1) Earth Company, Fire Incorporated, and Wind Incorporated created a joint venture to
market their products on the internet. Earth owns 40% of the stock, Fire owns 45% of
the stock and Wind owns the remaining 15%. Which firms should report their joint
venture investments using the equity method?
A) Earth
B) Fire
C) Earth and Fire
D) Earth, Fire and Wind
2) Which one of the following operating segment information items is not directly
named by GAAP to be reconciled to consolidated totals?
A) Assets
B) Liabilities
C) Revenues
D) Profit or loss
3) The risk that interest payments will not be made, or that the face value of a bond is
not repaid when a bond matures is
A) interest rate risk
B) inflation risk
C) moral hazard
D) default risk
4) The following are transactions for the city of Clinton.
a.Borrowed $100,000 by issuing a one-year, 5% note, three months before year-end.
b.Accrued interest at year end, but did not pay the interest at year end.
c.Charges for services rendered of $2,500 were billed and collected immediately.
d.Incurred salary costs of $5,000, unpaid.
Required:
Analyze the above transactions by using the accounting equation for a governmental
fund.
5) In reference to estates, which of the following statements is correct?
A) An estate comes into existence at the death of an individual
B) If the deceased person had a valid will at the time of death, he or she is said to have
died intestate
C) The heir receiving the largest portion of the estate is typically appointed the executor
D) Claims may be made for up to seven years against an estate
6) Goldberg Corporation owned a 70% interest in Savannah Corporation on December
31, 2010, and Goldberg’s Investment in Savannah account had a balance of $3,900,000.
Savannah’s stockholders’ equity on this date was as follows:
Capital stock, $10 par value$3,000,000
Retained Earnings2,400,000
Total Stockholders’ Equity$5,400,000
On January 1, 2011, Savannah issues 80,000 new shares of common stock to Goldberg
for $16 each.
What is Goldberg’s percentage ownership in Savannah after Savannah issues its stock to
Goldberg?
A) 76.32%
B) 80.43%
C) 82.57%
D) 83.43%
7) Sadie Corporation’s stockholders’ equity at December 31, 2010 included the
following:
6% Preferred stock, $10 par value$1,000,000
Common stock, $1 par value10,000,000
Other paid-in capitalcommon4,000,000
Retained earnings 4,000,000
$19,000,000
Pilga Corporation purchased a 30% interest in Sadie’s common stock from other
shareholders on January 1, 2011 for $5,800,000. What was the book value of Pilga’s
investment in Sadie on January 1, 2011?
A) $5,400,000
B) $5,700,000
C) $7,120,000
D) $7,440,000
8) A(n) ________ in the riskiness of corporate bonds will ________ the price of
corporate bonds and ________ the yield on corporate bonds, all else equal
A) increase; increase; increase
B) increase; decrease; increase
C) decrease; increase; increase
D) decrease; decrease;decrease
9) Under the provisions of FASB Statement No. 141R, in a business combination, when
the fair value of identifiable net assets acquired exceeds the investment cost, which of
the following statements is correct?
A) A gain from a bargain purchase is recognized for the amount that the fair value of
the identifiable net assets acquired exceeds the acquisition price
B) The difference is allocated first to reduce proportionately (according to market
value) non-current assets, then to non-monetary current assets, and any negative
remainder is classified as a deferred credit
C) The difference is allocated first to reduce proportionately (according to market
value) non-current assets, and any negative remainder is classified as an extraordinary
gain
D) The difference is allocated first to reduce proportionately (according to market
value) non-current, depreciable assets to zero, and any negative remainder is classified
as a deferred credit
10) A decrease in the liquidity of corporate bonds, other things being equal, shifts the
demand curve for corporate bonds to the ________ and the demand curve for Treasury
bonds shifts to the ________
A) right; right
B) right; left
C) left; left
D) left; right
11) The additional incentive that the purchaser of a Treasury security requires to buy a
long-term security rather than a short-term security is called the
A) risk premium
B) term premium
C) tax premium
D) market premium
12) Record the following transactions for Porter Hospital, a private, nonprofit hospital:
1>Gross patient services revenues: $25,000,000. Billed to patients.
2>Included in the above revenues are: charity services, $500,000; contractual
adjustments, $11,000,000; and estimated uncollectible amounts, $250,000.
