1) P Company acquires all of the voting stock of S Company for $930,000 cash. The
book values of S Companys assets are $800,000, but the fair values are $840,000
because land has a fair value above its book value. Goodwill from the combination is
computed as:
a.$130,000
b.$90,000
c.$40,000
d.$0
2) Ford Corporation entered into a troubled debt restructuring agreement with their
local bank. The bank agreed to accept land with a carrying value of $200,000 and a fair
value of $300,000 in exchange for a note with a carrying amount of $425,000. Ignoring
income taxes, what amount should Ford report as a gain on its income statement?
a.$0
b.$100,000
c.$125,000
d.$225,000
3) The balance sheet for the partnership of Nina, Pinta, and Santa Maria at January 1,
2014 follows. The partners share profits and losses in the ratio of 3:2:5, respectively.
Assets at cost$480,000
Liabilities$135,000
Nina, capital75,000
Pinta, capital 120,000
Santa Maria, capital 150,000
$480,000
Nina is retiring from the partnership. By mutual agreement, the assets are to be adjusted
to their fair value of $540,000 at January 1, 2014. Pinta and Santa Maria agree that the
partnership will pay Nina $135,000 cash for hers her partnership interest. There is no
goodwill is to be recorded. What is the balance of Pintas capital account after Ninas
retirement?
a.$138,000
b.$108,000
c.$120,000
d.$132,000
4) On the consolidated statement of cash flows, the parents acquisition of additional
shares of the subsidiarys stock directly from the subsidiary is reported as
a.an investing activity
b.a financing activity
c.an operating activity
d.none of these
5) All of the following are options for non-US companies who wish to list securities on
a US exchange except:
a.The company can use either IFRS or their local GAAP
b.If a company uses their local GAAP they must reconcile net income and shareholders
equity or fully disclose all financial information required of US companies
c.If a company uses their local GAAP they must reconcile net income and shareholders
equity and fully disclose all financial information required of US companies
d.The company must file a form 20-F with the SEC
6) On September 1, 2014, Mudd Plating Company entered into two forward exchange
contracts to purchase 250,000 euros each in 90 days. The relevant exchange rates are as
follows:
Forward Rate
Spot rateFor Dec. 1, 2014
September 1, 20141.461.47
September 30, 2014 (year-end)1.501.48
The second forward contract was strictly for speculation. On September 30, 2014, what
amount of foreign currency transaction gain should Mudd Plating report in income?
a.$0
b.$2,500
c.$5,000
d.$10,000
7) In which of the following cases would consolidation be inappropriate?
a.The subsidiary is in bankruptcy
b.Subsidiary’s operations are dissimilar from those of the parent
c.The parent owns 90 percent of the subsidiary’s common stock, but all of the
subsidiary’s nonvoting preferred stock is held by a single investor
d.Subsidiary is foreign
8) Which of the following statements is correct?
a.Total elimination is consistent with the parent company concept
b.Partial elimination is consistent with the economic unit concept
c.Past accounting standards required the total elimination of unrealized intercompany
profit in assets acquired from affiliated companies
d.none of these
9) The partnership of Homer, Marge, and Bart share profits and losses in the ratio of
4:4:2, respectively. The partners voted to dissolve the partnership when its assets,
liabilities, and capital were as follows:
AssetsLiabilities and Equity
Cash$150,000Liabilities$120,000
Other assets600,000Homer, Capital180,000
Marge, Capital210,000
Bart, Capital 240,000
Total assets$750,000Total Lia & Equity$750,000
The partnership will be liquidated over a prolonged period of time. As cash is available,
it will be distributed to the partners. The first sale of noncash assets having a book value
of $360,000 realized $285,000. How much cash should be distributed to each partner
after this sale?
