1) On January 1, 2013, Prosser Company acquired 90% of the common stock of
Simone Company for $720,000 and 20% of the preferred stock for $70,000.On this
date,Simone Company reported the following account balances:
Common stock ($10 par value)$600,000
Preferred stock ($100 par value, 8%,
cumulative, nonparticipating, liquidation
value equal to par value)300,000
Other contributed capital- premium on
common stock120,000
Retained earnings80,000
Simone Company did not declare a cash dividend during 2012. Prosser Company uses
the cost method.
Required:
A.During 2013Simone Company reported net income of $360,000 and declared cash
dividends of $160,000.Calculate the 2013 noncontrolling interest in net income and the
amount of the cash dividends Prosser Company should have received during the year
from each of the stock investments.
B.Prepare, in general journal form, the workpaper entries that would be made in the
preparation of the December 31, 2013, consolidated statements workpaper.The
difference between the implied value of the common stock and the book value interest
acquired is attributable to an undervaluation in the land of Simone Company. Any
difference between the implied value of the preferred stock and its book value is
allocated to other contributed capital.
2) When following the economic unit concept in the preparation of consolidated
financial statements, the basis for valuing the noncontrolling interest in net assets is the
a.book values of subsidiary assets and liabilities
b.fair values of subsidiary assets and liabilities
c.general price level adjusted values of subsidiary assets and liabilities
d.fair values of parent company assets and liabilities
3) On January 1, 2013, Power Company purchased 80% of the common stock of
Stuckey Company for $400,000.Stuckey Company reported common stock of $200,000
($10 par value), other contributed capital of $60,000, and retained earnings of $120,000
on this date.The difference between implied value and the book value interest acquired
is attributable to the under-valuation of land held by Stuckey Company.Stuckey
Company reported net income for 2013 of $100,000.During 2013Stuckey Company
declared and paid a 20% stock dividend and a $24,000 cash dividend.Stuckey Company
stock had a market value of $30 per share on the date the stock dividend was
declared.Power Company uses the cost method to account for its investment in Stuckey
Company.
Required:
A.Prepare the journal entries required in the books of Power Company to account for
the investment in Stuckey Company.
B.Prepare in general journal form the workpaper entries necessary in the consolidated
statements workpaper for the year ended December 31, 2013.
C.Prepare the workpaper entry to establish reciprocity in the 2014 consolidated
statements workpaper.
4) Balance sheet information for Hope Corporation at January 1, 2013, is summarized
as follows:
Current assets$ 920,000Liabilities $ 1,200,000
Plant assets 1,800,000Capital stock $10 par 800,000
Retained earnings 720,000
$2,720,000 $ 2,720,000
Hopes assets and liabilities are fairly valued except for plant assets that are undervalued
by $200,000. On January 2, 2013, Robin Corporation issues 80,000 shares of its $10 par
value common stock for all of Hopes net assets and Hope is dissolved. Market
quotations for the two stocks on this date are:
Robin common:$28
Hope common:$19
Robin pays the following fees and costs in connection with the combination:
Finders fee$10,000
Costs of registering and issuing stock 5,000
Legal and accounting fees 6,000
Required:
A.Calculate Robins investment cost of Hope Corporation.
B.Calculate any goodwill from the business combination.
5) For interim financial reporting, a company’s income tax provision for the second
quarter of 2014 should be determined using the
a.statutory tax rate for 2014
b.effective tax rate expected to be applicable for the full year of 2014 as estimated at the
end of the first quarter of 2014
c.effective tax rate expected to be applicable for the full year of 2014 as estimated at the
end of the second quarter of 2014
d.effective tax rate expected to be applicable for the second quarter of 2014
6) Current authoritative pronouncements require the disclosure of segment information
when certain criteria are met. Which of the following reflects the type of firm and type
of financial statement for which this disclosure is required?
a.Annual financial statements for publicly held companies
b.Annual financial statements for both publicly held and nonpublicly held companies
c.Annual and interim financial statements for publicly held companies
d.Annual and interim financial statements for both publicly held and nonpublicly held
companies
7) Which of the following would be restated using the current exchange rate under the
temporal method?
a.Marketable securities carried at cost
b.Inventory carried at market
c.Common stock
d.None of these
8) 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 would be the balance in the Investment
of S Corporation account on December 31, 2013?
a.$300,000
b.$225,000
c.$279,000
d.$261,000
9) Use the information below to (a) translate the year-end financial statements of
Perfect Company, the foreign subsidiary, using the temporal method, and (b) prepare a
schedule to compute the translation gain or loss for Perfect Company. Round numbers
to the nearest dollar.
