1) A composition agreement is an agreement between the debtor and its creditors
whereby the creditors agree to:
a.accept less than the full amount of their claims
b.delay settlement of the claim until a later date
c.force the debtor into a liquidation
d.accrue interest at a higher rate
2) From 1999 to 2001, Tycos revenue grew approximately24% and it acquired over 700
companies. It was widely rumored that Tyco executives aggressively managed the
performance of the companies that they acquired by suggesting that before the
acquisition, they should accelerate the payment of liabilities, delay recording the
collections of revenue, and increase the estimated amounts in reserve accounts.
1>What effect does each of the three items might list the 3 items as A-B-Chave on the
reported net income of the acquired company before the acquisition and on the reported
net income of the combined company in the first year of the acquisition and future
years?
2>What effect does each of the three items have on the cash from operations of the
acquired company before the acquisition and on the cash from operations of the
combined company in the first year of the acquisition and future years?
3>If you are the manager of the acquired company, how do you respond to these
suggestions?
4>Assume that all three items can be managed within the rules provided by GAAP but
would be regarded by many as pushing the limits of GAAP.Is there an ethical issue?
Describe your position as: (A) an accountant for the target company and (B) as an
accountant for Tyco.
3) When the donor has specified a particular date or event after which the principal of
the Endowment Fund may be expended, the Endowment Fund is referred to as a(n)
a.pure endowment fund
b.term endowment fund
c.quasi endowment fund
d.expendable endowment fund
4) On January 1, 2008, Perry Company purchased a 90% interest in Sludge Company
for $800,000, the same as the book value on that date. On January 1, 2014, Sludge sold
new equipment to Perry for $16,000. The equipment cost $11,000 and had a five year
estimated life as of January 1, 2014.
During 2015, Perry sold merchandise to Sludge at 20% above cost in the amount
(selling price) of $126,000. At the end of the year, Sludge had $42,000 of this
merchandise in its ending inventory. At the beginning of 2015, Sludge had $48,000 of
inventory purchased in 2014 from Perry.
Required:
A.Prepare all workpaper entries necessary to eliminate the effects of the intercompany
sales on the consolidated financial statements for 2015.
B.Calculate the amount of noncontrolling interest to be deducted from consolidated net
income in the consolidated income statement for 2015. Sludge Company reported
$40,000 of net income in 2015.
5) Pine, Inc. owns 40% of Supra Corporation. During the year, Supra had net earnings
of $200,000 and paid dividends of $50,000. Masters used the cost method of
accounting. What effect would this have on the investment account, net earnings, and
retained earnings, respectively?
a.understate, overstate, overstate
b.overstate, understate, understate
c.overstate, overstate, overstate
d.understate, understate, understate
6) Parr Company owned 24,000 of the 30,000 outstanding common shares of Solomon
Company on January 1, 2013. Parrs shares were purchased at book value when the fair
values of Solomons assets and liabilities were equal to their book values. The
stockholders equity of Solomon Company on January 1, 2013, consisted of the
following:
Common stock, $15 par value$ 450,000
Other contributed capital337,500
Retained earnings 712,500
Total$1,500,000
Solomon Company sold 7,500 additional shares of common stock for $90 per share on
January 2, 2013. If Parr Company purchased all 7,500 shares, the book entry to record
the purchase should increase the Investment in Solomon Company account by
a.$562,500
b.$590,625
c.$675,000
d.$150,000
e. Some other account.why now have 5 choices? most professors would prefer the
consistency of 4 only – be consistent
7) On January 1, 2013, Pippert Company acquired 80% of Skyler Company’s common
stock for $210,000 and 70% of Skyler’s preferred stock for $80,000.Skyler Company
reported the following stockholders’ equity on this date:
Preferred stock, 8%, Par value $20$ 100,000
Common stock, Par value $50200,000
Premium on common stock30,000
Retained earnings 80,000
Total$410,000
The preferred stock is cumulative, nonparticipating, and callable at 104% of par value
plus dividends in arrears.On January 1, 2013, dividends were in arrears for one
year.Any difference between the implied value of the preferred stock and its book value
interest is to be allocated to other contributed capital.
Changes in Skyler Company’s retained earnings during 2013 and 2014 were as follows:
January 1, 2013 Balance$ 80,000
2013 net income20,000
2014 net income16,000
2014 cash dividends(30,000)
December 31, 2014 Balance$ 86,000
Required:
A.Compute the difference between the implied value and book value interest acquired
for the investment in preferred stock.
