1) According to the liquidity premium theory, a yield curve that is flat means that
A) bond purchasers expect interest rates to rise in the future
B) bond purchasers expect interest rates to stay the same
C) bond purchasers expect interest rates to fall in the future
D) the yield curve has nothing to do with expectations of bond purchasers
2) On January 1, 2011, Punch Corporation purchased 80% of the common stock of
Soopy Co. Separate balance sheet data for the companies at the acquisition date(after
the acquisition) are given below:
PunchSoopy
Cash$34,000 $206,000
Accounts Receivable144,00026,000
Inventory132,00038,000
Land68,00032,000
Plant assets700,000300,000
Accum. Depreciation(240,000)(60,000)
Investment in Soopy392,000
Total assets$ 1,230,000$ 542,000
Accounts payable$206,000$142,000
Capital stock800,000300,000
Retained earnings224,000100,000
Total liabilities & equities$ 1,230,000$ 542,000
At the date of the acquisition, the book values of Soopy’s net assets were equal to the
fair value except for Soopy’s inventory, which had a fair value of $60,000.
Determine below what the consolidated balance would be for each of the requested
accounts.
What amount of total liabilities will be reported?
A) $206,000
B) $278,400
C) $319,600
D) $348,000
3) A nongovernmental, not-for-profit entity is subject to:
I.GASB
II.FASB
A) I only
B) II only
C) a combination of I and II depending on the entity’s purpose
D) neither I or II
4) On October 4, 2010, Sooty Corporation borrowed 250,000 British pounds from a
London bank, evidenced by an interest-bearing note payable due in one year. The note
was payable in pounds. Exchange rates for pounds were:
October 4, 2010$1.59
December 31, 2010$1.55
October 4, 2011$1.61
What exchange gain or loss appeared on Sooty’s 2010 income statement?
A) a loss of $10,000
B) a loss of $15,000
C) a gain of $10,000
D) a gain of $15,000
5) The ________ of the term structure states the following: the interest rate on a
long-term bond will equal an average of short-term interest rates expected to occur over
the life of the long-term bond plus a term premium that responds to supply and demand
conditions for that bond
A) segmented markets theory
B) expectations theory
C) liquidity premium theory
D) separable markets theory
6) Taxes which were billed, but are not paid by the due date, require which of the
following entries at the fiscal close?
A) Debit Taxes Receivable – Delinquent
B) Debit Allowance for Uncollectible Taxes – Delinquent
C) Credit Taxes Receivable – Delinquent
D) Credit Allowance for Uncollectible Taxes – Current
7) The proceeds from a bond issuance for the construction of a new public school
should be recorded in the ________ fund at the time the bonds are sold. At the time of
the bond issue, the debit is to cash and the credit is to ________.
A) capital projects; revenues
B) general; bonds payable
C) general; other financing sources
D) capital projects; other financing sources
8) Paint Corporation owns 82% of Achille Corporation and Achille Corporation owns
80% of Badrack Corporation. For the current year, the separate net incomes (excluding
investment income) of Paint, Achille, and Badrack are $120,000, $100,000, and
$50,000, respectively. The cost of each investment was equal to the book value of the
investment, which was also equal to the fair value.
Noncontrolling interest share for Badrack is
A) $9,000
B) $10,000
C) $20,000
D) $40,000
9) Goodwill arising from a business combination is
A) charged to Retained Earnings after the acquisition is completed
B) amortized over 40 years or its useful life, whichever is longer
C) amortized over 40 years or its useful life, whichever is shorter
D) never amortized
10) On January 1, 2011, Punch Corporation purchased 80% of the common stock of
Soopy Co. Separate balance sheet data for the companies at the acquisition date(after
the acquisition) are given below:
PunchSoopy
Cash$34,000 $206,000
Accounts Receivable144,00026,000
Inventory132,00038,000
Land68,00032,000
Plant assets700,000300,000
Accum. Depreciation(240,000)(60,000)
Investment in Soopy392,000
Total assets$ 1,230,000$ 542,000
Accounts payable$206,000$142,000
Capital stock800,000300,000
Retained earnings224,000100,000
Total liabilities & equities$ 1,230,000$ 542,000
At the date of the acquisition, the book values of Soopy’s net assets were equal to the
fair value except for Soopy’s inventory, which had a fair value of $60,000.
