1) Note: This is a Kaplan CPA Review Question
On January 2, 20X5, Well Co. purchased 10 percent of Rea, Inc.’s outstanding common
shares for $400,000. Well is the largest single shareholder in Rea, and Well’s officers are
a majority on Rea’s board of directors. As a result, Well is able to exercise significant
influence over Rea. Rea reported net income of $500,000 for 20X5, and paid dividends
of $150,000. In its December 31, 20X5, balance sheet, what amount should Well report
as investment in Rea?
A.$385,000
B.$450,000
C.$400,000
D.$435,000
2) Which combination of accounts and exchange rates is correct for the remeasurement
of a foreign entity’s financial statements from its local currency to U.S. dollars?
A.Option A
B.Option B
C.Option C
D.Option D
3) New Life Corporation has just finished preparing a consolidated balance sheet,
income statement, and statement of changes in retained earnings for 20X9. The
following items are proposed for inclusion in the consolidated cash flow statement:
New Life holds 75 percent of the voting stock of Shane Pharmaceuticals, acquired at
book value on June 21, 20X6. On the date of the acquisition, the fair value of the
noncontrolling interest was equal to 25 percent of the book value of Shane.
Based on the preceding information, assuming that New Life uses the direct method of
computing cash flows from operating activities, what amount will be reported by the
company as cash received from customers during the year?
A.$815,000
B.$785,000
C.$800,000
D.$835,000
4) A private, not-for-profit hospital uses a fund structure which includes a general fund
and donor restricted funds. Contributions received from donors for research to be
conducted by the hospital should be accounted for in the:
A.specific purpose fund
B.time-restricted fund
C.general fund
D.restricted current fund
5) In which of the following ways can debt be restructured?
I. Assets can be transferred to the creditor.
II. An equity interest can be granted to the creditor.
III. The terms of the debt can be modified.
A.I and II only
B.I and III only
C.II and III only
D.I, II, and III
6) Forge Company, a calendar-year entity, had 6,000 units in its beginning inventory for
20X8. On December 31, 20X7, the units had been adjusted down to $470 per unit from
an actual cost of $510 per unit. It was the lower of cost or market. No additional units
were purchased during 20X8. The following additional information is provided for
20X8:
Forge does not have sufficient experience with the seasonal market for its inventory
units and assumes that any reductions in market value during the year will be
permanent.
Based on the preceding information, the cost of goods sold for the first quarter is:
A.$636,000
B.$564,000
C.$546,000
D.$624,000
7) Pilfer Company acquired 90 percent ownership of Scrooge Corporation in 20X7, at
underlying book value. On that date, the fair value of noncontrolling interest was equal
to 10 percent of the book value of Scrooge Corporation. Pilfer purchased inventory
from Scrooge for $90,000 on August 20, 20X8, and resold 70 percent of the inventory
to unaffiliated companies on December 1, 20X8, for $100,000. Scrooge produced the
inventory sold to Pilfer for $67,000. The companies had no other transactions during
20X8.
Based on the information given above, what amount of sales will be reported in the
20X8 consolidated income statement?
A.$90,000
B.$120,000
C.$100,000
D.$67,000
8) Note: This is a Kaplan CPA Review Question
James Dixon, a partner in an accounting firm, decided to withdraw from the
partnership. Dixon’s share of the partnership profits and losses was 20%. Upon
withdrawing from the partnership he was paid $74,000 in final settlement for his
interest. The total of the partners’ capital accounts before recognition of partnership
goodwill prior to Dixon’s withdrawal was $210,000. After his withdrawal the remaining
partners’ capital accounts, excluding their share of goodwill, totaled $160,000. The total
agreed upon goodwill of the firm was
A.$250,000
B.$140,000
C.$160,000
D.$120,000
9) A budgetary comparison schedule presented as required supplementary information
for the general fund should report variances for the difference between:
I. Original budget amounts and final budget amounts
II. Final budget amounts and actual amounts.
A.I only
B.II only
C.Both I and II
D.Neither I nor II
10) Note: This is a Kaplan CPA Review Question
Correy Corp. and its divisions are engaged solely in manufacturing operations. The
following data (consistent with prior years’ data) pertain to the industries in which
operations were conducted for the year ended December 31st:
In its segment information for the year, how many reportable segments does Correy
have?
