1) There have been several recent cases of a CEO or CFO resigning or being ousted for
misrepresenting academic credentials. For instance, during February 2006,the CEO of
RadioShack resigned by mutual agreement for inflating his educational background.
During 2002, Veritas Software Corporations CFO resigned after claiming to have an
MBA from Stanford University. On the other hand, Bausch & Lomb Inc.s board refused
the CEOs offer to resign following a questionable claim to have an MBA.
Suppose you have been retained by the board of a company where the CEO has
overstated credentials. This company has a code of ethics and conduct which states that
the employee should always do the right thing.(a) What is the board of directors
responsibility in such matters?(b) What arguments would you make to ask the CEO to
resign? What damage might be caused if the decision is made to retain the current
CEO?
2) Target Corporation was forced into bankruptcy and is in the process of liquidating
assets and paying claims. Unsecured claims will be paid at the rate of thirty cents on the
dollar. Arrow holds a note receivable from Target for $90,000 collateralized by an asset
with a book value of $60,000 and a liquidation value of $30,000. The amount to be
realized by Arrow on this note is:
a.$30,000
b.$48,000
c.$60,000
d.$90,000
3) Search Company is a 90% owned subsidiary of Passage Company.On January 1,
2013, Search Company purchased for $680,000 bonds of Passage Company that had a
carrying value of $725,000 (par value $700,000). The bonds mature on December 31,
2014.Both companies use the straight-line method of amortization and have a
December 31 year-end.The increase in 2013 consolidated income (i.e., income before
subtracting noncontrolling interest) is
a.$45,000
b.$44,000
c.$54,000
d.$36,000
e.$46,000
4) The GASB has the responsibility for establishing financial accounting standards for
all of the following entities except:
a.state and local government entities
b.veterans hospitals
c.school districts
d.civic organizations
5) On January 1 2013, Pounder Company purchased 75% of SludgeSmile Company for
$500,000. SludgeSmile Companys stockholders equity on that date was equal to
$600,000 and SludgeSmile Company had 60,000 shares issued and outstanding on that
date. SludgeSmile Company Corporation sold an additional 15,000 shares of previously
unissued stock on December 31, 2013.
Assume SludgeSmile Company sold the 15,000 shares to outside interests, Pounder
Companys percent ownership would be:
a.33 1/3%
b.60%
c.75%
d.80%
6) Which of the following requires the use of the encumbrance system?
a.Capital projects fund
b.Debt service fund
c.Internal service fund
d.Enterprise fund
7) 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 $135,000 to S for
$189,000. One-third of this merchandise remained in Ss inventory at December 31, 20
S reported net income of $120,000 for 20 Ps income from S for 2014 is:
a.$36,000
b.$50,400
c.$54,000
d.$61,200
8) On the consolidated balance sheet, consolidated stockholders’ equity is
a.equal to the sum of the parent and subsidiary stockholders’ equity
b.greater than the parent’s stockholders’ equity
c.less than the parent’s stockholders’ equity
d.equal to the parent’s stockholders’ equity
9) Noncontrolling interest in consolidated income is never affected by
a.upstream sales
b.downstream sales
c.horizontal sales
d.Noncontrolling interest is affected by all sales
10) What journal entry should be made at the end of the fiscal year to close out
encumbrances for which goods and services have not been received?
a.Debit reserve for encumbrance and credit encumbrances
b.Debit reserve for encumbrances and credit fund balance
c.Debit fund balance and credit encumbrances
d.Debit encumbrances and credit reserve for encumbrances
11) Polish Company acquired 90% of Sandwich Company’s common stock for
$780,000 and 40% of its preferred stock for $180,000.On January 1, 2013, the date of
acquisition, the companies reported the following account balances:
Polish CompanySandwich Company
Preferred stock, $100 par value$ 500,000$ 360,000
Common stock, $10 par value1,200,000600,000
Other contributed capital190,000140,000
Retained earnings 210,000 110,000
Total stockholders’ equity$2,100,000$1,200,000
The preferred stock is 10%, cumulative, nonparticipating, and has a liquidation value
equal to 104% of par value.Dividends were not paid during 2012.During 2013,
Sandwich Company reported net income of $120,000 and declared and paid cash
dividends in the amount of $70,000.
