1) What method of accounting will generally be used when one company purchases less
than 20% of the outstanding stock of another company?
A) Only the fair value method may be used
B) Only the equity method may be used
C) Either the fair value method or the equity method may be used, depending upon the
relationship between the companies
D) Neither the fair value method nor the equity method may be used, regardless of the
level of ownership
2) An inverted yield curve
A) slopes up
B) is flat
C) slopes down
D) has a U shape
3) Passcode Incorporated acquired 90% of Safe Systems International for $540,000, the
market value at that time. On the date of acquisition, Safe Systems showed the
following balances on their ledger:
Book ValueFair Value
Current Assets$200,000$200,000
Buildings290,000320,000
Equipment410,000430,000
Liabilities(350,000)(360,000)
Safe Systems has determined that their buildings have a remaining life of 10 years, and
their equipment has a remaining useful life of 8 years.
Requirement 1: Calculate the amount of goodwill that will appear on the general ledger
of Passcode and Safe Systems, as well as the amount that will appear on the
consolidated financial statements.
Requirement 2: Calculate the amount of amortization that will appear on the
consolidated financial statements for buildings and equipment, and explain how this
amortization of excess fair value is shown on the separate general ledgers of Passcode
and Safe Systems.
4) Nettle Corporation is preparing its first quarterly interim report. It is subject to a
corporate income tax rate of 20% on the first $50,000 of taxable income and 35% on
taxable income above $50,000. Its estimated pretax accounting income for 2011, by
quarter, is:
1st2nd3rd4th2011
QuarterQuarterQuarterQuarterTotal
Est. Income$75,000$165,000$143,000$120,000$503,000
Nettle expects to earn and receive operating income for the year and does not
contemplate any changes in accounting procedures or principles that would affect its
pretax accounting income.
Required:
1> Determine Nettle’s estimated effective tax rate for 2011 .
2> Prepare a schedule to show Nettle’s estimated net income for each quarter of 2011 .
5) Tye, Ula, Val, and Watt are partners who share profits and losses 40%, 30%, 20%,
and 10%, respectively. The partnership will be liquidated gradually over several months
beginning January 1, 2011 . The partnership trial balance at December 31, 2010 is as
follows:
DebitsCredits
Cash$3,000
Accounts receivable19,000
Inventory25,000
Loan to Val5,000
Furniture15,000
Equipment10,000
Goodwill12,000
Accounts payable$13,600
Note payable30,000
Loan from Tye5,000
Tye, capital (40%)15,000
Ula, capital (30%)9,000
Val, capital (20%)12,400
Watt, capital (10%)4,000
Totals$89,000$89,000
Required:
Prepare a cash distribution plan for January 1, 2011, showing how cash installments
will be distributed among the partners as it becomes available. Prepare vulnerability
rankings for the partners and a schedule of assumed loss absorption.
6) Krull Corporation is preparing its interim financial statements for the third quarter of
calendar 2011 .
The following trial balance information is available for third quarter:
AccountDebitCredit
Cash$98,000
Accounts Receivable285,000
Inventory750,000
Fixed assets600,000
Accounts Payable$300,000
Common Stock50,000
Retained Earnings80,000
Sales4,400,000
Administrative expense312,000
Cost of goods sold2,650,000
Loss on sale of securities sold on July 3075,000
Annual equipment overhaul costs paid on August 160,000
Totals$4,830,000$4,830,000
Additional information:
At the end of the year, Krull distributes annual employee bonuses and charitable
donations that are estimated at $40,000, and $12,000, respectively. The cost of goods
sold includes the liquidation of a $45,000 base layer in inventory that Krull will restore
in the fourth quarter at a cost of $75,000. Effective corporate tax rate for 2011 is 32%.
Required:
Prepare Krull’s interim income statement for the third quarter of calendar 2011 .
7) Paice Corporation owns 80% of the voting common stock of Accardi Corporation.
