1) At December 31, 2011, an Enterprise Fund has the following adjusted accounts
outstanding:
Insurance Expense$2,000
Depreciation Expense3,000
Supplies Expense10,000
Salaries Expense100,000
Service Revenues123,000
When preparing the closing entry for the temporary accounts at December 31, 2011, the
Enterprise Fund’s accountant will
A) credit Retained Earnings $8,000
B) credit Net Cash, $8,000
C) credit Net Assets, Unrestricted $8,000
D) credit Invested Capital Assets, Net of Related Debt, $8,000
2) Percy Inc. acquired 80% of the outstanding stock of Sillson Company in a business
combination. The book values of Sillson’s net assets are equal to the fair values except
for the building, whose net book value and fair value are $500,000 and $800,000,
respectively. At what amount is the building reported on the consolidated balance sheet?
A) $400,000
B) $500,000
C) $640,000
D) $800,000
3) Pyming Corporation accounts for its 40% investment in Sillabog Company using the
equity method. On the date of the original investment, fair values were equal to the
book values except for a patent, which cost Pyming an additional $40,000. The patent
had an estimated life of 10 years. Sillabog has a steady net income of $20,000 per year
and consistently pays out 40% of its net income as dividends to its shareholders. Which
one of the following statements is correct?
A) The net change in the investment account for each full year will be a debit of $8,000
B) The net change in the investment account for each full year will be a debit of $4,800
C) The net change in the investment account for each full year will be a debit of $800
D) The net change in the investment account for each full year will be a credit of $800
4) Which of the following securities has the lowest interest rate?
A) Junk bonds
B) US Treasury bonds
C) Investment-grade bonds
D) Corporate Baa bonds
5) Jacana Corporation paid $200,000 for a 25% interest in Lilypad Corporation’s
common stock on January 1, 2010, but was not able to exercise significant influence
over Lilypad. During 2011, Jacana reported income of $120,000, excluding its income
from Lilypad, and paid dividends of $50,000. Lilypad reported net income of $40,000
during 2011 and paid dividends of $20,000. Jacana should report net income for 2011 in
the amount of
A) $115,000
B) $120,000
C) $125,000
D) $130,000
6) Which of the following statements is true regarding forward contracts, futures
contracts, options and swaps?
A) A forward contract can be purchased on the open market and is recorded at its
historical cost, then adjusted for changes in the market
B) A futures contract is negotiated between two parties who are betting in the opposite
direction on the movement of the underlying price
C) An option is a contract requiring the holder to either “put” or “call” an underlying
asset at a specified point in time
D) A swap is a contract between two parties to exchange an ongoing stream of cash
flows
7) On January 1, 2012, Pauline Company acquired 90% of Stephen Company at a cost
of $90,000. On January 1, 2012, Stephen Company acquired 10% of Pauline Company
at a cost of $10,000.
On January 1, 2012, the following data is available:
Stephen CompanyPauline Company
Common Stock$50,000Common Stock$50,000
Retained Earnings$50,000Retained Earnings$50,000
Assets fair value$100,000Assets fair value$100,000
Assets book value$100,000Assets book value$100,000
Liabilities$0Liabilities$0
At December 31, 2012, the following data is available:
January 1, 2012December 31, 2012
On Pauline Books:
Investment in Stephen$90,000$105,000
On Stephen Books:
Investment in Pauline$10,000$10,000
Assuming the treasury stock method is used, what elimination entry is needed for the
Investment in Pauline at December 31, 2012?
A)
B)
C)
D)
8) Pahm Corporation owns 80% of the outstanding voting common stock of Abussi
Corporation, which was purchased for $60,000 over Abussi’s book value. The excess
purchase price was attributable to goodwill. Abussi Corporation owns 60% of the
outstanding common stock of Badock Corporation, which was purchased at book value.
The separate net incomes of Pahm, Abussi, and Badock (excluding investment income)
for the year are $200,000, $240,000, and $260,000, respectively. There were no fair
value/book value differences in the assets and liabilities of Pahm, Abussi and Badock.