Noncontrolling interest in the 2013 reported net income of Sandwich Company is
a.$29,500
b.$12,000
c.$34,000
d.$21,000
e.$30,000
12) An investor adjusts the investment account for the amortization of any difference
between cost and book value under the
a.cost method
b.complete equity method
c.partial equity method
d.complete and partial equity methods
13) Eden Company is trying to decide whether to acquire Bloomington Inc. The
following balance sheet for Bloomington Inc. provides information about book values.
Estimated market values are also listed, based upon Eden Company’s appraisals.
Bloomington Inc.Bloomington Inc.
Book ValuesMarket Values
Current Assets$ 450,000$ 450,000
Property, Plant & Equipment (net) 1,140,000 1,300,000
Total Assets$1,590,000$1,750,000
Total Liabilities$700,000$700,000
Common Stock, $10 par value280,000
Retained Earnings 610,000
Total Liabilities and Equities$1,590,000
Eden Company expects that Bloomington will earn approximately $290,000 per year in
net income over the next five years. This income is higher than the 14% annual return
on tangible assets considered to be the industry “norm.”
Required:
A.Compute an estimation of goodwill based on the information above that Eden might
be willing to pay (include in its purchase price), under each of the following additional
assumptions:
(1)Eden is willing to pay for excess earnings for an expected life of 4 years
(undiscounted).
(2)Eden is willing to pay for excess earnings for an expected life of 4 years, which
should be capitalized at the industry normal rate of return.
(3)Excess earnings are expected to last indefinitely, but Eden demands a higher rate of
return of 20% because of the risk involved.
B.Determine the amount of goodwill to be recorded on the books if Eden pays
$1,300,000 cash and assumes Bloomington’s liabilities.
14) In accounting for liabilities, IFRS interprets probable as
a.likely
b.more likely than not
c.somewhat possible
d.possible and not remote
15) Donkey desires to purchase a one-fourth capital and profit and loss interest in the
partnership of Shrek, Fiona, and Muffin. The three partners agree to sell Donkey
one-fourth of their respective capital and profit and loss interests in exchange for a total
payment of $125,000. The payment is made directly to the individual partners. The
capital accounts and the respective percentage interests in profits and losses
immediately before the sale to Donkey follow
Percentage
CapitalInterests in
AccountsProfits and Losses
Shrek$210,00060%
Fiona130,00025
Muffin 60,00015
Total$400,000
All other assets and liabilities are fairly valued by Donkey. Immediately after Donkeys
acquisition, what should be the capital balances of Shrek, Fiona, and Muffin,
respectively?
a.$157,500; $97,500; $45,000
b.$195,000; $123,750; $56,250
c.$222,500; $138,750; $63,750
d.$260,000; $165,000; $75,000
16) On January 1, 2009, Pharma Company purchased 16,000 of the 20,000 outstanding
common shares of Sludge Company for $760,000. On January 1, 2013, Pharma
Company sold 2,000 of its shares of Sludge Company on the open market for $90 per
share. Sludge Company’s stockholders’ equity on January 1, 2009, and January 1, 2013,
was as follows: 1/1/09 1/1/13 Common stock, $10 par value $ 200,000 $ 200,000 Other
contributed capital 200,000 200,000 Retained earnings 400,000 700,000 $800,000
$1,100,000 The difference between implied and book value is assigned to Sludge
Company’s land.
As a result of the sale, Pharma Companys Investment in Sludge account should be
credited for
a.$110,000
b.$137,500
c.$80,000
d.$95,000
e.None of these
17) Splat Company filed a voluntary bankruptcy petition, and the statement of affairs
reflected the following amounts:
Estimated
AssetsBook ValueCurrent Value
Assets pledged with fully secured creditors$ 900,000$ 1,110,000
Assets pledged partially secured creditors540,000360,000
Free assets 1,260,000 960,000
$2,700,000 $2,430,000
Liabilities
Liabilities with priority$ 210,000
Fully secured creditors780,000
Partially secured creditors600,000
Unsecured creditors 1,620,000
$3,210,000
Assume the assets are converted to cash at their estimated current values. What amount
of cash will be available to pay unsecured nonpriority claims?
a.$720,000
b.$840,000
c.$960,000
d.$1,080,000
18) The following schedule of capital assets was prepared for Johnson County.