On January 2, 2014, Design Inc., a U.S. parent company, purchased a 100% interest in
Perfect Company, a subdivision located in Switzerland. The purchase method of
accounting was used to account for the acquisition. The 2014 financial statements for
Perfect Company, the subsidiary, in Swiss francs were as follows:
Comparative Balance Sheets
Jan. 2Dec. 31
Cash15,00033,000
Accounts receivable45,00049,500
Plant and equipment (net) (purchased 6/30/11)75,00067,500
Land (purchased 6/30/11) 45,000 45,000
Total180,000195,000
Accounts payable13,50018,000
Long-term notes payable (issued 6/30/11)31,50027,000
Common stock (issued 6/30/11)90,00090,000
Retained earnings 45,000 60,000
Total180,000195,000
Income Statement
Revenues180,000
Operating expenses including depreciation
of 7,500 francs 135,000
Net income45,000
Beginning retained earnings 45,000
90,000
Dividends declared and paid 30,000
Ending retained earnings 60,000
Sales were earned and operating expenses were incurred evenly during the year.
Exchange rates for the franc at various dates are:
January 2, 20140.8600
December 31, 20140.8830
Average for 20140.8715
December 10, 2014, dividend payment date0.8810
June 30, 20110.8316
10) If the book value of preferred stock is greater than itsimplied value, the difference is
accounted for as an increase in
a.consolidated retained earnings
b.consolidated net income
c.other contributed capital
d.investment in subsidiary preferred stock
11) As mentioned in Chapter 1, the project on business combinations was the first of
several joint projects undertaken by the FASB and the IASB in their move to converge
standards globally. Nonetheless, complete convergence has not yet occurred, and there
are those who believe it to be a poor idea. Discuss the reasons for and against global
convergence.
12) Admissions, counseling and registration are considered to be:
a.educational and general services
b.auxiliary enterprises
c.student services
d.institutional support
13) IFRS and US GAAP differ with regard to financial statement presentation in all of
the following except:
a.IFRS generally requires that assets be listed in order of increasing liquidity while US
GAAP requires that assets be listed in order of decreasing liquidity
b.US GAAP requires expenses to be listed by function while IFRS requires expenses to
be listed by nature
c.IFRS prohibits extraordinary items which are allowed by US GAAP
d.IFRS requires two years of comparative income statements while under US GAAP,
three years of income statements are required
14) The highest level of priority of pronouncements that a government entity should
look to for accounting and reporting guidance is
a.GASB Technical Bulletins
b.GASB Concepts Statements
c.
d.GASB Statements
15) The term used to describe the application of accounting to expendable fund entities
is the
a.accrual method
b.cash method
c.modified cash method
d.modified accrual method
16) On January 1, 2010, Brighton Company acquired the net assets of Dakota Company
for $1,580,000 cash. The fair value of Dakotas identifiable net assets was $1,310,000 on
his date. Brighton Company decided to measure goodwill impairment using the present
value of future cash flows to estimate the fair value of the reporting unit (Dakota). The
information for these subsequent years is as follows:
* Identifiable net assets do not include goodwill.
Required:
A: For each year determine the amount of goodwill impairment, if any.
B: Prepare the journal entries needed each year to record the goodwill impairment (if
any) on Brightons books.
17) Eliminating entries are made to cancel the effects of intercompany transactions and
are made on the
a.books of the parent company
b.books of the subsidiary company
c.workpaper only
d.books of both the parent company and the subsidiary
18) Jersey Hospital received money from a donor to set up an endowment fund. The
following information pertains to this contribution:
2013
1>$3,000,000 was received to establish the fund. The requirements were
a.$150,000 of the endowment funds income must be used for research grants each year.
b.The remainder of income is under the discretion of the governing board.
c.The principal is expendable after the donors death. It shall be used to purchase
equipment.
