Partnership Accounting
Final Exam Questions
Course Introduction
Partnership Accounting focuses on the principles and procedures involved in accounting for business partnerships. The course covers the formation, operation, and dissolution of partnerships, including the distribution of income and losses, admission and retirement of partners, changes in ownership structures, and liquidation processes. Students will gain proficiency in preparing and analyzing financial statements specific to partnerships, handling capital and drawing accounts, and understanding the legal and ethical considerations related to partnership entities.
Recommended Textbook Fundamentals of Advanced Accounting 5th Edition by Joe Ben Hoyle
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Chapter 1: The Equity Method of Accounting for Investments
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Sample Questions
Q1) You are auditing a company that owns twenty percent of the voting common stock of another corporation and uses the equity method to account for the investment. How would you verify that the equity method is appropriate in this case?
Answer: In order to verify that the equity method is appropriate, the auditor should determine whether the investor is able to exercise significant influence over the operations of the investee. The ability to influence the investee's operations is the most important criterion for adopting the equity method. The auditor should look for such evidence of significant influence as (1) frequent or material intercompany transactions; (2) exchange of managerial personnel; (3) technological interdependency; and (4) investor participation in the decision-making process of the investee.
Q2) Aqua Corp. purchased 30% of the common stock of Marcus Co. by paying $500,000. Of this amount, $50,000 is associated with goodwill.
Required:
Prepare the journal entry to record Aqua's investment.
Answer: 11ea8df8_a858_34ce_b636_3b49850ce374_TB4172_00
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Chapter 2: Consolidation of Financial Information
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Q1) Which of the following statements is true regarding a statutory consolidation?
A) The original companies dissolve while remaining as separate divisions of a newly created company.
B) Both companies remain in existence as legal corporations with one corporation now a subsidiary of the acquiring company.
C) The acquired company dissolves as a separate corporation and becomes a division of the acquiring company.
D) The acquiring company acquires the stock of the acquired company as an investment.
E) A statutory consolidation is no longer a legal option.
Answer: A
Q2) Describe the accounting for direct costs, indirect costs, and issuance costs under the acquisition method of accounting for a business combination.
Answer: Direct and indirect combination costs are expensed and issuance costs reduce the otherwise fair value of the consideration issued under the acquisition method of accounting for business combinations.
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Chapter 3: Consolidationssubsequent to the Date of Acquisition
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Q1) Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2010 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2011 if Rhine generates cash flows from operations of $27,000 or more in the next year. Harrison estimates that there is a 20% probability that Rhine will generate at least $27,000 next year, and uses an interest rate of 5% to incorporate the time value of money. The fair value of $16,500 at 5%, using a probability weighted approach, is $3,142. What will Harrison record as its Investment in Rhine on January 1, 2010?
A) $400,000.
B) $403,142.
C) $406,000.
D) $409,142.
E) $416,500.
Answer: B
Q2) For an acquisition when the subsidiary retains its incorporation, which method of internal recordkeeping gives the most accurate portrayal of the accounting results for the entire business combination?
Answer: The equity method gives the most accurate portrayal of the results for the combined entity.
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Chapter 4: Consolidated Financial Statements and Outside Ownership
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Q1) Prevatt, Inc. owns 80% of Franklin Company. During the current year, a portion of the investment in Franklin is sold. Prior to recording the sale, Prevatt adjusts the carrying value of its investment. What is the purpose of the adjustment?
Q2) On January 1, 2010, Jannison Inc. acquired 90% of Techron Co. by paying $477,000 cash. There is no active trading market for Techron stock. Techron Co. reported a Common Stock account balance of $140,000 and Retained Earnings of $280,000 at that date. The fair value of Techron Co. was appraised at $530,000. The total annual amortization was $11,000 as a result of this transaction. The subsidiary earned $98,000 in 2010 and $126,000 in 2011 with dividend payments of $42,000 each year. Without regard for this investment, Jannison had income of $308,000 in 2010 and $364,000 in 2011. Use the economic unit concept to account for this acquisition. What is the non-controlling interest balance as of December 31, 2011?
