1) Which of the following phrases is frequently used to refer to estate or trust
accounting?
A) Non-profit accounting
B) Testamentary accounting
C) Fiduciary accounting
D) All of the above phrases are used to refer to estate or trust accounting.
2) With respect to goodwill, an impairment
A) will be amortized over the remaining useful life
B) is a two-step process which analyzes each business reporting unit of the entity
C) is a one-step process considering the entire firm
D) occurs when asset values are adjusted to fair value in a purchase
3) Bonds with relatively low risk of default are called ________ securities and have a
rating of Baa (or BBB) and above; bonds with ratings below Baa (or BBB) have a
higher default risk and are called ________
A) investment grade; lower grade
B) investment grade; junk bonds
C) high quality; lower grade
D) high quality; junk bonds
4) On June 1, 2011, Puell Company acquired 100% of the stock of Sorrell Inc. On this
date, Puell had Retained Earnings of $100,000 and Sorrell had Retained Earnings of
$50,000. On December 31, 2011, Puell had Retained Earnings of $120,000 and Sorrell
had Retained Earnings of $60,000. The amount of Retained Earnings that appeared in
the December 31, 2011 consolidated balance sheet was
A) $120,000
B) $130,000
C) $170,000
D) $180,000
5) A decrease in the riskiness of corporate bonds will ________ the price of corporate
bonds and ________ the price of Treasury bonds, everything else held constant
A) increase; increase
B) reduce; reduce
C) reduce; increase
D) increase; reduce
6) Pinata Corporation acquired an 80% interest in Smackem Inc. for $130,000 on
January 1, 2011, when Smackem had Capital Stock of $125,000 and Retained Earnings
of $25,000. Assume the fair value and book value of Smackem’s net assets were equal
on January 1, 2011 . Pinata’s separate income statement and a consolidated income
statement for Pinata and Subsidiary as of December 31, 2011, are shown below.
Pinata Consolidated
Sales revenue$145,850 $234,750
Income from Smackem 12,600
Cost of sales(60,000)(100,000)
Other expenses(20,000)(50,000)
Noncontrolling
interest share (3,150)
Net income$ 78,450 $ 81,600
Smackem’s separate income statement must have reported net income of
A) $13,750
B) $14,750
C) $15,750
D) $15,250
7) The General Fund transfers $50,000 cash to the Debt Service Fund to meet annual
interest payments. What entry did the Debt Service Fund prepare?
A) Debit Cash $50,000, Credit Revenue $50,000
B) Debit Cash $50,000, Credit Other Financing Sources-Transfer from General Fund
$50,000
C) Debit Encumbrance $50,000, Credit Due to General Fund $50,000
D) Debit Appropriation $50,000, Credit Reserve for Encumbrance $50,000
8) Because a fund is an accounting entity, each fund has
I.its own accounting equation.
II.its own journals, ledgers, and other accounting records.
III.its own separate auditor.
A) I only
B) II only
C) I and II
D) I, II and III
9) Government-wide financial statements include a
A) balance sheet, an income statement, and a statement of cash flows
B) statement of net assets, a statement of activities, and a statement of cash flows
C) statement of net assets and a statement of activities
D) statement of activities and a statement of cash flows
10) On January 1, 2011, Pansy Company acquired a 10% interest in Sunflower
Corporation for $80,000 when Sunflower’s stockholders’ equity consisted of $400,000
capital stock and $100,000 retained earnings. Book values of Sunflower’s net assets
equaled their fair values on this date. Sunflower’s net income and dividends for 2011
through 2013 were as follows:
2011 2012 2013
Net income$ 8,000$ 10,000$15,000
Dividends paid5,0005,0005,000
Assume that Pansy Incorporated used the cost method of accounting for its investment
in Sunflower. The balance in the Investment in Sunflower account at December 31,
2013 was
A) $76,700
B) $80,000
C) $83,300
D) $95,000
11) Alfred and Barne share profits and losses in a ratio of 2:3, respectively, after salary
allowances, interest allowances and bonus allocations. Alfred and Barne receive salary
allowances of $30,000 and $60,000, respectively, and both partners receive 10%
interest based upon the balance in their capital accounts on January 1 . Partners’
drawings are not used in determining the average capital balances. Total net income for
2011 is $180,000. If net income after deducting the interest and salary allocations is
more than $60,000, Barne receives a bonus of 5% of the original amount of net income.