A.Five
B.Three
C.Four
D.Six
11) Senior Corporation acquired 80 percent of Junior Company’s voting shares on
January 1, 20X8, at underlying book value. On Dec. 31, 20X8, it also purchased
$500,000 par value 8 percent Junior bonds, which had been issued on January 1, 20X5
to Partner Corporation (unaffiliated with either Senior or Junior) at a $45,000 premium.
The bonds were originally issued with a 12-year maturity and pay interest annually on
December 31. During preparation of the consolidated financial statements for
December 31, 20X8, the following eliminating entry was included in the consolidation
worksheet:
Based on the information given above, what was the carrying amount of the bonds on
Junior’s books on the date of purchase?
A.$533,769
B.$516,875
C.$500,000
D.$550,644
12) A city’s museum is supported by a special tax levy and by user charges. The user
charges constitute only 10 percent of the resources needed to support the operations of
the museum. In which fund should the city account for its museum?
A.An enterprise fund
B.An agency fund
C.An expendable trust fund
D.A special revenue fund
13) Local Services, a voluntary health and welfare organization had the following
classes of net assets on July 1, 20X8, the beginning of its fiscal year:
During the year ended June 30, 20X9, the following events occurred:
(1) It purchased equipment, costing $100,000, with contributions restricted for this
purpose. The contributions had been received from donors during June of 20X8.
(2) It received $130,000 of cash donations which were restricted for research activities.
During the year ended June 30, 20X9, $90,000 of the contributions were expended on
research.
(3) It sold investments classified in the permanently restricted class for a loss of
$40,000. Dividends and interest income earned on the investments amounted to
$70,000. There were no restrictions on how investment income was to be used.
(4) It received cash contributions of $200,000 from donors who did not place either
time or use restrictions upon their donations.
(5) Expenses, excluding depreciation expense, for program services and supporting
services incurred during the year ended June 30, 20X9, amounted to $260,000.
(6) Depreciation expense for the year ended June 30, 20X9, was $80,000.
Refer to the above information. At June 30, 20X9, the amount of permanently restricted
net assets reported on the statement of financial position would be:
A.$1,070,000
B.$1,030,000
C.$1,000,000
D.$960,000
14) Pursuing an inorganic growth strategy, Wilson Company acquired Venus
Company’s net assets and assigned them to four separate reporting divisions. Wilson
assigned total goodwill of $134,000 to the four reporting divisions as given below:
Based on the preceding information, what amount of goodwill will be reported for Beta
at year-end?
A.$0
B.$14,000
C.$34,000
D.$50,000
15) Elvis Company purchases inventory for $70,000 on Mar 19, 20X8 and sells it to
Graceland Corporation for $95,000 on May 14, 20X8. Graceland still holds the
inventory on December 31, 20X8, and determines that its market value (replacement
cost) is $82,000 at that time. Graceland writes the inventory down from $95,000 to its
lower market value of $82,000 at the end of the year. Elvis owns 75 percent of
Graceland.
Based on the information given above, what amount of cost of goods sold should be
eliminated in the consolidation worksheet for 20X8?
A.$82,000
B.$70,000
C.$95,000
D.$60,000
16) Mortar Corporation acquired 80 percent of Granite Corporation’s voting common
stock on January 1, 20X7. On January 1, 20X8, Mortar received $350,000 from Granite
for equipment Mortar had purchased on January 1, 20X5, for $400,000. The equipment
is expected to have a 10-year useful life and no salvage value. Both companies
depreciate equipment on a straight-line basis.
