1) Keenan Company has had bonds payable of $20,000 outstanding for several years.
On January 1, 2013, there was an unamortized premium of $2,000 with a remaining life
of 10 years, Keenan’s parent, Ross, Inc., purchased the bonds in the open market for
$19,000. Keenan is a 90% owned subsidiary of Ross. The bonds pay 8% interest
annually on December 31. The companies use the straight-line method to amortize
interest revenue and expense. Compute the consolidated gain or loss on a consolidated
income statement for 2013.
A) $3,000 gain.
B) $3,000 loss.
C) $1,000 gain.
D) $1,000 loss.
E) $2,000 gain.
2) A subsidiary of Porter Inc., a U.S. company, was located in a foreign country. The
functional currency of this subsidiary was the Stickle (§), the local currency where the
subsidiary is located. The subsidiary acquired inventory on credit on November 1,
2012, for §120,000 that was sold on January 17, 2013 for §156,000. The subsidiary paid
for the inventory on January 31, 2013. Currency exchange rates between the dollar and
the Stickle were as follows:
What amount would have been reported for this inventory in Porter’s consolidated
balance sheet at December 31, 2012?
A.$24,000
B.$26,400
C.$22,800
D.$27,600
E.$28,800
3) For each of the following situations, select the best answer concerning information
forms filed with the SEC:
(A) Form 10-K
(B) Form 10-Q
(C) Form 8-K
(D) Not required
___ 1) A unique or significant happening.
___ 2) Annual information required by Regulation S-X.
___ 3) Changes in control of the registrant.
___ 4) Interim financial statements.
___ 5) Fourth quarter income statement.
___ 6) Bankruptcy.
___ 7) Annual information required by Regulation S-K.
___ 8) Income statement for the current quarter, year-to-date, and comparative periods
in the previous year.
___ 9) Changes in bookkeeping staff.
___ 10) Changes in the registrant’s external auditor.
4) Pepe, Incorporated acquired 60% of Devin Company on January 1, 2012. On that
date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000
and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin
reported net income of $300,000 and $325,000 for 2012 and 2013, respectively. Pepe
uses the equity method to account for its investment in Devin.
Compute the income from Devin reported on Pepe’s books for 2012.
A) $174,600.
B) $184,800.
C) $172,000.
D) $171,000.
E) $180,000.
5) Jaynes Inc. acquired all of Aaron Co.’s common stock on January 1, 2012, by issuing
11,000 shares of $1 par value common stock. Jaynes’ shares had a $17 per share fair
value. On that date, Aaron reported a net book value of $120,000. However, its
equipment (with a five-year remaining life) was undervalued by $6,000 in the
company’s accounting records. Any excess of consideration transferred over fair value
of assets and liabilities is assigned to an unrecorded patent to be amortized over ten
years.
What was the total for consolidated patents as of December 31, 2013?
6) Wilson owned equipment with an estimated life of 10 years when it was acquired for
an original cost of $80,000. The equipment had a book value of $50,000 at January 1,
2012. On January 1, 2012, Wilson realized that the useful life of the equipment was
longer than originally anticipated, at ten remaining years.
On April 1, 2012 Simon Company, a 90% owned subsidiary of Wilson Company,
bought the equipment from Wilson for $68,250 and for depreciation purposes used the
estimated remaining life as of that date. The following data are available pertaining to
Simon’s income and dividends:
Compute the amortization of gain through a depreciation adjustment for 2013 for
consolidation purposes.
A) $1,950.
B) $1,825.
C) $2,000.
D) $1,500.
E) $7,000.
7) The employees of the City of Raymond earn vacation compensation that totals
$1,500 per week. During 2013, $30,000 in vacation time was taken and the remainder is
expected to be used during the latter part of next year. In the government-wide financial
statements, assuming there was no beginning balance, what liability should be reported
at the end of 2013?
A.$0.
B.$1,500.
C.$30,000.
D.$48,000.
E.$78,000.
8) On January 4, 2013, Bailey Corp. purchased 40% of the voting common stock of
Emery Co., paying $3,000,000. Bailey properly accounts for this investment using the
equity method. At the time of the investment, Emery’s total stockholders’ equity was
$5,000,000. Bailey gathered the following information about Emery’s assets and
liabilities whose book values and fair values differed:
Any excess of cost over fair value was attributed to goodwill, which has not been
impaired. Emery Co. reported net income of $400,000 for 2013, and paid dividends of
$200,000 during that year.
How much goodwill is associated with this investment?
A) $(500,000)
B) $ 0
C) $ 100,000
D) $ 200,000
E) $2,000,000
9) Matching
1> Deficit capital balances
2> Predistribution plan
3> The schedule of liquidation
4> Safe capital balances
A. A schedule should be produced periodically by the accountant to disclose losses and
gains that have been incurred, remaining assets and liabilities, and current capital
balances.
