TEST BANK for Advanced Financial Accounting 12th Edition by David Cottrell, Theodore Christensen and

Chapter 1 Intercorporate Acquisitions and Investments in Other Entities 1) Assuming no impairment in value prior to transfer, assets transferred by a parent company to another entity it has created should be recorded by the newly created entity at the assets': A) cost to the parent company.

B) book value on the parent company's books at the date of transfer.

C) fair value at the date of transfer.

D) fair value of consideration exchanged by the newly created entity.

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

A) Securities and Exchange Commission (SEC) B) Public Company Accounting Oversight Board (PCAOB) C) Financial Accounting Standards Board (FASB) D) All of the other answers are correct 3) A business combination in which the acquired company's assets and liabilities are combined with those of the acquiring company into a single entity is defined as: A) Stock acquisition B) Leveraged buyout C) Statutory Merger D) Reverse statutory rollup 4) In which of the following situations do accounting standards not require that the financial statements of the parent and subsidiary be consolidated?

A) A corporation creates a new 100 percent owned subsidiary B) A corporation purchases 90 percent of the voting stock of another company C) A corporation has both control and majority ownership of an unincorporated company D) A corporation owns less-than a controlling interest in an unincorporated company During its inception, Devon Company purchased land for $100,000 and a building for $180,000.

After exactly 3 years, it transferred these assets and cash of $50,000 to a newly created subsidiary, Regan Company, in exchange for 15,000 shares of Regan's $10 par value stock.

Devon uses straight-line depreciation. Useful life for the building is 30 years, with zero residual value. An appraisal revealed that the building has a fair value of $200,000.

5) Based on the information provided, at the time of the transfer, Regan Company should record: A) Building at $180,000 and no accumulated depreciation.

B) Building at $162,000 and no accumulated depreciation.

C) Building at $200,000 and accumulated depreciation of $24,000.

D) Building at $180,000 and accumulated depreciation of $18,000.

6) Based on the information provided, what amount would be reported by Devon Company as investment in Regan Company common stock?

A) $312,000 B) $180,000 C) $330,000 D) $150,000 7) Based on the preceding information, Regan Company will report A) additional paid-in capital of $0.

B) additional paid-in capital of $150,000.

C) additional paid-in capital of $162,000.

D) additional paid-in capital of $180,000.

At its inception, Peacock Company purchased land for $50,000 and a building for $220,000.

After exactly 4 years, it transferred these assets and cash of $75,000 to a newly created subsidiary, Selvick Company, in exchange for 25,000 shares of Selvick's $5 par value stock.

Peacock uses straight-line depreciation. When purchased, the building had a useful life of 20 years with no expected salvage value. An appraisal at the time of the transfer revealed that the building has a fair value of $250,000.

8) Based on the information provided, at the time of the transfer, Selvick Company should record A) the building at $220,000 and accumulated depreciation of $44,000.

B) the building at $220,000 with no accumulated depreciation.

C) the building at $176,000 with no accumulated depreciation.

D) the building at $250,000 with no accumulated depreciation.

9) Based on the information provided, what amount would be reported by Peacock Company as investment in Selvick Company common stock?

A) $125,000 B) $250,000 C) $301,000 D) $345,000 10) Based on the preceding information, Selvick Company will report additional paid-in capital of A) $125,000.

B) $176,000.

C) $220,000.

D) $250,000.

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

A) Both companies in a combination continue to operate as separate, but related, legal entities.

B) Only one of the combining companies survives and the other loses its separate identity.

C) Two companies combine to form a new third company, and the original two companies are dissolved.

D) One company transfers assets to another company it has created.

12) A statutory consolidation is a type of business combination in which: A) One of the combining companies survives and the other loses its separate identity.

B) One company acquires the voting shares of the other company and the two companies continue to operate as separate legal entities.

C) Two publicly traded companies agree to share a board of directors.

D) Each of the combining companies is dissolved and the net assets of both companies are transferred to a newly created corporation.

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

Cash and receivables

23,000

Inventory

15,000

Land

30,000

Buildings

100,000

Equipment

95,000

Accounts Payable

20,000

Accumulated Depreciation—Buildings

32,000

Accumulated Depreciation—Equipment

30,000

Common Stock

56,000

Additional Paid-In Capital

125,000

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

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

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

A) $243,000 B) $263,000 C) $221,000 D) $201,000 15) Based on the preceding information, what amount did Conservative report as its investment in Spin after the transfer of assets and liabilities?

A) $181,000 B) $221,000 C) $263,000 D) $243,000 16) Based on the preceding information, immediately after the transfer, A) Conservative's total assets decreased by $23,000.

B) Conservative's total assets decreased by $20,000.

C) Conservative's total assets increased by $56,000.

D) Conservative's total assets remained the same.

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

17) Based on the preceding information, under the acquisition method, what amount relating to the business combination would be expensed?

A) $72,000 B) $19,000 C) $53,000 D) $63,000 18) Based on the preceding information, under the acquisition method: A) $72,000 of stock issue costs are treated as goodwill.

B) $19,000 of stock issue costs are treated as a reduction in the paid-in capital.

C) $19,000 of stock issue costs are expensed.

D) $72,000 of stock issue costs are expensed.

Miguel Corporation and Forest Company merged as of January 1, 20X3. Miguel paid finder's fees of $36,000 and legal fees of $8,000. Miguel also paid audit fees related to the stock issuance of $12,000, stock registration fees of $7,000, and stock listing application fees of $3,000.

19) Based on the preceding information, under the acquisition method, what amount relating to the business combination would be expensed?

A) $22,000 B) $36,000 C) $44,000 D) $66,000 20) Based on the preceding information, under the acquisition method A) $22,000 of stock issue costs are treated as a reduction in the issue price.

B) $22,000 of stock issue costs are expensed.

C) $66,000 of stock issue costs are classified as goodwill.

D) $66,000 of stock issue costs are expensed.

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

by Burrough Corporation while recording its investment in Helyar?

A) $0 B) $5,000 C) $8,000 D) $13,000 22) Simmons Corporation paid $170,000 to acquire all of Bush Company's net assets. Bush reported assets with a book value of $189,000 and a fair value of $206,000 and liabilities with a book value and fair value of $48,000 on the date of the combination. Simmons also paid $8,000 to a search firm for finder's fees related to the acquisition. What amount will be recorded as goodwill by Simmons Corporation when recording its investment in Bush?

A) $29,000 B) $20,000 C) $12,000 D) $10,000

Plummet Corporation reported the book value of its net assets at $400,000 when Zenith Corporation acquired 100 percent ownership. The fair value of Plummet's net assets was determined to be $510,000 on that date.

23) Based on the preceding information, what amount of goodwill will be reported in consolidated financial statements presented immediately following the combination if Zenith paid $550,000 for the acquisition?

A) $0 B) $50,000 C) $150,000 D) $40,000 24) Based on the preceding information, what amount will be recorded by Zenith as its investment in Plummet, if it paid $500,000 for the acquisition?

A) $610,000 B) $400,000 C) $500,000 D) $510,000 25) Based on the preceding information, what amount of goodwill will be reported in consolidated financial statements presented immediately following the combination if Zenith paid $500,000 for the acquisition?

A) $0 B) $50,000 C) $150,000 D) $40,000 Mercury Corporation acquired 100 percent of the stock of Jupiter Company when the book value of Jupiter's net assets was $250,000. The fair value of Jupiter's net assets was $280,000 on the acquisition date.

26) Based on the preceding information, what amount of goodwill will be reported in consolidated financial statements presented immediately following the combination if Mercury paid $295,000 for the acquisition?

A) $0 B) $5,000 C) $15,000 D) $45,000 27) Based on the preceding information, what amount will be recorded by Mercury as its investment in Jupiter if it paid $275,000 for the acquisition?

A) $250,000 B) $275,000 C) $280,000 D) $300,000 28) Based on the preceding information, what amount of goodwill will be reported in consolidated financial statements presented immediately following the combination if Mercury

paid $275,000 for the acquisition?

A) ($5,000) B) $0 C) $5,000 D) $25,000 29) The fair value of net identifiable assets of a reporting unit of X Company is $300,000. On X Company's books, the carrying value of this reporting unit's net assets is $350,000, which includes $60,000 of goodwill. If the fair value of the reporting unit as a whole is $335,000, what amount of goodwill impairment will be recognized for this unit?

A) $0 B) $15,000 C) $25,000 D) $35,000 30) The fair value of net identifiable assets of a reporting unit of Y Company is $270,000. The carrying value of the reporting unit's net assets on Y Company's books is $320,000, including $50,000 of goodwill before any impairment. If the reported goodwill impairment for the unit is $10,000, what would be the fair value of the entire reporting unit?

A) $320,000 B) $310,000 C) $270,000 D) $290,000 Following its acquisition of the net assets of Dan Company, Empire Company assigned goodwill of $60,000 to one of the reporting divisions. Information for this division follows:

Cash Inventory Equipment Goodwill Accounts Payable

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

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

31) Based on the preceding information, what amount of goodwill will be reported for this division – after any necessary impairments – if the fair value of the entire reporting unit is determined to be $200,000?

A) $0 B) $60,000 C) $30,000 D) $50,000 32) Based on the preceding information, what amount of goodwill impairment will be recognized for this division if its fair value is determined to be $195,000?

A) $15,000

B) $30,000 C) $60,000 D) $55,000 33) Based on the preceding information, what amount of amount of goodwill impairment will be recognized for this division if its fair value is determined to be $245,000?

A) $0 B) $5,000 C) $60,000 D) $55,000 Public Equity Corporation acquired Lenore Company through an exchange of common shares.

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

Par value of shares outstanding Additional paid-in capital

Public Equity Before acquisition After acquisition $ 200,000 $ 250,000 $ 350,000 $ 550,000

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

A) 5,000 B) 17,500 C) 12,500 D) 10,000 35) Based on the preceding information, what is the par value of Public's common stock?

A) $10 B) $1 C) $5 D) $4 36) Based on the preceding information, what is the fair value of Lenore's net assets, if goodwill of $56,000 is recorded?

A) $306,000 B) $244,000 C) $194,000 D) $300,000 Nash Company acquired Seel Corporation through an exchange of common shares. All of Seel's assets and liabilities were immediately transferred to Nash. Nash's common stock was trading at $25 per share at the time of the exchange. The total par value of Nash's stock outstanding before and after the acquisition was $750,000 and $840,000, respectively. Nash's additional paid-in capital before and after the acquisition were $200,000 and $560,000, respectively.

37) Based on the preceding information, what number of shares did Nash issue at the time of the exchange?

A) 3,600 B) 5,000 C) 14,400 D) 18,000 38) Based on the preceding information, what is the par value of Nash's common stock?

A) $1 B) $5 C) $6 D) $18 39) Based on the preceding information, what is the fair value of Seel's net assets if goodwill of $20,000 is recorded in the acquisition?

A) $430,000 B) $470,000 C) $540,000 D) $580,000

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

Carrying value Goodwill included in carrying value Fair value of net identifiable assets at year-end Fair value of reporting unit at year-end

Alpha $ 200,000

Beta $ 320,000

Gamma $ 370,000

Delta $ 300,000

20,000

34,000

50,000

30,000

150,000

300,000

390,000

280,000

180,000

350,000

360,000

295,000

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

A) $0 B) $20,000 C) $30,000 D) $10,000 41) Based on the preceding information, what amount of goodwill will be reported for Beta at year-end?

A) $0 B) $14,000 C) $34,000 D) $50,000 42) Based on the preceding information, for Gamma A) no goodwill should be reported at year-end.

B) goodwill impairment of $30,000 should be recognized at year-end.

C) goodwill impairment of $20,000 should be recognized at year-end.

D) goodwill of $40,000 should be reported at year-end.

43) Based on the preceding information, for Delta A) no goodwill should be reported at year-end.

B) goodwill impairment of $5,000 should be recognized at year-end.

C) goodwill impairment of $20,000 should be recognized at year-end.

D) goodwill of $30,000 should be reported at year-end.

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

A) $0 B) $99,000 C) $79,000 D) $94,000 45) Which of the following observations is(are) consistent with the acquisition method of accounting for business combinations?

I. Expenses related to the business combination are expensed.

II. Stock issue costs are treated as a reduction in the issue price.

III. All merger and stock issue costs are expensed.

IV. No goodwill is ever recorded.

A) III B) IV C) I and II D) I, II, and IV 46) Which of the following observations refers to the term differential?

A) Excess of consideration exchanged over fair value of net identifiable assets.

B) Excess of fair value over book value of net identifiable assets.

C) Excess of consideration exchanged over book value of net identifiable assets.

D) Excess of fair value over historical cost of net identifiable assets.

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

A) Once written down, it may be written up for recoveries.

B) It must be tested for impairment at least annually.

C) A goodwill impairment loss must be reported as a separate line item within income from continuing operations unless it relates to discontinued operations.

D) It must be reported as a separate line item in the balance sheet.

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

Inventory Land Buildings and Equipment Current Liabilities

$

70,000 100,000 320,000 50,000

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

A) $30,000 Goodwill, capitalized and tested for impairment B) $30,000 Bargain purchase, recognized in current earnings C) $30,000 Bargain purchase, capitalized and recognized over time D) $30,000 Goodwill, capitalized and amortized over time 49) Company X acquired for cash all of the outstanding common stock of Company Y. How should Company X determine in general the amounts to be reported for the inventories and longterm debt acquired from Company Y?

Inventories

Long-term debt

A.

Fair value

Fair value

B.

Fair value

Recorded value

C.

Recorded value

Fair value

D.

Recorded value

Recorded value

A) Option A B) Option B C) Option C D) Option D 50) Point Co. purchased 90% of Sharpe Corp.'s voting stock on January 1, 20X2 for $5,580,000.

Prior to the acquisition, Point held a 10% equity position in Sharpe Company. On January 1, 20X2 Pointe's 10% investment in Sharpe has a book value of $340,000 and a fair value of $620,000. On January 1, 20X2 Point records the following: A) Debit Gain on revaluation of Sharpe's stock $280,000 B) Credit Gain on revaluation of Sharpe's stock $280,000 C) Credit Investment in Sharpe stock $5,860,000 D) Debit Investment in Sharpe stock $6,200,000 51) The length of the measurement period allowed to value the assets and liabilities in an

acquired business combination starts on the date of acquisition and lasts until: A) All necessary information about the facts of the acquisition is obtained B) All necessary information about the facts of the acquisition is obtained, not to exceed one month C) All necessary information about the facts of the acquisition is obtained, not to exceed one reporting period D) All necessary information about the facts of the acquisition is obtained, not to exceed one year 52) ASC 805 requires contingent consideration in a business combination to be classified as: A) An asset B) A liability or equity C) An asset or equity D) An asset or a liability 53) For all acquired contingencies, the acquirer should do all of the following except: A) Provide documentation from the acquirer's attorney regarding pending lawsuits and loan guarantees B) Provide a description of each contingency C) Disclose the amount recognized at the acquisition date D) Describe the estimated range of possible undiscounted outcomes of the contingency 54) ASC 805 requires that acquired ongoing research and development projects be treated in all of the following ways except: A) Recorded at acquisition-date fair values B) Classified as intangible assets having indefinite lives C) Expensed immediately D) Tested for impairment periodically

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

Cash Accounts Receivable Inventory Patents Buildings and Equipment Less: Accumulated Depreciation Total Assets Accounts Payable Notes Payable Common Stock: $5 par value $2 par value Additional Paid-In Capital Retained Earnings Total Liabilities and Equities

Alaska Book Value $ 200,000 40,000 120,000 50,000 330,000 − 140,000 $ 600,000 $ 85,000 100,000

Mercantile Book Value Fair Value $ 30,000 $ 30,000 22,000 22,000 25,000 36,000 20,000 40,000 250,000 150,000 − 150,000 $ 197,000 $ 278,000 $ 55,000 $ 55,000 80,000 80,000

120,000 140,000 155,000 $ 600,000

20,000 25,000 17,000 $ 197,000

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

56) On January 1, 20X8, Line Corporation acquired all of the common stock of Staff Company for $300,000. On that date, Staff's identifiable net assets had a fair value of $250,000. The assets acquired in the purchase of Staff are considered to be a separate reporting unit of Line Corporation. The carrying value of Staff's net assets at December 31, 20X8, is $310,000. The fair value of the reporting unit is determined to be 260,000.

Required: 1) Explain how goodwill is tested for impairment for a reporting unit.

2) Determine the amount, if any, of impairment loss to be recognized at December 31, 20X8.

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

Cash Accounts Receivables Inventory Land Buildings Equipment Accounts Payable Fair Value of Reporting Unit Carrying Value of Investment Goodwill Included in Carrying Value

Unit X $ 15,000 15,000 35,000 30,000 120,000 140,000 25,000 360,000 375,000

Unit Y $ 45,000 18,000 60,000 45,000 80,000 45,000 45,000 230,000 240,000

Unit Z $ 35,000 10,000 35,000 20,000 50,000 50,000 25,000 220,000 240,000

50,000

25,000

40,000

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

Advanced Financial Accounting, 12e (Christensen) Chapter 2 Reporting Intercorporate Investments and Consolidation of Wholly Owned Subsidiaries with No Differential 1) If Push Company owned 51 percent of the outstanding common stock of Shove Company, which method would be appropriate for financial reporting purposes?

A) Cost method B) Full consolidation method C) Equity method D) Fair value method 2) Usually, an investment of 20 to 50 percent in another company's voting stock is reported under the: A) cost method.

B) full consolidation method.

C) equity method.

D) fair value method.

3) In the case of an investment in equity securities where the investor does not have significant influence and the investment is carried at fair value, a dividend from the investee is: A) A reduction of the carrying amount of the investment.

B) Income to the investor in the period of declaration.

C) An expense to the investor in the period of declaration.

D) A direct increase to retained earnings of the investor to offset the direct decrease to retained earnings of the investee.

4) Which of the following observations is NOT consistent with the accounting for investments in equity securities where there is no significant influence?

A) Changes in the number of investment shares resulting from stock dividends, stock splits, or reverse splits must be formally recorded by the investor.

B) Investments are carried by the investor at fair value.

C) The investor recognizes income from the investment as dividends are declared by the investee.

D) When the securities are remeasured to fair value as of the end of each period, any resulting difference is an unrealized gain or loss to be recognized in income.

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

A) $0 B) $16,500 C) $4,500 D) $12,000 On January 1, 20X8, Pullman Company acquired 30 percent of Skate Company's common stock, at underlying book value of $100,000. Skate has 100,000 shares of $2 par value, 5 percent

cumulative preferred stock outstanding. No dividends are in arrears. Skate reported net income of $150,000 for 20X8 and paid total dividends of $72,000. Pullman uses the equity method to account for this investment.

6) Based on the preceding information, what amount would Pullman Company receive as dividends from Skate for the year?

A) $62,000 B) $21,600 C) $18,600 D) $54,000 7) Based on the preceding information, what amount of investment income will Pullman Company report from its investment in Skate for the year?

A) $45,000 B) $42,000 C) $62,000 D) $35,000 8) Based on the preceding information, what amount would be reported by Pullman Company as the balance in its investment account on December 31, 20X8?

A) $100,000 B) $123,400 C) $120,400 D) $142,000 On January 1, 20X4, Pony Company acquired 25% of Stallion Company's common stock at underlying book value of $200,000. Stallion has 80,000 shares of $10 par value, 6 percent cumulative preferred stock outstanding. No dividends are in arrears. Stallion reported net income of $270,000 for 20X4 and paid total dividends of $140,000. Pony uses the equity method to account for this investment.

9) Based on the preceding information, what amount would Pony Company receive as dividends from Stallion for the year?

A) $23,000 B) $35,000 C) $37,500 D) $92,000 10) Based on the preceding information, what amount of investment income will Pony Company report from its investment in Stallion for the year?

A) $140,000 B) $67,500 C) $55,500 D) $35,000 11) Based on the preceding information, what amount would be reported by Pony Company as the balance in its investment account on December 31, 20X4?

A) $200,000 B) $220,500

C) $232,500 D) $255,500 On January 1, 20X7, Poke Corporation acquired 25 percent of the outstanding shares of Shove Corporation for $100,000 cash. Shove Company reported net income of $75,000 and paid dividends of $30,000 for both 20X7 and 20X8. The fair value of shares held by Poke was $110,000 and $105,000 on December 31, 20X7 and 20X8 respectively.

12) Based on the preceding information, what amount will be reported by Poke as income from its investment in Shove for 20X8, if it used the equity method of accounting?

A) $7,500 B) $11,250 C) $18,750 D) $26,250 13) Based on the preceding information, what amount will be reported by Poke as balance in investment in Shove on December 31, 20X8, if it used the equity method of accounting?

A) $108,250 B) $118,750 C) $100,000 D) $122,500 14) If instead, Poke could not exercise significant influence over the investee, by what amount will Poke's 20X7 income increase due to its investment in Shove?

A) $17,500 B) $12,500 C) $11,250 D) $7,500 15) If instead, Poke could not exercise significant influence over the investee, by what amount will Poke's 20X8 income increase due to its investment in Shove?

A) $11,250 B) $2,500 C) $6,250 D) $7,500 16) If instead, Poke could not exercise significant influence over the investee, what amount will be reported by Poke as balance in investment in Shove on December 31, 20X8?

A) $105,000 B) $118,750 C) $100,000 D) $122,500 17) A change from carrying securities at fair value to the equity method of accounting for an investment in common stock resulting from an increase in the number of shares held by the investor requires: A) only a footnote disclosure.

B) that the cumulative amount of the change be shown as a line item on the income statement, net of tax.

C) retroactive restatement as if the investor always had used the equity method.

D) that the investor begins accruing income earned by the investee under the equity method at the date of acquisition of the new shares.

18) Under the equity method of accounting for a stock investment, the investment initially should be recorded at: A) cost.

B) cost minus any differential.

C) proportionate share of the fair value of the investee company's net assets.

D) proportionate share of the book value of the investee company's net assets.

19) On July 1, 20X4, Pillow Corp. obtained significant influence over Sleep Co. through the purchase of 3,000 shares of Sleep's 10,000 outstanding shares of common stock for $20 per share. On December 15, 20X4, Sleep paid $40,000 in dividends to its common stockholders.

Sleep's net income for the year ended December 31, 20X4, was $120,000, earned evenly throughout the year. In its 20X4 income statement, what amount of income from this investment should Pillow report?

A) $12,000 B) $36,000 C) $18,000 D) $6,000 20) On January 2, 20X5, Park Co. purchased 10 percent of Sky, Inc.'s outstanding common shares for $400,000. Park is the largest single shareholder in Sky, and Park's officers are a majority on Sky's board of directors. As a result, Park is able to exercise significant influence over Sky. Sky reported net income of $500,000 for 20X5, and paid dividends of $150,000. In its December 31, 20X5, balance sheet, what amount should Park report as investment in Sky? A) $385,000 B) $450,000 C) $400,000 D) $435,000

21) The Salmon Corporation (Salmon) reported net income for the current year of $200,000 and paid cash dividends of $30,000. The Pond Company (Pond) holds 22 percent of the outstanding voting stock of Salmon. However, another corporation holds the other 78 percent ownership and does not take Pond's input into consideration when making financing and operating decisions for Salmon. What investment income should Pond recognize for the current year?

A) $6,600 B) $0 C) $44,000 D) $50,600 22) Slide Corporation reported net income for the current year of $370,000 and paid cash dividends of $50,000. Power Company holds 40 percent of the outstanding voting stock of Slide.

However, another corporation holds the other 60 percent ownership and does not take Power's input into consideration when making financing and operating decisions for Slide. What investment income should Power recognize for the current year?

A) $0 B) $20,000 C) $128,000 D) $148,000 23) What account balances in the subsidiary stockholders' equity accounts should be eliminated in preparing a consolidated balance sheet?

A) Common stock B) Additional paid-in capital C) Retained Earnings D) All of these account balances are eliminated 24) The consolidation process consists of all the following except: A) Combining the financial statements of two or more legally separate companies.

B) Eliminating intercompany transactions and holdings.

C) Closing the individual subsidiary's revenue and expense accounts into the parent's retained earnings.

D) Combining the accounts of separate companies, creating a single set of financial statements.

Prime Company acquired 100 percent of the voting common shares of Standard Video Corporation, its bitter rival, by issuing bonds with a par value and fair value of $150,000.

Immediately prior to the acquisition, Prime reported total assets of $500,000, liabilities of $280,000, and stockholders' equity of $220,000. At that date, Standard Video reported total assets of $400,000, liabilities of $250,000, and stockholders' equity of $150,000. Included in Standard's liabilities was an account payable to Prime in the amount of $20,000, which Prime included in its accounts receivable.

25) Based on the preceding information, what amount of total assets did Prime report in its separate balance sheet immediately after the acquisition before any consolidation with Standard Video?

A) $500,000 B) $650,000 C) $750,000 D) $900,000 26) Based on the preceding information, what amount of total assets was reported in the consolidated balance sheet immediately after acquisition?

A) $650,000 B) $880,000 C) $920,000 D) $750,000 27) Based on the preceding information, what amount of total liabilities was reported in the consolidated balance sheet immediately after acquisition?

A) $500,000 B) $530,000 C) $280,000 D) $660,000 28) Based on the preceding information, what amount of stockholders' equity was reported in the consolidated balance sheet immediately after acquisition?

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

Pickup Company acquired 100 percent of the voting common shares of Sedan Corporation by issuing bonds with a par value and fair value of $200,000. Immediately prior to the acquisition, Pickup reported total assets of $600,000, liabilities of $370,000, and stockholders' equity of $230,000. At that date, Sedan reported total assets of $500,000, liabilities of $300,000, and stockholders' equity of $200,000. Included in Sedan's liabilities was an account payable to Pickup in the amount of $50,000, which Pickup included in its accounts receivable.

29) Based on the preceding information, what amount of total assets did Pickup report in its balance sheet immediately after the acquisition?

A) $1,100,000 B) $1,000,000 C) $800,000 D) $1,600,000 30) Based on the preceding information, what amount of total assets was reported in the consolidated balance sheet immediately after acquisition?

A) $600,000 B) $800,000 C) $1,050,000 D) $1,150,000 31) Based on the preceding information, what amount of total liabilities was reported in the consolidated balance sheet immediately after the acquisition?

A) $370,000 B) $670,000 C) $820,000 D) $870,000 32) Based on the preceding information, what amount of stockholders' equity was reported in the consolidated balance sheet immediately after acquisition?

A) $200,000 B) $230,000 C) $380,000 D) $430,000

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

33) Based on the preceding information, what is Parent's post-closing retained earnings balance on December 31, 20X1?

A) $485,000 B) $505,000 C) $525,000 D) $600,000 34) Based on the preceding information, what is Son's post-closing retained earnings balance on December 31, 20X1?

A) $141,000 B) $150,000 C) $159,000 D) $165,000 35) Based on the preceding information, what is the consolidated retained earnings balance on December 31, 20X1?

A) $470,000 B) $585,000 C) $600,000 D) $759,000 Phips Co. purchases 100 percent of Sips Company on January 1, 20X2, when Phips' retained earnings balance is $320,000 and Sips' is $120,000. During 20X2, Sips reports $20,000 of net income and declares $8,000 of dividends. Phips reports $125,000 of separate operating earnings plus $20,000 of equity-method income from its 100 percent interest in Sips; Phips declares dividends of $35,000.

36) Based on the preceding information, what is Phips' post-closing retained earnings balance on December 31, 20X2?

A) $305,000 B) $410,000 C) $430,000 D) $465,000 37) Based on the preceding information, what is Sips' post-closing retained earnings balance on December 31, 20X2?

A) $108,000 B) $120,000 C) $132,000 D) $140,000 38) Based on the preceding information, what is the consolidated retained earnings balance on December 31, 20X2?

A) $402,000 B) $410,000 C) $430,000 D) $562,000 39) The main guidance on equity-method reporting, found in ASC 323 and 325 requires all of the following except: A) The investor's share of the investee's discontinued operations should be reported.

B) The investor's share of the investee's prior-period adjustments should be reported.

C) Continued use of the equity-method even if continued losses result in a zero or negative balance in the investment account.

D) Preferred dividends of the investee should be deducted from net income before the investor computes its share of investee earnings.

On January 1, 20X4, Plimsol Company acquired 100 percent of Shipping Corporation's voting shares, at underlying book value. Plimsol accounts for its investment in Shipping at cost.

Shipping's retained earnings was $75,000 on the date of acquisition. On December 31, 20X4, the trial balance data for the two companies are as follows: Item Current Assets Depreciable Assets (net) Investment in Shipping Corp.

Other Expenses Depreciation Expense Dividends Declared Current Liabilities Long-Term Debt Common Stock Retained Earnings Sales Dividend Income, Shipping Corp.

Plimsol Co. Debit Credit $ 100,000 200,000 125,000 60,000 20,000 25,000 $ 40,000 75,000 100,000 150,000 150,000 15,000 $ 530,000 $ 530,000

Shipping Corp.

Debit Credit $ 75,000 150,000 45,000 15,000 15,000 $

$ 300,000

25,000 50,000 50,000 75,000 100,000

$ 300,000

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

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

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

A) $425,000 B) $525,000 C) $650,000 D) $630,000 42) Based on the information provided, what amount of retained earnings will be reported in the consolidated balance sheet prepared on December 31, 20X4?

A) $235,000 B) $210,000 C) $310,000 D) $225,000 43) Based on the information provided, what amount of total liabilities will be reported in the consolidated balance sheet prepared on December 31, 20X4?

A) $525,000 B) $115,000 C) $125,000 D) $190,000 44) Based on the information provided, what amount of total stockholders' equity will be reported in the consolidated balance sheet prepared on December 31, 20X4?

A) $190,000 B) $335,000 C) $460,000 D) $310,000 Parent Company purchased 100 percent of Son Inc. on January 1, 20X2 for $420,000. Son reported earnings of $82,000 and declared dividends of $4,000 during 20X2.

45) Based on the preceding information and assuming Parent carries its investment in Son at cost, what is the balance in Parent's Investment in Son account on December 31, 20X2, prior to consolidation?

A) $416,000 B) $420,000 C) $424,000 D) $498,000 46) Based on the preceding information and assuming Parent uses the equity method to account for its investment in Son, what is the balance in Parent's Investment in Son account on December 31, 20X2, prior to consolidation?

A) $416,000 B) $420,000 C) $424,000 D) $498,000 Pone Company purchased 100 percent of Sone Inc. on January 1, 20X9 for $625,000. Sone reported earnings of $76,000 and declared dividends of $8,000 during 20X9.

47) Based on the preceding information and assuming Pone carries its investment in Sone at cost, what is the balance in Pone's Investment in Sone account on December 31, 20X9, prior to consolidation?

A) $617,000 B) $625,000 C) $633,000 D) $693,000 48) Based on the preceding information and assuming Pone uses the equity method to account for its investment in Sone, what is the balance in Pone's Investment in Sone account on December 31, 20X9, prior to consolidation?

A) $617,000 B) $625,000 C) $633,000 D) $693,000 49) Pocket Corporation acquired 100 percent of the voting shares of Sleeve Inc. by issuing 10,000 new shares of $5 par value common stock with a $30 market value.

Required: 1. Which company is the parent and which is the subsidiary?

2. Define a subsidiary corporation.

3. Define a parent corporation.

4. Which entity prepares the consolidated worksheet?

5. Why are consolidation entries used?

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

Peery Co. Item Current Assets Depreciable Assets Investment in Standard Co. Other Expenses Depreciation Expense Dividends Declared Accumulated Depreciation Current Liabilities Long-Term Debt Common Stock Retained Earnings Sales Income from Standard Co.

Debit $ 238,000

Standard Co. Credit

300,000

Debit $ 95,000

Credit

170,000

100,000 90,000

70,000

30,000

17,000

32,000

10,000 $ 120,000

$

85,000

50,000

30,000

120,000

50,000

100,000

50,000

175,000

35,000

200,000

112,000

25,000 $ 790,000

$ 790,000

$ 362,000

$ 362,000

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

2. Prepare a three-part consolidation worksheet as of December 31, 20X9.

51) In the absence of other evidence, common stock ownership of between 20 and 50 percent is viewed as indicating that the investor is able to exercise significant influence over the investee.

What are some of the other factors that could constitute evidence of the ability to exercise significant influence?

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

Item Current Assets Depreciable Assets (net) Investment in Shipping Corp.

Other Expenses Depreciation Expense Dividends Declared Current Liabilities Long-Term Debt Common Stock Retained Earnings Sales Dividend Income

Plimsol Co. Debit Credit $ 160,000 180,000

Shipping Corp.

Debit Credit $ 115,000 135,000

125,000 85,000

60,000

20,000

15,000

30,000

15,000 $

25,000

$

20,000

75,000

50,000

100,000

50,000

210,000

100,000

175,000

120,000

15,000 $ 600,000

$ 600,000

$ 340,000

$ 340,000

Required: 1. Provide all consolidating entries required to prepare a full set of consolidated statements for 20X8.

2. Prepare a three-part consolidation worksheet in good form as of December 31, 20X8.

Advanced Financial Accounting, 12e (Christensen) Chapter 3 The Reporting Entity and the Consolidation of Less-than-Wholly- Owned Subsidiaries with No Differential 1) Consolidated financial statements tend to be most useful for: A) Creditors of a consolidated subsidiary.

B) Investors and long-term creditors of the parent company.

C) Short-term creditors of the parent company.

D) Stockholders of a consolidated subsidiary.

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

C) Pea plus Essone plus Esstwo.

D) Pea plus Essone plus Esstwo plus Essthree.

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

A) The subsidiary is in bankruptcy.

B) Subsidiary's operations are dissimilar from those of the parent.

C) The parent owns 90 percent of the subsidiary's common stock, but all of the subsidiary's nonvoting preferred stock is held by a single investor.

D) Subsidiary is foreign.

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

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

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

Common Stock ($5 par value) Additional Paid-In Capital Retained Earnings

$

Pleat 500,000 300,000 350,000

Stitch $ 200,000 80,000 150,000

Total Stockholders' Equity

$ 1,150,000

$ 430,000

Noncontrolling interest was assigned income of $11,000 in Pleat's consolidated income statement for 20X9.

5) Based on the preceding information, what amount will be assigned to the noncontrolling interest on January 3, 20X9, in the consolidated balance sheet?

A) $86,000 B) $44,000 C) $68,800 D) $50,000 6) Based on the preceding information, what is the total stockholders' equity in the consolidated balance sheet as of January 3, 20X9?

A) $1,580,000 B) $1,064,000 C) $1,150,000 D) $1,236,000 7) Based on the preceding information, what will be the amount of net income reported by Stitch Corporation in 20X9?

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

On January 2, 20X2, Piranha Company acquired 70 percent of Salmon Corporation's common stock for $420,000 cash. At the acquisition date, the book values and fair values of Salmon' assets and liabilities were equal, and the fair value of the noncontrolling interest was equal to 30 percent of the total book value of Salmon. The stockholders' equity accounts of the two companies at the acquisition date are as follows:

Common Stock ($10 par value) Additional Paid-In Capital Retained Earnings

Piranha $ 600,000 450,000 250,000

Salmon $ 350,000 50,000 200,000

Total Stockholders' Equity

$ 1,300,000

$ 600,000

Noncontrolling interest was assigned income of $15,000 in Piranha's consolidated income statement for 20X2.

8) Based on the preceding information, what amount will be assigned to noncontrolling interest on January 2, 20X2, in the consolidated balance sheet?

A) $120,000 B) $126,000 C) $180,000 D) $420,000 9) Based on the preceding information, what is the total stockholders' equity in the consolidated balance sheet as of January 2, 20X2?

A) $1,120,000 B) $1,300,000 C) $1,480,000 D) $1,900,000 10) Based on the preceding information, what will be the amount of net income reported by Salmon Corporation in 20X2?

A) $45,000 B) $50,000 C) $75,000 D) $105,000

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

Total Assets Liabilities Common Stock Retained Earnings

Pine $ 504,000 144,000 120,000 240,000

Sap $ 216,000 72,000 60,000 84,000

Total Liabilities and Stockholders' Equity

$ 504,000

$ 216,000

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

A) $90,000 B) $54,000 C) $36,000 D) $0 12) Based on the preceding information, what amount will Pine Company report as common stock outstanding in its consolidated balance sheet at December 31, 20X9?

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

On January 1, 20X6, Power Company acquired 80 percent of Strong Company's outstanding stock for cash. The fair value of the noncontrolling interest was equal to a proportionate share of the book value of Strong Company's net assets at the date of acquisition. Selected balance sheet data at December 31, 20X6 are as follows:

Total Assets Liabilities Common Stock Retained Earnings

Power $ 564,000 $ 180,000 150,000 234,000

Strong $ 241,000 $ 65,000 80,000 96,000

Total Liabilities and Stockholders' Equity

$ 564,000

$ 241,000

13) Based on the preceding information, what amount should be reported as noncontrolling interest in net assets in Power Company's December 31, 20X6, consolidated balance sheet?

A) $35,200 B) $48,200 C) $76,800 D) $112,800 14) Based on the preceding information, what amount will Power Company report as common stock outstanding in its consolidated balance sheet at December 31, 20X6?

A) $214,000 B) $150,000 C) $184,000 D) $230,000 15) Putter Corporation owns 80 percent of the voting common shares of Sand Corporation.

Noncontrolling interest was assigned $24,000 of income in the 20X9 consolidated income statement. What amount of net income did Sand Corporation report for the year?

A) $150,000 B) $96,000 C) $120,000 D) $30,000 16) Paul Corporation owns 70 percent of the voting common shares of Sally Corporation, purchased at book value. Noncontrolling interest was assigned $21,000 of income in the 20X0 consolidated income statement. What amount of net income did Sally Corporation report for the year?

A) $70,000 B) $63,000 C) $30,000 D) $147,000 17) Peta Corporation and its subsidiary reported consolidated net income of $320,000 for the

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

A) $170,000 B) $150,000 C) $120,000 D) $200,000 18) Maple Corporation and its subsidiary reported consolidated net income of $380,000 for the year ended December 31, 20X5. Maple owns 75% of the common shares of its subsidiary, acquired at book value. Noncontrolling interest was assigned income of $25,000 in the consolidated income statement for 20X5. What is the amount of separate operating income reported by Maple for the year?

A) $95,000 B) $100,000 C) $280,000 D) $285,000

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

Potter Company Debit Current Assets

Credit

Shoemaker Corporation Debit

$ 200,000

$ 140,000

Depreciable Assets

350,000

250,000

Investment in Shoemaker Corp.

162,000

Depreciation Expense

27,000

10,000

Other Expenses

95,000

60,000

Dividends Declared

20,000

10,000

Accumulated Depreciation

$ 118,000

Credit

$

80,000

Current Liabilities

100,000

80,000

Long-Term Debt

100,000

50,000

Common Stock

100,000

50,000

Retained Earnings

150,000

100,000

Sales

250,000

110,000

Income from Subsidiary

36,000 $ 854,000

$ 854,000

$ 470,000

$ 470,000

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

A) $805,000 B) $712,000 C) $742,000 D) $1,102,000 20) Based on the preceding information, what amount would be reported as total liabilities in the consolidated balance sheet at December 31, 20X9?

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

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

A) $314,000 B) $294,000 C) $150,000 D) $424,000 22) Based on the preceding information, what amount would be reported as noncontrolling interest in the consolidated balance sheet at December 31, 20X9?

A) $27,000 B) $4,000 C) $15,000 D) $18,000 23) Based on the preceding information, what amount would be reported as total stockholders' equity in the consolidated balance sheet at December 31, 20X9?

A) $412,000 B) $394,000 C) $542,000 D) $348,000 24) Based on the preceding information, what amount would be reported as income to controlling interest in the consolidated financial statements for 20X9?

A) $168,000 B) $138,000 C) $164,000 D) $150,000 25) Pluto Company owns 80 percent of the common stock of Star Corporation. During the year, Pluto reported sales of $1,000,000, and Star reported sales of $500,000, including sales to Pluto of $80,000. The amount of sales that should be reported in the consolidated income statement for the year is: A) $500,000.

B) $1,300,000.

C) $1,420,000.

D) $1,500,000.

26) For which of the following reporting units is the preparation of combined financial statements most appropriate?

A) A corporation and a foreign subsidiary with nonintegrated homogeneous operations.

B) A corporation and a majority-owned subsidiary with nonhomogeneous operations.

C) Several corporations with related operations owned by one individual.

D) Several corporations with related operations with some common individual owners.

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

A) Common stock, with no special features or provisions B) Senior debt C) Subordinated debt D) Loan or asset guarantees 28) All of the following statements accurately describe Special Purpose Entities (SPEs) except for: A) SPEs are corporations, trusts or partnerships created for a single specified purpose.

B) SPEs usually have no substantive operations and are often used for financing operations.

C) Among other things, SPEs are used for asset securitization, risk sharing and taking advantage of tax statues.

D) A variable interest entity (VIE) is a type of SPE with a limited number of equity investors.

29) On December 31, 20X9, Play Company acquired 80 percent of the common stock of Station Company. At the time, Play held land with a book value of $100,000 and a fair value of $260,000; Station held land with a book value of $600,000 and fair value of $600,000. At what amount would land be reported in a consolidated balance sheet prepared immediately after the combination?

A) $550,000 B) $590,000 C) $700,000 D) $860,000 30) Princeton Company acquired 75 percent of the common stock of Sheffield Corporation on December 31, 20X9. On the date of acquisition, Princeton held land with a book value of $150,000 and a fair value of $300,000; Sheffield held land with a book value of $500,000 and fair value of $500,000. At what amount would land be reported in a consolidated balance sheet prepared immediately after the combination?

A) $650,000 B) $500,000 C) $550,000 D) $375,000 31) Pepper Company acquired 60 percent of the common stock of Safton Corporation on December 31, 20X9. On the date of acquisition, Pepper held land with a book value of $200,000 and a fair value of $350,000; Safton held land with a book value of $300,000 and fair value of $300,000. At what amount would land be reported in a consolidated balance sheet prepared immediately after the combination?

A) $290,000 B) $500,000 C) $590,000 D) $650,000

32) On January 1, 20X9, Peanuts Corporation acquired 80 percent of Schulz Corporation's voting common stock. On that date, Peanuts had equipment with a book value of $50,000 and a fair value of $200,000. Schulz's buildings and equipment had a book value of $300,000 and a fair value of $300,000 at the time of acquisition. What will be the amount at which buildings and equipment will be reported in consolidated statements immediately following the acquisition?

A) $350,000 B) $340,000 C) $280,000 D) $300,000 33) Primo Corporation acquired 60 percent of Secondo Corporation's voting common stock. On the date of acquisition, Primo had equipment with a book value of $50,000 and a fair value of $150,000. Secondo's buildings and equipment had a book value of $200,000 and a fair value of $200,000 at the time of the acquisition. What will be the amount at which buildings and equipment will be reported in consolidated statements immediately following the acquisition?

A) $150,000 B) $200,000 C) $230,000 D) $250,000 34) On January 1, 20X9, Pallet Company acquires 80 percent ownership in Slat Corporation for $200,000. The fair value of the noncontrolling interest at that time is determined to be $50,000.

Slat reports net assets with a book value of $250,000 and fair value of $250,000. Pallet Company reports net assets with a book value of $600,000 and a fair value of $650,000 at that time, excluding its investment in Slat. What will be the amount of consolidated net assets that would be reported immediately after the combination?

A) $680,000 B) $800,000 C) $900,000 D) $850,000 35) On January 1, 20X5, Playa Company acquires 90 percent ownership in Seaside Corporation for $180,000. The fair value of the noncontrolling interest at that time is determined to be $20,000. Seaside reports net assets with a book value of $200,000 and fair value of $200,000.

Playa Company reports net assets with a book value of $480,000 and a fair value of $525,000 at that time, excluding its investment in Seaside. What will be the amount of consolidated net assets that would be reported immediately after the combination?

A) $544,000 B) $660,000 C) $680,000 D) $725,000

36) Which of the following statements are true relative to US GAAP and IFRS consolidation rules?

A) US GAAP allows for two consolidation models, the VIE model and the voting interest model.

B) US GAAP and IFRS both use the notion of control to determine whether consolidation is appropriate.

C) US GAAP and IFRS differ to some degree as to the definition of control.

D) All of the given statements are true relative to US GAAP and IFRS consolidation rules.

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

38) In reading a set of consolidated financial statements you are surprised to see the term noncontrolling interest not reported under the Liability section of the Balance Sheet.

Required: a. What is a noncontrolling interest? b. Why must it be reported in the financial statements as an element of equity rather than a liability?

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

Cash Inventory Plant Assets (net) Property

$

350,000 100,000 320,000 500,000

Total Assets

$ 1,270,000

Current Liabilities Common Stock Retained Earnings Total Liabilities & Equity

$

120,000 100,000 1,050,000

$ 1,270,000

During the year Son Inc. reported $310,000 in net income and declared $15,000 in dividends.

Parent Company reported $520,000 in net income and declared $25,000 in dividends. Parent accounts for their investment using the equity method.

Required: 1) What journal entry will Parent make on the date of acquisition to record the Investment in Son Inc.?

2) If Parent were to prepare a consolidated balance sheet on the acquisition date (January 31, 20X2), what is the basic consolidation entry Parent would use in the consolidation worksheet?

3) What is Parent's balance in "Investment in Son Inc." prior to consolidation on December 31, 20X2?

4) What is the basic consolidation entry Parent would use in the consolidation worksheet on December 31, 20X2?

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

Pierce Company Current Assets Depreciable Assets Investment in Sharp Depreciation Expense Other Expenses Dividends Declared

Debit $ 200,000 300,000 139,500

Credit

Sharp Corporation Debit $ 120,000 225,000

30,000

25,000

100,000 30,000

60,000 10,000

Accumulated Depreciation Current Liabilities Long-Term Debt Common Stock Retained Earnings Sales

$ 120,000

$

62,000 75,000 100,000 120,000 300,000

Income from Subsidiary

Credit

75,000 25,000 90,000 75,000 65,000 110,000

22,500 $ 799,500

$ 799,500

$ 440,000

$ 440,000

Required: 1) Provide all consolidating entries required as of December 31, 20X8, to prepare consolidated financial statements.

2) Prepare a three-part consolidation worksheet.

41) On January 1, 20X8, Pierce Corporation acquired 90 percent of Sharp Company's voting stock, at underlying book value. The fair value of the noncontrolling interest was equal to 10 percent of the book value of Sharp at that date. The amount of accumulated depreciation to eliminate is $50,000. Pierce uses the equity method in accounting for its ownership of Sharp. On December 31, 20X9, the trial balances of the two companies are as follows:

Pierce Company Debit

Credit

Sharp Corporation Debit

Current Assets

$ 225,500

$ 145,000

Depreciable Assets

300,000

225,000

Investment in Sharp Corp.

144,000

Depreciation Expense Other Expenses Dividends Declared

30,000

25,000

180,000

85,000

40,000

10,000

Accumulated Depreciation

Credit

$ 150,000

$ 100,000

Current Liabilities

45,000

20,000

Long-Term Debt

75,000

90,000

Common Stock

100,000

75,000

282,500

80,000

253,500

125,000

Retained Earnings Sales Income from Sharp

13,500 $ 919,500

$ 919,500

$ 490,000

$ 490,000

Required: 1) Give all consolidating entries required on December 31, 20X8, to prepare consolidated financial statements.

2) Prepare a three-part consolidation worksheet as of December 31, 20X8.

42) ASC 805 is related to the Consolidation of Variable Interest Entities. Describe what a

Variable Interest Entity is and discuss why the FASB has difficulty in prescribing when these entities are consolidated?

Advanced Financial Accounting, 12e (Christensen) Chapter 4 Consolidation of Wholly Owned Subsidiaries Acquired at More than Book Value On July 1, 20X9, Playa Corporation paid $340,000 for all of Seashore Company's outstanding common stock. On that date, the costs and fair values of Seashore's recorded assets and liabilities were as follows:

Cash and Receivables Inventory Buildings and Equipment (net) Liabilities Net assets

Cost $ 50,000 120,000 200,000 (100,000) $ 270,000

Fair Value $ 50,000 125,000 240,000 (100,000) $ 315,000

1) Based on the preceding information, the differential reflected in a consolidation worksheet to prepare a consolidated balance sheet immediately after the business combination is: A) $0.

B) $25,000.

C) $70,000.

D) $45,000.

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

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

On October 1, 20X3, Pole Corporation paid $450,000 for all of Stick Company's outstanding common stock. On that date, the book values and fair values of Stick's recorded assets and liabilities were as follows:

Cash and Receivables Inventory Buildings and Equipment (net) Liabilities Net Assets

Book Value $ 75,000 155,000 260,000 (150,000) $ 340,000

Fair Value $ 75,000 160,000 320,000 (150,000) $ 405,000

3) Based on the preceding information, the differential implicit in this acquisition is A) $0.

B) $45,000.

C) $65,000.

D) $110,000.

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

A) $110,000.

B) $65,000.

C) $45,000.

D) $0.

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

Cash and Receivables Inventory Land Buildings and Equipment (net) Total Assets Accounts Payable Bonds Payable Common Stock Retained Earnings Total Liabilities and Stockholders' Equity

$

35,000 75,000 100,000 220,000 $ 430,000 $65,000 150,000 100,000 115,000 $ 430,000

At the date of the business combination, Saturn's net assets and liabilities approximated fair value except for inventory, which had a fair value of $60,000, land which had a fair value of $125,000, and buildings and equipment (net), which had a fair value of $250,000.

5) Based on the information provided, what amount of inventory will be included in the consolidated balance sheet immediately following the acquisition?

A) $60,000 B) $75,000 C) $15,000 D) $45,000 6) Based on the information provided, what amount of goodwill will be included in the consolidated balance sheet immediately following the acquisition?

A) $30,000 B) $15,000 C) $85,000 D) $45,000 7) Based on the information provided, what amount will be included as Investment in Saturn Corporation in the consolidated balance sheet immediately following the acquisition?

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

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

Pirate Corp.

Item Cash and Receivables Inventory Buildings and Equipment (net) Investment in Ship Stock Total Accounts Payable Bonds Payable Common Stock Retained Earnings Total

$

$ $

$

60,000 110,000 160,000 150,000 480,000 40,000 200,000 100,000 140,000 480,000

Ship Corporation Book Value Fair Value $ 15,000 $ 15,000 32,000 38,000 90,000 120,000 $ 137,000 $ 5,000 40,000 40,000 52,000 $ 137,000

$

5,000 40,000

8) Based on the preceding information, the amount of differential associated with the acquisition is: A) $0.

B) $58,000.

C) $22,000.

D) $36,000.

9) Based on the information provided, the consolidated balance sheet of Pirate and Ship will reflect goodwill in the amount of: A) $0.

B) $58,000.

C) $22,000.

D) $36,000.

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

B) retained earnings.

C) deferred charges.

D) equipment.

Pace Corporation acquired 100 percent of Spin Company's common stock on January 1, 20X9.

Balance sheet data for the two companies immediately following the acquisition follows: Item Cash Accounts Receivable Inventory Land Buildings and Equipment Less: Accumulated Depreciation Investment in Spin Company Stock Total Assets Accounts Payable Taxes Payable Bonds Payable Common Stock Retained Earnings Total Liabilities and Stockholders' Equity

Pace Corporation $ 30,000 80,000 150,000 65,000 260,000 (120,000) 150,000 $ 615,000 $45,000 20,000 200,000 50,000 300,000 $ 615,000

Spin Company $ 25,000 40,000 55,000 40,000 160,000 (50,000) $ 270,000 $33,000 8,000 100,000 20,000 109,000 $ 270,000

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

11) Based on the preceding information, at what amount should total land be reported in the consolidated balance sheet prepared immediately after the business combination?

A) $130,000 B) $105,000 C) $115,000 D) $120,000 12) Based on the preceding information, what amount of total assets will appear in the consolidated balance sheet prepared immediately after the business combination?

A) $756,000 B) $735,000 C) $750,000 D) $642,000 13) Based on the preceding information, what is the differential associated with the acquisition?

A) $15,000 B) $21,000 C) $6,000 D) $10,000 14) Based on the preceding information, what amount of goodwill will be reported in the consolidated balance sheet prepared immediately after the business combination?

A) $0 B) $21,000 C) $6,000 D) $15,000 15) Based on the preceding information, what amount of liabilities will be reported in the consolidated balance sheet prepared immediately after the business combination?

A) $615,000 B) $406,000 C) $300,000 D) $265,000 16) Based on the preceding information, what amount of retained earnings will be reported in the consolidated balance sheet prepared immediately after the business combination?

A) $300,000 B) $409,000 C) $259,000 D) $191,000 17) Based on the preceding information, what amount of total stockholders' equity will be reported in the consolidated balance sheet prepared immediately after the business combination?

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

Paccu Corporation acquired 100 percent of Sallee Company's common stock on January 1, 20X7. Balance sheet data for the two companies immediately following the acquisition follow: Cash Accounts Receivable Inventory Land Buildings and Equipment Less: Accumulated Depreciation Investment in Sallee Company Stock Total Assets Accounts Payable Taxes Payable Bonds Payable Common Stock Retained Earnings Total Liabilities and Stockholders' Equity

Paccu 50,000 60,000 130,000 75,000 310,000 (130,000) 250,000 $ 745,000 $ 40,000 30,000 250,000 75,000 350,000 $ 745,000 $

$

Sallee 30,000 35,000 45,000 60,000 170,000 (30,000)

$ 310,000 $ 35,000 12,000 50,000 75,000 138,000 $ 310,000

At the date of the business combination, the book values of Sallee's assets and liabilities approximated fair value except for inventory, which had a fair value of $55,000, and land, which had a fair value of $65,000. The fair value of land for Paccu Corporation was estimated at $90,000 immediately prior to the acquisition.

18) Based on the preceding information, at what amount should the land be reported in the consolidated balance sheet prepared immediately after the business combination?

A) $135,000 B) $140,000 C) $150,000 D) $155,000 19) Based on the preceding information, what amount of total assets will appear in the consolidated balance sheet prepared immediately after the business combination?

A) $745,000 B) $805,000 C) $830,000 D) $842,000 20) Based on the preceding information, what is the differential associated with the acquisition?

A) $15,000 B) $20,000 C) $22,000 D) $37,000

21) Based on the preceding information, what amount of goodwill will be reported in the consolidated balance sheet prepared immediately after the business combination?

A) $37,000 B) $22,000 C) $15,000 D) $0 22) Based on the preceding information, what amount of liabilities will be reported in the consolidated balance sheet prepared immediately after the business combination?

A) $300,000 B) $320,000 C) $417,000 D) $745,000 23) Based on the preceding information, what amount of retained earnings will be reported in the consolidated balance sheet prepared immediately after the business combination?

A) $200,000 B) $212,000 C) $350,000 D) $488,000 24) Perimeter, Inc. acquired 30 percent of South Co.'s (South) voting stock for $200,000 on January 1, 20X1. Perimeter's 30 percent interest in South gave Perimeter the ability to exercise significant influence over South's operating and financial policies. On that date, South reported assets of $500,000 and liabilities of $100,000. South had equipment with a book value of $60,000 that was actually worth $160,000. The equipment had a remaining useful life of five years. During 20X1, South reported net income of $80,000 and paid dividends of $50,000. What amount of income should Perimeter recognize in 20X1 as a result of this investment?

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

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

Cash Accounts Receivable Inventory Land Buildings and Equipment Investment in Stryder Company Cost of Goods Sold Depreciation Expense Other Expenses Dividends Declared Accumulated Depreciation Accounts Payable Mortgages Payable Common Stock Retained Earnings Sales Income from Subsidiary

Patriot Corp.

Debit Credit $ 50,000 60,000 75,000 60,000 300,000

Stryder Corporation Debit Credit $ 30,000 40,000 80,000 40,000 120,000

256,000 270,000 30,000 80,000 40,000

170,000 12,000 63,000 15,000 $

$ 1,221,000

120,000 50,000 100,000 200,000 200,000 500,000 51,000 $ 1,221,000

$ 48,000 27,000 25,000 100,000 70,000 300,000 $ 570,000

$ 570,000

On the acquisition date, Stryder reported net assets with a book value of $170,000. A total of $10,000 of the acquisition price is applied to goodwill, which was not impaired in 20X8.

Stryder's depreciable assets had an estimated economic life of 10 years on the date of combination. The difference between fair value and book value of tangible assets is related entirely to buildings and equipment. Patriot used the equity method in accounting for its investment in Stryder. Analysis of receivables and payables revealed that Stryder owed Patriot $10,000 on December 31, 20X8.

25) Based on the information provided, the differential associated with this acquisition is: A) $36,000.

B) $40,000.

C) $10,000.

D) $50,000.

26) Based on the information provided, the beginning differential assigned to buildings and equipment is: A) $50,000.

B) $40,000.

C) $10,000.

D) $36,000.

27) Based on the information provided, the annual amortization of the differential assigned to buildings and equipment is: A) $5,000.

B) $4,000.

C) $10,000.

D) $3,600.

28) Based on the information provided, what amount of retained earnings will be reported in the consolidated financial statements for the year?

A) $331,000 B) $110,000 C) $441,000 D) $456,000 29) Based on the information provided, what amount of net income will be reported in the consolidated financial statements for the year?

A) $226,000 B) $55,000 C) $230,000 D) $171,000 30) Based on the information provided, what amount of total assets will be reported in the consolidated balance sheet for the year?

A) $895,000 B) $801,000 C) $723,000 D) $1,111,000

Pail, Inc. holds 100 percent of the common stock of Shovel Company, an investment acquired for $680,000. Immediately following the combination, Pail's net assets have a book value of $1,150,000 and a fair value of $1,390,000. The book value and the fair value of Shovel's net assets on the date of combination are $400,000 and $550,000, respectively. Immediately following the combination, a consolidated balance sheet is prepared.

31) Based on the information given above, what will be the amount of net assets reported in the consolidated balance sheet, prepared immediately following the combination?

A) $1,150,000 B) $1,550,000 C) $1,700,000 D) $1,830,000 32) Based on the information given above, goodwill will be reported in the consolidated balance sheet in the amount of: A) $240,000.

B) $130,000.

C) $150,000.

D) $270,000.

33) Based on the information given above, at what amount will Pail's investment in Shovel stock be reported in the consolidated balance sheet?

A) $0 B) $400,000 C) $440,000 D) $480,000 Paris, Inc. holds 100 percent of the common stock of Stockholm Company, an investment acquired for $520,000. Immediately following the combination, Paris's net assets have a book value of $900,000 and a fair value of $1,050,000. The book and fair value of Stockholm's net assets on the date of combination are $350,000 and $425,000, respectively. Immediately following the combination, a consolidated balance sheet is prepared.

34) Based on the information given above, what will be the amount of net assets reported in the consolidated balance sheet?

A) $1,420,000 B) $1,325,000 C) $1,250,000 D) $900,000 35) Based on the information given above, goodwill will be reported at what amount in a consolidated balance sheet?

A) $170,000 B) $150,000 C) $95,000 D) $75,000 36) Based on the information given above, at what amount will Paris's investment in Stockholm stock be reported in a consolidated balance?

A) $520,000 B) $170,000 C) $95,000 D) $0 On December 31, 20X8, Polaris Corporation acquired 100 percent ownership of Star Corporation. On that date, Star reported assets and liabilities with book values of $300,000 and $100,000, respectively, common stock outstanding of $50,000, and retained earnings of $150,000. The book values and fair values of Star's assets and liabilities were identical except for land which had increased in value by $10,000 and inventories which had decreased by $5,000.

37) Based on the preceding information, what amount of differential will appear in the consolidating entries required to prepare a consolidated balance sheet immediately after the business combination, if the acquisition price was $240,000?

A) $0 B) $40,000 C) $25,000 D) $5,000 38) Based on the preceding information, what amount of goodwill will be reported if the acquisition price was $240,000?

A) $0 B) $40,000 C) $15,000 D) $35,000 39) Based on the preceding information, what amount of goodwill will be reported if the acquisition price was $195,000?

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

On December 31, 20X1, Pine Corporation acquired 100 percent ownership of Sap Corporation. On that date, Sap reported assets and liabilities with books values of $450,000 and $200,000, respectively, common stock outstanding of $150,000, and retained earnings of $100,000. The book values and fair values of Sap's assets and liabilities were identical except for land which had increased in value by $15,000 and inventories which had decreased by $5,000.

40) Based on the preceding information, what amount of differential is implicit in the acquisition if the acquisition price was $280,000?

A) $10,000 B) $20,000 C) $25,000 D) $30,000 41) Based on the preceding information, what amount of goodwill will be reported in the consolidated balance sheet on the acquisition date if the acquisition price was $280,000?A) $10,000 B) $20,000 C) $30,000 D) $35,000 42) Based on the preceding information, what amount of goodwill will be reported in the consolidated balance sheet on the acquisition date if the acquisition price was $240,000?A) $35,000 B) $30,000 C) $20,000 D) $0 43) Company P acquires 100 percent of the voting shares of Company S for $275,000 on December 31, 20X8. The fair value of the net assets of Company P at the date of acquisition was $300,000. This is an example of a(n): A) positive differential.

B) bargain purchase.

C) unusual loss.

D) revaluation adjustment.

Plant Company acquired all of Sprout Corporation's stock on January 1, 20X6 for $150,000 cash.

On December 31, 20X8, the trial balances of the two companies were as follows:

Cash Accounts Receivable Land Buildings and Equipment Investment in Sprout Corp.

Cost of Services Provided Depreciation Expense Other Expenses Dividends Declared Accumulated Depreciation Accounts Payable Taxes Payable Notes Payable Common Stock Retained Earnings Service Revenue Income from Subsidiary

Plant Company Debit Credit $ 90,000 97,000 80,000 300,000 180,000 140,000 30,000 70,000 40,000 $ 180,000 42,000 20,000 75,000 100,000 265,000 300,000 45,000 $ 1,027,000 $ 1,027,000

Sprout Corporation Debit Credit $ 58,000 55,000 45,000 200,000 75,000 20,000 35,000 20,000 $ 100,000 18,000 20,000 50,000 50,000 90,000 180,000 $ 508,000

$ 508,000

Sprout Corporation reported retained earnings of $75,000 at the date of acquisition. The difference between the acquisition price and underlying book value is assigned to buildings and equipment with a remaining economic life of five years from the date of acquisition. At December 31, 20X8, Sprout owed Plant $4,000 for services provided.

44) Based on the preceding information, all of the following are consolidating entries required on December 31, 20X8, to prepare consolidated financial statements, except: A)

B)

C)

D)

Common Stock Retained Earnings Income from Sprout Corp.

Dividends Declared Investment in Sprout Corp.

50,000 90,000 50,000

Accounts Payable Accounts Receivable

4,000

Depreciation Expense Income from Sprout Corp.

5,000

Buildings and Equipment Accumulated Depreciation Investment in Sprout Corp.

20,000

20,000 170,000

4,000

5,000

10,000 10,000

A) Option A B) Option B C) Option C D) Option D 45) Based on the preceding information, what amount will be reported as total assets in the consolidated balance sheet for 20X8?

A) $666,000 B) $747,000 C) $651,000 D) $946,000 46) Based on the preceding information, what amount will be reported for total accounts payable in the consolidated balance sheet for the year 20X8?

A) $56,000 B) $46,000 C) $60,000 D) $42,000 47) Based on the preceding information, what amount of total liabilities will be reported in the consolidated balance sheet for 20X8?

A) $225,000 B) $221,000 C) $217,000 D) $137,000 48) Based on the preceding information, what amount of total retained earnings will be reported in the consolidated balance sheet for the year 20X8?

A) $330,000 B) $450,000 C) $430,000 D) $370,000 49) On January 1, 20X8, Piano Company acquired all of Song Corporation's voting shares for $280,000 cash. On December 31, 20X9, Song owed Piano $5,000 for services provided during the year. When consolidated financial statements are prepared for 20X9, which entry is needed to eliminate intercompany receivables and payables in the consolidation worksheet?

