Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
Chapter 01
Intercorporate Acquisitions and Investments in Other Entities
Multiple Choice Questions
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In order to reduce the risk associated with a new line of business, Conservative Corporation
established Spin Company as a wholly owned subsidiary. It transferred assets and accounts
payable to Spin in exchange for its common stock. Spin recorded the following entry when
the transaction occurred:
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1. Based on the preceding information, what number of shares of $7 par value stock did Spin
issue to Conservative?
A. 10,000
B. 7,000
C. 8,000
D. 25,000
2. Based on the preceding information, what was Conservative's book value of assets
transferred to Spin Company?
A. $243,000
B. $263,000
C. $221,000
D. $201,000
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Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
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3. Based on the preceding information, what amount did Conservative report as its investment
in Spin after the transfer of assets and liabilities?
A. $181,000
B. $221,000
C. $263,000
D. $243,000
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4. Based on the preceding information, immediately after the transfer,
A. Conservative's total assets decreased by $23,000.
B. Conservative's total assets decreased by $20,000.
C. Conservative's total assets increased by $56,000.
D. Conservative's total assets remained the same.
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During its inception, Devon Company purchased land for $100,000 and a building for
$180,000. After exactly 3 years, it transferred these assets and cash of $50,000 to a newly
created subsidiary, Regan Company, in exchange for 15,000 shares of Regan's $10 par value
stock. Devon uses straight-line depreciation. Useful life for the building is 30 years, with zero
residual value. An appraisal revealed that the building has a fair value of $200,000.
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5. Based on the information provided, at the time of the transfer, Regan Company should
record:
A. Building at $180,000 and no accumulated depreciation.
B. Building at $162,000 and no accumulated depreciation.
C. Building at $200,000 and accumulated depreciation of $24,000.
D. Building at $180,000 and accumulated depreciation of $18,000.
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6. Based on the information provided, what amount would be reported by Devon Company as
investment in Regan Company common stock?
A. $312,000
B. $180,000
C. $330,000
D. $150,000
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Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
7. Based on the preceding information, Regan Company will report
A. additional paid-in capital of $0.
B. additional paid-in capital of $150,000.
C. additional paid-in capital of $162,000.
D. additional paid-in capital of $180,000.
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8. Burrough Corporation concluded that the fair value of Helyar Company was $80,000 and
paid that amount to acquire all of its net assets. Helyar reported assets with a book value of
$60,000 and fair value of $98,000 and liabilities with a book value and fair value of $23,000
on the date of combination. Burrough also paid $3,000 to a search firm for finder's fees
related to the acquisition. What amount will be recorded as goodwill by Burrough
Corporation while recording its investment in Helyar?
A. $0
B. $5,000
C. $8,000
D. $13,000
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Plummet Corporation reported the book value of its net assets at $400,000 when Zenith
Corporation acquired 100 percent ownership. The fair value of Plummet's net assets was
determined to be $510,000 on that date.
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9. Based on the preceding information, what amount of goodwill will be reported in
consolidated financial statements presented immediately following the combination
if Zenith paid $550,000 for the acquisition?
A. $0
B. $50,000
C. $150,000
D. $40,000
10. Based on the preceding information, what amount will be recorded by Zenith as its
investment in Plummet, if it paid $500,000 for the acquisition?
A. $610,000
B. $400,000
C. $500,000
D. $510,000
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Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
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11. Based on the preceding information, what amount of goodwill will be reported in
consolidated financial statements presented immediately following the combination
if Zenith paid $500,000 for the acquisition?
A. $0
B. $50,000
C. $150,000
D. $40,000
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Octane Company and Bio Company have announced terms of an exchange agreement under
which Octane will issue 10,000 shares of its $5 par value common stock to acquire all of Bio's
assets. Octane shares are trading at $28, and Bio's $10 par value shares are trading at $15.
Historical cost and fair value balance sheet data on January 1, 2008, are as follows:
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12. Based on the information provided, what amount will be reported immediately following
the business combination for Buildings and Equipment (net) in the combined company's
balance sheet?
A. $300,000
B. $370,000
C. $330,000
D. $340,000
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Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
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13. Based on the information provided, what amount will be reported for Common Stock in
the combined company's balance sheet immediately following the business combination?
A. $200,000
B. $250,000
C. $300,000
D. $210,000
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14. Based on the information provided, what amount will be reported for Additional Paid-In
Capital in the combined company's balance sheet immediately following the business
combination?
A. $60,000
B. $80,000
C. $310,000
D. $290,000
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15. Based on the information provided, what amount of goodwill will be reported
immediately following the business combination in the combined company's balance sheet?
A. $0
B. $50,000
C. $40,000
D. $105,000
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16. Based on the information provided, what amount will be reported immediately following
the business combination for Retained Earnings in the combined company's balance sheet?
A. $170,000
B. $225,000
C. $115,000
D. $210,000
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Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
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17. The fair value of net identifiable assets of a reporting unit of X Company is $300,000. On
X Company's books, the carrying value of this reporting unit's net assets is $350,000,
including $60,000 goodwill. If the fair value of the reporting unit is $335,000, what amount of
goodwill impairment will be recognized for this unit?
A. $0
B. $10,000
C. $25,000
D. $35,000
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18. The fair value of net identifiable assets of a reporting unit of Y Company is $270,000. The
carrying value of the reporting unit's net assets on Y Company's books is $320,000, including
$50,000 goodwill. If the reported goodwill impairment for the unit is $10,000, what would be
the fair value of the reporting unit?
A. $320,000
B. $310,000
C. $270,000
D. $290,000
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Following its acquisition of the net assets of Dan Company, Empire Company assigned
goodwill of $60,000 to one of the reporting divisions. Information for this division follows:
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Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
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19. Based on the preceding information, what amount of goodwill will be reported for this
division if its fair value is determined to be $200,000?
A. $0
B. $60,000
C. $30,000
D. $10,000
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20. Based on the preceding information, what amount of goodwill impairment will be
recognized for this division if its fair value is determined to be $195,000?
A. $5,000
B. $30,000
C. $60,000
D. $55,000
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21. Based on the preceding information, what amount of amount of goodwill impairment will
be recognized for this division if its fair value is determined to be $245,000?
A. $0
B. $30,000
C. $60,000
D. $55,000
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Public Equity Corporation acquired Lenore Company through an exchange of common
shares. All of Lenore's assets and liabilities were immediately transferred to Public Equity.
Public's common stock was trading at $20 per share at the time of exchange. Following
selected information is also available.
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Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
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22. Based on the preceding information, what number of shares was issued at the time of the
exchange?
A. 5,000
B. 17,500
C. 12,500
D. 10,000
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23. Based on the preceding information, what is the par value of Public's common stock?
A. $10
B. $1
C. $5
D. $4
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24. Based on the preceding information, what is the fair value of Lenore's net assets, if
goodwill of $56,000 is recorded?
A. $306,000
B. $244,000
C. $194,000
D. $300,000
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Pursuing an inorganic growth strategy, Wilson Company acquired Venus Company's net
assets and assigned them to four separate reporting divisions. Wilson assigned total goodwill
of $134,000 to the four reporting divisions as given below:
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Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
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25. Based on the preceding information, what amount of goodwill will be reported for Alpha
at year-end?
A. $0
B. $20,000
C. $30,000
D. $10,000
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26. Based on the preceding information, what amount of goodwill will be reported for Beta at
year-end?
A. $0
B. $14,000
C. $34,000
D. $50,000
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27. Based on the preceding information, for Gamma:
A. no goodwill should be reported at year-end.
B. goodwill impairment of $30,000 should be recognized at year-end.
C. goodwill impairment of $20,000 should be recognized at year-end.
D. goodwill of $30,000 should be reported at year-end.
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28. Based on the preceding information, for Delta:
A. no goodwill should be reported at year-end.
B. goodwill impairment of $15,000 should be recognized at year-end.
C. goodwill impairment of $20,000 should be recognized at year-end.
D. goodwill of $30,000 should be reported at year-end.
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29. Based on the preceding information, what would be the total amount of goodwill that
Wilson should report at year-end?
A. $0
B. $69,000
C. $79,000
D. $94,000
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Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
Rivendell Corporation and Foster Company merged as of January 1, 2009. To effect the
merger, Rivendell paid finder's fees of $40,000, legal fees of $13,000, audit fees related to the
stock issuance of $10,000, stock registration fees of $5,000, and stock listing application fees
of $4,000.
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30. Based on the preceding information, under the acquisition method, what amount relating
to the business combination would be expensed?
A. $72,000
B. $19,000
C. $53,000
D. $63,000
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31. Based on the preceding information, under the acquisition method:
A. $72,000 of stock issue costs are treated as goodwill.
B. $19,000 of stock issue costs are treated as a reduction in the issue price.
C. $19,000 of stock issue costs are expensed.
D. $72,000 of stock issue costs are expensed.
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32. Using the preceding information, what amount would have been expensed if the purchase
method of accounting was used?
A. $0
B. $19,000
C. $53,000
D. $72,000
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33. Using the preceding information, what amount would have been expensed if the poolingof-interests method of accounting was used?
A. $0
B. $19,000
C. $53,000
D. $72,000
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Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
34. Which of the following observations is (are) consistent with the acquisition method of
accounting for business combinations?
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I. Expenses related to the business combination are expensed.
II. Stock issue costs are treated as a reduction in the issue price.
III. All merger and stock issue costs are expensed.
IV. No goodwill is ever recorded.
A. III
B. IV
C. I and II
D. I, II, and IV
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35. Which of the following situations best describes a business combination to be accounted
for as a statutory merger?
A. Both companies in a combination continue to operate as separate, but related, legal entities.
B. Only one of the combining companies survives and the other loses its separate identity.
C. Two companies combine to form a new third company, and the original two companies are
dissolved.
D. One company transfers assets to another company it has created.
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36. A statutory consolidation is a type of business combination in which:
A. one of the combining companies survives and the other loses its separate identity.
B. one company acquires the voting shares of the other company and the two companies
continue to operate as separate legal entities.
C. two publicly traded companies agree to share a board of directors.
D. each of the combining companies is dissolved and the net assets of both companies are
transferred to a newly created corporation.
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37. Which of the following observations refers to the term differential?
A. Excess of consideration exchanged over fair value of net identifiable assets.
B. Excess of fair value over book value of net identifiable assets.
C. Excess of consideration exchanged over book value of net identifiable assets.
D. Excess of fair value over historical cost of net identifiable assets.
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Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
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38. Which of the following observations concerning "goodwill" is NOT correct?
A. Once written down, it may be written up for recoveries.
B. It must be tested for impairment at least annually.
C. Goodwill impairment losses are recognized in income from continuing operations or
income before extraordinary gains and losses.
D. It must be reported as a separate line item in the balance sheet.
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39. Assuming no impairment in value prior to transfer, assets transferred by a parent company
to another entity it has created should be recorded by the newly created entity at the assets':
A. cost to the parent company.
B. book value on the parent company's books at the date of transfer.
C. fair value at the date of transfer.
D. fair value of consideration exchanged by the newly created entity.
Essay Questions
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40. On January 1, 2008, Line Corporation acquired all of the common stock of Staff Company
for $300,000. On that date, Staff's identifiable net assets had a fair value of $250,000. The
assets acquired in the purchase of Staff are considered to be a separate reporting unit of Line
Corporation. The carrying value of Staff's investment at December 31, 2008, is $310,000. The
fair value of the net assets (excluding goodwill) at that date is $220,000 and the fair value of
the reporting unit is determined to be 260,000.
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Required:
1) Explain how goodwill is tested for impairment for a reporting unit.
2) Determine the amount, if any, of impairment loss to be recognized at December 31, 2008.
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Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
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41. Haynes Corporation entered into an agreement with Diego Company to establish H&D
Partnership. Haynes agreed to transfer the following assets to H&D for 80 percent ownership,
and Diego agreed to transfer $120,000 cash to the partnership for 20 percent ownership.
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Required: 1. Give the journal entries that Haynes Corporation and Diego Company recorded
for their transfer of assets and accounts payable to H&D Partnership.
Give the journal entries that H&D recorded for its receipt of assets and accounts payable from
Haynes and Diego.
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Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
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42. Envire Corporation acquired all the assets and liabilities of CFC Corporation by issuing
shares of its common stock On January 1, 2009. Partial balance sheet data for the companies
prior to the business combination and immediately following the combination is provided:
Required:
What number of shares did Envire issue for this acquisition?
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At what price was Envire stock trading when stock was issued for this acquisition?
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What was the fair value of the net assets held by CFC at the date of combination?
What amount of goodwill will be reported by the combined entity immediately following the
combination?
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What balance in retained earnings will the combined entity report immediately following the
combination?
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Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
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43. On January 1, 2008, Alaska Corporation acquired Mercantile Corporation's net assets by
paying $160,000 cash. Balance sheet data for the two companies and fair value information
for Mercantile Corporation immediately before the business combination are given below:
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Required:
Prepare a combined balance sheet immediately following the acquisition.
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Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
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44. SeaLine Corporation is involved in the distribution of processed marine products. The fair
values of assets and liabilities held by three reporting units and other information related to
the reporting units owned by SeaLine are as follows:
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Required: Determine the amount of goodwill that SeaLine should report in its current
financial statements.
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Chapter 01 Intercorporate Acquisitions and Investments in Other Entities
Answer Key
Multiple Choice Questions
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Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
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In order to reduce the risk associated with a new line of business, Conservative Corporation
established Spin Company as a wholly owned subsidiary. It transferred assets and accounts
payable to Spin in exchange for its common stock. Spin recorded the following entry when
the transaction occurred:
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1. Based on the preceding information, what number of shares of $7 par value stock did Spin
issue to Conservative?
A. 10,000
B. 7,000
C. 8,000
D. 25,000
AACSB: Analytic
AICPA: Measurement
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2. Based on the preceding information, what was Conservative's book value of assets
transferred to Spin Company?
A. $243,000
B. $263,000
C. $221,000
D. $201,000
AACSB: Analytic
AICPA: Measurement
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Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
3. Based on the preceding information, what amount did Conservative report as its investment
in Spin after the transfer of assets and liabilities?
A. $181,000
B. $221,000
C. $263,000
D. $243,000
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AACSB: Analytic
AICPA: Measurement
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4. Based on the preceding information, immediately after the transfer,
A. Conservative's total assets decreased by $23,000.
B. Conservative's total assets decreased by $20,000.
C. Conservative's total assets increased by $56,000.
D. Conservative's total assets remained the same.
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AACSB: Analytic
AICPA: Measurement
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During its inception, Devon Company purchased land for $100,000 and a building for
$180,000. After exactly 3 years, it transferred these assets and cash of $50,000 to a newly
created subsidiary, Regan Company, in exchange for 15,000 shares of Regan's $10 par value
stock. Devon uses straight-line depreciation. Useful life for the building is 30 years, with zero
residual value. An appraisal revealed that the building has a fair value of $200,000.
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5. Based on the information provided, at the time of the transfer, Regan Company should
record:
A. Building at $180,000 and no accumulated depreciation.
B. Building at $162,000 and no accumulated depreciation.
C. Building at $200,000 and accumulated depreciation of $24,000.
D. Building at $180,000 and accumulated depreciation of $18,000.
AACSB: Analytic
AICPA: Measurement
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Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
6. Based on the information provided, what amount would be reported by Devon Company as
investment in Regan Company common stock?
A. $312,000
B. $180,000
C. $330,000
D. $150,000
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AACSB: Analytic
AICPA: Measurement
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7. Based on the preceding information, Regan Company will report
A. additional paid-in capital of $0.
B. additional paid-in capital of $150,000.
C. additional paid-in capital of $162,000.
D. additional paid-in capital of $180,000.
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AACSB: Analytic
AICPA: Measurement
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8. Burrough Corporation concluded that the fair value of Helyar Company was $80,000 and
paid that amount to acquire all of its net assets. Helyar reported assets with a book value of
$60,000 and fair value of $98,000 and liabilities with a book value and fair value of $23,000
on the date of combination. Burrough also paid $3,000 to a search firm for finder's fees
related to the acquisition. What amount will be recorded as goodwill by Burrough
Corporation while recording its investment in Helyar?
A. $0
B. $5,000
C. $8,000
D. $13,000
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AACSB: Analytic
AICPA: Measurement
Plummet Corporation reported the book value of its net assets at $400,000 when Zenith
Corporation acquired 100 percent ownership. The fair value of Plummet's net assets was
determined to be $510,000 on that date.
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Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
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9. Based on the preceding information, what amount of goodwill will be reported in
consolidated financial statements presented immediately following the combination
if Zenith paid $550,000 for the acquisition?
A. $0
B. $50,000
C. $150,000
D. $40,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
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10. Based on the preceding information, what amount will be recorded by Zenith as its
investment in Plummet, if it paid $500,000 for the acquisition?
A. $610,000
B. $400,000
C. $500,000
D. $510,000
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11. Based on the preceding information, what amount of goodwill will be reported in
consolidated financial statements presented immediately following the combination
if Zenith paid $500,000 for the acquisition?
A. $0
B. $50,000
C. $150,000
D. $40,000
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AACSB: Analytic
AICPA: Measurement
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Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
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Octane Company and Bio Company have announced terms of an exchange agreement under
which Octane will issue 10,000 shares of its $5 par value common stock to acquire all of Bio's
assets. Octane shares are trading at $28, and Bio's $10 par value shares are trading at $15.
Historical cost and fair value balance sheet data on January 1, 2008, are as follows:
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12. Based on the information provided, what amount will be reported immediately following
the business combination for Buildings and Equipment (net) in the combined company's
balance sheet?
A. $300,000
B. $370,000
C. $330,000
D. $340,000
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AACSB: Analytic
AICPA: Measurement
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13. Based on the information provided, what amount will be reported for Common Stock in
the combined company's balance sheet immediately following the business combination?
A. $200,000
B. $250,000
C. $300,000
D. $210,000
AACSB: Analytic
AICPA: Measurement
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Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
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14. Based on the information provided, what amount will be reported for Additional Paid-In
Capital in the combined company's balance sheet immediately following the business
combination?
A. $60,000
B. $80,000
C. $310,000
D. $290,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
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15. Based on the information provided, what amount of goodwill will be reported
immediately following the business combination in the combined company's balance sheet?
A. $0
B. $50,000
C. $40,000
D. $105,000
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16. Based on the information provided, what amount will be reported immediately following
the business combination for Retained Earnings in the combined company's balance sheet?
A. $170,000
B. $225,000
C. $115,000
D. $210,000
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AACSB: Analytic
AICPA: Measurement
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Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
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17. The fair value of net identifiable assets of a reporting unit of X Company is $300,000. On
X Company's books, the carrying value of this reporting unit's net assets is $350,000,
including $60,000 goodwill. If the fair value of the reporting unit is $335,000, what amount of
goodwill impairment will be recognized for this unit?
A. $0
B. $10,000
C. $25,000
D. $35,000
AACSB: Analytic
AICPA: Measurement
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AACSB: Analytic
AICPA: Measurement
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18. The fair value of net identifiable assets of a reporting unit of Y Company is $270,000. The
carrying value of the reporting unit's net assets on Y Company's books is $320,000, including
$50,000 goodwill. If the reported goodwill impairment for the unit is $10,000, what would be
the fair value of the reporting unit?
A. $320,000
B. $310,000
C. $270,000
D. $290,000
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Following its acquisition of the net assets of Dan Company, Empire Company assigned
goodwill of $60,000 to one of the reporting divisions. Information for this division follows:
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Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
19. Based on the preceding information, what amount of goodwill will be reported for this
division if its fair value is determined to be $200,000?
A. $0
B. $60,000
C. $30,000
D. $10,000
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AACSB: Analytic
AICPA: Measurement
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AACSB: Analytic
AICPA: Measurement
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20. Based on the preceding information, what amount of goodwill impairment will be
recognized for this division if its fair value is determined to be $195,000?
A. $5,000
B. $30,000
C. $60,000
D. $55,000
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21. Based on the preceding information, what amount of amount of goodwill impairment will
be recognized for this division if its fair value is determined to be $245,000?
A. $0
B. $30,000
C. $60,000
D. $55,000
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AACSB: Analytic
AICPA: Measurement
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Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
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Public Equity Corporation acquired Lenore Company through an exchange of common
shares. All of Lenore's assets and liabilities were immediately transferred to Public Equity.
Public's common stock was trading at $20 per share at the time of exchange. Following
selected information is also available.
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AACSB: Analytic
AICPA: Measurement
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22. Based on the preceding information, what number of shares was issued at the time of the
exchange?
A. 5,000
B. 17,500
C. 12,500
D. 10,000
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23. Based on the preceding information, what is the par value of Public's common stock?
A. $10
B. $1
C. $5
D. $4
AACSB: Analytic
AICPA: Measurement
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24. Based on the preceding information, what is the fair value of Lenore's net assets, if
goodwill of $56,000 is recorded?
A. $306,000
B. $244,000
C. $194,000
D. $300,000
AACSB: Analytic
AICPA: Measurement
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Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
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Pursuing an inorganic growth strategy, Wilson Company acquired Venus Company's net
assets and assigned them to four separate reporting divisions. Wilson assigned total goodwill
of $134,000 to the four reporting divisions as given below:
AACSB: Analytic
AICPA: Measurement
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25. Based on the preceding information, what amount of goodwill will be reported for Alpha
at year-end?
A. $0
B. $20,000
C. $30,000
D. $10,000
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26. Based on the preceding information, what amount of goodwill will be reported for Beta at
year-end?
A. $0
B. $14,000
C. $34,000
D. $50,000
AACSB: Analytic
AICPA: Measurement
1-26
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
27. Based on the preceding information, for Gamma:
A. no goodwill should be reported at year-end.
B. goodwill impairment of $30,000 should be recognized at year-end.
C. goodwill impairment of $20,000 should be recognized at year-end.
D. goodwill of $30,000 should be reported at year-end.
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AACSB: Analytic
AICPA: Measurement
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28. Based on the preceding information, for Delta:
A. no goodwill should be reported at year-end.
B. goodwill impairment of $15,000 should be recognized at year-end.
C. goodwill impairment of $20,000 should be recognized at year-end.
D. goodwill of $30,000 should be reported at year-end.
AACSB: Analytic
AICPA: Measurement
C
PA
29. Based on the preceding information, what would be the total amount of goodwill that
Wilson should report at year-end?
A. $0
B. $69,000
C. $79,000
D. $94,000
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AACSB: Analytic
AICPA: Measurement
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Rivendell Corporation and Foster Company merged as of January 1, 2009. To effect the
merger, Rivendell paid finder's fees of $40,000, legal fees of $13,000, audit fees related to the
stock issuance of $10,000, stock registration fees of $5,000, and stock listing application fees
of $4,000.
1-27
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
30. Based on the preceding information, under the acquisition method, what amount relating
to the business combination would be expensed?
A. $72,000
B. $19,000
C. $53,000
D. $63,000
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AACSB: Analytic
AICPA: Measurement
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31. Based on the preceding information, under the acquisition method:
A. $72,000 of stock issue costs are treated as goodwill.
B. $19,000 of stock issue costs are treated as a reduction in the issue price.
C. $19,000 of stock issue costs are expensed.
D. $72,000 of stock issue costs are expensed.
PA
AACSB: Analytic
AICPA: Measurement
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32. Using the preceding information, what amount would have been expensed if the purchase
method of accounting was used?
A. $0
B. $19,000
C. $53,000
D. $72,000
AACSB: Analytic
AICPA: Measurement
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33. Using the preceding information, what amount would have been expensed if the poolingof-interests method of accounting was used?
A. $0
B. $19,000
C. $53,000
D. $72,000
AACSB: Analytic
AICPA: Measurement
1-28
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
34. Which of the following observations is (are) consistent with the acquisition method of
accounting for business combinations?
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I. Expenses related to the business combination are expensed.
II. Stock issue costs are treated as a reduction in the issue price.
III. All merger and stock issue costs are expensed.
IV. No goodwill is ever recorded.
A. III
B. IV
C. I and II
D. I, II, and IV
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AACSB: Reflective Thinking
AICPA: Reporting
C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
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35. Which of the following situations best describes a business combination to be accounted
for as a statutory merger?
A. Both companies in a combination continue to operate as separate, but related, legal entities.
B. Only one of the combining companies survives and the other loses its separate identity.
C. Two companies combine to form a new third company, and the original two companies are
dissolved.
D. One company transfers assets to another company it has created.
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36. A statutory consolidation is a type of business combination in which:
A. one of the combining companies survives and the other loses its separate identity.
B. one company acquires the voting shares of the other company and the two companies
continue to operate as separate legal entities.
C. two publicly traded companies agree to share a board of directors.
D. each of the combining companies is dissolved and the net assets of both companies are
transferred to a newly created corporation.
AACSB: Reflective Thinking
AICPA: Decision Making
1-29
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
37. Which of the following observations refers to the term differential?
A. Excess of consideration exchanged over fair value of net identifiable assets.
B. Excess of fair value over book value of net identifiable assets.
C. Excess of consideration exchanged over book value of net identifiable assets.
D. Excess of fair value over historical cost of net identifiable assets.
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AACSB: Reflective Thinking
AICPA: Reporting
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38. Which of the following observations concerning "goodwill" is NOT correct?
A. Once written down, it may be written up for recoveries.
B. It must be tested for impairment at least annually.
C. Goodwill impairment losses are recognized in income from continuing operations or
income before extraordinary gains and losses.
D. It must be reported as a separate line item in the balance sheet.
PA
AACSB: Reflective Thinking
AICPA: Reporting
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39. Assuming no impairment in value prior to transfer, assets transferred by a parent company
to another entity it has created should be recorded by the newly created entity at the assets':
A. cost to the parent company.
B. book value on the parent company's books at the date of transfer.
C. fair value at the date of transfer.
D. fair value of consideration exchanged by the newly created entity.
AACSB: Reflective Thinking
AICPA: Decision Making
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Essay Questions
1-30
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
40. On January 1, 2008, Line Corporation acquired all of the common stock of Staff Company
for $300,000. On that date, Staff's identifiable net assets had a fair value of $250,000. The
assets acquired in the purchase of Staff are considered to be a separate reporting unit of Line
Corporation. The carrying value of Staff's investment at December 31, 2008, is $310,000. The
fair value of the net assets (excluding goodwill) at that date is $220,000 and the fair value of
the reporting unit is determined to be 260,000.
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Required:
1) Explain how goodwill is tested for impairment for a reporting unit.
2) Determine the amount, if any, of impairment loss to be recognized at December 31, 2008.
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1) To test for the impairment of goodwill, the fair value of the reporting unit is compared with
its carrying amount. If the fair value of the reporting unit exceeds its carrying amount, the
goodwill of that reporting unit is considered unimpaired. On the other hand, if the carrying
amount of the reporting unit exceeds its fair value, an impairment of the reporting unit's
goodwill is implied. The amount of the reporting unit's goodwill impairment is measured as
the excess of the carrying amount of the unit's goodwill over the implied value of its goodwill.
The implied value of its goodwill is determined as the excess of the fair value of the reporting
unit over the fair value of its net assets excluding goodwill.
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AACSB: Analytic, Communication
AICPA: Measurement
PA
2. The $310,000 carrying value exceeds the $260,000 fair value, implying impairment.
Implied goodwill = $260,000 - $220,000 = $40,000.
Impairment loss = $50,000 - $40,000 = $10,000.
1-31
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
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41. Haynes Corporation entered into an agreement with Diego Company to establish H&D
Partnership. Haynes agreed to transfer the following assets to H&D for 80 percent ownership,
and Diego agreed to transfer $120,000 cash to the partnership for 20 percent ownership.
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PA
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Required: 1. Give the journal entries that Haynes Corporation and Diego Company recorded
for their transfer of assets and accounts payable to H&D Partnership.
Give the journal entries that H&D recorded for its receipt of assets and accounts payable from
Haynes and Diego.
1-32
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
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1. Journal Entry – Haynes
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Journal Entry – Diego
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PA
2. Journal entry recorded by H&D partnership for receipt of assets and accounts payable:
AACSB: Analytic
AICPA: Measurement
1-33
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
PA
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42. Envire Corporation acquired all the assets and liabilities of CFC Corporation by issuing
shares of its common stock On January 1, 2009. Partial balance sheet data for the companies
prior to the business combination and immediately following the combination is provided:
Required:
What number of shares did Envire issue for this acquisition?
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At what price was Envire stock trading when stock was issued for this acquisition?
EO
What was the fair value of the net assets held by CFC at the date of combination?
What amount of goodwill will be reported by the combined entity immediately following the
combination?
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What balance in retained earnings will the combined entity report immediately following the
combination?
1. Number of shares = 30,000 (160,000 – 100,000 = 60,000; 60,000/$2 par)
2. Stock price = $8 (Increase in par value and paid-in capital = 240,000; 240,000/30,000
shares)
3. Fair value of net assets = $227,000 ($25,000 + $22,000 + $55,000 + $250,000) - ($25,000
+ $100,000)
4. Goodwill = $13,000 ($240,000 - $227,000)
5. Retained earnings balance = $105,000
1-34
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
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PA
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AACSB: Analytic
AICPA: Measurement
1-35
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
PA
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43. On January 1, 2008, Alaska Corporation acquired Mercantile Corporation's net assets by
paying $160,000 cash. Balance sheet data for the two companies and fair value information
for Mercantile Corporation immediately before the business combination are given below:
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Required:
Prepare a combined balance sheet immediately following the acquisition.
1-36
Chapter 01 - Intercorporate Acquisitions and Investments in Other Entities
AACSB: Analytic
AICPA: Measurement
PA
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44. SeaLine Corporation is involved in the distribution of processed marine products. The fair
values of assets and liabilities held by three reporting units and other information related to
the reporting units owned by SeaLine are as follows:
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Required: Determine the amount of goodwill that SeaLine should report in its current
financial statements.
Total Goodwill reported = $70,000
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AACSB: Analytic
AICPA: Measurement
1-37
Chapter 02 - Reporting Intercorporate Interests
Chapter 02
Reporting Intercorporate Interests
Multiple Choice Questions
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On January 1, 2007, Rotor Corporation acquired 30 percent of Stator Company's stock for
$150,000. On the acquisition date, Stator reported net assets of $450,000 valued at historical
cost and $500,000 stated at fair value. The difference was due to the increased value of
buildings with a remaining life of 15 years. During 2007 and 2008 Stator reported net income
of $25,000 and $15,000 and paid dividends of $10,000 and $12,000, respectively. Rotor uses
the equity method.
PA
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1. Based on the preceding information, what amount of differential will be amortized
annually?
A. $0
B. $750
C. $1,000
D. $2,000
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C
2. Based on the preceding information, what will be the balance in the investment account on
Dec 31, 2007?
A. $150,000
B. $157,500
C. $154,500
D. $153,500
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3. Based on the preceding information, what amount of investment income will be reported by
Rotor for the year 2007?
A. $6,500
B. $7,500
C. $7,000
D. $25,000
2-1
Chapter 02 - Reporting Intercorporate Interests
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4. Based on the preceding information, what amount will Rotor report as the balance in the
investment account on Dec 31, 2008?
A. $150,000
B. $157,500
C. $153,400
D. $153,500
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5. Based on the preceding information, what amount of investment income will be reported by
Rotor for 2008?
A. $6,500
B. $7,500
C. $3,500
D. $4,500
C
PA
6. Based on the preceding information, had Rotor Corporation used the cost method, what
would have been the balance in the investment account on Dec 31, 2008?
A. $150,000
B. $157,500
C. $153,400
D. $153,500
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On January 1, 2007, Firewire Company acquired 40 percent of Browser Company's common
stock. For this acquisition, Firewire paid $45,000 above book value. The full differential was
attributed to equipment with a remaining life of ten years and zero salvage value at the date of
acquisition. During 2007 and 2008, Browser reported net income of $90,000 and $50,000 and
paid dividends of $40,000 and $60,000, respectively. Firewire reported a balance in its
investment account of $230,000 on December 31, 2008. It uses the equity method in
accounting for this investment.
2-2
Chapter 02 - Reporting Intercorporate Interests
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7. Based on the preceding information, what is the annual amount of amortization of
differential over the ten year period?
A. $0
B. $1,800
C. $4,500
D. $8,500
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8. Based on the preceding information, during 2007, Firewire will report:
A. an increase in the investment account balance of $15,500.
B. a decrease in the investment account balance of $20,000.
C. an increase in the investment account balance of $36,000.
D. a decrease in the investment account balance of $31,500.
PA
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9. Based on the preceding information, during 2008, Firewire will report:
A. an increase in the investment account balance of $8,000.
B. a decrease in the investment account balance of $15,500.
C. an increase in the investment account balance of $20,000.
D. a decrease in the investment account balance of $8,500.
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10. Based on the information provided, what would be the amount paid by Firewire for this
acquisition?
A. $254,000
B. $223,000
C. $230,000
D. $174,000
2-3
Chapter 02 - Reporting Intercorporate Interests
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11. On January 1, 2009 Athlon Company acquired 30 percent of the common stock of
Opteron Corporation, at underlying book value. For the same year, Opteron reported net
income of $55,000, which includes an extraordinary gain of 40,000. It did not pay any
dividends during the year. By what amount would Athlon's investment in Opteron
Corporation increase for the year, if Athlon used the equity method?
A. $0
B. $16,500
C. $4,500
D. $12,000
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On January 1, 2008, William Company acquired 30 percent of eGate Company's common
stock, at underlying book value of $100,000. eGate has 100,000 shares of $2 par value, 5
percent cumulative preferred stock outstanding. No dividends are in arrears. eGate reported
net income of $150,000 for 2008 and paid total dividends of $72,000. William uses the equity
method to account for this investment.
C
PA
12. Based on the preceding information, what amount would William Company receive as
dividends from eGate for the year?
A. $62,000
B. $21,600
C. $18,600
D. $54,000
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13. Based on the preceding information, what amount of investment income will William
Company report from its investment in eGate for the year?
A. $45,000
B. $42,000
C. $62,000
D. $35,000
2-4
Chapter 02 - Reporting Intercorporate Interests
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14. Based on the preceding information, what amount would be reported by William
Company as the balance in its investment account on December 31, 2008?
A. $100,000
B. $123,400
C. $120,400
D. $142,000
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Denver Corporation owns 25 percent of the voting shares of Alamos Corporation. In 2008,
Alamos reported net income of $120,000 and paid dividends of $30,000. Denver uses the
equity method to account for this investment. Denver reported taxable income of $160,000 on
its separate operations and has an effective tax rate of 40 percent. There is an 80 percent
exemption on intercompany dividends.
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PA
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15. Based on the preceding information, income tax expense for Denver for the year 2008 will
be:
A. $67,000
B. $64,600
C. $64,000
D. $66,400
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16. Based on the preceding information, income taxes payable for Denver for the year 2008
will be:
A. $67,000
B. $64,600
C. $64,000
D. $76,000
Connector Corporation invested in an unincorporated joint venture and elected to use pro rata
consolidation in preparing its financial statements. Connector reported income of $120,000
from its separate operations and net income of $150,000 for the year ended December 31,
2008. The joint venture reported assets of $150,000 and liabilities of $60,000 on January 1,
2008, and assets of $240,000 and liabilities of $75,000 on December 31, 2008. It made no
distributions to owners during the year. Connector reports total assets (excluding its
investment in the unincorporated joint venture) of $550,000 at December 31, 2008.
2-5
Chapter 02 - Reporting Intercorporate Interests
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17. Based on the preceding information, what is Connector's percentage ownership in the joint
venture?
A. 20 percent
B. 50 percent
C. 40 percent
D. 25 percent
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18. Based on the preceding information, what amount of total assets will Connector report in
its balance sheet on December 31, 2008?
A. $646,000
B. $625,000
C. $610,000
D. $628,000
C
PA
19. Based on the preceding information, Connector's total assets at the end of the year will be
highest if it were able to use:
A. pro rata consolidation.
B. equity-method reporting.
C. cost-method reporting.
D. full consolidation.
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On January 1, 2008, Gulfstream Corporation acquired 40 percent of the voting shares of
Hunter Company for $65,000. Hunter reported net income of $45,000 and paid dividends of
$10,000 in 2008. Gulfstream reported operating income of $50,000 for the year. There is 80
percent exemption of intercompany dividends and the effective tax rate is 35 percent. Assume
that the equity method is being used.
20. Based on the preceding information, what would Gulfstream report as income tax expense
for the year?
A. $17,500
B. $18,760
C. $23,800
D. $22,540
2-6
Chapter 02 - Reporting Intercorporate Interests
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21. Based on the preceding information, what amount would Gulfstream report as net income
(after taxes) for the year?
A. $49,240
B. $68,000
C. $64,000
D. $67,500
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PA
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On January 1 2007, Wheeley Company issued common shares with a par value of $20,000
and a market value of $172,000 in exchange for 40 percent ownership of Twain Company.
Balance sheet information reported by Twain on that date is given below:
Twain reported net income of $56,000 and paid dividends of $25,000 during the year.
Wheeley uses the equity method of accounting. The estimated economic life of the patents
held by Twain is 8 years. The buildings and equipment are expected to last 6 more years on
average with zero salvage value.
2-7
Chapter 02 - Reporting Intercorporate Interests
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22. Based on the information provided, differential assigned by Wheeley to inventory for the
year is:
A. $0
B. $12,000
C. $4,800
D. $22,000
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23. Based on the information provided, what amount of differential assigned to buildings and
equipment will be amortized for the year?
A. $0
B. $4,800
C. $2,000
D. $3,800
C
PA
24. Based on the information provided, what amount of differential assigned to patents will be
amortized for the year?
A. $0
B. $4,800
C. $2,000
D. $3,800
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25. Based on the information provided, what amount of income will be reported by Wheeley
from its investment in Twain for the year 2007?
A. $22,400
B. $11,800
C. $4,800
D. $12,400
26. Based on the information provided, what will be the balance in the investment account on
December 31, 2007 reported by Wheeley?
A. $172,000
B. $173,800
C. $183,800
D. $194,400
2-8
Chapter 02 - Reporting Intercorporate Interests
On January 1, 2007, Yang Corporation acquired 25 percent of the outstanding shares of Spiel
Corporation for $100,000 cash. Spiel Company reported net income of $75,000 and paid
dividends of $30,000 for both 2007 and 2008. The fair value of shares held by Yang was
$110,000 and $105,000 on December 31, 2007 and 2008 respectively.
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27. Based on the preceding information, what amount will be reported by Yang as income
from its investment in Spiel for 2008, if it used the equity method of accounting?
A. $7,500
B. $11,250
C. $18,750
D. $26,250
PA
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28. Based on the preceding information, what amount will be reported by Yang as balance in
investment in Spiel on December 31, 2008, if it used the equity method of accounting?
A. $111,250
B. $118,750
C. $100,000
D. $122,500
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29. Based on the preceding information, what amount will be reported by Yang as income
from its investment in Spiel for 2007, if it used the fair value method of accounting?
A. $17,500
B. $12,500
C. $11,250
D. $7,500
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30. Based on the preceding information, what amount will be reported by Yang as income
from its investment in Spiel for 2008, if it used the fair value method of accounting?
A. $11,250
B. $2,500
C. $6,250
D. $7,500
2-9
Chapter 02 - Reporting Intercorporate Interests
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31. Based on the preceding information, what amount will be reported by Yang as balance in
investment in Spiel on December 31, 2008, if it used the fair value method of accounting?
A. $105,000
B. $118,750
C. $100,000
D. $122,500
PA
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32. A change from the cost method to the equity method of accounting for an investment in
common stock resulting from an increase in the number of shares held by the investor
requires:
A. only a footnote disclosure.
B. that the cumulative amount of the change be shown as a line item on the income statement,
net of tax.
C. that the change be accounted for as an unrealized gain included in other comprehensive
income.
D. retroactive restatement as if the investor always had used the equity method.
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C
33. Under the equity method of accounting for a stock investment, the investment initially
should be recorded at:
A. cost.
B. cost minus any differential.
C. proportionate share of the fair value of the investee company's net assets.
D. proportionate share of the book value of the investee company's net assets.
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34. From an investor's point of view, a liquidating dividend from an investee is:
A. A dividend declared by the investee in excess of its earnings in the current year.
B. A dividend declared by the investee in excess of its earnings since acquisition by the
investor.
C. Any dividend declared by the investee since acquisition.
D. A dividend declared by the investee in excess of the investee's retained earnings.
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Chapter 02 - Reporting Intercorporate Interests
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35. Under the cost method of accounting for a stock investment, the differential:
A. is written off.
B. is amortized.
C. is written down if related to limited-life assets.
D. is not amortized or written off.
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36. Usually, an investment of 20 to 50 percent in another company's voting stock is reported
under the:
A. cost method.
B. equity method.
C. full consolidation method.
D. fair value method.
C
PA
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37. Which of the following observations is consistent with the equity method of accounting?
A. Dividends declared by the investee are treated as income by the investor.
B. It is used when the investor lacks the ability to exercise significant influence over the
investee.
C. It may be used in place of consolidation.
D. Its primary use is in reporting nonsubsidiary investments.
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38. Which of the following observations is NOT consistent with the cost method of
accounting?
A. Investee dividends from earnings since acquisition by investor are treated as reduction of
investment.
B. Investments are carried by the investor at historical cost.
C. Differential is not amortized or written off.
D. It is consistent with the treatment normally accorded noncurrent assets.
Essay Questions
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Chapter 02 - Reporting Intercorporate Interests
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39. A cash dividend returns assets to the stockholders while reducing corporate liquidity. Why
are not all cash dividends considered to be "liquidating dividends"? In your response include a
discussion of how an investor accounts for a liquidating dividend.
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PA
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40. In the absence of other evidence, common stock ownership of 20 percent or more is
viewed as indicating that the investor is able to exercise significant influence over the
investee. What are some of the other factors that could constitute evidence of the ability to
exercise significant influence?
2-12
Chapter 02 - Reporting Intercorporate Interests
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41. On January 31, 2008, Argentine Company acquired 20 percent of Silver Corporation's
common stock at book value. During 2008 and 2009 Silver reported net income and dividends
and Argentine reported operating income as follows:
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PA
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Assume an 80 percent exemption of intercompany dividends. Argentine has an effective tax
rate of 35 percent.
Required: Calculate the amount of income tax expense and net income Argentine Company
should report for 2008 and 2009 under the:
Cost method
Equity Method
2-13
Chapter 02 - Reporting Intercorporate Interests
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PA
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42. On January 1, 2007, Xeta Corporation acquired 45 percent of the voting common stock of
Yvonne Company by issuing common stock with a par value of $50,000 and fair value of
$135,000. Immediately after this transaction, Yvonne acquired 30 percent of the voting
common stock of Zerox Corporation by issuing bonds payable with a par value and market
value of $35,700. On January 1, 2007, the book values of Yvonne's net assets were equal to
their fair values except for equipment that had a fair value $48,000 greater than book value
and patents that had a fair value $12,000 greater than book value. At that date the equipment
had a remaining economic life of ten years and the patents had a remaining economic life of
six years. The book values of Zerox's assets were equal to their fair values except for
inventory that had a fair value $4,000 in excess of book value and was accounted for on a
FIFO basis. Selected balance sheet information at January 1, 2007, and income statement data
for 2007 for Xeta Corporation, Yvonne Company, and Zerox Corporation are provided below:
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Required:
1) What will be the net income reported by Xeta Corporation for 2008, assuming the equity
method is used by both Xeta and Yvonne in accounting for intercorporate investments.
2) Provide all journal entries recorded by Xeta relating to its investment in Yvonne during
2007.
2-14
Chapter 02 - Reporting Intercorporate Interests
Chapter 02 Reporting Intercorporate Interests Answer Key
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Multiple Choice Questions
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On January 1, 2007, Rotor Corporation acquired 30 percent of Stator Company's stock for
$150,000. On the acquisition date, Stator reported net assets of $450,000 valued at historical
cost and $500,000 stated at fair value. The difference was due to the increased value of
buildings with a remaining life of 15 years. During 2007 and 2008 Stator reported net income
of $25,000 and $15,000 and paid dividends of $10,000 and $12,000, respectively. Rotor uses
the equity method.
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AACSB: Analytic
AICPA: Measurement
C
PA
1. Based on the preceding information, what amount of differential will be amortized
annually?
A. $0
B. $750
C. $1,000
D. $2,000
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2. Based on the preceding information, what will be the balance in the investment account on
Dec 31, 2007?
A. $150,000
B. $157,500
C. $154,500
D. $153,500
AACSB: Analytic
AICPA: Measurement
2-15
Chapter 02 - Reporting Intercorporate Interests
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3. Based on the preceding information, what amount of investment income will be reported by
Rotor for the year 2007?
A. $6,500
B. $7,500
C. $7,000
D. $25,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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4. Based on the preceding information, what amount will Rotor report as the balance in the
investment account on Dec 31, 2008?
A. $150,000
B. $157,500
C. $153,400
D. $153,500
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C
5. Based on the preceding information, what amount of investment income will be reported by
Rotor for 2008?
A. $6,500
B. $7,500
C. $3,500
D. $4,500
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AACSB: Analytic
AICPA: Measurement
2-16
Chapter 02 - Reporting Intercorporate Interests
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6. Based on the preceding information, had Rotor Corporation used the cost method, what
would have been the balance in the investment account on Dec 31, 2008?
A. $150,000
B. $157,500
C. $153,400
D. $153,500
AACSB: Analytic
AICPA: Measurement
PA
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On January 1, 2007, Firewire Company acquired 40 percent of Browser Company's common
stock. For this acquisition, Firewire paid $45,000 above book value. The full differential was
attributed to equipment with a remaining life of ten years and zero salvage value at the date of
acquisition. During 2007 and 2008, Browser reported net income of $90,000 and $50,000 and
paid dividends of $40,000 and $60,000, respectively. Firewire reported a balance in its
investment account of $230,000 on December 31, 2008. It uses the equity method in
accounting for this investment.
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7. Based on the preceding information, what is the annual amount of amortization of
differential over the ten year period?
A. $0
B. $1,800
C. $4,500
D. $8,500
AACSB: Analytic
AICPA: Measurement
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8. Based on the preceding information, during 2007, Firewire will report:
A. an increase in the investment account balance of $15,500.
B. a decrease in the investment account balance of $20,000.
C. an increase in the investment account balance of $36,000.
D. a decrease in the investment account balance of $31,500.
AACSB: Analytic
AICPA: Measurement
2-17
Chapter 02 - Reporting Intercorporate Interests
9. Based on the preceding information, during 2008, Firewire will report:
A. an increase in the investment account balance of $8,000.
B. a decrease in the investment account balance of $15,500.
C. an increase in the investment account balance of $20,000.
D. a decrease in the investment account balance of $8,500.
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AACSB: Analytic
AICPA: Measurement
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10. Based on the information provided, what would be the amount paid by Firewire for this
acquisition?
A. $254,000
B. $223,000
C. $230,000
D. $174,000
PA
AACSB: Analytic
AICPA: Measurement
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11. On January 1, 2009 Athlon Company acquired 30 percent of the common stock of
Opteron Corporation, at underlying book value. For the same year, Opteron reported net
income of $55,000, which includes an extraordinary gain of 40,000. It did not pay any
dividends during the year. By what amount would Athlon's investment in Opteron
Corporation increase for the year, if Athlon used the equity method?
A. $0
B. $16,500
C. $4,500
D. $12,000
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AACSB: Analytic
AICPA: Measurement
On January 1, 2008, William Company acquired 30 percent of eGate Company's common
stock, at underlying book value of $100,000. eGate has 100,000 shares of $2 par value, 5
percent cumulative preferred stock outstanding. No dividends are in arrears. eGate reported
net income of $150,000 for 2008 and paid total dividends of $72,000. William uses the equity
method to account for this investment.
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Chapter 02 - Reporting Intercorporate Interests
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12. Based on the preceding information, what amount would William Company receive as
dividends from eGate for the year?
A. $62,000
B. $21,600
C. $18,600
D. $54,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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13. Based on the preceding information, what amount of investment income will William
Company report from its investment in eGate for the year?
A. $45,000
B. $42,000
C. $62,000
D. $35,000
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14. Based on the preceding information, what amount would be reported by William
Company as the balance in its investment account on December 31, 2008?
A. $100,000
B. $123,400
C. $120,400
D. $142,000
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AACSB: Analytic
AICPA: Measurement
Denver Corporation owns 25 percent of the voting shares of Alamos Corporation. In 2008,
Alamos reported net income of $120,000 and paid dividends of $30,000. Denver uses the
equity method to account for this investment. Denver reported taxable income of $160,000 on
its separate operations and has an effective tax rate of 40 percent. There is an 80 percent
exemption on intercompany dividends.
2-19
Chapter 02 - Reporting Intercorporate Interests
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15. Based on the preceding information, income tax expense for Denver for the year 2008 will
be:
A. $67,000
B. $64,600
C. $64,000
D. $66,400
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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16. Based on the preceding information, income taxes payable for Denver for the year 2008
will be:
A. $67,000
B. $64,600
C. $64,000
D. $76,000
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Connector Corporation invested in an unincorporated joint venture and elected to use pro rata
consolidation in preparing its financial statements. Connector reported income of $120,000
from its separate operations and net income of $150,000 for the year ended December 31,
2008. The joint venture reported assets of $150,000 and liabilities of $60,000 on January 1,
2008, and assets of $240,000 and liabilities of $75,000 on December 31, 2008. It made no
distributions to owners during the year. Connector reports total assets (excluding its
investment in the unincorporated joint venture) of $550,000 at December 31, 2008.
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17. Based on the preceding information, what is Connector's percentage ownership in the joint
venture?
A. 20 percent
B. 50 percent
C. 40 percent
D. 25 percent
AACSB: Analytic
AICPA: Measurement
2-20
Chapter 02 - Reporting Intercorporate Interests
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18. Based on the preceding information, what amount of total assets will Connector report in
its balance sheet on December 31, 2008?
A. $646,000
B. $625,000
C. $610,000
D. $628,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Reporting
PA
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19. Based on the preceding information, Connector's total assets at the end of the year will be
highest if it were able to use:
A. pro rata consolidation.
B. equity-method reporting.
C. cost-method reporting.
D. full consolidation.
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C
On January 1, 2008, Gulfstream Corporation acquired 40 percent of the voting shares of
Hunter Company for $65,000. Hunter reported net income of $45,000 and paid dividends of
$10,000 in 2008. Gulfstream reported operating income of $50,000 for the year. There is 80
percent exemption of intercompany dividends and the effective tax rate is 35 percent. Assume
that the equity method is being used.
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20. Based on the preceding information, what would Gulfstream report as income tax expense
for the year?
A. $17,500
B. $18,760
C. $23,800
D. $22,540
AACSB: Analytic
AICPA: Measurement
2-21
Chapter 02 - Reporting Intercorporate Interests
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21. Based on the preceding information, what amount would Gulfstream report as net income
(after taxes) for the year?
A. $49,240
B. $68,000
C. $64,000
D. $67,500
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PA
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AACSB: Analytic
AICPA: Measurement
2-22
Chapter 02 - Reporting Intercorporate Interests
C
PA
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On January 1 2007, Wheeley Company issued common shares with a par value of $20,000
and a market value of $172,000 in exchange for 40 percent ownership of Twain Company.
Balance sheet information reported by Twain on that date is given below:
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Twain reported net income of $56,000 and paid dividends of $25,000 during the year.
Wheeley uses the equity method of accounting. The estimated economic life of the patents
held by Twain is 8 years. The buildings and equipment are expected to last 6 more years on
average with zero salvage value.
2-23
Chapter 02 - Reporting Intercorporate Interests
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22. Based on the information provided, differential assigned by Wheeley to inventory for the
year is:
A. $0
B. $12,000
C. $4,800
D. $22,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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23. Based on the information provided, what amount of differential assigned to buildings and
equipment will be amortized for the year?
A. $0
B. $4,800
C. $2,000
D. $3,800
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24. Based on the information provided, what amount of differential assigned to patents will be
amortized for the year?
A. $0
B. $4,800
C. $2,000
D. $3,800
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AACSB: Analytic
AICPA: Measurement
2-24
Chapter 02 - Reporting Intercorporate Interests
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25. Based on the information provided, what amount of income will be reported by Wheeley
from its investment in Twain for the year 2007?
A. $22,400
B. $11,800
C. $4,800
D. $12,400
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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26. Based on the information provided, what will be the balance in the investment account on
December 31, 2007 reported by Wheeley?
A. $172,000
B. $173,800
C. $183,800
D. $194,400
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C
On January 1, 2007, Yang Corporation acquired 25 percent of the outstanding shares of Spiel
Corporation for $100,000 cash. Spiel Company reported net income of $75,000 and paid
dividends of $30,000 for both 2007 and 2008. The fair value of shares held by Yang was
$110,000 and $105,000 on December 31, 2007 and 2008 respectively.
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27. Based on the preceding information, what amount will be reported by Yang as income
from its investment in Spiel for 2008, if it used the equity method of accounting?
A. $7,500
B. $11,250
C. $18,750
D. $26,250
AACSB: Analytic
AICPA: Measurement
2-25
Chapter 02 - Reporting Intercorporate Interests
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28. Based on the preceding information, what amount will be reported by Yang as balance in
investment in Spiel on December 31, 2008, if it used the equity method of accounting?
A. $111,250
B. $118,750
C. $100,000
D. $122,500
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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29. Based on the preceding information, what amount will be reported by Yang as income
from its investment in Spiel for 2007, if it used the fair value method of accounting?
A. $17,500
B. $12,500
C. $11,250
D. $7,500
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30. Based on the preceding information, what amount will be reported by Yang as income
from its investment in Spiel for 2008, if it used the fair value method of accounting?
A. $11,250
B. $2,500
C. $6,250
D. $7,500
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AACSB: Analytic
AICPA: Measurement
2-26
Chapter 02 - Reporting Intercorporate Interests
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31. Based on the preceding information, what amount will be reported by Yang as balance in
investment in Spiel on December 31, 2008, if it used the fair value method of accounting?
A. $105,000
B. $118,750
C. $100,000
D. $122,500
AACSB: Analytic
AICPA: Measurement
C
AACSB: Reflective Thinking
AICPA: Reporting
PA
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32. A change from the cost method to the equity method of accounting for an investment in
common stock resulting from an increase in the number of shares held by the investor
requires:
A. only a footnote disclosure.
B. that the cumulative amount of the change be shown as a line item on the income statement,
net of tax.
C. that the change be accounted for as an unrealized gain included in other comprehensive
income.
D. retroactive restatement as if the investor always had used the equity method.
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33. Under the equity method of accounting for a stock investment, the investment initially
should be recorded at:
A. cost.
B. cost minus any differential.
C. proportionate share of the fair value of the investee company's net assets.
D. proportionate share of the book value of the investee company's net assets.
AACSB: Reflective Thinking
AICPA: Decision Making
2-27
Chapter 02 - Reporting Intercorporate Interests
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34. From an investor's point of view, a liquidating dividend from an investee is:
A. A dividend declared by the investee in excess of its earnings in the current year.
B. A dividend declared by the investee in excess of its earnings since acquisition by the
investor.
C. Any dividend declared by the investee since acquisition.
D. A dividend declared by the investee in excess of the investee's retained earnings.
AACSB: Reflective Thinking
AICPA: Decision Making
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35. Under the cost method of accounting for a stock investment, the differential:
A. is written off.
B. is amortized.
C. is written down if related to limited-life assets.
D. is not amortized or written off.
PA
AACSB: Reflective Thinking
AICPA: Decision Making
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36. Usually, an investment of 20 to 50 percent in another company's voting stock is reported
under the:
A. cost method.
B. equity method.
C. full consolidation method.
D. fair value method.
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AACSB: Reflective Thinking
AICPA: Reporting
2-28
Chapter 02 - Reporting Intercorporate Interests
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37. Which of the following observations is consistent with the equity method of accounting?
A. Dividends declared by the investee are treated as income by the investor.
B. It is used when the investor lacks the ability to exercise significant influence over the
investee.
C. It may be used in place of consolidation.
D. Its primary use is in reporting nonsubsidiary investments.
AACSB: Reflective Thinking
AICPA: Decision Making
AACSB: Reflective Thinking
AICPA: Decision Making
C
Essay Questions
PA
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38. Which of the following observations is NOT consistent with the cost method of
accounting?
A. Investee dividends from earnings since acquisition by investor are treated as reduction of
investment.
B. Investments are carried by the investor at historical cost.
C. Differential is not amortized or written off.
D. It is consistent with the treatment normally accorded noncurrent assets.
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39. A cash dividend returns assets to the stockholders while reducing corporate liquidity. Why
are not all cash dividends considered to be "liquidating dividends"? In your response include a
discussion of how an investor accounts for a liquidating dividend.
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A dividend represents earnings of a company being returned to its shareholders.
A liquidating dividend occurs when an investee declares dividends in excess of the earnings
from the purchase date of the investment. An individual investor must treat a liquidating
dividend associated with its investment as a return of capital and reduce the investment
account accordingly. It is possible for blocks of stock acquired at different times to have
different amounts associated with a potential liquidating dividend.
AACSB: Communication
AICPA: Decision Making
2-29
Chapter 02 - Reporting Intercorporate Interests
40. In the absence of other evidence, common stock ownership of 20 percent or more is
viewed as indicating that the investor is able to exercise significant influence over the
investee. What are some of the other factors that could constitute evidence of the ability to
exercise significant influence?
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APB stated that these include 1. Representation on board of directors; 2. Participation in
policy making; 3. Material intercompany transactions; 4. Interchange of managerial
personnel; 5. Technological dependency; and 6. Size of investment in relation to
concentration of other shareholdings.
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PA
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AACSB: Communication
AICPA: Decision Making
2-30
Chapter 02 - Reporting Intercorporate Interests
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41. On January 31, 2008, Argentine Company acquired 20 percent of Silver Corporation's
common stock at book value. During 2008 and 2009 Silver reported net income and dividends
and Argentine reported operating income as follows:
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PA
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Assume an 80 percent exemption of intercompany dividends. Argentine has an effective tax
rate of 35 percent.
Required: Calculate the amount of income tax expense and net income Argentine Company
should report for 2008 and 2009 under the:
Cost method
Equity Method
2-31
Chapter 02 - Reporting Intercorporate Interests
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PA
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1. Cost Method
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2. Equity Method
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PA
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Chapter 02 - Reporting Intercorporate Interests
AACSB: Analytic
AICPA: Measurement
2-33
Chapter 02 - Reporting Intercorporate Interests
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PA
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42. On January 1, 2007, Xeta Corporation acquired 45 percent of the voting common stock of
Yvonne Company by issuing common stock with a par value of $50,000 and fair value of
$135,000. Immediately after this transaction, Yvonne acquired 30 percent of the voting
common stock of Zerox Corporation by issuing bonds payable with a par value and market
value of $35,700. On January 1, 2007, the book values of Yvonne's net assets were equal to
their fair values except for equipment that had a fair value $48,000 greater than book value
and patents that had a fair value $12,000 greater than book value. At that date the equipment
had a remaining economic life of ten years and the patents had a remaining economic life of
six years. The book values of Zerox's assets were equal to their fair values except for
inventory that had a fair value $4,000 in excess of book value and was accounted for on a
FIFO basis. Selected balance sheet information at January 1, 2007, and income statement data
for 2007 for Xeta Corporation, Yvonne Company, and Zerox Corporation are provided below:
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Required:
1) What will be the net income reported by Xeta Corporation for 2008, assuming the equity
method is used by both Xeta and Yvonne in accounting for intercorporate investments.
2) Provide all journal entries recorded by Xeta relating to its investment in Yvonne during
2007.
2-34
Chapter 02 - Reporting Intercorporate Interests
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1.
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2.
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Chapter 02 - Reporting Intercorporate Interests
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PA
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AACSB: Analytic
AICPA: Measurement
2-36
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
Chapter 03
The Reporting Entity and Consolidated Financial Statements
Multiple Choice Questions
PA
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On January 3, 2009, Jane Company acquired 75 percent of Miller Company's outstanding
common stock for cash. The fair value of the noncontrolling interest was equal to a
proportionate share of the book value of Miller Company's net assets at the date of
acquisition. Selected balance sheet data at December 31, 2009, are as follows:
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1. Based on the preceding information, what amount should be reported as noncontrolling
interest in net assets in Jane Company's December 31, 2009, consolidated balance sheet?
A. $90,000
B. $54,000
C. $36,000
D. $0
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2. Based on the preceding information, what amount will Jane Company report as common
stock outstanding in its consolidated balance sheet at December 31, 2009?
A. $120,000
B. $180,000
C. $156,000
D. $264,000
3-1
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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Beta Company acquired 100 percent of the voting common shares of Standard Video
Corporation, its bitter rival, by issuing bonds with a par value and fair value of $150,000.
Immediately prior to the acquisition, Beta reported total assets of $500,000, liabilities of
$280,000, and stockholders' equity of $220,000. At that date, Standard Video reported total
assets of $400,000, liabilities of $250,000, and stockholders' equity of $150,000. Included in
Standard's liabilities was an account payable to Beta in the amount of $20,000, which Beta
included in its accounts receivable.
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3. Based on the preceding information, what amount of total assets did Beta report in its
balance sheet immediately after the acquisition?
A. $500,000
B. $650,000
C. $750,000
D. $900,000
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4. Based on the preceding information, what amount of total assets was reported in the
consolidated balance sheet immediately after acquisition?
A. $650,000
B. $880,000
C. $920,000
D. $750,000
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5. Based on the preceding information, what amount of total liabilities was reported in the
consolidated balance sheet immediately after acquisition?
A. $500,000
B. $530,000
C. $280,000
D. $660,000
3-2
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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6. Based on the preceding information, what amount of stockholders' equity was reported in
the consolidated balance sheet immediately after acquisition?
A. $220,000
B. $150,000
C. $370,000
D. $350,000
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7. Company Pea owns 90 percent of Company Essone which in turn owns 80 percent of
Company Esstwo. Company Esstwo owns 100 percent of Company Essthree. Consolidated
financial statements should be prepared to report the financial status and results of operations
for:
A. Pea.
B. Pea plus Essone.
C. Pea plus Essone plus Esstwo.
D. Pea plus Essone plus Esstwo plus Essthree.
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PA
8. Xing Corporation owns 80 percent of the voting common shares of Adams Corporation.
Noncontrolling interest was assigned $24,000 of income in the 2009 consolidated income
statement. What amount of net income did Adams Corporation report for the year?
A. $150,000
B. $96,000
C. $120,000
D. $30,000
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9. On December 31, 2009, Rudd Company acquired 80 percent of the common stock of
Wilton Company. At the time, Rudd held land with a book value of $100,000 and a fair value
of $260,000; Wilton held land with a book value of $50,000 and fair value of $600,000. Using
the parent company theory, at what amount would land be reported in a consolidated balance
sheet prepared immediately after the combination?
A. $550,000
B. $590,000
C. $700,000
D. $860,000
3-3
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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10. Princeton Company acquired 75 percent of the common stock of Sheffield Corporation on
December 31, 2009. On the date of acquisition, Princeton held land with a book value of
$150,000 and a fair value of $300,000; Sheffield held land with a book value of $100,000 and
fair value of $500,000. Using the entity theory, at what amount would land be reported in a
consolidated balance sheet prepared immediately after the combination?
A. $650,000
B. $500,000
C. $550,000
D. $375,000
PA
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11. If Push Company owned 51 percent of the outstanding common stock of Shove Company,
which reporting method would be appropriate?
A. Cost method
B. Consolidation
C. Equity method
D. Merger method
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12. Under FASB 141R, consolidation follows largely which theory approach?
A. Proprietary
B. Parent company
C. Entity
D. Variable
3-4
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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On January 3, 2009, Redding Company acquired 80 percent of Frazer Corporation's common
stock for $344,000 in cash. At the acquisition date, the book values and fair values of Frazer's
assets and liabilities were equal, and the fair value of the noncontrolling interest was equal to
20 percent of the total book value of Frazer. The stockholders' equity accounts of the two
companies at the acquisition date are:
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Noncontrolling interest was assigned income of $11,000 in Redding's consolidated income
statement for 2009.
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13. Based on the preceding information, what amount will be assigned to the noncontrolling
interest on January 3, 2009, in the consolidated balance sheet?
A. $86,000
B. $44,000
C. $68,800
D. $50,000
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14. Based on the preceding information, what will be the total stockholders' equity in the
consolidated balance sheet as of January 3, 2009?
A. $1,580,000
B. $1,064,000
C. $1,150,000
D. $1,236,000
3-5
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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16. Goodwill under the parent theory:
A. exceeds goodwill under the proprietary theory.
B. exceeds goodwill under the entity theory.
C. is less than goodwill under the entity theory.
D. is less than goodwill under the proprietary theory.
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15. Based on the preceding information, what will be the amount of net income reported by
Frazer Corporation in 2009?
A. $44,000
B. $55,000
C. $66,000
D. $36,000
PA
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Small-Town Retail owns 70 percent of Supplier Corporation's common stock. For the current
financial year, Small-Town and Supplier reported sales of $450,000 and $300,000 and
expenses of $290,000 and $240,000, respectively.
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17. Based on the preceding information, what is the amount of net income to be reported in
the consolidated income statement for the year under the parent company theory approach?
A. $220,000
B. $202,000
C. $160,000
D. $200,000
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18. Based on the preceding information, what is the amount of net income to be reported in
the consolidated income statement for the year under the proprietary theory approach?
A. $210,000
B. $202,000
C. $160,000
D. $200,000
3-6
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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19. Based on the preceding information, what is the amount of net income to be reported in
the consolidated income statement for the year under the entity theory approach?
A. $210,000
B. $202,000
C. $160,000
D. $220,000
PA
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20. Quid Corporation acquired 75 percent of Pro Company's common stock on December 31,
2006. Goodwill (attributable to Quid's acquisition of Pro shares) of $300,000 was reported in
the consolidated financial statements at December 31, 2006. Parent company approach was
used in determining this amount. What is the amount of goodwill to be reported under
proprietary theory approach?
A. $300,000
B. $400,000
C. $150,000
D. $100,000
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21. Quid Corporation acquired 60 percent of Pro Company's common stock on December 31,
2004. Goodwill (attributable to Quid's acquisition of Pro shares) of $150,000 was reported in
the consolidated financial statements at December 31, 2004. Proprietary theory approach was
used in determining this amount. What is the amount of goodwill to be reported under entity
theory approach?
A. $150,000
B. $200,000
C. $250,000
D. $100,000
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22. Blue Company owns 80 percent of the common stock of White Corporation. During the
year, Blue reported sales of $1,000,000, and White reported sales of $500,000, including sales
to Blue of $80,000. The amount of sales that should be reported in the consolidated income
statement for the year is:
A. $500,000.
B. $1,300,000.
C. $1,420,000.
D. $1,500,000.
3-7
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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23. In which of the following cases would consolidation be inappropriate?
A. The subsidiary is in bankruptcy.
B. Subsidiary's operations are dissimilar from those of the parent.
C. The parent owns 90 percent of the subsidiary's common stock, but all of the subsidiary's
nonvoting preferred stock is held by a single investor.
D. Subsidiary is foreign.
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24. Consolidated financial statements tend to be most useful for:
A. Creditors of a consolidated subsidiary.
B. Investors and long-term creditors of the parent company.
C. Short-term creditors of the parent company.
D. Stockholders of a consolidated subsidiary.
PA
R
On January 1, 2009, Heathcliff Corporation acquired 80 percent of Garfield Corporation's
voting common stock. Garfield's buildings and equipment had a book value of $300,000 and a
fair value of $350,000 at the time of acquisition.
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25. Based on the preceding information, what will be the amount at which Garfield's buildings
and equipment will be reported in consolidated statements using the parent company
approach?
A. $350,000
B. $340,000
C. $280,000
D. $300,000
R
26. Based on the preceding information, what will be the amount at which Garfield's buildings
and equipment will be reported in consolidated statements using the current accounting
practice?
A. $350,000
B. $340,000
C. $280,000
D. $300,000
3-8
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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27. On January 1, 2009, Gold Rush Company acquires 80 percent ownership in California
Corporation for $200,000. The fair value of the noncontrolling interest at that time is
determined to be $50,000. It reports net assets with a book value of $200,000 and fair value of
$230,000. Gold Rush Company reports net assets with a book value of $600,000 and a fair
value of $650,000 at that time, excluding its investment in California. What will be the
amount of goodwill that would be reported immediately after the combination under current
accounting practice?
A. $50,000
B. $30,000
C. $40,000
D. $20,000
C
PA
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28. Roland Company acquired 100 percent of Garros Company's voting shares in 2007.
During 2008, Garros purchased tennis equipment for $30,000 and sold them to Roland for
$55,000. Roland continues to hold the items in inventory on December 31, 2008. Sales for the
two companies during 2008 totaled $655,000, and total cost of goods sold was $420,000.
Which of the following observations will be true if no adjustment is made to eliminate the
intercorporate sale when a consolidated income statement is prepared for 2008?
A. Sales would be overstated by $30,000.
B. Cost of goods sold will be understated by $25,000.
C. Net income will be overstated by $25,000.
D. Consolidated net income will be unaffected.
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29. Zeta Corporation and its subsidiary reported consolidated net income of $320,000 for the
year ended December 31, 2008. Zeta owns 80 percent of the common shares of its subsidiary,
acquired at book value. Noncontrolling interest was assigned income of $30,000 in the
consolidated income statement for 2008. What is the amount of separate operating income
reported by Zeta for the year?
A. $170,000
B. $150,000
C. $120,000
D. $200,000
3-9
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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30. Rohan Corporation holds assets with a fair value of $150,000 and a book value of
$125,000 and liabilities with a book value and fair value of $50,000. What balance will be
assigned to the noncontrolling interest in the consolidated balance sheet if Helms Company
pays $90,000 to acquire 75 percent ownership in Rohan and goodwill of $20,000 is reported?
A. $50,000
B. $30,000
C. $40,000
D. $20,000
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ev
Elbonia Corporation, a 100 percent subsidiary of Atomic Corporation, caters to its parent's
entire inventory requirements. In 2007, Elbonia produced inventory at a cost of $36,000 and
sold it to Atomic for $75,000. Atomic held all the items in inventory on January 1, 2008.
During 2008, Atomic sold all the units for $98,000. Assume that the companies had no other
transactions during 2007 and 2008.
C
PA
31. Based on the preceding information, what amount would be reported in the consolidated
financial statements for inventory on January 1, 2008?
A. $39,000
B. $36,000
C. $75,000
D. $0
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32. Based on the preceding information, what amount would be reported in the consolidated
financial statements for cost of goods sold for 2007?
A. $39,000
B. $36,000
C. $75,000
D. $0
3-10
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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33. Based on the preceding information, what amount would be reported in the consolidated
financial statements for cost of goods sold for 2008?
A. $0
B. $39,000
C. $36,000
D. $98,000
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ev
34. Based on the preceding information, what amount would be reported in the consolidated
financial statements for sales for 2007?
A. $0
B. $39,000
C. $36,000
D. $75,000
PA
35. When a primary beneficiary's consolidation of a variable interest entity (VIE) is
appropriate, the amounts of the VIE to be consolidated are:
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C
I. Book values for assets and liabilities transferred by the primary beneficiary.
II. Fair values when the primary beneficiary relationship became established.
A. I
B. II
C. Both I and II
D. Neither I nor II
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36. Which of the following usually does not represent a variable interest?
A. Common stock, with no special features or provisions
B. Senior debt
C. Subordinated debt
D. Loan or asset guarantees
Essay Questions
3-11
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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37. Consolidated financial statements are required by GAAP in certain circumstances. This
information can be very useful to stockholders and creditors. Yet, there are limitations to
these financial statements for which the users must be aware. What are at least three (3)
limitations of consolidated financial statements?
ev
38. In reading a set of consolidated financial statements you are surprised to see the term
noncontrolling interest not reported under the Stockholders' Equity section of the Balance
Sheet.
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PA
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a. What is a non-controlling interest?
b. Why must it be reported in the financial statements as an element of equity rather than a
liability?
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39. FASB issued Interpretation No. 46 R related to the Consolidation of Variable Interest
Entities. Why does FASB have difficulty in prescribing when these entities are consolidated?
3-12
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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40. Dish Corporation acquired 100 percent of the common stock of Toll Company by issuing
10,000 shares of $10 par common stock with a market value of $60 per share. Summarized
balance sheet data for the two companies immediately preceding the acquisition are as
follows:
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C
PA
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Required: Determine the dollar amounts to be presented in the consolidated balance sheet for
(1) total assets, (2) total liabilities, and (3) total stockholders' equity.
3-13
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
C
PA
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41. The Hamilton Company acquired 100 percent of the stock of Hudson Company on
January 1, 2010, for $308,000 cash. Summarized balance sheet data for the companies on
December 31, 2009, are as follows:
EO
The book values of Hudson's assets and liabilities are equal to their fair values, except as
indicated. On January 1, 2010, Hudson owed Hamilton $14,000 on account.
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Required: Prepare a consolidated balance sheet immediately following the acquisition.
3-14
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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42. Barnes Company acquired 80 percent of the outstanding voting stock of Dean Company
on January 1, 2008. During 2008 Dean Company sold inventory costing $50,000 to Barnes
Company for $80,000. Barnes Company continued to hold the inventory at December 31,
2008. Also during 2008, Barnes Company sold merchandise costing $400,000 to nonaffiliates
for $600,000, and on its separate balance sheet reported total inventory at year end of
$140,000. In its separate financial statements, Dean Company reported total sales and cost of
goods sold of $350,000 and $220,000, respectively, for 2008 and ending inventory of
$150,000.
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PA
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Required: Based on the above information, compute the amounts that should appear in the
consolidated financial statements prepared for Barnes Company and it subsidiary, Dean
Company, at year end for the following items: 1) sales; 2) cost of goods sold; 3) gross profit
on sales; 4) inventory.
3-15
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
PA
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43. On January 1, 2009, Field Corporation, a retail outlet chain, acquired 100 percent of the
common stock of Palouse Company by issuing 14,000 shares of Field's $5 par value common
stock. The market price of Field's common stock was $20 per share on the eve of December
31, 2008. Summarized balance sheet data at December 31, 2008, are as follows:
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Additional Information:
The book values of Palouse's assets approximated their respective fair values, except for
inventory (included in current assets), which had a fair value $20,000 more than book value,
and land, which had a market value of $200,000 on the date of combination. At that date,
Field owed Palouse $34,000 on account.
R
Required: Prepare a consolidated balance sheet immediately following the acquisition.
3-16
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
Chapter 03 The Reporting Entity and Consolidated Financial Statements Answer
Key
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Multiple Choice Questions
C
PA
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On January 3, 2009, Jane Company acquired 75 percent of Miller Company's outstanding
common stock for cash. The fair value of the noncontrolling interest was equal to a
proportionate share of the book value of Miller Company's net assets at the date of
acquisition. Selected balance sheet data at December 31, 2009, are as follows:
R
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1. Based on the preceding information, what amount should be reported as noncontrolling
interest in net assets in Jane Company's December 31, 2009, consolidated balance sheet?
A. $90,000
B. $54,000
C. $36,000
D. $0
AACSB: Analytic
AICPA: Measurement
3-17
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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2. Based on the preceding information, what amount will Jane Company report as common
stock outstanding in its consolidated balance sheet at December 31, 2009?
A. $120,000
B. $180,000
C. $156,000
D. $264,000
AACSB: Analytic
AICPA: Measurement
PA
R
ev
Beta Company acquired 100 percent of the voting common shares of Standard Video
Corporation, its bitter rival, by issuing bonds with a par value and fair value of $150,000.
Immediately prior to the acquisition, Beta reported total assets of $500,000, liabilities of
$280,000, and stockholders' equity of $220,000. At that date, Standard Video reported total
assets of $400,000, liabilities of $250,000, and stockholders' equity of $150,000. Included in
Standard's liabilities was an account payable to Beta in the amount of $20,000, which Beta
included in its accounts receivable.
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C
3. Based on the preceding information, what amount of total assets did Beta report in its
balance sheet immediately after the acquisition?
A. $500,000
B. $650,000
C. $750,000
D. $900,000
AACSB: Analytic
AICPA: Measurement
R
4. Based on the preceding information, what amount of total assets was reported in the
consolidated balance sheet immediately after acquisition?
A. $650,000
B. $880,000
C. $920,000
D. $750,000
AACSB: Analytic
AICPA: Measurement
3-18
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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5. Based on the preceding information, what amount of total liabilities was reported in the
consolidated balance sheet immediately after acquisition?
A. $500,000
B. $530,000
C. $280,000
D. $660,000
AACSB: Analytic
AICPA: Measurement
R
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6. Based on the preceding information, what amount of stockholders' equity was reported in
the consolidated balance sheet immediately after acquisition?
A. $220,000
B. $150,000
C. $370,000
D. $350,000
PA
AACSB: Analytic
AICPA: Measurement
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C
7. Company Pea owns 90 percent of Company Essone which in turn owns 80 percent of
Company Esstwo. Company Esstwo owns 100 percent of Company Essthree. Consolidated
financial statements should be prepared to report the financial status and results of operations
for:
A. Pea.
B. Pea plus Essone.
C. Pea plus Essone plus Esstwo.
D. Pea plus Essone plus Esstwo plus Essthree.
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AACSB: Analytic
AICPA: Decision Making
3-19
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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8. Xing Corporation owns 80 percent of the voting common shares of Adams Corporation.
Noncontrolling interest was assigned $24,000 of income in the 2009 consolidated income
statement. What amount of net income did Adams Corporation report for the year?
A. $150,000
B. $96,000
C. $120,000
D. $30,000
AACSB: Analytic
AICPA: Measurement
C
AACSB: Analytic
AICPA: Measurement
PA
R
ev
9. On December 31, 2009, Rudd Company acquired 80 percent of the common stock of
Wilton Company. At the time, Rudd held land with a book value of $100,000 and a fair value
of $260,000; Wilton held land with a book value of $50,000 and fair value of $600,000. Using
the parent company theory, at what amount would land be reported in a consolidated balance
sheet prepared immediately after the combination?
A. $550,000
B. $590,000
C. $700,000
D. $860,000
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10. Princeton Company acquired 75 percent of the common stock of Sheffield Corporation on
December 31, 2009. On the date of acquisition, Princeton held land with a book value of
$150,000 and a fair value of $300,000; Sheffield held land with a book value of $100,000 and
fair value of $500,000. Using the entity theory, at what amount would land be reported in a
consolidated balance sheet prepared immediately after the combination?
A. $650,000
B. $500,000
C. $550,000
D. $375,000
AACSB: Analytic
AICPA: Measurement
3-20
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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11. If Push Company owned 51 percent of the outstanding common stock of Shove Company,
which reporting method would be appropriate?
A. Cost method
B. Consolidation
C. Equity method
D. Merger method
AACSB: Reflective Thinking
AICPA: Reporting
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12. Under FASB 141R, consolidation follows largely which theory approach?
A. Proprietary
B. Parent company
C. Entity
D. Variable
PA
AACSB: Reflective Thinking
AICPA: Reporting
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C
On January 3, 2009, Redding Company acquired 80 percent of Frazer Corporation's common
stock for $344,000 in cash. At the acquisition date, the book values and fair values of Frazer's
assets and liabilities were equal, and the fair value of the noncontrolling interest was equal to
20 percent of the total book value of Frazer. The stockholders' equity accounts of the two
companies at the acquisition date are:
Noncontrolling interest was assigned income of $11,000 in Redding's consolidated income
statement for 2009.
3-21
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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13. Based on the preceding information, what amount will be assigned to the noncontrolling
interest on January 3, 2009, in the consolidated balance sheet?
A. $86,000
B. $44,000
C. $68,800
D. $50,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
R
ev
14. Based on the preceding information, what will be the total stockholders' equity in the
consolidated balance sheet as of January 3, 2009?
A. $1,580,000
B. $1,064,000
C. $1,150,000
D. $1,236,000
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15. Based on the preceding information, what will be the amount of net income reported by
Frazer Corporation in 2009?
A. $44,000
B. $55,000
C. $66,000
D. $36,000
R
AACSB: Analytic
AICPA: Measurement
3-22
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
16. Goodwill under the parent theory:
A. exceeds goodwill under the proprietary theory.
B. exceeds goodwill under the entity theory.
C. is less than goodwill under the entity theory.
D. is less than goodwill under the proprietary theory.
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AACSB: Reflective Thinking
AICPA: Reporting
ev
Small-Town Retail owns 70 percent of Supplier Corporation's common stock. For the current
financial year, Small-Town and Supplier reported sales of $450,000 and $300,000 and
expenses of $290,000 and $240,000, respectively.
C
AACSB: Analytic
AICPA: Measurement
PA
R
17. Based on the preceding information, what is the amount of net income to be reported in
the consolidated income statement for the year under the parent company theory approach?
A. $220,000
B. $202,000
C. $160,000
D. $200,000
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18. Based on the preceding information, what is the amount of net income to be reported in
the consolidated income statement for the year under the proprietary theory approach?
A. $210,000
B. $202,000
C. $160,000
D. $200,000
AACSB: Analytic
AICPA: Measurement
3-23
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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19. Based on the preceding information, what is the amount of net income to be reported in
the consolidated income statement for the year under the entity theory approach?
A. $210,000
B. $202,000
C. $160,000
D. $220,000
AACSB: Analytic
AICPA: Measurement
C
AACSB: Analytic
AICPA: Measurement
PA
R
ev
20. Quid Corporation acquired 75 percent of Pro Company's common stock on December 31,
2006. Goodwill (attributable to Quid's acquisition of Pro shares) of $300,000 was reported in
the consolidated financial statements at December 31, 2006. Parent company approach was
used in determining this amount. What is the amount of goodwill to be reported under
proprietary theory approach?
A. $300,000
B. $400,000
C. $150,000
D. $100,000
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21. Quid Corporation acquired 60 percent of Pro Company's common stock on December 31,
2004. Goodwill (attributable to Quid's acquisition of Pro shares) of $150,000 was reported in
the consolidated financial statements at December 31, 2004. Proprietary theory approach was
used in determining this amount. What is the amount of goodwill to be reported under entity
theory approach?
A. $150,000
B. $200,000
C. $250,000
D. $100,000
AACSB: Analytic
AICPA: Measurement
3-24
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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22. Blue Company owns 80 percent of the common stock of White Corporation. During the
year, Blue reported sales of $1,000,000, and White reported sales of $500,000, including sales
to Blue of $80,000. The amount of sales that should be reported in the consolidated income
statement for the year is:
A. $500,000.
B. $1,300,000.
C. $1,420,000.
D. $1,500,000.
ev
AACSB: Analytic
AICPA: Measurement
AACSB: Reflective Thinking
AICPA: Reporting
PA
R
23. In which of the following cases would consolidation be inappropriate?
A. The subsidiary is in bankruptcy.
B. Subsidiary's operations are dissimilar from those of the parent.
C. The parent owns 90 percent of the subsidiary's common stock, but all of the subsidiary's
nonvoting preferred stock is held by a single investor.
D. Subsidiary is foreign.
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24. Consolidated financial statements tend to be most useful for:
A. Creditors of a consolidated subsidiary.
B. Investors and long-term creditors of the parent company.
C. Short-term creditors of the parent company.
D. Stockholders of a consolidated subsidiary.
R
AACSB: Reflective Thinking
AICPA: Reporting
On January 1, 2009, Heathcliff Corporation acquired 80 percent of Garfield Corporation's
voting common stock. Garfield's buildings and equipment had a book value of $300,000 and a
fair value of $350,000 at the time of acquisition.
3-25
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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25. Based on the preceding information, what will be the amount at which Garfield's buildings
and equipment will be reported in consolidated statements using the parent company
approach?
A. $350,000
B. $340,000
C. $280,000
D. $300,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
R
ev
26. Based on the preceding information, what will be the amount at which Garfield's buildings
and equipment will be reported in consolidated statements using the current accounting
practice?
A. $350,000
B. $340,000
C. $280,000
D. $300,000
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EO
C
27. On January 1, 2009, Gold Rush Company acquires 80 percent ownership in California
Corporation for $200,000. The fair value of the noncontrolling interest at that time is
determined to be $50,000. It reports net assets with a book value of $200,000 and fair value of
$230,000. Gold Rush Company reports net assets with a book value of $600,000 and a fair
value of $650,000 at that time, excluding its investment in California. What will be the
amount of goodwill that would be reported immediately after the combination under current
accounting practice?
A. $50,000
B. $30,000
C. $40,000
D. $20,000
AACSB: Analytic
AICPA: Measurement
3-26
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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28. Roland Company acquired 100 percent of Garros Company's voting shares in 2007.
During 2008, Garros purchased tennis equipment for $30,000 and sold them to Roland for
$55,000. Roland continues to hold the items in inventory on December 31, 2008. Sales for the
two companies during 2008 totaled $655,000, and total cost of goods sold was $420,000.
Which of the following observations will be true if no adjustment is made to eliminate the
intercorporate sale when a consolidated income statement is prepared for 2008?
A. Sales would be overstated by $30,000.
B. Cost of goods sold will be understated by $25,000.
C. Net income will be overstated by $25,000.
D. Consolidated net income will be unaffected.
ev
AACSB: Analytic
AICPA: Measurement
EO
AACSB: Analytic
AICPA: Measurement
C
PA
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29. Zeta Corporation and its subsidiary reported consolidated net income of $320,000 for the
year ended December 31, 2008. Zeta owns 80 percent of the common shares of its subsidiary,
acquired at book value. Noncontrolling interest was assigned income of $30,000 in the
consolidated income statement for 2008. What is the amount of separate operating income
reported by Zeta for the year?
A. $170,000
B. $150,000
C. $120,000
D. $200,000
R
30. Rohan Corporation holds assets with a fair value of $150,000 and a book value of
$125,000 and liabilities with a book value and fair value of $50,000. What balance will be
assigned to the noncontrolling interest in the consolidated balance sheet if Helms Company
pays $90,000 to acquire 75 percent ownership in Rohan and goodwill of $20,000 is reported?
A. $50,000
B. $30,000
C. $40,000
D. $20,000
AACSB: Analytic
AICPA: Measurement
3-27
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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Elbonia Corporation, a 100 percent subsidiary of Atomic Corporation, caters to its parent's
entire inventory requirements. In 2007, Elbonia produced inventory at a cost of $36,000 and
sold it to Atomic for $75,000. Atomic held all the items in inventory on January 1, 2008.
During 2008, Atomic sold all the units for $98,000. Assume that the companies had no other
transactions during 2007 and 2008.
ev
31. Based on the preceding information, what amount would be reported in the consolidated
financial statements for inventory on January 1, 2008?
A. $39,000
B. $36,000
C. $75,000
D. $0
R
AACSB: Analytic
AICPA: Measurement
EO
AACSB: Analytic
AICPA: Measurement
C
PA
32. Based on the preceding information, what amount would be reported in the consolidated
financial statements for cost of goods sold for 2007?
A. $39,000
B. $36,000
C. $75,000
D. $0
R
33. Based on the preceding information, what amount would be reported in the consolidated
financial statements for cost of goods sold for 2008?
A. $0
B. $39,000
C. $36,000
D. $98,000
AACSB: Analytic
AICPA: Measurement
3-28
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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34. Based on the preceding information, what amount would be reported in the consolidated
financial statements for sales for 2007?
A. $0
B. $39,000
C. $36,000
D. $75,000
AACSB: Analytic
AICPA: Measurement
ev
35. When a primary beneficiary's consolidation of a variable interest entity (VIE) is
appropriate, the amounts of the VIE to be consolidated are:
PA
R
I. Book values for assets and liabilities transferred by the primary beneficiary.
II. Fair values when the primary beneficiary relationship became established.
A. I
B. II
C. Both I and II
D. Neither I nor II
C
AACSB: Analytic
AICPA: Reporting
EO
36. Which of the following usually does not represent a variable interest?
A. Common stock, with no special features or provisions
B. Senior debt
C. Subordinated debt
D. Loan or asset guarantees
R
AACSB: Reflective Thinking
AICPA: Reporting
Essay Questions
3-29
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
37. Consolidated financial statements are required by GAAP in certain circumstances. This
information can be very useful to stockholders and creditors. Yet, there are limitations to
these financial statements for which the users must be aware. What are at least three (3)
limitations of consolidated financial statements?
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C
AACSB: Communication
AICPA: Reporting
PA
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Limitations to consolidated financial statements include:
1) The operating results and financial position of individual companies included in the
consolidation are not disclosed. Therefore, the poor performance or position of one or more
companies may be hidden by the good performance and position of others.
2) The consolidated statements include the subsidiary's assets, not all assets shown are
available to dividend distributions of the parent company.
3) Financial ratios are based upon the aggregated consolidated information; therefore, these
ratios may not be representative of any single company in the consolidation, including the
parent.
4) Similar accounts of different companies that are consolidated may not be entirely
comparable. For example, the length of operating cycles of different subsidiaries may vary,
causing receivables of similar length to be classified differently.
5) Additional information about individual companies or groups of companies that have been
consolidated may be necessary for fair presentation, resulting in voluminous footnote
disclosures.
3-30
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
38. In reading a set of consolidated financial statements you are surprised to see the term
noncontrolling interest not reported under the Stockholders' Equity section of the Balance
Sheet.
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a. What is a non-controlling interest?
b. Why must it be reported in the financial statements as an element of equity rather than a
liability?
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a. Noncontrolling interest occurs when less than 100 percent equity is acquired in a
subsidiary. It represents the fact that the parent may control but not own the entire subsidiary.
The noncontrolling shareholders have a claim on the subsidiary's assets and earnings through
their percentage ownership of the stock.
b. Noncontrolling interest clearly does not meet the definition of a liability. FASB 160 makes
clear that the noncontrolling interest's claim on net assets is an element of equity, not a
liability. It requires reporting the noncontrolling interest in equity.
AACSB: Communication
AICPA: Reporting
PA
39. FASB issued Interpretation No. 46 R related to the Consolidation of Variable Interest
Entities. Why does FASB have difficulty in prescribing when these entities are consolidated?
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A Variable Interest Entity (VIE) is a legal structure used for business purposes that either:
1. Does not have equity investors that:
a. have voting rights or
b. doesn't share in all of the entity's profits or losses.
2. Has equity investors that do not provide sufficient financial resources to support the entity's
activities.
Therefore, FASB has been trying to define the Primary Beneficiary and from this lead to
consolidation not just control as presumed under FASB 141.
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AACSB: Communication
AICPA: Reporting
3-31
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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40. Dish Corporation acquired 100 percent of the common stock of Toll Company by issuing
10,000 shares of $10 par common stock with a market value of $60 per share. Summarized
balance sheet data for the two companies immediately preceding the acquisition are as
follows:
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Required: Determine the dollar amounts to be presented in the consolidated balance sheet for
(1) total assets, (2) total liabilities, and (3) total stockholders' equity.
