53394030 fundamentals adv acct 3e hoyle

ch1

Student: ___________________________________________________________________________

1. Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value method to account for this investment. Trace reported net income of $110,000 for 2008 and paid dividends of $60,000 on October 1, 2008. How much income should Gaw recognize on this investment in 2008? A. $16,500 B. $9,000 C. $25,500 D. $7,500 E. $50,000

2. Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to account for the investment. During 2008, Dew reported income of $250,000 and paid dividends of $80,000. There is no amortization associated with the investment. During 2008, how much income should Yaro recognize related to this investment? A. $24,000 B. $75,000 C. $99,000 D. $51,000 E. $80,000

3. On January 1, 2008, Pacer Company paid $1,920,000 for 60,000 shares of Lennon Co.'s voting common stock which represents a 45% investment. No allocation to goodwill or other specific account was made. Significant influence over Lennon was achieved by this acquisition. Lennon distributed a dividend of $2.50 per share during 2008 and reported net income of $670,000. What was the balance in the Investment in Lennon Co. account found in the financial records of Pacer as of December 31, 2008? A. $2,040,500 B. $2,212,500 C. $2,260,500 D. $2,171,500 E. $2,071,500

4. A company should always use the equity method to account for an investment if A. It has the ability to exercise significant influence over the operating policies of the investee B. It owns 30% of another company's stock C. It has a controlling interest (more than 50%) of another company's stock D. The investment was made primarily to earn a return on excess cash E. It does not have the ability to exercise significant influence over the operating policies of the investee

5. On January 1, 2006, Dermot Company purchased 15% of the voting common stock of Horne Corp. On January 1, 2008, Dermot purchased 28% of Horne's voting common stock. If Dermot achieves significant influence with this new investment, how must Dermot account for the change to the equity method? A. It must use the equity method for 2008 but should make no changes in its financial statements for 2007 and 2006 B. It should prepare consolidated financial statements for 2008 C. It must restate the financial statements for 2007 and 2006 as if the equity method had been used for those two years D. It should record a prior period adjustment at the beginning of 2008 but should not restate the financial statements for 2007 and 2006 E. It must restate the financial statements for 2007 as if the equity method had been used then

6. During January 2007, Wells, Inc. acquired 30% of the outstanding common stock of Wilton Co. for $1,400,000. This investment gave Wells the ability to exercise significant influence over Wilton. Wilton's assets on that date were recorded at $6,400,000 with liabilities of $3,000,000. Any excess of cost over book value of Wells' investment was attributed to unrecorded patents having a remaining useful life of ten years. In 2007, Wilton reported net income of $600,000. For 2008, Wilton reported net income of $750,000. Dividends of $200,000 were paid in each of these two years. What was the reported balance of Wells' Investment in Wilson Co. at December 31, 2008? A. $1,609,000 B. $1,485,000 C. $1,685,000 D. $1,647,000 E. $1,054,300

7. On January 1, 2008, Bangle Company purchased 30% of the voting common stock of Sleat Corp. for $1,000,000. Any excess of cost over book value was assigned to goodwill. During 2008, Sleat paid dividends of $24,000 and reported a net loss of $140,000. What is the balance in the investment account on December 31, 2008? A. $950,800 B. $958,000 C. $836,000 D. $990,100 E. $956,400

8. On January 1, 2007, Jordan Inc. acquired 30% of Nico Corp. Jordan used the equity method to account for the investment. On January 1, 2008, Jordan sold 2/3 of its investment in Nico. It no longer had the ability to exercise significant influence over the operations of Nico. How should Jordan have accounted for this change? A. Jordan should continue to use the equity method to maintain consistency in its financial statements B. Jordan should restate the prior years' financial statements and change the balance in the investment account as if the fair-value method had been used since 2007 C. Jordan has the option of using either the equity method or the fair-value method for 2007 and future years D. Jordan should report the effect of the change from the equity to the fair-value method as a retrospective change in accounting principle E. Jordan should use the fair-value method for 2008 and future years but should not make a retrospective adjustment to the investment account

9. Tower Inc. owns 30% of Yale Co. and applies the equity method. During the current year, Tower bought inventory costing $66,000 and then sold it to Yale for $120,000. At year-end, only $24,000 of merchandise was still being held by Yale. What amount of inter-company inventory profit must be deferred by Tower? A. $6,480 B. $3,240 C. $10,800 D. $16,200 E. $6,610

10. On January 4, 2006, Watts Co. purchased 40,000 shares (40%) of the common stock of Adams Corp., paying $800,000. There was no goodwill or other cost allocation associated with the investment. Watts has significant influence over Adams. During 2006, Adams reported income of $200,000 and paid dividends of $80,000. On January 2, 2006, Watts sold 5,000 shares for $125,000. What was the balance in the investment account after the shares had been sold? A. $848,000 B. $742,000 C. $723,000 D. $761,000 E. $925,000

On January 3, 2008, Austin Corp. purchased 25% of the voting common stock of Gainsville Co., paying $2,500,000. Austin decided to use the equity method to account for this investment. At the time of the investment, Gainsville's total stockholders' equity was $8,000,000. Austin gathered the following information about Gainsville's assets and liabilities:

For all other assets and liabilities, book value and fair value were equal. Any excess of cost over fair value was attributed to goodwill, which has not been impaired.

11. What is the amount of goodwill associated with the investment? A. $500,000 B. $200,000 C. $0 D. $300,000 E. $400,000

12. For 2008, what is the total amount of excess amortization for Austin's 25% investment in Gainsville? A. $27,500 B. $20,000 C. $30,000 D. $120,000 E. $70,000

13. Club Co. appropriately uses the equity method to account for its investment in Chip Corp. As of the end of 2008, Chip's common stock had suffered a significant decline in fair value, which is expected to be recovered over the next several months. How should Club account for the decline in value? A. Club should switch to the fair-value method B. No accounting because the decline in fair value is temporary C. Club should decrease the balance in the investment account to the current value and recognize a loss on the income statement D. Club should not record its share of Chip's 2008 earnings until the decline in the fair value of the stock has been recovered E. Club should decrease the balance in the investment account to the current value and recognize an unrealized loss on the balance sheet

14. An upstream sale of inventory is a sale A. Between subsidiaries owned by a common parent B. With the transfer of goods scheduled by contract to occur on a specified future date C. In which the goods are physically transported by boat from a subsidiary to its parent D. Made by the investor to the investee E. Made by the investee to the investor

Starge Inc. owns 30% of the outstanding voting common stock of Ticker Co. and has the ability to significantly influence the investee's operations and decision making. On January 1, 2008, the balance in the Investment in Ticker Co. account was $402,000. Amortization associated with this acquisition is $8,000 per year. During 2008, Ticker earned an income of $108,000 and paid cash dividends of $36,000. Previously in 2007, Ticker had sold inventory costing $28,800 to Starge for $48,000. All but 25% of this merchandise was consumed by Starge during 2007. The remainder was used during the first few weeks of 2008. Additional sales were made to Starge in 2008; inventory costing $33,600 was transferred at a price of $60,000. Of this total, 40% was not consumed until 2009.

15. What amount of equity income would Starge have recognized in 2008 from its ownership interest in Ticker? A. $19,792 B. $27,640 C. $22,672 D. $24,400 E. $21,748

16. What was the balance in the Investment in Ticker Co. account at the end of 2008? A. $401,136 B. $413,872 C. $418,840 D. $412,432 E. $410,148

On January 1, 2007, Deuce Inc. acquired 15% of Wiz Co.'s outstanding common stock for $62,400 and categorized the investment as an available-for-sale security. Wiz earned net income of $96,000 in 2007 and paid dividends of $36,000. On January 1, 2008, Deuce bought an additional 10% of Wiz for $54,000. This second purchase gave Deuce the ability to significantly influence the decision making of Wiz. During 2008, Wiz earned $120,000 and paid $48,000 in dividends. As of December 31, 2008, Wiz reported a net book value of $468,000. For both purchases, Deuce concluded that Wiz Co.'s book values approximated fair values and attributed any excess cost to goodwill.

17. On Deuce's December 31, 2008 balance sheet, what balance was reported for the Investment in Wiz Co. account? A. $139,560 B. $143,400 C. $310,130 D. $186,080 E. $182,250

18. What amount of equity income should Deuce have reported for 2008? A. $30,000 B. $16,420 C. $38,340 D. $18,000 E. $32,840

19. In a situation where the investor exercises significant influence over the investee, which of the following entries is not actually posted to the books of the investor? 1) Debit to the Investment account and a Credit to the Equity in Investee Income account. 2) Debit to Cash (for dividends received from the investee) and a Credit to Dividend Revenue. 3) Debit to Cash (for dividends received from the investee) and a Credit to the Investment account. A. Entries 1 and 2 B. Entries 2 and 3 C. Entry 1 only D. Entry 2 only E. Entry 3 only

20. All of the following would require use of the equity method for investments except A. Material inter-company transactions B. Investor participation in the policy-making process of the investee C. Valuation at fair value D. Technological dependency E. Significant control

21. All of the following statements regarding the investment account using the equity method are true except A. The investment is recorded at cost B. Dividends received are reported as revenue C. Net income of investee increases the investment account D. Dividends received reduce the investment account E. Amortization of fair value over cost reduces the investment account

22. A company has been using the fair-value method to account for its investment. The company now has the ability to significantly control the investee and the equity method has been deemed appropriate. Which of the following statements is true? A. A cumulative effect change in accounting principle must occur B. A prospective change in accounting principle must occur C. A retrospective change in accounting principle must occur D. The investor will not receive future dividends from the investee E. Future dividends will continue to be recorded as revenue

23. A company has been using the equity method to account for its investment. The company sells shares and does not continue to have significant control. Which of the following statements is true? A. A cumulative effect change in accounting principle must occur B. A prospective change in accounting principle must occur C. A retrospective change in accounting principle must occur D. The investor will not receive future dividends from the investee E. Future dividends will continue to reduce the investment account

24. An investee company incurs an extraordinary loss during the period. The investor appropriately applies the equity method. Which of the following statements is true? A. Under the equity method, the investor only recognizes its share of investee's income from continuing operations B. The extraordinary loss would reduce the value of the investment C. The extraordinary loss should increase equity in investee income D. The extraordinary loss would not appear on the income statement but would be a component of comprehensive income E. The loss would be ignored but shown in the investor's notes to the financial statements

25. How should a permanent loss in value of an investment using the equity method be treated? A. The equity in investee income is reduced B. A loss is reported the same as a loss in value of other long-term assets C. The investor's stockholders' equity is reduced D. No adjustment is necessary E. An extraordinary loss would be reported

26. Under the equity method, when the company's share of cumulative losses equals its investment and the company has no obligation or intention to fund such additional losses, which of the following statements is true? A. The investor should change to the fair-value method to account for its investment B. The investor should suspend applying the equity method until the investee reports income C. The investor should suspend applying the equity method and not record any equity in income of investee until its share of future profits is sufficient to recover losses that have not previously been recorded D. The cumulative losses should be reported as a prior period adjustment E. The investor should report these losses as extraordinary items

27. When an investor sells shares of its investee company, which of the following statements is true? A. A realized gain or loss is reported as the difference between selling price and original cost B. An unrealized gain or loss is reported as the difference between selling price and original cost C. A realized gain or loss is reported as the difference between selling price and carrying value D. An unrealized gain or loss is reported as the difference between selling price and carrying value E. Any gain or loss is reported as part as comprehensive income

28. When applying the equity method, how is the excess of cost over book value accounted for? A. The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of current assets B. The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of total assets C. The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of net assets D. The excess is allocated to goodwill E. The excess is ignored

29. After allocating cost in excess of book value, which asset or liability would not be amortized over a useful life? A. Cost of goods sold B. Property, plant, & equipment C. Patents D. Goodwill E. Bonds payable

30. Which statement is true concerning unrealized profits in inventory transfers using the equity method? A. The investee must defer upstream ending inventory profits B. The investee must defer upstream beginning inventory profits C. The investor must defer downstream ending inventory profits D. The investor must defer downstream beginning inventory profits E. The investor must defer upstream beginning inventory profits

31. Which statement is true concerning unrealized profits in inventory transfers using the equity method? A. The investor and investee make reciprocal entries to defer and realize inventory profits B. The same adjustments are made for upstream and downstream transfers C. Different adjustments are made for upstream and downstream transfers D. No adjustments are necessary E. Adjustments will be made only when profits are known upon sale to outsiders

On January 1, 2008, Dawson, Incorporated, paid $100,000 for a 30% interest in Sacco Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2008, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2009 it reported income of $75,000 and dividends of $30,000. Assume Dawson has the ability to significantly influence the operations of Sacco.

32. The amount allocated to goodwill at January 1, 2008 is A. $25,000 B. $13,000 C. $9,000 D. $16,000 E. $10,000

33. The equity in income of Sacco for 2008 is A. $9,000 B. $13,500 C. $15,000 D. $7,500 E. $50,000


35. The balance in the investment in Sacco account at December 31, 2008 is A. $100,000 B. $112,000 C. $106,000 D. $107,500 E. 140,000

36. The balance in the investment in Sacco account at December 31, 2009 is A. $119,500 B. $125,500 C. $116,500 D. $118,000 E. $100,000

Dodge, Incorporated acquires 15% of Gates Corporation on January 1, 2007, for $105,000 when the book value of Gates was $600,000. During 2007 Gates reported net income of $150,000 and paid dividends of $50,000. On January 1, 2008, Dodge purchased an additional 25% of Gates for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2007 but Dodge has deemed it necessary to change to the equity method after the second purchase. During 2008 Gates reported net income of $200,000 and reported dividends of $75,000.

37. The income reported by Dodge for 2007 with regard to the Gates investment is A. $7,500 B. $22,500 C. $15,000 D. $100,000 E. $150,000


39. Which adjustment would be made to change from the fair-value method to the equity method? A. A debit to additional paid-in capital for $15,000 B. A credit to additional paid-in capital for $15,000 C. A debit to retained earnings for $15,000 D. A credit to retained earnings for $15,000 E. A credit to a gain on investment

40. The balance in the investment account at December 31, 2008 is A. $370,000 B. $355,000 C. $305,000 D. $400,000 E. $105,000

Clancy Incorporated, sold $210,000 of its inventory to Reid Company during 2008 for $350,000. Reid sold $224,000 of this merchandise in 2008 with the remainder to be disposed of during 2009. Assume Clancy owns 30% of Reid and applies the equity method.

41. What journal entry will be recorded at the end of 2008 to defer the unrealized inter-company profits?

A. Entry A B. Entry B C. Entry C D. Entry D E. No entry is necessary

42. What journal entry will be recorded in 2009 to realize the inter-company profit that was deferred in 2008?


On January 1, 2007, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2008 Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2007, was $1,000,000. The book value of Cook on January 1, 2008, was $1,150,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over five years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years:

On, April 1, 2009, just after its first dividend receipt, Mehan sells 10,000 shares of its investment.

43. What is the balance in the investment account at December 31, 2007? A. $150,000 B. $172,500 C. $180,000 D. $157,500 E. $170,000

44. How much income did Mehan report from Cook during 2007? A. $30,000 B. $22,500 C. $7,500 D. $0 E. $50,000

45. How much income did Mehan report from Cook during 2008? A. $90,000 B. $110,000 C. $67,500 D. $87,500 E. $78,750

46. What was the balance in the investment account at December 31, 2008? A. $517,500 B. $537,500 C. $520,000 D. $540,000 E. $211,250

47. What was the balance in the investment account at April 1, 2009 just before the sale of shares? A. $468,281 B. $468,750 C. $558,375 D. $616,000 E. $624,375

48. How much of Cook's net income did Mehan report for the year 2009? A. $61,750 B. $81,250 C. $72,500 D. $59,250 E. $75,000

On January 4, 2007, Harley, Inc. acquired 40% of the outstanding common stock of Bike Co. for $2,400,000. This investment gave Harley the ability to exercise significant influence over Bike. Bike's assets on that date were recorded at $10,500,000 with liabilities of $4,500,000. There were no other differences between book and fair values. During 2007, Bike reported net income of $500,000. For 2008, Bike reported net income of $800,000. Dividends of $300,000 were paid in each of these two years.

49. How much income did Harley report from Bike for 2007? A. $120,000 B. $200,000 C. $300,000 D. $320,000 E. $500,000


51. What was the reported balance of Harley's Investment in Bike Co. at December 31, 2007? A. $880,000 B. $2,400,000 C. $2,480,000 D. $2,600,000 E. $2,900,000

52. What was the reported balance of Harley's Investment in Bike Co. at December 31, 2008? A. $2,400,000 B. $2,480,000 C. $2,500,000 D. $2,600,000 E. $2,680,000

On January 1, 2008, Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000, which approximated book value. During 2008, Barney paid dividends of $30,000 and reported a net loss of $70,000.

53. What is the balance in the investment account on December 31, 2008? A. $1,900,000 B. $1,960,000 C. $2,000,000 D. $2,016,000 E. $2,028,000

54. What amount of equity income would Anderson recognize in 2008 from its ownership interest in Barney? A. $12,000 income B. $12,000 loss C. $16,000 loss D. $28,000 income E. $28,000 loss

55. Luffman Inc. owns 30% of Bruce Inc. and appropriately applies the equity method. During the current year, Bruce bought inventory costing $52,000 and then sold it to Luffman for $80,000. At year-end, all of the merchandise had been sold by Luffman to other customers. What amount of unrealized inter-company profit must be deferred by Luffman? A. $0 B. $8,400 C. $28,000 D. $52,000 E. $80,000

On January 3, 2008, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation, paying $1,500,000. There was no goodwill or other cost allocation associated with the investment. Roberts has significant influence over Thomas. During 2008, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2009, Roberts sold 15,000 shares for $800,000.

56. What was the balance in the investment account before the shares were sold? A. $1,560,000 B. $1,600,000 C. $1,700,000 D. $1,800,000 E. $1,860,000

57. What is the gain/loss on the sale of the 15,000 shares? A. $0 B. $10,000 gain C. $12,000 loss D. $15,000 loss E. $20,000 gain

58. What is the balance in the investment account after the sale of the 15,000 shares? A. $750,000 B. $760,000 C. $780,000 D. $790,000 E. $800,000

59. What is the appropriate journal entry to record the sale of the 15,000 shares?

A. A Above B. B Above C. C Above D. D Above E. E Above

On January 4, 2008, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly's net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2008, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2009, Mason sold 10,000 shares for $150,000.

60. What was the balance in the investment account before the shares were sold? A. $520,000 B. $544,000 C. $560,000 D. $604,000 E. $620,000

61. What is the gain/loss on the sale of the 10,000 shares? A. $20,000 gain B. $10,000 gain C. $1,000 gain D. $1,000 loss E. $10,000 loss




On January 4, 2008, Bailey Corp. purchased 40% of the voting common stock of Emery Co., paying $3,000,000. Bailey properly accounts for this investment using the equity method. At the time of the investment, Emery's total stockholders' equity was $5,000,000. Bailey gathered the following information about Emery's assets and liabilities whose book values and fair values differed:

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Emery Co. reported net income of $400,000 for 2008 and paid dividends of $200,000 during that year.

64. What is the amount of the excess of purchase price over book value? A. $200,000 B. $800,000 C. $1,000,000 D. $2,000,000 E. $3,000,000

65. How much goodwill is associated with this investment? A. $500,000 B. $0 C. $100,000 D. $200,000 E. $2,000,000

66. What is the amount of excess amortization expense for Bailey's investment in Emery for the first year? A. $0 B. $84,000 C. $100,000 D. $160,000 E. $400,000

On January 1, 2008, Jackie Corp. purchased 30% of the voting common stock of Rob Co., paying $2,000,000. Jackie properly accounts for this investment using the equity method. At the time of the investment, Rob's total stockholders' equity was $3,000,000. Jackie gathered the following information about Rob's assets and liabilities whose book values and fair values differed:

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Rob Co. reported net income of $300,000 for 2008 and paid dividends of $100,000 during that year.

67. What is the amount of the excess of purchase price over book value? A. $100,000 B. $400,000 C. $800,000 D. $1,000,000 E. $1,100,000

68. How much goodwill is associated with this investment? A. $500,000 B. $0 C. $650,000 D. $1,000,000 E. $2,000,000

69. What is the amount of excess amortization expense for Jackie Corp's investment in Rob Co. for the first year? A. $0 B. $30,000 C. $40,000 D. $55,000 E. $60,000

70. What is the balance in Jackie Corp's Investment in Rob Co. account at December 31, 2008? A. $2,000,000 B. $2,005,000 C. $2,060,000 D. $2,090,000 E. $2,200,000

Acker Inc. bought 40% of Howell Co. on January 1, 2008 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows:

Howell reported net income of $100,000 in 2008 and $120,000 in 2009 while paying $40,000 in dividends each year. Refer To: 01-71

71. What is the amount of unrealized inter-company inventory profit to be deferred on December 31, 2008? A. $1,600 B. $4,000 C. $8,000 D. $15,000 E. $20,000


73. What is the Equity in Howell Income that should be reported by Acker in 2008? A. $10,000 B. $24,000 C. $36,000 D. $38,400 E. $40,000

74. What is the balance in Acker's Investment in Howell account at December 31, 2008? A. $576,000 B. $598,400 C. $604,400 D. $606,000 E. $616,000



Cayman Inc. bought 30% of Maya Company on January 1, 2008 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows:

Maya reported net income of $100,000 in 2008 and $120,000 in 2009 while paying $40,000 in dividends each year.

77. What is the amount of unrealized inter-company inventory profit to be deferred on December 31, 2008? A. $900 B. $3,000 C. $4,500 D. $6,000 E. $9,000

78. What is the amount of unrealized inventory gain to be deferred on December 31, 2009? A. $1,500 B. $2,400 C. $3,600 D. $4,000 E. $8,000

79. What is the Equity in Maya Income that should be reported by Cayman in 2008? A. $17,100 B. $18,000 C. $25,500 D. $29,100 E. $30,900

80. What is the balance in Cayman's Investment in Maya account at December 31, 2008? A. $463,500 B. $467,100 C. $468,000 D. $468,900 E. $480,000



83. Which of the following results in a decrease in the investment account when applying the equity method? A. Dividends paid by the investor B. Net income of the investee C. Net income of the investor D. Unrealized gain on inter-company inventory transfers for the current year E. Purchase of additional common stock by the investor during the current year

84. Which of the following results in an increase in the investment account when applying the equity method? A. Unrealized gain on inter-company inventory transfers for the prior year B. Unrealized gain on inter-company inventory transfers for the current year C. Dividends paid by the investor D. Dividends paid by the investee E. Sale of a portion of the investment during the current year

85. Which of the following results in a decrease in the Equity in Investee Income account when applying the equity method? A. Dividends paid by the investor B. Net income of the investee C. Unrealized gain on inter-company inventory transfers for the current year D. Unrealized gain on inter-company inventory transfers for the prior year E. Extraordinary gain of the investee

86. Which of the following results in an increase in the Equity in Investee Income account when applying the equity method? A. Amortizations of purchase price over book value on date of purchase B. Amortizations of purchase price over book value on date of purchase for the prior year C. Extraordinary gain of the investor D. Unrealized gain on inter-company inventory transfers for the prior year E. Sale of a portion of the investment at a loss

Renfroe, Inc. acquires 10% of Stanley Corporation on January 1, 2007, for $90,000 when the book value of Stanley was $1,000,000. During 2007, Stanley reported net income of $215,000 and paid dividends of $50,000. On January 1, 2008, Renfroe purchased an additional 30% of Stanley for $325,000. Any excess of cost over book value is attributable to goodwill with an indefinite life. During 2008, Renfroe reported net income of $320,000 and paid dividends of $50,000.

87. How much is the adjustment to the Investment in Stanley Corporation for the change from the fair-value method to the equity method on January 1, 2008? A. A debit of $16,500 B. A debit of $21,500 C. A debit of $90,000 D. A debit of $165,000 E. There is no adjustment

88. What is the balance in the Investment in Stanley Corporation on December 31, 2008? A. $415,000 B. $512,500 C. $523,000 D. $539,500 E. $544,500

89. For each of the following numbered situations below, select the best letter answer concerning accounting for investments: (A.) Increase the investment account. (B.) Decrease the investment account. (C.) Increase dividend revenue. (D.) No adjustment necessary. (1.) Income reported by 40% owned investee. (2.) Income reported by 10% owned investee. (3.) Loss reported by 40% owned investee. (4.) Loss reported by 10% investee. (5.) Change from fair-value method to equity method. Prior income exceeded dividends. (6.) Change from fair-value method to equity method. Prior income was less than dividends. (7.) Change from equity method to fair-value method. Prior income exceeded dividends. (8.) Change from equity method to fair-value method. Prior income was less than dividends. (9.) Dividends received from 40% investee. (10.) Dividends received from 10% investee. (11.) Purchase of additional shares of investee. (12.) Unrealized ending inventory profits using the equity method.

90. Jarmon Company owns twenty-three percent of the voting common stock of Kaleski Corp. Jarmon does not have the ability to exercise significant influence over the operations of Kaleski. What method should Jarmon use to account for its investment in Kaleski?

91. Idler Co. has an investment in Cowl Corp. for which it uses the equity method. Cowl has suffered large losses for several years and the balance in the investment account has been reduced to zero. How should Idler account for this investment?

92. Which types of transactions, exchanges or events would indicate that an investor has the ability to exercise significant influence over the operations of an investee?

93. You are auditing a company that owns twenty percent of the voting common stock of another corporation and uses the equity method to account for the investment. How would you verify that the equity method is appropriate in this case?

94. How does the use of the equity method affect the investor's financial statements?

95. What is the primary objective of the equity method of accounting for an investment?

96. What is the justification for the timing of recognition of income under the equity method?

97. What argument could be made against the equity method?

98. How would a change be made from the equity method to the fair value method?

99. Why did the APB and the FASB require an investor to accrue a liability for future income taxes when using the equity method?

100. When should an investor not use the equity method for an investment of 21% in another corporation?

101. What is the primary objective of the fair value method of accounting for an investment?

102. How would a change be made from the fair value method to the equity method?

103. Charlie Co. owns 30% of the voting common stock of Turf Services Inc. Charlie uses the equity method to account for its investment. On January 1, 2008, the balance in the investment account was $624,000. During 2008, Turf Services reported net income of $120,000 and paid dividends of $30,000. What is the balance in the investment account as of December 31, 2008?

104. Tinker Co. owns 25% of the common stock of Harbor Co. and uses the equity method to account for the investment. During 2008, Harbor reported income of $120,000 and paid dividends of $40,000. Harbor owns a building with a useful life of twenty years which is undervalued by $80,000. Required: Prepare a schedule to show the equity income Tinker should recognize for 2008 related to this investment.

105. Aqua Corp. purchased 30% of the common stock of Marcus Co. by paying $500,000. Of this amount, $50,000 is associated with goodwill. Required: Prepare the journal entry to record Aqua's investment.

106. On January 2, 2008, Heinreich Co. paid $500,000 for 25% of the voting common stock of Jones Corp. At the time of the investment, Jones had net assets with a book value and fair value of $1,800,000. During 2008, Jones incurred a net loss of $60,000 and paid dividends of $100,000. Any excess cost over book value is attributable to goodwill with an indefinite life. Required: 1) Prepare a schedule to show the amount of goodwill from Heinrich's investment in Jones. 2) Prepare a schedule to show the balance in Heinreich's investment account at December 31, 2008.

107. On January 3, 2008, Jenkins Corp. acquired 40% of the outstanding common stock of Bolivar Co. for $1,200,000. This acquisition gave Jenkins the ability to exercise significant influence over the investee. The book value of the acquired shares was $950,000. Any excess cost over the underlying book value was assigned to a patent that was undervalued on Bolivar's balance sheet. This patent has a remaining useful life of ten years. For the year ended December 31, 2008, Bolivar reported net income of $312,000 and paid cash dividends of $96,000. Required: Prepare a schedule to show the balance Jenkins a should report as its Investment in Bolivar Co. at December 31, 2008.

108. On January 1, 2008, Spark Corp. acquired a 40% interest in Cranston Inc. for $250,000. On that date, Cranston's balance sheet disclosed net assets of $430,000. During 2008, Cranston reported net income of $100,000 and paid cash dividends of $30,000. Spark sold inventory costing $40,000 to Cranston during 2008 for $50,000. Cranston used all of this merchandise in its operations during 2008. Any excess cost over fair value is attributable to an unamortized trademark with a 20 year remaining life. Required: Prepare all of Spark's journal entries for 2008 to apply the equity method to this investment.

109. Wathan Inc. sold $180,000 in inventory to Miller Co. during 2008, for $270,000. Miller resold $108,000 of this merchandise in 2008 with the remainder to be disposed of during 2009. Required: Assuming Wathan owns 25% of Miller and applies the equity method, prepare the journal entry Walthan should have recorded at the end of 2008 to defer the unrealized inter-company inventory profit?

110. Jager Inc. holds 30% of the outstanding voting shares of Kinson Co. and appropriately applies the equity method of accounting. Amortization associated with this investment equals $11,000 per year. For 2008, Kinson reported earnings of $100,000 and paid cash dividends of $40,000. During 2008, Kinson acquired inventory for $62,400, which was then sold to Jager for $96,000. At the end of 2008, Jager still held some of this inventory at its transfer price of $50,000. Required: Determine the amount of Equity in Investee Income Jager should have reported for 2008.

111. On January 2, 2008, Hull Corp. paid $516,000 for 24% (48,000 shares) of the outstanding common stock of Oliver Co. Hull used the equity method to account for the investment. At the end of 2008, the balance in the investment account was $620,000. On January 2, 2009, Hull sold 12,000 shares of Oliver stock for $12 per share. For 2009, Oliver reported income of $118,000 and paid dividends of $30,000. Required: (A.) Prepare the journal entry to record the sale of the 12,000 shares. (B.) After the sale has been recorded, what is the balance in the investment account? (C.) What percentage of Oliver Co. stock does Hull own after selling the 12,000 shares? (D.) Because of the sale of stock, Hull can no longer exercise significant influence over the operations of Oliver. What effect will this have on Hull's accounting for the investment? (E.) Prepare Hull's journal entries related to the investment for the rest of 2009.

112. On January 1, 2008, Jolley Corp. paid $250,000 for 25% of the voting common stock of Tige Co. On that date, the book value of Tige was $850,000. A building with a carrying value of $160,000 was actually worth $220,000. The building had a remaining life of twenty years. Tige owned a trademark valued at $90,000 over cost that was to be amortized over 20 years. During 2008, Tige sold to Jolley inventory costing $60,000, at a markup of 50% on cost. At the end of the year, Jolley still owned some of these goods with a transfer price of $33,000. Jolly uses a perpetual inventory system. Tige reported net income of $200,000 during 2008. This amount included an extraordinary gain of $35,000. Tige paid dividends totaling $40,000. Required: Prepare all of Jolley's journal entries for 2008 in relation to Tige Co., Assume the equity method is appropriate for use.

113. On January 1, 2008, Pond Co. acquired 40% of the outstanding voting common shares of Ramp Co. for $700,000. On that date, Ramp reported assets and liabilities with book values of $2.2 million and $700,000, respectively. A building owned by Ramp had an appraised value of $300,000, although it had a book value of only $120,000. This building had a 12-year remaining life and no salvage value. It was being depreciated on the straight-line basis. Ramp generated net income of $300,000 in 2008 and a loss of $120,000 in 2009. In each of these two years, Ramp paid a cash dividend of $70,000 to its stockholders. During 2008, Ramp sold inventory to Pond that had an original cost of $60,000. The merchandise was sold to Pond for $96,000. Of this balance, $72,000 was resold to outsiders during 2008 and the remainder was sold during 2009. In 2009, Ramp sold inventory to Pond for $180,000. This inventory had cost only $108,000. Pond resold $120,000 of the inventory during 2009 and the rest during 2010. Required: For 2008 and then for 2009, calculate the equity income to be reported by Pond for external reporting purposes.

114. Pursley, Inc. acquires 10% of Ritz Corporation on January 3, 2008, for $80,000 when the book value of Ritz was $800,000. During 2008 Ritz reported net income of $125,000 and paid dividends of $30,000. On January 1, 2009, Pursley purchased an additional 20% of Ritz for $325,000, giving Pursley the ability to significantly influence the operating policies of Ritz. Any excess of cost over book value is attributable to goodwill with an indefinite life. What journal entry(ies) is(are) required on January 1, 2009?

Steven Company owns 40% of the outstanding voting common stock of Nicole Corp. and has the ability to significantly influence the investee's operations. On January 3, 2009, the balance in the Investment in Nicole Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2009, Nicole earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2008, Nicole had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2008. Additional sales were made to Steven in 2009 at a transfer price of $75,000 that had cost Nicole $54,000. Only 10% of the 2009 purchases had not been sold to outsiders by the end of 2009.

115. What amount of unrealized inter-company inventory profit should be deferred by Steven at December 31, 2008?

116. What amount of unrealized inter-company profit should be deferred by Steven at December 31, 2009?

117. What amount of equity income would Steven have recognized in 2009 from its ownership interest in Nicole?

118. What was the balance in the Investment in Nicole Corp. account at December 31, 2006?

ch1 Key

1. Gaw Company owns 15% of the common stock of Trace Corporation and used the fair-value method to account for this investment. Trace reported net income of $110,000 for 2008 and paid dividends of $60,000 on October 1, 2008. How much income should Gaw recognize on this investment in 2008? A. $16,500 B. $9,000 C. $25,500 D. $7,500 E. $50,000

Difficulty: Easy Hoyle - Chapter 01 #1

2. Yaro Company owns 30% of the common stock of Dew Co. and uses the equity method to account for the investment. During 2008, Dew reported income of $250,000 and paid dividends of $80,000. There is no amortization associated with the investment. During 2008, how much income should Yaro recognize related to this investment? A. $24,000 B. $75,000 C. $99,000 D. $51,000 E. $80,000


3. On January 1, 2008, Pacer Company paid $1,920,000 for 60,000 shares of Lennon Co.'s voting common stock which represents a 45% investment. No allocation to goodwill or other specific account was made. Significant influence over Lennon was achieved by this acquisition. Lennon distributed a dividend of $2.50 per share during 2008 and reported net income of $670,000. What was the balance in the Investment in Lennon Co. account found in the financial records of Pacer as of December 31, 2008? A. $2,040,500 B. $2,212,500 C. $2,260,500 D. $2,171,500 E. $2,071,500

Difficulty: Medium Hoyle - Chapter 01 #3

4. A company should always use the equity method to account for an investment if A. It has the ability to exercise significant influence over the operating policies of the investee B. It owns 30% of another company's stock C. It has a controlling interest (more than 50%) of another company's stock D. The investment was made primarily to earn a return on excess cash E. It does not have the ability to exercise significant influence over the operating policies of the investee


5. On January 1, 2006, Dermot Company purchased 15% of the voting common stock of Horne Corp. On January 1, 2008, Dermot purchased 28% of Horne's voting common stock. If Dermot achieves significant influence with this new investment, how must Dermot account for the change to the equity method? A. It must use the equity method for 2008 but should make no changes in its financial statements for 2007 and 2006 B. It should prepare consolidated financial statements for 2008 C. It must restate the financial statements for 2007 and 2006 as if the equity method had been used for those two years D. It should record a prior period adjustment at the beginning of 2008 but should not restate the financial statements for 2007 and 2006 E. It must restate the financial statements for 2007 as if the equity method had been used then


6. During January 2007, Wells, Inc. acquired 30% of the outstanding common stock of Wilton Co. for $1,400,000. This investment gave Wells the ability to exercise significant influence over Wilton. Wilton's assets on that date were recorded at $6,400,000 with liabilities of $3,000,000. Any excess of cost over book value of Wells' investment was attributed to unrecorded patents having a remaining useful life of ten years. In 2007, Wilton reported net income of $600,000. For 2008, Wilton reported net income of $750,000. Dividends of $200,000 were paid in each of these two years. What was the reported balance of Wells' Investment in Wilson Co. at December 31, 2008? A. $1,609,000 B. $1,485,000 C. $1,685,000 D. $1,647,000 E. $1,054,300

Difficulty: Hard Hoyle - Chapter 01 #6

7. On January 1, 2008, Bangle Company purchased 30% of the voting common stock of Sleat Corp. for $1,000,000. Any excess of cost over book value was assigned to goodwill. During 2008, Sleat paid dividends of $24,000 and reported a net loss of $140,000. What is the balance in the investment account on December 31, 2008? A. $950,800 B. $958,000 C. $836,000 D. $990,100 E. $956,400


8. On January 1, 2007, Jordan Inc. acquired 30% of Nico Corp. Jordan used the equity method to account for the investment. On January 1, 2008, Jordan sold 2/3 of its investment in Nico. It no longer had the ability to exercise significant influence over the operations of Nico. How should Jordan have accounted for this change? A. Jordan should continue to use the equity method to maintain consistency in its financial statements B. Jordan should restate the prior years' financial statements and change the balance in the investment account as if the fair-value method had been used since 2007 C. Jordan has the option of using either the equity method or the fair-value method for 2007 and future years D. Jordan should report the effect of the change from the equity to the fair-value method as a retrospective change in accounting principle E. Jordan should use the fair-value method for 2008 and future years but should not make a retrospective adjustment to the investment account


9. Tower Inc. owns 30% of Yale Co. and applies the equity method. During the current year, Tower bought inventory costing $66,000 and then sold it to Yale for $120,000. At year-end, only $24,000 of merchandise was still being held by Yale. What amount of inter-company inventory profit must be deferred by Tower? A. $6,480 B. $3,240 C. $10,800 D. $16,200 E. $6,610


10. On January 4, 2006, Watts Co. purchased 40,000 shares (40%) of the common stock of Adams Corp., paying $800,000. There was no goodwill or other cost allocation associated with the investment. Watts has significant influence over Adams. During 2006, Adams reported income of $200,000 and paid dividends of $80,000. On January 2, 2006, Watts sold 5,000 shares for $125,000. What was the balance in the investment account after the shares had been sold? A. $848,000 B. $742,000 C. $723,000 D. $761,000 E. $925,000


On January 3, 2008, Austin Corp. purchased 25% of the voting common stock of Gainsville Co., paying $2,500,000. Austin decided to use the equity method to account for this investment. At the time of the investment, Gainsville's total stockholders' equity was $8,000,000. Austin gathered the following information about Gainsville's assets and liabilities:

For all other assets and liabilities, book value and fair value were equal. Any excess of cost over fair value was attributed to goodwill, which has not been impaired.

Hoyle - Chapter 01

11. What is the amount of goodwill associated with the investment? A. $500,000 B. $200,000 C. $0 D. $300,000 E. $400,000


12. For 2008, what is the total amount of excess amortization for Austin's 25% investment in Gainsville? A. $27,500 B. $20,000 C. $30,000 D. $120,000 E. $70,000


13. Club Co. appropriately uses the equity method to account for its investment in Chip Corp. As of the end of 2008, Chip's common stock had suffered a significant decline in fair value, which is expected to be recovered over the next several months. How should Club account for the decline in value? A. Club should switch to the fair-value method B. No accounting because the decline in fair value is temporary C. Club should decrease the balance in the investment account to the current value and recognize a loss on the income statement D. Club should not record its share of Chip's 2008 earnings until the decline in the fair value of the stock has been recovered E. Club should decrease the balance in the investment account to the current value and recognize an unrealized loss on the balance sheet


14. An upstream sale of inventory is a sale A. Between subsidiaries owned by a common parent B. With the transfer of goods scheduled by contract to occur on a specified future date C. In which the goods are physically transported by boat from a subsidiary to its parent D. Made by the investor to the investee E. Made by the investee to the investor


Starge Inc. owns 30% of the outstanding voting common stock of Ticker Co. and has the ability to significantly influence the investee's operations and decision making. On January 1, 2008, the balance in the Investment in Ticker Co. account was $402,000. Amortization associated with this acquisition is $8,000 per year. During 2008, Ticker earned an income of $108,000 and paid cash dividends of $36,000. Previously in 2007, Ticker had sold inventory costing $28,800 to Starge for $48,000. All but 25% of this merchandise was consumed by Starge during 2007. The remainder was used during the first few weeks of 2008. Additional sales were made to Starge in 2008; inventory costing $33,600 was transferred at a price of $60,000. Of this total, 40% was not consumed until 2009.

Hoyle - Chapter 01

15. What amount of equity income would Starge have recognized in 2008 from its ownership interest in Ticker? A. $19,792 B. $27,640 C. $22,672 D. $24,400 E. $21,748


16. What was the balance in the Investment in Ticker Co. account at the end of 2008? A. $401,136 B. $413,872 C. $418,840 D. $412,432 E. $410,148


On January 1, 2007, Deuce Inc. acquired 15% of Wiz Co.'s outstanding common stock for $62,400 and categorized the investment as an available-for-sale security. Wiz earned net income of $96,000 in 2007 and paid dividends of $36,000. On January 1, 2008, Deuce bought an additional 10% of Wiz for $54,000. This second purchase gave Deuce the ability to significantly influence the decision making of Wiz. During 2008, Wiz earned $120,000 and paid $48,000 in dividends. As of December 31, 2008, Wiz reported a net book value of $468,000. For both purchases, Deuce concluded that Wiz Co.'s book values approximated fair values and attributed any excess cost to goodwill.

Hoyle - Chapter 01

17. On Deuce's December 31, 2008 balance sheet, what balance was reported for the Investment in Wiz Co. account? A. $139,560 B. $143,400 C. $310,130 D. $186,080 E. $182,250


18. What amount of equity income should Deuce have reported for 2008? A. $30,000 B. $16,420 C. $38,340 D. $18,000 E. $32,840


19. In a situation where the investor exercises significant influence over the investee, which of the following entries is not actually posted to the books of the investor? 1) Debit to the Investment account and a Credit to the Equity in Investee Income account. 2) Debit to Cash (for dividends received from the investee) and a Credit to Dividend Revenue. 3) Debit to Cash (for dividends received from the investee) and a Credit to the Investment account. A. Entries 1 and 2 B. Entries 2 and 3 C. Entry 1 only D. Entry 2 only E. Entry 3 only


20. All of the following would require use of the equity method for investments except A. Material inter-company transactions B. Investor participation in the policy-making process of the investee C. Valuation at fair value D. Technological dependency E. Significant control


21. All of the following statements regarding the investment account using the equity method are true except A. The investment is recorded at cost B. Dividends received are reported as revenue C. Net income of investee increases the investment account D. Dividends received reduce the investment account E. Amortization of fair value over cost reduces the investment account


22. A company has been using the fair-value method to account for its investment. The company now has the ability to significantly control the investee and the equity method has been deemed appropriate. Which of the following statements is true? A. A cumulative effect change in accounting principle must occur B. A prospective change in accounting principle must occur C. A retrospective change in accounting principle must occur D. The investor will not receive future dividends from the investee E. Future dividends will continue to be recorded as revenue


23. A company has been using the equity method to account for its investment. The company sells shares and does not continue to have significant control. Which of the following statements is true? A. A cumulative effect change in accounting principle must occur B. A prospective change in accounting principle must occur C. A retrospective change in accounting principle must occur D. The investor will not receive future dividends from the investee E. Future dividends will continue to reduce the investment account


24. An investee company incurs an extraordinary loss during the period. The investor appropriately applies the equity method. Which of the following statements is true? A. Under the equity method, the investor only recognizes its share of investee's income from continuing operations B. The extraordinary loss would reduce the value of the investment C. The extraordinary loss should increase equity in investee income D. The extraordinary loss would not appear on the income statement but would be a component of comprehensive income E. The loss would be ignored but shown in the investor's notes to the financial statements


25. How should a permanent loss in value of an investment using the equity method be treated? A. The equity in investee income is reduced B. A loss is reported the same as a loss in value of other long-term assets C. The investor's stockholders' equity is reduced D. No adjustment is necessary E. An extraordinary loss would be reported


26. Under the equity method, when the company's share of cumulative losses equals its investment and the company has no obligation or intention to fund such additional losses, which of the following statements is true? A. The investor should change to the fair-value method to account for its investment B. The investor should suspend applying the equity method until the investee reports income C. The investor should suspend applying the equity method and not record any equity in income of investee until its share of future profits is sufficient to recover losses that have not previously been recorded D. The cumulative losses should be reported as a prior period adjustment E. The investor should report these losses as extraordinary items


27. When an investor sells shares of its investee company, which of the following statements is true? A. A realized gain or loss is reported as the difference between selling price and original cost B. An unrealized gain or loss is reported as the difference between selling price and original cost C. A realized gain or loss is reported as the difference between selling price and carrying value D. An unrealized gain or loss is reported as the difference between selling price and carrying value E. Any gain or loss is reported as part as comprehensive income


28. When applying the equity method, how is the excess of cost over book value accounted for? A. The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of current assets B. The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of total assets C. The excess is allocated to the difference between fair value and book value multiplied by the percent ownership of net assets D. The excess is allocated to goodwill E. The excess is ignored


29. After allocating cost in excess of book value, which asset or liability would not be amortized over a useful life? A. Cost of goods sold B. Property, plant, & equipment C. Patents D. Goodwill E. Bonds payable


30. Which statement is true concerning unrealized profits in inventory transfers using the equity method? A. The investee must defer upstream ending inventory profits B. The investee must defer upstream beginning inventory profits C. The investor must defer downstream ending inventory profits D. The investor must defer downstream beginning inventory profits E. The investor must defer upstream beginning inventory profits


31. Which statement is true concerning unrealized profits in inventory transfers using the equity method? A. The investor and investee make reciprocal entries to defer and realize inventory profits B. The same adjustments are made for upstream and downstream transfers C. Different adjustments are made for upstream and downstream transfers D. No adjustments are necessary E. Adjustments will be made only when profits are known upon sale to outsiders


On January 1, 2008, Dawson, Incorporated, paid $100,000 for a 30% interest in Sacco Corporation. This investee had assets with a book value of $550,000 and liabilities of $300,000. A patent held by Sacco having a book value of $10,000 was actually worth $40,000 with a six year remaining life. Any goodwill associated with this acquisition is considered to have an indefinite life. During 2008, Sacco reported income of $50,000 and paid dividends of $20,000 while in 2009 it reported income of $75,000 and dividends of $30,000. Assume Dawson has the ability to significantly influence the operations of Sacco.

Hoyle - Chapter 01

32. The amount allocated to goodwill at January 1, 2008 is A. $25,000 B. $13,000 C. $9,000 D. $16,000 E. $10,000






35. The balance in the investment in Sacco account at December 31, 2008 is A. $100,000 B. $112,000 C. $106,000 D. $107,500 E. 140,000


36. The balance in the investment in Sacco account at December 31, 2009 is A. $119,500 B. $125,500 C. $116,500 D. $118,000 E. $100,000


Dodge, Incorporated acquires 15% of Gates Corporation on January 1, 2007, for $105,000 when the book value of Gates was $600,000. During 2007 Gates reported net income of $150,000 and paid dividends of $50,000. On January 1, 2008, Dodge purchased an additional 25% of Gates for $200,000. Any excess cost over book value is attributable to goodwill with an indefinite life. The fair-value method was used during 2007 but Dodge has deemed it necessary to change to the equity method after the second purchase. During 2008 Gates reported net income of $200,000 and reported dividends of $75,000.

Hoyle - Chapter 01





39. Which adjustment would be made to change from the fair-value method to the equity method? A. A debit to additional paid-in capital for $15,000 B. A credit to additional paid-in capital for $15,000 C. A debit to retained earnings for $15,000 D. A credit to retained earnings for $15,000 E. A credit to a gain on investment


40. The balance in the investment account at December 31, 2008 is A. $370,000 B. $355,000 C. $305,000 D. $400,000 E. $105,000


Clancy Incorporated, sold $210,000 of its inventory to Reid Company during 2008 for $350,000. Reid sold $224,000 of this merchandise in 2008 with the remainder to be disposed of during 2009. Assume Clancy owns 30% of Reid and applies the equity method.

Hoyle - Chapter 01

41. What journal entry will be recorded at the end of 2008 to defer the unrealized inter-company profits?



42. What journal entry will be recorded in 2009 to realize the inter-company profit that was deferred in 2008?



On January 1, 2007, Mehan, Incorporated purchased 15,000 shares of Cook Company for $150,000 giving Mehan a 15% ownership of Cook. On January 1, 2008 Mehan purchased an additional 25,000 shares (25%) of Cook for $300,000. This last purchase gave Mehan the ability to apply significant influence over Cook. The book value of Cook on January 1, 2007, was $1,000,000. The book value of Cook on January 1, 2008, was $1,150,000. Any excess of cost over book value for this second transaction is assigned to a database and amortized over five years. Cook reports net income and dividends as follows. These amounts are assumed to have occurred evenly throughout the years:

On, April 1, 2009, just after its first dividend receipt, Mehan sells 10,000 shares of its investment.

Hoyle - Chapter 01

43. What is the balance in the investment account at December 31, 2007? A. $150,000 B. $172,500 C. $180,000 D. $157,500 E. $170,000


44. How much income did Mehan report from Cook during 2007? A. $30,000 B. $22,500 C. $7,500 D. $0 E. $50,000


45. How much income did Mehan report from Cook during 2008? A. $90,000 B. $110,000 C. $67,500 D. $87,500 E. $78,750


46. What was the balance in the investment account at December 31, 2008? A. $517,500 B. $537,500 C. $520,000 D. $540,000 E. $211,250


47. What was the balance in the investment account at April 1, 2009 just before the sale of shares? A. $468,281 B. $468,750 C. $558,375 D. $616,000 E. $624,375


48. How much of Cook's net income did Mehan report for the year 2009? A. $61,750 B. $81,250 C. $72,500 D. $59,250 E. $75,000


On January 4, 2007, Harley, Inc. acquired 40% of the outstanding common stock of Bike Co. for $2,400,000. This investment gave Harley the ability to exercise significant influence over Bike. Bike's assets on that date were recorded at $10,500,000 with liabilities of $4,500,000. There were no other differences between book and fair values. During 2007, Bike reported net income of $500,000. For 2008, Bike reported net income of $800,000. Dividends of $300,000 were paid in each of these two years.

Hoyle - Chapter 01





51. What was the reported balance of Harley's Investment in Bike Co. at December 31, 2007? A. $880,000 B. $2,400,000 C. $2,480,000 D. $2,600,000 E. $2,900,000


52. What was the reported balance of Harley's Investment in Bike Co. at December 31, 2008? A. $2,400,000 B. $2,480,000 C. $2,500,000 D. $2,600,000 E. $2,680,000


On January 1, 2008, Anderson Company purchased 40% of the voting common stock of Barney Company for $2,000,000, which approximated book value. During 2008, Barney paid dividends of $30,000 and reported a net loss of $70,000.

Hoyle - Chapter 01

53. What is the balance in the investment account on December 31, 2008? A. $1,900,000 B. $1,960,000 C. $2,000,000 D. $2,016,000 E. $2,028,000


54. What amount of equity income would Anderson recognize in 2008 from its ownership interest in Barney? A. $12,000 income B. $12,000 loss C. $16,000 loss D. $28,000 income E. $28,000 loss


55. Luffman Inc. owns 30% of Bruce Inc. and appropriately applies the equity method. During the current year, Bruce bought inventory costing $52,000 and then sold it to Luffman for $80,000. At year-end, all of the merchandise had been sold by Luffman to other customers. What amount of unrealized inter-company profit must be deferred by Luffman? A. $0 B. $8,400 C. $28,000 D. $52,000 E. $80,000


On January 3, 2008, Roberts Company purchased 30% of the 100,000 shares of common stock of Thomas Corporation, paying $1,500,000. There was no goodwill or other cost allocation associated with the investment. Roberts has significant influence over Thomas. During 2008, Thomas reported income of $300,000 and paid dividends of $100,000. On January 4, 2009, Roberts sold 15,000 shares for $800,000.

Hoyle - Chapter 01

56. What was the balance in the investment account before the shares were sold? A. $1,560,000 B. $1,600,000 C. $1,700,000 D. $1,800,000 E. $1,860,000


57. What is the gain/loss on the sale of the 15,000 shares? A. $0 B. $10,000 gain C. $12,000 loss D. $15,000 loss E. $20,000 gain







On January 4, 2008, Mason Co. purchased 40,000 shares (40%) of the common stock of Hefly Corp., paying $560,000. At that time, the book value and fair value of Hefly's net assets was $1,400,000. The investment gave Mason the ability to exercise significant influence over the operations of Hefly. During 2008, Hefly reported income of $150,000 and paid dividends of $40,000. On January 2, 2009, Mason sold 10,000 shares for $150,000.

Hoyle - Chapter 01

60. What was the balance in the investment account before the shares were sold? A. $520,000 B. $544,000 C. $560,000 D. $604,000 E. $620,000


61. What is the gain/loss on the sale of the 10,000 shares? A. $20,000 gain B. $10,000 gain C. $1,000 gain D. $1,000 loss E. $10,000 loss







On January 4, 2008, Bailey Corp. purchased 40% of the voting common stock of Emery Co., paying $3,000,000. Bailey properly accounts for this investment using the equity method. At the time of the investment, Emery's total stockholders' equity was $5,000,000. Bailey gathered the following information about Emery's assets and liabilities whose book values and fair values differed:

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Emery Co. reported net income of $400,000 for 2008 and paid dividends of $200,000 during that year.

Hoyle - Chapter 01

64. What is the amount of the excess of purchase price over book value? A. $200,000 B. $800,000 C. $1,000,000 D. $2,000,000 E. $3,000,000


65. How much goodwill is associated with this investment? A. $500,000 B. $0 C. $100,000 D. $200,000 E. $2,000,000


66. What is the amount of excess amortization expense for Bailey's investment in Emery for the first year? A. $0 B. $84,000 C. $100,000 D. $160,000 E. $400,000


On January 1, 2008, Jackie Corp. purchased 30% of the voting common stock of Rob Co., paying $2,000,000. Jackie properly accounts for this investment using the equity method. At the time of the investment, Rob's total stockholders' equity was $3,000,000. Jackie gathered the following information about Rob's assets and liabilities whose book values and fair values differed:

Any excess of cost over fair value was attributed to goodwill, which has not been impaired. Rob Co. reported net income of $300,000 for 2008 and paid dividends of $100,000 during that year.

Hoyle - Chapter 01

67. What is the amount of the excess of purchase price over book value? A. $100,000 B. $400,000 C. $800,000 D. $1,000,000 E. $1,100,000


68. How much goodwill is associated with this investment? A. $500,000 B. $0 C. $650,000 D. $1,000,000 E. $2,000,000


69. What is the amount of excess amortization expense for Jackie Corp's investment in Rob Co. for the first year? A. $0 B. $30,000 C. $40,000 D. $55,000 E. $60,000


70. What is the balance in Jackie Corp's Investment in Rob Co. account at December 31, 2008? A. $2,000,000 B. $2,005,000 C. $2,060,000 D. $2,090,000 E. $2,200,000


Acker Inc. bought 40% of Howell Co. on January 1, 2008 for $576,000. The equity method of accounting was used. The book value and fair value of the net assets of Howell on that date were $1,440,000. Acker began supplying inventory to Howell as follows:

Howell reported net income of $100,000 in 2008 and $120,000 in 2009 while paying $40,000 in dividends each year. Refer To: 01-71

Hoyle - Chapter 01





Cayman Inc. bought 30% of Maya Company on January 1, 2008 for $450,000. The equity method of accounting was used. The book value and fair value of the net assets of Maya on that date were $1,500,000. Maya began supplying inventory to Cayman as follows:

Maya reported net income of $100,000 in 2008 and $120,000 in 2009 while paying $40,000 in dividends each year.

Hoyle - Chapter 01

77. What is the amount of unrealized inter-company inventory profit to be deferred on December 31, 2008? A. $900 B. $3,000 C. $4,500 D. $6,000 E. $9,000


78. What is the amount of unrealized inventory gain to be deferred on December 31, 2009? A. $1,500 B. $2,400 C. $3,600 D. $4,000 E. $8,000










83. Which of the following results in a decrease in the investment account when applying the equity method? A. Dividends paid by the investor B. Net income of the investee C. Net income of the investor D. Unrealized gain on inter-company inventory transfers for the current year E. Purchase of additional common stock by the investor during the current year


84. Which of the following results in an increase in the investment account when applying the equity method? A. Unrealized gain on inter-company inventory transfers for the prior year B. Unrealized gain on inter-company inventory transfers for the current year C. Dividends paid by the investor D. Dividends paid by the investee E. Sale of a portion of the investment during the current year


85. Which of the following results in a decrease in the Equity in Investee Income account when applying the equity method? A. Dividends paid by the investor B. Net income of the investee C. Unrealized gain on inter-company inventory transfers for the current year D. Unrealized gain on inter-company inventory transfers for the prior year E. Extraordinary gain of the investee


86. Which of the following results in an increase in the Equity in Investee Income account when applying the equity method? A. Amortizations of purchase price over book value on date of purchase B. Amortizations of purchase price over book value on date of purchase for the prior year C. Extraordinary gain of the investor D. Unrealized gain on inter-company inventory transfers for the prior year E. Sale of a portion of the investment at a loss


Renfroe, Inc. acquires 10% of Stanley Corporation on January 1, 2007, for $90,000 when the book value of Stanley was $1,000,000. During 2007, Stanley reported net income of $215,000 and paid dividends of $50,000. On January 1, 2008, Renfroe purchased an additional 30% of Stanley for $325,000. Any excess of cost over book value is attributable to goodwill with an indefinite life. During 2008, Renfroe reported net income of $320,000 and paid dividends of $50,000.

Hoyle - Chapter 01

87. How much is the adjustment to the Investment in Stanley Corporation for the change from the fair-value method to the equity method on January 1, 2008? A. A debit of $16,500 B. A debit of $21,500 C. A debit of $90,000 D. A debit of $165,000 E. There is no adjustment


88. What is the balance in the Investment in Stanley Corporation on December 31, 2008? A. $415,000 B. $512,500 C. $523,000 D. $539,500 E. $544,500


89. For each of the following numbered situations below, select the best letter answer concerning accounting for investments: (A.) Increase the investment account. (B.) Decrease the investment account. (C.) Increase dividend revenue. (D.) No adjustment necessary. (1.) Income reported by 40% owned investee. (2.) Income reported by 10% owned investee. (3.) Loss reported by 40% owned investee. (4.) Loss reported by 10% investee. (5.) Change from fair-value method to equity method. Prior income exceeded dividends. (6.) Change from fair-value method to equity method. Prior income was less than dividends. (7.) Change from equity method to fair-value method. Prior income exceeded dividends. (8.) Change from equity method to fair-value method. Prior income was less than dividends. (9.) Dividends received from 40% investee. (10.) Dividends received from 10% investee. (11.) Purchase of additional shares of investee. (12.) Unrealized ending inventory profits using the equity method.

(1) A; (2) D; (3) B; (4) D; (5) A; (6) B; (7) D; (8) D; (9) B; (10) C; (11) A; (12) B


90. Jarmon Company owns twenty-three percent of the voting common stock of Kaleski Corp. Jarmon does not have the ability to exercise significant influence over the operations of Kaleski. What method should Jarmon use to account for its investment in Kaleski?

The fair-value method should be used. Generally, ownership of more than twenty percent of the voting common stock would be presumed to carry significant influence and would require use of the equity method. The equity method is not appropriate in this case because of the lack of the ability to exercise significant influence.


91. Idler Co. has an investment in Cowl Corp. for which it uses the equity method. Cowl has suffered large losses for several years and the balance in the investment account has been reduced to zero. How should Idler account for this investment?

Idler should discontinue the use of the equity method. The investment would have a zero balance until investee profits eliminate unrealized losses.


92. Which types of transactions, exchanges or events would indicate that an investor has the ability to exercise significant influence over the operations of an investee?

When an investor has the ability to exercise significant influence over the operations of an investee, the investor should use the equity method to account for the investment. The Accounting Principles Board suggested several events or conditions which would indicate such influence: (1) investor representation on the investee's board of directors; (2) material transactions between the companies; (3) interchange of managerial personnel; (4) technological dependency between the companies; and (5) the extent of investor ownership and the concentration of other ownership interests in the investee; (6) investor participation in the policy-making process of the investee. All of these conditions should be examined to determine whether the investor has the ability to exercise significant influence over the investee.


93. You are auditing a company that owns twenty percent of the voting common stock of another corporation and uses the equity method to account for the investment. How would you verify that the equity method is appropriate in this case?

In order to verify that the equity method is appropriate, the auditor should determine whether the investor is able to exercise significant influence over the operations of the investee. The ability to influence the investee's operations is the most important criterion for adopting the equity method. The auditor should look for such evidence of significant influence as (1) frequent or material inter-company transactions; (2) exchange of managerial personnel; (3) technological interdependency; and (4) investor participation in the decision-making process of the investee.


94. How does the use of the equity method affect the investor's financial statements?

The use of the equity method influences the investor's income statement and balance sheet. On the income statement, the investor's total revenues will be increased by its share of the investee's earnings reduced by any amortization of cost in excess of fair value of depreciable net assets. On the balance sheet, the investor's total assets will include the investment account. The balance of the investment account is increased by the investor's share of the investee's income and decreased by investee losses and dividends paid and amortization of depreciable allocations. The investor's retained earnings are influenced by the investee's income or loss reported on the investor's income statement.


95. What is the primary objective of the equity method of accounting for an investment?

The objective of the equity method is to reflect the special relationship between investor and investee. The equity method is used when the investor holds a relatively large share of the investee, but not a controlling interest. The large ownership percentage indicates that the investor has the ability to influence the decision-making processes of the investee. Use of the fair-value method would not reflect the relationship between the two parties.


96. What is the justification for the timing of recognition of income under the equity method?

According to the equity method, the investor should recognize its share of the investee's income in the same period in which it is earned by the investee. The APB argued that the equity method provided the best application of accrual accounting when the investor could exercise significant influence over the investee.


97. What argument could be made against the equity method?

An argument could be made against the recognition of income under the equity method. The investor is required to recognize its share of the investee's income even when it is unlikely that the investor will ever receive all of this amount in cash dividends.


98. How would a change be made from the equity method to the fair value method?

A change to the fair value method is appropriate when the investor can no longer exercise significant influence over the operations of the investee. No retrospective adjustment of previous years' financial statements or the balance in the investment account is required. The balance in the investment account at the time of the change would be treated as the cost of the investment.


99. Why did the APB and the FASB require an investor to accrue a liability for future income taxes when using the equity method?

The APB and the FASB required an investor to accrue a liability for income taxes on the amount of the investor's equity in the investee's income, even though it is possible that the investor will not receive some of that amount for years, if ever. Recognizing an income tax liability for the entire amount of potential income taxes is based on the matching principle. The amount of income tax expense is recognized in the same period as the related revenues regardless of when the tax will be paid.


100. When should an investor not use the equity method for an investment of 21% in another corporation?

When the investor does not have significant influence with regard to the investee.


101. What is the primary objective of the fair value method of accounting for an investment?

The investor possesses only a small percentage of an investee and cannot expect to have a significant impact on the operations or decision making of the investee. Therefore, the shares are bought in anticipation of cash dividends or in appreciation of stock market values.


102. How would a change be made from the fair value method to the equity method?

According to APB 18, the investment account and retained earnings of the investor should be adjusted to retrospectively restate results of operations of prior periods.


103. Charlie Co. owns 30% of the voting common stock of Turf Services Inc. Charlie uses the equity method to account for its investment. On January 1, 2008, the balance in the investment account was $624,000. During 2008, Turf Services reported net income of $120,000 and paid dividends of $30,000. What is the balance in the investment account as of December 31, 2008?


104. Tinker Co. owns 25% of the common stock of Harbor Co. and uses the equity method to account for the investment. During 2008, Harbor reported income of $120,000 and paid dividends of $40,000. Harbor owns a building with a useful life of twenty years which is undervalued by $80,000. Required: Prepare a schedule to show the equity income Tinker should recognize for 2008 related to this investment.


105. Aqua Corp. purchased 30% of the common stock of Marcus Co. by paying $500,000. Of this amount, $50,000 is associated with goodwill. Required: Prepare the journal entry to record Aqua's investment.


106. On January 2, 2008, Heinreich Co. paid $500,000 for 25% of the voting common stock of Jones Corp. At the time of the investment, Jones had net assets with a book value and fair value of $1,800,000. During 2008, Jones incurred a net loss of $60,000 and paid dividends of $100,000. Any excess cost over book value is attributable to goodwill with an indefinite life. Required: 1) Prepare a schedule to show the amount of goodwill from Heinrich's investment in Jones. 2) Prepare a schedule to show the balance in Heinreich's investment account at December 31, 2008.


107. On January 3, 2008, Jenkins Corp. acquired 40% of the outstanding common stock of Bolivar Co. for $1,200,000. This acquisition gave Jenkins the ability to exercise significant influence over the investee. The book value of the acquired shares was $950,000. Any excess cost over the underlying book value was assigned to a patent that was undervalued on Bolivar's balance sheet. This patent has a remaining useful life of ten years. For the year ended December 31, 2008, Bolivar reported net income of $312,000 and paid cash dividends of $96,000. Required: Prepare a schedule to show the balance Jenkins a should report as its Investment in Bolivar Co. at December 31, 2008.


108. On January 1, 2008, Spark Corp. acquired a 40% interest in Cranston Inc. for $250,000. On that date, Cranston's balance sheet disclosed net assets of $430,000. During 2008, Cranston reported net income of $100,000 and paid cash dividends of $30,000. Spark sold inventory costing $40,000 to Cranston during 2008 for $50,000. Cranston used all of this merchandise in its operations during 2008. Any excess cost over fair value is attributable to an unamortized trademark with a 20 year remaining life. Required: Prepare all of Spark's journal entries for 2008 to apply the equity method to this investment.


109. Wathan Inc. sold $180,000 in inventory to Miller Co. during 2008, for $270,000. Miller resold $108,000 of this merchandise in 2008 with the remainder to be disposed of during 2009. Required: Assuming Wathan owns 25% of Miller and applies the equity method, prepare the journal entry Walthan should have recorded at the end of 2008 to defer the unrealized inter-company inventory profit?


110. Jager Inc. holds 30% of the outstanding voting shares of Kinson Co. and appropriately applies the equity method of accounting. Amortization associated with this investment equals $11,000 per year. For 2008, Kinson reported earnings of $100,000 and paid cash dividends of $40,000. During 2008, Kinson acquired inventory for $62,400, which was then sold to Jager for $96,000. At the end of 2008, Jager still held some of this inventory at its transfer price of $50,000. Required: Determine the amount of Equity in Investee Income Jager should have reported for 2008.


111. On January 2, 2008, Hull Corp. paid $516,000 for 24% (48,000 shares) of the outstanding common stock of Oliver Co. Hull used the equity method to account for the investment. At the end of 2008, the balance in the investment account was $620,000. On January 2, 2009, Hull sold 12,000 shares of Oliver stock for $12 per share. For 2009, Oliver reported income of $118,000 and paid dividends of $30,000. Required: (A.) Prepare the journal entry to record the sale of the 12,000 shares. (B.) After the sale has been recorded, what is the balance in the investment account? (C.) What percentage of Oliver Co. stock does Hull own after selling the 12,000 shares? (D.) Because of the sale of stock, Hull can no longer exercise significant influence over the operations of Oliver. What effect will this have on Hull's accounting for the investment? (E.) Prepare Hull's journal entries related to the investment for the rest of 2009.


112. On January 1, 2008, Jolley Corp. paid $250,000 for 25% of the voting common stock of Tige Co. On that date, the book value of Tige was $850,000. A building with a carrying value of $160,000 was actually worth $220,000. The building had a remaining life of twenty years. Tige owned a trademark valued at $90,000 over cost that was to be amortized over 20 years. During 2008, Tige sold to Jolley inventory costing $60,000, at a markup of 50% on cost. At the end of the year, Jolley still owned some of these goods with a transfer price of $33,000. Jolly uses a perpetual inventory system. Tige reported net income of $200,000 during 2008. This amount included an extraordinary gain of $35,000. Tige paid dividends totaling $40,000. Required: Prepare all of Jolley's journal entries for 2008 in relation to Tige Co., Assume the equity method is appropriate for use.

Required journal entries:

113. On January 1, 2008, Pond Co. acquired 40% of the outstanding voting common shares of Ramp Co. for $700,000. On that date, Ramp reported assets and liabilities with book values of $2.2 million and $700,000, respectively. A building owned by Ramp had an appraised value of $300,000, although it had a book value of only $120,000. This building had a 12-year remaining life and no salvage value. It was being depreciated on the straight-line basis. Ramp generated net income of $300,000 in 2008 and a loss of $120,000 in 2009. In each of these two years, Ramp paid a cash dividend of $70,000 to its stockholders. During 2008, Ramp sold inventory to Pond that had an original cost of $60,000. The merchandise was sold to Pond for $96,000. Of this balance, $72,000 was resold to outsiders during 2008 and the remainder was sold during 2009. In 2009, Ramp sold inventory to Pond for $180,000. This inventory had cost only $108,000. Pond resold $120,000 of the inventory during 2009 and the rest during 2010. Required: For 2008 and then for 2009, calculate the equity income to be reported by Pond for external reporting purposes.


114. Pursley, Inc. acquires 10% of Ritz Corporation on January 3, 2008, for $80,000 when the book value of Ritz was $800,000. During 2008 Ritz reported net income of $125,000 and paid dividends of $30,000. On January 1, 2009, Pursley purchased an additional 20% of Ritz for $325,000, giving Pursley the ability to significantly influence the operating policies of Ritz. Any excess of cost over book value is attributable to goodwill with an indefinite life. What journal entry(ies) is(are) required on January 1, 2009?


Steven Company owns 40% of the outstanding voting common stock of Nicole Corp. and has the ability to significantly influence the investee's operations. On January 3, 2009, the balance in the Investment in Nicole Corp. account was $503,000. Amortization associated with this acquisition is $12,000 per year. During 2009, Nicole earned net income of $120,000 and paid cash dividends of $40,000. Previously in 2008, Nicole had sold inventory costing $35,000 to Steven for $50,000. All but 25% of that inventory had been sold to outsiders by Steven during 2008. Additional sales were made to Steven in 2009 at a transfer price of $75,000 that had cost Nicole $54,000. Only 10% of the 2009 purchases had not been sold to outsiders by the end of 2009.

Hoyle - Chapter 01

115. What amount of unrealized inter-company inventory profit should be deferred by Steven at December 31, 2008?

[($50,000 - $35,000) x .25 x .40] = $1,500


116. What amount of unrealized inter-company profit should be deferred by Steven at December 31, 2009?

[($75,000 - $54,000) x .10 x .40] = $840


117. What amount of equity income would Steven have recognized in 2009 from its ownership interest in Nicole?

[($120,000 x .4) - $12,000 - $840 + $1,500] = $36,660


118. What was the balance in the Investment in Nicole Corp. account at December 31, 2006?

[$503,000 + $36,660 - ($40,000 x .4)] = $523,660


ch1 Summary

Category # of Questions Difficulty: Easy 15 Difficulty: Hard 37 Difficulty: Medium 66 Hoyle - Chapter 01 135

ch2

Student: ___________________________________________________________________________

1. At the date of an acquisition which is not a bargain purchase, the acquisition method A. Consolidates the subsidiary's assets at fair value and the liabilities at book value B. Consolidates all subsidiary assets and liabilities at book value C. Consolidates all subsidiary assets and liabilities at fair value D. Consolidates current assets and liabilities at book value, long-term assets and liabilities at fair value E. Consolidates the subsidiary's assets at book value and the liabilities at fair value

2. In a purchase or acquisition where control is achieved, how would the land accounts of the parent and the land accounts of the subsidiary be combined?

A. Entry A B. Entry B C. Entry C D. Entry D E. Entry E

3. Lisa Co. paid cash for all of the voting common stock of Victoria Corp. Victoria will continue to exist as a separate corporation. Entries for the consolidation of Lisa and Victoria would be recorded in A. A worksheet B. Lisa's general journal C. Victoria's general journal D. Victoria's secret consolidation journal E. The general journals of both companies

4. Using the purchase method, goodwill is generally defined as: A. Cost of the investment less the subsidiary's book value at the beginning of the year B. Cost of the investment less the subsidiary's book value at the acquisition date C. Cost of the investment less the subsidiary's Fair Value at the beginning of the year D. Cost of the investment less the subsidiary's Fair Value at acquisition date E. Is no longer allowed under federal law

5. Direct combination costs and stock issuance costs are often incurred in the process of making a controlling investment in another company. How should those costs be accounted for in a Purchase transaction?


6. Direct combination costs and stock issuance costs are often incurred in the process of making a controlling investment in another company. How should those costs be accounted for in an Acquisition transaction?


7. What is the primary accounting difference between accounting for when the subsidiary is dissolved and when the subsidiary retains its incorporation? A. If the subsidiary is dissolved, it will not be operated as a separate division B. If the subsidiary is dissolved, assets and liabilities are consolidated at their book values C. If the subsidiary retains its incorporation, there will be no goodwill associated with the acquisition D. If the subsidiary retains its incorporation, assets and liabilities are consolidated at their book values E. If the subsidiary retains its incorporation, the consolidation is not formally recorded in the accounting records of the acquiring company

8. According to SFAS No. 141, the pooling of interest method for business combinations A. Is preferred to the purchase method B. Is allowed for all new acquisitions C. Is no longer allowed for business combinations after June 30, 2001 D. Is no longer allowed for business combinations after December 31, 2001 E. Is only allowed for large corporate mergers like Exxon and Mobil

9. In a pooling of interests, A. Revenues and expenses are consolidated for the entire fiscal year, even if the combination occurred late in the year B. Goodwill may be recognized C. Consolidation is accomplished using the fair values of both companies D. The transactions may involve the exchange of preferred stock or debt securities as well as common stock E. The transaction is properly regarded as an acquisition of one company by another

10. A company is not required to consolidate a subsidiary in which it holds more than 50% of the voting stock when A. The subsidiary is located in a foreign country B. The subsidiary in question is a finance subsidiary C. The company holds more than 50% but less than 60% of the subsidiary's voting stock D. The company holds less than 75% of the subsidiary's voting stock E. The subsidiary is in bankruptcy

11. Which one of the following is a characteristic of a business combination that should be accounted for as an acquisition? A. The combination must involve the exchange of equity securities only B. The transaction establishes an acquisition fair value basis for the company being acquired C. The two companies may be about the same size and it is difficult to determine the acquired company and the acquiring company D. The transaction may be considered to be the uniting of the ownership interests of the companies involved E. The acquired subsidiary must be smaller in size than the acquiring parent

12. Which one of the following is a characteristic of a business combination that should be accounted for as a purchase? A. The combination must involve the exchange of equity securities only B. The transaction clearly establishes an acquisition price for the company being acquired C. The two companies may be about the same size and it is difficult to determine the acquired company and the acquiring company D. The transaction may be considered to be the uniting of the ownership interests of the companies involved E. The acquired subsidiary must be smaller in size than the acquiring parent

13. A statutory merger is a(n) A. Business combination in which only one of the two companies continues to exist as a legal corporation B. Business combination in which both companies continues to exist C. Acquisition of a competitor D. Acquisition of a supplier or a customer E. Legal proposal to acquire outstanding shares of the target's stock

14. How are stock issuance costs and direct combination costs treated in a business combination which is accounted for as an acquisition when the subsidiary will retain its incorporation? A. Stock issuance costs are a part of the acquisition costs and the direct combination costs are expensed B. Direct combination costs are a part of the acquisition costs and the stock issuance costs are a reduction to additional paid-in capital C. Direct combination costs are expensed and stock issuance costs are a reduction to additional paid-in capital D. Both are treated as part of the acquisition price E. Both are treated as a reduction to additional paid-in capital

Bullen Inc. assumed 100% control over Vicker Inc. on January 1, 20X1. The book value and fair value of Vicker's accounts on that date (prior to creating the combination) follow, along with the book value of Bullen's accounts:

15. Assume that Bullen issued 12,000 shares of common stock with a $5 par value and a $47 fair value to obtain all of Vicker's outstanding stock. In this transaction (which is not a pooling of interests), how much goodwill should be recognized? A. $144,000 B. $104,000 C. $64,000 D. $60,000 E. $0

16. Assume that Bullen issued 12,000 shares of common stock with a $5 par value and a $42 fair value for all of the outstanding stock of Vicker. What is the consolidated Land as a result of this transaction (which is not a pooling of interests)? A. $460,000 B. $510,000 C. $500,000 D. $520,000 E. $490,000

17. Assume that Bullen issued 12,000 shares of common stock with a $5 par value and a $42 fair value for all of the outstanding shares of Vicker. What will be the consolidated Additional Paid-In Capital and Retained Earnings (January 1, 20X1 balances) as a result of this transaction (which is not a pooling of interests)? A. $20,000 and $160,000 B. $20,000 and $260,000 C. $380,000 and $160,000 D. $464,000 and $160,000 E. $380,000 and $260,000

18. Assume that Bullen issued preferred stock with a par value of $240,000 and a fair value of $500,000 for all of the outstanding shares of Vicker in a business combination (which is not a pooling of interests). What will be the balance in the consolidated Inventory and Land accounts? A. $440,000, $496,000 B. $440,000, $520,000 C. $425,000, $505,000 D. $402,000, $520,000 E. $427,000, $510,000

19. Assume that Bullen paid a total of $480,000 in cash for all of the shares of Vicker. In addition, Bullen paid $35,000 to a group of attorneys for their work in arranging the combination to be accounted for as a purchase. What will be the balance in consolidated goodwill? A. $0 B. $20,000 C. $35,000 D. $55,000

20. Assume that Bullen paid a total of $480,000 in cash for all of the shares of Vicker. In addition, Bullen paid $35,000 to a group of attorneys for their work in arranging the combination to be accounted for as an acquisition. What will be the balance in consolidated goodwill? A. $0 B. $20,000 C. $35,000 D. $55,000

Prior to being united in a business combination, Botkins Inc. and Volkerson Corp. had the following stockholders' equity figures:

Botkins issued 56,000 new shares of its common stock valued at $3.25 per share for all of the outstanding stock of Volkerson.

21. Assume that Botkins acquired Volkerson as a purchase combination. Immediately afterwards, what are consolidated Additional Paid-In Capital and Retained Earnings, respectively? A. $133,000 and $360,000 B. $236,000 and $360,000 C. $130,000 and $360,000 D. $236,000 and $490,000 E. $133,000 and $490,000

22. Assume that Botkins and Volkerson were being joined in a pooling of interests and this occurred on January 1, 2000, using the same values given. Immediately afterwards, what is consolidated Additional Paid-In Capital? A. $138,000 B. $266,000 C. $130,000 D. $236,000 E. $133,000

23. Chapel Hill Company had common stock of $350,000 and retained earnings of $490,000. Blue Town Inc. had common stock of $700,000 and retained earnings of $980,000. On January 1, 2009, Blue Town issued 34,000 shares of common stock with a $12 par value and a $35 fair value for all of Chapel Hill Company's outstanding common stock. This combination was accounted for as an acquisition. Immediately after the combination, what was the consolidated net assets? A. $2,520,000 B. $1,190,000 C. $1,680,000 D. $2,870,000 E. $2,030,000

24. Which of the following is a not a reason for a business combination to take place? A. Cost savings through elimination of duplicate facilities B. Quick entry for new and existing products into domestic and foreign markets C. Diversification of business risk D. Vertical integration E. Cost synergies throughout the organizations

25. Which of the following statements is true regarding a statutory merger? A. The original companies dissolve while remaining as separate divisions of a newly created company B. Both companies remain in existence as legal corporations with one corporation now a subsidiary of the acquiring company C. The acquired company dissolves as a separate corporation and becomes a division of the acquiring company D. The acquiring company acquires the stock of the acquired company as an investment E. A statutory merger is no longer a legal option

26. Which of the following statements is true regarding a statutory consolidation? A. The original companies dissolve while remaining as separate divisions of a newly created company B. Both companies remain in existence as legal corporations with one corporation now a subsidiary of the acquiring company C. The acquired company dissolves as a separate corporation and becomes a division of the acquiring company D. The acquiring company acquires the stock of the acquired company as an investment E. A statutory consolidation is no longer a legal option

27. In a transaction accounted for using the purchase method where cost exceeds book value, which statement is true for the acquiring company with regard to its investment? A. Net assets of the acquired company are revalued to their fair values and any excess of cost over fair value is allocated to goodwill B. Net assets of the acquired company are maintained at book value and any excess of cost over book value is allocated to goodwill C. Assets are revalued to their fair values. Liabilities are maintained at book values. Any excess is allocated to goodwill D. Long-term assets are revalued to their fair values. Any excess is allocated to goodwill

28. In a transaction accounted for using the purchase method where cost is less than fair value, which statement is true? A. Negative goodwill is recorded B. A deferred credit is recorded C. Long-term assets of the acquired company are reduced in proportion to their fair values. Any excess is recorded as a deferred credit D. Long-term assets of the acquired company are reduced in proportion to their fair values. Any excess is recorded as an extraordinary gain E. Long-term assets and liabilities of the acquired company are reduced in proportion to their fair values. Any excess is recorded as an extraordinary gain

29. Which of the following statements is true regarding the pooling of interests method of accounting for a business combination? A. Net assets of the acquired company are reported at their book values B. Net assets of the acquired company are reported at their fair values C. Any goodwill associated with the acquisition has an indefinite life D. Subsequent amounts of cost in excess of fair value of net assets are amortized over their useful lives E. Indirect costs reduce additional paid-in capital

30. Which of the following statements is true? A. Pooling of interests is acceptable provided the twelve criteria required by the APB are met B. Pooling of interests is no longer acceptable for new combinations as stated in SFAS No. 141, "Business Combinations" C. Companies that used pooling of interests method in the past must make a retrospective accounting change in accounting principle D. Companies that used pooling of interests method in the past must make a cumulative effect accounting change in accounting principle E. Companies that used pooling of interests in the past must make a prospective change in accounting principle

The financial statements for Goodwin, Inc. and Corr Company for the year ended December 31, 20X1, prior to Goodwin's business combination transaction regarding Corr, follow (in thousands):

On December 31, 20X1, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to purchase all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560.

31. If the combination is accounted for as a purchase, at what amount is the investment recorded on Goodwin's books? A. $1,540 B. $1,800 C. $1,860 D. $1,825 E. $1,625

32. If the combination is accounted for as an acquisition, at what amount is the investment recorded on Goodwin's books? A. $1,540 B. $1,800 C. $1,860 D. $1,825 E. $1,625

33. Compute the consolidated revenues for 20X1. A. $2,700 B. $720 C. $920 D. $3,300 E. $1,540

34. Assuming the combination is accounted for as a purchase, compute the consolidated expenses for 20X1. A. $1,980 B. $2,380 C. $2,040 D. $2,015 E. $2,005

35. Assuming the combination is accounted for as an acquisition, compute the consolidated expenses for 20X1. A. $1,980 B. $2,380 C. $2,040 D. $2,015 E. $2,005

36. Compute the consolidated cash account at December 31, 20X1. A. $460 B. $425 C. $400 D. $435 E. $240

37. Compute the consolidated buildings (net) account at December 31, 20X1. A. $2,700 B. $3,370 C. $3,300 D. $3,260 E. $3,340

38. Compute the consolidated equipment (net) account at December 31, 20X1. A. $2,100 B. $3,500 C. $3,300 D. $3,000 E. $3,200

39. Assuming the combination is accounted for as a purchase, compute the consolidated goodwill account at December 31, 20X1. A. $0 B. $100 C. $125 D. $160 E. $45

40. Assuming the combination is accounted for as an acquisition, compute the consolidated goodwill account at December 31, 20X1. A. $0 B. $100 C. $125 D. $160 E. $45

41. Compute the consolidated common stock account at December 31, 20X1. A. $1,080 B. $1,480 C. $1,380 D. $2,280 E. $2,680

42. Compute the consolidated additional paid-in capital at December 31, 20X1. A. $810 B. $1,350 C. $1,675 D. $1,910 E. $1,875

43. Assuming the combination is accounted for as a purchase, compute the consolidated retained earnings at December 31, 20X1. A. $2,850 B. $3,450 C. $2,400 D. $2,800 E. $2,810

44. Assuming the combination is accounted for as an acquisition, compute the consolidated retained earnings at December 31, 20X1. A. $2,800 B. $2,825 C. $2,850 D. $3,425 E. $3,450

On January 1, 20X1, the Moody company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants and brokers for assistance in bringing about this purchase. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows:

Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40 and Buildings by $60.

