Chapter 1: Introduction to Business Combinations and the
Conceptual Framework
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Q1) Under the economic unit concept,noncontrolling interest in net assets is treated as:
A)a liability.
B)an asset.
C)stockholders' equity.
D)an expense.
Answer: C
Q2) The impairment standard as it relates to goodwill is an example of a:
A)consumption of benefit approach.
B)loss or lack of benefit approach.
C)component of other comprehensive income.
D)direct matching of expenses to revenues.
Answer: B
Q3) The parent company concept adjusts subsidiary net asset values for the:
A)differences between cost and fair value.
B)differences between cost and book value.
C)total fair value implied by the price paid by the parent.
D)total cost implied by the price paid by the parent.
Answer: B
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Chapter 2: Accounting for Business Combinations
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Q1) SFAS 141R requires that the acquirer disclose each of the following for each material business combination EXCEPT the:
A)name and a description of the acquiree acquired.
B)percentage of voting equity instruments acquired.
C)fair value of the consideration transferred.
D)each of the above is a required disclosure
Answer: D
Q2) A business combination is accounted for properly as an acquisition.Which of the following expenses related to effecting the business combination should enter into the determination of net income of the combined corporation for the period in which the expenses are incurred?
A)Security issue cost,yes; overhead allocated merger,yes
B)Security issue cost,yes; overhead allocated merger,no
C)Security issue cost,no; overhead allocated merger,yes
D)Security issue cost,no; overhead allocated merger,no
Answer: C
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Chapter 3: Consolidated Financial Statements Date of Acquisition
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Q1) A useful first step in the consolidating process is to prepare a Computation and Allocation of Difference (CAD)Schedule.Identify the steps involved in preparing the CAD schedule.
Answer: Preparation of the Computation and Allocation of Difference Schedule involves the following process:
-Determine the percentage of stock acquired in the subsidiary.
-Compute the implied value of the subsidiary by dividing the purchase price by the percentage acquired.
-Allocate any difference between the implied value and the book value of the subsidiary's equity to adjust the underlying assets and/or liabilities of the acquired company.
Q2) Under the acquisition method,indirect costs relating to acquisitions should be:
A)included in the investment cost.
B)expensed as incurred.
C)deducted from other contributed capital.
D)none of these.
Answer: B
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Chapter 4: Consolidated Financial Statements After Acquisition
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Q1) On January 1,2017,Pantera Company purchased 40% of Stratton Company's 30,000 shares of voting common stock for a cash payment of $1,800,000 when 40% of the net book value of Stratton Company was $1,740,000.The payment in excess of the net book value was attributed to depreciable assets with a remaining useful life of six years.As a result of this transaction Pantera has the ability to exercise significant influence over Stratton Company's operating and financial policies.Stratton's net income for the ended December 31,2017 was $600,000.During 2017,Stratton paid $325,000 in dividends to its shareholders.The income reported by Pantera for its investment in Stratton should be:
A)$120,000
B)$130,000
C)$230,000
D)$240,000
Q2) On the consolidated statement of cash flows,the parent's acquisition of additional shares of the subsidiary's stock directly from the subsidiary is reported as:
A)an investing activity.
B)a financing activity.
C)an operating activity.
D)none of these.
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Chapter 5: Allocation and Depreciation of Differences
Between Implied and Book Values
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Q1) The entry to amortize the amount of difference between implied and book value allocated to an unspecified intangible is recorded:
A)on the subsidiary's books.
B)on the parent's books.
C)on the consolidated statements workpaper.
D)on the parent's books and on the consolidated statements workpaper.
Q2) On November 30,2016,Piani Incorporated purchased for cash of $25 per share all 400,000 shares of the outstanding common stock of Surge Company.Surge 's balance sheet at November 30,2016,showed a book value of $8,000,000.Additionally,the fair value of Surge's property,plant,and equipment on November 30,2016,was $1,200,000 in excess of its book value.What amount,if any,will be shown in the balance sheet caption "Goodwill" in the November 30,2016,consolidated balance sheet of Piani Incorporated,and its wholly owned subsidiary,Surge Company?
A)$0.
B)$800,000.
C)$1,200,000.
D)$2,000,000.