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AACSB: Analytic
AICPA: Measurement
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Total assets = $2,550,000 ($1,200,000 + $1,300,000 + $50,000 GW)
Total liabilities = $1,550,000 ($800,000 + $750,000)
Total stockholders' equity = $1,000,000 [$400,000 + ($60 x 10,000 shares)]
3-32
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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41. The Hamilton Company acquired 100 percent of the stock of Hudson Company on
January 1, 2010, for $308,000 cash. Summarized balance sheet data for the companies on
December 31, 2009, are as follows:
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The book values of Hudson's assets and liabilities are equal to their fair values, except as
indicated. On January 1, 2010, Hudson owed Hamilton $14,000 on account.
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Required: Prepare a consolidated balance sheet immediately following the acquisition.
3-33
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Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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AACSB: Analytic
AICPA: Measurement
3-34
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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42. Barnes Company acquired 80 percent of the outstanding voting stock of Dean Company
on January 1, 2008. During 2008 Dean Company sold inventory costing $50,000 to Barnes
Company for $80,000. Barnes Company continued to hold the inventory at December 31,
2008. Also during 2008, Barnes Company sold merchandise costing $400,000 to nonaffiliates
for $600,000, and on its separate balance sheet reported total inventory at year end of
$140,000. In its separate financial statements, Dean Company reported total sales and cost of
goods sold of $350,000 and $220,000, respectively, for 2008 and ending inventory of
$150,000.
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Required: Based on the above information, compute the amounts that should appear in the
consolidated financial statements prepared for Barnes Company and it subsidiary, Dean
Company, at year end for the following items: 1) sales; 2) cost of goods sold; 3) gross profit
on sales; 4) inventory.
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AACSB: Analytic
AICPA: Measurement
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1) Sales = $870,000 ($600,000 + $350,000 - $80,000)
2) Cost of Goods Sold = $570,000 ($400,000 + $220,000 - $50,000)
3) Gross Profit on Sales = $300,000 ($870,000 - $570,000)
4) Inventory = $260,000 ($140,000 + $150,000 - $30,000)
3-35
Chapter 03 - The Reporting Entity and Consolidated Financial Statements
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43. On January 1, 2009, Field Corporation, a retail outlet chain, acquired 100 percent of the
common stock of Palouse Company by issuing 14,000 shares of Field's $5 par value common
stock. The market price of Field's common stock was $20 per share on the eve of December
31, 2008. Summarized balance sheet data at December 31, 2008, are as follows:
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Additional Information:
The book values of Palouse's assets approximated their respective fair values, except for
inventory (included in current assets), which had a fair value $20,000 more than book value,
and land, which had a market value of $200,000 on the date of combination. At that date,
Field owed Palouse $34,000 on account.
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Required: Prepare a consolidated balance sheet immediately following the acquisition.
3-36
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AACSB: Analytic
AICPA: Measurement
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Chapter 03 - The Reporting Entity and Consolidated Financial Statements
3-37
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
Chapter 04
Consolidation of Wholly Owned Subsidiaries
Multiple Choice Questions
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On July 1, 2009, Link Corporation paid $340,000 for all of Tinsel Company's outstanding
common stock. On that date, the costs and fair values of Tinsel's recorded assets and liabilities
were as follows:
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PA
1. Based on the preceding information, the differential reflected in a consolidation workpaper
to prepare a consolidated balance sheet immediately after the business combination is:
A. $0.
B. $25,000.
C. $70,000.
D. $45,000.
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2. Based on the preceding information, what amount should be allocated to goodwill in the
consolidated balance sheet, prepared after this business combination?
A. $0
B. $25,000
C. $70,000
D. $45,000
4-1
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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On December 31, 2009, Add-On Company acquired 100 percent of Venus Corporation's
common stock for $300,000. Balance sheet information Venus just prior to the acquisition is
given here:
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At the date of the business combination, Venus's net assets and liabilities approximated fair
value except for inventory, which had a fair value of $60,000, land which had a fair value of
$125,000, and buildings and equipment (net), which had a fair value of $250,000.
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3. Based on the information provided, what amount of inventory will be included in the
consolidated balance sheet immediately following the acquisition?
A. $60,000
B. $75,000
C. $15,000
D. $45,000
4-2
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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4. Based on the information provided, what amount of goodwill will be included in the
consolidated balance sheet immediately following the acquisition?
A. $30,000
B. $15,000
C. $85,000
D. $45,000
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5. Based on the information provided, what amount of differential will be reflected in a
consolidation workpaper to prepare a consolidated balance sheet immediately after the
business combination?
A. $0
B. $45,000
C. $15,000
D. $85,000
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6. Based on the information provided, what amount will be included as investment in Venus
Corporation in the consolidated balance sheet immediately following the acquisition?
A. $0
B. $395,000
C. $255,000
D. $300,000
4-3
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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Enya Corporation acquired 100 percent of Celtic Corporation's common stock on January 1,
2009. Summarized balance sheet information for the two companies immediately after the
combination is provided:
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7. Based on the preceding information, the amount of differential associated with the
acquisition is:
A. $0.
B. $58,000.
C. $22,000.
D. $36,000.
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8. Based on the information provided, the consolidated balance sheet of Enya and Celtic will
reflect goodwill in the amount of:
A. $0.
B. $58,000.
C. $22,000.
D. $36,000.
4-4
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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9. On January 1, 2008, Blake Company acquired all of Frost Corporation's voting shares for
$280,000 cash. On December 31, 2009, Frost owed Blake $5,000 for services provided during
the year. When consolidated financial statements are prepared for 2009, which entry is needed
to eliminate intercompany receivables and payables in the consolidation workpaper?
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A. Option A
B. Option B
C. Option C
D. Option D
4-5
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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Pace Corporation acquired 100 percent of Spin Company's common stock on January 1,
2009. Balance sheet data for the two companies immediately following the acquisition follow:
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At the date of the business combination, the book values of Spin's net assets and liabilities
approximated fair value except for inventory, which had a fair value of $60,000, and land,
which had a fair value of $50,000. The fair value of land for Pace Corporation was estimated
at $80,000 immediately prior to the acquisition.
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10. Based on the preceding information, at what amount should total land be reported in the
consolidated balance sheet prepared immediately after the business combination?
A. $130,000
B. $105,000
C. $115,000
D. $120,000
4-6
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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11. Based on the preceding information, what amount of total assets will appear in the
consolidated balance sheet prepared immediately after the business combination?
A. $756,000
B. $735,000
C. $750,000
D. $642,000
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12. Based on the preceding information, what is the differential associated with the
acquisition?
A. $15,000
B. $21,000
C. $6,000
D. $10,000
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13. Based on the preceding information, what amount of goodwill will be reported in the
consolidated balance sheet prepared immediately after the business combination?
A. $0
B. $21,000
C. $6,000
D. $15,000
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14. Based on the preceding information, what amount of liabilities will be reported in the
consolidated balance sheet prepared immediately after the business combination?
A. $615,000
B. $406,000
C. $300,000
D. $265,000
15. Based on the preceding information, what amount of retained earnings will be reported in
the consolidated balance sheet prepared immediately after the business combination?
A. $300,000
B. $409,000
C. $259,000
D. $191,000
4-7
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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16. Based on the preceding information, what amount of total stockholder's equity will be
reported in the consolidated balance sheet prepared immediately after the business
combination?
A. $300,000
B. $479,000
C. $315,000
D. $350,000
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On December 31, 2008, Mercury Corporation acquired 100 percent ownership of Saturn
Corporation. On that date, Saturn reported assets and liabilities with book values of $300,000
and $100,000, respectively, common stock outstanding of $50,000, and retained earnings of
$150,000. The book values and fair values of Saturn's assets and liabilities were identical
except for land which had increased in value by $10,000 and inventories which had decreased
by $5,000.
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17. Based on the preceding information, what amount of differential will appear in the
eliminating entries required to prepare a consolidated balance sheet immediately after the
business combination, if the acquisition price was $240,000?
A. $0
B. $40,000
C. $25,000
D. $5,000
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18. Based on the preceding information, what amount of goodwill will be reported if the
acquisition price was $240,000?
A. $0
B. $40,000
C. $15,000
D. $35,000
4-8
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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19. Based on the preceding information, which of the following will pertain to the differential
that will appear in the eliminating entries required to prepare a consolidated balance sheet
immediately after the business combination, if the acquisition price was $195,000?
A. Debit balance of $15,000
B. Credit balance of $15,000
C. Credit balance of $5,000
D. Debit balance of $5,000
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20. Based on the preceding information, what amount of goodwill will be reported if the
acquisition price was $195,000?
A. $0
B. $40,000
C. $15,000
D. $35,000
C
PA
West, Inc. holds 100 percent of the common stock of Coast Company, an investment
acquired for $680,000. Immediately following the combination, West's net assets have a book
value of $1,150,000 and a fair value of $1,390,000. The book value and the fair value of
Coast's net assets on the date of combination are $400,000 and $550,000, respectively.
Immediately following the combination, a consolidated balance sheet is prepared.
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21. Based on the information given above, what will be the amount of net assets reported in
the consolidated balance sheet, prepared immediately following the combination?
A. $1,150,000
B. $1,550,000
C. $1,700,000
D. $1,830,000
22. Based on the information given above, goodwill will be reported in the consolidated
balance sheet in the amount of:
A. $240,000.
B. $130,000.
C. $150,000.
D. $270,000.
4-9
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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23. Based on the information given above, what will be the amount of total consolidated
stockholders' equity be reported in the consolidated balance sheet prepared immediately
following the combination?
A. $1,390,000
B. $1,550,000
C. $1,700,000
D. $1,150,000
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24. Based on the information given above, at what amount will West's investment in Coast
stock be reported in the consolidated balance sheet?
A. $0
B. $400,000
C. $440,000
D. $480,000
4-10
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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On January 1, 2009, Wilton Company acquired all of Sirius Company's common shares, for
$365,000 cash. On that date, Sirius's balance sheet appeared as follows:
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PA
The fair values of all of Sirius's assets and liabilities were equal to their book values except
for inventory that had a fair value of $85,000, land that had a fair value of $60,000, and
buildings and equipment that had a fair value of $250,000. Buildings and equipment have a
remaining useful life of 10 years with zero salvage value. Wilton Company decided to employ
push-down accounting for the acquisition. Subsequent to the combination, Sirius continued to
operate as a separate company.
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25. Based on the preceding information, what amount will be present in the revaluation
capital account, when eliminating entries are prepared?
A. $0
B. $65,000
C. $60,000
D. $15,000
4-11
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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26. Based on the preceding information, what amount of differential will arise in the
consolidation process?
A. $0
B. $5,000
C. $15,000
D. $65,000
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27. Based on the preceding information, the write-up of buildings and equipment will:
A. increase Sirius's reported net income for 2009 by $5,000.
B. decrease Sirius's reported net income for 2009 by $5,000.
C. increase Sirius's reported net income for 2009 by $50,000.
D. have no affect on Sirius's reported net income for 2009.
4-12
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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Lea Company acquired all of Tenzing Corporation's stock on January 1, 2006 for $150,000
cash. On December 31, 2008, the trial balances of the two companies were as follows:
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Tenzing Corporation reported retained earnings of $75,000 at the date of acquisition. The
difference between the acquisition price and underlying book value is assigned to buildings
and equipment with a remaining economic life of five years from the date of acquisition. At
December 31, 2008, Tenzing owed Lea $4,000 for services provided.
4-13
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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28. Based on the preceding information, all of the following are eliminating entries required
on December 31, 2008, to prepare consolidated financial statements, except:
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A. Option A
B. Option B
C. Option C
D. Option D
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29. Based on the preceding information, what amount will be reported as total assets in the
consolidated balance sheet for 2008?
A. $666,000
B. $747,000
C. $651,000
D. $946,000
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30. Based on the preceding information, what amount will be reported for total accounts
payable in the consolidated balance sheet for the year 2008?
A. $56,000
B. $46,000
C. $60,000
D. $42,000
4-14
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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31. Based on the preceding information, what amount of total liabilities will be reported in the
consolidated balance sheet for 2008?
A. $225,000
B. $221,000
C. $217,000
D. $137,000
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32. Based on the preceding information, what amount of total retained earnings will be
reported in the consolidated balance sheet for the year 2008?
A. $330,000
B. $450,000
C. $430,000
D. $370,000
C
PA
33. Tanner Company, a subsidiary acquired for cash, owned equipment with a fair value
higher than the book value as of the date of combination. A consolidated balance sheet
prepared immediately after the acquisition would include this difference in:
A. goodwill.
B. retained earnings.
C. deferred charges.
D. equipment.
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34. Which term refers to the practice of revaluing an acquired subsidiary's assets and
liabilities to their fair values directly on that subsidiary's books at the date of acquisition?
A. Fair value accounting
B. Push-down accounting
C. Fully adjusted method
D. Reciprocal ownership
4-15
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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35. Which of the following observations is NOT consistent with the use of push-down
accounting?
A. The revaluation capital account is part of the subsidiary's stockholders' equity.
B. No differential arises in the consolidation process.
C. Revaluation Capital account is eliminated in preparing consolidated statements.
D. Eliminating entries related to the differential are needed in the workpapers.
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36. When companies employ push-down accounting:
A. the consolidated financial statements will appear exactly as if push-down accounting had
not been used.
B. a special account called Revaluation Capital will appear in the consolidated balance sheet.
C. all consolidation elimination entries are made on the books of the subsidiary rather than in
consolidated workpapers.
D. it means that the subsidiary is not substantially wholly owned by the parent.
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PA
37. Which of the following help explain the differences between the total debit and credit
balances appearing on the balance sheet and those that appear in the workpaper?
A. Contra asset accounts
B. Investment balances
C. Push-down accounting
D. Reporting methods
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38. Company X acquires 100 percent of the voting shares of Company Y for $275,000 on
December 31, 2008. The fair value of the net assets of Company X at the date of acquisition
was $300,000. This is an example of a(n):
A. positive differential.
B. bargain purchase.
C. extraordinary loss.
D. revaluation adjustment.
4-16
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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39. What portion of the balances of subsidiary stockholders' equity accounts are eliminated in
preparing the consolidated balance sheet?
A. Common stock
B. Additional paid-in capital
C. Retained Earnings
D. All of the balances are eliminated
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40. Which of the following observations is NOT true?
A. The differential account is a clearing account.
B. A clearing account can reduce the chance of error in preparing consolidated statements.
C. Eliminating entries remove the balance in the investment account from the parent's books.
D. The differential continues to be a part of the investment account balance until fully
amortized.
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41. Consolidated financial statements are being prepared for Behemoth Corporation and its
two wholly-owned subsidiaries that have intercompany loans of $50,000 and intercompany
profits of $100,000. How much of these intercompany loans and profits should be
eliminated?
A. intercompany loans - $0; intercompany profits - $0
B. intercompany loans - $50,000; intercompany profits - $0
C. intercompany loans - $50,000; intercompany profits - $100,000
D. intercompany loans - $0; intercompany profits - $100,000
4-17
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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On January 1, 2008, Chariot Company acquired 100 percent of Stryder Company for
$220,000 cash. The trial balances for the two companies on December 31, 2008, included the
following amounts:
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On the acquisition date, Stryder reported net assets with a book value of $170,000. A total of
$10,000 of the acquisition price is applied to goodwill, which was not impaired in 2008.
Stryder's depreciable assets had an estimated economic life of 10 years on the date of
combination. The difference between fair value and book value of tangible assets is related
entirely to buildings and equipment. Chariot used the equity method in accounting for its
investment in Stryder. Analysis of receivables and payables revealed that Stryder owed
Chariot $10,000 on December 31, 2008.
4-18
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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42. Based on the information provided, the differential associated with this acquisition is:
A. $36,000.
B. $40,000.
C. $10,000.
D. $50,000.
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43. Based on the information provided, the beginning differential assigned to buildings and
equipment is:
A. $50,000.
B. $40,000.
C. $10,000.
D. $36,000.
C
PA
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44. Based on the information provided, the amount of differential assigned to buildings and
equipment that is amortized for the year is:
A. $5,000.
B. $4,000.
C. $10,000.
D. $3,600.
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45. Based on the information provided, what amount of retained earnings will be reported in
the consolidated financial statements for the year?
A. $331,000
B. $110,000
C. $441,000
D. $456,000
46. Based on the information provided, what amount of net income will be reported in the
consolidated financial statements for the year?
A. $226,000
B. $55,000
C. $230,000
D. $171,000
4-19
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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47. Based on the information provided, what amount of total assets will be reported in the
consolidated balance sheet for the year?
A. $895,000
B. $801,000
C. $723,000
D. $1,111,000
Essay Questions
PA
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48. Paco Company acquired 100 percent of the stock of Garland Corp. on December 31, 2008.
The stockholder's equity section of Garland's balance sheet at that date is as follows:
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Paco financed the acquisition by using $880,000 cash and giving a note payable for $400,000.
Book value approximated fair value for all of Garland's assets and liabilities except for
buildings which had a fair value $60,000 more than its book value and a remaining useful life
of 10 years. Any remaining differential was related to goodwill. Paco has an account payable
to Garland in the amount of $30,000.
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Required:
1) Present all eliminating entries needed to prepare a consolidated balance sheet immediately
following the acquisition.
2) What additional eliminating entry must be prepared at December 31, 2009?
4-20
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
49. Dear Corporation acquired 100 percent of the voting shares of Therry Inc. by issuing
10,000 new shares of $5 par value common stock with a $30 market value.
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Required:
1) Which company is the parent and which is the subsidiary?
2) Define a subsidiary corporation.
3) Define a parent corporation.
4) Which entity prepares consolidated workpapers?
5) Why are elimination entries used?
4-21
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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50. On December 31, 2009, Thessaly Corporation acquired all of Ionian Company's common
shares, for $570,000 cash. On that date, Ionian's balance sheet appeared as follows:
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The fair values of all of Ionian's assets and liabilities were equal to their book values except
for the following:
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Required:
1) Record the acquisition of Ionian's stock on Thessaly's books on December 31, 2009.
2) Record any entries that would be made on December 31, 2009, on Ionian's books related to
the business combination if push-down accounting is employed.
3) Present all eliminating entries that would appear in the workpaper to prepare a consolidated
balance sheet immediately after the combination.
4-22
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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51. On January 1, 2009, Zigma Corporation acquired 100 percent of Standard Company's
common shares at underlying book value. Zigma uses the equity method in accounting for its
ownership of Standard. On December 31, 2009, the trial balances of the two companies are as
follows:
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Required:
Prepare the eliminating entries needed as of December 31, 2009, to complete a consolidation
workpaper.
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Prepare a three-part consolidation workpaper as of December 31, 2009.
4-23
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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52. Lea Company acquired all of Tenzing Corporation's stock on January 1, 2006 for
$150,000 cash. On December 31, 2007, the balance sheets of the two companies showed the
following amounts:
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Tenzing Corporation reported retained earnings of $75,000 at the date of acquisition. The
difference between the acquisition price and underlying book value is assigned to buildings
and equipment with a remaining economic life of five years from the date of acquisition.
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Required:
1) Give the appropriate eliminating entry or entries needed to prepare a consolidated balance
sheet as of December 31, 2007.
2) Prepare a consolidated balance sheet workpaper as of December 31, 2007.
4-24
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
Chapter 04 Consolidation of Wholly Owned Subsidiaries Answer Key
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Multiple Choice Questions
PA
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On July 1, 2009, Link Corporation paid $340,000 for all of Tinsel Company's outstanding
common stock. On that date, the costs and fair values of Tinsel's recorded assets and liabilities
were as follows:
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1. Based on the preceding information, the differential reflected in a consolidation workpaper
to prepare a consolidated balance sheet immediately after the business combination is:
A. $0.
B. $25,000.
C. $70,000.
D. $45,000.
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AACSB: Analytic
AICPA: Measurement
4-25
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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2. Based on the preceding information, what amount should be allocated to goodwill in the
consolidated balance sheet, prepared after this business combination?
A. $0
B. $25,000
C. $70,000
D. $45,000
AACSB: Analytic
AICPA: Measurement
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On December 31, 2009, Add-On Company acquired 100 percent of Venus Corporation's
common stock for $300,000. Balance sheet information Venus just prior to the acquisition is
given here:
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At the date of the business combination, Venus's net assets and liabilities approximated fair
value except for inventory, which had a fair value of $60,000, land which had a fair value of
$125,000, and buildings and equipment (net), which had a fair value of $250,000.
4-26
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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3. Based on the information provided, what amount of inventory will be included in the
consolidated balance sheet immediately following the acquisition?
A. $60,000
B. $75,000
C. $15,000
D. $45,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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4. Based on the information provided, what amount of goodwill will be included in the
consolidated balance sheet immediately following the acquisition?
A. $30,000
B. $15,000
C. $85,000
D. $45,000
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5. Based on the information provided, what amount of differential will be reflected in a
consolidation workpaper to prepare a consolidated balance sheet immediately after the
business combination?
A. $0
B. $45,000
C. $15,000
D. $85,000
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AACSB: Analytic
AICPA: Measurement
4-27
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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6. Based on the information provided, what amount will be included as investment in Venus
Corporation in the consolidated balance sheet immediately following the acquisition?
A. $0
B. $395,000
C. $255,000
D. $300,000
AACSB: Analytic
AICPA: Measurement
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Enya Corporation acquired 100 percent of Celtic Corporation's common stock on January 1,
2009. Summarized balance sheet information for the two companies immediately after the
combination is provided:
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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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7. Based on the preceding information, the amount of differential associated with the
acquisition is:
A. $0.
B. $58,000.
C. $22,000.
D. $36,000.
AACSB: Analytic
AICPA: Measurement
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AACSB: Analytic
AICPA: Measurement
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8. Based on the information provided, the consolidated balance sheet of Enya and Celtic will
reflect goodwill in the amount of:
A. $0.
B. $58,000.
C. $22,000.
D. $36,000.
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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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9. On January 1, 2008, Blake Company acquired all of Frost Corporation's voting shares for
$280,000 cash. On December 31, 2009, Frost owed Blake $5,000 for services provided during
the year. When consolidated financial statements are prepared for 2009, which entry is needed
to eliminate intercompany receivables and payables in the consolidation workpaper?
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AICPA: Measurement
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A. Option A
B. Option B
C. Option C
D. Option D
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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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Pace Corporation acquired 100 percent of Spin Company's common stock on January 1,
2009. Balance sheet data for the two companies immediately following the acquisition follow:
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At the date of the business combination, the book values of Spin's net assets and liabilities
approximated fair value except for inventory, which had a fair value of $60,000, and land,
which had a fair value of $50,000. The fair value of land for Pace Corporation was estimated
at $80,000 immediately prior to the acquisition.
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10. Based on the preceding information, at what amount should total land be reported in the
consolidated balance sheet prepared immediately after the business combination?
A. $130,000
B. $105,000
C. $115,000
D. $120,000
AACSB: Analytic
AICPA: Measurement
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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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11. Based on the preceding information, what amount of total assets will appear in the
consolidated balance sheet prepared immediately after the business combination?
A. $756,000
B. $735,000
C. $750,000
D. $642,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
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12. Based on the preceding information, what is the differential associated with the
acquisition?
A. $15,000
B. $21,000
C. $6,000
D. $10,000
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13. Based on the preceding information, what amount of goodwill will be reported in the
consolidated balance sheet prepared immediately after the business combination?
A. $0
B. $21,000
C. $6,000
D. $15,000
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AACSB: Analytic
AICPA: Measurement
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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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14. Based on the preceding information, what amount of liabilities will be reported in the
consolidated balance sheet prepared immediately after the business combination?
A. $615,000
B. $406,000
C. $300,000
D. $265,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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15. Based on the preceding information, what amount of retained earnings will be reported in
the consolidated balance sheet prepared immediately after the business combination?
A. $300,000
B. $409,000
C. $259,000
D. $191,000
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C
16. Based on the preceding information, what amount of total stockholder's equity will be
reported in the consolidated balance sheet prepared immediately after the business
combination?
A. $300,000
B. $479,000
C. $315,000
D. $350,000
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AACSB: Analytic
AICPA: Measurement
On December 31, 2008, Mercury Corporation acquired 100 percent ownership of Saturn
Corporation. On that date, Saturn reported assets and liabilities with book values of $300,000
and $100,000, respectively, common stock outstanding of $50,000, and retained earnings of
$150,000. The book values and fair values of Saturn's assets and liabilities were identical
except for land which had increased in value by $10,000 and inventories which had decreased
by $5,000.
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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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17. Based on the preceding information, what amount of differential will appear in the
eliminating entries required to prepare a consolidated balance sheet immediately after the
business combination, if the acquisition price was $240,000?
A. $0
B. $40,000
C. $25,000
D. $5,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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18. Based on the preceding information, what amount of goodwill will be reported if the
acquisition price was $240,000?
A. $0
B. $40,000
C. $15,000
D. $35,000
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19. Based on the preceding information, which of the following will pertain to the differential
that will appear in the eliminating entries required to prepare a consolidated balance sheet
immediately after the business combination, if the acquisition price was $195,000?
A. Debit balance of $15,000
B. Credit balance of $15,000
C. Credit balance of $5,000
D. Debit balance of $5,000
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AACSB: Analytic
AICPA: Measurement
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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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20. Based on the preceding information, what amount of goodwill will be reported if the
acquisition price was $195,000?
A. $0
B. $40,000
C. $15,000
D. $35,000
AACSB: Analytic
AICPA: Measurement
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West, Inc. holds 100 percent of the common stock of Coast Company, an investment
acquired for $680,000. Immediately following the combination, West's net assets have a book
value of $1,150,000 and a fair value of $1,390,000. The book value and the fair value of
Coast's net assets on the date of combination are $400,000 and $550,000, respectively.
Immediately following the combination, a consolidated balance sheet is prepared.
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AACSB: Analytic
AICPA: Measurement
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21. Based on the information given above, what will be the amount of net assets reported in
the consolidated balance sheet, prepared immediately following the combination?
A. $1,150,000
B. $1,550,000
C. $1,700,000
D. $1,830,000
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22. Based on the information given above, goodwill will be reported in the consolidated
balance sheet in the amount of:
A. $240,000.
B. $130,000.
C. $150,000.
D. $270,000.
AACSB: Analytic
AICPA: Measurement
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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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23. Based on the information given above, what will be the amount of total consolidated
stockholders' equity be reported in the consolidated balance sheet prepared immediately
following the combination?
A. $1,390,000
B. $1,550,000
C. $1,700,000
D. $1,150,000
AACSB: Analytic
AICPA: Measurement
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AACSB: Analytic
AICPA: Measurement
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24. Based on the information given above, at what amount will West's investment in Coast
stock be reported in the consolidated balance sheet?
A. $0
B. $400,000
C. $440,000
D. $480,000
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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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On January 1, 2009, Wilton Company acquired all of Sirius Company's common shares, for
$365,000 cash. On that date, Sirius's balance sheet appeared as follows:
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The fair values of all of Sirius's assets and liabilities were equal to their book values except
for inventory that had a fair value of $85,000, land that had a fair value of $60,000, and
buildings and equipment that had a fair value of $250,000. Buildings and equipment have a
remaining useful life of 10 years with zero salvage value. Wilton Company decided to employ
push-down accounting for the acquisition. Subsequent to the combination, Sirius continued to
operate as a separate company.
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25. Based on the preceding information, what amount will be present in the revaluation
capital account, when eliminating entries are prepared?
A. $0
B. $65,000
C. $60,000
D. $15,000
AACSB: Analytic
AICPA: Measurement
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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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26. Based on the preceding information, what amount of differential will arise in the
consolidation process?
A. $0
B. $5,000
C. $15,000
D. $65,000
AACSB: Analytic
AICPA: Measurement
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27. Based on the preceding information, the write-up of buildings and equipment will:
A. increase Sirius's reported net income for 2009 by $5,000.
B. decrease Sirius's reported net income for 2009 by $5,000.
C. increase Sirius's reported net income for 2009 by $50,000.
D. have no affect on Sirius's reported net income for 2009.
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AACSB: Analytic
AICPA: Measurement
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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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Lea Company acquired all of Tenzing Corporation's stock on January 1, 2006 for $150,000
cash. On December 31, 2008, the trial balances of the two companies were as follows:
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Tenzing Corporation reported retained earnings of $75,000 at the date of acquisition. The
difference between the acquisition price and underlying book value is assigned to buildings
and equipment with a remaining economic life of five years from the date of acquisition. At
December 31, 2008, Tenzing owed Lea $4,000 for services provided.
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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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28. Based on the preceding information, all of the following are eliminating entries required
on December 31, 2008, to prepare consolidated financial statements, except:
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AACSB: Analytic
AICPA: Measurement
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A. Option A
B. Option B
C. Option C
D. Option D
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29. Based on the preceding information, what amount will be reported as total assets in the
consolidated balance sheet for 2008?
A. $666,000
B. $747,000
C. $651,000
D. $946,000
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AACSB: Analytic
AICPA: Measurement
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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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30. Based on the preceding information, what amount will be reported for total accounts
payable in the consolidated balance sheet for the year 2008?
A. $56,000
B. $46,000
C. $60,000
D. $42,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
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31. Based on the preceding information, what amount of total liabilities will be reported in the
consolidated balance sheet for 2008?
A. $225,000
B. $221,000
C. $217,000
D. $137,000
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32. Based on the preceding information, what amount of total retained earnings will be
reported in the consolidated balance sheet for the year 2008?
A. $330,000
B. $450,000
C. $430,000
D. $370,000
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AACSB: Analytic
AICPA: Measurement
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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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33. Tanner Company, a subsidiary acquired for cash, owned equipment with a fair value
higher than the book value as of the date of combination. A consolidated balance sheet
prepared immediately after the acquisition would include this difference in:
A. goodwill.
B. retained earnings.
C. deferred charges.
D. equipment.
AACSB: Reflective Thinking
AICPA: Reporting
AACSB: Reflective Thinking
AICPA: Reporting
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34. Which term refers to the practice of revaluing an acquired subsidiary's assets and
liabilities to their fair values directly on that subsidiary's books at the date of acquisition?
A. Fair value accounting
B. Push-down accounting
C. Fully adjusted method
D. Reciprocal ownership
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35. Which of the following observations is NOT consistent with the use of push-down
accounting?
A. The revaluation capital account is part of the subsidiary's stockholders' equity.
B. No differential arises in the consolidation process.
C. Revaluation Capital account is eliminated in preparing consolidated statements.
D. Eliminating entries related to the differential are needed in the workpapers.
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AACSB: Reflective Thinking
AICPA: Reporting
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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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36. When companies employ push-down accounting:
A. the consolidated financial statements will appear exactly as if push-down accounting had
not been used.
B. a special account called Revaluation Capital will appear in the consolidated balance sheet.
C. all consolidation elimination entries are made on the books of the subsidiary rather than in
consolidated workpapers.
D. it means that the subsidiary is not substantially wholly owned by the parent.
AACSB: Reflective Thinking
AICPA: Decision Making
AACSB: Reflective Thinking
AICPA: Decision Making
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37. Which of the following help explain the differences between the total debit and credit
balances appearing on the balance sheet and those that appear in the workpaper?
A. Contra asset accounts
B. Investment balances
C. Push-down accounting
D. Reporting methods
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38. Company X acquires 100 percent of the voting shares of Company Y for $275,000 on
December 31, 2008. The fair value of the net assets of Company X at the date of acquisition
was $300,000. This is an example of a(n):
A. positive differential.
B. bargain purchase.
C. extraordinary loss.
D. revaluation adjustment.
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AACSB: Reflective Thinking
AICPA: Decision Making
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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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39. What portion of the balances of subsidiary stockholders' equity accounts are eliminated in
preparing the consolidated balance sheet?
A. Common stock
B. Additional paid-in capital
C. Retained Earnings
D. All of the balances are eliminated
AACSB: Reflective Thinking
AICPA: Decision Making
AACSB: Reflective Thinking
AICPA: Decision Making
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40. Which of the following observations is NOT true?
A. The differential account is a clearing account.
B. A clearing account can reduce the chance of error in preparing consolidated statements.
C. Eliminating entries remove the balance in the investment account from the parent's books.
D. The differential continues to be a part of the investment account balance until fully
amortized.
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41. Consolidated financial statements are being prepared for Behemoth Corporation and its
two wholly-owned subsidiaries that have intercompany loans of $50,000 and intercompany
profits of $100,000. How much of these intercompany loans and profits should be
eliminated?
A. intercompany loans - $0; intercompany profits - $0
B. intercompany loans - $50,000; intercompany profits - $0
C. intercompany loans - $50,000; intercompany profits - $100,000
D. intercompany loans - $0; intercompany profits - $100,000
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AACSB: Reflective Thinking
AICPA: Decision Making
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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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On January 1, 2008, Chariot Company acquired 100 percent of Stryder Company for
$220,000 cash. The trial balances for the two companies on December 31, 2008, included the
following amounts:
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On the acquisition date, Stryder reported net assets with a book value of $170,000. A total of
$10,000 of the acquisition price is applied to goodwill, which was not impaired in 2008.
Stryder's depreciable assets had an estimated economic life of 10 years on the date of
combination. The difference between fair value and book value of tangible assets is related
entirely to buildings and equipment. Chariot used the equity method in accounting for its
investment in Stryder. Analysis of receivables and payables revealed that Stryder owed
Chariot $10,000 on December 31, 2008.
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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
42. Based on the information provided, the differential associated with this acquisition is:
A. $36,000.
B. $40,000.
C. $10,000.
D. $50,000.
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AICPA: Measurement
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43. Based on the information provided, the beginning differential assigned to buildings and
equipment is:
A. $50,000.
B. $40,000.
C. $10,000.
D. $36,000.
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AACSB: Analytic
AICPA: Measurement
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44. Based on the information provided, the amount of differential assigned to buildings and
equipment that is amortized for the year is:
A. $5,000.
B. $4,000.
C. $10,000.
D. $3,600.
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AACSB: Analytic
AICPA: Measurement
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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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45. Based on the information provided, what amount of retained earnings will be reported in
the consolidated financial statements for the year?
A. $331,000
B. $110,000
C. $441,000
D. $456,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
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46. Based on the information provided, what amount of net income will be reported in the
consolidated financial statements for the year?
A. $226,000
B. $55,000
C. $230,000
D. $171,000
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47. Based on the information provided, what amount of total assets will be reported in the
consolidated balance sheet for the year?
A. $895,000
B. $801,000
C. $723,000
D. $1,111,000
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AACSB: Analytic
AICPA: Measurement
Essay Questions
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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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48. Paco Company acquired 100 percent of the stock of Garland Corp. on December 31, 2008.
The stockholder's equity section of Garland's balance sheet at that date is as follows:
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Paco financed the acquisition by using $880,000 cash and giving a note payable for $400,000.
Book value approximated fair value for all of Garland's assets and liabilities except for
buildings which had a fair value $60,000 more than its book value and a remaining useful life
of 10 years. Any remaining differential was related to goodwill. Paco has an account payable
to Garland in the amount of $30,000.
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1)
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Required:
1) Present all eliminating entries needed to prepare a consolidated balance sheet immediately
following the acquisition.
2) What additional eliminating entry must be prepared at December 31, 2009?
2) As of December 31, 2009 there is a need for a Depreciation elimination entry.
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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
AACSB: Analytic
AICPA: Measurement
49. Dear Corporation acquired 100 percent of the voting shares of Therry Inc. by issuing
10,000 new shares of $5 par value common stock with a $30 market value.
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Required:
1) Which company is the parent and which is the subsidiary?
2) Define a subsidiary corporation.
3) Define a parent corporation.
4) Which entity prepares consolidated workpapers?
5) Why are elimination entries used?
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AACSB: Reflective Thinking
AICPA: Decision Making
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1) Dear is the parent and Therry is the subsidiary.
2) A subsidiary is an entity in which another entity, the parent company, holds a controlling
financial interest.
3) A parent company holds a controlling financial interest in another company.
4) The parent, Dear, prepares the consolidated workpapers.
5) Elimination entries are used to adjust the amounts reported by the parent and all of the
subsidiaries to reflect the amounts that would be reported if the separate legal entities were a
single company.
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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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50. On December 31, 2009, Thessaly Corporation acquired all of Ionian Company's common
shares, for $570,000 cash. On that date, Ionian's balance sheet appeared as follows:
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The fair values of all of Ionian's assets and liabilities were equal to their book values except
for the following:
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Required:
1) Record the acquisition of Ionian's stock on Thessaly's books on December 31, 2009.
2) Record any entries that would be made on December 31, 2009, on Ionian's books related to
the business combination if push-down accounting is employed.
3) Present all eliminating entries that would appear in the workpaper to prepare a consolidated
balance sheet immediately after the combination.
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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
1)
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2)
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AICPA: Measurement
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3)
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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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51. On January 1, 2009, Zigma Corporation acquired 100 percent of Standard Company's
common shares at underlying book value. Zigma uses the equity method in accounting for its
ownership of Standard. On December 31, 2009, the trial balances of the two companies are as
follows:
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Required:
Prepare the eliminating entries needed as of December 31, 2009, to complete a consolidation
workpaper.
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Prepare a three-part consolidation workpaper as of December 31, 2009.
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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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2.
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Chapter 04 - Consolidation of Wholly Owned Subsidiaries
AACSB: Analytic
AICPA: Measurement
4-54
Chapter 04 - Consolidation of Wholly Owned Subsidiaries
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52. Lea Company acquired all of Tenzing Corporation's stock on January 1, 2006 for
$150,000 cash. On December 31, 2007, the balance sheets of the two companies showed the
following amounts:
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Tenzing Corporation reported retained earnings of $75,000 at the date of acquisition. The
difference between the acquisition price and underlying book value is assigned to buildings
and equipment with a remaining economic life of five years from the date of acquisition.
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Required:
1) Give the appropriate eliminating entry or entries needed to prepare a consolidated balance
sheet as of December 31, 2007.
2) Prepare a consolidated balance sheet workpaper as of December 31, 2007.
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2)
AACSB: Analytic
AICPA: Measurement
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Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
Chapter 05
Consolidation of Less-than-Wholly Owned Subsidiaries
Multiple Choice Questions
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Bristle Corporation acquired 75 percent of Silver Corporation's common stock on December
31, 2008, for $300,000. The fair value of the noncontrolling interest at that date was
determined to be $100,000. Silver's balance sheet immediately before the combination
reflected the following balances:
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A careful review of the fair value of Silver's assets and liabilities indicated that inventory,
land, and buildings and equipment (net) had fair values of $65,000, $100,000, and, $300,000
respectively. Goodwill is assigned proportionately to Bristle and the noncontrolling
shareholders.
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Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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1. Based on the preceding information, what amount of inventory will be included in the
consolidated balance sheet immediately following the acquisition?
A. $0
B. $65,000
C. $70,000
D. $60,000
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2. Based on the preceding information, what amount of land will be included in the
consolidated balance sheet immediately following the acquisition?
A. $0
B. $10,000
C. $90,000
D. $100,000
C
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3. Based on the preceding information, what amount of buildings and equipment (net) will be
included in the consolidated balance sheet immediately following the acquisition?
A. $0
B. $50,000
C. $250,000
D. $300,000
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4. Based on the preceding information, what amount of goodwill will be reported in the
consolidated balance sheet immediately following the acquisition?
A. $0
B. $120,000
C. $65,000
D. $20,000
5. Based on the preceding information, what amount will be reported as investment in Silver
Corporation stock in the consolidated balance sheet immediately following the acquisition?
A. $0
B. $210,000
C. $300,000
D. $400,000
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Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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6. Based on the preceding information, what amount will be reported as noncontrolling
interest in the consolidated balance sheet immediately following the acquisition?
A. $0
B. $70,000
C. $83,750
D. $100,000
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On January 1, 2009, Gulliver Corporation acquired 80 percent of Sea-Gull Company's
common stock for $160,000 cash. The fair value of the noncontrolling interest at that date was
determined to be $40,000. Data from the balance sheets of the two companies included the
following amounts as of the date of acquisition:
At the date of the business combination, the book values of Sea-Gull's net assets and liabilities
approximated fair value except for inventory, which had a fair value of $45,000, and land,
which had a fair value of $60,000.
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Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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7. Based on the preceding information, what amount of total inventory will be reported in the
consolidated balance sheet prepared immediately after the business combination?
A. $130,000
B. $135,000
C. $90,000
D. $45,000
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8. Based on the preceding information, what amount of goodwill will be reported in the
consolidated balance sheet prepared immediately after the business combination?
A. $0
B. $40,000
C. $20,000
D. $15,000
C
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9. Based on the preceding information, what amount of total assets will be reported in the
consolidated balance sheet prepared immediately after the business combination?
A. $720,000
B. $840,000
C. $825,000
D. $865,000
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10. Based on the preceding information, what amount of total liabilities will be reported in the
consolidated balance sheet prepared immediately after the business combination?
A. $395,000
B. $280,000
C. $265,000
D. $195,000
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Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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11. Based on the preceding information, what amount will be reported as noncontrolling
interest in the consolidated balance sheet prepared immediately after the business
combination?
A. $0
B. $15,000
C. $40,000
D. $46,000
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12. Based on the preceding information, what amount of consolidated retained earnings will
be reported?
A. $205,000
B. $120,000
C. $325,000
D. $310,000
C
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13. Based on the preceding information, what amount will be reported as total stockholders'
equity in the consolidated balance sheet prepared immediately after the business
combination?
A. $445,000
B. $205,000
C. $565,000
D. $550,000
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On January 1, 2008, Ramon Corporation acquired 75 percent of Tester Company's voting
common stock for $300,000. At the time of the combination, Tester reported common stock
outstanding of $200,000 and retained earnings of $150,000, and the fair value of the
noncontrolling interest was $100,000. The book value of Tester's net assets approximated
market value except for patents that had a market value of $50,000 more than their book
value. The patents had a remaining economic life of ten years at the date of the business
combination. Tester reported net income of $40,000 and paid dividends of $10,000 during
2008.
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14. Based on the preceding information, what balance will Ramon report as its investment in
Tester at December 31, 2008, assuming Ramon uses the equity method in accounting for its
investment?
A. $318,750
B. $317,500
C. $330,000
D. $326,250
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A. Choice A
B. Choice B
C. Choice C
D. Choice D
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15. Based on the preceding information, all of the following are eliminating entries needed to
prepare a full set of consolidated financial statements at December 31, 2008, except:
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On January 1, 2008, Climber Corporation acquired 90 percent of Wisden Corporation for
$180,000 cash. Wisden reported net income of $30,000 and dividends of $10,000 for 2008,
2009, and 2010. On January 1, 2008, Wisden reported common stock outstanding of $100,000
and retained earnings of $60,000, and the fair value of the noncontrolling interest was
$20,000. It held land with a book value of $30,000 and a market value of $35,000 and
equipment with a book value of $50,000 and a market value of $60,000 at the date of
combination. The remainder of the differential at acquisition was attributable to an increase in
the value of patents, which had a remaining useful life of five years. All depreciable assets
held by Wisden at the date of acquisition had a remaining economic life of five years. Climber
uses the equity method in accounting for its investment in Wisden.
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16. Based on the preceding information, the increase in the fair value of patents held by
Wisden is:
A. $20,000
B. $25,000
C. $15,000
D. $5,000
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17. Based on the preceding information, what balance would Climber report as its investment
in Wisden at January 1, 2010?
A. $230,400
B. $180,000
C. $234,000
D. $203,400
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18. Based on the preceding information, what balance would Climber report as its investment
in Wisden at January 1, 2011?
A. $251,100
B. $224,100
C. $215,100
D. $234,000
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On January 1, 2008, Wilhelm Corporation acquired 90 percent of Kaiser Company's voting
stock, at underlying book value. The fair value of the noncontrolling interest was equal to 10
percent of the book value of Kaiser at that date. Wilhelm uses the equity method in
accounting for its ownership of Kaiser. On December 31, 2009, the trial balances of the two
companies are as follows:
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19. Based on the preceding information, what amount would be reported as total assets in the
consolidated balance sheet at December 31, 2009?
A. $805,000
B. $712,000
C. $742,000
D. $1,102,000
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20. Based on the preceding information, what amount would be reported as total liabilities in
the consolidated balance sheet at December 31, 2009?
A. $330,000
B. $712,000
C. $318,000
D. $130,000
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21. Based on the preceding information, what amount would be reported as retained earnings
in the consolidated balance sheet prepared at December 31, 2009?
A. 314,000
B. 294,000
C. 150,000
D. 424,000
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22. Based on the preceding information, what amount would be reported as noncontrolling
interest in the consolidated balance sheet at December 31, 2009?
A. $27,000
B. $4,000
C. $15,000
D. $18,000
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23. Based on the preceding information, what amount would be reported as total stockholder's
equity in the consolidated balance sheet at December 31, 2009?
A. $412,000
B. $394,000
C. $542,000
D. $348,000
24. Based on the preceding information, what amount would be reported as income to
controlling interest in the consolidated financial statements for 2009?
A. $168,000
B. $138,000
C. $164,000
D. $150,000
5-9
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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On January 1, 2008, Bristol Company acquired 80 percent of Animation Company's common
stock for $280,000 cash. At that date, Animation reported common stock outstanding of
$200,000 and retained earnings of $100,000, and the fair value of the noncontrolling interest
was $70,000. The book values and fair values of Animation's assets and liabilities were equal,
except for other intangible assets which had a fair value $50,000 greater than book value and
an 8-year remaining life. Animation reported the following data for 2008 and 2009:
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Bristol reported net income of $100,000 and paid dividends of $30,000 for both the years.
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25. Based on the preceding information, what is the amount of consolidated comprehensive
income reported for 2008?
A. $125,000
B. $123,750
C. $118,750
D. $130,000
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26. Based on the preceding information, what is the amount of consolidated comprehensive
income reported for 2009?
A. $145,000
B. $135,000
C. $138,750
D. $128,750
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27. Based on the preceding information, what is the amount of comprehensive income
attributable to the controlling interest for 2008?
A. $123,750
B. $118,750
C. $119,000
D. $104,000
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28. Based on the preceding information, what is the amount of comprehensive income
attributable to the controlling interest for 2009?
A. $138,750
B. $131,000
C. $128,750
D. $135,000
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Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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On January 1, 2008, Colorado Corporation acquired 75 percent of Denver Company's voting
common stock for $90,000 cash. At that date, the fair value of the noncontrolling interest was
$30,000. Denvers's balance sheet at the date of acquisition contained the following balances:
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At the date of acquisition, the reported book values of Denver's assets and liabilities
approximated fair value. Eliminating entries are being made to prepare a consolidated balance
sheet immediately following the business combination.
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29. Based on the preceding information, in the entry to eliminate the investment balance,
A. retained earnings will be credited for $20,000.
B. additional paid-in-capital will be credited for $20,000.
C. differential will be credited for $10,000.
D. noncontrolling interest will be debited for 30,000.
30. Based on the preceding information, the amount of goodwill reported is:
A. $0.
B. $10,000.
C. $15,000.
D. $20,000.
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On December 31, 2008, Melkor Corporation acquired 80 percent of Sydney Company's
common stock for $160,000. At that date, the fair value of the noncontrolling interest was
$40,000. Of the $75,000 differential, $10,000 related to the increased value of Sydney's
inventory, $20,000 related to the increased value of its land, and $25,000 related to the
increased value of its equipment that had a remaining life of 10 years from the date of
combination. Sydney sold all inventory it held at the end of 2008 during 2009. The land to
which the differential related was also sold during 2009 for a large gain. At the date of
combination, Sydney reported retained earnings of $75,000 and common stock outstanding of
$50,000. In 2009, Sydney reported net income of $60,000, but paid no dividends. Melkor
accounts for its investment in Sydney using the equity method.
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31. Based on the preceding information, the amount of goodwill reported in the consolidated
financial statements prepared immediately after the combination is:
A. $0
B. $32,500
C. $26,000
D. $20,000
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32. Based on the preceding information, what is the amount of write-off of differential
associated with this acquisition recorded by Melkor during 2009?
A. $0
B. $32,500
C. $26,000
D. $20,000
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33. Based on the preceding information, what is the elimination entry made to assign income
to noncontrolling interest in the workpaper to prepare a full set of consolidated financial
statements for the year 2009?
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A. Option A
B. Option B
C. Option C
D. Option D
5-14
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On January 1, 2004, Plimsol Company acquired 100 percent of Shipping Corporation's
voting shares, at underlying book value. Plimsol uses the cost method in accounting for its
investment in Shipping. Shipping's retained earnings was $75,000 on the date of acquisition.
On December 31, 2004, the trial balance data for the two companies are as follows:
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34. Based on the information provided, what amount of net income will be reported in the
consolidated financial statements prepared on December 31, 2004?
A. $100,000
B. $85,000
C. $110,000
D. $125,000
5-15
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35. Based on the information provided, what amount of total assets will be reported in the
consolidated balance sheet prepared on December 31, 2004?
A. $425,000
B. $525,000
C. $650,000
D. $630,000
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36. Based on the information provided, what amount of retained earnings will be reported in
the consolidated balance sheet prepared on December 31, 2004?
A. $235,000
B. $210,000
C. $310,000
D. $225,000
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PA
37. Based on the information provided, what amount of total liabilities will be reported in the
consolidated balance sheet prepared on December 31, 2004?
A. $525,000
B. $115,000
C. $125,000
D. $190,000
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38. Based on the information provided, what amount of total stockholder's equity will be
reported in the consolidated balance sheet prepared on December 31, 2004?
A. $190,000
B. $335,000
C. $460,000
D. $310,000
5-16
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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On December 31, 2008, X Company acquired controlling ownership of Y Company. A
consolidated balance sheet was prepared immediately. Partial balance sheet data for the two
companies and the consolidated entity at that date follow:
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During 2008, X Company provided consulting services to Y Company and has not yet been
paid for them. There were no other receivables or payables between the companies at
December 31, 2008.
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39. Based on the information given, what is the amount of unpaid consulting services at
December 31, 2008, on work done by X Company for Y Company?
A. $0
B. $10,000
C. $5,000
D. $15,000
5-17
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40. Based on the information given, what balance in accounts receivable did Y Company
report at December 31, 2008?
A. $28,000
B. $48,000
C. $40,000
D. $38,000
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41. Based on the information given, X Company and Y Company reported wages payable of
A. $50,000 and $28,000 respectively.
B. $60,000 and $32,000 respectively.
C. $40,000 and $35,000 respectively.
D. $28,000 and $60,000 respectively.
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42. Based on the information given, what was the fair value of Y Company as a whole at the
date of acquisition?
A. $155,000
B. $110,000
C. $115,000
D. $135,000
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43. Based on the information given, what percentage of Y Company's shares were acquired by
X Company?
A. 100 percent
B. 60 percent
C. 80 percent
D. 75 percent
44. Based on the information given, what amount will be reported as total controlling interest
in the consolidated balance sheet?
A. $254,000
B. $285,000
C. $364,000
D. $395,000
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Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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45. On January 1, 2008, Zeta Company acquired 85 percent of Theta Company's common
stock for $100,000 cash. The fair value of the noncontrolling interest was determined to be 15
percent of the book value of Theta at that date. What portion of the retained earnings reported
in the consolidated balance sheet prepared immediately after the business combination is
assigned to the noncontrolling interest?
A. Nil
B. 15 percent
C. 100 percent
D. Cannot be determined
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Essay Questions
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46. On December 31, 2008, Defoe Corporation acquired 80 percent of Crusoe Company's
common stock for $104,000 cash. The fair value of the noncontrolling interest at that date was
determined to be $26,000. Data from the balance sheets of the two companies included the
following amounts as of the date of acquisition:
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On that date, the book values of Crusoe's assets and liabilities approximated fair value except
for inventory, which had a fair value of $45,000, and buildings and equipment, which had a
fair value of $100,000. At December 31, 2008, Defoe reported accounts payable of $15,000 to
Crusoe, which reported an equal amount in its accounts receivable.
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Required:
1) Provide the eliminating entries needed to prepare a consolidated balance sheet immediately
following the business combination.
2) Prepare a consolidated balance sheet workpaper.
3) Prepare a consolidated balance sheet in good form.
5-20
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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47. Magellan Corporation acquired 80 percent ownership of Dipper Corporation on January 1,
2008, for $200,000. At that date, Dipper reported common stock outstanding of $75,000 and
retained earnings of $150,000. The fair value of the noncontrolling interest was $50,000. The
differential is assigned to equipment, which had a fair value $25,000 greater than book value
and a remaining economic life of five years at the date of the business combination. Canton
reported net income of $40,000 and paid dividends of $20,000 in 2008.
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Required:
1) Provide the journal entries recorded by Magellan during 2008 on its books if it accounts for
its investment in Dipper using the equity method.
2) Give the eliminating entries needed at December 31, 2008, to prepare consolidated
financial statements.
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Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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48. On January 1, 2007, Plimsol Company acquired 100 percent of Shipping Corporation's
voting shares, at underlying book value. Plimsol uses the cost method in accounting for its
investment in Shipping. Shipping's reported retained earnings of $75,000 on the date of
acquisition. The trial balances for Plimsol Company and Shipping Corporation as of
December 31, 2008, follow:
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Required:
1) Provide all eliminating entries required to prepare a full set of consolidated statements for
2008.
2) Prepare a three-part consolidation workpaper in good form as of December 31, 2008.
5-22
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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49. On January 1, 2008, Gregory Corporation acquired 90 percent of Nova Company's voting
stock, at underlying book value. The fair value of the noncontrolling interest was equal to 10
percent of the book value of Nova at that date. Gregory uses the equity method in accounting
for its ownership of Nova. On December 31, 2008, the trial balances of the two companies are
as follows:
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Required:
1) Provide all eliminating entries required as of December 31, 2008, to prepare consolidated
financial statements.
2) Prepare a three-part consolidation workpaper.
3) Prepare a consolidated balance sheet, income statement, and retained earnings statement
for 2008.
5-23
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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50. On January 1, 2008, Gregory Corporation acquired 90 percent of Nova Company's voting
stock, at underlying book value. The fair value of the noncontrolling interest was equal to 10
percent of the book value of Nova at that date. Gregory uses the equity method in accounting
for its ownership of Nova. On December 31, 2009, the trial balances of the two companies are
as follows:
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Required:
1) Give all eliminating entries required on December 31, 2008, to prepare consolidated
financial statements.
2) Prepare a three-part consolidation workpaper as of December 31, 2008.
5-24
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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51. On January 1, 2008, Vector Company acquired 80 percent of Scalar Company's ownership
on for $120,000 cash. At that date, the fair value of the noncontrolling interest was $30,000.
The book value of Scalar's net assets at acquisition was $125,000. The book values and fair
values of Scalar's assets and liabilities were equal, except for buildings and equipment, which
were worth $15,000 more than book value. Buildings and equipment are depreciated on a 10year basis. Although goodwill is not amortized, the management of Vector concluded at
December 31, 2008, that goodwill from its acquisition of Scalar shares had been impaired and
the correct carrying amount was $5,000. Goodwill and goodwill impairment were assigned
proportionately to the controlling and noncontrolling shareholders. (Note that Vector
Company does not adjust its Income from Subsidiary for goodwill impairment under the basic
equity method.) No additional impairment occurred in 2009.
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Trial balance data for Vector and Scalar on December 31, 2009, are as follows:
Required:
5-25
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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1) Provide all eliminating entries needed to prepare a three-part consolidation workpaper as of
December 31, 2009.
2) Prepare a three-part consolidation workpaper for 2009 in good form.
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Chapter 05 Consolidation of Less-than-Wholly Owned Subsidiaries Answer Key
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Multiple Choice Questions
5-26
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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Bristle Corporation acquired 75 percent of Silver Corporation's common stock on December
31, 2008, for $300,000. The fair value of the noncontrolling interest at that date was
determined to be $100,000. Silver's balance sheet immediately before the combination
reflected the following balances:
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A careful review of the fair value of Silver's assets and liabilities indicated that inventory,
land, and buildings and equipment (net) had fair values of $65,000, $100,000, and, $300,000
respectively. Goodwill is assigned proportionately to Bristle and the noncontrolling
shareholders.
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1. Based on the preceding information, what amount of inventory will be included in the
consolidated balance sheet immediately following the acquisition?
A. $0
B. $65,000
C. $70,000
D. $60,000
AACSB: Analytic
AICPA: Measurement
5-27
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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2. Based on the preceding information, what amount of land will be included in the
consolidated balance sheet immediately following the acquisition?
A. $0
B. $10,000
C. $90,000
D. $100,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
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3. Based on the preceding information, what amount of buildings and equipment (net) will be
included in the consolidated balance sheet immediately following the acquisition?
A. $0
B. $50,000
C. $250,000
D. $300,000
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4. Based on the preceding information, what amount of goodwill will be reported in the
consolidated balance sheet immediately following the acquisition?
A. $0
B. $120,000
C. $65,000
D. $20,000
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AACSB: Analytic
AICPA: Measurement
5-28
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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5. Based on the preceding information, what amount will be reported as investment in Silver
Corporation stock in the consolidated balance sheet immediately following the acquisition?
A. $0
B. $210,000
C. $300,000
D. $400,000
AACSB: Analytic
AICPA: Measurement
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AACSB: Analytic
AICPA: Measurement
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6. Based on the preceding information, what amount will be reported as noncontrolling
interest in the consolidated balance sheet immediately following the acquisition?
A. $0
B. $70,000
C. $83,750
D. $100,000
5-29
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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On January 1, 2009, Gulliver Corporation acquired 80 percent of Sea-Gull Company's
common stock for $160,000 cash. The fair value of the noncontrolling interest at that date was
determined to be $40,000. Data from the balance sheets of the two companies included the
following amounts as of the date of acquisition:
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At the date of the business combination, the book values of Sea-Gull's net assets and liabilities
approximated fair value except for inventory, which had a fair value of $45,000, and land,
which had a fair value of $60,000.
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7. Based on the preceding information, what amount of total inventory will be reported in the
consolidated balance sheet prepared immediately after the business combination?
A. $130,000
B. $135,000
C. $90,000
D. $45,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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8. Based on the preceding information, what amount of goodwill will be reported in the
consolidated balance sheet prepared immediately after the business combination?
A. $0
B. $40,000
C. $20,000
D. $15,000
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9. Based on the preceding information, what amount of total assets will be reported in the
consolidated balance sheet prepared immediately after the business combination?
A. $720,000
B. $840,000
C. $825,000
D. $865,000
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AACSB: Analytic
AICPA: Measurement
5-31
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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10. Based on the preceding information, what amount of total liabilities will be reported in the
consolidated balance sheet prepared immediately after the business combination?
A. $395,000
B. $280,000
C. $265,000
D. $195,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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11. Based on the preceding information, what amount will be reported as noncontrolling
interest in the consolidated balance sheet prepared immediately after the business
combination?
A. $0
B. $15,000
C. $40,000
D. $46,000
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12. Based on the preceding information, what amount of consolidated retained earnings will
be reported?
A. $205,000
B. $120,000
C. $325,000
D. $310,000
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AACSB: Analytic
AICPA: Measurement
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13. Based on the preceding information, what amount will be reported as total stockholders'
equity in the consolidated balance sheet prepared immediately after the business
combination?
A. $445,000
B. $205,000
C. $565,000
D. $550,000
AACSB: Analytic
AICPA: Measurement
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On January 1, 2008, Ramon Corporation acquired 75 percent of Tester Company's voting
common stock for $300,000. At the time of the combination, Tester reported common stock
outstanding of $200,000 and retained earnings of $150,000, and the fair value of the
noncontrolling interest was $100,000. The book value of Tester's net assets approximated
market value except for patents that had a market value of $50,000 more than their book
value. The patents had a remaining economic life of ten years at the date of the business
combination. Tester reported net income of $40,000 and paid dividends of $10,000 during
2008.
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14. Based on the preceding information, what balance will Ramon report as its investment in
Tester at December 31, 2008, assuming Ramon uses the equity method in accounting for its
investment?
A. $318,750
B. $317,500
C. $330,000
D. $326,250
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AACSB: Analytic
AICPA: Measurement
5-33
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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AACSB: Analytic
AICPA: Measurement
C
A. Choice A
B. Choice B
C. Choice C
D. Choice D
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15. Based on the preceding information, all of the following are eliminating entries needed to
prepare a full set of consolidated financial statements at December 31, 2008, except:
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On January 1, 2008, Climber Corporation acquired 90 percent of Wisden Corporation for
$180,000 cash. Wisden reported net income of $30,000 and dividends of $10,000 for 2008,
2009, and 2010. On January 1, 2008, Wisden reported common stock outstanding of $100,000
and retained earnings of $60,000, and the fair value of the noncontrolling interest was
$20,000. It held land with a book value of $30,000 and a market value of $35,000 and
equipment with a book value of $50,000 and a market value of $60,000 at the date of
combination. The remainder of the differential at acquisition was attributable to an increase in
the value of patents, which had a remaining useful life of five years. All depreciable assets
held by Wisden at the date of acquisition had a remaining economic life of five years. Climber
uses the equity method in accounting for its investment in Wisden.
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16. Based on the preceding information, the increase in the fair value of patents held by
Wisden is:
A. $20,000
B. $25,000
C. $15,000
D. $5,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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17. Based on the preceding information, what balance would Climber report as its investment
in Wisden at January 1, 2010?
A. $230,400
B. $180,000
C. $234,000
D. $203,400
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18. Based on the preceding information, what balance would Climber report as its investment
in Wisden at January 1, 2011?
A. $251,100
B. $224,100
C. $215,100
D. $234,000
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AACSB: Analytic
AICPA: Measurement
5-35
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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On January 1, 2008, Wilhelm Corporation acquired 90 percent of Kaiser Company's voting
stock, at underlying book value. The fair value of the noncontrolling interest was equal to 10
percent of the book value of Kaiser at that date. Wilhelm uses the equity method in
accounting for its ownership of Kaiser. On December 31, 2009, the trial balances of the two
companies are as follows:
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19. Based on the preceding information, what amount would be reported as total assets in the
consolidated balance sheet at December 31, 2009?
A. $805,000
B. $712,000
C. $742,000
D. $1,102,000
AACSB: Analytic
AICPA: Measurement
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Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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20. Based on the preceding information, what amount would be reported as total liabilities in
the consolidated balance sheet at December 31, 2009?
A. $330,000
B. $712,000
C. $318,000
D. $130,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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21. Based on the preceding information, what amount would be reported as retained earnings
in the consolidated balance sheet prepared at December 31, 2009?
A. 314,000
B. 294,000
C. 150,000
D. 424,000
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22. Based on the preceding information, what amount would be reported as noncontrolling
interest in the consolidated balance sheet at December 31, 2009?
A. $27,000
B. $4,000
C. $15,000
D. $18,000
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AACSB: Analytic
AICPA: Measurement
5-37
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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23. Based on the preceding information, what amount would be reported as total stockholder's
equity in the consolidated balance sheet at December 31, 2009?
A. $412,000
B. $394,000
C. $542,000
D. $348,000
AACSB: Analytic
AICPA: Measurement
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AACSB: Analytic
AICPA: Measurement
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24. Based on the preceding information, what amount would be reported as income to
controlling interest in the consolidated financial statements for 2009?
A. $168,000
B. $138,000
C. $164,000
D. $150,000
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Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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On January 1, 2008, Bristol Company acquired 80 percent of Animation Company's common
stock for $280,000 cash. At that date, Animation reported common stock outstanding of
$200,000 and retained earnings of $100,000, and the fair value of the noncontrolling interest
was $70,000. The book values and fair values of Animation's assets and liabilities were equal,
except for other intangible assets which had a fair value $50,000 greater than book value and
an 8-year remaining life. Animation reported the following data for 2008 and 2009:
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Bristol reported net income of $100,000 and paid dividends of $30,000 for both the years.
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25. Based on the preceding information, what is the amount of consolidated comprehensive
income reported for 2008?
A. $125,000
B. $123,750
C. $118,750
D. $130,000
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AACSB: Analytic
AICPA: Measurement
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Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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26. Based on the preceding information, what is the amount of consolidated comprehensive
income reported for 2009?
A. $145,000
B. $135,000
C. $138,750
D. $128,750
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
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27. Based on the preceding information, what is the amount of comprehensive income
attributable to the controlling interest for 2008?
A. $123,750
B. $118,750
C. $119,000
D. $104,000
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28. Based on the preceding information, what is the amount of comprehensive income
attributable to the controlling interest for 2009?
A. $138,750
B. $131,000
C. $128,750
D. $135,000
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AACSB: Analytic
AICPA: Measurement
5-40
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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On January 1, 2008, Colorado Corporation acquired 75 percent of Denver Company's voting
common stock for $90,000 cash. At that date, the fair value of the noncontrolling interest was
$30,000. Denvers's balance sheet at the date of acquisition contained the following balances:
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At the date of acquisition, the reported book values of Denver's assets and liabilities
approximated fair value. Eliminating entries are being made to prepare a consolidated balance
sheet immediately following the business combination.
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29. Based on the preceding information, in the entry to eliminate the investment balance,
A. retained earnings will be credited for $20,000.
B. additional paid-in-capital will be credited for $20,000.
C. differential will be credited for $10,000.
D. noncontrolling interest will be debited for 30,000.
AACSB: Analytic
AICPA: Measurement
5-41
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
30. Based on the preceding information, the amount of goodwill reported is:
A. $0.
B. $10,000.
C. $15,000.
D. $20,000.
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AACSB: Analytic
AICPA: Measurement
PA
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On December 31, 2008, Melkor Corporation acquired 80 percent of Sydney Company's
common stock for $160,000. At that date, the fair value of the noncontrolling interest was
$40,000. Of the $75,000 differential, $10,000 related to the increased value of Sydney's
inventory, $20,000 related to the increased value of its land, and $25,000 related to the
increased value of its equipment that had a remaining life of 10 years from the date of
combination. Sydney sold all inventory it held at the end of 2008 during 2009. The land to
which the differential related was also sold during 2009 for a large gain. At the date of
combination, Sydney reported retained earnings of $75,000 and common stock outstanding of
$50,000. In 2009, Sydney reported net income of $60,000, but paid no dividends. Melkor
accounts for its investment in Sydney using the equity method.
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31. Based on the preceding information, the amount of goodwill reported in the consolidated
financial statements prepared immediately after the combination is:
A. $0
B. $32,500
C. $26,000
D. $20,000
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AACSB: Analytic
AICPA: Measurement
5-42
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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32. Based on the preceding information, what is the amount of write-off of differential
associated with this acquisition recorded by Melkor during 2009?
A. $0
B. $32,500
C. $26,000
D. $20,000
AACSB: Analytic
AICPA: Measurement
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A. Option A
B. Option B
C. Option C
D. Option D
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33. Based on the preceding information, what is the elimination entry made to assign income
to noncontrolling interest in the workpaper to prepare a full set of consolidated financial
statements for the year 2009?
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AACSB: Analytic
AICPA: Measurement
5-43
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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On January 1, 2004, Plimsol Company acquired 100 percent of Shipping Corporation's
voting shares, at underlying book value. Plimsol uses the cost method in accounting for its
investment in Shipping. Shipping's retained earnings was $75,000 on the date of acquisition.
On December 31, 2004, the trial balance data for the two companies are as follows:
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34. Based on the information provided, what amount of net income will be reported in the
consolidated financial statements prepared on December 31, 2004?
A. $100,000
B. $85,000
C. $110,000
D. $125,000
AACSB: Analytic
AICPA: Measurement
5-44
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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35. Based on the information provided, what amount of total assets will be reported in the
consolidated balance sheet prepared on December 31, 2004?
A. $425,000
B. $525,000
C. $650,000
D. $630,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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36. Based on the information provided, what amount of retained earnings will be reported in
the consolidated balance sheet prepared on December 31, 2004?
A. $235,000
B. $210,000
C. $310,000
D. $225,000
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37. Based on the information provided, what amount of total liabilities will be reported in the
consolidated balance sheet prepared on December 31, 2004?
A. $525,000
B. $115,000
C. $125,000
D. $190,000
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AACSB: Analytic
AICPA: Measurement
5-45
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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38. Based on the information provided, what amount of total stockholder's equity will be
reported in the consolidated balance sheet prepared on December 31, 2004?
A. $190,000
B. $335,000
C. $460,000
D. $310,000
AACSB: Analytic
AICPA: Measurement
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On December 31, 2008, X Company acquired controlling ownership of Y Company. A
consolidated balance sheet was prepared immediately. Partial balance sheet data for the two
companies and the consolidated entity at that date follow:
During 2008, X Company provided consulting services to Y Company and has not yet been
paid for them. There were no other receivables or payables between the companies at
December 31, 2008.
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Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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39. Based on the information given, what is the amount of unpaid consulting services at
December 31, 2008, on work done by X Company for Y Company?
A. $0
B. $10,000
C. $5,000
D. $15,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
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40. Based on the information given, what balance in accounts receivable did Y Company
report at December 31, 2008?
A. $28,000
B. $48,000
C. $40,000
D. $38,000
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41. Based on the information given, X Company and Y Company reported wages payable of
A. $50,000 and $28,000 respectively.
B. $60,000 and $32,000 respectively.
C. $40,000 and $35,000 respectively.
D. $28,000 and $60,000 respectively.
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AACSB: Analytic
AICPA: Measurement
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Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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42. Based on the information given, what was the fair value of Y Company as a whole at the
date of acquisition?
A. $155,000
B. $110,000
C. $115,000
D. $135,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
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43. Based on the information given, what percentage of Y Company's shares were acquired by
X Company?
A. 100 percent
B. 60 percent
C. 80 percent
D. 75 percent
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44. Based on the information given, what amount will be reported as total controlling interest
in the consolidated balance sheet?
A. $254,000
B. $285,000
C. $364,000
D. $395,000
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AACSB: Analytic
AICPA: Measurement
5-48
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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45. On January 1, 2008, Zeta Company acquired 85 percent of Theta Company's common
stock for $100,000 cash. The fair value of the noncontrolling interest was determined to be 15
percent of the book value of Theta at that date. What portion of the retained earnings reported
in the consolidated balance sheet prepared immediately after the business combination is
assigned to the noncontrolling interest?
A. Nil
B. 15 percent
C. 100 percent
D. Cannot be determined
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AACSB: Reflective Thinking
AICPA: Reporting
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Essay Questions
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Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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46. On December 31, 2008, Defoe Corporation acquired 80 percent of Crusoe Company's
common stock for $104,000 cash. The fair value of the noncontrolling interest at that date was
determined to be $26,000. Data from the balance sheets of the two companies included the
following amounts as of the date of acquisition:
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On that date, the book values of Crusoe's assets and liabilities approximated fair value except
for inventory, which had a fair value of $45,000, and buildings and equipment, which had a
fair value of $100,000. At December 31, 2008, Defoe reported accounts payable of $15,000 to
Crusoe, which reported an equal amount in its accounts receivable.
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Required:
1) Provide the eliminating entries needed to prepare a consolidated balance sheet immediately
following the business combination.
2) Prepare a consolidated balance sheet workpaper.
3) Prepare a consolidated balance sheet in good form.
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1)
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2)
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3)
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AICPA: Measurement
5-52
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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47. Magellan Corporation acquired 80 percent ownership of Dipper Corporation on January 1,
2008, for $200,000. At that date, Dipper reported common stock outstanding of $75,000 and
retained earnings of $150,000. The fair value of the noncontrolling interest was $50,000. The
differential is assigned to equipment, which had a fair value $25,000 greater than book value
and a remaining economic life of five years at the date of the business combination. Canton
reported net income of $40,000 and paid dividends of $20,000 in 2008.
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Required:
1) Provide the journal entries recorded by Magellan during 2008 on its books if it accounts for
its investment in Dipper using the equity method.
2) Give the eliminating entries needed at December 31, 2008, to prepare consolidated
financial statements.
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Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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1)
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2)
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AACSB: Analytic
AICPA: Measurement
5-55
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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48. On January 1, 2007, Plimsol Company acquired 100 percent of Shipping Corporation's
voting shares, at underlying book value. Plimsol uses the cost method in accounting for its
investment in Shipping. Shipping's reported retained earnings of $75,000 on the date of
acquisition. The trial balances for Plimsol Company and Shipping Corporation as of
December 31, 2008, follow:
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Required:
1) Provide all eliminating entries required to prepare a full set of consolidated statements for
2008.
2) Prepare a three-part consolidation workpaper in good form as of December 31, 2008.
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1)
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2)
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Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
AACSB: Analytic
AICPA: Measurement
5-58
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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49. On January 1, 2008, Gregory Corporation acquired 90 percent of Nova Company's voting
stock, at underlying book value. The fair value of the noncontrolling interest was equal to 10
percent of the book value of Nova at that date. Gregory uses the equity method in accounting
for its ownership of Nova. On December 31, 2008, the trial balances of the two companies are
as follows:
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Required:
1) Provide all eliminating entries required as of December 31, 2008, to prepare consolidated
financial statements.
2) Prepare a three-part consolidation workpaper.
3) Prepare a consolidated balance sheet, income statement, and retained earnings statement
for 2008.
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2)
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3)
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5-62
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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AACSB: Analytic
AICPA: Measurement
5-63
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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50. On January 1, 2008, Gregory Corporation acquired 90 percent of Nova Company's voting
stock, at underlying book value. The fair value of the noncontrolling interest was equal to 10
percent of the book value of Nova at that date. Gregory uses the equity method in accounting
for its ownership of Nova. On December 31, 2009, the trial balances of the two companies are
as follows:
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Required:
1) Give all eliminating entries required on December 31, 2008, to prepare consolidated
financial statements.
2) Prepare a three-part consolidation workpaper as of December 31, 2008.
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1)
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AACSB: Analytic
AICPA: Measurement
5-67
Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
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51. On January 1, 2008, Vector Company acquired 80 percent of Scalar Company's ownership
on for $120,000 cash. At that date, the fair value of the noncontrolling interest was $30,000.
The book value of Scalar's net assets at acquisition was $125,000. The book values and fair
values of Scalar's assets and liabilities were equal, except for buildings and equipment, which
were worth $15,000 more than book value. Buildings and equipment are depreciated on a 10year basis. Although goodwill is not amortized, the management of Vector concluded at
December 31, 2008, that goodwill from its acquisition of Scalar shares had been impaired and
the correct carrying amount was $5,000. Goodwill and goodwill impairment were assigned
proportionately to the controlling and noncontrolling shareholders. (Note that Vector
Company does not adjust its Income from Subsidiary for goodwill impairment under the basic
equity method.) No additional impairment occurred in 2009.
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Trial balance data for Vector and Scalar on December 31, 2009, are as follows:
Required:
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Chapter 05 - Consolidation of Less-than-Wholly Owned Subsidiaries
1) Provide all eliminating entries needed to prepare a three-part consolidation workpaper as of
December 31, 2009.
2) Prepare a three-part consolidation workpaper for 2009 in good form.
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1) Eliminating entries
2)
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AICPA: Measurement
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(contd.)
5-71
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
Chapter 06
Intercompany Transfers of Services and Noncurrent Assets
Multiple Choice Questions
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1. Blue Company owns 70 percent of Black Company's outstanding common stock. On
December 31, 2008, Black sold equipment to Blue at a price in excess of Black's carrying
amount, but less than its original cost. On a consolidated balance sheet at December 31, 2008,
the carrying amount of the equipment should be reported at:
A. Blue's original cost.
B. Black's original cost.
C. Blue's original cost less Black's recorded gain.
D. Blue's original cost less 70 percent of Black's recorded gain.
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2. A parent and its 80 percent owned subsidiary have made several intercompany sales of
noncurrent assets during the past two years. The amount of income assigned to the
noncontrolling interest for the second year should include the noncontrolling interest's share
of gains:
A. unrealized in the second year from upstream sales made in the second year.
B. realized in the second year from downstream sales made in both years.
C. realized in the second year from upstream sales made in both years.
D. both realized and unrealized from upstream sales made in the second year.
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3. A wholly owned subsidiary sold land to its parent during the year at a gain. The parent
continues to hold the land at the end of the year. The amount to be reported as consolidated
net income for the year should equal:
A. the parent's separate operating income, plus the subsidiary's net income.
B. the parent's separate operating income, plus the subsidiary's net income, minus the
intercompany gain.
C. the parent's separate operating income, plus the subsidiary's net income, plus the
intercompany gain.
D. the parent's net income, plus the subsidiary's net income, minus the intercompany gain.
6-1
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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Sky Corporation owns 75 percent of Earth Company's stock. On July 1, 2008, Sky sold a
building to Earth for $33,000. Sky had purchased this building on January 1, 2006, for
$36,000. The building's original eight-year estimated total economic life remains unchanged.
Both companies use straight-line depreciation. The equipment's residual value is considered
negligible.
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4. Based on the information provided, in the preparation of the 2008 consolidated financial
statements, building will be _____ in the eliminating entries.
A. debited for $33,000
B. debited for $36,000
C. credited for $36,000
D. debited for $3,000
C
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5. Based on the information provided, the gain on sale of the building eliminated in the
consolidated financial statements for 2008 is:
A. $8,250.
B. $10,500.
C. $6,000.
D. $11,250.
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6. Based on the information provided, while preparing the 2008 consolidated income
statement, depreciation expense will be:
A. debited for $750 in the eliminating entries.
B. credited for $750 in the eliminating entries.
C. credited for $1500 in the eliminating entries.
D. debited for $1500 in the eliminating entries.
7. Based on the information provided, in the preparation of the 2009 consolidated income
statement, depreciation expense will be:
A. debited for $750 in the eliminating entries.
B. credited for $750 the eliminating entries.
C. credited for $1500 in the eliminating entries.
D. debited for $1500 in the eliminating entries.
6-2
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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8. Based on the information provided, in the preparation of a consolidated balance sheet at
January 1, 2009, retained earnings will be:
A. debited for $6,750 in the eliminating entries.
B. credited for $6,750 in the eliminating entries.
C. credited for $7,500 in the eliminating entries.
D. debited for $7,500 in the eliminating entries.
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9. Phobos Company holds 80 percent of Deimos Company's voting shares. During the
preparation of consolidated financial statements for 2009, the following eliminating entry was
made:
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Which of the following statements is correct?
A. Phobos Company purchased land from Deimos Company during 2009.
B. Phobos Company purchased land from Deimos Company before January 1, 2009.
C. Deimos Company purchased land from Phobos Company during 2009.
D. Deimos Company purchased land from Phobos Company before January 1, 2009.
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ABC Corporation purchased land on January 1, 2006, for $50,000. On July 15, 2008, it sold
the land to its subsidiary, XYZ Corporation, for $70,000. ABC owns 80 percent of XYZ's
voting shares.
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Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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10. Based on the preceding information, what will be the workpaper eliminating entry to
remove the effects of the intercompany sale of land in preparing the consolidated financial
statements for 2008?
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A. Option A
B. Option B
C. Option C
D. Option D
6-4
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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A. Option A
B. Option B
C. Option C
D. Option D
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11. Based on the preceding information, what will be the workpaper eliminating entry to
remove the effects of the intercompany sale of land in preparing the consolidated financial
statements for 2009?
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Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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A. Option A
B. Option B
C. Option C
D. Option D
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12. Which workpaper eliminating entry will be made on December 31, 2009, if XYZ
Corporation had initially purchased the land for $50,000 and then sold it to ABC on July 15,
2008, for $70,000?
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Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on
January 1, 2007. On December 31, 2008, Mortar received $390,000 from Granite for a
equipment Mortar had purchased on January 1, 2005, for $400,000. The equipment is
expected to have a 10-year useful life and no salvage value. Both companies depreciate
equipments on a straight-line basis.
13. Based on the preceding information, in the preparation of the 2008 consolidated financial
statements, equipment will be:
A. debited for $1,000.
B. debited for $10,000.
C. credited for $15,000.
D. debited for $25,000.
6-6
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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14. Based on the preceding information, the gain on sale of the equipment recorded by Mortar
for 2008 is:
A. $150,000
B. $65,000
C. $110,000
D. $40,000
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15. Based on the preceding information, in the preparation of the 2009 consolidated financial
statements, equipment will be:
A. debited for $1,000.
B. debited for $10,000.
C. credited for $15,000.
D. debited for $25,000.
C
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16. Based on the preceding information, in the preparation of the 2009 consolidated income
statement, depreciation expense will be:
A. debited for $25,000 in the eliminating entries.
B. credited for $15,000 in the eliminating entries.
C. debited for $15,000 in the eliminating entries.
D. credited for $25,000 in the eliminating entries.
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17. Based on the preceding information, in the preparation of the 2009 consolidated balance
sheet, accumulated depreciation will be:
A. debited for $160,000 in the eliminating entries.
B. credited for $160,000 in the eliminating entries.
C. credited for $135,000 in the eliminating entries.
D. debited for $135,000 in the eliminating entries.
Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on
January 1, 2007. On January 1, 2008, Mortar received $350,000 from Granite for a equipment
Mortar had purchased on January 1, 2005, for $400,000. The equipment is expected to have a
10-year useful life and no salvage value. Both companies depreciate equipments on a straightline basis.
6-7
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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18. Based on the preceding information, in the preparation of the 2008 consolidated financial
statements, equipment will be:
A. debited for $50,000.
B. debited for $40,000.
C. credited for $70,000.
D. debited for $25,000.
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19. Based on the preceding information, the gain on sale of equipment recorded by Mortar for
2008 is:
A. $70,000.
B. $65,000.
C. $50,000.
D. $40,000.
C
PA
20. Based on the preceding information, in the preparation of the 2008 consolidated balance
sheet, accumulated depreciation will be:
A. debited for $50,000 in the eliminating entries.
B. credited for $110,000 in the eliminating entries.
C. credited for $120,000 in the eliminating entries.
D. debited for $160,000 in the eliminating entries.
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21. Based on the preceding information, in the preparation of the 2009 consolidated income
statement, depreciation expense will be:
A. Debited for $40,000 in the eliminating entries.
B. Credited for $10,000 in the eliminating entries.
C. Debited for $10,000 in the eliminating entries.
D. Credited for $40,000 in the eliminating entries.
22. Based on the preceding information, in the preparation of the 2009 consolidated balance
sheet, accumulated depreciation will be:
A. debited for $110,000 in the eliminating entries.
B. credited for $110,000 in the eliminating entries.
C. credited for $100,000 in the eliminating entries.
D. debited for $100,000 in the eliminating entries.
6-8
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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On January 1, 2007, Servant Company purchased a machine with an expected economic life
of five years. On January 1, 2009, Servant sold the machine to Master Corporation and
recorded the following entry:
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Master Corporation holds 75 percent of Servant's voting shares. Servant reported net income
of $50,000, and Master reported income from its own operations of $100,000 for 2009. There
is no change in the estimated economic life of the equipment as a result of the intercorporate
transfer.
C
PA
23. Based on the preceding information, in the preparation of the 2009 consolidated income
statement, depreciation expense will be:
A. Debited for $1,000 in the eliminating entries.
B. Credited for $1,000 in the eliminating entries.
C. Debited for $15,000 in the eliminating entries.
D. Credited for $15,000 in the eliminating entries.
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24. Based on the preceding information, in the preparation of the 2009 consolidated balance
sheet, machine will be:
A. debited for $1,000.
B. debited for $15,000.
C. credited for $45,000.
D. debited for $25,000.
6-9
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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25. Based on the preceding information, income assigned to the noncontrolling interest in the
2009 consolidated income statement will be:
A. $12,000.
B. $14,000.
C. $12,500.
D. $48,000.
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26. Based on the preceding information, consolidated net income for 2009 will be:
A. $150,000.
B. $100,000.
C. $148,000.
D. $130,000.
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C
PA
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27. On January 1, 2009, Light Corporation sold equipment for $400,000 to Star Corporation,
its wholly owned subsidiary. Light had paid $900,000 for this equipment, which had
accumulated depreciation of $170,000. Light estimated a $50,000 salvage value and
depreciated the tractor using the straight-line method over 10 years, a policy that Star
continued. In Light's December 31, 2009, consolidated balance sheet, this tractor should be
included in fixed-asset cost and accumulated depreciation as:
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A. Option A
B. Option B
C. Option C
D. Option D
6-10
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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Blue Corporation holds 70 percent of Black Company's voting common stock. On January 1,
2003, Black paid $500,000 to acquire a building with a 10-year expected economic life. Black
uses straight-line depreciation for all depreciable assets. On December 31, 2008, Blue
purchased the building from Black for $180,000. Blue reported income, excluding investment
income from Black, of $140,000 and $162,000 for 2008 and 2009, respectively. Black
reported net income of $30,000 and $45,000 for 2008 and 2009, respectively.
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28. Based on the preceding information, the amount to be reported as consolidated net income
for 2008 will be:
A. $190,000.
B. $170,000.
C. $175,000.
D. $150,000.
C
PA
29. Based on the preceding information, the amount of income assigned to the controlling
shareholders in the consolidated income statement for 2008 will be:
A. $190,000.
B. $170,000.
C. $175,000.
D. $150,000.
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30. Based on the preceding information, the amount to be reported as consolidated net income
for 2009 will be:
A. $207,000.
B. $202,000.
C. $212,000.
D. $190,000.
31. Based on the preceding information, the amount of income assigned to the controlling
shareholders in the consolidated income statement for 2009 will be:
A. $207,000.
B. $202,000.
C. $212,000.
D. $190,000.
6-11
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
32. Which of the following are examples of intercompany balances and transactions that must
be eliminated in preparing consolidated financial statements?
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I. Security holdings
II. Interest and dividends
III. Sales and purchases
A. I, II
B. I, III
C. I, II, III
D. II
PA
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Parent Corporation purchased land from S1 Corporation for $220,000 on December 26, 2008.
This purchase followed a series of transactions between P-controlled subsidiaries. On
February 15, 2008, S3 Corporation purchased the land from a nonaffiliate for $160,000. It
sold the land to S2 Company for $145,000 on October 19, 2008, and S2 sold the land to S1
for $197,000 on November 27, 2008. Parent has control of the following companies:
C
Parent reported income from its separate operations of $200,000 for 2008.
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33. Based on the preceding information, at what amount should the land be reported in the
consolidated balance sheet as of December 31, 2008?
A. $145,000
B. $220,000
C. $197,000
D. $160,000
6-12
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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34. Based on the preceding information, what amount of gain or loss on sale of land should be
reported in the consolidated income statement for 2008?
A. $60,000
B. $0
C. $75,000
D. $23,000
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35. Based on the preceding information, what should be the amount of income assigned to the
controlling shareholders in the consolidated income statement for 2008?
A. $369,400
B. $405,000
C. $465,000
D. $60,000
C
PA
Big Corporation receives management consulting services from its 92 percent owned
subsidiary, Small Inc. During 2007, Big paid Small $125,432 for its services. For the year
2008, Small billed Big $140,000 for such services and collected all but $7,900 by year-end.
Small's labor cost and other associated costs for the employees providing services to Big
totaled $86,000 in 2007 and $121,000 in 2008. Big reported $2,567,000 of income from its
own separate operations for 2008, and Small reported net income of $695,000.
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36. Based on the preceding information, what amount of consolidated net income should be
reported in 2008?
A. $3,262,000
B. $4,050,000
C. $3,254,100
D. $3,122,000
37. Based on the preceding information, what amount of income should be assigned to the
noncontrolling shareholders in the consolidated income statement for 2008?
A. $47,700
B. $44,400
C. $55,600
D. $60,000
6-13
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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38. Based on the preceding information, what amount of receivable/payable should be
eliminated in the 2008 consolidated financial statements?
A. $125,432
B. $7,900
C. $5,560
D. $140,000
PA
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39. A parent sold land to its partially owned subsidiary during the year at a loss. The
subsidiary continues to hold the land at the end of the year. The amount to be reported as
consolidated net income for the year should equal:
A. the parent's separate operating income, plus the intercompany loss.
B. the parent's separate operating income, plus the intercompany loss, plus the subsidiary's net
income.
C. the parent's separate operating income, minus the intercompany loss.
D. the parent's separate operating income, minus the intercompany loss, plus the subsidiary's
net income.
40. Any intercompany gain or loss on a downstream sale of land should be recognized in
consolidated net income:
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C
I. in the year of the downstream sale.
II. over the period of time the subsidiary uses the land.
III. in the year the subsidiary sells the land to an unrelated party.
A. I
B. II
C. III
D. I or II
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Essay Questions
6-14
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
PA
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41. Fred Corporation owns 75 percent of Winner Company's voting shares, acquired on
March 21, 2005, at book value. At that date, the fair value of the noncontrolling interest was
equal to 25 percent of the book value of Winner Company. The companies' permanent
accounts on December 31, 2008, contained the following balances:
C
On January 1, 2004, Fred paid $150,000 for equipment with a 10-year expected total
economic life. The equipment was depreciated on a straight-line basis with no residual value.
Winner purchased the equipment from Fred on December 31, 2006, for $140,000. Winner
sold land it had purchased for $75,000 on February 18, 2004, to Fred for $60,000 on October
10, 2007.
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Required: Prepare a consolidated balance sheet workpaper in good form as of December 31,
2008.
6-15
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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42. New Company acquired 75 percent of Old Company's stock at underlying book value on
January 1, 2008. At that date, the fair value of the noncontrolling interest was equal to 25
percent of the book value of Old Company. Old Company reported shares outstanding of
$350,000 and retained earnings of $100,000. During 2008, Old Company reported net income
of $60,000 and paid dividends of $3,000. In 2009, Old Company reported net income of
$90,000 and paid dividends of $15,000. The following transactions occurred between New
Company and Old Company in 2008 and 2009:
Old Co. sold computer equipment to New Co. for a $42,000 profit on December 26, 2008.
The equipment had a five-year estimated economic life remaining at the time of intercompany
transfer and is depreciated on a straight-line basis.
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New sold land costing $90,000 to Old Company on June 28, 2009, for $110,000.
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C
PA
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Required:
1) Give all eliminating entries needed to prepare a consolidation workpaper for 2009
assuming that New Co. uses the fully adjusted equity method to account for its investment in
Old Company.
2) Give all eliminating entries needed to prepare a consolidation workpaper for 2009
assuming that New Co. uses the cost method to account for its investment in Old Company.
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43. Peter Architectural Services owns 100 percent of Smith Manufacturing. During the course
of 2008 Peter provides $100,000 of architectural services associated with Smith's new
manufacturing facility, which will open January 4, 2009, and has a 5 year useful life. Explain
the impact providing this service has on Peter Architectural Services' 2008 and 2009
consolidated financial statements.
6-16
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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44. PeopleMag sells a plot of land for $100,000 to Seven Star Company, its 100 percent
owned subsidiary, on January 1, 2008. The cost of the land was $75,000, when it was
purchased in 2007. In 2010, Seven Star sells the land to Hot Properties Inc., an unrelated
entity, for $120,000. How is the land reported in the consolidated financial statements for
2008, 2009 and 2010?
