1) A change from the cost method 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.that the change be accounted for as an unrealized gain included in other
comprehensive income
D.retroactive restatement as if the investor always had used the equity method
2) On January 1, 20X9, Gold Rush Company acquires 80 percent ownership in
California Corporation for $200,000. The fair value of the noncontrolling interest at that
time is determined to be $50,000. It reports net assets with a book value of $200,000
and fair value of $230,000. Gold Rush 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
California. What will be the amount of goodwill that would be reported immediately
after the combination under current accounting practice?
A. $50,000
B. $30,000
C. $40,000
D. $20,000
3) 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 100,000
Swiss francs. The forward contract is not designated as a hedge. The rates were as
follows:
Based on the preceding information, the entries on January 30, 20X9, 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
4) 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
5) 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
6) 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
7) 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.
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
8) Big Corporation receives management consulting services from its 92 percent owned
subsidiary, Small Inc. During 20X7, Big paid Small $125,432 for its services. For the
year 20X8, Small billed Big $140,000 for such services and collected all but $7,900 by
year-end. Small’s labor cost and other associated costs for the employees providing
services to Big totaled $86,000 in 20X7 and $121,000 in 20X Big reported $2,567,000
of income from its own separate operations for 20X8, and Small reported net income of
$695,000.
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
9) 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
10) Forge Company, a calendar-year entity, had 6,000 units in its beginning inventory
for 20X8. On December 31, 20X7, 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. No additional
units were purchased during 20X8. The following additional information is provided for
20X8:
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.
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
11) Note: This is a Kaplan CPA Review Question
Mazeppa, Inc. is a multinational entity with its head office located in Toronto, Canada.
Its main foreign subsidiary is in Paris, France, but the primary economic environment in
which the foreign subsidiary generates and expends cash is in the United States. Based
on this information, which of the following statements is most likely true for Mazeppa,
Inc.?
A.The functional currency is the Euro
B.The local currency is the U.S. dollar
C.The reporting currency is the Canadian dollar
D.The reporting currency is the U.S. dollar
12) 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, 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
13) 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.
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
14) 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
15) 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.
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.Option A
B.Option B
C.Option C
D.Option D
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 the U.S. dollar is the functional currency,
what is the balance in Johnson’s investment in foreign subsidiary account at December
31, 2008?
16) A.$3,303,400
B.$3,294,500
C.$3,323,400
D.$3,314,500
17) Hunter Corporation holds 80 percent of the voting shares of Moss Company. On
January 1, 20X8, Moss purchased $100,000 par value 12 percent first mortgage bonds
of Hunter from Cruse for $115,000. Hunter 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. Moss’ reported net income of $65,000 for 20X8, and Hunter reported income
(excluding income from ownership of Moss’s stock) of $90,000.
Based on the information given above, what amount of interest income does Moss
record for 20X8?
A.$12,000
B.$2,500
C.$7,500
D.$9,500
18) Granite 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. Mortar Corporation purchased $140,000 of Granite’s bonds from the
original purchaser on January 1, 20X8, for $122,000. Mortar owns 75 percent of
Granite’s voting common stock. Granite’s partial bond amortization schedule is as
follows:
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
19) Company A holds 70 percent of the voting shares of Company B. During 20X8,
Company B sold land with a book value of $125,000 to Company A for $150,000.
Company A 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 A
uses the fully adjusted equity method in accounting for its investment in Company B.
Use the information given, but also assume that Company A holds the land at the end of
20X9. The eliminating 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 B 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
20) 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.Option A
B.Option B
C.Option C
D.Option D
21) 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?
A.Option A
B.Option B
C.Option C
D.Option D
22) Enya Corporation acquired 100 percent of Celtic Corporation’s common stock on
January 1, 20X9.Summarized balance sheet information for the two companies
immediately after the combination is provided:
Based on the information provided, the consolidated balance sheet of Enya and Celtic
will reflect goodwill in the amount of:
A.$0
B.$58,000
C.$22,000
D.$36,000
23) 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 power than A
B.Partner L will receive cash only after A has received cash
C.Partner A will have a smaller loss absorption power than L
D.Partner A will never receive any cash from partnership liquidation
24) On December 1, 20X8, Winston Corporation acquired 100 shares of Linked
Corporation at a cost of $40 per share. 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
100 shares at $40 per share. The option expires on February 20, 20X9. Selected
information concerning the fair values of the investment and the options follow:
Assume that Winston exercises the put option and sells Linked shares on February 20,
20X9.
Based on the preceding information, what is the market price of Linked Corporation
stock on February 20, 20X9?
A.$35
B.$37
C.$36
D.$40
25) 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:
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
26) On January 1, 20X7, Yang Corporation acquired 25 percent of the outstanding
shares of Spiel Corporation for $100,000 cash. Spiel 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 Yang was $110,000 and $105,000 on December 31, 20X7 and 20X8
respectively.
Based on the preceding information, what amount will be reported by Yang as income
from its investment in Spiel for 20X7 if it used the fair value option to account for its
investment in Spiel?
A.$17,500
B.$12,500
C.$11,250
D.$7,500
27) 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
28) 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.
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
29) 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
30) 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
31) 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.Option A
B.Option B
C.Option C
D.Option D
32) On July 1, 20X8, Cleveland established a capital projects fund to construct a new
town hall. Financing for construction came from the following sources:
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