Q3) One company buys a controlling interest in another company on April 1. How should the preacquisition subsidiary revenues and expenses be handled in the consolidated balances for the year of acquisition?
Q4) What is preacquisition income?
Q5) Where should a non-controlling interest appear on a consolidated balance sheet?
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Chapter 5: Consolidated Financial Statementsintra-Entity
Asset Transactions
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Sample Questions
Q1) Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2010, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000, and $220,000 for 2010, 2011, and 2012, respectively. Parker sold the land purchased from Stark in 2010 for $92,000 in 2012. Compute income from Stark reported on Parker's books for 2011.
A) $185,000.
B) $157,500.
C) $166,500.
D) $162,000.
E) $180,000.
Q2) Virginia Corp. owned all of the voting common stock of Stateside Co. Both companies use the perpetual inventory method, and Virginia decided to use the partial equity method to account for this investment. During 2010, Virginia made cash sales of $400,000 to Stateside. The gross profit rate was 30% of the selling price. By the end of 2010, Stateside had sold 75% of the goods to outside parties for $420,000 cash. Prepare any 2011 consolidation worksheet entries that would be required regarding the 2010 inventory transfer.
Q3) How is the gain on an intra-entity transfer of a depreciable asset realized?
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Chapter 6: Variable Interest Entities, Intra-Entity Debt,
Consolidated Cash Flows, and Other Issues
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Q1) Campbell Inc. owned all of Gordon Corp. For 2011, Campbell reported net income (without consideration of its investment in Gordon) of $280,000 while the subsidiary reported $112,000. The subsidiary had bonds payable outstanding on January 1, 2011, with a book value of $297,000. The parent acquired the bonds on that date for $281,000. During 2011, Campbell reported interest income of $31,000 while Gordon reported interest expense of $29,000. What is consolidated net income for 2011?
A) $406,000.
B) $374,000.
C) $378,000.
D) $410,000.
E) $394,000.
Q2) Danbers Co. owned seventy-five percent of the common stock of Renz Corp. How does the issuance of a five percent stock dividend by Renz affect Danbers and the consolidation process?
Q3) Parent Corporation acquired some of its subsidiary's bonds on the open bond market, paying a price $40,000 higher than the bonds' carrying value. How should the difference between the purchase price and the carrying value be accounted for?
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Chapter 7: Foreign Currency Transactions and Hedging
Foreign Exchange Risk
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Sample Questions
Q1) All of the following data may be needed to determine the fair value of a forward contract at any point in time except
A) The forward rate when the forward contract was entered into.
B) The current forward rate for a contract that matures on the same date as the forward contract entered into.
C) The future spot rate.
D) A discount rate.
E) The company's incremental borrowing rate.
Q2) U.S. GAAP provides guidance for hedges of all the following sources of foreign exchange risk except
A) Recognized foreign currency denominated assets and liabilities.
B) Unrecognized foreign currency firm commitments.
C) Forecasted foreign currency denominated transactions.
D) Net investment in foreign operations.
E) Deferred foreign currency gains and losses.
Q3) What happens when a U.S. company purchases goods denominated in a foreign currency and the foreign currency appreciates?
Q4) What factors create a foreign exchange gain?
Q5) What is the major assumption underlying the one-transaction perspective?
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Chapter 8: Translation of Foreign Currency Financial Statements
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Q1) Where is the disposition of a remeasurement gain or loss reported in the parent company's financial statements?
A) Net income/loss in the income statement.
B) Cumulative translation adjustment as a deferred asset.
C) Cumulative translation adjustment as a deferred liability.
D) Other comprehensive income.
E) Retained earnings.
Q2) Under the current rate method, how would cost of goods sold be translated?
A) Beginning of the year rate.
B) Average rate.
C) Current rate.
D) Historical rate.
E) Composite amount.
Q3) How can a parent corporation determine the functional currency for a foreign subsidiary that conducts business in more than one country?
