1) The financial statements of a proprietary fund are similar to those of a business
enterprise except for
A) proprietary funds do not report income taxes on the operating statement
B) proprietary funds do not have paid-in capital or capital stock
C) proprietary funds use modified accrual accounting
D) both A and B
2) When a cash flow hedge is appropriate, the effective portion of the gain or loss on
the derivative is
A) deferred using other comprehensive income
B) recognized immediately at the time the agreement is made
C) recognized over time, amortized over the period of the agreement
D) recognized over time, offset by the fluctuation in the value of the hedged asset or
liability
3) Paggle Corporation owns 80% of Spillway Inc.’s common stock that was purchased
at its underlying book value. At the time of purchase, the book value and fair value of
Spillway’s net assets were equal. The two companies report the following information
for 2011 and 2012 .
During 2011, one company sold inventory to the other company for $50,000 which cost
the transferor $40,000. As of the end of 2011, 30% of the inventory was unsold. In
2012, the remaining inventory was resold outside the consolidated entity.
2011 Selected Data:PaggleSpillway
Sales Revenue $600,000 $320,000
Cost of Goods Sold320,000155,000
Other Expenses100,00089,000
Net Income $180,000 $76,000
Dividends Paid19,0000
2012 Selected Data:PaggleSpillway
Sales Revenue$580,000 $445,000
Cost of Goods Sold300,000180,000
Other Expenses130,000171,000
Net Income$150,000 $94,000
Dividends Paid16,0005,000
If the intercompany sale was an upstream sale, the total amount of consolidated cost of
goods sold for 2012 will be
A) $300,000
B) $430,000
C) $470,000
D) $477,000
4) The town of Mayberry receives a gift of $500,000 in bonds. The contributor instructs
that the principal should remain intact, but the annual interest income of $50,000 can be
used for the maintenance of the zoo animals.
When the donation of bonds is received, what account should be debited?
A) Encumbrance
B) Other Financing Sources
C) Other Financing Uses
D) Investment
5) Under push-down accounting, the ________ of the acquired subsidiary’s assets and
liabilities are reported on the financial statements of the ________.
A) book value; subsidiary
B) book value; parent
C) fair value; subsidiary
D) present value; parent
6) Pigeon Corporation purchased land from its 60%-owned subsidiary, Seed Inc., in
2010 at a cost $50,000 greater than Seed’s book value. In 2012, Pigeon sold the land to
an outside entity for $20,000 more than Pigeon’s book value. The 2012 consolidated
income statement should report a gain on the sale of land of
A) $12,000
B) $20,000
C) $42,000
D) $70,000
7) If the expected path of 1-year interest rates over the next five years is 1 percent, 2
percent, 3 percent, 4 percent, and 5 percent, the expectations theory predicts that the
bond with the highest interest rate today is the one with a maturity of
A) two years
B) three years
C) four years
D) five years
8) Fresh-start reporting results in
A) a new reporting entity with no retained earnings/deficit balance
B) a new reporting entity with a retained earnings/deficit balance equal to the
reorganization value
C) a continuation of the reorganized organization with no retained earnings/deficit
balance
D) a continuation of the reorganized organization with a retained earnings/deficit
balance equal to the reorganization value
9) Which one of the following statements is not required for voluntary health and
welfare organizations?
A) A statement of financial position
B) A statement of activities
C) A statement of functional expenses
D) A statement of changes in net assets
10) On April 1, 2011, Paramount Company acquires 100% of the outstanding stock of
Yester Company on the open market. Paramount and Yester have December 31 fiscal
year ends. Under GAAP, a consolidated income statement for the year ending
December 31, 2011, will include
A) 100 percent of the revenues and expenses in 2011 of Yester Company after January
1, 2011
B) no revenues and expenses in 2011 of Yester Company
C) 80 percent of the revenues and expenses in 2011 of Yester Company
D) 100 percent of the revenues and expenses in 2011 of Yester Company after April 1,
2011
11) In a limited partnership, a general partner
A) is excluded from management of the business
B) is not entitled to a bonus at the end of the year
C) has limited liability for partnership debt
D) has unlimited liability for partnership debt
12) Pascoe Corporation paid $450,000 for a 90% interest in Sarabet Corporation on
January 1, 2011, when Sarabet’s stockholders’ equity consisted of $250,000 Common
Stock and $50,000 Retained Earnings. The book values and fair values of Sarabet’s
assets and liabilities were equal when Pascoe acquired its interest.
The separate net incomes (excluding investment income) of Pascoe and Sarabet for
2011 were $600,000 and $100,000, respectively. Dividends declared and paid during
2011 were $250,000 for Pascoe and $50,000 for Sarabet. Pascoe uses the entity theory
in consolidating its financial statements with those of Sarabet.