Government ActivitiesBeg. BalanceAdditionsRetirementsEnding Balance
Total Capital Assets$850,000 250,000(185,000) $915,000
Less: Accumulated( 500,000) ( 50,000)150,000( 400,000)
Depreciation
Net Capital Assets$350,000 $200,000( 35,000) $515,000
All capital asset acquisitions were made in the capital projects fund and paid in cash.
An asset was sold by the general fund for $40,000 cash.
Required:
Determine how the above information will be reflected on each of the following
statements for the year 2014.
A.The governmental funds statement of revenues, expenditures, and changes in fund
balances. List the governmental fund and then list the dollar amount within the
appropriate heading on the statement (such as Revenues, Expenditures, or Other
Financing Sources (Uses)).
B.The government-wide statement of net assets.
C.The government-wide statement of activities.
19) When a secured claim is not fully settled by the selling of the underlying collateral,
the remaining portion:
a.of the claim cannot be collected by the creditor
b.remains as a secured claim
c.is classified as an unsecured priority claim
d.is classified as an unsecured nonpriority claim
20) When the goodwill method is used and the book value acquired is less than the
value of the assets invested, total implied capital is computed by
a.multiplying the new partners capital interest by the capital balances of existing
partners
b.dividing the total capital balances of existing partners by their collective capital
interest
c.dividing the new partners investment by his (her) capital interest
d.dividing the new partners investment by the existing partners collective capital
interest
21) The material sale of inventory items by a parent company to an affiliated company:
a.enters the consolidated revenue computation only if the transfer was the result of arms
length bargaining
b.affects consolidated net income under a periodic inventory system but not under a
perpetual inventory system
c.does not result in consolidated income until the merchandise is sold to outside parties
d.does not require a working paper adjustment if the merchandise was transferred at
cost
22) 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. Assume that Mary Ann
became a partner by investing $150,000 in the Gilligan, Skipper, and Ginger partnership
for a 25 percent interest in capital and profits and that partnership net assets are not
revalued. Mary Anns capital credit using the bonus method should be
a.$180,000
b.$142,500
c.$150,000
d.$190,000
23) In determining controlling interest in consolidated income in the consolidated
financial statements, unrealized intercompany profit on inventory acquired by a parent
from its subsidiary should:
a.not be eliminated
b.be eliminated in full
c.be eliminated to the extent of the parent companys controlling interest in the
subsidiary
d.be eliminated to the extent of the noncontrolling interest in the subsidiary
24) The following balance sheets were reported on January 1, 2013, for Wood Company
and Rose Company:
WoodRose
Cash$ 150,000$ 30,000
Inventory 450,000 150,000
Equipment (net) 1,320,000 570,000
Total$1,920,000$750,000
Total liabilities$ 450,000$150,000
Common stock, $20 par value600,000300,000
Other contributed capital375,000105,000
Retained earnings 495,000 195,000
Total$1,920,000$750,000
Required:
Appraisals reveal that the inventory has a fair value $180,000, and the equipment has a
current value of $615,000. The book value and fair value of liabilities are the same.
Assuming that Wood Company wishes to acquire Rose for cash in an asset acquisition,
determine the following cutoff amounts:
A.The purchase price above which Wood would record goodwill.
B.The purchase price at which Wood would record a $50,000 gain.
C.The purchase price below which Wood would obtain a bargain.
D.The purchase price at which Wood would record $75,000 of goodwill.