Based on the preceding information, the gain on sale of equipment recorded by Mortar
for 20X8 is:
A.$70,000
B.$65,000
C.$50,000
D.$40,000
17) Which of the following observations is (are) consistent with the acquisition method
of accounting for business combinations?
I. Expenses related to the business combination are expensed.
II. Stock issue costs are treated as a reduction in the issue price.
III. All merger and stock issue costs are expensed.
IV. No goodwill is ever recorded.
A.III
B.IV
C.I and II
D.I, II, and IV
18) Sky Corporation owns 75 percent of Earth Company’s stock. On July 1, 20X8, Sky
sold a building to Earth for $33,000. Sky had purchased this building on January 1,
20X6, for $36,000. The building’s original eight-year estimated total economic life
remains unchanged. Both companies use straight-line depreciation. The equipment’s
residual value is considered negligible.
Based on the information provided, while preparing the 20X8 consolidated income
statement, depreciation expense will be:
A.debited for $750 in the eliminating entries
B.credited for $750 in the eliminating entries
C.credited for $1,500 in the eliminating entries
D.debited for $1,500 in the eliminating entries
19) Unrestricted current funds of a private university designated by the governing board
for a specific future purpose should be reported as part of:
A.unrestricted net assets
B.temporarily restricted net assets
C.board-restricted net assets
D.term endowments
20) On January 1, 20X8, Colorado Corporation acquired 75 percent of Denver
Company’s voting common stock for $90,000 cash. At that date, the fair value of the
noncontrolling interest was $30,000. Denvers’s balance sheet at the date of acquisition
contained the following balances:
At the date of acquisition, the reported book values of Denver’s assets and liabilities
approximated fair value. Eliminating entries are being made to prepare a consolidated
balance sheet immediately following the business combination.
Based on the preceding information, the amount of goodwill reported is:
A.$0
B.$10,000
C.$15,000
D.$20,000
21) The income tax expense applicable to the second quarter’s income statement is
determined by:
A.dividing the estimated annual income tax expense by four and allocating the amount
to the second quarter
B.multiplying the effective income tax rate times the income before tax for the second
quarter
C.subtracting the income tax expense applicable to the first quarter from the income tax
expense applicable to the first two quarters
D.subtracting the income tax liability applicable to the first quarter from the income tax
liability applicable to the first two quarters
22) Note: This is a Kaplan CPA Review Question
On September 22, 20X1,Yumi Corp. purchased merchandise from an unaffiliated
foreign company for 10,000 units of the foreign company’s local currency. On that date,
the spot rate was $.55. Yumi paid the bill in full, six months later, on March 20, 20X2,
when the spot rate was $.65. The spot rate was $.70 on December 31, 20X1. What
amount should Yumi report as a foreign currency transaction loss in its income
statement for the year ended December 31, 20X1?
A.$500
B.$0
C.$1,500
D.$1,000
23) A debt service fund for the City of Madison received $50,000 from a capital
projects fund. The amount received represented the premium received from the issuance
of general obligation bonds. What account should the debt service fund credit to record
this receipt?
A.Revenue-General Obligation Bond Premium
B.Matured Bonds Payable
C.Other Financing SourcesTransfer In from Capital Projects Fund
D.Due to Capital Projects Fund
24) The governing board of a hospital operated by a religious organization designated
$3,000,000 of cash to be used for plant expansion. The cash was invested in stocks and
bonds which earned $250,000 of dividend and interest income. The income from
investments should be reported on the hospital’s statement of operations as an increase
in:
A.temporarily restricted net assets
B.operating income
C.either temporarily restricted net assets or unrestricted net assets, depending upon the
nature of the governing board’s restrictions
D.fund balance in the general fund
25) Culver owns 80 percent of the common stock of Fowler Company. Culver also
purchases some of Fowler’s bonds directly from Fowler and holds the bonds as a
long-term investment. How is the acquisition of the bonds treated for consolidated
reporting purposes?