a.Homer, $54,000;Marge, $84,000;Bart, $177,000
b.Homer, $174,000;Marge, $174,000;Bart, $87,000
c.Homer, $126,000;Marge, $126,000;Bart, $63,000
d.Homer, $90,000;Marge, $105,000;Bart, $120,000
10) On January 1, 2013, Pent Company and Shelter Company had condensed balanced
sheets as follows:
Pent Shelter
Current assets $ 210,000 $ 60,000
Noncurrent assets 270,000 120,000
Total assets $480,000 $180,000
Current liabilities $ 90,000 $ 30,000
Long-term debt 150,000 -0-
Stock holders’ equity 240,000 150,000
Total liabilities & stockholders’ equity $ 480,000 $ 180,000
On January 2, 2013 Pent borrowed $180,000 and used the proceeds to purchase 90% of
the outstanding common stock of Shelter. This debt is payable in 10 equal annual
principal payments, plus interest, starting December 30, 2013. Any difference between
book value and the value implied by the purchase price relates to land.
On Pent’s January 2, 2013 consolidated balance sheet,
Noncurrent assets should be
a.$390,000
b.$402,000
c.$408,000
d.$440,000
11) The parent company records the receipt of shares from a subsidiary’s stock dividend
as
a.dividend income
b.a reduction of the investment account
c.an increase in the investment account
d.none of these
12) On January 1, 2014, Puma Corporation acquired 30 percent of Slume Company’s
stock for $150,000. On the acquisition date, Slume reported net assets of $450,000
valued at historical cost and $500,000 stated at fair value. The difference was due to the
increased value of buildings with a remaining life of 10 years. During 2014 Slume
reported net income of $25,000 and paid dividends of $10,000. Puma uses the equity
method.
What amount of investment income will be reported by Puma for the year 2014?
a.$7,500
b.$6,000
c.$4,500
d.$25,000
13) A 90% owned subsidiary sold merchandise at a profit to its parent company near the
end of 2013. Under the partial equity method, the workpaper entry in 2014 to recognize
the intercompany profit in beginning inventory realized during 2014 includes a debit to
a.Retained Earnings – P
b.Noncontrolling interest
c.Cost of Sales
d.both Retained Earnings – P and Noncontrolling Interest
14) Reasons a parent company may pay more than book value for the subsidiary
company’s stock include all of the following except
a.the fair value of one of the subsidiary’s assets may exceed its recorded value because
of appreciation
b.the existence of unrecorded goodwill
c.liabilities may be overvalued
d.stockholders’ equity may be undervalued
The translation adjustment that results from translating the financial statements of a
foreign subsidiary using the current rate method should be:15) a.included as a separate
item in the stockholders’ equity section of the balance sheet
b.included in the determination of net income for the period it occurs
c.deferred and amortized over a period not to exceed forty years
d.deferred until a subsequent year when a loss occurs and offset against that loss
16) Define the following: (a)Operating segment.(b)Reportable segment.
17) The third period of business combinations started after World War II and is called
a.horizontal integration
b.merger mania
c.operating integration
d.vertical integration
18) The parent company concept of consolidation represents the view that the primary
purpose of consolidated financial statements is:
a.to provide information relevant to the controlling stockholders
b.to represent the view that the affiliated companies are a separate, identifiable
economic entity
c.to emphasis control of the whole by a single management
d.to include only a portion of the subsidiarys assets, liabilities, revenues, expenses,
gains, and losses
19) Under IFRS, the criteria to determine whether a lease should be capitalized include
a.the present value of the minimum lease payments is 90% or more of the fair value of
the asset at the inception of the lease
b.the term of the lease is 75% or more of the economic life of the asset
c.the term of the lease is equal to substantially all of the economic life of the asset
d.the present value of the minimum lease payments is equal to substantially all of the
fair value of the asset at the inception of the lease
20) P Corporation purchased an 80% interest in S Corporation on January 1, 2013, at
book value for $300,000. Ss net income for 2013 was $90,000 and no dividends were
declared. On May 1, 2013, P reduced its interest in S by selling a 20% interest, or
one-fourth of its investment for $90,000. What will be the Consolidated Gain on Sale
and Subsidiary Income Sold for 2013?