B.One or more partners may have a negative capital balance often as a result of losses
incurred in disposing of assets.
C. A provision for an equitable distribution of assets during liquidation.
D. At the start of a liquidation, this document provides guidance for all payments made
to the partners throughout the liquidation.
10) Gargiulo Company, a 90% owned subsidiary of Posito Corporation, sells inventory
to Posito at a 25% profit on selling price. The following data are available pertaining to
intra-entity purchases. Gargiulo was acquired on January 1, 2012.
Assume the equity method is used. The following data are available pertaining to
Gargiulo’s income and dividends.
Compute the equity in earnings of Gargiulo reported on Posito’s books for 2013.
A) $76,500.
B) $77,130.
C) $75,870.
D) $75,600.
E) $75,800.
11) A local partnership was considering the possibility of liquidation since one of the
partners (Ding) was personally insolvent. Capital balances at that time were as follows.
Profits and losses were divided on a 4:2:2:2 basis, respectively.
Creditors of partner Ding filed a $25,000 claim against the partnership’s assets. At that
time, the partnership held noncash assets reported at $360,000 and liabilities of
$120,000. There was no cash on hand at the time.
If the assets could be sold for $228,000, what is the minimum amount that Laurel’s
creditors would have received?
A.$36,000.
B.$0.
C.$2,500.
D.$38,250.
E.$67,250.
12) Dean Hardware, Inc. is comprised of five operating segments. Information about
each of these segments is as follows (in thousands):
In applying the profit or loss test, what is the minimum amount an operating segment
must have in order to meet the profit or loss test for a reportable segment?
A.$8.2
B.$9.0
C.$10.4
D.$13.0
E.$82.0
13) Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on
May 8. Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is
Brisco’s fiscal year-end. The pertinent exchange rates were as follows:
How much Foreign Exchange Gain or Loss should Brisco record on May 31?
A.$2,520,000 gain.
B.$20,000 gain.
C.$20,000 loss.
D.$80,000 gain.
E.$80,000 loss.
15) Pell Company acquires 80% of Demers Company for $500,000 on January 1, 2014.
Demers reported common stock of $300,000 and retained earnings of $210,000 on that
date. Equipment was undervalued by $30,000 and buildings were undervalued by
$40,000, each having a 10-year remaining life. Any excess consideration transferred
over fair value was attributed to goodwill with an indefinite life. Based on an annual
review, goodwill has not been impaired.
Demers earns income and pays dividends as follows:
Assume the INITIAL VALUE is applied.
How much does Pell record as Income from Demers for the year ended December 31,
2015?
A) $90,400.
B) $40,000.
C) $89,000.
D) $50,400.
E) $56,000.
16) Gargiulo Company, a 90% owned subsidiary of Posito Corporation, sells inventory
to Posito at a 25% profit on selling price. The following data are available pertaining to
intra-entity purchases. Gargiulo was acquired on January 1, 2012.
Assume the equity method is used. The following data are available pertaining to
Gargiulo’s income and dividends.
Compute the non-controlling interest in Gargiulo’s net income for 2012.
A) $6,970.
B) $7,000.
C) $7,030.
D) $6,270.
E) $6,230.
17) Cleary, Wasser, and Nolan formed a partnership on January 1, 2012, with
investments of $100,000, $150,000, and $200,000, respectively. For division of income,
they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual
compensation of $10,000 to Wasser, and (3) sharing the remainder of the income or loss
in a ratio of 20% for Cleary, and 40% each for Wasser and Nolan. Net income was
$150,000 in 2012 and $180,000 in 2013. Each partner withdrew $1,000 for personal use
every month during 2012 and 2013.
What was Wasser’s total share of net income for 2012?
A.$63,000.
B.$53,000.
C.$58,000.
D.$29,000.
E.$51,000.
18) On May 1, 2013, Mosby Company received an order to sell a machine to a
customer in Canada at a price of 2,000,000 Mexican pesos. The machine was shipped
and payment was received on March 1, 2014. On May 1, 2013, Mosby purchased a put
option giving it the right to sell 2,000,000 pesos on March 1, 2014 at a price of
$190,000. Mosby properly designates the option as a fair value hedge of the peso firm
commitment. The option cost $3,000 and had a fair value of $3,200 on December 31,
2013. The following spot exchange rates apply:
Mosby’s incremental borrowing rate is 12 percent, and the present value factor for two
months at a 12 percent annual rate is .9803
What was the overall result of having entered into this hedge of exposure to foreign
exchange risk?
A.$0
B.$9,000 net loss on the option.
C.$9,000 net gain on the option.
D.$2,000 net gain on the option.
E.$2,000 net loss.