B.Compute the balance in the Investment in Preferred Stock account on December 31,
2014.
C.Compute the amount of Skyler Company’s net income that will be included in the
controlling interest in consolidated net income for 2014.
8) On December 31, 2013, Priestly Company purchased a controlling interest in Shelter
Company for $1,060,000. The consolidated balance sheet on December 31, 2013
reported noncontrolling interest in Shelter Company of $265,000.
On the date of acquisition, the stockholders’ equity section of Shelter Company’s
balance sheet was as follows:
Common stock$520,000
Other contributed capital380,000
Retained earnings280,000
Total1,180,000
Required:
A.Compute the noncontrolling interest percentage on December 31, 2013.
B.Prepare the investment elimination entry made to prepare a consolidated balance
sheet workpaper. Any difference between book value and the value implied by the
purchase price relates to subsidiary land.
9) Which of the following groups of not-for-profit entities must use fund accounting to
be in conformity with GAAP?
GovernmentalNongovernmental
a.YesYes
b.YesNo
c.NoYes
d.NoNo
10) The entry to close appropriations, expenditures, and encumbrances accounts
includes a debit to
a.Appropriations
b.Expenditures
c.Encumbrances
d.both Appropriations and Encumbrances
11) Edina Company acquired the assets (except cash) and assumed the liabilities of
Burns Company on January 1, 2013, paying $2,600,000 cash. Immediately prior to the
acquisition, Burns Company’s balance sheet was as follows:
BOOK VALUEFAIR VALUE
Accounts receivable (net)$ 240,000$ 220,000
Inventory290,000320,000
Land960,0001,508,000
Buildings (net) 1,020,000 1,392,000
Total$2,510,000$3,440,000
Accounts payable$ 270,000$ 270,000
Note payable600,000600,000
Common stock, $5 par420,000
Other contributed capital640,000
Retained earnings 580,000
Total$2,510,000
Edina Company agreed to pay Burns Company’s former stockholders $200,000 cash in
2014 if post- combination earnings of the combined company reached $1,000,000
during 2013.
Required:
A.Prepare the journal entry necessary for Edina Company to record the acquisition on
January 1, 2013. It is expected that the earnings target is likely to be met.
B.Prepare the journal entry necessary for Edina Company in 2014 assuming the
earnings contingency was not met.
12) Cindy Duncan is a social worker on the staff of Military Family Center, a voluntary
welfare organization. She earns $42,000 annually for a normal workload of 2,000 hours.
During 2014 she contributed an additional 800 hours of her time to Military Family
Center at no extra charge. How much should Military Family Center record in 2014 as
contributed service expense?
a.$0
b.$1,680
c.$8,400
d.$16,800
Gains and losses that arise in an interim period should be13) a.recognized in the interim
period in which they arise
b.recognized in the last quarter of the year in which they arise
c.allocated equally among the remaining interim periods
d.deferred and included only in the annual income statement
14) Which of the following is an advantage of a partnership?
a.mutual agency
b.limited life
c.unlimited liability
d.none of these
15) The final settlement with unsecured creditors is computed by dividing:
a.total net realizable value by total unsecured creditor claims
b.net free assets by total secured creditor claims
c.total net realizable value by total secured creditor claims
d.net free assets by total unsecured creditor claims
Gilligan, Skipper, and Professor are partners with a profit and loss ratio of 4:3:3. The
partnership was liquidated and, prior to the liquidation process, the partnership balance
sheet was as follows:16) GILLIGAN, SKIPPER, AND PROFESSOR
Balance Sheet
January 1, 2014
AssetsLiabilities and Equity
Cash$ 60,000Gilligan, Capital $216,000
Other assets540,000Skipper, Capital240,000
Professor, Capital 144,000
Total Assets$600,000Total Liabilities & Equities $600,000
After the partnership was liquidated and the cash was distributed, Skipper received
$96,000 in cash in full settlement of his interest.