45. If the transaction is accounted for as a purchase, what amount was recorded as the investment in Osorio? A. $930 B. $820 C. $800 D. $835 E. $815

46. If the transaction is accounted for as an acquisition, what amount was recorded as the investment in Osorio? A. $930 B. $820 C. $800 D. $835 E. $815

47. Compute the amount of consolidated inventories at date of combination. A. $1,080 B. $1,350 C. $1,360 D. $1,370 E. $290

48. Compute the amount of consolidated buildings (net) at date of combination. A. $1,700 B. $1,760 C. $1,655 D. $1,550 E. $1,660

49. Compute the amount of consolidated land at date of combination. A. $1,000 B. $816 C. $940 D. $916 E. $920

50. Compute the amount of consolidated equipment at date of combination. A. $580 B. $480 C. $559 D. $570 E. $560

51. Compute the amount of consolidated common stock at date of acquisition. A. $370 B. $570 C. $610 D. $330 E. $530

52. Compute the amount of consolidated additional paid-in capital at date of combination. A. $1,080 B. $1,420 C. $1,065 D. $1,425 E. $1,440

53. Compute the amount of consolidated cash after recording the transaction. A. $220 B. $185 C. $200 D. $205 E. $215

Carnes has the following account balances as of May 1, 2000 before a pooling of interests transaction takes place.

The fair value of Carnes' Land and Buildings are $650,000 and $550,000, respectively. On May 1, 2000, Riley Company issues 30,000 shares of its $10 par value ($25 fair value) common stock in exchange for all of the shares of Carnes' common stock.

54. On May 1, 2000, what value is assigned to the investment account? A. $300,000 B. $750,000 C. $800,000 D. $1,100,000 E. $1,300,000

55. At the date of pooling, by how much does Riley's retained earnings increase or decrease? A. $200,000 increase B. $200,000 decrease C. $700,000 increase D. $300,000 increase E. $300,000 decrease

56. Assume Riley issues 70,000 shares instead of 30,000 at date of acquisition. Riley currently has $40,000 of additional paid-in capital on its books. By how much will Riley's retained earnings increase or decrease as a result of the combination? A. $40,000 increase B. $200,000 increase C. $140,000 increase D. $160,000 increase E. $40,000 decrease

57. Assume Riley issues 70,000 shares instead of 30,000 at date of pooling. Assume Riley has no additional paid-in capital on its books. By how much will Riley's retained earnings increase or decrease as a result of the combination? A. $100,000 increase B. $200,000 increase C. $100,000 decrease D. $200,000 decrease E. No change

The financial balances for the Atwood Company and the Franz Company as of December 31, 20X1, are presented below. Also included are the fair values for Franz Company's net assets.

Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 20X1. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid.

58. Assuming Atwood accounts for the combination as a purchase, compute the investment to be recorded at date of acquisition. A. $1,760 B. $1,750 C. $1,775 D. $1,765 E. $1,120

59. Assuming Atwood accounts for the combination as an acquisition, compute the investment to be recorded at date of acquisition. A. $1,760 B. $1,750 C. $1,775 D. $1,765 E. $1,120

60. Compute consolidated inventory at the date of the business combination. A. $1,650 B. $1,810 C. $1,230 D. $580 E. $1,830

61. Compute consolidated land at the date of the business combination. A. $2,060 B. $1,800 C. $260 D. $2,050 E. $2,070

62. Compute consolidated buildings (net) at the date of the business combination. A. $2,450 B. $2,340 C. $1,800 D. $650 E. $1,690

63. Assuming Atwood accounts for the combination as a purchase, compute consolidated goodwill at the date of the combination. A. $360 B. $450 C. $460 D. $440 E. $475

64. Assuming Atwood accounts for the combination as an acquisition, compute consolidated goodwill at the date of the combination. A. $360 B. $450 C. $460 D. $440 E. $475

65. Compute consolidated equipment (net) at the date of the combination. A. $400 B. $660 C. $1,060 D. $1,040 E. $1,050

66. Assuming the combination is accounted for as a purchase, compute consolidated retained earnings at the date of the combination. A. $1,170 B. $1,650 C. $1,290 D. $1,810 E. $3,870

67. Assuming the combination is accounted for as an acquisition, compute consolidated retained earnings at the date of the combination. A. $1,160 B. $1,170 C. $1,280 D. $1,290 E. $1,640

68. Compute consolidated revenues at the date of the combination. A. $3,540 B. $2,880 C. $1,170 D. $1,650 E. $4,050

69. Assuming the combination is accounted for as a purchase, compute consolidated expenses at the date of the combination. A. $2,760 B. $3,380 C. $2,770 D. $2,735 E. $2,785

70. Assuming the combination is accounted for as an acquisition, compute consolidated expenses at the date of the combination. A. $2,760 B. $2,770 C. $2,785 D. $3,380 E. $3,390

Presented below are the financial balances for the Atwood Company and the Franz Company as of December 31, 2009, immediately before Atwood acquired Franz. Also included are the fair values for Franz Company's net assets at that date.

Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 2009. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Atwood is applying the acquisition method in accounting for Franz. To settle a difference of opinion regarding Franz's fair value, Atwood promises to pay an additional $5.2 (in thousands) to the former owners if Franz's earnings exceed a certain sum during the next year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is $5 (in thousands).

71. Compute the investment cost at date of acquisition. A. $1,760 B. $1,755 C. $1,750 D. $1,765 E. $1,120

72. Compute consolidated inventory at date of acquisition. A. $1,650 B. $1,810 C. $1,230 D. $580 E. $1,830

73. Compute consolidated land at date of acquisition. A. $2,060 B. $1,800 C. $260 D. $2,050 E. $2,070

74. Compute consolidated buildings (net) at date of acquisition. A. $2,450 B. $2,340 C. $1,800 D. $650 E. $1,690

75. Compute consolidated goodwill at date of acquisition. A. $455 B. $460 C. $450 D. $440 E. $465

76. Compute consolidated equipment at date of acquisition. A. $400 B. $660 C. $1,060 D. $1,040 E. $1,050

77. Compute consolidated retained earnings as a result of this acquisition. A. $1,160 B. $1,170 C. $1,265 D. $1,280 E. $1,650

78. Compute consolidated revenues at date of acquisition. A. $3,540 B. $2,880 C. $1,170 D. $1,650 E. $4,050

79. Compute consolidated expenses at date of acquisition. A. $2,760 B. $3,380 C. $2,770 D. $2,735 E. $2,785

80. Compute the consolidated cash upon completion of the acquisition. A. $870 B. $1,110 C. $1,080 D. $1,085 E. $635

Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 20X1. To obtain these shares, Flynn pays $400 (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the transaction. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek as of January 1, 20X1 follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands.

81. Assuming the combination is accounted for as a purchase, what amount will be reported for goodwill? A. $35 B. $5 C. $110 D. $70 E. $150

82. Assuming the combination is accounted for as an acquisition, what amount will be reported for goodwill? A. $55 B. $65 C. $70 D. $135 E. $175

83. What amount will be reported for consolidated receivables? A. $660 B. $640 C. $500 D. $460 E. $480

84. What amount will be reported for consolidated inventory? A. $960 B. $920 C. $700 D. $620 E. $660

85. What amount will be reported for consolidated buildings (net)? A. $1,420 B. $1,260 C. $1,140 D. $1,480 E. $1,200

86. What amount will be reported for consolidated equipment (net)? A. $385 B. $335 C. $435 D. $460 E. $360

87. What amount will be reported for consolidated long-term liabilities? A. $1,480 B. $1,440 C. $1,180 D. $1,100 E. $1,520

88. What amount will be reported for consolidated common stock? A. $1,200 B. $1,280 C. $1,400 D. $1,480 E. $1,390

89. Assuming the combination is accounted for as a purchase, what amount will be reported for consolidated retained earnings? A. $1,830 B. $1,350 C. $1,080 D. $1,560 E. $1,535

90. Assuming the combination is accounted for as an acquisition, what amount will be reported for consolidated retained earnings? A. $1,065 B. $1,080 C. $1,525 D. $1,535 E. $1,560

91. What amount will be reported for consolidated additional paid-in capital? A. $165 B. $150 C. $160 D. $175 E. $145

92. What amount will be reported for consolidated cash after the purchase transaction? A. $900 B. $875 C. $955 D. $980 E. $555

93. What term is used to refer to a business combination in which only one of the original companies continues to exist?

94. Dutch Co. has loaned $90,000 to its subsidiary, Hans Corp., which retains separate incorporation. How would this loan be treated on a consolidated balance sheet?

95. How are stock issuance costs accounted for in a business combination that is not a pooling of interests?

96. How are direct combination costs accounted for in a purchase transaction?

97. How are direct combination costs accounted for in an acquisition transaction?

98. Peterman Co. owns 55% of Samson Co. Under what circumstances would Peterman not be required to prepare consolidated financial statements?

99. How would you account for in-process research and development purchased in a business combination?

100. How would you account for in-process research and development acquired in a business combination accounted for as an acquisition?

101. Elon Corp. purchased all of the common stock of Finley Co., paying slightly less than the fair value of Finley's net assets. How should the difference between the purchase price and the fair value be treated if the transaction is treated as a purchase?

102. Elon Corp. obtained all of the common stock of Finley Co., paying slightly less than the fair value of Finley's net assets acquired. How should the difference between the consideration transferred and the fair value of the net assets be treated if the transaction is accounted for as an acquisition?

103. For purchase accounting, why are assets and liabilities of the subsidiary consolidated at fair value?

104. Goodwill is often created or purchased, during a business combination. Why doesn't Goodwill show up on the Parent company's trial balance as a separate account?

105. What are the three departures from SFAS 141 according to SFAS 141(R) Business Combinations?

106. How is contingent consideration accounted for according to SFAS 141(R) Business Combinations?

107. How are bargain purchases different between SFAS 141 and SFAS 141(R) Business Combinations?

108. Describe the accounting for direct costs, indirect costs and issuance costs under: (1) The pooling-of-interests method; (2) The purchase method; and (3) The acquisition method.

109. Bale Co. acquired Silo Inc. on October 1, 20X1, in a business combination transaction. Bale's net income for the year was $1,400,000, while Silo had net income of $400,000 earned evenly during the year. There was no goodwill and there were no other allocations. Required: What is consolidated net income for 20X1?

110. What is the difference in consolidated results between a business combination whereby the acquired company is dissolved and a business combination whereby separate incorporation is maintained?

111. Fine Co. issued its common stock in exchange for the common stock of Dandy Corp. in a business combination that was neither a pooling of interests nor a bargain purchase. At the date of the combination, Fine had land with a book value of $480,000 and a fair value of $620,000. Dandy had land with a book value of $170,000 and a fair value of $190,000. Required: If a consolidated balance sheet was prepared at the date of the combination, what was the consolidated balance for Land?

112. Lorne Co. issued its common stock in exchange for the common stock of Fenn Corp. in a combination accounted for as a pooling of interests. At the date of the combination, Lorne had land with a book value of $700,000 and a fair value of $980,000. Fenn had land with a book value of $280,000 and a fair value of $250,000. The purchase was not a bargain purchase. Required: If a consolidated balance sheet was prepared at the date of the combination, what was the consolidated balance for Land?

113. Jernigan Corp. had the following account balances at 12/31/X1:

Several of Jernigan's accounts have fair values that differ from book value: Land — $480,000; Building — $720,000; Inventory — $336,000; and Liabilities — $396,000. Inglewood Inc. obtained all of the outstanding common shares of Jernigan by issuing 20,000 shares of common stock having a $6 par value, but a $66 fair value. Stock issuance costs amounted to $12,000. Required: Prepare a fair value allocation and goodwill schedule at the date of the combination.

Salem Co. had the following account balances as of February 1, 2008:

Bellington Inc. paid $1.7 million in cash and issued 12,000 shares of its $30 par value common stock (valued at $90 per share) for all of Salem's outstanding common stock. This investment is accounted for using the purchase method.

114. Determine the balance for Goodwill that would be included in a February 1, 2008, consolidation.

115. Assume that Bellington paid cash of $2.8 million. No stock is issued. An additional $50,000 is paid in direct combination costs. Required: For Goodwill, determine what balance would be included in a February 1, 2008 consolidation.

116. On January 1, 2010, Chester Inc. acquires 100% of Festus Corp.'s outstanding common stock by exchanging 37,500 shares of Chester's $2 par value common voting stock. On January 1, 2010, Chester's voting common stock had a fair value of $40 per share. Festus' voting common shares were selling for $6.50 per share. Festus' balances on the acquisition date, just prior to acquisition are listed below. Chester is accounting for the investment in Festus using the acquisition method.

Required: Compute the value of the Goodwill account on the date of acquisition, 1/1/10.

The financial statements for Jode Inc. and Lakely Corp., just prior to their combination, for the year ending December 31, 2009, follow. Lakely's buildings were undervalued on its financial records by $60,000.

On December 31, 2009, Jode issued 54,000 new shares of its $10 par value stock to the owners of Lakely in exchange for all of the outstanding shares of that company. Jode's shares had a fair value on that date of $35 per share. Jode paid $34,000 to an investment bank for assisting in the arrangements. Jode also paid $24,000 in stock issuance costs. This combination is accounted for as an acquisition.

117. Prepare the journal entries to record (1) the issuance of stock by Jode and (2) the payment of the combination costs.

118. Required: Determine consolidated Net Income for at December 31, 2009.

119. Determine consolidated Paid-in Capital at December 31, 2009.

120. The following are preliminary financial statements for Black Co. and Blue Co. for the year ending December 31, 2008.

On December 31, 2008 (subsequent to the preceding statements), Black exchanged 10,000 shares of its $10 par value common stock for all of the outstanding shares of Blue. Black's stock on that date has a fair value of $60 per share. Black was willing to issue 10,000 shares of stock because Blue's land was appraised at $204,000. Black also paid $14,000 to several attorneys and accountants who assisted in creating this combination. Required: Assuming that these two companies retained their separate legal identities, prepare a consolidation worksheet as of December 31, 2008 assuming the transaction is treated as a purchase combination.


On December 31, 2009 (subsequent to the preceding statements), Black exchanged 10,000 shares of its $10 par value common stock for all of the outstanding shares of Blue. Black's stock on that date has a fair value of $60 per share. Black was willing to issue 10,000 shares of stock because Blue's land was appraised at $204,000. Black also paid $14,000 to several attorneys and accountants who assisted in creating this combination. Required: Assuming that these two companies retained their separate legal identities, prepare a consolidation worksheet as of December 31, 2009 assuming the transaction is treated as an acquisition combination.

122. How are direct and indirect costs accounted for when applying the acquisition method?

123. For each of the following situations, select the best answer concerning accounting for combinations: (A) Pooling-of-interests method only. (B) Purchase method only. (C) Acquisition method only. (D) Pooling-of-interests method and purchase method, but not acquisition method. (E) Purchase method and acquisition method, but not pooling-of-interests method. (F) Pooling-of-interests method and acquisition method, but not purchase method. (G) All methods (pooling-of-interests, purchase and acquisition.) (H) None of the methods (neither pooling-of-interests, purchase, nor acquisition.) _____1. Direct costs are expensed. _____2. Indirect costs are expensed. _____3. Direct costs reduce the additional paid-in capital of the acquirer. _____4. Both direct costs and indirect costs increase the investment account. _____5. Direct costs increase the investment account and stock issue costs reduce the acquirer's additional paid-in capital account. _____6. Contingent consideration increases the investment account at date of acquisition. _____7. Contingent consideration increases the investment account at a date subsequent to the acquisition date. _____8. A bargain purchase reduces the fair value of long-term assets. _____9. A bargain purchase is ignored or not applicable. _____10. A bargain purchase is recorded at date of acquisition as a gain (not extraordinary). _____11. The combination clearly defines an acquired company and an acquiring company. _____12. Method(s) appropriate to combinations prior to June 30, 2001.

ch2 Key

1. At the date of an acquisition which is not a bargain purchase, the acquisition method A. Consolidates the subsidiary's assets at fair value and the liabilities at book value B. Consolidates all subsidiary assets and liabilities at book value C. Consolidates all subsidiary assets and liabilities at fair value D. Consolidates current assets and liabilities at book value, long-term assets and liabilities at fair value E. Consolidates the subsidiary's assets at book value and the liabilities at fair value


2. In a purchase or acquisition where control is achieved, how would the land accounts of the parent and the land accounts of the subsidiary be combined?



3. Lisa Co. paid cash for all of the voting common stock of Victoria Corp. Victoria will continue to exist as a separate corporation. Entries for the consolidation of Lisa and Victoria would be recorded in A. A worksheet B. Lisa's general journal C. Victoria's general journal D. Victoria's secret consolidation journal E. The general journals of both companies


4. Using the purchase method, goodwill is generally defined as: A. Cost of the investment less the subsidiary's book value at the beginning of the year B. Cost of the investment less the subsidiary's book value at the acquisition date C. Cost of the investment less the subsidiary's Fair Value at the beginning of the year D. Cost of the investment less the subsidiary's Fair Value at acquisition date E. Is no longer allowed under federal law


5. Direct combination costs and stock issuance costs are often incurred in the process of making a controlling investment in another company. How should those costs be accounted for in a Purchase transaction?



6. Direct combination costs and stock issuance costs are often incurred in the process of making a controlling investment in another company. How should those costs be accounted for in an Acquisition transaction?



7. What is the primary accounting difference between accounting for when the subsidiary is dissolved and when the subsidiary retains its incorporation? A. If the subsidiary is dissolved, it will not be operated as a separate division B. If the subsidiary is dissolved, assets and liabilities are consolidated at their book values C. If the subsidiary retains its incorporation, there will be no goodwill associated with the acquisition D. If the subsidiary retains its incorporation, assets and liabilities are consolidated at their book values E. If the subsidiary retains its incorporation, the consolidation is not formally recorded in the accounting records of the acquiring company


8. According to SFAS No. 141, the pooling of interest method for business combinations A. Is preferred to the purchase method B. Is allowed for all new acquisitions C. Is no longer allowed for business combinations after June 30, 2001 D. Is no longer allowed for business combinations after December 31, 2001 E. Is only allowed for large corporate mergers like Exxon and Mobil


9. In a pooling of interests, A. Revenues and expenses are consolidated for the entire fiscal year, even if the combination occurred late in the year B. Goodwill may be recognized C. Consolidation is accomplished using the fair values of both companies D. The transactions may involve the exchange of preferred stock or debt securities as well as common stock E. The transaction is properly regarded as an acquisition of one company by another


10. A company is not required to consolidate a subsidiary in which it holds more than 50% of the voting stock when A. The subsidiary is located in a foreign country B. The subsidiary in question is a finance subsidiary C. The company holds more than 50% but less than 60% of the subsidiary's voting stock D. The company holds less than 75% of the subsidiary's voting stock E. The subsidiary is in bankruptcy


11. Which one of the following is a characteristic of a business combination that should be accounted for as an acquisition? A. The combination must involve the exchange of equity securities only B. The transaction establishes an acquisition fair value basis for the company being acquired C. The two companies may be about the same size and it is difficult to determine the acquired company and the acquiring company D. The transaction may be considered to be the uniting of the ownership interests of the companies involved E. The acquired subsidiary must be smaller in size than the acquiring parent


12. Which one of the following is a characteristic of a business combination that should be accounted for as a purchase? A. The combination must involve the exchange of equity securities only B. The transaction clearly establishes an acquisition price for the company being acquired C. The two companies may be about the same size and it is difficult to determine the acquired company and the acquiring company D. The transaction may be considered to be the uniting of the ownership interests of the companies involved E. The acquired subsidiary must be smaller in size than the acquiring parent


13. A statutory merger is a(n) A. Business combination in which only one of the two companies continues to exist as a legal corporation B. Business combination in which both companies continues to exist C. Acquisition of a competitor D. Acquisition of a supplier or a customer E. Legal proposal to acquire outstanding shares of the target's stock


14. How are stock issuance costs and direct combination costs treated in a business combination which is accounted for as an acquisition when the subsidiary will retain its incorporation? A. Stock issuance costs are a part of the acquisition costs and the direct combination costs are expensed B. Direct combination costs are a part of the acquisition costs and the stock issuance costs are a reduction to additional paid-in capital C. Direct combination costs are expensed and stock issuance costs are a reduction to additional paid-in capital D. Both are treated as part of the acquisition price E. Both are treated as a reduction to additional paid-in capital


Bullen Inc. assumed 100% control over Vicker Inc. on January 1, 20X1. The book value and fair value of Vicker's accounts on that date (prior to creating the combination) follow, along with the book value of Bullen's accounts:

Hoyle - Chapter 02

15. Assume that Bullen issued 12,000 shares of common stock with a $5 par value and a $47 fair value to obtain all of Vicker's outstanding stock. In this transaction (which is not a pooling of interests), how much goodwill should be recognized? A. $144,000 B. $104,000 C. $64,000 D. $60,000 E. $0


16. Assume that Bullen issued 12,000 shares of common stock with a $5 par value and a $42 fair value for all of the outstanding stock of Vicker. What is the consolidated Land as a result of this transaction (which is not a pooling of interests)? A. $460,000 B. $510,000 C. $500,000 D. $520,000 E. $490,000


17. Assume that Bullen issued 12,000 shares of common stock with a $5 par value and a $42 fair value for all of the outstanding shares of Vicker. What will be the consolidated Additional Paid-In Capital and Retained Earnings (January 1, 20X1 balances) as a result of this transaction (which is not a pooling of interests)? A. $20,000 and $160,000 B. $20,000 and $260,000 C. $380,000 and $160,000 D. $464,000 and $160,000 E. $380,000 and $260,000


18. Assume that Bullen issued preferred stock with a par value of $240,000 and a fair value of $500,000 for all of the outstanding shares of Vicker in a business combination (which is not a pooling of interests). What will be the balance in the consolidated Inventory and Land accounts? A. $440,000, $496,000 B. $440,000, $520,000 C. $425,000, $505,000 D. $402,000, $520,000 E. $427,000, $510,000


19. Assume that Bullen paid a total of $480,000 in cash for all of the shares of Vicker. In addition, Bullen paid $35,000 to a group of attorneys for their work in arranging the combination to be accounted for as a purchase. What will be the balance in consolidated goodwill? A. $0 B. $20,000 C. $35,000 D. $55,000


20. Assume that Bullen paid a total of $480,000 in cash for all of the shares of Vicker. In addition, Bullen paid $35,000 to a group of attorneys for their work in arranging the combination to be accounted for as an acquisition. What will be the balance in consolidated goodwill? A. $0 B. $20,000 C. $35,000 D. $55,000


Prior to being united in a business combination, Botkins Inc. and Volkerson Corp. had the following stockholders' equity figures:

Botkins issued 56,000 new shares of its common stock valued at $3.25 per share for all of the outstanding stock of Volkerson.

Hoyle - Chapter 02

21. Assume that Botkins acquired Volkerson as a purchase combination. Immediately afterwards, what are consolidated Additional Paid-In Capital and Retained Earnings, respectively? A. $133,000 and $360,000 B. $236,000 and $360,000 C. $130,000 and $360,000 D. $236,000 and $490,000 E. $133,000 and $490,000


22. Assume that Botkins and Volkerson were being joined in a pooling of interests and this occurred on January 1, 2000, using the same values given. Immediately afterwards, what is consolidated Additional Paid-In Capital? A. $138,000 B. $266,000 C. $130,000 D. $236,000 E. $133,000


23. Chapel Hill Company had common stock of $350,000 and retained earnings of $490,000. Blue Town Inc. had common stock of $700,000 and retained earnings of $980,000. On January 1, 2009, Blue Town issued 34,000 shares of common stock with a $12 par value and a $35 fair value for all of Chapel Hill Company's outstanding common stock. This combination was accounted for as an acquisition. Immediately after the combination, what was the consolidated net assets? A. $2,520,000 B. $1,190,000 C. $1,680,000 D. $2,870,000 E. $2,030,000


24. Which of the following is a not a reason for a business combination to take place? A. Cost savings through elimination of duplicate facilities B. Quick entry for new and existing products into domestic and foreign markets C. Diversification of business risk D. Vertical integration E. Cost synergies throughout the organizations


25. Which of the following statements is true regarding a statutory merger? A. The original companies dissolve while remaining as separate divisions of a newly created company B. Both companies remain in existence as legal corporations with one corporation now a subsidiary of the acquiring company C. The acquired company dissolves as a separate corporation and becomes a division of the acquiring company D. The acquiring company acquires the stock of the acquired company as an investment E. A statutory merger is no longer a legal option


26. Which of the following statements is true regarding a statutory consolidation? A. The original companies dissolve while remaining as separate divisions of a newly created company B. Both companies remain in existence as legal corporations with one corporation now a subsidiary of the acquiring company C. The acquired company dissolves as a separate corporation and becomes a division of the acquiring company D. The acquiring company acquires the stock of the acquired company as an investment E. A statutory consolidation is no longer a legal option


27. In a transaction accounted for using the purchase method where cost exceeds book value, which statement is true for the acquiring company with regard to its investment? A. Net assets of the acquired company are revalued to their fair values and any excess of cost over fair value is allocated to goodwill B. Net assets of the acquired company are maintained at book value and any excess of cost over book value is allocated to goodwill C. Assets are revalued to their fair values. Liabilities are maintained at book values. Any excess is allocated to goodwill D. Long-term assets are revalued to their fair values. Any excess is allocated to goodwill


28. In a transaction accounted for using the purchase method where cost is less than fair value, which statement is true? A. Negative goodwill is recorded B. A deferred credit is recorded C. Long-term assets of the acquired company are reduced in proportion to their fair values. Any excess is recorded as a deferred credit D. Long-term assets of the acquired company are reduced in proportion to their fair values. Any excess is recorded as an extraordinary gain E. Long-term assets and liabilities of the acquired company are reduced in proportion to their fair values. Any excess is recorded as an extraordinary gain


29. Which of the following statements is true regarding the pooling of interests method of accounting for a business combination? A. Net assets of the acquired company are reported at their book values B. Net assets of the acquired company are reported at their fair values C. Any goodwill associated with the acquisition has an indefinite life D. Subsequent amounts of cost in excess of fair value of net assets are amortized over their useful lives E. Indirect costs reduce additional paid-in capital


30. Which of the following statements is true? A. Pooling of interests is acceptable provided the twelve criteria required by the APB are met B. Pooling of interests is no longer acceptable for new combinations as stated in SFAS No. 141, "Business Combinations" C. Companies that used pooling of interests method in the past must make a retrospective accounting change in accounting principle D. Companies that used pooling of interests method in the past must make a cumulative effect accounting change in accounting principle E. Companies that used pooling of interests in the past must make a prospective change in accounting principle


The financial statements for Goodwin, Inc. and Corr Company for the year ended December 31, 20X1, prior to Goodwin's business combination transaction regarding Corr, follow (in thousands):

On December 31, 20X1, Goodwin issued $600 in debt and 30 shares of its $10 par value common stock to the owners of Corr to purchase all of the outstanding shares of that company. Goodwin shares had a fair value of $40 per share. Goodwin paid $25 to a broker for arranging the transaction. Goodwin paid $35 in stock issuance costs. Corr's equipment was actually worth $1,400 but its buildings were only valued at $560.

Hoyle - Chapter 02

31. If the combination is accounted for as a purchase, at what amount is the investment recorded on Goodwin's books? A. $1,540 B. $1,800 C. $1,860 D. $1,825 E. $1,625


32. If the combination is accounted for as an acquisition, at what amount is the investment recorded on Goodwin's books? A. $1,540 B. $1,800 C. $1,860 D. $1,825 E. $1,625


33. Compute the consolidated revenues for 20X1. A. $2,700 B. $720 C. $920 D. $3,300 E. $1,540


34. Assuming the combination is accounted for as a purchase, compute the consolidated expenses for 20X1. A. $1,980 B. $2,380 C. $2,040 D. $2,015 E. $2,005


35. Assuming the combination is accounted for as an acquisition, compute the consolidated expenses for 20X1. A. $1,980 B. $2,380 C. $2,040 D. $2,015 E. $2,005


36. Compute the consolidated cash account at December 31, 20X1. A. $460 B. $425 C. $400 D. $435 E. $240


37. Compute the consolidated buildings (net) account at December 31, 20X1. A. $2,700 B. $3,370 C. $3,300 D. $3,260 E. $3,340


38. Compute the consolidated equipment (net) account at December 31, 20X1. A. $2,100 B. $3,500 C. $3,300 D. $3,000 E. $3,200


39. Assuming the combination is accounted for as a purchase, compute the consolidated goodwill account at December 31, 20X1. A. $0 B. $100 C. $125 D. $160 E. $45


40. Assuming the combination is accounted for as an acquisition, compute the consolidated goodwill account at December 31, 20X1. A. $0 B. $100 C. $125 D. $160 E. $45


41. Compute the consolidated common stock account at December 31, 20X1. A. $1,080 B. $1,480 C. $1,380 D. $2,280 E. $2,680


42. Compute the consolidated additional paid-in capital at December 31, 20X1. A. $810 B. $1,350 C. $1,675 D. $1,910 E. $1,875


43. Assuming the combination is accounted for as a purchase, compute the consolidated retained earnings at December 31, 20X1. A. $2,850 B. $3,450 C. $2,400 D. $2,800 E. $2,810


44. Assuming the combination is accounted for as an acquisition, compute the consolidated retained earnings at December 31, 20X1. A. $2,800 B. $2,825 C. $2,850 D. $3,425 E. $3,450


On January 1, 20X1, the Moody company entered into a transaction for 100% of the outstanding common stock of Osorio Company. To acquire these shares, Moody issued $400 in long-term liabilities and 40 shares of common stock having a par value of $1 per share but a fair value of $10 per share. Moody paid $20 to lawyers, accountants and brokers for assistance in bringing about this purchase. Another $15 was paid in connection with stock issuance costs. Prior to these transactions, the balance sheets for the two companies were as follows:

Note: Parentheses indicate a credit balance. In Moody's appraisal of Osorio, three assets were deemed to be undervalued on the subsidiary's books: Inventory by $10, Land by $40 and Buildings by $60.

Hoyle - Chapter 02

45. If the transaction is accounted for as a purchase, what amount was recorded as the investment in Osorio? A. $930 B. $820 C. $800 D. $835 E. $815


46. If the transaction is accounted for as an acquisition, what amount was recorded as the investment in Osorio? A. $930 B. $820 C. $800 D. $835 E. $815


47. Compute the amount of consolidated inventories at date of combination. A. $1,080 B. $1,350 C. $1,360 D. $1,370 E. $290


48. Compute the amount of consolidated buildings (net) at date of combination. A. $1,700 B. $1,760 C. $1,655 D. $1,550 E. $1,660


49. Compute the amount of consolidated land at date of combination. A. $1,000 B. $816 C. $940 D. $916 E. $920


50. Compute the amount of consolidated equipment at date of combination. A. $580 B. $480 C. $559 D. $570 E. $560


51. Compute the amount of consolidated common stock at date of acquisition. A. $370 B. $570 C. $610 D. $330 E. $530


52. Compute the amount of consolidated additional paid-in capital at date of combination. A. $1,080 B. $1,420 C. $1,065 D. $1,425 E. $1,440


53. Compute the amount of consolidated cash after recording the transaction. A. $220 B. $185 C. $200 D. $205 E. $215


Carnes has the following account balances as of May 1, 2000 before a pooling of interests transaction takes place.

The fair value of Carnes' Land and Buildings are $650,000 and $550,000, respectively. On May 1, 2000, Riley Company issues 30,000 shares of its $10 par value ($25 fair value) common stock in exchange for all of the shares of Carnes' common stock.

Hoyle - Chapter 02

54. On May 1, 2000, what value is assigned to the investment account? A. $300,000 B. $750,000 C. $800,000 D. $1,100,000 E. $1,300,000


55. At the date of pooling, by how much does Riley's retained earnings increase or decrease? A. $200,000 increase B. $200,000 decrease C. $700,000 increase D. $300,000 increase E. $300,000 decrease


56. Assume Riley issues 70,000 shares instead of 30,000 at date of acquisition. Riley currently has $40,000 of additional paid-in capital on its books. By how much will Riley's retained earnings increase or decrease as a result of the combination? A. $40,000 increase B. $200,000 increase C. $140,000 increase D. $160,000 increase E. $40,000 decrease


57. Assume Riley issues 70,000 shares instead of 30,000 at date of pooling. Assume Riley has no additional paid-in capital on its books. By how much will Riley's retained earnings increase or decrease as a result of the combination? A. $100,000 increase B. $200,000 increase C. $100,000 decrease D. $200,000 decrease E. No change


The financial balances for the Atwood Company and the Franz Company as of December 31, 20X1, are presented below. Also included are the fair values for Franz Company's net assets.

Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 20X1. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid.

Hoyle - Chapter 02

58. Assuming Atwood accounts for the combination as a purchase, compute the investment to be recorded at date of acquisition. A. $1,760 B. $1,750 C. $1,775 D. $1,765 E. $1,120


59. Assuming Atwood accounts for the combination as an acquisition, compute the investment to be recorded at date of acquisition. A. $1,760 B. $1,750 C. $1,775 D. $1,765 E. $1,120


60. Compute consolidated inventory at the date of the business combination. A. $1,650 B. $1,810 C. $1,230 D. $580 E. $1,830


61. Compute consolidated land at the date of the business combination. A. $2,060 B. $1,800 C. $260 D. $2,050 E. $2,070


62. Compute consolidated buildings (net) at the date of the business combination. A. $2,450 B. $2,340 C. $1,800 D. $650 E. $1,690


63. Assuming Atwood accounts for the combination as a purchase, compute consolidated goodwill at the date of the combination. A. $360 B. $450 C. $460 D. $440 E. $475


64. Assuming Atwood accounts for the combination as an acquisition, compute consolidated goodwill at the date of the combination. A. $360 B. $450 C. $460 D. $440 E. $475


65. Compute consolidated equipment (net) at the date of the combination. A. $400 B. $660 C. $1,060 D. $1,040 E. $1,050


66. Assuming the combination is accounted for as a purchase, compute consolidated retained earnings at the date of the combination. A. $1,170 B. $1,650 C. $1,290 D. $1,810 E. $3,870


67. Assuming the combination is accounted for as an acquisition, compute consolidated retained earnings at the date of the combination. A. $1,160 B. $1,170 C. $1,280 D. $1,290 E. $1,640


68. Compute consolidated revenues at the date of the combination. A. $3,540 B. $2,880 C. $1,170 D. $1,650 E. $4,050


69. Assuming the combination is accounted for as a purchase, compute consolidated expenses at the date of the combination. A. $2,760 B. $3,380 C. $2,770 D. $2,735 E. $2,785


70. Assuming the combination is accounted for as an acquisition, compute consolidated expenses at the date of the combination. A. $2,760 B. $2,770 C. $2,785 D. $3,380 E. $3,390


Presented below are the financial balances for the Atwood Company and the Franz Company as of December 31, 2009, immediately before Atwood acquired Franz. Also included are the fair values for Franz Company's net assets at that date.

Note: Parenthesis indicate a credit balance Assume a business combination took place at December 31, 2009. Atwood issued 50 shares of its common stock with a fair value of $35 per share for all of the outstanding common shares of Franz. Stock issuance costs of $15 (in thousands) and direct costs of $10 (in thousands) were paid. Atwood is applying the acquisition method in accounting for Franz. To settle a difference of opinion regarding Franz's fair value, Atwood promises to pay an additional $5.2 (in thousands) to the former owners if Franz's earnings exceed a certain sum during the next year. Given the probability of the required contingency payment and utilizing a 4% discount rate, the expected present value of the contingency is $5 (in thousands).

Hoyle - Chapter 02

71. Compute the investment cost at date of acquisition. A. $1,760 B. $1,755 C. $1,750 D. $1,765 E. $1,120


72. Compute consolidated inventory at date of acquisition. A. $1,650 B. $1,810 C. $1,230 D. $580 E. $1,830


73. Compute consolidated land at date of acquisition. A. $2,060 B. $1,800 C. $260 D. $2,050 E. $2,070


74. Compute consolidated buildings (net) at date of acquisition. A. $2,450 B. $2,340 C. $1,800 D. $650 E. $1,690


75. Compute consolidated goodwill at date of acquisition. A. $455 B. $460 C. $450 D. $440 E. $465


76. Compute consolidated equipment at date of acquisition. A. $400 B. $660 C. $1,060 D. $1,040 E. $1,050


77. Compute consolidated retained earnings as a result of this acquisition. A. $1,160 B. $1,170 C. $1,265 D. $1,280 E. $1,650


78. Compute consolidated revenues at date of acquisition. A. $3,540 B. $2,880 C. $1,170 D. $1,650 E. $4,050


79. Compute consolidated expenses at date of acquisition. A. $2,760 B. $3,380 C. $2,770 D. $2,735 E. $2,785


80. Compute the consolidated cash upon completion of the acquisition. A. $870 B. $1,110 C. $1,080 D. $1,085 E. $635


Flynn acquires 100 percent of the outstanding voting shares of Macek Company on January 1, 20X1. To obtain these shares, Flynn pays $400 (in thousands) and issues 10,000 shares of $20 par value common stock on this date. Flynn's stock had a fair value of $36 per share on that date. Flynn also pays $15 (in thousands) to a local investment firm for arranging the transaction. An additional $10 (in thousands) was paid by Flynn in stock issuance costs. The book values for both Flynn and Macek as of January 1, 20X1 follow. The fair value of each of Flynn and Macek accounts is also included. In addition, Macek holds a fully amortized trademark that still retains a $40 (in thousands) value. The figures below are in thousands. Any related question also is in thousands.

Hoyle - Chapter 02

81. Assuming the combination is accounted for as a purchase, what amount will be reported for goodwill? A. $35 B. $5 C. $110 D. $70 E. $150


82. Assuming the combination is accounted for as an acquisition, what amount will be reported for goodwill? A. $55 B. $65 C. $70 D. $135 E. $175


83. What amount will be reported for consolidated receivables? A. $660 B. $640 C. $500 D. $460 E. $480


84. What amount will be reported for consolidated inventory? A. $960 B. $920 C. $700 D. $620 E. $660


85. What amount will be reported for consolidated buildings (net)? A. $1,420 B. $1,260 C. $1,140 D. $1,480 E. $1,200


86. What amount will be reported for consolidated equipment (net)? A. $385 B. $335 C. $435 D. $460 E. $360


87. What amount will be reported for consolidated long-term liabilities? A. $1,480 B. $1,440 C. $1,180 D. $1,100 E. $1,520


88. What amount will be reported for consolidated common stock? A. $1,200 B. $1,280 C. $1,400 D. $1,480 E. $1,390


89. Assuming the combination is accounted for as a purchase, what amount will be reported for consolidated retained earnings? A. $1,830 B. $1,350 C. $1,080 D. $1,560 E. $1,535


90. Assuming the combination is accounted for as an acquisition, what amount will be reported for consolidated retained earnings? A. $1,065 B. $1,080 C. $1,525 D. $1,535 E. $1,560


91. What amount will be reported for consolidated additional paid-in capital? A. $165 B. $150 C. $160 D. $175 E. $145


92. What amount will be reported for consolidated cash after the purchase transaction? A. $900 B. $875 C. $955 D. $980 E. $555


93. What term is used to refer to a business combination in which only one of the original companies continues to exist?

The appropriate term is statutory merger.


94. Dutch Co. has loaned $90,000 to its subsidiary, Hans Corp., which retains separate incorporation. How would this loan be treated on a consolidated balance sheet?

The loan represents an inter company payable and receivable and it would be eliminated in preparing a consolidated balance sheet.


95. How are stock issuance costs accounted for in a business combination that is not a pooling of interests?

Stock issuance costs reduce the balance in Additional Paid-In Capital in a business combination that is not a pooling of interests.


96. How are direct combination costs accounted for in a purchase transaction?

In a purchase, direct combination costs are treated as part of the cost of the investment.


97. How are direct combination costs accounted for in an acquisition transaction?

In an acquisition, direct combination costs are expensed in the period of the acquisition.


98. Peterman Co. owns 55% of Samson Co. Under what circumstances would Peterman not be required to prepare consolidated financial statements?

Peterman would not be required to prepare consolidated financial statements if control of Samson is temporary or if, despite majority ownership, Peterman does not have control over Samson. A lack of control might exist if Samson is in a country that imposes restrictions on Peterman's actions.


99. How would you account for in-process research and development purchased in a business combination?

In-Process Research and Development is evaluated and if it has no alternative future use, then it is expensed immediately. Otherwise, it is capitalized as an asset of the combination.


100. How would you account for in-process research and development acquired in a business combination accounted for as an acquisition?

In-Process Research and Development is capitalized as an asset of the combination and reported as intangible assets with indefinite lives subject to impairment reviews.


101. Elon Corp. purchased all of the common stock of Finley Co., paying slightly less than the fair value of Finley's net assets. How should the difference between the purchase price and the fair value be treated if the transaction is treated as a purchase?

The difference between the purchase price and the fair value is used to reduce the balances in long-term assets (except for long-term investments).


102. Elon Corp. obtained all of the common stock of Finley Co., paying slightly less than the fair value of Finley's net assets acquired. How should the difference between the consideration transferred and the fair value of the net assets be treated if the transaction is accounted for as an acquisition?

The difference between the consideration transferred and the fair value of the net assets acquired is recognized as a gain on bargain purchase.


103. For purchase accounting, why are assets and liabilities of the subsidiary consolidated at fair value?

A purchase is considered to be the acquisition of one company by another. The acquisition of an asset or a group of assets is generally recorded at fair value. The purchase is assumed to occur through a bargained exchange that establishes an acquisition price. Because the assets and liabilities are being purchased, they should be recorded at fair value as of the date of the purchase.


104. Goodwill is often created or purchased, during a business combination. Why doesn't Goodwill show up on the Parent company's trial balance as a separate account?

While the Goodwill does not show up on the Parent company's books, it is implied as part of the account called Investment in Subsidiary. During the consolidation process, the Investment account is broken down into its component parts. Goodwill, along with other items such as subsidiary fair value adjustments is then shown separately as part of the consolidated financial statement balances.


105. What are the three departures from SFAS 141 according to SFAS 141(R) Business Combinations?

The acquisition method embraces a fair value concept as measured by the fair value of consideration transferred as opposed to a cost-based measure. This requires three departures: (1) Direct combination costs are expensed as incurred (and not considered a part of the investment cost); (2) Contingent consideration obligations are recognized as part of the purchase price; and (3) When a bargain purchase occurs, the acquirer measures and recognizes the fair values of each of the assets acquired and liabilities assumed at the date of the combination and as a result no assets or liabilities are recorded at amounts below their assessed fair values as under SFAS 141. A gain on the bargain purchase is recognized at the acquisition date.


106. How is contingent consideration accounted for according to SFAS 141(R) Business Combinations?

The fair value approach of the acquisition method views contingent payments as part of the consideration transferred. Under this view, contingencies have a value to those who receive the consideration and represent measurable obligations of the acquirer. The amount of the contingent consideration is measured as the expected present value of a potential payment and increases the investment cost.


107. How are bargain purchases different between SFAS 141 and SFAS 141(R) Business Combinations?

Under SFAS 141 (the purchase method), a bargain purchase reduces long-term assets, excluding long-term investments, utilizing the relative fair value method. Those reductions may reduce those assets to a value of zero and any remaining bargain is considered an extraordinary gain. Under SFAS 141(R), Business Combinations (the acquisition method), the assets and liabilities acquired are recorded at their fair values and a bargain purchase is recorded as a Gain on Bargain Purchase.


108. Describe the accounting for direct costs, indirect costs and issuance costs under: (1) The pooling-of-interests method; (2) The purchase method; and (3) The acquisition method.

(1) All costs of the combination were expensed under the pooling-of-interests method. (2) Direct costs are considered an increase in the investment, indirect costs are expensed and issuance costs reduce the otherwise fair value of the securities issued (additional paid-in capital for stock issued or debt for debt issued) under the purchase method. (3) Direct and indirect combination costs are expensed and issuance costs reduce the otherwise fair value of the consideration issued under the acquisition method.


109. Bale Co. acquired Silo Inc. on October 1, 20X1, in a business combination transaction. Bale's net income for the year was $1,400,000, while Silo had net income of $400,000 earned evenly during the year. There was no goodwill and there were no other allocations. Required: What is consolidated net income for 20X1?


110. What is the difference in consolidated results between a business combination whereby the acquired company is dissolved and a business combination whereby separate incorporation is maintained?

There is no difference in consolidated results.


111. Fine Co. issued its common stock in exchange for the common stock of Dandy Corp. in a business combination that was neither a pooling of interests nor a bargain purchase. At the date of the combination, Fine had land with a book value of $480,000 and a fair value of $620,000. Dandy had land with a book value of $170,000 and a fair value of $190,000. Required: If a consolidated balance sheet was prepared at the date of the combination, what was the consolidated balance for Land?


112. Lorne Co. issued its common stock in exchange for the common stock of Fenn Corp. in a combination accounted for as a pooling of interests. At the date of the combination, Lorne had land with a book value of $700,000 and a fair value of $980,000. Fenn had land with a book value of $280,000 and a fair value of $250,000. The purchase was not a bargain purchase. Required: If a consolidated balance sheet was prepared at the date of the combination, what was the consolidated balance for Land?


113. Jernigan Corp. had the following account balances at 12/31/X1:

Several of Jernigan's accounts have fair values that differ from book value: Land — $480,000; Building — $720,000; Inventory — $336,000; and Liabilities — $396,000. Inglewood Inc. obtained all of the outstanding common shares of Jernigan by issuing 20,000 shares of common stock having a $6 par value, but a $66 fair value. Stock issuance costs amounted to $12,000. Required: Prepare a fair value allocation and goodwill schedule at the date of the combination.


Salem Co. had the following account balances as of February 1, 2008:

Bellington Inc. paid $1.7 million in cash and issued 12,000 shares of its $30 par value common stock (valued at $90 per share) for all of Salem's outstanding common stock. This investment is accounted for using the purchase method.

Hoyle - Chapter 02

114. Determine the balance for Goodwill that would be included in a February 1, 2008, consolidation.


115. Assume that Bellington paid cash of $2.8 million. No stock is issued. An additional $50,000 is paid in direct combination costs. Required: For Goodwill, determine what balance would be included in a February 1, 2008 consolidation.


116. On January 1, 2010, Chester Inc. acquires 100% of Festus Corp.'s outstanding common stock by exchanging 37,500 shares of Chester's $2 par value common voting stock. On January 1, 2010, Chester's voting common stock had a fair value of $40 per share. Festus' voting common shares were selling for $6.50 per share. Festus' balances on the acquisition date, just prior to acquisition are listed below. Chester is accounting for the investment in Festus using the acquisition method.

Required: Compute the value of the Goodwill account on the date of acquisition, 1/1/10.


The financial statements for Jode Inc. and Lakely Corp., just prior to their combination, for the year ending December 31, 2009, follow. Lakely's buildings were undervalued on its financial records by $60,000.

On December 31, 2009, Jode issued 54,000 new shares of its $10 par value stock to the owners of Lakely in exchange for all of the outstanding shares of that company. Jode's shares had a fair value on that date of $35 per share. Jode paid $34,000 to an investment bank for assisting in the arrangements. Jode also paid $24,000 in stock issuance costs. This combination is accounted for as an acquisition.

Hoyle - Chapter 02

117. Prepare the journal entries to record (1) the issuance of stock by Jode and (2) the payment of the combination costs.

Entry One - To record the issuance of common stock by Jode to execute the purchase.

Entry Two - To record the combination costs.


118. Required: Determine consolidated Net Income for at December 31, 2009.

Note: In a purchase, the subsidiary's revenues and expenses prior to the date of acquisition are NOT consolidated.


119. Determine consolidated Paid-in Capital at December 31, 2009.



On December 31, 2008 (subsequent to the preceding statements), Black exchanged 10,000 shares of its $10 par value common stock for all of the outstanding shares of Blue. Black's stock on that date has a fair value of $60 per share. Black was willing to issue 10,000 shares of stock because Blue's land was appraised at $204,000. Black also paid $14,000 to several attorneys and accountants who assisted in creating this combination. Required: Assuming that these two companies retained their separate legal identities, prepare a consolidation worksheet as of December 31, 2008 assuming the transaction is treated as a purchase combination.

Purchase Consolidation Worksheet



On December 31, 2009 (subsequent to the preceding statements), Black exchanged 10,000 shares of its $10 par value common stock for all of the outstanding shares of Blue. Black's stock on that date has a fair value of $60 per share. Black was willing to issue 10,000 shares of stock because Blue's land was appraised at $204,000. Black also paid $14,000 to several attorneys and accountants who assisted in creating this combination. Required: Assuming that these two companies retained their separate legal identities, prepare a consolidation worksheet as of December 31, 2009 assuming the transaction is treated as an acquisition combination.

Acquisition Consolidation Worksheet


122. How are direct and indirect costs accounted for when applying the acquisition method?

A


123. For each of the following situations, select the best answer concerning accounting for combinations: (A) Pooling-of-interests method only. (B) Purchase method only. (C) Acquisition method only. (D) Pooling-of-interests method and purchase method, but not acquisition method. (E) Purchase method and acquisition method, but not pooling-of-interests method. (F) Pooling-of-interests method and acquisition method, but not purchase method. (G) All methods (pooling-of-interests, purchase and acquisition.) (H) None of the methods (neither pooling-of-interests, purchase, nor acquisition.) _____1. Direct costs are expensed. _____2. Indirect costs are expensed. _____3. Direct costs reduce the additional paid-in capital of the acquirer. _____4. Both direct costs and indirect costs increase the investment account. _____5. Direct costs increase the investment account and stock issue costs reduce the acquirer's additional paid-in capital account. _____6. Contingent consideration increases the investment account at date of acquisition. _____7. Contingent consideration increases the investment account at a date subsequent to the acquisition date. _____8. A bargain purchase reduces the fair value of long-term assets. _____9. A bargain purchase is ignored or not applicable. _____10. A bargain purchase is recorded at date of acquisition as a gain (not extraordinary). _____11. The combination clearly defines an acquired company and an acquiring company. _____12. Method(s) appropriate to combinations prior to June 30, 2001.

(1) F; (2) G; (3) H; (4) H; (5) B; (6) C; (7) B; (8) B; (9) A; (10) C; (11) E; (12) D


ch2 Summary


ch3

Student: ___________________________________________________________________________

1. Which one of the following accounts would not appear on the consolidated financial statements at the end of the first fiscal period of the combination? A. Goodwill B. Equipment C. Investment in Subsidiary D. Common Stock E. Additional Paid-In Capital

2. Which of the following internal record-keeping methods can a parent choose to account for a subsidiary acquired in a business combination? A. Initial value or book value B. Initial value, lower-of-cost-or-market-value or equity C. Initial value, equity or partial equity D. Initial value, equity or book value E. Initial value, lower-of-cost-or-market-value or partial equity

3. Which one of the following varies between the equity, initial value and partial equity methods of accounting for an investment? A. The amount of consolidated net income B. Total assets on the consolidated balance sheet C. Total liabilities on the consolidated balance sheet D. The balance in the investment account on the parent's books E. The amount of consolidated cost of goods sold

4. Under the partial equity method, the parent recognizes income when A. Dividends are received from the investee B. Dividends are declared by the investee C. The related expense has been incurred D. The related contract is signed by the subsidiary E. It is earned by the subsidiary

5. Push-down accounting is concerned with the A. Impact of the purchase on the subsidiary's financial statements B. Recognition of goodwill by the parent C. Correct consolidation of the financial statements D. Impact of the purchase on the separate financial statements of the parent E. Recognition of dividends received from the subsidiary

6. Racer Corp. purchased all of the common stock of Tangiers Co. several years ago. Tangiers maintained its incorporation. Balances in which of Racer's accounts would vary between the equity method and the initial value method? A. Goodwill, Investment in Tangiers Co. and Retained Earnings B. Expenses, Investment in Tangiers Co. and Equity in Subsidiary Earnings C. Investment in Tangiers Co., Equity in Subsidiary Earnings and Retained Earnings D. Common Stock, Goodwill and Investment in Tangiers Co E. Expenses, Goodwill and Investment in Tangiers Co

7. How does the partial equity method differ from the equity method? A. In the total assets reported on the consolidated balance sheet B. In the treatment of dividends C. In the total liabilities reported on the consolidated balance sheet D. Under the partial equity method, subsidiary income does not increase the balance in the parent's investment account E. Under the partial equity method, the balance in the investment account is not decreased by amortization on allocations made in the acquisition of the subsidiary

8. Jansen Inc. acquired all of the outstanding common stock of Merriam Co. on January 1, 2009, for $257,000. Annual amortization of $19,000 resulted from this acquisition. Jansen reported net income of $70,000 in 2009 and $50,000 in 2010 and paid $22,000 in dividends each year. Merriam reported net income of $40,000 in 2009 and $47,000 in 2010 and paid $10,000 in dividends each year. What is the Investment in Merriam Co. balance on Jansen's books as of December 31, 2010, if the equity method has been applied? A. $286,000 B. $296,000 C. $276,000 D. $344,000 E. $300,000

9. Velway Corp. acquired Joker Inc. on January 1, 2009. The parent paid more than the fair value of the subsidiary's net assets. On that date, Velway had equipment with a book value of $500,000 and a fair value of $640,000. Joker had equipment with a book value of $400,000 and a fair value of $470,000. Joker decided to use push-down accounting. Immediately after the acquisition, what Equipment amount would appear on Joker's separate balance sheet and on Velway's consolidated balance sheet, respectively? A. $400,000 and $900,000 B. $400,000 and $970,000 C. $470,000 and $900,000 D. $470,000 and $970,000 E. $470,000 and $1,040,000

10. Parrett Corp. bought one hundred percent of Jones Inc. on January 1, 2009, at a price in excess of the subsidiary's fair value. On that date, Parrett's equipment (ten-year life) had a book value of $360,000 but a fair value of $480,000. Jones had equipment (ten-year life) with a book value of $240,000 and a fair value of $350,000. Parrett used the partial equity method to record its investment in Jones. On December 31, 2011, Parrett had equipment with a book value of $250,000 and a fair value of $400,000. Jones had equipment with a book value of $170,000 and a fair value of $320,000. What is the consolidated balance for the Equipment account as of December 31, 2011? A. $710,000 B. $580,000 C. $474,000 D. $497,000 E. $565,000

On January 1, 2009, Cale Corp. paid $1,020,000 to acquire Kaltop Co. Kaltop maintained separate incorporation. Cale used the equity method to account for the investment. The following information is available for Kaltop's assets, liabilities and stockholders' equity accounts:

Kaltop earned net income for 2009 of $126,000 and paid dividends of $48,000 during the year.

11. The 2009 total amortization of allocations is calculated to be A. $4,000 B. $6,400 C. $(2,400) D. $(1,000) E. $3,800

12. In Cale's accounting records, what amount would appear on December 31, 2009 for equity in subsidiary earnings? A. $79,000 B. $129,800 C. $126,000 D. $127,000 E. $81,800

13. What is the balance in Cale's investment in subsidiary account at the end of 2009? A. $1,099,000 B. $1,020,000 C. $1,096,200 D. $1,098,000 E. $1,144,400

14. At the end of 2009, the consolidation entry to eliminate Cale's accrual of Kaltop's earnings would include a credit to Investment in Kaltop Co. for A. $124,400 B. $126,000 C. $127,000 D. $76,400 E. $0

15. If Cale Corp. had net income of $444,000, exclusive of the investment, what is the amount of consolidated net income? A. $568,400 B. $570,000 C. $571,000 D. $566,400 E. $444,000

On January 1, 2009, Franel Co. acquired all of the common stock of Hurlem Corp. For 2009, Hurlem earned net income of $360,000 and paid dividends of $190,000. Amortization of the patent allocation that was included in the acquisition was $6,000.

16. How much difference would there have been in Franel's income with regard to the effect of the investment, between using the equity method or using the initial value method of internal recordkeeping? A. $190,000 B. $360,000 C. $164,000 D. $354,000 E. $150,000

17. How much difference would there have been in Franel's income with regard to the effect of the investment, between using the equity method or using the partial equity method of internal recordkeeping? A. $170,000 B. $354,000 C. $164,000 D. $6,000 E. $174,000

Cashen Co. paid $2,400,000 to acquire all of the common stock of Janex Corp. on January 1, 2009. Janex's reported earnings for 2009 totaled $432,000 and it paid $120,000 in dividends during the year. The amortization of allocations related to the investment was $24,000. Cashen's net income, not including the investment, was $3,180,000 and it paid dividends of $900,000.

18. On the consolidated financial statements, what amount should have been shown for Equity in Subsidiary Earnings? A. $432,000 B. $-0- C. $408,000 D. $120,000 E. $312,000

19. On the consolidated financial statements, what amount should have been shown for consolidated dividends? A. $900,000 B. $1,020,000 C. $876,000 D. $996,000 E. $948,000

20. What is the amount of consolidated net income? A. $3,180,000 B. $3,612,000 C. $3,300,000 D. $3,588,000 E. $3,420,000

Jans Inc. acquired all of the outstanding common stock of Tysk Corp. on January 1, 2009, for $372,000. Equipment with a ten-year life was undervalued on Tysk's financial records by $46,000. Tysk also owned an unrecorded customer list with an assessed fair value of $67,000 and an estimated remaining life of five years. Tysk earned reported net income of $180,000 in 2009 and $216,000 in 2010. Dividends of $70,000 were paid in each of these two years. Selected account balances as of December 31, 20011, for the two companies follow.

21. If the partial equity method has been applied, what was 2011 consolidated net income? A. $840,000 B. $768,400 C. $822,000 D. $240,000 E. $600,000

22. If the equity method had been applied, what would be the Investment in Tysk Corp. account balance within the records of Jans at the end of 20011? A. $612,100 B. $744,000 C. $774,150 D. $372,000 E. $844,150

23. Red Co. acquired 100% of Green, Inc. on October 1, 2009. On January 1, Green had inventory with a book value of $42,000 and a fair value of $52,000. This inventory had not yet been sold at December 31, 2009. Green had a building with a book value of $200,000 and a fair value of $390,000. Green had equipment with a book value of $350,000 and a fair value of $280,000. The building had a 10-year remaining useful life and the equipment had a 5-year remaining useful life. How much amortization expense will be on the consolidated financial statements for the year ended on December 31, 2009 related to the acquisition of Green? A. $43,000 B. $33,000 C. $5,000 D. $15,000 E. 0

24. All of the following are acceptable methods to account for a majority owned investment in subsidiary except A. The equity method B. The initial value method C. The partial equity method D. The fair-value method E. Book value method

25. Under the equity method of accounting for an investment, A. The investment account remains at initial value B. Dividends received are recorded as revenue C. Goodwill is amortized over 20 years D. Income reported by the subsidiary increases the investment account E. Dividends received increase the investment account

26. Under the partial equity method of accounting for an investment, A. The investment account remains at initial value B. Dividends received are recorded as revenue C. Amortization of the excess of fair value allocations over book value of net assets is applied over their useful lives to reduce the investment account D. Amortization of the excess of fair value allocations over book value is ignored in regard to the investment account E. Dividends received increase the investment account

27. Under the initial value method, when accounting for an investment in a subsidiary, A. Dividends received by the subsidiary decrease the investment account B. The investment account is adjusted to fair value at year-end C. Income reported by the subsidiary increases the investment account D. The investment account remains at initial value E. Dividends received are ignored

28. According to SFAS 142, which of the following statements is true? A. Goodwill recognized in consolidation must be amortized over 20 years B. Goodwill recognized in consolidation must be expensed in the period of acquisition C. Goodwill recognized in consolidation will not be amortized but subject to an annual test for impairment D. Goodwill recognized in consolidation can never be written off E. Goodwill recognized in consolidation must be amortized over 40 years

29. When a company applies the initial method in accounting for its investment in a subsidiary and the subsidiary reports income in excess of dividends paid, what entry would be made for a consolidated worksheet?

A. A above B. B above C. C above D. D above E. E above

30. When a company applies the initial value method in accounting for its investment in a subsidiary and the subsidiary reports income less than dividends paid, what entry would be made for a consolidated worksheet?


31. When a company applies the partial equity method in accounting for its investment in a subsidiary and the subsidiary's equipment has a fair value greater than its book value, what consolidation worksheet entry is made in a year subsequent to the initial acquisition of the subsidiary?


32. When a company applies the partial equity method in accounting for its investment in a subsidiary and initial value, book values and fair values of net assets are all equal, what consolidation worksheet entry would be made?


33. When consolidating a subsidiary under the equity method, which of the following statements is true? A. Goodwill is never recognized B. Goodwill required is amortized over 20 years C. Goodwill may be recorded on the parent company's books D. The value of any goodwill should be tested annually for impairment in value E. Goodwill should be expensed in the year of acquisition

34. When consolidating a subsidiary under the equity method, which of the following statements is true subsequent to the year of acquisition? A. All net assets are revalued to fair value and must be amortized over their useful lives B. Only net assets that had excess fair value over book value when acquired by the parent must be amortized over their useful lives C. All depreciable net assets are revalued to fair value at date of acquisition and must be amortized over their useful lives D. Only depreciable net assets that have excess fair value over book value must be amortized over their useful lives E. Only assets that have excess fair value over book value must be amortized over their useful lives

35. Which of the following statements is false regarding push-down accounting? A. Push-down accounting simplifies the consolidation process B. Fewer worksheet entries are necessary when push-down accounting is applied C. Push-down accounting provides better information for internal evaluation D. Push-down accounting must be applied for combinations under a pooling of interests E. Push-down proponents argue that a change in ownership creates a new basis for subsidiary assets and liabilities

36. In accounting for an acquisition using the pooling of interests method, which of the following statements is true? A. In subsequent periods, the subsidiary's retained earnings is always eliminated by the amount at date of acquisition B. The investment account will always equal the book value of the subsidiary at any date C. Any goodwill will have an indefinite life D. Any goodwill must be amortized over 20 years E. The excess of fair value over book value of the net assets of a subsidiary is amortized over their useful lives

37. Melvin Company applies the equity method to account for its investment in Lang Company. Lang reports income in excess of an extraordinary loss in 2009. Melvin acknowledges that it must separately disclose the extraordinary loss in consolidated financial statements. What entry would be made by Melvin Company to record Lang's results?


38. Consolidated net income using the equity method under a n acquisition combination is computed as follows: A. Parent company's income from its own operations plus the equity from subsidiary's income recorded by the parent B. Parent's reported net income C. Combined revenues less combined expenses less equity in subsidiary's income less amortization of fair value allocations in excess of book value D. Parent's revenues less expenses for its own operations plus the equity from subsidiary's income recorded by parent E. All of the above

Perry Company obtains 100% of the stock of Hurley Corporation on January 1, 2009, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value is considered goodwill with an indefinite life. FIFO inventory valuation method is used.

39. Compute the consideration transferred in excess of book value at January 1, 2009. A. $150 B. $700 C. $2,200 D. $550 E. $2,900

40. Compute goodwill, if any, at January 1, 2009. A. $150 B. $250 C. $700 D. $1,200 E. $550

41. Compute the amount of Hurley's inventory that would be reported on a January 1, 2009, consolidated balance sheet. A. $800 B. $100 C. $900 D. $150 E. $0

42. Compute the amount of Hurley's buildings that would be reported on a December 31, 2009, consolidated balance sheet. A. $1,560 B. $1,260 C. $1,440 D. $1,160 E. $1,140

43. Compute the amount of Hurley's equipment that would be reported on a December 31, 2009, consolidated balance sheet. A. $1,000 B. $1,250 C. $875 D. $1,125 E. $750

44. Compute the amount of Hurley's land that would be reported on a December 31, 2009, consolidated balance sheet. A. $900 B. $400 C. $1,300 D. $1,450 E. $2,200

45. Compute the amount of Hurley's long-term liabilities that would be reported on a December 31, 2009, consolidated balance sheet. A. $1,800 B. $1,700 C. $1,725 D. $1,675 E. $3,500


47. Compute the amount of Hurley's equipment that would be reported on a December 31, 2010, consolidated balance sheet. A. $0 B. $1,000 C. $1,250 D. $1,125 E. $1,200

48. Compute the amount of Hurley's land that would be reported on a December 31, 2010, consolidated balance sheet. A. $900 B. $1,300 C. $400 D. $1,450 E. $2,200


Kaye Company acquired 100% of Fiore Company on January 1, 2009. Kaye paid $1,000 excess consideration over book value which is being amortized at $20 per year. Fiore reported net income of $400 in 2009 and paid dividends of $100.

50. Assume the equity method is applied. How much will Kaye's income increase or decrease as a result of Fiore's operations? A. $400 increase B. $300 increase C. $380 increase D. $280 increase E. $480 increase

51. Assume the partial equity method is applied. How much will Kaye's income increase or decrease as a result of Fiore's operations? A. $400 increase B. $300 increase C. $380 increase D. $280 increase E. $480 increase

52. Assume the initial value method is applied. How much will Kaye's income increase or decrease as a result of Fiore's operations? A. $400 increase B. $300 increase C. $380 increase D. $100 increase E. $210 increase

53. Assume the partial equity method is used. In the years following acquisition, what additional worksheet entry must be made for consolidation purposes that is not required for the equity method?


54. Assume the initial value method is used. In the years subsequent to acquisition, what additional worksheet entry must be made for consolidation purposes that is not required for the equity method?


55. Hoyt Corporation agreed to the following terms in order to acquire the net assets of Brown Company on January 1, 2009: (1.) To issue 400 shares of common stock ($10 par) with a fair value of $45 per share. (2.) To assume Brown's liabilities which have a fair value of $1,500. On the date of acquisition, the consideration transferred for Hoyt's acquisition of Brown would be A. $18,000 B. $16,500 C. $20,000 D. $18,500 E. $19,500

Following are selected accounts for Green Corporation and Vega Company as of December 31, 2010. Several of Green's accounts have been omitted.

Green obtained 100% of Vega on January 1, 2006, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share. On January 1, 2006, Vega's land was undervalued by $40,000, its buildings were overvalued by $30,000 and equipment was undervalued by $80,000. The buildings have a 20-year life and the equipment has a 10-year life. $50,000 was attributed to an unrecorded trademark with a 16-year remaining life. There was no goodwill associated with this investment.

56. Compute the book value of Vega at January 1, 2006. A. $997,500 B. $857,500 C. $1,200,000 D. $1,600,000 E. $827,500

57. Compute the December 31, 2010, consolidated revenues. A. $1,400,000 B. $800,000 C. $500,000 D. $1,590,375 E. $1,390,375

58. Compute the December 31, 2010, consolidated total expenses. A. $620,000 B. $280,000 C. $900,000 D. $909,625 E. $299,625

59. Compute the December 31, 2010, consolidated buildings. A. $1,037,500 B. $1,007,500 C. $1,000,000 D. $1,022,500 E. $1,012,500

60. Compute the December 31, 2010, consolidated equipment. A. $800,000 B. $808,000 C. $840,000 D. $760,000 E. $848,000

61. Compute the December 31, 2010, consolidated land. A. $220,000 B. $180,000 C. $670,000 D. $630,000 E. $450,000

62. Compute the December 31, 2010, consolidated trademark. A. $50,000 B. $46,875 C. $0 D. $34,375 E. $37,500

63. Compute the December 31, 2010, consolidated common stock. A. $450,000 B. $530,000 C. $555,000 D. $635,000 E. $525,000

64. Compute the December 31, 2010, consolidated additional paid-in capital. A. $210,000 B. $75,000 C. $1,102,500 D. $942,500 E. $525,000

65. Compute the December 31, 2010 consolidated retained earnings. A. $1,645,375 B. $1,350,000 C. $1,565,375 D. $2,845,375 E. $1,265,375

66. Compute the equity in Vega's income reported by Green for 2010. A. $500,000 B. $300,000 C. $190,375 D. $200,000 E. $290,375

67. One company acquires another company in a combination accounted for as an acquisition. The acquiring company decides to apply the initial value method in accounting for the combination. What is one reason the acquiring company might have made this decision? A. It is the only method allowed by the SEC B. It is relatively easy to apply C. It is the only internal reporting method allowed by generally accepted accounting principles D. Operating results on the parent's financial records reflect consolidated totals E. When the initial method is used, no worksheet entries are required in the consolidation process

68. One company acquires another company in a combination accounted for as an acquisition. The acquiring company decides to apply the equity method in accounting for the combination. What is one reason the acquiring company might have made this decision? A. It is the only method allowed by the SEC B. It is relatively easy to apply C. It is the only internal reporting method allowed by generally accepted accounting principles D. Operating results on the parent's financial records reflect consolidated totals E. When the equity method is used, no worksheet entries are required in the consolidation process

69. When is a goodwill impairment loss recognized? A. Annually on a systematic and rational basis B. Never C. If both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying values D. If the fair value of a reporting unit falls below its original acquisition price E. Whenever the fair value of the entity declines significantly

70. Which of the following will result in the recognition of an impairment loss on goodwill? A. Goodwill amortization is to be recognized annually on a systematic and rational basis B. Both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying values C. The fair value of the entity declines significantly D. The fair value of a reporting unit falls below the original consideration transferred for the acquisition E. The entity is investigated by the SEC and its reputation has been severely damaged

Goehler, Inc. acquires all of the voting stock of Kenneth, Inc. on January 4, 2009, at a price in excess of Kenneth's fair value. On that date, Kenneth has equipment with a book value of $90,000 and a fair value of $120,000 (10-year remaining life). Goehler has equipment with a book value of $800,000 and a fair value of $1,200,000 (10-year remaining life). On December 31, 2010, Goehler has equipment with a book value of $975,000 but a fair value of $1,350,000 and Kenneth has equipment with a book value of $105,000 but a fair value of $125,000.

71. If Goehler applies the equity method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2010? A. $1,080,000 B. $1,104,000 C. $1,100,000 D. $1,468,000 E. $1,475,000

72. If Goehler applies the partial equity method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2010? A. $1,080,000 B. $1,104,000 C. $1,100,000 D. $1,468,000 E. $1,475,000

73. If Goehler applies the initial value method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2010? A. $1,080,000 B. $1,104,000 C. $1,100,000 D. $1,468,000 E. $1,475,000

74. How is the fair value allocation of an intangible asset allocated to expense when the asset has no legal, regulatory, contractual, competitive, economic or other factors that limit its life? A. Equally over 20 years B. Equally over 40 years C. Equally over 20 years with an annual impairment review D. No amortization, but annually reviewed for impairment and adjusted accordingly E. No amortization over an indefinite period time

Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2009 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2010 if Rhine generates cash flows from operations of $27,000 or more in the next year. Harrison estimates that there is a 20% probability that Rhine will generate at least $27,000 next year and uses an interest rate of 5% to incorporate the time value of money. The fair value of $16,500 at 5%, using a probability weighted approach is $3,142.

75. Under SFAS 141(R), what will Harrison record as the acquisition price on January 1, 2009? A. $400,000 B. $403,142 C. $406,000 D. $409,142 E. $416,500

76. Assuming Rhine generates cash flow from operations of $27,200 in 2009, how will Harrison record the $16,500 payment of cash on April 15, 2010 according to SFAS 141(R)? A. Debit Contingent performance obligation $16,500 and Credit Cash $16,500 B. Debit Contingent performance obligation $3,142, debit Loss from contingent performance obligation $13,358 and Credit Cash $16,500 C. Debit Investment in Subsidiary and Credit Cash, $16,500 D. Debit Goodwill and Credit Cash, $16,500 E. No entry

77. If the combination transaction had taken place on January 1, 2008, under SFAS 141, Business Combinations, what would Harrison have recorded as the acquisition price on that date? A. $400,000 B. $403,142 C. $406,000 D. $409,142 E. $416,500

Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2009 for $500,000 cash. A contingent payment of $12,000 will be paid on April 1, 2010 if Gataux generates cash flows from operations of $26,500 or more in the next year. Harrison estimates that there is a 30% probability that Rhine will generate at least $26,500 next year and uses an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%, using a probability weighted approach is $3,461.

78. Under SFAS 141(R), what will Beatty record as the acquisition price on January 1, 2009? A. $500,000 B. $503,461 C. $512,000 D. $515,461 E. $526,500

79. Assuming Gataux generates cash flow from operations of $27,200 in 2009, how will Beatty record the $12,000 payment of cash on April 1, 2010 according to SFAS 141(R)? A. Debit Contingent performance obligation $3,461, debit Goodwill $8,539 and Credit Cash $12,000 B. Debit Contingent performance obligation $3,461, debit Loss from contingent performance obligation $8,539 and Credit Cash $12,000 C. Debit Goodwill and Credit Cash, $12,000 D. Debit Goodwill $27,200, credit Contingent performance obligation $15,200 and Credit Cash $12,000 E. No entry

80. Under SFAS 141 for purchase Business Combinations, what will Beatty record as the cost of the investment in Gataux if the purchase had occurred on January 1, 2008? A. $500,000 B. $503,461 C. $512,000 D. $515,461 E. $526,500

Prince Company acquires Duchess, Inc. on January 1, 2009. The consideration transferred exceeds the fair value of Duchess' net assets. On that date, Prince has a building with a book value of $1,200,000 and a fair value of $1,500,000. Duchess has a building with a book value of $400,000 and fair value of $500,000.

81. If push-down accounting is used, what amounts in the Building account appear on Duchess' separate balance sheet and on the consolidated balance sheet immediately after acquisition? A. $400,000 and $1,600,000 B. $500,000 and $1,700,000 C. $400,000 and $1,700,000 D. $500,000 and $2,000,000 E. $500,000 and $1,600,000

82. If push-down accounting is not used, what amounts in the Building account appear on Duchess' separate balance sheet and on the consolidated balance sheet immediately after acquisition? A. $400,000 and $1,600,000 B. $500,000 and $1,700,000 C. $400,000 and $1,700,000 D. $500,000 and $2,000,000 E. $500,000 and $1,600,000

Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2009. At that date, Glen owns only three assets and has no liabilities:

83. If Watkins pays $450,000 in cash for Glen, what amount would be represented as the subsidiary's Building in a consolidation at December 31, 2011, assuming the book value at that date is still $200,000? A. $200,000 B. $285,000 C. $290,000 D. $295,000 E. $300,000


85. If Watkins pays $450,000 in cash for Glen, what amount would be represented as the subsidiary's Equipment in a consolidation at December 31, 2011, assuming the book value at that date is still $80,000? A. $70,000 B. $73,500 C. $75,000 D. $76,500 E. $80,000

86. If Watkins pays $450,000 in cash for Glen, what allocation should be assigned to the subsidiary's Equipment in preparing for consolidation at December 31, 2011, assuming the book value at that date is still $80,000? A. $5,000 B. $80,000 C. $75,000 D. $73,500 E. $3,500

87. If Watkins pays $300,000 in cash for Glen, at what amount would the subsidiary's Building be represented in a January 2, 2009 consolidation? A. $200,000 B. $225,000 C. $273,000 D. $279,000 E. $300,000

88. If the transaction instead occurred on January 1, 2008 under a SFAS 141 purchase combination and Watkins pays $300,000 in cash for Glen, at what amount would the subsidiary's Equipment be represented in a December 31, 2011 consolidation? A. $48,000 B. $50,000 C. $52,000 D. $77,000 E. $80,000

89. If Watkins issued common stock valued at $410,000 for Glen, rather than paying cash, in a pooling of interests on June 15, 1999, at what amount would the subsidiary's Building be represented in a December 31, 2009, consolidation, assuming there are no acquisitions or disposals of buildings and equipment? A. $190,000 B. $193,000 C. $197,000 D. $199,400 E. $200,000

90. If Watkins issued common stock valued at $410,000 for Glen, rather than paying cash, in a pooling of interests on June 15, 1999, at what amount would the subsidiary's Equipment be represented in a December 31, 2009, consolidation, assuming no acquisitions or disposals of buildings or equipment? A. $75,000 B. $77,400 C. $80,000 D. $82,100 E. $84,000

91. For an acquisition when the subsidiary retains its incorporation, which method of internal recordkeeping is the easiest for the parent to use?

92. For an acquisition when the subsidiary retains its incorporation, which method of internal recordkeeping gives the most accurate portrayal of the accounting results for the entire business combination?

93. For an acquisition when the subsidiary maintains its incorporation, under the partial equity method, what adjustments are made to the balance of the investment account?

94. From which methods can a parent choose for its internal recordkeeping related to the operations of a subsidiary?

95. What accounting method requires a subsidiary to record acquisition fair value allocations and the amortization of allocations in its accounting records?

96. What is the partial equity method? How does it differ from the equity method? What are its advantages and disadvantages compared to the equity method?

97. What advantages might push-down accounting offer for internal reporting?

98. What is the basic objective of all consolidations?

99. Yules Co. acquired Noel Co. in an acquisition transaction. Yules decided to use the partial equity method to account for the investment. The current balance in the investment account is $416,000. Describe in words how this balance was derived.

100. Consolidations subsequent to the date of combination are generally considered to be easier for a pooling of interests than for an acquisition. Why is this so?

101. Avery Company acquires Billings Company in a combination accounted for as an acquisition and adopts the equity method to account for Investment in Billings. At the end of four years, the Investment in Billings account on Avery's books is $198,984. What items constitute this balance?

102. An acquisition transaction results in $90,000 of goodwill. Several years later a worksheet is being produced to consolidate the two companies. Describe in words at what amount goodwill will be reported at this date.

103. Why is push-down accounting a popular internal reporting technique?

104. On January 1, 2009, Jumper Co. acquired all of the common stock of Cable Corp. for $540,000. Annual amortization associated with the purchase amounted to $1,800. During 2009, Cable earned net income of $54,000 and paid dividends of $24,000. Cable's net income and dividends for 2010 were $86,000 and $24,000, respectively. Required: Assuming that Jumper decided to use the partial equity method, prepare a schedule to show the balance in the investment account at the end of 2010.

105. Hanson Co. acquired all of the common stock of Roberts Inc. on January 1, 2009, transferring consideration in an amount slightly more than the fair value of Roberts' net assets. At that time, Roberts had buildings with a twenty-year useful life, a book value of $600,000 and a fair value of $696,000. On December 31, 2010, Roberts had buildings with a book value of $570,000 and a fair value of $648,000. On that date, Hanson had buildings with a book value of $1,878,000 and a fair value of $2,160,000. Required: What amount should be shown for buildings on the consolidated balance sheet dated December 31, 2010?

106. Carnes Co. decided to use the partial equity method to account for its investment in Domino Corp. An unamortized trademark associated with the acquisition was $30,000 and Carnes decided to amortize the trademark over ten years. For 2009, Carnes' Equity in Subsidiary Earnings was $78,000. Required: What balance would have been in the Equity in Subsidiary Earnings account if Carnes had used equity accounting?

Fesler Inc. acquired all of the outstanding common stock of Pickett Company on January 1, 2009. Annual amortization of $22,000 resulted from this transaction. On the date of the takeover, Fesler reported retained earnings of $520,000 while Pickett reported a $240,000 balance. Fesler reported net income of $100,000 in 2009 and $68,000 in 20010 and paid dividends of $25,000 in dividends each year. Pickett reported net income of $24,000 in 2009 and $36,000 in 2010 and paid dividends of $10,000 in dividends each year. Assume that Fesler's reported net income includes Equity in Subsidiary Income.

107. If the parent's net income reflected use of the equity method, what were the consolidated retained earnings on December 31, 2010?

108. If the parent's net income reflected use of the partial equity method, what were the consolidated retained earnings on December 31, 2010?

109. If the parent's net income reflected use of the initial value method, what were the consolidated retained earnings on December 31, 2010?

Jaynes Inc. obtained all of Aaron Co.'s common stock on January 1, 2009, by issuing 11,000 shares of $1 par value common stock. Jaynes' shares had a $17 per share fair value. On that date, Aaron reported a net book value of $120,000. However, its equipment (with a five-year remaining life) was undervalued by $6,000 in the company's accounting records. Any excess of consideration transferred over fair value of assets and liabilities is assigned to an unrecorded patent to be amortized over ten years.

110. If this combination is viewed as an acquisition, what balance would Jaynes' Investment in Aaron Co. account have shown on December 31, 2010, when the equity method was applied?

111. If this combination is viewed as an acquisition, what was consolidated net income for the year ended December 31, 2010?

112. If this combination is viewed as an acquisition, what was consolidated equipment as of December 31, 2010?

113. If this combination is viewed as an acquisition, what was consolidated patents as of December 31, 2010?

Utah Inc. obtained all of the outstanding common stock of Trimmer Corp. on January 1, 2009. At that date, Trimmer owned only three assets and had no liabilities:

114. If Utah paid $300,000 in cash for Trimmer, what allocation should have been assigned to the subsidiary's Building account and its Equipment account in a December 31, 2011 consolidation?

115. If Utah paid $264,000 in cash for Trimmer and the original transaction occurred on January 1, 2008 under SFAS 141, what allocation should have been assigned to the subsidiary's Building account and its Equipment account in a December 31, 2010 consolidation? The fair value of net assets is $288,000.

116. Matthews Co. obtained all of the common stock of Jackson Co. on January 1, 2009. As of that date, Jackson had the following trial balance:

During 2009, Jackson reported net income of $96,000 while paying dividends of $12,000. During 2010, Jackson reported net income of $132,000 while paying dividends of $36,000. Assume that Matthews Co. acquired the common stock of Jackson Co. for $588,000 in cash. As of January 1, 2009, Jackson's land had a fair value of $102,000, its buildings were valued at $188,000 and its equipment was appraised at $216,000. Any excess of consideration transferred over fair value of assets and liabilities acquired is due to an unamortized patent to be amortized over 10 years. Matthews decided to use the equity method for this investment. Required: (A.) Prepare consolidation worksheet entries for December 31, 2009. (B.) Prepare consolidation worksheet entries for December 31, 2010.

117. On January 1, 2009, Rand Corp. issued shares of its common stock for all of the outstanding common stock of Spaulding Inc. This combination was accounted for as a purchase. Spaulding's book value was only $140,000 at the time, but Rand issued 12,000 shares having a par value of $1 per share and a fair value of $20 per share. Rand was willing to convey these shares because it felt that buildings (ten-year life) were undervalued on Spaulding's records by $60,000 while equipment (five-year life) was undervalued by $25,000. Any excess cost over fair value is assigned to goodwill. Following are the individual financial records for these two companies for the year ended December 31, 2009.

Required: Prepare a consolidation worksheet for this business combination.