Determine below what the consolidated balance would be for each of the requested
accounts.
What amount of Inventory will be reported?
A) $170,000
B) $169,000
C) $186,500
D) $192,000
11) Economists’ attempts to explain the term structure of interest rates
A) illustrate how economists modify theories to improve them when they are
inconsistent with the empirical evidence
B) illustrate how economists continue to accept theories that fail to explain observed
behavior of interest rate movements
C) prove that the real world is a special case that tends to get short shrift in theoretical
models
D) have proved entirely unsatisfactory to date
12) On November 1, 2010, Mayberry Corporation, a U.S. corporation, purchased from
Cantata Corporation, a Mexican company, some machinery that cost 1,000,000 pesos.
The invoice was payable in pesos on January 30, 2011 . To hedge against rapid changes
in the peso, Mayberry entered into a forward contract on November 1, 2010 with AB
Trader & Company, a US brokerage and investment firm. The contract specified that
Mayberry would buy 1,000,000 pesos from AB Trader at $0.084 per peso for settlement
on January 30, 2011 .
Assume that all three companies are subject to the same accounting standards and have
December 31st year-ends. The spot rates for pesos on November 1, December 31, and
January 30, are $0.082, $0.080, and $0.089, respectively. The 30-day forward rate for
pesos on December 31, 2010 is $0.083. The forward contract is not settled net.
Required:
Record General Journal entries for Mayberry Corporation on November 1, December
31, and January 30 . If no entry is required on a particular date, indicate “No entry” in
the General Journal. This is a fair value hedge.
13) On January 1, 2011 Paki Inc. bought 75% interest in Adam Corporation. At the time
of purchase, Adam owned 80% of Baird Company. In all acquisitions, the book value
equals the fair value, which equals the acquisition cost. Separate earnings (loss)
(excluding investment income) for the three affiliates for 2011 are as follows:
Separate
Earnings (Loss) Dividends
Paki Company$400,000$150,000
Adam Inc(50,000)90,000
Baird Company100,00035,000
Required:
Compute controlling interest share of consolidated net income and noncontrolling
interest shares for Paki and affiliates for 2011 .
14) Paster Corporation was seeking to expand its customer base, and wanted to acquire
a company in a market area it had not yet served. Paster determined that the Semma
Company was already in the market they were pursuing, and on January 1, 2011,
purchased a 25% interest in Semma to assure access to Semma’s customer base. Paster
paid $800,000, at a time when the book value of Semma’s net equity was $3,000,000.
Semma’s book values equaled their fair values except for the following items:
BookFair
ValueValueDifference
Inventories$150,000$200,000$ 50,000
Land 80,000100,000 20,000
Building-net220,000180,000 (40,000)
Equipment-net260,000310,000 50,000
Required:
Prepare a schedule to allocate any excess purchase cost to identifiable assets and
goodwill.
15) On January 1, 2011, Peabody Corporation acquired a 90% interest in Salisbury
Company for $270,000 when Salisbury’s stockholders’ equity was $300,000; with
Common stock $200,000 and Retained earnings $100,000.
On January 1, 2011, Salisbury purchased a 10% interest in Peabody for $70,000 when
Peabody’s total stockholders’ equity was $700,000; with Common stock $500,000 and
Retained earnings $200,000.
The following data was available for the year ending December 31, 2011:
Peabody CompanySalisbury Company
Net income$50,000$30,000
Dividends00
Use the conventional approach to account for the mutually-held stock. Assume there
were no book value/fair value differentials for each investment. The separate net
incomes do not include investment income.
Required:
1> Prepare the journal entry for Peabody on January 1, 2011 .