2>The cash received was invested in a number of securities.
2014
3>Dividends of $150,000 and interest of $400,000 were received.
4>The income was transferred to the appropriate funds.
5>Of the restricted income, only $100,000 was expended for its specified purpose
during 2014.
6>The governing board specified that $300,000 of the income would be used for loans
for deserving medical students.
2015
7>$250,000 was lent to medical students.
8>The donor died of cancer.
Required:
Set up headings for the following funds: Endowment, General, Specific Purpose, and
Plant Replacement and Expansion. Prepare the entries necessary in each fund to record
the events listed above.
19) In years subsequent to the upstream intercompany sale of nondepreciable assets, the
necessary consolidated workpaper entry under the cost method is to debit the
a.Noncontrolling interest and Retained Earnings (Parent) accounts, and credit the
nondepreciable asset
b.Retained Earnings (Parent) account and credit the nondepreciable asset
c.Nondepreciable asset, and credit the Noncontrolling interest and Investment in
Subsidiary accounts
d.No entries are necessary
20) Stemberger Company issued 10-year, 8% bonds with a par value of $1,000,000 on
January 2, 2012, for $1,040,000.Interest is payable semiannually on June 30 and
December 31.On December 31, 2013, Putter Company purchased $700,000 of
Stemberger par value bonds for $670,000. Stemberger is an 80% owned subsidiary of
Putter. Both companies use the straight-line method to amortize bond discounts and
premiums.Stemberger declared cash dividends of $100,000 in 2013 and reported net
income of $220,000 for the year.
Putter reported net income of $350,000 for 2013 and paid dividends of $160,000 during
2013.
Required:
A.Compute the total gain or loss on the constructive retirement of the debt.
B.Allocate the total gain or loss between Stemberger Company and Putter Company.
C.Compute the controlling interest in consolidated net income for 2013.
D.Prepare in general journal form the intercompany bond elimination entries for the
consolidated statements workpaper prepared on December 31, 2013.
21) If the value implied by the purchase price of an acquired company exceeds the fair
values of identifiable net assets, the excess should be
a.allocated to reduce any previously recorded goodwill and classify any remainder as an
ordinary gain
b.allocated to reduce current and long-lived assets
c.allocated to reduce long-lived assets
d.accounted for as goodwill
22) On October 1, 2013, Philly Company purchased inventory from a foreign customer
for 750,000 units of foreign currency (FCU) due on January 31, 201 Simultaneously,
Philly entered into a forward contract for 750,000 units of FC for delivery on January
31, 2014, at the forward rate of $0.75. Payment was made to the foreign customer on
January 31, 201 Spot rates on October 1, December 31, and January 31, were $0.72,
$0.73, and $0.76, respectively. Philly amortizes all premiums and discounts on forward
contracts and closes its books on December 31.
Required:
A.Prepare all journal entries relative to the above to be made by Philly on October 1,
2013.
B.Prepare all journal entries relative to the above to be made by Philly on December 31,
2013.
C.Compute the transaction gain or loss on the forward contract that would be recorded
in 2014. Indicate clearly whether the amount is a gain or loss.
23) In preparing consolidated working papers, beginning retained earnings of the parent
company will be adjusted in years subsequent to acquisition with an elimination entry
whenever:
a.a noncontrolling interest exists
b.it does not reflect the equity method
c.the cost method has been used only
d.the complete equity method is in use
24) Which of the following statements is true regarding the IASC?
a.The IASC is a public-sector, not-for-profit organization
b.The IASC is accountable to an international securities regulator
c.The IASC is a stand-alone, private-sector organization
d.The IASC funds the operations of the IASB through filing fees paid to national
securities regulators
25) Maplewood Corporation purchased the net assets of West Corporation on January 2,
2013 for $560,000 and also paid $20,000 in direct acquisition costs. Wests balance
sheet on January
1, 2013 was as follows:
Accounts receivable-net$ 180,000Current liabilities$ 70,000
Inventory 360,000Long term debt 160,000
Land 40,000Common stock ($1 par) 20,000
Building-net 60,000Paid-in capital 430,000
Equipment-net 80,000Retained earnings 40,000
Total assets$ 720,000Total liab. & equity$ 720,000
Fair values agree with book values except for inventory, land, and equipment, which
have fair values of $400,000, $50,000 and $70,000, respectively. West has patent rights
valued at $20,000.