A) Accounts Payable Accounts Receivable

5,000

B) Accounts Receivable Accounts Payable

5,000

C) Retained Earnings Accounts Receivable

5,000

5,000

5,000

5,000

D) Consolidating entry not required A) Option A B) Option B C) Option C D) Option D 50) Consolidated financial statements are being prepared for Behemoth Corporation and its two wholly-owned subsidiaries that have intercompany loans of $50,000 and intercompany profits of $100,000. How much of these intercompany loans and profits should be eliminated?

A) intercompany loans − $0; intercompany profits − $0 B) intercompany loans − $50,000; intercompany profits − $0 C) intercompany loans − $50,000; intercompany profits − $100,000 D) intercompany loans − $0; intercompany profits − $100,000

On January 1, 20X9, Paradox Company acquired all of Sirius Company's common shares, for $365,000 cash. On that date, Sirius's balance sheet appeared as follows: Assets Cash and Receivables Inventory Land Buildings and Equipment(net)

Total

$

50,000 80,000 50,000 200,000

$ 380,000

Liabilities Current Payables Notes Payable Stockholders' Equity Common Stock Additional Capital Retained Earnings Total

$

30,000 50,000

100,000 150,000 50,000 $ 380,000

The fair values of all of Sirius's assets and liabilities were equal to their book values except for inventory that had a fair value of $85,000, land that had a fair value of $60,000, and buildings and equipment that had a fair value of $250,000. Buildings and equipment have a remaining useful life of 10 years with zero salvage value. Paradox Company decided to employ push-down accounting for the acquisition. Subsequent to the combination, Sirius continued to operate as a separate company.

51) Based on the preceding information, what amount will be present in the revaluation capital account, when consolidating entries are prepared?

A) $0 B) $65,000 C) $60,000 D) $15,000 52) Based on the preceding information, what amount of differential will arise in the consolidation process?

A) $0 B) $5,000 C) $15,000 D) $65,000 53) Which term refers to the practice of revaluing an acquired subsidiary's assets and liabilities to their fair values directly on that subsidiary's books at the date of acquisition?

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

54) Which of the following observations is NOT consistent with the use of push-down accounting?

A) The revaluation capital account is part of the subsidiary's stockholders' equity.

B) No differential arises in the consolidation process.

C) Revaluation Capital account is eliminated in preparing consolidated statements.

D) Consolidating entries related to the differential are needed in the worksheets.

55) Which of the following is true? When companies employ push-down accounting: A) the subsidiary revalues assets and liabilities to their fair values as of the acquisition date.

B) a special account called Revaluation Capital will appear in the consolidated balance sheet.

C) all consolidation entries are made on the books of the subsidiary rather than in consolidated worksheets.

D) the subsidiary is not substantially wholly owned by the parent.

56) Puzzle Corporation acquired 100 percent of the common stock of Solver Company by issuing 10,000 shares of $10 par common stock with a market value of $60 per share.

Summarized balance sheet data for the two companies immediately preceding the acquisition are as follows: Puzzle Corporation Book Value Fair Value Total Assets $ 1,200,000 $ 1,500,000 Total Liabilities $ 800,000 $ 700,000 Total Stockholders 400,000 Equity $ 1,200,000

Solver Corporation Book Value Fair Value $ 900,000 $ 1,300,000 $ 600,000 $ 750,000 300,000 $ 900,000

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

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

$

Pop 300,000 25,000

Snap $ 200,000 15,000

Required: Prepare each of the journal entries listed below related to Pop's investment in Snap.

1. Pop's acquisition of Snap.

2. Pop's share of Snap's 20X6 income.

3. Pop's share of Snap's 20X6 dividend income.

4.Pop's amortization of excess acquisition price.

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

Common Stock Additional Paid-In Capital Retained Earnings Total

$

$

300,000 500,000 400,000 1,200,000

Paco financed the acquisition by using $880,000 cash and giving a note payable for $400,000.

Book value approximated fair value for all of Salad's assets and liabilities except for buildings which had a fair value $60,000 more than its book value and a remaining useful life of 10 years.

Any remaining differential was related to goodwill. Paco has an account payable to Salad in the amount of $30,000.

Required: 1) Present all consolidating entries needed to prepare a consolidated balance sheet immediately following the acquisition.

2) What additional consolidating entry must be prepared at December 31, 20X9?

59) Pepper Company acquired all of Salt Corporation's stock on January 1, 20X6 for $150,000 cash. On December 31, 20X7, the balance sheets of the two companies showed the following amounts: Cash Accounts Receivable Land Buildings and Equipment Less: Accumulated Depreciation Investment in Salt Corporation Total Assets Accounts Payable Taxes Payable Notes Payable Common Stock Retained Earnings Total Liabilities and Equity

Pepper Company $ 55,000 60,000 80,000 300,000 (150,000) 155,000 $ 500,000 $ 40,000 20,000 75,000 100,000 265,000 $ 500,000

Salt Corporation $ 25,000 30,000 45,000 200,000 (80,000) $ 220,000 $ 15,000 15,000 50,000 50,000 90,000 $ 220,000

Salt Corporation reported retained earnings of $75,000 at the date of acquisition. The difference between the acquisition price and underlying book value is assigned to buildings and equipment with a remaining economic life of five years from the date of acquisition.

Required: 1) Give the appropriate consolidating entry or entries needed to prepare a consolidated balance sheet as of December 31, 20X7.

2) Prepare a consolidated balance sheet worksheet as of December 31, 20X7.

60) Pizza Corporation acquired 100 percent of Slice Company on January 1, 20X5, for $350,000.

Following are selected account balances from Pizza and Slice Corporation as of December 31, 20X5:

Item Current Assets Buildings & Equipment Copyrights Investment in Slice Cost of Goods Sold Depreciation Expense Other Expenses Dividends Declared Accumulated Depreciation Liabilities Common Stock Retained Earnings Sales Income from Slice

$

Pizza Corp.

Debit Credit 405,000

Slice Corp.

Debit Credit $ 110,000

500,000

180,000

900,000

400,000

384,500 375,000

100,000

60,000

30,000

220,000

100,000

80,000

30,000 $

360,000

$

60,000

500,000 600,000

300,000 90,000

600,000

200,000

800,000

300,000

64,500 $ 2,924,500 $ 2,924,500

$ 950,000

$ 950,000

Additional Information: •

• •

On January 1, 20X5 the fair market value of Slice's assets equaled their book value with the exception of Plant Assets (with an estimated economic life of 6 years) which had a fair market value in excess in Slice's depreciable assets of $33,000.

Pizza used the equity method in accounting for its investment in Slice.

Detailed analysis of receivables and payables showed that Slice owed Pizza $10,000 on December 31, 20X5.

Required: a. Give all journal entries recorded by Pizza with regard to its investment in Slice during 20X5. b. Give all consolidating entries needed to prepare a full set of consolidated financial statements for 20X5. c. Prepare a three-part consolidation worksheet as of December 31, 20X5.

61) On December 31, 20X9, Port Corporation acquired all of Ship Company's common shares,

for $570,000 cash. On that date, Ship's balance sheet appeared as follows: Assets Cash Accounts Receivables Inventory Land Buildings and Equipment (net) Total

$

80,000 40,000 100,000 120,000 260,000

$ 600,000

Liabilities Current Payables Notes Payable Stockholders' Equity Common Stock Additional Capital Retained Earnings Total

$

50,000 70,000

150,000 200,000 130,000 $ 600,000

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

Inventory Land Buildings and Equipment

Fair Value $ 120,000 150,000 300,000

In recording this acquisition, push-down accounting was used.

Required: 1) Record the acquisition of Ship's stock on Port's books on December 31, 20X9.

2) Record any entries that would be made on December 31, 20X9, on Ship's books related to the business combination.

3) Present all consolidating entries that would appear in the worksheet to prepare a consolidated balance sheet immediately after the combination.

Advanced Financial Accounting, 12e (Christensen) Chapter 5 Consolidation of Less-than-Wholly- Owned Subsidiaries Acquired at More than Book Value Postage Corporation acquired 75 percent of Stamp Corporation's common stock on December 31, 20X8, for $300,000. The fair value of the noncontrolling interest at that date was determined to be $100,000. Stamp's balance sheet immediately before the combination reflected the following balances:

Cash and Receivables Inventory Land Buildings and Equipment (net) Total Assets Accounts Payable Income Taxes Payable Bonds Payable Common Stock Retained Earnings Total Liabilities and Stockholders' Equity

$

40,000 70,000 90,000 250,000 $ 450,000 $ 30,000 40,000 100,000 100,000 180,000 $ 450,000

A careful review of the fair value of Stamp's assets and liabilities indicated that inventory, land, and buildings and equipment (net) had fair values of $65,000, $100,000, and, $300,000 respectively. Goodwill is assigned proportionately to Postage and the noncontrolling shareholders.

1) Based on the preceding information, what amount of Stamp's inventory will be included in the consolidated balance sheet immediately following the acquisition?

A) $0 B) $65,000 C) $70,000 D) $60,000 2) Based on the preceding information, what amount of Stamp's land will be included in the consolidated balance sheet immediately following the acquisition?

A) $0 B) $10,000 C) $90,000 D) $100,000

3) Based on the preceding information, what amount of Stamp's buildings and equipment (net) will be included in the consolidated balance sheet immediately following the acquisition?

A) $0 B) $50,000 C) $250,000 D) $300,000 4) Based on the preceding information, what amount of goodwill will be reported in the consolidated balance sheet immediately following the acquisition?

A) $0 B) $120,000 C) $65,000 D) $20,000 5) Based on the preceding information, what amount will be reported as investment in Stamp Corporation stock in the consolidated balance sheet immediately following the acquisition?

A) $0 B) $210,000 C) $300,000 D) $400,000 6) Based on the preceding information, what amount will be reported as noncontrolling interest in the consolidated balance sheet immediately following the acquisition?

A) $0 B) $70,000 C) $83,750 D) $100,000

On January 1, 20X9, Pirate Corporation acquired 80 percent of Sea-Gull Company's common stock for $160,000 cash. The fair value of the noncontrolling interest at that date was determined to be $40,000. Data from the balance sheets of the two companies included the following amounts as of the date of acquisition: Cash Accounts Receivable Inventory Land Buildings and Equipment Less: Accumulated Depreciation Investment in Sea-Gull Corp.

Total Assets

Pirate Corp. $ 60,000 80,000 90,000 100,000 200,000 (80,000) 160,000 $ 610,000

Sea-Gull Corp. $ 20,000 30,000 40,000 40,000 150,000 (50,000)

Accounts Payable Bonds Payable Common Stock Retained Earnings Total Liabilities and Equity

$ 110,000 95,000 200,000 205,000 $ 610,000

$

$ 230,000 30,000 40,000 40,000 120,000 $ 230,000

At the date of the business combination, the book values of Sea-Gull's net assets and liabilities approximated fair value except for inventory, which had a fair value of $45,000, and land, which had a fair value of $60,000.

7) Based on the preceding information, what amount of total inventory will be reported in the consolidated balance sheet prepared immediately after the business combination?

A) $130,000 B) $135,000 C) $90,000 D) $45,000 8) Based on the preceding information, what amount of goodwill will be reported in the consolidated balance sheet prepared immediately after the business combination?

A) $0 B) $40,000 C) $20,000 D) $15,000 9) Based on the preceding information, what amount of total assets will be reported in the consolidated balance sheet prepared immediately after the business combination?

A) $720,000 B) $840,000 C) $825,000 D) $865,000 10) Based on the preceding information, what amount of total liabilities will be reported in the consolidated balance sheet prepared immediately after the business combination?

A) $395,000 B) $280,000 C) $275,000 D) $195,000 11) Based on the preceding information, what amount will be reported as noncontrolling interest in the consolidated balance sheet prepared immediately after the business combination?

A) $0 B) $15,000 C) $40,000 D) $46,000 12) Based on the preceding information, what amount of consolidated retained earnings will be reported immediately after the business combination?

A) $205,000 B) $120,000 C) $325,000 D) $310,000 13) Based on the preceding information, what amount will be reported as total stockholders' equity in the consolidated balance sheet prepared immediately after the business combination?

A) $445,000 B) $205,000 C) $565,000 D) $550,000

On January 1, 20X6, Pumpkin Corporation acquired 70 percent of Spice Company's common stock for $210,000 cash. The fair value of the noncontrolling interest at that date was determined to be $90,000. Data from the balance sheets of the two companies included the following amounts as of the date of acquisition: Pumpkin 50,000 70,000 30,000 150,000 250,000 (70,000) 210,000 $ 690,000

Cash Accounts Receivable Inventory Land Buildings and Equipment Less: Accumulated Depreciation Investment in Spice Co. Total Assets

$

Accounts Payable Bonds Payable Common Stock Retained Earnings Total Liabilities and Equity

$

40,000 150,000 300,000 200,000 $ 690,000

$

Spice 15,000 25,000 20,000 80,000 200,000 (20,000)

$ 320,000 $

10,000 40,000 90,000 180,000 $ 320,000

At the date of the business combination, the book values of Spice's assets and liabilities approximated fair value except for inventory, which had a fair value of $30,000, and land, which had a fair value of $95,000.

14) Based on the preceding information, what amount of total inventory will be reported in the consolidated balance sheet prepared immediately after the business combination?

A) $20,000 B) $30,000 C) $50,000 D) $60,000 15) Based on the preceding information, what amount of goodwill will be reported in the consolidated balance sheet prepared immediately after the business combination?

A) $0 B) $5,000 C) $25,000 D) $30,000

16) Based on the preceding information, what amount of total assets will be reported in the consolidated balance sheet prepared immediately after the business combination?

A) $800,000 B) $830,000 C) $1,010,000 D) $1,040,000 17) Based on the preceding information, what amount of total liabilities will be reported in the consolidated balance sheet prepared immediately after the business combination?

A) $190,000 B) $230,000 C) $240,000 D) $440,000 18) Based on the preceding information, what amount will be reported as noncontrolling interest in the consolidated balance sheet prepared immediately after the business combination?

A) $0 B) $81,000 C) $90,000 D) $96,000 19) Based on the preceding information, what amount of consolidated retained earnings will be reported in the consolidated balance sheet prepared immediately after the business combination?

A) $180,000 B) $200,000 C) $300,000 D) $380,000 20) Based on the preceding information, what amount will be reported as total stockholders' equity in the consolidated balance sheet prepared immediately after the business combination?

A) $360,000 B) $590,000 C) $770,000 D) $860,000

On December 31, 20X8, Pancake Company acquired controlling ownership of Syrup Company.

A consolidated balance sheet was prepared immediately. Partial balance sheet data for the two companies and the consolidated entity at that date follow:

Cash Accounts Receivable Inventory Buildings and Equipment Less: Accumulated Depreciation Investment in Syrup Stock Goodwill Total Assets Accounts Payable Wages Payable Notes Payable Common Stock Retained Earnings Noncontrolling Interest Total Liabilities and Equities

Pancake Company $ 80,000 50,000 60,000 200,000 (50,000) ?

Syrup Company $ 30,000 ?

50,000 140,000 (28,000)

Consolidated Entity $ 110,000 78,000 115,000 365,000 (78,000)

$ 464,000

$ 230,000

15,000 $ 605,000

$

$

$

60,000 ?

100,000 100,000 154,000 ?

32,000 ?

60,000 50,000 60,000

$ 230,000

82,000 78,000 160,000 ? ?

31,000 $ 605,000

During 20X8, Pancake Company provided consulting services to Syrup Company and has not yet paid for them. There were no other receivables or payables between the companies at December 31, 20X8.

21) Based on the information given, what is the amount of unpaid consulting services at December 31, 20X8, on work done by Pancake Company for Syrup Company?

A) $0 B) $10,000 C) $5,000 D) $15,000 22) Based on the information given, what balance in accounts receivable did Syrup Company report at December 31, 20X8?

A) $28,000 B) $48,000 C) $40,000 D) $38,000

23) Based on the information given, Pancake Company and Syrup Company reported wages payable of A) $50,000 and $28,000 respectively.

B) $60,000 and $32,000 respectively.

C) $40,000 and $35,000 respectively.

D) $28,000 and $60,000 respectively.

24) Based on the information given, what was the fair value of Syrup Company as a whole at the date of acquisition?

A) $155,000 B) $110,000 C) $115,000 D) $135,000 25) Based on the information given, what percentage of Syrup Company's shares were acquired

by Pancake Company?

A) 100 percent B) 60 percent C) 80 percent D) 75 percent 26) Based on the information given, what amount will be reported as total controlling interest in the consolidated balance sheet?

A) $254,000 B) $285,000 C) $364,000 D) $395,000 27) Scissor Corporation holds assets with a fair value of $150,000 and a book value of $125,000 and liabilities with a book value and fair value of $50,000. What balance will be assigned to the noncontrolling interest in the consolidated balance sheet if Paper Company pays $90,000 to acquire 75 percent ownership in Scissor and goodwill of $20,000 is reported?

A) $50,000 B) $30,000 C) $40,000 D) $20,000 28) When a parent owns less than 100% of a subsidiary, the noncontrolling interest shareholders are allocated their ownership percentage of income or net assets in all of the following consolidating entries except for: A) The basic investment account consolidation entry B) The excess value (differential) reclassification entry C) The accumulated depreciation consolidation entry D) The amortized excess value reclassification entry

On January 1, 20X6, Plus Corporation acquired 90 percent of Side Corporation for $180,000 cash. Side reported net income of $30,000 and dividends of $10,000 for 20X6, 20X7, and 20X8.

On January 1, 20X6, Side reported common stock outstanding of $100,000 and retained earnings of $60,000, and the fair value of the noncontrolling interest was $20,000. It held land with a book value of $30,000 and a market value of $35,000 and equipment with a book value of $50,000 and a market value of $60,000 at the date of combination. The remainder of the differential at acquisition was attributable to an increase in the value of patents, which had a remaining useful life of five years. All depreciable assets held by Side at the date of acquisition had a remaining economic life of five years. Plus uses the equity method in accounting for its investment in Side.

29) Based on the preceding information, the increase in the fair value of patents held by Side is: A) $20,000 B) $25,000 C) $15,000 D) $5,000 30) Based on the preceding information, what balance would Plus report as its investment in Side at January 1, 20X8?

A) $230,400 B) $180,000 C) $234,000 D) $203,400 31) Based on the preceding information, what balance would Plus report as its investment in Side at January 1, 20X9?

A) $251,100 B) $224,100 C) $215,100 D) $234,000

On January 1, 20X2, Pint Corporation acquired 80 percent of Size Corporation for $200,000 cash. Size reported net income of $25,000 each year and dividends of $5,000 each year for 20X2, 20X3, and 20X4. On January 1, 20X2, Size reported common stock outstanding of $160,000 and retained earnings of $40,000, and the fair value of the noncontrolling interest was $50,000. It held land with a book value of $90,000 and a market value of $100,000, and equipment with a book value of $40,000 and a market value of $48,000 at the date of combination. The remainder of the differential at acquisition was attributable to an increase in the value of patents, which had a remaining useful life of eight years. All depreciable assets held by Size at the date of acquisition had a remaining economic life of eight years. Pint uses the equity method in accounting for its investment in Size.

32) Based on the preceding information, the increase in the fair value of patents held by Size is A) $10,000 B) $18,000 C) $32,000 D) $50,000 33) Based on the preceding information, what balance would Pint report as its investment in Size at January 1, 20X4?

A) $200,000 B) $224,000 C) $232,000 D) $240,000 34) Based on the preceding information, what balance would Pint report as its investment in Size at January 1, 20X5?

A) $236,000 B) $248,000 C) $260,000 D) $300,000

On December 31, 20X8, Peak Corporation acquired 80 percent of Summit Company's common stock for $160,000. At that date, the fair value of the noncontrolling interest was $40,000. Of the $75,000 differential, $10,000 related to the increased value of Summit's inventory, $20,000 related to the increased value of its land, and $25,000 related to the increased value of its equipment that had a remaining life of 10 years from the date of combination. Summit sold all inventory it held at the end of 20X8 during 20X9. The land to which the differential related was also sold during 20X9 for a large gain. At the date of combination, Summit reported retained earnings of $75,000 and common stock outstanding of $50,000. In 20X9, Summit reported net income of $60,000, but paid no dividends. Peak accounts for its investment in Summit using the equity method.

35) Based on the preceding information, the amount of goodwill reported in the consolidated financial statements prepared immediately after the combination is: A) $0 B) $32,500 C) $26,000 D) $20,000 36) Based on the preceding information, what is the amount of write-off of differential associated with this acquisition recorded by Peak during 20X9?

A) $0 B) $32,500 C) $26,000 D) $20,000 On December 31, 20X5, Paris Corporation acquired 60 percent of Sanlo Company's common stock for $180,000. At that date, the fair value of the noncontrolling interest was $120,000. Of the $45,000 differential, $5,000 related to the increased value of Sanlo's inventory, $15,000 related to the increased value of its land, and $10,000 related to the increased value of its equipment that had a remaining life of five years from the date of combination. Sanlo sold all inventory it held at the end of 20X5 during 20X6. The land to which the differential related was also sold during 20X6 for a large gain. In 20X6, Sanlo reported net income of $40,000 but paid no dividends. Paris accounts for its investment in Sanlo using the equity method.

37) Based on the preceding information, the amount of goodwill reported in the consolidated financial statements prepared immediately after the combination is: A) $9,000 B) $15,000 C) $27,000 D) $45,000

38) Based on the preceding information, what amount of differential would Paris amortize during 20X6 in its equity method journal entries?

A) $13,200 B) $15,000 C) $22,000 D) $30,000 On January 1, 20X8, Polo Corporation acquired 75 percent of Stallion Company's voting common stock for $300,000. At the time of the combination, Stallion reported common stock outstanding of $200,000 and retained earnings of $150,000, and the fair value of the noncontrolling interest was $100,000. The book value of Stallion's net assets approximated market value except for patents that had a market value of $50,000 more than their book value.

The patents had a remaining economic life of ten years at the date of the business combination.

Stallion reported net income of $40,000 and paid dividends of $10,000 during 20X8.

39) Based on the preceding information, what balance will Polo report as its investment in Stallion at December 31, 20X8, assuming Polo uses the equity method in accounting for its investment?

A) $318,750 B) $317,500 C) $330,000 D) $326,250

40) Based on the preceding information, which of the following is a consolidating entry needed to prepare a full set of consolidated financial statements at December 31, 20X8: A) Common Stock Retained Earnings Income from Stallion Co. Dividends declared Investment in Stallion Co. NCI in NA of Stallion Co. B) Depreciation Expense Income from Stallion Co. NCI in NI of Stallion Co. C) Common Stock Retained Earnings Income from Stallion Co. NCI in NI of Stallion Co. Dividends declared Investment in Stallion Co. NCI in NA of Stallion Co. D) Patents Accumulated Depreciation Investment in Stallion Co. NCI in NA of Stallion Co. A) Choice A B) Choice B C) Choice C D) Choice D

200,000 150,000 40,000 10,000 285,000 95,000

5,000 4,000 1,000

200,000 150,000 30,000 10,000 10,000 285,000 95,000

50,000 10,000 30,000 10,000

41) All of the following are examples of how a parent company may lose control over a subsidiary and discontinue future consolidation, except: A) The parent sells some of its interest in the subsidiary.

B) The subsidiary issues additional common stock.

C) The subsidiary comes under the control of the government or other regulator.

D) The subsidiary issues a stock dividend or a stock split.

42) Pink Inc. sells half of its 70% interest in Salmon Co. on January 1, 20X6. On that date, the fair value of Salmon as a whole is $940,000 and the carrying amount of Pink's 70% share of Salmon is $320,000. What, if any, is the gain on the sale of half of Pink's interest in Salmon?

A) $0 B) $9,000 C) $169,000 D) $338,000 On January 1, 20X8, Package Company acquired 80 percent of Stamp Company's common stock for $280,000 cash. At that date, Stamp reported common stock outstanding of $200,000 and retained earnings of $100,000, and the fair value of the noncontrolling interest was $70,000. The book values and fair values of Stamp's assets and liabilities were equal, except for other intangible assets which had a fair value $50,000 greater than book value and an 8-year remaining life. Stamp reported the following data for 20X8 and 20X9:

Year 20X8 20X9

Net Income $ 25,000 35,000

Stamp Corporation Comprehensive Income $ 30,000 45,000

Dividends Paid $ 5,000 10,000

Package reported net income of $100,000 and paid dividends of $30,000 for both the years.

43) Based on the preceding information, what is the amount of consolidated comprehensive income reported for 20X8?

A) $125,000 B) $123,750 C) $118,750 D) $130,000 44) Based on the preceding information, what is the amount of consolidated comprehensive income reported for 20X9?

A) $145,000 B) $135,000 C) $138,750 D) $128,750 45) Based on the preceding information, what is the amount of comprehensive income attributable to the controlling interest for 20X8?

A) $123,750 B) $118,750 C) $119,000 D) $104,000 46) Based on the preceding information, what is the amount of comprehensive income attributable to the controlling interest for 20X9?

A) $138,750 B) $131,000 C) $128,750 D) $135,000 On January 1, 20X8, Parsley Corporation acquired 75 percent of Sage Company's voting common stock for $90,000 cash. At that date, the fair value of the noncontrolling interest was $30,000. Sage's balance sheet at the date of acquisition contained the following balances:

Cash Accounts Receivable Land Building and Equipment Less: Accumulated Depreciation Total Assets

Sage Company Balance Sheet January 1, 20X8 $ 10,000 Accounts Payable 20,000 Notes Payable 40,000 Common Stock 165,000 Additional Paid-In Capital (50,000) Retained Earnings $ 185,000

Total Liabilities and Equity

$

35,000 50,000 100,000 20,000 (20,000)

$ 185,000

At the date of acquisition, the reported book values of Sage's assets and liabilities approximated fair value. Consolidating entries are being made to prepare a consolidated balance sheet immediately following the business combination.

47) Based on the preceding information, in the entry to eliminate the investment balance, A) retained earnings will be credited for $20,000.

B) additional paid-in-capital will be credited for $20,000.

C) retained earnings will be credited for $10,000.

D) noncontrolling interest will be debited for 30,000.

48) Based on the preceding information, the amount of goodwill reported is: A) $0.

B) $10,000.

C) $15,000.

D) $20,000.

49) Which of the following stockholders' equity accounts are eliminated during the consolidation process?

A) Common Stock of the subsidiary B) Preferred Stock of the subsidiary

C) Additional Paid-in Capital of the subsidiary D) All of the choices.

50) On December 31, 20X8, Parkway Corporation acquired 80 percent of Street Company's common stock for $104,000 cash. The fair value of the noncontrolling interest at that date was determined to be $26,000. Data from the balance sheets of the two companies included the following amounts as of the date of acquisition:

Cash Accounts Receivable Inventory Land Buildings and Equipment Less: Accumulated Depreciation Investment in Street Company Total Assets Accounts Payable Mortgage Payable Common Stock Retained Earnings Total Liabilities and Equity

Parkway Corp $ 90,000 80,000 100,000 40,000 300,000 (100,000) 104,000 $ 614,000 120,000 200,000 50,000 244,000 $ 614,000

Street Company $ 20,000 35,000 40,000 60,000 100,000 (40,000) $ 215,000 30,000 100,000 25,000 60,000 $ 215,000

On that date, the book values of Street's assets and liabilities approximated fair value except for inventory, which had a fair value of $45,000, and buildings and equipment, which had a fair value of $100,000. At December 31, 20X8, Parkway reported accounts payable of $15,000 to Street, which reported an equal amount in its accounts receivable.

Required: 1) Provide the consolidating entries needed to prepare a consolidated balance sheet immediately following the business combination.

2) Prepare a consolidated balance sheet worksheet.

51) Patriot Corporation acquired 80 percent ownership of Seahawk Corporation on January 1, 20X8, for $200,000. At that date, Seahawk reported common stock outstanding of $75,000 and retained earnings of $150,000. The fair value of the noncontrolling interest was $50,000. The differential is assigned to equipment, which had a fair value $25,000 greater than book value and a remaining economic life of five years at the date of the business combination. Seahawk reported net income of $40,000 and paid dividends of $20,000 in 20X8.

Required: 1) Provide the journal entries recorded by Patriot during 20X8 on its books if it accounts for its investment in Seahawk using the equity method.

2) Give the consolidating entries needed at December 31, 20X8, to prepare consolidated financial statements.

52) On January 1, 20X8, Plane Company acquired 80 percent of Scalar Company's ownership for $120,000 cash. At that date, the fair value of the noncontrolling interest was $30,000. The book value of Scalar's net assets at acquisition was $125,000. The book values and fair values of Scalar's assets and liabilities were equal, except for buildings and equipment, which were worth $15,000 more than book value. Buildings and equipment are depreciated on a 10-year basis.

Although goodwill is not amortized, the management of Plane concluded at December 31, 20X8, that goodwill from its acquisition of Scalar shares had been impaired and the correct carrying amount was $5,000. Goodwill and goodwill impairment were assigned proportionately to the controlling and noncontrolling shareholders. No additional impairment occurred in 20X9.

Trial balance data for Plane and Scalar on December 31, 20X9, are as follows: Plane Co. Debit Credit Item $ 100,000 Cash Accounts 60,000 Receivable 80,000 Inventory Land 150,000 Buildings and 300,000 Equipment Investment in 144,800 Scalar Co. Cost of Goods 180,000 Sold Wage Expense 50,000 Depreciation 30,000 Expense Interest Expense 25,000 Other Expenses 40,000 Dividends 40,000 Declared Accumulated $ 150,000 Depreciation Accounts Payable 90,000 Wages Payable 30,800 Notes Payable 180,000 Common Stock 150,000 Retained 181,000 Earnings Sales 400,000 Income from 18,000 Scalar $ 1,199,800 $ 1,199,800

Scalar Co. Debit Credit $ 30,000 25,000 30,000 50,000 150,000

100,000 34,000 15,000 6,000 21,000 10,000 $

36,000 26,000 9,000 50,000 100,000 50,000 200,000

$ 471,000

$ 471,000

Required: 1) Provide all consolidating entries needed to prepare a three-part consolidation worksheet as of

December 31, 20X9.

2) Prepare a three-part consolidation worksheet for 20X9 in good form.

53) Poppy Corporation acquired 80 percent of Seed Corporation's common stock on January 1, 20X8, for $520,000. At that date, Seed reported common stock outstanding of $250,000 and retained earnings of $375,000. Assume the fair value of the noncontrolling interest on January 1, 20X8 was $130,000. The book values and fair values of Seed's assets and liabilities were equal on the acquisition date, except for other intangible assets, which had a fair value $25,000 greater than book value and a 5-year remaining life. Poppy and Seed reported the following data for 20X8 and 20X9:

Poppy Co. Year 20X8 20X9

Operating Income $ 50,000 $ 60,000

Dividends Paid $ 10,000 $ 12,000

Seed Co. Net Income $ 90,000 $ 110,000

Comprehensive Income $ 95,000 $ 120,000

Dividends Paid $ 30,000 $ 25,000

a. Compute consolidated comprehensive income for 20X8 and 20X9. b. Compute comprehensive income attributable to the controlling interest for 20X8 and 20X9.

Advanced Financial Accounting, 12e (Christensen) Chapter 6 Intercompany Inventory Transactions 1) When there are intercompany sales of inventory during the year and a three-part consolidation worksheet is prepared, consolidation entries related to the intercompany sales: I. Always are needed.

II. Are not needed if the entire inventory is resold to unrelated parties prior to the end of the year.

A) I B) II C) Both I and II D) Either I or II Pluto Company owns 100 percent of the capital stock of both Saturn Corporation and Sol Corporation. Saturn purchases merchandise inventory from Sol at 125 percent of Sol's cost.

During 20X8, Sol sold inventory to Saturn that it had purchased for $25,000. Saturn sold all of this merchandise to unrelated customers for $56,892 during 20X8. In preparing combined financial statements for 20X8, Pluto's bookkeeper disregarded the common ownership of Saturn and Sol. 2) Based on the information given above, what amount should be eliminated from cost of goods sold in the combined income statement for 20X8?

A) $31,250 B) $25,000 C) $56,892 D) $6,250 3) Based on the information given above, by what amount was unadjusted revenue overstated in the combined income statement for 20X8?

A) $25,000 B) $56,892 C) $31,250 D) $6,250 4) Which of the following are examples of intercompany balances and transactions that must be eliminated in preparing consolidated financial statements?

I. Security holdings II. Interest and dividends III. Sales and purchases A) I, II B) I, III C) I, II, III D) II 5) Playa Inc. owns 85 percent of Seashore Inc. During 20X8, Playa sold goods with a 25 percent gross profit to Seashore. Seashore sold all of these goods in 20X8. How should 20X8

consolidated income statement items be adjusted?

A) No adjustment is necessary.

B) Sales and cost of goods sold should be reduced by 85 percent of the intercompany sales.

C) Net income should be reduced by 85 percent of the gross profit on intercompany sales.

D) Sales and cost of goods sold should be reduced by the intercompany sales.

6) During the year a parent makes sales of inventory at a profit to its 75 percent owned subsidiary. The subsidiary also makes sales of inventory at a profit to its parent during the same year. Both the parent and the subsidiary have on hand at the end of the year 20 percent of the inventory acquired from one another. Consolidated revenues for the year should exclude: A) 80 percent of the total revenues from intercompany sales.

B) total revenues from intercompany sales.

C) only the revenues from the subsidiary's intercompany sales.

D) only the revenues from the parent's intercompany sales.

7) Consolidated net income may include the parent's separate operating income plus the parent's share of the subsidiary's reported net income: A) plus the unrealized profit on upstream intercompany sales of inventory made during the current year.

B) plus the profit realized this year from upstream intercompany sales of inventory made last year.

C) plus unrealized profit on downstream intercompany sales of inventory made during the current year.

D) minus the parent's share of profit realized this year from upstream intercompany sales of inventory made last year.

Perth Corporation owns 90 percent of Sydney Company's stock. At the end of 20X8, Perth and Sydney reported the following partial operating results and inventory balances:

Total sales Sales to Sydney Company Sales to Perth Corporation Net income Operating income (excluding investment income from Sydney) Inventory on hand, December 31, 20X8, purchased from: Sydney Company Perth Corporation

Perth Corporation $ 500,000 100,000

Sydney Company $ 350,000 150,000 15,000

56,000 36,000 31,000

Perth regularly prices its products at cost plus a 30 percent markup for profit. Sydney prices its sales at cost plus a 10 percent markup. The total sales reported by Perth and Sydney include both intercompany sales and sales to nonaffiliates.

8) Based on the information given above, what amount of sales will be reported in the consolidated income statement for 20X8?

A) $500,000 B) $850,000 C) $600,000 D) $800,000 9) Based on the information given above, what balance will be reported for inventory in the consolidated balance sheet for December 31, 20X8?

A) $56,573 B) $23,846 C) $32,727 D) $67,000

Pole Corporation owns 65 percent of Stick Company's stock. At the end of 20X3, Pole and Stick reported the following partial operating results and inventory balances: Total Sales Sales to Stick Company Sales to Pole Corporation Net income Operating income (excluding investment income from Stick): Inventory on hand, December 31, 20X3, purchased from: Stick Company Pole Corporation

Pole $ 750,000 150,000

Stick $ 200,000 75,000 35,000

73,000 11,000 62,000

Pole regularly prices its products at cost plus a 40 percent markup for profit. Stick prices its sales at cost plus a 25 percent markup. The total sales reported by Pole and Stick include both intercompany sales and sales to nonaffiliates.

10) Based on the information given above, what amount of sales will be reported in the consolidated income statement for 20X3?

A) $725,000 B) $750,000 C) $875,000 D) $950,000 11) Based on the information given above, what balance will be reported for inventory in the consolidated balance sheet for December 31, 20X3?

A) $8,800 B) $44,286 C) $53,086 D) $73,000 12) Consolidated net income for a parent and its 80 percent owned subsidiary should be computed by eliminating: A) all unrealized profit in downstream intercompany inventory sales, and unrealized profit in upstream intercompany inventory sales made during the current year.

B) all unrealized profit in downstream intercompany inventory sales, and the noncontrolling interest's share of unrealized profit in upstream inventory sales made during the current year.

C) the controlling interest's share of unrealized profit in downstream intercompany sales, and the controlling interest's share of unrealized profit in upstream sales made during the current year.

D) all unrealized profit in downstream intercompany sales, and the noncontrolling interest's share of unrealized profit in upstream sales made during the current year.

13) When a parent and its subsidiary use a periodic inventory system rather than a perpetual system, the income and asset balances reported in the consolidated financial statements are: I. affected only if there are upstream intercompany sales of inventory.

II. affected only if there are downstream intercompany sales of inventory.

A) I B) II C) Both I and II D) Neither I nor II 14) Pirate Corporation acquired 85 percent of Ship Company's voting shares of stock in 20X7.

During 20X8, Pirate purchased 50,000 circuit boards for $15 each and sold 28,000 of them to Ship for $20 each. Ship sold all of the units to unrelated entities prior to December 31, 20X8, for $30 each. Both companies use perpetual inventory systems.

Which worksheet consolidating entry is needed in preparing consolidated financial statements for 20X8 to remove all effects of the intercompany sale?

A. Sales Cost of Goods Sold B. Sales Cost of Goods Sold C. Cost of Goods Sold Sales D. Cost of Goods Sold Sales A) Option A B) Option B C) Option C D) Option D

560,000 560,000 650,000 650,000 560,000 560,000 650,000 650,000

On January 1, 20X8, Parent Company acquired 90 percent ownership of Subsidiary Corporation, at underlying book value. The fair value of the noncontrolling interest at the date of acquisition was equal to 10 percent of the book value of Subsidiary Corporation. On Mar 17, 20X8, Subsidiary purchased inventory from Parent for $90,000. Subsidiary sold the entire inventory to an unaffiliated company for $120,000 on November 21, 20X8. Parent had produced the inventory sold to Subsidiary for $62,000. The companies had no other transactions during 20X8.

15) Based on the information given above, what amount of sales will be reported in the 20X8 consolidated income statement?

A) $62,000 B) $120,000 C) $90,000 D) $58,000 16) Based on the information given above, what amount of cost of goods sold will be reported in the 20X8 consolidated income statement?

A) $62,000 B) $120,000 C) $90,000 D) $58,000 17) Based on the information given above, what amount of consolidated net income will be assigned to the controlling shareholders for 20X8?

A) $58,000 B) $59,000 C) $55,000 D) $52,200 On January 1, 20X1, Picture Company acquired 70 percent ownership of Seven Corporation at underlying book value. The fair value of the noncontrolling interest at the date of acquisition was equal to 30 percent of the book value of Seven Corporation. On April 25, 20X1, Seven purchased inventory from Picture for $45,000. Seven sold the entire inventory to an unaffiliated company for $58,000 on October 12, 20X1. Picture had produced the inventory sold to Seven for $38,000. The companies had no other transactions during 20X1.

18) Based on the information given above, what amount of sales will be reported in the 20X1 consolidated income statement?

A) $13,000 B) $38,000 C) $45,000 D) $58,000

19) Based on the information given above, what amount of cost of goods sold will be reported in the 20X1 consolidated income statement?

A) $13,000 B) $38,000 C) $45,000 D) $58,000 20) Based on the information given above, what amount of consolidated net income will be assigned to the controlling shareholders for 20X1?

A) $14,000 B) $16,100 C) $17,900 D) $20,000 Pepper Corporation owns 75 percent of Salt Company's voting shares. During 20X8, Pepper produced 50,000 chairs at a cost of $79 each and sold 35,000 chairs to Salt for $90 each. Salt sold 18,000 of the chairs to unaffiliated companies for $117 each prior to December 31, 20X8, and sold the remainder in early 20X9 to unaffiliated companies for $130 each. Both companies use perpetual inventory systems.

21) Based on the information given above, what amount of cost of goods sold did Pepper record in 20X8?

A) $2,765,000 B) $1,620,000 C) $1,422,000 D) $2,963,000 22) Based on the information given above, what amount of cost of goods sold did Salt record in 20X8?

A) $2,765,000 B) $1,620,000 C) $1,422,000 D) $2,963,000 23) Based on the information given above, what amount of cost of goods sold must be reported in the consolidated income statement for 20X8?

A) $2,765,000 B) $1,620,000 C) $1,422,000 D) $2,963,000

24) Based on the information given above, what amount of cost of goods sold must be eliminated from the consolidated income statement for 20X8?

A) $2,765,000 B) $1,620,000 C) $1,422,000 D) $2,963,000 25) Based on the information given above, what amount of cost of goods sold must be eliminated from the consolidated income statement for 20X9?

A) $187,000 B) $221,000 C) $1,422,000 D) $2,963,000 Pink Corporation owns 80 percent of Sink Company's voting shares. During 20X4, Pink produced 60,000 smart phones at a cost of $62 each and sold 45,000 smart phones to Sink for $93 each. Sink sold 26,000 of the smart phones to unaffiliated companies for $128 each prior to December 31, 20X4, and sold the remainder in early 20X5 to unaffiliated companies for $133 each. Both companies use the perpetual inventory systems.

26) Based on the information given above, what amount of cost of goods sold did Pink record in 20X4?

A) $1,612,000 B) $2,418,000 C) $2,790,000 D) $3,596,000 27) Based on the information given above, what amount of cost of goods sold did Sink record in 20X4?

A) $1,612,000 B) $2,418,000 C) $2,790,000 D) $3,596,000 28) Based on the information given above, what amount of cost of goods sold must be reported in the consolidated income statement for 20X4?

A) $1,612,000 B) $2,418,000 C) $2,790,000 D) $3,596,000

29) Based on the information given above, what amount of cost of goods must be eliminated from the consolidated income statement for 20X4?

A) $3,596,000 B) $3,379,000 C) $806,000 D) $589,000 30) Based on the information given above, what amount of cost of goods must be eliminated from the consolidated income statement for 20X5?

A) $3,596,000 B) $3,379,000 C) $806,000 D) $589,000 Push Company owns 60% of Shove Company's outstanding common stock. Intra-entity sales are as follows: Year 20X1 20X2

Inventory Cost $ 80,000 $ 110,000

Transfer Price $ 100,000 $ 130,000

Inventory Remaining at Year End (at transfer price) $ 30,000 $ 26,000

31) Assume Push sold the inventory to Shove. Using the fully adjusted equity method, what journal entry would be recorded by Push to defer the unrealized gross profit on inventory sales to Shove in 20X1?

A. Income from Shove Company Investment in Shove Company B. Income from Shove Company Investment in Shove Company C. Investment in Shove Company Income from Shove Company D. Investment in Shove Company Income from Shove Company A) Option A B) Option B C) Option C D) Option D

6,000 6,000 3,600 3,600 6,000 6,000 3,600 3,600

32) Assume Shove sold the inventory to Push. Using the fully adjusted equity method, what journal entry would be recorded by Push to defer the unrealized gross profit on inventory sales to Shove in 20X1?

A. Income from Shove Company Investment in Shove Company B. Income from Shove Company Investment in Shove Company C. Investment in Shove Company Income from Shove Company D. Investment in Shove Company Income from Shove Company

6,000 6,000 3,600 3,600 6,000 6,000 3,600 3,600

A) Option A B) Option B C) Option C D) Option D 33) Assume Push sold the inventory to Shove. Using the fully adjusted equity method, what journal entry would be recorded by Push to recognize the realization of the 20X1 deferred intercompany profit and to defer the 20X2 unrealized gross profit on inventory sales to Shove?

A. Income from Shove Company Investment in Shove Company B. Income from Shove Company Investment in Shove Company C. Investment in Shove Company Income from Shove Company D. Investment in Shove Company Income from Shove Company A) Option A B) Option B C) Option C D) Option D

2,000 2,000 1,200 1,200 2,000 2,000 1,200 1,200

34) Assume Shove sold the inventory to Push. Using the fully adjusted equity method, what journal entry would be recorded by Push to recognize the realization of the 20X1 deferred intercompany profit and to defer the 20X2 unrealized gross profit on inventory sales to Shove?

A. Income from Shove Company Investment in Shove Company B. Income from Shove Company Investment in Shove Company C. Investment in Shove Company Income from Shove Company D. Investment in Shove Company Income from Shove Company

2,000 2,000 1,200 1,200 2,000 2,000 1,200 1,200

A) Option A B) Option B C) Option C D) Option D Pilfer Company acquired 90 percent ownership of Scrooge Corporation in 20X7, at underlying book value. On that date, the fair value of noncontrolling interest was equal to 10 percent of the book value of Scrooge Corporation. Pilfer purchased inventory from Scrooge for $90,000 on August 20, 20X8, and resold 70 percent of the inventory to unaffiliated companies on December 1, 20X8, for $100,000. Scrooge produced the inventory sold to Pilfer for $67,000. The companies had no other transactions during 20X8.

35) Based on the information given above, what amount of sales will be reported in the 20X8 consolidated income statement?

A) $90,000 B) $120,000 C) $100,000 D) $67,000 36) Based on the information given above, what amount of cost of goods sold will be reported in the 20X8 consolidated income statement?

A) $60,900 B) $90,000 C) $46,900 D) $67,000 37) Based on the information given above, what amount of consolidated net income will be assigned to the controlling interest for 20X8?

A) $51,490 B) $53,100 C) $37,000 D) $20,100 38) Based on the information given above, what inventory balance will be reported by the

consolidated entity on December 31, 20X8?

A) $51,490 B) $53,100 C) $37,000 D) $20,100 Potter Company acquired 75 percent ownership of Snape Corporation in 20X5, at underlying book value. On that date, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Snape Corporation. Potter purchased inventory from Snape for $150,000 on July 24, 20X6, and resold 90 percent of the inventory to unaffiliated companies on November 11, 20X6, for $160,000. Snape produced the inventory sold to Potter for $120,000. The companies had no other transactions during 20X6.

39) Based on the information given above, what amount of sales will be reported in the 20X6 consolidated income statement?

A) $120,000 B) $135,000 C) $150,000 D) $160,000 40) Based on the information given above, what amount of cost of goods sold will be reported in the 20X6 consolidated income statement?

A) $90,000 B) $108,000 C) $120,000 D) $135,000 41) Based on the information given above, what amount of consolidated net income will be assigned to the controlling interest for 20X6?

A) $12,000 B) $25,000 C) $45,250 D) $52,000 42) Based on the information given above, what inventory balance will be reported by the consolidated entity on December 31, 20X6?

A) $3,000 B) $12,000 C) $15,000 D) $25,000

Sub Company sells all its output at 20 percent above cost to Par Corporation. Par purchases its entire inventory from Sub. The incomes reported by the companies over the past three years are as follows:

Year 20X6 20X7 20X8

Sub Company's Net Income 150,000 135,000 240,000

Par Corporation's Operating Income $ 225,000 360,000 450,000

Sub Company sold inventory for $300,000, $262,500 and $337,500 in the years 20X6, 20X7, and 20X8 respectively. Par Company reported ending inventory of $105,000, $157,500 and $180,000 for 20X6, 20X7, and 20X8 respectively. Par acquired 70 percent of the ownership of Sub on January 1, 20X6, at underlying book value. The fair value of the noncontrolling interest at the date of acquisition was equal to 30 percent of the book value of Sub Company.

43) Based on the information given above, what will be the consolidated net income for 20X6?

A) $357,500 B) $375,000 C) $490,000 D) $317,750 44) Based on the information given above, what will be the consolidated net income for 20X7?

A) $495,000 B) $317,750 C) $486,250 D) $690,000 45) Based on the information given above, what will be the income assigned to controlling interest for 20X7?

A) $448,375 B) $495,000 C) $486,250 D) $615,375 46) Based on the information given above, what will be the income to noncontrolling interest for 20X8?

A) $39,750 B) $37,875 C) $71,275 D) $70,875

47) Based on the information given above, what will be the income to controlling interest for 20X8?

A) $615,375 B) $686,250 C) $690,000 D) $694,000 48) A newly created subsidiary sold all of its inventory to its parent at a profit in its first year of existence. The parent, in turn, sold all but 20 percent of the inventory to unaffiliated companies, recognizing a profit. The parent had no other sales during the year. The amount that should be reported as cost of goods sold in this year's consolidated income statement should be: A) 80 percent of the amount reported as intercompany sales by the subsidiary.

B) 80 percent of the amount reported as cost of goods sold by the subsidiary.

C) the amount reported as cost of goods sold by the parent minus unrealized profit in the ending inventory of the parent.

D) 80 percent of the amount reported as cost of goods sold by the parent.

Parent Corporation owns 90 percent of Subsidiary 1 Company's stock and 75 percent of Subsidiary 2 Company's stock. During 20X8, Parent sold inventory purchased in 20X7 for $48,000 to Subsidiary 1 for $60,000. Subsidiary 1 then sold the inventory at its cost of $60,000 to Subsidiary 2. Prior to December 31, 20X8, Subsidiary 2 sold $45,000 of inventory to a nonaffiliate for $67,000 and held $15,000 in inventory at December 31, 20X8.

49) Based on the information given above, what amount should be reported in the 20X8 consolidated income statement as cost of goods sold?

A) $36,000 B) $12,000 C) $48,000 D) $45,000 50) Based on the information given above, what amount should be reported in the December 31, 20X8, consolidated balance sheet as inventory?

A) $36,000 B) $12,000 C) $15,000 D) $28,000 51) Based on the information given above, what amount of cost of goods sold must be eliminated from the consolidated income statement for 20X8?

A) $117,000 B) $120,000 C) $150,000 D) $128,000

52) Based on the information given above, what amount of sales must be eliminated from the consolidated income statement for 20X8?

A) $117,000 B) $120,000 C) $150,000 D) $128,000 53) Based on the information given above, what amount of inventory must be eliminated from the consolidated balance sheet for 20X8?

A) $2,400 B) $9,000 C) $12,000 D) $3,000 54) The consolidation treatment of profits on inventory transfers that occurred before the business combination depends on whether: I. the companies were independent at that time.

II. the sale transaction was the result of arm's-length bargaining.

A) I B) II C) Both I and II D) Neither I nor II Padre Company purchases inventory for $70,000 on Mar 19, 20X8 and sells it to Sonny Corporation for $95,000 on May 14, 20X8. Sonny still holds the inventory on December 31, 20X8, and determines that its market value (replacement cost) is $82,000 at that time. Sonny writes the inventory down from $95,000 to its lower market value of $82,000 at the end of the year. Padre owns 75 percent of Sonny.

55) Based on the information given above, what amount of cost of goods sold should be eliminated in the consolidation worksheet for 20X8?

A) $82,000 B) $70,000 C) $95,000 D) $60,000 56) Based on the information given above, what amount of inventory should be eliminated in the consolidation worksheet for 20X8?

A) $15,000 B) $14,000 C) $12,000 D) $13,000

57) Based on the information given above, by what amount should Sonny write down inventory in its books?

A) $14,000 B) $15,000 C) $13,000 D) $16,000 58) Pole Company acquired 80 percent ownership of South Company's voting shares on January 1, 20X8, at underlying book value. The fair value of the noncontrolling interest on that date was equal to 20 percent of the book value of South Company. During 20X8, Pole purchased inventory for $30,000 and sold the full amount to South Company for $50,000. On December 31, 20X8, South's ending inventory included $10,000 of items purchased from Pole. Also in 20X8, South purchased inventory for $80,000 and sold the units to Pole for $100,000. Pole included $30,000 of its purchase from South in ending inventory on December 31, 20X8. Summary income statement data for the two companies revealed the following:

Sales Income from Subsidiary Cost of Goods Sold Other Expenses Total Expenses Net Income

Pole Company $ 300,000 39,000 $ 339,000 $ 190,000 45,000 $ (235,000) $ 104,000

South Company $ 172,000 $ $

172,000 110,000 29,000 $ (139,000) $ 33,000

Required: a. Compute the amount to be reported as sales in the 20X8 consolidated income statement. b. Compute the amount to be reported as cost of goods sold in the 20X8 consolidated income statement. c. What amount of income will be assigned to the noncontrolling shareholders in the 20X8 consolidated income statement? d. What amount of income will be assigned to the controlling interest in the 20X8 consolidated income statement?

59) Pants Company and Shirt Company both produce and purchase fabric for resale each period and frequently sell to each other. Since Pants Company holds 80 percent ownership of Shirt Company, Pants' controller compiled the following information with regard to intercompany transactions between the two companies in 20X7 and 20X8:

Percent Resold to Nonaffiliate in Year 20X7 20X7 20X8 20X8

Produced by Pants Co. Shirt Co. Pants Co. Shirt Co.

Sold to Shirt Co. Pants Co. Shirt Co. Pants Co.

20X7 20X8 70% 30% 50% 30% 75% 40%

Cost to Produce $ 170,000 50,000 35,000 230,000

Sale Price to Affiliate $ 200,000 80,000 52,000 280,000

Required: a. Give the consolidating entries required at December 31, 20X8, to eliminate the effects of the inventory transfers in preparing a full set of consolidated financial statements. b. Compute the amount of cost of goods sold to be reported in the consolidated income statement for 20X8.

60) On January 1, 20X7, Pepper Company acquired 90 percent of the outstanding common stock of Salt Corporation for $1,242,000. On that date, the fair value of noncontrolling interest was equal to $138,000. The entire differential was related to land held by Salt. At the date of acquisition, Salt had common stock outstanding of $520,000, additional paid-in capital of $200,000, and retained earnings of $540,000. During 20X7, Salt sold inventory to Pepper for $440,000. The inventory originally cost Salt $360,000. By year-end, 30 percent was still in Pepper's ending inventory. During 20X8, the remaining inventory was resold to an unrelated customer. Both Pepper and Salt use perpetual inventory systems.

Income and dividend information for both Pepper and Salt for 20X7 and 20X8 are as follows:

Pepper Company

20X7 20X8

Operating Income $ 860,000 910,000

Dividends $ 160,000 200,000

Salt Corp.

Net Income $ 360,000 420,000

Dividends $ 200,000 200,000

Assume Pepper uses the fully adjusted equity method to account for its investment in Salt.

Required: a. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X7. b. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X8.

61) Pisa Company acquired 75 percent of Siena Company on January 1, 20X3 for $712,500. The fair value of the noncontrolling interest was equal to 25 percent of book value. On the date of acquisition, Siena had common stock outstanding of $300,000 and a balance in retained earnings of $650,000. During 20X3, Siena purchased inventory for $35,000 and sold it to Pisa for $50,000. Of this amount, Pisa reported $20,000 in ending inventory in 20X3 and later sold it in 20X4. In 20X4, Pisa sold inventory it had purchased for $40,000 to Siena for $60,000. Siena sold $45,000 of this inventory in 20X4.

Income and dividend information for Siena for 20X3 and 20X4 are as follows:

Year 20X3 20X4

Net Income $ 150,000 $ 200,000

Dividends $ 40,000 $ 50,000

Pisa Company uses the fully adjusted equity method.

Required: a. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X3. b. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X4.

62) On January 1, 20X7, Pepper Company acquired 90 percent of the outstanding common stock of Salt Corporation for $1,242,000. On that date, the fair value of noncontrolling interest was equal to $138,000. The entire differential was related to land held by Salt. At the date of acquisition, Salt had common stock outstanding of $520,000, additional paid-in capital of $200,000, and retained earnings of $540,000. During 20X7, Salt sold inventory to Pepper for $440,000. The inventory originally cost Salt $360,000. By year-end, 30 percent was still in Pepper' ending inventory. During 20X8, the remaining inventory was resold to an unrelated customer. Both Pepper and Salt use perpetual inventory systems.

Income and dividend information for both Pepper and Salt for 20X7 and 20X8 are as follows:

Pepper Company

20X7 20X8

Operating Income $ 860,000 910,000

Dividends $ 160,000 200,000

Salt Corp.

Net Income $ 360,000 420,000

Dividen ds $ 200,000 200,000

Assume Pepper uses the modified equity method to account for its investment in Salt.

Required: a. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X7. b. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X8.

63) On January 1, 20X7, Pepper Company acquired 90 percent of the outstanding common stock of Salt Corporation for $1,242,000. On that date, the fair value of noncontrolling interest was equal to $138,000. The entire differential was related to land held by Salt. At the date of acquisition, Salt had common stock outstanding of $520,000, additional paid-in capital of $200,000, and retained earnings of $540,000. During 20X7, Salt sold inventory to Pepper for $440,000. The inventory originally cost Salt $360,000. By year-end, 30 percent was still in Pepper' ending inventory. During 20X8, the remaining inventory was resold to an unrelated customer. Both Pepper and Salt use perpetual inventory systems.

Income and dividend information for both Pepper and Salt for 20X7 and 20X8 are as follows: Pepper Company

20X7 20X8

Operating Income $ 860,000 910,000

Dividends $ 160,000 200,000

Salt Corp.

Net Income $ 360,000 420,000

Dividen ds $ 200,000 200,000

Assume Pepper uses the cost method to account for its investment in Salt.

Required: a. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X7. b. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X8.

64) Pisa Company acquired 75 percent of Siena Company on January 1, 20X3 for $712,500. The fair value of the noncontrolling interest was equal to 25 percent of book value. On the date of acquisition, Siena had common stock outstanding of $300,000 and a balance in retained earnings of $650,000. During 20X3, Siena purchased inventory for $35,000 and sold it to Pisa for $50,000. Of this amount, Pisa reported $20,000 in ending inventory in 20X3 and later sold it in 20X4. In 20X4, Pisa sold inventory it had purchased for $40,000 to Siena for $60,000. Siena sold $45,000 of this inventory in 20X4.

Income and dividend information for Siena for 20X3 and 20X4 are as follows: Year 20X3 20X4

Net Income $ 150,000 $ 200,000

Dividends $ 40,000 $ 50,000

Pisa Company uses the modified equity method.

Required: a. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X3. b. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X4.

65) Pisa Company acquired 75 percent of Siena Company on January 1, 20X3 for $712,500. The fair value of the noncontrolling interest was equal to 25 percent of book value. On the date of acquisition, Siena had common stock outstanding of $300,000 and a balance in retained earnings of $650,000. During 20X3, Siena purchased inventory for $35,000 and sold it to Pisa for $50,000. Of this amount, Pisa reported $20,000 in ending inventory in 20X3 and later sold it in 20X4. In 20X4, Pisa sold inventory it had purchased for $40,000 to Siena for $60,000. Siena sold $45,000 of this inventory in 20X4.

Income and dividend information for Siena for 20X3 and 20X4 are as follows: Year 20X3 20X4

Net Income $ 150,000 $ 200,000

Dividends $ 40,000 $ 50,000

Pisa Company uses the cost method.

Required: a. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X3. b. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X4.

Advanced Financial Accounting, 12e (Christensen) Chapter 7 Intercompany Transfers of Services and Noncurrent Assets 1) Pillar Company owns 70 percent of Salt Company's outstanding common stock. On December 31, 20X8, Salt sold equipment to Pillar at a price in excess of Salt's carrying amount, but less than its original cost. On a consolidated balance sheet at December 31, 20X8, the carrying amount of the equipment should be reported at: A) Pillar's original cost.

B) Salt's original cost.

C) Pillar's original cost less Salt's recorded gain.

D) Pillar's original cost less 70 percent of Salt's recorded gain.

2) A parent and its 80 percent-owned subsidiary have made several intercompany sales of noncurrent assets during the past two years. The amount of income assigned to the noncontrolling interest for the second year should include the noncontrolling interest's share of gains: A) unrealized in the second year from upstream sales made in the second year.

B) realized in the second year from downstream sales made in both years.

C) realized in the second year from upstream sales made in both years.

D) both realized and unrealized from upstream sales made in the second year.

Parent Corporation purchased land from S1 Corporation for $220,000 on December 26, 20X8.

This purchase followed a series of transactions between P-controlled subsidiaries. On February 15, 20X8, S3 Corporation purchased the land from a nonaffiliate for $160,000. It sold the land to S2 Company for $145,000 on October 19, 20X8, and S2 sold the land to S1 for $197,000 on November 27, 20X8. Parent has control of the following companies: Subsidiary S3 S2 S1

Level of Ownership 80 percent 70 percent 90 percent

2008 Net Income $ 100,000 70,000 95,000

Parent reported income from its separate operations of $200,000 for 20X8.

3) Based on the preceding information, at what amount should the land be reported in the consolidated balance sheet as of December 31, 20X8?

A) $145,000 B) $220,000 C) $197,000 D) $160,000

4) Based on the preceding information, what amount of gain or loss on sale of land should be reported in the consolidated income statement for 20X8?

A) $60,000 B) $0 C) $75,000 D) $23,000 5) Based on the preceding information, what should be the amount of income assigned to the controlling shareholders in the consolidated income statement for 20X8?

A) $369,400 B) $405,000 C) $465,000 D) $60,000 Patch Corporation purchased land from Sub1 Corporation for $350,000 on December 3, 20X5.

This purchase followed a series of transactions between Patch-controlled subsidiaries. On January 23, 20X5, Sub3 Corporation purchased the land from a nonaffiliate for $240,000. It sold the land to Sub2 Company for $220,000 on July 15, 20X5, and Sub2 sold the land to Sub1 for $305,000 on September 5, 20X5. Patch has control of the following companies: Subsidiary Sub3 Sub2 Sub1

Level of Ownership 60 percent 90 percent 70 percent

20X5 Net Income $ 60,000 $ 140,000 $ 90,000

Patch reported income from its separate operations of $345,000 for 20X5.

6) Based on the preceding information, at what amount should the land be reported in the consolidated balance sheet as of December 31, 20X5?

A) $220,000 B) $240,000 C) $305,000 D) $350,000 7) Based on the preceding information, what amount of gain or loss on the sale of land should be reported in the consolidated income statement for 20X5?

A) $0 B) $20,000 loss C) $110,000 gain D) $130,000 gain

8) Based on the preceding information, what should be the amount of income assigned to the controlling shareholders in the consolidated income statement for 20X5?

A) $110,000 B) $474,000 C) $525,000 D) $635,000 Postage Corporation receives management consulting services from its 92 percent-owned subsidiary, Stamp Inc. During 20X7, Postage paid Stamp $125,432 for its services. For the year 20X8, Stamp billed Postage $140,000 for such services and collected all but $7,900 by year-end.

Stamp's labor cost and other associated costs for the employees providing services to Postage totaled $86,000 in 20X7 and $121,000 in 20X8. Postage reported $2,567,000 of income from its own separate operations for 20X8, and Stamp reported net income of $695,000.

9) Based on the preceding information, what amount of consolidated net income should be reported in 20X8?

A) $3,262,000 B) $4,050,000 C) $3,254,100 D) $3,122,000 10) Based on the preceding information, what amount of income should be assigned to the noncontrolling shareholders in the consolidated income statement for 20X8?

A) $47,700 B) $44,400 C) $55,600 D) $60,000 11) Based on the preceding information, what amount of receivable/payable should be eliminated in the 20X8 consolidated financial statements?

A) $125,432 B) $7,900 C) $5,560 D) $140,000 12) A wholly owned subsidiary sold land to its parent during the year at a gain. The parent continues to hold the land at the end of the year. The amount to be reported as consolidated net income for the year should equal: A) the parent's separate operating income, plus the subsidiary's net income.

B) the parent's separate operating income, plus the subsidiary's net income, minus the intercompany gain.

C) the parent's separate operating income, plus the subsidiary's net income, plus the intercompany gain.

D) the parent's net income, plus the subsidiary's net income, minus the intercompany gain.

13) Phobos Company holds 80 percent of Seimos Company's voting shares. During the preparation of consolidated financial statements for 20X9, the following consolidating entry was made: Investment in Seimos Land

50,000 50,000

Which of the following statements is correct?

A) Phobos Company purchased land from Seimos Company during 20X9.

B) Phobos Company purchased land from Seimos Company before January 1, 20X9.

C) Seimos Company purchased land from Phobos Company during 20X9.

D) Seimos Company purchased land from Phobos Company before January 1, 20X9.

14) Any intercompany gain or loss on a downstream sale of land should be recognized in consolidated net income: I. in the year of the downstream sale.

