Shrek, Donkey, and Muffin are partners with capital balances of $135,000, $90,000, and
$60,000, respectively. The partners share profits and losses equally. For an investment
of $120,000 cash, Fiona is to be admitted as a partner with a one-fourth interest in
capital and profits. Based on this information, the amount of Fionas investment can best
be justified by which of the following?1) a.Fiona will receive a bonus from the other
partners upon his admission to the partnership
b.Assets of the partnership were overvalued immediately prior to Fionas investment
c.The book value of the partnerships net assets were less than their fair value
immediately prior to Fionas investment
d.Fiona is apparently bringing goodwill into the partnership and her capital account will
be credited for the appropriate amount
2) The first step in the liquidation process is to
a.convert noncash assets into cash
b.pay partnership creditors
c.compute any net income (loss) up to the date of dissolution
d.allocate any gains or losses to the partners
3) On January 1, 2014, Pharma Company purchased equipment from its 80%-owned
subsidiary for $2,400,000. On the date of the sale, the carrying value of the equipment
on the books of the subsidiary company was $1,800,000. The equipment had a
remaining useful life of six years on January 2014. On January 1, 2015, Pharma
Company sold the equipment to an outside party for $2,200,000.
Required:
A.Prepare, in general journal form, the entries necessary in 2014 and 2015 on the books
of Pharma Company to account for the purchase and sale of the equipment.
B.Determine the consolidated gain or loss on the sale of the equipment and prepare, in
general journal form, the entry necessary on the December 31, 2015 consolidated
statements workpaper to properly reflect this gain or loss.
4) Under which set of circumstances would it not be appropriate to assume the value
the noncontrolling shares is the same as the controlling shares?
a.The acquisition is for less than 100% of the subsidiary
b.The fair value of the of the noncontrolling shares can be inferred from the value
implied by the acquisition price
c.Active market prices for shares not obtained by the acquirer imply a different value
d.The amount of the control premium cannot be determined
The two basic statements prepared for expendable fund entities are a balance sheet and
a(n)5) a.income statement
b.statement of revenue
c.statement of expenditures and encumbrances
d.none of these
6) If a portion of an investment is sold, the value of the shares sold is determined by
using the:
1>first-in, first-out method.
2>average cost method.
3>specific identification method.
a.1
b.2
c.3
d.1 and 3
7) Primer Company acquired an 80% interest in SealCoat Company on January 1, 2013,
for $450,000 cash when SealCoat Company had common stock of $250,000 and
retained earnings of $250,000. All excess was attributable to plant assets with a 10-year
life. SealCoat Company made $50,000 in 2013 and paid no dividends. Primer
Companys separate income in 2013 was $625,000. The controlling interest in
consolidated net income for 2013 is:
a.$675,000
b.$665,000
c.$660,000
d.$625,000
8) All of the following are Governmental (Expendable) Fund Entities except the
a.Capital Projects Fund
b.Debt Service Fund
c.Internal Service Fund
d.Special Revenue Fund
9) Parental Company and Sub Company were combined in an acquisition transaction.
Parental was able to acquire Sub at a bargain price. The sum of the fair values of
identifiable assets acquired less the fair value of liabilities assumed exceeded the cost to
Parental. After eliminating previously recorded goodwill, there was still some “negative
goodwill.” Proper accounting treatment by Parental is to report the amount as
a.paid-in capital
b.a deferred credit, which is amortized
c.an ordinary gain
d.an extraordinary gain
10) The view that the noncontrolling interest in income reflects the noncontrolling
stockholders’ allocated share of consolidated income is consistent with the
a.economic unit concept
b.parent company concept
c.current practice concept
d.historical cost company concept
11) When translating foreign currency financial statements for a company whose
functional currency is the U.S. dollar, which of the following accounts is translated
using historical exchange rates?
