1) From a consolidated entity point of view, the constructive gain or loss on the open
market purchase of a parent company’s bonds by a subsidiary company is
a.considered realized at the date of the open market purchase
b.realized in future periods through discount and premium amortization on the books of
the individual companies
c.realized only to the extent of the parent company’s interest in the subsidiary
d.deferred and recognized in the consolidated income statement when the bonds are
retired
2) Bruges Electronics Inc. offers one model of laptop computer for £1000 and a
two-year warranty for £250. The retailer, as part of a Boxing Day promotion, offers a
limited-time offer for the laptop, including delivery and the two-year warranty for
£1,180. The cost of the computer to Bruges is £700. Any warranty repairs are assumed
to be done ratably over time. Bruges accounts for transactions using the customer
consideration model.
In the first twelve months following the sale, Bruges incurred £980 of costs servicing
the computers under warranty.
In the first twelve months following the sale, Bruges would reduce the Contract liability
warranty account by
a.£784
b.£980
c.£1,180
d.£1,380
3) A business combination in which the boards of directors of the potential combining
companies negotiate mutually agreeable terms is a(n)
a.agreeable combination
b.friendly combination
c.hostile combination
d.unfriendly combination
4) The expendable fund entitys measurement focus is on:
a.the flow of current financial resources
b.the flow of economic resources
c.the flow of revenue, expenses, and net income
d.none of the above
5) Porpoise Corporation acquired Sims Company through an exchange of common
shares. All of Sims assets and liabilities were immediately transferred to Porpoise.
Porpoise Companys common stock was trading at $20 per share at the time of
exchange. The following selected information is also available:
Porpoise Company
What number of shares was issued at the time of the exchange?
a.5,000
b.17,500
c.12,500
d.10,000
6) Montana Corporation a U.S. company, contracted to purchase foreign goods.
Payment in foreign currency was due one month after delivery. Between the delivery
date and the time of payment, the exchange rate changed in Montanas favor. The
resulting gain should be reported in the financial statements as a(n):
a.component of other comprehensive income
b.component of income from continuing operations
c.extraordinary income
d.deferred income
8.An involuntary petition filed by a firms creditors whereby there are twelve or more
creditors must be signed by at least:7) a.two creditors
b.three creditors
c.five creditors
d.six creditors
8) On January 1, 2014, Pantera Company purchased 40% of Stratton Companys 30,000
shares of voting common stock for a cash payment of $1,800,000 when 40% of the net
book value of Stratton Company was $1,740,000. The payment in excess of the net
book value was attributed to depreciable assets with a remaining useful life of six years.
As a result of this transaction Pantera has the ability to exercise significant influence
over Stratton Companys operating and financial policies. Strattons net income for the
ended December 31, 2014 was $600,000. During 2014, Stratton paid $325,000 in
dividends to its shareholders. The income reported by Pantera for its investment in
Stratton should be:
a.$120,000
b.$130,000
c.$230,000
d.$240,000
9) Constructive gains and losses from intercompany bond transactions are:
a.treated as extraordinary items on the consolidated income statement
b.included as other revenues and expenses on the consolidated income statement
c.excluded from the consolidated income statement until realized
d.eliminated from the consolidated income statement
10) North Company issued 24,000 shares of its $20 par value common stock for the net
assets of Prairie Company in business combination under which Prairie Company will
be merged into North Company. On the date of the combination, North Company
common stock had a fair value of $30 per share. Balance sheets for North Company and
Prairie Company immediately prior to the combination were as follows:
North Prairie
Current Assets$1,314,000$192,000
Plant and Equipment (net) 1,725,000 408,000
Total$3,039,000$600,000
Liabilities$ 900,000$150,000
Common Stock, $20 par value 1,650,000 240,000
Other Contributed Capital 218,000 60,000
Retained Earnings 271,000 150,000
Total$3,039,000$600,000
If the business combination is treated as an acquisition and the fair value of Prairie
Companys current assets is $270,000, its plant and equipment is $726,000, and its
liabilities are $168,000, North Companys financial statements immediately after the
combination will include
a.Negative goodwill of $108,000
b.Plant and equipment of $2,133,000
c.Plant and equipment of $2,343,000
d.An ordinary gain of $108,000
11) A parent company regularly sells merchandise to its 80%-owned subsidiary. Which
of the following statements describes the computation of noncontrolling interest
income?