Q4) Farley Brothers, a U.S. company, had a subsidiary in Italy. Under what conditions would the U.S. dollar be the functional currency for this subsidiary?
Q5) What is the justification for the remeasurement of foreign currency transactions?
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Chapter 9: Partnerships: Formation and Operation
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Q1) Under what circumstances does a partner's balance in his or her capital account have practical consequences for the partner?
Q2) When the hybrid method is used to record the withdrawal of a partner, the partnership
A) revalues assets and liabilities and records goodwill to the continuing partner but not to the withdrawing partner.
B) revalues liabilities but not assets, and no goodwill is recorded.
C) can recognize goodwill but does not revalue assets and liabilities.
D) revalues assets but not liabilities, and records goodwill to the continuing partner but not to the withdrawing partner.
E) revalues assets and liabilities but does not record goodwill.
Q3) Why are the terms of the Articles of Partnership important to partners?
Q4) The disadvantages of the partnership form of business organization, compared to corporations, include
A) the legal requirements for formation.
B) unlimited liability for the partners.
C) the requirement for the partnership to pay income taxes.
D) the extent of governmental regulation.
E) the complexity of operations.
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Chapter 10: Partnerships: Termination and Liquidation
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Q1) What events or circumstances might force the termination of a partnership and liquidation of its assets?
Q2) Gonda, Herron, and Morse is considering possible liquidation because partner Morse is personally insolvent. The partners have the following capital balances: $60,000, $70,000, and $40,000, respectively, and share profits and losses 30%, 45%, and 25%, respectively. The partnership has $200,000 in noncash assets that can be sold for $150,000. The partnership has $10,000 cash on hand, and $40,000 in liabilities. What is the minimum that partner Morse's creditors would receive if they have filed a claim for $50,000?
A) $0.
B) $27,500.
C) $45,000.
D) $47,500.
E) $50,000.
Q3) The partnership of Rayne, Marin, and Fulton was being liquidated by the partners. Rayne was insolvent and did not have enough assets to pay all his personal creditors. Under what conditions might Rayne's personal creditors have claimed some of the partnership assets?
Q4) Why is a Schedule of Liquidation prepared?
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Chapter 11: Accounting for State and Local Governments
Part 1
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Sample Questions
Q1) Trapper City issued 30-year bonds for the purpose of building a new City Hall. The proceeds of the bonds are deposited in the General Fund. For the Fund Financial Statements, in what fund will Bonds Payable appear?
A) General Fund.
B) Capital Projects Fund.
C) Permanent Fund.
D) Debt Service Fund.
E) Bonds Payable do not appear in Fund Financial Statements.
Q2) What account is debited in the general fund when equipment is received by a governmental entity?
A) Expenditures.
B) Encumbrances.
C) Plant assets.
D) Accounts Payable.
E) Fund Balance-Reserve for Encumbrances.
Q3) When should property taxes be recognized under modified accrual accounting?
Q4) For a government, what kinds of operations are accounted for using a proprietary fund? Give three examples.
Q5) What is the purpose of government-wide financial statements?
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Chapter 12: Accounting for State and Local Governments
Part 2
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Q1) The City of Kamen maintains a collection of paintings of a former citizen in its City Hall building. During the year, one painting was purchased by the city for $2,000 at an auction using appropriated funds in the General Fund. Also during the year, a donation of a painting valued at $3,000 was made to the city and the city has appropriately decided to record this painting as an asset.
Required: Prepare the journal entry/entries for the two transactions for the purposes of preparing the government-wide financial statements.
Q2) According to the GASB (Governmental Accounting Standards Board), which one of the following is not a criterion for determining whether a government is legally separate?
A) The government can determine its own budget.
B) The government can issue debt.
C) The government has corporate powers including the right to sue and be sued.
D) The government has the power to levy taxes.
E) The government can issue preferred stock.
Q3) How is the Statement of Cash Flows for Proprietary Funds similar and dissimilar to a Statement of Cash Flows for a for-profit business?
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