capital Balance $110,000 = Isaac's Provisional Balance ($10,000) Non-Cash Assets BV $300,000 - Assumed Cash Received $0 = Loss on Non-Cash Assets ($300,000) × 40% = Loss to Jacobs ($120,000) - Capital Balance $140,000 = Jacobs' Provisional Balance $20,000 Isaac's Provisional Balance ($10,000) + Liquidation Expenses ($5,000) = Loss for Remaining Partners ($15,000)/3 = Henry's Portion ($5,000) + Henry's Provisional Balance $20,000 = Henry's Safe Distribution $15,000 Isaac's Provisional Balance ($10,000) + Liquidation Expenses ($5,000) = Loss for Remaining Partners ($15,000) × 2/3 = Jacobs' Portion ($10,000) + Jacobs' Provisional 15-68 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Balance $20,000 = Jacobs' Safe Distribution $10,000

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 15-04 Prepare a proposed schedule of liquidation from safe capital balances to determine an equitable preliminary distribution of available partnership assets.

10.

The Henry, Isaac, and Jacobs partnership was about to enter liquidation with the following account balances:

A. Option A B. Option B C. Option C D. Option D E. Option E Cash from Sale $120,000 - Liquidation Expenses $5,000 = Cash to Distribute $115,000 × 20% = $23,000 + Henry's Portion of Deficit Balance at Safe Distribution $5,000 = Henry's Distribution of $28,000

AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 15-04 Prepare a proposed schedule of liquidation from safe capital balances to determine an equitable preliminary distribution of available partnership assets. Learning Objective: 15-05 Develop a predistribution plan to guide the distribution of assets in a partnership liquidation.

11.

The following account balances were available for the Perry, Quincy, and Renquist partnership just before it entered liquidation:

A. $185,000 B. $170,000 C. $165,000 D. $95,000 E. $90,000 Cash $90,000 - Liquidation Expenses $15,000 - Liabilities $170,000 = Balance Needed from Non-Cash Assets ($95,000)

AACSB: Analytic

AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

12.

The following account balances were available for the Perry, Quincy, and Renquist partnership just before it entered liquidation:

Included in Perry's capital balance is a $20,000 partnership loan owed to Perry. Perry, Quincy, and Renquist shared profits and losses in a ratio of 2:4:4. Liquidation expenses were expected to be $15,000. All partners were solvent. What would be the minimum amount for which the noncash assets must have been sold, in order for Quincy to receive some cash from the liquidation?

A. any amount in excess of $170,000. B. any amount in excess of $190,000. C. any amount in excess of $260,000. D. any amount in excess of $280,000. E. any amount in excess of $300,000.

13.

A local partnership was in the process of liquidating and reported the following capital balances:

A. $15,467. B. $15,533. C. $17,333. D. $16,533. E. $15,867. Douglass' Deficit ($14,000) × (.40/.75) = ($7,467) + Justice's Capital Balance $23,000 = $15,533 Distribution to Justice

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital balance or become personally insolvent.

14.

A local partnership was in the process of liquidating and reported the following capital balances:

A. $15,467. B. $14,467. C. $17,333. D. $15,633. E. $15,867. Douglass' Deficit ($14,000) × (.35/.75) = ($6,533) + Zobart's Capital Balance $22,000 = $15,467 Distribution to Zobart

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital balance or become personally insolvent.

15.

A local partnership was considering the possibility of liquidation since one of the partners (Ding) was personally insolvent. Capital balances at that time were as follows. Profits and losses were divided on a 4:2:2:2 basis, respectively.

A. $36,000. B. $0. C. $2,500. D. $38,720. E. $67,250. Non-Cash Assets BV $360,000 - Cash Received $228,000 = Loss on Non-Cash Assets ($132,000) × 40% = Loss to Ding ($52,800) - Capital Balance $60,000 = Ding Excess after Loss $7,200 Non-Cash Assets BV $360,000 - Cash Received $228,000 = Loss on Non-Cash Assets ($132,000) × 20% = Loss to Ezzard ($26,400) - Capital Balance $17,000 = Ezzard's Deficit ($9,400) × 4/8 = Deficit to Ding's Capital Account ($4,700) Ding Excess after Loss $7,200 + Ezzard's Deficit to Ding's Capital Account ($4,700) = Ding's Available Balance to Creditors $2,500

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement

Blooms: Apply Difficulty: 2 Medium Learning Objective: 15-01 Determine amounts to be paid to partners in a liquidation.

16.

A. $36,000. B. $0. C. $2,500. D. $38,250. E. $67,250. Non-Cash Assets BV $360,000 - Cash Received $228,000 = Loss on Non-Cash Assets ($132,000) × 20% = Loss to Laurel ($26,400) - Capital Balance $67,000 = Laurel Excess after Loss $40,600 Non-Cash Assets BV $360,000 - Cash Received $228,000 = Loss on Non-Cash Assets ($132,000) × 20% = Loss to Ezzard ($26,400) - Capital Balance $17,000 = Ezzard's Deficit ($9,400) × 2/8 = Deficit to Laurel's Capital Account ($2,350) Laurel Excess after Loss $40,600 + Ezzard's Deficit to Laurel's Capital Account ($2,350) = Laurel's Available Balance to Creditors $38,250

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement

Blooms: Apply Difficulty: 2 Medium Learning Objective: 15-01 Determine amounts to be paid to partners in a liquidation.

17.

A. $36,000. B. $0. C. $2,500. D. $38,250. E. $67,250. Non-Cash Assets BV $360,000 - Cash Received $228,000 = Loss on Non-Cash Assets ($132,000) × 20% = Loss to Ezzard ($26,400) - Capital Balance $17,000 = Ezzard's Deficit ($9,400), so Ezzard has $0 Available Balance to Creditors and Owes Other Partners $9,400

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium

Learning Objective: 15-01 Determine amounts to be paid to partners in a liquidation.

18.

Creditors of partner Ding filed a $25,000 claim against the partnership's assets. At that time, the partnership held noncash assets reported at $360,000 and liabilities of $120,000. There was no cash on hand at the time. If the assets could be sold, for $228,000 what is the minimum amount that Tillman's creditors would have received?

A. $36,000. B. $0. C. $2,500. D. $38,250. E. $67,250. Non-Cash Assets BV $360,000 - Cash Received $228,000 = Loss on Non-Cash Assets ($132,000) × 20% = Loss to Tillman ($26,400) - Capital Balance $96,000 = Tillman Excess after Loss $69,600 Non-Cash Assets BV $360,000 - Cash Received $228,000 = Loss on Non-Cash Assets ($132,000) × 20% = Loss to Ezzard ($26,400) - Capital Balance $17,000 = Ezzard's Deficit ($9,400) × 2/8 = Deficit to Tillman's Capital Account ($2,350) Tillman Excess after Loss $69,600 + Ezzard's Deficit to Laurel's Capital Account ($2,350) = Tillman's Available Balance to Creditors $67,250

AACSB: Analytic

AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 15-01 Determine amounts to be paid to partners in a liquidation.

19.

Dancey, Reese, Newman, and Jahn were partners who shared profits and losses on a 4:2:2:2 basis, respectively. They were beginning to liquidate their business. At the start of the process, capital balances were as follows:

Which one of the following statements is true for a predistribution plan?

A. The first available $16,000 would go to Newman. B. The first available $20,000 would go to Dancey. C. The first available $8,000 would go to Jahn. D. The first available $8,000 would go to Newman. E. The first available $4,000 would go to Jahn. D = $72,000; R = $32,000; N = $52,000; J = $24,000 with Losses Shared 4:2:2:2 First eliminate lowest value J = $24,000 - $24,000 = 0 D = $72,000 - $48,000 = $24,000 - $16,000 = $8,000 - $8,000 = 0 R = $32,000 - $24,000 = $8,000 - $8,000 = 0 N = $52,000 - $24,000 = $28,000 - $8,000 = $20,000 - $4,000 = $16,000

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 15-05 Develop a predistribution plan to guide the distribution of assets in a partnership liquidation.

20.

Which one of the following statements is true for a predistribution plan?

R = $32,000 - $24,000 = $8,000 - $8,000 = 0 N = $52,000 - $24,000 = $28,000 - $8,000 = $20,000 - $4,000 = $16,000

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 15-05 Develop a predistribution plan to guide the distribution of assets in a partnership liquidation.

21.

Which of the following could result in the termination and liquidation of a partnership? 1) Partners are incompatible and choose to cease operations. 2) There are excessive losses that are expected to continue. 3) Retirement of a partner.

A. 1 only B. 1 and 2 only C. 2 and 3 only D. 3 only E. 1, 2, and 3

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 15-01 Determine amounts to be paid to partners in a liquidation.

22.

What accounting transactions are not recorded by an accountant during partnership liquidation?

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

23.

Which of the following statements is false concerning the partnership Schedule of

Liquidation?

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember 15-83 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 2 Medium Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

24.

What is the preferred method of resolving a partner's deficit balance, according to the

Uniform Partnership Act?

25.

Which of the following statements is true concerning the distribution of safe payments?

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital balance or become personally insolvent.

26.

Which one of the following statements is correct?

27.

Which item is not shown on the schedule of partnership liquidation?

A. Current cash balances. B. Property owned by the partnership. C. Liabilities still to be paid. D. Personal assets of the partners. E. Current capital balances of the partners.

AACSB: Reflective thinking AICPA BB: Legal

AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

28.

Harding, Jones, and Sandy is in the process of liquidating and the partners have the following capital balances; $24,000, $24,000, and ($9,000) respectively. The partners share all profits and losses 16%, 48%, and 36%, respectively. Sandy has indicated that the ($9,000) deficit will be covered with a forthcoming contribution. The remaining partners have requested to immediately receive $20,000 in cash that is available. How should this cash be distributed?

A. Harding $5,000; Jones $15,000. B. Harding $17,000; Jones $3,000. C. Harding $11,154; Jones $8,846. D. Harding $14,297; Jones $5,703. E. Harding $12,500; Jones $7,500. Harding = $72,000; Jones = $32,000; Sandy = $52,000 beginning balances with Losses Shared 16:48:36 First eliminate Sandy's negative capital loss to Harding & Jones Losses shared 16/64 & 48/64 or 25% & 75% Harding = $24,000 - ($9,000 × 25%) $2,250 = $21,750 - $5,750 = $16,000 + ($4,000 × 25%) $1,000 = $17,000 Jones = $24,000 - ($9,000 × 75%) $6,750 = $17,250 - $17,250 = 0 + ($4,000 × 75%) $3,000 = $3,000

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard

Learning Objective: 15-05 Develop a predistribution plan to guide the distribution of assets in a partnership liquidation.

29.

Gonda, Herron, and Morse is considering possible liquidation because partner Morse is personally insolvent. The partners have the following capital balances: $60,000, $70,000, and $40,000, respectively, and share profits and losses 30%, 45%, and 25%, respectively. The partnership has $200,000 in noncash assets that can be sold for $150,000. The partnership has $10,000 cash on hand, and $40,000 in liabilities. What is the minimum that partner Morse's creditors would receive if they have filed a claim for $50,000?

A. $0. B. $27,500. C. $45,000. D. $47,500. E. $50,000. M = $40,000 - Loss on Non-Cash Asset Sale ($50,000 × .25) $12,500 = $27,500

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

30.

White, Sands, and Luke has the following capital balances and profit and loss ratios: $60,000 (30%); $100,000 (20%); and $200,000 (50%). The partnership has received a predistribution plan. How would $90,000 be distributed?

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

Sands: $20,000 + $20,000 ($90,000 - $20,000 = $70,000 × 2/7) = $40,000 Luke: $50,000 ($90,000 - $20,000 = $70,000 × 5/7)

31.

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

White: ($200,000 - $20,000 - $140,000) × 30% = $12,000 Sands: $20,000 + $40,000 ($140,000 × 2/7) + $8,000 (($200,000 - $20,000 - $140,000) × 20%) = $68,000 Luke: $100,000 ($140,000 × 5/7) + $20,000 (($200,000 - $20,000 - $140,000) × 50%) = $120,000

32.

A local partnership has assets of cash of $5,000 and a building recorded at $80,000. All liabilities have been paid. The partners' capital accounts are as follows Harry $40,000, Landers $30,000 and Waters 15,000. The partners share profits and losses 4:4:2. If the building is sold for $50,000, how much cash will Harry receive in the final settlement?

A. $5,000. B. $9,000. C. $18,000. D. $28,000. E. $55,000. H = $40,000 - Loss on Blg ($30,000 × .40) $12,000 = $28,000

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

33.

A. $5,000. B. $9,000. C. $18,000. D. $28,000. E. $55,000. W = $15,000 - Loss on Blg ($30,000 × .20) $6,000 = $9,000

34.

A local partnership has assets of cash of $130,000 and land recorded at $700,000. All liabilities have been paid and the partners are all personally insolvent. The partners' capital accounts are as follows Roberts, $500,000, Ferry, $300,000 and Mones, $30,000. The partners share profits and losses 5:3:2. If the land is sold for $450,000, how much cash will Roberts receive in the final settlement?

A. $0. B. $30,000. C. $217,500. D. $362,500. E. $502,500. R = $500,000; F = $300,000; M = $30,000 with Losses Shared 5:3:2 First eliminate M Balance of $30,000 in $250,000 Loss Losses now shared 5/8 & 3/8 R = $500,000 - ($220,000 × 5/8) $137,500 = $362,500 F = $300,000 - ($220,000 × 3/8) $82,500 = $217,500

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital balance or become personally insolvent.

35.

A. $0. B. $15,000. C. $300,000. D. $217,500. E. $362,500. R = $500,000; F = $300,000; M = $30,000 with Losses Shared 5:3:2 M Share of $250,000 Loss × 20% = $50,000; Capital Balance of $30,000 is Lost; Balance =0

Matching Questions

36.

Matching

A schedule should be produced periodically by the accountant to disclose losses and gains that have been incurred, 1. Safe capital balances

remaining assets and liabilities, and current capital balances. 4 One or more partners may have a

2. Predistribution

negative capital balance often as a result of

plan

losses incurred in disposing of assets.

3. Deficit capital

A provision for an equitable distribution

balances

of assets during liquidation. 1 At the start of a liquidation, this document provides guidance for all

4. The schedule of liquidation

payments made to the partners throughout the liquidation. 2

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership. Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital balance or become personally insolvent. Learning Objective: 15-04 Prepare a proposed schedule of liquidation from safe capital balances to determine an equitable preliminary distribution of available partnership assets.

Essay Questions

37.

What is the role of the accountant during the liquidation process?

The accountant works to ensure the equitable treatment of all parties involved in the liquidation. The accountant is responsible for recording and reporting the conversion of partnership assets into cash, the allocation of gains and losses, the payment of liabilities and expenses, and any remaining unpaid debts and distributions to the partners.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 15-01 Determine amounts to be paid to partners in a liquidation.

38.

The partnership of Rayne, Marin, and Fulton was being liquidated by the partners. Rayne was insolvent and did not have enough assets to pay all his personal creditors. Under what conditions might Rayne's personal creditors have claimed some of the partnership assets?

Rayne's personal creditors might have claimed some partnership assets if Rayne had a credit balance in his capital account.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Analyze Difficulty: 1 Easy Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital balance or become personally insolvent.

39.

The Arnold, Bates, Carlton, and Delbert partnership was liquidating. It had paid all its liabilities and had some assets yet to be sold. The partners had capital account balances of ($50,000), $90,000, $110,000, and $130,000. There was $40,000 cash available for distribution to the partners. What procedures would be followed to determine the amount of cash that could safely be distributed to each partner?

To determine the amount of cash that can be safely distributed to each partner, one should assume that maximum losses will be realized on the disposal of noncash assets, estimate liquidation expenses, and assume that any partners with deficit balances cannot pay them.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital balance or become personally insolvent.

40.

Xygote, Yen, and Zen were partners who were liquidating their partnership. Each partner has a deficit balance in their respective capital account. All assets from the partnership have been liquidated and all of the liabilities had been paid. How should any additional cash coming into the partnership be distributed to the partners?

All partners with deficits in their capital accounts should transfer personal assets into the partnership to eliminate their deficits in the capital accounts. Then each partner should receive any additional cash equal to his or her profit sharing ratio or specific treatment as noted in the partnership agreement based on the source of the cash inflow.

AACSB: Reflective thinking AICPA BB: Legal

AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital balance or become personally insolvent.

41.

What is the purpose of a predistribution plan?

The purpose of a predistribution plan is to determine how assets should be distributed to creditors and partners as the partnership's noncash assets are realized. A predistribution plan would be particularly useful for a liquidation that takes a long time to complete.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 15-05 Develop a predistribution plan to guide the distribution of assets in a partnership liquidation.

42.

What financial schedule would be prepared for a partnership that has begun liquidation but has not yet completed the process? What is the purpose of this schedule?

The appropriate financial schedule is a schedule of liquidation. The purpose of this schedule is to report to partners and creditors on the progress of the liquidation to date, summarizing the various transactions that have occurred.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 15-04 Prepare a proposed schedule of liquidation from safe capital balances to determine an equitable preliminary distribution of available partnership assets.

43.

What events or circumstances might force the termination of a partnership and liquidation of its assets?

There are many events or situations that can lead to the termination of a partnership and the liquidation of its assets. These circumstances include insolvency of the partnership and dissension among the partners. A partnership would be liquidated if it was formed to accomplish a specific purpose and has no further usefulness. Liquidation of the partnership may be required whenever there is a large claim against the partnership's assets. Such a claim might occur through the loss of a lawsuit and the payment of a large judgment, the insolvency of a partner, or the death or retirement of a partner.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 15-01 Determine amounts to be paid to partners in a liquidation.

44.

For a partnership, how should liquidation gains and losses be accounted for?

Gains and losses on the liquidation of assets should be allocated to the partners' capital accounts using the profit and loss sharing ratio.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

45.

What should occur when a solvent partner has a deficit balance?

The partner should contribute personal assets to the extent of the deficit balance.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital balance or become personally insolvent.

46.

Why is a Schedule of Liquidation prepared?

To provide information to the creditors and partners about liquidation transactions to date, property still held by the partnership, liabilities remaining to be paid, and current cash and capital balances.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 15-04 Prepare a proposed schedule of liquidation from safe capital balances to determine an equitable preliminary distribution of available partnership assets.

47.

What is a safe cash payment?

A safe cash payment is a fair allocation of funds made available before liquidation has been completed. Safe cash payments are based on the assumption that any capital deficits will prove to be a total loss to the partnership and must be absorbed by the remaining partners based on their relative profit and loss ratio.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital balance or become personally insolvent.

Short Answer Questions

48.

The Albert, Boynton, and Creamer partnership was in the process of liquidating its assets and going out of business. Albert, Boynton, and Creamer had capital account balances of $80,000, $120,000, and $200,000, respectively, and shared profits and losses in the ratio of 1:3:2. Equipment that had cost $90,000 and had a book value of $60,000 was sold for $24,000 cash.

Required: Prepare the appropriate journal entry to record the sale of the equipment, distributing any gain or loss directly to the partners.

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 15-02 Prepare journal entries to record the transactions incurred in the liquidation of a partnership.

49.

The Amos, Billings, and Cleaver partnership had two assets: (1) cash of $40,000 and (2) an investment with a book value of $110,000. The ratio for sharing profits and losses is 2:1:1. The balances in the capital accounts were: Amos, capital: $45,000 Billings, capital: $75,000 Cleaver, capital: $30,000

Required: If the investment was sold for $80,000, how much cash would each partner have received?

50.

As of January 1, 2013, the partnership of Canton, Yulls, and Garr had the following account balances and percentages for the sharing of profits and losses:

The amount of cash that could be distributed to partners at this time = current cash balance $80,000 - liabilities $47,000 - estimate for liquidation expenses $10,000 = $23,000.

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 15-01 Determine amounts to be paid to partners in a liquidation.

51.

As of January 1, 2013, the partnership of Canton, Yulls, and Garr had the following account balances and percentages for the sharing of profits and losses:

To determine the amount to be distributed to partners, assuming maximum losses on liquidation:

The entire $23,000 should be distributed to Canton.

52.

As of January 1, 2013, the partnership of Canton, Yulls, and Garr had the following account balances and percentages for the sharing of profits and losses:

The maximum amount that Garr might have to contribute to eliminate a deficit would be $84,000, assuming that the noncash assets cannot be sold and become a total loss to the partnership.

53.

As of January 1, 2013, the partnership of Canton, Yulls, and Garr had the following account balances and percentages for the sharing of profits and losses:

The maximum amount that Canton could be expected to recover is $105,000. This assumes that Garr can cover his deficit:

54.

A partnership had the following account balances: Cash, $91,000; Other Assets, $702,000; Liabilities, $338,000; Polk, Capital (50% of profits and losses), $221,000; Garfield, Capital (30%), $143,000; Arthur, Capital (20%), $91,000. The company liquidated and $10,400 became available to the partners.

Required: Who would have received the $10,400?

Since the partnership had total capital of $455,000, the $10,400 that was available would have indicated maximum potential losses of $444,600.

The $10,400 would have gone to Garfield ($8,840) and Arthur ($1,560).

55.

A partnership held three assets: Cash, $13,000; Land, $45,000; and a Building, $65,000. There were no recorded liabilities. The partners anticipated that expenses required to liquidate their partnership would amount to $6,000. Capital balances were as follows: King, Capital: $32,700 Murphy, Capital: 36,400 Madison, Capital: 26,000 Pond, Capital: 27,900 The partners shared profits and losses 30:30:20:20, respectively.

Required: Prepare a proposed schedule of liquidation, showing how cash could be safely distributed to the partners at this time.

Murphy received $700, Madison received $2,200, and Pond received $4,100.

56.

On January 1, 2013, the partners of Won, Cadel, and Dax (who shared profits and losses in the ratio of 5:3:2, respectively) decided to liquidate their partnership. The trial balance at this date was as follows:

Prepare a schedule to calculate the safe payments to be made to the partners at the end of January.

57.

Prepare a schedule to calculate the safe installment payments to be made to the partners at the end of February.

58.

Prepare a schedule to calculate the safe payments to be made to the partners at the end of March.

59.

Hardin, Sutton, and Williams have operated a local business as a partnership for several years. All profits and losses have been allocated in a 3:2:1 ratio, respectively. Recently, Williams has undergone personal financial problems, and is insolvent. To satisfy Williams' creditors, the partnership has decided to liquidate. The following balance sheet has been produced:

(1.) The first $92,000 pays for liabilities and liquidation expenses. (2.) The next $28,500 goes to Hardin. (3.) The next $32,500 goes to Hardin (60%) and Sutton (40%). (4.) The remainder goes to all three partners in their 3:2:1 ratio.

60.

During the liquidation process, the following transactions take place: - Noncash assets are sold for $116,000. - Liquidation expenses of $12,000 are paid. No further expenses are expected. - Safe capital distributions are made to the partners. - Payment is made of all business liabilities. - Any deficit capital balances are deemed to be uncollectible. Compute safe cash payments after the noncash assets have been sold and the liquidation expenses have been paid.

Safe Cash Payments:

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply 15-120 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 2 Medium Learning Objective: 15-03 Determine the distribution of available cash when one or more partners have a deficit capital balance or become personally insolvent.

61.