II. over the period of time the subsidiary uses the land.

III. in the year the subsidiary sells the land to an unrelated party.

A) I B) II C) III D) I or II

Pumpkin Corporation purchased land on January 1, 20X6, for $50,000. On July 15, 20X8, it sold the land to its subsidiary, Spice Corporation, for $70,000. Pumpkin owns 80 percent of Spice's voting shares.

15) Based on the preceding information, what will be the worksheet consolidating entry to remove the effects of the intercompany sale of land in preparing the consolidated financial statements for 20X8?

A. Gain on Sale of Land

20,000

Land B. Gain on Sale of Land

20,000 16,000

Land C. Land

16,000 16,000

Gain on Sale of Land D. Land Gain on Sale of Land A) Option A B) Option B C) Option C D) Option D

16,000 20,000 20,000

16) Based on the preceding information, what will be the worksheet consolidating entry to remove the effects of the intercompany sale of land in preparing the consolidated financial statements for 20X9?

A. Investment in Spice

20,000

Land B. Land

20,000 16,000

Investment in Spice C. Investment in Spice

16,000 16,000

Land D. Land Investment in Spice A) Option A B) Option B C) Option C D) Option D

16,000 20,000 20,000

17) Which worksheet consolidating entry will be made on December 31, 20X9, if Spice Corporation had initially purchased the land for $50,000 and then sold it to Pumpkin on July 15, 20X8, for $70,000?

A. Investment in Spice

12,000

NCI in NA of Spice

8,000

Land

20,000

B. Investment in Spice

16,000

NCI in NA of Spice

4,000

Land C. Land

20,000 20,000

Investment in Spice

14,000

NCI in NA of Spice

6,000

D. Land

20,000

Investment in Spice

18,000

NCI in NA of Spice

2,000

A) Option A B) Option B C) Option C D) Option D

Pancake Corporation purchased land on January 1, 20X0, for $60,000. On August 7, 20X2, it sold the land to its subsidiary, Syrup Corporation, for $35,000. Pancake owns 60 percent of Syrup's voting shares.

18) Based on the preceding information, what will be the worksheet consolidation entry to remove the effects of the intercompany sale of land in preparing the consolidated financial statements for 20X2?

A. Land

15,000

Loss on Sale of Land B. Land

15,000 25,000

Loss on Sale of Land C. Loss on Sale of Land

25,000 15,000

Land D. Loss on Sale of Land Land A) Option A B) Option B C) Option C D) Option D

15,000 25,000 25,000

19) Based on the preceding information, what will be the worksheet consolidation entry to remove the effects of the intercompany sale of land in preparing the consolidated financial statements for 20X3?

A. Investment in Syrup

25,000

Land B. Land

25,000 15,000

Investment in Syrup C. Investment in Syrup

15,000 15,000

Land D. Land Investment in Syrup A) Option A B) Option B C) Option C D) Option D

15,000 25,000 25,000

20) Which worksheet consolidation entry will be made on December 31, 20X3, if Syrup Corporation had initially purchased the land for $60,000 and then sold it to Pancake on August 7, 20X2, for $35,000?

A. Investment in Syrup

15,000

NCI in NA of Syrup

10,000

Land

25,000

B. Investment in Syrup

20,000

NCI in NA of Syrup

5,000

Land C. Land

25,000 25,000

Investment in Syrup

15,000

NCI in NA of Syrup

10,000

D. Land

25,000

Investment in Syrup

20,000

NCI in NA of Syrup

5,000

A) Option A B) Option B C) Option C D) Option D 21) A parent sold land to its partially owned subsidiary during the year at a loss. The subsidiary continues to hold the land at the end of the year. The amount to be reported as consolidated net income for the year should equal: A) the parent's separate operating income, plus the intercompany loss.

B) the parent's separate operating income, plus the intercompany loss, plus the subsidiary's net income.

C) the parent's separate operating income, minus the intercompany loss.

D) the parent's separate operating income, minus the intercompany loss, plus the subsidiary's net income.

22) Parent Company owns 70% of Son Company's outstanding stock. During 20X1 Son Company sold land to Parent Company for a gain of $25,000. Parent company held the land all of 20X1. The gain on the sale to Parent should be: A) recorded on Son's books as a gain of $25,000 and then eliminated during the consolidation process.

B) deferred by Son until Parent sells the land to an outside party.

C) recorded on Son's books as a gain of $17,500 and eliminated during the consolidation process.

D) recorded on Parent's book as a gain of $17,500 and eliminated during the consolidation process.

23) Using the fully adjusted equity method, an intercompany gain on an upstream sale of land is: A) recognized by the parent and the deferral is shared between the controlling and noncontrolling stockholders of the subsidiary.

B) recognized by the subsidiary and the deferral is shared between the controlling and noncontrolling stockholders of the subsidiary.

C) deferred by the subsidiary until the land is sold to an entity outside the consolidated group.

D) recognized by the subsidiary and the deferral is completely allocated to the controlling stockholders of the subsidiary.

Paper Corporation owns 75 percent of Scissor Company's stock. On July 1, 20X8, Paper sold a building to Scissor for $33,000. Paper had purchased this building on January 1, 20X6, for $36,000. The building's original eight-year estimated total economic life remains unchanged.

Both companies use straight-line depreciation. The building's residual value is considered negligible.

24) Based on the information provided, in the preparation of the 20X8 consolidated financial statements, building will be in the consolidating entries.

A) debited for $33,000 B) debited for $36,000 C) credited for $36,000 D) debited for $3,000 25) Based on the information provided, the gain on sale of the building eliminated in the consolidated financial statements for 20X8 is: A) $8,250.

B) $10,500.

C) $6,000.

D) $11,250.

26) Based on the information provided, while preparing the 20X8 consolidated income statement, depreciation expense will be: A) debited for $750 in the consolidating entries.

B) credited for $750 in the consolidating entries.

C) credited for $1,500 in the consolidating entries.

D) debited for $1,500 in the consolidating entries.

27) Based on the information provided, in the preparation of the 20X9 consolidated income statement, depreciation expense will be:

A) debited for $750 in the consolidating entries.

B) credited for $750 the consolidating entries.

C) credited for $1,500 in the consolidating entries.

D) debited for $1,500 in the consolidating entries.

Pluto Corporation owns 70 percent of Saturn Company's stock. On July 1, 20X4, Pluto sold a piece of equipment to Saturn for $56,350. Pluto had purchased this equipment on January 1, 20X1, for $63,000. The equipment's original 15-year estimated total economic life remains unchanged. Both companies use straight-line depreciation. The equipment's residual value is considered negligible.

28) Based on the information provided, in the preparation of the 20X4 consolidated financial statements, equipment will be in the consolidation entries.

A) debited for $6,650 B) debited for $56,350 C) debited for $63,000 D) credited for $63,000 29) Based on the information provided, the gain on the sale of the equipment eliminated in the consolidated financial statements for 20X4 is A) $5,950.

B) $8,050.

C) $10,150.

D) $14,700.

30) Based on the information provided, while preparing the 20X4 consolidated income statement, depreciation expense will be A) credited for $350 in the consolidation entries.

B) debited for $350 in the consolidation entries.

C) credited for $700 in the consolidation entries.

D) debited for $700 in the consolidation entries.

31) Based on the information provided, in the preparation of the 20X5 consolidated income statement, depreciation expense will be A) debited for $350 in the consolidation entries.

B) credited for $350 in the consolidation entries.

C) debited for $700 in the consolidation entries.

D) credited for $700 in the consolidation entries.

32) On January 1, 20X9, Planet Corporation sold equipment for $400,000 to Star Corporation, its wholly owned subsidiary. Planet had paid $900,000 for this equipment, which had accumulated depreciation of $170,000. Planet estimated a $50,000 salvage value and depreciated the tractor using the straight-line method over 10 years, a policy that Star continued. In Planet's December 31, 20X9, consolidated balance sheet, this tractor should be included in fixed-asset cost and accumulated depreciation as:

A. B. C. D.

Cost $ 900,000 $ 900,000 $ 730,000 $ 730,000

Accumulated Depreciation $ 255,000 $ 120,000 $ 85,000 $ 170,000

A) Option A B) Option B C) Option C D) Option D Pat Corporation acquired 80 percent of Smack Corporation's voting common stock on January 1, 20X7. On December 31, 20X8, Pat received $390,000 from Smack for equipment Pat had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipment on a straight-line basis.

33) Based on the preceding information, in the preparation of the 20X8 consolidated financial statements, equipment will be: A) debited for $1,000.

B) debited for $10,000.

C) credited for $15,000.

D) debited for $25,000.

34) Based on the preceding information, the gain on sale of the equipment recorded by Pat for 20X8 is: A) $150,000 B) $65,000 C) $110,000 D) $40,000 35) Based on the preceding information, in the preparation of the 20X9 consolidated financial statements, equipment will be: A) debited for $1,000.

B) debited for $10,000.

C) credited for $15,000.

D) debited for $25,000.

36) Based on the preceding information, in the preparation of the 20X9 consolidated income statement, depreciation expense will be:

A) debited for $25,000 in the consolidating entries.

B) credited for $15,000 in the consolidating entries.

C) debited for $15,000 in the consolidating entries.

D) credited for $25,000 in the consolidating entries.

37) Based on the preceding information, in the preparation of consolidation entries related to the equipment transfer for the 20X9 consolidated financial statements, the net effect on accumulated depreciation will be: A) a decrease of $160,000.

B) an increase of $160,000.

C) an increase of $135,000.

D) a decrease of $135,000.

Plesco Corporation acquired 80 percent of Slesco Corporation's voting common stock on January 1, 20X7. On January 1, 20X8, Plesco received $350,000 from Slesco for equipment Plesco had purchased on January 1, 20X5, for $400,000. The equipment is expected to have a 10-year useful life and no salvage value. Both companies depreciate equipment on a straight-line basis.

38) Based on the preceding information, in the preparation of the 20X8 consolidated financial statements, equipment will be: A) debited for $50,000.

B) debited for $40,000.

C) credited for $70,000.

D) debited for $25,000.

39) Based on the preceding information, the gain on sale of equipment recorded by Plesco for 20X8 is: A) $70,000.

B) $65,000.

C) $50,000.

D) $40,000.

40) Based on the preceding information, in the preparation of consolidation entries related to the equipment transfer for the 20X8 consolidated financial statements, net effect on accumulated depreciation will be: A) a decrease of $50,000.

B) an increase of $110,000.

C) an increase of $120,000.

D) a decrease of $160,000.

41) Based on the preceding information, in the preparation of the 20X9 consolidated income statement, depreciation expense will be: A) Debited for $40,000 in the consolidating entries.

B) Credited for $10,000 in the consolidating entries.

C) Debited for $10,000 in the consolidating entries.

D) Credited for $40,000 in the consolidating entries.

42) Based on the preceding information, in the preparation of consolidation entries related to the equipment transfer for the 20X9 consolidated financial statements, net effect on accumulated depreciation will be: A) a decrease of $110,000.

B) an increase of $110,000.

C) an increase of $100,000.

D) a decrease of $100,000.

On January 1, 20X7, Server Company purchased a machine with an expected economic life of five years. On January 1, 20X9, Server sold the machine to Patron Corporation and recorded the following entry: Cash Accumulated Depreciation Machine Gain on Sale of Equipment

45,000 28,000 70,000 3,000

Patron Corporation holds 75 percent of Server's voting shares. Server reported net income of $50,000, and Patron reported income from its own operations of $100,000 for 20X9. There is no change in the estimated economic life of the equipment as a result of the intercorporate transfer.

43) Based on the preceding information, in the preparation of the 20X9 consolidated income statement, depreciation expense will be: A) Debited for $1,000 in the consolidating entries.

B) Credited for $1,000 in the consolidating entries.

C) Debited for $15,000 in the consolidating entries.

D) Credited for $15,000 in the consolidating entries.

44) Based on the preceding information, in the preparation of the 20X9 consolidated balance sheet, machine will be: A) debited for $1,000.

B) debited for $15,000.

C) credited for $45,000.

D) debited for $25,000.

45) Based on the preceding information, income assigned to the noncontrolling interest in the 20X9 consolidated income statement will be: A) $12,000.

B) $14,000.

C) $12,500.

D) $48,000.

46) Based on the preceding information, consolidated net income for 20X9 will be: A) $150,000.

B) $100,000.

C) $148,000.

D) $130,000.

Pint Corporation holds 70 percent of Size Company's voting common stock. On January 1, 20X3, Size paid $500,000 to acquire a building with a 10-year expected economic life. Size uses straight-line depreciation for all depreciable assets. On December 31, 20X8, Pint purchased the building from Size for $180,000. Pint reported income, excluding investment income from Size, of $140,000 and $162,000 for 20X8 and 20X9, respectively. Size reported net income of $30,000 and $45,000 for 20X8 and 20X9, respectively.

47) Based on the preceding information, the amount to be reported as consolidated net income for 20X8 will be: A) $190,000.

B) $170,000.

C) $175,000.

D) $150,000.

48) Based on the preceding information, the amount of income assigned to the controlling shareholders in the consolidated income statement for 20X8 will be: A) $190,000.

B) $170,000.

C) $175,000.

D) $150,000.

49) Based on the preceding information, the amount to be reported as consolidated net income for 20X9 will be: A) $207,000.

B) $202,000.

C) $212,000.

D) $190,000.

50) Based on the preceding information, the amount of income assigned to the controlling shareholders in the consolidated income statement for 20X9 will be: A) $207,000.

B) $202,000.

C) $212,000.

D) $190,000.

51) Peter Architectural Services owns 100 percent of Smith Manufacturing. During the course of 20X8 Peter provides $100,000 of architectural services associated with Smith's new manufacturing facility, which will open January 4, 20X9, and has a 5 year useful life. Explain the impact providing this service has on Peter Architectural Services' 20X8 and 20X9 consolidated financial statements.

52) PeopleMag sells a plot of land for $100,000 to Seven Star Company, its 100 percent owned subsidiary, on January 1, 20X7. The cost of the land was $75,000, when it was purchased in 20X6. In 20X9, Seven Star sells the land to Hot Properties Inc., an unrelated entity, for $120,000. How is the land reported in the consolidated financial statements for 20X7, 20X8 and 20X9?

53) Peak Corporation owns 75 percent of Summit Company's voting shares, acquired on March 21, 20X5, at book value. At that date, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Summit Company.

Cash and Receivables Inventory Land Buildings and Equipment Investment in Summit Company Stock Debits Accum. Depreciation Accounts Payable Notes Payable Common Stock Retained Earnings Credits

Peak Corporation $ 70,000 46,250 140,000 250,000 93,750 $ 600,000 $ 100,000 30,000 70,000 100,000 300,000 $ 600,000

Summit Company $ 10,000 20,000 45,000 150,000 $ 225,000 $ 42,500 12,500 45,000 100,000 25,000 $ 225,000

On January 1, 20X4, Peak paid $150,000 for equipment with a 10-year expected total economic life. The equipment was depreciated on a straight-line basis with no residual value. Summit purchased the equipment from Peak on December 31, 20X6, for $140,000. Summit sold land it had purchased for $75,000 on February 18, 20X4, to Peak for $60,000 on October 10, 20X7.

Required: Prepare the consolidation entries for 20X8 related to the sale of depreciable assets and land if Peak uses the fully adjusted equity method to account for its investment in Summit.

54) Pie Company acquired 75 percent of Strawberry Company's stock at the underlying book value on January 1, 20X8. At that date, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Strawberry Company. Strawberry Company reported shares outstanding of $350,000 and retained earnings of $100,000. During 20X8, Strawberry Company reported net income of $60,000 and paid dividends of $3,000. In 20X9, Strawberry Company reported net income of $90,000 and paid dividends of $15,000. The following transactions occurred between Pie Company and Strawberry Company in 20X8 and 20X9: Strawberry Co. sold equipment to Pie Co. for a $42,000 gain on December 31, 20X8. Strawberry Co. had originally purchased the equipment for $140,000 and it had a carrying value of $28,000 on December 31, 20X8. At the time of the purchase, Pie Co. estimated that the equipment still had a seven-year remaining useful life.

Pie Co. sold land costing $90,000 to Strawberry Co. on June 28, 20X9, for $110,000.

Required: Give all consolidating entries needed to prepare a consolidation worksheet for 20X9 assuming that Pie Co. uses the fully adjusted equity method to account for its investment in Strawberry Company.

55) Pepper Company acquired 75 percent of Salt Company's stock at underlying book value on January 1, 20X8. At that date, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Salt Company. Salt Company reported shares outstanding of $350,000 and retained earnings of $100,000. During 20X8, Salt Company reported net income of $60,000 and paid dividends of $3,000. In 20X9, Salt Company reported net income of $90,000 and paid dividends of $15,000. The following transactions occurred between Pepper Company and Salt Company in 20X8 and 20X9: Salt Co. sold equipment to Pepper Co. for a $42,000 gain on December 31, 20X8. Salt Co. had originally purchased the equipment for $140,000 and it had a carrying value of $28,000 on December 31, 20X8. At the time of the purchase, Pepper Co. estimated that the equipment still had a seven-year remaining useful life.

Pepper sold land costing $90,000 to Oregano Company on June 28, 20X9, for $110,000.

Required: Give all consolidating entries needed to prepare a consolidation worksheet for 20X9 assuming that Pepper Co. uses the modified equity method to account for its investment in Oregano Company.

56) Peanut Company acquired 75 percent of Snoopy Company's stock at underlying book value on January 1, 20X8. At that date, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Snoopy Company. Snoopy Company reported shares outstanding of $350,000 and retained earnings of $100,000. During 20X8, Snoopy Company reported net income of $60,000 and paid dividends of $3,000. In 20X9, Snoopy Company reported net income of $90,000 and paid dividends of $15,000. The following transactions occurred between Peanut Company and Snoopy Company in 20X8 and 20X9: Snoopy Co. sold equipment to Peanut Co. for a $42,000 gain on December 31, 20X8. Snoopy Co. had originally purchased the equipment for $140,000 and it had a carrying value of $28,000 on December 31, 20X8. At the time of the purchase, Peanut Co. estimated that the equipment still had a seven-year remaining useful life.

Peanut sold land costing $90,000 to Snoopy Company on June 28, 20X9, for $110,000.

Required: Give all consolidating entries needed to prepare a consolidation worksheet for 20X9 assuming that Peanut Co. uses the cost method to account for its investment in Snoopy Company.

Advanced Financial Accounting, 12e (Christensen) Chapter 8 Intercompany Indebtedness 1) Poodle Company owns 80 percent of the common stock of Shepherd Inc. Poodle acquires some of Shepherd's bonds from an unrelated party for less than the carrying value on Shepherd's books and holds them as a long-term investment. For consolidated reporting purposes, how is the acquisition of Shepherd's bonds treated?

A) As a decrease in the Bonds Payable account on Shepherd's books.

B) As an increase in noncurrent assets.

C) Everything related to the bonds is eliminated in the consolidation worksheet, and nothing related to the bonds appears in the consolidated financial statements.

D) As a retirement of bonds.

2) Portuguese owns 80 percent of the common stock of Spanish Company. Portuguese also purchases some of Spanish's bonds directly from Spanish and holds the bonds as a long-term investment. How is the acquisition of the bonds treated for consolidated reporting purposes?

A) As a retirement of bonds.

B) As an increase in the Bonds Payable account on Spanish's books.

C) Everything related to the intercompany bonds is eliminated in the consolidation worksheet, and nothing related to the bonds appears in the consolidated financial statements.

D) As an increase in noncurrent assets.

3) At the end of the year, a parent acquires a wholly owned subsidiary's bonds from unaffiliated parties at a cost less than the subsidiary's carrying value. The consolidated net income for the year of acquisition should include the parent's separate operating income plus: A) the subsidiary's net income increased by the gain on constructive retirement of debt.

B) the subsidiary's net income decreased by the loss on constructive retirement of debt.

C) the subsidiary's net income increased by the gain on constructive retirement of debt, and decreased by the subsidiary's bond interest expense.

D) the subsidiary's net income decreased by the loss on constructive retirement of debt, and decreased by the subsidiary's bond interest expense.

4) A loss on the constructive retirement of a parent's bonds by a subsidiary is effectively recognized in the individual accounting records of the parent and its subsidiary: I. at the date of constructive retirement II. over the remaining term of the bonds.

A) I B) II C) Both I and II D) Neither I nor II

5) When one company purchases the debt of an affiliate from an unrelated party, a gain or loss on the constructive retirement of debt is recognized by which of the following?

Issuing Affiliate

Purchasing Affiliate

Consolidated Entity

A.

No

No

Yes

B.

Yes

Yes

No

C.

No

No

No

D.

Yes

Yes

Yes

A) Option A B) Option B C) Option C D) Option D 6) Which of the following statements is (are) correct?

I. The amount assigned to the noncontrolling interest may be affected by a constructive retirement of bonds.

II. A constructive retirement of bonds normally results in a gain or loss.

III. In constructive retirement, the entity would still consider the bonds outstanding, even though they are treated as if they were retired in preparing consolidated financial statements.

A) I B) II C) I and III D) I, II, and III 7) On January 1, 20X6, Pepper Corporation issued 10-year bonds at par to unrelated parties. The bonds have a 10% stated rate, face value of $300,000, and pay interest every June 30 and December 31. On December 31, 20X9, Salt Corporation purchased all of Pepper's bonds in the open market at a $6,000 discount. Salt is Pepper's 80 percent owned subsidiary. Salt uses the effective interest method of amortization. The consolidated income statement for the year 20X9 should report with respect to the bonds: I. interest expense of $30,000.

II. a gain of $6,000.

A) I B) II C) Either I or II D) Neither I nor II

Puget Corporation owns 80 percent of Sound Company's voting shares. On January 1, 20X7, Sound sold bonds with a par value of $300,000 when the market rate was 7 percent. Puget purchased two thirds of the bonds; the remainder was sold to nonaffiliates. The bonds mature in ten years and pay an annual interest rate of 6 percent. Interest is paid semiannually on June 30 and Dec 31.

8) Based on the information given above, what amount of interest expense should be reported in the 20X8 consolidated income statement?

A) $0 B) $6,548 C) $6,511 D) $19,643 9) Based on the information given above, what amount of interest income will Puget Corporation recognize on December 31, 20X8 relative to the interest received on that day, in its separate financial statements?

A) $13,023 B) $13,096 C) $6,538 D) $6,557 10) Based on the information given above, what amount of interest expense will be eliminated in the preparation of the 20X8 consolidated financial statements?

A) $13,096 B) $13,023 C) $8,730 D) $8,682 Potter Corporation owns 60 percent of Snape Company's voting shares. On January 1, 20X4, Snape sold bonds with a par value of $400,000 when the market rate was 6 percent. Potter purchased one-third of the bonds; the remainder was sold to nonaffiliates. The bonds mature in 15 years and pay an annual interest rate of 5 percent. Interest is paid semiannually on June 30 and December 31.

11) Based on the information given above, what amount of interest expense should be reported in the 20X5 consolidated income statement?

A) $0 B) $14,448 C) $14,516 D) $21,775

12) Based on the information given above, what amount of interest income will Potter Corporation recognize on December 31, 20X5 relative to the interest received on that day, in its separate financial statements?

A) $3,625 B) $3,633 C) $7,224 D) $7,258 13) Based on the information given above, what amount of interest expense will be eliminated in the preparation of the 20X5 consolidated financial statements?

A) $7,224 B) $7,259 C) $14,516 D) $21,775 Pancake Corporation owns 85 percent of Syrup Corporation's voting shares. On January 1, 20X8, Pancake Corporation sold $200,000 par value 8 percent bonds to Syrup when the market interest rate was 5 percent. The bonds mature in 10 years and pay interest semiannually on June 30 and Dec 31.

14) Based on the information given above, in the preparation of the 20X8 consolidated financial statements, premium on bonds payable will be: A) debited for $46,767 in the consolidating entries.

B) credited for $43,060 in the consolidating entries.

C) debited for $43,060 in the consolidating entries.

D) credited for $46,767 in the consolidating entries.

15) Based on the information given above, in the preparation of the 20X8 consolidated financial statements, interest income will be: A) debited for $12,293 in the consolidating entries.

B) credited for $12,293 in the consolidating entries.

C) debited for $16,000 in the consolidating entries.

D) credited for $16,000 in the consolidating entries.

16) Based on the information given above, what amount of investment in bonds will be eliminated in the preparation of the 20X8 consolidated financial statements?

A) $243,060 B) $200,000 C) $246,767 D) $156,940

Pan Corporation owns 65 percent of Sauce Corporation's voting shares. On January 1, 20X3, Pan Corporation sold $300,000 par value 7 percent bonds to Sauce when the market interest rate was 4 percent. The bonds mature in 15 years and pay interest semiannually on June 30 and December 31.

17) Based on the information given above, in the preparation of the 20X3 consolidated financial statements, premium on bonds payable will be: A) credited for $95,766 in the consolidation entries.

B) debited for $95,766 in the consolidation entries.

C) credited for $100,784 in the consolidation entries.

D) debited for $100,784 in the consolidation entries.

18) Based on the information given above, in the preparation of the 20X3 consolidated financial statements, interest income will be: A) credited for $15,982 in the consolidation entries.

B) debited for $15,982 in the consolidation entries.

C) debited for $21,000 in the consolidation entries.

D) credited for $21,000 in the consolidation entries.

19) Based on the information given above, what amount of investment in bonds will be eliminated in the preparation of the 20X3 consolidated financial statements?

A) $257,248 B) $300,000 C) $395,766 D) $400,784

Saturn Corporation issued $300,000 par value 10-year bonds at 107 on January 1, 20X3, which Star Corporation purchased. Pluto Corporation owns 65% of Saturn's voting shares. On Jan 1, 20X7, Pluto Corporation purchased $120,000 face value of Saturn bonds from Star for $118,020.

On the date Pluto purchased the bonds, the bonds' carrying value on Saturn's book was $126,019.

The bonds pay 12 percent interest annually on December 31. The preparation of consolidated financial statements for Saturn and Pluto at December 31, 20X9, required the following consolidating entry: Bonds Payable Premium on Bonds Payable Interest Income Investment in Saturn Corporation Bonds Interest Expense Investment in Saturn Corporation Stock NCI in NA of Saturn Corp.

120,000 3,470 14,705 118,838 13,461 3,819 2,057

20) Based on the information given above, what amount of gain or loss on bond retirement is included in the 20X7 consolidated income statement?

A) $8,000 gain B) $5,200 gain C) $8,000 loss D) $5,200 loss 21) Based on the information given above, if 20X9 consolidated net income of $50,000 would have been reported without the consolidating entry provided, what amount will actually be reported?

A) $45,286 B) $47,774 C) $51,244 D) $48,756 Postage, a holder of a $400,000 Stamp Inc. bond, collected the interest due on June 30, 20X8, and then sold the bond to DEF Inc. for $365,000. On that date the bond issuer, Stamp, a 90 percent owner of DEF, had a $450,000 carrying amount for this bond.

22) Based on the information given above, what amount of gain or loss on bond retirement was recorded?

A) No gain or loss B) $85,000 gain C) $85,000 loss D) $35,000 loss

23) Based on the information given above, what was the effect of DEF's purchase of Stamp's bond on the noncontrolling interest amount reported in Stamp's June 30, 20X8, consolidated balance sheet?

A) No effect B) $35,000 increase C) $8,500 decrease D) $8,500 increase Aaron, a holder of a $200,000 Post Inc. bond, collected the interest due on June 30, 20X2, and then sold the bond to Stick Inc. for $185,000. On that date the bond issuer, Post, an 80 percent owner of Stick, had a $220,000 carrying amount for this bond.

24) Based on the information given above, what amount of gain or loss on bond retirement was recorded during the consolidation process?

A) No gain or loss B) $35,000 loss C) $35,000 gain D) $15,000 loss 25) Based on the information given above, what was the effect of Stick's purchase of Post's bonds on the noncontrolling interest amount reported in Post's June 30, 20X2 consolidated balance sheet?

A) $3,000 increase B) $7,000 decrease C) $7,000 increase D) No effect

Spice Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105.

The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Pumpkin Corporation purchased $140,000 of Spice's bonds from the original purchaser on December 31, 20X8, for $125,000. Pumpkin owns 75 percent of Spice's voting common stock. Spice's partial bond amortization schedule is as follows:

PMT # 1 2 3 4 5 6 7 8 9 10 11 12

1/1/20X4 7/1/20X4 1/1/20X5 7/1/20X5 1/1/20X6 7/1/20X6 1/1/20X7 7/1/20X7 1/1/20X8 7/1/20X8 1/1/20X9 7/1/20X9 1/1/20X0

Interest $ PMT

Interest Expense

10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00

9,684.96 9,670.43 9,655.23 9,639.33 9,622.69 9,605.29 9,587.09 9,568.04 9,548.12 9,527.28 9,505.48 9,482.68

Amort of Discount (Premium) (315.04) (329.57) (344.77) (360.67) (377.31) (394.71) (412.91) (431.96) (451.88) (472.72) (494.52) (517.32)

Premium (Discount) 10,000.00 9,684.96 9,355.38 9,010.61 8,649.94 8,272.63 7,877.92 7,465.01 7,033.05 6,581.18 6,108.46 5,613.94 5,096.62

Bonds Payable 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00

CV of Bonds 210,000.00 209,684.96 209,355.38 209,010.61 208,649.94 208,272.63 207,877.92 207,465.01 207,033.05 206,581.18 206,108.46 205,613.94 205,096.62

26) Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the December 31, 20X8 consolidated financial statements?

A) $4,276 B) $6,108 C) $6,581 D) $4,607 27) Based on the information given above, what amount of gain or loss on constructive bond retirement will be reported in the December 31, 20X8 consolidated financial statements?

A) $8,892 loss B) $81,108 loss C) $19,276 gain D) $81,108 gain 28) Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the December 31, 20X9 consolidated financial statements?

A) $5,097 B) $3,568 C) $5,614 D) $3,930

29) Based on the information given above, what amount of interest expense will be eliminated in the preparation of the December 31, 20X9 consolidated financial statements?

A) $13,292 B) $18,988 C) $16,296 D) $9,483 30) Based on the information given above, what amount of interest income will be eliminated in the preparation of the December 31, 20X9 consolidated financial statements?

A) $8,184 B) $16,296 C) $12,704 D) $18,988 31) Based on the information given above, what amount of constructive gain or loss will be allocated to noncontrolling interest in 20X8 consolidated financial statements?

A) $20,277 loss B) $2,223 loss C) $20,277 gain D) $4,819 gain

Spice Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105.

The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Pumpkin Corporation purchased $140,000 of Spice's bonds from the original purchaser on January 1, 20X8, for $122,000. Pumpkin owns 75 percent of Spice's voting common stock. Spice's partial bond amortization schedule is as follows:

PMT # 1 2 3 4 5 6 7 8 9 10 11 12 13

1/1/20X4 7/1/20X4 1/1/20X5 7/1/20X5 1/1/20X6 7/1/20X6 1/1/20X7 7/1/20X7 1/1/20X8 7/1/20X8 1/1/20X9 7/1/20X9 1/1/20X0 7/1/20X0

Interest $ PMT

Interest Expense

Amort of Discount (Premium)

10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00

9,684.96 9,670.43 9,655.23 9,639.33 9,622.69 9,605.29 9,587.09 9,568.04 9,548.12 9,527.28 9,505.48 9,482.68 9,458.82

(315.04) (329.57) (344.77) (360.67) (377.31) (394.71) (412.91) (431.96) (451.88) (472.72) (494.52) (517.32) (541.18)

Premium (Discount) 10,000.00 9,684.96 9,355.38 9,010.61 8,649.94 8,272.63 7,877.92 7,465.01 7,033.05 6,581.18 6,108.46 5,613.94 5,096.62 4,555.44

Bonds Payable 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00 200,000.00

BV of Bonds 210,000.00 209,684.96 209,355.38 209,010.61 208,649.94 208,272.63 207,877.92 207,465.01 207,033.05 206,581.18 206,108.46 205,613.94 205,096.62 204,555.44

32) Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X8 year-end consolidated financial statements?

A) $4,276 B) $4,923 C) $6,108 D) $7,033 33) Based on the information given above, what amount of gain or loss on bond retirement will be reported in the 20X8 consolidated financial statements?

A) $84,018 loss B) $84,108 gain C) $22,923 loss D) $22,923 gain 34) Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X9 year-end consolidated financial statements?

A) $4,276 B) $3,568 C) $5,097 D) $6,108

35) Based on the information given above, what amount of interest income will be eliminated in the preparation of the 20X9 consolidated financial statements?

A) $16,420 B) $11,494 C) $16,103 D) $11,291 Paper Corporation holds 80 percent of the voting shares of Scissor Company. On January 1, 20X8, Scissor purchased $100,000 par value 12 percent Paper bonds from Cruse Corporation for $115,000. Paper originally issued the bonds to Cruse on January 1, 20X6, for $110,000. The bonds have an 8-year maturity from the date of issue and pay interest semiannually on June 30 and December 31 each year. Scissor' reported net income of $65,000 for 20X8, and Paper reported income (excluding income from ownership of Scissor's stock) of $90,000. Paper's partial bond amortization schedule is as follows: PMT # 1 2 3 4 5 6

1/1/20X6 6/30/20X6 12/31/20X6 6/30/20X7 12/31/20X7 6/30/20X8 12/31/20X8

Interest $ PMT

Interest Expense

Amort of Discount (Premium)

6,000.00 6,000.00 6,000.00 6,000.00 6,000.00 6,000.00

5,579.78 5,558.47 5,536.07 5,512.54 5,487.81 5,461.83

(420.22) (441.53) (463.93) (487.46) (512.19) (538.17)

Premium (Discount) 10,000.00 9,579.78 9,138.25 8,674.33 8,186.86 7,674.68 7,136.51

Bonds Payable 100,000.00 100,000.00 100,000.00 100,000.00 100,000.00 100,000.00 100,000.00

BV of Bonds 110,000.00 109,579.78 109,138.25 108,674.33 108,186.86 107,674.68 107,136.51

36) Based on the information given above, what amount of interest expense does Paper record on its individual books in 20X8?

A) $10,950 B) $8,760 C) $10,301 D) $10,002 37) Based on the information given above, what amount of interest income does Scissor record on its individual books for 20X8?

A) $10,950 B) $8,002 C) $9,410 D) $10,002 38) Based on the information given above, what gain or loss on the retirement of bonds should be reported in the 20X8 consolidated income statement?

A) $6,326 gain B) $6,813 gain C) $6,813 loss D) $6,326 loss 39) Based on the information given above, what amount of consolidated net income should be

reported for 20X8?

A) $147,240 B) $134,240 C) $149,134 D) $136,134 Peanut Corporation acquired 80 percent of Snoopy Company's voting shares on January 1, 20X8, at underlying book value. On Dec. 31, 20X8, it also purchased $500,000 par value 8 percent Snoopy bonds, which had been issued on January 1, 20X5 to Schulz Corporation (unaffiliated with either Peanut or Snoopy) at a $45,000 premium. The bonds were originally issued with a 12-year maturity and pay interest annually on December 31. During preparation of the consolidated financial statements for December 31, 20X8, the following consolidating entry was included in the consolidation worksheet:

Bonds Payable Bond Premium Loss on Bond Retirement Investment in Snoopy Company Bonds

500,000 33,769 16,875 550,644

40) Based on the information given above, what price did Peanut pay to purchase the Snoopy bonds?

A) $533,769 B) $516,875 C) $500,000 D) $550,644 41) Based on the information given above, what was the carrying amount of the bonds on Snoopy's books on the date of purchase?

A) $533,769 B) $516,875 C) $500,000 D) $550,644 42) Based on the information given above, what is the interest income that must be eliminated in preparing the 20X9 consolidated financial statements?

A) $33,769 B) $27,957 C) $34,944 D) $16,894

Pants Corporation acquired 75 percent of Shirt Company's voting shares on January 1, 20X7, at underlying book value. On December 31, 20X7, it also purchased $300,000 par value 9 percent Shirt bonds, which had been issued on January 1, 20X3 to Parry Corporation (unaffiliated with either Pants or Shirt) at a $20,000 premium. The bonds were originally issued with a 10-year maturity and pay interest annually on December 31. During preparation of the consolidated financial statements for December 31, 20X7, the following consolidation entry was included in the consolidation worksheet: Bonds Payable Bond Premium Loss on Bond Retirement Investment in Shirt Company Bonds

300,000 11,902 12,098 324,000

43) Based on the information given above, what price did Pants pay to purchase the Shirt bonds?

A) $324,000 B) $312,098 C) $311,902 D) $300,000 44) Based on the information given above, what was the carrying amount of the bonds on Shirt's books on the date of purchase by Pants?

A) $300,000 B) $311,902 C) $312,098 D) $324,000 45) Based on the information given above, what is the interest income that must be eliminated in preparing the 20X7 consolidated financial statements?

A) $11,902 B) $22,830 C) $24,000 D) $29,160

46) A subsidiary issues bonds. The parent can then acquire the bonds either directly from the subsidiary or from a nonaffiliate that had originally acquired the subsidiary's bonds.

Required: a) Discuss the parent's accounting as it relates to the preparation of consolidated financial statements, for their acquisition of the bonds: 1. from the nonaffiliate.

2. directly from the subsidiary. b) Why does it matter who the bonds are acquired from?

47) Sydney Company issued $1,000,000 par value 10-year bonds at 102 on January 1, 20X5, which Melbourne Corporation purchased. The coupon rate on the bonds is 9 percent. Interest payments are made semiannually on July 1 and January 1. On Jan 1, 20X8, Perth Company purchased $500,000 par value of the bonds from Melbourne for $492,200. Perth owns 65 percent of Sydney's voting shares.

Required: a. What amount of gain or loss will be reported in Sydney's 20X8 income statement on the retirement of bonds? b. Will a gain or loss be reported in the 20X8 consolidated financial statements for Perth for the constructive retirement of bonds? What amount will be reported? c. How much will Perth's purchase of the bonds change consolidated net income for 20X8? d. Prepare the worksheet consolidating entry or entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements at December 31, 20X8. e. Prepare the worksheet consolidating entry or entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements at December 31, 20X9.

48) On January 1, 20X7, Passport Company acquired 60 percent of the outstanding common stock of Stamp Company at the book value of the shares acquired. On that date, the fair value of noncontrolling interest was equal to 40 percent of book value of Stamp. At the time of purchase, Stamp had common stock of $1,000,000 outstanding and retained earnings of $800,000.

On December 31, 20X7, Passport purchased 50 percent of Stamp's bonds outstanding which were originally issued on January 1, 20X4, at 99. The total bond issue has a face value of $600,000, pays 10 percent interest annually, and has a 10-year maturity. Any premium or discount is amortized using the effective interest method. Passport paid $306,000 for its investment in Stamp's bonds and intends to hold the bonds until maturity.

Income and dividends for Passport and Stamp for 20X7 and 20X8 are as follows:

Passport

20X7 20X8

Operating Income $ 1,600,000 1,200,000

Stamp Dividends $ 400,000 400,000

$

Net Income 600,000 1,000,000

Dividends $ 300,000 300,000

Assume Passport accounts for its investment in Stamp stock using the fully adjusted equity method.

Required: a. Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X7. b. Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X8.

49) On January 1, 20X7, Passport Company acquired 60 percent of the outstanding common stock of Stamp Company at the book value of the shares acquired. On that date, the fair value of noncontrolling interest was equal to 40 percent of book value of Stamp. At the time of purchase, Stamp had common stock of $1,000,000 outstanding and retained earnings of $800,000.

On December 31, 20X7, Passport purchased 50 percent of Stamp' bonds outstanding which were originally issued on January 1, 20X4, at 99. The total bond issue has a face value of $600,000, pays 10 percent interest annually, and has a 10-year maturity. Any premium or discount is amortized using the effective interest method. Passport paid $306,000 for its investment in Stamp' bonds and intends to hold the bonds until maturity.

Income and dividends for Passport and Stamp for 20X7 and 20X8 are as follows:

20X7 20X8

Passport Operating Income Dividends $ 1,600,000 $ 400,000 1,200,000 400,000

Stamp Net Income $ 600,000 1,000,000

Dividends $ 300,000 300,000

Assume Passport accounts for its investment in Stamp stock using the modified equity method.

Required: a. Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X7. b. Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X8.

50) On January 1, 20X7, Passport Company acquired 60 percent of the outstanding common stock of Stamp Company at the book value of the shares acquired. On that date, the fair value of noncontrolling interest was equal to 40 percent of book value of Stamp. At the time of purchase, Stamp had common stock of $1,000,000 outstanding and retained earnings of $800,000.

On December 31, 20X7, Passport purchased 50 percent of Stamp's bonds outstanding which were originally issued on January 1, 20X4, at 99. The total bond issue has a face value of $600,000, pays 10 percent interest annually, and has a 10-year maturity. Any premium or discount is amortized using the effective interest method. Passport paid $306,000 for its investment in Stamp's bonds and intends to hold the bonds until maturity.

Income and dividends for Passport and Stamp for 20X7 and 20X8 are as follows:

Passport

20X7 20X8

Operating Income $ 1,600,000 1,200,000

Stamp Dividends $ 400,000 400,000

Net Income $ 600,000 1,000,000

Dividends $ 300,000 300,000

Assume Passport accounts for its investment in Stamp stock using the cost method.

Required: a. Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X7. b. Present the worksheet elimination entries necessary to prepare consolidated financial statements for 20X8.

Advanced Financial Accounting, 12e (Christensen) Chapter 9 Consolidation Ownership Issues On January 1, 20X9, Princeton Company acquired 80 percent of the common stock and 60 percent of the preferred stock of Stanford Company, for $400,000 and $60,000, respectively. At the time of acquisition, the fair value of the common shares of Stanford Company held by the noncontrolling interest was $100,000. Stanford Company's balance sheet contained the following balances:

Preferred Stock ($5 par value) Common Stock ($10 par value) Retained Earnings Total Stockholders' Equity

$ 100,000 200,000 300,000 $ 600,000

For the year ended December 31, 20X9, Stanford Company reported net income of $100,000 and paid dividends of $40,000. The preferred stock is cumulative and pays an annual dividend of 10 percent.

1) Based on the preceding information, what will be the equity method income reported by Princeton Company from its investment in Stanford Company during 20X9?

A) $32,000 B) $30,000 C) $72,000 D) $48,000 2) Based on the preceding information, the consolidating entry to prepare the consolidated financial statements for Princeton Company as of December 31, 20X9 will include a credit to Investment in Stanford Company—Common Stock for: A) $506,000 B) $448,000 C) $400,000 D) $500,000 3) Based on the preceding information, the consolidating entry to prepare the consolidated financial statements for Princeton Company as of December 31, 20X9 will include a credit to noncontrolling interest in Stanford Company for: A) $140,000 B) $154,000 C) $152,000 D) $150,000

Pail Corporation acquired 80 percent of the common shares and 70 percent of the preferred shares of Shovel Corporation at underlying book value on January 1, 20X9. At that date, the fair value of the noncontrolling interest in Shovel's common stock was equal to 20 percent of the book value of its common stock. Shovel's balance sheet at the time of acquisition contained the following balances:

Total Assets

$ 600,000

Total Assets

$ 600,000

Total Liabilities $ Preferred Stock Common Stock Retained Earnings Total Liabilities and Equities $

90,000 100,000 150,000 260,000 600,000

The preferred shares are cumulative and have a 10 percent annual dividend rate and are four years in arrears on January 1, 20X9. All of the $5 par value preferred shares are callable at $6 per share. During 20X9, Shovel reported net income of $100,000 and paid no dividends.

4) Based on the preceding information, what is Shovel's contribution to consolidated net income for 20X9?

A) $80,000 B) $100,000 C) $90,000 D) $50,000 5) Based on the preceding information, what will be the amount of income to be assigned to the noncontrolling interest in the 20X9 consolidated income statement?

A) $21,000 B) $18,000 C) $23,000 D) $15,000 6) Based on the preceding information, the amount assigned to noncontrolling stockholders' share of preferred stock interest in the preparation of a consolidated balance sheet on January 1, 20X9, is: A) $40,000 B) $42,000 C) $36,000 D) $48,000 7) Based on the preceding information, what is the portion of Shovel's retained earnings assignable to its preferred shareholders on January 1, 20X9?

A) $40,000 B) $50,000 C) $60,000 D) $70,000 8) Based on the information provided, what is the book value of the common stock on January 1, 20X9?

A) $410,000 B) $360,000 C) $390,000 D) $350,000 9) Based on the information provided, what amount will be reported as the noncontrolling interest in the consolidated balance sheet on January 1, 20X9?

A) $70,000 B) $130,000 C) $118,000 D) $142,000 Protective Corporation acquired 70 percent of the common shares and 60 percent of the preferred shares of Safety Corporation at underlying book value on January 1, 20X6. At that date, the fair value of the noncontrolling interest in Safety's common stock was equal to 30 percent of the book value of its common stock. Safety's balance sheet at the time of acquisition contained the following balances: Assets

$ 700,000

Total Assets

$ 700,000

Liabilities Preferred Stock Common Stock Retained Earnings Total Liabilities and Equities

$ 110,000 100,000 200,000 290,000 $ 700,000

The preferred shares are cumulative and have an 8 percent annual dividend rate and are three years in arrears on January 1, 20X6. All of the $10 par value preferred shares are callable at $12 per share. During 20X6, Safety reported net income of $80,000 and paid no dividends.

10) Based on the preceding information, what is Safety's contribution to consolidated net income for 20X6?

A) $48,000 B) $56,000 C) $72,000 D) $80,000 11) Based on the preceding information, what will be the amount of income to be assigned to the noncontrolling interest in the 20X6 consolidated income statement?

A) $3,200 B) $18,400 C) $21,600 D) $24,800 12) Based on the preceding information, the amount assigned to the noncontrolling stockholders' share of preferred stock interest in the preparation of a consolidated balance sheet on January 1, 20X6 is A) $57,600.

B) $49,600.

C) $48,000.

D) $40,000.

13) Based on the preceding information, what is the portion of Safety's retained earnings assignable to its preferred shareholders on January 1, 20X6?

A) $52,000 B) $44,000 C) $36,000 D) $28,000 14) Based on the information provided, what is the book value of the common stock on January 1, 20X6?

A) $390,000 B) $420,000 C) $446,000 D) $490,000 15) Based on the information provided, what amount will be reported as the noncontrolling interest in the consolidated balance sheet on January 1, 20X6?

A) $133,800 B) $191,400 C) $204,600 D) $210,000

Pooley Corporation owns 75 percent of the common shares and 60 percent of the preferred shares of Stanley Company, all acquired at underlying book value on January 1, 20X8. At that date, the fair value of the noncontrolling interest in Stanley's common stock was equal to 25 percent of the book value of its common stock. The balance sheets of Pooley and Stanley immediately after the acquisition contained these balances:

Cash and Receivables Inventory Buildings and Equipment (net) Investment in Stanley Preferred Stock Investment in Stanley Common Stock Total Assets Liabilities Preferred Stock Common Stock Retained Earnings Total Liabilities and Equity

Pooley Corporation $ 80,000 90,000 250,000 60,000 120,000 $ 600,000 $ 150,000 200,000 250,000 $ 600,000

Stanley Company $ 40,000 60,000 200,000

$ 300,000 $40,000 100,000 100,000 60,000 $ 300,000

Stanley's preferred stock pays a 12 percent dividend and is cumulative. For 20X8, Stanley reports net income of $40,000 and pays no dividends. Pooley reports income from its separate operations of $75,000 and pays dividends of $30,000 during 20X8.

16) Based on the preceding information, what is the total noncontrolling interest reported in the consolidated balance sheet as of January 1, 20X8?

A) $80,000 B) $40,000 C) $50,000 D) $60,000 17) Based on the preceding information, what is the income assigned to the noncontrolling interest in the 20X8 consolidated income statement?

A) $10,000 B) $7,000 C) $11,800 D) $4,800 18) Based on the preceding information, what amount of income is attributable to the controlling interest in the consolidated income statement for 20X8?

A) $75,000 B) $105,000 C) $96,000 D) $103,200 19) Based on the preceding information, what is the total stockholders' equity reported in the consolidated balance sheet as of January 1, 20X8?

A) $450,000 B) $530,000 C) $490,000 D) $370,000 20) Based on the preceding information, what amount is reported as preferred stock outstanding reported in the consolidated balance sheet as of January 1, 20X8?

A) $0 B) $40,000 C) $50,000 D) $44,000 Patty Corporation holds 75 percent of Slider Corporation's voting common stock, acquired at book value. The fair value of the noncontrolling interest at the date of acquisition was equal to 25 percent of the book value of Slider Corporation. On December 31, 20X8, Slider Corporation acquired 25 percent of Patty Corporation's stock. Slider records dividends received from Patty as nonoperating income. In 20X9, Patty reported operating income of $100,000 and paid dividends of $40,000. During the same year, Slider reported operating income of $75,000 and paid $20,000 in dividends.

21) Based on the information provided, what amount will be reported as consolidated net income for 20X9 under the treasury stock method?

A) $150,000 B) $100,000 C) $75,000 D) $175,000 22) Based on the information provided, what amount will be reported as income assigned to the controlling interest for 20X9 under the treasury stock method?

A) $18,750 B) $156,250 C) $175,000 D) $100,000

Plate Corporation acquired 75 percent of the stock of Silver Company on January 1, 20X7, for $225,000. At that date, the fair value of the noncontrolling interest was $75,000. Silver's balance sheet contained the following amounts at the time of the combination:

Cash $ Accounts Receivable Inventory Buildings and Equipment (net) Total Assets $

40,000 40,000 20,000 300,000 400,000

Accounts Payable Bonds Payable Common Stock Retained Earnings

$

$

50,000 50,000 100,000 200,000 400,000

During each of the next three years, Silver reported net income of $30,000 and paid dividends of $10,000. On January 1, 20X9, Plate sold 1,500 shares of Silver's $10 par value shares for $60,000 in cash. Plate used the fully adjusted equity method in accounting for its ownership of Silver Company.

23) Based on the preceding information, what was the balance in the investment account reported by Plate on January 1, 20X9, before its sale of shares?

A) $225,000 B) $285,000 C) $245,000 D) $255,000 24) Based on the preceding information, in the journal entry recorded by Plate for sale of shares: A) Cash will be credited for $60,000.

B) Investment in Silver Stock will be credited for $51,000.

C) Investment in Silver Stock will be credited for $60,000.

D) Additional Paid-in Capital will be credited for $45,000.

25) Based on the preceding information, in the journal entry recorded by Plate for sale of shares, Additional Paid-in Capital will be credited for: A) $0.

B) $15,000.

C) $9,000.

D) $45,000.

26) Based on the preceding information, in the elimination entries to complete a full consolidation worksheet for 20X9, noncontrolling interest in the net income of Silver Co. will be credited for: A) $12,000.

B) $7,500.

C) $8,000.

D) $2,500.

27) Based on the preceding information, in the consolidating entries to complete a full consolidation worksheet, Investment in Silver Stock at January 1, 20X9, will be credited for: A) $255,000.

B) $240,000.

C) $204,000.

D) $136,000.

Petunia Corporation acquired 90 percent of the stock of Spring Company on January 1, 20X2, for $360,000. At that date, the fair value of the noncontrolling interest was $40,000. Spring's balance sheet contained the following amounts at the time of the combination:

Cash Accounts Receivable Inventory Buildings and Equipment (net) Total Assets

$

20,000 60,000 70,000 350,000 $ 500,000

Accounts Payable Bonds Payable Common Stock Retained Earnings Total Liabilities & Equity

$

25,000 75,000 100,000 300,000 $ 500,000

During each of the next three years, Spring reported net income of $70,000 and paid dividends of $20,000. On January 1, 20X4, Petunia sold 3,000 shares of Spring's $5 par value shares for $90,000 in cash. Petunia used the fully adjusted equity method in accounting for its ownership of Spring Company.

28) Based on the preceding information, what was the balance in the investment account reported by Petunia on January 1, 20X4, before its sale of shares?

A) $360,000 B) $450,000 C) $486,000 D) $500,000 29) Based on the preceding information, in the journal entry recorded by Petunia for the sale of shares A) Cash will be credited for $90,000.

B) Investment in Spring Stock will be credited for $90,000.

C) Investment in Spring Stock will be credited for $75,000.

D) Additional Paid-in Capital will be credited for $9,000.

30) Based on the preceding information, in the journal entry recorded by Petunia for the sale of shares, Additional Paid-in Capital will be credited for A) $240,000.

B) $15,000.

C) $9,000.

D) $0.

31) Based on the preceding information, in the consolidation entries to complete a full consolidation worksheet for 20X4, noncontrolling interest in the net income of Spring will be credited for A) $2,000.

B) $7,000.

C) $12,500.

D) $17,500.

32) Based on the preceding information, in the consolidation entries to complete a consolidation worksheet at January 1, 20X4 (after the sale of the 3,000 shares of Spring stock), Investment in Spring Stock will be credited for A) $360,000.

B) $375,000.

C) $405,000.

D) $450,000.

Perfect Corporation acquired 70 percent of Storm Company's shares on December 31, 20X8, for $140,000. At that date, the fair value of the noncontrolling interest was $60,000. On January 1, 20X0, Perfect acquired an additional 10 percent of Storm's common stock for $32,500.

Summarized balance sheets for Storm on the dates indicated are as follows:

Cash Accounts Receivable Inventory Buildings and Equipment (net) Total Assets Accounts Payable Notes Payable Common Stock Retained Earnings Total Liabilities and Equities

$

$

$

20X8 25,000 30,000 45,000 200,000 300,000 $40,000 60,000 100,000 100,000 300,000

Dec 31 20X9 35,000 45,000 60,000 180,000 $ 320,000 35,000 60,000 100,000 125,000 $ 320,000

20X0 50,000 80,000 70,000 160,000 $ 360,000 40,000 60,000 100,000 160,000 $ 360,000

Storm paid dividends of $10,000 in each of the three years. Perfect uses the fully adjusted equity method in accounting for its investment in Storm and amortizes all differentials over 5 years against the related investment income. All differentials are assigned to patents in the consolidated financial statements.

33) Based on the preceding information, Storm Company's net income for 20X9 and 20X0 are: A) $10,000 and $20,000 respectively.

B) $25,000 and $35,000 respectively.

C) $35,000 and $45,000 respectively.

D) $25,000 and $45,000 respectively.

34) Based on the preceding information, what was the balance in Perfect's Investment in Storm Company Stock account on December 31, 20X9?

A) $164,500 B) $157,500 C) $165,000 D) $168,000 35) Based on the preceding information, what was the balance in Perfect's Investment in Storm Company Stock account on December 31, 20X0?

A) $211,500 B) $218,000 C) $173,000 D) $216,000

Play Company acquired 70 percent of Screen Corporation's shares on December 31, 20X5, at underlying book value of $98,000. At that date, the fair value of the noncontrolling interest was equal to 30 percent of the book value of Screen Corporation. Screen's balance sheet on January 1, 20X8, contained the following balances: Cash Accounts Receivable Inventory Buildings and Equipment Less: Accumulated Depreciation Total Assets

$

50,000 35,000 40,000 300,000 (100,000) $ 325,000

Accounts Payable Bonds Payable Common Stock Additional Paid-In Capital Retained Earnings Total Liabilities and Equities

$

40,000 100,000 50,000 75,000 60,000 $ 325,000

On January 1, 20X8, Screen acquired 5,000 of its own $2 par value common shares from Nonaffiliated Corporation for $6 per share.

36) Based on the preceding information, what is the increase in the book value of the equity attributable to the parent as a result of the repurchase of shares by Screen Corporation?

A) $19,375 B) $6,125 C) $2,625 D) $9,000 37) Based on the preceding information, what will be the journal entry to be recorded on Play Company's books to recognize the change in the book value of the shares it holds?

A) Investment in Screen Corp.

Additional Paid-In Capital B) Investment in Screen Corp.

Cash C) Investment in Screen Corp.

Retained Earnings D) Investment in Screen Corp.

Additional Paid-In Capital A) Option A B) Option B C) Option C D) Option D

19,375 19,375 30,000 30,000 2,625 2,625 6,125 6,125

38) Based on the preceding information, the consolidating entry needed in preparing a consolidated balance sheet immediately following the acquisition of shares will include: A) a credit to Noncontrolling Interest in Net Assets of Screen Corp. for $19,375.

B) a credit to Additional Paid-In Capital for $75,000.

C) a debit to Treasury Shares for $30,000.

D) a credit to Investment in Screen stock for $6,125.

39) Based on the preceding information, in the consolidating entry needed in preparing a consolidated balance sheet immediately following the acquisition of shares, Investment in Screen stock will be credited for: A) $165,625.

B) $135,625.

C) $185,000.

D) $155,000.

On January 1, 20X7, Pisa Company acquired 80 percent of Siena Company by purchasing 40,000 shares of Siena's common stock. There was no differential related to this transaction. The noncontrolling interest had a fair value equal to 20 percent of book value. The book value of Siena on December 31, 20X7 was as follows:

Common Stock ($10 par value) Retained Earnings

$

500,000 350,000

Total

$

850,000

On January 1, 20X8, Pisa purchased an additional 12,500 shares directly from Siena for $25 per share.

40) Based on the preceding information, by what amount did the Investment in Siena account change?

A) Increase of $296,500 B) Decrease of $296,500 C) Increase of $64,000 D) Decrease of $64,000 41) Based on the preceding information, the elimination entry to prepare the consolidated financial statements on December 31, 20X7 would include a: A) credit to common stock for $625,000 B) debit to retained earnings for $37,500 C) credit to Investment in Siena Co. for $976,500 D) credit to NCI in the net assets of Siena Co. for $232,500

42) Based on the preceding information, the ending balance in Additional Paid-In Capital would be: A) $0 B) $187,500 C) $312,500 D) $125,000 43) Based on the preceding information, what is Pisa's new ownership interest?

A) 84 percent B) 55 percent C) 70 percent D) 64 percent 44) Based on the preceding information, what is the ending balance in noncontrolling interest in the net assets of Siena?

A) $186,000 B) $418,500 C) $523,125 D) $232,500 45) Based on the preceding information, the elimination entry to prepare the consolidated financial statements on December 31, 20X7 would include a: A) debit to common stock for $812,500 B) credit to additional paid-in capital for $187,500 C) credit to Investment in Siena Co. for $744,000 D) credit to retained earnings for $350,000 46) Pratt Corporation owns 75 percent of Swan Corporation's outstanding common stock. Swan, in turn, owns 15 percent of Pratt's outstanding common stock. What percent of the dividends paid by Pratt is reported as dividends declared in the consolidated retained earnings statement?

A) None B) 100 percent C) 85 percent D) 75 percent

On January 1, 20X9, A Company acquired 85 percent of B Company's voting common stock for $425,000. At that date, the fair value of the noncontrolling interest of B Company was $75,000.

Immediately after A Company acquired its ownership, B Company acquired 75 percent of C Company's stock for $150,000. The fair value of the noncontrolling interest of C Company was $50,000 at that date. At January 1, 20X9, the stockholders' equity sections of the balance sheets of the companies were as follows:

Common Stock Additional Paid-In Capital Retained Earnings Total Stockholders' Equity

A Company $ 400,000 100,000 500,000 $ 1,000,000

B Company $ 200,000 120,000 180,000 $ 500,000

C Company $ 50,000 50,000 100,000 $ 200,000

During 20X9, A Company reported operating income of $175,000 and paid dividends of $50,000. B Company reported operating income of $125,000 and paid dividends of $40,000. C Company reported net income of $100,000 and paid dividends of $25,000.

47) Based on the information provided, what amount of consolidated net income will A Company report for 20X9?

A) $175,000 B) $285,000 C) $356,250 D) $400,000 48) Based on the information provided, the equity-method income recorded by A Company is: A) $125,000 B) $200,000 C) $170,000 D) $181,250 49) Based on the information provided, what amount of income will be assigned to the noncontrolling interest in the consolidated income statement for 20X9?

A) $55,000 B) $25,000 C) $30,000 D) $43,750 50) Based on the information provided, what amount of income will be assigned to the controlling interest in the consolidated income statement for 20X9?

A) $400,000 B) $345,000 C) $285,000 D) $175,000 X Corporation owns 80 percent of Y Corporation's common stock and 40 percent of Z Corporation's common stock. Additionally, Y Corporation owns 35 percent of Z Corporation's

common stock. The acquisitions were made at book values. The following information is available for 20X8: Operating Income Dividends declared

X $ 100,000 30,000

Y $ 50,000 20,000

Z $ 25,000 10,000

51) Based on the information provided, what amount of consolidated net income will X Corporation report for 20X8?

A) $148,750 B) $175,000 C) $150,000 D) $158,750 52) Based on the information provided, what amount of income will be assigned to the noncontrolling interest in the 20X8 consolidated income statement?

A) $23,750 B) $25,000 C) $18,000 D) $33,750 53) Based on the information provided, what amount of income will be assigned to the controlling interest in the 20X8 consolidated income statement?

A) $130,750 B) $150,000 C) $141,250 D) $157,000 54) Based on the information provided, what amount will be reported as dividends declared in X Corporation's 20X8 consolidated retained earnings statement?

A) $30,000 B) $50,000 C) $60,000 D) $0

Plum Corporation acquired 80 percent of Saucy Corporation's common shares on January 1, 20X7, at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 20 percent of the book value of Saucy Corporation. Saucy prepared the following balance sheet as of December 31, 20X8: Cash $ 70,000 Accounts Receivable 60,000 Inventory 80,000 Buildings and Equipment 400,000 Less: Accumulated Depreciation (120,000) Total Assets $ 490,000

Accounts Payable Bonds Payable Common Stock Additional Paid-In Capital Retained Earnings Total Liabilities and Equities

$

40,000 50,000 150,000 50,000 200,000 $ 490,000

On January 1, 20X9, Saucy declares a stock dividend of 9,000 shares on its $5 par value common stock. The current market price per share of Saucy stock on January 1, 20X9, is $20.

55) Based on the preceding information, the investment elimination entry required to prepare a consolidated balance sheet immediately after the stock dividend is issued will include a debit to Additional Paid-In Capital for: A) $50,000.

B) $95,000.

C) $230,000.

D) $185,000.

56) Based on the preceding information, the investment elimination entry required to prepare a consolidated balance sheet immediately after the stock dividend is issued will include a debit to Retained Earnings for: A) $200,000 B) $65,000 C) $155,000 D) $20,000 57) Begin with information provided, but assume instead that Saucy declared a stock dividend of 3,000 shares on its $5 par value common stock. The investment elimination entry required to prepare a consolidated balance sheet immediately after the stock dividend is issued will include a debit to Additional Paid-In Capital for: A) $65,000.

B) $95,000.

C) $50,000.

D) $110,000.

58) Begin with the information provided, but assume instead that Saucy declared a stock dividend of 3,000 shares on its $5 par value common stock. The investment elimination entry required to prepare a consolidated balance sheet immediately after the stock dividend is issued will include a debit to Retained Earnings for: A) $185,000.

B) $65,000.

C) $155,000.

D) $200,000.

59) Portfolio Corporation acquired 70 percent ownership of Standard Company on January 1, 20X6, at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 30 percent of the book value of Standard. On January 1, 20X8, Portfolio sold 1,000 shares of Standard Company for $20,000 to Adventure Corporation and recorded a $5,000 gain.

Trial balances for the companies on December 31, 20X8, contain the following data:

Portfolio Corp.

Cash Accounts Receivable Inventory Buildings and Equipment Investment in Standard Cost of Goods Sold Depreciation Expense Other Expenses Dividends Declared Accumulated Depreciation Accounts Payable Bonds Payable

$

Debit 70,000

Standard Company

Credit $

Debit 20,000

60,000

40,000

80,000

60,000

400,000

200,000

Credit

114,000 180,000

90,000

40,000

20,000

17,000

30,000

25,000

20,000 $

Common Stock ($5 par) Additional Paid-In Capital Retained Earnings Sales Gain on Sale of Standard Company Stock

80,000

$

60,000

40,000 100,000

30,000 40,000

150,000

50,000

75,000

10,000

200,000 300,000

90,000 200,000

5,000

Income from Standard Company

36,000 $ 986,000

$ 986,000

$ 480,000

$ 480,000

Standard Company's net income was earned evenly throughout the year. Both companies declared and paid their dividends on December 31, 20X8. Portfolio uses the fully adjusted equity

method in accounting for its investment in Standard.