Consolidated Gain on SaleSubsidiary Income Sold
a.$9,000$6,000
b.$9,000$15,000
c.$15,000$6,000
d.$15,000$15,000
21) On November 1, 2014, American Company sold inventory to a foreign customer.
The account will be settled on March 1 with the receipt of $500,000 foreign currency
units (FCU). On November 1, American also entered into a forward contract to hedge
the exposed asset. The forward rate is $0.70 per unit of foreign currency. American has
a December 31 fiscal year-end. Spot rates on relevant dates were:
Per Unit of
DateForeign Currency
November 1$0.73
December 310.71
March 10.74
The entry to record the forward contract is
a.FCU Receivable350,000
Premium on Forward Contract15,000
Dollars Payable365,000
b.Dollars Receivable365,000
Discount on Forward Contract15,000
FCU Payable350,000
c.FCU Receivable365,000
Discount on Forward Contract15,000
Dollars Payable350,000
d.Dollars Receivable350,000
Discount on Forward Contract15,000
FCU Payable365,000
22) On January 1, 2009, Pharma Company purchased 16,000 of the 20,000 outstanding
common shares of Sludge Company for $760,000. On January 1, 2013, Pharma
Company sold 2,000 of its shares of Sludge Company on the open market for $90 per
share. Sludge Company’s stockholders’ equity on January 1, 2009, and January 1, 2013,
was as follows: 1/1/09 1/1/13 Common stock, $10 par value $ 200,000 $ 200,000 Other
contributed capital 200,000 200,000 Retained earnings 400,000 700,000 $800,000
$1,100,000 The difference between implied and book value is assigned to Sludge
Company’s land.
Assuming no other equity transactions, the amount of the difference between implied
and book value that would be added to land on a work paper for the preparation of
consolidated statements on December 31, 2013 would be
a.$120,000
b.$115,000
c.$105,000
d.$84,000
23) Pinta Company purchased 40% of Snuggie Corporation on January 1, 2014 for
$150,000. Snuggie Corporations balance sheet at the time of acquisition was as follows:
During 2014, Snuggie Corporation reported net income of $30,000 and paid dividends
of $9,000. The fair values of Snuggies assets and liabilities were equal to their book
values at the date of acquisition, with the exception of Building and Equipment, which
had a fair value of $35,000 above book value. All buildings and equipment had a
remaining useful life of five years at the time of the acquisition. The amount attributed
to goodwill as a result of the acquisition in not impaired.
Required:
A. What amount of investment income will Pinta record during 2014 under the equity
method of accounting?
B. What amount of income will Pinta record during 2014 under the cost method of
accounting?
C. What will be the balance in the investment account on December 31, 2014 under the
cost and equity method of accounting?
24) Assets transferred by the debtor to a creditor to settle a debt are transferred at:
a.book value of the debt
b.book value of the transferred assets
c.fair market value of the debt
d.fair market value of the transferred assets
25) Pallet Corporation owns 90% of the outstanding common stock of Stealth
Company.On January 1, 2011, Stealth Company issued $500,000, 12%, ten-year bonds.
On January 1, 2013, Pallet Corporation paid $412,000 for Stealth Company bonds with
a par value of $400,000 and a carrying value of $393,600.Both companies use the
straight-line method to amortize bond premiums and discounts.Pallet Corporation
accounts for the investment using the cost method of accounting.
Pallet Corporation would report a balance in the Investment in Stealth Company Bonds
account on December 31, 2013, of
a.$412,000
b.$393,600
c.$410,500
d.$400,000
e.none of these
A foreign subsidiary’s functional currency is its local currency which has not
experienced significant inflation. The weighted average exchange rate for the current
year would be the appropriate exchange rate for translating26) Wages expenseSales to
customers
a.YesYes
b.YesNo
c.NoNo
d.NoYes
27) On January 1, 2013, Pamela Company purchased 75% of the common stock of
Snicker Company. Separate balance sheet data for the companies at the combination
date are given below:
Snicker Co.Snicker Co.