During the liquidation process, the following transactions take place: - Noncash assets are sold for $116,000. - Liquidation expenses of $12,000 are paid. No further expenses are expected. - Safe capital distributions are made to the partners. - Payment is made of all business liabilities. - Any deficit capital balances are deemed to be uncollectible. Prepare journal entries to record the actual liquidation transactions.

62.

Jones, Marge, and Tate LLP decided to dissolve and liquidate the partnership on September 30, 2013. After realization of a portion of the noncash assets, the capital account balances were Jones $50,000; Marge $40,000; and Tate $15,000. Cash of $35,000 and other assets with a carrying amount of $100,000 were on hand. Creditors' claims totaled $30,000. Jones, Marge, and Tate shared net income and losses in a 2:1:1 ratio, respectively. Prepare a working paper to compute the amount of cash that may be paid to creditors and to partners at this time, assuming that no partner is solvent.

63.

The balance sheet of Rogers, Dennis & Berry LLP prior to liquidation included the following:

To record sale of noncash of assets at a loss of $20,000, divided in 5:3:2 ratio

64.

The balance sheet of Rogers, Dennis & Berry LLP prior to liquidation included the following:

To record payment to creditors.

65.

The balance sheet of Rogers, Dennis & Berry LLP prior to liquidation included the following:

The three partners shared net income and losses in a 5:3:2 ratio, respectively. Noncash assets were sold for $60,000. Creditors were paid in full, partners were paid $35,000, and the balance of cash was retained pending future developments. Determine the cash to be retained and prepare a schedule to distribute $35,000 cash to the partners.

66.

The balance sheet of Rogers, Dennis & Berry LLP prior to liquidation included the following:

67.

The partners of Donald, Chief & Berry LLP decided to liquidate on August 1, 2013. The balance sheet of the partnership is as follows, with the profit and loss ratio of 25%, 45%, and 30%, respectively.

68.

69.

70.

The disposal of Other Assets with a carrying amount of $200,000 realized $140,000, and all available cash was distributed. Prepare the schedule to compute the cash payments to the partners.

Total cash of $70,000 can be safely distributed. Beginning cash $60,000 + sale of assets $140,000 - payment of liabilities $130,000 = $70,000.

Chapter 16 Accounting for State and Local Governments (Part 1)

Multiple Choice Questions

1. Which standard issued by the Governmental Accounting Standards Board in 1999 required two distinct sets of financial statements for state and local governments?

A. GASB Statement No. 32. B. GASB Statement No. 33. C. GASB Statement No. 34. D. GASB Statement No. 35. E. GASB Statement No. 36.

2. Which group of governmental financial statements reports all revenues and all costs of providing services each year?

A. GAAP-Based Financial Statements. B. Fund Financial Statements. C. Cost-Based Financial Statements. D. Government-Wide Financial Statements. E. General Fund Financial Statements.

3. Proprietary funds are

A. Funds used to account for the activities of a government that are carried out primarily to provide services to citizens. B. Funds used to account for a government's ongoing organizations and activities that are similar to those operated by for-profit organizations. C. Funds used to account for monies held by the government in a trustee capacity. D. Funds used to account for all financial resources except those required to be accounted for in another fund. E. Funds used to account for revenues that have been legally restricted as to expenditure.

4. Fiduciary funds are

5. Governmental funds are

6. Special Revenue funds are

7. The term "current financial resources" refers to

A. Those assets that can quickly be converted into cash. B. Monetary assets available to meet the government's needs. C. The government's current assets and current liabilities. D. The current value of all net assets owned by the governmental unit. E. Financial resources used to provide electricity to local citizens.

8. What are the broad types or classifications of funds for a governmental entity such as a city?

A. general, governmental, and trust funds. B. governmental, proprietary, and fiduciary funds. C. revenue, trust, and governmental funds. D. enterprise, revenue, and fiduciary funds. E. governmental, agency, and enterprise funds.

9. Which group of financial statements is prepared using the "modified accrual accounting" approach?

A. GAAP-Based Financial Statements. B. Fund Financial Statements. C. Cost-Based Financial Statements. D. Government-Wide Financial Statements. E. General Purpose Financial Statements.

10. Under modified accrual accounting, revenues should be recognized when they are

A. collected. B. realizable. C. reasonably estimable. D. measurable and available. E. earned.

11. Under modified accrual accounting, when should an expenditure be recorded to recognize interest on long-term debt?

A. at the end of each accounting period. B. when payment is due within one fiscal year. C. when payment is due. D. when cash is available to pay the interest. E. when the interest is incurred.

12. Which of the following funds is most likely created with an endowed gift?

A. Enterprise Fund. B. Internal Service Fund. C. Debt Service Fund. D. Capital Projects Fund. E. Permanent Fund.

13. Revenue from property taxes should be recorded in the General Fund

A. when received. B. when there is an enforceable legal claim. C. when they are available for recognition. D. in the period for which they are required or permitted to be used. E. in the period in which the tax bills are mailed.

14. Which type of fund is not included in the Government-Wide Financial Statements?

A. Governmental Funds B. Proprietary Funds C. Fiduciary Funds D. Debt Service Funds E. Special Revenue Funds

15. A city received a grant of $5,000,000 from a private agency. The money was to be used to build a new city library. In which fund should the money be recorded for the Fund Financial Statements?

A. the General Fund. B. an Expendable Trust Fund. C. a Capital Projects Fund. D. an Agency Fund. E. a Permanent Fund.

16. When a city received a federal grant for providing food and other assistance to the homeless, the money should have been recorded in

A. the General Fund. B. an Expendable Trust Fund. C. a Capital Projects Fund. D. an Agency Fund. E. a Special Revenue Fund.

17. Bay City received a federal grant to provide health care services to low income mothers and children. When should the revenues be recognized?

A. as health care services are provided. B. when the awarding of the grant is announced. C. when the grant money is received. D. at the end of Bay City's fiscal year. E. when the grant money is receivable.

18. Trapper City issued 30-year bonds for the purpose of building a new City Hall. The proceeds of the bonds are deposited in the General Fund. For the Fund Financial Statements, in what fund will Bonds Payable appear?

A. General Fund. B. Capital Projects Fund. C. Permanent Fund. D. Debt Service Fund. E. Bonds Payable do not appear in Fund Financial Statements.

19. Which of the following is a governmental fund?

A. Enterprise fund. B. Internal service fund. C. Permanent fund. D. Investment trust fund. E. Agency fund.

20. Which of the following is a fiduciary fund?

A. Pension trust fund. B. Debt service fund. C. Permanent fund. D. Enterprise fund. E. Capital projects fund.

21. According to GASB Concepts Statement No. 1, what are the three groups of primary users of external state and local governmental financial reports?

A. The Securities Exchange Commission, the citizenry, and legislative and oversight bodies. B. The Securities Exchange Commission, legislative and oversight bodies, and investors and creditors. C. The Securities Exchange Commission, the citizenry, and investors and creditors. D. The citizenry, legislative and oversight bodies, and investors and creditors. E. The citizenry, management, and the Governmental Accounting Office.

22. Which of the following statements is true regarding fund financial statements?

A. Fund financial statements report a government's activities and financial position as a whole. B. Fund financial statements should tell the amount spent this year on such services as public safety, education, health and sanitation, and the construction of a new road. C. Fund financial statements utilize the accrual basis of accounting much like any for-profit entity. D. Fund financial statements help to determine whether the government's overall financial position improved or deteriorated. E. Fund financial statements report all assets and liabilities in a way comparable to businesstype accounting.

23. Which of the following statements is false regarding government-wide financial statements?

A. Government-wide financial statements report a government's activities and financial position as a whole. B. The government-wide financial statement approach helps users make long-term evaluations of the financial decisions and stability of the government. C. Government-wide financial statements focus on the short-term instead of the long-term. D. Government-wide financial statements assess the finances of the government in its entirety, including the year's operating results. E. The measurement focus of government-wide financial statements is on all economic resources and utilizes accrual accounting.

24. How do the balance sheet and statement of revenues, expenditures, and changes in fund balances of governmental funds differ from the financial statement presentation for the governmental activities in the government-wide statement of net assets and statement of activities? (1) Internal service funds are not included in the fund financial statements of governmental funds but could be reported in the governmental activities of government-wide financial statements. (2) The economic resources measurement basis is used for fund financial statements of governmental funds and the current financial resources measurement basis is used for governmental activities in the government-wide financial statements. (3) Modified accrual accounting is used for fund financial statements of governmental funds to time revenues and expenditures and accrual accounting is used for governmental activities of government-wide financial statements. (4) The financial statements of governmental funds for fund financial statements are the same as governmental activities in government-wide financial statements but with different titles of the financial statements.

A. 1 and 2. B. 2, 3, and 4. C. 1, 2, and 3. D. 1 and 3. E. 1, 2, 3, and 4.

25. Which of the following is not a classification of non-exchange transactions?

A. Derived tax expenditures. B. Voluntary non-exchange transactions. C. Government-mandated non-exchange transactions. D. Derived tax revenues. E. Imposed non-exchange revenues.

26. GASB Codification Section N50.104 divides all eligibility requirements into four general classifications including all of the following except:

A. Required characteristics of the recipients. B. Time requirements. C. Reimbursement. D. Contingencies. E. Refunding.

27. Which statement is not correct?

A. Governmental funds account for expenditures of financial resources rather than matching revenues and expenses. B. The Fund Balance Reserved for Encumbrances account is not closed at the end of a fiscal year. C. Revenues from licenses and permit fees are recognized when received in cash if using the modified accrual basis of accounting for governmental funds. D. A fund is an independent accounting entity composed of cash and other financial resources, segregated for the purpose of carrying on specific activities and objectives. E. Commitments for purchase orders are recorded as expenses.

28. For governmental entities, the accrual basis of accounting is used for:

A. Special revenue funds. B. Internal service funds. C. Debt service funds. D. General Fund. E. Capital Projects Fund.

29. What account is debited in the general fund when equipment is received by a governmental entity?

A. Expenditures. B. Encumbrances. C. Plant assets. D. Accounts Payable. E. Fund Balance-Reserve for Encumbrances.

30. Generally, annual budgets are recorded within the following funds:

A. General fund and special revenue funds. B. Capital projects funds and debt service fund. C. Enterprise funds and internal service funds. D. General Fund and Pension Trust Fund. E. Agency Funds and General Fund.

31. When a city received a federal grant for books to be purchased for a library, the money should have been recorded in

A. the Permanent Fund. B. an Expendable Trust Fund. C. a Capital Projects Fund. D. an Agency Fund. E. a Special Revenue Fund.

32. When a city holds pension monies for city employees, the monies should be recorded in

A. the General Fund. B. an Expendable Trust Fund. C. a Fiduciary Fund. D. an Agency Fund. E. a Special Revenue Fund.

33. When a city received a private donation of $1,000,000 stipulating that the principal donation would be preserved but allowing the interest income to be spent on building a city park with access for disabled children, which fund should the money be recorded in?

A. the General Fund. B. an Expendable Trust Fund. C. a Permanent Fund. D. an Agency Fund. E. a Special Revenue Fund.

34. When a city collects fees from citizens who use the public swimming pool, the money should be recorded in

A. the General Fund. B. an Enterprise Fund. C. a Capital Projects Fund. D. an Agency Fund. E. an Internal Service Fund.

35. A city operates a central data processing facility. The expenses of this facility would be accounted for using

A. the General Fund. B. an Enterprise Fund. C. a Capital Projects Fund. D. an Agency Fund. E. an Internal Service Fund.

36. What are the two proprietary fund types? (1) Internal service funds. (2) Investment trust funds. (3) Enterprise funds. (4) Agency funds.

A. 1 and 2. B. 2 and 3. C. 1 and 3. D. 2 and 4. E. 1 and 4.

37. Salaries and wages that have been earned by governmental employees that have not yet been paid are recorded in the general fund as:

A. An expenditure. B. An encumbrance. C. An appropriation. D. An expense. E. An investment.

38. The reporting of the fund balance of governmental funds will result in a maximum of ___________ categories:

A. One B. Two C. Three D. Four E. Five

39. Which classifications may be not used for the Fund Balance of governmental funds?

A. Spendable B. Non-Spendable C. Assigned D. Unassigned E. Restricted

40. Which of the following statements is true about Fund Balance classifications for the governmental funds?

A. A restricted fund balance is for monies the governing board has appropriated. B. An assigned fund balance has been designated for a specific purpose and is restricted to use for only that purpose. C. An unassigned fund balance has no restriction for use of the money and is only applicable to the General Fund. D. A committed fund balance has been designated by an outside party for a particular use. E. A non-spendable fund balance is designated only for Permanent Fund balances.

Essay Questions

41. For each of the following transactions, select the area of accounting records in which an entry will be recorded. (A) General Fund only. (B) Governmental Activities only. (C) General Fund and Governmental Activities. (D) General Fund and Debt Service Fund. (E) Capital Projects Fund and Governmental Activities. (F) Debt Service Fund and Governmental Activities. (G) Special Revenue Fund and Governmental Activities. ___ (1.) The city council adopts an annual budget for the General Fund. ___ (2.) Property taxes are levied. ___ (3.) Computers are ordered for the fire department. ___ (4.) A transfer of funds is made from the General Fund to the Debt Service Fund. ___ (5.) The principal and interest of a bond are paid. ___ (6.) A building is acquired for the police department, and renovations begin immediately. ___ (7.) Depreciation on fire trucks is recorded. ___ (8.) Citizens are assessed for a street lighting project that has been legally restricted for those citizens. ___ (9.) A grant is received to landscape tree-lined areas beside city-owned streets. ___ (10.) The city spends grant money received in (9.) above and landscapes the tree-lined areas beside the streets for which the grant money was received.

42. What organization is responsible for establishing accounting principles for governmental entities? By whom was this organization established?

43. What is a special revenue fund used to account for?

44. What is the definition of the term fund?

45. For a government, what kinds of operations are accounted for using a proprietary fund? Give three examples.

46. What are the five types of governmental funds?

47. A city enacted a special tax levy and the money must be used to provide medical services at the municipal hospital. What kind of fund should be used to record the revenues generated by the tax?

48. In governmental accounting, what term is used for a decrease in financial resources?

49. Under modified accrual accounting, when are expenditures recorded?

50. What assets would be included in the accounting records of a city's general fund?

51. Under modified accrual accounting, when should revenues be reported by a governmentaltype fund?

52. When should property taxes be recognized under modified accrual accounting?

53. What are the two groups of financial statements mandated by GASB Statement No. 34? For each group, what are the names of the individual statements that must be produced?

54. What is the primary difference between monies accounted for in the general fund and monies accounted for in the special revenue fund?

55. What are the two proprietary fund types?

56. What are the four fiduciary fund types?

57. What is the purpose of fund financial statements?

58. What is the purpose of government-wide financial statements?

59. The board of commissioners of the city of Jarmaine adopted a General Fund budget for the year ending June 30, 2013, which indicated revenues of $1,300,000, bond proceeds of $520,000, appropriations of $1,170,000, and operating transfers out of $390,000.

Required: If this budget was formally integrated into the accounting records used to produce the Fund Financial Statements, what was the required journal entry at the beginning of the year?

60. On July 1, 2013, Fred City ordered $1,500 of office supplies. They were to be paid for out of the General Fund.

Required: (A.) What journal entry was required for the Fund Financial Statements? (B.) What journal entry was required for the Government-Wide Statements?

61. On July 12, 2013, Fred City ordered a new computer at an anticipated cost of $114,400. The computer was received on July 16 with an actual cost of $116,220. Payment was subsequently made on August 15, 2013.

Required: (A.) Prepare all the required journal entries and identify the type of fund in which each entry was recorded for the Fund Financial Statements. (B.) Prepare all the required journal entries and identify the type of fund in which each entry was recorded for the Government-Wide Financial Statements.

62. A new truck was ordered for the sanitation department at a cost of $122,200 on September 3, 2013.

Required: (A.) Prepare the required journal entry in the General Fund for the Fund Financial Statements. (B.) Prepare the required journal entry for the Government-Wide Financial Statements.

63. The school system had some booklets printed by a local print shop on September 22, 2013. The school system was charged $1,560 for the printing, but the bill is not due until October.

Required: (A.) Prepare the required journal entry in the General Fund for the Fund Financial Statements. (B.) Prepare the required journal entry for the Government-Wide Financial Statements.

64. A $910,000 bond was issued on October 1, 2013 to build a new road. The bonds carried a 6% interest rate and are due in 10 years.

Required: (A.) Prepare the required journal entry in the Capital Projects Fund on October 1 for the Fund Financial Statements. (B.) Prepare the required journal entry for the Government-Wide Financial Statements.

65. On June 14, 2013, Fred City agreed to transfer cash of $52,000 from the General Fund to provide permanent financing for a municipal swimming pool that will be viewed as an Enterprise Fund. The cash was transferred on June 30.

Required: (A.) Prepare all the required journal entries and identify the fund in which each entry was recorded for the Fund Financial Statements. (B.) Prepare all the required journal entries and identify the type of activity for the Government-Wide Financial Statements.

66. On August 21, 2013, Fred City transferred $100,000 to the School System to cover repairs to a school building.

Required: Prepare all the required journal entries and identify the fund in which each entry was recorded for the Fund Financial Statements.

67. On January 1, 2013, Wakefield City purchased $40,000 office supplies. During the year $35,000 of these supplies were used.

Required: Record the journal entries for these transactions using the purchases method. (Disregard the encumbrance entries.)

68. On January 1, 2013, Wakefield City purchased $40,000 office supplies. During the year $35,000 of these supplies were used.

Required: Record the journal entries for these transactions using the consumption method. (Disregard the encumbrance entries.)

69. The town council adopted an annual budget estimating general revenues of $2,000,000, approved expenditures of $1,700,000 and other financing for other funds of $130,000.

Required: Record the journal entry to record the budget and identify the fund in which it is recorded.

70. Property taxes of 1,500,000 are levied for Miner County. The county expects that 5% will be uncollectible.

Required: Prepare the required journal entry and identify the fund in which it is recorded.

71. Shell City transfers $100,000 from the General Fund to the Debt Service fund.

Required: Prepare the required journal entries and identify the funds in which they are recorded.

72. Prepare the journal entry and identify the fund to record the purchase order of two trucks owned by Simple City for $100,000. Identify the fund in which the entry is recorded.

73. Simple City has recorded the purchase order of two trucks for a total of $100,000. Prepare the journal entries to reflect that the two trucks have been received with a voucher price of $105,000. This amount has been approved but not yet paid. Identify the fund in which the entries are recorded.

74. A $5,000,000 bond is issued by Northern City to build a new hospital.

Required: Prepare the journal entry and identify the fund in which it is recorded to reflect the bond issue.

75. The Town of Anthrop receives a $10,000 grant to make the Town Hall handicappedaccessible.

Required: Prepare the journal entry, and identify the fund in which it is recorded, to record the receipt of the grant.

76. The Town of Anthrop has recorded the receipt of a $10,000 grant to make its Town Hall handicapped-accessible. The town now spends $10,000 to make the Town Hall handicappedaccessible.

Required: Prepare the journal entry (or entries), and identify the fund for recording, to record that the town spends $10,000 of a grant it received to make the Town Hall handicapped-accessible.

77. The City of Kamen collected $17,000 from parking meters that must be transferred to the county government.

Required: For fund financial statements, prepare the journal entry for this transaction including the fund type in which the entry would have been recorded.

78. The City of Kamen transferred $27,000 into a Pension Trust Fund. Of this amount, $19,000 was contributed by the city with the remainder coming from the employees.

Required: For fund financial statements, prepare the journal entry for this transaction including the fund type in which the entry would have been recorded.

Chapter 16 Accounting for State and Local Governments (Part 1) Answer Key

Multiple Choice Questions

Which standard issued by the Governmental Accounting Standards Board in 1999 required two distinct sets of financial statements for state and local governments?

A. GASB Statement No. 32. B. GASB Statement No. 33. C. GASB Statement No. 34. D. GASB Statement No. 35. E. GASB Statement No. 36.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-02 Differentiate between the two sets of financial statements produced by state and local governments.

Which group of governmental financial statements reports all revenues and all costs of providing services each year?

A. GAAP-Based Financial Statements. B. Fund Financial Statements. C. Cost-Based Financial Statements. D. Government-Wide Financial Statements. E. General Fund Financial Statements.

Proprietary funds are

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember

Difficulty: 1 Easy Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

Fiduciary funds are

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

Governmental funds are

Special Revenue funds are

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Reporting

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

The term "current financial resources" refers to

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 16-02 Differentiate between the two sets of financial statements produced by state and local governments.

What are the broad types or classifications of funds for a governmental entity such as a city?

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation 16-40 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

Which group of financial statements is prepared using the "modified accrual accounting" approach?

A. GAAP-Based Financial Statements. B. Fund Financial Statements. C. Cost-Based Financial Statements. D. Government-Wide Financial Statements. E. General Purpose Financial Statements.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-02 Differentiate between the two sets of financial statements produced by state and local governments.

10.

Under modified accrual accounting, revenues should be recognized when they are

A. collected. B. realizable. C. reasonably estimable. D. measurable and available. E. earned.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember 16-41 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Difficulty: 1 Easy Learning Objective: 16-02 Differentiate between the two sets of financial statements produced by state and local governments.

11.

Under modified accrual accounting, when should an expenditure be recorded to recognize interest on long-term debt?

A. at the end of each accounting period. B. when payment is due within one fiscal year. C. when payment is due. D. when cash is available to pay the interest. E. when the interest is incurred.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

12.

Which of the following funds is most likely created with an endowed gift?

A. Enterprise Fund. B. Internal Service Fund. C. Debt Service Fund. D. Capital Projects Fund. E. Permanent Fund.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy 16-42 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

13.

Revenue from property taxes should be recorded in the General Fund

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-08 Determine the proper timing for the recognition of revenues from nonexchange transactions.

14.

Which type of fund is not included in the Government-Wide Financial Statements?

A. Governmental Funds B. Proprietary Funds C. Fiduciary Funds D. Debt Service Funds E. Special Revenue Funds

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

15.

A city received a grant of $5,000,000 from a private agency. The money was to be used to build a new city library. In which fund should the money be recorded for the Fund Financial Statements?

A. the General Fund. B. an Expendable Trust Fund. C. a Capital Projects Fund. D. an Agency Fund. E. a Permanent Fund.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

16.

When a city received a federal grant for providing food and other assistance to the homeless, the money should have been recorded in

A. the General Fund. B. an Expendable Trust Fund. C. a Capital Projects Fund. D. an Agency Fund. E. a Special Revenue Fund.

17.

Bay City received a federal grant to provide health care services to low income mothers and children. When should the revenues be recognized?

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 16-08 Determine the proper timing for the recognition of revenues from nonexchange transactions.

18.

Trapper City issued 30-year bonds for the purpose of building a new City Hall. The proceeds of the bonds are deposited in the General Fund. For the Fund Financial Statements, in what fund will Bonds Payable appear?

A. General Fund. B. Capital Projects Fund. C. Permanent Fund. D. Debt Service Fund. E. Bonds Payable do not appear in Fund Financial Statements.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium

Learning Objective: 16-09 Accounts for the issuance of long-term bonds and the reporting of special assessment projects.

19.

Which of the following is a governmental fund?