Multiple Choice Questions
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Chapter 06 Intercompany Transfers of Services and Noncurrent Assets Answer
Key
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1. Blue Company owns 70 percent of Black Company's outstanding common stock. On
December 31, 2008, Black sold equipment to Blue at a price in excess of Black's carrying
amount, but less than its original cost. On a consolidated balance sheet at December 31, 2008,
the carrying amount of the equipment should be reported at:
A. Blue's original cost.
B. Black's original cost.
C. Blue's original cost less Black's recorded gain.
D. Blue's original cost less 70 percent of Black's recorded gain.
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AACSB: Analytic
AICPA: Reporting
6-17
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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2. A parent and its 80 percent owned subsidiary have made several intercompany sales of
noncurrent assets during the past two years. The amount of income assigned to the
noncontrolling interest for the second year should include the noncontrolling interest's share
of gains:
A. unrealized in the second year from upstream sales made in the second year.
B. realized in the second year from downstream sales made in both years.
C. realized in the second year from upstream sales made in both years.
D. both realized and unrealized from upstream sales made in the second year.
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AACSB: Analytic
AICPA: Reporting
C
AACSB: Analytic
AICPA: Decision Making
PA
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3. A wholly owned subsidiary sold land to its parent during the year at a gain. The parent
continues to hold the land at the end of the year. The amount to be reported as consolidated
net income for the year should equal:
A. the parent's separate operating income, plus the subsidiary's net income.
B. the parent's separate operating income, plus the subsidiary's net income, minus the
intercompany gain.
C. the parent's separate operating income, plus the subsidiary's net income, plus the
intercompany gain.
D. the parent's net income, plus the subsidiary's net income, minus the intercompany gain.
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Sky Corporation owns 75 percent of Earth Company's stock. On July 1, 2008, Sky sold a
building to Earth for $33,000. Sky had purchased this building on January 1, 2006, for
$36,000. The building's original eight-year estimated total economic life remains unchanged.
Both companies use straight-line depreciation. The equipment's residual value is considered
negligible.
6-18
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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4. Based on the information provided, in the preparation of the 2008 consolidated financial
statements, building will be _____ in the eliminating entries.
A. debited for $33,000
B. debited for $36,000
C. credited for $36,000
D. debited for $3,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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5. Based on the information provided, the gain on sale of the building eliminated in the
consolidated financial statements for 2008 is:
A. $8,250.
B. $10,500.
C. $6,000.
D. $11,250.
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C
6. Based on the information provided, while preparing the 2008 consolidated income
statement, depreciation expense will be:
A. debited for $750 in the eliminating entries.
B. credited for $750 in the eliminating entries.
C. credited for $1500 in the eliminating entries.
D. debited for $1500 in the eliminating entries.
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AACSB: Analytic
AICPA: Measurement
6-19
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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7. Based on the information provided, in the preparation of the 2009 consolidated income
statement, depreciation expense will be:
A. debited for $750 in the eliminating entries.
B. credited for $750 the eliminating entries.
C. credited for $1500 in the eliminating entries.
D. debited for $1500 in the eliminating entries.
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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8. Based on the information provided, in the preparation of a consolidated balance sheet at
January 1, 2009, retained earnings will be:
A. debited for $6,750 in the eliminating entries.
B. credited for $6,750 in the eliminating entries.
C. credited for $7,500 in the eliminating entries.
D. debited for $7,500 in the eliminating entries.
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C
9. Phobos Company holds 80 percent of Deimos Company's voting shares. During the
preparation of consolidated financial statements for 2009, the following eliminating entry was
made:
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Which of the following statements is correct?
A. Phobos Company purchased land from Deimos Company during 2009.
B. Phobos Company purchased land from Deimos Company before January 1, 2009.
C. Deimos Company purchased land from Phobos Company during 2009.
D. Deimos Company purchased land from Phobos Company before January 1, 2009.
AACSB: Analytic
AICPA: Measurement
6-20
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
ABC Corporation purchased land on January 1, 2006, for $50,000. On July 15, 2008, it sold
the land to its subsidiary, XYZ Corporation, for $70,000. ABC owns 80 percent of XYZ's
voting shares.
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AACSB: Analytic
AICPA: Measurement
C
A. Option A
B. Option B
C. Option C
D. Option D
PA
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10. Based on the preceding information, what will be the workpaper eliminating entry to
remove the effects of the intercompany sale of land in preparing the consolidated financial
statements for 2008?
6-21
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
PA
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AACSB: Analytic
AICPA: Measurement
C
A. Option A
B. Option B
C. Option C
D. Option D
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11. Based on the preceding information, what will be the workpaper eliminating entry to
remove the effects of the intercompany sale of land in preparing the consolidated financial
statements for 2009?
6-22
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
PA
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AACSB: Analytic
AICPA: Measurement
C
A. Option A
B. Option B
C. Option C
D. Option D
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12. Which workpaper eliminating entry will be made on December 31, 2009, if XYZ
Corporation had initially purchased the land for $50,000 and then sold it to ABC on July 15,
2008, for $70,000?
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Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on
January 1, 2007. On December 31, 2008, Mortar received $390,000 from Granite for a
equipment Mortar had purchased on January 1, 2005, for $400,000. The equipment is
expected to have a 10-year useful life and no salvage value. Both companies depreciate
equipments on a straight-line basis.
6-23
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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13. Based on the preceding information, in the preparation of the 2008 consolidated financial
statements, equipment will be:
A. debited for $1,000.
B. debited for $10,000.
C. credited for $15,000.
D. debited for $25,000.
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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14. Based on the preceding information, the gain on sale of the equipment recorded by Mortar
for 2008 is:
A. $150,000
B. $65,000
C. $110,000
D. $40,000
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C
15. Based on the preceding information, in the preparation of the 2009 consolidated financial
statements, equipment will be:
A. debited for $1,000.
B. debited for $10,000.
C. credited for $15,000.
D. debited for $25,000.
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AACSB: Analytic
AICPA: Measurement
6-24
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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16. Based on the preceding information, in the preparation of the 2009 consolidated income
statement, depreciation expense will be:
A. debited for $25,000 in the eliminating entries.
B. credited for $15,000 in the eliminating entries.
C. debited for $15,000 in the eliminating entries.
D. credited for $25,000 in the eliminating entries.
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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17. Based on the preceding information, in the preparation of the 2009 consolidated balance
sheet, accumulated depreciation will be:
A. debited for $160,000 in the eliminating entries.
B. credited for $160,000 in the eliminating entries.
C. credited for $135,000 in the eliminating entries.
D. debited for $135,000 in the eliminating entries.
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C
Mortar Corporation acquired 80 percent of Granite Corporation's voting common stock on
January 1, 2007. On January 1, 2008, Mortar received $350,000 from Granite for a equipment
Mortar had purchased on January 1, 2005, for $400,000. The equipment is expected to have a
10-year useful life and no salvage value. Both companies depreciate equipments on a straightline basis.
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18. Based on the preceding information, in the preparation of the 2008 consolidated financial
statements, equipment will be:
A. debited for $50,000.
B. debited for $40,000.
C. credited for $70,000.
D. debited for $25,000.
AACSB: Analytic
AICPA: Measurement
6-25
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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19. Based on the preceding information, the gain on sale of equipment recorded by Mortar for
2008 is:
A. $70,000.
B. $65,000.
C. $50,000.
D. $40,000.
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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20. Based on the preceding information, in the preparation of the 2008 consolidated balance
sheet, accumulated depreciation will be:
A. debited for $50,000 in the eliminating entries.
B. credited for $110,000 in the eliminating entries.
C. credited for $120,000 in the eliminating entries.
D. debited for $160,000 in the eliminating entries.
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C
21. Based on the preceding information, in the preparation of the 2009 consolidated income
statement, depreciation expense will be:
A. Debited for $40,000 in the eliminating entries.
B. Credited for $10,000 in the eliminating entries.
C. Debited for $10,000 in the eliminating entries.
D. Credited for $40,000 in the eliminating entries.
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AACSB: Analytic
AICPA: Measurement
6-26
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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22. Based on the preceding information, in the preparation of the 2009 consolidated balance
sheet, accumulated depreciation will be:
A. debited for $110,000 in the eliminating entries.
B. credited for $110,000 in the eliminating entries.
C. credited for $100,000 in the eliminating entries.
D. debited for $100,000 in the eliminating entries.
AACSB: Analytic
AICPA: Measurement
PA
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On January 1, 2007, Servant Company purchased a machine with an expected economic life
of five years. On January 1, 2009, Servant sold the machine to Master Corporation and
recorded the following entry:
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C
Master Corporation holds 75 percent of Servant's voting shares. Servant reported net income
of $50,000, and Master reported income from its own operations of $100,000 for 2009. There
is no change in the estimated economic life of the equipment as a result of the intercorporate
transfer.
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23. Based on the preceding information, in the preparation of the 2009 consolidated income
statement, depreciation expense will be:
A. Debited for $1,000 in the eliminating entries.
B. Credited for $1,000 in the eliminating entries.
C. Debited for $15,000 in the eliminating entries.
D. Credited for $15,000 in the eliminating entries.
AACSB: Analytic
AICPA: Measurement
6-27
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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24. Based on the preceding information, in the preparation of the 2009 consolidated balance
sheet, machine will be:
A. debited for $1,000.
B. debited for $15,000.
C. credited for $45,000.
D. debited for $25,000.
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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25. Based on the preceding information, income assigned to the noncontrolling interest in the
2009 consolidated income statement will be:
A. $12,000.
B. $14,000.
C. $12,500.
D. $48,000.
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C
26. Based on the preceding information, consolidated net income for 2009 will be:
A. $150,000.
B. $100,000.
C. $148,000.
D. $130,000.
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AACSB: Analytic
AICPA: Measurement
6-28
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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27. On January 1, 2009, Light Corporation sold equipment for $400,000 to Star Corporation,
its wholly owned subsidiary. Light had paid $900,000 for this equipment, which had
accumulated depreciation of $170,000. Light estimated a $50,000 salvage value and
depreciated the tractor using the straight-line method over 10 years, a policy that Star
continued. In Light's December 31, 2009, consolidated balance sheet, this tractor should be
included in fixed-asset cost and accumulated depreciation as:
PA
AACSB: Analytic
AICPA: Measurement
R
A. Option A
B. Option B
C. Option C
D. Option D
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C
Blue Corporation holds 70 percent of Black Company's voting common stock. On January 1,
2003, Black paid $500,000 to acquire a building with a 10-year expected economic life. Black
uses straight-line depreciation for all depreciable assets. On December 31, 2008, Blue
purchased the building from Black for $180,000. Blue reported income, excluding investment
income from Black, of $140,000 and $162,000 for 2008 and 2009, respectively. Black
reported net income of $30,000 and $45,000 for 2008 and 2009, respectively.
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28. Based on the preceding information, the amount to be reported as consolidated net income
for 2008 will be:
A. $190,000.
B. $170,000.
C. $175,000.
D. $150,000.
AACSB: Analytic
AICPA: Measurement
6-29
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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29. Based on the preceding information, the amount of income assigned to the controlling
shareholders in the consolidated income statement for 2008 will be:
A. $190,000.
B. $170,000.
C. $175,000.
D. $150,000.
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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30. Based on the preceding information, the amount to be reported as consolidated net income
for 2009 will be:
A. $207,000.
B. $202,000.
C. $212,000.
D. $190,000.
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C
31. Based on the preceding information, the amount of income assigned to the controlling
shareholders in the consolidated income statement for 2009 will be:
A. $207,000.
B. $202,000.
C. $212,000.
D. $190,000.
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AACSB: Analytic
AICPA: Measurement
6-30
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
32. Which of the following are examples of intercompany balances and transactions that must
be eliminated in preparing consolidated financial statements?
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I. Security holdings
II. Interest and dividends
III. Sales and purchases
A. I, II
B. I, III
C. I, II, III
D. II
ev
AACSB: Analytic
AICPA: Reporting
C
PA
R
Parent Corporation purchased land from S1 Corporation for $220,000 on December 26, 2008.
This purchase followed a series of transactions between P-controlled subsidiaries. On
February 15, 2008, S3 Corporation purchased the land from a nonaffiliate for $160,000. It
sold the land to S2 Company for $145,000 on October 19, 2008, and S2 sold the land to S1
for $197,000 on November 27, 2008. Parent has control of the following companies:
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Parent reported income from its separate operations of $200,000 for 2008.
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33. Based on the preceding information, at what amount should the land be reported in the
consolidated balance sheet as of December 31, 2008?
A. $145,000
B. $220,000
C. $197,000
D. $160,000
AACSB: Analytic
AICPA: Measurement
6-31
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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34. Based on the preceding information, what amount of gain or loss on sale of land should be
reported in the consolidated income statement for 2008?
A. $60,000
B. $0
C. $75,000
D. $23,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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35. Based on the preceding information, what should be the amount of income assigned to the
controlling shareholders in the consolidated income statement for 2008?
A. $369,400
B. $405,000
C. $465,000
D. $60,000
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Big Corporation receives management consulting services from its 92 percent owned
subsidiary, Small Inc. During 2007, Big paid Small $125,432 for its services. For the year
2008, Small billed Big $140,000 for such services and collected all but $7,900 by year-end.
Small's labor cost and other associated costs for the employees providing services to Big
totaled $86,000 in 2007 and $121,000 in 2008. Big reported $2,567,000 of income from its
own separate operations for 2008, and Small reported net income of $695,000.
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36. Based on the preceding information, what amount of consolidated net income should be
reported in 2008?
A. $3,262,000
B. $4,050,000
C. $3,254,100
D. $3,122,000
AACSB: Analytic
AICPA: Measurement
6-32
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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37. Based on the preceding information, what amount of income should be assigned to the
noncontrolling shareholders in the consolidated income statement for 2008?
A. $47,700
B. $44,400
C. $55,600
D. $60,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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38. Based on the preceding information, what amount of receivable/payable should be
eliminated in the 2008 consolidated financial statements?
A. $125,432
B. $7,900
C. $5,560
D. $140,000
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39. A parent sold land to its partially owned subsidiary during the year at a loss. The
subsidiary continues to hold the land at the end of the year. The amount to be reported as
consolidated net income for the year should equal:
A. the parent's separate operating income, plus the intercompany loss.
B. the parent's separate operating income, plus the intercompany loss, plus the subsidiary's net
income.
C. the parent's separate operating income, minus the intercompany loss.
D. the parent's separate operating income, minus the intercompany loss, plus the subsidiary's
net income.
AACSB: Analytic
AICPA: Reporting
6-33
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
40. Any intercompany gain or loss on a downstream sale of land should be recognized in
consolidated net income:
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I. in the year of the downstream sale.
II. over the period of time the subsidiary uses the land.
III. in the year the subsidiary sells the land to an unrelated party.
A. I
B. II
C. III
D. I or II
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AACSB: Analytic
AICPA: Reporting
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Essay Questions
6-34
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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41. Fred Corporation owns 75 percent of Winner Company's voting shares, acquired on
March 21, 2005, at book value. At that date, the fair value of the noncontrolling interest was
equal to 25 percent of the book value of Winner Company. The companies' permanent
accounts on December 31, 2008, contained the following balances:
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On January 1, 2004, Fred paid $150,000 for equipment with a 10-year expected total
economic life. The equipment was depreciated on a straight-line basis with no residual value.
Winner purchased the equipment from Fred on December 31, 2006, for $140,000. Winner
sold land it had purchased for $75,000 on February 18, 2004, to Fred for $60,000 on October
10, 2007.
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Required: Prepare a consolidated balance sheet workpaper in good form as of December 31,
2008.
6-35
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Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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Eliminating entries:
6-36
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Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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AACSB: Analytic
AICPA: Measurement
6-37
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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42. New Company acquired 75 percent of Old Company's stock at underlying book value on
January 1, 2008. At that date, the fair value of the noncontrolling interest was equal to 25
percent of the book value of Old Company. Old Company reported shares outstanding of
$350,000 and retained earnings of $100,000. During 2008, Old Company reported net income
of $60,000 and paid dividends of $3,000. In 2009, Old Company reported net income of
$90,000 and paid dividends of $15,000. The following transactions occurred between New
Company and Old Company in 2008 and 2009:
Old Co. sold computer equipment to New Co. for a $42,000 profit on December 26, 2008.
The equipment had a five-year estimated economic life remaining at the time of intercompany
transfer and is depreciated on a straight-line basis.
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New sold land costing $90,000 to Old Company on June 28, 2009, for $110,000.
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Required:
1) Give all eliminating entries needed to prepare a consolidation workpaper for 2009
assuming that New Co. uses the fully adjusted equity method to account for its investment in
Old Company.
2) Give all eliminating entries needed to prepare a consolidation workpaper for 2009
assuming that New Co. uses the cost method to account for its investment in Old Company.
6-38
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
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1) Fully Adjusted Equity Method Eliminating Entries, December 31, 2009:
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2) Cost Method Eliminating Entries, December 31, 2009:
6-39
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Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
AACSB: Analytic
AICPA: Measurement
6-40
Chapter 06 - Intercompany Transfers of Services and Noncurrent Assets
43. Peter Architectural Services owns 100 percent of Smith Manufacturing. During the course
of 2008 Peter provides $100,000 of architectural services associated with Smith's new
manufacturing facility, which will open January 4, 2009, and has a 5 year useful life. Explain
the impact providing this service has on Peter Architectural Services' 2008 and 2009
consolidated financial statements.
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Peter has provided a service to the subsidiary Smith. During 2008 the cost of the architectural
services will be capitalized by Smith as part of the cost of the manufacturing facility. The
profit earned on the consulting services must be eliminated in 2008 against the cost of the
building. In this manner consolidated net income is not overstated.
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Beginning in 2009 the intercompany profit would be realized over a 5 year period. In each of
the years, depreciation expense is decreased and consolidated net income is increased; as
income to the controlling interests.
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AACSB: Communication
AICPA: Decision Making
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PA
44. PeopleMag sells a plot of land for $100,000 to Seven Star Company, its 100 percent
owned subsidiary, on January 1, 2008. The cost of the land was $75,000, when it was
purchased in 2007. In 2010, Seven Star sells the land to Hot Properties Inc., an unrelated
entity, for $120,000. How is the land reported in the consolidated financial statements for
2008, 2009 and 2010?
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PeopleMag cannot report a gain on the sale of land for 2008 or 2009 in the consolidated
financial statements. The land must be reported on the consolidated balance sheet at its
original cost of $75,000. The intercompany gain is unrealized and is eliminated. In 2010, the
entire gain of $45,000 ($120,000 - $75,000) is realized and recognized when the land is sold
to an outside party.
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AACSB: Communication
AICPA: Reporting
6-41
Chapter 07 - Intercompany Inventory Transactions
Chapter 07
Intercompany Inventory Transactions
Multiple Choice Questions
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1. When there are intercompany sales of inventory during the year and a three-part
consolidation workpaper is prepared, elimination entries related to the intercompany sales:
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I. Always are needed.
II. Are not needed if all the inventory is resold to unrelated parties prior to the end of the
year.
A. I
B. II
C. Both I and II
D. Either I or II
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PA
Earth Company owns 100 percent of the capital stock of both Mars Corporation and Venus
Corporation. Mars purchases merchandise inventory from Venus at 125 percent of Venus's
cost. During 2008, Venus sold inventory to Mars that it had purchased for $25,000. Mars sold
all of this merchandise to unrelated customers for $56,892 during 2008. In preparing
combined financial statements for 2008, Earth's bookkeeper disregarded the common
ownership of Mars and Venus.
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2. Based on the information given above, what amount should be eliminated from cost of
goods sold in the combined income statement for 2008?
A. $31,250
B. $25,000
C. $56,892
D. $6,250
3. Based on the information given above, by what amount was unadjusted revenue overstated
in the combined income statement for 2008?
A. $25,000
B. $56,892
C. $31,250
D. $6,250
7-1
Chapter 07 - Intercompany Inventory Transactions
4. Global Corporation acquired 85 percent of Local Company's voting shares of stock in 2007.
During 2008, Global purchased 50,000 picture tubes for $15 each and sold 28,000 of them to
Local for $20 each. Local sold all of the units to unrelated entities prior to December 31,
2008, for $30 each. Both companies use perpetual inventory systems.
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A. Option A
B. Option B
C. Option C
D. Option D
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Which workpaper eliminating entry is needed in preparing consolidated financial statements
for 2008 to remove all effects of the intercompany sale?
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5. When a parent and its subsidiary use a periodic inventory system rather than a perpetual
system, the income and asset balances reported in the consolidated financial statements are:
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I. affected only if there are upstream intercompany sales of inventory.
II. affected only if there are downstream intercompany sales of inventory.
A. I
B. II
C. Both I and II
D. Neither I nor II
7-2
Chapter 07 - Intercompany Inventory Transactions
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On January 1, 2008, Parent Company acquired 90 percent ownership of Subsidiary
Corporation, at underlying book value. The fair value of the noncontrolling interest at the date
of acquisition was equal to 10 percent of the book value of Subsidiary Corporation. On Mar
17, 2008, Subsidiary purchased inventory from Parent for $90,000. Subsidiary sold the entire
inventory to an unaffiliated company for $120,000 on November 21, 2008. Parent had
produced the inventory sold to Subsidiary for $62,000. The companies had no other
transactions during 2008.
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6. Based on the information given above, what amount of sales will be reported in the 2008
consolidated income statement?
A. $62,000
B. $120,000
C. $90,000
D. $58,000
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PA
7. Based on the information given above, what amount of cost of goods sold will be reported
in the 2008 consolidated income statement?
A. $62,000
B. $120,000
C. $90,000
D. $58,000
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8. Based on the information given above, what amount of consolidated net income will be
assigned to the controlling shareholders for 2008?
A. $58,000
B. $59,000
C. $55,000
D. $52,200
7-3
Chapter 07 - Intercompany Inventory Transactions
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Pilfer Company acquired 90 percent ownership of Scrooge Corporation in 2007, at
underlying book value. On that date, the fair value of noncontrolling interest was equal to 10
percent of the book value of Scrooge Corporation. Pilfer purchased inventory from Scrooge
for $90,000 on August 20, 2008, and resold 70 percent of the inventory to unaffiliated
companies on December 1, 2008, for $100,000. Scrooge produced the inventory sold to Pilfer
for $67,000. The companies had no other transactions during 2008.
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9. Based on the information given above, what amount of sales will be reported in the 2008
consolidated income statement?
A. $90,000
B. $120,000
C. $100,000
D. $67,000
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PA
10. Based on the information given above, what amount of cost of goods sold will be reported
in the 2008 consolidated income statement?
A. $60,900
B. $90,000
C. $46,900
D. $67,000
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11. Based on the information given above, what amount of consolidated net income will be
assigned to the controlling interest for 2008?
A. $51,490
B. $53,100
C. $37,000
D. $20,100
12. Based on the information given above, what inventory balance will be reported by the
consolidated entity on December 31, 2008?
A. $51,490
B. $53,100
C. $37,000
D. $20,100
7-4
Chapter 07 - Intercompany Inventory Transactions
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13. Senior Inc. owns 85 percent of Junior Inc. During 2008, Senior sold goods with a 25
percent gross profit to Junior. Junior sold all of these goods in 2008. How should 2008
consolidated income statement items be adjusted?
A. No adjustment is necessary.
B. Sales and cost of goods sold should be reduced by 85 percent of the intercompany sales.
C. Net income should be reduced by 85 percent of the gross profit on intercompany sales.
D. Sales and cost of goods sold should be reduced by the intercompany sales.
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Parent Corporation owns 90 percent of Subsidiary 1 Company's stock and 75 percent of
Subsidiary 2 Company's stock. During 2008, Parent sold inventory purchased in 2007 for
$48,000 to Subsidiary 1 for $60,000. Subsidiary 1 then sold the inventory at its cost of
$60,000 to Subsidiary 2. Prior to December 31, 2008, Subsidiary 2 sold $45,000 of inventory
to a nonaffiliate for $67,000 and held $15,000 in inventory at December 31, 2008.
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PA
14. Based on the information given above, what amount should be reported in the 2008
consolidated income statement as cost of goods sold?
A. $36,000
B. $12,000
C. $48,000
D. $45,000
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15. Based on the information given above, what amount should be reported in the December
31, 2008, consolidated balance sheet as inventory?
A. $36,000
B. $12,000
C. $15,000
D. $28,000
16. Based on the information given above, what amount of cost of goods sold must be
eliminated from the consolidated income statement for 2008?
A. $117,000
B. $120,000
C. $150,000
D. $128,000
7-5
Chapter 07 - Intercompany Inventory Transactions
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17. Based on the information given above, what amount of sales must be eliminated from the
consolidated income statement for 2008?
A. $117,000
B. $120,000
C. $150,000
D. $128,000
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18. Based on the information given above, what amount of inventory must be eliminated from
the consolidated balance sheet for 2008?
A. $2,400
B. $9,000
C. $12,000
D. $3,000
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PA
Sub Company sells all its output at 20 percent above cost to Par Corporation. Par purchases
all its inventory from Sub. The incomes reported by the companies over the past three years
are as follows:
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Sub Company sold inventory for $300,000, $262,500 and $337,500 in the years 2006, 2007,
and 2008 respectively. Par Company reported ending inventory of $105,000, $157,500 and
$180,000 for 2006, 2007, and 2008 respectively. Par acquired 70 percent of the ownership of
Sub on January 1, 2006, at underlying book value. The fair value of the noncontrolling
interest at the date of acquisition was equal to 30 percent of the book value of Sub Company.
7-6
Chapter 07 - Intercompany Inventory Transactions
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19. Based on the information given above, what will be the consolidated net income for
2006?
A. $357,500
B. $375,000
C. $490,000
D. $317,750
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20. Based on the information given above, what will be the consolidated net income for
2007?
A. $495,000
B. $317,750
C. $486,250
D. $690,000
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PA
21. Based on the information given above, what will be the income assigned to controlling
interest for 2007?
A. $448,375
B. $495,000
C. $486,250
D. $615,375
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22. Based on the information given above, what will be the income to noncontrolling interest
for 2008?
A. $39,750
B. $37,875
C. $71,275
D. $70,875
23. Based on the information given above, what will be the income to controlling interest for
2008?
A. $615,375
B. $686,250
C. $690,000
D. $694,000
7-7
Chapter 07 - Intercompany Inventory Transactions
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24. During the year a parent makes sales of inventory at a profit to its 75 percent owned
subsidiary. The subsidiary also makes sales of inventory at a profit to its parent during the
same year. Both the parent and the subsidiary have on hand at the end of the year 20 percent
of the inventory acquired from one another. Consolidated revenues for the year should
exclude:
A. 80 percent of the total revenues from intercompany sales.
B. total revenues from intercompany sales.
C. only the revenues from the subsidiary's intercompany sales.
D. only the revenues from the parent's intercompany sales.
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PA
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25. Consolidated net income may include the parent's separate operating income plus the
parent's share of the subsidiary's reported net income:
A. plus the unrealized profit on upstream intercompany sales of inventory made during the
current year.
B. plus the profit realized this year from upstream intercompany sales of inventory made last
year.
C. plus unrealized profit on downstream intercompany sales of inventory made during the
current year.
D. minus the parent's share of profit realized this year from upstream intercompany sales of
inventory made last year.
7-8
Chapter 07 - Intercompany Inventory Transactions
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Perth Corporation owns 90 percent of Dundee Company's stock. At the end of 2008, Perth
and Dundee reported the following partial operating results and inventory balances:
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Perth regularly prices its products at cost plus a 30 percent markup for profit. Dundee prices
its sales at cost plus a 10 percent markup. The total sales reported by Perth and Dundee
include both intercompany sales and sales to nonaffiliates.
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26. Based on the information given above, what amount of sales will be reported in the
consolidated income statement for 2008?
A. $500,000
B. $850,000
C. $600,000
D. $800,000
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27. Based on the information given above, what balance will be reported for inventory in the
consolidated balance sheet for December 31, 2008?
A. $56,573
B. $23,846
C. $32,727
D. $67,000
7-9
Chapter 07 - Intercompany Inventory Transactions
28. The consolidation treatment of profits on inventory transfers that occurred before the
business combination depends on whether:
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I. the companies were independent at that time.
II. the sale transaction was the result of arm's-length bargaining.
A. I
B. II
C. Both I and II
D. Neither I nor II
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Elvis Company purchases inventory for $70,000 on Mar 19, 2008 and sells it to Graceland
Corporation for $95,000 on May 14, 2008. Graceland still holds the inventory on December
31, 2008, and determines that its market value (replacement cost) is $82,000 at that time.
Graceland writes the inventory down from $95,000 to its lower market value of $82,000 at the
end of the year. Elvis owns 75 percent of Graceland.
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29. Based on the information given above, what amount of cost of goods sold should be
eliminated in the consolidation workpaper for 2008?
A. $82,000
B. $70,000
C. $95,000
D. $60,000
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30. Based on the information given above, what amount of inventory should be eliminated in
the consolidation workpaper for 2008?
A. $15,000
B. $14,000
C. $12,000
D. $13,000
7-10
Chapter 07 - Intercompany Inventory Transactions
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31. Based on the information given above, by what amount should Graceland write down
inventory in its books?
A. $14,000
B. $15,000
C. $13,000
D. $16,000
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ABC Corporation owns 75 percent of XYZ Company's voting shares. During 2008, ABC
produced 50,000 chairs at a cost of $79 each and sold 35,000 chairs to XYZ for $90 each.
XYZ sold 18,000 of the chairs to unaffiliated companies for $117 each prior to December 31,
2008, and sold the remainder in early 2009 for $130 each. Both companies use perpetual
inventory systems.
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PA
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32. Based on the information given above, what amount of cost of goods sold did ABC record
in 2008?
A. $2,765,000
B. $1,620,000
C. $1,422,000
D. $2,963,000
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33. Based on the information given above, what amount of cost of goods sold did XYZ record
in 2008?
A. $2,765,000
B. $1,620,000
C. $1,422,000
D. $2,963,000
34. Based on the information given above, what amount of cost of goods sold must be
reported in the consolidated income statement for 2008?
A. $2,765,000
B. $1,620,000
C. $1,422,000
D. $2,963,000
7-11
Chapter 07 - Intercompany Inventory Transactions
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35. Based on the information given above, what amount of cost of goods sold must be
eliminated from the consolidated income statement for 2008?
A. $2,765,000
B. $1,620,000
C. $1,422,000
D. $2,963,000
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36. Based on the information given above, what amount of cost of goods sold must be
eliminated from the consolidated income statement for 2009?
A. $187,000
B. $221,000
C. $1,422,000
D. $2,963,000
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PA
37. A subsidiary made sales of inventory to its parent at a profit this year. The parent, in turn,
sold all but 20 percent of the inventory to unaffiliated companies, recognizing a profit. The
amount that should be reported as cost of goods sold in the consolidated income statement
prepared for the year should be:
A. the amount reported as intercompany sales by the subsidiary.
B. the amount reported as intercompany sales by the subsidiary minus unrealized profit in the
ending inventory of the parent.
C. the amount reported as cost of goods sold by the parent minus unrealized profit in the
ending inventory of the parent.
D. the amount reported as cost of goods sold by the parent.
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38. Consolidated net income for a parent and its 80 percent owned subsidiary should be
computed by eliminating:
A. all unrealized profit in downstream intercompany inventory sales, and unrealized profit in
upstream intercompany inventory sales made during the current year.
B. all unrealized profit in downstream intercompany inventory sales, and the noncontrolling
interest's share of unrealized profit in upstream inventory sales made during the current year.
C. the controlling interest's share of unrealized profit in downstream intercompany sales, and
the controlling interest's share of unrealized profit in upstream sales made during the current
year.
D. all unrealized profit in downstream intercompany sales, and the noncontrolling interest's
share of unrealized profit in upstream sales made during the current year.
7-12
Chapter 07 - Intercompany Inventory Transactions
Essay Questions
Required:
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39. Colton Company acquired 80 percent ownership of Mota Company's voting shares on
January 1, 2008, at underlying book value. The fair value of the noncontrolling interest on
that date was equal to 20 percent of the book value of Mota Company. During 2008, Colton
purchased inventory for $30,000 and sold the full amount to Mota Company for $50,000. On
December 31, 2008, Mota's ending inventory included $10,000 of items purchased from
Colton. Also in 2008, Mota purchased inventory for $80,000 and sold the units to Colton for
$100,000. Colton included $30,000 of its purchase from Mota in ending inventory on
December 31, 2008. Summary income statement data for the two companies revealed the
following:
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a. Compute the amount to be reported as sales in the 2008 consolidated income statement.
b. Compute the amount to be reported as cost of goods sold in the 2008 consolidated income
statement.
c. What amount of income will be assigned to the noncontrolling shareholders in the 2008
consolidated income statement?
d. What amount of income will be assigned to the controlling interest in the 2008 consolidated
income statement?
7-13
Chapter 07 - Intercompany Inventory Transactions
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40. Hunter Company and Moss Company both produce and purchase fabric for resale each
period and frequently sell to each other. Since Hunter Company holds 80 percent ownership
of Moss Company, Hunter's controller compiled the following information with regard to
intercompany transactions between the two companies in 2007 and 2008:
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Required:
a. Give the eliminating entries required at December 31, 2008, to eliminate the effects of the
inventory transfers in preparing a full set of consolidated financial statements.
b. Compute the amount of cost of goods sold to be reported in the consolidated income
statement for 2008.
7-14
Chapter 07 - Intercompany Inventory Transactions
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41. On January 1, 2007, Jones Company acquired 90 percent of the outstanding common
stock of Smith Corporation for $1,242,000. On that date, the fair value of noncontrolling
interest was equal to $138,000. The entire differential was related to land held by Smith. At
the date of acquisition, Smith had common stock outstanding of $520,000, additional paid-in
capital of $200,000, and retained earnings of $540,000. During 2007, Smith sold inventory to
Jones for $440,000. The inventory originally cost Smith $360,000. By year-end, 30 percent
was still in Jones' ending inventory. During 2008, the remaining inventory was resold to an
unrelated customer. Both Jones and Smith use perpetual inventory systems.
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Income and dividend information for both Jones and Smith for 2007 and 2008 are as follows:
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Required:
a. Present the workpaper elimination entries necessary to prepare consolidated financial
statements for 2007 assuming Jones accounts for its investment in Smith stock using the fully
adjusted equity method.
b. Present the workpaper elimination entries necessary to prepare consolidated financial
statements for 2008, assuming Jones accounts for its investment in Smith stock using the cost
method.
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Chapter 07 Intercompany Inventory Transactions Answer Key
Multiple Choice Questions
7-15
Chapter 07 - Intercompany Inventory Transactions
1. When there are intercompany sales of inventory during the year and a three-part
consolidation workpaper is prepared, elimination entries related to the intercompany sales:
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I. Always are needed.
II. Are not needed if all the inventory is resold to unrelated parties prior to the end of the
year.
A. I
B. II
C. Both I and II
D. Either I or II
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AACSB: Analytic
AICPA: Decision Making
PA
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Earth Company owns 100 percent of the capital stock of both Mars Corporation and Venus
Corporation. Mars purchases merchandise inventory from Venus at 125 percent of Venus's
cost. During 2008, Venus sold inventory to Mars that it had purchased for $25,000. Mars sold
all of this merchandise to unrelated customers for $56,892 during 2008. In preparing
combined financial statements for 2008, Earth's bookkeeper disregarded the common
ownership of Mars and Venus.
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2. Based on the information given above, what amount should be eliminated from cost of
goods sold in the combined income statement for 2008?
A. $31,250
B. $25,000
C. $56,892
D. $6,250
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AACSB: Analytic
AICPA: Measurement
7-16
Chapter 07 - Intercompany Inventory Transactions
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3. Based on the information given above, by what amount was unadjusted revenue overstated
in the combined income statement for 2008?
A. $25,000
B. $56,892
C. $31,250
D. $6,250
AACSB: Analytic
AICPA: Measurement
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4. Global Corporation acquired 85 percent of Local Company's voting shares of stock in 2007.
During 2008, Global purchased 50,000 picture tubes for $15 each and sold 28,000 of them to
Local for $20 each. Local sold all of the units to unrelated entities prior to December 31,
2008, for $30 each. Both companies use perpetual inventory systems.
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Which workpaper eliminating entry is needed in preparing consolidated financial statements
for 2008 to remove all effects of the intercompany sale?
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A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Reporting
7-17
Chapter 07 - Intercompany Inventory Transactions
5. When a parent and its subsidiary use a periodic inventory system rather than a perpetual
system, the income and asset balances reported in the consolidated financial statements are:
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I. affected only if there are upstream intercompany sales of inventory.
II. affected only if there are downstream intercompany sales of inventory.
A. I
B. II
C. Both I and II
D. Neither I nor II
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AACSB: Analytic
AICPA: Decision Making
PA
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On January 1, 2008, Parent Company acquired 90 percent ownership of Subsidiary
Corporation, at underlying book value. The fair value of the noncontrolling interest at the date
of acquisition was equal to 10 percent of the book value of Subsidiary Corporation. On Mar
17, 2008, Subsidiary purchased inventory from Parent for $90,000. Subsidiary sold the entire
inventory to an unaffiliated company for $120,000 on November 21, 2008. Parent had
produced the inventory sold to Subsidiary for $62,000. The companies had no other
transactions during 2008.
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6. Based on the information given above, what amount of sales will be reported in the 2008
consolidated income statement?
A. $62,000
B. $120,000
C. $90,000
D. $58,000
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AACSB: Analytic
AICPA: Measurement
7-18
Chapter 07 - Intercompany Inventory Transactions
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7. Based on the information given above, what amount of cost of goods sold will be reported
in the 2008 consolidated income statement?
A. $62,000
B. $120,000
C. $90,000
D. $58,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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8. Based on the information given above, what amount of consolidated net income will be
assigned to the controlling shareholders for 2008?
A. $58,000
B. $59,000
C. $55,000
D. $52,200
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Pilfer Company acquired 90 percent ownership of Scrooge Corporation in 2007, at
underlying book value. On that date, the fair value of noncontrolling interest was equal to 10
percent of the book value of Scrooge Corporation. Pilfer purchased inventory from Scrooge
for $90,000 on August 20, 2008, and resold 70 percent of the inventory to unaffiliated
companies on December 1, 2008, for $100,000. Scrooge produced the inventory sold to Pilfer
for $67,000. The companies had no other transactions during 2008.
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9. Based on the information given above, what amount of sales will be reported in the 2008
consolidated income statement?
A. $90,000
B. $120,000
C. $100,000
D. $67,000
AACSB: Analytic
AICPA: Measurement
7-19
Chapter 07 - Intercompany Inventory Transactions
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10. Based on the information given above, what amount of cost of goods sold will be reported
in the 2008 consolidated income statement?
A. $60,900
B. $90,000
C. $46,900
D. $67,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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11. Based on the information given above, what amount of consolidated net income will be
assigned to the controlling interest for 2008?
A. $51,490
B. $53,100
C. $37,000
D. $20,100
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12. Based on the information given above, what inventory balance will be reported by the
consolidated entity on December 31, 2008?
A. $51,490
B. $53,100
C. $37,000
D. $20,100
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AACSB: Analytic
AICPA: Measurement
7-20
Chapter 07 - Intercompany Inventory Transactions
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13. Senior Inc. owns 85 percent of Junior Inc. During 2008, Senior sold goods with a 25
percent gross profit to Junior. Junior sold all of these goods in 2008. How should 2008
consolidated income statement items be adjusted?
A. No adjustment is necessary.
B. Sales and cost of goods sold should be reduced by 85 percent of the intercompany sales.
C. Net income should be reduced by 85 percent of the gross profit on intercompany sales.
D. Sales and cost of goods sold should be reduced by the intercompany sales.
AACSB: Analytic
AICPA: Reporting
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Parent Corporation owns 90 percent of Subsidiary 1 Company's stock and 75 percent of
Subsidiary 2 Company's stock. During 2008, Parent sold inventory purchased in 2007 for
$48,000 to Subsidiary 1 for $60,000. Subsidiary 1 then sold the inventory at its cost of
$60,000 to Subsidiary 2. Prior to December 31, 2008, Subsidiary 2 sold $45,000 of inventory
to a nonaffiliate for $67,000 and held $15,000 in inventory at December 31, 2008.
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14. Based on the information given above, what amount should be reported in the 2008
consolidated income statement as cost of goods sold?
A. $36,000
B. $12,000
C. $48,000
D. $45,000
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AACSB: Analytic
AICPA: Measurement
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15. Based on the information given above, what amount should be reported in the December
31, 2008, consolidated balance sheet as inventory?
A. $36,000
B. $12,000
C. $15,000
D. $28,000
AACSB: Analytic
AICPA: Measurement
7-21
Chapter 07 - Intercompany Inventory Transactions
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16. Based on the information given above, what amount of cost of goods sold must be
eliminated from the consolidated income statement for 2008?
A. $117,000
B. $120,000
C. $150,000
D. $128,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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17. Based on the information given above, what amount of sales must be eliminated from the
consolidated income statement for 2008?
A. $117,000
B. $120,000
C. $150,000
D. $128,000
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18. Based on the information given above, what amount of inventory must be eliminated from
the consolidated balance sheet for 2008?
A. $2,400
B. $9,000
C. $12,000
D. $3,000
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AACSB: Analytic
AICPA: Measurement
7-22
Chapter 07 - Intercompany Inventory Transactions
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Sub Company sells all its output at 20 percent above cost to Par Corporation. Par purchases
all its inventory from Sub. The incomes reported by the companies over the past three years
are as follows:
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Sub Company sold inventory for $300,000, $262,500 and $337,500 in the years 2006, 2007,
and 2008 respectively. Par Company reported ending inventory of $105,000, $157,500 and
$180,000 for 2006, 2007, and 2008 respectively. Par acquired 70 percent of the ownership of
Sub on January 1, 2006, at underlying book value. The fair value of the noncontrolling
interest at the date of acquisition was equal to 30 percent of the book value of Sub Company.
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AACSB: Analytic
AICPA: Measurement
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PA
19. Based on the information given above, what will be the consolidated net income for
2006?
A. $357,500
B. $375,000
C. $490,000
D. $317,750
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20. Based on the information given above, what will be the consolidated net income for
2007?
A. $495,000
B. $317,750
C. $486,250
D. $690,000
AACSB: Analytic
AICPA: Measurement
7-23
Chapter 07 - Intercompany Inventory Transactions
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21. Based on the information given above, what will be the income assigned to controlling
interest for 2007?
A. $448,375
B. $495,000
C. $486,250
D. $615,375
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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22. Based on the information given above, what will be the income to noncontrolling interest
for 2008?
A. $39,750
B. $37,875
C. $71,275
D. $70,875
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23. Based on the information given above, what will be the income to controlling interest for
2008?
A. $615,375
B. $686,250
C. $690,000
D. $694,000
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AACSB: Analytic
AICPA: Measurement
7-24
Chapter 07 - Intercompany Inventory Transactions
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24. During the year a parent makes sales of inventory at a profit to its 75 percent owned
subsidiary. The subsidiary also makes sales of inventory at a profit to its parent during the
same year. Both the parent and the subsidiary have on hand at the end of the year 20 percent
of the inventory acquired from one another. Consolidated revenues for the year should
exclude:
A. 80 percent of the total revenues from intercompany sales.
B. total revenues from intercompany sales.
C. only the revenues from the subsidiary's intercompany sales.
D. only the revenues from the parent's intercompany sales.
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AACSB: Reflective Thinking
AICPA: Reporting
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AACSB: Analytic
AICPA: Reporting
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25. Consolidated net income may include the parent's separate operating income plus the
parent's share of the subsidiary's reported net income:
A. plus the unrealized profit on upstream intercompany sales of inventory made during the
current year.
B. plus the profit realized this year from upstream intercompany sales of inventory made last
year.
C. plus unrealized profit on downstream intercompany sales of inventory made during the
current year.
D. minus the parent's share of profit realized this year from upstream intercompany sales of
inventory made last year.
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Chapter 07 - Intercompany Inventory Transactions
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Perth Corporation owns 90 percent of Dundee Company's stock. At the end of 2008, Perth
and Dundee reported the following partial operating results and inventory balances:
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Perth regularly prices its products at cost plus a 30 percent markup for profit. Dundee prices
its sales at cost plus a 10 percent markup. The total sales reported by Perth and Dundee
include both intercompany sales and sales to nonaffiliates.
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26. Based on the information given above, what amount of sales will be reported in the
consolidated income statement for 2008?
A. $500,000
B. $850,000
C. $600,000
D. $800,000
AACSB: Analytic
AICPA: Measurement
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27. Based on the information given above, what balance will be reported for inventory in the
consolidated balance sheet for December 31, 2008?
A. $56,573
B. $23,846
C. $32,727
D. $67,000
AACSB: Analytic
AICPA: Measurement
7-26
Chapter 07 - Intercompany Inventory Transactions
28. The consolidation treatment of profits on inventory transfers that occurred before the
business combination depends on whether:
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I. the companies were independent at that time.
II. the sale transaction was the result of arm's-length bargaining.
A. I
B. II
C. Both I and II
D. Neither I nor II
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AACSB: Analytic
AICPA: Decision Making
PA
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Elvis Company purchases inventory for $70,000 on Mar 19, 2008 and sells it to Graceland
Corporation for $95,000 on May 14, 2008. Graceland still holds the inventory on December
31, 2008, and determines that its market value (replacement cost) is $82,000 at that time.
Graceland writes the inventory down from $95,000 to its lower market value of $82,000 at the
end of the year. Elvis owns 75 percent of Graceland.
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29. Based on the information given above, what amount of cost of goods sold should be
eliminated in the consolidation workpaper for 2008?
A. $82,000
B. $70,000
C. $95,000
D. $60,000
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AACSB: Analytic
AICPA: Measurement
7-27
Chapter 07 - Intercompany Inventory Transactions
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30. Based on the information given above, what amount of inventory should be eliminated in
the consolidation workpaper for 2008?
A. $15,000
B. $14,000
C. $12,000
D. $13,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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31. Based on the information given above, by what amount should Graceland write down
inventory in its books?
A. $14,000
B. $15,000
C. $13,000
D. $16,000
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ABC Corporation owns 75 percent of XYZ Company's voting shares. During 2008, ABC
produced 50,000 chairs at a cost of $79 each and sold 35,000 chairs to XYZ for $90 each.
XYZ sold 18,000 of the chairs to unaffiliated companies for $117 each prior to December 31,
2008, and sold the remainder in early 2009 for $130 each. Both companies use perpetual
inventory systems.
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32. Based on the information given above, what amount of cost of goods sold did ABC record
in 2008?
A. $2,765,000
B. $1,620,000
C. $1,422,000
D. $2,963,000
AACSB: Analytic
AICPA: Measurement
7-28
Chapter 07 - Intercompany Inventory Transactions
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33. Based on the information given above, what amount of cost of goods sold did XYZ record
in 2008?
A. $2,765,000
B. $1,620,000
C. $1,422,000
D. $2,963,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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34. Based on the information given above, what amount of cost of goods sold must be
reported in the consolidated income statement for 2008?
A. $2,765,000
B. $1,620,000
C. $1,422,000
D. $2,963,000
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35. Based on the information given above, what amount of cost of goods sold must be
eliminated from the consolidated income statement for 2008?
A. $2,765,000
B. $1,620,000
C. $1,422,000
D. $2,963,000
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AACSB: Analytic
AICPA: Measurement
7-29
Chapter 07 - Intercompany Inventory Transactions
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36. Based on the information given above, what amount of cost of goods sold must be
eliminated from the consolidated income statement for 2009?
A. $187,000
B. $221,000
C. $1,422,000
D. $2,963,000
AACSB: Analytic
AICPA: Measurement
C
AACSB: Reflective Thinking
AICPA: Reporting
PA
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37. A subsidiary made sales of inventory to its parent at a profit this year. The parent, in turn,
sold all but 20 percent of the inventory to unaffiliated companies, recognizing a profit. The
amount that should be reported as cost of goods sold in the consolidated income statement
prepared for the year should be:
A. the amount reported as intercompany sales by the subsidiary.
B. the amount reported as intercompany sales by the subsidiary minus unrealized profit in the
ending inventory of the parent.
C. the amount reported as cost of goods sold by the parent minus unrealized profit in the
ending inventory of the parent.
D. the amount reported as cost of goods sold by the parent.
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38. Consolidated net income for a parent and its 80 percent owned subsidiary should be
computed by eliminating:
A. all unrealized profit in downstream intercompany inventory sales, and unrealized profit in
upstream intercompany inventory sales made during the current year.
B. all unrealized profit in downstream intercompany inventory sales, and the noncontrolling
interest's share of unrealized profit in upstream inventory sales made during the current year.
C. the controlling interest's share of unrealized profit in downstream intercompany sales, and
the controlling interest's share of unrealized profit in upstream sales made during the current
year.
D. all unrealized profit in downstream intercompany sales, and the noncontrolling interest's
share of unrealized profit in upstream sales made during the current year.
AACSB: Analytic
AICPA: Reporting
7-30
Chapter 07 - Intercompany Inventory Transactions
Essay Questions
Required:
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39. Colton Company acquired 80 percent ownership of Mota Company's voting shares on
January 1, 2008, at underlying book value. The fair value of the noncontrolling interest on
that date was equal to 20 percent of the book value of Mota Company. During 2008, Colton
purchased inventory for $30,000 and sold the full amount to Mota Company for $50,000. On
December 31, 2008, Mota's ending inventory included $10,000 of items purchased from
Colton. Also in 2008, Mota purchased inventory for $80,000 and sold the units to Colton for
$100,000. Colton included $30,000 of its purchase from Mota in ending inventory on
December 31, 2008. Summary income statement data for the two companies revealed the
following:
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a. Compute the amount to be reported as sales in the 2008 consolidated income statement.
b. Compute the amount to be reported as cost of goods sold in the 2008 consolidated income
statement.
c. What amount of income will be assigned to the noncontrolling shareholders in the 2008
consolidated income statement?
d. What amount of income will be assigned to the controlling interest in the 2008 consolidated
income statement?
7-31
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Chapter 07 - Intercompany Inventory Transactions
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Chapter 07 - Intercompany Inventory Transactions
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Alternative solution: d
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Information on consolidated sales was computed in part (a); consolidated cost of goods sold
was computed in part (b) and income assigned to the noncontrolling interest was computed in
part (c).
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AACSB: Analytic
AICPA: Measurement
7-33
Chapter 07 - Intercompany Inventory Transactions
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40. Hunter Company and Moss Company both produce and purchase fabric for resale each
period and frequently sell to each other. Since Hunter Company holds 80 percent ownership
of Moss Company, Hunter's controller compiled the following information with regard to
intercompany transactions between the two companies in 2007 and 2008:
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PA
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Required:
a. Give the eliminating entries required at December 31, 2008, to eliminate the effects of the
inventory transfers in preparing a full set of consolidated financial statements.
b. Compute the amount of cost of goods sold to be reported in the consolidated income
statement for 2008.
7-34
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Chapter 07 - Intercompany Inventory Transactions
AACSB: Analytic
AICPA: Measurement
7-35
Chapter 07 - Intercompany Inventory Transactions
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41. On January 1, 2007, Jones Company acquired 90 percent of the outstanding common
stock of Smith Corporation for $1,242,000. On that date, the fair value of noncontrolling
interest was equal to $138,000. The entire differential was related to land held by Smith. At
the date of acquisition, Smith had common stock outstanding of $520,000, additional paid-in
capital of $200,000, and retained earnings of $540,000. During 2007, Smith sold inventory to
Jones for $440,000. The inventory originally cost Smith $360,000. By year-end, 30 percent
was still in Jones' ending inventory. During 2008, the remaining inventory was resold to an
unrelated customer. Both Jones and Smith use perpetual inventory systems.
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Income and dividend information for both Jones and Smith for 2007 and 2008 are as follows:
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Required:
a. Present the workpaper elimination entries necessary to prepare consolidated financial
statements for 2007 assuming Jones accounts for its investment in Smith stock using the fully
adjusted equity method.
b. Present the workpaper elimination entries necessary to prepare consolidated financial
statements for 2008, assuming Jones accounts for its investment in Smith stock using the cost
method.
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Chapter 07 - Intercompany Inventory Transactions
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a. 2007 Entries under Fully Adjusted Equity Method
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b. 2008 Entries under Cost Method
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AICPA: Measurement
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Chapter 07 - Intercompany Inventory Transactions
7-38
Chapter 08 - Intercompany Indebtedness
Chapter 08
Intercompany Indebtedness
Multiple Choice Questions
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1. Cutler Company owns 80 percent of the common stock of Marina Inc. Cutler acquires some
of Marina's bonds from an unrelated party for less than the carrying value on Marina's books
and holds and holds them as a long-term investment. For consolidated reporting purposes,
how is the acquisition of Marina's bonds treated?
A. As a decrease in the Bonds Payable account on Marina's books.
B. As an increase in noncurrent assets.
C. Everything related to the bonds is eliminated in the consolidation workpaper, and nothing
related to the bonds appears in the consolidated financial statements.
D. As a retirement of bonds.
C
PA
2. Culver owns 80 percent of the common stock of Fowler Company. Culver also purchases
some of Fowler's bonds directly from Fowler and holds the bonds as a long-term investment.
How is the acquisition of the bonds treated for consolidated reporting purposes?
A. As a retirement of bonds.
B. As an increase in the Bonds Payable account on Fowler's books.
C. Everything related to the bonds is eliminated in the consolidation workpaper, and nothing
related to the bonds appears in the consolidated financial statements.
D. As an increase in noncurrent assets.
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Hunter Corporation holds 80 percent of the voting shares of Moss Company. On January 1,
2008, Moss purchased $100,000 par value 12 percent first mortgage bonds of Hunter from
Cruse for $115,000. Hunter originally issued the bonds to Cruse on January 1, 2006, for
$110,000. The bonds have a 8-year maturity from the date of issue. Moss' reported net income
of $65,000 for 2008, and Hunter reported income (excluding income from ownership of
Moss's stock) of $90,000.
8-1
Chapter 08 - Intercompany Indebtedness
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3. Based on the information given above, what amount of interest expense does Hunter record
annually?
A. $10,750
B. $9,500
C. $2,500
D. $12,000
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4. Based on the information given above, what amount of interest income does Moss record
for 2008?
A. $12,000
B. $2,500
C. $7,500
D. $9,500
C
PA
5. Based on the information given above, what gain or loss on the retirement of bonds should
be reported in the 2008 consolidated income statement?
A. $6,250 gain
B. $7,500 gain
C. $7,500 loss
D. $6,250 loss
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6. Based on the information given above, what amount of consolidated net income should be
reported for 2008?
A. $163,750
B. $161,250
C. $146,250
D. $148,750
8-2
Chapter 08 - Intercompany Indebtedness
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7. At the end of the year, a parent acquires a wholly owned subsidiary's bonds from
unaffiliated parties at a cost less than the subsidiary's carrying value. The consolidated net
income for the year of acquisition should include the parent's separate operating income plus:
A. the subsidiary's net income increased by the gain on constructive retirement of debt.
B. the subsidiary's net income decreased by the gain on constructive retirement of debt.
C. the subsidiary's net income increased by the gain on constructive retirement of debt, and
decreased by the subsidiary's bond interest expense.
D. the subsidiary's net income decreased by the gain on constructive retirement of debt, and
decreased by the subsidiary's bond interest expense.
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I. at the date of constructive retirement.
II. over the remaining term of the bonds.
A. I
B. II
C. Both I and II
D. Neither I nor II
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8. A loss on the constructive retirement of a parent's bonds by a subsidiary is effectively
recognized in the accounting records of the parent and its subsidiary:
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Light Corporation owns 80 percent of Sound Company's voting shares. On January 1, 2007,
Sound sold bonds with a par value of $300,000 at 95. Light purchased $200,000 par value of
the bonds; the remainder was sold to nonaffiliates. The bonds mature in ten years and pay an
annual interest rate of 6 percent. Interest is paid semiannually on January 1 and July 1.
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9. Based on the information given above, what amount of interest expense should be reported
in the 2008 consolidated income statement?
A. $6,000
B. $6,500
C. $5,000
D. $10,000
8-3
Chapter 08 - Intercompany Indebtedness
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10. Based on the information given above, what amount of interest receivable will be
recorded by Light Corporation on December 31, 2008, in its separate financial statements?
A. $5,000
B. $6,500
C. $10,000
D. $6,000
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11. Based on the information given above, what amount of interest expense will be eliminated
in the preparation of the 2008 consolidated financial statements?
A. $13,000
B. $13,500
C. $10,000
D. $15,000
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PA
Moon Corporation issued $300,000 par value 10-year bonds at 107 on January 1, 2003,
which Star Corporation purchased. On July 1, 2007, Sun Corporation purchased $120,000 of
Moon bonds from Star. The bonds pay 12 percent interest annually on December 31. The
preparation of consolidated financial statements for Moon and Sun at December 31, 2009,
required the following eliminating entry:
12. Based on the information given above, what percentage of the subsidiary's ownership does
the parent company hold?
A. 75 percent
B. 65 percent
C. 80 percent
D. 95 percent
8-4
Chapter 08 - Intercompany Indebtedness
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13. Based on the information given above, what amount did Sun pay when it purchased the
bonds on July 1, 2007?
A. $118,020
B. $118,920
C. $118,620
D. $117,220
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14. Based on the information given above, what amount of gain or loss on bond retirement is
included in the 2007 consolidated income statement?
A. $6,600
B. $4,800
C. $6,000
D. $5,400
C
PA
15. Based on the information given above, if 2009 consolidated net income of $50,000 would
have been reported without the eliminating entry provided, what amount will actually be
reported?
A. $47,900
B. $48,200
C. $49,400
D. $48,800
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16. Which of the following eliminating entries might be found on a consolidation workpaper
to eliminate the effects of intercompany debt?
A. I
B. II
C. Either I or II
D. Neither I nor II
8-5
Chapter 08 - Intercompany Indebtedness
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17. When one company purchases the debt of an affiliate from an unrelated party, a gain or
loss on the constructive retirement of debt is recognized by which of the following?
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A. Option A
B. Option B
C. Option C
D. Option D
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ABC, a holder of a $400,000 XYZ Inc. bond, collected the interest due on June 30, 2008, and
then sold the bond to DEF Inc. for $365,000. On that date, XYZ, a 90 percent owner of DEF,
had a $450,000 carrying amount for this bond.
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18. Based on the information given above, what was the effect of DEF's purchase of XYZ's
bond on the amount of retained earnings reported in XYZ's June 30, 2008, consolidated
balance sheet?
A. No effect
B. $85,000 increase
C. $85,000 decrease
D. $35,000 decrease
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19. Based on the information given above, what was the effect of DEF's purchase of XYZ's
bond on the noncontrolling interest amount reported in XYZ's June 30, 2008, consolidated
balance sheet?
A. No effect
B. $35,000 increase
C. $8,500 decrease
D. $8,500 increase
8-6
Chapter 08 - Intercompany Indebtedness
Master Corporation owns 85 percent of Servant Corporation's voting shares. On January 1,
2008, Master Corporation sold $200,000 par value 8 percent bonds to Servant for $245,000.
The bonds mature in 10 years and pay interest semiannually on January 1 and July 1.
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20. Based on the information given above, in the preparation of the 2008 consolidated
financial statements, premium on bonds payable will be:
A. debited for $45,000 in the eliminating entries.
B. credited for $40,500 in the eliminating entries.
C. debited for $40,500 in the eliminating entries.
D. credited for $45,000 in the eliminating entries.
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21. Based on the information given above, in the preparation of the 2008 consolidated
financial statements, interest income will be:
A. debited for $11,500 in the eliminating entries.
B. credited for $11,500 in the eliminating entries.
C. debited for $16,000 in the eliminating entries.
D. credited for $16,000 in the eliminating entries.
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22. Based on the information given above, what amount of investment in bonds will be
eliminated in the preparation of the 2008 consolidated financial statements?
A. $240,500
B. $200,000
C. $245,000
D. $211,500
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Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 2004, at
105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1.
Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on
December 31, 2008, for $125,000. Mortar owns 75 percent of Granite's voting common stock.
8-7
Chapter 08 - Intercompany Indebtedness
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23. Based on the information given above, what amount of premium on bonds payable will be
eliminated in the preparation of the 2008 consolidated financial statements?
A. $3,500
B. $2,800
C. $5,000
D. $2,500
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24. Based on the information given above, what amount of gain or loss on bond retirement
will be reported in the 2008 consolidated financial statements?
A. $17,000 loss
B. $12,800 loss
C. $18,500 gain
D. $22,200 gain
C
PA
25. Based on the information given above, what amount of premium on bonds payable will be
eliminated in the preparation of the 2009 consolidated financial statements?
A. $3,500
B. $2,800
C. $5,000
D. $2,500
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26. Based on the information given above, what amount of interest income will be eliminated
in the preparation of the 2009 consolidated financial statements?
A. $17,000
B. $13,300
C. $18,500
D. $22,200
27. Based on the information given above, what amount of interest expense will be eliminated
in the preparation of the 2009 consolidated financial statements?
A. $17,000
B. $13,300
C. $18,500
D. $22,200
8-8
Chapter 08 - Intercompany Indebtedness
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28. Based on the information given above, what amount of constructive gain will be allocated
to noncontrolling interest in 2008 consolidated financial statements?
A. $4,925
B. $5,550
C. $5,625
D. $4,625
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Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 2004, at
105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1.
Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on
January 1, 2008, for $122,000. Mortar owns 75 percent of Granite's voting common stock.
PA
R
29. Based on the information given above, what amount of premium on bonds payable will be
eliminated in the preparation of the 2008 consolidated financial statements?
A. $3,500
B. $2,800
C. $5,000
D. $2,500
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C
30. Based on the information given above, what amount of gain or loss on bond retirement
will be reported in the 2008 consolidated financial statements?
A. $17,000
B. $12,800
C. $18,500
D. $22,200
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31. Based on the information given above, what amount of premium on bonds payable will be
eliminated in the preparation of the 2009 consolidated financial statements?
A. $3,500
B. $2,800
C. $5,000
D. $2,500
8-9
Chapter 08 - Intercompany Indebtedness
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32. Based on the information given above, what amount of interest income will be eliminated
in the preparation of the 2009 consolidated financial statements?
A. $17,000
B. $13,300
C. $18,500
D. $22,200
C
PA
R
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Senior Corporation acquired 80 percent of Junior Company's voting shares on January 1,
2008, at underlying book value. On that date, it also purchased $500,000 par value 8 percent
Junior bonds, which had been issued on January 1, 2005, with a 12-year maturity. During
preparation of the consolidated financial statements for December 31, 2008, the following
eliminating entry was made in the workpaper:
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33. Based on the information given above, what price did Senior pay to purchase the Junior
bonds?
A. $530,000
B. $516,875
C. $533,750
D. $550,625
34. Based on the information given above, what was the carrying amount of the bonds on
Junior's books on the date of purchase?
A. $533,750
B. $516,875
C. $545,000
D. $550,625
8-10
Chapter 08 - Intercompany Indebtedness
35. Which of the following statements is (are) correct?
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I. The amount assigned to the noncontrolling interest may be affected by a constructive
retirement of bonds.
II. A constructive retirement of bonds normally results in an extraordinary gain or loss.
III. In constructive retirement, the bonds are considered outstanding, even though they are
treated as if they were retired in preparing consolidated financial statements.
A. I
B. II
C. I and III
D. I, II, and III
PA
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36. On January 1, 2006, Nichols Corporation issued 10-year bonds at par to unrelated parties.
The bonds pay interest of $15,000 every June 30 and December 31. On December 31, 2009,
Harn Corporation purchased all of Nichols' bonds in the open market at a $6,000 discount.
Harn is Nichols' 80 percent owned subsidiary. Harn uses the straight line method of
amortization. The consolidated income statement for the year 2009 should report with respect
to the bonds:
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I. interest expense of $30,000.
II. an extraordinary gain of $6,000.
A. I
B. II
C. Either I or II
D. Neither I nor II
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Essay Questions
8-11
Chapter 08 - Intercompany Indebtedness
37. Dundee Company issued $1,000,000 par value 10-year bonds at 102 on January 1, 2005,
which Mega Corporation purchased. The coupon rate on the bonds is 9 percent. Interest
payments are made semiannually on July 1 and January 1. On July 1, 2008, Perth Company
purchased $500,000 par value of the bonds from Mega for $492,200. Perth owns 65 percent
of Dundee's voting shares.
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PA
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Required:
a. What amount of gain or loss will be reported in Dundee's 2008 income statement on the
retirement of bonds?
b. Will a gain or loss be reported in the 2008 consolidated financial statements for Perth for
the constructive retirement of bonds? What amount will be reported?
c. How much will Perth's purchase of the bonds change consolidated net income for 2008?
d. Prepare the workpaper eliminating entry or entries needed to remove the effects of the
intercorporate bond ownership in preparing consolidated financial statements at December 31,
2008.
e. Prepare the workpaper eliminating entry or entries needed to remove the effects of the
intercorporate bond ownership in preparing consolidated financial statements at December 31,
2009.
8-12
Chapter 08 - Intercompany Indebtedness
38. A subsidiary issues bonds. The parent can then acquire the bonds either directly from the
subsidiary or from a nonaffiliate that had originally acquired the subsidiary's bonds.
directly from the subsidiary.
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PA
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b) Why does it matter who the bonds are acquired from?
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Required:
a) Discuss the parent's accounting as it relates to the preparation of consolidated financial
statements, for their acquisition of the bonds:
from the nonaffiliate.
8-13
Chapter 08 - Intercompany Indebtedness
39. On January 1, 2007, Gild Company acquired 60 percent of the outstanding common stock
of Leeds Company at the book value of the shares acquired. On that date, the fair value of
noncontrolling interest was equal to 40 percent of book value of Leeds. At the time of
purchase, Leeds had common stock of $1,000,000 outstanding and retained earnings of
$800,000.
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On December 31, 2007, Gild purchased 50 percent of Leeds' bonds outstanding which were
originally issued on January 2, 2004, at 99. The total bond issue has a face value of $600,000,
pays 10 percent interest annually, and has a 10-year maturity. Any premium or discount is
amortized on a straight-line basis. Gild paid $306,000 for its investment in Leeds' bonds and
intends to hold the bonds until maturity.
Income and dividends for Gild and Leeds for 2007 and 2008 are as follows:
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PA
Required:
A) Present the workpaper elimination entries necessary to prepare consolidated financial
statements for 2007 assuming Gild accounts for its investment in Leeds stock using the fully
adjusted equity method.
B) Present the workpaper elimination entries necessary to prepare consolidated financial
statements for 2008, assuming Gild accounts for its investment in Leeds stock using the cost
method.
Chapter 08 Intercompany Indebtedness Answer Key
Multiple Choice Questions
8-14
Chapter 08 - Intercompany Indebtedness
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1. Cutler Company owns 80 percent of the common stock of Marina Inc. Cutler acquires some
of Marina's bonds from an unrelated party for less than the carrying value on Marina's books
and holds and holds them as a long-term investment. For consolidated reporting purposes,
how is the acquisition of Marina's bonds treated?
A. As a decrease in the Bonds Payable account on Marina's books.
B. As an increase in noncurrent assets.
C. Everything related to the bonds is eliminated in the consolidation workpaper, and nothing
related to the bonds appears in the consolidated financial statements.
D. As a retirement of bonds.
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AACSB: Reflective Thinking
AICPA: Decision Making
C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
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2. Culver owns 80 percent of the common stock of Fowler Company. Culver also purchases
some of Fowler's bonds directly from Fowler and holds the bonds as a long-term investment.
How is the acquisition of the bonds treated for consolidated reporting purposes?
A. As a retirement of bonds.
B. As an increase in the Bonds Payable account on Fowler's books.
C. Everything related to the bonds is eliminated in the consolidation workpaper, and nothing
related to the bonds appears in the consolidated financial statements.
D. As an increase in noncurrent assets.
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Hunter Corporation holds 80 percent of the voting shares of Moss Company. On January 1,
2008, Moss purchased $100,000 par value 12 percent first mortgage bonds of Hunter from
Cruse for $115,000. Hunter originally issued the bonds to Cruse on January 1, 2006, for
$110,000. The bonds have a 8-year maturity from the date of issue. Moss' reported net income
of $65,000 for 2008, and Hunter reported income (excluding income from ownership of
Moss's stock) of $90,000.
8-15
Chapter 08 - Intercompany Indebtedness
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3. Based on the information given above, what amount of interest expense does Hunter record
annually?
A. $10,750
B. $9,500
C. $2,500
D. $12,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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4. Based on the information given above, what amount of interest income does Moss record
for 2008?
A. $12,000
B. $2,500
C. $7,500
D. $9,500
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C
5. Based on the information given above, what gain or loss on the retirement of bonds should
be reported in the 2008 consolidated income statement?
A. $6,250 gain
B. $7,500 gain
C. $7,500 loss
D. $6,250 loss
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AACSB: Analytic
AICPA: Measurement
8-16
Chapter 08 - Intercompany Indebtedness
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6. Based on the information given above, what amount of consolidated net income should be
reported for 2008?
A. $163,750
B. $161,250
C. $146,250
D. $148,750
AACSB: Analytic
AICPA: Measurement
C
AACSB: Analytic
AICPA: Decision Making
PA
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7. At the end of the year, a parent acquires a wholly owned subsidiary's bonds from
unaffiliated parties at a cost less than the subsidiary's carrying value. The consolidated net
income for the year of acquisition should include the parent's separate operating income plus:
A. the subsidiary's net income increased by the gain on constructive retirement of debt.
B. the subsidiary's net income decreased by the gain on constructive retirement of debt.
C. the subsidiary's net income increased by the gain on constructive retirement of debt, and
decreased by the subsidiary's bond interest expense.
D. the subsidiary's net income decreased by the gain on constructive retirement of debt, and
decreased by the subsidiary's bond interest expense.
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8. A loss on the constructive retirement of a parent's bonds by a subsidiary is effectively
recognized in the accounting records of the parent and its subsidiary:
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I. at the date of constructive retirement.
II. over the remaining term of the bonds.
A. I
B. II
C. Both I and II
D. Neither I nor II
AACSB: Reflective Thinking
AICPA: Decision Making
8-17
Chapter 08 - Intercompany Indebtedness
Light Corporation owns 80 percent of Sound Company's voting shares. On January 1, 2007,
Sound sold bonds with a par value of $300,000 at 95. Light purchased $200,000 par value of
the bonds; the remainder was sold to nonaffiliates. The bonds mature in ten years and pay an
annual interest rate of 6 percent. Interest is paid semiannually on January 1 and July 1.
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9. Based on the information given above, what amount of interest expense should be reported
in the 2008 consolidated income statement?
A. $6,000
B. $6,500
C. $5,000
D. $10,000
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AACSB: Analytic
AICPA: Measurement
EO
AACSB: Analytic
AICPA: Measurement
C
PA
10. Based on the information given above, what amount of interest receivable will be
recorded by Light Corporation on December 31, 2008, in its separate financial statements?
A. $5,000
B. $6,500
C. $10,000
D. $6,000
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11. Based on the information given above, what amount of interest expense will be eliminated
in the preparation of the 2008 consolidated financial statements?
A. $13,000
B. $13,500
C. $10,000
D. $15,000
AACSB: Analytic
AICPA: Measurement
8-18
Chapter 08 - Intercompany Indebtedness
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Moon Corporation issued $300,000 par value 10-year bonds at 107 on January 1, 2003,
which Star Corporation purchased. On July 1, 2007, Sun Corporation purchased $120,000 of
Moon bonds from Star. The bonds pay 12 percent interest annually on December 31. The
preparation of consolidated financial statements for Moon and Sun at December 31, 2009,
required the following eliminating entry:
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AACSB: Analytic
AICPA: Measurement
C
PA
12. Based on the information given above, what percentage of the subsidiary's ownership does
the parent company hold?
A. 75 percent
B. 65 percent
C. 80 percent
D. 95 percent
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13. Based on the information given above, what amount did Sun pay when it purchased the
bonds on July 1, 2007?
A. $118,020
B. $118,920
C. $118,620
D. $117,220
AACSB: Analytic
AICPA: Measurement
8-19
Chapter 08 - Intercompany Indebtedness
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14. Based on the information given above, what amount of gain or loss on bond retirement is
included in the 2007 consolidated income statement?
A. $6,600
B. $4,800
C. $6,000
D. $5,400
AACSB: Analytic
AICPA: Measurement
PA
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15. Based on the information given above, if 2009 consolidated net income of $50,000 would
have been reported without the eliminating entry provided, what amount will actually be
reported?
A. $47,900
B. $48,200
C. $49,400
D. $48,800
AACSB: Analytic
AICPA: Measurement
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C
16. Which of the following eliminating entries might be found on a consolidation workpaper
to eliminate the effects of intercompany debt?
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A. I
B. II
C. Either I or II
D. Neither I nor II
AACSB: Reflective Thinking
AICPA: Decision Making
8-20
Chapter 08 - Intercompany Indebtedness
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17. When one company purchases the debt of an affiliate from an unrelated party, a gain or
loss on the constructive retirement of debt is recognized by which of the following?
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A. Option A
B. Option B
C. Option C
D. Option D
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AACSB: Reflective Thinking
AICPA: Decision Making
PA
ABC, a holder of a $400,000 XYZ Inc. bond, collected the interest due on June 30, 2008, and
then sold the bond to DEF Inc. for $365,000. On that date, XYZ, a 90 percent owner of DEF,
had a $450,000 carrying amount for this bond.
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C
18. Based on the information given above, what was the effect of DEF's purchase of XYZ's
bond on the amount of retained earnings reported in XYZ's June 30, 2008, consolidated
balance sheet?
A. No effect
B. $85,000 increase
C. $85,000 decrease
D. $35,000 decrease
AACSB: Analytic
AICPA: Measurement
8-21
Chapter 08 - Intercompany Indebtedness
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19. Based on the information given above, what was the effect of DEF's purchase of XYZ's
bond on the noncontrolling interest amount reported in XYZ's June 30, 2008, consolidated
balance sheet?
A. No effect
B. $35,000 increase
C. $8,500 decrease
D. $8,500 increase
AACSB: Analytic
AICPA: Measurement
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Master Corporation owns 85 percent of Servant Corporation's voting shares. On January 1,
2008, Master Corporation sold $200,000 par value 8 percent bonds to Servant for $245,000.
The bonds mature in 10 years and pay interest semiannually on January 1 and July 1.
EO
AACSB: Analytic
AICPA: Measurement
C
PA
20. Based on the information given above, in the preparation of the 2008 consolidated
financial statements, premium on bonds payable will be:
A. debited for $45,000 in the eliminating entries.
B. credited for $40,500 in the eliminating entries.
C. debited for $40,500 in the eliminating entries.
D. credited for $45,000 in the eliminating entries.
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21. Based on the information given above, in the preparation of the 2008 consolidated
financial statements, interest income will be:
A. debited for $11,500 in the eliminating entries.
B. credited for $11,500 in the eliminating entries.
C. debited for $16,000 in the eliminating entries.
D. credited for $16,000 in the eliminating entries.
AACSB: Analytic
AICPA: Measurement
8-22
Chapter 08 - Intercompany Indebtedness
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22. Based on the information given above, what amount of investment in bonds will be
eliminated in the preparation of the 2008 consolidated financial statements?
A. $240,500
B. $200,000
C. $245,000
D. $211,500
AACSB: Analytic
AICPA: Measurement
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Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 2004, at
105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1.
Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on
December 31, 2008, for $125,000. Mortar owns 75 percent of Granite's voting common stock.
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AACSB: Analytic
AICPA: Measurement
C
PA
23. Based on the information given above, what amount of premium on bonds payable will be
eliminated in the preparation of the 2008 consolidated financial statements?
A. $3,500
B. $2,800
C. $5,000
D. $2,500
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24. Based on the information given above, what amount of gain or loss on bond retirement
will be reported in the 2008 consolidated financial statements?
A. $17,000 loss
B. $12,800 loss
C. $18,500 gain
D. $22,200 gain
AACSB: Analytic
AICPA: Measurement
8-23
Chapter 08 - Intercompany Indebtedness
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25. Based on the information given above, what amount of premium on bonds payable will be
eliminated in the preparation of the 2009 consolidated financial statements?
A. $3,500
B. $2,800
C. $5,000
D. $2,500
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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26. Based on the information given above, what amount of interest income will be eliminated
in the preparation of the 2009 consolidated financial statements?
A. $17,000
B. $13,300
C. $18,500
D. $22,200
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C
27. Based on the information given above, what amount of interest expense will be eliminated
in the preparation of the 2009 consolidated financial statements?
A. $17,000
B. $13,300
C. $18,500
D. $22,200
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AACSB: Analytic
AICPA: Measurement
8-24
Chapter 08 - Intercompany Indebtedness
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28. Based on the information given above, what amount of constructive gain will be allocated
to noncontrolling interest in 2008 consolidated financial statements?
A. $4,925
B. $5,550
C. $5,625
D. $4,625
AACSB: Analytic
AICPA: Measurement
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Granite Company issued $200,000 of 10 percent first mortgage bonds on January 1, 2004, at
105. The bonds mature in 10 years and pay interest semiannually on January 1 and July 1.
Mortar Corporation purchased $140,000 of Granite's bonds from the original purchaser on
January 1, 2008, for $122,000. Mortar owns 75 percent of Granite's voting common stock.
EO
AACSB: Analytic
AICPA: Measurement
C
PA
29. Based on the information given above, what amount of premium on bonds payable will be
eliminated in the preparation of the 2008 consolidated financial statements?
A. $3,500
B. $2,800
C. $5,000
D. $2,500
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30. Based on the information given above, what amount of gain or loss on bond retirement
will be reported in the 2008 consolidated financial statements?
A. $17,000
B. $12,800
C. $18,500
D. $22,200
AACSB: Analytic
AICPA: Measurement
8-25
Chapter 08 - Intercompany Indebtedness
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31. Based on the information given above, what amount of premium on bonds payable will be
eliminated in the preparation of the 2009 consolidated financial statements?
A. $3,500
B. $2,800
C. $5,000
D. $2,500
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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32. Based on the information given above, what amount of interest income will be eliminated
in the preparation of the 2009 consolidated financial statements?
A. $17,000
B. $13,300
C. $18,500
D. $22,200
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C
Senior Corporation acquired 80 percent of Junior Company's voting shares on January 1,
2008, at underlying book value. On that date, it also purchased $500,000 par value 8 percent
Junior bonds, which had been issued on January 1, 2005, with a 12-year maturity. During
preparation of the consolidated financial statements for December 31, 2008, the following
eliminating entry was made in the workpaper:
8-26
Chapter 08 - Intercompany Indebtedness
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33. Based on the information given above, what price did Senior pay to purchase the Junior
bonds?
A. $530,000
B. $516,875
C. $533,750
D. $550,625
AACSB: Analytic
AICPA: Measurement
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34. Based on the information given above, what was the carrying amount of the bonds on
Junior's books on the date of purchase?
A. $533,750
B. $516,875
C. $545,000
D. $550,625
PA
AACSB: Analytic
AICPA: Measurement
35. Which of the following statements is (are) correct?
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C
I. The amount assigned to the noncontrolling interest may be affected by a constructive
retirement of bonds.
II. A constructive retirement of bonds normally results in an extraordinary gain or loss.
III. In constructive retirement, the bonds are considered outstanding, even though they are
treated as if they were retired in preparing consolidated financial statements.
A. I
B. II
C. I and III
D. I, II, and III
AACSB: Reflective Thinking
AICPA: Decision Making
8-27
Chapter 08 - Intercompany Indebtedness
36. On January 1, 2006, Nichols Corporation issued 10-year bonds at par to unrelated parties.
The bonds pay interest of $15,000 every June 30 and December 31. On December 31, 2009,
Harn Corporation purchased all of Nichols' bonds in the open market at a $6,000 discount.
Harn is Nichols' 80 percent owned subsidiary. Harn uses the straight line method of
amortization. The consolidated income statement for the year 2009 should report with respect
to the bonds:
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I. interest expense of $30,000.
II. an extraordinary gain of $6,000.
A. I
B. II
C. Either I or II
D. Neither I nor II
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AACSB: Analytic
AICPA: Reporting
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C
PA
Essay Questions
8-28
Chapter 08 - Intercompany Indebtedness
37. Dundee Company issued $1,000,000 par value 10-year bonds at 102 on January 1, 2005,
which Mega Corporation purchased. The coupon rate on the bonds is 9 percent. Interest
payments are made semiannually on July 1 and January 1. On July 1, 2008, Perth Company
purchased $500,000 par value of the bonds from Mega for $492,200. Perth owns 65 percent
of Dundee's voting shares.
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PA
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Required:
a. What amount of gain or loss will be reported in Dundee's 2008 income statement on the
retirement of bonds?
b. Will a gain or loss be reported in the 2008 consolidated financial statements for Perth for
the constructive retirement of bonds? What amount will be reported?
c. How much will Perth's purchase of the bonds change consolidated net income for 2008?
d. Prepare the workpaper eliminating entry or entries needed to remove the effects of the
intercorporate bond ownership in preparing consolidated financial statements at December 31,
2008.
e. Prepare the workpaper eliminating entry or entries needed to remove the effects of the
intercorporate bond ownership in preparing consolidated financial statements at December 31,
2009.
8-29
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PA
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Chapter 08 - Intercompany Indebtedness
8-30
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PA
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Chapter 08 - Intercompany Indebtedness
AACSB: Analytic
AICPA: Measurement
8-31
Chapter 08 - Intercompany Indebtedness
38. A subsidiary issues bonds. The parent can then acquire the bonds either directly from the
subsidiary or from a nonaffiliate that had originally acquired the subsidiary's bonds.
directly from the subsidiary.
b) Why does it matter who the bonds are acquired from?
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Required:
a) Discuss the parent's accounting as it relates to the preparation of consolidated financial
statements, for their acquisition of the bonds:
from the nonaffiliate.
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PA
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a) 1. When the parent acquires the bonds from a nonaffiliate, the bonds were originally held
outside the consolidated entity and the bonds must be treated as if they were reacquired by the
original issuer. In this case the bond acquisition is handled as a constructive retirement, which
means the bonds are treated as if the subsidiary had retired the bonds when the consolidated
financial statements are prepared. Any gain or loss on constructive retirement should be
reported in the consolidated income statement but not in separate financial statements of the
parent and subsidiary.
2. When the parent purchases the bonds directly from the subsidiary the transaction is viewed
as an inter-company debt and must be eliminated in the preparation of the consolidated
financial statements.
b) When a parent acquires a subsidiary's debt it is important to know if the acquisition is
direct or indirect. In case of direct intercompany debt transfer, there is no impact on
consolidated financial statements. However, if the parent has to go outside the consolidated
entity i.e. in case of indirect intercompany debt transfer, the impact of the transaction on the
consolidated entity must be reported.
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AACSB: Communication
AICPA: Reporting
8-32
Chapter 08 - Intercompany Indebtedness
39. On January 1, 2007, Gild Company acquired 60 percent of the outstanding common stock
of Leeds Company at the book value of the shares acquired. On that date, the fair value of
noncontrolling interest was equal to 40 percent of book value of Leeds. At the time of
purchase, Leeds had common stock of $1,000,000 outstanding and retained earnings of
$800,000.
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On December 31, 2007, Gild purchased 50 percent of Leeds' bonds outstanding which were
originally issued on January 2, 2004, at 99. The total bond issue has a face value of $600,000,
pays 10 percent interest annually, and has a 10-year maturity. Any premium or discount is
amortized on a straight-line basis. Gild paid $306,000 for its investment in Leeds' bonds and
intends to hold the bonds until maturity.
Income and dividends for Gild and Leeds for 2007 and 2008 are as follows:
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PA
Required:
A) Present the workpaper elimination entries necessary to prepare consolidated financial
statements for 2007 assuming Gild accounts for its investment in Leeds stock using the fully
adjusted equity method.
B) Present the workpaper elimination entries necessary to prepare consolidated financial
statements for 2008, assuming Gild accounts for its investment in Leeds stock using the cost
method.
8-33
Chapter 08 - Intercompany Indebtedness
PA
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a. Fully Adjusted Equity Method Entries for 2007:
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b. Cost Method Entries for 2008:
8-34
C
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AACSB: Analytic
AICPA: Measurement
PA
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Chapter 08 - Intercompany Indebtedness
8-35
Chapter 09 - Consolidation Ownership Issues
Chapter 09
Consolidation Ownership Issues
Multiple Choice Questions
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1. Windsor Corporation owns 75 percent of Elven Corporation's outstanding common stock.
Elven, in turn, owns 15 percent of Windsor's outstanding common stock. What percent of the
dividends paid by Windsor is reported as dividends declared in the consolidated retained
earnings statement?
A. None
B. 100 percent
C. 85 percent
D. 75 percent
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PA
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On January 1, 2009, Company A acquired 80 percent of the common stock and 60 percent of
the preferred stock of Company B, for $400,000 and $60,000, respectively. At the time of
acquisition, the fair value of the common shares of Company B held by the noncontrolling
interest was $100,000. Company B's balance sheet contained the following balances:
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For the year ended December 31, 2009, Company B reported net income of $100,000 and
paid dividends of $40,000. The preferred stock is cumulative and pays an annual dividend of
10 percent.
9-1
Chapter 09 - Consolidation Ownership Issues
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2. Based on the preceding information, what will be the equity method income reported by
Company A from its investment in Company B during 2009?
A. $32,000
B. $30,000
C. $72,000
D. $48,000
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3. Based on the preceding information, the eliminating entry to assign income to
noncontrolling interest to prepare the consolidated financial statements for Company A as of
December 31, 2009, will include:
A. a debit to Income to Noncontrolling Interest for $24,000.
B. a credit to Dividends Declared — Preferred Stock for $10,000.
C. a credit to Dividends Declared — Common Stock for $8,000.
D. a credit to Noncontrolling Interest for $12,000.
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4. Based on the preceding information, the entry to eliminate subsidiary preferred stock to
prepare the consolidated financial statements for Company A as of December 31, 2009, will
include:
A. a debit to Preferred Stock for $60,000.
B. a credit to Investment in Company B Preferred Stock for $40,000.
C. a debit to Retained Earnings for $40,000.
D. a credit to Noncontrolling Interest for $40,000.
9-2
Chapter 09 - Consolidation Ownership Issues
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Winner Corporation acquired 80 percent of the common shares and 70 percent of the
preferred shares of First Corporation at underlying book value on January 1, 2009. At that
date, the fair value of the noncontrolling interest in First's common stock was equal to 20
percent of the book value of its common stock. First's balance sheet at the time of acquisition
contained the following balances:
PA
The preferred shares are cumulative and have a 10 percent annual dividend rate and are four
years in arrears on January 1, 2009. All of the $5 par value preferred shares are callable at $6
per share. During 2009, First reported net income of $100,000 and paid no dividends.
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5. Based on the preceding information, what is First's contribution to consolidated net income
for 2009?
A. $80,000
B. $100,000
C. $90,000
D. $50,000
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6. Based on the preceding information, what will be the amount of income to be assigned to
the noncontrolling interest in the 2009 consolidated income statement?
A. $21,000
B. $18,000
C. $23,000
D. $15,000
9-3
Chapter 09 - Consolidation Ownership Issues
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7. Based on the preceding information, the amount assigned to noncontrolling stockholders'
share of preferred stock interest in the preparation of a consolidated balance sheet on January
1, 2009, is:
A. $40,000
B. $42,000
C. $36,000
D. $48,000
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8. Based on the preceding information, what is the portion of First's retained earnings
assignable to its preferred shareholders on January 1, 2009?
A. $40,000
B. $50,000
C. $60,000
D. $70,000
C
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9. Based on the information provided, what is the book value of the common stock on January
1, 2009?
A. $410,000
B. $360,000
C. $390,000
D. $350,000
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10. Based on the information provided, what amount will be reported as the noncontrolling
interest in the consolidated balance sheet on January 1, 2009?
A. $70,000
B. $130,000
C. $118,000
D. $142,000
9-4
Chapter 09 - Consolidation Ownership Issues
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On January 1, 2009, A Company acquired 85 percent of B Company's voting common stock
for $425,000. At that date, the fair value of the noncontrolling interest of B Company was
$75,000. Immediately after A Company acquired its ownership, B Company acquired 75
percent of C Company's stock for $150,000. The fair value of the noncontrolling interest of C
Company was $50,000 at that date. At January 1, 2009, the stockholders' equity sections of
the balance sheets of the companies were as follows:
PA
During 2009, A Company reported operating income of $175,000 and paid dividends of
$50,000. B Company reported operating income of $125,000 and paid dividends of $40,000.
C Company reported net income of $100,000 and paid dividends of $25,000.
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11. Based on the information provided, what amount of consolidated net income will A
Company report for 2009?
A. $175,000
B. $285,000
C. $356,250
D. $400,000
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12. Based on the information provided, the equity-method income recorded by A Company
is:
A. $125,000
B. $200,000
C. $170,000
D. $181,250
9-5
Chapter 09 - Consolidation Ownership Issues
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13. Based on the information provided, what amount of income will be assigned to the
noncontrolling interest in the consolidated income statement for 2009?
A. $55,000
B. $25,000
C. $30,000
D. $43,750
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14. Based on the information provided, what amount of income will be assigned to the
controlling interest in the consolidated income statement for 2009?
A. $400,000
B. $345,000
C. $285,000
D. $175,000
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PA
X Corporation owns 80 percent of Y Corporation's common stock and 40 percent of Z
Corporation's common stock. Additionally, Y Corporation owns 35 percent of Z Corporation's
common stock. The acquisitions were made at book values. The following information is
available for 2008:
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15. Based on the information provided, what amount of consolidated net income will X
Corporation report for 2008?
A. $148,750
B. $175,000
C. $150,000
D. $158,750
9-6
Chapter 09 - Consolidation Ownership Issues
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16. Based on the information provided, what amount of income will be assigned to the
noncontrolling interest in the 2008 consolidated income statement?
A. $23,750
B. $25,000
C. $18,000
D. $33,750
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17. Based on the information provided, what amount of income will be assigned to the
controlling interest in the 2008 consolidated income statement?
A. $130,750
B. $150,000
C. $141,250
D. $157,000
C
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18. Based on the information provided, what amount will be reported as dividends declared in
X Corporation's 2008 consolidated retained earnings statement?
A. $30,000
B. $50,000
C. $60,000
D. $0
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Janet Corporation holds 75 percent of Slider Corporation's voting common stock, acquired at
book value. The fair value of the noncontrolling interest at the date of acquisition was equal to
25 percent of the book value of Slider Corporation. On December 31, 2008, Slider
Corporation acquired 25 percent of Janet Corporation's stock. Slider records dividends
received from Janet as nonoperating income. In 2009, Janet reported operating income of
$100,000 and paid dividends of $40,000. During the same year, Slider reported operating
income of $75,000 and paid $20,000 in dividends.
9-7
Chapter 09 - Consolidation Ownership Issues
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19. Based on the information provided, what amount will be reported as consolidated net
income for 2009 under the treasury stock method?
A. $150,000
B. $100,000
C. $75,000
D. $175,000
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20. Based on the information provided, what amount will be reported as income assigned to
the controlling interest for 2009 under the treasury stock method?
A. $18,750
B. $156,250
C. $175,000
D. $100,000
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PA
Vision Corporation acquired 75 percent of the stock of Meta Company on January 1, 2007,
for $225,000. At that date, the fair value of the noncontrolling interest was $75,000. Meta's
balance sheet contained the following amounts at the time of the combination:
During each of the next three years, Meta reported net income of $30,000 and paid dividends
of $10,000. On January 1, 2009, Vision sold 1,500 shares of Meta's $10 par value shares for
$60,000 in cash. Vision used the basic equity method in accounting for its ownership of Meta
Company.
