1) 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:
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
2) Golden Path, a labor union, had the following receipts and expenses for the year
ended December 31, 20X8:
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.
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 unrestricted funds?
A.$980,000
B.$1,100,000
C.$1,210,000
D.$1,020,000
3) 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.
Comment Letter
4) 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:
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
5) 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 these
Bristle Corporation acquired 75 percent of Silver 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. Silver’s balance sheet immediately before the
combination reflected the following balances:
A careful review of the fair value of Silver’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 Bristle
and the noncontrolling shareholders.
Based on the preceding information, what amount will be reported as investment in
Silver Corporation stock in the consolidated balance sheet immediately following the
acquisition?
6) A.$0
B.$210,000
C.$300,000
D.$400,000
7) On July 1, 20X8, Fair Logic Corporation acquires 75 percent of Integrated 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
Integrated Systems. On January 1, 20X8 Integrated reported common stock of $100,000
and retained earnings of $130,000. For the year 20X8, Integrated reports the following
items:
Fair Logic uses the equity method in accounting for this investment.
Based on the preceding information, what is the book value of shares acquired by Fair
Logic on July 1, 20X8?
A.$240,000
B.$191,250
C.$230,000
D.$180,000
8) Myway Company sold equipment to a Canadian company for 100,000 Canadian
dollars (C$) on January 1, 20X9 with settlement to be in 60 days. On the same date,
Alman entered into a 60-day 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:
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
9) Company A owns 85 percent of Company B’s stock and 80 percent of Company C’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:
Company A does not record income tax expense on income from subsidiaries because a
consolidated tax return is filed.
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
10) Jupiter 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.
Jupiter acquired 75 percent of Ganymede 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 Ganymede Company’s book value. Ganymede reported net income of
$20,000, paid dividends of $8,000 in 20X8, and is included in Jupiter’s consolidated
statements. Jupiter paid dividends of $25,000 in 20X8. The indirect method is used in
computing cash flow from operations.
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
11) 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:
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.
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
12) ABC Corporation owns 75 percent of XYZ Company’s voting shares. During 20X8,
ABC produced 50,000 chairs at a cost of $79 each and sold 35,000 chairs to XYZ for
$90 each. XYZ 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.
Based on the information given above, what amount of cost of goods sold did XYZ
record in 20X8?
A.$2,765,000
B.$1,620,000
C.$1,422,000
D.$2,963,000
13) On July 1, 20X8, Fair Logic Corporation acquires 75 percent of Integrated 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
Integrated Systems. On January 1, 20X8 Integrated reported common stock of $100,000
and retained earnings of $130,000. For the year 20X8, Integrated reports the following
items:
Fair Logic uses the equity method in accounting for this investment.
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
14) Moon Corporation issued $300,000 par value 10-year bonds at 107 on January 1,
20X3, which Star Corporation purchased. On July 1, 20X7, Sun Corporation purchased
$120,000 face value of Moon bonds from Star. The bonds pay 12 percent interest
annually on December 31. The preparation of consolidated financial statements for
Moon and Sun at December 31, 20X9, required the following eliminating entry:
Based on the information given above, if 20X9 consolidated net income of $50,000
would have been reported without the eliminating entry provided, what amount will
actually be reported?
A.$47,900
B.$48,200
C.$49,400
D.$48,800
15) Micron 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 Micron and Stanley immediately after the acquisition contained these
balances:
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. Micron reports income
from its separate operations of $75,000 and pays dividends of $30,000 during 20X8.
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
16) 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
17) Beta 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, Beta 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 Beta in the
amount of $20,000, which Beta included in its accounts receivable.
Based on the preceding information, what amount of total assets did Beta report in its
balance sheet immediately after the acquisition?
A.$500,000
B.$650,000
C.$750,000
D.$900,000
18) Global Corporation acquired 85 percent of Local Company’s voting shares of stock
in 20X7. During 20X8, Global purchased 50,000 picture tubes for $15 each and sold
28,000 of them to Local for $20 each. Local sold all of the units to unrelated entities
prior to December 31, 20X8, for $30 each. Both companies use perpetual inventory
systems.
Which worksheet eliminating entry is needed in preparing consolidated financial
statements for 20X8 to remove all effects of the intercompany sale?
A.Option A
B.Option B
C.Option C
D.Option D
19) Light 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. Light 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.
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
20) 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
21) On January 2, 20X8, Johnson Company acquired a 100% interest in the capital
stock of Perth Company for $3,100,000. Any excess cost over book value is attributable
to a patent with a 10-year remaining life. At the date of acquisition, Perth’s balance
sheet contained the following information:
Perth’s income statement for 20X8 is as follows:
The balance sheet of Perth at December 31, 20X8, is as follows:
Perth declared and paid a dividend of 20,000 FCU on October 1, 20X8. Spot rates at
various dates for 20X8 follow:
Assume Perth’s revenues, purchases, operating expenses, depreciation expense, and
income taxes were incurred evenly throughout 20X8.