Required: 1) Prepare the elimination entries needed to complete a full consolidation worksheet for 20X8.

2) Prepare a consolidation worksheet for 20X8.

60) On January 1, 20X7, Apple Corporation acquired 90 percent of Banana Corporation's common stock for $315,000. At the date of acquisition, the fair value of the noncontrolling interest was $35,000, and Banana reported common stock outstanding of $150,000 and retained earnings of $180,000. The differential is assigned to a patent with a remaining life of eight years.

Each year since acquisition, Banana has reported income from operations of $50,000 and paid dividends of $30,000.

Banana acquired 75 percent ownership of Cherry Company on January 1, 20X9, for $187,500.

At that date, the fair value of the noncontrolling interest was $62,500, and Cherry reported common stock outstanding of $100,000 and retained earnings of $130,000. In 20X9, Cherry reported net income of $20,000 and paid dividends of $8,000. The differential is assigned to buildings and equipment with an economic life of 10 years at the date of acquisition.

Required: 1) Prepare the journal entries recorded by Banana for its investment in Cherry during 20X9.

2) Prepare the journal entries recorded by Apple for its investment in Banana during 20X9.

3) Prepare the consolidating entries related to Banana's investment in Cherry and Apple's investment in Banana needed to prepare consolidated financial statements for Apple and its subsidiaries at December 31, 20X9.

61) On January 1, 20X8, Plandex Company acquired 70 percent of Simplex Company's stock at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 30 percent of the book value of Simplex Company. On December 31, 20X9, Simplex acquired 15 percent of Plandex's stock. Balance sheets for the two companies on December 31, 20X9, are as follows: Plandex Company Condensed Balance Sheet December 31 20X9 Cash $ 100,000 Accounts Payable Accounts Receivable 50,000 Bonds Payable Inventory 100,000 Common Stock Buildings and Equipment (net) 300,000 Retained Earnings Investment in Simplex Company Common Stock 210,000 $ 760,000

Simplex Company Condensed Balance Sheet December 31 20X9 Cash $ 70,000 Accounts Payable Accounts Receivable 71,000 Bonds Payable Inventory 80,000 Common Stock Buildings and Equipment (net) 100,000 Retained Earnings Investment in Plandex Company Common Stock 69,000 $ 390,000

$

50,000 250,000 200,000 260,000

$ 760,000

$

40,000 50,000 100,000 200,000

$ 390,000

Required: Assuming that the treasury stock method is used in reporting Plandex's shares held by Simplex, prepare the elimination entries and a consolidated balance sheet worksheet for December 31, 20X9.

62) Pratt Corporation acquired 90 percent of Splatt Corporation's common shares on January 1, 20X6, at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 10 percent of the book value of Splatt. Splatt Corporation prepared the following balance sheet as of January 1, 20X9: Cash Accounts Receivable Inventory Buildings and Equipment

$

20,000 100,000 80,000 350,000

Accounts Payable Bonds Payable Common Stock Additional Paid-In

$

60,000

Capital Less: Accumulated Depreciation Total Assets

$

(150,000)

Retained Earnings

400,000

Total Liabilities and Equities

40,000 50,000 100,000

150,000 $

400,000

The company is considering the following alternatives: 1. A 3-for-1 stock split 2. A stock dividend of 7,000 shares on its $5 par value common stock 3. A stock dividend of 2,000 shares on its $5 par value common stock The current market price per share of Splatt stock on January 1, 20X9, is $15.

Required: Give the investment elimination entry required to prepare a consolidated balance sheet at the close of business on January 1, 20X9, for each of the alternative transactions under consideration

by Splatt Corporation.

Advanced Financial Accounting, 12e (Christensen) Chapter 10 Additional Consolidation Reporting Issues 1) Which sections of the cash flow statement are affected by the difference in the direct and indirect approaches of presenting a cash flow statement?

I. Operating activities section II. Investing activities section III. Financing activities section A) I B) II C) III D) I, II, and III 2) Which of the following observations concerning the comparisons between the direct and indirect approaches of presenting a cash flow statement is true?

A) The final dollar amount of cash flows from operating activities is different under the two approaches.

B) The direct approach provides a clearer picture of cash flows related to operations.

C) Authoritative bodies have generally expressed a preference for the indirect method.

D) A separate reconciliation of operating cash flows and net income is required under the indirect approach.

Sigma Company develops and markets organic food products to natural foods retailers. The following information is available for the company for the year 20X8: Sales Cost of goods sold Increase in accounts receivable Decrease in inventory Decrease in accounts payable

$

450,000 275,000 25,000 13,000 30,000

3) Based on the preceding information, what amount will be reported by the company as cash received from customers during the year?

A) $455,000 B) $475,000 C) $450,000 D) $425,000

4) Based on the preceding information, what amount will be reported by the company as cash payments to suppliers for 20X8?

A) $292,000 B) $305,000 C) $262,000 D) $258,000 5) Based on the preceding information, what amount will be reported by the company as cash flows from operating activities for 20X8?

A) $175,000 B) $133,000 C) $167,000 D) $207,000 The following information comes from Torveson Company's accounting records for 20X5:

Sales Cost of goods sold Decrease in accounts receivable Increase in inventory Increase in accounts payable

$

575,000 350,000 15,000 8,000 25,000

6) Based on the preceding information, what amount will be reported by the company as cash received from customers during the year?

A) $590,000 B) $585,000 C) $575,000 D) $560,000 7) Based on the preceding information, what amount will be reported by the company as cash payments to suppliers for 20X5?

A) $325,000 B) $333,000 C) $358,000 D) $367,000 8) Based on the preceding information, what amount will be reported by the company as cash flows from operating activities for 20X5?

A) $225,000 B) $227,000 C) $232,000 D) $257,000

Power Corporation's controller has just finished preparing a consolidated balance sheet, income statement, and statement of changes in retained earnings for the year ended December 31, 20X9.

Power owns 80 percent of Setwork Corporation's stock, which it acquired at underlying book value on November 1, 20X6. At that date, the fair value of the noncontrolling interest was equal to 20 percent of Setwork Corporation's book value. The following information is available: Consolidated net income for 20X9 was $160,000.

Setwork reported net income of $50,000 for 20X9.

Power paid dividends of $30,000 in 20X9.

Setwork paid dividends of $10,000 in 20X9.

Power issued common stock on February, 18, 20X9, for a total of $100,000.

Consolidated wages payable decreased by $6,000 in 20X9.

Consolidated depreciation expense for the year was $15,000.

Consolidated accounts receivable decreased by $20,000 in 20X9.

Bonds payable of Power with a book value of $102,000 were retired for $100,000 on December 31, 20X9.

Consolidated amortization expense on patents was $10,000 for 20X9.

Power sold land that it had purchased for $75,000 to a nonaffiliate for $80,000 on June 10, 20X9.

Consolidated accounts payable decreased by $7,000 during 20X9.

Total purchases of equipment by Power and Setwork during 20X9 were $180,000.

Consolidated inventory increased by $36,000 during 20X9.

There were no intercompany transfers between Power and Setwork in 20X9 or prior years except for Setwork's payment of dividends. Power uses the indirect method in preparing its cash flow statement.

9) Based on the preceding information, what amount will be reported in the consolidated cash flow statement as net cash provided by operating activities for 20X9?

A) $207,000 B) $163,000 C) $180,000 D) $149,000 10) Based on the preceding information, what amount will be reported in the consolidated cash flow statement as net cash used in investing activities for 20X9?

A) $180,000 B) $100,000 C) $255,000 D) $110,000 11) Based on the preceding information, what amount will be reported in the consolidated cash flow statement as net cash used in financing activities for 20X9?

A) $32,000 B) $38,000 C) $42,000 D) $70,000 12) Based on the preceding information, what was the change in cash balance for the consolidated entity for 20X9?

A) Increase of $49,000 B) Decrease of $66,000 C) Increase of $17,000 D) Increase of $32,000 Plywood Corporation's consolidated cash flow statement for the year ended December 31, 20X8, reported operating cash inflows of $160,000, financing cash outflows of $90,000, and investing cash outflows $55,000, and an ending cash balance of $75,000. Plywood acquired 75 percent of Sawdust Company's common stock on July 1, 20X6, at book value. At that date, the fair value of the noncontrolling interest was equal to 25 percent of Sawdust Company's book value. Sawdust reported net income of $20,000, paid dividends of $8,000 in 20X8, and is included in Plywood's consolidated statements. Plywood paid dividends of $25,000 in 20X8. The indirect method is used in computing cash flow from operations.

13) Based on the information provided, what was the consolidated cash balance at January 1, 20X8?

A) $60,000 B) $85,000 C) $15,000 D) $380,000 14) Based on the information provided, what amount was reported as dividends paid in the cash flow from financing activities section of the consolidated statement of cash flows?

A) $25,000 B) $33,000 C) $27,000 D) $8,000

Polar Corporation's consolidated cash flow statement for the year ended December 31, 20X2, reported operating cash inflows of $100,000, financing cash inflows of $30,000, investing cash outflows of $120,000, and an ending cash balance of $50,000. Polar acquired 60 percent of Snow Company's common stock on April 1, 20X0 at book value. At that date, the fair value of the noncontrolling interest was equal to 40 percent of Snow's book value. Snow reported net income of $30,000, paid dividends of $20,000 in 20X2, and is included in Polar's consolidated statements. Polar paid dividends of $40,000 in 20X2. The indirect method is used in computing cash flows from operations.

15) Based on the information provided, what was the consolidated cash balance at January 1, 20X2?

A) $300,000 B) $100,000 C) $60,000 D) $40,000 16) Based on the information provided, what amount was reported as dividends paid in the cash flow from financing activities section of the consolidated statement of cash flows?

A) $60,000 B) $48,000 C) $40,000 D) $20,000 17) Dividends paid to noncontrolling shareholders: I. are reported as a cash outflow in the consolidated cash flow statement.

II. represent funds that are no longer available to the consolidated entity.

III. are reported in the consolidated retained earnings statement.

A) Observation I alone is true.

B) Observation III alone is true.

C) Observations I and II are true.

D) Observations I, II, and III are true.

Pure Life Corporation has just finished preparing a consolidated balance sheet, income statement, and statement of changes in retained earnings for 20X9. The following items are proposed for inclusion in the consolidated cash flow statement: Decrease in accounts receivable Increase in accounts payable Increase in inventory Increase in bonds payable Equipment purchased Common stock repurchased Depreciation reported for current period Gain recorded on sale of equipment Book value of equipment sold Goodwill impairment loss Sales Cost of goods sold Dividends paid by parent Dividends paid by subsidiary Consolidated net income for the year Income assigned to the noncontrolling interest

$

15,000 18,000 20,000 50,000 200,000 40,000 50,000 12,000 58,000 12,000 800,000 350,000 45,000 20,000 400,000 20,000

Pure Life holds 75 percent of the voting stock of Shane Pharmaceuticals, acquired at book value on June 21, 20X6. On the date of the acquisition, the fair value of the noncontrolling interest was equal to 25 percent of the book value of Shane.

18) Based on the preceding information, what amount will be reported in the consolidated cash flow statement as net cash provided by operating activities for 20X9?

A) $350,000 B) $463,000 C) $335,000 D) $421,000 19) Based on the preceding information, what amount will be reported in the consolidated cash flow statement as net cash used in investing activities for 20X9?

A) $200,000 B) $142,000 C) $155,000 D) $130,000 20) Based on the preceding information, what amount will be reported in the consolidated cash flow statement as net cash used in financing activities for 20X9?

A) $40,000 B) $55,000 C) $90,000 D) $10,000 21) Based on the preceding information, what was the change in cash balance for the consolidated entity for 20X9?

A) Decrease of $153,000 B) Increase of $450,000 C) Increase of $293,000 D) Increase of $150,000 22) Based on the preceding information, assuming that Pure Life uses the direct method of computing cash flows from operating activities, what amount will be reported by the company as cash received from customers during the year?

A) $815,000 B) $785,000 C) $800,000 D) $835,000 23) Based on the preceding information, assuming that Pure Life uses the direct method of computing cash flows from operating activities, what amount will be reported by the company as cash payments to suppliers for 20X9?

A) $350,000 B) $348,000 C) $312,000 D) $352,000

On July 1, 20X8, Pair Logic Corporation acquires 75 percent of Systems Inc. common stock for its underlying book value. At the time of acquisition, the fair value of the noncontrolling interest is equal to its proportionate share of book value of Systems. On January 1, 20X8 Systems reported common stock of $100,000 and retained earnings of $130,000. For the year 20X8, Systems reports the following items:

Sales Cost of Goods Sold Depreciation Expense Other Expenses Net Income Dividends

Before Combination (January 1 to June 30) $ 150,000 90,000 20,000 15,000 25,000 15,000

After Combination (July 1 to December 31) $ 160,000 93,000 20,000 17,000 30,000 18,000

Pair Logic uses the equity method in accounting for this investment.

24) Based on the preceding information, what is the book value of shares acquired by Pair Logic on July 1, 20X8?

A) $240,000 B) $191,250 C) $230,000 D) $180,000 25) Based on the preceding information, what is the fair value of the noncontrolling interest at the time of acquisition?

A) $47,813 B) $57,500 C) $60,000 D) $45,000

26) Based on the preceding information, what journal entry would Pair Logic make to record equity method income for the year?

A) Cash Investment in Systems

24,750

B) Investment in Systems Income from Systems

22,500

C) Cash Investment in Systems

18,000

D) Investment in Systems Income from Systems

41,250

24,750

22,500

18,000

41,250

A) Option A B) Option B C) Option C D) Option D Pony Corporation acquired 90 percent of Saddle Corporation's common stock on September 30, 20X8 for $225,000. At that date, the fair value of the noncontrolling interest was $25,000. On January 1, 20X8, Saddle reported the following stockholders' equity balances: Common Stock ($5 par value) Additional Paid-In Capital Retained Earnings Total Stockholders' Equity

$ 100,000 25,000 75,000 200,000

Saddle reported net income of $80,000 in 20X8, earned uniformly throughout the year, and declared and paid dividends of $10,000 on June 30 and $30,000 on December 31, 20X8. Pony reported retained earnings of $250,000 on January 1, 20X8, and had 20X8 income of $120,000 from its separate operations. Pony paid dividends of $50,000 on December 31, 20X8. Pony accounts for its investment in Saddle Corporation using the fully adjusted equity method.

27) Based on the information provided, what is the consolidated net income reported for the year 20X8?

A) $120,000 B) $138,000 C) $140,000 D) $192,000 28) Based on the information provided, what is the consolidated income to the controlling interest reported for the year 20X8?

A) $192,000 B) $138,000 C) $140,000 D) $120,000 29) Based on the information provided, what is the amount of consolidated retained earnings as of December 31, 20X8?

A) $340,000 B) $250,000 C) $338,000 D) $388,000 30) Based on the information provided, what is the balance of Pony's investment in Saddle Corporation as of December 31, 20X8?

A) $216,000 B) $225,000 C) $213,000 D) $215,000 Peacoat Corporation acquired 80 percent of Sweater Corporation's common stock on March 31, 20X4 for $360,000. At that date, the fair value of the noncontrolling interest was $90,000. On January 1, 20X4, Sweater reported the following stockholders' equity balances:

Common Stock ($10 par value) Additional Paid-In Capital Retained Earnings Total Stockholders' Equity

$ 150,000 75,000 200,000 $ 425,000

Sweater reported net income of $100,000 in 20X4, earned uniformly throughout the year, and declared and paid dividends of $40,000 on December 31, 20X4. Peacoat reported retained earnings of $500,000 on January 1, 20X8, and had 20X4 income of $200,000 from its separate operations. Peacoat paid dividends of $50,000 on December 31, 20X4. Peacoat accounts for its investment in Sweater Corporation using the fully adjusted equity method.

31) Based on the information provided, what is the consolidated net income reported for the year 20X4?

A) $280,000 B) $275,000 C) $260,000 D) $200,000

32) Based on the information provided, what is the consolidated income to the controlling interest reported for the year 20X4?

A) $275,000 B) $280,000 C) $260,000 D) $200,000 33) Based on the information provided, what is the amount of consolidated retained earnings as of December 31, 20X4?

A) $500,000 B) $710,000 C) $725,000 D) $760,000 34) Based on the information provided, what is the balance of Peacoat's investment in Sweater Corporation as of December 31, 20X4?

A) $360,000 B) $380,000 C) $388,000 D) $395,000 Ponte Corporation owns 25 percent of the voting shares of Scala Corporation. In 20X8, Scala reported net income of $120,000 and paid dividends of $30,000. Ponte uses the equity method to account for this investment. Ponte reported taxable income of $160,000 on its separate operations and has an effective tax rate of 40 percent. There is an 80 percent exemption on intercompany dividends.

35) Based on the preceding information, income tax expense for Ponte for the year 20X8 will be: A) $67,000 B) $64,600 C) $64,000 D) $66,400 36) Based on the preceding information, income taxes payable for Ponte for the year 20X8 will be: A) $67,000 B) $64,600 C) $64,000 D) $76,000

On January 1, 20X8, Putter Corporation acquired 40 percent of the voting shares of Shank Company for $65,000. Shank reported net income of $45,000 and paid dividends of $10,000 in 20X8. Putter reported operating income of $50,000 for the year. There is 80 percent exemption of intercompany dividends and the effective tax rate is 35 percent. Assume that the equity method is being used.

37) Based on the preceding information, what would Putter report as income tax expense for the year?

A) $17,500 B) $18,760 C) $23,800 D) $22,540 38) Based on the preceding information, what amount would Putter report as net income (after taxes) for the year?

A) $49,240 B) $68,000 C) $64,000 D) $67,500 39) For a subsidiary to be eligible to be included in a consolidated tax return, at least of its stock must be held by the parent company or another company included in the consolidated return.

A) 50 percent B) 40 percent C) 75 percent D) 80 percent

Company P holds 70 percent of the voting shares of Company S. During 20X8, Company S sold land with a book value of $125,000 to Company P for $150,000. Company P continues to hold the land at the end of the year. The companies file separate tax returns and are subject to a 40 percent tax rate. Assume that Company P uses the fully adjusted equity method in accounting for its investment in Company S. 40) Based on the information given, which consolidating entry relating to the intercorporate sale of land is to be entered in the consolidation worksheet prepared at the end of 20X8?

A) Deferred Tax Asset Income Tax Expense

10,000

B) Deferred Tax Asset Income Tax Expense

25,000

C) Deferred Tax Asset Land

25,000

10,000

25,000

25,000

D) No consolidating entry is required.

A) Option A B) Option B C) Option C D) Option D 41) Use the information given, but also assume that Company P holds the land at the end of 20X9. The consolidating entry relating to the intercorporate sale of land to be entered in the consolidation worksheet prepared at the end of 20X9 will include: A) a debit to Investment in Company S for $7,500.

B) a debit to Noncontrolling Interest for $4,500.

C) a credit to Land for $150,000.

D) a credit to Land for $15,000.

42) Use the information given, but also assume that Company P holds the land at the end of 20X9. The consolidating entry relating to the intercorporate sale of land to be entered in the consolidation worksheet prepared at the end of 20X9 will include a debit to Investment in Company S for: A) $4,500.

B) $7,500.

C) $15,000.

D) $10,500.

Pappas Company owns 85 percent of Sunny Company's stock and 80 percent of Sibble Company's stock. All acquisitions were made at book value. The fair values of noncontrolling interests at the time of acquisition were equal to the proportionate share of the book values of the companies. The companies file a consolidated tax return each year and in 20X9 paid a total tax of $112,000. Each company is involved in a number of intercompany inventory transfers each period. Information on the companies' activities for 20X9 is as follows:

Pappas Company Sunny Company Sibble Company

20X9 Reported Operating Income $ 155,000 35,000 60,000

20X8 Intercompany Profit Realized in 20X9 $ 25,000 10,000 28,000

20X9 Intercompany Profit Not Realized in 20X9 $ 15,000 6,000 12,000

Pappas Company does not record income tax expense on income from subsidiaries because a consolidated tax return is filed.

43) Based on the information provided, what amount of income tax expense should be assigned to Pappas Company?

A) $72,000 B) $66,000 C) $112,000 D) $62,000 44) Based on the information provided, what amount of income tax expense should be assigned to Sibble?

A) $24,000 B) $35,200 C) $19,200 D) $30,400 45) Based on the information provided, what amount of consolidated net income will be reported for the year 20X9?

A) $168,000 B) $280,000 C) $165,000 D) $250,000 46) Based on the information provided, income to the controlling interest for 20X9 is: A) $155,370.

B) $56,000.

C) $168,000.

D) $250,000.

Plush Corporation holds 80 percent of Scratch Company's voting common shares, acquired at book values, but none of its preferred shares. At the date of acquisition, the fair value of the

noncontrolling interest was equal to 20 percent of the book value of Scratch Company. Summary balance sheets for the companies on December 31, 20X8, are as follows:

Cash and Receivables Inventory Buildings and Equipment (net) Investment in Scratch Company Total Assets Accounts Payable Preferred Stock Common Stock ($5 par value) Retained Earnings Total Liabilities and Owners' Equity

Plush Corporation $ 75,000 40,000 160,000 80,000 $ 355,000 50,000 50,000 100,000 155,000 $ 355,000

Scratch Company $ 60,000 30,000 110,000 0 $ 200,000 $ 25,000 75,000 50,000 50,000 $ 200,000

Neither of the preferred issues is convertible. Plush's preferred pays a 8 percent annual dividend, and Scratch's preferred pays a 12 percent dividend. Scratch reported net income of $30,000 and paid a total of $10,000 of dividends in 20X8. Plush reported income from its separate operations of $70,000 and paid total dividends of $25,000 in 20X8.

47) Based on the preceding information, what is the amount of earnings available to common shareholders reported in the consolidated financial statements for the year?

A) $89,200 B) $87,000 C) $91,000 D) $82,800 48) Based on the preceding information, what is the consolidated earnings per share for 20X8?

A) $4.46 B) $4.14 C) $4.35 D) $4.55

Plexis Corporation holds 70 percent of Solar Company's voting common shares, acquired at book value, but none of its preferred shares. At the date of acquisition, the fair value of the noncontrolling interest was equal to 30 percent of the book value of Solar Company. Summary balance sheets for the companies on December 31, 20X5, are as follows: Cash and Receivables Inventory Buildings and Equipment (net) Investment in Solar Company Total Assets Accounts Payable Preferred Stock Common Stock ($15 par value) Retained Earnings Total Liabilities and Owners' Equity

Plexis Corp. $ 70,000 60,000 180,000 112,000 $ 422,000 $ 40,000 30,000 90,000 262,000 $ 422,000

Solar Company $ 55,000 35,000 160,000 0 $ 250,000 $ 40,000 50,000 75,000 85,000 $ 250,000

Neither of the preferred issues is convertible. Plexis's preferred pays a 9 percent annual dividend, and Solar's preferred pays a 10 percent dividend. Solar reported net income of $40,000 and paid a total of $15,000 of dividends in 20X5. Plexis reported income from its separate operations of $80,000 and paid total dividends of $45,000 in 20X5.

49) Based on the preceding information, what is the amount of earnings available to common shareholders reported in the consolidated financial statements for the year?

A) $101,800 B) $104,500 C) $112,300 D) $115,000 50) Based on the preceding information, what is the consolidated earnings per share for 20X5?

A) $16.97 B) $17.42 C) $18.72 D) $19.17

Pain Corporation holds 90 percent of Soothing Company's common shares but none of its preferred shares. On the date of acquisition, the fair value of the noncontrolling interest was equal to 10 percent of the book value of Soothing Company. Summary balance sheets for the companies on December 31, 20X8, are as follows:

Cash and Receivables Inventory Buildings and Equipment (net) Investment in Soothing Company Total Assets Accounts Payable Preferred Stock ($10 par value) Common Stock ($5 par value) Retained Earnings Total Liabilities and Owners' Equity

Pain Corporation $ 80,000 40,000 160,000 135,000 $ 415,000 50,000 50,000 100,000 215,000 $ 415,000

Soothing Company $ 70,000 30,000 150,000 0 $ 250,000 $ 25,000 75,000 50,000 100,000 $ 250,000

Pain's preferred pays a 8 percent annual dividend, and Soothing's preferred pays a 10 percent dividend. Soothing's preferred shares can be converted into 20,000 shares of common stock at any time. Soothing reported net income of $35,000 and paid a total of $10,000 of dividends in 20X8. Pain reported income from its separate operations of $80,000 and paid total dividends of $25,000 in 20X8.

51) Based on the information provided, what is the basic earnings per share for the consolidated entity for 20X8?

A) $5.04 B) $5.24 C) $3.80 D) $5.18 52) Based on the information provided, what is the diluted earnings per share for the consolidated entity for 20X8?

A) $4.53 B) $4.33 C) $4.00 D) $3.80

53) Pokey Corporation acquired 80 percent ownership of Stereo Company on January 1, 20X6, at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 20 percent of the book value of Stereo Company. Consolidated balance sheets at January 1, 20X8, and December 31, 20X8, are as follows: Item Cash Accounts Receivable Inventory Land Buildings and Equipment Less: Accumulated Depreciation Patents Total Assets Accounts Payable Wages Payable Notes Payable Common Stock ($5 par value) Retained Earnings Noncontrolling Interest Total Liabilities and Equities

Jan 1, 20X8 $ 50,000 75,000 85,000 60,000 300,000 (90,000) 12,000 $ 492,000 $ 40,000 20,000 150,000 100,000 162,000 20,000 $ 492,000

Dec 31, 20X8 $ 80,000 90,000 100,000 80,000 350,000 (120,000) 10,000 $ 590,000 $ 58,000 16,000 175,000 100,000 218,000 23,000 $ 590,000

The consolidated income statement for 20X8 contained the following amounts:

Sales Cost of Goods Sold Wage Expense Depreciation Expense Interest Expense Amortization Expense Other Expenses Consolidated Net Income Income to Noncontrolling Interest Income to Controlling Interest

$ $ 172,000 45,000 30,000 12,000 2,000 52,000

400,000

(313,000) $ 87,000 (6,000) $ 81,000

Pokey and Stereo paid dividends of $25,000 and $15,000, respectively, in 20X8.

Required: 1) Prepare a worksheet to develop a consolidated statement of cash flows for 20X8 using the indirect method of computing cash flows from operations.

2) Prepare a consolidated statement of cash flows for 20X8.

54) Pokey Corporation acquired 80 percent ownership of Stereo Company on January 1, 20X6, at underlying book value. At that date, the fair value of the noncontrolling interest was equal to

20 percent of the book value of Stereo Company. Consolidated balance sheets at January 1, 20X8, and December 31, 20X8, are as follows: Item Cash Accounts Receivable Inventory Land Buildings and Equipment Less: Accumulated Depreciation Patents Total Assets Accounts Payable Wages Payable Notes Payable Common Stock ($5 par value) Retained Earnings Noncontrolling Interest Total Liabilities and Equities

Jan 1, 20X8 $ 50,000 75,000 85,000 60,000 300,000 (90,000) 12,000 $ 492,000 $ 40,000 20,000 150,000 100,000 162,000 20,000 $ 492,000

Dec 31, 20X8 $ 80,000 90,000 100,000 80,000 350,000 (120,000) 10,000 $ 590,000 $ 58,000 16,000 175,000 100,000 218,000 23,000 $ 590,000

The consolidated income statement for 20X8 contained the following amounts: Sales Cost of Goods Sold Wage Expense Depreciation Expense Interest Expense Amortization Expense Other Expenses Consolidated Net Income Income to Noncontrolling Interest Income to Controlling Interest

$ $ 172,000 45,000 30,000 12,000 2,000 52,000

400,000

(313,000) $ 87,000 (6,000) $ 81,000

Pokey and Stereo paid dividends of $25,000 and $15,000, respectively, in 20X8.

Required: 1) Prepare a worksheet to develop a consolidated statement of cash flows for 20X8 using the direct method of computing cash flows from operations.

2) Prepare a consolidated statement of cash flows for 20X8.

55) Part Company holds 75 percent ownership of Spare Corporation. The consolidated balance sheets as of December 31, 20X8, and December 31, 20X9, are as follows:

Cash Accounts Receivable Inventory Land Buildings and Equipment Less: Accumulated Depreciation Goodwill Total Assets Accounts Payable Interest Payable Bonds Payable Bonds Premium Noncontrolling Interest Common Stock Additional Paid-In Capital Retained Earnings Total Liabilities and Owners' Equity

Dec. 31, 20X8 $ 110,000 100,000 120,000 250,000 400,000 (160,000) 20,000 $ 840,000 40,000 30,000 200,000 15,000 25,000 200,000 50,000 280,000 $ 840,000

Dec. 31, 20X9 $ 186,000 90,000 175,000 210,000 500,000 (180,000) 15,000 $ 996,000 55,000 25,000 300,000 13,500 27,500 200,000 50,000 325,000 $ 996,000

The 20X9 consolidated income statement contained the following amounts:

Sales Cost of Goods Sold Depreciation Expense Interest Expense Loss on Sale of Land Goodwill Impairment Loss Consolidated Net Income Income to Noncontrolling Interest Income to Controlling Interest

$ $ 350,000 20,000 45,000 10,000 5,000

500,000

(430,000) $ $70,000 (5,000) $ 65,000

Part acquired its investment in Spare on January 1, 20X6, for $120,000. At that date, the fair value of the noncontrolling interest was $40,000, and Spare reported net assets of $130,000. A total of $20,000 of the differential was assigned to goodwill. The remainder of the differential was assigned to equipment with a remaining life of 10 years from the date of combination.

Part sold $100,000 of bonds on December 31, 20X9, to assist in generating additional funds.

Spare reported net income of $20,000 for 20X9 and paid dividends of $10,000. Part reported 20X9 equity-method net income of $75,000 paid dividends of $20,000 for the year.

Required: 1) Prepare a worksheet to develop a consolidated statement of cash flows for 20X9 using the indirect method of computing cash flows from operations.

2) Prepare a consolidated statement of cash flows for 20X9.

56) For the first quarter of 20X8, Signature Corporation reported sales of $150,000 and operating expenses of $100,000, and paid dividends of $20,000. Signature Company operates on a calendar-year basis. On April 1, 20X8, Player Corporation acquired 80 percent of Signature's common stock for $320,000. At that date, the fair value of the noncontrolling interest was $80,000, and Signature had 20,000 shares of $5 par common stock outstanding, originally issued at $12 per share. The differential is related to goodwill. On December 31, 20X8, the management of Player Corporation reviewed the amount attributed to goodwill as a result of its acquisition of Signature common stock and concluded that goodwill was not impaired. Signature's retained earnings statement for the full year 20X8 appears as follows: Retained Earnings, January 1, 20X8 Net Income Dividends Retained Earnings, December 31, 20X8

$ 100,000 220,000 (60,000) $ 260,000

Player uses the fully adjusted equity method in accounting for this investment: Required: 1) Prepare all entries that Player would have recorded in accounting for its investment in Signature during 20X8.

2) Present all consolidating entries needed in a worksheet to prepare a complete set of consolidated financial statements for the year 20X8.

57) On December 31, 20X7, Planet Corporation acquired 80 percent of Sonic Company's stock, at underlying book value. At that date, the fair value of the noncontrolling interest was equal to 20 percent of the book value of Sonic Company. The two companies' balance sheets on December 31, 20X9, are as follows: Planet Corporation and Sonic Company Balance Sheets December 31, 20X9

Cash Accounts Receivable Inventory Land Buildings and Equipment Less: Accumulated Depreciation Investment in Sonic Co. Total Assets Accounts Payable Wages Payable Bonds Payable Common Stock Retained Earnings Total Liabilities and Equities

Planet Corp. $ 45,000 60,000 134,000 60,000 350,000 (175,000) 153,200 $ 627,200 $ 60,000 40,000 100,000 150,000 277,200 $ 627,200

Sonic Company $ 25,000 15,000 85,000 40,000 200,000 (80,000) $ 285,000 $ 40,000 25,000 100,000 120,000 $ 285,000

On December 31, 20X9, Planet holds inventory purchased from Sonic for $40,000. Sonic's cost of producing the merchandise was $25,000. Sonic's ending inventory also contains $30,000 of purchases from Planet that had cost it $20,000 to produce.

On December 30, 20X9, Sonic sold equipment to Planet for $40,000. Sonic had purchased the equipment for $60,000 several years earlier. At the time of sale to Planet, the equipment had a book value of $20,000. The two companies file separate tax returns and are subject to a 40 percent tax rate. Planet does not record tax expense on its share of Sonic's undistributed earnings.

Required: 1) Prepare the consolidating entries necessary to complete a consolidated balance sheet worksheet as of December 31, 20X9.

2) Complete a consolidated balance sheet worksheet as of December 31, 20X9.

58) Power Corporation owns 75 percent of Transmitter Company's common stock. At the date of acquisition the fair value of the noncontrolling interest was equal to the book value of Transmitter Company's common stock. The following balance sheet data are presented for December 31, 20X8:

Cash Accounts Receivable Inventory Land Buildings and Equipment Less: Accumulated Depreciation Investment in Transmitter Company Stock Total Assets Accounts Payable Bonds Payable Preferred Stock ($100 par value) Common Stock ($10 par value) Retained Earnings Total Liabilities and Equities

Power Corp. $ 90,000 70,000 140,000 100,000 1,000,000 (500,000) 300,000 $ 1,200,000 $ 150,000 300,000 500,000 250,000 $ 1,200,000

Transmitter Company $ 60,000 85,000 105,000 80,000 700,000 (280,000) $ $

$

750,000 50,000 200,000 100,000 200,000 200,000 750,000

Transmitter reported net income of $90,000 in 20X8 and paid dividends of $30,000. Its bonds have an annual interest rate of 10 percent and are convertible into 12,000 common shares. Its preferred shares pay a 12 percent annual dividend and convert into 5,000 shares of common stock. In addition, Transmitter has warrants outstanding for 12,000 shares of common stock at $15 per share. The 20X8 average price of Transmitter common shares was $25.

Power reported income of $180,000 from its own operations for 20X8 and paid dividends of $40,000. Its 9 percent bonds convert into 8,000 shares of its common stock. The companies file separate tax returns and are subject to income taxes of 40 percent.

Required: Compute basic and diluted earnings per share for the consolidated entity for 20X8.

Advanced Financial Accounting, 12e (Christensen) Chapter 11 Multinational Accounting: Foreign Currency Transactions and Financial Instruments 1) If 1 British pound can be exchanged for 180 cents of U.S. currency, what fraction should be used to compute the indirect quotation of the exchange rate expressed in British pounds?

A) 1/180 B) 1/.56 C) 1.8/1 D) 1/1.8 Suppose the direct foreign exchange rates in U.S. dollars are: 1 Singapore dollar = $0.7025 1 Cyprus pound = $2.5132 2) Based on the information given above, the indirect exchange rates for the Singapore dollar and the Cyprus Pound (from a U.S. perspective) are: A) 1.7655 Singapore dollars and 1.4235 Cyprus pounds respectively.

B) 0.2975 Singapore dollars and 1.5132 Cyprus pounds respectively.

C) 2.1622 Singapore dollars and 0.4625 Cyprus pounds respectively.

D) 1.4235 Singapore dollars and 0.3979 Cyprus pounds respectively.

3) Based on the information given above, how many U.S. dollars must be paid for a purchase of citrus fruits costing 10,000 Cyprus pounds?

A) $25,132 B) $15,132 C) $3,979 D) $35,775 4) Based on the information given above, how many Singapore dollars are required to purchase goods costing 10,000 US dollars?

A) 7,025 B) 14,235 C) 17,655 D) 2,975 Suppose the direct foreign exchange rates in U.S. dollars are as follows: 1 Swiss franc = $1.0371 1 Swedish krona = $0.1526

1 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

5) Based on the information given above, the indirect exchange rates for the Swiss franc and the Swedish krona (from a U.S. perspective) are A) 0.9642 Swiss francs and 6.5531 Swedish krona respectively.

B) 1.6893 Swiss francs and 5.2563 Swedish krona respectively.

C) 1.0371 Swiss francs and 0.1527 Swedish krona respectively.

D) 0.8372 Swiss francs and 4.2713 Swedish krona respectively.

6) Based on the information given above, how many U.S. dollars must be paid for a purchase of goods costing 20,000 Swedish krona?

A) $131,062 B) $20,742 C) $19,285 D) $3.052 7) Based on the information given above, how many Swiss francs are required to purchase goods costing $5,000 U.S.?

A) 32,785 B) 5,186 C) 4,821 D) 763 8) Upon arrival in Chile, Karen exchanged $1,000 of U.S. currency into 480,000 Chilean Pesos.

While returning after her two-month visit, she exchanged her remaining 50,000 Pesos into $100 of U.S. currency. What amount of gain or a loss did Karen experience on the 50,000 pesos she held during her visit and converted to U.S. dollars at the departure date?

A) Loss of $4.

B) Gain of $4.

C) Loss of $6.

D) No gain or loss.

2 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

9) Chicago based Corporation X has a number of importing transactions with companies based in UK. Importing activities result in payables. If the settlement currency is the British Pound, which of the following will happen by changes in the direct or indirect exchange rates?

Direct Exchange Rate

Indirect Exchange Rate

Increases

Decreases

Increases

Decreases

A.

NA

NA

NA

NA

B.

Loss

Gain

Gain

Loss

C.

Loss

Gain

NA

NA

D.

Gain

Loss

Loss

Gain

A) Option A B) Option B C) Option C D) Option D 10) Chicago based Corporation X has a number of exporting transactions with companies based in Sweden. Exporting activities result in receivables. If the settlement currency is the Swedish Krona, which of the following will happen by changes in the direct or indirect exchange rates?

Direct Exchange Rate

Indirect Exchange Rate

Increases

Decreases

Increases

Decreases

A.

Loss

Gain

NA

NA

B.

Loss

Gain

Gain

Loss

C.

NA

NA

NA

NA

D.

Gain

Loss

Loss

Gain

A) Option A B) Option B C) Option C D) Option D

3 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

11) Corporation X has a number of exporting transactions with companies based in Vietnam.

Exporting activities result in receivables. If the settlement currency is the US dollar, which of the following will happen by changes in the direct or indirect exchange rates?

Direct Exchange Rate

Indirect Exchange Rate

Increases

Decreases

Increases

Decreases

A.

Loss

Gain

NA

NA

B.

Loss

Gain

Gain

Loss

C.

NA

NA

NA

NA

D.

Gain

Loss

Loss

Gain

A) Option A B) Option B C) Option C D) Option D Heavy Company sold metal scrap to a Brazilian company for 200,000 Brazilian reals on December 1, 20X8, with payment due on January 20, 20X9. The exchange rates were:

December 1, 20X8 December 31, 20X8 January 20, 20X9

1 real = $ 0.5435 1 real = 0.5192 1 real = 0.5305

12) Based on the preceding information, which of the following is true of dollar's movement visà-vis Brazilian real during the period?

Dec 1 - 31

Jan 1 - 20

A.

Dollar weakened

Dollar strengthened

B.

Dollar weakened

Dollar weakened

C.

Dollar strengthened

Dollar strengthened

D.

Dollar strengthened

Dollar weakened

A) Option A B) Option B C) Option C D) Option D

4 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

13) Based on the preceding information, what is the Heavy's overall net gain or net loss from its foreign currency exposure related to this transaction?

A) $4,860 loss B) $2,600 loss C) $9,018 gain D) $2,260 gain Highland Company sold goods to an Egyptian company for 350,000 Egyptian pounds on December 6, 20X3, with payment due on January 15, 20X4. The exchange rates were as follows:

December 6, 20X3 December 31, 20X3 January 15, 20X4

1 Egyptian pound 1 Egyptian pound 1 Egyptian pound

= = =

$ 0.1593 $ 0.1612 $ 0.1604

14) Based on the preceding information, which of the following is true of the dollar's movement vis-à-vis the Egyptian pound during the period?

December 6 - 31

January 1 - 15

A.

Dollar weakened

Dollar strengthened

B.

Dollar weakened

Dollar weakened

C.

Dollar strengthened

Dollar strengthened

D.

Dollar strengthened

Dollar weakened

A) Option A B) Option B C) Option C D) Option D 15) Based on the preceding information, what is Highland's overall net gain or net loss from its foreign currency exposure related to this transaction?

A) $280 loss B) $302 loss C) $385 gain D) $665 gain

5 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

16) Mint Corporation has several transactions with foreign entities. Each transaction is denominated in the local currency unit of the country in which the foreign entity is located. On October 1, 20X8, Mint purchased confectionary items from a foreign company at a price of LCU 5,000 when the direct exchange rate was 1 LCU = $1.20. The account has not been settled as of December 31, 20X8, when the exchange rate has decreased to 1 LCU = $1.10. The foreign exchange gain or loss on Mint's records at year-end for this transaction will be: A) $500 loss B) $500 gain C) $378 gain D) $5,500 loss 17) Mint Corporation has several transactions with foreign entities. Each transaction is denominated in the local currency unit of the country in which the foreign entity is located. On November 2, 20X8, Mint sold confectionary items to a foreign company at a price of LCU 23,000 when the direct exchange rate was 1 LCU = $1.08. The account has not been settled as of December 31, 20X8, when the exchange rate has increased to 1 LCU = $1.10. The foreign exchange gain or loss on Mint's records at year-end for this transaction will be: A) $460 loss B) $387 loss C) $387 gain D) $460 gain

6 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

18) On September 3, 20X8, Jackson Corporation purchases goods for a U.S. dollar equivalent of $17,000 from a Swiss company. The transaction is denominated in Swiss francs (SFr). The payment is made on October 10. The exchange rates were:

September 3: October 10:

1 Swiss franc = 1 Swiss franc =

$ 0.85 0.90

What entry is required to revalue foreign currency payable to U.S. dollar equivalent value on October 10?

A. Foreign Currency Transaction Loss Accounts Payable (SFr) B. Accounts Payable (SFr) Foreign Currency Transaction Gain C. Foreign Currency Transaction Loss Accounts Payable (SFr) D. Accounts Payable (SFr) Foreign Currency Transaction Gain

1,000 1,000 850 850 850 850 1,000 1,000

A) Option A B) Option B C) Option C D) Option D

7 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

19) On March 1, 20X8, Wilson Corporation sold goods for a U.S. dollar equivalent of $31,000 to a Thai company. The transaction is denominated in Thai baht. The payment is received on May 10. The exchange rates were:

March 1: May 10:

1 baht = 1 baht =

$ 0.031 0.034

What entry is required to revalue foreign currency payable to U.S. dollar equivalent value on May 10?

A. Accounts Receivable (baht) Foreign Currency Transaction Gain B. Accounts Receivable (baht) Foreign Currency Transaction Gain C. Foreign Currency Transaction Loss Accounts Receivable (baht) D. Sales Foreign Currency Transaction Gain

93 93 3,000 3,000 3,000 3,000 93 93

A) Option A B) Option B C) Option C D) Option D

8 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

On December 5, 20X8, Texas based Imperial Corporation purchased goods from a Saudi Arabian firm for 100,000 riyals (SAR), to be paid on January 10, 20X9. The transaction is denominated in Saudi riyals. Imperial's fiscal year ends on December 31, and its reporting currency is the U.S. dollar. The exchange rates are:

December 5, 20X8 December 31, 20X8 January 10, 20X9

1 riyal = 1 riyal = 1 riyal =

$ 0.265 0.262 0.264

20) Based on the preceding information, what journal entry would Imperial make on December 31, 20X8, to revalue foreign currency payable to equivalent U.S. dollar value?

A. Accounts Payable (SAR)

300

Foreign Currency Transaction Gain B. Accounts Payable (SAR)

300 100

Foreign Currency Transaction Gain C. Foreign Currency Transaction Loss

100 300

Accounts Payable (SAR) D. Foreign Currency Transaction Loss Accounts Payable (SAR)

300 200 200

A) Option A B) Option B C) Option C D) Option D

9 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

21) Based on the preceding information, what journal entry would Imperial make on January 10, 20X9, to revalue foreign currency payable to equivalent U.S. dollar value?

A. Accounts Payable (SAR)

300

Foreign Currency Transaction Gain

300

B. Accounts Payable (SAR)

100

Foreign Currency Transaction Gain

100

C. Foreign Currency Transaction Loss

100

Accounts Payable (SAR)

100

D. Foreign Currency Transaction Loss

200

Accounts Payable (SAR)

200

A) Option A B) Option B C) Option C D) Option D 22) Based on the preceding information, what was the overall foreign currency gain or loss on the accounts payable transaction?

A) $300 loss B) $200 loss C) $100 gain D) $200 gain Spartan Company purchased interior decoration material from Egypt for 100,000 Egyptian pounds on September 5, 20X8, with payment due on December 2, 20X8. Additionally, on September 5, Spartan acquired a 90-day forward contract to purchase 100,000 Egyptian pounds of E£ = $.1850. The forward contract was acquired to manage the exposed net liability position in Egyptian pounds, but it was not designated as a hedge. The spot rates were:

September 5, 20X8 December 2, 20X8

E£1 = $ 0.1835 E£1 = $ 0.1865

23) Based on the preceding information, in the entry made on December 2nd to revalue foreign currency receivable to current equivalent U.S. dollar value, A) Accounts Payable will be debited for $18,350.

B) Foreign Currency Units will be debited for $18,500.

C) Foreign Currency Transaction Gain will be credited for $150.

D) Other Comprehensive Income will be credited for $300.

10 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

24) Based on the preceding information, what is the entry required to settle foreign currency payable on December 2?

A. Accounts Payable (E£)

18,800

Foreign Currency Units (E£)

18,800

B. Accounts Payable (E£)

18,500

Foreign Currency Units (E£)

18,500

C. Accounts Payable (E£)

18,650

Foreign Currency Units (E£)

18,650

D. Accounts Payable (E£)

18,350

Foreign Currency Units (E£)

18,350

A) Option A B) Option B C) Option C D) Option D 25) Detroit based Auto Corporation, purchased ancillaries from a Japanese firm on December 1, 20X8, for 1,000,000 Yen, when the spot rate for Yen was $.0095. On December 31, 20X8, the spot rate stood at $.0096. On January 10, 20X9 Auto paid 1,000,000 Yen acquired at a rate of $.0094. Auto's income statements should report a foreign exchange gain or loss for the years ended December 31, 20X8 and 20X9 of:

A. B. C. D.

20X8 $ 0 $ 100 loss $ 0 $ 100 gain

20X9 $ 0 $ 200 gain $ 100 gain $ 100 loss

A) Option A B) Option B C) Option C D) Option D

11 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

26) On November 1, 20X8, Denver Company borrowed 500,000 local currency units (LCU) from a foreign lender evidenced by an interest-bearing note due on November 1, 20X9, which is denominated in the currency of the lender. The U.S. dollar equivalent of the note principal was as follows:

7/1/X8 (date borrowed) 12/31/X8 (Denver's year-end) 7/1/X9 (date repaid)

$ 100,000 125,000 140,000

In its income statement for 20X9, what amount should Denver include as a foreign exchange gain or loss on the note principal?

A) $15,000 gain B) $25,000 gain C) $15,000 loss D) $40,000 loss 27) Company X denominated a December 1, 20X9, purchase of goods in a currency other than its functional currency. The transaction resulted in a payable fixed in terms of the amount of foreign currency, and was paid on the settlement date, January 10, 2010. Exchange rates moved unfavorably at December 31, 20X9, resulting in a loss that should: A) be included as a separate component of stockholders' equity at Dec. 31, 20X9.

B) be included as a component of income from continuing operations for 20X9.

C) be included as a deferred charge at December 31, 20X9.

D) not be reported until January 10, 2010, the settlement date.

28) On November 6, 20X7, Zucor Corp. purchased merchandise from an unaffiliated foreign company for 50,000 units of the foreign company's local currency. On that date, the spot rate was $1.259. Zucor paid the bill in full three months later when the spot rate was $1.258. The spot rate was $1.255 on December 31, 20X7. What amount should Zucor report as a foreign currency transaction gain in its income statement for the year ended December 31, 20X7?

A) $0 B) $50 C) $150 D) $200

12 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Myway Company sold equipment to a Canadian company for 100,000 Canadian dollars (C$) on January 1, 20X9 with settlement to be in 60 days. On the same date, Myway entered into a 60day forward contract to sell 100,000 Canadian dollars at a forward rate of 1 C$ = $.94 in order to manage its exposed foreign currency receivable. The forward contract is not designated as a hedge. The spot rates were:

January 1 March 1

1 C$ = 1 C$ =

$ 0.945 0.930

29) Based on the preceding information, the entry to revalue foreign currency payable to current U.S. dollar value on March 1 will have: A) a credit to Foreign Currency Transaction Gain for $1,500.

B) a debit to Foreign Currency Transaction Loss for $2,500.

C) a debit to Foreign Currency Transaction Loss for $1,500.

D) a credit to Foreign Currency Transaction Gain for $1,000.

30) Based on the preceding information, what is the overall effect on net income of Myway's use of the forward exchange contract?

A) Net loss of $1,000 B) Net gain of $1,500 C) Net loss of $500 D) No effect 31) Based on the preceding information, had Myway not used the forward exchange contract, net income for the year would have: A) increased by $1,000.

B) increased by $500.

C) decreased by $1,000.

D) decreased by $1,500.

13 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Robert Company sold inventory to an Australian company for 50,000 Australian dollars on April 1, 20X0 with settlement to be in 60 days. On the same date, Robert entered into a 60-day forward contract to sell 50,000 Australian dollars at a forward rate of $1.164 in order to manage its exposed foreign currency receivable. The forward contract is not designated as a hedge. The spot rates were as follows:

April 1 May 31

1 Australian dollar = 1 Australian dollar =

$ 1.167 1.16

32) Based on the preceding information, the entry to revalue the foreign currency payable to current U.S. dollar value on May 31 will include a A) credit to Foreign Currency Transaction Gain for $350.

B) credit to Foreign Currency Transaction Gain for $200.

C) debit to Foreign Currency Transaction Loss for $550.

D) debit to Foreign Currency Transaction Loss for $350.

33) Based on the preceding information, what is the overall effect on net income of Robert's use of the forward exchange contract?

A) No effect B) Net loss of $150 C) Net loss of $200 D) Net gain of $350 34) Based on the preceding information, had Robert not used the forward exchange contract, what would have been the foreign currency transaction gain or loss for the year?

A) Gain of $200 B) Gain of $150 C) Loss of $350 D) Loss of $200

14 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

35) Levin company entered into a forward contract to speculate in the foreign currency. It sold 100,000 foreign currency units under a contract dated November 1, 20X8, for delivery on January 31, 20X9:

Spot rates 30-day forward rate 90-day forward rate

11/1/20X8 $ 0.035 0.034 0.033

12/31/20X8 $ 0.037 0.036 0.035

In its income statement for the year ended December 31, 20X8, what amount of loss should Levin report from this forward contract?

A) $0 B) $300 C) $200 D) $100 Taste Bits Inc. purchased chocolates from Switzerland for 200,000 Swiss francs (SFr) on December 1, 20X8. Payment is due on January 30, 20X9. On December 1, 20X8, the company also entered into a 60-day forward contract to purchase 200,000 Swiss francs. The forward contract is not designated as a hedge. The rates were as follows:

December 1, 20X8 December 31, 20X8 January 30, 20X9

Spot Rate $ 0.89 0.91 0.92

Forward Rate $ 0.90 (60 days) 0.93 (30 days)

36) Based on the preceding information, the entries on December 31, 20X8 related to the forward contract include a: A) Credit to Foreign Currency Payable to Exchange Broker, $4,000.

B) Debit to Foreign Currency Receivable from Exchange Broker, $6,000.

C) Debit to Foreign Currency Receivable from Exchange Broker, $186,000.

D) Debit to Foreign Currency Transaction Gain, $4,000.

37) Based on the preceding information, the entries on January 30, 20X9 related to the forward contract include a: A) Debit to Dollars Payable to Exchange Broker, $180,000.

B) Credit to Cash, $184,000.

C) Credit to Premium on Forward Contract, $4,000.

D) Credit to Foreign Currency Receivable from Exchange Broker, $180,000.

15 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

38) Based on the preceding information, the entries on January 30, 20X9 related to the forward contract include a: A) Credit to Foreign Currency Units (SFr), $184,000.

B) Credit to Cash, $180,000.

C) Debit to Foreign Currency Transaction Loss, $4,000.

D) Debit to Dollars Payable to Exchange Broker, $184,000.

39) Based on the preceding information, the entries on January 30, 20X9 related to the forward contract include a: A) Debit to Dollars Payable to Exchange Broker, $184,000.

B) Credit to Foreign Currency Transaction Gain, $4,000.

C) Credit to Foreign Currency Receivable from Exchange Broker, $180,000.

D) Debit to Foreign Currency Units (SFr), $184,000.

Tinitoys, Inc., a domestic company, purchased inventory from a Brazilian company for 500,000 Brazilian reals (Br. reals) on May 1, 20X2. Payment is due on June 30, 20X2. On May 1, 20X2, Tinitoys also entered into a 60-day forward contract to purchase 500,000 Brazilian reals. The forward contract is not designated as a hedge. Tinitoys' fiscal year ends on May 31. The direct exchange rates were as follows:

May 1, 20X2 May 31, 20X2 June 30, 20X2

Spot Rate $ 0.523 $ 0.516 $ 0.508

Forward Rate $ 0.525 (60 days) $ 0.52 (30 days)

40) Based on the preceding information, the entries on May 31, 20X2, include a A) credit to Foreign Currency Payable to Exchange Broker, $3,500.

B) debit to Foreign Currency Transaction Loss, $3,500.

C) credit to Foreign Currency Receivable from Exchange Broker, $2,500.

D) credit to Foreign Currency Receivable from Exchange Broker, $260,000.

41) Based on the preceding information, the entries on June 30, 20X2, include a A) debit to Dollars Payable to Exchange Broker, $262,500.

B) credit to Cash, $254,000.

C) credit to Premium on Forward Contract, $6,000.

D) credit to Foreign Currency Receivable from Exchange Broker, $262,500.

42) Based on the preceding information, the entries on June 30, 20X2, include a A) debit to Foreign Currency Transaction Loss, $4,000.

B) credit to Foreign Currency Units (Br. reals), $262,500.

C) credit to Cash, $262,500.

D) debit to Dollars Payable to Exchange Broker, $254,000.

16 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

43) Based on the preceding information, the entries on June 30, 20X2, include a A) credit to Foreign Currency Transaction Gain, $6,000.

B) debit to Dollars Payable to Exchange Broker, $254,000.

C) debit to Foreign Currency Units (Br. reals), $254,000.

D) credit to Foreign Currency Receivable from Exchange Broker, $262,500.

On December 1, 20X8, Hedge Company entered into a 60-day speculative forward contract to sell 200,000 British pounds (£) at a forward rate of £1 = $1.78. On the same day it purchased a 60-day speculative forward contract to buy 100,000 euros (€) at a forward rate of €1 = $1.42.

The rates are as follows:

Date December 1, 20X8 December 31, 20X8 February 1, 20X9

Spot Rate £1 = $ 1.76 £1 = 1.73 £1 = 1.75

Forward Rate for Feb 1 $ 1.78 1.74

Spot Rate €1 = $ 1.40 €1 = 1.38 €1 = 1.41

Forward Rate for Feb 1 $ 1.42 1.40

Hedge had no other speculation transactions in 20X8 and 20X9. Ignore taxes.

44) Based on the preceding information, what is the effect of the British pound speculative contract on 20X8 net income?

A) $10,000 gain B) $6,000 gain C) $8,000 gain D) $2,000 loss 45) Based on the preceding information, what is the overall effect of speculation on 20X8 net income?

A) $4,000 gain B) $6,000 gain C) $8,000 loss D) $8,000 gain 46) Based on the preceding information, what is the effect of the euro speculative contract on 20X9 net income?

A) $4,000 loss B) $1,000 gain C) $8,000 gain D) $2,000 loss

17 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

47) Based on the preceding information, what is the overall effect of speculation on 20X9 net income?

A) $1,000 loss B) $6,000 gain C) $3,000 loss D) $8,000 gain 48) Based on the preceding information, what is the net gain or loss on the British pound speculative contract?

A) $8,000 gain B) $6,000 gain C) $3,000 loss D) $10,000 gain 49) Based on the preceding information, what is the net gain or loss on the euro speculative contract?

A) $8,000 gain B) $6,000 gain C) $3,000 loss D) $1,000 loss 50) Which of the following observations is true of forward contracts?

A) A substantial margin is required to initiate a contract.

B) They must be completed either with the underlying's future delivery or net cash settlement.

C) They cannot be customized for a specific amount at a specific date.

D) They are usually settled with a net cash amount prior to maturity date.

51) All of the following are true statements when measuring hedge effectiveness except: A) Effectiveness means there is an approximate offset with the range of 80% to 125% of the changes in the fair value of the cash flows.

B) Effectiveness means there is an approximate offset in fair value to the risk being hedged.

C) A company may elect to choose from several different measures for assessing hedge effectiveness.

D) Effectiveness must be assessed at least annually when the company reports their annual financial statements.

52) All of the following are management tools available for a U.S. company to hedge its net investment in a foreign affiliate except for: A) Forward exchange contracts B) Foreign currency commitments C) Intercompany financing arrangements including intercompany transactions D) None of the choices are correct.

18 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

The fair market value of a near-month call option with a strike price of $45 is $5, when the stock is trading at $48.

53) Based on the preceding information, which of the following is true of the intrinsic and time values associated with this option.

A) B) C) D)

Intrinsic Value $ 5 $ 0 $ 3 $ 2

Time Value $ 0 $ 5 $ 2 $ 3

A) Option A B) Option B C) Option C D) Option D 54) Based on the preceding information, the call option: A) has no intrinsic value currently.

B) is at the money.

C) is out of the money.

D) is in the money.

55) An investor purchases a put option with a strike price of $100 for $3. This option is considered "in the money" if the underlying is trading: A) below $100.

B) at $100.

C) above $100.

D) above $103.

56) Which of the following observations is true of futures contracts?

A) They are contracted through a dealer, usually a bank.

B) They are customized to meet contracting company's terms and needs.

C) Future contracts typically do not require a margin deposit.

D) Future contracts are traded on an exchange and acquired through an exchange broker.

19 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

57) Company X issues variable-rate debt but wishes to fix its interest rates because it believes the variable rate may increase. Company Y has a fixed-rate bond but is looking for a variable-rate interest because it assumes the interest rates may decrease. The two companies agree to exchange cash flows. Such an arrangement is called: A) a futures contract.

B) a forward contract.

C) a swap.

D) an option.

20 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Spiraling crude oil prices prompted AMAR Company to purchase call options on oil as a pricerisk-hedging device to hedge the expected increase in prices on an anticipated purchase of oil.

On November 30, 20X8, AMAR purchases call options for 20,000 barrels of oil at $100 per barrel at a premium of $4 per barrel, with a February 1, 20X9, call date. The following is the pricing information for the term of the call:

Date November 30, 20X8 December 31, 20X8 February 1, 20X9

Spot Price $ 100 105 110

Futures Price (for Feb 1, 20X9, delivery) $ 101 106

The information for the change in the fair value of the options follows: Date November 30, 20X8 December 31, 20X8 February 1, 20X9

Time Value $ 80,000 30,000 0

Intrinsic Value $ 0 100,000 200,000

Total Value $ 80,000 130,000 200,000

On February 1, 20X9, AMAR sells the options at their value on that date and acquires 20,000 barrels of oil at the spot price. On April 1, 20X9, AMAR sells the oil for $112 per barrel.

58) Based on the preceding information, which of the following adjusting entries would be required on December 31, 20X8?

A. Loss on Hedge Activity

30,000

Purchased Call Options B. Loss on Hedge Activity

30,000 50,000

Purchased Call Options C. Loss on Hedge Activity

50,000 80,000

Purchased Call Options D. Loss on Hedge Activity Purchased Call Options

80,000 100,000 100,000

A) Option A B) Option B C) Option C D) Option D 21 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

59) Based on the preceding information, in the entry to record the increase in the intrinsic value of the options on December 31, 20X8, A) Purchased Call Options will be credited for $100,000.

B) Purchased Call Options will be debited for $130,000.

C) Retained Earnings will be credited for $100,000.

D) Other Comprehensive Income will be credited for $100,000.

60) Based on the preceding information, which of the following entries will be required on February 1, 20X9?

A. Loss on Hedge Activity

80,000

Purchased Call Options B. Purchased Call Options

80,000 100,000

Other Comprehensive Income C. Cash

100,000 80,000

Purchased Call Options D. Oil Inventory Cash

80,000 2,000,000 2,000,000

A) Option A B) Option B C) Option C D) Option D

22 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

61) Based on the preceding information, the entries made on April 1, 20X9 will include: A) a debit to Other Comprehensive Income for $200,000.

B) a debit to Cost of Goods Sold for $2,240,000.

C) a credit to Oil Inventory for $2,240,000.

D) a credit to Cost of Goods Sold for $100,000.

On December 1, 20X8, Winston Corporation acquired 10 deep discount bonds from Linked Corporation at a cost of $400 per bond. Winston classifies them as available-for-sale securities.

On this same date, it decides to hedge against a possible decline in the value of the securities by purchasing, at a cost of $250, an at-the-money put option to sell the 10 bonds at $400 per bond.

The option expires on February 20, 20X9. Selected information concerning the fair values of the investment and the options follow:

December 1, 20X8 Linked Corporation Per Bond: Put Option (100 shares) Market Value Intrinsic Value Time Value

December 31, 20X8

February 20, 20X9

$ 400

?

?

$ 250 0

$ 400 ?

$ 400 400

$ 250

$ 100

?

Assume that Winston exercises the put option and sells Linked bonds on February 20, 20X9.

62) Based on the preceding information, what is the market price of Linked Corporation bonds on December 31, 20X8?

A) $400 B) $370 C) $360 D) $380 63) Based on the preceding information, what is the market price of Linked Corporation bonds on February 20, 20X9?

A) $350 B) $370 C) $360 D) $400

23 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

64) Based on the preceding information, the journal entry made on December 31, 20X8 to record the decrease in the time value of the options will include: A) a debit to Loss on Hedge Activity for $150.

B) a credit to Put Option for $300.

C) a debit to Loss on Hedge Activity for $300.

D) a credit to Put Option for $100.

65) Based on the preceding information, which of the following journal entries will be made on February 20, 20X9?

A. Cash

4,000

Available-for-Sale Securities B. Cash

4,000 4,000

Put Option

400

Available-for-Sale Securities C. Loss on Hedge Activity

3,600 150

Put Option D. Loss on Hedge Activity Available-for-Sale Securities

150 400 400

A) Option A B) Option B C) Option C D) Option D

24 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

66) Quantum Company imports goods from different countries. Some transactions are denominated in U.S. dollars and others in foreign currencies. A summary of accounts receivable and accounts payable on December 31, 20X8, before adjustments for the effects of changes in exchange rates during 20X8, follows:

Accounts receivable: In U.S. dollars In 60,000 Swiss francs (SFr) Accounts payable: In U.S. dollars In 10,000,000 yen (¥)

$ 100,000 $ 50,000 $ $

86,000 97,000

The spot rates on December 31, 20X8, were:

1 SFr 1 Yen

= $ 0.85 = $ 0.0095

The average exchange rates during the collection and payment period in 20X9 are:

1 SFr 1 Yen

= $ 0.90 = $ 0.0098

Required: 1. Prepare the adjusting entries on December 31, 20X8.

2. Record the collection of the accounts receivable and the payment of the accounts payable in 20X9.

3. What was the foreign currency gain or loss on the accounts receivable transaction denominated in SFr for the year ended December 31, 20X8? For the year ended December 31, 20X9? Overall for this transaction?