A. Enterprise fund. B. Internal service fund. C. Permanent fund. D. Investment trust fund. E. Agency fund.

20.

Which of the following is a fiduciary fund?

A. Pension trust fund. B. Debt service fund. C. Permanent fund. D. Enterprise fund. E. Capital projects fund.

21.

According to GASB Concepts Statement No. 1, what are the three groups of primary users of external state and local governmental financial reports?

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-01 Explain the history of and the reasons for the unique characteristics of the financial statements produced by state and local governments.

22.

Which of the following statements is true regarding fund financial statements?

A. Fund financial statements report a government's activities and financial position as a whole. B. Fund financial statements should tell the amount spent this year on such services as public safety, education, health and sanitation, and the construction of a new road. C. Fund financial statements utilize the accrual basis of accounting much like any forprofit entity. D. Fund financial statements help to determine whether the government's overall financial position improved or deteriorated. E. Fund financial statements report all assets and liabilities in a way comparable to business-type accounting.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 16-02 Differentiate between the two sets of financial statements produced by state and local governments.

23.

Which of the following statements is false regarding government-wide financial statements?

A. Government-wide financial statements report a government's activities and financial position as a whole. B. The government-wide financial statement approach helps users make long-term evaluations of the financial decisions and stability of the government. C. Government-wide financial statements focus on the short-term instead of the longterm. D. Government-wide financial statements assess the finances of the government in its entirety, including the year's operating results. E. The measurement focus of government-wide financial statements is on all economic resources and utilizes accrual accounting.

24.

How do the balance sheet and statement of revenues, expenditures, and changes in fund balances of governmental funds differ from the financial statement presentation for the governmental activities in the government-wide statement of net assets and statement of activities? (1) Internal service funds are not included in the fund financial statements of governmental funds but could be reported in the governmental activities of governmentwide financial statements. (2) The economic resources measurement basis is used for fund financial statements of governmental funds and the current financial resources measurement basis is used for governmental activities in the government-wide financial statements. (3) Modified accrual accounting is used for fund financial statements of governmental funds to time revenues and expenditures and accrual accounting is used for governmental activities of government-wide financial statements. (4) The financial statements of governmental funds for fund financial statements are the same as governmental activities in government-wide financial statements but with different titles of the financial statements.

A. 1 and 2. B. 2, 3, and 4. C. 1, 2, and 3. D. 1 and 3. E. 1, 2, 3, and 4.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-02 Differentiate between the two sets of financial statements produced by state and local governments. Learning Objective: 16-05 Understand the basic structure of government-wide financial statements and fund financial statements (as produced for the government funds).

25.

Which of the following is not a classification of non-exchange transactions?

A. Derived tax expenditures. B. Voluntary non-exchange transactions. C. Government-mandated non-exchange transactions. D. Derived tax revenues. E. Imposed non-exchange revenues.

26.

GASB Codification Section N50.104 divides all eligibility requirements into four general classifications including all of the following except:

A. Required characteristics of the recipients. B. Time requirements. C. Reimbursement. D. Contingencies. E. Refunding.

27.

Which statement is not correct?

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-06 Record the passage of a budget as well as subsequent encumbrances and expenditures.

28.

For governmental entities, the accrual basis of accounting is used for:

A. Special revenue funds. B. Internal service funds. C. Debt service funds. D. General Fund. E. Capital Projects Fund.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium

Learning Objective: 16-02 Differentiate between the two sets of financial statements produced by state and local governments. Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each. Learning Objective: 16-07 Understand the reporting of capital assets; supplies; and prepaid expenses by a state or local government.

29.

What account is debited in the general fund when equipment is received by a governmental entity?

A. Expenditures. B. Encumbrances. C. Plant assets. D. Accounts Payable. E. Fund Balance-Reserve for Encumbrances.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-06 Record the passage of a budget as well as subsequent encumbrances and expenditures.

30.

Generally, annual budgets are recorded within the following funds:

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation 16-53 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-06 Record the passage of a budget as well as subsequent encumbrances and expenditures.

31.

When a city received a federal grant for books to be purchased for a library, the money should have been recorded in

A. the Permanent Fund. B. an Expendable Trust Fund. C. a Capital Projects Fund. D. an Agency Fund. E. a Special Revenue Fund.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

32.

When a city holds pension monies for city employees, the monies should be recorded in

A. the General Fund. B. an Expendable Trust Fund. C. a Fiduciary Fund. D. an Agency Fund. E. a Special Revenue Fund.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium 16-54 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

33.

When a city received a private donation of $1,000,000 stipulating that the principal donation would be preserved but allowing the interest income to be spent on building a city park with access for disabled children, which fund should the money be recorded in?

A. the General Fund. B. an Expendable Trust Fund. C. a Permanent Fund. D. an Agency Fund. E. a Special Revenue Fund.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

34.

When a city collects fees from citizens who use the public swimming pool, the money should be recorded in

A. the General Fund. B. an Enterprise Fund. C. a Capital Projects Fund. D. an Agency Fund. E. an Internal Service Fund.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze

Difficulty: 2 Medium Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

35.

A city operates a central data processing facility. The expenses of this facility would be accounted for using

A. the General Fund. B. an Enterprise Fund. C. a Capital Projects Fund. D. an Agency Fund. E. an Internal Service Fund.

36.

What are the two proprietary fund types? (1) Internal service funds. (2) Investment trust funds. (3) Enterprise funds. (4) Agency funds.

A. 1 and 2. B. 2 and 3. C. 1 and 3. D. 2 and 4. E. 1 and 4.

AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

37.

Salaries and wages that have been earned by governmental employees that have not yet been paid are recorded in the general fund as:

A. An expenditure. B. An encumbrance. C. An appropriation. D. An expense. E. An investment.

38.

The reporting of the fund balance of governmental funds will result in a maximum of ___________ categories:

A. One B. Two C. Three D. Four E. Five

AACSB: Reflective thinking

AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-06 Record the passage of a budget as well as subsequent encumbrances and expenditures.

39.

Which classifications may be not used for the Fund Balance of governmental funds?

A. Spendable B. Non-Spendable C. Assigned D. Unassigned E. Restricted

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-06 Record the passage of a budget as well as subsequent encumbrances and expenditures.

40.

Which of the following statements is true about Fund Balance classifications for the governmental funds?

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-06 Record the passage of a budget as well as subsequent encumbrances and expenditures.

Essay Questions

41.

For each of the following transactions, select the area of accounting records in which an entry will be recorded. (A) General Fund only. (B) Governmental Activities only. (C) General Fund and Governmental Activities. (D) General Fund and Debt Service Fund. (E) Capital Projects Fund and Governmental Activities. (F) Debt Service Fund and Governmental Activities. (G) Special Revenue Fund and Governmental Activities. ___ (1.) The city council adopts an annual budget for the General Fund. ___ (2.) Property taxes are levied. ___ (3.) Computers are ordered for the fire department. ___ (4.) A transfer of funds is made from the General Fund to the Debt Service Fund. ___ (5.) The principal and interest of a bond are paid. ___ (6.) A building is acquired for the police department, and renovations begin immediately. ___ (7.) Depreciation on fire trucks is recorded. ___ (8.) Citizens are assessed for a street lighting project that has been legally restricted for those citizens. ___ (9.) A grant is received to landscape tree-lined areas beside city-owned streets. ___ (10.) The city spends grant money received in (9.) above and landscapes the tree-lined areas beside the streets for which the grant money was received.

(1) A; (2) C; (3) A; (4) D; (5) F; (6) E; (7) B; (8) G; (9) G; (10) G

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement AICPA FN: Reporting Blooms: Understand Difficulty: 2 Medium

Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each. Learning Objective: 16-06 Record the passage of a budget as well as subsequent encumbrances and expenditures. Learning Objective: 16-07 Understand the reporting of capital assets; supplies; and prepaid expenses by a state or local government. Learning Objective: 16-08 Determine the proper timing for the recognition of revenues from nonexchange transactions. Learning Objective: 16-10 Record the various types of monetary transfers that occur within the funds of a state or local government.

42.

What organization is responsible for establishing accounting principles for governmental entities? By whom was this organization established?

The organization that is responsible for establishing accounting principles for governmental entities is the GASB (Governmental Accounting Standards Board ). The

Financial Accounting Foundation has oversight responsibility for the GASB, as it does for the FASB.

AACSB: Reflective thinking AICPA BB: Research AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-01 Explain the history of and the reasons for the unique characteristics of the financial statements produced by state and local governments.

43.

What is a special revenue fund used to account for?

A special revenue fund is used to account for revenues that are legally restricted as to how they can be spent.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Blooms: Remember

Difficulty: 1 Easy Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

44.

What is the definition of the term fund?

The term fund is defined as a self-balancing set of accounts used to record data generated by an identifiable government function.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-03 Understand the reason that fund accounting has traditionally been such a prominent factor in the internal recording of state and local governments.

45.

For a government, what kinds of operations are accounted for using a proprietary fund? Give three examples.

A proprietary fund is used to account for governmental operations similar to those found in the private sector. They usually involve user charges. Three examples are (1) a toll road, (2) a municipal swimming pool, and (3) a city maintenance garage.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

46.

What are the five types of governmental funds?

The five types of governmental funds are: (A.) The General Fund. (B.) Special Revenue Funds. (C.) Capital Projects Funds. (D.) Debt Service Funds. (E.) Permanent Funds.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Blooms: Analyze Difficulty: 1 Easy Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

47.

A city enacted a special tax levy and the money must be used to provide medical services at the municipal hospital. What kind of fund should be used to record the revenues generated by the tax?

A special revenue fund should be used.

48.

In governmental accounting, what term is used for a decrease in financial resources?

The appropriate term is expenditure.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-06 Record the passage of a budget as well as subsequent encumbrances and expenditures.

49.

Under modified accrual accounting, when are expenditures recorded?

Under modified accrual accounting, expenditures are usually recorded when the claim against financial resources is created.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-06 Record the passage of a budget as well as subsequent encumbrances and expenditures.

50.

What assets would be included in the accounting records of a city's general fund?

The assets in the accounting records of a city's general fund would typically include financial resources such as (1) cash, (2) receivables, and (3) investments, but no capital assets.

AICPA BB: Industry AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 16-05 Understand the basic structure of government-wide financial statements and fund financial statements (as produced for the government funds).

51.

Under modified accrual accounting, when should revenues be reported by a governmentaltype fund?

Under modified accrual accounting, revenues should be reported by a governmental-type fund when they are both measurable and available. Revenues are measurable when they are subject to reasonable estimation. They are available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 16-02 Differentiate between the two sets of financial statements produced by state and local governments.

52.

When should property taxes be recognized under modified accrual accounting?

Property taxes should be recognized under modified accrual accounting when they become both measurable and available.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium

Learning Objective: 16-08 Determine the proper timing for the recognition of revenues from nonexchange transactions.

53.

What are the two groups of financial statements mandated by GASB Statement No. 34? For each group, what are the names of the individual statements that must be produced?

GASB No. 34 requires two groups of financial statements. They are the Government-Wide

Financial Statements and the Fund Financial Statements. The Government-Wide Financial Statements include the Statement of Net Assets and the Statement of Activities. The Fund Financial Statements include the Balance Sheet and the Statement of Revenues,

Expenditures, and Changes in Fund Balance.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Reporting Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-02 Differentiate between the two sets of financial statements produced by state and local governments.

54.

What is the primary difference between monies accounted for in the general fund and monies accounted for in the special revenue fund?

Monies in the special revenue fund are legally restricted as to expenditure and monies in the general fund are used for general public benefit.

55.

What are the two proprietary fund types?

Internal service funds and enterprise funds.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

56.

What are the four fiduciary fund types?

Investment trust funds, private-purpose trust funds, pension trust funds, and agency funds.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each.

57.

What is the purpose of fund financial statements?

To show restrictions on the planned use of resources or to measure, in the short term, the revenues and expenditures arising from certain activities.

AACSB: Reflective thinking AICPA BB: Industry

AICPA FN: Reporting Blooms: Understand Difficulty: 1 Easy Learning Objective: 16-02 Differentiate between the two sets of financial statements produced by state and local governments.

58.

What is the purpose of government-wide financial statements?

To show longer-term focus because they will report all revenues and all costs of providing services each year, not just those received or paid in the current year or soon after yearend.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Reporting Blooms: Understand Difficulty: 1 Easy Learning Objective: 16-02 Differentiate between the two sets of financial statements produced by state and local governments.

59.

The board of commissioners of the city of Jarmaine adopted a General Fund budget for the year ending June 30, 2013, which indicated revenues of $1,300,000, bond proceeds of $520,000, appropriations of $1,170,000, and operating transfers out of $390,000.

Required: If this budget was formally integrated into the accounting records used to produce the Fund Financial Statements, what was the required journal entry at the beginning of the year?

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-06 Record the passage of a budget as well as subsequent encumbrances and expenditures.

60.

On July 1, 2013, Fred City ordered $1,500 of office supplies. They were to be paid for out of the General Fund.

Required: (A.) What journal entry was required for the Fund Financial Statements? (B.) What journal entry was required for the Government-Wide Statements?

(A.) For the Fund Statements, an encumbrance must be recorded in the General Fund.

(B.) For the Government-Wide Statements no entry is required, because under accrual accounting, no entry is made until a transaction occurs.

61.

On July 12, 2013, Fred City ordered a new computer at an anticipated cost of $114,400. The computer was received on July 16 with an actual cost of $116,220. Payment was subsequently made on August 15, 2013.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each. Learning Objective: 16-06 Record the passage of a budget as well as subsequent encumbrances and expenditures.

62.

A new truck was ordered for the sanitation department at a cost of $122,200 on September 3, 2013.

Required: (A.) Prepare the required journal entry in the General Fund for the Fund Financial Statements. (B.) Prepare the required journal entry for the Government-Wide Financial Statements.

63.

The school system had some booklets printed by a local print shop on September 22, 2013. The school system was charged $1,560 for the printing, but the bill is not due until October.

Required: (A.) Prepare the required journal entry in the General Fund for the Fund Financial Statements. (B.) Prepare the required journal entry for the Government-Wide Financial Statements.

64.

A $910,000 bond was issued on October 1, 2013 to build a new road. The bonds carried a 6% interest rate and are due in 10 years.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-09 Accounts for the issuance of long-term bonds and the reporting of special assessment projects.

65.

On June 14, 2013, Fred City agreed to transfer cash of $52,000 from the General Fund to provide permanent financing for a municipal swimming pool that will be viewed as an Enterprise Fund. The cash was transferred on June 30.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium 16-75 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each. Learning Objective: 16-05 Understand the basic structure of government-wide financial statements and fund financial statements (as produced for the government funds). Learning Objective: 16-10 Record the various types of monetary transfers that occur within the funds of a state or local government.

66.

On August 21, 2013, Fred City transferred $100,000 to the School System to cover repairs to a school building.

Required: Prepare all the required journal entries and identify the fund in which each entry was recorded for the Fund Financial Statements.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each. Learning Objective: 16-10 Record the various types of monetary transfers that occur within the funds of a state or local government.

67.

On January 1, 2013, Wakefield City purchased $40,000 office supplies. During the year $35,000 of these supplies were used.

Required: Record the journal entries for these transactions using the purchases method. (Disregard the encumbrance entries.)

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-07 Understand the reporting of capital assets; supplies; and prepaid expenses by a state or local government.

68.

On January 1, 2013, Wakefield City purchased $40,000 office supplies. During the year $35,000 of these supplies were used.

Required: Record the journal entries for these transactions using the consumption method. (Disregard the encumbrance entries.)

69.

The town council adopted an annual budget estimating general revenues of $2,000,000, approved expenditures of $1,700,000 and other financing for other funds of $130,000.

Required: Record the journal entry to record the budget and identify the fund in which it is recorded.

70.

Property taxes of 1,500,000 are levied for Miner County. The county expects that 5% will be uncollectible.

Required: Prepare the required journal entry and identify the fund in which it is recorded.

AACSB: Analytic AICPA BB: Industry

AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each. Learning Objective: 16-08 Determine the proper timing for the recognition of revenues from nonexchange transactions.

71.

Shell City transfers $100,000 from the General Fund to the Debt Service fund.

Required: Prepare the required journal entries and identify the funds in which they are recorded.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each. Learning Objective: 16-10 Record the various types of monetary transfers that occur within the funds of a state or local government.

72.

Prepare the journal entry and identify the fund to record the purchase order of two trucks owned by Simple City for $100,000. Identify the fund in which the entry is recorded.

AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each. Learning Objective: 16-06 Record the passage of a budget as well as subsequent encumbrances and expenditures.

73.

Simple City has recorded the purchase order of two trucks for a total of $100,000. Prepare the journal entries to reflect that the two trucks have been received with a voucher price of $105,000. This amount has been approved but not yet paid. Identify the fund in which the entries are recorded.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each. Learning Objective: 16-06 Record the passage of a budget as well as subsequent encumbrances and expenditures.

74.

A $5,000,000 bond is issued by Northern City to build a new hospital.

Required: Prepare the journal entry and identify the fund in which it is recorded to reflect the bond issue.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each. Learning Objective: 16-09 Accounts for the issuance of long-term bonds and the reporting of special assessment projects.

75.

The Town of Anthrop receives a $10,000 grant to make the Town Hall handicappedaccessible.

Required: Prepare the journal entry, and identify the fund in which it is recorded, to record the receipt of the grant.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement

Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each. Learning Objective: 16-08 Determine the proper timing for the recognition of revenues from nonexchange transactions.

76.

The Town of Anthrop has recorded the receipt of a $10,000 grant to make its Town Hall handicapped-accessible. The town now spends $10,000 to make the Town Hall handicapped-accessible.

Required: Prepare the journal entry (or entries), and identify the fund for recording, to record that the town spends $10,000 of a grant it received to make the Town Hall handicappedaccessible.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-04 Identify the three fund types and the individual fund categories within each. Learning Objective: 16-08 Determine the proper timing for the recognition of revenues from nonexchange transactions.

77.

The City of Kamen collected $17,000 from parking meters that must be transferred to the county government.

Required: For fund financial statements, prepare the journal entry for this transaction including the fund type in which the entry would have been recorded.

General Fund

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 16-10 Record the various types of monetary transfers that occur within the funds of a state or local government.

78.

The City of Kamen transferred $27,000 into a Pension Trust Fund. Of this amount, $19,000 was contributed by the city with the remainder coming from the employees.

Required: For fund financial statements, prepare the journal entry for this transaction including the fund type in which the entry would have been recorded.

Pension Trust Fund

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 16-03 Understand the reason that fund accounting has traditionally been such a prominent factor in the internal recording of state and local governments.

Chapter 17 Accounting for State and Local Governments (Part 2)

Multiple Choice Questions

1. For government-wide financial statements, what account is credited when a piece of equipment is leased on a capital lease?

A. Equipment-Capital Lease B. Encumbrances-Long Term C. Encumbrances-Lease Obligations D. Capital Lease Obligation E. The lease is not recorded.

2. For fund financial statements, what account is credited when a piece of equipment is leased on a capital lease?

A. Equipment-Capital Lease. B. Encumbrances-Long Term. C. Encumbrances-Lease Obligations. D. Capital Lease Obligation. E. Other Financing Sources-Capital Lease.

3. Jones College, a public institution of higher education, must prepare financial statements

A. As if the college was an enterprise fund. B. Following the same rules as state and local governments. C. According to GAAP. D. As if the college was a fiduciary fund. E. In the same manner as private colleges and universities.

4. For the purpose of government-wide financial statements, the cost of cleaning up a government-owned landfill and closing the landfill

A. Is not recognized until the costs are actually incurred. B. Is accrued and amortized over the expected useful life of the landfill. C. Is accrued on a pro-rated basis each period based on how full the landfill is. D. Is accrued in full at the time the costs become estimable. E. Is treated as an encumbrance at the time it become estimable, and then as an expenditure when it is actually paid.

5. A method of depreciation for infrastructure assets that allows the expensing of all maintenance costs each year instead of computing depreciation is called

A. Government-wide depreciation. B. Proprietary depreciation. C. GASB depreciation. D. Modified approach. E. Alternative depreciation.

6. Drye Township has received a donation of a rare painting worth $1,000,000. For Drye's government-wide financial statements, three criteria must be met before Drye can opt not to recognize the painting as an asset. Which of the following is not one of the three criteria? (1.) The painting is held for public exhibition, education, or research in furtherance of public service, rather than financial gain. (2.) The painting is scheduled to be sold immediately at auction. (3.) The painting is protected, kept unencumbered, cared for, and preserved.

A. Item 1 is not one of the three criteria. B. Item 2 is not one of the three criteria. C. Item 3 is not one of the three criteria. D. All three items are required criteria. E. None of the three items are required criteria.

7. GASB Codification Section 2200.106-107 makes which of the following statements regarding Management's Discussion and Analysis?

A. MD&A is required only for Proprietary Fund Financial Statements. B. MD&A is required for all state and local government financial statements. C. MD&A is only required for comprehensive annual financial reports. D. MD&A for state and local government financial statements must include an analysis of potential, untapped revenue sources. E. MD&A is an optional inclusion for state and local government financial statements.

8. Which one of the following is a criterion for identifying a primary government?

A. it has an appointed board of directors. B. it is fiscally dependent. C. it is a local government. D. it has a separately elected governing body. E. it must prepare financial statements.

9. A local government's basic financial statements would include a statement of cash flows for all

A. proprietary fund types. B. governmental fund types. C. fund types. D. fiduciary fund types. E. A statement of cash flows is not required for any fund types.

10. According to the GASB (Governmental Accounting Standards Board), which one of the following is not a criterion for determining whether a government is legally separate?

A. The government can determine its own budget. B. The government can issue debt. C. The government has corporate powers including the right to sue and be sued. D. The government has the power to levy taxes. E. The government can issue preferred stock.

11. Which of the following is not a criterion of a capital lease?

A. The lease transfers ownership of the property to the lessee by the end of the lease term. B. The present value of the minimum lease payments equals or exceeds 90 percent of the fair value of the leased property, net of lessor's investment tax credit. C. The lease contains an option to purchase the leased property at a bargain price. D. The lease contains an option to renew. E. The lease term is equal to or greater than 75 percent of the estimated economic life of the leased property.

12. A five-year lease is signed by the City of Wachovia for equipment with a seven-year life. The asset will be returned to the lessor at the end of the lease. The present value of the lease is $20,000, and annual payments of $5,411.41 are payable beginning on the date the lease is signed. The interest portion of the second payment is $1,604.75. The equipment is to be used in City Hall and was purchased from appropriated funds of the General Fund. What should be recorded in the General Fund on the date the lease is signed?

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

13. A five-year lease is signed by the City of Wachovia for equipment with a seven-year life. The asset will be returned to the lessor at the end of the lease. The present value of the lease is $20,000, and annual payments of $5,411.41 are payable beginning on the date the lease is signed. The interest portion of the second payment is $1,604.75. The equipment is to be used in City Hall and was purchased from appropriated funds of the General Fund. What should be recorded in the General Fund one year from the date the lease is signed?

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

14. A five-year lease is signed by the City of Wachovia for equipment with a seven-year life. The asset will be returned to the lessor at the end of the lease. The present value of the lease is $20,000, and annual payments of $5,411.41 are payable beginning on the date the lease is signed. The interest portion of the second payment is $1,604.75. The equipment is to be used in City Hall and was purchased from appropriated funds of the General Fund. What entry should be made for the government-wide financial statements on the date the lease is signed?