The liquidation loss must have been:
a.$360,000
b.$144,000
c.$504,000
d.$480,000
17) The discount or premium on a forward contract entered into as a hedge of an
exposed asset or liability position should be:
a.included as a separate component of stockholders equity
b.amortized over the life of the forward contract
c.deferred and included in the measurement of related foreign currency transaction
d.none of these
18) Parr Company owned 24,000 of the 30,000 outstanding common shares of Solomon
Company on January 1, 2013. Parrs shares were purchased at book value when the fair
values of Solomons assets and liabilities were equal to their book values. The
stockholders equity of Solomon Company on January 1, 2013, consisted of the
following:
Common stock, $15 par value$ 450,000
Other contributed capital337,500
Retained earnings 712,500
Total$1,500,000
Solomon Company sold 7,500 additional shares of common stock for $90 per share on
January 2, 2013. If all 7,500 shares were sold to noncontrolling stockholders, the
workpaper adjustment needed each time a workpaper is prepared should increase
(decrease) the Investment in Solomon Company by
a.($140,625)
b.$140,625
c.($112,500)
d.$192,000
e.None of these
19) Pruitt Company owns 80% of Stoney Companys common stock. During 2014,
Stoney sold $400,000 of merchandise to Pruitt. At December 31, 2014, one-fourth of
the merchandise remained in Pruitts inventory. In 2014, gross profit percentages were
25% for Pruitt and 30% for Stoney. The amount of unrealized intercompany profit that
should be eliminated in the consolidated statements is
a.$80,000
b.$24,000
c.$30,000
d.$25,000
20) Estimated goodwill is determined by computing the present value of the
a.average earnings
b.excess earnings
c.expected future earnings
d.normal earnings
21) A transaction gain or loss on a forward contract entered into as a hedge of an
identifiable foreign currency commitment may be:
a.included as a separate item in the stockholders equity section of the balance sheet
b.recognized currently in the determination of net income
c.deferred and included in the measurement of the related foreign currency transaction
d.none of these
22) Price Company acquired 75 percent of the common stock of Shandie Corporation
on December 31, 2013. On the date of acquisition, Price held land with a book value of
$150,000 and a fair value of $300,000; Shandie held land with a book value of
$100,000 and fair value of $500,000. What amount would land be reported in the
consolidated balance sheet prepared immediately after the combination?
a.$650,000
b.$500,000
c.$550,000
d.$375,000
23) The fair value of assets and liabilities of the acquired entity is to be reflected in the
financial statements of the combined entity. When the acquisition takes place over a
period of time rather than all at once, at what time is the fair value of the assets and
liabilities of the acquired entity determined under SFAS 141R?
a.the date the interest in the acquiree was acquired
b.the date the acquirer obtains control of the acquiree
c.the date of acquisition of the largest portion of the interest in the acquiree
d.the date of the financial statements
24) The following information pertains to the transfer of real estate in regards to a
troubled debt restructuring by MSG Co. to Beta Co. in full settlement of MSGs liability
to Beta:
Carrying amount of liability settled$375,000
Carrying amount of real estate transferred$250,000
Fair value of real estate transferred$275,000
What amount should MSG report as ordinary gain (loss) on transfer of real estate?
a.$(25,000)
b.$25,000
c.$100,000
d.$125,000
25) A merger between a supplier and a customer is a(n)
a.friendly combination
b.horizontal combination
c.unfriendly combination
d.vertical combination
26) The constructive gain or loss on an intercompany bond retirement is recognized in
the consolidated income statement _________ the recognition of the gain or loss on the
individual companies’ books.
a.after
b.before
c.at the same time as
d.before or after
27) Which of the following situations best describes a business combination to be
accounted for as a statutory merger?
a.Both companies in a combination continue to operate as separate, but related, legal
entities
b.Only one of the combining companies survives and the other loses its separate
identity
c.Two companies combine to form a new third company, and the original two
companies are dissolved
d.One company transfers assets to another company it has created
28) If the fair value of the subsidiary’s identifiable net assets exceeds both the book
value and the value implied by the purchase price, the workpaper entry to eliminate the
investment account
a.debits Excess of Fair Value over Implied Value
b.debits Difference Between Implied and Fair Value
c.debits Difference Between Implied and Book Value
d.credits Difference Between Implied and Book Value
29) P Company owns an 80% interest in S Company. During 2014, S sells merchandise
to P for $150,000 at a profit of $30,000. On December 31, 2014, 50% of this
merchandise is included in Ps inventory. Income statements for P and S are summarized
below:
P __ S__
Sales$900,000$450,000
Cost of Sales (450,000) (300,000)
Operating Expenses (225,000) ( 60,000)
Net Income (2014)$225,000$ 90,000
Noncontrolling interest in income for 2014 is:
a.$3,000
b.$14,400
c.$15,000
d.$18,000
30) The amount of intercompany profit eliminated is the same under total elimination
and partial elimination in the case of
1>upstream sales where the selling affiliate is a less than wholly owned subsidiary.
2>all downstream sales.