Pritchett Company recently acquired three businesses, recognizing goodwill in each acquisition. Destin has allocated its acquired goodwill to its three reporting units: Apple, Banana and Carrot. Pritchett provides the following information in performing the 2009 annual review for impairment:

118. Which of Pritchett's reporting units require both steps to test for goodwill impairment?

119. How much goodwill impairment should Pritchett report for 2009?

On 4/1/09, Sey Mold Corporation acquired 100% of DotDot.Com for $2,000,000 cash. On the date of acquisition, DotDot's net book value was $900,000. DotDot's assets included land that was undervalued by $300,000, a building that was undervalued by $400,000 and equipment that was overvalued by $50,000. The building had a remaining useful life of 8 years and the equipment had a remaining useful life of 4 years. Any excess fair value over consideration transferred is allocated to an undervalued patent and is amortized over 5 years.

http://www.dotdot.com/

120. Determine the amortization expense related to the combination at the year-end date of 12/31/09.


122. Determine the amortization expense related to the consolidation at the year-end date of 12/31/19.

123. For each of the following situations, select the best answer that applies to consolidating financial information subsequent to the acquisition date: (A) Acquisition method, but not purchase method. (B) Acquisition method, but not pooling-of-interests method. (C) Both pooling-of-interest method and acquisition method. (D) Initial value method. (E) Partial equity method. (F) Equity method. (G) Initial value method and partial equity method but not equity method. (H) Partial equity method and equity method but not initial value method. (I) Initial value method, partial equity method and equity method. _____ 1. Basic objective is to combine asset, liability, revenue, expense and equity accounts of a parent and its subsidiaries. _____ 2. Method(s) available to the parent for internal record-keeping. _____ 3. Never results in goodwill. _____ 4. Easiest internal record-keeping method to apply. _____ 5. Income of the subsidiary is recorded by the parent when earned. _____ 6. Designed to create a parallel between the parent's investment accounts and changes in the underlying equity of the acquired company. _____ 7. For years subsequent to acquisition, requires the *C entry. _____ 8. Uses the cash basis for income recognition. _____ 9. Investment account remains at initially recorded amount. _____ 10. Dividends received by the parent from the subsidiary reduce the parent's investment account. _____ 11. Requires a schedule to allocate the consideration transferred in the original combination transaction. _____ 12. Often referred to in accounting as a single-line consolidation. _____ 13. Increases the investment account for subsidiary earnings, but does not decrease the subsidiary account for equity adjustments such as amortizations.

ch3 Key

1. Which one of the following accounts would not appear on the consolidated financial statements at the end of the first fiscal period of the combination? A. Goodwill B. Equipment C. Investment in Subsidiary D. Common Stock E. Additional Paid-In Capital


2. Which of the following internal record-keeping methods can a parent choose to account for a subsidiary acquired in a business combination? A. Initial value or book value B. Initial value, lower-of-cost-or-market-value or equity C. Initial value, equity or partial equity D. Initial value, equity or book value E. Initial value, lower-of-cost-or-market-value or partial equity


3. Which one of the following varies between the equity, initial value and partial equity methods of accounting for an investment? A. The amount of consolidated net income B. Total assets on the consolidated balance sheet C. Total liabilities on the consolidated balance sheet D. The balance in the investment account on the parent's books E. The amount of consolidated cost of goods sold


4. Under the partial equity method, the parent recognizes income when A. Dividends are received from the investee B. Dividends are declared by the investee C. The related expense has been incurred D. The related contract is signed by the subsidiary E. It is earned by the subsidiary


5. Push-down accounting is concerned with the A. Impact of the purchase on the subsidiary's financial statements B. Recognition of goodwill by the parent C. Correct consolidation of the financial statements D. Impact of the purchase on the separate financial statements of the parent E. Recognition of dividends received from the subsidiary


6. Racer Corp. purchased all of the common stock of Tangiers Co. several years ago. Tangiers maintained its incorporation. Balances in which of Racer's accounts would vary between the equity method and the initial value method? A. Goodwill, Investment in Tangiers Co. and Retained Earnings B. Expenses, Investment in Tangiers Co. and Equity in Subsidiary Earnings C. Investment in Tangiers Co., Equity in Subsidiary Earnings and Retained Earnings D. Common Stock, Goodwill and Investment in Tangiers Co E. Expenses, Goodwill and Investment in Tangiers Co


7. How does the partial equity method differ from the equity method? A. In the total assets reported on the consolidated balance sheet B. In the treatment of dividends C. In the total liabilities reported on the consolidated balance sheet D. Under the partial equity method, subsidiary income does not increase the balance in the parent's investment account E. Under the partial equity method, the balance in the investment account is not decreased by amortization on allocations made in the acquisition of the subsidiary


8. Jansen Inc. acquired all of the outstanding common stock of Merriam Co. on January 1, 2009, for $257,000. Annual amortization of $19,000 resulted from this acquisition. Jansen reported net income of $70,000 in 2009 and $50,000 in 2010 and paid $22,000 in dividends each year. Merriam reported net income of $40,000 in 2009 and $47,000 in 2010 and paid $10,000 in dividends each year. What is the Investment in Merriam Co. balance on Jansen's books as of December 31, 2010, if the equity method has been applied? A. $286,000 B. $296,000 C. $276,000 D. $344,000 E. $300,000


9. Velway Corp. acquired Joker Inc. on January 1, 2009. The parent paid more than the fair value of the subsidiary's net assets. On that date, Velway had equipment with a book value of $500,000 and a fair value of $640,000. Joker had equipment with a book value of $400,000 and a fair value of $470,000. Joker decided to use push-down accounting. Immediately after the acquisition, what Equipment amount would appear on Joker's separate balance sheet and on Velway's consolidated balance sheet, respectively? A. $400,000 and $900,000 B. $400,000 and $970,000 C. $470,000 and $900,000 D. $470,000 and $970,000 E. $470,000 and $1,040,000


10. Parrett Corp. bought one hundred percent of Jones Inc. on January 1, 2009, at a price in excess of the subsidiary's fair value. On that date, Parrett's equipment (ten-year life) had a book value of $360,000 but a fair value of $480,000. Jones had equipment (ten-year life) with a book value of $240,000 and a fair value of $350,000. Parrett used the partial equity method to record its investment in Jones. On December 31, 2011, Parrett had equipment with a book value of $250,000 and a fair value of $400,000. Jones had equipment with a book value of $170,000 and a fair value of $320,000. What is the consolidated balance for the Equipment account as of December 31, 2011? A. $710,000 B. $580,000 C. $474,000 D. $497,000 E. $565,000


On January 1, 2009, Cale Corp. paid $1,020,000 to acquire Kaltop Co. Kaltop maintained separate incorporation. Cale used the equity method to account for the investment. The following information is available for Kaltop's assets, liabilities and stockholders' equity accounts:

Kaltop earned net income for 2009 of $126,000 and paid dividends of $48,000 during the year.

Hoyle - Chapter 03

11. The 2009 total amortization of allocations is calculated to be A. $4,000 B. $6,400 C. $(2,400) D. $(1,000) E. $3,800


12. In Cale's accounting records, what amount would appear on December 31, 2009 for equity in subsidiary earnings? A. $79,000 B. $129,800 C. $126,000 D. $127,000 E. $81,800


13. What is the balance in Cale's investment in subsidiary account at the end of 2009? A. $1,099,000 B. $1,020,000 C. $1,096,200 D. $1,098,000 E. $1,144,400


14. At the end of 2009, the consolidation entry to eliminate Cale's accrual of Kaltop's earnings would include a credit to Investment in Kaltop Co. for A. $124,400 B. $126,000 C. $127,000 D. $76,400 E. $0


15. If Cale Corp. had net income of $444,000, exclusive of the investment, what is the amount of consolidated net income? A. $568,400 B. $570,000 C. $571,000 D. $566,400 E. $444,000


On January 1, 2009, Franel Co. acquired all of the common stock of Hurlem Corp. For 2009, Hurlem earned net income of $360,000 and paid dividends of $190,000. Amortization of the patent allocation that was included in the acquisition was $6,000.

Hoyle - Chapter 03

16. How much difference would there have been in Franel's income with regard to the effect of the investment, between using the equity method or using the initial value method of internal recordkeeping? A. $190,000 B. $360,000 C. $164,000 D. $354,000 E. $150,000


17. How much difference would there have been in Franel's income with regard to the effect of the investment, between using the equity method or using the partial equity method of internal recordkeeping? A. $170,000 B. $354,000 C. $164,000 D. $6,000 E. $174,000


Cashen Co. paid $2,400,000 to acquire all of the common stock of Janex Corp. on January 1, 2009. Janex's reported earnings for 2009 totaled $432,000 and it paid $120,000 in dividends during the year. The amortization of allocations related to the investment was $24,000. Cashen's net income, not including the investment, was $3,180,000 and it paid dividends of $900,000.

Hoyle - Chapter 03

18. On the consolidated financial statements, what amount should have been shown for Equity in Subsidiary Earnings? A. $432,000 B. $-0- C. $408,000 D. $120,000 E. $312,000


19. On the consolidated financial statements, what amount should have been shown for consolidated dividends? A. $900,000 B. $1,020,000 C. $876,000 D. $996,000 E. $948,000


20. What is the amount of consolidated net income? A. $3,180,000 B. $3,612,000 C. $3,300,000 D. $3,588,000 E. $3,420,000


Jans Inc. acquired all of the outstanding common stock of Tysk Corp. on January 1, 2009, for $372,000. Equipment with a ten-year life was undervalued on Tysk's financial records by $46,000. Tysk also owned an unrecorded customer list with an assessed fair value of $67,000 and an estimated remaining life of five years. Tysk earned reported net income of $180,000 in 2009 and $216,000 in 2010. Dividends of $70,000 were paid in each of these two years. Selected account balances as of December 31, 20011, for the two companies follow.

Hoyle - Chapter 03

21. If the partial equity method has been applied, what was 2011 consolidated net income? A. $840,000 B. $768,400 C. $822,000 D. $240,000 E. $600,000


22. If the equity method had been applied, what would be the Investment in Tysk Corp. account balance within the records of Jans at the end of 20011? A. $612,100 B. $744,000 C. $774,150 D. $372,000 E. $844,150


23. Red Co. acquired 100% of Green, Inc. on October 1, 2009. On January 1, Green had inventory with a book value of $42,000 and a fair value of $52,000. This inventory had not yet been sold at December 31, 2009. Green had a building with a book value of $200,000 and a fair value of $390,000. Green had equipment with a book value of $350,000 and a fair value of $280,000. The building had a 10-year remaining useful life and the equipment had a 5-year remaining useful life. How much amortization expense will be on the consolidated financial statements for the year ended on December 31, 2009 related to the acquisition of Green? A. $43,000 B. $33,000 C. $5,000 D. $15,000 E. 0


24. All of the following are acceptable methods to account for a majority owned investment in subsidiary except A. The equity method B. The initial value method C. The partial equity method D. The fair-value method E. Book value method


25. Under the equity method of accounting for an investment, A. The investment account remains at initial value B. Dividends received are recorded as revenue C. Goodwill is amortized over 20 years D. Income reported by the subsidiary increases the investment account E. Dividends received increase the investment account


26. Under the partial equity method of accounting for an investment, A. The investment account remains at initial value B. Dividends received are recorded as revenue C. Amortization of the excess of fair value allocations over book value of net assets is applied over their useful lives to reduce the investment account D. Amortization of the excess of fair value allocations over book value is ignored in regard to the investment account E. Dividends received increase the investment account


27. Under the initial value method, when accounting for an investment in a subsidiary, A. Dividends received by the subsidiary decrease the investment account B. The investment account is adjusted to fair value at year-end C. Income reported by the subsidiary increases the investment account D. The investment account remains at initial value E. Dividends received are ignored


28. According to SFAS 142, which of the following statements is true? A. Goodwill recognized in consolidation must be amortized over 20 years B. Goodwill recognized in consolidation must be expensed in the period of acquisition C. Goodwill recognized in consolidation will not be amortized but subject to an annual test for impairment D. Goodwill recognized in consolidation can never be written off E. Goodwill recognized in consolidation must be amortized over 40 years


29. When a company applies the initial method in accounting for its investment in a subsidiary and the subsidiary reports income in excess of dividends paid, what entry would be made for a consolidated worksheet?



30. When a company applies the initial value method in accounting for its investment in a subsidiary and the subsidiary reports income less than dividends paid, what entry would be made for a consolidated worksheet?



31. When a company applies the partial equity method in accounting for its investment in a subsidiary and the subsidiary's equipment has a fair value greater than its book value, what consolidation worksheet entry is made in a year subsequent to the initial acquisition of the subsidiary?



32. When a company applies the partial equity method in accounting for its investment in a subsidiary and initial value, book values and fair values of net assets are all equal, what consolidation worksheet entry would be made?



33. When consolidating a subsidiary under the equity method, which of the following statements is true? A. Goodwill is never recognized B. Goodwill required is amortized over 20 years C. Goodwill may be recorded on the parent company's books D. The value of any goodwill should be tested annually for impairment in value E. Goodwill should be expensed in the year of acquisition


34. When consolidating a subsidiary under the equity method, which of the following statements is true subsequent to the year of acquisition? A. All net assets are revalued to fair value and must be amortized over their useful lives B. Only net assets that had excess fair value over book value when acquired by the parent must be amortized over their useful lives C. All depreciable net assets are revalued to fair value at date of acquisition and must be amortized over their useful lives D. Only depreciable net assets that have excess fair value over book value must be amortized over their useful lives E. Only assets that have excess fair value over book value must be amortized over their useful lives


35. Which of the following statements is false regarding push-down accounting? A. Push-down accounting simplifies the consolidation process B. Fewer worksheet entries are necessary when push-down accounting is applied C. Push-down accounting provides better information for internal evaluation D. Push-down accounting must be applied for combinations under a pooling of interests E. Push-down proponents argue that a change in ownership creates a new basis for subsidiary assets and liabilities


36. In accounting for an acquisition using the pooling of interests method, which of the following statements is true? A. In subsequent periods, the subsidiary's retained earnings is always eliminated by the amount at date of acquisition B. The investment account will always equal the book value of the subsidiary at any date C. Any goodwill will have an indefinite life D. Any goodwill must be amortized over 20 years E. The excess of fair value over book value of the net assets of a subsidiary is amortized over their useful lives


37. Melvin Company applies the equity method to account for its investment in Lang Company. Lang reports income in excess of an extraordinary loss in 2009. Melvin acknowledges that it must separately disclose the extraordinary loss in consolidated financial statements. What entry would be made by Melvin Company to record Lang's results?



38. Consolidated net income using the equity method under a n acquisition combination is computed as follows: A. Parent company's income from its own operations plus the equity from subsidiary's income recorded by the parent B. Parent's reported net income C. Combined revenues less combined expenses less equity in subsidiary's income less amortization of fair value allocations in excess of book value D. Parent's revenues less expenses for its own operations plus the equity from subsidiary's income recorded by parent E. All of the above


Perry Company obtains 100% of the stock of Hurley Corporation on January 1, 2009, for $3,800 cash. As of that date Hurley has the following trial balance;

Any excess of consideration transferred over fair value is considered goodwill with an indefinite life. FIFO inventory valuation method is used.

Hoyle - Chapter 03

39. Compute the consideration transferred in excess of book value at January 1, 2009. A. $150 B. $700 C. $2,200 D. $550 E. $2,900


40. Compute goodwill, if any, at January 1, 2009. A. $150 B. $250 C. $700 D. $1,200 E. $550


41. Compute the amount of Hurley's inventory that would be reported on a January 1, 2009, consolidated balance sheet. A. $800 B. $100 C. $900 D. $150 E. $0




43. Compute the amount of Hurley's equipment that would be reported on a December 31, 2009, consolidated balance sheet. A. $1,000 B. $1,250 C. $875 D. $1,125 E. $750


44. Compute the amount of Hurley's land that would be reported on a December 31, 2009, consolidated balance sheet. A. $900 B. $400 C. $1,300 D. $1,450 E. $2,200






47. Compute the amount of Hurley's equipment that would be reported on a December 31, 2010, consolidated balance sheet. A. $0 B. $1,000 C. $1,250 D. $1,125 E. $1,200


48. Compute the amount of Hurley's land that would be reported on a December 31, 2010, consolidated balance sheet. A. $900 B. $1,300 C. $400 D. $1,450 E. $2,200




Kaye Company acquired 100% of Fiore Company on January 1, 2009. Kaye paid $1,000 excess consideration over book value which is being amortized at $20 per year. Fiore reported net income of $400 in 2009 and paid dividends of $100.

Hoyle - Chapter 03

50. Assume the equity method is applied. How much will Kaye's income increase or decrease as a result of Fiore's operations? A. $400 increase B. $300 increase C. $380 increase D. $280 increase E. $480 increase


51. Assume the partial equity method is applied. How much will Kaye's income increase or decrease as a result of Fiore's operations? A. $400 increase B. $300 increase C. $380 increase D. $280 increase E. $480 increase


52. Assume the initial value method is applied. How much will Kaye's income increase or decrease as a result of Fiore's operations? A. $400 increase B. $300 increase C. $380 increase D. $100 increase E. $210 increase


53. Assume the partial equity method is used. In the years following acquisition, what additional worksheet entry must be made for consolidation purposes that is not required for the equity method?



54. Assume the initial value method is used. In the years subsequent to acquisition, what additional worksheet entry must be made for consolidation purposes that is not required for the equity method?



55. Hoyt Corporation agreed to the following terms in order to acquire the net assets of Brown Company on January 1, 2009: (1.) To issue 400 shares of common stock ($10 par) with a fair value of $45 per share. (2.) To assume Brown's liabilities which have a fair value of $1,500. On the date of acquisition, the consideration transferred for Hoyt's acquisition of Brown would be A. $18,000 B. $16,500 C. $20,000 D. $18,500 E. $19,500


Following are selected accounts for Green Corporation and Vega Company as of December 31, 2010. Several of Green's accounts have been omitted.

Green obtained 100% of Vega on January 1, 2006, by issuing 10,500 shares of its $10 par value common stock with a fair value of $95 per share. On January 1, 2006, Vega's land was undervalued by $40,000, its buildings were overvalued by $30,000 and equipment was undervalued by $80,000. The buildings have a 20-year life and the equipment has a 10-year life. $50,000 was attributed to an unrecorded trademark with a 16-year remaining life. There was no goodwill associated with this investment.

Hoyle - Chapter 03

56. Compute the book value of Vega at January 1, 2006. A. $997,500 B. $857,500 C. $1,200,000 D. $1,600,000 E. $827,500


57. Compute the December 31, 2010, consolidated revenues. A. $1,400,000 B. $800,000 C. $500,000 D. $1,590,375 E. $1,390,375


58. Compute the December 31, 2010, consolidated total expenses. A. $620,000 B. $280,000 C. $900,000 D. $909,625 E. $299,625


59. Compute the December 31, 2010, consolidated buildings. A. $1,037,500 B. $1,007,500 C. $1,000,000 D. $1,022,500 E. $1,012,500


60. Compute the December 31, 2010, consolidated equipment. A. $800,000 B. $808,000 C. $840,000 D. $760,000 E. $848,000


61. Compute the December 31, 2010, consolidated land. A. $220,000 B. $180,000 C. $670,000 D. $630,000 E. $450,000


62. Compute the December 31, 2010, consolidated trademark. A. $50,000 B. $46,875 C. $0 D. $34,375 E. $37,500


63. Compute the December 31, 2010, consolidated common stock. A. $450,000 B. $530,000 C. $555,000 D. $635,000 E. $525,000


64. Compute the December 31, 2010, consolidated additional paid-in capital. A. $210,000 B. $75,000 C. $1,102,500 D. $942,500 E. $525,000


65. Compute the December 31, 2010 consolidated retained earnings. A. $1,645,375 B. $1,350,000 C. $1,565,375 D. $2,845,375 E. $1,265,375


66. Compute the equity in Vega's income reported by Green for 2010. A. $500,000 B. $300,000 C. $190,375 D. $200,000 E. $290,375


67. One company acquires another company in a combination accounted for as an acquisition. The acquiring company decides to apply the initial value method in accounting for the combination. What is one reason the acquiring company might have made this decision? A. It is the only method allowed by the SEC B. It is relatively easy to apply C. It is the only internal reporting method allowed by generally accepted accounting principles D. Operating results on the parent's financial records reflect consolidated totals E. When the initial method is used, no worksheet entries are required in the consolidation process


68. One company acquires another company in a combination accounted for as an acquisition. The acquiring company decides to apply the equity method in accounting for the combination. What is one reason the acquiring company might have made this decision? A. It is the only method allowed by the SEC B. It is relatively easy to apply C. It is the only internal reporting method allowed by generally accepted accounting principles D. Operating results on the parent's financial records reflect consolidated totals E. When the equity method is used, no worksheet entries are required in the consolidation process


69. When is a goodwill impairment loss recognized? A. Annually on a systematic and rational basis B. Never C. If both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying values D. If the fair value of a reporting unit falls below its original acquisition price E. Whenever the fair value of the entity declines significantly


70. Which of the following will result in the recognition of an impairment loss on goodwill? A. Goodwill amortization is to be recognized annually on a systematic and rational basis B. Both the fair value of a reporting unit and its associated implied goodwill fall below their respective carrying values C. The fair value of the entity declines significantly D. The fair value of a reporting unit falls below the original consideration transferred for the acquisition E. The entity is investigated by the SEC and its reputation has been severely damaged


Goehler, Inc. acquires all of the voting stock of Kenneth, Inc. on January 4, 2009, at a price in excess of Kenneth's fair value. On that date, Kenneth has equipment with a book value of $90,000 and a fair value of $120,000 (10-year remaining life). Goehler has equipment with a book value of $800,000 and a fair value of $1,200,000 (10-year remaining life). On December 31, 2010, Goehler has equipment with a book value of $975,000 but a fair value of $1,350,000 and Kenneth has equipment with a book value of $105,000 but a fair value of $125,000.

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71. If Goehler applies the equity method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2010? A. $1,080,000 B. $1,104,000 C. $1,100,000 D. $1,468,000 E. $1,475,000


72. If Goehler applies the partial equity method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2010? A. $1,080,000 B. $1,104,000 C. $1,100,000 D. $1,468,000 E. $1,475,000


73. If Goehler applies the initial value method in accounting for Kenneth, what is the consolidated balance for the Equipment account as of December 31, 2010? A. $1,080,000 B. $1,104,000 C. $1,100,000 D. $1,468,000 E. $1,475,000


74. How is the fair value allocation of an intangible asset allocated to expense when the asset has no legal, regulatory, contractual, competitive, economic or other factors that limit its life? A. Equally over 20 years B. Equally over 40 years C. Equally over 20 years with an annual impairment review D. No amortization, but annually reviewed for impairment and adjusted accordingly E. No amortization over an indefinite period time


Harrison, Inc. acquires 100% of the voting stock of Rhine Company on January 1, 2009 for $400,000 cash. A contingent payment of $16,500 will be paid on April 15, 2010 if Rhine generates cash flows from operations of $27,000 or more in the next year. Harrison estimates that there is a 20% probability that Rhine will generate at least $27,000 next year and uses an interest rate of 5% to incorporate the time value of money. The fair value of $16,500 at 5%, using a probability weighted approach is $3,142.

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75. Under SFAS 141(R), what will Harrison record as the acquisition price on January 1, 2009? A. $400,000 B. $403,142 C. $406,000 D. $409,142 E. $416,500


76. Assuming Rhine generates cash flow from operations of $27,200 in 2009, how will Harrison record the $16,500 payment of cash on April 15, 2010 according to SFAS 141(R)? A. Debit Contingent performance obligation $16,500 and Credit Cash $16,500 B. Debit Contingent performance obligation $3,142, debit Loss from contingent performance obligation $13,358 and Credit Cash $16,500 C. Debit Investment in Subsidiary and Credit Cash, $16,500 D. Debit Goodwill and Credit Cash, $16,500 E. No entry


77. If the combination transaction had taken place on January 1, 2008, under SFAS 141, Business Combinations, what would Harrison have recorded as the acquisition price on that date? A. $400,000 B. $403,142 C. $406,000 D. $409,142 E. $416,500


Beatty, Inc. acquires 100% of the voting stock of Gataux Company on January 1, 2009 for $500,000 cash. A contingent payment of $12,000 will be paid on April 1, 2010 if Gataux generates cash flows from operations of $26,500 or more in the next year. Harrison estimates that there is a 30% probability that Rhine will generate at least $26,500 next year and uses an interest rate of 4% to incorporate the time value of money. The fair value of $12,000 at 4%, using a probability weighted approach is $3,461.

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78. Under SFAS 141(R), what will Beatty record as the acquisition price on January 1, 2009? A. $500,000 B. $503,461 C. $512,000 D. $515,461 E. $526,500


79. Assuming Gataux generates cash flow from operations of $27,200 in 2009, how will Beatty record the $12,000 payment of cash on April 1, 2010 according to SFAS 141(R)? A. Debit Contingent performance obligation $3,461, debit Goodwill $8,539 and Credit Cash $12,000 B. Debit Contingent performance obligation $3,461, debit Loss from contingent performance obligation $8,539 and Credit Cash $12,000 C. Debit Goodwill and Credit Cash, $12,000 D. Debit Goodwill $27,200, credit Contingent performance obligation $15,200 and Credit Cash $12,000 E. No entry


80. Under SFAS 141 for purchase Business Combinations, what will Beatty record as the cost of the investment in Gataux if the purchase had occurred on January 1, 2008? A. $500,000 B. $503,461 C. $512,000 D. $515,461 E. $526,500


Prince Company acquires Duchess, Inc. on January 1, 2009. The consideration transferred exceeds the fair value of Duchess' net assets. On that date, Prince has a building with a book value of $1,200,000 and a fair value of $1,500,000. Duchess has a building with a book value of $400,000 and fair value of $500,000.

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81. If push-down accounting is used, what amounts in the Building account appear on Duchess' separate balance sheet and on the consolidated balance sheet immediately after acquisition? A. $400,000 and $1,600,000 B. $500,000 and $1,700,000 C. $400,000 and $1,700,000 D. $500,000 and $2,000,000 E. $500,000 and $1,600,000


82. If push-down accounting is not used, what amounts in the Building account appear on Duchess' separate balance sheet and on the consolidated balance sheet immediately after acquisition? A. $400,000 and $1,600,000 B. $500,000 and $1,700,000 C. $400,000 and $1,700,000 D. $500,000 and $2,000,000 E. $500,000 and $1,600,000


Watkins, Inc. acquires all of the outstanding stock of Glen Corporation on January 1, 2009. At that date, Glen owns only three assets and has no liabilities:

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85. If Watkins pays $450,000 in cash for Glen, what amount would be represented as the subsidiary's Equipment in a consolidation at December 31, 2011, assuming the book value at that date is still $80,000? A. $70,000 B. $73,500 C. $75,000 D. $76,500 E. $80,000


86. If Watkins pays $450,000 in cash for Glen, what allocation should be assigned to the subsidiary's Equipment in preparing for consolidation at December 31, 2011, assuming the book value at that date is still $80,000? A. $5,000 B. $80,000 C. $75,000 D. $73,500 E. $3,500


87. If Watkins pays $300,000 in cash for Glen, at what amount would the subsidiary's Building be represented in a January 2, 2009 consolidation? A. $200,000 B. $225,000 C. $273,000 D. $279,000 E. $300,000


88. If the transaction instead occurred on January 1, 2008 under a SFAS 141 purchase combination and Watkins pays $300,000 in cash for Glen, at what amount would the subsidiary's Equipment be represented in a December 31, 2011 consolidation? A. $48,000 B. $50,000 C. $52,000 D. $77,000 E. $80,000


89. If Watkins issued common stock valued at $410,000 for Glen, rather than paying cash, in a pooling of interests on June 15, 1999, at what amount would the subsidiary's Building be represented in a December 31, 2009, consolidation, assuming there are no acquisitions or disposals of buildings and equipment? A. $190,000 B. $193,000 C. $197,000 D. $199,400 E. $200,000


90. If Watkins issued common stock valued at $410,000 for Glen, rather than paying cash, in a pooling of interests on June 15, 1999, at what amount would the subsidiary's Equipment be represented in a December 31, 2009, consolidation, assuming no acquisitions or disposals of buildings or equipment? A. $75,000 B. $77,400 C. $80,000 D. $82,100 E. $84,000


91. For an acquisition when the subsidiary retains its incorporation, which method of internal recordkeeping is the easiest for the parent to use?

The initial value method is the easiest to use.


92. For an acquisition when the subsidiary retains its incorporation, which method of internal recordkeeping gives the most accurate portrayal of the accounting results for the entire business combination?

The equity method gives the most accurate portrayal of the results for the combined entity.


93. For an acquisition when the subsidiary maintains its incorporation, under the partial equity method, what adjustments are made to the balance of the investment account?

The balance of the investment account is increased for the subsidiary's net income. It is decreased for subsidiary dividends and losses. The amortization of excess fair value allocations does not affect the account balance.


94. From which methods can a parent choose for its internal recordkeeping related to the operations of a subsidiary?

The parent can choose from among the initial value method, equity method and partial equity method.


95. What accounting method requires a subsidiary to record acquisition fair value allocations and the amortization of allocations in its accounting records?

The appropriate method is termed push-down accounting.


96. What is the partial equity method? How does it differ from the equity method? What are its advantages and disadvantages compared to the equity method?

The partial equity method is a compromise between the initial value method and the equity method. It provides some of the advantages of the equity method but is easier to use. Under the partial equity method, the balance in the investment account is increased by the accrual of the subsidiary's income and decreased when the subsidiary pays dividends. The method is simpler than the equity method because amortization of excess fair value allocations is not done.


97. What advantages might push-down accounting offer for internal reporting?

Push-down accounting requires the subsidiary to record acquisition fair value allocations and amortizations in its accounting records. One advantage that the method offers to internal reporting is that it simplifies the consolidation process. More important, it provides better information for internal evaluation.


98. What is the basic objective of all consolidations?

The basic objective of all consolidations is to combine asset, liability, revenue, expense and stockholders' equity accounts in a manner consistent with the concepts of the acquisition method, purchase method (pre-2009 transactions) or the pooling of interests method (pre-2000 transactions).


99. Yules Co. acquired Noel Co. in an acquisition transaction. Yules decided to use the partial equity method to account for the investment. The current balance in the investment account is $416,000. Describe in words how this balance was derived.

The initial balance in the investment account would be the acquisition value implied by the fair value of consideration transferred. This would not include consideration paid for costs to effect the combination. After the acquisition, the balance in the account is increased by the parent's accrual of the subsidiary's income and decreased by the dividends paid by the subsidiary.


100. Consolidations subsequent to the date of combination are generally considered to be easier for a pooling of interests than for an acquisition. Why is this so?

A pooling of interests does not involve fair value allocations because assets and liabilities are recorded at book value. For future periods, there will be no amortization of excess fair value allocations. Therefore, subsequent consolidations are simpler because consolidation entries are not required for fair value allocations or their amortization.


101. Avery Company acquires Billings Company in a combination accounted for as an acquisition and adopts the equity method to account for Investment in Billings. At the end of four years, the Investment in Billings account on Avery's books is $198,984. What items constitute this balance?

Since the equity method has been applied by Avery, the $198,984 is composed of four items: (a.) The acquisition value of consideration transferred by the parent; (b.) The annual accruals made by Avery to recognize income as it is earned by the subsidiary; (c.) The reductions that are created by the subsidiary's payment of dividends; (d.) The periodic amortization recognized by Avery in connection with the excess fair value allocations identified with its acquisition.


102. An acquisition transaction results in $90,000 of goodwill. Several years later a worksheet is being produced to consolidate the two companies. Describe in words at what amount goodwill will be reported at this date.

The $90,000 attributed to goodwill is reported at its original amount unless a portion of goodwill is impaired or a unit of the business where goodwill resides is sold.


103. Why is push-down accounting a popular internal reporting technique?

Push down accounting has become popular for the parent's internal reporting purposes for two reasons. First, this method simplifies the consolidation process each year. If acquisition value allocations and subsequent amortization are recorded by the subsidiary, they do not need to be repeated each year on a consolidation worksheet. Second, recording of amortization by the subsidiary enables that company's information to provide a good representation of the impact that the acquisition has on the earnings of the business combination. For example, if the subsidiary earns $100,000 each year but annual amortization is $80,000, the acquisition is only adding $20,000 to the income of the combination each year rather than the $100,000 that is reported by the subsidiary unless push down accounting is used.


104. On January 1, 2009, Jumper Co. acquired all of the common stock of Cable Corp. for $540,000. Annual amortization associated with the purchase amounted to $1,800. During 2009, Cable earned net income of $54,000 and paid dividends of $24,000. Cable's net income and dividends for 2010 were $86,000 and $24,000, respectively. Required: Assuming that Jumper decided to use the partial equity method, prepare a schedule to show the balance in the investment account at the end of 2010.


105. Hanson Co. acquired all of the common stock of Roberts Inc. on January 1, 2009, transferring consideration in an amount slightly more than the fair value of Roberts' net assets. At that time, Roberts had buildings with a twenty-year useful life, a book value of $600,000 and a fair value of $696,000. On December 31, 2010, Roberts had buildings with a book value of $570,000 and a fair value of $648,000. On that date, Hanson had buildings with a book value of $1,878,000 and a fair value of $2,160,000. Required: What amount should be shown for buildings on the consolidated balance sheet dated December 31, 2010?


106. Carnes Co. decided to use the partial equity method to account for its investment in Domino Corp. An unamortized trademark associated with the acquisition was $30,000 and Carnes decided to amortize the trademark over ten years. For 2009, Carnes' Equity in Subsidiary Earnings was $78,000. Required: What balance would have been in the Equity in Subsidiary Earnings account if Carnes had used equity accounting?


Fesler Inc. acquired all of the outstanding common stock of Pickett Company on January 1, 2009. Annual amortization of $22,000 resulted from this transaction. On the date of the takeover, Fesler reported retained earnings of $520,000 while Pickett reported a $240,000 balance. Fesler reported net income of $100,000 in 2009 and $68,000 in 20010 and paid dividends of $25,000 in dividends each year. Pickett reported net income of $24,000 in 2009 and $36,000 in 2010 and paid dividends of $10,000 in dividends each year. Assume that Fesler's reported net income includes Equity in Subsidiary Income.

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107. If the parent's net income reflected use of the equity method, what were the consolidated retained earnings on December 31, 2010?


108. If the parent's net income reflected use of the partial equity method, what were the consolidated retained earnings on December 31, 2010?


109. If the parent's net income reflected use of the initial value method, what were the consolidated retained earnings on December 31, 2010?


Jaynes Inc. obtained all of Aaron Co.'s common stock on January 1, 2009, by issuing 11,000 shares of $1 par value common stock. Jaynes' shares had a $17 per share fair value. On that date, Aaron reported a net book value of $120,000. However, its equipment (with a five-year remaining life) was undervalued by $6,000 in the company's accounting records. Any excess of consideration transferred over fair value of assets and liabilities is assigned to an unrecorded patent to be amortized over ten years.

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110. If this combination is viewed as an acquisition, what balance would Jaynes' Investment in Aaron Co. account have shown on December 31, 2010, when the equity method was applied?

An allocation of the acquisition value (based on the fair value of the shares issued) must first be made.


111. If this combination is viewed as an acquisition, what was consolidated net income for the year ended December 31, 2010?


112. If this combination is viewed as an acquisition, what was consolidated equipment as of December 31, 2010?


113. If this combination is viewed as an acquisition, what was consolidated patents as of December 31, 2010?


Utah Inc. obtained all of the outstanding common stock of Trimmer Corp. on January 1, 2009. At that date, Trimmer owned only three assets and had no liabilities:

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114. If Utah paid $300,000 in cash for Trimmer, what allocation should have been assigned to the subsidiary's Building account and its Equipment account in a December 31, 2011 consolidation?

Since Utah paid more than the $288,000 fair value of Trimmer's net assets, all allocations are based on fair value with the excess $12,000 assigned to goodwill.


115. If Utah paid $264,000 in cash for Trimmer and the original transaction occurred on January 1, 2008 under SFAS 141, what allocation should have been assigned to the subsidiary's Building account and its Equipment account in a December 31, 2010 consolidation? The fair value of net assets is $288,000.

Since Utah paid $24,000 less than the $288,000 fair value of Trimmer's net assets, a reduction of that amount must be made against non-current assets (other than long-term investments in marketable securities and certain deferred assets):


116. Matthews Co. obtained all of the common stock of Jackson Co. on January 1, 2009. As of that date, Jackson had the following trial balance:

During 2009, Jackson reported net income of $96,000 while paying dividends of $12,000. During 2010, Jackson reported net income of $132,000 while paying dividends of $36,000. Assume that Matthews Co. acquired the common stock of Jackson Co. for $588,000 in cash. As of January 1, 2009, Jackson's land had a fair value of $102,000, its buildings were valued at $188,000 and its equipment was appraised at $216,000. Any excess of consideration transferred over fair value of assets and liabilities acquired is due to an unamortized patent to be amortized over 10 years. Matthews decided to use the equity method for this investment. Required: (A.) Prepare consolidation worksheet entries for December 31, 2009. (B.) Prepare consolidation worksheet entries for December 31, 2010.

A. Consolidated Worksheet Entries-2009:

B. Consolidated Worksheet Entries -2010:

117. On January 1, 2009, Rand Corp. issued shares of its common stock for all of the outstanding common stock of Spaulding Inc. This combination was accounted for as a purchase. Spaulding's book value was only $140,000 at the time, but Rand issued 12,000 shares having a par value of $1 per share and a fair value of $20 per share. Rand was willing to convey these shares because it felt that buildings (ten-year life) were undervalued on Spaulding's records by $60,000 while equipment (five-year life) was undervalued by $25,000. Any excess cost over fair value is assigned to goodwill. Following are the individual financial records for these two companies for the year ended December 31, 2009.

Required: Prepare a consolidation worksheet for this business combination.

Consolidation Worksheet for Rand and Spaulding: CONSOLIDATION WORKSHEET-Purchase For the Year Ended 12/31/2009


Pritchett Company recently acquired three businesses, recognizing goodwill in each acquisition. Destin has allocated its acquired goodwill to its three reporting units: Apple, Banana and Carrot. Pritchett provides the following information in performing the 2009 annual review for impairment:

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118. Which of Pritchett's reporting units require both steps to test for goodwill impairment?

Goodwill Impairment Test—Step 1

Therefore, the Apple and the Carrot reporting units require both steps to test for goodwill impairment.


119. How much goodwill impairment should Pritchett report for 2009?

Goodwill Impairment Test—Step 2 (Apple and Carrot only)

Total impairment loss $5,000 + $75,000 = $80,000


On 4/1/09, Sey Mold Corporation acquired 100% of DotDot.Com for $2,000,000 cash. On the date of acquisition, DotDot's net book value was $900,000. DotDot's assets included land that was undervalued by $300,000, a building that was undervalued by $400,000 and equipment that was overvalued by $50,000. The building had a remaining useful life of 8 years and the equipment had a remaining useful life of 4 years. Any excess fair value over consideration transferred is allocated to an undervalued patent and is amortized over 5 years.

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http://www.dotdot.com/





122. Determine the amortization expense related to the consolidation at the year-end date of 12/31/19.

By 2019, all of the fair value adjustments and the patent will have been fully amortized. The amortization expense for 2019 related to the combination will be $0.


123. For each of the following situations, select the best answer that applies to consolidating financial information subsequent to the acquisition date: (A) Acquisition method, but not purchase method. (B) Acquisition method, but not pooling-of-interests method. (C) Both pooling-of-interest method and acquisition method. (D) Initial value method. (E) Partial equity method. (F) Equity method. (G) Initial value method and partial equity method but not equity method. (H) Partial equity method and equity method but not initial value method. (I) Initial value method, partial equity method and equity method. _____ 1. Basic objective is to combine asset, liability, revenue, expense and equity accounts of a parent and its subsidiaries. _____ 2. Method(s) available to the parent for internal record-keeping. _____ 3. Never results in goodwill. _____ 4. Easiest internal record-keeping method to apply. _____ 5. Income of the subsidiary is recorded by the parent when earned. _____ 6. Designed to create a parallel between the parent's investment accounts and changes in the underlying equity of the acquired company. _____ 7. For years subsequent to acquisition, requires the *C entry. _____ 8. Uses the cash basis for income recognition. _____ 9. Investment account remains at initially recorded amount. _____ 10. Dividends received by the parent from the subsidiary reduce the parent's investment account. _____ 11. Requires a schedule to allocate the consideration transferred in the original combination transaction. _____ 12. Often referred to in accounting as a single-line consolidation. _____ 13. Increases the investment account for subsidiary earnings, but does not decrease the subsidiary account for equity adjustments such as amortizations.

(1) C; (2) I; (3) A; (4) D; (5) H; (6) F; (7) G; (8) D; (9) D; (10) H; (11) B; (12) F; (13) E


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Student: ___________________________________________________________________________

1. According to SFAS 160, Non-controlling Interests and Consolidated Financial Statements, a non-controlling interest is most likely to be shown as part of equity under the A. Partial equity concept B. Proportionate consolidation concept C. Economic unit concept D. Parent company concept E. Proprietary concept

When Jolt Co. acquired 75% of the common stock of Yelts Corp., Yelts owned land with a book value of $70,000 and a fair value of $100,000.

2. What amount should have been reported for the land on a consolidated balance sheet, according to SFAS 141(R), assuming the economic unit concept was used? A. $70,000 B. $75,000 C. $85,000 D. $92,500 E. $100,000

3. What amount of excess land allocation would be included for the calculation of non-controlling interest, according to SFAS 141(R)? A. $0 B. $7,500 C. $17,500 D. $25,000 E. $70,000

4. What amount should have been reported for the land on a consolidated balance sheet, assuming the investment was obtained prior to SFAS 141(R) and the parent company concept was used? A. $70,000 B. $75,000 C. $85,000 D. $92,500 E. $100,000

Perch Co. acquired 80% of the common stock of Float Corp. for $1,600,000. The fair value of Float's net assets was $1,850,000 and the book value was $1,500,000. The non-controlling interest shares of Float Corp. are not actively traded.

5. What is the total amount of goodwill recognized according to the economic unit concept per SFAS 141 (R)? A. $150,000 B. $250,000 C. $0 D. $120,000 E. $170,000

6. What amount of goodwill should be attributed to Perch according to the economic unit concept per SFAS 141(R)? A. $150,000 B. $250,000 C. $0 D. $120,000 E. $170,000

7. What amount of goodwill should be attributed to the non-controlling interest according to the economic unit concept per SFAS 141(R)? A. $0 B. $20,000 C. $30,000 D. $100,000 E. $120,000

8. What is the dollar amount of non-controlling interest which should appear on a balance sheet prepared immediately after consolidation according to the economic unit concept per SFAS 141(R)? A. $350,000 B. $300,000 C. $400,000 D. $370,000 E. $0

9. What is the dollar amount of Float Corp.'s net assets that would be represented on a balance sheet prepared immediately after consolidation according to the economic unit concept per SFAS 141(R)? A. $1,600,000 B. $1,480,000 C. $1,200,000 D. $1,780,000 E. $1,850,000

10. What is the dollar amount of non-controlling interest which should appear on a balance sheet prepared immediately after consolidation according to the parent company concept? A. $350,000 B. $300,000 C. $400,000 D. $250,000 E. $0

Femur Co. owns 70% of the voting common stock of Harbor Corp. During 2009, Harbor had revenues of $2,500,000 and expenses of $2,000,000. The amortization of excess cost allocations totaled $60,000 in 2009. Femur Co. accounts for its consolidations according to SFAS 141(R) and SFAS 160.

11. The non-controlling interest's share of the earnings of Harbor Corp. is calculated to be A. $132,000 B. $150,000 C. $168,000 D. $160,000 E. $0

12. What is the net effect of the inclusion of Harbor on consolidated net income for 2009? A. $350,000 B. $308,000 C. $500,000 D. $440,000 E. $290,000

Denber Co. acquired 60% of the common stock of Kailey Corp. on September 1, 2009. For 2009, Kailey reported revenues of $800,000 and expenses of $620,000. The annual amount of amortization related to this acquisition was $15,000. Denber Co. accounts for its consolidations according to SFAS 141(R) and SFAS 160.

13. In consolidation, the total amount of expenses related to Kailey and to Denber's acquisition of Kailey for 2009 is determined to be A. $206,667 B. $211,667 C. $221,667 D. $620,000 E. $635,000

14. The impact of the consolidation on consolidated net income for 2009 is determined to be A. $31,000 B. $33,000 C. $55,000 D. $60,000 E. $39,000

15. The non-controlling interest's share of Denber's income for 2009 is calculated to be A. $22,000 B. $24,000 C. $48,000 D. $66,000 E. $72,000

16. MacHeath Inc. bought 60% of the outstanding common stock of Nomes Inc. in a business combination that resulted in the recognition of goodwill. Nomes owned a piece of land that cost $250,000 but was worth $600,000 at the date of purchase. What value would be attributed to this land in a consolidated balance sheet at the date of takeover, according to the economic unit concept per SFAS 141(R) and the parent company concept per SFAS 141?


17. Kordel Inc. holds 75% of the outstanding common stock of Raxston Corp. Raxston currently owes Kordel $500,000 for inventory acquired over the past few months. In preparing consolidated financial statements, what amount of this debt should be eliminated? A. $375,000 B. $125,000 C. $300,000 D. $500,000 E. $0

Royce Co. acquired 60% of Park Co. for $420,000 when Park's book value was $560,000. On that date, Park had equipment (with a ten-year life) that was undervalued in the financial records by $140,000. Two years later, the following figures were reported by the two companies (stockholders' equity accounts have been omitted from their separate operations). Royce accounts for its consolidations according to SFAS 141(R) and SFAS 160.

18. What is consolidated net income that is attributable to Royce's controlling interest? A. $686,000 B. $560,000 C. $644,000 D. $635,600 E. $691,600

19. What is the non-controlling interest's share of the subsidiary's net income and what is the ending balance of the non-controlling interest in the subsidiary? A. $50,400 and $324,800 B. $53,648 and $304,500 C. $56,000 and $296,800 D. $52,640 and $313,600 E. $55,270 and $297,300

20. What is the consolidated balance of the Equipment account? A. $666,400 B. $604,000 C. $756,000 D. $711,200 E. $764,000

On January 1, 2009, Palk Corp. and Spraz Corp. had condensed balance sheets as follows: On January 2, 2009, Palk borrowed $84,000 to acquire 90% of the outstanding common shares of Spraz. This was to be paid in ten equal annual principal payments, plus interest, beginning December 31, 2009. The excess consideration transferred over the underlying book value of the acquired net assets was allocated 60% to inventory and 40% to goodwill. Palk accounts for its consolidations according to SFAS 141(R) and SFAS 160.

21. What is consolidated current assets as of January 2, 2009? A. $138,600 B. $134,400 C. $126,000 D. $140,000 E. $127,400

22. What is consolidated noncurrent assets as of January 2, 2009? A. $182,000 B. $190,400 C. $187,600 D. $191,333 E. $189,000

23. What is consolidated current liabilities as of January 2, 2009? A. $70,000 B. $56,000 C. $64,400 D. $42,000 E. $58,100

24. Under the economic unit concept, which of the following statements is true about consolidated financial statements? A. The accounting emphasis in preparing consolidated financial statements is placed on the business combination being formed B. The accounting emphasis in preparing consolidated financial statements is placed on the parent's investment C. The objective of consolidated financial statements is to serve as a report to the stockholders of the parent company D. The economic unit concept is a hybrid of the proportionate consolidation concept and the parent company concept E. The economic unit concept is no longer allowed according to SFAS 141(R)

25. Under the proportionate consolidation concept, which of the following statements is true about consolidated financial statements? A. The accounting emphasis in preparing consolidated financial statements is placed on the business combination being formed B. Holding control of a subsidiary provides the parent with an indivisible interest in that company C. The objective of consolidated financial statements is to serve as a report to the stockholders of the parent company D. The proportionate consolidation concept is a hybrid of the economic unit concept and the parent company concept E. The proportionate consolidation concept is no longer allowed according to SFAS 141(R)

26. Under the parent company concept, which of the following statements is false about consolidated financial statements? A. Holding control of a subsidiary provides the parent with an indivisible interest in that company B. Consolidated financial statements are produced primarily for the benefit of the parent company stockholders C. The non-controlling interest is calculated at book value amounts D. A portion of the subsidiary net assets is valued at book value and a portion is valued at fair value E. All of the subsidiary net assets are valued at fair value

27. When a parent uses the equity method throughout the year to account for investment in a subsidiary, which of the following statements is false before making adjustments on the consolidated worksheet? A. Parent company net income equals controlling interest in consolidated net income B. Parent company retained earnings equals consolidated retained earnings C. Parent company total assets equals consolidated total assets D. Parent company dividends equals consolidated dividends E. Goodwill may need to be recorded

28. When a parent uses the initial value method throughout the year to account for investment in a subsidiary, which of the following statements is true before making adjustments on the consolidated worksheet? A. Parent company net income equals consolidated net income B. Parent company retained earnings equals consolidated retained earnings C. Parent company total assets equals consolidated total assets D. Parent company dividends equals consolidated dividends E. Goodwill is never recognized

29. When a parent uses the partial equity method throughout the year to account for investment in a subsidiary, which of the following statements is false before making adjustments on the consolidated worksheet? A. Parent company net income will equal controlling interest in consolidated net income when initial value, book value and fair value of the investment are equal B. Parent company net income will exceed controlling interest in consolidated net income when fair value acquired exceeds book value C. Parent company net income will be less than controlling interest in consolidated net income when fair value acquired exceeds book value D. Goodwill will be recognized if acquisition value exceeds fair value E. Subsidiary net assets are valued at their book values

30. In a step acquisition, using the economic unit concept per SFAS 141(R), which of the following statements is false? A. The acquisition method views a step acquisition essentially the same as a single step acquisition B. Income from subsidiary is computed by applying a partial year for a new purchase acquired during the year C. Income from subsidiary is computed for the entire year for a new purchase acquired during the year D. Obtaining control through a step acquisition is a significant re-measurement event E. Pre-acquisition earnings are not included on the consolidated income statement

31. Which of the following statements is false regarding multiple acquisitions of a subsidiary's existing common stock and using the economic unit concept? A. The parent recognizes a larger percent of income from subsidiary B. A step acquisition resulting in control may result in a parent recognizing a gain on revaluation C. The book value of the subsidiary will increase D. The parent's percent ownership in subsidiary will increase E. Non-controlling interest in subsidiary's net income will decrease

32. When a subsidiary is acquired sometime after the first day of the fiscal year, which of the following statements is true? A. Income from subsidiary is not recognized until there is an entire year of consolidated operations B. Income from subsidiary is recognized from date of acquisition to year-end C. Excess cost over acquisition value is recognized at the beginning of the fiscal year D. No goodwill can be recognized E. Income from subsidiary is recognized for the entire year

33. When consolidating a subsidiary that was acquired on a date other than the first day of the fiscal year, which of the following statements is true in the presentation of consolidated financial statements? A. Purchased pre-acquisition earnings are deducted from combined revenues and expenses B. Purchased pre-acquisition earnings are added to combined revenues and expenses C. Purchased pre-acquisition earnings are deducted from the beginning consolidated stockholders' equity D. Purchased pre-acquisition earnings are added to the beginning consolidated stockholders' equity E. Purchased pre-acquisition earnings are ignored on the consolidated income statement

34. When a parent uses the acquisition method for business combinations and sells shares of its subsidiary, which of the following statements is false? A. If majority control is still maintained, consolidated financial statements are still required B. If majority control is not maintained but significant influence exists, the equity method to account for the investment is still used but consolidated financial statements are not required C. If majority control is not maintained but significant influence exists, the equity method is still used to account for the investment and consolidated financial statements are still required D. If majority control is not maintained and significant influence no longer exists, a prospective change in accounting principle to the fair value method is required E. A gain or loss calculation must be prepared if control is lost

35. All of the following statements regarding the sale of subsidiary shares are true except which of the following? A. The use of specific identification based on serial number is acceptable B. The use of the FIFO assumption is acceptable C. The use of the averaging assumption is acceptable D. The use of specific LIFO assumption is acceptable E. The parent company must determine whether consolidation is still appropriate for the remaining shares owned

36. Which of the following statements is true regarding the sale of subsidiary shares when using the acquisition method for accounting for business combinations? A. If control continues, the difference between selling price and acquisition value is recorded as a realized gain or loss B. If control continues, the difference between selling price and acquisition value is an unrealized gain or loss C. If control continues, the difference between selling price and carrying value is recorded as an adjustment to additional paid-in capital D. If control continues, the difference between selling price and carrying value is recorded as a realized gain or loss E. If control continues, the difference between selling price and carrying value is recorded as an adjustment to retained earnings

37. When using the acquisition method for accounting for business combinations, all of the following statements are false regarding the sale of subsidiary shares except: A. If control ceases to exist and significant influence ceases to exist, the difference between selling price and acquisition value is recorded as a realized gain or loss B. If control ceases to exist and significant influence ceases to exist, the difference between selling price and acquisition value is recorded as an unrealized gain or loss C. If control ceases to exist and significant influence ceases to exist, the difference between selling price and carrying value is recorded as a realized gain or loss D. If control ceases to exist and significant influence ceases to exist, the difference between selling price and carrying value is recorded as an unrealized gain or loss E. If control ceases to exist and significant influence ceases to exist, the difference between selling price and carrying value is recorded as an adjustment to retained earnings

38. Keefe, Inc., a calendar-year corporation, acquires 70% of George Company on September 1, 2009 and an additional 10% on April 1, 2010. Total annual amortization of $6,000 relates to the first acquisition. George reports the following figures for 2010:

Without regard for this investment, Keefe earns $300,000 in net income during 2010. All net income is earned evenly throughout the year. What is the controlling interest in consolidated net income for 2010? A. $373,300 B. $372,850 C. $371,500 D. $376,000 E. $372,805

McGuire company acquired 90 percent of Hogan Company on January 1, 2009, for $234,000 cash. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following: Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years.

39. In consolidation at January 1, 2009, what adjustment is necessary for Hogan's Buildings account? A. $2,000 increase B. $2,000 decrease C. $1,800 increase D. $1,800 decrease E. No change

40. In consolidation at December 31, 2009, what adjustment is necessary for Hogan's Buildings account? A. $1,620 increase B. $1,620 decrease C. $1,800 increase D. $1,800 decrease E. No change


42. In consolidation at January 1, 2009, what adjustment is necessary for Hogan's Equipment account? A. $4,000 increase B. $4,000 decrease C. $3,600 increase D. $3,600 decrease E. No change

43. In consolidation at December 31, 2009, what adjustment is necessary for Hogan's Equipment account? A. $3,000 increase B. $3,000 decrease C. $2,700 increase D. $2,700 decrease E. No change


45. In consolidation at January 1, 2009, what adjustment is necessary for Hogan's Land account? A. $7,000 increase B. $7,000 decrease C. $6,300 increase D. $6,300 decrease E. No change

46. In consolidation at December 31, 2009, what adjustment is necessary for Hogan's Land account? A. $0 B. $7,000 increase C. $6,300 increase D. $6,300 decrease E. $8,000 decrease


48. In consolidation at January 1, 2009, what adjustment is necessary for Hogan's Patent account? A. $7,000 B. $6,300 C. $0 D. $11,000 E. $9,900

49. In consolidation at December 31, 2009, what net adjustment is necessary for Hogan's Patent account? A. $5,600 B. $8,800 C. $0 D. $7,700 E. $7,000


Bell Company acquires 80% of Demers Company for $500,000 on January 1, 2009. Demers reported common stock of $300,000 and retained earnings of $200,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Based on an annual review, goodwill has not been impaired. Demers earns income and pays dividends as follows:

Assume the equity method is applied.

51. Compute Bell's investment in Demers at December 31, 2009. A. $580,000 B. $574,400 C. $548,000 D. $542,400 E. $541,000



54. Compute Bell's income from Demers for the year ended December 31, 2009. A. $74,400 B. $73,000 C. $42,400 D. $41,000 E. $80,000



57. Compute the non-controlling interest in the net income of Demers at December 31, 2009. A. $20,000 B. $12,000 C. $18,600 D. $10,600 E. $14,400



60. Compute the non-controlling interest of Demers at December 31, 2009. A. $135,600 B. $117,000 C. $112,000 D. $100,000 E. $110,600




Assume the initial value method is applied.




66. How much does Bell report as Income from Demers for the year ended December 31, 2009? A. $32,000 B. $74,400 C. $73,000 D. $42,400 E. $41,000




Bell Company acquires 80% of Demers Company for $500,000 on January 1, 2009. Demers reported common stock of $300,000 and retained earnings of $200,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Demers earns income and pays dividends as follows:

Assume the partial equity method is applied.





79. How much does Bell report as income from Demers for the year ended December 31, 2010? A. $90,400 B. $89,000 C. $50,400 D. $96,000 E. $56,000








Ross Company acquired 90% of Parsons Company several years ago and recorded goodwill of $200,000 at that date. During 2009 an analysis of the fair market value of Parson's assets determined an impairment of goodwill in the amount of $50,000.

87. At what amount would consolidated goodwill be reported for 2009? A. $150,000 B. $200,000 C. $50,000 D. $0 E. $135,000

88. What journal entry would be made by Ross regarding its investment in Parsons impairment of goodwill?

A. Journal entry A B. Journal entry B C. Journal entry C D. Journal entry D E. Journal entry E

89. Under the economic unit concept and according to SFAS 160, where would the non-controlling interest appear on the consolidated balance sheet?

90. What is pre-acquisition income?

91. Shedds Corp. owns less than one hundred percent of the voting common stock of Beta Co. Under what conditions will Shedds be required to prepare consolidated financial statements?

92. Where may a non-controlling interest be presented on a consolidated balance sheet?

93. A theory related to consolidation of a subsidiary is the economic unit concept. What are the theoretical arguments on which the economic unit concept is based?

94. How would you determine the amount of goodwill to be recognized at date of acquisition when there is a non-controlling interest present and the economic unit concept is used?

95. How is a non-controlling interest in the net income of an entry reported in the income statement under the economic unit concept?

96. One company buys a controlling interest in another company on April 1. How should the pre-acquisition subsidiary revenues and expenses be handled in the consolidated balances for the year of acquisition?

97. Franklin, Inc. owns 80% of Prevatt Company. During the current year, a portion of the investment in Prevatt is sold. Prior to recording the sale, Franklin adjusts the book value of its investment. What is the purpose of the adjustment?

98. How does a parent corporation account for the sale of a portion of an investment in a subsidiary?

99. Alonzo Co. acquired 60% of Beazley Corp. at a purchase price of $240,000. At the time of the acquisition, the book value of Beazley's net assets was $300,000. Required: Under the economic unit concept, what amount should have been assigned to the non-controlling interest immediately after the combination?

100. Tosco Co. paid $540,000 for 80% of the stock of Martz Co. when the book value of Martz's net assets was $600,000. For all of Martz's assets and liabilities, book value and fair value were approximately equal. Required: Under the economic unit concept using the acquisition method, what amount of goodwill should appear on a consolidated balance sheet prepared immediately after the combination?

101. On January 1, 2009, Elva Corp. paid $750,000 for 80% of Fenton Co. when the book value of Fenton's net assets was $800,000. Fenton owned a building with a fair value of $150,000 and a book value of $120,000. Required: At what amount would the building appear on a consolidated balance sheet prepared immediately after the combination, assuming Elva used the acquisition method?

102. Pennant Corp. owns 70% of the common stock of Scarvens Co. Scarvens' revenues for 2009 totaled $200,000. Required: What amount of Scarvens' revenues would be included in the consolidated total under the economic unit concept?

Caldwell Inc. acquired 65% of Club Corp. for $2,600,000. Club owned a building and equipment with ten-year useful lives. The book value of these assets was $830,000 and the fair value was $950,000. For Club's other assets and liabilities, book value was equal to fair value. The total fair value of Club's net assets was $3,500,000.

103. Using the economic unit concept and acquisition method, determine the amount of goodwill associated with Caldwell's purchase of Club.

104. Using the economic unit concept, determine the amount of the non-controlling interest as of the date of the acquisition.

On January 1, 2009, Glenville Co. acquired an 80% interest in Acron Corp. for $500,000. The fair value of Acron's net assets was $600,000 and Glenville will account for its interest using the acquisition method.

105. Determine the amount of goodwill to be recognized in this acquisition.

106. Determine the value assigned to the non-controlling interest as of the date of the acquisition.

On January 1, 2008, prior to the effective date of SFAS 141(R), Cranston Inc. reported net assets of $1,064,000, although equipment (with a four-year life) with a book value of $616,000 was worth $700,000. Peak Corp. paid $969,000 on that date for an 80% ownership interest in Cranston. Peak still owns its 80% interest in 2009.

107. What is the annual excess amortization using the parent company concept?

108. What is the consolidated goodwill balance on January 1, 2009, assuming the parent company concept is used?

On January 1, 2009, Jannison Inc. acquired 90% of Techron Co. by paying $477,000 cash. Techron Co. reported a Common Stock account balance of $140,000 and Retained Earnings of $280,000 at that date. The fair value of Techron Co. was appraised at $530,000. The total annual amortization was $11,000 as a result of this transaction. The subsidiary earned $98,000 in 2009 and $126,000 in 2010 with dividend payments of $42,000 each year. Without regard for this investment, Jannison had income of $308,000 in 2009 and $364,000 in 2010. Use the economic unit concept to account for this acquisition.

109. Prepare a proper presentation of consolidated net income for 2009.


111. What is the non-controlling interest balance as of December 31, 2010?

112. On January 1, 2009, Vacker Co. acquired 70% of Carper Inc. by paying $650,000. This included a $20,000 control premium. Carper reported common stock on that date of $420,000 with retained earnings of $252,000. A building was undervalued in the company's financial records by $28,000. This building had a ten-year remaining life. Copyrights of $80,000 were to be recognized and amortized over 20 years. Carper earned income and paid cash dividends as follows:

On December 31, 2011, Vacker owed $30,800 to Carper. There have been no changes in Carper's common stock account since the acquisition. Required: If the equity method had been applied by Vacker for this acquisition, what were the consolidation entries needed as of December 31, 2011?

On January 1, 2009, John Doe Enterprises (JDE) bought a 55% interest in Bubba Manufacturing, Inc. (BMI). JDE paid for the transaction with $3 million cash and 500,000 shares of JDE common stock (par value $1.00 per share). At the time of the acquisition, BMI's book value was $16,970,000. On January 1, JDE stock had a market value of $14.90 per share and there was no control premium in this transaction. Any consideration transferred over book value is assigned to goodwill. BMI had the following balances on January 1, 2009.

For internal reporting purposes, JDE employed the equity method to account for this investment.

113. Prepare a schedule to determine goodwill and the amortization and allocation amounts.

114. The following account balances are for the year ending December 31, 2009 for both companies.

Required: Prepare a consolidation worksheet for this business combination. Assume goodwill has been reviewed and there is no goodwill impairment.

115. McLaughlin, Inc. acquires 70 percent of Ellis Corporation on September 1, 2009 and an additional 10 percent on November 1, 2010. Annual amortization of $8,400 attributed to the controlling interest relates to the first acquisition. Ellis reports the following figures for 2010:

Without regard for this investment, McLaughlin earns $480,000 in net income ($840,000 revenues less $360,000 expenses earned and incurred evenly through the year) during 2010. Required: Prepare a proper schedule of consolidated net income and apportionment to non-controlling and controlling interests for 2010.

116. For each of the following situations, select the best answer concerning consolidating financial information where there is a non-controlling interest in the subsidiary: (A) Economic unit concept. (B) Parent company concept. (C) Economic unit concept and parent company concept. _____ 1. Reflects the cost principle, but also assigns a value to the non-controlling interest shares at book value. _____ 2. Recognizes the non-controlling interest has a value to be reported, but since it is not a part of the exchange transaction, no new basis of accountability arises. _____ 3. Recognizes that management effectively controls 100% of the net assets acquired and is thus accountable for the entire fair value. _____ 4. The vast majority of consolidated financial statements in the U.S. are prepared under this concept for purchase business combinations. _____ 5. Requires the computation of an implied value. _____ 6. Recognizes the full fair value of partially owned acquisitions. _____ 7. Non-controlling interest is reported at an implied fair value. _____ 8. Non-controlling interest is reported at book value. _____ 9. Required by SFAS 141(R) Business Combinations.

ch4 Key

1. According to SFAS 160, Non-controlling Interests and Consolidated Financial Statements, a non-controlling interest is most likely to be shown as part of equity under the A. Partial equity concept B. Proportionate consolidation concept C. Economic unit concept D. Parent company concept E. Proprietary concept


When Jolt Co. acquired 75% of the common stock of Yelts Corp., Yelts owned land with a book value of $70,000 and a fair value of $100,000.

Hoyle - Chapter 04

2. What amount should have been reported for the land on a consolidated balance sheet, according to SFAS 141(R), assuming the economic unit concept was used? A. $70,000 B. $75,000 C. $85,000 D. $92,500 E. $100,000


3. What amount of excess land allocation would be included for the calculation of non-controlling interest, according to SFAS 141(R)? A. $0 B. $7,500 C. $17,500 D. $25,000 E. $70,000


4. What amount should have been reported for the land on a consolidated balance sheet, assuming the investment was obtained prior to SFAS 141(R) and the parent company concept was used? A. $70,000 B. $75,000 C. $85,000 D. $92,500 E. $100,000


Perch Co. acquired 80% of the common stock of Float Corp. for $1,600,000. The fair value of Float's net assets was $1,850,000 and the book value was $1,500,000. The non-controlling interest shares of Float Corp. are not actively traded.

Hoyle - Chapter 04

5. What is the total amount of goodwill recognized according to the economic unit concept per SFAS 141 (R)? A. $150,000 B. $250,000 C. $0 D. $120,000 E. $170,000


6. What amount of goodwill should be attributed to Perch according to the economic unit concept per SFAS 141(R)? A. $150,000 B. $250,000 C. $0 D. $120,000 E. $170,000


7. What amount of goodwill should be attributed to the non-controlling interest according to the economic unit concept per SFAS 141(R)? A. $0 B. $20,000 C. $30,000 D. $100,000 E. $120,000


8. What is the dollar amount of non-controlling interest which should appear on a balance sheet prepared immediately after consolidation according to the economic unit concept per SFAS 141(R)? A. $350,000 B. $300,000 C. $400,000 D. $370,000 E. $0


9. What is the dollar amount of Float Corp.'s net assets that would be represented on a balance sheet prepared immediately after consolidation according to the economic unit concept per SFAS 141(R)? A. $1,600,000 B. $1,480,000 C. $1,200,000 D. $1,780,000 E. $1,850,000


10. What is the dollar amount of non-controlling interest which should appear on a balance sheet prepared immediately after consolidation according to the parent company concept? A. $350,000 B. $300,000 C. $400,000 D. $250,000 E. $0


Femur Co. owns 70% of the voting common stock of Harbor Corp. During 2009, Harbor had revenues of $2,500,000 and expenses of $2,000,000. The amortization of excess cost allocations totaled $60,000 in 2009. Femur Co. accounts for its consolidations according to SFAS 141(R) and SFAS 160.

Hoyle - Chapter 04

11. The non-controlling interest's share of the earnings of Harbor Corp. is calculated to be A. $132,000 B. $150,000 C. $168,000 D. $160,000 E. $0


12. What is the net effect of the inclusion of Harbor on consolidated net income for 2009? A. $350,000 B. $308,000 C. $500,000 D. $440,000 E. $290,000


Denber Co. acquired 60% of the common stock of Kailey Corp. on September 1, 2009. For 2009, Kailey reported revenues of $800,000 and expenses of $620,000. The annual amount of amortization related to this acquisition was $15,000. Denber Co. accounts for its consolidations according to SFAS 141(R) and SFAS 160.

Hoyle - Chapter 04

13. In consolidation, the total amount of expenses related to Kailey and to Denber's acquisition of Kailey for 2009 is determined to be A. $206,667 B. $211,667 C. $221,667 D. $620,000 E. $635,000


14. The impact of the consolidation on consolidated net income for 2009 is determined to be A. $31,000 B. $33,000 C. $55,000 D. $60,000 E. $39,000


15. The non-controlling interest's share of Denber's income for 2009 is calculated to be A. $22,000 B. $24,000 C. $48,000 D. $66,000 E. $72,000


16. MacHeath Inc. bought 60% of the outstanding common stock of Nomes Inc. in a business combination that resulted in the recognition of goodwill. Nomes owned a piece of land that cost $250,000 but was worth $600,000 at the date of purchase. What value would be attributed to this land in a consolidated balance sheet at the date of takeover, according to the economic unit concept per SFAS 141(R) and the parent company concept per SFAS 141?



17. Kordel Inc. holds 75% of the outstanding common stock of Raxston Corp. Raxston currently owes Kordel $500,000 for inventory acquired over the past few months. In preparing consolidated financial statements, what amount of this debt should be eliminated? A. $375,000 B. $125,000 C. $300,000 D. $500,000 E. $0


Royce Co. acquired 60% of Park Co. for $420,000 when Park's book value was $560,000. On that date, Park had equipment (with a ten-year life) that was undervalued in the financial records by $140,000. Two years later, the following figures were reported by the two companies (stockholders' equity accounts have been omitted from their separate operations). Royce accounts for its consolidations according to SFAS 141(R) and SFAS 160.

Hoyle - Chapter 04

18. What is consolidated net income that is attributable to Royce's controlling interest? A. $686,000 B. $560,000 C. $644,000 D. $635,600 E. $691,600


19. What is the non-controlling interest's share of the subsidiary's net income and what is the ending balance of the non-controlling interest in the subsidiary? A. $50,400 and $324,800 B. $53,648 and $304,500 C. $56,000 and $296,800 D. $52,640 and $313,600 E. $55,270 and $297,300


20. What is the consolidated balance of the Equipment account? A. $666,400 B. $604,000 C. $756,000 D. $711,200 E. $764,000


On January 1, 2009, Palk Corp. and Spraz Corp. had condensed balance sheets as follows: On January 2, 2009, Palk borrowed $84,000 to acquire 90% of the outstanding common shares of Spraz. This was to be paid in ten equal annual principal payments, plus interest, beginning December 31, 2009. The excess consideration transferred over the underlying book value of the acquired net assets was allocated 60% to inventory and 40% to goodwill. Palk accounts for its consolidations according to SFAS 141(R) and SFAS 160.

Hoyle - Chapter 04

21. What is consolidated current assets as of January 2, 2009? A. $138,600 B. $134,400 C. $126,000 D. $140,000 E. $127,400


22. What is consolidated noncurrent assets as of January 2, 2009? A. $182,000 B. $190,400 C. $187,600 D. $191,333 E. $189,000


23. What is consolidated current liabilities as of January 2, 2009? A. $70,000 B. $56,000 C. $64,400 D. $42,000 E. $58,100


24. Under the economic unit concept, which of the following statements is true about consolidated financial statements? A. The accounting emphasis in preparing consolidated financial statements is placed on the business combination being formed B. The accounting emphasis in preparing consolidated financial statements is placed on the parent's investment C. The objective of consolidated financial statements is to serve as a report to the stockholders of the parent company D. The economic unit concept is a hybrid of the proportionate consolidation concept and the parent company concept E. The economic unit concept is no longer allowed according to SFAS 141(R)


25. Under the proportionate consolidation concept, which of the following statements is true about consolidated financial statements? A. The accounting emphasis in preparing consolidated financial statements is placed on the business combination being formed B. Holding control of a subsidiary provides the parent with an indivisible interest in that company C. The objective of consolidated financial statements is to serve as a report to the stockholders of the parent company D. The proportionate consolidation concept is a hybrid of the economic unit concept and the parent company concept E. The proportionate consolidation concept is no longer allowed according to SFAS 141(R)


26. Under the parent company concept, which of the following statements is false about consolidated financial statements? A. Holding control of a subsidiary provides the parent with an indivisible interest in that company B. Consolidated financial statements are produced primarily for the benefit of the parent company stockholders C. The non-controlling interest is calculated at book value amounts D. A portion of the subsidiary net assets is valued at book value and a portion is valued at fair value E. All of the subsidiary net assets are valued at fair value


27. When a parent uses the equity method throughout the year to account for investment in a subsidiary, which of the following statements is false before making adjustments on the consolidated worksheet? A. Parent company net income equals controlling interest in consolidated net income B. Parent company retained earnings equals consolidated retained earnings C. Parent company total assets equals consolidated total assets D. Parent company dividends equals consolidated dividends E. Goodwill may need to be recorded


28. When a parent uses the initial value method throughout the year to account for investment in a subsidiary, which of the following statements is true before making adjustments on the consolidated worksheet? A. Parent company net income equals consolidated net income B. Parent company retained earnings equals consolidated retained earnings C. Parent company total assets equals consolidated total assets D. Parent company dividends equals consolidated dividends E. Goodwill is never recognized


29. When a parent uses the partial equity method throughout the year to account for investment in a subsidiary, which of the following statements is false before making adjustments on the consolidated worksheet? A. Parent company net income will equal controlling interest in consolidated net income when initial value, book value and fair value of the investment are equal B. Parent company net income will exceed controlling interest in consolidated net income when fair value acquired exceeds book value C. Parent company net income will be less than controlling interest in consolidated net income when fair value acquired exceeds book value D. Goodwill will be recognized if acquisition value exceeds fair value E. Subsidiary net assets are valued at their book values


30. In a step acquisition, using the economic unit concept per SFAS 141(R), which of the following statements is false? A. The acquisition method views a step acquisition essentially the same as a single step acquisition B. Income from subsidiary is computed by applying a partial year for a new purchase acquired during the year C. Income from subsidiary is computed for the entire year for a new purchase acquired during the year D. Obtaining control through a step acquisition is a significant re-measurement event E. Pre-acquisition earnings are not included on the consolidated income statement


31. Which of the following statements is false regarding multiple acquisitions of a subsidiary's existing common stock and using the economic unit concept? A. The parent recognizes a larger percent of income from subsidiary B. A step acquisition resulting in control may result in a parent recognizing a gain on revaluation C. The book value of the subsidiary will increase D. The parent's percent ownership in subsidiary will increase E. Non-controlling interest in subsidiary's net income will decrease


32. When a subsidiary is acquired sometime after the first day of the fiscal year, which of the following statements is true? A. Income from subsidiary is not recognized until there is an entire year of consolidated operations B. Income from subsidiary is recognized from date of acquisition to year-end C. Excess cost over acquisition value is recognized at the beginning of the fiscal year D. No goodwill can be recognized E. Income from subsidiary is recognized for the entire year


33. When consolidating a subsidiary that was acquired on a date other than the first day of the fiscal year, which of the following statements is true in the presentation of consolidated financial statements? A. Purchased pre-acquisition earnings are deducted from combined revenues and expenses B. Purchased pre-acquisition earnings are added to combined revenues and expenses C. Purchased pre-acquisition earnings are deducted from the beginning consolidated stockholders' equity D. Purchased pre-acquisition earnings are added to the beginning consolidated stockholders' equity E. Purchased pre-acquisition earnings are ignored on the consolidated income statement


34. When a parent uses the acquisition method for business combinations and sells shares of its subsidiary, which of the following statements is false? A. If majority control is still maintained, consolidated financial statements are still required B. If majority control is not maintained but significant influence exists, the equity method to account for the investment is still used but consolidated financial statements are not required C. If majority control is not maintained but significant influence exists, the equity method is still used to account for the investment and consolidated financial statements are still required D. If majority control is not maintained and significant influence no longer exists, a prospective change in accounting principle to the fair value method is required E. A gain or loss calculation must be prepared if control is lost


35. All of the following statements regarding the sale of subsidiary shares are true except which of the following? A. The use of specific identification based on serial number is acceptable B. The use of the FIFO assumption is acceptable C. The use of the averaging assumption is acceptable D. The use of specific LIFO assumption is acceptable E. The parent company must determine whether consolidation is still appropriate for the remaining shares owned


36. Which of the following statements is true regarding the sale of subsidiary shares when using the acquisition method for accounting for business combinations? A. If control continues, the difference between selling price and acquisition value is recorded as a realized gain or loss B. If control continues, the difference between selling price and acquisition value is an unrealized gain or loss C. If control continues, the difference between selling price and carrying value is recorded as an adjustment to additional paid-in capital D. If control continues, the difference between selling price and carrying value is recorded as a realized gain or loss E. If control continues, the difference between selling price and carrying value is recorded as an adjustment to retained earnings


37. When using the acquisition method for accounting for business combinations, all of the following statements are false regarding the sale of subsidiary shares except: A. If control ceases to exist and significant influence ceases to exist, the difference between selling price and acquisition value is recorded as a realized gain or loss B. If control ceases to exist and significant influence ceases to exist, the difference between selling price and acquisition value is recorded as an unrealized gain or loss C. If control ceases to exist and significant influence ceases to exist, the difference between selling price and carrying value is recorded as a realized gain or loss D. If control ceases to exist and significant influence ceases to exist, the difference between selling price and carrying value is recorded as an unrealized gain or loss E. If control ceases to exist and significant influence ceases to exist, the difference between selling price and carrying value is recorded as an adjustment to retained earnings


38. Keefe, Inc., a calendar-year corporation, acquires 70% of George Company on September 1, 2009 and an additional 10% on April 1, 2010. Total annual amortization of $6,000 relates to the first acquisition. George reports the following figures for 2010:

Without regard for this investment, Keefe earns $300,000 in net income during 2010. All net income is earned evenly throughout the year. What is the controlling interest in consolidated net income for 2010? A. $373,300 B. $372,850 C. $371,500 D. $376,000 E. $372,805


McGuire company acquired 90 percent of Hogan Company on January 1, 2009, for $234,000 cash. Hogan's stockholders' equity consisted of common stock of $160,000 and retained earnings of $80,000. An analysis of Hogan's net assets revealed the following: Any excess consideration transferred over fair value is attributable to an unamortized patent with a useful life of 5 years.

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39. In consolidation at January 1, 2009, what adjustment is necessary for Hogan's Buildings account? A. $2,000 increase B. $2,000 decrease C. $1,800 increase D. $1,800 decrease E. No change






42. In consolidation at January 1, 2009, what adjustment is necessary for Hogan's Equipment account? A. $4,000 increase B. $4,000 decrease C. $3,600 increase D. $3,600 decrease E. No change






45. In consolidation at January 1, 2009, what adjustment is necessary for Hogan's Land account? A. $7,000 increase B. $7,000 decrease C. $6,300 increase D. $6,300 decrease E. No change






48. In consolidation at January 1, 2009, what adjustment is necessary for Hogan's Patent account? A. $7,000 B. $6,300 C. $0 D. $11,000 E. $9,900







Assume the equity method is applied.

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Assume the initial value method is applied.

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Bell Company acquires 80% of Demers Company for $500,000 on January 1, 2009. Demers reported common stock of $300,000 and retained earnings of $200,000 on that date. Equipment was undervalued by $30,000 and buildings were undervalued by $40,000, each having a 10-year remaining life. Any excess consideration transferred over fair value was attributed to goodwill with an indefinite life. Demers earns income and pays dividends as follows:

Assume the partial equity method is applied.

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Ross Company acquired 90% of Parsons Company several years ago and recorded goodwill of $200,000 at that date. During 2009 an analysis of the fair market value of Parson's assets determined an impairment of goodwill in the amount of $50,000.

Hoyle - Chapter 04

87. At what amount would consolidated goodwill be reported for 2009? A. $150,000 B. $200,000 C. $50,000 D. $0 E. $135,000


88. What journal entry would be made by Ross regarding its investment in Parsons impairment of goodwill?

A. Journal entry A B. Journal entry B C. Journal entry C D. Journal entry D E. Journal entry E


89. Under the economic unit concept and according to SFAS 160, where would the non-controlling interest appear on the consolidated balance sheet?

The non-controlling interest would appear as a part of stockholders' equity where it would be clearly identified, labeled and distinguished from the parent's controlling interest in subsidiaries.


90. What is pre-acquisition income?

When a company acquires control of a subsidiary during a fiscal year, pre-acquisition income is the income attributed to the previous owners of the shares of the common stock for the portion of the year before the acquisition.


91. Shedds Corp. owns less than one hundred percent of the voting common stock of Beta Co. Under what conditions will Shedds be required to prepare consolidated financial statements?

Shedds will be required to prepare consolidated financial statements if it has control of Beta. If Shedds has more than 50% of the voting common stock of Beta, it has control and must prepare consolidated financial statements. Occasionally, ownership of less than 50% of the voting common stock can confer control. In this situation, an argument can be made that the company with control should prepare consolidated financial statements, although not required currently.


92. Where may a non-controlling interest be presented on a consolidated balance sheet?

According to SFAS 160, a non-controlling interest must be shown on the balance sheet as a part of stockholders' equity. It may no longer be shown between liabilities and stockholders' equity or classified as neither.


93. A theory related to consolidation of a subsidiary is the economic unit concept. What are the theoretical arguments on which the economic unit concept is based?

The economic unit concept emphasizes the business combination being formed, rather than the parent company's investment. The subsidiary and its accounts cannot be divided along ownership lines. The controlled company must be consolidated as a whole. The subsidiary is perceived as an indivisible part of the consolidated entity. The income statement will show all the income that is generated by the net assets under the control of the parent company.


94. How would you determine the amount of goodwill to be recognized at date of acquisition when there is a non-controlling interest present and the economic unit concept is used?

The amount of goodwill to be recognized is calculated by subtracting the non-controlling interest's proportionate fair value of the net assets of the acquired entity from the fair value of the non-controlling interest as evidenced by the parent's consideration transferred for its own share of ownership.


95. How is a non-controlling interest in the net income of an entry reported in the income statement under the economic unit concept?

The non-controlling interest would appear as a clearly identifiable portion of consolidated net income such that the controlling portion plus the non-controlling portion equals the consolidated net income presented.


96. One company buys a controlling interest in another company on April 1. How should the pre-acquisition subsidiary revenues and expenses be handled in the consolidated balances for the year of acquisition?

Only post-acquisition revenues and expenses are included in consolidated totals. The non-controlling interest is thereby viewed as beginning as of the acquisition date.


97. Franklin, Inc. owns 80% of Prevatt Company. During the current year, a portion of the investment in Prevatt is sold. Prior to recording the sale, Franklin adjusts the book value of its investment. What is the purpose of the adjustment?

If control is maintained after the sale, then the difference between the sales proceeds and the book value is an adjustment to the parent's owners' equity. If control is not maintained, then such difference is a gain or loss on sale of investment. In either situation, the book value of the investment should be on the equity method basis in order to calculate the proper entry for the sale. Therefore, if Franklin adjusts the book value of its investment, it is in order to bring an initial value method or partial equity method investment basis to an equity method basis.


98. How does a parent corporation account for the sale of a portion of an investment in a subsidiary?

If control is maintained after the sale, then the difference between the sales proceeds and the book value is an adjustment to the parent's owners' equity (APIC). If control is not maintained, then such difference is a gain or loss on sale of investment. In either situation, the book value of the investment should be on the equity method basis in order to calculate the proper entry for the sale. Therefore, if the investment has been kept under the initial value or the partial equity method, the investor adjusts the book value of its investment in order to bring an initial value method or partial equity method investment basis to an equity method basis.


99. Alonzo Co. acquired 60% of Beazley Corp. at a purchase price of $240,000. At the time of the acquisition, the book value of Beazley's net assets was $300,000. Required: Under the economic unit concept, what amount should have been assigned to the non-controlling interest immediately after the combination?


100. Tosco Co. paid $540,000 for 80% of the stock of Martz Co. when the book value of Martz's net assets was $600,000. For all of Martz's assets and liabilities, book value and fair value were approximately equal. Required: Under the economic unit concept using the acquisition method, what amount of goodwill should appear on a consolidated balance sheet prepared immediately after the combination?


101. On January 1, 2009, Elva Corp. paid $750,000 for 80% of Fenton Co. when the book value of Fenton's net assets was $800,000. Fenton owned a building with a fair value of $150,000 and a book value of $120,000. Required: At what amount would the building appear on a consolidated balance sheet prepared immediately after the combination, assuming Elva used the acquisition method?


102. Pennant Corp. owns 70% of the common stock of Scarvens Co. Scarvens' revenues for 2009 totaled $200,000. Required: What amount of Scarvens' revenues would be included in the consolidated total under the economic unit concept?


Caldwell Inc. acquired 65% of Club Corp. for $2,600,000. Club owned a building and equipment with ten-year useful lives. The book value of these assets was $830,000 and the fair value was $950,000. For Club's other assets and liabilities, book value was equal to fair value. The total fair value of Club's net assets was $3,500,000.

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103. Using the economic unit concept and acquisition method, determine the amount of goodwill associated with Caldwell's purchase of Club.


104. Using the economic unit concept, determine the amount of the non-controlling interest as of the date of the acquisition.


On January 1, 2009, Glenville Co. acquired an 80% interest in Acron Corp. for $500,000. The fair value of Acron's net assets was $600,000 and Glenville will account for its interest using the acquisition method.

Hoyle - Chapter 04

105. Determine the amount of goodwill to be recognized in this acquisition.


106. Determine the value assigned to the non-controlling interest as of the date of the acquisition.


On January 1, 2008, prior to the effective date of SFAS 141(R), Cranston Inc. reported net assets of $1,064,000, although equipment (with a four-year life) with a book value of $616,000 was worth $700,000. Peak Corp. paid $969,000 on that date for an 80% ownership interest in Cranston. Peak still owns its 80% interest in 2009.