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

15. A five-year lease is signed by the City of Wachovia for equipment with a seven-year life. The asset will be returned to the lessor at the end of the lease. The present value of the lease is $20,000, and annual payments of $5,411.41 are payable beginning on the date the lease is signed. The interest portion of the second payment is $1,604.75. The equipment is to be used in City Hall and was purchased from appropriated funds of the General Fund. What entry should be made for the government-wide financial statements one year from the date the lease is signed?

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

16. Which of the following is a section of the general purpose external financial statements of a state or local government? (1) Management's discussion and analysis (MD&A). (2) Required supplementary information (other than MD&A). (3) Basic financial statements and notes to financial statements.

A. 1 and 2. B. 2 and 3. C. 1 and 3. D. 3 only. E. 1, 2, and 3.

17. Which of the following must be presented in the MD&A of a government?

A. A brief discussion of the basic financial statements. B. Total assets. C. Total liabilities. D. Net assets. E. An organization chart of government officials.

18. What are the three broad sections of a state or local government's CAFR?

A. Introductory, financial, and statistical. B. Financial statements, notes to the financial statements, and component units. C. Introductory, statistical, and component units. D. Component units, financial, and statistical. E. Financial statements, notes to the financial statements, and statistical.

19. Which of the following is a financial statement of a proprietary fund?

A. Balance sheet. B. Statement of Operations. C. Statement of Changes in Cash Flows. D. Statement of Net Assets. E. Statement of Revenues, Expenditures, and Changes in Fund Balance.

20. Which criteria must be met to be considered a special purpose government? (1.) Have a separately elected governing body (2.) Be legally independent (3.) Be fiscally independent

A. 1 only. B. 1 and 2. C. 2 and 3. D. 1 and 3. E. 1, 2, and 3.

21. Which statement is false regarding the government-wide Statement of Net Assets?

A. the purpose of the Statement of Net Assets is to report the economic resources of the government as a whole. B. assets are reported excluding capital assets. C. capital assets are reported net of depreciation. D. investments are reported at fair value rather than historical cost. E. Business-type activities include Enterprise Funds.

22. Which item is not included on the government-wide Statement of Activities?

A. revenues. B. expenses. C. assets. D. operating grants. E. capital contributions.

23. Which statement is false regarding the Balance Sheet for Fund Financial Statements?

A. The Balance Sheet for Fund Financial Statements measures only current financial resources of the governmental entity. B. The Balance Sheet for Fund Financial Statements uses the modified accrual method for timing purposes. C. Capital Assets are not reported on the Balance Sheet for Fund Financial Statements. D. The Balance Sheet for Fund Financial Statements measures only long-term financial resources of the governmental entity. E. Long-term debts are not reported on the Balance Sheet for Fund Financial Statements.

24. The city operates a public pool where each person is assessed a $2 entrance fee. Which fund is most appropriate to record these revenues?

A. General Fund. B. Enterprise Fund. C. Special Revenue Fund. D. Internal Service Fund. E. Capital Projects Fund.

25. Which statement is false regarding the Statement of Revenues, Expenditures, and Changes in Fund Balance when it is included with government-wide financial statements?

A. The Statement of Revenues, Expenditures, and Changes in Fund Balance uses the modified accrual method for timing purposes. B. The Statement of Revenues, Expenditures, and Changes in Fund Balance presents revenues as either program revenues or general revenues. C. A presentation reconciles the change in governmental fund balance to the change in net assets for governmental activities. D. Other financing sources are presented on the Statement of Revenues, Expenditures, and Changes in Fund Balance. E. All non-major funds are combined and reported together.

26. A city starts a solid waste landfill during 2012. When the landfill was opened the city estimated that it would fill to capacity within 5 years and that the cost to cover the facility would be $1.5 million which will not be paid until the facility is closed. At the end of 2012, the facility was 20% full, and at the end of 2013 the facility was 45% full. On government-wide financial statements, which of the following are the appropriate amounts to present in the financial statements for 2013?

27. A city starts a solid waste landfill during 2012. When the landfill was opened the city estimated that it would fill to capacity within 5 years and that the cost to cover the facility would be $1.5 million which will not be paid until the facility is closed. At the end of 2012, the facility was 20% full, and at the end of 2013 the facility was 45% full. If the landfill is judged to be a governmental fund, what liability is reported on the fund financial statements at the end of 2013?

A. $0. B. $300,000. C. $375,000. D. $600,000. E. $675,000.

28. The employees of the City of Raymond earn vacation compensation that totals $1,500 per week. During 2013, $30,000 in vacation time was taken and the remainder is expected to be used during the latter part of next year. In the government-wide financial statements, assuming there was no beginning balance, what liability should be reported at the end of 2013?

A. $0. B. $1,500. C. $30,000. D. $48,000. E. $78,000.

29. The employees of the City of Raymond earn vacation compensation that totals $1,500 per week. During 2013, $30,000 in vacation time was taken and $48,000 is expected to be used during the latter part of next year. On fund financial statements, what liability should be reported at the end of 2013?

A. $0. B. $1,500. C. $30,000. D. $48,000. E. $78,000.

30. The Town of Conway opened a solid waste landfill in 2001 that is now filled to capacity. The city initially anticipated closure costs of $2 million. These costs were not expected to be incurred until the landfill is closed. What is the final journal entry to record these costs assuming the estimated $2 million closure costs were properly recorded and the landfill is accounted for in an enterprise fund?

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

Essay Questions

31. What three criteria must be met to identify a governmental unit as a primary government?

32. What three criteria must be met before a governmental unit can elect to not capitalize and therefore report a work of art or historical treasure as an asset?

33. What are the three broad sections of a state or local government's CAFR?

34. What information is required in the introductory section of a state or local government's CAFR?

35. What information is required in the financial section of a state or local government's CAFR?

36. What is meant by the term fiscally independent?

37. What is meant by the term legally independent?

38. How is the Statement of Cash Flows for Proprietary Funds similar and dissimilar to a Statement of Cash Flows for a for-profit business?

39. The City of Wetteville has a fiscal year ending June 30. Examine the following transactions for Wetteville: (A.) On 6/1/13, Wetteville enters into a 5-year lease on a copying machine. The lease meets the criteria of a capital lease and carries an implied interest rate of 10%. The copier has a present value of $2,300. Wetteville has to put a $300 down payment on the lease at the beginning of the lease with monthly payments thereafter of $42.49. (B.) On 6/5/13, Wetteville opens a new landfill. The engineers estimate that at the end of 10 years the landfill will be full. Estimated costs to close the landfill are currently at $3,500,000. (C.) On 6/18/13, Wetteville receives a donation of a vintage railroad steam engine. The engine will be put on display at the local town park. A fee will be charged to actually climb up into the engine. The engine has been valued at $500,000. (D.) On 6/30/13, Wetteville makes its first payment on the leased copier. The $42.49 payment includes $16.68 interest. (E.) On 6/30/13, Wetteville estimates that the landfill is 2% filled.

Required: Prepare the journal entries for the above transactions in the general fund, on the dates mentioned for each lettered item, for the purposes of preparing the fund financial statements.

40. The City of Wetteville has a fiscal year ending June 30. Examine the following transactions for Wetteville: (A.) On 6/1/13, Wetteville enters into a 5-year lease on a copying machine. The lease meets the criteria of a capital lease and carries an implied interest rate of 10%. The copier has a present value of $2,300. Wetteville has to put a $300 down payment on the lease at the beginning of the lease with monthly payments thereafter of $42.49. (B.) On 6/5/13, Wetteville opens a new landfill. The engineers estimate that at the end of 10 years the landfill will be full. Estimated costs to close the landfill are currently at $3,500,000. (C.) On 6/18/13, Wetteville receives a donation of a vintage railroad steam engine. The engine will be put on display at the local town park. A fee will be charged to actually climb up into the engine. The engine has been valued at $500,000. (D.) On 6/30/13, Wetteville makes its first payment on the leased copier. The $42.49 payment includes $16.68 interest. (E.) On 6/30/13, Wetteville estimates that the landfill is 2% filled.

Required: Prepare the journal entries for the above transactions, on the dates mentioned for each lettered item, for the purposes of preparing the government-wide financial statements.

41. The parking garage and parking lots owned by the City of Danton reported the following balances for 2013:

Required: What amount of net revenue (or expense) should be reported by the fund that was used to account for parking operations assuming the preparation of government-wide financial statements?

42. The City of Nextville operates a motor pool serving all city-owned vehicles. The motor pool bought a new garage by paying $29,000 in cash and signing a note with the local bank for $280,000. Subsequently, the motor pool performed work for the police department at a cost of $17,000, which had not yet been collected. Depreciation on the garage amounted to $20,000. The first $12,000 payment made on the note included $4,800 in interest.

Required: Prepare the journal entries for these transactions that are necessary to prepare governmentwide financial statements.

43. The City of Kamen maintains a collection of paintings of a former citizen in its City Hall building. During the year, one painting was purchased by the city for $2,000 at an auction using appropriated funds in the General Fund. Also during the year, a donation of a painting valued at $3,000 was made to the city.

Required: Prepare the journal entry/entries for the two transactions for the purposes of preparing the fund financial statements.

44. The City of Kamen maintains a collection of paintings of a former citizen in its City Hall building. During the year, one painting was purchased by the city for $2,000 at an auction using appropriated funds in the General Fund. Also during the year, a donation of a painting valued at $3,000 was made to the city and the city has appropriately decided to record this painting as an asset.

Required: Prepare the journal entry/entries for the two transactions for the purposes of preparing the government-wide financial statements.

45. The Town of Wakefield opened a solid waste landfill in 2012 that was at 20% capacity on December 31, 2012 and at 50% capacity on December 31, 2013. The city initially anticipated closure costs of $2.3 million but in 2013 revised the estimate of the closure costs to be $2.7 million. None of these costs will be incurred until the landfill is scheduled to be closed. What is the journal entry that should be recorded on December 31, 2013 for Governmentwide Financial Statements?

46. The Town of Wakefield opened a solid waste landfill in 2012 that was at 20% capacity on December 31, 2012 and at 50% capacity on December 31, 2013. The city initially anticipated closure costs of $2.3 million but in 2013 revised the estimate of the closure costs to be $2.7 million. None of these costs will be incurred until the landfill is scheduled to be closed. Assuming the landfill is recorded within the General fund, what is the journal entry that should be recorded in the Fund Financial Statements on December 31, 2013?

47. The Town of Portsmouth has at the beginning of the year a $213,000 Net Asset balance, and a $52,000 Fund Balance. The following information relates to the activities within the Town of Portsmouth for the year of 2013.

Prepare a Statement of Revenues, Expenditures and Changes in Fund Balances

48. The Town of Portsmouth has at the beginning of the year a $213,000 Net Asset balance, and a $52,000 Fund Balance. The following information relates to the activities within the Town of Portsmouth for the year of 2013.

Prepare a Statement of Net Assets

49. The Town of Portsmouth has at the beginning of the year a $213,000 Net Asset balance, and a $52,000 Fund Balance. The following information relates to the activities within the Town of Portsmouth for the year of 2013.

Prepare a Statement of Activities

Chapter 17 Accounting for State and Local Governments (Part 2) Answer Key

Multiple Choice Questions

For government-wide financial statements, what account is credited when a piece of equipment is leased on a capital lease?

A. Equipment-Capital Lease B. Encumbrances-Long Term C. Encumbrances-Lease Obligations D. Capital Lease Obligation E. The lease is not recorded.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 1 Easy Learning Objective: 17-01 Account for lease contracts where the state or local government finds itself as either lessor or lessee.

For fund financial statements, what account is credited when a piece of equipment is leased on a capital lease?

A. Equipment-Capital Lease. B. Encumbrances-Long Term. C. Encumbrances-Lease Obligations. D. Capital Lease Obligation. E. Other Financing Sources-Capital Lease.

Jones College, a public institution of higher education, must prepare financial statements

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-09 Understand the presentation of financial statements for a public college or university.

For the purpose of government-wide financial statements, the cost of cleaning up a government-owned landfill and closing the landfill

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-02 Recognize the liability caused by the eventual closure and postclosure costs of operating a solid waste landfill as well as for the compensated absences earned by government employees.

A method of depreciation for infrastructure assets that allows the expensing of all maintenance costs each year instead of computing depreciation is called

A. Government-wide depreciation. B. Proprietary depreciation. C. GASB depreciation. D. Modified approach. E. Alternative depreciation.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy

Learning Objective: 17-05 Explain the reporting and possible depreciation of infrastructure assets.

Drye Township has received a donation of a rare painting worth $1,000,000. For Drye's government-wide financial statements, three criteria must be met before Drye can opt not to recognize the painting as an asset. Which of the following is not one of the three criteria? (1.) The painting is held for public exhibition, education, or research in furtherance of public service, rather than financial gain. (2.) The painting is scheduled to be sold immediately at auction. (3.) The painting is protected, kept unencumbered, cared for, and preserved.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-04 Record the donation and acquisition of works of art and historical treasures.

GASB Codification Section 2200.106-107 makes which of the following statements regarding Management's Discussion and Analysis?

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-06 Understand the composition of a state or local government's comprehensive annual financial report (CAFR).

Which one of the following is a criterion for identifying a primary government?

A. it has an appointed board of directors. B. it is fiscally dependent. C. it is a local government. D. it has a separately elected governing body. E. it must prepare financial statements.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-07 Explain the makeup of a primary government and its relationship to component units.

A local government's basic financial statements would include a statement of cash flows for all

A. proprietary fund types. B. governmental fund types. C. fund types. D. fiduciary fund types. E. A statement of cash flows is not required for any fund types.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-08 Describe the physical structure of a complete set of government-wide financial statements and a complete set of fund financial statements.

10.

According to the GASB (Governmental Accounting Standards Board), which one of the following is not a criterion for determining whether a government is legally separate?

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy

Learning Objective: 17-07 Explain the makeup of a primary government and its relationship to component units.

11.

Which of the following is not a criterion of a capital lease?

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-01 Account for lease contracts where the state or local government finds itself as either lessor or lessee.

12.

A five-year lease is signed by the City of Wachovia for equipment with a seven-year life. The asset will be returned to the lessor at the end of the lease. The present value of the lease is $20,000, and annual payments of $5,411.41 are payable beginning on the date the lease is signed. The interest portion of the second payment is $1,604.75. The equipment is to be used in City Hall and was purchased from appropriated funds of the General Fund. What should be recorded in the General Fund on the date the lease is signed?

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

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Analyze Difficulty: 2 Medium Learning Objective: 17-01 Account for lease contracts where the state or local government finds itself as either lessor or lessee.

13.

A. Option A B. Option B C. Option C D. Option D E. Option E Payment $5,411.41 - Interest Expenditure $1,604.75 = Lease Principle $3,806.66

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 17-01 Account for lease contracts where the state or local government finds itself as either lessor or lessee.

14.

A five-year lease is signed by the City of Wachovia for equipment with a seven-year life. The asset will be returned to the lessor at the end of the lease. The present value of the lease is $20,000, and annual payments of $5,411.41 are payable beginning on the date the lease is signed. The interest portion of the second payment is $1,604.75. The equipment is to be used in City Hall and was purchased from appropriated funds of the General Fund. What entry should be made for the government-wide financial statements on the date the lease is signed?

A. Option A B. Option B C. Option C D. Option D E. Option E Equipment Cost $20,000 - Cash Payment $5,411.41 = Capital Lease Obligation $14,588.59

15.

A five-year lease is signed by the City of Wachovia for equipment with a seven-year life. The asset will be returned to the lessor at the end of the lease. The present value of the lease is $20,000, and annual payments of $5,411.41 are payable beginning on the date the lease is signed. The interest portion of the second payment is $1,604.75. The equipment is to be used in City Hall and was purchased from appropriated funds of the General Fund. What entry should be made for the government-wide financial statements one year from the date the lease is signed?

A. Option A B. Option B C. Option C D. Option D E. Option E Payment $5,411.41 - Interest Expense $1,604.75 = Capital Lease Obligation $3,806.66

16.

Which of the following is a section of the general purpose external financial statements of a state or local government? (1) Management's discussion and analysis (MD&A). (2) Required supplementary information (other than MD&A). (3) Basic financial statements and notes to financial statements.

A. 1 and 2. B. 2 and 3. C. 1 and 3. D. 3 only. E. 1, 2, and 3.

17.

Which of the following must be presented in the MD&A of a government?

A. A brief discussion of the basic financial statements. B. Total assets. C. Total liabilities. D. Net assets. E. An organization chart of government officials.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation

Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-06 Understand the composition of a state or local government's comprehensive annual financial report (CAFR).

18.

What are the three broad sections of a state or local government's CAFR?

19.

Which of the following is a financial statement of a proprietary fund?

A. Balance sheet. B. Statement of Operations. C. Statement of Changes in Cash Flows. D. Statement of Net Assets. E. Statement of Revenues, Expenditures, and Changes in Fund Balance.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember

Difficulty: 1 Easy Learning Objective: 17-08 Describe the physical structure of a complete set of government-wide financial statements and a complete set of fund financial statements.

20.

Which criteria must be met to be considered a special purpose government? (1.) Have a separately elected governing body (2.) Be legally independent (3.) Be fiscally independent

A. 1 only. B. 1 and 2. C. 2 and 3. D. 1 and 3. E. 1, 2, and 3.

21.

Which statement is false regarding the government-wide Statement of Net Assets?

AACSB: Reflective thinking

AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-08 Describe the physical structure of a complete set of government-wide financial statements and a complete set of fund financial statements.

22.

Which item is not included on the government-wide Statement of Activities?

A. revenues. B. expenses. C. assets. D. operating grants. E. capital contributions.

23.

Which statement is false regarding the Balance Sheet for Fund Financial Statements?

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-08 Describe the physical structure of a complete set of government-wide financial statements and a complete set of fund financial statements.

24.

The city operates a public pool where each person is assessed a $2 entrance fee. Which fund is most appropriate to record these revenues?

A. General Fund. B. Enterprise Fund. C. Special Revenue Fund. D. Internal Service Fund. E. Capital Projects Fund.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand

Difficulty: 1 Easy Learning Objective: 17-08 Describe the physical structure of a complete set of government-wide financial statements and a complete set of fund financial statements.

25.

Which statement is false regarding the Statement of Revenues, Expenditures, and Changes in Fund Balance when it is included with government-wide financial statements?

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 17-08 Describe the physical structure of a complete set of government-wide financial statements and a complete set of fund financial statements.

26.

A city starts a solid waste landfill during 2012. When the landfill was opened the city estimated that it would fill to capacity within 5 years and that the cost to cover the facility would be $1.5 million which will not be paid until the facility is closed. At the end of 2012, the facility was 20% full, and at the end of 2013 the facility was 45% full. On governmentwide financial statements, which of the following are the appropriate amounts to present in the financial statements for 2013?

A. Both expense and liability will be zero. B. Expense will be $300,000 and liability will be $600,000. C. Expense will be $600,000 and liability will be $600,000. D. Expense will be $675,000 and liability will be $600,000. E. Expense will be $375,000 and liability will be $675,000. $1,500,000 × 20% = $300,000 Expense & Liability for 2012 $1,500,000 × 45% = $675,000 Liability at Year End of 2013 $675,000 Liability at Year-End of 2013 - $300,000 Liability at Year-End 2012 = $375,000 Expense for 2013

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 17-02 Recognize the liability caused by the eventual closure and postclosure costs of operating a solid waste landfill as well as for the compensated absences earned by government employees.

27.

A city starts a solid waste landfill during 2012. When the landfill was opened the city estimated that it would fill to capacity within 5 years and that the cost to cover the facility would be $1.5 million which will not be paid until the facility is closed. At the end of 2012, the facility was 20% full, and at the end of 2013 the facility was 45% full. If the landfill is judged to be a governmental fund, what liability is reported on the fund financial statements at the end of 2013?

A. $0. B. $300,000. C. $375,000. D. $600,000. E. $675,000. As a Governmental Fund, No Liability is Recorded, Only Expenditures.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 17-02 Recognize the liability caused by the eventual closure and postclosure costs of operating a solid waste landfill as well as for the compensated absences earned by government employees.

28.

The employees of the City of Raymond earn vacation compensation that totals $1,500 per week. During 2013, $30,000 in vacation time was taken and the remainder is expected to be used during the latter part of next year. In the government-wide financial statements, assuming there was no beginning balance, what liability should be reported at the end of 2013?

A. $0. B. $1,500. C. $30,000. D. $48,000. E. $78,000. Beginning Balance $0 + Accrued Liability $78,000 - Vacation Used $30,000 = Ending Liability Balance $48,000

29.

The employees of the City of Raymond earn vacation compensation that totals $1,500 per week. During 2013, $30,000 in vacation time was taken and $48,000 is expected to be used during the latter part of next year. On fund financial statements, what liability should be reported at the end of 2013?

A. $0. B. $1,500. C. $30,000. D. $48,000. E. $78,000. As a Governmental Fund, No Liability is Recorded in 2013, Expenditures are Recorded as Vacation Time is Taken.

30.

The Town of Conway opened a solid waste landfill in 2001 that is now filled to capacity. The city initially anticipated closure costs of $2 million. These costs were not expected to be incurred until the landfill is closed. What is the final journal entry to record these costs assuming the estimated $2 million closure costs were properly recorded and the landfill is accounted for in an enterprise fund?

A. Option A B. Option B C. Option C D. Option D E. Option E Previously Accrued Closure Liability Balance of $2,000,000 is satisfied by $2,000,000 Cash Payment at Closure of Facility.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 17-02 Recognize the liability caused by the eventual closure and postclosure costs of operating a solid waste landfill as well as for the compensated absences earned by government employees.

Essay Questions

31.

What three criteria must be met to identify a governmental unit as a primary government?

To be considered a primary government, the unit must meet the following 3 criteria: (1.) It must have a separately elected governing body. (2.) It must be legally independent which can be demonstrated by having corporate powers such as the right to sue and be sued in its own name as well as the right to buy, sell, and lease property in its own name. (3.) It must be fiscally independent of other state and local governments.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-07 Explain the makeup of a primary government and its relationship to component units.

32.

What three criteria must be met before a governmental unit can elect to not capitalize and therefore report a work of art or historical treasure as an asset?

Before a governmental unit can elect to not record a work of art or a historical treasure as an asset, three criteria must be met: (1.) It must be held for public exhibition, education, or research in furtherance of public service, rather than financial gain. (2.) It must be protected, kept unencumbered, cared for, and preserved. (3.) It must be subject to an organizational policy that requires the proceeds from sales of collection items to be used to acquire other items for collections.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-04 Record the donation and acquisition of works of art and historical treasures.

33.

What are the three broad sections of a state or local government's CAFR?

The introductory section, the financial section, and the statistical section.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Reporting Blooms: Remember Difficulty: 1 Easy Learning Objective: 17-06 Understand the composition of a state or local government's comprehensive annual financial report (CAFR).

34.

What information is required in the introductory section of a state or local government's CAFR?

A letter of transmittal from appropriate government officials, an organization chart, and a list of principal officers.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Reporting Blooms: Remember Difficulty: 2 Medium Learning Objective: 17-06 Understand the composition of a state or local government's comprehensive annual financial report (CAFR).