Noncontrolling interest share was reported in the 2011 consolidated income statement at
A) $5,000
B) $6,000
C) $8,000
D) $10,000
13) If the yield curve has a mild upward slope, the liquidity premium theory (assuming
a mild preference for shorter-term bonds) indicates that the market is predicting
A) a rise in short-term interest rates in the near future and a decline further out in the
future
B) constant short-term interest rates in the near future and further out in the future
C) a decline in short-term interest rates in the near future and a rise further out in the
future
D) a decline in short-term interest rates in the near future and an even steeper decline
further out in the future
14) Pigeon Corporation acquired an 80% interest in Statue Company on January 1,
2011, for $90,000 cash when Statue had Capital Stock of $60,000 and Retained
Earnings of $40,000. The fair value/book value differential was attributable to
equipment with a 10-year (straight-line) life. Statue suffered a $10,000 net loss in 2011
and paid no dividends. At year-end 2011, Statue owed Pigeon $18,000 on account.
Pigeon’s separate income for 2011 was $150,000. Controlling interest share of
consolidated net income for 2011 was
A) $140,000
B) $141,000
C) $142,000
D) $150,000
15) The term structure of interest rates is
A) the relationship among interest rates of different bonds with the same maturity
B) the structure of how interest rates move over time
C) the relationship among the term to maturity of different bonds
D) the relationship among interest rates on bonds with different maturities
16) Bird Corporation purchased an 80% interest in Brush Corporation on July 1, 2010
at its book value, and on January 1, 2011 its Investment in Brush account was
$300,000, equal to its book value. Brush’s net income for 2011 was $99,000 (earned
uniformly); no dividends were declared. On March 1, 2011, Bird reduced its interest in
Brush by selling a 20% interest, one-fourth of its investment, for $84,000.
If Bird uses a “beginning-of-the-year” sale assumption, its gain on sale and income
from Brush for 2011 will be
A)
B)
C)
D)
17) When a parent acquires the preferred stock of a subsidiary, there will be a
constructive retirement and
A) any difference paid above the book value of the preferred stock reduces the parent’s
additional paid-in capital
B) any difference paid above the book value of the preferred stock reduces the
subsidiary’s retained earnings
C) any difference paid above the book value of the preferred stock increases the parent’s
additional paid-in capital
D) any difference paid above the book value of the preferred stock increases the
parent’s retained earnings
18) A parent company regularly sells merchandise to its 70%-owned subsidiary. Which
of the following statements describes the computation of noncontrolling interest share?
A) The subsidiary’s net income times 30%
B) (The subsidiary’s net income 30%) + unrealized profits in the beginning inventory –
unrealized profits in the ending inventory
C) (The subsidiary’s net income + unrealized profits in the beginning inventory –
unrealized profits in the ending inventory) 30%
D) (The subsidiary’s net income + unrealized profits in the ending inventory –
unrealized profits in the beginning inventory) 30%
19) Proprietary funds are required to prepare financial statements that include:
A.Statement of Activities
B.Statement of Revenues, Expenditures and Changes in Fund Balance
C.Balance Sheet
D.Statement of Cash Flows
E.Statement of Net Assets
F.Statement of Revenues, Expenses and Changes in Net Assets
A) C, D, F
B) A, B, D
C) B, C, D
D) D, E, F
20) Other things being equal, an increase in the default risk of corporate bonds shifts
the demand curve for corporate bonds to the ________ and the demand curve for
Treasury bonds to the ________
A) right; right
B) right; left
C) left; right
D) left; left
21) On November 1, 2010, Ironside Company (a U.S. manufacturer) sold an airplane
for 1 million New Zealand dollars (NZ$) to a New Zealand company, Wellington
Corporation. Ironside will receive payment on January 30, 2011 in New Zealand
dollars. In order to hedge the accounts receivable position, Ironside entered into a
90-day forward contract on November 1, 2010 to sell 1 million New Zealand dollars.
On November 1, 2010, the forward rate is US$0.79 per New Zealand dollar. The
forward contract will be settled net. This is a fair value hedge. Ignore the time value of
money.
The relevant exchange rates per New Zealand dollar:
Spot RateForward Rate to 1/30/11
Nov. 1, 2010US$0.79US$0.79
Dec. 31, 2010US$0.75US$0.76
Jan. 30, 2011US$0.73US$0.73
Required:
Record the journal entries that Stateside would need to prepare at November 1, 2010,
December 31, 2010 and January 30, 2011 .
December 31 is the fiscal year end.
22) Dip Corporation is in a Chapter 11 bankruptcy reorganization. For each of the
following transactions relating to the reorganization, show the journal entry that would
be required by Dip. Assume that all unsecured liabilities were not reclassified to
Prepetition Claims Subject to Compromise.
1>Dip has $200,000 in bonds payable which mature at the end of the current year. The
bondholders agree to accept $100,000 of new common stock and $75,000 cash, payable
immediately.
2>Accrued interest on the bonds recorded at $20,000 will not be paid.
3>Recorded patents in the amount of $15,000 are determined to be worthless and are
written off.
4>Equipment recorded net at $24,000 is appraised at $30,000.
5>A building recorded net at $78,000 is appraised for $87,000.
6>Creditors owed $120,000 recorded in accounts payable are paid $96,000 in full
settlement.
7>Property taxes and payroll taxes withheld are paid in full at $12,000.
8>A capital lease recorded at $48,000 is re-negotiated, and the resulting operating lease
will require monthly lease payments of $500.