9-8
Chapter 09 - Consolidation Ownership Issues
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21. Based on the preceding information, what was the balance in the investment account
reported by Vision on January 1, 2009, before its sale of shares?
A. $225,000
B. $285,000
C. $245,000
D. $255,000
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22. Based on the preceding information, in the journal entry recorded by Vision for sale of
shares:
A. Cash will be credited for $60,000.
B. Investment in Meta Stock will be credited for $51,000.
C. Investment in Meta Stock will be credited for $60,000.
D. Additional Paid-in Capital will be credited for $45,000.
C
PA
23. Based on the preceding information, in the journal entry recorded by Vision for sale of
shares, Additional Paid-in Capital will be credited for:
A. $0.
B. $15,000.
C. $9,000.
D. $45,000.
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24. Based on the preceding information, in the elimination entries to complete a full
consolidation workpaper for 2009, Income to Noncontrolling Interest will be credited for:
A. $12,000.
B. $7,500.
C. $8,000.
D. $2,500.
25. Based on the preceding information, in the eliminating entries to complete a full
consolidation workpaper, Investment in Meta Stock at January 1, 2009, will be credited for:
A. $255,000.
B. $240,000.
C. $204,000.
D. $136,000.
9-9
Chapter 09 - Consolidation Ownership Issues
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Perfect Corporation acquired 70 percent of Trevor Company's shares on December 31, 2008,
for $140,000. At that date, the fair value of the noncontrolling interest was $60,000. On
January 1, 2010, Perfect acquired an additional 10 percent of Trevor's common stock for
$32,500. Summarized balance sheets for Trevor on the dates indicated are as follows:
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Trevor paid dividends of $10,000 in each of the three years. Perfect uses the basic equity
method in accounting for its investment in Trevor and amortizes all differentials over 5 years
against the related investment income. All differentials are assigned to patents in the
consolidated financial statements.
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26. Based on the preceding information, Trevor Company's net income for 2009 and 2010
are:
A. $10,000 and $20,000 respectively.
B. $25,000 and $35,000 respectively.
C. $35,000 and $45,000 respectively.
D. $25,000 and $45,000 respectively.
9-10
Chapter 09 - Consolidation Ownership Issues
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27. Based on the preceding information, what was the balance in Perfect's Investment in
Trevor Company Stock account on December 31, 2009?
A. $164,500
B. $157,500
C. $165,000
D. $168,000
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28. Based on the preceding information, what was the balance in Perfect's Investment in
Trevor Company Stock account on December 31, 2010?
A. $211,500
B. $218,000
C. $173,000
D. $216,000
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PA
29. Based on the preceding information, in the eliminating entry to assign differential and
amortize patents for the year:
A. Differential will be credited for $10,000.
B. Amortization Expense will be credited for $2,000.
C. Amortization Expense will be debited for $1,000.
D. Patents will be debited for $10,000.
9-11
Chapter 09 - Consolidation Ownership Issues
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Cinema Company acquired 70 percent of Movie Corporation's shares on December 31, 2005,
at underlying book value of $98,000. At that date, the fair value of the noncontrolling interest
was equal to 30 percent of the book value of Movie Corporation. Movie's balance sheet on
January 1, 2008, contained the following balances:
PA
On January 1, 2008, Movie acquired 5,000 of its own $2 par value common shares from
Nonaffiliated Corporation for $6 per share.
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30. Based on the preceding information, what is the increase in the book value of the equity
attributable to the parent as a result of the repurchase of shares by Movie Corporation?
A. $19,375
B. $6,125
C. $2,625
D. $9,000
9-12
Chapter 09 - Consolidation Ownership Issues
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31. Based on the preceding information, what will be the journal entry to be recorded on
Cinema Company's books to recognize the change in the book value of the shares it holds?
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A. Option A
B. Option B
C. Option C
D. Option D
C
PA
32. Based on the preceding information, the eliminating entry needed in preparing a
consolidated balance sheet immediately following the acquisition of shares will include:
A. a credit to Noncontrolling Interest for $19,375.
B. a credit to Additional Paid-In Capital for $75,000.
C. a debit to Treasury Shares for $30,000.
D. a credit to Investment in Movie stock for $6,125.
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33. Based on the preceding information, in the eliminating entry needed in preparing a
consolidated balance sheet immediately following the acquisition of shares, Investment in
Movie stock will be credited for:
A. $165,625.
B. $135,625.
C. $185,000.
D. $155,000.
9-13
Chapter 09 - Consolidation Ownership Issues
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Lemon Corporation acquired 80 percent of Bricks Corporation's common shares on January
1, 2007, at underlying book value. At that date, the fair value of the noncontrolling interest
was equal to 20 percent of the book value of Bricks Corporation. Bricks prepared the
following balance sheet as of December 31, 2008:
PA
On January 1, 2009, Bricks declares a stock dividend of 9,000 shares on its $5 par value
common stock. The current market price per share of Bricks stock on January 1, 2009, is $20.
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34. Based on the preceding information, the investment elimination entry required to prepare
a consolidated balance sheet immediately after the stock dividend is issued will include a
debit to Additional Paid-In Capital for:
A. $50,000.
B. $95,000.
C. $230,000.
D. $185,500.
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35. Based on the preceding information, the investment elimination entry required to prepare
a consolidated balance sheet immediately after the stock dividend is issued will include a
debit to Retained Earnings for:
A. $200,000
B. $65,000
C. $155,000
D. $20,000
9-14
Chapter 09 - Consolidation Ownership Issues
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36. Assume instead that Bricks declared a stock dividend of 3,000 shares on its $5 par value
common stock. The investment elimination entry required to prepare a consolidated balance
sheet immediately after the stock dividend is issued will include a debit to Additional Paid-In
Capital for:
A. $65,000.
B. $95,000.
C. $50,000.
D. $110,000.
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37. Assume that Bricks declared a stock dividend of 3,000 shares on its $5 par value common
stock. The investment elimination entry required to prepare a consolidated balance sheet
immediately after the stock dividend is issued will include a debit to Retained Earnings for:
A. $185,000.
B. $65,000.
C. $155,000.
D. $140,000.
9-15
Chapter 09 - Consolidation Ownership Issues
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Micron Corporation owns 75 percent of the common shares and 60 percent of the preferred
shares of Stanley Company, all acquired at underlying book value on January 1, 2008. At that
date, the fair value of the noncontrolling interest in Stanley's common stock was equal to 25
percent of the book value of its common stock. The balance sheets of Micron and Stanley
immediately after the acquisition contained these balances:
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Stanley's preferred stock pays a 12 percent dividend and is cumulative. For 2008, Stanley
reports net income of $40,000 and pays no dividends. Micron reports income from its separate
operations of $75,000 and pays dividends of $30,000 during 2008.
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38. Based on the preceding information, what is the total noncontrolling interest reported in
the consolidated balance sheet as of January 1, 2008?
A. $80,000
B. $40,000
C. $50,000
D. $60,000
9-16
Chapter 09 - Consolidation Ownership Issues
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39. Based on the preceding information, what is the income assigned to the noncontrolling
interest in the 2008 consolidated income statement?
A. $10,000
B. $7,000
C. $11,800
D. $4,800
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40. Based on the preceding information, what amount of income is attributable to the
controlling interest in the consolidated income statement for 2008?
A. $75,000
B. $105,000
C. $96,000
D. $103,200
C
PA
41. Based on the preceding information, what is the total stockholders' equity reported in the
consolidated balance sheet as of January 1, 2008?
A. $450,000
B. $530,000
C. $490,000
D. $370,000
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42. Based on the preceding information, what amount is reported as preferred stock
outstanding reported in the consolidated balance sheet as of January 1, 2008?
A. $0
B. $40,000
C. $50,000
D. $44,000
Essay Questions
9-17
Chapter 09 - Consolidation Ownership Issues
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43. Windsor Corporation acquired 90 percent of Agro Corporation's common shares on
January 1, 2006, at underlying book value. At that date, the fair value of the noncontrolling
interest was equal to 10 percent of the book value of Agro. Agro Corporation prepared the
following balance sheet as of January 1, 2009:
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PA
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The company is considering a 3-for-1 stock split, a stock dividend of 7,000 shares, or a stock
dividend of 2,000 shares on its $5 par value common stock. The current market price per
share of Agro stock on January 1, 2009, is $15.
Required:
Give the investment elimination entry required to prepare a consolidated balance sheet at the
close of business on January 1, 2009, for each of the alternative transactions under
consideration by Agro Corporation.
9-18
Chapter 09 - Consolidation Ownership Issues
44. On January 1, 2007, Infinity Corporation acquired 90 percent of Trader Corporation's
common stock for $315,000. At the date of acquisition, the fair value of the noncontrolling
interest was $35,000, and Trader reported common stock outstanding of $150,000 and
retained earnings of $180,000. The differential is assigned to a patent with a remaining life of
eight years. Each year since acquisition, Trader has reported income from operations of
$50,000 and paid dividends of $30,000.
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Trader acquired 75 percent ownership of Minnow Company on January 1, 2009, for
$187,500. At that date, the fair value of the noncontrolling interest was $62,500, and Minnow
reported common stock outstanding of $100,000 and retained earnings of $130,000. In 2009,
Minnow reported net income of $20,000 and paid dividends of $8,000. The differential is
assigned to buildings and equipment with an economic life of 10 years at the date of
acquisition.
Required:
1) Prepare the journal entries recorded by Trader for its investment in Minnow during 2009.
2) Prepare the journal entries recorded by Infinity for its investment in Trader during 2009.
3) Prepare the eliminating entries related to Trader's investment in Minnow and Infinity's
investment in Trader needed to prepare consolidated financial statements for Infinity and its
subsidiaries at December 31, 2009.
9-19
Chapter 09 - Consolidation Ownership Issues
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45. On January 1, 2008, Orion Company acquired 70 percent of Simplex Company's stock at
underlying book value. At that date, the fair value of the noncontrolling interest was equal to
30 percent of the book value of Simplex Company. On December 31, 2009, Simplex acquired
15 percent of Orion's stock. Balance sheets for the two companies on December 31, 2009, are
as follows:
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Required:
Assuming that the treasury stock method is used in reporting Orion's shares held by Simplex,
prepare a consolidated balance sheet workpaper and consolidated balance sheet for December
31, 2009.
9-20
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PA
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Chapter 09 - Consolidation Ownership Issues
9-21
Chapter 09 - Consolidation Ownership Issues
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PA
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46. Portfolio Corporation acquired 70 percent ownership of Index Company on January 1,
2006, at underlying book value. At that date, the fair value of the noncontrolling interest was
equal to 30 percent of the book value of Index. On January 1, 2008, Portfolio sold 1,000
shares of Index Company for $20,000 to Adventure Corporation and recorded a $5,000 gain.
Trial balances for the companies on December 31, 2008, contain the following data:
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Index Company's net income was earned evenly throughout the year. Both companies
declared and paid their dividends on December 31, 2008. Portfolio uses the basic equity
method in accounting for its investment in Index.
Required:
1) Prepare the elimination entries needed to complete a full consolidation workpaper for 2008.
2) Prepare a consolidation workpaper for 2008.
9-22
Chapter 09 - Consolidation Ownership Issues
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Chapter 09 Consolidation Ownership Issues Answer Key
Multiple Choice Questions
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AACSB: Reflective Thinking
AICPA: Reporting
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1. Windsor Corporation owns 75 percent of Elven Corporation's outstanding common stock.
Elven, in turn, owns 15 percent of Windsor's outstanding common stock. What percent of the
dividends paid by Windsor is reported as dividends declared in the consolidated retained
earnings statement?
A. None
B. 100 percent
C. 85 percent
D. 75 percent
9-23
Chapter 09 - Consolidation Ownership Issues
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On January 1, 2009, Company A acquired 80 percent of the common stock and 60 percent of
the preferred stock of Company B, for $400,000 and $60,000, respectively. At the time of
acquisition, the fair value of the common shares of Company B held by the noncontrolling
interest was $100,000. Company B's balance sheet contained the following balances:
PA
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For the year ended December 31, 2009, Company B reported net income of $100,000 and
paid dividends of $40,000. The preferred stock is cumulative and pays an annual dividend of
10 percent.
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2. Based on the preceding information, what will be the equity method income reported by
Company A from its investment in Company B during 2009?
A. $32,000
B. $30,000
C. $72,000
D. $48,000
AACSB: Analytic
AICPA: Measurement
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3. Based on the preceding information, the eliminating entry to assign income to
noncontrolling interest to prepare the consolidated financial statements for Company A as of
December 31, 2009, will include:
A. a debit to Income to Noncontrolling Interest for $24,000.
B. a credit to Dividends Declared — Preferred Stock for $10,000.
C. a credit to Dividends Declared — Common Stock for $8,000.
D. a credit to Noncontrolling Interest for $12,000.
AACSB: Analytic
AICPA: Measurement
9-24
Chapter 09 - Consolidation Ownership Issues
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4. Based on the preceding information, the entry to eliminate subsidiary preferred stock to
prepare the consolidated financial statements for Company A as of December 31, 2009, will
include:
A. a debit to Preferred Stock for $60,000.
B. a credit to Investment in Company B Preferred Stock for $40,000.
C. a debit to Retained Earnings for $40,000.
D. a credit to Noncontrolling Interest for $40,000.
AACSB: Analytic
AICPA: Measurement
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PA
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Winner Corporation acquired 80 percent of the common shares and 70 percent of the
preferred shares of First Corporation at underlying book value on January 1, 2009. At that
date, the fair value of the noncontrolling interest in First's common stock was equal to 20
percent of the book value of its common stock. First's balance sheet at the time of acquisition
contained the following balances:
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The preferred shares are cumulative and have a 10 percent annual dividend rate and are four
years in arrears on January 1, 2009. All of the $5 par value preferred shares are callable at $6
per share. During 2009, First reported net income of $100,000 and paid no dividends.
9-25
Chapter 09 - Consolidation Ownership Issues
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5. Based on the preceding information, what is First's contribution to consolidated net income
for 2009?
A. $80,000
B. $100,000
C. $90,000
D. $50,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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6. Based on the preceding information, what will be the amount of income to be assigned to
the noncontrolling interest in the 2009 consolidated income statement?
A. $21,000
B. $18,000
C. $23,000
D. $15,000
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7. Based on the preceding information, the amount assigned to noncontrolling stockholders'
share of preferred stock interest in the preparation of a consolidated balance sheet on January
1, 2009, is:
A. $40,000
B. $42,000
C. $36,000
D. $48,000
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AACSB: Analytic
AICPA: Measurement
9-26
Chapter 09 - Consolidation Ownership Issues
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8. Based on the preceding information, what is the portion of First's retained earnings
assignable to its preferred shareholders on January 1, 2009?
A. $40,000
B. $50,000
C. $60,000
D. $70,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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9. Based on the information provided, what is the book value of the common stock on January
1, 2009?
A. $410,000
B. $360,000
C. $390,000
D. $350,000
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10. Based on the information provided, what amount will be reported as the noncontrolling
interest in the consolidated balance sheet on January 1, 2009?
A. $70,000
B. $130,000
C. $118,000
D. $142,000
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AACSB: Analytic
AICPA: Measurement
9-27
Chapter 09 - Consolidation Ownership Issues
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On January 1, 2009, A Company acquired 85 percent of B Company's voting common stock
for $425,000. At that date, the fair value of the noncontrolling interest of B Company was
$75,000. Immediately after A Company acquired its ownership, B Company acquired 75
percent of C Company's stock for $150,000. The fair value of the noncontrolling interest of C
Company was $50,000 at that date. At January 1, 2009, the stockholders' equity sections of
the balance sheets of the companies were as follows:
PA
During 2009, A Company reported operating income of $175,000 and paid dividends of
$50,000. B Company reported operating income of $125,000 and paid dividends of $40,000.
C Company reported net income of $100,000 and paid dividends of $25,000.
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11. Based on the information provided, what amount of consolidated net income will A
Company report for 2009?
A. $175,000
B. $285,000
C. $356,250
D. $400,000
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AACSB: Analytic
AICPA: Measurement
9-28
Chapter 09 - Consolidation Ownership Issues
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12. Based on the information provided, the equity-method income recorded by A Company
is:
A. $125,000
B. $200,000
C. $170,000
D. $181,250
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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13. Based on the information provided, what amount of income will be assigned to the
noncontrolling interest in the consolidated income statement for 2009?
A. $55,000
B. $25,000
C. $30,000
D. $43,750
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14. Based on the information provided, what amount of income will be assigned to the
controlling interest in the consolidated income statement for 2009?
A. $400,000
B. $345,000
C. $285,000
D. $175,000
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AACSB: Analytic
AICPA: Measurement
9-29
Chapter 09 - Consolidation Ownership Issues
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X Corporation owns 80 percent of Y Corporation's common stock and 40 percent of Z
Corporation's common stock. Additionally, Y Corporation owns 35 percent of Z Corporation's
common stock. The acquisitions were made at book values. The following information is
available for 2008:
AACSB: Analytic
AICPA: Measurement
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15. Based on the information provided, what amount of consolidated net income will X
Corporation report for 2008?
A. $148,750
B. $175,000
C. $150,000
D. $158,750
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16. Based on the information provided, what amount of income will be assigned to the
noncontrolling interest in the 2008 consolidated income statement?
A. $23,750
B. $25,000
C. $18,000
D. $33,750
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AACSB: Analytic
AICPA: Measurement
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Chapter 09 - Consolidation Ownership Issues
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17. Based on the information provided, what amount of income will be assigned to the
controlling interest in the 2008 consolidated income statement?
A. $130,750
B. $150,000
C. $141,250
D. $157,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
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18. Based on the information provided, what amount will be reported as dividends declared in
X Corporation's 2008 consolidated retained earnings statement?
A. $30,000
B. $50,000
C. $60,000
D. $0
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Janet Corporation holds 75 percent of Slider Corporation's voting common stock, acquired at
book value. The fair value of the noncontrolling interest at the date of acquisition was equal to
25 percent of the book value of Slider Corporation. On December 31, 2008, Slider
Corporation acquired 25 percent of Janet Corporation's stock. Slider records dividends
received from Janet as nonoperating income. In 2009, Janet reported operating income of
$100,000 and paid dividends of $40,000. During the same year, Slider reported operating
income of $75,000 and paid $20,000 in dividends.
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19. Based on the information provided, what amount will be reported as consolidated net
income for 2009 under the treasury stock method?
A. $150,000
B. $100,000
C. $75,000
D. $175,000
AACSB: Analytic
AICPA: Measurement
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Chapter 09 - Consolidation Ownership Issues
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20. Based on the information provided, what amount will be reported as income assigned to
the controlling interest for 2009 under the treasury stock method?
A. $18,750
B. $156,250
C. $175,000
D. $100,000
AACSB: Analytic
AICPA: Measurement
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Vision Corporation acquired 75 percent of the stock of Meta Company on January 1, 2007,
for $225,000. At that date, the fair value of the noncontrolling interest was $75,000. Meta's
balance sheet contained the following amounts at the time of the combination:
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During each of the next three years, Meta reported net income of $30,000 and paid dividends
of $10,000. On January 1, 2009, Vision sold 1,500 shares of Meta's $10 par value shares for
$60,000 in cash. Vision used the basic equity method in accounting for its ownership of Meta
Company.
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21. Based on the preceding information, what was the balance in the investment account
reported by Vision on January 1, 2009, before its sale of shares?
A. $225,000
B. $285,000
C. $245,000
D. $255,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
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22. Based on the preceding information, in the journal entry recorded by Vision for sale of
shares:
A. Cash will be credited for $60,000.
B. Investment in Meta Stock will be credited for $51,000.
C. Investment in Meta Stock will be credited for $60,000.
D. Additional Paid-in Capital will be credited for $45,000.
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23. Based on the preceding information, in the journal entry recorded by Vision for sale of
shares, Additional Paid-in Capital will be credited for:
A. $0.
B. $15,000.
C. $9,000.
D. $45,000.
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AACSB: Analytic
AICPA: Measurement
9-33
Chapter 09 - Consolidation Ownership Issues
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24. Based on the preceding information, in the elimination entries to complete a full
consolidation workpaper for 2009, Income to Noncontrolling Interest will be credited for:
A. $12,000.
B. $7,500.
C. $8,000.
D. $2,500.
AACSB: Analytic
AICPA: Measurement
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AICPA: Measurement
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25. Based on the preceding information, in the eliminating entries to complete a full
consolidation workpaper, Investment in Meta Stock at January 1, 2009, will be credited for:
A. $255,000.
B. $240,000.
C. $204,000.
D. $136,000.
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Chapter 09 - Consolidation Ownership Issues
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Perfect Corporation acquired 70 percent of Trevor Company's shares on December 31, 2008,
for $140,000. At that date, the fair value of the noncontrolling interest was $60,000. On
January 1, 2010, Perfect acquired an additional 10 percent of Trevor's common stock for
$32,500. Summarized balance sheets for Trevor on the dates indicated are as follows:
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Trevor paid dividends of $10,000 in each of the three years. Perfect uses the basic equity
method in accounting for its investment in Trevor and amortizes all differentials over 5 years
against the related investment income. All differentials are assigned to patents in the
consolidated financial statements.
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26. Based on the preceding information, Trevor Company's net income for 2009 and 2010
are:
A. $10,000 and $20,000 respectively.
B. $25,000 and $35,000 respectively.
C. $35,000 and $45,000 respectively.
D. $25,000 and $45,000 respectively.
AACSB: Analytic
AICPA: Measurement
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Chapter 09 - Consolidation Ownership Issues
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27. Based on the preceding information, what was the balance in Perfect's Investment in
Trevor Company Stock account on December 31, 2009?
A. $164,500
B. $157,500
C. $165,000
D. $168,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
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28. Based on the preceding information, what was the balance in Perfect's Investment in
Trevor Company Stock account on December 31, 2010?
A. $211,500
B. $218,000
C. $173,000
D. $216,000
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29. Based on the preceding information, in the eliminating entry to assign differential and
amortize patents for the year:
A. Differential will be credited for $10,000.
B. Amortization Expense will be credited for $2,000.
C. Amortization Expense will be debited for $1,000.
D. Patents will be debited for $10,000.
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AICPA: Measurement
9-36
Chapter 09 - Consolidation Ownership Issues
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Cinema Company acquired 70 percent of Movie Corporation's shares on December 31, 2005,
at underlying book value of $98,000. At that date, the fair value of the noncontrolling interest
was equal to 30 percent of the book value of Movie Corporation. Movie's balance sheet on
January 1, 2008, contained the following balances:
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On January 1, 2008, Movie acquired 5,000 of its own $2 par value common shares from
Nonaffiliated Corporation for $6 per share.
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30. Based on the preceding information, what is the increase in the book value of the equity
attributable to the parent as a result of the repurchase of shares by Movie Corporation?
A. $19,375
B. $6,125
C. $2,625
D. $9,000
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AICPA: Measurement
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Chapter 09 - Consolidation Ownership Issues
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31. Based on the preceding information, what will be the journal entry to be recorded on
Cinema Company's books to recognize the change in the book value of the shares it holds?
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A. Option A
B. Option B
C. Option C
D. Option D
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AACSB: Analytic
AICPA: Measurement
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32. Based on the preceding information, the eliminating entry needed in preparing a
consolidated balance sheet immediately following the acquisition of shares will include:
A. a credit to Noncontrolling Interest for $19,375.
B. a credit to Additional Paid-In Capital for $75,000.
C. a debit to Treasury Shares for $30,000.
D. a credit to Investment in Movie stock for $6,125.
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AICPA: Measurement
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Chapter 09 - Consolidation Ownership Issues
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33. Based on the preceding information, in the eliminating entry needed in preparing a
consolidated balance sheet immediately following the acquisition of shares, Investment in
Movie stock will be credited for:
A. $165,625.
B. $135,625.
C. $185,000.
D. $155,000.
AACSB: Analytic
AICPA: Measurement
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Lemon Corporation acquired 80 percent of Bricks Corporation's common shares on January
1, 2007, at underlying book value. At that date, the fair value of the noncontrolling interest
was equal to 20 percent of the book value of Bricks Corporation. Bricks prepared the
following balance sheet as of December 31, 2008:
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On January 1, 2009, Bricks declares a stock dividend of 9,000 shares on its $5 par value
common stock. The current market price per share of Bricks stock on January 1, 2009, is $20.
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Chapter 09 - Consolidation Ownership Issues
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34. Based on the preceding information, the investment elimination entry required to prepare
a consolidated balance sheet immediately after the stock dividend is issued will include a
debit to Additional Paid-In Capital for:
A. $50,000.
B. $95,000.
C. $230,000.
D. $185,500.
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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35. Based on the preceding information, the investment elimination entry required to prepare
a consolidated balance sheet immediately after the stock dividend is issued will include a
debit to Retained Earnings for:
A. $200,000
B. $65,000
C. $155,000
D. $20,000
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36. Assume instead that Bricks declared a stock dividend of 3,000 shares on its $5 par value
common stock. The investment elimination entry required to prepare a consolidated balance
sheet immediately after the stock dividend is issued will include a debit to Additional Paid-In
Capital for:
A. $65,000.
B. $95,000.
C. $50,000.
D. $110,000.
AACSB: Analytic
AICPA: Measurement
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37. Assume that Bricks declared a stock dividend of 3,000 shares on its $5 par value common
stock. The investment elimination entry required to prepare a consolidated balance sheet
immediately after the stock dividend is issued will include a debit to Retained Earnings for:
A. $185,000.
B. $65,000.
C. $155,000.
D. $140,000.
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AICPA: Measurement
9-41
Chapter 09 - Consolidation Ownership Issues
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Micron Corporation owns 75 percent of the common shares and 60 percent of the preferred
shares of Stanley Company, all acquired at underlying book value on January 1, 2008. At that
date, the fair value of the noncontrolling interest in Stanley's common stock was equal to 25
percent of the book value of its common stock. The balance sheets of Micron and Stanley
immediately after the acquisition contained these balances:
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Stanley's preferred stock pays a 12 percent dividend and is cumulative. For 2008, Stanley
reports net income of $40,000 and pays no dividends. Micron reports income from its separate
operations of $75,000 and pays dividends of $30,000 during 2008.
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38. Based on the preceding information, what is the total noncontrolling interest reported in
the consolidated balance sheet as of January 1, 2008?
A. $80,000
B. $40,000
C. $50,000
D. $60,000
AACSB: Analytic
AICPA: Measurement
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Chapter 09 - Consolidation Ownership Issues
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39. Based on the preceding information, what is the income assigned to the noncontrolling
interest in the 2008 consolidated income statement?
A. $10,000
B. $7,000
C. $11,800
D. $4,800
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
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40. Based on the preceding information, what amount of income is attributable to the
controlling interest in the consolidated income statement for 2008?
A. $75,000
B. $105,000
C. $96,000
D. $103,200
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41. Based on the preceding information, what is the total stockholders' equity reported in the
consolidated balance sheet as of January 1, 2008?
A. $450,000
B. $530,000
C. $490,000
D. $370,000
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AICPA: Measurement
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42. Based on the preceding information, what amount is reported as preferred stock
outstanding reported in the consolidated balance sheet as of January 1, 2008?
A. $0
B. $40,000
C. $50,000
D. $44,000
AACSB: Analytic
AICPA: Measurement
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Essay Questions
9-44
Chapter 09 - Consolidation Ownership Issues
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43. Windsor Corporation acquired 90 percent of Agro Corporation's common shares on
January 1, 2006, at underlying book value. At that date, the fair value of the noncontrolling
interest was equal to 10 percent of the book value of Agro. Agro Corporation prepared the
following balance sheet as of January 1, 2009:
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The company is considering a 3-for-1 stock split, a stock dividend of 7,000 shares, or a stock
dividend of 2,000 shares on its $5 par value common stock. The current market price per
share of Agro stock on January 1, 2009, is $15.
Required:
Give the investment elimination entry required to prepare a consolidated balance sheet at the
close of business on January 1, 2009, for each of the alternative transactions under
consideration by Agro Corporation.
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AICPA: Measurement
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Chapter 09 - Consolidation Ownership Issues
9-46
Chapter 09 - Consolidation Ownership Issues
44. On January 1, 2007, Infinity Corporation acquired 90 percent of Trader Corporation's
common stock for $315,000. At the date of acquisition, the fair value of the noncontrolling
interest was $35,000, and Trader reported common stock outstanding of $150,000 and
retained earnings of $180,000. The differential is assigned to a patent with a remaining life of
eight years. Each year since acquisition, Trader has reported income from operations of
$50,000 and paid dividends of $30,000.
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Trader acquired 75 percent ownership of Minnow Company on January 1, 2009, for
$187,500. At that date, the fair value of the noncontrolling interest was $62,500, and Minnow
reported common stock outstanding of $100,000 and retained earnings of $130,000. In 2009,
Minnow reported net income of $20,000 and paid dividends of $8,000. The differential is
assigned to buildings and equipment with an economic life of 10 years at the date of
acquisition.
Required:
1) Prepare the journal entries recorded by Trader for its investment in Minnow during 2009.
2) Prepare the journal entries recorded by Infinity for its investment in Trader during 2009.
3) Prepare the eliminating entries related to Trader's investment in Minnow and Infinity's
investment in Trader needed to prepare consolidated financial statements for Infinity and its
subsidiaries at December 31, 2009.
9-47
Chapter 09 - Consolidation Ownership Issues
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1) Journal entries recorded by Trader Corporation on its investment in Minnow Company:
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2) Journal entries recorded by Infinity Corporation on its investment in Trader Corporation:
3) Eliminating entries:
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Chapter 09 - Consolidation Ownership Issues
9-49
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Chapter 09 - Consolidation Ownership Issues
AACSB: Analytic
AICPA: Measurement
9-50
Chapter 09 - Consolidation Ownership Issues
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45. On January 1, 2008, Orion Company acquired 70 percent of Simplex Company's stock at
underlying book value. At that date, the fair value of the noncontrolling interest was equal to
30 percent of the book value of Simplex Company. On December 31, 2009, Simplex acquired
15 percent of Orion's stock. Balance sheets for the two companies on December 31, 2009, are
as follows:
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Required:
Assuming that the treasury stock method is used in reporting Orion's shares held by Simplex,
prepare a consolidated balance sheet workpaper and consolidated balance sheet for December
31, 2009.
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Chapter 09 - Consolidation Ownership Issues
9-52
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Chapter 09 - Consolidation Ownership Issues
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AACSB: Analytic
AICPA: Measurement
9-53
Chapter 09 - Consolidation Ownership Issues
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46. Portfolio Corporation acquired 70 percent ownership of Index Company on January 1,
2006, at underlying book value. At that date, the fair value of the noncontrolling interest was
equal to 30 percent of the book value of Index. On January 1, 2008, Portfolio sold 1,000
shares of Index Company for $20,000 to Adventure Corporation and recorded a $5,000 gain.
Trial balances for the companies on December 31, 2008, contain the following data:
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Index Company's net income was earned evenly throughout the year. Both companies
declared and paid their dividends on December 31, 2008. Portfolio uses the basic equity
method in accounting for its investment in Index.
Required:
1) Prepare the elimination entries needed to complete a full consolidation workpaper for 2008.
2) Prepare a consolidation workpaper for 2008.
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Chapter 09 - Consolidation Ownership Issues
9-55
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Chapter 09 - Consolidation Ownership Issues
9-56
Chapter 09 - Consolidation Ownership Issues
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AICPA: Measurement
9-57
Chapter 10 - Additional Consolidation Reporting Issues
Chapter 10
Additional Consolidation Reporting Issues
Multiple Choice Questions
1. Which sections of the cash flow statement are affected by the difference in the direct and
indirect approaches of presenting a cash flow statement?
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I. Operating activities section
II. Investing activities section
III. Financing activities section
A. I
B. II
C. III
D. I, II, and III
C
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2. Which of the following observations concerning the comparisons between the direct and
indirect approaches of presenting a cash flow statement is true?
A. The final number of cash flows from operating activities is different under the two
approaches.
B. The direct approach provides a clearer picture of cash flows related to operations.
C. Authoritative bodies have generally expressed a preference for the indirect method.
D. A separate reconciliation of operating cash flows and net income is required under the
indirect approach.
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Sigma Company develops and markets organic food products to natural foods retailers. The
following information is available for the company for the year 2008:
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Chapter 10 - Additional Consolidation Reporting Issues
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3. Based on the preceding information, what amount will be reported by the company as cash
received from customers during the year?
A. $455,000
B. $475,000
C. $450,000
D. $425,000
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4. Based on the preceding information, what amount will be reported by the company as cash
payments to suppliers for 2008?
A. $292,000
B. $305,000
C. $262,000
D. $258,000
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5. Based on the preceding information, what amount will be reported by the company as cash
flows from operating activities for 2008?
A. $175,000
B. $133,000
C. $167,000
D. $207,000
10-2
Chapter 10 - Additional Consolidation Reporting Issues
Tower Corporation's controller has just finished preparing a consolidated balance sheet,
income statement, and statement of changes in retained earnings for the year ended December
31, 2009. Tower owns 80 percent of Network Corporation's stock, which it acquired at
underlying book value on November 1, 2006. At that date, the fair value of the noncontrolling
interest was equal to 20 percent of Network Corporation's book value. The following
information is available:
Network reported net income of $50,000 for 2009.
Tower paid dividends of $30,000 in 2009.
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Network paid dividends of $10,000 in 2009.
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Consolidated net income for 2009 was $160,000.
Tower issued common stock on February, 18, 2009, for a total of $100,000.
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Consolidated wages payable decreased by $6,000 in 2009.
Consolidated depreciation expense for the year was $15,000.
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Consolidated accounts receivable decreased by $20,000 in 2009.
Bonds payable of Tower with a book value of $102,000 were retired for $100,000 on
December 31, 2009.
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Consolidated amortization expense on patents was $10,000 for 2009.
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Tower sold land that it had purchased for $75,000 to a nonaffiliate for $80,000 on June 10,
2009.
Consolidated accounts payable decreased by $7,000 during 2009.
Total purchases of equipment by Tower and Network during 2009 were $180,000.
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Consolidated inventory increased by $36,000 during 2009.
There were no intercompany transfers between Tower and Network in 2009 or prior years
except for Network's payment of dividends. Tower uses the indirect method in preparing its
cash flow statement.
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Chapter 10 - Additional Consolidation Reporting Issues
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6. Based on the preceding information, what amount will be reported in the consolidated cash
flow statement as net cash provided by operating activities for 2009?
A. $207,000
B. $163,000
C. $180,000
D. $149,000
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7. Based on the preceding information, what amount will be reported in the consolidated cash
flow statement as net cash used in investing activities for 2009?
A. $180,000
B. $100,000
C. $255,000
D. $110,000
C
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8. Based on the preceding information, what amount will be reported in the consolidated cash
flow statement as net cash used in financing activities for 2009?
A. $32,000
B. $38,000
C. $42,000
D. $70,000
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9. Based on the preceding information, what was the change in cash balance for the
consolidated entity for 2009?
A. Increase of $49,000
B. Decrease of $66,000
C. Increase of $17,000
D. Increase of $32,000
10-4
Chapter 10 - Additional Consolidation Reporting Issues
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On July 1, 2008, Fair Logic Corporation acquires 75 percent of Integrated Systems Inc.
common stock for its underlying book value. At the time of acquisition, the fair value of the
noncontrolling interest is equal to its proportionate share of book value of Integrated Systems.
On January 1, 2008 Integrated reported common stock of $100,000 and retained earnings of
$130,000. For the year 2008, Integrated reports the following items:
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Fair Logic uses the equity method in accounting for this investment.
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10. Based on the preceding information, what is the book value of shares acquired by Fair
Logic on July 1, 2008?
A. $240,000
B. $191,250
C. $230,000
D. $180,000
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11. Based on the preceding information, what is the fair value of the noncontrolling interest at
the time of acquisition?
A. $47,813
B. $57,500
C. $60,000
D. $45,000
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Chapter 10 - Additional Consolidation Reporting Issues
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12. Based on the preceding information, what journal entry would Fair Logic make to record
equity method income for the year?
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A. Option A
B. Option B
C. Option C
D. Option D
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13. For a subsidiary to be eligible to be included in a consolidated tax return, at least _____ of
its stock must be held by the parent company or another company included in the consolidated
return.
A. 50 percent
B. 40 percent
C. 75 percent
D. 80 percent
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Jupiter Corporation's consolidated cash flow statement for the year ended December 31,
2008, reported operating cash inflows of $160,000, financing cash outflows of $90,000, and
investing cash outflows $55,000, and an ending cash balance of $75,000. Jupiter acquired 75
percent of Ganymede Company's common stock on July 1, 2006, at book value. At that date,
the fair value of the noncontrolling interest was equal to 25 percent of Ganymede Company's
book value. Ganymede reported net income of $20,000, paid dividends of $8,000 in 2008, and
is included in Jupiter's consolidated statements. Jupiter paid dividends of $25,000 in 2008.
The indirect method is used in computing cash flow from operations.
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Chapter 10 - Additional Consolidation Reporting Issues
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14. Based on the information provided, what was the consolidated cash balance at January 1,
2008?
A. $60,000
B. $85,000
C. $15,000
D. $380,000
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15. Based on the information provided, what amount was reported as dividends paid in the
cash flow from financing activities section of the consolidated statement of cash flows?
A. $25,000
B. $33,000
C. $27,000
D. $8,000
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16. Dividends paid to noncontrolling shareholders:
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I. are reported as a cash outflow in the consolidated cash flow statement.
II. represent funds that are no longer available to the consolidated entity.
III. are reported in the consolidated retained earnings statement.
A. Observation I alone is true.
B. Observation III alone is true.
C. Observations I and II are true.
D. Observations I, II, and II are true.
10-7
Chapter 10 - Additional Consolidation Reporting Issues
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New Life Corporation has just finished preparing a consolidated balance sheet, income
statement, and statement of changes in retained earnings for 2009. The following items are
proposed for inclusion in the consolidated cash flow statement:
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New Life holds 75 percent of the voting stock of Shane Pharmaceuticals, acquired at book
value on June 21, 2006. On the date of the acquisition, the fair value of the noncontrolling
interest was equal to 25 percent of the book value of Shane.
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17. Based on the preceding information, what amount will be reported in the consolidated
cash flow statement as net cash provided by operating activities for 2009?
A. $350,000
B. $463,000
C. $335,000
D. $421,000
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18. Based on the preceding information, what amount will be reported in the consolidated
cash flow statement as net cash used in investing activities for 2009?
A. $200,000
B. $142,000
C. $155,000
D. $130,000
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19. Based on the preceding information, what amount will be reported in the consolidated
cash flow statement as net cash used in financing activities for 2009?
A. $40,000
B. $55,000
C. $90,000
D. $10,000
C
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20. Based on the preceding information, what was the change in cash balance for the
consolidated entity for 2009?
A. Decrease of $153,000
B. Increase of $450,000
C. Increase of $293,000
D. Increase of $150,000
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21. Assume that New Life uses the direct method of computing cash flows from operating
activities. Based on the preceding information, what amount will be reported by the company
as cash received from customers during the year?
A. $815,000
B. $785,000
C. $800,000
D. $835,000
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22. Assume that New Life uses the direct method of computing cash flows from operating
activities. Based on the preceding information, what amount will be reported by the company
as cash payments to suppliers for 2009?
A. $350,000
B. $348,000
C. $312,000
D. $352,000
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Catalyst Corporation acquired 90 percent of Trigger Corporation's common stock on
September 30, 2008 for $225,000. At that date, the fair value of the noncontrolling interest
was $25,000. On January 1, 2008, Trigger reported the following stockholders' equity
balances:
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Trigger reported net income of $80,000 in 2008, earned uniformly throughout the year, and
declared and paid dividends of $10,000 on June 30 and $30,000 on December 31, 2008.
Catalyst reported retained earnings of $250,000 on January 1, 2008, and had 2008 income of
$120,000 from its separate operations. Catalyst paid dividends of $50,000 on December 31,
2008. Catalyst accounts for its investment in Trigger Corporation using the basic equity
method.
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23. Based on the information provided, what is the consolidated net income reported for the
year 2008?
A. $120,000
B. $138,000
C. $140,000
D. $192,000
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Chapter 10 - Additional Consolidation Reporting Issues
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24. Based on the information provided, what is the consolidated income to the controlling
interest reported for the year 2008?
A. $192,000
B. $138,000
C. $140,000
D. $120,000
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25. Based on the information provided, what is the amount of consolidated retained earnings
as of December 31, 2008?
A. $340,000
B. $250,000
C. $338,000
D. $388,000
C
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26. Based on the information provided, what is the balance of Catalyst's investment in Trigger
Corporation as of December 31, 2008?
A. $216,000
B. $225,000
C. $213,000
D. $215,000
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Company A holds 70 percent of the voting shares of Company B. During 2008, Company B
sold land with a book value of $125,000 to Company A for $150,000. Company A continues
to hold the land at the end of the year. The companies file separate tax returns and are subject
to a 40 percent tax rate. Assume that Company A uses the basic equity method in accounting
for its investment in Company B.
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Chapter 10 - Additional Consolidation Reporting Issues
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27. Based on the information given, which eliminating entry relating to the intercorporate sale
of land is to be entered in the consolidation workpaper prepared at the end of 2008?
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A. Option A
B. Option B
C. Option C
D. Option D
C
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28. Assume the Company A holds the land at the end of 2009. Based on the information
given, the eliminating entry relating to the intercorporate sale of land to be entered in the
consolidation workpaper prepared at the end of 2009 will include:
A. a debit to Retained Earnings for $7,500.
B. a debit to Noncontrolling Interest for $4,500.
C. a credit to Land for $150,000.
D. a credit to Land for $15,000.
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29. Assume the Company A holds the land at the end of 2009. The eliminating entry relating
to the intercorporate sale of land to be entered in the consolidation workpaper prepared at the
end of 2009 will include a debit to Retained Earnings for:
A. $4,500.
B. $7,500.
C. $15,000.
D. $10,500.
10-12
Chapter 10 - Additional Consolidation Reporting Issues
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Electric Corporation holds 80 percent of Utility Company's voting common shares, acquired
at book values, but none of its preferred shares. At the date of acquisition, the fair value of the
noncontrolling interest was equal to 20 percent of the book value of Utility Company.
Summary balance sheets for the companies on December 31, 2008, are as follows:
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Neither of the preferred issues is convertible. Electric's preferred pays a 8 percent annual
dividend, and Utility's preferred pays a 12 percent dividend. Utility reported net income of
$30,000 and paid a total of $10,000 of dividends in 2008. Electric reported income from its
separate operations of $70,000 and paid total dividends of $25,000 in 2008.
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30. Based on the preceding information, what is the amount of earnings available to common
shareholders reported in the consolidated financial statements for the year?
A. $89,200
B. $87,000
C. $91,000
D. $82,800
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Chapter 10 - Additional Consolidation Reporting Issues
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31. Based on the preceding information, what is the consolidated earnings per share for
2008?
A. 4.46
B. 4.14
C. 4.35
D. 4.55
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Flyer Corporation holds 90 percent of Kite Company's common shares but none of its
preferred shares. On the date of acquisition, the fair value of the noncontrolling interest was
equal to 10 percent of the book value of Kite Company. Summary balance sheets for the
companies on December 31, 2008, are as follows:
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Flyer's preferred pays a 8 percent annual dividend, and Kite's preferred pays a 10 percent
dividend. Kite's preferred shares can be converted into 20,000 shares of common stock at any
time. Kite reported net income of $35,000 and paid a total of $10,000 of dividends in 2008.
Flyer reported income from its separate operations of $80,000 and paid total dividends of
$25,000 in 2008.
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Chapter 10 - Additional Consolidation Reporting Issues
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32. Based on the information provided, what is the basic earnings per share for the
consolidated entity for 2008?
A. 5.04
B. 5.24
C. 3.80
D. 5.18
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33. Based on the information provided, what is the diluted earnings per share for the
consolidated entity for 2008?
A. 4.53
B. 4.33
C. 4.00
D. 3.80
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PA
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Company A owns 85 percent of Company B's stock and 80 percent of Company C's stock.
All acquisitions were made at book value. The fair values of noncontrolling interests at the
time of acquisition were equal to the proportionate share of the book values of the companies.
The companies file a consolidated tax return each year and in 2009 paid a total tax of
$112,000. Each company is involved in a number of intercompany inventory transfers each
period. Information on the companies' activities for 2009 is as follows:
Company A does not record income tax expense on income from subsidiaries because a
consolidated tax return is filed.
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Chapter 10 - Additional Consolidation Reporting Issues
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34. Based on the information provided, what amount of income tax expense should be
assigned to Company A?
A. $72,000
B. $66,000
C. $112,000
D. $62,000
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35. Based on the information provided, what amount of income tax expense should be
assigned to Company C?
A. $24,000
B. $35,200
C. $19,200
D. $30,400
C
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36. Based on the information provided, what amount of consolidated net income will be
reported for the year 2009?
A. $168,000
B. $280,000
C. $165,000
D. $250,000
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37. Based on the information provided, income to the controlling interest for 2009 is:
A. $155,370.
B. $56,000.
C. $168,000.
D. $250,000.
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Essay Questions
10-16
Chapter 10 - Additional Consolidation Reporting Issues
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38. Locus Corporation acquired 80 percent ownership of Stereo Company on January 1, 2006,
at underlying book value. At that date, the fair value of the noncontrolling interest was equal
to 20 percent of the book value of Stereo Company. Consolidated balance sheets at January 1,
2008, and December 31, 2008, are as follows:
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The consolidated income statement for 2008 contained the following amounts:
Locus and Stereo paid dividends of $25,000 and $15,000, respectively, in 2008.
Required:
1) Prepare a workpaper to develop a consolidated statement of cash flows for 2008 using the
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Chapter 10 - Additional Consolidation Reporting Issues
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indirect method of computing cash flows from operations.
2) Prepare a consolidated statement of cash flows for 2008.
39. Using the data presented in question 38:
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1) Prepare a workpaper to develop a consolidated statement of cash flows for 2008 using the
direct method of computing cash flows from operations.
2) Prepare a consolidated statement of cash flows for 2008.
10-18
Chapter 10 - Additional Consolidation Reporting Issues
PA
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40. Boycott Company holds 75 percent ownership of Fred Corporation. The consolidated
balance sheets as of December 31, 2008, and December 31, 2009, are as follows:
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The 2009 consolidated income statement contained the following amounts:
Boycott acquired its investment in Fred on January 1, 2006, for $120,000. At that date, the
fair value of the noncontrolling interest was $40,000, and Fred reported net assets of
$130,000. A total of $20,000 of the differential was assigned to goodwill. The remainder of
the differential was assigned to equipment with a remaining life of 10 years from the date of
10-19
Chapter 10 - Additional Consolidation Reporting Issues
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combination. Boycott sold $100,000 of bonds on December 31, 2009, to assist in generating
additional funds. Fred reported net income of $20,000 for 2009 and paid dividends of
$10,000. Boycott reported 2009 equity-method net income of $75,000 paid dividends of
$20,000 for the year.
Required:
1) Prepare a workpaper to develop a consolidated statement of cash flows for 2009 using the
indirect method of computing cash flows from operations.
2) Prepare a consolidated statement of cash flows for 2009.
10-20
Chapter 10 - Additional Consolidation Reporting Issues
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41. For the first quarter of 2008, Vinyl Corporation reported sales of $150,000 and operating
expenses of $100,000, and paid dividends of $20,000. Vinyl Company operates on a calendaryear basis. On April 1, 2008, Signature Corporation acquired 80 percent of Vinyl's common
stock for $320,000. At that date, the fair value of the noncontrolling interest was $80,000, and
Vinyl had 20,000 shares of $5 par common stock outstanding, originally issued at $12 per
share. The differential is related to goodwill. On December 31, 2008, the management of
Signature Corporation reviewed the amount attributed to goodwill as a result of its acquisition
of Vinyl common stock and concluded that goodwill was not impaired. Vinyl's retained
earnings statement for the full year 2008 appears as follows:
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PA
Signature uses the equity-method in accounting for this investment:
Required:
1) Prepare all entries that Signature would have recorded in accounting for its investment in
Vinyl during 2008.
2) Present all eliminating entries needed in a workpaper to prepare a complete set of
consolidated financial statements for the year 2008.
10-21
Chapter 10 - Additional Consolidation Reporting Issues
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42. On December 31, 2007, Planet Corporation acquired 80 percent of Broadway Company's
stock, at underlying book value. At that date, the fair value of the noncontrolling interest was
equal to 20 percent of the book value of Broadway Company. The two companies' balance
sheets on December 31, 2009, are as follows:
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On December 31, 2009, Planet holds inventory purchased from Broadway for $40,000.
Broadway's cost of producing the merchandise was $25,000. Broadway's ending inventory
also contains $30,000 of purchases from Planet that had cost it $20,000 to produce.
On December 30, 2009, Broadway sold equipment to Planet for $40,000. Broadway had
purchased the equipment for $60,000 several years earlier. At the time of sale to Planet, the
equipment had a book value of $20,000. The two companies file separate tax returns and are
subject to a 40 percent tax rate. Planet does not record tax expense on its share of Broadway's
undistributed earnings.
Required:
1) Prepare the eliminating entries necessary to complete a consolidated balance sheet
workpaper as of December 31, 2009.
2) Complete a consolidated balance sheet workpaper as of December 31, 2009.
3) Prepare a consolidated balance sheet as of December 31, 2009.
10-22
Chapter 10 - Additional Consolidation Reporting Issues
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PA
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43. Power Corporation owns 75 percent of Transmitter Company's common stock. At the date
of acquisition the fair value of the noncontrolling interest was equal to the book value of
Transmitter Company's common stock. The following balance sheet data are presented for
December 31, 2008:
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Transmitter reported net income of $90,000 in 2008 and paid dividends of $30,000. Its bonds
have an annual interest rate of 10 percent and are convertible into 12,000 common shares. Its
preferred shares pay an 12 percent annual dividend and convert into 5,000 shares of common
stock. In addition, Transmitter has warrants outstanding for 12,000 shares of common stock at
$15 per share. The 2008 average price of Transmitter common shares was $25.
Power reported income of $180,000 from its own operations for 2008 and paid dividends of
$40,000. Its 9 percent bonds convert into 8,000 shares of its common stock. The companies
file separate tax returns and are subject to income taxes of 40 percent.
Required:
Compute basic and diluted earnings per share for the consolidated entity for 2008.
10-23
Chapter 10 - Additional Consolidation Reporting Issues
Chapter 10 Additional Consolidation Reporting Issues Answer Key
Multiple Choice Questions
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PA
AACSB: Reflective Thinking
AICPA: Decision Making
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I. Operating activities section
II. Investing activities section
III. Financing activities section
A. I
B. II
C. III
D. I, II, and III
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1. Which sections of the cash flow statement are affected by the difference in the direct and
indirect approaches of presenting a cash flow statement?
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2. Which of the following observations concerning the comparisons between the direct and
indirect approaches of presenting a cash flow statement is true?
A. The final number of cash flows from operating activities is different under the two
approaches.
B. The direct approach provides a clearer picture of cash flows related to operations.
C. Authoritative bodies have generally expressed a preference for the indirect method.
D. A separate reconciliation of operating cash flows and net income is required under the
indirect approach.
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AACSB: Reflective Thinking
AICPA: Decision Making
10-24
Chapter 10 - Additional Consolidation Reporting Issues
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Sigma Company develops and markets organic food products to natural foods retailers. The
following information is available for the company for the year 2008:
PA
AACSB: Analytic
AICPA: Measurement
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3. Based on the preceding information, what amount will be reported by the company as cash
received from customers during the year?
A. $455,000
B. $475,000
C. $450,000
D. $425,000
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4. Based on the preceding information, what amount will be reported by the company as cash
payments to suppliers for 2008?
A. $292,000
B. $305,000
C. $262,000
D. $258,000
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AACSB: Analytic
AICPA: Measurement
10-25
Chapter 10 - Additional Consolidation Reporting Issues
5. Based on the preceding information, what amount will be reported by the company as cash
flows from operating activities for 2008?
A. $175,000
B. $133,000
C. $167,000
D. $207,000
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AACSB: Analytic
AICPA: Measurement
10-26
Chapter 10 - Additional Consolidation Reporting Issues
Tower Corporation's controller has just finished preparing a consolidated balance sheet,
income statement, and statement of changes in retained earnings for the year ended December
31, 2009. Tower owns 80 percent of Network Corporation's stock, which it acquired at
underlying book value on November 1, 2006. At that date, the fair value of the noncontrolling
interest was equal to 20 percent of Network Corporation's book value. The following
information is available:
Network reported net income of $50,000 for 2009.
Tower paid dividends of $30,000 in 2009.
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Network paid dividends of $10,000 in 2009.
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Consolidated net income for 2009 was $160,000.
Tower issued common stock on February, 18, 2009, for a total of $100,000.
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Consolidated wages payable decreased by $6,000 in 2009.
Consolidated depreciation expense for the year was $15,000.
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Consolidated accounts receivable decreased by $20,000 in 2009.
Bonds payable of Tower with a book value of $102,000 were retired for $100,000 on
December 31, 2009.
C
Consolidated amortization expense on patents was $10,000 for 2009.
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Tower sold land that it had purchased for $75,000 to a nonaffiliate for $80,000 on June 10,
2009.
Consolidated accounts payable decreased by $7,000 during 2009.
Total purchases of equipment by Tower and Network during 2009 were $180,000.
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Consolidated inventory increased by $36,000 during 2009.
There were no intercompany transfers between Tower and Network in 2009 or prior years
except for Network's payment of dividends. Tower uses the indirect method in preparing its
cash flow statement.
10-27
Chapter 10 - Additional Consolidation Reporting Issues
6. Based on the preceding information, what amount will be reported in the consolidated cash
flow statement as net cash provided by operating activities for 2009?
A. $207,000
B. $163,000
C. $180,000
D. $149,000
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AACSB: Analytic
AICPA: Measurement
PA
AACSB: Analytic
AICPA: Measurement
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7. Based on the preceding information, what amount will be reported in the consolidated cash
flow statement as net cash used in investing activities for 2009?
A. $180,000
B. $100,000
C. $255,000
D. $110,000
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8. Based on the preceding information, what amount will be reported in the consolidated cash
flow statement as net cash used in financing activities for 2009?
A. $32,000
B. $38,000
C. $42,000
D. $70,000
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AACSB: Analytic
AICPA: Measurement
10-28
Chapter 10 - Additional Consolidation Reporting Issues
9. Based on the preceding information, what was the change in cash balance for the
consolidated entity for 2009?
A. Increase of $49,000
B. Decrease of $66,000
C. Increase of $17,000
D. Increase of $32,000
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AACSB: Analytic
AICPA: Measurement
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PA
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On July 1, 2008, Fair Logic Corporation acquires 75 percent of Integrated Systems Inc.
common stock for its underlying book value. At the time of acquisition, the fair value of the
noncontrolling interest is equal to its proportionate share of book value of Integrated Systems.
On January 1, 2008 Integrated reported common stock of $100,000 and retained earnings of
$130,000. For the year 2008, Integrated reports the following items:
Fair Logic uses the equity method in accounting for this investment.
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10. Based on the preceding information, what is the book value of shares acquired by Fair
Logic on July 1, 2008?
A. $240,000
B. $191,250
C. $230,000
D. $180,000
AACSB: Analytic
AICPA: Measurement
10-29
Chapter 10 - Additional Consolidation Reporting Issues
11. Based on the preceding information, what is the fair value of the noncontrolling interest at
the time of acquisition?
A. $47,813
B. $57,500
C. $60,000
D. $45,000
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AACSB: Analytic
AICPA: Measurement
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A. Option A
B. Option B
C. Option C
D. Option D
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12. Based on the preceding information, what journal entry would Fair Logic make to record
equity method income for the year?
AACSB: Analytic
AICPA: Measurement
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13. For a subsidiary to be eligible to be included in a consolidated tax return, at least _____ of
its stock must be held by the parent company or another company included in the consolidated
return.
A. 50 percent
B. 40 percent
C. 75 percent
D. 80 percent
AACSB: Reflective Thinking
AICPA: Decision Making
10-30
Chapter 10 - Additional Consolidation Reporting Issues
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Jupiter Corporation's consolidated cash flow statement for the year ended December 31,
2008, reported operating cash inflows of $160,000, financing cash outflows of $90,000, and
investing cash outflows $55,000, and an ending cash balance of $75,000. Jupiter acquired 75
percent of Ganymede Company's common stock on July 1, 2006, at book value. At that date,
the fair value of the noncontrolling interest was equal to 25 percent of Ganymede Company's
book value. Ganymede reported net income of $20,000, paid dividends of $8,000 in 2008, and
is included in Jupiter's consolidated statements. Jupiter paid dividends of $25,000 in 2008.
The indirect method is used in computing cash flow from operations.
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14. Based on the information provided, what was the consolidated cash balance at January 1,
2008?
A. $60,000
B. $85,000
C. $15,000
D. $380,000
PA
AACSB: Analytic
AICPA: Measurement
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15. Based on the information provided, what amount was reported as dividends paid in the
cash flow from financing activities section of the consolidated statement of cash flows?
A. $25,000
B. $33,000
C. $27,000
D. $8,000
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AACSB: Analytic
AICPA: Measurement
10-31
Chapter 10 - Additional Consolidation Reporting Issues
16. Dividends paid to noncontrolling shareholders:
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I. are reported as a cash outflow in the consolidated cash flow statement.
II. represent funds that are no longer available to the consolidated entity.
III. are reported in the consolidated retained earnings statement.
A. Observation I alone is true.
B. Observation III alone is true.
C. Observations I and II are true.
D. Observations I, II, and II are true.
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AACSB: Reflective Thinking
AICPA: Reporting
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New Life Corporation has just finished preparing a consolidated balance sheet, income
statement, and statement of changes in retained earnings for 2009. The following items are
proposed for inclusion in the consolidated cash flow statement:
New Life holds 75 percent of the voting stock of Shane Pharmaceuticals, acquired at book
value on June 21, 2006. On the date of the acquisition, the fair value of the noncontrolling
interest was equal to 25 percent of the book value of Shane.
10-32
Chapter 10 - Additional Consolidation Reporting Issues
17. Based on the preceding information, what amount will be reported in the consolidated
cash flow statement as net cash provided by operating activities for 2009?
A. $350,000
B. $463,000
C. $335,000
D. $421,000
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AACSB: Analytic
AICPA: Measurement
PA
AACSB: Analytic
AICPA: Measurement
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18. Based on the preceding information, what amount will be reported in the consolidated
cash flow statement as net cash used in investing activities for 2009?
A. $200,000
B. $142,000
C. $155,000
D. $130,000
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19. Based on the preceding information, what amount will be reported in the consolidated
cash flow statement as net cash used in financing activities for 2009?
A. $40,000
B. $55,000
C. $90,000
D. $10,000
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AACSB: Analytic
AICPA: Measurement
10-33
Chapter 10 - Additional Consolidation Reporting Issues
20. Based on the preceding information, what was the change in cash balance for the
consolidated entity for 2009?
A. Decrease of $153,000
B. Increase of $450,000
C. Increase of $293,000
D. Increase of $150,000
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AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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21. Assume that New Life uses the direct method of computing cash flows from operating
activities. Based on the preceding information, what amount will be reported by the company
as cash received from customers during the year?
A. $815,000
B. $785,000
C. $800,000
D. $835,000
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22. Assume that New Life uses the direct method of computing cash flows from operating
activities. Based on the preceding information, what amount will be reported by the company
as cash payments to suppliers for 2009?
A. $350,000
B. $348,000
C. $312,000
D. $352,000
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AACSB: Analytic
AICPA: Measurement
10-34
Chapter 10 - Additional Consolidation Reporting Issues
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Catalyst Corporation acquired 90 percent of Trigger Corporation's common stock on
September 30, 2008 for $225,000. At that date, the fair value of the noncontrolling interest
was $25,000. On January 1, 2008, Trigger reported the following stockholders' equity
balances:
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Trigger reported net income of $80,000 in 2008, earned uniformly throughout the year, and
declared and paid dividends of $10,000 on June 30 and $30,000 on December 31, 2008.
Catalyst reported retained earnings of $250,000 on January 1, 2008, and had 2008 income of
$120,000 from its separate operations. Catalyst paid dividends of $50,000 on December 31,
2008. Catalyst accounts for its investment in Trigger Corporation using the basic equity
method.
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23. Based on the information provided, what is the consolidated net income reported for the
year 2008?
A. $120,000
B. $138,000
C. $140,000
D. $192,000
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AACSB: Analytic
AICPA: Measurement
10-35
Chapter 10 - Additional Consolidation Reporting Issues
24. Based on the information provided, what is the consolidated income to the controlling
interest reported for the year 2008?
A. $192,000
B. $138,000
C. $140,000
D. $120,000
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AACSB: Analytic
AICPA: Measurement
PA
AACSB: Analytic
AICPA: Measurement
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25. Based on the information provided, what is the amount of consolidated retained earnings
as of December 31, 2008?
A. $340,000
B. $250,000
C. $338,000
D. $388,000
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26. Based on the information provided, what is the balance of Catalyst's investment in Trigger
Corporation as of December 31, 2008?
A. $216,000
B. $225,000
C. $213,000
D. $215,000
AACSB: Analytic
AICPA: Measurement
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Company A holds 70 percent of the voting shares of Company B. During 2008, Company B
sold land with a book value of $125,000 to Company A for $150,000. Company A continues
to hold the land at the end of the year. The companies file separate tax returns and are subject
to a 40 percent tax rate. Assume that Company A uses the basic equity method in accounting
for its investment in Company B.
10-36
Chapter 10 - Additional Consolidation Reporting Issues
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27. Based on the information given, which eliminating entry relating to the intercorporate sale
of land is to be entered in the consolidation workpaper prepared at the end of 2008?
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A. Option A
B. Option B
C. Option C
D. Option D
PA
AACSB: Analytic
AICPA: Measurement
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28. Assume the Company A holds the land at the end of 2009. Based on the information
given, the eliminating entry relating to the intercorporate sale of land to be entered in the
consolidation workpaper prepared at the end of 2009 will include:
A. a debit to Retained Earnings for $7,500.
B. a debit to Noncontrolling Interest for $4,500.
C. a credit to Land for $150,000.
D. a credit to Land for $15,000.
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AACSB: Analytic
AICPA: Measurement
10-37
Chapter 10 - Additional Consolidation Reporting Issues
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29. Assume the Company A holds the land at the end of 2009. The eliminating entry relating
to the intercorporate sale of land to be entered in the consolidation workpaper prepared at the
end of 2009 will include a debit to Retained Earnings for:
A. $4,500.
B. $7,500.
C. $15,000.
D. $10,500.
AACSB: Analytic
AICPA: Measurement
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Electric Corporation holds 80 percent of Utility Company's voting common shares, acquired
at book values, but none of its preferred shares. At the date of acquisition, the fair value of the
noncontrolling interest was equal to 20 percent of the book value of Utility Company.
Summary balance sheets for the companies on December 31, 2008, are as follows:
Neither of the preferred issues is convertible. Electric's preferred pays a 8 percent annual
dividend, and Utility's preferred pays a 12 percent dividend. Utility reported net income of
$30,000 and paid a total of $10,000 of dividends in 2008. Electric reported income from its
separate operations of $70,000 and paid total dividends of $25,000 in 2008.
10-38
Chapter 10 - Additional Consolidation Reporting Issues
30. Based on the preceding information, what is the amount of earnings available to common
shareholders reported in the consolidated financial statements for the year?
A. $89,200
B. $87,000
C. $91,000
D. $82,800
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AACSB: Analytic
AICPA: Measurement
PA
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AACSB: Analytic
AICPA: Measurement
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31. Based on the preceding information, what is the consolidated earnings per share for
2008?
A. 4.46
B. 4.14
C. 4.35
D. 4.55
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Chapter 10 - Additional Consolidation Reporting Issues
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Flyer Corporation holds 90 percent of Kite Company's common shares but none of its
preferred shares. On the date of acquisition, the fair value of the noncontrolling interest was
equal to 10 percent of the book value of Kite Company. Summary balance sheets for the
companies on December 31, 2008, are as follows:
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Flyer's preferred pays a 8 percent annual dividend, and Kite's preferred pays a 10 percent
dividend. Kite's preferred shares can be converted into 20,000 shares of common stock at any
time. Kite reported net income of $35,000 and paid a total of $10,000 of dividends in 2008.
Flyer reported income from its separate operations of $80,000 and paid total dividends of
$25,000 in 2008.
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32. Based on the information provided, what is the basic earnings per share for the
consolidated entity for 2008?
A. 5.04
B. 5.24
C. 3.80
D. 5.18
AACSB: Analytic
AICPA: Measurement
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Chapter 10 - Additional Consolidation Reporting Issues
33. Based on the information provided, what is the diluted earnings per share for the
consolidated entity for 2008?
A. 4.53
B. 4.33
C. 4.00
D. 3.80
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AICPA: Measurement
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Company A owns 85 percent of Company B's stock and 80 percent of Company C's stock.
All acquisitions were made at book value. The fair values of noncontrolling interests at the
time of acquisition were equal to the proportionate share of the book values of the companies.
The companies file a consolidated tax return each year and in 2009 paid a total tax of
$112,000. Each company is involved in a number of intercompany inventory transfers each
period. Information on the companies' activities for 2009 is as follows:
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Company A does not record income tax expense on income from subsidiaries because a
consolidated tax return is filed.
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Chapter 10 - Additional Consolidation Reporting Issues
34. Based on the information provided, what amount of income tax expense should be
assigned to Company A?
A. $72,000
B. $66,000
C. $112,000
D. $62,000
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AICPA: Measurement
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AACSB: Analytic
AICPA: Measurement
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35. Based on the information provided, what amount of income tax expense should be
assigned to Company C?
A. $24,000
B. $35,200
C. $19,200
D. $30,400
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36. Based on the information provided, what amount of consolidated net income will be
reported for the year 2009?
A. $168,000
B. $280,000
C. $165,000
D. $250,000
AACSB: Analytic
AICPA: Measurement
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37. Based on the information provided, income to the controlling interest for 2009 is:
A. $155,370.
B. $56,000.
C. $168,000.
D. $250,000.
AACSB: Analytic
AICPA: Measurement
10-42
Chapter 10 - Additional Consolidation Reporting Issues
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Essay Questions
10-43
Chapter 10 - Additional Consolidation Reporting Issues
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38. Locus Corporation acquired 80 percent ownership of Stereo Company on January 1, 2006,
at underlying book value. At that date, the fair value of the noncontrolling interest was equal
to 20 percent of the book value of Stereo Company. Consolidated balance sheets at January 1,
2008, and December 31, 2008, are as follows:
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The consolidated income statement for 2008 contained the following amounts:
Locus and Stereo paid dividends of $25,000 and $15,000, respectively, in 2008.
Required:
1) Prepare a workpaper to develop a consolidated statement of cash flows for 2008 using the
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Chapter 10 - Additional Consolidation Reporting Issues
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indirect method of computing cash flows from operations.
2) Prepare a consolidated statement of cash flows for 2008.
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Chapter 10 - Additional Consolidation Reporting Issues
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PA
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1)
10-46
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PA
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Chapter 10 - Additional Consolidation Reporting Issues
10-47
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PA
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Chapter 10 - Additional Consolidation Reporting Issues
AACSB: Analytic
AICPA: Measurement
10-48
Chapter 10 - Additional Consolidation Reporting Issues
39. Using the data presented in question 38:
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1) Prepare a workpaper to develop a consolidated statement of cash flows for 2008 using the
direct method of computing cash flows from operations.
2) Prepare a consolidated statement of cash flows for 2008.
10-49
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PA
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Chapter 10 - Additional Consolidation Reporting Issues
10-50
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Chapter 10 - Additional Consolidation Reporting Issues
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PA
2)
10-51
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Chapter 10 - Additional Consolidation Reporting Issues
10-52
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Chapter 10 - Additional Consolidation Reporting Issues
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PA
AACSB: Analytic
AICPA: Measurement
10-53
Chapter 10 - Additional Consolidation Reporting Issues
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40. Boycott Company holds 75 percent ownership of Fred Corporation. The consolidated
balance sheets as of December 31, 2008, and December 31, 2009, are as follows:
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The 2009 consolidated income statement contained the following amounts:
Boycott acquired its investment in Fred on January 1, 2006, for $120,000. At that date, the
fair value of the noncontrolling interest was $40,000, and Fred reported net assets of
$130,000. A total of $20,000 of the differential was assigned to goodwill. The remainder of
the differential was assigned to equipment with a remaining life of 10 years from the date of
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Chapter 10 - Additional Consolidation Reporting Issues
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combination. Boycott sold $100,000 of bonds on December 31, 2009, to assist in generating
additional funds. Fred reported net income of $20,000 for 2009 and paid dividends of
$10,000. Boycott reported 2009 equity-method net income of $75,000 paid dividends of
$20,000 for the year.
Required:
1) Prepare a workpaper to develop a consolidated statement of cash flows for 2009 using the
indirect method of computing cash flows from operations.
2) Prepare a consolidated statement of cash flows for 2009.
10-55
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Chapter 10 - Additional Consolidation Reporting Issues
10-56
Chapter 10 - Additional Consolidation Reporting Issues
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PA
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Workpaper entries:
10-57
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Chapter 10 - Additional Consolidation Reporting Issues
AACSB: Analytic
AICPA: Measurement
10-58
Chapter 10 - Additional Consolidation Reporting Issues
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41. For the first quarter of 2008, Vinyl Corporation reported sales of $150,000 and operating
expenses of $100,000, and paid dividends of $20,000. Vinyl Company operates on a calendaryear basis. On April 1, 2008, Signature Corporation acquired 80 percent of Vinyl's common
stock for $320,000. At that date, the fair value of the noncontrolling interest was $80,000, and
Vinyl had 20,000 shares of $5 par common stock outstanding, originally issued at $12 per
share. The differential is related to goodwill. On December 31, 2008, the management of
Signature Corporation reviewed the amount attributed to goodwill as a result of its acquisition
of Vinyl common stock and concluded that goodwill was not impaired. Vinyl's retained
earnings statement for the full year 2008 appears as follows:
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PA
Signature uses the equity-method in accounting for this investment:
Required:
1) Prepare all entries that Signature would have recorded in accounting for its investment in
Vinyl during 2008.
2) Present all eliminating entries needed in a workpaper to prepare a complete set of
consolidated financial statements for the year 2008.
10-59
Chapter 10 - Additional Consolidation Reporting Issues
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1) Equity-method entries recorded during 2008:
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2)
10-60
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Chapter 10 - Additional Consolidation Reporting Issues
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AACSB: Analytic
AICPA: Measurement
10-61
Chapter 10 - Additional Consolidation Reporting Issues
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42. On December 31, 2007, Planet Corporation acquired 80 percent of Broadway Company's
stock, at underlying book value. At that date, the fair value of the noncontrolling interest was
equal to 20 percent of the book value of Broadway Company. The two companies' balance
sheets on December 31, 2009, are as follows:
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On December 31, 2009, Planet holds inventory purchased from Broadway for $40,000.
Broadway's cost of producing the merchandise was $25,000. Broadway's ending inventory
also contains $30,000 of purchases from Planet that had cost it $20,000 to produce.
On December 30, 2009, Broadway sold equipment to Planet for $40,000. Broadway had
purchased the equipment for $60,000 several years earlier. At the time of sale to Planet, the
equipment had a book value of $20,000. The two companies file separate tax returns and are
subject to a 40 percent tax rate. Planet does not record tax expense on its share of Broadway's
undistributed earnings.
Required:
1) Prepare the eliminating entries necessary to complete a consolidated balance sheet
workpaper as of December 31, 2009.
2) Complete a consolidated balance sheet workpaper as of December 31, 2009.
3) Prepare a consolidated balance sheet as of December 31, 2009.
10-62
Chapter 10 - Additional Consolidation Reporting Issues
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1) Eliminating entries:
2)
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Chapter 10 - Additional Consolidation Reporting Issues
10-64
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AICPA: Measurement
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Chapter 10 - Additional Consolidation Reporting Issues
10-65
Chapter 10 - Additional Consolidation Reporting Issues
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43. Power Corporation owns 75 percent of Transmitter Company's common stock. At the date
of acquisition the fair value of the noncontrolling interest was equal to the book value of
Transmitter Company's common stock. The following balance sheet data are presented for
December 31, 2008:
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Transmitter reported net income of $90,000 in 2008 and paid dividends of $30,000. Its bonds
have an annual interest rate of 10 percent and are convertible into 12,000 common shares. Its
preferred shares pay an 12 percent annual dividend and convert into 5,000 shares of common
stock. In addition, Transmitter has warrants outstanding for 12,000 shares of common stock at
$15 per share. The 2008 average price of Transmitter common shares was $25.
Power reported income of $180,000 from its own operations for 2008 and paid dividends of
$40,000. Its 9 percent bonds convert into 8,000 shares of its common stock. The companies
file separate tax returns and are subject to income taxes of 40 percent.
Required:
Compute basic and diluted earnings per share for the consolidated entity for 2008.
10-66
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Chapter 10 - Additional Consolidation Reporting Issues
AACSB: Analytic
AICPA: Measurement
10-67
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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Chapter 12
Multinational Accounting: Issues in Financial Reporting and Translation of
Foreign Entity Statements
Multiple Choice Questions
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The balance in Newsprint Corp.'s foreign exchange loss account was $10,000 on December
31, 2008, before any necessary year-end adjustment relating to the following:
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(1) Newsprint had a $15,000 debit resulting from the restatement in dollars of the accounts of
its wholly owned foreign subsidiary for the year ended December 31, 2008.
PA
(2) Newsprint had an account payable to an unrelated foreign supplier, payable in the
supplier's local currency unit (LCU) on January 15, 2009. The U.S. dollar–equivalent of the
payable was $50,000 on the December 1, 2008, invoice date and $53,000 on December 31,
2008.
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1. Based on the information provided, in Newsprint's 2008 consolidated income statement,
what amount should be included as foreign exchange loss in computing net income, if the
LCU is the functional currency and the translation method is appropriate?
A. $28,000
B. $13,000
C. $25,000
D. $8,000
2. Based on the information provided, in Newsprint's 2008 consolidated income statement,
what amount should be included as foreign exchange loss in computing net income, if the
U.S. dollar is the functional currency and the remeasurement method is appropriate?
A. $15,000
B. $10,000
C. $25,000
D. $28,000
12-1
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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3. Infinity Corporation acquired 80 percent of the common stock of an Egyptian company on
January 1, 2008. The goodwill associated with this acquisition was $18,350. Exchange rates at
various dates during 2008 follow:
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Goodwill suffered an impairment of 20 percent during the year. If the functional currency is
the Egyptian Pound, how much goodwill impairment loss should be reported on Infinity's
consolidated statement of income for 2008?
A. $3,670
B. $3,700
C. $3,680
D. $3,690
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4. Infinity Corporation acquired 80 percent of the common stock of an Egyptian company on
January 1, 2008. The goodwill associated with this acquisition was $18,350. Exchange rates at
various dates during 2008 follow:
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Goodwill suffered an impairment of 20 percent during the year. If the functional currency is
the U.S. dollar, how much goodwill impairment loss should be reported on Infinity's
consolidated statement of income for 2008?
A. $3,680
B. $3,670
C. $3,690
D. $3,700
12-2
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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5. Simon Company has two foreign subsidiaries. One is located in France, the other in
England. Simon has determined the U.S. dollar is the functional currency for the French
subsidiary, while the British pound is the functional currency for the English subsidiary. Both
subsidiaries maintain their books and records in their respective local currencies. What
methods will Simon use to convert each of the subsidiary's financial statements into U.S.
dollars?
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A. Option A
B. Option B
C. Option C
D. Option D
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PA
Michigan-based Leo Corporation acquired 100 percent of the common stock of a British
company on January 1, 2008, for $1,100,000. The British subsidiary's net assets amounted to
500,000 pounds on the date of acquisition. On January 1, 2008, the book values of its
identifiable assets and liabilities approximated their fair values. As a result of an analysis of
functional currency indicators, Leo determined that the British pound was the functional
currency. On December 31, 2008, the British subsidiary's adjusted trial balance, translated
into U.S. dollars, contained $17,000 more debits than credits. The British subsidiary reported
income of 33,000 pounds for 2008 and paid a cash dividend of 8,000 pounds on October 25,
2008. Included on the British subsidiary's income statement was depreciation expense of
3,500 pounds. Leo uses the basic equity method of accounting for its investment in the British
subsidiary and determined that goodwill in the first year had an impairment loss of 25 percent
of its initial amount. Exchange rates at various dates during 2008 follow:
12-3
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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6. Based on the preceding information, what amount should Leo record as "income from
subsidiary" based on the British subsidiary's reported net income?
A. $72,930
B. $52,500
C. $72,600
D. $69,300
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7. Based on the preceding information, the receipt of the dividend will result in a credit to the
investment account for:
A. $16,800
B. $17,680
C. $18,000
D. $17,600
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8. Based on the preceding information, on Leo's consolidated balance sheet at December 31,
2008, what amount should be reported for the goodwill acquired on January 1, 2008?
A. $36,845
B. $39,286
C. $36,905
D. $36,607
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9. Based on the preceding information, in the stockholders' equity section of Leo's
consolidated balance sheet at December 31, 2008, Leo should report the translation
adjustment as a component of other comprehensive income of:
A. $19,440
B. $17,000
C. $18,786
D. $19,380
12-4
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
10. Which of the following defines a foreign-based entity that uses a functional currency
different from the local currency?
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I. A U.S. subsidiary in Britain maintains its accounting records in pounds sterling, with the
majority of its transactions denominated in pounds sterling.
II. A U.S. subsidiary in Peru conducts virtually all of its business in Latin America, and uses
the U.S. dollar as its major currency.
A. I.
B. II.
C. Both I and II.
D. Neither I nor II.
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11. When the local currency of the foreign subsidiary is the functional currency, a foreign
subsidiary's inventory carried at cost would be converted to U.S. dollars by:
A. translation using historical exchange rates.
B. remeasurement using historical exchange rates.
C. remeasurement using the current exchange rate.
D. translation using the current exchange rate.
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12. When the local currency of the foreign subsidiary is the functional currency, a foreign
subsidiary's income statement accounts would be converted to U.S. dollars by:
A. translation using historical exchange rates.
B. remeasurement using current exchange rates at the time of statement preparation.
C. translation using average exchange rate for the period.
D. remeasurement using the current exchange rate at the time of statement preparation.
12-5
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
13. If the restatement method for a foreign subsidiary involves remeasuring from the local
currency into the functional currency, then translating from functional currency to U.S.
dollars, the functional currency of the subsidiary is:
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I. U.S. dollar.
II. Local currency unit.
III. A third country's currency.
A. I
B. III
C. II
D. Either I or II
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14. If the U.S. dollar is the currency in which the foreign affiliate's books and records are
maintained, and the U.S. dollar is also the functional currency,
A. the translation method should be used for restatement.
B. the remeasurement method should be used for restatement.
C. either translation or remeasurement could be used for restatement.
D. no restatement is required.
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15. All of the following stockholders' equity accounts of a foreign subsidiary are translated at
historical exchange rates except:
A. retained earnings.
B. common stock.
C. additional paid-in capital.
D. preferred stock.
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16. Dividends of a foreign subsidiary are translated at:
A. the average exchange rate for the year.
B. the exchange rate on the date of declaration.
C. the current exchange rate on the date of preparation of the financial statement.
D. the exchange rate on the record date.
12-6
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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17. If the functional currency is the local currency of a foreign subsidiary, what exchange
rates should be used to translate the items below, assuming the foreign subsidiary is in a
country which has not experienced hyperinflation over three years?
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A. Option A
B. Option B
C. Option C
D. Option D
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A. Option A
B. Option B
C. Option C
D. Option D
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18. If the functional currency is the local currency of a foreign subsidiary, what exchange
rates should be used to translate the items below, assuming the foreign subsidiary is in a
country which has not experienced hyperinflation over three years?
12-7
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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19. Which combination of accounts and exchange rates is correct for the translation of a
foreign entity's financial statements from the functional currency to U.S. dollars?
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A. Option A
B. Option B
C. Option C
D. Option D
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A. Option A
B. Option B
C. Option C
D. Option D
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20. Which combination of accounts and exchange rates is correct for the remeasurement of a
foreign entity's financial statements from its local currency to U.S. dollars?
12-8
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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21. The assets listed below of a foreign subsidiary have been converted to U.S. dollars at both
current and historical exchange rates. Assuming that the local currency of the foreign
subsidiary is the functional currency, what total amount should appear for these assets on the
U.S. company's consolidated balance sheet?
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A. $636,000
B. $648,000
C. $708,000
D. $960,000
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22. The gain or loss on the effective portion of a U.S. parent company's hedge of a net
investment in a foreign entity should be treated as:
A. an adjustment to the retained earnings account in the stockholders' equity section of its
balance sheet.
B. other comprehensive income.
C. a translation gain or loss in the computation of net income for the reporting period.
D. an adjustment to a valuation account in the asset section of its balance sheet.
12-9
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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23. Dover Company owns 90% of the capital stock of a foreign subsidiary located in Italy.
Dover's accountant has just translated the accounts of the foreign subsidiary and determined
that a debit translation adjustment of $80,000 exists. If Dover uses the equity method for its
investment, what entry should Dover record in order to recognize the translation adjustment?
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A. Option A
B. Option B
C. Option C
D. Option D
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24. For each of the items listed below, state whether they increase or decrease the balance in
cumulative translation adjustments (assuming a credit balance at the beginning of the year)
when the foreign currency strengthened relative to the U.S. dollar during the year.
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A. Option A
B. Option B
C. Option C
D. Option D
12-10
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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25. Nichols Company owns 90% of the capital stock of a foreign subsidiary located in Ireland.
As a result of translating the subsidiary's accounts, a debit of $160,000 was needed in the
translation adjustments account so that the foreign subsidiary's debits and credits were equal
in U.S. dollars. How should Nichols report its translation adjustments on its consolidated
financial statements?
A. As a $144,000 increase in the stockholders' equity section of the balance sheet.
B. As a $144,000 reduction in consolidated comprehensive net income.
C. As a $160,000 debit in stockholders' equity section of the balance sheet.
D. As a $160,000 reduction in consolidated comprehensive net income.
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I. The current exchange rate
II The historical exchange rate
III. Average exchange rate
A. I
B. III
C. II
D. Either I or II
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26. Under the temporal method, which of the following is usually used to translate monetary
amounts to the functional currency?
12-11
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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Mercury Company is a subsidiary of Neptune Company and is located in Valparaíso, Chile,
where the currency is the Chilean Peso. Data on Mercury's inventory and purchases are as
follows:
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The beginning inventory was acquired during the fourth quarter of 2007, and the ending
inventory was acquired during the fourth quarter of 2008. Purchases were made evenly over
the year. Exchange rates were as follows:
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27. Refer the information provided above. Assuming the U.S. dollar is the functional
currency, what is the amount of Mercury's cost of goods sold remeasured in U.S. dollars?
A. $1,680
B. $1,712
C. $1,700
D. $1,692
12-12
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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28. Based on the preceding information, the translation of cost of goods sold for 2008,
assuming that the Spanish peseta is the functional currency is:
A. $1,700.
B. $1,760.
C. $1,680.
D. $1,692.
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29. The British subsidiary of a U.S. company reported cost of goods sold of 75,000 pounds
(sterling) for the current year ended December 31. The beginning inventory was 10,000
pounds, and the ending inventory was 15,000 pounds. Spot rates for various dates are as
follows:
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Assuming the dollar is the functional currency of the British subsidiary, the remeasured
amount of cost of goods sold that should appear in the consolidated income statement is:
A. $108,750.
B. $112,500.
C. $114,250.
D. $125,700.
12-13
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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30. The British subsidiary of a U.S. company reported cost of goods sold of 75,000 pounds
(sterling) for the current year ended December 31. The beginning inventory was 10,000
pounds, and the ending inventory was 15,000 pounds. Spot rates for various dates are as
follows:
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Assuming the pound is the functional currency of the British subsidiary, the translated amount
of cost of goods sold that should appear in the consolidated income statement is:
A. $108,750.
B. $112,500.
C. $114,300.
D. $125,700.
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Elan, a U.S. corporation, completed the December 31, 2008, foreign currency translation of
its 70 percent owned Swiss subsidiary's trial balance using the current rate method. The
translation resulted in a debit adjustment of $25,000. The subsidiary had reported net income
of 800,000 Swiss francs for 2008 and paid dividends of 50,000 Swiss francs on September 1,
2008. The translation rates for the year were:
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The January 1 balance of the Investment in the Swiss subsidiary account was $1,600,000.
Elan acquired its interest in the Swiss subsidiary at book value with no differential or
goodwill recorded at acquisition.
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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31. Elan's Investment in Swiss subsidiary account at December 31, 2008, is:
A. $1,881,050.
B. $1,916,050.
C. $1,923,950.
D. $2,051,500.
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A. Option A
B. Option B
C. Option C
D. Option D
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32. Elan's consolidated workpaper eliminations related to the foreign currency translation
adjustment will include which entry?
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33. Seattle, Inc. owns an 80 percent interest in a Portuguese subsidiary. For 2008, Seattle
reported income from operations of $2.0 million. The Portuguese company's income from
operations, after foreign currency translation, was $1.1 million. The foreign currency
translation adjustment was $120,000 (credit). Consolidated net income and consolidated
comprehensive income for the year are:
A. Option A
B. Option B
C. Option C
D. Option D
12-15
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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On January 2, 2008, Johnson Company acquired a 100% interest in the capital stock of Perth
Company for $3,100,000. Any excess cost over book value is attributable to a patent with a
10-year remaining life. At the date of acquisition, Perth's balance sheet contained the
following information:
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Perth's income statement for 2008 is as follows:
12-16
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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The balance sheet of Perth at December 31, 2008, is as follows:
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Perth declared and paid a dividend of 20,000 FCU on October 1, 2008. Spot rates at various
dates for 2008 follow:
Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income
taxes were incurred evenly throughout 2008.
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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34. Refer to the above information. Assuming the local currency of the country in which Perth
Company is located is the functional currency, what are the translated amounts for the items
below in U.S. dollars?
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A. Option A
B. Option B
C. Option C
D. Option D
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PA
35. Refer to the above information. Assuming Perth's local currency is the functional
currency, what is the amount of translation adjustments that result from translating Perth's
trial balance into U.S. dollars at December 31, 2008?
A. $396,500 debit
B. $285,000 credit
C. $405,000 credit
D. $411,000 credit
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36. Refer to the above information. Assuming Perth's local currency is the functional
currency, what is the amount of patent amortization for 2008 that results from Johnson's
acquisition of Perth's stock on January 2, 2008. Round your answer to the nearest dollar.
A. $11,500
B. $11,884
C. $7,667
D. $9,394
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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37. Refer to the above information. Assuming Perth's local currency is the functional
currency, what is the amount of translation adjustment that appears on Johnson's consolidated
financial statements at December 31, 2008?
A. $419,184 credit
B. $416,884 credit
C. $405,884 debit
D. $398,500 credit
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38. Refer to the above information. Assuming Perth's local currency is the functional
currency, what is the balance in Johnson's investment in foreign subsidiary account at
December 31, 2008, assuming use of the equity method?
A. $3,216,500
B. $3,560,000
C. $3,568,300
D. $3,577,694
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PA
39. Refer to the above information. Assuming the U.S. dollar is the functional currency, what
is Johnson's remeasurement gain (loss) for 2008? (Assume the ending inventory was acquired
on December 31, 2008.)
A. $31,000 gain
B. $36,500 loss
C. $22,000 gain
D. $32,000 gain
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40. Refer to the above information. Assuming the U.S. dollar is the functional currency, what
is the amount of Perth's cost of goods sold remeasured in U.S. dollars?
A. $811,500
B. $843,500
C. $884,500
D. $799,500
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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41. Refer to the above information. Assuming the U.S. dollar is the functional currency, what
is the amount of patent amortization for 2008 that results from Johnson's acquisition of Perth's
stock on January 2, 2008?
A. $11,884
B. $11,770
C. $12,550
D. $11,500
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42. Refer to the above information. Assuming the U.S. dollar is the functional currency, what
is Perth's net income for 2008 in U.S. dollars (include the remeasurement gain or loss in
Perth's net income)?
A. $238,000
B. $228,000
C. $219,500
D. $202,000
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PA
43. Refer to the above information. Assuming the U.S. dollar is the functional currency, what
is the balance in Johnson's investment in foreign subsidiary account at December 31, 2008
(assuming the use of the equity method)?
A. $3,303,400
B. $3,294,500
C. $3,323,400
D. $3,314,500
12-20
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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On January 1, 2008, Transport Corporation acquired 75 percent interest in Steamship
Company for $300,000. Steamship is a Norwegian company. The local currency is the
Norwegian kroner (NKr). The acquisition resulted in an excess of cost-over-book value of
$25,000 due solely to a patent having a remaining life of 5 years. Transport uses the equity
method to account for its investment. Steamship's December 31, 2008, trial balance has been
translated into U.S. dollars, requiring a translation adjustment debit of $8,000. Steamship's net
income translated into U.S. dollars is $35,000. It declared and paid an NKr 20,000 dividend
on June 1, 2008. Relevant exchange rates are as follows:
PA
Assume the kroner is the functional currency.
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44. Based on the preceding information, in the journal entry to record the receipt of dividend
from Steamship,
A. Investment in Steamship Company will be credited for $3,450.
B. Cash will be debited for $3,300.
C. Investment in Steamship Company will be credited for $4,000.
D. Cash will be debited for $3,600.
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45. Based on the preceding information, in the journal entry to record parent's share of
subsidiary's translation adjustment:
A. Other Comprehensive Income — Translation Adjustment will be debited for $8,000.
B. Other Comprehensive Income — Translation Adjustment will be credited for $6,000.
C. Investment in Steamship Company will be credited for $6,000.
D. Investment in Steamship Company will be debited for $8,000.
12-21
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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46. Based on the preceding information, what amount of translation adjustment is required for
increase in differential?
A. $3,000
B. $5,500
C. $4,500
D. $5,000
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47. Based on the preceding information, in the journal entry to record the amortization of the
patent for 2008 on the parent's books, Investment in Steamship Company will be debited for:
A. $5,000
B. $5,500
C. $4,500
D. $3,000
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PA
On September 30, 2008, Wilfred Company sold inventory to Jackson Corporation, its
Canadian subsidiary. The goods cost Wilfred $30,000 and were sold to Jackson for $40,000,
payable in Canadian dollars. The goods are still on hand at the end of the year on December
31. The Canadian dollar (C$) is the functional currency of the Canadian subsidiary. The
exchange rates follow:
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48. Based on the preceding information, at what dollar amount is the ending inventory shown
in the trial balance of the consolidated workpaper?
A. $45,000
B. $50,000
C. $40,000
D. $35,000
12-22
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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49. Based on the preceding information, what amount of unrealized intercompany gross profit
is eliminated in preparing the consolidated financial statements for the year?