25) Pina Corp. owns 60% of Simon Corp.’s outstanding common stock. On May 1,
2013, Pina advanced Simon $90,000 in cash, which was still outstanding at December
31, 2013. What portion of this advance should be eliminated in the preparation of the
December 31, 2013 consolidated balance sheet?
a.$90,000
b.$54,000
c.$36,000
d.$-0-
26) For external reporting purposes, it is appropriate to use estimated gross profit rates
to determine the ending inventory value for
InterimAnnual
ReportingReporting
a.NoNo
b.NoYes
c.YesNo
d.YesYes
27) Garlic, Pepper, and Salt are partners in a plumbing service. The business reported
net income of $108,000 for 2014. The partnership agreement provides that profits and
losses are to be divided equally after Pepper receives a $60,000 salary, Salt receives a
$24,000 salary, and each partner receives 10% interest on his beginning capital balance.
Beginning capital balances were $40,000 for Garlic, $48,000 for Pepper, and $32,000
for Salt. Peppers share of partnership income for 2014 is:
a.$68,800
b.$36,000
c.$31,200
d.$27,200
28) The objectives of FASB 141R (Business Combinations) and FASB 160
(Noncontrolling Interests in Consolidated Financial Statements) are as follows:
a.to improve the relevance, comparability, and transparency of financial information
related to business combinations
b.to eliminate the amortization of Goodwill
c.to facilitate the convergence project of the FASB and the International Accounting
Standards Board
d.a and b only
29) If a parent company acquires additional shares of its subsidiarys stock directly from
the subsidiary for a price less than their book value:
1>total noncontrolling book value interest increases.
2>the controlling book value interest increases.
3>the controlling book value interest decreases.
a.1
b.2
c.3
d.1 and 3
30) The impairment standard as it relates to goodwill is an example of a
a.consumption of benefit approach
b.loss or lack of benefit approach
c.component of other comprehensive income
d.direct matching of expenses to revenues
31) The constructive gain or loss to the purchasing company is the difference between
the
a.book value of the bonds and their par value
b.book value of the bonds and their purchase price
c.cost of the bonds and their par value
d.cost of the bonds and their purchase price
32) On January 2, 2013, Porous, Inc. acquired an 80% interest in Simtex Corporation
for $2,250,000. Simtex reported total stockholders equity of $2,500,000 on this date. An
examination of Simtexs books revealed that book value was equal to fair value for all
assets and liabilities except for inventory, which was undervalued by $150,000. All of
the undervalued inventory was sold during 2013.
Porous also purchased 30% of the $1,250,000 par value outstanding bonds of Simtex
Corporation for $350,000 on January 2, 2013. The bonds mature in 10 years, carry an
11% annual interest rate payable on June 30 and December 31, and had a carrying value
of $1,270,000 on the date of purchase. Both companies use the straight-line method to
amortize bond discounts and premiums.
Porous reported net income of $750,000 for 2013 and paid dividends of $325,000
during 2013. Simtex Corporation reported net income of $800,000 for 2013 and paid
dividends of $225,000 during the year.
Required:
Compute the following items at December 31, 2013.
1>Carrying value of the debt.
2>Interest revenue reported by Porous, Inc.
3>Interest expense reported by Simtex Corporation.
4>Balance in the Investment in Simtex Bonds account.
5>Controlling interest in consolidated net income for 2013 using the t-account
approach.
6>Noncontrolling interest in consolidated income for 2013.
33) What exception to the normal expenditure recognition criteria is associated with
debt ser-vice service funds and what is the justification for this exception?
34) Identify two types of temporary differences that may arise in the consolidated
financial statements when the affiliates file separate income tax returns.
35) Past and proposed GAAP agree that unrealized intercompany profit should not be
included in consolidated net income or assets. Briefly explain the preferred approach of
eliminating intercompany profit.
36) The Bankruptcy Reform Act assigns priorities to certain unsecured claims, and each
rank must be satisfied in full before the nextlower rank is paid. Identify the five
categories of unsecured creditor claims.
37) What criteria must be satisfied for a foreign currency transaction to be considered a
hedge of an identifiable foreign currency commitment?
38) What is the difference between a governmental fund and a proprietary fund?