2> Prepare the journal entry for Salisbury on January 1, 2011 .
3> Prepare the journal entry to record the constructive retirement of 10% of Peabody’s
outstanding stock due to Salisbury’s purchase of Peabody’s stock.
4> Determine the incomes of Peabody and Salisbury on a consolidated basis with
mutual income for 2011 using simultaneous equations.
5> What is controlling interest share of consolidated net income and noncontrolling
interest shares for 2011?
16) Petra Corporation paid $500,000 for 80% of the outstanding voting common stock
of Sizable Corporation on January 2, 2011 when the book value of Sizable’s net assets
was $460,000. The fair values of Sizable’s identifiable net assets were equal to their
book values except as indicated below.
BookFair
ValueValue
Inventories (sold in 2011)$80,000$112,000
Buildings-net (15-year life)200,000170,000
Note Payable (paid in 2011)20,00021,250
Sizable reported net income of $75,000 during 2011; dividends of $35,000 were
declared and paid during the year.
Required:
1>Prepare a schedule to allocate the fair value/book value differential to the specific
identifiable assets and liabilities.
2>Determine Petra’s income from Sizable for 2011 .
3>Determine the correct balance in the Investment in Sizable account as of December
31, 2011
17) On November 1, 2010, the Yankee Corporation, a US corporation, purchased and
received an extruding machine from Wales Corporation, a UK company. The purchase
price was $10,000(U.S. dollars) and Yankee agreed to pay in pounds on February 1,
2011 . Both corporations are on a calendar year accounting period. Assume that the spot
rates for the British pound on November 1, 2010, December 31, 2010, and February 1,
2011, are $1.60, $1.62, and $1.66, respectively.
Required:
Record the November 1, December 31, and February 1 transactions in the General
Journals of Yankee Corporation and Wales Corporation. If no entry is required on a
particular date, indicate “No entry” in the General Journal.
18) If a higher inflation is expected, what would you expect to happen to the shape of
the yield curve? Why?
19) Prepare journal entries in the motor pool department of Hill County to record each
of the following transactions.
1>The General Fund contributed $50,000 cash to the motor pool department. The motor
pool department purchased four vehicles on July 1, 2011 by paying $50,000 down and
borrowing $70,000 on a 5%, 3-year note.
2>Billed General Fund departments $430,000 for services provided to those
departments. Billings to the Enterprise Fund totaled $210,000. All billings were
collected by year-end(June 30, 2012) except for $80,000 charged to the General Fund.
3>Accrued year-end adjustments at June 30, 2012 for interest expense and depreciation.
The useful life of the equipment is 5 years with no salvage value.
20) On January 1, 2011, Penny Company acquired a 90% interest in Lampire Company
for $180,000 cash. On January 1, 2011, Lampire Company had the following assets and
liabilities:
Book ValueFair Value
Cash$10,000$10,000
Accounts Receivable30,00035,000
Inventory40,00050,000
Plant Assets60,00080,000
Total Assets$140,000$175,000
Liabilities$25,000$25,000
Capital Stock100,000
Retained Earnings15,000
Total Liabilities &
Stockholders’ Equity$140,000
Push-down accounting is used for the acquisition.
Required:
1> Assume both companies use the entity theory. Record the push-down adjustment on
Lampire’s separate books on January 1, 2011 .
2> Assume both companies use the parent company theory. Record the push-down
adjustment on Lampire’s separate books on January 1, 2011 .
21) Gargantuan Bank has loaned money in two separate loans to Little Company, which
is now in Chapter 7 bankruptcy. Little Company has the following assets and liabilities,
stated at fair value in liquidation.
Assets pledged with secured creditors$190,000
Assets pledged with partially secured creditors70,000
Other assets30,000
Secured debt to Gargantuan130,000
Partially secured debt to Gargantuan110,000
Unsecured liabilities with priority50,000
Unsecured liabilities160,000
Required:
Determine the amount of cash that Gargantuan will collect from these two pieces of
debt.