35.

What information is required in the financial section of a state or local government's CAFR?

The financial section of a CAFR must include the auditor's report, Management's Discussion and Analysis (MD&A), the basic financial statements, and Required Supplementary Information other than MD&A (RSI).

36.

What is meant by the term fiscally independent?

Fiscally independent means that the leadership of a governing body is able to determine the activity's budget, levy taxes, set rates or issue debt without having to seek the approval of an outside party.

37.

What is meant by the term legally independent?

Legal independence is demonstrated by having corporate powers such as the right to sue and be sued, the right to buy, sell and lease property in its own name.

38.

How is the Statement of Cash Flows for Proprietary Funds similar and dissimilar to a Statement of Cash Flows for a for-profit business?

The statement of cash flows for a proprietary fund is very similar to the statement of cash flows for a for-profit business. Two sections are similar including the cash flows from operating activities and cash flows from investing activities. The cash flows from financing activities are reported differently than for profit businesses and are split into two sections when reporting for a Proprietary Fund. These two sections specify the cash flows from noncapital financing and cash flows from capital and related financing activities. The statement of cash flows for a proprietary fund is different from the cash flow statement for a for-profit business in that GASB requires the direct method of presenting cash flows from operating activities, with a reconciliation to net operating income. At this time, GAAP for the cash flow statement for a for-profit business gives the option of presenting cash flows from operating activities using either the direct or the indirect method.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Blooms: Analyze Difficulty: 3 Hard Learning Objective: 17-08 Describe the physical structure of a complete set of government-wide financial statements and a complete set of fund financial statements.

39.

The City of Wetteville has a fiscal year ending June 30. Examine the following transactions for Wetteville: (A.) On 6/1/13, Wetteville enters into a 5-year lease on a copying machine. The lease meets the criteria of a capital lease and carries an implied interest rate of 10%. The copier has a present value of $2,300. Wetteville has to put a $300 down payment on the lease at the beginning of the lease with monthly payments thereafter of $42.49. (B.) On 6/5/13, Wetteville opens a new landfill. The engineers estimate that at the end of 10 years the landfill will be full. Estimated costs to close the landfill are currently at $3,500,000. (C.) On 6/18/13, Wetteville receives a donation of a vintage railroad steam engine. The engine will be put on display at the local town park. A fee will be charged to actually climb up into the engine. The engine has been valued at $500,000. (D.) On 6/30/13, Wetteville makes its first payment on the leased copier. The $42.49 payment includes $16.68 interest. (E.) On 6/30/13, Wetteville estimates that the landfill is 2% filled.

Required: Prepare the journal entries for the above transactions in the general fund, on the dates mentioned for each lettered item, for the purposes of preparing the fund financial statements.

Entries for Fund Financial Statements

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 17-01 Account for lease contracts where the state or local government finds itself as either lessor or lessee. Learning Objective: 17-02 Recognize the liability caused by the eventual closure and postclosure costs of operating a solid waste landfill as well as for the compensated absences earned by government employees. Learning Objective: 17-04 Record the donation and acquisition of works of art and historical treasures.

40.

Required: Prepare the journal entries for the above transactions, on the dates mentioned for each lettered item, for the purposes of preparing the government-wide financial statements.

41.

The parking garage and parking lots owned by the City of Danton reported the following balances for 2013:

Required: What amount of net revenue (or expense) should be reported by the fund that was used to account for parking operations assuming the preparation of government-wide financial statements?

Danton's net revenue coming from the proprietary fund for parking garages and parking lots is determined as follows:

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 17-08 Describe the physical structure of a complete set of government-wide financial statements and a complete set of fund financial statements.

42.

The City of Nextville operates a motor pool serving all city-owned vehicles. The motor pool bought a new garage by paying $29,000 in cash and signing a note with the local bank for $280,000. Subsequently, the motor pool performed work for the police department at a cost of $17,000, which had not yet been collected. Depreciation on the garage amounted to $20,000. The first $12,000 payment made on the note included $4,800 in interest.

Required: Prepare the journal entries for these transactions that are necessary to prepare government-wide financial statements.

Entries for government-wide financial statements

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply

Difficulty: 2 Medium Learning Objective: 17-08 Describe the physical structure of a complete set of government-wide financial statements and a complete set of fund financial statements.

43.

The City of Kamen maintains a collection of paintings of a former citizen in its City Hall building. During the year, one painting was purchased by the city for $2,000 at an auction using appropriated funds in the General Fund. Also during the year, a donation of a painting valued at $3,000 was made to the city.

Required: Prepare the journal entry/entries for the two transactions for the purposes of preparing the fund financial statements.

No entry in General Fund for second transaction - does not represent a change in current financial resources.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 17-04 Record the donation and acquisition of works of art and historical treasures.

44.

Required: Prepare the journal entry/entries for the two transactions for the purposes of preparing the government-wide financial statements.

Government-wide Financial Statements - Government Activities:

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 17-04 Record the donation and acquisition of works of art and historical treasures.

45.

The Town of Wakefield opened a solid waste landfill in 2012 that was at 20% capacity on December 31, 2012 and at 50% capacity on December 31, 2013. The city initially anticipated closure costs of $2.3 million but in 2013 revised the estimate of the closure costs to be $2.7 million. None of these costs will be incurred until the landfill is scheduled to be closed. What is the journal entry that should be recorded on December 31, 2013 for Governmentwide Financial Statements?

46.

The Town of Wakefield opened a solid waste landfill in 2012 that was at 20% capacity on December 31, 2012 and at 50% capacity on December 31, 2013. The city initially anticipated closure costs of $2.3 million but in 2013 revised the estimate of the closure costs to be $2.7 million. None of these costs will be incurred until the landfill is scheduled to be closed. Assuming the landfill is recorded within the General fund, what is the journal entry that should be recorded in the Fund Financial Statements on December 31, 2013?

There is nothing recognized at the end of 2013 because there is not a claim to any current financial resources.

AACSB: Analytic

AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 17-02 Recognize the liability caused by the eventual closure and postclosure costs of operating a solid waste landfill as well as for the compensated absences earned by government employees.

47.

The Town of Portsmouth has at the beginning of the year a $213,000 Net Asset balance, and a $52,000 Fund Balance. The following information relates to the activities within the Town of Portsmouth for the year of 2013.

Prepare a Statement of Revenues, Expenditures and Changes in Fund Balances

AACSB: Analytic AICPA BB: Industry AICPA FN: Reporting Blooms: Apply Difficulty: 3 Hard Learning Objective: 17-08 Describe the physical structure of a complete set of government-wide financial statements and a complete set of fund financial statements.

48.

Prepare a Statement of Net Assets

49.

Prepare a Statement of Activities

a complete set of fund financial statements.

Chapter 18 Accounting and Reporting for Private Not-for-Profit Entities

Multiple Choice Questions

1. Reciprocal transfers where both parties give and receive something of value are

A. contributed services. B. unconditional promises to give. C. endowment transactions. D. exchange transactions. E. required contributions.

2. Which of the following types of health care organizations follow FASB Accounting Standards Codification for GAAP?

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

3. Which of the following types of health care organizations recognize depreciation expense?

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

4. In accruing patient charges for the current month, which one of the following accounts should a hospital credit?

A. Accounts Payable. B. Deferred Revenue. C. Unearned Revenue. D. Patient Service Revenues. E. Accounts Receivable.

5. Which account would be credited in recording a gift of medicine to a nursing home from an outside party?

A. Non-Operating Gain-Special Revenues. B. Contractual Adjustments. C. Patient Service Revenues. D. Drugs and Medicines. E. Non-Operating Revenues-Contribution.

6. Which one of the following financial statements is not required by GAAP regarding a voluntary health and welfare organization?

A. Statement of Financial Position. B. Statement of Functional Expense. C. Statement of Activities and Changes in Net Assets. D. Statement of Cash Flows. E. Statement of Operations.

7. Unconditional transfers of cash or other resources to an entity in a voluntary nonreciprocal transaction is the GAAP definition for

A. miscellaneous revenues. B. contributions. C. unconditional promises to give. D. exchange transactions. E. pledges.

8. Which one of the following is a voluntary health and welfare organization?

A. Charity raising money for underprivileged children. B. Nursing home. C. Clinic. D. Hospital. E. Preschool.

9. On a statement of functional expenses for a voluntary health and welfare organization, how are expenses classified?

A. health services expenses and operating expenses. B. program services expenses and administrative services expenses. C. program services expenses and supporting services expenses. D. operating expenses and supporting services expenses. E. operating expenses and administrative expenses.

10. Which of the following is not a question individuals ask of not-for-profit organizations in considering whether to make a contribution?

A. Will donated funds be used effectively by the organization to accomplish its purpose? B. Will the donated funds be wasted? C. How much should this organization receive? D. Is this organization profitable? E. Is contributing to this charity a wise allocation of resources?

11. Historically, what was the pattern of reporting of not-for-profit organizations? (1) Patterned after for-profit accounting (2) Emphasis on separate fund types (3) Disregard for the entire entity

A. 1 only. B. 2 only. C. 1 and 2 only. D. 1, 2 and 3. E. 2 and 3 only.

12. Which of the following statements is required for voluntary health and welfare organizations, but not for other not-for-profit organizations?

A. Statement of Activities and Changes in Net Assets. B. Statement of Functional Expenses. C. Statement of Financial Position. D. Statement of Cash Flows. E. Statement of Budget to Actual.

13. What are the three categories of net assets required by GAAP in reporting a not-for-profit organization?

A. Unrestricted, Temporarily Restricted, and Permanently Restricted. B. Unrestricted, Restricted, and Fund Balance. C. Restricted, Permanently Restricted, and Fund Balance. D. Unrestricted, Temporarily Restricted, and Fund Balance. E. None of these.

14. What is the basis of accounting used in reporting the Statement of Activities and Changes in Net Assets?

A. Cash basis. B. Modified accrual basis. C. Accrual basis. D. Either cash basis or accrual basis, depending on the type of revenue. E. Either modified accrual basis or accrual basis, depending on the type of revenue.

15. When are unconditional promises to give recognized as revenues?

A. In the period the promise is received. B. In the period the promise is collected. C. In the period in which the conditions on which they depend are substantially met. D. In the period in which the conditions on which they depend have begun to be met. E. Unconditional promises from potential donors are not revenues.

16. The following gifts are received in Year One by a not-for-profit organization: I. $2,000 specified by the donor to be used to pay salaries. II. $10,000 for new conference room furniture. III. $5,000 to be held for one year before being expended. The salaries are paid in Year Two and the conference room furniture is purchased in Year One. How much should be shown as increases as Temporarily Restricted Net Assets in Year One?

A. $2,000 B. $7,000 C. $12,000 D. $15,000 E. $17,000

17. The following gifts are received in Year One by a not-for-profit organization: I. $2,000 specified by the donor to be used to pay salaries. II. $10,000 for new conference room furniture. III. $5,000 to be held for one year before being expended. The salaries are paid in Year Two and the conference room furniture is purchased in Year One. How much should be reclassified on the Statement of Activities in Year Two from the Temporarily Restricted column to the Unrestricted column?

A. $2,000. B. $5,000. C. $7,000. D. $10,000. E. $12,000.

18. How are investments in equity securities with readily determinable market values and their related unrealized gains and losses reported by a not-for-profit organization?

A. Lower of cost or market, with unrealized losses in the Statement of Activities. B. Fair value, with unrealized gains and losses in the Statement of Activities. C. Lower of cost or market, with unrealized losses in Temporarily Restricted Net Assets. D. Cost, with unrealized gains and losses in the Statement of Activities.

19. Which statement below is not correct?

A. The accounting period in which pledged revenues are recognized is dependent on donor specifications. B. The permanently restricted section of a nonprofit organization's net assets is set aside by donor restrictions. C. A contributed asset is recognized as revenue by a nonprofit organization. D. Depreciation expense is not recognized by nonprofit organizations. E. Nonprofit organizations issue a statement of activities.

20. A gift to a not-for-profit school that is not restricted by the donor is credited to:

A. Fund Balance. B. Deferred Revenues. C. Contribution Revenues. D. Non-Operating Revenues. E. Encumbrances.

21. Which entry would be the correct entry on the donor's books when the donor relinquishes control of an asset that it contributes to a not-for-profit organization?

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

22. Which entry would be the correct entry on the donor's books when the donor retains control of an asset that it contributes to a not-for-profit organization?

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

23. Which entry would be the correct entry on the not-for-profit organization's books to record a donor's gift when the money is simply passing through the not-for-profit organization and creates no direct benefit, and when control of the assets has been relinquished by the donor?

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

24. Which entry would be the correct entry on the not-for-profit organization's books to record a donor's gift when power over the assets has been retained by the donor?

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

25. Which entry would be the correct entry to record pledges of $100,000 to a public television fundraiser? The public television organization estimates that 5% of the funds will be uncollectible.

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

26. Which entry would be the correct entry to record that a not-for-profit organization collected $80,000 of the amounts pledged and wrote off $3,000 of the amounts pledged as amounts uncollectible?

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

27. In not-for-profit accounting, an acquisition occurs when one not-for-profit organization obtains:

A. Significant influence over another not-for-profit organization. B. The direct ability to determine the direction of management of another not-for-profit organization. C. The indirect ability to direct the policies of management of another not-for-profit organization. D. Control over another not-for-profit organization. E. None of these. An acquisition can only occur for profit-oriented organizations.

28. If the total acquisition value of an acquired not-for-profit organization is greater than the fair value of all identifiable net assets of the organization, and that organization's revenues are not earned by dues or other types of earned revenues, then the excess of acquisition value over identifiable net assets is immediately reported:

A. As goodwill on the consolidated balance sheet. B. As a pro-rata increase to the identifiable assets and liabilities acquired. C. As a direct reduction in unrestricted net assets on the balance sheet. D. As a reduction in unrestricted net assets on the statement of activities. E. As an increase in other assets on the balance sheet.

29. When an acquisition occurs in not-for-profit accounting, recognition of goodwill depends on:

A. Whether control has been achieved by the acquiring not-for-profit entity. B. Whether the acquired not-for-profit entity has the ability to generate significant amounts of earned revenue or whether it generates mostly contribution and investment revenue in the future. C. Whether the acquired not-for-profit entity has the ability to generate significant amounts of both earned revenues and contribution revenues in the future. D. Whether the acquired not-for-profit entity has a history of generating significant revenues of any type. E. None of these. Goodwill can only be recognized in an acquisition of a for-profit entity.

30. Which of the following is not true about a merger of two not-for-profit organizations?

A. The two organizations will continue to legally exist but there will be a new governing board. B. Neither organization is considered to be acquired. C. Identifiable assets and liabilities are not adjusted to their fair values at the date of the merger. D. The two entities will together form an entirely new organization with a new governing board. E. There will be no acquisition value or goodwill determination.

31. Which entry would be the correct entry to record that a hospital has provided patient services for $200,000, of which 25% will be billed to a third party?

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

32. What is the appropriate account to debit when reducing net patient service revenue as a result of arrangements with third party payors?

A. Contractual Adjustments. B. Allowance for uncollectible and reduced accounts. C. Patient Service Revenues. D. Account Receivable-Patients. E. Accounts Receivable-Third Party.

33. What is the appropriate account to credit when estimating a portion of health care organization receivables that will prove to be uncollectible?

A. Bad Debt Expense. B. Allowance for Uncollectible Accounts. C. Patient Service Revenues. D. Accounts Receivable. E. Contractual Adjustments.

Essay Questions

34. Give several examples of voluntary health and welfare organizations.

35. What are the objectives of accounting for a not-for-profit organization?

36. What term is used by voluntary health and welfare organizations for contributions?

37. What two classifications are used for the expenses incurred by voluntary health and welfare organizations?

38. What is the main source of financial support for most voluntary health and welfare organizations?

39. What criteria must be met before a voluntary health and welfare organization can recognize donated services as a means of support?

40. For a voluntary health and welfare organization, what are supporting services expenses?

41. What financial statements would normally be prepared by a voluntary health and welfare organization?

42. What are third party payors? Why are their interests important in accounting for health care entities?

43. How does a voluntary health and welfare organization account for donated goods and cash contributed for operating purposes? What types of revenues are recognized by voluntary health and welfare organizations?

44. For a not-for-profit organization, when is recognition of contributions of artworks and historical treasures not required?

45. How does a recipient not-for-profit organization record the receipt of a gift that will be transferred without restriction to another charitable organization? What if the donor retains the right to revoke or redirect the gift?

46. For not-for-profit organizations, what is the difference in identification of "control" between a merger and an acquisition?

47. For May 2013, Carlington Hospital's charges for patient services were $608,000, of which 80% was billed to third-party payors.

Required: Prepare the journal entry to accrue patient charges for the month.

48. For the month of December 2013, patient charges at Northfield Hospital (a not-for-profit hospital) were $2,720,000. Third-party payors were billed $1,800,000. Prepare the necessary journal entry to record the revenue and receivables.

49. For the month of December 2013, patient charges at Northfield Hospital (a not-for-profit hospital) were $2,720,000. Third-party payors were billed $1,800,000. $520,000 of the $2,720,000 was expected to be uncollectible.

Required: Prepare the necessary journal entry to record the anticipated uncollectible amount.

50. For the month of December 2013, patient charges at Northfield Hospital (a not-for-profit hospital) were $2,720,000. Third-party payors were billed $1,800,000. In this month, there were several patients that had no health insurance and due to their low income level, the hospital decided that $85,000 of receivables would not be collectible.

Required: Prepare the necessary journal entry to reflect the decision to consider the $85,000 as charity care.

51. For the month of December 2013, patient charges at Northfield Hospital (a not-for-profit hospital) were $2,720,000. Third-party payors were billed $1,800,000. The hospital estimated that contractual adjustments would reduce the amount collected from third-party payors to $1,710,000.

Required: Prepare the necessary journal entry to record the contractual adjustments.

52. Dura Foundation, a voluntary health and welfare organization dedicated to finding medical cures and supported by contributions from the general public, included the following costs in its Statement of Functional Expenses for the year ended December 31, 2013:

What should Dura Foundation report as program service expenses?

53. Dura Foundation, a voluntary health and welfare organization dedicated to finding medical cures and supported by contributions from the general public, included the following costs in its Statement of Functional Expenses for the year ended December 31, 2013:

What should Dura Foundation report as supporting service expenses?

54. During 2013, the Garfield Humane Society, a voluntary health and welfare organization, received cash donations of $892,000 and membership dues of $62,000. A member of the Humane Society donated services valued at $8,000 that would otherwise have been performed by a paid staff member. A pet food manufacturer donated dog food valued at $16,400. The Humane Society received a gift of $140,000, to be used in building a new animal shelter. Also during 2013, investments held by the Humane Society earned interest of $2,000.

Required: Prepare a schedule showing the amount that the Garfield Humane Society should have recorded for public support for 2013.

55. The Yelton Center is a voluntary health and welfare organization. During 2012, unrestricted pledges of $780,000 were received by the center, sixty percent of which were payable in 2012, with the remainder payable in 2013 (for use in 2013). Officials estimated that fifteen percent of these pledges will be uncollectible.

Required: How much should the Yelton Center report as revenue for 2012?

56. A local social worker, earning $12 per hour working for the state government, contributed 600 hours of time at no charge to the Yelton Center, a voluntary health and welfare organization. If not for these donated services, an additional staff person would have been hired by the organization.

Required: How should the Yelton Center record the contributed services?

57. A not-for-profit organization receives a computer as a donation (valued at $2,000). Prepare the journal entry for the transaction.

58. A not-for-profit organization (Charity A) raises money for other charitable organizations. Charity A receives $10,000 to distribute to Charity B. Assume there are no donor rights to revoke or redirect the gift. Prepare the journal entries for Charity A when the gift is received, and for Charity A and Charity B when the gift is distributed.

59. A not-for-profit organization (Charity A) raises money for other charitable organizations. Charity A receives $10,000 to distribute to Charity B. Assume that the donor retains the right to revoke or redirect the gift. Prepare the journal entries for Charity A and Charity B. The entries should be for the gift when received by Charity A, and when the gift is distributed for Charity B.

60. A not-for-profit organization provides the following information for the year:

Required: Prepare the journal entries for these transactions.

61. Wakefield Home is a private not-for-profit healthcare organization offering services for a fee. In the first quarter of 2013, Wakefield Home rendered services of $300,000 to patients. Of this amount 75% will be paid by patients, and $25,000 will be adjusted based on estimated insurance agreements. The remaining amount is to be paid by third party insurance providers. Record the journal entries that reflect all of this information.

62. Wakefield Home is a private not-for-profit healthcare organization offering services for a fee. In the first quarter of 2013, Wakefield Home rendered services of $300,000 to patients. Of this amount 75% will be paid by patients, and $25,000 will be adjusted based on estimated insurance agreements. The remaining amount is to be paid by third party insurance providers. A local business donated medical supplies to Wakefield with a value of $40,000. Prepare the journal entry for the receipt of these supplies.

63. Wakefield Home is a private not-for-profit healthcare organization offering services for a fee. In the first quarter of 2013, Wakefield Home rendered services of $300,000 to patients. Of this amount 75% will be paid by patients, and $25,000 will be adjusted based on estimated insurance agreements. The remaining amount is to be paid by third party insurance providers. The Home incurred the following liabilities: $110,000 salaries, $30,000 medical equipment, $10,000 utilities expense. Prepare the journal entries for these transactions.

64. Wakefield Home is a private not-for-profit healthcare organization offering services for a fee. The home has an endowment and the income may be used to sponsor families that are unable to pay for services but the principal must be preserved. In addition, various fundraising activities take place during the year. When the Home held its annual Holiday fund raiser, pledges of $50,000 were received. The administration expected 5% to be uncollectible. In addition, income of $10,000 was received from the endowment to sponsor families. Prepare the journal entries for these transactions.

Chapter 18 Accounting and Reporting for Private Not-for-Profit Entities Answer Key

Multiple Choice Questions

Reciprocal transfers where both parties give and receive something of value are

A. contributed services. B. unconditional promises to give. C. endowment transactions. D. exchange transactions. E. required contributions.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-04 Report the various types of contributions that a private not-for-profit organization can receive.

Which of the following types of health care organizations follow FASB Accounting Standards Codification for GAAP?

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

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Research Blooms: Remember Difficulty: 2 Medium Learning Objective: 18-01 Understand the basic composition of the financial statements produced for a private not-forprofit organization.

Which of the following types of health care organizations recognize depreciation expense?

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

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 18-02 Determine the proper classification for assets that are unrestricted; temporarily restricted; or permanently restricted and explain the method of reporting these categories.

In accruing patient charges for the current month, which one of the following accounts should a hospital credit?

A. Accounts Payable. B. Deferred Revenue. C. Unearned Revenue. D. Patient Service Revenues. E. Accounts Receivable.

AACSB: Analytic

AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 1 Easy Learning Objective: 18-07 Describe the unique aspects of accounting for health care organizations.

Which account would be credited in recording a gift of medicine to a nursing home from an outside party?

A. Non-Operating Gain-Special Revenues. B. Contractual Adjustments. C. Patient Service Revenues. D. Drugs and Medicines. E. Non-Operating Revenues-Contribution.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 18-02 Determine the proper classification for assets that are unrestricted; temporarily restricted; or permanently restricted and explain the method of reporting these categories. Learning Objective: 18-04 Report the various types of contributions that a private not-for-profit organization can receive.