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Chapter 6: Elimination of Unrealized Profit on Intercompany
Sales of Inventory
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Q1) Pinta Company owns 90% of the common stock of Simplex Company.Simplex Company sells merchandise to Pinta Company at 25% above cost.During 2016 and 2017 such sales amounted to $800,000 and $1,020,000,respectively.At the end of each year,Pinta Company had in its inventory one-fourth of the amount of goods purchased from Simplex Company during that year.Pinta Company reported income of $1,500,000 from its independent operations in 2016 and $1,720,000 in 2017.Simplex Company reported net income of $600,000 in each year and did not declare any dividends in either year.There were no intercompany sales prior to 2016.
Required:
A.Prepare,in general journal form,all entries necessary on the 2017 consolidated statements workpaper to eliminate the effects of intercompany sales.
B.Calculate the amount of noncontrolling interest to be deducted from consolidated income in the consolidated income statement in 2017.
C.Calculate controlling interest in consolidated net income for 2017.
Q2) Past and proposed GAAP agree that unrealized intercompany profit should not be included in consolidated net income or assets.Briefly explain the preferred approach of eliminating intercompany profit.
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Chapter 7: Elimination of Unrealized Gains or Losses on
Intercompany Sales of Property and Equipment
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Q1) P Corporation acquired an 80% interest in S Corporation two years ago at an implied value equal to the book value of S.On January 2,2017,S sold equipment with a five-year remaining life to P for a gain of $120,000.S reports net income of $600,000 for 2017 and pays dividends of $200,000.P's Equity from Subsidiary Income for 2017 is:
A)$480,000.
B)$384,000.
C)$403,200.
D)$576,000
Q2) In the year an 80% owned subsidiary sells equipment to its parent company at a gain,the noncontrolling interest in consolidated income is calculated by multiplying the noncontrolling interest percentage by the subsidiary's reported net income:
A)plus the intercompany gain considered realized in the current period.
B)plus the net amount of unrealized gain on the intercompany sale.
C)minus the net amount of unrealized gain on the intercompany sale.
D)minus the intercompany gain considered realized in the current period.
Q3) An eliminating entry is needed to adjust the consolidated financial statements when the purchasing affiliate sells a depreciable asset that was acquired from another affiliate.Describe the necessary eliminating entry.
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Chapter 8: Changes in Ownership Interest
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Q1) On January 1 2016,Paulus Company purchased 75% of Sweet Corporation for $500,000.Sweet' stockholders' equity on that date was equal to $600,000 and Sweet had 60,000 shares issued and outstanding on that date.Sweet Corporation sold an additional 15,000 shares of previously unissued stock on December 31,2016. Assuming that Paulus Company purchased the additional shares,what would be their current percentage ownership on December 31,2016?
A)92%
B)87%
C)80%
D)100%
Q2) A parent's ownership percentage in a subsidiary may change for several reasons.Identify three reasons the ownership percentage may change.
Q3) The purchase by a subsidiary of some of its shares from noncontrolling stockholders results in the parent company's share of the subsidiary's net assets:
A)increasing.
B)decreasing.
C)remaining unchanged.
D)increasing,decreasing,or remaining unchanged.
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Chapter 9: Intercompany Bond Holdings and
Miscellaneous
Topics
Consolidated Financial Statements
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Q1) Pointe Company purchased bonds issued by Sentient Company on the open market at a premium.Sentient Company is a 100% owned subsidiary of Pointe Company.Pointe intends to hold the bonds until maturity.In a consolidated balance sheet,the difference between the bond carrying values in the two companies would be:
A)included as a decrease to retained earnings.
B)included as an increase to retained earnings.
C)reported as a deferred debit to be amortized over the remaining life of the bonds.
D)reported as a deferred credit to be amortized over the remaining life of the bonds.
Q2) The parent company records the receipt of shares from a subsidiary's stock dividend as:
A)dividend income.
B)a reduction of the investment account.
C)an increase in the investment account.
D)none of these.
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Chapter 10: Insolvency Liquidation and Reorganization
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Q1) Which statement with respect to gains and losses on troubled debt restructuring is correct?
A)Creditors losses on restructuring are extraordinary.
B)Debtor's gains and losses on asset transfers and debtor's gains on restructuring are combined and treated as extraordinary.
C)Debtor gains and creditor losses on restructuring are extraordinary,if material in amount.