4. What was the foreign currency gain or loss on the accounts receivable transaction denominated in ¥? For the year ended December 31, 20X8? For the year ended December 31, 20X9? Overall for this transaction?

25 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

67) On December 1, 20X8, Secure Company bought a 90-day forward contract to purchase 200,000 euros (€) at a forward rate of €1 = $1.35 when the spot rate was $1.33. Other exchange rates were as follows:

December 31, 20X8 March 1, 20X9

Spot Rate $ 1.34 1.33

Forward Rate for March 1, 20X9 $ 1.36

Required: 1. Prepare all journal entries related to Secure Company's foreign currency speculation from December 1, 20X8, through March 1, 20X9, assuming the fiscal year ends on December 31, 20X8.

2. Did the company gain or lose on its purchase of the forward contract?

68) On December 1, 20X8, Denizen Corporation entered into a 120-day forward contract to purchase 200,000 Canadian dollars (C$). Denizen's fiscal year ends on December 31. The forward contract was to hedge a firm commitment agreement made on December 1, 20X8, to purchase electronic goods on January 30, with payment due on March 31, 20X8. The derivative is designated as a fair value hedge. The direct exchange rates follow:

December 1, 20X8 December 31, 20X8 January 30, 20X9 March 31, 20X9

Spot Rate 0.940 0.945 0.942 0.941

Forward Rate for March 1, 20X9 0.944 0.947 0.943

Required: Prepare all journal entries for Denizen Corporation.

26 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

69) On December 1, 20X8, Denizen Corporation entered into a 120-day forward contract to purchase 200,000 Canadian dollars (C$). Denizen's fiscal year ends on December 31. The forward contract was to hedge an anticipated purchase of electronic goods on January 30, 20X9.

The purchase took place on January 30, with payment due on March 31, 20X9. The derivative is designated as a cash flow hedge. The company uses the forward exchange rate to measure hedge effectiveness. The direct exchange rates follow:

December 1, 20X8 December 31, 20X8 January 30, 20X9 March 31, 20X9

Spot Rate 0.940 0.945 0.942 0.941

Forward Rate for March 1, 20X9 0.944 0.947 0.943

Required: Prepare all journal entries for Denizen Corporation.

27 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

70) On December 1, 20X8, Merry Corporation acquired 10 deep discount bonds of Venus Corporation at a cost of $600 per bond. Merry classifies them as available-for-sale securities. On this same date, it decides to hedge against a possible decline in the value of the securities by purchasing, at a cost of $400, an at-the-money put option to sell the 10 bonds at $600 per bond.

The option expires on February 20, 20X9 and is properly designated as a hedge at the time of purchase. Selected information concerning the fair values of the investment and the options follow:

Venus Corporation Per Share: Put Option (10 bonds) Market value Intrinsic value Time value

December 1, 20X8 $ 600

December 31, 20X8 $ 550

February 20, 20X9 $ 420

$ 400 0 $ 400

$ 750 500 $ 250

$ 1,800 1,800 0

Assume that Merry exercises the put option and sells Venus shares on February 20, 20X9.

Required: 1. Prepare the entries required on December 1, 20X8, to record the purchase of the Venus bonds and the put options.

2. Prepare the entries required on December 31, 20X8, to record the change in intrinsic value and time value of the options, as well as the revaluation of the available-for-sale securities.

3. Prepare the entries required on February 20, 20X8, to record the exercise of the put option and the sale of the securities at that date.

28 Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Advanced Financial Accounting, 12e (Christensen) Chapter 12 Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity Statements 1) All of the following are benefits the U.S. would gain from the adoption of globally consistent accounting standards except for: A) Reduction in reporting costs as the need for multiple sets of financial statements decreases.

B) Increased quality of information available to investors.

C) Continued expansion of capital markets across national borders, facilitating more efficient use of global capital.

D) Nearly seamless transition with minimal expenses related to corporate governance considerations.

2) Which of the following statements is true regarding the SEC's timeline for convergence?

A) The SEC has no immediate plans to converge GAAP reporting with IFRS standards.

B) The SEC has a plan in place to allow firms to begin filing in the United States based on IFRS during the next several years.

C) The SEC has a plan in place to allow companies to choose to file statements under GAAP reporting or IFRS standards indefinitely.

D) The SEC currently allows domestic companies to choose to file financial statements under either GAAP or IFRS reporting standards.

3) All of the following describe the International Accounting Standard Board (IASB) except for: A) The IASB is a privately funded accounting standards-setting body based in London.

B) The mission of the IASB is to develop a single set of high-quality, understandable and enforceable global accounting standards.

C) Board members of the IASB come from diverse geographical countries that have adopted IFRS. D) IASB members serve a five-year term subject to one reappointment.

4) Which of the following defines a foreign-based entity that uses a functional currency different from the recording currency?

I. A U.S. subsidiary in Britain maintains its accounting records in pounds sterling, with the majority of its transactions denominated in pounds sterling.

II. A U.S. subsidiary in Peru conducts virtually all of its business in Latin America, records transactions in the respective local currencies, and uses the U.S. dollar as its major currency.

A) I. B) II. C) Both I and II. D) Neither I nor II.

5) If the restatement method for a foreign subsidiary involves remeasuring from the recording currency into the functional currency, then translating from functional currency to U.S. dollars, the functional currency of the subsidiary is: I. the U.S. dollar.

II. the recording currency unit.

III. a third country's currency.

A) I B) III C) II D) Either I or II 6) In cases of operations located in highly inflationary economies: A) The reporting currency of the U.S. parent—the U.S. dollar—should be used as the foreign entity's functional currency.

B) The foreign currency should be used as the functional currency with a footnote to the financials displaying what the earnings would have been using the U.S. dollar as the functional currency.

C) The foreign currency should be used as the functional currency with a single line item— foreign translation—reporting the adjustment using the U.S. dollar as the functional currency.

D) None of the choices are correct.

The balance in Newsprint Corp.'s foreign exchange loss account was $10,000 on December 31, 20X8, before any necessary year-end adjustment relating to the following: (1) Newsprint had a $15,000 debit resulting from the restatement in dollars of the accounts of its wholly owned foreign subsidiary for the year ended December 31, 20X8.

(2) Newsprint had an account payable to an unrelated foreign supplier, payable in the supplier's foreign currency unit on January 15, 20X9. The U.S. dollar—equivalent of the payable was $50,000 on the December 1, 20X8, invoice date and $53,000 on December 31, 20X8.

7) Based on the information provided, in Newsprint's 20X8 consolidated income statement, what amount should be included as foreign exchange loss in computing net income, if the supplier's foreign currency is the functional currency and the translation method is appropriate?

A) $28,000 B) $13,000 C) $25,000 D) $8,000

8) Based on the information provided, in Newsprint's 20X8 consolidated income statement, what amount should be included as foreign exchange loss in computing net income, if the U.S. dollar is the functional currency and the remeasurement method is appropriate?

A) $15,000 B) $10,000 C) $25,000 D) $28,000 9) Infinity Corporation acquired 80 percent of the common stock of an Egyptian company on January 1, 20X8. The goodwill associated with this acquisition was $18,350. Exchange rates at various dates during 20X8 follow:

January 1, 20X8 December 31, 20X8 Average for 20X8

1 E£ 1 E£ 1 E£

= = =

$ 0.1835 0.1850 0.1840

Goodwill suffered an impairment of 20 percent during the year. If the functional currency is the Egyptian Pound, how much goodwill impairment loss should be reported on Infinity's consolidated statement of income for 20X8?

A) $3,670 B) $3,700 C) $3,680 D) $3,690 10) Barcode Corporation acquired 70% of the common stock of a Russian company on January 1, 20X6. The goodwill associated with this acquisition was $12,520. Exchange rates at various dates during 20X6 follow: January 1, 20X6 December 31, 20X6 Average for 20X6

1 ruble 1 ruble 1 ruble

= = =

$ 0.0313 $ 0.0308 $ 0.031

Goodwill suffered an impairment of 25 percent during the year. If the functional currency is the Russian ruble, how much goodwill impairment loss should be reported on Barcode's consolidated statement of income for 20X6?

A) $3,130 B) $3,100 C) $3,090 D) $3,080

11) Infinity Corporation acquired 80 percent of the common stock of an Egyptian company on January 1, 20X8. The goodwill associated with this acquisition was $18,350. Exchange rates at various dates during 20X8 follow:

January 1, 20X8 December 31, 20X8 Average for 20X8

1 E£ 1 E£ 1 E£

= = =

$

0.1835 0.1850 0.1840

Goodwill suffered an impairment of 20 percent during the year. If the functional currency is the U.S. dollar, how much goodwill impairment loss should be reported on Infinity's consolidated statement of income for 20X8?

A) $3,680 B) $3,670 C) $3,690 D) $3,700 12) Barcode Corporation acquired 70% of the common stock of a Russian company on January 1, 20X6. The goodwill associated with this acquisition was $12,520. Exchange rates at various dates during 20X6 follow: January 1, 20X6 December 31, 20X6 Average for 20X6

1 ruble 1 ruble 1 ruble

= = =

$ 0.0313 $ 0.0308 $ 0.031

Goodwill suffered an impairment of 25 percent during the year. If the functional currency is the U.S. dollar, how much goodwill impairment loss should be reported on Barcode's consolidated statement of income for 20X6?

A) $3,080 B) $3,090 C) $3,100 D) $3,130

13) Simon Company has two foreign subsidiaries. One is located in France, the other in England.

Simon has determined the U.S. dollar is the functional currency for the French subsidiary, while the British pound is the functional currency for the English subsidiary. Both subsidiaries maintain their books and records in their respective local currencies. What methods will Simon use to convert each of the subsidiary's financial statements into U.S. dollars?

English Subsidiary's Financial Statements

French Subsidiary's Financial Statements

A)

Translation

Translation

B)

Remeasurement

Remeasurement

C)

Remeasurement

Translation

D)

Translation

Remeasurement

A) Option A B) Option B C) Option C D) Option D 14) When the local currency of a foreign subsidiary is the functional currency, the foreign subsidiary's inventory carried at cost would be converted to U.S. dollars by: A) translation using historical exchange rates.

B) remeasurement using historical exchange rates.

C) remeasurement using the current exchange rate.

D) translation using the current exchange rate.

15) When the local currency of a foreign subsidiary is the functional currency, the foreign subsidiary's income statement accounts would be converted to U.S. dollars by: A) translation using historical exchange rates.

B) remeasurement using current exchange rates at the time of statement preparation.

C) translation using average exchange rate for the period.

D) remeasurement using the current exchange rate at the time of statement preparation.

16) If the U.S. dollar is the currency in which the foreign affiliate's books and records are maintained, and the U.S. dollar is also the functional currency, A) the translation method should be used for restatement.

B) the remeasurement method should be used for restatement.

C) either translation or remeasurement could be used for restatement.

D) no restatement is required.

17) Under the temporal method, which of the following is usually used to translate monetary amounts to the functional currency?

I. The current exchange rate II. The historical exchange rate III. Average exchange rate A) I B) III C) II D) Either I or II 18) All of the following stockholders' equity accounts of a foreign subsidiary are translated at historical exchange rates except: A) retained earnings.

B) common stock.

C) additional paid-in capital.

D) preferred stock.

19) Dividends of a foreign subsidiary are translated at: A) the average exchange rate for the year.

B) the exchange rate on the date of declaration.

C) the current exchange rate on the date of preparation of the financial statement.

D) the exchange rate on the record date.

20) If the functional currency is the local currency of a foreign subsidiary, what exchange rates should be used to translate the items below, assuming the foreign subsidiary is in a country which has not experienced hyperinflation over three years?

Equipment

Inventories

Depreciation Expense—Equipment

A)

Current Rate

Current Rate

Average Rate

B)

Historical Rate

Current Rate

Historical Rate

C)

Current Rate

Current Rate

Historical Rate

D)

Historical Rate

Average Rate

Average Rate

A) Option A B) Option B C) Option C D) Option D

21) If the functional currency is the local currency of a foreign subsidiary, what exchange rates should be used to translate the items below, assuming the foreign subsidiary is in a country which has not experienced hyperinflation over three years?

Common Stock

Premium on Bonds Payable

Sales

A)

Current Rate

Historical Rate

Average Rate

B)

Historical Rate

Current Rate

Average Rate

C)

Historical Rate

Historical Rate

Current Rate

D)

Current Rate

Current Rate

Current Rate

A) Option A B) Option B C) Option C D) Option D 22) Which combination of accounts and exchange rates is correct for the translation of a foreign entity's financial statements from the functional currency to U.S. dollars?

Exchange Rates

Accounts

A) Current

Salary Expense, Sales, Depreciation Expense

B) Current

Accounts Payable, Inventories, Investments

C) Historical

Common Stock, Dividends Payable, Retained Earnings

D) Weighted Average Retained Earnings, Land, Inventories A) Option A B) Option B C) Option C D) Option D

23) The assets listed below of a foreign subsidiary have been converted to U.S. dollars at both current and historical exchange rates. Assuming that the recording currency of the foreign subsidiary is the functional currency, what total amount should appear for these assets on the U.S. company's consolidated balance sheet?

Asset Prepaid Insurance Buildings (Net) Inventories, at Cost Investments, at Cost Total

Historical Rates $ 60,000 480,000 300,000 120,000 $ 960,000

Current Rate $ 48,000 240,000 288,000 60,000 $ 636,000

A) $636,000 B) $648,000 C) $708,000 D) $960,000 24) Dover Company owns 90% of the capital stock of a foreign subsidiary located in Italy.

Dover's accountant has just translated the accounts of the foreign subsidiary and determined that a debit translation adjustment of $80,000 exists. If Dover uses the fully adjusted equity method for its investment, what entry should Dover record in order to recognize the translation adjustment?

A. Investment in Italian Subsidiary Other Comprehensive Income—Translation Adjustment

72,000

B. Other Comprehensive Income—Translation Adjustment Investment in Italian Subsidiary

80,000

C. Other Comprehensive Income—Translation Adjustment Investment in Italian Subsidiary

72,000

D. No entry required A) Option A B) Option B C) Option C D) Option D

72,000

80,000

72,000

25) For each of the items listed below, when the foreign currency strengthened relative to the U.S. dollar during the year, what is the effect on the cumulative translation adjustment (assuming a credit balance at the beginning of the year).

A) B) C) D)

Net Income Decrease Increase Decrease Increase

Dividends Declared Increase Decrease Decrease Increase

A) Option A B) Option B C) Option C D) Option D 26) The British subsidiary of a U.S. company reported cost of goods sold of 75,000 pounds (sterling) for the current year ended December 31. The beginning inventory was 10,000 pounds, and the ending inventory was 15,000 pounds. Spot rates for various dates are as follows: Date beginning inventory was acquired Rate at beginning of the year Weighted average rate for the year Date ending inventory was acquired

$ 1.60 = $ 1.58 = $ 1.50 = $ 1.45 =

1 pound 1 pound 1 pound 1 pound

Assuming the pound is the functional currency of the British subsidiary, the translated amount of cost of goods sold that should appear in the consolidated income statement is: A) $108,750.

B) $112,500.

C) $114,300.

D) $125,700.

27) The Canadian subsidiary of a U.S. company reported cost of goods sold of 50,000 C$, for the current year ended December 31. The beginning inventory was 15,000 C$, and the ending inventory was 10,000 C$. Spot rates for various dates are as follows:

Date beginning inventory was acquired Rate at beginning of the year Weighted average rate for the year Date ending inventory was acquired

$ 1.08 = 1C$ $ 1.10 = 1C$ $ 1.12 = 1C$ $ 1.13 = 1C$

Assuming the Canadian dollar is the functional currency of the Canadian subsidiary, the translated amount of cost of goods sold that should appear in the consolidated income statement is A) $50,000.

B) $55,300.

C) $56,000.

D) $56,500.

28) Seattle, Inc. owns an 80 percent interest in a Portuguese subsidiary. For 20X8, Seattle reported income from operations of $2.0 million. The Portuguese company's income from operations, after foreign currency translation, was $1.1 million. The foreign currency translation adjustment was $120,000 (credit). Consolidated net income and consolidated comprehensive income for the year are:

A) B) C) D)

A) Option A B) Option B C) Option C D) Option D

Consolidated Net Income $ 3,100,000 $ 2,980,000 $ 3,004,000 $ 2,880,000

Consolidated Comprehensive Income $ 3,196,000 $ 3,076,000 $ 3,100,000 $ 2,976,000

On October 15, 20X1, Planet Company sold inventory to Stars Corporation, its Mexican subsidiary. The goods cost Planet $2,700 and were sold to Stars for $3,500, payable in Mexican pesos. The goods are still on hand at the end of the year on December 31. The Mexican peso is the functional currency of Stars. The exchange rates follow: October 15 December 31

1 peso 1 peso

= =

$ 0.07 $ 0.08

29) Based on the preceding information, at what dollar amount is the ending inventory shown in the subsidiary's trial balance column of the consolidation worksheet?

A) $3,250 B) $3,500 C) $3,750 D) $4,000 30) Based on the preceding information, what amount of unrealized intercompany gross profit is eliminated in preparing the consolidated financial statements for the year?

A) $0 B) $800 C) $1,000 D) $1,300 31) Based on the preceding information, at what amount is the inventory shown on the consolidated balance sheet for the year?

A) $2,700 B) $3,200 C) $3,500 D) $4,000 32) Park Co.'s wholly-owned subsidiary, Schnell Corp., maintains its accounting records in German marks. Because all of Schnell's branch offices are in Switzerland, its functional currency is the Swiss franc. Remeasurement of Schnell's 20X1 financial statements resulted in a $7,600 gain, and translation of its financial statements resulted in an $8,100 gain. What amount should Park report as a foreign exchange gain in its income statement for the year ended December 31, 20X1?

A) $15,700 B) $0 C) $8,100 D) $7,600

33) Parent Company's wholly-owned subsidiary, Son Corporation, maintains its accounting records in Danish krone. However, because all of Son's branch offices are in Sweden, its functional currency is the Swedish krona. Remeasurement of Son's 20X3 financial statements resulted in a $3,200 loss, and translation of its financial statement resulted in a $2,600 loss. What amount should Parent report as a loss in its income statement for the year ended December 31, 20X3?

A) $0 B) $2,600 C) $3,200 D) $5,800

On January 2, 20X8, Polaris Company acquired a 100% interest in the capital stock of Ski Company for $3,100,000. Any excess cost over book value is attributable to a patent with a 10year remaining life. At the date of acquisition, Ski's balance sheet contained the following information:

Cash Receivables (net) Inventories (FIFO) Plant and Equipment (net) Total Accounts Payable Capital Stock Retained Earnings Total

Foreign Currency Units (FCU) 40,000 150,000 500,000 1,500,000 2,190,000 200,000 600,000 1,390,000 2,190,000

Ski's income statement for 20X8 is as follows: Revenues from Sales Cost of Goods Sold Gross Margin Operating Expenses (exclusive of depreciation) Depreciation Expense Income Taxes Net Income

Foreign Currency Units (FCU) 1,010,000 (590,000) 420,000 (120,000) (200,000) (40,000) 60,000

The balance sheet of Ski at December 31, 20X8, is as follows:

Cash Receivables (net) Inventories (FIFO) Plant and Equipment (net) Total Accounts Payable Capital Stock Retained Earnings Total

Foreign Currency Units (FCU) 180,000 210,000 520,000 1,300,000 2,210,000 180,000 600,000 1,430,000 2,210,000

Ski declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at various dates

for 20X8 follow:

January 2 October 1 December 31 Weighted Average

1 FCU 1 FCU 1 FCU 1 FCU

= = = =

$ $ $ $

1.50 1.60 1.70 1.55

Assume Ski's revenues, purchases, operating expenses, depreciation expense, and income taxes were incurred evenly throughout 20X8.

34) Refer to the above information. Assuming the FCU of the country in which Ski Company is located is the functional currency, what are the translated amounts for the items below in U.S. dollars?

A) B) C) D)

Net Income $ 96,000 $ 102,000 $ 93,000 $ 90,000

Retained Earnings at 12/31/X8 $ 2,145,000 $ 2,155,500 $ 2,146,000 $ 2,143,500

A) Option A B) Option B C) Option C D) Option D 35) Refer to the above information. Assuming Ski's FCU is the functional currency, what is the net translation adjustment that result from translating Ski's trial balance into U.S. dollars at December 31, 20X8?

A) $396,500 debit B) $285,000 credit C) $405,000 credit D) $411,000 credit 36) Refer to the above information. Assuming Ski's FCU is the functional currency, what is the amount of patent amortization for 20X8 that results from Polaris's acquisition of Ski's stock on January 2, 20X8. Round your answer to the nearest dollar.

A) $11,500 B) $11,884 C) $7,667 D) $9,394 37) Refer to the above information. Assuming Ski's FCU is the functional currency, what is the amount of translation adjustment that appears on Polaris's consolidated financial statements at December 31, 20X8?

A) $419,184 credit

B) $416,884 credit C) $405,884 debit D) $398,500 credit 38) Refer to the above information. Assuming Ski's FCU is the functional currency, what is the balance in Polaris's investment in foreign subsidiary account at December 31, 2008?

A) $3,216,500 B) $3,560,000 C) $3,568,300 D) $3,577,694 39) Refer to the above information. Assuming the U.S. dollar is the functional currency, what is Polaris's remeasurement gain (loss) for 20X8? (Assume the ending inventory was acquired on December 31, 20X8.)

A) $31,000 gain B) $36,500 loss C) $22,000 gain D) $32,000 gain 40) Refer to the above information. Assuming the U.S. dollar is the functional currency, what is the amount of Ski's cost of goods sold remeasured in U.S. dollars?

A) $811,500 B) $843,500 C) $884,500 D) $799,500 41) Refer to the above information. Assuming the U.S. dollar is the functional currency, what is the amount of patent amortization for 20X8 that results from Polaris's acquisition of Ski's stock on January 2, 20X8?

A) $11,884 B) $11,770 C) $12,550 D) $11,500 42) Refer to the above information. Assuming the U.S. dollar is the functional currency, what is Ski's net income for 20X8 in U.S. dollars (include the remeasurement gain or loss in Ski's net income)?

A) $238,000 B) $228,000 C) $219,500 D) $202,000 43) Refer to the above information. Assuming the U.S. dollar is the functional currency, what is the balance in Polaris's investment in foreign subsidiary account at December 31, 2008?

A) $3,303,400 B) $3,294,500 C) $3,323,400 D) $3,314,500

Michigan-based Leo Corporation acquired 100 percent of the common stock of a British company on January 1, 20X8, for $1,100,000. The British subsidiary's net assets amounted to 500,000 pounds on the date of acquisition. On January 1, 20X8, the book values of its identifiable assets and liabilities approximated their fair values. As a result of an analysis of functional currency indicators, Leo determined that the British pound was the functional currency. On December 31, 20X8, the British subsidiary's adjusted trial balance, translated into U.S. dollars, contained $17,000 more debits than credits. The British subsidiary reported income of 33,000 pounds for 20X8 and paid a cash dividend of 8,000 pounds on October 25, 20X8.

Included on the British subsidiary's income statement was depreciation expense of 3,500 pounds.

Leo uses the fully adjusted equity method of accounting for its investment in the British subsidiary and determined that goodwill in the first year had an impairment loss of 25 percent of its initial amount. Exchange rates at various dates during 20X8 follow:

January 1 October 25 December 31 Average for 20X8

1£ 1£ 1£ 1£

= $ = = =

2.10 2.25 2.20 2.21

44) Based on the preceding information, what amount should Leo record as "income from subsidiary" based on the British subsidiary's reported net income?

A) $72,930 B) $52,500 C) $72,600 D) $69,300 45) Based on the preceding information, the receipt of the dividend will result in a credit to the investment account for: A) $16,800 B) $17,680 C) $18,000 D) $17,600

46) Based on the preceding information, on Leo's consolidated balance sheet at December 31, 20X8, what amount should be reported for the goodwill acquired on January 1, 20X8?

A) $36,845 B) $39,286 C) $36,905 D) $36,607 47) Based on the preceding information, in the stockholders' equity section of Leo's consolidated balance sheet at December 31, 20X8, Leo should report the translation adjustment as a component of other comprehensive income of: A) $19,440 B) $17,000 C) $18,786 D) $19,380 48) Nichols Company owns 90% of the capital stock of a foreign subsidiary located in Ireland.

As a result of translating the subsidiary's accounts, a debit of $160,000 was needed in the translation adjustments account so that the foreign subsidiary's debits and credits were equal in U.S. dollars. How should Nichols report its translation adjustments on its consolidated financial statements?

A) As a $144,000 increase in the stockholders' equity section of the balance sheet.

B) As a $144,000 reduction in consolidated comprehensive net income.

C) As a $160,000 debit in stockholders' equity section of the balance sheet.

D) As a $160,000 reduction in consolidated comprehensive net income.

49) Elan, a U.S. corporation, completed the December 31, 20X8, foreign currency translation of its 70 percent owned Swiss subsidiary's trial balance using the current rate method. The translation resulted in a debit adjustment of $25,000. The subsidiary had reported net income of 800,000 Swiss francs for 20X8 and paid dividends of 50,000 Swiss francs on September 1, 20X8. The translation rates for the year were:

January 1, 20X8 September 1, 20X8 Average for 20X8

$ 0.55 = $ 0.59 = $ 0.57 =

1 franc 1 franc 1 franc

The January 1 balance of the Investment in the Swiss subsidiary account was $1,600,000. Elan acquired its interest in the Swiss subsidiary at book value with no differential or goodwill recorded at acquisition.

Elan's Investment in Swiss subsidiary account at December 31, 20X8, is: A) $1,881,050.

B) $1,916,050.

C) $1,923,950.

D) $2,051,500.

On January 1, 20X8, Pullman Corporation acquired 75 percent interest in Steamship Company

for $300,000. Steamship is a Norwegian company. The recording currency is the Norwegian kroner (NKr). The acquisition resulted in an excess of cost-over-book value of $25,000 due solely to a patent having a remaining life of 5 years. Pullman uses the fully adjusted equity method to account for its investment. Steamship's December 31, 20X8, trial balance has been translated into U.S. dollars, requiring a translation adjustment debit of $8,000. Steamship's net income translated into U.S. dollars is $35,000. It declared and paid an NKr 20,000 dividend on June 1, 20X8. Relevant exchange rates are as follows:

January 1, 20X8 June 1, 20X8 December 31, 20X8 Average for 20X8

NKrl NKrl NKrl NKrl

= = = =

$ 0.20 $ 0.23 $ 0.24 $ 0.22

Assume the kroner is the functional currency.

50) Based on the preceding information, in the journal entry to record the receipt of dividend from Steamship, A) Investment in Steamship Company will be credited for $3,450.

B) Cash will be debited for $3,300.

C) Investment in Steamship Company will be credited for $4,000.

D) Cash will be debited for $3,600.

51) Based on the preceding information, in the journal entry to record parent's share of subsidiary's translation adjustment: A) Other Comprehensive Income—Translation Adjustment will be debited for $8,000.

B) Other Comprehensive Income—Translation Adjustment will be credited for $6,000.

C) Investment in Steamship Company will be credited for $6,000.

D) Investment in Steamship Company will be debited for $8,000.

52) Based on the preceding information, what amount of translation adjustment is required for increase in differential?

A) $3,000 B) $5,500 C) $4,500 D) $5,000 53) Based on the preceding information, in the journal entry to record the amortization of the patent for 20X8 on the parent's books, Investment in Steamship Company will be debited for: A) $5,000 B) $5,500 C) $4,500 D) $3,000 54) Which combination of accounts and exchange rates is correct for the remeasurement of a foreign entity's financial statements from its recording currency to U.S. dollars?

Exchange Rates Accounts A) Historical B)

Weighted Average

Property, Plant & Equipment, Prepaid Insurance, Accounts Payable Revenue, Depreciation Expense, Cost of Goods Sold

C) Current

Accounts Receivable, Bonds Payable, Accounts Payable

D) Historical

Goodwill, Inventories Carried at Cost, Accounts Receivable

A) Option A B) Option B C) Option C D) Option D Stack Company is a subsidiary of Pile Company and is located in Valparaíso, Chile, where the currency is the Chilean Peso. Data on Stack's inventory and purchases are as follows:

Inventory, January 1, 20X8 Purchases during 20X8 Inventory, December 31, 20X8

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

The beginning inventory was acquired during the fourth quarter of 20X7, and the ending inventory was acquired during the fourth quarter of 20X8. Purchases were made evenly over the year. Exchange rates were as follows: Fourth quarter of 20X7 January 1, 20X8 Average during 20X8 Fourth quarter of 20X8 December 31, 20X8

1 Peso 1 Peso 1 Peso 1 Peso 1 Peso

= = = = =

$ $ $ $ $

0.00148 0.00152 0.00160 0.00162 0.00165

55) Refer the information provided above. Assuming the U.S. dollar is the functional currency, what is the amount of Stack's cost of goods sold remeasured in U.S. dollars?

A) $1,680 B) $1,712 C) $1,700 D) $1,692 56) Based on the preceding information, the translation of cost of goods sold for 20X8, assuming that the Chilean peso is the functional currency is: A) $1,700.

B) $1,760.

C) $1,680.

D) $1,692.

South Company is a subsidiary of Pole Company and is located in Malaysia, where the currency is the ringgit. Data on South's inventory and purchases are as follows:

Inventory, January 1, 20X4 Purchases during 20X4 Inventory, December 31, 20X4

30,000 ringgits 80,000 ringgits 20,000 ringgits

The beginning inventory was acquired during the fourth quarter of 20X3, and the ending inventory was acquired during the fourth quarter of 20X4. Purchases were made evenly during 20X4. Exchange rates were as follows:

Fourth quarter of 20X3 January 1, 20X4 Average during 20X4 Fourth quarter of 20X4 December 31, 20X4

1 ringgit 1 ringgit 1 ringgit 1 ringgit 1 ringgit

= = = = =

$ 0.319 $ 0.318 $ 0.315 $ 0.313 $ 0.31

57) Based on the preceding information and assuming the U.S. dollar is the functional currency, what is the amount of South's costs of goods sold remeasured in U.S. dollars?

A) $28,480 B) $28,510 C) $28,540 D) $28,570 58) Based on the preceding information, the translation of cost of goods sold for 20X4, assuming that the Malaysian ringgit is the function currency is A) $28,350.

B) $28,480.

C) $28,540.

D) $28,470.

59) The British subsidiary of a U.S. company reported cost of goods sold of 75,000 pounds (sterling) for the current year ended December 31. The beginning inventory was 10,000 pounds, and the ending inventory was 15,000 pounds. Spot rates for various dates are as follows:

Date beginning inventory was acquired Rate at beginning of the year Weighted average rate for the year Date ending inventory was acquired

$ 1.60 = $ 1.58 = $ 1.50 = $ 1.45 =

1 pound 1 pound 1 pound 1 pound

Assuming the dollar is the functional currency of the British subsidiary, the remeasured amount of cost of goods sold that should appear in the consolidated income statement is: A) $108,750.

B) $112,500.

C) $114,250.

D) $125,700.

60) The Canadian subsidiary of a U.S. company reported cost of goods sold of 50,000 C$, for the current year ended December 31. The beginning inventory was 15,000 C$, and the ending inventory was 10,000 C$. Spot rates for various dates are as follows: Date beginning inventory was acquired Rate at beginning of the year Weighted average rate for the year Date ending inventory was acquired

$ 1.08 $ 1.10 $ 1.12 $ 1.13

= 1C$ = 1C$ = 1C$ = 1C$

Assuming the U.S. dollar is the functional currency of the Canadian subsidiary, the remeasured amount of cost of goods sold that should appear in the consolidated income statement is A) $50,000.

B) $55,300.

C) $56,000.

D) $56,500.

61) The gain or loss on the effective portion of a U.S. parent company's hedge of a net investment in a foreign entity should be treated as: A) an adjustment to the retained earnings account in the stockholders' equity section of its balance sheet.

B) other comprehensive income.

C) a translation gain or loss in the computation of net income for the reporting period.

D) an adjustment to a valuation account in the asset section of its balance sheet.

62) Which of the following describes a situation when a parent company would not consolidate a foreign subsidiary?

A) Restrictions on foreign exchange in the foreign country.

B) Restrictions on transfers of property in the foreign country.

C) Other governmentally imposed uncertainties.

D) All of the choices are correct.

63) Briefly explain the following terms associated with accounting for foreign entities: a) Functional Currency b) Translation c) Remeasurement 64) Saltaire Co. is a French company located in Paris. Primer Corp., located in New York City, acquires Saltaire Co. Saltaire has the Euro as its recording currency and the Swiss Franc as its functional currency. Primer has the U.S. dollar as its recording currency and the U.S. dollar as its functional currency.

Required: a) The year-end consolidated financial statements will be prepared in which currency? b) Explain which method is appropriate to use to use at year-end: Translation or Remeasurement?

65) Prepare a schedule providing a proof of the translation adjustment using the information provided below.

Exchange Rates Accounts Property, Plant & Equipment, Prepaid Insurance, Accounts Historical Payable B) Weighted Average Revenue, Depreciation Expense, Cost of Goods Sold C) Current Accounts Receivable, Bonds Payable, Accounts Payable D) Historical Goodwill, Inventories Carried at Cost, Accounts Receivable A)

66) On January 1, 20X8, Pace Company acquired all of the outstanding stock of Spin PLC, a British Company, for $350,000. Spin's net assets on the date of acquisition were 250,000 pounds (£). On January 1, 20X8, the book and fair values of the Spin's identifiable assets and liabilities approximated their fair values except for property, plant, and equipment and trademarks. The fair value of Spin's property, plant, and equipment exceeded its book value by $25,000. The remaining useful life of Spin's equipment at January 1, 20X8, was 10 years. The remainder of the differential was attributable to a trademark having an estimated useful life of 5 years. Spin's trial balance on December 31, 20X8, in pounds, follows:

Cash Accounts Receivable (net) Inventory Property, Plant, and Equipment Accumulated Depreciation Accounts Payable Notes Payable Common Stock Retained Earnings Sales Cost of Goods Sold Operating Expenses Depreciation Expense Dividends Paid Total

£

Debits 70,000 100,000 120,000 330,000

Credits

£ 120,000 110,000 90,000 100,000 150,000 420,000 270,000 60,000 30,000 10,000 £ 990,000

£ 990,000

Additional Information 1. Spin uses the FIFO method for its inventory. The beginning inventory was acquired on December 31, 20X7, and ending inventory was acquired on December 26, 20X8. Purchases of £300,000 were made evenly throughout 20X8.

2. Spin acquired all of its property, plant, and equipment on March 1, 20X6, and uses straightline depreciation.

3. Spin's sales were made evenly throughout 20X8, and its operating expenses were incurred evenly throughout 20X8.

4. The dividends were declared and paid on November 1, 20X8.

5. Pace's income from its own operations was $150,000 for 20X8, and its total stockholders' equity on January 1, 20X8, was $1,000,000. Pace declared $50,000 of dividends during 20X8.

6. Exchange rates were as follows:

March 1, 20X6 December 31, 20X7 January 1, 20X8 November 1, 20X8 December 26, 20X8 December 31, 20X8 Average for 20X8

1£ = 1£ = 1£ = 1£ = 1£ = 1£ = 1£ =

$ 1.20 $ 1.25 $ 1.25 $ 1.26 $ 1.31 $ 1.35 $ 1.30

Required: 1) Prepare a schedule translating the trial balance from British pounds into U.S. dollars. Assume the pound is the functional currency.

2) Assume that Pace uses the fully adjusted equity method. Record all journal entries that relate to its investment in the British subsidiary during 20X8. Provide the necessary documentation and support for the amounts in the journal entries, including a schedule of the translation adjustment related to the differential.

3) Prepare a schedule that determines Pace's consolidated comprehensive income for 20X8.

67) On January 1, 20X8, Pace Company acquired all of the outstanding stock of Spin PLC, a British Company, for $350,000. Spin's net assets on the date of acquisition were 250,000 pounds (£). On January 1, 20X8, the book and fair values of the Spin's identifiable assets and liabilities approximated their fair values except for property, plant, and equipment and trademarks. The fair value of Spin's property, plant, and equipment exceeded its book value by $25,000. The remaining useful life of Spin's equipment at January 1, 20X8, was 10 years. The remainder of the differential was attributable to a trademark having an estimated useful life of 5 years. Spin's trial balance on December 31, 20X8, in pounds, follows:

Cash Accounts Receivable (net) Inventory Property, Plant, and Equipment Accumulated Depreciation Accounts Payable Notes Payable Common Stock Retained Earnings Sales Cost of Goods Sold Operating Expenses Depreciation Expense Dividends Paid Total

£

Debits 70,000 100,000 120,000 330,000

Credits

£ 120,000 110,000 90,000 100,000 150,000 420,000 270,000 60,000 30,000 10,000 £ 990,000

£ 990,000

Additional Information 1. Spin uses the FIFO method for its inventory. The beginning inventory was acquired on December 31, 20X7, and ending inventory was acquired on December 26, 20X8. Purchases of £300,000 were made evenly throughout 20X8.

2. Spin acquired all of its property, plant, and equipment on March 1, 20X6, and uses straightline depreciation.

3. Spin's sales were made evenly throughout 20X8, and its operating expenses were incurred evenly throughout 20X8.

4. The dividends were declared and paid on November 1, 20X8.

5. Pace's income from its own operations was $150,000 for 20X8, and its total stockholders' equity on January 1, 20X8, was $1,000,000. Pace declared $50,000 of dividends during 20X8.

6. Exchange rates were as follows: March 1, 20X6 December 31, 20X7 January 1, 20X8 November 1, 20X8 December 26, 20X8 December 31, 20X8 Average for 20X8

1£ 1£ 1£ 1£ 1£ 1£ 1£

= = = = = = =

$ 1.20 $ 1.25 $ 1.25 $ 1.26 $ 1.31 $ 1.35 $ 1.30

Assume the U.S. dollar is the functional currency, not the pound. Prepare a schedule providing a proof of the remeasurement gain or loss. Assume that the British subsidiary had the following monetary assets and liabilities at January 1, 20X8: Monetary Assets Cash Accounts Receivable (net)

£

40,000 70,000

Monetary Liabilities Accounts Payable Notes Payable

£ 105,000 85,000

68) On January 1, 20X8, Pace Company acquired all of the outstanding stock of Spin PLC, a British Company, for $350,000. Spin's net assets on the date of acquisition were 250,000 pounds (£). On January 1, 20X8, the book and fair values of the Spin's identifiable assets and liabilities approximated their fair values except for property, plant, and equipment and trademarks. The fair value of Spin's property, plant, and equipment exceeded its book value by $25,000. The remaining useful life of Spin's equipment at January 1, 20X8, was 10 years. The remainder of the differential was attributable to a trademark having an estimated useful life of 5 years. Spin's trial balance on December 31, 20X8, in pounds, follows:

Cash Accounts Receivable (net) Inventory Property, Plant, and Equipment Accumulated Depreciation Accounts Payable Notes Payable Common Stock Retained Earnings Sales Cost of Goods Sold Operating Expenses Depreciation Expense Dividends Paid Total

£

Debits 70,000 100,000 120,000 330,000

Credits

£ 120,000 110,000 90,000 100,000 150,000 420,000 270,000 60,000 30,000 10,000 £ 990,000

£ 990,000

Additional Information 1. Spin uses the FIFO method for its inventory. The beginning inventory was acquired on December 31, 20X7, and ending inventory was acquired on December 26, 20X8. Purchases of £300,000 were made evenly throughout 20X8.

2. Spin acquired all of its property, plant, and equipment on March 1, 20X6, and uses straightline depreciation.

3. Spin's sales were made evenly throughout 20X8, and its operating expenses were incurred evenly throughout 20X8.

4. The dividends were declared and paid on November 1, 20X8.

5. Pace's income from its own operations was $150,000 for 20X8, and its total stockholders' equity on January 1, 20X8, was $1,000,000. Pace declared $50,000 of dividends during 20X8.

6. Exchange rates were as follows: March 1, 20X6 December 31, 20X7 January 1, 20X8 November 1, 20X8 December 26, 20X8 December 31, 20X8 Average for 20X8

1£ 1£ 1£ 1£ 1£ 1£ 1£

= = = = = = =

$ 1.20 $ 1.25 $ 1.25 $ 1.26 $ 1.31 $ 1.35 $ 1.30

Assume the U.S. dollar is the functional currency, not the pound.

Required: 1) Prepare a schedule remeasuring the trial balance from British pound into U.S. dollars.

2) Assume that Pace uses the fully adjusted equity method. Record all journal entries that relate to its investment in the British subsidiary during 20X8. Provide the necessary documentation and support for the amounts in the journal entries.

3) Prepare a schedule that determines Pace's consolidated net income for 20X8.

Advanced Financial Accounting, 12e (Christensen) Chapter 13 Segment and Interim Reporting 1) Trevor Company discloses supplementary operating segment information for its three reportable segments. Data for 20X8 are available as follows:

Sales Traceable operating expenses

Segment A $ 500,000 250,000

Segment B $ 300,000 120,000

Segment C $ 200,000 90,000

Additional 20X8 expenses include indirect operating expenses of $200,000. Appropriately selected common indirect operating expenses are allocated to segments based on the ratio of each segment's sales to total sales. The 20X8 operating profit for Segment B was: A) $180,000 B) $120,000 C) $150,000 D) $250,000 2) Tuttle Company discloses supplementary operating segment information for its three reportable segments. Data for 20X3 are available as follows:

Sales Traceable operating expenses

Segment A $ 500,000 250,000

Segment B $ 300,000 120,000

Segment C $ 200,000 90,000

Additional 20X3 expenses include indirect operating expenses of $100,000. Appropriately selected common indirect operating expenses are allocated to segments based on the ratio of each segment's sales to total sales. The 20X3 operating profit for Segment A was: A) $150,000 B) $180,000 C) $200,000 D) $250,000

3) Trevor Company discloses supplementary operating segment information for its three reportable segments. Data for 20X8 are available as follows:

Sales Traceable operating expenses

Segment A $ 500,000 250,000

Segment B $ 300,000 120,000

Segment C $ 200,000 90,000

Allocable costs for the year was $180,000. Allocable costs are assigned based on the ratio of a segment's income before allocable costs to total income before allocable costs. The 20X8 operating profit for Segment B was: A) $110,000 B) $180,000 C) $126,000 D) $120,000 4) Tuttle Company discloses supplementary operating segment information for its three reportable segments. Data for 20X3 are available as follows:

Sales Traceable operating expenses

Segment A $ 500,000 250,000

Segment B $ 300,000 120,000

Segment C $ 200,000 90,000

Allocable costs for the year were $54,000. Allocable costs are assigned based on the ratio of a segment's income before allocable costs to total income before allocable costs. The 20X3 operating profit for Segment A was: A) $196,000 B) $223,000 C) $225,000 D) $250,000 5) The management approach to the definition of segments for financial reporting expects a company to: I. Report disaggregated information on the same organizational basis as used by the company's internal decision makers.

II. Report disaggregated information for at least ten segments.

A) I B) II C) Both I and II D) Neither I nor II 6) ASC 280 uses a(n) A) line of business

approach to the definition of segments.

B) entity C) portfolio D) management 7) In 20X6 and 20X7, each of Putney Company's four operating segments met one of the three quantitative tests for segment reporting. In 20X8, Segment B failed to qualify under the prescribed tests because of abnormal financial conditions. The other three segments qualified for reporting. For 20X8, Segment B: A) should be excluded from segment disclosure but referred to in the management letter to shareholders.

B) should be distinctly separated from the other three segments and listed as a "nonqualifying" segment.

C) should be combined with one of the other three segments and reported.

D) should be included in the segment disclosures at the discretion of management.

8) Zeus Corporation has determined that it has 15 reportable operating segments. In order to comply with the standard for segment disclosures, Zeus Corporation should do which of the following?

A) Report 10 reportable segments and disclose the remaining 5 segments as other operating segments.

B) Report 10 reportable segments by combining the most closely related segments.

C) Report 15 reportable segments as long as the 75 percent revenue test has been satisfied.

D) Report 12 reportable segments and show all other operating segments in a column labeled "Other Operating Segments."

9) Trimester Corporation's revenue for the year ended December 31, 20X8, was as follows: Consolidated revenue per income statement Intersegment sales Intersegment transfers Combined revenue of all industry segments

$ 600,000 45,000 10,000 $ 655,000

Trimester has a reportable operating segment if that segment's revenue exceeds: A) $65,500 B) $60,000 C) $64,500 D) $61,000

10) Biometric Corporation's revenue for the year ended December 31, 20X6, was as follows: Consolidated revenue per income statement Intersegment sales Intersegment transfers Combined revenue of all industry segments

$ 400,000 30,000 20,000 $ 450,000

Biometric has a reportable operating segment if that segment's revenue exceeds: A) $40,000 B) $42,000 C) $43,000 D) $45,000 11) Five of eight internally reported operating segments of Rollins Company qualify under the standards set by ASC 280 for segment reporting. However, the five identified segments do not meet the 75 percent revenue test. ASC 280 prescribes that management: A) subdivide segments until there are at least 10 reportable segments.

B) consolidate the remaining operating segments and include them under an "all other" category.

C) select additional operating segments until the 75% threshold is met.

D) include the heading "corporate headquarters" as an operating segment.

An analysis of Abbey Company's operating segments provides the following information: Operating Segment A B C D E

External $ 30 45 36 200 44

Revenues Intersegment $ 27 0 0 116 0

Segment Profit (Loss) $

6 32 (7) 4 (72)

Segment Assets $

40 120 82 190 38

12) Refer to the above information. Which of the operating segments above meet the revenue test?

A) B, D, and E B) A and D C) A, B, and D D) B, C, D, and E

13) Refer to the above information. Which of the operating segments above meet the operating profit (loss) test?

A) B and E B) A and B C) A, B, and E D) A, B, C, and E 14) Refer to the above information. Which of the operating segments above are reportable segments?

A) B, C, and D B) A, B, D, and E C) B, D, and E D) A, B, C, D, and E 15) Crisfield Company has two reportable segments, C and D. Segment C made $4,000,000 of sales to external customers and $400,000 of sales to other operating segments. Segment D, on the other hand, made sales of $8,000,000 to external customers and $1,600,000 of sales to other operating segments. Crisfield Company reported $13,200,000 of revenues on its consolidated income statement. What calculation below correctly determines whether Crisfield Company's reportable segments satisfy the 75% revenue test?

A) $14,000,000/$15,200,000 B) $14,000,000/$13,200,000 C) $12,000,000/$13,200,000 D) $12,000,000/$15,200,000 16) Dragon Company has two reportable segments, A and B. Segment A made $3,000,000 of sales to external customers and $200,000 of sales to other operating segments. Segment B made sales of $5,000,000 to external customers and $1,200,000 of sales to other operating segments.

Dragon Company reported $9,600,000 of revenues on its consolidated income statement. What calculation below correctly determines whether Dragon Company's reportable segments satisfy the 75% revenue test?

A) $8,000,000/$9,600,000 B) $8,000,000/$11,000,000 C) $9,400,000/$9,600,000 D) $9,400,000/$11,000,000

17) Main Manufacturing Corporation reported consolidated revenues of $50,000,000 on its income statement for 20X8. The management of the corporation identified 3 industry segments, M, N, and O. These segments had the following intersegment sales and transfers during 20X8:

Operating Segment M N O

Intersegment Sales and Transfers $ 2,000,000 $ 2,400,000 $ 3,000,000

For Main Manufacturing Corporation, the revenue test would be satisfied if any of its industry segments had revenue equal to or greater than which of the following?

A) $7,400,000 B) $5,740,000 C) $5,000,000 D) $4,260,000 18) Operand Corporation reported consolidated revenues of $30,000,000 on its income statement for 20X4. The management of the corporation identified three industry segments, X, Y, and Z. These segments had the following intersegment sales and transfers during 20X4:

Operating Segment X Y Z

Intersegment Sales and Transfers $ 1,000,000 $ 3,000,000 $ 1,500,000

For Operand Corporation, the revenue test would be satisfied if any of its industry segments had revenue equal to or greater than which of the following?

A) $2,450,000 B) $3,000,000 C) $3,550,000 D) $5,500,000

19) Collins Company reported consolidated revenue of $120,000,000 in 20X8. Collins operates in two geographic areas, domestic and Asia. The following information pertains to these two areas:

Domestic Asia

Sales to External Customers $ 70,000,000 $ 50,000,000

Interarea Sales Between Affiliates $ 12,000,000 $ 8,000,000

What calculation below is correct to determine if the revenue test is satisfied for the Asian operations?

A) $58,000,000/$140,000,000 B) $50,000,000/$120,000,000 C) $58,000,000/$120,000,000 D) $50,000,000/$140,000,000 20) Cherokee Company reported consolidated revenue of $90,000,000 in 20X5. Cherokee operates in two geographic areas, domestic and Europe. The following information pertains to these two areas:

Domestic Europe

Sales to External Customers $ 62,000,000 $ 28,000,000

Interarea Sales Between Affiliates $ 6,000,000 $ 4,000,000

What calculation below is correct to determine if the revenue test is satisfied for the European operations?

A) $28,000,000/$90,000,000 B) $28,000,000/$100,000,000 C) $32,000,000/$100,000,000 D) $32,000,000/$90,000,000 21) ASC 280 requires certain disclosures about major customers. All of the following statements about those disclosures are true with the exception of which statement?

A) The identity of the segment reporting the revenue from a significant customer must be disclosed a footnote.

B) The amount of revenue from a significant customer must be disclosed in a footnote.

C) For applying the disclosure test, there is no specific threshold (percent of total revenues) that is defined as "significant".

D) A local, state, or foreign government can be considered a major customer.

22) Stone Company reported $100,000,000 of revenues on its 20X8 income statement. During the year ended December 31, 20X8, Stone made sales of $8,000,000 to external customers in Western Europe. In addition, Stone made sales of $10,000,000 to the U.S. government and $4,000,000 of sales to various state governments. In the footnotes to its financial statements for 20X8, in reporting enterprisewide disclosures, Stone is required to disclose:

A) B) C) D)

Segment Reporting the Revenue Yes Yes No No

Identity of Each Major Customer No Yes Yes No

A) Option A B) Option B C) Option C D) Option D 23) Which of the following are established by ASC 280 as "enterprisewide disclosure" standards to provide more information about the risks to a company?

I. Information about dominant industry segments.

II. Information about major customers.

III. Information about geographic areas.

A) Both I and III B) Both I and II C) Both II and III D) I, II, and III Wakefield Company uses a perpetual inventory system. In August, it sold 2,000 units from its LIFO-base inventory, which had originally cost $35 per unit. The replacement cost is expected to be $45 per unit. The company is planning to reduce its inventory and expects to replace only 1,500 of these units by December 31, the end of its fiscal year. The company replaced 1,500 units in November at an actual cost of $50 per unit.

24) Based on the preceding information, in the entry in August to record the sale of the 2,000 units: A) Cost of Goods Sold will be debited for $70,000.

B) Inventory will be credited for $85,000.

C) Excess of Replacement Cost over LIFO Cost of Inventory Liquidation will be credited for $15,000.

D) Excess of Replacement Cost over LIFO Cost of Inventory Liquidation will be credited for $67,000.

25) Based on the preceding information, in the entry to record the replacement of the 1,500 units in November, Cost of Goods Sold will be debited for:

A) $52,500.

B) $22,500.

C) $15,000.

D) $7,500.

26) Based on the preceding information, in the entry to record the replacement of the 1,500 units in November, Inventory will be debited for: A) $52,500.

B) $75,000.

C) $67,500.

D) $60,000.

27) Based on the preceding information, in the entry to record the replacement of the 1,500 units in November, Accounts Payable will be credited for: A) $67,500.

B) $75,000.

C) $62,500.

D) $60,000.

28) Assume that the replacement did not happen in November. In December, the company decided not to replace any of the 1,500 units. The entry required on December 31 to eliminate valuation accounts related to the inventory that will not be replaced will include: A) a debit to Excess of Replacement Cost over LIFO Cost of Inventory Liquidation for $22,500.

B) a credit to Cost of Goods Sold for $15,000.

C) a debit to Inventory for $70,000.

D) a debit to Inventory for $15,000.

29) William Corporation, which has a fiscal year ending January 31, had the following pretax accounting income and estimated effective annual income tax rates for the first three quarters of the year ended January 31, 20X8:

Quarter Q1 Q2 Q3

Pretax Accounting Income $ 100,000 110,000 90,000

Estimated Effective Annual Income Tax Rate at End of Quarter 35 % 35 % 40 %

William's income tax expense in its interim income statement for the third quarter are: A) $36,000.

B) $73,500.

C) $46,500.

D) $120,000.

30) Daniel Corporation, which has a fiscal year ending December 31, had the following pretax accounting income and estimated effective annual income tax rates for the first three quarters of the year ended December 31, 20X6:

Quarter Q1 Q2 Q3

Pretax Accounting Income $ 100,000 90,000 110,000

Estimated Effective Annual Income Tax Rate at End of Quarter 36 % 35 % 32 %

Daniel's income tax expense in its interim income statement for the third quarter is: A) $29,500 B) $35,200 C) $66,500 D) $96,000 31) On June 30, 20X8, String Corporation incurred a $220,000 net loss from disposal of a business component. Also, on June 30, 20X8, String paid $60,000 for property taxes assessed for the calendar year 20X8. What amount of the preceding items should be included in the determination of String's net income or loss for the six-month interim period ended June 30, 20X8?

A) $250,000 B) $220,000 C) $140,000 D) $280,000 32) On June 30, 20X0, Bow Corporation incurred a $150,000 net loss from disposal of a business component. Also on June 30, 20X0, Bow paid $50,000 for property taxes assessed for the calendar year 20X0. What amount of the preceding items should be included in the determination of Bow's net income or loss for the six-month interim period ended June 30, 20X0?

A) $100,000 B) $150,000 C) $175,000 D) $200,000 33) During the third quarter of 20X8, Pride Company sold a piece of equipment at an $8,000 gain. What portion of the gain should Pride report in its income statement for the third quarter of 20X8?

A) $0 B) $2,000 C) $4,000 D) $8,000 34) During the third quarter of 20X4, Ripley Company sold a piece of equipment at a $10,000 gain. What portion of the gain should Ripley report in its income statement for the third quarter of 20X4?

A) $10,000 B) $7,500 C) $2,500

D) $0 35) On March 15, 20X9, Clarion Company paid property taxes of $60,000 on its factory building for calendar year 20X9. On July 1, 20X9, Clarion made $40,000 in unanticipated repairs to its machinery. The repairs will benefit operations for the remainder of the calendar year. What total amount of these expenses should be included in Clarion's quarterly income statement for the three months ended September 30, 20X9?

A) $55,000 B) $15,000 C) $35,000 D) $40,000 36) On March 15, 20X7, Barrel Company paid property taxes of $120,000 on its factory building for calendar year 20X7. On July 1, 20X7, Barrel made $20,000 in unanticipated repairs to its machinery. The repairs will benefit operations for the remainder of the calendar year. What total amount of these expenses should be included in Barrel's quarterly income statement for the three months ended September 30, 20X7?

A) $30,000 B) $35,000 C) $40,000 D) $50,000

Forge Company, a calendar-year entity, had 6,000 units in its beginning inventory for 20X8. On December 31, 20X7, applying the lower-of-cost-or-market (NRV) principle, the units had been adjusted down to $470 per unit from an actual cost of $510 per unit. It was the lower of cost or market (NRV). No additional units were purchased during 20X8. The following additional information is provided for 20X8: Quarter First Second Third Fourth

Date March 31, 20X8 June 30, 20X8 September 30, 20X8 December 31, 20X8

Inventory (units) 4,800 4,000 3,100 2,000

Unit Market Value $ 455 480 440 455

Forge does not have sufficient experience with the seasonal market for its inventory units and assumes that any reductions in market value during the year will be permanent.

37) Based on the preceding information, the cost of goods sold for the first quarter is: A) $636,000 B) $564,000 C) $546,000 D) $624,000 38) Based on the preceding information, the cost of goods sold for the second quarter is: A) $416,000 B) $364,000 C) $304,000 D) $424,000 39) Based on the preceding information, the cost of goods sold for the year 20X8, is: A) $2,080,000 B) $1,880,000 C) $1,835,000 D) $1,910,000 40) Samuel Corporation foresees a downturn in its business in the medium term. It expects to sustain an operating loss of $160,000 for the full year ending December 31, 20X8. Samuel's tax rate is 35 percent. Anticipated tax credits for 20X8 total $8,000. No permanent differences are expected. Realization of the full tax benefit of the expected operating loss and realization of anticipated tax credits are assured beyond any reasonable doubt because they will be carried back. For the first quarter ended March 31, 20X8, Samuel reported an operating loss of $30,000.

How much of a tax benefit should Samuel report for the interim period ended March 31, 20X8?

A) $8,000 B) $12,000 C) $13,500 D) $15,500 41) Derby Company pays its executives a bonus of 6 percent of income before deducting the

bonus and income taxes. For the quarter ended March 31, 20X8, Derby had income before the bonus and income tax of $12,000,000. For the year ended December 31, 20X8, Derby estimates that its income before bonus and income taxes will be $70,000,000. For the quarter ended March 31, 20X8, what is the amount of the bonus that Derby should deduct on its income statement?

A) $4,200,000 B) $720,000 C) $1,050,000 D) $180,000 42) Fisher Company pays its executives a bonus of 4 percent of income before deducting the bonus and income taxes. For the quarter ended March 31, 20X1, Fisher had income before the bonus and income tax of $10,000,000. For the year ended December 31, 20X1, Fisher estimates that its income before bonus and income taxes will be $50,000,000. For the quarter ended March 31, 20X1, what is the amount of the bonus that Fisher should deduct on its income statement?

A) $100,000 B) $400,000 C) $500,000 D) $2,000,000 43) Tyler Company incurred an inventory loss due to a decline in net realizable value (NRV) during its first quarter of operations in 20X8. At the end of the first quarter, management of the company believed the decline in NRV to be permanent. In the second quarter, the NRV of Tyler's inventories increased above their acquisition cost. NRV remained higher than acquisition cost during the remainder of 20X8. How should Tyler report the facts above on its first and second quarter income statements?

A) B) C) D)

First Quarter Recognize inventory loss Recognize inventory loss No recognition of inventory loss Recognize inventory loss and recovery loss

A) Option A B) Option B C) Option C D) Option D

Second Quarter Recognize recovery of inventory loss No recognition of recovery of inventory loss No recognition of recovery of inventory loss No recognition of inventory loss nor recovery of inventory loss

44) Denver Company, a calendar-year corporation, had the following actual income before income tax expense and estimated effective annual income tax rates for the first three quarters in 20X8:

Quarter First Second Third

Income Before Income Tax Expense $ 100,000 $ 140,000 $ 180,000

Estimated Effective Annual Tax Rate at the End of Each Quarter 30 % 24 % 30 %

Denver's income tax expense in its interim income statement for the third quarter should be: A) $126,000.

B) $68,400.

C) $62,400.

D) $54,000.

45) Chicago Company, a calendar-year corporation, had the following actual income before income tax expense and estimated effective annual income tax rates for the first three quarters in 20X2:

Quarter First Second Third

Income Before Income Tax Expense $ 70,000 $ 90,000 $ 120,000

Estimated Effective Annual Tax Rate at the End of Each Quarter 28 % 26 % 30 %

Chicago's income tax expense in its interim income statement for the third quarter should be: A) $36,000 B) $41,000 C) $42,400 D) $84,000 46) Which of the following observations is true of the discrete view of interim reporting?

A) An interim period is viewed as an installment of an annual period.

B) Recognition and adjustment of certain income or expense items may be affected by judgments about the expected results of the entire year's operations.

C) Each interim period is considered as a basic accounting period to be evaluated as if it were an annual accounting period.

D) One interim period would not bear the entire expense that benefits more than one interim period.

47) Mason Company paid its annual property taxes of $240,000 on February 15, 20X9. Mason also anticipates that its annual repairs expense for 20X9 will be $1,200,000. This amount is

usually incurred and paid in July and August when operations are shut down so that machinery and equipment can be repaired. What amount should Mason deduct for property taxes and repairs in each quarter for 20X9?

A) B) C) D)

First Quarter $ 240,000 $ 360,000 $ 540,000 $ 60,000

Second Quarter $ 600,000 $ 360,000 $ 300,000 $ 660,000

Third Quarter $ 600,000 $ 360,000 $ 300,000 $ 660,000

Fourth Quarter $ 0 $ 360,000 $ 300,000 $ 60,000

A) Option A B) Option B C) Option C D) Option D 48) Toledo Imports, a calendar-year corporation, had the following income before tax expense and estimated effective annual income tax rates for the first three quarters in 20X8:

Quarter First Second Third

Income Before Income Tax Expense $ 200,000 $ 280,000 $ 360,000

Estimated Effective Annual Tax Rate at the End of Each Quarter 32 % 31 % 30 %

Toledo's income tax expense in its interim income statement for the nine months ended September 30 and for the third quarter, respectively, are: A) $250,800 and $103,200.

B) $252,000 and $108,000.

C) $252,000 and $103,200.

D) $250,800 and $108,000.

49) Estimated gross profit rates may be used to estimate a company's cost of goods sold and its ending inventory for: A) quarterly but not for annual financial statements.

B) both quarterly and annual financial statements.

C) neither quarterly nor annual financial statements.

D) annual but not for quarterly financial statements.

50) Davis Company uses LIFO for all of its inventories. During its second quarter of 20X9, Davis experienced a LIFO liquidation. Davis fully expects to replace the liquidated inventory in the early part of the third quarter. How should Davis report the inventory temporarily liquidated on its income statement for the second quarter?

A) Cost of goods sold for the second quarter should include the acquisition cost of the goods temporarily liquidated.

B) Cost of goods sold for the second quarter should include the expected replacement cost of the goods temporarily liquidated.

C) Cost of goods sold for the second quarter should not include the expected replacement cost of the goods temporarily liquidated.

D) Cost of goods sold for the second quarter is not affected by the temporary liquidation of LIFO inventory.

51) How would a company report a change in an accounting principle made on the last day of the third quarter?

A) Retrospective application to all pre-change interim periods reported.

B) No change is required.

C) Apply to current and prospective interim periods only.

D) Apply to prospective interim periods only.

52) Missoula Corporation disposed of one of its segments in the second quarter and incurred a gain from disposal of discontinued segment of $600,000, net of taxes. What is the effect of this gain from disposal of discontinued segment?

A) Increase net income from operations for the year by $600,000.

B) Increase second quarter net income by $600,000.

C) Increase each quarter's net income by $150,000.

D) Increase each of the last three quarters' net income by $200,000.

53) Reno Corporation disposed of one of its segments in the second quarter and incurred a gain from disposal of discontinued segment of $300,000, net of taxes. What is the effect of this gain from disposal of discontinued segment?

A) Increase each of the last three quarters' net income by $100,000 B) Increase net income from operations for the year by $300,000 C) Increase second quarter net income by $300,000 D) Increase each quarter's net income by $75,000 54) Frahm Company incurred a first quarter operating loss before income tax effect of $4,000,000. This is a normal occurrence for Frahm because of seasonal fluctuations. Experience has demonstrated the income earned during the remaining quarters far exceeds the first quarter losses each year. Frahm estimates its annual income tax rate will be 30 percent. What net loss should Frahm report for the first quarter?

A) $4,000,000 B) $2,800,000 C) $700,000 D) $0 55) Follett Company incurred a first quarter operating loss before income tax effect of $2,000,000. This is a normal occurrence for Follett because of seasonal fluctuations. Experience has demonstrated the income earned during the remaining quarters far exceeds the first quarter losses each year. Follett estimates its annual income tax rate will be 35 percent. What net loss should Follett report for the first quarter?

A) $0

B) $700,000 C) $1,300,000 D) $2,000,000 56) The income tax expense applicable to the second quarter's income statement is determined by: A) dividing the estimated annual income tax expense by four and allocating the amount to the second quarter.