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107. What is the annual excess amortization using the parent company concept?


108. What is the consolidated goodwill balance on January 1, 2009, assuming the parent company concept is used?


On January 1, 2009, Jannison Inc. acquired 90% of Techron Co. by paying $477,000 cash. Techron Co. reported a Common Stock account balance of $140,000 and Retained Earnings of $280,000 at that date. The fair value of Techron Co. was appraised at $530,000. The total annual amortization was $11,000 as a result of this transaction. The subsidiary earned $98,000 in 2009 and $126,000 in 2010 with dividend payments of $42,000 each year. Without regard for this investment, Jannison had income of $308,000 in 2009 and $364,000 in 2010. Use the economic unit concept to account for this acquisition.

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111. What is the non-controlling interest balance as of December 31, 2010?


112. On January 1, 2009, Vacker Co. acquired 70% of Carper Inc. by paying $650,000. This included a $20,000 control premium. Carper reported common stock on that date of $420,000 with retained earnings of $252,000. A building was undervalued in the company's financial records by $28,000. This building had a ten-year remaining life. Copyrights of $80,000 were to be recognized and amortized over 20 years. Carper earned income and paid cash dividends as follows:

On December 31, 2011, Vacker owed $30,800 to Carper. There have been no changes in Carper's common stock account since the acquisition. Required: If the equity method had been applied by Vacker for this acquisition, what were the consolidation entries needed as of December 31, 2011?

From the acquisition value, $28,000 was allocated based on the fair value of the building. With a ten-year remaining life, amortization will be $2,800 per year of which $1,960 is attributed to the controlling interest. Copyright amortization would have been $4,000 per year of which $2,800 is attributed to the controlling interest.


On January 1, 2009, John Doe Enterprises (JDE) bought a 55% interest in Bubba Manufacturing, Inc. (BMI). JDE paid for the transaction with $3 million cash and 500,000 shares of JDE common stock (par value $1.00 per share). At the time of the acquisition, BMI's book value was $16,970,000. On January 1, JDE stock had a market value of $14.90 per share and there was no control premium in this transaction. Any consideration transferred over book value is assigned to goodwill. BMI had the following balances on January 1, 2009.

For internal reporting purposes, JDE employed the equity method to account for this investment.

Hoyle - Chapter 04

113. Prepare a schedule to determine goodwill and the amortization and allocation amounts.


114. The following account balances are for the year ending December 31, 2009 for both companies.

Required: Prepare a consolidation worksheet for this business combination. Assume goodwill has been reviewed and there is no goodwill impairment.

Consolidation Worksheet for John Doe Enterprises and Bubba Manufacturing at 12/31/09. CONSOLIDATED WORKSHEET Acquisition For the year ended 12/31/2009


115. McLaughlin, Inc. acquires 70 percent of Ellis Corporation on September 1, 2009 and an additional 10 percent on November 1, 2010. Annual amortization of $8,400 attributed to the controlling interest relates to the first acquisition. Ellis reports the following figures for 2010:

Without regard for this investment, McLaughlin earns $480,000 in net income ($840,000 revenues less $360,000 expenses earned and incurred evenly through the year) during 2010. Required: Prepare a proper schedule of consolidated net income and apportionment to non-controlling and controlling interests for 2010.

* Amortization of $12,000 = original $8,400 for 70% grossed up to the 100% amount of $12,000.


116. For each of the following situations, select the best answer concerning consolidating financial information where there is a non-controlling interest in the subsidiary: (A) Economic unit concept. (B) Parent company concept. (C) Economic unit concept and parent company concept. _____ 1. Reflects the cost principle, but also assigns a value to the non-controlling interest shares at book value. _____ 2. Recognizes the non-controlling interest has a value to be reported, but since it is not a part of the exchange transaction, no new basis of accountability arises. _____ 3. Recognizes that management effectively controls 100% of the net assets acquired and is thus accountable for the entire fair value. _____ 4. The vast majority of consolidated financial statements in the U.S. are prepared under this concept for purchase business combinations. _____ 5. Requires the computation of an implied value. _____ 6. Recognizes the full fair value of partially owned acquisitions. _____ 7. Non-controlling interest is reported at an implied fair value. _____ 8. Non-controlling interest is reported at book value. _____ 9. Required by SFAS 141(R) Business Combinations.

(1) B; (2) B; (3) A; (4) B; (5) A; (6) A; (7) A; (8) B; (9) A


ch4 Summary


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Student: ___________________________________________________________________________

1. On November 8, 2009, Power Corp. sold land to Wood Co., its wholly owned subsidiary. The land cost $61,500 and was sold to Wood for $89,000. From the perspective of the combination, when is the gain on the sale of the land realized? A. Proportionately over a designated period of years B. When Wood Co. sells the land to a third party C. No gain can be recognized D. As Wood uses the land E. When Wood Co. begins using the land productively

2. Edgar Co. acquired 60% of Kindall Co. on January 1, 2009. During 2009, Edgar made several sales of inventory to Kindall. The cost and selling price of the goods were $140,000 and $200,000, respectively. Kindall still owned one-fourth of the goods at the end of 2009. Consolidated cost of goods sold for 2009 was $2,140,000. How would consolidated cost of goods sold have differed if the inventory transfers had been for the same amount and cost, but from Kindall to Edgar? A. Consolidated cost of goods sold would have been $2,140,000 B. Consolidated cost of goods sold would have been $2,175,000 C. The effect on consolidated cost of goods sold cannot be predicted from the information provided D. Consolidated cost of goods sold would have been reduced because of the non-controlling interest in the subsidiary E. Consolidated cost of goods sold would have been higher because of the non-controlling interest in the subsidiary

3. On January 1, 2009, Race Corp. acquired 80% of the voting common stock of Gallow Inc. During the year, Race sold to Gallow for $450,000 goods which cost $330,000. Gallow still owned 15% of the goods at year-end. Gallow's reported net income was $204,000 and Race's net income was $806,000. Race decided to use the equity method to account for this investment. What was the non-controlling interest's share of consolidated net income? A. $37,200 B. $22,800 C. $30,900 D. $32,900 E. $40,800

4. Webb Co. acquired 100% of Rand Inc. on January 5, 2009. During 2009, Webb sold Rand for $2,400,000 goods that cost $1,800,000. Rand still owned 40% of the goods at the end of the year. Cost of goods sold was $10,800,000 for Webb and $6,400,000 for Rand. What was consolidated cost of goods sold? A. $17,200,000 B. $15,040,000 C. $14,800,000 D. $16,960,000 E. $14,560,000

5. Gentry Inc. acquired 100% of Gaspard Farms on January 5, 2009. During 2009, Gentry sold Gaspard Farms for $625,000 goods which had cost $425,000. Gaspard Farms still owned 12% of the goods at the end of the year. In 2010, Gentry sold goods with a cost of $800,000 to Gaspard Farms for $1,000,000 and Gaspard Farms still owned 10% of the goods at year-end. For 2010, cost of goods sold was $1,200,000 for Gaspard Farms and $5,400,000 for Gentry. What was consolidated cost of goods sold for 2010? A. $6,600,000 B. $6,596,000 C. $5,620,000 D. $5,596,000 E. $5,625,000

6. X-Beams Inc. owned 70% of the voting common stock of Kent Corp. During 2009, Kent made several sales of inventory to X-Beams. The total selling price was $180,000 and the cost was $100,000. At the end of the year, 20% of the goods were still in X-Beams' inventory. Kent's reported net income was $300,000. What was the non-controlling interest in Kent's net income? A. $90,000 B. $85,200 C. $54,000 D. $94,800 E. $86,640

7. Justings Co. owned 80% of Evana Corp. During 2009, Justings sold to Evana land with a book value of $48,000. The selling price was $70,000. In its accounting records, Justings should A. Not recognize a gain on the sale of the land since it was made to a related party B. Recognize a gain of $17,600 C. Defer recognition of the gain until Evana sells the land to a third party D. Recognize a gain of $8,000 E. Recognize a gain of $22,000

8. Norek Corp. owned 70% of the voting common stock of Thelma Co. On January 2, 2009, Thelma sold a parcel of land to Norek. The land had a book value of $32,000 and was sold to Norek for $45,000. Thelma's reported net income for 2009 was $119,000. What is the non-controlling interest's share of Thelma's net income? A. $35,700 B. $31,800 C. $39,600 D. $22,200 E. $26,100

9. Clemente Co. owned all of the voting common stock of Snider Co. On January 2, 2009, Clemente sold some equipment to Snider for $125,000. The equipment had cost $140,000. At the time of the sale, the balance in accumulated depreciation was $40,000. The equipment had a remaining useful life of five years and a $0 salvage value. Straight-line depreciation is used by both Clemente and Snider. At what amount should the equipment (net of depreciation) be included on the consolidated balance sheet dated December 31, 2009? A. $100,000 B. $95,000 C. $75,000 D. $80,000 E. $85,000

10. During 2009, Von Co. sold inventory to its wholly-owned subsidiary, Lord Co. The inventory cost $30,000 and was sold to Lord for $44,000. From the perspective of the combination, when is the $14,000 gain realized? A. When the goods are sold to a third party by Lord B. When Lord pays Von for the goods C. When Von sold the goods to Lord D. When the goods are used by Lord E. No gain can be recognized since the transaction was between related parties

11. Bauerly Co. owned 70% of the voting common stock of Devin Co. During 2009, Devin made frequent sales of inventory to Bauerly. There were unrealized gains of $40,000 in the beginning inventory and $25,000 at the end of the year. Devin reported net income of $137,000 for 2009. Bauerly decided to use the equity method to account for the investment. What is the non-controlling interest's share of Devin's net income for 2009? A. $41,100 B. $33,600 C. $21,600 D. $45,600 E. $36,600

12. Chain Co. owned all of the voting common stock of Shannon Corp. The corporations' balance sheets dated December 31, 2009, include the following balances for land: for Chain-$416,000 and for Shannon-$256,000. On the original date of acquisition, the book value of Shannon's land was equal to its fair value. On April 4, 2010, Chain sold to Shannon a parcel of land with a book value of $65,000. The selling price was $83,000. There were no other transactions which affected the companies' land accounts during 2010. What is the consolidated balance for land on the 2010 balance sheet? A. $672,000 B. $690,000 C. $755,000 D. $737,000 E. $654,000

13. Gibson Corp. owned a 90% interest in Sparis Co. Sparis frequently made sales of inventory to Gibson. The sales, which include a markup over cost of 25%, were $420,000 in 2009 and $500,000 in 2010. At the end of each year, Gibson still owned 30% of the goods. Net income for Sparis was $912,000 during 2010. What was the non-controlling interest's share of Sparis' net income for 2010? A. $85,680 B. $90,600 C. $90,720 D. $91,680 E. $91,800

14. On January 1, 2009, Payton Co. sold equipment to its subsidiary, Starker Corp., for $115,000. The equipment had cost $125,000 and the balance in accumulated depreciation was $45,000. The equipment had an estimated remaining useful life of eight years and $0 salvage value. Both companies use straight-line depreciation. On their separate 2009 income statements, Payton and Starker reported depreciation expense of $84,000 and $60,000, respectively. The amount of depreciation expense on the consolidated income statement for 2009 would have been A. $144,000 B. $148,375 C. $109,000 D. $134,000 E. $139,625

15. Yukon Co. acquired 75% percent of the voting common stock of Ontario Corp. on January 1, 2009. During the year, Yukon made sales of inventory to Ontario. The inventory cost Yukon $260,000 and was sold to Ontario for $390,000. Ontario still had $60,000 of the goods in its inventory at the end of the year. The amount of unrealized intercompany profit that should be eliminated in the consolidation process at the end of 2009 is A. $15,000 B. $20,000 C. $32,500 D. $30,000 E. $110,000

16. Prince Corp. owned 80% of Kile Corp.'s common stock. During October 2009, Kile sold merchandise to Prince for $140,000. At December 31, 2009, 50% of this merchandise remained in Prince's inventory. For 2009, gross profit percentages were 30% of sales for Prince and 40% of sales for Kile. The amount of unrealized intercompany profit in ending inventory at December 31, 2009 that should be eliminated in the consolidation process is A. $28,000 B. $56,000 C. $22,400 D. $21,000 E. $42,000

Pot Co. holds 90% of the common stock of Skillet Co. During 2009, Pot reported sales of $1,120,000 and cost of goods sold of $840,000. For this same period, Skillet had sales of $420,000 and cost of goods sold of $252,000. Also during 2009, Pot sold merchandise to Skillet for $140,000. The subsidiary still possesses 40% of this inventory at the end of 2009. Pot had established the transfer price based on its normal markup.

17. What are consolidated sales and cost of goods sold? A. $1,400,000 and $952,000 B. $1,400,000 and $966,000 C. $1,540,000 and $1,078,000 D. $1,400,000 and $1,022,000 E. $1,540,000 and $1,092,000

18. Assuming that the transfers were from Skillet Co. to Pot Co., what are consolidated sales and cost of goods sold? A. $1,400,000 and $952,000 B. $1,400,000 and $966,000 C. $1,540,000 and $1,078,000 D. $1,400,000 and $974,400 E. $1,540,000 and $1,092,000

19. Dalton Corp. owned 70% of the outstanding common stock of Shrugs Inc. On January 1, 2007, Dalton acquired a building with a ten-year life for $420,000. No salvage value was anticipated and the building was to be depreciated on the straight-line basis. On January 1, 2009, Dalton sold this building to Shrugs for $392,000. At that time, the building had a remaining life of eight years but still no expected salvage value. In preparing financial statements for 2009, how does this transfer affect the calculation of Dalton's share of consolidated net income? A. Consolidated net income must be reduced by $44,800 B. Consolidated net income must be reduced by $50,400 C. Consolidated net income must be reduced by $49,000 D. Consolidated net income must be reduced by $56,000 E. Consolidated net income must be reduced by $53,200

On January 1, 2009, Pride, Inc. bought 80% of the outstanding voting common stock of Strong Corp. for $364,000. Of this payment, $28,000 was allocated to equipment (with a five-year life) that had been undervalued on Strong's books by $35,000. Any remaining excess was attributable to goodwill which has not been impaired. As of December 31, 2009, before preparing the consolidated worksheet, the financial statements appeared as follows:

During 2009, Pride bought inventory for $112,000 and sold it to Strong for $140,000. Only half of this purchase had been paid for by Strong by the end of the year. 60% of these goods were still in the company's possession on December 31.

20. What is the total of consolidated revenues? A. $700,000 B. $644,000 C. $588,000 D. $560,000 E. $840,000

21. What is the total of consolidated operating expenses? A. $42,000 B. $47,600 C. $53,200 D. $48,000 E. $36,400

22. What is the total of consolidated cost of goods sold? A. $196,000 B. $212,800 C. $184,800 D. $203,000 E. $168,000

23. What is the consolidated total of non-controlling interest appearing on the balance sheet? A. $100,800 B. $97,440 C. $93,800 D. $98,840 E. $101,900

24. What is the consolidated total for equipment (net) at December 31, 2009? A. $952,000 B. $1,058,400 C. $1,069,600 D. $1,064,000 E. $1,066,800

25. What is the consolidated total for inventory at December 31, 2009? A. $336,000 B. $280,000 C. $364,000 D. $347,200 E. $349,300

Strickland Company sells inventory to its parent, Carter Company, at a profit during 2009. Select the correct answer.

26. With regard to the intercompany sale, which of the following choices would be a debit entry in the consolidated worksheet for 2009? A. Retained earnings B. Cost of goods sold C. Inventory D. Investment Strickland Company E. Additional paid-in capital

27. With regard to the intercompany sale, which of the following choices would be a credit entry in the consolidated worksheet for 2009? A. Retained earnings B. Cost of goods sold C. Inventory D. Investment Strickland Company E. Additional paid-in capital



Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2009. Walsh uses the equity method to account for its investment in Fisher.

30. With regard to the intercompany sale, which of the following choices would be a debit entry in the consolidated worksheet for 2009? A. Retained earnings B. Cost of goods sold C. Inventory D. Investment Fisher Company E. Additional paid-in capital

31. With regard to the intercompany sale, which of the following choices would be a credit entry in the consolidated worksheet for 2009? A. Retained earnings B. Cost of goods sold C. Inventory D. Investment Fisher Company E. Additional paid-in capital

32. With regard to the intercompany sale, which of the following choices would be a debit entry in the consolidated worksheet for 2010? A. Retained earnings B. Cost of goods sold C. Inventory D. Investment in Fisher Company E. Additional paid-in capital


34. When comparing the difference between an upstream and downstream transfer of inventory and using the initial value method, which of the following statements is true? A. Income from subsidiary will be lower by the amount of the ending inventory profit multiplied by the non-controlling interest percentage for downstream transfers B. Income from subsidiary will be higher by the amount of the ending inventory profit multiplied by the non-controlling interest percentage for downstream transfers C. Income from subsidiary will be reduced for downstream ending inventory profit but not for upstream profit, before the effect of the non-controlling interest D. Income from subsidiary will be reduced for upstream ending inventory profit but not for downstream profit, before the effect of the non-controlling interest E. Income from subsidiary will be the same for upstream and downstream profit

35. When comparing the difference between an upstream and downstream transfer of inventory and using the initial value method, which of the following statements is true? A. Income from subsidiary will be lower by the amount of the beginning inventory profits multiplied by the non-controlling interest percentage for upstream transfers B. Income from subsidiary will be higher by the amount of the beginning inventory profits multiplied by the non-controlling interest percentage for upstream transfers C. Income from subsidiary will be reduced for downstream ending inventory profits but not for upstream profits, before the non-controlling interest D. Income from subsidiary will be reduced for upstream ending inventory profits but not for downstream profits, before the non-controlling interest E. Income from subsidiary will be the same for upstream and downstream profits

36. Which of the following statements is true regarding inventory transfers between a parent and its subsidiary, using the initial value method? A. The sale of merchandise between a parent and its subsidiary represents an arm's-length transaction and thus provides the basis for the recognition of profit on such transfers B. Profits on upstream transfers associated with the parent's ending inventory are subtracted from subsidiary net income for the current year in the calculation of parent's income from subsidiary. These year-end deferrals are then added to next year's subsidiary net income in the calculation of parent's income from subsidiary. This procedure is inappropriate because all the intercompany transactions unsold at year-end may not be sold in the next year C. Profits on upstream transfers associated with the parent's ending inventory are subtracted from subsidiary net income for the current year in the calculation of parent's income from subsidiary. These year-end deferrals are then added to next year's subsidiary net income in the calculation of parent's income from subsidiary. This procedure is appropriate even if all the intercompany transactions unsold at year-end may not be sold in the next year D. Merchandise transfers from a parent to its subsidiary that have not been sold to unaffiliated parties should be included in consolidated inventory at their transfer price E. Non-controlling interest in subsidiary's net income should not be reduced for upstream or downstream ending inventory profits

37. Which of the following statements is true regarding an intercompany sale of land? A. A loss is always recognized but a gain is eliminated on a consolidated income statement B. A loss and a gain are always eliminated on a consolidated income statement C. A loss and a gain are always recognized on a consolidated income statement D. A gain is always recognized but a loss is eliminated on a consolidated income statement E. A gain or loss is eliminated by adjusting stockholders' equity through comprehensive income

38. Parent sold land to its subsidiary for a gain in 2007. The subsidiary sold the land externally for a gain in 2010. Which of the following statements is true? A. A gain will be reported on the consolidated income statement in 2007 B. A gain will be reported on the consolidated income statement in 2010 C. No gain will be reported on the 2010 consolidated income statement D. Only the parent company will report a gain in 2010 E. The subsidiary will report a gain in 2007

39. An intercompany sale took place whereby the transfer price exceeded the book value of a depreciable asset. Which statement is true for the year following the sale? A. A worksheet entry is made with a debit to gain for a downstream transfer B. A worksheet entry is made with a debit to gain for an upstream transfer C. A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer when the parent uses the equity method D. A worksheet entry is made with a debit to retained earnings for a downstream transfer E. No worksheet entry is necessary

40. An intercompany sale took place whereby the book value exceeded the transfer price of a depreciable asset. Which statement is true for the year following the sale? A. A worksheet entry is made with a debit to retained earnings for an upstream transfer B. A worksheet entry is made with a credit to retained earnings for an upstream transfer C. A worksheet entry is made with a debit to retained earnings for a downstream transfer D. A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer E. No worksheet entry is necessary

41. An intercompany sale took place whereby the transfer price was less than the book value of a depreciable asset. Which statement is true for the year following the sale? A. A worksheet entry is made with a debit to investment in subsidiary for an upstream transfer B. A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer C. A worksheet entry is made with a credit to investment in subsidiary for a downstream transfer when the parent uses the equity method D. A worksheet entry is made with a debit to retained earnings for an upstream transfer E. No worksheet entry is necessary

42. Which of the following statements is true concerning an intercompany transfer of a depreciable asset? A. Non-controlling interest in subsidiary's net income is never affected by a gain on the transfer B. Non-controlling interest in subsidiary's net income is always affected by a gain on the transfer C. Non-controlling interest in subsidiary's net income is affected by a downstream gain only D. Non-controlling interest in subsidiary's net income is affected only when the transfer is upstream E. Non-controlling interest in subsidiary's net income is increased by an upstream gain in the year of transfer

Gargiulo Company, a 90% owned subsidiary of Posito Corporation, sells inventory to Posito at a 25% profit on selling price. The following data are available pertaining to intercompany purchases. Gargiulo was acquired on January 1, 2009.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

43. Compute the income from Gargiulo reported on Posito's books for 2009. A. $63,000 B. $62,730 C. $63,270 D. $70,000 E. $62,700



46. Compute the non-controlling interest in Gargiulo's net income for 2009. A. $6,970 B. $7,000 C. $7,030 D. $6,270 E. $6,230



49. For consolidation purposes, what amount would be debited to cost of goods sold for consolidation (worksheet entry G) in 2009? A. $300 B. $240 C. $2,000 D. $1,600 E. $270

50. For consolidation purposes, what amount would be debited to cost of goods sold for consolidation (worksheet entry G) in 2010? A. $1,000 B. $800 C. $3,000 D. $2,400 E. $900


52. For consolidation purposes, what amount would be debited to retained earnings for consolidation (worksheet entry G) in 2009? A. $0 B. $1,600 C. $300 D. $240 E. $270

53. For consolidation purposes, what amount would be debited to retained earnings for consolidation (worksheet entry G) in 2010? A. $240 B. $300 C. $2,000 D. $1,600 E. $270

54. For consolidation purposes, what amount would be debited to retained earnings for consolidation (worksheet entry G) in 2011? A. $3,000 B. $2,400 C. $1,000 D. $800 E. $900

Patti Company holds 80% of the common stock of Shannon, Inc. In the current year, Patti reports sales of $10,000,000 and cost of goods sold of $7,500,000. For the same period, Shannon has sales of $200,000 and cost of goods sold of $160,000. During the year, Patti sold merchandise to Shannon for $60,000 at a price based on the normal markup. At the end of the year, Shannon still possesses 30 percent of this inventory.

55. Compute consolidated sales. A. $10,000,000 B. $10,126,000 C. $10,140,000 D. $10,200,000 E. $10,260,000

56. Compute consolidated cost of goods sold. A. $7,500,000 B. $7,600,000 C. $7,615,000 D. $7,604,500 E. $7,660,000

57. Assume the same information, except Shannon sold inventory to Patti. Compute consolidated sales. A. $10,000,000 B. $10,126,000 C. $10,140,000 D. $10,200,000 E. $10,260,000

On April 1, 2009 Wilson Company, a 90% owned subsidiary of Simon Company, bought equipment from Simon for $68,250. On January 1, 2009, Simon realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. The equipment had an original cost to Simon of $80,000 and a book value of $50,000 with a 10-year remaining life as of January 1, 2009. The following data are available pertaining to Wilson's income and dividends:

58. Compute the gain on transfer of equipment reported by Simon for 2009. A. $19,500 B. $18,250 C. $11,750 D. $38,250 E. $37,500

59. Compute the amortization of gain for 2009 for consolidation purposes. A. $1,950 B. $1,825 C. $1,500 D. $2,000 E. $5,250



62. Compute Simon's share of income from Wilson for consolidation for 2009. A. $72,000 B. $90,000 C. $73,575 D. $73,800 E. $72,500



On January 1, 2009, Smeder Company, an 80% owned subsidiary of Collins, Inc., transferred equipment with a 10-year life (six of which remain with no salvage value) to Collins in exchange for $84,000 cash. At the date of transfer, Smeder's records carried the equipment at a cost of $120,000 less accumulated depreciation of $48,000. Straight-line depreciation is used. Smeder reported net income of $28,000 and $32,000 for 2009 and 2010, respectively.

65. Compute the gain recognized by Smeder Company relating to the equipment for 2009. A. $36,000 B. $34,000 C. $12,000 D. $10,000 E. $0

66. Compute Collins' share of Smeder's net income for 2009. A. $12,400 B. $14,400 C. $11,200 D. $12,800 E. $18,000


68. For consolidation purposes, what net debit or credit will be made in 2009 relating to the equipment transfer? A. Debit accumulated depreciation, $46,000 B. Debit accumulated depreciation, $48,000 C. Credit accumulated depreciation, $48,000 D. Credit accumulated depreciation, $46,000 E. Debit accumulated depreciation, $2,000

69. What is the net effect on consolidated net income in 2009, before allocation to controlling and non-controlling interests, due to the equipment transfer? A. Increase $2,000 B. Decrease $12,000 C. Decrease $10,000 D. Decrease $14,000 E. Increase $10,000

Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2009, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2009 and 2010, respectively. Leo uses the equity method to account for its investment.

70. Compute the gain or loss on the intercompany sale of land. A. $15,000 loss B. $15,000 gain C. $50,000 loss D. $50,000 gain E. $65,000 gain

71. On a consolidation worksheet, what adjustment would be made for 2009 regarding the land transfer? A. Debit gain for $50,000 B. Credit gain for $50,000 C. Debit land for $15,000 D. Credit land for $15,000 E. Credit gain for $15,000

72. On a consolidation worksheet, having used the equity method, what adjustment would be made for 2010 regarding the land transfer? A. Debit retained earnings for $15,000 B. Credit retained earnings for $15,000 C. Debit retained earnings for $50,000 D. Credit retained earnings for $50,000 E. Debit investment in Stiller for $15,000

73. Compute income from Stiller on Leo's books for 2009. A. $110,000 B. $100,000 C. $125,000 D. $85,000 E. $88,000


Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2009, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000 and $220,000 for 2009, 2010 and 2011, respectively. Parker sold the land it purchased from Stark in 2009 for $92,000 in 2011.

75. Compute the gain or loss on the intercompany sale of land. A. $80,000 gain B. $80,000 loss C. $5,000 gain D. $5,000 loss E. $85,000 loss

76. Which of the following will be included in a consolidation entry for 2009? A. Debit loss for $5,000 B. Credit loss for $5,000 C. Credit land for $5,000 D. Debit gain for $5,000 E. Credit gain for $5,000

77. Which of the following will be included in a consolidation entry for 2010? A. Debit retained earnings for $5,000 B. Credit retained earnings for $5,000 C. Debit investment in subsidiary for $5,000 D. Credit investment in subsidiary for $5,000 E. Credit land for $5,000

78. Compute income from Stark reported on Parker's books for 2009. A. $205,000 B. $200,000 C. $180,000 D. $175,500 E. $184,500


80. Compute the consolidated gain or loss relating to the land for 2011. A. $5,000 loss B. $7,000 gain C. $12,000 gain D. $7,000 loss E. $12,000 loss

81. Compute Parker's reported gain or loss relating to the land for 2011. A. $12,000 gain B. $5,000 loss C. $12,000 loss D. $7,000 gain E. $7,000 loss

82. Compute Stark's reported gain or loss relating to the land for 2011. A. $5,000 loss B. $5,000 gain C. $7,000 loss D. $7,000 gain E. $0


Pepe, Incorporated acquired 60% of Devin Company on January 1, 2009. On that date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000 and $325,000 for 2009 and 2010, respectively. Pepe uses the equity method to account for its investment in Devin.

84. What is the gain or loss on equipment reported by Devin for 2009? A. $54,000 gain B. $21,000 loss C. $21,000 gain D. $9,000 loss E. $9,000 gain

85. What is the consolidated gain or loss on equipment for 2009? A. $0 B. $9,000 gain C. $9,000 loss D. $21,000 gain E. $21,000 loss

86. Compute the income from Devin reported on Pepe's books for 2009. A. $174,600 B. $184,800 C. $172,000 D. $171,000 E. $180,600


88. Compute the non-controlling interest in the net income of Devin for 2009. A. $116,400 B. $120,400 C. $120,000 D. $123,200 E. $112,000


90. For each of the following situations (1 - 10), select the correct entry (a - e) that would be required on a consolidated worksheet. (A.) Debit retained earnings. (B.) Credit retained earnings. (C.) Debit investment in subsidiary. (D.) Credit investment in subsidiary. (E.) None of the above. ___ 1. Upstream beginning inventory profit, using the initial value method. ___ 2. Downstream beginning inventory profit, using the initial value method. ___ 3. Upstream ending inventory profit, using the initial value method. ___ 4. Downstream ending inventory profit, using the initial value method. ___ 5. Upstream transfer of depreciable assets in the period after transfer where subsidiary recognizes a gain, using the initial value method. ___ 6. Downstream transfer of depreciable assets in the period after transfer where parent recognizes a gain, using the initial value method. ___ 7. Upstream transfer of land in the period after transfer where subsidiary recognizes a loss, using the initial value method. ___ 8. Downstream transfer of land in the period after transfer where parent recognizes a loss, using the initial value method. ___ 9. Income from subsidiary, using the equity method. ___ 10. Amortization of cost over book value, using the equity method.

91. On April 7, 2009, Pate Corp. sold land to Shannahan Co., its subsidiary. From a consolidated point of view, when will the gain on this transfer actually be earned?

92. Throughout 2009, Cleveland Co. sold inventory to Leeward Co., its subsidiary. From a consolidated point of view, when will the gain on this transfer be earned?

93. Varton Corp. acquired all of the voting common stock of Caleb Co. on January 1, 2009. Varton owned some land with a book value of $84,000 that was sold to Caleb for its fair value of $120,000. How should this transaction be accounted for by the consolidated entity?

94. During 2009, Edwards Co. sold inventory to its parent company, Forsyth Corp. Forsyth still owned all of the inventory at the end of 2009. Why must the gross profit on the sale be deferred when consolidated financial statements are prepared at the end of 2009?

95. How does a gain on an intercompany sale of equipment affect the calculation of a non-controlling interest?

96. How do upstream and downstream inventory transfers differ in their effect on a year-end consolidation?

97. How is the gain on an intercompany transfer of a depreciable asset realized?

98. Dithers Inc. acquired all of the common stock of Bumstead Corp. on January 1, 2009. During 2009, Bumstead sold land to Dithers at a gain. No consolidation entry for the sale of the land was made at the end of 2009. What errors will this omission cause in the consolidated financial statements?

99. Why do intercompany transfers between the component companies of a business combination occur so frequently?

100. Fraker, Inc. owns 90 percent of Richards, Inc. and bought $200,000 of Richards' inventory in 2009. The transfer price was equal to 30 percent of the sales price. When preparing consolidated financial statements, what amount of these sales is eliminated?

101. What is meant by unrealized inventory gains and how are they treated on a consolidation worksheet?

102. What is the impact on the non-controlling interest of a subsidiary when there are downstream transfers of inventory between the parent and subsidiary companies?

103. How is the gain on an intercompany transfer of land realized?

104. What is the purpose of the adjustments to depreciation expense within the consolidation process when there has been an intercompany transfer of a depreciable asset?

105. Tara Company holds 80 percent of the common stock of Stodd Inc. In the current year, Tara reports sales of $5,000,000 and cost of goods sold of $3,500,000. For the same period, Stodd has sales of $500,000 and cost of goods sold of $400,000. During the year, Stodd sold merchandise to Tara for $40,000 at a price based on the normal markup. At the end of the year, Tara still possesses 20 percent of this inventory. Prepare the consolidation entry to defer the unrealized gain.

106. King Corp. owns 85% of James Co. King uses the equity method to account for this investment. During 2009, King sells inventory to James for $500,000. The inventory originally cost King $420,000. At 12/31/09, 25% of the goods were still in James' inventory. Required: Prepare the Consolidation Entry TI and Consolidation Entry G for the consolidation worksheet.

107. Flintstone Inc. acquired all of Rubble Co. on January 1, 2009. Flintstone decided to use the initial value method to account for this investment. During 2009, Flintstone sold to Rubble for $600,000 inventory with a cost of $500,000. At the end of the year 30% of the goods were still in Rubble's inventory. Required: Prepare Consolidation Entry TI and Consolidation Entry G for the consolidation worksheet at 12/31/09.

108. Yoderly Co., a wholly owned subsidiary of Nelson Corp., sold goods to Nelson near the end of 2008. The goods had cost Yoderly $105,000 and the selling price was $140,000. Nelson had not sold any of the goods by the end of the year. Required: Prepare Consolidation Entry TI and Consolidation Entry G that are required for 2009.

109. Strayten Corp. is a wholly owned subsidiary of Quint Inc. Quint decided to use the initial value method to account for this investment. During 2009, Strayten sold Quint goods which had cost $48,000. The selling price was $64,000. Quint still had one-fourth of the goods on hand at the end of the year. Required: Prepare Consolidation Entry *G, which would have to be recorded at the end of 2010.

110. Hambly Corp. owned 80% of the voting common stock of Stroban Co. During 2009, Stroban sold a parcel of land to Hambly. The land had a book value of $82,000 and was sold to Hambly for $145,000. Stroban's reported net income for 2009 was $119,000. Required: What was the non-controlling interest's share of Stroban Co.'s net income?

111. McGraw Corp. owned all of the voting common stock of both Ritter Co. and Lawler Co. During 2009, Ritter sold inventory to Lawler. The goods had cost Ritter $65,000 and they were sold to Lawler for $100,000. At the end of 2009, Lawler still held 30% of the inventory. Required: How should the sale between Lawler and Ritter be accounted for by the consolidated entity?

Virginia Corp. owned all of the voting common stock of Stateside Co. Both companies use the perpetual inventory method and Virginia decided to use the partial equity method to account for this investment. During 2009, Virginia made cash sales of $400,000 to Stateside. The gross profit rate was 30% of the selling price. By the end of the year, Stateside had used 75% of the goods.

112. Prepare journal entries for Virginia and Stateside to record the sales/purchases during 2009.

113. Prepare the consolidation entries that should be made at the end of 2009.

114. Prepare any 2010 consolidation worksheet entries that would be required for this inventory transfer.

Several years ago Polar Inc. purchased an 80% interest in Icecap Co. The book values of Icecap's asset and liability accounts at that time were considered to be equal to their fair values. Polar paid an amount corresponding to the underlying book value of Icecap so that no allocations or goodwill resulted from the purchase price. The following selected account balances were from the individual financial records of these two companies as of December 31, 2009:

115. Assume that Polar sold inventory to Icecap at a markup equal to 40% of cost. Intercompany transfers were $126,000 in 2008 and $154,000 in 2009. Of this inventory, $39,200 of the 2008 transfers were retained and then sold by Icecap in 2009 while $58,800 of the 2009 transfers were held until 2010. Required: On the consolidated financial statements for 2009, determine the balances that would appear for the following accounts: (1) Cost of Goods Sold, (2) Inventory and (3) Non-controlling Interest in Subsidiary's Net Income. (If you use a gross profit percentage, do not round the calculation.)

116. Assume that Icecap sold inventory to Polar at a markup equal to 40% of cost. Intercompany transfers were $70,000 in 2008 and $112,000 in 2009. Of this inventory, $29,400 of the 2008 transfers were retained and then sold by Polar in 2009 whereas $49,000 of the 2009 transfers were held until 2010. Required: On the consolidated financial statements for 2009, determine the balances that would appear for the following accounts: (1) Cost of Goods Sold, (2) Inventory and (3) Non-controlling Interest in Subsidiary's Net Income. (If you use a gross profit percentage, do not round the calculation.)

117. Polar sold a building to Icecap on January 1, 2008 for $112,000, although the book value of this asset was only $70,000 on that date. The building had a five-year remaining useful life and was to be depreciated using the straight-line method with no salvage value. Required: On the consolidated financial statements for 2009, determine the balances that would appear for the following accounts: (1) Buildings (net), (2) Operating expenses and (3) Non-controlling Interest in Subsidiary's Net Income.

On January 1, 2009, Musial Corp. sold equipment to Matin Inc. (a wholly-owned subsidiary) for $168,000 in cash. The equipment had originally cost $140,000 but had a book value of only $98,000 when transferred. On that date, the equipment had a five-year remaining life. Depreciation expense was calculated using the straight-line method. Musial earned $308,000 in net income in 2009 (not including any investment income) while Matin reported $126,000. Assume there is no amortization related to the original investment.

118. What is consolidated net income for 2009?

119. Assuming that Musial owned only 90% of Matin, what is consolidated net income for 2009?

120. Assuming that Musial owned only 90% of Matin and the equipment transfer had been upstream, what is consolidated net income for 2009?

ch5 Key

1. On November 8, 2009, Power Corp. sold land to Wood Co., its wholly owned subsidiary. The land cost $61,500 and was sold to Wood for $89,000. From the perspective of the combination, when is the gain on the sale of the land realized? A. Proportionately over a designated period of years B. When Wood Co. sells the land to a third party C. No gain can be recognized D. As Wood uses the land E. When Wood Co. begins using the land productively


2. Edgar Co. acquired 60% of Kindall Co. on January 1, 2009. During 2009, Edgar made several sales of inventory to Kindall. The cost and selling price of the goods were $140,000 and $200,000, respectively. Kindall still owned one-fourth of the goods at the end of 2009. Consolidated cost of goods sold for 2009 was $2,140,000. How would consolidated cost of goods sold have differed if the inventory transfers had been for the same amount and cost, but from Kindall to Edgar? A. Consolidated cost of goods sold would have been $2,140,000 B. Consolidated cost of goods sold would have been $2,175,000 C. The effect on consolidated cost of goods sold cannot be predicted from the information provided D. Consolidated cost of goods sold would have been reduced because of the non-controlling interest in the subsidiary E. Consolidated cost of goods sold would have been higher because of the non-controlling interest in the subsidiary


3. On January 1, 2009, Race Corp. acquired 80% of the voting common stock of Gallow Inc. During the year, Race sold to Gallow for $450,000 goods which cost $330,000. Gallow still owned 15% of the goods at year-end. Gallow's reported net income was $204,000 and Race's net income was $806,000. Race decided to use the equity method to account for this investment. What was the non-controlling interest's share of consolidated net income? A. $37,200 B. $22,800 C. $30,900 D. $32,900 E. $40,800


4. Webb Co. acquired 100% of Rand Inc. on January 5, 2009. During 2009, Webb sold Rand for $2,400,000 goods that cost $1,800,000. Rand still owned 40% of the goods at the end of the year. Cost of goods sold was $10,800,000 for Webb and $6,400,000 for Rand. What was consolidated cost of goods sold? A. $17,200,000 B. $15,040,000 C. $14,800,000 D. $16,960,000 E. $14,560,000


5. Gentry Inc. acquired 100% of Gaspard Farms on January 5, 2009. During 2009, Gentry sold Gaspard Farms for $625,000 goods which had cost $425,000. Gaspard Farms still owned 12% of the goods at the end of the year. In 2010, Gentry sold goods with a cost of $800,000 to Gaspard Farms for $1,000,000 and Gaspard Farms still owned 10% of the goods at year-end. For 2010, cost of goods sold was $1,200,000 for Gaspard Farms and $5,400,000 for Gentry. What was consolidated cost of goods sold for 2010? A. $6,600,000 B. $6,596,000 C. $5,620,000 D. $5,596,000 E. $5,625,000


6. X-Beams Inc. owned 70% of the voting common stock of Kent Corp. During 2009, Kent made several sales of inventory to X-Beams. The total selling price was $180,000 and the cost was $100,000. At the end of the year, 20% of the goods were still in X-Beams' inventory. Kent's reported net income was $300,000. What was the non-controlling interest in Kent's net income? A. $90,000 B. $85,200 C. $54,000 D. $94,800 E. $86,640


7. Justings Co. owned 80% of Evana Corp. During 2009, Justings sold to Evana land with a book value of $48,000. The selling price was $70,000. In its accounting records, Justings should A. Not recognize a gain on the sale of the land since it was made to a related party B. Recognize a gain of $17,600 C. Defer recognition of the gain until Evana sells the land to a third party D. Recognize a gain of $8,000 E. Recognize a gain of $22,000


8. Norek Corp. owned 70% of the voting common stock of Thelma Co. On January 2, 2009, Thelma sold a parcel of land to Norek. The land had a book value of $32,000 and was sold to Norek for $45,000. Thelma's reported net income for 2009 was $119,000. What is the non-controlling interest's share of Thelma's net income? A. $35,700 B. $31,800 C. $39,600 D. $22,200 E. $26,100


9. Clemente Co. owned all of the voting common stock of Snider Co. On January 2, 2009, Clemente sold some equipment to Snider for $125,000. The equipment had cost $140,000. At the time of the sale, the balance in accumulated depreciation was $40,000. The equipment had a remaining useful life of five years and a $0 salvage value. Straight-line depreciation is used by both Clemente and Snider. At what amount should the equipment (net of depreciation) be included on the consolidated balance sheet dated December 31, 2009? A. $100,000 B. $95,000 C. $75,000 D. $80,000 E. $85,000


10. During 2009, Von Co. sold inventory to its wholly-owned subsidiary, Lord Co. The inventory cost $30,000 and was sold to Lord for $44,000. From the perspective of the combination, when is the $14,000 gain realized? A. When the goods are sold to a third party by Lord B. When Lord pays Von for the goods C. When Von sold the goods to Lord D. When the goods are used by Lord E. No gain can be recognized since the transaction was between related parties


11. Bauerly Co. owned 70% of the voting common stock of Devin Co. During 2009, Devin made frequent sales of inventory to Bauerly. There were unrealized gains of $40,000 in the beginning inventory and $25,000 at the end of the year. Devin reported net income of $137,000 for 2009. Bauerly decided to use the equity method to account for the investment. What is the non-controlling interest's share of Devin's net income for 2009? A. $41,100 B. $33,600 C. $21,600 D. $45,600 E. $36,600


12. Chain Co. owned all of the voting common stock of Shannon Corp. The corporations' balance sheets dated December 31, 2009, include the following balances for land: for Chain-$416,000 and for Shannon-$256,000. On the original date of acquisition, the book value of Shannon's land was equal to its fair value. On April 4, 2010, Chain sold to Shannon a parcel of land with a book value of $65,000. The selling price was $83,000. There were no other transactions which affected the companies' land accounts during 2010. What is the consolidated balance for land on the 2010 balance sheet? A. $672,000 B. $690,000 C. $755,000 D. $737,000 E. $654,000


13. Gibson Corp. owned a 90% interest in Sparis Co. Sparis frequently made sales of inventory to Gibson. The sales, which include a markup over cost of 25%, were $420,000 in 2009 and $500,000 in 2010. At the end of each year, Gibson still owned 30% of the goods. Net income for Sparis was $912,000 during 2010. What was the non-controlling interest's share of Sparis' net income for 2010? A. $85,680 B. $90,600 C. $90,720 D. $91,680 E. $91,800


14. On January 1, 2009, Payton Co. sold equipment to its subsidiary, Starker Corp., for $115,000. The equipment had cost $125,000 and the balance in accumulated depreciation was $45,000. The equipment had an estimated remaining useful life of eight years and $0 salvage value. Both companies use straight-line depreciation. On their separate 2009 income statements, Payton and Starker reported depreciation expense of $84,000 and $60,000, respectively. The amount of depreciation expense on the consolidated income statement for 2009 would have been A. $144,000 B. $148,375 C. $109,000 D. $134,000 E. $139,625


15. Yukon Co. acquired 75% percent of the voting common stock of Ontario Corp. on January 1, 2009. During the year, Yukon made sales of inventory to Ontario. The inventory cost Yukon $260,000 and was sold to Ontario for $390,000. Ontario still had $60,000 of the goods in its inventory at the end of the year. The amount of unrealized intercompany profit that should be eliminated in the consolidation process at the end of 2009 is A. $15,000 B. $20,000 C. $32,500 D. $30,000 E. $110,000


16. Prince Corp. owned 80% of Kile Corp.'s common stock. During October 2009, Kile sold merchandise to Prince for $140,000. At December 31, 2009, 50% of this merchandise remained in Prince's inventory. For 2009, gross profit percentages were 30% of sales for Prince and 40% of sales for Kile. The amount of unrealized intercompany profit in ending inventory at December 31, 2009 that should be eliminated in the consolidation process is A. $28,000 B. $56,000 C. $22,400 D. $21,000 E. $42,000


Pot Co. holds 90% of the common stock of Skillet Co. During 2009, Pot reported sales of $1,120,000 and cost of goods sold of $840,000. For this same period, Skillet had sales of $420,000 and cost of goods sold of $252,000. Also during 2009, Pot sold merchandise to Skillet for $140,000. The subsidiary still possesses 40% of this inventory at the end of 2009. Pot had established the transfer price based on its normal markup.

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17. What are consolidated sales and cost of goods sold? A. $1,400,000 and $952,000 B. $1,400,000 and $966,000 C. $1,540,000 and $1,078,000 D. $1,400,000 and $1,022,000 E. $1,540,000 and $1,092,000


18. Assuming that the transfers were from Skillet Co. to Pot Co., what are consolidated sales and cost of goods sold? A. $1,400,000 and $952,000 B. $1,400,000 and $966,000 C. $1,540,000 and $1,078,000 D. $1,400,000 and $974,400 E. $1,540,000 and $1,092,000


19. Dalton Corp. owned 70% of the outstanding common stock of Shrugs Inc. On January 1, 2007, Dalton acquired a building with a ten-year life for $420,000. No salvage value was anticipated and the building was to be depreciated on the straight-line basis. On January 1, 2009, Dalton sold this building to Shrugs for $392,000. At that time, the building had a remaining life of eight years but still no expected salvage value. In preparing financial statements for 2009, how does this transfer affect the calculation of Dalton's share of consolidated net income? A. Consolidated net income must be reduced by $44,800 B. Consolidated net income must be reduced by $50,400 C. Consolidated net income must be reduced by $49,000 D. Consolidated net income must be reduced by $56,000 E. Consolidated net income must be reduced by $53,200


On January 1, 2009, Pride, Inc. bought 80% of the outstanding voting common stock of Strong Corp. for $364,000. Of this payment, $28,000 was allocated to equipment (with a five-year life) that had been undervalued on Strong's books by $35,000. Any remaining excess was attributable to goodwill which has not been impaired. As of December 31, 2009, before preparing the consolidated worksheet, the financial statements appeared as follows:

During 2009, Pride bought inventory for $112,000 and sold it to Strong for $140,000. Only half of this purchase had been paid for by Strong by the end of the year. 60% of these goods were still in the company's possession on December 31.

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20. What is the total of consolidated revenues? A. $700,000 B. $644,000 C. $588,000 D. $560,000 E. $840,000


21. What is the total of consolidated operating expenses? A. $42,000 B. $47,600 C. $53,200 D. $48,000 E. $36,400


22. What is the total of consolidated cost of goods sold? A. $196,000 B. $212,800 C. $184,800 D. $203,000 E. $168,000


23. What is the consolidated total of non-controlling interest appearing on the balance sheet? A. $100,800 B. $97,440 C. $93,800 D. $98,840 E. $101,900


24. What is the consolidated total for equipment (net) at December 31, 2009? A. $952,000 B. $1,058,400 C. $1,069,600 D. $1,064,000 E. $1,066,800


25. What is the consolidated total for inventory at December 31, 2009? A. $336,000 B. $280,000 C. $364,000 D. $347,200 E. $349,300


Strickland Company sells inventory to its parent, Carter Company, at a profit during 2009. Select the correct answer.

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Walsh Company sells inventory to its subsidiary, Fisher Company, at a profit during 2009. Walsh uses the equity method to account for its investment in Fisher.

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30. With regard to the intercompany sale, which of the following choices would be a debit entry in the consolidated worksheet for 2009? A. Retained earnings B. Cost of goods sold C. Inventory D. Investment Fisher Company E. Additional paid-in capital




32. With regard to the intercompany sale, which of the following choices would be a debit entry in the consolidated worksheet for 2010? A. Retained earnings B. Cost of goods sold C. Inventory D. Investment in Fisher Company E. Additional paid-in capital




34. When comparing the difference between an upstream and downstream transfer of inventory and using the initial value method, which of the following statements is true? A. Income from subsidiary will be lower by the amount of the ending inventory profit multiplied by the non-controlling interest percentage for downstream transfers B. Income from subsidiary will be higher by the amount of the ending inventory profit multiplied by the non-controlling interest percentage for downstream transfers C. Income from subsidiary will be reduced for downstream ending inventory profit but not for upstream profit, before the effect of the non-controlling interest D. Income from subsidiary will be reduced for upstream ending inventory profit but not for downstream profit, before the effect of the non-controlling interest E. Income from subsidiary will be the same for upstream and downstream profit


35. When comparing the difference between an upstream and downstream transfer of inventory and using the initial value method, which of the following statements is true? A. Income from subsidiary will be lower by the amount of the beginning inventory profits multiplied by the non-controlling interest percentage for upstream transfers B. Income from subsidiary will be higher by the amount of the beginning inventory profits multiplied by the non-controlling interest percentage for upstream transfers C. Income from subsidiary will be reduced for downstream ending inventory profits but not for upstream profits, before the non-controlling interest D. Income from subsidiary will be reduced for upstream ending inventory profits but not for downstream profits, before the non-controlling interest E. Income from subsidiary will be the same for upstream and downstream profits


36. Which of the following statements is true regarding inventory transfers between a parent and its subsidiary, using the initial value method? A. The sale of merchandise between a parent and its subsidiary represents an arm's-length transaction and thus provides the basis for the recognition of profit on such transfers B. Profits on upstream transfers associated with the parent's ending inventory are subtracted from subsidiary net income for the current year in the calculation of parent's income from subsidiary. These year-end deferrals are then added to next year's subsidiary net income in the calculation of parent's income from subsidiary. This procedure is inappropriate because all the intercompany transactions unsold at year-end may not be sold in the next year C. Profits on upstream transfers associated with the parent's ending inventory are subtracted from subsidiary net income for the current year in the calculation of parent's income from subsidiary. These year-end deferrals are then added to next year's subsidiary net income in the calculation of parent's income from subsidiary. This procedure is appropriate even if all the intercompany transactions unsold at year-end may not be sold in the next year D. Merchandise transfers from a parent to its subsidiary that have not been sold to unaffiliated parties should be included in consolidated inventory at their transfer price E. Non-controlling interest in subsidiary's net income should not be reduced for upstream or downstream ending inventory profits


37. Which of the following statements is true regarding an intercompany sale of land? A. A loss is always recognized but a gain is eliminated on a consolidated income statement B. A loss and a gain are always eliminated on a consolidated income statement C. A loss and a gain are always recognized on a consolidated income statement D. A gain is always recognized but a loss is eliminated on a consolidated income statement E. A gain or loss is eliminated by adjusting stockholders' equity through comprehensive income


38. Parent sold land to its subsidiary for a gain in 2007. The subsidiary sold the land externally for a gain in 2010. Which of the following statements is true? A. A gain will be reported on the consolidated income statement in 2007 B. A gain will be reported on the consolidated income statement in 2010 C. No gain will be reported on the 2010 consolidated income statement D. Only the parent company will report a gain in 2010 E. The subsidiary will report a gain in 2007


39. An intercompany sale took place whereby the transfer price exceeded the book value of a depreciable asset. Which statement is true for the year following the sale? A. A worksheet entry is made with a debit to gain for a downstream transfer B. A worksheet entry is made with a debit to gain for an upstream transfer C. A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer when the parent uses the equity method D. A worksheet entry is made with a debit to retained earnings for a downstream transfer E. No worksheet entry is necessary


40. An intercompany sale took place whereby the book value exceeded the transfer price of a depreciable asset. Which statement is true for the year following the sale? A. A worksheet entry is made with a debit to retained earnings for an upstream transfer B. A worksheet entry is made with a credit to retained earnings for an upstream transfer C. A worksheet entry is made with a debit to retained earnings for a downstream transfer D. A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer E. No worksheet entry is necessary


41. An intercompany sale took place whereby the transfer price was less than the book value of a depreciable asset. Which statement is true for the year following the sale? A. A worksheet entry is made with a debit to investment in subsidiary for an upstream transfer B. A worksheet entry is made with a debit to investment in subsidiary for a downstream transfer C. A worksheet entry is made with a credit to investment in subsidiary for a downstream transfer when the parent uses the equity method D. A worksheet entry is made with a debit to retained earnings for an upstream transfer E. No worksheet entry is necessary


42. Which of the following statements is true concerning an intercompany transfer of a depreciable asset? A. Non-controlling interest in subsidiary's net income is never affected by a gain on the transfer B. Non-controlling interest in subsidiary's net income is always affected by a gain on the transfer C. Non-controlling interest in subsidiary's net income is affected by a downstream gain only D. Non-controlling interest in subsidiary's net income is affected only when the transfer is upstream E. Non-controlling interest in subsidiary's net income is increased by an upstream gain in the year of transfer


Gargiulo Company, a 90% owned subsidiary of Posito Corporation, sells inventory to Posito at a 25% profit on selling price. The following data are available pertaining to intercompany purchases. Gargiulo was acquired on January 1, 2009.

Assume the equity method is used. The following data are available pertaining to Gargiulo's income and dividends.

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50. For consolidation purposes, what amount would be debited to cost of goods sold for consolidation (worksheet entry G) in 2010? A. $1,000 B. $800 C. $3,000 D. $2,400 E. $900




52. For consolidation purposes, what amount would be debited to retained earnings for consolidation (worksheet entry G) in 2009? A. $0 B. $1,600 C. $300 D. $240 E. $270


53. For consolidation purposes, what amount would be debited to retained earnings for consolidation (worksheet entry G) in 2010? A. $240 B. $300 C. $2,000 D. $1,600 E. $270


54. For consolidation purposes, what amount would be debited to retained earnings for consolidation (worksheet entry G) in 2011? A. $3,000 B. $2,400 C. $1,000 D. $800 E. $900


Patti Company holds 80% of the common stock of Shannon, Inc. In the current year, Patti reports sales of $10,000,000 and cost of goods sold of $7,500,000. For the same period, Shannon has sales of $200,000 and cost of goods sold of $160,000. During the year, Patti sold merchandise to Shannon for $60,000 at a price based on the normal markup. At the end of the year, Shannon still possesses 30 percent of this inventory.

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55. Compute consolidated sales. A. $10,000,000 B. $10,126,000 C. $10,140,000 D. $10,200,000 E. $10,260,000


56. Compute consolidated cost of goods sold. A. $7,500,000 B. $7,600,000 C. $7,615,000 D. $7,604,500 E. $7,660,000


57. Assume the same information, except Shannon sold inventory to Patti. Compute consolidated sales. A. $10,000,000 B. $10,126,000 C. $10,140,000 D. $10,200,000 E. $10,260,000


On April 1, 2009 Wilson Company, a 90% owned subsidiary of Simon Company, bought equipment from Simon for $68,250. On January 1, 2009, Simon realized that the useful life of the equipment was longer than originally anticipated, at ten remaining years. The equipment had an original cost to Simon of $80,000 and a book value of $50,000 with a 10-year remaining life as of January 1, 2009. The following data are available pertaining to Wilson's income and dividends:

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58. Compute the gain on transfer of equipment reported by Simon for 2009. A. $19,500 B. $18,250 C. $11,750 D. $38,250 E. $37,500






On January 1, 2009, Smeder Company, an 80% owned subsidiary of Collins, Inc., transferred equipment with a 10-year life (six of which remain with no salvage value) to Collins in exchange for $84,000 cash. At the date of transfer, Smeder's records carried the equipment at a cost of $120,000 less accumulated depreciation of $48,000. Straight-line depreciation is used. Smeder reported net income of $28,000 and $32,000 for 2009 and 2010, respectively.

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65. Compute the gain recognized by Smeder Company relating to the equipment for 2009. A. $36,000 B. $34,000 C. $12,000 D. $10,000 E. $0






68. For consolidation purposes, what net debit or credit will be made in 2009 relating to the equipment transfer? A. Debit accumulated depreciation, $46,000 B. Debit accumulated depreciation, $48,000 C. Credit accumulated depreciation, $48,000 D. Credit accumulated depreciation, $46,000 E. Debit accumulated depreciation, $2,000


69. What is the net effect on consolidated net income in 2009, before allocation to controlling and non-controlling interests, due to the equipment transfer? A. Increase $2,000 B. Decrease $12,000 C. Decrease $10,000 D. Decrease $14,000 E. Increase $10,000


Stiller Company, an 80% owned subsidiary of Leo Company, purchased land from Leo on March 1, 2009, for $75,000. The land originally cost Leo $60,000. Stiller reported net income of $125,000 and $140,000 for 2009 and 2010, respectively. Leo uses the equity method to account for its investment.

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70. Compute the gain or loss on the intercompany sale of land. A. $15,000 loss B. $15,000 gain C. $50,000 loss D. $50,000 gain E. $65,000 gain


71. On a consolidation worksheet, what adjustment would be made for 2009 regarding the land transfer? A. Debit gain for $50,000 B. Credit gain for $50,000 C. Debit land for $15,000 D. Credit land for $15,000 E. Credit gain for $15,000


72. On a consolidation worksheet, having used the equity method, what adjustment would be made for 2010 regarding the land transfer? A. Debit retained earnings for $15,000 B. Credit retained earnings for $15,000 C. Debit retained earnings for $50,000 D. Credit retained earnings for $50,000 E. Debit investment in Stiller for $15,000






Stark Company, a 90% owned subsidiary of Parker, Inc., sold land to Parker on May 1, 2009, for $80,000. The land originally cost Stark $85,000. Stark reported net income of $200,000, $180,000 and $220,000 for 2009, 2010 and 2011, respectively. Parker sold the land it purchased from Stark in 2009 for $92,000 in 2011.

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75. Compute the gain or loss on the intercompany sale of land. A. $80,000 gain B. $80,000 loss C. $5,000 gain D. $5,000 loss E. $85,000 loss


76. Which of the following will be included in a consolidation entry for 2009? A. Debit loss for $5,000 B. Credit loss for $5,000 C. Credit land for $5,000 D. Debit gain for $5,000 E. Credit gain for $5,000


77. Which of the following will be included in a consolidation entry for 2010? A. Debit retained earnings for $5,000 B. Credit retained earnings for $5,000 C. Debit investment in subsidiary for $5,000 D. Credit investment in subsidiary for $5,000 E. Credit land for $5,000






80. Compute the consolidated gain or loss relating to the land for 2011. A. $5,000 loss B. $7,000 gain C. $12,000 gain D. $7,000 loss E. $12,000 loss


81. Compute Parker's reported gain or loss relating to the land for 2011. A. $12,000 gain B. $5,000 loss C. $12,000 loss D. $7,000 gain E. $7,000 loss


82. Compute Stark's reported gain or loss relating to the land for 2011. A. $5,000 loss B. $5,000 gain C. $7,000 loss D. $7,000 gain E. $0




Pepe, Incorporated acquired 60% of Devin Company on January 1, 2009. On that date Devin sold equipment to Pepe for $45,000. The equipment had a cost of $120,000 and accumulated depreciation of $66,000 with a remaining life of 9 years. Devin reported net income of $300,000 and $325,000 for 2009 and 2010, respectively. Pepe uses the equity method to account for its investment in Devin.

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84. What is the gain or loss on equipment reported by Devin for 2009? A. $54,000 gain B. $21,000 loss C. $21,000 gain D. $9,000 loss E. $9,000 gain


85. What is the consolidated gain or loss on equipment for 2009? A. $0 B. $9,000 gain C. $9,000 loss D. $21,000 gain E. $21,000 loss










90. For each of the following situations (1 - 10), select the correct entry (a - e) that would be required on a consolidated worksheet. (A.) Debit retained earnings. (B.) Credit retained earnings. (C.) Debit investment in subsidiary. (D.) Credit investment in subsidiary. (E.) None of the above. ___ 1. Upstream beginning inventory profit, using the initial value method. ___ 2. Downstream beginning inventory profit, using the initial value method. ___ 3. Upstream ending inventory profit, using the initial value method. ___ 4. Downstream ending inventory profit, using the initial value method. ___ 5. Upstream transfer of depreciable assets in the period after transfer where subsidiary recognizes a gain, using the initial value method. ___ 6. Downstream transfer of depreciable assets in the period after transfer where parent recognizes a gain, using the initial value method. ___ 7. Upstream transfer of land in the period after transfer where subsidiary recognizes a loss, using the initial value method. ___ 8. Downstream transfer of land in the period after transfer where parent recognizes a loss, using the initial value method. ___ 9. Income from subsidiary, using the equity method. ___ 10. Amortization of cost over book value, using the equity method.

(1) A; (2) A; (3) E; (4) E; (5) A; (6) A; (7) B; (8) B; (9) D; (10) C


91. On April 7, 2009, Pate Corp. sold land to Shannahan Co., its subsidiary. From a consolidated point of view, when will the gain on this transfer actually be earned?

The gain is earned when Shannahan sells the land to a third party.


92. Throughout 2009, Cleveland Co. sold inventory to Leeward Co., its subsidiary. From a consolidated point of view, when will the gain on this transfer be earned?

The gain is earned when Leeward uses the goods or sells them to a third party.


93. Varton Corp. acquired all of the voting common stock of Caleb Co. on January 1, 2009. Varton owned some land with a book value of $84,000 that was sold to Caleb for its fair value of $120,000. How should this transaction be accounted for by the consolidated entity?

Caleb and Varton are in substance one entity, although in legal form they are separate. The "sale" of land by Varton should be regarded as a transfer of assets within the entity. No gain on the transfer should be recognized on the consolidated financial statements since the earnings process is not complete. Because Caleb recognized a gain on its income statement, the consolidation process must eliminate the gain. Also, Caleb's separate balance sheet showed the land at an amount greater than its cost to the combined entity. The consolidation entry must reduce land to its cost.


94. During 2009, Edwards Co. sold inventory to its parent company, Forsyth Corp. Forsyth still owned all of the inventory at the end of 2009. Why must the gross profit on the sale be deferred when consolidated financial statements are prepared at the end of 2009?

A sale of inventory by a subsidiary to its parent is more accurately understood as a transfer within the entity. Since Forsyth still owned the inventory at the end of the year, the earnings process was not yet complete. If recognition of the gross profit on the transfer was allowed, the parent would be able to manipulate consolidated net income and consolidated net assets by transferring inventory between parent and subsidiary.


95. How does a gain on an intercompany sale of equipment affect the calculation of a non-controlling interest?

If the equipment is sold by the parent to the subsidiary, the sale of the equipment does not affect the calculation of the non-controlling interest's share of the subsidiary's net income. When the sale of equipment is upstream, the gain on the sale must be subtracted from the subsidiary's income and according to SFAS 160, this elimination may be allocated between the controlling interest and non-controlling interest share of the subsidiary's earnings.


96. How do upstream and downstream inventory transfers differ in their effect on a year-end consolidation?

If the sale of inventory is downstream (from parent to subsidiary), any unrealized gain on the sale does not affect the calculation of non-controlling interest. When the sale is upstream (from the subsidiary to the parent), the gain on the sale is associated with the subsidiary. The gain on goods that the parent still owns should be deducted from the subsidiary's income and according to SFAS 160, this elimination may be allocated between the controlling interest and the non-controlling interest's share of the subsidiary's earnings.


97. How is the gain on an intercompany transfer of a depreciable asset realized?

The gain on an intercompany transfer of a depreciable asset may be realized in one of two ways: (1) through the use of the asset in operations or (2) through the sale of the asset to an independent third party.


98. Dithers Inc. acquired all of the common stock of Bumstead Corp. on January 1, 2009. During 2009, Bumstead sold land to Dithers at a gain. No consolidation entry for the sale of the land was made at the end of 2009. What errors will this omission cause in the consolidated financial statements?

Consolidation Entry for 2009

This omission causes both the amounts for Land and Gain on Sale of Land to be overstated in the consolidated financial statements and ultimately, Total Assets and Ending Retained Earnings to be overstated as well. Also, according to SFAS 160, the correction for gain may be allocated to the non-controlling interest share of subsidiary earnings and the non-controlling interest balance on the consolidated balance sheet.


99. Why do intercompany transfers between the component companies of a business combination occur so frequently?

"One reason for the significant volume and frequency of intercompany transfers is that many business combinations are specifically organized so that the companies can provide products for each other. This design is intended to benefit the business combination as a whole because of the economies provided by vertical integration. In effect, more profit can often be generated by the combination if one member is able to buy from another rather than from an outside party".


100. Fraker, Inc. owns 90 percent of Richards, Inc. and bought $200,000 of Richards' inventory in 2009. The transfer price was equal to 30 percent of the sales price. When preparing consolidated financial statements, what amount of these sales is eliminated?

Regardless of the ownership percentage or the markup, the $200,000 was simply an intercompany asset transfer for consolidation purposes. Thus, within the consolidation process, the entire $200,000 should be eliminated from both the Sales and the Purchases (Inventory) accounts.


101. What is meant by unrealized inventory gains and how are they treated on a consolidation worksheet?

"In intercompany transactions, a transfer price is often established that exceeds the cost of the inventory. Hence, the seller is recording a gain on its books that, from the perspective of the business combination as a whole, remains unrealized until the asset is consumed or sold to an outside party. Any unrealized gain on merchandise still being held by the buyer must be eliminated whenever consolidated financial statements are produced. For the year of transfer, this consolidation procedure is carried out by removing the unrealized gain from the inventory account on the balance sheet and from the ending inventory balance within cost of goods sold. In the year following the transfer (if the goods are resold or consumed), the unrealized gain must again be eliminated within the consolidation process. This second reduction is made on the worksheet to the beginning inventory component of cost of goods sold as well as to the beginning retained earnings balance of the original seller. The gain is being moved into the year of realization. If the transfer was downstream in direction and the parent company has applied the equity method, the adjustment in the subsequent year must be made to the equity in subsidiary earnings account rather than to retained earnings".


102. What is the impact on the non-controlling interest of a subsidiary when there are downstream transfers of inventory between the parent and subsidiary companies?

None.


103. How is the gain on an intercompany transfer of land realized?

The gain on an intercompany transfer of land is realized through the sale of the asset to an independent third party. The gain is deferred until that time.


104. What is the purpose of the adjustments to depreciation expense within the consolidation process when there has been an intercompany transfer of a depreciable asset?

"Depreciable assets are often transferred between the members of a business combination at amounts in excess of book value. The buyer will then compute depreciation expense based on this inflated transfer price rather than on an historical cost basis. From the perspective of the business combination, depreciation should be calculated solely on historical cost figures. Thus, within the consolidation process for each period, adjustment of the depreciation (being recorded by the buyer) is necessary to reduce the expense to a cost based figure".


105. Tara Company holds 80 percent of the common stock of Stodd Inc. In the current year, Tara reports sales of $5,000,000 and cost of goods sold of $3,500,000. For the same period, Stodd has sales of $500,000 and cost of goods sold of $400,000. During the year, Stodd sold merchandise to Tara for $40,000 at a price based on the normal markup. At the end of the year, Tara still possesses 20 percent of this inventory. Prepare the consolidation entry to defer the unrealized gain.


106. King Corp. owns 85% of James Co. King uses the equity method to account for this investment. During 2009, King sells inventory to James for $500,000. The inventory originally cost King $420,000. At 12/31/09, 25% of the goods were still in James' inventory. Required: Prepare the Consolidation Entry TI and Consolidation Entry G for the consolidation worksheet.


107. Flintstone Inc. acquired all of Rubble Co. on January 1, 2009. Flintstone decided to use the initial value method to account for this investment. During 2009, Flintstone sold to Rubble for $600,000 inventory with a cost of $500,000. At the end of the year 30% of the goods were still in Rubble's inventory. Required: Prepare Consolidation Entry TI and Consolidation Entry G for the consolidation worksheet at 12/31/09.


108. Yoderly Co., a wholly owned subsidiary of Nelson Corp., sold goods to Nelson near the end of 2008. The goods had cost Yoderly $105,000 and the selling price was $140,000. Nelson had not sold any of the goods by the end of the year. Required: Prepare Consolidation Entry TI and Consolidation Entry G that are required for 2009.


109. Strayten Corp. is a wholly owned subsidiary of Quint Inc. Quint decided to use the initial value method to account for this investment. During 2009, Strayten sold Quint goods which had cost $48,000. The selling price was $64,000. Quint still had one-fourth of the goods on hand at the end of the year. Required: Prepare Consolidation Entry *G, which would have to be recorded at the end of 2010.


110. Hambly Corp. owned 80% of the voting common stock of Stroban Co. During 2009, Stroban sold a parcel of land to Hambly. The land had a book value of $82,000 and was sold to Hambly for $145,000. Stroban's reported net income for 2009 was $119,000. Required: What was the non-controlling interest's share of Stroban Co.'s net income?


111. McGraw Corp. owned all of the voting common stock of both Ritter Co. and Lawler Co. During 2009, Ritter sold inventory to Lawler. The goods had cost Ritter $65,000 and they were sold to Lawler for $100,000. At the end of 2009, Lawler still held 30% of the inventory. Required: How should the sale between Lawler and Ritter be accounted for by the consolidated entity?

Lawler and Ritter are related parties since they are both part of a combined entity. The following Consolidation Entries should be prepared:

These entries (1) eliminate the sale from the consolidated income statement, (2) decrease cost of goods sold and (3) reduce consolidated inventory to its cost to the combined entity.


Virginia Corp. owned all of the voting common stock of Stateside Co. Both companies use the perpetual inventory method and Virginia decided to use the partial equity method to account for this investment. During 2009, Virginia made cash sales of $400,000 to Stateside. The gross profit rate was 30% of the selling price. By the end of the year, Stateside had used 75% of the goods.

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112. Prepare journal entries for Virginia and Stateside to record the sales/purchases during 2009.


113. Prepare the consolidation entries that should be made at the end of 2009.


114. Prepare any 2010 consolidation worksheet entries that would be required for this inventory transfer.


Several years ago Polar Inc. purchased an 80% interest in Icecap Co. The book values of Icecap's asset and liability accounts at that time were considered to be equal to their fair values. Polar paid an amount corresponding to the underlying book value of Icecap so that no allocations or goodwill resulted from the purchase price. The following selected account balances were from the individual financial records of these two companies as of December 31, 2009:

Hoyle - Chapter 05

115. Assume that Polar sold inventory to Icecap at a markup equal to 40% of cost. Intercompany transfers were $126,000 in 2008 and $154,000 in 2009. Of this inventory, $39,200 of the 2008 transfers were retained and then sold by Icecap in 2009 while $58,800 of the 2009 transfers were held until 2010. Required: On the consolidated financial statements for 2009, determine the balances that would appear for the following accounts: (1) Cost of Goods Sold, (2) Inventory and (3) Non-controlling Interest in Subsidiary's Net Income. (If you use a gross profit percentage, do not round the calculation.)


116. Assume that Icecap sold inventory to Polar at a markup equal to 40% of cost. Intercompany transfers were $70,000 in 2008 and $112,000 in 2009. Of this inventory, $29,400 of the 2008 transfers were retained and then sold by Polar in 2009 whereas $49,000 of the 2009 transfers were held until 2010. Required: On the consolidated financial statements for 2009, determine the balances that would appear for the following accounts: (1) Cost of Goods Sold, (2) Inventory and (3) Non-controlling Interest in Subsidiary's Net Income. (If you use a gross profit percentage, do not round the calculation.)


117. Polar sold a building to Icecap on January 1, 2008 for $112,000, although the book value of this asset was only $70,000 on that date. The building had a five-year remaining useful life and was to be depreciated using the straight-line method with no salvage value. Required: On the consolidated financial statements for 2009, determine the balances that would appear for the following accounts: (1) Buildings (net), (2) Operating expenses and (3) Non-controlling Interest in Subsidiary's Net Income.


On January 1, 2009, Musial Corp. sold equipment to Matin Inc. (a wholly-owned subsidiary) for $168,000 in cash. The equipment had originally cost $140,000 but had a book value of only $98,000 when transferred. On that date, the equipment had a five-year remaining life. Depreciation expense was calculated using the straight-line method. Musial earned $308,000 in net income in 2009 (not including any investment income) while Matin reported $126,000. Assume there is no amortization related to the original investment.

Hoyle - Chapter 05

118. What is consolidated net income for 2009?


119. Assuming that Musial owned only 90% of Matin, what is consolidated net income for 2009?


120. Assuming that Musial owned only 90% of Matin and the equipment transfer had been upstream, what is consolidated net income for 2009?


ch5 Summary


ch6

Student: ___________________________________________________________________________

1. On January 1, 2009, Riley Corp. acquired some of the outstanding bonds of one of its subsidiaries. The bonds had a carrying value of $421,620 and Riley paid $401,937 for them. How should you account for the difference between the carrying value and the purchase price in the consolidated financial statements for 2009? A. The difference is added to the carrying value of the debt B. The difference is deducted from the carrying value of the debt C. The difference is treated as a loss from the extinguishment of the debt D. The difference is treated as a gain from the extinguishment of the debt E. The difference does not influence the consolidated financial statements

2. Safire Corp. recently acquired $500,000 of the bonds of Regency Co., one of its subsidiaries, paying more than the carrying value of the bonds. According to the most practical view of this intercompany transaction, to whom would the loss be attributed? A. To Regency because the bonds were issued by Regency B. The loss should be allocated between Safire and Regency based on the purchase price and the original face value of the debt C. The loss should be amortized over the life of the bonds and need not be attributed to either party D. The loss should be deferred until it can be determined to whom the attribution can be made E. To Safire because Safire is the controlling party in the business combination

3. Which one of the following characteristics of preferred stock would make the stock a dilutive security for earnings per share? A. The preferred stock is callable B. The preferred stock is convertible C. The preferred stock is cumulative D. The preferred stock is non-cumulative E. The preferred stock is participating

4. Where do dividends paid to the non-controlling interest of a subsidiary appear on a consolidated statement of cash flows? A. Cash flows from operating activities B. Cash flows from investing activities C. Cash flows from financing activities D. Supplemental schedule of non-cash investing and financing activities E. They do not appear on the consolidated statement of cash flows

5. Where do dividends paid by a subsidiary to the parent company appear on a consolidated statement of cash flows? A. Cash flows from operating activities B. Cash flows from investing activities C. Cash flows from financing activities D. Supplemental schedule of non-cash investing and financing activities E. They do not appear on the consolidated statement of cash flows

6. Where do intercompany sales of inventory appear on a consolidated statement of cash flows? A. They do not appear on the consolidated statement of cash flows B. Supplemental schedule of non-cash investing and financing activities C. Cash flows from operating activities D. Cash flows from investing activities E. Cash flows from financing activities

7. How do intercompany sales of inventory affect the preparation of a consolidated statement of cash flows? A. They must be added in calculating cash flows from investing activities B. They must be deducted in calculating cash flows from investing activities C. They must be added in calculating cash flows from operating activities D. Because the consolidated balance sheet and income statement are used in preparing the consolidated statement of cash flows, no special elimination is required E. They must be deducted in calculating cash flows from operating activities

8. How would consolidated earnings per share be calculated if the subsidiary has no convertible securities or warrants? A. Parent's earnings per share plus subsidiary's earnings per share B. Parent's net income divided by parent's number of shares outstanding C. Consolidated net income divided by parent's number of shares outstanding D. Average of parent's earnings per share and subsidiary's earnings per share E. Consolidated income divided by total number of shares outstanding for the parent and subsidiary

On January 1, 2009, Riney Co. owned 85% of the common stock of Garvin Co. On that date, Garvin's stockholders' equity accounts had the following balances:

The balance in Riney's Investment in Garvin Co. account was $569,500 and the non-controlling interest was $100,500. On January 1, 2009, Garvin Co. sold 10,000 shares of previously unissued common stock for $15 per share. Riney did not acquire any of these shares.

9. What is the balance in Investment in Garvin Co. after the sale of the 10,000 shares of common stock? (Do not round calculation of new interest.) A. $569,500 B. $580,833 C. $558,167 D. $584,500 E. $615,000

10. What is the balance in Non-controlling Interest in Garvin Co. after the sale of the 10,000 shares of common stock? (Do not round calculation of new interest.) A. $100,500 B. $239,167 C. $261,833 D. $250,500 E. $205,000

11. Rojas Co. owned 7,000 shares (70%) of the outstanding 10%, $100 par preferred stock and 60% of the outstanding common stock of Brett Co. When Brett reported net income of $780,000, what was the non-controlling interest in the subsidiary's income? A. $234,000 B. $273,000 C. $302,000 D. $312,000 E. $284,000

Stoop Co. owned 80% of the common stock of Knight Co. Knight had 50,000 shares of $5 par value common stock and 2,000 shares of preferred stock outstanding. Each preferred share received an annual per share dividend of $10 and is convertible into four shares of common stock. Stoop did not own any of Knight's preferred stock. Knight also had 600 bonds outstanding, each of which is convertible into ten shares of common stock. Knight's annual after-tax interest expense for the bonds was $22,000. Stoop did not own any of Knight's bonds. Knight reported income of $300,000 for 2009.

12. What was the amount of Knight's earnings that should be included in calculating consolidated diluted earnings per share? A. $300,000 B. $240,000 C. $257,600 D. $322,000 E. $201,250

13. Knight's diluted earnings per share (rounded) is calculated to be A. $5.62 B. $3.26 C. $3.11 D. $5.03 E. $4.28

14. Campbell Inc. owned all of Gordon Corp. For 2009, Campbell reported net income (without consideration of its investment in Gordon) of $280,000 while the subsidiary reported $112,000. The subsidiary had bonds payable outstanding on January 1, 2009, with a book value of $297,000. The parent acquired the bonds on that date for $281,000. During 2009, Campbell reported interest income of $31,000 while Gordon reported interest expense of $29,000. What is consolidated net income for 2009? A. $406,000 B. $374,000 C. $378,000 D. $410,000 E. $394,000

15. Vontkins Inc. owned all of Quasimota Co. The subsidiary had bonds payable outstanding on January 1, 2009, with a book value of $265,000. The parent acquired the bonds on that date for $288,000. Subsequently, Vontkins reported interest income of $25,000 in 2009 while Quasimota reported interest expense of $29,000. Consolidated financial statements were prepared for 2010. What adjustment would have been required for the retained earnings balance as of January 1, 2010? A. Reduction of $27,000 B. Reduction of $4,000 C. Reduction of $19,000 D. Reduction of $30,000 E. Reduction of $20,000

16. Tray Co. reported current earnings of $560,000 while paying $56,000 in cash dividends. Sparrish Co. earned $140,000 in net income and distributed $14,000 in dividends. Tray held a 70% interest in Sparrish for several years, an investment that it originally purchased at a price equal to the book value of the underlying net assets. Tray used the initial value method to account for these shares. On January 1, 2009, Sparrish acquired in the open market $70,000 of Tray's 8% bonds. The bonds had originally been issued several years ago at 92, reflecting a 10% effective interest rate. On the date of purchase, the book value of the bonds payable was $67,600. Sparrish paid $65,200 based on a 12% effective interest rate over the remaining life of the bonds. What is the non-controlling interest's share of the subsidiary's net income? A. $42,000 B. $37,800 C. $39,600 D. $40,070 E. $44,080

17. A company had common stock with a total par value of $18,000,000 and fair value of $62,000,000; and 7% preferred stock with a total par value of $6,000,000 and a fair value of $8,000,000. The book value of the company was $185,000,000. If 90% of this company's equity was acquired by another, what portion of the value would be assigned to the non-controlling interest? A. $18,500,000 B. $7,000,000 C. $6,200,000 D. $2,400,000 E. $6,929,400

18. Cadion Co. owned control over Knieval Inc. Cadion reported sales of $420,000 during 2009 while Knieval reported $280,000. Inventory costing $28,000 was transferred from Knieval to Cadion (upstream) during the year for $56,000. Of this amount, twenty-five percent was still in ending inventory at year's end. Total receivables on the consolidated balance sheet were $112,000 at the first of the year and $154,000 at year-end. No intercompany debt existed at the beginning or ending of the year. Using the direct approach, what is the consolidated amount of cash collected by the business combination from its customers? A. $602,000 B. $644,000 C. $686,000 D. $714,000 E. $592,000

19. Parker owned all of Odom Inc. Although the Investment in Odom Inc. account had a balance of $834,000, the subsidiary's 12,000 shares had an underlying book value of only $56 per share. On January 1, 2010, Odom issued 3,000 new shares to the public for $70 per share. How does this transaction affect the Investment in Odom Inc. account? A. It should be decreased by $141,120 B. It should be increased by $176,400 C. It should be increased by $48,000 D. It should be decreased by $128,400 E. It is not affected since the shares were sold to outside parties

These questions are based on the following information and should be viewed as independent situations. Popper Co. purchased 80% of the common stock of Cocker Co. on January 1, 2004, when Cocker had the following stockholders' equity accounts.

To acquire this interest in Cocker, Popper paid a total of $682,000 with any excess cost being allocated to goodwill, which has been measured for impairment annually and has not been determined to be impaired as of January 1, 2009. On January 1, 2009, Cocker reported a net book value of $1,113,000 before the following transactions were conducted. Popper uses the equity method to account for its investment in Cocker, thereby reflecting the change in book value of Cocker.

