1) Under parent company theory, noncontrolling interest is classified on the
consolidated balance sheet as ________. Under entity theory, noncontrolling interest is
classified on the consolidated balance sheet as ________.
A) stockholders’ equity; stockholders’ equity
B) stockholders’ equity; liability
C) liability; a liability
D) liability; stockholders’ equity
2) Governmental fund financial statements are prepared on the ________ basis of
accounting. Proprietary fund financial statements are prepared on the ________ basis of
accounting.
A) modified accrual; modified accrual
B) accrual; fund
C) modified accrual; accrual
D) blended; discrete
3) GAAP requires disclosures for each reportable operating segment for each of the
following, except for
A) Revenues
B) Depreciation expense
C) R&D expenditures
D) Extraordinary items
4) You are serving as the trustee for the Paul Porter testamentary income trust. The trust
was created by Paul’s will. All of his assets were transferred to the trust to cover the
living expenses of his wife, Paula. Upon her death, the assets are to be sold, with the
proceeds distributed to his brother, Saul. If Saul is not alive when Paula passes, the
proceeds are to go to the Porter Scholarship in Business Administration.
The probate court has ruled that all personal effects and household items could be
excluded from the estate. All taxes have been paid, and the following assets remain to
be transferred to the trust:
AssetCostFair Market Value
Cash$160,000$160,000
Certificates of deposit75,00075,000
ExTech Company common stock22,000216,000
Rentall common stock42,00040,000
Lake house (his share)149,000170,000
Personal residence (his share)226,000280,000
Antique sports car35,00046,000
Coin collection7,00012,000
Required:
Prepare the journal entries for the creation of the trust.
5) On May 1, 2011, Deerfield Corporation purchased merchandise from a German firm
for 78,000 euros when the spot rate for the euro was 1.48 euro per dollar. The account
payable was denominated in the euro. Deerfield settled the account on August 1 when
the spot rate for the euro was 1.39 euro per dollar. How much cash will Deerfield have
to disburse to settle the account?
A) $ 52,702.72
B) $ 56,115.11
C) $108,420.00
D) $115,440.00
6) Perth Corporation acquired a 100% interest in Sansone Company for $1,600,000
when Sansone had no liabilities. The book values and fair values of Sansone’s assets
were
Book ValueFair Value
Current assets$350,000$400,000
Equipment150,000210,000
Land & buildings570,000590,000
Total assets$1,070,000$1,200,000
Immediately following the acquisition, equipment will be included on the consolidated
balance sheet at
A) $150,000
B) $200,000
C) $210,000
D) $280,000
7) On January 1, 2011, Pardy Corporation acquired a 70% interest in the common stock
of Salter Corporation for $7,000,000 when Salter’s stockholders’ equity was as follows:
10% cumulative, nonparticipating preferred stock,
$100 par, with a $105 liquidation preference,
callable at $110$ 1,000,000
Common stock, $10 par value6,000,000
Additional paid-in capital1,500,000
Retained earnings2,500,000
Total stockholders’ equity$11,000,000
There were no preferred dividends in arrears on January 1, 2011 . There are no book
value/fair value differentials.
Salter has a 2011 net loss of $200,000. No dividends are declared or paid in 2011 .
What is the change in Pardy’s Investment in Salter for the year ending December 31,
2011?
A) $ 50,000
B) $ 70,000
C) $140,000
D) $210,000
8) A bond with default risk will always have a ________ risk premium and an increase
in its default risk will ________ the risk premium
A) positive; raise
B) positive; lower
C) negative; raise
D) negative; lower
9) On January 1, 2011, Persona Company acquired 80% of Sule Tooling for $332,000.
At that time, Sule reported their Common stock at $150,000, Additional paid in capital
at $45,000, and Retained earnings at $105,000. Sule also had equipment on their books
that had a remaining life of 10 years and were undervalued on the books by $40,000,
but any additional fair value/book value differential is assumed to be goodwill. During
the next three years, Sule reported the following:
YearNet IncomeDividends Paid
2011$35,000 $5,000
2012 45,000 7,500
2013 50,000 10,000
Required: Calculate the following.
a. How much excess depreciation or amortization would be recognized in the
consolidated financial statements in each of these three years?
b. How much goodwill would be recognized on the balance sheet at the date of
acquisition, and at the end of each year listed?
c. How much investment income would be reported by Persona under the equity
method for each of the three years?
d. What would be the balance in the Investment in Sule account at January 1, 2011, and
at the end of each of the three years listed?