Paice owns 60% of the voting common stock of Badger Corporation. Accardi owns
20% of the voting common stock of Badger. There are no cost/book value/fair value
differentials to consider. The separate net incomes (excluding investment income) of
these affiliated companies for 2011 are:
Paice$300,000
Accardi160,000
Badger120,000
Required:
Calculate controlling interest share of consolidated net income and noncontrolling
interest shares for Paice Corporation and Subsidiaries for 2011 .
8) Crabby Industries, a U.S. corporation, purchased inventory from a company in
Sweden on November 18, 2011 when the Swedish krona was trading at 1 krona =
$0.161. The transaction was for 600,000 krona, and was to be paid in krona in 90 days.
Crabby closed their books at December 31 for financial reporting purposes when the
krona was trading at $0.167. On February 16, 2012, Crabby paid the invoice when the
krona was trading at $0.156.
Required:
Show the journal entries recorded by Crabby on November 18, 2011, December 31,
2011, and February 16, 2012 .
9) Park Corporation paid $180,000 for a 75% interest in Stem Co.’s outstanding Capital
Stock on January 1, 2011, when Stem’s stockholders’ equity consisted of $150,000 of
Capital Stock and $50,000 of Retained Earnings. Book values of Stem’s net assets were
equal to their fair values on this date. The adjusted trial balances of Park and Stem on
December 31, 2011 were as follows:
ParkStem
Cash$8,250$35,000
Dividends receivable7,500
Other current assets40,00050,000
Land50,00030,000
Plant assets-net100,000150,000
Investment in Stem195,000
Cost of sales225,000125,000
Other expenses45,00025,000
Dividends25,00020,000
$695,750$435,000
Accounts payable$40,750$35,000
Dividends payable10,000
Capital stock150,000150,000
Retained earnings75,00050,000
Sales revenue400,000190,000
Income from Stem30,000
$695,750$435,000
Required: Complete the partially prepared consolidated balance sheet working papers
that appear below.
10) Prepare journal entries to record the following grant-related transactions for a
municipality special revenue fund.
1>Special Revenue Fund awarded an operating grant from the state, $2,500,000 (cash
will be received after qualified expenditures are made).
2>Special Revenue Fund received funds of $1,600,000, temporarily transferred from
the General Fund.
3>Incurred qualifying expenditures on the state grant program of $1,600,000 and paid
them with funds temporarily transferred from the General Fund.
4>Received a federal grant to finance planting of trees in city, $4,500,000 (cash
received in advance).
5>Incurred and paid cost of $3,000,000 for planting 10,000 trees in city.
11) 1>Urban City issued $6 million of general obligation bonds at par to finance the
construction of a city building. The bonds are 6%, 10-year bonds, and interest is paid on
June 30 and December 31 .
2> The city transferred $3,600,000 from its General Fund to its Debt Service Fund to
provide a portion of the resources needed to service the bonds.
3>The city paid the first interest payment to the bondholders.
Required:
Prepare journal entries for each of the above transactions. Identify the appropriate fund
or funds used by the city of Urban.
12) You are serving as the executor for the estate of Dr. Mary Carlson. The following
transactions occur during August 2011 . Dr. Carlson died on July 30, 2011 .
1>On August 6, you received interest of $3,000 on State of Colorado general revenue
bonds. Interest of $1,600 was earned after the date of death. The balance was earned
prior to death, and had been accrued. The bonds were included in the estate’s initial
inventory. The maturity value and fair market values of the bond are $100,000.
2>On August 11, you issued a check to pay a probate court fee of $1,120.
3>The estate included 10,000 shares of Dasher International’s common stock, valued at
$40 per share, which were properly included in the estate’s initial inventory. On the date
of her death, there were no outstanding dividends receivable. On August 14, you read
that a dividend of $1 per share was declared.
4>In Mary’s will, she wanted $100,000 given to the National Zoo.
After examining the assets, you determined that the estate’s assets will adequately cover
all expenses and specific devises, so on August 23, you issued a check to the Zoo for
$100,000.
5>On August 25, you issued a check to pay Mary’s final medical expenses of $16,700.
6>On August 28, you received a check for $10,000 for the common stock dividends
paid by Dash International.
Required:
Prepare the necessary journal entries for the above transactions. You may ignore any
estate or income taxes.