20. On January 1, 2009, Cocker issued 10,000 additional shares of common stock for $35 per share. Popper acquired 8,000 of these shares. How would this transaction affect the additional paid-in capital of the parent company? A. Increase it by $28,700 B. Increase it by $16,800 C. $0 D. Increase it by $280,000 E. Increase it by $593,600

21. On January 1, 2009, Cocker issued 10,000 additional shares of common stock for $21 per share. Popper did not acquire any of this newly issued stock. How would this transaction affect the additional paid-in capital of the parent company? A. $0 B. Decrease it by $23,240 C. Decrease it by $68,250 D. Decrease it by $45,060 E. Decrease it by $43,680

22. On January 1, 2009, Cocker reacquired 8,000 of the outstanding shares of its own common stock for $34 per share. None of these shares belonged to Popper. How would this transaction have affected the additional paid-in capital of the parent company? A. $0 B. Decrease it by $32,900 C. Decrease it by $45,700 D. Decrease it by $49,400 E. Decrease it by $50,500

23. If newly issued debt is issued from a parent to its subsidiary, which of the following statements is false? A. Any premium or discount on bonds payable is exactly offset by a premium or discount on bond investment B. There will be $0 net gain or loss on the bond transaction C. Interest expense needs to be eliminated on the consolidated income statement D. Interest revenue needs to be eliminated on the consolidated income statement E. A net gain or loss on the bond transaction will be reported

24. The accounting problems encountered in consolidated intercompany debt transactions when the debt is acquired by an affiliate from an outside party include all of the following except: A. Both the investment and debt accounts have to be eliminated now and for each future consolidated financial statement despite containing differing balances B. Subsequent interest revenue/expense must be removed although these balances fail to agree in amount C. A gain or loss must be recognized by both parent and subsidiary companies D. Changes in the investment, debt, interest revenue and interest expense accounts occur constantly because of the amortization process E. The gain or loss on the retirement of the debt must be recognized by the business combination in the year the debt is acquired, even though this balance does not appear on the financial records of either company

25. Which of the following statements is true concerning the acquisition of existing debt of a consolidated affiliate in the year of the debt acquisition? A. Any gain or loss is deferred on a consolidated income statement B. Any gain or loss is recognized on a consolidated income statement C. Interest revenue on the affiliated debt is recognized on a consolidated income statement D. Interest expense on the affiliated debt is recognized on a consolidated income statement E. Consolidated retained earnings is adjusted for the difference between the purchase price and the carrying value of the bonds

26. Which of the following statements is false regarding the assignment of a gain or loss on intercompany bond transfer? A. Subsidiary net income is not affected by a gain on bond transaction B. Subsidiary net income is not affected by a loss on bond transaction C. Parent Company net income is not affected by a gain on bond transaction D. Parent Company net income is not affected by a loss on bond transaction E. Consolidated net income is not affected by a gain or loss on bond transaction

27. What would differ between a statement of cash flows for a consolidated company and an unconsolidated company using the indirect method? A. Parent's dividends would be subtracted as a financing activity B. Gain on sale of land would be deducted from net income C. Non-controlling interest in net income of subsidiary would be added to net income D. Proceeds from the sale of long-term investments would be added to investing activities E. Loss on sale of equipment would be added to net income

28. Which of the following statements is true for a consolidated statement of cash flows? A. Parent's dividends and subsidiary's dividends are deducted as a financing activity B. Only parent's dividends are deducted as a financing activity C. Parent's dividends and its share of subsidiary's dividends are deducted as a financing activity D. All of parent's dividends and non-controlling interest of subsidiary's dividends are deducted as a financing activity E. Neither parent's or subsidiary's dividends are deducted as a financing activity

29. In reporting consolidated earnings per share when there is a wholly owned subsidiary, which of the following statements is true? A. Parent company earnings per share equals consolidated earnings per share when the equity method is used B. Parent company earnings per share is equal to consolidated earnings per share when the initial value method is used C. Parent company earnings per share is equal to consolidated earnings per share when the partial equity method is used and acquisition-date fair value exceeds book value D. Parent company earnings per share is equal to consolidated earnings per share when the partial equity method is used and acquisition-date fair value is less than book value E. Preferred dividends are not deducted from net income for consolidated earnings per share

30. If a subsidiary issues additional common shares at below book value to outsiders, which of the following statements is true? A. The parent's additional paid-in capital will be increased B. The parent's investment in subsidiary will be increased C. The parent's retained earnings will be increased D. The parent's additional paid-in capital will be decreased E. The parent's retained earnings will be decreased

31. If a parent acquires all of the additional common shares issued by its subsidiary at greater than book value, which of the following statements is true? A. The investment in subsidiary will decrease B. Additional paid-in capital will decrease C. Retained earnings will increase D. The investment in subsidiary will increase E. No adjustment will be necessary

32. If a subsidiary reacquires its outstanding shares from outside ownership for more than book value, which of the following statements is true? A. Additional paid-in capital on the parent company's books will decrease B. Investment in subsidiary will increase C. Treasury stock on the parent's books will increase D. Treasury stock on the parent's books will decrease E. No adjustment is necessary

33. If a subsidiary issues a stock dividend, which of the following statements is true? A. Investment in subsidiary on the parent's books will increase B. Investment in subsidiary on the parent's books will decrease C. Additional paid-in capital on the parent's books will increase D. Additional paid-in capital on the parent's books will increase E. No adjustment is necessary

34. Stevens Company has had bonds payable of $10,000 outstanding for several years. On January 1, 2009, when there was an unamortized discount of $2,000 and a remaining life of 5 years. Its 80% owned subsidiary, Matthews Company, purchased the bonds in the open market for $11,000. The bonds pay 6% interest annually on December 31. The companies use the straight-line method to amortize interest revenue and expense. Compute the consolidated gain or loss on a consolidated income statement for 2009. A. $1,000 gain B. $1,000 loss C. $2,000 loss D. $3,000 loss E. $3,000 gain

35. Keenan Company has had bonds payable of $20,000 outstanding for several years. On January 1, 2009, when there was an unamortized premium of $2,000 with a remaining life of 10 years, Keenan's parent, Ross, Inc., purchased the bonds in the open market for $19,000. Keenan is a 90% owned subsidiary of Ross. The bonds pay 8% interest annually on December 31. The companies use the straight-line method to amortize interest revenue and expense. Compute the consolidated gain or loss on a consolidated income statement for 2009. A. $3,000 gain B. $3,000 loss C. $1,000 gain D. $1,000 loss E. $2,000 gain

On January 1, 2009, Nichols Company acquired 80% of Smith Company's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is:

36. Determine the amount and account to be recorded for Nichols' investment in Smith. A. $1,324,000 for Investment in Smith B. $1,200,000 for Investment in Smith C. $1,200,000 for Investment in Smith's Common Stock and $124,000 for Investment in Smith's Preferred Stock D. $1,200,000 for Investment in Smith's Common Stock and $120,000 for Investment in Smith's Preferred Stock E. $1,448,000 for Investment in Smith's Common Stock

37. Compute the goodwill recognized in consolidation. A. $800,000 B. $310,000 C. $124,000 D. $0 E. $(196,000)

38. Compute the non-controlling interest in Smith at date of acquisition. A. $486,000 B. $480,000 C. $300,000 D. $150,000 E. $120,000

39. The consolidation entry at date of acquisition will include (referring to Smith): A. Debit Common stock $500,000 and debit Preferred stock $120,000 B. Debit Common stock $400,000 and debit Additional paid-in capital $160,000 C. Debit Common stock $500,000 and debit Preferred stock $300,000 D. Debit Common stock $500,000, debit Preferred stock $120,000 and debit Additional paid-in capital $200,000 E. Debit Common stock $400,000, debit Preferred stock $300,000, debit Additional paid-in capital $200,000 and debit Retained earnings $500,000

40. If Smith's net income is $100,000 in the year following the acquisition, A. The portion allocated to the common stock (residual amount) is $92,800 B. $10,800 preferred stock dividend will be subtracted from net income attributed to common stock in arriving at non-controlling interest in subsidiary income C. The non-controlling interest balance will be $27,200 D. The preferred stock dividend will be ignored in non-controlling interest in subsidiary net income because Nichols owns the non-controlling interest of preferred stock E. The non-controlling interest in subsidiary net income is $30,800

The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company. (1.) Graham reports a loss on sale of land of $5,000. The land cost Graham $20,000. (2.) Non-controlling interest in Stage's net income was $30,000. (3.) Graham paid dividends of $15,000. (4.) Stage paid dividends of $10,000. (5.) Excess acquisition-date fair value over book value was expensed by $6,000. (6.) Consolidated accounts receivable decreased by $8,000. (7.) Consolidated accounts payable decreased by $7,000.

41. How is the loss on sale of land reported on the consolidated statement of cash flows? A. $20,000 added to net income as an operating activity B. $20,000 deducted from net income as an operating activity C. $15,000 deducted from net income as an operating activity D. $5,000 added to net income as an operating activity E. $5,000 deducted from net income as an operating activity

42. Where does the non-controlling interest in Stage's net income appear on a consolidated statement of cash flows? A. $30,000 added to net income as an operating activity on the consolidated statement of cash flows B. $30,000 deducted from net income as an operating activity on the consolidated statement of cash flows C. $30,000 increase as an investing activity on the consolidated statement of cash flows D. $30,000 decrease as an investing activity on the consolidated statement of cash flows E. Non-controlling interest in Stage's net income does not appear on a consolidated statement of cash flows

43. How will dividends be reported on consolidated statement of cash flows? A. $15,000 decrease as a financing activity B. $25,000 decrease as a financing activity C. $10,000 decrease as a financing activity D. $23,000 decrease as a financing activity E. $17,000 decrease as a financing activity

44. How is the amount of excess acquisition-date fair value over book value recognized on a consolidated statement of cash flows assuming the indirect method is used? A. It is ignored B. $6,000 subtracted from net income C. $4,800 subtracted from net income D. $6,000 added to net income E. $4,800 added to net income

45. Using the indirect method, where does the decrease in accounts receivable appear on a consolidated statement of cash flows? A. $8,000 increase to net income as an operating activity B. $8,000 decrease to net income as an operating activity C. $6,400 increase to net income as an operating activity D. $6,400 decrease to net income as an operating activity E. $8,000 increase as an investing activity

46. Using the indirect method, where does the decrease in accounts payable appear on a consolidated statement of cash flows? A. $7,000 increase to net income as an operating activity B. $7,000 decrease to net income as an operating activity C. $5,600 increase to net income as an operating activity D. $5,600 decrease to net income as an operating activity E. $7,000 increase as a financing activity

Webb Company owns 90% of Jones Company. The original balances presented for Jones and Webb as of January 1, 2009, are as follows:

Jones sells 20,000 shares of previously unissued shares of its common stock to outside parties for $10 per share.

47. What is the adjusted book value of Jones after the sale of the shares? A. $200,000 B. $1,400,000 C. $1,280,000 D. $1,050,000 E. $1,440,000

48. What is the new percent ownership of Webb in Jones after the stock issuance? A. 75% B. 90% C. 80% D. 64% E. 60%

49. What adjustment is needed for Webb's investment in Jones account? A. $180,000 increase B. $180,000 decrease C. $30,000 increase D. $30,000 decrease E. No adjustment is necessary

Webb Company owns 90% of Jones Company. The original balances presented for Jones and Webb as of January 1, 2009 are as follows:

Assume Jones issues 20,000 new shares of its common stock for $15 per share. Of this total, Webb acquires 18,000 shares to maintain its 90% interest in Jones.

50. What is the adjusted book value of Jones after the stock issuance? A. $1,500,000 B. $1,200,000 C. $1,350,000 D. $1,080,000 E. $1,335,000

51. After acquiring the additional shares, what adjustment is needed for Webb's investment in Jones account? A. $270,000 increase B. $270,000 decrease C. $27,000 increase D. $27,000 decrease E. No adjustment is necessary

Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and Chase as of January 1, 2009, are as follows:

Assume Chase issues 30,000 additional shares common stock solely to Ryan for $12 per share.

52. What is the new percent ownership Ryan owns in Chase? A. 80% B. 87.5% C. 90% D. 75% E. 82.5%

53. What is the adjusted book value of Chase Company after the issuance of the shares? A. $608,000 B. $720,000 C. $680,000 D. $760,000 E. $400,000

54. After acquiring the additional shares, what adjustment is needed for Ryan's investment in Chase account? A. $70,000 increase B. $70,000 decrease C. $15,000 increase D. $15,000 decrease E. No adjustment is necessary

Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and Chase as of January 1, 2009 are as follows:

Assume Chase reacquired 8,000 shares of its common stock from outsiders at $10 per share.

55. What should the adjusted book value of Chase be after the treasury shares were purchased? A. $400,000 B. $480,000 C. $320,000 D. $336,000 E. $464,000

56. What is Ryan's percent ownership in Chase after the acquisition of the treasury shares (rounded)? A. 80% B. 95% C. 64% D. 76% E. 69%

57. When Ryan's new percent ownership is rounded to a whole number, what adjustment is needed for Ryan's investment in Chase account? A. $16,000 decrease B. $60,000 decrease C. $64,000 increase D. $64,000 decrease E. No adjustment is necessary

58. A special purpose entity can take all of the following forms except a A. Trust B. Partnership C. Joint venture D. Corporation E. Estate

59. All of the following are examples of variable interests except A. Guarantees of debt B. Stock options C. Lease residual value guarantees D. Participation rights E. Asset purchase options

60. All of the following are potential losses or returns of a special purpose entity except A. Entitles holder to residual profits B. Entitles holder to benefit from increases in asset fair value C. Entitles holder to receive shares of common stock D. If the special purpose entity cannot repay liabilities, honoring a debt guarantee will produce a loss E. If leased asset declines below the residual value, honoring the guarantee will produce a loss

61. Which of the following characteristics is not indicative of an enterprise qualifying as a primary beneficiary with a controlling financial interest in a variable interest entity? A. The direct ability to make decisions about the entity's activities B. The indirect ability to make decisions about the entity's activities C. The obligation to absorb the expected losses of the entity if they occur D. No ability to make decisions about the entity's activities E. The right to receive the expected residual returns of the entity if they occur

62. Which of the following statements is false concerning variable interest entities (VIEs)? A. Sometimes VIEs do not have independent management B. Most VIEs are established for valid business purposes C. VIEs may be formed as a source of low-cost financing D. VIEs have little need for voting stock E. A VIE cannot take the form of a trust, partnership, joint venture, corporation or estate

63. Which of the following statements is true concerning variable interest entities (VIEs)? 1) The role of the VIE equity investors can be fairly minor. 2) A VIE may be created specifically to benefit its sponsoring firm with low-cost financing. 3) VIE governing agreements often limit activities and decision making. 4) VIEs usually have a well-defined and limited business activity. A. 2 and 4 B. 2, 3 and 4 C. 1, 2 and 4 D. 1, 2 and 3 E. 1, 2, 3 and 4

64. Which of the following is not an indicator that requires a sponsoring firm to consolidate a variable interest entity (VIE) with its own financial statements? A. The sponsoring firm has the obligation to absorb the expected losses of the VIE if they occur B. The sponsoring firm receives risks and rewards of the VIE in proportion to equity ownership C. The sponsoring firm has the right to receive the expected residual returns of the VIE if they occur D. The sponsoring firm has direct ability to make decisions about the entity's activities E. The sponsoring firm has only indirect ability to make decisions about the entity's activities

65. A parent acquires all of a subsidiary's common stock and 60 percent of its preferred stock. The preferred stock has a cumulative dividend. No dividends are in arrears. How is the non-controlling interest in the subsidiary's net income assigned? A. Income is assigned as 40 percent of the value of the preferred stock, based on an allocation between common stock and preferred stock B. There is no allocation to the non-controlling interest because the parent owns 100% of the common stock and net income belongs to the residual owners C. Income is assigned as 40 percent of the preferred stock dividends D. Income is assigned as 40 percent of the subsidiary's income before preferred stock dividends E. Income is assigned as 40 percent of the subsidiary's income after subtracting preferred stock dividends

66. A parent acquires 70% of a subsidiary's common stock and 60 percent of its preferred stock. The preferred stock is non-cumulative. The current year's dividend was paid. How is the non-controlling interest in the subsidiary's net income assigned? A. Income is assigned as 40 percent of the value of the preferred stock, based on an allocation between common stock and preferred stock and their relative par values B. There is no allocation to the non-controlling interest because there are no dividends in arrears C. Income is assigned as 40 percent of the preferred stock dividends D. Income is assigned as 40 percent of the preferred stock dividends plus 30% of the subsidiary's income after subtracting all preferred stock dividends E. Income is assigned as 30 percent of the subsidiary's income after subtracting 60% of preferred stock dividends

67. Wolff Corporation owns 70 percent of the outstanding stock of Donald, Inc. During the current year, Donald made $75,000 in sales to Wolff. How does this transfer affect the consolidated statement of cash flows? A. Included as a decrease in the investing section B. Included as an increase in the operating section C. Included as a decrease in the operating section D. Included as an increase in the investing section E. Not reported in the consolidated statement of cash flows

68. Stahl Corporation owns 80 percent of the outstanding stock of MacDonald, Inc. During the current year, MacDonald made $125,000 in sales to Stahl. How does this transfer affect the consolidated statement of cash flows? A. Include 80 percent as a decrease in the investing section B. Include 100 percent as a decrease in the investing section C. Include 80 percent as a decrease in the operating section D. Include 100 percent as an increase in the operating section E. Not reported in the consolidated statement of cash flows

69. Pursley, Inc. owns 70 percent of Harry, Inc. The consolidated income statement for a year reports $50,000 Non-controlling Interest in Harry, Inc. Income. Harry paid dividends in the amount of $80,000 for the year. What are the effects of these transactions on the consolidated statement of cash flows for the year?


70. Goehring, Inc. owns 70 percent of Harry, Inc. The consolidated income statement for a year reports $40,000 Non controlling Interest in Harry, Inc. Income. Harry paid dividends in the amount of $100,000 for the year. What are the effects of these transactions on the consolidated statement of cash flows for the year? A. Increase in the financing section of $70,000 and decrease in the operating section of $30,000 B. Increase in the operating section of $70,000 and decrease in the financing section of $30,000 C. Increase in the operating section of $70,000 D. Decrease in the financing section of $30,000 E. No effects

Anderson, Inc. has owned 70% of its subsidiary, Arthur Corp., for several years. The balance sheets of Anderson, Inc. and Arthur Corp., are presented below:

Additional information for 2009:

71. Net cash flow from operating activities was: A. $44,000 B. $44,800 C. $46,200 D. $50,000 E. $52,200

72. Net cash flow from financing activities was: A. $28,000 B. $35,000 C. $50,000 D. $63,000 E. $64,200

The balance sheets of Butler, Inc. and its 70 percent-owned subsidiary, Cassie Corp., are presented below:




75. How do subsidiary stock warrants outstanding affect consolidated earnings per share? A. They will be included in both basic and diluted earnings per share if they are dilutive B. They will only be included in diluted earnings per share if they are dilutive C. They will only be included in basic earnings per share if they are dilutive D. Only the warrants owned by the parent company affect consolidated earnings per share E. Because the warrants are for subsidiary shares, there will be no effect on consolidated earnings per share

76. A parent company owns a controlling interest in a subsidiary whose stock has a book value of $27 per share. The last day of the year, the subsidiary issues new shares entirely to outside parties at $33 per share. The parent still holds control over the subsidiary. Which of the following statements is true? A. Since the sale was made at the end of the year, the parent's investment account is not affected B. Since the shares were sold for more than book value, the parent's investment account must be increased C. Since the shares were sold for more than book value, the parent's investment account must be decreased D. Since the shares were sold for more than book value but the parent did not buy any of the shares, the parent's investment account is not affected E. None of the above

77. A parent company owns a controlling interest in a subsidiary whose stock has a book value of $27 per share. The last day of the year, the subsidiary issues new shares entirely to outside parties at $25 per share. The parent still holds control over the subsidiary. Which of the following statements is true? A. Since the sale was made at the end of the year, the parent's investment account is not affected B. Since the shares were sold for less than book value, the parent's investment account must be increased C. Since the shares were sold for less than book value, the parent's investment account must be decreased D. Since the shares were sold for less than book value but the parent did not buy any of the shares, the parent's investment account is not affected E. None of the above

78. A parent company owns a 70 percent interest in a subsidiary whose stock has a book value of $27 per share. The last day of the year, the subsidiary issues new shares for $27 per share and the parent buys its 70 percent interest in the new shares. Which of the following statements is true? A. Since the sale was made at the end of the year, the parent's investment account is not affected B. Since the shares were sold for book value, the parent's investment account must be increased C. Since the shares were sold for book value, the parent's investment account must be decreased D. Since the shares were sold for book value and the parent bought 70 percent of the shares, the parent's investment account is not affected except for the price of the new shares E. None of the above

79. Carlson, Inc. owns 80 percent of Madrid, Inc. Carlson reports net income for 2009 (without consideration of its investment in Madrid, Inc.) of $1,500,000. For the same year, Madrid reports net income of $705,000. Carlson had bonds payable outstanding on January 1, 2009 with a carrying value of $1,200,000. Madrid acquired the bonds on January 3, 2009 for $1,090,000. During 2009, Carlson reported interest expense on the bonds in the amount of $96,000, while Madrid reported interest income of $94,000 for the same bonds. What is Carlson's share of consolidated net income? A. $2,064,000 B. $2,066,000 C. $2,176,000 D. $2,207,000 E. $2,317,000

80. Davidson, Inc. owns 70 percent of the outstanding voting stock of Ernest Company. On January 2, 2007, Davidson sold 8 percent bonds payable with a $5,000,000 face value maturing January 2, 2027 at a premium of $400,000. On January 1, 2009, Ernest acquired 30 percent of these same bonds at 97.6. Both companies use the straight-line method of amortization. What adjustment should be made to Davidson's 2010 beginning Retained Earnings as a result of this bond acquisition? A. $114,000 B. $122,000 C. $136,000 D. $144,000 E. $152,000

81. Franklin Corporation owns 90 percent of the outstanding voting stock of Georgia Company. On January 2, 2007, Georgia sold 7 percent bonds payable with a $5,000,000 face value maturing January 2, 2027 at a premium of $500,000. On January 1, 2009, Franklin acquired 20 percent of these same bonds at 97.66. Both companies use the straight-line method of amortization. What adjustment should be made to Franklin's 2010 beginning Retained Earnings as a result of this bond acquisition? A. $107,100 B. $113,400 C. $119,700 D. $144,000 E. $152,000

On January 1, 2009, Harrison Corporation spent $2,600,000 to acquire control over Involved, Inc. This price was based on paying $750,000 for 30 percent of Involved's preferred stock and $1,850,000 for 80 percent of its outstanding common stock. As of the date of the acquisition, Involved's stockholders' equity accounts were as follows:

82. What is the total acquisition-date fair value of Involved? A. $2,600,000 B. $4,812,500 C. $3,062,500 D. $2,312,500 E. $3,250,000

83. Assuming Involved's accounts are correctly valued within the company's financial statements, what amount of goodwill should be recognized for the Investment in Involved? A. $100,000 B. $0 C. $200,000 D. $812,500 E. $2,112,500

84. Johnson, Inc. owns control over Kaspar, Inc. Johnson reports sales of $400,000 during 2009 while Kaspar reports $250,000. Kaspar transferred inventory during 2009 to Johnson at a price of $50,000. On December 31, 2009, 30 percent of the transferred goods are still in Johnson's inventory. Consolidated accounts receivable on January 1, 2009 was $120,000 and on December 31, 2009 is $130,000. Johnson uses the direct approach in preparing the statement of cash flows. How much is cash collected from customers on the consolidated statement of cash flows? A. $590,000 B. $610,000 C. $625,000 D. $635,000 E. $650,000

85. Parent Corporation loaned money to its subsidiary on a five-year note at the market interest rate. How would the note be accounted for in the consolidation process?

86. What documents or other sources of information would be used to prepare a consolidated statement of cash flows?

87. Parent Corporation acquired some of its subsidiary's bonds on the bond market. The remaining life of the bonds was eight years and Parent expected to hold the bonds for the full eight years. How should the acquisition of the bonds have been viewed in the consolidation process?

88. Parent Corporation acquired some of its subsidiary's bonds on the bond market, paying a price $40,000 higher than the bonds' carrying value. How should the difference between the purchase price and the carrying value be accounted for?

89. How are intercompany inventory transfers reflected on a consolidated statement of cash flows?

90. Danbers Co. owned seventy-five percent of the common stock of Renz Corp. How does the issuance of a five percent stock dividend by Renz affect Danbers and the consolidation process?

91. During 2009, Parent Corporation purchased at book value some of the outstanding bonds of its subsidiary. How would this acquisition have been reflected in the consolidated statement of cash flows?

92. On January 1, 2009, Parent Corporation acquired a controlling interest in the voting common stock of Foxboro Co. At the same time, Parent purchased sixty percent of Foxboro's outstanding preferred stock. In preparing consolidated financial statements, how should the acquisition of the preferred stock be accounted for?

93. When a company has preferred stock in its capital structure, what amount should be used to calculate non-controlling interest in the preferred stock of the subsidiary when the company is acquired as a subsidiary of another company?

94. Parent Corporation acquired some of its subsidiary's outstanding bonds. Why might Parent purchase the bonds, rather than the subsidiary buying its own bonds?

95. Parent Corporation had just purchased some of its subsidiary's outstanding bonds. What items related to these bonds will have to be accounted for in the consolidation process?

96. Parent Corporation recently acquired some of its subsidiary's outstanding bonds, at an amount which required the recognition of a loss. In what ways could the loss be allocated? Which allocation would you recommend? Why?

97. How does the existence of a non-controlling interest affect the preparation of a consolidated statement of cash flows?

98. On January 1, 2009, Bast Co. had a net book value of $2,100,000 as follows:

Fisher Co. acquired all of the outstanding preferred shares for $148,000 and 60% of the common stock for $1,281,000. Fisher believed that one of Bast's buildings, with a twelve-year life, was undervalued on the company's financial records by $70,000. Required: What is the amount of goodwill to be recognized from this purchase?

Fargus Corporation owned 51% of the voting common stock of Sanatee, Inc. The parent's interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the purchase price. On January 1, 2006, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a cash interest rate of 10% payable every December 31. Fargus acquired 40% of these bonds on January 1, 2008, for 95% of the face value. Both companies utilized the straight-line method of amortization.

99. What balances would need to be considered in order to prepare the consolidation entry in connection with these intercompany bonds at December 31, 2008, the end of the first year of the intercompany investment? Prepare schedules to show numerical answers for balances that would be needed for the entry.

100. What consolidation entry would have been recorded in connection with these intercompany bonds on December 31, 2008?



103. Skipen Corp. had the following stockholders' equity accounts:

The preferred stock was participating and is therefore considered to be equity. Vestin Corp. acquired 90% of this common stock for $2,250,000 and 70% of the preferred stock for $1,120,000. All of the subsidiary's assets and liabilities were determined to have fair values equal to their book values except for land which is undervalued by $130,000. Required: What amount was attributed to goodwill on the date of acquisition?

Thomas Inc. had the following stockholders' equity accounts as of January 1, 2009:

Kuried Co. acquired all of the voting common stock of Thomas on January 1, 2009, for $20,656,000. The preferred stock remained in the hands of outside parties and had a fair value of $3,060,000. A database valued at $656,000 was recognized and amortized over five years. During 2009, Thomas reported earning $630,000 in net income and paid $504,000 in total cash dividends. Kuried decided used the equity method to account for this investment.

104. What is the amount of goodwill resulting from this acquisition?

105. What was the non-controlling interest's share of consolidated net income for this period?

106. What is the controlling interest share of Thomas' net income for the year ended December 31, 2009?

107. What was Kuried's balance in the Investment in Thomas Inc. account as of December 31, 2009?

108. Prepare all consolidation entries for 2009.

109. Jet Corp. acquired all of the outstanding shares of Nittle Inc. on January 1, 2007, for $644,000 in cash. Of this price, $42,000 was attributed to equipment with a ten-year remaining useful life. Goodwill of $56,000 had also been identified. Jet applied the partial equity method so that income would be accrued each period based solely on the earnings reported by the subsidiary. On January 1, 2010, Jet reported $280,000 in bonds outstanding with a book value of $263,200. Nittle purchased half of these bonds on the open market for $135,800. During 2010, Jet began to sell merchandise to Nittle. During that year, inventory costing $112,000 was transferred at a price of $140,000. All but $14,000 (at selling price) of these goods were resold to outside parties by year's end. Nittle still owed $50,400 for inventory shipped from Jet during December. The following financial figures were for the two companies for the year ended December 31, 2010.

Required: Prepare a consolidation worksheet for the year ended December 31, 2010.

110. Allen Co. held 80% of the common stock of Brewer Inc. and 40% of this subsidiary's convertible bonds. The following consolidated financial statements were for 2009 and 2010.

Additional Information: Bonds were issued during 2010 by the parent for cash. Amortization of a database acquired in the original combination amounted to $7,000 per year. A building with a cost of $84,000 but a $42,000 book value was sold by the parent for cash on May 11, 2010. Equipment was purchased by the subsidiary on July 23, 2010, using cash. Late in November 2010, the parent issued common stock for cash. During 2010, the subsidiary paid dividends of $14,000. Required: Prepare a consolidated statement of cash flows for this business combination for the year ending December 31, 2010. Either the direct method or the indirect method may be used.

Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago. At the present time, Glotfelty is reporting the following stockholders' equity:

Glotfelty issues 5,000 shares of previously unissued stock to the public for $40 per share. None of this stock is purchased by Panton.

111. Describe how this transaction would affect Panton's books.

112. Prepare Panton's journal entry to recognize the impact of this transaction.





115. Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago. At the present time, Glotfelty is reporting the following stockholders' equity:

Glotfelty issues 5,000 shares of previously unissued stock to Panton for $35 per share. Required: Describe how this transaction would affect Panton's books.

ch6 Key

1. On January 1, 2009, Riley Corp. acquired some of the outstanding bonds of one of its subsidiaries. The bonds had a carrying value of $421,620 and Riley paid $401,937 for them. How should you account for the difference between the carrying value and the purchase price in the consolidated financial statements for 2009? A. The difference is added to the carrying value of the debt B. The difference is deducted from the carrying value of the debt C. The difference is treated as a loss from the extinguishment of the debt D. The difference is treated as a gain from the extinguishment of the debt E. The difference does not influence the consolidated financial statements


2. Safire Corp. recently acquired $500,000 of the bonds of Regency Co., one of its subsidiaries, paying more than the carrying value of the bonds. According to the most practical view of this intercompany transaction, to whom would the loss be attributed? A. To Regency because the bonds were issued by Regency B. The loss should be allocated between Safire and Regency based on the purchase price and the original face value of the debt C. The loss should be amortized over the life of the bonds and need not be attributed to either party D. The loss should be deferred until it can be determined to whom the attribution can be made E. To Safire because Safire is the controlling party in the business combination


3. Which one of the following characteristics of preferred stock would make the stock a dilutive security for earnings per share? A. The preferred stock is callable B. The preferred stock is convertible C. The preferred stock is cumulative D. The preferred stock is non-cumulative E. The preferred stock is participating


4. Where do dividends paid to the non-controlling interest of a subsidiary appear on a consolidated statement of cash flows? A. Cash flows from operating activities B. Cash flows from investing activities C. Cash flows from financing activities D. Supplemental schedule of non-cash investing and financing activities E. They do not appear on the consolidated statement of cash flows


5. Where do dividends paid by a subsidiary to the parent company appear on a consolidated statement of cash flows? A. Cash flows from operating activities B. Cash flows from investing activities C. Cash flows from financing activities D. Supplemental schedule of non-cash investing and financing activities E. They do not appear on the consolidated statement of cash flows


6. Where do intercompany sales of inventory appear on a consolidated statement of cash flows? A. They do not appear on the consolidated statement of cash flows B. Supplemental schedule of non-cash investing and financing activities C. Cash flows from operating activities D. Cash flows from investing activities E. Cash flows from financing activities


7. How do intercompany sales of inventory affect the preparation of a consolidated statement of cash flows? A. They must be added in calculating cash flows from investing activities B. They must be deducted in calculating cash flows from investing activities C. They must be added in calculating cash flows from operating activities D. Because the consolidated balance sheet and income statement are used in preparing the consolidated statement of cash flows, no special elimination is required E. They must be deducted in calculating cash flows from operating activities


8. How would consolidated earnings per share be calculated if the subsidiary has no convertible securities or warrants? A. Parent's earnings per share plus subsidiary's earnings per share B. Parent's net income divided by parent's number of shares outstanding C. Consolidated net income divided by parent's number of shares outstanding D. Average of parent's earnings per share and subsidiary's earnings per share E. Consolidated income divided by total number of shares outstanding for the parent and subsidiary


On January 1, 2009, Riney Co. owned 85% of the common stock of Garvin Co. On that date, Garvin's stockholders' equity accounts had the following balances:

The balance in Riney's Investment in Garvin Co. account was $569,500 and the non-controlling interest was $100,500. On January 1, 2009, Garvin Co. sold 10,000 shares of previously unissued common stock for $15 per share. Riney did not acquire any of these shares.

Hoyle - Chapter 06

9. What is the balance in Investment in Garvin Co. after the sale of the 10,000 shares of common stock? (Do not round calculation of new interest.) A. $569,500 B. $580,833 C. $558,167 D. $584,500 E. $615,000


10. What is the balance in Non-controlling Interest in Garvin Co. after the sale of the 10,000 shares of common stock? (Do not round calculation of new interest.) A. $100,500 B. $239,167 C. $261,833 D. $250,500 E. $205,000


11. Rojas Co. owned 7,000 shares (70%) of the outstanding 10%, $100 par preferred stock and 60% of the outstanding common stock of Brett Co. When Brett reported net income of $780,000, what was the non-controlling interest in the subsidiary's income? A. $234,000 B. $273,000 C. $302,000 D. $312,000 E. $284,000


Stoop Co. owned 80% of the common stock of Knight Co. Knight had 50,000 shares of $5 par value common stock and 2,000 shares of preferred stock outstanding. Each preferred share received an annual per share dividend of $10 and is convertible into four shares of common stock. Stoop did not own any of Knight's preferred stock. Knight also had 600 bonds outstanding, each of which is convertible into ten shares of common stock. Knight's annual after-tax interest expense for the bonds was $22,000. Stoop did not own any of Knight's bonds. Knight reported income of $300,000 for 2009.

Hoyle - Chapter 06

12. What was the amount of Knight's earnings that should be included in calculating consolidated diluted earnings per share? A. $300,000 B. $240,000 C. $257,600 D. $322,000 E. $201,250


13. Knight's diluted earnings per share (rounded) is calculated to be A. $5.62 B. $3.26 C. $3.11 D. $5.03 E. $4.28


14. Campbell Inc. owned all of Gordon Corp. For 2009, Campbell reported net income (without consideration of its investment in Gordon) of $280,000 while the subsidiary reported $112,000. The subsidiary had bonds payable outstanding on January 1, 2009, with a book value of $297,000. The parent acquired the bonds on that date for $281,000. During 2009, Campbell reported interest income of $31,000 while Gordon reported interest expense of $29,000. What is consolidated net income for 2009? A. $406,000 B. $374,000 C. $378,000 D. $410,000 E. $394,000


15. Vontkins Inc. owned all of Quasimota Co. The subsidiary had bonds payable outstanding on January 1, 2009, with a book value of $265,000. The parent acquired the bonds on that date for $288,000. Subsequently, Vontkins reported interest income of $25,000 in 2009 while Quasimota reported interest expense of $29,000. Consolidated financial statements were prepared for 2010. What adjustment would have been required for the retained earnings balance as of January 1, 2010? A. Reduction of $27,000 B. Reduction of $4,000 C. Reduction of $19,000 D. Reduction of $30,000 E. Reduction of $20,000


16. Tray Co. reported current earnings of $560,000 while paying $56,000 in cash dividends. Sparrish Co. earned $140,000 in net income and distributed $14,000 in dividends. Tray held a 70% interest in Sparrish for several years, an investment that it originally purchased at a price equal to the book value of the underlying net assets. Tray used the initial value method to account for these shares. On January 1, 2009, Sparrish acquired in the open market $70,000 of Tray's 8% bonds. The bonds had originally been issued several years ago at 92, reflecting a 10% effective interest rate. On the date of purchase, the book value of the bonds payable was $67,600. Sparrish paid $65,200 based on a 12% effective interest rate over the remaining life of the bonds. What is the non-controlling interest's share of the subsidiary's net income? A. $42,000 B. $37,800 C. $39,600 D. $40,070 E. $44,080


17. A company had common stock with a total par value of $18,000,000 and fair value of $62,000,000; and 7% preferred stock with a total par value of $6,000,000 and a fair value of $8,000,000. The book value of the company was $185,000,000. If 90% of this company's equity was acquired by another, what portion of the value would be assigned to the non-controlling interest? A. $18,500,000 B. $7,000,000 C. $6,200,000 D. $2,400,000 E. $6,929,400


18. Cadion Co. owned control over Knieval Inc. Cadion reported sales of $420,000 during 2009 while Knieval reported $280,000. Inventory costing $28,000 was transferred from Knieval to Cadion (upstream) during the year for $56,000. Of this amount, twenty-five percent was still in ending inventory at year's end. Total receivables on the consolidated balance sheet were $112,000 at the first of the year and $154,000 at year-end. No intercompany debt existed at the beginning or ending of the year. Using the direct approach, what is the consolidated amount of cash collected by the business combination from its customers? A. $602,000 B. $644,000 C. $686,000 D. $714,000 E. $592,000


19. Parker owned all of Odom Inc. Although the Investment in Odom Inc. account had a balance of $834,000, the subsidiary's 12,000 shares had an underlying book value of only $56 per share. On January 1, 2010, Odom issued 3,000 new shares to the public for $70 per share. How does this transaction affect the Investment in Odom Inc. account? A. It should be decreased by $141,120 B. It should be increased by $176,400 C. It should be increased by $48,000 D. It should be decreased by $128,400 E. It is not affected since the shares were sold to outside parties


These questions are based on the following information and should be viewed as independent situations. Popper Co. purchased 80% of the common stock of Cocker Co. on January 1, 2004, when Cocker had the following stockholders' equity accounts.

To acquire this interest in Cocker, Popper paid a total of $682,000 with any excess cost being allocated to goodwill, which has been measured for impairment annually and has not been determined to be impaired as of January 1, 2009. On January 1, 2009, Cocker reported a net book value of $1,113,000 before the following transactions were conducted. Popper uses the equity method to account for its investment in Cocker, thereby reflecting the change in book value of Cocker.

Hoyle - Chapter 06

20. On January 1, 2009, Cocker issued 10,000 additional shares of common stock for $35 per share. Popper acquired 8,000 of these shares. How would this transaction affect the additional paid-in capital of the parent company? A. Increase it by $28,700 B. Increase it by $16,800 C. $0 D. Increase it by $280,000 E. Increase it by $593,600


21. On January 1, 2009, Cocker issued 10,000 additional shares of common stock for $21 per share. Popper did not acquire any of this newly issued stock. How would this transaction affect the additional paid-in capital of the parent company? A. $0 B. Decrease it by $23,240 C. Decrease it by $68,250 D. Decrease it by $45,060 E. Decrease it by $43,680


22. On January 1, 2009, Cocker reacquired 8,000 of the outstanding shares of its own common stock for $34 per share. None of these shares belonged to Popper. How would this transaction have affected the additional paid-in capital of the parent company? A. $0 B. Decrease it by $32,900 C. Decrease it by $45,700 D. Decrease it by $49,400 E. Decrease it by $50,500


23. If newly issued debt is issued from a parent to its subsidiary, which of the following statements is false? A. Any premium or discount on bonds payable is exactly offset by a premium or discount on bond investment B. There will be $0 net gain or loss on the bond transaction C. Interest expense needs to be eliminated on the consolidated income statement D. Interest revenue needs to be eliminated on the consolidated income statement E. A net gain or loss on the bond transaction will be reported


24. The accounting problems encountered in consolidated intercompany debt transactions when the debt is acquired by an affiliate from an outside party include all of the following except: A. Both the investment and debt accounts have to be eliminated now and for each future consolidated financial statement despite containing differing balances B. Subsequent interest revenue/expense must be removed although these balances fail to agree in amount C. A gain or loss must be recognized by both parent and subsidiary companies D. Changes in the investment, debt, interest revenue and interest expense accounts occur constantly because of the amortization process E. The gain or loss on the retirement of the debt must be recognized by the business combination in the year the debt is acquired, even though this balance does not appear on the financial records of either company


25. Which of the following statements is true concerning the acquisition of existing debt of a consolidated affiliate in the year of the debt acquisition? A. Any gain or loss is deferred on a consolidated income statement B. Any gain or loss is recognized on a consolidated income statement C. Interest revenue on the affiliated debt is recognized on a consolidated income statement D. Interest expense on the affiliated debt is recognized on a consolidated income statement E. Consolidated retained earnings is adjusted for the difference between the purchase price and the carrying value of the bonds


26. Which of the following statements is false regarding the assignment of a gain or loss on intercompany bond transfer? A. Subsidiary net income is not affected by a gain on bond transaction B. Subsidiary net income is not affected by a loss on bond transaction C. Parent Company net income is not affected by a gain on bond transaction D. Parent Company net income is not affected by a loss on bond transaction E. Consolidated net income is not affected by a gain or loss on bond transaction


27. What would differ between a statement of cash flows for a consolidated company and an unconsolidated company using the indirect method? A. Parent's dividends would be subtracted as a financing activity B. Gain on sale of land would be deducted from net income C. Non-controlling interest in net income of subsidiary would be added to net income D. Proceeds from the sale of long-term investments would be added to investing activities E. Loss on sale of equipment would be added to net income


28. Which of the following statements is true for a consolidated statement of cash flows? A. Parent's dividends and subsidiary's dividends are deducted as a financing activity B. Only parent's dividends are deducted as a financing activity C. Parent's dividends and its share of subsidiary's dividends are deducted as a financing activity D. All of parent's dividends and non-controlling interest of subsidiary's dividends are deducted as a financing activity E. Neither parent's or subsidiary's dividends are deducted as a financing activity


29. In reporting consolidated earnings per share when there is a wholly owned subsidiary, which of the following statements is true? A. Parent company earnings per share equals consolidated earnings per share when the equity method is used B. Parent company earnings per share is equal to consolidated earnings per share when the initial value method is used C. Parent company earnings per share is equal to consolidated earnings per share when the partial equity method is used and acquisition-date fair value exceeds book value D. Parent company earnings per share is equal to consolidated earnings per share when the partial equity method is used and acquisition-date fair value is less than book value E. Preferred dividends are not deducted from net income for consolidated earnings per share


30. If a subsidiary issues additional common shares at below book value to outsiders, which of the following statements is true? A. The parent's additional paid-in capital will be increased B. The parent's investment in subsidiary will be increased C. The parent's retained earnings will be increased D. The parent's additional paid-in capital will be decreased E. The parent's retained earnings will be decreased


31. If a parent acquires all of the additional common shares issued by its subsidiary at greater than book value, which of the following statements is true? A. The investment in subsidiary will decrease B. Additional paid-in capital will decrease C. Retained earnings will increase D. The investment in subsidiary will increase E. No adjustment will be necessary


32. If a subsidiary reacquires its outstanding shares from outside ownership for more than book value, which of the following statements is true? A. Additional paid-in capital on the parent company's books will decrease B. Investment in subsidiary will increase C. Treasury stock on the parent's books will increase D. Treasury stock on the parent's books will decrease E. No adjustment is necessary


33. If a subsidiary issues a stock dividend, which of the following statements is true? A. Investment in subsidiary on the parent's books will increase B. Investment in subsidiary on the parent's books will decrease C. Additional paid-in capital on the parent's books will increase D. Additional paid-in capital on the parent's books will increase E. No adjustment is necessary


34. Stevens Company has had bonds payable of $10,000 outstanding for several years. On January 1, 2009, when there was an unamortized discount of $2,000 and a remaining life of 5 years. Its 80% owned subsidiary, Matthews Company, purchased the bonds in the open market for $11,000. The bonds pay 6% interest annually on December 31. The companies use the straight-line method to amortize interest revenue and expense. Compute the consolidated gain or loss on a consolidated income statement for 2009. A. $1,000 gain B. $1,000 loss C. $2,000 loss D. $3,000 loss E. $3,000 gain


35. Keenan Company has had bonds payable of $20,000 outstanding for several years. On January 1, 2009, when there was an unamortized premium of $2,000 with a remaining life of 10 years, Keenan's parent, Ross, Inc., purchased the bonds in the open market for $19,000. Keenan is a 90% owned subsidiary of Ross. The bonds pay 8% interest annually on December 31. The companies use the straight-line method to amortize interest revenue and expense. Compute the consolidated gain or loss on a consolidated income statement for 2009. A. $3,000 gain B. $3,000 loss C. $1,000 gain D. $1,000 loss E. $2,000 gain


On January 1, 2009, Nichols Company acquired 80% of Smith Company's common stock and 40% of its non-voting, cumulative preferred stock. The consideration transferred by Nichols was $1,200,000 for the common and $124,000 for the preferred. Any excess acquisition-date fair value over book value is considered goodwill. The capital structure of Smith immediately prior to the acquisition is:

Hoyle - Chapter 06

36. Determine the amount and account to be recorded for Nichols' investment in Smith. A. $1,324,000 for Investment in Smith B. $1,200,000 for Investment in Smith C. $1,200,000 for Investment in Smith's Common Stock and $124,000 for Investment in Smith's Preferred Stock D. $1,200,000 for Investment in Smith's Common Stock and $120,000 for Investment in Smith's Preferred Stock E. $1,448,000 for Investment in Smith's Common Stock


37. Compute the goodwill recognized in consolidation. A. $800,000 B. $310,000 C. $124,000 D. $0 E. $(196,000)


38. Compute the non-controlling interest in Smith at date of acquisition. A. $486,000 B. $480,000 C. $300,000 D. $150,000 E. $120,000


39. The consolidation entry at date of acquisition will include (referring to Smith): A. Debit Common stock $500,000 and debit Preferred stock $120,000 B. Debit Common stock $400,000 and debit Additional paid-in capital $160,000 C. Debit Common stock $500,000 and debit Preferred stock $300,000 D. Debit Common stock $500,000, debit Preferred stock $120,000 and debit Additional paid-in capital $200,000 E. Debit Common stock $400,000, debit Preferred stock $300,000, debit Additional paid-in capital $200,000 and debit Retained earnings $500,000


40. If Smith's net income is $100,000 in the year following the acquisition, A. The portion allocated to the common stock (residual amount) is $92,800 B. $10,800 preferred stock dividend will be subtracted from net income attributed to common stock in arriving at non-controlling interest in subsidiary income C. The non-controlling interest balance will be $27,200 D. The preferred stock dividend will be ignored in non-controlling interest in subsidiary net income because Nichols owns the non-controlling interest of preferred stock E. The non-controlling interest in subsidiary net income is $30,800


The following information has been taken from the consolidation worksheet of Graham Company and its 80% owned subsidiary, Stage Company. (1.) Graham reports a loss on sale of land of $5,000. The land cost Graham $20,000. (2.) Non-controlling interest in Stage's net income was $30,000. (3.) Graham paid dividends of $15,000. (4.) Stage paid dividends of $10,000. (5.) Excess acquisition-date fair value over book value was expensed by $6,000. (6.) Consolidated accounts receivable decreased by $8,000. (7.) Consolidated accounts payable decreased by $7,000.

Hoyle - Chapter 06

41. How is the loss on sale of land reported on the consolidated statement of cash flows? A. $20,000 added to net income as an operating activity B. $20,000 deducted from net income as an operating activity C. $15,000 deducted from net income as an operating activity D. $5,000 added to net income as an operating activity E. $5,000 deducted from net income as an operating activity


42. Where does the non-controlling interest in Stage's net income appear on a consolidated statement of cash flows? A. $30,000 added to net income as an operating activity on the consolidated statement of cash flows B. $30,000 deducted from net income as an operating activity on the consolidated statement of cash flows C. $30,000 increase as an investing activity on the consolidated statement of cash flows D. $30,000 decrease as an investing activity on the consolidated statement of cash flows E. Non-controlling interest in Stage's net income does not appear on a consolidated statement of cash flows


43. How will dividends be reported on consolidated statement of cash flows? A. $15,000 decrease as a financing activity B. $25,000 decrease as a financing activity C. $10,000 decrease as a financing activity D. $23,000 decrease as a financing activity E. $17,000 decrease as a financing activity


44. How is the amount of excess acquisition-date fair value over book value recognized on a consolidated statement of cash flows assuming the indirect method is used? A. It is ignored B. $6,000 subtracted from net income C. $4,800 subtracted from net income D. $6,000 added to net income E. $4,800 added to net income


45. Using the indirect method, where does the decrease in accounts receivable appear on a consolidated statement of cash flows? A. $8,000 increase to net income as an operating activity B. $8,000 decrease to net income as an operating activity C. $6,400 increase to net income as an operating activity D. $6,400 decrease to net income as an operating activity E. $8,000 increase as an investing activity


46. Using the indirect method, where does the decrease in accounts payable appear on a consolidated statement of cash flows? A. $7,000 increase to net income as an operating activity B. $7,000 decrease to net income as an operating activity C. $5,600 increase to net income as an operating activity D. $5,600 decrease to net income as an operating activity E. $7,000 increase as a financing activity


Webb Company owns 90% of Jones Company. The original balances presented for Jones and Webb as of January 1, 2009, are as follows:

Jones sells 20,000 shares of previously unissued shares of its common stock to outside parties for $10 per share.

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47. What is the adjusted book value of Jones after the sale of the shares? A. $200,000 B. $1,400,000 C. $1,280,000 D. $1,050,000 E. $1,440,000


48. What is the new percent ownership of Webb in Jones after the stock issuance? A. 75% B. 90% C. 80% D. 64% E. 60%


49. What adjustment is needed for Webb's investment in Jones account? A. $180,000 increase B. $180,000 decrease C. $30,000 increase D. $30,000 decrease E. No adjustment is necessary


Webb Company owns 90% of Jones Company. The original balances presented for Jones and Webb as of January 1, 2009 are as follows:

Assume Jones issues 20,000 new shares of its common stock for $15 per share. Of this total, Webb acquires 18,000 shares to maintain its 90% interest in Jones.

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50. What is the adjusted book value of Jones after the stock issuance? A. $1,500,000 B. $1,200,000 C. $1,350,000 D. $1,080,000 E. $1,335,000


51. After acquiring the additional shares, what adjustment is needed for Webb's investment in Jones account? A. $270,000 increase B. $270,000 decrease C. $27,000 increase D. $27,000 decrease E. No adjustment is necessary


Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and Chase as of January 1, 2009, are as follows:

Assume Chase issues 30,000 additional shares common stock solely to Ryan for $12 per share.

Hoyle - Chapter 06

52. What is the new percent ownership Ryan owns in Chase? A. 80% B. 87.5% C. 90% D. 75% E. 82.5%


53. What is the adjusted book value of Chase Company after the issuance of the shares? A. $608,000 B. $720,000 C. $680,000 D. $760,000 E. $400,000


54. After acquiring the additional shares, what adjustment is needed for Ryan's investment in Chase account? A. $70,000 increase B. $70,000 decrease C. $15,000 increase D. $15,000 decrease E. No adjustment is necessary


Ryan Company owns 80% of Chase Company. The original balances presented for Ryan and Chase as of January 1, 2009 are as follows:

Assume Chase reacquired 8,000 shares of its common stock from outsiders at $10 per share.

Hoyle - Chapter 06

55. What should the adjusted book value of Chase be after the treasury shares were purchased? A. $400,000 B. $480,000 C. $320,000 D. $336,000 E. $464,000


56. What is Ryan's percent ownership in Chase after the acquisition of the treasury shares (rounded)? A. 80% B. 95% C. 64% D. 76% E. 69%


57. When Ryan's new percent ownership is rounded to a whole number, what adjustment is needed for Ryan's investment in Chase account? A. $16,000 decrease B. $60,000 decrease C. $64,000 increase D. $64,000 decrease E. No adjustment is necessary


58. A special purpose entity can take all of the following forms except a A. Trust B. Partnership C. Joint venture D. Corporation E. Estate


59. All of the following are examples of variable interests except A. Guarantees of debt B. Stock options C. Lease residual value guarantees D. Participation rights E. Asset purchase options


60. All of the following are potential losses or returns of a special purpose entity except A. Entitles holder to residual profits B. Entitles holder to benefit from increases in asset fair value C. Entitles holder to receive shares of common stock D. If the special purpose entity cannot repay liabilities, honoring a debt guarantee will produce a loss E. If leased asset declines below the residual value, honoring the guarantee will produce a loss


61. Which of the following characteristics is not indicative of an enterprise qualifying as a primary beneficiary with a controlling financial interest in a variable interest entity? A. The direct ability to make decisions about the entity's activities B. The indirect ability to make decisions about the entity's activities C. The obligation to absorb the expected losses of the entity if they occur D. No ability to make decisions about the entity's activities E. The right to receive the expected residual returns of the entity if they occur


62. Which of the following statements is false concerning variable interest entities (VIEs)? A. Sometimes VIEs do not have independent management B. Most VIEs are established for valid business purposes C. VIEs may be formed as a source of low-cost financing D. VIEs have little need for voting stock E. A VIE cannot take the form of a trust, partnership, joint venture, corporation or estate


63. Which of the following statements is true concerning variable interest entities (VIEs)? 1) The role of the VIE equity investors can be fairly minor. 2) A VIE may be created specifically to benefit its sponsoring firm with low-cost financing. 3) VIE governing agreements often limit activities and decision making. 4) VIEs usually have a well-defined and limited business activity. A. 2 and 4 B. 2, 3 and 4 C. 1, 2 and 4 D. 1, 2 and 3 E. 1, 2, 3 and 4


64. Which of the following is not an indicator that requires a sponsoring firm to consolidate a variable interest entity (VIE) with its own financial statements? A. The sponsoring firm has the obligation to absorb the expected losses of the VIE if they occur B. The sponsoring firm receives risks and rewards of the VIE in proportion to equity ownership C. The sponsoring firm has the right to receive the expected residual returns of the VIE if they occur D. The sponsoring firm has direct ability to make decisions about the entity's activities E. The sponsoring firm has only indirect ability to make decisions about the entity's activities


65. A parent acquires all of a subsidiary's common stock and 60 percent of its preferred stock. The preferred stock has a cumulative dividend. No dividends are in arrears. How is the non-controlling interest in the subsidiary's net income assigned? A. Income is assigned as 40 percent of the value of the preferred stock, based on an allocation between common stock and preferred stock B. There is no allocation to the non-controlling interest because the parent owns 100% of the common stock and net income belongs to the residual owners C. Income is assigned as 40 percent of the preferred stock dividends D. Income is assigned as 40 percent of the subsidiary's income before preferred stock dividends E. Income is assigned as 40 percent of the subsidiary's income after subtracting preferred stock dividends


66. A parent acquires 70% of a subsidiary's common stock and 60 percent of its preferred stock. The preferred stock is non-cumulative. The current year's dividend was paid. How is the non-controlling interest in the subsidiary's net income assigned? A. Income is assigned as 40 percent of the value of the preferred stock, based on an allocation between common stock and preferred stock and their relative par values B. There is no allocation to the non-controlling interest because there are no dividends in arrears C. Income is assigned as 40 percent of the preferred stock dividends D. Income is assigned as 40 percent of the preferred stock dividends plus 30% of the subsidiary's income after subtracting all preferred stock dividends E. Income is assigned as 30 percent of the subsidiary's income after subtracting 60% of preferred stock dividends


67. Wolff Corporation owns 70 percent of the outstanding stock of Donald, Inc. During the current year, Donald made $75,000 in sales to Wolff. How does this transfer affect the consolidated statement of cash flows? A. Included as a decrease in the investing section B. Included as an increase in the operating section C. Included as a decrease in the operating section D. Included as an increase in the investing section E. Not reported in the consolidated statement of cash flows


68. Stahl Corporation owns 80 percent of the outstanding stock of MacDonald, Inc. During the current year, MacDonald made $125,000 in sales to Stahl. How does this transfer affect the consolidated statement of cash flows? A. Include 80 percent as a decrease in the investing section B. Include 100 percent as a decrease in the investing section C. Include 80 percent as a decrease in the operating section D. Include 100 percent as an increase in the operating section E. Not reported in the consolidated statement of cash flows


69. Pursley, Inc. owns 70 percent of Harry, Inc. The consolidated income statement for a year reports $50,000 Non-controlling Interest in Harry, Inc. Income. Harry paid dividends in the amount of $80,000 for the year. What are the effects of these transactions on the consolidated statement of cash flows for the year?



70. Goehring, Inc. owns 70 percent of Harry, Inc. The consolidated income statement for a year reports $40,000 Non controlling Interest in Harry, Inc. Income. Harry paid dividends in the amount of $100,000 for the year. What are the effects of these transactions on the consolidated statement of cash flows for the year? A. Increase in the financing section of $70,000 and decrease in the operating section of $30,000 B. Increase in the operating section of $70,000 and decrease in the financing section of $30,000 C. Increase in the operating section of $70,000 D. Decrease in the financing section of $30,000 E. No effects


Anderson, Inc. has owned 70% of its subsidiary, Arthur Corp., for several years. The balance sheets of Anderson, Inc. and Arthur Corp., are presented below:


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The balance sheets of Butler, Inc. and its 70 percent-owned subsidiary, Cassie Corp., are presented below:


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75. How do subsidiary stock warrants outstanding affect consolidated earnings per share? A. They will be included in both basic and diluted earnings per share if they are dilutive B. They will only be included in diluted earnings per share if they are dilutive C. They will only be included in basic earnings per share if they are dilutive D. Only the warrants owned by the parent company affect consolidated earnings per share E. Because the warrants are for subsidiary shares, there will be no effect on consolidated earnings per share


76. A parent company owns a controlling interest in a subsidiary whose stock has a book value of $27 per share. The last day of the year, the subsidiary issues new shares entirely to outside parties at $33 per share. The parent still holds control over the subsidiary. Which of the following statements is true? A. Since the sale was made at the end of the year, the parent's investment account is not affected B. Since the shares were sold for more than book value, the parent's investment account must be increased C. Since the shares were sold for more than book value, the parent's investment account must be decreased D. Since the shares were sold for more than book value but the parent did not buy any of the shares, the parent's investment account is not affected E. None of the above


77. A parent company owns a controlling interest in a subsidiary whose stock has a book value of $27 per share. The last day of the year, the subsidiary issues new shares entirely to outside parties at $25 per share. The parent still holds control over the subsidiary. Which of the following statements is true? A. Since the sale was made at the end of the year, the parent's investment account is not affected B. Since the shares were sold for less than book value, the parent's investment account must be increased C. Since the shares were sold for less than book value, the parent's investment account must be decreased D. Since the shares were sold for less than book value but the parent did not buy any of the shares, the parent's investment account is not affected E. None of the above


78. A parent company owns a 70 percent interest in a subsidiary whose stock has a book value of $27 per share. The last day of the year, the subsidiary issues new shares for $27 per share and the parent buys its 70 percent interest in the new shares. Which of the following statements is true? A. Since the sale was made at the end of the year, the parent's investment account is not affected B. Since the shares were sold for book value, the parent's investment account must be increased C. Since the shares were sold for book value, the parent's investment account must be decreased D. Since the shares were sold for book value and the parent bought 70 percent of the shares, the parent's investment account is not affected except for the price of the new shares E. None of the above


79. Carlson, Inc. owns 80 percent of Madrid, Inc. Carlson reports net income for 2009 (without consideration of its investment in Madrid, Inc.) of $1,500,000. For the same year, Madrid reports net income of $705,000. Carlson had bonds payable outstanding on January 1, 2009 with a carrying value of $1,200,000. Madrid acquired the bonds on January 3, 2009 for $1,090,000. During 2009, Carlson reported interest expense on the bonds in the amount of $96,000, while Madrid reported interest income of $94,000 for the same bonds. What is Carlson's share of consolidated net income? A. $2,064,000 B. $2,066,000 C. $2,176,000 D. $2,207,000 E. $2,317,000


80. Davidson, Inc. owns 70 percent of the outstanding voting stock of Ernest Company. On January 2, 2007, Davidson sold 8 percent bonds payable with a $5,000,000 face value maturing January 2, 2027 at a premium of $400,000. On January 1, 2009, Ernest acquired 30 percent of these same bonds at 97.6. Both companies use the straight-line method of amortization. What adjustment should be made to Davidson's 2010 beginning Retained Earnings as a result of this bond acquisition? A. $114,000 B. $122,000 C. $136,000 D. $144,000 E. $152,000


81. Franklin Corporation owns 90 percent of the outstanding voting stock of Georgia Company. On January 2, 2007, Georgia sold 7 percent bonds payable with a $5,000,000 face value maturing January 2, 2027 at a premium of $500,000. On January 1, 2009, Franklin acquired 20 percent of these same bonds at 97.66. Both companies use the straight-line method of amortization. What adjustment should be made to Franklin's 2010 beginning Retained Earnings as a result of this bond acquisition? A. $107,100 B. $113,400 C. $119,700 D. $144,000 E. $152,000


On January 1, 2009, Harrison Corporation spent $2,600,000 to acquire control over Involved, Inc. This price was based on paying $750,000 for 30 percent of Involved's preferred stock and $1,850,000 for 80 percent of its outstanding common stock. As of the date of the acquisition, Involved's stockholders' equity accounts were as follows:

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82. What is the total acquisition-date fair value of Involved? A. $2,600,000 B. $4,812,500 C. $3,062,500 D. $2,312,500 E. $3,250,000


83. Assuming Involved's accounts are correctly valued within the company's financial statements, what amount of goodwill should be recognized for the Investment in Involved? A. $100,000 B. $0 C. $200,000 D. $812,500 E. $2,112,500


84. Johnson, Inc. owns control over Kaspar, Inc. Johnson reports sales of $400,000 during 2009 while Kaspar reports $250,000. Kaspar transferred inventory during 2009 to Johnson at a price of $50,000. On December 31, 2009, 30 percent of the transferred goods are still in Johnson's inventory. Consolidated accounts receivable on January 1, 2009 was $120,000 and on December 31, 2009 is $130,000. Johnson uses the direct approach in preparing the statement of cash flows. How much is cash collected from customers on the consolidated statement of cash flows? A. $590,000 B. $610,000 C. $625,000 D. $635,000 E. $650,000


85. Parent Corporation loaned money to its subsidiary on a five-year note at the market interest rate. How would the note be accounted for in the consolidation process?

The note would be eliminated in the consolidation process with an entry debiting Notes Payable and crediting Notes Receivable.


86. What documents or other sources of information would be used to prepare a consolidated statement of cash flows?

The main source of information would be the consolidated income statement and the consolidated balance sheet.


87. Parent Corporation acquired some of its subsidiary's bonds on the bond market. The remaining life of the bonds was eight years and Parent expected to hold the bonds for the full eight years. How should the acquisition of the bonds have been viewed in the consolidation process?

In the consolidation process, the bonds would be treated as if they had been retired. A gain or loss would be recognized in the period in which they were acquired.


88. Parent Corporation acquired some of its subsidiary's bonds on the bond market, paying a price $40,000 higher than the bonds' carrying value. How should the difference between the purchase price and the carrying value be accounted for?

The $40,000 difference between the acquisition price and the carrying value would be recognized as a loss on early extinguishment of debt and would only be extraordinary under limited circumstances.


89. How are intercompany inventory transfers reflected on a consolidated statement of cash flows?

Intercompany inventory transfers are eliminated on the consolidation worksheet and therefore do not appear on the consolidated statement of cash flows.


90. Danbers Co. owned seventy-five percent of the common stock of Renz Corp. How does the issuance of a five percent stock dividend by Renz affect Danbers and the consolidation process?

A stock dividend would not influence Danbers' ownership percentage and would not alter the consolidation process.


91. During 2009, Parent Corporation purchased at book value some of the outstanding bonds of its subsidiary. How would this acquisition have been reflected in the consolidated statement of cash flows?

The cash paid for the bonds would be shown under cash flows from financing activities.


92. On January 1, 2009, Parent Corporation acquired a controlling interest in the voting common stock of Foxboro Co. At the same time, Parent purchased sixty percent of Foxboro's outstanding preferred stock. In preparing consolidated financial statements, how should the acquisition of the preferred stock be accounted for?

The investment in preferred stock account and Foxboro's preferred stock balance should be eliminated in consolidation so that only the parent's equity remains. No gain or loss should have been recognized.


93. When a company has preferred stock in its capital structure, what amount should be used to calculate non-controlling interest in the preferred stock of the subsidiary when the company is acquired as a subsidiary of another company?

The non-controlling interest should be reflected at its acquisition-date fair value.


94. Parent Corporation acquired some of its subsidiary's outstanding bonds. Why might Parent purchase the bonds, rather than the subsidiary buying its own bonds?

The purchase might have been made by Parent Corporation because it had more available cash than the subsidiary and there was a desire to bring the bonds in from the market. Also, in some cases, the contract signed when the bonds were issued might prevent the subsidiary from purchasing its own bonds or it might require the payment of a price that would be higher than the market value of the bonds.


95. Parent Corporation had just purchased some of its subsidiary's outstanding bonds. What items related to these bonds will have to be accounted for in the consolidation process?

For each period that the parent owns the bonds, the bonds must be eliminated on the consolidation worksheet. Eliminating the bonds requires the elimination of the parent's investment account, the portion of the bonds payable that the parent acquired, interest expense of the issuer and interest income of the investor. In the year in which the parent acquired the bonds, a gain or loss must have been recognized. Over the life of the bonds, retained earnings must be debited or credited for the amount or the gain or loss, as adjusted by the previous years' difference between interest expense and interest income.


96. Parent Corporation recently acquired some of its subsidiary's outstanding bonds, at an amount which required the recognition of a loss. In what ways could the loss be allocated? Which allocation would you recommend? Why?

The loss could be assigned to the subsidiary since it originally issued the bonds. The loss could be assigned to the parent since the parent acquired the bonds. A method could be applied to divide the loss between the parent and subsidiary. Finally, the loss could be assigned to the parent because the parent controls the combined entity. The loss should probably be assigned to the parent, without regard to who issued and who purchased the bonds, since the parent is responsible for decision making for the combined entity.


97. How does the existence of a non-controlling interest affect the preparation of a consolidated statement of cash flows?

The non-controlling interest's share of the subsidiary's income would not appear on the consolidated statement of cash flows since it does not involve a cash flow. Dividends paid to the non-controlling interest represent cash outflows for the combined entity and should be shown as cash flows from financing activities.


98. On January 1, 2009, Bast Co. had a net book value of $2,100,000 as follows:

Fisher Co. acquired all of the outstanding preferred shares for $148,000 and 60% of the common stock for $1,281,000. Fisher believed that one of Bast's buildings, with a twelve-year life, was undervalued on the company's financial records by $70,000. Required: What is the amount of goodwill to be recognized from this purchase?


Fargus Corporation owned 51% of the voting common stock of Sanatee, Inc. The parent's interest was acquired several years ago on the date that the subsidiary was formed. Consequently, no goodwill or other allocation was recorded in connection with the purchase price. On January 1, 2006, Sanatee sold $1,400,000 in ten-year bonds to the public at 108. The bonds pay a cash interest rate of 10% payable every December 31. Fargus acquired 40% of these bonds on January 1, 2008, for 95% of the face value. Both companies utilized the straight-line method of amortization.

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99. What balances would need to be considered in order to prepare the consolidation entry in connection with these intercompany bonds at December 31, 2008, the end of the first year of the intercompany investment? Prepare schedules to show numerical answers for balances that would be needed for the entry.




103. Skipen Corp. had the following stockholders' equity accounts:

The preferred stock was participating and is therefore considered to be equity. Vestin Corp. acquired 90% of this common stock for $2,250,000 and 70% of the preferred stock for $1,120,000. All of the subsidiary's assets and liabilities were determined to have fair values equal to their book values except for land which is undervalued by $130,000. Required: What amount was attributed to goodwill on the date of acquisition?


Thomas Inc. had the following stockholders' equity accounts as of January 1, 2009:

Kuried Co. acquired all of the voting common stock of Thomas on January 1, 2009, for $20,656,000. The preferred stock remained in the hands of outside parties and had a fair value of $3,060,000. A database valued at $656,000 was recognized and amortized over five years. During 2009, Thomas reported earning $630,000 in net income and paid $504,000 in total cash dividends. Kuried decided used the equity method to account for this investment.

Hoyle - Chapter 06

104. What is the amount of goodwill resulting from this acquisition?


105. What was the non-controlling interest's share of consolidated net income for this period?

All residual net income is attributed to the controlling interest of Kuried as sole owner of common stock of Thomas.


106. What is the controlling interest share of Thomas' net income for the year ended December 31, 2009?


107. What was Kuried's balance in the Investment in Thomas Inc. account as of December 31, 2009?


108. Prepare all consolidation entries for 2009.


109. Jet Corp. acquired all of the outstanding shares of Nittle Inc. on January 1, 2007, for $644,000 in cash. Of this price, $42,000 was attributed to equipment with a ten-year remaining useful life. Goodwill of $56,000 had also been identified. Jet applied the partial equity method so that income would be accrued each period based solely on the earnings reported by the subsidiary. On January 1, 2010, Jet reported $280,000 in bonds outstanding with a book value of $263,200. Nittle purchased half of these bonds on the open market for $135,800. During 2010, Jet began to sell merchandise to Nittle. During that year, inventory costing $112,000 was transferred at a price of $140,000. All but $14,000 (at selling price) of these goods were resold to outside parties by year's end. Nittle still owed $50,400 for inventory shipped from Jet during December. The following financial figures were for the two companies for the year ended December 31, 2010.

Required: Prepare a consolidation worksheet for the year ended December 31, 2010.

CONSOLIDATION WORKSHEET For the Year Ended 12/31/2010


110. Allen Co. held 80% of the common stock of Brewer Inc. and 40% of this subsidiary's convertible bonds. The following consolidated financial statements were for 2009 and 2010.

Additional Information: Bonds were issued during 2010 by the parent for cash. Amortization of a database acquired in the original combination amounted to $7,000 per year. A building with a cost of $84,000 but a $42,000 book value was sold by the parent for cash on May 11, 2010. Equipment was purchased by the subsidiary on July 23, 2010, using cash. Late in November 2010, the parent issued common stock for cash. During 2010, the subsidiary paid dividends of $14,000. Required: Prepare a consolidated statement of cash flows for this business combination for the year ending December 31, 2010. Either the direct method or the indirect method may be used.



Hoyle - Chapter 06


Prior to the issuance of the new shares, Panton owns a 90% interest in Glotfelty (18,000 shares out of 20,000 shares). The underlying book value of this investment is $540,000 ($600,000 x 90%). Subsequent to the issuance, total book value of the subsidiary will have risen by $200,000 (5,000 shares x $40) to $800,000. Panton's ownership, however, will only be 72% (18,000/25,000). The book value underlying Panton's investment is now $576,000 (72% of $800,000) so that a $36,000 increase must be recorded by the parent.



Difficulty: Easy

Hoyle - Chapter 06 #112



Hoyle - Chapter 06


Prior to the issuance of the new shares, Panton owns a 90% interest in Glotfelty (18,000 shares out of 20,000 shares). The underlying book value of this investment is $540,000 ($600,000 x 90%). Subsequent to the issuance, total book value of the subsidiary will have risen by $135,000 (5,000 shares x $27) to $735,000. Panton's ownership, however, will only be 72% (18,000/25,000). The book value underlying Panton's investment is now $529,200 (72% of $735,000) so that a $10,800 decrease must be recorded by the parent.



Difficulty: Easy


115. Panton, Inc. acquired 18,000 shares of Glotfelty Corp. several years ago. At the present time, Glotfelty is reporting the following stockholders' equity:

Glotfelty issues 5,000 shares of previously unissued stock to Panton for $35 per share. Required: Describe how this transaction would affect Panton's books.

The investment price is above the book value of the subsidiary. In this case, however, the additional amount has been paid by the parent company, not by an outside party. Because the payment is made by Panton, the investment account will need an adjustment after recording the cost of the new shares. A change in ownership is accounted for as an equity transaction when controlling interest is retained. Book value equivalency prior to new issuance (90% x $600,000) $540,000 Book value of subsidiary after new issuance ($600,000 + $175,000) $775,000 Panton's ownership (23,000 shares/25,000 shares) x 92% Book value equivalency after new issuance $713,000 Investment account after new shares recorded (540,000 + $175,000) $715,000 Adjustment: Decrease investment and additional paid-in capital ($713,000 - $715,000) = $(2,000)


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Student: ___________________________________________________________________________

1. Pigskin Co., a U.S. corporation, sold inventory on credit to a British company on April 8, 2008. Pigskin received payment of 35,000 British pounds on May 8, 2008. The exchange rate was $1 = £0.65 on April 8 and $1 = £0.70 on May 8. What amount of foreign exchange gain or loss should be recognized? (round to the nearest dollar) A. $10,500 loss B. $10,500 gain C. $1,750 loss D. $3,846 loss E. No gain or loss should be recognized

Norton Co., a U.S. corporation, sold inventory on December 1, 2008, with payment of 10,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows:

2. For what amount should Sales be credited on December 1? A. $5,500 B. $16,949 C. $18,182 D. $17,241 E. $16,667

3. What amount of foreign exchange gain or loss should be recorded on December 31? A. $300 gain B. $300 loss C. $0 D. $941 loss E. $941 gain

4. What amount of foreign exchange gain or loss should be recorded on January 30? A. $1,516 gain B. $1,516 loss C. $575 loss D. $500 loss E. $500 gain

Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May 8. Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is Brisco's fiscal year-end. The pertinent exchange rates were as follows:

5. For what amount should Brisco's Accounts Payable be credited on May 8? A. $2,500,000 B. $2,440,000 C. $1,600,000 D. $1,639,344 E. $1,666,667

6. How much Foreign Exchange Gain or Loss should Brisco record on May 31? A. $2,520,000 gain B. $20,000 gain C. $20,000 loss D. $80,000 gain E. $80,000 loss

7. How much US $ will it cost Brisco to finally pay the payable on June 7? A. $1,666,667 B. $2,440,000 C. $2,520,000 D. $2,500,000 E. $2,400,000

8. On June 1, CamCo received a contract to sell inventory for ×500,000. The sale would take place in 90 days. CamCo immediately signed a 90-day forward contract to sell the yen as soon as they are received. The spot rate on June 1 was $1 = ×240 and the 90-day forward rate was $1 = ×234. At what amount would CamCo record the Forward Contract on June 1? A. $2,083 B. $0 C. $2,110 D. $2,532 E. $2,137

9. Belsen purchased inventory on December 1, 2008. Payment of 200,000 stickles was to be made in sixty days. Also on December 1, Belsen signed a contract to purchase §200,000 in sixty days. The spot rate was $1 = §2.80 and the 60-day forward rate was $1 = §2.60. On December 31, the spot rate was $1 = §2.90 and the 30-day forward rate was $1 = §2.62. Assume an annual interest rate of 12% and a fair value hedge. The present value for one month at 12% is .9901. In the journal entry to record the establishment of a forward exchange contract, at what amount should the Forward Contract account be recorded on December 1? A. $71,428.57 B. $76,923.08 C. $5,549.51 D. $587.20 E. $0, since there is no cost, there is no value for the contract at this date

10. Meisner Co. ordered parts costing §100,000 for a foreign supplier on May 12 when the spot rate was $.24 per stickle. A one-month forward contract was signed on that date to purchase §100,000 at a forward rate of $.25 per stickle. On June 12, when the parts were received and payment was made, the spot rate was $.28 per stickle. At what amount should inventory be reported? A. $0 B. $28,000 C. $24,200 D. $25,000 E. $2,000

Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2008, with payment of 10 million Korean won to be received on January 15, 2009. The following exchange rates applied:

11. Assuming a forward contract was not entered into, what would be the net impact on Car Corp.'s 2008 income statement related to this transaction? A. $500 (gain) B. $500 (loss) C. $200 (gain) D. $200 (loss) E. $- 0 -

12. Assuming a forward contract was entered into, what would be the net impact on Car Corp.'s 2008 income statement related to this transaction? Assume an annual interest rate of 12% and a fair value hedge. The present value for one month at 12% is .9901. A. $700 (gain) B. $700 (loss) C. $300 (gain) D. $300 (loss) E. $295.05 (loss)

13. Assuming a forward contract was entered into on December 16, what would be the net impact on Car Corp.'s 2009 income statement related to this transaction? A. $500 (gain) B. $100 (loss) C. $200 (gain) D. $200 (loss) E. $0

14. Mills Inc. had a receivable from a foreign customer that is due in the local currency of the customer (stickles). On December 31, 2008, this receivable for §200,000 was correctly included in Mills' balance sheet at $132,000. When the receivable was collected on February 15, 2009, the U.S. dollar equivalent was $144,000. In Mills' 2009 consolidated income statement, how much should have been reported as a foreign exchange gain? A. $0 B. $36,000 C. $48,000 D. $10,000 E. $12,000

15. A spot rate may be defined as A. The price a foreign currency can be purchased or sold today B. The price today at which a foreign currency can be purchased or sold in the future C. The forecasted future value of a foreign currency D. The U.S. dollar value of a foreign currency E. The Euro value of a foreign currency

16. The forward rate may be defined as A. The price a foreign currency can be purchased or sold today B. The price today at which a foreign currency can be purchased or sold in the future C. The forecasted future value of a foreign currency D. The U.S. dollar value of a foreign currency E. The Euro value of a foreign currency

17. Which statement is true regarding a foreign currency option? A. A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future B. A foreign currency option gives the holder the obligation only sell foreign currency in the future C. A foreign currency option gives the holder the obligation to only buy foreign currency in the future D. A foreign currency option gives the holder the right but not the obligation to buy or sell foreign currency in the future E. A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future at the spot rate

18. A U.S. company sells merchandise to a foreign company denominated in U.S. dollars. Which of the following statements is true? A. If the foreign currency appreciates, a foreign exchange gain will result B. If the foreign currency depreciates, a foreign exchange gain will result C. No foreign exchange gain or loss will result D. If the foreign currency appreciates, a foreign exchange loss will result E. If the foreign currency depreciates, a foreign exchange loss will result

19. A U.S. company sells merchandise to a foreign company denominated in the foreign currency. Which of the following statements is true? A. If the foreign currency appreciates, a foreign exchange gain will result B. If the foreign currency depreciates, a foreign exchange gain will result C. No foreign exchange gain or loss will result D. If the foreign currency appreciates, a foreign exchange loss will result E. Any gain or loss will be included in comprehensive income

20. A U.S. company buys merchandise from a foreign company denominated in U.S. dollars. Which of the following statements is true? A. If the foreign currency appreciates, a foreign exchange gain will result B. If the foreign currency depreciates, a foreign exchange gain will result C. No foreign exchange gain or loss will result D. If the foreign currency appreciates, a foreign exchange loss will result E. Any gain or loss will be included in comprehensive income

21. A U.S. company buys merchandise from a foreign company denominated in the foreign currency. Which of the following statements is true? A. If the foreign currency appreciates, a foreign exchange gain will result B. If the foreign currency depreciates, a foreign exchange loss will result C. No foreign exchange gain or loss will result D. If the foreign currency appreciates, a foreign exchange loss will result E. Any gain or loss will be included in comprehensive income

22. SFAS 133 provides guidance for hedges of all the following sources of foreign exchange risk except A. Recognized foreign currency denominated assets and liabilities B. Unrecognized foreign currency firm commitments C. Forecasted foreign currency denominated transactions D. Net investment in foreign operations E. Deferred foreign currency gains and losses

23. All of the following data may be needed to determine the fair value of a forward contract at any point in time except A. The forward rate when the forward contract was entered into B. The current forward rate for a contract that matures on the same date as the forward contract entered into C. The future spot rate D. A discount rate E. The company's incremental borrowing rate

24. A forward contract may be used for which of the following? 1) A fair value hedge of an asset. 2) A cash flow hedge of an asset. 3) A fair value hedge of a liability. 4) A cash flow hedge of a liability. A. 1 and 3 B. 2 and 4 C. 1 and 2 D. 1, 3 and 4 E. 1, 2, 3 and 4

25. A company has a discount on a forward contract for an asset. How is the discount recognized over the life of the contract? A. It is charged to a deferred credit B. It is charged to a deferred asset C. It is charged to accumulated other comprehensive income D. It increases sales E. It decreases sales

26. A speculative derivative would be similar to which type of hedge? A. An option designated as a cash flow hedge B. An option designated as a fair value hedge C. A forward contract designated as a cash flow hedge D. A forward contract designated as a fair value hedge E. A speculative option not designated

27. Which of the following statements is true concerning hedge accounting? A. Hedges of foreign currency firm commitments are used for future sales only B. Hedges of foreign currency firm commitments are used for future purchases only C. Hedges of foreign currency firm commitments are used for current purchases or sales D. Hedges of foreign currency firm commitments are used for future sales or purchases E. Hedges of foreign currency firm commitments are speculative in nature

28. All of the following hedges are used for future purchase/sale transactions except A. Forward contracts used as a fair value hedge of a firm commitment B. Options used as a fair value hedge of a firm commitment C. Hedge of a foreign currency denominated asset D. Forward cash flow hedges of a forecasted transaction E. Forward contracts used to hedge a foreign currency denominated liability

On December 1, 2007, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Spain for 150,000 euro. Payment is due on February 1, 2008. Keenan entered into a forward exchange contract on December 1, 2007, to deliver 150,000 euro on February 1, 2008 for $.97. Keenan chose to use a foreign currency option to hedge this foreign currency asset designated as a cash flow hedge. Relevant exchange rates follow:

29. Compute the value of the foreign currency option at December 1, 2007. A. $6,000 B. $4,500 C. $3,000 D. $7,500 E. $1,500


31. Compute the value of the foreign currency option at February 1, 2008. A. $6,000 B. $4,500 C. $3,000 D. $7,500 E. $1,500

32. Compute the U.S. dollars received on February 1, 2008. A. $138,000 B. $136,500 C. $145,500 D. $141,000 E. $142,500

33. Which of the following approaches is used in the United States in accounting for foreign currency transactions? A. One-transaction perspective; defer foreign exchange gains and losses B. Two-transaction perspective; accrue foreign exchange gains and losses C. Three-transaction perspective; defer foreign exchange gains and losses D. One-transaction perspective; accrue foreign exchange gains and losses E. Two-transaction perspective; defer foreign exchange gains and losses

34. When a U.S. company purchases parts from a foreign company, which of the following will result in no foreign exchange gain or loss? A. The transaction is denominated in U.S. dollars B. The transaction resulted in an extraordinary gain C. The transaction resulted in an extraordinary loss D. The foreign currency appreciated in value relative to the U.S. dollar E. The foreign currency depreciated in value relative to the U.S. dollar

35. Alpha, Inc., a U.S. company, had a receivable from a customer that was denominated in pesos. On December 31, 2008, this receivable for 75,000 pesos was correctly included in Alpha's balance sheet at $8,000. The receivable was collected on March 2, 2009, when the U.S. equivalent was $6,900. How much foreign exchange gain or loss will Alpha record on the income statement for the year ended December 31, 2009? A. $1,100 loss B. $1,100 gain C. $6,900 loss D. $6,900 gain E. $8,000 gain

On April 1, 2007, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign lender by signing an interest-bearing note due April 1, 2008. The dollar value of the loan was as follows:

36. How much foreign exchange gain or loss should be included in Shannon's 2007 income statement? A. $3,000 gain B. $3,000 loss C. $6,000 gain D. $6,000 loss E. $7,000 gain

37. How much foreign exchange gain or loss should be included in Shannon's 2008 income statement? A. $1,000 gain B. $1,000 loss C. $2,000 gain D. $2,000 loss E. $8,000 loss

38. Angela, Inc., a U.S. company, had a euro receivable from exports to Spain and a British pound payable resulting from imports from England. Angela recorded foreign exchange gain related to both its euro receivable and pound payable. Did the foreign currencies increase or decrease in dollar value from the date of the transaction to the settlement date?


39. Frankfurter Company, a U.S. company, had a ruble receivable from exports to Russia and a euro payable resulting from imports from Italy. Frankfurter recorded foreign exchange loss related to both its ruble receivable and euro payable. Did the foreign currencies increase or decrease in dollar value from the date of the transaction to the settlement date?


Parker Corp., a U.S. company, had the following foreign currency transactions during 2009: (1.) Purchased merchandise from a foreign supplier on July 5, 2009 for the U.S. dollar equivalent of $80,000 and paid the invoice on August 3, 2009 at the U.S. dollar equivalent of $82,000. (2.) On October 1, 2009 borrowed the U.S. dollar equivalent of $872,000 evidenced by a non-interest-bearing note payable in euros on October 1, 2009. The U.S. dollar equivalent of the note amount was $860,000 on December 31, 2009 and $881,000 on October 1, 2010.

40. What amount should be included as a foreign exchange gain or loss from the two transactions for 2009? A. $2,000 loss B. $2,000 gain C. $10,000 gain D. $14,000 loss E. $14,000 gain

41. What amount should be included as a foreign exchange gain or loss from the two transactions for 2010? A. $9,000 loss B. $9,000 gain C. $11,000 loss D. $21,000 loss E. $21,000 gain

Winston Corp., a U.S. company, had the following foreign currency transactions during 2008: (1.) Purchased merchandise from a foreign supplier on July 16, 2008 for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2008 at the U.S. dollar equivalent of $54,000. (2.) On October 15, 2008 borrowed the U.S. dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15, 2008. The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2008 and $299,000 on October 15, 2009.