A. $0
B. $5,000
C. $10,000
D. $15,000
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50. Based on the preceding information, at what amount is the inventory shown on the
consolidated balance sheet for the year?
A. $45,000
B. $30,000
C. $40,000
D. $35,000
PA
Essay Questions
51. Briefly explain the following terms associated with accounting for foreign entities:
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a) Functional Currency
b) Translation
c) Remeasurement
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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PA
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52. On January 1, 2008, Pace Company acquired all of the outstanding stock of Spin PLC, a
British Company, for $350,000. Spin's net assets on the date of acquisition were 250,000
pounds (£). On January 1, 2008, the book and fair values of the Spin's identifiable assets and
liabilities approximated their fair values except for property, plant, and equipment and
trademarks. The fair value of Spin's property, plant, and equipment exceeded its book value
by $25,000. The remaining useful life of Spin's equipment at January 1, 2008, was 10 years.
The remainder of the differential was attributable to a trademark having an estimated useful
life of 5 years. Spin's trial balance on December 31, 2008, in pounds, follows:
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Additional Information
1 Spin uses the FIFO method for its inventory. The beginning inventory was acquired on
December 31, 2007, and ending inventory was acquired on December 26, 2008. Purchases of
£300,000 were made evenly throughout 2008.
2 Spin acquired all of its property, plant, and equipment on March 1, 2006, and uses straightline depreciation.
3 Spin's sales were made evenly throughout 2008, and its operating expenses were incurred
evenly throughout 2008.
4 The dividends were declared and paid on November 1, 2008.
5 Pace's income from its own operations was $150,000 for 2008, and its total stockholders'
equity on January 1, 2008, was $1,000,000. Pace declared $50,000 of dividends during 2008.
6 Exchange rates were as follows:
12-24
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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Required:
1) Prepare a schedule translating the trial balance from British pounds into U.S. dollars.
Assume the pound is the functional currency.
2) Assume that Pace uses the basic equity method. Record all journal entries that relate to its
investment in the British subsidiary during 2008. Provide the necessary documentation and
support for the amounts in the journal entries, including a schedule of the translation
adjustment related to the differential.
2) Prepare a schedule that determines Pace's consolidated comprehensive income for 2008.
4) Compute Pace's total consolidated stockholders' equity at December 31, 2008.
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53. Use the information given in question 52 to prepare a schedule providing a proof of the
translation adjustment.
12-25
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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54. Refer to the information in question 52. Assume the U.S. dollar is the functional currency,
not the pound.
Required:
1) Prepare a schedule remeasuring the trial balance from British pound into U.S. dollars.
2) Assume that Pace uses the basic equity method. Record all journal entries that relate to its
investment in the British subsidiary during 2008. Provide the necessary documentation and
support for the amounts in the journal entries.
3) Prepare a schedule that determines Pace's consolidated net income for 2008.
4) Compute Pace's total consolidated stockholders' equity at December 31, 2008.
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PA
55. Refer to the information in question 52. Assume the U.S. dollar is the functional currency,
not the pound. Prepare a schedule providing a proof of the remeasurement gain or loss.
Assume that the British subsidiary had the following monetary assets and liabilities at January
1, 2008:
12-26
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
56. Parisian Co. is a French company located in Paris. Yankee Corp., located in New York
City, acquires Parisian Co. Parisian has the Euro as its local currency and the Swiss Franc as
its functional currency. Yankee has the U.S. dollar as its local currency and the U.S. dollar as
its functional currency.
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Required:
a) The year-end consolidated financial statements will be prepared in which currency?
b) Explain which method is appropriate to use to use at year-end: Translation or
Remeasurement?
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PA
Chapter 12 Multinational Accounting: Issues in Financial Reporting and
Translation of Foreign Entity Statements Answer Key
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Multiple Choice Questions
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The balance in Newsprint Corp.'s foreign exchange loss account was $10,000 on December
31, 2008, before any necessary year-end adjustment relating to the following:
(1) Newsprint had a $15,000 debit resulting from the restatement in dollars of the accounts of
its wholly owned foreign subsidiary for the year ended December 31, 2008.
(2) Newsprint had an account payable to an unrelated foreign supplier, payable in the
supplier's local currency unit (LCU) on January 15, 2009. The U.S. dollar–equivalent of the
payable was $50,000 on the December 1, 2008, invoice date and $53,000 on December 31,
2008.
12-27
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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1. Based on the information provided, in Newsprint's 2008 consolidated income statement,
what amount should be included as foreign exchange loss in computing net income, if the
LCU is the functional currency and the translation method is appropriate?
A. $28,000
B. $13,000
C. $25,000
D. $8,000
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AACSB: Analytic
AICPA: Measurement
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AACSB: Analytic
AICPA: Measurement
PA
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2. Based on the information provided, in Newsprint's 2008 consolidated income statement,
what amount should be included as foreign exchange loss in computing net income, if the
U.S. dollar is the functional currency and the remeasurement method is appropriate?
A. $15,000
B. $10,000
C. $25,000
D. $28,000
12-28
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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3. Infinity Corporation acquired 80 percent of the common stock of an Egyptian company on
January 1, 2008. The goodwill associated with this acquisition was $18,350. Exchange rates at
various dates during 2008 follow:
AACSB: Analytic
AICPA: Measurement
PA
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Goodwill suffered an impairment of 20 percent during the year. If the functional currency is
the Egyptian Pound, how much goodwill impairment loss should be reported on Infinity's
consolidated statement of income for 2008?
A. $3,670
B. $3,700
C. $3,680
D. $3,690
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4. Infinity Corporation acquired 80 percent of the common stock of an Egyptian company on
January 1, 2008. The goodwill associated with this acquisition was $18,350. Exchange rates at
various dates during 2008 follow:
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Goodwill suffered an impairment of 20 percent during the year. If the functional currency is
the U.S. dollar, how much goodwill impairment loss should be reported on Infinity's
consolidated statement of income for 2008?
A. $3,680
B. $3,670
C. $3,690
D. $3,700
AACSB: Analytic
AICPA: Measurement
12-29
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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5. Simon Company has two foreign subsidiaries. One is located in France, the other in
England. Simon has determined the U.S. dollar is the functional currency for the French
subsidiary, while the British pound is the functional currency for the English subsidiary. Both
subsidiaries maintain their books and records in their respective local currencies. What
methods will Simon use to convert each of the subsidiary's financial statements into U.S.
dollars?
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AACSB: Reflective Thinking
AICPA: Decision Making
PA
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A. Option A
B. Option B
C. Option C
D. Option D
12-30
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
PA
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Michigan-based Leo Corporation acquired 100 percent of the common stock of a British
company on January 1, 2008, for $1,100,000. The British subsidiary's net assets amounted to
500,000 pounds on the date of acquisition. On January 1, 2008, the book values of its
identifiable assets and liabilities approximated their fair values. As a result of an analysis of
functional currency indicators, Leo determined that the British pound was the functional
currency. On December 31, 2008, the British subsidiary's adjusted trial balance, translated
into U.S. dollars, contained $17,000 more debits than credits. The British subsidiary reported
income of 33,000 pounds for 2008 and paid a cash dividend of 8,000 pounds on October 25,
2008. Included on the British subsidiary's income statement was depreciation expense of
3,500 pounds. Leo uses the basic equity method of accounting for its investment in the British
subsidiary and determined that goodwill in the first year had an impairment loss of 25 percent
of its initial amount. Exchange rates at various dates during 2008 follow:
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6. Based on the preceding information, what amount should Leo record as "income from
subsidiary" based on the British subsidiary's reported net income?
A. $72,930
B. $52,500
C. $72,600
D. $69,300
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AACSB: Analytic
AICPA: Measurement
12-31
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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7. Based on the preceding information, the receipt of the dividend will result in a credit to the
investment account for:
A. $16,800
B. $17,680
C. $18,000
D. $17,600
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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8. Based on the preceding information, on Leo's consolidated balance sheet at December 31,
2008, what amount should be reported for the goodwill acquired on January 1, 2008?
A. $36,845
B. $39,286
C. $36,905
D. $36,607
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9. Based on the preceding information, in the stockholders' equity section of Leo's
consolidated balance sheet at December 31, 2008, Leo should report the translation
adjustment as a component of other comprehensive income of:
A. $19,440
B. $17,000
C. $18,786
D. $19,380
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AACSB: Analytic
AICPA: Measurement
12-32
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
10. Which of the following defines a foreign-based entity that uses a functional currency
different from the local currency?
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I. A U.S. subsidiary in Britain maintains its accounting records in pounds sterling, with the
majority of its transactions denominated in pounds sterling.
II. A U.S. subsidiary in Peru conducts virtually all of its business in Latin America, and uses
the U.S. dollar as its major currency.
A. I.
B. II.
C. Both I and II.
D. Neither I nor II.
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AACSB: Reflective Thinking
AICPA: Global
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PA
11. When the local currency of the foreign subsidiary is the functional currency, a foreign
subsidiary's inventory carried at cost would be converted to U.S. dollars by:
A. translation using historical exchange rates.
B. remeasurement using historical exchange rates.
C. remeasurement using the current exchange rate.
D. translation using the current exchange rate.
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AACSB: Reflective Thinking
AICPA: Decision Making
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12. When the local currency of the foreign subsidiary is the functional currency, a foreign
subsidiary's income statement accounts would be converted to U.S. dollars by:
A. translation using historical exchange rates.
B. remeasurement using current exchange rates at the time of statement preparation.
C. translation using average exchange rate for the period.
D. remeasurement using the current exchange rate at the time of statement preparation.
AACSB: Reflective Thinking
AICPA: Decision Making
12-33
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
13. If the restatement method for a foreign subsidiary involves remeasuring from the local
currency into the functional currency, then translating from functional currency to U.S.
dollars, the functional currency of the subsidiary is:
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I. U.S. dollar.
II. Local currency unit.
III. A third country's currency.
A. I
B. III
C. II
D. Either I or II
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AACSB: Reflective Thinking
AICPA: Decision Making
C
PA
14. If the U.S. dollar is the currency in which the foreign affiliate's books and records are
maintained, and the U.S. dollar is also the functional currency,
A. the translation method should be used for restatement.
B. the remeasurement method should be used for restatement.
C. either translation or remeasurement could be used for restatement.
D. no restatement is required.
AACSB: Reflective Thinking
AICPA: Decision Making
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15. All of the following stockholders' equity accounts of a foreign subsidiary are translated at
historical exchange rates except:
A. retained earnings.
B. common stock.
C. additional paid-in capital.
D. preferred stock.
AACSB: Reflective Thinking
AICPA: Decision Making
12-34
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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16. Dividends of a foreign subsidiary are translated at:
A. the average exchange rate for the year.
B. the exchange rate on the date of declaration.
C. the current exchange rate on the date of preparation of the financial statement.
D. the exchange rate on the record date.
AACSB: Reflective Thinking
AICPA: Decision Making
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17. If the functional currency is the local currency of a foreign subsidiary, what exchange
rates should be used to translate the items below, assuming the foreign subsidiary is in a
country which has not experienced hyperinflation over three years?
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A. Option A
B. Option B
C. Option C
D. Option D
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AACSB: Reflective Thinking
AICPA: Decision Making
12-35
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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18. If the functional currency is the local currency of a foreign subsidiary, what exchange
rates should be used to translate the items below, assuming the foreign subsidiary is in a
country which has not experienced hyperinflation over three years?
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A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Reflective Thinking
AICPA: Decision Making
C
PA
19. Which combination of accounts and exchange rates is correct for the translation of a
foreign entity's financial statements from the functional currency to U.S. dollars?
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A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Reflective Thinking
AICPA: Decision Making
12-36
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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20. Which combination of accounts and exchange rates is correct for the remeasurement of a
foreign entity's financial statements from its local currency to U.S. dollars?
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A. Option A
B. Option B
C. Option C
D. Option D
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AACSB: Reflective Thinking
AICPA: Decision Making
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21. The assets listed below of a foreign subsidiary have been converted to U.S. dollars at both
current and historical exchange rates. Assuming that the local currency of the foreign
subsidiary is the functional currency, what total amount should appear for these assets on the
U.S. company's consolidated balance sheet?
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A. $636,000
B. $648,000
C. $708,000
D. $960,000
AACSB: Analytic
AICPA: Measurement
12-37
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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22. The gain or loss on the effective portion of a U.S. parent company's hedge of a net
investment in a foreign entity should be treated as:
A. an adjustment to the retained earnings account in the stockholders' equity section of its
balance sheet.
B. other comprehensive income.
C. a translation gain or loss in the computation of net income for the reporting period.
D. an adjustment to a valuation account in the asset section of its balance sheet.
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AACSB: Reflective Thinking
AICPA: Decision Making
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A. Option A
B. Option B
C. Option C
D. Option D
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23. Dover Company owns 90% of the capital stock of a foreign subsidiary located in Italy.
Dover's accountant has just translated the accounts of the foreign subsidiary and determined
that a debit translation adjustment of $80,000 exists. If Dover uses the equity method for its
investment, what entry should Dover record in order to recognize the translation adjustment?
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AACSB: Analytic
AICPA: Measurement
12-38
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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24. For each of the items listed below, state whether they increase or decrease the balance in
cumulative translation adjustments (assuming a credit balance at the beginning of the year)
when the foreign currency strengthened relative to the U.S. dollar during the year.
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A. Option A
B. Option B
C. Option C
D. Option D
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AACSB: Reflective Thinking
AICPA: Decision Making
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25. Nichols Company owns 90% of the capital stock of a foreign subsidiary located in Ireland.
As a result of translating the subsidiary's accounts, a debit of $160,000 was needed in the
translation adjustments account so that the foreign subsidiary's debits and credits were equal
in U.S. dollars. How should Nichols report its translation adjustments on its consolidated
financial statements?
A. As a $144,000 increase in the stockholders' equity section of the balance sheet.
B. As a $144,000 reduction in consolidated comprehensive net income.
C. As a $160,000 debit in stockholders' equity section of the balance sheet.
D. As a $160,000 reduction in consolidated comprehensive net income.
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AACSB: Analytic
AICPA: Decision Making
12-39
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
26. Under the temporal method, which of the following is usually used to translate monetary
amounts to the functional currency?
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I. The current exchange rate
II The historical exchange rate
III. Average exchange rate
A. I
B. III
C. II
D. Either I or II
AACSB: Reflective Thinking
AICPA: Decision Making
EO
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Mercury Company is a subsidiary of Neptune Company and is located in Valparaíso, Chile,
where the currency is the Chilean Peso. Data on Mercury's inventory and purchases are as
follows:
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The beginning inventory was acquired during the fourth quarter of 2007, and the ending
inventory was acquired during the fourth quarter of 2008. Purchases were made evenly over
the year. Exchange rates were as follows:
12-40
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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27. Refer the information provided above. Assuming the U.S. dollar is the functional
currency, what is the amount of Mercury's cost of goods sold remeasured in U.S. dollars?
A. $1,680
B. $1,712
C. $1,700
D. $1,692
AACSB: Analytic
AICPA: Measurement
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AACSB: Analytic
AICPA: Measurement
PA
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28. Based on the preceding information, the translation of cost of goods sold for 2008,
assuming that the Spanish peseta is the functional currency is:
A. $1,700.
B. $1,760.
C. $1,680.
D. $1,692.
12-41
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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29. The British subsidiary of a U.S. company reported cost of goods sold of 75,000 pounds
(sterling) for the current year ended December 31. The beginning inventory was 10,000
pounds, and the ending inventory was 15,000 pounds. Spot rates for various dates are as
follows:
PA
AACSB: Analytic
AICPA: Measurement
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Assuming the dollar is the functional currency of the British subsidiary, the remeasured
amount of cost of goods sold that should appear in the consolidated income statement is:
A. $108,750.
B. $112,500.
C. $114,250.
D. $125,700.
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30. The British subsidiary of a U.S. company reported cost of goods sold of 75,000 pounds
(sterling) for the current year ended December 31. The beginning inventory was 10,000
pounds, and the ending inventory was 15,000 pounds. Spot rates for various dates are as
follows:
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Assuming the pound is the functional currency of the British subsidiary, the translated amount
of cost of goods sold that should appear in the consolidated income statement is:
A. $108,750.
B. $112,500.
C. $114,300.
D. $125,700.
AACSB: Analytic
AICPA: Measurement
12-42
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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Elan, a U.S. corporation, completed the December 31, 2008, foreign currency translation of
its 70 percent owned Swiss subsidiary's trial balance using the current rate method. The
translation resulted in a debit adjustment of $25,000. The subsidiary had reported net income
of 800,000 Swiss francs for 2008 and paid dividends of 50,000 Swiss francs on September 1,
2008. The translation rates for the year were:
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The January 1 balance of the Investment in the Swiss subsidiary account was $1,600,000.
Elan acquired its interest in the Swiss subsidiary at book value with no differential or
goodwill recorded at acquisition.
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31. Elan's Investment in Swiss subsidiary account at December 31, 2008, is:
A. $1,881,050.
B. $1,916,050.
C. $1,923,950.
D. $2,051,500.
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AACSB: Analytic
AICPA: Measurement
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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32. Elan's consolidated workpaper eliminations related to the foreign currency translation
adjustment will include which entry?
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A. Option A
B. Option B
C. Option C
D. Option D
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33. Seattle, Inc. owns an 80 percent interest in a Portuguese subsidiary. For 2008, Seattle
reported income from operations of $2.0 million. The Portuguese company's income from
operations, after foreign currency translation, was $1.1 million. The foreign currency
translation adjustment was $120,000 (credit). Consolidated net income and consolidated
comprehensive income for the year are:
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A. Option A
B. Option B
C. Option C
D. Option D
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AICPA: Reporting
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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On January 2, 2008, Johnson Company acquired a 100% interest in the capital stock of Perth
Company for $3,100,000. Any excess cost over book value is attributable to a patent with a
10-year remaining life. At the date of acquisition, Perth's balance sheet contained the
following information:
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Perth's income statement for 2008 is as follows:
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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The balance sheet of Perth at December 31, 2008, is as follows:
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Perth declared and paid a dividend of 20,000 FCU on October 1, 2008. Spot rates at various
dates for 2008 follow:
Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income
taxes were incurred evenly throughout 2008.
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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34. Refer to the above information. Assuming the local currency of the country in which Perth
Company is located is the functional currency, what are the translated amounts for the items
below in U.S. dollars?
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A. Option A
B. Option B
C. Option C
D. Option D
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AICPA: Reporting
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35. Refer to the above information. Assuming Perth's local currency is the functional
currency, what is the amount of translation adjustments that result from translating Perth's
trial balance into U.S. dollars at December 31, 2008?
A. $396,500 debit
B. $285,000 credit
C. $405,000 credit
D. $411,000 credit
AACSB: Analytic
AICPA: Decision Making
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36. Refer to the above information. Assuming Perth's local currency is the functional
currency, what is the amount of patent amortization for 2008 that results from Johnson's
acquisition of Perth's stock on January 2, 2008. Round your answer to the nearest dollar.
A. $11,500
B. $11,884
C. $7,667
D. $9,394
AACSB: Analytic
AICPA: Measurement
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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37. Refer to the above information. Assuming Perth's local currency is the functional
currency, what is the amount of translation adjustment that appears on Johnson's consolidated
financial statements at December 31, 2008?
A. $419,184 credit
B. $416,884 credit
C. $405,884 debit
D. $398,500 credit
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C
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AICPA: Measurement
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38. Refer to the above information. Assuming Perth's local currency is the functional
currency, what is the balance in Johnson's investment in foreign subsidiary account at
December 31, 2008, assuming use of the equity method?
A. $3,216,500
B. $3,560,000
C. $3,568,300
D. $3,577,694
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39. Refer to the above information. Assuming the U.S. dollar is the functional currency, what
is Johnson's remeasurement gain (loss) for 2008? (Assume the ending inventory was acquired
on December 31, 2008.)
A. $31,000 gain
B. $36,500 loss
C. $22,000 gain
D. $32,000 gain
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AICPA: Measurement
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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40. Refer to the above information. Assuming the U.S. dollar is the functional currency, what
is the amount of Perth's cost of goods sold remeasured in U.S. dollars?
A. $811,500
B. $843,500
C. $884,500
D. $799,500
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AICPA: Measurement
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AICPA: Measurement
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41. Refer to the above information. Assuming the U.S. dollar is the functional currency, what
is the amount of patent amortization for 2008 that results from Johnson's acquisition of Perth's
stock on January 2, 2008?
A. $11,884
B. $11,770
C. $12,550
D. $11,500
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42. Refer to the above information. Assuming the U.S. dollar is the functional currency, what
is Perth's net income for 2008 in U.S. dollars (include the remeasurement gain or loss in
Perth's net income)?
A. $238,000
B. $228,000
C. $219,500
D. $202,000
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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43. Refer to the above information. Assuming the U.S. dollar is the functional currency, what
is the balance in Johnson's investment in foreign subsidiary account at December 31, 2008
(assuming the use of the equity method)?
A. $3,303,400
B. $3,294,500
C. $3,323,400
D. $3,314,500
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AICPA: Reporting
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On January 1, 2008, Transport Corporation acquired 75 percent interest in Steamship
Company for $300,000. Steamship is a Norwegian company. The local currency is the
Norwegian kroner (NKr). The acquisition resulted in an excess of cost-over-book value of
$25,000 due solely to a patent having a remaining life of 5 years. Transport uses the equity
method to account for its investment. Steamship's December 31, 2008, trial balance has been
translated into U.S. dollars, requiring a translation adjustment debit of $8,000. Steamship's net
income translated into U.S. dollars is $35,000. It declared and paid an NKr 20,000 dividend
on June 1, 2008. Relevant exchange rates are as follows:
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Assume the kroner is the functional currency.
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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44. Based on the preceding information, in the journal entry to record the receipt of dividend
from Steamship,
A. Investment in Steamship Company will be credited for $3,450.
B. Cash will be debited for $3,300.
C. Investment in Steamship Company will be credited for $4,000.
D. Cash will be debited for $3,600.
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45. Based on the preceding information, in the journal entry to record parent's share of
subsidiary's translation adjustment:
A. Other Comprehensive Income — Translation Adjustment will be debited for $8,000.
B. Other Comprehensive Income — Translation Adjustment will be credited for $6,000.
C. Investment in Steamship Company will be credited for $6,000.
D. Investment in Steamship Company will be debited for $8,000.
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46. Based on the preceding information, what amount of translation adjustment is required for
increase in differential?
A. $3,000
B. $5,500
C. $4,500
D. $5,000
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AICPA: Measurement
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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47. Based on the preceding information, in the journal entry to record the amortization of the
patent for 2008 on the parent's books, Investment in Steamship Company will be debited for:
A. $5,000
B. $5,500
C. $4,500
D. $3,000
AACSB: Analytic
AICPA: Measurement
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On September 30, 2008, Wilfred Company sold inventory to Jackson Corporation, its
Canadian subsidiary. The goods cost Wilfred $30,000 and were sold to Jackson for $40,000,
payable in Canadian dollars. The goods are still on hand at the end of the year on December
31. The Canadian dollar (C$) is the functional currency of the Canadian subsidiary. The
exchange rates follow:
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48. Based on the preceding information, at what dollar amount is the ending inventory shown
in the trial balance of the consolidated workpaper?
A. $45,000
B. $50,000
C. $40,000
D. $35,000
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AICPA: Measurement
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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49. Based on the preceding information, what amount of unrealized intercompany gross profit
is eliminated in preparing the consolidated financial statements for the year?
A. $0
B. $5,000
C. $10,000
D. $15,000
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AICPA: Measurement
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Essay Questions
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50. Based on the preceding information, at what amount is the inventory shown on the
consolidated balance sheet for the year?
A. $45,000
B. $30,000
C. $40,000
D. $35,000
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
51. Briefly explain the following terms associated with accounting for foreign entities:
a) Functional Currency
b) Translation
c) Remeasurement
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a) Functional currency is the currency of the primary economic environment in which the
entity operates; normally that is the currency of the environment in which an entity primarily
generates and receives cash. The functional currency is used to differentiate between two
types of foreign operations, those that are self-contained and integrated into a local
environment, and those that are an extension of the parent and integrated with the parent.
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b) Translation is the most common method used and is applied when the local currency is the
foreign entity's functional currency. To translate the financial statements, the company will
use the current rate, which is the exchange rate on the balance sheet date, to convert the local
currency balance sheet account balances into U.S. dollars. Any translation adjustment that
occurs is a component of comprehensive income. Because revenues and expenses are
assumed to occur uniformly over the period, revenues and expenses on the income statement
are translated using the average rate for the reporting period.
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c) Remeasurement is the restatement of the foreign entity's financial statements from the local
currency that the entity used into the foreign entity's functional currency. Remeasurement is
required only when the functional currency is different from the currency used to maintain the
books and records of the foreign entity. Monetary assets and liabilities are translated at the
current rate. Non-monetary assets and liabilities, including inventories, are translated at their
historical rates. The income statement items other than cost of goods sold is translated at
average rates. Any resulting adjustment is taken into current period income.
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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52. On January 1, 2008, Pace Company acquired all of the outstanding stock of Spin PLC, a
British Company, for $350,000. Spin's net assets on the date of acquisition were 250,000
pounds (£). On January 1, 2008, the book and fair values of the Spin's identifiable assets and
liabilities approximated their fair values except for property, plant, and equipment and
trademarks. The fair value of Spin's property, plant, and equipment exceeded its book value
by $25,000. The remaining useful life of Spin's equipment at January 1, 2008, was 10 years.
The remainder of the differential was attributable to a trademark having an estimated useful
life of 5 years. Spin's trial balance on December 31, 2008, in pounds, follows:
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Additional Information
1 Spin uses the FIFO method for its inventory. The beginning inventory was acquired on
December 31, 2007, and ending inventory was acquired on December 26, 2008. Purchases of
£300,000 were made evenly throughout 2008.
2 Spin acquired all of its property, plant, and equipment on March 1, 2006, and uses straightline depreciation.
3 Spin's sales were made evenly throughout 2008, and its operating expenses were incurred
evenly throughout 2008.
4 The dividends were declared and paid on November 1, 2008.
5 Pace's income from its own operations was $150,000 for 2008, and its total stockholders'
equity on January 1, 2008, was $1,000,000. Pace declared $50,000 of dividends during 2008.
6 Exchange rates were as follows:
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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Required:
1) Prepare a schedule translating the trial balance from British pounds into U.S. dollars.
Assume the pound is the functional currency.
2) Assume that Pace uses the basic equity method. Record all journal entries that relate to its
investment in the British subsidiary during 2008. Provide the necessary documentation and
support for the amounts in the journal entries, including a schedule of the translation
adjustment related to the differential.
2) Prepare a schedule that determines Pace's consolidated comprehensive income for 2008.
4) Compute Pace's total consolidated stockholders' equity at December 31, 2008.
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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53. Use the information given in question 52 to prepare a schedule providing a proof of the
translation adjustment.
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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54. Refer to the information in question 52. Assume the U.S. dollar is the functional currency,
not the pound.
Required:
1) Prepare a schedule remeasuring the trial balance from British pound into U.S. dollars.
2) Assume that Pace uses the basic equity method. Record all journal entries that relate to its
investment in the British subsidiary during 2008. Provide the necessary documentation and
support for the amounts in the journal entries.
3) Prepare a schedule that determines Pace's consolidated net income for 2008.
4) Compute Pace's total consolidated stockholders' equity at December 31, 2008.
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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2) Journal entries for 2008:
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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AICPA: Measurement
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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55. Refer to the information in question 52. Assume the U.S. dollar is the functional currency,
not the pound. Prepare a schedule providing a proof of the remeasurement gain or loss.
Assume that the British subsidiary had the following monetary assets and liabilities at January
1, 2008:
AACSB: Analytic
AICPA: Measurement
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
56. Parisian Co. is a French company located in Paris. Yankee Corp., located in New York
City, acquires Parisian Co. Parisian has the Euro as its local currency and the Swiss Franc as
its functional currency. Yankee has the U.S. dollar as its local currency and the U.S. dollar as
its functional currency.
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Required:
a) The year-end consolidated financial statements will be prepared in which currency?
b) Explain which method is appropriate to use to use at year-end: Translation or
Remeasurement?
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AACSB: Communication
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a) The consolidated financial statements will be reported in Yankee's functional currency - the
U.S. dollar.
b) Parisian's financial statements will need to be remeasured first from the Euro to the Swiss
Franc. Then the financial statements' valued in the Swiss Franc will be translated to the U.S.
dollar.
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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Chapter 12
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Foreign Entity Statements
Multiple Choice Questions
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The balance in Newsprint Corp.'s foreign exchange loss account was $10,000 on December
31, 2008, before any necessary year-end adjustment relating to the following:
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(1) Newsprint had a $15,000 debit resulting from the restatement in dollars of the accounts of
its wholly owned foreign subsidiary for the year ended December 31, 2008.
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(2) Newsprint had an account payable to an unrelated foreign supplier, payable in the
supplier's local currency unit (LCU) on January 15, 2009. The U.S. dollar–equivalent of the
payable was $50,000 on the December 1, 2008, invoice date and $53,000 on December 31,
2008.
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1. Based on the information provided, in Newsprint's 2008 consolidated income statement,
what amount should be included as foreign exchange loss in computing net income, if the
LCU is the functional currency and the translation method is appropriate?
A. $28,000
B. $13,000
C. $25,000
D. $8,000
2. Based on the information provided, in Newsprint's 2008 consolidated income statement,
what amount should be included as foreign exchange loss in computing net income, if the
U.S. dollar is the functional currency and the remeasurement method is appropriate?
A. $15,000
B. $10,000
C. $25,000
D. $28,000
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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3. Infinity Corporation acquired 80 percent of the common stock of an Egyptian company on
January 1, 2008. The goodwill associated with this acquisition was $18,350. Exchange rates at
various dates during 2008 follow:
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Goodwill suffered an impairment of 20 percent during the year. If the functional currency is
the Egyptian Pound, how much goodwill impairment loss should be reported on Infinity's
consolidated statement of income for 2008?
A. $3,670
B. $3,700
C. $3,680
D. $3,690
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4. Infinity Corporation acquired 80 percent of the common stock of an Egyptian company on
January 1, 2008. The goodwill associated with this acquisition was $18,350. Exchange rates at
various dates during 2008 follow:
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Goodwill suffered an impairment of 20 percent during the year. If the functional currency is
the U.S. dollar, how much goodwill impairment loss should be reported on Infinity's
consolidated statement of income for 2008?
A. $3,680
B. $3,670
C. $3,690
D. $3,700
12-2
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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5. Simon Company has two foreign subsidiaries. One is located in France, the other in
England. Simon has determined the U.S. dollar is the functional currency for the French
subsidiary, while the British pound is the functional currency for the English subsidiary. Both
subsidiaries maintain their books and records in their respective local currencies. What
methods will Simon use to convert each of the subsidiary's financial statements into U.S.
dollars?
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A. Option A
B. Option B
C. Option C
D. Option D
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Michigan-based Leo Corporation acquired 100 percent of the common stock of a British
company on January 1, 2008, for $1,100,000. The British subsidiary's net assets amounted to
500,000 pounds on the date of acquisition. On January 1, 2008, the book values of its
identifiable assets and liabilities approximated their fair values. As a result of an analysis of
functional currency indicators, Leo determined that the British pound was the functional
currency. On December 31, 2008, the British subsidiary's adjusted trial balance, translated
into U.S. dollars, contained $17,000 more debits than credits. The British subsidiary reported
income of 33,000 pounds for 2008 and paid a cash dividend of 8,000 pounds on October 25,
2008. Included on the British subsidiary's income statement was depreciation expense of
3,500 pounds. Leo uses the basic equity method of accounting for its investment in the British
subsidiary and determined that goodwill in the first year had an impairment loss of 25 percent
of its initial amount. Exchange rates at various dates during 2008 follow:
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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6. Based on the preceding information, what amount should Leo record as "income from
subsidiary" based on the British subsidiary's reported net income?
A. $72,930
B. $52,500
C. $72,600
D. $69,300
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7. Based on the preceding information, the receipt of the dividend will result in a credit to the
investment account for:
A. $16,800
B. $17,680
C. $18,000
D. $17,600
C
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8. Based on the preceding information, on Leo's consolidated balance sheet at December 31,
2008, what amount should be reported for the goodwill acquired on January 1, 2008?
A. $36,845
B. $39,286
C. $36,905
D. $36,607
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9. Based on the preceding information, in the stockholders' equity section of Leo's
consolidated balance sheet at December 31, 2008, Leo should report the translation
adjustment as a component of other comprehensive income of:
A. $19,440
B. $17,000
C. $18,786
D. $19,380
12-4
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
10. Which of the following defines a foreign-based entity that uses a functional currency
different from the local currency?
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I. A U.S. subsidiary in Britain maintains its accounting records in pounds sterling, with the
majority of its transactions denominated in pounds sterling.
II. A U.S. subsidiary in Peru conducts virtually all of its business in Latin America, and uses
the U.S. dollar as its major currency.
A. I.
B. II.
C. Both I and II.
D. Neither I nor II.
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11. When the local currency of the foreign subsidiary is the functional currency, a foreign
subsidiary's inventory carried at cost would be converted to U.S. dollars by:
A. translation using historical exchange rates.
B. remeasurement using historical exchange rates.
C. remeasurement using the current exchange rate.
D. translation using the current exchange rate.
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12. When the local currency of the foreign subsidiary is the functional currency, a foreign
subsidiary's income statement accounts would be converted to U.S. dollars by:
A. translation using historical exchange rates.
B. remeasurement using current exchange rates at the time of statement preparation.
C. translation using average exchange rate for the period.
D. remeasurement using the current exchange rate at the time of statement preparation.
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
13. If the restatement method for a foreign subsidiary involves remeasuring from the local
currency into the functional currency, then translating from functional currency to U.S.
dollars, the functional currency of the subsidiary is:
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I. U.S. dollar.
II. Local currency unit.
III. A third country's currency.
A. I
B. III
C. II
D. Either I or II
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14. If the U.S. dollar is the currency in which the foreign affiliate's books and records are
maintained, and the U.S. dollar is also the functional currency,
A. the translation method should be used for restatement.
B. the remeasurement method should be used for restatement.
C. either translation or remeasurement could be used for restatement.
D. no restatement is required.
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15. All of the following stockholders' equity accounts of a foreign subsidiary are translated at
historical exchange rates except:
A. retained earnings.
B. common stock.
C. additional paid-in capital.
D. preferred stock.
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16. Dividends of a foreign subsidiary are translated at:
A. the average exchange rate for the year.
B. the exchange rate on the date of declaration.
C. the current exchange rate on the date of preparation of the financial statement.
D. the exchange rate on the record date.
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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17. If the functional currency is the local currency of a foreign subsidiary, what exchange
rates should be used to translate the items below, assuming the foreign subsidiary is in a
country which has not experienced hyperinflation over three years?
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A. Option A
B. Option B
C. Option C
D. Option D
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A. Option A
B. Option B
C. Option C
D. Option D
C
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18. If the functional currency is the local currency of a foreign subsidiary, what exchange
rates should be used to translate the items below, assuming the foreign subsidiary is in a
country which has not experienced hyperinflation over three years?
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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19. Which combination of accounts and exchange rates is correct for the translation of a
foreign entity's financial statements from the functional currency to U.S. dollars?
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A. Option A
B. Option B
C. Option C
D. Option D
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A. Option A
B. Option B
C. Option C
D. Option D
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20. Which combination of accounts and exchange rates is correct for the remeasurement of a
foreign entity's financial statements from its local currency to U.S. dollars?
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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21. The assets listed below of a foreign subsidiary have been converted to U.S. dollars at both
current and historical exchange rates. Assuming that the local currency of the foreign
subsidiary is the functional currency, what total amount should appear for these assets on the
U.S. company's consolidated balance sheet?
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A. $636,000
B. $648,000
C. $708,000
D. $960,000
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22. The gain or loss on the effective portion of a U.S. parent company's hedge of a net
investment in a foreign entity should be treated as:
A. an adjustment to the retained earnings account in the stockholders' equity section of its
balance sheet.
B. other comprehensive income.
C. a translation gain or loss in the computation of net income for the reporting period.
D. an adjustment to a valuation account in the asset section of its balance sheet.
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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23. Dover Company owns 90% of the capital stock of a foreign subsidiary located in Italy.
Dover's accountant has just translated the accounts of the foreign subsidiary and determined
that a debit translation adjustment of $80,000 exists. If Dover uses the equity method for its
investment, what entry should Dover record in order to recognize the translation adjustment?
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A. Option A
B. Option B
C. Option C
D. Option D
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24. For each of the items listed below, state whether they increase or decrease the balance in
cumulative translation adjustments (assuming a credit balance at the beginning of the year)
when the foreign currency strengthened relative to the U.S. dollar during the year.
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A. Option A
B. Option B
C. Option C
D. Option D
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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25. Nichols Company owns 90% of the capital stock of a foreign subsidiary located in Ireland.
As a result of translating the subsidiary's accounts, a debit of $160,000 was needed in the
translation adjustments account so that the foreign subsidiary's debits and credits were equal
in U.S. dollars. How should Nichols report its translation adjustments on its consolidated
financial statements?
A. As a $144,000 increase in the stockholders' equity section of the balance sheet.
B. As a $144,000 reduction in consolidated comprehensive net income.
C. As a $160,000 debit in stockholders' equity section of the balance sheet.
D. As a $160,000 reduction in consolidated comprehensive net income.
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I. The current exchange rate
II The historical exchange rate
III. Average exchange rate
A. I
B. III
C. II
D. Either I or II
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26. Under the temporal method, which of the following is usually used to translate monetary
amounts to the functional currency?
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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Mercury Company is a subsidiary of Neptune Company and is located in Valparaíso, Chile,
where the currency is the Chilean Peso. Data on Mercury's inventory and purchases are as
follows:
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PA
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The beginning inventory was acquired during the fourth quarter of 2007, and the ending
inventory was acquired during the fourth quarter of 2008. Purchases were made evenly over
the year. Exchange rates were as follows:
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27. Refer the information provided above. Assuming the U.S. dollar is the functional
currency, what is the amount of Mercury's cost of goods sold remeasured in U.S. dollars?
A. $1,680
B. $1,712
C. $1,700
D. $1,692
12-12
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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28. Based on the preceding information, the translation of cost of goods sold for 2008,
assuming that the Spanish peseta is the functional currency is:
A. $1,700.
B. $1,760.
C. $1,680.
D. $1,692.
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29. The British subsidiary of a U.S. company reported cost of goods sold of 75,000 pounds
(sterling) for the current year ended December 31. The beginning inventory was 10,000
pounds, and the ending inventory was 15,000 pounds. Spot rates for various dates are as
follows:
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PA
Assuming the dollar is the functional currency of the British subsidiary, the remeasured
amount of cost of goods sold that should appear in the consolidated income statement is:
A. $108,750.
B. $112,500.
C. $114,250.
D. $125,700.
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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30. The British subsidiary of a U.S. company reported cost of goods sold of 75,000 pounds
(sterling) for the current year ended December 31. The beginning inventory was 10,000
pounds, and the ending inventory was 15,000 pounds. Spot rates for various dates are as
follows:
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Assuming the pound is the functional currency of the British subsidiary, the translated amount
of cost of goods sold that should appear in the consolidated income statement is:
A. $108,750.
B. $112,500.
C. $114,300.
D. $125,700.
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Elan, a U.S. corporation, completed the December 31, 2008, foreign currency translation of
its 70 percent owned Swiss subsidiary's trial balance using the current rate method. The
translation resulted in a debit adjustment of $25,000. The subsidiary had reported net income
of 800,000 Swiss francs for 2008 and paid dividends of 50,000 Swiss francs on September 1,
2008. The translation rates for the year were:
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The January 1 balance of the Investment in the Swiss subsidiary account was $1,600,000.
Elan acquired its interest in the Swiss subsidiary at book value with no differential or
goodwill recorded at acquisition.
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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31. Elan's Investment in Swiss subsidiary account at December 31, 2008, is:
A. $1,881,050.
B. $1,916,050.
C. $1,923,950.
D. $2,051,500.
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A. Option A
B. Option B
C. Option C
D. Option D
PA
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32. Elan's consolidated workpaper eliminations related to the foreign currency translation
adjustment will include which entry?
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33. Seattle, Inc. owns an 80 percent interest in a Portuguese subsidiary. For 2008, Seattle
reported income from operations of $2.0 million. The Portuguese company's income from
operations, after foreign currency translation, was $1.1 million. The foreign currency
translation adjustment was $120,000 (credit). Consolidated net income and consolidated
comprehensive income for the year are:
A. Option A
B. Option B
C. Option C
D. Option D
12-15
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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PA
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On January 2, 2008, Johnson Company acquired a 100% interest in the capital stock of Perth
Company for $3,100,000. Any excess cost over book value is attributable to a patent with a
10-year remaining life. At the date of acquisition, Perth's balance sheet contained the
following information:
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Perth's income statement for 2008 is as follows:
12-16
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
PA
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The balance sheet of Perth at December 31, 2008, is as follows:
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Perth declared and paid a dividend of 20,000 FCU on October 1, 2008. Spot rates at various
dates for 2008 follow:
Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income
taxes were incurred evenly throughout 2008.
12-17
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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34. Refer to the above information. Assuming the local currency of the country in which Perth
Company is located is the functional currency, what are the translated amounts for the items
below in U.S. dollars?
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A. Option A
B. Option B
C. Option C
D. Option D
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PA
35. Refer to the above information. Assuming Perth's local currency is the functional
currency, what is the amount of translation adjustments that result from translating Perth's
trial balance into U.S. dollars at December 31, 2008?
A. $396,500 debit
B. $285,000 credit
C. $405,000 credit
D. $411,000 credit
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36. Refer to the above information. Assuming Perth's local currency is the functional
currency, what is the amount of patent amortization for 2008 that results from Johnson's
acquisition of Perth's stock on January 2, 2008. Round your answer to the nearest dollar.
A. $11,500
B. $11,884
C. $7,667
D. $9,394
12-18
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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37. Refer to the above information. Assuming Perth's local currency is the functional
currency, what is the amount of translation adjustment that appears on Johnson's consolidated
financial statements at December 31, 2008?
A. $419,184 credit
B. $416,884 credit
C. $405,884 debit
D. $398,500 credit
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38. Refer to the above information. Assuming Perth's local currency is the functional
currency, what is the balance in Johnson's investment in foreign subsidiary account at
December 31, 2008, assuming use of the equity method?
A. $3,216,500
B. $3,560,000
C. $3,568,300
D. $3,577,694
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39. Refer to the above information. Assuming the U.S. dollar is the functional currency, what
is Johnson's remeasurement gain (loss) for 2008? (Assume the ending inventory was acquired
on December 31, 2008.)
A. $31,000 gain
B. $36,500 loss
C. $22,000 gain
D. $32,000 gain
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40. Refer to the above information. Assuming the U.S. dollar is the functional currency, what
is the amount of Perth's cost of goods sold remeasured in U.S. dollars?
A. $811,500
B. $843,500
C. $884,500
D. $799,500
12-19
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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41. Refer to the above information. Assuming the U.S. dollar is the functional currency, what
is the amount of patent amortization for 2008 that results from Johnson's acquisition of Perth's
stock on January 2, 2008?
A. $11,884
B. $11,770
C. $12,550
D. $11,500
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42. Refer to the above information. Assuming the U.S. dollar is the functional currency, what
is Perth's net income for 2008 in U.S. dollars (include the remeasurement gain or loss in
Perth's net income)?
A. $238,000
B. $228,000
C. $219,500
D. $202,000
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43. Refer to the above information. Assuming the U.S. dollar is the functional currency, what
is the balance in Johnson's investment in foreign subsidiary account at December 31, 2008
(assuming the use of the equity method)?
A. $3,303,400
B. $3,294,500
C. $3,323,400
D. $3,314,500
12-20
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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On January 1, 2008, Transport Corporation acquired 75 percent interest in Steamship
Company for $300,000. Steamship is a Norwegian company. The local currency is the
Norwegian kroner (NKr). The acquisition resulted in an excess of cost-over-book value of
$25,000 due solely to a patent having a remaining life of 5 years. Transport uses the equity
method to account for its investment. Steamship's December 31, 2008, trial balance has been
translated into U.S. dollars, requiring a translation adjustment debit of $8,000. Steamship's net
income translated into U.S. dollars is $35,000. It declared and paid an NKr 20,000 dividend
on June 1, 2008. Relevant exchange rates are as follows:
PA
Assume the kroner is the functional currency.
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44. Based on the preceding information, in the journal entry to record the receipt of dividend
from Steamship,
A. Investment in Steamship Company will be credited for $3,450.
B. Cash will be debited for $3,300.
C. Investment in Steamship Company will be credited for $4,000.
D. Cash will be debited for $3,600.
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45. Based on the preceding information, in the journal entry to record parent's share of
subsidiary's translation adjustment:
A. Other Comprehensive Income — Translation Adjustment will be debited for $8,000.
B. Other Comprehensive Income — Translation Adjustment will be credited for $6,000.
C. Investment in Steamship Company will be credited for $6,000.
D. Investment in Steamship Company will be debited for $8,000.
12-21
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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46. Based on the preceding information, what amount of translation adjustment is required for
increase in differential?
A. $3,000
B. $5,500
C. $4,500
D. $5,000
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47. Based on the preceding information, in the journal entry to record the amortization of the
patent for 2008 on the parent's books, Investment in Steamship Company will be debited for:
A. $5,000
B. $5,500
C. $4,500
D. $3,000
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PA
On September 30, 2008, Wilfred Company sold inventory to Jackson Corporation, its
Canadian subsidiary. The goods cost Wilfred $30,000 and were sold to Jackson for $40,000,
payable in Canadian dollars. The goods are still on hand at the end of the year on December
31. The Canadian dollar (C$) is the functional currency of the Canadian subsidiary. The
exchange rates follow:
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48. Based on the preceding information, at what dollar amount is the ending inventory shown
in the trial balance of the consolidated workpaper?
A. $45,000
B. $50,000
C. $40,000
D. $35,000
12-22
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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49. Based on the preceding information, what amount of unrealized intercompany gross profit
is eliminated in preparing the consolidated financial statements for the year?
A. $0
B. $5,000
C. $10,000
D. $15,000
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50. Based on the preceding information, at what amount is the inventory shown on the
consolidated balance sheet for the year?
A. $45,000
B. $30,000
C. $40,000
D. $35,000
PA
Essay Questions
51. Briefly explain the following terms associated with accounting for foreign entities:
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a) Functional Currency
b) Translation
c) Remeasurement
12-23
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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52. On January 1, 2008, Pace Company acquired all of the outstanding stock of Spin PLC, a
British Company, for $350,000. Spin's net assets on the date of acquisition were 250,000
pounds (£). On January 1, 2008, the book and fair values of the Spin's identifiable assets and
liabilities approximated their fair values except for property, plant, and equipment and
trademarks. The fair value of Spin's property, plant, and equipment exceeded its book value
by $25,000. The remaining useful life of Spin's equipment at January 1, 2008, was 10 years.
The remainder of the differential was attributable to a trademark having an estimated useful
life of 5 years. Spin's trial balance on December 31, 2008, in pounds, follows:
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Additional Information
1 Spin uses the FIFO method for its inventory. The beginning inventory was acquired on
December 31, 2007, and ending inventory was acquired on December 26, 2008. Purchases of
£300,000 were made evenly throughout 2008.
2 Spin acquired all of its property, plant, and equipment on March 1, 2006, and uses straightline depreciation.
3 Spin's sales were made evenly throughout 2008, and its operating expenses were incurred
evenly throughout 2008.
4 The dividends were declared and paid on November 1, 2008.
5 Pace's income from its own operations was $150,000 for 2008, and its total stockholders'
equity on January 1, 2008, was $1,000,000. Pace declared $50,000 of dividends during 2008.
6 Exchange rates were as follows:
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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Required:
1) Prepare a schedule translating the trial balance from British pounds into U.S. dollars.
Assume the pound is the functional currency.
2) Assume that Pace uses the basic equity method. Record all journal entries that relate to its
investment in the British subsidiary during 2008. Provide the necessary documentation and
support for the amounts in the journal entries, including a schedule of the translation
adjustment related to the differential.
2) Prepare a schedule that determines Pace's consolidated comprehensive income for 2008.
4) Compute Pace's total consolidated stockholders' equity at December 31, 2008.
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53. Use the information given in question 52 to prepare a schedule providing a proof of the
translation adjustment.
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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54. Refer to the information in question 52. Assume the U.S. dollar is the functional currency,
not the pound.
Required:
1) Prepare a schedule remeasuring the trial balance from British pound into U.S. dollars.
2) Assume that Pace uses the basic equity method. Record all journal entries that relate to its
investment in the British subsidiary during 2008. Provide the necessary documentation and
support for the amounts in the journal entries.
3) Prepare a schedule that determines Pace's consolidated net income for 2008.
4) Compute Pace's total consolidated stockholders' equity at December 31, 2008.
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PA
55. Refer to the information in question 52. Assume the U.S. dollar is the functional currency,
not the pound. Prepare a schedule providing a proof of the remeasurement gain or loss.
Assume that the British subsidiary had the following monetary assets and liabilities at January
1, 2008:
12-26
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
56. Parisian Co. is a French company located in Paris. Yankee Corp., located in New York
City, acquires Parisian Co. Parisian has the Euro as its local currency and the Swiss Franc as
its functional currency. Yankee has the U.S. dollar as its local currency and the U.S. dollar as
its functional currency.
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Required:
a) The year-end consolidated financial statements will be prepared in which currency?
b) Explain which method is appropriate to use to use at year-end: Translation or
Remeasurement?
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Chapter 12 Multinational Accounting: Issues in Financial Reporting and
Translation of Foreign Entity Statements Answer Key
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Multiple Choice Questions
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The balance in Newsprint Corp.'s foreign exchange loss account was $10,000 on December
31, 2008, before any necessary year-end adjustment relating to the following:
(1) Newsprint had a $15,000 debit resulting from the restatement in dollars of the accounts of
its wholly owned foreign subsidiary for the year ended December 31, 2008.
(2) Newsprint had an account payable to an unrelated foreign supplier, payable in the
supplier's local currency unit (LCU) on January 15, 2009. The U.S. dollar–equivalent of the
payable was $50,000 on the December 1, 2008, invoice date and $53,000 on December 31,
2008.
12-27
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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1. Based on the information provided, in Newsprint's 2008 consolidated income statement,
what amount should be included as foreign exchange loss in computing net income, if the
LCU is the functional currency and the translation method is appropriate?
A. $28,000
B. $13,000
C. $25,000
D. $8,000
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AACSB: Analytic
AICPA: Measurement
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AACSB: Analytic
AICPA: Measurement
PA
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2. Based on the information provided, in Newsprint's 2008 consolidated income statement,
what amount should be included as foreign exchange loss in computing net income, if the
U.S. dollar is the functional currency and the remeasurement method is appropriate?
A. $15,000
B. $10,000
C. $25,000
D. $28,000
12-28
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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3. Infinity Corporation acquired 80 percent of the common stock of an Egyptian company on
January 1, 2008. The goodwill associated with this acquisition was $18,350. Exchange rates at
various dates during 2008 follow:
AACSB: Analytic
AICPA: Measurement
PA
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Goodwill suffered an impairment of 20 percent during the year. If the functional currency is
the Egyptian Pound, how much goodwill impairment loss should be reported on Infinity's
consolidated statement of income for 2008?
A. $3,670
B. $3,700
C. $3,680
D. $3,690
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4. Infinity Corporation acquired 80 percent of the common stock of an Egyptian company on
January 1, 2008. The goodwill associated with this acquisition was $18,350. Exchange rates at
various dates during 2008 follow:
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Goodwill suffered an impairment of 20 percent during the year. If the functional currency is
the U.S. dollar, how much goodwill impairment loss should be reported on Infinity's
consolidated statement of income for 2008?
A. $3,680
B. $3,670
C. $3,690
D. $3,700
AACSB: Analytic
AICPA: Measurement
12-29
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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5. Simon Company has two foreign subsidiaries. One is located in France, the other in
England. Simon has determined the U.S. dollar is the functional currency for the French
subsidiary, while the British pound is the functional currency for the English subsidiary. Both
subsidiaries maintain their books and records in their respective local currencies. What
methods will Simon use to convert each of the subsidiary's financial statements into U.S.
dollars?
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AACSB: Reflective Thinking
AICPA: Decision Making
PA
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A. Option A
B. Option B
C. Option C
D. Option D
12-30
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
PA
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Michigan-based Leo Corporation acquired 100 percent of the common stock of a British
company on January 1, 2008, for $1,100,000. The British subsidiary's net assets amounted to
500,000 pounds on the date of acquisition. On January 1, 2008, the book values of its
identifiable assets and liabilities approximated their fair values. As a result of an analysis of
functional currency indicators, Leo determined that the British pound was the functional
currency. On December 31, 2008, the British subsidiary's adjusted trial balance, translated
into U.S. dollars, contained $17,000 more debits than credits. The British subsidiary reported
income of 33,000 pounds for 2008 and paid a cash dividend of 8,000 pounds on October 25,
2008. Included on the British subsidiary's income statement was depreciation expense of
3,500 pounds. Leo uses the basic equity method of accounting for its investment in the British
subsidiary and determined that goodwill in the first year had an impairment loss of 25 percent
of its initial amount. Exchange rates at various dates during 2008 follow:
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6. Based on the preceding information, what amount should Leo record as "income from
subsidiary" based on the British subsidiary's reported net income?
A. $72,930
B. $52,500
C. $72,600
D. $69,300
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AACSB: Analytic
AICPA: Measurement
12-31
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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7. Based on the preceding information, the receipt of the dividend will result in a credit to the
investment account for:
A. $16,800
B. $17,680
C. $18,000
D. $17,600
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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8. Based on the preceding information, on Leo's consolidated balance sheet at December 31,
2008, what amount should be reported for the goodwill acquired on January 1, 2008?
A. $36,845
B. $39,286
C. $36,905
D. $36,607
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9. Based on the preceding information, in the stockholders' equity section of Leo's
consolidated balance sheet at December 31, 2008, Leo should report the translation
adjustment as a component of other comprehensive income of:
A. $19,440
B. $17,000
C. $18,786
D. $19,380
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AACSB: Analytic
AICPA: Measurement
12-32
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
10. Which of the following defines a foreign-based entity that uses a functional currency
different from the local currency?
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I. A U.S. subsidiary in Britain maintains its accounting records in pounds sterling, with the
majority of its transactions denominated in pounds sterling.
II. A U.S. subsidiary in Peru conducts virtually all of its business in Latin America, and uses
the U.S. dollar as its major currency.
A. I.
B. II.
C. Both I and II.
D. Neither I nor II.
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AACSB: Reflective Thinking
AICPA: Global
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PA
11. When the local currency of the foreign subsidiary is the functional currency, a foreign
subsidiary's inventory carried at cost would be converted to U.S. dollars by:
A. translation using historical exchange rates.
B. remeasurement using historical exchange rates.
C. remeasurement using the current exchange rate.
D. translation using the current exchange rate.
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AACSB: Reflective Thinking
AICPA: Decision Making
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12. When the local currency of the foreign subsidiary is the functional currency, a foreign
subsidiary's income statement accounts would be converted to U.S. dollars by:
A. translation using historical exchange rates.
B. remeasurement using current exchange rates at the time of statement preparation.
C. translation using average exchange rate for the period.
D. remeasurement using the current exchange rate at the time of statement preparation.
AACSB: Reflective Thinking
AICPA: Decision Making
12-33
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
13. If the restatement method for a foreign subsidiary involves remeasuring from the local
currency into the functional currency, then translating from functional currency to U.S.
dollars, the functional currency of the subsidiary is:
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I. U.S. dollar.
II. Local currency unit.
III. A third country's currency.
A. I
B. III
C. II
D. Either I or II
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AACSB: Reflective Thinking
AICPA: Decision Making
C
PA
14. If the U.S. dollar is the currency in which the foreign affiliate's books and records are
maintained, and the U.S. dollar is also the functional currency,
A. the translation method should be used for restatement.
B. the remeasurement method should be used for restatement.
C. either translation or remeasurement could be used for restatement.
D. no restatement is required.
AACSB: Reflective Thinking
AICPA: Decision Making
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15. All of the following stockholders' equity accounts of a foreign subsidiary are translated at
historical exchange rates except:
A. retained earnings.
B. common stock.
C. additional paid-in capital.
D. preferred stock.
AACSB: Reflective Thinking
AICPA: Decision Making
12-34
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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16. Dividends of a foreign subsidiary are translated at:
A. the average exchange rate for the year.
B. the exchange rate on the date of declaration.
C. the current exchange rate on the date of preparation of the financial statement.
D. the exchange rate on the record date.
AACSB: Reflective Thinking
AICPA: Decision Making
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17. If the functional currency is the local currency of a foreign subsidiary, what exchange
rates should be used to translate the items below, assuming the foreign subsidiary is in a
country which has not experienced hyperinflation over three years?
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PA
A. Option A
B. Option B
C. Option C
D. Option D
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AACSB: Reflective Thinking
AICPA: Decision Making
12-35
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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18. If the functional currency is the local currency of a foreign subsidiary, what exchange
rates should be used to translate the items below, assuming the foreign subsidiary is in a
country which has not experienced hyperinflation over three years?
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A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Reflective Thinking
AICPA: Decision Making
C
PA
19. Which combination of accounts and exchange rates is correct for the translation of a
foreign entity's financial statements from the functional currency to U.S. dollars?
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A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Reflective Thinking
AICPA: Decision Making
12-36
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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20. Which combination of accounts and exchange rates is correct for the remeasurement of a
foreign entity's financial statements from its local currency to U.S. dollars?
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A. Option A
B. Option B
C. Option C
D. Option D
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AACSB: Reflective Thinking
AICPA: Decision Making
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21. The assets listed below of a foreign subsidiary have been converted to U.S. dollars at both
current and historical exchange rates. Assuming that the local currency of the foreign
subsidiary is the functional currency, what total amount should appear for these assets on the
U.S. company's consolidated balance sheet?
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A. $636,000
B. $648,000
C. $708,000
D. $960,000
AACSB: Analytic
AICPA: Measurement
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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22. The gain or loss on the effective portion of a U.S. parent company's hedge of a net
investment in a foreign entity should be treated as:
A. an adjustment to the retained earnings account in the stockholders' equity section of its
balance sheet.
B. other comprehensive income.
C. a translation gain or loss in the computation of net income for the reporting period.
D. an adjustment to a valuation account in the asset section of its balance sheet.
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AACSB: Reflective Thinking
AICPA: Decision Making
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A. Option A
B. Option B
C. Option C
D. Option D
C
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23. Dover Company owns 90% of the capital stock of a foreign subsidiary located in Italy.
Dover's accountant has just translated the accounts of the foreign subsidiary and determined
that a debit translation adjustment of $80,000 exists. If Dover uses the equity method for its
investment, what entry should Dover record in order to recognize the translation adjustment?
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AACSB: Analytic
AICPA: Measurement
12-38
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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24. For each of the items listed below, state whether they increase or decrease the balance in
cumulative translation adjustments (assuming a credit balance at the beginning of the year)
when the foreign currency strengthened relative to the U.S. dollar during the year.
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A. Option A
B. Option B
C. Option C
D. Option D
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AACSB: Reflective Thinking
AICPA: Decision Making
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C
PA
25. Nichols Company owns 90% of the capital stock of a foreign subsidiary located in Ireland.
As a result of translating the subsidiary's accounts, a debit of $160,000 was needed in the
translation adjustments account so that the foreign subsidiary's debits and credits were equal
in U.S. dollars. How should Nichols report its translation adjustments on its consolidated
financial statements?
A. As a $144,000 increase in the stockholders' equity section of the balance sheet.
B. As a $144,000 reduction in consolidated comprehensive net income.
C. As a $160,000 debit in stockholders' equity section of the balance sheet.
D. As a $160,000 reduction in consolidated comprehensive net income.
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AACSB: Analytic
AICPA: Decision Making
12-39
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
26. Under the temporal method, which of the following is usually used to translate monetary
amounts to the functional currency?
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I. The current exchange rate
II The historical exchange rate
III. Average exchange rate
A. I
B. III
C. II
D. Either I or II
AACSB: Reflective Thinking
AICPA: Decision Making
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C
PA
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Mercury Company is a subsidiary of Neptune Company and is located in Valparaíso, Chile,
where the currency is the Chilean Peso. Data on Mercury's inventory and purchases are as
follows:
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The beginning inventory was acquired during the fourth quarter of 2007, and the ending
inventory was acquired during the fourth quarter of 2008. Purchases were made evenly over
the year. Exchange rates were as follows:
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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27. Refer the information provided above. Assuming the U.S. dollar is the functional
currency, what is the amount of Mercury's cost of goods sold remeasured in U.S. dollars?
A. $1,680
B. $1,712
C. $1,700
D. $1,692
AACSB: Analytic
AICPA: Measurement
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C
AACSB: Analytic
AICPA: Measurement
PA
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28. Based on the preceding information, the translation of cost of goods sold for 2008,
assuming that the Spanish peseta is the functional currency is:
A. $1,700.
B. $1,760.
C. $1,680.
D. $1,692.
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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29. The British subsidiary of a U.S. company reported cost of goods sold of 75,000 pounds
(sterling) for the current year ended December 31. The beginning inventory was 10,000
pounds, and the ending inventory was 15,000 pounds. Spot rates for various dates are as
follows:
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AACSB: Analytic
AICPA: Measurement
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Assuming the dollar is the functional currency of the British subsidiary, the remeasured
amount of cost of goods sold that should appear in the consolidated income statement is:
A. $108,750.
B. $112,500.
C. $114,250.
D. $125,700.
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30. The British subsidiary of a U.S. company reported cost of goods sold of 75,000 pounds
(sterling) for the current year ended December 31. The beginning inventory was 10,000
pounds, and the ending inventory was 15,000 pounds. Spot rates for various dates are as
follows:
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Assuming the pound is the functional currency of the British subsidiary, the translated amount
of cost of goods sold that should appear in the consolidated income statement is:
A. $108,750.
B. $112,500.
C. $114,300.
D. $125,700.
AACSB: Analytic
AICPA: Measurement
12-42
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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Elan, a U.S. corporation, completed the December 31, 2008, foreign currency translation of
its 70 percent owned Swiss subsidiary's trial balance using the current rate method. The
translation resulted in a debit adjustment of $25,000. The subsidiary had reported net income
of 800,000 Swiss francs for 2008 and paid dividends of 50,000 Swiss francs on September 1,
2008. The translation rates for the year were:
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The January 1 balance of the Investment in the Swiss subsidiary account was $1,600,000.
Elan acquired its interest in the Swiss subsidiary at book value with no differential or
goodwill recorded at acquisition.
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31. Elan's Investment in Swiss subsidiary account at December 31, 2008, is:
A. $1,881,050.
B. $1,916,050.
C. $1,923,950.
D. $2,051,500.
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AACSB: Analytic
AICPA: Measurement
12-43
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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32. Elan's consolidated workpaper eliminations related to the foreign currency translation
adjustment will include which entry?
AACSB: Analytic
AICPA: Decision Making
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A. Option A
B. Option B
C. Option C
D. Option D
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33. Seattle, Inc. owns an 80 percent interest in a Portuguese subsidiary. For 2008, Seattle
reported income from operations of $2.0 million. The Portuguese company's income from
operations, after foreign currency translation, was $1.1 million. The foreign currency
translation adjustment was $120,000 (credit). Consolidated net income and consolidated
comprehensive income for the year are:
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A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Reporting
12-44
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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On January 2, 2008, Johnson Company acquired a 100% interest in the capital stock of Perth
Company for $3,100,000. Any excess cost over book value is attributable to a patent with a
10-year remaining life. At the date of acquisition, Perth's balance sheet contained the
following information:
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Perth's income statement for 2008 is as follows:
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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The balance sheet of Perth at December 31, 2008, is as follows:
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Perth declared and paid a dividend of 20,000 FCU on October 1, 2008. Spot rates at various
dates for 2008 follow:
Assume Perth's revenues, purchases, operating expenses, depreciation expense, and income
taxes were incurred evenly throughout 2008.
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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34. Refer to the above information. Assuming the local currency of the country in which Perth
Company is located is the functional currency, what are the translated amounts for the items
below in U.S. dollars?
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A. Option A
B. Option B
C. Option C
D. Option D
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AACSB: Analytic
AICPA: Reporting
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PA
35. Refer to the above information. Assuming Perth's local currency is the functional
currency, what is the amount of translation adjustments that result from translating Perth's
trial balance into U.S. dollars at December 31, 2008?
A. $396,500 debit
B. $285,000 credit
C. $405,000 credit
D. $411,000 credit
AACSB: Analytic
AICPA: Decision Making
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36. Refer to the above information. Assuming Perth's local currency is the functional
currency, what is the amount of patent amortization for 2008 that results from Johnson's
acquisition of Perth's stock on January 2, 2008. Round your answer to the nearest dollar.
A. $11,500
B. $11,884
C. $7,667
D. $9,394
AACSB: Analytic
AICPA: Measurement
12-47
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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37. Refer to the above information. Assuming Perth's local currency is the functional
currency, what is the amount of translation adjustment that appears on Johnson's consolidated
financial statements at December 31, 2008?
A. $419,184 credit
B. $416,884 credit
C. $405,884 debit
D. $398,500 credit
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AACSB: Analytic
AICPA: Decision Making
C
AACSB: Analytic
AICPA: Measurement
PA
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38. Refer to the above information. Assuming Perth's local currency is the functional
currency, what is the balance in Johnson's investment in foreign subsidiary account at
December 31, 2008, assuming use of the equity method?
A. $3,216,500
B. $3,560,000
C. $3,568,300
D. $3,577,694
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39. Refer to the above information. Assuming the U.S. dollar is the functional currency, what
is Johnson's remeasurement gain (loss) for 2008? (Assume the ending inventory was acquired
on December 31, 2008.)
A. $31,000 gain
B. $36,500 loss
C. $22,000 gain
D. $32,000 gain
AACSB: Analytic
AICPA: Measurement
12-48
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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40. Refer to the above information. Assuming the U.S. dollar is the functional currency, what
is the amount of Perth's cost of goods sold remeasured in U.S. dollars?
A. $811,500
B. $843,500
C. $884,500
D. $799,500
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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41. Refer to the above information. Assuming the U.S. dollar is the functional currency, what
is the amount of patent amortization for 2008 that results from Johnson's acquisition of Perth's
stock on January 2, 2008?
A. $11,884
B. $11,770
C. $12,550
D. $11,500
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42. Refer to the above information. Assuming the U.S. dollar is the functional currency, what
is Perth's net income for 2008 in U.S. dollars (include the remeasurement gain or loss in
Perth's net income)?
A. $238,000
B. $228,000
C. $219,500
D. $202,000
AACSB: Analytic
AICPA: Reporting
12-49
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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43. Refer to the above information. Assuming the U.S. dollar is the functional currency, what
is the balance in Johnson's investment in foreign subsidiary account at December 31, 2008
(assuming the use of the equity method)?
A. $3,303,400
B. $3,294,500
C. $3,323,400
D. $3,314,500
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AACSB: Analytic
AICPA: Reporting
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PA
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On January 1, 2008, Transport Corporation acquired 75 percent interest in Steamship
Company for $300,000. Steamship is a Norwegian company. The local currency is the
Norwegian kroner (NKr). The acquisition resulted in an excess of cost-over-book value of
$25,000 due solely to a patent having a remaining life of 5 years. Transport uses the equity
method to account for its investment. Steamship's December 31, 2008, trial balance has been
translated into U.S. dollars, requiring a translation adjustment debit of $8,000. Steamship's net
income translated into U.S. dollars is $35,000. It declared and paid an NKr 20,000 dividend
on June 1, 2008. Relevant exchange rates are as follows:
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Assume the kroner is the functional currency.
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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44. Based on the preceding information, in the journal entry to record the receipt of dividend
from Steamship,
A. Investment in Steamship Company will be credited for $3,450.
B. Cash will be debited for $3,300.
C. Investment in Steamship Company will be credited for $4,000.
D. Cash will be debited for $3,600.
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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45. Based on the preceding information, in the journal entry to record parent's share of
subsidiary's translation adjustment:
A. Other Comprehensive Income — Translation Adjustment will be debited for $8,000.
B. Other Comprehensive Income — Translation Adjustment will be credited for $6,000.
C. Investment in Steamship Company will be credited for $6,000.
D. Investment in Steamship Company will be debited for $8,000.
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46. Based on the preceding information, what amount of translation adjustment is required for
increase in differential?
A. $3,000
B. $5,500
C. $4,500
D. $5,000
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AACSB: Analytic
AICPA: Measurement
12-51
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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47. Based on the preceding information, in the journal entry to record the amortization of the
patent for 2008 on the parent's books, Investment in Steamship Company will be debited for:
A. $5,000
B. $5,500
C. $4,500
D. $3,000
AACSB: Analytic
AICPA: Measurement
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On September 30, 2008, Wilfred Company sold inventory to Jackson Corporation, its
Canadian subsidiary. The goods cost Wilfred $30,000 and were sold to Jackson for $40,000,
payable in Canadian dollars. The goods are still on hand at the end of the year on December
31. The Canadian dollar (C$) is the functional currency of the Canadian subsidiary. The
exchange rates follow:
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48. Based on the preceding information, at what dollar amount is the ending inventory shown
in the trial balance of the consolidated workpaper?
A. $45,000
B. $50,000
C. $40,000
D. $35,000
AACSB: Analytic
AICPA: Measurement
12-52
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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49. Based on the preceding information, what amount of unrealized intercompany gross profit
is eliminated in preparing the consolidated financial statements for the year?
A. $0
B. $5,000
C. $10,000
D. $15,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
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Essay Questions
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50. Based on the preceding information, at what amount is the inventory shown on the
consolidated balance sheet for the year?
A. $45,000
B. $30,000
C. $40,000
D. $35,000
12-53
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
51. Briefly explain the following terms associated with accounting for foreign entities:
a) Functional Currency
b) Translation
c) Remeasurement
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a) Functional currency is the currency of the primary economic environment in which the
entity operates; normally that is the currency of the environment in which an entity primarily
generates and receives cash. The functional currency is used to differentiate between two
types of foreign operations, those that are self-contained and integrated into a local
environment, and those that are an extension of the parent and integrated with the parent.
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b) Translation is the most common method used and is applied when the local currency is the
foreign entity's functional currency. To translate the financial statements, the company will
use the current rate, which is the exchange rate on the balance sheet date, to convert the local
currency balance sheet account balances into U.S. dollars. Any translation adjustment that
occurs is a component of comprehensive income. Because revenues and expenses are
assumed to occur uniformly over the period, revenues and expenses on the income statement
are translated using the average rate for the reporting period.
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c) Remeasurement is the restatement of the foreign entity's financial statements from the local
currency that the entity used into the foreign entity's functional currency. Remeasurement is
required only when the functional currency is different from the currency used to maintain the
books and records of the foreign entity. Monetary assets and liabilities are translated at the
current rate. Non-monetary assets and liabilities, including inventories, are translated at their
historical rates. The income statement items other than cost of goods sold is translated at
average rates. Any resulting adjustment is taken into current period income.
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AACSB: Communication
AICPA: Global
12-54
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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52. On January 1, 2008, Pace Company acquired all of the outstanding stock of Spin PLC, a
British Company, for $350,000. Spin's net assets on the date of acquisition were 250,000
pounds (£). On January 1, 2008, the book and fair values of the Spin's identifiable assets and
liabilities approximated their fair values except for property, plant, and equipment and
trademarks. The fair value of Spin's property, plant, and equipment exceeded its book value
by $25,000. The remaining useful life of Spin's equipment at January 1, 2008, was 10 years.
The remainder of the differential was attributable to a trademark having an estimated useful
life of 5 years. Spin's trial balance on December 31, 2008, in pounds, follows:
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Additional Information
1 Spin uses the FIFO method for its inventory. The beginning inventory was acquired on
December 31, 2007, and ending inventory was acquired on December 26, 2008. Purchases of
£300,000 were made evenly throughout 2008.
2 Spin acquired all of its property, plant, and equipment on March 1, 2006, and uses straightline depreciation.
3 Spin's sales were made evenly throughout 2008, and its operating expenses were incurred
evenly throughout 2008.
4 The dividends were declared and paid on November 1, 2008.
5 Pace's income from its own operations was $150,000 for 2008, and its total stockholders'
equity on January 1, 2008, was $1,000,000. Pace declared $50,000 of dividends during 2008.
6 Exchange rates were as follows:
12-55
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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Required:
1) Prepare a schedule translating the trial balance from British pounds into U.S. dollars.
Assume the pound is the functional currency.
2) Assume that Pace uses the basic equity method. Record all journal entries that relate to its
investment in the British subsidiary during 2008. Provide the necessary documentation and
support for the amounts in the journal entries, including a schedule of the translation
adjustment related to the differential.
2) Prepare a schedule that determines Pace's consolidated comprehensive income for 2008.
4) Compute Pace's total consolidated stockholders' equity at December 31, 2008.
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
12-57
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
12-58
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
12-59
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AACSB: Analytic
AICPA: Measurement
PA
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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AACSB: Analytic
AICPA: Measurement
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53. Use the information given in question 52 to prepare a schedule providing a proof of the
translation adjustment.
12-61
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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54. Refer to the information in question 52. Assume the U.S. dollar is the functional currency,
not the pound.
Required:
1) Prepare a schedule remeasuring the trial balance from British pound into U.S. dollars.
2) Assume that Pace uses the basic equity method. Record all journal entries that relate to its
investment in the British subsidiary during 2008. Provide the necessary documentation and
support for the amounts in the journal entries.
3) Prepare a schedule that determines Pace's consolidated net income for 2008.
4) Compute Pace's total consolidated stockholders' equity at December 31, 2008.
12-62
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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2) Journal entries for 2008:
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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12-64
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Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
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AACSB: Analytic
AICPA: Measurement
12-65
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
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55. Refer to the information in question 52. Assume the U.S. dollar is the functional currency,
not the pound. Prepare a schedule providing a proof of the remeasurement gain or loss.
Assume that the British subsidiary had the following monetary assets and liabilities at January
1, 2008:
AACSB: Analytic
AICPA: Measurement
12-66
Chapter 12 - Multinational Accounting: Issues in Financial Reporting and Translation of Foreign Entity
Statements
56. Parisian Co. is a French company located in Paris. Yankee Corp., located in New York
City, acquires Parisian Co. Parisian has the Euro as its local currency and the Swiss Franc as
its functional currency. Yankee has the U.S. dollar as its local currency and the U.S. dollar as
its functional currency.
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Required:
a) The year-end consolidated financial statements will be prepared in which currency?
b) Explain which method is appropriate to use to use at year-end: Translation or
Remeasurement?
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AACSB: Communication
AICPA: Critical Thinking
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a) The consolidated financial statements will be reported in Yankee's functional currency - the
U.S. dollar.
b) Parisian's financial statements will need to be remeasured first from the Euro to the Swiss
Franc. Then the financial statements' valued in the Swiss Franc will be translated to the U.S.
dollar.
12-67
Chapter 13 - Segment and Interim Reporting
Chapter 13
Segment and Interim Reporting
Multiple Choice Questions
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Wakefield Company uses a perpetual inventory system. In August, it sold 2,000 units from
its LIFO-base inventory, which had originally cost $35 per unit. The replacement cost is
expected to be $45 per unit. The company is planning to reduce its inventory and expects to
replace only 1,500 of these units by December 31, the end of its fiscal year. The company
replaced 1,500 units in November at an actual cost of $50 per unit.
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1. Based on the preceding information, in the entry in August to record the sale of the 2,000
units:
A. Cost of Goods Sold will be debited for $70,000.
B. Inventory will be credited for $85,000.
C. Excess of Replacement Cost over LIFO Cost of Inventory Liquidation will be credited for
$15,000.
D. Excess of Replacement Cost over LIFO Cost of Inventory Liquidation will be credited for
$67,000.
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2. Based on the preceding information, in the entry to record the replacement of the 1,500
units in November, Cost of Goods Sold will be debited for:
A. $52,500.
B. $22,500.
C. $15,000.
D. $7,500.
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3. Based on the preceding information, in the entry to record the replacement of the 1,500
units in November, Inventory will be debited for:
A. $52,500.
B. $75,000.
C. $67,500.
D. $60,000.
13-1
Chapter 13 - Segment and Interim Reporting
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4. Based on the preceding information, in the entry to record the replacement of the 1,500
units in November, Accounts Payable will be credited for:
A. $67,500.
B. $75,000.
C. $62,500.
D. $60,000.
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5. Assume that the replacement did not happen in November. In December, the company
decided not to replace any of the 1,500 units. The entry required on December 31 to eliminate
valuation accounts related to the inventory that will not be replaced will include:
A. a debit to Excess of Replacement Cost over LIFO Cost of Inventory Liquidation for
$22,500.
B. a credit to Cost of Goods Sold for $15,000.
C. a debit to Inventory for $70,000.
D. a debit to Inventory for $15,000.
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6. William Corporation, which has a fiscal year ending January 31, had the following pretax
accounting income and estimated effective annual income tax rates for the first three quarters
of the year ended January 31, 2008:
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William's income tax expenses in its interim income statement for the third quarter are:
A. $36,000.
B. $73,500.
C. $46,500.
D. $120,000.
13-2
Chapter 13 - Segment and Interim Reporting
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7. On June 30, 2008, String Corporation incurred a $220,000 net loss from disposal of a
business component. Also, on June 30, 2008, String paid $60,000 for property taxes assessed
for the calendar year 2008. What amount of the preceding items should be included in the
determination of String's net income or loss for the six-month interim period ended June 30,
2008?
A. $250,000
B. $220,000
C. $140,000
D. $280,000
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8. Trevor Company discloses supplementary operating segment information for its three
reportable segments. Data for 2008 are available as follows:
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Additional 2008 expenses include indirect operating expenses of $200,000. Appropriately
selected common indirect operating expenses are allocated to segments based on the ratio of
each segment's sales to total sales. The 2008 operating profit for Segment B was:
A. $180,000
B. $120,000
C. $150,000
D. $250,000
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9. Trevor Company discloses supplementary operating segment information for its three
reportable segments. Data for 2008 are available as follows:
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Allocable costs for the year was $180,000. Allocable costs are assigned based on the ratio of a
segment's income before allocable costs to total income before allocable costs. The 2008
operating profit for Segment B was:
A. $110,000
B. $180,000
C. $126,000
D. $120,000
13-3
Chapter 13 - Segment and Interim Reporting
10. Trimester Corporation's revenue for the year ended December 31, 2008, was as follows:
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Trimester has a reportable operating segment if that segment's revenue exceeds:
A. $65,500
B. $60,000
C. $64,500
D. $61,000
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11. During the third quarter of 2008, Pride Company sold a piece of equipment at an $8,000
gain. What portion of the gain should Pride report in its income statement for the third
quarter of 2008?
A. $0
B. $2,000
C. $4,000
D. $8,000
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12. On March 15, 2009, Clarion Company paid property taxes of $60,000 on its factory
building for calendar year 2009. On July 1, 2009, Clarion made $40,000 in unanticipated
repairs to its machinery. The repairs will benefit operations for the remainder of the calendar
year. What total amount of these expenses should be included in Clarion's quarterly income
statement for the three months ended September 30, 2009?
A. $55,000
B. $15,000
C. $35,000
D. $40,000
13-4
Chapter 13 - Segment and Interim Reporting
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Forge Company, a calendar-year entity, had 6,000 units in its beginning inventory for 2008.
On December 31, 2007, the units had been adjusted down to $470 per unit from an actual cost
of $510 per unit. It was the lower of cost or market. No additional units were purchased
during 2008. The following additional information is provided for 2008:
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Forge does not have sufficient experience with the seasonal market for its inventory units and
assumes that any reductions in market value during the year will be permanent.
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13. Based on the preceding information, the cost of goods sold for the first quarter is:
A. $636,000
B. $564,000
C. $546,000
D. $624,000
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14. Based on the preceding information, the cost of goods sold for the second quarter is:
A. $416,000
B. $364,000
C. $304,000
D. $424,000
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15. Based on the preceding information, the cost of goods sold for the year 2008, is:
A. $2,080,000
B. $1,880,000
C. $1,835,000
D. $1,910,000
13-5
Chapter 13 - Segment and Interim Reporting
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16. Samuel Corporation foresees a downturn in its business in the medium term. It expects to
sustain an operating loss of $160,000 for the full year ending December 31, 2008. Samuel's
tax rate is 35 percent. Anticipated tax credits for 2008 total $8,000. No permanent differences
are expected. Realization of the full tax benefit of the expected operating loss and realization
of anticipated tax credits are assured beyond any reasonable doubt because they will be
carried back. For the first quarter ended March 31, 2008, Samuel reported an operating loss of
$30,000. How much of a tax benefit should Samuel report for the interim period ended March
31, 2008?
A. $8,000
B. $12,000
C. $13,500
D. $15,500
PA
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17. Five of eight internally reported operating segments of Rollins Company qualify under the
standards set by FASB 131 for segment reporting. However, the five identified segments do
not meet the 75 percent revenue test. FASB 131 prescribes that management:
A. subdivide segments until there are at least 10 reportable segments.
B. consolidate the remaining operating segments and include them under an "all other"
category.
C. select additional operating segments until the 75% threshold is met.
D. include the heading "corporate headquarters" as an operating segment.
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18. Derby Company pays its executives a bonus of 6 percent of income before deducting the
bonus and income taxes. For the quarter ended March 31, 2008, Derby had income before the
bonus and income tax of $12,000,000. For the year ended December 31, 2008, Derby
estimates that its income before bonus and income taxes will be $70,000,000. For the quarter
ended March 31, 2008, what is the amount of the bonus that Derby should deduct on its
income statement?
A. $4,200,000
B. $720,000
C. $1,050,000
D. $180,000
13-6
Chapter 13 - Segment and Interim Reporting
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19. In 2006 and 2007, each of Putney Company's four operating segments met one of the
three quantitative tests for segment reporting. In 2008, Segment B failed to qualify under the
prescribed tests because of abnormal financial conditions. The other three segments qualified
for reporting. For 2008, Segment B:
A. should be excluded from segment disclosure but referred to in the management letter to
shareholders.
B. should be distinctly separated from the other three segments and listed as a "nonqualifying"
segment.
C. should be combined with one of the other three segments and reported.
D. should be included in the segment disclosures at the discretion of management.
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20. Collins Company reported consolidated revenue of $120,000,000 in 2008. Collins
operates in two geographic areas, domestic and Asia. The following information pertains to
these two areas:
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PA
What calculation below is correct to determine if the revenue test is satisfied for the Asian
operations?
A. $58,000,000/$140,000,000
B. $50,000,000/$120,000,000
C. $58,000,000/$120,000,000
D. $50,000,000/$140,000,000
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An analysis of Abbey Company's operating segments provides the following information:
13-7
Chapter 13 - Segment and Interim Reporting
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21. Refer to the above information. Which of the operating segments above meet the revenue
test?
A. B, D, and E
B. A and D
C. A, B, and D
D. B, C, D, and E
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22. Refer to the above information. Which of the operating segments above meet the
operating profit (loss) test?
A. B and E
B. A and B
C. A, B, and E
D. A, B, C, and E
C
PA
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23. Refer to the above information. Which of the operating segments above are reportable
segments?
A. B, C, and D
B. A, B, D, and E
C. B, D, and E
D. A, B, C, D, and E
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24. Crisfield Company has two reportable segments, C and D. Segment C made $4,000,000 of
sales to external customers and $400,000 of sales to other operating segments. Segment D, on
the other hand, made sales of $8,000,000 to external customers and $1,600,000 of sales to
other operating segments. Crisfield Company reported $13,200,000 of revenues on its
consolidated income statement. What calculation below correctly determines whether
Crisfield Company's reportable segments satisfy the 75% revenue test?
A. $14,000,000/$15,200,000
B. $14,000,000/$13,200,000
C. $12,000,000/$13,200,000
D. $12,000,000/$15,200,000
13-8
Chapter 13 - Segment and Interim Reporting
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25. Zeus Corporation has determined that it has 15 reportable operating segments. In order to
comply with the standard for segment disclosures, Zeus Corporation should do which of the
following?
A. Report 10 reportable segments and disclose the remaining 5 segments as other operating
segments.
B. Report 10 reportable segments by combining the most closely related segments.
C. Report 15 reportable segments as long as the 75 percent revenue test has been satisfied.
D. Report 12 reportable segments and show all other operating segments in a column labeled
"Other Operating Segments."
PA
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26. FASB 131 requires certain disclosures about major customers. All of the following
statements about those disclosures are true with the exception of which statement?
A. The identity of the segment reporting the revenue from a significant customer must be
disclosed a footnote.
B. The amount of revenue from a significant customer must be disclosed in a footnote.
C. For applying the disclosure test a threshold of 10 percent of total revenues is mandated.
D. A local, state, or foreign government can be considered a major customer.
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27. The management approach to the definition of segments for financial reporting expects a
company to:
I. Report disaggregated information on the same organizational basis as used by the
company's internal decision makers.
II. Report disaggregated information for at least ten segments.
A. I
B. II
C. Both I and II
D. Neither I nor II
13-9
Chapter 13 - Segment and Interim Reporting
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28. Main Manufacturing Corporation reported consolidated revenues of $50,000,000 on its
income statement for 2008. The management of the corporation identified 3 industry
segments, M, N, and O. These segments had the following intersegment sales and transfers
during 2008:
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For Main Manufacturing Corporation, the revenue test would be satisfied if any of its industry
segments had revenue equal to or greater than which of the following?
A. $7,400,000
B. $5,740,000
C. $5,000,000
D. $4,260,000
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A. Option A
B. Option B
C. Option C
D. Option D
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29. Stone Company reported $100,000,000 of revenues on its 2008 income statement. During
the year ended December 31, 2008, Stone made sales of $8,000,000 to external customers in
Western Europe. In addition, Stone made sales of $10,000,000 to the U.S. government and
$4,000,000 of sales to various state governments. In the footnotes to its financial statements
for 2008, in reporting enterprisewide disclosures, Stone is required to disclose:
13-10
Chapter 13 - Segment and Interim Reporting
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30. Tyler Company incurred an inventory loss due to a decline in market prices during its first
quarter of operations in 2008. At the end of the first quarter, management of the company
believed the decline in market prices to be permanent. In the second quarter, the market prices
of Tyler's inventories increased above their acquisition cost. Market prices remained higher
than acquisition cost during the remainder of 2008. How should Tyler report the facts above
on its first and second quarter income statements?
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A. Option A
B. Option B
C. Option C
D. Option D
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31. Denver Company, a calendar-year corporation, had the following actual income before
income tax expense and estimated effective annual income tax rates for the first three quarters
in 2008:
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Denver's income tax expense in its interim income statement for the third quarter should be:
A. $126,000.
B. $68,400.
C. $62,400.
D. $54,000.
13-11
Chapter 13 - Segment and Interim Reporting
32. APB Opinion 28 uses which view of interim reporting?
A. Integral
B. Discrete
C. Segmental
D. Comprehensive
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33. Which of the following observations is true of the discrete view of interim reporting?
A. An interim period is viewed as an installment of an annual period.
B. Recognition and adjustment of certain income or expense items may be affected by
judgments about the expected results of the entire year's operations.
C. Each interim period is considered as a basic accounting period to be evaluated as if it were
an annual accounting period.
D. One interim period would not bear the entire expense that benefits more than one interim
period.
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PA
34. Mason Company paid its annual property taxes of $240,000 on February 15, 2009. Mason
also anticipates that its annual repairs expense for 2009 will be $1,200,000. This amount is
usually incurred and paid in July and August when operations are shut down so that
machinery and equipment can be repaired. What amount should Mason deduct for property
taxes and repairs in each quarter for 2009?
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A. Option A
B. Option B
C. Option C
D. Option D
13-12
Chapter 13 - Segment and Interim Reporting
35. Toledo Imports, a calendar-year corporation, had the following income before tax expense
and estimated effective annual income tax rates for the first three quarters in 2008:
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Toledo's income tax expense in its interim income statement for the nine months ended
September 30 and for the third quarter, respectively, are:
A. $250,800 and $103,200.
B. $252,000 and $108,000.
C. $252,000 and $103,200.
D. $250,800 and $108,000.
PA
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36. Estimated gross profit rates may be used to estimate a company's cost of goods sold and
its ending inventory for:
A. quarterly but not for annual financial statements.
B. both quarterly and annual financial statements.
C. neither quarterly nor annual financial statements.
D. annual but not for quarterly financial statements.
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37. Davis Company uses LIFO for all of its inventories. During its second quarter of 2009,
Davis experienced a LIFO liquidation. Davis fully expects to replace the liquidated inventory
in the early part of the third quarter. How should Davis report the inventory temporarily
liquidated on its income statement for the second quarter?
A. Cost of goods sold for the second quarter should include the acquisition cost of the goods
temporarily liquidated.
B. Cost of goods sold for the second quarter should include the expected replacement cost of
the goods temporarily liquidated.
C. Cost of goods sold for the second quarter should not include the expected replacement cost
of the goods temporarily liquidated.
D. Cost of goods sold for the second quarter is not affected by the temporary liquidation of
LIFO inventory.
13-13
Chapter 13 - Segment and Interim Reporting
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38. How would a company report a change in an accounting principle made on the last day of
the third quarter?
A. Retrospective application to all pre-change interim periods reported.
B. No change is required.
C. Apply to current and prospective interim periods only.
D. Apply to prospective interim periods only.
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39. Missoula Corporation disposed of one of its segments in the second quarter and incurred a
gain from disposal of discontinued segment of $600,000, net of taxes. What is the effect of
this gain from disposal of discontinued segment?
A. Increase net income from operations for the year by $600,000.
B. Increase second quarter net income by $600,000.
C. Increase each quarter's net income by $150,000.
D. Increase each of the last three quarters' net income by $200,000.
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PA
40. Frahm Company incurred a first quarter operating loss before income tax effect of
$4,000,000. This is a normal occurrence for Frahm because of seasonal fluctuations.
Experience has demonstrated the income earned during the remaining quarters far exceeds the
first quarter losses each year. Frahm estimates its annual income tax rate will be 30 percent.
What net loss should Frahm report for the first quarter?
A. $4,000,000
B. $2,800,000
C. $700,000
D. $0
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41. The income tax expense applicable to the second quarter's income statement is determined
by:
A. dividing the estimated annual income tax expense by four and allocating the amount to the
second quarter.
B. multiplying the effective income tax rate times the income before tax for the second
quarter.
C. subtracting the income tax expense applicable to the first quarter from the income tax
expense applicable to the first two quarters.
D. subtracting the income tax liability applicable to the first quarter from the income tax
liability applicable to the first two quarters.
13-14
Chapter 13 - Segment and Interim Reporting
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42. Which of the following are established by FASB 131 as "enterprisewide disclosure"
standards to provide more information about the risks to a company?