Pamela Co.Book ValuesFair Values
Cash$ 18,000$155,000$155,000
Accounts receivable108,00020,00020,000
Inventory99,00026,00045,000
Land60,00024,00045,000
Plant assets525,000225,000300,000
Acc. depreciation(180,000)(45,000)
Investment in Snicker Co. 330,000
Total assets$960,000$405,000$565,000
Accounts payable$156,000$105,000$105,000
Capital stock600,000225,000
Retained earnings 204,000 75,000
Total liabilities & equities$960,000$405,000
Determine below what the consolidated balance would be for each of the requested
accounts on January 2, 2013.
What is the amount of total assets?
a.$921,000
b.$1,185,000
c.$1,525,000
d.$1,195,000
Lyme Corporation entered into a troubled debt restructuring agreement with their local
bank. The bank agreed to accept land with a carrying amount of $360,000 and a fair
value of $540,000 in exchange for a note with a carrying amount of $765,000. Ignoring
income taxes, what amount should Lyme report as a gain on its income statement?28) a.
$0
b.$180,000
c.$225,000
d.$405,000
29) The purchase by a subsidiary of some of its shares from noncontrolling
stockholders results in the parent companys share of the subsidiarys net assets
a.increasing
b.decreasing
c.remaining unchanged
d.increasing, decreasing, or remaining unchanged
30) The amount of a long-lived asset impairment loss is generally determined by
comparing
a.the assets carrying amount and its fair value under US GAAP
b.the assets carrying amount and its discounted future cash flows less cost to sell under
IFRS
c.the assets carrying amount and its undiscounted future cash flows under US GAAP
d.the assets carrying amount and its undiscounted future cash flows less disposal cost
under IFRS
31) Milestones in the transition plan for mandatory adoption of IFRS by US companies
include all of the following except:
a.Improvements in accounting standards
b.Limited early adoption of IFRS in an effort to enhance comparability for US investors
c.Mandatory use of IFRS by US entities
d.All of the above are milestones in the transition plan for mandatory adoption of IFRS
by US companies
32) Which of the following statements is correct?
a.The economic unit concept suggests partial elimination of unrealized intercompany
profits
b.The parent company concept suggests partial elimination of unrealized intercompany
profits
c.The economic unit concept suggests no elimination of unrealized intercompany
profits
d.The parent company concept suggests total elimination of unrealized intercompany
profits
33) In a leveraged buyout, the portion of the net assets of the new corporation provided
by the management group is recorded at
a.appraisal value
b.book value
c.fair value
d.lower of cost or market
34) The activities of a central computer facility should be accounted for in the
a.General Fund
b.Internal Service Fund
c.Enterprise Fund
d.Capital Projects Fund
35) A good reason for NNOs to adopt fund accounting even though FASB standards do
not require it is because:
a.the capital assets are significant
b.the donated services are significant
c.the program services are involved with more than one type of revenue
d.restrictions are placed by donors in many cases
On January 1, 2013, BelgianAir purchases an airplane for 14,400,000. The components
of the airplane and their useful lives are as follows:
36) BelgianAir uses the straight-line method of depreciation. The asset is assumed to
have no salvage value.
Under IFRS, the entry to record the acquisition of the airplane would include
a.a debit to Asset/ Airplane of 14,400,000
b.a debit to Asset/ Airplane frame of 14,400,000
c.a debit to Asset/ Airplane engine of 4,800,000
d.cannot be determined from the information given
37) Governmental units include all of the following except
a.counties
b.school districts
c.industrial development districts
d.voluntary health and welfare organizations
38) Due to the fact that the partnership had been unprofitable for the past several years,
A, B, C, and D decided to liquidate their partnership. The partners share profits and
losses in the ratio of 40:30:20:10, respectively. The following balance sheet was
prepared immediately before the liquidation process began:
A B C D Partnership
Balance Sheet
Cash$ 100,000Liabilities$250,000
Other Assets350,000A, Capital55,000
B, Capital60,000
C, Capital50,000
D, Capital 35,000
Total Assets$450,000Total Lia & Equities$450,000
The personal status of each partner is as follows:
PersonalPersonal
_Assets_Liabilities
A$165,000$ 120,000
B100,000140,000
C180,000160,000
D60,00070,000
The partnership’s other assets are sold for $100,000 cash. The partnership operates in a
state which has adopted the Uniform Partnership Act.