A.As a retirement of bonds
B.As an increase in the Bonds Payable account on Fowler’s books
C.Everything related to the intercompany bonds is eliminated in the consolidation
worksheet, and nothing related to the bonds appears in the consolidated financial
statements
D.As an increase in noncurrent assets
26) For a subsidiary to be eligible to be included in a consolidated tax return, at least
_____ of its stock must be held by the parent company or another company included in
the consolidated return.
A.50 percent
B.40 percent
C.75 percent
D.80 percent
27) Note: This is a Kaplan CPA Review Question
Which of the following transactions of a private voluntary health and welfare
organization would increase temporarily restricted net assets in the statement of
activities for the current year?
I. Received a contribution of $20,000 from a donor in the current year who stipulated
that the money not be spent until the following year.
II. Spent $25,000 for fund raising during the current year from a donation from the
previous year.
A.I only
B.Both I and II
C.II only
D.Neither I nor II
28) SeaLine Corporation is involved in the distribution of processed marine products.
The fair values of assets and liabilities held by three reporting units and other
information related to the reporting units owned by SeaLine are as follows:
Required: Determine the amount of goodwill that SeaLine should report in its current
financial statements.
29) Quantum Company imports goods from different countries. Some transactions are
denominated in U.S. dollars and others in foreign currencies. A summary of accounts
receivable and accounts payable on December 31, 20X8, before adjustments for the
effects of changes in exchange rates during 20X8, follows:
The spot rates on December 31, 20X8, were:
The average exchange rates during the collection and payment period in 20X9 are:
Required:
1> Prepare the adjusting entries on December 31, 20X8.
2> Record the collection of the accounts receivable and the payment of the accounts
payable in 20X9.
3> What was the foreign currency gain or loss on the accounts receivable transaction
denominated in SFr for the year ended December 31, 20X8? For the year ended
December 31, 20X9? Overall for this transaction?
4> What was the foreign currency gain or loss on the accounts receivable transaction
denominated in ? For the year ended December 31, 20X8? For the year ended
December 31, 20X9? Overall for this transaction?
30) The partnership of Rachel, Adams, and Nixon has the following trial balance on
September 30, 2009:
The partners share profits and losses as follows: Rachel, 50 percent; Adams, 30 percent;
and Nixon, 20 percent. The partners are considering an offer of $180,000 for the
accounts receivable, inventory, and plant and equipment as of September 30. The
$180,000 will be paid to creditors and the partners in installments, the number and
amounts of which are to be negotiated.
Required:
Prepare a cash distribution plan as of September 30, 2009, showing how much cash
each partner will receive if the offer to sell the assets is accepted.
31) On January 1, 20X7, Plimsol Company acquired 100 percent of Shipping
Corporation’s voting shares, at underlying book value. Plimsol uses the cost method in
accounting for its investment in Shipping. Shipping’s reported retained earnings of
$75,000 on the date of acquisition. The trial balances for Plimsol Company and
Shipping Corporation as of December 31, 20X8, follow:
Required:
1> Provide all eliminating entries required to prepare a full set of consolidated
statements for 20X8.
2> Prepare a three-part consolidation worksheet in good form as of December 31,
20X8.
32) Newport Village was recently incorporated and began financial operations on
January 1, 20X8, the beginning of its fiscal year. The following transactions occurred
during this first fiscal year, January 1, 20X8, to December 31, 20X8:
1> The village council adopted a budget for general operations for the fiscal year
ending December 31, 20X8. Revenue was estimated at $650,000. Legal authorizations
for budgeted expenditures totaled $620,000.
2> Property taxes were levied in the amount of $630,000; 3 percent of this amount was
estimated to prove uncollectible. These taxes are available as of the date of levy to
finance current expenditures.
3> During the year, a village resident donated marketable securities valued at $75,000
to the village under the terms of a trust agreement which stipulates that the principal
amount be kept intact. The revenue generated by the securities is restricted to providing
support to the village library. Revenue earned and received on these amounted to
$3,000 through December 31, 20X8.