a.the subsidiarys net income times 20%
b.(the subsidiarys net income x 20%) + unrealized profits in the beginning inventory
unrealized profits in the ending inventory
c.(the subsidiarys net income + unrealized profits in the beginning inventory unrealized
profits in the ending inventory) 20%
d.(the subsidiarys net income + unrealized profits in the ending inventory unrealized
profits in the beginning inventory) 20%
12) On January 1, 2013, Pell Company and Sand Company had condensed balance
sheets as follows:
PellSand
Current assets $ 280,000$80,000
Noncurrent assets_360,000__160,000
Total assets $640,000$240,000
Current liabilities $ 120,000$40,000
Long-term debt200,000-0-
Stockholders’ equity__320,000 200,000
Total liabilities & stockholders’ equity$640,000$240,000
On January 2, 2013 Pell borrowed $240,000 and used the proceeds to purchase 90% of
the outstanding common stock of Sand. This debt is payable in 10 equal annual
principal payments, plus interest, starting December 30, 2013. Any difference between
book value and the value implied by the purchase price relates to land.
On Pell’s January 2, 2013 consolidated balance sheet,
Noncurrent liabilities should be
a.$440,000
b.$416,000
c.$240,000
d.$216,000
13) Pentagon Company acquired 90% of Smoker Company’s common stock for
$1,300,000 and 40% of its preferred stock for $300,000.On January 1, 2013, the date of
acquisition, the companies reported the following account balances:
Pentagon CompanySmoker Company
Preferred stock, $100 par value$ 800,000$ 600,000
Common stock, $10 par value2,000,0001,000,000
Other contributed capital320,000230,000
Retained earnings 350,000 180,000
Total stockholders’ equity$3,470,000$2,010,000
The preferred stock is 10%, cumulative, nonparticipating, and has a liquidation value
equal to 102% of par value.Dividends were not paid during 2012.During 2013, Smoker
Company reported net income of $200,000 and declared and paid cash dividends in the
amount of $120,000.
The difference between the implied value of the preferred stock and its book value is
a.$60,000
b.$78,000
c.$55,200
d.$36,000
e.none of these
14) Pink desires to purchase a one-fourth capital and profit and loss interest in the
partnership of Brown, Greene, and Red. The three partners agree to sell Pink one-fourth
of their respective capital and profit and loss interests in exchange for a total payment
of $100,000. 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 Pink follow
Percentage
CapitalInterests in
AccountsProfits and Losses
Brown$168,00050%
Greene104,00035
Red 48,00015
Total$320,000
All other assets and liabilities are fairly valued and implied goodwill is to be recorded
prior to the acquisition by Pink. Immediately after Pinks acquisition, what should be the
capital balances of Brown, Greene, and Red, respectively?
a.$126,000; $78,000; $36,000
b.$156,000; $99,000; $45,000
c.$178,000; $111,000; $51,000
d.$208,000; $132,000; $60,000
15) The following balances were taken from the records of S Company:
Common stock$2,500,000
Retained earnings, 1/1/11$1,450,000
Net income for 20143,000,000
Dividends declared in 2014(1,550,000)
Retained earnings, 12/31/11 2,900,000
Total stockholders equity, 12/31/11$5,400,000
P Company owns 80% of the common stock of S Company. During 2014, P Company
purchased merchandise from S Company for $4,000,000. S Company sells merchandise
to P Company at cost plus 25% of cost. On December 31, 2014, merchandise purchased
from S Company for $1,250,000 remains in the inventory of P Company. On January 1,
2014, P Companys inventory contained merchandise purchased from S Company for
$525,000. The affiliated companies file a consolidated income tax return. There was no
difference between the implied value and the book value of net assets acquired.