AlfredBarne
January 1 capital balances$600,000$900,000
Yearly drawings ($3,000 a month)36,00036,000
What is the total amount for the allocation of interest, salary, and bonus, and how much
over-allocation is present?
A) $180,000 and $0
B) $240,000 and $60,000
C) $249,000 and $0
D) $249,000 and $69,000
12) Pelga Company routinely receives goods from its 80%-owned subsidiary, Swede
Corporation. In 2011, Swede sold merchandise that cost $80,000 to Pelga for $100,000.
Half of this merchandise remained in Pelga’s December 31, 2011 inventory. This
inventory was sold in 2012 . During 2012, Swede sold merchandise that cost $160,000
to Pelga for $200,000. $62,500 of the 2012 merchandise inventory remained in Pelga’s
December 31, 2012 inventory. Selected income statement information for the two
affiliates for the year 2012 was as follows:
PelgaSwede
Sales Revenue$500,000$400,000
Cost of Goods Sold400,000320,000
Gross profit$100,000$80,000
Consolidated cost of goods sold for Pelga and Subsidiary for 2012 were
A) $512,000
B) $526,000
C) $522,500
D) $528,000
13) Oscar Lloyd is serving as the executor for the estate of Dixie Cooper, who passed
away on January 28, 2011, at the age of 98 . Dixie’s estate consisted of Treasury bonds
with a maturity value and fair market value of $1,400,000, $4,000 in her checking
account, and $50,000 in a Certificate of Deposit with First State Bank of Springfield.
Total accrued interest at the time of death was $44,000, made up of $2,000 from the CD
and $42,000 from the bonds.
Dixie left a valid will, which provided that most of her estate would be inherited by her
two nephews, Jimmy Johns and Joey Johns. In addition, Dixie provided that $200,000
be transferred to a trust account for her faithful cats, Petra and Hobbes. Income from the
trust would be used to care for Hobbes and Petra. Upon their passing, the remaining
funds would then transfer to Operation Kindness, an organization that cares for cats and
dogs.
Mr. Lloyd will also serve as the fiduciary for the trust. He has determined that no state
or federal inheritance taxes are due. The limited estate income is also free from any
federal or state income tax. The following transactions occurred during February.
1>On February 3, Oscar sold the treasury bonds for $1,460,000. $1,400,000 was for the
fair market value of the bonds, $42,000 was for interest accrued to the time of Dixie’s
death, and the remaining $18,000 was for accrued interest since Dixie’s death. Estate
income will be used to pay final medical expenses, and if anything is left, funeral
expenses.
2>On February 11, Oscar issued a check to pay Dixie’s final medical expenses of
$11,900.
3>On February 15, Oscar received a check in the amount of $52,000 from First State
Bank of Springfield. It is the maturity value and interest from a certificate of deposit in
the amount of $50,000. The CD matured on January 22, 2011 .
4>In Dixie’s will, she wanted to give $150,000 to the American Humane Society. After
examining the assets, Oscar determined that the estate’s assets will adequately cover all
expenses and specific devises, so on February 3, he issued a check to the organization
for $150,000.
5>On February 18, Oscar transferred $200,000 to a trust account at First State Bank to
fund the trust, to care for the cats.
6>On February 25, Oscar issued a check to pay Dixie’s funeral expenses of $9,800.
7>On February 26, Oscar paid himself the $4,000 executor’s fee specified in Dixie’s
will.
Assume that on February 28, 2011, Oscar finalized the estate and transferred the
balance of the estate assets to Dixie’s nephews, Jimmy Johns and Joey Johns. Each
received one-half of the residual estate.
Required:
1>Prepare the closing entry on February 28, 2011 .
2>Prepare the charge-discharge statement for the estate of Dixie Cooper for the period
January 28 through February 28, 2011 .
14) What is the dollar amount of the federal lifetime maximum gift tax exclusion?
A) $24,000
B) $600,000
C) $1,000,000
D) $2,000,000
15) Which of the following statements is not true with respect to the statement of cash
flows for a consolidated entity?