19) On January 1, 2012, Jones Company bought 15% of Whitton Company. Jones paid
$150,000 for these shares, an amount that exactly equaled the proportionate book value
of Whitton. On January 1, 2013, Whitton acquired 80% ownership of Jones. The
following data are available concerning Whitton’s acquisition of Jones:
Excess fair value over book value (assigned to trademarks) is amortized over 20 years.
The initial value method is used by both companies.
The following information is available regarding Jones and Whitton:
Compute the non-controlling interest in net income for 2013.
A.$11,000.
B.$10,800.
C.$9,000.
D.$8,200.
E.$7,200.
20) Hampton Company is trying to decide whether to seek liquidation or
reorganization. Hampton has provided the following balance sheet:
Additional information is as follows:
– The investments are currently worth $13,000.
– It is estimated that $32,000 of the accounts receivable are collectible.
– The inventory can be sold for $74,000.
– The prepaid expenses and the intangible assets have no net realizable value.
– The land and building are currently valued at $250,000.
– The equipment can be sold for $60,000.
– Administrative expenses (not yet recorded) are estimated to be $12,500.
– Accrued expenses include $17,000 of salaries payable ($11,000 to one employee and
$3,000 each to two other employees).
– Accrued expenses include $7,000 of unpaid payroll taxes.
How much will be paid to the holder of the note payable secured by the land and
building?
(Round your payout percentage to the nearest whole number.)
21) The balance sheet of Rogers, Dennis & Berry LLP prior to liquidation included the
following:
The three partners shared net income and losses in a 5:3:2 ratio, respectively. Noncash
assets were sold for $60,000. Creditors were paid in full, partners were paid $35,000,
and the balance of cash was retained pending future developments.
Record the journal entry for the cash distribution to the partners.
22) Norr and Caylor established a partnership on January 1, 2012. Norr invested cash of
$100,000 and Caylor invested $30,000 in cash and equipment with a book value of
$40,000 and fair value of $50,000. For both partners, the beginning capital balance was
to equal the initial investment. Norr and Caylor agreed to the following procedure for
sharing profits and losses:
– 12% interest on the yearly beginning capital balance
– $10 per hour of work that can be billed to the partnership’s clients
– the remainder divided in a 3:2 ratio
The Articles of Partnership specified that each partner should withdraw no more than
$1,000 per month.
For 2012, the partnership’s income was $70,000. Norr had 1,000 billable hours, and
Caylor worked 1,400 billable hours. In 2013, the partnership’s income was $24,000, and
Norr and Caylor worked 800 and 1,200 billable hours respectively. Each partner
withdrew $1,000 per month throughout 2012 and 2013.
Determine the balance in both capital accounts at the end of 2012.
23) The ABCD Partnership has the following balance sheet at January 1, 2012, prior to
the admission of new partner, Eden.
Eden contributed $124,000 in cash to the business to receive a 20% interest in the
partnership. Goodwill was to be recorded. The four original partners shared all profits
and losses equally. After Eden made his investment, what were the individual capital
balances?
24) Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago. At the
present time, Glotfelty is reporting the following stockholders’ equity:
Glotfelty issues
5,000 shares of previously unissued stock to the public for $27 per share. None of this
stock is purchased by Panton.
Describe how this transaction would affect Panton’s books.
25) Dice Inc. owns 40% of the outstanding shares of Spalding Corp., an investment
accounted for by the equity method. During 2013, Dice earned operating income (not
including income from its investment in Spalding) of $370,000. For this same period,
Spalding reported net income of $160,000 and paid cash dividends of $60,000. Dice has
an effective income tax rate of 35% and anticipates holding its investment in Spalding
for an indefinite period.
26) The partners of Donald, Chief & Berry LLP decided to liquidate on August 1, 2013.
The balance sheet of the partnership is as follows, with the profit and loss ratio of 25%,
45%, and 30%, respectively.
The disposal of Other Assets with a carrying amount of $200,000 realized $140,000,
and all available cash was distributed.
Prepare the journal entry for Donald, Chief & Berry LLP on August 1, 2013, to record
the offset of the loan receivable from Donald.
27) Fargus Corporation owned 51% of the voting common stock of Sanatee, Inc. The
parent’s interest was acquired several years ago on the date that the subsidiary was
formed. Consequently, no goodwill or other allocation was recorded in connection with
the acquisition price.
On January 1, 2012, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The
bonds pay a 10% interest rate every December 31. Fargus acquired 40% of these bonds
on January 1, 2014, for 95% of the face value. Both companies utilized the straight-line
method of amortization.
What balances would need to be considered in order to prepare the consolidation entry
in connection with these intra-entity bonds at December 31, 2014, the end of the first
year of the intra-entity investment? Prepare schedules to show numerical answers for
balances that would be needed for the entry.