4> A general fund transfer of $8,000 was made to establish an internal service fund to
provide for a permanent investment in inventory.
5> The village decided to construct a small recreation facility through a special
assessment project authorized to do so at a cost of $100,000. The city is obligated if the
property owners default on their special assessments. Special assessment bonds were
issued in the amount of $90,000, and the first year’s special assessment of $22,500 was
levied against the village’s property owners. The remaining $10,000 for the project will
be contributed from the village’s general fund.
6> The special assessments for the lighting project are due over a four-year period, and
the first year’s assessments of $22,500 were collected. The $10,000 transfer from the
village’s general fund was received by the lighting capital projects fund.
7> A contract for $100,000 was let for the installation of the lighting. The capital
projects fund was encumbered for the contract. On December, 20X8, the contract was
completed and the contractor was paid.
8> During the year, the internal service fund purchased various supplies at a cost of
$3,000.
9> Current property taxes collected during the year was $615,000. Licenses and permit
fees collected amounted to $15,000. The allowance for estimated uncollectible taxes is
adjusted to $15,000.
Required:
Prepare journal entries to record each of these transactions in the appropriate fund or
funds of Newport Village for the fiscal year ended December 31, 20X8. Use the
following funds: general fund, capital projects fund, internal service fund, and
private-purpose trust fund. Closing entries are not required. Organize your answer using
the following format:
33) On January 1, 20X8, Vector Company acquired 80 percent of Scalar Company’s
ownership on for $120,000 cash. At that date, the fair value of the noncontrolling
interest was $30,000. The book value of Scalar’s net assets at acquisition was $125,000.
The book values and fair values of Scalar’s assets and liabilities were equal, except for
buildings and equipment, which were worth $15,000 more than book value. Buildings
and equipment are depreciated on a 10-year basis. Although goodwill is not amortized,
the management of Vector concluded at December 31, 20X8, that goodwill from its
acquisition of Scalar shares had been impaired and the correct carrying amount was
$5,000. Goodwill and goodwill impairment were assigned proportionately to the
controlling and noncontrolling shareholders. No additional impairment occurred in
20X9.
Trial balance data for Vector and Scalar on December 31, 20X9, are as follows:
Required:
1> Provide all eliminating entries needed to prepare a three-part consolidation
worksheet as of December 31, 20X9.
2> Prepare a three-part consolidation worksheet for 20X9 in good form.
34) Portfolio Corporation acquired 70 percent ownership of Index Company on January
1, 20X6, at underlying book value. At that date, the fair value of the noncontrolling
interest was equal to 30 percent of the book value of Index. On January 1, 20X8,
Portfolio sold 1,000 shares of Index Company for $20,000 to Adventure Corporation
and recorded a $5,000 gain. Trial balances for the companies on December 31, 20X8,
contain the following data:
Index Company’s net income was earned evenly throughout the year. Both companies
declared and paid their dividends on December 31, 20X8. Portfolio uses the fully
adjusted equity method in accounting for its investment in Index.
Required:
1>Prepare the elimination entries needed to complete a full consolidation worksheet for
20X8.
2>Prepare a consolidation worksheet for 20X8.
35) ASC 805 is related to the Consolidation of Variable Interest Entities. Describe what
a Variable Interest Entity is and discuss why the FASB has difficulty in prescribing
when these entities are consolidated?
36) In reading a set of consolidated financial statements you are surprised to see the
term noncontrolling interest not reported under the Liability section of the Balance
Sheet.
Required:
What is a non-controlling interest?
Why must it be reported in the financial statements as an element of equity rather than a
liability?
37) Interim income statements are required for Smith Orchards. Smith does most of its
sales in the fall quarter of the year. These sales are both to individual and commercial
customers. How do you recommend Smith report sales during the spring quarter of the
year?