9>An unsecured bank note amounting to $180,000 will be exchanged for $120,000 note
secured by the building and equipment.
10>Current stockholders will exchange their stock which has a current book value of
$300,000 for $100,000 common stock of the new entity.
23) CommTex Corporation is liquidating under Chapter 7 of the Bankruptcy Act. The
accounts of CommTex at the time of filing are summarized as follows:
Estimated
Realizable
Book ValueValue
Cash$80,000$80,000
Accounts receivable-net50,00040,000
Inventory80,00060,000
Land10,00020,000
Building-net150,000110,000
Equipment-net60,00040,000
Goodwill10,0000
$440,000
Accounts payable$120,000
Wages and salaries20,000
Contributions due to pension plan10,000
Taxes payable60,000
Accrued interest payable (includes10,000
$8,000 from the mortgage payable and
$2,000 from the note payable)
Note payable120,000
Mortgage payable90,000
Capital stock80,000
Deficit(70,000)
$440,000
The land and building are pledged as security for the mortgage payable as well as any
accrued interest on the mortgage. The note payable is secured with the equipment, but
the interest on the note is unsecured. Wages and salaries were earned within 90 days of
filing the petition for bankruptcy and pension plan contributions relate to services
rendered within 6 months of filing the petition for bankruptcy; neither exceeds $4,000
per employee. Liquidation expenses are expected to be $40,000.
Required:
1>Prepare a schedule showing the priority rankings of the creditors and the expected
payouts.
2>Devendor Corporation was a supplier to CommTex Corporation and at the time of
CommTex’s bankruptcy filing, Devendor’s account receivable from CommTex was
$25,000. On the basis of the estimates, how much can Devendor expect to receive?
24) On July 1, 2010, Parslow Corporation acquired a 75% interest in Sanderson
Corporation for $150,000. Sanderson’s net assets on this date had a book value of
$140,000 and a fair value of $160,000. The excess of fair value over book value at
acquisition was due to understated plant assets with a remaining useful life of five years
from July 1, 2010 . Separate net incomes (excluding investment income) of Parslow and
Sanderson for 2011 were $400,000 and $20,000, respectively.
Required:
1> Compute goodwill at July 1, 2010 under the parent company theory and the entity
theory.
2> Determine consolidated net income and noncontrolling interest share for 2011 under
the parent company theory and the entity theory.
25) On December 31, 2011, Pat Corporation has the following information available:
Common stock, $10 par$100,000
Additional paid-in capital60,000
Retained earnings40,000
Total stockholders’ equity$200,000
On December 31, 2011, Anne Corporation buys an 80% interest in Pat Corporation for
$160,000. On December 31, 2011, the fair value of Pat’s assets and liabilities are equal
to the respective book values. Use four decimal places for the ownership percentage.
Required:
1> On January 1, 2012, Pat Corporation sells 2,000 additional shares of common stock
to noncontrolling stockholders at $20 per share. Prepare the journal entry for Anne
Corporation on January 1, 2012 .
2> On January 1, 2012, Pat Corporation sells 2,000 additional shares of common stock
to noncontrolling stockholders at $35 per share. Prepare the journal entry for Anne
Corporation on January 1, 2012 .
3> On January 1, 2012, Pat Corporation sells 2,000 additional shares of common stock
to noncontrolling stockholders at $15 per share. Prepare the journal entry for Anne
Corporation on January 1, 2012 .
26) Padhy Corporation owns 80% of Abrams Corporation, Abrams Corporation owns
60% of Bacud Corporation, and Bacud Corporation owns 10% of Abrams Corporation.
The separate net incomes (excluding investment income) of Padhy, Abrams, and Bacud
are $300,000, $100,000, and $80,000, respectively. Assume the investments were
acquired at a cost equal to the book value of each investment, which also equals the fair
value.
Required:
Calculate the controlling interest share of consolidated net income and the
noncontrolling interest shares for Padhy Corporation and its subsidiaries. Use the
conventional method for your solution.
27) Olson Corporation paid $62,000 to acquire 100% of Towing Corporation’s
outstanding voting common stock at book value on May 1, 2011 . The stockholders’
equity of Towing on January 1, 2011 consisted of $40,000 Capital Stock and $20,000
Retained Earnings. Towing’s total dividends for 2011 were $6,000, paid equally on
April 1 and October 1 . Towing’s net income was earned uniformly throughout 2011 . In
2011, preacquisition sales were $10,000 and preacquisition expenses were cost of sales
for $5,000. (There were no other preacquisition expenses in 2011)
During 2011, Olson made sales of $10,000 to Towing at a gross profit of $3,000.
One-half of this merchandise was inventoried by Towing at year-end, and one-half of
the 2011 intercompany sales were unpaid at year-end 2011 .
Olson sold equipment with a ten-year remaining useful life to Towing at a $2,000 gain
on December 31, 2011 . The straight-line depreciation method is used by both
companies. The equipment has no salvage value.
Financial statements of Olson and Towing Corporations for 2011 appear in the first two
columns of the partially completed consolidation working papers.
Required:
Complete the consolidating working papers for Olson Corporation and Subsidiary for
the year ending December 31, 2011 .