D)Debtor losses on asset transfers and debtor gains on restructuring are reported as a component of net income.
Q2) Lyme Corporation entered into a troubled debt restructuring agreement with their local bank.The bank agreed to accept land with a carrying amount of $360,000 and a fair value of $540,000 in exchange for a note with a carrying amount of $765,000.Ignoring income taxes,what amount should Lyme report as a gain on its income statement?
A)$0.
B)$180,000.
C)$225,000.
D)$405,000.
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Chapter 11: International Financial Reporting Standards
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Q1) Benefits of the FASB Accounting Standards Codification (ASC)include all of the following EXCEPT:
A)increases the independence of the FASB.
B)aids in the convergence of US GAAP with IFRS.
C)reduces time and effort required to research accounting issues.
D)clearly distinguishes between authoritative and non-authoritative guidance.
Q2) All of the following are options for non-US companies who wish to list securities on a US exchange EXCEPT:
A)The company can use either IFRS or their local GAAP.
B)If a company uses their local GAAP they must reconcile net income and shareholders' equity or fully disclose all financial information required of US companies.
C)If a company uses their local GAAP they must reconcile net income and shareholders' equity and fully disclose all financial information required of US companies
D)The company must file a form 20-F with the SEC.
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Chapter 12: Accounting for Foreign Currency Transactions and Hedging
Foreign Exchange Risk
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Q1) There are a number of business situations in which a firm may acquire a forward exchange contract.Identify three common situations in which a forward exchange contract can be used as a hedge.
Q2) On October 1,2016,Kill Company shipped equipment to a foreign customer for a foreign currency (FC)price of FC 3,000,000 due on January 31,2017.All revenue realization criteria were satisfied and accordingly the sale was recorded by Kill Company on October 1.Simultaneously,Kill entered into a forward contract to sell 3,000,000 FCU on January 31,2017 for $1,200,000.Payment was received from the foreign customer on January 31,2017.Spot rates on October 1,December 31,and January 31 were $0.42,$0.425,and $0.435,respectively.Kill amortizes all premiums and discounts on forward contracts and closes its books on December 31.
Required:
Prepare all journal entries relative to the above to be made by Kill during 2016 and 2017.
Q3) A transaction gain is recorded when there is an:
A)importing transaction and the exchange rate increases.
B)exporting transaction and the exchange rate increases.
C)exporting transaction and the exchange rate decreases. D)none of these.
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Chapter 13: Translation of Financial Statements of Foreign
Affiliates
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Q1) Which of the following would be restated using the average exchange rate under the temporal method?
A)cost of goods sold
B)depreciation expense
C)amortization expense
D)None of these
Q2) To accomplish the objectives of translation,two translation methods are used depending on the functional currency of the foreign entity.Describe the two translation methods.
Q3) In preparing consolidated financial statements of a U.S.parent company and a foreign subsidiary,the foreign subsidiary's functional currency is the currency:
A)of the country the parent is located.
B)of the country the subsidiary is located.
C)in which the subsidiary primarily generates and spends cash.
D)in which the subsidiary maintains its accounting records.
Q4) The translation process can be done using either the current rate method or the temporal method.Explain under what circumstances each of the methods is appropriate.
15
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Chapter 14: Reporting for Segments and for Interim
Financial Periods
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Q1) Pale Company has four manufacturing divisions,each of which has been determined to be a reportable segment.Common operating costs are appropriately allocated on the basis of each division's sales in relation to Pale's aggregate sales.Pale's Delta division accounted for 40% of Pale's total sales in 2017.For the year ended December 31,2017,Delta had sales of $5,000,000 and traceable costs of $3,600,000.In 2017,Pale incurred operating costs of $350,000 that were not directly traceable to any of the divisions.In addition,Pale incurred interest expense of $360,000 in 2017.In reporting supplementary segment information,how much should be shown as Delta's operating profit for 2017?
A)$1,400,000
B)$1,256,000
C)$1,260,000
D)$1,116,000
Q2) Which of the following is NOT part of the information about foreign operations that is required to be disclosed?
A)Revenues from external customers
B)Operating profit or loss,net income,or some other common measure of profitability
C)Capital expenditures
D)Long-lived assets
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Chapter 15: Partnerships: Formation, operation and Ownership Changes
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Q1) When a partner retires and withdraws assets in excess of his book value,the remaining partners absorb the excess:
A)equally.