Required:
A.Prepare Maplewoods general journal entry for the cash purchase of Wests net assets.
B.Assume Maplewood Corporation purchased the net assets of West Corporation for
$500,000 rather than $560,000, prepare the general journal entry.
26) When a company issues interim financial statements, extraordinary items should be
a.allocated to the current and remaining interim periods of the current year on a pro rata
basis
b.deferred and included only in the annual income statement
c.included in the determination of net income in the interim period in which they occur
d.charged or credited directly to retained earnings so that comparisons of interim results
of operations will not be distorted
27) A transaction gain or loss at the settlement date is:
a.a change in the exchange rate quoted by a foreign exchange trader
b.synonymous with the translation of foreign currency financial statements into dollars
c.the difference between the recorded dollar amount of an account receivable
denominated in a foreign currency and the amount of dollars received
d.the difference between the buying and selling rate quoted by a foreign exchange
trader at the settlement date
28) P Company regularly sells merchandise to its 80%-owned subsidiary, S
Corporation. In 2013, P sold merchandise that cost $192,000 to S for $240,000. Half of
this merchandise remained in Ss December 31, 2013 inventory. During 2014, P sold
merchandise that cost $300,000 to S for $375,000. Forty percent of this merchandise
inventory remained in Ss December 31, 2014 inventory. Selected income statement
information for the two affiliates for the year 2014 is as follows:
P _ S_
Sales Revenue $1,800,000$900,000
Cost of Goods Sold 1,440,000 750,000
Gross profit $ 360,000$150,000
Consolidated sales revenue for P and Subsidiary for 2014 are:
a.$2,325,000
b.$2,400,000
c.$2,565,000
d.$2,700,000
29) P Corporation acquired a 60% interest in S Corporation on January 1, 2014, at book
value equal to fair value. During 2014, P sold merchandise that cost $225,000 to S for
$315,000. One-third of this merchandise remained in Ss inventory at December 31,
2014. S reported net income of $200,000 for 2014. Ps income from S for 2014 is:
a.$60,000
b.$90,000
c.$120,000
d.$102,000
30) Bruges Electronics Inc. offers one model of laptop computer for £1000 and a
two-year warranty for £250. The retailer, as part of a Boxing Day promotion, offers a
limited-time offer for the laptop, including delivery and the two-year warranty for
£1,180. The cost of the computer to Bruges is £700. Any warranty repairs are assumed
to be done ratably over time. Bruges accounts for transactions using the customer
consideration model.
In the first twelve months following the sale, Bruges incurred £980 of costs servicing
the computers under warranty.
Bruges sells ten laptops to Brussels Inc. under the limited-time promotion. Upon
delivery of the laptops to Brussels, Bruges will recognize revenue of
a.£9,300
b.£9,440
c.£10,000
d.£11,800
31) In 2014, P Company sells land to its 80% owned subsidiary, S Company, at a gain
of $50,000. What is the effect of this sale of land on consolidated net income assuming
S Company still owns the land at the end of the year?