Refer to the above information. Assuming Perth’s local currency is the functional
currency, what is the amount of translation adjustment that appears on Johnson’s
consolidated financial statements at December 31, 20X8?
A.$419,184 credit
B.$416,884 credit
C.$405,884 debit
D.$398,500 credit
22) 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
23) Note: This is a Kaplan CPA Review Question
Grant, Inc. acquired 30 percent of South Co.’s voting stock for $200,000 on January 2,
20X4. Grant’s 30 percent interest in South gave Grant the ability to exercise significant
influence over South’s operating and financial policies. During 20X4, South earned
$80,000 and paid dividends of $50,000. South reported earnings of $100,000 for the six
months ended June 30, 20X5, and $200,000 for the year ended December 31, 20X5. On
July 1, 20X5, Grant sold half of its stock in South for $150,000 cash. South paid
dividends of $60,000 on October 1, 20X5.
What amount should Grant include in its 20X4 income statement as a result of the
investment?
A.$15,000
B.$24,000
C.$50,000
D.$80,000
24) Small-Town Retail owns 70 percent of Supplier Corporation’s common stock. For
the current financial year, Small-Town and Supplier reported sales of $450,000 and
$300,000 and expenses of $290,000 and $240,000, respectively.
Based on the preceding information, what is the amount of net income to be reported in
the consolidated income statement for the year under the parent company theory
approach?
A. $220,000
B. $202,000
C. $160,000
D. $200,000
25) On December 31, 20X9, Add-On Company acquired 100 percent of Venus
Corporation’s common stock for $300,000. Balance sheet information Venus just prior
to the acquisition is given here:
At the date of the business combination, Venus’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.
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
26) Revenue and expense 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
27) 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 unrestricted net assets.
B. Decreases unrestricted net assets.
C. Increases temporarily restricted net assets.
D. Decreases temporarily restricted net assets.
E. Increases permanently restricted net assets.
F. Decreases permanently restricted net assets.
G. Transaction is not reported on the statement of activities.
Received cash contributions restricted by donors for equipment.
28) 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
29) 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
30) ABC, a holder of a $400,000 XYZ 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,
XYZ, a 90 percent owner of DEF, had a $450,000 carrying amount for this bond.
Based on the information given above, what was the effect of DEF’s purchase of XYZ’s
bond on the noncontrolling interest amount reported in XYZ’s June 30, 20X8,
consolidated balance sheet?
A.No effect
B.$35,000 increase
C.$8,500 decrease
D.$8,500 increase
31) 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.
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
32) Windsor Corporation owns 75 percent of Elven Corporation’s outstanding common
stock. Elven, in turn, owns 15 percent of Windsor’s outstanding common stock. What
percent of the dividends paid by Windsor is reported as dividends declared in the
consolidated retained earnings statement?
A.None
B.100 percent
C.85 percent
D.75 percent
33) Riviera Township reported the following data for its governmental activities for the
year ended June 30, 20X9:
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.
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
34) The information below is for the second quarter of Tampa Company for 20X8:
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.
35) The partnership of Rachel, Adams, and Nixon has the following trial balance on
September 30, 2009:
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.
36) 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?
37) Boycott Company holds 75 percent ownership of Fred Corporation. The
consolidated balance sheets as of December 31, 20X8, and December 31, 20X9, are as
follows:
The 20X9 consolidated income statement contained the following amounts:
Boycott acquired its investment in Fred on January 1, 20X6, for $120,000. At that date,
the fair value of the noncontrolling interest was $40,000, and Fred 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.
Boycott sold $100,000 of bonds on December 31, 20X9, to assist in generating
additional funds. Fred reported net income of $20,000 for 20X9 and paid dividends of
$10,000. Boycott 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.
38) 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?
39) Big Company acquired 75 percent of Little 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 Little Company. Little Company reported
shares outstanding of $350,000 and retained earnings of $100,000. During 20X8, Little
Company reported net income of $60,000 and paid dividends of $3,000. In 20X9, Little
Company reported net income of $90,000 and paid dividends of $15,000. The following
transactions occurred between Big Company and Little Company in 20X8 and 20X9:
Little Co. sold equipment to Big Co. for a $42,000 gain on December 31, 20X8. Little
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, Big Co. estimated that the
equipment still had a seven-year remaining useful life.
Big sold land costing $90,000 to Old Company on June 28, 20X9, for $110,000.
Required:
Give all eliminating entries needed to prepare a consolidation worksheet for 20X9
assuming that Big Co. uses the modified equity method to account for its investment in
Old Company.
40) Briefly explain the three classes of creditors specified in the Bankruptcy Code.
41) 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 investment at
December 31, 20X8, is $310,000. The fair value of the net assets (excluding goodwill)
at that date is $220,000 and 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.