42. What amount should be included as a foreign exchange gain or loss from the two transactions for 2008? A. $9,000 loss B. $9,000 gain C. $11,000 loss D. $13,000 gain E. $14,000 gain

43. What amount should be included as a foreign exchange gain or loss from the two transactions for 2009? A. $1,000 loss B. $1,000 gain C. $2,000 loss D. $4,000 gain E. $4,000 loss

44. Williams, Inc., a U.S. company, has a Japanese yen account receivable resulting from an export sale on March 1 to a customer in Japan. The exporter signed a forward contract on March 1 to sell yen and designated it as a cash flow hedge of a recognized receivable. The spot rate was $.0094 and the forward rate was $.0095. Which of the following did the U.S. exporter report in net income? A. Discount revenue B. Premium revenue C. Discount expense D. Premium expense E. Both a discount revenue and a premium expense

45. Larson Company, a U.S. company, has an India rupee account receivable resulting from an export sale on September 7 to a customer in India. Larson signed a forward contract on September 7 to sell rupees and designated it as a cash flow hedge of a recognized receivable. The spot rate was $.023 and the forward rate was $.021. Which of the following did the U.S. exporter report in net income? A. Discount revenue B. Premium revenue C. Discount expense D. Premium expense E. Both a discount revenue and a premium expense

46. Primo Inc., a U.S. company, ordered parts costing 100,000 rupee from a foreign supplier on July 7 when the spot rate was $.025 per rupee. A one-month forward contract was signed on that date to purchase 100,000 rupee at a rate of $.027. The forward contract is properly designated as a fair value hedge of the 100,000 rupee firm commitment. On August 7, when the parts are received, the spot rate is $.028. At what amount should the parts inventory be carried on Primo's books? A. $2,000 B. $2,100 C. $2,500 D. $2,700 E. $2,800

47. Lawrence Company, a U.S. company, ordered parts costing 1,000,000 Thailand bahts from a foreign supplier on July 7 when the spot rate was $.025 per baht. A one-month forward contract was signed on that date to purchase 1,000,000 bahts at a rate of $.027. The forward contract is properly designated as a fair value hedge of the 1,000,000 baht firm commitment. On August 7, when the parts are received, the spot rate is $.028. What is the amount of accounts payable that will be paid at this date? A. $20,000 B. $20,100 C. $25,000 D. $27,000 E. $28,000

48. On December 1, 2009, Joseph Company, a U.S. company, entered into a three-month forward contract to purchase 50,000 pesos on March 1, 2010. The following U.S. dollar per peso exchange rates apply:

Joseph's incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent is .9803. Which of the following is included in Joseph's December 31, 2009 balance sheet for the forward contract? A. $5,146.58 asset B. $5,146.58 liability C. $500 liability D. $490.15 asset E. $490.15 liability

49. On April 1, Quality Corporation, a U.S. company, expects to order merchandise from a German supplier in three months, denominating the transaction in euros. On April 1, the spot rate is $1.19 per euro and Quality enters into a three-month forward contract to purchase 400,000 euros at a rate of $1.20. At the end of three months, the spot rate is $1.21 per euro and Quality orders and receives the merchandise, paying 400,000 euros. What are the effects on net income from these transactions? A. $4,000 Discount Expense plus a $4,000 negative Adjustment to Net Income when the merchandise is received B. $4,000 Discount Expense plus an $8,000 negative Adjustment to Net Income when the merchandise is received C. $4,000 Premium Expense plus a $4,000 negative Adjustment to Net Income when the merchandise is received D. $8,000 Premium Expense plus a $4,000 positive Adjustment to Net Income when the merchandise is received E. $8,000 Discount Expense plus an $8,000 positive Adjustment to Net Income when the merchandise is received

50. On August 31, Ram Corporation, a U.S. company, expects to order merchandise from a German supplier in three months, denominating the transaction in euros. On August 31, the spot rate is $1.19 per euro and Quality enters into a three-month forward contract to purchase 600,000 euros at a rate of $1.20. At the end of three months, the spot rate is $1.21 per euro and Ram orders and receives the merchandise, paying 600,000 euros. What are the effects on net income from these transactions? A. $6,000 Discount Expense plus a $6,000 negative Adjustment to Net Income when the merchandise is sold B. $6,000 Discount Expense plus a $12,000 negative Adjustment to Net Income when the merchandise is sold C. $6,000 Premium Expense plus a $6,000 negative Adjustment to Net Income when the merchandise is sold D. $12,000 Premium Expense plus a $6,000 positive Adjustment to Net Income when the merchandise is sold E. $12,000 Discount Expense plus an $12,000 positive Adjustment to Net Income when the merchandise is sold

51. Woolsey Corporation, a U.S. company, expects to order goods from a British supplier at a price of 250,000 pounds, with delivery and payment to be made on October 24. On July 24, Woolsey purchased a three-month call option for 250,000 British pounds and designated this option as a cash flow hedge of a forecasted foreign currency transaction. The following exchange rates apply:

What amount will Woolsey include as an option expense in net income during the period July 24 to October 24? A. $4,000 B. $5,000 C. $10,000 D. $12,000 E. $14,000

52. Atherton, Inc., a U.S. company, expects to order goods from a foreign supplier at a price of 100,000 lira, with delivery and payment to be made on April 17. On January 17, Atherton purchased a three-month call option on 100,000 lira and designated this option as a cash flow hedge of a forecasted foreign currency transaction. The following exchange rates apply:

What amount will Atherton include as an option expense in net income during the period January 17 to April 17? A. $4,000 B. $4,260 C. $4,340 D. $5,000 E. $5,260

On May 1, 2007, Mosby Company received an order to sell a machine to a customer in Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was received on March 1, 2008. On May 1, 2007, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2008 at a price of $190,000. Mosby properly designates the option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had a fair value of $3,200 on December 31, 2007. The following spot exchange rates apply:

Mosby's incremental borrowing rate is 12 percent and the present value factor for two months at a 12 percent annual rate is .9803.

53. What was the net impact on Mosby's 2007 income as a result of this fair value hedge of a firm commitment? A. $1,760.60 decrease B. $1,960.60 decrease C. $1,000.00 decrease D. $1,760.60 increase E. $1,960.60 increase

54. What was the net impact on Mosby's 2008 income as a result of this fair value hedge of a firm commitment? A. $1,760.60 decrease B. $2,500 increase C. $2,500 decrease D. $188,760.60 increase E. $188,760.60 decrease

55. What was the net increase or decrease in cash flow from having purchased the foreign currency option to hedge this exposure to foreign exchange risk? A. $0 B. $9,000 decrease C. $9,000 increase D. $2,000 increase E. $2,000 decrease

On March 1, 2007, Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds. The machine was shipped and payment was received on March 1, 2008. On March 1, 2007, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2008 at a price of $380,000. Mattie properly designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and had a fair value of $2,200 on December 31, 2007. The following spot exchange rates apply:

Mattie's incremental borrowing rate is 12 percent and the present value factor for two months at a 12 percent annual rate is .9803.

56. What was the net impact on Mattie's 2007 income as a result of this fair value hedge of a firm commitment? A. $1,660.40 decrease B. $1,760.60 decrease C. $2,240.40 decrease D. $1,660.40 increase E. $2,240.60 increase

57. What was the net impact on Mattie's 2008 income as a result of this fair value hedge of a firm commitment? A. $379,760.60 decrease B. $8,360.60 increase C. $8,360.60 decrease D. $4,390.40 decrease E. $379,760.60 increase

58. What was the net increase or decrease in cash flow from having purchased the foreign currency option to hedge this exposure to foreign exchange risk? A. $0 B. $10,000 increase C. $10,000 decrease D. $20,000 increase E. $20,000 decrease

On October 1, 2007, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2008, at a price of 100,000 British pounds. On October 1, 2007, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2007, the option has a fair value of $1,600. The following spot exchange rates apply:

59. What journal entry should Eagle prepare on October 1, 2007?


60. What journal entry should Eagle prepare on December 31, 2007?


61. What is the amount of option expense for 2008 from these transactions? A. $1,000 B. $1,600 C. $2,500 D. $2,600 E. $0

62. What is the amount of Adjustment to Accumulated Other Comprehensive Income for 2008 from these transactions? A. $1,000 B. $1,600 C. $1,800 D. $2,000 E. $2,600

63. What is the amount of Cost of Goods Sold for 2008 as a result of these transactions? A. $200,000 B. $195,000 C. $201,000 D. $202,600 E. $203,000

64. What is the 2008 effect on net income as a result of these transactions? A. $195,000 B. $201,600 C. $201,000 D. $202,600 E. $203,000

65. Yelton Co. just sold inventory for 80,000 lira, which Yelton will collect in sixty days. Briefly describe a hedging transaction Yelton could engage in to reduce its risk of unfavorable exchange rates.

66. Where can you find exchange rates between the U.S. dollar and most foreign currencies?

67. What is meant by the spot rate?

68. How is the fair value of a Forward Contract determined under SFAS 133?

69. What is the major assumption underlying the one-transaction perspective?

70. What is meant by the term hedging?

71. How does a foreign currency forward contract differ from a foreign currency option?

72. What factors create a foreign exchange gain?

73. What happens when a U.S. company purchases goods denominated in a foreign currency and the foreign currency depreciates?

74. What happens when a U.S. company purchases goods denominated in a foreign currency and the foreign currency appreciates?

75. What happens when a U.S. company sells goods denominated in a foreign currency and the foreign currency depreciates?

76. What happens when a U.S. company sells goods denominated in a foreign currency and the foreign currency appreciates?

77. Gaw Produce Co. purchased inventory from a Japanese company on December 18, 2009. Payment of ×400,000 was due on January 18, 2010. Exchange rates between the dollar and the yen were as follows:

Required: Prepare all journal entries for Gaw Produce Co. in connection with the purchase and payment.

78. Old Colonial Corp. (a U.S. company) made a sale to a foreign customer on September 15, 2009, for 100,000 stickles. Payment was received on October 15, 2009. The following exchange rates applied:

Required: Prepare all journal entries for Old Colonial Corp. in connection with this sale assuming that the company closes its books on September 30 to prepare interim financial statements.

Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2009. The appropriate exchange rates during 2009 were as follows:

The appropriate exchange rates during 2009 were as follows:

79. Prepare all journal entries in U.S. dollars along with any December 31, 2009 adjusting entries. Coyote uses a perpetual inventory system.

80. What amount will Coyote Corp. report on its 2009 financial statements for Inventory?

81. What amount will Coyote Corp. report on its 2009 financial statements for Cost of Goods Sold?

82. What amount will Coyote Corp. report on its 2009 financial statements for Sales?

83. What amount will Coyote Corp. report on its 2009 financial statements for Accounts Receivable?

84. What amount will Coyote Corp. report on its 2009 financial statements for Accounts Payable?

85. The beginning balance of cash was 50,000 pesos on January 1, 2009, translated at $.18 = $1. What amount will Coyote Corp. report on its 2009 financial statements for Cash?

On November 10, 2008, King Co. sold inventory to a customer in a foreign country. King agreed to accept 96,000 local currency units (LCU) in full payment for this inventory. Payment was to be made on February 1, 2009. On December 1, 2008, King entered into a forward exchange contract wherein 96,000 LCU would be delivered to a currency broker in two months. The two month forward exchange rate on that date was 1 LCU = $.30. The spot rates and forward rates on various dates were as follows:

The company's borrowing rate is 12%. The present value factor for one month is .9901.

86. (A.) Assume this hedge is designated as a cash flow hedge. Prepare the journal entries relating to the transaction and the forward contract. (B.) Compute the effect on 2008 net income. (C.) Compute the effect on 2009 net income.

87. (A.) Assume this hedge is designated as a fair value hedge. Prepare the journal entries relating to the transaction and the forward contract. (B.) Compute the effect on 2008 net income. (C.) Compute the effect on 2009 net income.

On October 1, 2009, a forward exchange contract was acquired whereby Jarvis Co. was to pay 100,000 LCU in four months (on February 1, 2010) and receive $78,000 in U.S. dollars. The spot and forward rates for the LCU were as follows:


88. Assuming this is a cash flow hedge, prepare journal entries for this sales transaction and forward contract.

89. Assuming this is a fair value hedge, prepare journal entries for this sales transaction and forward contract.

90. On October 31, 2008, Darling Company negotiated a two-year 100,000 franc loan from a foreign bank at an interest rate of 3 percent per year. Interest payments are made annually on October 31 and the principal will be repaid on October 31, 2010. Darling prepares U.S.-dollar financial statements and has a December 31 year-end. Prepare all journal entries related to this foreign currency borrowing assuming the following:

91. For each of the following situations, select the best answer concerning accounting for foreign currency transactions: (A) Results in a foreign exchange gain. (B) Results in a foreign exchange loss. (C) No foreign exchange gain or loss. _____1. Export sale by a U.S. company denominated in dollars, foreign currency of buyer appreciates. _____2. Export sale by a U.S. company denominated in foreign currency, foreign currency of buyer appreciates. _____3. Import purchase by a U.S. company denominated in foreign currency, foreign currency of buyer appreciates. _____4. Import purchase by a U.S. company denominated in dollars, foreign currency of buyer appreciates. _____5. Import purchase by a U.S. company denominated in foreign currency, foreign currency of buyer depreciates. _____6. Import purchase by a U.S. company denominated in dollars, foreign currency of buyer depreciates. _____7. Export sale by a U.S. company denominated in dollars, foreign currency of buyer depreciates. _____8. Export sale by a U.S. company denominated in foreign currency, foreign currency of buyer depreciates.

ch7 Key

1. Pigskin Co., a U.S. corporation, sold inventory on credit to a British company on April 8, 2008. Pigskin received payment of 35,000 British pounds on May 8, 2008. The exchange rate was $1 = £0.65 on April 8 and $1 = £0.70 on May 8. What amount of foreign exchange gain or loss should be recognized? (round to the nearest dollar) A. $10,500 loss B. $10,500 gain C. $1,750 loss D. $3,846 loss E. No gain or loss should be recognized


Norton Co., a U.S. corporation, sold inventory on December 1, 2008, with payment of 10,000 British pounds to be received in sixty days. The pertinent exchange rates were as follows:

Hoyle - Chapter 07

2. For what amount should Sales be credited on December 1? A. $5,500 B. $16,949 C. $18,182 D. $17,241 E. $16,667


3. What amount of foreign exchange gain or loss should be recorded on December 31? A. $300 gain B. $300 loss C. $0 D. $941 loss E. $941 gain


4. What amount of foreign exchange gain or loss should be recorded on January 30? A. $1,516 gain B. $1,516 loss C. $575 loss D. $500 loss E. $500 gain


Brisco Bricks purchases raw material from its foreign supplier, Bolivian Clay, on May 8. Payment of 2,000,000 foreign currency units (FC) is due in 30 days. May 31 is Brisco's fiscal year-end. The pertinent exchange rates were as follows:

Hoyle - Chapter 07

5. For what amount should Brisco's Accounts Payable be credited on May 8? A. $2,500,000 B. $2,440,000 C. $1,600,000 D. $1,639,344 E. $1,666,667


6. How much Foreign Exchange Gain or Loss should Brisco record on May 31? A. $2,520,000 gain B. $20,000 gain C. $20,000 loss D. $80,000 gain E. $80,000 loss


7. How much US $ will it cost Brisco to finally pay the payable on June 7? A. $1,666,667 B. $2,440,000 C. $2,520,000 D. $2,500,000 E. $2,400,000


8. On June 1, CamCo received a contract to sell inventory for ×500,000. The sale would take place in 90 days. CamCo immediately signed a 90-day forward contract to sell the yen as soon as they are received. The spot rate on June 1 was $1 = ×240 and the 90-day forward rate was $1 = ×234. At what amount would CamCo record the Forward Contract on June 1? A. $2,083 B. $0 C. $2,110 D. $2,532 E. $2,137


9. Belsen purchased inventory on December 1, 2008. Payment of 200,000 stickles was to be made in sixty days. Also on December 1, Belsen signed a contract to purchase §200,000 in sixty days. The spot rate was $1 = §2.80 and the 60-day forward rate was $1 = §2.60. On December 31, the spot rate was $1 = §2.90 and the 30-day forward rate was $1 = §2.62. Assume an annual interest rate of 12% and a fair value hedge. The present value for one month at 12% is .9901. In the journal entry to record the establishment of a forward exchange contract, at what amount should the Forward Contract account be recorded on December 1? A. $71,428.57 B. $76,923.08 C. $5,549.51 D. $587.20 E. $0, since there is no cost, there is no value for the contract at this date


10. Meisner Co. ordered parts costing §100,000 for a foreign supplier on May 12 when the spot rate was $.24 per stickle. A one-month forward contract was signed on that date to purchase §100,000 at a forward rate of $.25 per stickle. On June 12, when the parts were received and payment was made, the spot rate was $.28 per stickle. At what amount should inventory be reported? A. $0 B. $28,000 C. $24,200 D. $25,000 E. $2,000


Car Corp. (a U.S.-based company) sold parts to a Korean customer on December 16, 2008, with payment of 10 million Korean won to be received on January 15, 2009. The following exchange rates applied:

Hoyle - Chapter 07

11. Assuming a forward contract was not entered into, what would be the net impact on Car Corp.'s 2008 income statement related to this transaction? A. $500 (gain) B. $500 (loss) C. $200 (gain) D. $200 (loss) E. $- 0 -


12. Assuming a forward contract was entered into, what would be the net impact on Car Corp.'s 2008 income statement related to this transaction? Assume an annual interest rate of 12% and a fair value hedge. The present value for one month at 12% is .9901. A. $700 (gain) B. $700 (loss) C. $300 (gain) D. $300 (loss) E. $295.05 (loss)


13. Assuming a forward contract was entered into on December 16, what would be the net impact on Car Corp.'s 2009 income statement related to this transaction? A. $500 (gain) B. $100 (loss) C. $200 (gain) D. $200 (loss) E. $0


14. Mills Inc. had a receivable from a foreign customer that is due in the local currency of the customer (stickles). On December 31, 2008, this receivable for §200,000 was correctly included in Mills' balance sheet at $132,000. When the receivable was collected on February 15, 2009, the U.S. dollar equivalent was $144,000. In Mills' 2009 consolidated income statement, how much should have been reported as a foreign exchange gain? A. $0 B. $36,000 C. $48,000 D. $10,000 E. $12,000


15. A spot rate may be defined as A. The price a foreign currency can be purchased or sold today B. The price today at which a foreign currency can be purchased or sold in the future C. The forecasted future value of a foreign currency D. The U.S. dollar value of a foreign currency E. The Euro value of a foreign currency


16. The forward rate may be defined as A. The price a foreign currency can be purchased or sold today B. The price today at which a foreign currency can be purchased or sold in the future C. The forecasted future value of a foreign currency D. The U.S. dollar value of a foreign currency E. The Euro value of a foreign currency


17. Which statement is true regarding a foreign currency option? A. A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future B. A foreign currency option gives the holder the obligation only sell foreign currency in the future C. A foreign currency option gives the holder the obligation to only buy foreign currency in the future D. A foreign currency option gives the holder the right but not the obligation to buy or sell foreign currency in the future E. A foreign currency option gives the holder the obligation to buy or sell foreign currency in the future at the spot rate


18. A U.S. company sells merchandise to a foreign company denominated in U.S. dollars. Which of the following statements is true? A. If the foreign currency appreciates, a foreign exchange gain will result B. If the foreign currency depreciates, a foreign exchange gain will result C. No foreign exchange gain or loss will result D. If the foreign currency appreciates, a foreign exchange loss will result E. If the foreign currency depreciates, a foreign exchange loss will result


19. A U.S. company sells merchandise to a foreign company denominated in the foreign currency. Which of the following statements is true? A. If the foreign currency appreciates, a foreign exchange gain will result B. If the foreign currency depreciates, a foreign exchange gain will result C. No foreign exchange gain or loss will result D. If the foreign currency appreciates, a foreign exchange loss will result E. Any gain or loss will be included in comprehensive income


20. A U.S. company buys merchandise from a foreign company denominated in U.S. dollars. Which of the following statements is true? A. If the foreign currency appreciates, a foreign exchange gain will result B. If the foreign currency depreciates, a foreign exchange gain will result C. No foreign exchange gain or loss will result D. If the foreign currency appreciates, a foreign exchange loss will result E. Any gain or loss will be included in comprehensive income


21. A U.S. company buys merchandise from a foreign company denominated in the foreign currency. Which of the following statements is true? A. If the foreign currency appreciates, a foreign exchange gain will result B. If the foreign currency depreciates, a foreign exchange loss will result C. No foreign exchange gain or loss will result D. If the foreign currency appreciates, a foreign exchange loss will result E. Any gain or loss will be included in comprehensive income


22. SFAS 133 provides guidance for hedges of all the following sources of foreign exchange risk except A. Recognized foreign currency denominated assets and liabilities B. Unrecognized foreign currency firm commitments C. Forecasted foreign currency denominated transactions D. Net investment in foreign operations E. Deferred foreign currency gains and losses


23. All of the following data may be needed to determine the fair value of a forward contract at any point in time except A. The forward rate when the forward contract was entered into B. The current forward rate for a contract that matures on the same date as the forward contract entered into C. The future spot rate D. A discount rate E. The company's incremental borrowing rate


24. A forward contract may be used for which of the following? 1) A fair value hedge of an asset. 2) A cash flow hedge of an asset. 3) A fair value hedge of a liability. 4) A cash flow hedge of a liability. A. 1 and 3 B. 2 and 4 C. 1 and 2 D. 1, 3 and 4 E. 1, 2, 3 and 4


25. A company has a discount on a forward contract for an asset. How is the discount recognized over the life of the contract? A. It is charged to a deferred credit B. It is charged to a deferred asset C. It is charged to accumulated other comprehensive income D. It increases sales E. It decreases sales


26. A speculative derivative would be similar to which type of hedge? A. An option designated as a cash flow hedge B. An option designated as a fair value hedge C. A forward contract designated as a cash flow hedge D. A forward contract designated as a fair value hedge E. A speculative option not designated


27. Which of the following statements is true concerning hedge accounting? A. Hedges of foreign currency firm commitments are used for future sales only B. Hedges of foreign currency firm commitments are used for future purchases only C. Hedges of foreign currency firm commitments are used for current purchases or sales D. Hedges of foreign currency firm commitments are used for future sales or purchases E. Hedges of foreign currency firm commitments are speculative in nature


28. All of the following hedges are used for future purchase/sale transactions except A. Forward contracts used as a fair value hedge of a firm commitment B. Options used as a fair value hedge of a firm commitment C. Hedge of a foreign currency denominated asset D. Forward cash flow hedges of a forecasted transaction E. Forward contracts used to hedge a foreign currency denominated liability


On December 1, 2007, Keenan Company, a U.S. firm, sold merchandise to Velez Company of Spain for 150,000 euro. Payment is due on February 1, 2008. Keenan entered into a forward exchange contract on December 1, 2007, to deliver 150,000 euro on February 1, 2008 for $.97. Keenan chose to use a foreign currency option to hedge this foreign currency asset designated as a cash flow hedge. Relevant exchange rates follow:

Hoyle - Chapter 07





31. Compute the value of the foreign currency option at February 1, 2008. A. $6,000 B. $4,500 C. $3,000 D. $7,500 E. $1,500


32. Compute the U.S. dollars received on February 1, 2008. A. $138,000 B. $136,500 C. $145,500 D. $141,000 E. $142,500


33. Which of the following approaches is used in the United States in accounting for foreign currency transactions? A. One-transaction perspective; defer foreign exchange gains and losses B. Two-transaction perspective; accrue foreign exchange gains and losses C. Three-transaction perspective; defer foreign exchange gains and losses D. One-transaction perspective; accrue foreign exchange gains and losses E. Two-transaction perspective; defer foreign exchange gains and losses


34. When a U.S. company purchases parts from a foreign company, which of the following will result in no foreign exchange gain or loss? A. The transaction is denominated in U.S. dollars B. The transaction resulted in an extraordinary gain C. The transaction resulted in an extraordinary loss D. The foreign currency appreciated in value relative to the U.S. dollar E. The foreign currency depreciated in value relative to the U.S. dollar


35. Alpha, Inc., a U.S. company, had a receivable from a customer that was denominated in pesos. On December 31, 2008, this receivable for 75,000 pesos was correctly included in Alpha's balance sheet at $8,000. The receivable was collected on March 2, 2009, when the U.S. equivalent was $6,900. How much foreign exchange gain or loss will Alpha record on the income statement for the year ended December 31, 2009? A. $1,100 loss B. $1,100 gain C. $6,900 loss D. $6,900 gain E. $8,000 gain


On April 1, 2007, Shannon Company, a U.S. company, borrowed 100,000 euros from a foreign lender by signing an interest-bearing note due April 1, 2008. The dollar value of the loan was as follows:

Hoyle - Chapter 07

36. How much foreign exchange gain or loss should be included in Shannon's 2007 income statement? A. $3,000 gain B. $3,000 loss C. $6,000 gain D. $6,000 loss E. $7,000 gain


37. How much foreign exchange gain or loss should be included in Shannon's 2008 income statement? A. $1,000 gain B. $1,000 loss C. $2,000 gain D. $2,000 loss E. $8,000 loss


38. Angela, Inc., a U.S. company, had a euro receivable from exports to Spain and a British pound payable resulting from imports from England. Angela recorded foreign exchange gain related to both its euro receivable and pound payable. Did the foreign currencies increase or decrease in dollar value from the date of the transaction to the settlement date?



39. Frankfurter Company, a U.S. company, had a ruble receivable from exports to Russia and a euro payable resulting from imports from Italy. Frankfurter recorded foreign exchange loss related to both its ruble receivable and euro payable. Did the foreign currencies increase or decrease in dollar value from the date of the transaction to the settlement date?



Parker Corp., a U.S. company, had the following foreign currency transactions during 2009: (1.) Purchased merchandise from a foreign supplier on July 5, 2009 for the U.S. dollar equivalent of $80,000 and paid the invoice on August 3, 2009 at the U.S. dollar equivalent of $82,000. (2.) On October 1, 2009 borrowed the U.S. dollar equivalent of $872,000 evidenced by a non-interest-bearing note payable in euros on October 1, 2009. The U.S. dollar equivalent of the note amount was $860,000 on December 31, 2009 and $881,000 on October 1, 2010.

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40. What amount should be included as a foreign exchange gain or loss from the two transactions for 2009? A. $2,000 loss B. $2,000 gain C. $10,000 gain D. $14,000 loss E. $14,000 gain


41. What amount should be included as a foreign exchange gain or loss from the two transactions for 2010? A. $9,000 loss B. $9,000 gain C. $11,000 loss D. $21,000 loss E. $21,000 gain


Winston Corp., a U.S. company, had the following foreign currency transactions during 2008: (1.) Purchased merchandise from a foreign supplier on July 16, 2008 for the U.S. dollar equivalent of $47,000 and paid the invoice on August 3, 2008 at the U.S. dollar equivalent of $54,000. (2.) On October 15, 2008 borrowed the U.S. dollar equivalent of $315,000 evidenced by a non-interest-bearing note payable in euros on October 15, 2008. The U.S. dollar equivalent of the note amount was $295,000 on December 31, 2008 and $299,000 on October 15, 2009.

Hoyle - Chapter 07

42. What amount should be included as a foreign exchange gain or loss from the two transactions for 2008? A. $9,000 loss B. $9,000 gain C. $11,000 loss D. $13,000 gain E. $14,000 gain


43. What amount should be included as a foreign exchange gain or loss from the two transactions for 2009? A. $1,000 loss B. $1,000 gain C. $2,000 loss D. $4,000 gain E. $4,000 loss


44. Williams, Inc., a U.S. company, has a Japanese yen account receivable resulting from an export sale on March 1 to a customer in Japan. The exporter signed a forward contract on March 1 to sell yen and designated it as a cash flow hedge of a recognized receivable. The spot rate was $.0094 and the forward rate was $.0095. Which of the following did the U.S. exporter report in net income? A. Discount revenue B. Premium revenue C. Discount expense D. Premium expense E. Both a discount revenue and a premium expense


45. Larson Company, a U.S. company, has an India rupee account receivable resulting from an export sale on September 7 to a customer in India. Larson signed a forward contract on September 7 to sell rupees and designated it as a cash flow hedge of a recognized receivable. The spot rate was $.023 and the forward rate was $.021. Which of the following did the U.S. exporter report in net income? A. Discount revenue B. Premium revenue C. Discount expense D. Premium expense E. Both a discount revenue and a premium expense


46. Primo Inc., a U.S. company, ordered parts costing 100,000 rupee from a foreign supplier on July 7 when the spot rate was $.025 per rupee. A one-month forward contract was signed on that date to purchase 100,000 rupee at a rate of $.027. The forward contract is properly designated as a fair value hedge of the 100,000 rupee firm commitment. On August 7, when the parts are received, the spot rate is $.028. At what amount should the parts inventory be carried on Primo's books? A. $2,000 B. $2,100 C. $2,500 D. $2,700 E. $2,800


47. Lawrence Company, a U.S. company, ordered parts costing 1,000,000 Thailand bahts from a foreign supplier on July 7 when the spot rate was $.025 per baht. A one-month forward contract was signed on that date to purchase 1,000,000 bahts at a rate of $.027. The forward contract is properly designated as a fair value hedge of the 1,000,000 baht firm commitment. On August 7, when the parts are received, the spot rate is $.028. What is the amount of accounts payable that will be paid at this date? A. $20,000 B. $20,100 C. $25,000 D. $27,000 E. $28,000


48. On December 1, 2009, Joseph Company, a U.S. company, entered into a three-month forward contract to purchase 50,000 pesos on March 1, 2010. The following U.S. dollar per peso exchange rates apply:

Joseph's incremental borrowing rate is 12 percent. The present value factor for two months at an annual interest rate of 12 percent is .9803. Which of the following is included in Joseph's December 31, 2009 balance sheet for the forward contract? A. $5,146.58 asset B. $5,146.58 liability C. $500 liability D. $490.15 asset E. $490.15 liability


49. On April 1, Quality Corporation, a U.S. company, expects to order merchandise from a German supplier in three months, denominating the transaction in euros. On April 1, the spot rate is $1.19 per euro and Quality enters into a three-month forward contract to purchase 400,000 euros at a rate of $1.20. At the end of three months, the spot rate is $1.21 per euro and Quality orders and receives the merchandise, paying 400,000 euros. What are the effects on net income from these transactions? A. $4,000 Discount Expense plus a $4,000 negative Adjustment to Net Income when the merchandise is received B. $4,000 Discount Expense plus an $8,000 negative Adjustment to Net Income when the merchandise is received C. $4,000 Premium Expense plus a $4,000 negative Adjustment to Net Income when the merchandise is received D. $8,000 Premium Expense plus a $4,000 positive Adjustment to Net Income when the merchandise is received E. $8,000 Discount Expense plus an $8,000 positive Adjustment to Net Income when the merchandise is received


50. On August 31, Ram Corporation, a U.S. company, expects to order merchandise from a German supplier in three months, denominating the transaction in euros. On August 31, the spot rate is $1.19 per euro and Quality enters into a three-month forward contract to purchase 600,000 euros at a rate of $1.20. At the end of three months, the spot rate is $1.21 per euro and Ram orders and receives the merchandise, paying 600,000 euros. What are the effects on net income from these transactions? A. $6,000 Discount Expense plus a $6,000 negative Adjustment to Net Income when the merchandise is sold B. $6,000 Discount Expense plus a $12,000 negative Adjustment to Net Income when the merchandise is sold C. $6,000 Premium Expense plus a $6,000 negative Adjustment to Net Income when the merchandise is sold D. $12,000 Premium Expense plus a $6,000 positive Adjustment to Net Income when the merchandise is sold E. $12,000 Discount Expense plus an $12,000 positive Adjustment to Net Income when the merchandise is sold


51. Woolsey Corporation, a U.S. company, expects to order goods from a British supplier at a price of 250,000 pounds, with delivery and payment to be made on October 24. On July 24, Woolsey purchased a three-month call option for 250,000 British pounds and designated this option as a cash flow hedge of a forecasted foreign currency transaction. The following exchange rates apply:

What amount will Woolsey include as an option expense in net income during the period July 24 to October 24? A. $4,000 B. $5,000 C. $10,000 D. $12,000 E. $14,000


52. Atherton, Inc., a U.S. company, expects to order goods from a foreign supplier at a price of 100,000 lira, with delivery and payment to be made on April 17. On January 17, Atherton purchased a three-month call option on 100,000 lira and designated this option as a cash flow hedge of a forecasted foreign currency transaction. The following exchange rates apply:

What amount will Atherton include as an option expense in net income during the period January 17 to April 17? A. $4,000 B. $4,260 C. $4,340 D. $5,000 E. $5,260


On May 1, 2007, Mosby Company received an order to sell a machine to a customer in Canada at a price of 2,000,000 Mexican pesos. The machine was shipped and payment was received on March 1, 2008. On May 1, 2007, Mosby purchased a put option giving it the right to sell 2,000,000 pesos on March 1, 2008 at a price of $190,000. Mosby properly designates the option as a fair value hedge of the peso firm commitment. The option cost $3,000 and had a fair value of $3,200 on December 31, 2007. The following spot exchange rates apply:

Mosby's incremental borrowing rate is 12 percent and the present value factor for two months at a 12 percent annual rate is .9803.

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53. What was the net impact on Mosby's 2007 income as a result of this fair value hedge of a firm commitment? A. $1,760.60 decrease B. $1,960.60 decrease C. $1,000.00 decrease D. $1,760.60 increase E. $1,960.60 increase


54. What was the net impact on Mosby's 2008 income as a result of this fair value hedge of a firm commitment? A. $1,760.60 decrease B. $2,500 increase C. $2,500 decrease D. $188,760.60 increase E. $188,760.60 decrease


55. What was the net increase or decrease in cash flow from having purchased the foreign currency option to hedge this exposure to foreign exchange risk? A. $0 B. $9,000 decrease C. $9,000 increase D. $2,000 increase E. $2,000 decrease


On March 1, 2007, Mattie Company received an order to sell a machine to a customer in England at a price of 200,000 British pounds. The machine was shipped and payment was received on March 1, 2008. On March 1, 2007, Mattie purchased a put option giving it the right to sell 200,000 British pounds on March 1, 2008 at a price of $380,000. Mattie properly designates the option as a fair hedge of the pound firm commitment. The option cost $2,000 and had a fair value of $2,200 on December 31, 2007. The following spot exchange rates apply:

Mattie's incremental borrowing rate is 12 percent and the present value factor for two months at a 12 percent annual rate is .9803.

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56. What was the net impact on Mattie's 2007 income as a result of this fair value hedge of a firm commitment? A. $1,660.40 decrease B. $1,760.60 decrease C. $2,240.40 decrease D. $1,660.40 increase E. $2,240.60 increase


57. What was the net impact on Mattie's 2008 income as a result of this fair value hedge of a firm commitment? A. $379,760.60 decrease B. $8,360.60 increase C. $8,360.60 decrease D. $4,390.40 decrease E. $379,760.60 increase


58. What was the net increase or decrease in cash flow from having purchased the foreign currency option to hedge this exposure to foreign exchange risk? A. $0 B. $10,000 increase C. $10,000 decrease D. $20,000 increase E. $20,000 decrease


On October 1, 2007, Eagle Company forecasts the purchase of inventory from a British supplier on February 1, 2008, at a price of 100,000 British pounds. On October 1, 2007, Eagle pays $1,800 for a three-month call option on 100,000 pounds with a strike price of $2.00 per pound. The option is considered to be a cash flow hedge of a forecasted foreign currency transaction. On December 31, 2007, the option has a fair value of $1,600. The following spot exchange rates apply:

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59. What journal entry should Eagle prepare on October 1, 2007?



60. What journal entry should Eagle prepare on December 31, 2007?



61. What is the amount of option expense for 2008 from these transactions? A. $1,000 B. $1,600 C. $2,500 D. $2,600 E. $0


62. What is the amount of Adjustment to Accumulated Other Comprehensive Income for 2008 from these transactions? A. $1,000 B. $1,600 C. $1,800 D. $2,000 E. $2,600


63. What is the amount of Cost of Goods Sold for 2008 as a result of these transactions? A. $200,000 B. $195,000 C. $201,000 D. $202,600 E. $203,000


64. What is the 2008 effect on net income as a result of these transactions? A. $195,000 B. $201,600 C. $201,000 D. $202,600 E. $203,000


65. Yelton Co. just sold inventory for 80,000 lira, which Yelton will collect in sixty days. Briefly describe a hedging transaction Yelton could engage in to reduce its risk of unfavorable exchange rates.

Yelton could sign a forward exchange contract to sell the lira in 60 days after they are received. Alternatively, Yelton could purchase an option to sell the lira in 60 days after they are received. Difficulty: Easy


66. Where can you find exchange rates between the U.S. dollar and most foreign currencies?

Foreign exchange rates are published in the Wall Street Journal, major U.S. newspapers and several Internet sites. Difficulty: Easy


67. What is meant by the spot rate?

The spot rate is the price at which a foreign currency can be purchased or sold today. Difficulty: Easy


68. How is the fair value of a Forward Contract determined under SFAS 133?

The fair value of a Forward Contract is determined by comparing the difference between the contracted forward rate and the currently available forward rate for contracts expiring on the same date. On the initial date of the contract, this would result in a fair value of $0. As time passes, the currently available forward rate will likely fluctuate relative to the "fixed" contracted forward rate, creating a difference that must be accounted for as a gain or loss on the forward contract. A contract with a net gain over its life is recorded on the balance sheet as a Forward Contract Asset. A contract with a net loss over its life is recorded on the balance sheet as a Forward Contract Liability. Difficulty: Medium


69. What is the major assumption underlying the one-transaction perspective?

The one-transaction perspective assumes that an export sale is not complete until the foreign currency receivable has been collected and converted into U.S. dollars. Difficulty: Easy


70. What is meant by the term hedging?

"Hedging is the process of eliminating exposure to foreign exchange risk so as to avoid potential losses from fluctuations in exchange rates. In addition to avoiding possible losses, companies hedge foreign currency transactions and commitments to introduce an element of certainty into the future cash flows resulting from foreign currency activities. Hedging involves establishing a price today at which foreign currency can be sold or purchased at a future date." Difficulty: Medium


71. How does a foreign currency forward contract differ from a foreign currency option?

"Whereas the owner of a foreign currency option can choose whether to exercise the option and exchange one currency for another or not, a party to a foreign currency forward contract is obligated to deliver one currency in exchange for another at a specified future date." Difficulty: Medium


72. What factors create a foreign exchange gain?

"Foreign exchange gains and losses are created by two factors: having foreign currency exposures (foreign currency receivables and payables) and changes in exchange rates." Difficulty: Medium


73. What happens when a U.S. company purchases goods denominated in a foreign currency and the foreign currency depreciates?

The event results in a foreign exchange gain. Difficulty: Medium


74. What happens when a U.S. company purchases goods denominated in a foreign currency and the foreign currency appreciates?

The event results in a foreign exchange loss. Difficulty: Medium


75. What happens when a U.S. company sells goods denominated in a foreign currency and the foreign currency depreciates?

The event results in a foreign exchange loss. Difficulty: Medium


76. What happens when a U.S. company sells goods denominated in a foreign currency and the foreign currency appreciates?

The event results in a foreign exchange gain. Difficulty: Medium


77. Gaw Produce Co. purchased inventory from a Japanese company on December 18, 2009. Payment of ×400,000 was due on January 18, 2010. Exchange rates between the dollar and the yen were as follows:

Required: Prepare all journal entries for Gaw Produce Co. in connection with the purchase and payment.

Difficulty: Medium


78. Old Colonial Corp. (a U.S. company) made a sale to a foreign customer on September 15, 2009, for 100,000 stickles. Payment was received on October 15, 2009. The following exchange rates applied:

Required: Prepare all journal entries for Old Colonial Corp. in connection with this sale assuming that the company closes its books on September 30 to prepare interim financial statements.

Difficulty: Medium


Coyote Corp. (a U.S. company in Texas) had the following series of transactions in a foreign country during 2009. The appropriate exchange rates during 2009 were as follows:

The appropriate exchange rates during 2009 were as follows:

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79. Prepare all journal entries in U.S. dollars along with any December 31, 2009 adjusting entries. Coyote uses a perpetual inventory system.

Difficulty: Medium


80. What amount will Coyote Corp. report on its 2009 financial statements for Inventory?

Inventory (60,000 pesos x $.20 x 40%): $4,800. Difficulty: Medium


81. What amount will Coyote Corp. report on its 2009 financial statements for Cost of Goods Sold?

Cost of Goods Sold (60,000 pesos x $.20 x 60%): $7,200. Difficulty: Medium


82. What amount will Coyote Corp. report on its 2009 financial statements for Sales?

Sales (54,000 pesos x $.22): $11,880. Difficulty: Medium


83. What amount will Coyote Corp. report on its 2009 financial statements for Accounts Receivable?

Accounts Receivable ((54,000 - 48,000 pesos) x $.25): $1,500. Difficulty: Medium


84. What amount will Coyote Corp. report on its 2009 financial statements for Accounts Payable?

Accounts Payable ((60,000 - 36,000 pesos) x $.25): $6,000. Difficulty: Medium


85. The beginning balance of cash was 50,000 pesos on January 1, 2009, translated at $.18 = $1. What amount will Coyote Corp. report on its 2009 financial statements for Cash?

Cash (50,000 pesos x $.18) + (48,000 pesos x $.23) - (36,000 pesos x $.24)): $2,400. Difficulty: Medium


On November 10, 2008, King Co. sold inventory to a customer in a foreign country. King agreed to accept 96,000 local currency units (LCU) in full payment for this inventory. Payment was to be made on February 1, 2009. On December 1, 2008, King entered into a forward exchange contract wherein 96,000 LCU would be delivered to a currency broker in two months. The two month forward exchange rate on that date was 1 LCU = $.30. The spot rates and forward rates on various dates were as follows:


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86. (A.) Assume this hedge is designated as a cash flow hedge. Prepare the journal entries relating to the transaction and the forward contract. (B.) Compute the effect on 2008 net income. (C.) Compute the effect on 2009 net income.

1 [(.30 - .28) 96,000] x .9901 = 1,901 2 [(.30 - .27) 96,000] = 2,880 - 1,901 = 979

Difficulty: Hard


87. (A.) Assume this hedge is designated as a fair value hedge. Prepare the journal entries relating to the transaction and the forward contract. (B.) Compute the effect on 2008 net income. (C.) Compute the effect on 2009 net income.

Difficulty: Hard


On October 1, 2009, a forward exchange contract was acquired whereby Jarvis Co. was to pay 100,000 LCU in four months (on February 1, 2010) and receive $78,000 in U.S. dollars. The spot and forward rates for the LCU were as follows:


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88. Assuming this is a cash flow hedge, prepare journal entries for this sales transaction and forward contract.

Difficulty: Hard


89. Assuming this is a fair value hedge, prepare journal entries for this sales transaction and forward contract.

Difficulty: Hard


90. On October 31, 2008, Darling Company negotiated a two-year 100,000 franc loan from a foreign bank at an interest rate of 3 percent per year. Interest payments are made annually on October 31 and the principal will be repaid on October 31, 2010. Darling prepares U.S.-dollar financial statements and has a December 31 year-end. Prepare all journal entries related to this foreign currency borrowing assuming the following:

In US dollars:

Difficulty: Hard


91. For each of the following situations, select the best answer concerning accounting for foreign currency transactions: (A) Results in a foreign exchange gain. (B) Results in a foreign exchange loss. (C) No foreign exchange gain or loss. _____1. Export sale by a U.S. company denominated in dollars, foreign currency of buyer appreciates. _____2. Export sale by a U.S. company denominated in foreign currency, foreign currency of buyer appreciates. _____3. Import purchase by a U.S. company denominated in foreign currency, foreign currency of buyer appreciates. _____4. Import purchase by a U.S. company denominated in dollars, foreign currency of buyer appreciates. _____5. Import purchase by a U.S. company denominated in foreign currency, foreign currency of buyer depreciates. _____6. Import purchase by a U.S. company denominated in dollars, foreign currency of buyer depreciates. _____7. Export sale by a U.S. company denominated in dollars, foreign currency of buyer depreciates. _____8. Export sale by a U.S. company denominated in foreign currency, foreign currency of buyer depreciates.

(1) C; (2) A; (3) B; (4) C; (5) A; (6) C; (7) C; (8) B Difficulty: Hard


ch7 Summary

Category # of Questions Hoyle - Chapter 07 104

ch8

Student: ___________________________________________________________________________

1. In accounting, the term translation refers to A. The calculation of gains or losses from hedging transactions B. The calculation of exchange rate gains or losses on individual transactions in foreign currencies C. The procedure required to identify a company's functional currency D. The calculation of gains or losses from all transactions for the year E. A procedure to prepare a foreign subsidiary's financial statements for consolidation

2. What is a company's functional currency? A. The currency of the primary economic environment in which it operates B. The currency of the country where it has its headquarters C. The currency in which it prepares its financial statements D. The reporting currency of its parent for a subsidiary E. The currency it chooses to designate as such

3. According to SFAS 52, which method is usually required for translating a foreign subsidiary's financial statements into the parent's reporting currency? A. The temporal method B. The current rate method C. The current/noncurrent method D. The monetary/non-monetary method E. The noncurrent rate method

4. In translating a foreign subsidiary's financial statements, which exchange rate does the current method require for the subsidiary's assets and liabilities? A. The exchange rate in effect when each asset or liability was acquired B. The average exchange rate for the current year C. A calculated exchange rate based on market value D. The exchange rate in effect as of the balance sheet date E. The exchange rate in effect at the start of the current year

5. The translation adjustment from translating a foreign subsidiary's financial statements should be shown as A. An asset or liability (depending on the balance) on the consolidated balance sheet B. A revenue or expense (depending on the balance) on the consolidated income statement C. A component of stockholders' equity on the consolidated balance sheet D. A component of cash flows from financing activities on the consolidated statement of cash flows E. An element of the notes which accompany the consolidated financial statements

Westmore, Ltd. is a British subsidiary of a U.S. company. Westmore's functional currency is the pound sterling. The following exchange rates were in effect during 2008:

6. Westmore reported sales of ≤1,500,000 during 2008. What amount (rounded) would have been included for this subsidiary in calculating consolidated sales? A. $2,380,952 B. $2,400,000 C. $2,429,150 D. $2,419,355 E. $2,425,876

7. On December 31, Westmore had accounts receivable of ≤280,000. What amount (rounded) would have been included for this subsidiary in calculating consolidated accounts receivable? A. $444,444 B. $451,613 C. $142,600 D. $176,400 E. $452,830

8. Gunther Co. established a subsidiary in Mexico on January 1, 2008. The subsidiary engaged in the following transactions during 2008:

What amount of foreign exchange gain or loss would have been recognized on Gunther's consolidated income statement for 2008? A. $200,400 loss B. $90,000 loss C. $226,000 loss D. $235,600 loss E. $250,000 loss

Darron Co. was formed on January 1, 2009 as a wholly owned foreign subsidiary of a U.S. corporation. Darron's functional currency was the stickle (§). The following transactions and events occurred during 2007:

9. What exchange rate should have been used in translating Darron's revenues and expenses for 2009? A. $1 = §.48 B. $1 = §.44 C. $1 = §.46 D. $1 = §.42 E. $1 = §.45

10. What was the amount of the translation adjustment for 2009? A. $293,479 increase in relative value of net assets B. $302,137 increase in relative value of net assets C. $300,160 increase in relative value of net assets D. $187,418 increase in relative value of net assets E. $270,800 increase in relative value of net assets

11. Which of the following translation methods was originally mandated by SFAS No. 8? A. Current/Noncurrent Method B. Monetary/Non-monetary Method C. Current Rate Method D. Temporal Method E. Indirect Method

12. Which accounts are re-measured using current exchange rates? A. All revenues and expenses B. All assets and liabilities C. All monetary assets and liabilities D. All current assets and liabilities E. All noncurrent assets and liabilities

13. For a foreign subsidiary that uses the US dollar as its functional currency, what translation method is required? A. Current/Noncurrent Method B. Monetary/Non-monetary Method C. Current Rate Method D. Temporal Method E. Indirect Method

Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's functional currency was the U.S. dollar.

14. Which one of the following statements would justify this conclusion? A. Most of the subsidiary's sales and purchases were with companies in the U.S B. Dilty's functional currency is the dollar and Dilty is the parent C. Dilty's other subsidiaries all had the dollar as their functional currency D. Generally accepted accounting principles require that the subsidiary's functional currency must be the dollar if consolidated financial statements are to be prepared E. Dilty is located in the U.S

15. What must Dilty do to ready the subsidiary's financial statements for consolidation? A. First translate them, then re-measure them B. First re-measure them, then translate them C. State all of the subsidiary's accounts in U.S. dollars using the exchange rate in effect at the balance sheet date D. Translate them E. Re-measure them

Certain balance sheet accounts of a foreign subsidiary of the Tulip Co. had been stated in U.S. dollars as follows:

16. If a foreign currency is the functional currency of this subsidiary, what total should have been included in Tulip's balance sheet for the preceding items? A. $609,000 B. $658,000 C. $602,000 D. $630,000 E. $616,000

17. If the U.S. dollar is the functional currency of this subsidiary, what total should have been included in Tulip's balance sheet for the items above? A. $609,000 B. $658,000 C. $602,000 D. $630,000 E. $616,000

A subsidiary of Porter Inc., a U.S. company, was located in a foreign country. The functional currency of this subsidiary was the stickle (§). The subsidiary acquired inventory on credit on November 1, 2008, for §120,000 that was sold on January 17, 2009 for §156,000. The subsidiary paid for the inventory on January 31, 2009. Currency exchange rates between the dollar and the stickle were as follows:

18. What figure would have been reported for this inventory on Porter's consolidated balance sheet at December 31, 2008? A. $24,000 B. $26,400 C. $22,800 D. $27,600 E. $28,800

19. What figure would have been reported for cost of goods sold on Porter's consolidated income statement at December 31, 2009? A. $24,000 B. $26,400 C. $22,800 D. $27,600 E. $28,800

20. A U.S. company's foreign subsidiary had the following amounts in stickles (§) in 2009:

The average exchange rate during 2009 was §1 = $.96. The beginning inventory was acquired when the exchange rate was §1 = $1.20. The ending inventory was acquired when the exchange rate was §1 = $.90. The exchange rate at December 31, 2009 was §1 = $.84. Assuming that the foreign country had a highly inflationary economy, at what amount should the foreign subsidiary's cost of goods sold have been reflected in the 2009 U.S. dollar income statement? A. $11,253,600 B. $11,577,600 C. $11,649,600 D. $11,613,600 E. $11,523,600

21. A historical exchange rate for a foreign subsidiary is best described as A. The rate at date of acquisition for a purchase transaction B. The rate when the common stock was originally issued for a purchase transaction C. The average rate from date of acquisition to the date of balance sheet D. The rate from the prior year's balances E. The January 1 exchange rate

22. A net asset balance sheet exposure exists and the foreign currency appreciates. Which of the following statements is true? A. There is no translation adjustment B. There is a transaction loss C. There is a transaction gain D. There is a negative translation adjustment E. There is a positive translation adjustment

23. A net asset balance sheet exposure exists and the foreign currency depreciates. Which of the following statements is true? A. There is no translation adjustment B. There is a transaction loss C. There is a transaction gain D. There is a negative translation adjustment E. There is a positive translation adjustment

24. A net liability balance sheet exposure exists and the foreign currency appreciates. Which of the following statements is true? A. There is no translation adjustment B. There is a transaction loss C. There is a transaction gain D. There is a negative translation adjustment E. There is a positive translation adjustment

25. A net liability balance sheet exposure exists and the foreign currency depreciates. Which of the following statements is true? A. There is no translation adjustment B. There is a transaction loss C. There is a transaction gain D. There is a negative translation adjustment E. There is a positive translation adjustment

26. Which method of translating a foreign subsidiary's financial statements is correct? A. Historical rate method B. Working capital method C. Current rate method D. Re-measurement E. Temporal method

27. Which method of re-measuring a foreign subsidiary's financial statements is correct? A. Historical rate method B. Working capital method C. Current rate method D. Translation E. Temporal method

28. Under the temporal method, inventory at market would be restated at what rate? A. Beginning of the year rate B. Average rate C. Current rate D. Historical rate E. Composite amount

29. Under the current rate method, inventory at market would be restated at what rate? A. Beginning of the year rate B. Average rate C. Current rate D. Historical rate E. Composite amount

30. Under the temporal method, common stock would be restated at what rate? A. Beginning of the year rate B. Average rate C. Current rate D. Historical rate E. Composite amount

31. Under the current rate method, common stock would be restated at what rate? A. Beginning of the year rate B. Average rate C. Current rate D. Historical rate E. Composite amount

32. Under the current rate method, property, plant & equipment would be restated at what rate? A. Beginning of the year rate B. Average rate C. Current rate D. Historical rate E. Composite amount

33. Under the temporal method, property, plant & equipment would be restated at what rate? A. Beginning of the year rate B. Average rate C. Current rate D. Historical rate E. Composite amount

34. Under the current rate method, retained earnings would be restated at what rate? A. Beginning of the year rate B. Average rate C. Current rate D. Historical rate E. Composite amount

35. Under the temporal method, retained earnings would be restated at what rate? A. Beginning of the year rate B. Average rate C. Current rate D. Historical rate E. Composite amount

36. Under the current rate method, depreciation expense would be restated at what rate? A. Beginning of the year rate B. Average rate C. Current rate D. Historical rate E. Composite amount

37. Under the temporal method, depreciation expense would be restated at what rate? A. Beginning of the year rate B. Average rate C. Current rate D. Historical rate E. Composite amount

38. Under the temporal method, how would cost of goods sold be restated? A. Beginning of the year rate B. Average rate C. Current rate D. Historical rate E. Composite amount

39. Under the current rate method, how would cost of goods sold be restated? A. Beginning of the year rate B. Average rate C. Current rate D. Historical rate E. Composite amount

40. How is the disposition of the translated gain or loss reported on the parent company's financial statements? A. Net income/loss on the income statement B. Cumulative translation adjustment as a deferred asset C. Cumulative translation adjustment as a deferred liability D. Other comprehensive income E. Retained earnings

41. How is the disposition of the re-measurement gain or loss reported on the parent company's financial statements? A. Net income/loss on the income statement B. Cumulative translation adjustment as a deferred asset C. Cumulative translation adjustment as a deferred liability D. Other comprehensive income E. Retained earnings

42. A highly inflationary economy is defined as A. Cumulative 5-year inflation in excess of 100% B. Cumulative 3-year inflation in excess of 100% C. Cumulative 5-year inflation in excess of 90% D. Cumulative 3-year inflation in excess of 90% E. Any country designated as a company operating in an underworld economy

43. If a subsidiary is operating in a highly inflationary economy, how are the financial statements to be restated? A. Historical rate B. Working capital rate C. Translation D. Re-measurement E. Current rate

44. When consolidating a foreign subsidiary, which of the following statements is true? A. Parent reports a cumulative translation adjustment using the equity method B. Parent's reports a gain or loss in net income using the equity method C. Subsidiary's cumulative translation adjustment is carried forward to the consolidated balance sheet D. Subsidiary's income/loss is carried forward to the consolidated balance sheet E. All foreign currency gains/losses are eliminated on the consolidated income statement and balance sheet

45. When preparing a consolidating statement of cash flows, which of the following statements is false? A. Subsidiary dividends are deducted as a financing activity B. Noncontrolling interest in subsidiary dividends are deducted as a financing activity C. Parent dividends are deducted as a financing activity D. Amortization of cost over book value of the investment in subsidiary is added to net income as an operating activity using the indirect method E. Intercompany gains do not appear on the consolidated statement of cash flows

The following account balances are available for Esposito, an Italian U.S. subsidiary for 2009:

46. Compute the cost of goods sold for 2009 in U.S. dollars using the temporal method. A. $376,650 B. $387,750 C. $388,800 D. $400,950 E. $409,050

47. Compute the cost of goods sold for 2009 in U.S. dollars using the current rate method. A. $376,550 B. $387,750 C. $388,800 D. $400,950 E. $409,050

48. Compute ending inventory for 2009 under the temporal method. A. $13,950 B. $14,100 C. $14,400 D. $14,850 E. $15,150

49. Compute ending inventory for 2009 under the current rate method. A. $13,950 B. $14,100 C. $14,400 D. $14,850 E. $15,150

The following inventory balances for 2008 in local currency units (LCU) are given:

50. Compute the December 31, 2008, inventory balance using the lower of cost or market method under the temporal method. A. $429,000 B. $457,600 C. $596,000 D. $568,000 E. $473,600

51. Compute the December 31, 2008, inventory balance using the current rate method. A. $454,400 B. $457,600 C. $596,000 D. $568,000 E. $473,600

Perez Company, a Mexican subsidiary of a U.S. company, sold equipment costing 200,000 pesos with accumulated depreciation of 75,000 pesos for 140,000 pesos on March 1, 2009. The equipment was purchased on January 1, 2008, when the exchange rate for the peso was $.11. Relevant exchange rates for the peso are as follows:

52. The financial statements for Perez are translated by its U.S. parent. What amount of gain or loss would be reported in its translated income statement? A. $1,530 B. $1,575 C. $1,590 D. $1,090 E. $1,650

53. The financial statements for Perez are re-measured by its U.S. parent. What amount of gain or loss would be reported in its translated income statement? A. $1,530 B. $1,575 C. $1,465 D. $1,090 E. $1,650

Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31, 2008, have been restated into U.S. dollars as follows:

54. Assuming the functional currency of the subsidiary is the U.S. dollar, what total should be included in Parker's consolidated balance sheet at December 31, 2008, for the above items? A. $407,500 B. $418,000 C. $396,000 D. $403,500 E. $398,500

55. Assuming the functional currency of the subsidiary is the local currency, what total should be included in Parker's consolidated balance sheet at December 31, 2008, for the above items? A. $407,500 B. $418,000 C. $396,000 D. $403,500 E. $398,500

56. If the current rate used to restate these balances is $.95, what was the historical rate used to restate the same balances? A. $.90 B. $1.00 C. $.95 D. $.9474 E. $1.0556

Kennedy Company acquired all of the outstanding common stock of Hastie Company of Canada for U.S. $350,000 on January 1, 2009, when the exchange rate for the Canadian dollar was U.S. $.70. The fair value of the net assets of Hastie was equal to their book value of C$450,000 (Canadian dollars) on the date of acquisition. Any excess cost over fair value was attributed to an unrecorded patent with a remaining life of five years. The functional currency of Hastie is the Canadian dollar. For the year ended December 31, 2009, Hastie's translated net income was $25,000. The average exchange rate for the Canadian dollar during 2009 was U.S. $.68 and the 2009 year-end exchange rate was U.S. $.65.

57. Calculate the U.S. $ amount allocated to the patent at January 1, 2009. A. $50,000 B. $35,000 C. $34,000 D. $32,500 E. $28,200

58. Amortization of the patent, translated, for 2009 would be A. $7,000 B. $10,000 C. $6,800 D. $9,000 E. $6,500

59. Compute the amount of the patent reported on the consolidated balance sheet at December 31, 2009. A. $28,200 B. 428,000 C. $35,000 D. $27,200 E. $26,000

60. Kennedy's share of Hastie's net income for 2009 would be A. $18,000 B. $15,000 C. $18,200 D. $16,000 E. $18,500

Quadros Inc., a Portugese firm was acquired by a U.S. company on January 1, 2007. Selected account balances are available for the year ended December 31, 2008 and are stated in euro, the local currency.

61. Assume the functional currency is the euro, compute the restated amount for sales for 2008. A. $364,000 B. $372,000 C. $380,000 D. $360,000 E. $404,000

62. Assume the functional currency is the euro, compute the restated amount for inventory for 2008. A. $18,600 B. $19,600 C. $18,000 D. $20,200 E. $19,000

63. Assume the functional currency is the euro, compute the restated amount for equipment for 2008. A. $81,900 B. $90,900 C. $83,700 D. $88,200 E. $85,500

64. Assume the functional currency is the euro, compute the restated amount for dividends for 2008. A. $19,000 B. $20,200 C. $18,600 D. $19,400 E. $19,600

65. Assume the functional currency is the euro, compute the restated amount for accumulated depreciation for 2008. A. $40,950 B. $41,850 C. $45,450 D. $42,750 E. $44,100

66. Assume the functional currency is the euro, compute the restated amount for depreciation expense for 2008. A. $8,190 B. $8,370 C. $8,820 D. $9,090 E. $8,550

67. Assume the functional currency is the U.S. dollar, compute the restated amount for sales for 2008. A. $364,000 B. $372,000 C. $380,000 D. $360,000 E. $404,000

68. Assume the functional currency is the U.S. dollar, compute the restated amount for inventory for 2008. A. $18,600 B. $19,600 C. $18,000 D. $20,200 E. $19,000

69. Assume the functional currency is the U.S. dollar, compute the restated amount for equipment for 2008. A. $81,900 B. $90,900 C. $83,700 D. $88,200 E. $85,500

70. Assume the functional currency is the U.S. dollar, compute the restated amount for dividends for 2008. A. $19,000 B. $20,200 C. $18,600 D. $19,400 E. $19,600

71. Assume the functional currency is the U.S. dollar, compute the restated amount for accumulated depreciation for 2008. A. $40,950 B. $41,850 C. $45,450 D. $42,750 E. $44,100

72. Assume the functional currency is the U.S. dollar, compute the restated amount for depreciation expense for 2008. A. $8,190 B. $8,370 C. $8,820 D. $9,090 E. $8,550

73. When translating Quadros' financial statements, which of the following statements is true? A. There will be a re-measurement gain reported on the consolidated income statement B. There will be a re-measurement loss reported on the consolidated income statement C. There will be a positive cumulative translation adjustment reported on the consolidated balance sheet D. There will be a positive cumulative translation adjustment reported on the consolidated income statement E. There will be a transaction gain reported on the consolidated income statement

74. A foreign subsidiary was purchased on January 1, 2008. Determine the exchange rate used to restate the following accounts at December 31, 2008. Land was purchased on October 1, 2008. Relevant exchange dates follow: (A) January 1, 2008 (B) October 1, 2008 (C) December 31, 2008 (D) Average, 2008 (E) Composite, using multiple dates. Identify the exchange rate used to translate items 1-5: ____ 1. Land. ____ 2. Equipment. ____ 3. Bonds payable. ____ 4. Common stock. ____ 5. Retained earnings. Identify the exchange rate used to re-measure the items 6-10: ____ 6. Land. ____ 7. Equipment. ____ 8. Bonds payable. ____ 9. Common stock. ____ 10. Retained earnings.

75. In translating a foreign subsidiary's financial statements, what exchange rate should be used for the subsidiary's revenues and expenses?

76. How can a parent corporation determine the functional currency for a foreign subsidiary that conducts business in more than one country?

77. What exchange rate should be used to translate (a) revenues and expenses that occur throughout the year and (b) a gain or loss that occurs on a specific day?

78. Perkle Co. owned a subsidiary in Belgium; the subsidiary's functional currency was the Belgian franc. During 2009, Perkle engaged in hedging transactions to offset part of the subsidiary's net asset position. How should the effects of exchange rate fluctuations on the currency hedge be accounted for?

79. Under what circumstances would the translation of a foreign subsidiary's financial statements not be required?

80. A foreign subsidiary of a U.S. corporation purchased equipment on January 4, 2005. (A.) How would depreciation expense on the equipment be translated for 2008? (B.) How would depreciation expense on the equipment be re-measured for 2008?

81. What exchange rate would be used to translate the asset and liability account balances of a foreign subsidiary? What justification can be given for using this exchange rate?

82. Farley Brothers, a U.S. company, had a subsidiary in Italy. Under what conditions would the U.S. dollar be the functional currency for this subsidiary?

83. What is the justification for the re-measurement of foreign currency transactions?

84. Contrast the purpose of re-measurement with the purpose of translation.

85. On January 1, 2008, Fandu Corp. started a foreign subsidiary. On April 1, 2008, the subsidiary purchased inventory costing 150,000 stickles. One-fourth of this inventory remained unsold at the end of 2008 while 40% of the liability from the purchase had not yet been paid. The pertinent exchange rates were:

Required: What should have been the December 31, 2008 inventory and accounts payable balances for this foreign subsidiary as translated into U.S. dollars? (Round your answers to the nearest whole dollar.)

86. On January 1, 2008, Veldon Co., a U.S. corporation with the U.S. dollar as its functional currency, established Malont Co. as a subsidiary. Malont is located in the country of Sorania and its functional currency is the stickle. Malont engaged in the following transactions during 2008:

Required: Calculate the translation adjustment for Malont. (Round your answers to the nearest whole dollar.)

Ginvold Co. began operating a subsidiary in a foreign country on January 1, 2008 by acquiring all of the common stock for §50,000. This subsidiary immediately borrowed §120,000 on a five-year note with ten percent interest payable annually beginning on January 1, 2008. A building was then purchased for §170,000. This property had a ten-year anticipated life and no salvage value and was to be depreciated using the straight-line method. The building was immediately rented for three years to a group of local doctors for §6,000 per month. By year-end, payments totaling §60,000 had been made. On October 1, §5,000 were paid for a repair made on that date. A cash dividend of §6,000 was transferred back to Ginvold on December 31, 2008. The functional currency for the subsidiary was the stickle. Currency exchange rates were as follows:

87. Prepare an income statement for this subsidiary in stickles and then translate these amounts into U.S. dollars.

88. Prepare a statement of retained earnings for this subsidiary in stickles and then translate these amounts into U.S. dollars.

89. Prepare a balance sheet for this subsidiary in stickles and then translate these amounts into U.S. dollars.

90. Prepare a statement of cash flows for this subsidiary in stickles and then translate these amounts into U.S. dollars.

Boerkian Co. started 2008 with two assets: cash of §26,000 (stickles) and land that originally cost §72,000 when acquired on April 4, 2004. On May 1, 2008, the company rendered services to a customer for §36,000, an amount immediately paid in cash. On October 1, 2008, the company incurred an operating expense of §22,000 that was immediately paid. No other transactions occurred during the year. Currency exchange rates were as follows:

91. Assume (1) that Boerkian was a foreign subsidiary of a U.S. multinational company that used the U.S. dollar as its functional currency and (2) that the stickle was the functional currency of the subsidiary. What was the translation adjustment for this subsidiary for 2008?

92. Assume (1) that Boerkian was a foreign subsidiary of a U.S. multinational company that used the U.S. dollar as its reporting currency and (2) that the U.S. dollar was the functional currency of the subsidiary. What was the re-measurement gain or loss for 2008?

93. Required: Assume that Boerkian was a foreign subsidiary of a U.S. multinational company. On the December 31, 2008 balance sheet, what was the translated value of the Land account?

94. Assume that Boerkian was a foreign subsidiary of a U.S. multinational company. On the December 31, 2008 balance sheet, what was the re-measured value of the Land account?

ch8 Key

1. In accounting, the term translation refers to A. The calculation of gains or losses from hedging transactions B. The calculation of exchange rate gains or losses on individual transactions in foreign currencies C. The procedure required to identify a company's functional currency D. The calculation of gains or losses from all transactions for the year E. A procedure to prepare a foreign subsidiary's financial statements for consolidation


2. What is a company's functional currency? A. The currency of the primary economic environment in which it operates B. The currency of the country where it has its headquarters C. The currency in which it prepares its financial statements D. The reporting currency of its parent for a subsidiary E. The currency it chooses to designate as such


3. According to SFAS 52, which method is usually required for translating a foreign subsidiary's financial statements into the parent's reporting currency? A. The temporal method B. The current rate method C. The current/noncurrent method D. The monetary/non-monetary method E. The noncurrent rate method


4. In translating a foreign subsidiary's financial statements, which exchange rate does the current method require for the subsidiary's assets and liabilities? A. The exchange rate in effect when each asset or liability was acquired B. The average exchange rate for the current year C. A calculated exchange rate based on market value D. The exchange rate in effect as of the balance sheet date E. The exchange rate in effect at the start of the current year


5. The translation adjustment from translating a foreign subsidiary's financial statements should be shown as A. An asset or liability (depending on the balance) on the consolidated balance sheet B. A revenue or expense (depending on the balance) on the consolidated income statement C. A component of stockholders' equity on the consolidated balance sheet D. A component of cash flows from financing activities on the consolidated statement of cash flows E. An element of the notes which accompany the consolidated financial statements


Westmore, Ltd. is a British subsidiary of a U.S. company. Westmore's functional currency is the pound sterling. The following exchange rates were in effect during 2008:

Hoyle - Chapter 08

6. Westmore reported sales of ≤1,500,000 during 2008. What amount (rounded) would have been included for this subsidiary in calculating consolidated sales? A. $2,380,952 B. $2,400,000 C. $2,429,150 D. $2,419,355 E. $2,425,876


7. On December 31, Westmore had accounts receivable of ≤280,000. What amount (rounded) would have been included for this subsidiary in calculating consolidated accounts receivable? A. $444,444 B. $451,613 C. $142,600 D. $176,400 E. $452,830


8. Gunther Co. established a subsidiary in Mexico on January 1, 2008. The subsidiary engaged in the following transactions during 2008:

What amount of foreign exchange gain or loss would have been recognized on Gunther's consolidated income statement for 2008? A. $200,400 loss B. $90,000 loss C. $226,000 loss D. $235,600 loss E. $250,000 loss


Darron Co. was formed on January 1, 2009 as a wholly owned foreign subsidiary of a U.S. corporation. Darron's functional currency was the stickle (§). The following transactions and events occurred during 2007:

Hoyle - Chapter 08

9. What exchange rate should have been used in translating Darron's revenues and expenses for 2009? A. $1 = §.48 B. $1 = §.44 C. $1 = §.46 D. $1 = §.42 E. $1 = §.45


10. What was the amount of the translation adjustment for 2009? A. $293,479 increase in relative value of net assets B. $302,137 increase in relative value of net assets C. $300,160 increase in relative value of net assets D. $187,418 increase in relative value of net assets E. $270,800 increase in relative value of net assets


11. Which of the following translation methods was originally mandated by SFAS No. 8? A. Current/Noncurrent Method B. Monetary/Non-monetary Method C. Current Rate Method D. Temporal Method E. Indirect Method


12. Which accounts are re-measured using current exchange rates? A. All revenues and expenses B. All assets and liabilities C. All monetary assets and liabilities D. All current assets and liabilities E. All noncurrent assets and liabilities


13. For a foreign subsidiary that uses the US dollar as its functional currency, what translation method is required? A. Current/Noncurrent Method B. Monetary/Non-monetary Method C. Current Rate Method D. Temporal Method E. Indirect Method


Dilty Corp. owned a subsidiary in France. Dilty concluded that the subsidiary's functional currency was the U.S. dollar.

Hoyle - Chapter 08

14. Which one of the following statements would justify this conclusion? A. Most of the subsidiary's sales and purchases were with companies in the U.S B. Dilty's functional currency is the dollar and Dilty is the parent C. Dilty's other subsidiaries all had the dollar as their functional currency D. Generally accepted accounting principles require that the subsidiary's functional currency must be the dollar if consolidated financial statements are to be prepared E. Dilty is located in the U.S


15. What must Dilty do to ready the subsidiary's financial statements for consolidation? A. First translate them, then re-measure them B. First re-measure them, then translate them C. State all of the subsidiary's accounts in U.S. dollars using the exchange rate in effect at the balance sheet date D. Translate them E. Re-measure them


Certain balance sheet accounts of a foreign subsidiary of the Tulip Co. had been stated in U.S. dollars as follows:

Hoyle - Chapter 08

16. If a foreign currency is the functional currency of this subsidiary, what total should have been included in Tulip's balance sheet for the preceding items? A. $609,000 B. $658,000 C. $602,000 D. $630,000 E. $616,000


17. If the U.S. dollar is the functional currency of this subsidiary, what total should have been included in Tulip's balance sheet for the items above? A. $609,000 B. $658,000 C. $602,000 D. $630,000 E. $616,000


A subsidiary of Porter Inc., a U.S. company, was located in a foreign country. The functional currency of this subsidiary was the stickle (§). The subsidiary acquired inventory on credit on November 1, 2008, for §120,000 that was sold on January 17, 2009 for §156,000. The subsidiary paid for the inventory on January 31, 2009. Currency exchange rates between the dollar and the stickle were as follows:

Hoyle - Chapter 08

18. What figure would have been reported for this inventory on Porter's consolidated balance sheet at December 31, 2008? A. $24,000 B. $26,400 C. $22,800 D. $27,600 E. $28,800


19. What figure would have been reported for cost of goods sold on Porter's consolidated income statement at December 31, 2009? A. $24,000 B. $26,400 C. $22,800 D. $27,600 E. $28,800


20. A U.S. company's foreign subsidiary had the following amounts in stickles (§) in 2009:

The average exchange rate during 2009 was §1 = $.96. The beginning inventory was acquired when the exchange rate was §1 = $1.20. The ending inventory was acquired when the exchange rate was §1 = $.90. The exchange rate at December 31, 2009 was §1 = $.84. Assuming that the foreign country had a highly inflationary economy, at what amount should the foreign subsidiary's cost of goods sold have been reflected in the 2009 U.S. dollar income statement? A. $11,253,600 B. $11,577,600 C. $11,649,600 D. $11,613,600 E. $11,523,600


21. A historical exchange rate for a foreign subsidiary is best described as A. The rate at date of acquisition for a purchase transaction B. The rate when the common stock was originally issued for a purchase transaction C. The average rate from date of acquisition to the date of balance sheet D. The rate from the prior year's balances E. The January 1 exchange rate


22. A net asset balance sheet exposure exists and the foreign currency appreciates. Which of the following statements is true? A. There is no translation adjustment B. There is a transaction loss C. There is a transaction gain D. There is a negative translation adjustment E. There is a positive translation adjustment


23. A net asset balance sheet exposure exists and the foreign currency depreciates. Which of the following statements is true? A. There is no translation adjustment B. There is a transaction loss C. There is a transaction gain D. There is a negative translation adjustment E. There is a positive translation adjustment


24. A net liability balance sheet exposure exists and the foreign currency appreciates. Which of the following statements is true? A. There is no translation adjustment B. There is a transaction loss C. There is a transaction gain D. There is a negative translation adjustment E. There is a positive translation adjustment


25. A net liability balance sheet exposure exists and the foreign currency depreciates. Which of the following statements is true? A. There is no translation adjustment B. There is a transaction loss C. There is a transaction gain D. There is a negative translation adjustment E. There is a positive translation adjustment


26. Which method of translating a foreign subsidiary's financial statements is correct? A. Historical rate method B. Working capital method C. Current rate method D. Re-measurement E. Temporal method


27. Which method of re-measuring a foreign subsidiary's financial statements is correct? A. Historical rate method B. Working capital method C. Current rate method D. Translation E. Temporal method


28. Under the temporal method, inventory at market would be restated at what rate? A. Beginning of the year rate B. Average rate C. Current rate D. Historical rate E. Composite amount


29. Under the current rate method, inventory at market would be restated at what rate? A. Beginning of the year rate B. Average rate C. Current rate D. Historical rate E. Composite amount


30. Under the temporal method, common stock would be restated at what rate? A. Beginning of the year rate B. Average rate C. Current rate D. Historical rate E. Composite amount


31. Under the current rate method, common stock would be restated at what rate? A. Beginning of the year rate B. Average rate C. Current rate D. Historical rate E. Composite amount


32. Under the current rate method, property, plant & equipment would be restated at what rate? A. Beginning of the year rate B. Average rate C. Current rate D. Historical rate E. Composite amount


33. Under the temporal method, property, plant & equipment would be restated at what rate? A. Beginning of the year rate B. Average rate C. Current rate D. Historical rate E. Composite amount


34. Under the current rate method, retained earnings would be restated at what rate? A. Beginning of the year rate B. Average rate C. Current rate D. Historical rate E. Composite amount


35. Under the temporal method, retained earnings would be restated at what rate? A. Beginning of the year rate B. Average rate C. Current rate D. Historical rate E. Composite amount


36. Under the current rate method, depreciation expense would be restated at what rate? A. Beginning of the year rate B. Average rate C. Current rate D. Historical rate E. Composite amount


37. Under the temporal method, depreciation expense would be restated at what rate? A. Beginning of the year rate B. Average rate C. Current rate D. Historical rate E. Composite amount


38. Under the temporal method, how would cost of goods sold be restated? A. Beginning of the year rate B. Average rate C. Current rate D. Historical rate E. Composite amount


39. Under the current rate method, how would cost of goods sold be restated? A. Beginning of the year rate B. Average rate C. Current rate D. Historical rate E. Composite amount


40. How is the disposition of the translated gain or loss reported on the parent company's financial statements? A. Net income/loss on the income statement B. Cumulative translation adjustment as a deferred asset C. Cumulative translation adjustment as a deferred liability D. Other comprehensive income E. Retained earnings


41. How is the disposition of the re-measurement gain or loss reported on the parent company's financial statements? A. Net income/loss on the income statement B. Cumulative translation adjustment as a deferred asset C. Cumulative translation adjustment as a deferred liability D. Other comprehensive income E. Retained earnings


42. A highly inflationary economy is defined as A. Cumulative 5-year inflation in excess of 100% B. Cumulative 3-year inflation in excess of 100% C. Cumulative 5-year inflation in excess of 90% D. Cumulative 3-year inflation in excess of 90% E. Any country designated as a company operating in an underworld economy


43. If a subsidiary is operating in a highly inflationary economy, how are the financial statements to be restated? A. Historical rate B. Working capital rate C. Translation D. Re-measurement E. Current rate


44. When consolidating a foreign subsidiary, which of the following statements is true? A. Parent reports a cumulative translation adjustment using the equity method B. Parent's reports a gain or loss in net income using the equity method C. Subsidiary's cumulative translation adjustment is carried forward to the consolidated balance sheet D. Subsidiary's income/loss is carried forward to the consolidated balance sheet E. All foreign currency gains/losses are eliminated on the consolidated income statement and balance sheet


45. When preparing a consolidating statement of cash flows, which of the following statements is false? A. Subsidiary dividends are deducted as a financing activity B. Noncontrolling interest in subsidiary dividends are deducted as a financing activity C. Parent dividends are deducted as a financing activity D. Amortization of cost over book value of the investment in subsidiary is added to net income as an operating activity using the indirect method E. Intercompany gains do not appear on the consolidated statement of cash flows


The following account balances are available for Esposito, an Italian U.S. subsidiary for 2009:

Hoyle - Chapter 08

46. Compute the cost of goods sold for 2009 in U.S. dollars using the temporal method. A. $376,650 B. $387,750 C. $388,800 D. $400,950 E. $409,050


47. Compute the cost of goods sold for 2009 in U.S. dollars using the current rate method. A. $376,550 B. $387,750 C. $388,800 D. $400,950 E. $409,050


48. Compute ending inventory for 2009 under the temporal method. A. $13,950 B. $14,100 C. $14,400 D. $14,850 E. $15,150


49. Compute ending inventory for 2009 under the current rate method. A. $13,950 B. $14,100 C. $14,400 D. $14,850 E. $15,150


The following inventory balances for 2008 in local currency units (LCU) are given:

Hoyle - Chapter 08

50. Compute the December 31, 2008, inventory balance using the lower of cost or market method under the temporal method. A. $429,000 B. $457,600 C. $596,000 D. $568,000 E. $473,600


51. Compute the December 31, 2008, inventory balance using the current rate method. A. $454,400 B. $457,600 C. $596,000 D. $568,000 E. $473,600


Perez Company, a Mexican subsidiary of a U.S. company, sold equipment costing 200,000 pesos with accumulated depreciation of 75,000 pesos for 140,000 pesos on March 1, 2009. The equipment was purchased on January 1, 2008, when the exchange rate for the peso was $.11. Relevant exchange rates for the peso are as follows:

Hoyle - Chapter 08

52. The financial statements for Perez are translated by its U.S. parent. What amount of gain or loss would be reported in its translated income statement? A. $1,530 B. $1,575 C. $1,590 D. $1,090 E. $1,650


53. The financial statements for Perez are re-measured by its U.S. parent. What amount of gain or loss would be reported in its translated income statement? A. $1,530 B. $1,575 C. $1,465 D. $1,090 E. $1,650


Certain balance sheet accounts of a foreign subsidiary of Parker Company at December 31, 2008, have been restated into U.S. dollars as follows:

Hoyle - Chapter 08

54. Assuming the functional currency of the subsidiary is the U.S. dollar, what total should be included in Parker's consolidated balance sheet at December 31, 2008, for the above items? A. $407,500 B. $418,000 C. $396,000 D. $403,500 E. $398,500


55. Assuming the functional currency of the subsidiary is the local currency, what total should be included in Parker's consolidated balance sheet at December 31, 2008, for the above items? A. $407,500 B. $418,000 C. $396,000 D. $403,500 E. $398,500


56. If the current rate used to restate these balances is $.95, what was the historical rate used to restate the same balances? A. $.90 B. $1.00 C. $.95 D. $.9474 E. $1.0556


Kennedy Company acquired all of the outstanding common stock of Hastie Company of Canada for U.S. $350,000 on January 1, 2009, when the exchange rate for the Canadian dollar was U.S. $.70. The fair value of the net assets of Hastie was equal to their book value of C$450,000 (Canadian dollars) on the date of acquisition. Any excess cost over fair value was attributed to an unrecorded patent with a remaining life of five years. The functional currency of Hastie is the Canadian dollar. For the year ended December 31, 2009, Hastie's translated net income was $25,000. The average exchange rate for the Canadian dollar during 2009 was U.S. $.68 and the 2009 year-end exchange rate was U.S. $.65.

Hoyle - Chapter 08

57. Calculate the U.S. $ amount allocated to the patent at January 1, 2009. A. $50,000 B. $35,000 C. $34,000 D. $32,500 E. $28,200


58. Amortization of the patent, translated, for 2009 would be A. $7,000 B. $10,000 C. $6,800 D. $9,000 E. $6,500


59. Compute the amount of the patent reported on the consolidated balance sheet at December 31, 2009. A. $28,200 B. 428,000 C. $35,000 D. $27,200 E. $26,000


60. Kennedy's share of Hastie's net income for 2009 would be A. $18,000 B. $15,000 C. $18,200 D. $16,000 E. $18,500


Quadros Inc., a Portugese firm was acquired by a U.S. company on January 1, 2007. Selected account balances are available for the year ended December 31, 2008 and are stated in euro, the local currency.

Hoyle - Chapter 08

61. Assume the functional currency is the euro, compute the restated amount for sales for 2008. A. $364,000 B. $372,000 C. $380,000 D. $360,000 E. $404,000


62. Assume the functional currency is the euro, compute the restated amount for inventory for 2008. A. $18,600 B. $19,600 C. $18,000 D. $20,200 E. $19,000


63. Assume the functional currency is the euro, compute the restated amount for equipment for 2008. A. $81,900 B. $90,900 C. $83,700 D. $88,200 E. $85,500


64. Assume the functional currency is the euro, compute the restated amount for dividends for 2008. A. $19,000 B. $20,200 C. $18,600 D. $19,400 E. $19,600


65. Assume the functional currency is the euro, compute the restated amount for accumulated depreciation for 2008. A. $40,950 B. $41,850 C. $45,450 D. $42,750 E. $44,100


66. Assume the functional currency is the euro, compute the restated amount for depreciation expense for 2008. A. $8,190 B. $8,370 C. $8,820 D. $9,090 E. $8,550


67. Assume the functional currency is the U.S. dollar, compute the restated amount for sales for 2008. A. $364,000 B. $372,000 C. $380,000 D. $360,000 E. $404,000


68. Assume the functional currency is the U.S. dollar, compute the restated amount for inventory for 2008. A. $18,600 B. $19,600 C. $18,000 D. $20,200 E. $19,000


69. Assume the functional currency is the U.S. dollar, compute the restated amount for equipment for 2008. A. $81,900 B. $90,900 C. $83,700 D. $88,200 E. $85,500


70. Assume the functional currency is the U.S. dollar, compute the restated amount for dividends for 2008. A. $19,000 B. $20,200 C. $18,600 D. $19,400 E. $19,600


71. Assume the functional currency is the U.S. dollar, compute the restated amount for accumulated depreciation for 2008. A. $40,950 B. $41,850 C. $45,450 D. $42,750 E. $44,100


72. Assume the functional currency is the U.S. dollar, compute the restated amount for depreciation expense for 2008. A. $8,190 B. $8,370 C. $8,820 D. $9,090 E. $8,550


73. When translating Quadros' financial statements, which of the following statements is true? A. There will be a re-measurement gain reported on the consolidated income statement B. There will be a re-measurement loss reported on the consolidated income statement C. There will be a positive cumulative translation adjustment reported on the consolidated balance sheet D. There will be a positive cumulative translation adjustment reported on the consolidated income statement E. There will be a transaction gain reported on the consolidated income statement


74. A foreign subsidiary was purchased on January 1, 2008. Determine the exchange rate used to restate the following accounts at December 31, 2008. Land was purchased on October 1, 2008. Relevant exchange dates follow: (A) January 1, 2008 (B) October 1, 2008 (C) December 31, 2008 (D) Average, 2008 (E) Composite, using multiple dates. Identify the exchange rate used to translate items 1-5: ____ 1. Land. ____ 2. Equipment. ____ 3. Bonds payable. ____ 4. Common stock. ____ 5. Retained earnings. Identify the exchange rate used to re-measure the items 6-10: ____ 6. Land. ____ 7. Equipment. ____ 8. Bonds payable. ____ 9. Common stock. ____ 10. Retained earnings.