B)in their profit-sharing ratio.
C)based on their average capital balances.
D)based on their ending capital balances.
Q2) Robbie and Ruben are partners operating a portable toilet lease and maintenance operation.For 2017,net income was $50,000 (without taking into consideration the salary allowances).Robbie and Ruben have salary allowances of $90,000 and $60,000,respectively,and remaining profits and losses are shared 6:4. If their agreement specifies that salaries are allowed only to the extent of income,based on a prorata share of their salary allowances,the division of profits would be:
A)$20,000 and $30,000
B)$50,000 and $-0-
C)$30,000 and $20,000
D)$25,000 and $25,000
Q3) The principal types of partnerships are general partnerships,limited partnerships,and joint ventures.Describe the characteristics of each type of partnership.
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Chapter 16: Partnership Liquidation
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Q1) In an advance plan for installment distributions of cash to partners of a liquidating partnership,each partner's loss absorption potential is computed by:
A)dividing each partner's capital account balance by the percentage of that partner's capital account balance to total partners' capital.
B)multiplying each partner's capital account balance by the percentage of that partner's capital account balance to total partners' capital.
C)dividing the total of each partner's capital account less receivables from the partner plus payables to the partner by the partner's profit and loss percentage.
D)some other method.
Q2) If a partner with a debit capital balance during liquidation is personally solvent,the:
A)partner must invest additional assets in the partnership.
B)partner's debit balance will be allocated to the other partners.
C)other partners will give the partner enough cash to absorb the debit balance.
D)partnership will loan the partner enough cash to absorb the debit balance.
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Chapter 17: Introduction to Fund Accounting
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Q1) Customers' meter deposits which cannot be spent for normal operating purposes would be classified as restricted cash in the balance sheet of which fund?
A)Internal Service
B)Trust
C)Agency
D)Enterprise
Q2) The Expenditures account of a governmental unit is debited when:
A)the budget is recorded.
B)supplies are ordered.
C)supplies encumbered are received.
D)the supplies invoice is paid.
Q3) In accounting for expendable fund entities,revenue is ordinarily not recognized until:
A)it can be objectively measured and it is available to finance expenditures of the current period.
B)a transaction has taken place and the earnings process is complete.
C)it has been received in cash.
D)none of these.
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Chapter 18: Introduction to Accounting for State and Local
Governmental Units
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Q1) The activities of a municipal airport should be accounted for in the:
A)General Fund.
B)Internal Service Fund.
C)Special Revenue Fund.
D)Enterprise Fund.
Q2) There are eleven categories of government fund entities that fall under three subheadings.What are the subheadings of government fund entities? What are the main characteristics that set these three subheadings apart?
Q3) All of the following are Governmental (Expendable)Fund Entities EXCEPT the:
A)Capital Projects Fund.
B)Debt Service Fund.
C)Internal Service Fund.
D)Special Revenue Fund.
Q4) The liability for general obligation long-term debt is reported in the:
A)Debt Service Fund.
B)Capital Projects Fund.
C)Enterprise Fund.
D)none of these.
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Chapter 19: Accounting for Nongovernment Nonbusiness
Organizations: Colleges and Universities, hospitals, and
Other Health Care Organizations
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Q1) A good reason for NNOs to adopt fund accounting even though FASB standards do NOT require it is because:
A)the capital assets are significant.
B)the donated services are significant.
C)the program services are involved with more than one type of revenue.
D)restrictions are placed by donors in many cases.
Q2) Tuition waivers for which there is no intention of collection from the student should be classified by a college as:
A)Revenue,No; Expenditures,No
B)Revenue,No; Expenditures,Yes
C)Revenue,Yes; Expenditures,Yes
D)Revenue,Yes; Expenditures,No
Q3) Which of the following is used for current expenditures by a college?
A)Unrestricted Current Funds,No; Restricted Current Funds,No
B)Unrestricted Current Funds,No; Restricted Current Funds,Yes
C)Unrestricted Current Funds,Yes; Restricted Current Funds,Yes
D)Unrestricted Current Funds,Yes; Restricted Current Funds,No
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Q4) The fund structure and terminology differ among NNOS,but there are six funds commonly used.Identify the funds used by nongovernment nonbusiness organizations.