Notes PayableEquipment
a.YesYes
b.YesNo
c.NoNo
d.NoYes
12) The partnership of Gamma, Ginger, and Gert had total capital of $1,140,000 on
December 31, 2014, as follows:
Gamma, Capital (30%)$360,000
Ginger, Capital (45%)510,000
Gert, Capital (25%) 270,000
Total$1,140,000
Profit and loss sharing percentages are shown in parentheses.
Assume that Grizelda became a partner by investing $300,000 in the Gamma, Ginger,
and Gert partnership for a 25 percent interest in capital and profits and that partnership
net assets are not revalued. Grizeldas capital credit should be
a.$360,000
b.$285,000
c.$300,000
d.$380,000
13) For interim financial reporting, the effective tax rate should reflect
AnticipatedExtraordinary
Tax CreditsItems
a.YesYes
b.YesNo
c.NoYes
d.N boNo
14) Pinta Company acquired an 80% interest in Strummer Company on January 1,
2013, for $270,000 cash when Strummer Company had common stock of $150,000 and
retained earnings of $150,000. All excess was attributable to plant assets with a 10-year
life. Strummer Company made $30,000 in 2013 and paid no dividends. Pinta Companys
separate income in 2013 was $375,000. Controlling interest in consolidated net income
for 2013 is:
a.$405,000
b.$399,000
c.$396,000
d.$375,000
15) During the second quarter of 2014, Clearwater Company sold a piece of equipment
at a gain of $90,000. What portion of the gain should Clearwater report in its income
statement for the second quarter of 2014?
a.$90,000
b.$45,000
c.$30,000
d.$ -0-
16) 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 first forward contract was to hedge a purchase of inventory on September 1,
payable on December 1. On September 30, what amount of foreign currency transaction
loss should Mudd Plating report in income?
a.$0
b.$2,500
c.$5,000
d.$10,000
During the liquidation of the partnership of Karr, Rice, and Long. Karr accepts, in
partial settlement of his interest, a machine with a cost to the partnership of $150,000,
accumulated depreciation of $70,000, and a current fair value of $110,000. The partners
share net income and loss equally. The net debit to Karr’s account (including any gain or
loss on disposal of the machine) is17) a.$90,000
b.$100,000
c.$110,000
d.$150,000
18) A transaction gain is recorded when there is an:
a.importing transaction and the exchange rate increases
b.exporting transaction and the exchange rate increases
c.exporting transaction and the exchange rate decreases
d.none of these
19) The partnership of Gilligan, Skipper, and Ginger had total capital of $570,000 on
December 31, 2014 as follows:
Gilligan, Capital (30%)$180,000
Skipper, Capital (45%)255,000
Ginger, Capital (25%) 135,000
Total$570,000
Profit and loss sharing percentages are shown in parentheses. The partnership has no
liabilities. If Mary Ann purchases a 25 percent interest from each of the old partners for
a total payment of $270,000 directly to the old partners
a.total partnership net assets can logically be revalued to $1,080,000 on the basis of the
price paid by Mary Ann
b.the payment of Mary Ann does not constitute a basis for revaluation of partnership net
assets because the capital and income interests of the old partnership were not aligned
c.total capital of the new partnership should be $760,000
d.total capital of the new partnership will be $840,000 assuming no revaluation
20) Under Southdale Hospitals established rate structure, the hospital would have
earned patient service revenue of $7,000,000 for the year ended December 31, 2014.
However, Southdale did not expect to collect this amount because of charity allowances
of $1,000,000 and discounts of $500,000 to third party payers. In May 2014, Southdale
purchased bandages from Ace Supply Co. at a cost of $5,000. However, Ace notified
Southdale that the invoice was being cancelled and that the bandages were being
donated to Southdale.