Required:
A.Prepare all workpaper entries necessitated by the intercompany sales of merchandise.
B.Compute noncontrolling interest in consolidated income for 2014.
C.Compute noncontrolling interest in consolidated net assets on December 31, 2014.
16) Petunia Company owns 100% of Sage Corporation. On January 1, 2014Petunia sold
equipment to Sage at a gain. Petunia had owned the equipment for four years and used a
ten-year straight-line rate with no residual value. Sage is using an eight-year
straight-line rate with no residual value. In the consolidated income statement, Sages
recorded depreciation expense on the equipment for 2014 will be reduced by
a.10% of the gain on sale
b.12 1/2% of the gain on sale
c.80% of the gain on sale
d.100% of the gain on sale
The computation of a company’s third quarter provision for income taxes should be
based upon earnings17) a.for the quarter at an expected annual effective income tax rate
b.for the quarter at the statutory rate
c.to date at an expected annual effective income tax rate less prior quarters’ provisions
d.to date at the statutory rate less prior quarters’ provisions
18) The following activities and transactions are typical of those which may affect the
various funds used by a municipal government.
Required:
Prepare journal entries to record each transaction and identify the fund in which each
entry is recorded.
1>The Sparta City Council passed a resolution approving a general operating budget of
$6,800,000 for the fiscal year. Total revenues are estimated at $5,800,000.
2>The Sparta City Council passed an ordinance providing a property tax levy of $3.50
per $100 of assessed valuation for the fiscal year. Total property valuation in Sparta
City is $320,000,000. Property is assessed at 30% of current property valuation.
Property tax bills are mailed to property owners. An estimated 5% will be uncollectible.
3>Sparta City sold a general obligation term bond issue for $1,000,000 at 104 to a
major brokerage firm. The stated interest rate is 10%. Construction of a new Municipal
Courts Building will be financed by the bond issue proceeds.
4>The premium on bond sale in (3) above is transferred to the Debt Service Fund.
5>At the end of fiscal year, the Sparta City Council approves the write-off of $55,000
of uncollected taxes because of inability to locate the property owners.
6>The Sparta City Municipal Courts Building (3 above) is completed. Contracts and
expenses total $1,190,000, and all have been paid and recorded in the Capital Projects
Fund. Prepare entries to close this project and record the completion of the project in all
other funds and/or account groups affected. Any balance in the Capital Projects Fund is
to be applied to payment of interest and principal of the bond issue.
7>On March 1, Sparta City issued 10% serial bonds at par to finance streetlights in an
area recently incorporated in the city limits. The face amount of the bonds is $900,000;
interest is payable annually, and bonds are to be retired in equal amounts over 6 years
from collections from assessments against property affected. In case of default by the
property owners, the bond principal will be paid by the city.
a.Record the issuance of the bonds on March 1 of the current year.
b.Record the payment to bondholders on March 1 of the next year.
8>The street lighting project in (7) above was completed on September 30 at a total cost
of $840,000. Record summary entries for expenditure transactions from March 1 –
September 30, and on completion of the project.
19) Under push down accounting, the workpaper entry to eliminate the investment
account includes a
a.debit to Goodwill
b.debit to Revaluation Capital
c.credit to Revaluation Capital
d.debit to Revaluation Assets
20) A parent companys equity interest in a subsidiary may change as the result of the
issuance of additional shares of stock by the subsidiary. Describe the affect on the
parents investment account when the new shares are (a) purchased ratably by the parent
and noncontrolling shareholders or (b) entirely by the noncontrolling shareholders.
21) Pallet Corporation owns 90% of the outstanding common stock of Stealth
Company.On January 1, 2011, Stealth Company issued $500,000, 12%, ten-year bonds.