a.consolidated net income will be the same as if the sale had not occurred
b.consolidated net income will be $50,000 less than it would had the sale not occurred
c.consolidated net income will be $40,000 less than it would had the sale not occurred
d.consolidated net income will be $50,000 greater than it would had the sale not
occurred
32) A schedule prepared each time cash is to be distributed is called a(n)
a.advance cash distribution schedule
b.marshaling of assets schedule
c.loss absorption potential schedule
d.safe payment schedule
33) The Difference between Implied and Book Value account titles s/b in Caps, but not
italics – you have not done this consistentlyaccount is:
a.an asset or liability account reflected on the consolidated balance sheet
b.used in allocating the amounts paid for recorded balance sheet accounts that are
different than
their fair values
c.the excess implied value assigned to goodwill
d.the unamortized excess that cannot be assigned to any related balance sheet accounts
34) One reason a parent company may pay an amount less than the book value of the
subsidiary’s stock acquired is
a.an undervaluation of the subsidiary’s assets
b.the existence of unrecorded goodwill
c.an overvaluation of the subsidiary’s liabilities
dthe existence of unrecorded contingent liabilities
35) The ABC partnership has the following capital accounts on its books at December
31, 2014:
Credit
A, Capital$400,000
B, Capital240,000
C, Capital80,000
All liabilities have been liquidated and the cash balance is zero. None of the partners
have personal assets in excess of his personal liabilities. The partners share profits and
losses in the ratio of 3:2:5. If the noncash assets are sold for $400,000, the partners
should receive as a final payment:
a.A, $304,000;B, $176,000;C, $80,000
b.A, $256,000;B, $144,000;C, $-0-
c.A, $304,000;B, $176,000;C, $-0-
d.A, $120,000;B, $80,000;C, $200,000
36) An inventory loss from a market price decline occurred in the first quarter. The loss
was not expected to be restored in the fiscal year. However, in the third quarter the
inventory had a market price recovery that exceeded the market decline that occurred in
the first quarter. For interim reporting, the dollar amount of net inventory should
a.decrease in the first quarter by the amount of the market price decline and increase in
the third quarter by the amount of the market price recovery
b.decrease in the first quarter by the amount of the market price decline and increase in
the third quarter by the amount of the decrease in the first quarter
c.not be affected in the first quarter and increase in the third quarter by the amount of
the market price recovery that exceeded the amount of the market price decline
d.not be affected in either the first quarter or the third quarter
37) The following balances were taken from the records of S Company:
Common stock (1/1/13 and 12/31/13)$720,000
Retained earnings 1/1/13$160,000
Net income for 2013180,000
Dividends declared in 2013(40,000)
Retained earnings, 12/31/13 300,000
Total stockholders’ equity on 12/31/13$1,020,000
P Company purchased 75% of S Company’s common stock on January 1, 2011 for
$900,000. The difference between implied value and book value is attributable to assets
with a remaining useful life on January 1, 2013 of ten years.
Required:
A.Compute the difference between cost/(implied) and book value applying:
1>Parent company theory.
2>Economic unit theory.
B.Assuming the economic unit theory:
1>Compute noncontrolling interest in consolidated income for 2013.
2>Compute noncontrolling interest in net assets on December 31, 2013.
38) Explain the effects on income from hedging a foreign currency exposed net asset
position or net liability position.
39) P Company acquired a 100% interest in S Company. On the date of acquisition the
fair value of the assets and liabilities of S Company was equal to their book value
except for land that had a fair value of $1,500,000 and a book value of $300,000.
At what amount should the land of S Company be included in the consolidated balance
sheet?
At what amount should the land of S Company be included in the consolidated balance
sheet if P Company acquired an80% interest in S Company rather than a 100%interest?
40) The __________is the functional currency of a foreign subsidiary with operations
that are relatively self-contained and integrated within the country in which it is located.
In such cases, the__________ method of translation would be used to translate the
accounts into dollars.
41) Eleven funds are recommended to account for the various activities and resources
of a govern-mental unit. Identify these funds by title and type and briefly state (in two
sentences or less) the basic purpose of each fund.
42) Dante, Milton, and Cervantes formed a partnership and agreed to share profits in a
3:1:2 ratio after recognition of 5% interest on average capital balances and monthly
salary allowances of $3,750 to Milton and $3,000 to Cervantes. Average capital
balances were as follows:
Dante300,000
Milton240,000
Cervantes180,000
Required:
Compute the net income (loss) allocated to each partner assuming the partnership
incurred a $27,000 net loss.
43) Does the elimination of the effects of intercompany sales of merchandise always
affect the amount of reported consolidated net income? Explain.
44) Why is the gross profit on intercompany sales, rather than profit after deducting
selling and administrative expenses, ordinarily eliminated from consolidated inventory
balances?