10) If conditions produce a debit balance in a partner’s capital account when liquidation
losses are allocated, then
A) the partner receives further allocations of liquidation losses, but not gains
B) the partner receives further allocations of liquidation gains, but not losses
C) the partner is no longer obligated to partnership creditors
D) the partner has an obligation of personal net assets to the other partners
11) Under GAAP, for nonprofit, nongovernmental entities, an unconditional transfer of
cash or other assets to an entity, or a settlement or cancellation of its liabilities in a
voluntary, non-reciprocal transfer, is called a(n)
A) unconditional promise to give
B) contribution
C) conditional promise to give
D) residual equity transfer
12) Which of the following is a gift of an object to a devisee?
A) A general devise
B) A specific devise
C) A testamentary allocation
D) An administrative devise
13) Paroz Corporation acquired a 70% interest in Sandberg Corporation for $900,000
when Sandberg’s stockholders’ equity consisted of $600,000 of Capital Stock and
$600,000 of Retained Earnings. The fair values of Sandberg’s net assets were equal to
their recorded book values. At the time of acquisition, on Paroz’s books, Paroz will
record
A) goodwill for $60,000 under the parent company theory
B) goodwill for $85,714 under the entity theory
C) investment in Sandberg for $1,285,714 under the entity theory
D) investment in Sandberg for $900,000 under the entity and parent company theories
14) Governments must record a liability for uncollected taxes instead of revenues for
uncollected taxes if the taxes are going to be collected
A) 30 days after the fiscal year end
B) 45 days after the fiscal year end
C) 60 days after the fiscal year end
D) 120 days after the fiscal year end
15) Assume you are preparing journal entries for the General Fund. What account
should be debited when office supplies are ordered?
A) Appropriations
B) Encumbrances
C) Expenditures
D) Other financing use
16) Lola, Melvin, and Nettie are in the process of liquidating their partnership. Since it
may take several months to convert the other assets into cash, the partners agree to
distribute all available cash immediately, except for $12,000 that is set aside for
contingent expenses. The balance sheet and residual profit and loss sharing percentages
are as follows:
Cash$500,000Accounts payable$225,000
Other assets225,000Lola, capital (20%)168,000
Melvin, capital (30%)270,000
Nettie, capital (50%)62,000
Total assets$725,000Total liab./equity$725,000
Using a safe payment schedule, how much cash should Lola receive in the first
distribution?
A) $ 81,000
B) $ 98,000
C) $168,600
D) $202,500
17) The balance sheet of the Flail, Gail, and Hale partnership on October 1, 2011 (the
date of partnership dissolution) was as follows:
Cash$3,000Liabilities$9,000
Other assets33,000Loan from Flail1,000
Loan to Gail4,000Flail,capital (20%)3,000
Gail, capital (30%)6,000
Hale, capital (50%)21,000
Total assets$40,000Total liab./equity$40,000
In October, other assets with a book value of $15,000 were sold for $17,000 in cash.
Required:
Determine how the available cash on October 31, 2011 will be distributed.
18) Penguin Corporation acquired a 60% interest in Squid Corporation on January 1,
2012, at a cost equal to 60% of the book value of Squid’s net assets. At the time of the
acquisition, the book values of Squid’s assets and liabilities were equal to the fair
values. Squid reports net income of $880,000 for 2012 . Penguin regularly sells
merchandise to Squid at 120% of Penguin’s cost. The intercompany sales information
for 2012 is as follows:
Intercompany sales at selling price $672,000
Sales value of merchandise unsold by Squid$132,000
Required:
1> Determine the unrealized profit in Squid’s inventory at December 31, 2012 .
2> Compute Penquin’s income from Squid for 2012 .