(1.) C; (2) C; (3.) C; (4.) A; (5.) E; (6.) B; (7.) A; (8.) C; (9.) A; (10.) E


75. In translating a foreign subsidiary's financial statements, what exchange rate should be used for the subsidiary's revenues and expenses?

The historical rate that was in effect when the revenues and expenses were incurred should be used unless those revenues and expenses occur throughout the year, then a weighted average exchange rate for the year may be used.


76. How can a parent corporation determine the functional currency for a foreign subsidiary that conducts business in more than one country?

If the foreign subsidiary has distinct and separable operations in different countries, each of these operations can use a different currency. If the subsidiary does not have distinct operations in different countries, the currency in which the most transactions are carried out should be selected.


77. What exchange rate should be used to translate (a) revenues and expenses that occur throughout the year and (b) a gain or loss that occurs on a specific day?

Revenues and expenses occurring throughout the year may be translated using the average exchange rate for the year. A gain or loss occurring on a specific date should be translated using the rate in effect on that day.


78. Perkle Co. owned a subsidiary in Belgium; the subsidiary's functional currency was the Belgian franc. During 2009, Perkle engaged in hedging transactions to offset part of the subsidiary's net asset position. How should the effects of exchange rate fluctuations on the currency hedge be accounted for?

Any effect on the contract resulting from exchange rate fluctuations is classified as a translation adjustment, rather than as a foreign exchange gain or loss.


79. Under what circumstances would the translation of a foreign subsidiary's financial statements not be required?

The translation of a foreign subsidiary's financial statements is not required in the following two situations: (A.) when the subsidiary's functional currency is the U.S. dollar. (B.) when the subsidiary operates in a highly inflationary economy.


80. A foreign subsidiary of a U.S. corporation purchased equipment on January 4, 2005. (A.) How would depreciation expense on the equipment be translated for 2008? (B.) How would depreciation expense on the equipment be re-measured for 2008?

(A.) Depreciation expense would be translated using the average exchange rate for 2008. (B.) Depreciation expense would be re-measured using the exchange rate in effect when the equipment was purchased.


81. What exchange rate would be used to translate the asset and liability account balances of a foreign subsidiary? What justification can be given for using this exchange rate?

Assets and liabilities are translated using the current exchange rate, the rate in effect at the balance sheet date. This rate is chosen because assets and liabilities are expected to affect future cash flows. Therefore, they should be translated using the most up-to-date exchange rates available.


82. Farley Brothers, a U.S. company, had a subsidiary in Italy. Under what conditions would the U.S. dollar be the functional currency for this subsidiary?

To determine the subsidiary's functional currency, Farley Brothers should look at the volume of the subsidiary's transactions in various currencies. If most of the subsidiary's sales and purchases are in dollars, the dollar may be the logical choice for the functional currency. If there are many transactions between the subsidiary and the parent and if most of the subsidiary's financing comes from the U.S., the dollar may be a better choice than the lira or other European currencies.


83. What is the justification for the re-measurement of foreign currency transactions?

Re-measurement is needed for transactions denominated in a currency other than the entity's functional currency. A U.S. company which engages in transactions in other countries may have to re-measure some of its transactions. The implicit justification for re-measurement is that foreign currency transactions which affect monetary assets and liabilities have a direct effect on the entity's cash flows. There will be direct effects on future cash flows in the functional currency and thus an effect on net income.


84. Contrast the purpose of re-measurement with the purpose of translation.

The purpose of translation is to transform a subsidiary's financial statements, prepared in its functional currency, into the reporting currency of the parent. The purpose of re-measurement is to restate transactions from one currency into the functional currency of the entity. Re-measurement is also required when a subsidiary's financial statements have been denominated in a currency other than the subsidiary's functional currency.


85. On January 1, 2008, Fandu Corp. started a foreign subsidiary. On April 1, 2008, the subsidiary purchased inventory costing 150,000 stickles. One-fourth of this inventory remained unsold at the end of 2008 while 40% of the liability from the purchase had not yet been paid. The pertinent exchange rates were:

Required: What should have been the December 31, 2008 inventory and accounts payable balances for this foreign subsidiary as translated into U.S. dollars? (Round your answers to the nearest whole dollar.)


86. On January 1, 2008, Veldon Co., a U.S. corporation with the U.S. dollar as its functional currency, established Malont Co. as a subsidiary. Malont is located in the country of Sorania and its functional currency is the stickle. Malont engaged in the following transactions during 2008:

Required: Calculate the translation adjustment for Malont. (Round your answers to the nearest whole dollar.)


Ginvold Co. began operating a subsidiary in a foreign country on January 1, 2008 by acquiring all of the common stock for §50,000. This subsidiary immediately borrowed §120,000 on a five-year note with ten percent interest payable annually beginning on January 1, 2008. A building was then purchased for §170,000. This property had a ten-year anticipated life and no salvage value and was to be depreciated using the straight-line method. The building was immediately rented for three years to a group of local doctors for §6,000 per month. By year-end, payments totaling §60,000 had been made. On October 1, §5,000 were paid for a repair made on that date. A cash dividend of §6,000 was transferred back to Ginvold on December 31, 2008. The functional currency for the subsidiary was the stickle. Currency exchange rates were as follows:

Hoyle - Chapter 08

87. Prepare an income statement for this subsidiary in stickles and then translate these amounts into U.S. dollars.


88. Prepare a statement of retained earnings for this subsidiary in stickles and then translate these amounts into U.S. dollars.

Ginvold Co. Subsidiary Statement of Retained Earnings For the Year Ended December 31, 2008


89. Prepare a balance sheet for this subsidiary in stickles and then translate these amounts into U.S. dollars.

Ginvold Co. Subsidiary Balance Sheet December 31, 2008


90. Prepare a statement of cash flows for this subsidiary in stickles and then translate these amounts into U.S. dollars.

Ginvold Co. Subsidiary Statement of Cash Flows For the Year Ended, December 31, 2008


Boerkian Co. started 2008 with two assets: cash of §26,000 (stickles) and land that originally cost §72,000 when acquired on April 4, 2004. On May 1, 2008, the company rendered services to a customer for §36,000, an amount immediately paid in cash. On October 1, 2008, the company incurred an operating expense of §22,000 that was immediately paid. No other transactions occurred during the year. Currency exchange rates were as follows:

Hoyle - Chapter 08

91. Assume (1) that Boerkian was a foreign subsidiary of a U.S. multinational company that used the U.S. dollar as its functional currency and (2) that the stickle was the functional currency of the subsidiary. What was the translation adjustment for this subsidiary for 2008?


92. Assume (1) that Boerkian was a foreign subsidiary of a U.S. multinational company that used the U.S. dollar as its reporting currency and (2) that the U.S. dollar was the functional currency of the subsidiary. What was the re-measurement gain or loss for 2008?


93. Required: Assume that Boerkian was a foreign subsidiary of a U.S. multinational company. On the December 31, 2008 balance sheet, what was the translated value of the Land account?


94. Assume that Boerkian was a foreign subsidiary of a U.S. multinational company. On the December 31, 2008 balance sheet, what was the re-measured value of the Land account?


ch8 Summary


ch9

Student: ___________________________________________________________________________

1. Cherryhill and Hace had been partners for several years and they decided to admit Quincy to the partnership. The accountant for the partnership believed that the dissolved partnership and the newly formed partnership were two separate entities. What method would the accountant have used for recording the admission of Quincy to the partnership? A. The bonus method B. The equity method C. The goodwill method D. The proportionate method E. The cost method

2. When the hybrid method is used to record the withdrawal of a partner, the partnership A. Revalues assets and liabilities and records goodwill to the continuing partner but not to the withdrawing partner B. Revalues liabilities but not assets and no goodwill is recorded C. Can recognize goodwill but does not revalue assets and liabilities D. Revalues assets but not liabilities and records goodwill to the continuing partner but not to the withdrawing partner E. Revalues assets and liabilities but does not record goodwill

3. The disadvantages of the partnership form of business organization, compared to corporations, include A. The legal requirements for formation B. Unlimited liability for the partners C. The requirement for the partnership to pay income taxes D. The extent of governmental regulation E. The complexity of operations

4. The advantages of the partnership form of business organization, compared to corporations, include A. Single taxation B. Ease of raising capital C. Mutual agency D. Limited liability E. Difficulty of formation

5. The dissolution of a partnership occurs A. Only when the partnership sells its assets and permanently closes its books B. Only when a partner leaves the partnership C. At the end of each year, when income is allocated to the partners D. Only when a new partner is admitted to the partnership E. When there is any change in the individuals who make up the partnership

6. The partnership of Clapton, Seidel and Thomas was insolvent and will be unable to pay $30,000 in liabilities currently due. What recourse was available to the partnership's creditors? A. They must present equal claims to the three partners as individuals B. They must try obtain a payment from the partner with the largest capital account balance C. They cannot seek remuneration from the partners as individuals D. They may seek remuneration from any partner they choose E. They must present their claims to the three partners in the order of the partners' capital account balances

Cleary, Wasser and Nolan formed a partnership on January 1, 2007, with investments of $100,000, $150,000 and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary and 40% each for Wasser and Nolan. Net income was $150,000 in 2007 and $180,000 in 2008. Each partner withdrew $1,000 for personal use every month during 2007 and 2008.

7. What was Wasser's share of income for 2007? A. $63,000 B. $53,000 C. $58,000 D. $29,000 E. $51,000

8. What was Nolan's share of income for 2007? A. $63,000 B. $53,000 C. $58,000 D. $29,000 E. $51,000

9. What was Cleary's share of income for 2007? A. $63,000 B. $53,000 C. $58,000 D. $29,000 E. $51,000

10. What was Nolan's capital balance at the end of 2007? A. $200,000 B. $224,000 C. $238,000 D. $246,000 E. $254,000

11. What was Wasser's capital balance at the end of 2007? A. $150,000 B. $160,000 C. $165,000 D. $213,000 E. $201,000

12. What was Cleary's capital balance at the end of 2007? A. $100,000 B. $117,000 C. $119,000 D. $129,000 E. $153,000






18. What is Cleary's capital account balance at the end of 2008? A. $163,420 B. $151,420 C. $139,420 D. $100,000 E. $142,000

19. Jell and Dell were partners with capital balances of $600 and $800 and an income sharing ratio of 2:3. They admitted Zell to a 30% interest in the partnership and the total amount of goodwill credited to the original partners was $700. What amount did Zell contribute to the business? A. $560 B. $570 C. $600 D. $590 E. $630

A partnership began its first year of operations with the following capital balances:

The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis, respectively. Each partner was allowed to withdraw up to $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. Assume further that each partner withdrew the maximum amount from the business each year.

20. What was Young's share of income or loss for the first year? A. $3,900 loss B. $11,700 loss C. $10,400 loss D. $24,700 loss E. $9,100 loss

21. What was Eaton's share of income or loss for the first year? A. $3,900 loss B. $11,700 loss C. $10,400 loss D. $24,700 loss E. $9,100 loss

22. What was Thurman's share of income or loss for the first year? A. $3,900 loss B. $11,700 loss C. $10,400 loss D. $24,700 loss E. $9,100 loss

23. What was the balance in Young's Capital account at the end of the first year? A. $120,900 B. $118,300 C. $126,100 D. $80,600 E. $111,500

24. What was the balance in Eaton's Capital account at the end of the first year? A. $120,900 B. $118,300 C. $126,100 D. $80,600 E. $111,500

25. What was the balance in Thurman's Capital account at the end of the first year? A. $120,900 B. $118,300 C. $126,100 D. $80,600 E. $111,500

26. What was Young's share of income or loss for the second year? A. $17,160 income B. $4,160 income C. $19,760 income D. $17,290 income E. $28,080 income

27. What was Eaton's share of income or loss for the second year? A. $17,160 income B. $4,160 income C. $19,760 income D. $17,290 income E. $28,080 income

28. What was Thurman's share of income or loss for the second year? A. $17,160 income B. $4,160 income C. $19,760 income D. $17,290 income E. $28,080 income

29. What was the balance in Young's Capital account at the end of the second year? A. $133,380 B. $84,760 C. $105,690 D. $132,860 E. $71,760

30. What was the balance in Eaton's Capital account at the end of the second year? A. $133,380 B. $84,760 C. $105,690 D. $132,860 E. $71,760

31. What was the balance in Thurman's Capital account at the end of the second year? A. $133,380 B. $84,760 C. $105,690 D. $132,860 E. $71,760

32. Which of the following is not a characteristic of a partnership? A. The partnership itself pays no income taxes B. It is easy to form a partnership C. Any partner can be held personally liable for all debts of the business D. A partnership requires written Articles of Partnership E. Each partner has the power to obligate the partnership for liabilities

33. Partnerships have alternative legal forms including all of the following except: A. Partnership B. Limited Partnership C. Subchapter S Corporation D. Limited Liability Partnership E. Limited Liability Company

34. Which of the following type of organization is classified as a partnership or similar to a partnership, for tax purposes? (I) Limited Liability Company (II) Limited Liability Partnership (III) Subchapter S Corporation A. II only B. II and III C. I and II D. I and III E. I, II and III

35. Which of the following statements is correct regarding the admission of a new partner? A. A new partner must purchase a partnership interest directly from the business B. The right of co-ownership in the business property can be transferred to a new partner without the consent of other existing partners C. The right to participate in management of the business can be conveyed without the consent of other existing partners D. The right to share in profits and losses can be sold to a new partner without the consent of other existing partners E. A new partner always pays book value

36. Withdrawals from the partnership accounts are typically not used A. To record compensation for work performed in the business B. To reduce the partners' capital account balances at the end of an accounting period C. To record interest earned on a partner's capital balance D. To reduce the basic investment that has been made in the business to record a reward for ownership in the partnership

37. The partnership contract for Hanes and Jones LLP provides that Hanes is to receive a bonus of 20% of net income (after the bonus) and that the remaining net income is to be divided equally. If the partnership income before the bonus for the year is $57,600, Hanes' share of this pre-bonus income is: A. $28,800 B. $33,600 C. $34,560 D. $43,200 E. $57,600

38. The partners of Apple, Bere and Carroll LLP share net income and losses in a 5:3:2 ratio, respectively. The capital account balances on January 1, 2008, were as follows:

The carrying amounts of the assets and liabilities of the partnership are the same as their current fair values. Dorr will be admitted to the partnership with a 20% capital interest and a 20% share of net income and losses in exchange for a cash investment. The amount of cash that Dorr should invest in the partnership is: A. $25,000 B. $30,000 C. $37,500 D. $75,000 E. $90,000

39. The appropriate format of the January 31, 2008 closing entry for John & Hope Limited Liability Partnership, whose two partners had withdrawn their salaries from the partnership during January is

A. A Above B. B Above C. C Above D. D Above

40. When Danny withdrew from John, Daniel, Harry and Danny LLP, he was paid $80,000, although his capital account balance was only $60,000. The four partners shared net income and losses equally. The journal entry of the partnership to record Danny's withdrawal preferably should include: A. $6,667 debit to John, Capital B. $6,667 credit to John, Capital C. $6,667 debit to John, Drawing D. $5,000 debit to John, Capital E. $5,000 credit to John, Capital

41. Max, Jones and Waters shared profits and losses 20%, 40% and 40% respectively and their partnership capital balance is $10,000, $30,000 and $50,000 respectively. Max has decided to withdraw from the partnership. An appraisal of the business and its property estimates the fair value to be $200,000. Land with a book value of $30,000 has a fair value of $45,000. Max has agreed to receive $20,000 in exchange for her partnership interest. What amount should land be recorded on the partnership books? A. $20,000 B. $30,000 C. $45,000 D. $50,000 E. $200,000

The capital account balances for Donald & Hanes LLP on January 1, 2008, were as follows:

Donald and Hanes shared net income and losses in the ratio of 3:2, respectively. The partners agreed to admit May to the partnership with a 35% interest in partnership capital and net income. May invested $100,000 cash and no goodwill was recognized.

42. What is the balance of May's capital account after the new partnership is created? A. $84,000 B. $100,000 C. $140,000 D. $176,000 E. $200,000

43. What is the balance of Donald's capital account after the new partnership is created? A. $84,000 B. $100,000 C. $140,000 D. $176,000 E. $200,000

44. What is the balance of Hane's capital account after the new partnership is created? A. $84,000 B. $100,000 C. $140,000 D. $176,000 E. $200,000

45. What is the new total balance of the partnership accounts? A. $84,000 B. $140,000 C. $176,000 D. $200,000 E. $400,000

46. Which of the following could be used as a basis to allocate profits among partners who are active in the management of the partnership? 1) allocation of salaries. 2) the number of years with the partnership. 3) the amount of time each partner works. 4) the average capital invested A. 1 and 2 B. 1 and 3 C. 1, 2 and 3 D. 1, 3 and 4 E. 1, 2, 3 and 4

Peter, Roberts and Dana have the following capital balances; $80,000, $100,000 and $60,000 respectively. The partners share profits and losses 20%, 40% and 40% respectively.

47. Roberts retires and is paid $160,000 based on the terms of the original partnership agreement. If the goodwill method is used, what is the capital balance of Peter? A. $20,000 B. $60,000 C. $110,000 D. $120,000 E. $230,000

48. Roberts retires and is paid $160,000 based on the terms of the original partnership agreement. If the goodwill method is used, what is the capital balance of Dana? A. $20,000 B. $60,000 C. $110,000 D. $120,000 E. $230,000

49. What is the total partnership capital after Roberts retires receiving $160,000 and using the goodwill method? A. $20,000 B. $60,000 C. $80,000 D. $120,000 E. $230,000

Donald, Anne and Todd have the following capital balances; $40,000, $50,000 and $30,000 respectively. The partners share profits and losses 20%, 40% and 40% respectively.

50. Anne retires and is paid $80,000 based on the terms of the original partnership agreement. If the goodwill method is used, what is the capital of the remaining partners? A. Donald, $55,000; Todd, $60,000 B. Donald, $40,000; Todd, $30,000 C. Donald, $65,000; Todd, $55,000 D. Donald, $15,000; Todd, $30,000

51. Anne retires and is paid $80,000 based on the terms of the original partnership agreement. If the bonus method is used, what is the capital of the remaining partners? A. Donald, $40,000; Todd, $30,000 B. Donald, $30,000; Todd, $10,000 C. Donald, $50,000; Todd, $50,000 D. Donald, $80,000; Todd, $70,000

52. What is the total partnership capital after Anne retires receiving $80,000 and using the bonus method? A. $20,000 B. $40,000 C. $60,000 D. $80,000 E. $100,000

53. What is the dissolution of a partnership?

54. By what methods can a person gain admittance to a partnership?

55. What events cause the dissolution of a partnership?

56. For what events or conditions should the Articles of Partnership make provision?

57. How is accounting for a partnership different from accounting for a corporation?

58. Why are the terms of the Articles of Partnership important to partners?

59. Brown and Green are forming a business as partners. If they do not create a formal written partnership agreement, what risks are they exposing themselves to?

60. What theoretical argument could be made against the recognition of goodwill when there is a change in the ownership of a partnership?

61. Under what circumstances does a partner's balance in his or her capital account have practical consequences for the partner?

62. Reed, Sharp and Tucker were partners with capital account balances of $80,000, $100,000 and $70,000, respectively. They agreed to admit Upton to the partnership. Upton purchased 30% of each partner's interest, with payments to Reed, Sharp and Tucker of $32,000, $40,000 and $28,000, respectively. Before the admission of Upton, the profit and loss sharing ratio was 2:3:2. The partners agreed to use the bonus method to account for the admission of Upton to the partnership. Required: Prepare the journal entry to record the admission of Upton to the partnership.

63. Jipsom and Klark were partners with capital account balances of $80,000 and $100,000, respectively. Looney paid $32,000 to Jipsom and $40,000 to Klark for 30% of their interests in the partnership. Jipsom and Klark shared income in the ratio of 2:3. They believed that revaluation of the partnership was appropriate when a new partner was admitted. Required: Prepare the journal entries to record the admission of Looney to the partnership.

Norr and Caylor established a partnership on January 1, 2007. Norr invested cash of $100,000 and Caylor invested $30,000 in cash and equipment with a book value of $40,000 and fair value of $50,000. For both partners, the beginning capital balance was to equal the initial investment. Norr and Caylor agreed to the following procedure for sharing profits and losses: - 12% interest on the yearly beginning capital balance - $10 per hour of work that can be billed to the partnership's clients - the remainder divided in a 3:2 ratio The Articles of Partnership specified that each partner should withdraw no more than $1,000 per month. For 2007, the partnership's income was $70,000. Norr had 1,000 billable hours and Caylor worked 1,400 billable hours. In 2008, the partnership's income was $24,000 and Norr and Caylor worked 800 and 1,200 billable hours respectively. Each partner withdrew $1,000 per month throughout 2007 and 2008.

64. Determine the amount of income allocated to each partner for 2007.

65. Determine the balance in both capital accounts at the end of 2007.

66. Determine the amount of income allocated to each partner for 2008 to the nearest dollar.

67. Determine the balance in both capital accounts at the end of 2008 to the nearest dollar.

68. Eden contributes $49,000 into the partnership for a 25% interest. The four original partners share profits and losses equally. Using the bonus method, determine the balances for each of the five partners after Eden joins the partnership.

69. Eden contributed $124,000 in cash to the business to receive a 20% interest in the partnership. Goodwill was to be recorded. The four original partners shared all profits and losses equally. After Eden made his investment, what were the individual capital balances?

70. Eden acquired a 20% interest in the partnership by contributing a total of $71,500 directly to the other four partners. No goodwill is to be recorded. Profits and losses have previously been split according to the following percentages: Adams, 15%, Barnes, 35%, Cordas, 30% and Davis, 20%. After Eden made his investment, what were the individual capital balances?

71. Eden acquired a 20% interest in the partnership by contributing a total of $71,500 directly to the other four partners. Goodwill is to be recorded. Profits and losses have previously been split according to the following percentages: Adams, 15%, Barnes, 35%, Cordas, 30% and Davis, 20%. After Eden made his investment, what were the individual capital balances?

Assume the partnership of Dean, Hardin and Roth has been in existence for a number of years. Dean decides to withdraw from the partnership when the partners' capital balances are as follows:

An appraisal of the business and its property estimates the fair value to be $100,000. Dean has agreed to receive $64,000 in exchange for his partnership interest.

72. Prepare the journal entry for the payment to Dean in the dissolution of his partnership interest, assuming the bonus method is to be applied.

73. What are the remaining partners' capital balances after Dean's interest is dissolved, assuming the bonus method is applied?

Assume the partnership of Howell, Madrid and Waldrop has been in existence for a number of years. Howell decides to withdraw from the partnership when the partners' capital balances are as follows:

An appraisal of the business and its net assets estimates the fair value to be $154,000. Land with a book value of $20,000 has a fair value of $35,000. Howell has agreed to receive $84,000 in exchange for her partnership interest.

74. Prepare the journal entries for the dissolution of Howell's partnership interest, assuming the goodwill method is to be applied.

75. What are the remaining partners' capital balances after Howell's interest is dissolved, assuming the goodwill method is applied?

On January 1, 2008, Lamb and Mona LLP admitted Noris to a 20% interest in net assets for an investment of $50,000 cash. Prior to the admission of Noris, Lamb and Mona had net assets of $100,000 and an income-sharing ratio of Lamb 25%, Mona 75%. After the admission of Noris, the partnership contract included the following provisions: Salary of $40,000 a year to Noris. Remaining net income in ratio Lamb 20%, Mona 60%, Noris 20% During the fiscal year ended December 31, 2008, the partnership had income of $90,000 prior to recognition of salary to Noris.

76. Record the journal entry for the admission of Noris. Goodwill is not to be recorded.

77. Record the journal entry to allocate the salary of Noris.

78. Record the journal entry to record the net income to the capital accounts

79. James, Keller and Rivers have the following capital balances; $48,000, $70,000 and $90,000 respectively. Because of a cash shortage James invests an additional $12,000 on June 1st. Each partner withdraws $1,000 per month. James, Keller and Rivers receive a salary of $13,000, $15,000 and $20,000, respectively, for work done during the year. Each partner receives interest of 8% on their weighted average capital balance without regard to normal drawings. Any remaining profits are split 20%, 30% and 50% respectively. The net income for the year is $30,000. What are the ending capital balances for each partner?

ch9 Key

1. Cherryhill and Hace had been partners for several years and they decided to admit Quincy to the partnership. The accountant for the partnership believed that the dissolved partnership and the newly formed partnership were two separate entities. What method would the accountant have used for recording the admission of Quincy to the partnership? A. The bonus method B. The equity method C. The goodwill method D. The proportionate method E. The cost method


2. When the hybrid method is used to record the withdrawal of a partner, the partnership A. Revalues assets and liabilities and records goodwill to the continuing partner but not to the withdrawing partner B. Revalues liabilities but not assets and no goodwill is recorded C. Can recognize goodwill but does not revalue assets and liabilities D. Revalues assets but not liabilities and records goodwill to the continuing partner but not to the withdrawing partner E. Revalues assets and liabilities but does not record goodwill


3. The disadvantages of the partnership form of business organization, compared to corporations, include A. The legal requirements for formation B. Unlimited liability for the partners C. The requirement for the partnership to pay income taxes D. The extent of governmental regulation E. The complexity of operations


4. The advantages of the partnership form of business organization, compared to corporations, include A. Single taxation B. Ease of raising capital C. Mutual agency D. Limited liability E. Difficulty of formation


5. The dissolution of a partnership occurs A. Only when the partnership sells its assets and permanently closes its books B. Only when a partner leaves the partnership C. At the end of each year, when income is allocated to the partners D. Only when a new partner is admitted to the partnership E. When there is any change in the individuals who make up the partnership


6. The partnership of Clapton, Seidel and Thomas was insolvent and will be unable to pay $30,000 in liabilities currently due. What recourse was available to the partnership's creditors? A. They must present equal claims to the three partners as individuals B. They must try obtain a payment from the partner with the largest capital account balance C. They cannot seek remuneration from the partners as individuals D. They may seek remuneration from any partner they choose E. They must present their claims to the three partners in the order of the partners' capital account balances


Cleary, Wasser and Nolan formed a partnership on January 1, 2007, with investments of $100,000, $150,000 and $200,000, respectively. For division of income, they agreed to (1) interest of 10% of the beginning capital balance each year, (2) annual compensation of $10,000 to Wasser and (3) sharing the remainder of the income or loss in a ratio of 20% for Cleary and 40% each for Wasser and Nolan. Net income was $150,000 in 2007 and $180,000 in 2008. Each partner withdrew $1,000 for personal use every month during 2007 and 2008.

Hoyle - Chapter 09



12. What was Cleary's capital balance at the end of 2007? A. $100,000 B. $117,000 C. $119,000 D. $129,000 E. $153,000












18. What is Cleary's capital account balance at the end of 2008? A. $163,420 B. $151,420 C. $139,420 D. $100,000 E. $142,000


19. Jell and Dell were partners with capital balances of $600 and $800 and an income sharing ratio of 2:3. They admitted Zell to a 30% interest in the partnership and the total amount of goodwill credited to the original partners was $700. What amount did Zell contribute to the business? A. $560 B. $570 C. $600 D. $590 E. $630


A partnership began its first year of operations with the following capital balances:

The Articles of Partnership stipulated that profits and losses be assigned in the following manner: Young was to be awarded an annual salary of $26,000 with $13,000 salary assigned to Thurman. Each partner was to be attributed with interest equal to 10% of the capital balance as of the first day of the year. The remainder was to be assigned on a 5:2:3 basis, respectively. Each partner was allowed to withdraw up to $13,000 per year. Assume that the net loss for the first year of operations was $26,000 with net income of $52,000 in the second year. Assume further that each partner withdrew the maximum amount from the business each year.

Hoyle - Chapter 09

20. What was Young's share of income or loss for the first year? A. $3,900 loss B. $11,700 loss C. $10,400 loss D. $24,700 loss E. $9,100 loss


21. What was Eaton's share of income or loss for the first year? A. $3,900 loss B. $11,700 loss C. $10,400 loss D. $24,700 loss E. $9,100 loss


22. What was Thurman's share of income or loss for the first year? A. $3,900 loss B. $11,700 loss C. $10,400 loss D. $24,700 loss E. $9,100 loss


23. What was the balance in Young's Capital account at the end of the first year? A. $120,900 B. $118,300 C. $126,100 D. $80,600 E. $111,500


24. What was the balance in Eaton's Capital account at the end of the first year? A. $120,900 B. $118,300 C. $126,100 D. $80,600 E. $111,500


25. What was the balance in Thurman's Capital account at the end of the first year? A. $120,900 B. $118,300 C. $126,100 D. $80,600 E. $111,500


26. What was Young's share of income or loss for the second year? A. $17,160 income B. $4,160 income C. $19,760 income D. $17,290 income E. $28,080 income


27. What was Eaton's share of income or loss for the second year? A. $17,160 income B. $4,160 income C. $19,760 income D. $17,290 income E. $28,080 income


28. What was Thurman's share of income or loss for the second year? A. $17,160 income B. $4,160 income C. $19,760 income D. $17,290 income E. $28,080 income


29. What was the balance in Young's Capital account at the end of the second year? A. $133,380 B. $84,760 C. $105,690 D. $132,860 E. $71,760


30. What was the balance in Eaton's Capital account at the end of the second year? A. $133,380 B. $84,760 C. $105,690 D. $132,860 E. $71,760


31. What was the balance in Thurman's Capital account at the end of the second year? A. $133,380 B. $84,760 C. $105,690 D. $132,860 E. $71,760


32. Which of the following is not a characteristic of a partnership? A. The partnership itself pays no income taxes B. It is easy to form a partnership C. Any partner can be held personally liable for all debts of the business D. A partnership requires written Articles of Partnership E. Each partner has the power to obligate the partnership for liabilities


33. Partnerships have alternative legal forms including all of the following except: A. Partnership B. Limited Partnership C. Subchapter S Corporation D. Limited Liability Partnership E. Limited Liability Company


34. Which of the following type of organization is classified as a partnership or similar to a partnership, for tax purposes? (I) Limited Liability Company (II) Limited Liability Partnership (III) Subchapter S Corporation A. II only B. II and III C. I and II D. I and III E. I, II and III


35. Which of the following statements is correct regarding the admission of a new partner? A. A new partner must purchase a partnership interest directly from the business B. The right of co-ownership in the business property can be transferred to a new partner without the consent of other existing partners C. The right to participate in management of the business can be conveyed without the consent of other existing partners D. The right to share in profits and losses can be sold to a new partner without the consent of other existing partners E. A new partner always pays book value


36. Withdrawals from the partnership accounts are typically not used A. To record compensation for work performed in the business B. To reduce the partners' capital account balances at the end of an accounting period C. To record interest earned on a partner's capital balance D. To reduce the basic investment that has been made in the business to record a reward for ownership in the partnership


37. The partnership contract for Hanes and Jones LLP provides that Hanes is to receive a bonus of 20% of net income (after the bonus) and that the remaining net income is to be divided equally. If the partnership income before the bonus for the year is $57,600, Hanes' share of this pre-bonus income is: A. $28,800 B. $33,600 C. $34,560 D. $43,200 E. $57,600

Bonus = .20 (NI - Bonus) = (.20NI) - (.20 Bonus).


38. The partners of Apple, Bere and Carroll LLP share net income and losses in a 5:3:2 ratio, respectively. The capital account balances on January 1, 2008, were as follows:

The carrying amounts of the assets and liabilities of the partnership are the same as their current fair values. Dorr will be admitted to the partnership with a 20% capital interest and a 20% share of net income and losses in exchange for a cash investment. The amount of cash that Dorr should invest in the partnership is: A. $25,000 B. $30,000 C. $37,500 D. $75,000 E. $90,000

($150,000/.8 = $187,500. $187,500 - $150,000 = $37,500 to invest)


39. The appropriate format of the January 31, 2008 closing entry for John & Hope Limited Liability Partnership, whose two partners had withdrawn their salaries from the partnership during January is

A. A Above B. B Above C. C Above D. D Above


40. When Danny withdrew from John, Daniel, Harry and Danny LLP, he was paid $80,000, although his capital account balance was only $60,000. The four partners shared net income and losses equally. The journal entry of the partnership to record Danny's withdrawal preferably should include: A. $6,667 debit to John, Capital B. $6,667 credit to John, Capital C. $6,667 debit to John, Drawing D. $5,000 debit to John, Capital E. $5,000 credit to John, Capital

($80,000 - $60,000) 3 = $6,667


41. Max, Jones and Waters shared profits and losses 20%, 40% and 40% respectively and their partnership capital balance is $10,000, $30,000 and $50,000 respectively. Max has decided to withdraw from the partnership. An appraisal of the business and its property estimates the fair value to be $200,000. Land with a book value of $30,000 has a fair value of $45,000. Max has agreed to receive $20,000 in exchange for her partnership interest. What amount should land be recorded on the partnership books? A. $20,000 B. $30,000 C. $45,000 D. $50,000 E. $200,000

Land will be recorded at the fair value of $45,000


The capital account balances for Donald & Hanes LLP on January 1, 2008, were as follows:

Donald and Hanes shared net income and losses in the ratio of 3:2, respectively. The partners agreed to admit May to the partnership with a 35% interest in partnership capital and net income. May invested $100,000 cash and no goodwill was recognized.

Hoyle - Chapter 09

42. What is the balance of May's capital account after the new partnership is created? A. $84,000 B. $100,000 C. $140,000 D. $176,000 E. $200,000


43. What is the balance of Donald's capital account after the new partnership is created? A. $84,000 B. $100,000 C. $140,000 D. $176,000 E. $200,000


44. What is the balance of Hane's capital account after the new partnership is created? A. $84,000 B. $100,000 C. $140,000 D. $176,000 E. $200,000


45. What is the new total balance of the partnership accounts? A. $84,000 B. $140,000 C. $176,000 D. $200,000 E. $400,000


46. Which of the following could be used as a basis to allocate profits among partners who are active in the management of the partnership? 1) allocation of salaries. 2) the number of years with the partnership. 3) the amount of time each partner works. 4) the average capital invested A. 1 and 2 B. 1 and 3 C. 1, 2 and 3 D. 1, 3 and 4 E. 1, 2, 3 and 4


Peter, Roberts and Dana have the following capital balances; $80,000, $100,000 and $60,000 respectively. The partners share profits and losses 20%, 40% and 40% respectively.

Hoyle - Chapter 09

47. Roberts retires and is paid $160,000 based on the terms of the original partnership agreement. If the goodwill method is used, what is the capital balance of Peter? A. $20,000 B. $60,000 C. $110,000 D. $120,000 E. $230,000

Roberts receives an additional $60,000 above her capital balance. Since she is assigned 40 percent of all profits and losses, this extra allocation indicates total goodwill of $150,000, which must be split among all partners.


48. Roberts retires and is paid $160,000 based on the terms of the original partnership agreement. If the goodwill method is used, what is the capital balance of Dana? A. $20,000 B. $60,000 C. $110,000 D. $120,000 E. $230,000



49. What is the total partnership capital after Roberts retires receiving $160,000 and using the goodwill method? A. $20,000 B. $60,000 C. $80,000 D. $120,000 E. $230,000



Donald, Anne and Todd have the following capital balances; $40,000, $50,000 and $30,000 respectively. The partners share profits and losses 20%, 40% and 40% respectively.

Hoyle - Chapter 09

50. Anne retires and is paid $80,000 based on the terms of the original partnership agreement. If the goodwill method is used, what is the capital of the remaining partners? A. Donald, $55,000; Todd, $60,000 B. Donald, $40,000; Todd, $30,000 C. Donald, $65,000; Todd, $55,000 D. Donald, $15,000; Todd, $30,000

Anne receives an additional $30,000 above her capital balance. Since she is assigned 40 percent of all profits and losses, this extra allocation indicates total goodwill of $75,000, which must be split among all partners.


51. Anne retires and is paid $80,000 based on the terms of the original partnership agreement. If the bonus method is used, what is the capital of the remaining partners? A. Donald, $40,000; Todd, $30,000 B. Donald, $30,000; Todd, $10,000 C. Donald, $50,000; Todd, $50,000 D. Donald, $80,000; Todd, $70,000

The $30,000 bonus is deducted from the remaining partners according to their relative profit and loss ratio. Donald = 20% and Todd = 40% which is a 1/3, 2/3 split.


52. What is the total partnership capital after Anne retires receiving $80,000 and using the bonus method? A. $20,000 B. $40,000 C. $60,000 D. $80,000 E. $100,000


53. What is the dissolution of a partnership?

The dissolution of a partnership is the breakup of the partnership caused by any change in the members that make up the partnership.


54. By what methods can a person gain admittance to a partnership?

A person can gain admittance to a partnership by purchasing all or part of a current partner's interest or by investing assets in the partnership.


55. What events cause the dissolution of a partnership?

The dissolution of a partnership occurs whenever there is a change in the members that make up the partnership. Dissolution does not mean going out of business, although, on occasion, dissolution would be accompanied by liquidation of assets and termination of the business. Dissolution would occur whenever a new partner is admitted to the partnership, dissolving one partnership and forming a new one. Dissolution also occurs when a partner leaves the partnership or when a partner dies or retires. The Articles of Partnership may allow the partners to force dissolution under some circumstances.


56. For what events or conditions should the Articles of Partnership make provision?

The Articles of Partnership should be a comprehensive document that is fair to all the partners. It should contain the following provisions: (A) The amounts that will be invested in the partnership by the founding partners. (B) The amounts of withdrawals that partners can make. Limiting the amount of withdrawals causes the partners to maintain a reasonable investment in the partnership. (C) The division of income or loss between the partners. (D) Guidelines for admission of new partners or withdrawal or retirement of partners. (E) In some cases, guidelines for division of assets when the partnership liquidates. In addition, the Articles of Partnership should specify how much time each partner will spend in the business; the responsibilities of each partner; and procedures for resolution of disputes between partners.


57. How is accounting for a partnership different from accounting for a corporation?

Financial accounting for a partnership differs from corporate accounting only in accounting for owners' equity. A partnership does not sell capital stock and does not have a retained earnings account. Each partner will have a capital account and a drawing account. On the balance sheet, the balance in each of the partner's capital accounts should be reported. The accountant for a partnership must divide income or loss among partners, following the provisions of the Articles of Partnership. Income tax accounting differs between corporations and partnerships. A corporation is a taxable entity and must file an income tax return. A partnership is not a taxable entity but is required to file an informational return that reports the various amounts of revenues and expenses attributed to each partner.


58. Why are the terms of the Articles of Partnership important to partners?

The Articles of Partnership contain terms that help to protect the interests of each partner and the longevity and profitability of the business. One of the most important terms in the Articles of Partnership is the provision for division of income or loss. The amount of income or loss assigned to partners affects the balances in their capital accounts and may affect the amount of withdrawals the partners can make and the assets they receive upon the liquidation of the partnership. The terms in the Articles of Partnership help to prevent one partner from taking advantage of other partners.


59. Brown and Green are forming a business as partners. If they do not create a formal written partnership agreement, what risks are they exposing themselves to?

The Articles of Partnership should help every partner protect his or her interests. Because of mutual agency and unlimited liability, being a partner involves some risk. If a partnership becomes insolvent, any or all of the partners may be required to use personal assets to settle partnership liabilities. The Articles of Partnership can require each partner to maintain his or her investment in the partnership and to meet other responsibilities, such as working in the business. With a formal written agreement, each partner would have recourse if another partner does not fulfill the terms in the Articles of Partnership.


60. What theoretical argument could be made against the recognition of goodwill when there is a change in the ownership of a partnership?

Goodwill should be recognized only when a business is purchased in an arms-length transaction — a transaction between independent parties. Generally, partners are not independent parties. Transactions between partners or between a partner and the partnership may be influenced by factors other than fair value and bargaining between independent parties. For example, if one partner has been causing trouble for a partnership, the other partners might agree to pay more than fair value to convince that partner to leave the business. The amount of goodwill that could be calculated for such a transaction would not be an indication of the fair value of the business.


61. Under what circumstances does a partner's balance in his or her capital account have practical consequences for the partner?

The most direct practical consequence of a partner's capital account balance occurs when the partnership is liquidated. After assets are sold and liabilities are paid, each partner receives the balance in his or her capital account. The balance in the capital account may also influence the division of income or loss each year and could affect the amount of cash each partner is allowed to withdraw from the partnership.


62. Reed, Sharp and Tucker were partners with capital account balances of $80,000, $100,000 and $70,000, respectively. They agreed to admit Upton to the partnership. Upton purchased 30% of each partner's interest, with payments to Reed, Sharp and Tucker of $32,000, $40,000 and $28,000, respectively. Before the admission of Upton, the profit and loss sharing ratio was 2:3:2. The partners agreed to use the bonus method to account for the admission of Upton to the partnership. Required: Prepare the journal entry to record the admission of Upton to the partnership.


63. Jipsom and Klark were partners with capital account balances of $80,000 and $100,000, respectively. Looney paid $32,000 to Jipsom and $40,000 to Klark for 30% of their interests in the partnership. Jipsom and Klark shared income in the ratio of 2:3. They believed that revaluation of the partnership was appropriate when a new partner was admitted. Required: Prepare the journal entries to record the admission of Looney to the partnership.


Norr and Caylor established a partnership on January 1, 2007. Norr invested cash of $100,000 and Caylor invested $30,000 in cash and equipment with a book value of $40,000 and fair value of $50,000. For both partners, the beginning capital balance was to equal the initial investment. Norr and Caylor agreed to the following procedure for sharing profits and losses: - 12% interest on the yearly beginning capital balance - $10 per hour of work that can be billed to the partnership's clients - the remainder divided in a 3:2 ratio The Articles of Partnership specified that each partner should withdraw no more than $1,000 per month. For 2007, the partnership's income was $70,000. Norr had 1,000 billable hours and Caylor worked 1,400 billable hours. In 2008, the partnership's income was $24,000 and Norr and Caylor worked 800 and 1,200 billable hours respectively. Each partner withdrew $1,000 per month throughout 2007 and 2008.

Hoyle - Chapter 09

64. Determine the amount of income allocated to each partner for 2007.

Distribution of income for 2007:


65. Determine the balance in both capital accounts at the end of 2007.

Capital account balances at the end of 2007:


66. Determine the amount of income allocated to each partner for 2008 to the nearest dollar.

Distribution of income for 2008:


67. Determine the balance in both capital accounts at the end of 2008 to the nearest dollar.

Capital account balances at the end of 2008:


Hoyle - Chapter 09

68. Eden contributes $49,000 into the partnership for a 25% interest. The four original partners share profits and losses equally. Using the bonus method, determine the balances for each of the five partners after Eden joins the partnership.

Eden's contribution of $49,000 into the partnership, raises the total partnership net assets to $400,000. Eden's capital account is credited, by agreement, for 25% of the partnership's total tangible assets or $100,000. The journal entry to record the admission of Eden is:

The capital balances of each of the five partners after Eden's entry into the partnership are as follows:


69. Eden contributed $124,000 in cash to the business to receive a 20% interest in the partnership. Goodwill was to be recorded. The four original partners shared all profits and losses equally. After Eden made his investment, what were the individual capital balances?

Eden's contribution of $124,000 to the partnership increases the partnership's net assets to $475,000. The implied value of the partnership is $620,000 ($124,000 ÷ 20%). Goodwill of $145,000 ($620,000 - $475,000) resulted from this transaction. The first entry requires that the goodwill be allocated to each of the original four partners according to their profit and loss sharing percentages. As indicated in the problem, the four original partners share profits and losses equally.

After allocating the goodwill to each of the original four partners, their partnership capital balances are as follows:

The second step is to record Eden's cash contribution and to record Eden's capital account balance:

Difficulty: Medium


70. Eden acquired a 20% interest in the partnership by contributing a total of $71,500 directly to the other four partners. No goodwill is to be recorded. Profits and losses have previously been split according to the following percentages: Adams, 15%, Barnes, 35%, Cordas, 30% and Davis, 20%. After Eden made his investment, what were the individual capital balances?

The partnership's total net assets are still $351,000, because Eden's $71,500 went to the partners. Using the book value method, each of the original partners will give up 20% of their current capital balance to Eden. The journal entry is:

The partners' balances following the admission of Eden are:

Difficulty: Medium


71. Eden acquired a 20% interest in the partnership by contributing a total of $71,500 directly to the other four partners. Goodwill is to be recorded. Profits and losses have previously been split according to the following percentages: Adams, 15%, Barnes, 35%, Cordas, 30% and Davis, 20%. After Eden made his investment, what were the individual capital balances?

Eden's contribution of $71,500 will go to the original four partners, not into the partnership. Therefore, the partnership's total net assets remain $351,000. The implied value of the partnership, based on Eden's contribution is $357,500 ($71,500 ÷ 20%). Goodwill arising out of this transaction is $6,500. First, the goodwill should be allocated to each of the original four partners:

The adjusted balances for the four original partners, after allocating goodwill, are:

The next step is to allocate 20% of each of the original partners' balances to Eden:

The partners' capital balances after admitting Eden are:


Assume the partnership of Dean, Hardin and Roth has been in existence for a number of years. Dean decides to withdraw from the partnership when the partners' capital balances are as follows:

An appraisal of the business and its property estimates the fair value to be $100,000. Dean has agreed to receive $64,000 in exchange for his partnership interest.

Hoyle - Chapter 09

72. Prepare the journal entry for the payment to Dean in the dissolution of his partnership interest, assuming the bonus method is to be applied.


73. What are the remaining partners' capital balances after Dean's interest is dissolved, assuming the bonus method is applied?

Hardin: $12,600 Roth: 23,400


Assume the partnership of Howell, Madrid and Waldrop has been in existence for a number of years. Howell decides to withdraw from the partnership when the partners' capital balances are as follows:

An appraisal of the business and its net assets estimates the fair value to be $154,000. Land with a book value of $20,000 has a fair value of $35,000. Howell has agreed to receive $84,000 in exchange for her partnership interest.

Hoyle - Chapter 09

74. Prepare the journal entries for the dissolution of Howell's partnership interest, assuming the goodwill method is to be applied.


75. What are the remaining partners' capital balances after Howell's interest is dissolved, assuming the goodwill method is applied?

Madrid: 33,000; Waldrop: 37,000


On January 1, 2008, Lamb and Mona LLP admitted Noris to a 20% interest in net assets for an investment of $50,000 cash. Prior to the admission of Noris, Lamb and Mona had net assets of $100,000 and an income-sharing ratio of Lamb 25%, Mona 75%. After the admission of Noris, the partnership contract included the following provisions: Salary of $40,000 a year to Noris. Remaining net income in ratio Lamb 20%, Mona 60%, Noris 20% During the fiscal year ended December 31, 2008, the partnership had income of $90,000 prior to recognition of salary to Noris.

Hoyle - Chapter 09

76. Record the journal entry for the admission of Noris. Goodwill is not to be recorded.


77. Record the journal entry to allocate the salary of Noris.


78. Record the journal entry to record the net income to the capital accounts


79. James, Keller and Rivers have the following capital balances; $48,000, $70,000 and $90,000 respectively. Because of a cash shortage James invests an additional $12,000 on June 1st. Each partner withdraws $1,000 per month. James, Keller and Rivers receive a salary of $13,000, $15,000 and $20,000, respectively, for work done during the year. Each partner receives interest of 8% on their weighted average capital balance without regard to normal drawings. Any remaining profits are split 20%, 30% and 50% respectively. The net income for the year is $30,000. What are the ending capital balances for each partner?

Remaining income (loss):

CALCULATION OF JAMES INTEREST ALLOCATION


ch9 Summary


ch10

Student: ___________________________________________________________________________

1. What is a marshaling of assets? A. A listing of estimated realizable values of a business's assets B. The order in which the creditors of a partnership will be paid as partnership assets are liquidated C. The order in which partners receive cash as partnership assets are liquidated D. A ranking of claims against an individual E. The order in which the partnership's assets are liquidated

2. The partnership of Nurr, Cleamons and Kelly was insolvent, as was Cleamons personally. The partnership had begun liquidating its assets and Cleamons' capital account had a debit balance. How would the claim of Nurr and Kelly against Cleamons be ranked in comparison with the claims of Cleamons' other creditors? A. It ranks lower in priority than Cleamons' personal creditors and the creditors of the partnership B. It ranks equal in priority with the claims of Cleamons' personal creditors C. It ranks lower in priority than Cleamons' personal creditors but higher in priority than the creditors of the partnership D. It ranks higher in priority than Cleamons' personal creditors and the creditors of the partnership E. It ranks higher in priority than Cleamons' personal creditors but lower in priority than the creditors of the partnership

3. The Abrams, Bartle and Creighton partnership began the process of liquidation with the following balance sheet:

Abrams, Bartle and Creighton share profits and losses in a ratio of 3:2:5. Liquidation expenses are expected to be $12,000. If the noncash assets were sold for $234,000, what amount of the loss would have been allocated to Bartle? A. $43,200 B. $46,800 C. $40,000 D. $42,400 E. $43,100


Abrams, Bartle and Creighton share profits and losses in a ratio of 3:2:5. Liquidation expenses are expected to be $12,000. The noncash assets were sold for $134,000. Which partner(s) would have had to contribute assets to the partnership to cover a deficit in his or her capital account? A. Abrams B. Bartle C. Creighton D. Abrams and Creighton E. Abrams and Bartle


Abrams, Bartle and Creighton share profits and losses in a ratio of 3:2:5. Liquidation expenses are expected to be $12,000. After the liquidation expenses of $12,000 had been paid and the noncash assets sold, Creighton had a deficit of $8,000. For what amount were the noncash assets sold? A. $170,000 B. $264,000 C. $158,000 D. $146,000 E. $185,000

6. The Keaton, Lewis and Meador partnership had the following balance sheet just before entering liquidation:

Keaton, Lewis and Meador share profits and losses in a ratio of 2:4:4. Noncash assets were sold for $180,000. Liquidation expenses were $10,000. Assume that Lewis was personally insolvent and could not contribute any assets to the partnership, while Keaton and Meador were both solvent. What amount of cash would Keaton have received from the distribution of partnership assets? A. $38,000 B. $30,000 C. $24,000 D. $34,000 E. $31,600


Keaton, Lewis and Meador share profits and losses in a ratio of 2:4:4. Noncash assets were sold for $180,000. Liquidation expenses were $10,000. Assume that Keaton was personally insolvent with assets of $8,000 and liabilities of $60,000. Lewis and Meador were both solvent and able to cover deficits in their capital accounts, if any. What amount of cash could Keaton's personal creditors have expected to receive from partnership assets? A. $30,000 B. $0 C. $52,000 D. $26,000 E. $34,000

8. The Henry, Isaac and Jacobs partnership was about to enter liquidation with the following account balances:

Estimated expenses of liquidation were $5,000. Henry, Isaac and Jacobs shared profits and losses in a ratio of 2:4:4. What amount of cash was available for safe payments, based on the above information? A. $30,000 B. $85,000 C. $25,000 D. $35,000 E. $40,000


Estimated expenses of liquidation were $5,000. Henry, Isaac and Jacobs shared profits and losses in a ratio of 2:4:4. Before liquidating any assets, the partners determined the amount of cash available for safe payments. How should the cash be distributed? A. In a ratio of 1:2:2 among the partners B. $18,333 to Henry and $16,667 to Jacobs C. In a ratio of 1:2 between Henry and Jacobs D. $15,000 to Henry and $10,000 to Jacobs E. $11,364 to Henry and $13,636 to Jacobs


Estimated expenses of liquidation were $5,000. Henry, Isaac and Jacobs shared profits and losses in a ratio of 2:4:4. Before liquidating any assets, the partners determined the amount of cash for safe payments and distributed it. The noncash assets were then sold for $120,000 and the liquidation expenses of $5,000 were paid. How much of the $120,000 would be distributed to Henry? A. $23,000 B. $24,000 C. $40.000 D. $27,000 E. $28,000

11. The following account balances were available for the Perry, Quincy and Renquist partnership just before it entered liquidation:

Perry, Quincy and Renquist had shared profits and losses in a ratio of 2:4:4. Liquidation expenses were expected to be $8,000. All partners were solvent. What would be the minimum amount for which the noncash assets must have been sold for, in order for Quincy to receive some cash from the liquidation? A. Any amount in excess of $175,000 B. Any amount in excess of $117,000 C. Any amount in excess of $183,000 D. Any amount in excess of $198,667 E. Any amount in excess of $168,333


Perry, Quincy and Renquist had shared profits and losses in a ratio of 2:4:4. Liquidation expenses were expected to be $8,000. Assume that Quincy was insolvent and could not contribute assets to cover any deficit in her capital account. For what amount must the noncash assets have been sold, so that Renquist would have received some cash from the liquidation? A. Any amount in excess of $108,000 B. Any amount in excess of $58,000 C. Any amount in excess of $201,600 D. Any amount in excess of $50,000 E. Any amount in excess of $104,000

13. A local partnership was in the process of liquidating and reported the following capital balances:

Douglass indicated that the $14,000 deficit would be covered by a forthcoming contribution. However, the two remaining partners asked to receive the $31,000 that was then available. How much of this money should Justice receive? A. $15,000 B. $15,467 C. $17,333 D. $16,533 E. $15,867


Douglass indicated that the $14,000 deficit would be covered by a forthcoming contribution. However, the two remaining partners asked to receive the $31,000 that was then available. How much of this money should Zobart receive? A. $15,000 B. $14,467 C. $17,333 D. $15,633 E. $15,867

15. A local partnership was considering the possibility of liquidation since one of the partners (Ding) was insolvent. Capital balances at that time were as follows. Profits and losses were divided on a 4:2:2:2 basis, respectively.

Ding's creditors filed a $25,000 claim against the partnership's assets. At that time, the partnership held assets reported at $360,000 and liabilities of $120,000. If the assets could be sold for $228,000, what is the minimum amount that Ding's creditors would have received? A. $36,000 B. $0 C. $2,500 D. $38,720 E. $67,250


Ding's creditors filed a $25,000 claim against the partnership's assets. At that time, the partnership held assets reported at $360,000 and liabilities of $120,000. If the assets could be sold for $228,000, what is the minimum amount that Laurel's creditors would have received? A. $36,000 B. $0 C. $2,500 D. $38,250 E. $67,250


Ding's creditors filed a $25,000 claim against the partnership's assets. At that time, the partnership held assets reported at $360,000 and liabilities of $120,000. If the assets could be sold for $228,000, what is the minimum amount that Ezzard's creditors would have received? A. $36,000 B. $0 C. $2,500 D. $38,250 E. $67,250


Ding's creditors filed a $25,000 claim against the partnership's assets. At that time, the partnership held assets reported at $360,000 and liabilities of $120,000. If the assets could be sold, for $228,000 what is the minimum amount that Tillman's creditors would have received? A. $36,000 B. $0 C. $2,500 D. $38,250 E. $67,250

19. Dancey, Reese, Newman and Jahn were partners who shared profits and losses on a 4:2:2:2 basis, respectively. They were beginning to liquidate their business. At the start of the process, capital balances were as follows:

Which one of the following statements is true? A. The first available $16,000 would go to Newman B. The first available $16,000 would go to Dancey C. The first available $8,000 would go to Jahn D. The first available $8,000 would go to Reese E. The first available $4,000 would go to Jahn

20. Which of the following will not result in the dissolution of a partnership? 1) Partners are incompatible and choose to cease operations. 2) Partners realize that the profit figures have failed to reach projected levels. 3) Retirement of a partner. 4) Death of a partner. A. 1 and 2 only B. 3 and 4 only C. 1, 2 and 3 D. 1, 2, 3 and 4 E. Neither 1, 2, 3 or 4

21. What accounting transactions are not recorded by an accountant during liquidation? A. The conversion of partnership assets into cash B. The allocation of the resulting gains and losses C. The payment of liabilities and expenses D. Remaining unpaid debts settled and the distribution of any remaining assets to the partners based on their profit and loss ratio

22. Which of the following statements is false concerning the Schedule of Liquidation? A. Liquidations may take a considerable length of time to complete B. Frequent reporting by the accountant is rarely necessary C. The Schedule of Liquidation provides a listing of transactions to date, current cash and capital balances D. The Schedule of Liquidation provides a listing of property still being held by the partnership and liabilities remaining unpaid E. The Schedule of Liquidation keeps creditors and partners apprised of the results of the process of dissolution

23. What is the preferred method of resolving a partner's deficit balance, according to the Uniform Partnership Act? A. Partners never have a deficit balance B. The other partners must contribute personal assets to cover the deficit balance C. The partnership must sell assets in order to cover the deficit balance D. The partner with a deficit balance must contribute personal assets to cover the deficit balance E. The partner with a deficit balance contributes personal assets only if those personal assets exceed personal liabilities

24. Which of the following statements is true concerning the distribution of safe payments? A. The distribution of safe payments assumes that any capital deficit balances will prove to be a total loss to the partnership B. Safe payments are equal to the recorded capital balances of partners with positive capital balances C. The distribution of safe payments may only be made after all liabilities have been paid D. In computing safe payments, partners with positive capital balances are assumed to absorb an equal share of any deficit balance(s) E. There are no safe payments until the liquidation is complete

25. Which of the following is the proper ranking order of property distributions stipulated by the Uniform Partnership Act? A. Those owing to partners by way of contribution, those owing to partnership creditors, those owing to separate creditors B. Those owing to separate creditors, those owing to partnership creditors, those owing to partners by way of contribution C. Those owing to separate creditors, those owing to partners by way of contribution, those owing to partnership creditors D. Those owing to partners by way of contribution, those owing to separate creditors, those owing to partnership creditors E. Those owing to partnership creditors, those owing to partners by way of contribution, those owing to separate creditors

26. Which statement below is correct? A. If a partner of a liquidating limited liability partnership is unable to pay a capital account deficit, the deficit is absorbed by the other partners in the income-sharing ratio of those partners B. Gains and losses from the sale of noncash assets are divided in the ratio of the partners' capital account balances if there is no income-sharing plan in the partnership contract C. A loan receivable from a partner is added to the partner's capital account balance in the preparation of a cash distribution plan D. Partners may receive cash before creditors receive cash when liquidating a limited liability partnership E. All cash payments to partners are made using their income-sharing ratio when liquidating the partnership

27. The marshaling of assets doctrine regulates claims against an individual's assets. The following lists groups interested in potential cash distributions. (1) those owed to the creditors of the partnership (2) those owed to separate creditors (3) those owed to partners by way of contribution When a partner is bankrupt, which order do claims against their property rank? A. 1, 2, 3 B. 2, 1, 3 C. 3, 2, 1 D. 1, 3, 2 E. 3, 1, 2

28. Which statement below is false? A. The purpose of a marshaling of assets is to protect the interests of various creditors B. The marshaling of assets gives order and structure to the settling of claims C. When a partner is insolvent, the partner's personal assets should first be used to settle the claims of his or her personal creditors D. After a partner's personal creditors are satisfied, any remaining personal assets may be used to pay creditors of the partnership E. Partnership assets may be used to pay a partner's personal creditor prior to payment to partnership creditors

29. Which item is not shown on the schedule of partnership liquidation? A. Current cash balances B. Property owned by the partnership C. Liabilities still to be paid D. Personal assets of the partners E. Current capital balances of the partners

30. Under the marshaling of assets doctrine, personal creditors can claim a partner's share of partnership assets under which condition? A. When payment of all partnership debts is assured B. When the insolvent partner has a positive capital balance C. When payment of all partnership debts is assured and the insolvent partner has a positive capital balance D. When the other partner's agree to the claim E. Personal creditors can not claim a partner's share of partnership assets

31. Harding, Jones and Sandy is in the process of liquidating and the partners have the following capital balances; 20,000, 22,000 and 10,000 respectively. The partners share all profits and losses 50%, 35% and 15%, respectively. Sandy has indicated that the 10,000 deficit will be covered with a forthcoming contribution. The remaining partners have requested to receive $18,382 in cash that is available. How should this cash be distributed? A. Harding $7,500; Jones $18,882 B. Harding $10,813; Jones $7,569 C. Harding $8,000; Jones $18,382 D. Harding $9,000; Jones $17,382 E. Harding $7,000; Jones $19,382

32. Gonda, Herron and Morse is considering possible liquidation because Morse is insolvent. The partners have the following capital balances: $60,000, $70,000 and $40,000, respectively and share profits and losses 30%, 45% and 25%, respectively. The partnership has $200,000 in assets that can be sold for $150,000. What is the minimum that Morse's creditors would receive if they have filed a claim for $50,000? A. $0 B. $27,500 C. $45,000 D. 47,500 E. 50,000

33. White, Sands and Luke has the following capital balances and profit and loss ratios; $50,000 (30%), $100,000 (20%) and $200,000 (50%). If the partnership is to be liquidated and $150,000 becomes available for the partners immediately, who gets the money? A. $0 White; $57,143 Sands; $92,857 Luke B. $10,000 White; $47,143 Sands; $92,857 Luke C. $0 White; $47,143 Sands; $102,857 Luke D. $20,000 White; $57,143 Sands; $82,857 Luke E. $30,857 White; $57,143 Sands; $62,000 Luke

34. A local partnership has assets of cash of $5,000 and a building worth $80,000. All liabilities have been paid and the partners are all insolvent. The partners capital accounts are as follows Harry $40,000, Landers $30,000 and Waters 15,000. The partners share profits and losses 4:4:2. If the building is sold for $50,000, how much cash will Harry receive in the final settlement? A. $5,000 B. $9,000 C. $18,000 D. $28,000 E. $55,000

35. A local partnership has assets of cash of $5,000 and a building worth $80,000. All liabilities have been paid and the partners are all insolvent. The partners capital accounts are as follows Harry $40,000, Landers $30,000 and Waters 15,000. The partners share profits and losses 4:4:2. If the building is sold for $50,000, how much cash will Waters receive in the final settlement? A. $5,000 B. $9,000 C. $18,000 D. $28,000 E. $55,000

36. A local partnership has assets of cash of $13,000 and land worth $70,000. All liabilities have been paid and the partners are all insolvent. The partners capital accounts are as follows Roberts, $50,000, Ferry, $30,000 and Mones, $3,000. The partners share profits and losses 5:3:2. If the land is sold for $45,000, how much cash will Roberts receive in the final settlement? A. $0 B. $3,000 C. $21,750 D. $36,250 E. $50,250

37. A local partnership has assets of cash of $13,000 and land worth $70,000. All liabilities have been paid and the partners are all insolvent. The partners capital accounts are as follows Roberts, $50,000, Ferry, $30,000 and Mones 3,000. The partners share profits and losses 5:3:2. If the land is sold for $45,000, how much cash will Mones receive in the final settlement? A. $0 B. $1,500 C. $3,000 D. $21,750 E. $36,250

38. Matching (1) The schedule of liquidation (2) Deficit capital balances (3) Marshaling of assets (4) Pre-distribution plan (A) A schedule of liquidation should be produced periodically by the accountant to disclose losses and gains that have been incurred, remaining assets and liabilities and current capital balances. (B) At the start of a liquidation, this document provides guidance for all payments made to the partners throughout the liquidation. (C) One or more partners may have a negative capital balance often as a result of losses incurred in disposing of assets. (D) Provides an equitable system for distributing assets during liquidation.

39. What is the role of the accountant during the liquidation process?

40. The partnership of Rayne, Marin and Fulton was being liquidated by the partners. Rayne was insolvent and did not have enough assets to pay all of his personal creditors. Under what conditions might Rayne's personal creditors have claimed some of the partnership assets?

41. What term is used for the ranking of creditors' claims against an individual?

42. The Arnold, Bates, Carlton and Delbert partnership was liquidating. It had paid all of its liabilities and had some assets yet to be sold. The partners had capital account balances of $50,000, $90,000, $110,000 and $130,000. There was $40,000 cash available for distribution to the partners. What procedures would be followed to determine the amount of cash that could safely be distributed to each partner?

43. Xygote, Yen and Zen were partners who were liquidating their partnership. Each partner was insolvent. All assets had been liquidated and all liabilities had been paid. How should any remaining cash have been distributed to the partners?

44. What is the purpose of a pre-distribution plan?

45. What financial schedule would be prepared for a partnership that has begun liquidation but has not yet completed the process? What is the purpose of this schedule?

46. What events or circumstances might force the termination of a partnership and liquidation of its assets?

47. What are the provisions of the marshaling of assets doctrine?

48. For a partnership, how should liquidation gains and losses be accounted for?

49. What is the purpose of a marshaling of assets? What are the provisions that must be complied with in a marshaling of assets?

50. What should occur when a solvent partner has a deficit balance?

51. Why is a Schedule of Liquidation prepared?

52. What is a safe cash payment?

53. The Albert, Boynton and Creamer partnership was in the process of liquidating its assets and going out of business. Albert, Boynton and Creamer had capital account balances of $80,000, $120,000 and $200,000, respectively and shared profits and losses in the ratio of 1:3:2. Equipment that had cost $90,000 and had a book value of $60,000 was sold for $24,000. Required: Prepare the appropriate journal entry.

54. The Amos, Billings and Cleaver partnership had two assets: (1) cash of $40,000 and (2) an investment with a book value of $110,000. The ratio for sharing profits and losses is 2:1:1. The balances in the capital accounts were: Amos, capital: $45,000 Billings, capital: $75,000 Cleaver, capital: $30,000 Required: If the investment was sold for $80,000, how much cash would each partner have received?

As of January 1, 2007, the partnership of Canton, Yulls and Garr had the following account balances and percentages for the sharing of profits and losses:

The partnership incurred losses in recent years and decided to liquidate. The liquidation expenses were expected to be $10,000.

55. 1) How much cash should have been distributed safely to partners at this time? 2) How much cash should each partner have received at this time?

56. What would be the maximum amount Garr might have had to contribute to the partnership to eliminate a deficit balance in his account?

57. If the noncash assets were sold for $105,000, what would have been the maximum amount of cash that Canton could have expected to receive?

58. A partnership had the following account balances: Cash, $91,000; Other Assets, $702,000; Liabilities, $338,000; Polk, Capital (50% of profits and losses), $221,000; Garfield, Capital (30%), $143,000; Arthur, Capital (20%), $91,000. The company liquidated and $10,400 became available to the partners. Required: Who would have received the $10,400?

59. A partnership held three assets: Cash, $13,000; Land, $45,000; and a Building, $65,000. The partners anticipated that expenses required to liquidate their partnership would amount to $6,000. Capital balances were as follows: King, Capital: $32,700 Murphy, Capital: 36,400 Madison, Capital: 26,000 Pond, Capital: 27,900 The partners shared profits and losses 30:30:20:20, respectively. Required: If a preliminary distribution of cash was to be made, how much would each of the partners have received?

On January 1, 2009, the partners of Won, Cadel and Dax (who shared profits and losses in the ratio of 5:3:2, respectively) decided to liquidate their partnership. The trial balance at this date was as follows:

The partners planned a program of piecemeal conversion of the business assets to minimize liquidation losses. All available cash, less an amount retained to provide for future expenses, was to be distributed to the partners at the end of each month. A summary of liquidation transactions follows:

60. Prepare a schedule to calculate the safe installment payments to be made to the partners at the end of January.

61. Prepare a schedule to calculate the safe installment payments to be made to the partners at the end of February.

62. Prepare a schedule to calculate the safe installment payments to be made to the partners at the end of March.

Hardin, Sutton and Williams has operated a local business as a partnership for several years. All profits and losses have been allocated on a 3:2:1 ratio, respectively. Recently, Williams has undergone personal financial problems and is insolvent. To satisfy Williams' creditors, the partnership has decided to liquidate. The following balance sheet has been produced:

During the liquidation process, the following transactions take place: - Noncash assets are sold for $116,000. - Liquidation expenses of $12,000 are paid. No further expenses are expected. - Safe capital distributions are made to the partners. - Payment is made of all business liabilities. - Any deficit capital balances are deemed to be uncollectible.

63. Develop a pre-distribution plan for this partnership, assuming $12,000 of liquidation expenses are expected to be paid.

64. Compute safe cash payments after the noncash assets have been sold and the liquidation expenses have been paid.

65. Prepare journal entries to record the actual liquidation transactions.

66. Jones, Marge and Tate LLP decided to dissolve and liquidate the partnership on September 31, 2009. After realization of a portion of the noncash assets, the capital account balances were Jones $50,000; Marge $40,000; and Tate $15,000. Cash of $35,000 and other assets with a carrying amount of $100,000 were on hand. Creditors' claims totaled $30,000. Jones, Marge and Tate shared net income and losses in a 2:1:1 ratio, respectively. Prepare a working paper to compute the amount of cash that may be paid to creditors and to partners at this time, assuming that no partner is solvent.

The balance sheet of Rogers, Dennis & Berry LLP prior to liquidation included the following:

The three partners shared net income and losses in a 5:3:2 ratio, respectively. Noncash assets were sold for $60,000. Creditors were paid in full, partners were paid $35,000 and the balance of cash was retained pending future developments.

67. Record the journal entry for the sale of the noncash assets.

68. Record the journal entry for payment of outstanding liabilities to the creditors.

69. Determine the cash to be retained and prepare a schedule to distribute $35,000 cash to the partners.

70. Record the journal entry for the cash distribution to the partners.

The partners of Donald, Chief & Berry LLP decided to liquidate on August 1, 2009. The balance sheet of the partnership is as follows, with the income-sharing ratio of 25%, 45%, 30% respectively.

The disposal of other assets with a carrying amount of $200,000 realized $140,000 and all available cash was distributed.

71. Prepare the journal entry for Donald, Chief & Berry LLP on August 1, 2009, to record the realization of the other assets.

72. Prepare the journal entry for Donald, Chief & Berry LLP on August 1, 2009, to record payment of liabilities.

73. Prepare the journal entry for Donald, Chief & Berry LLP on August 1, 2009, to record the elimination of the loan receivable from Donald.

74. Prepare the schedule to compute the cash payments to the partners.

ch10 Key

1. What is a marshaling of assets? A. A listing of estimated realizable values of a business's assets B. The order in which the creditors of a partnership will be paid as partnership assets are liquidated C. The order in which partners receive cash as partnership assets are liquidated D. A ranking of claims against an individual E. The order in which the partnership's assets are liquidated


2. The partnership of Nurr, Cleamons and Kelly was insolvent, as was Cleamons personally. The partnership had begun liquidating its assets and Cleamons' capital account had a debit balance. How would the claim of Nurr and Kelly against Cleamons be ranked in comparison with the claims of Cleamons' other creditors? A. It ranks lower in priority than Cleamons' personal creditors and the creditors of the partnership B. It ranks equal in priority with the claims of Cleamons' personal creditors C. It ranks lower in priority than Cleamons' personal creditors but higher in priority than the creditors of the partnership D. It ranks higher in priority than Cleamons' personal creditors and the creditors of the partnership E. It ranks higher in priority than Cleamons' personal creditors but lower in priority than the creditors of the partnership



Abrams, Bartle and Creighton share profits and losses in a ratio of 3:2:5. Liquidation expenses are expected to be $12,000. If the noncash assets were sold for $234,000, what amount of the loss would have been allocated to Bartle? A. $43,200 B. $46,800 C. $40,000 D. $42,400 E. $43,100



Abrams, Bartle and Creighton share profits and losses in a ratio of 3:2:5. Liquidation expenses are expected to be $12,000. The noncash assets were sold for $134,000. Which partner(s) would have had to contribute assets to the partnership to cover a deficit in his or her capital account? A. Abrams B. Bartle C. Creighton D. Abrams and Creighton E. Abrams and Bartle



Abrams, Bartle and Creighton share profits and losses in a ratio of 3:2:5. Liquidation expenses are expected to be $12,000. After the liquidation expenses of $12,000 had been paid and the noncash assets sold, Creighton had a deficit of $8,000. For what amount were the noncash assets sold? A. $170,000 B. $264,000 C. $158,000 D. $146,000 E. $185,000



Keaton, Lewis and Meador share profits and losses in a ratio of 2:4:4. Noncash assets were sold for $180,000. Liquidation expenses were $10,000. Assume that Lewis was personally insolvent and could not contribute any assets to the partnership, while Keaton and Meador were both solvent. What amount of cash would Keaton have received from the distribution of partnership assets? A. $38,000 B. $30,000 C. $24,000 D. $34,000 E. $31,600



Keaton, Lewis and Meador share profits and losses in a ratio of 2:4:4. Noncash assets were sold for $180,000. Liquidation expenses were $10,000. Assume that Keaton was personally insolvent with assets of $8,000 and liabilities of $60,000. Lewis and Meador were both solvent and able to cover deficits in their capital accounts, if any. What amount of cash could Keaton's personal creditors have expected to receive from partnership assets? A. $30,000 B. $0 C. $52,000 D. $26,000 E. $34,000



Estimated expenses of liquidation were $5,000. Henry, Isaac and Jacobs shared profits and losses in a ratio of 2:4:4. What amount of cash was available for safe payments, based on the above information? A. $30,000 B. $85,000 C. $25,000 D. $35,000 E. $40,000



Estimated expenses of liquidation were $5,000. Henry, Isaac and Jacobs shared profits and losses in a ratio of 2:4:4. Before liquidating any assets, the partners determined the amount of cash available for safe payments. How should the cash be distributed? A. In a ratio of 1:2:2 among the partners B. $18,333 to Henry and $16,667 to Jacobs C. In a ratio of 1:2 between Henry and Jacobs D. $15,000 to Henry and $10,000 to Jacobs E. $11,364 to Henry and $13,636 to Jacobs



Estimated expenses of liquidation were $5,000. Henry, Isaac and Jacobs shared profits and losses in a ratio of 2:4:4. Before liquidating any assets, the partners determined the amount of cash for safe payments and distributed it. The noncash assets were then sold for $120,000 and the liquidation expenses of $5,000 were paid. How much of the $120,000 would be distributed to Henry? A. $23,000 B. $24,000 C. $40.000 D. $27,000 E. $28,000



Perry, Quincy and Renquist had shared profits and losses in a ratio of 2:4:4. Liquidation expenses were expected to be $8,000. All partners were solvent. What would be the minimum amount for which the noncash assets must have been sold for, in order for Quincy to receive some cash from the liquidation? A. Any amount in excess of $175,000 B. Any amount in excess of $117,000 C. Any amount in excess of $183,000 D. Any amount in excess of $198,667 E. Any amount in excess of $168,333



Perry, Quincy and Renquist had shared profits and losses in a ratio of 2:4:4. Liquidation expenses were expected to be $8,000. Assume that Quincy was insolvent and could not contribute assets to cover any deficit in her capital account. For what amount must the noncash assets have been sold, so that Renquist would have received some cash from the liquidation? A. Any amount in excess of $108,000 B. Any amount in excess of $58,000 C. Any amount in excess of $201,600 D. Any amount in excess of $50,000 E. Any amount in excess of $104,000



Douglass indicated that the $14,000 deficit would be covered by a forthcoming contribution. However, the two remaining partners asked to receive the $31,000 that was then available. How much of this money should Justice receive? A. $15,000 B. $15,467 C. $17,333 D. $16,533 E. $15,867



Douglass indicated that the $14,000 deficit would be covered by a forthcoming contribution. However, the two remaining partners asked to receive the $31,000 that was then available. How much of this money should Zobart receive? A. $15,000 B. $14,467 C. $17,333 D. $15,633 E. $15,867



Ding's creditors filed a $25,000 claim against the partnership's assets. At that time, the partnership held assets reported at $360,000 and liabilities of $120,000. If the assets could be sold for $228,000, what is the minimum amount that Ding's creditors would have received? A. $36,000 B. $0 C. $2,500 D. $38,720 E. $67,250



Ding's creditors filed a $25,000 claim against the partnership's assets. At that time, the partnership held assets reported at $360,000 and liabilities of $120,000. If the assets could be sold for $228,000, what is the minimum amount that Laurel's creditors would have received? A. $36,000 B. $0 C. $2,500 D. $38,250 E. $67,250



Ding's creditors filed a $25,000 claim against the partnership's assets. At that time, the partnership held assets reported at $360,000 and liabilities of $120,000. If the assets could be sold for $228,000, what is the minimum amount that Ezzard's creditors would have received? A. $36,000 B. $0 C. $2,500 D. $38,250 E. $67,250



Ding's creditors filed a $25,000 claim against the partnership's assets. At that time, the partnership held assets reported at $360,000 and liabilities of $120,000. If the assets could be sold, for $228,000 what is the minimum amount that Tillman's creditors would have received? A. $36,000 B. $0 C. $2,500 D. $38,250 E. $67,250


19. Dancey, Reese, Newman and Jahn were partners who shared profits and losses on a 4:2:2:2 basis, respectively. They were beginning to liquidate their business. At the start of the process, capital balances were as follows:

Which one of the following statements is true? A. The first available $16,000 would go to Newman B. The first available $16,000 would go to Dancey C. The first available $8,000 would go to Jahn D. The first available $8,000 would go to Reese E. The first available $4,000 would go to Jahn


20. Which of the following will not result in the dissolution of a partnership? 1) Partners are incompatible and choose to cease operations. 2) Partners realize that the profit figures have failed to reach projected levels. 3) Retirement of a partner. 4) Death of a partner. A. 1 and 2 only B. 3 and 4 only C. 1, 2 and 3 D. 1, 2, 3 and 4 E. Neither 1, 2, 3 or 4


21. What accounting transactions are not recorded by an accountant during liquidation? A. The conversion of partnership assets into cash B. The allocation of the resulting gains and losses C. The payment of liabilities and expenses D. Remaining unpaid debts settled and the distribution of any remaining assets to the partners based on their profit and loss ratio


22. Which of the following statements is false concerning the Schedule of Liquidation? A. Liquidations may take a considerable length of time to complete B. Frequent reporting by the accountant is rarely necessary C. The Schedule of Liquidation provides a listing of transactions to date, current cash and capital balances D. The Schedule of Liquidation provides a listing of property still being held by the partnership and liabilities remaining unpaid E. The Schedule of Liquidation keeps creditors and partners apprised of the results of the process of dissolution


23. What is the preferred method of resolving a partner's deficit balance, according to the Uniform Partnership Act? A. Partners never have a deficit balance B. The other partners must contribute personal assets to cover the deficit balance C. The partnership must sell assets in order to cover the deficit balance D. The partner with a deficit balance must contribute personal assets to cover the deficit balance E. The partner with a deficit balance contributes personal assets only if those personal assets exceed personal liabilities


24. Which of the following statements is true concerning the distribution of safe payments? A. The distribution of safe payments assumes that any capital deficit balances will prove to be a total loss to the partnership B. Safe payments are equal to the recorded capital balances of partners with positive capital balances C. The distribution of safe payments may only be made after all liabilities have been paid D. In computing safe payments, partners with positive capital balances are assumed to absorb an equal share of any deficit balance(s) E. There are no safe payments until the liquidation is complete


25. Which of the following is the proper ranking order of property distributions stipulated by the Uniform Partnership Act? A. Those owing to partners by way of contribution, those owing to partnership creditors, those owing to separate creditors B. Those owing to separate creditors, those owing to partnership creditors, those owing to partners by way of contribution C. Those owing to separate creditors, those owing to partners by way of contribution, those owing to partnership creditors D. Those owing to partners by way of contribution, those owing to separate creditors, those owing to partnership creditors E. Those owing to partnership creditors, those owing to partners by way of contribution, those owing to separate creditors


26. Which statement below is correct? A. If a partner of a liquidating limited liability partnership is unable to pay a capital account deficit, the deficit is absorbed by the other partners in the income-sharing ratio of those partners B. Gains and losses from the sale of noncash assets are divided in the ratio of the partners' capital account balances if there is no income-sharing plan in the partnership contract C. A loan receivable from a partner is added to the partner's capital account balance in the preparation of a cash distribution plan D. Partners may receive cash before creditors receive cash when liquidating a limited liability partnership E. All cash payments to partners are made using their income-sharing ratio when liquidating the partnership


27. The marshaling of assets doctrine regulates claims against an individual's assets. The following lists groups interested in potential cash distributions. (1) those owed to the creditors of the partnership (2) those owed to separate creditors (3) those owed to partners by way of contribution When a partner is bankrupt, which order do claims against their property rank? A. 1, 2, 3 B. 2, 1, 3 C. 3, 2, 1 D. 1, 3, 2 E. 3, 1, 2


28. Which statement below is false? A. The purpose of a marshaling of assets is to protect the interests of various creditors B. The marshaling of assets gives order and structure to the settling of claims C. When a partner is insolvent, the partner's personal assets should first be used to settle the claims of his or her personal creditors D. After a partner's personal creditors are satisfied, any remaining personal assets may be used to pay creditors of the partnership E. Partnership assets may be used to pay a partner's personal creditor prior to payment to partnership creditors


29. Which item is not shown on the schedule of partnership liquidation? A. Current cash balances B. Property owned by the partnership C. Liabilities still to be paid D. Personal assets of the partners E. Current capital balances of the partners


30. Under the marshaling of assets doctrine, personal creditors can claim a partner's share of partnership assets under which condition? A. When payment of all partnership debts is assured B. When the insolvent partner has a positive capital balance C. When payment of all partnership debts is assured and the insolvent partner has a positive capital balance D. When the other partner's agree to the claim E. Personal creditors can not claim a partner's share of partnership assets


31. Harding, Jones and Sandy is in the process of liquidating and the partners have the following capital balances; 20,000, 22,000 and 10,000 respectively. The partners share all profits and losses 50%, 35% and 15%, respectively. Sandy has indicated that the 10,000 deficit will be covered with a forthcoming contribution. The remaining partners have requested to receive $18,382 in cash that is available. How should this cash be distributed? A. Harding $7,500; Jones $18,882 B. Harding $10,813; Jones $7,569 C. Harding $8,000; Jones $18,382 D. Harding $9,000; Jones $17,382 E. Harding $7,000; Jones $19,382


32. Gonda, Herron and Morse is considering possible liquidation because Morse is insolvent. The partners have the following capital balances: $60,000, $70,000 and $40,000, respectively and share profits and losses 30%, 45% and 25%, respectively. The partnership has $200,000 in assets that can be sold for $150,000. What is the minimum that Morse's creditors would receive if they have filed a claim for $50,000? A. $0 B. $27,500 C. $45,000 D. 47,500 E. 50,000


33. White, Sands and Luke has the following capital balances and profit and loss ratios; $50,000 (30%), $100,000 (20%) and $200,000 (50%). If the partnership is to be liquidated and $150,000 becomes available for the partners immediately, who gets the money? A. $0 White; $57,143 Sands; $92,857 Luke B. $10,000 White; $47,143 Sands; $92,857 Luke C. $0 White; $47,143 Sands; $102,857 Luke D. $20,000 White; $57,143 Sands; $82,857 Luke E. $30,857 White; $57,143 Sands; $62,000 Luke

Since the partnership currently has total capital of $350,000, the $150,000 that is available would indicate maximum potential losses of $200,000 that is hypothetically split among the partners.