3>Purchased equipment by issuing a 5-year note for $200,000.
4>Received cash donations restricted for a capital building addition program,
$5,100,000.
5>Incurred and paid $1,700,000 of contractor billings for the capital building program.
13) Pommu Corporation paid $78,000 for a 60% interest in Schtick Inc. on January 1,
2011, when Schtick’s Capital Stock was $80,000 and its Retained Earnings $20,000.
The fair values of Schtick’s identifiable assets and liabilities were the same as the
recorded book values on the acquisition date. Trial balances at the end of the year on
December 31, 2011 are given below:
PommuSchtick
Cash$4,500$20,000
Accounts Receivable24,00030,000
Inventory100,00070,000
Investment in Schtick78,000
Cost of Goods Sold71,50050,000
Operating Expenses22,00037,000
Dividends15,00010,000
$315,000$217,000
Liabilities$47,000$27,000
Capital stock, $10 par value100,00080,000
Additional Paid-in Capital11,000
Retained Earnings31,00020,000
Sales Revenue120,00090,000
Dividend Income6,000
$315,000$217,000
During 2011, Pommu made only two journal entries with respect to its investment in
Schtick. On January 1, 2011, it debited the Investment in Schtick account for $78,000
and on November 1, 2011, it credited Dividend Income for $6,000.
Required:
1>Prepare a consolidated income statement and a statement of retained earnings for
Pommu and Subsidiary for the year ended December 31, 2011 .
2>Prepare a consolidated balance sheet for Pommu and Subsidiary as of December 31,
2011 .
14) A cash distribution plan for the Sammi, Tammy, and Udd partnership was as
follows:
Priority
CreditorsSammiTammyUdd
First $250,000100%
Next $100,00070%30%
Next $150,00011/154/15
Remainder20%35%45%
Required:
If $850,000 of cash was distributed by the partnership, how much was received
respectively by the priority creditors, Sammi, Tammy, and Udd?
15) Adam, Bella, and Chris operate a partnership with a complex profit and loss sharing
agreement. The average capital balance for Adam, Bella and Chris on December 31,
2011 is $120,000, $270,000, and $340,000, respectively. A 6% interest allocation is
provided to each partner based on the average capital balance on December 31, 2011 .
Adam and Bella receive salary allocations of $40,000 and $50,000, respectively. If
partnership net income is above $160,000, after the salary allocations are considered
(but before the interest allocations are considered), Chris will receive a bonus of 10% of
the income (pre-salary and interest, but net of the bonus). All residual income is
allocated in the ratios of 2:2:6 to Adam, Bella, and Chris, respectively.
Required:
1>Prepare a schedule to allocate income or loss to the partners assuming that the
partnership incurs a net loss of $26,200 for 2011 .
2>Prepare a journal entry to distribute the partnership’s loss to the partners (assume that
an Income Summary account is used by the partnership).
16) On December 15, 2011, Electronix Company purchased inventory from a foreign
supplier for 2,000,000 foreign currency units (fcu’s). Payment will be made on February
13, 2012 . On December 15, 2011, to hedge the transaction, Electronix signed a forward
contract to buy 2,000,000 fcu’s in 60 days. Electronix uses a discount rate of 5%
resulting in a 45-day present value factor of .9938. The forward contract will be settled
net. The related exchange rates are shown below:
On December 15, 2011, Electronix recorded a debit to Inventory and a credit to
Accounts Payable (fcu) for $20,000, using the current spot rate.
Required:
1> Show the required entries on December 31, 2011 if the hedge is a cash flow hedge.
Round to the nearest whole dollar.
2> Show the required entries on December 31, 2011 if the hedge is a fair value hedge.
Round to the nearest whole dollar.
17) Samantha’s Sporting Goods had net assets consisting of the following:
Book ValueFair Value
Cash150,000 150,000
Inventory820,000 960,000
Building and Fixtures330,000 310,000
Liabilities(90,000)(88,000)
Pedic Incorporated purchased Samantha’s Sporting Goods, and immediately dissolved
Samantha’s as a separate legal entity.
Requirement 1: If Samantha’s was purchased for $1,000,000 cash, prepare the entry
recorded by Pedic.
Requirement 2: If Samantha’s was purchased for $1,500,000 cash, prepare the entry
recorded by Pedic.