I. Information about dominant industry segments.
II. Information about major customers.
III. Information about geographic areas
A. Both II and III
B. Both I and III
C. Both I and II
D. I, II, and II
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43. FASB 131 uses a(n) ______ approach to the definition of segments.
A. line of business
B. entity approach
C. portfolio
D. management
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PA
Essay Questions
13-15
Chapter 13 - Segment and Interim Reporting
44. Iona Corporation is in the process of preparing its financial statements for the first quarter
of 2009 and has asked your advice as to how to report several items. These items include the
following events which took place during the first quarter of 2009 (assume all amounts are
material):
1) Iona redeemed bonds with a carrying value of $4,000,000 at a cost of $3,760,000. This
early extinguishment occurred because Iona wants to issue new debt at lower interest rates.
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2) Iona uses the LIFO method for its inventories. On January 1, 2009, inventories amounted
to $10,000,000, while, on March 31, 2009, inventories totaled $9,200,000. Iona expects to
replace the liquidated inventory at the beginning of the second quarter at a cost of $1,000,000.
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3) Iona changed its depreciation method on $4,000,000 of its delivery trucks from the
declining balance method to the straight-line method. On January 1, 2009, accumulated
depreciation under the declining balance method was $2,800,000. Had the straight-line
method been used, accumulated depreciation on January 1, 2009, would have been
$2,300,000. The remaining life of the trucks is two years.
PA
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4) Iona pays its top executives a bonus at year-end of 6 percent of operating income before
bonus and income taxes. Operating income before bonus and income taxes for the three
months ended March 31, 2009, was $10,000,000. Iona estimates that its yearly operating
income before bonus and income taxes will be $60,000,000.
5) Iona closes its manufacturing operations in July of each year in order to make its major
annual repairs. Iona estimates that the cost of these repairs in 2009 will be $1,000,000.
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Required:
For each of the events numbered 1 through 5, indicate how that event should be reported on
Iona's income statement for the three months ended March 31, 2009, and the balance sheet
accounts effects at March 31, 2009. Ignore income taxes.
13-16
Chapter 13 - Segment and Interim Reporting
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45. Ridge Company is in the process of determining its reportable segments for the year
ended December 31, 2008. As the person responsible for determining this information, you
gather the following information:
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PA
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Required:
a) Using the appropriate tests, determine which of the industry segments listed above are
reportable for 2008. Show your supporting computations in good form.
b) Indicate whether or not Ridge's reportable segments satisfy the 75 percent test. Show your
supporting computations in good form.
13-17
Chapter 13 - Segment and Interim Reporting
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46. Lloyd Corporation reports the following information for 2008 for its three operating
segments:
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Indirect operating expenses are allocated to segments based upon the ratio of each segment's
traceable operating expenses to total traceable operating expenses. Interest expense is
allocated to segments based upon the ratio of each segment's sales to total sales.
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PA
Required:
a) Calculate the operating profit or loss for each of the segments for 2008.
b) Determine which segments are reportable, applying the operating profit or loss test.
13-18
Chapter 13 - Segment and Interim Reporting
PA
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47. The information below is for the second quarter of Tampa Company for 2008:
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Required:
Prepare an interim income statement for the second quarter for Tampa Company. Assume the
LIFO liquidation is expected to be restored by the end of 2008.
13-19
Chapter 13 - Segment and Interim Reporting
48. FASB 131, Disclosure about Segments of an Enterprise and Related Information, has
taken what has been referred to as a "management approach" to the definition of a segment
and the allocation of costs to a segment.
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Required:
a) What is meant by a management approach? How does this concept of a management
approach impact the decision to disclose information?
b) How are decisions about cost allocation handled in segment disclosures?
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49. FASB has specified a "75% percent consolidated revenue test".
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PA
Required:
a) What is the 75% test?
b) How is the 75% test impacted by the "10% Significance Rule"?
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50. Interim income statements are required for Smith Orchards. Smith does most of its sales in
the fall quarter of the year. These sales are both to individual and commercial customers. How
do you recommend Smith report sales during the spring quarter of the year?
13-20
Chapter 13 - Segment and Interim Reporting
Chapter 13 Segment and Interim Reporting Answer Key
Multiple Choice Questions
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Wakefield Company uses a perpetual inventory system. In August, it sold 2,000 units from
its LIFO-base inventory, which had originally cost $35 per unit. The replacement cost is
expected to be $45 per unit. The company is planning to reduce its inventory and expects to
replace only 1,500 of these units by December 31, the end of its fiscal year. The company
replaced 1,500 units in November at an actual cost of $50 per unit.
C
AACSB: Analytic
AICPA: Measurement
PA
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1. Based on the preceding information, in the entry in August to record the sale of the 2,000
units:
A. Cost of Goods Sold will be debited for $70,000.
B. Inventory will be credited for $85,000.
C. Excess of Replacement Cost over LIFO Cost of Inventory Liquidation will be credited for
$15,000.
D. Excess of Replacement Cost over LIFO Cost of Inventory Liquidation will be credited for
$67,000.
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2. Based on the preceding information, in the entry to record the replacement of the 1,500
units in November, Cost of Goods Sold will be debited for:
A. $52,500.
B. $22,500.
C. $15,000.
D. $7,500.
AACSB: Analytic
AICPA: Measurement
13-21
Chapter 13 - Segment and Interim Reporting
3. Based on the preceding information, in the entry to record the replacement of the 1,500
units in November, Inventory will be debited for:
A. $52,500.
B. $75,000.
C. $67,500.
D. $60,000.
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AACSB: Analytic
AICPA: Measurement
PA
AACSB: Analytic
AICPA: Measurement
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4. Based on the preceding information, in the entry to record the replacement of the 1,500
units in November, Accounts Payable will be credited for:
A. $67,500.
B. $75,000.
C. $62,500.
D. $60,000.
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5. Assume that the replacement did not happen in November. In December, the company
decided not to replace any of the 1,500 units. The entry required on December 31 to eliminate
valuation accounts related to the inventory that will not be replaced will include:
A. a debit to Excess of Replacement Cost over LIFO Cost of Inventory Liquidation for
$22,500.
B. a credit to Cost of Goods Sold for $15,000.
C. a debit to Inventory for $70,000.
D. a debit to Inventory for $15,000.
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AACSB: Analytic
AICPA: Measurement
13-22
Chapter 13 - Segment and Interim Reporting
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6. William Corporation, which has a fiscal year ending January 31, had the following pretax
accounting income and estimated effective annual income tax rates for the first three quarters
of the year ended January 31, 2008:
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William's income tax expenses in its interim income statement for the third quarter are:
A. $36,000.
B. $73,500.
C. $46,500.
D. $120,000.
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AACSB: Analytic
AICPA: Measurement
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PA
7. On June 30, 2008, String Corporation incurred a $220,000 net loss from disposal of a
business component. Also, on June 30, 2008, String paid $60,000 for property taxes assessed
for the calendar year 2008. What amount of the preceding items should be included in the
determination of String's net income or loss for the six-month interim period ended June 30,
2008?
A. $250,000
B. $220,000
C. $140,000
D. $280,000
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AACSB: Analytic
AICPA: Measurement
13-23
Chapter 13 - Segment and Interim Reporting
8. Trevor Company discloses supplementary operating segment information for its three
reportable segments. Data for 2008 are available as follows:
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Additional 2008 expenses include indirect operating expenses of $200,000. Appropriately
selected common indirect operating expenses are allocated to segments based on the ratio of
each segment's sales to total sales. The 2008 operating profit for Segment B was:
A. $180,000
B. $120,000
C. $150,000
D. $250,000
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AACSB: Analytic
AICPA: Measurement
PA
9. Trevor Company discloses supplementary operating segment information for its three
reportable segments. Data for 2008 are available as follows:
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Allocable costs for the year was $180,000. Allocable costs are assigned based on the ratio of a
segment's income before allocable costs to total income before allocable costs. The 2008
operating profit for Segment B was:
A. $110,000
B. $180,000
C. $126,000
D. $120,000
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AACSB: Analytic
AICPA: Measurement
13-24
Chapter 13 - Segment and Interim Reporting
10. Trimester Corporation's revenue for the year ended December 31, 2008, was as follows:
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Trimester has a reportable operating segment if that segment's revenue exceeds:
A. $65,500
B. $60,000
C. $64,500
D. $61,000
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AACSB: Analytic
AICPA: Measurement
C
AACSB: Analytic
AICPA: Measurement
PA
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11. During the third quarter of 2008, Pride Company sold a piece of equipment at an $8,000
gain. What portion of the gain should Pride report in its income statement for the third
quarter of 2008?
A. $0
B. $2,000
C. $4,000
D. $8,000
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12. On March 15, 2009, Clarion Company paid property taxes of $60,000 on its factory
building for calendar year 2009. On July 1, 2009, Clarion made $40,000 in unanticipated
repairs to its machinery. The repairs will benefit operations for the remainder of the calendar
year. What total amount of these expenses should be included in Clarion's quarterly income
statement for the three months ended September 30, 2009?
A. $55,000
B. $15,000
C. $35,000
D. $40,000
AACSB: Analytic
AICPA: Measurement
13-25
Chapter 13 - Segment and Interim Reporting
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Forge Company, a calendar-year entity, had 6,000 units in its beginning inventory for 2008.
On December 31, 2007, the units had been adjusted down to $470 per unit from an actual cost
of $510 per unit. It was the lower of cost or market. No additional units were purchased
during 2008. The following additional information is provided for 2008:
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Forge does not have sufficient experience with the seasonal market for its inventory units and
assumes that any reductions in market value during the year will be permanent.
C
AACSB: Analytic
AICPA: Measurement
PA
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13. Based on the preceding information, the cost of goods sold for the first quarter is:
A. $636,000
B. $564,000
C. $546,000
D. $624,000
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14. Based on the preceding information, the cost of goods sold for the second quarter is:
A. $416,000
B. $364,000
C. $304,000
D. $424,000
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AACSB: Analytic
AICPA: Measurement
13-26
Chapter 13 - Segment and Interim Reporting
15. Based on the preceding information, the cost of goods sold for the year 2008, is:
A. $2,080,000
B. $1,880,000
C. $1,835,000
D. $1,910,000
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AACSB: Analytic
AICPA: Measurement
C
AACSB: Analytic
AICPA: Measurement
PA
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16. Samuel Corporation foresees a downturn in its business in the medium term. It expects to
sustain an operating loss of $160,000 for the full year ending December 31, 2008. Samuel's
tax rate is 35 percent. Anticipated tax credits for 2008 total $8,000. No permanent differences
are expected. Realization of the full tax benefit of the expected operating loss and realization
of anticipated tax credits are assured beyond any reasonable doubt because they will be
carried back. For the first quarter ended March 31, 2008, Samuel reported an operating loss of
$30,000. How much of a tax benefit should Samuel report for the interim period ended March
31, 2008?
A. $8,000
B. $12,000
C. $13,500
D. $15,500
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17. Five of eight internally reported operating segments of Rollins Company qualify under the
standards set by FASB 131 for segment reporting. However, the five identified segments do
not meet the 75 percent revenue test. FASB 131 prescribes that management:
A. subdivide segments until there are at least 10 reportable segments.
B. consolidate the remaining operating segments and include them under an "all other"
category.
C. select additional operating segments until the 75% threshold is met.
D. include the heading "corporate headquarters" as an operating segment.
AACSB: Reflective Thinking
AICPA: Decision Making
13-27
Chapter 13 - Segment and Interim Reporting
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18. Derby Company pays its executives a bonus of 6 percent of income before deducting the
bonus and income taxes. For the quarter ended March 31, 2008, Derby had income before the
bonus and income tax of $12,000,000. For the year ended December 31, 2008, Derby
estimates that its income before bonus and income taxes will be $70,000,000. For the quarter
ended March 31, 2008, what is the amount of the bonus that Derby should deduct on its
income statement?
A. $4,200,000
B. $720,000
C. $1,050,000
D. $180,000
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AACSB: Analytic
AICPA: Measurement
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PA
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19. In 2006 and 2007, each of Putney Company's four operating segments met one of the
three quantitative tests for segment reporting. In 2008, Segment B failed to qualify under the
prescribed tests because of abnormal financial conditions. The other three segments qualified
for reporting. For 2008, Segment B:
A. should be excluded from segment disclosure but referred to in the management letter to
shareholders.
B. should be distinctly separated from the other three segments and listed as a "nonqualifying"
segment.
C. should be combined with one of the other three segments and reported.
D. should be included in the segment disclosures at the discretion of management.
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AACSB: Reflective Thinking
AICPA: Decision Making
13-28
Chapter 13 - Segment and Interim Reporting
20. Collins Company reported consolidated revenue of $120,000,000 in 2008. Collins
operates in two geographic areas, domestic and Asia. The following information pertains to
these two areas:
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What calculation below is correct to determine if the revenue test is satisfied for the Asian
operations?
A. $58,000,000/$140,000,000
B. $50,000,000/$120,000,000
C. $58,000,000/$120,000,000
D. $50,000,000/$140,000,000
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AACSB: Analytic
AICPA: Measurement
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An analysis of Abbey Company's operating segments provides the following information:
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21. Refer to the above information. Which of the operating segments above meet the revenue
test?
A. B, D, and E
B. A and D
C. A, B, and D
D. B, C, D, and E
AACSB: Analytic
AICPA: Decision Making
13-29
Chapter 13 - Segment and Interim Reporting
22. Refer to the above information. Which of the operating segments above meet the
operating profit (loss) test?
A. B and E
B. A and B
C. A, B, and E
D. A, B, C, and E
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AACSB: Analytic
AICPA: Decision Making
PA
AACSB: Analytic
AICPA: Decision Making
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23. Refer to the above information. Which of the operating segments above are reportable
segments?
A. B, C, and D
B. A, B, D, and E
C. B, D, and E
D. A, B, C, D, and E
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24. Crisfield Company has two reportable segments, C and D. Segment C made $4,000,000 of
sales to external customers and $400,000 of sales to other operating segments. Segment D, on
the other hand, made sales of $8,000,000 to external customers and $1,600,000 of sales to
other operating segments. Crisfield Company reported $13,200,000 of revenues on its
consolidated income statement. What calculation below correctly determines whether
Crisfield Company's reportable segments satisfy the 75% revenue test?
A. $14,000,000/$15,200,000
B. $14,000,000/$13,200,000
C. $12,000,000/$13,200,000
D. $12,000,000/$15,200,000
AACSB: Analytic
AICPA: Measurement
13-30
Chapter 13 - Segment and Interim Reporting
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25. Zeus Corporation has determined that it has 15 reportable operating segments. In order to
comply with the standard for segment disclosures, Zeus Corporation should do which of the
following?
A. Report 10 reportable segments and disclose the remaining 5 segments as other operating
segments.
B. Report 10 reportable segments by combining the most closely related segments.
C. Report 15 reportable segments as long as the 75 percent revenue test has been satisfied.
D. Report 12 reportable segments and show all other operating segments in a column labeled
"Other Operating Segments."
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AACSB: Reflective Thinking
AICPA: Decision Making
C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
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26. FASB 131 requires certain disclosures about major customers. All of the following
statements about those disclosures are true with the exception of which statement?
A. The identity of the segment reporting the revenue from a significant customer must be
disclosed a footnote.
B. The amount of revenue from a significant customer must be disclosed in a footnote.
C. For applying the disclosure test a threshold of 10 percent of total revenues is mandated.
D. A local, state, or foreign government can be considered a major customer.
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27. The management approach to the definition of segments for financial reporting expects a
company to:
I. Report disaggregated information on the same organizational basis as used by the
company's internal decision makers.
II. Report disaggregated information for at least ten segments.
A. I
B. II
C. Both I and II
D. Neither I nor II
AACSB: Reflective Thinking
AICPA: Decision Making
13-31
Chapter 13 - Segment and Interim Reporting
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28. Main Manufacturing Corporation reported consolidated revenues of $50,000,000 on its
income statement for 2008. The management of the corporation identified 3 industry
segments, M, N, and O. These segments had the following intersegment sales and transfers
during 2008:
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For Main Manufacturing Corporation, the revenue test would be satisfied if any of its industry
segments had revenue equal to or greater than which of the following?
A. $7,400,000
B. $5,740,000
C. $5,000,000
D. $4,260,000
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AACSB: Analytic
AICPA: Measurement
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PA
29. Stone Company reported $100,000,000 of revenues on its 2008 income statement. During
the year ended December 31, 2008, Stone made sales of $8,000,000 to external customers in
Western Europe. In addition, Stone made sales of $10,000,000 to the U.S. government and
$4,000,000 of sales to various state governments. In the footnotes to its financial statements
for 2008, in reporting enterprisewide disclosures, Stone is required to disclose:
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A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Reflective Thinking
AICPA: Reporting
13-32
Chapter 13 - Segment and Interim Reporting
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30. Tyler Company incurred an inventory loss due to a decline in market prices during its first
quarter of operations in 2008. At the end of the first quarter, management of the company
believed the decline in market prices to be permanent. In the second quarter, the market prices
of Tyler's inventories increased above their acquisition cost. Market prices remained higher
than acquisition cost during the remainder of 2008. How should Tyler report the facts above
on its first and second quarter income statements?
AACSB: Reflective Thinking
AICPA: Reporting
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A. Option A
B. Option B
C. Option C
D. Option D
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31. Denver Company, a calendar-year corporation, had the following actual income before
income tax expense and estimated effective annual income tax rates for the first three quarters
in 2008:
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Denver's income tax expense in its interim income statement for the third quarter should be:
A. $126,000.
B. $68,400.
C. $62,400.
D. $54,000.
AACSB: Analytic
AICPA: Measurement
13-33
Chapter 13 - Segment and Interim Reporting
32. APB Opinion 28 uses which view of interim reporting?
A. Integral
B. Discrete
C. Segmental
D. Comprehensive
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AACSB: Reflective Thinking
AICPA: Reporting
AACSB: Reflective Thinking
AICPA: Reporting
PA
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33. Which of the following observations is true of the discrete view of interim reporting?
A. An interim period is viewed as an installment of an annual period.
B. Recognition and adjustment of certain income or expense items may be affected by
judgments about the expected results of the entire year's operations.
C. Each interim period is considered as a basic accounting period to be evaluated as if it were
an annual accounting period.
D. One interim period would not bear the entire expense that benefits more than one interim
period.
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34. Mason Company paid its annual property taxes of $240,000 on February 15, 2009. Mason
also anticipates that its annual repairs expense for 2009 will be $1,200,000. This amount is
usually incurred and paid in July and August when operations are shut down so that
machinery and equipment can be repaired. What amount should Mason deduct for property
taxes and repairs in each quarter for 2009?
A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Measurement
13-34
Chapter 13 - Segment and Interim Reporting
35. Toledo Imports, a calendar-year corporation, had the following income before tax expense
and estimated effective annual income tax rates for the first three quarters in 2008:
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Toledo's income tax expense in its interim income statement for the nine months ended
September 30 and for the third quarter, respectively, are:
A. $250,800 and $103,200.
B. $252,000 and $108,000.
C. $252,000 and $103,200.
D. $250,800 and $108,000.
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AACSB: Analytic
AICPA: Measurement
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PA
36. Estimated gross profit rates may be used to estimate a company's cost of goods sold and
its ending inventory for:
A. quarterly but not for annual financial statements.
B. both quarterly and annual financial statements.
C. neither quarterly nor annual financial statements.
D. annual but not for quarterly financial statements.
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AACSB: Reflective Thinking
AICPA: Decision Making
13-35
Chapter 13 - Segment and Interim Reporting
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37. Davis Company uses LIFO for all of its inventories. During its second quarter of 2009,
Davis experienced a LIFO liquidation. Davis fully expects to replace the liquidated inventory
in the early part of the third quarter. How should Davis report the inventory temporarily
liquidated on its income statement for the second quarter?
A. Cost of goods sold for the second quarter should include the acquisition cost of the goods
temporarily liquidated.
B. Cost of goods sold for the second quarter should include the expected replacement cost of
the goods temporarily liquidated.
C. Cost of goods sold for the second quarter should not include the expected replacement cost
of the goods temporarily liquidated.
D. Cost of goods sold for the second quarter is not affected by the temporary liquidation of
LIFO inventory.
AACSB: Reflective Thinking
AICPA: Decision Making
C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
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38. How would a company report a change in an accounting principle made on the last day of
the third quarter?
A. Retrospective application to all pre-change interim periods reported.
B. No change is required.
C. Apply to current and prospective interim periods only.
D. Apply to prospective interim periods only.
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39. Missoula Corporation disposed of one of its segments in the second quarter and incurred a
gain from disposal of discontinued segment of $600,000, net of taxes. What is the effect of
this gain from disposal of discontinued segment?
A. Increase net income from operations for the year by $600,000.
B. Increase second quarter net income by $600,000.
C. Increase each quarter's net income by $150,000.
D. Increase each of the last three quarters' net income by $200,000.
AACSB: Analytic
AICPA: Measurement
13-36
Chapter 13 - Segment and Interim Reporting
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40. Frahm Company incurred a first quarter operating loss before income tax effect of
$4,000,000. This is a normal occurrence for Frahm because of seasonal fluctuations.
Experience has demonstrated the income earned during the remaining quarters far exceeds the
first quarter losses each year. Frahm estimates its annual income tax rate will be 30 percent.
What net loss should Frahm report for the first quarter?
A. $4,000,000
B. $2,800,000
C. $700,000
D. $0
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AACSB: Analytic
AICPA: Measurement
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PA
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41. The income tax expense applicable to the second quarter's income statement is determined
by:
A. dividing the estimated annual income tax expense by four and allocating the amount to the
second quarter.
B. multiplying the effective income tax rate times the income before tax for the second
quarter.
C. subtracting the income tax expense applicable to the first quarter from the income tax
expense applicable to the first two quarters.
D. subtracting the income tax liability applicable to the first quarter from the income tax
liability applicable to the first two quarters.
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AACSB: Reflective Thinking
AICPA: Decision Making
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42. Which of the following are established by FASB 131 as "enterprisewide disclosure"
standards to provide more information about the risks to a company?
I. Information about dominant industry segments.
II. Information about major customers.
III. Information about geographic areas
A. Both II and III
B. Both I and III
C. Both I and II
D. I, II, and II
AACSB: Reflective Thinking
AICPA: Decision Making
13-37
Chapter 13 - Segment and Interim Reporting
43. FASB 131 uses a(n) ______ approach to the definition of segments.
A. line of business
B. entity approach
C. portfolio
D. management
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AACSB: Reflective Thinking
AICPA: Reporting
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Essay Questions
13-38
Chapter 13 - Segment and Interim Reporting
44. Iona Corporation is in the process of preparing its financial statements for the first quarter
of 2009 and has asked your advice as to how to report several items. These items include the
following events which took place during the first quarter of 2009 (assume all amounts are
material):
1) Iona redeemed bonds with a carrying value of $4,000,000 at a cost of $3,760,000. This
early extinguishment occurred because Iona wants to issue new debt at lower interest rates.
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2) Iona uses the LIFO method for its inventories. On January 1, 2009, inventories amounted
to $10,000,000, while, on March 31, 2009, inventories totaled $9,200,000. Iona expects to
replace the liquidated inventory at the beginning of the second quarter at a cost of $1,000,000.
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3) Iona changed its depreciation method on $4,000,000 of its delivery trucks from the
declining balance method to the straight-line method. On January 1, 2009, accumulated
depreciation under the declining balance method was $2,800,000. Had the straight-line
method been used, accumulated depreciation on January 1, 2009, would have been
$2,300,000. The remaining life of the trucks is two years.
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4) Iona pays its top executives a bonus at year-end of 6 percent of operating income before
bonus and income taxes. Operating income before bonus and income taxes for the three
months ended March 31, 2009, was $10,000,000. Iona estimates that its yearly operating
income before bonus and income taxes will be $60,000,000.
5) Iona closes its manufacturing operations in July of each year in order to make its major
annual repairs. Iona estimates that the cost of these repairs in 2009 will be $1,000,000.
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Required:
For each of the events numbered 1 through 5, indicate how that event should be reported on
Iona's income statement for the three months ended March 31, 2009, and the balance sheet
accounts effects at March 31, 2009. Ignore income taxes.
13-39
Chapter 13 - Segment and Interim Reporting
1) Iona should report a gain (nonoperating i.e., not extraordinary) from early extinguishment
of debt for $240,000 on the income statement. On the balance sheet, long-term debt will be
reduced by $4,000,000, retained earnings will increase by $240,000, and cash will be reduced
by $3,760,000.
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2) Cost of goods sold should be increased by $1,000,000, the expected replacement cost of
inventory. This assumes the cost of the liquidated inventory was not part of cost of goods
sold. If the cost of the liquidated inventory has been charged to cost of goods sold, then only
the difference between the expected replacement cost of $1,000,000 and the cost of the
inventory liquidated of $800,000 should be the increase to cost of goods sold. On the balance
sheet, inventory should be reported at $9,200,000, and a liability titled "Excess of
Replacement Cost Over Lifo Cost of Inventory Liquidated" should be reported at $200,000.
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3) The remaining book value of the trucks is $1,200,000 and will be depreciated over two
years, accounted for currently and prospectively as a change in estimate. The current annual
depreciation expense of $600,000 is allocated quarterly and therefore $150,000 is an
operating expense in the first quarter. On the balance sheet, the accumulated depreciation is
$2,800,000 (prior) and $150,000 (current) = $2,950,000.
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4) The bonus is accrued for the first quarter based upon the income of the quarter, not the
estimate of income for the year. Bonus expense is 6% X $10,000,000, or $600,000, for the 1st
quarter. On the March 31, 2009, balance sheet, the liability for the accrued bonus would be
reported as a current liability of $600,000.
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5) Since the repairs benefit the entire year, each quarter is benefited by the repairs made in
July. It is correct to use the straight-line method to allocate the repairs in the absence of any
other approach. Therefore, 1/4 ($1,000,000), or $250,000, should be charged to repairs
expense in the first quarter. On the March 31, 2009, balance sheet, the $250,000 should be
disclosed as a current liability and titled "Accrued Repairs Payable."
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AACSB: Communication
AICPA: Measurement
13-40
Chapter 13 - Segment and Interim Reporting
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45. Ridge Company is in the process of determining its reportable segments for the year
ended December 31, 2008. As the person responsible for determining this information, you
gather the following information:
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Required:
a) Using the appropriate tests, determine which of the industry segments listed above are
reportable for 2008. Show your supporting computations in good form.
b) Indicate whether or not Ridge's reportable segments satisfy the 75 percent test. Show your
supporting computations in good form.
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Chapter 13 - Segment and Interim Reporting
Conclusions from the tests:
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1. Operating segments A, L, and R satisfy the revenue test.
2. Operating segments A, L, R, and Z satisfy the segment profit (loss) test.
3. Operating segments A, R, and Z satisfy the identifiable assets test.
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Conclusion:
Segments A, L, R, and Z are reportable segments while segments M and S are not.
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b) The 75 percent test is calculated as follows:
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Conclusion: The 75 percent revenue test is satisfied.
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AACSB: Analytic
AICPA: Reporting
13-42
Chapter 13 - Segment and Interim Reporting
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46. Lloyd Corporation reports the following information for 2008 for its three operating
segments:
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Indirect operating expenses are allocated to segments based upon the ratio of each segment's
traceable operating expenses to total traceable operating expenses. Interest expense is
allocated to segments based upon the ratio of each segment's sales to total sales.
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Required:
a) Calculate the operating profit or loss for each of the segments for 2008.
b) Determine which segments are reportable, applying the operating profit or loss test.
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a) Operating profit or loss for each segment.
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Note: General corporate expenses are not allocated for the purpose of identifying reportable
segments.
b) Reportable segments.
Segments B and C both meet the operating profit or loss test. The absolute dollar amount of
their respective operating profit and loss amounts are 10% or more of the absolute dollar
amount of the combined segment operating losses of $157,000 ($10,000 loss + $147,000
loss).
13-43
Chapter 13 - Segment and Interim Reporting
AACSB: Analytic
AICPA: Measurement
PA
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47. The information below is for the second quarter of Tampa Company for 2008:
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Required:
Prepare an interim income statement for the second quarter for Tampa Company. Assume the
LIFO liquidation is expected to be restored by the end of 2008.
13-44
Chapter 13 - Segment and Interim Reporting
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Income statement for the second quarter for Tampa Company:
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AACSB: Analytic
AICPA: Measurement
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Note: Cost of sales was $12,400,000 because the LIFO liquidation was expected to be
restored by the end of 2008. Gains from early extinguishment of debt are no longer reported
as extraordinary items unless material and specifically deemed as such. Income tax expense
for the second quarter is calculated on cumulative income before tax for the first two quarters
and then net of income tax expense from the first quarter.
13-45
Chapter 13 - Segment and Interim Reporting
48. FASB 131, Disclosure about Segments of an Enterprise and Related Information, has
taken what has been referred to as a "management approach" to the definition of a segment
and the allocation of costs to a segment.
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Required:
a) What is meant by a management approach? How does this concept of a management
approach impact the decision to disclose information?
b) How are decisions about cost allocation handled in segment disclosures?
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a) FASB 131 focuses on financial information that an enterprise's financial decision makers
use to evaluate the entity's operating segments. The information provided about segments
should correspond to the internal organization structure used by the chief operating decision
maker in deciding how to allocate resources and in assessing performance.
b) FASB 131 stated that the allocations of revenues and costs should be included for a
reported segment only if they are included in the segment's profit or loss that the chief
operating decision maker uses.
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AACSB: Communication
AICPA: Reporting
49. FASB has specified a "75% percent consolidated revenue test".
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Required:
a) What is the 75% test?
b) How is the 75% test impacted by the "10% Significance Rule"?
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a) The total revenue from external sources by all separately reportable operating segments
must equal at least 75% of the total consolidated revenue.
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b) The reporting entity must identify additional operating segments as reportable until this
75% test is met. The 10% Significance Rule includes segments that have significant
intersegment sales. If there are more then ten reportable segments then the segments should be
aggregated until 75% of the external revenue is disclosed. An entity does not have to have ten
reportable segments.
AACSB: Communication
AICPA: Reporting
13-46
Chapter 13 - Segment and Interim Reporting
50. Interim income statements are required for Smith Orchards. Smith does most of its sales in
the fall quarter of the year. These sales are both to individual and commercial customers. How
do you recommend Smith report sales during the spring quarter of the year?
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Smith Orchards should be encouraged to supplement their interim reports with information
for the 12-month periods ending at the interim date for both the current and preceding years.
This form of disclosure reduces the possibility that users of the reports might make
unwarranted inferences about the annual results from an interim report with material seasonal
variations.
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AACSB: Communication
AICPA: Reporting
13-47
Chapter 14 - SEC Reporting
Chapter 14
SEC Reporting
Multiple Choice Questions
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1. The Securities and Exchange Commission is responsible for:
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A. Option A
B. Option B
C. Option C
D. Option D
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2. Which regulation created the Securities and Exchange Commission?
A. Securities Act of 1933
B. Securities Exchange Act of 1934
C. Investment Company Act of 1940
D. Garn-St. Germain Depository Institutions Act of 1982
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3. Which system helps the SEC accomplish its primary purpose of increasing the efficiency
and fairness of the securities markets by expediting the receipt, acceptance, dissemination,
and analysis of time-sensitive data filed with it?
A. EDI
B. ESEC
C. EDGAR
D. EMMA
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Chapter 14 - SEC Reporting
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4. Which of the following divisions of the SEC regulates national securities exchanges,
brokers, and dealers of securities?
A. Division of Investment Management
B. Division of Corporation Finance
C. Division of Corporation Regulation
D. Division of Market Regulation
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5. Which division of the SEC develops and administers the disclosure requirements for the
securities acts and reviews all registration statements and other issue-oriented disclosures?
A. Division of Enforcement
B. Division of Corporation Finance
C. Division of Investment Management
D. Division of Market Regulation
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6. Identify the regulation that created an entity which insures investors from possible losses if
an investment house enters bankruptcy.
A. Federal Deposit Insurance Protection Act
B. Securities Investor Protection Act
C. Investment Advisers Act
D. Federal Bankruptcy Acts
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7. Regulation S-X and Regulation S-K:
A. govern the preparation of financial statements and associated disclosures.
B. govern the registration requirements for private placements.
C. outline responsibilities for audit committees of publicly held companies.
D. prohibit artificial pyramids of capital in public utilities.
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8. Which regulation resulted in the creation of the Public Company Accounting Oversight
Board?
A. Investment Advisers Act
B. Securities Investor Protection Act
C. Sarbanes-Oxley Act
D. Trust Indenture Act
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Chapter 14 - SEC Reporting
9. Regulation S-X presents the rules for preparing all of the following except:
A. financial statements.
B. footnotes.
C. auditor's report.
D. management's discussion.
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10. The preparation of which of the following items is covered by Regulation S-K?
A. Descriptions of business
B. Pro forma disclosures
C. Schedules
D. Reports of accountants
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11. Which of the following presents the results of actions taken against accountants, brokers,
and other participants for filing false or misleading statements?
A. Financial Reporting Releases
B. Financial Reporting Interpretations
C. Accounting and Auditing Enforcement Releases
D. Staff Accounting Bulletins
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12. Which of the following covers new or revised administrative practices and interpretations
used by the SEC staff in reviewing financial statements?
A. Securities Exchange Act releases
B. Exchange Act industry guides
C. Accounting and Auditing Enforcement Releases
D. Staff Accounting Bulletins
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13. In the issuer's annual report, how many years of audited financial statements must be
presented?
I. Three years of audited income statements
II. Two years of audited balance sheets
III. Three years of audited statements of cash flows
A. I and II
B. II and III
C. I and III
D. I, II, and III
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Chapter 14 - SEC Reporting
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14. Which of the following types of securities or securities transactions are exempt from the
need to be registered under the Securities Act of 1933?
I. Commercial paper with a maturity of nine months or less.
II. Intrastate issues in which the securities are offered and sold only within one state.
III. Securities exchanged by an issuer exclusively with its existing shareholders with no
commission charged.
A. I and II
B. II
C. I, II, and III
D. III
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15. Regulation D of the SEC presents important exemptions from full registration
requirements for:
A. private placements.
B. issuances of securities by savings and loan associations.
C. issuances of securities by common carriers regulated by the Interstate Commerce
Commission.
D. foreign companies.
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16. Which of the following forms is the most comprehensive registration statement?
A. Form S-1
B. Form F-2
C. Form S-3
D. Form S-2
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17. When deficiencies are found in a registration statement that must be corrected before the
securities may be offered for sale, which of the following is issued by the SEC?
A. An audit opinion
B. A comment letter
C. A customary review
D. A comfort letter
14-4
Chapter 14 - SEC Reporting
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18. The purpose of a "tombstone ad" is:
A. to inform investors an upcoming offering has been canceled.
B. to inform investors of an upcoming offering.
C. to inform investors an upcoming offering will be delayed for 30 days.
D. to inform investors securities will be offered for sale after the company has responded to
the SEC's comment letter.
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19. Which of the following best describes a "red herring" prospectus?
A. A shortened version of registration Form S-1 available to those companies that already
have publicly traded securities.
B. A prospectus containing material irregularities and deficiencies.
C. Preliminary information provided to investors about an upcoming issue, and issued
between the time a registration statement is presented to the SEC and its effective date.
D. Disclosure in the business press, outlined in red, informing investors of an upcoming
offering.
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20. Which of the following observations is true of the shelf registration rule?
A. It is an option available to all listed companies.
B. Shelf registration is limited to 25 percent of the company's currently outstanding stock.
C. It allows private placements of an unlimited amount of securities.
D. It allows large companies to select the optimal time to sell their stock.
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21. Accountants are liable for any materially false or misleading information contained in the
registration statement filed with the SEC up to:
A. the date the registration statement is filed.
B. the date of the audit report.
C. the effective date of the registration statement.
D. the date securities are sold.
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Chapter 14 - SEC Reporting
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22. Which of the following classes of information are included in the Form 10-K?
I. Management's discussion and analysis
II. Audited financial statements and footnotes
III. Auditor's opinion on the company's internal control system
A. I and II
B. I and III
C. II and III
D. I, II, and III
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23. Which of the following statements concerning Form 10-Q is NOT true?
A. It is filed for all four quarters.
B. It is the quarterly report to the SEC.
C. It contains an update on significant matters occurring since the last quarter.
D. It includes comparative financial statements prepared in accordance with APB 28.
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24. Information concerning the unexpected resignation of one or more of the registrant's
directors would be disclosed on which of the following forms?
I. Form 8-Q
II. Form 8-K
A. I
B. II
C. Both I and II
D. Neither I nor II
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25. Proxy statements are:
A. filed by an entity that acquires a beneficial ownership of more than 5 percent in a
company.
B. interim financial statements need not be audited.
C. materials submitted to shareholders for votes on corporate matters.
D. used to disclose unscheduled material events.
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Chapter 14 - SEC Reporting
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26. Schedule 13D is filed
A. by entities that acquire a beneficial ownership of more than 5 percent of a class of
registered equity securities.
B. to broadly report material information that is being provided to securities analysts, selected
institutional investors, or others.
C. to disclose material items related to asset-backed securities such as a bond issue.
D. by management to report the existence and effectiveness of the company's internal control
over financial reporting.
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27. Which of the following is defined as directly or indirectly having the power to vote the
shares or investment power to sell the security?
A. Proxy
B. Significant influence
C. Control
D. Beneficial ownership
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C
PA
28. Which of the following is true about the Foreign Corrupt Practices Act of 1977 (FCPA)?
I. Publicly held companies should maintain an adequate system of internal control.
II. Individuals associated with U.S. companies are prohibited from bribing foreign officials
for the purpose of securing a contract.
III. Compensating or agents' fees are disallowed under all circumstances.
A. I and II
B. II and II
C. I and III
D. I, II, and III
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29. According to the provisions of the Sarbanes-Oxley Act,
A. accounting firms can provide both audit and non-audit services to the same company.
B. the auditor should report directly to, and have its work overseen by, the company's
management.
C. audit committees should be composed of non-management members of a company's board
of directors.
D. both the lead audit partner and the audit review partner for publicly held companies should
be rotated at least every two years.
14-7
Chapter 14 - SEC Reporting
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30. What does an underwriter typically require from an accountant which indicates that the
company has fulfilled all the accounting requirements in the registration process?
A. A comment letter
B. An audit opinion
C. A "red herring" prospectus
D. A comfort letter
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31. Which of the following acts requires that a trustee be appointed for sales of bonds,
debentures, and other debt securities of public corporations?
A. Securities Investor Protection Act
B. Trust Indenture Act
C. Investment Company Act
D. Investment Advisors Act
C
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A. Option A
B. Option B
C. Option C
D. Option D
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32. Which of the following choices best describes correct use of the forms indicated?
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33. The history of securities regulation can be traced to:
A. the stock market crash of 1929.
B. medieval times.
C. 18th century creation of the New York Stock Exchange.
D. 18th century English Parliament's passage of the Bubbles Acts.
14-8
Chapter 14 - SEC Reporting
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34. Which of the following statements concerning the management discussion and analysis
(MD&A) of a company's financial condition is true?
I. It should cover the financial statements and other statistical data for the most recent threeyear time span.
II. It should make year-to-year comparisons of material changes in the line items.
III. Management need not explain the cause(s) of the material changes.
IV. Disclosure of material off-balance sheet transactions, arrangements, and obligations is
required in each annual and each quarterly report.
A. I, II, and IV
B. II and III
C. I, III, and IV
D. I, II, III, and IV
PA
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35. Pro forma disclosures are:
A. used to disclose unscheduled material events.
B. interim financial statements need not be audited.
C. materials submitted to shareholders for votes on corporate matters.
D. "what-if " presentations often taking the form of summarized financial statements.
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C
36. Which of the following statements concerning pro forma disclosures is not true?
A. They show the effects of major transactions that occur after the end of the fiscal period.
B. They show the effects of major transactions that have occurred during the year but are not
fully reflected in the company's historical cost financial statements.
C. The SEC requires these to be presented only when the company has made an unusual asset
exchange, or a restructuring of existing indebtedness.
D. They often take the form of summarized financial statements.
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Essay Questions
14-9
Chapter 14 - SEC Reporting
37. The Securities Exchange Act of 1934 requires publicly held companies to file periodic
financial disclosures as updates of their economic activity. The three basic forms used for this
updating are Form 10-K, Form 10-Q, and Form 8-K.
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Required:
Describe the information contained in each of the three basic forms noted above.
38. The items below are associated with the Securities and Exchange Commission. Describe
or explain each item as concisely as possible.
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PA
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(a) Customary Review
(b) Comment Letter
(c) "Red Herring" Prospectus
(d) "Tombstone Ad"
(e) Financial Reporting Releases
(f) Staff Accounting Bulletins
(g) Accounting and Auditing Enforcement Releases
(h) Management's Discussion and Analysis
14-10
Chapter 14 - SEC Reporting
Each of the following questions names an item. Select the correct description of the item
from this list. Indicate your selection by entering the letter of the description.
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C
39. Customary Review
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Descriptions
a. Provides preliminary information to investors about an upcoming issue.
b. Informs investors of an upcoming offering.
c. Required annual filing to the SEC.
d. Discloses unscheduled material events.
e. Includes amendments to the Securities Act, additional disclosure requirements, and other
current issues regarding accounting and auditing principles and standards.
f. Results in a thorough examination by the SEC of a registration statement.
g. Issued by the staff of the SEC and contains differences that must be corrected in a
registration statement before the securities may be offered or sale.
h. Quarterly report to SEC.
i. Includes new or revised administrative practices and interpretations used in reviewing
financial statements.
j. Includes the results of actions taken against accountants or other participants because false
or misleading statements were filed.
k. Includes Regulations S-X and S-K.
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40. Comment Letter
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Chapter 14 - SEC Reporting
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41. "Red Herring" Prospectus
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42. "Tombstone ad"
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44. Form 10-Q
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43. Form 10-K
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45. Form 8-K
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47. Staff Accounting Bulletins
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46. Financial Reporting Releases
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48. Accounting and Auditing Enforcement Releases
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Chapter 14 - SEC Reporting
49. The SEC administers many laws and regulations governing the information made in files
reports.
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Required:
a) What is the difference in issues covered by Regulation S-X and Regulation S-K?
b) How do the issues covered by these regulations differ from the AAERs and SABs?
C
PA
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50. Companies issuing stock to the public have to aware of certain terms. Using complete
sentences define the following:
a) Comment Letter
b) Preliminary Prospectus.
c) Shelf Registration.
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51. Both the FCPA (Foreign Corrupt Practices Act of 1977) and SOX (Sarbanes-Oxley Act of
2002) contain provisions related to Internal Control. Discuss some significant differences
between how the two acts impact internal control practices for publicly held companies.
14-14
Chapter 14 - SEC Reporting
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Chapter 14 SEC Reporting Answer Key
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52. Smithtown Distributors acquired Paul's Plumbing on January 15, 2008. Violet Flowers
acquired Frank's Farm on January 1, 2007. In the 12/31/07 financial statements filed with the
SEC, Smithtown included a Pro Forma disclosure and Violet did not. If both acquisitions
account for 100% of the common stock of the company acquired and are considered to be
material, then can both filings be considered proper?
PA
Multiple Choice Questions
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C
1. The Securities and Exchange Commission is responsible for:
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A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Reflective Thinking
AICPA: Decision Making
14-15
Chapter 14 - SEC Reporting
2. Which regulation created the Securities and Exchange Commission?
A. Securities Act of 1933
B. Securities Exchange Act of 1934
C. Investment Company Act of 1940
D. Garn-St. Germain Depository Institutions Act of 1982
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AICPA: Decision Making
PA
AACSB: Reflective Thinking
AICPA: Decision Making
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3. Which system helps the SEC accomplish its primary purpose of increasing the efficiency
and fairness of the securities markets by expediting the receipt, acceptance, dissemination,
and analysis of time-sensitive data filed with it?
A. EDI
B. ESEC
C. EDGAR
D. EMMA
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C
4. Which of the following divisions of the SEC regulates national securities exchanges,
brokers, and dealers of securities?
A. Division of Investment Management
B. Division of Corporation Finance
C. Division of Corporation Regulation
D. Division of Market Regulation
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AACSB: Reflective Thinking
AICPA: Decision Making
14-16
Chapter 14 - SEC Reporting
5. Which division of the SEC develops and administers the disclosure requirements for the
securities acts and reviews all registration statements and other issue-oriented disclosures?
A. Division of Enforcement
B. Division of Corporation Finance
C. Division of Investment Management
D. Division of Market Regulation
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AICPA: Decision Making
PA
AACSB: Reflective Thinking
AICPA: Decision Making
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6. Identify the regulation that created an entity which insures investors from possible losses if
an investment house enters bankruptcy.
A. Federal Deposit Insurance Protection Act
B. Securities Investor Protection Act
C. Investment Advisers Act
D. Federal Bankruptcy Acts
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C
7. Regulation S-X and Regulation S-K:
A. govern the preparation of financial statements and associated disclosures.
B. govern the registration requirements for private placements.
C. outline responsibilities for audit committees of publicly held companies.
D. prohibit artificial pyramids of capital in public utilities.
AACSB: Reflective Thinking
AICPA: Decision Making
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8. Which regulation resulted in the creation of the Public Company Accounting Oversight
Board?
A. Investment Advisers Act
B. Securities Investor Protection Act
C. Sarbanes-Oxley Act
D. Trust Indenture Act
AACSB: Reflective Thinking
AICPA: Decision Making
14-17
Chapter 14 - SEC Reporting
9. Regulation S-X presents the rules for preparing all of the following except:
A. financial statements.
B. footnotes.
C. auditor's report.
D. management's discussion.
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AICPA: Reporting
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10. The preparation of which of the following items is covered by Regulation S-K?
A. Descriptions of business
B. Pro forma disclosures
C. Schedules
D. Reports of accountants
AACSB: Reflective Thinking
AICPA: Reporting
C
PA
11. Which of the following presents the results of actions taken against accountants, brokers,
and other participants for filing false or misleading statements?
A. Financial Reporting Releases
B. Financial Reporting Interpretations
C. Accounting and Auditing Enforcement Releases
D. Staff Accounting Bulletins
EO
AACSB: Reflective Thinking
AICPA: Decision Making
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12. Which of the following covers new or revised administrative practices and interpretations
used by the SEC staff in reviewing financial statements?
A. Securities Exchange Act releases
B. Exchange Act industry guides
C. Accounting and Auditing Enforcement Releases
D. Staff Accounting Bulletins
AACSB: Reflective Thinking
AICPA: Decision Making
14-18
Chapter 14 - SEC Reporting
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13. In the issuer's annual report, how many years of audited financial statements must be
presented?
I. Three years of audited income statements
II. Two years of audited balance sheets
III. Three years of audited statements of cash flows
A. I and II
B. II and III
C. I and III
D. I, II, and III
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AACSB: Reflective Thinking
AICPA: Decision Making
C
PA
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14. Which of the following types of securities or securities transactions are exempt from the
need to be registered under the Securities Act of 1933?
I. Commercial paper with a maturity of nine months or less.
II. Intrastate issues in which the securities are offered and sold only within one state.
III. Securities exchanged by an issuer exclusively with its existing shareholders with no
commission charged.
A. I and II
B. II
C. I, II, and III
D. III
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AACSB: Reflective Thinking
AICPA: Decision Making
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15. Regulation D of the SEC presents important exemptions from full registration
requirements for:
A. private placements.
B. issuances of securities by savings and loan associations.
C. issuances of securities by common carriers regulated by the Interstate Commerce
Commission.
D. foreign companies.
AACSB: Reflective Thinking
AICPA: Reporting
14-19
Chapter 14 - SEC Reporting
16. Which of the following forms is the most comprehensive registration statement?
A. Form S-1
B. Form F-2
C. Form S-3
D. Form S-2
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AICPA: Reporting
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17. When deficiencies are found in a registration statement that must be corrected before the
securities may be offered for sale, which of the following is issued by the SEC?
A. An audit opinion
B. A comment letter
C. A customary review
D. A comfort letter
PA
AACSB: Reflective Thinking
AICPA: Decision Making
EO
C
18. The purpose of a "tombstone ad" is:
A. to inform investors an upcoming offering has been canceled.
B. to inform investors of an upcoming offering.
C. to inform investors an upcoming offering will be delayed for 30 days.
D. to inform investors securities will be offered for sale after the company has responded to
the SEC's comment letter.
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AACSB: Reflective Thinking
AICPA: Decision Making
14-20
Chapter 14 - SEC Reporting
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19. Which of the following best describes a "red herring" prospectus?
A. A shortened version of registration Form S-1 available to those companies that already
have publicly traded securities.
B. A prospectus containing material irregularities and deficiencies.
C. Preliminary information provided to investors about an upcoming issue, and issued
between the time a registration statement is presented to the SEC and its effective date.
D. Disclosure in the business press, outlined in red, informing investors of an upcoming
offering.
AACSB: Reflective Thinking
AICPA: Decision Making
AACSB: Reflective Thinking
AICPA: Decision Making
PA
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20. Which of the following observations is true of the shelf registration rule?
A. It is an option available to all listed companies.
B. Shelf registration is limited to 25 percent of the company's currently outstanding stock.
C. It allows private placements of an unlimited amount of securities.
D. It allows large companies to select the optimal time to sell their stock.
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21. Accountants are liable for any materially false or misleading information contained in the
registration statement filed with the SEC up to:
A. the date the registration statement is filed.
B. the date of the audit report.
C. the effective date of the registration statement.
D. the date securities are sold.
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AACSB: Reflective Thinking
AICPA: Reporting
14-21
Chapter 14 - SEC Reporting
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22. Which of the following classes of information are included in the Form 10-K?
I. Management's discussion and analysis
II. Audited financial statements and footnotes
III. Auditor's opinion on the company's internal control system
A. I and II
B. I and III
C. II and III
D. I, II, and III
AACSB: Reflective Thinking
AICPA: Reporting
AACSB: Reflective Thinking
AICPA: Reporting
PA
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23. Which of the following statements concerning Form 10-Q is NOT true?
A. It is filed for all four quarters.
B. It is the quarterly report to the SEC.
C. It contains an update on significant matters occurring since the last quarter.
D. It includes comparative financial statements prepared in accordance with APB 28.
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C
24. Information concerning the unexpected resignation of one or more of the registrant's
directors would be disclosed on which of the following forms?
I. Form 8-Q
II. Form 8-K
A. I
B. II
C. Both I and II
D. Neither I nor II
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AACSB: Reflective Thinking
AICPA: Reporting
14-22
Chapter 14 - SEC Reporting
25. Proxy statements are:
A. filed by an entity that acquires a beneficial ownership of more than 5 percent in a
company.
B. interim financial statements need not be audited.
C. materials submitted to shareholders for votes on corporate matters.
D. used to disclose unscheduled material events.
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AICPA: Reporting
AACSB: Reflective Thinking
AICPA: Reporting
PA
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26. Schedule 13D is filed
A. by entities that acquire a beneficial ownership of more than 5 percent of a class of
registered equity securities.
B. to broadly report material information that is being provided to securities analysts, selected
institutional investors, or others.
C. to disclose material items related to asset-backed securities such as a bond issue.
D. by management to report the existence and effectiveness of the company's internal control
over financial reporting.
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C
27. Which of the following is defined as directly or indirectly having the power to vote the
shares or investment power to sell the security?
A. Proxy
B. Significant influence
C. Control
D. Beneficial ownership
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AACSB: Reflective Thinking
AICPA: Reporting
14-23
Chapter 14 - SEC Reporting
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28. Which of the following is true about the Foreign Corrupt Practices Act of 1977 (FCPA)?
I. Publicly held companies should maintain an adequate system of internal control.
II. Individuals associated with U.S. companies are prohibited from bribing foreign officials
for the purpose of securing a contract.
III. Compensating or agents' fees are disallowed under all circumstances.
A. I and II
B. II and II
C. I and III
D. I, II, and III
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AACSB: Reflective Thinking
AICPA: Reporting
C
AACSB: Reflective Thinking
AICPA: Reporting
PA
R
29. According to the provisions of the Sarbanes-Oxley Act,
A. accounting firms can provide both audit and non-audit services to the same company.
B. the auditor should report directly to, and have its work overseen by, the company's
management.
C. audit committees should be composed of non-management members of a company's board
of directors.
D. both the lead audit partner and the audit review partner for publicly held companies should
be rotated at least every two years.
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30. What does an underwriter typically require from an accountant which indicates that the
company has fulfilled all the accounting requirements in the registration process?
A. A comment letter
B. An audit opinion
C. A "red herring" prospectus
D. A comfort letter
AACSB: Reflective Thinking
AICPA: Decision Making
14-24
Chapter 14 - SEC Reporting
31. Which of the following acts requires that a trustee be appointed for sales of bonds,
debentures, and other debt securities of public corporations?
A. Securities Investor Protection Act
B. Trust Indenture Act
C. Investment Company Act
D. Investment Advisors Act
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AACSB: Reflective Thinking
AICPA: Decision Making
A. Option A
B. Option B
C. Option C
D. Option D
C
AACSB: Reflective Thinking
AICPA: Reporting
PA
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32. Which of the following choices best describes correct use of the forms indicated?
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33. The history of securities regulation can be traced to:
A. the stock market crash of 1929.
B. medieval times.
C. 18th century creation of the New York Stock Exchange.
D. 18th century English Parliament's passage of the Bubbles Acts.
AACSB: Reflective Thinking
AICPA: Decision Making
14-25
Chapter 14 - SEC Reporting
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34. Which of the following statements concerning the management discussion and analysis
(MD&A) of a company's financial condition is true?
I. It should cover the financial statements and other statistical data for the most recent threeyear time span.
II. It should make year-to-year comparisons of material changes in the line items.
III. Management need not explain the cause(s) of the material changes.
IV. Disclosure of material off-balance sheet transactions, arrangements, and obligations is
required in each annual and each quarterly report.
A. I, II, and IV
B. II and III
C. I, III, and IV
D. I, II, III, and IV
AACSB: Reflective Thinking
AICPA: Decision Making
C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
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35. Pro forma disclosures are:
A. used to disclose unscheduled material events.
B. interim financial statements need not be audited.
C. materials submitted to shareholders for votes on corporate matters.
D. "what-if " presentations often taking the form of summarized financial statements.
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36. Which of the following statements concerning pro forma disclosures is not true?
A. They show the effects of major transactions that occur after the end of the fiscal period.
B. They show the effects of major transactions that have occurred during the year but are not
fully reflected in the company's historical cost financial statements.
C. The SEC requires these to be presented only when the company has made an unusual asset
exchange, or a restructuring of existing indebtedness.
D. They often take the form of summarized financial statements.
AACSB: Reflective Thinking
AICPA: Decision Making
Essay Questions
14-26
Chapter 14 - SEC Reporting
37. The Securities Exchange Act of 1934 requires publicly held companies to file periodic
financial disclosures as updates of their economic activity. The three basic forms used for this
updating are Form 10-K, Form 10-Q, and Form 8-K.
Required:
Describe the information contained in each of the three basic forms noted above.
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Form 10-K: Form 10-K must be filed within 60 days after the end of the company's fiscal
year-end. Although the report is broken into four parts, the general format is similar to the
company's annual report. Parts I, II, and III contain the financial statements, management
discussion and analysis, management report on internal control, auditor's report, and
condensed financial information disclosures, often incorporated by reference to the annual
report. Part IV contains additional schedules and exhibits. However, Form 10-K differs from
the annual report by providing specific information relevant to the security holders, discussion
of any disagreements with external auditors, management compensation and major ownership
blocks, and schedules detailing selected asset and liability accounts including accounts
receivable, property, plant, and equipment, the company's investments in other enterprises,
and indebtedness of the company and its affiliates.
C
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Form 10-Q: Form 10-Q is the interim report of the SEC. It is due within 45 days after the end
of each quarter except the fourth quarter when the 10-K is issued. Part I of Form 10-Q
includes comparative financial statements prepared in accordance with APB Opinion No. 28,
but these interim statements need not be audited. Essentially the company provides financial
statements for the most recent quarter, cumulative statements from the beginning of the fiscal
period, and comparative statements for the preceding fiscal year. Part II of Form 10-Q is an
update on significant matters occurring since the last quarter. These include new legal
proceedings, changes in the rights of securities, defaults on senior securities, increases or
decreases in the number of securities outstanding, and other materially important events
affecting security holders.
EO
Form 8-K: Form 8-K is used to disclose unscheduled material events. This form is due with 4
days after the occurrence of a "triggering event". The purpose of Form 8-K is to provide
public disclosure of these significant events on a relatively contemporaneous basis.
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AICPA: Reporting
14-27
Chapter 14 - SEC Reporting
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(a) Customary Review
(b) Comment Letter
(c) "Red Herring" Prospectus
(d) "Tombstone Ad"
(e) Financial Reporting Releases
(f) Staff Accounting Bulletins
(g) Accounting and Auditing Enforcement Releases
(h) Management's Discussion and Analysis
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38. The items below are associated with the Securities and Exchange Commission. Describe
or explain each item as concisely as possible.
14-28
Chapter 14 - SEC Reporting
(a) Customary Review
A customary review is a thorough examination made by the staff of the SEC of a registration
statement.
(b) Comment Letter
A comment letter contains the deficiencies that must be corrected in a registration statement
before the securities may be offered for sale.
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(c) "Red Herring" Prospectus
A "red herring" prospectus provides preliminary information to investors about an upcoming
issue. The name red herring comes from the red ink used on the cover of this preliminary
prospectus indicating it is not an offering statement and the securities being discussed are not
yet available for sale.
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(d) "Tombstone Ad"
A tombstone ad appears in the business press to inform investors of an upcoming offering.
These ads are bordered in black ink, thus the title tombstone ad.
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(e) Financial Reporting Releases
Financial Reporting Releases include amendments to the Securities Act, additional disclosure
requirements, and other current issues regarding accounting and auditing principles and
standards.
PA
(f) Staff Accounting Bulletins
Staff Accounting Bulletins are new or revised administrative practices and interpretations
used by the Commission's staff in reviewing financial statements.
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(g) Accounting and Auditing Enforcement Releases
The Accounting and Auditing Enforcement Releases (AAERs) present the results of
enforcement actions taken against accountants, brokers, and other participants in the filing
process. They include discussion of the findings and opinions, including sanctions against the
accountants involved, and enforcement hearings held by the Commission.
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(h) Management's Discussion and Analysis
Management's Discussion and Analysis is one of the five classes of information comprising
the Basic Information Package. The MDA consists of an analysis of the company's financial
condition and changes in financial condition. The focus is on the discussion of the company's
present and future prospects for liquidity, capital resources, and changes in operations.
Management must disclose unused lines of credit, capital budgeting plans, and must perform a
line-by-line analysis of the causes for changes in the financial statements presented.
AACPA: Communication
AICPA: Reporting
14-29
Chapter 14 - SEC Reporting
Each of the following questions names an item. Select the correct description of the item
from this list. Indicate your selection by entering the letter of the description.
39. Customary Review
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Descriptions
a. Provides preliminary information to investors about an upcoming issue.
b. Informs investors of an upcoming offering.
c. Required annual filing to the SEC.
d. Discloses unscheduled material events.
e. Includes amendments to the Securities Act, additional disclosure requirements, and other
current issues regarding accounting and auditing principles and standards.
f. Results in a thorough examination by the SEC of a registration statement.
g. Issued by the staff of the SEC and contains differences that must be corrected in a
registration statement before the securities may be offered or sale.
h. Quarterly report to SEC.
i. Includes new or revised administrative practices and interpretations used in reviewing
financial statements.
j. Includes the results of actions taken against accountants or other participants because false
or misleading statements were filed.
k. Includes Regulations S-X and S-K.
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AACSB: Reflective Thinking
AICPA: Decision Making
40. Comment Letter
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14-30
Chapter 14 - SEC Reporting
41. "Red Herring" Prospectus
a
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AICPA: Decision Making
42. "Tombstone ad"
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b
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43. Form 10-K
44. Form 10-Q
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C
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AICPA: Decision Making
PA
c
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AACSB: Reflective Thinking
AICPA: Decision Making
45. Form 8-K
d
AACSB: Reflective Thinking
AICPA: Decision Making
14-31
Chapter 14 - SEC Reporting
46. Financial Reporting Releases
e
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AICPA: Decision Making
47. Staff Accounting Bulletins
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48. Accounting and Auditing Enforcement Releases
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AACSB: Reflective Thinking
AICPA: Decision Making
PA
j
14-32
Chapter 14 - SEC Reporting
49. The SEC administers many laws and regulations governing the information made in files
reports.
Required:
a) What is the difference in issues covered by Regulation S-X and Regulation S-K?
b) How do the issues covered by these regulations differ from the AAERs and SABs?
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a) Regulation S-X presents the rules for preparing financial statements, footnotes, and the
auditor's report. Regulation S-K covers all nonfinancial items such, as management's
discussion and analysis of the company's operation and present financial position.
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b) AAERs (Accounting and Auditing Enforcement Releases) and SABs (Staff Accounting
Bulletins) are issued by the SEC. The SABs allow staff to make announcements on technical
issues with which it is concerned as a result of reviews of SEC filings. AAERs present the
results of enforcement actions taken against accountants, brokers, and other participants in the
filing process.
PA
AACPA: Communication
AICPA: Reporting
C
50. Companies issuing stock to the public have to aware of certain terms. Using complete
sentences define the following:
a) Comment Letter
b) Preliminary Prospectus.
c) Shelf Registration.
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a) A comment letter is issued by the SEC to specify deficiencies that must be corrected prior
to the security being offered for sale.
b) A preliminary prospectus, also referred to as a red herring, provides tentative information
to investors about an upcoming issue.
c) The shelf registration allows a company with stock actively traded to establish a
registration statement which can be updated in a short period of time, 2 or 3 days, and then
issue more stock. The shelf registration is limited to 10 percent of the company's currently
outstanding stock. A company may in this manner choose an optimal period in which to sell
more stock.
AACPA: Communication
AICPA: Reporting
14-33
Chapter 14 - SEC Reporting
51. Both the FCPA (Foreign Corrupt Practices Act of 1977) and SOX (Sarbanes-Oxley Act of
2002) contain provisions related to Internal Control. Discuss some significant differences
between how the two acts impact internal control practices for publicly held companies.
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The FCPA defined important aspects of a good internal control system to include:
1. strong budgetary controls,
2. an objective internal audit function,
3. an active audit committee from the company's board of directors, and
4. a review of the internal audit control system by the independent auditors.
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SOX, Section 404, requires an internal control report to be filed by management reporting on
the existence and effectiveness of the company's internal control over financial reporting.
AACPA: Communication
AICPA: Critical Thinking
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52. Smithtown Distributors acquired Paul's Plumbing on January 15, 2008. Violet Flowers
acquired Frank's Farm on January 1, 2007. In the 12/31/07 financial statements filed with the
SEC, Smithtown included a Pro Forma disclosure and Violet did not. If both acquisitions
account for 100% of the common stock of the company acquired and are considered to be
material, then can both filings be considered proper?
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Pro forma statements can be used to show the effects of major transactions that occur after the
end of the fiscal period. The acquisition of Paul's Plumbing occurred after 12/31/07 so it is
proper for Smithtown to disclose the impact of this acquisition on its financial statements.
Violet should have reported the acquisition of Frank's Farm in its consolidated 12/31/07
financial statements.
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AACPA: Communication
AICPA: Critical Thinking
14-34
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
Chapter 15
Partnerships: Formation, Operation, and Changes in Membership
Multiple Choice Questions
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1. A partnership is a(n):
I. accounting entity.
II. taxable entity.
A. I only
B. II only
C. Neither I nor II
D. Both I and II
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2. A partner's tax basis in a partnership is comprised of which of the following items?
I. The partner's tax basis of assets contributed to the partnership.
II. The amount of the partner's liabilities assumed by the other partners.
III. The partner's share of other partners' liabilities assumed by the partnership.
A. I plus II minus III
B. I plus II plus III
C. I minus II plus III
D. I minus II minus III
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C
In the ABC partnership (to which Daniel seeks admittance), the capital balances of Albert,
Bert, and Connell, who share income in the ratio of 5:3:2 are:
3. Based on the preceding information, if no goodwill or bonus is recorded, how much should
Daniel invest for a 20 percent interest?
A. $400,000
B. $200,000
C. $300,000
D. $250,000
15-1
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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4. Based on the preceding information, what amount of goodwill will be recorded if Daniel
invests $450,000 for a one-third interest?
A. $0
B. $10,000
C. $50,000
D. $100,000
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Jones and Smith formed a partnership with each partner contributing the following items:
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Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed
by the Jones and Smith partnership.
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5. Refer to the above information. What is each partner's tax basis in the Jones and Smith
partnership?
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A. Option A
B. Option B
C. Option C
D. Option D
15-2
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
6. Refer to the above information. What is the balance in each partner's capital account for
financial accounting purposes?
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A. Option A
B. Option B
C. Option C
D. Option D
C
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7. Griffin and Rhodes formed a partnership on January 1, 2009. Griffin contributed cash of
$120,000 and Rhodes contributed land with a fair value of $160,000. The partnership
assumed the mortgage on the land which amounted to $40,000 on January 1. Rhodes
originally paid $90,000 for the land. On July 31, 2009, the partnership sold the land for
$190,000. Assuming Griffin and Rhodes share profits and losses equally, how much of the
gain from sale of land should be credited to Griffin for financial accounting purposes?
A. $0
B. $15,000
C. $35,000
D. $45,000
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8. Which of the following accounts could be found in the general ledger of a partnership?
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A. Option A
B. Option B
C. Option C
D. Option D
15-3
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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9. Which of the following accounts could be found in the PQ partnership's general ledger?
I. Due from P
II. P, Drawing
III. Loan Payable to Q
A. I, II
B. I, III
C. II, III
D. I, II, and III
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10. The DEF partnership reported net income of $130,000 for the year ended December 31,
2008. According to the partnership agreement, partnership profits and losses are to be
distributed as follows:
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A. Option A
B. Option B
C. Option C
D. Option D
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How should partnership net income for 2008 be allocated to D, E, and F?
15-4
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
11. The JPB partnership reported net income of $160,000 for the year ended December 31,
2008. According to the partnership agreement, partnership profits and losses are to be
distributed as follows:
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How should partnership net income for 2008 be allocated to J, P, and B?
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A. Option A
B. Option B
C. Option C
D. Option D
C
The APB partnership agreement specifies that partnership net income be allocated as follows:
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Average capital balances for the current year were $50,000 for A, $30,000 for P, and $20,000
for B.
15-5
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
12. Refer to the information given. Assuming a current year net income of $150,000, what
amount should be allocated to each partner?
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A. Option A
B. Option B
C. Option C
D. Option D
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A. Option A
B. Option B
C. Option C
D. Option D
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13. Refer to the information given. Assuming a current year net income of $50,000, what
amount should be allocated to each partner?
15-6
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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14. RD formed a partnership on February 10, 2009. R contributed cash of $150,000, while D
contributed inventory with a fair value of $120,000. Due to R's expertise in selling, D agreed
that R should have 60 percent of the total capital of the partnership. R and D agreed to
recognize goodwill. What is the total capital of the RD partnership and the capital balance of
R after the goodwill is recognized?
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A. Option A
B. Option B
C. Option C
D. Option D
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C
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15. A joint venture may be organized as a:
I. Partnership.
II. Corporation.
III. Undivided interest.
A. I only
B. II only
C. I or III only
D. I, II, or III
16. Refer to the above information. Which statement below is correct if a new partner receives
a bonus upon contributing assets into the partnership?
A. B < A and D = C - A
B. B > A and D = C + A
C. A = B and A = D + C
D. B > A and C = D + A
15-7
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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17. Refer to the above information. Which statement below is correct if the old partners
receive a bonus upon the contribution of assets into the partnership by a new partner?
A. B < A and D = C - A
B. B + A and D > C + A
C. B < A and D = C + A
D. B > A and D = C + A
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18. Refer to the above information. Which statement below is correct if goodwill of the old
partners is recognized upon the contribution of assets into the partnership by a new partner?
A. B = A and D < C + A
B. B = A and D > C + A
C. B < A and D = C + A
D. B > A and D < C + A
C
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19. Refer to the above information. Which statement below is correct if a new partner
purchases an interest in capital directly from the old partners?
A. C < D
B. C = D
C. C = D and B = A
D. C < D and B = A
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20. Refer to the above information. Which statement below is correct if a new partner's
goodwill is recognized upon contributing assets into the partnership?
A. B = A and D > C + A
B. B < A and D < C + A
C. B > A and D = C + A
D. B > A and D > C + A
21. When a partnership is formed, noncash assets contributed by partners should be recorded:
I. at their respective book values for income tax purposes.
II. at their respective fair values for financial accounting purposes.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
15-8
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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22. When a new partner is admitted into a partnership and the new partner receives a capital
credit less than the tangible assets contributed, which of the following explains the difference?
I. The new partner's goodwill has been recognized.
II. The old partners received a bonus from the new partner.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
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23. When a new partner is admitted into a partnership and the new partner receives a capital
credit greater than the tangible assets contributed, which of the following explains the
difference?
I. The old partners' goodwill is being recognized.
II. The new partner's goodwill is being recognized.
A. I only
B. II only
C. Either I or II
D. Both I and II
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24. When a new partner is admitted into a partnership and the capital of the old partners
decreases, which of the following explains the reason for the decrease?
I. Undervalued liabilities were written up to their fair values.
II. Undervalued assets were written up to their fair values.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
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25. When a partner retires from a partnership and the retiring partner is paid more than the
capital balance in her account, which of the following explains the difference?
I. The retiring partner is receiving a bonus from the other partners.
II. The retiring partner's goodwill is being recognized.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
15-9
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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26. When the old partners receive a bonus upon admission of a new partner into a partnership,
the bonus is allocated to:
I. all the partners in their profit and loss sharing ratio.
II. the existing partners in their profit and loss sharing ratio.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
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27. When a new partner is admitted into a partnership and the old partners' goodwill is
recognized, the goodwill is allocated to:
I. all the partners in their profit-and-loss-sharing ratio.
II. the old partners in their profit and loss sharing ratio.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
C
In the RST partnership, Ron's capital is $80,000, Stella's is $75,000, and Tiffany's is $50,000.
They share income in a 3:2:1 ratio, respectively. Tiffany is retiring from the partnership. Each
of the following questions is independent of the others.
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28. Refer to the above information. Tiffany is paid $60,000, and no goodwill is recorded. In
the journal entry to record Tiffany's withdrawal:
A. Tiffany, Capital will be credited for $60,000.
B. Ron, Capital will be debited for $5,000.
C. Stella, Capital will be debited for $4,000.
D. Cash will be debited for $60,000.
29. Refer to the above information. Tiffany is paid $60,000, and no goodwill is recorded.
What is the Ron's capital balance after Tiffany withdraws from the partnership?
A. $74,000
B. $71,000
C. $75,000
D. $86,000
15-10
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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30. Refer to the above information. Tiffany is paid $56,000, and all implied goodwill is
recorded. What is the total amount of goodwill recorded?
A. $0
B. $6,000
C. $30,000
D. $36,000
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In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share
income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the
following questions is independent of the others.
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31. Refer to the information provided above. What amount will David have to invest to give
him one-fifth percent interest in the capital of the partnership if no goodwill or bonus is
recorded?
A. $60,000
B. $36,000
C. $50,000
D. $45,000
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C
32. Refer to the information provided above. Assume that David invests $50,000 for a onefourth interest. Goodwill is to be recorded. The journal to record David's admission into the
partnership will include:
A. a credit to cash for $50,000.
B. a debit to goodwill for $7,500.
C. a credit to David, Capital for $60,000.
D. a credit to David, Capital for $50,000.
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33. Refer to the information provided above. Allen and Daniel agree that some of the
inventory is obsolete. The inventory account is decreased before David is admitted. David
invests $40,000 for a one-fifth interest. What is the amount of inventory written down?
A. $4,000
B. $20,000
C. $15,000
D. $10,000
15-11
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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34. Refer to the information provided above. Allen and Daniel agree that some of the
inventory is obsolete. The inventory account is decreased before David is admitted. David
invests $40,000 for a one-fifth interest. What are the capital balances of Allen and Daniel after
David is admitted into the partnership?
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A. Option A
B. Option B
C. Option C
D. Option D
C
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35. Refer to the information provided above. David directly purchases a one-fifth interest by
paying Allen $34,000 and Daniel $10,000. The land account is increased before David is
admitted. By what amount is the land account increased?
A. $40,000
B. $10,000
C. $36,000
D. $20,000
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36. Refer to the information provided above. David directly purchases a one-fifth interest by
paying Allen $34,000 and Daniel $10,000. The land account is increased before David is
admitted. What are the capital balances of Allen and Daniel after David is admitted into the
partnership?
A. Option A
B. Option B
C. Option C
D. Option D
15-12
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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37. Refer to the information provided above. David invests $40,000 for a one-fifth interest in
the total capital of $220,000. The journal to record David's admission into the partnership will
include:
A. a credit to Cash for $40,000.
B. a debit to Allen, Capital for $3,000.
C. a credit to David, Capital for $40,000.
D. a credit to Daniel, Capital for $1,000.
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A. Option A
B. Option B
C. Option C
D. Option D
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38. Refer to the information provided above. David invests $40,000 for a one-fifth interest in
the total capital of $220,000. What are the capital balances of Allen and Daniel after David is
admitted into the partnership?
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39. Refer to the information provided above. David invests $50,000 for a one-fifth interest.
What amount of goodwill will be recorded?
A. $20,000
B. $4,000
C. $40,000
D. $15,000
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40. Which of the following observations is true of an S corporation?
A. It elects to be taxed in the same manner as a corporation.
B. It does not have the burden of double taxation of corporate income.
C. Its shareholders have personal liability for the corporation's obligations.
D. Its primary income source should be passive investments.
15-13
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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41. A limited liability company (LLC):
I. is governed by the laws of the state in which it is formed.
II. provides liability protection to its investors.
III. does not offer pass-through taxation benefits of partnerships.
A. Both I and III.
B. III
C. Both I and II
D. I, II, and II
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42. If A is the total capital of a partnership before the admission of a new partner, B is the
total capital of the partnership after the admission of the new partner, C is the amount of the
new partner's investment, and D is the amount of capital credited to the new partner, then
there is:
A. goodwill to the new partner if B > (A + C) and D < C.
B. goodwill to the old partners if B = A + C and D > C.
C. a bonus to the new partner if B = A + C and D > C.
D. neither bonus nor goodwill if B > (A + C) and D > C.
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C
43. The terms of a partnership agreement provide that one of the partners is to receive a salary
allowance of $30,000, plus a bonus of 20 percent of income after deduction of the bonus and
the salary allowance. If income is $150,000, the bonus should be:
A. $18,000
B. $20,000
C. $24,000
D. $30,000
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44. The partnership of X and Y shares profits and losses in the ratio of 60 percent to X and 40
percent to Y. For the year 2008, partnership net income was double X's withdrawals. Assume
X's beginning capital balance was $80,000, and ending capital balance (after closing) was
$140,000. Partnership net income for the year was:
A. $120,000.
B. $300,000.
C. $500,000.
D. $600,000.
15-14
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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45. Shue, a partner in the Financial Brokers Partnership, has a 30 percent share in partnership
profits and losses. Shue's capital account had a net decrease of $100,000 during 2008. During
2008, Shue withdrew $240,000 as withdrawals and contributed equipment valued at $50,000
to the partnership. What was the net income of the Financial Brokers Partnership for 2008?
A. $633,334
B. $466,666
C. $300,000
D. $190,000
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46. Transferable interest of a partner includes all of the following except:
A. the partner's share of the profits and losses of the partnership.
B. the right to receive distributions.
C. the right to receive any liquidating distribution.
D. the authority to transact any of the partnership's business operations.
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PA
Essay Questions
15-15
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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47. Net income for Levin-Tom partnership for 2009 was $125,000. Levin and Tom have
agreed to distribute partnership net income according to the following plan:
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Additional Information for 2009 follows:
1. Levin began the year with a capital balance of $75,000.
2. Tom began the year with a capital balance of $100,000.
3. On March 1, Levin invested an additional $25,000 into the partnership.
4. On October 1, Tom invested an additional $20,000 into the partnership.
5. Throughout 2009, each partner withdrew $200 per week in anticipation of partnership net
income. The partners agreed that these withdrawals are not to be included in the computation
of average capital balances for purposes of income distributions.
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Required:
a. Prepare a schedule that discloses the distribution of partnership net income for 2009. Show
supporting computations in good form.
b. Prepare the statement of partners' capital at December 31, 2009.
c. How would your answer to part a change if all of the provisions of the income distribution
plan were the same except that the salaries were $45,000 to Levin and $60,000 to Jack?
15-16
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
48. Paul and Ray sell musical instruments through their partnership. To bring in additional
funds and expertise, they decide to admit Janet to the partnership. Paul's capital is $400,000,
Ray's capital is $200,000, and they share income in a ratio of 7:3, respectively.
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PA
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Required
Record Janet's admission for each of the following independent situations:
a) Janet invests $180,000 for a one-fourth interest. Goodwill is to be recorded.
b) Paul and Ray agree that some of the inventory is obsolete. The inventory account is
decreased before Janet is admitted. Janet invests $190,000 for a one-fourth interest.
15-17
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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49. Two sole proprietors, L and M, agreed to form a partnership on January 1, 2009. The trial
balance for each proprietorship is shown below as of January 1, 2009.
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The LM partnership will take over the assets and assume the liabilities of the proprietors as of
January 1, 2009.
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PA
Required:
a) Prepare a balance sheet, for financial accounting purposes, for the LM partnership as of
January 1, 2009.
b) In addition, assume that M agreed to recognize the goodwill generated by L's business.
Accordingly, M agreed to recognize an amount for L's goodwill such that L's capital equalled
M's capital on January 1, 2009. Given this alternative, how does the balance sheet prepared
for requirement A change?
15-18
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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50. The PQ partnership has the following plan for the distribution of partnership net income
(loss):
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PA
1. Partnership net income is $360,000.
2. Partnership net income is $240,000.
3. Partnership net loss is $40,000.
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Required:
Calculate the distribution of partnership net income (loss) for each independent situation
below (for each situation, assume the average capital balance of P is $140,000 and of Q is
$240,000).
15-19
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
51. Miller and Davis, partners in a consulting business, share profits and losses in the ratio of
3:2, respectively. Prior to recording the admission of Shaw as a new partner, Miller has a
capital balance of $80,000, and Davis has a capital balance of $40,000.
Required:
For each of the following independent cases, prepare the journal entry that was made to
record the admission of Shaw into the partnership.
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1) Shaw purchased 20 percent of the respective capital balances of Miller and Davis, paying
$20,000 cash directly to each of them.
2) Shaw invested $30,000 cash in the partnership for a 20 percent ownership interest. Total
capital after recording his admission was $150,000.
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3) Shaw invested $40,000 cash into the partnership for a 20 percent ownership interest. Total
capital after recording his admission was $160,000.
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4) Shaw invested $50,000 into the partnership for a 20 percent interest. Goodwill is to be
recognized.
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52. In the JAW partnership, Jane's capital is $100,000, Anne's is $80,000, and William's is
$75,000. They share income in a 3:2:1 ratio, respectively. William is retiring from the
partnership.
Required
Prepare journal entries to record William's withdrawal according to each of the following
independent assumptions:
a. William is paid $80,000, and no goodwill is recorded.
b. William is paid $85,000, and only his share of the goodwill is recorded.
c. William is paid $78,000, and all implied goodwill is recorded.
15-20
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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53. Apple and Betty are planning on beginning a new business. They plan on forming a
partnership. Apple will contribute $300,000 and will not be working. Betty will be working
full time. They plan on splitting profits equally. They approach you, as an accounting major,
to confirm their thoughts. What do you recommend?
PA
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54. The ABC partnership had net income of $100,000 for 2009. They allocate profits and
losses in the ratio 5:3:2. After closing the 12/31/2009 books they discovered that $30,000 was
spent on a piece of land in December 2009 and was expensed. What should happen?
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Chapter 15 Partnerships: Formation, Operation, and Changes in Membership
Answer Key
Multiple Choice Questions
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1. A partnership is a(n):
I. accounting entity.
II. taxable entity.
A. I only
B. II only
C. Neither I nor II
D. Both I and II
AACSB: Reflective Thinking
AICPA: Decision Making
15-21
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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2. A partner's tax basis in a partnership is comprised of which of the following items?
I. The partner's tax basis of assets contributed to the partnership.
II. The amount of the partner's liabilities assumed by the other partners.
III. The partner's share of other partners' liabilities assumed by the partnership.
A. I plus II minus III
B. I plus II plus III
C. I minus II plus III
D. I minus II minus III
AACSB: Reflective Thinking
AICPA: Decision Making
PA
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In the ABC partnership (to which Daniel seeks admittance), the capital balances of Albert,
Bert, and Connell, who share income in the ratio of 5:3:2 are:
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3. Based on the preceding information, if no goodwill or bonus is recorded, how much should
Daniel invest for a 20 percent interest?
A. $400,000
B. $200,000
C. $300,000
D. $250,000
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AACSB: Analytic
AICPA: Decision Making
15-22
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
4. Based on the preceding information, what amount of goodwill will be recorded if Daniel
invests $450,000 for a one-third interest?
A. $0
B. $10,000
C. $50,000
D. $100,000
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AACSB: Analytic
AICPA: Decision Making
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Jones and Smith formed a partnership with each partner contributing the following items:
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Assume that for tax purposes Jones and Smith agree to share equally in the liabilities assumed
by the Jones and Smith partnership.
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5. Refer to the above information. What is each partner's tax basis in the Jones and Smith
partnership?
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A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Measurement
15-23
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
6. Refer to the above information. What is the balance in each partner's capital account for
financial accounting purposes?
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A. Option A
B. Option B
C. Option C
D. Option D
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AACSB: Analytic
AICPA: Measurement
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7. Griffin and Rhodes formed a partnership on January 1, 2009. Griffin contributed cash of
$120,000 and Rhodes contributed land with a fair value of $160,000. The partnership
assumed the mortgage on the land which amounted to $40,000 on January 1. Rhodes
originally paid $90,000 for the land. On July 31, 2009, the partnership sold the land for
$190,000. Assuming Griffin and Rhodes share profits and losses equally, how much of the
gain from sale of land should be credited to Griffin for financial accounting purposes?
A. $0
B. $15,000
C. $35,000
D. $45,000
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AACSB: Analytic
AICPA: Decision Making
15-24
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
8. Which of the following accounts could be found in the general ledger of a partnership?
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A. Option A
B. Option B
C. Option C
D. Option D
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AACSB: Reflective Thinking
AICPA: Decision Making
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9. Which of the following accounts could be found in the PQ partnership's general ledger?
I. Due from P
II. P, Drawing
III. Loan Payable to Q
A. I, II
B. I, III
C. II, III
D. I, II, and III
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AACSB: Reflective Thinking
AICPA: Decision Making
15-25
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
10. The DEF partnership reported net income of $130,000 for the year ended December 31,
2008. According to the partnership agreement, partnership profits and losses are to be
distributed as follows:
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How should partnership net income for 2008 be allocated to D, E, and F?
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PA
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C
AACSB: Analytic
AICPA: Measurement
ev
A. Option A
B. Option B
C. Option C
D. Option D
15-26
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
11. The JPB partnership reported net income of $160,000 for the year ended December 31,
2008. According to the partnership agreement, partnership profits and losses are to be
distributed as follows:
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How should partnership net income for 2008 be allocated to J, P, and B?
PA
AACSB: Analytic
AICPA: Measurement
R
A. Option A
B. Option B
C. Option C
D. Option D
EO
C
The APB partnership agreement specifies that partnership net income be allocated as follows:
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Average capital balances for the current year were $50,000 for A, $30,000 for P, and $20,000
for B.
15-27
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
12. Refer to the information given. Assuming a current year net income of $150,000, what
amount should be allocated to each partner?
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A. Option A
B. Option B
C. Option C
D. Option D
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AACSB: Analytic
AICPA: Measurement
C
EO
A. Option A
B. Option B
C. Option C
D. Option D
PA
13. Refer to the information given. Assuming a current year net income of $50,000, what
amount should be allocated to each partner?
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AACSB: Analytic
AICPA: Measurement
15-28
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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14. RD formed a partnership on February 10, 2009. R contributed cash of $150,000, while D
contributed inventory with a fair value of $120,000. Due to R's expertise in selling, D agreed
that R should have 60 percent of the total capital of the partnership. R and D agreed to
recognize goodwill. What is the total capital of the RD partnership and the capital balance of
R after the goodwill is recognized?
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A. Option A
B. Option B
C. Option C
D. Option D
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AACSB: Analytic
AICPA: Measurement
EO
C
PA
15. A joint venture may be organized as a:
I. Partnership.
II. Corporation.
III. Undivided interest.
A. I only
B. II only
C. I or III only
D. I, II, or III
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AACSB: Analytic
AICPA: Measurement
15-29
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
16. Refer to the above information. Which statement below is correct if a new partner receives
a bonus upon contributing assets into the partnership?
A. B < A and D = C - A
B. B > A and D = C + A
C. A = B and A = D + C
D. B > A and C = D + A
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AACSB: Analytic
AICPA: Decision Making
PA
AACSB: Analytic
AICPA: Decision Making
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17. Refer to the above information. Which statement below is correct if the old partners
receive a bonus upon the contribution of assets into the partnership by a new partner?
A. B < A and D = C - A
B. B + A and D > C + A
C. B < A and D = C + A
D. B > A and D = C + A
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C
18. Refer to the above information. Which statement below is correct if goodwill of the old
partners is recognized upon the contribution of assets into the partnership by a new partner?
A. B = A and D < C + A
B. B = A and D > C + A
C. B < A and D = C + A
D. B > A and D < C + A
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AACSB: Analytic
AICPA: Decision Making
15-30
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
19. Refer to the above information. Which statement below is correct if a new partner
purchases an interest in capital directly from the old partners?
A. C < D
B. C = D
C. C = D and B = A
D. C < D and B = A
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AACSB: Analytic
AICPA: Decision Making
PA
AACSB: Analytic
AICPA: Decision Making
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20. Refer to the above information. Which statement below is correct if a new partner's
goodwill is recognized upon contributing assets into the partnership?
A. B = A and D > C + A
B. B < A and D < C + A
C. B > A and D = C + A
D. B > A and D > C + A
EO
C
21. When a partnership is formed, noncash assets contributed by partners should be recorded:
I. at their respective book values for income tax purposes.
II. at their respective fair values for financial accounting purposes.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
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AACSB: Reflective Thinking
AICPA: Decision Making
15-31
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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22. When a new partner is admitted into a partnership and the new partner receives a capital
credit less than the tangible assets contributed, which of the following explains the difference?
I. The new partner's goodwill has been recognized.
II. The old partners received a bonus from the new partner.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
AACSB: Reflective Thinking
AICPA: Decision Making
C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
R
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23. When a new partner is admitted into a partnership and the new partner receives a capital
credit greater than the tangible assets contributed, which of the following explains the
difference?
I. The old partners' goodwill is being recognized.
II. The new partner's goodwill is being recognized.
A. I only
B. II only
C. Either I or II
D. Both I and II
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EO
24. When a new partner is admitted into a partnership and the capital of the old partners
decreases, which of the following explains the reason for the decrease?
I. Undervalued liabilities were written up to their fair values.
II. Undervalued assets were written up to their fair values.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
AACSB: Reflective Thinking
AICPA: Decision Making
15-32
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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25. When a partner retires from a partnership and the retiring partner is paid more than the
capital balance in her account, which of the following explains the difference?
I. The retiring partner is receiving a bonus from the other partners.
II. The retiring partner's goodwill is being recognized.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
AACSB: Reflective Thinking
AICPA: Decision Making
C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
R
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26. When the old partners receive a bonus upon admission of a new partner into a partnership,
the bonus is allocated to:
I. all the partners in their profit and loss sharing ratio.
II. the existing partners in their profit and loss sharing ratio.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
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EO
27. When a new partner is admitted into a partnership and the old partners' goodwill is
recognized, the goodwill is allocated to:
I. all the partners in their profit-and-loss-sharing ratio.
II. the old partners in their profit and loss sharing ratio.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
AACSB: Reflective Thinking
AICPA: Decision Making
15-33
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
In the RST partnership, Ron's capital is $80,000, Stella's is $75,000, and Tiffany's is $50,000.
They share income in a 3:2:1 ratio, respectively. Tiffany is retiring from the partnership. Each
of the following questions is independent of the others.
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28. Refer to the above information. Tiffany is paid $60,000, and no goodwill is recorded. In
the journal entry to record Tiffany's withdrawal:
A. Tiffany, Capital will be credited for $60,000.
B. Ron, Capital will be debited for $5,000.
C. Stella, Capital will be debited for $4,000.
D. Cash will be debited for $60,000.
AACSB: Analytic
AICPA: Measurement
C
AACSB: Analytic
AICPA: Measurement
PA
R
29. Refer to the above information. Tiffany is paid $60,000, and no goodwill is recorded.
What is the Ron's capital balance after Tiffany withdraws from the partnership?
A. $74,000
B. $71,000
C. $75,000
D. $86,000
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30. Refer to the above information. Tiffany is paid $56,000, and all implied goodwill is
recorded. What is the total amount of goodwill recorded?
A. $0
B. $6,000
C. $30,000
D. $36,000
AACSB: Analytic
AICPA: Measurement
15-34
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
In the AD partnership, Allen's capital is $140,000 and Daniel's is $40,000 and they share
income in a 3:1 ratio, respectively. They decide to admit David to the partnership. Each of the
following questions is independent of the others.
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31. Refer to the information provided above. What amount will David have to invest to give
him one-fifth percent interest in the capital of the partnership if no goodwill or bonus is
recorded?
A. $60,000
B. $36,000
C. $50,000
D. $45,000
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AACSB: Analytic
AICPA: Measurement
EO
AACSB: Analytic
AICPA: Measurement
C
PA
32. Refer to the information provided above. Assume that David invests $50,000 for a onefourth interest. Goodwill is to be recorded. The journal to record David's admission into the
partnership will include:
A. a credit to cash for $50,000.
B. a debit to goodwill for $7,500.
C. a credit to David, Capital for $60,000.
D. a credit to David, Capital for $50,000.
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33. Refer to the information provided above. Allen and Daniel agree that some of the
inventory is obsolete. The inventory account is decreased before David is admitted. David
invests $40,000 for a one-fifth interest. What is the amount of inventory written down?
A. $4,000
B. $20,000
C. $15,000
D. $10,000
AACSB: Analytic
AICPA: Measurement
15-35
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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34. Refer to the information provided above. Allen and Daniel agree that some of the
inventory is obsolete. The inventory account is decreased before David is admitted. David
invests $40,000 for a one-fifth interest. What are the capital balances of Allen and Daniel after
David is admitted into the partnership?