B) multiplying the effective income tax rate times the income before tax for the second quarter.

C) subtracting the income tax expense applicable to the first quarter from the income tax expense applicable to the first two quarters.

D) subtracting the income tax liability applicable to the first quarter from the income tax liability applicable to the first two quarters.

57) If a company changes the method it uses to compute the allowance for uncollectible accounts receivable because more recent information has become available, how is this change in method accounted for?

A) The change is only reported in the current period in which the change is made B) The change is reported in all future periods affected by the change C) Previously issued financial statements are not adjusted by the change D) All of the other answers are correct ways to account for the change 58) All of the following situations require a retrospective application of a change in a reporting entity except for: A) Presenting consolidated financials rather than individual statements for separate entities.

B) Changing the specific subsidiaries that make up a consolidated entity.

C) Presenting foreign subsidiaries in addition to domestic subsidiaries.

D) Changing entities that are included in combined financial statements.

59) ASC 280, Disclosure about Segments of an Enterprise and Related Information, has taken what has been referred to as a "management approach" to the definition of a segment and the allocation of costs to a segment.

Required: a) What is meant by a management approach? How does this concept of a management approach impact the decision to disclose information? b) How are decisions about cost allocation handled in segment disclosures?

60) Lloyd Corporation reports the following information for 20X8 for its three operating segments:

Sales Traceable operating expenses

Segment A $ 1,500,000 1,000,000

Segment B $ 1,200,000 700,000

Other 20X8 expenses for Lloyd Corporation are as follows: Indirect operating expenses Interest expense General corporate expenses

Segment C $ 300,000 300,000

$ 900,000 120,000 200,000

Indirect operating expenses are allocated to segments based upon the ratio of each segment's traceable operating expenses to total traceable operating expenses. Interest expense is allocated to segments based upon the ratio of each segment's sales to total sales.

Required: a) Calculate the operating profit or loss for each of the segments for 20X8. b) Determine which segments are reportable, applying the operating profit or loss test.

61) Ridge Company is in the process of determining its reportable segments for the year ended December 31, 20X8. As the person responsible for determining this information, you gather the following information:

Operating Segment A L M R S Z

Sales to External Customers $ 1,000 400 320 1,420 160 180

Intersegment Sales and Transfers $ 80 20 40 120

Segment Profit (Loss) $ 40 (43) 8 16 (9) 60

Segment Assets $ 400 80 160 740 100 240

Required: a) Using the appropriate tests, determine which of the industry segments listed above are reportable for 20X8. Show your supporting computations in good form. b) Indicate whether or not Ridge's reportable segments satisfy the 75 percent test. Show your supporting computations in good form.

62) FASB has specified a "75% percent consolidated revenue test".

Required: a) What is the 75% test? b) How is the 75% test impacted by the "10% Significance Rule"?

63) Iona Corporation is in the process of preparing its financial statements for the first quarter of 20X9 and has asked your advice as to how to report several items. These items include the following events which took place during the first quarter of 20X9 (assume all amounts are material): 1) Iona redeemed bonds with a carrying value of $4,000,000 at a cost of $3,760,000. This early extinguishment occurred because Iona wants to issue new debt at lower interest rates.

2) Iona uses the LIFO method for its inventories. On January 1, 20X9, inventories amounted to $10,000,000, while, on March 31, 20X9, inventories totaled $9,200,000. Iona expects to replace the liquidated inventory at the beginning of the second quarter at a cost of $1,000,000.

3) Iona changed its depreciation method on $4,000,000 of its delivery trucks from the declining balance method to the straight-line method. On January 1, 20X9, accumulated depreciation under the declining balance method was $2,800,000. Had the straight-line method been used, accumulated depreciation on January 1, 20X9, would have been $2,300,000. The remaining life of the trucks is two years.

4) Iona pays its top executives a bonus at year-end of 6 percent of operating income before bonus and income taxes. Operating income before bonus and income taxes for the three months ended March 31, 20X9, was $10,000,000. Iona estimates that its yearly operating income before bonus and income taxes will be $60,000,000.

5) Iona closes its manufacturing operations in July of each year in order to make its major annual repairs. Iona estimates that the cost of these repairs in 20X9 will be $1,000,000.

Required: For each of the events numbered 1 through 5, indicate how that event should be reported on Iona's income statement for the three months ended March 31, 20X9, and the balance sheet accounts effects at March 31, 20X9. Ignore income taxes.

64) The information below is for the second quarter of Tampa Company for 20X8:

Revenues of 2nd quarter $ 18,000,000 Cost of sales (includes the replacement cost of the LIFO inventory liquidated) 12,400,000 Cost of sales (does not include the replacement cost of the LIFO inventory liquidated) 11,600,000 nd 3,000,000 Operating expenses for 2 quarter Estimated annual repairs and property taxes (not included in the operating expenses for the 2nd quarter) 600,000 Loss from early extinguishment of debt (not material in relation to the expected annual income) 500,000 st 350,000 Income tax expense, 1 quarter st Income before tax, 1 quarter 1,000,000 Effective annual income tax rate 30%

Required: Prepare an interim income statement for the second quarter for Tampa Company. Assume the LIFO liquidation is expected to be restored by the end of 20X8.

65) Interim income statements are required for Smith Orchards. Smith does most of its sales in the fall quarter of the year. These sales are both to individual and commercial customers. How do you recommend Smith report sales during the spring quarter of the year?

Advanced Financial Accounting, 12e (Christensen) Chapter 14 SEC Reporting 1) The Securities and Exchange Commission is responsible for: Full and Fair Disclosure of Information

Regulating Securities Markets

Assessing the Quality of Registered Securities

A) Yes

No

Yes

Yes

Yes

No

No

Yes

Yes

Yes

Yes

Yes

B)

C)

D)

2) Which regulation created the Securities and Exchange Commission?

A) Securities Act of 1933 B) Securities Exchange Act of 1934 C) Investment Company Act of 1940 D) Securities Investor Protection Act of 1970 3) Which of the following divisions of the SEC regulates national securities exchanges, brokers, and dealers of securities?

A) Division of Investment Management B) Division of Corporation Finance C) Division of Economic and Risk Analysis D) Division of Trading and Markets 4) Which division of the SEC develops and administers the disclosure requirements for the securities acts and reviews all registration statements and other issue-oriented disclosures?

A) Division of Enforcement B) Division of Corporation Finance C) Division of Investment Management D) Division of Trading and Markets

5) Identify the regulation that created an entity which insures investors from possible losses if an investment house enters bankruptcy.

A) Federal Deposit Insurance Protection Act B) Securities Investor Protection Act C) Investment Advisers Act D) Federal Bankruptcy Act 6) Regulation S-X and Regulation S-K: A) govern the preparation of financial statements and associated disclosures.

B) govern the registration requirements for private placements.

C) outline responsibilities for audit committees of publicly held companies.

D) prohibit artificial pyramids of capital in public utilities.

7) Which regulation resulted in the creation of the Public Company Accounting Oversight Board?

A) Investment Advisers Act B) Securities Investor Protection Act C) Sarbanes-Oxley Act D) Trust Indenture Act 8) Regulation S-X presents the rules for preparing all of the following except: A) financial statements.

B) footnotes.

C) auditor's report.

D) management's discussion.

9) The preparation of which of the following items is covered by Regulation S-K? A) Descriptions of business B) Pro forma disclosures C) Schedules D) Reports of accountants 10) Which of the following presents the results of actions taken against accountants, brokers, and other participants for filing false or misleading statements?

A) Financial Reporting Releases B) Financial Reporting Interpretations C) Accounting and Auditing Enforcement Releases D) Staff Accounting Bulletins 11) Which of the following covers new or revised administrative practices and interpretations used by the SEC staff in reviewing financial statements?

A) Securities Exchange Act releases B) Exchange Act industry guides C) Accounting and Auditing Enforcement Releases D) Staff Accounting Bulletins 12) Which of the following acts requires that a trustee be appointed for sales of bonds, debentures, and other debt securities of public corporations?

A) Securities Investor Protection Act B) Trust Indenture Act C) Investment Company Act D) Investment Advisors Act 13) Which of the following acts helps businesses raise funds in public capital markets by minimizing regulatory requirements?

A) Dodd-Frank Wall Street Reform and Consumer Protection Act B) Foreign Corrupt Practices Act C) Jumpstart Our Business Startups (JOBS) Act D) Sarbanes-Oxley Act 14) For an accelerated filer, how many years of audited financial statements must be presented in the issuer's annual report?

I. Three years of audited income statements II. Two years of audited balance sheets III. Three years of audited statements of cash flows A) I and II B) II and III C) I and III D) I, II, and III 15) Which of the following types of securities or securities transactions are exempt from the need to be registered under the Securities Act of 1933?

I. Commercial paper with a maturity of nine months or less.

II. Intrastate issues in which the securities are offered and sold only within one state.

III. Municipal bonds.

A) I and II B) II C) I, II, and III D) III 16) Regulation D of the SEC presents important exemptions from full registration requirements for: A) private placements.

B) issuances of securities by savings and loan associations.

C) issuances of securities by common carriers regulated by the Interstate Commerce Commission.

D) foreign companies.

17) Which of the following forms is the most comprehensive registration statement?

A) Form S-1 B) Form S-2 C) Form S-3

D) Form 20-F 18) When deficiencies are found in a registration statement that must be corrected before the securities may be offered for sale, which of the following is issued by the SEC? A) An audit opinion B) A comment letter C) A customary review D) A comfort letter 19) The purpose of a "tombstone ad" is: A) to inform investors an upcoming offering has been canceled.

B) to inform investors of an upcoming offering.

C) to inform investors an upcoming offering will be delayed for 30 days.

D) to inform investors securities will be offered for sale after the company has responded to the SEC's comment letter.

20) Which of the following best describes a "red herring" prospectus?

A) A shortened version of registration Form S-1 available to those companies that already have publicly traded securities.

B) A prospectus containing material irregularities and deficiencies.

C) Preliminary information provided to investors about an upcoming issue, and issued between the time a registration statement is presented to the SEC and its effective date.

D) Disclosure in the business press, outlined in red, informing investors of an upcoming offering.

21) Which of the following observations is true of the shelf registration rule?

A) It is an option available to all listed companies.

B) Shelf registration is limited to 25 percent of the company's currently outstanding stock.

C) It allows private placements of an unlimited amount of securities.

D) It allows large companies to select the optimal time to sell their stock.

22) Accountants are liable for any materially false or misleading information contained in the registration statement filed with the SEC up to: A) the date the registration statement is filed.

B) the date of the audit report.

C) the effective date of the registration statement.

D) the date securities are sold.

23) What does an underwriter typically require from an accountant which indicates that the company has fulfilled all the accounting requirements in the registration process?

A) A comment letter B) An audit opinion C) A "red herring" prospectus D) A comfort letter 24) Which system helps the SEC accomplish its primary purpose of increasing the efficiency and fairness of the securities markets by expediting the receipt, acceptance, dissemination, and analysis of time-sensitive data filed with it?

A) EDI B) ESEC C) EDGAR D) EMMA 25) Which of the following classes of information are included in the Form 10-K? I. Management's discussion and analysis II. Audited financial statements and footnotes III. Auditor's opinion on the company's internal control system A) I and II B) I and III C) II and III D) I, II, and III 26) Which of the following statements concerning Form 10-Q is NOT true?

A) It is filed for all four quarters.

B) It is the quarterly report to the SEC. C) It contains an update on significant matters occurring since the last quarter.

D) It includes comparative financial statements for the quarter presented.

27) Information concerning the unexpected resignation of one or more of the registrant's directors would be disclosed on which of the following forms?

A) Form 10-K B) Form 8-K C) Form S-1 D) Form 10-Q 28) Proxy statements are: A) filed by an entity that acquires a beneficial ownership of more than 5 percent in a company.

B) interim financial statements need not be audited.

C) materials submitted to shareholders for votes on corporate matters.

D) used to disclose unscheduled material events.

29) Schedule 13D is filed: A) by entities that acquire a beneficial ownership of more than 5 percent of a class of registered equity securities.

B) to broadly report material information that is being provided to securities analysts, selected institutional investors, or others.

C) to disclose material items related to asset-backed securities such as a bond issue.

D) by management to report the existence and effectiveness of the company's internal control over financial reporting.

30) Which of the following is defined as directly or indirectly having the power to vote the shares or investment power to sell the security?

A) Proxy B) Significant influence C) Control D) Beneficial ownership 31) Which of the following is true about the Foreign Corrupt Practices Act of 1977 (FCPA)?

I. Publicly held companies should maintain an adequate system of internal control.

II. Individuals associated with U.S. companies are prohibited from bribing foreign officials for the purpose of securing a contract.

III. Compensating or agents' fees are disallowed under all circumstances.

A) I and II B) II and III C) I and III D) I, II, and III 32) According to the provisions of the Sarbanes-Oxley Act, A) accounting firms can provide both audit and non-audit services to the same company.

B) the auditor should report directly to, and have its work overseen by, the company's management.

C) audit committees should be composed of non-management members of a company's board of directors.

D) both the lead audit partner and the audit review partner for publicly held companies should be rotated at least every two years.

33) Which of the following statements concerning the management discussion and analysis (MD&A) of a company's financial condition is true?

I. It should cover the financial statements and other statistical data for the most recent three-year time span.

II. It should make year-to-year comparisons of material changes in the line items.

III. Management need not explain the cause(s) of the material changes.

IV. Disclosure of material off-balance sheet transactions, arrangements, and obligations is required in each annual and each quarterly report.

A) I, II, and IV B) II and III C) I, III, and IV D) I, II, III, and IV 34) Pro forma disclosures are: A) used to disclose unscheduled material events.

B) interim financial statements need not be audited.

C) materials submitted to shareholders for votes on corporate matters.

D) "what-if" presentations often taking the form of summarized financial statements.

35) Which of the following statements concerning pro forma disclosures is not true?

A) They show the effects of major transactions that occur after the end of the fiscal period.

B) They show the effects of major transactions that have occurred during the year but are not fully reflected in the company's historical cost financial statements.

C) The SEC requires these to be presented only when the company has made an unusual asset exchange, or a restructuring of existing indebtedness.

D) They often take the form of summarized financial statements.

36) The SEC administers many laws and regulations governing the information made in files reports.

Required: a) What is the difference in issues covered by Regulation S-X and Regulation S-K? b) How do the issues covered by these regulations differ from the AAERs and SABs? Each of the following questions names an item. Select the correct description of the item from this list. Indicate your selection by entering the letter of the description.

Descriptions A. Provides preliminary information to investors about an upcoming issue.

B. Informs investors of an upcoming offering.

C. Required annual filing to the SEC. D. Discloses unscheduled material events.

E. Includes amendments to the Securities Act, additional disclosure requirements, and other current issues regarding accounting and auditing principles and standards.

F. Results in a thorough examination by the SEC of a registration statement.

G. Issued by the staff of the SEC and contains differences that must be corrected in a registration statement before the securities may be offered or sale.

H. Quarterly report to SEC. I. Includes new or revised administrative practices and interpretations used in reviewing financial statements.

J. Includes the results of actions taken against accountants or other participants because false or misleading statements were filed.

K. Includes Regulations S-X and S-K. 37) Customary Review 38) Comment Letter 39) "Red Herring" Prospectus 40) "Tombstone ad" 41) Form 10-K 42) Form 10-Q 43) Form 8-K 44) Staff Accounting Bulletins 45) Accounting and Auditing Enforcement Releases 46) The items below are associated with the Securities and Exchange Commission. Describe or explain each item as concisely as possible.

(a) Customary Review (b) Comment Letter (c) "Red Herring" Prospectus (d) "Tombstone Ad" (e) Financial Reporting Releases (f) Staff Accounting Bulletins (g) Accounting and Auditing Enforcement Releases (h) Management's Discussion and Analysis 47) Companies issuing stock to the public have to aware of certain terms. Using complete sentences define the following: a) Comment Letter. b) Preliminary Prospectus. c) Shelf Registration.

48) The Securities Exchange Act of 1934 requires publicly held companies to file periodic financial disclosures as updates of their economic activity. The three basic forms used for this updating are Form 10-K, Form 10-Q, and Form 8-K. Required: Describe the information contained in each of the three basic forms noted above.

49) Both the FCPA (Foreign Corrupt Practices Act of 1977) and SOX (Sarbanes-Oxley Act of 2002) contain provisions related to internal control. Discuss some significant differences between how the two acts impact internal control practices for publicly held companies.

50) Paul's Plumbing acquired Smithtown Distributors on January 15, 20X8. Pansy's Flowers acquired Sam's Farm on January 1, 20X7. In the 12/31/X7 financial statements filed with the SEC, Paul's Plumbing included a Pro Forma disclosure and Pansy's Flowers did not. If both acquisitions account for 100% of the common stock of the company acquired and are considered to be material, then can both filings be considered proper?

Advanced Financial Accounting, 12e (Christensen) Chapter 15 Partnerships: Formation, Operation, and Changes in Membership 1) A partnership is a(n): I. accounting entity.

II. taxable entity.

A) I only B) II only C) Neither I nor II D) Both I and II 2) Which of the following accounts could be found in the general ledger of a partnership?

A) B) C) D)

Income Tax Expense No Yes Yes No

Interest Expense on Partner Loans No No Yes Yes

A) Option A B) Option B C) Option C D) Option D 3) Which of the following accounts could be found in the PQ partnership's general ledger?

I. Due from P II. P, Drawing III. Loan Payable to Q A) I, II B) I, III C) II, III D) I, II, and III 4) Transferable interest of a partner includes all of the following except: A) the partner's share of the profits and losses of the partnership.

B) the right to receive distributions.

C) the right to receive any liquidating distribution.

D) the authority to transact any of the partnership's business operations.

5) Which of the following statements best describes limited partnerships?

A) In an LLP, there must be at least one general partner that is personally liable for the obligations of the partnership and has management responsibilities.

B) There are no general or limited partners in a LP; each partner has the rights and duties of a general partner, but limited legal liability.

C) The identifier LP or LLP need not be included in the name or identification of a limited partnership.

D) If the presumption of control by the general partner can be overcome, the partner would account for its investment using the equity method of accounting.

6) RD formed a partnership on February 10, 20X9. R contributed cash of $150,000, while D contributed inventory with a fair value of $120,000. Due to R's expertise in selling, D agreed that R should have 60 percent of the total capital of the partnership. R and D agreed to recognize goodwill. What is the total capital of the RD partnership and the capital balance of R after the goodwill is recognized?

A) B) C) D)

Total Capital $ 450,000 $ 330,000 $ 300,000 $ 270,000

R, Capital $ 270,000 $ 198,000 $ 180,000 $ 162,000

A) Option A B) Option B C) Option C D) Option D 7) When a partnership is formed, noncash assets contributed by partners should be recorded: I. at their respective book values for income tax purposes.

II. at their respective fair values for financial accounting purposes.

A) I only B) II only C) Both I and II D) Neither I nor II 8) The partnership of X and Y shares profits and losses in the ratio of 60 percent to X and 40 percent to Y. For the year 20X8, partnership net income was double X's withdrawals. Assume X's beginning capital balance was $80,000, and ending capital balance (after closing) was $140,000. Partnership net income for the year was: A) $120,000.

B) $300,000.

C) $500,000.

D) $600,000.

9) Shue, a partner in the Financial Brokers Partnership, has a 30 percent share in partnership profits and losses. Shue's capital account had a net decrease of $100,000 during 20X8. During

20X8, Shue withdrew $240,000 as withdrawals and contributed equipment valued at $50,000 to the partnership. What was the net income of the Financial Brokers Partnership for 20X8?

A) $633,334 B) $466,666 C) $300,000 D) $190,000 10) Which of the following statements best describes accounting for a partnership?

A) A partnership may be a profit or a nonprofit entity.

B) A partnership may use federal income tax rules to account for transactions in their journals and ledger accounts.

C) A partnership's equity section contains both capital and retained earnings accounts.

D) A partnership may only distribute money through a dividend payment.

11) Which of the following accounts is not maintained for each partner in its accounting records?

A) Capital account B) Drawing account C) Earnings account D) Loan account 12) Griffin and Rhodes formed a partnership on January 1, 20X9. Griffin contributed cash of $120,000 and Rhodes contributed land with a fair value of $160,000. The partnership assumed the mortgage on the land that amounted to $40,000 on January 1. Rhodes originally paid $90,000 for the land. On July 31, 20X9, the partnership sold the land for $190,000. Assuming Griffin and Rhodes share profits and losses equally, how much of the gain from sale of land should be credited to Griffin for financial accounting purposes?

A) $0 B) $15,000 C) $35,000 D) $45,000

13) The DEF partnership reported net income of $130,000 for the year ended December 31, 20X8. According to the partnership agreement, partnership profits and losses are to be distributed as follows: Salaries Bonus on net income Remainder

D $ 25,000 10% 60%

E $ 20,000 -30%

F $ 15,000 -10%

How should partnership net income for 20X8 be allocated to D, E, and F?

A) B) C) D)

D $ 78,000 $ 72,200 $ 52,500 $ 42,500

A) Option A B) Option B C) Option C D) Option D

E $ 39,000 $ 37,100 $ 75,000 $ 42,500

F $ 13,000 $ 20,700 $ 22,500 $ 65,000

14) The JPB partnership reported net income of $160,000 for the year ended December 31, 20X8. According to the partnership agreement, partnership profits and losses are to be distributed as follows: Salaries Bonus on net income Remainder (if positive) Remainder (if negative)

J $ 50,000 10% 60% 30%

P $ 60,000 5% 30% 40%

B $ 30,000 10% 10% 30%

How should partnership net income for 20X8 be allocated to J, P, and B?

A) B) C) D)

J $ 96,000 $ 58,000 $ 60,000 $ 66,000

A) Option A B) Option B C) Option C D) Option D

P $ 48,000 $ 64,000 $ 60,000 $ 68,000

B $ 16,000 $ 38,000 $ 40,000 $ 46,000

The APB partnership agreement specifies that partnership net income be allocated as follows: Partner A $ 30,000 10% 40%

Salary allowance Interest on average capital balances Remainder

Partner P $ 10,000 10% 40%

Partner B $ 40,000 10% 20%

Average capital balances for the current year were $50,000 for A, $30,000 for P, and $20,000 for B. 15) Refer to the information given. Assuming a current year net income of $150,000, what amount should be allocated to each partner?

A) B) C) D)

Partner A $ 60,000 $ 59,000 $ 24,000 $ 58,000

Partner P $ 60,000 $ 37,000 $ 24,000 $ 38,000

Partner B $ 30,000 $ 54,000 $ 12,000 $ 54,000

A) Option A B) Option B C) Option C D) Option D 16) Refer to the information given. Assuming a current year net income of $50,000, what amount should be allocated to each partner?

A) B) C) D)

A) Option A B) Option B C) Option C D) Option D

Partner A $ 20,000 $ 16,000 $ 19,000 $ 17,000

Partner P $ 20,000 $ 16,000 $ (3,000) $ 0

Partner B $ 10,000 $ 8,000 $ 34,000 $ 33,000

The SRT partnership agreement specifies that partnership net income be allocated as follows:

Salary allowance Interest on average capital balance Remainder

Partner S $ 20,000 10% 30%

Partner R $ 25,000 10% 30%

Partner T $ 15,000 10% 40%

Average capital balances for the current year were $60,000 for S, $50,000 for R, and $40,000 for T. 17) Refer to the information given. Assuming a current year net income of $125,000, what amount should be allocated to each partner?

A. B. C. D.

Partner S $ 15,000 $ 37,500 $ 41,000 $ 42,000

Partner R $ 15,000 $ 37,500 $ 45,000 $ 48,000

Partner T $ 20,000 $ 50,000 $ 39,000 $ 35,000

A) Option A B) Option B C) Option C D) Option D 18) Refer to the information given. Assuming a current year net income of $45,000, what amount should be allocated to each partner?

A. B. C. D.

A) Option A B) Option B C) Option C D) Option D

Partner S $ 17,000 $ (9,000) $ 13,500 $ 22,500

Partner R $ 21,000 $ (9,000) $ 13,500 $ 22,500

Partner T $ 7,000 $ (12,000) $ 18,000 $ 0

19) The terms of a partnership agreement provide that one of the partners is to receive a salary allowance of $30,000, plus a bonus of 20 percent of income after deduction of the bonus and the salary allowance. If income is $150,000, the bonus should be: A) $18,000 B) $20,000 C) $24,000 D) $30,000 20) The terms of a partnership agreement provide that one of the partners is to receive a salary allowance of $20,000 plus a bonus of 10 percent of income after deduction of the bonus and the salary allowance. If income is $130,000, the bonus should be: A) $10,000 B) $11,000 C) $12,222 D) $20,000 In the ABC partnership (to which Daniel seeks admittance), the capital balances of Albert, Bert, and Connell, who share income in the ratio of 5:3:2 are: Albert Bert Connell

$

500,000 300,000 200,000

21) Based on the preceding information, if no goodwill or bonus is recorded, how much should Daniel invest for a 20 percent interest?

A) $400,000 B) $200,000 C) $300,000 D) $250,000 22) Based on the preceding information, what amount of goodwill will be recorded if Daniel invests $450,000 for a one-third interest?

A) $0 B) $10,000 C) $50,000 D) $100,000

A B C D

= The amount of tangible assets contributed by the new partner into the partnership = The amount of capital credited to the new partner = Total capital of the partnership before the admission of a new partner = Total capital of the partnership after the admission of a new partner

23) Refer to the above information. Which statement below is correct if a new partner receives a bonus upon contributing assets into the partnership?

A) B < A and D = C − A B) B > A and D = C + A C) A = B and A = D + C D) B > A and C = D + A 24) Refer to the above information. Which statement below is correct if the old partners receive a bonus upon the contribution of assets into the partnership by a new partner?

A) B < A and D = C − A B) B + A and D > C + A C) B < A and D = C + A D) B > A and D = C + A 25) Refer to the above information. Which statement below is correct if goodwill of the old partners is recognized upon the contribution of assets into the partnership by a new partner?

A) B = A and D < C + A B) B = A and D > C + A C) B < A and D = C + A D) B > A and D < C + A 26) Refer to the above information. Which statement below is correct if a new partner purchases an interest in capital directly from the old partners?

A) C < D B) C = D C) C = D and B = A D) C < D and B = A 27) Refer to the above information. Which statement below is correct if a new partner's goodwill is recognized upon contributing assets into the partnership?

A) B = A and D > C + A B) B < A and D < C + A C) B > A and D = C + A D) B > A and D > C + A

28) When a new partner is admitted into a partnership and the new partner receives a capital credit less than the tangible assets contributed, which of the following explains the difference?

I. The new partner's goodwill has been recognized.

II. The old partners received a bonus from the new partner.

A) I only B) II only C) Either I or II D) Neither I nor II 29) When a new partner is admitted into a partnership and the new partner receives a capital credit greater than the tangible assets contributed, which of the following explains the difference?

I. The old partners' goodwill is being recognized.

II. The new partner's goodwill is being recognized.

A) I only B) II only C) Either I or II D) Both I and II 30) When a new partner is admitted into a partnership and the capital of the old partners decreases, which of the following explains the reason for the decrease?

I. Undervalued liabilities were written up to their fair values.

II. Undervalued assets were written up to their fair values.

A) I only B) II only C) Both I and II D) Neither I nor II 31) When a partner retires from a partnership and the retiring partner is paid more than the capital balance in her account, which of the following explains the difference?

I. The retiring partner is receiving a bonus from the other partners.

II. The retiring partner's goodwill is being recognized.

A) I only B) II only C) Either I or II D) Neither I nor II

32) When the old partners receive a bonus upon admission of a new partner into a partnership, the bonus is allocated to: I. all the partners in their profit and loss sharing ratio.

II. the existing partners in their profit and loss sharing ratio.

A) I only B) II only C) Either I or II D) Neither I nor II 33) When a new partner is admitted into a partnership and the old partners' goodwill is recognized, the goodwill is allocated to: I. all the partners in their profit-and-loss-sharing ratio.

II. the old partners in their profit and loss sharing ratio.

A) I only B) II only C) Either I or II D) Neither I nor II In the RST partnership, Ron's capital is $80,000, Stella's is $75,000, and Tiffany's is $50,000.

They share income in a 3:2:1 ratio, respectively. Tiffany is retiring from the partnership. Each of the following questions is independent of the others.

34) Refer to the above information. Tiffany is paid $60,000, and no goodwill is recorded. In the journal entry to record Tiffany's withdrawal: A) Tiffany, Capital will be credited for $60,000.

B) Ron, Capital will be debited for $5,000.

C) Stella, Capital will be debited for $4,000.

D) Cash will be debited for $60,000.

35) Refer to the above information. Tiffany is paid $60,000, and no goodwill is recorded. What is the Ron's capital balance after Tiffany withdraws from the partnership?

A) $74,000 B) $71,000 C) $75,000 D) $86,000 36) Refer to the above information. Tiffany is paid $56,000, and all implied goodwill is recorded. What is the total amount of goodwill recorded?

A) $0 B) $6,000 C) $30,000 D) $36,000 In the LMN partnership, Lynn's capital is $60,000, Marty's is $80,000, and Nancy's is $70,000.

They share income in a 4:3:3 ratio, respectively. Nancy is retiring from the partnership. Each of

the following questions is independent of the others.

37) Refer to the information above. Nancy is paid $84,000, and no goodwill is recorded. In the journal entry to record Nancy's withdrawal: A) Lynn, Capital will be debited for $7,000 B) Marty, Capital will be debited for $6,000 C) Nancy, Capital will be credited for $70,000 D) Cash will be debited for $84,000 38) Refer to the above information. Nancy is paid $84,000, and no goodwill is recorded. What is Lynn's capital balance after Nancy withdraws from the partnership?

A) $68,000 B) $54,000 C) $53,000 D) $52,000 39) Refer to the above information. Nancy is paid $76,000, and all implied goodwill is recorded.

What is the total amount of goodwill recorded?

A) $20,000 B) $14,000 C) $6,000 D) $0 In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the following questions is independent of the others.

40) Refer to the information provided above. What amount will David have to invest to give him one-fifth percent interest in the capital of the partnership if no goodwill or bonus is recorded?

A) $60,000 B) $36,000 C) $50,000 D) $45,000 41) Refer to the information provided above. Assume that David invests $50,000 for a one-fourth interest. Goodwill is to be recorded. The journal to record David's admission into the partnership will include: A) a credit to cash for $50,000.

B) a debit to goodwill for $7,500.

C) a credit to David, Capital for $60,000.

D) a credit to David, Capital for $50,000.

42) Refer to the information provided above. Allen and Daniel agree that some of the inventory is obsolete. The inventory account is decreased before David is admitted. David invests $40,000 for a one-fifth interest. What is the amount of inventory written down?

A) $4,000 B) $20,000 C) $15,000 D) $10,000 43) Refer to the information provided above. Allen and Daniel agree that some of the inventory is obsolete. The inventory account is decreased before David is admitted. David invests $40,000 for a one-fifth interest. What are the capital balances of Allen and Daniel after David is admitted into the partnership?

A) B) C) D)

$ $ $ $

Allen 140,000 125,000 120,000 137,000

Daniel $ 40,000 $ 35,000 $ 36,000 $ 39,000

A) Option A B) Option B C) Option C D) Option D 44) Refer to the information provided above. David directly purchases a one-fifth interest by paying Allen $34,000 and Daniel $10,000. The land account is increased before David is admitted. By what amount is the land account increased?

A) $40,000 B) $10,000 C) $36,000 D) $20,000

45) Refer to the information provided above. David directly purchases a one-fifth interest by paying Allen $34,000 and Daniel $10,000. The land account is increased before David is admitted. What are the capital balances of Allen and Daniel after David is admitted into the partnership?

A) B) C) D)

$ $ $ $

Allen 136,000 160,000 170,000 140,000

$ $ $ $

Daniel 34,000 60,000 50,000 40,000

A) Option A B) Option B C) Option C D) Option D 46) Refer to the information provided above. David invests $40,000 for a one-fifth interest in the total capital of $220,000. The journal to record David's admission into the partnership will include: A) a credit to Cash for $40,000.

B) a debit to Allen, Capital for $3,000.

C) a credit to David, Capital for $40,000.

D) a credit to Daniel, Capital for $1,000.

47) Refer to the information provided above. David invests $40,000 for a one-fifth interest in the total capital of $220,000. What are the capital balances of Allen and Daniel after David is admitted into the partnership?

A) B) C) D)

A) Option A B) Option B C) Option C D) Option D

$ $ $ $

Allen 160,000 136,000 140,000 137,000

$ $ $ $

Daniel 60,000 36,000 40,000 39,000

48) Refer to the information provided above. David invests $50,000 for a one-fifth interest. What amount of goodwill will be recorded?

A) $20,000 B) $4,000 C) $40,000 D) $15,000 In the JK partnership, Jacob's capital is $140,000, and Katy's is $40,000. They share income in a 3:2 ratio, respectively. They decide to admit Erin to the partnership. Each of the following questions is independent of the others.

49) Refer to the information provided above. What amount will Erin have to invest to give her a one-fourth interest in the capital of the partnership if no goodwill or bonus is recorded?

A) $45,000 B) $50,000 C) $60,000 D) $66,000 50) Refer to the information provided above. Assume that Erin invests $40,000 for a one-fifth interest. Goodwill is to be recorded. The journal entry to record Erin's admission into the partnership will include: A) a credit to Cash for $40,000 B) a credit to Erin, Capital for $45,000 C) a credit to Erin, Capital for $40,000 D) a debit to Goodwill for $4,000 51) Refer to the information provided above. Jacob and Katy agree that some of the inventory is obsolete. The inventory account is decreased before Erin is admitted. Erin invests $38,000 for aone-fifth interest. What is the amount of inventory written down?

A) $10,000 B) $20,000 C) $28,000 D) $36,000

52) Refer to the information provided above. Jacob and Katy agree that some of the inventory is obsolete. The inventory account is decreased before Erin is admitted. Erin invests $38,000 for a one-fifth interest. What are the capital balances of Jacob and Katy after Erin is admitted into the partnership?

A. B. C. D.

$ $ $ $

Jacob 140,000 134,000 123,200 118,400

$ $ $ $

Katy 40,000 36,000 28,800 25,600

A) Option A B) Option B C) Option C D) Option D 53) Refer to the information provided above. Erin directly purchases a one-fifth interest by paying Jacob $33,000 and Katy $9,000. The land account is increased for its implied increase in value before Erin is admitted. By what amount is the land account increased?

A) $20,000 B) $24,000 C) $30,000 D) $36,000 54) Refer to the information provided above. Erin directly purchased a one-fifth interest by paying Jacob $33,000 and Katy $9,000. The land account is increased for its implied increase in value before Erin is admitted. What are the capital balances of Jacob and Katy after Erin is admitted into the partnership?

A. B. C. D.

A) Option A B) Option B C) Option C D) Option D

$ $ $ $

Jacob 140,000 152,000 155,000 158,000

$ $ $ $

Katy 40,000 48,000 55,000 52,000

55) Refer to the information provided above. Erin invests $50,000 for a one-fifth interest in the total capital of $230,000. The journal entry to record Erin's admission into the partnership would include A) a debit to Jacob, Capital for $2,400.

B) a credit to Erin, Capital for $50,000.

C) a credit to Katy, Capital for $1,600.

D) a credit to Cash for $50,000.

56) Refer to the information provide above. Erin invests $50,000 for a one-fifth interest in the total capital of $230,000. What are the capital balances of Jacob and Katy after Erin is admitted into the partnership?

A. B. C. D.

$ $ $ $

Jacob 142,400 142,000 140,000 137,600

$ $ $ $

Katy 41,600 42,000 40,000 38,400

A) Option A B) Option B C) Option C D) Option D 57) Refer to the information provided above. Erin invests $52,000 for a one-fifth interest. What amount of goodwill will be recorded?

A) $7,000 B) $28,000 C) $50,000 D) $80,000

58) If A is the total capital of a partnership before the admission of a new partner, B is the total capital of the partnership after the admission of the new partner, C is the amount of the new partner's investment, and D is the amount of capital credited to the new partner, then there is: A) goodwill to the new partner if B > (A + C) and D < C. B) goodwill to the old partners if B = A + C and D > C. C) a bonus to the new partner if B = A + C and D > C. D) neither bonus nor goodwill if B > (A + C) and D > C. Jones and Smith formed a partnership with each partner contributing the following items:

Jones $ 80,000 300,000 400,000

Cash Building

- Cost to Jones - Fair Value Inventory - Cost to Smith - Fair Value Mortgage Payable Accounts Payable

Smith $ 40,000

200,000 280,000 120,000 60,000

Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed by the Jones and Smith partnership.

59) Refer to the above information. What is each partner's tax basis in the Jones and Smith partnership?

A) B) C) D)

A) Option A B) Option B C) Option C D) Option D

$ $ $ $

Jones 350,000 260,000 360,000 500,000

$ $ $ $

Smith 270,000 180,000 260,000 300,000

60) Refer to the above information. What is the balance in each partner's capital account for financial accounting purposes?

A. B. C. D.

$ $ $ $

Jones 350,000 260,000 360,000 500,000

$ $ $ $

Smith 270,000 180,000 260,000 300,000

A) Option A B) Option B C) Option C D) Option D 61) A partner's tax basis in a partnership is comprised of which of the following items?

I. The partner's tax basis of assets contributed to the partnership.

II. The amount of the partner's liabilities assumed by the other partners.

III. The partner's share of other partners' liabilities assumed by the partnership.

A) I plus II minus III B) I plus II plus III C) I minus II plus III D) I minus II minus III 62) Which of the following observations is true of an S corporation?

A) It elects to be taxed in the same manner as a corporation.

B) It does not have the burden of double taxation of corporate income.

C) Its shareholders have personal liability for the corporation's obligations.

D) Its primary income source should be passive investments.

63) A joint venture may be organized as a: I. Partnership.

II. Corporation.

III. Undivided interest.

A) I only B) II only C) I or III only D) I, II, or III

64) Apple and Betty are planning on beginning a new business. They plan on forming a partnership. Apple will contribute $300,000 and will not be working. Betty will be working full time. They plan on splitting profits equally. They approach you, as an accounting major, to confirm their thoughts. What do you recommend?

65) The ABC partnership had net income of $100,000 for 20X9. They allocate profits and losses in the ratio 5:3:2. After closing the 12/31/20X9 books they discovered that $30,000 was spent on a piece of land in December 20X9 and was expensed. What should happen?

66) Two sole proprietors, L and M, agreed to form a partnership on January 1, 20X9. The trial balance for each proprietorship is shown below as of January 1, 20X9.

L

Cash Accounts Receivable (net) Merchandise Inventory Buildings (net) Furniture and Fixtures (net) Accounts Payable Mortgage Payable L, Capital M, Capital

M

On Books of L $ 40,000

Fair Values $ 40,000

On Books of M $ 30,000

Fair Values $ 30,000

60,000

52,000

70,000

56,000

100,000 280,000

94,000 320,000

100,000 250,000

114,000 280,000

60,000

64,000

40,000

44,000

110,000 200,000 230,000

110,000 200,000

80,000 150,000

80,000 150,000

260,000

The LM partnership will take over the assets and assume the liabilities of the proprietors as of January 1, 20X9.

Required: a) Prepare a balance sheet, for financial accounting purposes, for the LM partnership as of January 1, 20X9. b) In addition, assume that M agreed to recognize the goodwill generated by L's business.

Accordingly, M agreed to recognize an amount for L's goodwill such that L's capital equaled M's capital on January 1, 20X9. Given this alternative, how does the balance sheet prepared for requirement A change?

67) Net income for Levin-Tom partnership for 20X9 was $125,000. Levin and Tom have agreed to distribute partnership net income according to the following plan:

Interest on average capital balances Bonus on net income before the bonus but after interest on average capital balances Salaries Residual (if positive) Residual (if negative)

Levin 7%

12% $ 40,000 60% 50%

Tom 7%

$ 50,000 40% 50%

Additional Information for 20X9 follows: 1. Levin began the year with a capital balance of $75,000.

2. Tom began the year with a capital balance of $100,000.

3. On March 1, Levin invested an additional $25,000 into the partnership.

4. On October 1, Tom invested an additional $20,000 into the partnership.

5. Throughout 20X9, each partner withdrew $200 per week in anticipation of partnership net income. The partners agreed that these withdrawals are not to be included in the computation of average capital balances for purposes of income distributions.

Required: a. Prepare a schedule that discloses the distribution of partnership net income for 20X9. Show supporting computations in good form. b. Prepare the statement of partners' capital at December 31, 20X9. c. How would your answer to part a change if all of the provisions of the income distribution plan were the same except that the salaries were $45,000 to Levin and $60,000 to Tom?

68) The PQ partnership has the following plan for the distribution of partnership net income (loss): Salaries Bonus on net income Interest on average capital balances Remainder (if positive) Remainder (if negative)

P $ 80,000 6% 7% 60% 50%

Q $ 100,000 12% 7% 40% 50%

Required: Calculate the distribution of partnership net income (loss) for each independent situation below (for each situation, assume the average capital balance of P is $140,000 and of Q is $240,000).

1. Partnership net income is $360,000.

2. Partnership net income is $240,000.

3. Partnership net loss is $40,000.

69) Paul and Ray sell musical instruments through their partnership. To bring in additional funds and expertise, they decide to admit Janet to the partnership. Paul's capital is $400,000, Ray's capital is $200,000, and they share income in a ratio of 7:3, respectively.

Required: Record Janet's admission and the recording of goodwill or inventory write-down, as indicated, for each of the following independent situations: a) Janet invests $180,000 for a one-fourth interest. Goodwill is to be recorded. b) Paul and Ray agree that some of the inventory is obsolete. The inventory account is decreased before Janet is admitted. Janet invests $190,000 for a one-fourth interest.

70) Miller and Davis, partners in a consulting business, share profits and losses in the ratio of 3:2, respectively. Prior to recording the admission of Shaw as a new partner, Miller has a capital balance of $80,000, and Davis has a capital balance of $40,000.

Required: For each of the following independent cases, prepare the journal entry that was made to record the admission of Shaw into the partnership.

1) Shaw purchased 20 percent of the respective capital balances of Miller and Davis, paying $20,000 cash directly to each of them.

2) Shaw invested $30,000 cash in the partnership for a 20 percent ownership interest. Total capital after recording his admission was $150,000.

3) Shaw invested $40,000 cash into the partnership for a 20 percent ownership interest. Total capital after recording his admission was $160,000.

4) Shaw invested $50,000 into the partnership for a 20 percent interest. Goodwill is to be recognized.

71) In the JAW partnership, Jane's capital is $100,000, Anne's is $80,000, and William's is $75,000. They share income in a 3:2:1 ratio, respectively. William is retiring from the partnership.

Required: Prepare journal entries to record William's withdrawal according to each of the following independent assumptions: a) William is paid $80,000, and no goodwill is recorded. b) William is paid $85,000, and only his share of the goodwill is recorded. c) William is paid $78,000, and all implied goodwill is recorded.

Advanced Financial Accounting, 12e (Christensen) Chapter 16 Partnerships: Liquidation 1) The CRT partnership has decided to terminate operations and to liquidate the partnership assets. There are no partner loans, and all partners have positive capital balances. Gains and losses on liquidation and cash distributions to partners should be allocated as follows: Gains and Losses A) In profit and loss ratio B) Based on capital balances C) In profit and loss ratio D) Based on capital balances

Cash Distributions Based on capital balances In profit and loss ratio In profit and loss ratio Based on capital balances

A) Option A B) Option B C) Option C D) Option D 2) According to UPA 1997, during partnership liquidation, loans the partners have made to the partnership have the same status as loans from third-party creditors. As a practical matter, most loans from partners: A) are subordinated to third-party creditors.

B) have the same status as loans from third-party creditors.

C) are paid prior to third-party creditors.

D) None of the options are correct.

3) In order to avoid inequalities in the liquidation process the legal doctrine of setoff effectively treats loans from partners to the partnership as: A) outside debt that can offset a deficit capital account balance.

B) inside debt that can offset a deficit capital account balance.

C) additional capital investments that can offset a deficit capital account balance.

D) additional capital investments that can offset a partnership loss.

4) When is a partnership considered to be insolvent?

I. When the total of all partners' capital accounts results in a debit balance.

II. When at least one of the partners is personally insolvent.

A) I only B) II only C) Both I and II D) Neither I nor II

5) The balance sheet given below is presented for the partnership of Janet, Anton, and Millet: Cash Other Assets

Total

$

60,000 Liabilities 150,000 Janet, Capital Anton, Capital Millet, Capital $ 210,000 Total

$

80,000 80,000 30,000 20,000 $ 210,000

The partners share profits and losses in the ratio of 5:3:2, respectively. The partners agreed to dissolve the partnership after selling the other assets for $50,000. On dissolution of the partnership, Janet should receive: A) $0.

B) $80,000.

C) $10,000.

D) $30,000.

Bill, Page, Larry, and Scott have decided to terminate their partnership. The partnership's balance sheet at the time they decide to wind up is as follows: Cash Noncash Assets

$ 100,000 Accounts payable 300,000 Bill, Capital Page, Capital Larry, Capital Scott, Capital $ 400,000

$ 100,000 25,000 110,000 100,000 65,000 $ 400,000

During the winding up of the partnership, the other assets are sold for $150,000 and the accounts payable are paid. Page and Larry are personally solvent, but Bill and Scott are personally insolvent. The partners share profits and losses in the ratio of 4:2:1:3.

6) Based on the preceding information, what amount will be paid out to Bill upon liquidation of the partnership?

A) $0 B) $25,000 C) $11,667 D) $2,500

7) Based on the preceding information, what amount will be paid out to Scott upon liquidation of the partnership?

A) $0 B) $2,500 C) $25,000 D) $65,000 8) Based on the preceding information, what amount will be distributed to Page and Larry upon liquidation of the partnership?

A) B) C) D)

A) Option A B) Option B C) Option C D) Option D

Page $ 80,000 $ 110,000 $ 68,333 $ 11,667

Larry $ 85,000 $ 100,000 $ 79,167 $ 5,833

Bill, Page, Larry, and Scott have decided to terminate their partnership. The partnership's balance sheet at the time they decide to wind up is as follows:

Cash Noncash Assets

$ 100,000 Accounts payable 300,000 Bill, Capital Page, Capital Larry, Capital Scott, Capital $ 400,000 Total

$ 100,000 25,000 110,000 100,000 65,000 $ 400,000

During the winding up of the partnership, the other assets are sold for $150,000 and the accounts payable are paid. Page and Larry are personally solvent, but Bill and Scott are personally insolvent. The partners share profits and losses in the ratio of 3:2:1:4.

9) Based on the preceding information, what amount will be paid out to Bill upon liquidation of the partnership?

A) $0 B) $5,000 C) $25,000 D) $2,500 10) Based on the preceding information, what amount will be paid out to Scott upon liquidation of the partnership?

A) $0 B) $2,500 C) $5,000 D) $6,429 11) Based on the preceding information, what amounts will be distributed to Page and Larry upon liquidation of the partnership?

A) B) C) D)

Page $ 0 $ 80,000 $ 74,286 $ 70,000

Larry $ 0 $ 85,000 $ 82,143 $ 80,000

A) Option A B) Option B C) Option C D) Option D The following condensed balance sheet is presented for the partnership of D, E, and F who share

profits and losses in the ratio of 5:3:2, respectively: Cash Other Assets Liabilities D, Capital E, Capital F, Capital Total

$ 100,000 480,000 $ 580,000 $ 160,000 200,000 130,000 90,000 $ 580,000

The partners agreed to liquidate the partnership after selling the other assets.

12) Refer to the above information. If the other assets are sold for $280,000, how much should F receive upon liquidation?

A) $44,000 B) $50,000 C) $76,000 D) $90,000 13) Refer to the above information. If the other assets are sold for $80,000, and all partners are personally insolvent, how much should E receive upon liquidation?

A) $0 B) $6,000 C) $10,000 D) $20,000

The following condensed balance sheet is presented for the partnership of H, I, and J who share profits and losses in the ratio of 4:3:3, respectively: Cash Other Assets Total Liabilities H, Capital I, Capital J, Capital Total

$

50,000 300,000 $ 350,000 $ 80,000 150,000 70,000 50,000 $ 350,000

The partners agree to liquidate the partnership after selling the other assets.

14) Refer to the above information. If the other assets are sold for $200,000, how much should J receive upon liquidation?

A) $50,000 B) $30,000 C) $20,000 D) $15,000 15) Refer to the above information. If the other assets are sold for $140,000 and all partners are personally insolvent, how much should I receive upon liquidation?

A) $0 B) $2,000 C) $6,600 D) $22,000

16) The following condensed balance sheet is presented for the partnership of Finn, Gary, and Eugene who share profits and losses in the ratio of 2:4:4, respectively: Cash Other assets Finn, loan Accounts payable Eugene, loan Finn, Capital Gary, Capital Eugene, Capital

$

70,000 730,000 20,000 $ 820,000 $ 250,000 30,000 110,000 230,000 200,000 $ 820,000

Assume that the partners decide to liquidate the partnership. If the other assets are sold for $600,000, how much of the available cash should be distributed to Finn?

A) $64,000 B) $84,000 C) $90,000 D) $110,000

17) The following condensed balance sheet is presented for the partnership of Dunn, Lott, and Tyler who share profits and losses in the ratio of 7:2:1, respectively.

Cash Other assets

$

30,000 150,000 $ 180,000 $ 60,000 50,000 40,000 30,000 $ 180,000

Liabilities Dunn, Capital Lott, Capital Tyler, Capital

The partners agreed that the partnership would be liquidated after selling the other assets. All partners are personally insolvent. What would each of the partners receive if the other assets are sold for $70,000?

A B C D

A) Option A B) Option B C) Option C D) Option D

Dunn $ 6,000 $ 0 $ 50,000 $ 0

Lott $ 24,000 $ 21,000 $ 40,000 $ 20,000

Tyler $ 22,000 $ 19,000 $ 30,000 $ 20,000

The trial balance of WM Partnership is as follows: Cash Accounts Receivable (net) Inventory Equipment (net) Accounts Payable Wilfred, Capital Mike, Capital Total

$

Debit 25,000 30,000 50,000 95,000

Credit

$

$ 200,000

50,000 100,000 50,000 $ 200,000

Wilfred and Mike decide to incorporate their partnership. The partnership's books will be closed, and new books will be used for W & M Corporation. The following additional information is available: 1. The estimated fair values of the assets follow: Accounts Receivable Inventory Equipment

$ 26,000 46,000 84,000

2. All assets and liabilities are transferred to the corporation.

3. The common stock is $10 par. Wilfred and Mike receive a total of 10,000 shares.

4. The partners share profits and losses in the ratio 7:3.

18) Based on the preceding information, the journal entry on the partnership's books to record the Investment in W&M Corporation Stock will be debited for: A) $181,000 B) $131,000 C) $200,000 D) $150,000 19) Based on the preceding information, the journal entry on the partnership's books to record distribution of stock to prior partners will include a debit to Wilfred, Capital for: A) $140,000.

B) $91,700.

C) $86,700.

D) $126,700.

20) Based on the preceding information, the journal entry on the partnership's books to record distribution of stock to prior partners will include a debit to Mike, Capital for: A) $38,010.

B) $31,500.

C) $42,000.

D) $44,300.

21) Based on the preceding information, the journal entry on W & M Corporation's books to record the assets and the issuance of the common stock will include a credit to Additional PaidIn Capital for: A) $0.

B) $81,000.

C) $31,000.

D) $50,000.

22) The capital balances, prior to the liquidation of the XYZ partnership, were as follows: X, Capital Y, Capital Z, Capital

$ 130,000 $ 130,000 $ 100,000

X, Y, and Z share profits and losses in the ratio of 5:3:2. As a result of a loan, the partnership owes Y $80,000. Using the information above, which partner has the highest Loss Absorption Potential (LAP) prior to liquidation?

A) X B) Y C) Z D) Both X and Y

23) On December 1, 20X9, the partners of Tim, Williams, and Levin, who share profits and losses in the ratio of 4:4:2, decided to liquidate their partnership. On this date the partnership condensed balance sheet was as follows:

Cash Other Assets

$ 100,000 Liabilities 300,000 Tim, Capital William, Capital Levin, Capital $ 400,000 Total

Total

$

90,000 100,000 120,000 90,000 $ 400,000

On December 11, 20X9, the first cash sale of other assets with a carrying amount of $200,000 realized $140,000. Safe installment payments to the partners were made on the same date. How much cash should be distributed to each partner?

A) B) C) D)

A) Option A B) Option B C) Option C D) Option D

Tim $ 40,000 $ 40,000 $ 36,000 $ 24,000

William $ 48,000 $ 40,000 $ 56,000 $ 24,000

Levin $ 18,000 $ 20,000 $ 58,000 $ 12,000

Tom, Dick, and Harry are partners in an equipment leasing business that has not been able to generate the type of revenue expected by the partners. They share profits and losses in a ratio of 5:3:2. They have decided to liquidate the business and have sold all the assets except for one piece of heavy machinery. All partnership liabilities have been settled and all the partners are personally insolvent. The machinery has a book value of $65,000, and the partners have capital account balances as follows: Tom, Capital Dick, Capital Harry, Capital

$

40,000 10,000 15,000

Each of the following is an independent case.

24) Refer to the information given above. What amount of cash will each partner receive as a liquidating distribution if the machinery is sold for $45,000?

A) B) C) D)

Tom $ 40,000 $ 30,000 $ 50,000 $ 40,000

Dick $ 10,000 $ 4,000 $ 16,000 $ 4,000

Harry $ 15,000 $ 11,000 $ 19,000 $ 14,000

A) Option A B) Option B C) Option C D) Option D 25) Refer to the information given above. What amount of cash will each partner receive as a liquidating distribution if the machinery is sold for $13,000?

A) B) C) D)

Tom $ 10,000 $ 14,000 $ 10,000 $ 11,200

$ $ $ $

Dick 5,600 5,600 0 0

$ $ $ $

Harry 3,000 4,600 3,000 2,920

A) Option A B) Option B C) Option C D) Option D 26) Refer to the information given above. What amount of cash will each partner receive as a liquidating distribution if the machinery is sold for $1,100?

A) B) C) D)

$ $ $ $

Tom 1,100 8,050 1,500 1,500

Dick $ $ $ $

Harry

0 9,170 0 0

$ $ $ $

0 2,220 400 0

A) Option A B) Option B C) Option C D) Option D Siera, Lani, and Cecilia are partners in an equipment leasing business that has not been able to generate the type of revenue expected by the partners. They share profits and losses in a ratio of 5:3:2, respectively. They have decided to liquidate the business and have sold all the assets except for one piece of heavy machinery. All the partners are personally insolvent. The machinery has a book value of $90,000, and the partners have capital balances as follows: Siera, Capital Lani, Capital Cecilia, Capital

$ $ $

40,000 20,000 30,000

Each of the following is an independent case.

27) Refer to the information given above. What amount of cash will each partner receive as a liquidating distribution if the machinery is sold for $60,000?

A. B. C. D.

Siera $ 25,000 $ 30,000 $ 40,000 $ 55,000

Lani $ 11,000 $ 10,000 $ 20,000 $ 29,000

Cecilia $ 24,000 $ 20,000 $ 30,000 $ 36,000

A) Option A B) Option B C) Option C D) Option D 28) Refer to the information given above. What amount of cash will each partner receive as a liquidating distribution if the machinery is sold for $21,000?

A. B. C. D.

$ $ $ $

Siera 5,000 5,000 5,500 5,500

Lani $ 0 $ 700 $ 0 $ 700

Cecilia $ 16,000 $ 16,000 $ 16,200 $ 16,200

A) Option A B) Option B C) Option C D) Option D 29) Refer to the information given above. What amount of cash will each partner receive as a liquidating distribution if the machinery is sold for $14,000?

A. B. C. D.

A) Option A B) Option B C) Option C D) Option D

Siera $ 2,000 $ 2,000 $ 0 $ 0

$ $ $ $

Lani 2,800 0 0 0

Cecilia $ 14,800 $ 14,000 $ 14,000 $ 16,000

Partners Dennis and Lilly have decided to liquidate their business. The following information is available: Cash Inventory

$ 100,000 Accounts payable 200,000 Dennis, Capital Lilly, Capital $ 300,000

$ 100,000 120,000 80,000 $ 300,000

Dennis and Lilly share profits and losses in a 3:2 ratio. During the first month of liquidation, half the inventory is sold for $60,000, and $60,000 of the accounts payable is paid. During the second month, the rest of the inventory is sold for $45,000, and the remaining accounts payable are paid.

Cash is distributed at the end of each month, and the liquidation is completed at the end of the second month.

30) Refer to the information provided above. Using a safe payments schedule, how much cash will be distributed to Dennis at the end of the first month?

A) $64,000 B) $60,000 C) $24,000 D) $36,000 31) Refer to the information provided above. Using a safe payments schedule, how much cash will be distributed to Lilly at the end of the first month?

A) $24,000 B) $40,000 C) $16,000 D) $64,000 32) Refer to the information provided above. Using a safe payments schedule, how much cash will be distributed to Dennis at the end of the second month?

A) $18,000 B) $27,000 C) $36,000 D) $60,000 33) Refer to the information provided above. Using a safe payments schedule, how much cash will be distributed to Lilly at the end of the second month?

A) $27,000 B) $36,000 C) $18,000 D) $0

34) Refer to the information provided. Assume instead that the remaining inventory was sold for $10,000 in the second month. What payments will be made to Dennis and Lilly at the end of the second month?

A) B) C) D)

Dennis $ 0 $ 10,000 $ 5,000 $ 6,000

Lilly $ $ $ $

0 0 5,000 4,000

A) Option A B) Option B C) Option C D) Option D Partners David and Goliath have decided to liquidate their business. The following information is available: Cash Inventory Accounts payable David, Capital Goliath, Capital

$ 100,000 200,000 $ 300,000 $ 80,000 140,000 80,000 $ 300,000

David and Goliath share profits and losses in a 3:1 ratio, respectively. During the first month of liquidation, half the inventory is sold for $70,000, and $50,000 of the accounts payable are paid.

During the second month, the rest of the inventory is sold for $55,000, and the remaining accounts payable are paid. Cash is distributed at the end of each month, and the liquidation is completed at the end of the second month.

35) Refer to the information provided above. Using a safe payment schedule, how much cash will be distributed to David at the end of the first month?

A) $22,500 B) $42,500 C) $75,000 D) $117,500

36) Refer to the information provided above. Using a safe payment schedule, how much cash will be distributed to Goliath at the end of the first month?

A) $7,500 B) $25,000 C) $47,500 D) $72,500 37) Refer to the information provided above. How much cash will be distributed to David at the end of the second month?

A) $75,000 B) $60,000 C) $41,250 D) $33,750 38) Refer to the information provided above. How much cash will be distributed to Goliath at the end of the second month?

A) $11,250 B) $13,750 C) $20,000 D) $25,000 39) Refer to the information provided above. Assume instead that the remaining inventory was sold for $20,000 in the second month. What payments will be made to David and Goliath at the end of the second month?

A. B. C. D.

David $ 0 $ 10,000 $ 15,000 $ 20,000

A) Option A B) Option B C) Option C D) Option D

Goliath $ 0 $ 10,000 $ 5,000 $ 0

40) In the computation of a partner's Loss Absorption Potential (LAP), the individual partner's capital balance and profit-and-loss percentage are used in which of the following ways?

A) B) C) D)

Partner's Net Capital balance Denominator Numerator Numerator Not used

Profit and Loss percentage Numerator Not used Denominator Denominator

A) Option A B) Option B C) Option C D) Option D 41) During the liquidation of the FGH partnership, a cash distribution was made to all the partners, who share profits and losses 60 percent, 20 percent, and 20 percent, respectively.

Assuming that the cash distribution referred to was made properly, how much would G receive if an additional $60,000 was distributed?

A) $60,000 B) $20,000 C) $17,000 D) $12,000 42) Which of the following items are important in the determination of safe installment payments to partners?

I. Deficits created in capital accounts are distributed to the remaining partners.

II. All unsold noncash assets are assumed to be worthless.

A) I only B) II only C) Both I and II D) Neither I nor II

43) In the computation of a partner's Loss Absorption Potential (LAP), which of the following statements is incorrect?

I. The computation of LAPs for all partners allows cash to be distributed before all partnership assets have been sold and all creditors have been paid.

II. The computation of LAPs for all partners indicates the relative strength of each partner's net capital position so that available cash is distributed in respective loss-sharing ratios.

A) I B) II C) Both I and II D) Neither I nor II 44) The BIG Partnership has decided to liquidate at December 31, 20X8. The capital and loan balances of the partners at December 31, 20X8, are provided below:

Partners B I G

Capital Balances $ 210,000CR 240,000CR 40,000CR

Loan Balances $ 40,000CR 100,000DR 80,000CR

Profit-and-Loss Sharing Percentages 50% 20% 30%

If you were to calculate the Loss Absorption Potential for each partner, how would the partners rank (from highest to lowest LAP)?

A) B, I, G B) I, B, G C) B, G, I D) G, I, B 45) Partner A has a smaller capital balance than Partner L. Partner A, however, has a higher profit-and-loss-sharing percentage than Partner L. The LA partnership has decided to liquidate.

As a result of the information given, A) Partner L will have a smaller loss absorption potential than A. B) Partner L will receive cash only after A has received cash.

C) Partner A will have a smaller loss absorption potential than L. D) Partner A will never receive any cash from partnership liquidation.

46) Which of the following statements is (are) true?

I. In the calculation of the loss absorption potential for a partner, a partner's loan balance (an amount that is owed by the partnership) should be added to the partner's capital balance.

II. In liquidation, a partner's loan balance (an amount that is owed by the partnership) should be paid to the partner as a creditor of the partnership after the outside creditors.

A) I only B) II only C) Both I and II D) Neither I nor II 47) When a partnership is liquidated on a piecemeal basis and cash has been distributed properly to all partners as noncash assets have been turned into cash, all future cash distributions should be made: I. In the profit and loss ratio.

II. According to the balances in the partners' capital accounts.

A) I only B) II only C) Both I and II D) Neither I nor II 48) The computation of a safe installment payment for the XYZ partnership resulted in only partner Z receiving cash. Which of the following statements is correct?

I. Partner Z lent the partnership cash, and the partnership had to pay back the loan to Z before distributing cash to X and Y. II. After assuming all noncash assets were potentially worthless and that assumed capital deficits created in X's and Y's capital balances were losses to be allocated to Z; Z's capital balance was the only capital balance left with a credit.

A) I only B) II only C) Either I or II D) Neither I nor II

49) The JKL partnership liquidated its business in 20X9. Due to an expected long liquidation period, a cash distribution plan was developed. The initial sale and realization of cash from noncash assets resulted in partner K properly getting $24,000. No other partners received cash along with K. Based upon this information, which of the following statements is correct?

I. K's loss absorption potential (LAP) was higher than J's LAP and L's LAP. II. K's capital balance was substantially larger than the balances of J and L. A) I only B) II only C) Either I or II D) Neither I nor II 50) On a partner's personal statement of financial condition, how should liabilities be valued?

I. Present value II. Lower of present value or cash settlement amount A) I B) II C) Both I and II D) Neither I nor II 51) On a partner's personal statement of financial condition, assets and liabilities are presented: I. As current and noncurrent.

II. In order of liquidity and maturity.

A) I B) II C) Both I and II D) Neither I nor II 52) The personal financial statements of a partner include which of the following?

I. Statement of financial condition.

II. Statement of changes in net worth.

III. Statement of cash flows.

A) I and II B) I and III C) II and III D) I, II, and III

53) On a partner's personal statement of financial condition, how are assets valued?

A) Historical cost B) Book value C) Discounted value D) Estimated current value 54) On a partner's personal statement of changes in net worth, what type(s) of income is (are) recognized?