A) The statement may be prepared using either the direct or the indirect method
B) Noncontrolling interest share will be added back to cash flows from operating
activities under the indirect method
C) Payment of dividends from the subsidiary to the parent will appear on the statement
of cash flows as a financing activity
D) If the subsidiary does not use the same method (direct or indirect) as the parent, they
must convert their separate statement of cash flows first to the same method that the
parent uses, and then the two statements are consolidated
16) If 1-year interest rates for the next three years are expected to be 4, 2, and 3 percent,
and the 3-year term premium is 1 percent, than the 3-year bond rate will be
A) 1 percent
B) 2 percent
C) 3 percent
D) 4 percent
17) In a schedule of assumed loss absorptions
A) the partner with lowest loss absorption is eliminated last
B) it is necessary to have a cash distribution plan first
C) the least vulnerable partner is eliminated first
D) the most vulnerable partner is eliminated first
18) In reference to the FASB disclosure requirements about a business combination in
the period in which the combination occurs, which of the following is correct?
A) Firms are not required to disclose the name of the acquired company
B) Firms are not required to disclose the business purpose for a combination
C) Firms are required to disclose the nature, terms and fair value of consideration
transferred in a business combination
D) All of the above are correct
19) Which partner is considered the most vulnerable as a result of a computation of
vulnerability rankings?
A) The partner who has the lowest loss absorption potential
B) The partner who has the highest loss absorption potential
C) The partner with the highest capital account balance
D) The partner with the lowest capital account balance
20) On December 31, 2011, Pinne Corporation sold equipment with a three-year
remaining useful life and a book value of $21,000 to its 70%-owned subsidiary, Sull
Company, for a price of $27,000. Pinne bought the equipment four years ago for
$49,000. The salvage value is zero. Straight-line depreciation is used by both
companies.
After eliminating/adjusting entries are prepared, what was the intercompany sale impact
on the consolidated financial statements for the year ended December 31, 2011?
A) Consolidated Net IncomeConsolidated Net Assets
No effectNo effect
B) Consolidated Net IncomeConsolidated Net Asset
No effectIncreased
C) Consolidated Net IncomeConsolidated Net Asset
DecreasedDecreased
D) Consolidated Net IncomeConsolidated Net Asset
DecreasedNo effect
21) On January 1, 2011, Pailor Inc. purchased 40% of the outstanding stock of Saska
Company for $300,000. At that time, Saska’s stockholders’ equity consisted of $270,000
common stock and $330,000 of retained earnings. Saska Corporation reported net
income of $360,000 for 2011 . The allocation of the $60,000 excess of cost over book
value acquired is shown below, along with information relating to the useful lives of the
items:
Overvalued receivables (collected in 2011)$(5,000)
Undervalued inventories (sold in 2011)16,000
Undervalued building (4 years’ useful life remaining at January 1, 2011)24,000
Undervalued land8,000
Unrecorded patent (6 years’ economic life remaining at January 1, 2011)18,000
Undervalued accounts payable (paid in 2011) (4,000)
Total of excess allocated to identifiable assets and liabilities57,000
Goodwill 3,000
Excess cost over book value acquired $60,000
Required:
Determine Pailor’s investment income from Saska for 2011 .
22) At the end of 2010, the partnership of Piatta, Ragoo, and Sauss was dissolved. By
February 1, 2011, all assets had been converted into cash and all partnership liabilities
were paid. The partnership balance sheet on February 1, 2011 (with partner residual
profit and loss sharing percentages) was as follows:
Cash$220,000Piatta,capital (20%)$20,000
Ragoo, capital (40%)(180,000)
Sauss, capital (40%)380,000
Total assets$220,000Total equity$220,000
The value of partners’ personal assets and liabilities on February 1, 2011 were as
follows:
PiattaRagooSauss
Personal assets$86,000$310,000$210,000
Personal liabilities79,000250,000250,000
Required:
Prepare the final statement of partnership liquidation.
23) Several years ago, Peacock International purchased 80% of the outstanding stock of
Strutt Incorporated, at a time when Strutt’s book values were equal to its fair values. On
January 1, 2009, Strutt purchased a truck for $160,000 which had no salvage value with
a useful life of 8 years, depreciated on a straight-line basis. On January 1, 2012, Strutt
sold the truck to Peacock Corporation for $56,000. The equipment was estimated to
have a five-year remaining life on this date, with no salvage value. All affiliates use the
straight-line depreciation method.