On January 1, 2013, Pallet Corporation paid $412,000 for Stealth Company bonds with
a par value of $400,000 and a carrying value of $393,600.Both companies use the
straight-line method to amortize bond premiums and discounts.Pallet Corporation
accounts for the investment using the cost method of accounting.
Compute the noncontrolling interest in the 2013 consolidated income assuming that
Pallet Corporation reported a net income of $300,000 (includes dividend income from
Stealth Company). Stealth Company reported net income of $180,000 and declared and
paid cash dividends of $100,000.
a.$18,000
b.$17,440
c.$17,360
d.$18,560
e.none of these
22) Under the cost method, the workpaper entry to establish reciprocity
a.debits Retained Earnings – S Company
b.credits Retained Earnings – S Company
c.debits Retained Earnings – P Company
d.credits Retained Earnings – P Company
23) The parent company concept adjusts subsidiary net asset values for the
a.differences between cost and fair value
b.differences between cost and book value
c.total fair value implied by the price paid by the parent
d.total cost implied by the price paid by the parent
24) P Company purchased 80% of the outstanding common stock of S Company on
May 1, 2014, for a cash payment of $1,272,000. S Companys December 31, 2013
balance sheet reported common stock of $800,000 and retained earnings of $540,000.
During the calendar year 2014, S Company earned $840,000 evenly throughout the year
and declared a dividend of $300,000 on November 1. What is the amount needed to
establish reciprocity under the cost method in the preparation of a consolidated
workpaper on December 31, 2015?
a.$208,000
b.$260,000
c.$248,000
d.$432,000
25) Posch Company issued 12,000 shares of its $20 par value common stock for the net
assets of Sato Company in a business combination under which Sato Company will be
merged into Posch Company. On the date of the combination, Posch Company common
stock had a fair value of $30 per share. Balance sheets for Posch Company and Sato
Company immediately prior to the combination were as follows:
Posch Sato
Current Assets$ 657,000$ 96,000
Plant and Equipment (net) 863,000 204,000
Total$1,520,000$300,000
Liabilities$ 450,000$ 75,000
Common Stock, $20 par value 825,000 120,000
Other Contributed Capital 109,000 30,000
Retained Earnings 136,000 75,000
Total$1,520,000$300,000
If the business combination is treated as an acquisition and the fair value of Sato
Companys current assets is $135,000, its plant and equipment is $363,000, and its
liabilities are $84,000, Posch Companys financial statements immediately after the
combination will include
a.Negative goodwill of $54,000
b.Plant and equipment of $1,226,000
c.Plant and equipment of $1,172,000
d.An extraordinary gain of $54,000
26) The view that only the parent company’s share of the unrealized intercompany
profit recognized by the selling affiliate that remains in assets should be eliminated in
the preparation of consolidated financial statements is consistent with the
a.economic unit concept
b.current practice concept
c.parent company concept
d.historical cost company concept
27) Revenues and expenses of hospitals are recorded in the accounts of the
a.Endowment Fund
b.General Fund
c.Plant Replacement Fund
d.Specific Purpose Fund
28) The activities of a municipal airport should be accounted for in the
a.General Fund
b.Internal Service Fund
c.Special Revenue Fund
d.Enterprise Fund
29) Under the parent company concept, consolidated net income __________ the
consolidated net income under the economic unit concept.
a.is the same as
b.is higher than
c.is lower than
d.can be higher or lower than
30) Poole made the following purchases of Smarte Company common stock:
DateSharesCost
1/1/1370,000 (70%)$1,000,000
1/1/1410,000 (10%)160,000
Stockholders equity information for Smarte Company for 2013 and 2014 follows:
20132014
Common stock, $10 par value$1,000,000$1,000,000
1/1 Retained earnings300,000380,000
Net income 110,000140,000
Dividends declared, 12/15 (30,000) (40,000)
Retained earnings, 12/31 380,000 480,000
Total stockholders equity, 12/31$1,380,000$1,480,000
On July 1, 2014, Poole sold 14,000 shares of Smarte Company common stock on the
open market for $22 per share. The shares sold were purchased on January 1, 2013.