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A. Option A
B. Option B
C. Option C
D. Option D
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AACSB: Analytic
AICPA: Measurement
C
PA
35. Refer to the information provided above. David directly purchases a one-fifth interest by
paying Allen $34,000 and Daniel $10,000. The land account is increased before David is
admitted. By what amount is the land account increased?
A. $40,000
B. $10,000
C. $36,000
D. $20,000
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EO
AACSB: Analytic
AICPA: Measurement
15-36
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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36. Refer to the information provided above. David directly purchases a one-fifth interest by
paying Allen $34,000 and Daniel $10,000. The land account is increased before David is
admitted. What are the capital balances of Allen and Daniel after David is admitted into the
partnership?
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A. Option A
B. Option B
C. Option C
D. Option D
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AACSB: Analytic
AICPA: Measurement
R
EO
AACSB: Analytic
AICPA: Measurement
C
PA
37. Refer to the information provided above. David invests $40,000 for a one-fifth interest in
the total capital of $220,000. The journal to record David's admission into the partnership will
include:
A. a credit to Cash for $40,000.
B. a debit to Allen, Capital for $3,000.
C. a credit to David, Capital for $40,000.
D. a credit to Daniel, Capital for $1,000.
15-37
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
38. Refer to the information provided above. David invests $40,000 for a one-fifth interest in
the total capital of $220,000. What are the capital balances of Allen and Daniel after David is
admitted into the partnership?
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A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
C
PA
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39. Refer to the information provided above. David invests $50,000 for a one-fifth interest.
What amount of goodwill will be recorded?
A. $20,000
B. $4,000
C. $40,000
D. $15,000
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40. Which of the following observations is true of an S corporation?
A. It elects to be taxed in the same manner as a corporation.
B. It does not have the burden of double taxation of corporate income.
C. Its shareholders have personal liability for the corporation's obligations.
D. Its primary income source should be passive investments.
AACSB: Reflective Thinking
AICPA: Decision Making
15-38
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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41. A limited liability company (LLC):
I. is governed by the laws of the state in which it is formed.
II. provides liability protection to its investors.
III. does not offer pass-through taxation benefits of partnerships.
A. Both I and III.
B. III
C. Both I and II
D. I, II, and II
AACSB: Reflective Thinking
AICPA: Decision Making
C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
R
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42. If A is the total capital of a partnership before the admission of a new partner, B is the
total capital of the partnership after the admission of the new partner, C is the amount of the
new partner's investment, and D is the amount of capital credited to the new partner, then
there is:
A. goodwill to the new partner if B > (A + C) and D < C.
B. goodwill to the old partners if B = A + C and D > C.
C. a bonus to the new partner if B = A + C and D > C.
D. neither bonus nor goodwill if B > (A + C) and D > C.
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43. The terms of a partnership agreement provide that one of the partners is to receive a salary
allowance of $30,000, plus a bonus of 20 percent of income after deduction of the bonus and
the salary allowance. If income is $150,000, the bonus should be:
A. $18,000
B. $20,000
C. $24,000
D. $30,000
AACSB: Analytic
AICPA: Measurement
15-39
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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44. The partnership of X and Y shares profits and losses in the ratio of 60 percent to X and 40
percent to Y. For the year 2008, partnership net income was double X's withdrawals. Assume
X's beginning capital balance was $80,000, and ending capital balance (after closing) was
$140,000. Partnership net income for the year was:
A. $120,000.
B. $300,000.
C. $500,000.
D. $600,000.
AACSB: Analytic
AICPA: Measurement
PA
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45. Shue, a partner in the Financial Brokers Partnership, has a 30 percent share in partnership
profits and losses. Shue's capital account had a net decrease of $100,000 during 2008. During
2008, Shue withdrew $240,000 as withdrawals and contributed equipment valued at $50,000
to the partnership. What was the net income of the Financial Brokers Partnership for 2008?
A. $633,334
B. $466,666
C. $300,000
D. $190,000
C
AACSB: Analytic
AICPA: Measurement
EO
46. Transferable interest of a partner includes all of the following except:
A. the partner's share of the profits and losses of the partnership.
B. the right to receive distributions.
C. the right to receive any liquidating distribution.
D. the authority to transact any of the partnership's business operations.
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AACSB: Reflective Thinking
AICPA: Decision Making
Essay Questions
15-40
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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47. Net income for Levin-Tom partnership for 2009 was $125,000. Levin and Tom have
agreed to distribute partnership net income according to the following plan:
PA
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Additional Information for 2009 follows:
1. Levin began the year with a capital balance of $75,000.
2. Tom began the year with a capital balance of $100,000.
3. On March 1, Levin invested an additional $25,000 into the partnership.
4. On October 1, Tom invested an additional $20,000 into the partnership.
5. Throughout 2009, each partner withdrew $200 per week in anticipation of partnership net
income. The partners agreed that these withdrawals are not to be included in the computation
of average capital balances for purposes of income distributions.
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C
Required:
a. Prepare a schedule that discloses the distribution of partnership net income for 2009. Show
supporting computations in good form.
b. Prepare the statement of partners' capital at December 31, 2009.
c. How would your answer to part a change if all of the provisions of the income distribution
plan were the same except that the salaries were $45,000 to Levin and $60,000 to Jack?
15-41
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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PA
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a)
15-42
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PA
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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AACSB: Analytic
AICPA: Measurement
15-43
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
48. Paul and Ray sell musical instruments through their partnership. To bring in additional
funds and expertise, they decide to admit Janet to the partnership. Paul's capital is $400,000,
Ray's capital is $200,000, and they share income in a ratio of 7:3, respectively.
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PA
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Required
Record Janet's admission for each of the following independent situations:
a) Janet invests $180,000 for a one-fourth interest. Goodwill is to be recorded.
b) Paul and Ray agree that some of the inventory is obsolete. The inventory account is
decreased before Janet is admitted. Janet invests $190,000 for a one-fourth interest.
15-44
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PA
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
15-45
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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PA
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AACSB: Analytic
AICPA: Measurement
15-46
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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49. Two sole proprietors, L and M, agreed to form a partnership on January 1, 2009. The trial
balance for each proprietorship is shown below as of January 1, 2009.
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The LM partnership will take over the assets and assume the liabilities of the proprietors as of
January 1, 2009.
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PA
Required:
a) Prepare a balance sheet, for financial accounting purposes, for the LM partnership as of
January 1, 2009.
b) In addition, assume that M agreed to recognize the goodwill generated by L's business.
Accordingly, M agreed to recognize an amount for L's goodwill such that L's capital equalled
M's capital on January 1, 2009. Given this alternative, how does the balance sheet prepared
for requirement A change?
15-47
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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a)
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b) Assets change due to the addition of goodwill of $34,000. Total assets are now $1,128,000
($1,094,000 + $34,000 goodwill).
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C
AACSB: Analytic
AICPA: Measurement
PA
L, Capital and M, Capital are each $294,000 if L's goodwill is recognized. Total capital is
$588,000, and total liabilities and capital amount to $1,128,000.
15-48
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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50. The PQ partnership has the following plan for the distribution of partnership net income
(loss):
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PA
1. Partnership net income is $360,000.
2. Partnership net income is $240,000.
3. Partnership net loss is $40,000.
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Required:
Calculate the distribution of partnership net income (loss) for each independent situation
below (for each situation, assume the average capital balance of P is $140,000 and of Q is
$240,000).
15-49
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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Situation 1: Net income is $360,000
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PA
Situation 3: Net loss is $40,000
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Situation 2: Net income is $240,000
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AACSB: Analytic
AICPA: Measurement
15-50
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
51. Miller and Davis, partners in a consulting business, share profits and losses in the ratio of
3:2, respectively. Prior to recording the admission of Shaw as a new partner, Miller has a
capital balance of $80,000, and Davis has a capital balance of $40,000.
Required:
For each of the following independent cases, prepare the journal entry that was made to
record the admission of Shaw into the partnership.
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1) Shaw purchased 20 percent of the respective capital balances of Miller and Davis, paying
$20,000 cash directly to each of them.
2) Shaw invested $30,000 cash in the partnership for a 20 percent ownership interest. Total
capital after recording his admission was $150,000.
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3) Shaw invested $40,000 cash into the partnership for a 20 percent ownership interest. Total
capital after recording his admission was $160,000.
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PA
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4) Shaw invested $50,000 into the partnership for a 20 percent interest. Goodwill is to be
recognized.
AACSB: Analytic
AICPA: Measurement
15-51
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
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PA
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52. In the JAW partnership, Jane's capital is $100,000, Anne's is $80,000, and William's is
$75,000. They share income in a 3:2:1 ratio, respectively. William is retiring from the
partnership.
Required
Prepare journal entries to record William's withdrawal according to each of the following
independent assumptions:
a. William is paid $80,000, and no goodwill is recorded.
b. William is paid $85,000, and only his share of the goodwill is recorded.
c. William is paid $78,000, and all implied goodwill is recorded.
15-52
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PA
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
15-53
PA
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Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
AACSB: Analytic
AICPA: Measurement
EO
C
53. Apple and Betty are planning on beginning a new business. They plan on forming a
partnership. Apple will contribute $300,000 and will not be working. Betty will be working
full time. They plan on splitting profits equally. They approach you, as an accounting major,
to confirm their thoughts. What do you recommend?
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Students should recognize that partners can agree to any form of profit allocation. However,
since one partner, Apple, has contributed money and Betty hasn't, they might want to consider
some form of interest on the capital balance. Also, since one partner, Betty, is working full
time, Apple is not, they might want to consider having a salary or a bonus opportunity for
Apple.
AACSB: Communication
AICPA: Critical Thinking
15-54
Chapter 15 - Partnerships: Formation, Operation, and Changes in Membership
54. The ABC partnership had net income of $100,000 for 2009. They allocate profits and
losses in the ratio 5:3:2. After closing the 12/31/2009 books they discovered that $30,000 was
spent on a piece of land in December 2009 and was expensed. What should happen?
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Since the books are closed then the correction must be made against the capital accounts. The
following journal entry would be made:
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PA
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AACSB: Analytic
AICPA: Critical Thinking
15-55
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
Chapter 17
Governmental Entities: Introduction and General Fund Accounting
Multiple Choice Questions
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1. Under the modified accrual basis of accounting, revenue should be recognized when it is:
A. measurable and earned.
B. received in cash.
C. available and earned.
D. measurable and available.
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A. I only
B. II only
C. I and II
D. Neither I nor II
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2. Which of the following statements is(are) correct about the funds used by governmental
entities?
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C
3. Which of the following funds should use the accrual basis of accounting?
A. Enterprise and private-purpose trust funds.
B. Permanent funds and internal service funds.
C. Debt service and agency funds.
D. Special revenue and capital projects funds.
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4. Which of the following funds should use the modified accrual basis of accounting?
A. Private-purpose trust and agency funds.
B. Capital projects and special revenue funds.
C. Internal service and enterprise funds.
D. Debt service and private-purpose trust funds.
17-1
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
5. Which of the following funds are classified as fiduciary funds?
A. Agency and Special revenue funds.
B. Internal service and Enterprise funds.
C. Private-purpose trust and Agency funds.
D. Capital projects and Debt service funds.
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6. Which of the following funds are classified as proprietary funds?
A. Agency and special revenue funds.
B. Enterprise and internal service funds.
C. Debt service and capital projects funds.
D. Agency and pension trust funds.
PA
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7. Which of the following funds are classified as governmental funds?
A. Internal service and capital projects funds.
B. Internal service and debt service funds.
C. Enterprise and agency funds.
D. The general and special revenue funds.
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C
8. Which organization has the authority to establish generally accepted accounting principles
for state and local government entities?
A. The National Council on Governmental Accounting
B. The Governmental Accounting Standards Board
C. The Financial Accounting Standards Board
D. The Municipal Officers Finance Organization
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9. What is the correct sequence in the expenditure process in governmental accounting?
A. Appropriation, Encumbrance, Expenditure, and Disbursement.
B. Encumbrance, Expenditure, Disbursement, and Appropriation.
C. Expenditure, Encumbrance, Disbursement, and Appropriation.
D. Appropriation, Expenditure, Encumbrance, and Disbursement.
17-2
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
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10. Which of the following observations concerning encumbrances is NOT true?
A. Their purpose is to ensure that the expenditures within a period do not exceed the budgeted
appropriations.
B. They provide a control system and safeguard for governmental unit administrators.
C. They are a unique element of governmental accounting.
D. They are recognized only at the time disbursements are made.
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11. The City of Ames uses the consumption method to report its inventory of supplies on its
general fund balance sheet. What account is debited in the general fund when Ames acquires
supplies?
A. Expenditures
B. Inventory of Supplies
C. Supplies Expense
D. Fund Balance-Reserved for Inventories
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PA
12. On July 25, 2008, the city of Pullman, which reports on a calendar-year basis, ordered five
police cars at an estimated cost of $200,000. On August 26, 2008, the police cars were
received, and the actual cost amounted to $197,000. Pullman encumbered the appropriation
for police cars in its general fund when the cars were ordered. When the police cars were
received, the general fund of Pullman should:
A. Credit Budgetary Fund Balance Reserved for Encumbrances for $197,000.
B. Debit Encumbrances for $200,000.
C. Debit Expenditures for $197,000.
D. Credit Budgetary Fund Balance Reserved for Expenditures for $200,000.
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Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
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13. What amount should be reported as expenditures for the current fiscal year when
accounting for inventories of supplies under the purchase method and under the consumption
method?
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A. Option A
B. Option B
C. Option C
D. Option D
C
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14. The Town of Pasco has no supplies inventory in its general fund on January 1, 2008.
During 2008, Pasco incurred expenditures of $200,000 for the acquisition of supplies. On
December 31, 2008, Pasco's inventory of supplies amounted to $30,000. Assume Pasco uses
the purchase method of accounting for supplies in its general fund and that the village reports
on the calendar year. On December 31, 2008, the general fund of Pasco should credit:
A. Expenditures for $170,000.
B. Fund Balance-Unreserved for $170,000.
C. Fund Balance-Reserved for Inventories for $30,000.
D. Expenditures for $30,000.
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15. Which of the following funds provides goods and services only to other departments or
agencies of the government on a cost-reimbursement basis?
A. Internal service funds
B. Enterprise funds
C. Special revenue funds
D. The general fund
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Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
16. The following information was obtained from the general fund balance sheet of Lima
Village on June 30, 2009, the close of its fiscal year:
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On June 30, 2009, what was Lima's unreserved fund balance in its general fund?
A. $84,000
B. $44,000
C. $34,000
D. $24,000
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17. The general fund of Park City acquired computer equipment at a cost of $50,000 on May
18, 2009. To record acquisition of this equipment, the general fund of Park City should debit:
A. expenditures.
B. encumbrances.
C. equipment.
D. vouchers payable.
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18. Which of the following characteristics are emphasized in the accounting for state and local
government entities?
I. Revenues should be matched with expenditures to measure success or failure of the
government entity.
II. There is an emphasis on expendability of resources to accomplish objectives of the
governmental entity.
A. I only
B. II only
C. I and II
D. Neither I nor II
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Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
19. Works of art and historical treasures purchased by the general fund should be reported as:
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A. I only.
B. II only.
C. Both I and II
D. Neither I nor II.
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20. Identify the legal term that allows the general fund to make expenditures.
A. Exceptions
B. Appropriations
C. Encumbrances
D. Consumption
C
A. I only
B. II only
C. Both I and II
D. Neither I nor II
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21. Under the modified accrual basis of accounting for the general fund, expenditures should
be recognized in the period in which the related liability is:
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22. In accounting for governmental funds, which of the following items could appear only on
government-wide financial statements?
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A. I only
B. I and II
C. I and III
D. I, II, III
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Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
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23. The general fund of Hatteras acquired a fire truck during the fiscal year ended June 30,
2009. The purchase order for the fire truck was recorded on February 15, 2009. Hatteras'
acquisition of the fire truck required which of the following sequences of accounting
activities?
I. Appropriation
II. Encumbrance
III. Expenditure
A. II, I, III.
B. I, III, II.
C. III, II, I.
D. I, II, III.
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24. Blue Ridge Township uses the consumption method of accounting for its inventory of
supplies. On the December 31, 2007 balance sheet for the general fund, the township reported
$10,000 of supplies inventory. During 2008, expenditures for supplies amounted to $40,000,
and, at December 31, 2008, unused supplies totalled $7,000. In the adjusting entry for
supplies at December 31, 2008,
A. Expenditures should be credited for $3,000.
B. Expenditures should be debited for $3,000.
C. Fund Balance-Reserved for Inventories should be debited for $7,000.
D. Fund Balance-Reserved for Inventories should be credited for $7,000.
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C
Gotham City acquires $25,000 of inventory on November 1, 2007, having held no inventory
previously. On December 31, 2007, the end of Gotham City's fiscal year, a physical count
shows $8,000 still in stock. During 2008, $6,500 of this inventory is used, resulting in a
$1,500 remaining balance of supplies on December 31, 2008.
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Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
25. Based on the preceding information, which of the following would be the correct account
balances for 2007 if Gotham City used the purchase method of accounting for inventories?
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A. Option A
B. Option B
C. Option C
D. Option D
C
A. Option A
B. Option B
C. Option C
D. Option D
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26. Based on the preceding information, which of the following would be the correct account
balances for 2008 if Gotham City used the purchase method of accounting for inventories?
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27. Based on the preceding information, which of the following would be the correct account
balances for 2007 if Gotham City used the consumption method of accounting for
inventories?
A. Option A
B. Option B
C. Option C
D. Option D
17-8
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
28. Based on the preceding information, which of the following would be the correct account
balances for 2008 if Gotham City used the consumption method of accounting for
inventories?
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A. Option A
B. Option B
C. Option C
D. Option D
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A. I, II, III, VI.
B. I, II, IV.
C. I, IV, V, VI.
D. III, IV, V.
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29. Which of the following accounts are debited when closing entries are made for the general
fund (assume outstanding encumbrances lapse at year-end)?
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30. The general fund of the City of Columbia transferred money to establish an internal
service fund for the city's data processing needs. The general fund of Columbia should
account for this transaction as a(n):
A. expenditure.
B. interfund transfer.
C. interfund reimbursement.
D. loan.
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Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
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31. In a town's general fund operating budget for the year, the amount of its estimated
revenues exceeded the amount of its appropriations. This excess should be:
A. credited to Budgetary Fund Balance-Unreserved.
B. debited to Budgetary Fund Balance-Unreserved.
C. credited to Fund Balance-Unreserved.
D. debited to Fund Balance-Unreserved.
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32. The general fund of the Town of Dean levied property taxes of $3,000,000 for the fiscal
year beginning on January 1, 2008. It was estimated that 1% of the levy would be
uncollectible. During the period January 1, 2008, through December 31, 2008, $2,960,000 of
the property tax levy was collected. At December 31, 2008, Dean estimated that $10,000 of
property taxes levied in 2008 would be collected during the first 60 days of 2009. What
amount of property tax revenue should be reported by the general fund for the year ended
December 31, 2008?
A. $2,960,000
B. $3,000,000
C. $2,970,000
D. $2,990,000
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C
33. The general fund of the City of Atlanta received a check for $10,000 from an Atlanta
resident on July 1, 2008. Of the amount received, $4,800 represented full payment of property
taxes for 2008, and the remaining $5,200 represented an advance payment for property taxes
of 2009. On July 1, 2008, the general fund should record the receipt by debiting Cash for
$10,000 and by crediting
A. Revenue-Property Tax for $10,000.
B. Property Taxes Receivable-Current for $4,800 and Deferred Revenue for $5,200.
C. Revenue-Property Tax for $4,800 and Deferred Revenue for $5,200.
D. Property Taxes Receivable-Current for $4,800 and Revenue- Property Tax for $5,200.
17-10
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
34. The general fund of Caldwell had the following operating budget for the fiscal year
beginning July 1, 2009:
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When the general fund records its operating budget on July 1, 2009, Budgetary Fund BalanceUnreserved should be
A. credited for $600,000.
B. debited for $900,000.
C. debited for $600,000.
D. credited for $900,000.
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35. The general fund of Richmond was billed $22,000 on August 15, 2008, for using the
services of one of its internal service funds (ISF). What accounts should be debited and
credited, respectively, in the general fund on August 15, 2008, to record this transaction?
A. Expenditures and Transfer Out to ISF
B. Expenditures and Due to ISF
C. Encumbrances and Due to ISF
D. Encumbrances and Transfer Out to ISF
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36. The general fund of Battle Creek budgeted a transfer to its capital projects fund for
$110,000 to be used in operations during the year ended June 20, 2009. On September 15,
2008, the general fund transferred $110,000 to the capital projects fund. What account should
be debited in the general fund on September 15 to record this transfer?
A. Appropriations
B. Expenditures
C. Budgetary Fund Balance—Reserved For Encumbrances
D. Other Financing Uses—Transfer Out to Capital Projects Fund
37. The general fund of Sun City was billed $7,000 for using the services of one of its internal
service funds. The general fund should account for this transaction as a(n)
A. interfund transfer.
B. interfund loan.
C. interfund service.
D. interfund reimbursement for services rendered.
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Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
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38. The general fund of Athens ordered computer equipment on December 1, 2008, for
$32,000. The order was appropriately encumbered on this date. Athens received the computer
equipment on January 25, 2009, and issued a voucher to pay the vendor $32,400. Athens uses
the calendar year for reporting, and all outstanding encumbrances lapse at year-end. Athens'
governing board honors all outstanding encumbrances by including them in the following
year's appropriations. On January 25, 2009, the general fund of Athens should debit:
A. Encumbrances for $32,000.
B. Fund Balance-Reserved for Encumbrances for $32,400.
C. Expenditures-2008 for $32,400.
D. Expenditures for $32,400.
PA
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39. The general fund of Loveland ordered a new fire truck on November 12, 2008, for
$150,000. The order was appropriately encumbered on this date. Loveland received the fire
truck on January 15, 2009, and issued a voucher to the manufacturer for $148,600. Loveland
uses the calendar year for reporting, and outstanding encumbrances at December 31, 2008, are
lapsing. On January 15, 2009, the general fund of Loveland should debit:
A. Fund Balance-Reserved for Encumbrances for $148,600.
B. Expenditures for $148,600.
C. Expenditures-2008 for $148,600.
D. Encumbrances for $148,600.
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40. Which combination of fund and measurement basis is correct?
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A. Option A
B. Option B
C. Option C
D. Option D
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Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
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41. The general fund of Wold Township ordered office furniture for the mayor's office on
August 1, 2008. The office furniture was estimated to cost $12,000. The office furniture was
received on September 1, 2008, with the actual cost being $11,800. Which of the following
accounts decreased on September 1, 2008?
A. Encumbrances only.
B. Expenditures only.
C. Encumbrances and Budgetary Fund Balance-Reserved for Encumbrances.
D. Expenditures and Budgetary Fund Balance-Reserved for Encumbrances.
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42. At the end of the fiscal year, uncollected property taxes in the general fund should be:
A. reclassified from current to delinquent.
B. written off as uncollectible.
C. charged against unreserved fund balance.
D. reclassified from current to noncurrent.
C
PA
43. The Town of Baker reported the following items on the June 30, 2009, balance sheet of its
general fund:
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At June 30, 2009, what amount should be reported for Fund Balance-Unreserved?
A. $46,000
B. $40,000
C. $30,000
D. $16,000
44. Which of the financial statements described below is prepared by the general fund of a
state or local government?
A. A statement of cash flows.
B. An income statement.
C. A statement of revenues, expenses, and changes in retained earnings.
D. A statement of revenues, expenditures, and changes in fund balance.
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Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
45. Which accounts described below would have non-zero balances after the accounts are
closed in the general fund of a state or local government?
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A. I, II, III.
B. I, II, IV.
C. IV, V, VI.
D. III, IV, V.
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46. Due to an error, the general fund of Pueblo did not record an encumbrance for police
equipment which had been ordered but not received on June 30, 2009, the end of its fiscal
year. Pueblo's outstanding encumbrances at year-end are nonlapsing. What was the effect of
this error on the balance sheet of Pueblo's general fund?
A. Assets are overstated.
B. Liabilities are understated.
C. Total fund balance is overstated.
D. Unreserved fund balance is overstated.
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C
47. In a statement of revenues, expenditures, and changes in fund balance, the unreserved
fund balance will be increased by:
I. a decrease in the fund balance reserved for inventories.
II. an excess of other financing sources over other financing uses.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
48. Assuming there is a budget surplus, which of the following accounts are credited when the
general fund records its operating budget at the beginning of the year?
A. Appropriations Control and Budgetary Fund Balance—Unreserved.
B. Estimated Revenues Control and Estimated Residual Equity Transfer Out.
C. Budgetary Fund Balance—Reserved For Encumbrances and Expenditures.
D. Estimated Residual Equity Transfer Out and Estimated Transfer In.
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Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
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49. Revenues from parking meters and parking fines should be reported in the general fund
when:
A. received.
B. measurable and available.
C. measurable and earned.
D. available.
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50. The general fund of Gillette levied property taxes of $400,000 on November 1, 2008.
However, the property taxes are not collectible until May and August of 2009. Assume
Gillette reports on the calendar year. On Gillette's general fund balance sheet at December 31,
2008, the property taxes levied on November 1 should:
A. be reported as an asset and as a decrease in unreserved fund balance.
B. be reported as an asset and as an increase in unreserved fund balance.
C. be reported as an asset and as a reservation of fund balance.
D. be reported as an asset and as a deferred revenue.
C
PA
51. Which of the following items should not be included as revenue for a state government?
A. Property taxes levied in the current fiscal year.
B. Private property for which a state takes custody when the legal owner cannot be found.
C. Amounts received from other financing sources.
D. Fines and licensing fees for which amounts cannot be budgeted.
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52. GASB 31 "Accounting for Financial Reporting for Certain Investments and for External
Reporting Investment Pools," establishes a general rule that government entities value
investments in option contracts, open-ended mutual funds, and debt securities for balance
sheet presentation at:
A. lower of cost or market.
B. fair value.
C. cost.
D. amortized cost.
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Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
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53. All of the following funds have a financial resources measurement focus with the
exception of which fund?
A. debt service fund
B. special revenue fund
C. capital projects fund
D. private-purpose trust fund
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54. When an internal service fund (ISF) enters into a capital lease the transaction is recorded
in the:
I. fixed assets of the ISF.
II. long-term debt of the ISF.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
C
PA
55. Which of the following items is not recognized as revenue by a governmental unit?
A. sales tax proceeds
B. property tax levies
C. bond proceeds
D. grants received from other governmental units
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56. GASB 34 established four types of interfund activities. Interfund activities are recognized
as revenue in a governmental fund for an:
A. Option A
B. Option B
C. Option C
D. Option D
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Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
57. The general ledger of Broadway contains the following selected account balances:
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Broadway wants to order additional goods and services before the fiscal year end. What is the
unencumbered balance of the budget that may be expended by Broadway?
A. $850,000
B. $760,000
C. $180,000
D. $130,000
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58. At any time, the remaining appropriating authority available to the fund managers is equal
to:
A. Appropriations minus Expenditures
B. Appropriations minus (Encumbrances + Expenditures)
C. Appropriations minus (Encumbrances - Expenditures)
D. Appropriations minus Encumbrances
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C
59. Which of the following observations concerning interfund transfers is true?
A. They are expected to be repaid.
B. They are classified as fund revenues or expenditures.
C. The receiving fund recognizes these transfers as revenue.
D. These transfers are classified under "Other Financing Sources or Uses."
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60. According to the latest GASB exposure draft, which of the following is the only
governmental fund type that may report an unassigned fund balance?
A. General fund
B. Special revenue fund
C. Capital projects fund
D. Permanent fund
17-17
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
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61. Which governmental fund includes resources that are legally restricted so that the
governmental entity must maintain the principal and can use only the earnings from the fund's
resources to benefit the government's programs for all of its citizens?
A. General fund
B. Special revenue fund
C. Capital projects fund
D. Permanent fund
Essay Questions
PA
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62. Briefly discuss the various types of governmental funds and proprietary funds.
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C
63. Discuss major differences between a governmental entity's uses of the modified accrual
method and a for-profit corporation's use of the accrual method.
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Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
64. The town of Stow was incorporated and began governmental operations on July 1, 2008.
Stow's transactions and events for the fiscal year ended June 30, 2009, are listed below. Stow
uses the consumption method of accounting for purchases of supplies. Encumbrances do not
lapse at year end.
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Required:
Prepare the journal entry (ies) required in the general fund for each of the following
transactions or events.
a. The town budget was approved, providing for revenues of $800,000, a $40,000 transfer to
establish an internal service fund (ISF), and expenditures of $750,000.
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b. Property taxes were levied in the amount of $700,000, with 4 percent of the total estimated
to be uncollectible.
c. Purchase orders were issued in the amount of $90,000 for equipment, and $635,000 for
other goods and services.
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d. Collections for fines and licenses totaled $99,000 for the year.
PA
e. Property taxes collected amounted to $680,000; the balance was reclassified as delinquent,
and the allowance for uncollectible taxes was reduced to $15,000.
f. The equipment ordered was received, and a voucher was issued for the final invoice cost of
$91,000.
C
g. All but $12,000 of the other goods and services ordered was received. Vouchers were
issued for the invoice cost of $622,000.
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h. All but $10,000 of the vouchers issued during the year was paid.
i. A transfer in the amount of $40,000 was made to establish an internal service fund for the
town. The general fund received services of $7,000 from the internal service fund during the
year, with $2,000 remaining unpaid at year end.
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j. Expenditures recorded for the year included the purchase of supplies. The estimated balance
of supplies on hand at year end was $2,000.
k. A reserve was established at year end for the outstanding encumbrances, all of which will
be honored in the next fiscal year.
l. Closing entries were made.
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Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
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PA
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65. Accounting processes differ between a for-profit entity and a governmental entity. Discuss
three differences between a governmental entity and a for-profit entity.
17-20
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
PA
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66. The adjusted trial balance for White River for the fiscal year ended June 30, 2009, is
presented below.
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Required:
a. Prepare a statement of revenues, expenditures, and changed in fund balance for White River
for the year ended June 30, 2009. Assume there were no supplies or outstanding
encumbrances at the beginning of the year.
b. Prepare a balance sheet for White River at June 30, 2009.
Chapter 17 Governmental Entities: Introduction and General Fund Accounting
Answer Key
17-21
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
Multiple Choice Questions
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1. Under the modified accrual basis of accounting, revenue should be recognized when it is:
A. measurable and earned.
B. received in cash.
C. available and earned.
D. measurable and available.
AACSB: Reflective Thinking
AICPA: Decision Making
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2. Which of the following statements is(are) correct about the funds used by governmental
entities?
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AACSB: Reflective Thinking
AICPA: Decision Making
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A. I only
B. II only
C. I and II
D. Neither I nor II
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3. Which of the following funds should use the accrual basis of accounting?
A. Enterprise and private-purpose trust funds.
B. Permanent funds and internal service funds.
C. Debt service and agency funds.
D. Special revenue and capital projects funds.
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AACSB: Reflective Thinking
AICPA: Decision Making
17-22
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
4. Which of the following funds should use the modified accrual basis of accounting?
A. Private-purpose trust and agency funds.
B. Capital projects and special revenue funds.
C. Internal service and enterprise funds.
D. Debt service and private-purpose trust funds.
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AACSB: Reflective Thinking
AICPA: Decision Making
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5. Which of the following funds are classified as fiduciary funds?
A. Agency and Special revenue funds.
B. Internal service and Enterprise funds.
C. Private-purpose trust and Agency funds.
D. Capital projects and Debt service funds.
AACSB: Reflective Thinking
AICPA: Decision Making
C
PA
6. Which of the following funds are classified as proprietary funds?
A. Agency and special revenue funds.
B. Enterprise and internal service funds.
C. Debt service and capital projects funds.
D. Agency and pension trust funds.
EO
AACSB: Reflective Thinking
AICPA: Decision Making
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7. Which of the following funds are classified as governmental funds?
A. Internal service and capital projects funds.
B. Internal service and debt service funds.
C. Enterprise and agency funds.
D. The general and special revenue funds.
AACSB: Reflective Thinking
AICPA: Decision Making
17-23
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
8. Which organization has the authority to establish generally accepted accounting principles
for state and local government entities?
A. The National Council on Governmental Accounting
B. The Governmental Accounting Standards Board
C. The Financial Accounting Standards Board
D. The Municipal Officers Finance Organization
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AACSB: Reflective Thinking
AICPA: Decision Making
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9. What is the correct sequence in the expenditure process in governmental accounting?
A. Appropriation, Encumbrance, Expenditure, and Disbursement.
B. Encumbrance, Expenditure, Disbursement, and Appropriation.
C. Expenditure, Encumbrance, Disbursement, and Appropriation.
D. Appropriation, Expenditure, Encumbrance, and Disbursement.
PA
AACSB: Reflective Thinking
AICPA: Decision Making
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10. Which of the following observations concerning encumbrances is NOT true?
A. Their purpose is to ensure that the expenditures within a period do not exceed the budgeted
appropriations.
B. They provide a control system and safeguard for governmental unit administrators.
C. They are a unique element of governmental accounting.
D. They are recognized only at the time disbursements are made.
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AACSB: Reflective Thinking
AICPA: Decision Making
17-24
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
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11. The City of Ames uses the consumption method to report its inventory of supplies on its
general fund balance sheet. What account is debited in the general fund when Ames acquires
supplies?
A. Expenditures
B. Inventory of Supplies
C. Supplies Expense
D. Fund Balance-Reserved for Inventories
AACSB: Reflective Thinking
AICPA: Decision Making
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AACSB: Analytic
AICPA: Decision Making
PA
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12. On July 25, 2008, the city of Pullman, which reports on a calendar-year basis, ordered five
police cars at an estimated cost of $200,000. On August 26, 2008, the police cars were
received, and the actual cost amounted to $197,000. Pullman encumbered the appropriation
for police cars in its general fund when the cars were ordered. When the police cars were
received, the general fund of Pullman should:
A. Credit Budgetary Fund Balance Reserved for Encumbrances for $197,000.
B. Debit Encumbrances for $200,000.
C. Debit Expenditures for $197,000.
D. Credit Budgetary Fund Balance Reserved for Expenditures for $200,000.
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Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
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13. What amount should be reported as expenditures for the current fiscal year when
accounting for inventories of supplies under the purchase method and under the consumption
method?
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A. Option A
B. Option B
C. Option C
D. Option D
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AACSB: Reflective Thinking
AICPA: Decision Making
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C
PA
14. The Town of Pasco has no supplies inventory in its general fund on January 1, 2008.
During 2008, Pasco incurred expenditures of $200,000 for the acquisition of supplies. On
December 31, 2008, Pasco's inventory of supplies amounted to $30,000. Assume Pasco uses
the purchase method of accounting for supplies in its general fund and that the village reports
on the calendar year. On December 31, 2008, the general fund of Pasco should credit:
A. Expenditures for $170,000.
B. Fund Balance-Unreserved for $170,000.
C. Fund Balance-Reserved for Inventories for $30,000.
D. Expenditures for $30,000.
AACSB: Reflective Thinking
AICPA: Decision Making
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15. Which of the following funds provides goods and services only to other departments or
agencies of the government on a cost-reimbursement basis?
A. Internal service funds
B. Enterprise funds
C. Special revenue funds
D. The general fund
AACSB: Reflective Thinking
AICPA: Decision Making
17-26
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
16. The following information was obtained from the general fund balance sheet of Lima
Village on June 30, 2009, the close of its fiscal year:
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On June 30, 2009, what was Lima's unreserved fund balance in its general fund?
A. $84,000
B. $44,000
C. $34,000
D. $24,000
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AACSB: Analytic
AICPA: Measurement
C
PA
17. The general fund of Park City acquired computer equipment at a cost of $50,000 on May
18, 2009. To record acquisition of this equipment, the general fund of Park City should debit:
A. expenditures.
B. encumbrances.
C. equipment.
D. vouchers payable.
AACSB: Reflective Thinking
AICPA: Decision Making
R
EO
18. Which of the following characteristics are emphasized in the accounting for state and local
government entities?
I. Revenues should be matched with expenditures to measure success or failure of the
government entity.
II. There is an emphasis on expendability of resources to accomplish objectives of the
governmental entity.
A. I only
B. II only
C. I and II
D. Neither I nor II
AACSB: Reflective Thinking
AICPA: Decision Making
17-27
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
19. Works of art and historical treasures purchased by the general fund should be reported as:
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A. I only.
B. II only.
C. Both I and II
D. Neither I nor II.
AACSB: Reflective Thinking
AICPA: Decision Making
AACSB: Reflective Thinking
AICPA: Decision Making
PA
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20. Identify the legal term that allows the general fund to make expenditures.
A. Exceptions
B. Appropriations
C. Encumbrances
D. Consumption
C
21. Under the modified accrual basis of accounting for the general fund, expenditures should
be recognized in the period in which the related liability is:
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A. I only
B. II only
C. Both I and II
D. Neither I nor II
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AACSB: Reflective Thinking
AICPA: Decision Making
17-28
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
22. In accounting for governmental funds, which of the following items could appear only on
government-wide financial statements?
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A. I only
B. I and II
C. I and III
D. I, II, III
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AACSB: Reflective Thinking
AICPA: Decision Making
C
PA
R
23. The general fund of Hatteras acquired a fire truck during the fiscal year ended June 30,
2009. The purchase order for the fire truck was recorded on February 15, 2009. Hatteras'
acquisition of the fire truck required which of the following sequences of accounting
activities?
I. Appropriation
II. Encumbrance
III. Expenditure
A. II, I, III.
B. I, III, II.
C. III, II, I.
D. I, II, III.
EO
AACSB: Reflective Thinking
AICPA: Decision Making
R
24. Blue Ridge Township uses the consumption method of accounting for its inventory of
supplies. On the December 31, 2007 balance sheet for the general fund, the township reported
$10,000 of supplies inventory. During 2008, expenditures for supplies amounted to $40,000,
and, at December 31, 2008, unused supplies totalled $7,000. In the adjusting entry for
supplies at December 31, 2008,
A. Expenditures should be credited for $3,000.
B. Expenditures should be debited for $3,000.
C. Fund Balance-Reserved for Inventories should be debited for $7,000.
D. Fund Balance-Reserved for Inventories should be credited for $7,000.
AACSB: Analytic
AICPA: Decision Making
17-29
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
Gotham City acquires $25,000 of inventory on November 1, 2007, having held no inventory
previously. On December 31, 2007, the end of Gotham City's fiscal year, a physical count
shows $8,000 still in stock. During 2008, $6,500 of this inventory is used, resulting in a
$1,500 remaining balance of supplies on December 31, 2008.
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25. Based on the preceding information, which of the following would be the correct account
balances for 2007 if Gotham City used the purchase method of accounting for inventories?
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AACSB: Analytic
AICPA: Measurement
R
A. Option A
B. Option B
C. Option C
D. Option D
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C
26. Based on the preceding information, which of the following would be the correct account
balances for 2008 if Gotham City used the purchase method of accounting for inventories?
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A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Analytic
AICPA: Measurement
17-30
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
27. Based on the preceding information, which of the following would be the correct account
balances for 2007 if Gotham City used the consumption method of accounting for
inventories?
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A. Option A
B. Option B
C. Option C
D. Option D
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AACSB: Analytic
AICPA: Measurement
EO
A. Option A
B. Option B
C. Option C
D. Option D
C
PA
28. Based on the preceding information, which of the following would be the correct account
balances for 2008 if Gotham City used the consumption method of accounting for
inventories?
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AACSB: Analytic
AICPA: Measurement
17-31
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
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29. Which of the following accounts are debited when closing entries are made for the general
fund (assume outstanding encumbrances lapse at year-end)?
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A. I, II, III, VI.
B. I, II, IV.
C. I, IV, V, VI.
D. III, IV, V.
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AACSB: Reflective Thinking
AICPA: Decision Making
C
PA
30. The general fund of the City of Columbia transferred money to establish an internal
service fund for the city's data processing needs. The general fund of Columbia should
account for this transaction as a(n):
A. expenditure.
B. interfund transfer.
C. interfund reimbursement.
D. loan.
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AACSB: Reflective Thinking
AICPA: Decision Making
R
31. In a town's general fund operating budget for the year, the amount of its estimated
revenues exceeded the amount of its appropriations. This excess should be:
A. credited to Budgetary Fund Balance-Unreserved.
B. debited to Budgetary Fund Balance-Unreserved.
C. credited to Fund Balance-Unreserved.
D. debited to Fund Balance-Unreserved.
AACSB: Reflective Thinking
AICPA: Decision Making
17-32
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
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32. The general fund of the Town of Dean levied property taxes of $3,000,000 for the fiscal
year beginning on January 1, 2008. It was estimated that 1% of the levy would be
uncollectible. During the period January 1, 2008, through December 31, 2008, $2,960,000 of
the property tax levy was collected. At December 31, 2008, Dean estimated that $10,000 of
property taxes levied in 2008 would be collected during the first 60 days of 2009. What
amount of property tax revenue should be reported by the general fund for the year ended
December 31, 2008?
A. $2,960,000
B. $3,000,000
C. $2,970,000
D. $2,990,000
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AACSB: Analytic
AICPA: Measurement
C
PA
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33. The general fund of the City of Atlanta received a check for $10,000 from an Atlanta
resident on July 1, 2008. Of the amount received, $4,800 represented full payment of property
taxes for 2008, and the remaining $5,200 represented an advance payment for property taxes
of 2009. On July 1, 2008, the general fund should record the receipt by debiting Cash for
$10,000 and by crediting
A. Revenue-Property Tax for $10,000.
B. Property Taxes Receivable-Current for $4,800 and Deferred Revenue for $5,200.
C. Revenue-Property Tax for $4,800 and Deferred Revenue for $5,200.
D. Property Taxes Receivable-Current for $4,800 and Revenue- Property Tax for $5,200.
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AACSB: Analytic
AICPA: Decision Making
17-33
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
34. The general fund of Caldwell had the following operating budget for the fiscal year
beginning July 1, 2009:
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When the general fund records its operating budget on July 1, 2009, Budgetary Fund BalanceUnreserved should be
A. credited for $600,000.
B. debited for $900,000.
C. debited for $600,000.
D. credited for $900,000.
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AACSB: Analytic
AICPA: Decision Making
C
PA
35. The general fund of Richmond was billed $22,000 on August 15, 2008, for using the
services of one of its internal service funds (ISF). What accounts should be debited and
credited, respectively, in the general fund on August 15, 2008, to record this transaction?
A. Expenditures and Transfer Out to ISF
B. Expenditures and Due to ISF
C. Encumbrances and Due to ISF
D. Encumbrances and Transfer Out to ISF
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AACSB: Reflective Thinking
AICPA: Decision Making
R
36. The general fund of Battle Creek budgeted a transfer to its capital projects fund for
$110,000 to be used in operations during the year ended June 20, 2009. On September 15,
2008, the general fund transferred $110,000 to the capital projects fund. What account should
be debited in the general fund on September 15 to record this transfer?
A. Appropriations
B. Expenditures
C. Budgetary Fund Balance—Reserved For Encumbrances
D. Other Financing Uses—Transfer Out to Capital Projects Fund
AACSB: Reflective Thinking
AICPA: Decision Making
17-34
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
37. The general fund of Sun City was billed $7,000 for using the services of one of its internal
service funds. The general fund should account for this transaction as a(n)
A. interfund transfer.
B. interfund loan.
C. interfund service.
D. interfund reimbursement for services rendered.
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AACSB: Reflective Thinking
AICPA: Decision Making
C
AACSB: Analytic
AICPA: Decision Making
PA
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38. The general fund of Athens ordered computer equipment on December 1, 2008, for
$32,000. The order was appropriately encumbered on this date. Athens received the computer
equipment on January 25, 2009, and issued a voucher to pay the vendor $32,400. Athens uses
the calendar year for reporting, and all outstanding encumbrances lapse at year-end. Athens'
governing board honors all outstanding encumbrances by including them in the following
year's appropriations. On January 25, 2009, the general fund of Athens should debit:
A. Encumbrances for $32,000.
B. Fund Balance-Reserved for Encumbrances for $32,400.
C. Expenditures-2008 for $32,400.
D. Expenditures for $32,400.
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39. The general fund of Loveland ordered a new fire truck on November 12, 2008, for
$150,000. The order was appropriately encumbered on this date. Loveland received the fire
truck on January 15, 2009, and issued a voucher to the manufacturer for $148,600. Loveland
uses the calendar year for reporting, and outstanding encumbrances at December 31, 2008, are
lapsing. On January 15, 2009, the general fund of Loveland should debit:
A. Fund Balance-Reserved for Encumbrances for $148,600.
B. Expenditures for $148,600.
C. Expenditures-2008 for $148,600.
D. Encumbrances for $148,600.
AACSB: Reflective Thinking
AICPA: Decision Making
17-35
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
40. Which combination of fund and measurement basis is correct?
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A. Option A
B. Option B
C. Option C
D. Option D
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AACSB: Reflective Thinking
AICPA: Decision Making
C
PA
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41. The general fund of Wold Township ordered office furniture for the mayor's office on
August 1, 2008. The office furniture was estimated to cost $12,000. The office furniture was
received on September 1, 2008, with the actual cost being $11,800. Which of the following
accounts decreased on September 1, 2008?
A. Encumbrances only.
B. Expenditures only.
C. Encumbrances and Budgetary Fund Balance-Reserved for Encumbrances.
D. Expenditures and Budgetary Fund Balance-Reserved for Encumbrances.
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AACSB: Reflective Thinking
AICPA: Decision Making
R
42. At the end of the fiscal year, uncollected property taxes in the general fund should be:
A. reclassified from current to delinquent.
B. written off as uncollectible.
C. charged against unreserved fund balance.
D. reclassified from current to noncurrent.
AACSB: Reflective Thinking
AICPA: Decision Making
17-36
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
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43. The Town of Baker reported the following items on the June 30, 2009, balance sheet of its
general fund:
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At June 30, 2009, what amount should be reported for Fund Balance-Unreserved?
A. $46,000
B. $40,000
C. $30,000
D. $16,000
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AACSB: Analytic
AICPA: Measurement
C
PA
44. Which of the financial statements described below is prepared by the general fund of a
state or local government?
A. A statement of cash flows.
B. An income statement.
C. A statement of revenues, expenses, and changes in retained earnings.
D. A statement of revenues, expenditures, and changes in fund balance.
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AACSB: Reflective Thinking
AICPA: Decision Making
17-37
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
45. Which accounts described below would have non-zero balances after the accounts are
closed in the general fund of a state or local government?
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A. I, II, III.
B. I, II, IV.
C. IV, V, VI.
D. III, IV, V.
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AACSB: Reflective Thinking
AICPA: Decision Making
C
PA
46. Due to an error, the general fund of Pueblo did not record an encumbrance for police
equipment which had been ordered but not received on June 30, 2009, the end of its fiscal
year. Pueblo's outstanding encumbrances at year-end are nonlapsing. What was the effect of
this error on the balance sheet of Pueblo's general fund?
A. Assets are overstated.
B. Liabilities are understated.
C. Total fund balance is overstated.
D. Unreserved fund balance is overstated.
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AACSB: Reflective Thinking
AICPA: Decision Making
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47. In a statement of revenues, expenditures, and changes in fund balance, the unreserved
fund balance will be increased by:
I. a decrease in the fund balance reserved for inventories.
II. an excess of other financing sources over other financing uses.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
AACSB: Reflective Thinking
AICPA: Decision Making
17-38
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
48. Assuming there is a budget surplus, which of the following accounts are credited when the
general fund records its operating budget at the beginning of the year?
A. Appropriations Control and Budgetary Fund Balance—Unreserved.
B. Estimated Revenues Control and Estimated Residual Equity Transfer Out.
C. Budgetary Fund Balance—Reserved For Encumbrances and Expenditures.
D. Estimated Residual Equity Transfer Out and Estimated Transfer In.
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AACSB: Reflective Thinking
AICPA: Decision Making
PA
AACSB: Reflective Thinking
AICPA: Decision Making
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49. Revenues from parking meters and parking fines should be reported in the general fund
when:
A. received.
B. measurable and available.
C. measurable and earned.
D. available.
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C
50. The general fund of Gillette levied property taxes of $400,000 on November 1, 2008.
However, the property taxes are not collectible until May and August of 2009. Assume
Gillette reports on the calendar year. On Gillette's general fund balance sheet at December 31,
2008, the property taxes levied on November 1 should:
A. be reported as an asset and as a decrease in unreserved fund balance.
B. be reported as an asset and as an increase in unreserved fund balance.
C. be reported as an asset and as a reservation of fund balance.
D. be reported as an asset and as a deferred revenue.
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AACSB: Reflective Thinking
AICPA: Decision Making
17-39
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
51. Which of the following items should not be included as revenue for a state government?
A. Property taxes levied in the current fiscal year.
B. Private property for which a state takes custody when the legal owner cannot be found.
C. Amounts received from other financing sources.
D. Fines and licensing fees for which amounts cannot be budgeted.
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AACSB: Reflective Thinking
AICPA: Decision Making
AACSB: Reflective Thinking
AICPA: Decision Making
PA
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52. GASB 31 "Accounting for Financial Reporting for Certain Investments and for External
Reporting Investment Pools," establishes a general rule that government entities value
investments in option contracts, open-ended mutual funds, and debt securities for balance
sheet presentation at:
A. lower of cost or market.
B. fair value.
C. cost.
D. amortized cost.
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C
53. All of the following funds have a financial resources measurement focus with the
exception of which fund?
A. debt service fund
B. special revenue fund
C. capital projects fund
D. private-purpose trust fund
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AACSB: Reflective Thinking
AICPA: Decision Making
17-40
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
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54. When an internal service fund (ISF) enters into a capital lease the transaction is recorded
in the:
I. fixed assets of the ISF.
II. long-term debt of the ISF.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
AACSB: Reflective Thinking
AICPA: Decision Making
AACSB: Reflective Thinking
AICPA: Decision Making
PA
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55. Which of the following items is not recognized as revenue by a governmental unit?
A. sales tax proceeds
B. property tax levies
C. bond proceeds
D. grants received from other governmental units
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C
56. GASB 34 established four types of interfund activities. Interfund activities are recognized
as revenue in a governmental fund for an:
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A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Reflective Thinking
AICPA: Decision Making
17-41
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
57. The general ledger of Broadway contains the following selected account balances:
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Broadway wants to order additional goods and services before the fiscal year end. What is the
unencumbered balance of the budget that may be expended by Broadway?
A. $850,000
B. $760,000
C. $180,000
D. $130,000
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AACSB: Analytic
AICPA: Measurement
C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
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58. At any time, the remaining appropriating authority available to the fund managers is equal
to:
A. Appropriations minus Expenditures
B. Appropriations minus (Encumbrances + Expenditures)
C. Appropriations minus (Encumbrances - Expenditures)
D. Appropriations minus Encumbrances
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59. Which of the following observations concerning interfund transfers is true?
A. They are expected to be repaid.
B. They are classified as fund revenues or expenditures.
C. The receiving fund recognizes these transfers as revenue.
D. These transfers are classified under "Other Financing Sources or Uses."
AACSB: Reflective Thinking
AICPA: Decision Making
17-42
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
60. According to the latest GASB exposure draft, which of the following is the only
governmental fund type that may report an unassigned fund balance?
A. General fund
B. Special revenue fund
C. Capital projects fund
D. Permanent fund
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AACSB: Reflective Thinking
AICPA: Decision Making
AACSB: Reflective Thinking
AICPA: Decision Making
C
Essay Questions
PA
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61. Which governmental fund includes resources that are legally restricted so that the
governmental entity must maintain the principal and can use only the earnings from the fund's
resources to benefit the government's programs for all of its citizens?
A. General fund
B. Special revenue fund
C. Capital projects fund
D. Permanent fund
62. Briefly discuss the various types of governmental funds and proprietary funds.
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Five types of governmental funds are used to provide basic governmental services to the
public. These are: (1) general fund, (2) special revenue funds, (3) capital projects funds, (4)
debt service funds, and (5) permanent funds. The number of governmental funds maintained
by the governmental entity is based on its legal and operating requirements. The five
governmental funds use the current financial resources measurement focus.
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The two types of proprietary funds typically used by governmental entities are (6) enterprise
funds and (7) internal service funds. Some activities of a governmental unit are similar to
those of commercial enterprises. The objective of the governmental unit is to recover its costs
in such operations through a system of user charges. Accounting and reporting for a
proprietary fund are similar to accounting for a commercial operation.
AACSB: Communication
AICPA: Decision Making
17-43
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
63. Discuss major differences between a governmental entity's uses of the modified accrual
method and a for-profit corporation's use of the accrual method.
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The modified accrual method of accounting is used to measure revenues that are available to
finance current expenditures and to measure the expenditures made during the period. The
accrual method is used to measure the revenues and expenses during a period with the
purpose of measuring profitability.
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PA
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AACSB: Communication
AICPA: Critical Thinking
17-44
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
64. The town of Stow was incorporated and began governmental operations on July 1, 2008.
Stow's transactions and events for the fiscal year ended June 30, 2009, are listed below. Stow
uses the consumption method of accounting for purchases of supplies. Encumbrances do not
lapse at year end.
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Required:
Prepare the journal entry (ies) required in the general fund for each of the following
transactions or events.
a. The town budget was approved, providing for revenues of $800,000, a $40,000 transfer to
establish an internal service fund (ISF), and expenditures of $750,000.
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b. Property taxes were levied in the amount of $700,000, with 4 percent of the total estimated
to be uncollectible.
c. Purchase orders were issued in the amount of $90,000 for equipment, and $635,000 for
other goods and services.
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d. Collections for fines and licenses totaled $99,000 for the year.
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e. Property taxes collected amounted to $680,000; the balance was reclassified as delinquent,
and the allowance for uncollectible taxes was reduced to $15,000.
f. The equipment ordered was received, and a voucher was issued for the final invoice cost of
$91,000.
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g. All but $12,000 of the other goods and services ordered was received. Vouchers were
issued for the invoice cost of $622,000.
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h. All but $10,000 of the vouchers issued during the year was paid.
i. A transfer in the amount of $40,000 was made to establish an internal service fund for the
town. The general fund received services of $7,000 from the internal service fund during the
year, with $2,000 remaining unpaid at year end.
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j. Expenditures recorded for the year included the purchase of supplies. The estimated balance
of supplies on hand at year end was $2,000.
k. A reserve was established at year end for the outstanding encumbrances, all of which will
be honored in the next fiscal year.
l. Closing entries were made.
17-45
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PA
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Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
17-46
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PA
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Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
AACSB: Analytic
AICPA: Measurement
17-47
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
65. Accounting processes differ between a for-profit entity and a governmental entity. Discuss
three differences between a governmental entity and a for-profit entity.
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C
AACSB: Communication
AICPA: Decision Making
PA
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The major differences between a governmental entity and a for-profit entity include:
• Governmental accounting must recognize that governmental units collect resources and
make expenditures to fulfil societal needs.
• Except for some proprietary activities such as utilities, governmental entities do not have a
general profit motive.
• Governmental operations have legal authorization for their existence, conduct revenue
raising through the power of taxation, and have mandated expenditures they must make to
provide their services.
• Governmental entities use comprehensive budgetary accounting, which services as a
significant control mechanism and provides the basis for comparing actual operations against
budgeted amounts.
• The primary emphasis in governmental fund accounting is to measure and report on
management's stewardship of the financial resources committed to the objectives of the
governmental unit.
• Governmental entities typically are required to establish separate funds to carry out their
various missions.
• Many fund entities do not record fixed assets or long-term debt in their funds.
17-48
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
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66. The adjusted trial balance for White River for the fiscal year ended June 30, 2009, is
presented below.
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Required:
a. Prepare a statement of revenues, expenditures, and changed in fund balance for White River
for the year ended June 30, 2009. Assume there were no supplies or outstanding
encumbrances at the beginning of the year.
b. Prepare a balance sheet for White River at June 30, 2009.
17-49
Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
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b)
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a)
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Chapter 17 - Governmental Entities: Introduction and General Fund Accounting
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C
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AACSB: Analytic
AICPA: Measurement
17-51
Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
Chapter 18
Governmental Entities: Special Funds and Government-wide Financial
Statements
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Multiple Choice Questions
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Riviera Township reported the following data for its governmental activities for the year
ended June 30, 2009:
C
Additional information available is as follows:
All of the long-term debt was used to acquire capital assets. Cash of $475,000 is restricted for
debt service.
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1. Based on the preceding information, on the statement of net assets prepared at June 30,
2009, what amount should be reported for total net assets?
A. $2,425,000
B. $4,200,000
C. $2,900,000
D. $3,625,000
18-1
Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
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2. Based on the preceding information, on the statement of net assets prepared at June 30,
2009, what amount should be reported for net assets invested in capital assets, net of related
debt?
A. $4,200,000
B. $2,900,000
C. $2,825,000
D. $3,300,000
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3. Based on the preceding information, on the statement of net assets prepared at June 30,
2009, what amount should be reported for net assets, unrestricted?
A. $425,000
B. $900,000
C. $525,000
D. $825,000
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A. I only
B. II only
C. I and III only
D. I, II, and III
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4. Which of the following funds use the accrual basis of accounting?
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5. A special revenue fund should be used in which of the following situations for a state
government?
A. For sales taxes which are to be distributed to towns, cities, villages, etc. of the state.
B. For the proceeds of general obligation bonds which are to be used to construct major longlived fixed assets.
C. For gasoline taxes which are to be used exclusively to repair state roads and bridges.
D. For investments donated by a prominent citizen which are to be invested permanently, with
income being used to support homeless people.
18-2
Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
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6. For which of the following funds are the principles and accounting most like those of the
general fund?
A. Debt service fund
B. Internal service fund
C. Special revenue fund
D. Investment trust fund
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7. Which of the following items would not be reported on the financial statements of a special
revenue fund?
A. Long-term productive assets.
B. Expenditures and revenues.
C. Vouchers payable and unreserved fund balance.
D. Fund balance reserved for encumbrances and expenditures.
C
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8. A city's museum is supported by a special tax levy and by user charges. The user charges
constitute only 10 percent of the resources needed to support the operations of the museum. In
which fund should the city account for its museum?
A. An enterprise fund
B. An agency fund
C. An expendable trust fund
D. A special revenue fund
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9. A tax collection fund that collects property taxes and then distributes them to local
governmental units is an example of a(n):
A. trust fund.
B. agency fund.
C. internal service fund.
D. permanent fund.
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10. Ponca City issued general obligation bonds to finance construction of a new city hall. In
the city hall capital projects fund, the proceeds of the general obligation bonds should be
credited to:
A. Revenue-General Obligation Bonds.
B. General Obligation Bonds Payable.
C. Deferred Revenue-General Obligation Bonds.
D. Other Financing Sources-Bond Issue Proceeds.
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11. The City of Fargo issued general obligation bonds to finance construction of a new fire
station. The bonds were issued at a premium. In the fire station capital projects fund, the
premium should be transferred to:
A. an agency fund.
B. a special revenue fund.
C. a debt service fund.
D. an expendable trust fund.
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12. The City of Fargo issued general obligation bonds to finance construction of a new fire
station. The bonds were issued at a discount. Which of the following is true?
I. The amount expended for the improvement must be decreased.
II. The general fund must make up the difference to the face value of the bonds.
III. A debt service fund must make up the difference to the face value of the bonds.
A. I only
B. Either I or III
C. Either II or III
D. Either I or II
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13. The costs of a building being constructed by a capital projects fund should be debited, or
charged, to which of the following accounts in the capital projects fund?
A. Expenditures.
B. Building.
C. Construction in Progress.
D. Other Financing Uses.
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14. When a capital projects fund transfers a premium from the issuance of general obligation
bonds to another fund, the transfer should be accounted for as which type of interfund
transaction or transfer?
A. As a loan.
B. As an interfund transfer.
C. As revenue.
D. As a reimbursement.
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15. A debt service fund for the City of Madison received $50,000 from a capital projects fund.
The amount received represented the premium received from the issuance of general
obligation bonds. What account should the debt service fund credit to record this receipt?
A. Revenue-General Obligation Bond Premium.
B. Matured Bonds Payable.
C. Other Financing Sources—Transfer In from Capital Projects Fund.
D. Due to Capital Projects Fund.
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16. Upon completion of construction, and full payment of all construction costs in a capital
projects fund, the entry to record the transfer of any remaining cash should include a debit to:
I. Contract Payable-Retained Percentage.
II. Transfer Out to Debt Service Fund.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
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Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
17. On July 1, 2008, Cleveland established a capital projects fund to construct a new town
hall. Financing for construction came from the following sources:
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Construction of the town hall was completed on June 15, 2009. For the fiscal year ended June
30, 2009, what amount should Cleveland's capital projects fund report for revenues on its
statement of revenues, expenditures, and changes in fund balance?
A. $1,000,000
B. $1,500,000
C. $3,500,000
D. $14,500,000
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18. On the statement of revenues, expenditures, and changes in fund balance for a capital
projects fund, proceeds of general obligation bonds should be reported:
A. in the revenue section of the statement.
B. as a direct addition to the beginning balance of unreserved fund balance.
C. in the other financing sources (uses) section of the statement.
D. as a subtraction from construction expenditures.
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19. The capital projects fund of Hood River completed construction of an addition to its city
hall at a cost of $4,000,000. The city council approved payment of the amount due the general
contractor, less a 10 percent retainage. How should the capital projects fund account for the
10 percent retainage?
I. As a credit of $400,000 to Deferred Revenue-Retained Percentage
II. As a credit for $400,000 to Contracts Payable-Retained Percentage.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
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20. The capital projects fund of Hysham completed construction of a new building. The
building should be reported in the:
I. government-wide statement of net assets.
II. capital projects fund.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
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21. During the fiscal year ended June 30, 2009, the city of Moorhead constructed a new
courthouse which was budgeted to cost $5,000,000. Moorhead used a capital projects fund to
account for the construction activities. In July of 2008, a bid was accepted from Diamond
Construction to build the courthouse for $4,800,000. On June 15, 2009, Diamond completed
construction and submitted a bill to the city for $4,900,000. The city accepted the bill and paid
Diamond all of the amount owed, except for a 10 percentage retainage. On the statement of
revenues, expenditures, and changes in fund balance prepared for the capital projects fund for
the year ended June 30, 2009, expenditures should be reported at
A. $4,900,000.
B. $4,800,000.
C. $4,410,000.
D. $4,320,000.
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22. For which of the following long-term debt obligations would payments not be accounted
for in a debt service fund?
A. Notes and warrants secured by specific tax revenues.
B. Special assessment bonds sold to acquire enterprise fund assets.
C. Notes and warrants.
D. Special assessment bonds may be used to finance capital projects.
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23. A debt service fund of Clifton received $100,000 from its general fund during the fiscal
year ended June 30, 2009. The cash was used to pay matured interest on Clifton's general
obligation bonds, which were issued to finance construction of a new municipal building. On
the statement of revenues, expenditures, and changes in fund balance prepared for the debt
service fund for the year ended June 30, 2009, the amount received from the general fund
should be reported as:
A. revenue.
B. a reduction of expenditures.
C. an other financing source.
D. matured interest payments.
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24. What account is debited in a debt service fund when it records matured interest payable?
I. Interest Expense
II. Expenditures
A. I only
B. II only
C. Either I or II
D. Neither I nor II
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25. On the statement of revenues, expenditures, and changes in fund balance prepared for a
debt service fund, the cash paid to retire matured serial bonds is reported as:
I. expenditures.
II. a direct deduction from unreserved fund balance.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
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26. Arlington has a debt service fund which it uses to pay the principal and interest on its
$2,000,000 of general long-term debt. Interest at 5 percent is due on October 1 and April 1.
On October 1, 2008, and April 1, 2009, Arlington's debt service fund paid $50,000 of interest
due on its bonds. On the balance sheet prepared on June 30, 2009, for Arlington's debt service
fund, interest payable should be reported at:
A. $0.
B. $16,667.
C. $25,000
D. $50,000.
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A. I, II, III
B. II, IV, V
C. I, II, V
D. II, III, IV
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27. Fixed assets and investments are reported in which of the following funds?
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28. On October 15, 2008, an enterprise fund of Blacksburg purchased office supplies at a cost
of $10,000. The inventory of office supplies on hand at the June 30, 2009, fiscal year end was
$4,000. There was no beginning inventory. Blacksburg should make entries that include:
A. debiting Supplies $10,000 at October 15, and debiting Expenses $4,000 on June 30.
B. debiting Expenditures $10,000 at October 15, and debiting Supplies $4,000 at June 30.
C. debiting Supplies $10,000 at October 15, and crediting Supplies $6,000 on June 30.
D. debiting Expenditures $10,000 at October 15, and crediting Expenses $4,000 at June 30.
29. A citizen of York purchased a truck in 2003 for $50,000. On June 10, 2009, she donated
the truck to York. The fair value of the truck on the date of donation was $30,000. How
should York report the truck in its government-wide Statement of Net Assets?
A. Machinery and equipment should be increased $50,000.
B. Machinery and equipment should be increased $30,000.
C. Machinery and equipment should be decreased $20,000.
D. No asset should be reported because no expenditures were made to acquire the truck.
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30. The general fund of Reston acquired computer equipment costing $70,000 during the
fiscal year ended June 30, 2009. Machinery and Equipment should be reported in Reston's
General Fund Balance Sheet and government-wide Statement of Net Assets at June 30, 2009,
as follows:
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A. Option A
B. Option B
C. Option C
D. Option D
C
A. I, II
B. II, III
C. I, IV
D. III, IV
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31. Which of the following funds report fixed assets on their balance sheets?
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32. The town of Decorah issued general obligation serial bonds at par to finance construction
of several new streets in the town. Construction activity was accounted for in a capital
projects fund. On the date the general obligation serial bonds were issued, what account was
credited in Decorah's capital projects fund?
A. Serial Bonds Payable
B. Due to Debt Service Fund
C. Revenues
D. Other Financing Sources-Bond Issue Proceeds
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33. What account should be debited in the debt service fund to recognize an installment
payment currently due on general obligation serial bonds?
I. Matured Bonds Payable.
II. Expenditures-Principal.
A. I
B. II
C. Either I or II
D. Neither I nor II
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34. As of May 30, 2009, the debt service fund of Cody had accumulated $52,000 of assets in a
debt service fund to pay the principal of its currently maturing serial bonds. On June 1, 2009,
$50,000 of serial bonds matured and were paid with the resources accumulated in the debt
service fund. In Cody's debt service fund, Matured Bonds Payable was debited for $50,000
and:
A. Cash was credited for $50,000.
B. Due to General Fund was credited for $50,000.
C. Investments was credited for $50,000.
D. Reserve for Encumbrances was credited for $50,000.
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35. Which of the following financial statements would not be prepared for an enterprise
fund?
A. A statement of cash flows.
B. A statement of revenues, expenses, and changes in fund net assets.
C. A balance sheet.
D. A statement of revenues, expenditures, and changes in fund balance.
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36. The costs of enterprise fund activities are recovered
A. from special tax levies.
B. from federal or state governmental grants.
C. by user charges.
D. by private donations.
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Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
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37. Enterprise and internal service funds should recognize revenues when they are
A. received in cash.
B. available and earned.
C. measurable and earned.
D. measurable and available.
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38. An enterprise fund of Grist was billed $10,000 for using the services of an internal service
fund's data processing center. What account should Grist's enterprise fund debit to record this
billing?
A. Due to Internal Service Fund
B. Expenditures
C. Transfer Out to Internal Service Fund
D. General Operating Expenses
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A. Option A
B. Option B
C. Option C
D. Option D
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39. During the fiscal year ended June 30, 2009, an enterprise fund of St. Cloud acquired
computer equipment costing $110,000 on account and issued $400,000 of long-term bonds.
Revenues of the enterprise fund will be used to repay bond interest and principal. What effect
did these transactions have on St. Cloud's enterprise fund assets and long-term debt?
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Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
40. The following information pertains to Auburn's water and sewer fund, an enterprise fund,
for the year ended June 30, 2009:
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Based upon the information presented, what was the increase in the enterprise funds
unrestricted net assets for the fiscal year ended June 30, 2009?
A. $200,000
B. $240,000
C. $300,000
D. $320,000
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41. Which of the following characteristics best describes an enterprise fund?
A. Capital maintenance, revenues from general public user charges, and net income.
B. Operating budgets, expenditures, and tax revenues from general public.
C. Capital maintenance, revenues from user charges to other funds, and net income.
D. Capital maintenance, tax revenues from general public, and net income.
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42. On the statement of cash flows prepared for an internal service fund, cash received from
customers and cash paid for operating expenses should be reported as
A. investing activities.
B. operating activities.
C. noncapital financing activities.
D. capital and related financing activities.
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43. Carlisle established a motor vehicle service and maintenance fund to service and maintain
all cars and trucks owned by the town. Revenues of the fund will only come from billings to
the funds which use the motor vehicle service and maintenance fund. What type of fund is the
motor vehicle service and maintenance fund?
A. An enterprise fund.
B. A special revenue fund.
C. An expendable trust fund.
D. An internal service fund.
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44. Which of the following fiduciary funds does not require a statement of changes in net
assets?
I. Private-purpose trust fund
II. Agency fund.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
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The City of Warwick received $4,000,000 from one of its most prominent citizens during the
year ended June 30, 2009. The donor stipulated that the $4,000,000 be invested permanently,
and that interest and dividends earned on the investments be used to support the homeless
people of Warwick. During the year ended June 30, 2009, dividends received from stock
investments amounted to $20,000, while interest received from bond investments amounted to
$40,000. At June 30, 2009, $10,000 of interest was earned, but it will not be received until
July of 2009. The fair value of the securities in which the $4,000,000 was invested had
increased $8,000 by June 30, 2009.
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45. Refer to the above information. For the year ended June 30, 2009, what amount should the
trust fund report as investment earnings on the statement of revenues, expenses, and changes
in fund balance?
A. $60,000
B. $68,000
C. $70,000
D. $78,000
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46. Refer to the above information. On the statement of fiduciary net assets at June 30, 2009,
the nonexpendable trust fund should report investments and interest receivable of:
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A. Option A
B. Option B
C. Option C
D. Option D
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47. A trust fund of Bruge City received $100,000 from a donor during the year ended June 30,
2009. During the year ended June 30, 2009, $94,000 of the cash received was used to provide
food and clothing to the city's poor. How should the trust fund report these resource flows on
its statement of changes in fiduciary net assets for the year ended June 30, 2009?
A. As revenues of $100,000 and as expenditures of $94,000.
B. As contributions for $100,000 and as deductions for benefits for $94,000.
C. As revenues of $100,000 and as an operating transfer out for $94,000.
D. As a transfer in from trust fund for $100,000 and as a transfer out for $94,000.
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48. Agency funds report:
A. only assets and liabilities.
B. assets, liabilities, fund balance, revenues, and expenditures.
C. assets, liabilities, and fund balance.
D. only revenues and expenditures.
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49. Government-wide financial statements prepared for a municipality include the following:
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A. Option A
B. Option B
C. Option C
D. Option D
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50. Revenue and expense on a government-wide statement of activities for a municipality
should be measured on a(n)
A. cash basis.
B. modified accrual basis.
C. accrual basis.
D. reconciliation basis.
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Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
51. Required financial statements of funds may include the following, among others:
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The financial statements that should be issued by governmental funds and by proprietary
funds include the following:
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A. Option A
B. Option B
C. Option C
D. Option D
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52. The government-wide financial statements prepared for a municipality should include
assets acquired by the following funds:
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A. Option A
B. Option B
C. Option C
D. Option D
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Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
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53. A budgetary comparison schedule presented as required supplementary information for
the general fund should report variances for the difference between:
I. Original budget amounts and final budget amounts
II. Final budget amounts and actual amounts.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
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54. At June 30, 2009, total assets for the various funds of a local municipality were as
follows:
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Applying GASB 34 criteria, which of the above are major funds for reporting purposes?
A. GF, CPF, EF
B. CPF, EF
C. CPF, ISF, EF
D. GF, CPF, ISF, EF
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55. In accordance with the Single Audit Act of 1984, external auditors issue the standard audit
report on the governmental unit's financial statements and must also issue:
I. a special report on the effectiveness with which the governmental unit is achieving its social
objectives.
II. a special report on the governmental unit's internal control system.
III. a special report on the governmental unit's compliance with laws and regulations.
A. I only
B. I and II
C. II and III
D. I, II, and III
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Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
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56. GASB 34 specifies two criteria for determining major governmental funds to be reported
separately in the Governmental Fund Balance Sheet and Statement of Revenues,
Expenditures, and Changes in Fund Balances. To be considered a major governmental fund, a
fund must:
A. meet at least one criterion.
B. be the general fund or meet at least one criterion.
C. be the general fund or meet two criteria.
D. either A or C.
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An internal service fund had the following transactions during the year ended June 30, 2009,
its first year of existence:
(1) Received $1,000,000 contribution from the general fund.
(2) Acquired fleet of cars for $950,000, paying cash.
(3) Billed departments in other funds $500,000 for using cars.
(4) Incurred operating costs, exclusive of depreciation, of $240,000.
(5) Depreciation expense amounted to $250,000.
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57. Refer to the above information. On the internal service fund's balance sheet on June 30,
2009, total net assets should be reported at:
A. $1,000,000.
B. $1,010,000.
C. $1,250,000.
D. $910,000.
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58. Refer to the above information. On the internal service fund's balance sheet at June 30,
2009, net assets-unrestricted should be reported at:
A. $260,000.
B. $310,000.
C. $550,000.
D. $1,250,000.
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Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
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59. The statement of changes in fiduciary net assets includes all of the following except:
A. employee benefit trust funds.
B. investment trust funds.
C. private-purpose trust funds.
D. agency funds.
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60. Which presentation method combines the component unit's results into the primary
government's financial results?
A. Blended presentation
B. Discrete presentation
C. Combined presentation
D. Consolidated presentation
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Essay Questions
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Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
61. Newport Village was recently incorporated and began financial operations on January 1,
2008, the beginning of its fiscal year. The following transactions occurred during this first
fiscal year, January 1, 2008, to December 31, 2008:
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1. The village council adopted a budget for general operations for the fiscal year ending
December 31, 2008. Revenue was estimated at $650,000. Legal authorizations for budgeted
expenditures totaled $620,000.
2. Property taxes were levied in the amount of $630,000; 3 percent of this amount was
estimated to prove uncollectible. These taxes are available as of the date of levy to finance
current expenditures.
3. During the year, a village resident donated marketable securities valued at $75,000 to the
village under the terms of a trust agreement which stipulates that the principal amount be kept
intact. The revenue generated by the securities is restricted to providing support to the village
library. Revenue earned and received on these amounted to $3,000 through December 31,
2008.
4. A general fund transfer of $8,000 was made to establish an internal service fund to provide
for a permanent investment in inventory.
5. The village decided to construct a small recreation facility through a special assessment
project authorized to do so at a cost of $100,000. The city is obligated if the property owners
default on their special assessments. Special assessment bonds were issued in the amount of
$90,000, and the first year's special assessment of $22,500 was levied against the village's
property owners. The remaining $10,000 for the project will be contributed from the village's
general fund.
6. The special assessments for the lighting project are due over a four-year period, and the
first year's assessments of $22,500 were collected. The $10,000 transfer from the village's
general fund was received by the lighting capital projects fund.
7. A contract for $100,000 was let for the installation of the lighting. The capital projects fund
was encumbered for the contract. On December, 2008, the contract was completed and the
contractor was paid.
8. During the year, the internal service fund purchased various supplies at a cost of $3,000.
9. Current property taxes collected during the year was $615,000. Licenses and permit fees
collected amounted to $15,000. The allowance for estimated uncollectible taxes is adjusted to
$15,000.
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Required:
Prepare journal entries to record each of these transactions in the appropriate fund or funds of
Newport Village for the fiscal year ended December 31, 2008. Use the following funds:
general fund, capital projects fund, internal service fund, and private-purpose trust fund.
Closing entries are not required. Organize your answer using the following format:
Fund Journal Entry
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62. The City of Edmond established a capital projects fund for the construction of a reading
room for the City Library. The estimated cost of the construction is $300,000. On January 1,
2008, an 8 percent, $200,000 bond issue was sold at 102. At that date, the county board
provided a $100,000 grant. On March 3, 2008, the premium from issuance of the bonds was
transferred to the debt service fund established to repay the bond principal and interest. On
March 1, 2008, a general contractor's bid was accepted to construct the facility at a cost of
$270,000. The construction was completed on October 5, 2008; its actual cost was $285,000.
The city council approved payment of the total actual cost of $285,000. In addition to the
$285,000, $9,000 was spent to make the facility ready for use. On November 3, 2008, the city
council gave the final approval for both these payments. After all bills were paid, the
remaining fund balance was transferred to the debt service fund.
Required
a. Prepare entries for the capital projects fund for 2008.
b. Prepare a statement of revenues, expenditures, and changes in fund balance for 2008 for the
capital projects fund.
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Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
63. Akron established an internal service fund for its data processing activities on July 1,
2008. During the fiscal year ended June 30, 2009, the following transactions and events
occurred:
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1) On July 1, 2008, the city council authorized the general fund to contribute $1,000,000 to
help establish the internal service fund on July 20, 2008.
2) The internal service fund spent $900,000 of the contribution to acquire a mainframe
computer on July 25, 2008.
3) During the year ended June 30, 2009, the internal service billed other funds of the city
$300,000 for use of the computer. By year end, all of the billings were collected except for
$30,000.
4) The internal service fund incurred general operating expenses of $100,000, exclusive of
depreciation, during the year ended June 30, 2009. All of the expenses were paid by June 30,
2009, except for $24,000.
5) Depreciation expense related to the computer was $180,000.
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Required:
A) Prepare all journal entries that would be recorded by Akron's internal service fund for the
year ended June 30, 2009. Explanations for journal entries are not necessary.
B) Prepare a statement of revenues, expenses, and changes in fund net assets for the internal
service fund for the year ended June 30, 2009.
C) Calculate the amount of unrestricted net assets at June 30, 2009.
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64. Required: For each transaction described below for the current fiscal year of the Town of
Golden, use an "x" to indicate the fund(s) in which a journal entry should appear, and whether
separate information should be kept for General Long Term Debt or General Fixed Assets.
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Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
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65. Prior to closing the accounts at the end of the most recent fiscal year, the Town of Sonora
reports the following amounts (in thousands):
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Required:
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Applying the criteria specified in GASB 34, determine which of the above funds should be
classified as major funds for reporting purposes.
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66. GASB 34 requires a Reconciliation schedule for the Statement of Net Assets. What does
this schedule document?
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Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
Chapter 18 Governmental Entities: Special Funds and Government-wide
Financial Statements Answer Key
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Multiple Choice Questions
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Riviera Township reported the following data for its governmental activities for the year
ended June 30, 2009:
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Additional information available is as follows:
All of the long-term debt was used to acquire capital assets. Cash of $475,000 is restricted for
debt service.
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1. Based on the preceding information, on the statement of net assets prepared at June 30,
2009, what amount should be reported for total net assets?
A. $2,425,000
B. $4,200,000
C. $2,900,000
D. $3,625,000
AACSB: Analytic
AICPA: Measurement
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Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
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2. Based on the preceding information, on the statement of net assets prepared at June 30,
2009, what amount should be reported for net assets invested in capital assets, net of related
debt?
A. $4,200,000
B. $2,900,000
C. $2,825,000
D. $3,300,000
AACSB: Analytic
AICPA: Measurement
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3. Based on the preceding information, on the statement of net assets prepared at June 30,
2009, what amount should be reported for net assets, unrestricted?
A. $425,000
B. $900,000
C. $525,000
D. $825,000
AACSB: Analytic
AICPA: Measurement
C
4. Which of the following funds use the accrual basis of accounting?
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A. I only
B. II only
C. I and III only
D. I, II, and III
AACSB: Reflective Thinking
AICPA: Decision Making
18-27
Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
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5. A special revenue fund should be used in which of the following situations for a state
government?
A. For sales taxes which are to be distributed to towns, cities, villages, etc. of the state.
B. For the proceeds of general obligation bonds which are to be used to construct major longlived fixed assets.
C. For gasoline taxes which are to be used exclusively to repair state roads and bridges.
D. For investments donated by a prominent citizen which are to be invested permanently, with
income being used to support homeless people.
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AACSB: Reflective Thinking
AICPA: Decision Making
AACSB: Reflective Thinking
AICPA: Decision Making
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6. For which of the following funds are the principles and accounting most like those of the
general fund?
A. Debt service fund
B. Internal service fund
C. Special revenue fund
D. Investment trust fund
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C
7. Which of the following items would not be reported on the financial statements of a special
revenue fund?
A. Long-term productive assets.
B. Expenditures and revenues.
C. Vouchers payable and unreserved fund balance.
D. Fund balance reserved for encumbrances and expenditures.
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AACSB: Reflective Thinking
AICPA: Decision Making
18-28
Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
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8. A city's museum is supported by a special tax levy and by user charges. The user charges
constitute only 10 percent of the resources needed to support the operations of the museum. In
which fund should the city account for its museum?
A. An enterprise fund
B. An agency fund
C. An expendable trust fund
D. A special revenue fund
AACSB: Reflective Thinking
AICPA: Decision Making
AACSB: Reflective Thinking
AICPA: Decision Making
PA
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9. A tax collection fund that collects property taxes and then distributes them to local
governmental units is an example of a(n):
A. trust fund.
B. agency fund.
C. internal service fund.
D. permanent fund.
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C
10. Ponca City issued general obligation bonds to finance construction of a new city hall. In
the city hall capital projects fund, the proceeds of the general obligation bonds should be
credited to:
A. Revenue-General Obligation Bonds.
B. General Obligation Bonds Payable.
C. Deferred Revenue-General Obligation Bonds.
D. Other Financing Sources-Bond Issue Proceeds.
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AACSB: Reflective Thinking
AICPA: Decision Making
18-29
Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
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11. The City of Fargo issued general obligation bonds to finance construction of a new fire
station. The bonds were issued at a premium. In the fire station capital projects fund, the
premium should be transferred to:
A. an agency fund.
B. a special revenue fund.
C. a debt service fund.
D. an expendable trust fund.
AACSB: Reflective Thinking
AICPA: Decision Making
C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
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12. The City of Fargo issued general obligation bonds to finance construction of a new fire
station. The bonds were issued at a discount. Which of the following is true?
I. The amount expended for the improvement must be decreased.
II. The general fund must make up the difference to the face value of the bonds.
III. A debt service fund must make up the difference to the face value of the bonds.
A. I only
B. Either I or III
C. Either II or III
D. Either I or II
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13. The costs of a building being constructed by a capital projects fund should be debited, or
charged, to which of the following accounts in the capital projects fund?
A. Expenditures.
B. Building.
C. Construction in Progress.
D. Other Financing Uses.
AACSB: Reflective Thinking
AICPA: Decision Making
18-30
Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
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14. When a capital projects fund transfers a premium from the issuance of general obligation
bonds to another fund, the transfer should be accounted for as which type of interfund
transaction or transfer?
A. As a loan.
B. As an interfund transfer.
C. As revenue.
D. As a reimbursement.
AACSB: Reflective Thinking
AICPA: Decision Making
AACSB: Reflective Thinking
AICPA: Decision Making
PA
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15. A debt service fund for the City of Madison received $50,000 from a capital projects fund.
The amount received represented the premium received from the issuance of general
obligation bonds. What account should the debt service fund credit to record this receipt?
A. Revenue-General Obligation Bond Premium.
B. Matured Bonds Payable.
C. Other Financing Sources—Transfer In from Capital Projects Fund.
D. Due to Capital Projects Fund.
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C
16. Upon completion of construction, and full payment of all construction costs in a capital
projects fund, the entry to record the transfer of any remaining cash should include a debit to:
I. Contract Payable-Retained Percentage.
II. Transfer Out to Debt Service Fund.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
AACSB: Reflective Thinking
AICPA: Decision Making
18-31
Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
17. On July 1, 2008, Cleveland established a capital projects fund to construct a new town
hall. Financing for construction came from the following sources:
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Construction of the town hall was completed on June 15, 2009. For the fiscal year ended June
30, 2009, what amount should Cleveland's capital projects fund report for revenues on its
statement of revenues, expenditures, and changes in fund balance?
A. $1,000,000
B. $1,500,000
C. $3,500,000
D. $14,500,000
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AACSB: Reflective Thinking
AICPA: Decision Making
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18. On the statement of revenues, expenditures, and changes in fund balance for a capital
projects fund, proceeds of general obligation bonds should be reported:
A. in the revenue section of the statement.
B. as a direct addition to the beginning balance of unreserved fund balance.
C. in the other financing sources (uses) section of the statement.
D. as a subtraction from construction expenditures.
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AACSB: Reflective Thinking
AICPA: Decision Making
18-32
Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
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19. The capital projects fund of Hood River completed construction of an addition to its city
hall at a cost of $4,000,000. The city council approved payment of the amount due the general
contractor, less a 10 percent retainage. How should the capital projects fund account for the
10 percent retainage?
I. As a credit of $400,000 to Deferred Revenue-Retained Percentage
II. As a credit for $400,000 to Contracts Payable-Retained Percentage.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
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AACSB: Reflective Thinking
AICPA: Decision Making
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20. The capital projects fund of Hysham completed construction of a new building. The
building should be reported in the:
I. government-wide statement of net assets.
II. capital projects fund.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
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AACSB: Reflective Thinking
AICPA: Decision Making
18-33
Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
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21. During the fiscal year ended June 30, 2009, the city of Moorhead constructed a new
courthouse which was budgeted to cost $5,000,000. Moorhead used a capital projects fund to
account for the construction activities. In July of 2008, a bid was accepted from Diamond
Construction to build the courthouse for $4,800,000. On June 15, 2009, Diamond completed
construction and submitted a bill to the city for $4,900,000. The city accepted the bill and paid
Diamond all of the amount owed, except for a 10 percentage retainage. On the statement of
revenues, expenditures, and changes in fund balance prepared for the capital projects fund for
the year ended June 30, 2009, expenditures should be reported at
A. $4,900,000.
B. $4,800,000.
C. $4,410,000.
D. $4,320,000.
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AACSB: Analytic
AICPA: Measurement
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22. For which of the following long-term debt obligations would payments not be accounted
for in a debt service fund?
A. Notes and warrants secured by specific tax revenues.
B. Special assessment bonds sold to acquire enterprise fund assets.
C. Notes and warrants.
D. Special assessment bonds may be used to finance capital projects.
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AACSB: Reflective Thinking
AICPA: Decision Making
R
23. A debt service fund of Clifton received $100,000 from its general fund during the fiscal
year ended June 30, 2009. The cash was used to pay matured interest on Clifton's general
obligation bonds, which were issued to finance construction of a new municipal building. On
the statement of revenues, expenditures, and changes in fund balance prepared for the debt
service fund for the year ended June 30, 2009, the amount received from the general fund
should be reported as:
A. revenue.
B. a reduction of expenditures.
C. an other financing source.
D. matured interest payments.
AACSB: Reflective Thinking
AICPA: Decision Making
18-34
Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
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24. What account is debited in a debt service fund when it records matured interest payable?
I. Interest Expense
II. Expenditures
A. I only
B. II only
C. Either I or II
D. Neither I nor II
AACSB: Reflective Thinking
AICPA: Decision Making
C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
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25. On the statement of revenues, expenditures, and changes in fund balance prepared for a
debt service fund, the cash paid to retire matured serial bonds is reported as:
I. expenditures.
II. a direct deduction from unreserved fund balance.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
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26. Arlington has a debt service fund which it uses to pay the principal and interest on its
$2,000,000 of general long-term debt. Interest at 5 percent is due on October 1 and April 1.
On October 1, 2008, and April 1, 2009, Arlington's debt service fund paid $50,000 of interest
due on its bonds. On the balance sheet prepared on June 30, 2009, for Arlington's debt service
fund, interest payable should be reported at:
A. $0.
B. $16,667.
C. $25,000
D. $50,000.
AACSB: Analytic
AICPA: Reporting
18-35
Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
27. Fixed assets and investments are reported in which of the following funds?
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A. I, II, III
B. II, IV, V
C. I, II, V
D. II, III, IV
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AACSB: Reflective Thinking
AICPA: Decision Making
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28. On October 15, 2008, an enterprise fund of Blacksburg purchased office supplies at a cost
of $10,000. The inventory of office supplies on hand at the June 30, 2009, fiscal year end was
$4,000. There was no beginning inventory. Blacksburg should make entries that include:
A. debiting Supplies $10,000 at October 15, and debiting Expenses $4,000 on June 30.
B. debiting Expenditures $10,000 at October 15, and debiting Supplies $4,000 at June 30.
C. debiting Supplies $10,000 at October 15, and crediting Supplies $6,000 on June 30.
D. debiting Expenditures $10,000 at October 15, and crediting Expenses $4,000 at June 30.
AACSB: Analytic
AICPA: Decision Making
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29. A citizen of York purchased a truck in 2003 for $50,000. On June 10, 2009, she donated
the truck to York. The fair value of the truck on the date of donation was $30,000. How
should York report the truck in its government-wide Statement of Net Assets?
A. Machinery and equipment should be increased $50,000.
B. Machinery and equipment should be increased $30,000.
C. Machinery and equipment should be decreased $20,000.
D. No asset should be reported because no expenditures were made to acquire the truck.
AACSB: Analytic
AICPA: Decision Making
18-36
Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
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30. The general fund of Reston acquired computer equipment costing $70,000 during the
fiscal year ended June 30, 2009. Machinery and Equipment should be reported in Reston's
General Fund Balance Sheet and government-wide Statement of Net Assets at June 30, 2009,
as follows:
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A. Option A
B. Option B
C. Option C
D. Option D
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AACSB: Reflective Thinking
AICPA: Decision Making
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A. I, II
B. II, III
C. I, IV
D. III, IV
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31. Which of the following funds report fixed assets on their balance sheets?
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AACSB: Reflective Thinking
AICPA: Decision Making
18-37
Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
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32. The town of Decorah issued general obligation serial bonds at par to finance construction
of several new streets in the town. Construction activity was accounted for in a capital
projects fund. On the date the general obligation serial bonds were issued, what account was
credited in Decorah's capital projects fund?
A. Serial Bonds Payable
B. Due to Debt Service Fund
C. Revenues
D. Other Financing Sources-Bond Issue Proceeds
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AACSB: Reflective Thinking
AICPA: Decision Making
C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
R
33. What account should be debited in the debt service fund to recognize an installment
payment currently due on general obligation serial bonds?
I. Matured Bonds Payable.
II. Expenditures-Principal.
A. I
B. II
C. Either I or II
D. Neither I nor II
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34. As of May 30, 2009, the debt service fund of Cody had accumulated $52,000 of assets in a
debt service fund to pay the principal of its currently maturing serial bonds. On June 1, 2009,
$50,000 of serial bonds matured and were paid with the resources accumulated in the debt
service fund. In Cody's debt service fund, Matured Bonds Payable was debited for $50,000
and:
A. Cash was credited for $50,000.
B. Due to General Fund was credited for $50,000.
C. Investments was credited for $50,000.
D. Reserve for Encumbrances was credited for $50,000.
AACSB: Reflective Thinking
AICPA: Decision Making
18-38
Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
AACSB: Reflective Thinking
AICPA: Decision Making
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36. The costs of enterprise fund activities are recovered
A. from special tax levies.
B. from federal or state governmental grants.
C. by user charges.
D. by private donations.
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35. Which of the following financial statements would not be prepared for an enterprise
fund?