Which one of the following financial statements is not required by GAAP regarding a voluntary health and welfare organization?

A. Statement of Financial Position. B. Statement of Functional Expense. C. Statement of Activities and Changes in Net Assets. D. Statement of Cash Flows. E. Statement of Operations.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-02 Determine the proper classification for assets that are unrestricted; temporarily restricted; or permanently restricted and explain the method of reporting these categories.

Unconditional transfers of cash or other resources to an entity in a voluntary nonreciprocal transaction is the GAAP definition for

A. miscellaneous revenues. B. contributions. C. unconditional promises to give. D. exchange transactions. E. pledges.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 18-04 Report the various types of contributions that a private not-for-profit organization can receive.

Which one of the following is a voluntary health and welfare organization?

A. Charity raising money for underprivileged children. B. Nursing home. C. Clinic. D. Hospital. E. Preschool.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 18-02 Determine the proper classification for assets that are unrestricted; temporarily restricted; or permanently restricted and explain the method of reporting these categories.

On a statement of functional expenses for a voluntary health and welfare organization, how are expenses classified?

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-03 Explain the purpose and the construction of a statement of functional expenses.

10.

Which of the following is not a question individuals ask of not-for-profit organizations in considering whether to make a contribution?

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 18-02 Determine the proper classification for assets that are unrestricted; temporarily restricted; or permanently restricted and explain the method of reporting these categories.

11.

Historically, what was the pattern of reporting of not-for-profit organizations? (1) Patterned after for-profit accounting (2) Emphasis on separate fund types (3) Disregard for the entire entity

A. 1 only. B. 2 only. C. 1 and 2 only. D. 1, 2 and 3. E. 2 and 3 only.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation

Blooms: Remember Difficulty: 2 Medium Learning Objective: 18-01 Understand the basic composition of the financial statements produced for a private not-forprofit organization.

12.

Which of the following statements is required for voluntary health and welfare organizations, but not for other not-for-profit organizations?

A. Statement of Activities and Changes in Net Assets. B. Statement of Functional Expenses. C. Statement of Financial Position. D. Statement of Cash Flows. E. Statement of Budget to Actual.

13.

What are the three categories of net assets required by GAAP in reporting a not-for-profit organization?

AACSB: Reflective thinking AICPA BB: Industry

AICPA FN: Reporting Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-01 Understand the basic composition of the financial statements produced for a private not-forprofit organization.

14.

What is the basis of accounting used in reporting the Statement of Activities and Changes in Net Assets?

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-01 Understand the basic composition of the financial statements produced for a private not-forprofit organization.

15.

When are unconditional promises to give recognized as revenues?

AACSB: Reflective thinking AICPA BB: Industry 18-42 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 18-04 Report the various types of contributions that a private not-for-profit organization can receive.

16.

The following gifts are received in Year One by a not-for-profit organization: I. $2,000 specified by the donor to be used to pay salaries. II. $10,000 for new conference room furniture. III. $5,000 to be held for one year before being expended. The salaries are paid in Year Two and the conference room furniture is purchased in Year One. How much should be shown as increases as Temporarily Restricted Net Assets in Year One?

A. $2,000 B. $7,000 C. $12,000 D. $15,000 E. $17,000 Restricted Funds [I. Salaries $2,000] + [III. Time Restricted Funds $5,000] = $7,000 Funds Restricted in Year One.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 1 Easy Learning Objective: 18-02 Determine the proper classification for assets that are unrestricted; temporarily restricted; or permanently restricted and explain the method of reporting these categories.

17.

The following gifts are received in Year One by a not-for-profit organization: I. $2,000 specified by the donor to be used to pay salaries. II. $10,000 for new conference room furniture. III. $5,000 to be held for one year before being expended. The salaries are paid in Year Two and the conference room furniture is purchased in Year One. How much should be reclassified on the Statement of Activities in Year Two from the Temporarily Restricted column to the Unrestricted column?

A. $2,000. B. $5,000. C. $7,000. D. $10,000. E. $12,000. Restricted Funds [I. Salaries $2,000] + [III. Time Restricted Funds $5,000] = $7,000 Funds Restricted in Year One are Reclassified as unrestricted in Year Two.

18.

How are investments in equity securities with readily determinable market values and their related unrealized gains and losses reported by a not-for-profit organization?

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-02 Determine the proper classification for assets that are unrestricted; temporarily restricted; or permanently restricted and explain the method of reporting these categories.

19.

Which statement below is not correct?

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 18-02 Determine the proper classification for assets that are unrestricted; temporarily restricted; or permanently restricted and explain the method of reporting these categories. 18-45 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

20.

A gift to a not-for-profit school that is not restricted by the donor is credited to:

A. Fund Balance. B. Deferred Revenues. C. Contribution Revenues. D. Non-Operating Revenues. E. Encumbrances.

21.

Which entry would be the correct entry on the donor's books when the donor relinquishes control of an asset that it contributes to a not-for-profit organization?

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

AACSB: Analytic

AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 18-04 Report the various types of contributions that a private not-for-profit organization can receive.

22.

Which entry would be the correct entry on the donor's books when the donor retains control of an asset that it contributes to a not-for-profit organization?

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

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 18-04 Report the various types of contributions that a private not-for-profit organization can receive.

23.

Which entry would be the correct entry on the not-for-profit organization's books to record a donor's gift when the money is simply passing through the not-for-profit organization and creates no direct benefit, and when control of the assets has been relinquished by the donor?

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

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 18-04 Report the various types of contributions that a private not-for-profit organization can receive.

24.

Which entry would be the correct entry on the not-for-profit organization's books to record a donor's gift when power over the assets has been retained by the donor?

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

25.

Which entry would be the correct entry to record pledges of $100,000 to a public television fundraiser? The public television organization estimates that 5% of the funds will be uncollectible.

A. Option A B. Option B C. Option C D. Option D E. Option E Pledges Made $100,000 - Estimated Uncollectable Pledges $5,000 = Net Receivables Recorded $95,000

26.

Which entry would be the correct entry to record that a not-for-profit organization collected $80,000 of the amounts pledged and wrote off $3,000 of the amounts pledged as amounts uncollectible?

A. Option A B. Option B C. Option C D. Option D E. Option E Cash $80,000 + Allowance for Uncollectable $3,000 = Pledges Receivable $83,000

27.

In not-for-profit accounting, an acquisition occurs when one not-for-profit organization obtains:

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 18-06 Account for both mergers and acquisitions of not-for-profit organizations.

28.

If the total acquisition value of an acquired not-for-profit organization is greater than the fair value of all identifiable net assets of the organization, and that organization's revenues are not earned by dues or other types of earned revenues, then the excess of acquisition value over identifiable net assets is immediately reported:

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 18-06 Account for both mergers and acquisitions of not-for-profit organizations.

29.

When an acquisition occurs in not-for-profit accounting, recognition of goodwill depends on:

30.

Which of the following is not true about a merger of two not-for-profit organizations?

31.

Which entry would be the correct entry to record that a hospital has provided patient services for $200,000, of which 25% will be billed to a third party?

A. Option A B. Option B C. Option C D. Option D E. Option E A/R Patients $150,000 + A/R Third Party Providers $50,000 = Patient Service Revenue Recognized $200,000

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 18-07 Describe the unique aspects of accounting for health care organizations.

32.

What is the appropriate account to debit when reducing net patient service revenue as a result of arrangements with third party payors?

A. Contractual Adjustments. B. Allowance for uncollectible and reduced accounts. C. Patient Service Revenues. D. Account Receivable-Patients. E. Accounts Receivable-Third Party.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 1 Easy Learning Objective: 18-07 Describe the unique aspects of accounting for health care organizations.

33.

What is the appropriate account to credit when estimating a portion of health care organization receivables that will prove to be uncollectible?

A. Bad Debt Expense. B. Allowance for Uncollectible Accounts. C. Patient Service Revenues. D. Accounts Receivable. E. Contractual Adjustments.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 18-07 Describe the unique aspects of accounting for health care organizations.

Essay Questions

34.

Give several examples of voluntary health and welfare organizations.

Examples of voluntary health and welfare organizations include: (1) Save the Children, (2) United Way, (3) March of Dimes, (4) Boy Scouts, (5) Girl Scouts, (6) YMCA, (7) YWCA, and (8) Greenpeace.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Blooms: Understand Difficulty: 1 Easy Learning Objective: 18-02 Determine the proper classification for assets that are unrestricted; temporarily restricted; or permanently restricted and explain the method of reporting these categories.

35.

What are the objectives of accounting for a not-for-profit organization?

The objectives of accounting for a not-for-profit organization are: (1) to provide contributors and potential contributors with a means of evaluating the use of resources by the organization and (2) to disclose how resources were acquired and used to accomplish the objectives of the organization.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 18-01 Understand the basic composition of the financial statements produced for a private not-for18-57 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

profit organization.

36.

What term is used by voluntary health and welfare organizations for contributions?

The term used by voluntary health and welfare organizations for contributions is public support (a nonrevenue source of assets).

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 18-02 Determine the proper classification for assets that are unrestricted; temporarily restricted; or permanently restricted and explain the method of reporting these categories.

37.

What two classifications are used for the expenses incurred by voluntary health and welfare organizations?

The two classifications of expenses incurred by voluntary health and welfare organizations are (1) program service expenses and (2) supporting service expenses.

38.

What is the main source of financial support for most voluntary health and welfare organizations?

Contributions (public support) represents the main source of financial support for most voluntary health and welfare organizations.

39.

What criteria must be met before a voluntary health and welfare organization can recognize donated services as a means of support?

The criteria that must be met for a voluntary health and welfare organization to recognize donated services as a means of support are: (A.) the services are a normal part of the voluntary health and welfare organization's program or supporting services and would otherwise be performed by salaried personnel. (B.) the organization exercises control over the employment and duties of the individual. (C.) there is a clearly measurable basis for determining the amount to be recognized as a donation.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 18-04 Report the various types of contributions that a private not-for-profit organization can receive.

40.

For a voluntary health and welfare organization, what are supporting services expenses?

Supporting services expenses are the costs of running a charity that are not directly related to its stated goals. They are usually split into two subgroups: (1) management and general expenses and (2) fund raising expenses.

41.

What financial statements would normally be prepared by a voluntary health and welfare organization?

A voluntary health and welfare organization would prepare the following financial statements: (A.) Statement of Financial Position (B.) Statement of Activities and Changes in Net Assets (C.) Statement of Cash Flows (D.) Statement of Functional Expenses

permanently restricted and explain the method of reporting these categories.

42.

What are third party payors? Why are their interests important in accounting for health care entities?

Third party payors include (1) insurance companies, (2) Medicare, (3) Medicaid, and (4) Blue Cross/Blue Shield. These organizations pay health care entities for a high percentage of the services provided to patients in this country. The large amount of payments from third-party payors for health care makes their interests important in the accounting done by health care entities. Third-party payors may be able to place restrictions on some of the assets of the health care entity and are allowed to audit a health care entity's costs before deciding the exact amount they should have paid to a hospital or other entity. Thus, thirdparty payors have a direct impact on the accounting done by health care entities.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 18-07 Describe the unique aspects of accounting for health care organizations.

43.

How does a voluntary health and welfare organization account for donated goods and cash contributed for operating purposes? What types of revenues are recognized by voluntary health and welfare organizations?

Contributions are extremely important to most voluntary health and welfare organizations. They are increases in net assets and are accounted for as public support, not as earned revenues. Donated materials are also accounted for as public support. Revenues that may be recognized by a voluntary health and welfare organization include (1) membership dues, (2) interest and dividends earned on investments, and (3) gains on the sale of property and investments.

44.

For a not-for-profit organization, when is recognition of contributions of artworks and historical treasures not required?

GAAP exempts the recording of gifts of artworks and historical treasures if: (1) they are added to a collection for public exhibition, education, or research; (2) they are protected and preserved; and (3) if they are ever sold, any receipts will be used to acquire other collection items.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement

Blooms: Remember Difficulty: 2 Medium Learning Objective: 18-04 Report the various types of contributions that a private not-for-profit organization can receive.

45.

How does a recipient not-for-profit organization record the receipt of a gift that will be transferred without restriction to another charitable organization? What if the donor retains the right to revoke or redirect the gift?

If there are no restrictions, the recipient organization records the transaction as a liability. If the donor retains the right to revoke or redirect the gift, then the recipient organization records a refundable advance (also a liability), except in the case where the recipient organization is in control of the asset, in which case the receipt is recorded as Temporarily Restricted Net Assets - Contributions.

AACSB: Reflective thinking AICPA BB: Industry AICPA FN: Measurement Blooms: Remember Difficulty: 3 Hard Learning Objective: 18-04 Report the various types of contributions that a private not-for-profit organization can receive.

46.

For not-for-profit organizations, what is the difference in identification of "control" between a merger and an acquisition?

In a merger, two or more not-for-profit organizations combine to form a new not-for-profit entity. Control is designated by a new governing board. In an acquisition, one entity transfers consideration for value to obtain direct or indirect ability to determine the direction of management and policies of the other organization.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting 18-63 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Blooms: Understand Difficulty: 2 Medium Learning Objective: 18-06 Account for both mergers and acquisitions of not-for-profit organizations.

47.

For May 2013, Carlington Hospital's charges for patient services were $608,000, of which 80% was billed to third-party payors.

Required: Prepare the journal entry to accrue patient charges for the month.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 18-07 Describe the unique aspects of accounting for health care organizations.

48.

For the month of December 2013, patient charges at Northfield Hospital (a not-for-profit hospital) were $2,720,000. Third-party payors were billed $1,800,000. Prepare the necessary journal entry to record the revenue and receivables.

AACSB: Analytic AICPA BB: Industry

AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 18-07 Describe the unique aspects of accounting for health care organizations.

49.

For the month of December 2013, patient charges at Northfield Hospital (a not-for-profit hospital) were $2,720,000. Third-party payors were billed $1,800,000. $520,000 of the $2,720,000 was expected to be uncollectible.

Required: Prepare the necessary journal entry to record the anticipated uncollectible amount.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 18-07 Describe the unique aspects of accounting for health care organizations.

50.

For the month of December 2013, patient charges at Northfield Hospital (a not-for-profit hospital) were $2,720,000. Third-party payors were billed $1,800,000. In this month, there were several patients that had no health insurance and due to their low income level, the hospital decided that $85,000 of receivables would not be collectible.

Required: Prepare the necessary journal entry to reflect the decision to consider the $85,000 as charity care.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 18-07 Describe the unique aspects of accounting for health care organizations.

51.

For the month of December 2013, patient charges at Northfield Hospital (a not-for-profit hospital) were $2,720,000. Third-party payors were billed $1,800,000. The hospital estimated that contractual adjustments would reduce the amount collected from third-party payors to $1,710,000.

Required: Prepare the necessary journal entry to record the contractual adjustments.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 18-07 Describe the unique aspects of accounting for health care organizations.

52.

Dura Foundation, a voluntary health and welfare organization dedicated to finding medical cures and supported by contributions from the general public, included the following costs in its Statement of Functional Expenses for the year ended December 31, 2013:

What should Dura Foundation report as program service expenses?

Program service expenses Research: $130,000

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Analyze Difficulty: 1 Easy Learning Objective: 18-02 Determine the proper classification for assets that are unrestricted; temporarily restricted; or permanently restricted and explain the method of reporting these categories.

53.

What should Dura Foundation report as supporting service expenses?

54.

During 2013, the Garfield Humane Society, a voluntary health and welfare organization, received cash donations of $892,000 and membership dues of $62,000. A member of the Humane Society donated services valued at $8,000 that would otherwise have been performed by a paid staff member. A pet food manufacturer donated dog food valued at $16,400. The Humane Society received a gift of $140,000, to be used in building a new animal shelter. Also during 2013, investments held by the Humane Society earned interest of $2,000.

Required: Prepare a schedule showing the amount that the Garfield Humane Society should have recorded for public support for 2013.

55.

The Yelton Center is a voluntary health and welfare organization. During 2012, unrestricted pledges of $780,000 were received by the center, sixty percent of which were payable in 2012, with the remainder payable in 2013 (for use in 2013). Officials estimated that fifteen percent of these pledges will be uncollectible.

Required: How much should the Yelton Center report as revenue for 2012?

56.

A local social worker, earning $12 per hour working for the state government, contributed 600 hours of time at no charge to the Yelton Center, a voluntary health and welfare organization. If not for these donated services, an additional staff person would have been hired by the organization.

Required: How should the Yelton Center record the contributed services?

Donated services would be valued at $7,200 and recognized as an increase in Unrestricted Net Assets as contributed support. At the same time, a salary expense is also recognized for this same amount which serves as a decrease in Unrestricted Net Assets. Therefore, no overall impact would be created but the impact of the donation is reflected.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Analyze Difficulty: 2 Medium Learning Objective: 18-04 Report the various types of contributions that a private not-for-profit organization can receive.

57.

A not-for-profit organization receives a computer as a donation (valued at $2,000). Prepare the journal entry for the transaction.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium

Learning Objective: 18-04 Report the various types of contributions that a private not-for-profit organization can receive.

58.

A not-for-profit organization (Charity A) raises money for other charitable organizations. Charity A receives $10,000 to distribute to Charity B. Assume there are no donor rights to revoke or redirect the gift. Prepare the journal entries for Charity A when the gift is received, and for Charity A and Charity B when the gift is distributed.

59.

A not-for-profit organization (Charity A) raises money for other charitable organizations. Charity A receives $10,000 to distribute to Charity B. Assume that the donor retains the right to revoke or redirect the gift. Prepare the journal entries for Charity A and Charity B. The entries should be for the gift when received by Charity A, and when the gift is distributed for Charity B.

60.

A not-for-profit organization provides the following information for the year:

Required: Prepare the journal entries for these transactions.

61.

Wakefield Home is a private not-for-profit healthcare organization offering services for a fee. In the first quarter of 2013, Wakefield Home rendered services of $300,000 to patients. Of this amount 75% will be paid by patients, and $25,000 will be adjusted based on estimated insurance agreements. The remaining amount is to be paid by third party insurance providers. Record the journal entries that reflect all of this information.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 18-07 Describe the unique aspects of accounting for health care organizations.

62.

Wakefield Home is a private not-for-profit healthcare organization offering services for a fee. In the first quarter of 2013, Wakefield Home rendered services of $300,000 to patients. Of this amount 75% will be paid by patients, and $25,000 will be adjusted based on estimated insurance agreements. The remaining amount is to be paid by third party insurance providers. A local business donated medical supplies to Wakefield with a value of $40,000. Prepare the journal entry for the receipt of these supplies.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 18-04 Report the various types of contributions that a private not-for-profit organization can receive. Learning Objective: 18-07 Describe the unique aspects of accounting for health care organizations.

63.

Wakefield Home is a private not-for-profit healthcare organization offering services for a fee. In the first quarter of 2013, Wakefield Home rendered services of $300,000 to patients. Of this amount 75% will be paid by patients, and $25,000 will be adjusted based on estimated insurance agreements. The remaining amount is to be paid by third party insurance providers. The Home incurred the following liabilities: $110,000 salaries, $30,000 medical equipment, $10,000 utilities expense. Prepare the journal entries for these transactions.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 18-03 Explain the purpose and the construction of a statement of functional expenses. Learning Objective: 18-07 Describe the unique aspects of accounting for health care organizations.

64.

Wakefield Home is a private not-for-profit healthcare organization offering services for a fee. The home has an endowment and the income may be used to sponsor families that are unable to pay for services but the principal must be preserved. In addition, various fundraising activities take place during the year. When the Home held its annual Holiday fund raiser, pledges of $50,000 were received. The administration expected 5% to be uncollectible. In addition, income of $10,000 was received from the endowment to sponsor families. Prepare the journal entries for these transactions.

AACSB: Analytic AICPA BB: Industry AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 18-07 Describe the unique aspects of accounting for health care organizations.

Chapter 19 Accounting for Estates and Trusts

Multiple Choice Questions

1. When a person dies without leaving a valid will, how is the distribution of his or her property determined?

A. in accordance with federal inheritance laws. B. in accordance with generally accepted accounting principles. C. in accordance with a plan developed by the executor of the estate. D. in accordance with state inheritance laws. E. in accordance with common law.

2. Under what circumstance does an estate have an executor?

A. when there is no valid will. B. when the estate exceeds the dollar amount of the estate tax exemption. C. when the will establishes a trust fund. D. when the will is contested. E. when the will names a specific person to administer the estate.

3. When an estate does not have sufficient assets to satisfy all claims against it, what claim has the highest priority?

A. expenses of administering the estate. B. federal income taxes. C. state income taxes. D. medical expenses of the final illness. E. back wages owed to any employees.

4. What is the process of abatement?

A. an attempt to determine the deceased's intentions when the terms of the will are unclear. B. a reduction of various bequests when the estate is not adequate to satisfy them completely. C. selling of assets included in an estate to be able to pay creditors. D. payment of the claims of creditors. E. the establishment of how the creditors will be paid.

5. A demonstrative legacy is a

A. gift of personal property that is directly identified. B. cash gift from a particular source. C. gift of estate property that remains after carrying out the other provisions of the will. D. gift of real property. E. gift of intangible property.

6. In a will, a devise is a

7. What guidelines must be followed to classify a transaction as associated with the principal of an estate or as an income transaction?

A. generally accepted accounting principles. B. federal estate laws. C. state estate laws. D. the Internal Revenue Code. E. the decedent's intentions or state laws.

8. Executor's fees and court costs for settling an estate usually

A. must be apportioned between the principal and the income of the estate. B. are adjustments to the principal of the estate. C. are adjustments to the income of the estate. D. are subtracted from life insurance proceeds. E. are ignored.

9. In an executor's accounting for an estate, debts and other obligations are recorded

A. at book value. B. at fair value. C. on the date of payment. D. as soon as they are discovered. E. only if they are past due.

10. A testamentary trust is a trust

A. intended to protect the assets of a minor. B. that is managed by the trustor. C. that is managed by an estate. D. established by a living person. E. established by a will.

11. Which of the following is usually accounted for as an adjustment to a trust's principal?

A. repairs expense. B. rent expense. C. investment costs and commissions. D. insurance expense. E. property taxes.

12. Which of the following is usually not accounted for as an adjustment to a trust's income?

A. ordinary repairs expense. B. rent expense. C. investment costs and commissions. D. insurance expense. E. property taxes.

13. The trustor is the

A. income beneficiary of the trust. B. ultimate recipient of the principal from the trust. C. fiduciary who manages the assets in the trust. D. person who funds the trust. E. person who disposes of the assets in the trust.

14. The terms of a will currently undergoing probate are: "A gift to my brother David of $25,000 cash; to my son James, $50,000 from my savings account; and to my Daughter Lila, all of my remaining property." At the time of death, the balance in the savings account was $40,000, and there was additional cash (after payment of funeral expenses and all claims against the estate) of $70,000. The gift to David is a

A. general legacy. B. specific legacy. C. demonstrative legacy. D. residual legacy. E. devise.

15. The terms of a will currently undergoing probate are: "A gift to my brother David of $25,000 cash; to my son James, $50,000 from my savings account; and to my Daughter Lila, all of my remaining property." At the time of death, the balance in the savings account was $40,000, and there was additional cash (after payment of funeral expenses and all claims against the estate) of $70,000. The gift to James is a

A. general legacy. B. specific legacy. C. demonstrative legacy. D. residual legacy. E. devise.

16. The terms of a will currently undergoing probate are: "A gift to my brother David of $25,000 cash; to my son James, $50,000 from my savings account; and to my Daughter Lila, all of my remaining property." At the time of death, the balance in the savings account was $40,000, and there was additional cash (after payment of funeral expenses and all claims against the estate) of $70,000. How much would James have received from the estate?