The amount of income for the current year assigned to the noncontrolling shareholders
of Badock Corporation is
A) $100,000
B) $104,000
C) $120,000
D) $140,000
9) On January 1, 2011, Plastam Industries acquired an 80% interest in Sparta Company
to assure a steady supply of Sparta’s inventory that Plastam uses in its own
manufacturing businesses. Sparta sold 100% of its output to Plastam during 2011 and
2012 at a markup of 125% of Sparta’s cost. Plastam had $12,000 of these items
remaining in its inventory at December 31, 2012 . If Plastam neglected to eliminate
unrealized profits from all intercompany sales from Sparta, the inventory on the
consolidated balance sheet at December 31, 2012 was
A) overstated by $1,920
B) understated by $1,920
C) overstated by $2,400
D) understated by $2,400
10) Pouch Corporation acquired an 80% interest in Shenley Corporation on January 1,
2012, when the book values of Shenley’s assets and liabilities were equal to their fair
values. The cost of the 80% interest was equal to 80% of the book value of Shenley’s
net assets. During 2012, Pouch sold merchandise that cost $70,000 to Shenley for
$86,000. On December 31, 2012, three-fourths of the merchandise acquired from Pouch
remained in Shenley’s inventory. Separate incomes (investment income not included) of
the two companies are as follows:
PouchShenley
Sales Revenue $180,000 $160,000
Cost of Goods Sold 120,00090,000
Operating Expenses 17,000 21,000
Separate incomes$ 43,000$ 49,000
The consolidated income statement for Pouch Corporation and subsidiary for the year
ended December 31, 2012 will show consolidated cost of sales of
A) $120,000
B) $136,000
C) $148,000
D) $210,000
11) Pecan Incorporated acquired 80% of the voting stock of Shew Manufacturing for
$800,000 on January 2, 2011 when Shew had outstanding common stock of $600,000
and Retained Earnings of $300,000. The book value and fair value of Shew’s assets and
liabilities were equal except for equipment. The entire fair value/book value differential
is allocated to equipment and is fully depreciated on a straight-line basis over a 5-year
period.
During 2011, Shew borrowed $80,000 on a short-term non-interest-bearing note from
Pecan, and on December 31, 2011, Shew mailed a check for $20,000 to Pecan in partial
payment of the note. Pecan deposited the check on January 4, 2012, and recorded the
entry to reduce the note balance at that time.
Required:
Complete the consolidation working papers for the year ended December 31, 2011 .
12) On June 30, 2011, the Able, Baker, and Charlie partnership had the following fiscal
year-end balance sheet:
Cash$8,000Accounts payable$14,000
Accounts receivable12,000Loan from Charlie10,000
Inventory28,000Able, capital (20%)28,000
Plant assets-net24,000Baker, capital (20%)20,000
Loan to Able12,000Charlie,capital (60%)12,000
Total assets$84,000Total liab./equity$84,000
The percentages shown are the residual profit and loss sharing ratios. The partners
dissolved the partnership on July 1, 2011, and began the liquidation process. During
July the following events occurred:
*Receivables of $6,000 were collected.
*All inventory was sold for $8,000.
*All available cash was distributed on July 31, except for
$4,000 that was set aside for contingent expenses.
How much cash would Baker receive from the cash that is available for distribution on
July 31? (Assume a safe payments schedule is used.)
A) $ 0
B) $ 800
C) $2,400
D) $4,000
13) The Deferred Revenue account in government accounting is frequently used for
A) taxes billed that are not expected to be collected within 60 days of the fiscal year end
B) taxes billed that are not expected to be collected based on a bad debt percentage
history
C) taxes that are to be remitted from another government agency in the second month
before the fiscal year end
D) taxes that are to be remitted from another government agency in the first month after
the fiscal year end
14) If bonds with different maturities are perfect substitutes, then the ________ on these
bonds must be equal
A) expected return
B) surprise return
C) surplus return
D) excess return
15) If a corporation begins to suffer large losses, then the default risk on the corporate
bond will
A) increase and the bond’s return will become more uncertain, meaning the expected
return on the corporate bond will fall
B) increase and the bond’s return will become less uncertain, meaning the expected
return on the corporate bond will fall
C) decrease and the bond’s return will become less uncertain, meaning the expected
return on the corporate bond will fall
D) decrease and the bond’s return will become less uncertain, meaning the expected
return on the corporate bond will rise
16) What basis of accounting is used by proprietary funds?
A) Modified accrual accounting
B) Accrual accounting
C) Cash basis accounting
D) Fair value accounting
17) Parrot Company owns all the outstanding voting stock of Southern Manufacturing.
On January 1, 2012, Parrot sold machinery to Southern at its book value of $24,000.