For the year ended December 31, 2014, Southdale should record the donation of
bandages as:
a.a $5,000 reduction in operating expenses
b.nonoperating revenue of $5,000
c.other operating revenue of $5,000
d.a memorandum entry only
21) Partner Company acquired 85% of the common stock of Simplex Company in two
separate cash transactions. The first purchase of 108,000 shares (60%) on January 1,
2012, cost $735,000. The second purchase, one year later, of 45,000 shares (25%) cost
$330,000. Simplex Companys stockholders equity was as follows:
December 31December 31
20122013
Common Stock, $5 par$ 900,000$ 900,000
Retained Earnings, 1/1262,000302,000
Net Income69,00090,000
Dividends Declared, 9/30 (30,000) (38,000)
Retained Earnings, 12/31 301,000 354,000
Total Stockholders Equity, 12/31$1,201,000$1,254,000
On April 1, 2013, after a significant rise in the market price of Simplex Companys
stock, Partner Company sold 32,400 of its Simplex Company shares for $390,000.
Simplex Company notified Partner Company that its net income for the first three
months was $22,000. The shares sold were identified as those obtained in the first
purchase. Any difference between cost and book value relates to goodwill. Partner uses
the partial equity method to account for its investment in Simplex Company.
Required:
A.Prepare the journal entries Partner Company will make on its books during 2012 and
2013 to account for its investment in Simplex Company.
B.Prepare the workpaper eliminating entries needed for a consolidated statements
workpaper on December 31, 2013.
22) In a business combination accounted for as an acquisition, how should the excess of
fair value of identifiable net assets acquired over implied value be treated?
a.Amortized as a credit to income over a period not to exceed forty years
b.Amortized as a charge to expense over a period not to exceed forty years
c.Amortized directly to retained earnings over a period not to exceed forty years
d.Recognized as an ordinary gain in the year of acquisition
23) Which type of fund can be either expendable or nonexpendable?
a.Debt service
b.Enterprise
c.Trust
d.Special revenues
24) Under SFAS 141R,
a.both direct and indirect costs are to be capitalized
b.both direct and indirect costs are to be expensed
c.direct costs are to be capitalized and indirect costs are to be expensed
d.indirect costs are to be capitalized and direct costs are to be expensed
25) X, Y, and Z have capital balances of $90,000, $60,000, and $30,000, respectively.
Profits are allocated 35% to X, 35% to Y, and 30% to Z. The partners have decided to
dissolve and liquidate the partnership. After paying all creditors, the amount available
for distribution is $60,000. X, Y, and Z are all personally solvent. Under the
circumstances, Z will
a.receive $18,000
b.receive $30,000
c.personally have to contribute an additional $6,000
d.personally have to contribute an additional $36,000
26) What is marshaling of assets?
27) When stock is exchanged for stock in a business combination, how is the stock
exchange ratio generally expressed?
28) One of the officers of a corporation that had just received a discharge in bankruptcy
said, Good, now we dont owe anyone. Is he correct?
29) SMC Inc. operates restaurants based on various themes, such as Mex-delight,
Chinese for the Buffet, and Steak-it and Eat-it. The Steak-it and Eat-it restaurants have
not been performing well recently, but SMC prefers not to disclose these details for fear
that competitors might use the information to the detriment of SMC. The restaurants are
located in various geographical locations, and management currently measures profits
and losses and asset allocation by restaurant concept. How-ever, when preparing the
segmental disclosures under SFAS No. 131 [ASC 280], the company reports the
segment information by geographical location only. The company recently hired you to
review the financial statements.
1>What disclosures should the company report for segment purposes?
2>The companys CEO believed that the rules in SFAS No. 131 [ASC 280] are vague
and that the company could easily support its decision to dis-close disclose the segment
data by geographic regions. What would you recommend to the CEO and how would
you approach the issues?
30) An outside party issued a note to Affiliate X, whothen sold the note to Affiliate Y. Y
discounted thenote at an unaffiliated bank, endorsing it withrecourse. Which party is
primarily liable andwhich party is contingently liable for the note?
31) What are the advantages of acquiring the majority of the voting stock of another
company rather than acquiring all its voting stock?