Smarte notified Poole that its net income for the first six months was $70,000. Any
difference between cost and book value relates to subsidiary land. Poole uses the cost
method to account for its investment in Smarte Company.
Required:
A.Prepare the journal entry made by Poole to record the sale of the 14,000 shares on
July 1, 2014.
B.Prepare the workpaper eliminating entries needed for a consolidated statements
workpaper on December 31, 2014.
C.Compute the amount of noncontrolling interest that would be reported on the
consolidated balance sheet on December 31, 2014.
31) A majority-owned subsidiary that is in legal reorganization should normally be
accounted for using
a.consolidated financial statements
b.the equity method
c.the market value method
d.the cost method
Revenues of a special revenue fund of a governmental unit should be recognized in the
period in which the32) a.revenues become available and measurable
b.revenues become available and appropriated
c.revenues are billable
d.cash is received
33) Phillips Company purchased a 90% interest in Standards Corporation for
$2,340,000 on January 1, 2013. Standards Corporation had $1,650,000 of common
stock and $1,050,000 of retained earnings on that date.
The following values were determined for Standards Corporation on the date of
purchase:
Book ValueFair Value
Inventory$240,000$300,000
Land2,400,0002,700,000
Equipment1,620,0001,800,000
Required:
A.Prepare a computation and allocation schedule for the difference between the implied
and book value in the consolidated statements workpaper.
B.Prepare the January 1, 2013, workpaper entries to eliminate the investment account
and allocate the difference between implied and book value.
34) Stock given as consideration for a business combination is valued at
a.fair market value
b.par value
c.historical cost
d.None of the above
35) In the preparation of a consolidated statements workpaper, dividend income
recognized by a parent company for dividends distributed by its subsidiary is
a.included with parent company income from other sources to constitute consolidated
net income.
b.assigned as a component of the noncontrolling interest
c.allocated proportionately to consolidated net income and the noncontrolling interest
d.eliminated
36) Soren Corporation is an 80% owned subsidiary of Passia Company. Soren
purchased bonds of Passia Company for $103,000.Passia Company reported the bond
liability on the date of purchase at $100,000 less unamortized discount of
$5,000.Assuming that the constructive gain or loss is material, the consolidated income
statement should report an
a.ordinary loss of $8,000
b.ordinary gain of $8,000
c.extraordinary loss of $8,000 adjusted for income tax effects
d.extraordinary gain of $8,000 adjusted for income tax effects
37) The partners in the ABC partnership have capital balances as follows:
A. $70,000;B. $70,000C. $105,000
Profits and losses are shared 30%, 20%, and 50%, respectively.
On this date, C withdraws and the partners agree to pay him $140,000 out of
partnership cash.
Required:
A.Prepare journal entries to show three acceptable methods of recording the
withdrawal. (Tangible assets are already stated at values approximating their fair market
values.)
B.Which alternative would you recommend if you determined that the agreement to pay
C $140,000 was not the result of arms length bargaining between C and the other
partners? Why?
38) P Company holds an 80% interest in S Company. Determine the effect (that is,
increase, decrease, no change, not determinable) on both the total book value of the
noncontrolling interest and the noncontrolling interests percentage of ownership in the
net assets of S Company for each of the following situations:
a. P Company acquires additional shares directly from S Company at a price equal to
the book value per share of the S Company stock immediately prior to the issuance.
b. S Company acquires its own shares on the open market. The cost of these shares is
less than their book value.
c. Assume the same situation as in (b) except that the cost of the shares is greater than
their book value.
d. P Company and a noncontrolling stockholder each acquire 100 shares directly from S
Company at a price below the book value per share.