A. $50,000. B. $40,000. C. $25,000. D. $45,000. E. $30,000.

17. The terms of a will currently undergoing probate are: "A gift to my brother David of $25,000 cash; to my son James, $50,000 from my savings account; and to my Daughter Lila, all of my remaining property." At the time of death, the balance in the savings account was $40,000, and there was additional cash (after payment of funeral expenses and all claims against the estate) of $70,000. How much would Lila have received from the estate?

A. $0. B. $40,000. C. $35,000. D. $45,000. E. $30,000.

18. The provisions of a will currently undergoing probate are: "Two thousand shares of Dorn stock to my son; $30,000 in cash from my savings account to my brother; $50,000 in cash to my daughter; and any remaining property divided equally between my son and daughter." Assume that, at the time of death, the estate included 1,200 shares of Dorn stock, $60,000 cash in the savings account, and $70,000 in cash from other sources. What would the son have received from the settlement of the estate?

19. The provisions of a will currently undergoing probate are: "Two thousand shares of Dorn stock to my son; $30,000 in cash from my savings account to my brother; $50,000 in cash to my daughter; and any remaining property divided equally between my son and daughter." Assume that the estate included 1,200 shares of Dorn stock, $22,000 cash in the savings account, and $70,000 in cash from other sources. What would the daughter have received from the settlement of the estate?

A. $60,000 cash. B. $50,000 cash. C. $55,000 cash. D. $62,000 cash. E. $56,000 cash.

20. Which of the following is not subtracted to arrive at the taxable value of an estate?

A. Liabilities. B. Charitable bequests. C. Funeral expenses. D. Estate administration expenses. E. Deduction for property conveyed to children of decedent.

21. Assume that Bob Smith dies on May 25, 2013. Mr. Smith's assets include the following: ABC Stock costing $30,000 but valued at $40,000; a house costing $280,000 but valued at $620,000; life insurance in the amount of $600,000; and cash from various sources totaling $50,700. Three credit cards in Mr. Smith's name had balances totaling $8,530 on the date of death. The estate paid funeral and final medical expenses in the amount of $50,492. There were no charitable gifts designated by the will, and Mr. Smith was single at the time of his death. What is the amount of the taxable estate?

A. $901,678. B. $1,251,678. C. $1,268,738. D. $1,310,700. E. $651,678.

22. What is the amount of the personal exemption on an estate income tax return?

A. $0. B. $100. C. $300. D. $500. E. $600.

23. Which of the following is normally viewed as an adjustment to the principal of an estate?

A. Ordinary repair expenses. B. Insurance expenses. C. Utility expenses. D. Major repairs to rental property. E. Property taxes.

24. Which of the following is not normally viewed as an adjustment to the principal of an estate?

A. Dividends declared prior to death. B. Investment commissions and other costs. C. Funeral expenses. D. Insurance expenses. E. Debts incurred prior to death.

25. What are the goals of probate laws? (1) gather and preserve all of the decedent's property; (2) carry out an orderly and fair settlement of all debts; (3) discover and follow the decedent's intent for the remaining property.

A. 1 only. B. 2 only. C. 3 only. D. 1 and 2. E. 1, 2, and 3.

26. After expenses of administering an estate, which claims would be next in a typical order of priority to establish which creditors will get paid? (1) funeral expenses (2) medical expenses of the last illness (3) debts and taxes given preference under laws (4) all other claims.

A. 1 and 2. B. 2 and 3. C. 3 and 4. D. 1 and 4. E. 2 and 4.

27. A gift that is specified in a will as "I leave my collection of baseball cards to my son" is a

A. general legacy. B. specific legacy. C. demonstrative legacy. D. residual legacy. E. devise.

28. A gift that is specified in a will as "I leave $5,000 in cash from my checking account to my daughter" is a

A. general legacy. B. specific legacy. C. demonstrative legacy. D. residual legacy. E. devise.

29. A gift that is specified in a will as "I leave $5,000 in cash to my son" is a

A. general legacy. B. specific legacy. C. demonstrative legacy. D. residual legacy. E. devise.

30. A gift of any remaining estate property is a

A. general legacy. B. specific legacy. C. demonstrative legacy. D. residual legacy. E. devise.

31. The provisions of a will currently undergoing probate are: "One thousand shares of Wal-Mart stock to my son; $10,000 in cash from my savings account to my brother; $5,000 in cash to my daughter; and any remaining property divided equally between my son and daughter." At the time of death, the estate included 1,400 shares of Wal-Mart stock and $25,000 cash in the savings account. What would the son have received from the settlement of the estate?

32. The provisions of a will currently undergoing probate are: "One thousand shares of Wal-Mart stock to my son; $10,000 in cash from my savings account to my brother; $5,000 in cash to my daughter; and any remaining property divided equally between my son and daughter." At the time of death, the estate included 1,400 shares of Wal-Mart stock and $25,000 cash in the savings account. What is the remaining principal to be divided equally between the son and the daughter?

A. $10,000 cash B. $15,000 cash C. 400 shares of Wal-Mart stock and $10,000 cash D. 400 shares of Wal-Mart stock and $15,000 cash E. 1,000 shares of Wal-Mart stock and $5,000 cash

33. The provisions of a will currently undergoing probate are: "One thousand shares of Wal-Mart stock to my son; $10,000 in cash from my savings account to my brother; $5,000 in cash to my daughter; and any remaining property divided equally between my son and daughter." At the time of death, the estate included 1,000 shares of Wal-Mart stock and $6,000 cash in the savings account. What would the brother have received from the settlement of the estate?

A. $0. B. $5,000. C. $6,000. D. $10,000. E. $11,000.

34. The estate of Bobbi Jones has the following provisions: total value of estate assets $2,000,000, amount specified to convey to a spouse $1,000,000, amount specified to convey to children $200,000, total debts 400,000, administrative expenses $50,000, and funeral expenses of $30,000. What is the value of the taxable estate?

A. $320,000. B. $520,000. C. $550,000. D. $1,480,000. E. $1,520,000.

35. The party to receive a distribution of principal from an estate is legally called a(n):

A. Principal grantee. B. Corpus benefitor. C. Estate receiver. D. Remainderman. E. Estate distributee.

36. Jim Bowie died on April 1, 2013. The estate has the following gross asset valuation information:

The estate tax will be calculated using:

A. $73,000. B. $75,000. C. $76,000. D. $80,000. E. $89,000.

37. An executor will normally carry out all the following tasks except:

A. Distribute property to beneficiaries. B. Settle claims against the decedent. C. Inventory property existing at the date of death. D. Prepare estate tax returns. E. Account to the probate court.

38. When there are not enough assets in the estate to satisfy all legacies in the will, the distribution schedule goes through a process of:

A. Ademption. B. Amendment. C. Abatement. D. Accretion. E. Aggregation.

39. For which type of trust is the income taxed in the grantor's individual income tax return?

A. Inter vivos trust. B. Grantor trust. C. Revocable living trust. D. Family trust. E. Irrevocable life insurance trust.

40. Which of the following is not a trust used for estate planning?

A. Minor's Section 2503(c) trust. B. Alimony trust. C. Credit shelter trust. D. Revocable living trust. E. Grantor retained annuity trust.

Essay Questions

41. For each of the following situations, select the best answer concerning adjustments to principal and income of an estate. Assume that the will does not specify whether the item is to be classified as principal or income. (A.) Adjustment to the principal of the estate. (B.) Adjustment to the income of the estate. (C.) Allocated between the principal and income of the estate in some fair manner. (D.) Allocated between the principal and income of the estate determined by existence at date of death. ___ 1. Homestead allowance ___ 2. Insurance expenses ___ 3. Executor's fee ___ 4. Life insurance proceeds when estate is beneficiary ___ 5. Investment commissions ___ 6. Debts incurred prior to death ___ 7. Water and other utility expenses ___ 8. Liquidating dividends ___ 9. Dividend income ___ 10. Funeral expenses ___ 11. Extraordinary repairs on income-producing property ___ 12. Attorney fees ___ 13. Property taxes ___ 14. Gains and losses on the sale of securities ___ 15. Interest income ___ 16. Court costs ___ 17. Ordinary repairs on income-producing property ___ 18. Accounting fees

42. What is meant by estate accounting?

43. What is meant by "an individual dies intestate"?

44. In settling an estate, what is the meaning of the term devise?

45. What is the purpose of the Uniform Probate Code?

46. How may real property be treated in identifying estate property subject to probate?

47. What choices does an executor of an estate have in determining the values of assets included in the estate for tax purposes?

48. What is a remainderman of trust property?

49. What are the three goals of probate laws?

50. What is the difference between an executor and an administrator?

51. What are the four levels of claims in the order of priority of the Uniform Probate Code?

52. In settling an estate, what is the meaning of the term legacy?

53. The estate of Kent Talbert reported the following information:

Required: Prepare a schedule to show the amount of the taxable estate.

54. During the most recent year, an estate generated income of $26,000:

The interest income was conveyed immediately to the beneficiary stated in the decedent's will. Dividends of $1,560 were given to the decedent's church. Prepare a schedule to show the amount of taxable income.

55. During the most recent year, an estate generated income of $26,000:

56. The executor of the estate of Yelbert Toper recorded the following information:

Assets discovered at death (at fair value):

Debts of $22,100 still remain to be paid. The shares of Dell stock were conveyed to the appropriate beneficiary. Executor fees are allocated based on total charges for principal and for income.

Required: Prepare a charge and discharge statement for this estate.

57. The executor of the Estate of Kate Tweed discovered the following assets (at fair value):

The will of Kate Tweed had the following provisions: • $195,000 in cash went to Victor Vickery. • All shares of PepsiCo went to Duchess Doyle. • The residence went to Louis Tweed. • All other estate assets were to be liquidated with the resulting cash going to the Sacred Church of Liberty, Missouri. Prepare the journal entry to record the property of the estate.

58. The executor of the Estate of Kate Tweed discovered the following assets (at fair value):

The will of Kate Tweed had the following provisions: • $195,000 in cash went to Victor Vickery. • All shares of PepsiCo went to Duchess Doyle. • The residence went to Louis Tweed. • All other estate assets were to be liquidated with the resulting cash going to the Sacred Church of Liberty, Missouri. For the Estate of Kate Tweed, interest of $9,100 was collected. Prepare the journal entry to record the collection.

59. The executor of the Estate of Kate Tweed discovered the following assets (at fair value):

The will of Kate Tweed had the following provisions: • $195,000 in cash went to Victor Vickery. • All shares of PepsiCo went to Duchess Doyle. • The residence went to Louis Tweed. • All other estate assets were to be liquidated with the resulting cash going to the Sacred Church of Liberty, Missouri. Funeral expenses of $26,000 were paid. Prepare the journal entry to record the transaction.

60. The executor of the Estate of Kate Tweed discovered the following assets (at fair value):

The will of Kate Tweed had the following provisions: • $195,000 in cash went to Victor Vickery. • All shares of PepsiCo went to Duchess Doyle. • The residence went to Louis Tweed. • All other estate assets were to be liquidated with the resulting cash going to the Sacred Church of Liberty, Missouri. Debts of $52,000 were discovered. Prepare the journal entry to record the transaction.

61. The executor of the Estate of Kate Tweed discovered the following assets (at fair value):

The will of Kate Tweed had the following provisions: • $195,000 in cash went to Victor Vickery. • All shares of PepsiCo went to Duchess Doyle. • The residence went to Louis Tweed. • All other estate assets were to be liquidated with the resulting cash going to the Sacred Church of Liberty, Missouri. An additional savings account of $15,600 was located by the executor. Prepare the journal entry to record the transaction.

62. The executor of the Estate of Kate Tweed discovered the following assets (at fair value):

The will of Kate Tweed had the following provisions: • $195,000 in cash went to Victor Vickery. • All shares of PepsiCo went to Duchess Doyle. • The residence went to Louis Tweed. • All other estate assets were to be liquidated with the resulting cash going to the Sacred Church of Liberty, Missouri. Title to the residence was conveyed to Louis Tweed. Prepare the journal entry to record the transaction.

63. The executor of the Estate of Kate Tweed discovered the following assets (at fair value):

The will of Kate Tweed had the following provisions: • $195,000 in cash went to Victor Vickery. • All shares of PepsiCo went to Duchess Doyle. • The residence went to Louis Tweed. • All other estate assets were to be liquidated with the resulting cash going to the Sacred Church of Liberty, Missouri. The life insurance policy was collected. Prepare the journal entry to record the transaction.

64. The executor of the Estate of Kate Tweed discovered the following assets (at fair value):

The will of Kate Tweed had the following provisions: • $195,000 in cash went to Victor Vickery. • All shares of PepsiCo went to Duchess Doyle. • The residence went to Louis Tweed. • All other estate assets were to be liquidated with the resulting cash going to the Sacred Church of Liberty, Missouri. Additional debts of $78,000 were discovered. Debts totaling $130,000 were paid. Prepare the journal entry to record the transaction.

65. The executor of the Estate of Kate Tweed discovered the following assets (at fair value):

The will of Kate Tweed had the following provisions: • $195,000 in cash went to Victor Vickery. • All shares of PepsiCo went to Duchess Doyle. • The residence went to Louis Tweed. • All other estate assets were to be liquidated with the resulting cash going to the Sacred Church of Liberty, Missouri. Cash of $195,000 was conveyed to the appropriate beneficiary. Prepare the journal entry to record the transaction.

66. The executor of the Estate of Kate Tweed discovered the following assets (at fair value):

The will of Kate Tweed had the following provisions: • $195,000 in cash went to Victor Vickery. • All shares of PepsiCo went to Duchess Doyle. • The residence went to Louis Tweed. • All other estate assets were to be liquidated with the resulting cash going to the Sacred Church of Liberty, Missouri. The shares of Kodak were sold for $145,600. Prepare the journal entry to record the transaction.

67. The executor of the Estate of Kate Tweed discovered the following assets (at fair value):

The will of Kate Tweed had the following provisions: • $195,000 in cash went to Victor Vickery. • All shares of PepsiCo went to Duchess Doyle. • The residence went to Louis Tweed. • All other estate assets were to be liquidated with the resulting cash going to the Sacred Church of Liberty, Missouri. Administrative expenses of $13,000 were paid. Prepare the journal entry to record the transaction.

68. An inter vivos trust was created by Isaac Posney. Isaac owned a large department store in Juggins, Utah. Adjacent to the store, Isaac also owned a tract of land that was used as an extra parking lot when the store was having a sale or during the Christmas season. Isaac expected the land to appreciate in value and eventually be sold for an office complex or additional stores. Isaac placed the land into a charitable lead trust which would hold the land for ten years until Isaac's son would turn 21. At that time, title would be transferred to the son. The store will pay rent to use the land during the interim. The income generated each year from this usage will be given to a local church. The land was currently valued at $416,000. During the first year of this arrangement, the trustee recorded the following cash transactions:

Required: Prepare all required journal entries for this trust fund including the entry to create the trust.

69. During the current year, an estate generates the following income amounts: Rental income $10,000, Interest income 4,000, Dividend income 6,000. The rental income is conveyed immediately to the beneficiary stated in the decedent's will. Dividends of $2,000 are donated to the decedent's church. What amount of federal income tax must be paid by the estate?

70. The executor of Danny Mack's estate has listed the following properties at fair value: Cash $200,000, Life Insurance Receivable $500,000, Investment in Stocks and Bonds $50,000, Rental Property $100,000, and Personal Property $80,000. Additionally, the executor found $100,000 of various debts incurred before the decedent's death. The cost of Danny Mack's funeral was $20,000. Prepare the journal entry to record the property of the estate.

71. The executor of Danny Mack's estate has listed the following properties at fair value: Cash $200,000, Life Insurance Receivable $500,000, Investment in Stocks and Bonds $50,000, Rental Property $100,000, and Personal Property $80,000. Additionally, the executor found $100,000 of various debts incurred before the decedent's death. The cost of Danny Mack's funeral was $20,000. Prepare the journal entry for claims of $100,000 made against the estate for various debts incurred before the decedent's death, and $20,000 for funeral expense bills.

72. The executor of Danny Mack's estate has listed the following properties at fair value: Cash $200,000, Life Insurance Receivable $500,000, Investment in Stocks and Bonds $50,000, Rental Property $100,000, and Personal Property $80,000. Additionally, the executor found $100,000 of various debts incurred before the decedent's death. The cost of Danny Mack's funeral was $20,000. Prepare the journal entry to record interest of $5,000 that was earned on the bonds of the estate. Of this amount, $2,000 had been earned prior to death.

73. The executor of Danny Mack's estate has listed the following properties at fair value: Cash $200,000, Life Insurance Receivable $500,000, Investment in Stocks and Bonds $50,000, Rental Property $100,000, and Personal Property $80,000. Additionally, the executor found $100,000 of various debts incurred before the decedent's death. The cost of Danny Mack's funeral was $20,000. Prepare the journal entry to record ordinary repairs to the rental property of $5,000.

74. The executor of Danny Mack's estate has listed the following properties at fair value: Cash $200,000, Life Insurance Receivable $500,000, Investment in Stocks and Bonds $50,000, Rental Property $100,000, and Personal Property $80,000. Additionally, the executor found $100,000 of various debts incurred before the decedent's death. The cost of Danny Mack's funeral was $20,000. Prepare the journal entry to record the payment of the estate's liabilities for debts incurred prior to the decedent's death.

75. The executor of Danny Mack's estate has listed the following properties at fair value: Cash $200,000, Life Insurance Receivable $500,000, Investment in Stocks and Bonds $50,000, Rental Property $100,000, and Personal Property $80,000. Additionally, the executor found $100,000 of various debts incurred before the decedent's death. The cost of Danny Mack's funeral was $20,000. Prepare the journal entry to record the sales of the stocks and bonds for $120,000

76. The executor of Danny Mack's estate has listed the following properties at fair value: Cash $200,000, Life Insurance Receivable $500,000, Investment in Stocks and Bonds $50,000, Rental Property $100,000, and Personal Property $80,000. Additionally, the executor found $100,000 of various debts incurred before the decedent's death. The cost of Danny Mack's funeral was $20,000. Prepare the journal entry to record the collection of rental income of $10,000. $1,000 had been earned prior to the decedent's death.

77. The executor of Danny Mack's estate has listed the following properties at fair value: Cash $200,000, Life Insurance Receivable $500,000, Investment in Stocks and Bonds $50,000, Rental Property $100,000, and Personal Property $80,000. Additionally, the executor found $100,000 of various debts incurred before the decedent's death. The cost of Danny Mack's funeral was $20,000. Prepare the journal entry to record the distribution of $4,000 to Anna Lee, an income beneficiary.

78. The executor of Danny Mack's estate has listed the following properties at fair value: Cash $200,000, Life Insurance Receivable $500,000, Investment in Stocks and Bonds $50,000, Rental Property $100,000, and Personal Property $80,000. Additionally, the executor found $100,000 of various debts incurred before the decedent's death. The cost of Danny Mack's funeral was $20,000. Prepare the journal entry to record the collection of the life insurance policy.

79. The executor of Danny Mack's estate has listed the following properties at fair value: Cash $200,000, Life Insurance Receivable $500,000, Investment in Stocks and Bonds $50,000, Rental Property $100,000, and Personal Property $80,000. Additionally, the executor found $100,000 of various debts incurred before the decedent's death. The cost of Danny Mack's funeral was $20,000. Prepare the journal entry to record payment of $20,000 in funeral expenses.

80. The executor of Danny Mack's estate has listed the following properties at fair value: Cash $200,000, Life Insurance Receivable $500,000, Investment in Stocks and Bonds $50,000, Rental Property $100,000, and Personal Property $80,000. Additionally, the executor found $100,000 of various debts incurred before the decedent's death. The cost of Danny Mack's funeral was $20,000. Prepare a Charge and Discharge Statement for the estate.

Chapter 19 Accounting for Estates and Trusts Answer Key

Multiple Choice Questions

When a person dies without leaving a valid will, how is the distribution of his or her property determined?

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 19-01 Understand the proper methods of accounting for and administering an estate and the corresponding legal terminology.

Under what circumstance does an estate have an executor?

When an estate does not have sufficient assets to satisfy all claims against it, what claim has the highest priority?

A. expenses of administering the estate. B. federal income taxes. C. state income taxes. D. medical expenses of the final illness. E. back wages owed to any employees.

What is the process of abatement?

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 19-02 Describe the types of estate distributions and identify the process of asset allocations and distributions from an estate.

A demonstrative legacy is a

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 19-02 Describe the types of estate distributions and identify the process of asset allocations and

distributions from an estate.

In a will, a devise is a

What guidelines must be followed to classify a transaction as associated with the principal of an estate or as an income transaction?

A. generally accepted accounting principles. B. federal estate laws. C. state estate laws. D. the Internal Revenue Code. E. the decedent's intentions or state laws.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 19-04 Understand and account for the distinction between principal and income in the context of 19-48 Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

estate and trust accounting.

Executor's fees and court costs for settling an estate usually

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 19-04 Understand and account for the distinction between principal and income in the context of estate and trust accounting.

In an executor's accounting for an estate, debts and other obligations are recorded

A. at book value. B. at fair value. C. on the date of payment. D. as soon as they are discovered. E. only if they are past due.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 19-01 Understand the proper methods of accounting for and administering an estate and the corresponding legal terminology.

10.

A testamentary trust is a trust

A. intended to protect the assets of a minor. B. that is managed by the trustor. C. that is managed by an estate. D. established by a living person. E. established by a will.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 19-05 Describe the financial statements and journal entries utilized to account for estate and trust transactions.

11.

Which of the following is usually accounted for as an adjustment to a trust's principal?

A. repairs expense. B. rent expense. C. investment costs and commissions. D. insurance expense. E. property taxes.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 19-06 Describe various trusts; their proper use; and accounting for activities.

12.

Which of the following is usually not accounted for as an adjustment to a trust's income?

A. ordinary repairs expense. B. rent expense. C. investment costs and commissions. D. insurance expense. E. property taxes.

13.

The trustor is the

14.

The terms of a will currently undergoing probate are: "A gift to my brother David of $25,000 cash; to my son James, $50,000 from my savings account; and to my Daughter Lila, all of my remaining property." At the time of death, the balance in the savings account was $40,000, and there was additional cash (after payment of funeral expenses and all claims against the estate) of $70,000. The gift to David is a

A. general legacy. B. specific legacy. C. demonstrative legacy. D. residual legacy. E. devise.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Learning Objective: 19-02 Describe the types of estate distributions and identify the process of asset allocations and distributions from an estate.

15.

A. general legacy. B. specific legacy. C. demonstrative legacy. D. residual legacy. E. devise.

16.

A. $50,000. B. $40,000. C. $25,000. D. $45,000. E. $30,000. Balance in Savings Account of $40,000 is Limit for Son James to receive, since the $50,000 bequest stated specifically he was to be paid from that account only.