3>horizontal sales where the selling affiliate is a wholly owned subsidiary.
a.1
b.2
c.3
d.both 2 and 3
31) If a partner with a debit capital balance during liquidation is personally solvent, the
a.partner must invest additional assets in the partnership
b.partner’s debit balance will be allocated to the other partners
c.other partners will give the partner enough cash to absorb the debit balance
d.partnership will loan the partner enough cash to absorb the debit balance
32) If a credit was made to the fund balance in the process of recording a budget for a
governmental unit, it can be assumed that
a.estimated expenses exceed actual revenues
b.actual expenses exceed estimated expenses
c.estimated revenues exceed appropriations
d.appropriations exceed estimated revenues
33) During a recent review of the quarterly financial statements and supporting ledgers,
you noticed several un-usual journal entries. While the dollar amounts of the journal
entries were not large, there did not appear to be supporting documentation. You decide
to bring the matter to the attention of your immediate supervisor. After you mentioned
the issue, the supervisor calmly stated that the matter would be looked into and that you
should not worry about it.1>delete 1> or add a 2>You feel a bit uncomfortable about the
situation. What is your responsibility and what action, if any, should you take?
34) The following information was taken from the accounts and records of the ABC
Foundation, a private, not-for-profit organization. All balances are as of June 30, 2014,
unless otherwise noted.
Unrestricted Support Contributions$250,000
Unrestricted Revenues Investment Income28,000
Temporarily Restricted Gain on Sale of Investments13,000
Expenses Scholarships300,000
Expenses Fund Raising60,000
Expenses Management and General120,000
Restricted Support Contributions420,000
Restricted Revenues Investment Income30,000
Permanently Restricted Support Contributions50,000
Unrestricted Net Assets, July 1, 2013250,000
Temporarily Restricted Net Assets, July 1, 201340,000
Permanently Restricted Net Assets, July 1, 201310,000
The unrestricted support from contributions was received in cash during the year. The
expenses included $500,000 payable from donor-restricted resources.
Required:
Prepare ABCs statement of activities for the fiscal year ended June 30, 2014.
35) The Uniform Partnership Act specifies specific steps in distributing available
partnership assets in liquidation. Describe the steps used to distribute partnership assets
during the liquidation process.
36) Estimating the value of goodwill to be included in an offering price can be done
under several alternative methods. The excess earnings approach is frequently used.
Identify the steps used in this approach to estimate goodwill.
37) What is meant by an entitys functional currency and what are the economic
indicators identified by the FASB to provide guidance in selecting the functional
currency?
38) What is meant by dissolution and what are its causes?
39) Why are consolidated work papers used in pre-paring preparing consolidated
financial statements?
40) Pullman Corporation acquired a 90% interest in Sleeter Company for $6,500,000 on
January 1 2013. At that time Sleeter Company had common stock of $4,500,000 and
retained earnings of $1,800,000. The balance sheet information available for Sleeter
Company on January 1, 2013, showed the following:
Book ValueFair Value
Inventory (FIFO)$1,300,000$1,500,000
Equipment (net)1,500,0001,900,000
Land3,000,0003,000,000
The equipment had a remaining useful life of ten years. Sleeter Company reported
$240,000 of net income in 2013 and declared $60,000 of dividends during the year.
Required:
Prepare the workpaper entries assuming the cost method is used, to eliminate dividends,
eliminate the investment account, and to allocate and depreciate the difference between
implied and book value for 2013.
41) P Company acquired 54,000 shares of the common stock of S Company on January
1, 2013, for $950,000 cash. The stockholders’ equity section of S Company’s balance
sheet on that date was as follows:
Common stock, $10 par value$600,000
Other contributed capital80,000
Retained earnings 320,000
Total$1,000,000
On the date of acquisition, S Company owed P Company $10,000 on open account.
Required:
Present, in general journal form, the elimination entries for the preparation of a
consolidated balance sheet workpaper on January 1, 2013. The difference between the
value implied by the purchase price of the investment and the book value of the net
assets acquired relates to subsidiary land.
42) A trial balance for the DEF partnership just prior to liquidation is given below:
DebitCredit
Cash$ 75,000
Noncash Assets750,000
Nonpartner Liabilities$240,000
Dugan, Loan75,000
Dugan, Capital225,000
Elston, Capital153,000
Flynn, Capital 132,000
Totals$825,000$825,000
The partners share income and loss on the following basis:
Dugan50%
Elston30%
Flynn20%
Required:
Prepare an advance cash distribution plan for the partners.