Parrot had the machinery three years before selling it and used an eight-year
straight-line depreciation method, with zero salvage value. Southern will use the
straight-line depreciation method, and assumes the machine has five years remaining
and no salvage value. In the 2012 consolidating working papers, the depreciation
expense
A) required no adjustment
B) decreased by $4,800
C) increased by $4,800
D) increased by $8,000
18) Paris Corporation purchased 80% of the outstanding voting common stock of
Sanders Corporation on January 1, 2011, at a cost of $400,000. The stockholders’ equity
of Sanders Corporation on this date consisted of $200,000 of Capital Stock and
$100,000 of Retained Earnings. Book values were equal to fair values except for land
and inventory. The book value of Sanders’ land was $10,000, and fair value was
$22,000. The book value of Sanders’ inventory was $30,000, and fair value was
$25,000.
Under the entity theory, what amount of goodwill was reported on the consolidated
balance sheet at December 31, 2011?
A) $185,000
B) $191,250
C) $193,000
D) $200,000
19) Plateau Incorporated bought 60% of the common stock of Sachet Company several
years ago. At the time of purchase, the fair value and book value of Sachet’s net assets
were equal. The cost of the 60% investment was equal to 60% of the book value of
Sachet’s net assets. Plateau sells merchandise to Sachet at 125% above Plateau’s cost.
Intercompany sales from Plateau to Sachet for 2012 were $60,000. Unrealized profits in
Sachet’s December 31, 2011 inventory and December 31, 2012 inventory were $6,000
and $4,500, respectively. Sachet reported net income of $120,000 for 2012 .
Required: In General Journal format, prepare consolidation working paper entries at
December 31, 2012 to eliminate the effects of the intercompany inventory sales.
20) The partners of Nelatyna Manufacturing have decided to dissolve their partnership
as of the end of 2010 . The partnership is going to liquidate during the first several
months of 2011 . The four partners of Nell, Ann, Tyler and Nadine, share profits and
losses 35%, 30%, 25%, and 10%, respectively. The partnership trial balance at
December 31, 2010 is as follows:
DebitsCredits
Cash$60,000
Accounts receivable150,000
Inventory115,000
Loan to Tyler20,000
Furniture86,000
Equipment147,000
Goodwill63,000
Accounts payable$140,000
Note payable200,000
Loan from Nell30,000
Nell, capital (35%)110,000
Ann, capital (30%)60,000
Tyler, capital (25%)73,000
Nadine, capital (10%)28,000
Totals$641,000$641,000
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.
21) Dotterel Corporation paid $200,000 cash for 40% of the voting common stock of
Swamp Land Inc. on January 1, 2011 . Book value and fair value information for
Swamp on this date is as follows:
BookFair
AssetsValuesValues
Cash$60,000$60,000
Accounts receivable120,000120,000
Inventories80,000100,000
Equipment340,000400,000
$ 600,000$ 680,000
Liabilities & Equities
Accounts payable$200,000$200,000
Note payable120,000100,000
Capital stock200,000
Retained earnings 80,000
$600,000$300,000
Required:
Prepare an allocation schedule for Dotterel’s investment in Swamp Land.
22) Charin Corporation, a U.S. corporation, imports and exports small electronics. On
December 1, 2011, Charin purchased components from an Egyptian manufacturer
amounting to 500,000 Egyptian pounds. The purchase is payable in Egyptian pounds.
At December 30, Charin wanted to take advantage of favorable exchange rates, but did
not have the full amount required to pay off the entire amount. Charin wired the funds
to pay off half of the balance owed, and expected to pay the remaining balance on
January 3, 2012 . Charin paid the remaining balance on January 3, 2012 .
The respective exchange rates were as follows:
December 1, 20111 pound = $.170
December 30, 20111 pound = $.165
December 31, 20111 pound = $.175
January 3, 20121 pound = $.180
Required:
Document the journal entries related to these transactions for the four dates shown. If
no entry is required, record “no entry.”
23) Platt Corporation paid $87,500 for a 70% interest in Suve Corporation on January
1, 2011, when Suve’s Capital Stock was $70,000 and its Retained Earnings $30,000.