A. A statement of cash flows.
B. A statement of revenues, expenses, and changes in fund net assets.
C. A balance sheet.
D. A statement of revenues, expenditures, and changes in fund balance.
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AACSB: Reflective Thinking
AICPA: Decision Making
EO
C
37. Enterprise and internal service funds should recognize revenues when they are
A. received in cash.
B. available and earned.
C. measurable and earned.
D. measurable and available.
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AACSB: Reflective Thinking
AICPA: Decision Making
18-39
Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
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38. An enterprise fund of Grist was billed $10,000 for using the services of an internal service
fund's data processing center. What account should Grist's enterprise fund debit to record this
billing?
A. Due to Internal Service Fund
B. Expenditures
C. Transfer Out to Internal Service Fund
D. General Operating Expenses
AACSB: Reflective Thinking
AICPA: Decision Making
C
A. Option A
B. Option B
C. Option C
D. Option D
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39. During the fiscal year ended June 30, 2009, an enterprise fund of St. Cloud acquired
computer equipment costing $110,000 on account and issued $400,000 of long-term bonds.
Revenues of the enterprise fund will be used to repay bond interest and principal. What effect
did these transactions have on St. Cloud's enterprise fund assets and long-term debt?
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AACSB: Analytic
AICPA: Decision Making
18-40
Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
40. The following information pertains to Auburn's water and sewer fund, an enterprise fund,
for the year ended June 30, 2009:
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Based upon the information presented, what was the increase in the enterprise funds
unrestricted net assets for the fiscal year ended June 30, 2009?
A. $200,000
B. $240,000
C. $300,000
D. $320,000
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AACSB: Analytic
AICPA: Measurement
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41. Which of the following characteristics best describes an enterprise fund?
A. Capital maintenance, revenues from general public user charges, and net income.
B. Operating budgets, expenditures, and tax revenues from general public.
C. Capital maintenance, revenues from user charges to other funds, and net income.
D. Capital maintenance, tax revenues from general public, and net income.
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AACSB: Reflective Thinking
AICPA: Decision Making
R
42. On the statement of cash flows prepared for an internal service fund, cash received from
customers and cash paid for operating expenses should be reported as
A. investing activities.
B. operating activities.
C. noncapital financing activities.
D. capital and related financing activities.
AACSB: Reflective Thinking
AICPA: Decision Making
18-41
Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
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43. Carlisle established a motor vehicle service and maintenance fund to service and maintain
all cars and trucks owned by the town. Revenues of the fund will only come from billings to
the funds which use the motor vehicle service and maintenance fund. What type of fund is the
motor vehicle service and maintenance fund?
A. An enterprise fund.
B. A special revenue fund.
C. An expendable trust fund.
D. An internal service fund.
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AACSB: Reflective Thinking
AICPA: Decision Making
C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
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44. Which of the following fiduciary funds does not require a statement of changes in net
assets?
I. Private-purpose trust fund
II. Agency fund.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
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The City of Warwick received $4,000,000 from one of its most prominent citizens during the
year ended June 30, 2009. The donor stipulated that the $4,000,000 be invested permanently,
and that interest and dividends earned on the investments be used to support the homeless
people of Warwick. During the year ended June 30, 2009, dividends received from stock
investments amounted to $20,000, while interest received from bond investments amounted to
$40,000. At June 30, 2009, $10,000 of interest was earned, but it will not be received until
July of 2009. The fair value of the securities in which the $4,000,000 was invested had
increased $8,000 by June 30, 2009.
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Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
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45. Refer to the above information. For the year ended June 30, 2009, what amount should the
trust fund report as investment earnings on the statement of revenues, expenses, and changes
in fund balance?
A. $60,000
B. $68,000
C. $70,000
D. $78,000
AACSB: Analytic
AICPA: Measurement
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46. Refer to the above information. On the statement of fiduciary net assets at June 30, 2009,
the nonexpendable trust fund should report investments and interest receivable of:
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A. Option A
B. Option B
C. Option C
D. Option D
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AACSB: Analytic
AICPA: Decision Making
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47. A trust fund of Bruge City received $100,000 from a donor during the year ended June 30,
2009. During the year ended June 30, 2009, $94,000 of the cash received was used to provide
food and clothing to the city's poor. How should the trust fund report these resource flows on
its statement of changes in fiduciary net assets for the year ended June 30, 2009?
A. As revenues of $100,000 and as expenditures of $94,000.
B. As contributions for $100,000 and as deductions for benefits for $94,000.
C. As revenues of $100,000 and as an operating transfer out for $94,000.
D. As a transfer in from trust fund for $100,000 and as a transfer out for $94,000.
AACSB: Reflective Thinking
AICPA: Decision Making
18-43
Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
48. Agency funds report:
A. only assets and liabilities.
B. assets, liabilities, fund balance, revenues, and expenditures.
C. assets, liabilities, and fund balance.
D. only revenues and expenditures.
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AACSB: Reflective Thinking
AICPA: Decision Making
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49. Government-wide financial statements prepared for a municipality include the following:
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A. Option A
B. Option B
C. Option C
D. Option D
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AACSB: Reflective Thinking
AICPA: Decision Making
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50. Revenue and expense on a government-wide statement of activities for a municipality
should be measured on a(n)
A. cash basis.
B. modified accrual basis.
C. accrual basis.
D. reconciliation basis.
AACSB: Reflective Thinking
AICPA: Decision Making
18-44
Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
51. Required financial statements of funds may include the following, among others:
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The financial statements that should be issued by governmental funds and by proprietary
funds include the following:
AACSB: Reflective Thinking
AICPA: Decision Making
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A. Option A
B. Option B
C. Option C
D. Option D
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C
52. The government-wide financial statements prepared for a municipality should include
assets acquired by the following funds:
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A. Option A
B. Option B
C. Option C
D. Option D
AACSB: Reflective Thinking
AICPA: Decision Making
18-45
Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
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53. A budgetary comparison schedule presented as required supplementary information for
the general fund should report variances for the difference between:
I. Original budget amounts and final budget amounts
II. Final budget amounts and actual amounts.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
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AACSB: Reflective Thinking
AICPA: Decision Making
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54. At June 30, 2009, total assets for the various funds of a local municipality were as
follows:
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Applying GASB 34 criteria, which of the above are major funds for reporting purposes?
A. GF, CPF, EF
B. CPF, EF
C. CPF, ISF, EF
D. GF, CPF, ISF, EF
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AACSB: Reflective Thinking
AICPA: Decision Making
18-46
Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
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55. In accordance with the Single Audit Act of 1984, external auditors issue the standard audit
report on the governmental unit's financial statements and must also issue:
I. a special report on the effectiveness with which the governmental unit is achieving its social
objectives.
II. a special report on the governmental unit's internal control system.
III. a special report on the governmental unit's compliance with laws and regulations.
A. I only
B. I and II
C. II and III
D. I, II, and III
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AACSB: Reflective Thinking
AICPA: Decision Making
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56. GASB 34 specifies two criteria for determining major governmental funds to be reported
separately in the Governmental Fund Balance Sheet and Statement of Revenues,
Expenditures, and Changes in Fund Balances. To be considered a major governmental fund, a
fund must:
A. meet at least one criterion.
B. be the general fund or meet at least one criterion.
C. be the general fund or meet two criteria.
D. either A or C.
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AACSB: Reflective Thinking
AICPA: Decision Making
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An internal service fund had the following transactions during the year ended June 30, 2009,
its first year of existence:
(1) Received $1,000,000 contribution from the general fund.
(2) Acquired fleet of cars for $950,000, paying cash.
(3) Billed departments in other funds $500,000 for using cars.
(4) Incurred operating costs, exclusive of depreciation, of $240,000.
(5) Depreciation expense amounted to $250,000.
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Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
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57. Refer to the above information. On the internal service fund's balance sheet on June 30,
2009, total net assets should be reported at:
A. $1,000,000.
B. $1,010,000.
C. $1,250,000.
D. $910,000.
AACSB: Analytic
AICPA: Measurement
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58. Refer to the above information. On the internal service fund's balance sheet at June 30,
2009, net assets-unrestricted should be reported at:
A. $260,000.
B. $310,000.
C. $550,000.
D. $1,250,000.
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AACSB: Analytic
AICPA: Measurement
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59. The statement of changes in fiduciary net assets includes all of the following except:
A. employee benefit trust funds.
B. investment trust funds.
C. private-purpose trust funds.
D. agency funds.
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AACSB: Reflective Thinking
AICPA: Decision Making
18-48
Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
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60. Which presentation method combines the component unit's results into the primary
government's financial results?
A. Blended presentation
B. Discrete presentation
C. Combined presentation
D. Consolidated presentation
AACSB: Reflective Thinking
AICPA: Decision Making
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Essay Questions
18-49
Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
61. Newport Village was recently incorporated and began financial operations on January 1,
2008, the beginning of its fiscal year. The following transactions occurred during this first
fiscal year, January 1, 2008, to December 31, 2008:
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1. The village council adopted a budget for general operations for the fiscal year ending
December 31, 2008. Revenue was estimated at $650,000. Legal authorizations for budgeted
expenditures totaled $620,000.
2. Property taxes were levied in the amount of $630,000; 3 percent of this amount was
estimated to prove uncollectible. These taxes are available as of the date of levy to finance
current expenditures.
3. During the year, a village resident donated marketable securities valued at $75,000 to the
village under the terms of a trust agreement which stipulates that the principal amount be kept
intact. The revenue generated by the securities is restricted to providing support to the village
library. Revenue earned and received on these amounted to $3,000 through December 31,
2008.
4. A general fund transfer of $8,000 was made to establish an internal service fund to provide
for a permanent investment in inventory.
5. The village decided to construct a small recreation facility through a special assessment
project authorized to do so at a cost of $100,000. The city is obligated if the property owners
default on their special assessments. Special assessment bonds were issued in the amount of
$90,000, and the first year's special assessment of $22,500 was levied against the village's
property owners. The remaining $10,000 for the project will be contributed from the village's
general fund.
6. The special assessments for the lighting project are due over a four-year period, and the
first year's assessments of $22,500 were collected. The $10,000 transfer from the village's
general fund was received by the lighting capital projects fund.
7. A contract for $100,000 was let for the installation of the lighting. The capital projects fund
was encumbered for the contract. On December, 2008, the contract was completed and the
contractor was paid.
8. During the year, the internal service fund purchased various supplies at a cost of $3,000.
9. Current property taxes collected during the year was $615,000. Licenses and permit fees
collected amounted to $15,000. The allowance for estimated uncollectible taxes is adjusted to
$15,000.
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Required:
Prepare journal entries to record each of these transactions in the appropriate fund or funds of
Newport Village for the fiscal year ended December 31, 2008. Use the following funds:
general fund, capital projects fund, internal service fund, and private-purpose trust fund.
Closing entries are not required. Organize your answer using the following format:
Fund Journal Entry
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Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
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Chapter 18 - Governmental Entities: Special Funds and Government-wide Financial Statements
AACSB: Analytic
AICPA: Measurement
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62. The City of Edmond established a capital projects fund for the construction of a reading
room for the City Library. The estimated cost of the construction is $300,000. On January 1,
2008, an 8 percent, $200,000 bond issue was sold at 102. At that date, the county board
provided a $100,000 grant. On March 3, 2008, the premium from issuance of the bonds was
transferred to the debt service fund established to repay the bond principal and interest. On
March 1, 2008, a general contractor's bid was accepted to construct the facility at a cost of
$270,000. The construction was completed on October 5, 2008; its actual cost was $285,000.
The city council approved payment of the total actual cost of $285,000. In addition to the
$285,000, $9,000 was spent to make the facility ready for use. On November 3, 2008, the city
council gave the final approval for both these payments. After all bills were paid, the
remaining fund balance was transferred to the debt service fund.
Required
a. Prepare entries for the capital projects fund for 2008.
b. Prepare a statement of revenues, expenditures, and changes in fund balance for 2008 for the
capital projects fund.
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a)
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b)
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63. Akron established an internal service fund for its data processing activities on July 1,
2008. During the fiscal year ended June 30, 2009, the following transactions and events
occurred:
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1) On July 1, 2008, the city council authorized the general fund to contribute $1,000,000 to
help establish the internal service fund on July 20, 2008.
2) The internal service fund spent $900,000 of the contribution to acquire a mainframe
computer on July 25, 2008.
3) During the year ended June 30, 2009, the internal service billed other funds of the city
$300,000 for use of the computer. By year end, all of the billings were collected except for
$30,000.
4) The internal service fund incurred general operating expenses of $100,000, exclusive of
depreciation, during the year ended June 30, 2009. All of the expenses were paid by June 30,
2009, except for $24,000.
5) Depreciation expense related to the computer was $180,000.
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Required:
A) Prepare all journal entries that would be recorded by Akron's internal service fund for the
year ended June 30, 2009. Explanations for journal entries are not necessary.
B) Prepare a statement of revenues, expenses, and changes in fund net assets for the internal
service fund for the year ended June 30, 2009.
C) Calculate the amount of unrestricted net assets at June 30, 2009.
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A) Journal entries for the year ended June 30, 2009:
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C)
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64. Required: For each transaction described below for the current fiscal year of the Town of
Golden, use an "x" to indicate the fund(s) in which a journal entry should appear, and whether
separate information should be kept for General Long Term Debt or General Fixed Assets.
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AICPA: Decision Making
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65. Prior to closing the accounts at the end of the most recent fiscal year, the Town of Sonora
reports the following amounts (in thousands):
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Required:
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Applying the criteria specified in GASB 34, determine which of the above funds should be
classified as major funds for reporting purposes.
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The major funds for reporting purposes are the General Fund, the Capital Projects Fund, the
Internal Service Fund, and the Enterprise Fund—Hydro, determined as follows:
1) GASB 34 states that the General Fund is always a major fund.
2) The following criteria apply to other governmental (includes Internal Service Fund) or
enterprise funds:
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a. Total assets, liabilities, revenues, or expenditures/expenses of the individual governmental
or enterprise fund are at least 10 percent of the governmental or enterprise category; in this
case, the totals are:
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b. Total assets, liabilities, revenues, or expenditures/expenses of the individual governmental
or enterprise fund are at least 5 percent of the total for all governmental and enterprise funds
combined; in this case, the total is:
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Application of the 10 percent and 5 percent tests (must meet both of the percentage tests for at
least one of the four financial statement items):
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* for example, assets of $100 < $115
** for example, assets of $100 < $150
*** both tests are met for expenditures
AACSB: Analytic
AICPA: Reporting
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66. GASB 34 requires a Reconciliation schedule for the Statement of Net Assets. What does
this schedule document?
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This schedule describes the adjustments necessary to move from the modified accrual method
used in the governmental funds to the accrual basis that is used in the government-wide
statements.
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Chapter 19 - Not-For-Profit Entities
Chapter 19
Not-For-Profit Entities
Multiple Choice Questions
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1. Which rule-making body is currently setting standards of financial reporting for private
not-for-profit universities and for public (governmental) universities?
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A. Option A
B. Option B
C. Option C
D. Option D
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2. Net assets restricted as to time or purpose should be classified as:
I. temporarily restricted.
II. permanently restricted.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
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3. A not-for-profit organization received a donation temporarily restricted as to use. The
donated amount was later spent in accordance with the restriction. In which category(ies) of
net assets should the related revenues and expenses be recognized?
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A. Option A
B. Option B
C. Option C
D. Option D
C
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4. According to FASB 93, "Recognition of Depreciation by Not-For-Profit (NFP) Entities,"
NFP entities should recognize depreciation:
I. on all long-lived tangible assets.
II. on all long-lived intangible assets.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
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5. The term "restricted" as used in university accounting refers to a constraint on the use of
funds which has been:
I. internally imposed.
II. externally imposed.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
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6. According to Statement of Financial Accounting Standards 117, the statement of financial
position of a private university should report the excess of the university's assets over its
liabilities as:
A. fund balance.
B. unrestricted and restricted fund balance.
C. retained earnings.
D. unrestricted, temporarily restricted, and permanently restricted net assets.
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7. Which of the following is an example of volunteer services received by a not-for-profit
entity that should be recognized as revenue?
I. Services requiring specialized skills, provided by individuals with those skills, that
otherwise would have to be purchased.
II. Services of lay faculty at a private university operated by a religious order.
III. Services that create or enhance non-financial assets, regardless of whether or not they
require specialized skills.
A. I only
B. I and III only
C. II and III only
D. I, II, and III
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8. In a university, class cancellation refunds of tuition and fees should be recorded as:
I. a reduction of revenue from tuition and fees.
II. a reduction of accounts receivable.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
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9. Which of the following recognition and measurement bases best summarizes the usual
treatment of current contributions to private not-for-profit entities in accordance with FASB
116?
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A. Option A
B. Option B
C. Option C
D. Option D
C
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10. According to FASB 124, not-for-profit entities should report investments in the financial
statements at:
I. fair market value.
II. lower of cost or market.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
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11. Investment income for not-for-profit entities may include:
I. interest from debt investments.
II. dividends from equity investments.
III. changes in the fair values of both debt and equity investments.
A. I only
B. I and II only
C. I and III only
D. I, II, and III
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12. A private university received $280,000 from student tuition and fees for the year 2009
summer session. The session began on June 20, 2009, and ended on July 30, 2009. The
university's fiscal year end is June 30. According to the AICPA College and University Audit
Guide, how should the university report the $280,000 of receipts in its financial statements for
the year ended June 30, 2009?
A. Current revenue of $280,000.
B. Current revenue of $70,000 and deferred revenue of $210,000.
C. Deferred revenue of $280,000.
D. Restricted current revenue of $280,000.
C
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13. Assume that a private university collects tuition and fees at the beginning of summer
school, in which two weeks are offered in the first fiscal year and the remaining six weeks are
offered in the second fiscal year. According to the approach recommended by the National
Association of College and University Business Officers (NACUBO), the university would:
A. record the collections as a debit to Cash and a credit to Deferred Revenue for the entire
amount of the collections.
B. record the collections as a debit to Cash and a credit to Restricted current revenue for the
entire amount of the collections.
C. account for the entire tuition and fees as revenue in the first fiscal period.
D. recognize revenue in the first fiscal period for two-eighths of the tuition and fees and
record six-eighths of the collections as a deferred revenue.
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14. A private university offers graduate assistantships to qualified students each year. In
exchange for the waiver of tuition, graduate assistants are required to assist faculty members
with research and other activities. Assume a graduate assistant received a $4,000 tuition
waiver for the current academic year. Based on these facts, the university should record
A. tuition revenues of $4,000 and expenditures of $4,000.
B. tuition revenues of $0 and expenditures of $0.
C. tuition revenues of $4,000 and expenditures of $0.
D. tuition revenues of $4,000 and a reduction of tuition revenues of $4,000.
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15. For the year ended June 30, 2009, a university assessed its students a total of $4,000,000
for tuition and fees. Included in this amount was $300,000 of tuition remissions awarded to
graduate teaching assistants, and $150,000 of scholarships awarded to undergraduate students.
Tuition and fees totaling $3,550,000 were collected during the year ended June 30, 2009.
What amount should be reported in the unrestricted fund as net revenue from tuition and fees
for the year ended June 30, 2009?
A. $4,000,000
B. $3,550,000
C. $3,700,000
D. $3,850,000
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16. A private not-for-profit university generally must depreciate all tangible fixed assets,
except:
I. works of art and other historical treasures.
II. administration buildings.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
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17. A private college received an offer from a CPA who is an alumnus to teach a onesemester advanced accounting course at no cost. FASB 116 prescribes that this contribution
of service:
A. need only be disclosed in the footnotes to the financial statements.
B. be recorded as an asset with an equivalent amount recorded in the unrestricted fund
balance.
C. be recorded as a revenue with an equivalent amount recorded as an expenditure.
D. need not be recorded if the service is for a period less than one academic year.
18. In accordance with FASB 117, contributions from donors which are to be permanently
invested should be disclosed on the statement of activities of a private university as an
increase in:
A. Permanently restricted net assets.
B. Permanently restricted fund balance.
C. Endowment fund balance.
D. Deferred revenues.
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19. For the year ended June 30, 2009, a private college received contributions from alumni
which were restricted for faculty research stipends to be awarded during the next fiscal year.
For the year ended June 30, 2009, these contributions should be disclosed on the statement of
activities of the private college as an increase in:
A. the fund balance of the restricted current fund.
B. temporarily restricted net assets.
C. deferred revenues.
D. temporarily restricted fund balance.
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A. I, II, and III.
B. II, III, and IV.
C. I, II, and IV.
D. II, III, and V.
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20. A private, not-for-profit university should prepare which of the following financial
statements?
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21. Unrestricted gifts and endowment income of a private university are reported as
A. increases in the unrestricted current fund balance on the statement of changes in fund
balances.
B. unrestricted revenues on the statement of current funds revenues, expenditures, and other
changes.
C. unrestricted revenues on the statement of activities.
D. increases in the unrestricted current fund balance on the statement of activities.
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22. One of the major objectives of FASB 117 is to
A. emphasize the different fund structures that currently exist for all private, nonprofit
organizations.
B. change the reporting for governmental organizations so that their reporting is comparable
to that of private, nonprofit organizations.
C. report combined financial statements, instead of individual fund financial statements, for
all private, nonprofit organizations.
D. bring about greater uniformity in the financial statements of all private, not-for-profit
organizations.
C
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23. A not-for-profit private college in Virginia created a separate foundation responsible for
obtaining financial support from alumni and others. Foundation assets are used for the benefit
of the college. Donations made to the foundation and subsequently transferred to the college
should be:
A. recognized as revenues by the foundation when received, and as revenues of the college
when transferred.
B. recognized as revenues by the foundation when received and as expenses by the foundation
when transferred.
C. recognized both as a change in its interest in the foundation and as revenues by the college
when the donation is received by the foundation.
D. recognized as an increase in net assets of the foundation and as revenues of the college
when the donation is received by the college.
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24. FASB 93:
A. guides depreciation.
B. guides accounting for contributions.
C. establishes financial display requirements.
D. establishes the accounting for investments.
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25. On the statement of operations prepared for a private, not-for-profit hospital, patient
service revenue earned during the year is reported net of amounts for which of the following
items?
I. Contractual adjustments
II. Bad debts expense
A. I only
B. II only
C. I and II
D. Neither I nor II
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26. A private, not-for-profit hospital received a cash contribution of $100,000 from Samantha
Hicks on November 14, 2008. Ms. Hicks specified the money be used to acquire equipment.
On December 31, 2008, the hospital had not expended any of Ms. Hicks' contribution. On the
statement of changes in net assets for the year ended December 31, 2008, the hospital should
report the contribution as a $100,000 increase in
A. temporarily restricted net assets.
B. unrestricted net assets.
C. fund balance.
D. deferred revenue.
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27. Unrestricted current funds of a private university designated by the governing board for a
specific future purpose should be reported as part of:
A. unrestricted net assets.
B. temporarily restricted net assets.
C. board-restricted net assets.
D. term endowments.
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28. A private, not-for-profit geographic society received cash contributions which were
restricted by the donors for the acquisition of fixed assets. In which section of the statement of
cash flows would these cash contributions be reported?
A. Financing activities
B. Investing activities
C. Operating activities
D. Capital and related financing activities
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29. On the statement of activities for a private, not-for-profit literary society, expenses
decrease which of the following classes of net assets?
I. temporarily restricted net assets
II. unrestricted net assets
A. I only
B. II only
C. Either I or II
D. Neither I nor II
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30. Bridger Hospital, which is operated by a religious organization, provides charity care for
the indigent living in the region served by the hospital. How should Bridger report the amount
of its charity care on its financial statements?
A. In the notes to the financial statements only.
B. As unrestricted revenues on the statement of operations.
C. As net patient service revenue and as an expense, equal to the net patient service revenue,
on the statement of operations.
D. As temporarily restricted revenue on the statement of operations.
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31. The governing board of Samaritan Hospital, which is operated by a religious organization,
designated $500,000 of cash for future expansion of the hospital. On the hospital's balance
sheet, the cash designated for future plant expansion would be disclosed in which of the
following classes of net assets?
A. Temporarily restricted net assets
B. Unrestricted net assets
C. Plant replacement and expansion.
D. Board designated net assets
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32. Good Care Hospital, which is operated by a religious organization, received contributions
of $1,000,000 from donors who stipulated that the cash be used to construct an addition to the
hospital. As of the balance sheet date, none of the contributions had been expended for
construction. On the hospital's balance sheet, the cash contributions would be disclosed in
which of the following classes of net assets?
A. Temporarily restricted net assets
B. Donor restricted net assets
C. Assets whose use is limited
D. Permanently restricted net assets
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33. A private, not-for-profit hospital received contributions of $50,000 from donors on June
15, 2009. The donors stipulated that their contributions be used to purchase equipment for the
hospital. As of June 30, 2009, the end of the hospital's fiscal year, $12,000 of the
contributions had been spent on equipment acquisitions. In the hospital's general fund, what
account would be credited to recognize the release of the restrictions on the temporarily
restricted contributions used to acquire equipment?
A. Revenue released from equipment acquisition restriction
B. Other financing sources
C. Net assets released from equipment acquisition restriction
D. Unrestricted net assets released from equipment acquisition restriction
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34. A private, not-for-profit hospital uses a fund structure which includes a general fund and
donor restricted funds. The hospital's revenues from nursing programs and gift shops should
be accounted for in the:
A. specific purpose fund.
B. restricted current fund.
C. general fund.
D. time-restricted fund.
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35. A private, not-for-profit hospital uses a fund structure which includes a general fund and
donor restricted funds. Contributions received from donors for research to be conducted by
the hospital should be accounted for in the:
A. specific purpose fund.
B. time-restricted fund.
C. general fund.
D. restricted current fund.
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36. On June 30, 2009, a voluntary health and welfare organization received pledges from
donors amounting to $50,000. The donors did not place any time or use restrictions on the
amount pledged. It was estimated that 10 percent of the pledges would not be collected. How
should the voluntary health and welfare organization report these pledges on its financial
statements prepared at the end of its fiscal year, June 30, 2009?
A. As fund balance for $45,000.
B. As contribution revenue-unrestricted for $45,000.
C. As contribution revenue-unrestricted for $50,000.
D. As fund balance-unrestricted for $50,000.
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37. The restricted funds of a not-for-profit hospital are often termed "______" funds because
they must hold the restricted assets and transfer expendable resources to the general fund for
expenditure.
A. specific
B. controlled
C. limited
D. holding
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38. All restricted funds of private, not-for-profit hospitals account for resources:
A. whose use is restricted by the donor.
B. received and expended in the hospital's primary health care mission.
C. that are only temporarily restricted.
D. received or pledged by donors for use in future periods.
C
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A donor agrees to contribute $5,000 per year at the end of each of the next five years to a
voluntary health and welfare organization. The donor did not place any use restrictions on the
amount pledged. The stream of the payments is discounted at 6 percent. The first payment of
$5,000 is received at the end of the first year. The present value factor for a five-payment
annuity due on June 30, 2009, at 6 percent is 4.2124.
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39. Based on the preceding information, the journal entry to recognize present value at the
time the pledge is received includes:
A. a credit to Pledges Receivable—Temporarily Restricted for $25,000.
B. a debit to Contributions—Temporarily Restricted for $21,062.
C. a debit to Pledges Receivable—Temporarily Restricted for $21,062.
D. a credit to Contributions—Temporarily Restricted for $25,000.
40. Based on the preceding information, at the end of the first year, the pledge increased
unrestricted net assets by:
A. $25,000.
B. $21,062.
C. $4,212.
D. $5,000.
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41. Based on the preceding information, the increase in present value of the contributions
receivable recognized at the end of the first year equals:
A. $5,000.
B. $1,264.
C. $4212.
D. $787.
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42. A private, not-for-profit hospital received a donation of medicine from the XYZ
Pharmaceutical Company on March 15, 2009. The cost of the medicine to the company was
$66,000, and its market value was $110,000. Twenty percent of the medicine was used by the
hospital during the year ended June 30, 2009. On the hospital's statement of operations for the
year ended June 30, 2009, the contribution of medicine would increase operating revenues by
A. $66,000.
B. $110,000.
C. $52,800.
D. $88,000.
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43. In accordance with FASB 116, contributions of services are recognized as increases in
unrestricted net assets by a private, not for profit entity if which of the following criteria are
satisfied?
I. The services received create or enhance nonfinancial assets.
II. The services require specialized skills, are provided by individuals possessing those skills,
and would typically need to be purchased if not provided by donations.
III. The services will be performed within the current fiscal year.
A. I or II.
B. I or III.
C. II or III.
D. I, II, III.
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44. The disclosure, "net assets released from restrictions," is reported on which of the
following financial statements for a voluntary health and welfare organization?
I. The statement of cash flows.
II. The statement of activities.
A. I only
B. II only
C. Both I and II.
D. Neither I nor II.
C
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45. Good Faith Hospital, operated by a religious organization, billed patients $4,000,000 for
services rendered during the year ended June 30, 2009. The hospital realized cash of
$3,500,000 from the patient billings because of the following reductions:
(1) contractual adjustments of $140,000 granted to private insurance companies and to the
federal government; and
(2) uncollectible accounts receivable of $360,000.
On the statement of operations prepared for the year ended June 30, 2009, Good Faith
Hospital should report net patient service revenue of:
A. $3,500,000.
B. $3,860,000.
C. $4,000,000.
D. $3,640,000.
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46. During the fiscal year ended June 30, 2009, a private, not-for-profit hospital acquired
equipment costing $75,000, with cash contributed by donors who restricted their contributions
for this purpose. On the hospital's statement of cash flows for the year ended June 30, 2009,
the equipment acquisition should be reported in which of the following sections?
I. Operating activities
II. Financing activities
III. Investing activities
A. I
B. II
C. III
D. I, II, III
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47. During the fiscal year ended June 30, 2009, Global Charities, a voluntary health and
welfare organization, received unrestricted cash contributions of $500,000 and temporarily
restricted cash contributions of $300,000. All of the temporarily restricted contributions were
restricted by the donors for equipment acquisitions. During the year ended June 30, 2009,
equipment costing $250,000 was acquired with the restricted contributions. As a result of
these two contributions, Global Charities' statement of cash flows, prepared for the year ended
June 30, 2009, would report an increase in net cash provided by operating activities of:
A. $500,000.
B. $800,000.
C. $750,000.
D. $550,000.
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48. A voluntary health and welfare organization received a $300,000 contribution on April 15,
2009, from a donor who stipulated the donation be invested permanently in stocks and bonds.
The donor further stipulated earnings from the investments be spent according to the wishes
of the governing board of the voluntary health and welfare organization. Earnings from the
investments for the year ended June 30, 2009, amounted to $6,000. How would the voluntary
health and welfare organization report this information for the year ended June 30, 2009?
A. Increase in permanently restricted net assets of $306,000.
B. Increase in permanently restricted net assets of $300,000, and in temporarily restricted net
assets of $6,000.
C. Increase in permanently restricted net assets of $300,000, and in unrestricted net assets of
$6,000.
D. Increase in permanently restricted net assets of $300,000, and in board-designated net
assets of $6,000.
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49. Which financial statement is (are) required for a voluntary health and welfare organization
which is not required for a private, not-for-profit hospital?
I. A statement of operations.
II. A statement of functional expenses.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
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50. A private, not-for-profit hospital expended $35,000 of temporarily restricted assets to
acquire equipment. What account should be debited in the hospital's plant replacement and
expansion fund as a result of the acquisition of the equipment?
A. Net Assets Released—Plant Acquisition.
B. Fund balance Released—Plant Acquisition.
C. Equipment.
D. Contribution Revenue Released—Plant Acquisition.
C
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51. In 2009, a private not-for-profit hospital received a $200,000 cash contribution to its
endowment fund. During the year, hospital administration invested $150,000 of the funds.
Which of the following statements regarding the effect of these transactions on the
preparation of the hospital's statement of cash flow is true?
A. The $200,000 contribution will appear in the investing activities section of the cash flow
statement as a cash inflow.
B. The $200,000 contribution will appear in the financing activities section of the cash flow
statement as a cash inflow.
C. The $150,000 investment will appear in the investing activities section of the cash flow
statement as a cash inflow.
D. The $150,000 contribution will appear in the financing activities section of the cash flow
statement as a cash inflow.
EO
A private, not-for-profit hospital received a contribution of $40,000 on June 15, 2008. The
donor restricted the contribution to funding research activities currently being performed by
the hospital. For the year ended December 31, 2008, the hospital spent $30,000 of the
contribution on research activities. The hospital expended the remaining $10,000 on research
activities in January of 2009.
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52. Refer to the above information. On the statement of cash flows prepared for the year
ended December 31, 2008, the events described would increase net cash flows provided by
A. operating activities by $40,000.
B. financing activities by $40,000.
C. financing activities by $10,000.
D. operating activities by $10,000.
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53. Refer to the above information. On the statement of operations prepared for the year
ended December 31, 2008, the events described would:
A. increase operating income by $30,000.
B. have no effect on operating income.
C. increase unrestricted net assets by $30,000.
D. decrease unrestricted net assets by $30,000.
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54. Refer to the above information. On the statement of changes in net assets prepared for the
year ended December 31, 2008, the events described would
A. increase temporarily restricted net assets by $10,000.
B. decrease temporarily restricted net assets by $10,000
C. increase unrestricted net assets by $10,000.
D. decrease unrestricted net assets by $10,000.
C
PA
55. In a private, not-for-profit hospital, which fund would record cash and investments which
have been restricted by the governing board for acquisitions of equipment and construction of
a new hospital addition?
A. The plant replacement and expansion fund.
B. The specific purpose fund.
C. The endowment fund.
D. The general fund.
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56. The governing board of a hospital operated by a religious organization designated
$3,000,000 of cash to be used for plant expansion. The cash was invested in stocks and bonds
which earned $250,000 of dividend and interest income. The income from investments should
be reported on the hospital's statement of operations as an increase in:
A. temporarily restricted net assets.
B. operating income.
C. either temporarily restricted net assets or unrestricted net assets, depending upon the nature
of the governing board's restrictions.
D. fund balance in the general fund.
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57. A voluntary health and welfare organization received unrestricted cash donations of
$20,000 from donors who attended a dinner held for the benefit of the organization. The costs
of the dinner, including room rental, and other expenses, amounted to $7,000. On the
statement of activities prepared for the voluntary health and welfare organization, the
expenses of the dinner should be:
A. reported as management and general expenses.
B. netted against the $20,000 of contribution revenue.
C. reported as fund raising costs.
D. reported as programmatic expenses.
PA
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58. On the statement of functional expenses prepared for a voluntary health and welfare
organization, depreciation expense is allocated to
I. expenses for program services.
II. expenses for supporting services.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
EO
C
59. A voluntary health and welfare organization developed and printed informational
materials which were intended to both educate the public about how its resources are used to
help people in need and to also appeal to the public for much needed support. In this situation,
the cost of the informational materials should be
A. accounted for as fund-raising expense.
B. allocated to expenses for program services.
C. allocated between expenses for program services and fund-raising expense.
D. accounted for as management and general expense.
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60. FASB 117 requires that an "other not-for-profit entity" (ONPO) provide three financial
statements. Which of the following is NOT one among them?
A. A statement of functional expenses
B. A statement of financial position
C. A statement of activities
D. A statement of cash flows
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61. A private, not-for-profit hospital received the following restricted contributions and other
receipts during the year ended December 31, 2008:
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None of the contributions or other receipts were expended during the ended December 31,
2008. For the year ended December 31, 2008, what amount would be reported on the
hospital's statement of changes in net assets as an increase in temporarily restricted net
assets?
A. $1,500,000
B. $1,200,000
C. $500,000
D. $300,000
C
PA
62. In accordance with FASB 116, pledges, which are temporarily restricted by donors, are
reported as increases in temporarily restricted net assets on the statement of activities of a
voluntary health and welfare organization when the
A. pledges are received in cash.
B. cash received from the pledges is expended in accordance with the donors' wishes.
C. pledges are made by the donors.
D. cash is received from the pledges is transferred to unrestricted net assets.
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63. A voluntary health and welfare organization received $200,000 of pledges from donors on
February 15, 2009. The donors did not place either time or use restrictions on the amount
pledged. The governing board estimated that 10 percent of the pledges would be uncollectible.
During the remainder of fiscal 2009, cash received from pledges amounted to $184,000. For
the year ended June 30, 2009, what amount should the voluntary health and welfare
organization report as Contributions-Unrestricted?
A. $0
B. $200,000
C. $184,000
D. $180,000
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64. A voluntary health and welfare organization reports pledges receivable on its statement of
financial position at the present value of the future cash collections. How is the increase in the
present value of the pledges receivable, which is due to the passage of time, reported on the
voluntary health and welfare organization's statement of activities?
A. As interest income-temporarily restricted.
B. As an increase in pledges receivable-temporarily restricted.
C. As an increase in contributions-temporarily restricted.
D. As an increase in deferred revenue-temporarily restricted.
PA
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Golden Path, a labor union, had the following receipts and expenses for the year ended
December 31, 2008:
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C
The union's constitution provides that 12 percent of the per capita dues be designated for the
strike insurance fund to be distributed for strike relief at the discretion of the union's executive
board.
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65. Based on the information provided, in Golden Path's statement of activities for the year
ended December 31, 2008, what amount should be reported under the classification of
revenue from unrestricted funds?
A. $980,000
B. $1,100,000
C. $1,210,000
D. $1,020,000
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66. Based on the information provided, in Golden Path's statement of activities for the year
ended December 31, 2008, what amount should be reported under the classification of
program services?
A. $720,000
B. $910,000
C. $440,000
D. $760,000
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67. Based on the information provided, in Golden Path's statement of activities for the year
ended December 31, 2008, what amount should be reported under the classification of
supporting services?
A. $150,000
B. $720,000
C. $440,000
D. $290,000
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C
PA
68. Based on the information provided, in Golden Path's statement of activities for the year
ended December 31, 2008, what amounts should be reported under the classifications of
temporarily and permanently restricted net assets?
A. $0 and $110,000 respectively.
B. $110,000 and $0 respectively.
C. $60,000 and $50,000 respectively.
D. $50,000 and $60,000 respectively.
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Chapter 19 - Not-For-Profit Entities
Local Services, a voluntary health and welfare organization had the following classes of net
assets on July 1, 2008, the beginning of its fiscal year:
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During the year ended June 30, 2009, the following events occurred:
(1) It purchased equipment, costing $100,000, with contributions restricted for this purpose.
The contributions had been received from donors during June of 2008.
(2) It received $130,000 of cash donations which were restricted for research activities.
During the year ended June 30, 2009, $90,000 of the contributions were expended on
research.
(3) It sold investments classified in the permanently restricted class for a loss of $40,000.
Dividends and interest income earned on the investments amounted to $70,000. There were
no restrictions on how investment income was to be used.
(4) It received cash contributions of $200,000 from donors who did not place either time or
use restrictions upon their donations.
(5) Expenses, excluding depreciation expense, for program services and supporting services
incurred during the year ended June 30, 2009, amounted to $260,000.
(6) Depreciation expense for the year ended June 30, 2009, was $80,000.
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C
69. Refer to the above information. At June 30, 2009, the amount of permanently restricted
net assets reported on the statement of financial position would be:
A. $1,070,000.
B. $1,030,000.
C. $1,000,000.
D. $960,000.
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70. Refer to the above information. On the statement of activities for the year ended June 30,
2009, temporarily restricted net assets:
A. increased $130,000.
B. increased $40,000.
C. decreased $100,000.
D. decreased $60,000.
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71. Refer to the above information. On the statement of activities for the year ended June 30,
2009, reclassifications would be reported at
A. $190,000.
B. $100,000.
C. $90,000.
D. $230,000.
PA
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72. Refer to the above information. Which of the following statements is (are) correct about
the program and supporting expenses that would be reported on the statement of activities for
the year ended June 30, 2009?
I. Program and supporting expenses should be reported at $340,000.
II. All of the program and supporting expenses should be reported as a deduction from
unrestricted revenues and other support.
A. I only
B. II only
C. I and II
D. Neither I nor II
C
The transactions listed in the following questions occurred in a private, not-for-profit hospital
during 2008. For each transaction, indicate its effect on the hospital's statement of operations
for the year ended December 31, 2008.
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73. Transaction: Billed patients for services rendered.
Effect on Statement of Operations:
A. Increases operating income.
B. Decreases operating income.
C. The transaction is reported on the statement of operations, but there is no effect on
operating income.
D. The transaction is not reported on the statement of operations.
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74. Transaction: A gain was realized from the sale of endowment investments. The gain is
not expendable.
Effect on Statement of Operations:
A. Increases operating income.
B. Decreases operating income.
C. The transaction is reported on the statement of operations, but there is no effect on
operating income.
D. The transaction is not reported on the statement of operations.
PA
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75. Transaction: Depreciation expense was recorded for the year.
Effect on Statement of Operations:
A. Increases operating income.
B. Decreases operating income.
C. The transaction is reported on the statement of operations, but there is no effect on
operating income.
D. The transaction is not reported on the statement of operations.
EO
C
76. Transaction: The governing board designated assets for plant expansion.
Effect on Statement of Operations:
A. Increases operating income.
B. Decreases operating income.
C. The event is reported on the statement of operations, but there is no effect on operating
income.
D. The event is not reported on the statement of operations.
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77. Transaction: Received contributions restricted by donors for research activities.
Effect on Statement of Operations:
A. Increases operating income.
B. Decreases operating income.
C. The transaction is reported on the statement of operations, but there is no effect on
operating income.
D. The transaction is not reported on the statement of operations.
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78. Transaction: Expended 50 percent of the contributions restricted for research in the
previous item.
Effect on Statement of Operations:
A. Increases operating income.
B. Decreases operating income.
C. The transaction is reported on the statement of operations, but there is no effect on
operating income.
D. The transaction is not reported on the statement of operations.
PA
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79. Transaction: Received contributions restricted by donors for equipment acquisition.
Effect on Statement of Operations:
A. Increases operating income.
B. Decreases operating income.
C. The transaction is reported on the statement of operations, but there is no effect on
operating income.
D. The transaction is not reported on the statement of operations.
EO
C
80. Transaction: Acquired equipment with all of the contributions received in the previous
item.
Effect on Statement of Operations:
A. Increases operating income.
B. Decreases operating income.
C. The transaction is reported on the statement of operations, but there is no effect on
operating income.
D. The transaction is not reported on the statement of operations.
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81. Transaction: Endowment income was earned. The donor placed no restrictions on the
investment earnings.
Effect on Statement of Operations:
A. Increases operating income.
B. Decreases operating income.
C. The transaction is reported on the statement of operations, but there is no effect on
operating income.
D. The transaction is not reported on the statement of operations.
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82. Transaction: Received cash contribution from donor who stipulated the contribution be
permanently invested.
Effect on Statement of Operations:
A. Increases operating income.
B. Decreases operating income.
C. The transaction is reported on the statement of operations, but there is no effect on
operating income.
D. The transaction is not reported on the statement of operations.
PA
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83. Transaction: Acquired investments with cash received in the previous item.
Effect on Statement of Operations:
A. Increases operating income.
B. Decreases operating income.
C. The transaction is reported on the statement of operations, but there is no effect on
operating income.
D. The transaction is not reported on the statement of operations.
EO
C
84. Transaction: Received tuition revenue from hospital nursing program and cash from
sales of goods in the hospital gift shop.
Effect on Statement of Operations:
A. Increases operating income.
B. Decreases operating income.
C. The transaction is reported on the statement of operations, but there is no effect on
operating income.
D. The transaction is not reported on the statement of operations.
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85. FASB 117 requires that an ONPO provide three financial statements. Which of the
following is not one of them?
A. A statement of financial position
B. A statement of activities
C. A statement of cash flows
D. A statement of functional expenses
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86. Reporting requirements of other not-for-profit entities (ONPOs) are similar to those of
which of the following entities?
A. A public university
B. A voluntary health and welfare organization
C. An enterprise fund of a state or local government
D. A hospital operated by a county government
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C
PA
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Essay Questions
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Chapter 19 - Not-For-Profit Entities
C
Additional information:
PA
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87. The following information is contained in the funds which are used to account for the
transactions of the Hope Hospital, which is operated by a nonprofit, religious organization.
The balances in the accounts are as of June 30, 2009, the end of the hospital's fiscal year.
Credit amounts are in parentheses.
The $64,000 in the specific purpose fund is restricted for research activities to be conducted
by the hospital.
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Required:
Prepare a balance sheet for Hope Hospital as of June 30, 2009.
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Chapter 19 - Not-For-Profit Entities
Private Not-For-Profit (NFP) Entities.
PA
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Select from this list of terms to answer the following questions.
C
Indicate your choice by entering the letter corresponding to the correct term. A term may be
used more than once or not at all.
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88. "Responsible for establishing accounting standards for private NFP entities" describes
which term listed above?
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89. "Classification of an endowment contribution" describes which term listed above?
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90. "Reported as an expenditure of the fund using plant and equipment" describes which term
listed above?
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C
PA
91. "Financial statement of a private NFP entity" describes which term listed above?
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92. "Tangible fixed assets not depreciated by a private college or university" describes which
term listed above?
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93. "Basis for measuring investments in financial statements" describes which term listed
above?
PA
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94. "Classification of investment income from endowment investments if there are no donor
restrictions as to income" describes which term listed above?
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95. "Classification of contributions restricted by purpose" describes which term listed above?
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96. "Basis for measuring expenditures for contributed services requiring special skills"
describes which term listed above?
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97. "Basis for measuring contributions" describes which term listed above?
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98. "Net asset classifications per FAC 6" describes which term listed above?
C
PA
99. "Basis of accounting for private NFPs" describes which term listed above?
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100. The CFO of a "Not-for-Profit" hospital is making a presentation at your college. The
presentation is for Business and Health-Science majors. During the presentation the CFO
mentions assets being reported "above the line." On the way out your roommate a healthscience major asks, you an accounting major, to explain what the CFO was referring to. What
do you respond?
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Chapter 19 - Not-For-Profit Entities
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The transactions described in the following questions occurred in a voluntary health and
welfare organization during the year ended December 31, 2008. For each transaction, indicate
its effect(s) on the organization's statement of activities prepared for the year ended December
31, 2008. List all effects of transactions affecting more than one class of net assets. Indicate
your choice(s) by entering the letter corresponding to the effects listed here:
C
PA
101. Received cash contributions restricted by donors for research.
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102. Incurred fund-raising costs.
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103. Depreciation expense for the year was recorded.
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104. The governing board designated assets for plant expansion.
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PA
105. A gain was realized from the sale of securities which were permanently invested. The
gain is restricted as to use.
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106. Endowment income was earned. The donor specified that the income be used for
community service.
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107. Received a multi-year pledge, with cash being received this year and for the next 4 years.
Donors did not place any use restrictions on how the pledges were to be spent.
PA
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108. Income was earned from investments of assets that the board previously designated for
plant expansion.
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109. Received pledges from donors who placed no time or use restrictions on how the pledges
were to be spent.
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110. Received cash contributions restricted by donors for equipment.
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111. Acquired equipment with all of the contributions previously received from donors for
equipment purchases.
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112. Expended 75 percent of the contributions previously received from donors for research.
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PA
113. Following are four independent transactions or events that relate to a voluntary health
and welfare organization:
1. Cash disbursement of $45,000 was made from the general fund's unrestricted assets for the
purchase of new equipment for the organization.
2. The organization receives an unrestricted cash gift of $80,000 from a donor.
3. Common stock investments with a total carrying value of $100,000 were sold by a
permanently restricted endowment fund for $112,000 before any dividends were earned on
these stocks. The gain is donor-restricted to remain in the permanently restricted fund.
4. General obligation bonds payable with a face amount of $750,000 were sold at par, with the
proceeds required to be used solely for construction of a new building. This building was
completed at a total cost of $750,000, and the total amount of bond issue proceeds was
disbursed toward this cost. Disregard interest capitalization.
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Required:
For each of these transactions or events, prepare journal entries specifying the affected funds
and showing how these transactions or events should be recorded by the organization.
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Chapter 19 - Not-For-Profit Entities
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114. The FASB has issued five standards that have direct applicability to private, not-forprofit entities. From the list given below, match each standard to the area it deals with.
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Multiple Choice Questions
PA
Chapter 19 Not-For-Profit Entities Answer Key
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1. Which rule-making body is currently setting standards of financial reporting for private
not-for-profit universities and for public (governmental) universities?
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A. Option A
B. Option B
C. Option C
D. Option D
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AACSB: Reflective Thinking
AICPA: Decision Making
C
PA
2. Net assets restricted as to time or purpose should be classified as:
I. temporarily restricted.
II. permanently restricted.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
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AACSB: Reflective Thinking
AICPA: Decision Making
19-38
Chapter 19 - Not-For-Profit Entities
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3. A not-for-profit organization received a donation temporarily restricted as to use. The
donated amount was later spent in accordance with the restriction. In which category(ies) of
net assets should the related revenues and expenses be recognized?
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A. Option A
B. Option B
C. Option C
D. Option D
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AACSB: Reflective Thinking
AICPA: Decision Making
C
PA
4. According to FASB 93, "Recognition of Depreciation by Not-For-Profit (NFP) Entities,"
NFP entities should recognize depreciation:
I. on all long-lived tangible assets.
II. on all long-lived intangible assets.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
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AACSB: Reflective Thinking
AICPA: Decision Making
19-39
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5. The term "restricted" as used in university accounting refers to a constraint on the use of
funds which has been:
I. internally imposed.
II. externally imposed.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
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AACSB: Reflective Thinking
AICPA: Decision Making
C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
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6. According to Statement of Financial Accounting Standards 117, the statement of financial
position of a private university should report the excess of the university's assets over its
liabilities as:
A. fund balance.
B. unrestricted and restricted fund balance.
C. retained earnings.
D. unrestricted, temporarily restricted, and permanently restricted net assets.
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7. Which of the following is an example of volunteer services received by a not-for-profit
entity that should be recognized as revenue?
I. Services requiring specialized skills, provided by individuals with those skills, that
otherwise would have to be purchased.
II. Services of lay faculty at a private university operated by a religious order.
III. Services that create or enhance non-financial assets, regardless of whether or not they
require specialized skills.
A. I only
B. I and III only
C. II and III only
D. I, II, and III
AACSB: Reflective Thinking
AICPA: Decision Making
19-40
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8. In a university, class cancellation refunds of tuition and fees should be recorded as:
I. a reduction of revenue from tuition and fees.
II. a reduction of accounts receivable.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
AACSB: Reflective Thinking
AICPA: Decision Making
PA
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9. Which of the following recognition and measurement bases best summarizes the usual
treatment of current contributions to private not-for-profit entities in accordance with FASB
116?
C
A. Option A
B. Option B
C. Option C
D. Option D
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AACSB: Reflective Thinking
AICPA: Decision Making
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10. According to FASB 124, not-for-profit entities should report investments in the financial
statements at:
I. fair market value.
II. lower of cost or market.
A. I only
B. II only
C. Either I or II
D. Neither I nor II
AACSB: Reflective Thinking
AICPA: Decision Making
19-41
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11. Investment income for not-for-profit entities may include:
I. interest from debt investments.
II. dividends from equity investments.
III. changes in the fair values of both debt and equity investments.
A. I only
B. I and II only
C. I and III only
D. I, II, and III
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AACSB: Reflective Thinking
AICPA: Decision Making
C
AACSB: Analytic
AICPA: Decision Making
PA
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12. A private university received $280,000 from student tuition and fees for the year 2009
summer session. The session began on June 20, 2009, and ended on July 30, 2009. The
university's fiscal year end is June 30. According to the AICPA College and University Audit
Guide, how should the university report the $280,000 of receipts in its financial statements for
the year ended June 30, 2009?
A. Current revenue of $280,000.
B. Current revenue of $70,000 and deferred revenue of $210,000.
C. Deferred revenue of $280,000.
D. Restricted current revenue of $280,000.
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13. Assume that a private university collects tuition and fees at the beginning of summer
school, in which two weeks are offered in the first fiscal year and the remaining six weeks are
offered in the second fiscal year. According to the approach recommended by the National
Association of College and University Business Officers (NACUBO), the university would:
A. record the collections as a debit to Cash and a credit to Deferred Revenue for the entire
amount of the collections.
B. record the collections as a debit to Cash and a credit to Restricted current revenue for the
entire amount of the collections.
C. account for the entire tuition and fees as revenue in the first fiscal period.
D. recognize revenue in the first fiscal period for two-eighths of the tuition and fees and
record six-eighths of the collections as a deferred revenue.
AACSB: Analytic
AICPA: Decision Making
19-42
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14. A private university offers graduate assistantships to qualified students each year. In
exchange for the waiver of tuition, graduate assistants are required to assist faculty members
with research and other activities. Assume a graduate assistant received a $4,000 tuition
waiver for the current academic year. Based on these facts, the university should record
A. tuition revenues of $4,000 and expenditures of $4,000.
B. tuition revenues of $0 and expenditures of $0.
C. tuition revenues of $4,000 and expenditures of $0.
D. tuition revenues of $4,000 and a reduction of tuition revenues of $4,000.
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AACSB: Analytic
AICPA: Decision Making
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AACSB: Analytic
AICPA: Measurement
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PA
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15. For the year ended June 30, 2009, a university assessed its students a total of $4,000,000
for tuition and fees. Included in this amount was $300,000 of tuition remissions awarded to
graduate teaching assistants, and $150,000 of scholarships awarded to undergraduate students.
Tuition and fees totaling $3,550,000 were collected during the year ended June 30, 2009.
What amount should be reported in the unrestricted fund as net revenue from tuition and fees
for the year ended June 30, 2009?
A. $4,000,000
B. $3,550,000
C. $3,700,000
D. $3,850,000
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16. A private not-for-profit university generally must depreciate all tangible fixed assets,
except:
I. works of art and other historical treasures.
II. administration buildings.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
AACSB: Reflective Thinking
AICPA: Decision Making
19-43
Chapter 19 - Not-For-Profit Entities
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17. A private college received an offer from a CPA who is an alumnus to teach a onesemester advanced accounting course at no cost. FASB 116 prescribes that this contribution
of service:
A. need only be disclosed in the footnotes to the financial statements.
B. be recorded as an asset with an equivalent amount recorded in the unrestricted fund
balance.
C. be recorded as a revenue with an equivalent amount recorded as an expenditure.
D. need not be recorded if the service is for a period less than one academic year.
ev
AACSB: Reflective Thinking
AICPA: Decision Making
C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
R
18. In accordance with FASB 117, contributions from donors which are to be permanently
invested should be disclosed on the statement of activities of a private university as an
increase in:
A. Permanently restricted net assets.
B. Permanently restricted fund balance.
C. Endowment fund balance.
D. Deferred revenues.
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19. For the year ended June 30, 2009, a private college received contributions from alumni
which were restricted for faculty research stipends to be awarded during the next fiscal year.
For the year ended June 30, 2009, these contributions should be disclosed on the statement of
activities of the private college as an increase in:
A. the fund balance of the restricted current fund.
B. temporarily restricted net assets.
C. deferred revenues.
D. temporarily restricted fund balance.
AACSB: Reflective Thinking
AICPA: Decision Making
19-44
Chapter 19 - Not-For-Profit Entities
20. A private, not-for-profit university should prepare which of the following financial
statements?
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A. I, II, and III.
B. II, III, and IV.
C. I, II, and IV.
D. II, III, and V.
AACSB: Reflective Thinking
AICPA: Decision Making
C
PA
R
21. Unrestricted gifts and endowment income of a private university are reported as
A. increases in the unrestricted current fund balance on the statement of changes in fund
balances.
B. unrestricted revenues on the statement of current funds revenues, expenditures, and other
changes.
C. unrestricted revenues on the statement of activities.
D. increases in the unrestricted current fund balance on the statement of activities.
EO
AACSB: Reflective Thinking
AICPA: Decision Making
R
22. One of the major objectives of FASB 117 is to
A. emphasize the different fund structures that currently exist for all private, nonprofit
organizations.
B. change the reporting for governmental organizations so that their reporting is comparable
to that of private, nonprofit organizations.
C. report combined financial statements, instead of individual fund financial statements, for
all private, nonprofit organizations.
D. bring about greater uniformity in the financial statements of all private, not-for-profit
organizations.
AACSB: Reflective Thinking
AICPA: Decision Making
19-45
Chapter 19 - Not-For-Profit Entities
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23. A not-for-profit private college in Virginia created a separate foundation responsible for
obtaining financial support from alumni and others. Foundation assets are used for the benefit
of the college. Donations made to the foundation and subsequently transferred to the college
should be:
A. recognized as revenues by the foundation when received, and as revenues of the college
when transferred.
B. recognized as revenues by the foundation when received and as expenses by the foundation
when transferred.
C. recognized both as a change in its interest in the foundation and as revenues by the college
when the donation is received by the foundation.
D. recognized as an increase in net assets of the foundation and as revenues of the college
when the donation is received by the college.
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AACSB: Reflective Thinking
AICPA: Decision Making
C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
24. FASB 93:
A. guides depreciation.
B. guides accounting for contributions.
C. establishes financial display requirements.
D. establishes the accounting for investments.
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25. On the statement of operations prepared for a private, not-for-profit hospital, patient
service revenue earned during the year is reported net of amounts for which of the following
items?
I. Contractual adjustments
II. Bad debts expense
A. I only
B. II only
C. I and II
D. Neither I nor II
AACSB: Reflective Thinking
AICPA: Decision Making
19-46
Chapter 19 - Not-For-Profit Entities
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26. A private, not-for-profit hospital received a cash contribution of $100,000 from Samantha
Hicks on November 14, 2008. Ms. Hicks specified the money be used to acquire equipment.
On December 31, 2008, the hospital had not expended any of Ms. Hicks' contribution. On the
statement of changes in net assets for the year ended December 31, 2008, the hospital should
report the contribution as a $100,000 increase in
A. temporarily restricted net assets.
B. unrestricted net assets.
C. fund balance.
D. deferred revenue.
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AACSB: Reflective Thinking
AICPA: Decision Making
C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
R
27. Unrestricted current funds of a private university designated by the governing board for a
specific future purpose should be reported as part of:
A. unrestricted net assets.
B. temporarily restricted net assets.
C. board-restricted net assets.
D. term endowments.
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28. A private, not-for-profit geographic society received cash contributions which were
restricted by the donors for the acquisition of fixed assets. In which section of the statement of
cash flows would these cash contributions be reported?
A. Financing activities
B. Investing activities
C. Operating activities
D. Capital and related financing activities
AACSB: Reflective Thinking
AICPA: Decision Making
19-47
Chapter 19 - Not-For-Profit Entities
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29. On the statement of activities for a private, not-for-profit literary society, expenses
decrease which of the following classes of net assets?
I. temporarily restricted net assets
II. unrestricted net assets
A. I only
B. II only
C. Either I or II
D. Neither I nor II
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AACSB: Reflective Thinking
AICPA: Decision Making
C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
R
30. Bridger Hospital, which is operated by a religious organization, provides charity care for
the indigent living in the region served by the hospital. How should Bridger report the amount
of its charity care on its financial statements?
A. In the notes to the financial statements only.
B. As unrestricted revenues on the statement of operations.
C. As net patient service revenue and as an expense, equal to the net patient service revenue,
on the statement of operations.
D. As temporarily restricted revenue on the statement of operations.
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31. The governing board of Samaritan Hospital, which is operated by a religious organization,
designated $500,000 of cash for future expansion of the hospital. On the hospital's balance
sheet, the cash designated for future plant expansion would be disclosed in which of the
following classes of net assets?
A. Temporarily restricted net assets
B. Unrestricted net assets
C. Plant replacement and expansion.
D. Board designated net assets
AACSB: Reflective Thinking
AICPA: Decision Making
19-48
Chapter 19 - Not-For-Profit Entities
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32. Good Care Hospital, which is operated by a religious organization, received contributions
of $1,000,000 from donors who stipulated that the cash be used to construct an addition to the
hospital. As of the balance sheet date, none of the contributions had been expended for
construction. On the hospital's balance sheet, the cash contributions would be disclosed in
which of the following classes of net assets?
A. Temporarily restricted net assets
B. Donor restricted net assets
C. Assets whose use is limited
D. Permanently restricted net assets
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AACSB: Reflective Thinking
AICPA: Decision Making
C
PA
R
33. A private, not-for-profit hospital received contributions of $50,000 from donors on June
15, 2009. The donors stipulated that their contributions be used to purchase equipment for the
hospital. As of June 30, 2009, the end of the hospital's fiscal year, $12,000 of the
contributions had been spent on equipment acquisitions. In the hospital's general fund, what
account would be credited to recognize the release of the restrictions on the temporarily
restricted contributions used to acquire equipment?
A. Revenue released from equipment acquisition restriction
B. Other financing sources
C. Net assets released from equipment acquisition restriction
D. Unrestricted net assets released from equipment acquisition restriction
EO
AACSB: Reflective Thinking
AICPA: Decision Making
R
34. A private, not-for-profit hospital uses a fund structure which includes a general fund and
donor restricted funds. The hospital's revenues from nursing programs and gift shops should
be accounted for in the:
A. specific purpose fund.
B. restricted current fund.
C. general fund.
D. time-restricted fund.
AACSB: Reflective Thinking
AICPA: Decision Making
19-49
Chapter 19 - Not-For-Profit Entities
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35. A private, not-for-profit hospital uses a fund structure which includes a general fund and
donor restricted funds. Contributions received from donors for research to be conducted by
the hospital should be accounted for in the:
A. specific purpose fund.
B. time-restricted fund.
C. general fund.
D. restricted current fund.
AACSB: Reflective Thinking
AICPA: Decision Making
C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
R
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36. On June 30, 2009, a voluntary health and welfare organization received pledges from
donors amounting to $50,000. The donors did not place any time or use restrictions on the
amount pledged. It was estimated that 10 percent of the pledges would not be collected. How
should the voluntary health and welfare organization report these pledges on its financial
statements prepared at the end of its fiscal year, June 30, 2009?
A. As fund balance for $45,000.
B. As contribution revenue-unrestricted for $45,000.
C. As contribution revenue-unrestricted for $50,000.
D. As fund balance-unrestricted for $50,000.
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37. The restricted funds of a not-for-profit hospital are often termed "______" funds because
they must hold the restricted assets and transfer expendable resources to the general fund for
expenditure.
A. specific
B. controlled
C. limited
D. holding
AACSB: Reflective Thinking
AICPA: Decision Making
19-50
Chapter 19 - Not-For-Profit Entities
38. All restricted funds of private, not-for-profit hospitals account for resources:
A. whose use is restricted by the donor.
B. received and expended in the hospital's primary health care mission.
C. that are only temporarily restricted.
D. received or pledged by donors for use in future periods.
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AACSB: Reflective Thinking
AICPA: Decision Making
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A donor agrees to contribute $5,000 per year at the end of each of the next five years to a
voluntary health and welfare organization. The donor did not place any use restrictions on the
amount pledged. The stream of the payments is discounted at 6 percent. The first payment of
$5,000 is received at the end of the first year. The present value factor for a five-payment
annuity due on June 30, 2009, at 6 percent is 4.2124.
EO
AACSB: Analytic
AICPA: Measurement
C
PA
39. Based on the preceding information, the journal entry to recognize present value at the
time the pledge is received includes:
A. a credit to Pledges Receivable—Temporarily Restricted for $25,000.
B. a debit to Contributions—Temporarily Restricted for $21,062.
C. a debit to Pledges Receivable—Temporarily Restricted for $21,062.
D. a credit to Contributions—Temporarily Restricted for $25,000.
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40. Based on the preceding information, at the end of the first year, the pledge increased
unrestricted net assets by:
A. $25,000.
B. $21,062.
C. $4,212.
D. $5,000.
AACSB: Analytic
AICPA: Measurement
19-51
Chapter 19 - Not-For-Profit Entities
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41. Based on the preceding information, the increase in present value of the contributions
receivable recognized at the end of the first year equals:
A. $5,000.
B. $1,264.
C. $4212.
D. $787.
AACSB: Analytic
AICPA: Measurement
PA
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42. A private, not-for-profit hospital received a donation of medicine from the XYZ
Pharmaceutical Company on March 15, 2009. The cost of the medicine to the company was
$66,000, and its market value was $110,000. Twenty percent of the medicine was used by the
hospital during the year ended June 30, 2009. On the hospital's statement of operations for the
year ended June 30, 2009, the contribution of medicine would increase operating revenues by
A. $66,000.
B. $110,000.
C. $52,800.
D. $88,000.
C
AACSB: Analytic
AICPA: Measurement
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43. In accordance with FASB 116, contributions of services are recognized as increases in
unrestricted net assets by a private, not for profit entity if which of the following criteria are
satisfied?
I. The services received create or enhance nonfinancial assets.
II. The services require specialized skills, are provided by individuals possessing those skills,
and would typically need to be purchased if not provided by donations.
III. The services will be performed within the current fiscal year.
A. I or II.
B. I or III.
C. II or III.
D. I, II, III.
AACSB: Reflective Thinking
AICPA: Decision Making
19-52
Chapter 19 - Not-For-Profit Entities
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44. The disclosure, "net assets released from restrictions," is reported on which of the
following financial statements for a voluntary health and welfare organization?
I. The statement of cash flows.
II. The statement of activities.
A. I only
B. II only
C. Both I and II.
D. Neither I nor II.
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AACSB: Reflective Thinking
AICPA: Decision Making
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EO
AACSB: Analytic
AICPA: Measurement
C
PA
R
45. Good Faith Hospital, operated by a religious organization, billed patients $4,000,000 for
services rendered during the year ended June 30, 2009. The hospital realized cash of
$3,500,000 from the patient billings because of the following reductions:
(1) contractual adjustments of $140,000 granted to private insurance companies and to the
federal government; and
(2) uncollectible accounts receivable of $360,000.
On the statement of operations prepared for the year ended June 30, 2009, Good Faith
Hospital should report net patient service revenue of:
A. $3,500,000.
B. $3,860,000.
C. $4,000,000.
D. $3,640,000.
19-53
Chapter 19 - Not-For-Profit Entities
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46. During the fiscal year ended June 30, 2009, a private, not-for-profit hospital acquired
equipment costing $75,000, with cash contributed by donors who restricted their contributions
for this purpose. On the hospital's statement of cash flows for the year ended June 30, 2009,
the equipment acquisition should be reported in which of the following sections?
I. Operating activities
II. Financing activities
III. Investing activities
A. I
B. II
C. III
D. I, II, III
AACSB: Reflective Thinking
AICPA: Decision Making
EO
C
PA
R
47. During the fiscal year ended June 30, 2009, Global Charities, a voluntary health and
welfare organization, received unrestricted cash contributions of $500,000 and temporarily
restricted cash contributions of $300,000. All of the temporarily restricted contributions were
restricted by the donors for equipment acquisitions. During the year ended June 30, 2009,
equipment costing $250,000 was acquired with the restricted contributions. As a result of
these two contributions, Global Charities' statement of cash flows, prepared for the year ended
June 30, 2009, would report an increase in net cash provided by operating activities of:
A. $500,000.
B. $800,000.
C. $750,000.
D. $550,000.
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AACSB: Analytic
AICPA: Measurement
19-54
Chapter 19 - Not-For-Profit Entities
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48. A voluntary health and welfare organization received a $300,000 contribution on April 15,
2009, from a donor who stipulated the donation be invested permanently in stocks and bonds.
The donor further stipulated earnings from the investments be spent according to the wishes
of the governing board of the voluntary health and welfare organization. Earnings from the
investments for the year ended June 30, 2009, amounted to $6,000. How would the voluntary
health and welfare organization report this information for the year ended June 30, 2009?
A. Increase in permanently restricted net assets of $306,000.
B. Increase in permanently restricted net assets of $300,000, and in temporarily restricted net
assets of $6,000.
C. Increase in permanently restricted net assets of $300,000, and in unrestricted net assets of
$6,000.
D. Increase in permanently restricted net assets of $300,000, and in board-designated net
assets of $6,000.
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AACSB: Analytic
AICPA: Decision Making
C
PA
49. Which financial statement is (are) required for a voluntary health and welfare organization
which is not required for a private, not-for-profit hospital?
I. A statement of operations.
II. A statement of functional expenses.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
EO
AACSB: Reflective Thinking
AICPA: Decision Making
R
50. A private, not-for-profit hospital expended $35,000 of temporarily restricted assets to
acquire equipment. What account should be debited in the hospital's plant replacement and
expansion fund as a result of the acquisition of the equipment?
A. Net Assets Released—Plant Acquisition.
B. Fund balance Released—Plant Acquisition.
C. Equipment.
D. Contribution Revenue Released—Plant Acquisition.
AACSB: Reflective Thinking
AICPA: Decision Making
19-55
Chapter 19 - Not-For-Profit Entities
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51. In 2009, a private not-for-profit hospital received a $200,000 cash contribution to its
endowment fund. During the year, hospital administration invested $150,000 of the funds.
Which of the following statements regarding the effect of these transactions on the
preparation of the hospital's statement of cash flow is true?
A. The $200,000 contribution will appear in the investing activities section of the cash flow
statement as a cash inflow.
B. The $200,000 contribution will appear in the financing activities section of the cash flow
statement as a cash inflow.
C. The $150,000 investment will appear in the investing activities section of the cash flow
statement as a cash inflow.
D. The $150,000 contribution will appear in the financing activities section of the cash flow
statement as a cash inflow.
R
AACSB: Reflective Thinking
AICPA: Decision Making
C
PA
A private, not-for-profit hospital received a contribution of $40,000 on June 15, 2008. The
donor restricted the contribution to funding research activities currently being performed by
the hospital. For the year ended December 31, 2008, the hospital spent $30,000 of the
contribution on research activities. The hospital expended the remaining $10,000 on research
activities in January of 2009.
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52. Refer to the above information. On the statement of cash flows prepared for the year
ended December 31, 2008, the events described would increase net cash flows provided by
A. operating activities by $40,000.
B. financing activities by $40,000.
C. financing activities by $10,000.
D. operating activities by $10,000.
AACSB: Analytic
AICPA: Decision Making
19-56
Chapter 19 - Not-For-Profit Entities
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53. Refer to the above information. On the statement of operations prepared for the year
ended December 31, 2008, the events described would:
A. increase operating income by $30,000.
B. have no effect on operating income.
C. increase unrestricted net assets by $30,000.
D. decrease unrestricted net assets by $30,000.
AACSB: Analytic
AICPA: Decision Making
AACSB: Analytic
AICPA: Decision Making
PA
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54. Refer to the above information. On the statement of changes in net assets prepared for the
year ended December 31, 2008, the events described would
A. increase temporarily restricted net assets by $10,000.
B. decrease temporarily restricted net assets by $10,000
C. increase unrestricted net assets by $10,000.
D. decrease unrestricted net assets by $10,000.
EO
C
55. In a private, not-for-profit hospital, which fund would record cash and investments which
have been restricted by the governing board for acquisitions of equipment and construction of
a new hospital addition?
A. The plant replacement and expansion fund.
B. The specific purpose fund.
C. The endowment fund.
D. The general fund.
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AACSB: Reflective Thinking
AICPA: Decision Making
19-57
Chapter 19 - Not-For-Profit Entities
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56. The governing board of a hospital operated by a religious organization designated
$3,000,000 of cash to be used for plant expansion. The cash was invested in stocks and bonds
which earned $250,000 of dividend and interest income. The income from investments should
be reported on the hospital's statement of operations as an increase in:
A. temporarily restricted net assets.
B. operating income.
C. either temporarily restricted net assets or unrestricted net assets, depending upon the nature
of the governing board's restrictions.
D. fund balance in the general fund.
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AACSB: Reflective Thinking
AICPA: Decision Making
C
PA
R
57. A voluntary health and welfare organization received unrestricted cash donations of
$20,000 from donors who attended a dinner held for the benefit of the organization. The costs
of the dinner, including room rental, and other expenses, amounted to $7,000. On the
statement of activities prepared for the voluntary health and welfare organization, the
expenses of the dinner should be:
A. reported as management and general expenses.
B. netted against the $20,000 of contribution revenue.
C. reported as fund raising costs.
D. reported as programmatic expenses.
EO
AACSB: Reflective Thinking
AICPA: Decision Making
R
58. On the statement of functional expenses prepared for a voluntary health and welfare
organization, depreciation expense is allocated to
I. expenses for program services.
II. expenses for supporting services.
A. I only
B. II only
C. Both I and II
D. Neither I nor II
AACSB: Reflective Thinking
AICPA: Decision Making
19-58
Chapter 19 - Not-For-Profit Entities
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59. A voluntary health and welfare organization developed and printed informational
materials which were intended to both educate the public about how its resources are used to
help people in need and to also appeal to the public for much needed support. In this situation,
the cost of the informational materials should be
A. accounted for as fund-raising expense.
B. allocated to expenses for program services.
C. allocated between expenses for program services and fund-raising expense.
D. accounted for as management and general expense.
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AACSB: Reflective Thinking
AICPA: Decision Making
AACSB: Reflective Thinking
AICPA: Decision Making
PA
R
60. FASB 117 requires that an "other not-for-profit entity" (ONPO) provide three financial
statements. Which of the following is NOT one among them?
A. A statement of functional expenses
B. A statement of financial position
C. A statement of activities
D. A statement of cash flows
EO
C
61. A private, not-for-profit hospital received the following restricted contributions and other
receipts during the year ended December 31, 2008:
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None of the contributions or other receipts were expended during the ended December 31,
2008. For the year ended December 31, 2008, what amount would be reported on the
hospital's statement of changes in net assets as an increase in temporarily restricted net
assets?
A. $1,500,000
B. $1,200,000
C. $500,000
D. $300,000
AACSB: Analytic
AICPA: Measurement
19-59
Chapter 19 - Not-For-Profit Entities
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62. In accordance with FASB 116, pledges, which are temporarily restricted by donors, are
reported as increases in temporarily restricted net assets on the statement of activities of a
voluntary health and welfare organization when the
A. pledges are received in cash.
B. cash received from the pledges is expended in accordance with the donors' wishes.
C. pledges are made by the donors.
D. cash is received from the pledges is transferred to unrestricted net assets.
AACSB: Reflective Thinking
AICPA: Decision Making
C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
R
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63. A voluntary health and welfare organization received $200,000 of pledges from donors on
February 15, 2009. The donors did not place either time or use restrictions on the amount
pledged. The governing board estimated that 10 percent of the pledges would be uncollectible.
During the remainder of fiscal 2009, cash received from pledges amounted to $184,000. For
the year ended June 30, 2009, what amount should the voluntary health and welfare
organization report as Contributions-Unrestricted?
A. $0
B. $200,000
C. $184,000
D. $180,000
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64. A voluntary health and welfare organization reports pledges receivable on its statement of
financial position at the present value of the future cash collections. How is the increase in the
present value of the pledges receivable, which is due to the passage of time, reported on the
voluntary health and welfare organization's statement of activities?
A. As interest income-temporarily restricted.
B. As an increase in pledges receivable-temporarily restricted.
C. As an increase in contributions-temporarily restricted.
D. As an increase in deferred revenue-temporarily restricted.
AACSB: Reflective Thinking
AICPA: Decision Making
19-60
Chapter 19 - Not-For-Profit Entities
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Golden Path, a labor union, had the following receipts and expenses for the year ended
December 31, 2008:
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The union's constitution provides that 12 percent of the per capita dues be designated for the
strike insurance fund to be distributed for strike relief at the discretion of the union's executive
board.
EO
C
PA
65. Based on the information provided, in Golden Path's statement of activities for the year
ended December 31, 2008, what amount should be reported under the classification of
revenue from unrestricted funds?
A. $980,000
B. $1,100,000
C. $1,210,000
D. $1,020,000
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AACSB: Analytic
AICPA: Measurement
19-61
Chapter 19 - Not-For-Profit Entities
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66. Based on the information provided, in Golden Path's statement of activities for the year
ended December 31, 2008, what amount should be reported under the classification of
program services?
A. $720,000
B. $910,000
C. $440,000
D. $760,000
AACSB: Analytic
AICPA: Measurement
AACSB: Analytic
AICPA: Measurement
PA
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67. Based on the information provided, in Golden Path's statement of activities for the year
ended December 31, 2008, what amount should be reported under the classification of
supporting services?
A. $150,000
B. $720,000
C. $440,000
D. $290,000
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C
68. Based on the information provided, in Golden Path's statement of activities for the year
ended December 31, 2008, what amounts should be reported under the classifications of
temporarily and permanently restricted net assets?
A. $0 and $110,000 respectively.
B. $110,000 and $0 respectively.
C. $60,000 and $50,000 respectively.
D. $50,000 and $60,000 respectively.
AACSB: Analytic
AICPA: Measurement
19-62
Chapter 19 - Not-For-Profit Entities
Local Services, a voluntary health and welfare organization had the following classes of net
assets on July 1, 2008, the beginning of its fiscal year:
PA
R
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During the year ended June 30, 2009, the following events occurred:
(1) It purchased equipment, costing $100,000, with contributions restricted for this purpose.
The contributions had been received from donors during June of 2008.
(2) It received $130,000 of cash donations which were restricted for research activities.
During the year ended June 30, 2009, $90,000 of the contributions were expended on
research.
(3) It sold investments classified in the permanently restricted class for a loss of $40,000.
Dividends and interest income earned on the investments amounted to $70,000. There were
no restrictions on how investment income was to be used.
(4) It received cash contributions of $200,000 from donors who did not place either time or
use restrictions upon their donations.
(5) Expenses, excluding depreciation expense, for program services and supporting services
incurred during the year ended June 30, 2009, amounted to $260,000.
(6) Depreciation expense for the year ended June 30, 2009, was $80,000.
EO
C
69. Refer to the above information. At June 30, 2009, the amount of permanently restricted
net assets reported on the statement of financial position would be:
A. $1,070,000.
B. $1,030,000.
C. $1,000,000.
D. $960,000.
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AACSB: Analytic
AICPA: Measurement
19-63
Chapter 19 - Not-For-Profit Entities
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70. Refer to the above information. On the statement of activities for the year ended June 30,
2009, temporarily restricted net assets:
A. increased $130,000.
B. increased $40,000.
C. decreased $100,000.
D. decreased $60,000.
AACSB: Analytic
AICPA: Measurement
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71. Refer to the above information. On the statement of activities for the year ended June 30,
2009, reclassifications would be reported at
A. $190,000.
B. $100,000.
C. $90,000.
D. $230,000.
PA
AACSB: Analytic
AICPA: Measurement
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C
72. Refer to the above information. Which of the following statements is (are) correct about
the program and supporting expenses that would be reported on the statement of activities for
the year ended June 30, 2009?
I. Program and supporting expenses should be reported at $340,000.
II. All of the program and supporting expenses should be reported as a deduction from
unrestricted revenues and other support.
A. I only
B. II only
C. I and II
D. Neither I nor II
AACSB: Reflective Thinking
AICPA: Decision Making
The transactions listed in the following questions occurred in a private, not-for-profit hospital
during 2008. For each transaction, indicate its effect on the hospital's statement of operations
for the year ended December 31, 2008.
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Chapter 19 - Not-For-Profit Entities
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73. Transaction: Billed patients for services rendered.
Effect on Statement of Operations:
A. Increases operating income.
B. Decreases operating income.
C. The transaction is reported on the statement of operations, but there is no effect on
operating income.
D. The transaction is not reported on the statement of operations.
AACSB: Reflective Thinking
AICPA: Decision Making
C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
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74. Transaction: A gain was realized from the sale of endowment investments. The gain is
not expendable.
Effect on Statement of Operations:
A. Increases operating income.
B. Decreases operating income.
C. The transaction is reported on the statement of operations, but there is no effect on
operating income.
D. The transaction is not reported on the statement of operations.
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75. Transaction: Depreciation expense was recorded for the year.
Effect on Statement of Operations:
A. Increases operating income.
B. Decreases operating income.
C. The transaction is reported on the statement of operations, but there is no effect on
operating income.
D. The transaction is not reported on the statement of operations.
AACSB: Reflective Thinking
AICPA: Decision Making
19-65
Chapter 19 - Not-For-Profit Entities
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76. Transaction: The governing board designated assets for plant expansion.
Effect on Statement of Operations:
A. Increases operating income.
B. Decreases operating income.
C. The event is reported on the statement of operations, but there is no effect on operating
income.
D. The event is not reported on the statement of operations.
AACSB: Reflective Thinking
AICPA: Decision Making
AACSB: Reflective Thinking
AICPA: Decision Making
PA
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77. Transaction: Received contributions restricted by donors for research activities.
Effect on Statement of Operations:
A. Increases operating income.
B. Decreases operating income.
C. The transaction is reported on the statement of operations, but there is no effect on
operating income.
D. The transaction is not reported on the statement of operations.
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C
78. Transaction: Expended 50 percent of the contributions restricted for research in the
previous item.
Effect on Statement of Operations:
A. Increases operating income.
B. Decreases operating income.
C. The transaction is reported on the statement of operations, but there is no effect on
operating income.
D. The transaction is not reported on the statement of operations.
AACSB: Reflective Thinking
AICPA: Decision Making
19-66
Chapter 19 - Not-For-Profit Entities
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79. Transaction: Received contributions restricted by donors for equipment acquisition.
Effect on Statement of Operations:
A. Increases operating income.
B. Decreases operating income.
C. The transaction is reported on the statement of operations, but there is no effect on
operating income.
D. The transaction is not reported on the statement of operations.
AACSB: Reflective Thinking
AICPA: Decision Making
C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
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80. Transaction: Acquired equipment with all of the contributions received in the previous
item.
Effect on Statement of Operations:
A. Increases operating income.
B. Decreases operating income.
C. The transaction is reported on the statement of operations, but there is no effect on
operating income.
D. The transaction is not reported on the statement of operations.
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81. Transaction: Endowment income was earned. The donor placed no restrictions on the
investment earnings.
Effect on Statement of Operations:
A. Increases operating income.
B. Decreases operating income.
C. The transaction is reported on the statement of operations, but there is no effect on
operating income.
D. The transaction is not reported on the statement of operations.
AACSB: Reflective Thinking
AICPA: Decision Making
19-67
Chapter 19 - Not-For-Profit Entities
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-82. Transaction: Received cash contribution from donor who stipulated the contribution be
permanently invested.
Effect on Statement of Operations:
A. Increases operating income.
B. Decreases operating income.
C. The transaction is reported on the statement of operations, but there is no effect on
operating income.
D. The transaction is not reported on the statement of operations.
ev
AACSB: Reflective Thinking
AICPA: Decision Making
C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
R
83. Transaction: Acquired investments with cash received in the previous item.
Effect on Statement of Operations:
A. Increases operating income.
B. Decreases operating income.
C. The transaction is reported on the statement of operations, but there is no effect on
operating income.
D. The transaction is not reported on the statement of operations.
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84. Transaction: Received tuition revenue from hospital nursing program and cash from
sales of goods in the hospital gift shop.
Effect on Statement of Operations:
A. Increases operating income.
B. Decreases operating income.
C. The transaction is reported on the statement of operations, but there is no effect on
operating income.
D. The transaction is not reported on the statement of operations.
AACSB: Reflective Thinking
AICPA: Decision Making
19-68
Chapter 19 - Not-For-Profit Entities
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85. FASB 117 requires that an ONPO provide three financial statements. Which of the
following is not one of them?
A. A statement of financial position
B. A statement of activities
C. A statement of cash flows
D. A statement of functional expenses
AACSB: Reflective Thinking
AICPA: Decision Making
AACSB: Reflective Thinking
AICPA: Decision Making
R
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C
Essay Questions
PA
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86. Reporting requirements of other not-for-profit entities (ONPOs) are similar to those of
which of the following entities?
A. A public university
B. A voluntary health and welfare organization
C. An enterprise fund of a state or local government
D. A hospital operated by a county government
19-69
Chapter 19 - Not-For-Profit Entities
C
Additional information:
PA
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87. The following information is contained in the funds which are used to account for the
transactions of the Hope Hospital, which is operated by a nonprofit, religious organization.
The balances in the accounts are as of June 30, 2009, the end of the hospital's fiscal year.
Credit amounts are in parentheses.
The $64,000 in the specific purpose fund is restricted for research activities to be conducted
by the hospital.
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Required:
Prepare a balance sheet for Hope Hospital as of June 30, 2009.
19-70
R
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C
PA
R
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Chapter 19 - Not-For-Profit Entities
19-71
R
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AACSB: Analytic
AICPA: Reporting
C
PA
R
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Chapter 19 - Not-For-Profit Entities
19-72
Chapter 19 - Not-For-Profit Entities
Private Not-For-Profit (NFP) Entities.
PA
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Select from this list of terms to answer the following questions.
C
Indicate your choice by entering the letter corresponding to the correct term. A term may be
used more than once or not at all.
EO
88. "Responsible for establishing accounting standards for private NFP entities" describes
which term listed above?
D
R
AACSB: Reflective Thinking
AICPA: Decision Making
19-73
Chapter 19 - Not-For-Profit Entities
89. "Classification of an endowment contribution" describes which term listed above?
K
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AACSB: Reflective Thinking
AICPA: Decision Making
90. "Reported as an expenditure of the fund using plant and equipment" describes which term
listed above?
ev
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R
AACSB: Reflective Thinking
AICPA: Decision Making
H
C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
91. "Financial statement of a private NFP entity" describes which term listed above?
EO
92. "Tangible fixed assets not depreciated by a private college or university" describes which
term listed above?
P
R
AACSB: Reflective Thinking
AICPA: Decision Making
19-74
Chapter 19 - Not-For-Profit Entities
93. "Basis for measuring investments in financial statements" describes which term listed
above?
A
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AACSB: Reflective Thinking
AICPA: Decision Making
94. "Classification of investment income from endowment investments if there are no donor
restrictions as to income" describes which term listed above?
ev
B
R
AACSB: Reflective Thinking
AICPA: Decision Making
L
C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
95. "Classification of contributions restricted by purpose" describes which term listed above?
EO
96. "Basis for measuring expenditures for contributed services requiring special skills"
describes which term listed above?
R
A
AACSB: Reflective Thinking
AICPA: Decision Making
19-75
Chapter 19 - Not-For-Profit Entities
97. "Basis for measuring contributions" describes which term listed above?
A
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AACSB: Reflective Thinking
AICPA: Decision Making
98. "Net asset classifications per FAC 6" describes which term listed above?
ev
N
R
AACSB: Reflective Thinking
AICPA: Decision Making
G
R
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C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
99. "Basis of accounting for private NFPs" describes which term listed above?
19-76
Chapter 19 - Not-For-Profit Entities
100. The CFO of a "Not-for-Profit" hospital is making a presentation at your college. The
presentation is for Business and Health-Science majors. During the presentation the CFO
mentions assets being reported "above the line." On the way out your roommate a healthscience major asks, you an accounting major, to explain what the CFO was referring to. What
do you respond?
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Not-for-Profit hospitals report an operating performance indicator in their statement of
operations. This item reports the hospital's operating activities for the period and should
include both operating income (loss) for the period and other income available for current
operations. FASB 117 requires that net assets released from restrictions that are used in
operations to be included in the performance indicator, thus, "above the line". This allows the
reader of the financial statements to be able to identify assets that were previously restricted,
held for specified purposes by the donor, that are now available for use in operations.
Therefore, expenses incurred to achieve the entity's operations can be matched with the
resources.
AACSB: Communication
AICPA: Critical Thinking
R
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C
PA
The transactions described in the following questions occurred in a voluntary health and
welfare organization during the year ended December 31, 2008. For each transaction, indicate
its effect(s) on the organization's statement of activities prepared for the year ended December
31, 2008. List all effects of transactions affecting more than one class of net assets. Indicate
your choice(s) by entering the letter corresponding to the effects listed here:
19-77
Chapter 19 - Not-For-Profit Entities
101. Received cash contributions restricted by donors for research.
C
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AACSB: Reflective Thinking
AICPA: Decision Making
102. Incurred fund-raising costs.
ev
B
R
AACSB: Reflective Thinking
AICPA: Decision Making
B
C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
103. Depreciation expense for the year was recorded.
104. The governing board designated assets for plant expansion.
EO
G
R
AACSB: Reflective Thinking
AICPA: Decision Making
105. A gain was realized from the sale of securities which were permanently invested. The
gain is restricted as to use.
C
AACSB: Reflective Thinking
AICPA: Decision Making
19-78
Chapter 19 - Not-For-Profit Entities
106. Endowment income was earned. The donor specified that the income be used for
community service.
C
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AACSB: Reflective Thinking
AICPA: Decision Making
107. Received a multi-year pledge, with cash being received this year and for the next 4 years.
Donors did not place any use restrictions on how the pledges were to be spent.
ev
A and C
R
AACSB: Reflective Thinking
AICPA: Decision Making
PA
108. Income was earned from investments of assets that the board previously designated for
plant expansion.
C
A
EO
AACSB: Reflective Thinking
AICPA: Decision Making
109. Received pledges from donors who placed no time or use restrictions on how the pledges
were to be spent.
R
A
AACSB: Reflective Thinking
AICPA: Decision Making
19-79
Chapter 19 - Not-For-Profit Entities
110. Received cash contributions restricted by donors for equipment.
C
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AACSB: Reflective Thinking
AICPA: Decision Making
111. Acquired equipment with all of the contributions previously received from donors for
equipment purchases.
ev
A and D
R
AACSB: Reflective Thinking
AICPA: Decision Making
D
R
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C
AACSB: Reflective Thinking
AICPA: Decision Making
PA
112. Expended 75 percent of the contributions previously received from donors for research.
19-80
Chapter 19 - Not-For-Profit Entities
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113. Following are four independent transactions or events that relate to a voluntary health
and welfare organization:
1. Cash disbursement of $45,000 was made from the general fund's unrestricted assets for the
purchase of new equipment for the organization.
2. The organization receives an unrestricted cash gift of $80,000 from a donor.
3. Common stock investments with a total carrying value of $100,000 were sold by a
permanently restricted endowment fund for $112,000 before any dividends were earned on
these stocks. The gain is donor-restricted to remain in the permanently restricted fund.
4. General obligation bonds payable with a face amount of $750,000 were sold at par, with the
proceeds required to be used solely for construction of a new building. This building was
completed at a total cost of $750,000, and the total amount of bond issue proceeds was
disbursed toward this cost. Disregard interest capitalization.
R
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PA
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Required:
For each of these transactions or events, prepare journal entries specifying the affected funds
and showing how these transactions or events should be recorded by the organization.
19-81
Chapter 19 - Not-For-Profit Entities
AACSB: Analytic
AICPA: Reporting
R
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C
AACSB: Reflective Thinking
AICPA: Reporting
PA
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114. The FASB has issued five standards that have direct applicability to private, not-forprofit entities. From the list given below, match each standard to the area it deals with.
19-82