I. Realized II. Unrealized A) I only B) II only C) Both I and II D) Neither I nor II 55) On December 31, 20X8, Mr. and Mrs. Williams owned a parcel of land held as an investment. The land was purchased for $40,000 in 20X6, and was encumbered by a mortgage with a principal balance of $30,000 at December 31, 20X8. On this date the fair value of the land was $75,000. In the Williams' December 31, 20X8, personal statement of financial condition, at what amount should the land investment and mortgage payable be reported?

A) B) C) D)

A) Option A B) Option B C) Option C D) Option D

Land Investment $ 10,000 $ 75,000 $ 40,000 $ 45,000

Mortgage Payable $ 0 $ 30,000 $ 30,000 $ 0

56) A partnership may be involved in "Dissociation" or "Dissolution."

Required: Describe "Dissociation" and "Dissolution."

57) When Disney and Charles decided to incorporate their partnership, the trial balance was as follows: Cash Accounts Receivable (net) Inventory Equipment (net) Accounts Payable Disney, Capital Charles, Capital Total

Debit $ 50,000 25,000 55,000 120,000

Credit

$

$ 250,000

40,000 140,000 70,000 $ 250,000

The partnership's books will be closed, and new books will be used for D & C Corporation. The following additional information is available: 1. The estimated fair values of the assets follow: Accounts Receivable Inventory Equipment

$ 22,000 48,000 95,000

2. All assets and liabilities are transferred to the corporation.

3. The common stock is $5 par. Disney and Charles receive a total of 24,000 shares.

4. Disney and Charles share profits and losses in the ratio 6:4.

Required: a. Prepare the entries on the partnership's books to record (1) the revaluation of assets, (2) the transfer of the assets to the D & C Corporation and the receipt of the common stock, and (3) the closing of the books. b. Prepare the entries on D & C Corporation's books to record the assets and the issuance of the common stock.

58) Listen and Hear are thinking of dissolving their partnership. Listen has a friend who told him to complete a "lump-sum" liquidation. Hear wants to complete an "installment" liquidation. They have come to you for advice. What do you recommend and Why?

59) On March 1, 20X9, the ABC partnership decides to complete a lump-sum liquidation as soon as possible. The partnership balance sheet prepared on March 1 appears below:

Cash Accounts Receivable Inventory Investments Plant and Equipment-Net Total Assets

$

$

ABC Partnership Balance Sheet March 1, 20X9 50,000 Accounts Payable $ 60,000 Due to Partner A 100,000 A, Capital (30%) 40,000 B, Capital (40%) 650,000 C, Capital (30%) 900,000 Total Liability and Capital $

200,000 30,000 350,000 80,000 240,000 900,000

The partners share profits and losses in the ratio of 3:4:3. Partner B is personally insolvent, but partners A and C have sufficient personal assets to satisfy any capital deficits. On March 15, 20X9, the non-cash assets are sold for $550,000. Lump sum payments are made to the partners on March 16, immediately after the creditors have been paid.

Required: Prepare a statement of partnership realization and liquidation.

60) The partnership of Rachel, Adams, and Nixon has the following trial balance on September 30, 20X9: Cash Accounts Receivable (net) Inventory Plant and Equipment (net) Accounts Payable Rachel, Capital Adams, Capital Nixon, Capital Total

$

Debit 20,000 30,000 35,000 215,000

Credit

$

$ 300,000

40,000 120,000 90,000 50,000 $ 300,000

The partners share profits and losses as follows: Rachel, 50 percent; Adams, 30 percent; and Nixon, 20 percent. The partners are considering an offer of $180,000 for the accounts receivable, inventory, and plant and equipment as of September 30. The $180,000 will be paid to creditors and the partners in installments, the number and amounts of which are to be negotiated.

Required: Prepare a cash distribution plan as of September 30, 20X9, showing how much cash each partner will receive if the offer to sell the assets is accepted.

61) The partnership of Rachel, Adams, and Nixon has the following trial balance on September 30, 20X9:

Cash Accounts Receivable (net) Inventory Plant and Equipment (net) Accounts Payable Rachel, Capital Adams, Capital Nixon, Capital Total

$

Debit 20,000 30,000 35,000 215,000

Credit

$

$

300,000

40,000 120,000 90,000 50,000 $ 300,000

The partners share profits and losses as follows: Rachel, 50 percent; Adams, 30 percent; and Nixon, 20 percent. The partners are considering an offer of $180,000 for the accounts receivable, inventory, and plant and equipment as of September 30. The $180,000 will be paid to creditors and the partners in installments, the number and amounts of which are to be negotiated.

The partners have decided to liquidate their partnership by installments instead of accepting the offer of $180,000. Cash is distributed to the partners at the end of each month. A summary of the liquidation transactions follows:

October 1. $25,000 is collected on accounts receivable; balance is uncollectible.

2. $20,000 received for the entire inventory.

3. $1,500 liquidation expense paid.

4. $40,000 paid to creditors.

5. $10,000 cash retained in the business at the end of the month.

November 6. $2,000 in liquidation expenses paid.

7. As part payment of his capital, Nixon accepted an item of special equipment that he developed, which had a book value of $8,000. The partners agreed that a value of $12,000 should be placed on this item for liquidation purposes.

8. $4,000 cash retained in the business at the end of the month.

December 9. $150,000 received on sale of remaining plant and equipment.

10. $1,000 liquidation expenses paid. No cash retained in the business.

Required: Prepare a statement of partnership realization and liquidation with supporting schedules of safe payments to partners.

62) A personal statement of financial condition dated December 31, 20X8, is to be prepared for Wilhelm Holz. He provides the following information for your use in preparing the statements.

All amounts are as of December 31, 20X8.

1) Cash on hand and in bank is $4,000.

2) Investments costing $30,000 have a market value of $78,000.

3) His personal residence cost $150,000 ten years ago, and is currently worth $320,000.

4) The payoff balance of his home mortgage is $80,000.

5) The fair value of his 401(k) retirement account is $700,000. All withdrawals from the account will be fully taxable.

6) Amounts due on credit card debt total $5,000.

7) Estimated income taxes on his calendar 20X8 earnings amount to $15,000. Taxes withheld in 20X8 were $14,000.

8) Assume an income tax rate of 30 percent.

Required: Prepare a statement of financial condition for Mr. Holz as of December 31, 20X8. Assume any gain on subsequent sale of the residence will not be tax-exempt.

Advanced Financial Accounting, 12e (Christensen) Chapter 17 Governmental Entities: Introduction and General Fund Accounting 1) Which organization has the authority to establish generally accepted accounting principles for state and local government entities?

A) The National Council on Governmental Accounting B) The Governmental Accounting Standards Board C) The Financial Accounting Standards Board D) The Municipal Officers Finance Organization 2) Which of the following characteristics are emphasized in the accounting for state and local government entities?

I. Revenues should be matched with expenditures to measure success or failure of the government entity.

II. There is an emphasis on expendability of resources to accomplish objectives of the governmental entity.

A) I only B) II only C) I and II D) Neither I nor II 3) All of the following are elements of the statement of financial condition for state and local governments with the exception of: A) Assets and Liabilities B) Deferred inflow and outflow of resources C) Net position D) Inflow and outflow of resources 4) Which of the following statements best describes the reporting process for profit seeking and governmental entities?

A) In profit-seeking enterprises the measurement focus is on the flow of all economic resources of the firm, whereas the focus for governmental funds is on current financial resources.

B) In profit-seeking enterprises the measurement focus is on the flow of current financial resources, whereas the focus for government funds is on all economic resources.

C) Both profit-seeking enterprises and governmental entities have an objective to measure profitability.

D) Both profit-seeking enterprises and governmental entities use the accrual or cash basis of accounting to record and report transactions.

5) Which of the following statements is(are) correct about the funds used by governmental entities?

I. Funds are fiscal entities.

II. Funds are accounting entities.

A) I only B) II only C) I and II D) Neither I nor II 6) Which of the following funds are classified as fiduciary funds?

A) Agency and special revenue funds.

B) Internal service and enterprise funds.

C) Private-purpose trust and agency funds.

D) Capital projects and debt service funds.

7) Which of the following funds are classified as proprietary funds?

A) Agency and special revenue funds.

B) Enterprise and internal service funds.

C) Debt service and capital projects funds.

D) Agency and pension trust funds.

8) Which of the following funds are classified as governmental funds?

A) Internal service and capital projects funds.

B) Internal service and debt service funds.

C) Enterprise and agency funds.

D) The general and special revenue funds.

9) Which of the following funds provides goods and services only to other departments or agencies of the government on a cost-reimbursement basis?

A) Internal service funds B) Enterprise funds C) Special revenue funds D) The general fund 10) All of the following funds have a financial resources measurement focus with the exception of which fund?

A) Debt service fund B) Special revenue fund C) Capital projects fund D) Private-purpose trust fund

11) Which governmental fund includes resources that are legally restricted so that the governmental entity must maintain the principal and can use only the earnings from the fund's resources to benefit the government's programs for all of its citizens?

A) General fund B) Special revenue fund C) Capital projects fund D) Permanent fund 12) The following information was obtained from the general fund balance sheet of Lincoln County on June 30, 20X2, the close of its fiscal year:

Vouchers Payable Inventory of Supplies Fund Balance—Assigned for Encumbrances Fund Balance—Nonspendable Total Assets

$ 310,000 30,000 50,000 30,000 516,000

On June 30, 20X2, what was Lincoln's unassigned fund balance in its general fund?

A) $96,000 B) $126,000 C) $176,000 D) $206,000 13) The following information was obtained from the general fund balance sheet of Lima Village on June 30, 20X9, the close of its fiscal year:

Vouchers Payable Inventory of Supplies Fund Balance—Assigned for Encumbrances Fund Balance—Nonspendable Total Assets

$ 220,000 10,000 40,000 10,000 304,000

On June 30, 20X9, what was Lima's unassigned fund balance in its general fund?

A) $84,000 B) $44,000 C) $34,000 D) $24,000

14) In accounting for governmental funds, which of the following items could appear only on governmentwide financial statements?

I. Fixed assets II. Long-term debt III. Investments A) I only B) I and II C) I and III D) I, II, III 15) At the end of the fiscal year, uncollected property taxes in the general fund should be: A) reclassified from current to delinquent.

B) written off as uncollectible.

C) charged against unassigned fund balance.

D) reclassified from current to noncurrent.

16) The Town of Baker reported the following items on the June 30, 20X9, balance sheet of its general fund: Cash Property Taxes Receivable—Delinquent (net) Inventory Supplies Vouchers Payable Due to Internal Service Fund Fund Balance—Assigned for Encumbrances Fund Balance—Nonspendable Fund Balance—Unassigned

$ 50,000 24,000 10,000 34,000 4,000 6,000 ? ?

At June 30, 20X9, what amount should be reported for Fund Balance—Unassigned?

A) $46,000 B) $40,000 C) $30,000 D) $16,000 17) Which of the financial statements described below is prepared by the general fund of a state or local government?

A) A statement of cash flows.

B) An income statement.

C) A statement of revenues, expenses, and changes in retained earnings.

D) A statement of revenues, expenditures, and changes in fund balance.

18) Which accounts described below would have non-zero balances after the accounts are closed in the general fund of a state or local government?

I. Estimated Revenues Control.

II. Appropriations Control.

III. Budgetary Fund Balance Unreserved.

IV. Deferred Revenue.

V. Due to Internal Service Fund.

VI. Fund Balance-Reserved for Inventories.

A) I, II, III. B) I, II, IV. C) IV, V, VI. D) III, IV, V. 19) In a statement of revenues, expenditures, and changes in fund balance, the unassigned fund balance will be increased by: I. a decrease in the fund balance—Nonspendable.

II. an excess of other financing sources over other financing uses.

A) I only B) II only C) Both I and II D) Neither I nor II 20) Which of the following items should not be included as revenue for a state government?

A) Property taxes levied in the current fiscal year.

B) Private property for which a state takes custody when the legal owner cannot be found.

C) Amounts received from other financing sources.

D) Fines and licensing fees for which amounts cannot be budgeted.

21) Under the modified accrual basis of accounting, revenue should be recognized when it is: A) measurable and earned.

B) received in cash.

C) available and earned.

D) measurable and available.

22) Which of the following funds should use the accrual basis of accounting?

A) Enterprise and private-purpose trust funds.

B) Permanent funds and internal service funds.

C) Debt service and agency funds.

D) Special revenue and capital projects funds.

23) Which of the following funds should use the modified accrual basis of accounting?

A) Private-purpose trust and agency funds.

B) Capital projects and special revenue funds.

C) Internal service and enterprise funds.

D) Debt service and private-purpose trust funds.

24) Under the modified accrual basis of accounting for the general fund, expenditures should be recognized in the period in which the related liability is: I. paid.

II. incurred.

A) I only B) II only C) Both I and II D) Neither I nor II 25) The general fund of the Town of Dean levied property taxes of $3,000,000 for the fiscal year beginning on January 1, 20X8. It was estimated that 1% of the levy would be uncollectible.

During the period January 1, 20X8, through December 31, 20X8, $2,960,000 of the property tax levy was collected. At December 31, 20X8, Dean estimated that $10,000 of property taxes levied in 20X8 would be collected during the first 60 days of 20X9. What amount of property tax revenue should be reported by the general fund for the year ended December 31, 20X8?

A) $2,960,000 B) $3,000,000 C) $2,970,000 D) $2,990,000 26) The general fund of the City of Atlanta received a check for $10,000 from an Atlanta resident on July 1, 20X8. Of the amount received, $4,800 represented full payment of property taxes for 20X8, and the remaining $5,200 represented an advance payment for property taxes of 20X9. On July 1, 20X8, the general fund should record the receipt by debiting Cash for $10,000 and by crediting A) Revenue-Property Tax for $10,000.

B) Property Taxes Receivable-Current for $4,800 and Deferred Revenue for $5,200.

C) Revenue-Property Tax for $4,800 and Deferred Revenue for $5,200.

D) Property Taxes Receivable-Current for $4,800 and Revenue-Property Tax for $5,200.

27) Which combination of fund and measurement basis is correct?

A) B) C) D)

Fund Special revenue Internal service Debt service Enterprise

Measurement Basis Modified cash Accrual Cash Modified accrual

A) Option A B) Option B C) Option C D) Option D 28) Revenues from parking meters and parking fines should be reported in the general fund when: A) received.

B) measurable and available.

C) measurable and earned.

D) available.

29) The general fund of Gillette levied property taxes of $400,000 on November 1, 20X8.

However, the property taxes are not collectible until May and August of 20X9. Assume Gillette reports on the calendar year. On Gillette's general fund balance sheet at December 31, 20X8, the property taxes levied on November 1 should: A) be reported as an asset and as a decrease in unassigned fund balance.

B) be reported as an asset and as an increase in unassigned fund balance.

C) be reported as an asset and as a reservation of fund balance.

D) be reported as an asset and as a deferred revenue.

30) Which of the following items is not recognized as revenue by a governmental unit?

A) Sales tax proceeds B) Property tax levies C) Bond proceeds D) Grants received from other governmental units

31) The following information pertains to property taxes levied by Sycamore City for 20X7: Collections during 20X7 Expected collections during the first 60 days of 20X8 Expected collections during the balance of 20X8 Expected collections during January 20X9 Estimated to be uncollectible Total levy

$

$

1,200,000 200,000 110,000 40,000 30,000 1,580,000

What amount should Sycamore report for 20X7 net property tax revenues?

A) $1,200,000 B) $1,400,000 C) $1,550,000 D) $1,580,000 32) In a town's general fund operating budget for the year, the amount of its estimated revenues exceeded the amount of its appropriations. This excess should be: A) credited to Budgetary Fund Balance—Unassigned.

B) debited to Budgetary Fund Balance—Unassigned.

C) credited to Fund Balance—Unassigned.

D) debited to Fund Balance—Unassigned.

33) The general fund of Caldwell had the following operating budget for the fiscal year beginning July 1, 20X9: Estimated Revenues Appropriations Budgeted Transfer In from Debt Service Fund Budgeted Transfer Out to Capital Projects Fund

$ 5,100,000 4,200,000 200,000 500,000

When the general fund records its operating budget on July 1, 20X9, Budgetary Fund Balance— Unassigned should be A) credited for $600,000.

B) debited for $900,000.

C) debited for $600,000.

D) credited for $900,000.

34) Assuming there is a budget surplus, which of the following accounts are credited when the general fund records its operating budget at the beginning of the year?

A) Appropriations Control and Budgetary Fund Balance—Unassigned.

B) Estimated Revenues Control and Estimated Residual Equity Transfer Out. C) Budgetary Fund Balance—Assigned For Encumbrances and Expenditures.

D) Estimated Residual Equity Transfer Out and Estimated Transfer In. 35) What is the correct sequence in the expenditure process in governmental accounting?

A) Appropriation, Encumbrance, Expenditure, and Disbursement.

B) Encumbrance, Expenditure, Disbursement, and Appropriation.

C) Expenditure, Encumbrance, Disbursement, and Appropriation.

D) Appropriation, Expenditure, Encumbrance, and Disbursement.

36) Which of the following observations concerning encumbrances is NOT true?

A) Their purpose is to ensure that the expenditures within a period do not exceed the budgeted appropriations.

B) They provide a control system and safeguard for governmental unit administrators.

C) They are an unique element of governmental accounting.

D) They are recognized only at the time disbursements are made.

37) The City of Ames uses the consumption method to report its inventory of supplies on its general fund balance sheet. What account is debited in the general fund when Ames acquires supplies?

A) Expenditures B) Inventory of Supplies C) Supplies Expense D) Fund Balance—Nonspendable 38) On July 25, 20X8, the city of Pullman, which reports on a calendar-year basis, ordered five police cars at an estimated cost of $200,000. On August 26, 20X8, the police cars were received, and the actual cost amounted to $197,000. Pullman encumbered the appropriation for police cars in its general fund when the cars were ordered. When the police cars were received, the general fund of Pullman should: A) Credit Budgetary Fund Balance Assigned for Encumbrances for $197,000.

B) Debit Encumbrances for $200,000.

C) Debit Expenditures for $197,000.

D) Credit Budgetary Fund Balance Assigned for Expenditures for $200,000.

39) What amount should be reported as expenditures for the current fiscal year when accounting for inventories of supplies under the purchase method and under the consumption method?

A) B) C) D)

Purchase Method amount used amount used amount purchased amount purchased

Consumption Method amount purchased amount used amount purchased amount used

A) Option A B) Option B C) Option C D) Option D 40) The Town of Pasco has no supplies inventory in its general fund on January 1, 20X8. During 20X8, Pasco incurred expenditures of $200,000 for the acquisition of supplies. On December 31, 20X8, Pasco's inventory of supplies amounted to $30,000. Assume Pasco uses the purchase method of accounting for supplies in its general fund and that the village reports on the calendar year. On December 31, 20X8, the general fund of Pasco should credit: A) Expenditures for $170,000.

B) Fund Balance—Unassigned for $170,000.

C) Fund Balance—Nonspendable for $30,000.

D) Expenditures for $30,000.

41) The general fund of Park City acquired computer equipment at a cost of $50,000 on May 18, 20X9. To record acquisition of this equipment, the general fund of Park City should debit: A) expenditures.

B) encumbrances.

C) equipment.

D) vouchers payable.

42) Works of art and historical treasures purchased by the general fund should be reported as: I. an expenditure in the general fund.

II. assets in the government-wide financial statements.

A) I only.

B) II only.

C) Both I and II. D) Neither I nor II.

43) Identify the legal term that allows the general fund to make expenditures.

A) Exceptions B) Appropriations C) Encumbrances D) Consumption 44) The general fund of Hatteras acquired a fire truck during the fiscal year ended June 30, 20X9. The purchase order for the fire truck was recorded on February 15, 20X9. Hatteras' acquisition of the fire truck required which of the following sequences of accounting activities?

I. Appropriation II. Encumbrance III. Expenditure A) II, I, III. B) I, III, II. C) III, II, I. D) I, II, III. 45) Blue Ridge Township uses the consumption method of accounting for its inventory of supplies. On the December 31, 20X7 balance sheet for the general fund, the township reported $10,000 of supplies inventory. During 20X8, expenditures for supplies amounted to $40,000, and, at December 31, 20X8, unused supplies totaled $7,000. In the adjusting entry for supplies at December 31, 20X8, A) Expenditures should be credited for $3,000.

B) Expenditures should be debited for $3,000.

C) Fund Balance—Nonspendable should be debited for $7,000.

D) Fund Balance—Nonspendable should be credited for $7,000.

Gotham City acquires $25,000 of inventory on November 1, 20X7, having held no inventory previously. On December 31, 20X7, the end of Gotham City's fiscal year, a physical count shows $8,000 still in stock. During 20X8, $6,500 of this inventory is used, resulting in a $1,500 remaining balance of supplies on December 31, 20X8.

46) Based on the preceding information, which of the following would be the correct account balances for 20X7 if Gotham City used the purchase method of accounting for inventories?

A) B) C) D)

Expenditures $ 25,000 $ 17,000 $ 17,000 $ 25,000

Inventory of Supplies $ 0 $ 8,000 $ 0 $ 8,000

A) Option A B) Option B C) Option C D) Option D 47) Based on the preceding information, which of the following would be the correct account balances for 20X8 if Gotham City used the purchase method of accounting for inventories?

A) B) C) D)

A) Option A B) Option B C) Option C D) Option D

Expenditures $ 0 $ 0 $ 6,500 $ 6,500

Inventory of Supplies $ 8,000 $ 1,500 $ 1,500 $ 0

48) Based on the preceding information, which of the following would be the correct account balances for 20X7 if Gotham City used the consumption method of accounting for inventories?

A) B) C) D)

Expenditures $ 17,000 $ 25,000 $ 25,000 $ 17,000

Inventory of Supplies $ 8,000 $ 8,000 $ 0 $ 0

A) Option A B) Option B C) Option C D) Option D 49) Based on the preceding information, which of the following would be the correct account balances for 20X8 if Gotham City used the consumption method of accounting for inventories?

A) B) C) D)

A) Option A B) Option B C) Option C D) Option D

Expenditures $ 0 $ 0 $ 6,500 $ 6,500

Inventory of Supplies $ 8,000 $ 1,500 $ 1,500 $ 0

Goshen City acquires $36,000 of inventory on November 1, 20X5, having held no inventory previously. On December 31, 20X5, the end of Goshen City's fiscal year, a physical count shows $7,000 still in stock. During 20X6, $5,000 of this inventory is used, resulting in a $2,000 remaining balance of supplies on December 31, 20X6.

50) Based on the preceding information, which of the following would be the correct account balances for 20X5 if Goshen City used the purchase method of accounting for inventories?

A. B. C. D.

Expenditures $ 36,000 $ 29,000 $ 36,000 $ 29,000

Inventory of Supplies $ 7,000 $ 0 $ 0 $ 7,000

A) Option A B) Option B C) Option C D) Option D 51) Based on the preceding information, which of the following would be the correct account balances for 20X6 if Goshen City used the purchase method of accounting for inventories?

A. B. C. D.

A) Option A B) Option B C) Option C D) Option D

Expenditures $ 0 $ 0 $ 5,000 $ 7,000

Inventory of Supplies $ 2,000 $ 7,000 $ 2,000 $ 2,000

52) Based on the preceding information, which of the following would be the correct account balances for 20X5 if Goshen City used the consumption method of accounting for inventories?

A. B. C. D.

Expenditures $ 29,000 $ 36,000 $ 29,000 $ 36,000

Inventory of Supplies $ 0 $ 0 $ 7,000 $ 7,000

A) Option A B) Option B C) Option C D) Option D 53) Based on the preceding information, which of the following would be the correct account balances for 20X6 if Goshen City used the consumption method of accounting for inventories?

A. B. C. D.

A) Option A B) Option B C) Option C D) Option D

Expenditures $ 5,000 $ 0 $ 0 $ 7,000

Inventory of Supplies $ 2,000 $ 2,000 $ 7,000 $ 2,000

54) Which of the following accounts are debited when closing entries are made for the general fund (assume outstanding encumbrances lapse at year-end)?

I. Appropriations Control.

II. Estimated Revenues Control.

III. Encumbrances.

IV. Budgetary Fund Balance-Reserved for Encumbrances.

V. Estimated Other Financing Uses-Transfer Out. VI. Revenue-Property Tax.

A) I, II, III, VI. B) I, II, IV. C) I, IV, V, VI. D) III, IV, V. 55) The general fund of Athens ordered computer equipment on December 1, 20X8, for $32,000.

The order was appropriately encumbered on this date. Athens received the computer equipment on January 25, 20X9, and issued a voucher to pay the vendor $32,400. Athens uses the calendar year for reporting, and all outstanding encumbrances lapse at year-end. Athens' governing board honors all outstanding encumbrances by including them in the following year's appropriations.

On January 25, 20X9, the general fund of Athens should debit: A) Encumbrances for $32,000.

B) Fund Balance—assigned for Encumbrances for $32,400.

C) Expenditures-20X8 for $32,400.

D) Expenditures for $32,400.

56) The general fund of Loveland ordered a new fire truck on November 12, 20X8, for $150,000.

The order was appropriately encumbered on this date. Loveland received the fire truck on January 15, 20X9, and issued a voucher to the manufacturer for $148,600. Loveland uses the calendar year for reporting, and outstanding encumbrances at December 31, 20X8, are lapsing.

On January 15, 20X9, the general fund of Loveland should debit: A) Fund Balance—assigned for Encumbrances for $148,600.

B) Expenditures for $148,600.

C) Expenditures-20X8 for $148,600.

D) Encumbrances for $148,600.

57) The general fund of Wold Township ordered office furniture for the mayor's office on August 1, 20X8. The office furniture was estimated to cost $12,000. The office furniture was received on September 1, 20X8, with the actual cost being $11,800. Which of the following accounts decreased on September 1, 20X8?

A) Encumbrances only.

B) Expenditures only.

C) Encumbrances and Budgetary Fund Balance—Assigned for Encumbrances.

D) Expenditures and Budgetary Fund Balance—Assigned for Encumbrances.

58) Due to an error, the general fund of Pueblo did not record an encumbrance for police equipment that had been ordered but not received on June 30, 20X9, the end of its fiscal year.

Pueblo's outstanding encumbrances at year-end are nonlapsing. What was the effect of this error on the balance sheet of Pueblo's general fund?

A) Assets are overstated.

B) Liabilities are understated.

C) Total fund balance is overstated.

D) Unassigned fund balance is overstated.

59) GASB 31 "Accounting for Financial Reporting for Certain Investments and for External Reporting Investment Pools," establishes a general rule that government entities value investments in option contracts, open-ended mutual funds, and debt securities for balance sheet presentation at: A) lower of cost or market.

B) fair value.

C) cost.

D) amortized cost.

60) The general ledger of Broadway contains the following selected account balances: Appropriations Control Reserve for Encumbrances Vouchers Payable Expenditures

$ 900,000 50,000 90,000 720,000

Broadway wants to order additional goods and services before the fiscal year end. What is the unencumbered balance of the budget that may be expended by Broadway?

A) $850,000 B) $760,000 C) $180,000 D) $130,000

61) The general ledger of Covington contains the following selected account balances: Appropriations Control Reserve for Encumbrances Vouchers Payable Expenditures

$ 1,500,000 60,000 80,000 830,000

Covington wants to order additional goods and services before the fiscal year end. What is the unencumbered balance of the budget that may be expended by Covington?

A) $610,000 B) $670,000 C) $1,360,000 D) $1,440,000 62) At any time, the remaining appropriating authority available to the fund managers is equal to: A) Appropriations minus Expenditures B) Appropriations minus (Encumbrances + Expenditures) C) Appropriations minus (Encumbrances - Expenditures) D) Appropriations minus Encumbrances 63) Which of the following describes how a governmental fund (e.g. general fund) accounts for a capital lease?

A) As a noncurrent liability B) In a manner similar to how the fund accounts for bonds.

C) As an asset and a lease liability D) None of the choices identifies the appropriate way to account for a capital lease.

64) The general fund of the City of Columbia transferred money to establish an internal service fund for the city's data processing needs. The general fund of Columbia should account for this transaction as a(n): A) expenditure.

B) interfund transfer.

C) interfund reimbursement.

D) loan.

65) The general fund of Richmond was billed $22,000 on August 15, 20X8, for using the services of one of its internal service funds (ISF). What accounts should be debited and credited, respectively, in the general fund on August 15, 20X8, to record this transaction?

A) Expenditures and Transfer Out to ISF B) Expenditures and Due to ISF C) Encumbrances and Due to ISF D) Encumbrances and Transfer Out to ISF

66) The general fund of Battle Creek budgeted a transfer to its capital projects fund for $110,000 to be used in operations during the year ended June 20, 20X9. On September 15, 20X8, the general fund transferred $110,000 to the capital projects fund. What account should be debited in the general fund on September 15 to record this transfer?

A) Appropriations B) Expenditures C) Budgetary Fund Balance—Assigned For Encumbrances D) Other Financing Uses—Transfer Out to Capital Projects Fund 67) The general fund of Sun City was billed $7,000 for using the services of one of its internal service funds. The general fund should account for this transaction as an: A) interfund transfer.

B) interfund loan.

C) interfund service.

D) interfund reimbursement for services rendered.

68) When an internal service fund (ISF) enters into a capital lease the transaction is recorded in the: I. fixed assets of the ISF. II. long-term debt of the ISF. A) I only B) II only C) Both I and II D) Neither I nor II 69) GASB 34 established four types of interfund activities. Interfund activities are recognized as revenue in a governmental fund for an:

A) B) C) D)

Interfund Loan no yes no no

A) Option A B) Option B C) Option C D) Option D

Interfund Transfer no yes yes yes

Interfund Service yes yes no yes

Interfund Reimbursement no no yes no

70) Which of the following observations concerning interfund transfers is true?

A) They are expected to be repaid.

B) They are classified as fund revenues or expenditures.

C) The receiving fund recognizes these transfers as revenue.

D) These transfers are classified under "Other Financing Sources or Uses."

71) Accounting processes differ between a for-profit entity and a governmental entity. Discuss three differences between a governmental entity and a for-profit entity.

72) Briefly discuss the various types of governmental funds and proprietary funds.

73) The adjusted trial balance for White River for the fiscal year ended June 30, 20X9, is presented below.

Cash Property Taxes Receivable—Delinquent Allowance for Uncollectible Taxes— Delinquent Inventory of Supplies Vouchers Payable Due to Internal Service Fund Fund Balance—Assigned for Inventories Fund Balance—Assigned for Encumbrances Fund Balance—Unassigned Expenditures Transfer Out to Internal Service Fund Property Taxes Revenues Fine and License Revenues Estimated Revenues Control Estimated Transfer Out to Internal Service Fund Appropriations Control Budgetary Fund Balance—Unassigned Totals

$

Debit 51,000 20,000

Credit

$

15,000

2,000 10,000 2,000 2,000 12,000 6,000 718,000 40,000 685,000 99,000 800,000 40,000

$ 1,631,000

750,000 10,000 $ 1,631,000

Required: a. Prepare a statement of revenues, expenditures, and changes in fund balance for White River for the year ended June 30, 20X9. Assume there were no supplies or outstanding encumbrances at the beginning of the year. b. Prepare a balance sheet for White River at June 30, 20X9.

74) Discuss major differences between a governmental entity's uses of the modified accrual method and a for-profit corporation's use of the accrual method.

75) The town of Stow was incorporated and began governmental operations on July 1, 20X8.

Stow's transactions and events for the fiscal year ended June 30, 20X9, are listed below. Stow uses the consumption method of accounting for purchases of supplies. Encumbrances do not lapse at year end.

Required: Prepare the journal entry(ies) required in the general fund for each of the following transactions or events. a. The town budget was approved, providing for revenues of $800,000, a $40,000 transfer to establish an internal service fund (ISF), and expenditures of $750,000. b. Property taxes were levied in the amount of $700,000, with 4 percent of the total estimated to be uncollectible. c. Purchase orders were issued in the amount of $90,000 for equipment, and $635,000 for other goods and services. d. Collections for fines and licenses totaled $99,000 for the year. e. Property taxes collected amounted to $680,000; the balance was reclassified as delinquent, and the allowance for uncollectible taxes was reduced to $15,000. f. The equipment ordered was received, and a voucher was issued for the final invoice cost of $91,000. g. All but $12,000 of the other goods and services ordered was received. Vouchers were issued for the invoice cost of $622,000. h. All but $10,000 of the vouchers issued during the year was paid. i. A transfer in the amount of $40,000 was made to establish an internal service fund for the town. The general fund received services of $7,000 from the internal service fund during the year, with $2,000 remaining unpaid at year end. j. Expenditures recorded for the year included the purchase of supplies. The estimated balance of supplies on hand at year end was $2,000. k. A reserve was established at year end for the outstanding encumbrances, all of which will be honored in the next fiscal year. l. Closing entries were made.

Advanced Financial Accounting, 12e (Christensen) Chapter 18 Governmental Entities: Special Funds and Governmentwide Financial Statements 1) Which of the following funds use the accrual basis of accounting?

I. Enterprise fund II. Agency fund III. Internal service fund A) I only B) II only C) I and III only D) I, II, and III 2) A special revenue fund should be used in which of the following situations for a state government?

A) For sales taxes that are to be distributed to towns, cities, villages, etc. of the state.

B) For the proceeds of general obligation bonds that are to be used to construct major long-lived fixed assets.

C) For gasoline taxes that are to be used exclusively to repair state roads and bridges.

D) For investments donated by a prominent citizen that are to be invested permanently, with income being used to support homeless people.

3) For which of the following funds are the principles and accounting most like those of the general fund?

A) Debt service fund B) Internal service fund C) Special revenue fund D) Investment trust fund 4) Which of the following items would not be reported on the financial statements of a special revenue fund?

A) Long-term productive assets.

B) Expenditures and revenues.

C) Vouchers payable and unreserved fund balance.

D) Fund balance reserved for encumbrances and expenditures.

5) A city's museum is supported by a special tax levy and by user charges. The user charges constitute only 10 percent of the resources needed to support the operations of the museum. In which fund should the city account for its museum?

A) An enterprise fund B) An agency fund C) An expendable trust fund D) A special revenue fund 6) Fixed assets and investments are reported in which of the following funds?

I. Fiduciary fund II. Enterprise fund III. Internal Service funds IV. Capital Projects fund V. Debt Service fund A) I, II, III B) II, IV, V C) I, II, V D) II, III, IV 7) Which of the following funds report fixed assets on their balance sheets?

I. Capital Projects fund II. Internal Service fund III. Enterprise fund IV. Agency funds A) I, II B) II, III C) I, IV D) III, IV 8) Ponca City issued general obligation bonds to finance construction of a new city hall. In the city hall capital projects fund, the proceeds of the general obligation bonds should be credited to: A) Revenue-General Obligation Bonds.

B) General Obligation Bonds Payable.

C) Deferred Revenue-General Obligation Bonds.

D) Other Financing Sources-Bond Issue Proceeds.

9) The City of Fargo issued general obligation bonds to finance construction of a new fire station. The bonds were issued at a discount. Which of the following is true?

I. The amount expended for the improvement must be decreased.

II. The general fund must make up the difference to the face value of the bonds.

III. A debt service fund must make up the difference to the face value of the bonds.

A) I only B) Either I or III C) Either II or III D) Either I or II

10) The costs of a building being constructed by a capital projects fund should be debited, or charged, to which of the following accounts in the capital projects fund?

A) Expenditures.

B) Building.

C) Construction in Progress.

D) Other Financing Uses.

11) When a capital projects fund transfers a premium from the issuance of general obligation bonds to another fund, the transfer should be accounted for as which type of interfund transaction or transfer?

A) As a loan.

B) As an interfund transfer.

C) As revenue.

D) As a reimbursement.

12) Upon completion of construction and full payment of all construction costs in a capital projects fund, the entry to record the transfer of any remaining cash should include a debit to: I. Contract Payable-Retained Percentage.

II. Transfer Out to Debt Service Fund.

A) I only B) II only C) Either I or II D) Neither I nor II 13) On July 1, 20X8, Cleveland established a capital projects fund to construct a new town hall.

Financing for construction came from the following sources:

(1) Transfer from the general fund (2) State grant (3) Proceeds of general obligation bonds

$

2,000,000 1,000,000 11,500,000*

* Includes $500,000 premium.

Construction of the town hall was completed on June 15, 20X9. For the fiscal year ended June 30, 20X9, what amount should Cleveland's capital projects fund report for revenues on its statement of revenues, expenditures, and changes in fund balance?

A) $1,000,000 B) $1,500,000 C) $3,500,000 D) $14,500,000

14) On the statement of revenues, expenditures, and changes in fund balance for a capital projects fund, proceeds of general obligation bonds should be reported: A) in the revenue section of the statement.

B) as a direct addition to the beginning balance of unreserved fund balance.

C) in the other financing sources (uses) section of the statement.

D) as a subtraction from construction expenditures.

15) The capital projects fund of Hood River completed construction of an addition to its city hall at a cost of $4,000,000. The city council approved payment of the amount due the general contractor, less a 10 percent retainage. How should the capital projects fund account for the 10 percent retainage?

I. As a credit of $400,000 to Deferred Revenue-Retained Percentage.

II. As a credit for $400,000 to Contracts Payable-Retained Percentage.

A) I only B) II only C) Either I or II D) Neither I nor II 16) The capital projects fund of Hysham completed construction of a new building. The building should be reported in the: I. government-wide statement of net assets.

II. capital projects fund.

A) I only B) II only C) Either I or II D) Neither I nor II 17) During the fiscal year ended June 30, 20X9, the city of Moorhead constructed a new courthouse that was budgeted to cost $5,000,000. Moorhead used a capital projects fund to account for the construction activities. In July of 20X8, a bid was accepted from Diamond Construction to build the courthouse for $4,800,000. On June 15, 20X9, Diamond completed construction and submitted a bill to the city for $4,900,000. The city accepted the bill and paid Diamond the entire amount owed, except for a 10 percentage retainage. On the statement of revenues, expenditures, and changes in fund balance prepared for the capital projects fund for the year ended June 30, 20X9, expenditures should be reported at A) $4,900,000.

B) $4,800,000.

C) $4,410,000.

D) $4,320,000.

18) The town of Decorah issued general obligation serial bonds at par to finance construction of several new streets in the town. Construction activity was accounted for in a capital projects fund. On the date the general obligation serial bonds were issued, what account was credited in Decorah's capital projects fund?

A) Serial Bonds Payable B) Due to Debt Service Fund C) Revenues D) Other Financing Sources-Bond Issue Proceeds 19) Financing for the renovation of Cherry City's municipal park, begun and completed during 20X1, came from the following sources:

Grant from state government Proceeds from general obligation bond issue Transfer from Cherry's general fund

$ 600,000 $ 2,000,000 $ 150,000

In its 20X1 capital projects fund operating statement, Cherry should report these amounts as:

A. B. C. D.

Revenues $ 0 $ 600,000 $ 2,750,000 $ 2,600,000

Other financing sources $ 2,750,000 $ 2,150,000 $ 0 $ 150,000

A) Option A B) Option B C) Option C D) Option D 20) In 20X6, Dorian City received $15,000,000 of bond proceeds to be used for capital projects.

Of this amount, $3,000,000 was expended in 20X6. Expenditures for the $12,000,000 balance were expected to be incurred in 20X7. These bond proceeds should be recorded in capital projects funds for: A) $3,000,000 in 20X6 and $12,000,000 in 20X7.

B) $3,000,000 in 20X6 and in the general fund for $12,000,000 in 20X6.

C) $15,000,000 in 20X6.

D) $15,000,000 in 20X7.

21) A debt service fund for the City of Madison received $50,000 from a capital projects fund.

The amount received represented the premium received from the issuance of general obligation bonds. What account should the debt service fund credit to record this receipt?

A) Revenue-General Obligation Bond Premium.

B) Matured Bonds Payable.

C) Other Financing Sources—Transfer In from Capital Projects Fund.

D) Due to Capital Projects Fund.

22) The City of Fargo issued general obligation bonds to finance construction of a new fire station. The bonds were issued at a premium. In the fire station capital projects fund, the premium should be transferred to: A) an agency fund.

B) a special revenue fund.

C) a debt service fund.

D) an expendable trust fund.

23) For which of the following long-term debt obligations would payments not be accounted for in a debt service fund?

A) Notes and warrants secured by specific tax revenues.

B) Special assessment bonds sold to acquire enterprise fund assets.

C) Notes and warrants.

D) Special assessment bonds may be used to finance capital projects.

24) A debt service fund of Clifton received $100,000 from its general fund during the fiscal year ended June 30, 20X9. The cash was used to pay matured interest on Clifton's general obligation bonds, which were issued to finance construction of a new municipal building. On the statement of revenues, expenditures, and changes in fund balance prepared for the debt service fund for the year ended June 30, 20X9, the amount received from the general fund should be reported as: A) revenue.

B) a reduction of expenditures.

C) an other financing source.

D) matured interest payments.

25) What account is debited in a debt service fund when it records matured interest payable?

I. Interest Expense II. Expenditures A) I only B) II only C) Either I or II D) Neither I nor II

26) On the statement of revenues, expenditures, and changes in fund balance prepared for a debt service fund, the cash paid to retire matured serial bonds is reported as: I. expenditures.

II. a direct deduction from unreserved fund balance.

A) I only B) II only C) Either I or II D) Neither I nor II 27) Arlington has a debt service fund that it uses to pay the principal and interest on its $2,000,000 of general long-term debt. Interest at 5 percent is due on October 1 and April 1. On October 1, 20X8, and April 1, 20X9, Arlington's debt service fund paid $50,000 of interest due on its bonds. On the balance sheet prepared on June 30, 20X9, for Arlington's debt service fund, interest payable should be reported at: A) $0.

B) $16,667.

C) $25,000.

D) $50,000.

28) What account should be debited in the debt service fund to recognize an installment payment currently due on general obligation serial bonds?

I. Matured Bonds Payable.

II. Expenditures-Principal.

A) I B) II C) Either I or II D) Neither I nor II 29) As of May 30, 20X9, the debt service fund of Cody had accumulated $52,000 of assets in a debt service fund to pay the principal of its currently maturing serial bonds. On June 1, 20X9, $50,000 of serial bonds matured and were paid with the resources accumulated in the debt service fund. In Cody's debt service fund, Matured Bonds Payable was debited for $50,000 and: A) Cash was credited for $50,000.

B) Due to General Fund was credited for $50,000.

C) Investments were credited for $50,000.

D) Reserve for Encumbrances was credited for $50,000.

30) Which of the following statement is true regarding permanent funds?

A) Permanent funds do not have any donor restrictions when they are established.

B) Permanent funds have a donor restriction on the fund principal but the income from the fund may be used to benefit the government's program.

C) Permanent funds have a donor restriction on the income generated from the fund principal but the principal may be used to benefit the government's program.

D) The cash or accrual basis of accounting may be used to account for a permanent fund.

31) On January 1, 20X1, Washington City received $200,000 from an estate with the stipulation that the money be invested and the income be used to provide maintenance to the city cemetery.

The money was invested in 7% governmental securities at 90 to yield an effective interest rate of 10%. The following journal entry would be made to account for the accrued interest of the permanent fund: A. Accrued Interest Receivable Interest Revenue B. Accrued Interest Receivable Interest Revenue C. Accrued Interest Receivable Interest Revenue D. Accrued Interest Receivable Interest Revenue A) Option A B) Option B C) Option C D) Option D

14,000 14,000 12,600 12,600 20,000 20,000 18,000 18,000

32) Required financial statements of funds may include the following, among others: I. Statement of net assets II. Statement of revenues, expenditures, and changes in fund balances III. Balance sheet IV. Statement of cash flows The financial statements that should be issued by governmental funds and by proprietary funds include the following:

A) B) C) D)

Governmental Funds II and III I and II I, II, and IV II and III

Proprietary Funds I and IV I and II II, III, and IV I, II and IV

A) Option A B) Option B C) Option C D) Option D 33) At June 30, 20X9, total assets for the various funds of a local municipality were as follows:

General Fund (GF) Capital Projects Fund (CPF) Internal Service Fund (ISF) Enterprise Fund (EF)

$

100,000 1,800,000 100,000 300,000

Applying GASB 34 criteria, which of the above are major funds for reporting purposes?

A) GF, CPF, EF B) CPF, EF C) CPF, ISF, EF D) GF, CPF, ISF, EF 34) GASB 34 specifies two criteria for determining major governmental funds to be reported separately in the Governmental Fund Balance Sheet and Statement of Revenues, Expenditures, and Changes in Fund Balances. To be considered a major governmental fund, a fund must: A) meet at least one criterion.

B) be the general fund or meet at least one criterion.

C) be the general fund or meet two criteria.

D) either meet at least one criterion or be the general fund or meet two criteria.

35) On October 15, 20X8, an enterprise fund of Blacksburg purchased office supplies at a cost of $10,000. The inventory of office supplies on hand at the June 30, 20X9, fiscal year end was $4,000. There was no beginning inventory. Blacksburg should make entries that include: A) debiting Supplies $10,000 at October 15, and debiting Expenses $4,000 on June 30.

B) debiting Expenditures $10,000 at October 15, and debiting Supplies $4,000 at June 30.

C) debiting Supplies $10,000 at October 15, and crediting Supplies $6,000 on June 30.

D) debiting Expenditures $10,000 at October 15, and crediting Expenses $4,000 at June 30.

36) The costs of enterprise fund activities are recovered A) from special tax levies.

B) from federal or state governmental grants.

C) by user charges.

D) by private donations.

37) An enterprise fund of Grist was billed $10,000 for using the services of an internal service fund's data processing center. What account should Grist's enterprise fund debit to record this billing?

A) Due to Internal Service Fund B) Expenditures C) Transfer Out to Internal Service Fund D) General Operating Expenses 38) During the fiscal year ended June 30, 20X9, an enterprise fund of St. Cloud acquired computer equipment costing $110,000 on account and issued $400,000 of long-term bonds.

Revenues of the enterprise fund will be used to repay bond interest and principal. What effect did these transactions have on St. Cloud's enterprise fund assets and long-term debt?

A) B) C) D) A) Option A B) Option B C) Option C D) Option D

Assets Increase of $400,000 Increase of $110,000 Increase of $510,000 Increase of $510,000

Long-Term Debt Increase of $400,000 Increase of $400,000 Increase of $400,000 No effect

39) During the fiscal year ended June 30, 20X3, an enterprise fund of New Spring acquired computer equipment costing $280,000 on account and issued $600,000 of long-term bonds at par value. Revenues of the enterprise fund will be used to repay bond interest and principal. What effect did these transactions have on New Spring's enterprise fund assets and long-term debt?

A. B. C. D.

Assets Increase of $880,000 Increase of $280,000 Increase of $880,000 Increase of $600,000

Long-Term Debt Increase of $600,000 Increase of $600,000 No effect Increase of $600,000

A) Option A B) Option B C) Option C D) Option D 40) Which of the following characteristics best describes an enterprise fund?

A) Capital maintenance, revenues from general public user charges, and net income.

B) Operating budgets, expenditures, and tax revenues from general public.

C) Capital maintenance, revenues from user charges to other funds, and net income.

D) Capital maintenance, tax revenues from general public, and net income.

41) Which of the following financial statements would not be prepared for an enterprise fund?

A) A statement of cash flows.

B) A statement of revenues, expenses, and changes in fund net assets.

C) A balance sheet.

D) A statement of revenues, expenditures, and changes in fund balance.

42) The following information pertains to Auburn's water and sewer fund, an enterprise fund, for the year ended June 30, 20X9: (1) Operating revenues (2) Operating expenses-excluding depreciation (3) Depreciation expense (4) Supplies Inventory (5) Cash

$ 1,200,000 960,000 40,000 20,000 100,000

Based upon the information presented, what was the increase in the enterprise funds unrestricted net assets for the fiscal year ended June 30, 20X9?

A) $200,000 B) $240,000 C) $300,000 D) $320,000 43) The following information pertains to Sundown's water and sewer fund, an enterprise fund, for the year ended June 30, 20X0:

Operating revenues Operating expenses—excluding depreciation Depreciation expense Supplies Inventory Cash

$ 840,000 610,000 50,000 10,000 130,000

Based upon the information presented, what was the increase in the enterprise fund's unrestricted net assets for the fiscal year ended June 30, 20X0?

A) $320,000 B) $310,000 C) $230,000 D) $180,000 44) On the statement of cash flows prepared for an internal service fund, cash received from customers and cash paid for operating expenses should be reported as: A) investing activities.

B) operating activities.

C) noncapital financing activities.

D) capital and related financing activities.

An internal service fund had the following transactions during the year ended June 30, 20X9, its first year of existence: (1) Received $1,000,000 contribution from the general fund.

(2) Acquired fleet of cars for $950,000, paying cash.

(3) Billed departments in other funds $500,000 for using cars.

(4) Incurred operating costs, exclusive of depreciation, of $240,000.

(5) Depreciation expense amounted to $250,000.

45) Refer to the above information. On the internal service fund's balance sheet on June 30, 20X9, total net assets should be reported at: A) $1,000,000.

B) $1,010,000.

C) $1,250,000.

D) $910,000.

46) Refer to the above information. On the internal service fund's balance sheet at June 30, 20X9, net assets-unrestricted should be reported at: A) $260,000.

B) $310,000.

C) $550,000.

D) $1,250,000.

47) Enterprise and internal service funds should recognize revenues when they are A) received in cash.

B) available and earned.

C) measurable and earned.

D) measurable and available.

48) Carlisle established a motor vehicle service and maintenance fund to service and maintain all cars and trucks owned by the town. Revenues of the fund will only come from billings to the funds that use the motor vehicle service and maintenance fund. What type of fund is the motor vehicle service and maintenance fund?

A) An enterprise fund.

B) A special revenue fund.

C) An expendable trust fund.

D) An internal service fund.

The City of Warwick received $4,000,000 from one of its most prominent citizens during the year ended June 30, 20X9. The donor stipulated that the $4,000,000 be invested permanently, and that interest and dividends earned on the investments be used to support the homeless people of Warwick. During the year ended June 30, 20X9, dividends received from stock investments amounted to $20,000, while interest received from bond investments amounted to $40,000. At June 30, 20X9, $10,000 of interest was earned, but it will not be received until July of 20X9. The fair value of the securities in which the $4,000,000 was invested had increased $8,000 by June 30, 20X9.

49) Refer to the above information. For the year ended June 30, 20X9, what amount should the trust fund report as investment earnings on the statement of revenues, expenses, and changes in fund balance?

A) $60,000 B) $68,000 C) $70,000 D) $78,000

50) Refer to the above information. On the statement of fiduciary net assets at June 30, 20X9, the nonexpendable trust fund should report investments and interest receivable of:

A) B) C) D)

Investments $ 4,000,000 $ 4,008,000 $ 4,008,000 $ 4,000,000

Interest Receivable $ 10,000 $ 10,000 $ 0 $ 0

A) Option A B) Option B C) Option C D) Option D 51) A trust fund of Bruge City received $100,000 from a donor during the year ended June 30, 20X9. During the year ended June 30, 20X9, $94,000 of the cash received was used to provide food and clothing to the city's poor. How should the trust fund report these resource flows on its statement of changes in fiduciary net assets for the year ended June 30, 20X9?

A) As revenues of $100,000 and as expenditures of $94,000.

B) As contributions for $100,000 and as deductions for benefits for $94,000.

C) As revenues of $100,000 and as an operating transfer out for $94,000.

D) As a transfer in from trust fund for $100,000 and as a transfer out for $94,000.

52) A tax collection fund that collects property taxes and then distributes them to local governmental units is an example of a(n): A) trust fund.

B) agency fund.

C) internal service fund.

D) permanent fund.

53) Agency funds report: A) only assets and liabilities.

B) assets, liabilities, fund balance, revenues, and expenditures.

C) assets, liabilities, and fund balance.

D) only revenues and expenditures.

Riviera Township reported the following data for its governmental activities for the year ended June 30, 20X9: Item Cash and cash equivalents Receivables Capital assets Accumulated depreciation Accounts payable Long-term liabilities

Amount $ 1,000,000 300,000 8,500,000 1,200,000 400,000 4,000,000

Additional information available is as follows: All of the long-term debt was used to acquire capital assets. Cash of $475,000 is restricted for debt service.

54) Based on the preceding information, on the statement of net assets prepared at June 30, 20X9, what amount should be reported for total net assets?

A) $2,425,000 B) $4,200,000 C) $2,900,000 D) $3,625,000 55) Based on the preceding information, on the statement of net assets prepared at June 30, 20X9, what amount should be reported for net assets invested in capital assets, net of related debt?

A) $4,200,000 B) $2,900,000 C) $2,825,000 D) $3,300,000 56) Based on the preceding information, on the statement of net assets prepared at June 30, 20X9, what amount should be reported for net assets, unrestricted?

A) $425,000 B) $900,000 C) $525,000 D) $825,000 57) A citizen of York purchased a truck in 20X3 for $50,000. On June 10, 20X9, she donated the truck to York. The fair value of the truck on the date of donation was $30,000. How should York report the truck in its government-wide Statement of Net Assets?

A) Machinery and equipment should be increased $50,000.

B) Machinery and equipment should be increased $30,000.

C) Machinery and equipment should be decreased $20,000.

D) No asset should be reported because no expenditures were made to acquire the truck.

58) A citizen of Minersville purchased a truck in 20X1 for $120,000. On September 18, 20X6, she donated the truck to Minersville. The fair value of the truck on the date of donation was

$70,000. How should Minersville report the truck in its government-wide Statement of Net Assets?

A) No asset should be reported because no expenditures were made to acquire the truck.

B) Machinery and equipment should be increased $50,000.

C) Machinery and equipment should be increased $70,000.

D) Machinery and equipment should be decreased $120,000.

59) The general fund of Reston acquired computer equipment costing $70,000 during the fiscal year ended June 30, 20X9. Machinery and Equipment should be reported in Reston's General Fund Balance Sheet and government-wide Statement of Net Assets at June 30, 20X9, as follows:

A) B) C) D)

General Fund Balance Sheet $ 70,000 $ 70,000 $ 0 $ 0

Statement of Net Assets $ 70,000 $ 0 $ 70,000 $ 0

A) Option A B) Option B C) Option C D) Option D 60) Which of the following fiduciary funds does not require a statement of changes in net assets?

I. Private-purpose trust fund.

II. Agency fund.

A) I only B) II only C) Both I and II D) Neither I nor II

61) Government-wide financial statements prepared for a municipality include the following:

A. B. C. D.

Statement of Net Assets Yes Yes No No

Statement of Activities Yes Yes No Yes

Statement of Cash Flows Yes No No Yes

A) Option A B) Option B C) Option C D) Option D 62) Revenue and expenses on a government-wide statement of activities for a municipality should be measured on a(n) A) cash basis.

B) modified accrual basis.

C) accrual basis.

D) reconciliation basis.

63) The government-wide financial statements prepared for a municipality should include assets acquired by the following funds:

A) B) C) D)

General Fund Yes Yes No Yes

Capital Projects Fund Yes Yes Yes No

Internal Service Fund No Yes No No

Enterprise Fund No Yes No No

A) Option A B) Option B C) Option C D) Option D 64) The statement of changes in fiduciary net assets includes all of the following except: A) employee benefit trust funds.

B) investment trust funds.

C) private-purpose trust funds.

D) agency funds.

65) Which presentation method combines the component unit's results into the primary government's financial results?

A) Blended presentation B) Discrete presentation C) Combined presentation D) Consolidated presentation 66) A budgetary comparison schedule presented as required supplementary information for the general fund should report variances for the difference between: I. Original budget amounts and final budget amounts.

II. Final budget amounts and actual amounts.

A) I only B) II only C) Both I and II D) Neither I nor II 67) In accordance with the Single Audit Act of 1984, external auditors issue the standard audit report on the governmental unit's financial statements and must also issue: I. a special report on the effectiveness with which the governmental unit is achieving its social objectives.

II. a special report on the governmental unit's internal control system.

III. a special report on the governmental unit's compliance with laws and regulations.

A) I only B) I and II C) II and III D) I, II, and III 68) Which of the following items is optional information for a special-purpose governmental entity when issuing financial reports?

A) Management's Discussion and Analysis B) Footnotes to the financial reports C) Supplementary Information to the financial reports D) All of the choices are required.

69) The City of Edmond established a capital projects fund for the construction of a reading room for the City Library. The estimated cost of the construction is $300,000. On January 1, 20X8, an 8 percent, $200,000 bond issue was sold at 102. At that date, the county board provided a $100,000 grant. On March 3, 20X8, the premium from issuance of the bonds was transferred to the debt service fund established to repay the bond principal and interest. On March 1, 20X8, a general contractor's bid was accepted to construct the facility at a cost of $270,000. The construction was completed on October 5, 20X8; its actual cost was $285,000. The city council approved payment of the total actual cost of $285,000. In addition to the $285,000, $9,000 was spent to make the facility ready for use. On November 3, 20X8, the city council gave the final approval for both these payments. After all bills were paid, the remaining fund balance was transferred to the debt service fund.

Required: a. Prepare entries for the capital projects fund, including closing entries, for 20X8. b. Prepare a statement of revenues, expenditures, and changes in fund balance for 20X8 for the capital projects fund.

70) Required: For each transaction described below for the current fiscal year of the Town of Golden, use an "x" to indicate the fund(s) in which a journal entry should appear, and whether separate information should be kept for General Long Term Debt or General Fixed Assets.

TRANSACTION DESCRIPTION

Capital Debt Internal General General General Projects Service Service LT Fixed Fund Fund Fund Debt Assets Fund

1. Term bonds are issued at par to finance construction of an arena.

2. A transfer is made to a fund for future bond interest and principal payments.

3. Expenditures, including for equipment, are made for routine government operations.

4. One-half the costs budgeted for the arena are incurred and paid.

5. A transfer is made to establish a printing services center.

6. Equipment purchased in a prior year is sold at public auction.

7. A state grant is received to help finance the cost of the arena.

8. Construction of the arena is completed, and the fund balance is transferred for bond financing.

9. The first year's principal and interest are paid on the civic arena bonds.

10. Printing services are provided for general government operations.

11. The printing services center purchases a new printing machine.

71) Prior to closing the accounts at the end of the most recent fiscal year, the Town of Sonora reports the following amounts (in thousands):

General fund Special revenue fund Capital projects fund Internal service fund Enterprise fund - Solar Enterprise fund - Hydro

Assets $ 200 100 800 50 150 1,700

Liabilities $ 100 70 500 40 100 1,000

Revenues $ 700 70 0 130 400 4,000

Expenditures or Expenses $ 540 60 2,000 400 300 3,500

Required: Applying the criteria specified in GASB 34, determine which of the above funds should be classified as major funds for reporting purposes.

72) Akron established an internal service fund for its data processing activities on July 1, 20X8.

During the fiscal year ended June 30, 20X9, the following transactions and events occurred: 1) On July 1, 20X8, the city council authorized the general fund to contribute $1,000,000 to help establish the internal service fund on July 20, 20X8.

2) The internal service fund spent $900,000 of the contribution to acquire a mainframe computer on July 25, 20X8.

3) During the year ended June 30, 20X9, the internal service billed other funds of the city $300,000 for use of the computer. By year end, all of the billings were collected except for $30,000.

4) The internal service fund incurred general operating expenses of $100,000, exclusive of depreciation, during the year ended June 30, 20X9. All of the expenses were paid by June 30, 20X9, except for $24,000.

5) Depreciation expense related to the computer was $180,000.

Required: A) Prepare all journal entries that would be recorded by Akron's internal service fund for the year ended June 30, 20X9. Explanations for journal entries are not necessary.

B) Prepare a statement of revenues, expenses, and changes in fund net assets for the internal service fund for the year ended June 30, 20X9.

C) Calculate the amount of unrestricted net assets at June 30, 20X9.

73) Newport Village was recently incorporated and began financial operations on January 1, 20X8, the beginning of its fiscal year. The following transactions occurred during this first fiscal year, January 1, 20X8, to December 31, 20X8: 1. The village council adopted a budget for general operations for the fiscal year ending December 31, 20X8. Revenue was estimated at $650,000. Legal authorizations for budgeted expenditures totaled $620,000.

2. Property taxes were levied in the amount of $630,000; 3 percent of this amount was estimated to prove uncollectible. These taxes are available as of the date of levy to finance current expenditures.

3. During the year, a village resident donated marketable securities valued at $75,000 to the village under the terms of a trust agreement which stipulates that the principal amount be kept intact. The revenue generated by the securities is restricted to providing support to the village library. Revenue earned and received on these amounted to $3,000 through December 31, 20X8.

4. A general fund transfer of $8,000 was made to establish an internal service fund to provide for a permanent investment in inventory.

5. The village decided to construct a small recreation facility through a special assessment project authorized to do so at a cost of $100,000. The city is obligated if the property owners default on their special assessments. Special assessment bonds were issued in the amount of $90,000, and the first year's special assessment of $22,500 was levied against the village's property owners. The remaining $10,000 for the project will be contributed from the village's general fund.

6. The special assessments for the lighting project are due over a four-year period, and the first year's assessments of $22,500 were collected. The $10,000 transfer from the village's general fund was received by the lighting capital projects fund.

7. A contract for $100,000 was let for the installation of the lighting. The capital projects fund was encumbered for the contract. On December, 20X8, the contract was completed and the contractor was paid.

8. During the year, the internal service fund purchased various supplies at a cost of $3,000.

9. Current property taxes collected during the year was $615,000. Licenses and permit fees collected amounted to $15,000. The allowance for estimated uncollectible taxes is adjusted to $15,000.

Required: Prepare journal entries to record each of these transactions in the appropriate fund or funds of Newport Village for the fiscal year ended December 31, 20X8. Use the following funds: general fund, capital projects fund, internal service fund, and private-purpose trust fund. Closing entries are not required. Organize your answer using the following format:

74) GASB 34 requires a reconciliation schedule for the Statement of Net Assets. What does this schedule document?

Advanced Financial Accounting, 12e (Christensen) Chapter 19 Not-for-Profit Entities 1) A not-for-profit organization received a donation temporarily restricted as to use. The donated amount was later spent in accordance with the restriction. In which category or categories of net assets should the related revenues and expenses be recognized?

A. B. C. D.

Without Donor Restrictions ---Revenues Expenses Revenues and Expenses

With Donor Restrictions Revenues and Expenses Expenses Revenues ----

A) Option A B) Option B C) Option C D) Option D 2) According to ASC 958, not-for-profit entities should recognize depreciation/amortization: I. on all long-lived tangible assets.

II. on all long-lived intangible assets.

A) I only B) II only C) Both I and II D) Neither I nor II 3) Which of the following is an example of volunteer services received by a not-for-profit entity that should be recognized as revenue?

I. Services requiring specialized skills, provided by individuals with those skills, that otherwise would have to be purchased.

II. Services of lay faculty at a private university operated by a religious order.

III. Services that create or enhance non-financial assets, regardless of whether or not they require specialized skills.

A) I only B) I and III only C) II and III only D) I, II, and III

4) Which of the following recognition and measurement bases best summarizes the usual treatment of current contributions to private not-for-profit entities in accordance with ASC 958?

A. B. C. D.

Timing of Recognition When pledged When received When received When pledged

Measurement Donor's cost Accrual value Donor's cost Face value

A) Option A B) Option B C) Option C D) Option D 5) According to ASC 958, not-for-profit entities should report investments in the financial statements at: I. fair market value.

II. lower of cost or market.

A) I only B) II only C) Either I or II D) Neither I nor II 6) Investment income for not-for-profit entities may include: I. interest from debt investments.

II. dividends from equity investments.

III. changes in the fair values of both debt and equity investments.

A) I only B) I and II only C) I and III only D) I, II, and III 7) One of the major objectives of ASC 958 is to: A) emphasize the different fund structures that currently exist for all private, nonprofit organizations.

B) change the reporting for governmental organizations so that their reporting is comparable to that of private, nonprofit organizations.

C) report combined financial statements, instead of individual fund financial statements, for all private, nonprofit organizations.

D) bring about greater uniformity in the financial statements of all private, not-for-profit organizations.