Required:
A.Complete the following schedule of partnership realization and liquidation. Assume
that a partner makes additional contributions to the partnership when appropriate based
on their individual status.
OTHERCAPITAL
CASHASSETSLIABILITIES__A____B____C____D__
$100,000$350,000$250,00055,00060,00050,00035,000
B.Complete the following schedule to show the total amount that will be paid to the
personal creditors.
FromDistributionTotal Paid
Personalfromto Personal
_Assets__Partnership__Creditors_
A
B
C
D
39) The amount of the adjustment to the noncontrolling interest in consolidated net
assets is equal to the noncontrolling interests percentage of the
a.unrealized intercompany gain at the beginning of the period
b.unrealized intercompany gain at the end of the period
c.realized intercompany gain at the beginning of the period
d.realized intercompany gain at the end of the period
40) Since the amount of an appropriation cannot be legally exceeded, the placing of
purchase orders and the signing of contracts are critical events in controlling the
expenditures of expendable fund entities. The financial resources of a fund are said to
be encumbered when a transaction is entered into that requires performance on the part
of another party before the nonprofit entity becomes liable to perform (expend financial
resources) its part of the transaction. Encumbrance accounting formally records the
reduction of appropriation authority resulting from purchase orders and similar
commitments and thus serves to provide an accounting safeguard against the
expenditure of financial resources in excess of appropriations.
41) To what extent can personal creditors seek re-covery from partnership assets?
42) Expenditures may be classified by function, activity, object, or organizational unit.
Give an ex-ample of each classification for a municipality. Which classification is the
most appropriate for
external financial reporting?
43) Discuss the possible outcomes in the situation where the equity interest of one
partner is inadequate to absorb realization losses.
44) Lennon, Newman, and Ott operate the LNO Partnership. The partnership agreement
provides that the partners share profits in the ratio of 40:40:20, respectively. Unable to
satisfy the firm’s debts, the partners decide to liquidate. Account balances just prior to
the start of the liquidation process are as follows:
DebitCredit
Cash$ 90,000
Other Assets330,000
Liabilities$165,000
Ott, Loan36,000
Lennon, Capital165,000
Newman, Capital36,000
Ott, Capital39,000
Ott, Drawing 21,000 _______
Totals$441,000$441,000
During the first month of liquidation, other assets with a book value of $150,000 are
sold for $165,000, and creditors are paid. In the following month unrecorded liabilities
of $12,000 are discovered and assets carried on the books at a cost of $90,000 are sold
for $36,000. During the third month the remaining other assets are sold for $42,000 and
all available cash is distributed.
Required:
Prepare a schedule of partnership realization and liquidation. A safe distribution of cash
is to be made at the end of the second and third months. The partners agreed to hold
$30,000 in cash in reserve to provide for possible liquidation expenses and/or
unrecorded liabilities. All of the partners are personally insolvent.
45) An eliminating entry is needed to adjust the consolidated financial statements when
the purchasing affiliate sells a depreciable asset that was acquired from another affiliate.
Describe the necessary eliminating entry.
46) Briefly describe the different treatment under SFAS 141 vs. SFAS 141R for the
following issues:
Business definition
Acquisition costs
In-process R&D
Contingent consideration
47) The FASB elected to require that deferred tax effects relating to unrealized
intercompany profits be calculated based on the income tax paid by the selling affiliate
rather than on the future tax benefit to the purchasing affiliate. Describe circumstances
where the amounts calculated under these approaches would be different. (Appendix)
48) How are foreign operations defined under SFASNo. 131 [ASC 280]?