34. A local partnership has assets of cash of $5,000 and a building worth $80,000. All liabilities have been paid and the partners are all insolvent. The partners capital accounts are as follows Harry $40,000, Landers $30,000 and Waters 15,000. The partners share profits and losses 4:4:2. If the building is sold for $50,000, how much cash will Harry receive in the final settlement? A. $5,000 B. $9,000 C. $18,000 D. $28,000 E. $55,000


35. A local partnership has assets of cash of $5,000 and a building worth $80,000. All liabilities have been paid and the partners are all insolvent. The partners capital accounts are as follows Harry $40,000, Landers $30,000 and Waters 15,000. The partners share profits and losses 4:4:2. If the building is sold for $50,000, how much cash will Waters receive in the final settlement? A. $5,000 B. $9,000 C. $18,000 D. $28,000 E. $55,000


36. A local partnership has assets of cash of $13,000 and land worth $70,000. All liabilities have been paid and the partners are all insolvent. The partners capital accounts are as follows Roberts, $50,000, Ferry, $30,000 and Mones, $3,000. The partners share profits and losses 5:3:2. If the land is sold for $45,000, how much cash will Roberts receive in the final settlement? A. $0 B. $3,000 C. $21,750 D. $36,250 E. $50,250


37. A local partnership has assets of cash of $13,000 and land worth $70,000. All liabilities have been paid and the partners are all insolvent. The partners capital accounts are as follows Roberts, $50,000, Ferry, $30,000 and Mones 3,000. The partners share profits and losses 5:3:2. If the land is sold for $45,000, how much cash will Mones receive in the final settlement? A. $0 B. $1,500 C. $3,000 D. $21,750 E. $36,250


38. Matching (1) The schedule of liquidation (2) Deficit capital balances (3) Marshaling of assets (4) Pre-distribution plan (A) A schedule of liquidation should be produced periodically by the accountant to disclose losses and gains that have been incurred, remaining assets and liabilities and current capital balances. (B) At the start of a liquidation, this document provides guidance for all payments made to the partners throughout the liquidation. (C) One or more partners may have a negative capital balance often as a result of losses incurred in disposing of assets. (D) Provides an equitable system for distributing assets during liquidation.

(1) A, (2) C, (3) D, (4) B


39. What is the role of the accountant during the liquidation process?

The accountant works to ensure the equitable treatment of all parties involved in the liquidation. The accountant is responsible for recording and reporting the conversion of partnership assets into cash, the allocation of gains and losses, the payment of liabilities and expenses and any remaining unpaid debts and distributions to the partners.


40. The partnership of Rayne, Marin and Fulton was being liquidated by the partners. Rayne was insolvent and did not have enough assets to pay all of his personal creditors. Under what conditions might Rayne's personal creditors have claimed some of the partnership assets?

Rayne's personal creditors might have claimed some partnership assets if Rayne had a credit balance in his capital account and the claims of the partnership's creditors had been satisfied.


41. What term is used for the ranking of creditors' claims against an individual?

The appropriate term is a marshaling of assets.


42. The Arnold, Bates, Carlton and Delbert partnership was liquidating. It had paid all of its liabilities and had some assets yet to be sold. The partners had capital account balances of $50,000, $90,000, $110,000 and $130,000. There was $40,000 cash available for distribution to the partners. What procedures would be followed to determine the amount of cash that could safely be distributed to each partner?

To determine the amount of cash that can be safely distributed to each partner, one should assume that maximum losses will be realized on the disposal of noncash assets, estimate liquidation expenses and assume that any partners with deficit balances cannot pay them.


43. Xygote, Yen and Zen were partners who were liquidating their partnership. Each partner was insolvent. All assets had been liquidated and all liabilities had been paid. How should any remaining cash have been distributed to the partners?

All partners with deficits in their capital accounts should transfer personal assets to the partnership to eliminate their deficits. Then each partner should receive an amount of cash equal to his or her capital balance.


44. What is the purpose of a pre-distribution plan?

The purpose of a pre-distribution plan is to determine how assets should be distributed to creditors and partners as the partnership's noncash assets are realized. A pre-distribution plan would be particularly useful for a liquidation that takes a long time to complete.


45. What financial schedule would be prepared for a partnership that has begun liquidation but has not yet completed the process? What is the purpose of this schedule?

The appropriate financial schedule is a schedule of liquidation. The purpose of this schedule is to report to partners and creditors on the progress of the liquidation to date, summarizing the various transactions that have occurred.


46. What events or circumstances might force the termination of a partnership and liquidation of its assets?

There are many events or situations that can lead to the termination of a partnership and the liquidation of its assets. These circumstances include insolvency of the partnership and dissension among the partners. A partnership would be liquidated if it was formed to accomplish a specific purpose and has no further usefulness. Liquidation of the partnership may be required whenever there is a large claim against the partnership's assets. Such a claim might occur through the loss of a lawsuit and the payment of a large judgment, the insolvency of a partner or the death or retirement of a partner.


47. What are the provisions of the marshaling of assets doctrine?

The marshaling of assets doctrine regulates claims against an individual's assets. When a partner is bankrupt or his or her estate is insolvent, claims against his or her separate property rank in the following order: (1) those owed to separate creditors. (2) those owed to the creditors of the partnership. (3) those owed to partners by way of contribution.


48. For a partnership, how should liquidation gains and losses be accounted for?

Gains and losses on the liquidation of assets should be allocated to the partners' capital accounts using the profit and loss sharing ratio.


49. What is the purpose of a marshaling of assets? What are the provisions that must be complied with in a marshaling of assets?

The purpose of a marshaling of assets is to protect the interests of various creditors and to give order and structure to the settling of claims. When a partner or his or her estate is insolvent, the partner's personal assets should first be used to settle the claims of his or her personal creditors. Next, the assets may be used to pay creditors of the partnership. Finally, the remaining assets of the partner may be distributed to the other partners (assuming that the partner has a debit balance in his or her capital account).


50. What should occur when a solvent partner has a deficit balance?

The partner should contribute personal assets to the extent of the deficit balance.


51. Why is a Schedule of Liquidation prepared?

To provide information to the creditors and partners about liquidation transactions to date, property still being held by the partnership, liabilities remaining to be paid and current cash and capital balances.


52. What is a safe cash payment?

A fair allocation of funds made available before liquidation has been completed. Safe cash payments are based on the assumption that any capital deficits will prove to be a total loss to the partnership and must be absorbed by the remaining partners based on their relative profit and loss ratio.


53. The Albert, Boynton and Creamer partnership was in the process of liquidating its assets and going out of business. Albert, Boynton and Creamer had capital account balances of $80,000, $120,000 and $200,000, respectively and shared profits and losses in the ratio of 1:3:2. Equipment that had cost $90,000 and had a book value of $60,000 was sold for $24,000. Required: Prepare the appropriate journal entry.


54. The Amos, Billings and Cleaver partnership had two assets: (1) cash of $40,000 and (2) an investment with a book value of $110,000. The ratio for sharing profits and losses is 2:1:1. The balances in the capital accounts were: Amos, capital: $45,000 Billings, capital: $75,000 Cleaver, capital: $30,000 Required: If the investment was sold for $80,000, how much cash would each partner have received?


As of January 1, 2007, the partnership of Canton, Yulls and Garr had the following account balances and percentages for the sharing of profits and losses:

The partnership incurred losses in recent years and decided to liquidate. The liquidation expenses were expected to be $10,000.

Hoyle - Chapter 10

55. 1) How much cash should have been distributed safely to partners at this time? 2) How much cash should each partner have received at this time?

1) The amount of cash that could be distributed to partners at this time = current cash balance - liabilities - liquidation expenses = $23,000. 2) To determine the amount to be distributed to partners, assuming maximum losses on liquidation:

The entire $23,000 should have been distributed to Canton.


56. What would be the maximum amount Garr might have had to contribute to the partnership to eliminate a deficit balance in his account?

The maximum amount that Garr might have had to contribute to eliminate a deficit would have been $84,000, assuming that the noncash assets cannot be sold and become a total loss to the partnership.


57. If the noncash assets were sold for $105,000, what would have been the maximum amount of cash that Canton could have expected to receive?

The maximum amount that Canton could have expected to recover was $105,000. This assumes that Garr could have covered his deficit:


58. A partnership had the following account balances: Cash, $91,000; Other Assets, $702,000; Liabilities, $338,000; Polk, Capital (50% of profits and losses), $221,000; Garfield, Capital (30%), $143,000; Arthur, Capital (20%), $91,000. The company liquidated and $10,400 became available to the partners. Required: Who would have received the $10,400?

Since the partnership had total capital of $455,000, the $10,400 that was available would have indicated maximum potential losses of $444,600.

The $10,400 would have gone to Garfield ($8,840) and Arthur ($1,560).


59. A partnership held three assets: Cash, $13,000; Land, $45,000; and a Building, $65,000. The partners anticipated that expenses required to liquidate their partnership would amount to $6,000. Capital balances were as follows: King, Capital: $32,700 Murphy, Capital: 36,400 Madison, Capital: 26,000 Pond, Capital: 27,900 The partners shared profits and losses 30:30:20:20, respectively. Required: If a preliminary distribution of cash was to be made, how much would each of the partners have received?

Murphy received $700, Madison received $2,200 and Pond received $4,100.


On January 1, 2009, the partners of Won, Cadel and Dax (who shared profits and losses in the ratio of 5:3:2, respectively) decided to liquidate their partnership. The trial balance at this date was as follows:

The partners planned a program of piecemeal conversion of the business assets to minimize liquidation losses. All available cash, less an amount retained to provide for future expenses, was to be distributed to the partners at the end of each month. A summary of liquidation transactions follows:

Hoyle - Chapter 10

60. Prepare a schedule to calculate the safe installment payments to be made to the partners at the end of January.


61. Prepare a schedule to calculate the safe installment payments to be made to the partners at the end of February.


62. Prepare a schedule to calculate the safe installment payments to be made to the partners at the end of March.


Hardin, Sutton and Williams has operated a local business as a partnership for several years. All profits and losses have been allocated on a 3:2:1 ratio, respectively. Recently, Williams has undergone personal financial problems and is insolvent. To satisfy Williams' creditors, the partnership has decided to liquidate. The following balance sheet has been produced:

During the liquidation process, the following transactions take place: - Noncash assets are sold for $116,000. - Liquidation expenses of $12,000 are paid. No further expenses are expected. - Safe capital distributions are made to the partners. - Payment is made of all business liabilities. - Any deficit capital balances are deemed to be uncollectible.

Hoyle - Chapter 10

63. Develop a pre-distribution plan for this partnership, assuming $12,000 of liquidation expenses are expected to be paid.

(1) The first $92,000 pays for liabilities and liquidation expenses. (2) The next $28,500 goes to Hardin. (3) The next $32,500 goes to Hardin (60%) and Sutton (40%). (4) The remainder goes to all three partners in their 3:2:1 ratio.

Schedule A: Partner

Schedule B: Partner


64. Compute safe cash payments after the noncash assets have been sold and the liquidation expenses have been paid.

Safe Cash Payments:


65. Prepare journal entries to record the actual liquidation transactions.


66. Jones, Marge and Tate LLP decided to dissolve and liquidate the partnership on September 31, 2009. After realization of a portion of the noncash assets, the capital account balances were Jones $50,000; Marge $40,000; and Tate $15,000. Cash of $35,000 and other assets with a carrying amount of $100,000 were on hand. Creditors' claims totaled $30,000. Jones, Marge and Tate shared net income and losses in a 2:1:1 ratio, respectively. Prepare a working paper to compute the amount of cash that may be paid to creditors and to partners at this time, assuming that no partner is solvent.


The balance sheet of Rogers, Dennis & Berry LLP prior to liquidation included the following:

The three partners shared net income and losses in a 5:3:2 ratio, respectively. Noncash assets were sold for $60,000. Creditors were paid in full, partners were paid $35,000 and the balance of cash was retained pending future developments.

Hoyle - Chapter 10

67. Record the journal entry for the sale of the noncash assets.


68. Record the journal entry for payment of outstanding liabilities to the creditors.


69. Determine the cash to be retained and prepare a schedule to distribute $35,000 cash to the partners.

Difficulty: Medium


70. Record the journal entry for the cash distribution to the partners.

Difficulty: Medium


The partners of Donald, Chief & Berry LLP decided to liquidate on August 1, 2009. The balance sheet of the partnership is as follows, with the income-sharing ratio of 25%, 45%, 30% respectively.

The disposal of other assets with a carrying amount of $200,000 realized $140,000 and all available cash was distributed.

Hoyle - Chapter 10

71. Prepare the journal entry for Donald, Chief & Berry LLP on August 1, 2009, to record the realization of the other assets.


72. Prepare the journal entry for Donald, Chief & Berry LLP on August 1, 2009, to record payment of liabilities.

Difficulty: Easy


73. Prepare the journal entry for Donald, Chief & Berry LLP on August 1, 2009, to record the elimination of the loan receivable from Donald.

Difficulty: Easy


74. Prepare the schedule to compute the cash payments to the partners.

Total cash of $70,000 can be safely distributed. Beginning cash $60,000 + sale of assets $140,000 - payment of liabilities $130,000 = $70,000.


ch10 Summary


ch11

Student: ___________________________________________________________________________

1. Which standard issued by the Governmental Accounting Standards Board in 1999 significantly modified fund accounting and created "a second group of financial statements based on an entirely different approach to financial reporting"? A. GASB Statement No. 32 B. GASB Statement No. 33 C. GASB Statement No. 34 D. GASB Statement No. 35 E. GASB Statement No. 36

2. Which group of governmental financial statements reports all revenues and all costs of providing services each year? A. GAAP-Based Financial Statements B. Fund-Based Financial Statements C. Cost-Based Financial Statements D. Government-Wide Financial Statements E. General Fund Financial Statements

3. Proprietary funds are A. Funds used to account for the activities of a government that are carried out primarily to provide services to citizens B. Funds used to account for a government's ongoing organizations and activities that are similar to those operated by for-profit organizations C. Funds used to account for monies held by the government in a trustee capacity D. Funds used to account for all financial resources except those required to be accounted for in another fund E. Funds used to account for revenues that have been legally restricted as to expenditure

4. Fiduciary funds are A. Funds used to account for the activities of a government that are carried out primarily to provide services to citizens B. Funds used to account for a government's ongoing organizations and activities that are similar to those operated by for-profit organizations C. Funds used to account for monies held by the government in a trustee capacity D. Funds used to account for all financial resources except those required to be accounted for in another fund E. Funds used to account for revenues that have been legally restricted as to expenditure

5. Governmental funds are A. Funds used to account for the activities of a government that are carried out primarily to provide services to citizens B. Funds used to account for a government's ongoing organizations and activities that are similar to those operated by for-profit organizations C. Funds used to account for monies held by the government in a trustee capacity D. Funds used to account for all financial resources except those required to be accounted for in another fund E. Funds used to account for revenues that have been legally restricted as to expenditure

6. Special Revenue funds are A. Funds used to account for the activities of a government that are carried out primarily to provide services to citizens B. Funds used to account for a government's ongoing organizations and activities that are similar to those operated by for-profit organizations C. Funds used to account for monies held by the government in a trustee capacity D. Funds used to account for all financial resources except those required to be accounted for in another fund E. Funds used to account for revenues that have been legally restricted as to expenditure

7. The term "current financial resources" refers to A. Those assets that can quickly be converted into cash B. Monetary assets that are available to meet the government's needs C. The government's current assets and current liabilities D. The current value of all net assets owned by the governmental unit E. Financial resources used to provide electricity to local citizens

8. What are the broad types or classifications of funds for a governmental entity such as a city? A. General, governmental and trust funds B. Governmental, proprietary and fiduciary funds C. Revenue, trust and governmental funds D. Enterprise, revenue and fiduciary funds E. Governmental, agency and enterprise funds

9. Which group of financial statements is prepared using the "modified accrual accounting" approach? A. GAAP-Based Financial Statements B. Fund-Based Financial Statements C. Cost-Based Financial Statements D. Government-Wide Financial Statements E. General Purpose Financial Statements

10. Under modified accrual accounting, revenues should be recognized when they are A. Collected B. Realizable C. Reasonably estimable D. Measurable and available E. Earned

11. Under modified accrual accounting, when should an expenditure to recognize interest on long-term debt be recorded? A. At the end of each accounting period B. When payment is due within one fiscal year C. When payment is due D. When cash is available to pay the interest E. When the interest is incurred

12. Which of the following is a new fund created by GASB Statement No. 34? A. Enterprise Fund B. Internal Service Fund C. Debt Service Fund D. Capital Projects Fund E. Permanent Fund

13. Revenue from property taxes should be recorded in the General Fund A. When received B. In the period for which the taxes are levied C. At the time of eligibility D. When they are available for recognition E. In the period in which they are consumed

14. Which type of fund is not included in the Government-Wide Financial Statements? A. Governmental Funds B. Proprietary Funds C. Fiduciary Funds D. Debt Service Funds E. Special Revenue Funds

15. A city received a grant of $5,000,000 from a private agency. The money was to be used to build a new city library. In which fund should the money be recorded for the Fund-Based Financial Statements? A. The General Fund B. An Expendable Trust Fund C. A Capital Projects Fund D. An Agency Fund E. A Permanent Fund

16. When a city received a federal grant for providing food and other assistance to the homeless, the money should have been recorded in A. The General Fund B. An Expendable Trust Fund C. A Capital Projects Fund D. An Agency Fund E. A Special Revenue Fund

17. Bay City received a federal grant to provide health care services to low income mothers and children. When should the revenues be recognized? A. As health care services are provided B. When the awarding of the grant is announced C. When the grant money is received D. At the end of Bay City's fiscal year E. When the grant money is receivable

18. Trapper City issued 30-year bonds for the purpose of building a new City Hall. The proceeds of the bonds are deposited in the General Fund. For the Fund-Based Financial Statements, in what fund will the Bonds Payable appear? A. General Fund B. Capital Projects Fund C. Permanent Fund D. Debt Service Fund E. Bonds Payable do not appear on Fund-Based Financial Statements

19. Which of the following is a governmental fund? A. Enterprise fund B. Internal service fund C. Permanent fund D. Investment trust fund E. Agency fund

20. Which of the following is a fiduciary fund? A. Pension trust fund B. Debt service fund C. Permanent fund D. Enterprise fund E. Capital projects fund

21. According to GASB Concepts Statement No. 1, what are the three groups of primary users of external state and local governmental financial reports? A. The Securities Exchange Commission, the citizenry and legislative and oversight bodies B. The Securities Exchange Commission, legislative and oversight bodies and investors and creditors C. The Securities Exchange Commission, the citizenry and investors and creditors D. The citizenry, legislative and oversight bodies and investors and creditors E. The citizenry, management and the Governmental Accounting Office

22. Which of the following statements is true regarding fund-based financial statements? A. Fund-based financial statements report a government's activities and financial position as a whole B. Fund-based financial statements should tell the amount spent this year on such services as public safety, education, health and sanitation and the construction of a new road C. Fund-based financial statements utilize the accrual basis of accounting much like any for-profit entity D. Fund-based financial statements help to determine whether the government's overall financial position improved or deteriorated E. Fund-based financial statements report all assets, liabilities in a way comparable to business-type accounting

23. Which of the following statements is false regarding government-wide financial statements? A. Government-wide financial statements report a government's activities and financial position as a whole B. The government-wide financial statement approach helps users make long-term evaluations of the financial decisions and stability of the government C. Government-wide financial statements focus on the short-term instead of the long-term D. Government-wide financial statements assess the finances of the government in its entirety, including the year's operating results E. The measurement focus of government-wide financial statements is on all economic resources and utilizes accrual accounting

24. How do the balance sheet and statement of revenues, expenditures and changes in fund balances of governmental funds differ from the financial statement presentation for the governmental activities in the government-wide statement of net assets and statement of activities? (1) Internal service funds are not included in the fund-based financial statements of governmental funds but could be reported in the governmental activities of government-wide financial statements (2) The economic resources measurement basis is used for fund-based financial statements of governmental funds and the current financial resources measurement basis is used for governmental activities in the government-wide financial statements (3) Modified accrual accounting is used for fund-based financial statements of governmental funds to time revenues and expenditures and accrual accounting is used for governmental activities of government = wide financial statements (4) The financial statements of governmental funds for fund-based financial statements are the same as governmental activities in government-wide financial statements but with different titles of the financial statements A. 1 and 2 B. 2, 3 and 4 C. 1, 2 and 3 D. 1 and 3 E. 1, 2, 3 and 4

25. Which of the following is not a classification of non-exchange transactions according to GASB Statement Number 33? A. Derived tax expenditures B. Voluntary non-exchange transactions C. Government-mandated non-exchange transactions D. Derived tax revenues E. Imposed non-exchange revenues

26. GASB Statement Number 33 divides all eligibility requirements into four general classifications including all of the following except: A. Required characteristics of the recipients B. Time requirements C. Reimbursement D. Contingencies E. Refunding

27. Which statement is not correct? A. Governmental funds account for expenditures of financial resources rather than matching revenues and expenses B. The Fund Balance Reserved for Encumbrances account is not closed at the end of a fiscal year C. Revenues from licenses and permit fees are recognized when received in cash if using the modified accrual basis of accounting for governmental funds D. A fund is an independent accounting entity composed of cash and other financial resources, segregated for the purpose of carrying on specific activities and objectives E. Commitments for purchase orders are recorded as expenses

28. For governmental entities, the accrual basis of accounting is used for: A. Special revenue funds B. Internal service funds C. Debt service funds D. General Fund E. Capital Projects Fund

29. What account is debited in the general fund when equipment is received by a governmental entity? A. Expenditures B. Encumbrances C. Plant assets D. Accounts Payable E. Fund Balance-Reserve for Encumbrances

30. Generally, annual budgets are recorded within the following funds: A. General fund and special revenue funds B. Capital projects funds and debt service fund C. Enterprise funds and internal service funds D. General Fund and Pension Trust Fund E. Agency Funds and General Fund

31. When a city received a federal grant for books to be purchased for a library, the money should have been recorded in A. The Permanent Fund B. An Expendable Trust Fund C. A Capital Projects Fund D. An Agency Fund E. A Special Revenue Fund

32. When a city holds pension monies for city employees, the monies should be recorded in A. The General Fund B. An Expendable Trust Fund C. A Fiduciary Fund D. An Agency Fund E. A Special Revenue Fund

33. When a city received a private donation of $1,000,000 stipulating that the principal donation would be preserved but allowing the interest income to be spent on building a city park with access for disabled children, which fund should the money be recorded in? A. The General Fund B. An Expendable Trust Fund C. A Permanent Fund D. An Agency Fund E. A Special Revenue Fund

34. When a city collects fees from citizens who use the public swimming pool, the money should be recorded in A. The General Fund B. An Enterprise Fund C. A Capital Projects Fund D. An Agency Fund E. An Internal Service Fund

35. A city operates a central data processing facility. The expenses of this facility would be accounted for using A. The General Fund B. An Enterprise Fund C. A Capital Projects Fund D. An Agency Fund E. An Internal Service Fund

36. What are the two proprietary fund types? (1) Internal service funds (2) Investment trust funds (3) Enterprise funds (4) Agency funds A. 1 and 2 B. 2 and 3 C. 1 and 3 D. 2 and 4 E. 1 and 4

37. Salaries and wages that have been earned by governmental employees that have not yet been paid are recorded in the general fund as: A. An expenditure B. An encumbrance C. An appropriation D. An expense E. An investment

38. For each of the following transactions, select the area of accounting records in which an entry will be recorded. (A) General Fund only. (B) Governmental Activities only. (C) General Fund and Governmental Activities. (D) General Fund and Debt Service Fund. (E) Capital Projects Fund and Governmental Activities. (F) Debt Service Fund and Governmental Activities. (G) Special Revenue Fund and Governmental Activities. ___ (1) The city council adopts an annual budget for the General Fund. ___ (2) Property taxes are levied. ___ (3) Computers are ordered for the fire department. ___ (4) A transfer of funds is made from the General Fund to the Debt Service Fund. ___ (5) The principal and interest of a bond are paid. ___ (6) A building is acquired for the police department and renovations begin immediately. ___ (7) Depreciation on fire trucks is recorded. ___ (8) Citizens are assessed for a street lighting project that has been legally restricted for those citizens. ___ (9) A grant is received to landscape tree-lined areas beside city-owned streets. ___ (10) The city spends grant money received in (9) above and landscapes the tree-lined areas beside the streets for which the grant money was received.

39. What organization is responsible for establishing accounting principles for governmental entities? By whom was this organization established?

40. What is a special revenue fund used to account for?

41. What is the definition of the term fund?

42. For a government, what kind of operations are accounted for using a proprietary fund? Give three examples.

43. What are the five types of governmental funds?

44. A city enacted a special tax levy to provide medical services at the municipal hospital. What kind of fund should have been used to record the revenues generated by the tax?

45. In governmental accounting, what term is used for a decrease in financial resources?

46. Under modified accrual accounting, when are expenditures recorded?

47. What assets would be included in the accounting records of a city's general fund?

48. Under modified accrual accounting, when should revenues be reported by a governmental-type fund?

49. When should property taxes be recognized under modified accrual accounting?

50. What are the two groups of financial statements mandated by GASB Statement No. 34? For each group, what are the names of the individual statements that must be produced?

51. What is the primary difference between monies accounted for in the general fund and monies accounted for in the special revenue fund?

52. What are the two proprietary fund types?

53. What are the four fiduciary fund types?

54. What is the purpose of fund-based financial statements?

55. What is the purpose of government-wide financial statements?

56. The board of commissioners of the city of Jarmaine adopted a General Fund budget for the year ending June 30, 2008, which indicated revenues of $1,300,000, bond proceeds of $520,000, appropriations of $1,170,000 and operating transfers out of $390,000. Required: If this budget was formally integrated into the accounting records used to produce the Fund-Based Financial Statements, what was the required journal entry at the beginning of the year?

57. On July 1, 2008, Fred City ordered $1,500 of office supplies. They were to be paid for out of the General Fund. Required: (A) What journal entry was required for the Fund-Based Statements? (B) What journal entry was required for the Government-Wide Statements?

58. On July 12, 2008, Fred City ordered a new computer at an anticipated cost of $114,400. The computer was received on July 16 with an actual cost of $116,220. Payment was subsequently made on August 15, 2008. Required: (A) Prepare all the required journal entries and identify the type of fund in which each entry was recorded for the Fund-Based Financial Statements. (B) Prepare all the required journal entries and identify the type of fund in which each entry was recorded for the Government-Wide Financial Statements.

59. A new truck was ordered for the sanitation department at a cost of $122,200 on September 3, 2008. Required: (A) Prepare the required journal entry in the General Fund for the Fund-Based Financial Statements. (B) Prepare the required journal entry for the Government-Wide Financial Statements.

60. The school system had some booklets printed by a local print shop on September 22, 2008. The school system was charged $1,560 for the printing, but the bill is not due until October. Required: (A) Prepare the required journal entry in the General Fund for the Fund-Based Financial Statements. (B) Prepare the required journal entry for the Government-Wide Financial Statements.

61. A $910,000 bond was issued on October 1, 2008 to build a new road. The bonds carried a 6% interest rate and are due in 10 years. Required: (A) Prepare the required journal entry in the Capital Projects Fund on October 1 for the Fund-Based Financial Statements. (B) Prepare the required journal entry for the Government-Wide Financial Statements.

62. On June 14, 2008, Fred City agreed to transfer cash of $52,000 from the General Fund to provide permanent financing for a municipal swimming pool that will be viewed as an Enterprise Fund. The cash was transferred on June 30. Required: (A) Prepare all the required journal entries and identify the fund in which each entry was recorded for the Fund-Based Financial Statements. (B) Prepare all the required journal entries and identify the type of activity for the Government-Wide Financial Statements.

63. On August 21, 2008, Fred City transferred $100,000 to the School System to cover repairs to a school building. Required: Prepare all the required journal entries and identify the fund in which each entry was recorded for the Fund-Based Financial Statements.

64. On January 1, 2008, Wakefield City purchased $40,000 office supplies. During the year $35,000 of these supplies were used. Required: Record the journal entries for these transactions using the purchases method.

65. On January 1, 2008, Wakefield City purchased $40,000 office supplies. During the year $35,000 of these supplies were used. Required: Record the journal entries for these transactions using the consumption method.

66. The town council adopted an annual budget estimating general revenues of $2,000,000, approved expenditures of $1,700,000 and other financing for other funds of $130,000. Required: Record the journal entry to record the budget and identify the fund in which it is recorded.

67. Property taxes of 1,500,000 are levied for Miner County. The county expects that 5% will be uncollectible. Required: Prepare the required journal entry and identify the fund in which it is recorded.

68. Shell City transfers $100,000 from the General Fund to the Debt Service fund. Required: Prepare the required journal entries and identify the funds in which they are recorded.

69. Prepare the journal entry and identify the fund to record the purchase order of two trucks owned by Simple City for $100,000. Identify the fund in which the entry is recorded.

70. Simple City has recorded the purchase order of two trucks for a total of $100,000. Prepare the journal entries to reflect that the two trucks have been received with a voucher price of $105,000. This amount has been approved but not yet paid. Identify the fund in which the entries are recorded.

71. A $5,000,000 bond is issued by Northern City to build a new hospital. Required: Prepare the journal entry and identify the fund in which it is recorded to reflect the bond issue.

72. The Town of Anthrop receives a $10,000 grant to make the Town Hall handicapped-accessible. Required: Prepare the journal entry and identify the fund in which it is recorded, to record the receipt of the grant.

73. The Town of Anthrop has recorded the receipt of a $10,000 grant to make its Town Hall handicapped-accessible. The town now spends $10,000 to make the Town Hall handicapped-accessible. Required: Prepare the journal entry (or entries) and identify the fund for recording, to record that the town spends $10,000 of a grant it received to make the Town Hall handicapped-accessible.

ch11 Key

1. Which standard issued by the Governmental Accounting Standards Board in 1999 significantly modified fund accounting and created "a second group of financial statements based on an entirely different approach to financial reporting"? A. GASB Statement No. 32 B. GASB Statement No. 33 C. GASB Statement No. 34 D. GASB Statement No. 35 E. GASB Statement No. 36


2. Which group of governmental financial statements reports all revenues and all costs of providing services each year? A. GAAP-Based Financial Statements B. Fund-Based Financial Statements C. Cost-Based Financial Statements D. Government-Wide Financial Statements E. General Fund Financial Statements


3. Proprietary funds are A. Funds used to account for the activities of a government that are carried out primarily to provide services to citizens B. Funds used to account for a government's ongoing organizations and activities that are similar to those operated by for-profit organizations C. Funds used to account for monies held by the government in a trustee capacity D. Funds used to account for all financial resources except those required to be accounted for in another fund E. Funds used to account for revenues that have been legally restricted as to expenditure


4. Fiduciary funds are A. Funds used to account for the activities of a government that are carried out primarily to provide services to citizens B. Funds used to account for a government's ongoing organizations and activities that are similar to those operated by for-profit organizations C. Funds used to account for monies held by the government in a trustee capacity D. Funds used to account for all financial resources except those required to be accounted for in another fund E. Funds used to account for revenues that have been legally restricted as to expenditure


5. Governmental funds are A. Funds used to account for the activities of a government that are carried out primarily to provide services to citizens B. Funds used to account for a government's ongoing organizations and activities that are similar to those operated by for-profit organizations C. Funds used to account for monies held by the government in a trustee capacity D. Funds used to account for all financial resources except those required to be accounted for in another fund E. Funds used to account for revenues that have been legally restricted as to expenditure


6. Special Revenue funds are A. Funds used to account for the activities of a government that are carried out primarily to provide services to citizens B. Funds used to account for a government's ongoing organizations and activities that are similar to those operated by for-profit organizations C. Funds used to account for monies held by the government in a trustee capacity D. Funds used to account for all financial resources except those required to be accounted for in another fund E. Funds used to account for revenues that have been legally restricted as to expenditure


7. The term "current financial resources" refers to A. Those assets that can quickly be converted into cash B. Monetary assets that are available to meet the government's needs C. The government's current assets and current liabilities D. The current value of all net assets owned by the governmental unit E. Financial resources used to provide electricity to local citizens


8. What are the broad types or classifications of funds for a governmental entity such as a city? A. General, governmental and trust funds B. Governmental, proprietary and fiduciary funds C. Revenue, trust and governmental funds D. Enterprise, revenue and fiduciary funds E. Governmental, agency and enterprise funds


9. Which group of financial statements is prepared using the "modified accrual accounting" approach? A. GAAP-Based Financial Statements B. Fund-Based Financial Statements C. Cost-Based Financial Statements D. Government-Wide Financial Statements E. General Purpose Financial Statements


10. Under modified accrual accounting, revenues should be recognized when they are A. Collected B. Realizable C. Reasonably estimable D. Measurable and available E. Earned


11. Under modified accrual accounting, when should an expenditure to recognize interest on long-term debt be recorded? A. At the end of each accounting period B. When payment is due within one fiscal year C. When payment is due D. When cash is available to pay the interest E. When the interest is incurred


12. Which of the following is a new fund created by GASB Statement No. 34? A. Enterprise Fund B. Internal Service Fund C. Debt Service Fund D. Capital Projects Fund E. Permanent Fund


13. Revenue from property taxes should be recorded in the General Fund A. When received B. In the period for which the taxes are levied C. At the time of eligibility D. When they are available for recognition E. In the period in which they are consumed


14. Which type of fund is not included in the Government-Wide Financial Statements? A. Governmental Funds B. Proprietary Funds C. Fiduciary Funds D. Debt Service Funds E. Special Revenue Funds


15. A city received a grant of $5,000,000 from a private agency. The money was to be used to build a new city library. In which fund should the money be recorded for the Fund-Based Financial Statements? A. The General Fund B. An Expendable Trust Fund C. A Capital Projects Fund D. An Agency Fund E. A Permanent Fund


16. When a city received a federal grant for providing food and other assistance to the homeless, the money should have been recorded in A. The General Fund B. An Expendable Trust Fund C. A Capital Projects Fund D. An Agency Fund E. A Special Revenue Fund


17. Bay City received a federal grant to provide health care services to low income mothers and children. When should the revenues be recognized? A. As health care services are provided B. When the awarding of the grant is announced C. When the grant money is received D. At the end of Bay City's fiscal year E. When the grant money is receivable


18. Trapper City issued 30-year bonds for the purpose of building a new City Hall. The proceeds of the bonds are deposited in the General Fund. For the Fund-Based Financial Statements, in what fund will the Bonds Payable appear? A. General Fund B. Capital Projects Fund C. Permanent Fund D. Debt Service Fund E. Bonds Payable do not appear on Fund-Based Financial Statements


19. Which of the following is a governmental fund? A. Enterprise fund B. Internal service fund C. Permanent fund D. Investment trust fund E. Agency fund


20. Which of the following is a fiduciary fund? A. Pension trust fund B. Debt service fund C. Permanent fund D. Enterprise fund E. Capital projects fund


21. According to GASB Concepts Statement No. 1, what are the three groups of primary users of external state and local governmental financial reports? A. The Securities Exchange Commission, the citizenry and legislative and oversight bodies B. The Securities Exchange Commission, legislative and oversight bodies and investors and creditors C. The Securities Exchange Commission, the citizenry and investors and creditors D. The citizenry, legislative and oversight bodies and investors and creditors E. The citizenry, management and the Governmental Accounting Office


22. Which of the following statements is true regarding fund-based financial statements? A. Fund-based financial statements report a government's activities and financial position as a whole B. Fund-based financial statements should tell the amount spent this year on such services as public safety, education, health and sanitation and the construction of a new road C. Fund-based financial statements utilize the accrual basis of accounting much like any for-profit entity D. Fund-based financial statements help to determine whether the government's overall financial position improved or deteriorated E. Fund-based financial statements report all assets, liabilities in a way comparable to business-type accounting


23. Which of the following statements is false regarding government-wide financial statements? A. Government-wide financial statements report a government's activities and financial position as a whole B. The government-wide financial statement approach helps users make long-term evaluations of the financial decisions and stability of the government C. Government-wide financial statements focus on the short-term instead of the long-term D. Government-wide financial statements assess the finances of the government in its entirety, including the year's operating results E. The measurement focus of government-wide financial statements is on all economic resources and utilizes accrual accounting


24. How do the balance sheet and statement of revenues, expenditures and changes in fund balances of governmental funds differ from the financial statement presentation for the governmental activities in the government-wide statement of net assets and statement of activities? (1) Internal service funds are not included in the fund-based financial statements of governmental funds but could be reported in the governmental activities of government-wide financial statements (2) The economic resources measurement basis is used for fund-based financial statements of governmental funds and the current financial resources measurement basis is used for governmental activities in the government-wide financial statements (3) Modified accrual accounting is used for fund-based financial statements of governmental funds to time revenues and expenditures and accrual accounting is used for governmental activities of government = wide financial statements (4) The financial statements of governmental funds for fund-based financial statements are the same as governmental activities in government-wide financial statements but with different titles of the financial statements A. 1 and 2 B. 2, 3 and 4 C. 1, 2 and 3 D. 1 and 3 E. 1, 2, 3 and 4


25. Which of the following is not a classification of non-exchange transactions according to GASB Statement Number 33? A. Derived tax expenditures B. Voluntary non-exchange transactions C. Government-mandated non-exchange transactions D. Derived tax revenues E. Imposed non-exchange revenues


26. GASB Statement Number 33 divides all eligibility requirements into four general classifications including all of the following except: A. Required characteristics of the recipients B. Time requirements C. Reimbursement D. Contingencies E. Refunding


27. Which statement is not correct? A. Governmental funds account for expenditures of financial resources rather than matching revenues and expenses B. The Fund Balance Reserved for Encumbrances account is not closed at the end of a fiscal year C. Revenues from licenses and permit fees are recognized when received in cash if using the modified accrual basis of accounting for governmental funds D. A fund is an independent accounting entity composed of cash and other financial resources, segregated for the purpose of carrying on specific activities and objectives E. Commitments for purchase orders are recorded as expenses


28. For governmental entities, the accrual basis of accounting is used for: A. Special revenue funds B. Internal service funds C. Debt service funds D. General Fund E. Capital Projects Fund


29. What account is debited in the general fund when equipment is received by a governmental entity? A. Expenditures B. Encumbrances C. Plant assets D. Accounts Payable E. Fund Balance-Reserve for Encumbrances


30. Generally, annual budgets are recorded within the following funds: A. General fund and special revenue funds B. Capital projects funds and debt service fund C. Enterprise funds and internal service funds D. General Fund and Pension Trust Fund E. Agency Funds and General Fund


31. When a city received a federal grant for books to be purchased for a library, the money should have been recorded in A. The Permanent Fund B. An Expendable Trust Fund C. A Capital Projects Fund D. An Agency Fund E. A Special Revenue Fund


32. When a city holds pension monies for city employees, the monies should be recorded in A. The General Fund B. An Expendable Trust Fund C. A Fiduciary Fund D. An Agency Fund E. A Special Revenue Fund


33. When a city received a private donation of $1,000,000 stipulating that the principal donation would be preserved but allowing the interest income to be spent on building a city park with access for disabled children, which fund should the money be recorded in? A. The General Fund B. An Expendable Trust Fund C. A Permanent Fund D. An Agency Fund E. A Special Revenue Fund


34. When a city collects fees from citizens who use the public swimming pool, the money should be recorded in A. The General Fund B. An Enterprise Fund C. A Capital Projects Fund D. An Agency Fund E. An Internal Service Fund


35. A city operates a central data processing facility. The expenses of this facility would be accounted for using A. The General Fund B. An Enterprise Fund C. A Capital Projects Fund D. An Agency Fund E. An Internal Service Fund


36. What are the two proprietary fund types? (1) Internal service funds (2) Investment trust funds (3) Enterprise funds (4) Agency funds A. 1 and 2 B. 2 and 3 C. 1 and 3 D. 2 and 4 E. 1 and 4


37. Salaries and wages that have been earned by governmental employees that have not yet been paid are recorded in the general fund as: A. An expenditure B. An encumbrance C. An appropriation D. An expense E. An investment


38. For each of the following transactions, select the area of accounting records in which an entry will be recorded. (A) General Fund only. (B) Governmental Activities only. (C) General Fund and Governmental Activities. (D) General Fund and Debt Service Fund. (E) Capital Projects Fund and Governmental Activities. (F) Debt Service Fund and Governmental Activities. (G) Special Revenue Fund and Governmental Activities. ___ (1) The city council adopts an annual budget for the General Fund. ___ (2) Property taxes are levied. ___ (3) Computers are ordered for the fire department. ___ (4) A transfer of funds is made from the General Fund to the Debt Service Fund. ___ (5) The principal and interest of a bond are paid. ___ (6) A building is acquired for the police department and renovations begin immediately. ___ (7) Depreciation on fire trucks is recorded. ___ (8) Citizens are assessed for a street lighting project that has been legally restricted for those citizens. ___ (9) A grant is received to landscape tree-lined areas beside city-owned streets. ___ (10) The city spends grant money received in (9) above and landscapes the tree-lined areas beside the streets for which the grant money was received.

(1) A; (2) C; (3) A; (4) D; (5) F; (6) E; (7) B; (8) G; (9) G; (10) G


39. What organization is responsible for establishing accounting principles for governmental entities? By whom was this organization established?

The organization that is responsible for establishing accounting principles for governmental entities is the GASB (Governmental Accounting Standards Board). The Financial Accounting Foundation has oversight responsibility for the GASB, as it does for the FASB.


40. What is a special revenue fund used to account for?

A special revenue fund is used to account for revenues that are legally restricted as to how they can be spent.


41. What is the definition of the term fund?

The term fund is defined as a self-balancing set of accounts used to record data generated by an identifiable government function.


42. For a government, what kind of operations are accounted for using a proprietary fund? Give three examples.

A proprietary fund is used to account for governmental operations similar to those found in the private sector. They usually involve user charges. Three examples are (1) a toll road, (2) a municipal swimming pool and (3) a city maintenance garage.


43. What are the five types of governmental funds?

The five types of governmental funds are: (A) The General Fund (B) Special Revenue Funds (C) Capital Projects Funds (D) Debt Service Funds (E) Permanent Funds


44. A city enacted a special tax levy to provide medical services at the municipal hospital. What kind of fund should have been used to record the revenues generated by the tax?

A special revenue fund should have been used.


45. In governmental accounting, what term is used for a decrease in financial resources?

The appropriate term is expenditure.


46. Under modified accrual accounting, when are expenditures recorded?

Under modified accrual accounting, expenditures are usually recorded when the related liability is incurred.


47. What assets would be included in the accounting records of a city's general fund?

The assets in the accounting records of a city's general fund would typically include financial resources such as (1) cash, (2) receivables and (3) investments, but no capital assets.


48. Under modified accrual accounting, when should revenues be reported by a governmental-type fund?

Under modified accrual accounting, revenues should be reported by a governmental-type fund when they are both measurable and available. Revenues are measurable when they are subject to reasonable estimation. They are available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period.


49. When should property taxes be recognized under modified accrual accounting?

Property taxes should be recognized under modified accrual accounting when they become both measurable and available.


50. What are the two groups of financial statements mandated by GASB Statement No. 34? For each group, what are the names of the individual statements that must be produced?

GASB No. 34 requires two groups of financial statements. They are the Government-Wide Financial Statements and the Fund-Based Financial Statements. The Government-Wide Financial Statements include the Statement of Net Assets and the Statement of Activities. The Fund-Based Financial Statements include the Balance Sheet and the Statement of Revenues, Expenditures and Changes in Fund Balance.


51. What is the primary difference between monies accounted for in the general fund and monies accounted for in the special revenue fund?

Monies in the special revenue fund are legally restricted as to expenditure and monies in the general fund are used for general public benefit.


52. What are the two proprietary fund types?

Internal service funds and enterprise funds.


53. What are the four fiduciary fund types?

Investment trust funds, private-purpose trust funds, pension trust funds and agency funds.


54. What is the purpose of fund-based financial statements?

To show restrictions on the planned use of resources or to measure, in the short term, the revenues and expenditures arising from certain activities.


55. What is the purpose of government-wide financial statements?

To show longer-term focus because they will report all revenues and all costs of providing services each year, not just those received or paid in the current year or soon after year-end.


56. The board of commissioners of the city of Jarmaine adopted a General Fund budget for the year ending June 30, 2008, which indicated revenues of $1,300,000, bond proceeds of $520,000, appropriations of $1,170,000 and operating transfers out of $390,000. Required: If this budget was formally integrated into the accounting records used to produce the Fund-Based Financial Statements, what was the required journal entry at the beginning of the year?


57. On July 1, 2008, Fred City ordered $1,500 of office supplies. They were to be paid for out of the General Fund. Required: (A) What journal entry was required for the Fund-Based Statements? (B) What journal entry was required for the Government-Wide Statements?

(A) For the Fund-Based Statements, an encumbrance must be recorded in the General Fund.

(B) For the Government-Wide Statements no entry is required, because under accrual accounting, no entry is made until a transaction occurs.


58. On July 12, 2008, Fred City ordered a new computer at an anticipated cost of $114,400. The computer was received on July 16 with an actual cost of $116,220. Payment was subsequently made on August 15, 2008. Required: (A) Prepare all the required journal entries and identify the type of fund in which each entry was recorded for the Fund-Based Financial Statements. (B) Prepare all the required journal entries and identify the type of fund in which each entry was recorded for the Government-Wide Financial Statements.


59. A new truck was ordered for the sanitation department at a cost of $122,200 on September 3, 2008. Required: (A) Prepare the required journal entry in the General Fund for the Fund-Based Financial Statements. (B) Prepare the required journal entry for the Government-Wide Financial Statements.


60. The school system had some booklets printed by a local print shop on September 22, 2008. The school system was charged $1,560 for the printing, but the bill is not due until October. Required: (A) Prepare the required journal entry in the General Fund for the Fund-Based Financial Statements. (B) Prepare the required journal entry for the Government-Wide Financial Statements.


61. A $910,000 bond was issued on October 1, 2008 to build a new road. The bonds carried a 6% interest rate and are due in 10 years. Required: (A) Prepare the required journal entry in the Capital Projects Fund on October 1 for the Fund-Based Financial Statements. (B) Prepare the required journal entry for the Government-Wide Financial Statements.


62. On June 14, 2008, Fred City agreed to transfer cash of $52,000 from the General Fund to provide permanent financing for a municipal swimming pool that will be viewed as an Enterprise Fund. The cash was transferred on June 30. Required: (A) Prepare all the required journal entries and identify the fund in which each entry was recorded for the Fund-Based Financial Statements. (B) Prepare all the required journal entries and identify the type of activity for the Government-Wide Financial Statements.


63. On August 21, 2008, Fred City transferred $100,000 to the School System to cover repairs to a school building. Required: Prepare all the required journal entries and identify the fund in which each entry was recorded for the Fund-Based Financial Statements.


64. On January 1, 2008, Wakefield City purchased $40,000 office supplies. During the year $35,000 of these supplies were used. Required: Record the journal entries for these transactions using the purchases method.


65. On January 1, 2008, Wakefield City purchased $40,000 office supplies. During the year $35,000 of these supplies were used. Required: Record the journal entries for these transactions using the consumption method.


66. The town council adopted an annual budget estimating general revenues of $2,000,000, approved expenditures of $1,700,000 and other financing for other funds of $130,000. Required: Record the journal entry to record the budget and identify the fund in which it is recorded.


67. Property taxes of 1,500,000 are levied for Miner County. The county expects that 5% will be uncollectible. Required: Prepare the required journal entry and identify the fund in which it is recorded.


68. Shell City transfers $100,000 from the General Fund to the Debt Service fund. Required: Prepare the required journal entries and identify the funds in which they are recorded.


69. Prepare the journal entry and identify the fund to record the purchase order of two trucks owned by Simple City for $100,000. Identify the fund in which the entry is recorded.


70. Simple City has recorded the purchase order of two trucks for a total of $100,000. Prepare the journal entries to reflect that the two trucks have been received with a voucher price of $105,000. This amount has been approved but not yet paid. Identify the fund in which the entries are recorded.


71. A $5,000,000 bond is issued by Northern City to build a new hospital. Required: Prepare the journal entry and identify the fund in which it is recorded to reflect the bond issue.


72. The Town of Anthrop receives a $10,000 grant to make the Town Hall handicapped-accessible. Required: Prepare the journal entry and identify the fund in which it is recorded, to record the receipt of the grant.


73. The Town of Anthrop has recorded the receipt of a $10,000 grant to make its Town Hall handicapped-accessible. The town now spends $10,000 to make the Town Hall handicapped-accessible. Required: Prepare the journal entry (or entries) and identify the fund for recording, to record that the town spends $10,000 of a grant it received to make the Town Hall handicapped-accessible.


ch11 Summary

Category # of Questions Difficulty: Easy 29 Difficulty: Medium 44 Hoyle - Chapter 11 73

ch12

Student: ___________________________________________________________________________

1. For government-wide financial statements, what account is credited when a piece of equipment is leased on a capital lease? A. Equipment - Capital Lease B. Encumbrances - Long Term C. Encumbrances - Lease Obligations D. Capital Lease Obligation E. The lease is not recorded

2. For fund-based financial statements, what account is credited when a piece of equipment is leased on a capital lease? A. Equipment - Capital Lease B. Encumbrances - Long Term C. Encumbrances - Lease Obligations D. Capital Lease Obligation E. Other Financing Sources - Capital Lease

3. Jones College, a public institution of higher education, must prepare financial statements A. As if the college was an enterprise fund B. Following the same rules as state and local governments C. According to GAAP D. As if the college was a fiduciary fund E. In the same manner as private colleges and universities

4. For the purpose of government-wide financial statements, the cost of cleaning up a government-owned landfill and closing the landfill A. Is not recognized until the costs are actually incurred B. Is accrued and amortized over the expected useful life of the landfill C. Is accrued on a pro-rated basis each period based on how full the landfill is D. Is accrued in full at the time the costs become estimable E. Is treated as an encumbrance at the time it become estimable and as an expenditure when it is actually paid

5. A method of depreciation for infrastructure assets that allows the expensing of all maintenance costs each year instead of computing depreciation is called A. Government-wide depreciation B. Proprietary depreciation C. GASB depreciation D. Modified approach E. Alternative depreciation

6. Drye Township has received a donation of a rare painting worth $1,000,000. For Drye's government-wide financial statements, three criteria must be met before Drye can opt not to recognize the painting as an asset. Which of the following is not one of the three criteria? (1) The painting is held for public exhibition, education or research in furtherance of public service, rather than financial gain (2) The painting is scheduled to be sold immediately at auction (3) The painting is protected, kept unencumbered, cared for and preserved A. Item 1 is not one of the three criteria B. Item 2 is not one of the three criteria C. Item 3 is not one of the three criteria D. All three items are required criteria E. None of the three items are required criteria

7. GASB No. 34 makes which of the following statements regarding Management's Discussion and Analysis? A. MD&A is required only for Proprietary Fund Financial Statements B. MD&A is required for all state and local government financial statements C. MD&A is only required for comprehensive annual financial reports D. MD&A for state and local government financial statements must include an analysis of potential, untapped revenue sources E. MD&A is an optional inclusion for state and local government financial statements

8. Which one of the following is a criterion for identifying a primary government? A. It has an appointed board of directors B. It is fiscally dependent C. It is a local government D. It has a separately elected governing body E. It must prepare financial statements

9. A local government's basic financial statements would include a statement of cash flows for all A. Proprietary fund types B. Governmental fund types C. Fund types D. Fiduciary fund types E. A statement of cash flows is not required for any fund types

10. According to the GASB (Governmental Accounting Standards Board), which one of the following is not a criterion for determining whether a government is legally separate? A. The government can determine its own budget B. The government can issue debt C. The government has corporate powers including the right to sue and be sued D. The government has the power to levy taxes E. The government can issue preferred stock

11. Which of the following is not a criterion of a capital lease? A. The lease transfers ownership of the property to the lessee by the end of the lease term B. The present value of the minimum lease payments equals or exceeds 90 percent of the fair value of the leased property, net of lessor's investment tax credit C. The lease contains an option to purchase the leased property at a bargain price D. The lease contains an option to renew E. The lease term is equal to or greater than 75 percent of the estimated economic life of the leased property

12. A five-year lease is signed by the City of Wachovia for equipment with a seven-year life. The asset will be returned to the lessor at the end of the lease. The present value of the lease is $20,000 and annual payments of $5,411.41 are payable beginning on the date the lease is signed. The interest portion of the second payment is $1,604.75. The equipment is to be used in City Hall and was purchased from appropriated funds of the General Fund. What should be recorded in the General Fund on the date the lease is

signed? A. Entry A B. Entry B C. Entry C D. Entry D E. Entry E

13. A five-year lease is signed by the City of Wachovia for equipment with a seven-year life. The asset will be returned to the lessor at the end of the lease. The present value of the lease is $20,000 and annual payments of $5,411.41 are payable beginning on the date the lease is signed. The interest portion of the second payment is $1,604.75. The equipment is to be used in City Hall and was purchased from appropriated funds of the General Fund. What should be recorded in the General Fund one year from the date the lease is


14. A five-year lease is signed by the City of Wachovia for equipment with a seven-year life. The asset will be returned to the lessor at the end of the lease. The present value of the lease is $20,000 and annual payments of $5,411.41 are payable beginning on the date the lease is signed. The interest portion of the second payment is $1,604.75. The equipment is to be used in City Hall and was purchased from appropriated funds of the General Fund. What entry should be made for the government-wide financial statements on the date the lease is


15. A five-year lease is signed by the City of Wachovia for equipment with a seven-year life. The asset will be returned to the lessor at the end of the lease. The present value of the lease is $20,000 and annual payments of $5,411.41 are payable beginning on the date the lease is signed. The interest portion of the second payment is $1,604.75. The equipment is to be used in City Hall and was purchased from appropriated funds of the General Fund. What entry should be made for the government-wide financial statements one year from the date the lease is


16. Which of the following is a section of the general purpose external financial statements of a state or local government? (1) Management's discussion and analysis (MD&A) (2) Required supplementary information (other than MD&A) (3) Basic financial statements and notes to financial statements A. 1 and 2 B. 2 and 3 C. 1 and 3 D. 3 only E. 1, 2 and 3

17. Which of the following must be presented in the MD&A of a government? A. A brief discussion of the basic financial statements B. Total assets C. Total liabilities D. Net assets E. An organization chart of government officials

18. What are the three broad sections of a state or local government's CAFR? A. Introductory, financial and statistical B. Financial statements, notes to the financial statements and component units C. Introductory, statistical and component units D. Component units, financial and statistical E. Financial statements, notes to the financial statements and statistical

19. Which of the following is a financial statement of a fiduciary fund? A. Balance sheet B. Statement of Operations C. Statement of Cash Flows D. Statement of Fiduciary Net Assets E. Statement of Revenues, Expenditures and Changes in Fund Balance

20. Which criteria must be met to be considered a special purpose government? (1) Have a separately elected governing body (2) Be legally independent (3) Be fiscally independent A. 1 only B. 1 and 2 C. 2 and 3 D. 1 and 3 E. 1, 2 and 3

21. Which statement is false regarding the government-wide Statement of Net Assets? A. The purpose of the Statement of Net Assets is to report the economic resources of the government as a whole B. Assets are reported excluding capital assets C. Capital assets are reported net of depreciation D. Investments are reported at fair value rather than historical cost E. Business-type activities include Enterprise Funds

22. Which item is not included on the government-wide Statement of Activities? A. Revenues B. Expenses C. Assets D. Operating grants E. Capital contributions

23. Which statement is false regarding the Balance Sheet for Fund-Based Statements? A. The Balance Sheet for Fund-Based Statements measures only current financial resources of the governmental entity B. The Balance Sheet for Fund-Based Statements uses the modified accrual method for timing purposes C. Capital assets are not reported on the Balance Sheet for Fund-Based Statements D. The Balance Sheet for Fund-Based Statements measures only long-term financial resources of the governmental entity E. Long-term debts are not reported on the Balance Sheet for Fund-Based Statements

24. The city operates a public pool where each person is assessed a $2 entrance fee. Which fund is most appropriate to record these revenues? A. General Fund B. Enterprise Fund C. Special Revenue Fund D. Internal Service Fund E. Capital Projects Fund

25. Which statement is false regarding the Statement of Revenues, Expenditures and Changes in Fund Balance when it is included with government-wide financial statements? A. The Statement of Revenues, Expenditures and Changes in Fund Balance uses the modified accrual method for timing purposes B. The Statement of Revenues, Expenditures and Changes in Fund Balance presents revenues as either program revenues or general revenues C. A presentation reconciles the change in governmental fund balance to the change in net assets for governmental activities D. Other financing sources are presented on the Statement of Revenues, Expenditures and Changes in Fund Balance E. All non-major funds are combined and reported together

26. A city starts a solid waste landfill during 2007. When the landfill was opened the city estimated that it would fill to capacity within 5 years and that the cost to cover the facility would be $1.5 million which will not be paid until the facility is closed. At the end of 2007, the facility was 20% full and at the end of 2008 the facility was 45% full. On government-wide financial statements, which of the following are the appropriate amounts to present in the financial statements for 2008? A. Both expense and liability will be zero B. Expense will be $300,000 and liability will be $600,000 C. Expense will be $600,000 and liability will be $600,000 D. Expense will be $675,000 and liability will be $600,000 E. Expense will be $375,000 and liability will be $675,000

27. A city starts a solid waste landfill during 2007. When the landfill was opened the city estimated that it would fill to capacity within 5 years and that the cost to cover the facility would be $1.5 million which will not be paid until the facility is closed. At the end of 2007, the facility was 20% full and at the end of 2008 the facility was 45% full. If the landfill is judged to be a governmental fund, what liability is reported on the fund-based financial statements at the end of 2008? A. $0 B. $300,000 C. $375,000 D. $600,000 E. $675,000

28. The employees of the City of Raymond earn vacation compensation that totals $1,500 per week. During 2008, $30,000 in vacation time was taken and the remainder is expected to be used next year. On the government-wide financial statements, assuming there was no beginning balance, what liability should be reported at the end of 2008? A. $0 B. $1,500 C. $30,000 D. $48,000 E. $78,000

29. The employees of the City of Raymond earn vacation compensation that totals $1,500 per week. During 2008, $30,000 in vacation time was taken and $48,000 is expected to be used during the latter part of next year. On fund-based financial statements, what liability should be reported at the end of 2008? A. $0 B. $1,500 C. $30,000 D. $48,000 E. $78,000

30. The town of Conway opened a solid waste landfill in 1998 that is now filled to capacity. The city initially anticipated closure costs of $2 million. These costs were not expected to be incurred until the landfill is closed. What is the final journal entry to record these costs assuming the estimated $2 million closure costs were properly recorded and the landfill is accounted for in an enterprise

fund? A. Entry A B. Entry B C. Entry C D. Entry D E. Entry E

31. What three criteria must be met to identify a governmental unit as a primary government?

32. What three criteria must be met before a governmental unit can elect to not capitalize and therefore report a work of art or historical treasure as an asset?

33. What are the three broad sections of a state or local government's CAFR?

34. What information is required in the introductory section of a state or local government's CAFR?

35. What information is required in the financial section of a state or local government's CAFR?

36. What is meant by the term fiscally independent?

37. What is meant by the term legally independent?

38. How is the Statement of Cash Flows for Proprietary Funds similar and dissimilar to a Statement of Cash Flows for a for-profit business?

39. The City of Wetteville has a fiscal year ending June 30. Examine the following transactions for Wetteville: (A) On 6/1/08, Wetteville enters into a 5-year lease on a copying machine. The lease meets the criteria of a capital lease and carries an implied interest rate of 10%. The copier has a present value of $2,300. Wetteville has to put a $300 down payment on the lease at the beginning of the lease with monthly payments thereafter of $42.49. (B) On 6/5/08, Wetteville opens a new landfill. The engineers estimate that at the end of 10 years the landfill will be full. Estimated costs to close the landfill are currently at $3,500,000. (C) On 6/15/08, the end of the two-week pay period, Wetteville has $20,000 in accrued vacation pay related to the payroll for the period. The city estimates that $5,000 of this pay will be taken by the end of this summer and the rest will be used next summer. (D) On 6/18/08, Wetteville receives a donation of a vintage railroad steam engine. The engine will be put on display at the local town park. A fee will be charged to actually climb up into the engine. The engine has been valued at $500,000. (E) On 6/30/08, Wetteville makes its first payment on the leased copier. The $42.49 payment includes $16.68 interest. (F) On 6/30/08, Wetteville estimates that the landfill is 2% filled. Required: Prepare the journal entries for the above transactions in the general fund, on the dates mentioned for each lettered item, for the purposes of preparing the fund-based financial statements.

40. The City of Wetteville has a fiscal year ending June 30. Examine the following transactions for Wetteville: (A) On 6/1/08, Wetteville enters into a 5-year lease on a copying machine. The lease meets the criteria of a capital lease and carries an implied interest rate of 10%. The copier has a present value of $2,300. Wetteville has to put a $300 down payment on the lease at the beginning of the lease with monthly payments thereafter of $42.49. (B) On 6/5/08, Wetteville opens a new landfill. The engineers estimate that at the end of 10 years the landfill will be full. Estimated costs to close the landfill are currently at $3,500,000. (C) On 6/15/08, the end of the two-week pay period, Wetteville has $20,000 in accrued vacation pay related to the payroll for the period. The city estimates that $5,000 of this pay will be taken by the end of this summer and the rest will be used next summer. (D) On 6/18/08, Wetteville receives a donation of a vintage railroad steam engine. The engine will be put on display at the local town park. A fee will be charged to actually climb up into the engine. The engine has been valued at $500,000. (E) On 6/30/08, Wetteville makes its first payment on the leased copier. The $42.49 payment includes $16.68 interest. (F) On 6/30/08, Wetteville estimates that the landfill is 2% filled. Required: Prepare the journal entries for the above transactions, on the dates mentioned for each lettered item, for the purposes of preparing the government-wide financial statements.

41. The parking garage and parking lots owned by the city of Danton reported the following balances for 2008:

Required: What amount of net revenue (or expense) should be reported by the fund that was used to account for parking operations assuming the preparation of government-wide financial statements?

42. The city of Next ville operates a motor pool serving all city-owned vehicles. The motor pool bought a new garage by paying $29,000 in cash and signing a note with the local bank for $280,000. Subsequently, the motor pool performed work for the police department at a cost of $17,000, which had not yet been paid. Depreciation on the garage amounted to $20,000. The first $12,000 payment made on the note included $4,800 in interest. Required: Prepare all of the journal entries for these transactions that are necessary to prepare government-wide financial statements.

43. The city of Kamen collected $17,000 from parking meters that must be transferred to the county government. Required: For fund-based financial statements, prepare the journal entry for this transaction including the fund type in which the entry would have been recorded.

44. The city of Kamen transferred $27,000 into a Pension Trust Fund. Of this amount, $19,000 was contributed by the city with the remainder coming from the employees. Required: For fund-based financial statements, prepare the journal entry for this transaction including the fund type in which the entry would have been recorded.

45. The city of Kamen maintains a collection of paintings of a former citizen in its City Hall building. During the year, one painting was purchased by the city for $2,000 at an auction using appropriated funds in the General Fund. Also during the year, a donation of a painting valued at $3,000 was made to the city. Required: Prepare the journal entry(ies) for the two transactions for the purposes of preparing the fund-based financial statements.

46. The city of Kamen maintains a collection of paintings of a former citizen in its City Hall building. During the year, one painting was purchased by the city for $2,000 at an auction using appropriated funds in the General Fund. Also during the year, a donation of a painting valued at $3,000 was made to the city and the city has appropriately decided to record this painting as an asset. Required: Prepare the journal entry(ies) for the two transactions for the purposes of preparing the government-wide financial statements.

47. The town of Wakefield opened a solid waste landfill in 2007 that was at 20% capacity on December 31, 2007 and at 50% capacity on December 31, 2008. The city initially anticipated closure costs of $2.3 million but in 2008 estimated the closure costs would be $2.7 million. None of these costs will be incurred until the landfill is scheduled to be closed. What is the journal entry that should be recorded on December 31, 2008 for Government-wide Financial Statements?

48. The town of Wakefield opened a solid waste landfill in 2007 that was at 20% capacity on December 31, 2007 and at 50% capacity on December 31, 2008. The city initially anticipated closure costs of $2.3 million but in 2008 estimated the closure costs would be $2.7 million. None of these costs will be incurred until the landfill is scheduled to be closed. Assuming the landfill is recorded within the General fund, what is the journal entry that should be recorded in the Fund based Financial Statements on December 31, 2008?

49. Marie Todd works for the City of Rochester and volunteered to work the New Years Eve holiday in December, 2008. In exchange for working the holiday, the city will grant her 2 vacation days compensated at $500 per day. Marie decided to take these vacation days during January, 2009. For Government-wide financial statements, what are the journal entries to record these events in 2008 and in 2009?

50. Marie Todd works for the City of Rochester and volunteered to work the New Years Eve holiday in December, 2008. In exchange for working the holiday, the city will grant her 2 vacation days compensated at $500 per day. Marie decided to take these vacation days during January, 2009. Assuming that Marie works in an activity reported within the General fund, for Fund-based financial statements, what are the journal entries to record these events?

The Town of Portsmouth has at the beginning of the year a $213,000 Net Asset balance and a $52,000 Fund Balance. The following information relates to the activities within the town of Portsmouth for the year of 2008.

51. Prepare a Statement of Revenues, Expenditures and Changes in Fund Balances

52. Prepare a Statement of Net Assets

53. Prepare a Statement of Activities

ch12 Key

1. For government-wide financial statements, what account is credited when a piece of equipment is leased on a capital lease? A. Equipment - Capital Lease B. Encumbrances - Long Term C. Encumbrances - Lease Obligations D. Capital Lease Obligation E. The lease is not recorded


2. For fund-based financial statements, what account is credited when a piece of equipment is leased on a capital lease? A. Equipment - Capital Lease B. Encumbrances - Long Term C. Encumbrances - Lease Obligations D. Capital Lease Obligation E. Other Financing Sources - Capital Lease


3. Jones College, a public institution of higher education, must prepare financial statements A. As if the college was an enterprise fund B. Following the same rules as state and local governments C. According to GAAP D. As if the college was a fiduciary fund E. In the same manner as private colleges and universities


4. For the purpose of government-wide financial statements, the cost of cleaning up a government-owned landfill and closing the landfill A. Is not recognized until the costs are actually incurred B. Is accrued and amortized over the expected useful life of the landfill C. Is accrued on a pro-rated basis each period based on how full the landfill is D. Is accrued in full at the time the costs become estimable E. Is treated as an encumbrance at the time it become estimable and as an expenditure when it is actually paid


5. A method of depreciation for infrastructure assets that allows the expensing of all maintenance costs each year instead of computing depreciation is called A. Government-wide depreciation B. Proprietary depreciation C. GASB depreciation D. Modified approach E. Alternative depreciation


6. Drye Township has received a donation of a rare painting worth $1,000,000. For Drye's government-wide financial statements, three criteria must be met before Drye can opt not to recognize the painting as an asset. Which of the following is not one of the three criteria? (1) The painting is held for public exhibition, education or research in furtherance of public service, rather than financial gain (2) The painting is scheduled to be sold immediately at auction (3) The painting is protected, kept unencumbered, cared for and preserved A. Item 1 is not one of the three criteria B. Item 2 is not one of the three criteria C. Item 3 is not one of the three criteria D. All three items are required criteria E. None of the three items are required criteria


7. GASB No. 34 makes which of the following statements regarding Management's Discussion and Analysis? A. MD&A is required only for Proprietary Fund Financial Statements B. MD&A is required for all state and local government financial statements C. MD&A is only required for comprehensive annual financial reports D. MD&A for state and local government financial statements must include an analysis of potential, untapped revenue sources E. MD&A is an optional inclusion for state and local government financial statements


8. Which one of the following is a criterion for identifying a primary government? A. It has an appointed board of directors B. It is fiscally dependent C. It is a local government D. It has a separately elected governing body E. It must prepare financial statements


9. A local government's basic financial statements would include a statement of cash flows for all A. Proprietary fund types B. Governmental fund types C. Fund types D. Fiduciary fund types E. A statement of cash flows is not required for any fund types


10. According to the GASB (Governmental Accounting Standards Board), which one of the following is not a criterion for determining whether a government is legally separate? A. The government can determine its own budget B. The government can issue debt C. The government has corporate powers including the right to sue and be sued D. The government has the power to levy taxes E. The government can issue preferred stock


11. Which of the following is not a criterion of a capital lease? A. The lease transfers ownership of the property to the lessee by the end of the lease term B. The present value of the minimum lease payments equals or exceeds 90 percent of the fair value of the leased property, net of lessor's investment tax credit C. The lease contains an option to purchase the leased property at a bargain price D. The lease contains an option to renew E. The lease term is equal to or greater than 75 percent of the estimated economic life of the leased property


12. A five-year lease is signed by the City of Wachovia for equipment with a seven-year life. The asset will be returned to the lessor at the end of the lease. The present value of the lease is $20,000 and annual payments of $5,411.41 are payable beginning on the date the lease is signed. The interest portion of the second payment is $1,604.75. The equipment is to be used in City Hall and was purchased from appropriated funds of the General Fund. What should be recorded in the General Fund on the date the lease is



13. A five-year lease is signed by the City of Wachovia for equipment with a seven-year life. The asset will be returned to the lessor at the end of the lease. The present value of the lease is $20,000 and annual payments of $5,411.41 are payable beginning on the date the lease is signed. The interest portion of the second payment is $1,604.75. The equipment is to be used in City Hall and was purchased from appropriated funds of the General Fund. What should be recorded in the General Fund one year from the date the lease is



14. A five-year lease is signed by the City of Wachovia for equipment with a seven-year life. The asset will be returned to the lessor at the end of the lease. The present value of the lease is $20,000 and annual payments of $5,411.41 are payable beginning on the date the lease is signed. The interest portion of the second payment is $1,604.75. The equipment is to be used in City Hall and was purchased from appropriated funds of the General Fund. What entry should be made for the government-wide financial statements on the date the lease is



15. A five-year lease is signed by the City of Wachovia for equipment with a seven-year life. The asset will be returned to the lessor at the end of the lease. The present value of the lease is $20,000 and annual payments of $5,411.41 are payable beginning on the date the lease is signed. The interest portion of the second payment is $1,604.75. The equipment is to be used in City Hall and was purchased from appropriated funds of the General Fund. What entry should be made for the government-wide financial statements one year from the date the lease is



16. Which of the following is a section of the general purpose external financial statements of a state or local government? (1) Management's discussion and analysis (MD&A) (2) Required supplementary information (other than MD&A) (3) Basic financial statements and notes to financial statements A. 1 and 2 B. 2 and 3 C. 1 and 3 D. 3 only E. 1, 2 and 3


17. Which of the following must be presented in the MD&A of a government? A. A brief discussion of the basic financial statements B. Total assets C. Total liabilities D. Net assets E. An organization chart of government officials


18. What are the three broad sections of a state or local government's CAFR? A. Introductory, financial and statistical B. Financial statements, notes to the financial statements and component units C. Introductory, statistical and component units D. Component units, financial and statistical E. Financial statements, notes to the financial statements and statistical


19. Which of the following is a financial statement of a fiduciary fund? A. Balance sheet B. Statement of Operations C. Statement of Cash Flows D. Statement of Fiduciary Net Assets E. Statement of Revenues, Expenditures and Changes in Fund Balance


20. Which criteria must be met to be considered a special purpose government? (1) Have a separately elected governing body (2) Be legally independent (3) Be fiscally independent A. 1 only B. 1 and 2 C. 2 and 3 D. 1 and 3 E. 1, 2 and 3


21. Which statement is false regarding the government-wide Statement of Net Assets? A. The purpose of the Statement of Net Assets is to report the economic resources of the government as a whole B. Assets are reported excluding capital assets C. Capital assets are reported net of depreciation D. Investments are reported at fair value rather than historical cost E. Business-type activities include Enterprise Funds


22. Which item is not included on the government-wide Statement of Activities? A. Revenues B. Expenses C. Assets D. Operating grants E. Capital contributions


23. Which statement is false regarding the Balance Sheet for Fund-Based Statements? A. The Balance Sheet for Fund-Based Statements measures only current financial resources of the governmental entity B. The Balance Sheet for Fund-Based Statements uses the modified accrual method for timing purposes C. Capital assets are not reported on the Balance Sheet for Fund-Based Statements D. The Balance Sheet for Fund-Based Statements measures only long-term financial resources of the governmental entity E. Long-term debts are not reported on the Balance Sheet for Fund-Based Statements


24. The city operates a public pool where each person is assessed a $2 entrance fee. Which fund is most appropriate to record these revenues? A. General Fund B. Enterprise Fund C. Special Revenue Fund D. Internal Service Fund E. Capital Projects Fund


25. Which statement is false regarding the Statement of Revenues, Expenditures and Changes in Fund Balance when it is included with government-wide financial statements? A. The Statement of Revenues, Expenditures and Changes in Fund Balance uses the modified accrual method for timing purposes B. The Statement of Revenues, Expenditures and Changes in Fund Balance presents revenues as either program revenues or general revenues C. A presentation reconciles the change in governmental fund balance to the change in net assets for governmental activities D. Other financing sources are presented on the Statement of Revenues, Expenditures and Changes in Fund Balance E. All non-major funds are combined and reported together


26. A city starts a solid waste landfill during 2007. When the landfill was opened the city estimated that it would fill to capacity within 5 years and that the cost to cover the facility would be $1.5 million which will not be paid until the facility is closed. At the end of 2007, the facility was 20% full and at the end of 2008 the facility was 45% full. On government-wide financial statements, which of the following are the appropriate amounts to present in the financial statements for 2008? A. Both expense and liability will be zero B. Expense will be $300,000 and liability will be $600,000 C. Expense will be $600,000 and liability will be $600,000 D. Expense will be $675,000 and liability will be $600,000 E. Expense will be $375,000 and liability will be $675,000


27. A city starts a solid waste landfill during 2007. When the landfill was opened the city estimated that it would fill to capacity within 5 years and that the cost to cover the facility would be $1.5 million which will not be paid until the facility is closed. At the end of 2007, the facility was 20% full and at the end of 2008 the facility was 45% full. If the landfill is judged to be a governmental fund, what liability is reported on the fund-based financial statements at the end of 2008? A. $0 B. $300,000 C. $375,000 D. $600,000 E. $675,000


28. The employees of the City of Raymond earn vacation compensation that totals $1,500 per week. During 2008, $30,000 in vacation time was taken and the remainder is expected to be used next year. On the government-wide financial statements, assuming there was no beginning balance, what liability should be reported at the end of 2008? A. $0 B. $1,500 C. $30,000 D. $48,000 E. $78,000


29. The employees of the City of Raymond earn vacation compensation that totals $1,500 per week. During 2008, $30,000 in vacation time was taken and $48,000 is expected to be used during the latter part of next year. On fund-based financial statements, what liability should be reported at the end of 2008? A. $0 B. $1,500 C. $30,000 D. $48,000 E. $78,000


30. The town of Conway opened a solid waste landfill in 1998 that is now filled to capacity. The city initially anticipated closure costs of $2 million. These costs were not expected to be incurred until the landfill is closed. What is the final journal entry to record these costs assuming the estimated $2 million closure costs were properly recorded and the landfill is accounted for in an enterprise

fund? A. Entry A B. Entry B C. Entry C D. Entry D E. Entry E


31. What three criteria must be met to identify a governmental unit as a primary government?

To be considered a primary government, the unit must meet the following 3 criteria: (1) It must have a separately elected governing body. (2) It must be legally independent which can be demonstrated by having corporate powers such as the right to sue and be sued in its own name as well as the right to buy, sell and lease property in its own name. (3) It must be fiscally independent of other state and local governments.


32. What three criteria must be met before a governmental unit can elect to not capitalize and therefore report a work of art or historical treasure as an asset?

Before a governmental unit can elect to not record a work of art or a historical treasure as an asset, three criteria must be met: (1) It must be held for public exhibition, education or research in furtherance of public service, rather than financial gain. (2) It must be protected, kept unencumbered, cared for and preserved. (3) It must be subject to an organizational policy that requires the proceeds from sales of collection items to be used to acquire other items for collections.


33. What are the three broad sections of a state or local government's CAFR?

The introductory section, the financial section and the statistical section.


34. What information is required in the introductory section of a state or local government's CAFR?

A letter of transmittal from appropriate government officials, an organization chart and a list of principal officers.


35. What information is required in the financial section of a state or local government's CAFR?

The financial section of a CAFR must include the auditor's report, management's discussion and analysis (MD&A), the basic financial statements and Required Supplementary Information other than MD&A (RSI).


36. What is meant by the term fiscally independent?

Fiscally independent means that the leadership of a governing body is able to determine the activity's budget, levy taxes, set rates or issue debt without having to seek the approval of an outside party.


37. What is meant by the term legally independent?

Legal independence is demonstrated by having corporate powers such as the right to sue and be sued, the right to buy, sell and lease property in its own name.


38. How is the Statement of Cash Flows for Proprietary Funds similar and dissimilar to a Statement of Cash Flows for a for-profit business?

The statement of cash flows for a proprietary fund is very similar to the statement of cash flows for a for-profit business. Two sections are similar including the cash flows from operating activities and cash flows from investing activities. The cash flows from financing activities are reported differently than for profit businesses and are split into two sections when reporting for a Proprietary Fund. These two sections specify the cash flows from non-capital financing and cash flows from capital and related financing activities. The statement of cash flows for a proprietary fund is different from the cash flow statement for a for-profit business in that GASB 34 requires the direct method of presenting cash flows from operating activities, with a reconciliation to net operating income. At this time, GAAP for the cash flow statement for a for-profit business gives the option of presenting cash flows from operating activities using either the direct or the indirect method.


39. The City of Wetteville has a fiscal year ending June 30. Examine the following transactions for Wetteville: (A) On 6/1/08, Wetteville enters into a 5-year lease on a copying machine. The lease meets the criteria of a capital lease and carries an implied interest rate of 10%. The copier has a present value of $2,300. Wetteville has to put a $300 down payment on the lease at the beginning of the lease with monthly payments thereafter of $42.49. (B) On 6/5/08, Wetteville opens a new landfill. The engineers estimate that at the end of 10 years the landfill will be full. Estimated costs to close the landfill are currently at $3,500,000. (C) On 6/15/08, the end of the two-week pay period, Wetteville has $20,000 in accrued vacation pay related to the payroll for the period. The city estimates that $5,000 of this pay will be taken by the end of this summer and the rest will be used next summer. (D) On 6/18/08, Wetteville receives a donation of a vintage railroad steam engine. The engine will be put on display at the local town park. A fee will be charged to actually climb up into the engine. The engine has been valued at $500,000. (E) On 6/30/08, Wetteville makes its first payment on the leased copier. The $42.49 payment includes $16.68 interest. (F) On 6/30/08, Wetteville estimates that the landfill is 2% filled. Required: Prepare the journal entries for the above transactions in the general fund, on the dates mentioned for each lettered item, for the purposes of preparing the fund-based financial statements.

Entries for Fund-Based Financial Statements


40. The City of Wetteville has a fiscal year ending June 30. Examine the following transactions for Wetteville: (A) On 6/1/08, Wetteville enters into a 5-year lease on a copying machine. The lease meets the criteria of a capital lease and carries an implied interest rate of 10%. The copier has a present value of $2,300. Wetteville has to put a $300 down payment on the lease at the beginning of the lease with monthly payments thereafter of $42.49. (B) On 6/5/08, Wetteville opens a new landfill. The engineers estimate that at the end of 10 years the landfill will be full. Estimated costs to close the landfill are currently at $3,500,000. (C) On 6/15/08, the end of the two-week pay period, Wetteville has $20,000 in accrued vacation pay related to the payroll for the period. The city estimates that $5,000 of this pay will be taken by the end of this summer and the rest will be used next summer. (D) On 6/18/08, Wetteville receives a donation of a vintage railroad steam engine. The engine will be put on display at the local town park. A fee will be charged to actually climb up into the engine. The engine has been valued at $500,000. (E) On 6/30/08, Wetteville makes its first payment on the leased copier. The $42.49 payment includes $16.68 interest. (F) On 6/30/08, Wetteville estimates that the landfill is 2% filled. Required: Prepare the journal entries for the above transactions, on the dates mentioned for each lettered item, for the purposes of preparing the government-wide financial statements.


41. The parking garage and parking lots owned by the city of Danton reported the following balances for 2008:

Required: What amount of net revenue (or expense) should be reported by the fund that was used to account for parking operations assuming the preparation of government-wide financial statements?

Danton's net revenue coming from the proprietary fund for parking garages and parking lots is determined as follows:


42. The city of Next ville operates a motor pool serving all city-owned vehicles. The motor pool bought a new garage by paying $29,000 in cash and signing a note with the local bank for $280,000. Subsequently, the motor pool performed work for the police department at a cost of $17,000, which had not yet been paid. Depreciation on the garage amounted to $20,000. The first $12,000 payment made on the note included $4,800 in interest. Required: Prepare all of the journal entries for these transactions that are necessary to prepare government-wide financial statements.

Entries for government-wide financial statements


43. The city of Kamen collected $17,000 from parking meters that must be transferred to the county government. Required: For fund-based financial statements, prepare the journal entry for this transaction including the fund type in which the entry would have been recorded.

General Fund


44. The city of Kamen transferred $27,000 into a Pension Trust Fund. Of this amount, $19,000 was contributed by the city with the remainder coming from the employees. Required: For fund-based financial statements, prepare the journal entry for this transaction including the fund type in which the entry would have been recorded.

Pension Trust Fund


45. The city of Kamen maintains a collection of paintings of a former citizen in its City Hall building. During the year, one painting was purchased by the city for $2,000 at an auction using appropriated funds in the General Fund. Also during the year, a donation of a painting valued at $3,000 was made to the city. Required: Prepare the journal entry(ies) for the two transactions for the purposes of preparing the fund-based financial statements.

No entry in General Fund for second transaction - does not represent a change in current financial resources.


46. The city of Kamen maintains a collection of paintings of a former citizen in its City Hall building. During the year, one painting was purchased by the city for $2,000 at an auction using appropriated funds in the General Fund. Also during the year, a donation of a painting valued at $3,000 was made to the city and the city has appropriately decided to record this painting as an asset. Required: Prepare the journal entry(ies) for the two transactions for the purposes of preparing the government-wide financial statements.

Government - wide Financial Statements - Government Activities:


47. The town of Wakefield opened a solid waste landfill in 2007 that was at 20% capacity on December 31, 2007 and at 50% capacity on December 31, 2008. The city initially anticipated closure costs of $2.3 million but in 2008 estimated the closure costs would be $2.7 million. None of these costs will be incurred until the landfill is scheduled to be closed. What is the journal entry that should be recorded on December 31, 2008 for Government-wide Financial Statements?


48. The town of Wakefield opened a solid waste landfill in 2007 that was at 20% capacity on December 31, 2007 and at 50% capacity on December 31, 2008. The city initially anticipated closure costs of $2.3 million but in 2008 estimated the closure costs would be $2.7 million. None of these costs will be incurred until the landfill is scheduled to be closed. Assuming the landfill is recorded within the General fund, what is the journal entry that should be recorded in the Fund based Financial Statements on December 31, 2008?

There is nothing recognized at the end of 2008 because there is not a claim to any current financial resources.


49. Marie Todd works for the City of Rochester and volunteered to work the New Years Eve holiday in December, 2008. In exchange for working the holiday, the city will grant her 2 vacation days compensated at $500 per day. Marie decided to take these vacation days during January, 2009. For Government-wide financial statements, what are the journal entries to record these events in 2008 and in 2009?


50. Marie Todd works for the City of Rochester and volunteered to work the New Years Eve holiday in December, 2008. In exchange for working the holiday, the city will grant her 2 vacation days compensated at $500 per day. Marie decided to take these vacation days during January, 2009. Assuming that Marie works in an activity reported within the General fund, for Fund-based financial statements, what are the journal entries to record these events?

December 31, 2008

January, 2009


The Town of Portsmouth has at the beginning of the year a $213,000 Net Asset balance and a $52,000 Fund Balance. The following information relates to the activities within the town of Portsmouth for the year of 2008.

Hoyle - Chapter 12

51. Prepare a Statement of Revenues, Expenditures and Changes in Fund Balances


52. Prepare a Statement of Net Assets


53. Prepare a Statement of Activities


ch12 Summary


53394030 fundamentals adv acct 3e hoyle

Documents

new investment

equity method

net income

common stock of dew

significant influence

companys stock

dermot account

book value of wells