8) A private, not-for-profit geographic society received cash contributions that were restricted by the donors for the acquisition of fixed assets. In which section of the statement of cash flows

would these cash contributions be reported?

A) Financing activities B) Investing activities C) Operating activities D) Capital and related financing activities 9) On the statement of activities for a private, not-for-profit literary society, expenses decrease which of the following classes of net assets?

I. net assets with donor restrictions II. net assets without donor restrictions A) I only B) II only C) Either I or II D) Neither I nor II 10) In accordance with ASC 958, contributions of services are recognized as increases in net assets without donor restrictions by a private, not for profit entity if which of the following criteria are satisfied?

I. The services received create or enhance nonfinancial assets.

II. The services require specialized skills, are provided by individuals possessing those skills, and would typically need to be purchased if not provided by donations.

III. The services will be performed within the current fiscal year.

A) I or II. B) I or III. C) II or III. D) I, II, III.

11) Which rule-making body is currently setting standards of financial reporting for private notfor-profit universities and for public (governmental) universities?

A. B. C. D.

Private Universities FASB GASB GASB FASB

Public Universities FASB GASB AICPA GASB

A) Option A B) Option B C) Option C D) Option D 12) The term "restricted" as used in university accounting refers to a constraint on the use of funds which has been: I. internally imposed.

II. externally imposed.

A) I only B) II only C) Either I or II D) Neither I nor II 13) According to ASC 958, the statement of financial position of a private university should report the excess of the university's assets over its liabilities as: A) fund balance.

B) fund with or without donor restrictions.

C) retained earnings.

D) assets without donor restrictions and net assets with donor restrictions.

14) In a university, class cancellation refunds of tuition and fees should be recorded as: I. a reduction of revenue from tuition and fees.

II. a reduction of accounts receivable.

A) I only B) II only C) Either I or II D) Neither I nor II

15) A private university received $280,000 from student tuition and fees for the year 20X9 summer session. The session began on June 20, 20X9, and ended on July 30, 20X9. The university's fiscal year end is June 30. According to the AICPA College and University Audit Guide, how should the university report the $280,000 of receipts in its financial statements for the year ended June 30, 20X9?

A) Current revenue of $280,000.

B) Current revenue of $70,000 and deferred revenue of $210,000.

C) Deferred revenue of $280,000.

D) Restricted current revenue of $280,000.

16) A private university received $2,640,000 from student tuition and fees for the year 20X6 summer session. The session began on May 16, 20X6, and ended on July 15, 20X6. The university's fiscal year end is June 30. According to the AICPA College and University Audit Guide, how should the university report the $2,640,000 of receipts in its financial statements for the year ended June 30, 20X6?

A) Current revenue of $2,640,000.

B) Current revenue of $1,980,000 and deferred revenue of $660,000.

C) Deferred revenue of $2,640,000.

D) Restricted current revenue of $2,640,000.

17) Assume that a private university collects tuition and fees at the beginning of summer school, in which two weeks are offered in the first fiscal year and the remaining six weeks are offered in the second fiscal year. According to the approach recommended by the National Association of College and University Business Officers (NACUBO), the university would: A) record the collections as a debit to Cash and a credit to Deferred Revenue for the entire amount of the collections.

B) record the collections as a debit to Cash and a credit to Restricted current revenue for the entire amount of the collections.

C) account for the entire tuition and fees as revenue in the first fiscal period.

D) recognize revenue in the first fiscal period for two-eighths of the tuition and fees and record six-eighths of the collections as a deferred revenue.

18) A private university offers graduate assistantships to qualified students each year. In exchange for the waiver of tuition, graduate assistants are required to assist faculty members with research and other activities. Assume a graduate assistant received a $4,000 tuition waiver for the current academic year. Based on these facts, the university should record: A) tuition revenues of $4,000 and expenditures of $4,000.

B) tuition revenues of $0 and expenditures of $0.

C) tuition revenues of $4,000 and expenditures of $0.

D) tuition revenues of $4,000 and a reduction of tuition revenues of $4,000.

19) For the year ended June 30, 20X9, a university assessed its students a total of $4,000,000 for tuition and fees. Included in this amount was $300,000 of tuition remissions awarded to graduate teaching assistants, and $150,000 of scholarships awarded to undergraduate students. Tuition and fees totaling $3,550,000 were collected during the year ended June 30, 20X9. What amount should be reported in the fund without donor restrictions as net revenue from tuition and fees for the year ended June 30, 20X9?

A) $4,000,000 B) $3,550,000 C) $3,700,000 D) $3,850,000 20) A private not-for-profit university generally must depreciate all tangible fixed assets, except: I. works of art and other historical treasures.

II. administration buildings.

A) I only B) II only C) Both I and II D) Neither I nor II 21) A private college received an offer from a CPA who is an alumnus to teach a one-semester advanced accounting course at no cost. ASC 958 prescribes that this contribution of service: A) need only be disclosed in the footnotes to the financial statements.

B) be recorded as an asset with an equivalent amount recorded in the unrestricted fund balance.

C) be recorded as a revenue with an equivalent amount recorded as an expenditure.

D) need not be recorded if the service is for a period less than one academic year.

22) In accordance with ASC 958, contributions from donors that are to be permanently invested should be disclosed on the statement of activities of a private university as an increase in: A) net assets with donor restrictions.

B) funds without donor restrictions.

C) endowment fund balance.

D) deferred revenues.

23) For the year ended June 30, 20X9, a private college received contributions from alumni that were restricted for faculty research stipends to be awarded during the next fiscal year. For the year ended June 30, 20X9, these contributions should be disclosed on the statement of activities of the private college as an increase in: A) the fund balance of the restricted current fund.

B) net assets with donor restrictions.

C) deferred revenues.

D) temporarily restricted fund balance.

24) A private, not-for-profit university should prepare which of the following financial statements?

I. Statement of financial position II. Statement of activities III. Statement of changes in fund balances IV. Statement of cash flows V. Statement of changes in financial position A) I, II, and III. B) II, III, and IV. C) I, II, and IV. D) II, III, and V. 25) Unrestricted gifts and endowment income of a private university are reported as: A) increases in the fund without donor restrictions on the statement of changes in fund balances.

B) revenues without donor restrictions on the statement of current funds revenues, expenditures, and other changes.

C) revenues without donor restrictions on the statement of activities.

D) increases in the fund without donor restrictions on the statement of activities.

26) A not-for-profit private college in Virginia created a separate foundation responsible for obtaining financial support from alumni and others. Foundation assets are used for the benefit of the college. Donations made to the foundation and subsequently transferred to the college should be: A) recognized as revenues by the foundation when received, and as revenues of the college when transferred.

B) recognized as revenues by the foundation when received and as expenses by the foundation when transferred.

C) recognized both as a change in its interest in the foundation and as revenues by the college when the donation is received by the foundation.

D) recognized as an increase in net assets of the foundation and as revenues of the college when the donation is received by the college.

27) Unrestricted current funds of a private university designated by the governing board for a specific future purpose should be reported as part of: A) net assets without donor restrictions.

B) net assets with donor restrictions.

C) board-restricted net assets.

D) term endowments.

28) Sayer University, a not-for-profit university, earned $750,000 from bookstore revenue and spent $250,000 for faculty research in 20X8. The $250,000 for faculty research came from a $400,000 research grant received in the previous year. What is the effect of these events on net assets without donor restrictions in 20X8?

A) Increase $500,000 B) Increase $750,000 C) Increase $1,000,000 D) Increase $1,150,000 29) On the statement of operations prepared for a private, not-for-profit hospital, patient service revenue earned during the year is reported net of amounts for which of the following items?

I. Contractual adjustments II. Bad debts expense A) I only B) II only C) I and II D) Neither I nor II 30) A private, not-for-profit hospital received a cash contribution of $100,000 from Samantha Hicks on November 14, 20X8. Ms. Hicks specified the money be used to acquire equipment. On December 31, 20X8, the hospital had not expended any of Ms. Hicks' contribution. On the statement of changes in net assets for the year ended December 31, 20X8, the hospital should report the contribution as a $100,000 increase in: A) net assets with donor restrictions.

B) net assets without donor restrictions.

C) fund balance.

D) deferred revenue.

31) Bridger Hospital, which is operated by a religious organization, provides charity care for the indigent living in the region served by the hospital. How should Bridger report the amount of its charity care on its financial statements?

A) In the notes to the financial statements only.

B) As revenues without donor restrictions on the statement of operations.

C) As net patient service revenue and as an expense, equal to the net patient service revenue, on the statement of operations.

D) As revenue with donor restrictions on the statement of operations.

32) The governing board of Samaritan Hospital, which is operated by a religious organization, designated $500,000 of cash for future expansion of the hospital. On the hospital's balance sheet, the cash designated for future plant expansion would be disclosed in which of the following classes of net assets?

A) Net assets with donor restrictions B) Net assets without donor restrictions C) Plant replacement and expansion D) Board designated net assets 33) Good Care Hospital, which is operated by a religious organization, received contributions of $1,000,000 from donors who stipulated that the cash be used to construct an addition to the hospital. As of the balance sheet date, none of the contributions had been expended for construction. On the hospital's balance sheet, the cash contributions would be disclosed in which of the following classes of net assets?

A) Net assets with donor restrictions B) Donor restricted net assets C) Assets whose use is limited D) Net assets without donor restrictions 34) A private, not-for-profit hospital received contributions of $50,000 from donors on June 15, 20X9. The donors stipulated that their contributions be used to purchase equipment for the hospital. As of June 30, 20X9, the end of the hospital's fiscal year, $12,000 of the contributions had been spent on equipment acquisitions. In the hospital's general fund, what account would be credited to recognize the release of the restrictions on the temporarily restricted contributions used to acquire equipment?

A) Revenue released from equipment acquisition restriction B) Other financing sources C) Net assets released from equipment acquisition restriction D) Net assets without donor restrictions released from equipment acquisition restriction 35) A private, not-for-profit hospital uses a fund structure that includes a general fund and donor restricted funds. The hospital's revenues from nursing programs and gift shops should be accounted for in the: A) specific purpose fund.

B) restricted current fund.

C) general fund.

D) time-restricted fund.

36) A private, not-for-profit hospital uses a fund structure that includes a general fund and donor restricted funds. Contributions received from donors for research to be conducted by the hospital should be accounted for in the: A) specific purpose fund.

B) time-restricted fund.

C) general fund.

D) restricted current fund.

37) The restricted funds of a not-for-profit hospital are often termed " " funds because they must hold the restricted assets and transfer expendable resources to the general fund for

expenditure.

A) specific B) controlled C) limited D) holding 38) All restricted funds of private, not-for-profit hospitals account for resources: A) whose use is restricted by the donor.

B) received and expended in the hospital's primary health care mission.

C) that are only temporarily restricted.

D) received or pledged by donors for use in future periods.

39) A private, not-for-profit hospital received a donation of medicine from the XYZ Pharmaceutical Company on March 15, 20X9. The cost of the medicine to the company was $66,000, and its market value was $110,000. Twenty percent of the medicine was used by the hospital during the year ended June 30, 20X9. On the hospital's statement of operations for the year ended June 30, 20X9, the contribution of medicine would increase operating revenues by: A) $66,000.

B) $110,000.

C) $52,800.

D) $88,000.

40) A private, not-for-profit hospital received a donation of medicine from the Xengen Pharmaceutical Company on February 13, 20X2. The cost of the medicine to the company was $34,000, and its market value was $76,000. Thirty percent of the medicine was used by the hospital during the year ended June 30, 20X2. On the hospital's statement of operations for the year ended June 30, 20X2, the contribution of medicine would increase operating revenues by: A) $23,800.

B) $34,000.

C) $53,200.

D) $76,000.

41) Good Faith Hospital, operated by a religious organization, billed patients $4,000,000 for services rendered during the year ended June 30, 20X9. The hospital realized cash of $3,500,000 from the patient billings because of the following reductions: (1) contractual adjustments of $140,000 granted to private insurance companies and to the federal government; and (2) uncollectible accounts receivable of $360,000.

On the statement of operations prepared for the year ended June 30, 20X9, Good Faith Hospital should report net patient service revenue of: A) $3,500,000.

B) $3,860,000.

C) $4,000,000.

D) $3,640,000.

42) Healing Angel Hospital, operated by a religious organization, billed patients $13,000,000 for services rendered during the year ended June 30, 20X3. The hospital realized cash of $10,700,000 from the patient billings because of the following reductions: (1) contractual adjustments of $1,400,000 granted to private insurance companies and to the federal government; and (2) uncollectible accounts receivable of $900,000.

On the statement of operations prepared for the year ended June 30, 20X3, Healing Angel Hospital should report net patient service revenue of: A) $13,000,000.

B) $12,100,000.

C) $11,600,000.

D) $10,700,000.

43) During the fiscal year ended June 30, 20X9, a private, not-for-profit hospital acquired equipment costing $75,000, with cash contributed by donors who restricted their contributions for this purpose. On the hospital's statement of cash flows for the year ended June 30, 20X9, the equipment acquisition should be reported in which of the following sections?

I. Operating activities II. Financing activities III. Investing activities A) I B) II C) III D) I, II, III

44) A private, not-for-profit hospital expended $35,000 of net assets with donor restrictions to acquire equipment. What account should be debited in the hospital's plant replacement and expansion fund as a result of the acquisition of the equipment?

A) Net Assets Released—Plant Acquisition.

B) Fund balance Released—Plant Acquisition.

C) Equipment.

D) Contribution Revenue Released—Plant Acquisition.

45) In 20X9, a private not-for-profit hospital received a $200,000 cash contribution to its endowment fund. During the year, hospital administration invested $150,000 of the funds. Which of the following statements regarding the effect of these transactions on the preparation of the hospital's statement of cash flow is true?

A) The $200,000 contribution will appear in the investing activities section of the cash flow statement as a cash inflow.

B) The $200,000 contribution will appear in the financing activities section of the cash flow statement as a cash inflow.

C) The $150,000 investment will appear in the investing activities section of the cash flow statement as a cash inflow.

D) The $150,000 contribution will appear in the financing activities section of the cash flow statement as a cash inflow.

A private, not-for-profit hospital received a contribution of $40,000 on June 15, 20X8. The donor restricted the contribution to funding research activities currently being performed by the hospital. For the year ended December 31, 20X8, the hospital spent $30,000 of the contribution on research activities. The hospital expended the remaining $10,000 on research activities in January of 20X9.

46) Refer to the above information. On the statement of cash flows prepared for the year ended December 31, 20X8, the events described would increase net cash flows provided by: A) operating activities by $40,000.

B) financing activities by $40,000.

C) financing activities by $10,000.

D) operating activities by $10,000.

47) Refer to the above information. On the statement of operations prepared for the year ended December 31, 20X8, the events described would: A) increase operating income by $30,000.

B) have no effect on operating income.

C) increase net assets without donor restrictions by $30,000.

D) decrease net assets without donor restrictions by $30,000.

48) Refer to the above information. On the statement of changes in net assets prepared for the year ended December 31, 20X8, the events described would: A) increase net assets with donor restrictions by $10,000.

B) decrease net assets with donor restrictions by $10,000.

C) increase net assets without donor restrictions by $10,000.

D) decrease net assets without donor restrictions by $10,000.

49) In a private, not-for-profit hospital, which fund would record cash and investments which have been restricted by the governing board for acquisitions of equipment and construction of a new hospital addition?

A) The plant replacement and expansion fund.

B) The specific purpose fund.

C) The endowment fund.

D) The general fund.

50) The governing board of a hospital operated by a religious organization designated $3,000,000 of cash to be used for plant expansion. The cash was invested in stocks and bonds which earned $250,000 of dividend and interest income. The income from investments should be reported on the hospital's statement of operations as an increase in: A) net assets with donor restrictions.

B) operating income.

C) either net assets with donor restrictions or net assets without donor restrictions, depending upon the nature of the governing board's restrictions.

D) fund balance in the general fund.

51) A private, not-for-profit hospital received the following restricted contributions and other receipts during the year ended December 31, 20X8: (1) For research (2) For equipment acquisitions (3) Income from endowment to be used for new addition to hospital plant

$ $

300,000 200,000

$ 1,000,000

None of the contributions or other receipts were expended during the ended December 31, 20X8.

For the year ended December 31, 20X8, what amount would be reported on the hospital's statement of changes in net assets as an increase in net assets with donor restrictions?

A) $1,500,000 B) $1,200,000 C) $500,000 D) $300,000

52) A private, not-for-profit hospital received the following restricted contributions and other receipts during the year ended September 30, 20X5: For research For equipment acquisitions Income from endowment to be used for new addition to hospital plant

$ 250,000 $ 400,000 $ 875,000

None of the contributions or other receipts was expended during the year ended September 30, 20X5. For the year ended September 30, 20X5, what amount would be reported on the hospital's statement of changes in net assets as an increase in net assets with donor restrictions?

A) $250,000 B) $650,000 C) $1,275,000 D) $1,525,000 The transactions listed in the following questions occurred in a private, not-for-profit hospital during 20X8. For each transaction, indicate its effect on the hospital's statement of operations for the year ended December 31, 20X8.

53) Transaction: Billed patients for services rendered.

Effect on Statement of Operations: A) Increases operating income.

B) Decreases operating income.

C) The transaction is reported on the statement of operations, but there is no effect on operating income.

D) The transaction is not reported on the statement of operations.

54) Transaction: A gain was realized from the sale of endowment investments. The gain is not expendable.

Effect on Statement of Operations: A) Increases operating income.

B) Decreases operating income.

C) The transaction is reported on the statement of operations, but there is no effect on operating income.

D) The transaction is not reported on the statement of operations.

55) Transaction: Depreciation expense was recorded for the year.

Effect on Statement of Operations: A) Increases operating income.

B) Decreases operating income.

C) The transaction is reported on the statement of operations, but there is no effect on operating income.

D) The transaction is not reported on the statement of operations.

56) Transaction: The governing board designated assets for plant expansion.

Effect on Statement of Operations:

A) Increases operating income.

B) Decreases operating income.

C) The event is reported on the statement of operations, but there is no effect on operating income.

D) The event is not reported on the statement of operations.

57) Transaction: Received contributions restricted by donors for research activities.

Effect on Statement of Operations: A) Increases operating income.

B) Decreases operating income.

C) The transaction is reported on the statement of operations, but there is no effect on operating income.

D) The transaction is not reported on the statement of operations.

58) Transaction: Expended 50 percent of the contributions restricted for research in the previous item.

Effect on Statement of Operations: A) Increases operating income.

B) Decreases operating income.

C) The transaction is reported on the statement of operations, but there is no effect on operating income.

D) The transaction is not reported on the statement of operations.

59) Transaction: Received contributions restricted by donors for equipment acquisition.

Effect on Statement of Operations: A) Increases operating income.

B) Decreases operating income.

C) The transaction is reported on the statement of operations, but there is no effect on operating income.

D) The transaction is not reported on the statement of operations.

60) Transaction: Acquired equipment with all of the contributions received in the previous item.

Effect on Statement of Operations: A) Increases operating income.

B) Decreases operating income.

C) The transaction is reported on the statement of operations, but there is no effect on operating income.

D) The transaction is not reported on the statement of operations.

61) Transaction: Endowment income was earned. The donor placed no restrictions on the investment earnings.

Effect on Statement of Operations: A) Increases operating income.

B) Decreases operating income.

C) The transaction is reported on the statement of operations, but there is no effect on operating income.

D) The transaction is not reported on the statement of operations.

62) Transaction: Received cash contribution from donor who stipulated the contribution be permanently invested.

Effect on Statement of Operations: A) Increases operating income.

B) Decreases operating income.

C) The transaction is reported on the statement of operations, but there is no effect on operating income.

D) The transaction is not reported on the statement of operations.

63) Transaction: Acquired investments with cash received in the previous item.

Effect on Statement of Operations: A) Increases operating income.

B) Decreases operating income.

C) The transaction is reported on the statement of operations, but there is no effect on operating income.

D) The transaction is not reported on the statement of operations.

64) Transaction: Received tuition revenue from hospital nursing program and cash from sales of goods in the hospital gift shop.

Effect on Statement of Operations: A) Increases operating income.

B) Decreases operating income.

C) The transaction is reported on the statement of operations, but there is no effect on operating income.

D) The transaction is not reported on the statement of operations.

65) On June 30, 20X9, a voluntary health and welfare organization received pledges from donors amounting to $50,000. The donors did not place any time or use restrictions on the amount pledged. It was estimated that 10 percent of the pledges would not be collected. How should the voluntary health and welfare organization report these pledges on its financial statements prepared at the end of its fiscal year, June 30, 20X9?

A) As fund balance for $45,000.

B) As contribution revenue without donor restrictions for $45,000.

C) As contribution revenue without donor restrictions for $50,000.

D) As fund balance without donor restrictions for $50,000.

A donor agrees to contribute $5,000 per year at the end of each of the next five years to a voluntary health and welfare organization. The donor did not place any use restrictions on the amount pledged. The stream of the payments is discounted at 6 percent. The first payment of $5,000 is received at the end of the first year. The present value factor for a five-payment annuity due on June 30, 20X9, at 6 percent is 4.2124. The present value factor for a four-payment annuity due on June 30, 20X9, at 6 percent is 3.4651.

66) Based on the preceding information, the journal entry to recognize present value at the time the pledge is received includes: A) a credit to Pledges Receivable—Temporarily Restricted for $25,000.

B) a debit to Contributions—Temporarily Restricted for $21,062.

C) a debit to Pledges Receivable—Temporarily Restricted for $21,062.

D) a credit to Contributions—Temporarily Restricted for $25,000.

67) Based on the preceding information, at the end of the first year, the pledge increased net assets without donor restrictions by: A) $25,000.

B) $21,062.

C) $4,212.

D) $5,000.

68) Based on the preceding information, the increase in present value of the contributions receivable recognized at the end of the first year equals: A) $5,000.

B) $1,264.

C) $4,212.

D) $787.

69) The disclosure, "net assets released from restrictions," is reported on which of the following financial statements for a voluntary health and welfare organization?

I. The statement of cash flows.

II. The statement of activities.

A) I only B) II only C) Both I and II D) Neither I nor II

70) During the fiscal year ended June 30, 20X9, Global Charities, a voluntary health and welfare organization, received unrestricted cash contributions of $500,000 and temporarily restricted cash contributions of $300,000. All of the temporarily restricted contributions were restricted by the donors for equipment acquisitions. During the year ended June 30, 20X9, equipment costing $250,000 was acquired with the restricted contributions. As a result of these two contributions, Global Charities' statement of cash flows, prepared for the year ended June 30, 20X9, would report an increase in net cash provided by operating activities of: A) $500,000.

B) $800,000.

C) $750,000.

D) $550,000.

71) A voluntary health and welfare organization received a $300,000 contribution on April 15, 20X9, from a donor who stipulated the donation be invested permanently in stocks and bonds.

The donor further stipulated earnings from the investments be spent according to the wishes of the governing board of the voluntary health and welfare organization. Earnings from the investments for the year ended June 30, 20X9, amounted to $6,000. How would the voluntary health and welfare organization report this information for the year ended June 30, 20X9?

A) Increase in net assets with donor restrictions of $306,000.

B) Increase in net assets with donor restrictions of $306,000, and a footnote disclosure explaining the nature of the restrictions.

C) Increase in net assets with donor restrictions of $300,000, and in net assets without donor restrictions of $6,000.

D) Increase in net assets with donor restrictions of $300,000, and in board-designated net assets of $6,000.

72) Which financial statement is (are) required for a voluntary health and welfare organization that is not required for a private, not-for-profit hospital?

I. A statement of operations.

II. A statement of functional expenses.

A) I only B) II only C) Both I and II D) Neither I nor II 73) A voluntary health and welfare organization received unrestricted cash donations of $20,000 from donors who attended a dinner held for the benefit of the organization. The costs of the dinner, including room rental, and other expenses, amounted to $7,000. On the statement of activities prepared for the voluntary health and welfare organization, the expenses of the dinner should be: A) reported as management and general expenses.

B) netted against the $20,000 of contribution revenue.

C) reported as fundraising costs.

D) reported as programmatic expenses.

74) On the statement of functional expenses prepared for a voluntary health and welfare organization, depreciation expense is allocated to:

I. expenses for program services.

II. expenses for supporting services.

A) I only B) II only C) Both I and II D) Neither I nor II 75) A voluntary health and welfare organization developed and printed informational materials that were intended to both educate the public about how its resources are used to help people in need and to also appeal to the public for much needed support. In this situation, the cost of the informational materials should be: A) accounted for as fund-raising expense.

B) allocated to expenses for program services.

C) allocated between expenses for program services and fund-raising expense.

D) accounted for as management and general expense.

76) In accordance with ASC 958, pledges, which are temporarily restricted by donors, are reported as increases in net assets with donor restrictions on the statement of activities of a voluntary health and welfare organization when the: A) pledges are received in cash.

B) cash received from the pledges is expended in accordance with the donors' wishes.

C) pledges are made by the donors.

D) cash is received from the pledges is transferred to net assets without donor restrictions.

77) A voluntary health and welfare organization received $200,000 of pledges from donors on February 15, 20X9. The donors did not place either time or use restrictions on the amount pledged. The governing board estimated that 10 percent of the pledges would be uncollectible.

During the remainder of fiscal 20X9, cash received from pledges amounted to $184,000. For the year ended June 30, 20X9, what amount should the voluntary health and welfare organization report as Contributions-Unrestricted?

A) $0 B) $200,000 C) $184,000 D) $180,000

78) A voluntary health and welfare organization reports pledges receivable on its statement of financial position at the present value of the future cash collections. How is the increase in the present value of the pledges receivable, which is due to the passage of time, reported on the voluntary health and welfare organization's statement of activities?

A) As interest income-temporarily restricted.

B) As an increase in pledges receivable-temporarily restricted.

C) As an increase in contributions-temporarily restricted.

D) As an increase in deferred revenue-temporarily restricted.

Local Services, a voluntary health and welfare organization had the following classes of net assets on July 1, 20X8, the beginning of its fiscal year:

Unrestricted Temporarily restricted Permanently restricted

$

500,000 100,000 1,000,000

During the year ended June 30, 20X9, the following events occurred: (1) It purchased equipment, costing $100,000, with contributions restricted for this purpose. The contributions had been received from donors during June of 20X8.

(2) It received $130,000 of cash donations which were restricted for research activities. During the year ended June 30, 20X9, $90,000 of the contributions were expended on research.

(3) It sold investments classified in the net assets with donor restrictions class for a loss of $40,000. Dividends and interest income earned on the investments amounted to $70,000. There were no restrictions on how investment income was to be used.

(4) It received cash contributions of $200,000 from donors who did not place either time or use restrictions upon their donations.

(5) Expenses, excluding depreciation expense, for program services and supporting services incurred during the year ended June 30, 20X9, amounted to $260,000.

(6) Depreciation expense for the year ended June 30, 20X9, was $80,000.

79) Refer to the above information. At June 30, 20X9, the amount of net assets with donor restrictions reported on the statement of financial position would be: A) $1,070,000.

B) $1,030,000.

C) $1,000,000.

D) $960,000.

80) Refer to the above information. On the statement of activities for the year ended June 30, 20X9, net assets with donor restrictions: A) increased $130,000.

B) increased $40,000.

C) decreased $100,000.

D) decreased $60,000.

81) Refer to the above information. On the statement of activities for the year ended June 30, 20X9, reclassifications would be reported at:

A) $190,000.

B) $100,000.

C) $90,000.

D) $230,000.

82) Refer to the above information. Which of the following statements is (are) correct about the program and supporting expenses that would be reported on the statement of activities for the year ended June 30, 20X9?

I. Program and supporting expenses should be reported at $340,000.

II. All of the program and supporting expenses should be reported as a deduction from revenues without donor restrictions and other support.

A) I only B) II only C) I and II D) Neither I nor II 83) ASC 958 requires that an "other not-for-profit entity" (ONPO) provide three financial statements. Which of the following is NOT one of them?

A) A statement of functional expenses B) A statement of financial position C) A statement of activities D) A statement of cash flows

Golden Path, a labor union, had the following receipts and expenses for the year ended December 31, 20X8: Receipts: Per capita dues Initiation fees Sales of organizational supplies Nonexpendable gift restricted by donor for loan purposes for 10 years Nonexpendable gift restricted by donor for loan purposes in perpetuity Expenses: Labor negotiations Fund-raising Membership development Administrative and general

$ 900,000 120,000 80,000 50,000 60,000 720,000 150,000 40,000 250,000

The union's constitution provides that 12 percent of the per capita dues be designated for the strike insurance fund to be distributed for strike relief at the discretion of the union's executive board.

84) Based on the information provided, in Golden Path's statement of activities for the year ended December 31, 20X8, what amount should be reported under the classification of revenue from funds without donor restrictions?

A) $980,000 B) $1,100,000 C) $1,210,000 D) $1,020,000 85) Based on the information provided, in Golden Path's statement of activities for the year ended December 31, 20X8, what amount should be reported under the classification of program services?

A) $720,000 B) $910,000 C) $440,000 D) $760,000 86) Based on the information provided, in Golden Path's statement of activities for the year ended December 31, 20X8, what amount should be reported under the classification of supporting services?

A) $150,000 B) $720,000 C) $440,000 D) $290,000

87) Based on the information provided, in Golden Path's statement of activities for the year ended December 31, 20X8, what amounts should be reported under the classifications of net assets with donor restrictions?

A) $50,000 B) $60,000 C) $10,000 D) $110,000 88) Reporting requirements of other not-for-profit entities (ONPOs) are similar to those of which of the following entities?

A) A public university B) A voluntary health and welfare organization C) An enterprise fund of a state or local government D) A hospital operated by a county government

Private Not-for-Profit (NFP) Entities.

Select from this list of terms to answer the following questions.

A. Fair value B. Net assets without donor restrictions C. GASB D. FASB E. Statement of Revenues, Expenditures, and Changes in Fund Balance F. Lower of cost or market G. Accrual method H. Statement of Activities I. General fund, restricted fund, endowment fund J. Modified accrual method K. Net assets with donor restrictions L. Endowment fund M. Unrestricted, temporarily restricted, permanently restricted N. Depreciation O. Works of art and other historical treasures P. General fund Q. Cost Indicate your choice by entering the letter corresponding to the correct term. A term may be used more than once or not at all.

89) "Responsible for establishing accounting standards for private NFP entities" describes which term listed above?

90) "Classification of an endowment contribution" describes which term listed above?

91) "Reported as an expenditure of the fund using plant and equipment" describes which term listed above?

92) "Financial statement of a private NFP entity" describes which term listed above?

93) "Tangible fixed assets not depreciated by a private college or university" describes which term listed above?

94) "Basis for measuring investments in financial statements" describes which term listed above?

95) "Classification of investment income from endowment investments if there are no donor restrictions as to income" describes which term listed above?

96) "Classification of contributions restricted by purpose" describes which term listed above?

97) "Basis for measuring expenditures for contributed services requiring special skills" describes which term listed above?

98) "Basis for measuring contributions" describes which term listed above?

99) "Net asset classifications per ASC 958-205" describes which term listed above?

100) "Basis of accounting for private NFPs" describes which term listed above?

101) The following information is contained in the funds that are used to account for the transactions of the Hope Hospital, which is operated by a nonprofit, religious organization. The balances in the accounts are as of June 30, 20X9, the end of the hospital's fiscal year. Credit amounts are in parentheses.

Cash Accounts Receivable Allowance for Uncollectibles Inventories Prepaid Expenses Long-term Investments Property, Plant & Equipment Accumulated Depreciation Accounts Payable Accrued Expenses Deferred Revenue Mortgage Payable

General Fund $ 60,000 50,000 (

Specific Purpose Fund $ 64,000

Plant Replacement & Expansion Fund $ 280,000

Endowment Fund $ 40,000

120,000

1,000,000

10,000) 100,000 20,000 200,000 600,000

( 280,000) ( 90,000) ( 34,000) ( 22,000) ( 250,000)

Additional information: The $64,000 in the specific purpose fund is restricted for research activities to be conducted by the hospital. The current portion of long-term debt is $48,000.

Required: Prepare a balance sheet for Hope Hospital as of June 30, 20X9.

102) The CFO of a "Not-for-Profit" hospital is making a presentation at your college. The presentation is for Business and Health-Science majors. During the presentation the CFO mentions assets being reported "above the line." On the way out your roommate a health-science major asks, you, an accounting major, to explain what the CFO was referring to. What do you respond?

The transactions described in the following questions occurred in a voluntary health and welfare organization during the year ended December 31, 20X8. For each transaction, indicate its effect(s) on the organization's statement of activities prepared for the year ended December 31, 20X8. List all effects of transactions affecting more than one class of net assets. Indicate your choice(s) by entering the letter corresponding to the effects listed here: Effects of Transactions on Statement of Activities A. Increases net assets with donor restrictions.

B. Decreases net assets with donor restrictions.

C. Increases net assets without donor restrictions.

D. Decreases net assets without donor restrictions.

E. Transaction is not reported on the statement of activities.

103) Received cash contributions restricted by donors for research.

104) Incurred fund-raising costs.

105) Depreciation expense for the year was recorded.

106) The governing board designated assets for plant expansion.

107) A gain was realized from the sale of securities that were permanently invested. The gain is restricted as to use.

108) Endowment income was earned. The donor specified that the income be used for community service.

109) Received a multi-year pledge, with cash being received this year and for the next 4 years.

Donors did not place any use restrictions on how the pledges were to be spent.

110) Income was earned from investments of assets that the board previously designated for plant expansion.

111) Received pledges from donors who placed no time or use restrictions on how the pledges were to be spent.

112) Received cash contributions restricted by donors for equipment.

113) Acquired equipment with all of the contributions previously received from donors for equipment purchases.

114) Expended 75 percent of the contributions previously received from donors for research.

115) Following are four independent transactions or events that relate to a voluntary health and welfare organization: 1. Cash disbursement of $45,000 was made from the general fund's unrestricted assets for the purchase of new equipment for the organization.

2. The organization receives an unrestricted cash gift of $80,000 from a donor.

3. Common stock investments with a total carrying value of $100,000 were sold by a permanently restricted endowment fund for $112,000 before any dividends were earned on these stocks. The gain is donor-restricted to remain in the fund with donor restrictions.

4. General obligation bonds payable with a face amount of $750,000 were sold at par, with the proceeds required to be used solely for construction of a new building. This building was completed at a total cost of $750,000, and the total amount of bond issue proceeds was disbursed toward this cost. Disregard interest capitalization.

Required: For each of these transactions or events, prepare journal entries specifying the affected funds and showing how these transactions or events should be recorded by the organization.

Advanced Financial Accounting, 12e (Christensen) Chapter 20 Corporations in Financial Difficulty 1) What is defined as a condition in which a company is unable to meet debts as the debts mature?

A) Deficit B) Liability C) Insolvency D) Credit squeeze 2) Under a composition agreement, A) creditors agree to accept less than the face amount of their claims.

B) debtors in financial difficulty transfer assets "without recourse."

C) a creditors' committee is initiated with a plan of settlement proposed by the debtor.

D) the debtor petitions for relief in a bankruptcy court.

3) In which of the following ways can debt be restructured?

I. Assets can be transferred to the creditor.

II. An equity interest can be granted to the creditor.

III. The terms of the debt can be modified.

A) I and II only B) I and III only C) II and III only D) I, II, and III 4) Under which nonjudicial action do creditors agree to assist the debtor in managing the most efficient payment of creditors' claims?

A) Debt restructuring arrangement B) Creditors' committee management C) Transfer of assets D) Composition agreement 5) A transfer of assets by a company in financial difficulty is considered a sale if: I. the transfer includes a recourse provision allowing the buyer to return the asset.

II. the transferee obtains the right to pledge or exchange the transferred assets.

III. the transferred assets have been isolated from the transferor.

IV. the transferor does not maintain effective control over the transferred assets.

A) I, II, and IV B) Both I and III C) Both I and II D) II, III, and IV 6) The Bankruptcy Reform Act contains chapters which deal with:

I. Individuals.

II. Corporations.

III. Municipal governments.

A) Only I and II B) Only II and III C) Only I and III D) I, II, and III 7) A debtor may file which type of petition when seeking judicial protection under the Bankruptcy Reform Act? I. Voluntary II. Involuntary A) I only B) II only C) Either I or II D) Neither I nor II 8) Creditors may file which type of petition when seeking remedy under the Bankruptcy Code?

I. Voluntary II. Involuntary A) I only B) II only C) Either I or II D) Neither I nor II 9) Under the Bankruptcy Code, an insolvent corporation may be: I. Reorganized.

II. Liquidated.

A) I B) II C) Either I or II D) Neither I nor II

10) Which chapters of the Bankruptcy Code deal with corporations?

A) Chapters 1, 3, and 5 B) Chapter 9 C) Chapters 7 and 11 D) Chapters 12 and 13 11) Chapter 11 of the Bankruptcy Code provides for: I. Reorganization.

II. Liquidation.

A) I only B) II only C) Both I and II D) Neither I nor II 12) Which of the following could be true of the proceedings under Chapter 11 of the Bankruptcy Code?

A) They are always administered by the bankruptcy courts.

B) The debtor's assets are sold and its liabilities extinguished.

C) The company does not operate during this period.

D) The debtor continues as a business after the reorganization.

13) Under Chapter 11 proceedings, what represents the fair value of the entity before considering liabilities and approximates the amount a willing buyer would pay for the entity's assets?

A) Reorganization value B) Fire sale value C) Fresh start value D) Excess value 14) A reorganization value in excess of amounts assignable to identifiable assets is: A) not reported.

B) reported as an intangible asset called Reorganization Value in Excess of Amounts Allocable to Identifiable Assets.

C) reported as Goodwill Associated with Exit or Disposal Activities.

D) passed on to prior shareholders of the company.

15) Which of the following observations regarding the use of fresh start accounting is true?

A) It is always required under Chapter 11 bankruptcy proceedings.

B) Prior shareholders will have control of the emerging company.

C) It results in a new reporting entity.

D) It is used under Chapter 7 bankruptcy proceedings.

16) A "debtor-in-possession" balance sheet is prepared for a company which: A) is having its debts restructured.

B) is undergoing a liquidation under Chapter 7.

C) is undergoing a reorganization under Chapter 11.

D) is in bankruptcy reorganization but management still controls the company.

17) A debtor-in-possession balance sheet should report: I. Liabilities not subject to compromise.

II. Liabilities subject to compromise.

A) I only B) II only C) Both I and II D) Neither I nor II 18) On a debtor-in-possession income statement, which of the following items should be reported under the heading "Reorganization Items"?

A) Sales B) Selling expenses C) Income tax benefit D) Loss on disposal of assets 19) Typically, the plan of reorganization must be approved by at least who must hold at least of the dollar amount of the outstanding debt.

A) one-third; half B) two-thirds; half C) half; one-third D) half; two-thirds 20) Chapter 7 of the Bankruptcy Code provides for: I. Reorganization.

II. Liquidation.

A) I only B) II only C) Both I and II D) Neither I nor II 21) have liens, or security interests, on specific assets.

A) Secured creditors B) Creditors with priority C) Unsecured creditors D) Assured creditors 22) As defined by the Bankruptcy Code, creditors with priority:

of all creditors,

I. have collateral claim against specific assets.

II. are unsecured creditors who have priority over other unsecured creditors.

III. are the first to be paid from any proceeds available to unsecured creditors.

A) I only B) II only C) I, II and III D) Both II and III 23) Which of the following observations concerning claims by general unsecured creditors is NOT true?

A) They are paid only after secured creditors and unsecured creditors with priority are satisfied to the extent of any legal limits.

B) They often receive less than the full amount of their claim.

C) They are entitled to "preference payments" at the discretion of the debtor's management.

D) The amounts to be paid to them are usually stated as a percentage of the total claim.

24) The payment to general unsecured creditors is often termed: A) a "preference payment."

B) a "dividend."

C) a "write-off."

D) a "bonus."

25) "Preference payments" made by the debtor to one creditor to the detriment of all other creditors within 90 days before the bankruptcy petition was filed: A) are reduced from the monies available to the general unsecured creditors.

B) are usually written off.

C) may be recovered and returned to the cash available for all creditors.

D) are not recovered, as management assurances are binding.

26) The accounting statement of affairs is prepared: A) at the end of the reorganization process.

B) at the end of the liquidation process.

C) at the beginning of the reorganization process.

D) at the beginning of the liquidation process.

Orville Company recently petitioned for bankruptcy and is now in the process of preparing a statement of affairs. The carrying values and estimated fair values of the assets of Orville Company are as follows: Cash Accounts Receivable Inventory Land Building (net) Equipment (net) Total

Carrying Value $ 20,000 45,000 60,000 75,000 180,000 170,000 $ 550,000

Fair Value $ 20,000 30,000 35,000 70,000 100,000 80,000 $ 335,000

Debts of Orville are as follows: Accounts Payable Wages Payable (all have priority) Taxes Payable Notes Payable (secured by receivables and inventory) Interest on Notes Payable Bonds Payable (secured by land and building) Interest on Bonds Payable Total

$

60,000 10,000 10,000 120,000 6,000 150,000 7,000 $ 363,000

27) Based on the preceding information, what is the total amount of unsecured claims?

A) $113,000 B) $126,000 C) $93,000 D) $121,000 28) Based on the preceding information, what estimated amount will be available for general unsecured creditors upon liquidation?

A) $28,000 B) $93,000 C) $113,000 D) $121,000 29) Based on the preceding information, what is the estimated dividend percentage?

A) 23 percent B) 93 percent C) 77 percent D) 68 percent

Wright Company recently petitioned for bankruptcy and is now in the process of preparing a statement of affairs. The carrying values and estimated fair values of the assets of Wright Company are as follows: Cash Accounts Receivable Inventory Land Building (net) Equipment (net) Total

Carrying Value $ 10,000 60,000 70,000 90,000 200,000 80,000 $ 510,000

Fair Value $ 10,000 20,000 40,000 75,000 150,000 25,000 $ 320,000

Debts of Wright are as follows: Accounts Payable Wages Payable (all have priority) Taxes Payable Notes Payable (secured by receivables and inventory) Interest on Notes Payable Bonds Payable (secured by land and buildings) Interest on Bonds Payable Total

$

40,000 6,000 12,000 90,000 5,000 200,000 8,000 $ 361,000

30) Based on the preceding information, what is the total amount of unsecured claims?

A) $52,000 B) $71,000 C) $75,000 D) $95,000 31) Based on the preceding information, what estimated amount will be available for general unsecured creditors upon liquidation?

A) $34,000 B) $52,000 C) $56,000 D) $75,000 32) Based on the preceding information, what is the estimated dividend percentage?

A) 45 percent B) 55 percent C) 61 percent D) 69 percent

33) Eagle Company recently petitioned for bankruptcy and is now in the process of preparing a statement of affairs. The following information has been assembled for this statement: Assets Cash Other current assets Building Land

Book Value $ 70,000 240,000 600,000 200,000

Estimated Current Value $ 70,000 230,000 700,000 300,000

Liabilities Liabilities with priority Mortgage payable (secured by Building) Notes Payable (secured by Land) Unsecured liabilities

$ 140,000 300,000 400,000 600,000

What amount will be paid to the fully secured creditors and the creditors with priority?

A) B) C) D)

A) Option A B) Option B C) Option C D) Option D

Fully Secured Creditors $ 300,000 $ 300,000 $ 600,000 $ 700,000

Creditors With Priority $ 140,000 $ 92,000 $ 92,000 $ 140,000

34) Norton Company recently petitioned for bankruptcy and is now in the process of preparing a statement of affairs. The following information has been assembled for this statement: Assets Cash Other current assets Building Land

Book Value $ 50,000 120,000 300,000 150,000

Estimated Current Value $ 50,000 110,000 400,000 200,000

Liabilities Liabilities with priority Mortgage payable (secured by Building) Notes Payable (secured by Land) Unsecured liabilities

$

90,000 150,000 250,000 350,000

What amount will be paid to the fully secured creditors and the creditors with priority?

A. B. C. D.

A) Option A B) Option B C) Option C D) Option D

Fully Secured Creditors $ 150,000 $ 150,000 $ 350,000 $ 400,000

Creditors With Priority $ 50,000 $ 90,000 $ 50,000 $ 90,000

35) What is the general form of the trustee's opening entry, accepting the assets of the debtor company?

A) Assets Debtor Company—In Receivership B) Net Assets Debtor Company—In Receivership C) Retained Earnings Debtor Company—In Receivership D) Debtor Company—In Receivership Net Assets

XXX XXX XXX XXX XXX XXX XXX XXX

A) Option A B) Option B C) Option C D) Option D 36) Which monthly report shows the results of the trustee's fiduciary actions beginning at the point the trustee accepts the debtor's assets?

A) Statement of affairs B) Statement of realization and liquidation C) Statement of financial position D) Statement of activities 37) The statement of realization and liquidation contains sections for all the following items except: A) assets.

B) supplementary items.

C) liabilities.

D) stockholders equity.

38) In a statement of realization and liquidation, unusual revenue items are reported under: A) assets.

B) discontinued items.

C) supplementary items.

D) These are never reported.

39) All of the following items are reported in a statement of realization and liquidation except: A) Cash B) Prepaid assets C) Depreciable assets (net) D) Receiver's expenses

40) Which of the following items are likely to be reported in the supplementary items section of a statement of realization and liquidation?

A) Creditors' claims settled during the period.

B) Trustee's administration fees.

C) New obligations incurred by the trustee.

D) Assets subsequently acquired by the trustee.

41) To obtain cash quickly, DebCo. sold $750,000 of its receivables to Finco., with recourse. As the accountant for DebCo., what issues do you need to resolve in order to determine the appropriate accounting treatment?

42) What are the conditions necessary for using fresh start reporting in reorganization?

43) Wilbur Corporation is to be liquidated under Chapter 7 of the Bankruptcy Code. The balance sheet on December 31, 20X8, is as follows:

Assets Cash Marketable Securities Accounts Receivable (net) Inventory Prepaid Insurance Land Plant and Equipment (net) Franchises Total

$

4,000 20,000 75,000 90,000 6,000 50,000 250,000 48,000 $ 543,000 Equities

Accounts Payable Wages Payable Taxes Payable Interest Payable Notes Payable Mortgages Payable Common Stock ($5 par) Retained Earnings (deficit) Total

$ 120,000 13,000 20,000 25,000 125,000 150,000 180,000 (90,000 ) $ 543,000

The following additional information is available: 1. Marketable securities consist of 2,000 shares of Bristol Inc. common stock. The market value per share of the stock is $8. The stock was pledged against a $20,000, 8 percent note payable that has accrued interest of $800.

2. Accounts receivable of $40,000 are collateral for a $35,000, 10 percent note payable that has accrued interest of $3,500.

3. Inventory with a book value of $35,000 and a current value of $32,000 is pledged against accounts payable of $60,000. The appraised value of the remainder of the inventory is $50,000.

4. Only $1,000 will be recovered from prepaid insurance.

5. Land is appraised at $65,000 and plant and equipment at $160,000.

6. It is estimated that the franchises can be sold for $15,000.

7. All the wages payable qualify for priority.

8. The mortgages are on the land and on a building with a book value of $110,000 and an appraised value of $100,000. The accrued interest on the mortgages is $7,500.

9. Estimated legal and accounting fees for the liquidation are $10,000.

Required: a. Prepare a statement of affairs as of December 31, 20X8. b. Compute the estimated percentage settlement to unsecured creditors.

44) Briefly explain the three classes of creditors specified in the Bankruptcy Code.

45) A trustee has been appointed for Smith Company, which is being liquidated under Chapter 7 of the Bankruptcy Code. The following transactions occurred after the assets were transferred tothe trustee: 1. Credit sales by the trustee were $100,000. Cost of goods sold were $72,000, consisting of all the inventory transferred from Smith.

2. The trustee sold all $20,000 worth of marketable securities for $15,000.

3. Receivables collected by the trustee: Old: $28,000 of the $50,000 transferred New: $65,000 4. Disbursements by the trustee: Old current payables: $31,000 of the $65,000 transferred Trustee's expenses: $6,000 5. Recorded $24,000 depreciation on the plant assets of $120,000 transferred from Smith.

Required: Prepare a statement of realization and liquidation according to the traditional approach illustrated in the chapter.

Advanced Financial Accounting, 12e (Christensen) Appendix 8A: Intercompany Indebtedness—Fully Adjusted Equity Method Using Straight-Line Interest Amortization 1) Poodle Company owns 80 percent of the common stock of Shepherd Inc. Poodle acquires some of Shepherd's bonds from an unrelated party for less than the carrying value on Shepherd's books and holds them as a long-term investment. For consolidated reporting purposes, how is the acquisition of Shepherd's bonds treated?

A) As a decrease in the Bonds Payable account on Shepherd's books.

B) As an increase in noncurrent assets.

C) Everything related to the bonds is eliminated in the consolidation worksheet, and nothing related to the bonds appears in the consolidated financial statements.

D) As a retirement of bonds.

2) Portuguese owns 80 percent of the common stock of Spanish Company. Portuguese also purchases some of Spanish's bonds directly from Spanish and holds the bonds as a long-term investment. How is the acquisition of the bonds treated for consolidated reporting purposes?

A) As a retirement of bonds.

B) As an increase in the Bonds Payable account on Spanish's books.

C) Everything related to the intercompany bonds is eliminated in the consolidation worksheet, and nothing related to the bonds appears in the consolidated financial statements.

D) As an increase in noncurrent assets.

3) At the end of the year, a parent acquires a wholly owned subsidiary's bonds from unaffiliated parties at a cost less than the subsidiary's carrying value. The consolidated net income for the year of acquisition should include the parent's separate operating income plus: A) the subsidiary's net income increased by the gain on constructive retirement of debt.

B) the subsidiary's net income decreased by the loss on constructive retirement of debt.

C) the subsidiary's net income increased by the gain on constructive retirement of debt, and decreased by the subsidiary's bond interest expense.

D) the subsidiary's net income decreased by the loss on constructive retirement of debt, and decreased by the subsidiary's bond interest expense.

4) A loss on the constructive retirement of a parent's bonds by a subsidiary is effectively recognized in the individual accounting records of the parent and its subsidiary: I. at the date of constructive retirement.

II. over the remaining term of the bonds.

A) I B) II C) Both I and II D) Neither I nor II

5) When one company purchases the debt of an affiliate from an unrelated party, a gain or loss on the constructive retirement of debt is recognized by which of the following?

Issuing Affiliate

Purchasing Affiliate

Consolidated Entity

A.

No

No

Yes

B.

Yes

Yes

No

C.

No

No

No

D.

Yes

Yes

Yes

A) Option A B) Option B C) Option C D) Option D 6) Which of the following statements is (are) correct?

I. The amount assigned to the noncontrolling interest may be affected by a constructive retirement of bonds.

II. A constructive retirement of bonds normally results in a gain or loss.

III. In constructive retirement, the entity would still consider the bonds outstanding, even though they are treated as if they were retired in preparing consolidated financial statements.

A) I B) II C) I and III D) I, II, and III 7) On January 1, 20X6, Pepper Corporation issued 10-year bonds at par to unrelated parties. The bonds pay interest of $15,000 every June 30 and December 31. On December 31, 20X9, Salt Corporation purchased all of Pepper's bonds in the open market at a $6,000 discount. Salt is Pepper's 80 percent owned subsidiary. Salt uses the straight-line method of amortization. The consolidated income statement for the year 20X9 should report with respect to the bonds: I. interest expense of $30,000.

II. a gain of $6,000.

A) I B) II C) Either I or II D) Neither I nor II

Puget Corporation owns 80 percent of Sound Company's voting shares. On January 1, 20X7, Sound sold bonds with a par value of $300,000 at 95. Puget purchased two thirds of the bonds; the remainder was sold to nonaffiliates. The bonds mature in ten years and pay an annual interest rate of 6 percent. Interest is paid semiannually on January 1 and July 1.

8) Based on the information given above, what amount of interest expense should be reported in the 20X8 consolidated income statement?

A) $6,000 B) $6,500 C) $5,000 D) $10,000 9) Based on the information given above, what amount of interest receivable will be recorded by Puget Corporation on December 31, 20X8, in its separate financial statements?

A) $5,000 B) $6,500 C) $10,000 D) $6,000 10) Based on the information given above, what amount of interest expense will be eliminated in the preparation of the 20X8 consolidated financial statements?

A) $13,000 B) $13,500 C) $10,000 D) $15,000 Pancake Corporation owns 85 percent of Syrup Corporation's voting shares. On January 1, 20X8, Pancake Corporation sold $200,000 par value 8 percent bonds to Syrup for $245,000. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1.

11) Based on the information given above, in the preparation of the 20X8 consolidated financial statements, premium on bonds payable will be: A) debited for $45,000 in the consolidating entries.

B) credited for $40,500 in the consolidating entries.

C) debited for $40,500 in the consolidating entries.

D) credited for $45,000 in the consolidating entries.

12) Based on the information given above, in the preparation of the 20X8 consolidated financial statements, interest income will be: A) debited for $11,500 in the consolidating entries.

B) credited for $11,500 in the consolidating entries.

C) debited for $16,000 in the consolidating entries.

D) credited for $16,000 in the consolidating entries.

13) Based on the information given above, what amount of investment in bonds will be eliminated in the preparation of the 20X8 consolidated financial statements?

A) $240,500 B) $200,000 C) $245,000 D) $211,500 Saturn Corporation issued $300,000 par value 10-year bonds at 107 on January 1, 20X3, which Star Corporation purchased. On July 1, 20X7, Pluto Corporation purchased $120,000 face value of Saturn bonds from Star. The bonds pay 12 percent interest annually on December 31. The preparation of consolidated financial statements for Saturn and Pluto at December 31, 20X9, required the following consolidation entry:

Bonds Payable Premium on Bonds Payable Interest Income Investment in Saturn Corporation Bonds Interest Expense Investment in Saturn Corporation Stock NCI in NA of Saturn Corp.

120,000 2,520 14,760 118,920 13,560 3,120 1,680

14) Based on the information given above, what percentage of the subsidiary's ownership does the parent company hold?

A) 75 percent B) 65 percent C) 80 percent D) 95 percent 15) Based on the information given above, what amount did Pluto pay when it purchased the bonds on July 1, 20X7?

A) $118,020 B) $118,920 C) $118,620 D) $117,220 16) Based on the information given above, what amount of gain or loss on bond retirement is included in the 20X7 consolidated income statement?

A) $6,600 B) $4,800 C) $6,000 D) $5,400

17) Based on the information given above, if 20X9 consolidated net income of $50,000 would have been reported without the consolidation entry provided, what amount will actually be reported?

A) $47,900 B) $48,200 C) $49,400 D) $48,800 Postage, a holder of a $400,000 Stamp Inc. bond, collected the interest due on June 30, 20X8, and then sold the bond to DEF Inc. for $365,000. On that date the bond issuer, Stamp, a 90 percent owner of DEF, had a $450,000 carrying amount for this bond.

18) Based on the information given above, what amount of gain or loss on bond retirement was recorded?

A) No gain or loss B) $85,000 gain C) $85,000 loss D) $35,000 loss 19) Based on the information given above, what was the effect of DEF's purchase of Stamp's bond on the noncontrolling interest amount reported in Stamp's June 30, 20X8, consolidated balance sheet?

A) No effect B) $35,000 increase C) $8,500 decrease D) $8,500 increase Spice Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105.

The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Pumpkin Corporation purchased $140,000 of Spice's bonds from the original purchaser on December 31, 20X8, for $125,000. Pumpkin owns 75 percent of Spice's voting common stock.

20) Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X8 consolidated financial statements?

A) $3,500 B) $2,800 C) $5,000 D) $2,500 21) Based on the information given above, what amount of gain or loss on bond retirement will be reported in the 20X8 consolidated financial statements?

A) $17,000 loss B) $12,800 loss C) $18,500 gain D) $22,200 gain 22) Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X9 consolidated financial statements?

A) $3,500 B) $2,800 C) $5,000 D) $2,500 23) Based on the information given above, what amount of interest income will be eliminated in the preparation of the 20X9 consolidated financial statements?

A) $17,000 B) $13,300 C) $18,500 D) $22,200 24) Based on the information given above, what amount of interest expense will be eliminated in the preparation of the 20X9 consolidated financial statements?

A) $17,000 B) $13,300 C) $18,500 D) $22,200 25) Based on the information given above, what amount of constructive gain will be allocated to noncontrolling interest in 20X8 consolidated financial statements?

A) $4,925 B) $5,550 C) $5,625 D) $4,625 Spice Company issued $200,000 of 10 percent first mortgage bonds on January 1, 20X4, at 105.

The bonds mature in 10 years and pay interest semiannually on January 1 and July 1. Pumpkin Corporation purchased $140,000 of Spice's bonds from the original purchaser on January 1, 20X8, for $122,000. Pumpkin owns 75 percent of Spice's voting common stock.

26) Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X8 year-end consolidated financial statements?

A) $3,500 B) $2,800 C) $5,000 D) $2,500 27) Based on the information given above, what amount of gain or loss on bond retirement will be reported in the 20X8 consolidated financial statements?

A) $17,000 B) $12,800 C) $18,500 D) $22,200 28) Based on the information given above, what amount of premium on bonds payable will be eliminated in the preparation of the 20X9 year-end consolidated financial statements?

A) $3,500 B) $2,800

C) $5,000 D) $2,500 29) Based on the information given above, what amount of interest income will be eliminated in the preparation of the 20X9 consolidated financial statements?

A) $17,000 B) $13,300 C) $18,500 D) $22,200 Paper Corporation holds 80 percent of the voting shares of Scissor Company. On January 1, 20X8, Scissor purchased $100,000 par value 12 percent first mortgage bonds of Paper from Cruse for $115,000. Paper originally issued the bonds to Cruse on January 1, 20X6, for $110,000. The bonds have an 8-year maturity from the date of issue. Scissor's reported net income of $65,000 for 20X8, and Paper reported income (excluding income from ownership of Scissor's stock) of $90,000.

30) Based on the information given above, what amount of interest expense does Paper record annually?

A) $10,750 B) $9,500 C) $2,500 D) $12,000 31) Based on the information given above, what amount of interest income does Scissor record for 20X8?

A) $12,000 B) $2,500 C) $7,500 D) $9,500 32) Based on the information given above, what gain or loss on the retirement of bonds should be reported in the 20X8 consolidated income statement?

A) $6,250 gain B) $7,500 gain C) $7,500 loss D) $6,250 loss

33) Based on the information given above, what amount of consolidated net income should be reported for 20X8?

A) $163,750 B) $161,250 C) $146,250 D) $148,750 Peanut Corporation acquired 80 percent of Snoopy Company's voting shares on January 1, 20X8, at underlying book value. On that date, it also purchased $500,000 par value 8 percent Snoopy bonds, which had been issued on January 1, 20X5, with a 12-year maturity. During preparation of the consolidated financial statements for December 31, 20X8, the following consolidating entry was made in the worksheet:

Bonds Payable Bond Premium Loss on Bond Retirement Interest Income Investment in Snoopy Company Bonds Interest Expense

500,000 30,000 16,875 ?

545,000 ?

34) Based on the information given above, what price did Peanut pay to purchase the Snoopy bonds?

A) $530,000 B) $516,875 C) $533,750 D) $550,625 35) Based on the information given above, what was the carrying amount of the bonds on Snoopy's books on the date of purchase?

A) $533,750 B) $516,875 C) $545,000 D) $550,625

36) A subsidiary issues bonds. The parent can then acquire the bonds either directly from the subsidiary or from a nonaffiliate that had originally acquired the subsidiary's bonds.

Required: a) Discuss the parent's accounting as it relates to the preparation of consolidated financial statements, for their acquisition of the bonds: 1. from the nonaffiliate.

2. directly from the subsidiary. b) Why does it matter who the bonds are acquired from?

37) Sydney Company issued $1,000,000 par value 10-year bonds at 102 on January 1, 20X5, which Melbourne Corporation purchased. The coupon rate on the bonds is 9 percent. Interest payments are made semiannually on July 1 and January 1. On July 1, 20X8, Perth Company purchased $500,000 par value of the bonds from Melbourne for $492,200. Perth owns 65 percent of Sydney's voting shares.

Required: a. What amount of gain or loss will be reported in Sydney's 20X8 income statement on the retirement of bonds? b. Will a gain or loss be reported in the 20X8 consolidated financial statements for Perth for the constructive retirement of bonds? What amount will be reported? c. How much will Perth's purchase of the bonds change consolidated net income for 20X8? d. Prepare the worksheet consolidation entry or entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements at December 31, 20X8. e. Prepare the worksheet consolidation entry or entries needed to remove the effects of the intercorporate bond ownership in preparing consolidated financial statements at December 31, 20X9.

38) On January 1, 20X7, Passport Company acquired 60 percent of the outstanding common stock of Stamp Company at the book value of the shares acquired. On that date, the fair value of noncontrolling interest was equal to 40 percent of book value of Stamp. At the time of purchase, Stamp had common stock of $1,000,000 outstanding and retained earnings of $800,000.

On December 31, 20X7, Passport purchased 50 percent of Stamp's bonds outstanding which were originally issued on January 2, 20X4, at 99. The total bond issue has a face value of $600,000, pays 10 percent interest annually, and has a 10-year maturity. Any premium or discount is amortized on a straight-line basis. Passport paid $306,000 for its investment in Stamp's bonds and intends to hold the bonds until maturity.

Income and dividends for Passport and Stamp for 20X7 and 20X8 are as follows:

Passport

20X7 20X8

Operating Income $ 1,600,000 1,200,000

Stamp Dividends $ 400,000 400,000

$

Net Income 600,000 1,000,000

Dividends $ 300,000 300,000

Assume Passport accounts for its investment in Stamp stock using the fully adjusted equity method.

Required: a. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X7. b. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X8.

39) On January 1, 20X7, Passport Company acquired 60 percent of the outstanding common stock of Stamp Company at the book value of the shares acquired. On that date, the fair value of noncontrolling interest was equal to 40 percent of book value of Stamp. At the time of purchase, Stamp had common stock of $1,000,000 outstanding and retained earnings of $800,000.

On December 31, 20X7, Passport purchased 50 percent of Stamp's bonds outstanding which were originally issued on January 2, 20X4, at 99. The total bond issue has a face value of $600,000, pays 10 percent interest annually, and has a 10-year maturity. Any premium or discount is amortized on a straight-line basis. Passport paid $306,000 for its investment in Stamp's bonds and intends to hold the bonds until maturity.

Income and dividends for Passport and Stamp for 20X7 and 20X8 are as follows:

Passport

20X7 20X8

Operating Income $ 1,600,000 1,200,000

Stamp Dividends $ 400,000 400,000

$

Net Income 600,000 1,000,000

Dividends $ 300,000 300,000

Assume Passport accounts for its investment in Stamp stock using the modified equity method.

Required: a. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X7. b. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X8.

40) On January 1, 20X7, Passport Company acquired 60 percent of the outstanding common stock of Stamp Company at the book value of the shares acquired. On that date, the fair value of noncontrolling interest was equal to 40 percent of book value of Stamp. At the time of purchase, Stamp had common stock of $1,000,000 outstanding and retained earnings of $800,000.

On December 31, 20X7, Passport purchased 50 percent of Stamp's bonds outstanding which were originally issued on January 2, 20X4, at 99. The total bond issue has a face value of $600,000, pays 10 percent interest annually, and has a 10-year maturity. Any premium or discount is amortized on a straight-line basis. Passport paid $306,000 for its investment in Stamp's bonds and intends to hold the bonds until maturity.

Income and dividends for Passport and Stamp for 20X7 and 20X8 are as follows:

20X7 20X8

Passport Operating Income Dividends $ 1,600,000 $ 400,000 1,200,000 400,000

Stamp Net Income $ 600,000 1,000,000

Dividends $ 300,000 300,000

Assume Passport accounts for its investment in Stamp stock using the cost method.

Required: a. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X7. b. Present the worksheet consolidation entries necessary to prepare consolidated financial statements for 20X8.