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 19-02 Describe the types of estate distributions and identify the process of asset allocations and distributions from an estate.

17.

A. $0. B. $40,000. C. $35,000. D. $45,000. E. $30,000. Son James is limited to $40,000 in savings and Brother James is to receive $25,000 from any source, for a total of $65,000 of the $110,000 available after final expenses, leaving $45,000 for Daughter Lila

18.

The provisions of a will currently undergoing probate are: "Two thousand shares of Dorn stock to my son; $30,000 in cash from my savings account to my brother; $50,000 in cash to my daughter; and any remaining property divided equally between my son and daughter." Assume that, at the time of death, the estate included 1,200 shares of Dorn stock, $60,000 cash in the savings account, and $70,000 in cash from other sources. What would the son have received from the settlement of the estate?

A. 1,200 shares of Dorn stock and $35,000 cash. B. 2,000 shares of Dorn stock and $10,000 cash. C. 2,000 shares of Dorn stock and $25,000 cash. D. 1,200 shares of Dorn stock and $10,000 cash. E. 1,200 shares of Dorn stock and $25,000 cash. Son receives only the 1,200 remaining shares of stock even though 2,000 are referenced in the will. The $130,000 in Cash ($70,000 Cash & $60,000 Savings) - specific bequests (Brother $30,000 + Daughter $50,000) $80,000 = $50,000 residual to be equally divided, therefore the son receives $25,000 of the Cash.

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Learning Objective: 19-02 Describe the types of estate distributions and identify the process of asset allocations and distributions from an estate.

19.

The provisions of a will currently undergoing probate are: "Two thousand shares of Dorn stock to my son; $30,000 in cash from my savings account to my brother; $50,000 in cash to my daughter; and any remaining property divided equally between my son and daughter." Assume that the estate included 1,200 shares of Dorn stock, $22,000 cash in the savings account, and $70,000 in cash from other sources. What would the daughter have received from the settlement of the estate?

A. $60,000 cash. B. $50,000 cash. C. $55,000 cash. D. $62,000 cash. E. $56,000 cash. The $92,000 in Cash ($22,000 Cash & $70,000 Savings) - specific bequests (Brother $30,000 + Daughter $50,000) $80,000 = $12,000 residual to be equally divided, therefore the daughter receives $6,000 + the $50,000 specific bequest to her = $56,000 total in Cash.

20.

Which of the following is not subtracted to arrive at the taxable value of an estate?

A. Liabilities. B. Charitable bequests. C. Funeral expenses. D. Estate administration expenses. E. Deduction for property conveyed to children of decedent.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Learning Objective: 19-03 Understand the federal estate tax and state inheritance tax systems; the corresponding exemptions; and tax planning opportunities.

21.

Assume that Bob Smith dies on May 25, 2013. Mr. Smith's assets include the following: ABC Stock costing $30,000 but valued at $40,000; a house costing $280,000 but valued at $620,000; life insurance in the amount of $600,000; and cash from various sources totaling $50,700. Three credit cards in Mr. Smith's name had balances totaling $8,530 on the date of death. The estate paid funeral and final medical expenses in the amount of $50,492. There were no charitable gifts designated by the will, and Mr. Smith was single at the time of his death. What is the amount of the taxable estate?

A. $901,678. B. $1,251,678. C. $1,268,738. D. $1,310,700. E. $651,678. ABC Stock at FV $40,000 + House at FV $620,000 + Life Insurance of $600,000 + Cash of 50,700 - Credit Card Liability of $8,530 - Funeral/Medical Expenses of $50,492 = $1,251,678 Estate Valuation

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Learning Objective: 19-03 Understand the federal estate tax and state inheritance tax systems; the corresponding exemptions; and tax planning opportunities.

22.

What is the amount of the personal exemption on an estate income tax return?

A. $0. B. $100. C. $300. D. $500. E. $600.

23.

Which of the following is normally viewed as an adjustment to the principal of an estate?

A. Ordinary repair expenses. B. Insurance expenses. C. Utility expenses. D. Major repairs to rental property. E. Property taxes.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 19-04 Understand and account for the distinction between principal and income in the context of estate and trust accounting.

24.

Which of the following is not normally viewed as an adjustment to the principal of an estate?

A. Dividends declared prior to death. B. Investment commissions and other costs. C. Funeral expenses. D. Insurance expenses. E. Debts incurred prior to death.

25.

What are the goals of probate laws? (1) gather and preserve all of the decedent's property; (2) carry out an orderly and fair settlement of all debts; (3) discover and follow the decedent's intent for the remaining property.

A. 1 only. B. 2 only. C. 3 only. D. 1 and 2. E. 1, 2, and 3.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Accessibility: Keyboard Navigation

Blooms: Understand Difficulty: 2 Medium Learning Objective: 19-01 Understand the proper methods of accounting for and administering an estate and the corresponding legal terminology.

26.

After expenses of administering an estate, which claims would be next in a typical order of priority to establish which creditors will get paid? (1) funeral expenses (2) medical expenses of the last illness (3) debts and taxes given preference under laws (4) all other claims.

A. 1 and 2. B. 2 and 3. C. 3 and 4. D. 1 and 4. E. 2 and 4.

27.

A gift that is specified in a will as "I leave my collection of baseball cards to my son" is a

A. general legacy. B. specific legacy. C. demonstrative legacy. D. residual legacy. E. devise.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Learning Objective: 19-02 Describe the types of estate distributions and identify the process of asset allocations and distributions from an estate.

28.

A gift that is specified in a will as "I leave $5,000 in cash from my checking account to my daughter" is a

A. general legacy. B. specific legacy. C. demonstrative legacy. D. residual legacy. E. devise.

29.

A gift that is specified in a will as "I leave $5,000 in cash to my son" is a

A. general legacy. B. specific legacy. C. demonstrative legacy. D. residual legacy. E. devise.

30.

A gift of any remaining estate property is a

A. general legacy. B. specific legacy. C. demonstrative legacy. D. residual legacy. E. devise.

31.

The provisions of a will currently undergoing probate are: "One thousand shares of WalMart stock to my son; $10,000 in cash from my savings account to my brother; $5,000 in cash to my daughter; and any remaining property divided equally between my son and daughter." At the time of death, the estate included 1,400 shares of Wal-Mart stock and $25,000 cash in the savings account. What would the son have received from the settlement of the estate?

A. 1,000 shares of Wal-Mart stock and $15,000 cash B. 1,000 shares of Wal-Mart stock and $0 cash C. 1,000 shares of Wal-Mart stock and $10,000 cash D. 1,200 shares of Wal-Mart stock and $5,000 cash E. 1,400 shares of Wal-Mart stock and $5,000 cash Son receives only the 1,000 shares of stock with the other 400 shares to the residual from which he will receive half for a total of 1,200 shares. The $25,000 in Savings Cash specific bequests (Brother $10,000 + Daughter $5,000) $15,000 = $10,000 residual to be equally divided, therefore the son receives $5,000 of the Cash.

32.

The provisions of a will currently undergoing probate are: "One thousand shares of WalMart stock to my son; $10,000 in cash from my savings account to my brother; $5,000 in cash to my daughter; and any remaining property divided equally between my son and daughter." At the time of death, the estate included 1,400 shares of Wal-Mart stock and $25,000 cash in the savings account. What is the remaining principal to be divided equally between the son and the daughter?

A. $10,000 cash B. $15,000 cash C. 400 shares of Wal-Mart stock and $10,000 cash D. 400 shares of Wal-Mart stock and $15,000 cash E. 1,000 shares of Wal-Mart stock and $5,000 cash Son receives only the 1,000 shares of stock with the other 400 shares to the residual. The $25,000 in Savings Cash - specific bequests (Brother $10,000 + Daughter $5,000) $15,000 = $10,000 residual to be equally divided.

33.

The provisions of a will currently undergoing probate are: "One thousand shares of WalMart stock to my son; $10,000 in cash from my savings account to my brother; $5,000 in cash to my daughter; and any remaining property divided equally between my son and daughter." At the time of death, the estate included 1,000 shares of Wal-Mart stock and $6,000 cash in the savings account. What would the brother have received from the settlement of the estate?

A. $0. B. $5,000. C. $6,000. D. $10,000. E. $11,000. Balance in Savings Account of $6,000 is Limit for Brother to receive, since the $10,000 bequest stated specifically he was to be paid from the Savings Account only.

34.

The estate of Bobbi Jones has the following provisions: total value of estate assets $2,000,000, amount specified to convey to a spouse $1,000,000, amount specified to convey to children $200,000, total debts 400,000, administrative expenses $50,000, and funeral expenses of $30,000. What is the value of the taxable estate?

A. $320,000. B. $520,000. C. $550,000. D. $1,480,000. E. $1,520,000. Total Estate Value $2,000,000 - Spousal Portion $1,000,000 - Debts $400,000 - Funeral Expense $30,000 - Administration Expense $50,000 = $520,000 Taxable Estate

35.

The party to receive a distribution of principal from an estate is legally called a(n):

A. Principal grantee. B. Corpus benefitor. C. Estate receiver. D. Remainderman. E. Estate distributee.

AACSB: Reflective thinking AICPA BB: Legal

AICPA FN: Research Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 19-04 Understand and account for the distinction between principal and income in the context of estate and trust accounting.

36.

Jim Bowie died on April 1, 2013. The estate has the following gross asset valuation information:

The estate tax will be calculated using:

A. $73,000. B. $75,000. C. $76,000. D. $80,000. E. $89,000. Coin Collection $30,000 + Stock $50,000 = $80,000 Fair Value for Estate Tax at Time of Death

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 19-03 Understand the federal estate tax and state inheritance tax systems; the corresponding exemptions; and tax planning opportunities.

37.

An executor will normally carry out all the following tasks except:

A. Distribute property to beneficiaries. B. Settle claims against the decedent. C. Inventory property existing at the date of death. D. Prepare estate tax returns. E. Account to the probate court.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Learning Objective: 19-01 Understand the proper methods of accounting for and administering an estate and the corresponding legal terminology.

38.

When there are not enough assets in the estate to satisfy all legacies in the will, the distribution schedule goes through a process of:

A. Ademption. B. Amendment. C. Abatement. D. Accretion. E. Aggregation.

39.

For which type of trust is the income taxed in the grantor's individual income tax return?

A. Inter vivos trust. B. Grantor trust. C. Revocable living trust. D. Family trust. E. Irrevocable life insurance trust.

40.

Which of the following is not a trust used for estate planning?

A. Minor's Section 2503(c) trust. B. Alimony trust. C. Credit shelter trust. D. Revocable living trust. E. Grantor retained annuity trust.

AACSB: Analytic AICPA BB: Legal AICPA FN: Research Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Learning Objective: 19-06 Describe various trusts; their proper use; and accounting for activities.

Essay Questions

41.

For each of the following situations, select the best answer concerning adjustments to principal and income of an estate. Assume that the will does not specify whether the item is to be classified as principal or income. (A.) Adjustment to the principal of the estate. (B.) Adjustment to the income of the estate. (C.) Allocated between the principal and income of the estate in some fair manner. (D.) Allocated between the principal and income of the estate determined by existence at date of death. ___ 1. Homestead allowance ___ 2. Insurance expenses ___ 3. Executor's fee ___ 4. Life insurance proceeds when estate is beneficiary ___ 5. Investment commissions ___ 6. Debts incurred prior to death ___ 7. Water and other utility expenses ___ 8. Liquidating dividends ___ 9. Dividend income ___ 10. Funeral expenses ___ 11. Extraordinary repairs on income-producing property ___ 12. Attorney fees ___ 13. Property taxes ___ 14. Gains and losses on the sale of securities ___ 15. Interest income ___ 16. Court costs ___ 17. Ordinary repairs on income-producing property ___ 18. Accounting fees

(1) A; (2) B; (3) C; (4) A; (5) A; (6) A; (7) B; (8) A; (9) D; (10) A; (11) A; (12) C; (13) B; (14) A; (15) D; (16) C; (17) B; (18) C

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Understand Difficulty: 2 Medium Learning Objective: 19-04 Understand and account for the distinction between principal and income in the context of estate and trust accounting.

42.

What is meant by estate accounting?

Estate accounting refers to the recording and reporting of financial events from the time of a person's death until the ultimate distribution of all property.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Remember Difficulty: 1 Easy Learning Objective: 19-01 Understand the proper methods of accounting for and administering an estate and the corresponding legal terminology.

43.

What is meant by "an individual dies intestate"?

If an individual dies intestate then that person did not create a legal will prior to death. Therefore, there is no executor or executrix and the court will appoint an administrator/administratrix to attend to fiduciary estate responsibilities.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Blooms: Understand Difficulty: 1 Easy Learning Objective: 19-01 Understand the proper methods of accounting for and administering an estate and the

corresponding legal terminology.

44.

In settling an estate, what is the meaning of the term devise?

A devise is a gift of real property such as land or a building.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Blooms: Understand Difficulty: 1 Easy Learning Objective: 19-02 Describe the types of estate distributions and identify the process of asset allocations and distributions from an estate.

45.

What is the purpose of the Uniform Probate Code?

The purpose of the Uniform Probate Code is to encourage consistent laws governing wills and estates among the states.

46.

How may real property be treated in identifying estate property subject to probate?

In some states, real property is conveyed directly to the beneficiary or co-owner at the time of death and would not be included in the inventory of estate.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Blooms: Remember Difficulty: 2 Medium Learning Objective: 19-01 Understand the proper methods of accounting for and administering an estate and the corresponding legal terminology.

47.

What choices does an executor of an estate have in determining the values of assets included in the estate for tax purposes?

The fair value of property must be determined at the date of death or on the alternative valuation date (six months after death or the date of disposition after death, whichever is earlier), at the option of the executor.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Measurement Blooms: Remember Difficulty: 2 Medium Learning Objective: 19-03 Understand the federal estate tax and state inheritance tax systems; the corresponding exemptions; and tax planning opportunities.

48.

What is a remainderman of trust property?

A remainderman of trust property is a person who receives the principal from a trust after someone else has received income from the trust for a given period of time.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 19-06 Describe various trusts; their proper use; and accounting for activities.

49.

What are the three goals of probate laws?

Probate laws generally are designed to (1) gather, preserve, and account for all of the decedent's property; (2) carry out an orderly and fair settlement of all debts; and (3) discover the decedent's intent for the remaining property held at death and then follow those wishes.

50.

What is the difference between an executor and an administrator?

An executor is a specific person named in the will to fulfill the fiduciary responsibilities of satisfying all applicable laws and making certain that the decedent's wishes are achieved, if possible. If the will does not designate an executor, or the named executor is unwilling or unable to serve, an administrator is appointed by the court to fulfill the same responsibilities.

51.

What are the four levels of claims in the order of priority of the Uniform Probate Code?

The order of priority is as follows: (1) expenses of administering the estate, (2) funeral expenses and medical expenses of the last illness, (3) debts and taxes given preference under federal and state laws, and (4) all other claims.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Reporting Blooms: Remember Difficulty: 2 Medium Learning Objective: 19-01 Understand the proper methods of accounting for and administering an estate and the corresponding legal terminology.

52.

In settling an estate, what is the meaning of the term legacy?

A legacy, also called a bequest, is a gift of personal property such as stocks or furniture.

AACSB: Reflective thinking AICPA BB: Legal AICPA FN: Research Blooms: Remember Difficulty: 1 Easy Learning Objective: 19-02 Describe the types of estate distributions and identify the process of asset allocations and distributions from an estate.

53.

The estate of Kent Talbert reported the following information:

Required: Prepare a schedule to show the amount of the taxable estate.

54.

During the most recent year, an estate generated income of $26,000:

55.

During the most recent year, an estate generated income of $26,000:

56.

The executor of the estate of Yelbert Toper recorded the following information:

Assets discovered at death (at fair value):

Debts of $22,100 still remain to be paid. The shares of Dell stock were conveyed to the appropriate beneficiary. Executor fees are allocated based on total charges for principal and for income.

Required: Prepare a charge and discharge statement for this estate.

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 3 Hard Learning Objective: 19-05 Describe the financial statements and journal entries utilized to account for estate and trust transactions.

57.

The executor of the Estate of Kate Tweed discovered the following assets (at fair value):

AACSB: Analytic

AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 19-04 Understand and account for the distinction between principal and income in the context of estate and trust accounting.

58.

The executor of the Estate of Kate Tweed discovered the following assets (at fair value):

The will of Kate Tweed had the following provisions: • $195,000 in cash went to Victor Vickery. • All shares of PepsiCo went to Duchess Doyle. • The residence went to Louis Tweed. • All other estate assets were to be liquidated with the resulting cash going to the Sacred Church of Liberty, Missouri. For the Estate of Kate Tweed, interest of $9,100 was collected. Prepare the journal entry to record the collection.

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply

Difficulty: 1 Easy Learning Objective: 19-04 Understand and account for the distinction between principal and income in the context of estate and trust accounting.

59.

The executor of the Estate of Kate Tweed discovered the following assets (at fair value):

The will of Kate Tweed had the following provisions: • $195,000 in cash went to Victor Vickery. • All shares of PepsiCo went to Duchess Doyle. • The residence went to Louis Tweed. • All other estate assets were to be liquidated with the resulting cash going to the Sacred Church of Liberty, Missouri. Funeral expenses of $26,000 were paid. Prepare the journal entry to record the transaction.

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 19-04 Understand and account for the distinction between principal and income in the context of estate and trust accounting.

60.

The executor of the Estate of Kate Tweed discovered the following assets (at fair value):

The will of Kate Tweed had the following provisions: • $195,000 in cash went to Victor Vickery. • All shares of PepsiCo went to Duchess Doyle. • The residence went to Louis Tweed. • All other estate assets were to be liquidated with the resulting cash going to the Sacred Church of Liberty, Missouri. Debts of $52,000 were discovered. Prepare the journal entry to record the transaction.

No entry is required, since debts are only recorded by an estate when they are paid.

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 19-04 Understand and account for the distinction between principal and income in the context of estate and trust accounting.

61.

The executor of the Estate of Kate Tweed discovered the following assets (at fair value):

The will of Kate Tweed had the following provisions: • $195,000 in cash went to Victor Vickery. • All shares of PepsiCo went to Duchess Doyle. • The residence went to Louis Tweed. • All other estate assets were to be liquidated with the resulting cash going to the Sacred Church of Liberty, Missouri. An additional savings account of $15,600 was located by the executor. Prepare the journal entry to record the transaction.

62.

The executor of the Estate of Kate Tweed discovered the following assets (at fair value):

The will of Kate Tweed had the following provisions: • $195,000 in cash went to Victor Vickery. • All shares of PepsiCo went to Duchess Doyle. • The residence went to Louis Tweed. • All other estate assets were to be liquidated with the resulting cash going to the Sacred Church of Liberty, Missouri. Title to the residence was conveyed to Louis Tweed. Prepare the journal entry to record the transaction.

63.

The executor of the Estate of Kate Tweed discovered the following assets (at fair value):

The will of Kate Tweed had the following provisions: • $195,000 in cash went to Victor Vickery. • All shares of PepsiCo went to Duchess Doyle. • The residence went to Louis Tweed. • All other estate assets were to be liquidated with the resulting cash going to the Sacred Church of Liberty, Missouri. The life insurance policy was collected. Prepare the journal entry to record the transaction.

64.

The executor of the Estate of Kate Tweed discovered the following assets (at fair value):

The will of Kate Tweed had the following provisions: • $195,000 in cash went to Victor Vickery. • All shares of PepsiCo went to Duchess Doyle. • The residence went to Louis Tweed. • All other estate assets were to be liquidated with the resulting cash going to the Sacred Church of Liberty, Missouri. Additional debts of $78,000 were discovered. Debts totaling $130,000 were paid. Prepare the journal entry to record the transaction.

65.

The executor of the Estate of Kate Tweed discovered the following assets (at fair value):

The will of Kate Tweed had the following provisions: • $195,000 in cash went to Victor Vickery. • All shares of PepsiCo went to Duchess Doyle. • The residence went to Louis Tweed. • All other estate assets were to be liquidated with the resulting cash going to the Sacred Church of Liberty, Missouri. Cash of $195,000 was conveyed to the appropriate beneficiary. Prepare the journal entry to record the transaction.

66.

The executor of the Estate of Kate Tweed discovered the following assets (at fair value):

The will of Kate Tweed had the following provisions: • $195,000 in cash went to Victor Vickery. • All shares of PepsiCo went to Duchess Doyle. • The residence went to Louis Tweed. • All other estate assets were to be liquidated with the resulting cash going to the Sacred Church of Liberty, Missouri. The shares of Kodak were sold for $145,600. Prepare the journal entry to record the transaction.

67.

The executor of the Estate of Kate Tweed discovered the following assets (at fair value):

The will of Kate Tweed had the following provisions: • $195,000 in cash went to Victor Vickery. • All shares of PepsiCo went to Duchess Doyle. • The residence went to Louis Tweed. • All other estate assets were to be liquidated with the resulting cash going to the Sacred Church of Liberty, Missouri. Administrative expenses of $13,000 were paid. Prepare the journal entry to record the transaction.

68.

An inter vivos trust was created by Isaac Posney. Isaac owned a large department store in Juggins, Utah. Adjacent to the store, Isaac also owned a tract of land that was used as an extra parking lot when the store was having a sale or during the Christmas season. Isaac expected the land to appreciate in value and eventually be sold for an office complex or additional stores. Isaac placed the land into a charitable lead trust which would hold the land for ten years until Isaac's son would turn 21. At that time, title would be transferred to the son. The store will pay rent to use the land during the interim. The income generated each year from this usage will be given to a local church. The land was currently valued at $416,000. During the first year of this arrangement, the trustee recorded the following cash transactions:

Required: Prepare all required journal entries for this trust fund including the entry to create the trust.

AACSB: Analytic AICPA BB: Legal AICPA FN: Measurement Blooms: Apply Difficulty: 2 Medium Learning Objective: 19-05 Describe the financial statements and journal entries utilized to account for estate and trust transactions.

69.

During the current year, an estate generates the following income amounts: Rental income $10,000, Interest income 4,000, Dividend income 6,000. The rental income is conveyed immediately to the beneficiary stated in the decedent's will. Dividends of $2,000 are donated to the decedent's church. What amount of federal income tax must be paid by the estate?

70.

The executor of Danny Mack's estate has listed the following properties at fair value: Cash $200,000, Life Insurance Receivable $500,000, Investment in Stocks and Bonds $50,000, Rental Property $100,000, and Personal Property $80,000. Additionally, the executor found $100,000 of various debts incurred before the decedent's death. The cost of Danny Mack's funeral was $20,000. Prepare the journal entry to record the property of the estate.

71.

No entry needed until liabilities are paid.

72.

73.

(Ordinary repair expenses are made to rental property and are generally charged to income rather than principal.)

74.

75.

(To record sale of stocks and to reflect gain on such sale with the additional proceeds becoming part of the estate's principal.)

76.

(To record the receipt of rental income, the $1,000 earned prior to the decedent's death was not included in original listing of estate assets and is therefore an ‘asset subsequently discovered'.)

77.

78.

AICPA FN: Measurement Blooms: Apply Difficulty: 1 Easy Learning Objective: 19-04 Understand and account for the distinction between principal and income in the context of estate and trust accounting.

79.

80.