39) On January 1, 2013, Pilsner Company acquired an 80% interest in Smalley
Company for $3,600,000. On that date, Smalley Company had retained earnings of
$800,000 and common stock of $2,800,000. The book values of assets and liabilities
were equal to fair values except for the following:
Book ValueFair Value
Inventory$ 50,000 $ 85,000
Equipment (net)540,000720,000
Land300,000660,000
The equipment had an estimated remaining useful life of 8 years. One-half of the
inventory was sold in 2013 and the remaining half was sold in 2014. Smalley Company
reported net income of $240,000 in 2013 and $300,000 in 2014. No dividends were
declared or paid in either year. Pilsner Company uses the cost method to record its
investment in Smalley Company.
Required:
Prepare, in general journal form, the workpaper eliminating entries necessary in the
consolidated statements workpaper for the year ending December 31, 2014.
40) The translation process can be done using either the current rate method or the
temporal method. Explain under what circumstances each of the methods is appropriate.
41) An appropriation is an authorization enacted by a legislative body or granted by a
governing board to make expenditures for a specified purpose.
An encumbrance is an obligation in the form of a purchase order or other commitment
that reduces appropriation authority and is formally recorded in the accounting records.
An expenditure is a decrease in the net financial resources of a fund entity incurred to
carry out the activities or objectives of the fund.
42) Under the allocation method followed in thistext, how is the noncontrolling interest
in consolidated income affected by intercompanybondholdings?
43) Part I. You are working on the valuation of accounts receivable, and bad debt
reserves for the current years annual report. The CFO stops by and asks you to reduce
the reserve by enough to increase the current years EPS by 2 cents a share. The
companys policy has always been to use the previous years actual bad debt percentage
adjusted for a specific economic index. The CFOs suggested change would still be
within acceptable GAAP. However, later, you learn that with the increased EPS, the
CFO would qualify for a significant bonus. What do you do and why?
Part II. Consider the following: Accounting firm KPMG created tax shelters called
BLIPS, FLIP, OPIS, and SOS that were based largely in the Cayman Islands and
allowed wealthy clients (there were 186) to create $5 billion in losses, which were then
deducted from their income for IRS tax purposes. BLIPS (Bond Linked Issue Premium
Structures) had clients borrow from an offshore bank for purposes of purchasing
currency. The client would then sell the currency back to the lender for a loss. However,
the IRS contends the losses were phony and that there was never any risk to the client in
the deals. The IRS has indicted eight former KPMG partners and an outside lawyer
alleging that the transactions were shams, illegal methods for avoiding taxes. KPMG
has agreed to pay a$456 million fine, no longer to do tax shelters, and to cooperate with
the government in its prosecution of the nine individuals involved in the tax shelter
scheme. Many argue that the courts have not always held that such tax avoidance
schemes show criminal intent because the tax laws permit individuals to minimize
taxes. However, the IRS argues that these shelters evidence intent because of the lack of
risk.
Question
In this case, the IRS contends that the losses generated by the tax shelters were phony
and that the clients never incurred any risk. Do tax avoidance schemes indicate criminal
intent if the tax laws permit individuals to minimize taxes? Justify your answer.
44) The partnership agreement of Sleeter, Frisco, and Kinney provides for annual
distribution of profit and loss in the following sequence:
Frisco, the managing partner, receives a bonus of 10% of net income.
Each partner receives 5% interest on average capital investment.
Residual profit or loss is to be divided 4:2:4.
Average capital investments for 2014 were:
Sleeter$270,000
Frisco$180,000
Kinney$120,000
Required:
APrepare a schedule to allocate net income, assuming operations for the year resulted
in:
Net loss of $30,000.
B.Prepare the journal entry to close the Income Summary account for each situation
above.
45) What types of information must be disclosed about foreign operations under SFAS
No. 131[ASC 280105040]?
46) The trial balance for the ABC Partnership is as follows just before liquidation:
OTHERBALLADLERBALLCARL
CASHASSETSRECEIVABLE=LIABILITIESCAPITALCAPITALCAPITAL
180,000625,00090,000150,000420,000270,000180,000
Partners share profits a 50:30:20 ratio.
Required:
Prepare an advance cash distribution plan showing how available cash would be
distributed.