Required:
Prepare the consolidation entries required for Peacock and subsidiary at:
1>December 31, 2012
2>December 31, 2013
3>December 31, 2014
4>December 31, 2015
24) Pascal Corporation paid $225,000 for a 70% interest in Sank Corporation on
January 1, 2011 . On that date, Sank’s balance sheet accounts, at book value and fair
value, were as follows:
Book ValueFair Value
Assets
Cash$25,000$25,000
Accounts receivable-net45,00055,000
Inventories40,00060,000
Plant, property and equipment-net140,000125,000
Total assets$250,000$265,000
Equities
Accounts payable$40,000$40,000
Common stock120,000
Retained earnings90,000
Total liab. & equity$250,000
Both companies use the parent company theory. Push-down accounting is used for the
acquisition.
Required:
1> Prepare the journal entry on January 1, 2011 on Sank Corporation’s books.
2> Prepare a balance sheet for Sank Corporation immediately after the acquisition on
January 1, 2011 .
25) On January 1, 2010, Petrel, Inc. purchased 70% of the outstanding voting common
stock of Ocean, Inc., for $2,600,000. The book value of Ocean’s net equity on that date
was $3,100,000. Book values were equal to fair values except as follows:
BookFair
Assets & LiabilitiesValuesValues
Equipment$ 250,000$ 190,000
Building600,000700,000
Note payable270,000240,000
Required:
Prepare a schedule to allocate any excess purchase cost to specific assets and liabilities.
26) On January 1, 2011, Brody Company acquired an 80% interest in Kristin Company
for $240,000 cash. On January 1, 2011, Kristin Company had the following assets and
liabilities:
Book ValueFair Value
Cash$10,000$10,000
Accounts Receivable50,00050,000
Inventory50,00070,000
Plant Assets100,000100,000
Total Assets$210,000$230,000
Liabilities$100,000$120,000
Capital Stock100,000
Retained Earnings10,000
Total Liabilities &
Stockholders’ Equity$210,000
Push-down accounting is used for the acquisition. Both companies use the entity theory.
Required:
1> What is the goodwill associated with Kristin Company on January 1, 2011?
2> Prepare the journal entry(ies) on Kristin’s books on January 1, 2011 .
3> Prepare the journal entry(ies) on Brody’s books on January 1, 2011 .
4> Prepare the elimination entry(ies) on the consolidating working papers on January 1,
2011 .
27) Carousel Clothes is a voluntary health and welfare organization that provides
gently-used second-hand clothes to those in need. They had the following transactions
in 2011 .
1>Cash gifts were received in the amount of $60,000, of which $13,000 had been
pledged in the prior year.
2>Pledges made in the current year but not yet fulfilled amounted to $39,000. Ten
percent of the pledges typically prove to be uncollectible. Pledges are made for 2011 .
3>An office supply company donates office furniture to the VHWO. The fair value of
the furniture is $40,000. No restrictions were placed on the donation.
4>The following expenses were incurred and paid: director’s salary, $15,000; facility
rental, $18,000; cleaning and repair costs for clothes, $29,000; and purchase of supplies
consumed in tagging and distribution of clothes, $5,000. The director’s salary is
categorized as Support Services and the rest of the costs are Program Services.
5>Restricted pledges were received during the year for $450,000. The pledges are
restricted for the construction of a new facility.
Required:
Prepare the journal entries for Carousel for 2011 .
28) On December 31, 2011, Maria Corporation has the following stockholders’ equity:
Common stock, $10 par$100,000
Additional paid-in capital20,000
Retained earnings80,000
Total stockholders’ equity$200,000
On January 1, 2012, Maria Corporation declared and issued a 10% stock dividend when
the market price per share was $50.
On January 2, 2012, James Corporation purchased an 80% interest in Maria
Corporation for $160,000 from the open market. On January 2, 2012, the fair value of
Maria’s individual assets and liabilities was equal to book value.
Required:
1> Prepare the journal entry(ies) for Maria Corporation on January 1, 2012 .
2> Prepare the journal entry(ies) for James 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 .