The fair values of Suve’s identifiable assets and liabilities were the same as the recorded
book values on the acquisition date. Trial balances at the end of the year on December
31, 2011 are given below:
PlattSuve
Cash$4,500$20,000
Accounts Receivable26,00030,000
Inventory100,00080,000
Investment in Suve87,500
Cost of Goods Sold60,00040,000
Operating Expenses22,00037,000
Dividends15,00010,000
$315,000$217,000
Liabilities$47,000$27,000
Capital stock, $10 par value100,00070,000
Additional Paid-in Capital10,000
Retained Earnings31,00030,000
Sales Revenue120,00090,000
Dividend Income7,0000
$315,000$217,000
During 2011, Platt made only two journal entries with respect to its investment in Suve.
On January 1, 2011, it debited the Investment in Suve account for $87,500 and on
November 1, 2011, it credited Dividend Income for $7,000.
Required:
1>Prepare a consolidated income statement and a statement of retained earnings for
Platt and Subsidiary for the year ended December 31, 2011 .
2>Prepare a consolidated balance sheet for Platt and Subsidiary as of December 31,
2011 .
24) Willborough County had the following transactions in 2012 .
1>A central motor pool was established with a $200,000 nonreciprocal transfer from the
General Fund.
2>The water and sewer authority, which provides services to residents for a fee, issued
a bond offering at $750,000 par. Bonds proceeds are restricted to renovating the
treatment facility.
3>Willborough received a grant from the state to be used for renovation of the
courthouse amounting to $800,000. The General Fund will temporarily provide
$100,000 cash, because the grant is set up on a reimbursement basis and will not be
distributed until proper expenditures are documented.
4>Willborough’s central motor pool bills out automobile usage to various government
agencies amounting to $42,000.
5>The General Fund transfers $67,000 out of the operating budget to fund the county
employees’ pension plan.
Required:
Prepare the necessary journal entries for each of the above transactions for all funds
affected. Be sure to identify the fund type for each entry.
25) Suzanne Quincy passed away on October 25, 2011 . Suzanne left behind a limited
estate, so there are no tax issues to address, however, she owned a dog, Buddy, and
Suzanne provided for Buddy in the will. Suzanne left $100,000 for Buddy’s care, and
the remainder of her estate was left to her neighbor, Agnes. Suzanne’s estate had the
following events and transactions in the month following her death.
1>Her assets were converted to cash at their fair value as inventoried: Mutual funds,
$270,000; and Residence, $209,000. There were no other reportable assets.
2>Transferred $100,000 to a trust account at Second National Bank to provide care for
Buddy, and delivered Buddy to Paws and Claws Pet Farm, his new home.
3>Wrote check to pay for funeral expenses for $9,600.
4>Wrote check to pay for executor fees as designated in the will of $1,000.
5>Wrote check to pay balance of estate to Agnes.
Required:
Prepare the journal entries for the listed transactions. Disregard the impact of estate and
income taxes.
26) On January 2, 2011, Paleon Packaging purchased 90% of the outstanding common
stock of Sampson Shipping and Supplies for $513,000. Sampson’s book values
represented the fair values of all recorded assets and liabilities at that date, however
Sampson had rights to a patent that was not recorded on their books, with an
approximate fair value of $270,000, and a 10-year remaining useful life. Sampson’s
shareholders’ equity reported on that date consisted of $100,000 in capital stock and
$150,000 in retained earnings. Any remaining fair value/book value differential is
assumed to be goodwill. The December 31, 2012 financial statements for each of the
companies are provided in the worksheet below.
Required: Complete the consolidation worksheet provided below to determine
consolidated balances to be reported at December 31, 2012 .
27) The spread between the interest rates on Baa corporate bonds and US government
bonds is very large during the Great Depression years 1930-1933 Explain this
difference using the bond supply and demand analysis
28) On June 1, 2011, Dapple Industries purchases an option contract for $5,000 on
10,000 gallons of aviation gas to minimize its purchasing cost price exposure. At the
time, the market price is $2.50 per gallon and the option price of $2 per gallon will
expire 6 months later. Dapple can exercise the option at its discretion. When Dapple
prepares quarterly reports on June 30, Dapple is still holding the option. On June 30, the
market price of aviation gas is $4.50 per gallon. The option is to be settled net.
On August 1, Dapple exercises the option when the gas market price is $5.00 per gallon
and purchases 40,000 gallons of gas. On August 15, Dapple uses all of the gas on a
charter flight.
Required:
What are Dapple’s journal entries with regard to the aviation gas option? Assume this is
a cash flow hedge. Ignore the time value of money.