19) On December 31, 2011, Potter Corporation has the following stockholders’ equity:
Common stock, $10 par$200,000
Retained earnings100,000
Total stockholders’ equity$300,000
On January 1, 2012, Potter Corporation declared and issued a 10% stock dividend when
the market price per share was $50.
On January 2, 2012, Corrao Corporation purchased an 80% interest in Potter
Corporation for $250,000 on the open market. On January 2, 2012, the fair value of
Potter’s individual assets and liabilities was equal to book value. Any excess cost over
book value is attributed to goodwill.
Required:
1> Prepare the journal entry(ies) for Potter Corporation on January 1, 2012 .
2> Prepare the journal entry(ies) for Corrao Corporation on January 2, 2012 .
3> Prepare the elimination entry(ies) for consolidating work papers on January 2, 2012 .
4> Prepare the elimination entry(ies) for consolidating work papers on January 2, 2012
if the 10% stock dividend is not declared and issued on January 1, 2012 .
20) Silvia Peacock has been appointed to serve as the executor of the estate of Mr.
Mickey Babay, who passed away at the age of 104 on April 5, 2011 . On April 5, 2011,
Mr. Babay’s assets consisted of the following:
The probate court has ruled that any other personal effects may be excluded from Mr.
Babay’s estate inventory.
Required:
Prepare an inventory of estate assets on April 5, 2011 .
21) Peel Corporation acquired a 80% interest in Sitt Corporation at a cost equal to 80%
of the book value of Sitt several years ago. At the time of purchase, the fair value and
book value of Sitt’s assets and liabilities were equal. Sitt purchases its entire inventory
from Peel at 150% of Peel’s cost. During 2011, Peel sold $190,000 of merchandise to
Sitt. Sitt’s beginning and ending inventories for 2011 were $72,000 and $66,000,
respectively. Income statement information for both companies for 2011 is as follows:
PeelSitt
Sales Revenue$820,000$440,000
Investment income from Sitt146,000
Cost of Goods Sold(460,000)(165,000)
Expenses(120,000)(95,000)
Net Income$386,000 $180,000
Required:
Prepare a consolidated income statement for Peel Corporation and Subsidiary for 2011 .
22) Goodwill County had the following transactions for their General Fund in the first
month of their fiscal 2012 year, which ends June 30, 2012 .
1>The budget was approved, with $1,200,000 expected from property taxes, and
another $5,000,000 expected from sales taxes. The budget showed these funds were
expected to be spent on Salaries and Wages, $3,100,000; Utilities, $1,800,000; Rent,
$900,000; and Supplies, $200,000.
2>Supplies were ordered in the amount of $33,000.
3>The electric bill was paid upon receipt in the amount of $75,000.
4>Property taxes were billed in the amount of $1,200,000, due on December 31 . Bad
debts are estimated at 1% of receivables.
5>Supplies were received, but the invoice amount was $35,000 and will be paid in 35
days. Supplies are used quickly and are not inventoried.
6>Property tax payments were received amounting to $100,000.
7>Payment was received from merchants for sales tax collections amounting to
$400,000.
Required:
Prepare the journal entries for the General Fund that would be required for these
transactions.
23) Pexo Industries purchases the majority of their raw materials from a wholly-owned
subsidiary, Springmade Chemicals. Pexo purchased Springmade to assure supply
availability at a time when the materials were being rationed in the industry due to
supply issues overseas. Pexo was able to purchase Springmade at the book value of
Springmade’s net assets. At the time of purchase, the book value and fair value of
Springmade’s net assets were equal. Pexo purchased $2,890,000 of materials from
Springmade in 2011 alone. All intercompany sales are made at 120% of cost, although
Springmade is able to mark up their products 80% to other outside buyers. Pexo carried
inventory on their books at the beginning and end of the year in the amount of $450,000
and $480,000, respectively, all of which had been purchased from Springmade. Income
statement information for both companies for 2011 is as follows:
Pexo Springmade
Sales Revenue$3,793,000 $4,441,000
Investment income from Springmade245,000
Cost of Goods Sold(3,139,000)(3,270,000)
Expenses(257,000)(921,000)
Net Income$642,000 $250,000
Required:
Prepare a consolidated income statement for Pexo Corporation and Subsidiary for
2011 .
